Fentura Financial, Inc. Announces Third Quarter 2020 Earnings

Thursday, 29. October 2020 21:49

Dollars in thousands except per share amounts. Certain items in the prior period financial statements have been reclassified to conform with the September 30, 2020 presentation.

FENTON, Mich., Oct. 29, 2020 (GLOBE NEWSWIRE) -- Fentura Financial, Inc. (OTCQX: FETM) announces quarterly results of net income of $5,336 and $12,731 for the three and nine month periods ended September 30, 2020.

Ronald Justice, President and CEO, stated “I remain extremely proud of our team.  Throughout the COVID-19 pandemic, they have remained committed to safely serving the needs of our customers and communities.  While the virus has presented many health and economic challenges, we are focused on enhancing long term shareholder value through consistent financial performance.”

Following is a discussion of the Corporation's financial performance as of, and for the three and nine month periods ended September 30, 2020. At the end of this document is a list of abbreviations and acronyms.

Results of Operations
The following table outlines the Corporation's QTD results of operations and provides certain performance measures as of, and for the three month periods ended:

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
INCOME STATEMENT DATA          
Interest income $12,070  $11,215  $11,070  $11,076  $11,240 
Interest expense 1,189  1,618  2,145  2,158  2,184 
Net interest income 10,881  9,597  8,925  8,918  9,056 
Provision for loan losses 1,109  2,001  1,542  436  422 
Noninterest income 5,159  5,292  4,513  2,129  2,262 
Noninterest expenses 8,218  7,809  7,686  7,415  6,608 
Federal income tax expense 1,377  1,036  858  644  873 
Net income $5,336  $4,043  $3,352  $2,552  $3,415 
PER SHARE          
Earnings $1.14  $0.87  $0.72  $0.55  $0.73 
Dividends $0.075  $0.075  $0.075  $0.07  $0.07 
Tangible book value(1) $23.50  $22.44  $21.56  $20.87  $20.37 
Quoted market value          
High $17.99  $18.95  $26.00  $25.50  $21.00 
Low $16.80  $14.90  $12.55  $20.60  $20.45 
Close(1) $16.93  $17.35  $15.50  $25.23  $21.00 
PERFORMANCE RATIOS          
Return on average assets 1.68% 1.35% 1.28% 1.02% 1.40%
Return on average shareholders' equity 18.86% 15.20% 13.01% 10.03% 13.83%
Return on average tangible shareholders' equity 19.54% 15.79% 13.54% 10.46% 14.47%
Efficiency ratio 51.23% 52.45% 57.20% 67.12% 58.38%
Yield on earning assets (FTE) 3.97% 3.94% 4.47% 4.66% 4.85%
Rate on interest bearing liabilities 0.63% 0.91% 1.28% 1.36% 1.42%
Net interest margin to earning assets (FTE) 3.58% 3.37% 3.61% 3.75% 3.91%
BALANCE SHEET DATA(1)          
Total investment securities $78,179  $75,526  $76,312  $61,621  $62,351 
Gross loans $1,060,885  $1,044,564  $865,577  $870,555  $826,597 
Total assets $1,284,845  $1,237,694  $1,071,180  $1,034,759  $978,046 
Total deposits $1,061,470  $1,018,287  $883,837  $863,102  $801,101 
Borrowed funds $96,217  $96,217  $71,500  $61,500  $69,000 
Total shareholders' equity $114,081  $108,969  $104,828  $101,444  $99,142 
Net loans to total deposits 98.99% 101.70% 97.11% 100.19% 102.51%
Common shares outstanding 4,691,142  4,680,920  4,675,499  4,664,369  4,658,722 
QTD BALANCE SHEET AVERAGES          
Total assets $1,264,105  $1,200,966  $1,049,245  $994,094  $971,074 
Earning assets $1,210,274  $1,146,941  $997,089  $944,692  $920,857 
Interest bearing liabilities $750,281  $711,500  $672,564  $629,454  $611,804 
Total shareholders' equity $112,565  $106,998  $103,646  $100,991  $97,958 
Total tangible shareholders' equity $108,655  $102,999  $99,558  $96,796  $93,650 
Earned common shares outstanding 4,673,629  4,664,946  4,659,279  4,652,569  4,646,835 
Unvested stock grants 14,208  14,208  13,481  9,947  9,967 
Total common shares outstanding 4,687,837  4,679,154  4,672,760  4,662,516  4,656,802 
ASSET QUALITY(1)          
Nonperforming loans to gross loans 0.07% 0.10% 0.10% 0.17% 0.11%
Nonperforming assets to total assets 0.06% 0.08% 0.12% 0.14% 0.09%
Allowance for loan losses to gross loans 0.95% 0.86% 0.84% 0.67% 0.65%
CAPITAL RATIOS(1)          
Total capital to risk weighted assets 15.57% 15.06% 14.42% 14.03% 14.42%
Tier 1 capital to risk weighted assets 14.40% 14.00% 13.56% 13.33% 13.73%
CET1 capital to risk weighted assets 12.77% 12.34% 11.91% 11.64% 11.96%
Tier 1 leverage ratio 9.86% 9.90% 10.97% 11.20% 11.22%
           
(1)At end of period          


The following table outlines the Corporation's YTD results of operations and provides certain performance measures as of, and for the nine month periods ended:

  9/30/2020 9/30/2019 9/30/2018 9/30/2017 9/30/2016
INCOME STATEMENT DATA          
Interest income $34,355  $32,465  $26,419  $21,246  $13,693 
Interest expense 4,952  6,469  3,901  2,181  1,758 
Net interest income 29,403  25,996  22,518  19,065  11,935 
Provision for loan losses 4,652  899  767  261   
Noninterest income 14,964  6,034  6,574  6,768  4,880 
Noninterest expenses 23,713  19,808  18,403  16,418  11,960 
Federal income tax expense 3,271  2,297  1,817  2,640  1,657 
Net income $12,731  $9,026  $8,105  $6,514  $3,198 
PER SHARE          
Earnings $2.73  $1.94  $2.23  $1.80  $1.28 
Dividends $0.23  $0.21  $0.18  $0.15  $0.35 
Tangible book value(1) $23.50  $20.37  $16.91  $14.29  $13.78 
Quoted market value          
High $26.00  $21.00  $23.00  $20.65  $15.00 
Low $12.55  $20.05  $18.88  $15.10  $12.85 
Close(1) $16.93  $21.00  $21.15  $18.45  $14.50 
PERFORMANCE RATIOS          
Return on average assets 1.45% 1.27% 1.32% 1.22% 0.91%
Return on average shareholders' equity 15.79% 12.73% 17.29% 16.24% 12.60%
Return on average tangible shareholders' equity 16.40% 13.35% 18.77% 17.52% 12.60%
Efficiency ratio 53.45% 61.84% 63.26% 63.55% 71.13%
Yield on earning assets (FTE) 4.11% 4.81% 4.59% 4.15% 4.38%
Rate on interest bearing liabilities 0.93% 1.43% 0.98% 0.60% 0.77%
Net interest margin to earning assets (FTE) 3.52% 3.86% 3.91% 3.72% 3.81%
BALANCE SHEET DATA(1)          
Total investment securities $78,179  $62,351  $79,531  $67,155  $23,300 
Gross loans $1,060,885  $826,597  $728,302  $628,552  $413,622 
Total assets $1,284,845  $978,046  $909,901  $756,967  $500,551 
Total deposits $1,061,470  $801,101  $766,587  $625,588  $418,849 
Borrowed funds $96,217  $69,000  $74,000  $68,000  $44,000 
Total shareholders' equity $114,081  $99,142  $66,340  $57,161  $35,048 
Net loans to total deposits 98.99% 102.51% 94.46% 99.95% 97.88%
Common shares outstanding 4,691,142  4,658,722  3,645,402  3,631,576  2,543,832 
YTD BALANCE SHEET AVERAGES          
Total assets $1,171,415  $950,749  $820,481  $718,335  $467,720 
Earning assets $1,118,093  $903,192  $772,111  $687,175  $417,673 
Interest bearing liabilities $711,449  $606,912  $528,165  $481,657  $283,548 
Total shareholders' equity $107,711  $94,815  $62,662  $53,760  $33,891 
Total tangible shareholders' equity $103,712  $90,394  $57,732  $49,838  $33,891 
Earned common shares outstanding 4,665,951  4,641,084  3,638,123  3,618,889  2,506,250 
Unvested stock grants 13,966  9,907       
Total common shares outstanding 4,679,917  4,650,991  3,638,123  3,618,889  2,506,250 
ASSET QUALITY(1)          
Nonperforming loans to gross loans 0.07% 0.11% 0.01% 0.03% %
Nonperforming assets to total assets 0.06% 0.09% 0.03% 0.05% 0.06%
Allowance for loan losses to gross loans 0.95% 0.65% 0.57% 0.52% 0.88%
CAPITAL RATIOS(1)          
Total capital to risk weighted assets 15.57% 14.42% 11.31% 10.92% 12.96%
Tier 1 capital to risk weighted assets 14.40% 13.73% 10.73% 10.41% 12.06%
CET1 capital to risk weighted assets 12.77% 11.96% 8.77% 8.23% 8.61%
Tier 1 leverage ratio 9.86% 11.22% 8.90% 9.26% 10.08%
           
(1)At end of period          


Income Statement Breakdown and Analysis

  Quarter to Date
  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
GAAP net income $5,336   $4,043   $3,352   $2,552   $3,415  
Acquisition related items (net of tax)          
Accretion on purchased loans (144)  (110)  (180)  (126)  (189) 
Amortization of core deposit intangibles 72   71   71   89   88  
Amortization on acquired time deposits 5   5   5   7   7  
Amortization on purchased mortgage servicing rights          3   3  
Total acquisition related items (net of tax) (67)  (34)  (104)  (27)  (91) 
Other nonrecurring items (net of tax)          
Net gain from COLI death benefit    (173)          
Prepayment penalties collected (16)  (12)  (36)  (42)  (284) 
Change in fair value of equity investment due to acquisition transaction       (578)       
Change in fair value of mortgage banking instruments       (448)       
Mortgage servicing rights (reduction of) impairment (176)  191   173        
Total other nonrecurring items (net of tax) (192)  6   (889)  (42)  (284) 
Adjusted net income from operations $5,077   $4,015   $2,359   $2,483   $3,040  
           
GAAP net interest income $10,881   $9,597   $8,925   $8,918   $9,056  
Accretion on purchased loans (182)  (139)  (228)  (160)  (239) 
Prepayment penalties collected (20)  (15)  (46)  (53)  (360) 
Amortization on acquired time deposits 6   6   6   9   9  
Adjusted net interest income $10,685   $9,449   $8,657   $8,714   $8,466  
           
PERFORMANCE RATIOS          
Based on adjusted net income from operations          
Earnings per share $1.09   $0.86   $0.51   $0.53   $0.65  
Return on average assets 1.60 % 1.34 % 0.90 % 0.99 % 1.24 %
Return on average shareholders' equity 17.94 % 15.09 % 9.15 % 9.75 % 12.31 %
Return on average tangible shareholders' equity 18.59 % 15.68 % 9.53 % 10.18 % 12.88 %
           
Based on adjusted net interest income          
Yield on earning assets (FTE) 3.90 % 3.89 % 4.36 % 4.57 % 4.59 %
Rate on interest bearing liabilities 0.63 % 0.91 % 1.28 % 1.37 % 1.43 %
Net interest margin to earning assets (FTE) 3.52 % 3.32 % 3.50 % 3.66 % 3.66 %


  Year to Date September 30 Variance
  2020 2019 Amount %
GAAP net income $12,731   $9,026   $3,705   41.05 %
Acquisition related items (net of tax)        
Accretion on purchased loans (434)  (509)  75   (14.73)%
Amortization of core deposit intangibles 214   267   (53)  (19.85)%
Amortization on acquired time deposits 15   21   (6)  (28.57)%
Amortization on purchased mortgage servicing rights    9   (9)  (100.00)%
Total acquisition related items (net of tax) (205)  (212)  7   (3.30)%
Other nonrecurring items (net of tax)        
Change in fair value of equity investment due to acquisition transaction (578)     (578)  N/M
Change in fair value of mortgage banking instruments (448)     (448)  N/M
Net gain from COLI death benefit (173)     (173)  N/M
Prepayment penalties collected (64)  (307)  243   (79.15)%
Mortgage servicing rights (reduction of) impairment 188      188   N/M
Total other nonrecurring items (net of tax) (1,075)  (307)  (768)  250.16 %
Adjusted net income from operations $11,451   $8,507   $2,944   34.61 %
         
GAAP net interest income $29,403   $25,996   $3,407   13.11 %
Accretion on purchased loans (549)  (644)  95   (14.75)%
Prepayment penalties collected (81)  (388)  307   (79.12)%
Amortization on acquired time deposits 18   26   (8)  (30.77)%
Adjusted net interest income $28,791   $24,990   $3,801   15.21 %
         
PERFORMANCE RATIOS        
Based on adjusted net income from operations        
Earnings per share $2.45   $1.83   $0.62   33.88 %
Return on average assets 1.31 % 1.20 %   0.11 %
Return on average shareholders' equity 14.20 % 12.00 %   2.20 %
Return on average tangible shareholders' equity 14.75 % 12.58 %   2.17 %
         
Based on adjusted net interest income        
Yield on earning assets (FTE) 4.03 % 4.66 %   (0.63)%
Rate on interest bearing liabilities 0.93 % 1.44 %   (0.51)%
Net interest margin to earning assets (FTE) 3.45 % 3.71 %   (0.26)%


To effectively compare core operating results from period to period, the impact of acquisition related items and other nonrecurring items have been isolated.

The Corporation adopted Staff Accounting Bulletin No. 109 as of January 1, 2020. This standard required the Corporation to record the servicing assets of interest rate lock commitments and loans held for sale at fair value.  Changes in the fair value of these instruments is recognized as a component of noninterest income.  As forward loan sales commitments and interest rate lock commitments were previously recorded at fair value, the nonrecurring item impact disclosed above represents the change in fair value of loans held for sale.  Subsequent to the adoption of Staff Accounting Bulletin No. 109, changes in fair value related to mortgage banking are recurring in nature.

Average Balances, Interest Rate, and Net Interest Income

The following tables present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities. These tables also present an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a FTE basis using a federal income tax rate of 21%. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances.

  Three Months Ended
  September 30, 2020 June 30, 2020 September 30, 2019
  Average Balance  Tax Equivalent Interest  Average Yield / Rate Average Balance   Tax Equivalent Interest  Average Yield / Rate Average Balance   Tax Equivalent Interest  Average Yield / Rate
Interest earning assets                  
Total loans $1,086,629  $11,701  4.28% $1,048,068  $10,788  4.14% $827,456  $10,639  5.10%
Taxable investment securities 62,490  256  1.63% 62,829  323  2.07% 58,059  375  2.56%
Nontaxable investment securities 15,822  101  2.54% 11,449  84  2.95% 9,482  72  3.01%
Federal funds sold     %     % 16,546  89  2.13%
Interest earning cash and cash equivalents 41,845  9  0.09% 21,314  5  0.09% 6,164  35  2.25%
Federal Home Loan Bank stock 3,488  24  2.74% 3,281  33  4.05% 3,150  45  5.67%
Total earning assets 1,210,274  12,091  3.97% 1,146,941  11,233  3.94% 920,857  11,255  4.85%
                   
Nonearning assets                  
Allowance for loan losses (9,255)     (7,753)     (5,139)    
Fixed assets 15,349      15,509      14,942     
Accrued income and other assets 47,737      46,269      40,414     
Total assets $1,264,105      $1,200,966      $971,074     
                   
Interest bearing liabilities                  
Interest bearing demand deposits $221,592  $144  0.26% $189,981  $249  0.53% $97,572  $244  0.99%
Savings deposits 271,260  116  0.17% 247,687  140  0.23% 243,796  282  0.46%
Time deposits 161,212  567  1.40% 181,661  821  1.82% 209,984  1,207  2.28%
Borrowed funds 96,217  362  1.50% 92,171  408  1.78% 60,452  451  2.96%
Total interest bearing liabilities 750,281  1,189  0.63% 711,500  1,618  0.91% 611,804  2,184  1.42%
                   
Noninterest bearing liabilities                  
Noninterest bearing deposits 388,904      371,320      253,292     
Accrued interest and other liabilities 12,355      11,148      8,020     
Shareholders' equity 112,565      106,998      97,958     
Total liabilities and shareholders' equity $1,264,105      $1,200,966      $971,074     
Net interest income (FTE)   $10,902      $9,615      $9,071   
Net interest margin to earning assets (FTE)     3.58%     3.37%     3.91%



  Nine Months Ended
  September 30, 2020 September 30, 2019
  Average Balance Tax Equivalent Interest Average Yield / Rate Average Balance Tax Equivalent Interest Average Yield / Rate
Interest earning assets            
Total loans $1,004,477  $32,970  4.38% $808,159  $30,521  5.05%
Taxable investment securities 60,760  932  2.05% 68,219  1,396  2.74%
Nontaxable investment securities 12,601  266  2.82% 9,812  218  2.97%
Federal funds sold 11,196  116  1.38% 8,928  150  2.25%
Interest earning cash and cash equivalents 25,753  40  0.21% 4,924  88  2.39%
Federal Home Loan Bank stock 3,306  87  3.52% 3,150  138  5.86%
Total earning assets 1,118,093  34,411  4.11% 903,192  32,511  4.81%
             
Nonearning assets            
Allowance for loan losses (7,610)     (4,851)    
Fixed assets 15,465      14,866     
Accrued income and other assets 45,467      37,542     
Total assets $1,171,415      $950,749     
             
Interest bearing liabilities            
Interest bearing demand deposits $194,058  $868  0.60% $82,161  $445  0.72%
Savings deposits 250,045  455  0.24% 243,135  898  0.49%
Time deposits 182,786  2,441  1.78% 221,903  3,746  2.26%
Borrowed funds 84,560  1,188  1.88% 59,713  1,380  3.09%
Total interest bearing liabilities 711,449  4,952  0.93% 606,912  6,469  1.43%
             
Noninterest bearing liabilities            
Noninterest bearing deposits 341,642      243,523     
Accrued interest and other liabilities 10,613      5,499     
Shareholders' equity 107,711      94,815     
Total liabilities and shareholders' equity $1,171,415      $950,749     
Net interest income (FTE)   $29,459      $26,042   
Net interest margin to earning assets (FTE)     3.52%     3.86%

Net Interest Income

Net interest income is the amount by which interest income on earning assets exceeds the interest expenses on interest bearing liabilities. Net interest income, which includes loan fees, is influenced by changes in the balance and mix of assets and liabilities and market interest rates. The Corporation exerts some control over these factors; however, FRB monetary policy and competition have a significant impact. For analytical purposes, net interest income is adjusted to a FTE basis by adding the income tax savings from interest on tax exempt loans, and nontaxable investment securities, thus making year-to-year comparisons more meaningful.

Volume and Rate Variance Analysis

The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows:

Volume - change in volume multiplied by the previous period's rate.
Rate - change in the FTE rate multiplied by the previous period's volume.

The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

  Three Months Ended Three Months Ended Nine Months Ended
  September 30, 2020 September 30, 2020 September 30, 2020
  Compared To Compared To Compared To
  June 30, 2020 September 30, 2019 September 30, 2019
  Increase (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due to
   Volume   Rate  Net  Volume   Rate  Net  Volume   Rate  Net
Changes in interest income                  
Total loans $476  $437  $913  $9,669  $(8,607) $1,062  $8,588  $(6,139) $2,449 
Taxable investment securities (2) (65) (67) 166  (285) (119) (140) (324) (464)
Nontaxable investment securities 81  (64) 17  96  (67) 29  66  (18) 48 
Federal funds sold       (45) (44) (89) 48  (82) (34)
Interest earning cash and cash equivalents 4    4  206  (232) (26) 137  (185) (48)
Federal Home Loan Bank stock 12  (21) (9) 28  (49) (21) 11  (62) (51)
Total changes in interest income 571  287  858  10,120  (9,284) 836  8,710  (6,810) 1,900 
                   
Changes in interest expense                  
Interest bearing demand deposits 227  (332) (105) 838  (938) (100) 553  (130) 423 
Savings deposits 73  (97) (24) 189  (355) (166) 41  (484) (443)
Time deposits (83) (171) (254) (240) (400) (640) (592) (713) (1,305)
Borrowed funds 103  (149) (46) 914  (1,003) (89) 646  (838) (192)
Total changes in interest expense 320  (749) (429) 1,701  (2,696) (995) 648  (2,165) (1,517)
Net change in net interest income (FTE) $251  $1,036  $1,287  $8,419  $(6,588) $1,831  $8,062  $(4,645) $3,417 


  Average Yield/Rate for the Three Month Periods Ended
  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Total earning assets 3.97% 3.94% 4.47% 4.66% 4.85%
Total interest bearing liabilities 0.63% 0.91% 1.28% 1.36% 1.42%
Net interest margin to earning assets (FTE) 3.58% 3.37% 3.61% 3.75% 3.91%


  Quarter to Date Net Interest Income (FTE)
  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Interest income $12,070  $11,215  $11,070  $11,076  $11,240 
FTE adjustment 21  18  17  17  15 
Total interest income (FTE) 12,091  11,233  11,087  11,093  11,255 
Total interest expense 1,189  1,618  2,145  2,158  2,184 
Net interest income (FTE) $10,902  $9,615  $8,942  $8,935  $9,071 



Noninterest Income

  Quarter to Date
  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Net gain on sales of mortgage loans $3,130  $2,644  $970  $650  $665 
Net mortgage servicing rights income 559  (163) (50) 130  142 
Trust and investment services 464  321  389  337  395 
ATM and debit card income 460  394  355  399  418 
Mortgage servicing fees 293  270  262  256  243 
Service charges on deposit accounts 177  119  219  245  239 
Change in fair value of equity investments 2  7  749  (5) 16 
Net gain from corporate owned life insurance death benefit   173       
Net gain on sales of commercial loans     668     
Change in fair value of mortgage banking instruments (66) 1,225  833     
Other income and fees 140  302  118  117  144 
Total noninterest income $5,159  $5,292  $4,513  $2,129  $2,262 


  Year to Date September 30 Variance
  2020 2019 Amount %
Net gain on sales of mortgage loans $6,744  $1,282  $5,462  426.05 %
Net mortgage servicing rights income 346  493  (147) (29.82)%
Trust and investment services 1,174  1,182  (8) (0.68)%
ATM and debit card income 1,209  1,182  27  2.28 %
Mortgage servicing fees 825  684  141  20.61 %
Service charges on deposit accounts 515  695  (180) (25.90)%
Change in fair value of equity investments 758  51  707  1386.27 %
Net gain from corporate owned life insurance death benefit 173    173  N/M
Net gain on sales of commercial loans 668    668  N/M
Change in fair value of mortgage banking instruments 1,992    1,992  N/M
Other income and fees 560  465  95  20.43 %
Total noninterest income $14,964  $6,034  $8,930  147.99 %


Net gain on sales of mortgage loans represents the income earned on the sale of residential mortgage loans into the secondary market. During 2019, and throughout 2020, the interest rate environment was very advantageous for residential mortgage originations and refinancing. While the interest rate environment is historically attractive for residential mortgage origination, the uncertainty that many consumers are facing due to the COVID-19 global pandemic is expected to reduce residential mortgage originations. As such, gains from the sales of mortgage loans are expected to decline in future periods.

Net mortgage servicing rights income represents income generated from the capitalization of mortgage servicing rights, net of amortization and impairment. For the quarter ended September 30, 2020, the Corporation recognized a reduction in MSR impairment of $222 as mortgage rates stabilized.

Trust and investment services includes income the Corporation earned from contracts with customers to manage assets for investment and/or to transact on their accounts. The wealth management component is strongly correlated to changes in the stock market and as such, can vary from period to period. Trust and investment services income is expected to approximate current levels throughout the remainder of the year.

ATM and debit card income represents fees earned on ATM and debit card transactions. The Corporation expects these fees to increase modestly throughout the remainder of 2020.

Mortgage servicing fees includes the fees earned for servicing loans that have been sold into the secondary market. The increase in mortgage servicing fees is directly related to the increase in the size of the serviced portfolio. Mortgage servicing fees are expected to continue to increase throughout the year.

Service charges on deposit accounts includes fees earned from deposit customers for transaction-based, account maintenance and overdraft services. The year-over-year decrease in service charges on deposit accounts is primarily due to a shift of customer demand toward deposit accounts with no or reduced service charges, as well as a temporary reduction in fees charged due to the COVID-19 global pandemic. 

Change in fair value of equity investments represents the income earned on equities held in the Corporation's investment portfolio. During the first quarter of 2020, an equity position held by the Corporation was bought out through an acquisition, resulting in a recognized gain of $732. The Corporation does not anticipate any significant changes in fair value from equity sales throughout the remainder of 2020.

Net gain from corporate owned life insurance death benefit is recognized in the event of the death of an insured individual. The death of an insured individual occurred in the second quarter of 2020. The Corporation does not expect to receive any gains from COLI death benefits for the remainder of 2020.

Net gain on sales of commercial loans represents the income earned from the sale of commercial loans into the secondary market. During the first quarter of 2020, the Corporation sold the guaranteed portion of one SBA loan and one USDA loan. The Corporation continually analyzes its commercial loan portfolio for opportunistic sales strategies.

On January 1, 2020, the Corporation adopted SAB 109. The Corporation now recognizes the value of servicing at the time of commitment, which resulted in an increase in retained earnings of $78 at January 1, 2020. The Corporation also elected the fair value option for its residential mortgage loans HFS on January 1, 2020, which resulted in an increase in retained earnings of $436. Pursuant to this adoption, changes in the fair value of mortgage banking instruments and loans held for sale are included in noninterest income. Change in fair value of mortgage banking instruments will fluctuate with the Corporation's residential mortgage loan originations and interest rate fluctuations. As mortgage loan originations are expected to decline, the change in fair value of mortgage banking instruments is expected to decrease throughout the remainder of 2020.

Other income and fees includes miscellaneous other income items, none of which are individually significant. Other income and fees are expected to approximate current levels throughout 2020.


Noninterest Expenses

  Quarter to Date
  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Total compensation $4,531  $4,252  $4,248  $4,037  $3,530 
Furniture and equipment 614  618  610  575  497 
Professional services 524  571  522  582  494 
Data processing 503  535  442  362  405 
Occupancy 491  435  476  467  444 
Loan and collection 292  229  162  203  120 
Advertising and promotional 284  255  252  232  222 
ATM and debit card 109  92  108  98  109 
Amortization of core deposit intangibles 91  90  90  113  112 
Telephone and communication 91  86  96  115  110 
FDIC insurance premiums 55  59  55  6  20 
Other general and administrative 633  587  625  625  545 
Total noninterest expenses $8,218  $7,809  $7,686  $7,415  $6,608 


  Year to Date September 30 Variance
  2020 2019 Amount %
Total compensation $13,031  $10,909  $2,122  19.45 %
Furniture and equipment 1,842  1,423  419  29.44 %
Professional services 1,617  1,378  239  17.34 %
Data processing 1,480  1,054  426  40.42 %
Occupancy 1,402  1,307  95  7.27 %
Loan and collection 683  349  334  95.70 %
Advertising and promotional 791  676  115  17.01 %
ATM and debit card 309  304  5  1.64 %
Amortization of core deposit intangibles 271  338  (67) (19.82)%
Telephone and communication 273  329  (56) (17.02)%
FDIC insurance premiums 169  138  31  22.46 %
Other general and administrative 1,845  1,603  242  15.10 %
Total noninterest expenses $23,713  $19,808  $3,905  19.71 %


Total compensation includes salaries, commissions and incentives, employee benefits, and payroll taxes. Total compensation has increased due to annual merit increases and an increase in commissions and incentives paid. Fluctuations in commissions and incentives are primarily driven by residential mortgage originations, which can vary significantly from period to period.

Furniture and equipment and occupancy expenses primarily consist of depreciation, repairs and maintenance, property taxes, utilities, insurance, certain service contracts, and other related items. These expenses are expected to increase with the size and complexity of the Corporation.

Professional services include expenses relating to third-party professional services. These services include, but are not limited to, regulatory, auditing, consulting, and legal. These expenses are expected to increase in future periods to ensure compliance with audit and regulatory requirements.

Data processing primarily includes the expenses relating to the Corporation's core data processor. These expenses are expected to increase throughout the remainder of 2020 with the size and complexity of the Corporation.

Loan and collection includes expenses related to the origination and collection of loans, as well as expenses related to OREO. The increase in expenses is a direct result of increased loan volume, as the current low interest rate environment has been attractive for borrowers. The Corporation may experience an increase in these expenses throughout the remainder of 2020 and into 2021.

Advertising and promotional includes the Corporation's media costs and any donations or sponsorships made on behalf of the Corporation. The increase in expenses is a direct result of the Corporation enhancing its marketing efforts to attract new and expand existing customer loans and deposit accounts. These expenses are expected to approximate current levels for the remainder of 2020 as a result of the Corporation's re-branding strategy.

ATM and debit card expenses fluctuate based on customer and non-customer utilization of ATMs and customer debit card volumes. The Corporation expects these fees to increase modestly throughout the remainder of 2020.

Amortization of core deposit intangibles relates to the core deposits acquired from Community Bancorp, Inc. on December 31, 2016 and is expected to approximate current levels throughout the remainder of 2020.

Telephone and communication includes expenses relating to the Corporation's communication systems. These expenses are expected to maintain current levels for the remainder of 2020.

FDIC insurance premiums typically fluctuate based on the size of the Corporation's balance sheet, capital position, overall risk profile, and examination ratings. FDIC insurance premiums decreased significantly in 2019 due to a Small Bank Assessment Credit issued by the FDIC in the second quarter of 2019. The credit was fully applied during the first quarter of 2020. The Corporation expects FDIC insurance premiums to approximate current levels throughout the remainder of 2020.

Other general and administrative includes miscellaneous other expense items, none of which are individually significant. These expenses are expected to approximate current levels into the foreseeable future.


Balance Sheet Breakdown and Analysis

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
ASSETS          
Cash and cash equivalents $75,032  $35,190  $71,140  $46,803  $37,572 
Total investment securities 78,179  75,526  76,312  61,621  62,351 
Loans held-for-sale 34,833  46,354  21,154  19,491  15,111 
Gross loans 1,060,885  1,044,564  865,577  870,555  826,597 
Less allowance for loan losses 10,100  8,991  7,250  5,813  5,413 
Net loans 1,050,785  1,035,573  858,327  864,742  821,184 
All other assets 46,016  45,051  44,247  42,102  41,828 
Total assets $1,284,845  $1,237,694  $1,071,180  $1,034,759  $978,046 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Total deposits $1,061,470  $1,018,287  $883,837  $863,102  $801,101 
Total borrowed funds 96,217  96,217  71,500  61,500  69,000 
Accrued interest payable and other liabilities 13,077  14,221  11,015  8,713  8,803 
Total liabilities 1,170,764  1,128,725  966,352  933,315  878,904 
Total shareholders' equity 114,081  108,969  104,828  101,444  99,142 
Total liabilities and shareholders' equity $1,284,845  $1,237,694  $1,071,180  $1,034,759  $978,046 


  9/30/2020 vs 6/30/2020 9/30/2020 vs 9/30/2019
  Variance Variance
  Amount % Amount %
ASSETS        
Cash and cash equivalents $39,842  113.22 % $37,460  99.70%
Total investment securities 2,653  3.51 % 15,828  25.39%
Loans held-for-sale (11,521) (24.85)% 19,722  130.51%
Gross loans 16,321  1.56 % 234,288  28.34%
Less allowance for loan losses 1,109  12.33 % 4,687  86.59%
Net loans 15,212  1.47 % 229,601  27.96%
All other assets 965  2.14 % 4,188  10.01%
Total assets $47,151  3.81 % $306,799  31.37%
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
Total deposits $43,183  4.24 % $260,369  32.50%
Total borrowed funds    % 27,217  39.44%
Accrued interest payable and other liabilities (1,144) (8.04)% 4,274  48.55%
Total liabilities 42,039  1.96 % 291,860  17.37%
Total shareholders' equity 5,112  4.69 % 14,939  15.07%
Total liabilities and shareholders' equity $47,151  3.81 % $306,799  31.37%


Cash and cash equivalents

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Cash and cash equivalents          
Noninterest bearing $22,108  $20,369  $33,312  $17,754   $21,808  
Interest bearing 52,924  14,821  37,828  6,049   6,764  
Federal funds sold       23,000   9,000  
Cash and cash equivalents $75,032  $35,190  $71,140  $46,803   $37,572  
           
  9/30/2020 vs 6/30/2020   9/30/2020 vs 9/30/2019
  Variance   Variance
  Amount %   Amount %
Cash and cash equivalents          
Noninterest bearing $1,739  8.54%   $300   1.38 %
Interest bearing 38,103  257.09%   46,160   682.44 %
Federal funds sold   N/M   (9,000)  (100.00)%
Cash and cash equivalents $39,842  113.22%   $37,460   99.70 %


Cash and cash equivalents, which is comprised of cash and due from banks and federal funds sold, fluctuate from period to period based on loan demand and variances in deposit accounts.

Primary and secondary liquidity sources

While the Corporation continues to maintain a strong liquidity position, it is important to monitor all liquidity sources. The following table outlines the Corporation's primary and secondary sources of liquidity as of:

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Cash and cash equivalents $75,032  $35,190  $71,140  $46,803  $37,572 
Unpledged investment securities 58,739  52,647  51,889  40,094  40,675 
FHLB borrowing availability 97,500  97,500  42,500  52,500  45,000 
Federal funds purchased lines of credit 21,500  21,500  17,500  17,500  17,500 
Funds available through the Fed Discount Window 10,000  10,000  10,000  10,000  10,000 
PPPLF 206,343  202,184       
Total liquidity sources $469,114  $419,021  $193,029  $166,897  $150,747 


Total investment securities

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Available-for-sale          
U.S. Government and federal agency $19,311  $21,339   $23,610  $18,867  $22,854  
State and municipal 15,729  14,115   10,657  10,691  10,194  
Mortgage backed residential 20,886  12,335   10,176  10,748  6,227  
Certificates of deposit 5,921  6,665   8,644  6,659  7,155  
Collateralized mortgage obligations - agencies 11,141  15,736   18,288  9,527  10,826  
Unrealized gain/(loss) on available-for-sale securities 2,099  2,242   1,735  1,092  1,048  
Total available-for-sale 75,087  72,432   73,110  57,584  58,304  
Held-to-maturity state and municipal 1,977  1,981   2,091  2,096  2,100  
Equity securities 1,115  1,113   1,111  1,941  1,947  
Total investment securities $78,179  $75,526   $76,312  $61,621  $62,351  
           
  9/30/2020 vs 6/30/2020   9/30/2020 vs 9/30/2019
  Variance   Variance
  Amount %   Amount %
Available-for-sale          
U.S. Government and federal agency $(2,028) (9.50)%   $(3,543) (15.50)%
State and municipal 1,614  11.43 %   5,535  54.30 %
Mortgage backed residential 8,551  69.32 %   14,659  235.41 %
Certificates of deposit (744) (11.16)%   (1,234) (17.25)%
Collateralized mortgage obligations - agencies (4,595) (29.20)%   315  2.91 %
Unrealized gain/(loss) on available-for-sale securities (143) (6.38)%   1,051  100.29 %
Total available-for-sale 2,655  3.67 %   16,783  28.79 %
Held-to-maturity state and municipal (4) (0.20)%   (123) (5.86)%
Equity securities 2  0.18 %   (832) (42.73)%
Total investment securities $2,653  3.51 %   $15,828  25.39 %


The amortized cost and fair value of AFS investment securities as of September 30, 2020 were as follows:

  Maturing    
  Due in One Year or Less After One Year But Within Five Years After Five Years But Within Ten Years After Ten Years Securities with Variable Monthly Payments or Noncontractual Maturities Total
U.S. Government and federal agency $16,380  $2,931  $  $  $  $19,311 
State and municipal 2,509  6,049  5,089  2,082    15,729 
Mortgage backed residential         20,886  20,886 
Certificates of deposit 1,731  4,190        5,921 
Collateralized mortgage obligations - agencies         11,141  11,141 
Total amortized cost $20,620  $13,170  $5,089  $2,082  $32,027  $72,988 
Fair value $20,757  $14,024  $5,308  $2,375  $32,623  $75,087 

The amortized cost and fair value of HTM investment securities as of September 30, 2020 were as follows:

  Maturing    
  Due in One Year or Less After One Year But Within Five Years After Five Years But Within Ten Years After Ten Years Securities with Variable Monthly Payments or Noncontractual Maturities Total
State and municipal $414  $1,113  $370  $80  $  $1,977 
Fair value $419  $1,160  $398  $86  $  $2,063 


Throughout 2019, yields on bonds that met the Corporation's investment standards declined significantly. As such, the Corporation did not replace the majority of maturing investments in 2019. However, an influx of liquidity in late 2019 and into 2020 led the Corporation to make investment security purchases in order to stabilize net interest margin and generate additional net interest income. Total investment securities are expected to grow with overall balance sheet growth as it is an important source of liquidity and consistent earnings. The following table summarizes information as of September 30, 2020 for investment securities purchased YTD:

  Book Value Fully Taxable Equivalent Weighted Average Yield
U.S. Government and federal agency $10,388  0.46%
State and municipal 6,274  1.72%
Collateralized mortgage obligations - agencies 7,103  1.59%
Certificates of deposit 496  1.01%
Mortgage backed residential 13,176  1.26%
Held-to-maturity state and municipal   %
Total $37,437  1.17%


Loans held-for-sale

Loans HFS represent the balance of loans that have been committed to be sold to the secondary market, but have not yet been delivered. The level of loans HFS fluctuates based on loan demand as well as the timing of loan deliveries to the secondary market. As residential mortgage activity is likely to decrease throughout the remainder of 2020, the balance of loans HFS will also likely decline.

During the first quarter of 2020, the Corporation opted to recognize loans HFS at fair value which represents the price at which the loans could be sold in the principal market at the measurement date.

Loans and allowance for loan losses

The following tables outline the composition and changes in the loan portfolio as of:

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Commercial $271,113  $260,440   $67,731  $71,689  $63,747  
Commercial real estate 483,275   469,039   462,561  455,289  420,127  
Total commercial loans 754,388   729,479   530,292  526,978  483,874  
Residential mortgage 261,375   268,295   285,392  292,946  291,401  
Home equity 39,456   40,114   43,222  41,987  43,061  
Total residential real estate loans 300,831   308,409   328,614  334,933  334,462  
Consumer 5,666   6,676   6,671  8,644  8,261  
Gross loans 1,060,885   1,044,564   865,577  870,555  826,597  
Allowance for loan losses (10,100)  (8,991)  (7,250) (5,813) (5,413) 
Loans, net $1,050,785  $1,035,573   $858,327  $864,742  $821,184  
           
  9/30/2020 vs 6/30/2020   9/30/2020 vs 9/30/2019
  Variance   Variance
  Amount %   Amount %
Commercial $10,673   4.10 %   $207,366  325.30 %
Commercial real estate 14,236   3.04 %   63,148  15.03 %
Total commercial loans 24,909   3.41 %   270,514  55.91 %
Residential mortgage (6,920)  (2.58)%   (30,026) (10.30)%
Home equity (658)  (1.64)%   (3,605) (8.37)%
Total residential real estate loans (7,578)  (2.46)%   (33,631) (10.06)%
Consumer (1,010)  (15.13)%   (2,595) (31.41)%
Gross loans 16,321   1.56 %   234,288  28.34 %
Allowance for loan losses (1,109)  12.33 %   (4,687) 86.59 %
Loans, net $15,212   1.47 %   $229,601  27.96 %


The following table presents historical loan balances by portfolio segment and impairment evaluation as of:

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Originated loans collectively evaluated for impairment          
Commercial $270,174  $259,384  $66,524  $70,322  $61,970 
Commercial real estate 469,353  452,084  446,713  436,626  400,470 
Residential mortgage 257,395  263,997  280,265  286,635  285,499 
Home equity 37,022  37,663  40,459  39,023  39,586 
Consumer 5,477  6,445  6,391  8,330  7,902 
Subtotal 1,039,421  1,019,573  840,352  840,936  795,427 
Originated loans individually evaluated for impairment          
Commercial          
Commercial real estate 2,204  3,290  1,658  1,668  1,677 
Residential mortgage 655  663  672  1,362  631 
Home equity         240 
Consumer 3  3  5     
Subtotal 2,862  3,956  2,335  3,030  2,548 
Acquired loans collectively evaluated for impairment          
Commercial 910  1,057  1,204  1,362  1,753 
Commercial real estate 11,368  13,293  13,630  16,346  17,194 
Residential mortgage 2,335  2,683  3,459  3,911  4,139 
Home equity 2,415  2,432  2,743  2,943  3,213 
Consumer 185  226  273  314  358 
Subtotal 17,213  19,691  21,309  24,876  26,657 
Acquired loans individually evaluated for impairment          
Commercial          
Commercial real estate          
Residential mortgage 55    58  58  61 
Home equity          
Consumer          
Subtotal 55    58  58  61 
Acquired loans with deteriorated credit quality          
Commercial 29  (1) 3  5  24 
Commercial real estate 350  372  560  649  786 
Residential mortgage 935  952  938  980  1,071 
Home equity 19  19  20  21  22 
Consumer 1  2  2    1 
Subtotal 1,334  1,344  1,523  1,655  1,904 
Gross Loans $1,060,885  $1,044,564  $865,577  $870,555  $826,597 
           
Total originated loans $1,042,283  $1,023,529  $842,687  $843,966  $797,975 
Total acquired loans 18,602  21,035  22,890  26,589  28,622 
Gross loans $1,060,885  $1,044,564  $865,577  $870,555  $826,597 


The following table presents historical allowance for loan losses allocations by portfolio segment and impairment evaluation as of:

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Originated loans collectively evaluated for impairment          
Commercial $632  $535  $478  $358  $301 
Commercial real estate 5,113  4,564  3,609  2,790  2,539 
Residential mortgage 3,281  3,080  2,442  1,917  1,820 
Home equity 416  353  280  195  198 
Consumer 101  102  89  87  87 
Subtotal 9,543  8,634  6,898  5,347  4,945 
Originated loans individually evaluated for impairment          
Commercial          
Commercial real estate 289  100  111  127  26 
Residential mortgage 5  5  6  128  27 
Home equity         213 
Consumer 3  3  5     
Subtotal 297  108  122  255  266 
Acquired loans collectively evaluated for impairment          
Commercial 1  1  1  1  2 
Commercial real estate 7  9  7  5  5 
Residential mortgage 9  9  9  8  9 
Home equity 18  15  14  12  13 
Consumer          
Subtotal 35  34  31  26  29 
Acquired loans with deteriorated credit quality          
Commercial          
Commercial real estate 32  22  39  34  31 
Residential mortgage 189  189  156  147  137 
Home equity 4  4  4  4  5 
Consumer          
Subtotal 225  215  199  185  173 
Allowance for loan losses $10,100  $8,991  $7,250  $5,813  $5,413 
           
Total originated loans $9,840  $8,742  $7,020  $5,602  $5,211 
Total acquired loans 260  249  230  211  202 
Allowance for loan losses $10,100  $8,991  $7,250  $5,813  $5,413 


Commercial $633  $536  $479  $359  $303 
Commercial real estate 5,441  4,695  3,766  2,956  2,601 
Residential mortgage 3,484  3,283  2,613  2,200  1,993 
Home equity 438  372  298  211  429 
Consumer 104  105  94  87  87 
Allowance for loan losses $10,100  $8,991  $7,250  $5,813  $5,413 


The following table summarizes the Corporation's current, past due, and nonaccrual loans as of:

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Accruing interest          
Current $1,058,437  $1,042,589  $862,581  $867,901  $824,587 
Past due 30-89 days 1,703  948  2,152  1,213  1,089 
Past due 90 days or more 86  361  166  239  209 
Total accruing interest 1,060,226  1,043,898  864,899  869,353  825,885 
Nonaccrual 659  666  678  1,202  712 
Total loans $1,060,885  $1,044,564  $865,577  $870,555  $826,597 
Total loans past due and in nonaccrual status $2,448  $1,975  $2,996  $2,654  $2,010 


The following table summarizes the Corporation's nonperforming assets as of:

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Nonaccrual loans $659  $666  $678  $1,202  $712 
Accruing loans past due 90 days or more 86  361  166  239  209 
Total nonperforming loans 745  1,027  844  1,441  921 
Other real estate owned     400     
Total nonperforming assets $745  $1,027  $1,244  $1,441  $921 


The following table summarizes the Corporation's primary asset quality measures as of:

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Nonperforming loans to gross loans 0.07% 0.10% 0.10% 0.17% 0.11%
Nonperforming assets to total assets 0.06% 0.08% 0.12% 0.14% 0.09%
Allowance for loan losses to gross loans 0.95% 0.86% 0.84% 0.67% 0.65%


The following table summarizes the balance of net unamortized discounts on purchased loans as of:

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Net unamortized discount on purchased loans $877  $1,058  $1,233  $1,462  $1,626 

As outlined in the preceding tables, the Corporation has grown its loan portfolio over the past 12 months with most of the growth coming in the form of commercial and commercial real estate loans. Despite the significant growth, the Corporation has not relaxed its underwriting standards.  Included in the increase in commercial loans were $211,060 of PPP loans.

Despite historically strong credit quality indicators, there continues to be significant uncertainty surrounding the overall impact of COVID-19 on the loan portfolio. This uncertainty resulted in the Corporation increasing the ALLL by $4,287, or 73.75%, since December 31, 2019. Management will continue to monitor the loan portfolio to ensure that the ALLL remains at an appropriate level.

The following table summarizes the average loan size as of:

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Commercial $166  $171  $214  $228  $204 
Commercial real estate 672  654  644  641  605 
Total commercial loans 321  325  513  514  481 
Residential mortgage 180  177  194  198  200 
Home equity 45  45  46  44  45 
Total residential real estate loans 129  128  137  138  139 
Consumer 22  25  26  32  31 
Gross loans $215  $213  $234  $234  $225 


COVID-19, CARES Act and SBA activity

The communities which the Corporation serves were not immune to the fallout of the COVID-19 global pandemic. The Corporation  has committed significant efforts to work with customers through temporary loan modifications and participation in the PPP loan program through the SBA.

The Corporation considers the modification type on a loan-by-loan basis. Most modifications for loans held within the Corporation's loan portfolio resulted in the deferment of principal and interest payments for 3 months.

In regards to commercial loan modifications, loan officers are contacting the borrowers to determine an appropriate strategy for the next 3 months. If an additional 3 months of principal deferral is warranted, the Corporation is generally collecting accrued interest.

Portfolio residential mortgage loans may have their deferral extended an additional 3 months if the borrower is experiencing a hardship. If the borrower has an escrow established, the Corporation is generally continuing to collect escrow payments.

The Corporation also provides a variety of accommodations for loans that the Corporation services for FHLMC including providing mortgage forbearance for up to 12 months, waiving assessments of penalties and late fees, halting foreclosure actions and evictions, and offering loan modification options that lower payments or keep payments the same after the forbearance period.

The table below outlines the COVID-19 related loan modifications granted by the Corporation as of September 30, 2020:

  Number of Modifications Outstanding Balance
Commercial 11  $3,020 
Commercial real estate 30  24,169 
Total commercial loan modifications 41  27,189 
Portfolio residential mortgage loans 92  20,591 
Home equity 11  645 
Total residential real estate loan modifications 103  21,236 
Consumer 3  25 
Total portfolio modifications 147  $48,450 
     
Residential mortgage loans serviced for FHLMC 101  $20,195 


The Corporation was extremely active in participating in the PPP loan program. As of September 30, 2020, the Corporation funded 1,370 loans with outstanding balances totaling $211,060.  The SBA is expected to begin processing applications for forgiveness of PPP loans in the fourth quarter of 2020.

The Corporation generated $6,738 in fees from the SBA through the PPP loan program. The income will be recognized over the life of the PPP loans, which were originated with 24 and 60 month terms. As of September 30, 2020, the Corporation has recognized $2,361 in income, with $4,377 remaining as unearned income.

All other assets

The following tables outline the composition and changes in other assets as of:

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Premises and equipment, net $15,267  $15,323   $15,533  $15,245  $15,443  
Corporate owned life insurance 10,225   10,115   10,380  10,316   10,248  
Accrued interest receivable 5,645   5,266   3,124  2,877   2,954  
Mortgage servicing rights 4,376   3,816   3,980  4,030   3,900  
Federal Home Loan Bank stock 3,488   3,488   3,150  3,150   3,150  
Goodwill 3,219   3,219   3,219  3,219   3,219  
Derivatives 1,772   1,311   1,063  125   172  
Core deposit intangibles 632   722   812  902   1,015  
Right-of-use assets 387   409   432  475   105  
Other real estate owned       400       
                    
Other assets 1,005   1,382   2,154  1,763   1,622  
All other assets $46,016  $45,051   $44,247  $42,102  $41,828  
           
  9/30/2020 vs 6/30/2020   9/30/2020 vs 9/30/2019
  Variance   Variance
  Amount %   Amount %
Premises and equipment, net $(56) (0.37)%   $(176) (1.14)%
Corporate owned life insurance 110  1.09 %   (23) (0.22)%
Accrued interest receivable 379  7.20 %   2,691  91.10 %
Mortgage servicing rights 560  14.68 %   476  12.21 %
Federal Home Loan Bank stock    %   338  10.73 %
Goodwill    %      %
Derivatives 461  35.16 %   1,600  930.23 %
Core deposit intangibles (90) (12.47)%   (383) (37.73)%
Right-of-use assets (22) (5.38)%   282  268.57 %
Other real estate owned   N/M     N/M
Other assets (377) (27.28)%   (617) (38.04)%
All other assets $965  2.14 %   $4,188  10.01 %


MSR are servicing assets that are recognized from the sales of mortgage loans. A portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. The increase in MSR is due to the increased volume of residential mortgage loan sales.  The Corporation expects MSR to stabilize, as residential real estate lending is expected to decline throughout the remainder of 2020.

Derivatives are used in the process of hedging the Corporation's mortgage banking activities. The derivatives are recorded at fair value. The Corporation does not expect significant growth in derivatives as residential real estate lending is expected to tighten throughout the remainder of 2020.

Right-of-use assets were established pursuant to the adoption of ASU 2016-02, "Leases (Topic 842)", on January 1, 2019. Right-of-use assets are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term, for leases that are longer than 12 months.

Total deposits

The following tables outline the composition and changes in the deposit portfolio as of:

  9/30/2020 6/30/2020 3/31/2020 12/31/2019 9/30/2019
Noninterest bearing demand $391,706   $383,452 $281,848  $260,503   $253,784  
Interest bearing          
Savings 269,051   245,957 215,748  215,218   213,494  
Money market demand 99,252   90,504 79,070  88,350   80,873  
NOW 120,681   122,477 83,910  75,976   39,286  
Time deposits 180,780   175,897 223,261  223,055   213,664  
Total deposits $1,061,470   $1,018,287 $883,837  $863,102   $801,101  
           
  9/30/2020 vs 6/30/2020   9/30/2020 vs 9/30/2019
  Variance   Variance
  Amount %   Amount %
Noninterest bearing demand $8,254    2.15 %   $137,922   54.35 %
Interest bearing          
Savings 23,094    9.39 %   55,557   26.02 %
Money market demand 8,748    9.67 %   18,379   22.73 %
NOW (1,796)   (1.47)%   81,395   207.19 %
Time deposits 4,883    2.78 %   (32,884)  (15.39)%
Total deposits $43,183    4.24 %   $260,369   32.50 %


The Corporation has continued its focus of growing non-contractual deposits while supplementing funding with time deposits. The Corporation has been able to drive this meaningful increase through enhanced organic growth strategies. The Corporation will continue to monitor deposit growth and adjust interest rates in order to minimize downward pressure on margins.

Schedule of time deposit maturities

The following table summarizes the contractual maturities of the time deposits as of September 30, 2020:

  Maturity Buckets
  3 Months or Less 3 to 6 Months 6 to 9 Months 9 to 12 Months Beyond 12 Months
Balance $68,508  $37,360  $13,078  $29,961  $31,873 
Weighted average yield 1.07% 1.07% 1.48% 0.81% 1.17%
           
  Cumulative Maturities
  3 Months or Less Up to 6 Months Up to 9 Months Up to 12 Months Total
Balance $68,508  $105,868  $118,946  $148,907  $180,780 
Weighted average yield 1.07% 1.07% 1.12% 1.06% 1.08%


The repricing of time deposits will have a significant impact on their weighted average yield. Current rates offered by the Corporation have time deposit rates ranging from 0.05% to 0.55% depending on the term and opening balance.

Total borrowed funds

The following tables outline the composition and changes in borrowed funds as of:

  9/30/20 6/30/20 3/31/20 12/31/19 9/30/19
Federal Home Loan Bank borrowings $77,500  $77,500  $57,500  $47,500  $55,000 
Subordinated debentures 14,000  14,000  14,000  14,000  14,000 
PPPLF 4,717  4,717       
Federal funds purchased          
Total borrowed funds $96,217   $96,217   $71,500   $61,500   $69,000  
           
  9/30/2020 vs 6/30/2020   9/30/2020 vs 9/30/2019
  Variance   Variance
  Amount %   Amount %
Federal Home Loan Bank borrowings $  %   $22,500  40.91%
Subordinated debentures   %     %
PPPLF   %   4,717  N/M
Federal funds purchased   %     %
Total borrowed funds $—   — %   $27,217   39.44 %


The Corporation utilizes a mix of borrowed funds and organic deposit growth to fund loan demand. There are times when Federal Home Loan Bank borrowings have extremely attractive interest rates and the Corporation will add to borrow funds for future deployment of funds. The increase in Federal Home Loan Bank borrowings in the second quarter of 2020 is solely due to the Corporation's participation in a PPP loan funding program through the FHLB.

Total borrowed funds are expected to decrease as current Federal Home Loan Bank borrowings mature. The Corporation continually analyzes the market for opportunities and will borrow funds when deemed financially beneficial.

Wholesale funding sources

The following tables outline the composition and changes in wholesale funding sources as of:

  9/30/20 6/30/20 3/31/20 12/31/19 9/30/19
Federal Home Loan Bank borrowings $77,500  $77,500   $57,500  $47,500  $55,000  
Brokered money market demand 25,029  25,010         
Brokered time deposits 28,605  28,837   28,605  28,605  16,326  
Subordinated debentures 14,000  14,000   14,000  14,000  14,000  
Internet time deposits 10,208  11,690   18,005  18,009  21,977  
PPPLF 4,717  4,717         
 Total wholesale funds $160,059   $161,754    $118,110   $108,114   $107,303   
           
  9/30/2020 vs 6/30/2020   9/30/2020 vs 9/30/2019
  Variance   Variance
  Amount %   Amount %
Federal Home Loan Bank borrowings $   %   $22,500  40.91 %
Brokered money market demand 19  0.08 %   25,029  N/M
Brokered time deposits (232) (0.80)%   12,279  75.21 %
Subordinated debentures    %      %
Internet time deposits (1,482) (12.68)%   (11,769) (53.55)%
PPPLF    %   4,717  N/M
 Total wholesale funds $(1,695) (1.05)%   $52,756   49.17  %

The Corporation utilizes wholesale funds to fund balance sheet growth. While wholesale funding has historically been more expensive than core deposits, there have been times in 2020 where that is not the case. The Corporation continually analyzes sources of wholesale funding when the increases in interest earning assets out-pace the increases in core deposits.

Accrued interest payable and other liabilities

Accrued interest payable and other liabilities includes accrued interest payable, federal income taxes payable, deferred federal income taxes payable, and all other liabilities (none of which are individually significant).  Accrued interest payable and other liabilities are not expected to fluctuate significantly in future periods.

Total shareholders' equity

Total shareholders' equity includes common stock, retained earnings, and AOCI. Total shareholders' equity is expected to continue to grow throughout the remainder of 2020 through the Corporation's earnings. In April 2020, the Corporation's Board of Directors amended its common stock repurchase plan to authorize the repurchase of up to $5,000 of common stock.

Stock Performance

The following graph compares the cumulative total shareholder return on the Corporation's common stock for the last five years with the cumulative total return on the ABA NASDAQ Community Bank Index (NASDAQ: XX:ABAQ) over the same period. The graph assumes the value of an investment in the Corporation's common stock and the ABA NASDAQ Community Bank Index was $100 at September 30, 2015 and all dividends were reinvested.

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/7ee315f5-1e3a-4bf3-9664-59d7b8baa5ad

Date FETM ABAQ Index
9/30/2015 100.00 100.00
9/30/2016 106.17 109.26
9/30/2017 135.60 140.97
9/30/2018 156.38 143.70
9/30/2019 157.23 129.69
9/30/2020 129.57 86.56


Abbreviations and Acronyms

ABA: American Bankers AssociationHTM: Held-to-maturity 
AFS: Available-for-saleIRA: Individual retirement account 
ALLL: Allowance for loan lossesITM: Interactive teller machine 
AOCI: Accumulated other comprehensive incomeMSR: Mortgage servicing rights 
ASU: Accounting Standards UpdateN/M: Not meaningful 
ATM: Automated teller machineNASDAQ: National Association of Securities Dealers Automated Quotations 
CARES Act: Coronavirus Aid, Relief, and Economic Security Act 
NOW: Negotiable order of withdrawal 
CET1: Common equity tier 1NSF: Non-sufficient funds 
COVID-19: Coronavirus Disease 2019OREO: Other real estate owned 
FDIC: Federal Deposit Insurance CorporationPPP: Paycheck Protection Program 
FHLB: Federal Home Loan BankPPPLF: Paycheck Protection Program Liquidity Facility 
FHLMC: Federal Home Loan Mortgage CorporationQTD: Quarter-to-date 
FRB: Federal Reserve BankSAB: Staff Accounting Bulletin 
FTE: Fully taxable equivalentSBA: Small Business Association 
GAAP: Generally Accepted Accounting PrinciplesUSDA: United States Department of Agriculture 
HFS: Held-for-saleYTD: Year-to-date 


About Fentura Financial, Inc. and The State Bank

Fentura Financial, Inc. is the holding company for The State Bank. It was formed in 1987 and is traded on the OTCQX exchange under the symbol FETM, and was recognized as one of the Top 50 performing stocks in 2018 and 2019 on that exchange.

The State Bank is a full-service, 5-Star Bauer Financial rated commercial, retail and trust bank headquartered in Fenton, Michigan. It currently operates 15 full-service branches in Genesee, Livingston, Oakland, Saginaw, and Shiawassee Counties and a loan production office in Saginaw County. The State Bank was ranked #22 by S&P Global in terms of 2019 performance for banks under $2 billion in assets. The State Bank’s commercial department provides a complete array of products including lines of credit, term loans, commercial mortgages, SBA loans and a full-suite of cash management products. The retail department offers personal checking, savings, time and IRA deposit accounts and a wide array of loan products including home equity, auto and personal loans. The residential loan department offers construction, purchase and refinance residential mortgage loans. The wealth management department offers a full-service suite of trust and portfolio management services. More information can be found at www.thestatebank.com or www.fentura.com.

Cautionary Statement: This press release contains certain forward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements concerning future growth in earning assets and net income. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including, but not limited to, economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services, interest rates and fees for services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release.

     
Contacts: Ronald L. Justice            
President & CEO             
Fentura Financial, Inc.   
810.714.3902                     ronj@thestatebank.com
 Aaron D. Wirsing
Chief Financial Officer
Fentura Financial, Inc.
810.714.3925aaronw@thestatebank.com

 

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