Fentura Financial, Inc. Announces Second Quarter 2020 Earnings

| Source: Fentura Financial, Inc. Fentura Financial, Inc.

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

FENTON, Mich., Aug. 04, 2020 (GLOBE NEWSWIRE) -- Fentura Financial, Inc. (OTCQX: FETM) announces quarterly results of net income of $4,043 and $7,395 for the three and six month periods ended June 30, 2020.

“Looking back on the second quarter, I am proud of the Fentura team. We worked hard and will continue efforts to serve our clients and help those in need get through the COVID-19 pandemic,” stated Ronald Justice, President and Chief Executive Officer of the Corporation. “We provided loan payment relief, interest free loans to individuals, significantly lowered and eliminated certain fees, performed daily cash drawings for a month, and provided more than 1,200 PPP loans totaling more than $205,000 to support local communities.”

Justice added, “Looking forward, as we navigate through these challenging times, we will continue to focus on prudent growth, a strong net interest margin, and maintaining credit quality, while supporting our customers and communities.”

Following is a discussion of the Corporation's financial performance as of, and for the quarter ended June 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:

  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
INCOME STATEMENT DATA          
Interest income $11,215  $11,070  $11,076  $11,240  $10,788 
Interest expense 1,618  2,145  2,158  2,184  2,195 
Net interest income 9,597  8,925  8,918  9,056  8,593 
Provision for loan losses 2,001  1,542  436  422  264 
Noninterest income 5,292  4,513  2,129  2,262  2,250 
Noninterest expenses 7,809  7,686  7,415  6,608  6,691 
Federal income tax expense 1,036  858  644  873  791 
Net income $4,043  $3,352  $2,552  $3,415  $3,097 
PER SHARE          
Earnings $0.87  $0.72  $0.55  $0.73  $0.67 
Dividends $0.075  $0.075  $0.07  $0.07  $0.07 
Tangible book value(1) $22.44  $21.56  $20.87  $20.37  $19.59 
Quoted market value          
High $18.95  $26.00  $25.50  $21.00  $21.00 
Low $14.90  $12.55  $20.60  $20.45  $20.45 
Close(1) $17.35  $15.50  $25.23  $21.00  $20.60 
PERFORMANCE RATIOS          
Return on average assets 1.35% 1.28% 1.02% 1.40% 1.31%
Return on average shareholders' equity 15.20% 13.01% 10.03% 13.83% 13.14%
Return on average tangible shareholders' equity 15.79% 13.54% 10.46% 14.47% 13.79%
Efficiency ratio 52.45% 57.20% 67.12% 58.38% 61.71%
Yield on earning assets (FTE) 3.94% 4.47% 4.66% 4.85% 4.81%
Rate on interest bearing liabilities 0.91% 1.28% 1.36% 1.42% 1.46%
Net interest margin to earning assets (FTE) 3.37% 3.61% 3.75% 3.91% 3.83%
BALANCE SHEET DATA(1)          
Total investment securities $75,526  $76,312  $61,621  $62,351  $73,285 
Gross loans $1,044,564  $865,577  $870,555  $826,597  $813,547 
Total assets $1,237,694  $1,071,180  $1,034,759  $978,046  $949,790 
Total deposits $1,018,287  $883,837  $863,102  $801,101  $792,555 
Borrowed funds $96,217  $71,500  $61,500  $69,000  $54,000 
Total shareholders' equity $108,969  $104,828  $101,444  $99,142  $95,504 
Net loans to total deposits 101.70% 97.11% 100.19% 102.51% 102.02%
Common shares outstanding 4,680,920  4,675,499  4,664,369  4,658,722  4,653,343 
QTD BALANCE SHEET AVERAGES          
Total assets $1,200,966  $1,049,245  $994,094  $971,074  $947,095 
Earning assets $1,146,941  $997,089  $944,692  $920,857  $900,738 
Interest bearing liabilities $711,500  $672,564  $629,454  $611,804  $603,965 
Total shareholders' equity $106,998  $103,646  $100,991  $97,958  $94,519 
Total tangible shareholders' equity $102,999  $99,558  $96,796  $93,650  $90,098 
Earned common shares outstanding 4,664,946  4,659,279  4,652,569  4,646,835  4,641,161 
Unvested stock grants 14,208  13,481  9,947  9,967  9,967 
Total common shares outstanding 4,679,154  4,672,760  4,662,516  4,656,802  4,651,128 
ASSET QUALITY(1)          
Nonperforming loans to gross loans 0.10% 0.10% 0.17% 0.11% 0.13%
Nonperforming assets to total assets 0.08% 0.12% 0.14% 0.09% 0.11%
Allowance for loan losses to gross loans 0.86% 0.84% 0.67% 0.65% 0.62%
CAPITAL RATIOS(1)          
Total capital to risk weighted assets 15.06% 14.42% 14.03% 14.42% 14.18%
Tier 1 capital to risk weighted assets 14.00% 13.56% 13.33% 13.73% 13.53%
CET1 capital to risk weighted assets 12.34% 11.91% 11.64% 11.96% 11.73%
Tier 1 leverage ratio 9.90% 10.97% 11.20% 11.22% 11.16%
           
(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 six month periods ended:

  6/30/2020 6/30/2019 6/30/2018 6/30/2017 6/30/2016
INCOME STATEMENT DATA          
Interest income $22,285  $21,225  $17,108  $13,681  $9,036 
Interest expense 3,763  4,285  2,263  1,389  1,158 
Net interest income 18,522  16,940  14,845  12,292  7,878 
Provision for loan losses 3,543  477  576  125  — 
Noninterest income 9,805  3,772  3,814  3,372  3,014 
Noninterest expenses 15,495  13,200  12,328  10,837  7,972 
Federal income tax expense 1,894  1,424  1,163  1,476  997 
Net income $7,395  $5,611  $4,592  $3,226  $1,923 
PER SHARE          
Earnings $1.59  $1.21  $1.26  $0.89  $0.77 
Dividends $0.15  $0.14  $0.12  $0.10  $0.30 
Tangible book value(1) $22.44  $19.59  $16.00  $13.45  $13.37 
Quoted market value          
High $26.00  $21.00  $21.25  $18.50  $14.94 
Low $12.55  $20.05  $18.88  $15.10  $12.85 
Close(1) $17.35  $20.60  $21.10  $18.25  $13.30 
PERFORMANCE RATIOS          
Return on average assets 1.32% 1.20% 1.16% 0.90% 0.85%
Return on average shareholders' equity 14.13% 12.14% 15.13% 12.36% 11.58%
Return on average tangible shareholders' equity 14.69% 12.75% 16.47% 13.16% 11.58%
Efficiency ratio 54.70% 63.73% 66.07% 69.18% 73.19%
Yield on earning assets (FTE) 4.19% 4.79% 4.42% 4.16% 4.41%
Rate on interest bearing liabilities 1.09% 1.43% 0.90% 0.57% 0.78%
Net interest margin to earning assets (FTE) 3.47% 3.82% 3.82% 3.73% 3.84%
BALANCE SHEET DATA(1)          
Total investment securities $75,526  $73,285  $49,110  $70,699  $24,378 
Gross loans $1,044,564  $813,547  $707,364  $591,753  $396,565 
Total assets $1,237,694  $949,790  $841,459  $730,511  $473,714 
Total deposits $1,018,287  $792,555  $702,035  $614,167  $393,578 
Borrowed funds $96,217  $54,000  $74,000  $59,000  $44,000 
Total shareholders' equity $108,969  $95,504  $63,078  $54,255  $33,919 
Net loans to total deposits 101.70% 102.02% 100.18% 95.85% 99.85%
Common shares outstanding 4,680,920  4,653,343  3,640,060  3,629,097  2,536,948 
YTD BALANCE SHEET AVERAGES          
Total assets $1,125,064  $940,585  $797,594  $723,786  $454,152 
Earning assets $1,072,008  $894,357  $749,755  $631,928  $410,313 
Interest bearing liabilities $692,035  $604,469  $509,294  $499,636  $297,662 
Total shareholders' equity $105,276  $93,239  $61,219  $52,786  $33,393 
Total tangible shareholders' equity $101,233  $88,762  $56,221  $49,586  $33,393 
Earned common shares outstanding 4,662,113  4,638,208  3,635,446  3,624,719  2,497,403 
Unvested stock grants 13,844  9,878  —  —  — 
Total common shares outstanding 4,675,957  4,648,086  3,635,446  3,624,719  2,497,403 
ASSET QUALITY(1)          
Nonperforming loans to gross loans 0.10% 0.13% 0.14% 0.09% 0.02%
Nonperforming assets to total assets 0.08% 0.11% 0.13% 0.08% 0.02%
Allowance for loan losses to gross loans 0.86% 0.62% 0.57% 0.52% 0.90%
CAPITAL RATIOS(1)          
Total capital to risk weighted assets 15.06% 14.18% 11.20% 11.25% 12.98%
Tier 1 capital to risk weighted assets 14.00% 13.53% 10.62% 10.73% 12.08%
CET1 capital to risk weighted assets 12.34% 11.73% 8.59% 8.36% 8.54%
Tier 1 leverage ratio 9.90% 11.16% 9.14% 8.99% 10.40%
           
(1)At end of period          
           

Income Statement Breakdown and Analysis

  Quarter to Date
  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
GAAP net income $4,043   $3,352   $2,552   $3,415   $3,097  
Acquisition related items (net of tax)          
Accretion on purchased loans (110)  (180)  (126)  (189)  (145) 
Amortization of core deposit intangibles 71   71   89   88   90  
Amortization on acquired time deposits 5   5   7   7   7  
Amortization on purchased mortgage servicing rights —   —   3   3   3  
Total acquisition related items (net of tax) (34)  (104)  (27)  (91)  (45) 
Other nonrecurring items (net of tax)          
Interest income on PPP loans (771)  —   —   —   —  
Net gain from COLI death benefit (137)  —   —   —   —  
Prepayment penalties collected (12)  (36)  (42)  (284)  (9) 
Change in fair value of equity investment due to acquisition transaction —   (578)  —   —   —  
Change in fair value of mortgage banking instruments —   (448)  —   —   —  
Interest expense on PPPLF 6   —   —   —   —  
Deferred costs recognized for PPP loans 58   —   —   —   —  
Mortgage servicing rights impairment 191   173   —   —   —  
Total other nonrecurring items (net of tax) (665)  (889)  (42)  (284)  (9) 
Adjusted net income from operations $3,344   $2,359   $2,483   $3,040   $3,043  
           
GAAP net interest income $9,597   $8,925   $8,918   $9,056   $8,593  
Interest income on PPP loans (976)  —   —   —   —  
Accretion on purchased loans (139)  (228)  (160)  (239)  (183) 
Prepayment penalties collected (15)  (46)  (53)  (360)  (12) 
Amortization on acquired time deposits 6   6   9   9   9  
Interest expense on PPPLF 8   —   —   —   —  
Deferred costs recognized for PPP loans 73   —   —   —   —  
Adjusted net interest income $8,554   $8,657   $8,714   $8,466   $8,407  
           
PERFORMANCE RATIOS          
Based on adjusted net income from operations          
Earnings per share $0.72   $0.51   $0.53   $0.65   $0.66  
Return on average assets 1.12 % 0.90 % 0.99 % 1.24 % 1.29 %
Return on average shareholders' equity 12.57 % 9.15 % 9.75 % 12.31 % 12.91 %
Return on average tangible shareholders' equity 13.06 % 9.53 % 10.18 % 12.88 % 13.55 %
           
Based on adjusted net interest income          
Yield on earning assets (FTE) 3.89 % 4.36 % 4.57 % 4.59 % 4.72 %
Rate on interest bearing liabilities 0.91 % 1.28 % 1.37 % 1.43 % 1.47 %
Net interest margin to earning assets (FTE) 3.32 % 3.50 % 3.66 % 3.66 % 3.75 %
                     


  Year to Date June 30 Variance
  2020 2019 Amount %
GAAP net income $7,395   $5,611   $1,784   31.79 %
Acquisition related items (net of tax)        
Accretion on purchased loans (290)  (320)  30   (9.38)%
Amortization of core deposit intangibles 142   179   (37)  (20.67)%
Amortization on acquired time deposits 10   13   (3)  (23.08)%
Amortization on purchased mortgage servicing rights —   6   (6)  (100.00)%
Total acquisition related items (net of tax) (138)  (122)  (16)  13.11 %
Other nonrecurring items (net of tax)        
Interest income on PPP loans (771)  —   (771)  N/M
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 (137)  —   (137)  N/M
Prepayment penalties collected (48)  (22)  (26)  118.18 %
Interest expense on PPPLF 6   —   6   N/M
Deferred costs recognized for PPP loans 58   —   58   N/M
Mortgage servicing rights impairment 364   —   364   N/M
Total other nonrecurring items (net of tax) (1,554)  (22)  (1,532)  6,963.64 %
Adjusted net income from operations $5,703   $5,467   $236   4.32 %
         
GAAP net interest income $18,522   $16,940   $1,582   9.34 %
Interest income on PPP loans (976)  —   (976)  N/M
Accretion on purchased loans (367)  (405)  38   (9.38)%
Prepayment penalties collected (61)  (28)  (33)  117.86 %
Amortization on acquired time deposits 12   17   (5)  (29.41)%
Interest expense on PPPLF 8   —   8   N/M
Deferred costs recognized for PPP loans 73   —   73   N/M
Adjusted net interest income $17,211   $16,524   $687   4.16 %
         
PERFORMANCE RATIOS        
Based on adjusted net income from operations        
Earnings per share $1.22   $1.18   $0.04   3.39 %
Return on average assets 1.02 % 1.17 %   (0.15)%
Return on average shareholders' equity 10.89 % 11.82 %   (0.93)%
Return on average tangible shareholders' equity 11.33 % 12.42 %   (1.09)%
         
Based on adjusted net interest income        
Yield on earning assets (FTE) 4.10 % 4.69 %   (0.59)%
Rate on interest bearing liabilities 1.09 % 1.44 %   (0.35)%
Net interest margin to earning assets (FTE) 3.39 % 3.73 %   (0.34)%
               

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.  The Corporation also opted to recognize the interest rate lock commitments, loans held for sale, and forward commitments at fair value. Changes in the fair value of these instruments is recognized as a component of noninterest income.  As forward loan sales commitments were previously recorded at fair value, the nonrecurring item impact disclosed above represents the change in fair value of interest rate lock commitments and loans held for sale.

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
  June 30, 2020 March 31, 2020 June 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 $1,048,068   $10,788  4.14% $878,813   $10,481  4.80% $805,954   $10,141  5.05%
Taxable investment securities 62,829   323  2.07% 56,963   353  2.49% 67,237   462  2.76%
Nontaxable investment securities 11,449   84  2.95% 10,532   81  3.09% 9,374   70  3.00%
Federal funds sold —   —  —% 33,588   116  1.39% 10,195   61  2.40%
Interest earning cash and cash equivalents 21,314   5  0.09% 14,043   26  0.74% 4,828   28  2.33%
Federal Home Loan Bank stock 3,281   33  4.05% 3,150   30  3.83% 3,150   41  5.22%
Total earning assets 1,146,941   11,233  3.94% 997,089   11,087  4.47% 900,738   10,803  4.81%
                   
Nonearning assets                  
Allowance for loan losses (7,753)      (5,821)      (4,822)     
Fixed assets 15,509       15,538       14,837      
Accrued income and other assets 46,269       42,439       36,342      
Total assets $1,200,966       $1,049,245       $947,095      
                   
Interest bearing liabilities                  
Interest bearing demand deposits $189,981   $249  0.53% $170,598   $475  1.12% $75,495   $117  0.62%
Savings deposits 247,687   140  0.23% 231,188   199  0.35% 243,795   319  0.52%
Time deposits 181,661   821  1.82% 205,485   1,053  2.06% 229,863   1,319  2.30%
Borrowed funds 92,171   408  1.78% 65,293   418  2.57% 54,812   440  3.22%
Total interest bearing liabilities 711,500   1,618  0.91% 672,564   2,145  1.28% 603,965   2,195  1.46%
                   
Noninterest bearing liabilities                  
Noninterest bearing deposits 371,320       264,699       243,010      
Accrued interest and other liabilities 11,148       8,336       5,601      
Shareholders' equity 106,998       103,646       94,519      
Total liabilities and shareholders' equity $1,200,966       $1,049,245       $947,095      
Net interest income (FTE)   $9,615      $8,942      $8,608   
Net interest margin to earning assets (FTE)     3.37%     3.61%     3.83%
                      


  Six Months Ended
  June 30, 2020 June 30, 2019
  Average
Balance		 Tax
Equivalent
Interest		 Average
Yield / Rate		 Average
Balance		 Tax
Equivalent
Interest		 Average
Yield / Rate
Interest earning assets            
Total loans $963,400   $21,269  4.44% $798,511   $19,882  5.02%
Taxable investment securities 59,896   676  2.27% 73,303   1,021  2.81%
Nontaxable investment securities 10,991   165  3.02% 9,977   146  2.95%
Federal funds sold 16,794   116  1.39% 5,119   61  2.40%
Interest earning cash and cash equivalents 17,712   31  0.35% 4,297   53  2.49%
Federal Home Loan Bank stock 3,215   63  3.94% 3,150   93  5.95%
Total earning assets 1,072,008   22,320  4.19% 894,357   21,256  4.79%
             
Nonearning assets            
Allowance for loan losses (6,787)      (4,706)     
Fixed assets 15,523       14,827      
Accrued income and other assets 44,320       36,107      
Total assets $1,125,064       $940,585      
             
Interest bearing liabilities            
Interest bearing demand deposits $180,291   $724  0.81% $74,454   $201  0.54%
Savings deposits 239,438   339  0.28% 242,805   616  0.51%
Time deposits 193,574   1,874  1.95% 227,865   2,539  2.25%
Borrowed funds 78,732   826  2.11% 59,345   929  3.16%
Total interest bearing liabilities 692,035   3,763  1.09% 604,469   4,285  1.43%
             
Noninterest bearing liabilities            
Noninterest bearing deposits 318,010       238,640      
Accrued interest and other liabilities 9,743       4,237      
Shareholders' equity 105,276       93,239      
Total liabilities and shareholders' equity $1,125,064       $940,585       
Net interest income (FTE)   $18,557      $16,971   
Net interest margin to earning assets (FTE)     3.48%     3.83%
               

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 Six Months Ended
  June 30, 2020 June 30, 2020 June 30, 2020
  Compared To Compared To Compared To
  March 31, 2020 June 30, 2019 June 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 $6,947  $(6,640) $307  $9,573  $(8,926) $647  $6,828  $(5,441) $1,387 
Taxable investment securities 170  (200) (30) (29) (110) (139) (168) (177) (345)
Nontaxable investment securities 21  (18) 3  20  (8) 12  15  4  19 
Federal funds sold (58) (58) (116) (30) (30) (60) 134  (79) 55 
Interest earning cash and cash equivalents 60  (81) (21) 151  (174) (23) 127  (149) (22)
Federal Home Loan Bank stock 1  2  3  11  (18) (7) 6  (36) (30)
Total changes in interest income 7,141  (6,995) 146  9,696  (9,266) 430  6,942  (5,878) 1,064 
                   
Changes in interest expense                  
Interest bearing demand deposits 317  (543) (226) 245  (113) 132  387  136  523 
Savings deposits 86  (145) (59) 34  (213) (179) (8) (269) (277)
Time deposits (116) (116) (232) (250) (248) (498) (353) (312) (665)
Borrowed funds 585  (595) (10) 934  (966) (32) 567  (670) (103)
Total changes in interest expense 872  (1,399) (527) 963  (1,540) (577) 593  (1,115) (522)
Net change in net interest income (FTE) $6,269  $(5,596) $673  $8,733  $(7,726) $1,007  $6,349  $(4,763) $1,586 
                                     


  Average Yield/Rate for the Three Month Periods Ended
  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Total earning assets 3.94% 4.47% 4.66% 4.85% 4.81%
Total interest bearing liabilities 0.91% 1.28% 1.36% 1.42% 1.46%
Net interest margin to earning assets (FTE) 3.37% 3.61% 3.75% 3.91% 3.83%
Net interest margin to earning assets (FTE) without impact of PPP loans 3.52% 3.61% 3.75% 3.91% 3.83%
  Quarter to Date Net Interest Income (FTE)
  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Interest income $11,215  $11,070  $11,076  $11,240  $10,788 
FTE adjustment 18  17  17  15  15 
Total interest income (FTE) 11,233  11,087  11,093  11,255  10,803 
Total interest expense 1,618  2,145  2,158  2,184  2,195 
Net interest income (FTE) $9,615  $8,942  $8,935  $9,071  $8,608 
                     

The current low interest rate environment continues to create pressure on the Corporation's net interest margin. At the end of the first quarter of 2020, and into the second quarter of 2020, the Corporation made a concentrated effort to  decrease the interest rates on deposit products.

Noninterest Income

  Quarter to Date
  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Net gain on sales of mortgage loans $2,644  $970  $650  $665  $422 
Change in fair value of mortgage banking instruments 1,225  833  —  —  — 
ATM and debit card income 394  355  399  418  404 
Trust and investment services 321  389  337  395  459 
Mortgage servicing fees 270  262  256  243  230 
Net gain from corporate owned life insurance death benefit 173  —  —  —  — 
Service charges on deposit accounts 119  219  245  239  222 
Change in fair value of equity investments 7  749  (5) 16  21 
Net gain on sales of commercial loans —  668  —  —  — 
Net mortgage servicing rights income (164) (50) 130  142  344 
Other income and fees 303  118  117  144  148 
Total noninterest income $5,292  $4,513  $2,129  $2,262  $2,250 
                     
                    


  Year to Date June 30 Variance
  2020 2019 Amount %
Net gain on sales of mortgage loans $3,614   $617  $2,997   485.74 %
Change in fair value of mortgage banking instruments 2,058   —  2,058   N/M
ATM and debit card income 749   764  (15)  (1.96)%
Trust and investment services 710   787  (77)  (9.78)%
Mortgage servicing fees 532   441  91   20.63 %
Net gain from corporate owned life insurance death benefit 173   —  173   N/M
Service charges on deposit accounts 338   456  (118)  (25.88)%
Change in fair value of equity investments 756   35  721   2060.00 %
Net gain on sales of commercial loans 668   —  668   N/M
Net mortgage servicing rights income (214)  352  (566)  (160.80)%
Other income and fees 421   320  101   31.56 %
Total noninterest income $9,805   $3,772  $6,033   159.94 %
                   

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 into 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 decrease through 2020.

On January 1, 2020, the Corporation adopted SAB 109. Because of this adoption, 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 such, the change in fair value of mortgage banking instruments is expected to decrease through 2020.

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.

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.

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 increases in the size of the serviced portfolio. Mortgage servicing fees are expected to continue to increase throughout the year.

Net gain from corporate owned life insurance death benefit is recognized in the event of the death of an insured individual. The death on 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.

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 reduction in fees charged. In order to provide relief to customers during the COVID-19 global pandemic, the Corporation reduced fees charged on NSF transactions by more than 50% through May 31, 2020. Now that this program has ended, service charges on deposit accounts are expected to slightly increase in the foreseeable future.

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, and that transaction generated a gain of $732. The Corporation does not anticipate any significant changes in fair value from equity sales throughout 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.

Net mortgage servicing rights income represents income generated from the capitalization of mortgage servicing rights, net of amortization and impairment. During the second quarter of 2019, the Corporation sold a pool of residential mortgage loans out of its loan portfolio, but retained servicing.  This sale generated $266 of net MSR income. During 2020, the Corporation recognized MSR impairments of $219 and $241 for the quarters ended March 31, 2020 and June 30, 2020, respectively. As interest rates remain at historically low levels, refinance opportunities continue to be very attractive to borrowers, thus driving down the value of MSR associated with the current portfolio.

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
  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Total compensation $4,252  $4,248  $4,037  $3,530  $3,749 
Furniture and equipment 618  610  665  579  525 
Professional services 571  522  582  494  439 
Data processing 535  442  272  323  281 
Occupancy 435  476  467  444  426 
Advertising and promotional 255  252  232  222  291 
Loan and collection 229  162  203  120  119 
ATM and debit card 92  108  98  109  100 
Amortization of core deposit intangibles 90  90  113  112  114 
FDIC insurance premiums 59  55  6  20  17 
Telephone and communication 86  96  115  110  108 
Other general and administrative 587  625  625  545  522 
Total noninterest expenses $7,809  $7,686  $7,415  $6,608  $6,691 
                     


  Year to Date June 30 Variance
  2020 2019 Amount %
Total compensation $8,500  $7,379  $1,121   15.19 %
Furniture and equipment 1,228  1,016  212   20.87 %
Professional services 1,093  908  185   20.37 %
Data processing 977  454  523   115.20 %
Occupancy 911  863  48   5.56 %
Advertising and promotional 507  535  (28)  (5.23)%
Loan and collection 391  229  162   70.74 %
ATM and debit card 200  195  5   2.56 %
Amortization of core deposit intangibles 180  226  (46)  (20.35)%
FDIC insurance premiums 114  118  (4)  (3.39)%
Telephone and communication 182  219  (37)  (16.89)%
Other general and administrative 1,212  1,058  154   14.56 %
Total noninterest expenses $15,495  $13,200  $2,295   17.39 %
                  

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. Total compensation is expected to moderate throughout 2020 as increases related to the growth in size and complexity of the Corporation will likely be offset by reductions in commissions and incentives.

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 2020 with the size and complexity of the Corporation.

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 increase throughout 2020 due to the Corporation's re-branding strategy and continued growth strategy.

Loan and collection includes expenses related to the origination and collection of loans, as well as expenses related to OREO. Given the impact that COVID-19 has had on the economy, the Corporation may experience elevated levels of these expenses in 2020.

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 maintain current levels throughout 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 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. Due to a combination of the Small Bank Assessment Credit, and increased asset size largely due to PPP loans, the Corporation expects FDIC insurance premiums to approximate current levels throughout 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.

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

  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
ASSETS          
Cash and cash equivalents $35,190  $71,140  $46,803  $37,572  $20,067 
Total investment securities 75,526  76,312  61,621  62,351  73,285 
Loans held-for-sale 46,354  21,154  19,491  15,111  6,771 
Gross loans 1,044,564  865,577  870,555  826,597  813,547 
Less allowance for loan losses 8,991  7,250  5,813  5,413  5,014 
Net loans 1,035,573  858,327  864,742  821,184  808,533 
All other assets 45,051  44,247  42,102  41,828  41,134 
Total assets $1,237,694  $1,071,180  $1,034,759  $978,046  $949,790 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Total deposits $1,018,287  $883,837  $863,102  $801,101  $792,555 
Total borrowed funds 96,217  71,500  61,500  69,000  54,000 
Accrued interest payable and other liabilities 14,221  11,015  8,713  8,803  7,731 
Total liabilities 1,128,725  966,352  933,315  878,904  854,286 
Total shareholders' equity 108,969  104,828  101,444  99,142  95,504 
Total liabilities and shareholders' equity $1,237,694  $1,071,180  $1,034,759  $978,046  $949,790 
                     


  6/30/2020 vs 3/31/2020 6/30/2020 vs 6/30/2019
  Variance Variance
  Amount % Amount %
ASSETS        
Cash and cash equivalents $(35,950) (50.53)% $15,123  75.36%
Total investment securities (786) (1.03)% 2,241  3.06%
Loans held-for-sale 25,200  119.13 % 39,583  584.60%
Gross loans 178,987  20.68 % 231,017  28.40%
Less allowance for loan losses 1,741  24.01 % 3,977  79.32%
Net loans 177,246  20.65 % 227,040  28.08%
All other assets 804  1.82 % 3,917  9.52%
Total assets $166,514  15.54 % $287,904  30.31%
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
Total deposits $134,450  15.21 % $225,732  28.48%
Total borrowed funds 24,717  34.57 % 42,217  78.18%
Accrued interest payable and other liabilities 3,206  29.11 % 6,490  83.95%
Total liabilities 162,373  8.78 % 274,439  16.66%
         
Total shareholders' equity 4,141  3.95 % 13,465  14.10%
Total liabilities and shareholders' equity $166,514  15.54 % $287,904  30.31%
                

Cash and cash equivalents

  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Cash and due from banks          
Noninterest bearing $20,369   $33,312   $17,754  $21,808   $12,143  
Interest bearing 14,821   37,828   6,049  6,764   4,924  
Federal funds sold —   —   23,000  9,000   3,000  
Cash and cash equivalents $35,190   $71,140   $46,803  $37,572   $20,067  
           
  6/30/2020 vs 3/31/2020   6/30/2020 vs 6/30/2019
  Variance   Variance
  Amount %   Amount %
Cash and due from banks          
Noninterest bearing $(12,943)  (38.85)%   $8,226   67.74 %
Interest bearing (23,007)  (60.82)%   9,897   201.00 %
Federal funds sold —   N/M   (3,000)  (100.00)%
Cash and cash equivalents $(35,950)  (50.53)%   $15,123   75.36 %
                     

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 maintain a strong liquidity position, it is important to monitor all liquidity sources. Because of the funding of PPP loans, the Corporation may have to make significant draws on these sources of liquidity in the near term. The following table outlines the Corporation's primary and secondary sources of liquidity as of:

  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Cash and cash equivalents $35,190  $71,140  $46,803  $37,572  $20,067 
Unpledged investment securities 52,647  51,889  40,094  40,675  50,729 
FHLB borrowing availability 97,500  42,500  52,500  45,000  60,000 
Federal funds purchased lines of credit 21,500  17,500  17,500  17,500  17,500 
Funds available through the Fed Discount Window 10,000  10,000  10,000  10,000  10,000 
PPPLF 202,184  —  —  —  — 
Total liquidity sources $419,021  $193,029  $166,897  $150,747  $158,296 
                     

Total investment securities

  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Available-for-sale          
U.S. Government and federal agency $21,339   $23,610   $18,867  $22,854   $33,842  
State and municipal 14,115   10,657   10,691  10,194   8,889  
Mortgage backed residential 12,335   10,176   10,748  6,227   6,733  
Certificates of deposit 6,665   8,644   6,659  7,155   7,154  
Collateralized mortgage obligations - agencies 15,736   18,288   9,527  10,826   11,856  
Unrealized gain/(loss) on available-for-sale securities 2,242   1,735   1,092  1,048   776  
Total available-for-sale 72,432   73,110   57,584  58,304   69,250  
Held-to-maturity state and municipal 1,981   2,091   2,096  2,100   2,104  
Equity securities 1,113   1,111   1,941  1,947   1,931  
Total investment securities $75,526   $76,312   $61,621  $62,351   $73,285  
           
  6/30/2020 vs 3/31/2020   6/30/2020 vs 6/30/2019
  Variance   Variance
  Amount %   Amount %
Available-for-sale          
U.S. Government and federal agency $(2,271)  (9.62)%   $(12,503)  (36.95)%
State and municipal 3,458   32.45 %   5,226   58.79 %
Mortgage backed residential 2,159   21.22 %   5,602   83.20 %
Certificates of deposit (1,979)  (22.89)%   (489)  (6.84)%
Collateralized mortgage obligations - agencies (2,552)  (13.95)%   3,880   32.73 %
Unrealized gain/(loss) on available-for-sale securities 507   29.22 %   1,466   188.92 %
Total available-for-sale (678)  (0.93)%   3,182   4.59 %
Held-to-maturity state and municipal (110)  (5.26)%   (123)  (5.85)%
Equity securities 2   0.18 %   (818)  (42.36)%
Total investment securities $(786)  (1.03)%   $2,241   3.06 %
                     

The amortized cost and fair value of AFS investment securities as of June 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 $16,411  $4,928  $—  $—  $—  $21,339 
State and municipal 2,474  5,772  3,777  2,092  —  14,115 
Mortgage backed residential —  —  —  —  12,335  12,335 
Certificates of deposit 2,475  4,190  —  —  —  6,665 
Collateralized mortgage obligations - agencies —  —  —  —  15,736  15,736 
Total amortized cost $21,360  $14,890  $3,777  $2,092  $28,071  $70,190 
Fair value $21,553  $15,756  $3,933  $2,371  $28,819  $72,432 
                         

The amortized cost and fair value of HTM investment securities as of June 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 $415  $1,116  $370  $80  $—  $1,981 
Fair value $421  $1,162  $396  $85  $—   $2,064 
                         

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 June 30, 2020 for investment securities purchased YTD:

  Book Value Fully Taxable
Equivalent
Weighted Average
Yield		 Weighted Average
Remaining
Maturity (Months)
U.S. Government and federal agency $10,421  0.46% 5 
State and municipal 4,510  1.66% 86 
Collateralized mortgage obligations - agencies 8,663  1.80% 289 
Certificates of deposit 1,240  1.05% 3 
Mortgage backed residential 3,132  1.05% 136 
Held-to-maturity state and municipal —  —% — 
Total $27,966  1.16% 121 
           

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 for 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. The Corporation believes that fair value is 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:

  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Commercial $260,440   $67,731   $71,689   $63,747   $63,998  
Commercial real estate 469,039   462,561   455,289   420,127   408,103  
Total commercial loans 729,479   530,292   526,978   483,874   472,101  
Residential mortgage 268,295   285,392   292,946   291,401   289,944  
Home equity 40,114   43,222   41,987   43,061   42,890  
Total residential real estate loans 308,409   328,614   334,933   334,462   332,834  
Consumer 6,676   6,671   8,644   8,261   8,612  
Gross loans 1,044,564   865,577   870,555   826,597   813,547  
Allowance for loan losses (8,991)  (7,250)  (5,813)  (5,413)  (5,014) 
Loans, net $1,035,573   $858,327   $864,742   $821,184   $808,533  
           
  6/30/2020 vs 3/31/2020   6/30/2020 vs 6/30/2019
  Variance   Variance
  Amount %   Amount %
Commercial $192,709   284.52 %   $196,442   306.95 %
Commercial real estate 6,478   1.40 %   60,936   14.93 %
Total commercial loans 199,187   37.56 %   257,378   54.52 %
Residential mortgage (17,097)  (5.99)%   (21,649)  (7.47)%
Home equity (3,108)  (7.19)%   (2,776)  (6.47)%
Total residential real estate loans (20,205)  (6.15)%   (24,425)  (7.34)%
Consumer 5   0.07 %   (1,936)  (22.48)%
Gross loans 178,987   20.68 %   231,017   28.40 %
Allowance for loan losses (1,741)  24.01 %   (3,977)  79.32 %
Loans, net $177,246   20.65 %   $227,040   28.08 %
                     

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

  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Originated loans collectively evaluated for impairment          
Commercial $259,384   $66,524  $70,322  $61,970  $61,122 
Commercial real estate 452,084   446,713  436,626  400,470  386,970 
Residential mortgage 263,997   280,265  286,635  285,499  283,638 
Home equity 37,663   40,459  39,023  39,586  39,243 
Consumer 6,445   6,391  8,330  7,902  8,169 
Subtotal 1,019,573   840,352  840,936  795,427  779,142 
Originated loans individually evaluated for impairment          
Commercial —   —  —  —  — 
Commercial real estate 3,290   1,658  1,668  1,677  1,703 
Residential mortgage 663   672  1,362  631  660 
Home equity —   —  —  240  218 
Consumer 3   5  —  —  — 
Subtotal 3,956   2,335  3,030  2,548  2,581 
Acquired loans collectively evaluated for impairment          
Commercial 1,057   1,204  1,362  1,753  2,806 
Commercial real estate 13,293   13,630  16,346  17,194  18,526 
Residential mortgage 2,683   3,459  3,911  4,139  4,388 
Home equity 2,432   2,743  2,943  3,213  3,399 
Consumer 226   273  314  358  441 
Subtotal 19,691   21,309  24,876  26,657  29,560 
Acquired loans individually evaluated for impairment          
Commercial —   —  —  —  — 
Commercial real estate —   —  —  —  — 
Residential mortgage —   58  58  61  113 
Home equity —   —  —  —  — 
Consumer —   —  —  —  — 
Subtotal —   58  58  61  113 
Acquired loans with deteriorated credit quality          
Commercial (1)  3  5  24  70 
Commercial real estate 372   560  649  786  904 
Residential mortgage 952   938  980  1,071  1,145 
Home equity 19   20  21  22  30 
Consumer 2   2  —  1  2 
Subtotal 1,344   1,523  1,655  1,904  2,151 
Gross Loans $1,044,564   $865,577  $870,555  $826,597  $813,547 
           
Total originated loans $1,023,529   $842,687  $843,966  $797,975  $781,723 
Total acquired loans 21,035   22,890  26,589  28,622  31,824 
Gross loans $1,044,564   $865,577  $870,555  $826,597  $813,547 
                      

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

  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Originated loans collectively evaluated for impairment          
Commercial $535  $478  $358  $301  $278 
Commercial real estate 4,564  3,609  2,790  2,539  2,381 
Residential mortgage 3,080  2,442  1,917  1,820  1,662 
Home equity 353  280  195  198  191 
Consumer 102  89  87  87  90 
Subtotal 8,634  6,898  5,347  4,945  4,602 
Originated loans individually evaluated for impairment          
Commercial —  —  —  —  — 
Commercial real estate 100  111  127  26  — 
Residential mortgage 5  6  128  27  28 
Home equity —  —  —  213  218 
Consumer 3  5  —  —  — 
Subtotal 108  122  255  266  246 
Acquired loans collectively evaluated for impairment          
Commercial 1  1  1  2  5 
Commercial real estate 9  7  5  5  5 
Residential mortgage 9  9  8  9  9 
Home equity 15  14  12  13  14 
Consumer —  —  —  —  — 
Subtotal 34  31  26  29  33 
Acquired loans with deteriorated credit quality          
Commercial —  —  —  —  — 
Commercial real estate 22  39  34  31  15 
Residential mortgage 189  156  147  137  114 
Home equity 4  4  4  5  4 
Consumer —  —  —  —  — 
Subtotal 215  199  185  173  133 
Allowance for loan losses $8,991  $7,250  $5,813  $5,413  $5,014 
           
Total originated loans $8,742  $7,020  $5,602  $5,211  $4,848 
Total acquired loans 249  230  211  202  166 
Allowance for loan losses $8,991  $7,250  $5,813  $5,413  $5,014 
Commercial $536  $479  $359  $303  $283 
Commercial real estate 4,695  3,766  2,956  2,601  2,401 
Residential mortgage 3,283  2,613  2,200  1,993  1,813 
Home equity 372  298  211  429  427 
Consumer 105  94  87  87  90 
Allowance for loan losses $8,991  $7,250  $5,813  $5,413  $5,014 
                     

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

  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Accruing interest          
Current $1,042,589  $862,581  $867,901  $824,587  $811,184 
Past due 30-89 days 948  2,152  1,213  1,089  1,275 
Past due 90 days or more 361  166  239  209  301 
Total accruing interest 1,043,898  864,899  869,353  825,885  812,760 
Nonaccrual 666  678  1,202  712  787 
Total loans $1,044,564  $865,577  $870,555  $826,597  $813,547 
Total loans past due and in nonaccrual status $1,975  $2,996  $2,654  $2,010  $2,363 
                     

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

  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Nonaccrual loans $666  $678  $1,202  $712  $787 
Accruing loans past due 90 days or more 361  166  239  209  301 
Total nonperforming loans 1,027  844  1,441  921  1,088 
Other real estate owned —  400  —  —  — 
Total nonperforming assets $1,027  $1,244  $1,441  $921  $1,088 
                     

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

  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Nonperforming loans to gross loans 0.10% 0.10% 0.17% 0.11% 0.13%
Nonperforming assets to total assets 0.08% 0.12% 0.14% 0.09% 0.11%
Allowance for loan losses to gross loans 0.86% 0.84% 0.67% 0.65% 0.62%
                

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

  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Net unamortized discount on purchased loans $1,058  $1,233  $1,462  $1,626  $1,914 
                     

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. During the second quarter of 2020, the Corporation funded 1,239 PPP loans totaling $206,901. The vast majority of these loans were non-real estate Commercial loans.  Despite the significant growth, the Corporation has not relaxed its underwriting standards.

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 $3,178, or 54.67%, 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:

  6/30/2020 3/31/2020 12/31/2019 9/30/2019 6/30/2019
Commercial $171  $214  $228  $204  $195 
Commercial real estate 654  644  641  605  609 
Total commercial loans 325  513  514  481  473 
Residential mortgage 177  194  198  200  206 
Home equity 45  46  44  45  45 
Total residential real estate loans 128  137  138  139  140 
Consumer 25  26  32  31  32 
Gross loans $213  $234  $234  $225  $223 
                     

COVID-19, CARES Act and SBA activity

As stated above, 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.

The Corporation was extremely active in participating in the PPP loan program. As of June 30, 2020 the Corporation funded 1,239 loans totaling $206,901.

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 all foreclosure actions and evictions of borrowers until at least May 17, 2020,
  • 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 issued by the Corporation through June 30, 2020:

  Number of
Modifications		 Outstanding
Balance
Commercial 123  $29,380 
Commercial real estate 227  152,724 
Total commercial loan modifications 350  182,104 
Residential mortgage loans serviced for FHLMC 131  28,656 
Portfolio residential mortgage loans 157  40,411 
Home equity 25  1,982 
Total residential real estate loan modifications 313   71,049  
Consumer 8  183 
Total modifications 671  $253,336 
        

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 and 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.

All other assets

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

  6/30/20 3/31/20 12/31/19 9/30/19 6/30/19
Premises and equipment, net $15,323   $15,533   $15,245  $15,443   $14,792  
Mortgage servicing rights 3,816   3,980   4,030  3,900   3,758  
Accrued interest receivable 5,266   3,124   2,877  2,954   3,350  
Corporate owned life insurance 10,115   10,380   10,316  10,248   10,181  
Federal Home Loan Bank stock 3,488   3,150   3,150  3,150   3,150  
Goodwill 3,219   3,219   3,219  3,219   3,219  
Core deposit intangibles 722   812   902  1,015   1,128  
Other real estate owned —   400   —  —   —  
Derivatives 1,311   1,063   125  172   —  
Right-of-use assets 409   432   475  105   119  
Other assets 1,382   2,154   1,763  1,622   1,437  
All other assets $45,051   $44,247   $42,102  $41,828   $41,134  
           
  6/30/2020 vs 3/31/2020   6/30/2020 vs 6/30/2019
  Variance   Variance
  Amount %   Amount %
Premises and equipment, net $(210)  (1.35)%   $531   3.59 %
Mortgage servicing rights (164)  (4.12)%   58   1.54 %
Accrued interest receivable 2,142   68.57 %   1,916   57.19 %
Corporate owned life insurance (265)  (2.55)%   (66)  (0.65)%
Federal Home Loan Bank stock 338   10.73 %   338   10.73 %
Goodwill —   — %   —   — %
Core deposit intangibles (90)  (11.08)%   (406)  (35.99)%
Other real estate owned (400)  (100.00)    —   N/M
Derivatives 248   23.33 %   1,311   N/M
Right-of-use assets (23)  (5.32)%   290   243.70 %
Other assets (772)  (35.84)%   (55)  (3.83)%
All other assets 804   1.82 %   $3,917   9.52 %
                    

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. While the volume of residential mortgage loan sales through June 30, 2020 has nearly exceeded the residential mortgage loan sales volume for all of 2019, MSR have decreased in 2020 due to total impairments of $460.  As interest rates remain at historically low levels, refinance opportunities continue to be very attractive to borrowers, thus driving down the value of MSR associated with the current portfolio.

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 in 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:

  6/30/20 3/31/20 12/31/19 9/30/19 6/30/19
Noninterest bearing demand $383,452   $281,848   $260,503  $253,784   $248,795  
Interest bearing          
Savings 245,957   215,748   215,218  213,494   232,130  
Money market demand 90,504   79,070   88,350  80,873   69,374  
NOW 122,477   83,910   75,976  39,286   14,925  
Time deposits 175,897   223,261   223,055  213,664   227,331  
Total deposits $1,018,287   $883,837   $863,102  $801,101   $792,555  
           
  6/30/2020 vs 3/31/2020   6/30/2020 vs 6/30/2019
  Variance   Variance
  Amount %   Amount %
Noninterest bearing demand $101,604   36.05 %   $134,657   54.12 %
Interest bearing          
Savings 30,209   14.00 %   13,827   5.96 %
Money market demand 11,434   14.46 %   21,130   30.46 %
NOW 38,567   45.96 %   107,552   720.62 %
Time deposits (47,364)  (21.21)%   (51,434)  (22.63)%
Total deposits $134,450   15.21 %   $225,732   28.48 %
                     

PPP loans are funded into a deposit account for the borrowers. The vast majority of these deposit accounts are noninterest bearing demand accounts. As of June 30, 2020, $37,521 of deposits were attributable to funds from PPP loans. In the second quarter of 2020, the Corporation also brought in $25,000 of FDIC insured deposits from one relationship.

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. For 2020, the Corporation expects to monitor deposit growth and adjust interest rates to minimize downward pressure on margins.

Schedule of time deposit maturities

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

  Maturity Buckets
  3 Months or Less 3 to 6 Months 6 to 9 Months 9 to 12 Months Beyond 12 Months
Balance $66,295  $36,107  $29,297  $12,394  $31,804 
Weighted average yield 1.42% 1.89% 1.27% 1.53% 1.58%
           
  Cumulative Maturities
  3 Months or Less Up to 6 Months Up to 9 Months Up to 12 Months Total
Balance $66,295  $102,402  $131,699  $144,093  $175,897 
Weighted average yield 1.42% 1.59% 1.52% 1.52% 1.53%
                

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 of the term and opening balance.

Total borrowed funds

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

  6/30/20 3/31/20 12/31/19 9/30/19 6/30/19
Federal Home Loan Bank borrowings $77,500  $57,500  $47,500  $55,000  $40,000 
Subordinated debentures 14,000  14,000  14,000  14,000  14,000 
PPPLF 4,717  —  —  —  — 
Federal funds purchased —  —  —  —  — 
Total borrowed funds $96,217  $71,500  $61,500  $69,000  $54,000 
           
  6/30/2020 vs 3/31/2020   6/30/2020 vs 6/30/2019
  Variance   Variance
  Amount %   Amount %
Federal Home Loan Bank borrowings $20,000  34.78%   $37,500  93.75%
Subordinated debentures —  —%   —  —%
PPPLF 4,717  N/M   4,717  N/M
Federal funds purchased —  —%   —  —%
Total borrowed funds $24,717  34.57%   $42,217  78.18%
                 

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:

  6/30/20 3/31/20 12/31/19 9/30/19 6/30/19
Federal Home Loan Bank borrowings $77,500   $57,500   $47,500  $55,000   $40,000  
Brokered time deposits 28,837   28,605   28,605  16,326   23,484  
Subordinated debentures 14,000   14,000   14,000  14,000   14,000  
Internet time deposits 11,690   18,005   18,009  21,977   25,058  
PPPLF 4,717   —   —  —   —  
 Total wholesale funds $136,744   $118,110   $108,114  $107,303   $102,542  
           
  6/30/2020 vs 3/31/2020   6/30/2020 vs 6/30/2019
  Variance   Variance
  Amount %   Amount %
Federal Home Loan Bank borrowings $20,000   34.78 %   $37,500   93.75 %
Brokered time deposits 232   0.81 %   5,353   22.79 %
Subordinated debentures —   — %   —   — %
Internet time deposits (6,315)  (35.07)%   (13,368)  (53.35)%
PPPLF 4,717   N/M   4,717   N/M
Total wholesale funds $18,634   15.78 %   $34,202   33.35 %
                     

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 in 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 June 30, 2015 and all dividends were reinvested.

A graph accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/4e71e085-6a4c-4e45-9fce-f13d60034839

     
Date FETM ABQ Index
6/30/2015 100.00 100.00
6/30/2016 96.00 97.31
6/30/2017 132.14 131.04
6/30/2018 153.68 142.79
6/30/2019 152.00 126.05
6/30/2020 131.23 93.17
     

Abbreviations and Acronyms

ABA: American Bankers Association HTM: Held-to-maturity 
AFS: Available-for-sale IRA: Individual retirement account 
ALLL: Allowance for loan losses ITM: Interactive teller machine 
AOCI: Accumulated other comprehensive income MSR: Mortgage servicing rights 
ASU: Accounting Standards Update N/M: Not meaningful 
ATM: Automated teller machine NASDAQ: 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 1 NSF: Non-sufficient funds 
COVID-19: Coronavirus Disease 2019 OREO: Other real estate owned 
FDIC: Federal Deposit Insurance Corporation PPP: Paycheck Protection Program 
FHLB: Federal Home Loan Bank PPPLF: Paycheck Protection Program Liquidity Facility 
FHLMC: Federal Home Loan Mortgage Corporation QTD: Quarter-to-date 
FRB: Federal Reserve Bank SAB: Staff Accounting Bulletin 
FTE: Fully taxable equivalent SBA: Small Business Association 
GAAP: Generally Accepted Accounting Principles USDA: United States Department of Agriculture 
HFS: Held-for-sale YTD: 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 Aaron D. Wirsing
 President & CEO Chief Financial Officer
 Fentura Financial, Inc.   Fentura Financial, Inc.
 810.714.3902 810.714.3925
 ronj@thestatebank.com   aaronw@thestatebank.com

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fentura FETM Fentura Financial Inc. earnings announcement