Dollars in thousands except per share amounts. Certain items in the prior period financial statements have been reclassified to conform with the December 31, 2020 presentation.

FENTON, Mich., Feb. 02, 2021 (GLOBE NEWSWIRE) — Fentura Financial, Inc. (OTCQX: FETM) announces quarterly results of net income of $2,733 and $15,464 for the three and twelve month periods ended December 31, 2020.

Ronald Justice, President and CEO, stated “We are very pleased to report a solid quarter and another year of strong financial performance despite the many challenges presented by the COVID-19 pandemic. The extraordinary efforts of the Fentura team in implementing strategies to respond to the pandemic, allowed us to continue to effectively operate and meet all the banking needs of our clients and to support the communities we serve.”

Justice continued, “Our commitment to provide PPP loans through the SBA to our business clients in need, an unprecedented level of residential mortgage loans processed, and the transition of transactions to technology channels during the “shelter in place” Orders, are examples of the team’s response and strong contributors to our results. As we look forward, remaining mindful of the ongoing challenges from the COVID-19 pandemic, we remain confident that our long term strategic focus will lead to continued strong performance.”

Following is a discussion of the Corporation’s financial performance as of, and for the three and twelve months periods ended December 31, 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:

    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
INCOME STATEMENT DATA                    
Interest income   $ 11,624     $ 12,070     $ 11,215     $ 11,070     $ 11,076  
Interest expense   972     1,189     1,618     2,145     2,158  
Net interest income   10,652     10,881     9,597     8,925     8,918  
Provision for loan losses   982     1,109     2,001     1,542     436  
Noninterest income   4,676     5,159     5,292     4,513     2,129  
Noninterest expenses   10,971     8,218     7,809     7,686     7,415  
Federal income tax expense   642     1,377     1,036     858     644  
Net income   $ 2,733     $ 5,336     $ 4,043     $ 3,352     $ 2,552  
PER SHARE                    
Earnings   $ 0.58     $ 1.14     $ 0.87     $ 0.72     $ 0.55  
Dividends   $ 0.075     $ 0.075     $ 0.075     $ 0.075     $ 0.07  
Tangible book value(1)   $ 24.00     $ 23.50     $ 22.44     $ 21.56     $ 20.87  
Quoted market value                    
High   $ 22.25     $ 17.99     $ 18.95     $ 26.00     $ 25.50  
Low   $ 16.93     $ 16.80     $ 14.90     $ 12.55     $ 20.60  
Close(1)   $ 22.00     $ 16.93     $ 17.35     $ 15.50     $ 25.23  
PERFORMANCE RATIOS                    
Return on average assets   0.84 %   1.68 %   1.35 %   1.28 %   1.02 %
Return on average shareholders’ equity   9.27 %   18.86 %   15.20 %   13.01 %   10.03 %
Return on average tangible shareholders’ equity   9.58 %   19.54 %   15.79 %   13.54 %   10.46 %
Efficiency ratio   71.57 %   51.23 %   52.45 %   57.20 %   67.12 %
Yield on earning assets (FTE)   3.75 %   3.97 %   3.94 %   4.47 %   4.66 %
Rate on interest bearing liabilities   0.50 %   0.63 %   0.91 %   1.28 %   1.36 %
Net interest margin to earning assets (FTE)   3.44 %   3.58 %   3.37 %   3.61 %   3.75 %
BALANCE SHEET DATA(1)                    
Total investment securities   $ 76,501     $ 78,179     $ 75,526     $ 76,312     $ 61,621  
Gross loans   $ 1,066,562     $ 1,060,885     $ 1,044,564     $ 865,577     $ 870,555  
Total assets   $ 1,251,343     $ 1,284,845     $ 1,237,694     $ 1,071,180     $ 1,034,759  
Total deposits   $ 1,071,976     $ 1,061,470     $ 1,018,287     $ 883,837     $ 863,102  
Borrowed funds   $ 49,000     $ 96,217     $ 96,217     $ 71,500     $ 61,500  
Total shareholders’ equity   $ 116,435     $ 114,081     $ 108,969     $ 104,828     $ 101,444  
Net loans to total deposits   98.48 %   98.99 %   101.70 %   97.11 %   100.19 %
Common shares outstanding   4,694,573     4,691,142     4,680,920     4,675,499     4,664,369  
QTD BALANCE SHEET AVERAGES                    
Total assets   $ 1,288,199     $ 1,264,105     $ 1,200,966     $ 1,049,245     $ 994,094  
Earning assets   $ 1,235,895     $ 1,210,274     $ 1,146,941     $ 997,089     $ 944,692  
Interest bearing liabilities   $ 773,132     $ 750,281     $ 711,500     $ 672,564     $ 629,454  
Total shareholders’ equity   $ 117,263     $ 112,565     $ 106,998     $ 103,646     $ 100,991  
Total tangible shareholders’ equity   $ 113,444     $ 108,655     $ 102,999     $ 99,558     $ 96,796  
Earned common shares outstanding   4,682,113     4,673,629     4,664,946     4,659,279     4,652,569  
Unvested stock grants   14,208     14,208     14,208     13,481     9,947  
Total common shares outstanding   4,696,321     4,687,837     4,679,154     4,672,760     4,662,516  
ASSET QUALITY(1)                    
Nonperforming loans to gross loans   0.75 %   0.07 %   0.10 %   0.10 %   0.17 %
Nonperforming assets to total assets   0.64 %   0.06 %   0.08 %   0.12 %   0.14 %
Allowance for loan losses to gross loans   1.02 %   0.95 %   0.86 %   0.84 %   0.67 %
Allowance for loan losses to gross loans, net of PPP loans   1.23 %   1.19 %   1.07 %   0.84 %   0.67 %
CAPITAL RATIOS(1)                    
Total capital to risk weighted assets   15.21 %   15.57 %   15.06 %   14.42 %   14.03 %
Tier 1 capital to risk weighted assets   14.00 %   14.40 %   14.00 %   13.56 %   13.33 %
CET1 capital to risk weighted assets   12.44 %   12.77 %   12.34 %   11.91 %   11.64 %
Tier 1 leverage ratio   9.85 %   9.86 %   9.90 %   10.97 %   11.20 %
                     
(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 twelve month periods ended:

    12/31/2020   12/31/2019   12/31/2018   12/31/2017   12/31/2016
INCOME STATEMENT DATA                    
Interest income   $ 45,979   $ 43,541   $ 36,350   $ 30,111   $ 18,645  
Interest expense   5,924   8,627   5,827   3,120   2,372  
Net interest income   40,055   34,914   30,523   26,991   16,273  
Provision for loan losses   5,634   1,335   1,057   609   (900 )
Noninterest income   19,640   8,163   8,277   8,988   6,658  
Noninterest expenses   34,684   27,223   25,310   23,818   17,097  
Federal income tax expense   3,913   2,941   2,319   2,876   2,293  
Net income   $ 15,464   $ 11,578   $ 10,114   $ 8,676   $ 4,441  
PER SHARE                    
Earnings   $ 3.31   $ 2.49   $ 2.65   $ 2.39   $ 1.70  
Dividends   $ 0.30   $ 0.28   $ 0.24   $ 0.20   $ 0.40  
Tangible book value(1)   $ 24.00   $ 20.87   $ 18.32   $ 14.96   $ 12.41  
Quoted market value                    
High   $ 26.00   $ 25.50   $ 23.00   $ 20.65   $ 16.00  
Low   $ 12.55   $ 20.05   $ 18.88   $ 15.10   $ 12.85  
Close(1)   $ 22.00   $ 25.23   $ 21.00   $ 18.88   $ 16.00  
PERFORMANCE RATIOS                    
Return on average assets   1.29 %   1.20 %   1.20 %   1.19 %   0.92 %
Return on average shareholders’ equity   14.05 %   12.02 %   15.05 %   15.38 %   10.28 %
Return on average tangible shareholders’ equity   14.57 %   12.59 %   16.23 %   16.63 %   10.28 %
Efficiency ratio   58.10 %   63.20 %   65.23 %   66.20 %   74.56 %
Yield on earning assets (FTE)   4.01 %   4.77 %   4.57 %   4.55 %   4.38 %
Rate on interest bearing liabilities   0.82 %   1.41 %   1.07 %   0.65 %   0.76 %
Net interest margin to earning assets (FTE)   3.50 %   3.83 %   3.84 %   4.08 %   3.83 %
BALANCE SHEET DATA(1)                    
Total investment securities   $ 76,501     $ 61,621     $ 94,721     $ 55,323     $ 72,458  
Gross loans   $ 1,066,562     $ 870,555     $ 772,227     $ 672,530     $ 515,775  
Total assets   $ 1,251,343     $ 1,034,759     $ 926,450     $ 781,443     $ 703,350  
Total deposits   $ 1,071,976     $ 863,102     $ 763,124     $ 673,505     $ 603,367  
Borrowed funds   $ 49,000     $ 61,500     $ 69,000     $ 46,000     $ 45,000  
Total shareholders’ equity   $ 116,435     $ 101,444     $ 89,516     $ 59,447     $ 50,660  
Net loans to total deposits   98.48 %   100.19 %   100.60 %   99.32 %   85.01 %
Common shares outstanding   4,694,573     4,664,369     4,636,455     3,631,933     3,619,282  
YTD BALANCE SHEET AVERAGES                    
Total assets   $ 1,200,605     $ 961,586     $ 844,673     $ 730,974     $ 484,042  
Earning assets   $ 1,147,570     $ 913,574     $ 796,283     $ 698,753     $ 429,547  
Interest bearing liabilities   $ 726,869     $ 612,549     $ 544,344     $ 485,522     $ 306,614  
Total shareholders’ equity   $ 110,094     $ 96,358     $ 67,192     $ 56,429     $ 43,218  
Total tangible shareholders’ equity   $ 106,140     $ 91,994     $ 62,329     $ 52,181     $ 43,218  
Earned common shares outstanding   4,669,992     4,643,955     3,811,677     3,625,568     2,608,903  
Unvested stock grants   14,026     9,917     756          
Total common shares outstanding   4,684,018     4,653,872     3,812,433     3,625,568     2,608,903  
ASSET QUALITY(1)                    
Nonperforming loans to gross loans   0.75 %   0.17 %   0.14 %   %   %
Nonperforming assets to total assets   0.64 %   0.14 %   0.12 %   0.02 %   0.04 %
Allowance for loan losses to gross loans   1.02 %   0.67 %   0.58 %   0.54 %   0.55 %
Allowance for loan losses to gross loans, net of PPP loans   1.23 %   0.67 %   0.58 %   0.54 %   0.55 %
CAPITAL RATIOS(1)                    
Total capital to risk weighted assets   15.21 %   14.03 %   14.00 %   10.93 %   11.47 %
Tier 1 capital to risk weighted assets   14.00 %   13.33 %   13.40 %   10.39 %   10.95 %
CET1 capital to risk weighted assets   12.44 %   11.64 %   11.52 %   8.27 %   8.40 %
Tier 1 leverage ratio   9.85 %   11.20 %   10.92 %   8.98 %   11.93 %
                     
(1)At end of period                    

Income Statement Breakdown and Analysis

    Quarter to Date
    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
GAAP net income   $ 2,733     $ 5,336     $ 4,043     $ 3,352     $ 2,552  
Acquisition related items (net of tax)                    
Accretion on purchased loans   (82 )   (144 )   (110 )   (180 )   (126 )
Amortization of core deposit intangibles   71     72     71     71     89  
Amortization on acquired time deposits   5     5     5     5     7  
Amortization on purchased mortgage servicing rights                   3  
Total acquisition related items (net of tax)   (6 )   (67 )   (34 )   (104 )   (27 )
Other nonrecurring items (net of tax)                    
FHLB prepayment penalties   1,507                  
Change in fair value of equity investment due to acquisition transaction               (578 )    
Change in fair value of mortgage banking instruments(1)               (567 )    
Interest writeoff from loan transferred to nonaccrual   265                  
Net gain from COLI death benefit           (173 )        
Prepayment penalties collected   (97 )   (16 )   (12 )   (36 )   (42 )
Mortgage servicing rights (reduction of) impairment   (188 )   (176 )   191     173      
Total other nonrecurring items (net of tax)   1,487     (192 )   6     (1,008 )   (42 )
Adjusted net income from operations   $ 4,214     $ 5,077     $ 4,015     $ 2,240     $ 2,483  
                     
GAAP net interest income   $ 10,652     $ 10,881     $ 9,597     $ 8,925     $ 8,918  
Accretion on purchased loans   (104 )   (182 )   (139 )   (228 )   (160 )
Interest writeoff from loan transferred to nonaccrual   335                  
Prepayment penalties collected   (123 )   (20 )   (15 )   (46 )   (53 )
Amortization on acquired time deposits   6     6     6     6     9  
Adjusted net interest income   $ 10,766     $ 10,685     $ 9,449     $ 8,657     $ 8,714  
                     
PERFORMANCE RATIOS                    
Based on adjusted net income from operations                    
Earnings per share   $ 0.90     $ 1.09     $ 0.86     $ 0.48     $ 0.53  
Return on average assets   1.30 %   1.60 %   1.34 %   0.86 %   0.99 %
Return on average shareholders’ equity   14.30 %   17.94 %   15.09 %   8.69 %   9.75 %
Return on average tangible shareholders’ equity   14.78 %   18.59 %   15.68 %   9.05 %   10.18 %
Efficiency ratio   59.02 %   52.03 %   52.12 %   62.83 %   67.31 %
                     
Based on adjusted net interest income                    
Yield on earning assets (FTE)   3.75 %   3.97 %   3.94 %   4.50 %   4.66 %
Rate on interest bearing liabilities   0.50 %   0.63 %   0.92 %   1.29 %   1.37 %
Net interest margin to earning assets (FTE)   3.47 %   3.52 %   3.32 %   3.52 %   3.66 %
    Year to Date December 31   Variance
    2020     2019     Amount   %
GAAP net income   $ 15,464     $ 11,578     $ 3,886      33.56  %
Acquisition related items (net of tax)                
Accretion on purchased loans   (516 )   (635 )   119     (18.74 )%
Amortization of core deposit intangibles   285     356     (71 )   (19.94 )%
Amortization on acquired time deposits   20     28     (8 )   (28.57 )%
Amortization on purchased mortgage servicing rights       12     (12 )   (100.00 )%
Total acquisition related items (net of tax)   (211 )   (239 )   28     (11.72 )%
Other nonrecurring items (net of tax)                
FHLB prepayment penalties   1,507         1,507     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(1)   (567 )       (567 )   N/M  
Interest writeoff from loan transferred to nonaccrual   265         265     N/M  
Net gain from COLI death benefit   (173 )       (173 )   N/M  
Prepayment penalties collected   (161 )   (348 )   187     (53.74 )%
Mortgage servicing rights (reduction of) impairment               N/M  
Total other nonrecurring items (net of tax)   293     (348 )   641     (184.20 )%
Adjusted net income from operations   $ 15,546     $ 10,991     $ 4,555     41.44 %
                 
GAAP net interest income   $ 40,055     $ 34,914     $ 5,141     14.72 %
Accretion on purchased loans   (653 )   (804 )   151     (18.78 )%
Interest writeoff from loan transferred to nonaccrual   335         335     N/M  
Prepayment penalties collected   (204 )   (441 )   237     (53.74 )%
Amortization on acquired time deposits   24     35     (11 )   (31.43 )%
Adjusted net interest income   $ 39,557     $ 33,704     $ 5,853     17.37 %
                 
PERFORMANCE RATIOS                
Based on adjusted net income from operations                
Earnings per share   $ 3.33     $ 2.37     $ 0.96     40.51 %
Return on average assets   1.29 %   1.14 %       0.15 %
Return on average shareholders’ equity   14.12 %   11.41 %       2.71 %
Return on average tangible shareholders’ equity   14.65 %   11.95 %       2.70 %
Efficiency ratio   56.16 %   63.92 %       (7.76 )%
                 
Based on adjusted net interest income                
Yield on earning assets (FTE)   3.97 %   4.64 %       (0.67 )%
Rate on interest bearing liabilities   0.82 %   1.41 %       (0.59 )%
Net interest margin to earning assets (FTE)   3.45 %   3.69 %       (0.24 )%

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

(1)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. 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
    December 31, 2020   September 30, 2020   December 31, 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   $ 1,099,779     $ 11,268     4.08 %   $ 1,086,629     $ 11,701     4.28 %   $ 857,474     $ 10,581     4.90 %
Taxable investment securities   62,866     238     1.51 %   62,490     256     1.63 %   49,982     307     2.44 %
Nontaxable investment securities   16,047     103     2.55 %   15,822     101     2.54 %   10,366     80     3.06 %
Federal funds sold           %           %   16,833     66     1.56 %
Interest earning cash and cash equivalents   53,715     15     0.11 %   41,845     9     0.09 %   6,887     28     1.61 %
Federal Home Loan Bank stock   3,488     22     2.51 %   3,488     24     2.74 %   3,150     31     3.90 %
Total earning assets   1,235,895     11,646     3.75 %   1,210,274     12,091     3.97 %   944,692     11,093     4.66 %
                                     
Nonearning assets                                    
Allowance for loan losses   (10,375 )           (9,255 )           (5,519 )        
Fixed assets   15,465             15,349             15,395          
Accrued income and other assets   47,214             47,737             39,526          
Total assets   $ 1,288,199             $ 1,264,105             $ 994,094          
                                     
Interest bearing liabilities                                    
Interest bearing demand deposits   $ 218,627     $ 128     0.23 %   $ 221,592     $ 144     0.26 %   $ 140,368     $ 410     1.16 %
Savings deposits   291,856     114     0.16 %   271,260     116     0.17 %   225,219     217     0.38 %
Time deposits   179,076     407     0.90 %   161,212     567     1.40 %   201,640     1,089     2.14 %
Borrowed funds   83,573     323     1.54 %   96,217     362     1.50 %   62,227     442     2.82 %
Total interest bearing liabilities   773,132     972     0.50 %   750,281     1,189     0.63 %   629,454     2,158     1.36 %
                                     
Noninterest bearing liabilities                                    
Noninterest bearing deposits   385,032             388,904             254,858          
Accrued interest and other liabilities   12,772             12,355             8,791          
Shareholders’ equity   117,263             112,565             100,991          
Total liabilities and shareholders’ equity   $ 1,288,199             $ 1,264,105             $ 994,094          
Net interest income (FTE)       $ 10,674             $ 10,902             $ 8,935      
Net interest margin to earning assets (FTE)           3.44 %           3.58 %           3.75 %
    Twelve Months Ended
    December 31, 2020   December 31, 2019
    Average Balance   Tax Equivalent Interest   Average Yield / Rate   Average Balance   Tax Equivalent Interest   Average Yield / Rate
Interest earning assets                        
Total loans   $ 1,028,303     $ 44,238     4.30 %   $ 820,489     $ 41,102     5.01 %
Taxable investment securities   61,288     1,170     1.91 %   63,661     1,703     2.68 %
Nontaxable investment securities   13,463     368     2.73 %   9,951     297     2.98 %
Federal funds sold   8,397     116     1.38 %   10,904     216     1.98 %
Interest earning cash and cash equivalents   32,767     55     0.17 %   5,419     116     2.14 %
Federal Home Loan Bank stock   3,352     109     3.25 %   3,150     169     5.37 %
Total earning assets   1,147,570     46,056     4.01 %   913,574     43,603     4.77 %
                         
Nonearning assets                        
Allowance for loan losses   (8,301 )           (5,018 )        
Fixed assets   15,465             14,998          
Accrued income and other assets   45,871             38,032          
Total assets   $ 1,200,605             $ 961,586          
                         
Interest bearing liabilities                        
Interest bearing demand deposits   $ 200,200     $ 996     0.50 %   $ 96,713     $ 855     0.88 %
Savings deposits   260,498     569     0.22 %   238,656     1,115     0.47 %
Time deposits   181,859     2,848     1.57 %   216,839     4,835     2.23 %
Borrowed funds   84,312     1,511     1.79 %   60,341     1,822     3.02 %
Total interest bearing liabilities   726,869     5,924     0.82 %   612,549     8,627     1.41 %
                         
Noninterest bearing liabilities                        
Noninterest bearing deposits   352,489             246,357          
Accrued interest and other liabilities   11,153             6,322          
Shareholders’ equity   110,094             96,358          
Total liabilities and shareholders’ equity   $ 1,200,605             $ 961,586          
Net interest income (FTE)       $ 40,132             $ 34,976      
Net interest margin to earning assets (FTE)           3.50 %           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   Twelve Months Ended
    December 31, 2020   December 31, 2020   December 31, 2020
    Compared To   Compared To   Compared To
    September 30, 2020   December 31, 2019   December 31, 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   $ 805     $ (1,238 )   $ (433 )   $ 9,263     $ (8,576 )   $ 687     $ 9,481     $ (6,345 )   $ 3,136  
Taxable investment securities   10     (28 )   (18 )   347     (416 )   (69 )   (62 )   (471 )   (533 )
Nontaxable investment securities   2         2     99     (76 )   23     98     (27 )   71  
Federal funds sold               (33 )   (33 )   (66 )   (43 )   (57 )   (100 )
Interest earning cash and cash equivalents   3     3     6     170     (183 )   (13 )   129     (190 )   (61 )
Federal Home Loan Bank stock       (2 )   (2 )   18     (27 )   (9 )   10     (70 )   (60 )
Total changes in interest income   820     (1,265 )   (445 )   9,864     (9,311 )   553     9,613     (7,160 )   2,453  
                                     
Changes in interest expense                                    
Interest bearing demand deposits   (2 )   (14 )   (16 )   955     (1,237 )   (282 )   625     (484 )   141  
Savings deposits   29     (31 )   (2 )   300     (403 )   (103 )   95     (641 )   (546 )
Time deposits   344     (504 )   (160 )   (110 )   (572 )   (682 )   (701 )   (1,286 )   (1,987 )
Borrowed funds   (96 )   57     (39 )   635     (754 )   (119 )   579     (890 )   (311 )
Total changes in interest expense   275     (492 )   (217 )   1,780     (2,966 )   (1,186 )   598     (3,301 )   (2,703 )
Net change in net interest income (FTE)   $ 545     $ (773 )   $ (228 )   $ 8,084     $ (6,345 )   $ 1,739     $ 9,015     $ (3,859 )   $ 5,156  
    Average Yield/Rate for the Three Month Periods Ended
    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Total earning assets   3.75 %   3.97 %   3.94 %   4.47 %   4.66 %
Total interest bearing liabilities   0.50 %   0.63 %   0.91 %   1.28 %   1.36 %
Net interest margin to earning assets (FTE)   3.44 %   3.58 %   3.37 %   3.61 %   3.75 %
    Quarter to Date Net Interest Income (FTE)
    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Interest income   $ 11,624     $ 12,070     $ 11,215     $ 11,070     $ 11,076  
FTE adjustment   22     21     18     17     17  
Total interest income (FTE)   11,646     12,091     11,233     11,087     11,093  
Total interest expense   972     1,189     1,618     2,145     2,158  
Net interest income (FTE)   $ 10,674     $ 10,902     $ 9,615     $ 8,942     $ 8,935  

Noninterest Income

    Quarter to Date
    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Net gain on sales of mortgage loans   $ 2,994     $ 3,130     $ 2,644     $ 970     $ 650  
ATM and debit card income   437     460     394     355     399  
Trust and investment services   445     464     321     389     337  
Change in fair value of mortgage banking instruments   (449 )   (66 )   1,225     833      
Mortgage servicing fees   325     293     270     262     256  
Net mortgage servicing rights income   509     559     (163 )   (50 )   130  
Change in fair value of equity investments   (3 )   2     7     749     (5 )
Service charges on deposit accounts   194     177     119     219     245  
Net gain on sales of commercial loans               668      
Net gain from corporate owned life insurance death benefit           173          
Other income and fees   224     140     302     118     117  
Total noninterest income   $ 4,676     $ 5,159     $ 5,292     $ 4,513     $ 2,129  
                     
Residential mortgage operations   $ 3,379     $ 3,916     $ 3,976     $ 2,015     $ 1,036  
    Year to Date December 31   Variance
    2020   2019   Amount   %
Net gain on sales of mortgage loans   $ 9,738     $ 1,932     $ 7,806     404.04 %
ATM and debit card income   1,646     1,581     65     4.11 %
Trust and investment services   1,619     1,519     100     6.58 %
Change in fair value of mortgage banking instruments   1,543         1,543     N/M  
Mortgage servicing fees   1,150     940     210     22.34 %
Net mortgage servicing rights income   855     624     231     37.02 %
Change in fair value of equity investments   755     46     709     1541.30 %
Service charges on deposit accounts   709     940     (231 )   (24.57 )%
Net gain on sales of commercial loans   668         668     N/M  
Net gain from corporate owned life insurance death benefit   173         173     N/M  
Other income and fees   784     581     203     34.94 %
Total noninterest income   $ 19,640     $ 8,163     $ 11,477     140.60 %
                 
Residential mortgage operations   $ 13,286     $ 3,496     9,790     280.03 %

Residential Mortgage Operations

Net gain on sales of mortgage loans represents the income earned on the sale of residential mortgage loans into the secondary market. Throughout 2020, the interest rate environment was very advantageous for residential mortgage originations and refinancing, resulting in record gains. Although many consumers are facing uncertainty due to the COVID-19 pandemic, residential mortgage originations and refinancing activities were substantially greater in 2020. Throughout 2020, home values and housing costs continued to rise due to inventory shortages and a lack of new construction. The Corporation expects residential mortgage activity to moderate in 2021.

Change in fair value of mortgage banking instruments represents changes in the fair value of the Corporation’s interest rate lock commitments, mortgage loans held-for-sale, and mandatory forward loan sales commitments. On January 1, 2020, the Corporation adopted SAB 109, resulting in the Corporation recognizing the value of servicing at the time of commitment, rather than at the time of delivery. Additionally, the Corporation also elected the fair value option for residential mortgage loans HFS on January 1, 2020. Generally, the adoption of SAB 109 resulted in the acceleration of the timing of revenue recognition in relation to the Corporation’s secondary market mortgage production. Pursuant to this adoption, changes in the fair value of mortgage banking instruments and loans held for sale are included in noninterest income.

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 2021.

Net mortgage servicing rights income represents income generated from the capitalization of mortgage servicing rights, net of amortization and impairment. In each of the first two quarters of 2020, the Corporation recognized impairments in its servicing portfolio as a direct result of the low interest rate environment and record level of refinancing activity. During the third and fourth quarters of 2020, these impairments were reversed.

Overall revenues from residential mortgage operations (net gains from sale of mortgage loans, change in the fair value of mortgage banking instruments, mortgage servicing fees, and net mortgage servicing rights income) increased by $9,790 or 280.03% in 2020, which represented a record level of production for the Corporation’s residential mortgage team. Included in the $487,342 of residential mortgage production in 2020, was $292,130 in refinancing activity. As refinancing activity is expected to decline in 2021, revenues from residential mortgage operations will likely decline in 2021.

All Other Noninterest Income

ATM and debit card income represents fees earned on ATM and debit card transactions. The Corporation expects these fees to increase modestly into 2021.

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 increase modestly in 2021.

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 in the foreseeable future.

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 pandemic. Service charges on deposit accounts are expected to approximate current levels into 2021.

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 does not expect to receive any gains from the sale of commercial loans in 2021.

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 in 2021.

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 2021.

Noninterest Expenses

    Quarter to Date
    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Total compensation   $ 4,958     $ 4,531     $ 4,252     $ 4,248     $ 4,037  
Professional services   938     524     571     522     582  
Furniture and equipment   607     614     618     610     575  
Data processing   501     503     535     442     362  
FHLB prepayment penalty   1,907                  
Occupancy   475     491     435     476     467  
Loan and collection   359     292     229     162     203  
Advertising and promotional   184     284     255     252     232  
ATM and debit card   125     109     92     108     98  
Amortization of core deposit intangibles   90     91     90     90     113  
Telephone and communication   64     91     86     96     115  
FDIC insurance premiums   59     55     59     55     6  
Other general and administrative   704     633     587     625     625  
Total noninterest expenses   $ 10,971     $ 8,218     $ 7,809     $ 7,686     $ 7,415  
    Year to Date December 31   Variance
    2020   2019   Amount   %
Total compensation   $ 17,989     $ 14,946     $ 3,043     20.36 %
Professional services   2,555     1,960     595     30.36 %
Furniture and equipment   2,449     1,998     451     22.57 %
Data processing   1,981     1,416     565     39.90 %
FHLB prepayment penalty   1,907         1,907     N/M  
Occupancy   1,877     1,774     103     5.81 %
Loan and collection   1,042     552     490     88.77 %
Advertising and promotional   975     908     67     7.38 %
ATM and debit card   434     402     32     7.96 %
Amortization of core deposit intangibles   361     451     (90 )   (19.96 )%
Telephone and communication   337     444     (107 )   (24.10 )%
FDIC insurance premiums   228     144     84     58.33 %
Other general and administrative   2,549     2,228     321     14.41 %
Total noninterest expenses   $ 34,684     $ 27,223     $ 7,461     27.41 %

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, however, commissions are expected to decline in 2021.

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.

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.

Data processing primarily includes the expenses relating to the Corporation’s core data processor. These expenses are expected to increase throughout 2021 with the size and complexity of the Corporation.

During the fourth quarter of 2020, the Corporation paid off three Federal Home Loan Bank borrowings, totaling $30,000. The Corporation incurred a one-time early payoff fee in the amount $1,907. The payoff was executed to enhance net interest income and net interest margins in each of the next three years. The weighted average rate of the three FHLB borrowings was 2.17%. The Corporation is expected to save approximately $650 during 2021.

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 continue to experience an increase in these expenses into 2021.

Advertising and promotional includes the Corporation’s media costs and any donations or sponsorships made on behalf of the Corporation. The annual 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. In addition to traditional marketing strategies, the Corporation rolled out a new branding strategy in 2020, which resulted in elevated advertising and promotional expenses. Total advertising and promotional expenses are expected to decline slightly in 2021.

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 2021.

Amortization of core deposit intangibles relates to the core deposits acquired from Community Bancorp, Inc. on December 31, 2016 and is expected to continue to decline as the core deposit intangible is being amortized based on the sum-of-years-digits method.

Telephone and communication includes expenses relating to the Corporation’s communication systems. These expenses are expected to maintain current levels throughout 2021.

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. FDIC insurance premiums are expected to increase in 2021 primarily due to the Corporation’s growth in total assets.

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

Balance Sheet Breakdown and Analysis

    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
ASSETS                    
Cash and cash equivalents   $ 46,367     $ 75,032     $ 35,190     $ 71,140     $ 46,803  
Total investment securities   76,501     78,179     75,526     76,312     61,621  
Loans held-for-sale   27,306     34,833     46,354     21,154     19,491  
Gross loans   1,066,562     1,060,885     1,044,564     865,577     870,555  
Less allowance for loan losses   10,900     10,100     8,991     7,250     5,813  
Net loans   1,055,662     1,050,785     1,035,573     858,327     864,742  
All other assets   45,507     46,016     45,051     44,247     42,102  
Total assets   $ 1,251,343     $ 1,284,845     $ 1,237,694     $ 1,071,180     $ 1,034,759  
                     
LIABILITIES AND SHAREHOLDERS’ EQUITY                    
Total deposits   $ 1,071,976     $ 1,061,470     $ 1,018,287     $ 883,837     $ 863,102  
Total borrowed funds   49,000     96,217     96,217     71,500     61,500  
Accrued interest payable and other liabilities   13,932     13,077     14,221     11,015     8,713  
Total liabilities   1,134,908     1,170,764     1,128,725     966,352     933,315  
Total shareholders’ equity   116,435     114,081     108,969     104,828     101,444  
Total liabilities and shareholders’ equity   $ 1,251,343     $ 1,284,845     $ 1,237,694     $ 1,071,180     $ 1,034,759  
    12/31/2020 vs 9/30/2020   12/31/2020 vs 12/31/2019
    Variance   Variance
    Amount   %   Amount   %
ASSETS                
Cash and cash equivalents   $ (28,665 )   (38.20 )%   $ (436 )   (0.93 )%
Total investment securities   (1,678 )   (2.15 )%   14,880     24.15 %
Loans held-for-sale   (7,527 )   (21.61 )%   7,815     40.10 %
Gross loans   5,677     0.54 %   196,007     22.52 %
Less allowance for loan losses   800     7.92 %   5,087     87.51 %
Net loans   4,877     0.46 %   190,920     22.08 %
All other assets   (509 )   (1.11 )%   3,405     8.09 %
Total assets   $ (33,502 )   (2.61 )%   $ 216,584     20.93 %
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Total deposits   $ 10,506     0.99 %   $ 208,874     24.20 %
Total borrowed funds   (47,217 )   (49.07 )%   (12,500 )   (20.33 )%
Accrued interest payable and other liabilities   855     6.54 %   5,219     59.90 %
Total liabilities   (35,856 )   (1.61 )%   201,593     11.22 %
Total shareholders’ equity   2,354     2.06 %   14,991     14.78 %
Total liabilities and shareholders’ equity   $ (33,502 )   (2.61 )%   $ 216,584     20.93 %

Cash and cash equivalents

    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Cash and cash equivalents                    
Noninterest bearing   $ 22,712     $ 22,108   $ 20,369     $ 33,312     $ 17,754
Interest bearing   23,655     52,924   14,821     37,828     6,049
Federal funds sold                 23,000
Cash and cash equivalents   $ 46,367     $ 75,032   $ 35,190     $ 71,140     $ 46,803
    12/31/2020 vs 9/30/2020   12/31/2020 vs 12/31/2019
    Variance   Variance
    Amount   %   Amount   %
Cash and cash equivalents                
Noninterest bearing   $ 604     2.73 %   $ 4,958     27.93 %
Interest bearing   (29,269 )   (55.30 )%   17,606     291.06 %
Federal funds sold       N/M     (23,000 )   (100.00 )%
Cash and cash equivalents   $ (28,665 )   (38.20 )%   $ (436 )   (0.93 )%

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:

    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Cash and cash equivalents   $ 46,367     $ 75,032     $ 35,190     $ 71,140     $ 46,803  
Unpledged investment securities   59,025     58,739     52,647     51,889     40,094  
FHLB borrowing availability   140,000     97,500     97,500     42,500     52,500  
Federal funds purchased lines of credit   21,500     21,500     21,500     17,500     17,500  
Funds available through the Fed Discount Window   10,000     10,000     10,000     10,000     10,000  
PPPLF   177,845     206,343     202,184          
Total liquidity sources   $ 454,737     $ 469,114     $ 419,021     $ 193,029     $ 166,897  

Total investment securities

    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Available-for-sale                    
U.S. Government and federal agency   $ 7,935     $ 19,311   $ 21,339     $ 23,610     $ 18,867
State and municipal   15,768     15,729   14,115     10,657     10,691
Mortgage backed residential   19,101     20,886   12,335     10,176     10,748
Certificates of deposit   5,180     5,921   6,665     8,644     6,659
Collateralized mortgage obligations – agencies   23,110     11,141   15,736     18,288     9,527
Unrealized gain/(loss) on available-for-sale securities   1,932     2,099   2,242     1,735     1,092
Total available-for-sale   73,026     75,087   72,432     73,110     57,584
Held-to-maturity state and municipal   1,973     1,977   1,981     2,091     2,096
Equity securities   1,502     1,115   1,113     1,111     1,941
Total investment securities   $ 76,501     $ 78,179   $ 75,526     $ 76,312     $ 61,621

 

    12/31/2020 vs 9/30/2020   12/31/2020 vs 12/31/2019
    Variance   Variance
    Amount   %   Amount   %
Available-for-sale                
U.S. Government and federal agency   $ (11,376 )   (58.91 )%   $ (10,932 )   (57.94 )%
State and municipal   39     0.25 %   5,077     47.49 %
Mortgage backed residential   (1,785 )   (8.55 )%   8,353     77.72 %
Certificates of deposit   (741 )   (12.51 )%   (1,479 )   (22.21 )%
Collateralized mortgage obligations – agencies   11,969     107.43 %   13,583     142.57 %
Unrealized gain/(loss) on available-for-sale securities   (167 )   (7.96 )%   840     76.92 %
Total available-for-sale   (2,061 )   (2.74 )%   15,442     26.82 %
Held-to-maturity state and municipal   (4 )   (0.20 )%   (123 )   (5.87 )%
Equity securities   387     34.71 %   (439 )   (22.62 )%
Total investment securities   $ (1,678 )   (2.15 )%   $ 14,880     24.15 %

The amortized cost and fair value of AFS investment securities as of December 31, 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   $ 4,994     $ 2,941     $     $     $     $ 7,935  
State and municipal   1,784     6,237     5,665     2,082         15,768  
Mortgage backed residential                   19,101     19,101  
Certificates of deposit   990     4,190                 5,180  
Collateralized mortgage obligations – agencies                   23,110     23,110  
Total amortized cost   $ 7,768     $ 13,368     $ 5,665     $ 2,082     $ 42,211     $ 71,094  
Fair value   $ 7,847     $ 14,166     $ 5,909     $ 2,420     $ 42,684     $ 73,026  

The amortized cost and fair value of HTM investment securities as of December 31, 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   $ 413     $ 1,110     $ 370     $ 80     $     $ 1,973  
Fair value   $ 416     $ 1,154     $ 398     $ 86     $     $ 2,054  

Throughout 2020, yields on bonds that met the Corporation’s investment standards declined significantly. An influx of liquidity during the year 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 December 31, 2020 for investment securities purchased YTD:

    Book Value   Fully Taxable Equivalent Weighted Average Yield
U.S. Government and federal agency   $     %
State and municipal   7,087     1.69 %
Collateralized mortgage obligations – agencies   20,902     1.09 %
Certificates of deposit       %
Mortgage backed residential   12,556     1.09 %
Held-to-maturity state and municipal       %
Total   $ 40,545     1.19 %

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.

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:

    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Commercial   $ 241,424     $ 271,113     $ 260,440     $ 67,731     $ 71,689  
Commercial real estate   517,054     483,275     469,039     462,561     455,289  
Total commercial loans   758,478     754,388     729,479     530,292     526,978  
Residential mortgage   262,770     261,375     268,295     285,392     292,946  
Home equity   39,900     39,456     40,114     43,222     41,987  
Total residential real estate loans   302,670     300,831     308,409     328,614     334,933  
Consumer   5,414     5,666     6,676     6,671     8,644  
Gross loans   1,066,562     1,060,885     1,044,564     865,577     870,555  
Allowance for loan losses   (10,900 )   (10,100 )   (8,991 )   (7,250 )   (5,813 )
Loans, net   $ 1,055,662     $ 1,050,785     $ 1,035,573     $ 858,327     $ 864,742  
    12/31/2020 vs 9/30/2020   12/31/2020 vs 12/31/2019
    Variance   Variance
    Amount   %   Amount   %
Commercial   $ (29,689 )   (10.95 )%   $ 169,735     236.77 %
Commercial real estate   33,779     6.99 %   61,765     13.57 %
Total commercial loans   4,090     0.54 %   231,500     43.93 %
Residential mortgage   1,395     0.53 %   (30,176 )   (10.30 )%
Home equity   444     1.13 %   (2,087 )   (4.97 )%
Total residential real estate loans   1,839     0.61 %   (32,263 )   (9.63 )%
Consumer   (252 )   (4.45 )%   (3,230 )   (37.37 )%
Gross loans   5,677     0.54 %   196,007     22.52 %
Allowance for loan losses   (800 )   7.92 %   (5,087 )   87.51 %
Loans, net   $ 4,877     0.46 %   $ 190,920     22.08 %

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

    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Originated loans collectively evaluated for impairment                    
Commercial   $ 241,009     $ 270,174     $ 259,384     $ 66,524     $ 70,322  
Commercial real estate   497,133     469,353     452,084     446,713     436,626  
Residential mortgage   259,080     257,395     263,997     280,265     286,635  
Home equity   37,701     37,022     37,663     40,459     39,023  
Consumer   5,248     5,477     6,445     6,391     8,330  
Subtotal   1,040,171     1,039,421     1,019,573     840,352     840,936  
Originated loans individually evaluated for impairment                    
Commercial                    
Commercial real estate   8,872     2,204     3,290     1,658     1,668  
Residential mortgage   699     655     663     672     1,362  
Home equity                    
Consumer   2     3     3     5      
Subtotal   9,573     2,862     3,956     2,335     3,030  
Acquired loans collectively evaluated for impairment                    
Commercial   387     910     1,057     1,204     1,362  
Commercial real estate   10,755     11,368     13,293     13,630     16,346  
Residential mortgage   2,073     2,335     2,683     3,459     3,911  
Home equity   2,173     2,415     2,432     2,743     2,943  
Consumer   163     185     226     273     314  
Subtotal   15,551     17,213     19,691     21,309     24,876  
Acquired loans individually evaluated for impairment                    
Commercial                    
Commercial real estate                    
Residential mortgage   54     55         58     58  
Home equity   26                  
Consumer                    
Subtotal   80     55         58     58  
Acquired loans with deteriorated credit quality                    
Commercial   28     29     (1 )   3     5  
Commercial real estate   294     350     372     560     649  
Residential mortgage   864     935     952     938     980  
Home equity       19     19     20     21  
Consumer   1     1     2     2      
Subtotal   1,187     1,334     1,344     1,523     1,655  
Gross Loans   $ 1,066,562     $ 1,060,885     $ 1,044,564     $ 865,577     $ 870,555  
                     
Total originated loans   $ 1,049,744     $ 1,042,283     $ 1,023,529     $ 842,687     $ 843,966  
Total acquired loans   16,818     18,602     21,035     22,890     26,589  
Gross loans   $ 1,066,562     $ 1,060,885     $ 1,044,564     $ 865,577     $ 870,555  

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

    12/31/2020   9/30/2020   6/30/2020
  3/31/2020   12/31/2019
Originated loans collectively evaluated for impairment                       
Commercial   $ 673     $ 632     $ 535     $ 478     $ 358  
Commercial real estate   5,561     5,113     4,564     3,609     2,790  
Residential mortgage   3,282     3,281     3,080     2,442     1,917  
Home equity   424     416     353     280     195  
Consumer   97     101     102     89     87  
Subtotal   10,037     9,543     8,634     6,898     5,347  
Originated loans individually evaluated for impairment                        
Commercial                    
Commercial real estate   602     289     100     111     127  
Residential mortgage   4     5     5     6     128  
Home equity                    
Consumer   2     3     3     5      
Subtotal   608     297     108     122     255  
Acquired loans collectively evaluated for impairment                    
Commercial       1     1     1     1  
Commercial real estate   9     7     9     7     5  
Residential mortgage   8     9     9     9     8  
Home equity   16     18     15     14     12  
Consumer                    
Subtotal   33     35     34     31     26  
Acquired loans with deteriorated credit quality                    
Commercial                    
Commercial real estate   32     32     22     39     34  
Residential mortgage   190     189     189     156     147  
Home equity       4     4     4     4  
Consumer                    
Subtotal   222     225     215     199     185  
Allowance for loan losses   $ 10,900     $ 10,100     $ 8,991     $ 7,250     $ 5,813  
                       
Total originated loans   $ 10,645     $ 9,840     $ 8,742     $ 7,020     $ 5,602  
Total acquired loans   255     260     249     230     211  
Allowance for loan losses   $ 10,900     $ 10,100     $ 8,991     $ 7,250     $ 5,813  
Commercial   $ 673     $ 633     $ 536     $ 479     $ 359  
Commercial real estate   6,204     5,441     4,695     3,766     2,956  
Residential mortgage   3,484     3,484     3,283     2,613     2,200  
Home equity   440     438     372     298     211  
Consumer   99     104     105     94     87  
Allowance for loan losses   $ 10,900     $ 10,100     $ 8,991     $ 7,250     $ 5,813  

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

    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Accruing interest                    
Current   $ 1,057,404     $ 1,058,437     $ 1,042,589     $ 862,581     $ 867,901  
Past due 30-89 days   1,165     1,703     948     2,152     1,213  
Past due 90 days or more   50     86     361     166     239  
Total accruing interest   1,058,619     1,060,226     1,043,898     864,899     869,353  
Nonaccrual   7,943     659     666     678     1,202  
Total loans   $ 1,066,562     $ 1,060,885     $ 1,044,564     $ 865,577     $ 870,555  
Total loans past due and in nonaccrual status   $ 9,158     $ 2,448     $ 1,975     $ 2,996     $ 2,654  

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

    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Nonaccrual loans   $ 7,943     $ 659     $ 666     $ 678     $ 1,202  
Accruing loans past due 90 days or more   50     86     361     166     239  
Total nonperforming loans   7,993     745     1,027     844     1,441  
Other real estate owned               400      
Total nonperforming assets   $ 7,993     $ 745     $ 1,027     $ 1,244     $ 1,441  

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

    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Nonperforming loans to gross loans   0.75 %   0.07 %   0.10 %   0.10 %   0.17 %
Nonperforming assets to total assets   0.64 %   0.06 %   0.08 %   0.12 %   0.14 %
Allowance for loan losses to gross loans   1.02 %   0.95 %   0.86 %   0.84 %   0.67 %
Allowance for loan losses to gross loans, less PPP loans   1.23 %   1.19 %   1.07 %   0.84 %   0.67 %

During the fourth quarter, the Corporation transferred one commercial real estate loan with an outstanding principal balance of $7,214 to nonaccrual. The underlying collateral for this loan is an extended stay hotel. The hotel’s current cash flow is insufficient to service the debt in accordance with the contractual terms of the note and, as such, the loan continues to be on payment deferrals. A specific reserve has been established for the estimated collateral deficiency (based on a current appraisal), net of a 70% USDA guarantee.

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

    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Net unamortized discount on purchased loans   $ 773     $ 877     $ 1,058     $ 1,233     $ 1,462  

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 since December 31, 2019 were $177,845 of PPP loans.

Despite historically strong credit quality indicators, there continues to be significant uncertainty surrounding the overall impact of the COVID-19 pandemic on the loan portfolio. This uncertainty resulted in the Corporation increasing the ALLL by $5,087, or 87.51%, since December 31, 2019. Management will continue to monitor the loan portfolio to ensure that the ALLL remains appropriate.

The following table summarizes the average loan size as of:

    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Commercial   $ 169     $ 166     $ 171     $ 214     $ 228  
Commercial real estate   707     672     654     644     641  
Total commercial loans   351     321     325     513     514  
Residential mortgage   182     180     177     194     198  
Home equity   45     45     45     46     44  
Total residential real estate loans   130     129     128     137     138  
Consumer   22     22     25     26     32  
Gross loans   $ 226     $ 215     $ 213     $ 234     $ 234  

COVID-19, CARES Act and SBA activity

The communities which the Corporation serves are not immune to the fallout of the COVID-19 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 considered 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 6 months or less.

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.

As outlined in the following table, the majority of the Corporation’s portfolio and serviced loans have returned to normal principal and interest payments. The balance of those loans with deferrals are actively monitored and specific reserves have been established where appropriate.

The table below outlines the active COVID-19 related loan modifications as of December 31, 2020:

    Number of Modifications   Outstanding Balance   % of Portfolio
Commercial   2     $ 1,303     0.54 %
Commercial real estate   8     15,504     3.00 %
Total commercial loan modifications   10     16,807     2.22 %
Portfolio residential mortgage loans   5     333     0.13 %
Home equity   1     21     0.05 %
Total residential real estate loan modifications   6     354     0.12 %
Consumer           %
Total portfolio modifications   16     $ 17,161     1.61 %
             
Residential mortgage loans serviced for FHLMC   55     $ 9,423     1.80 %

The accommodation industry was particularly impacted by the COVID-19 pandemic. Due to executive action put in place by the government, including stay-at-home orders and travel restrictions, hotel occupancy rates were reduced drastically. The Corporation has 15 commercial loans in its portfolio in the accommodation industry with a book balance of $19,980. Of these loans, approximately 52% are government-backed by guarantees from either the SBA or USDA.

The Corporation was extremely active in participating in the PPP loan program. As of December 31, 2020, the Corporation funded 1,370 loans totaling $216,205. During the fourth quarter of 2020, the SBA began processing PPP forgiveness applications, which reduced the outstanding balance of PPP loans to $177,845 as of December 31, 2020. As of December 31, 2020, the Corporation received forgiveness payments for 232 PPP loans from the SBA.

The Corporation generated $6,799 in fees from the SBA through the PPP loan program. The income is being recognized over the life of the PPP loans (24 to 60 months) based on the level yield method. As of December 31, 2020, the Corporation has recognized $3,560 in income, with $3,239 remaining as unearned income.

All other assets

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

    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Premises and equipment, net   $ 15,461     $ 15,267   $ 15,323     $ 15,533     $ 15,245
Corporate owned life insurance   10,291     10,225   10,115     10,380     10,316
Accrued interest receivable   5,068     5,645   5,266     3,124     2,877
Mortgage servicing rights   4,885     4,376   3,816     3,980     4,030
Federal Home Loan Bank stock   3,488     3,488   3,488     3,150     3,150
Goodwill   3,219     3,219   3,219     3,219     3,219
Derivatives   1,331     1,772   1,311     1,063     125
Core deposit intangibles   541     632   722     812     902
Right-of-use assets   364     387   409     432     475
Other real estate owned             400    
Other assets   859     1,005   1,382     2,154     1,763
All other assets   $ 45,507     $ 46,016   $ 45,051     $ 44,247     $ 42,102
    12/31/2020 vs 9/30/2020   12/31/2020 vs 12/31/2019
    Variance   Variance
    Amount   %   Amount   %
Premises and equipment, net   $ 194     1.27 %   $ 216     1.42 %
Corporate owned life insurance   66     0.65 %   (25 )   (0.24 )%
Accrued interest receivable   (577 )   (10.22 )%   2,191     76.16 %
Mortgage servicing rights   509     11.63 %   855     21.22 %
Federal Home Loan Bank stock       %   338     10.73 %
Goodwill       %       %
Derivatives   (441 )   (24.89 )%   1,206     964.80 %
Core deposit intangibles   (91 )   (14.40 )%   (361 )   (40.02 )%
Right-of-use assets   (23 )   (5.94 )%   (111 )   (23.37 )%
Other real estate owned       N/M         N/M  
Other assets   (146 )   (14.53 )%   (904 )   (51.28 )%
All other assets   $ (509 )   (1.11 )%   $ 3,405     8.09 %

Mortgage servicing rights 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 mortgage servicing rights is due to the increased volume of residential mortgage loan sales. The Corporation expects mortgage servicing rights to increase, as residential real estate lending is expected to continue to remain strong into 2021.

Derivatives represent the fair value of interest rate lock commitments and mandatory forward loan sales commitments that are in a gain position. These balances can fluctuate from period to period based on changes in interest rates and the volume of the Corporation’s loan pipeline.

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:

    12/31/2020   9/30/2020   6/30/2020   3/31/2020   12/31/2019
Noninterest bearing demand   $ 378,733     $ 391,706   $ 383,452     $ 281,848     $ 260,503
Interest bearing                    
Savings   290,343     269,051   245,957     215,748     215,218
Money market demand   113,729     99,252   90,504     79,070     88,350
NOW   101,419     120,681   122,477     83,910     75,976
Time deposits   187,752     180,780   175,897     223,261     223,055
Total deposits   $ 1,071,976     $ 1,061,470   $ 1,018,287     $ 883,837     $ 863,102
    12/31/2020 vs 9/30/2020   12/31/2020 vs 12/31/2019
    Variance   Variance
    Amount   %   Amount   %
Noninterest bearing demand   $ (12,973 )   (3.31 )%   $ 118,230     45.39 %
Interest bearing                
Savings   21,292     7.91 %   75,125     34.91 %
Money market demand   14,477     14.59 %   25,379     28.73 %
NOW   (19,262 )   (15.96 )%   25,443     33.49 %
Time deposits   6,972     3.86 %   (35,303 )   (15.83 )%
Total deposits   $ 10,506     0.99 %   $ 208,874     24.20 %

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 December 31, 2020:

    Maturity Buckets
    3 Months or Less   3 to 6 Months   6 to 9 Months   9 to 12 Months   Beyond 12 Months
Balance   $ 70,975     $ 31,251     $ 33,057     $ 16,780     $ 35,689  
Weighted average yield   0.63 %   0.82 %   0.77 %   0.54 %   0.99 %
                     
    Cumulative Maturities
    3 Months or Less   Up to 6 Months   Up to 9 Months   Up to 12 Months   Total
Balance   $ 70,975     $ 102,226     $ 135,283     $ 152,063     $ 187,752  
Weighted average yield   0.63 %   0.69 %   0.71 %   0.69 %   0.75 %

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:

    12/31/20   9/30/20   6/30/20   3/31/20   12/31/19
Federal Home Loan Bank borrowings   $ 35,000     $ 77,500   $ 77,500     $ 57,500     $ 47,500
Subordinated debentures   14,000     14,000   14,000     14,000     14,000
PPPLF       4,717   4,717        
Federal funds purchased                
Total borrowed funds   $ 49,000     $ 96,217   $ 96,217     $ 71,500     $ 61,500
    12/31/2020 vs 9/30/2020   12/31/2020 vs 12/31/2019
    Variance   Variance
    Amount   %   Amount   %
Federal Home Loan Bank borrowings   $ (42,500 )   (54.84 )%   $ (12,500 )   (26.32 )%
Subordinated debentures       %       %
PPPLF   (4,717 )   (100.00 )%       N/M  
Federal funds purchased       %       %
Total borrowed funds   $ (47,217 )   (49.07 )%   $ (12,500 )   (20.33 )%

The Corporation utilizes a mix of borrowed funds and organic deposit growth to fund loan demand. The increase in Federal Home Loan Bank borrowings in the second quarter of 2020 was solely due to the Corporation funding PPP loans. The decrease in Federal Home Loan Bank borrowings in the fourth quarter of 2020 was primarily due to early payoffs of three FHLB borrowings totaling $30,000.

Total borrowed funds are expected to approximate current levels in 2021 as there are no scheduled maturities. 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:

    12/31/20   9/30/20   6/30/20   3/31/20   12/31/19
Federal Home Loan Bank borrowings   $ 35,000     $ 77,500   $ 77,500     $ 57,500     $ 47,500
Brokered money market demand       25,029   25,010        
Brokered time deposits   20,000     28,605   28,837     28,605     28,605
Subordinated debentures   14,000     14,000   14,000     14,000     14,000
Internet time deposits   2,839     10,208   11,690     18,005     18,009
PPPLF       4,717   4,717        
Total wholesale funds   $ 71,839     $ 160,059   $ 161,754     $ 118,110     $ 108,114
    12/31/2020 vs 9/30/2020   12/31/2020 vs 12/31/2019
    Variance   Variance
    Amount   %   Amount   %
Federal Home Loan Bank borrowings   $ (42,500 )   (54.84 )%   $ (12,500 )   (26.32 )%
Brokered money market demand   (25,029 )   (100.00 )%       N/M  
Brokered time deposits   (8,605 )   (30.08 )%   (8,605 )   (30.08 )%
Subordinated debentures               %
Internet time deposits   (7,369 )   (72.19 )%   (15,170 )   (84.24 )%
PPPLF   (4,717 )   (100.00 )%       N/M  
Total wholesale funds   $ (88,220 )   (55.12 )%   $ (36,275 )   (33.55 )%

The Corporation utilizes wholesale funds to manage balance sheet growth. Wholesale funding has historically been more expensive than core deposits, however, due to the COVID-19 pandemic, the FRB has kept Fed funds rates near zero. 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 2021 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. During the fourth quarter of 2020, the Corporation repurchased 5,640 shares for $110.

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 December 31, 2015 and all dividends were reinvested.

The graph accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/d09cbdf7-6e1d-421d-b74d-c95960b6fe9a

Date   FETM   ABAQ Index
12/31/2015   100.00   100.00
12/31/2016   119.19   135.98
12/31/2017   141.41   136.98
12/31/2018   158.44   114.22
12/31/2019   190.98   137.44
12/31/2020   169.84   117.60

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.

 



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