Fentura Financial, Inc. Announces First Quarter 2020 Earnings

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

FENTON, Mich., May 04, 2020 (GLOBE NEWSWIRE) -- Fentura Financial, Inc. (OTCQX: FETM) announces quarterly results of net income of $3,352 for the three month period ended March 31, 2020.

• 3.52% increase in total assets since December 31, 2019
• 6.88% increase in gross loans since March 31, 2019
• 2.40% increase in total deposits since December 31, 2019
• Net interest margin of 3.61% for the quarter ended March 31, 2020

“Considering the challenging environment we faced in the first quarter of 2020 based on the global pandemic, I am pleased with our operating results,” said Fentura’s President and CEO Ronald Justice. “Despite the pressures faced by the organization based on the impact of the Coronavirus, we have taken measures to protect the safety of our team while continuing to meet the needs of our clients. Our branch offices remain open by appointment, while the majority of banking transactions have been processed through online banking, our mobile application and ITMs. Recognizing the financial pressures placed on so many, we have actively worked with individuals, families and business clients to defer loan payments and created a short term, interest free loan program to help bridge the gap for many in need as well. We have been active in the SBA’s Paycheck Protection Program assisting hundreds of businesses in accessing funding to support their operations during this unprecedented time. All of these efforts demonstrate our continued commitment to help those we serve manage through this crisis.”

“The Company entered this crisis with strong capital and liquidity that will support us as we move forward during these uncertain times,” added Justice.

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

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
INCOME STATEMENT DATA
Interest income		$	11,070			$	11,076			$	11,240			$	10,788			$	10,437
Interest expense		2,145				2,158				2,184				2,195				2,090
Net interest income		8,925				8,918				9,056				8,593				8,347
Provision for loan losses		1,542				436				422				264				213
Noninterest income		4,513				2,129				2,262				2,250				1,522
Noninterest expenses		7,686				7,415				6,608				6,691				6,509
Federal income tax expense		858				644				873				791				633
Net income		$	3,352			$	2,552			$	3,415			$	3,097			$	2,514
PER SHARE
Earnings		$	0.72			$	0.55			$	0.73			$	0.67			$	0.54
Dividends		$	0.075			$	0.07			$	0.07			$	0.07			$	0.07
Tangible book value(1)		$	21.56			$	20.87			$	20.37			$	19.59			$	18.88
Quoted market value
High		$	26.00			$	25.50			$	21.00			$	21.00			$	21.00
Low		$	12.55			$	20.60			$	20.45			$	20.45			$	20.05
Close(1)		$	15.50			$	25.23			$	21.00			$	20.60			$	20.89
PERFORMANCE RATIOS
Return on average assets		1.28		%		1.02		%		1.40		%		1.31		%		1.09		%
Return on average shareholders' equity		13.01		%		10.03		%		13.83		%		13.14		%		11.09		%
Return on average tangible shareholders' equity		13.54		%		10.46		%		14.47		%		13.79		%		11.66		%
Efficiency ratio		57.20		%		67.12		%		58.38		%		61.71		%		65.95		%
Yield on earning assets (FTE)		4.47		%		4.66		%		4.85		%		4.81		%		4.77		%
Rate on interest bearing liabilities		1.28		%		1.36		%		1.42		%		1.46		%		1.40		%
Net interest margin to earning assets (FTE)		3.61		%		3.75		%		3.91		%		3.83		%		3.82		%
BALANCE SHEET DATA(1)
Total investment securities		$	76,312			$	61,621			$	62,351			$	73,285			$	82,222
Gross loans		$	865,577			$	870,555			$	826,597			$	813,547			$	809,863
Total assets		$	1,071,180			$	1,034,759			$	978,046			$	949,790			$	946,172
Total deposits		$	883,837			$	863,102			$	801,101			$	792,555			$	789,533
Borrowed funds		$	71,500			$	61,500			$	69,000			$	54,000			$	59,000
Total shareholders' equity		$	104,828			$	101,444			$	99,142			$	95,504			$	92,236
Net loans to total deposits		97.11		%		100.19		%		102.51		%		102.02		%		101.97		%
Common shares outstanding		4,675,499				4,664,369				4,658,722				4,653,343				4,647,978
QTD BALANCE SHEET AVERAGES
Total assets		$	1,049,245			$	994,094			$	971,074			$	947,095			$	934,078
Earning assets		$	997,089			$	944,692			$	920,857			$	900,738			$	887,974
Interest bearing liabilities		$	672,564			$	629,454			$	611,804			$	603,965			$	604,973
Total shareholders' equity		$	103,646			$	100,991			$	97,958			$	94,519			$	91,964
Total tangible shareholders' equity		$	99,558			$	96,796			$	93,650			$	90,098			$	87,430
Earned common shares outstanding		4,659,279				4,652,569				4,646,835				4,641,161				4,635,255
Unvested stock grants		13,481				9,947				9,967				9,967				9,788
Total common shares outstanding		4,672,760				4,662,516				4,656,802				4,651,128				4,645,043
ASSET QUALITY(1)
Nonperforming loans to gross loans		0.10		%		0.17		%		0.11		%		0.13		%		0.15		%
Nonperforming assets to total assets		0.12		%		0.14		%		0.09		%		0.11		%		0.13		%
Allowance for loan losses to gross loans		0.84		%		0.67		%		0.65		%		0.62		%		0.59		%
CAPITAL RATIOS(1)
Total capital to risk weighted assets		14.42		%		14.03		%		14.42		%		14.18		%		13.99		%
Tier 1 capital to risk weighted assets		13.56		%		13.33		%		13.73		%		13.53		%		13.37		%
CET1 capital to risk weighted assets		11.91		%		11.64		%		11.96		%		11.73		%		11.54		%
Tier 1 leverage ratio		10.97		%		11.20		%		11.22		%		11.16		%		10.99		%
(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 three month periods ended:

		3/31/2020				3/31/2019				3/31/2018				3/31/2017				3/31/2016
INCOME STATEMENT DATA
Interest income		$	11,070			$	10,437			$	8,379			$	6,427			$	4,526
Interest expense		2,145				2,090				1,031				687				573
Net interest income		8,925				8,347				7,348				5,740				3,953
Provision for loan losses		1,542				213				275				—				—
Noninterest income		4,513				1,522				1,801				1,234				1,488
Noninterest expenses		7,686				6,509				6,279				5,095				4,046
Federal income tax expense		858				633				521				592				475
Net income		$	3,352			$	2,514			$	2,074			$	1,287			$	920
PER SHARE
Earnings		$	0.72			$	0.54			$	0.57			$	0.35			$	0.36
Dividends		$	0.075			$	0.07			$	0.06			$	0.05			$	0.25
Tangible book value(1)		$	21.56			$	18.88			$	15.27			$	12.86			$	13.02
Quoted market value
High		$	26.00			$	21.00			$	20.19			$	18.25			$	14.94
Low		$	12.55			$	20.05			$	18.88			$	15.10			$	13.70
Close(1)		$	15.50			$	20.89			$	19.75			$	18.00			$	14.75
PERFORMANCE RATIOS
Return on average assets		1.28		%		1.09		%		0.26		%		0.18		%		0.20		%
Return on average shareholders' equity		13.01		%		11.09		%		3.45		%		2.51		%		2.75		%
Return on average tangible shareholders' equity		13.54		%		11.66		%		3.45		%		2.51		%		2.75		%
Efficiency ratio		57.20		%		65.95		%		64.19		%		70.32		%		74.36		%
Yield on earning assets (FTE)		4.47		%		4.77		%		4.51		%		4.19		%		4.43		%
Rate on interest bearing liabilities		1.28		%		1.40		%		0.83		%		0.55		%		0.77		%
Net interest margin to earning assets (FTE)		3.61		%		3.82		%		3.90		%		3.74		%		3.87		%
BALANCE SHEET DATA(1)
Total investment securities		$	76,312			$	82,222			$	49,608			$	72,472			$	23,440
Gross loans		$	865,577			$	809,863			$	686,140			$	554,415			$	386,685
Total assets		$	1,071,180			$	946,172			$	789,943			$	730,636			$	455,603
Total deposits		$	883,837			$	789,533			$	683,775			$	630,055			$	376,397
Borrowed funds		$	71,500			$	59,000			$	44,600			$	45,000			$	44,775
Total shareholders' equity		$	104,828			$	92,236			$	60,621			$	51,816			$	32,996
Net loans to total deposits		97.11		%		101.97		%		99.80		%		87.54		%		101.79		%
Common shares outstanding		4,675,499				4,647,978				3,635,098				3,620,964				2,534,255
YTD BALANCE SHEET AVERAGES
Total assets		$	1,049,245			$	934,078			$	789,391			$	716,998			$	456,730
Earning assets		$	997,089			$	887,974			$	755,281			$	613,904			$	408,579
Interest bearing liabilities		$	672,564			$	604,973			$	505,174			$	499.636			$	297.662
Total shareholders' equity		$	103,646			$	91,964			$	60,107			$	51,241			$	33,445
Total tangible shareholders' equity		$	99,558			$	87,430			$	55,041			$	49,104			$	33,445
Earned common shares outstanding		4,659,279				4,635,255				3,633,093				3,677,143				2,558,333
Unvested stock grants		13,481				9,788				—				—				—
Total common shares outstanding		4,672,760				4,645,043				3,633,093				3,677,143				2,558,333
ASSET QUALITY(1)
Nonperforming loans to gross loans		0.10		%		0.15		%		0.10		%		0.33		%		0.06		%
Nonperforming assets to total assets		0.12		%		0.13		%		0.10		%		0.28		%		0.18		%
Allowance for loan losses to gross loans		0.84		%		0.59		%		0.54		%		0.52		%		0.92		%
CAPITAL RATIOS(1)
Total capital to risk weighted assets		14.42		%		13.99		%		11.03		%		11.72		%		13.27		%
Tier 1 capital to risk weighted assets		13.56		%		13.37		%		10.48		%		11.20		%		12.33		%
CET1 capital to risk weighted assets		11.91		%		11.54		%		8.41		%		8.65		%		8.64		%
Tier 1 leverage ratio		10.97		%		10.99		%		9.01		%		8.60		%		10.43		%
(1)At end of period

Income Statement Breakdown and Analysis

		Quarter to Date
		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
GAAP net income		$	3,352			$	2,552			$	3,415			$	3,097			$	2,514
Acquisition related items (net of tax)
Accretion on purchased loans		(180		)		(126		)		(189		)		(145		)		(175		)
Amortization of core deposit intangibles		71				89				88				90				89
Amortization on acquired time deposits		5				7				7				7				7
Amortization on purchased mortgage servicing rights		—				3				3				3				3
Total acquisition related items (net of tax)		(104		)		(27		)		(91		)		(45		)		(76		)
Other nonrecurring items (net of tax)
Change in fair value of equity investment due to acquisition transaction		(578		)		—				—				—				—
Impact of adoption of SAB 109		(976		)		—				—				—				—
Prepayment penalties collected		(36		)		(42		)		(284		)		(9		)		(13		)
Mortgage servicing rights impairment		173				—				—				—				—
Total other nonrecurring items (net of tax)		(1,417		)		(42		)		(284		)		(9		)		(13		)
Adjusted net income from operations		$	1,831			$	2,483			$	3,040			$	3,043			$	2,425
GAAP net interest income		$	8,925			$	8,918			$	9,056			$	8,593			$	8,347
Accretion on purchased loans		(228		)		(160		)		(239		)		(183		)		(222		)
Prepayment penalties collected		(46		)		(53		)		(360		)		(12		)		(16		)
Amortization on acquired time deposits		6				9				9				9				9
Adjusted net interest income		$	8,657			$	8,714			$	8,466			$	8,407			$	8,118
PERFORMANCE RATIOS
Based on adjusted net income from operations
Earnings per share		$	0.39			$	0.53			$	0.65			$	0.66			$	0.52
Return on average assets		0.70		%		0.99		%		1.24		%		1.29		%		1.05		%
Return on average shareholders' equity		7.11		%		9.75		%		12.31		%		12.91		%		10.69		%
Return on average tangible shareholders' equity		7.40		%		10.18		%		12.88		%		13.55		%		11.25		%
Based on adjusted net interest income
Yield on earning assets (FTE)		4.36		%		4.57		%		4.59		%		4.72		%		4.66		%
Rate on interest bearing liabilities		1.28		%		1.37		%		1.43		%		1.47		%		1.41		%
Net interest margin to earning assets (FTE)		3.50		%		3.66		%		3.66		%		3.75		%		3.72		%

		Year to Date March 31								Variance
		2020				2019				Amount				%
GAAP net income		$	3,352			$	2,514			$	838			33.33	%
Acquisition related items (net of tax)
Accretion on purchased loans		(180		)		(175		)		(5		)		2.86	%
Amortization of core deposit intangibles		71				89				(18		)		(20.22	)%
Amortization on acquired time deposits		5				7				(2		)		(28.57	)%
Amortization on purchased mortgage servicing rights		—				3				(3		)		(100.00	)%
Total acquisition related items (net of tax)		(104		)		(76		)		(28		)		36.84	%
Other nonrecurring items (net of tax)
Change in fair value of equity investment due to acquisition transaction		(578		)		—				(578		)		N/M
Impact of adoption of SAB 109		(976		)		—				(976		)		N/M
Prepayment penalties collected		(36		)		(13		)		(23		)		176.92	%
Mortgage servicing rights impairment		173				—				173				N/M
Total other nonrecurring items (net of tax)		(1,417		)		(13		)		(1,404		)		10,800.00	%
Adjusted net income from operations		$	1,831			$	2,425			$	(594	)		(24.49	)%
GAAP net interest income		$	8,925			$	8,347			$	578			6.92	%
Accretion on purchased loans		(228		)		(222		)		(6		)		2.70	%
Prepayment penalties collected		(46		)		(16		)		(30		)		187.50	%
Amortization on acquired time deposits		6				9				(3		)		(33.33	)%
Adjusted net interest income		$	8,657			$	8,118			$	539			6.64	%
PERFORMANCE RATIOS
Based on adjusted net income from operations
Earnings per share		$	0.39			$	0.52			$	(0.13	)		(25.00	)%
Return on average assets		0.70		%		1.05		%						(0.35	)%
Return on average shareholders' equity		7.11		%		10.69		%						(3.58	)%
Return on average tangible shareholders' equity		7.40		%		11.25		%						(3.85	)%
Based on adjusted net interest income
Yield on earning assets (FTE)		4.36		%		4.66		%						(0.30	)%
Rate on interest bearing liabilities		1.28		%		1.41		%						(0.13	)%
Net interest margin to earning assets (FTE)		3.50		%		3.72		%						(0.22	)%

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 interest rate lock commitments, forward loan sales commitments, and loans held for sale at fair value.  Changes in the fair value of these instruments is recognized as a component of noninterest income.  As forward loan sales commitments 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
		March 31, 2020																December 31, 2019																March 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		$			878,813			$			10,481			4.80		%		$			857,474			$			10,581			4.90		%		$			791,069			$			9,741			4.99		%
Taxable investment securities		56,963						353						2.49		%		49,982						307						2.44		%		79,367						559						2.86		%
Nontaxable investment securities		10,532						81						3.09		%		10,366						80						3.06		%		10,582						76						2.91		%
Federal funds sold		33,588						116						1.39		%		16,833						66						1.56		%		43						—						—		%
Interest earning cash and cash equivalents		14,043						26						0.74		%		6,887						28						1.61		%		3,763						25						2.69		%
Federal Home Loan Bank stock		3,150						30						3.83		%		3,150						31						3.90		%		3,150						52						6.69		%
Total earning assets		997,089						11,087						4.47		%		944,692						11,093						4.66		%		887,974						10,453						4.77		%
Nonearning assets
Allowance for loan losses		(5,821				)												(5,519				)												(4,591				)
Fixed assets		15,538																15,395																14,818
Accrued income and other assets		42,439																39,526																35,877
Total assets		$			1,049,245													$			994,094													$			934,078
Interest bearing liabilities
Interest bearing demand deposits		$			170,598			$			475			1.12		%		$			140,368			$			410			1.16		%		$			73,414			$			84			0.46		%
Savings deposits		231,188						199						0.35		%		225,219						217						0.38		%		241,815						297						0.50		%
Time deposits		205,485						1,053						2.06		%		201,640						1,089						2.14		%		225,866						1,220						2.19		%
Borrowed funds		65,293						418						2.57		%		62,227						442						2.82		%		63,878						489						3.10		%
Total interest bearing liabilities		672,564						2,145						1.28		%		629,454						2,158						1.36		%		604,973						2,090						1.40		%
Noninterest bearing liabilities
Noninterest bearing deposits		264,699																254,858																234,268
Accrued interest and other liabilities		8,336																8,791																2,873
Shareholders' equity		103,646																100,991																91,964
Total liabilities and shareholders' equity		$			1,049,245													$			994,094													$			934,078
Net interest income (FTE)								$			8,942													$			8,935													$			8,363
Net interest margin to earning assets (FTE)														3.61		%														3.75		%														3.82		%

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
		March 31, 2020												March 31, 2020
		Compared To												Compared To
		December 31, 2019												March 31, 2019
		Increase (Decrease) Due to												Increase (Decrease) Due to
		Volume				Rate				Net				Volume				Rate				Net
Changes in interest income
Total loans		$	887			$	(987	)		$	(100	)		$	2,789			$	(2,049	)		$	740
Taxable investment securities		40				6				46				(141		)		(65		)		(206		)
Nontaxable investment securities		1				—				1				(2		)		7				5
Federal funds sold		97				(47		)		50				—				116				116
Interest earning cash and cash equivalents		78				(80		)		(2		)		116				(115		)		1
Federal Home Loan Bank stock		—				(1		)		(1		)		—				(22		)		(22		)
Total changes in interest income		1,103				(1,109		)		(6		)		2,762				(2,128		)		634
Changes in interest expense
Interest bearing demand deposits		153				(88		)		65				188				203				391
Savings deposits		30				(48		)		(18		)		(12		)		(86		)		(98		)
Time deposits		97				(133		)		(36		)		(101		)		(66		)		(167		)
Borrowed funds		102				(126		)		(24		)		70				(141		)		(71		)
Total changes in interest expense		382				(395		)		(13		)		145				(90		)		55
Net change in net interest income (FTE)		$	721			$	(714	)		$	7			$	2,617			$	(2,038	)		$	579

		Average Yield/Rate for the Three Month Periods Ended
		3/31/2020																12/31/2019				9/30/2019				6/30/2019				3/31/2019
Total earning assets		4.47														%		4.66		%		4.85		%		4.81		%		4.77		%
Total interest bearing liabilities		1.28														%		1.36		%		1.42		%		1.46		%		1.40		%
Net interest margin to earning assets (FTE)		3.61														%		3.75		%		3.91		%		3.83		%		3.82		%

		Quarter to Date Net Interest Income (FTE)
		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Interest income		$	11,070			$	11,076			$	11,240			$	10,788			$	10,437
FTE adjustment		17				17				15				15				16
Total interest income (FTE)		11,087				11,093				11,255				10,803				10,453
Total interest expense		2,145				2,158				2,184				2,195				2,090
Net interest income (FTE)		$	8,942			$	8,935			$	9,071			$	8,608			$	8,363

The current interest rate environment continues to create pressure on the Corporation's net interest margin. While the Corporation was able to increase net interest income for the quarter ended March 31, 2020 compared to the quarter ended December 31, 2019, the increase was not as significant as previous quarters.

In the first quarter of 2020, the Corporation made a concentrated effort to sharply decrease the interest rates on deposit products paying interest rates that were above the offered rates available in the market. Net interest margins are expected to compress throughout 2020 as rates on interest earning assets are expected to continue to fall faster than interest bearing liabilities.

Noninterest Income

		Quarter to Date
		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Net gain on sales of mortgage loans		$	970			$	650			$	665			$	422			$	195
Change in fair value of mortgage banking hedge instruments		833				—				—				—				—
Change in fair value of equity investments		749				(5		)		16				21				14
Net gain on sales of commercial loans		668				—				—				—				—
Trust and investment services		389				337				395				459				328
ATM and debit card income		355				399				418				404				360
Mortgage servicing fees		262				256				243				230				211
Service charges on deposit accounts		219				245				239				222				234
Net mortgage servicing rights income		(50		)		130				142				344				8
Other income and fees		118				117				144				148				172
Total noninterest income		$	4,513			$	2,129			$	2,262			$	2,250			$	1,522

		Year to Date March 31								Variance
		2020				2019				Amount				%
Net gain on sales of mortgage loans		$	970			$	195			$	775			397.44	%
Change in fair value of mortgage banking hedge instruments		833				—				833				N/M
Change in fair value of equity investments		749				14				735				5250.00	%
Net gain on sales of commercial loans		668				—				668				N/M
Trust and investment services		389				328				61				18.60	%
ATM and debit card income		355				360				(5		)		(1.39	)%
Mortgage servicing fees		262				211				51				24.17	%
Service charges on deposit accounts		219				234				(15		)		(6.41	)%
Net mortgage servicing rights income		(50		)		8				(58		)		(725.00	)%
Other income and fees		118				172				(54		)		(31.40	)%
Total noninterest income		$	4,513			$	1,522			$	2,991			196.52	%

 

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 hedge instruments and loans held for sale are included in noninterest income.

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 includes the income earned on 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.

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

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

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

Service charges on deposit accounts includes fees earned from deposit customers for transaction-based, account maintenance and overdraft services. The year-over-year decrease in service charges on deposit accounts is a result of a decline in NSF fees as well as a shift of customer demand toward deposit accounts with no or reduced service charges. 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%. This reduction in fees runs through May 31, 2020. For these reasons, service charges on deposit accounts are expected to decrease in the foreseeable future.

Net mortgage servicing rights income represents income generated from the capitalization of mortgage servicing rights, net of amortization. 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 the first quarter of 2020, the Corporation recognized an impairment on the MSR portfolio of $219. This impairment was recognized due to the fact that the MSR portfolio had a carrying balance that was larger than the value produced by a forecasting model. The model that was used is produced by a third-party consultant, and uses proprietary analytical tools to calculates unique present values of expected future cash flows. This cash flow analysis is calculated by pooling loans into homogeneous characteristics. The impairment recognized is attributable to the pool of loans with an original term of 30 years. The Corporation also decreased the rates at which MSR are capitalized so as to reflect more accurate fair value. The Corporation expects net MSR income to slightly decrease in 2020 due to the decreased rates that MSR are capitalized at and slowing residential mortgage loan origination.

Other income and fees includes 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
		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Total compensation		$	4,248			$	4,037			$	3,530			$	3,749			$	3,630
Furniture and equipment		610				665				579				525				491
Professional services		522				582				494				439				445
Occupancy		476				467				444				426				437
Data processing		442				272				323				281				278
Advertising and promotional		252				232				222				291				163
Loan and collection		162				203				120				119				110
ATM and debit card		108				98				109				100				95
Telephone and communication		96				115				110				108				111
Amortization of core deposit intangibles		90				113				112				114				112
FDIC insurance premiums		55				6				20				17				101
Other general and administrative		625				625				545				522				536
Total noninterest expenses		$	7,686			$	7,415			$	6,608			$	6,691			$	6,509

		Year to Date March 31								Variance
		2020				2019				Amount				%
Total compensation		$	4,248			$	3,630			$	618			17.02	%
Furniture and equipment		610				491				119				24.24	%
Professional services		522				445				77				17.30	%
Occupancy		476				437				39				8.92	%
Data processing		442				278				164				58.99	%
Advertising and promotional		252				163				89				54.60	%
Loan and collection		162				110				52				47.27	%
ATM and debit card		108				95				13				13.68	%
Telephone and communication		96				111				(15		)		(13.51	)%
Amortization of core deposit intangibles		90				112				(22		)		(19.64	)%
FDIC insurance premiums		55				101				(46		)		(45.54	)%
Other general and administrative		625				536				89				16.60	%
Total noninterest expenses		$	7,686			$	6,509			$	1,177			18.08	%

 

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 continue to increase modestly 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 increase modestly 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.

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 the application of the Small Bank Assessment Credit, FDIC insurance premiums are not expected to increase in 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

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
ASSETS
Cash and cash equivalents		$	71,140			$	46,803			$	37,572			$	20,067			$	16,509
Total investment securities		76,312				61,621				62,351				73,285				82,222
Loans held-for-sale		21,154				19,491				15,111				6,771				1,835
Gross loans		865,577				870,555				826,597				813,547				809,863
Less allowance for loan losses		7,250				5,813				5,413				5,014				4,745
Net loans		858,327				864,742				821,184				808,533				805,118
All other assets		44,247				42,102				41,828				41,134				40,488
Total assets		$	1,071,180			$	1,034,759			$	978,046			$	949,790			$	946,172
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits		$	883,837			$	863,102			$	801,101			$	792,555			$	789,533
Total borrowed funds		71,500				61,500				69,000				54,000				59,000
Accrued interest payable and other liabilities		11,015				8,713				8,803				7,731				5,403
Total liabilities		966,352				933,315				878,904				854,286				853,936
Total shareholders' equity		104,828				101,444				99,142				95,504				92,236
Total liabilities and shareholders' equity		$	1,071,180			$	1,034,759			$	978,046			$	949,790			$	946,172

		3/31/2020 vs 12/31/2019							3/31/2020 vs 3/31/2019
		Variance							Variance
		Amount				%			Amount				%
ASSETS
Cash and cash equivalents		$	24,337			52.00	%		$	54,631			330.92	%
Total investment securities		14,691				23.84	%		(5,910		)		(7.19	)%
Loans held-for-sale		1,663				8.53	%		19,319				1,052.81	%
Gross loans		(4,978		)		(0.57	)%		55,714				6.88	%
Less allowance for loan losses		1,437				24.72	%		2,505				52.79	%
Net loans		(6,415		)		(0.74	)%		53,209				6.61	%
All other assets		2,145				5.09	%		3,759				9.28	%
Total assets		$	36,421			3.52	%		$	125,008			13.21	%
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits		$	20,735			2.40	%		$	94,304			11.94	%
Total borrowed funds		10,000				16.26	%		12,500				21.19	%
Accrued interest payable and other liabilities		2,302				26.42	%		5,612				103.87	%
Total liabilities		33,037				1.84	%		112,416				6.84	%
Total shareholders' equity		3,384				3.34	%		12,592				13.65	%
Total liabilities and shareholders' equity		$	36,421			3.52	%		$	125,008			13.21	%

Cash and cash equivalents

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Cash and due from banks
Noninterest bearing		$	33,312			$	17,754			$	21,808			$	12,143			$	7,683
Interest bearing		37,828				6,049				6,764				4,924				8,826
Federal funds sold		—				23,000				9,000				3,000				—
Cash and cash equivalents		$	71,140			$	46,803			$	37,572			$	20,067			$	16,509
		3/31/2020 vs 12/31/2019												3/31/2020 vs 3/31/2019
		Variance												Variance
		Amount				%								Amount				%
Cash and due from banks
Noninterest bearing		$	15,558			87.63		%						$	25,629			333.58		%
Interest bearing		31,779				525.36		%						29,002				328.60		%
Federal funds sold		(23,000		)		(100.00		)%						—					N/M
Cash and cash equivalents		$	24,337			52.00		%						$	54,631			330.92		%

 

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. Federal funds sold increased in the fourth quarter of 2019 compared to that year's third quarter due to an increase in total deposits. Towards the end of the first quarter of 2020, the Corporation shifted funds from federal funds sold to cash and due from banks as those accounts were yielding a higher interest rate. The overall increase in cash and cash equivalents from the fourth quarter of 2019 to the first quarter of 2020 is largely due to an increase in total deposits. The Corporation expects to fund investment security growth and PPP loans with cash and cash equivalents.

Primary and secondary liquidity sources

While the Corporation continues to have strong cash and cash equivalents, it is important to monitor all sources of liquidity. Because of the volume 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:

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Cash and cash equivalents		$	71,140			$	46,803			$	37,572			$	20,067			$	16,509
Unpledged investment securities		51,889				40,094				40,675				50,729				60,032
FHLB borrowing availability		42,500				52,500				45,000				60,000				60,000
Federal funds purchased lines of credit		17,500				17,500				17,500				17,500				12,500
Funds available through the Fed Discount Window		10,000				10,000				10,000				10,000				10,000
Total liquidity sources		$	193,029			$	166,897			$	150,747			$	158,296			$	159,041

Total investment securities

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Available-for-sale
U.S. Government and federal agency		$	23,610			$	18,867			$	22,854			$	33,842			$	38,796
State and municipal		10,657				10,691				10,194				8,889				10,322
Mortgage backed residential		10,176				10,748				6,227				6,733				7,031
Certificates of deposit		8,644				6,659				7,155				7,154				8,394
Collateralized mortgage obligations - agencies		18,288				9,527				10,826				11,856				12,516
Unrealized gain/(loss) on available-for-sale securities		1,735				1,092				1,048				776				288
Total available-for-sale		73,110				57,584				58,304				69,250				77,347
Held-to-maturity state and municipal		2,091				2,096				2,100				2,104				2,965
Equity securities		1,111				1,941				1,947				1,931				1,910
Total investment securities		$	76,312			$	61,621			$	62,351			$	73,285			$	82,222
		3/31/2020 vs 12/31/2019												3/31/2020 vs 3/31/2019
		Variance												Variance
		Amount				%								Amount				%
Available-for-sale
U.S. Government and federal agency		$	4,743			25.14		%						$	(15,186	)		(39.14		)%
State and municipal		(34		)		(0.32		)%						335				3.25		%
Mortgage backed residential		(572		)		(5.32		)%						3,145				44.73		%
Certificates of deposit		1,985				29.81		%						250				2.98		%
Collateralized mortgage obligations - agencies		8,761				91.96		%						5,772				46.12		%
Unrealized gain/(loss) on available-for-sale securities		643				58.88		%						1,447				502.43		%
Total available-for-sale		15,526				26.96		%						(4,237		)		(5.48		)%
Held-to-maturity state and municipal		(5		)		(0.24		)%						(874		)		(29.48		)%
Equity securities		(830		)		(42.76		)%						(799		)		(41.83		)%
Total investment securities		$	14,691			23.84		%						$	(5,910	)		(7.19		)%

The amortized cost and fair value of AFS investment securities as of March 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		$	18,692			$	4,918			$	—			$	—			$	—			$	23,610
State and municipal		3,380				4,663				1,379				1,235				—				10,657
Mortgage backed residential		—				—				—				—				10,176				10,176
Certificates of deposit		4,454				4,190				—				—				—				8,644
Collateralized mortgage obligations - agencies		—				—				—				—				18,288				18,288
Total amortized cost		$	26,526			$	13,771			$	1,379			$	1,235			$	28,464			$	71,375
Fair value		$	26,701			$	14,352			$	1,488			$	1,497			$	29,072			$	73,110

The amortized cost and fair value of HTM investment securities as of March 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		$	486			$	1,155			$	370			$	80			$	—			$	2,091
Fair value		$	480			$	1,122			$	341			$	72			$	—			$	2,015

 

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. 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 March 31, 2020 for investment securities purchased YTD:

		Book Value						Tax Effective Weighted Average Yield				Weighted Average Remaining Maturity (Months)
U.S. Government and federal agency		$			10,454			0.46		%		8
State and municipal		—						—		%		—
Collateralized mortgage obligations - agencies		9,723						2.48		%		291
Certificates of deposit		1,984						1.01		%		5
Mortgage backed residential		—						—		%		—
Held-to-maturity state and municipal		—						—		%		—
Total		$			22,161			1.40		%		132

Loans held-for-sale

Loans held-for-sale 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 in 2020, the balance of loans HFS will also decline.

During the first quarter of 2020, the Corporation adopted SAB 109. Because of this adoption, the Corporation now recognizes 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:

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Commercial		$	67,731			$	71,689			$	63,747			$	63,998			$	56,790
Commercial real estate		462,561				455,289				420,127				408,103				394,462
Total commercial loans		530,292				526,978				483,874				472,101				451,252
Residential mortgage		285,392				292,946				291,401				289,944				306,466
Home equity		43,222				41,987				43,061				42,890				43,130
Total residential real estate loans		328,614				334,933				334,462				332,834				349,596
Consumer		6,671				8,644				8,261				8,612				9,015
Gross loans		865,577				870,555				826,597				813,547				809,863
Allowance for loan losses		(7,250		)		(5,813		)		(5,413		)		(5,014		)		(4,745		)
Loans, net		$	858,327			$	864,742			$	821,184			$	808,533			$	805,118
		3/31/2020 vs 12/31/2019												3/31/2020 vs 3/31/2019
		Variance												Variance
		Amount				%								Amount				%
Commercial		$	(3,958	)		(5.52		)%						$	10,941			19.27		%
Commercial real estate		7,272				1.60		%						68,099				17.26		%
Total commercial loans		3,314				0.63		%						79,040				17.52		%
Residential mortgage		(7,554		)		(2.58		)%						(21,074		)		(6.88		)%
Home equity		1,235				2.94		%						92				0.21		%
Total residential real estate loans		(6,319		)		(1.89		)%						(20,982		)		(6.00		)%
Consumer		(1,973		)		(22.83		)%						(2,344		)		(26.00		)%
Gross loans		(4,978		)		(0.57		)%						55,714				6.88		%
Allowance for loan losses		(1,437		)		24.72		%						(2,505		)		52.79		%
Loans, net		$	(6,415	)		(0.74		)%						$	53,209			6.61		%

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

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Originated loans collectively evaluated for impairment
Commercial		$	66,524			$	70,322			$	61,970			$	61,122			$	53,549
Commercial real estate		446,713				436,626				400,470				386,970				372,347
Residential mortgage		280,265				286,635				285,499				283,638				299,439
Home equity		40,459				39,023				39,586				39,243				39,407
Consumer		6,391				8,330				7,902				8,169				8,404
Subtotal		840,352				840,936				795,427				779,142				773,146
Originated loans individually evaluated for impairment
Commercial		—				—				—				—				—
Commercial real estate		1,658				1,668				1,677				1,703				2,058
Residential mortgage		672				1,362				631				660				618
Home equity		—				—				240				218				—
Consumer		5				—				—				—				—
Subtotal		2,335				3,030				2,548				2,581				2,676
Acquired loans collectively evaluated for impairment
Commercial		1,204				1,362				1,753				2,806				3,160
Commercial real estate		13,630				16,346				17,194				18,526				19,164
Residential mortgage		3,459				3,911				4,139				4,388				5,070
Home equity		2,743				2,943				3,213				3,399				3,693
Consumer		273				314				358				441				608
Subtotal		21,309				24,876				26,657				29,560				31,695
Acquired loans individually evaluated for impairment
Commercial		—				—				—				—				—
Commercial real estate		—				—				—				—				—
Residential mortgage		58				58				61				113				117
Home equity		—				—				—				—				—
Consumer		—				—				—				—				—
Subtotal		58				58				61				113				117
Acquired loans with deteriorated credit quality
Commercial		3				5				24				70				81
Commercial real estate		560				649				786				904				893
Residential mortgage		938				980				1,071				1,145				1,222
Home equity		20				21				22				30				30
Consumer		2				—				1				2				3
Subtotal		1,523				1,655				1,904				2,151				2,229
Gross Loans		$	865,519			$	870,497			$	826,536			$	813,434			$	809,746
Total originated loans		$	842,687			$	843,966			$	797,975			$	781,723			$	775,822
Total acquired loans		22,890				26,589				28,622				31,824				34,041
Gross loans		$	865,577			$	870,555			$	826,597			$	813,547			$	809,863

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

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Originated loans collectively evaluated for impairment
Commercial		$	478			$	358			$	301			$	278			$	240
Commercial real estate		3,609				2,790				2,539				2,381				2,282
Residential mortgage		2,442				1,917				1,820				1,662				1,744
Home equity		280				195				198				191				186
Consumer		89				87				87				90				88
Subtotal		6,898				5,347				4,945				4,602				4,540
Originated loans individually evaluated for impairment
Commercial		—				—				—				—				—
Commercial real estate		111				127				26				—				—
Residential mortgage		6				128				27				28				39
Home equity		—				—				213				218				—
Consumer		5				—				—				—				—
Subtotal		122				255				266				246				39
Acquired loans collectively evaluated for impairment
Commercial		1				1				2				5				3
Commercial real estate		7				5				5				5				8
Residential mortgage		9				8				9				9				12
Home equity		14				12				13				14				15
Consumer		—				—				—				—				—
Subtotal		31				26				29				33				38
Acquired loans with deteriorated credit quality
Commercial		—				—				—				—				—
Commercial real estate		39				34				31				15				25
Residential mortgage		156				147				137				114				97
Home equity		4				4				5				4				4
Consumer		—				—				—				—				2
Subtotal		199				185				173				133				128
Allowance for loan losses		$	7,250			$	5,813			$	5,413			$	5,014			$	4,745
Total originated loans		$	7,020			$	5,602			$	5,211			$	4,848			$	4,579
Total acquired loans		230				211				202				166				166
Allowance for loan losses		$	7,250			$	5,813			$	5,413			$	5,014			$	4,745

Commercial		$	479			$	359			$	303			$	283			$	243
Commercial real estate		3,766				2,956				2,601				2,401				2,315
Residential mortgage		2,613				2,200				1,993				1,813				1,892
Home equity		298				211				429				427				205
Consumer		94				87				87				90				90
Allowance for loan losses		$	7,250			$	5,813			$	5,413			$	5,014			$	4,745

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

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Accruing interest
Current		$	862,581			$	867,901			$	824,587			$	811,184			$	807,671
Past due 30-89 days		2,152				1,213				1,089				1,275				1,009
Past due 90 days or more		166				239				209				301				310
Total accruing interest		864,899				869,353				825,885				812,760				808,990
Nonaccrual		678				1,202				712				787				873
Total loans		$	865,577			$	870,555			$	826,597			$	813,547			$	809,863
Total loans past due and in nonaccrual status		$	2,996			$	2,654			$	2,010			$	2,363			$	2,192

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

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Nonaccrual loans		$	678			$	1,202			$	712			$	787			$	873
Accruing loans past due 90 days or more		166				239				209				301				310
Total nonperforming loans		844				1,441				921				1,088				1,183
Other real estate owned		400				—				—				—				—
Total nonperforming assets		$	1,244			$	1,441			$	921			$	1,088			$	1,183

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

		3/31/2020			12/31/2019			9/30/2019			6/30/2019			3/31/2019
Nonperforming loans to gross loans		0.10	%		0.17	%		0.11	%		0.13	%		0.15	%
Nonperforming assets to total assets		0.12	%		0.14	%		0.09	%		0.11	%		0.13	%
Allowance for loan losses to gross loans		0.84	%		0.67	%		0.65	%		0.62	%		0.59	%

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

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Net unamortized discount on purchased loans		$	1,233			$	1,462			$	1,626			$	1,914			$	2,095

 

As outlined in the preceding tables, the Corporation has been successful in growing 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 as evidenced by the low level of nonperforming loans.

While the Corporation's credit quality metrics remain at historically low levels, the uncertainty in the local, national and global economy, especially as it relates to the impact of the COVID-19 global pandemic, the Corporation increased the ALLL by $1,437, or 24.72%, as March 31, 2020.

The following table summarizes the average loan size as of:

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Commercial		$	214			$	228			$	204			$	195			$	174
Commercial real estate		644				641				605				609				597
Total commercial loans		513				514				481				473				457
Residential mortgage		194				198				200				206				206
Home equity		46				44				45				45				45
Total residential real estate loans		137				138				139				140				142
Consumer		26				32				31				32				33
Gross loans		$	234			$	234			$	225			$	223			$	218

 

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 has been extremely active in participating in the PPP loan program. As of April 29, 2020 the Corporation had approved 1,128 loans totaling $208,607. To help fund PPP loans, the Federal Reserve established the PPPLF to supply liquidity in the form of non-recourse loans to participating financial institutions. The PPPLF will accept the PPP loans as collateral at face value. Extensions of credit under the PPPLF will be made at a rate of 0.35% and there are no fees associated with PPPLF. As a funding precaution, the Corporation has established the ability to utilize the PPPLF.  Additionally, the Corporation requested, and was approved for, a $75,000 increase in credit availability at the FHLB.

The CARES Act 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 that have been requested to, but not yet issued by, the Corporation through April 29, 2020:

		Number of Requests			Outstanding Balance
Commercial		63			$	18,210
Commercial real estate		163			128,888
Total commercial loan modification requests		226			147,098
Residential mortgage loans serviced for FHLMC		—			—
Portfolio residential mortgage loans		40			11,317
Home equity		6			373
Total residential real estate loan modification requests		46			11,690
Consumer		2			10
Total outstanding modification requests		274			$	158,798

The table below outlines the COVID-19 related loan modifications issued by the Corporation through April 29, 2020:

		Number of Modifications			Outstanding Balance
Commercial		60			$	21,173
Commercial real estate		142			111,101
Total commercial loan modifications		202			132,274
Residential mortgage loans serviced for FHLMC		113			24,044
Portfolio residential mortgage loans		95			22,999
Home equity		16			1,429
Total residential real estate loan modifications		224			48,472
Consumer		2			22
Total modifications		428			$	180,768

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.

All other assets

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

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Premises and equipment, net		$	15,533			$	15,245			$	15,443			$	14,792			$	14,838
Mortgage servicing rights		3,980				4,030				3,900				3,758				3,414
Accrued interest receivable		3,124				2,877				2,954				3,350				3,298
Corporate owned life insurance		10,380				10,316				10,248				10,181				10,070
Federal Home Loan Bank stock		3,150				3,150				3,150				3,150				3,150
Goodwill		3,219				3,219				3,219				3,219				3,219
Core deposit intangibles		812				902				1,015				1,128				1,241
Other real estate owned		400				—				—				—				—
Derivative assets		1,063				125				172				—				—
Right-of-use assets		432				475				105				119				132
Other assets		2,154				1,763				1,622				1,437				1,126
All other assets		$	44,247			$	42,102			$	41,828			$	41,134			$	40,488
		3/31/2020 vs 12/31/2019												3/31/2020 vs 3/31/2019
		Variance												Variance
		Amount				%								Amount				%
Premises and equipment, net		$	288			1.89		%						$	695			4.68		%
Mortgage servicing rights		(50		)		(1.24		)%						566				16.58		%
Accrued interest receivable		247				8.59		%						(174		)		(5.28		)%
Corporate owned life insurance		64				0.62		%						310				3.08		%
Federal Home Loan Bank stock		—				—		%						—				—		%
Goodwill		—				—		%						—				—		%
Core deposit intangibles		(90		)		(9.98		)%						(429		)		(34.57		)%
Other real estate owned		400					N/M							400					N/M
Derivative assets		938				750.40		%						1,063					N/M
Right-of-use assets		(43		)		(9.05		)%						300				227.27		%
Other assets		391				22.18		%						1,028				91.30		%
All other assets		2,145				5.09		%						$	3,759			9.28		%

MSR are servicing assets that are recognized from the sales of mortgage loans. A portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. The increase in MSR for 2019 is due to the increased volume of residential mortgage loan sales. As noted early, in the first quarter of 2020, the Corporation recognized an impairment on the MSR of $219. The Corporation does not expect any additional impairments for 2020, and expects nominal growth in MSR in 2020 due to continued residential mortgage origination.

Derivative assets are used in the process of hedging the Corporation's mortgage banking activities. The derivative assets are recorded at fair value at the end of each quarter. The Corporation does not expect significant growth in derivative assets 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. The large increase from September 30, 2019 was due to an additional lease being entered into by the Corporation.

Total deposits

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

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Noninterest bearing demand		$	281,848			$	260,503			$	253,784			$	248,795			$	237,213
Interest bearing
Savings		215,748				215,218				213,494				232,130				230,006
Money market demand		79,070				88,350				80,873				69,374				61,294
NOW		83,910				75,976				39,286				14,925				17,450
Time deposits		223,261				223,055				213,664				227,331				243,570
Total deposits		$	883,837			$	863,102			$	801,101			$	792,555			$	789,533
		3/31/2020 vs 12/31/2019												3/31/2020 vs 3/31/2019
		Variance												Variance
		Amount				%								Amount				%
Noninterest bearing demand		$	21,345			8.19		%						$	44,635			18.82		%
Interest bearing
Savings		530				0.25		%						(14,258		)		(6.20		)%
Money market demand		(9,280		)		(10.50		)%						17,776				29.00		%
NOW		7,934				10.44		%						66,460				380.86		%
Time deposits		206				0.09		%						(20,309		)		(8.34		)%
Total deposits		$	20,735			2.40		%						$	94,304			11.94		%

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 so as to create minimal pressure on the net interest margin.

Schedule of time deposit maturities

The following table summarizes the contractual maturities of the time deposits as of March 31, 2020:

		Maturity Buckets
		3 Months or Less				3 to 6 Months				6 to 9 Months				9 to 12 Months				Beyond 12 Months
Balance		$	77,034			$	44,767			$	35,959			$	28,916			$	36,585
Weighted average yield		1.97		%		2.05		%		1.90		%		1.28		%		1.82		%
		Cumulative Maturities
		3 Months or Less				Up to 6 Months				Up to 9 Months				Up to 12 Months				Total
Balance		$	77,034			$	121,801			$	157,760			$	186,676			$	223,261
Weighted average yield		1.97		%		2.00		%		1.98		%		1.87		%		1.86		%

Total borrowed funds

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

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Federal Home Loan Bank borrowings		$	57,500			$	47,500			$	55,000			$	40,000			$	40,000
Subordinated debentures		14,000				14,000				14,000				14,000				14,000
Federal funds purchased		—				—				—				—				5,000
Total borrowed funds		$	71,500			$	61,500			$	69,000			$	54,000			$	59,000
		3/31/2020 vs 12/31/2019												3/31/2020 vs 3/31/2019
		Variance												Variance
		Amount				%								Amount				%
Federal Home Loan Bank borrowings		$	10,000			21.05		%						$	17,500			43.75		%
Subordinated debentures		—				—		%						—				—		%
Federal funds purchased		—				—		%						(5,000		)		(100.00		)%
Total borrowed funds		$	10,000			16.26		%						$	12,500			21.19		%

While the Corporation increased its reliance on borrowed funds in 2018 to fund its strong loan demand, borrowed funds gradually declined in the quarters prior to December 31, 2019 as the Corporation has been able to fund organic growth through increases in deposit accounts. Total borrowed funds increased in the third quarter of 2019 as the interest rates for Federal Home Loan Bank borrowings were extremely attractive. Total borrowed funds are expected to decrease as current Federal Home Loan Bank borrowings mature. Although, as noted earlier, significant volume of PPP loans may cause the Corporation to utilize the PPPLF or other funding sources. 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:

		3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Federal Home Loan Bank borrowings		$	57,500			$	47,500			$	55,000			$	40,000			$	40,000
Brokered time deposits		28,605				28,605				16,326				23,484				35,398
Internet time deposits		18,005				18,009				21,977				25,058				26,452
Total wholesale funds		$	104,110			$	94,114			$	93,303			$	88,542			$	101,850
		3/31/2020 vs 12/31/2019												3/31/2020 vs 3/31/2019
		Variance												Variance
		Amount				%								Amount				%
Federal Home Loan Bank borrowings		$	10,000			21.05		%						$	17,500			43.75		%
Brokered time deposits		—				—		%						(6,793		)		(19.19		)%
Internet time deposits		(4		)		(0.02		)%						(8,447		)		(31.93		)%
Total wholesale funds		$	9,996			10.62		%						$	2,260			2.22		%

The Corporation utilizes wholesale funds to fund balance sheet growth. As wholesale funding is typically more expensive than core deposits, 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 March 31, 2015 and all dividends were reinvested.

A graph accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/d16a1278-56d1-47e4 ...

Date		FETM				ABQ Index
3/31/2015		$	100.00			$	100.00
3/31/2016		126.00				101.56
3/31/2017		154.75				140.48
3/31/2018		171.08				148.82
3/31/2019		182.67				130.86
3/31/2020		140.17				93.22

Abbreviations and Acronyms

ABA: American Bankers Association	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	YTD: Year-to-date
HFS: Held-for-sale	USDA: United States Department of Agriculture
HTM: Held-to-maturity

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 2016 and 2018 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 #20 by S&P Global in terms of 2018 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
	[e-mail]	[e-mail]