Fentura Financial, Inc. Announces Second Quarter 2021 Earnings

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

Dollars in thousands except per share amounts. Certain items in the prior period financial statements have been reclassified to conform with the June 30, 2021 presentation.

FENTON, Mich., July 30, 2021 (GLOBE NEWSWIRE) -- Fentura Financial, Inc. (OTCQX: FETM) announces quarterly results of net income of $4,726 and $9,382 for the three and six month periods ended June 30, 2021.

Ronald Justice, President and CEO, stated, "Once again, I am pleased with our operating results for the quarter. Opportunities for new loan and core deposit relationships remain strong. Our team's outstanding efforts generated an increase in total loans (net of PPP loans) of $45,629 during the quarter and $62,446 on a year to date basis. These growth trends, along with continued strong residential mortgage activity and a solid net interest margin actively contributed to our strong operating results. While the COVID-19 pandemic continues to create uncertainties, client relationship growth, consistent asset quality, and stock performance trends are encouraging indicators."

Following is a discussion of the Corporation's financial performance as of, and for the three and six month periods ended June 30, 2021. At the end of this document is a list of abbreviations and acronyms.

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

  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
INCOME STATEMENT DATA          
Interest income $11,658  $11,919  $11,624  $12,070  $11,215 
Interest expense 762  676  972  1,189  1,618 
Net interest income 10,896  11,243  10,652  10,881  9,597 
Provision for loan losses 6  212  982  1,109  2,001 
Noninterest income 4,230  3,854  4,676  5,159  5,292 
Noninterest expenses 9,222  9,031  10,971  8,218  7,809 
Federal income tax expense 1,172  1,198  642  1,377  1,036 
Net income $4,726  $4,656  $2,733  $5,336  $4,043 
PER SHARE          
Earnings $1.02  $1.00  $0.58  $1.14  $0.87 
Dividends $0.080  $0.080  $0.075  $0.075  $0.075 
Tangible book value(1) $25.73  $24.75  $23.88  $23.50  $22.44 
Quoted market value          
High $27.40  $24.75  $22.25  $17.99  $18.95 
Low $23.55  $21.90  $16.93  $16.80  $14.90 
Close(1) $26.00  $23.30  $22.00  $16.93  $17.35 
PERFORMANCE RATIOS          
Return on average assets 1.45% 1.50% 0.84% 1.68% 1.35%
Return on average shareholders' equity 15.64% 15.86% 9.27% 18.86% 15.20%
Return on average tangible shareholders' equity 16.12% 16.38% 9.58% 19.54% 15.79%
Efficiency ratio 60.97% 59.82% 71.57% 51.23% 52.45%
Yield on earning assets (FTE) 3.79% 4.01% 3.75% 3.97% 3.94%
Rate on interest bearing liabilities 0.41% 0.37% 0.50% 0.63% 0.91%
Net interest margin to earning assets (FTE) 3.55% 3.79% 3.44% 3.58% 3.37%
BALANCE SHEET DATA(1)          
Total investment securities $129,944  $89,772  $76,111  $78,179  $75,526 
Gross loans $986,358  $1,028,117  $1,066,562  $1,060,885  $1,044,564 
Total assets $1,309,685  $1,303,175  $1,251,446  $1,284,845  $1,237,694 
Total deposits $1,126,496  $1,122,508  $1,071,976  $1,061,470  $1,018,287 
Borrowed funds $49,500  $49,000  $49,000  $96,217  $96,217 
Total shareholders' equity $122,986  $119,360  $115,868  $114,081  $108,969 
Net loans to total deposits 86.60% 90.60% 98.48% 98.99% 101.70%
Common shares outstanding 4,638,614  4,673,932  4,694,275  4,691,142  4,680,920 
QTD BALANCE SHEET AVERAGES          
Total assets $1,309,942  $1,259,119  $1,288,199  $1,264,105  $1,200,966 
Earning assets $1,234,827  $1,206,411  $1,235,895  $1,210,274  $1,146,941 
Interest bearing liabilities $753,706  $735,159  $773,132  $750,281  $711,500 
Total shareholders' equity $121,235  $119,034  $117,263  $112,565  $106,998 
Total tangible shareholders' equity $117,567  $115,298  $113,444  $108,655  $102,999 
Earned common shares outstanding 4,644,833  4,664,893  4,682,063  4,673,629  4,664,946 
Unvested stock grants 20,671  21,922  14,208  14,208  14,208 
Total common shares outstanding 4,665,504  4,686,815  4,696,271  4,687,837  4,679,154 
ASSET QUALITY(1)          
Nonperforming loans to gross loans 0.87% 0.79% 0.75% 0.07% 0.10%
Nonperforming assets to total assets 0.66% 0.62% 0.64% 0.06% 0.08%
Allowance for loan losses to gross loans 1.09% 1.08% 1.02% 0.95% 0.86%
Allowance for loan losses to gross loans, net of PPP loans 1.14% 1.23% 1.23% 1.19% 1.07%
CAPITAL RATIOS(1)          
Total capital to risk weighted assets 14.35% 15.02% 15.14% 15.57% 15.06%
Tier 1 capital to risk weighted assets 13.27% 13.84% 13.93% 14.40% 14.00%
CET1 capital to risk weighted assets 11.87% 12.34% 12.38% 12.77% 12.34%
Tier 1 leverage ratio 10.19% 10.31% 9.80% 9.86% 9.90%
           
(1)At end of period          
           

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

  6/30/2021 6/30/2020 6/30/2019 6/30/2018 6/30/2017
INCOME STATEMENT DATA          
Interest income $23,577  $22,285  $21,225  $17,108  $13,681 
Interest expense  1,438   3,763   4,285   2,263   1,389 
Net interest income  22,139   18,522   16,940   14,845   12,292 
Provision for loan losses  218   3,543   477   576   125 
Noninterest income  8,084   9,805   3,772   3,814   3,372 
Noninterest expenses  18,253   15,495   13,200   12,328   10,837 
Federal income tax expense  2,370   1,894   1,424   1,163   1,476 
Net income $9,382  $7,395  $5,611  $4,592  $3,226 
PER SHARE                    
Earnings $2.02  $1.59  $1.21  $1.26  $0.89 
Dividends $0.160  $0.150  $0.140  $0.120  $0.100 
Tangible book value(1) $25.73  $22.44  $19.59  $16.00  $13.45 
Quoted market value                    
High $27.40  $26.00  $21.00  $21.25  $18.50 
Low $21.90  $12.55  $20.05  $18.88  $15.10 
Close(1) $26.00  $17.35  $20.60  $21.10  $18.25 
PERFORMANCE RATIOS                    
Return on average assets 1.47% 1.32% 1.20% 1.16% 0.90%
Return on average shareholders' equity 15.75% 14.13% 12.14% 15.13% 12.32%
Return on average tangible shareholders' equity 16.25% 14.69% 12.75% 16.47% 13.12%
Efficiency ratio 60.39% 54.70% 63.73% 66.07% 69.18%
Yield on earning assets (FTE) 3.89% 4.20% 4.79% 4.42% 4.16%
Rate on interest bearing liabilities 0.39% 1.09% 1.43% 0.90% 0.57%
Net interest margin to earning assets (FTE) 3.65% 3.49% 3.82% 3.82% 3.73%
BALANCE SHEET DATA(1)          
Total investment securities $129,944  $75,526  $73,285  $49,110  $70,699 
Gross loans $986,358  $1,044,564  $813,547  $707,364  $591,753 
Total assets $1,309,685  $1,237,694  $949,790  $841,459  $730,511 
Total deposits $1,126,496  $1,018,287  $792,555  $702,035  $614,167 
Borrowed funds $49,500  $96,217  $54,000  $74,000  $59,000 
Total shareholders' equity $122,986  $108,969  $95,504  $63,078  $54,255 
Net loans to total deposits 86.60% 101.70% 102.02% 100.18% 95.85%
Common shares outstanding 4,638,614  4,680,920  4,653,343  3,640,060  3,629,097 
YTD BALANCE SHEET AVERAGES          
Total assets $1,284,534  $1,125,064  $940,585  $797,594  $723,786 
Earning assets $1,225,641  $1,068,847  $894,357  $749,755  $631,928 
Interest bearing liabilities $744,434  $692,035  $604,469  $509,294  $499,636 
Total shareholders' equity $120,134  $105,276  $93,239  $61,219  $52,786 
Total tangible shareholders' equity $116,432  $101,233  $88,762  $56,221  $49,586 
Earned common shares outstanding 4,654,863  4,662,113  4,638,208  3,635,446  3,624,719 
Unvested stock grants 21,297  13,844  9,878  —  — 
Total common shares outstanding 4,676,160  4,675,957  4,648,086  3,635,446  3,624,719 
ASSET QUALITY(1)          
Nonperforming loans to gross loans 0.87% 0.10% 0.13% 0.14% 0.09%
Nonperforming assets to total assets 0.66% 0.08% 0.11% 0.13% 0.08%
Allowance for loan losses to gross loans 1.09% 0.86% 0.62% 0.57% 0.52%
Allowance for loan losses to gross loans, net of PPP loans 1.14% 1.07% 0.62% 0.57% 0.52%
CAPITAL RATIOS(1)          
Total capital to risk weighted assets 14.35% 15.06% 14.18% 11.20% 11.25%
Tier 1 capital to risk weighted assets 13.27% 14.00% 13.53% 10.62% 10.73%
CET1 capital to risk weighted assets 11.87% 12.34% 11.73% 8.59% 8.36%
Tier 1 leverage ratio 10.19% 9.90% 11.16% 9.14% 8.99%
           
(1)At end of period          
           

Income Statement Breakdown and Analysis

  Quarter to Date
  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
GAAP net income $4,726  $4,656  $2,733  $5,336  $4,043 
Acquisition related items (net of tax)          
Accretion on purchased loans (152) (151) (82) (144) (110)
Amortization of core deposit intangibles 53  54  71  72  71 
Amortization on acquired time deposits 2  2  5  5  5 
Total acquisition related items (net of tax) (97) (95) (6) (67) (34)
Other nonrecurring items (net of tax)          
FHLB prepayment penalties —  —  1,507  —  — 
Change in fair value of equity investment due to acquisition transaction —  —  —  —  — 
Change in fair value of mortgage banking instruments —  —  —  —  — 
Interest writeoff from loan transferred to nonaccrual —  —  265  —  — 
Net gain from COLI death benefit —  —  —  —  (173)
Prepayment penalties collected (33) (17) (97) (16) (12)
Mortgage servicing rights impairment (reduction of impairment) —  —  (188) (176) 191 
Total other nonrecurring items (net of tax) (33) (17) 1,487  (192) 6 
Adjusted net income from operations $4,596  $4,544  $4,214  $5,077  $4,015 
           
GAAP net interest income $10,896  $11,243  $10,652  $10,881  $9,597 
Accretion on purchased loans (192) (191) (104) (182) (139)
Interest writeoff from loan transferred to nonaccrual —  —  335  —  — 
Prepayment penalties collected (42) (21) (123) (20) (15)
Amortization on acquired time deposits 3  3  6  6  6 
Adjusted net interest income $10,665  $11,034  $10,766  $10,685  $9,449 
           
PERFORMANCE RATIOS          
Based on adjusted net income from operations          
Earnings per share $0.99  $0.97  $0.90  $1.09  $0.86 
Return on average assets 1.41% 1.46% 1.30% 1.60% 1.34%
Return on average shareholders' equity 15.21% 15.48% 14.30% 17.94% 15.09%
Return on average tangible shareholders' equity 15.68% 15.98% 14.78% 18.59% 15.68%
Efficiency ratio 61.46% 60.20% 59.02% 52.03% 52.12%
           
Based on adjusted net interest income          
Yield on earning assets (FTE) 3.72% 3.94% 3.78% 3.91% 3.89%
Rate on interest bearing liabilities 0.41% 0.37% 0.50% 0.63% 0.92%
Net interest margin to earning assets (FTE) 3.47% 3.71% 3.47% 3.52% 3.32%


  Year to Date June 30 Variance
  2021 2020 Amount %
GAAP net income $9,382  $7,395  $1,987  26.87%
Acquisition related items (net of tax)        
Accretion on purchased loans (303) (290) (13) 4.48%
Amortization of core deposit intangibles 107  142  (35) (24.65)%
Amortization on acquired time deposits 4  10  (6) (60.00)%
Total acquisition related items (net of tax) (192) (138) (54) 39.13%
Other nonrecurring items (net of tax)        
FHLB prepayment penalties —  —  —  —%
Change in fair value of equity investment due to acquisition transaction —  (578) 578  (100.00)%
Change in fair value of mortgage banking instruments —  (448) 448  (100.00)%
Interest writeoff from loan transferred to nonaccrual —  —  —  —%
Net gain from COLI death benefit —  (173) 173  (100.00)%
Prepayment penalties collected (50) (48) (2) 4.17%
Mortgage servicing rights impairment (reduction of impairment) —  364  (364) (100.00)%
Total other nonrecurring items (net of tax) (50) (883) 833  (94.34)%
Adjusted net income from operations $9,140  $6,374  $2,766   43.40 %
         
GAAP net interest income $22,139  $18,522  $3,617   19.53 %
Accretion on purchased loans (383) (367) (16) 4.36%
Interest writeoff from loan transferred to nonaccrual —  —  —  —%
Prepayment penalties collected (63) (61) (2) 3.28%
Amortization on acquired time deposits 6  12  (6) (50.00)%
Adjusted net interest income $21,699  $18,106  $3,593   19.84 %
         
PERFORMANCE RATIOS        
Based on adjusted net income from operations        
Earnings per share $1.96  $1.37  $0.59  43.07%
Return on average assets 1.43% 1.14%   0.29%
Return on average shareholders' equity 15.34% 12.18%   3.16%
Return on average tangible shareholders' equity 15.83% 12.66%   3.17%
Efficiency ratio 60.84% 56.94%   3.90%
         
Based on adjusted net interest income        
Yield on earning assets (FTE) 3.81% 4.12%   (0.31)%
Rate on interest bearing liabilities 0.39% 1.10%   (0.71)%
Net interest margin to earning assets (FTE) 3.58% 3.41%   0.17%


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.

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 period-to-period comparisons more meaningful.

  Three Months Ended
  June 30, 2021 March 31, 2021 June 30, 2020
   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 $1,023,620  $11,220 4.40% $1,074,096  $11,598 4.38% $1,048,068  $10,788 4.14%
Taxable investment securities 89,467  322 1.44% 58,859  202 1.39% 62,829  323 2.07%
Nontaxable investment securities 17,234  100 2.33% 17,165  105 2.48% 11,449  84 2.95%
Federal funds sold —  — —% —  — —% —  — —%
Interest earning cash and cash equivalents 101,018  23 0.09% 52,803  11 0.08% 21,314  5 0.09%
Federal Home Loan Bank stock 3,488  14 1.61% 3,488  25 2.91% 3,281  33 4.05%
Total earning assets 1,234,827  11,679 3.79% 1,206,411  11,941 4.01% 1,146,941  11,233 3.94%
                   
Nonearning assets                  
Allowance for loan losses (11,193)     (11,143)     (7,753)    
Fixed assets 16,104      15,757      15,509     
Accrued income and other assets 70,204      48,094      46,269     
Total assets $1,309,942      $1,259,119       $1,200,966      
                   
Interest bearing liabilities                  
Interest bearing demand deposits $223,420  $122 0.22% $206,565  $121 0.24% $189,981  $249 0.53%
Savings deposits 320,000  108 0.14% 310,830  109 0.14% 247,687  140 0.23%
Time deposits 161,197  377 0.94% 168,764  291 0.70% 181,661  821 1.82%
Borrowed funds 49,089  155 1.27% 49,000  155 1.28% 92,171  408 1.78%
Total interest bearing liabilities 753,706  762 0.41% 735,159  676 0.37% 711,500  1,618 0.91%
                   
Noninterest bearing liabilities                  
Noninterest bearing deposits 425,353      393,751      371,320     
Accrued interest and other liabilities 9,648      11,175      11,148     
Shareholders' equity 121,235      119,034      106,998     
Total liabilities and shareholders' equity $1,309,942      $1,259,119      $1,200,966     
Net interest income (FTE)   $10,917     $11,265     $9,615  
Net interest margin to earning assets (FTE)     3.55%     3.79%     3.37%


   
  Six Months Ended
  June 30, 2021 June 30, 2020
  Average
Balance		 Tax
Equivalent
Interest		 Average
Yield /
Rate		 Average
Balance		 Tax
Equivalent
Interest		 Average
Yield /
Rate
Interest earning assets            
Total loans $1,048,858  $22,818 4.39% $963,400  $21,269 4.44%
Taxable investment securities 74,162  524 1.42% 59,896  676 2.27%
Nontaxable investment securities 17,200  205 2.40% 10,991  165 3.02%
Federal funds sold —  — —% 16,794  116 1.39%
Interest earning cash and cash equivalents 81,933  34 0.08% 14,551  31 0.43%
Federal Home Loan Bank stock 3,488  39 2.25% 3,215  63 3.94%
Total earning assets 1,225,641  23,620 3.89% 1,068,847  22,320 4.20%
             
Nonearning assets            
Allowance for loan losses (11,168)     (6,787)    
Fixed assets 15,930      15,523     
Accrued income and other assets 54,131      47,481     
Total assets $1,284,534      $1,125,064     
             
Interest bearing liabilities            
Interest bearing demand deposits $214,993  $243 0.23% $180,291  $724 0.81%
Savings deposits 315,415  217 0.14% 239,438  339 0.28%
Time deposits 164,981  668 0.82% 193,574  1,874 1.95%
Borrowed funds 49,045  310 1.27% 78,732  826 2.11%
Total interest bearing liabilities 744,434  1,438 0.39% 692,035  3,763 1.09%
             
Noninterest bearing liabilities            
Noninterest bearing deposits 409,553      318,010     
Accrued interest and other liabilities 10,413      9,743     
Shareholders' equity 120,134      105,276     
Total liabilities and shareholders' equity $1,284,534      $1,125,064     
Net interest income (FTE)   $22,182     $18,557  
Net interest margin to earning assets (FTE)     3.65%     3.49%


Volume and Rate Variance Analysis

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

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

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

  Three Months Ended Three Months Ended Six Months Ended
  June 30, 2021 June 30, 2021 June 30, 2021
  Compared To Compared To Compared To
  March 31, 2021 June 30, 2020 June 30, 2020
  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 $(736) $358  $(378) $(1,359) $1,791  $432  $2,230  $(681) $1,549 
Taxable investment securities 112  8  120  460  (461) (1) 337  (489) (152)
Nontaxable investment securities 3  (8) (5) 112  (96) 16  129  (89) 40 
Federal funds sold —  —  —  —  —  —  (58) (58) (116)
Interest earning cash and cash equivalents 11  1  12  18  —  18  89  (86) 3 
Federal Home Loan Bank stock —  (11) (11) 13  (32) (19) 14  (38) (24)
Total changes in interest income (610) 348  (262) (756) 1,202  446  2,741  (1,441) 1,300 
                   
Changes in interest expense                  
Interest bearing demand deposits 41  (40) 1  243  (370) (127) 341  (822) (481)
Savings deposits (1) —  (1) 177  (209) (32) 213  (335) (122)
Time deposits (84) 170  86  (84) (360) (444) (245) (961) (1,206)
Borrowed funds 2  (2) —  (157) (96) (253) (251) (265) (516)
Total changes in interest expense (42) 128  86  179  (1,035) (856) 58  (2,383) (2,325)
Net change in net interest income (FTE) $(568) $220  $(348) $(935) $2,237  $1,302  $2,683  $942  $3,625 


  Average Yield/Rate for the Three Month Periods Ended
  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Total earning assets 3.79% 4.01% 3.75% 3.97% 3.94%
Total interest bearing liabilities 0.41% 0.37% 0.50% 0.63% 0.91%
Net interest margin to earning assets (FTE) 3.55% 3.79% 3.44% 3.58% 3.37%


  Quarter to Date Net Interest Income (FTE)
  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Interest income $11,658  $11,919  $11,624  $12,070  $11,215 
FTE adjustment 21  22  22  21  18 
Total interest income (FTE) 11,679  11,941  11,646  12,091  11,233 
Total interest expense 762  676  972  1,189  1,618 
Net interest income (FTE) $10,917  $11,265   $10,674  $10,902  $9,615 


Noninterest Income

  Quarter to Date
  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Net gain on sales of mortgage loans $1,253 $1,845  $2,545  $3,064 $3,869 
Net mortgage servicing rights income 1,119 138  509  559 (163)
ATM and debit card income 511 448  437  460 394 
Trust and investment services 403 468  445  464 321 
Mortgage servicing fees 362 335  325  293 270 
PPP referral fees 74 351  —  — — 
Service charges on deposit accounts 168 166  194  177 119 
Net gain on sales of commercial loans — —  —  — — 
Net gain from corporate owned life insurance death benefit — —  —  — 173 
Change in fair value of equity investments 2 (19) (3) 2 7 
Other income and fees 338 122  224  140 302 
Total noninterest income $4,230 $3,854  $4,676  $5,159 $5,292 
           
Residential mortgage operations $2,734 $2,318  $3,379  $3,916 $3,976 


  Year to Date June 30 Variance
  2021 2020 Amount %
Net gain on sales of mortgage loans $3,098  $5,672  $(2,574) (45.38)%
Net mortgage servicing rights income 1,257  (214) 1,471  (687.38)%
ATM and debit card income 959  749  210  28.04%
Trust and investment services 871  710  161  22.68%
Mortgage servicing fees 697  532  165  31.02%
PPP referral fees 425  —  425  —%
Service charges on deposit accounts 334  338  (4) (1.18)%
Net gain on sales of commercial loans —  668  (668) (100.00)%
Net gain from corporate owned life insurance death benefit —  173  (173) (100.00)%
Change in fair value of equity investments (17) 756  (773) (102.25)%
Other income and fees 460  421  39  9.26%
Total noninterest income $8,084  $9,805  $(1,721) (17.55)%
         
Residential mortgage operations $5,052  $5,990  (938) (15.66)%

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 advantageous for residential mortgage originations and refinancing, resulting in record gains. While residential mortgage originations and refinancing activity continues to be strong during the first half of 2021, it is likely to slow down due to lower housing inventory and expected increases in interest rates.

Net mortgage servicing rights income represents income generated from the capitalization of MSR, net of amortization. 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 a record level of refinancing activity. During the third and fourth quarters of 2020, these impairments had recovered.

In 2021 the Corporation elected to adopt the fair value measurement option for all MSR pursuant to ASC 860. This election resulted in a transfer of $301 to retained earnings to reflect the difference between the fair value and the carrying amount of MSR as of January 1, 2021, net of tax. Changes in the fair value of MSR are highly correlated to changes in interest rates. As a significant portion of the serviced loan portfolio has been originated over the past two years at low interest rates, management expects the value of the servicing portfolio to remain strong.

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 increase throughout the remainder of 2021 as the Corporation continues to add to the serviced portfolio. During the second quarter of 2021, the Corporations added a net $35,268 to its serviced loan portfolio

Throughout the remainder of 2021, overall revenues from residential mortgage operations (net gain from sale of mortgage loans, mortgage servicing fees, and net mortgage servicing rights income) are expected to remain strong, but are not expected to reach the elevated levels experienced during 2020 due to the constrained housing inventory and rising interest rates.

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 throughout 2021, as customers begin to venture out with the easing of COVID restrictions and spend more freely.

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 through the wealth management and trust department. Income generated from trust services has remained stable from fiduciary fees for estate settlement services and portfolio management. Revenue from wealth management has increased in 2021 due to strong demand from customers for annuities. Both the trust services and wealth management programs are subject to market fluctuations and interest rate changes. Trust and investment services income is expected to increase modestly throughout the remainder of 2021.

PPP referral fees represent referral fees the Corporation earned from the second round of the PPP loan program through the SBA. Due to strong portfolio loan demand, management elected to refer the second round of PPP requests to a third party for processing and funding. As such, the associated referral fees were recognized as a component of noninterest income. As the second round of the PPP loan program ended on May 31, 2021, the Corporation does not expect to earn additional PPP referral fees throughout the remainder of 2021.

Service charges on deposit accounts includes fees earned from deposit customers for transaction-based, account maintenance and overdraft services. Service charges on deposit accounts are expected to approximate current levels throughout the remainder of 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 sell any commercial loans over the remainder of 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.

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, the Corporation recorded a $732 gain from an equity investment in a financial institution that was sold. The Corporation does not anticipate any significant changes in fair value from equity sales in the foreseeable future.

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
  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Total compensation $5,000  $5,004  $4,958  $4,531  $4,252 
Furniture and equipment 712  637  607  614  618 
Professional services 703  624  938  524  571 
Data processing 583  509  501  503  535 
Occupancy 508  495  475  491  435 
Loan and collection 337  406  359  292  229 
Advertising and promotional 304  284  184  284  255 
ATM and debit card 144  122  125  109  92 
FDIC insurance premiums 79  155  59  55  59 
Telephone and communication 130  94  64  91  86 
Amortization of core deposit intangibles 67  68  90  91  90 
FHLB prepayment penalty —  —  1,907  —  — 
Other general and administrative 655  633  704  633  587 
Total noninterest expenses $9,222  $9,031  $10,971  $8,218  $7,809 


  Year to Date June 30 Variance
  2021 2020 Amount %
Total compensation $10,004 $8,500 $1,504  17.69%
Furniture and equipment 1,349 1,228 121  9.85%
Professional services 1,327 1,093 234  21.41%
Data processing 1,092 977 115  11.77%
Occupancy 1,003 911 92  10.10%
Loan and collection 743 391 352  90.03%
Advertising and promotional 588 507 81  15.98%
ATM and debit card 266 200 66  33.00%
FDIC insurance premiums 234 114 120  105.26%
Telephone and communication 224 182 42  23.08%
Amortization of core deposit intangibles 135 180 (45) (25.00)%
FHLB prepayment penalty — — —  —%
Other general and administrative 1,288 1,212 76  6.27%
Total noninterest expenses $18,253 $15,495 $2,758  17.80%

Total compensation includes salaries, commissions and incentives, employee benefits, and payroll taxes. Total compensation has increased due to additional employees, a reduction of deferred loan costs, annual merit increases and an increase in employee benefits. 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 throughout the remainder of 2021 as mortgage originations decline.

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 continue 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 continue to increase in future periods to ensure compliance with audit and regulatory requirements. Professional services are also expected to be temporarily elevated over the remainder of 2021 from expenditures related to the acquisition of the Farmers State Bank of Munith.

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

Loan and collection includes expenses related to the origination and collection of loans. The increase in expenses throughout 2020 and into 2021 is a direct result of increased loan volume due to the low interest rate environment created by the Federal Reserve Bank's response to the COVID-19 pandemic. Loan and collections cost are expected to decline through the remainder of 2021, due to the declining loan volumes.

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 loan and deposit account relationships. In addition to traditional marketing strategies, the Corporation rolled out a new branding strategy in 2020, which resulted in elevated advertising and promotional expenses in both 2020 and 2021. Total advertising and promotional expenses are expected to increase modestly throughout the remainder of 2021 due to the growth of the Corporation.

ATM and debit card expenses fluctuate based on customer and non-customer utilization of ATMs and customer debit card volumes. The Corporation expects these fees to increase modestly throughout the remainder of 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 are expected to moderate throughout the remainder of 2021.

Telephone and communication includes expenses relating to the Corporation's communication systems. These expenses are expected to increase throughout 2021 primarily due to the growth of the Corporation.

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.

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%. As a result of the early payoffs, the Corporation is expected to reduce interest expense by approximately $660 during 2021.

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

  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
ASSETS          
Cash and cash equivalents $132,676 $121,477 $46,757 $75,032 $35,190
Total investment securities 129,944 89,772 76,111 78,179 75,526
Residential mortgage loans held-for-sale, at fair value 7,670 26,322 27,306 34,833 46,354
Gross loans 986,358 1,028,117 1,066,562 1,060,885 1,044,564
Less allowance for loan and lease losses 10,800 11,100 10,900 10,100 8,991
Net loans 975,558 1,017,017 1,055,662 1,050,785 1,035,573
All other assets 63,837 48,587 45,610 46,016 45,051
Total assets $1,309,685 $1,303,175 $1,251,446 $1,284,845 $1,237,694
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Total deposits $1,126,496 $1,122,508 $1,071,976 $1,061,470 $1,018,287
Total borrowed funds 49,500 49,000 49,000 96,217 96,217
Accrued interest payable and other liabilities 10,703 12,307 14,602 13,077 14,221
Total liabilities 1,186,699 1,183,815 1,135,578 1,170,764 1,128,725
Total shareholders' equity 122,986 119,360 115,868 114,081 108,969
Total liabilities and shareholders' equity $1,309,685 $1,303,175 $1,251,446 $1,284,845 $1,237,694


  6/30/2021 vs 3/31/2021 6/30/2021 vs 6/30/2020
  Variance Variance
  Amount % Amount %
ASSETS        
Cash and cash equivalents $11,199  9.22% $97,486  277.03%
Total investment securities 40,172  44.75% 54,418  72.05%
Residential mortgage loans held-for-sale, at fair value (18,652) (70.86)% (38,684) (83.45)%
Gross loans (41,759) (4.06)% (58,206) (5.57)%
Less allowance for loan and lease losses (300) (2.70)% 1,809  20.12%
Net loans (41,459) (4.08)% (60,015) (5.80)%
All other assets 15,250  31.39% 18,786  41.70%
Total assets $6,510  0.50% $71,991  5.82%
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
Total deposits $3,988  0.36% $108,209  10.63%
Total borrowed funds 500  1.02% (46,717) (48.55)%
Accrued interest payable and other liabilities (1,604) (13.03)% (3,518) (24.74)%
Total liabilities 2,884  0.13% 57,974  2.70%
Total shareholders' equity 3,626  3.04% 14,017  12.86%
Total liabilities and shareholders' equity $6,510  0.50% $71,991  5.82%

Cash and cash equivalents

  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Cash and cash equivalents                   
Noninterest bearing $22,454  $25,698  $23,102  $22,108 $20,369 
Interest bearing  110,222   95,779   23,655   52,924  14,821 
Cash and cash equivalents $132,676  $121,477  $46,757  $75,032 $35,190 
                    
  6/30/2021 vs 3/31/2021
     6/30/2021 vs 6/30/2020
  Variance
     Variance
  Amount
 %
     Amount
 %
Cash and cash equivalents                   
Noninterest bearing $(3,244)  (12.62)%     $2,085  10.24%
Interest bearing  14,443   15.08%      95,401  643.69%
Cash and cash equivalents $11,199   9.22%     $97,486  277.03%

Cash and cash equivalents, which is comprised of cash and due from banks, fluctuate from period to period based on loan demand and variances in deposit accounts. In recent periods, the Corporation has experienced an inflow of customer deposits resulting in historically high levels of cash and cash equivalents. The increase in interest bearing cash in the first and second quarters of 2021 is primarily due to funds received from the SBA for forgiveness of PPP loans. The Corporation expects cash and cash equivalents to remain elevated throughout the remainder of the year primarily due to additional forgiveness of outstanding PPP loans totaling $35,195 as of June 30, 2021.

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:

  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Cash and cash equivalents $132,676  $121,477  $46,757  $75,032  $35,190 
Unpledged investment securities 118,019  76,384  59,025  58,739  52,647 
FHLB borrowing availability 140,000  140,000  140,000  97,500  97,500 
Federal funds purchased lines of credit 21,500  21,500  21,500  21,500  21,500 
Funds available through the Fed Discount Window 10,000  10,000  10,000  10,000  10,000 
PPPLF 35,195  122,583  177,845  206,343  202,184 
Total liquidity sources $457,390  $491,944  $455,127  $469,114  $419,021 

Total investment securities

  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Available-for-sale                 
U.S. Government and federal agency $5,917  $5,942  $7,935 $19,311  $21,339 
State and municipal 23,096   17,080   15,768  15,729   14,115 
Mortgage backed residential 60,390   32,135   19,101  20,886   12,335 
Certificates of deposit 4,932   4,932   5,180  5,921   6,665 
Collateralized mortgage obligations - agencies 31,281   25,505   23,110  11,141   15,736 
Unrealized gain/(loss) on available-for-sale securities 1,334   1,117   1,932  2,099   2,242 
Total available-for-sale 126,950   86,711   73,026  75,087   72,432 
Held-to-maturity state and municipal 1,859   1,968   1,973  1,977   1,981 
Equity securities 1,135   1,093   1,112  1,115   1,113 
Total investment securities $129,944  $89,772  $76,111  $78,179   $75,526 
                  
  6/30/2021 vs 3/31/2021   6/30/2021 vs 6/30/2020
  Variance   Variance
  Amount %   Amount %
Available-for-sale          
U.S. Government and federal agency $(25) (0.42)%   $(15,422) (72.27)%
State and municipal 6,016  35.22%   8,981  63.63%
Mortgage backed residential 28,255  87.93%   48,055  389.58%
Certificates of deposit —  —%   (1,733) (26.00)%
Collateralized mortgage obligations - agencies 5,776  22.65%   15,545  98.79%
Unrealized gain/(loss) on available-for-sale securities 217  19.43%   (908) (40.50)%
Total available-for-sale 40,239  46.41%   54,518  75.27%
Held-to-maturity state and municipal (109) (5.54)%   (122) (6.16)%
Equity securities 42  3.84%   22  1.98%
Total investment securities $40,172  44.75%   $54,418  72.05%

The amortized cost and fair value of AFS investment securities as of June 30, 2021 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 $3,981  $971  $965  $—  $—  $5,917 
State and municipal 2,301  8,272  10,639  1,884  —  23,096 
Mortgage backed residential —  —  —  —  60,390  60,390 
Certificates of deposit 1,726  3,206  —  —  —  4,932 
Collateralized mortgage obligations - agencies —  —  —  —  31,281  31,281 
Total amortized cost $8,008  $12,449  $11,604  $1,884  $91,671  $125,616 
Fair value $8,141  $13,015  $11,719  $2,147  $91,928  $126,950 

The amortized cost and fair value of HTM investment securities as of June 30, 2021 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 $676  $803  $380  $—  $—  $1,859 
Fair value $682  $840  $402  $—  $—  $1,924 

During the first and second quarters of 2021, the Corporation expanded its investment portfolio to generate additional interest income. Total investment securities are expected to continue to grow throughout the remainder of 2021 as management expects deposits to continue to grow at historically high levels. The following table summarizes information as of June 30, 2021 for investment securities purchased YTD:

  Book Value Fully Taxable
Equivalent Weighted
Average Yield
U.S. Government and federal agency $965  1.04%
State and municipal 8,967  1.15%
Collateralized mortgage obligations - agencies 12,760  1.28%
Mortgage backed residential 45,447  1.50%
Total $68,139  1.41%

Residential mortgage loans held-for-sale, at fair value

Loans HFS represent the fair value 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.

Loans and allowance for loan losses

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

  6/30/2021  3/31/2021  12/31/2020  9/30/2020  6/30/2020
Commercial$101,070  $183,276  $241,424  $271,113  $260,440 
Commercial real estate 573,598   541,428   517,054   483,275   469,039 
Total commercial loans 674,668   724,704   758,478    754,388   729,479 
Residential mortgage 265,323   258,333   262,770   261,375   268,295 
Home equity 41,771   40,205   39,900   39,456   40,114 
Total residential real estate loans 307,094   298,538   302,670    300,831   308,409 
Consumer 4,596   4,875   5,414   5,666   6,676 
Gross loans 986,358   1,028,117   1,066,562    1,060,885   1,044,564 
Allowance for loan and lease losses (10,800)  (11,100)  (10,900)  (10,100)  (8,991)
Loans, net$975,558  $1,017,017  $1,055,662  $1,050,785  $1,035,573 
                    
  6/30/2021 vs 3/31/2021     6/30/2021 vs 6/30/2020
  Variance     Variance
  Amount  %     Amount  %
Commercial$(82,206)  (44.85)%     $(159,370)  (61.19)%
Commercial real estate 32,170   5.94%      104,559   22.29%
Total commercial loans (50,036)  (6.90)%      (54,811)  (7.51)%
Residential mortgage 6,990   2.71%      (2,972)  (1.11)%
Home equity 1,566   3.90%      1,657   4.13%
Total residential real estate loans 8,556   2.87%      (1,315)  (0.43)%
Consumer (279)  (5.72)%      (2,080)  (31.16)%
Gross loans (41,759)  (4.06)%      (58,206)  (5.57)%
Allowance for loan losses 300   (2.70)%      (1,809)  20.12%
Loans, net$(41,459)  (4.08)%     $(60,015)  (5.80)%

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

  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Loans collectively evaluated for impairment          
Commercial $100,424  $183,203  $241,424  $271,113  $260,440 
Commercial real estate 564,781  532,294  508,182  481,071  465,749 
Residential mortgage 264,448  257,543  262,017  260,665  267,632 
Home equity 41,708  40,141  39,874  39,456  40,114 
Consumer 4,596  4,875  5,412  5,663  6,673 
Subtotal 975,957  1,018,056  1,056,909  1,057,968  1,040,608 
Loans individually evaluated for impairment          
Commercial $646  $73  $—  $—  $— 
Commercial real estate 8,817  9,134  8,872  2,204  3,290 
Residential mortgage 875  790  753  710  663 
Home equity 63  64  26  —  — 
Consumer —  —  2  3  3 
Subtotal 10,401  10,061  9,653  2,917  3,956 
Gross Loans $986,358  $1,028,117  $1,066,562  $1,060,885  $1,044,564 
           

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

  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Loans collectively evaluated for impairment          
Commercial $585  $626  $673  $633  $536 
Commercial real estate 6,264  6,026  5,602  5,152  4,595 
Residential mortgage 2,814  3,280  3,480  3,479  3,278 
Home equity 440  453  440  438  372 
Consumer 85  92  97  101  102 
Subtotal 10,188  10,477  10,292  9,803  8,883 
Loans individually evaluated for impairment          
Commercial $42  $—  $—  $—  $— 
Commercial real estate 566  619  602  289  100 
Residential mortgage 4  4  4  5  5 
Home equity —  —  —  —  — 
Consumer —  —  2  3  3 
Subtotal 612  623  608  297  108 
Allowance for loan losses $10,800  $11,100  $10,900  $10,100  $8,991 


Commercial $627  $626  $673  $633  $536 
Commercial real estate 6,830  6,645  6,204  5,441  4,695 
Residential mortgage 2,818  3,284  3,484  3,484  3,283 
Home equity 440  453  440  438  372 
Consumer 85  92  99  104  105 
Allowance for loan losses $10,800  $11,100  $10,900  $10,100  $8,991 

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

  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Accruing interest          
Current $976,852  $1,018,343  $1,057,404  $1,058,437  $1,042,589 
Past due 30-89 days 923  1,636  1,165  1,703  948 
Past due 90 days or more 36  120  50  86  361 
Total accruing interest 977,811  1,020,099  1,058,619  1,060,226  1,043,898 
Nonaccrual 8,547  8,018  7,943  659  666 
Total loans $986,358  $1,028,117  $1,066,562  $1,060,885  $1,044,564 
Total loans past due and in nonaccrual status $9,506  $9,774  $9,158  $2,448  $1,975 

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

  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Nonaccrual loans $8,547  $8,018  $7,943  $659  $666 
Accruing loans past due 90 days or more 36  120  50  86  361 
Total nonperforming loans 8,583  8,138  7,993  745  1,027 
Other real estate owned —  —  —  —  — 
Total nonperforming assets $8,583  $8,138  $7,993  $745  $1,027 

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

  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Nonperforming loans to gross loans 0.87% 0.79% 0.75% 0.07% 0.10%
Nonperforming assets to total assets 0.66% 0.62% 0.64% 0.06% 0.08%
Allowance for loan losses to gross loans 1.09% 1.08% 1.02% 0.95% 0.86%
Allowance for loan losses to gross loans, less PPP loans 1.14% 1.23% 1.23% 1.19% 1.07%

During the fourth quarter of 2020, 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. It was determined in the fourth quarter of 2020 that the hotel's cash flow was insufficient to service the debt in accordance with the contractual terms of the note. However, as COVID-19 restrictions eased in the second quarter of 2021, the hotel has begun making regular, consecutive principal and interest payments. A specific reserve has been established for the estimated collateral deficiency (based on a current appraisal), net of a 70% USDA guarantee and the loan will remain in a nonaccrual status until it is deemed that sufficient improvements in cash flows can be established.

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

  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Net unamortized discount on purchased loans $388  $580  $773  $877  $1,058 

The following table summarizes the balance of PPP loans included in commercial loans as of:

  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Outstanding PPP loans $35,195  $122,583  $177,845  $211,060  $206,901 

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 $1,809, or 20.12%, since June 30, 2020. 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:

  6/30/2021 3/31/2021 12/31/2020 9/30/2020 6/30/2020
Commercial $168  $206  $169  $166  $171 
Commercial real estate 761  727  707  672  654 
Total commercial loans 498  444  351  321  325 
Residential mortgage 199  183  182  180  177 
Home equity 47  46  45  45  45 
Total residential real estate loans 138  131  130  129  128 
Consumer 24  22  22  22  25 
Gross loans $262  $249  $226  $215  $213 

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 provided 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 June 30, 2021:

  Number of
Modifications		 Outstanding
Balance		 % of Portfolio
Commercial real estate 1  104  0.02%
Portfolio residential mortgage loans 5  1,356  0.51%
Total portfolio modifications 6  $1,460  0.15%
Residential mortgage loans serviced for FHLMC 25  $5,922  1.02%

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 $19,634. Of these loans, approximately 52% are at least partially government-backed by guarantees from either the SBA or USDA.

The Corporation was extremely active in participating in the PPP loan program. The Corporation funded 1,370 PPP 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 $35,195 as of June 30, 2021.

The Corporation generated $6,799 in fees from the SBA through the first round of the PPP loan program since April 2020. The income is being recognized over the life of the PPP loans (24 to 60 months) based on the level yield method or upon forgiveness. As of June 30, 2021, the Corporation has recognized $6,337 in income, with $462 remaining as unearned income.

During the first quarter of 2021, the SBA began processing applications for a second round of PPP loans. The Corporation is utilizing a third-party for the processing of applications and funding of these loans. The Corporation is generating referral fee income for the second round of the PPP loan program. As of June 30, 2021, the Corporation generated $425 in referral fees.

All other assets

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

   6/30/2021  3/31/2021  12/31/2020  9/30/2020  6/30/2020
Corporate owned life insurance $25,638  $10,354  $10,291 $10,225  $10,115 
Premises and equipment, net  16,231   15,969   15,461  15,267   15,323 
Mortgage servicing rights  6,523   5,404   4,885  4,376   3,816 
Accrued interest receivable  4,423   5,451   5,068  5,645   5,266 
Federal Home Loan Bank stock  3,488   3,488   3,488  3,488   3,488 
Goodwill  3,219   3,219   3,219  3,219   3,219 
Right-of-use assets  1,364   1,139   364  387   409 
Derivatives  601   1,009   1,331  1,772   1,311 
Core deposit intangibles  406   474   541  632   722 
Other assets  1,944   2,080   962  1,005   1,382 
All other assets $63,837  $48,587  $45,610 $46,016  $45,051 
                
   6/30/2021 vs 3/31/2021     6/30/2021 vs 6/30/2020
   Variance     Variance
   Amount  %     Amount  %
Corporate owned life insurance $15,284   147.61%    $15,523   153.47%
Premises and equipment, net  262   1.64%     908   5.93%
Mortgage servicing rights  1,119   20.71%     2,707   70.94%
Accrued interest receivable  (1,028)  (18.86)%     (843)  (16.01)%
Federal Home Loan Bank stock  —   —%     —   —%
Goodwill  —   —%     —   —%
Right-of-use assets  225   19.75%     955   233.50%
Derivatives  (408)  (40.44)%     (710)  (54.16)%
Core deposit intangibles  (68)  (14.35)%     (316)  (43.77)%
Other assets  (136)  (6.54)%     562   40.67%
All other assets $15,250   31.39%    $18,786   41.70%

Corporate owned life insurance represents the cash surrender value of life insurance policies owned by the Corporation on the lives of key members of management. The increase in Corporate owned life insurance in the second quarter of 2021 is due to the purchase of $15,000 in additional policies.

Mortgage servicing rights are servicing assets that are recognized from the sales of mortgage loans. The increase in mortgage servicing rights is due to the increased volume of residential mortgage loan sales. The Corporation expects the serviced loan portfolio to continue to grow throughout the remainder of 2021 as mortgage loan demand has remained elevated.

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 increase in the Corporation's right-of-use assets in the first quarter of 2021 is due to the recognition of two additional lease obligations.

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.

Other assets includes miscellaneous other asset items, none of which are individually significant.

Total deposits

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

   6/30/2021  3/31/2021  12/31/2020  9/30/2020  6/30/2020
Noninterest bearing demand $435,588  $422,013  $378,733 $391,706  $383,452 
Interest bearing                   
Savings  305,409   309,454   290,343  269,051   245,957 
Money market demand  113,088   109,101   113,729  99,252   90,504 
NOW  102,046   103,342   101,419  120,681   122,477 
Time deposits  170,365   178,598   187,752  180,780   175,897 
Total deposits $1,126,496  $1,122,508  $1,071,976 $1,061,470  $1,018,287 
                    
   6/30/2021 vs 3/31/2021     6/30/2021 vs 6/30/2020
   Variance     Variance
   Amount  %     Amount  %
Noninterest bearing demand $13,575   3.22%    $52,136   13.60%
Interest bearing                   
Savings  (4,045)  (1.31)%     59,452   24.17%
Money market demand  3,987   3.65%     22,584   24.95%
NOW  (1,296)  (1.25)%     (20,431)  (16.68)%
Time deposits  (8,233)  (4.61)%     (5,532)  (3.15)%
Total deposits $3,988   0.36%    $108,209   10.63%

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. Total deposits also increased due to government related stimulus programs. 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 June 30, 2021:

  Maturity Buckets
  3 Months or
Less		 3 to 6
Months		 6 to 9
Months		 9 to 12
Months		 Beyond 12
Months
Balance $72,467  $23,247  $17,262  $30,222  $27,167 
Weighted average yield 0.44% 0.46% 0.55% 0.48% 0.90%
           
  Cumulative Maturities
  3 Months or
Less		 Up to 6
Months		 Up to 9
Months		 Up to 12
Months		 Total
Balance $72,467  $95,714  $112,976  $143,198  $170,365 
Weighted average yield 0.44% 0.44% 0.46% 0.46% 0.53%

Included in balances of 3 months or less is a brokered time deposit for $20,000, related to the Corporation's derivatives. 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:

  6/30/21 3/31/21 12/31/20 9/30/20 6/30/20
Federal Home Loan Bank borrowings $35,000 $35,000  $35,000 $77,500  $77,500 
Subordinated debentures 14,000  14,000  14,000 14,000   14,000 
PPPLF —  —  — 4,717   4,717 
Other borrowings 500  —  — —   — 
Total borrowed funds $49,500 $49,000  $49,000 $96,217  $96,217 
               
  6/30/2021 vs 3/31/2021   6/30/2021 vs 6/30/2020
  Variance   Variance
  Amount %   Amount %
Federal Home Loan Bank borrowings $—  —%   $(42,500)  (54.84)%
Subordinated debentures —  —%   —   —%
PPPLF —  —%   (4,717)  (100.00)%
Other borrowings 500  N/M    500   N/M 
Total borrowed funds $500  1.02%   $(46,717)  (48.55)%

The Corporation utilizes a mix of borrowed funds and organic deposit growth to fund loan demand. 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 throughout 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:

  6/30/21 3/31/21 12/31/20 9/30/20 6/30/20
Federal Home Loan Bank borrowings $35,000  $35,000  $35,000  $77,500  $77,500 
Subordinated debentures 14,000   14,000  14,000  14,000   14,000 
PPPLF —   —  —  4,717   4,717 
Other borrowings 500   —  —  —   — 
Brokered money market demand —   —  —  25,029   25,010 
Brokered time deposits 20,000   20,234  20,000  28,605   28,837 
Internet time deposits 2,739   2,739  2,839  10,208   11,690 
Total wholesale funds $72,239  $71,973  $71,839  $160,059  $161,754 
           
  6/30/2021 vs 3/31/2021   6/30/2021 vs 6/30/2020
  Variance   Variance
  Amount %   Amount %
Federal Home Loan Bank borrowings $—   —%   $(42,500)  (54.84)%
Subordinated debentures —   —%   —   —%
PPPLF —   —%   (4,717)  (100.00)%
Other borrowings 500   N/M    500   N/M 
Brokered money market demand —   —%   (25,010)  (100.00)%
Brokered time deposits (234)  (1.16)%   (8,837)  (30.64)%
Internet time deposits —   —%   (8,951)  (76.57)%
Total wholesale funds $266   0.37%   $(89,515)  (55.34)%

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. As of June 30, 2021, the Corporation's capital ratios remained strong and are expected to exceed well capitalized provisions for the foreseeable future, inclusive of the projected impact of the acquisition of The Farmers State Bank of Munith in the fourth quarter.

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. The following table outlines the number shares and dollar amount associated with the Corporation's common stock repurchase plan for the quarters ended:

  6/30/21 3/31/21 12/31/20 9/30/20 6/30/20
Number of Shares Repurchased 40,383  37,315 5,342  —  —
Dollar Amount of Shares Repurchased $1,059  $880 $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 June 30, 2016 and all dividends were reinvested.

The graph accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/5ffc65ef-6755-4ffd-aca9-10334f71da96


Date FETM ABAQ Index
6/30/2016 100.00 100.00
6/30/2017 141.88 134.65
6/30/2018 164.96 146.73
6/30/2019 163.16 129.53
6/30/2020 140.90 95.74
6/30/2021 208.27 148.38

Abbreviations and Acronyms

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

About Fentura Financial, Inc. and The State Bank

Fentura Financial, Inc. is the holding company for The State Bank. It was formed in 1987 and is traded on the OTCQX exchange under the symbol FETM, and was recognized as one of the Best 50 performing stocks in 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 17 full-service branches in Genesee, Livingston, Oakland, Saginaw, and Shiawassee Counties. 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:  Aaron D. Wirsing
Chief Financial Officer
Fentura Financial, Inc.
810.714.3925
aaron.wirsing@thestatebank.com		 Ronald L. Justice
President & CEO
Fentura Financial, Inc.
810.714.3902
ron.justice@thestatebank.com


 


Figure 1

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fentura Fentura Financial Inc. FETM EARNINGS earnings announcement