Fentura Financial, Inc. Announces Third Quarter 2021 Earnings

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

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

FENTON, Mich., Nov. 01, 2021 (GLOBE NEWSWIRE) -- Fentura Financial, Inc. (OTCQX: FETM) announces quarterly results of net income of $3,855 and $13,237 for the three and nine month periods ended September 30, 2021.

Ronald Justice, President and CEO, stated "I am extremely pleased by our team's tremendous efforts which continue to generate strong operating results. While residential mortgage activity has been trending downward, overall closings and pipelines remain at historically high levels. Additionally, our commercial lending team has done a tremendous job of developing new relationships and expanding existing customer relationships. These efforts have led to increases in gross loans (net of PPP loans) of $59,029 and $160,367 since June 30, 2021 and September 30, 2020, respectively. Asset quality metrics remain strong and the vast majority of borrowers who were granted COVID-19 related payment deferrals have resumed regular payments. Our team remains committed to our mission and we are well positioned and optimistic about our future."

Following is a discussion of the Corporation's financial performance as of, and for the three and nine month periods ended September 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:

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
INCOME STATEMENT DATA          
Interest income $11,584   $11,658  $11,919  $11,624  $12,070 
Interest expense 653   762  676  972  1,189 
Net interest income 10,931   10,896  11,243  10,652  10,881 
Provision for loan losses (436)  6  212  982  1,109 
Noninterest income 2,899   4,230  3,854  4,676  5,159 
Noninterest expenses 9,453   9,222  9,031  10,971  8,218 
Federal income tax expense 958   1,172  1,198  642  1,377 
Net income $3,855   $4,726  $4,656  $2,733  $5,336 
PER SHARE          
Earnings $0.84   $1.02  $1.00  $0.58  $1.14 
Dividends $0.080   $0.080  $0.080  $0.075  $0.075 
Tangible book value(1) $26.53   $25.73  $24.75  $23.88  $23.50 
Quoted market value          
High $26.25   $27.40  $24.75  $22.25  $17.99 
Low $25.60   $23.55  $21.90  $16.93  $16.80 
Close(1) $25.75   $26.00  $23.30  $22.00  $16.93 
PERFORMANCE RATIOS          
Return on average assets 1.16 % 1.45% 1.50% 0.84% 1.68%
Return on average shareholders' equity 12.26 % 15.64% 15.86% 9.27% 18.86%
Return on average tangible shareholders' equity 12.63 % 16.12% 16.38% 9.58% 19.54%
Efficiency ratio 68.35 % 60.97% 59.82% 71.57% 51.23%
Yield on earning assets (FTE) 3.69 % 3.79% 4.01% 3.75% 3.97%
Rate on interest bearing liabilities 0.34 % 0.41% 0.37% 0.50% 0.63%
Net interest margin to earning assets (FTE) 3.48 % 3.55% 3.79% 3.44% 3.58%
BALANCE SHEET DATA(1)          
Total investment securities $138,476   $129,944  $89,772  $76,111  $78,179 
Gross loans $1,015,177   $986,358  $1,028,117  $1,066,562  $1,060,885 
Total assets $1,329,300   $1,309,685  $1,303,175  $1,251,446  $1,284,845 
Total deposits $1,144,291   $1,126,496  $1,122,508  $1,071,976  $1,061,470 
Borrowed funds $50,000   $49,500  $49,000  $49,000  $96,217 
Total shareholders' equity $124,809   $122,986  $119,360  $115,868  $114,081 
Net loans to total deposits 87.80 % 86.60% 90.60% 98.48% 98.99%
Common shares outstanding 4,569,955   4,638,614  4,673,932  4,694,275  4,691,142 
QTD BALANCE SHEET AVERAGES          
Total assets $1,323,912   $1,309,942  $1,259,119  $1,288,199  $1,264,105 
Earning assets $1,248,018   $1,234,827  $1,206,411  $1,235,895  $1,210,274 
Interest bearing liabilities $756,545   $753,706  $735,159  $773,132  $750,281 
Total shareholders' equity $124,720   $121,235  $119,034  $117,263  $112,565 
Total tangible shareholders' equity $121,120   $117,567  $115,298  $113,444  $108,655 
Earned common shares outstanding 4,582,401   4,644,833  4,664,893  4,682,063  4,673,629 
Unvested stock grants 20,671   20,671  21,922  14,208  14,208 
Total common shares outstanding 4,603,072   4,665,504  4,686,815  4,696,271  4,687,837 
ASSET QUALITY(1)          
Nonperforming loans to gross loans 0.82 % 0.87% 0.79% 0.75% 0.07%
Nonperforming assets to total assets 0.63 % 0.66% 0.62% 0.64% 0.06%
Allowance for loan losses to gross loans 1.03 % 1.09% 1.08% 1.02% 0.95%
Allowance for loan losses to gross loans, net of PPP loans 1.04 % 1.14% 1.23% 1.23% 1.19%
CAPITAL RATIOS(1)          
Total capital to risk weighted assets 13.63 % 14.35% 15.02% 15.14% 15.57%
Tier 1 capital to risk weighted assets 12.64 % 13.27% 13.84% 13.93% 14.40%
CET1 capital to risk weighted assets 11.33 % 11.87% 12.34% 12.38% 12.77%
Tier 1 leverage ratio 10.21 % 10.19% 10.31% 9.80% 9.86%
           
(1)At end of period          

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

  9/30/2021 9/30/2020 9/30/2019 9/30/2018 9/30/2017
INCOME STATEMENT DATA          
Interest income $35,161  $34,355 $32,465 $26,419 $21,246
Interest expense 2,091  4,952 6,469 3,901 2,181
Net interest income 33,070  29,403 25,996 22,518 19,065
Provision for loan losses (218) 4,652 899 767 261
Noninterest income 10,983  14,964 6,034 6,574 6,768
Noninterest expenses 27,706  23,713 19,808 18,403 16,418
Federal income tax expense 3,328  3,271 2,297 1,817 2,640
Net income $13,237  $12,731 $9,026 $8,105 $6,514
PER SHARE          
Earnings $2.86  $2.73 $1.94 $2.23 $1.80
Dividends $0.240  $0.225 $0.210 $0.180 $0.150
Tangible book value(1) $26.53  $23.50 $20.37 $16.91 $14.29
Quoted market value          
High $27.40  $26.00 $21.00 $23.00 $20.65
Low $21.90  $12.55 $20.05 $18.88 $15.10
Close(1) $25.75  $16.93 $21.00 $21.15 $18.45
PERFORMANCE RATIOS          
Return on average assets 1.36% 1.45% 1.27% 1.32% 1.21%
Return on average shareholders' equity 14.55% 15.79% 12.73% 17.29% 16.20%
Return on average tangible shareholders' equity 15.00% 16.40% 13.35% 18.77% 17.48%
Efficiency ratio 62.89% 53.45% 61.84% 63.26% 63.55%
Yield on earning assets (FTE) 3.83% 4.12% 4.81% 4.59% 4.15%
Rate on interest bearing liabilities 0.37% 0.93% 1.43% 0.98% 0.60%
Net interest margin to earning assets (FTE) 3.60% 3.52% 3.85% 3.91% 3.72%
BALANCE SHEET DATA(1)          
Total investment securities $138,476  $78,179  $62,351  $79,531  $67,155 
Gross loans $1,015,177  $1,060,885  $826,597  $728,302  $628,552 
Total assets $1,329,300  $1,284,845  $978,046  $909,901  $756,967 
Total deposits $1,144,291  $1,061,470  $801,101  $766,587  $625,588 
Borrowed funds $50,000  $96,217  $69,000  $74,000  $68,000 
Total shareholders' equity $124,809  $114,081  $99,142  $66,340  $57,161 
Net loans to total deposits 87.80% 98.99% 102.51% 94.46% 99.95%
Common shares outstanding 4,569,955  4,691,142  4,658,722  3,645,402  3,631,576 
YTD BALANCE SHEET AVERAGES          
Total assets $1,297,657  $1,171,415  $950,749  $820,481  $718,335 
Earning assets $1,230,553  $1,116,861  $903,192  $772,111  $687,175 
Interest bearing liabilities $748,472  $711,449  $606,912  $528,165  $481,657 
Total shareholders' equity $121,659  $107,711  $94,815  $62,662  $53,760 
Total tangible shareholders' equity $117,991  $103,712  $90,394  $57,732  $49,838 
Earned common shares outstanding 4,630,709  4,665,951  4,641,084  3,638,123  3,618,889 
Unvested stock grants 21,088  13,966  9,907  —  — 
Total common shares outstanding 4,651,797  4,679,917  4,650,991  3,638,123  3,618,889 
ASSET QUALITY(1)          
Nonperforming loans to gross loans 0.82% 0.07% 0.11% 0.01% 0.03%
Nonperforming assets to total assets 0.63% 0.06% 0.09% 0.03% 0.05%
Allowance for loan losses to gross loans 1.03% 0.95% 0.65% 0.57% 0.52%
Allowance for loan losses to gross loans, net of PPP loans 1.04% 1.19% 0.65% 0.57% 0.52%
CAPITAL RATIOS(1)          
Total capital to risk weighted assets 13.63% 15.57% 14.42% 11.31% 10.92%
Tier 1 capital to risk weighted assets 12.64% 14.40% 13.73% 10.73% 10.41%
CET1 capital to risk weighted assets 11.33% 12.77% 11.96% 8.77% 8.23%
Tier 1 leverage ratio 10.21% 9.86% 11.22% 8.90% 9.26%
           
(1)At end of period          

Income Statement Breakdown and Analysis

  Quarter to Date
  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
GAAP net income $3,855  $4,726  $4,656  $2,733  $5,336 
Acquisition related items (net of tax)          
Accretion on purchased loans (152) (152) (151) (82) (144)
Amortization of core deposit intangibles 54  53  54  71  72 
Amortization on acquired time deposits 2  2  2  5  5 
Other acquisition related expenses 51  —  —  —  — 
Total acquisition related items (net of tax) (45) (97) (95) (6) (67)
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 —  —  —  —  — 
Prepayment penalties collected (65) (33) (17) (97) (16)
Mortgage servicing rights impairment (reduction of impairment) —  —  —  (188) (176)
Total other nonrecurring items (net of tax) (65) (33) (17) 1,487  (192)
Adjusted net income from operations $3,745  $4,596  $4,544  $4,214  $5,077 
           
GAAP net interest income $10,931  $10,896  $11,243  $10,652  $10,881 
Accretion on purchased loans (192) (192) (191) (104) (182)
Interest writeoff from loan transferred to nonaccrual —  —  —  335  — 
Prepayment penalties collected (82) (42) (21) (123) (20)
Amortization on acquired time deposits 3  3  3  6  6 
Adjusted net interest income $10,660  $10,665  $11,034  $10,766  $10,685 
           
PERFORMANCE RATIOS          
Based on adjusted net income from operations          
Earnings per share $0.82  $0.99  $0.97  $0.90  $1.09 
Return on average assets 1.12% 1.41% 1.46% 1.30% 1.60%
Return on average shareholders' equity 11.91% 15.21% 15.48% 14.30% 17.94%
Return on average tangible shareholders' equity 12.27% 15.68% 15.98% 14.78% 18.59%
Efficiency ratio 68.74% 61.46% 60.20% 59.02% 52.03%
           
Based on adjusted net interest income          
Yield on earning assets (FTE) 3.60% 3.72% 3.94% 3.78% 3.91%
Rate on interest bearing liabilities 0.34% 0.41% 0.37% 0.50% 0.63%
Net interest margin to earning assets (FTE) 3.39% 3.47% 3.71% 3.47% 3.52%


  Year to Date September 30 Variance
  2021  2020  Amount %
GAAP net income $13,237  $12,731  $506    3.97  %
Acquisition related items (net of tax)        
Accretion on purchased loans (455) (434) (21)  4.84 %
Amortization of core deposit intangibles 161  214  (53)  (24.77)%
Amortization on acquired time deposits 6  13  (7)  (53.85)%
Other acquisition related expenses 51  —  51     N/M
Total acquisition related items (net of tax) (237) (207) (30)  14.49 %
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 (115) (64) (51)  79.69 %
Mortgage servicing rights impairment (reduction of impairment) —  188  (188)  (100.00)%
Total other nonrecurring items (net of tax) (115) (1,075) 960   (89.30)%
Adjusted net income from operations $12,885  $11,449  $1,436    12.54  %
         
GAAP net interest income $33,070  $29,403  $3,667    12.47  %
Accretion on purchased loans (575) (549) (26)  4.74 %
Interest writeoff from loan transferred to nonaccrual —  —  —   — %
Prepayment penalties collected (145) (81) (64)  79.01 %
Amortization on acquired time deposits 9  17  (8)  (47.06)%
Adjusted net interest income $32,359  $28,790  $3,569    12.40  %
         
PERFORMANCE RATIOS        
Based on adjusted net income from operations        
Earnings per share $2.78  $2.45  $0.33   13.47 %
Return on average assets 1.33% 1.31%   0.02 %
Return on average shareholders' equity 14.16% 14.20%   (0.04)%
Return on average tangible shareholders' equity 14.60% 14.75%   (0.15)%
Efficiency ratio 63.31% 55.13%   8.18 %
         
Based on adjusted net interest income        
Yield on earning assets (FTE) 3.75% 4.04%   (0.29)%
Rate on interest bearing liabilities 0.37% 0.93%   (0.56)%
Net interest margin to earning assets (FTE) 3.52% 3.45%   0.07 %

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
  September 30, 2021 June 30, 2021 September 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 $1,000,660   $11,076  4.39% $1,023,620   $11,220  4.40% $1,086,629   $11,701  4.28%
Taxable investment securities 113,868   372  1.30% 89,467   322  1.44% 62,490   256  1.63%
Nontaxable investment securities 17,085   95  2.21% 17,234   100  2.33% 15,822   101  2.54%
Federal funds sold —   —  —% —   —  —% —   —  —%
Interest earning cash and cash equivalents 112,917   45  0.16% 101,018   23  0.09% 41,845   9  0.09%
Federal Home Loan Bank stock 3,488   16  1.82% 3,488   14  1.61% 3,488   24  2.74%
Total earning assets 1,248,018   11,604  3.69% 1,234,827   11,679  3.79% 1,210,274   12,091  3.97%
                   
Nonearning assets                  
Allowance for loan losses (10,889)      (11,193)      (9,255)     
Fixed assets 16,465       16,104       15,349      
Accrued income and other assets 70,318       70,204       47,737      
Total assets $1,323,912       $1,309,942       $1,264,105      
                   
Interest bearing liabilities                  
Interest bearing demand deposits $228,147   $121  0.21% $223,420   $122  0.22% $221,592   $144  0.26%
Savings deposits 325,161   108  0.13% 320,000   108  0.14% 271,260   116  0.17%
Time deposits 153,694   264  0.68% 161,197   377  0.94% 161,212   567  1.40%
Borrowed funds 49,543   160  1.28% 49,089   155  1.27% 96,217   362  1.50%
Total interest bearing liabilities 756,545   653  0.34% 753,706   762  0.41% 750,281   1,189  0.63%
                   
Noninterest bearing liabilities                  
Noninterest bearing deposits 433,057       425,353       388,904      
Accrued interest and other liabilities 9,590       9,648       12,355      
Shareholders' equity 124,720       121,235       112,565      
Total liabilities and shareholders' equity $1,323,912       $1,309,942       $1,264,105      
Net interest income (FTE)   $10,951      $10,917      $10,902   
Net interest margin to earning assets (FTE)     3.48%     3.55%     3.58%


 


  Nine Months Ended
  September 30, 2021 September 30, 2020
  Average
Balance		 Tax
Equivalent
Interest		 Average
Yield /
Rate		 Average
Balance		 Tax
Equivalent
Interest		 Average
Yield /
Rate
Interest earning assets            
Total loans $1,032,792   $33,894  4.39% $1,004,476   $32,970  4.38%
Taxable investment securities 87,399   896  1.37% 60,760   932  2.05%
Nontaxable investment securities 17,161   300  2.34% 12,601   266  2.82%
Federal funds sold —   —  —% 11,196   116  1.38%
Interest earning cash and cash equivalents 89,713   79  0.12% 24,522   40  0.22%
Federal Home Loan Bank stock 3,488   55  2.11% 3,306   87  3.52%
Total earning assets 1,230,553   35,224  3.83% 1,116,861   34,411  4.12%
             
Nonearning assets            
Allowance for loan losses (11,075)      (7,610)     
Fixed assets 16,108       15,465      
Accrued income and other assets 62,071       46,699      
Total assets $1,297,657       $1,171,415      
             
Interest bearing liabilities            
Interest bearing demand deposits $219,378   $364  0.22% $194,058   $868  0.60%
Savings deposits 318,664   325  0.14% 250,045   455  0.24%
Time deposits 161,219   932  0.77% 182,786   2,441  1.78%
Borrowed funds 49,211   470  1.28% 84,560   1,188  1.88%
Total interest bearing liabilities 748,472   2,091  0.37% 711,449   4,952  0.93%
             
Noninterest bearing liabilities            
Noninterest bearing deposits 417,387       341,642      
Accrued interest and other liabilities 10,139       10,613      
Shareholders' equity 121,659       107,711      
Total liabilities and shareholders' equity $1,297,657       $1,171,415      
Net interest income (FTE)   $33,133      $29,459   
Net interest margin to earning assets (FTE)     3.60%     3.52%

Volume and Rate Variance Analysis

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

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

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

  Three Months Ended Three Months Ended Nine Months Ended
  September 30, 2021 September 30, 2021 September 30, 2021
  Compared To Compared To Compared To
  June 30, 2021 September 30, 2020 September 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 $(131)  $(13)  $(144)  $(2,276)  $1,651   $(625)  $855   $69   $924  
Taxable investment securities 221   (171)  50   424   (308)  116   450   (486)  (36) 
Nontaxable investment securities (1)  (4)  (5)  37   (43)  (6)  105   (71)  34  
Federal funds sold —   —   —   —   —   —   (58)  (58)  (116) 
Interest earning cash and cash equivalents 3   19   22   25   11   36   76   (37)  39  
Federal Home Loan Bank stock —   2   2   —   (8)  (8)  7   (39)  (32) 
Total changes in interest income 92   (167)  (75)  (1,790)  1,303   (487)  1,435   (622)  813  
                   
Changes in interest expense                  
Interest bearing demand deposits 13   (14)  (1)  26   (49)  (23)  166   (670)  (504) 
Savings deposits 11   (11)  —   96   (104)  (8)  147   (277)  (130) 
Time deposits (16)  (97)  (113)  (25)  (278)  (303)  (260)  (1,249)  (1,509) 
Borrowed funds 3   2   5   (155)  (47)  (202)  (407)  (311)  (718) 
Total changes in interest expense 11   (120)  (109)  (58)  (478)  (536)  (354)  (2,507)  (2,861) 
Net change in net interest income (FTE) $81   $(47)  $34   $(1,732)  $1,781   $49   $1,789   $1,885   $3,674  


  Average Yield/Rate for the Three Month Periods Ended
  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Total earning assets 3.69% 3.79% 4.01% 3.75% 3.97%
Total interest bearing liabilities 0.34% 0.41% 0.37% 0.50% 0.63%
Net interest margin to earning assets (FTE) 3.48% 3.55% 3.79% 3.44% 3.58%


  Quarter to Date Net Interest Income (FTE)
  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Interest income $11,584  $11,658  $11,919  $11,624  $12,070 
FTE adjustment 20  21  22  22  21 
Total interest income (FTE) 11,604  11,679  11,941  11,646  12,091 
Total interest expense 653  762  676  972  1,189 
Net interest income (FTE) $10,951  $10,917  $11,265  $10,674  $10,902 

Noninterest Income

  Quarter to Date
  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Net gain on sales of mortgage loans $1,096   $1,253  $1,845   $2,545   $3,064 
ATM and debit card income 495   511  448   437   460 
Trust and investment services 562   403  468   445   464 
Net mortgage servicing rights income (69)  1,119  138   509   559 
Mortgage servicing fees 369   362  335   325   293 
Service charges on deposit accounts 199   168  166   194   177 
Change in cash surrender value of corporate owned life insurance 165   237  64   65   65 
PPP referral fees 6   74  351   —   — 
Net gain on sales of commercial loans —   —  —   —   — 
Net gain from corporate owned life insurance death benefit —   —  —   —   — 
Change in fair value of equity investments (4)  2  (19)  (3)  2 
Other income and fees 80   101  58   159   75 
Total noninterest income $2,899   $4,230  $3,854   $4,676   $5,159 
           
Memo items:          
Residential mortgage operations $1,396   $2,734  $2,318   $3,379   $3,916 


  Year to Date September 30 Variance
  2021 2020 Amount %
Net gain on sales of mortgage loans $4,194   $8,736  $(4,542)  (51.99)%
ATM and debit card income 1,454   1,209  245   20.26 %
Trust and investment services 1,433   1,174  259   22.06 %
Net mortgage servicing rights income 1,188   346  842   243.35 %
Mortgage servicing fees 1,066   825  241   29.21 %
Service charges on deposit accounts 533   515  18   3.50 %
Change in cash surrender value of corporate owned life insurance 466   196  270   137.76 %
PPP referral fees 431   —  431   — %
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 (21)  758  (779)  (102.77)%
Other income and fees 239   364  (125)  (34.34)%
Total noninterest income $10,983   $14,964  $(3,981)  (26.60)%
         
Memo items:        
Residential mortgage operations $6,448   $9,907  (3,459)  (34.91)%

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 and continuing into 2021, the interest rate environment was advantageous for residential mortgage originations and refinancing, resulting in record gains. While residential mortgage originations and refinancing activity remained strong during the first nine months of 2021, however not as strong as 2020, 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 the first quarter of 2021, refinancing activity remained elevated, however beginning in the second quarter of 2021, the composition of mortgage originations shifted from refinancing activity to purchase activity and was at a slower volume than previous refinancing.

In 2021, the Corporation elected to adopt the fair value measurement option for all MSR pursuant to FASB ASC 860 ("Transfers and Servicing"). 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. In addition, as the Corporation continues to see a shift from refinancing activity to purchase activity in mortgage originations which should positively impact the servicing portfolio value.

The primary driver utilized in the fair value of MSR is prepayment speeds. Prepayment speed assumptions are derived from a combination of recent industry-wide pool speeds and Bloomberg's dealer estimates. Faster prepayment speeds result in lower value, due to cash flow being shorter. During the third quarter of 2021, prepayment speeds increased slightly due to overall industry trends in the Corporation's serviced portfolio resulting in a slight decrease in the fair value of MSR.

Mortgage servicing fees includes the fees earned for servicing loans that have been sold into the secondary market. The annual increase in mortgage servicing fees is directly related to the increase in the size of the serviced portfolio. The MSR portfolio has continued to grow throughout 2021 and the mortgage servicing fees are expected to increase throughout the remainder of 2021 as the Corporation continues to add to the serviced portfolio.

Throughout the remainder of 2021, overall revenues from residential mortgage operations (net gain on sales of mortgage loans, net mortgage servicing rights income, and mortgage servicing fees) 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 moderately throughout the remainder of 2021, as economic activity begins to normalize to pre-pandemic levels.

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.

Service charges on deposit accounts includes fees earned from deposit customers for transaction-based, account maintenance and overdraft services. The increase in the third quarter of 2021 is a result of more deposit customers utilizing overdraft services. Service charges on deposit accounts are expected to approximate current levels throughout the remainder of 2021.

Change in cash surrender value of corporate owned life insurance increased in 2021 as a result of the purchase of $15,000 in additional corporate owned life insurance policies in the second quarter of 2021. The Corporation expects the change in cash surrender value of corporate owned life insurance to moderate through 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.

Net gain on sales of commercial loans represents the income earned from the sale of commercial loans into the secondary market. During the first quarter of 2020, the Corporation sold the guaranteed portion of one SBA loan and one USDA loan. The Corporation continually analyzes its commercial loan portfolio for opportunistic sales strategies. In 2021, the Corporation did not sell the guaranteed portion of SBA or USDA loans.

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 investment 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
  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Total compensation $5,001  $5,000  $5,004  $4,958  $4,531 
Professional services 790  703  624  938  524 
Furniture and equipment 761  712  637  607  614 
Data processing 557  583  509  501  503 
Occupancy 522  508  495  475  491 
Loan and collection 264  337  406  359  292 
Advertising and promotional 384  304  284  184  284 
ATM and debit card 131  144  122  125  109 
FDIC insurance premiums 153  79  155  59  55 
Telephone and communication 80  130  94  64  91 
Amortization of core deposit intangibles 68  67  68  90  91 
Other acquisition related expenses 64  —  —  —  — 
FHLB prepayment penalty —  —  —  1,907  — 
Other general and administrative 678  655  633  704  633 
Total noninterest expenses $9,453  $9,222  $9,031  $10,971  $8,218 


  Year to Date September 30 Variance
  2021 2020 Amount %
Total compensation $15,005  $13,031  $1,974   15.15 %
Professional services 2,117  1,617  500   30.92 %
Furniture and equipment 2,110  1,842  268   14.55 %
Data processing 1,649  1,480  169   11.42 %
Occupancy 1,525  1,402  123   8.77 %
Loan and collection 1,007  683  324   47.44 %
Advertising and promotional 972  791  181   22.88 %
ATM and debit card 397  309  88   28.48 %
FDIC insurance premiums 387  169  218   128.99 %
Telephone and communication 304  273  31   11.36 %
Amortization of core deposit intangibles 203  271  (68)  (25.09)%
Other acquisition related expenses 64  —  64   N/M
FHLB prepayment penalty —  —  —   N/M
Other general and administrative 1,966  1,845  121   6.56 %
Total noninterest expenses $27,706  $23,713  $3,993   16.84 %

Total compensation includes salaries, commissions and incentives, employee benefits, and payroll taxes. Total compensation has increased in 2021 due to an increase in the number of 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.

Professional services include expenses relating to third-party professional services. These services include, but are not limited to, regulatory, auditing, consulting, and legal. The increase in professional services is primarily due to audit and accounting and other outside services, which include professional services related to the Interactive Teller Machine project. These expenses are expected to continue to increase in future periods to ensure compliance with audit and regulatory requirements and legal expenses related to the acquisition.

Furniture and equipment and occupancy expenses primarily consist of depreciation, repairs and maintenance, certain service contracts, and other related items. The increase in furniture and equipment relate to the Interactive Teller Machine integration with in the Corporation. These expenses are expected to continue to increase with the size and complexity of the Corporation..

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

Occupancy expenses primarily consist of depreciation of buildings, property taxes, repairs and maintenance, utilities, insurance, and other related items. The increase in these expenses in 2021 is due to branch remodels. These expenses are expected to continue to increase 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 the first half of 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. Due to declining volume, loan and collection costs are expected to decline through the remainder of 2021.

Advertising and promotional includes the Corporation's media costs and any donations or sponsorships made on behalf of the Corporation. The increase in advertising and promotional expenses in the third quarter of 2021 is due to the Corporation's sponsorship for a portion of the Linden, Argentine Township, Fenton, Fenton Township Pathway group. The annual increase in expenses is a 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 approximate current levels 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. The fluctuation is attributed to the increased asset size and composition of the Corporation's balance sheet. FDIC insurance premiums are expected to normalize 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 in 2021 as the core deposit intangible is being amortized based on the sum-of-years-digits method. The Corporation expects an increase in the the core deposit intangible in 2022 associated with the acquisition of Farmers State Bank of Munith.

Other acquisition related expenses includes, but is not limited to, consulting and legal expenses related to the Corporation's acquisition of Farmers State Bank of Munith. The transaction is anticipated to close during the fourth quarter of 2021. As such, these expenses are expected to be temporarily elevated over the remainder of 2021 and potentially into early 2022.

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 2021, 2022, and 2023. The weighted average rate of the three FHLB borrowings was 2.17%. As a result of the early payoffs, the Corporation will 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

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
ASSETS          
Cash and cash equivalents $112,861  $132,676  $121,477  $46,757  $75,032 
Total investment securities 138,476  129,944  89,772  76,111  78,179 
Residential mortgage loans held-for-sale, at fair value 9,702  7,670  26,322  27,306  34,833 
Gross loans 1,015,177  986,358  1,028,117  1,066,562  1,060,885 
Less allowance for loan and lease losses 10,500  10,800  11,100  10,900  10,100 
Net loans 1,004,677  975,558  1,017,017  1,055,662  1,050,785 
All other assets 63,584  63,837  48,587  45,610  46,016 
Total assets $1,329,300  $1,309,685   $1,303,175   $1,251,446   $1,284,845  
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Total deposits $1,144,291  $1,126,496  $1,122,508  $1,071,976  $1,061,470 
Total borrowed funds 50,000  49,500  49,000  49,000  96,217 
Accrued interest payable and other liabilities 10,200  10,703  12,307  14,602  13,077 
Total liabilities 1,204,491  1,186,699  1,183,815  1,135,578  1,170,764 
Total shareholders' equity 124,809  122,986  119,360  115,868  114,081 
Total liabilities and shareholders' equity $1,329,300  $1,309,685  $1,303,175  $1,251,446  $1,284,845 


  9/30/2021 vs 6/30/2021 9/30/2021 vs 9/30/2020
  Variance Variance
  Amount % Amount %
ASSETS        
Cash and cash equivalents $(19,815)  (14.93)% $37,829   50.42 %
Total investment securities 8,532   6.57 % 60,297   77.13 %
Residential mortgage loans held-for-sale, at fair value 2,032   26.49 % (25,131)  (72.15)%
Gross loans 28,819   2.92 % (45,708)  (4.31)%
Less allowance for loan and lease losses (300)  (2.78)% 400   3.96 %
Net loans 29,119   2.98 % (46,108)  (4.39)%
All other assets (253)  (0.40)% 17,568   38.18 %
Total assets $19,615   1.50 % $44,455   3.46 %
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
Total deposits $17,795   1.58 % $82,821   7.80 %
Total borrowed funds 500   1.01 % (46,217)  (48.03)%
Accrued interest payable and other liabilities (503)  (4.70)% (2,877)  (22.00)%
Total liabilities 17,792   0.77 % 33,727   1.51 %
Total shareholders' equity 1,823   1.48 % 10,728   9.40 %
Total liabilities and shareholders' equity $19,615   1.50 % $44,455   3.46 %

Total investment securities

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Available-for-sale          
U.S. Government and federal agency $5,967   $5,917 $5,942  $7,935   $19,311
State and municipal 25,227   23,096 17,080  15,768   15,729
Mortgage backed residential 67,199   60,390 32,135  19,101   20,886
Certificates of deposit 4,190   4,932 4,932  5,180   5,921
Collateralized mortgage obligations - agencies 31,732   31,281 25,505  23,110   11,141
Unrealized gain/(loss) on available-for-sale securities 1,432   1,334 1,117  1,932   2,099
Total available-for-sale 135,747   126,950 86,711  73,026   75,087
Held-to-maturity state and municipal 1,515   1,859 1,968  1,973   1,977
Equity securities 1,214   1,135 1,093  1,112   1,115
Total investment securities $138,476   $129,944 $89,772  $76,111   $78,179
           
  9/30/2021 vs 6/30/2021   9/30/2021 vs 9/30/2020
  Variance   Variance
  Amount %   Amount %
Available-for-sale          
U.S. Government and federal agency $50   0.85 %   $(13,344)  (69.10)%
State and municipal 2,131   9.23 %   9,498   60.39 %
Mortgage backed residential 6,809   11.28 %   46,313   221.74 %
Certificates of deposit (742)  (15.04)%   (1,731)  (29.23)%
Collateralized mortgage obligations - agencies 451   1.44 %   20,591   184.82 %
Unrealized gain/(loss) on available-for-sale securities 98   7.35 %   (667)  (31.78)%
Total available-for-sale 8,797   6.93 %   60,660   80.79 %
Held-to-maturity state and municipal (344)  (18.50)%   (462)  (23.37)%
Equity securities 79   6.96 %   99   8.88 %
Total investment securities $8,532   6.57 %   $60,297   77.13 %

The amortized cost and fair value of AFS investment securities as of September 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 $2,986  $2,015  $966  $—  $—  $5,967 
State and municipal 2,268  8,611  12,514  1,834  —  25,227 
Mortgage backed residential —  —  —  —  67,199  67,199 
Certificates of deposit 984  3,206  —  —  —  4,190 
Collateralized mortgage obligations - agencies —  —  —  —  31,732  31,732 
Total amortized cost $6,238  $13,832  $13,480  $1,834  $98,931  $134,315 
Fair value $6,332  $14,319  $13,654  $2,089  $99,353  $135,747 

The amortized cost and fair value of HTM investment securities as of September 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 $334  $801  $380  $—  $—  $1,515 
Fair value $338  $837  $402  $—  $—  $1,577 

Throughout 2021, the Corporation expanded its investment portfolio to generate additional interest income. Total investment securities are expected to stabilize through 2021. The following table summarizes information as of September 30, 2021 for investment securities purchased YTD:

  Book Value Fully Taxable
Equivalent Weighted Average Yield
U.S. Government and federal agency $2,006  0.95%
State and municipal 11,199  1.15%
Collateralized mortgage obligations - agencies 14,471  1.15%
Mortgage backed residential 54,083  1.37%
Total $81,759  1.29%

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:

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Commercial, net of PPP loans 74,308   65,875  60,693   63,579   60,053 
PPP loans 4,985   35,195  122,583   177,845   211,060 
Commercial real estate 616,358   573,598  541,428   517,054   483,275 
Total commercial loans 695,651   674,668  724,704   758,478   754,388 
Residential mortgage 273,478   265,323  258,333   262,770   261,375 
Home equity 41,902   41,771  40,205   39,900   39,456 
Total residential real estate loans 315,380   307,094  298,538   302,670   300,831 
Consumer 4,146   4,596  4,875   5,414   5,666 
Gross loans 1,015,177   986,358  1,028,117   1,066,562   1,060,885 
Allowance for loan and lease losses (10,500)  (10,800) (11,100)  (10,900)  (10,100)
Loans, net $1,004,677   $975,558  $1,017,017   $1,055,662   $1,050,785 
           
Memo items:          
Gross loans, net of PPP loans $1,010,192   $951,163  $905,534   $888,717   $849,825 
Residential mortgage loans serviced for others $591,399   $581,984  $546,836   $526,416   $489,247 
           
  9/30/2021 vs 6/30/2021   9/30/2021 vs 9/30/2020
  Variance   Variance
  Amount %   Amount %
Commercial, net of PPP loans $8,433   12.80 %   $14,255   23.74 %
PPP loans (30,210)  (85.84)%   (206,075)  (97.64)%
Commercial real estate 42,760   7.45 %   133,083   27.54 %
Total commercial loans 20,983   3.11 %   (58,737)  (7.79)%
Residential mortgage 8,155   3.07 %   12,103   4.63 %
Home equity 131   0.31 %   2,446   6.20 %
Total residential real estate loans 8,286   2.70 %   14,549   4.84 %
Consumer (450)  (9.79)%   (1,520)  (26.83)%
Gross loans 28,819   2.92 %   (45,708)  (4.31)%
Allowance for loan losses 300   (2.78)%   (400)  3.96 %
Loans, net $29,119   2.98 %   $(46,108)  (4.39)%
           
Memo items:          
Gross loans, net of PPP loans $59,029   6.21 %   $160,367   18.87 %
Residential mortgage loans serviced for others $9,415   1.62 %   $102,152   20.88 %
           

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

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Loans collectively evaluated for impairment          
Commercial $79,252  $100,424  $183,203  $241,424  $271,113 
Commercial real estate 609,382  564,781  532,294  508,182  481,071 
Residential mortgage 272,463  264,448  257,543  262,017  260,665 
Home equity 41,840  41,708  40,141  39,874  39,456 
Consumer 4,146  4,596  4,875  5,412  5,663 
Subtotal 1,007,083  975,957  1,018,056  1,056,909  1,057,968 
Loans individually evaluated for impairment          
Commercial $41  $646  $73  $—  $— 
Commercial real estate 6,976  8,817  9,134  8,872  2,204 
Residential mortgage 1,015  875  790  753  710 
Home equity 62  63  64  26  — 
Consumer —  —  —  2  3 
Subtotal 8,094  10,401  10,061  9,653  2,917 
Gross Loans $1,015,177  $986,358  $1,028,117  $1,066,562  $1,060,885 
           

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

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Loans collectively evaluated for impairment          
Commercial $613  $585  $626  $673  $633 
Commercial real estate 6,104  6,264  6,026  5,602  5,152 
Residential mortgage 3,066  2,814  3,280  3,480  3,479 
Home equity 410  440  453  440  438 
Consumer 53  85  92  97  101 
Subtotal 10,246  10,188  10,477  10,292  9,803 
Loans individually evaluated for impairment          
Commercial $—  $42  $—  $—  $— 
Commercial real estate 250  566  619  602  289 
Residential mortgage 4  4  4  4  5 
Home equity —  —  —  —  — 
Consumer —  —  —  2  3 
Subtotal 254  612  623  608  297 
Allowance for loan losses $10,500  $10,800  $11,100  $10,900  $10,100 
           


Commercial $613  $627  $626  $673  $633 
Commercial real estate 6,354  6,830  6,645  6,204  5,441 
Residential mortgage 3,070  2,818  3,284  3,484  3,484 
Home equity 410  440  453  440  438 
Consumer 53  85  92  99  104 
Allowance for loan losses $10,500  $10,800  $11,100  $10,900  $10,100 

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

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Accruing interest          
Current $1,004,220  $976,852  $1,018,343  $1,057,404  $1,058,437 
Past due 30-89 days 2,596  923  1,636  1,165  1,703 
Past due 90 days or more 364  36  120  50  86 
Total accruing interest 1,007,180  977,811  1,020,099  1,058,619  1,060,226 
Nonaccrual 7,997  8,547  8,018  7,943  659 
Total loans $1,015,177  $986,358  $1,028,117  $1,066,562  $1,060,885 
Total loans past due and in nonaccrual status $10,957  $9,506  $9,774  $9,158  $2,448 

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

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Nonaccrual loans $7,997  $8,547  $8,018  $7,943  $659 
Accruing loans past due 90 days or more 364  36  120  50  86 
Total nonperforming loans 8,361  8,583  8,138  7,993  745 
Other real estate owned —  —  —  —  — 
Total nonperforming assets $8,361  $8,583  $8,138  $7,993  $745 

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

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Nonperforming loans to gross loans 0.82% 0.87% 0.79% 0.75% 0.07%
Nonperforming assets to total assets 0.63% 0.66% 0.62% 0.64% 0.06%
Allowance for loan losses to gross loans 1.03% 1.09% 1.08% 1.02% 0.95%
Allowance for loan losses to gross loans, less PPP loans 1.04% 1.14% 1.23% 1.23% 1.19%

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 began, and continues to make, the regular contractual 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:

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Net unamortized discount on purchased loans $196  $388  $580  $773  $877 

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. Management continues to actively enhance the analysis of the ALLL as client impact and broader economic data from the pandemic becomes more clear.

The following table summarizes the average loan size as of:

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Commercial $217  $168  $206  $169  $166 
Commercial real estate 791  761  727  707  672 
Total commercial loans 608  498  444  351  321 
Residential mortgage 203  199  183  182  180 
Home equity 47  47  46  45  45 
Total residential real estate loans 141  138  131  130  129 
Consumer 25  24  22  22  22 
Gross loans $287  $262  $249  $226  $215 

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 September 30, 2021:

  Number of Modifications Outstanding Balance % of Portfolio
Commercial real estate 1  104  0.02%
Portfolio residential mortgage loans 2  366  0.13%
Total portfolio modifications 3  $470  0.05%
       
Residential mortgage loans serviced for FHLMC 21  $4,960  0.84%

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 in 2021. The Corporation has 15 commercial loans in its portfolio in the accommodation industry with a book balance of $19,370. Of these loans, approximately 51% 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 $4,985 as of September 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 September 30, 2021, the Corporation has recognized $6,712 in income since April 2020, with $87 remaining as unearned income.

During the first quarter of 2021, the SBA processed applications for a second round of PPP loans. 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 of September 30, 2021, the Corporation generated referral fee income of $431 for the second round of the PPP loan program.
The tables below summarize total PPP fee income as of:

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
PPP fees recognized $376  $999  $1,777  $1,199  $1,757 
PPP referral fee income 6  74  351  —  — 
Total PPP fees recognized $382  $1,073  $2,128  $1,199  $1,757 
           


  Year to Date September 30 Variance
  2021 2020 Amount %
PPP fees recognized $3,152  $2,361  $791  33.50%
PPP referral fee income 431  —  431  N/M
Total PPP fees recognized $3,583  $2,361  $1,222  51.76%

All other assets

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

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Corporate owned life insurance $25,803   $25,638 $10,354  $10,291   $10,225
Premises and equipment, net 16,330   16,231 15,969  15,461   15,267
Mortgage servicing rights 6,454   6,523 5,404  4,885   4,376
Accrued interest receivable 4,416   4,423 5,451  5,068   5,645
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 1,241   1,364 1,139  364   387
Core deposit intangibles 338   406 474  541   632
Derivatives 320   601 1,009  1,331   1,772
Other assets 1,975   1,944 2,080  962   1,005
All other assets $63,584   $63,837 $48,587  $45,610   $46,016
           
  9/30/2021 vs 6/30/2021   9/30/2021 vs 9/30/2020
  Variance   Variance
  Amount %   Amount %
Corporate owned life insurance $165   0.64 %   $15,578   152.35 %
Premises and equipment, net 99   0.61 %   1,063   6.96 %
Mortgage servicing rights (69)  (1.06)%   2,078   47.49 %
Accrued interest receivable (7)  (0.16)%   (1,229)  (21.77)%
Federal Home Loan Bank stock —   — %   —   — %
Goodwill —   — %   —   — %
Right-of-use assets (123)  (9.02)%   854   220.67 %
Core deposit intangibles (68)  (16.75)%   (294)  (46.52)%
Derivatives (281)  (46.76)%   (1,452)  (81.94)%
Other assets 31   1.59 %   970   96.52 %
All other assets $(253)  (0.40)%   $17,568   38.18 %

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 was 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 throughout 2021 is due to the increased volume of residential mortgage loan sales. The serviced loan portfolio has continued to grow in 2021 and the Corporation expects the serviced loan portfolio to increase throughout the remainder of 2021 as the Corporation continues to add to the serviced portfolio.

Right-of-use assets were established pursuant to the adoption of FASB 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 was 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:

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Noninterest bearing demand $442,358   $435,588 $422,013  $378,733   $391,706
Interest bearing          
Savings 320,724   305,409 309,454  290,343   269,051
Money market demand 119,719   113,088 109,101  113,729   99,252
NOW 115,114   102,046 103,342  101,419   120,681
Time deposits 146,376   170,365 178,598  187,752   180,780
Total deposits $1,144,291   $1,126,496 $1,122,508  $1,071,976   $1,061,470
           
  9/30/2021 vs 6/30/2021   9/30/2021 vs 9/30/2020
  Variance   Variance
  Amount %   Amount %
Noninterest bearing demand $6,770   1.55 %   $50,652   12.93 %
Interest bearing          
Savings 15,315   5.01 %   51,673   19.21 %
Money market demand 6,631   5.86 %   20,467   20.62 %
NOW 13,068   12.81 %   (5,567)  (4.61)%
Time deposits (23,989)  (14.08)%   (34,404)  (19.03)%
Total deposits $17,795   1.58 %   $82,821   7.80 %

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 have also increased due to government related stimulus programs. The decrease in time deposits throughout 2021 is primarily due to maturities of municipal time deposits. As a result of the liquidity position of the Corporation and rate compression on contractual time deposits, the Corporation may allow higher priced time deposits to exit. The Corporation will continue to monitor deposit growth and adjust interest rates in order to minimize downward pressure on margins.

Cash and cash equivalents

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Cash and cash equivalents          
Noninterest bearing $25,693   $22,454 $25,698  $23,102  $22,108
Interest bearing 87,168   110,222 95,779  23,655  52,924
Cash and cash equivalents $112,861   $132,676 $121,477  $46,757  $75,032
           
  9/30/2021 vs 6/30/2021   9/30/2021 vs 9/30/2020
  Variance   Variance
  Amount %   Amount %
Cash and cash equivalents          
Noninterest bearing $3,239   14.43 %   $3,585  16.22%
Interest bearing (23,054)  (20.92)%   34,244  64.70%
Cash and cash equivalents $(19,815)  (14.93)%   $37,829  50.42%

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. The Corporation expects cash and cash equivalents to decline from its current elevated levels as the funds are redeployed into the loan and investment portfolios.

Primary and secondary liquidity sources

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

  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Cash and cash equivalents $112,861  $132,676  $121,477  $46,757  $75,032 
Unpledged investment securities 127,913  118,019  76,384  59,025  58,739 
FHLB borrowing availability 140,000  140,000  140,000  140,000  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 
Parent company line of credit 7,000  7,500  8,000  8,000  8,000 
PPPLF 4,985  35,195  122,583  177,845  206,343 
Total liquidity sources $424,259  $464,890  $499,944  $463,127  $477,114 

Total borrowed funds

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

  9/30/21 6/30/21 3/31/21 12/31/20 9/30/20
Federal Home Loan Bank borrowings $35,000  $35,000 $35,000  $35,000   $77,500
Subordinated debentures 14,000  14,000 14,000  14,000   14,000
PPPLF —  — —  —   4,717
Other borrowings 1,000  500 —  —   —
Total borrowed funds $50,000  $49,500 $49,000  $49,000   $96,217
           
  9/30/2021 vs 6/30/2021   9/30/2021 vs 9/30/2020
  Variance   Variance
  Amount %   Amount %
Federal Home Loan Bank borrowings $—  —%   $(42,500)  (54.84)%
Subordinated debentures —  —%   —   — %
PPPLF —  —%   (4,717)  (100.00)%
Other borrowings 500  100.00%   1,000   N/M
Total borrowed funds $500  1.01 %   $(46,217)  (48.03)%

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. Other borrowings is comprised of the outstanding balance on the holding company line of credit.

Total borrowed funds are expected to approximate current levels throughout the remainder of 2021. The Corporation continually analyzes the market for opportunities and will borrow funds when deemed financially beneficial.

Wholesale funding sources

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

  9/30/21 6/30/21 3/31/21 12/31/20 9/30/20
Federal Home Loan Bank borrowings $35,000  $35,000 $35,000  $35,000   $77,500
Subordinated debentures 14,000  14,000 14,000  14,000   14,000
PPPLF —  — —  —   4,717
Other borrowings 1,000  500 —  —   —
Brokered money market demand —  — —  —   25,029
Brokered time deposits 20,000  20,000 20,234  20,000   28,605
Internet time deposits 2,739  2,739 2,739  2,839   10,208
Total wholesale funds $72,739  $72,239 $71,973  $71,839   $160,059
           
  9/30/2021 vs 6/30/2021   9/30/2021 vs 9/30/2020
  Variance   Variance
  Amount %   Amount %
Federal Home Loan Bank borrowings $—  —%   $(42,500)  (54.84)%
Subordinated debentures —  —%   —   — %
PPPLF —  —%   (4,717)  (100.00)%
Other borrowings 500  100.00%   1,000   N/M
Brokered money market demand —  —%   (25,029)  (100.00)%
Brokered time deposits —  —%   (8,605)  (30.08)%
Internet time deposits —  —%   (7,469)  (73.17)%
Total wholesale funds $500  0.69%   $(87,320)  (54.55)%

The Corporation utilizes wholesale funds to manage balance sheet growth. Wholesale funding has historically been more expensive than core deposits, however, due to the COVID-19 pandemic, the FRB has kept Fed funds rates near zero. The Corporation continually analyzes sources of wholesale funding when the increases in interest earning assets out-pace the increases in core deposits.

Accrued interest payable and other liabilities

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

Total shareholders' equity

Total shareholders' equity includes common stock, retained earnings, and AOCI. Total shareholders' equity is expected to continue to grow throughout the remainder of 2021 through the Corporation's earnings. As of September 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 Farmers State Bank of Munith in the fourth quarter of 2021.

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. As of September 30, 2021, the Corporation has $1,022 of common stock available to repurchase. The following tables outline the number shares, dollar amount and weighted average share price associated with the Corporation's common stock repurchase plan for the following periods:

  Quarter to Date
  9/30/2021 6/30/2021 3/31/2021 12/31/2020 9/30/2020
Number of Shares Repurchased 73,714   40,383  37,315  5,342  —
Dollar Amount of Shares Repurchased $1,929  $1,059  $880  $110  $—
Weighted Average Share Price $26.17  $26.22  $23.58  $20.59  N/M


  Year to Date September 30
  2021 2020
Number of Shares Repurchased 151,412   5,342 
Dollar Amount of Shares Repurchased $3,868  $110 
Weighted Average Share Price $25.55  $20.59 

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: ABAQ) over the same period. The graph assumes the value of an investment in the Corporation's common stock and the ABA NASDAQ Community Bank Index was $100 at September 30, 2016 and all dividends were reinvested.

The graph accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/b1d51f61-f019-4687-9c48-919225bee0de


Date FETM ABAQ Index
9/30/2016 100.00 100.00
9/30/2017 131.17 129.03
9/30/2018 152.07 131.53
9/30/2019 152.90 118.70
9/30/2020 126.90 79.22
9/30/2021 189.86 139.04

Abbreviations and Acronyms

ABA: American Bankers AssociationHFS: Held-for-sale
AFS: Available-for-saleHTM: Held-to-maturity
ALLL: Allowance for loan and lease lossesIRA: Individual retirement account
AOCI: Accumulated other comprehensive incomeITM: Interactive teller machine
ASC: Accounting Standards CodificationMSR: 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
FASB: Financial Accounting Standards BoardPPP: Paycheck Protection Program
FDIC: Federal Deposit Insurance CorporationPPPLF: Paycheck Protection Program Liquidity Facility
FHLB: Federal Home Loan BankQTD: Quarter-to-date
FHLMC: Federal Home Loan Mortgage CorporationSAB: Staff Accounting Bulletin
FRB: Federal Reserve BankSBA: U.S. Small Business Administration
FTE: Fully taxable equivalentUSDA: United States Department of Agriculture
GAAP: Generally Accepted Accounting PrinciplesYTD: 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: Ronald L. Justice Aaron D. Wirsing
  President & CEO Chief Financial Officer
  Fentura Financial, Inc. Fentura Financial, Inc.
  810.714.3902 810.714.3925
  ron.justice@thestatebank.com aaron.wirsing@thestatebank.com

  


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