Fentura Financial, Inc. Announces Second Quarter 2023 Earnings (unaudited)

| 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, 2023 presentation.

FENTON, Mich., July 28, 2023 (GLOBE NEWSWIRE) -- Fentura Financial, Inc. (OTCQX: FETM) announces quarterly net income results of $3,226 and $7,070 for the three and six months ended June 30, 2023.

Ronald L. Justice, President and CEO, stated, “I am proud of our strong second quarter and year-to-date performance, as we successfully navigate a challenging banking environment. This is a direct result of our Bank’s focus on supporting our customers, maintaining solid asset quality, and controlling expenses. While we were able to settle the proxy contest prior to the annual meeting, we incurred $523 in legal and professional fees in the process. Excluding the costs associated with the proxy contest and other non-recurring items, adjusted net income from operations for the quarter was $3,604 as compared to $3,483 for the quarter ended June 30, 2022. Throughout these challenging times, we remain committed to providing long-term shareholder value.”

Mr. Justice continued, “We continue to focus on strengthening our balance sheet by taking a measured approach to loan growth, while maintaining strong asset quality. Gross loans increased 19.4% year-over-year to a record $1.47 billion at June 30, 2023. Our asset quality remains excellent with historically low levels of net charge-offs and nonperforming loans to gross loans of just 0.16%, reflecting our stringent underwriting standards and stable economic trends across our local Michigan markets. In addition, our non-owner occupied commercial office exposure was only 4.22% of gross loans at June 30, 2023 with limited exposure in suburban markets. Overall, our performance throughout the first half of 2023 is encouraging and we continue to believe 2023 will be another good year for Fentura Financial.”

Following is a discussion of our financial performance as of, and for the three and six months ended June 30, 2023. At the end of this document is a list of abbreviations and acronyms.

Results of Operations (unaudited)
The following table outlines our QTD results of operations and provides certain performance measures as of, and for the three months ended:

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
INCOME STATEMENT DATA          
Interest income $19,553  $18,679  $17,782  $15,726  $13,411 
Interest expense  6,469   5,335   3,645   1,738   785 
Net interest income  13,084   13,344   14,137   13,988   12,626 
Provision for loan losses  205   236   847   1,231   525 
Noninterest income  2,460   2,328   1,949   2,395   2,794 
Noninterest expenses  11,320   10,633   9,781   10,143   10,560 
Federal income tax expense  793   959   1,094   1,000   859 
Net income $3,226  $3,844  $4,364  $4,009  $3,476 
PER SHARE          
Earnings $0.73  $0.87  $0.99  $0.91  $0.79 
Dividends $0.10  $0.10  $0.09  $0.09  $0.09 
Tangible book value(1) $27.16  $26.64  $26.22  $25.22  $24.53 
Quoted market value          
High $21.21  $24.10  $23.40  $25.20  $27.85 
Low $18.70  $21.10  $21.60  $23.00  $24.40 
Close(1) $19.35  $21.31  $22.20  $23.00  $25.00 
PERFORMANCE RATIOS          
Return on average assets  0.76%  0.92%  1.06%  1.02%  0.96%
Return on average shareholders' equity  9.89%  12.32%  14.01%  12.96%  11.55%
Return on average tangible shareholders' equity  10.67%  13.34%  15.21%  14.10%  12.60%
Efficiency ratio  72.83%  67.85%  60.80%  61.91%  68.48%
Yield on earning assets (FTE)  4.85%  4.75%  4.57%  4.27%  3.96%
Rate on interest bearing liabilities  2.35%  2.02%  1.42%  0.75%  0.38%
Net interest margin to earning assets (FTE)  3.25%  3.40%  3.63%  3.79%  3.73%
BALANCE SHEET DATA(1)          
Total investment securities $117,563  $122,995  $125,049  $129,886  $136,725 
Gross loans $1,472,288  $1,457,173  $1,436,166  $1,350,851  $1,232,892 
Allowance for credit losses $15,400  $15,220  $13,000  $12,200  $11,000 
Total assets $1,718,819  $1,749,073  $1,688,863  $1,588,592  $1,471,454 
Total deposits $1,380,192  $1,353,918  $1,332,883  $1,345,209  $1,231,543 
Borrowed funds $200,550  $259,050  $222,350  $116,600  $111,000 
Total shareholders' equity $130,690  $128,247  $126,087  $121,630  $118,566 
Net loans to total deposits  105.56%  106.50%  106.77%  99.51%  99.22%
Common shares outstanding  4,460,053   4,453,951   4,439,725   4,434,937   4,429,357 
QTD BALANCE SHEET AVERAGES          
Total assets $1,706,147  $1,687,175  $1,637,191  $1,558,040  $1,449,874 
Earning assets $1,617,593  $1,595,605  $1,544,880  $1,464,233  $1,360,658 
Interest bearing liabilities $1,105,807  $1,072,417  $1,016,876  $917,888  $826,708 
Total shareholders' equity $130,860  $126,495  $123,567  $122,695  $120,659 
Total tangible shareholders' equity $121,274  $116,834  $113,810  $112,829  $110,686 
Earned common shares outstanding  4,427,890   4,421,584   4,413,710   4,408,399   4,417,447 
Unvested stock grants  29,916   29,007   24,460   24,460   24,460 
Total common shares outstanding  4,457,806   4,450,591   4,438,170   4,432,859   4,441,907 
ASSET QUALITY          
Nonperforming loans to gross loans(1)  0.16%  0.19%  0.16%  0.12%  0.16%
Nonperforming assets to total assets(1)  0.16%  0.17%  0.15%  0.12%  0.16%
Allowance for credit losses to gross loans(1)  1.05%  1.04%  0.91%  0.90%  0.89%
Allowance for credit losses to gross loans, net of PPP loans(1)  1.05%  1.04%  0.91%  0.90%  0.89%
Net charge-offs (recoveries) to QTD average gross loans  —%  —%  —%  —%  0.04%
Provision for loan losses to QTD average gross loans  0.01%  0.02%  0.06%  0.10%  0.04%
CAPITAL RATIOS(1)          
Total capital to risk weighted assets  11.31%  11.08%  10.87%  10.96%  11.36%
Tier 1 capital to risk weighted assets  10.23%  10.02%  9.95%  10.07%  10.50%
CET1 capital to risk weighted assets  9.25%  9.04%  8.96%  9.04%  9.39%
Tier 1 leverage ratio  8.55%  8.47%  8.58%  8.91%  9.30%
           
(1)At end of period          
           

The following table outlines our YTD results of operations and provides certain performance measures as of, and for the six months ended (unaudited):

  6/30/2023 6/30/2022 6/30/2021 6/30/2020 6/30/2019
INCOME STATEMENT DATA          
Interest income $38,232  $25,712  $23,577  $22,285  $21,225 
Interest expense  11,804   1,384   1,438   3,763   4,285 
Net interest income  26,428   24,328   22,139   18,522   16,940 
Provision for loan losses  441   1,027   218   3,543   477 
Noninterest income  4,788   5,602   8,173   9,985   3,772 
Noninterest expenses  21,953   20,727   18,342   15,675   13,200 
Federal income tax expense  1,752   1,616   2,370   1,894   1,424 
Net income $7,070  $6,560  $9,382  $7,395  $5,611 
PER SHARE          
Earnings $1.60  $1.48  $2.02  $1.59  $1.21 
Dividends $0.20  $0.18  $0.16  $0.15  $0.14 
Tangible book value(1) $27.16  $24.53  $25.73  $22.44  $19.59 
Quoted market value          
High $24.10  $29.25  $27.40  $26.00  $21.00 
Low $18.70  $24.40  $21.90  $12.55  $20.05 
Close(1) $19.35  $25.00  $26.00  $17.35  $20.60 
PERFORMANCE RATIOS          
Return on average assets  0.84%  0.91%  1.47%  1.32%  1.20%
Return on average shareholders' equity  11.08%  11.05%  15.75%  14.13%  12.14%
Return on average tangible shareholders' equity  11.98%  12.05%  16.25%  14.69%  12.75%
Efficiency ratio  70.33%  69.25%  60.51%  54.99%  63.73%
Yield on earning assets (FTE)  4.80%  3.83%  3.89%  4.20%  4.79%
Rate on interest bearing liabilities  2.19%  0.34%  0.39%  1.09%  1.43%
Net interest margin to earning assets (FTE)  3.32%  3.63%  3.65%  3.49%  3.82%
BALANCE SHEET DATA(1)          
Total investment securities $117,563  $136,725  $129,944  $75,526  $73,285 
Gross loans $1,472,288  $1,232,892  $986,358  $1,044,564  $813,547 
Allowance for credit losses $15,400  $11,000  $10,800  $8,991  $5,014 
Total assets $1,718,819  $1,471,454  $1,309,685  $1,237,694  $949,790 
Total deposits $1,380,192  $1,231,543  $1,126,496  $1,018,287  $792,555 
Borrowed funds $200,550  $111,000  $49,500  $96,217  $54,000 
Total shareholders' equity $130,690  $118,566  $122,986  $108,969  $95,504 
Net loans to total deposits  105.56%  99.22%  86.60%  101.70%  102.02%
Common shares outstanding  4,460,053   4,429,357   4,638,594   4,680,920   4,653,343 
YTD BALANCE SHEET AVERAGES          
Total assets $1,696,660  $1,449,212  $1,284,534  $1,125,064  $940,585 
Earning assets $1,606,599  $1,354,652  $1,225,641  $1,068,847  $894,357 
Interest bearing liabilities $1,089,115  $828,955  $744,434  $692,035  $604,469 
Total shareholders' equity $128,673  $119,711  $120,134  $105,276  $93,239 
Total tangible shareholders' equity $119,050  $109,776  $116,432  $101,233  $88,762 
Earned common shares outstanding  4,424,737   4,434,527   4,654,863   4,662,113   4,638,208 
Unvested stock grants  29,461   25,963   21,297   13,844   9,878 
Total common shares outstanding  4,454,198   4,460,490   4,676,160   4,675,957   4,648,086 
ASSET QUALITY          
Nonperforming loans to gross loans(1)  0.16%  0.16%  0.87%  0.10%  0.13%
Nonperforming assets to total assets(1)  0.16%  0.16%  0.66%  0.08%  0.11%
Allowance for credit losses to gross loans(1)  1.05%  0.89%  1.09%  0.86%  0.62%
Allowance for credit losses to gross loans, net of PPP loans(1)  1.05%  0.89%  1.14%  1.07%  0.62%
Net charge-offs (recoveries) to YTD average gross loans  —%  0.05%  0.03%  0.04% (0.01)%
Provision for loan losses to YTD average gross loans  0.03%  0.09%  0.02%  0.38%  0.06%
CAPITAL RATIOS(1)          
Total capital to risk weighted assets  11.31%  11.36%  14.35%  15.06%  14.18%
Tier 1 capital to risk weighted assets  10.23%  10.50%  13.27%  14.00%  13.53%
CET1 capital to risk weighted assets  9.25%  9.39%  11.87%  12.34%  11.73%
Tier 1 leverage ratio  8.55%  9.30%  10.19%  9.90%  11.16%
           
(1)At end of period          
           

Income Statement Breakdown and Analysis

  Quarter to Date
  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Net income $3,226  $3,844  $4,364  $4,009  $3,476 
Acquisition related items (net of tax)          
Accretion on purchased loans  —   —   (20)  (20)  (20)
Amortization of core deposit intangibles  60   60   85   85   85 
Amortization on acquired time deposits  —   —   (21)  (21)  (21)
Other acquisition related expenses  —   —   —   —   11 
Total acquisition related items (net of tax)  60   60   44   44   55 
Other nonrecurring items (net of tax)          
Proxy contest related expenses  413   —   —   —   — 
Prepayment penalties collected  (95)  (9)  (61)  (119)  (48)
Total other nonrecurring items (net of tax)  318   (9)  (61)  (119)  (48)
Adjusted net income from operations $3,604  $3,895  $4,347  $3,934  $3,483 
           
Net interest income $13,084  $13,344  $14,137  $13,988  $12,626 
Accretion on purchased loans  —   —   (25)  (25)  (26)
Prepayment penalties collected  (120)  (12)  (77)  (150)  (61)
Amortization on acquired time deposits  —   —   (27)  (27)  (26)
Adjusted net interest income $12,964  $13,332  $14,008  $13,786  $12,513 
           
PERFORMANCE RATIOS          
Based on adjusted net income from operations          
Earnings per share $0.81  $0.88  $0.98  $0.89  $0.79 
Return on average assets  0.85%  0.94%  1.05%  1.00%  0.96%
Return on average shareholders' equity  11.05%  12.49%  13.96%  12.72%  11.58%
Return on average tangible shareholders' equity  11.92%  13.52%  15.15%  13.83%  12.62%
Efficiency ratio  69.51%  67.41%  60.62%  62.02%  68.19%
           
Based on adjusted net interest income          
Yield on earning assets (FTE)  4.82%  4.75%  4.54%  4.22%  3.93%
Rate on interest bearing liabilities  2.35%  2.02%  1.41%  0.74%  0.37%
Net interest margin to earning assets (FTE)  3.22%  3.40%  3.60%  3.74%  3.70%
           


  Year to Date June 30 Variance
  2023 2022 Amount %
Net income $7,070  $6,560  $510  7.77%
Acquisition related items (net of tax)        
Accretion on purchased loans  —   (41)  41  (100.00)%
Amortization of core deposit intangibles  120   170   (50) (29.41)%
Amortization on acquired time deposits  —   (42)  42  (100.00)%
Other acquisition related expenses  —   213   (213) (100.00)%
Total acquisition related items (net of tax)  120   300   (180) (60.00)%
Other nonrecurring items (net of tax)        
Proxy contest related expenses  413   —   413  N/M
Prepayment penalties collected  (104)  (210)  106  (50.48)%
Total other nonrecurring items (net of tax)  309   (210)  519  (247.14)%
Adjusted net income from operations $7,499  $6,650  $849  12.77%
         
Net interest income $26,428  $24,328  $2,100  8.63%
Accretion on purchased loans  —   (51)  51  (100.00)%
Prepayment penalties collected  (132)  (266)  134  (50.38)%
Amortization on acquired time deposits  —   (54)  54  (100.00)%
Adjusted net interest income $26,296  $23,957  $2,339  9.76%
         
PERFORMANCE RATIOS        
Based on adjusted net income from operations        
Earnings per share $1.69  $1.50  $0.19  12.67%
Return on average assets  0.89%  0.93%   (0.04)%
Return on average shareholders' equity  11.75%  11.20%   0.55%
Return on average tangible shareholders' equity  12.70%  12.22%   0.48%
Efficiency ratio  68.45%  68.48%   (0.03)%
         
Based on adjusted net interest income        
Yield on earning assets (FTE)  4.78%  3.78%   1.00%
Rate on interest bearing liabilities  2.19%  0.33%   1.86%
Net interest margin to earning assets (FTE)  3.30%  3.57%   (0.27)%
         

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. We exert 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, 2023 March 31, 2023 June 30, 2022
  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 $1,470,156  $18,725 5.11% $1,447,375  $17,854 5.00% $1,189,812  $12,843 4.33%
Taxable investment securities  107,256   418 1.56%  109,671   435 1.61%  129,727   441 1.36%
Nontaxable investment securities  13,253   76 2.27%  14,287   81 2.30%  15,305   85 2.25%
Interest earning cash and cash equivalents  15,552   208 5.36%  14,035   153 4.42%  22,269   40 0.72%
Federal Home Loan Bank stock  11,376   143 5.04%  10,237   173 6.85%  3,545   19 2.15%
Total earning assets  1,617,593   19,570 4.85%  1,595,605   18,696 4.75%  1,360,658   13,428 3.96%
                   
Nonearning assets                  
Allowance for credit losses  (15,220)      (15,145)      (11,217)    
Premises and equipment, net  15,363       15,453       16,695     
Accrued income and other assets  88,411       91,262       83,738     
Total assets $1,706,147      $1,687,175      $1,449,874     
                   
Interest bearing liabilities                  
Interest bearing demand deposits $380,224  $2,619 2.76% $359,223  $2,078 2.35% $256,856  $185 0.29%
Savings deposits  306,195   434 0.57%  341,154   473 0.56%  367,917   113 0.12%
Time deposits  175,607   1,303 2.98%  166,518   1,012 2.46%  113,026   140 0.50%
Borrowed funds  243,781   2,113 3.48%  205,522   1,772 3.50%  88,909   347 1.57%
Total interest bearing liabilities  1,105,807   6,469 2.35%  1,072,417   5,335 2.02%  826,708   785 0.38%
                   
Noninterest bearing liabilities                  
Noninterest bearing deposits  455,123       474,686       490,863     
Accrued interest and other liabilities  14,357       13,577       11,644     
Shareholders' equity  130,860       126,495       120,659     
Total liabilities and shareholders' equity $1,706,147      $1,687,175      $1,449,874     
Net interest income (FTE)   $13,101     $13,361     $12,643  
Net interest margin to earning assets (FTE)     3.25%     3.40%     3.73%
                   


  Six Months Ended
  June 30, 2023 June 30, 2022
  Average Balance Tax Equivalent Interest Average Yield / Rate Average Balance Tax Equivalent Interest Average Yield / Rate
Interest earning assets            
Total loans $1,458,766  $36,579 5.06% $1,150,284  $24,582 4.31%
Taxable investment securities  108,463   853 1.59%  136,835   881 1.30%
Nontaxable investment securities  13,769   157 2.28%  16,008   175 2.24%
Interest earning cash and cash equivalents  14,794   361 4.92%  47,969   69 0.29%
Federal Home Loan Bank stock  10,807   316 5.90%  3,556   39 2.21%
Total earning assets  1,606,599   38,266 4.80%  1,354,652   25,746 3.83%
             
Nonearning assets            
Allowance for credit losses  (15,183)      (10,863)    
Premises and equipment, net  15,407       16,818     
Accrued income and other assets  89,837       88,605     
Total assets $1,696,660      $1,449,212     
             
Interest bearing liabilities            
Interest bearing demand deposits $369,723  $4,697 2.56% $266,356  $322 0.24%
Savings deposits  323,675   907 0.57%  366,369   233 0.13%
Time deposits  171,064   2,315 2.73%  126,245   327 0.52%
Borrowed funds  224,653   3,885 3.49%  69,985   502 1.45%
Total interest bearing liabilities  1,089,115   11,804 2.19%  828,955   1,384 0.34%
             
Noninterest bearing liabilities            
Noninterest bearing deposits  464,905       481,729     
Accrued interest and other liabilities  13,967       18,817     
Shareholders' equity  128,673       119,711     
Total liabilities and shareholders' equity $1,696,660      $1,449,212     
Net interest income (FTE)   $26,462     $24,362  
Net interest margin to earning assets (FTE)     3.32%     3.63%
             

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, 2023 June 30, 2023 June 30, 2023
  Compared To Compared To Compared To
  March 31, 2023 June 30, 2022 June 30, 2022
  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 $363  $508  $871  $3,333  $2,549  $5,882  $7,276  $4,721  $11,997 
Taxable investment securities  (7)  (10)  (17)  (293)  270   (23)  (396)  368   (28)
Nontaxable investment securities  (5)  —   (5)  (21)  12   (9)  (32)  14   (18)
Interest earning cash and cash equivalents  19   36   55   (84)  252   168   (172)  464   292 
Federal Home Loan Bank stock  101   (131)  (30)  77   47   124   152   125   277 
Total changes in interest income  471   403   874   3,012   3,130   6,142   6,828   5,692   12,520 
                   
Changes in interest expense                  
Interest bearing demand deposits  136   405   541   130   2,304   2,434   169   4,206   4,375 
Savings deposits  (91)  52   (39)  (128)  449   321   (86)  760   674 
Time deposits  60   231   291   117   1,046   1,163   153   1,835   1,988 
Borrowed funds  410   (69)  341   1,040   726   1,766   2,067   1,316   3,383 
Total changes in interest expense  515   619   1,134   1,159   4,525   5,684   2,303   8,117   10,420 
Net change in net interest income (FTE) $(44) $(216) $(260) $1,853  $(1,395) $458  $4,525  $(2,425) $2,100 
                   


  Average Yield/Rate for the Three Months Ended
  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Total earning assets 4.85% 4.75% 4.57% 4.27% 3.96%
Total interest bearing liabilities 2.35% 2.02% 1.42% 0.75% 0.38%
Net interest margin to earning assets (FTE) 3.25% 3.40% 3.63% 3.79% 3.73%
           


  Quarter to Date Net Interest Income (FTE)
  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Interest income $19,553 $18,679 $17,782 $15,726 $13,411
FTE adjustment  17  17  17  18  17
Total interest income (FTE)  19,570  18,696  17,799  15,744  13,428
Total interest expense  6,469  5,335  3,645  1,738  785
Net interest income (FTE) $13,101 $13,361 $14,154 $14,006 $12,643
           

Noninterest Income

  Three Months Ended
  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Service charges and fees          
Trust and investment services $583  $549 $505  $546  $458 
ATM and debit card income  570   531  559   553   577 
Service charges on deposit accounts  224   218  245   270   246 
Total  1,377   1,298  1,309   1,369   1,281 
Net gain on sales of residential mortgage loans  198   161  24   36   182 
Changes in the fair value of MSR  (8)  107  (129)  207   433 
Net gain on sales of commercial loans  95   —  —   —   — 
Change in fair value of equity investments  (16)  15  2   (39)  (31)
Other          
Mortgage servicing fees  406   406  415   427   435 
Change in cash surrender value of corporate owned life insurance  178   172  175   172   168 
Other  230   169  153   223   326 
Total  814   747  743   822   929 
Total noninterest income $2,460  $2,328 $1,949  $2,395  $2,794 
           
Memo items:          
Residential mortgage operations $596  $674 $310  $670  $1,050 
                    


  Six Months Ended June 30 Variance
  2023 2022 Amount %
Service charges and fees        
Trust and investment services $1,132  $1,056  $76  7.20%
ATM and debit card income  1,101   1,062   39  3.67%
Service charges on deposit accounts  442   487   (45) (9.24)%
Total  2,675   2,605   70  2.69%
Net gain on sales of residential mortgage loans  359   665   (306) (46.02)%
Changes in the fair value of MSR  99   752   (653) (86.84)%
Net gain on sales of commercial loans  95   —   95  N/M
Change in fair value of equity investments  (1)  (79)  78  (98.73)%
Other        
Mortgage servicing fees  812   879   (67) (7.62)%
Change in cash surrender value of corporate owned life insurance  350   334   16  4.79%
Other  399   446   (47) (10.54)%
Total  1,561   1,659   (98) (5.91)%
Total noninterest income $4,788  $5,602  $(814) (14.53)%
         
Memo items:        
Residential mortgage operations $1,270  $2,296  $(1,026) (44.69)%
         

Residential Mortgage Operations

Residential mortgage operations includes net gains on sales of loans, net mortgage servicing rights income, and mortgage servicing fees.

Net gain on sales of residential mortgage loans represents the income earned on the sale of residential mortgage loans into the secondary market. Increases in interest rates and limited inventories have significantly driven down the volume of new originations and refinancing activity. While a majority of our residential mortgage loans originated have been portfolio loans, we have been actively selling residential mortgage loans into the secondary market, resulting in increased gain on sales in the first half of 2023. We expect this trend to continue in future periods.

Changes in the fair value of MSR are highly correlated to changes in interest rates and prepayment speeds. As a significant portion of the serviced loan portfolio was originated at historically low interest rates, the relative value of the servicing portfolio has increased.   While we experienced an increase in the overall value of the portfolio first quarter of 2023, the overall direction of the fair value of MSR will likely continue to decline due to a reduction in the size of our servicing portfolio. This is a result of reduced levels of secondary market originations and prepayments. During the second quarter of 2023, the serviced loan portfolio declined by $4,103. We expect this trend to continue in future periods.

Mortgage servicing fees includes the fees earned for servicing loans that have been sold into the secondary market. The annual decrease in mortgage servicing fees is directly related to the size of the serviced portfolio. Due to reduced levels of secondary market originations and prepayments, the serviced loan portfolio declined by $46,099 since the second quarter of 2022. We expect mortgage servicing fees to trend modestly downward throughout 2023 due to decreased secondary market originations.

All Other Noninterest Income

Trust and investment services includes income earned from contracts with customers to manage assets for investment and/or to transact on their accounts through the wealth management and trust department. The increase in income in 2023 is a direct result of higher customer demand for annuity products. Additionally, during the second quarter of 2023, we transitioned our wealth management program to Ameriprise Financial, Inc. Ameriprise offers a robust, flexible technology platform and comprehensive financial solutions, which will provide our clients a full range of leading investment services and solutions. Trust services and wealth management fees are subject to market fluctuations and interest rate changes. We expect these fees to continue to increase throughout 2023.

ATM and debit card income represents fees earned on ATM and debit card transactions. We expect these fees to approximate current levels throughout 2023.

Service charges on deposit accounts includes fees earned from deposit customers for transaction-based charges, account maintenance and overdraft services. Service charges on deposit accounts are expected to approximate current levels throughout 2023.

Net gain on sales of commercial loans represents the income earned from the sale of commercial loans into the secondary market. During the second quarter of 2023, we sold the guaranteed portion of three SBA loans. We continually analyze our commercial loan portfolio for opportunistic sales strategies.

Change in cash surrender value of corporate owned life insurance is expected to modestly increase throughout 2023.

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

Noninterest Expenses

  Three Months Ended
  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Compensation and benefits $5,492 $5,792 $5,329 $5,320 $5,453
Professional services  1,237  766  594  763  777
Furniture and equipment  685  726  772  822  805
Occupancy  589  635  566  578  579
Data processing  565  513  111  363  665
Advertising and promotional  509  451  580  405  326
Loan and collection  457  240  278  435  600
Other          
FDIC insurance premiums  330  201  149  150  172
ATM and debit card  179  161  254  154  160
Telephone and communication  100  119  110  112  112
Amortization of core deposit intangibles  76  76  107  108  107
Other acquisition related expenses  —  —  —  —  14
Other general and administrative  1,101  953  931  933  790
Total $1,786 $1,510 $1,551 $1,457 $1,355
Total noninterest expenses $11,320 $10,633 $9,781 $10,143 $10,560
           


  Six Months Ended
June 30		 Variance
  2023 2022 Amount %
Compensation and benefits $11,284 $10,800 $484  4.48%
Professional services  2,003  1,589  414  26.05%
Furniture and equipment  1,411  1,623  (212) (13.06)%
Occupancy  1,224  1,183  41  3.47%
Data processing  1,078  1,077  1  0.09%
Advertising and promotional  960  604  356  58.94%
Loan and collection  697  927  (230) (24.81)%
Other        
FDIC insurance premiums  531  322  85  21.96%
ATM and debit card  340  303  37  12.21%
Telephone and communication  219  217  2  0.92%
Amortization of core deposit intangibles  152  215  (63) (29.30)%
Other acquisition related expenses  —  270  (270) (100.00)%
Other general and administrative  2,054  1,597  457  28.62%
Total $3,296 $2,924 $372  12.72%
Total noninterest expenses $21,953 $20,727 $1,226  5.91%
         

Compensation and benefits includes salaries, commissions and incentives, employee benefits, and payroll taxes. Compensation and benefits increased year-to-date for 2023 due to an increase in the size of the organization, merit increases, and market based adjustments. During the quarter, overall compensation trended downward due to reduced commissions and staff attrition. While there continues to be meaningful wage pressure, we expect a modest increase in overall compensation and benefits due to merit increases and market based adjustments. These increases will be partially offset by decreases in commissions as loan originations continue to slow. This trend is expected to continue throughout 2023.

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 during the second quarter of 2023 was due to an increase in expenses resulting from a proxy contest relating to our 2023 annual meeting of stockholders. The consulting and legal fees related to this matter totaled approximately $523. Professional services expenses are expected to normalize in future periods.

Furniture and equipment and occupancy expenses primarily consist of depreciation, repairs and maintenance, certain service contracts, and other related items. These expenses are expected to approximate current levels in 2023.

Data processing primarily includes the expenses relating to our core data processor. These expenses trended downward during the second half of 2022 due to receipt of renewal incentives from our core data processor. Data processing expenses are expected to normalize in 2023.

Advertising and promotional includes media costs and any donations or sponsorships. The annual increase in such expenses is a result of enhanced marketing efforts to attract new and expand existing customer loan and deposit account relationships. Total advertising and promotional expenses are expected to moderately increase during 2023.

Loan and collection includes expenses related to the origination and collection of loans. These expenses increased during the second quarter of 2023 primarily due to homeownership grants awarded to Habitat for Humanity. Loan and collection expenses are expected to decline in future periods as loan growth is expected to moderate throughout 2023.

FDIC insurance premiums typically fluctuate each period based on the size of the balance sheet, capital position and overall risk profile. FDIC insurance premiums have increased in 2023 due to the FDIC increasing its assessment rate for all insured institutions effective January 1, 2023.

ATM and debit card expenses fluctuate based on customer and non-customer utilization of ATMs and customer debit card volumes. We expect these fees to approximate current levels in 2023.

Telephone and communication includes expenses relating to our communication systems. These expenses are expected to approximate current levels during 2023.

Amortization of core deposit intangibles relates to the core deposits acquired from Community Bancorp, Inc. on December 31, 2016 and FSB on December 1, 2021. These core deposit intangibles are being amortized using an accelerated sum-of-years-digits method over their estimated useful lives of seven years.

Other acquisition related expenses includes expenses incurred during the first half of 2022 related to the acquisition of FSB. We do not anticipate recording additional acquisition expenses in future periods.

Other general and administrative includes miscellaneous other expense items. These expenses increased during the second quarter of 2023 partially due to an increase in fraudulent activity (check, ACH and identity theft) on customer accounts. Other general and administrative expenses are expected to increase slightly in future periods.

Balance Sheet Breakdown and Analysis

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
ASSETS          
Cash and due from banks $59,181 $100,496 $57,844 $43,345 $38,510
Total investment securities  117,563  122,995  125,049  129,886  136,725
Residential mortgage loans held-for-sale, at fair value  1,106  875  493  62  664
Gross loans  1,472,288  1,457,173  1,436,166  1,350,851  1,232,892
Less allowance for credit losses  15,400  15,220  13,000  12,200  11,000
Net loans  1,456,888  1,441,953  1,423,166  1,338,651  1,221,892
All other assets  84,081  82,754  82,311  76,648  73,663
Total assets $1,718,819 $1,749,073 $1,688,863 $1,588,592 $1,471,454
  .        
LIABILITIES AND SHAREHOLDERS' EQUITY          
Total deposits $1,380,192 $1,353,918 $1,332,883 $1,345,209 $1,231,543
Total borrowed funds  200,550  259,050  222,350  116,600  111,000
Accrued interest payable and other liabilities  7,387  7,858  7,543  5,153  10,345
Total liabilities  1,588,129  1,620,826  1,562,776  1,466,962  1,352,888
Total shareholders' equity  130,690  128,247  126,087  121,630  118,566
Total liabilities and shareholders' equity $1,718,819 $1,749,073 $1,688,863 $1,588,592 $1,471,454
           


  6/30/2023 vs 3/31/2023 6/30/2023 vs 6/30/2022
  Variance Variance
  Amount % Amount %
ASSETS        
Cash and due from banks $(41,315) (41.11)% $20,671  53.68%
Total investment securities  (5,432) (4.42)%  (19,162) (14.01)%
Residential mortgage loans held-for-sale, at fair value  231  26.40%  442  66.57%
Gross loans  15,115  1.04%  239,396  19.42%
Less allowance for credit losses  180  1.18%  4,400  40.00%
Net loans  14,935  1.04%  234,996  19.23%
All other assets  1,327  1.60%  10,418  14.14%
Total assets $(30,254) (1.73)% $247,365  16.81%
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
Total deposits $26,274  1.94% $148,649  12.07%
Total borrowed funds  (58,500) (22.58)%  89,550  80.68%
Accrued interest payable and other liabilities  (471) (5.99)%  (2,958) (28.59)%
Total liabilities  (32,697) (2.02)%  235,241  17.39%
Total shareholders' equity  2,443  1.90%  12,124  10.23%
Total liabilities and shareholders' equity $(30,254) (1.73)% $247,365  16.81%
         

Cash and due from banks

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Cash and due from banks          
Noninterest bearing $33,028  $24,376  $28,216 $29,530 $26,085 
Interest bearing  26,153   76,120   29,628  13,815  12,425 
Total $59,181  $100,496  $57,844 $43,345 $38,510 
           
  6/30/2023 vs 3/31/2023   6/30/2023 vs 6/30/2022
  Variance   Variance
  Amount %   Amount %
Cash and due from banks          
Noninterest bearing $8,652   35.49%   $6,943  26.62%
Interest bearing  (49,967) (65.64)%    13,728  110.49%
Total $(41,315) (41.11)%   $20,671  53.68%
           

Cash and due from banks fluctuates from period to period based on loan demand and variances in deposit account balances.

Primary and secondary liquidity sources

The following table outlines our primary and secondary sources of liquidity as of:

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Cash and cash equivalents $59,181 $100,496 $57,844 $43,345 $38,510
Fair value of unpledged investment securities  82,041  102,368  103,819  109,685  115,586
FHLB borrowing availability  170,000  111,500  144,567  78,000  83,000
Unsecured lines of credit  20,000  20,000  26,500  26,500  26,500
Funds available through the Fed Discount Window  119  119  113  115  125
Parent company line of credit  1,450  1,450  1,650  2,400  3,000
PPPLF  —  —  —  —  429
Total liquidity sources $332,791 $335,933 $334,493 $260,045 $267,150
           

The increase in cash and cash equivalents during the first quarter of 2023 was due to our utilization of wholesale funding (see "Wholesale funding sources" below), which we did not utilize to the same extent during the second quarter of 2023. The decrease in fair value of unpledged investment securities during the second quarter of 2023 is due to pledging additional securities in our investment portfolio for deposit relationships with collateral agreements. The increase in FHLB borrowing availability during the second quarter of 2023 is due to less utilization of FHLB advances as loan growth has recently moderated.

In addition to the above liquidity sources, we also have the option of utilizing wholesale funding sources, such as brokered NOW accounts, brokered time deposits and internet time deposits. Although wholesale funding sources are typically more expensive than core deposits and other liquidity sources, they are an integral part of our funding.

Investment securities

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Available-for-sale          
U.S. Government and federal agency $24,411  $24,402  $24,394  $26,391  $27,391 
State and municipal  21,110   22,649   22,709   22,743   22,863 
Mortgage backed residential  52,704   54,595   56,293   58,313   60,672 
Certificates of deposit  6,679   7,426   7,426   8,166   8,914 
Collateralized mortgage obligations - agencies  24,680   25,275   25,925   26,560   27,733 
Unrealized gain/(loss) on available-for-sale securities  (14,536)  (13,940)  (14,184)  (14,698)  (13,509)
Total available-for-sale  115,048   120,407   122,563   127,475   134,064 
Held-to-maturity state and municipal  1,081   1,168   1,171   1,173   1,386 
Equity securities  1,434   1,420   1,315   1,238   1,275 
Total investment securities $117,563  $122,995  $125,049  $129,886  $136,725 
           
  6/30/2023 vs 3/31/2023   6/30/2023 vs 6/30/2022
  Variance   Variance
  Amount %   Amount %
Available-for-sale          
U.S. Government and federal agency  9   0.04%   $(2,980) (10.88)%
State and municipal  (1,539) (6.80)%    (1,753) (7.67)%
Mortgage backed residential  (1,891) (3.46)%    (7,968) (13.13)%
Certificates of deposit  (747) (10.06)%    (2,235) (25.07)%
Collateralized mortgage obligations - agencies  (595) (2.35)%    (3,053) (11.01)%
Unrealized gain/(loss) on available-for-sale securities  (596)  4.28%    (1,027)  7.60%
Total available-for-sale  (5,359) (4.45)%    (19,016) (14.18)%
Held-to-maturity state and municipal  (87) (7.45)%    (305) (22.01)%
Equity securities  14   0.99%    159   12.47%
Total investment securities $(5,432) (4.42)%   $(19,162) (14.01)%
           

The amortized cost and fair value of AFS investment securities as of June 30, 2023 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 $6,523 $17,888 $— $— $— $24,411
State and municipal  1,832  16,610  1,287  1,381  —  21,110
Mortgage backed residential  —        52,704  52,704
Certificates of deposit  4,704  1,975  —  —  —  6,679
Collateralized mortgage obligations - agencies  —  —  —  —  24,680  24,680
Total amortized cost $13,059 $36,473 $1,287 $1,381 $77,384 $129,584
Fair value $12,747 $33,065 $1,160 $1,259 $66,817 $115,048
             

The amortized cost and fair value of HTM investment securities as of June 30, 2023 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 $546 $305 $230 $— $— $1,081
Fair value $540 $294 $222 $— $— $1,056
             

Total investment securities have declined primarily due to maturities and prepayments, in addition to our unrealized loss position on available-for-sale investments. Due to the current liquidity environment and overall market conditions, we have not replenished maturing securities with new purchases.

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 credit losses

As outlined in the following tables, our loan portfolio has continued to grow throughout the past 12 months, primarily in the commercial real estate and residential mortgage segments. However, due to current market conditions, we expect minimal loan growth for the remainder of 2023. Specifically, our commercial pipeline has declined significantly since December 31, 2022, and the requests that are being presented are lower dollar balances and often carry an SBA guarantee. Our allowance for credit losses increased $2,000 during the first quarter of 2023 as a result of the adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" on January 1, 2023. This was recorded as a cumulative-effect adjustment, net of tax, from retained earnings. Based on analysis, we provided an additional $180 to our allowance for credit losses during the second quarter of 2023.

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

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Commercial, net of PPP loans $120,985  $111,557  $106,616  $107,531  $108,054 
PPP loans  —   —   —   —   429 
Commercial real estate  870,761   874,690   869,496   820,165   745,416 
Total commercial loans  991,746   986,247   976,112   927,696   853,899 
Residential mortgage  430,065   418,987   406,408   368,971   327,574 
Home equity  45,689   46,909   47,768   47,928   44,648 
Total residential real estate loans  475,754   465,896   454,176   416,899   372,222 
Consumer  4,788   5,030   5,878   6,256   6,771 
Gross loans  1,472,288   1,457,173   1,436,166   1,350,851   1,232,892 
Allowance for credit losses  (15,400)  (15,220)  (13,000)  (12,200)  (11,000)
Loans, net $1,456,888  $1,441,953  $1,423,166  $1,338,651  $1,221,892 
           
Memo items:          
Gross loans, net of PPP loans $1,472,288  $1,457,173  $1,436,166  $1,350,851  $1,232,463 
Residential mortgage loans serviced for others $632,018  $636,121  $647,121  $660,490  $678,117 
           
  6/30/2023 vs 3/31/2023   6/30/2023 vs 6/30/2022
  Variance   Variance
  Amount %   Amount %
Commercial, net of PPP loans $9,428   8.45%   $12,931   11.97%
PPP loans  —  N/M    (429) (100.00)%
Commercial real estate  (3,929) (0.45)%    125,345   16.82%
Total commercial loans  5,499   0.56%    137,847   16.14%
Residential mortgage  11,078   2.64%    102,491   31.29%
Home equity  (1,220) (2.60)%    1,041   2.33%
Total residential real estate loans  9,858   2.12%    103,532   27.81%
Consumer  (242) (4.81)%    (1,983) (29.29)%
Gross loans  15,115   1.04%    239,396   19.42%
Allowance for credit losses  (180)  1.18%    (4,400)  40.00%
Loans, net $14,935   1.04%   $234,996   19.23%
           
Memo items:          
Gross loans, net of PPP loans $15,115   1.04%   $239,825   19.46%
Residential mortgage loans serviced for others $(4,103) (0.65)%   $(46,099) (6.80)%
           

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

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Loans collectively evaluated for impairment          
Commercial and industrial $120,854 $111,426 $106,616 $107,531 $108,483
Commercial real estate  870,580  874,509  869,313  819,982  745,025
Residential mortgage  428,147  416,879  404,308  367,652  326,481
Home equity  45,535  46,761  47,728  47,887  44,607
Consumer  4,788  5,020  5,871  6,251  6,771
Subtotal  1,469,904  1,454,595  1,433,836  1,349,303  1,231,367
Loans individually evaluated for impairment          
Commercial and industrial  131  131  —  —  —
Commercial real estate  181  181  183  183  391
Residential mortgage  1,918  2,108  2,100  1,319  1,093
Home equity  154  148  40  41  41
Consumer  —  10  7  5  —
Subtotal  2,384  2,578  2,330  1,548  1,525
Gross Loans $1,472,288 $1,457,173 $1,436,166 $1,350,851 $1,232,892
           

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

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Loans collectively evaluated for impairment          
Commercial and industrial $1,488 $1,324 $1,094 $1,129 $1,074
Commercial real estate  8,991  8,765  7,480  7,126  6,437
Residential mortgage  4,453  4,576  3,878  3,458  3,061
Home equity  325  416  370  370  345
Consumer  40  49  128  90  74
Unallocated  49  —  —  —  —
Subtotal  15,346  15,130  12,950  12,173  10,991
Loans individually evaluated for impairment          
Commercial and industrial  15  3  —  —  —
Commercial real estate  —  —  —  —  —
Residential mortgage  39  77  43  27  9
Home equity  —  —  —  —  —
Consumer  —  10  7  —  —
Unallocated  —  —  —  —  —
Subtotal  54  90  50  27  9
Allowance for credit losses $15,400 $15,220 $13,000 $12,200 $11,000
           
Commercial and industrial $1,503 $1,327 $1,094 $1,129 $1,074
Commercial real estate  8,991  8,765  7,480  7,126  6,437
Residential mortgage  4,492  4,653  3,921  3,485  3,070
Home equity  325  416  370  370  345
Consumer  40  59  135  90  74
Unallocated  49  —  —  —  —
Allowance for credit losses $15,400 $15,220 $13,000 $12,200 $11,000
           

Loan concentration analysis

As a result of the current economic conditions, there continues to be a heightened focus in the financial industry for non-owner occupied commercial real estate loans, most specifically retail and office space industries. We continue to monitor various industries that have been impacted by the pandemic but we will now shift attention to new concerns associated with inflation, supply chain disruption, rising interest rates, and office space usage associated with an increased remote workforce. The overall non-owner occupied commercial real estate loan portfolio has remained solid, and performance has not been lacking. Performance is based on debt service coverage ratio, loan to value ratio and payment trends. As of June 30, 2023, delinquencies in the non-owner occupied commercial real estate loan portfolio continue to remain minimal, as only one loan was included in our 30-89 days past due category in the office pool for $179. We expect loan demand in the non-owner occupied commercial real estate loan portfolio to experience insignificant growth, if any, in future periods.

The net lease pool is one of the largest growth pools in the non-owner occupied commercial real estate portfolio and continues to remain strong. Risk associated within this pool is minimal as these are national or regional tenants that are well vetted during origination and annually thereafter. Risk is further minimized in this pool as locations are spread out nationally.

Due to the ongoing pressures on the office sector due to remote work capabilities and less required office space, we continue to monitor the office pool more closely for potential deterioration. It is not expected that there will be much, if any, impact on portfolio performance in this pool in the near future due to existing lease terms, tenant mix, office size, and strong underwriting at origination.

Below is a description of each industry pool within the non-owner occupied commercial real estate loan portfolio:

Net lease: Loans in this pool represent national credit tenants (or franchisees of the same) or large regional tenants with excellent credit. These loans are typically single tenant net lease credits with strong debt service coverage ratios and lease terms that extend beyond the maturity of the loan.

Retail strip centers: Loans in this pool represent loans collateralized by retail strip centers. The tenant base within this pool consists primarily of retail space whose average lease periods run between one and ten years. Larger strip centers are usually anchored by a national or regional tenant. Guarantors in this category typically have large liquid reserves.

Office: Loans in this pool represent loans collateralized by non-owner occupied office buildings. The tenant base includes legal and other professional services whose average lease periods run from three to fifteen years.

Special use: Loans in this pool represent loans collateralized by special use buildings, which include hotels, motels, assisted living and nursing homes that are not classified as construction or SBA loans.

Medical office: Loans in this pool represent loans collateralized by non-owner occupied medical office buildings. The tenant base includes medical services whose average lease periods run from three to fifteen years.

Industrial: Loans in pool represent investment properties used for manufacturing and production.

Self storage: Loans in this pool represent self storage buildings. Loan terms are generally five years or less and the lease terms of the units are typically on a month-to-month basis.

Mixed use: Loans in this pool represent loans collateralized by mixed use real estate. The tenant base within this pool consists primarily of office-retail, office-residential or retail-residential space. The properties are most often purchased by individuals for investment purposes.

Retail: Loans in this pool represent loans collateralized by single tenant retail buildings whose average lease periods run over five years.

The following tables present the composition of current and historical non-owner occupied commercial real estate loans, based on loan collateral, by industry pool:

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Net lease $159,199  $161,392  $165,848 $160,453  $162,424 
Retail strip centers  96,310   95,726   89,671  85,050   69,598 
Office  62,062   59,867   60,166  58,997   42,556 
Special use  57,978   41,932   35,284  25,289   26,576 
Medical office  28,752   30,363   30,305  29,679   26,890 
Industrial  28,661   29,025   30,396  32,222   28,235 
Self storage  22,169   22,265   22,285  22,467   10,736 
Mixed use  19,412   19,054   19,208  19,405   16,520 
Retail  14,998   17,429   15,437  15,279   13,597 
           
Total non-owner occupied commercial loans $489,541  $477,053  $468,600 $448,841  $397,132 
           
  6/30/2023 vs 3/31/2023   6/30/2023 vs 6/30/2022
  Variance   Variance
  Amount %   Amount %
Net lease $(2,193) (1.36)%   $(3,225) (1.99)%
Retail strip centers  584   0.61%    26,712   38.38%
Office  2,195   3.67%    19,506   45.84%
Special use  16,046   38.27%    31,402   118.16%
Medical office  (1,611) (5.31)%    1,862   6.92%
Industrial  (364) (1.25)%    426   1.51%
Self storage  (96) (0.43)%    11,433   106.49%
Mixed use  358   1.88%    2,892   17.51%
Retail  (2,431) (13.95)%    1,401   10.30%
           
Total non-owner occupied commercial loans $12,488   2.62%   $92,409   23.27%
           

The following table presents current and historical non-owner occupied commercial real estate loans by industry as a percentage of gross loans:

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Net lease 10.81% 11.08% 11.55% 11.88% 13.17%
Retail strip centers 6.54% 6.57% 6.24% 6.30% 5.65%
Office 4.22% 4.11% 4.19% 4.37% 3.45%
Special use 3.94% 2.88% 2.46% 1.87% 2.16%
Medical office 1.95% 2.08% 2.11% 2.20% 2.18%
Industrial 1.95% 1.99% 2.12% 2.39% 2.29%
Self storage 1.51% 1.53% 1.55% 1.66% 0.87%
Mixed use 1.32% 1.31% 1.34% 1.44% 1.34%
Retail 1.02% 1.20% 1.07% 1.13% 1.10%
           
Total non-owner occupied commercial loans to gross loans 33.26% 32.75% 32.63% 33.24% 32.21%
           

Asset quality

The following table summarizes our current, past due, and nonaccrual loans as of:

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Accruing interest          
Current $1,466,354 $1,449,266 $1,428,691 $1,346,141 $1,228,082
Past due 30-89 days  3,550  5,185  5,182  3,131  2,802
Past due 90 days or more  —  144  —  71  525
Total accruing interest  1,469,904  1,454,595  1,433,873  1,349,343  1,231,409
Nonaccrual  2,384  2,578  2,293  1,508  1,483
Total loans $1,472,288 $1,457,173 $1,436,166 $1,350,851 $1,232,892
Total loans past due and in nonaccrual status $5,934 $7,907 $7,475 $4,710 $4,810
           

The following table summarizes the our nonperforming assets as of:

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Nonaccrual loans $2,384 $2,578 $2,293 $1,508 $1,483
Accruing loans past due 90 days or more  —  144  —  71  525
Total nonperforming loans  2,384  2,722  2,293  1,579  2,008
Other real estate owned  345  293  293  293  383
Total nonperforming assets $2,729 $3,015 $2,586 $1,872 $2,391
           

The following table summarizes our charge-offs, recoveries and provision for loan losses as of, and for the three-month periods ended:

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Total charge-offs $42 $28 $58 $40 $533
Total recoveries  17  12  11  9  8
Net charge-offs (recoveries) $25 $16 $47 $31 $525
Provision for loan losses $205 $236 $847 $1,231 $525
           

The following table summarizes the our primary asset quality measures as of:

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Nonperforming loans to gross loans 0.16% 0.19% 0.16% 0.12% 0.16%
Nonperforming assets to total assets 0.16% 0.17% 0.15% 0.12% 0.16%
Allowance for credit losses to gross loans 1.05% 1.04% 0.91% 0.90% 0.89%
Allowance for credit losses to gross loans, net of PPP loans 1.05% 1.04% 0.91% 0.90% 0.89%
Net charge-offs (recoveries) to QTD average gross loans —% —% —% —% 0.04%
Provision for loan losses to QTD average gross loans 0.01% 0.02% 0.06% 0.10% 0.04%
           

The following table summarizes our net unamortized premium (discount) on purchased loans as of:

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Net unamortized premium (discount) on purchased loans $— $— $— $(25) $(51)
                  

The following table summarizes the average loan size as of:

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Commercial and industrial $346 $312 $311 $314 $309
Commercial real estate  885  895  890  851  802
Total commercial loans  743  739  740  711  667
Residential mortgage  234  228  225  217  208
Home equity  51  52  52  52  50
Total residential real estate loans  174  170  166  159  151
Consumer  12  13  13  14  14
Gross loans $333 $328 $323 $311 $292
           

All other assets

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

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Premises and equipment, net $15,345  $15,219  $15,571 $16,100  $16,459 
Federal Home Loan Bank stock  11,498   10,958   10,215  5,760   4,140 
Corporate owned life insurance  27,047   26,869   26,697  26,522   26,350 
Mortgage servicing rights  8,765   8,773   8,666  8,795   8,588 
Accrued interest receivable  3,992   3,976   4,002  3,300   2,798 
Goodwill  8,853   8,853   8,853  8,853   8,853 
Other assets          
Core deposit intangibles  684   760   836  943   1,051 
Right-of-use assets  1,510   1,107   1,204  1,065   1,159 
Other real estate owned  345   293   293  293   383 
Other  6,042   5,946   5,974  5,017   3,882 
Total  8,581   8,106   8,307  7,318   6,475 
All other assets $84,081  $82,754  $82,311 $76,648  $73,663 
           
  6/30/2023 vs 3/31/2023   6/30/2023 vs 6/30/2022
  Variance   Variance
  Amount %   Amount %
Premises and equipment, net $126   0.83%   $(1,114) (6.77)%
Federal Home Loan Bank stock  540   4.93%    7,358   177.73%
Corporate owned life insurance  178   0.66%    697   2.65%
Mortgage servicing rights  (8) (0.09)%    177   2.06%
Accrued interest receivable  16   0.40%    1,194   42.67%
Goodwill  —   —%    —   —%
Other assets          
Core deposit intangibles  (76) (10.00)%    (367) (34.92)%
Right-of-use assets  403   36.40%    351   30.28%
Other real estate owned  52   17.75%    (38) (9.92)%
Other  96   1.61%    2,160   55.64%
Total  475   5.86%    2,106   32.53%
All other assets $1,327   1.60%   $10,418   14.14%
           

The increase in FHLB stock throughout 2022 and into 2023 is a direct result of an increase in FHLB advances to support our continued loan growth. However, as loan growth has recently moderated, our reliance on FHLB advances has declined. As such, we anticipate our FHLB stock balance will remain consistent in future periods.

The increase in right-of-use assets in the second quarter of 2023 was primarily due to a lease renewal for office equipment.

Total deposits

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

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Noninterest bearing demand $457,204  $457,585  $461,390 $500,204  $493,262 
Interest bearing          
Savings  301,872   323,254   351,066  380,118   368,849 
Money market demand  221,686   214,781   170,459  213,672   144,606 
NOW          
Retail NOW  161,765   155,659   136,611  148,775   118,707 
Brokered NOW  —   60,005   40,009  —   — 
           
Total NOW Accounts  161,765   215,664   176,620  148,775   118,707 
Time deposits          
Other time deposits  176,280   121,567   102,358  80,454   84,376 
Brokered time deposits  60,395   20,077   70,000  20,000   20,000 
Internet time deposits  990   990   990  1,986   1,743 
           
Total time deposits  237,665   142,634   173,348  102,440   106,119 
           
Total deposits $1,380,192  $1,353,918  $1,332,883 $1,345,209  $1,231,543 
           
  6/30/2023 vs 3/31/2023   6/30/2023 vs 6/30/2022
  Variance   Variance
  Amount %   Amount %
Noninterest bearing demand $(381) (0.08)%   $(36,058) (7.31)%
Interest bearing          
Savings  (21,382) (6.61)%    (66,977) (18.16)%
Money market demand  6,905   3.21%    77,080   53.30%
NOW          
Retail NOW  6,106   3.92%    43,058   36.27%
Brokered NOW  (60,005) (100.00)%    —   —%
           
Total NOW Accounts  (53,899) (24.99)%    43,058   36.27%
Time deposits          
Other time deposits  54,713   45.01%    91,904   108.92%
Brokered time deposits  40,318   200.82%    40,395   201.98%
Internet time deposits  —   —%    (753) (43.20)%
           
Total time deposits  95,031   66.63%    131,546   123.96%
           
Total deposits $26,274   1.94%   $148,649   12.07%
           

Beginning in March 2022, the FOMC began raising its target federal funds rate in order to combat rising inflation. Since then, the FOMC has raised its target federal funds rate 10 times, from a target range of 0.00-0.25% to 5.00-5.25%, or 500 basis points. This rapid increase in interest rates has led to significant competition amongst financial institutions for deposits. Due to the expectation that interest rates may continue to rise, customers have not sought out long-term funds, leading to a shift in demand to higher-yielding non-maturity deposit accounts as well as short-term time deposits. While overall market liquidity continues to tighten and be extremely competitive, we have strategic initiatives in place to grow core market deposits throughout 2023.

As a result of the competitive deposit market and customer demand shifting to non-maturity deposit accounts and short-term time deposits, we navigated away from brokered NOW accounts and executed two brokered time deposits during the second quarter of 2023 totaling $40,251, which were split between two- and three-year maturities.

Total borrowed funds

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

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Federal Home Loan Bank borrowings $180,000  $238,500  $202,000 $97,000 $92,000 
Subordinated debentures  14,000   14,000   14,000  14,000  14,000 
Other borrowings  6,550   6,550   6,350  5,600  5,000 
Total borrowed funds $200,550  $259,050  $222,350 $116,600 $111,000 
           
  6/30/2023 vs 3/31/2023   6/30/2023 vs 6/30/2022
  Variance   Variance
  Amount %   Amount %
Federal Home Loan Bank borrowings $(58,500) (24.53)%   $88,000  95.65%
Subordinated debentures  —   —%    —  —%
Other borrowings  —   —%    1,550  31.00%
Total borrowed funds $(58,500) (22.58)%   $89,550  80.68%
           

We utilize a mix of borrowed funds and organic deposit growth to fund loan demand. The increase in Federal Home Loan Bank borrowings throughout 2022 and into the first quarter of 2023 was the result of the highly competitive deposit landscape and the growth of our loan portfolio, which grew $239,825, or 19.46%, net of PPP loans, since the second quarter of 2022 (see "Wholesale funding sources" below). However, as loan growth has recently moderated, our reliance on FHLB advances declined during the second quarter of 2023.

Wholesale funding sources

Although we have been successful at growing market deposits, we utilize wholesale funding sources when necessary to fill gaps when asset growth outpaces deposit growth. Our wholesale funding sources include Federal Home Loan Bank borrowings, correspondent Fed Funds lines and brokered deposits. Although wholesale funding sources are typically more expensive than core deposits, they are an integral part of our funding.

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

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Federal Home Loan Bank borrowings $180,000  $238,500  $202,000 $97,000  $92,000 
Subordinated debentures  14,000   14,000   14,000  14,000   14,000 
Other borrowings  6,550   6,550   6,350  5,600   5,000 
Brokered NOW accounts  —   60,005   40,009  —   — 
Brokered time deposits  60,395   20,077   70,000  20,000   20,000 
Internet time deposits  990   990   990  1,986   1,743 
Total wholesale funds $261,935  $340,122  $333,349 $138,586  $132,743 
           
  6/30/2023 vs 3/31/2023   6/30/2023 vs 6/30/2022
  Variance   Variance
  Amount %   Amount %
Federal Home Loan Bank borrowings $(58,500) (24.53)%    88,000   95.65%
Subordinated debentures  —   —%    —   —%
Other borrowings  —   —%    1,550   31.00%
Brokered NOW accounts  (60,005) (100.00)%    —  N/A
Brokered time deposits  40,318   200.82%    40,395   201.98%
Internet time deposits  —   —%    (753) (43.20)%
Total wholesale funds $(78,187) (22.99)%   $129,192   97.32%
           

As noted above, the increased competition for deposits, coupled with strong loan growth has led to an increased utilization of wholesale funding sources. During the second quarter of 2023, our reliance on wholesale funding sources decreased, as our outstanding FHLB borrowings declined $58,500 and brokered NOW accounts declined $60,005. However, we replaced a portion of these wholesale funds by executing two brokered time deposits during the second quarter of 2023 totaling $40,251.

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).

Total shareholders' equity

We are considered a “well-capitalized” institution, as our capital ratios exceed the minimum designated standards necessary in accordance with Basel III guidelines. As of June 30, 2023, the Bank's total capital ratio was 11.51%, tier 1 capital ratio was 10.43%, and tier 1 leverage ratio was 8.71%. The minimum requirements to be considered well-capitalized are a total capital ratio of 10.00%, tier 1 capital ratio of 8.00%, and tier 1 leverage ratio of 5.00%. While we continue to be considered well-capitalized, we are focused on enhancing our capital ratios through asset growth moderation strategies.

The following tables outline the composition and changes in shareholders' equity as of:

  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Common stock $73,993  $73,868  $73,569  $73,460  $73,324 
Retained earnings  67,643   64,863   63,044   59,080   55,469 
Accumulated other comprehensive (loss) income  (10,946)  (10,484)  (10,526)  (10,910)  (10,227)
Total shareholders' equity $130,690  $128,247  $126,087  $121,630  $118,566 
           
  6/30/2023 vs 3/31/2023   6/30/2023 vs 6/30/2022
  Variance   Variance
  Amount %   Amount %
Common stock $125   0.17%   $669   0.91%
Retained earnings  2,780   4.29%    12,174   21.95%
Accumulated other comprehensive (loss) income  (462)  4.41%    (719)  7.03%
Total shareholders' equity $2,443   1.90%   $12,124   10.23%
           

The Board of Directors has authorized the repurchase of up to $10,000 of common stock. As of June 30, 2023, we had $1,393 of common stock available to repurchase through the program. The following tables outline the number of shares, dollar amount and weighted average share price associated with the common stock repurchase plan for the following periods:

  Three Months Ended
  6/30/2023 3/31/2023 12/31/2022 9/30/2022 6/30/2022
Number of Shares Repurchased  —  —  —  —  35,000
Dollar Amount of Shares Repurchased $— $— $— $— $935
Weighted Average Share Price N/A N/A N/A N/A $26.71
            

Stock Performance

The following graph compares the cumulative total shareholder return on our 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 our common stock and the ABA NASDAQ Community Bank Index was $100 at June 30, 2018 and all dividends were reinvested.

The graph accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/eb538d8e-5144-4f8e-b7f3-a54ee300dc61

Date FETM ABAQ Index
6/30/2018 $100.00 $100.00
6/30/2019  98.86  88.28
6/30/2020  84.83  65.25
6/30/2021  127.30  101.13
6/30/2022  124.17  92.66
6/30/2023  99.19  74.26

Abbreviations and Acronyms

ABA: American Bankers AssociationFTE: Fully taxable equivalent
ACH: Automated Clearing HouseGAAP: Generally Accepted Accounting Principles
ACL: Allowance for credit lossesHFS: Held-for-sale
AFS: Available-for-saleHTM: Held-to-maturity
AIR: Accrued interest receivableHFS: Held-for-sale
AOCI: Accumulated other comprehensive incomeHTM: Held-to-maturity
ARRC: Alternative Reference Rates CommitteeIRA: Individual retirement account
ASC: Accounting Standards CodificationITM: Interactive Teller Machine
ASU: Accounting Standards UpdateLIBOR: London Interbank Offered Rate
ATM: Automated teller machineMSR: Mortgage servicing rights
CARES Act: Coronavirus Aid, Relief, and Economic Security ActN/M: Not meaningful
CDI: Core deposit intangibleNASDAQ: National Association of Securities Dealers Automated Quotations
CET1: Common equity tier 1NOW: Negotiable order of withdrawal
COLI: Corporate owned life insuranceNSF: Non-sufficient funds
COVID-19: Coronavirus Disease 2019OCI: Other comprehensive income
DRIP: Dividend Reinvestment PlanOIS: Overnight Index Swap
EPS: Earnings Per Common ShareOREO: Other real estate owned
ESOP: Employee Stock Ownership PlanOTTI: Other-than-temporary impairment
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
FHLLC: Fentura Holdings LLCSAB: Staff Accounting Bulletin
FHLMC: Federal Home Loan Mortgage CorporationSBA: U.S. Small Business Administration
FNMA: Federal National Mortgage AssociationSEC: Securities and Exchange Commission
FOMC: Federal Open Market CommitteeSERP: Supplemental Executive Retirement Plan
FRB: Federal Reserve BankSOFR: Secured Overnight Funding Rate
FSB: Farmers State Bank of MunithTDR: Troubled debt restructuring
  

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 has been recognized as one of the Top 50 performing stocks on that exchange.

The State Bank is a commercial, retail and trust bank headquartered in Fenton, Michigan. It currently operates 20 full-service offices and one loan production center serving Bay, Genesee, Ingham, Jackson, Livingston, Oakland, Saginaw, and Shiawassee counties. The State Bank believes in the potential of banking to help create better lives, better businesses, and better communities, and works to achieve this through its full array of consumer, mortgage, SBA, commercial and wealth management banking and advisory services, together with philanthropic and volunteer support to organizations and groups within the communities it serves. 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

Figure 1

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