Fentura Financial, Inc. Announces Third Quarter 2024 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 September 30, 2024 presentation.

FENTON, Mich., Oct. 25, 2024 (GLOBE NEWSWIRE) -- Fentura Financial, Inc. (OTCQX: FETM) announces quarterly net income results of $867 and $5,637 for the three and nine months ended September 30, 2024, respectively.

Ronald L. Justice, President and CEO, stated, “We ended the 2024 third quarter with record total assets, deposits, and shareholders’ equity. These results are a testament to the continued hard work of our team members, and the local value we provide our Michigan communities. During the third quarter, we announced a merger with ChoiceOne Financial Services, Inc., pursuant to which ChoiceOne and Fentura will merge in an all-stock transaction. Once completed, the combination will create the third largest publicly traded bank in Michigan with approximately $4.3 billion in consolidated total assets and 56 offices in Western, Central and Southeastern Michigan. We continue to expect to close the transaction in the first quarter of 2025, subject to the satisfaction of customary closing conditions and regulatory approvals.”

Following is a discussion of our financial performance as of, and for the three and nine months ended September 30, 2024. 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:

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
INCOME STATEMENT DATA          
Interest income $22,194  $21,487  $21,541  $21,033  $20,416 
Interest expense  10,202   9,650   9,315   8,526   7,757 
Net interest income  11,992   11,837   12,226   12,507   12,659 
Credit loss expense (reversal)  1,203   796   (43)  (190)  (309)
Noninterest income  2,210   2,314   2,355   2,145   2,338 
Noninterest expenses  11,974   10,921   11,166   10,121   10,594 
Federal income tax expense  158   454   668   937   937 
Net income $867  $1,980  $2,790  $3,784  $3,775 
PER SHARE          
Earnings $0.19  $0.44  $0.63  $0.85  $0.85 
Dividends $0.11  $0.11  $0.11  $0.10  $0.10 
Tangible book value(1) $30.51  $29.84  $29.38  $28.92  $27.64 
Quoted market value          
High $40.00  $24.39  $27.20  $27.20  $23.74 
Low $22.16  $22.33  $24.00  $22.26  $19.10 
Close(1) $39.07  $22.50  $24.40  $27.20  $23.74 
PERFORMANCE RATIOS          
Return on average assets  0.19%  0.45%  0.63%  0.86%  0.86%
Return on average shareholders' equity  2.37%  5.59%  7.98%  11.11%  11.27%
Return on average tangible shareholders' equity  2.54%  5.98%  8.55%  11.94%  12.14%
Efficiency ratio  84.31%  77.17%  76.58%  69.08%  70.64%
Yield on average earning assets (FTE)  5.17%  5.18%  5.15%  5.06%  4.92%
Rate on interest bearing liabilities  3.28%  3.22%  3.11%  2.90%  2.66%
Net interest margin to average earning assets (FTE)  2.80%  2.85%  2.92%  3.01%  3.05%
BALANCE SHEET DATA(1)          
Total investment securities $99,724  $100,167  $103,210  $107,615  $109,543 
Gross loans $1,442,389  $1,459,929  $1,461,465  $1,473,471  $1,483,720 
Allowance for credit losses $14,700  $15,300  $15,300  $15,400  $15,400 
Total assets $1,807,370  $1,756,629  $1,764,629  $1,738,952  $1,744,939 
Total deposits $1,470,586  $1,427,059  $1,438,408  $1,394,182  $1,401,797 
Borrowed funds $179,970  $178,397  $178,500  $198,500  $201,050 
Total shareholders' equity $146,398  $143,301  $141,074  $138,702  $132,902 
Net loans to total deposits  97.08%  101.23%  100.54%  104.58%  104.75%
Common shares outstanding  4,495,005   4,490,087   4,484,447   4,470,871   4,466,221 
QTD BALANCE SHEET AVERAGES          
Total assets $1,797,307  $1,762,651  $1,771,614  $1,740,526  $1,739,510 
Earning assets $1,708,177  $1,669,862  $1,683,708  $1,649,091  $1,646,848 
Interest bearing liabilities $1,237,665  $1,204,370  $1,205,162  $1,165,064  $1,156,835 
Total shareholders' equity $145,240  $142,577  $140,574  $135,157  $132,860 
Total tangible shareholders' equity $135,959  $133,252  $131,204  $125,723  $123,349 
Earned common shares outstanding  4,466,951   4,461,580   4,449,376   4,443,463   4,437,415 
Unvested stock grants  26,500   26,500   31,821   26,018   26,668 
Total common shares outstanding  4,493,451   4,488,080   4,481,197   4,469,481   4,464,083 
ASSET QUALITY          
Nonperforming loans to gross loans (1)  0.71%  0.66%  0.39%  0.38%  0.24%
Nonperforming assets to total assets (1)  0.58%  0.56%  0.34%  0.35%  0.23%
Allowance for credit losses to gross loans (1)  1.02%  1.05%  1.05%  1.05%  1.04%
Net charge-offs (recoveries) to QTD average gross loans  0.12%  0.05%  —% (0.01)% (0.03)%
Credit loss expense (reversal) to QTD average gross loans  0.08%  0.05%  —% (0.01)% (0.02)%
CAPITAL RATIOS(1)          
Total capital to risk weighted assets  12.48%  12.38%  12.27%  11.91%  11.59%
Tier 1 capital to risk weighted assets  11.42%  11.28%  11.17%  10.82%  10.51%
CET1 capital to risk weighted assets  10.40%  10.28%  10.17%  9.83%  9.53%
Tier 1 leverage ratio  8.78%  8.92%  8.78%  8.77%  8.58%
           
(1)At end of period          


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

  9/30/2024 9/30/2023 9/30/2022 9/30/2021 9/30/2020
INCOME STATEMENT DATA          
Interest income $65,222  $58,648  $41,438  $35,161  $34,355 
Interest expense  29,167   19,561   3,122   2,091   4,952 
Net interest income  36,055   39,087   38,316   33,070   29,403 
Credit loss expense (reversal)  1,956   132   2,258   (218)  4,652 
Noninterest income  6,879   7,126   7,997   11,092   15,190 
Noninterest expenses  34,061   32,547   30,870   27,815   23,939 
Federal income tax expense  1,280   2,689   2,616   3,328   3,271 
Net income $5,637  $10,845  $10,569  $13,237  $12,731 
PER SHARE          
Earnings $1.26  $2.45  $2.39  $2.86  $2.73 
Dividends $0.33  $0.3  $0.27  $0.24  $0.225 
Tangible book value(1) $30.51  $27.64  $25.22  $26.53  $23.50 
Quoted market value          
High $40.00  $24.10  $29.25  $27.40  $26.00 
Low $22.16  $18.70  $23.00  $21.90  $12.55 
Close(1) $39.07  $23.74  $23.00  $25.75  $16.93 
PERFORMANCE RATIOS          
Return on average assets  0.42%  0.85%  0.95%  1.36%  1.45%
Return on average shareholders' equity  5.27%  11.15%  11.71%  14.55%  15.79%
Return on average tangible shareholders' equity  5.64%  12.03%  12.75%  15.00%  16.40%
Efficiency ratio  79.33%  70.43%  66.66%  62.98%  53.68%
Yield on average earning assets (FTE)  5.17%  4.84%  3.99%  3.83%  4.12%
Rate on interest bearing liabilities  3.20%  2.35%  0.49%  0.37%  0.93%
Net interest margin to average earning assets (FTE)  2.86%  3.23%  3.69%  3.60%  3.52%
BALANCE SHEET DATA(1)          
Total investment securities $99,724  $109,543  $129,886  $138,476  $78,179 
Gross loans $1,442,389  $1,483,720  $1,350,851  $1,015,177  $1,060,885 
Allowance for credit losses $14,700  $15,400  $12,200  $10,500  $10,100 
Total assets $1,807,370  $1,744,939  $1,588,592  $1,329,300  $1,284,845 
Total deposits $1,470,586  $1,401,797  $1,345,209  $1,144,291  $1,061,470 
Borrowed funds $179,970  $201,050  $116,600  $50,000  $96,217 
Total shareholders' equity $146,398  $132,902  $121,630  $124,809  $114,081 
Net loans to total deposits  97.08%  104.75%  99.51%  87.80%  98.99%
Common shares outstanding  4,495,005   4,466,221   4,434,937   4,569,935   4,691,142 
YTD BALANCE SHEET AVERAGES          
Total assets $1,777,188  $1,710,941  $1,485,489  $1,297,657  $1,171,415 
Earning assets $1,687,249  $1,620,015  $1,391,179  $1,230,553  $1,116,861 
Interest bearing liabilities $1,215,731  $1,111,687  $858,600  $748,472  $711,449 
Total shareholders' equity $142,796  $130,068  $120,704  $121,659  $107,711 
Total tangible shareholders' equity $133,470  $120,482  $110,792  $117,991  $103,712 
Earned common shares outstanding  4,459,303   4,428,963   4,425,818   4,630,709   4,665,951 
Unvested stock grants  28,274   28,530   25,462   21,088   13,966 
Total common shares outstanding  4,487,577   4,457,493   4,451,280   4,651,797   4,679,917 
ASSET QUALITY          
Nonperforming loans to gross loans (1)  0.71%  0.24%  0.12%  0.82%  0.07%
Nonperforming assets to total assets (1)  0.58%  0.23%  0.12%  0.63%  0.06%
Allowance for credit losses to gross loans (1)  1.02%  1.04%  0.90%  1.03%  0.95%
Net charge-offs (recoveries) to YTD average gross loans  0.18% (0.03)%  0.05%  0.02%  0.03%
Credit loss expense (reversal) to YTD average gross loans  0.13%  0.01%  0.19% (0.02)%  0.44%
CAPITAL RATIOS(1)          
Total capital to risk weighted assets  12.48%  11.59%  10.96%  13.63%  15.57%
Tier 1 capital to risk weighted assets  11.42%  10.51%  10.07%  12.64%  14.40%
CET1 capital to risk weighted assets  10.40%  9.53%  9.04%  11.33%  12.77%
Tier 1 leverage ratio  8.78%  8.58%  8.91%  10.21%  9.86%
           
(1)At end of period          

Income Statement Breakdown and Analysis

  Quarter to Date
  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Net income $867  $1,980  $2,790  $3,784  $3,775 
Acquisition related items (net of tax)          
Other acquisition related expenses  753   —   —   —   — 
Amortization of core deposit intangibles  35   34   36   60   60 
Total acquisition related items (net of tax)  788   34   36   60   60 
Other nonrecurring items (net of tax)          
Proxy contest related expenses  —   —   —   —   — 
Prepayment penalties collected  (24)  (40)  (58)  (85)  (29)
Total other nonrecurring items (net of tax)  (24)  (40)  (58)  (85)  (29)
Adjusted net income from operations $1,631  $1,974  $2,768  $3,759  $3,806 
           
Net interest income $11,992  $11,837  $12,226  $12,507  $12,659 
Prepayment penalties collected  (31)  (51)  (73)  (107)  (37)
Adjusted net interest income $11,961  $11,786  $12,153  $12,400  $12,622 
           
PERFORMANCE RATIOS          
Based on adjusted net income from operations          
Earnings per share $0.37  $0.44  $0.62  $0.85  $0.86 
Return on average assets  0.36%  0.45%  0.63%  0.86%  0.87%
Return on average shareholders' equity  4.47%  5.57%  7.92%  11.03%  11.37%
Return on average tangible shareholders' equity  4.77%  5.96%  8.49%  11.86%  12.24%
Efficiency ratio  77.45%  77.15%  76.65%  69.06%  70.31%
           
Based on adjusted net interest income          
Yield on average earning assets (FTE)  5.16%  5.17%  5.13%  5.03%  4.91%
Rate on interest bearing liabilities  3.28%  3.22%  3.11%  2.90%  2.66%
Net interest margin to average earning assets (FTE)  2.79%  2.84%  2.90%  2.98%  3.04%
           


  Year to Date September 30 Variance
   2024   2023  Amount %
Net income $5,637  $10,845  $(5,208) (48.02)%
Acquisition related items (net of tax)        
Other acquisition related expenses  753   —   753  N/M
Amortization of core deposit intangibles  105   180   (75) (41.67)%
Total acquisition related items (net of tax)  858   180   678  376.67%
Other nonrecurring items (net of tax)        
Proxy contest related expenses  —   413   (413) (100.00)%
Prepayment penalties collected  (122)  (133)  11  (8.27)%
Total other nonrecurring items (net of tax)  (122)  280   (402) (143.57)%
Adjusted net income from operations $6,373  $11,305  $(4,932) (43.63)%
         
Net interest income $36,055  $39,087  $(3,032) (7.76)%
Prepayment penalties collected  (155)  (169)  14  (8.28)%
Adjusted net interest income $35,900  $38,918  $(3,018) (7.75)%
         
PERFORMANCE RATIOS        
Based on adjusted net income from operations        
Earnings per share $1.43  $2.55  $(1.12) (43.92)%
Return on average assets  0.48%  0.88%   (0.40)%
Return on average shareholders' equity  5.96%  11.62%   (5.66)%
Return on average tangible shareholders' equity  6.38%  12.55%   (6.17)%
Efficiency ratio  77.08%  69.06%   8.02%
         
Based on adjusted net interest income        
Yield on average earning assets (FTE)  5.16%  4.83%   0.33%
Rate on interest bearing liabilities  3.20%  2.35%   0.85%
Net interest margin to average earning assets (FTE)  2.85%  3.22%   (0.37)%
         

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
  September 30, 2024 June 30, 2024 September 30, 2023
   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 $1,450,371  $19,599 5.38% $1,462,362  $19,550 5.38% $1,477,343  $19,170 5.15%
Taxable investment securities  89,175   335 1.49%  89,751   350 1.57%  101,549   397 1.55%
Nontaxable investment securities  10,580   57 2.14%  11,059   62 2.25%  12,670   70 2.19%
Interest earning cash and cash equivalents  148,872   2,023 5.41%  97,511   1,331 5.49%  43,865   594 5.37%
Federal Home Loan Bank stock  9,179   192 8.32%  9,179   207 9.07%  11,421   199 6.91%
Total earning assets  1,708,177   22,206 5.17%  1,669,862   21,500 5.18%  1,646,848   20,430 4.92%
                   
Nonearning assets                  
Allowance for credit losses  (15,282)      (15,300)      (15,503)    
Premises and equipment, net  13,514       13,964       15,210     
Accrued income and other assets  90,898       94,125       92,955     
Total assets $1,797,307      $1,762,651      $1,739,510     
                   
Interest bearing liabilities                  
Interest bearing demand deposits $460,256  $4,054 3.50% $429,141  $3,745 3.51% $416,500  $3,230 3.08%
Savings deposits  261,620   416 0.63%  266,731   408 0.62%  290,939   429 0.59%
Time deposits  336,570   3,865 4.57%  330,024   3,756 4.58%  248,389   2,280 3.64%
Borrowed funds  179,219   1,867 4.14%  178,474   1,741 3.92%  201,007   1,818 3.59%
Total interest bearing liabilities  1,237,665   10,202 3.28%  1,204,370   9,650 3.22%  1,156,835   7,757 2.66%
                   
Noninterest bearing liabilities                  
Noninterest bearing deposits  402,274       405,985       435,398     
Accrued interest and other liabilities  12,128       9,719       14,417     
Shareholders' equity  145,240       142,577       132,860     
Total liabilities and shareholders' equity $1,797,307      $1,762,651      $1,739,510     
Net interest income (FTE)   $12,004     $11,850     $12,673  
Net interest margin to earning assets (FTE)     2.80%     2.85%     3.05%
                   


  Nine Months Ended
  September 30, 2024 September 30, 2023
  Average Balance Tax Equivalent Interest Average Yield / Rate Average Balance Tax Equivalent Interest Average Yield / Rate
Interest earning assets            
Total loans $1,461,289  $58,758 5.37% $1,464,959  $55,749 5.09%
Taxable investment securities  91,041   1,044 1.53%  106,158   1,250 1.57%
Nontaxable investment securities  11,200   186 2.22%  13,403   227 2.26%
Interest earning cash and cash equivalents  114,540   4,673 5.45%  24,484   955 5.21%
Federal Home Loan Bank stock  9,179   600 8.73%  11,011   515 6.25%
Total earning assets  1,687,249   65,261 5.17%  1,620,015   58,696 4.84%
             
Nonearning assets            
Allowance for credit losses  (15,328)      (15,290)    
Premises and equipment, net  13,957       15,342     
Accrued income and other assets  91,310       90,874     
Total assets $1,777,188      $1,710,941     
             
Interest bearing liabilities            
Interest bearing demand deposits $436,997  $11,358 3.47% $385,316  $7,927 2.75%
Savings deposits  266,883   1,237 0.62%  312,762   1,336 0.57%
Time deposits  331,113   11,265 4.54%  196,838   4,595 3.12%
Borrowed funds  180,738   5,307 3.92%  216,771   5,703 3.52%
Total interest bearing liabilities  1,215,731   29,167 3.20%  1,111,687   19,561 2.35%
             
Noninterest bearing liabilities            
Noninterest bearing deposits  408,449       455,069     
Accrued interest and other liabilities  10,212       14,117     
Shareholders' equity  142,796       130,068     
Total liabilities and shareholders' equity $1,777,188      $1,710,941     
Net interest income (FTE)   $36,094     $39,135  
Net interest margin to earning assets (FTE)     2.86%     3.23%
             

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, 2024 September 30, 2024 September 30, 2024
  Compared To Compared To Compared To
  June 30, 2024 September 30, 2023 September 30, 2023
  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 $49  $—  $49  $(1,847) $2,276  $429  $(227) $3,236  $3,009 
Taxable investment securities  (2)  (13)  (15)  (47)  (15)  (62)  (175)  (31)  (206)
Nontaxable investment securities  (2)  (3)  (5)  (12)  (1)  (13)  (37)  (4)  (41)
Interest earning cash and cash equivalents  825   (133)  692   1,424   5   1,429   3,672   46   3,718 
Federal Home Loan Bank stock  —   (15)  (15)  (161)  154   (7)  (137)  222   85 
Total changes in interest income  870   (164)  706   (643)  2,419   1,776   3,096   3,469   6,565 
                   
Changes in interest expense                  
Interest bearing demand deposits  380   (71)  309   359   465   824   1,162   2,269   3,431 
Savings deposits  (25)  33   8   (147)  134   (13)  (258)  159   (99)
Time deposits  158   (49)  109   922   663   1,585   4,001   2,669   6,670 
Borrowed funds  9   117   126   (896)  945   49   (1,265)  869   (396)
Total changes in interest expense  522   30   552   238   2,207   2,445   3,640   5,966   9,606 
Net change in net interest income (FTE) $348  $(194) $154  $(881) $212  $(669) $(544) $(2,497) $(3,041)
                   


  Average Yield/Rate for the Three Months Ended
  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Total earning assets 5.17% 5.18% 5.15% 5.06% 4.92%
Total interest bearing liabilities 3.28% 3.22% 3.11% 2.90% 2.66%
Net interest margin to earning assets (FTE) 2.80% 2.85% 2.92% 3.01% 3.05%
           


  Quarter to Date Net Interest Income (FTE)
  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Interest income $22,194  $21,487  $21,541 $21,033  $20,416 
FTE adjustment  12   13   14  14   14 
Total interest income (FTE)  22,206   21,500   21,555  21,047   20,430 
Total interest expense  10,202   9,650   9,315  8,526   7,757 
Net interest income (FTE) $12,004  $11,850  $12,240 $12,521  $12,673 
           

Noninterest Income

  Three Months Ended
  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Service charges and fees          
Trust and investment services  619   607   641   433   572 
ATM and debit card  541   545   512   549   568 
Service charges on deposit accounts  163   162   140   211   244 
Total  1,323   1,314   1,293   1,193   1,384 
Net gain on sales of residential mortgage loans  211   177   143   96   164 
Net gain on sales of commercial loans  133   98   296   226   — 
Change in fair value of equity investments  33   (3)  (10)  42   (28)
Changes in the fair value of MSR  (175)  (44)  (96)  (108)  119 
Other          
Mortgage servicing fees  389   386   394   398   398 
Change in cash surrender value of corporate owned life insurance  206   207   204   192   181 
Other  90   179   131   106   120 
Total  685   772   729   696   699 
Total noninterest income $2,210  $2,314  $2,355  $2,145  $2,338 
           
Memo items:          
Residential mortgage operations $425  $519  $441  $386  $681 


  Nine Months Ended September 30 Variance
   2024   2023  Amount %
Service charges and fees        
Trust and investment services $1,867  $1,704  $163  9.57%
ATM and debit card  1,598   1,669   (71) (4.25)%
Service charges on deposit accounts  465   686   (221) (32.22)%
Total  3,930   4,059   (129) (3.18)%
Net gain on sales of residential mortgage loans  531   523   8  1.53%
Net gain on sales of commercial loans  527   95   432  454.74%
Change in fair value of equity investments  20   (29)  49  (168.97)%
Changes in the fair value of MSR  (315)  218   (533) (244.50)%
Other        
Mortgage servicing fees  1,169   1,210   (41) (3.39)%
Change in cash surrender value of corporate owned life insurance  617   531   86  16.20%
Other  400   519   (119) (22.93)%
Total  2,186   2,260   (74) (3.27)%
Total noninterest income $6,879  $7,126  $(247) (3.47)%
         
Memo items:        
Residential mortgage operations $1,385  $1,951  $(566) (29.01)%
         

Residential Mortgage Operations

Residential mortgage operations includes net gains on sales of loans, changes in the fair value of mortgage servicing rights, 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. Although elevated interest rates and limited inventories have significantly driven down the volume of new originations and refinancing activity, we continue to actively sell residential mortgage loans into the secondary market. During the third quarter of 2024, residential mortgage originations sold into the secondary market totaled $10,722.

Changes in the fair value of MSR are highly correlated to changes in interest rates and prepayment speeds. During the third quarter of 2024, the fair value of the servicing portfolio decreased primarily due to a decline in the size of the servicing portfolio, as the portfolio declined by $4,741. Mortgage servicing rights are expected to continue to decline due to likely further reductions in the size of our servicing portfolio as paydowns and maturities are expected to outpace new originations.

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 $22,584, or 3.58%, since September 30, 2023. We expect mortgage servicing fees to trend modestly downward in future periods 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. Trust services and wealth management fees are subject to market fluctuations and interest rate changes. We expect trust and investment services fees to modestly increase in future periods.

ATM and debit card income represents fees earned on ATM and debit card transactions. We expect these fees to approximate current levels in 2024.

Service charges on deposit accounts includes fees earned from deposit customers for transaction-based charges, account maintenance and overdraft services. These charges have declined in 2024 due to a reduced level of NSF fees charged to customers based on regulatory guidance and overall industry trends. Service charges on deposit accounts are expected to approximate current levels throughout the remainder of the year.

Net gain on sales of commercial loans represents the income earned from the sale of commercial loans into the secondary market. Throughout 2024, we sold the guaranteed portion of select SBA loans. We anticipate this strategy to continue throughout the remainder of the year.

Change in cash surrender value of corporate owned life insurance is expected to modestly increase throughout 2024.

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

Noninterest Expenses

  Three Months Ended
  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Compensation and benefits $5,839 $5,842 $6,066 $5,521 $5,592
Professional services  799  963  894  695  726
Furniture and equipment  668  689  727  696  668
Occupancy  622  605  623  610  591
Data processing  751  490  547  505  576
Loan and collection  349  425  322  301  232
Advertising and promotional  312  337  348  139  506
Other          
Acquisition related expenses  953  —  —  —  —
FDIC insurance premiums  275  327  299  270  330
ATM and debit card  214  188  171  158  153
Telephone and communication  95  86  109  103  115
Amortization of core deposit intangibles  44  44  45  76  75
Other general and administrative  1,053  925  1,015  1,047  1,030
Total  2,634  1,570  1,639  1,654  1,703
Total noninterest expenses $11,974 $10,921 $11,166 $10,121 $10,594
           


  Nine Months Ended
September 30		 Variance
   2024  2023 Amount %
Compensation and benefits $17,747 $16,876 $871  5.16%
Professional services  2,656  2,729  (73) (2.67)%
Furniture and equipment  2,084  2,079  5  0.24%
Occupancy  1,850  1,815  35  1.93%
Data processing  1,788  1,654  134  8.10%
Loan and collection  1,096  929  167  17.98%
Advertising and promotional  997  1,466  (469) (31.99)%
Other        
Acquisition related expenses  953  —  953  N/M
FDIC insurance premiums  901  861  40  4.65%
ATM and debit card  573  493  80  16.23%
Telephone and communication  290  334  (44) (13.17)%
Amortization of core deposit intangibles  133  227  (94) (41.41)%
Other general and administrative  2,993  3,084  (91) (2.95)%
Total  5,843  4,999  844  16.88%
Total noninterest expenses $34,061 $32,547 $1,514  4.65%
         

Compensation and benefits includes salaries, commissions and incentives, employee benefits, and payroll taxes. Compensation and benefits has increased in 2024 due to an increase in the size of the organization, merit increases, and market based adjustments. We expect a modest increase in overall compensation and benefits throughout the remainder of 2024.

Professional services include expenses relating to third-party professional services. These services include, but are not limited to, regulatory, auditing, consulting, and legal. Professional services expenses are expected to approximate current levels 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 throughout the remainder of 2024.

Data processing primarily includes the expenses relating to our core data processor. The increase in data processing in the third quarter of 2024 is primarily due to the loss of incentive credits from our core data processor following our proposed merger announcement. Data processing expenses are expected to modestly increase throughout 2024 due to annual contractual increases from our core data processor.

Loan and collection includes expenses related to the origination and collection of loans. The increase in such expenses in 2024 is due to increased levels of home ownership grants. Loan and collection expenses are expected to approximate current levels in future periods as loan growth is expected to approximate current levels.

Advertising and promotional expenses includes media costs and any donations or sponsorships. These expenses also include marketing efforts to attract new and expand existing customer loan and deposit account relationships. Total advertising and promotional expenses have declined in 2024 due to the expiration of certain long-term sponsorship commitments. Advertising and promotional expenses are expected to approximate current levels in future periods.

Acquisition related expenses includes expenses related to our proposed merger with ChoiceOne Financial Services, Inc., which was announced during the third quarter of 2024. These expenses include services rendered for investment banking, legal and accounting. We expect to incur additional acquisition related expenses in future periods.

FDIC insurance premiums typically fluctuate each period based on the size of the balance sheet, capital position and overall risk profile. FDIC insurance premiums are expected to approximate current levels in future periods.

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 future periods.

Telephone and communication includes expenses relating to our communication systems. These expenses are expected to approximate current levels in future periods.

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. The core deposit intangibles associated with the acquisition of Community Bancorp, Inc. were fully amortized as of December 31, 2023. The core deposit intangibles associated with the acquisition of FSB will be amortized through 2028.

Other general and administrative includes miscellaneous other expense items. Other general and administrative expenses are expected to approximate current levels in future periods.

Balance Sheet Breakdown and Analysis

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
ASSETS          
Cash and due from banks $199,717 $128,590 $132,349 $90,661 $83,365
Total investment securities  99,724  100,167  103,210  107,615  109,543
Residential mortgage loans held-for-sale, at fair value  1,861  2,440  1,067  747  1,037
Gross loans  1,442,389  1,459,929  1,461,465  1,473,471  1,483,720
Less allowance for credit losses  14,700  15,300  15,300  15,400  15,400
Net loans  1,427,689  1,444,629  1,446,165  1,458,071  1,468,320
All other assets  78,379  80,803  81,838  81,858  82,674
Total assets $1,807,370 $1,756,629 $1,764,629 $1,738,952 $1,744,939
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Total deposits $1,470,586 $1,427,059 $1,438,408 $1,394,182 $1,401,797
Total borrowed funds  179,970  178,397  178,500  198,500  201,050
Accrued interest payable and other liabilities  10,416  7,872  6,647  7,568  9,190
Total liabilities  1,660,972  1,613,328  1,623,555  1,600,250  1,612,037
Total shareholders' equity  146,398  143,301  141,074  138,702  132,902
Total liabilities and shareholders' equity $1,807,370 $1,756,629 $1,764,629 $1,738,952 $1,744,939
           


  9/30/2024 vs 6/30/2024 9/30/2024 vs 9/30/2023
  Variance Variance
  Amount % Amount %
ASSETS        
Cash and due from banks $71,127  55.31% $116,352  139.57%
Total investment securities  (443) (0.44)%  (9,819) (8.96)%
Residential mortgage loans held-for-sale, at fair value  (579) (23.73)%  824  79.46%
Gross loans  (17,540) (1.20)%  (41,331) (2.79)%
Less allowance for credit losses  (600) (3.92)%  (700) (4.55)%
Net loans  (16,940) (1.17)%  (40,631) (2.77)%
All other assets  (2,424) (3.00)%  (4,295) (5.20)%
Total assets $50,741  2.89% $62,431  3.58%
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
Total deposits $43,527  3.05% $68,789  4.91%
Total borrowed funds  1,573  0.88%  (21,080) (10.48)%
Accrued interest payable and other liabilities  2,544  32.32%  1,226  13.34%
Total liabilities  47,644  2.95%  48,935  3.04%
Total shareholders' equity  3,097  2.16%  13,496  10.15%
Total liabilities and shareholders' equity $50,741  2.89% $62,431  3.58%
         

Cash and due from banks

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Cash and due from banks          
Noninterest bearing $37,871 $35,437  $26,128 $29,997 $35,121 
Interest bearing  161,846  93,153   106,221  60,664  48,244 
Total $199,717 $128,590  $132,349 $90,661 $83,365 
           
  9/30/2024 vs 6/30/2024   9/30/2024 vs 9/30/2023
  Variance   Variance
  Amount %   Amount %
Cash and due from banks          
Noninterest bearing $2,434  6.87%   $2,750  7.83%
Interest bearing  68,693  73.74%    113,602  235.47%
Total $71,127  55.31%   $116,352  139.57%
           

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:

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Cash and cash equivalents $199,717 $128,590 $132,349 $90,661 $83,365
Fair value of unpledged investment securities  77,019  74,775  73,680  80,247  82,103
FHLB borrowing availability  190,000  190,000  190,000  170,000  170,000
Unsecured lines of credit  23,000  23,000  23,000  20,000  20,000
Funds available through the Fed Discount Window  109  106  107  111  110
Parent company line of credit  5,100  7,000  3,500  3,500  950
Total liquidity sources $494,945 $423,471 $422,636 $364,519 $356,528
           

The increase in cash and cash equivalents as of September 30, 2024 was due to an increase in total deposits (see "Total deposits" below).

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 overall asset and liability management strategy.

Investment securities

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Available-for-sale          
U.S. Government and federal agency $19,432  $20,430  $20,427  $22,425  $23,420 
State and municipal  18,997   19,108   20,403   20,460   20,992 
Mortgage backed residential  44,086   45,808   47,505   49,076   50,786 
Certificates of deposit  2,234   2,481   2,729   2,728   3,956 
Collateralized mortgage obligations - agencies  21,640   22,213   22,778   23,320   24,062 
Unrealized gain/(loss) on available-for-sale securities  (8,798)  (12,179)  (13,027)  (12,760)  (15,958)
Total available-for-sale  97,591   97,861   100,815   105,249   107,258 
Held-to-maturity state and municipal  535   791   877   878   879 
Equity securities  1,598   1,515   1,518   1,488   1,406 
Total investment securities $99,724  $100,167  $103,210  $107,615  $109,543 
           
  9/30/2024 vs 6/30/2024   9/30/2024 vs 9/30/2023
  Variance   Variance
  Amount %   Amount %
Available-for-sale          
U.S. Government and federal agency  (998) (4.88)%   $(3,988) (17.03)%
State and municipal  (111) (0.58)%    (1,995) (9.50)%
Mortgage backed residential  (1,722) (3.76)%    (6,700) (13.19)%
Certificates of deposit  (247) (9.96)%    (1,722) (43.53)%
Collateralized mortgage obligations - agencies  (573) (2.58)%    (2,422) (10.07)%
Unrealized gain/(loss) on available-for-sale securities  3,381  (27.76)%    7,160  (44.87)%
Total available-for-sale  (270) (0.28)%    (9,667) (9.01)%
Held-to-maturity state and municipal  (256) (32.36)%    (344) (39.14)%
Equity securities  83   5.48%    192   13.66%
Total investment securities $(443) (0.44)%   $(9,819) (8.96)%
           

The amortized cost and fair value of AFS investment securities as of September 30, 2024 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 $6,481 $12,951 $— $— $— $19,432
State and municipal  1,624  15,190  1,113  1,070  —  18,997
Mortgage backed residential  —        44,086  44,086
Certificates of deposit  2,234  —  —  —  —  2,234
Collateralized mortgage obligations - agencies  —  —  —  —  21,640  21,640
Total amortized cost $10,339 $28,141 $1,113 $1,070 $65,726 $106,389
Fair value $10,111 $26,620 $1,017 $1,001 $58,842 $97,591
             

The amortized cost and fair value of HTM investment securities as of September 30, 2024 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 $85 $295 $155 $— $— $535
Fair value $84 $290 $152 $— $— $526
             

Total investment securities have declined in recent periods primarily due to maturities and prepayments. As a result of 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 strategically declined throughout the past 12 months. As a result of current market conditions, we expect minimal loan growth throughout the remainder of 2024. Specifically, our commercial pipeline has declined significantly, and the requests that are being presented are lower dollar balances and often carry an SBA guarantee.

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

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Commercial and industrial $109,188  $120,331  $114,772  $118,089  $125,330 
Commercial real estate  855,270   864,200   867,270   870,693   874,870 
Total commercial loans  964,458   984,531   982,042   988,782   1,000,200 
Residential mortgage  419,140   418,403   426,762   431,836   431,740 
Home equity  55,475   53,133   48,568   48,380   47,069 
Total residential real estate loans  474,615   471,536   475,330   480,216   478,809 
Consumer  3,316   3,862   4,093   4,473   4,711 
Gross loans  1,442,389   1,459,929   1,461,465   1,473,471   1,483,720 
Allowance for credit losses  (14,700)  (15,300)  (15,300)  (15,400)  (15,400)
Loans, net $1,427,689  $1,444,629  $1,446,165  $1,458,071  $1,468,320 
           
Memo items:          
Residential mortgage loans serviced for others $609,113  $613,854  $619,160  $624,765  $631,697 
           
  9/30/2024 vs 6/30/2024   9/30/2024 vs 9/30/2023
  Variance   Variance
  Amount %   Amount %
Commercial and industrial $(11,143) (9.26)%   $(16,142) (12.88)%
Commercial real estate  (8,930) (1.03)%    (19,600) (2.24)%
Total commercial loans  (20,073) (2.04)%    (35,742) (3.57)%
Residential mortgage  737   0.18%    (12,600) (2.92)%
Home equity  2,342   4.41%    8,406   17.86%
Total residential real estate loans  3,079   0.65%    (4,194) (0.88)%
Consumer  (546) (14.14)%    (1,395) (29.61)%
Gross loans  (17,540) (1.20)%    (41,331) (2.79)%
Allowance for credit losses  600  (3.92)%    700  (4.55)%
Loans, net $(16,940) (1.17)%   $(40,631) (2.77)%
           
Memo items:          
Residential mortgage loans serviced for others $(4,741) (0.77)%   $(22,584) (3.58)%
           

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

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Loans collectively evaluated          
Commercial and industrial $102,523 $113,254 $112,542 $115,665 $124,860
Commercial real estate  854,038  864,026  867,270  870,524  874,701
Residential mortgage  416,864  416,130  423,881  429,109  428,927
Home equity  55,416  53,056  48,388  48,136  46,898
Consumer  3,325  3,862  4,093  4,473  4,711
Subtotal  1,432,166  1,450,328  1,456,174  1,467,907  1,480,097
Loans individually evaluated          
Commercial and industrial  6,665  7,077  2,230  2,424  470
Commercial real estate  1,232  174  —  169  169
Residential mortgage  2,276  2,273  2,881  2,727  2,813
Home equity  48  77  180  244  171
Consumer  2  —  —  —  —
Subtotal  10,223  9,601  5,291  5,564  3,623
Gross Loans $1,442,389 $1,459,929 $1,461,465 $1,473,471 $1,483,720
           

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

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Allowance for credit losses for collectively evaluated loans          
Commercial and industrial $1,436 $1,434 $1,300 $1,407 $1,362
Commercial real estate  8,347  8,903  8,359  8,467  8,703
Residential mortgage  4,131  4,133  4,202  4,409  4,439
Home equity  348  327  305  321  315
Consumer  51  80  38  44  36
Unallocated  —  —  670  355  294
Subtotal  14,313  14,877  14,874  15,003  15,149
Allowance for credit losses for individually evaluated loans          
Commercial and industrial  385  423  423  363  248
Commercial real estate  —  —  —  —  —
Residential mortgage  —  —  3  34  3
Home equity  —  —  —  —  —
Consumer  2  —  —  —  —
Unallocated  —  —  —  —  —
Subtotal  387  423  426  397  251
Allowance for credit losses $14,700 $15,300 $15,300 $15,400 $15,400
           
Commercial and industrial $1,784 $1,857 $1,723 $1,770 $1,610
Commercial real estate  8,347  8,903  8,359  8,467  8,703
Residential mortgage  4,131  4,133  4,205  4,443  4,442
Home equity  348  327  305  321  315
Consumer  53  80  38  44  36
Unallocated  —  —  670  355  294
Allowance for credit losses $14,700 $15,300 $15,300 $15,400 $15,400
           

Loan concentration analysis

As a result of 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. While we continue to monitor various industries that have been impacted by the pandemic, we also continue to monitor the effects of inflation, supply chain disruption, elevated interest rates, and office space usage associated with an increased remote workforce. The overall credit quality indicators of non-owner occupied commercial real estate loan portfolio have remained strong. Performance is based on debt service coverage ratio, loan to value ratio and payment trends. As of September 30, 2024, there were no delinquencies in the non-owner occupied commercial real estate loan portfolio. We expect the non-owner occupied commercial real estate loan portfolio to experience insignificant growth, if any, in future periods.

Within the net lease and retail strip center non-owner occupied commercial real estate pools, we have exposure to Rite Aid. During the fourth quarter of 2023, Rite Aid, which operates over 2,000 retail pharmacies across 17 states, filed for Chapter 11 bankruptcy protection. During the third quarter of 2024, Rite Aid announced that it successfully emerged from bankruptcy protection and will now operate as a private company. However, all Rite Aid stores in Michigan were closed as part of the company's restructuring. As a result, one commercial real estate loan was partially charged off and its remaining balance was moved to nonaccrual status during the third quarter of 2024. We continue to actively monitor five remaining loans previously associated with Rite Aid.

With 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. Due to current economic uncertainty and the pressures noted above, it is unlikely that we will seek new loan originations in the non-owner occupied office pool in 2024.

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.

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

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.

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:

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Net lease $137,406  $141,064  $147,103 $149,056  $160,077 
Retail strip centers  106,948   106,631   107,834  98,588   96,567 
Office  61,897   62,237   61,657  61,822   62,959 
Special use  71,307   71,006   58,278  58,710   57,612 
Industrial  23,338   23,107   22,575  28,380   28,906 
Medical office  24,551   24,818   25,380  25,842   28,591 
Self storage  32,797   32,502   25,660  23,455   21,993 
Mixed use  16,829   16,980   17,174  17,335   19,833 
Retail  15,183   17,191   12,533  12,981   14,115 
           
Total non-owner occupied commercial real estate loans $490,256  $495,536  $478,194 $476,169  $490,653 
           
  9/30/2024 vs 6/30/2024   9/30/2024 vs 9/30/2023
  Variance   Variance
  Amount %   Amount %
Net lease $(3,658) (2.59)%   $(22,671) (14.16)%
Retail strip centers  317   0.30%    10,381   10.75%
Office  (340) (0.55)%    (1,062) (1.69)%
Special use  301   0.42%    13,695   23.77%
Industrial  231   1.00%    (5,568) (19.26)%
Medical office  (267) (1.08)%    (4,040) (14.13)%
Self storage  295   0.91%    10,804   49.12%
Mixed use  (151) (0.89)%    (3,004) (15.15)%
Retail  (2,008) (11.68)%    1,068   7.57%
           
Total non-owner occupied commercial real estate loans $(5,280) (1.07)%   $(397) (0.08)%
           

The following table presents the average loan size of current and historical non-owner occupied commercial real estate loans, based on loan collateral, by industry pool:

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Net lease $1,383 $1,291 $1,311 $1,316 $1,300
Retail strip centers  2,379  2,197  2,231  2,135  2,115
Office  1,370  1,363  1,296  1,297  1,294
Special use  2,612  2,546  2,064  2,079  2,134
Industrial  933  925  941  1,092  1,072
Medical office  1,116  1,128  1,103  1,078  1,145
Self storage  1,923  1,926  1,509  1,380  1,692
Mixed use  1,324  1,334  1,321  1,333  1,240
Retail  407  513  447  461  429
           
Total non-owner occupied commercial real estate loans $1,489 $1,448 $1,392 $1,379 $1,362
           

The following table presents current and historical non-owner occupied commercial real estate loans, based on loan collateral, by industry pool as a percentage of gross loans:

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Net lease 9.53% 9.66% 10.07% 10.12% 10.79%
Retail strip centers 7.41% 7.30% 7.38% 6.69% 6.51%
Office 4.29% 4.26% 4.22% 4.20% 4.24%
Special use 4.94% 4.86% 3.99% 3.98% 3.88%
Industrial 1.62% 1.58% 1.54% 1.93% 1.95%
Medical office 1.70% 1.70% 1.74% 1.75% 1.93%
Self storage 2.27% 2.23% 1.76% 1.59% 1.48%
Mixed use 1.17% 1.16% 1.18% 1.18% 1.34%
Retail 1.05% 1.18% 0.86% 0.88% 0.95%
           
Total non-owner occupied commercial real estate loans to gross loans 33.98% 33.93% 32.74% 32.32% 33.07%
           

Asset quality

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

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Accruing interest          
Current $1,428,014 $1,445,780 $1,451,432 $1,463,668 $1,477,386
Past due 30-89 days  4,152  4,534  4,344  4,239  2,711
Past due 90 days or more  —  14  398  —  —
Total accruing interest  1,432,166  1,450,328  1,456,174  1,467,907  1,480,097
Nonaccrual  10,223  9,601  5,291  5,564  3,623
Total loans $1,442,389 $1,459,929 $1,461,465 $1,473,471 $1,483,720
Total loans past due and in nonaccrual status $14,375 $14,149 $10,033 $9,803 $6,334
           

The following table summarizes the our nonperforming assets as of:

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Nonaccrual loans $10,223 $9,601 $5,291 $5,564 $3,623
Accruing loans past due 90 days or more  —  14  398  —  —
Total nonperforming loans  10,223  9,615  5,689  5,564  3,623
Other real estate owned  293  293  345  597  345
Total nonperforming assets $10,516 $9,908 $6,034 $6,161 $3,968
           

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

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Total charge-offs $1,814 $814 $86  $110  $16 
Total recoveries  11  18  29   300   455 
Net charge-offs (recoveries) $1,803 $796 $57  $(190) $(439)
Allowance for credit losses $1,203 $796 $(43) $(190) $(309)
           

During the third quarter of 2024, we partially charged off one commercial real estate loan for $1,443 related to the Rite Aid bankruptcy filing. We believe that the credit characteristics are unique and are not an indication of softening in the remainder of our commercial loan portfolio.

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

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Nonperforming loans to gross loans 0.71% 0.66% 0.39% 0.38% 0.24%
Nonperforming assets to total assets 0.58% 0.56% 0.34% 0.35% 0.23%
Allowance for credit losses to gross loans 1.02% 1.05% 1.05% 1.05% 1.04%
Net charge-offs (recoveries) to QTD average gross loans 0.12% 0.05% —% (0.01)% (0.03)%
Credit loss expense (reversal) to QTD average gross loans 0.08% 0.05% —% (0.01)% (0.02)%
           

The following table summarizes the average loan size as of:

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Commercial and industrial $310 $343 $326 $334 $353
Commercial real estate  901  906  900  905  896
Total commercial loans  740  754  746  752  751
Residential mortgage  235  234  234  236  234
Home equity  58  56  53  53  52
Total residential real estate loans  173  173  174  175  174
Consumer  12  13  13  13  12
Gross loans $335 $337 $336 $337 $335
           

All other assets

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

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Premises and equipment, net $13,203  $13,661  $14,111 $14,561  $14,928 
Federal Home Loan Bank stock  9,179   9,179   9,179  9,179   9,179 
Corporate owned life insurance  28,129   27,877   27,670  27,466   27,274 
Mortgage servicing rights  8,461   8,636   8,680  8,776   8,884 
Accrued interest receivable  4,354   4,747   4,869  4,472   4,485 
Goodwill  8,853   8,853   8,853  8,853   8,853 
Other assets          
Core deposit intangibles  400   444   488  533   609 
Right-of-use assets  1,062   1,142   1,237  1,333   1,426 
Other real estate owned  293   293   345  597   345 
Other  4,445   5,971   6,406  6,088   6,691 
Total  6,200   7,850   8,476  8,551   9,071 
All other assets $78,379  $80,803  $81,838 $81,858  $82,674 
           
  9/30/2024 vs 6/30/2024   9/30/2024 vs 9/30/2023
  Variance   Variance
  Amount %   Amount %
Premises and equipment, net $(458) (3.35)%   $(1,725) (11.56)%
Federal Home Loan Bank stock  —   —%    —   —%
Corporate owned life insurance  252   0.90%    855   3.13%
Mortgage servicing rights  (175) (2.03)%    (423) (4.76)%
Accrued interest receivable  (393) (8.28)%    (131) (2.92)%
Goodwill  —   —%    —   —%
Other assets          
Core deposit intangibles  (44) (9.91)%    (209) (34.32)%
Right-of-use assets  (80) (7.01)%    (364) (25.53)%
Other real estate owned  —   —%    (52) (15.07)%
Other  (1,526) (25.56)%    (2,246) (33.57)%
Total  (1,650) (21.02)%    (2,871) (31.65)%
All other assets $(2,424) (3.00)%   $(4,295) (5.20)%
           

The annual decrease in premises and equipment was due to depreciation on our existing premises and equipment.

Total deposits

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

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Noninterest bearing demand $398,338  $404,521  $401,518 $423,019  $425,820 
Interest bearing          
Savings  264,337   262,538   274,922  273,302   293,310 
Money market demand  250,715   230,304   229,584  223,827   225,138 
NOW          
Retail NOW  202,030   205,383   203,614  178,892   198,271 
Brokered NOW  —   —   —  —   — 
           
Total NOW Accounts  202,030   205,383   203,614  178,892   198,271 
Time deposits          
Other time deposits  294,862   264,009   268,466  234,838   198,509 
Brokered time deposits  60,304   60,304   60,304  60,304   60,251 
Internet time deposits  —   —   —  —   498 
           
Total time deposits  355,166   324,313   328,770  295,142   259,258 
           
Total deposits $1,470,586  $1,427,059  $1,438,408 $1,394,182  $1,401,797 
           
  9/30/2024 vs 6/30/2024   9/30/2024 vs 9/30/2023
  Variance   Variance
  Amount %   Amount %
Noninterest bearing demand $(6,183) (1.53)%   $(27,482) (6.45)%
Interest bearing          
Savings  1,799   0.69%    (28,973) (9.88)%
Money market demand  20,411   8.86%    25,577   11.36%
NOW          
Retail NOW  (3,353) (1.63)%    3,759   1.90%
Brokered NOW  —   —%    —   —%
           
Total NOW Accounts  (3,353) (1.63)%    3,759   1.90%
Time deposits          
Other time deposits  30,853   11.69%    96,353   48.54%
Brokered time deposits  —   —%    53   0.09%
Internet time deposits  —   —%    (498) (100.00)%
           
Total time deposits  30,853   9.51%    95,908   36.99%
           
Total deposits $43,527   3.05%   $68,789   4.91%
           

Between March 2022 and July 2023, the FOMC raised its target federal funds rate 11 times, from a target range of 0.00-0.25% to 5.25-5.50%, or 525 basis points, in order to combat rising inflation. This rapid increase in interest rates led to significant competition amongst financial institutions for deposits. In September 2024, the FOMC lowered the target federal funds rate 50 basis points to a target range of 4.75-5.00%. Due to the overall uncertainty regarding potential rate changes in the future, 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.

Total borrowed funds

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

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Federal Home Loan Bank borrowings $160,000 $160,000  $160,000 $180,000  $180,000 
Subordinated debentures  14,000  14,000   14,000  14,000   14,000 
Other borrowings  5,970  4,397   4,500  4,500   7,050 
Total borrowed funds $179,970 $178,397  $178,500 $198,500  $201,050 
           
  9/30/2024 vs 6/30/2024   9/30/2024 vs 9/30/2023
  Variance   Variance
  Amount %   Amount %
Federal Home Loan Bank borrowings $—  —%   $(20,000) (11.11)%
Subordinated debentures  —  —%    —   —%
Other borrowings  1,573  35.77%    (1,080) (15.32)%
Total borrowed funds $1,573  0.88%   $(21,080) (10.48)%
           

We utilize a mix of borrowed funds and organic deposit growth to fund loan demand. As loan growth has slowed in recent periods, our reliance on FHLB advances has declined.

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:

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Federal Home Loan Bank borrowings $160,000 $160,000  $160,000 $180,000  $180,000 
Subordinated debentures  14,000  14,000   14,000  14,000   14,000 
Other borrowings  5,970  4,397   4,500  4,500   7,050 
Brokered NOW accounts  —  —   —  —   — 
Brokered time deposits  60,304  60,304   60,304  60,304   60,251 
Internet time deposits  —  —   —  —   498 
Total wholesale funds $240,274 $238,701  $238,804 $258,804  $261,799 
           
  9/30/2024 vs 6/30/2024   9/30/2024 vs 9/30/2023
  Variance   Variance
  Amount %   Amount %
Federal Home Loan Bank borrowings $—  —%    (20,000) (11.11)%
Subordinated debentures  —  —%    —   —%
Other borrowings  1,573  35.77%    (1,080) (15.32)%
Brokered NOW accounts  — N/A    —  N/A
Brokered time deposits  —  —%    53   0.09%
Internet time deposits  — N/A    (498) (100.00)%
Total wholesale funds $1,573  0.66%   $(21,525) (8.22)%
           

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 September 30, 2024, the Bank's total capital ratio was 12.78%, tier 1 capital ratio was 11.72%, and tier 1 leverage ratio was 9.02%. 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 earnings of the Bank as well as asset growth moderation strategies in 2024.

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

  9/30/2024 6/30/2024 3/31/2024 12/31/2023 9/30/2023
Common stock $74,826  $74,690  $74,555  $74,230  $74,118 
Retained earnings  78,467   78,094   76,607   74,309   70,972 
Accumulated other comprehensive (loss) income  (6,895)  (9,483)  (10,088)  (9,837)  (12,188)
Total shareholders' equity $146,398  $143,301  $141,074  $138,702  $132,902 
           
  9/30/2024 vs 6/30/2024   9/30/2024 vs 9/30/2023
  Variance   Variance
  Amount %   Amount %
Common stock $136   0.18%   $708   0.96%
Retained earnings  373   0.48%    7,495   10.56%
Accumulated other comprehensive (loss) income  2,588  (27.29)%    5,293  (43.43)%
Total shareholders' equity $3,097   2.16%   $13,496   10.15%
           

The Board of Directors has authorized the repurchase of up to $10,000 of common stock. As of September 30, 2024, we had $1,393 of common stock available to repurchase through the program. We did not execute any repurchases of our common stock during 2024.

Stock Performance

The following table compares the cumulative total shareholder return on our common stock for the year-to-date, 1 year, 3 year, and 5 year periods ended September 30, 2024. The National OTC Peer Group was developed by selecting all OTC traded bank holding companies with total assets between $1 billion and $3 billion as of 03/31/2024 that had a quoted stock price on Bloomberg. The Midwest / Great Lakes OTC Peer Group represents those institutions included in the National OTC Peer Group that are headquartered in Illinois, Indiana, Michigan, Ohio, Pennsylvania, and Wisconsin.

 # in Peer Group YTD 1 Year 3 Year 5 Year
Fentura Financial, Inc. (OTCQX:FETM)  45.40% 67.28% 59.12% 100.80%
          
National OTC Peers43 (1.01)% (3.49)% 2.11% 8.44%
Fentura Ranking out of 44  1  1  4  4 
          
Midwest / Great Lakes OTC Peers17 (1.97)% (5.16)% (1.63)% 1.35%
Fentura Ranking out of 18  1  1  1  1 
          

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
CDI: Core deposit intangibleN/M: Not meaningful
CET1: Common equity tier 1NASDAQ: National Association of Securities Dealers Automated Quotations
COLI: Corporate owned life insuranceNOW: Negotiable order of withdrawal
DRIP: Dividend Reinvestment PlanNSF: Non-sufficient funds
EPS: Earnings Per Common ShareOCI: Other comprehensive income
ESOP: Employee Stock Ownership PlanOIS: Overnight Index Swap
FASB: Financial Accounting Standards BoardOREO: Other real estate owned
FDIC: Federal Deposit Insurance CorporationOTTI: Other-than-temporary impairment
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 MunithTLM: Troubled loan modifications
  

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 5-Star Bauer Financial rated 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 & CEOChief Financial Officer
 Fentura Financial, Inc.  Fentura Financial, Inc.
 810.714.3902810.714.3925
 ron.justice@thestatebank.comaaron.wirsing@thestatebank.com

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