UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______________ to _______________
Commission file number 0-23550
Fentura Bancorp, Inc.
(Exact name of small business issuer as specified in its charter)
Michigan 38-2806518
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Fenton Sq, P.O. Box 725, Fenton, Michigan 48430
(Address of Principal Executive Offices)
(810) 629-2263
(Issuer's telephone number)
None
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
__X__ Yes ____ No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: May 10, 2001
Class - Common Stock Shares Outstanding - 1,727,905
1
Fentura Bancorp, Inc.
Index to Form 10-Q
Page
Part I - Financial Information
Item 1 - Consolidated Financial Statements (Unaudited) 3
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 19
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K 21
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Fentura Bancorp, Inc.
Consolidated Balance Sheets
-------------------------------------------------------------------------------------------------
MARCH 31, DEC 31,
(000's omitted Except Per Share Data) 2001 2000
(unaudited)
-------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 15,733 13,459
Federal funds sold 23,100 7,250
----------------------------
Total cash & cash equivalents 38,833 20,709
Securities-available for sale
Securities-held to maturity, (market value of $13,503 49,368 53,421
at March 31, 2001 and $13,419 at December 31, 2000) 13,262 13,283
----------------------------
Total securities 62,630 66,704
Loans:
Commercial 104,176 101,090
Tax exempt development loans 783 835
Real estate loans - mortgage 11,099 10,514
Real estate loans - construction 19,729 17,471
Consumer loans 63,219 65,198
----------------------------
Total loans 199,006 195,108
Less: Allowance for loan losses (2,950) (2,932)
----------------------------
Net loans 196,056 192,176
Loans held for sale 190 187
Bank premises and equipment 6,979 6,547
Accrued interest receivable 1,939 1,924
Other assets 4,743 4,643
----------------------------
Total assets $ 311,370 292,890
============================
LIABILITIES
Deposits:
Non-interest bearing deposits $ 38,658 34,762
Interest bearing deposits 232,310 213,894
-----------------------------
Total deposits 270,968 248,656
Federal funds purchased 0 4,680
Other borrowings 1,366 1,151
Accrued taxes, interest and other liabilities 2,200 2,649
----------------------------
Total liabilities 274,534 257,136
----------------------------
STOCKHOLDERS' EQUITY
Common stock - $2.5 par value
1,727,905 shares issued (1,722,308 in Dec. 2000) 4,320 4,305
Surplus 26,147 26,016
Retained earnings 6,087 5,648
Accumulated other comprehensive income (loss) 282 (215)
----------------------------
Total stockholder's equity 36,836 35,754
----------------------------
Total Liabilities and Shareholders' Equity $ 311,370 292,890
============================
See notes to consolidated financial statements.
3
Fentura Bancorp, Inc.
Consolidated Statements of Income (Unaudited)
Three Months Ended
(000's omitted Except Per Share Data) March 31,
2001 2000
-------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 4,584 $ 4,453
Interest and dividends on Investment securities:
Taxable 767 840
Tax-exempt 170 171
Interest on federal funds sold 265 75
------------------------------
Total interest income 5,786 5,539
INTEREST EXPENSE
Deposits 2,572 2,219
Short-term borrowings 47 77
------------------------------
Total interest expense 2,619 2,296
NET INTEREST INCOME 3,167 3,243
Provision for loan losses 138 169
------------------------------
Net interest income after
Provision for loan losses 3,029 3,074
NON-INTEREST INCOME
Service charges on deposit accounts 479 467
Fiduciary income 165 162
Other operating income 384 322
------------------------------
Total non-interest income 1,028 951
NON-INTEREST EXPENSE
Salaries and benefits 1,579 1,455
Occupancy of bank premises 215 202
Equipment expense 327 373
Other operating expenses 778 852
------------------------------
Total non-interest expense 2,899 2,882
INCOME BEFORE TAXES 1,158 1,143
Federal income taxes 339 270
------------------------------
NET INCOME $ 819 $ 873
==============================
Per share:
Net income - basic $ 0.48 $ 0.51
Net income - diluted $ 0.47 $ 0.51
Dividends $ 0.22 $ 0.21
Average number of common
Shares outstanding 1,723,798 1,707,661
See notes to consolidated financial statements.
4
Fentura Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Three Months Three Months
Ended Ended
-------------------------------------------------------------------------------------------------------
March 31, March 31,
(000's omitted) 2001 2000
-------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance, beginning of period $ 4,305 $ 3,555
Issuance of shares under
Director stock purchase plan,
Stock purchase plan, and
Dividend reinvestment program 15 10
---------------- ---------------
Balance, end of period 4,320 3,565
SURPLUS
Balance, beginning of period 26,016 18,317
Issuance of shares under
Director stock purchase plan,
Stock purchase plan, and
Dividend reinvestment program 131 157
---------------- ---------------
Balance, end of period 26,147 18,474
RETAINED EARNINGS
Balance, beginning of period 5,648 11,078
Net income 819 873
Cash dividends declared (380) (357)
---------------- ---------------
Balance, end of period 6,087 11,594
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
Balance, beginning of period (215) (1,085)
Change in unrealized gain (loss)
on securities, net of tax 497 (302)
---------------- ---------------
Balance, end of period 282 (1,387)
---------------- ---------------
TOTAL SHAREHOLDERS' EQUITY $ 36,836 $ 32,246
================ ===============
See notes to consolidated financial statements.
5
Fentura Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
----------------------------------------------------------------------------------------
(000's omitted,
Except Per Share Data) 2001 2000
----------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $819 $873
Adjustments to reconcile net income to cash
Provided by Operating Activities:
Depreciation and amortization 209 246
Provision for loan losses 138 150
Amortization (accretion) on securities 18 (12)
Loans originated for sale (1951) (641)
Loans sold 1,948 626
Gain on investment securities 0 0
Decrease (increase) in interest receivable 15 (211)
Decrease (increase) in other assets (286) 1,047
Increase (decrease) in accrued taxes,
Interest, and other liabilities (449) 87
------------------------
Total Adjustments (358) 1,292
------------------------
Net Cash Provided By (Used In) Operating Activities 461 2,165
------------------------
Cash Flows From Investing Activities:
Net decrease in deposits with other banks 0 0
Proceeds from maturities of investment activities - HTM 0 20
Proceeds from maturities of investment activities - AFS 8,289 786
Purchases of investment securities - HTM 0 0
Purchases of investment securities - AFS (3,579) 0
Net increase in customer loans (4,018) (6,924)
Capital expenditures (641) (1,163)
------------------------
Net Cash Used in Investing Activities 51 (7,281)
Cash Flows From Financing Activities:
Net increase (decrease) in DDA/SAV deposits 6,010 791
Net increase (decrease) in Time deposits 16,302 6,142
Net increase in borrowings (4,465) 13,220
Proceeds from stock issuance 145 167
Cash dividends (380) (357)
------------------------
Net Cash Provided By (Used In) Financing Activities 17,612 19,963
NET INCREASE IN CASH AND CASH EQUIVALENTS $18,124 $14,847
CASH AND CASH EQUIVALENTS - BEGINNING $20,709 $13,614
CASH AND CASH EQUIVALENTS - ENDING $38,833 $28,461
========================
CASH PAID FOR:
INTEREST $2,501 $2,186
INCOME TAXES $400 $0
See notes to consolidated financial statements.
6
Fentura Bancorp, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended
(000's Omitted) March 31,
2001 2000
----------------------------
Net Income $819 $873
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising
during period $497 ($302)
Less: reclassification adjustment for
gains included in net income $0 $0
----------------------------
Other comprehensive income $497 ($302)
----------------------------
Comprehensive income $1,316 $571
============================
Fentura Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions for Form - 10Q
and Article 9 of Regulation S-X. Accordingly, they do not include all
of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2001. All share and per share amounts have
been retroactively adjusted to reflect the 20% stock dividend paid on
May 26, 2000.
7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
This item provides a narrative discussion and analysis of the consolidated
financial condition and results of operations of Fentura Bancorp, Inc. (the
Corporation), together with its operating subsidiaries, The State Bank and
Davison State Bank (the Banks), for the three months ended March 31, 2001 and
2000. The supplemental financial data included throughout should be read in
conjunction with the primary financial statements presented on pages 3 through
7. It provides a more detailed and comprehensive review of the operating results
and financial position than could be obtained from the financial statements
alone.
Table 1 Selected Financial Data
Three Months Ended
March 31,
$ in thousands except per share data and ratios 2001 2000
(unaudited)
---------------------------------------------------------------------------------------------
Summary of Consolidated Statements of Income:
Interest Income $5,786 $5,539
Interest Expense 2,619 2,296
----------------------------------
Net Interest Income 3,167 3,243
Provision for Loan Losses 138 169
----------------------------------
Net Interest Income after Provision for Loan Losses 3,029 3,074
Total Other Operating Income 1,105 951
Total Other Operating Expense 2,976 2,882
----------------------------------
Income Before Income Taxes 1,158 1,143
Provision for Income Taxes 339 270
----------------------------------
Net Income $819 $873
==================================
Net Income Per Share - Basic $0.48 $0.51
Net Income Per Share - Diluted $0.47 $0.51
Other Financial and Statistical Data:
Tier 1 Capital to Risk Weighted Assets 13.57% 13.58%
Total Capital to Risk Weighted Assets 14.76% 14.82%
Tier 1 Capital to Average Assets 11.01% 11.71%
Total Cash Dividends $380 $357
Book Value Per Share $21.32 $18.85
Cash Dividends Paid Per Share $0.22 $0.21
Period End Market Price Per Share $27.00 $28.10
Dividend Pay-out Ratio 46.40% 40.89%
Return on Average Stockholders' Equity 8.99% 10.73%
Return on Average Assets 1.08% 1.22%
Net Interest Margin (FTE) 4.69% 5.01%
Summary of Consolidated Balance Sheets: Mar.31, 2001 Dec. 31, 2000
------------ -------------
Assets $311,370 $292,890
Securities 62,630 66,704
Loans 199,196 195,108
Deposits 270,968 248,656
Shareholders' Equity 36,836 35,754
Total Equity to Assets 11.83% 10.60%
8
Earnings Per Common Share
A reconciliation of the numerators and denominators used in the computation of
basic earnings per Common share and diluted. Earnings per common share is
presented below for the three months Ended March 31, 2001 and 2000:
2001 2000
---- ----
Basic Earnings Per Common Share:
Numerator
Net Income $819,000 $873,000
======== ========
Denominator
Weighted average common shares
Outstanding 1,723,798 1,707,661
========= =========
Basic earnings per common share $0.48 $0.51
===== =====
Diluted Earnings Per Common Share:
Numerator
Net Income $819,000 $873,000
======== ========
Denominator
Weighted average common shares
Outstanding for basic earnings per
Common share 1,723,798 1,707,661
Add: Dilutive effects of assumed
Exercises of stock options 3,206 6,092
----- -----
Weighted average common shares
and dilutive potential common
Shares outstanding 1,727,004 1,713,753
========= =========
Diluted earnings per common share $0.47 $0.51
===== =====
Stock options for 6,975 and 2007 shares of common stock for the three month
periods ended March 31, 2001 and 2000 were not considered in computing diluted
earning per common shares because they were not dilutive.
9
Results of Operations
Table 1 summarizes selected financial data for the three months ended March 31,
2001 and 2000. As indicated in Table 1 earnings for the three months ended March
31, 2001 were $819,000 compared to $873,000 for the same period in 2000.
Earnings decreased as a result a tightening of net interest income and increased
operating expenses. Despite this earnings decline, core banking activities and
new opportunities in our current and surrounding markets remain strong and
accordingly, management believes overall performance will remain strong
throughout 2001. However, performance in 2001 could be negatively affected by
any further softening of the economy.
The banking industry uses standard performance indicators to help evaluate a
banking institution's performance. Return on average assets is one of these
indicators. For the three months ended March 31, 2001 the Corporation's return
on average assets was 1.08% compared to 1.22% for the same period in 2000. Net
income per share-basic was $.48 in the first three months of 2001 compared to
$.51 for the same period in 2000.
Total assets increased approximately $18,000,000 from December 31, 2000 to
$311,370,000 at March 31, 2001. Stockholders' Equity increased approximately
$1,082,000 from December 31, 2000 to $36,836,000 at March 31, 2001. The increase
in equity should allow the Corporation to continue its growth strategy.
Net Interest Income
Net interest income and average balances and yields on major categories of
interest-earning assets and interest-bearing liabilities for the three months
ended March 31, 2001 and 2000 are summarized in Table 3. The effects of changes
in average interest rates and average balances are detailed in Table 2 below.
Table 2
CHANGES IN NET INTEREST INCOME
DUE TO CHANGES IN AVERAGE VOLUME
AND INTEREST RATES
THREE MONTHS ENDED MARCH 31, THREE MONTHS ENDED MARCH 31,
2001 COMPARED TO 2000 2000 COMPARED TO 1999
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO: DUE TO:
----------------------------------------------------------------------------
YIELD/ YIELD/
(000'S OMITTED) VOL RATE TOTAL VOL RATE TOTAL
-------------------------------------------------------------------------------------------------------------------------
TAXABLE SECURITIES ($66) ($7) ($73) $3 $55 $58
TAX-EXEMPT SECURITIES (6) 5 (1) 41 (5) 36
FEDERAL FUNDS SOLD 232 (42) 190 (90) 21 (69)
TOTAL LOANS 134 (4) 130 716 (104) 612
LOANS HELD FOR SALE 0 1 1 (182) 1 (181)
----------------------------------------------------------------------------
TOTAL EARNING ASSETS 294 (47) 247 488 (32) 456
INTEREST BEARING DEMAND DEPOSITS (14) (2) (16) (9) 9 0
SAVINGS DEPOSITS (28) 11 (17) 33 119 152
TIME CD'S $100,000 AND OVER 133 59 192 87 29 116
OTHER TIME DEPOSITS 72 122 194 15 13 28
OTHER BORROWINGS (27) (3) (30) 43 2 45
----------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 136 187 323 169 172 341
----------------------------------------------------------------------------
NET INTEREST INCOME $158 ($234) ($76) $319 ($204) $115
============================================================================
10
As indicated in Table 2, during the three months ended March 31, 2001, net
interest income decreased compared to the same period in 2000, principally
because of the increase in interest expense resulting from growth of certificate
of deposit balances and the increase in interest rates which rose with market
rates throughout 2000.
Net interest income (displayed without consideration of full tax equivalency),
average balance sheet amounts, and the corresponding yields for the three months
ended March 31, 2001 and 2000 are shown in Table 3. Net interest income for the
three months ended March 31, 2001 was $3,167,000 a decrease of $76,000 over the
same period in 2000. This represents a decrease of 2.3%. The primary factor
contributing to the net interest income decrease was an increase in interest
expense from deposit growth and the reduction in interest rates by the Federal
Reserve Board. Also indicated in Table 3, for the three months ended March 31,
2000 net interest income was $3,243,000. This is an increase of $115,000 or 3.7%
over the same period in 1999. The increase in 2000 is attributable to the
increase in interest income from loan growth.
Management expects a continued strong local economy throughout 2001 and because
of this believes loan demand will become stronger in the upcoming year.
Accordingly, the Corporation will aggressively seek out new loan opportunities
while continuing to maintain sound credit quality. Management also believes that
continued loan growth and managing deposit rates will stabilize net interest
income in 2001.
As indicated in Table 3, for the three months ended March 31, 2001, the
Corporation's net interest margin (without consideration of full tax
equivalency) was 4.55% compared with 4.90% for the same period in 2000. This
decline is attributable to the impact of interest rates reduction by the Federal
Reserve Board and the increase in interest expense due to certificate of deposit
growth. The decrease in interest rates impacts the net interest income in the
short term because loans start to reprice quicker than our deposits thus
reducing net interest income.
Average earning assets increased 6.0% or approximately $15,953,000 comparing the
first quarter of 2001 to the same time period in 2000. Loans, the highest
yielding component of earning assets, represented 70.7% of earning assets in
2001 compared to 72.8% in 2000. Average interest bearing liabilities increased
3.2% or $7,010,000 comparing the first quarter of 2001 to the same time period
in 2000. Non-interest bearing deposits amounted to 13.1% of average earning
assets in the first quarter of 2001 compared with 12.1% in the same time period
on 2000.
Management continually monitors the Corporation's balance sheet to insulate net
interest income from significant swings caused by interest rate volatility. If
market rates continue to change in 2001, corresponding changes in funding costs
will be considered to avoid any potential negative impact on net interest
income. The Corporation's policies in this regard are further discussed in the
section titled "Interest Rate Sensitivity Management".
11
Table 3
THREE MONTHS ENDED MARCH 31,
AVERAGE BALANCES AND RATES 2001 2000
(000's omitted) AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
ASSETS BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------------------------------------------------------------------
Interest bearing deposits in Banks $0 $0 0.00% $0 $0 0.00%
Investment securities:
U.S. Treasury and Government Agencies 47,511 751 6.41% 51,728 824 6.41%
State and Political 14,239 170 4.84% 14,764 171 4.66%
Other 1,096 16 5.92% 1,077 16 5.98%
-------------------------------- --------------------------------
Total Investment Securities 62,846 937 6.05% 67,569 1,011 6.02%
Fed Funds Sold 19,522 265 5.51% 4,745 75 6.36%
Loans:
Commercial 116,539 2,691 9.36% 102,018 2,368 9.34%
Tax Free 799 10 5.08% 588 9 6.16%
Real Estate-Mortgage 15,522 362 9.46% 25,316 535 8.50%
Consumer 66,773 1,517 9.21% 65,816 1,538 9.40%
-------------------------------- --------------------------------
Total loans 199,633 4,580 9.30% 193,738 4,450 9.24%
Allowance for Loan Loss (2,975) (2,984)
Net Loans 196,658 4,580 9.45% 190,754 4,450 9.38%
-------------------------------- --------------------------------
Loans Held for Sale 188 4 8.63% 184 3 6.56%
-------------------------------- --------------------------------
TOTAL EARNING ASSETS $282,189 $5,786 8.32% $266,236 $5,539 8.37%
-------------------------------------------------------------------
Cash Due from Banks 11,018 10,732
All Other Assets 13,786 13,190
----------- -----------
TOTAL ASSETS $304,018 $287,174
----------- -----------
LIABILITIES & SHAREHOLDERS' EQUITY:
Deposits:
Non-Interest bearing - DDA $37,056 $32,174
Interest bearing - DDA 37,829 171 1.83% 41,030 187 1.83%
Savings Deposits 64,448 559 3.52% 67,777 576 3.42%
Time CD's $100,000 and Over 41,434 642 6.28% 31,926 450 5.67%
Other Time CD's 81,558 1,200 5.97% 76,040 1,006 5.32%
-------------------------------- --------------------------------
Total Deposits 262,325 2,572 3.98% 248,947 2,219 3.59%
Other Borrowings 2,744 47 6.95% 4,230 77 7.32%
-------------------------------- --------------------------------
INTEREST BEARING LIABILITIES $228,013 $2,619 4.66% $221,003 $2,296 4.18%
-------------------------------------------------------------------
All Other Liabilities 2,523 1,446
Shareholders' Equity 36,426 32,551
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $304,018 $287,174
----------- --------- ----------- ---------
Net Interest Rate Spread 3.66% 4.19%
Impact of Non-Interest Bearing Funds on Margin 0.89% 0.71%
--------- ---------
Net Interest Income /Margin $3,167 4.55% $3,243 4.90%
===================== =====================
12
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses (ALL) reflects management's judgment as to the
level considered appropriate to absorb losses inherent in the loan portfolio.
Fentura's subsidiary banks' methodology in determining the adequacy of the ALL
includes a review of individual loans, historical loss experience, current
economic conditions, portfolio trends, and other pertinent factors. Although
reserves have been allocated to various portfolio segments, the ALL is general
in nature and is available for the portfolio in its entirety. At March 31, 2001,
the ALL was $2,950,000, or 1.48% of total loans. This compares with $2,932,000,
or 1.50%, at December 31, 2000. The reduction of the ALL as a percentage of
total loans reflects reduction in the allowance for loan losses and increased
loan totals.
The provision for loan losses was $138,000 in the first three months of 2001 and
$169,000 for the same time period in 2000. The Bank decreased the provision in
2001 comparing to 2000 because of an overall improvement in asset quality.
Table 4 summarizes loan losses and recoveries for the first quarter of 2000 and
2001. During the first three months of 2001 the Corporation experienced net
charge-offs of $120,000, compared with net charge-offs of $84,000 for the same
time period in 2000. Accordingly, the net charge-off ratio for the first quarter
of 2001 was .06% compared to .04% for the same time period in 2000.
The Corporation maintains formal policies and procedures to control and monitor
credit risk. Management believes the allowance for loan losses is adequate to
meet normal credit risks in the loan portfolio. The Corporation's loan portfolio
has no significant concentrations in any one industry nor any exposure in
foreign loans. The Corporation has not extended credit to finance highly
leveraged transactions nor does it intend to do so in the future. Employment
levels and other economic conditions in the Corporation's local markets may have
a significant impact on the level of loan losses. Management continues to
identify and devote attention to credits that may not be performing as agreed.
Therefore, in light of the aforementioned, and assuming continued strong
economic conditions and asset quality, management expects a modest reduction to
the allowance for loan losses as a percentage to gross loans in 2001. Of course,
should economic conditions deteriorate management may need to increase the
provision for loan losses and maintain or increase the ALL as a percentage of
gross loans. Non-performing loans are discussed further in the section titled
"Non-Performing Assets".
Table 4 ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Three Months Ended
March 31
(000's omitted) 2001 2000
------------------------------
Balance at Beginning of Period $2,932 $2,961
------------------------------
Charge-Offs:
Commercial, Financial and Agriculture (6) (9)
Real Estate-Mortgage 0 0
Installment Loans to Individuals (141) (99)
Lease Financing 0 0
------------------------------
Total Charge-Offs (147) (108)
------------------------------
Recoveries:
Commercial, Financial and Agriculture 2 1
Real Estate-Mortgage 0 0
Installment Loans to Individuals 25 23
Lease Financing 0 0
------------------------------
Total Recoveries 27 24
------------------------------
Net Charge-Offs (120) (84)
------------------------------
Provision 138 169
------------------------------
Balance at End of Period $2,950 $3,046
==============================
Ratio of Net Charge-Offs During the Period 0.06% 0.04%
==============================
13
NON-INTEREST INCOME
TABLE 5
Three Months Ended
Analysis of Non-Interest Income March 31,
-------------------------------------------------------------------------
(000's omitted)
2001 2000
-------------------------------------------------------------------------
Service Charges on Deposit Accounts $479 $467
Gain on Sale of Mortgages $59 $13
Mortgage Servicing Fees $33 $65
Fiduciary Income $165 $162
Other Operating Income $292 $244
------------------------
Total Non-Interest Income $1,028 $951
========================
Non-interest income increased in the three months ended March 31, 2001 as
compared to the same period in 2000, due to an increase in the gain on sale of
mortgage loans, and an increase in other operating income. Overall non-interest
income was $1,028,000 in the three months ended March 31, 2001 compared to
$951,000 for the same period in 2000. These figures represent an increase of
8.1%. Table 5 provides a more detailed breakdown of the components of
non-interest income than can be found in the income statement on page 4.
The most significant category of non-interest income is service charges on
deposit accounts. These fees were $479,000 in the first quarter 2001 compared to
$467,000 for the same period of 2000. This represents an increase of 2.6%. An
increase in average balances maintained in savings accounts offset service
charges and a reduction in fees from non-sufficient funds balances.
Gains on the sale of mortgage loans originated by the Banks and sold in the
secondary market were $59,000 in the quarter ended March 31, 2001 and $13,000 in
the same period in 2000. The increase occurred because of an increase in
residential mortgage refinance activity and new loan volumes due to the downward
movement of market interest rates.
Mortgage servicing fees were $33,000 in the three months ended March 31, 2001
compared to $65,000 in the same time period in 2000. This is a decline of
$32,000 or 49.2%. The decline is attributable to the sale of a significant
portion of the Corporation's serviced loans, in the last quarter of 2000.
Fiduciary income increased $3,000 in the three months ended March 31, 2001
comparing to the same period in the prior year. This 0.2% increase in fees is
attributed to growth in the assets under management within the Corporation's
Trust Department.
Other operating income increased $48,000 to $292,000 in the first quarter of
2001 compared to $244,000 in the same time period in 2000. This is an increase
of 19.7%. Other operating income increased due to increases in income from the
sale of official checks and an increase in income from the sale of consumer
investment products.
14
Non-Interest Expense
TABLE 6
Three Months Ended
Analysis of Non-Interest Expense March 31,
-------------------------------------------------------------------------
(000's omitted)
2001 2000
-------------------------------------------------------------------------
Salaries and Benefits $1,579 $1,455
Equipment $327 $373
Net Occupancy $215 $202
Office Supplies $46 $74
Loan & Collection Expense $26 $121
Advertising $74 $55
Other Operating Expense $632 $602
------------------------
Total Non-Interest Expense $2,899 $2,882
========================
Total non-interest expense was $2,899,000 in the three months ended March 31,
2001 compared with $2,882,000 in the same period of 2000. This is a increase of
0.6%. This increase is largely attributable to an increase in salary and
benefits expense and an increase in other operating expenses.
Salary and benefit costs, Fentura's largest non-interest expense category, were
$1,579,000 in the three months ended March 31, 2001, compared with $1,455,000,
or an increase of 8.5%, for the same time period in 2000. Increased costs are
primarily a result of normal annual salary increases, an increase in employee
benefit costs, and an increase in salary costs in connection with the opening of
the second bank, Davison State Bank.
During the three months ended March 31, 2001 equipment expenses were $327,000
compared to $373,000 for the same period in 2000, a decrease of 12.3%. The
decrease in expense is attributable to equipment depreciation which decreased
due to the roll off of fully depreciated assets.
Occupancy expenses at $215,000 increased in the three months ended March 31,
2001 comparing to the same period in 2000 by $13,000 or 6.4%. The increase is
attributable to increases in facility repairs and maintenance contracts expense.
During the three months ended March 31, 2001 office supplies expense at $46,000
decreased $28,000 comparing to the $74,000 in expense for the same period in
2000. This decrease is attributable to volume decreases of regular office
supplies and preprinted forms in 2001.
Loan and collection expenses, at $26,000, were down $95,000 during the three
months ended March 31, 2001 comparing to the same time period in 2000. The
decrease is primarily attributable to a decrease in legal expenses in connection
with collection efforts and a decrease in fees paid to dealers for indirect
lending transactions.
Other operating expenses were $632,000 in the three months ended March 31, 2001
compared to $602,000 in the same time period in 2000, an increase of $30,000 or
5.0%. The increase is attributable to an increase in deposit account charge-offs
and losses and an increase in legal and consulting expenses.
Financial Condition
Proper management of the volume and composition of the Corporation's earning
assets and funding sources is essential for ensuring strong and consistent
earnings performance, maintaining adequate liquidity and limiting exposure to
risks caused by changing market conditions. The Corporation's investment
securities portfolio is structured to provide a source of liquidity through
maturities and generate an income stream with relatively low levels of principal
risk. The Corporation does not engage in securities trading. Loans comprise the
largest component of earning assets and are the Corporation's highest yielding
assets. Client deposits are the primary
15
source of funding for earning assets while short term debt and other sources of
funds could be utilized if market conditions and liquidity needs change.
The Corporation's total assets equaled $311 million for March 31, 2001 exceeding
December 31, 2000 total assets of $293 million by $18 million or 6.1%. Loans
comprised 63.9% of total assets at March 31, 2001 compared to 66.6% at December
31, 2000. Loans grew $3.9 million with commercial loans leading the advance by
$3.1 million. The ratio of non-interest bearing deposits to total deposits was
16.6% at March 31, 2001 compared to 16.25% at December 31, 2000. Interest
bearing liabilities totaled $233 million at March 31, 2001 compared to $220
million at December 31, 2000. Deposits grew $18.4 million and Fed Funds
Purchased decreased $4.7 million to make up the change in interest bearing
liabilities at March 31, 2001.
NON-PERFORMING ASSETS
Non-performing assets include loans on which interest accruals have ceased,
loans which have been renegotiated, and real estate acquired through
foreclosure. Past due loans are loans which were delinquent 90 days or more, but
have not been placed on non-accrual status. Table 7 represents the levels of
these assets at March 31, 2001 and December 31, 2000.
Non-performing assets decreased modestly at March 31, 2001 compared to December
31, 2000. This decrease is attributable to a decrease in loans past due 90 days
or more and still accruing. These loans decreased because of restructuring of
one commercial loan.
The level and composition of non-performing assets are affected by economic
conditions in the Corporation's local markets. Non-performing assets,
charge-offs, and provisions for loan losses tend to decline in a strong economy
and increase in a weak economy, potentially impacting the Corporation's
operating results. In addition to non-performing loans, management carefully
monitors other credits that are current in terms of principal and interest
payments but, in management's opinion, may deteriorate in quality if economic
conditions change.
Table 7
Non-Performing Assets and Past Due Loans
March 31, Dec. 31,
2001 2000
------------------------------
Non-Performing Loans:
Loans Past Due 90 Days or More & Still
Accruing $172,000 $489,000
Non-Accrual Loans 778,000 731,000
Renegotiated Loans 0 0
------------------------------
Total Non-Performing Loans 950,000 1,220,000
------------------------------
Other Non-Performing Assets:
Other Real Estate 37,000 0
REO in Redemption 0 0
Other Non-Performing Assets 117,000 159,000
------------------------------
Total Other Non-Performing Assets 154,000 159,000
------------------------------
Total Non-Performing Assets $1,104,000 $1,379,000
==============================
Non-Performing Loans as a % of
Total Loans 0.48% 0.63%
Allowance for Loan Losses as a % of
Non-Performing Loans 310.53% 240.33%
Accruing Loans Past Due 90 Days or
More to Total Loans 0.09% 0.25%
Non-performing Assets as a % of
Total Assets 0.35% 0.47%
16
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT
Asset/Liability management is designed to assure liquidity and reduce interest
rate risks. The goal in managing interest rate risk is to maintain a strong and
relatively stable net interest margin. It is the responsibility of the
Asset/Liability Management Committee (ALCO) to set policy guidelines and to
establish short-term and long-term strategies with respect to interest rate
exposure and liquidity. The ALCO, which is comprised of key members of
management, meets regularly to review financial performance and soundness,
including interest rate risk and liquidity exposure in relation to present and
perspective markets, business conditions, and product lines. Accordingly, the
committee adopts funding and balance sheet management strategies that are
intended to maintain earnings, liquidity, and growth rates consistent with
policy and prudent business standards.
Liquidity maintenance together with a solid capital base and strong earnings
performance are key objectives of the Corporation. The Corporation's liquidity
is derived from a strong deposit base comprised of individual and business
deposits. Deposit accounts of customers in the mature market represent a
substantial portion of deposits of individuals. The Banks' deposit base plus
other funding sources (federal funds purchased, other liabilities and
shareholders' equity) provided primarily all funding needs in the first three
months of 2001 and 2000. While these sources of funds are expected to continue
to be available to provide funds in the future, the mix and availability of
funds will depend upon future economic conditions. The Corporation does not
foresee any difficulty in meeting its funding requirements.
Primary liquidity is provided through short-term investments or borrowings
(including federal funds sold and purchased) while secondary liquidity is
provided by the investment portfolio. As of March 31, 2001 federal funds sold
represented 7.4% of total assets, compared to 2.5% at March 31, 2000. The
Corporation regularly monitors liquidity to ensure adequate cash flows to cover
unanticipated reductions in the availability of funding sources.
Interest rate risk is managed by controlling and limiting the level of earnings
volatility arising from rate movements. The Corporation regularly performs
reviews and analysis of those factors impacting interest rate risk. Factors
include maturity and re-pricing frequency of balance sheet components, impact of
rate changes on interest margin and prepayment speeds, market value impacts of
rate changes, and other issues. Both actual and projected performance is
reviewed, analyzed, and compared to policy and objectives to assure present and
future financial viability.
As indicated in the statement of cash flows, cash flows from financing
activities increased $17,612,000 in the first three months of 2001 due to the
increase in deposits. Comparatively, in the first three months of 2000, cash
flows from financing activities increased $19,963,000 because of increases in
deposits and borrowings. Cash flows from investing activities were $51,000
during the first three months of 2000. The increases in investing activities at
the end of the first quarter of 2001, were offset by maturing and called
investment securities.
CAPITAL MANAGEMENT
Total shareholders' equity rose 3.0% to $36,836,000 at March 31, 2001 compared
with $35,754,000 at December 31, 2000. The Corporation's equity to asset ratio
was 11.8% at March 31, 2001 and 12.2% at December 31, 2000. The increase in the
amount of capital was obtained through retained earnings and the proceeds from
the issuance of new shares. In the first three months of 2001, the Corporation
increased its cash dividends by 4.8% to $.22 per share compared with $.21 in the
same period in 2000.
As indicated on the balance sheet at December 31, 2000 the Corporation had
accumulated other comprehensive loss of $215,000 compared to accumulated other
comprehensive income at March 31, 2001 of $282,000. The increase to an income
position is attributable to the downward movement of market interest rates and
the interest rate structures on those securities held in the available for sale
portfolio.
17
Regulatory Capital Requirements
Bank holding companies and their bank subsidiaries are required by banking
industry regulators to maintain certain levels of capital. These are expressed
in the form of certain ratios. These ratios are based on the degree of credit
risk in the Corporation's assets. All assets and off-balance sheet items such as
outstanding loan commitments are assigned risk factors to create an overall risk
weighted asset total. Capital is separated into two levels, Tier I capital
(essentially total common shareholders' equity less goodwill) and Tier II
capital (essentially the reserve for loan losses limited to 1.25% of gross
risk-weighted assets). Capital levels are then measured as a percentage of total
risk weighted assets. The regulatory minimum for Tier I capital to risk weighted
assets is 4% and the minimum for Total capital (Tier I plus Tier II) to risk
weighted assets is 8%. The Tier I leverage ratio measures Tier I capital to
average assets and must be a minimum of 4%. As reflected in Table 8, at March
31, 2001 and at December 31, 2000, the Corporation was well in excess of the
minimum capital and leverage requirements necessary to be considered a "well
capitalized" banking company.
The FDIC has adopted a risk-based insurance premium system based in part on a
bank's capital adequacy. Under this system a depository institution is
classified as well capitalized, adequately capitalized, or undercapitalized
according to its regulatory capital levels. Subsequently, a financial
institution's premium levels are based on these classifications and its
regulatory supervisory rating (the higher the classification the lower the
premium). It is the Corporation's goal to maintain capital levels sufficient to
receive a designation of "well capitalized".
Table 8
Capital Ratios
-----------------------------------------------------------------------------
Regulatory Minimum Fentura Bancorp, Inc.
For "Well Capitalized" March 31, December 31, March 31,
2001 2000 2000
Total Capital to risk
Weighted assets 10% 14.76% 16.20% 14.82%
Tier 1 Capital to risk
weighted assets 6% 13.57% 15.00% 13.58%
Tier 1 Capital to average 5% 11.01% 12.10% 11.71%
assets
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information concerning quantitative and qualitative disclosures about market
risk contained and incorporated by reference on pages 40 through 42 in Fentura's
Annual Report on Form 10-K, is here incorporated by reference.
Fentura Bancorp, Inc. faces market risk to the extent that both earnings and the
fair value of its financial instruments are affected by changes in interest
rates. The Corporation manages this risk with static GAP analysis and has begun
simulation modeling. For the first three months of 2001, the results of these
measurement techniques were within the Corporation's policy guidelines. The
Corporation does not believe that there has been a material change in the nature
of the Corporation's primary market risk exposures, including the categories of
market risk to which the Corporation is exposed and the particular markets that
present the primary risk of loss to the Corporation, or in how those exposures
are managed in 2001 compared to 2000.
The Corporation's market risk exposure is mainly comprised of its vulnerability
to interest rate risk. Prevailing interest rates and interest rate relationships
in the future will be primarily determined by market factors which are outside
of the Corporation's control. All information provided in this section consists
of forward looking statements. Reference is made to the section captioned
"Forward Looking Statements" in this quarterly report for a discussion of the
limitations on the Corporation's responsibility for such statements.
18
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity management seeks to maximize net interest income as a
result of changing interest rates, within prudent ranges of risk. The
Corporation attempts to accomplish this objective by structuring the balance
sheet so that re-pricing opportunities exist for both assets and liabilities in
roughly equivalent amounts at approximately the same time intervals. Imbalances
in these re-pricing opportunities at any point in time constitute a bank's
interest rate sensitivity. The Corporation currently does not utilize
derivatives in managing interest rate risk.
An indicator of the interest rate sensitivity structure of a financial
institution's balance sheet is the difference between rate sensitive assets and
rate sensitive liabilities, and is referred to as "GAP".
Table 9 sets forth the distribution of re-pricing of the Corporation's earning
assets and interest bearing liabilities as of March 31, 2001, the interest rate
sensitivity GAP, as defined above, the cumulative interest rate sensitivity GAP,
the interest rate sensitivity GAP ratio (i.e. interest rate sensitive assets
divided by interest rate sensitive liabilities) and the cumulative sensitivity
GAP ratio. The table also sets forth the time periods in which earning assets
and liabilities will mature or may re-price in accordance with their contractual
terms.
Table 9 GAP ANALYSIS MARCH 31, 2001
(000's Omitted) Within Three One to After
Three Months- Five Five
Months One Year Years Years Total
-------------------------------------------------------------
Earning Assets:
Federal Funds Sold 23,100 0 0 0 23,100
Investment Securities 4,810 5,403 25,642 26,775 62,630
Loans 78,519 8,066 81,028 31,393 199,006
Loans Held for Sale 190 0 0 0 190
-------------------------------------------------------------
Total Earning Assets $106,619 $13,469 $106,670 $58,168 $284,926
=============================================================
Interest Bearing Liabilities:
Interest Bearing Demand Deposits $37,227 $ 0 $ 0 $ 0 $ 37,227
Savings Deposits 68,228 0 0 0 68,228
Time Deposits Less than $100,000 15,398 35,852 29,467 2,881 83,598
Time Deposits Greater than $100,000 24,785 13,753 4,719 0 43,257
Other Borrowings 225 0 40 1,101 1,366
-------------------------------------------------------------
Total Interest Bearing Liabilities $145,863 $49,605 $34,226 $3,982 $233,676
=============================================================
Interest Rate Sensitivity GAP ($39,244) ($36,136) $72,444 $54,186 $51,250
Cumulative Interest Rate
Sensitivity GAP ($39,244) ($75,380) ($2,936) $51,250
Interest Rate Sensitivity GAP (0.73) (0.27) 3.12 14.61
Cumulative Interest Rate
Sensitivity GAP Ratio (0.73) (.61) (0.99) 1.22
As indicated in Table 9, the short-term (one year and less) cumulative interest
rate sensitivity gap is negative. Accordingly, if market interest rates
increase, this negative gap position would have a short- term negative impact on
interest margin. Conversely, if market rates continue to decline this would have
a short-term positive impact. However, gap analysis is limited and may not
provide an accurate indication of the impact of general interest rate movements
on the net interest margin since the re-pricing of various categories of assets
and liabilities is subject to the Corporation's needs, competitive pressures,
and the needs of the Corporation's customers. In addition, various assets and
liabilities indicated as re-pricing within the same period may in fact re-price
at different times within such period and at different rate volumes.
Additionally, simulation modeling, which measures the impact of upward and
downward movements of interest rates on interest margin and the market value of
equity, indicates that an upward movement of interest rates would not
significantly reduce net interest income.
19
FORWARD LOOKING STATEMENTS
This report contains "forward looking statements" as that term is used in the
securities laws. All statements regarding our expected financial position,
performance, business and strategies are forward looking statements. These
statements are based on management's beliefs, assumptions, current expectations,
estimates and projections about the financial services industry, the economy,
and about the Corporation itself. Words such as "anticipates," "believes,"
"estimates," "expects," "forecasts," "intends," "is likely," "plans,"
"projects," variations of such words and similar expressions are intended to
identify such forward looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
("Future Factors") which are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what may be expressed or forecast in such forward looking
statements. The Corporation undertakes no obligation to update, amend or clarify
forward looking statements as a result of new information, future events, or
otherwise.
Future Factors that could cause a difference between an ultimate actual outcome
and a preceding forward looking statement include, but are not limited to,
changes in interest rate and interest rate relationships, demands for products
and services, the degree of competition by traditional and non-traditional
competitors, changes in banking laws or regulations, changes in tax laws,
changes in prices, the impact of technological advances, government and
regulatory policy changes, the outcome of pending and future litigation and
contingencies, trends in customer's behaviors as well as their ability to repay
loans, and the local economy. Further information concerning us and our
business, including additional factors that could materially affect our
financial results, is included in our filings with the Securities and Exchange
Commission.
20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - None
b. Report on Form 8-K
A Report on Form 8-K dated March 26, 2001 reporting a change in
registrant's independent accountant was filed March 28, 2001.
21
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fentura Bancorp, Inc.
Date May 11, 2001 By /s/ Donald L. Grill
Donald L. Grill
President & CEO
Date May 11, 2001 By /s/ Ronald L. Justice
Ronald L. Justice
Chief Financial Officer
22