-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BfblMIy+jzOyt4cgwU/0Ky4KrkO9ySxCpJob4jcWBlsPPjDhBjW62SwyhmqN4NEx KNFAlIURTkxEOkl7cwZs0w== 0000950124-99-003174.txt : 19990514 0000950124-99-003174.hdr.sgml : 19990514 ACCESSION NUMBER: 0000950124-99-003174 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FENTURA BANCORP INC CENTRAL INDEX KEY: 0000919865 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382806518 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23550 FILM NUMBER: 99619433 BUSINESS ADDRESS: STREET 1: ONE FENTON SQUARE STREET 2: P O BOX725 CITY: FENTON STATE: MI ZIP: 48430-0725 BUSINESS PHONE: 8106292263 MAIL ADDRESS: STREET 1: ONE FENTON SQ P O BOX 725 CITY: FENTON STATE: MI ZIP: 48430-0725 10-Q 1 FORM 10-Q 1 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 1999 [ ] 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 7, 1999 Class - Common Stock Shares Outstanding - 1,415,331 2 Fentura Bancorp, Inc. Index to Form 10-Q Page Part I - Financial Information Item 1 - Consolidated Financial Statements 3 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II - Other Information Item 1 - 6 Miscellaneous Information 19 3 PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements Fentura Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited) - ------------------------------------------------------------------------------------------------------- MARCH 31, DEC 31, MARCH 31, (000's omitted Except Per Share Data) 1999 1998 1998 - ------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 11,721 11,858 10,163 Federal funds sold 7,700 6,300 9,300 ----------------------------------- Total Cash & Cash Equivalents 19,421 18,158 19,463 Interest bearing deposits with banks 0 0 0 Investment securities-held to maturity, at cost (market value of $11,622, and $9,952 at March 31, 1999 and 1998, respectively, and $11,695 at Dec. 1998) 11,356 11,377 9,848 Investment securities-avail for sale, at market 53,886 66,579 42,549 ----------------------------------- Total investment securities 65,242 77,956 52,397 Loans: Commercial 79,086 78,536 75,790 Tax exempt development loans 286 296 449 Real estate loans - mortgage 9,532 9,010 13,617 Real estate loans - construction 13,252 11,641 15,701 Consumer loans 61,200 62,423 70,272 ----------------------------------- Total loans 163,356 161,906 175,829 Less: Reserve for loan losses (2,850) (2,783) (3,012) ----------------------------------- Net loans 160,506 159,123 172,817 Loans held for sale 10,591 10,507 7,867 Bank premises and equipment 4,030 3,996 3,789 Accrued interest receivable 1,428 1,658 1,715 Other assets 5,230 3,649 3,432 ----------------------------------- Total assets $ 266,448 275,047 261,480 ===================================
4 LIABILITIES
Deposits: Non-interest bearing deposits $ 26,757 29,974 29,070 Interest bearing deposits 205,475 211,131 199,884 ------------------------------ Total deposits 232,232 241,105 228,954 Federal Funds Purchased 0 0 0 Other borrowings 1,380 1,216 2,394 Accrued taxes, interest and other liabilities 2,271 2,704 2,580 ------------------------------ Total liabilities 235,883 245,025 233,928 ------------------------------ STOCKHOLDERS' EQUITY Common stock - $5 par value 1,411,711 shares issued (1,408,436 in 3,529 3,521 3,482 Dec.1998 and 1,392,777 in March, 1998) Surplus 17,807 17,644 17,111 Retained Earnings 9,226 8,664 6,844 Unrealized loss on sec avail for sale 3 193 115 ------------------------------ Total stockholder's equity 30,565 30,022 27,552 ------------------------------ Total liabilities and stockholder's equity $266,448 275,047 261,480 ==============================
See notes to consolidated financial statements. 5 Fentura Bancorp, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 1999 1998 - ------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 4,022 4,456 Interest and dividends on investment securities: Taxable 782 672 Tax-exempt 135 119 Int on deposits with banks 0 1 Interest on federal funds sold 144 48 ----------------------- Total interest income 5,083 5,296 INTEREST EXPENSE Deposits 1,923 2,162 Short-term borrowings 32 46 ----------------------- Total interest expense 1,955 2,208 NET INTEREST INCOME 3,128 3,088 Provision for loan losses 195 156 ----------------------- Net interest income after provision for loan losses 2,933 2,932 NON-INTEREST INCOME Service chrgs on dep accts 476 415 Fiduciary income 155 141 Other operating income 369 404 Investment gains 26 0 ----------------------- Total non-interest income 1,026 960 NON-INTEREST EXPENSE Salaries and benefits 1,328 1,239 Occupancy of bank premises 193 178 Equipment expense 341 316 Other operating expenses 813 967 ----------------------- Total non-interest expense 2,675 2,700 NET INCOME BEFORE TAXES 1,284 1,192 Applicable income taxes 398 372 ----------------------- NET INCOME $ 886 820 ======================= Per share: Net income $ 0.63 0.59 Dividends $ 0.23 0.21 Average number of common shares outstanding 1,409,277 1,386,989
See notes to consolidated financial statements. 6 Fentura Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Three Months Three Months Ended Ended - --------------------------------------------------------------------------------- March 31, March 31, (000's omitted) 1999 1998 - --------------------------------------------------------------------------------- COMMON STOCK Balance, beginning of period $ 3,521 $ 3,462 Issuance of shares under director stock purchase plan, stock purchase plan, and dividend reinvestment prog 8 20 -------- -------- Balance, end of period 3,529 3,482 SURPLUS Balance, beginning of period 17,644 16,913 Issuance of shares under director stock purchase plan, stock purchase plan, and dividend reinvestment prog 163 198 -------- -------- Balance, end of period 17,807 17,111 RETAINED EARNINGS Balance, beginning of period 8,664 6,308 Net income 886 820 Cash dividends declared (324) (284) -------- -------- Balance, end of period 9,226 6,844 UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE Balance, beginning of period 193 59 Change in unrealized gain (loss) on securities, net of tax (190) 56 -------- -------- Balance, end of period 3 115 -------- -------- TOTAL SHAREHOLDERS' EQUITY $ 30,565 $ 27,552 ======== ========
See notes to consolidated financial statements. 7 Fentura Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows Three Months Ended March 31, - -------------------------------------------------------------------------------- (000's omitted, Except Per Share Data) 1999 1998 - -------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 886 $ 820 Adjustments to reconcile net inc to cash Provided by Operating Activities: Depreciation and amortization 200 218 Provision for loan losses 195 156 Amortization (accretion) on securities (4) 10 Loans originated for sale (1,141) (5,876) Loans sold 1,057 1,534 Gain on investment securities (26) 0 Decrease (increase) in interest receivable 230 192 Decrease (increase) in other assets (1,445) (396) Increase (decrease) in accrued taxes, interest, and other liabilities (433) (257) ------------------------ Total Adjustments (1,367) (4,419) ------------------------ Net Cash Provided By (Used In) Operating Activities (481) (3,599) ------------------------ Cash Flows From Investing Activities: Net decrease in deposits with other banks 0 95 Proceeds from maturities of inv activities - HTM 20 20 Proceeds from maturities of inv activities - AFS 34,291 11,450 Purchases of investment securities - HTM 0 (281) Purchases of investment securities - AFS (21,893) (7,460) Net (increase) in customer loans (1,578) 4,745 Capital expenditures (234) (17) ------------------------ Net Cash Used in Investing Activities 10,606 8,552 Cash Flows From Financing Activities: Net increase (decrease) in DDA/SAV deposits (4,639) 167 Net increase (decrease) in Time deposits (4,234) (1,747) Net increase (decr) in borrowing's 164 (291) Proceeds from stock issuance 171 218 Cash dividends (324) (284) ------------------------ Net Cash Provided By (Used In) Financing Activities (8,862) (1,937) NET INCREASE IN CASH AND CASH EQUIVALENTS $ 1,263 $ 3,016 CASH AND CASH EQUIVALENTS - BEGINNING $ 18,158 $ 16,447 CASH AND CASH EQUIVALENTS - ENDING $ 19,421 $ 19,463 ======================== CASH PAID FOR: INTEREST $ 2,384 $ 2,400 INCOME TAXES $ 60 $ 200
See notes to consolidated financial statements. 8 Fentura Bancorp, Inc. and Subsidiaries Statement of Comprehensive Income
Three Months Ended (000's Omitted) March 31, 1999 1998 --------------------------- Net Income $ 886 $ 820 Other comprehensive income, net of tax: Unrealized holding gains arising during period ($164) $ 56 Less: reclassification adjustment for gains included in net income $ 26 $ 0 --------------------------- Other comprehensive income ($190) $ 56 --------------------------- Comprehensive income $ 696 $ 876 ===========================
Fentura Bancorp, Inc. and Subsidiaries Notes to Consolidated Financial Statements 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, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. Note 2. Reclassifications Certain prior year amounts have been reclassified to conform to the current year financial statement presentation. Note 3. During the first quarter of 1998 the Corporation adopted the Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income". The statement requires that entities present items of other comprehensive income in a financial statement with the same prominence as other financial statements. This statement requires reclassification of financial statements for earlier periods for comparative purposes. The adoption for SFAS No. 130 does not effect the net income of the Corporation. 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis is intended to address significant factors affecting the Corporation's consolidated financial statements during the three months ended March 31, 1999 and 1998. 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 1999 1998 - -------------------------------------------------------------------------------------------- Summary of Consolidated Statements of Earnings: Interest Income $ 5,083 $ 5,296 Interest Expense 1,955 2,208 --------------------------------- Net Interest Income 3,128 3,088 Provision for Possible Credit Losses 195 156 --------------------------------- Net Interest Income after Provision 2,933 2,932 Total Other Operating Income 1,026 960 Total Other Operating Expense 2,675 2,700 --------------------------------- Income Before Income Taxes 1,284 1,192 Provision for Income Taxes 398 372 --------------------------------- Net Income $ 886 $ 820 ================================= Net Income Per Share $ 0.63 $ 0.59 Summary of Consolidated Statements of Financial Condition: Assets $266,448 $261,480 Securities 65,242 52,397 Loans 173,947 183,696 Deposits 235,883 233,928 Stockholders' Equity 30,565 27,552 Other Financial and Statistical Data: Tier 1 Capital to Risk Weighted Assets 13.67% 12.46% Total Capital to Risk Weighted Assets 14.92% 13.71% Tier 1 Capital to Average Assets 10.61% 10.18% Total Cash Dividends $ 324 $ 284 Book Value Per Share $ 21.69 $ 19.86 Cash Dividends Paid Per Share $ 0.23 $ 0.21 Period End Market Price Per Share $ 54.00 $ 28.00 Dividend Payout Ratio 36.57% 34.63% Return on Average Stockholders'Equity 11.51% 11.96% Return on Average Assets 1.32% 1.28% Net Interest Margin (FTE) 5.12% 5.25% Total Equity to Assets at Year End 11.50% 10.50%
- -------------------------------------------------------------------------------- 10 Results of Operations Table 1 summarizes selected financial data for the three months ended March 31, 1999 and 1998. As indicated earnings for the three months ended March 31, 1999 were $886,000 compared to $820,000 for the same period in 1998. Earnings have continued to steadily increase as a result of continued strength of core banking activities. Contributing to the 1999 results was the improvement of net interest income and other operating income. The banking industry uses standard performance indicators to help evaluate the Corporation's performance. Return on average assets is one of these indicators. For the three months ended March 31, 1999 the Corporation's return on average assets was 1.32% compared to 1.28% for the same period in 1998. Total assets increased approximately $5,000,000 from March 31, 1998 to $266,448,000 at March 31, 1999. Stockholders' Equity increased approximately $3,000,000 from March 31, 1998 to $30,565,000 at March 31, 1999. The increase in equity will allow the Corporation to continue its growth strategy. Net income per share-basic was $.63 in the first three months of 1999 compared to $.59 for the same period in 1998. Net Interest Income Net interest income and average balances and yields on major categories of interest-earning assets and interest-bearing liabilities for the three months ended March 31, 1999 and 1998 are summarized in Table 3. The effects of changes in average interest rates and average balances are detailed in Table 2 below. Table 2 CHANGES IN NET INTEREST INCOME DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES
THREE MONTHS ENDED MARCH 31, THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO 1998 1998 COMPARED TO 1997 INCREASE (DECREASE) INCREASE (DECREASE) DUE TO: DUE TO: ----------------------------------------------------------------- YIELD/ YIELD/ (000'S OMITTED) VOL RATE TOTAL VOL RATE TOTAL - ------------------------------------------------------------------------------------------------------ INT. BEARING DEPOSITS IN BANKS ($ 1) $ 0 ($ 1) ($ 1) $ 0 ($ 1) TAXABLE SECURITIES 126 (16) 110 (1) 3 2 TAX-EXEMPT SECURITIES 19 (3) 16 38 (7) 31 FEDERAL FUNDS SOLD 126 (30) 96 (46) 3 (43) TOTAL LOANS (337) (180) (517) (16) (45) (61) LOANS HELD FOR SALE 108 (25) 83 97 (13) 84 ------------------------------------------------------------- TOTAL EARNING ASSETS 41 (254) (213) 71 (59) 12 INT. BEARING DEMAND DEPOSITS 40 (55) (15) 13 (6) 7 SAVINGS DEPOSITS 34 (69) (35) 17 (23) (6) TIME CD'S $100,000 AND OVER (1) (44) (45) (51) 10 (41) OTHER TIME DEPOSITS (62) (82) (144) 7 (13) (6) OTHER BORROWINGS (12) (2) (14) (2) 5 3 ------------------------------------------------------------- TOTAL INT. BEARING LIABILITIES (1) (252) (253) (16) (27) (43) ------------------------------------------------------------- NET INTEREST INCOME $ 42 ($ 2) $ 40 $ 87 ($ 32) $ 55 =============================================================
As indicated in Table 2, during the three months ended March 31, 1999, net interest income increased over the same period in 1998 principally due to the reduction of rates paid on interest bearing liabilities. 11 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, 1999 and 1998 are shown in Table 3. Net interest income for the three months ended March 31, 1999 was 3,128,000 an increase of $40,000 over the same period in 1998. This represents an increase of 1.3%. The primary factor contributing to the net interest income increase is the reduction of interest expense due to lower rates paid on savings, interest bearing DDA, and time deposits. Also indicated in Table 3, for the three months ended March 31, 1998 net interest income was $3,088,000. This is an increase of $55,000 or 1.8% over the same period in 1997. The increase in 1998 is also attributable to the reduction of interest expense due to lower rates paid on interest bearing deposits and a reduction in time deposits of $100,000 and over. 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 1999, additional 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 Risk". 12
Table 3 THREE MONTHS ENDED MARCH 31, AVERAGE BALANCES AND RATES 1999 1998 (000s omitted) AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ Assets BALANCE EXPENSE RATE BALANCE EXPENSE RATE ------------------------------------------------------------------- Interest bearing deposits in Banks $0 $0 0.00% $64 $1 6.34% Investment securities: U.S. Treasury and Government Agencies 51,357 767 6.06% 43,620 657 6.11% State and Political 11,360 135 4.82% 9,822 119 4.91% Other 1,264 15 4.81% 760 15 8.00% -------------------------------- -------------------------------- Total Investment Securities 63,981 917 5.81% 54,202 791 5.92% Fed Funds Sold 12,556 144 4.65% 3,492 48 5.57% Loans: Commercial 85,745 1,963 9.28% 86,699 2,084 9.75% Tax Free 296 4 5.48% 467 7 6.08% Real Estate-Mortgage 15,731 388 10.00% 19,604 518 10.72% Consumer 61,727 1,483 9.74% 70,216 1,746 10.08% -------------------------------- -------------------------------- Total loans 163,499 3,838 9.52% 176,986 4,355 9.98% Allowance for Loan Loss (2,828) (2,945) Net Loans 160,671 3,838 9.69% 174,041 4,355 10.15% -------------------------------- -------------------------------- Loans Held for Sale 10,549 184 7.07% 5,697 101 7.19% -------------------------------- -------------------------------- TOTAL EARNING ASSETS $250,585 $5,083 8.23% $240,441 $5,296 8.93% ------------------------------------------------------------------- Cash Due from Banks 9,960 9,558 All Other Assets 10,959 9,175 ----------- ----------- TOTAL ASSETS $268,676 $256,229 ----------- ----------- LIABILITIES & SHAREHOLDERS' EQUITY: Deposits: Non-Interest bearing - DDA $27,625 $24,648 Interest bearing - DDA 43,024 187 1.76% 35,958 202 2.28% Savings Deposits 62,881 424 2.73% 58,631 459 3.17% Time CD's $100,000 and Over 25,384 334 5.34% 25,474 379 6.03% Other Time CD's 74,896 978 5.30% 79,185 1,122 5.75% -------------------------------- -------------------------------- Total Deposits 233,810 1,923 3.34% 223,896 2,162 3.92% Other Borrowings 1,818 32 7.14% 2,421 46 7.71% -------------------------------- -------------------------------- INTEREST BEARING LIABILITIES $208,003 $1,955 3.81% $201,669 $2,208 4.44% ------------------------------------------------------------------- All Other Liabilities 2,255 2,477 Shareholders Equity 30,793 27,435 ----------- ----------- TOTAL LIABILITIES and S/H EQUITY $268,676 $256,229 ----------- --------- ----------- --------- Net Interest Rate Spread 4.41% 4.49% Impact of Non-Int Funds on Margin 0.65% 0.72% --------- --------- Net Interest Income/Margin $3,128 5.06% $3,088 5.21% ===================== =====================
13 ALLOWANCE AND PROVISION FOR LOAN LOSSES The allowance for loan losses (ALL) reflects management's judgment as to the level considered appropriate to absorb potential losses inherent in the loan portfolio. Fentura's subsidiary, The State Bank's, methodology in determining the adequacy of the ALL includes a review of individual loans and off-balance sheet arrangements, 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, 1999, the ALL was $2,850,000, or 1.64% of total loans, including those loans held for sale. This compares with $3,012,000, or 1.64%, at March 31, 1998. The decline in the ALL balance was a result of a substantial write down on a nonperforming commercial loan in 1998. The loss was a result of isolated circumstances and management believes that overall asset quality remains strong. The provision for loan losses was $195,000 for the three months ended March 31, 1999 and $156,000 for the same period in 1998. The primary reason for increasing the provision in 1999 was to maintain the ALL balance commensurate with expected loan growth. Table 4 ANALYSIS OF THE ALLOWANCE FOR POSSIBLE CREDIT LOSSES
Three Months Ended (000's omitted) March 31, 1999 1998 ------------------------------ Balance at Beginning of Period $ 2,783 $ 2,955 ------------------------------ Charge-Offs: Domestic: Commercial, Financial and Agriculture (72) (42) Real Estate-Construction 0 0 Real Estate-Mortgage (2) 0 Installment Loans to Individuals (88) (86) Lease Financing 0 0 ------------------------------ Total Charge-Offs (162) (128) ------------------------------ Recoveries: Domestic: Commercial, Financial and Agriculture 6 13 Real Estate-Construction 0 0 Real Estate-Mortgage 0 0 Installment Loans to Individuals 28 16 Lease Financing 0 0 ------------------------------ Total Recoveries 34 29 ------------------------------ Net Charge-Offs (128) (99) ------------------------------ Provision 195 156 ------------------------------ Balance at End of Period $ 2,850 $ 3,012 ============================== Ratio of Net Charge-Offs During the Period 0.08% 0.06% ==============================
NON-INTEREST INCOME
TABLE 5 Three Months Ended Analysis of Non-Interest Income March 31, - ------------------------------------------------------------------------ (000's omitted) 1999 1998 - ------------------------------------------------------------------------ Service Charges on Deposit Accounts $476 $415 Gain on Sale of Mortgages $52 $74 Mortgage Servicing Fees $76 $94 Fiduciary Income $155 $141 Other Operating Income $241 $236 Investment Gains $26 $0 ------------------------ Total Non-Interest Income $1,026 $960 ========================
14 Non-interest income increased in the three months ended March 31, 1999 as compared to the same period in 1998, due to an increase in service charges on deposit accounts. Overall non-interest income was $1,026,000 in the three months ended March 31, 1999 compared to $960,000 for the same period in 1998. These figures represent an increase of 6.9%. Table 5 provides a more detailed breakdown of the components of non-interest income than can be found in the income statement on page 5. The most significant category of non-interest income is service charges on deposit accounts. These fees were $476,000 in the three months ended March 31, 1999 compared to $415,000 for the same period of 1998. This represents an increase of 14.7%. Growth in deposit totals, the number of accounts and certain account activities account for the increases in fees. Gains on the sale of mortgage loans originated by the bank and sold in the secondary market were $52,000 in the quarter ended March 31, 1999 and $74,000 in the same period in 1998. The decrease occurred because of a decrease in residential mortgage refinance activity and new loan volumes. Mortgage servicing fees were $76,000 in the three months ended March 31, 1999 compared to $94,000 in the same time period in 1998. This is a decline of $18,000 or 19.1%. The decline is attributable to lower serviced loan balances in 1999 due to payoffs throughout 1998 and the first three months of 1999 of serviced loans and the Corporation's retention of certain new mortgages as opposed to selling those loans and recognizing servicing fees. Fiduciary income increased $14,000 in the three months ended March 31, 1999 comparing to the same time period in the prior year. This 9.9% increase in fees is attributed to growth in the assets under management within the Corporation's Investment Trust Department. Gains on the sale of investments were $26,000 in the first quarter of 1999. These gains occurred from sales of investments which had lower yield potential and longer maturities in connection with forecasts relating to yield curve movements and the expected impact on market rates. Proceeds from these transactions are being used to invest in other securities with stronger yields within certain maturity horizons. In the first quarter of 1998 there were no such transactions and accordingly there were no gains from the sale of investments. Non-Interest Expense
TABLE 6 Three Months Ended Analysis of Non-Interest Expense March 31, - ------------------------------------------------------------------------ (000's omitted) 1999 1998 - ------------------------------------------------------------------------- Salaries and Benefits $1,328 $1,239 Equipment $341 $316 Net Occupancy $193 $177 FDIC Assessment $7 $7 Office Supplies $65 $88 Loan & Collection Expense $60 $111 Advertising $52 $81 Other Operating Expense $629 $681 ------------------------ Total Non-Interest Expense $2,675 $2,700 ========================
Total non-interest expense was $2,675,000 in the three months ended March 31, 1999 compared with $2,700,000 in the same period of 1998. This is a decrease of .9%. This decrease occurred due to decreases in office supplies, loan and collection, advertising, and other operating expenses. Salary and benefit costs, Fentura's largest non-interest expense category, were $1,328,000 in the three months ended March 31, 1999, compared with $1,239,000, or an increase of 7.2%, for the same time period in 1998. Increased costs are primarily a result of an increase in the number of employees and normal annual salary increases. 15 During the three months ended March 31, 1999 equipment expenses were $341,000 compared to $316,000 for the same period in 1998, an increase of 7.9%. The increase in expense is attributable to equipment repairs, upgrades, and maintenance. Occupancy expenses at $193,000 increased in the three months ended March 31, 1999 comparing to the same period in 1998 by $16,000 or 9.0%. The increase is attributable to increases in facility repairs and maintenance, utility, real estate tax, and facility depreciation expense. During the three months ended March 31, 1999 office supplies expense at $65,000 decreased $23,000 comparing to the $88,000 in expense for the same period in 1998. This decrease is attributable to volume decreases of regular office supplies and preprinted forms in 1999. Loan and collection expenses, at $60,000, were down $51,000 during the three months ended March 31, 1999 comparing to the same time period in 1998. This decrease is primarily attributable to decreases in home equity loan fees waived to the customer and paid by the bank and a decrease in dealer service fees paid in connection with indirect auto lending. Advertising expenses were $52,000 in the quarter ended March 31, 1999 compared to $81,000 in the same period of 1998. This is a decrease of $29,000 or 35.8%. Media and promotional advertising expenses in connection with the Bank's 100th anniversary in 1998 account for the variance to 1999 expense. Other operating expenses were $629,000 in the three months ended March 31, 1999 compared to $681,000 in the same time period in 1998, a decrease of $52,000 or 7.6%. The decrease is attributable to a decrease in deposit account losses. These losses were down in 1999 because of a loss of $75,000 on an improperly endorsed check in January of 1998. NONPERFORMING 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, 1999 and 1998. Non-performing loans include several delinquent single-family mortgage loans which have sufficient equity and no expected loss. Non-accrual loans include a large commercial loan and a residential construction mortgage loan. An agreement has been executed that requires specific action plans, collateral pledges, and related performance expectations for the commercial loan creating the largest exposure for the Corporation. These loans will be closely monitored. 16 Table 7 Non-Performing Assets and Past Due Loans
March 31, 1999 1998 ------------------------------ Non-Performing Loans: Loans Past Due 90 Days or More & Still Accruing $ 182,000 $ 869,000 Non-Accrual Loans 1,032,000 1,688,000 Renegotiated Loans 7,000 8,000 ------------------------------ Total Non-Performing Loans 1,221,000 2,565,000 ------------------------------ Other Non-Performing Assets: Other Real Estate 172,000 0 REO in Redemption 96,000 154,000 Other Non-Performing Assets 30,000 63,000 ------------------------------ Total Other Non-Performing Assets 298,000 217,000 ------------------------------ Total Non-Performing Assets $1,519,000 $2,782,000 ============================== Non-Performing Loans as a % of Total Loans 0.75% 1.46% Non-Performing Assets as a % of Total Loans and Other Real Estate 0.93% 1.58% Allowance for Loan Losses as a % of Non-Performing Loans 233.42% 117.43% Allowance for Loan Losses, Other Real Estate, and In-Substance Foreclosures as a % of Non-Performing Assets 198.95% 113.80% Accruing Loans Past Due 90 Days or More to Total Loans 0.11% 0.49% Non-performing Assets as a % of Total Assets 0.57% 1.06%
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT Asset/Liability management procedures are 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. ALCO, which is comprised of key members of management, meets regularly to review Fentura's 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 determine that earnings, liquidity, and growth rates are 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 Bank'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 Bank's 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 1999 and 1998. Primary liquidity is provided through short-term investments or borrowings (including federal funds sold and purchased) and secondary liquidity is provided by the investment portfolio. As of March 30, 1999 federal funds sold represented 2.9% of total assets, compared to 3.6% at March 30, 17 1998. 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 decreased $8,862,000 in first three months of 1999 due to the decline of total deposits. Comparatively, in the first three months of 1998, cash flows from financing activities decreased $1,937,000 because of decreases in time deposits. Cash flows from investing activities were $10,606,000 during the first three months of 1999 and $8,552,000 in the same period of 1998. The primary reason for the increase in investing activities at the end of the first quarter of 1999, was an increase in maturing investments comparing to the same period in 1998. CAPITAL MANAGEMENT Total shareholders' equity rose 10.9% to $30,565,000 at March 31, 1999 compared with $27,552,000 at March 31, 1998. The Company's equity to asset ratio was 11.5% at March 31, 1999 and 10.5% at March 31, 1998. 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 1999, the Corporation increased its cash dividends by 9.5% to $.23 per share compared with $.21 in the same time period in 1998. As indicated on the balance sheet on page 4, at March 31, 1998 the Company had an unrealized gain on securities available for sale (AFS) of $3,000 compared to an unrealized gain at March 31, 1998 of $115,000. This decrease in gain position is attributable to market interest rates and the interest rate structures on those securities held in the AFS portfolio. REGULATORY CAPITAL REQUIREMENTS Bank holding companies and their bank subsidiaries are required by banking industry regulators to meet certain levels of capital adequacy. These are expressed in the form of certain ratios. Capital is separated into two levels, Tier I capital (essentially total common stockholders' equity less goodwill) and Tier II capital (essentially the reserve for loan losses limited to 1.25% of gross risk-weighted assets). 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 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%. The FDIC has adopted a risk-based insurance premium system based in part on a corporation'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". 18
Table 8 - ---------------------------------------------------------------------------------------- Capital Ratios Regulatory Minimum For "Well March 31, December 31, March 31, Capitalization" 1998 1998 1998 - ---------------------------------------------------------------------------------------- Risk Based Capital: Total Capital 10% 14.92% 14.55% 13.71% Tier 1 6% 13.67% 13.30% 12.46% Tier 1 Leverage 5% 10.61% 10.60% 10.18%
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. As a matter of practice, the Bank doesn't use derivative transactions 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, 1998, 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. However, the table does not necessarily indicate 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 rates or indices.
Table 9 GAP ANALYSIS MARCH 31, 1999 (000's Omitted) Within Three One to After Three Months- Five Five Months One Year Years Years Total Earning Assets: Interest Bearing Bank Deposits $0 $0 $0 $0 0 Federal Funds Sold 7,700 0 0 0 7,700 Investment Securities 22,312 674 13,848 28,408 65,242 Loans 53,002 9,553 79,409 21,392 163,356 Loans Held for Sale 166 0 0 10,425 10,591 ------------------------------------------------------------ Total Earning Assets $83,180 $10,227 $93,257 $60,225 $246,889 ============================================================ Interest Bearing Liabilities: Interest Bearing Demand Deposits $39,882 $0 $0 $0 $39,882 Savings Deposits 18,376 0 0 47,936 66,312 Time Deposits Less than $100,000 16,666 33,982 23,809 60 74,517 Time Deposits Greater than $100,000 12,193 7,679 4,892 0 24,764 Other Borrowings 215 0 40 1,125 1,380 ------------------------------------------------------------ Total Interest Bearing Liabilities $87,332 $41,661 $28,741 $49,121 $206,855 ============================================================ Interest Rate Sensitivity GAP ($4,152) ($31,434) $64,516 $11,104 $40,034 Cumulative Interest Rate Sensitivity GAP ($4,152) ($35,586) $28,930 $40,034 Interest Rate Sensitivity GAP 0.95 0.25 3.24 1.23 Cumulative Interest Rate Sensitivity GAP Ratio 0.95 0.72 1.18 1.19
19 IMPACT OF YEAR 2000 The Year 2000 issue is the result of computer programs which were designed to utilize two digits rather than four digits in date fields for computer calculations. Any computer or electronic calculation recognizing a two digit rather than a four digit date may incur system failure or miscalculate information when using a date after December 31, 1999 resulting in potentially serious impairment to business operations. The Corporation began addressing the Year 2000 issue internally in 1997 with the formation of a task force created to identify, coordinate, manage and monitor the impact of Year 2000 related issues. The task force consists of representatives from every functional area of the Corporation. The Corporation's Year 2000 Program initially focused on technology assessment and planning, and the upgrading or renovation of internal systems. Once the assessment and renovation phases were largely complete the task force focused on testing or validating internal systems and the assessment of external business risk and contingency planning. Currently, the Corporation's Year 2000 Program is tracked against a well defined set of goals and key dates. The Corporation has not identified any noncompliant systems for which a solution is not available and which would impair the business operations. All Year 2000 costs to date have not been material and are being expensed, or capitalized if it is a system replacement, as incurred. Anticipated future expenses are not expected to materially impair future earnings. The Corporation anticipates that all renovation or replacement and testing procedures will be completed by June 30, 1999. As of December 31, 1998, substantially all core system software applications were remediated. The majority of internal testing of these software applications was complete. Completion of the goals as of December 31, 1998, exceeds the milestones established by the Corporation's banking regulators. Throughout 1999, the task force will continue to assess and create contingency plans as they relate to internal operational risk as well as external risks including major customer and vendor due diligence. In its normal course of business, the Corporation manages many types of risk. Management recognizes that the risks presented by Year 2000 are unique given the pervasive nature of the problem and the fact that there may be a higher likelihood the Year 2000 risk will present itself in multiple, simultaneous impacts. Because of this, the Corporation has adjusted and will continue to adjust its risk management processes and contingency plans to take the most probable anticipated Year 2000 effects into account. Although it is too early to predict accurately what system failures may occur, management believes sufficient planning, communication, coordination, and testing will mitigate potential material disruption. In this regard, contingency plans including command centers, response teams, technology teams, and testing are being developed. In addition to the internal and external testing, and credit assessments, the Corporation is assessing operational and liquidity needs to enhance contingency plans. While the Corporation is not aware of any Year 2000 problems for which a solution is not available, other unanticipated Year 2000 issues could arise, and there can be no assurance that actual results will be comparable to expected results. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a. Exhibits The exhibits listed on the "Exhibit Index" on page 15 of this report are incorporated herein by reference. b. Report on Form 8-k 4 No reports on Form 8-k were filed for the quarter ended March 31, 1999. 20 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FENTURA BANCORP, INC. Date May 12, 1999 By /s/ Donald L. Grill ------------ -------------------- Donald L. Grill Director President & CEO Date May 12, 1999 By /s/ Ronald L. Justice ------------ ---------------------- Ronald L. Justice Senior Vice President (Authorized Signer) Chief Financial Officer Cashier 21 FENTURA BANCORP, INC. 1999 Quarterly Report on Form 10Q EXHIBIT INDEX
Exhibit No. Exhibit Location - ------- ------- -------- 4.1 Dividend Reinvestment Plan ***** 10.1 Equipment Sale Agreement between The State Bank and ITI, Inc. dated May 31, 1989 * 10.2 Master Equipment Lease Agreement between The State Bank and Unisys Finance Corporation dated September 6, 1989 * 10.3 Software License Agreement between The State Bank and ITI, Inc. dated July 3, 1989 * 10.4 Lease of Site for Automated Teller Machines between The State Bank and Bryce Felch dated November 6, 1986 * 10.5 Lease of Site for Automated Teller Machines between The State Bank and VG's Food Center, Inc. dated January 1, 1992 * 10.6 Lease of Holly Branch Bank Site between The State Bank and Inter Lakes Associates dated March 26, 1991 * 10.7 Lease of Davison Branch Bank Site between The State Bank and VG's Food Center, Inc. dated April 27, 1993 * 10.8 Lease of Clarkston Branch Site between The State Bank and Waldon Properties, Inc. dated January 24, 1994 *** 10.9 Lease of Site for Automated Teller Machines between The State Bank and Russell and Joy Manser dated December 1, 1994 *** 10.10 Lease of Fenton Silver Parkway Branch site between The State Bank and VG's Food Centers dated March 26, 1996 **** 10.11 Lease of Davison (second) Branch site between The State Bank and VG'S Food Centers dated November 12, 1996 ****** 10.12 Directors Stock Purchase Plan ***** 10.13 Non-Employee Director Stock Option Plan ***** 10.14 Form of Non-Employee Director Stock Option Agreement ***** 10.15 Retainer Stock Plan for Directors ***** 10.16 Employee Stock Option Plan ***** 10.17 Form of Employee Stock Option Plan Agreement ***** 10.18 Executive Stock Bonus Plan *****
22 10.19 Stock Purchase Plan between The State Bank and Donald E. Johnson, Jr., Mary Alice J. Heaton, and Linda J. LeMieux dated November 27, 1996 ****** 10.20 Severance Compensation Agreements between the registrant and Donald L. Grill and Richard A. Bagnall dated March 20, 1997 ******* 27.0 Financial Data Schedule * Incorporated by reference to form 10-SB registration number 0-23550 ** Incorporated by reference to form 8-K filed July 8, 1994 *** Incorporated by reference to form 10K-SB filed March 20, 1995 **** Incorporated by reference to form 10Q-SB filed May 2, 1996 ***** Incorporated by reference to form 10K-SB filed March 27, 1996 ****** Incorporated by reference to form 10K-SB filed March 20, 1997 ******* Incorporated by reference to from 10Q-SB filed May 12, 1997
EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 11,721 0 7,700 0 53,886 11,356 11,622 173,947 2,850 266,448 232,232 205 2,271 1,175 3529 0 0 27,036 266,448 4,022 917 144 5,083 1,923 1,955 3,128 195 26 2,675 1,284 1,284 0 0 886 .23 .23 5.12 1,032 182 7 54 2,783 162 34 2,850 2,850 0 0
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