<PAGE> 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 June 30, 1998
[ ] 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: August 12, 1998
----------------
Class - Common Stock Shares Outstanding - 1,403,177
<PAGE> 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
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Fentura Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
JUNE 30, DEC 31, JUNE 30,
(000's omitted Except Per Share Data) 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Cash and due from banks $ 14,965 11,047 9,790
Federal funds sold 9,400 5,400 8,150
----------------------------------------------
Total Cash & Cash Equivalents 24,365 16,447 17,940
Interest bearing deposits with banks 0 95 95
Investment securities-held to maturity, at cost (market
value of $10,958, and
$6,799 at June 30, 1998 and 1997,
respectively) 10,845 9,590 6,772
Investment securities-avail for sale,
at market 44,813 46,460 48,773
----------------------------------------------
Total investment securities 55,658 56,050 55,545
Loans:
Commercial 72,185 81,063 78,341
Tax exempt development loans 427 481 670
Real estate loans - mortgage 11,996 14,589 14,491
Real estate loans - construction 13,593 15,007 19,563
Consumer loans 69,831 69,533 67,384
----------------------------------------------
Total loans 168,032 180,673 180,449
Less: Reserve for loan losses (2,758) (2,955) (2,930)
----------------------------------------------
Net loans 165,274 177,718 177,519
Loans held for sale 11,137 3,525 1,119
Bank premises and equipment 3,702 3,990 4,375
Accrued interest receivable 1,747 1,907 1,810
Other assets 3,369 3,066 3,328
----------------------------------------------
Total assets $ 265,252 262,798 261,731
==============================================
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
LIABILITIES
Deposits:
<S> <C> <C> <C>
Non-interest bearing deposits $ 28,231 31,072 27,172
Interest bearing deposits 203,371 199,462 203,674
----------------------------------------------
Total deposits 231,602 230,534 230,846
Federal Funds Purchased 0 0 0
Other borrowings 2,675 2,685 3,025
Accrued taxes, interest and
other liabilities 2,458 2,837 2,309
----------------------------------------------
Total liabilities 236,735 236,056 236,180
----------------------------------------------
STOCKHOLDERS' EQUITY
Common stock - $5 par value
1,403,177 shares issued (692,343 in Dec., 7,016 3,462 3,427
1997 and 685,455 in June, 1997)
Surplus 17,375 16,913 16,595
Retained Earnings 3,963 6,308 5,690
Unrealized loss on sec avail for sale 163 59 (161)
----------------------------------------------
Total stockholder's equity 28,517 26,742 25,551
----------------------------------------------
Total liabilities and
stockholder's equity $ 265,252 262,798 261,731
==============================================
See notes to consolidated financial statements.
</TABLE>
<PAGE> 5
Fentura Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 4,527 4,464 $ $ 8,983 8,897
Interest and dividends on
investment securities:
Taxable 637 715 1,309 1,385
Tax-exempt 128 87 247 175
Int on deposits with banks 0 3 1 5
Interest on federal funds sold 112 82 160 173
------------------------------ -------------------------------
Total interest income 5,404 5,351 10,700 10,635
INTEREST EXPENSE
Deposits 2,111 2,266 4,273 4,474
Short-term borrowings 40 44 86 87
------------------------------ -------------------------------
Total interest expense 2,151 2,310 4,359 4,561
NET INTEREST INCOME 3,253 3,041 6,341 6,074
Provision for loan losses 256 156 412 312
------------------------------ -------------------------------
Net interest income after
provision for loan losses 2,997 2,885 5,929 5,762
NON-INTEREST INCOME
Service chrgs on dep accts 428 396 843 758
Fiduciary income 139 114 280 220
Other operating income 453 356 857 695
Investment gains 5 0 5 0
------------------------------ -------------------------------
Total non-interest income 1,025 866 1,985 1,673
NON-INTEREST EXPENSE
Salaries and benefits 1,315 1,226 2,554 2,515
Occupancy of bank premises 182 160 360 337
Equipment expense 359 354 675 693
Other operating expenses 879 792 1,846 1,595
-----------------------------------------------------------------
Total non-interest expense 2,735 2,532 5,435 5,140
NET INCOME BEFORE TAXES 1,287 1,219 2,479 2,295
Applicable income taxes 390 378 762 719
------------------------------ -------------------------------
NET INCOME $ 897 841 $ 1,717 1,576
============================== ===============================
Per share:
Net income .................. $ 0.64 0.61 $ 1.23 1.16
Dividends ................... $ 0.21 0.19 $ 0.42 0.38
Average number of common
shares outstanding......... 1,401,213 1,368,038 1,394,140 1,361,800
See notes to consolidated financial statements.
</TABLE>
<PAGE> 6
Fentura Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
- -------------------------------------------------------------------------------------------------------
June 30, June 30,
(000's omitted) 1998 1997
- -------------------------------------------------------------------------------------------------------
COMMON STOCK
<S> <C> <C>
Balance, beginning of period $ 3,462 $ 3,386
Issuance of shares under
director stock purchase plan,
stock purchase plan, and
dividend reinvestment prog 72 41
Stock dividend 3,482 0
--------------- ----------------
Balance, end of period 7,016 3,427
SURPLUS
Balance, beginning of period 16,913 16,266
Issuance of shares under
director stock purchase plan,
stock purchase plan, and
dividend reinvestment prog 462 329
Stock dividend 0 0
--------------- ----------------
Balance, end of period 17,375 16,595
RETAINED EARNINGS
Balance, beginning of period 6,308 4,632
Net income 1,717 1,576
Stock dividend (3,483)
Cash dividends declared (579) (518)
--------------- ----------------
Balance, end of period 3,963 5,690
UNREALIZED GAIN ON SECURITIES
AVAILABLE FOR SALE
Balance, beginning of period 59 (175)
Change in unrealized gain (loss)
on securities, net of tax 104 14
--------------- ----------------
Balance, end of period 163 (161)
--------------- ----------------
TOTAL SHAREHOLDERS' EQUITY $ 28,517 $ 25,551
=============== ================
See notes to consolidated financial statements.
</TABLE>
<PAGE> 7
Fentura Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30,
- ---------------------------------------------------------------------------------------
(000's omitted,
Except Per Share Data) 1998 1997
- ---------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $1,717 $1,576
Adjustments to reconcile net inc to cash
Provided by Operating Activities:
Depreciation and amortization 441 492
Provision for loan losses 256 312
Amortization (accretion) on securities 28 57
Loans originated for sale (17,764) (10,415)
Loans sold 10,152 10,303
Gain on investment securities (5) 0
Decrease (increase) in interest receivable 160 25
Decrease (increase) in other assets (358) (332)
Increase (decrease) in accrued taxes,
interest, and other liabilities (379) (1,545)
------------------------
Total Adjustments (7,469) (1,103)
------------------------
Net Cash Provided By (Used In) Operating Activities (5,752) 473
------------------------
Cash Flows From Investing Activities:
Net decrease in deposits with other banks 95 0
Proceeds from maturities of inv activities - HTM 3,055 550
Proceeds from maturities of inv activities - AFS 19,759 4,537
Purchases of investment securities - HTM (4,314) (797)
Purchases of investment securities - AFS (17,973) (8,988)
Net (increase) in customer loans 12,188 (5,438)
Capital expenditures (153) (73)
------------------------
Net Cash Used in Investing Activities 12,657 (10,209)
Cash Flows From Financing Activities:
Net increase (decrease) in DDA/SAV deposits 1,202 1,907
Net increase (decrease) in Time deposits (134) 4,890
Net increase (decr) in borrowings (10) 656
Proceeds from stock issuance 534 370
Cash dividends (579) (518)
------------------------
Net Cash Provided By (Used In) Financing Activities 1,013 7,305
NET INCREASE IN CASH AND CASH EQUIVALENTS $7,918 $(2,431)
CASH AND CASH EQUIVALENTS - BEGINNING $16,447 $20,371
CASH AND CASH EQUIVALENTS - ENDING $24,365 $17,940
========================
CASH PAID FOR:
INTEREST $4,398 $4,471
INCOME TAXES $1,130 $631
See notes to consolidated financial statements.
</TABLE>
<PAGE> 8
Fentura Bancorp, Inc. and Subsidiaries
Statement of Comprehensive Income
Six Months Ended
(000's Omitted) June 30,
1998 1997
---------------------------
Net Income $1,717 $1,576
Other comprehensive income, net of tax:
Unrealized holding gains arising
during period $109 $14
Less: reclassification adjustment for
gains included in net income $5 $0
---------------------------
Other comprehensive income $104 $14
---------------------------
Comprehensive income $1,821 $1,590
===========================
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
six months ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the year ended December 31,
1998.
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.
<PAGE> 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
and six months ended June 30, 1998 and 1997. It provides a more detailed and
comprehensive review of the operating results and financial position than could
be obtained from the financial statements alone.
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 and six
months ended June 30, 1998 and 1997 are summarized in Tables 2 and 3,
respectively. The effects of changes in average interest rates and average
balances are detailed in Table 1 below.
Table 1 CHANGES IN NET INTEREST INCOME
DUE TO CHANGES IN AVERAGE VOLUME
AND INTEREST RATES
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1998 COMPARED TO 1997 1998 COMPARED TO 1997
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO: DUE TO:
-------------------------------------------------------------------------
YIELD/ YIELD/
(000'S OMITTED) VOL RATE TOTAL VOL RATE TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST BEARING DEPOSITS IN BANKS ($3) $0 ($3) ($3) ($1) ($4)
TAXABLE SECURITIES (67) (11) (78) (68) (8) (76)
TAX-EXEMPT SECURITIES 51 (10) 41 89 (17) 72
FEDERAL FUNDS SOLD 29 1 30 (19) 6 (13)
TOTAL LOANS (117) 31 (86) (112) (35) (147)
LOANS HELD FOR SALE 163 (14) 149 206 27 233
-------------------------------------------------------------------------
TOTAL EARNING ASSETS 56 (3) 53 93 (28) 65
INTEREST BEARING DEMAND DEPOSITS 20 (4) 16 33 (10) 23
SAVINGS DEPOSITS 17 (81) (64) 34 (104) (70)
TIME CDs $100,000 AND OVER (71) (1) (72) (117) 4 (113)
OTHER TIME DEPOSITS (5) (30) (35) (2) (39) (41)
OTHER BORROWINGS (3) (1) (4) (4) 3 (1)
-------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES (42) (117) (159) (56) (146) (202)
-------------------------------------------------------------------------
NET INTEREST INCOME $98 $114 $212 $149 $118 $267
=========================================================================
</TABLE>
As indicated in Table 1, during the three and six months ended June 30 1998, net
interest income increased over the same period in 1997 due to the increase in
volume of earning assets and both the reduction of volume and rate of interest
bearing liabilities.
Net interest income (displayed without consideration of full tax equivalency),
average balance sheet amounts, and the corresponding yields for the three months
ended June 30, 1998 and 1997 are shown in Table 2. Net interest income for the
three months ended June 30, 1998 was 3,253,000 an increase of $212,000 over the
same period in 1997. This represents an increase of 7.0%. The primary factors
contributing to the net interest income increase are growth in the Corporation's
earning assets through increases in federal funds sold and loans held for sale
and a reduction of interest expense due to lower rates paid on savings, interest
bearing DDA, and time deposits. Also indicated in Table 2, for the three months
ended June 30, 1997 net interest income was $3,041,000. This is an increase of
$78,000 or 2.6% over the same period in 1996. The increase in 1997 is
attributable to the increase in income derived from increases within investment
securities and loans.
<PAGE> 10
Net interest income (displayed without consideration of full tax equivalency),
average balance sheet amounts, and the corresponding yields for the six months
ended June 30, 1998 and 1997 are shown in Table 3. Net interest income for the
six months ended June 30, 1998 was 6,341,000 an increase of $267,000 over the
same period in 1997. This represents an increase of 4.4%. The primary factors
contributing to the net interest income increase are growth in the Corporation's
earning assets through increases in loans held for sale and investment
securities and a reduction of interest expense due to lower rates paid on
savings, interest bearing DDA, and other time deposits. Also indicated in Table
3, for the six months ended June 30, 1997 net interest income was $6,074,000.
This is an increase of $232,000 or 4.0% over the same period in 1996. The
increase in 1997 is attributable to the increase in income derived from
increases within investment securities and loans.
Overall, improved volumes of earning assets and decreased costs on interest
bearing liabilities due to favorable rate variances resulted in higher net
interest margins for the three and six months ended June 30, 1998 as compared to
the same periods in 1997.
Management continually monitors the Corporation's balance sheet to insulate net
interest income from significant swings caused by interest rate volatility. If
market rates change in 1998, corresponding changes in funding costs would 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".
<PAGE> 11
<TABLE>
<CAPTION>
Table 2 AVERAGE BALANCES AND RATES
THREE MONTHS ENDED JUNE 30,
1998 1997
ASSETS AVG BAL INC/EXP YIELD AVG BAL INC/EXP YIELD
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits in Banks $0 $0 0.00% $95 $3 12.63%
Investment securities:
U.S. Treasury and Government Agencies 41,524 621 5.98% 45,947 700 6.09%
State and Political 10,739 128 4.77% 6,775 87 5.14%
Other 788 16 8.12% 757 15 7.93%
-------------------------------- -------------------------------
Total Investment Securities 53,051 765 5.77% 53,479 802 6.00%
Fed Funds Sold 8,136 112 5.51% 6,028 82 5.44%
Loans:
Commercial 85,687 2,124 9.92% 88,387 2,151 9.73%
Tax Free 435 11 10.11% 682 10 5.87%
Real Estate-Mortgage 17,907 462 10.32% 23,014 603 10.48%
Consumer 70,221 1,763 10.04% 66,884 1,682 10.06%
-------------------------------- -------------------------------
Total loans 174,250 4,360 10.01% 178,967 4,446 9.94%
Allowance for Loan Loss (3,017) (2,912)
Net Loans 171,233 4,360 10.18% 176,055 4,446 10.10%
-------------------------------- -------------------------------
Loans Held for Sale 9,502 167 7.03% 943 18 7.64%
-------------------------------- -------------------------------
TOTAL EARNING ASSETS $244,939 $5,404 8.83% $239,512 $5,351 8.94%
------------------------------------------------------------------
Cash Due from Banks 9,673 9,476
All Other Assets 9,212 9,805
----------- -----------
TOTAL ASSETS $260,807 $255,881
----------- -----------
LIABILITIES & SHAREHOLDERS' EQUITY:
Deposits:
Non-Interest bearing - DDA $27,765 $24,976
Interest bearing - DDA 37,097 209 2.25% 33,625 193 2.30%
Savings Deposits 60,742 438 2.88% 58,773 502 3.42%
Time CDs $100,000 and Over 23,726 346 5.83% 28,569 418 5.85%
Other Time CDs 79,353 1,118 5.64% 79,668 1,153 5.79%
-------------------------------- -------------------------------
Total Deposits 228,683 2,111 3.69% 225,611 2,266 4.02%
Other Borrowings 2,321 40 6.89% 2,483 44 7.09%
-------------------------------- -------------------------------
INTEREST BEARING LIABILITIES $203,239 $2,151 4.23% $203,118 $2,310 4.55%
------------------------------------------------------------------
All Other Liabilities 2,319 2,366
Shareholders Equity 27,484 25,421
----------- -----------
TOTAL LIABILITIES and S/H EQUITY $260,807 $255,881
----------- --------- ----------- ----------
Net Interest Rate Spread 4.59% 4.39%
Funds on Margin 0.72% 0.69%
--------- ----------
Net Interest Income/Margin $3,253 5.31% $3,041 5.08%
===================== ====================
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
Table 3 AVERAGE BALANCES AND RATES
SIX MONTHS ENDED JUNE 30,
1998 1997
ASSETS AVG BAL INC/EXP YIELD AVG BAL INC/EXP YIELD
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits in Banks $32 $1 6.25% $95 $5 10.53%
Investment securities:
U.S. Treasury and Government Agencies 42,572 1,278 6.00% 44,836 1,356 6.05%
State and Political 10,281 247 4.80% 6,817 175 5.13%
Other 774 31 8.01% 737 29 7.87%
-------------------------------- -------------------------------
Total Investment Securities 53,627 1,556 5.80% 52,390 1,560 5.96%
Fed Funds Sold 5,814 160 5.50% 6,539 173 5.29%
Loans:
Commercial 86,193 4,208 9.76% 87,443 4,267 9.76%
Tax Free 451 18 7.98% 708 20 5.65%
Real Estate-Mortgage 18,988 980 10.32% 23,951 1,274 10.64%
Consumer 70,255 3,509 9.99% 66,033 3,301 10.00%
-------------------------------- -------------------------------
Total loans 175,887 8,715 9.91% 178,135 8,862 9.95%
Allowance for Loan Loss (2,981) (2,891)
Net Loans 172,906 8,715 10.08% 175,244 8,862 10.11%
-------------------------------- -------------------------------
Loans Held for Sale 7,331 268 7.31% 1,064 35 6.58%
-------------------------------- -------------------------------
TOTAL EARNING ASSETS $242,691 $10,700 8.82% $238,223 $10,635 8.93%
------------------------------------------------------------------
Cash Due from Banks 9,616 9,501
All Other Assets 9,194 9,883
----------- -----------
TOTAL ASSETS $258,520 $254,716
----------- -----------
LIABILITIES & SHAREHOLDERS' EQUITY:
Deposits:
Non-Interest bearing - DDA $25,660 $25,453
Interest bearing - DDA 36,484 411 2.25% 33,659 388 2.31%
Savings Deposits 59,730 897 3.00% 57,696 967 3.35%
Time CDs $100,000 and Over 24,681 725 5.87% 28,703 838 5.84%
Other Time CDs 79,189 2,240 5.66% 79,242 2,281 5.76%
-------------------------------- -------------------------------
Total Deposits 225,744 4,273 3.79% 224,753 4,474 3.98%
Other Borrowings 2,370 86 7.26% 2,498 87 6.97%
-------------------------------- -------------------------------
INTEREST BEARING LIABILITIES $202,454 $4,359 4.31% $201,798 $4,561 4.52%
------------------------------------------------------------------
All Other Liabilities 2,399 2,353
Shareholders Equity 28,007 25,112
----------- -----------
TOTAL LIABILITIES and S/H EQUITY $258,520 $254,716
----------- --------- ----------- ---------
Net Interest Rate Spread 4.51% 4.41%
FUNDS ON MARGIN 0.71% 0.69%
--------- ---------
Net Interest Income/Margin $6,341 5.23% $6,074 5.10%
===================== ====================
</TABLE>
<PAGE> 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 June 30, 1998, the ALL was
$2,758,000, or 1.54% of total loans, including those loans held for sale. This
compares with $2,930,000, or 1.61%, at June 30, 1997. The decline in the ALL
balance and percentage of total loans was a result of a substantial write down
on a nonperforming commercial loan. The loss was a result of isolated
circumstances and management believes that overall asset quality remains strong.
The provision for loan losses was $256,000 and $412,000 for the three and six
months, respectively, ended June 30, 1998 and $156,000 and $ 312,000 for the
same periods in 1997. The primary reason for increasing the provision in the
second quarter was the expected impact of the nonperforming commercial loan
referenced in the prior paragraph.
Table 4 ANALYSIS OF THE ALLOWANCE FOR POSSIBLE CREDIT LOSSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(000's omitted) June 30, June 30,
1998 1997 1998 1997
------------------------------------------------
<S> <C> <C> <C> <C>
Balance Beginning of Period $3,012 $2,913 $2,955 $2,836
------------------------------------------------
Charge-offs:
Domestic:
Commercial, Financial and
Agricultural (383) (10) (425) (12)
Real Estate-Mortgage (10) 0 (10) 0
Installment Loans to Individuals (145) (139) (231) (244)
Lease Financing 0 0 0 0
------------------------------------------------
Total Charge-offs (538) (149) (666) (256)
------------------------------------------------
Recoveries:
Commercial, Financial and
Agricultural 2 1 15 13
Real Estate-Mortgage 0 0 0 4
Installment Loans to Individuals 26 9 42 21
Lease Financing 0 0 0 0
------------------------------------------------
Total Recoveries 28 10 57 38
------------------------------------------------
Net Charge-offs (510) (139) (609) (218)
------------------------------------------------
Provision 256 156 412 312
------------------------------------------------
Balance at End of Period $2,758 $2,930 $2,758 $2,930
================================================
Loans outstanding at period end $179,169 $181,568 $179,169 $181,568
Average loans outstanding during period $183,752 $179,910 $183,218 $179,199
Allowance for loan losses as percentage
of loans outstanding at period end 1.54% 1.61% 1.54% 1.61%
Ratio of net charge-offs during period to
average loans outstanding(annualized) 1.11% 0.31% 1.33% 0.49%
</TABLE>
<PAGE> 14
NON-INTEREST INCOME
Non-interest income increased in the three and six month periods ended June 30,
1998 as compared to the same periods in 1997 due to increases in other operating
income. In addition to other income, the Corporation experienced increases in
service charges on deposit accounts and fiduciary income. Overall non-interest
income was $1,025,000 and $1,985,000 in the three and six months, respectively,
ended June 30, 1998 compared to $866,000 and $1,673,000 for the same periods in
1997. These figures represents an increase of 18.4% and 18.6% respectively.
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 $428,000 in the three months ended June 30,
1998 and $1,985,000 in the six months ended June 30, 1998 compared to $396,000
and $758,000, respectively, for the same periods of 1997. These represent
increases of 8.1% and 11.2%, respectively. Growth in deposit totals, the number
of accounts and certain account activities account for the increases.
Gains on the sale of mortgage loans originated by the bank and sold in the
secondary market were $73,000 in the quarter ended June 30, 1998 and $72,000 in
the same period in 1997. These gains were $147,000 in the six months ended June
30, 1998 and $135,000 in the same period of 1997. These increases occurred
because of increases in residential mortgage refinance activity due to the
impact of lower market rates.
Fiduciary income increased $25,000 in the three months ended June 30, 1998 and
increased $60,000 in the six months ended June 30, 1998 comparing to the same
time periods in the prior year. These 21.9% and 27.3%, respectively, increases
in fees is attributed to growth in the assets under management within the
Corporation's Investment Trust Department.
Other operating income includes income from the sale of checks, safe deposit box
rent, merchant account income, ATM income, and other miscellaneous income items.
Other operating income was $293,000 for the three months ended June 30, 1998 and
$186,000 for the same period in 1997. This is an increase of 57.5% compared to
the same time period in 1997. For the six months ended June 30, 1998 other
income was $529,000 compared to $363,000 to the same period in 1997. This is an
increase of 45.7%. These increases occurred due to transaction fees associated
with certain ATM activity.
TABLE 5
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Analysis of Non-Interest Income June 30, June 30,
- ------------------------------------------------------------------------------------------------
(000's omitted)
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service Charges on Deposit Accounts $428 $396 $843 $758
Gain on Sale of Mortgages $73 $72 147 135
Gain on Sale of Real Estate Owned $0 $0 0 1
Mortgage Servicing Fees $87 $98 181 196
Fiduciary Income $139 $114 280 220
Other Operating Income $293 $186 529 363
Investment Gains $5 $0 5 0
------------------------------------------------
Total Non-Interest Income $1,025 $866 $1,985 $1,673
================================================
</TABLE>
Non-Interest Expense
Total non-interest expense was $2,735,000 in the three months ended June 30,
1998 compared with $2,532,000 in the same period of 1997. This is an increase of
8.0%. For the six months ended June 30, 1998 non-interest expenses were
$5,435,000 compared to $5,140,000 in the same time period of 1997, an increase
of 5.7%. These increases occurred due to increases in salaries and benefits, net
occupancy, and other operating expenses.
<PAGE> 15
Salary and benefit costs, Fentura's largest non-interest expense category, were
$1,315,000 in the quarter ended June 30, 1998, compared with $1,226,000, or an
increase of 7.3%, for the same time period in 1997. These costs were $2,554,000
in the six months ended June 30, 1998, and $2,515,000, or an increase of 1.6%,
for the same time period in 1997. Increased costs are primarily a result of
filling vacant positions and the revision of position and salary levels in the
second quarter of 1998.
During the three months ended June 30, 1998 equipment expenses were $359,000
compared to $354,000 for the same period in 1997, an increase of 1.4%. For the
six months ended June 30, 1998 these expenses were $675,000 compared to $693,000
for the same time period in 1997, a decrease of 2.6%. The reduction of expense
in the six months ended June 30, 1998 is attributable to equipment depreciation.
Depreciation expense decreased because several substantial assets reached full
depreciation in the last quarter of 1997. For the three months ended June 30,
1998 expenses began to increase over prior year and prior quarter because of new
equipment purchases resulting in additional depreciation expense.
Occupancy expenses increased in both the three and six months ended June 30,
1998 comparing to the same periods in 1997 because of increases in the accrual
for real estate taxes. Tax accruals are up as a result of reviewing tax
liabilities and adjusting accruals accordingly.
During the three and six months ended June 30, 1998 office supplies expense
increased $6,000 and $31,000, respectively, comparing to the same periods in
1997. These increases are attributable to cost and volume increases of regular
office supplies and preprinted forms.
Loan and collection expenses were down $9,000 in the three months ended June 30,
1998 comparing to the same time period in 1997. This drop caused year to date
loan and collection expense to equal 1997 expense in the same period. The
decrease is primarily attributable to a decrease in home equity loan fees waived
to the customer and paid by the bank.
Other operating expenses were $642,000 in the three months ended June 30, 1998
compared to $556,000 in the same time period in 1997, an increase of 15.5%. The
expenses were $1,323,000 in the six months ended June 30, 1998 and $1,088,000 in
the same time period of 1997, an increase of 21.6%. These increases in expense
are attributable to a loss in January 1998 of $75,000 on an improperly endorsed
check and increases in legal and consulting expense associated with efforts to
improve employee benefits and enhance compensation and leveling systems.
TABLE 6
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Analysis of Non-Interest Expense June 30, June 30,
- ------------------------------------------------------------------------------------------------
(000's omitted)
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and Benefits $1,315 $1,226 $2,554 $2,515
Equipment $359 $354 675 693
Net Occupancy $183 $160 360 337
FDIC Assessment $7 $7 14 13
Office Supplies $71 $65 159 128
Loan & Collection Expense $88 $97 199 199
Advertising $70 $67 151 167
Other Operating Expense $642 $556 1,323 1,088
------------------------------------------------
Total Non-Interest Expense $2,735 $2,532 $5,435 $5,140
================================================
</TABLE>
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 June 30, 1998 and 1997.
<PAGE> 16
Non-performing loans include several delinquent single-family mortgage loans
which have sufficient equity and no expected loss. Non-accrual loans include two
large commercial loan facilities and three residential mortgage loans. An
agreement has been executed that requires specific action plans, collateral
pledges, and related performance expectations for the facility creating the
largest exposure for the Corporation. These loans will be closely monitored.
While the non-performing loan increase is of concern, overall asset quality
remains satisfactory.
The ratio trends listed below support the above mentioned loan facilities that
are included in the non-performing category.
Table 7
Non-Performing Assets and Past Due Loans
<TABLE>
<CAPTION>
June 30,
1998 1997
------------------------------
<S> <C> <C>
Non-Performing Loans:
Loans Past Due 90 Days or More & Still
Accruing $255,000 $192,000
Non-Accrual Loans 1,916,000 1,665,000
Renegotiated Loans 7,000 0
------------------------------
Total Non-Performing Loans 2,178,000 1,857,000
------------------------------
Other Non-Performing Assets:
Other Real Estate 0 0
REO in Redemption 131,000 0
Other Non-Performing Assets 82,000 68,000
------------------------------
Total Other Non-Performing Assets 213,000 68,000
------------------------------
Total Non-Performing Assets $2,391,000 $1,925,000
==============================
Non-Performing Loans as a % of
Total Loans 1.30% 1.03%
Non-Performing Assets as a % of
Total Loans and Other Real Estate 1.42% 1.07%
Allowance for Loan Losses as a % of
Non-Performing Loans 126.63% 157.78%
Allowance for Loan Losses, Other Real
Estate, and In-Substance Foreclosures
as a % of Non-Performing Assets 120.83% 152.21%
Accruing Loans Past Due 90 Days or
More to Total Loans 0.15% 0.11%
Nonperforming Assets as a % of
Total Assets 0.90% 0.74%
</TABLE>
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 six
months of 1998 and 1997.
<PAGE> 17
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 June 30, 1998 federal funds sold represented
3.5% of total assets, compared to 3.1% at June 30, 1997. 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 are
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 have increased in 1998 due to the growth of demand and savings
deposits. Comparatively, in the first six months of 1997, cash flows from
financing activities increased because of an increase in checking, saving, and
time deposits. Cash flows from investing activities were $12,657,000 during the
first six months of 1998 and ($10,209,000) in the same period of 1997. The
primary reason for the decline in investing activities at the end of the second
quarter of 1998 was an increase in maturing investments netting against funds
used for investment purchases.
CAPITAL MANAGEMENT
Total shareholders' equity rose 11.6% to $28,517,000 at June 30, 1998 compared
with $25,551,000 at June 30, 1997. The Company's equity to asset ratio was 10.8%
at June 30, 1998 and 9.8% at June 30, 1997. The increase in the amount of
capital was obtained through retained earnings and the proceeds from the
issuance of new shares. In the first half of 1998, the Corporation increased its
cash dividends by 10.5% to $.42 per share compared with $.38 in the first half
of 1997.
As indicated on the balance sheet on page 4, at June 30, 1998 the Company had an
unrealized gain on securities available for sale (AFS) of $163,000 compared to
an unrealized loss at June 30, 1997 of $161,000. This decrease in unrealized
loss to a 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".
<PAGE> 18
<TABLE>
<CAPTION>
Table 8
- ---------------------------------------------------------------------------------------
Capital Ratios Regulatory
Minimum For
"Well June 30, December 31, June 30,
Capitalization" 1998 1997 1997
- ----------------------------------------------------------------------------------------
Risk Based Capital:
<S> <C> <C> <C> <C>
Total Capital 10% 13.08% 13.47% 13.14%
Tier 1 6% 11.83% 12.22% 11.89%
Tier 1 Leverage 5% 10.21% 9.99% 9.61%
</TABLE>
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 June 30, 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>
<CAPTION>
Table 9 GAP ANALYSIS JUNE 30, 1998
(000's Omitted) Within Three One to After
Three Months- Five Five
Months One Year Years Years Total
Earning Assets:
<S> <C> <C> <C> <C> <C>
Interest Bearing Bank Deposits $0 $0 $0 $0 0
Federal Funds Sold 9,400 0 0 0 9,400
Investment Securities 8,923 5,366 14,170 27,199 55,658
Loans 53,733 9,327 82,171 22,801 168,032
Loans Held for Sale 61 0 0 11,076 11,137
------------------------------------------------------------
Total Earning Assets $72,117 $14,693 $96,341 $61,076 $244,227
============================================================
Interest Bearing Liabilities:
Interest Bearing Demand Deposits $35,091 $0 $0 $0 $35,091
Savings Deposits 18,559 0 0 44,678 63,237
Time Deposits Less than $100,000 17,776 39,345 22,256 0 79,377
Time Deposits Greater than $100,000 10,393 11,170 4,103 0 25,666
Other Borrowings 1,500 10 40 1,125 2,675
------------------------------------------------------------
Total Interest Bearing Liabilities $83,319 $50,525 $26,399 $45,803 $206,046
============================================================
Interest Rate Sensitivity GAP ($11,202) ($35,832) $69,942 $15,273 $38,181
Cumulative Interest Rate
Sensitivity GAP ($11,202) ($47,034) $22,908 $38,181
Interest Rate Sensitivity GAP 0.87 0.29 3.65 1.33
Cumulative Interest Rate
Sensitivity GAP Ratio 0.87 0.65 1.14 1.19
</TABLE>
<PAGE> 19
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
No reports on Form 8-k were filed for the quarter ended June 30, 1998.
<PAGE> 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 August 11, 998 By /s/ Donald L. Grill
-------------- --------------------
Donald L. Grill
Director
President & CEO
Date August 11, 1998 By /s/ Ronald L. Justice
--------------- ----------------------
Ronald L. Justice
Vice President
(Authorized Signer)
Chief Financial Officer
Cashier
<PAGE> 21
FENTURA BANCORP, INC.
1998 Quarterly Report on Form 10Q
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Location
- ------- -------------------------------------------------------- ---------
<S> <C>
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 *****
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 14,965
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,813
<INVESTMENTS-CARRYING> 10,845
<INVESTMENTS-MARKET> 10,958
<LOANS> 168,032
<ALLOWANCE> 2,758
<TOTAL-ASSETS> 265,252
<DEPOSITS> 231,602
<SHORT-TERM> 1,500
<LIABILITIES-OTHER> 2,458
<LONG-TERM> 1,175
0
0
<COMMON> 7,016
<OTHER-SE> 21,501
<TOTAL-LIABILITIES-AND-EQUITY> 265,252
<INTEREST-LOAN> 8,983
<INTEREST-INVEST> 1,557
<INTEREST-OTHER> 160
<INTEREST-TOTAL> 10,700
<INTEREST-DEPOSIT> 4,273
<INTEREST-EXPENSE> 4,359
<INTEREST-INCOME-NET> 6,341
<LOAN-LOSSES> 412
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 5,435
<INCOME-PRETAX> 2,479
<INCOME-PRE-EXTRAORDINARY> 2,479
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,717
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
<YIELD-ACTUAL> 5.23
<LOANS-NON> 1,916
<LOANS-PAST> 255
<LOANS-TROUBLED> 7
<LOANS-PROBLEM> 46
<ALLOWANCE-OPEN> 2,955
<CHARGE-OFFS> 666
<RECOVERIES> 57
<ALLOWANCE-CLOSE> 2,758
<ALLOWANCE-DOMESTIC> 2,758
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
