<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 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
<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
<TABLE>
<CAPTION>
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
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
===================================
</TABLE>
<PAGE> 4
LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
==============================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
Fentura Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
Fentura Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
- ---------------------------------------------------------------------------------
March 31, March 31,
(000's omitted) 1999 1998
- ---------------------------------------------------------------------------------
COMMON STOCK
<S> <C> <C>
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
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 7
Fentura Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
Three Months Ended
March 31,
- --------------------------------------------------------------------------------
(000's omitted,
Except Per Share Data) 1999 1998
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C>
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
</TABLE>
See notes to consolidated financial statements.
<PAGE> 8
Fentura Bancorp, Inc. and Subsidiaries
Statement of Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended
(000's Omitted) March 31,
1999 1998
---------------------------
<S> <C> <C>
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
===========================
</TABLE>
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.
<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
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
<TABLE>
<CAPTION>
Three Months Ended
March 31,
$ in thousands except per share data and ratios 1999 1998
- --------------------------------------------------------------------------------------------
Summary of Consolidated Statements of Earnings:
<S> <C> <C>
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%
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 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 $.59 for the same period in 1998.
Net Interest Income
Net interest income and average balances and yields on major categories of
interest-earning assets and interest-bearing liabilities for the three months
ended March 31, 1999 and 1998 are summarized in Table 3. The effects of changes
in average interest rates and average balances are detailed in Table 2 below.
Table 2 CHANGES IN NET INTEREST INCOME
DUE TO CHANGES IN AVERAGE VOLUME
AND INTEREST RATES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, THREE MONTHS ENDED MARCH 31,
1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO: DUE TO:
-----------------------------------------------------------------
YIELD/ YIELD/
(000'S OMITTED) VOL RATE TOTAL VOL RATE TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INT. BEARING DEPOSITS IN BANKS ($ 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
=============================================================
</TABLE>
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.
<PAGE> 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".
<PAGE> 12
<TABLE>
<CAPTION>
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
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
===================== =====================
</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 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
<TABLE>
<CAPTION>
Three Months Ended
(000's omitted) March 31,
1999 1998
------------------------------
<S> <C> <C>
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%
==============================
</TABLE>
NON-INTEREST INCOME
<TABLE>
<CAPTION>
TABLE 5
Three Months Ended
Analysis of Non-Interest Income March 31,
- ------------------------------------------------------------------------
(000's omitted)
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
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
========================
</TABLE>
<PAGE> 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>
<CAPTION>
TABLE 6
Three Months Ended
Analysis of Non-Interest Expense March 31,
- ------------------------------------------------------------------------
(000's omitted)
1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
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
========================
</TABLE>
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.
<PAGE> 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.
<PAGE> 16
Table 7
Non-Performing Assets and Past Due Loans
<TABLE>
<CAPTION>
March 31,
1999 1998
------------------------------
<S> <C> <C>
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%
</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 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,
<PAGE> 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".
<PAGE> 18
<TABLE>
<CAPTION>
Table 8
- ----------------------------------------------------------------------------------------
Capital Ratios Regulatory
Minimum For
"Well March 31, December 31, March 31,
Capitalization" 1998 1998 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
</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 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>
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE> 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.
<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 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
<PAGE> 21
FENTURA BANCORP, INC.
1999 Quarterly Report on Form 10Q
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Location
- ------- ------- --------
<S> <C> <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>
<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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,721
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,886
<INVESTMENTS-CARRYING> 11,356
<INVESTMENTS-MARKET> 11,622
<LOANS> 173,947
<ALLOWANCE> 2,850
<TOTAL-ASSETS> 266,448
<DEPOSITS> 232,232
<SHORT-TERM> 205
<LIABILITIES-OTHER> 2,271
<LONG-TERM> 1,175
3529
0
<COMMON> 0
<OTHER-SE> 27,036
<TOTAL-LIABILITIES-AND-EQUITY> 266,448
<INTEREST-LOAN> 4,022
<INTEREST-INVEST> 917
<INTEREST-OTHER> 144
<INTEREST-TOTAL> 5,083
<INTEREST-DEPOSIT> 1,923
<INTEREST-EXPENSE> 1,955
<INTEREST-INCOME-NET> 3,128
<LOAN-LOSSES> 195
<SECURITIES-GAINS> 26
<EXPENSE-OTHER> 2,675
<INCOME-PRETAX> 1,284
<INCOME-PRE-EXTRAORDINARY> 1,284
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 886
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
<YIELD-ACTUAL> 5.12
<LOANS-NON> 1,032
<LOANS-PAST> 182
<LOANS-TROUBLED> 7
<LOANS-PROBLEM> 54
<ALLOWANCE-OPEN> 2,783
<CHARGE-OFFS> 162
<RECOVERIES> 34
<ALLOWANCE-CLOSE> 2,850
<ALLOWANCE-DOMESTIC> 2,850
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
