e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from to
Commission file number 000-23550
Fentura Financial, Inc.
(Exact name of registrant as specified in its charter)
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Michigan
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38-2806518 |
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employee Identification No.) |
175 N Leroy, P.O. Box 725, Fenton, Michigan 48430
(Address of Principal Executive Offices)
(810) 629-2263
(Registrants telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 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. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: July 30, 2008
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Class Common Stock
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Shares Outstanding 2,175,664 |
Fentura Financial Inc.
Index to Form 10-Q
2
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Fentura Financial, Inc.
Consolidated Balance Sheets
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June 30, |
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Dec 31, |
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2008 |
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2007 |
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(000s omitted except share data) |
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(unaudited) |
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ASSETS |
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Cash and due from banks |
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$ |
16,147 |
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$ |
22,734 |
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Federal funds sold |
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0 |
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7,300 |
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Total cash & cash equivalents |
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16,147 |
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30,034 |
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Securities-available for sale |
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58,028 |
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71,792 |
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Securities-held to maturity, (fair value of $8,151
at June 30, 2008 and $8,714 at December 31, 2007) |
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8,179 |
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8,685 |
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Total securities |
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66,207 |
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80,477 |
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Loans held for sale |
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448 |
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1,655 |
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Loans: |
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Commercial |
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318,109 |
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313,642 |
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Real estate loans construction |
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51,569 |
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59,805 |
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Real estate loans mortgage |
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37,023 |
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39,817 |
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Consumer loans |
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58,155 |
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58,139 |
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Total loans |
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464,856 |
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471,403 |
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Less: Allowance for loan losses |
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(12,778 |
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(8,554 |
) |
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Net loans |
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452,078 |
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462,849 |
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Bank Owned Life Insurance |
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7,150 |
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7,042 |
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Bank premises and equipment |
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19,307 |
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20,101 |
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Federal Home Loan Bank stock |
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2,032 |
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2,032 |
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Accrued interest receivable |
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2,506 |
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2,813 |
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Goodwill |
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7,955 |
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7,955 |
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Acquisition intangibles |
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377 |
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485 |
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Equity Investment |
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2,631 |
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3,089 |
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Other assets |
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9,069 |
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9,487 |
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Total Assets |
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$ |
585,907 |
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$ |
628,019 |
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LIABILITIES |
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Deposits: |
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Non-interest bearing deposits |
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$ |
78,867 |
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$ |
75,148 |
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Interest bearing deposits |
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426,605 |
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468,355 |
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Total deposits |
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505,472 |
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543,503 |
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Short term borrowings |
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3,458 |
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649 |
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Federal Home Loan Bank Advances |
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14,007 |
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11,030 |
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Repurchase Agreements |
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0 |
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5,000 |
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Subordinated debentures |
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14,000 |
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14,000 |
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Accrued taxes, interest and other liabilities |
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2,471 |
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4,341 |
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Total liabilities |
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539,408 |
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578,523 |
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SHAREHOLDERS EQUITY |
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Common stock no par value
2,175,184 shares issued (2,163,385 at Dec. 31, 2007) |
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42,695 |
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42,478 |
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Retained earnings |
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4,691 |
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7,488 |
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Accumulated other comprehensive income (loss) |
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(887 |
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(470 |
) |
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Total shareholders equity |
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46,499 |
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49,496 |
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Total Liabilities and Shareholders Equity |
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$ |
585,907 |
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$ |
628,019 |
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See notes to consolidated financial statements.
3
Fentura Financial, Inc.
Consolidated Statements of Income (Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30 |
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June 30 |
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(000s omitted except per share data) |
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2008 |
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2007 |
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2008 |
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2007 |
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INTEREST INCOME |
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Interest and fees on loans |
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$ |
7,457 |
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$ |
8,917 |
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$ |
15,561 |
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$ |
17,564 |
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Interest and dividends on securities: |
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Taxable |
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565 |
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801 |
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1,193 |
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1,718 |
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Tax-exempt |
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151 |
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180 |
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268 |
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395 |
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Interest on federal funds sold |
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16 |
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44 |
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114 |
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211 |
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Total interest income |
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8,189 |
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9,942 |
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17,136 |
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19,888 |
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INTEREST EXPENSE |
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Deposits |
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3,285 |
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3,990 |
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7,312 |
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7,951 |
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Borrowings |
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439 |
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560 |
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935 |
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1,145 |
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Total interest expense |
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3,724 |
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4,550 |
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8,247 |
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9,096 |
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NET INTEREST INCOME |
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4,465 |
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5,392 |
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8,889 |
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10,792 |
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Provision for loan losses |
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3,811 |
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649 |
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4,892 |
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1,088 |
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Net interest income after
Provision for loan losses |
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654 |
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4,743 |
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3,997 |
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9,704 |
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NON-INTEREST INCOME |
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Service charges on deposit accounts |
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715 |
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836 |
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1,489 |
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1,687 |
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Gain on sale of mortgage loans |
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100 |
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119 |
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218 |
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203 |
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Trust and investment services income |
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518 |
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461 |
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974 |
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968 |
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Other income and fees |
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220 |
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612 |
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430 |
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1,035 |
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Total non-interest income |
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1,553 |
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2,028 |
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3,111 |
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3,893 |
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NON-INTEREST EXPENSE |
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Salaries and employee benefits |
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2,935 |
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3,193 |
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5,937 |
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6,440 |
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Occupancy |
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531 |
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510 |
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1,082 |
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1,013 |
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Furniture and equipment |
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536 |
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534 |
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1,030 |
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1,059 |
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Loan and collection |
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378 |
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85 |
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544 |
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176 |
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Advertising and promotional |
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145 |
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159 |
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249 |
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271 |
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Loss on security impairment |
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36 |
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0 |
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|
610 |
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0 |
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Other operating expenses |
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954 |
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1,117 |
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1,969 |
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2,135 |
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Total non-interest expense |
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5,515 |
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5,598 |
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11,421 |
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11,094 |
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INCOME (LOSS) BEFORE TAXES |
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(3,308 |
) |
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1,173 |
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(4,313 |
) |
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2,503 |
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Federal income taxes/(benefit) |
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(1,140 |
) |
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329 |
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(1,516 |
) |
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|
711 |
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NET INCOME (LOSS) |
|
$ |
(2,168 |
) |
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$ |
844 |
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|
$ |
(2,797 |
) |
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$ |
1,792 |
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Per share: |
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Net income (loss) basic |
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$ |
(1.00 |
) |
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$ |
0.39 |
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$ |
(1.29 |
) |
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$ |
0.83 |
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Net income (loss) diluted |
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$ |
(1.00 |
) |
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$ |
0.39 |
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$ |
(1.29 |
) |
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$ |
0.83 |
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Cash Dividends declared |
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$ |
0.00 |
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$ |
0.25 |
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$ |
0.00 |
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|
$ |
0.50 |
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|
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|
|
|
|
|
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|
See notes to consolidated financial statements.
4
Fentura Financial, Inc.
Consolidated Statements of Changes in Shareholders Equity (Unaudited)
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Six Months Ended |
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June 30, |
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(000s omitted) |
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2008 |
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2007 |
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COMMON STOCK |
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Balance, beginning of period |
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$ |
42,478 |
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$ |
42,158 |
|
Issuance of shares under |
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Director stock purchase plan &
Dividend reinvestment program(11,799 and 14,677 shares) |
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213 |
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|
458 |
|
Stock repurchase (0 and 3,784 shares) |
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0 |
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(112 |
) |
Stock options exercised (0 and 295 shares) |
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0 |
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|
6 |
|
Stock compensation expense |
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4 |
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|
28 |
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Balance, end of period |
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|
42,695 |
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|
|
42,538 |
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|
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|
|
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RETAINED EARNINGS |
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Balance, beginning of period |
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|
7,488 |
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|
|
10,118 |
|
Net income (loss) |
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|
(2,797 |
) |
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|
1,792 |
|
Cash dividends declared |
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0 |
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|
|
(1,083 |
) |
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|
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Balance, end of period |
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|
4,691 |
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|
|
10,827 |
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|
|
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ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS) |
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|
|
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Balance, beginning of period |
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|
(470 |
) |
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|
(958 |
) |
Change in unrealized gain (loss)
on securities available for sale, net of tax |
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|
(417 |
) |
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|
(80 |
) |
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|
|
|
|
|
|
Balance, end of period |
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|
(887 |
) |
|
|
(1,038 |
) |
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|
|
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TOTAL SHAREHOLDERS EQUITY |
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$ |
46,499 |
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|
$ |
52,327 |
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|
|
|
|
|
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|
See notes to consolidated financial statements.
5
Fentura Financial, Inc.
Consolidated Statements of Cash Flows (Unaudited)
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Six Months Ended |
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|
June 30, |
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(000s omitted) |
|
2008 |
|
|
2007 |
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|
|
OPERATING ACTIVITIES: |
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|
|
|
|
|
|
Net income (loss) |
|
$ |
(2,797 |
) |
|
$ |
1,792 |
|
|
Adjustments
to reconcile net income (loss) to cash Provided by Operating Activities: |
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|
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|
Stock compensation expense |
|
|
4 |
|
|
|
28 |
|
|
Depreciation and amortization |
|
|
505 |
|
|
|
882 |
|
Provision for loan losses |
|
|
4,892 |
|
|
|
1,088 |
|
|
Loans originated for sale |
|
|
(16,999 |
) |
|
|
(10,328 |
) |
Proceeds from the sale of loans |
|
|
18,424 |
|
|
|
11,703 |
|
|
(Gain) Loss on sales of loans |
|
|
(218 |
) |
|
|
(203 |
) |
Gain (Loss) on sale of fixed assets |
|
|
(118 |
) |
|
|
0 |
|
|
Loss on security impairment |
|
|
610 |
|
|
|
0 |
|
Loss on equity investment |
|
|
458 |
|
|
|
0 |
|
|
Earnings from bank owned life insurance |
|
|
(108 |
) |
|
|
(105 |
) |
Net (increase) decrease in interest receivable & other assets |
|
|
3,629 |
|
|
|
(541 |
) |
|
Net increase (decrease) in interest payable & other liabilities |
|
|
(1,659 |
) |
|
|
(2,762 |
) |
|
|
|
Total Adjustments |
|
|
9,420 |
|
|
|
(238 |
) |
|
|
|
|
Net Cash Provided By (Used In) Operating Activities |
|
|
6,623 |
|
|
|
1,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
|
Proceeds from maturities of securities AFS |
|
|
4,958 |
|
|
|
5,746 |
|
Proceeds from maturities of securities HTM |
|
|
1,253 |
|
|
|
1,570 |
|
|
Proceeds from calls of securities AFS |
|
|
12,662 |
|
|
|
1,700 |
|
Proceeds from calls of securities HTM |
|
|
0 |
|
|
|
140 |
|
|
Proceeds from sales of securities AFS |
|
|
1,999 |
|
|
|
0 |
|
Purchases of securities AFS |
|
|
(6,732 |
) |
|
|
(4,071 |
) |
|
Purchases of securities HTM |
|
|
(750 |
) |
|
|
0 |
|
Purchase of FHLB Stock |
|
|
0 |
|
|
|
0 |
|
|
Net (increase) decrease in loans |
|
|
2,987 |
|
|
|
(7,761 |
) |
Acquisition of premises and equipment, net |
|
|
145 |
|
|
|
(3,300 |
) |
|
|
|
|
Net Cash Provided By (Used in) Investing Activities |
|
|
16,522 |
|
|
|
(5,976 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits |
|
|
(38,031 |
) |
|
|
4,063 |
|
Net increase (decrease) in short term borrowings |
|
|
2,809 |
|
|
|
(426 |
) |
|
Net increase (decrease) in repurchase agreements |
|
|
(5,000 |
) |
|
|
(5,000 |
) |
Purchase of advances from FHLB |
|
|
11,001 |
|
|
|
7,000 |
|
|
Repayments of advances from FHLB |
|
|
(8,024 |
) |
|
|
(7,022 |
) |
Net proceeds from stock issuance and purchase |
|
|
213 |
|
|
|
352 |
|
|
Cash dividends |
|
|
0 |
|
|
|
(1,083 |
) |
|
|
|
Net Cash Provided By (Used In) Financing Activities |
|
|
(37,032 |
) |
|
|
(2,116 |
) |
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
$ |
(13,887 |
) |
|
$ |
(6,538 |
) |
CASH AND CASH EQUIVALENTS BEGINNING |
|
$ |
30,034 |
|
|
$ |
29,446 |
|
|
|
|
|
CASH AND CASH EQUIVALENTS ENDING |
|
$ |
16,147 |
|
|
$ |
22,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PAID FOR: |
|
|
|
|
|
|
|
|
|
INTEREST |
|
$ |
8,250 |
|
|
$ |
9,212 |
|
INCOME TAXES |
|
$ |
0 |
|
|
$ |
831 |
|
|
NONCASH DISCLOSURES: |
|
|
|
|
|
|
|
|
Transfers from loans to other real estate |
|
$ |
2,892 |
|
|
$ |
78 |
|
See notes to consolidated financial statements
6
Fentura Financial, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(000s Omitted) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
Net Income (loss) |
|
$ |
(2,168 |
) |
|
$ |
844 |
|
|
$ |
(2,797 |
) |
|
$ |
1,792 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising
during period |
|
|
(791 |
) |
|
|
(343 |
) |
|
|
(1,027 |
) |
|
|
(80 |
) |
Less: Impairment loss recognized during
period |
|
|
(36 |
) |
|
|
0 |
|
|
|
(610 |
) |
|
|
0 |
|
|
|
|
Other comprehensive income (loss) |
|
|
(755 |
) |
|
|
(343 |
) |
|
|
(417 |
) |
|
|
(80 |
) |
|
|
|
Comprehensive income (loss) |
|
$ |
(2,923 |
) |
|
$ |
501 |
|
|
$ |
(3,214 |
) |
|
$ |
1,712 |
|
|
|
|
Fentura Financial, Inc.
Notes to Consolidated Financial Statements (Unaudited)
Note 1 Basis of Presentation
The consolidated financial statements at December 31, 2007 and June 30, 2008 include Fentura
Financial, Inc. (the Corporation) and its wholly owned subsidiaries, The State Bank in Fenton,
Michigan; Davison State Bank in Davison, Michigan; and West Michigan Community Bank in Hudsonville,
Michigan (the Banks), as well as Fentura Mortgage Company, West Michigan Mortgage Company, LLC,
and the other subsidiaries of the Banks. Intercompany transactions and balances are eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial
information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by accounting principles generally
accepted in the United States of America 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, 2008 are
not necessarily indicative of the results that may be expected for the year ending December 31,
2008. For further information, refer to the consolidated financial statements and footnotes thereto
included in the Corporations annual report on Form 10-K for the year ended December 31, 2007.
Reclassifications: Some items in the prior year financial statements were reclassified to
conform to the current presentation.
Securities: Securities are classified as held to maturity and carried at amortized cost
when management has the positive intent and ability to hold them to maturity. Securities are
classified as available for sale when they might be sold before maturity. Securities available for
sale are carried at fair value, with unrealized holding gains and losses reported in other
comprehensive income.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on
securities are amortized on the level-yield method without anticipating prepayments. Gains and
losses on sales are based on the amortized cost of the security sold. Securities are written down
to fair value when a decline in fair value is not temporary.
Declines in the fair value of securities below their cost that are other than temporary are
reflected as realized losses. In estimating other-than-temporary losses, management considers:
the length of time and extent the fair value has been less than cost, the financial condition and
near term prospects of the issuer,
7
and the Corporations ability and intent to hold the security for a period sufficient to allow for
any anticipated recovery in fair value.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for
probable incurred credit losses, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required using past loan
loss experience, the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other factors. Allocations of
the allowance may be made for specific loans, but the entire allowance is available for any loan
that, in managements judgment, should be charged-off. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated
in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and on
an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value of estimated future cash flows
using the loans existing rate or at the fair value of collateral if repayment is expected solely
from the collateral.
Stock Option Plans
The Nonemployee Director Stock Option Plan provides for granting options to nonemployee directors
to purchase the Corporations common stock. No options have been granted in 2008. The purchase
price of the shares is the fair market value at the date of the grant, and there is a three-year
vesting period before options may be exercised. Options to acquire no more than 8,131 shares of
stock may be granted under the Plan in any calendar year and options to acquire not more than
73,967 shares in the aggregate may be outstanding at any one time.
The Employee Stock Option Plan grants options to eligible employees to purchase the Corporations
common stock at or above, the fair market value of the stock at the date of the grant. Awards
granted under this plan are limited to an aggregate of 86,936 shares. The administrator of the
plan is a committee of directors. The administrator has the power to determine the number of
options to be granted, the exercise price of the options and other terms of the options, subject to
consistency with the terms of the Plan.
The fair value of each option award is estimated on the date of grant using a closed form option
valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected
volatilities are based on historical volatilities of the Corporations common stock. The
Corporation uses historical data to estimate option exercise and post-vesting termination behavior.
(Employee and management options are tracked separately.) The expected term of options granted is
based on historical data and represents the period of time that options granted are expected to be
outstanding, which takes into account that the options are not transferable. The risk-free
interest rate for the expected term of the option is based on the U.S. Treasury yield curve in
effect at the time of the grant. Shares that are issued upon option exercise come from authorized
but unissued shares.
The following table summarizes stock option activity:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Weighted |
|
|
Options |
|
Average Price |
Options outstanding at December 31, 2007 |
|
|
40,228 |
|
|
$ |
29.74 |
|
Options forfeited 2008 |
|
|
(3,004 |
) |
|
$ |
30.35 |
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2008 |
|
|
37,224 |
|
|
$ |
29.69 |
|
|
|
|
|
|
|
|
|
|
8
Note 2 Adoption of New Accounting Standards
Fair Value Option and Fair Value Measurements
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement
defines fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. This Statement establishes a fair value hierarchy about the assumptions
used to measure fair value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. The standard is effective for fiscal years beginning after November
15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB
Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. The Corporation adopted the standard effective January 1, 2008
and applicable disclosures have been added to the Notes to Consolidated Financial Statements.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. The standard provides companies with an option to report selected financial
assets and liabilities at fair value and establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose different measurement attributes
for similar types of assets and liabilities. The Corporation did not elect the fair value option
for any financial assets or financial liabilities as of January 1, 2008, the effective date of the
standard.
Note 3 Fair Value
Statement No. 157 establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entitys own assumptions
about the assumptions that market participants would use in pricing and asset or liability.
The fair values of securities available for sale are determined by obtaining quoted prices on
nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a
mathematical technique widely used to in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities but rather by relying on the securities
relationship to other benchmark quoted securities (Level 2 inputs).
9
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2008 Using |
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
in Active |
|
Significant Other |
|
Significant |
|
|
|
|
|
|
Markets for |
|
Observable |
|
Unobservable |
|
|
June 30, |
|
Identical Assets |
|
Inputs |
|
Inputs |
(000s omitted) |
|
2008 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
securities |
|
$ |
58,028 |
|
|
$ |
11 |
|
|
$ |
56,046 |
|
|
$ |
1,971 |
|
Level 1 assets are comprised of investments in other financial institutions, which are publicly
traded on the open market.
Level 2 assets are comprised of available for sale securities including, U.S. Treasuries,
Government Agencies and Municipal Securities.
Level 3 assets are comprised of investments in other financial institutions including DeNovo banks.
The table below presents a reconciliation and income statement classification of gains and losses
for all assets measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the six month period ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant |
|
|
Unobservable Inputs |
|
|
(Level 3) |
(000s omitted) |
|
Asset |
|
Liability |
|
Total |
Beginning balance, Jan. 1, 2008 |
|
$ |
2,721 |
|
|
$ |
0 |
|
|
$ |
2,721 |
|
Total gains or losses (realized / unrealized)
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
Loss on security impairment |
|
|
(610 |
) |
|
|
0 |
|
|
|
(610 |
) |
Included in other comprehensive income |
|
|
(140 |
) |
|
|
0 |
|
|
|
(140 |
) |
Purchases, issuances, and settlements |
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in and / or out of Level 3 |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Ending balance, June 30, 2008 |
|
$ |
1,971 |
|
|
$ |
0 |
|
|
$ |
1,971 |
|
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2008 Using |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
Quoted Prices in |
|
Other |
|
Significant |
|
|
|
|
|
|
Active Markets for |
|
Observable |
|
Unobservable |
|
|
June 30, |
|
Identical Assets |
|
Inputs |
|
Inputs |
(000s omitted) |
|
2008 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
24,490 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
24,490 |
|
10
The following represent impairment charges recognized during the period:
Impaired loans, which are measured for impairment using the fair value of the collateral for
collateral dependent loans, had a carrying amount of $24,490,059, with a valuation allowance of
$5,333,881, resulting in an additional provision for loan losses of $2,863,000 for the period. The
fair values of these loans were determined primarily using independent appraisals and are adjusted
for anticipated disposition costs.
Note 4 Securities
During the quarter ended June 30, 2008, the Corporation recognized a $35,400 other-than-temporary
impairment loss on one of its DeNovo bank investments. The 2008 year to date other-than-temporary
impairment recognition on this investment totals $609,800. This investment was in an unrealized
loss position at December 31, 2007 and since such time; its unrealized loss has continued to
increase. The book value of this investment was $843,200 and its market value was 18.5% less at
December 31, 2007. Throughout 2007 and into 2008, this institution, based in Michigan, has
experienced credit quality deterioration. The institution experienced a net operating loss for 2007
and for the first half of 2008. The institutions second quarter performance results are not yet
known. Our Corporation attempted to maintain an informed position regarding this institutions
performance, and as a result of current and forward looking projections, has concluded that a
recovery can no longer be forecasted, and accordingly, an other-than-temporary loss has been
recorded.
Note 5 Allowance for Loan Losses
Activity in the allowance for loan losses for the six month period ended June 30, 2008 and 2007 is
as follows (in thousands)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Balance, beginning of year |
|
$ |
8,554 |
|
|
$ |
6,692 |
|
Provision for loan losses |
|
|
4,892 |
|
|
|
1,088 |
|
Loans charged off |
|
|
(933 |
) |
|
|
(755 |
) |
Loan recoveries |
|
|
265 |
|
|
|
149 |
|
|
|
|
Balance, end of period |
|
$ |
12,778 |
|
|
$ |
7,174 |
|
|
|
|
Loan impairment is measured by estimating the expected future cash flows and discounting them at
the respective effective interest rate or by valuing the underlying collateral. The recorded
investment in these loans is as follows at June 30, 2008 and December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December |
|
|
|
2008 |
|
|
31, 2007 |
|
Period end loans not requiring allocation |
|
$ |
11,068 |
|
|
$ |
11,197 |
|
Period end loans requiring allocation |
|
|
26,968 |
|
|
|
18,186 |
|
|
|
|
|
|
$ |
38,036 |
|
|
$ |
29,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of the allowance for loan losses
allocated |
|
$ |
6,133 |
|
|
$ |
2,751 |
|
Loans for which the accrual of interest has been discontinued at June 30, 2008 and December 31,
2007 amounted to $21,360,000 and $13,056,000, respectively, and are included in the impaired loans
above. Loans past due, greater than 90 days and still accruing interest, amounted to $2,191,000
and $54,000 at June 30, 2008 and December 31, 2007.
11
Note 6 Earnings Per Common Share
A reconciliation of the numerators and denominators used in the computation of basic earnings per
common share and diluted earnings per common share is presented below. Earnings per common share
are presented below for the three and six month periods ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
($ in thousands except per share data) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
Basic Earnings Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
$ |
(2,168,000 |
) |
|
$ |
844,000 |
|
|
$ |
(2,797,000 |
) |
|
$ |
1,792,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
Outstanding |
|
|
2,172,177 |
|
|
|
2,162,599 |
|
|
|
2,169,692 |
|
|
|
2,160,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
(1.00 |
) |
|
$ |
0.39 |
|
|
$ |
(1.29 |
) |
|
$ |
0.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
$ |
(2,168,000 |
) |
|
$ |
844,000 |
|
|
$ |
(2,797,000 |
) |
|
$ |
1,792,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
Outstanding for basic earnings per
Common share |
|
|
2,172,177 |
|
|
|
2,162,599 |
|
|
|
2,169,692 |
|
|
|
2,160,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Dilutive effects of assumed
exercises of stock options |
|
|
0 |
|
|
|
3,068 |
|
|
|
0 |
|
|
|
3,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
and dilutive potential common
shares outstanding |
|
|
2,172,177 |
|
|
|
2,165,667 |
|
|
|
2,169,873 |
|
|
|
2,163,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common
share |
|
$ |
(1.00 |
) |
|
$ |
0.39 |
|
|
$ |
(1.29 |
) |
|
$ |
0.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options for zero shares and 181 shares of common stock for the three and six month period
ended June 30, 2008 and stock options for 17,596 shares and 17,607 shares of common stock for the
three and six month period ended June 30, 2007 were not considered in computing diluted earnings
per common share because they were antidilutive.
Note 7 Commitments and Contingencies
There are various contingent liabilities that are not reflected in the financial statements
including claims and legal actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of these matters is not
expected to have a material effect on the Corporations consolidated financial condition or results
of operations.
12
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Certain of the Corporations accounting policies are important to the portrayal of the
Corporations financial condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates
associated with these policies are susceptible to material changes as a result of changes in facts
and circumstances. Facts and circumstances, which could affect these judgments, include, but
without limitation, changes in interest rates, in the performance of the economy or in the
financial condition of borrowers. Management believes that its critical accounting policies include
determining the allowance for loan losses and determining the fair value of securities and other
financial instruments.
As indicated in the income statement, the net loss for the three months ended June 30, 2008 was
($2,168,000) compared to net income of $844,000 for the same period in 2007. Net interest income
in the second quarter of 2008, was $927 thousand below net interest income for the same quarter in
2007. This is primarily due to a 17.2% decrease in interest income from declining market rates and
an increase in non-performing loans that were put on non-accrual during the second quarter.
Additionally, a decrease in non-interest income and a modest decrease in non-interest expense for
the second quarter of 2008 also contributed to the second quarter loss. The second quarter 2008
provision for loan losses was up $3.2 million compared to second quarter of 2007. The increase in
provision is due to declining market conditions which have negatively impacted borrower capacity to
repay their obligations and declining property values. Management feels the provision is adequate
and the allowance for loan losses has increased $5,604,000 when comparing year to date June 30,
2008 to June 30, 2007.
The Corporation had an $843,200 investment in a DeNovo institution carried as available for sale.
At December 31, 2007, the estimated fair value of this investment was $687,600. Late in the first
quarter of 2008, the DeNovo made information available that indicated its financial losses were
beyond start up losses expected from a DeNovo and management began to conduct a financial analysis.
The unrealized loss had been recorded through other comprehensive income in accordance with
available for sale security accounting. Management has continued to identify more information
about the DeNovo and management has concluded that a recovery can no longer be forecasted, and
accordingly, an other-than-temporary loss of $574,400 was recognized through earnings in the first
quarter of 2008 and the Corporation recorded another other-than-temporary loss of $35,400 in the
second quarter of 2008. We will continue to update our financial analysis of the $233,400
remaining investment and future losses may be recorded if the DeNovos condition declines further.
The banking industry uses standard performance indicators to help evaluate a banking institutions
performance. Return on average assets is one of these indicators. For the three months ended June
30, 2008, the Corporations return on average assets (annualized) was (1.45%) compared to 0.55% for
the same period in 2007. For six months ended June 30, 2008, the Corporations return on average
assets (annualized) was (0.92%) compared to 0.58% for the same period in 2007. Net income (loss)
per share basic and diluted was ($1.00) in the second quarter of 2008 compared to $0.39 net
income per share basic and diluted for the same period in 2007. Net income (loss) per share
basic and diluted was ($1.29) for the six months ended June 30, 2008 compared to $0.83 net income
per share basic and diluted for the same period in 2007.
13
Net Interest Income
Net interest income and average balances and yields on major categories of interest-earning assets
and interest-bearing liabilities for the six months ended June 30, 2008 and 2007 are summarized in
Table 2. Table 3 summarizes net interest income, average balances and yields on major categories of
interest-earning assets and interest-earning liabilities for the three months ended June 30, 2008
and 2007. The effects of changes in average interest rates and average balances are detailed in
Table 1 below.
Table 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED |
|
|
|
JUNE 30, |
|
|
|
2008 COMPARED TO 2007 |
|
|
|
INCREASE (DECREASE) |
|
|
|
DUE TO |
|
|
|
|
|
|
|
YIELD/ |
|
|
|
|
(000S OMITTED) |
|
VOL |
|
|
RATE |
|
|
TOTAL |
|
|
Taxable Securities |
|
$ |
(481 |
) |
|
$ |
(48 |
) |
|
$ |
(529 |
) |
Tax-Exempt Securities |
|
|
(128 |
) |
|
|
(64 |
) |
|
|
(192 |
) |
Federal Funds Sold |
|
|
(16 |
) |
|
|
(81 |
) |
|
|
(97 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
|
|
473 |
|
|
|
(2,466 |
) |
|
|
(1,993 |
) |
Loans Held for Sale |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets |
|
|
(157 |
) |
|
|
(2,664 |
) |
|
|
(2,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Demand Deposits |
|
|
(49 |
) |
|
|
(471 |
) |
|
|
(520 |
) |
Savings Deposits |
|
|
(47 |
) |
|
|
(139 |
) |
|
|
(186 |
) |
Time CDs $100,000 and Over |
|
|
346 |
|
|
|
(45 |
) |
|
|
301 |
|
Other Time Deposits |
|
|
(148 |
) |
|
|
(86 |
) |
|
|
(234 |
) |
Other Borrowings |
|
|
(112 |
) |
|
|
(98 |
) |
|
|
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Bearing Liabilities |
|
|
(10 |
) |
|
|
(839 |
) |
|
|
(849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
(147 |
) |
|
$ |
(1,825 |
) |
|
$ |
(1,972 |
) |
|
|
|
|
|
|
|
|
|
|
As indicated in Table 1, during the six months ended June 30, 2008, net interest income decreased
compared to the same period in 2007, resulting primarily from decreasing rates on loans. Deposit
interest expense decreased, as management reacted by decreasing interest bearing liability rates to
be aligned with market rates during the first six months of 2008 compared to the same period in
2007.
Net interest income (displayed with consideration of full tax equivalency), average balance sheet
amounts, and the corresponding yields for the three months ended June 30, 2008 and 2007 are shown
in Table 3. Net interest income for the three months ended June 30, 2008 was $4,561,000, a decrease
of $944,000, or 17.1%, over the same period in 2007. Net interest margin decreased due to a rapid
decrease in interest income which was partially offset by decreases in interest bearing deposits.
However, the decrease in interest expense was limited by the maturity of time deposits and their
ability to re-price. Management has re-priced deposits to be competitive in the respective markets.
Additionally, increases in non-accruing loans, to a total of $23,651,000, have had a negative
impact to interest income. Loan pricing continues to be competitive. While management strives to
acquire quality credits with favorable pricing, local competition has been driving loan pricing
down to unfavorable levels. As a result, the Banks have opted not to acquire minimally priced
loans. Management has also addressed credit quality issues during the second quarter of 2008.
This will be discussed further in the Allowance and Provision for Loan Losses section.
14
Management reviews economic forecasts and strategy on a monthly basis. Accordingly, the Corporation
will continue to strategically manage the balance sheet structure in an effort to create stability
in net interest income. The Corporation expects to continue to seek out new loan opportunities with
a focus on sound credit quality.
As indicated in Table 2, for the six months ended June 30, 2008, the Corporations net interest
margin (with consideration of full tax equivalency) was 3.27% compared with 3.93% for the same
period in 2007. This decrease is a result of declines in interest income which primarily was due to
decreases in yields on loans. The decrease in interest income was partially due to an increase in
loans placed into non-accrual status. Those decreases outpaced the repricing ability of interest
bearing liabilities, due to the large proportion of time deposits.
As indicated in Table 3, for the three months ended June 30, 2008, the Corporations net interest
margin (with consideration of full tax equivalency) was 3.35% compared with 3.91% for the same
period in 2007. This decrease is a result of declines in interest income, due to an increase in
loans places into non-accrual status, versus the re-pricing ability of interest bearing
liabilities. This is partially due to the large proportion of time deposits and the movement of
additional deposit dollars into jumbo CDs with a higher pooled rate than other interest bearing
liabilities.
Average earning assets decreased 1.7% or approximately $9,653,000 comparing the six months of 2008
to the same time period in 2007. Loans, the highest yielding component of earning assets,
represented 84.7% of earning assets in 2008 compared to 80.6% in 2007. Average interest bearing
liabilities decreased .88% or $4,293,000 comparing the first six months of 2008 to the same time
period in 2007. Non-interest bearing deposits amounted to 13.1% of average earning assets in the
first six months of 2008 compared with 13.2% in the same time period of 2007. For the second
quarter of 2008 compared to 2007, average earning assets decreased 3.1% or $17,434,000. The
largest decrease was in the investment securities portfolio, as the funds were used to fund loans
and repay borrowings. Loans increased 1.9% or $8,710,000 comparing the second quarter of 2008 to
the second quarter of 2007. Loans represented 86.0% of earning assets in 2008 compared to 81.8% in
2007. Average interest bearing liabilities decreased $13,855,000 or 2.8% comparing the second
quarter of 2008 to 2007. Non-interest bearing liabilities were 13.6% of average earning assets for
the second quarter of 2008 versus 13.4% in the second quarter of 2007.
Management continually monitors the Corporations balance sheet in an effort to insulate net
interest income from significant swings caused by interest rate volatility. If market rates change
in 2008, corresponding changes in funding costs will be considered to avoid the potential negative
impact on net interest income. The Corporations policies in this regard are further discussed in
the section titled Interest Rate Sensitivity Management.
15
Table 2 Average Balance and Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDED June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
AVERAGE |
|
|
INCOME/ |
|
|
YIELD/ |
|
|
AVERAGE |
|
|
INCOME/ |
|
|
YIELD/ |
|
(000s omitted)(Annualized) |
|
BALANCE |
|
|
EXPENSE |
|
|
RATE |
|
|
BALANCE |
|
|
EXPENSE |
|
|
RATE |
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and Government Agencies |
|
$ |
54,088 |
|
|
$ |
1,128 |
|
|
|
4.19 |
% |
|
$ |
77,242 |
|
|
$ |
1,673 |
|
|
|
4.37 |
% |
State and Political (1) |
|
|
15,369 |
|
|
|
406 |
|
|
|
5.31 |
% |
|
|
19,435 |
|
|
|
598 |
|
|
|
6.21 |
% |
Other |
|
|
7,987 |
|
|
|
65 |
|
|
|
1.64 |
% |
|
|
4,881 |
|
|
|
49 |
|
|
|
2.02 |
% |
|
|
|
|
|
Total Securities |
|
|
77,444 |
|
|
|
1,599 |
|
|
|
4.15 |
% |
|
|
101,558 |
|
|
|
2,320 |
|
|
|
4.61 |
% |
Fed Funds Sold |
|
|
7,685 |
|
|
|
114 |
|
|
|
2.98 |
% |
|
|
8,244 |
|
|
|
211 |
|
|
|
5.16 |
% |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
370,267 |
|
|
|
12,232 |
|
|
|
6.64 |
% |
|
|
354,834 |
|
|
|
13,717 |
|
|
|
7.80 |
% |
Tax Free (1) |
|
|
3,278 |
|
|
|
109 |
|
|
|
6.69 |
% |
|
|
3,748 |
|
|
|
121 |
|
|
|
6.52 |
% |
Real Estate-Mortgage |
|
|
38,885 |
|
|
|
1,245 |
|
|
|
6.44 |
% |
|
|
36,259 |
|
|
|
1,223 |
|
|
|
6.80 |
% |
Consumer |
|
|
57,944 |
|
|
|
1,970 |
|
|
|
6.84 |
% |
|
|
60,358 |
|
|
|
2,488 |
|
|
|
8.31 |
% |
|
|
|
|
|
Total loans |
|
|
470,374 |
|
|
|
15,556 |
|
|
|
6.65 |
% |
|
|
455,199 |
|
|
|
17,549 |
|
|
|
7.77 |
% |
Allowance for Loan Losses |
|
|
(9,100 |
) |
|
|
|
|
|
|
|
|
|
|
(6,843 |
) |
|
|
|
|
|
|
|
|
Net Loans |
|
|
461,274 |
|
|
|
15,556 |
|
|
|
6.78 |
% |
|
|
448,356 |
|
|
|
17,549 |
|
|
|
7.89 |
% |
|
|
|
|
|
Loans Held for Sale |
|
|
1,444 |
|
|
|
42 |
|
|
|
5.85 |
% |
|
|
1,599 |
|
|
|
52 |
|
|
|
6.56 |
% |
|
|
|
|
|
TOTAL EARNING ASSETS |
|
$ |
556,947 |
|
|
$ |
17,311 |
|
|
|
6.25 |
% |
|
$ |
566,600 |
|
|
$ |
20,132 |
|
|
|
7.17 |
% |
|
|
|
|
|
Cash Due from Banks |
|
|
15,361 |
|
|
|
|
|
|
|
|
|
|
|
17,234 |
|
|
|
|
|
|
|
|
|
All Other Assets |
|
|
47,670 |
|
|
|
|
|
|
|
|
|
|
|
44,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
610,878 |
|
|
|
|
|
|
|
|
|
|
$ |
621,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & SHAREHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing DDA |
|
$ |
96,564 |
|
|
$ |
669 |
|
|
|
1.39 |
% |
|
$ |
100,091 |
|
|
$ |
1,189 |
|
|
|
2.40 |
% |
Savings Deposits |
|
|
83,190 |
|
|
|
391 |
|
|
|
0.95 |
% |
|
|
89,820 |
|
|
|
577 |
|
|
|
1.30 |
% |
Time CDs $100,000 and Over |
|
|
150,553 |
|
|
|
3,642 |
|
|
|
4.86 |
% |
|
|
135,472 |
|
|
|
3,341 |
|
|
|
4.97 |
% |
Other Time CDs |
|
|
119,657 |
|
|
|
2,610 |
|
|
|
4.39 |
% |
|
|
125,369 |
|
|
|
2,844 |
|
|
|
4.57 |
% |
|
|
|
|
|
Total Deposits |
|
|
449,964 |
|
|
|
7,312 |
|
|
|
3.27 |
% |
|
|
450,752 |
|
|
|
7,951 |
|
|
|
3.56 |
% |
Other Borrowings |
|
|
34,759 |
|
|
|
935 |
|
|
|
5.41 |
% |
|
|
38,264 |
|
|
|
1,145 |
|
|
|
6.03 |
% |
|
|
|
|
|
INTEREST BEARING LIABILITIES |
|
$ |
484,723 |
|
|
$ |
8,247 |
|
|
|
3.42 |
% |
|
$ |
489,016 |
|
|
$ |
9,096 |
|
|
|
3.75 |
% |
|
|
|
|
|
Non-Interest bearing DDA |
|
|
73,003 |
|
|
|
|
|
|
|
|
|
|
|
74,830 |
|
|
|
|
|
|
|
|
|
All Other Liabilities |
|
|
3,353 |
|
|
|
|
|
|
|
|
|
|
|
4,468 |
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
49,799 |
|
|
|
|
|
|
|
|
|
|
|
52,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES & SHAREHOLDERS EQUITY |
|
$ |
610,878 |
|
|
|
|
|
|
|
|
|
|
$ |
621,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Rate Spread |
|
|
|
|
|
|
|
|
|
|
2.83 |
% |
|
|
|
|
|
|
|
|
|
|
3.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income /Margin |
|
|
|
|
|
$ |
9,064 |
|
|
|
3.27 |
% |
|
|
|
|
|
$ |
11,036 |
|
|
|
3.93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Presented on a fully taxable equivalent basis using a federal income tax rate of 34%. |
16
Table 3 Average Balance and Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
AVERAGE |
|
|
INCOME/ |
|
|
YIELD/ |
|
|
AVERAGE |
|
|
INCOME/ |
|
|
YIELD/ |
|
(000s omitted)(Annualized) |
|
BALANCE |
|
|
EXPENSE |
|
|
RATE |
|
|
BALANCE |
|
|
EXPENSE |
|
|
RATE |
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and Government Agencies |
|
$ |
50,780 |
|
|
$ |
532 |
|
|
|
4.21 |
% |
|
$ |
76,091 |
|
|
$ |
782 |
|
|
|
4.12 |
% |
State and Political (1) |
|
|
15,355 |
|
|
|
229 |
|
|
|
5.99 |
% |
|
|
18,092 |
|
|
|
273 |
|
|
|
6.05 |
% |
Other |
|
|
7,666 |
|
|
|
33 |
|
|
|
1.75 |
% |
|
|
5,365 |
|
|
|
20 |
|
|
|
1.50 |
% |
|
|
|
|
|
Total Securities |
|
|
73,801 |
|
|
|
794 |
|
|
|
4.32 |
% |
|
|
99,548 |
|
|
|
1,075 |
|
|
|
4.33 |
% |
Fed Funds Sold |
|
|
2,969 |
|
|
|
16 |
|
|
|
2.11 |
% |
|
|
3,366 |
|
|
|
44 |
|
|
|
5.24 |
% |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
369,877 |
|
|
|
5,854 |
|
|
|
6.37 |
% |
|
|
360,535 |
|
|
|
6,996 |
|
|
|
7.78 |
% |
Tax Free (1) |
|
|
3,247 |
|
|
|
54 |
|
|
|
6.69 |
% |
|
|
3,686 |
|
|
|
59 |
|
|
|
6.43 |
% |
Real Estate-Mortgage |
|
|
38,307 |
|
|
|
612 |
|
|
|
6.42 |
% |
|
|
36,303 |
|
|
|
628 |
|
|
|
6.94 |
% |
Consumer |
|
|
57,813 |
|
|
|
941 |
|
|
|
6.55 |
% |
|
|
59,425 |
|
|
|
1,230 |
|
|
|
8.30 |
% |
|
|
|
|
|
Total loans |
|
|
469,244 |
|
|
|
7,461 |
|
|
|
6.39 |
% |
|
|
459,949 |
|
|
|
8,913 |
|
|
|
7.77 |
% |
Allowance for Loan Losses |
|
|
(9,421 |
) |
|
|
|
|
|
|
|
|
|
|
(6,950 |
) |
|
|
|
|
|
|
|
|
Net Loans |
|
|
459,823 |
|
|
|
7,461 |
|
|
|
6.53 |
% |
|
|
452,999 |
|
|
|
8,913 |
|
|
|
7.89 |
% |
|
|
|
|
|
Loans Held for Sale |
|
|
916 |
|
|
|
14 |
|
|
|
5.93 |
% |
|
|
1,501 |
|
|
|
23 |
|
|
|
6.15 |
% |
|
|
|
|
|
TOTAL EARNING ASSETS |
|
$ |
546,930 |
|
|
$ |
8,285 |
|
|
|
6.09 |
% |
|
$ |
564,364 |
|
|
$ |
10,055 |
|
|
|
7.15 |
% |
|
|
|
|
|
Cash Due from Banks |
|
|
14,398 |
|
|
|
|
|
|
|
|
|
|
|
16,704 |
|
|
|
|
|
|
|
|
|
All Other Assets |
|
|
47,175 |
|
|
|
|
|
|
|
|
|
|
|
45,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
599,082 |
|
|
|
|
|
|
|
|
|
|
$ |
619,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & SHAREHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing DDA |
|
$ |
97,132 |
|
|
$ |
325 |
|
|
|
1.35 |
% |
|
$ |
100,345 |
|
|
$ |
600 |
|
|
|
2.39 |
% |
Savings Deposits |
|
|
83,606 |
|
|
|
169 |
|
|
|
0.81 |
% |
|
|
89,038 |
|
|
|
290 |
|
|
|
1.31 |
% |
Time CDs $100,000 and Over |
|
|
138,635 |
|
|
|
1,635 |
|
|
|
4.74 |
% |
|
|
134,374 |
|
|
|
1,659 |
|
|
|
4.95 |
% |
Other Time CDs |
|
|
116,576 |
|
|
|
1,156 |
|
|
|
3.99 |
% |
|
|
125,523 |
|
|
|
1,441 |
|
|
|
4.60 |
% |
|
|
|
|
|
Total Deposits |
|
|
435,949 |
|
|
|
3,285 |
|
|
|
3.03 |
% |
|
|
449,280 |
|
|
|
3,990 |
|
|
|
3.56 |
% |
Other Borrowings |
|
|
36,383 |
|
|
|
439 |
|
|
|
4.85 |
% |
|
|
36,907 |
|
|
|
560 |
|
|
|
6.09 |
% |
|
|
|
|
|
INTEREST BEARING LIABILITIES |
|
$ |
472,332 |
|
|
$ |
3,724 |
|
|
|
3.17 |
% |
|
$ |
486,187 |
|
|
$ |
4,550 |
|
|
|
3.75 |
% |
|
|
|
|
|
Non-Interest bearing DDA |
|
|
74,166 |
|
|
|
|
|
|
|
|
|
|
|
75,714 |
|
|
|
|
|
|
|
|
|
All Other Liabilities |
|
|
2,840 |
|
|
|
|
|
|
|
|
|
|
|
4,124 |
|
|
|
|
|
|
|
|
|
Shareholders Equity |
|
|
49,744 |
|
|
|
|
|
|
|
|
|
|
|
53,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES & SHAREHOLDERS EQUITY |
|
$ |
599,082 |
|
|
|
|
|
|
|
|
|
|
$ |
619,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Rate Spread |
|
|
|
|
|
|
|
|
|
|
2.92 |
% |
|
|
|
|
|
|
|
|
|
|
3.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income /Margin |
|
|
|
|
|
$ |
4,561 |
|
|
|
3.35 |
% |
|
|
|
|
|
$ |
5,505 |
|
|
|
3.91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Presented on a fully taxable equivalent basis using a federal income tax rate of 34%. |
17
Allowance and Provision For Loan Losses
The Corporation maintains formal policies and procedures to control and monitor credit risk.
Management believes the allowance for loan losses is adequate to provide for probable incurred
losses in the loan portfolio. While the Corporations loan portfolio has no significant
concentrations in any one industry or any exposure in foreign loans, the loan portfolio has a
concentration connected with construction and land development loans. Specific strategies have
been deployed to reduce the concentration level and limit exposure to this type of lending in the
future. The Michigan economy, employment levels and other economic conditions in the Corporations
local markets may have a significant impact on the level of credit losses. Management continues to
identify and devote attention to credits that are not performing as agreed. Of course,
deterioration of economic conditions could have an impact on the Corporations credit quality,
which could impact the need for greater provision for loan losses and the level of the allowance
for loan losses as a percentage of gross loans. Non-performing loans are discussed further in the
section titled Non-Performing Assets.
The allowance for loan losses reflects managements judgment as to the level considered appropriate
to absorb probable losses in the loan portfolio. The Corporations methodology in determining the
adequacy of the allowance is based on ongoing quarterly assessments and relies on several key
elements, which include specific allowances for identified problem loans and a formula-based
risk-allocated allowance for the remainder of the portfolio. This includes a review of individual
loans, size, and composition of the loan portfolio, historical loss experience, current economic
conditions, financial condition of borrowers, the level and composition of non-performing loans,
portfolio trends, estimated net charge-offs and other pertinent factors. While we consider the
allowance for loan losses to be adequate based on information currently available, future
adjustments to the allowance may be necessary due to changes in economic conditions, delinquencies,
or loss rates. Although portions of the allowance have been allocated to various portfolio
segments, the allowance is general in nature and is available for the portfolio in its entirety. At
June 30, 2008, the allowance was $12,778,000, or 2.75% of total loans compared to $8,554,000, or
1.81%, at December 31, 2007, increasing the allowance $4,224,000 during the first six months of
2008. Non-performing loan levels, discussed later, increased during the period and net charge-offs
have decreased to $422,000 during the second quarter of 2008 compared to $437,000 during the second
quarter of 2007. Management believes that the allowance is appropriate given identified risk in
the loan portfolio based on asset quality.
Table 4 below summarizes loan losses and recoveries for the first six months of 2008 and 2007.
During the first six months of 2008, the Corporation experienced net charge-offs of $668,000 or
.14% of gross loans compared with net charge-offs of $606,000 or .13% of gross loans in the first
six months of 2007. The provision for loan losses was $4,892,000 in the first six months of 2008
and $1,088,000 for the same time period in 2007. As a result of continuing credit quality
deterioration, additional provision for loan losses was taken in the second quarter. During the
second quarter of 2008, the provision for loan losses was $3,811,000 compared to $649,000 in the
second quarter of 2007. A substantial portion of the increase in provision for loan losses in the
second quarter can directly be attributed to twelve particular loans for which valuations of
underlying collateral, which were received during the second quarter, were found to be inadequate.
These inadequacies necessitated the Banks to provide additional specific reserves for those
accounts. The sizeable increase in provision for loan losses was to provide specific reserves
mainly for non-performing construction and land development loans and the continuing decline in the
Michigan economy.
18
Table 4 Analysis of the Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
(000s omitted) |
|
2008 |
|
2007 |
|
|
|
Balance at Beginning of Period |
|
$ |
8,554 |
|
|
$ |
6,692 |
|
|
|
|
Charge-Offs: |
|
|
|
|
|
|
|
|
Commercial, Financial and Agriculture |
|
|
(630 |
) |
|
|
(534 |
) |
Real Estate-Mortgage |
|
|
(88 |
) |
|
|
(30 |
) |
Installment Loans to Individuals |
|
|
(215 |
) |
|
|
(191 |
) |
|
|
|
Total Charge-Offs |
|
|
(933 |
) |
|
|
(755 |
) |
Recoveries: |
|
|
|
|
|
|
|
|
Commercial, Financial and Agriculture |
|
|
201 |
|
|
|
102 |
|
Real Estate-Mortgage |
|
|
0 |
|
|
|
0 |
|
Installment Loans to Individuals |
|
|
64 |
|
|
|
47 |
|
|
|
|
Total Recoveries |
|
|
265 |
|
|
|
149 |
|
|
|
|
Net Charge-Offs |
|
|
(668 |
) |
|
|
(606 |
) |
Provision for loan losses |
|
|
4,892 |
|
|
|
1,088 |
|
|
|
|
Balance at End of Period |
|
$ |
12,778 |
|
|
$ |
7,174 |
|
|
|
|
Ratio of Net Charge-Offs to Gross Loans |
|
|
0.14 |
% |
|
|
0.13 |
% |
|
|
|
Non-Interest Income
Non-interest income decreased during the six months ended June 30, 2008 as compared to the same
period in 2007, primarily due to the increase in loss on sale of real estate owned, increase in
loss on sale of fixed assets, and decreases in service charges on deposits. Overall non-interest
income was $3,111,000 for the six months ended June 30, 2008 compared to $3,893,000 for the same
period in 2007. This represents a decrease of 20.1%.
Non-interest income decreased from the second quarter of 2008 when comparing to the same period in
2007. The most notable components of this decrease are decrease in total service charges, increase
in loss on sale of real estate owned and increase in loss on sale of fixed assets. A favorable
contributor to non-interest income was an increase in loan placement fees and an increase in land
contract income. The increase in land contract income was due to the payoff of the land contract
held by one of the Banks. Overall non-interest income was $1,553,000 for the second quarter of
2008 compared to $2,028,000 for the same period in 2007. This is a decrease of 23.4%.
The most significant category of non-interest income is service charges on deposit accounts. These
fees were $1,489,000 in the first six months of 2008, compared to $1,687,000 for the same period of
2007. This represents a decrease of 11.7% from year to year. The decrease is attributable to lower
customer usage of the overdraft privilege product, as customers continue to be more economically
conscious. Debit Card income was up $18,000 year-to-year, remote customer capture charges were up
$4,300, ATM Surcharges were down $16,600, Customer Service Fees were down $10,400, and other
service charge categories remained relatively flat from year to year.
Gain on the sale of mortgage loans originated by the Banks and sold into the secondary market
increased 7.4% to $218,000 in the six months ended June 30, 2008 compared to $203,000 in the same
period in 2007. This increase is a result of consumers continuing to refinance their homes to
better control their expenses. Gain on the sale of mortgages was down 16.0% when comparing second
quarter of 2008 to 2007. This decrease is equal to approximately $19,000.
Trust, investment and financial planning services income increased slightly by $6,000 or 0.6% in
the first six months of 2008 compared to the same period in the prior year. The increase is mostly
due to an increase in Trust Custodial fees. Comparing the second quarter of 2008 to 2007, trust,
investment and
19
financial planning services income increased $57,000 or 12.4%. This was due to increases in both
trust and financial planning relationships when comparing the two time periods.
Other operating income decreased by $605,000 or 58.5% to $430,000 in the first six months of 2008
compared to $1,035,000 in the same time period in 2007. The largest portion of the decrease is the
loss on equity investment. In 2007, the Corporation made an investment of 24.99% ownership in
Valley Capital Bank headquartered in Mesa, Arizona. As a DeNovo, Valley Capital Bank was
anticipated to have operating losses during their start-up phase. Accordingly, the Corporation has
recognized its share of the operating loss. Using the equity method of accounting on this
investment, the Corporation has experienced a loss of $302,000 on this startup DeNovo bank, as
expected, in the six months of 2008. Of this loss, the Corporation has recognized $191,000 in the
second quarter of 2008.
Categories of other operating income which had significant declines from year-to-year were: cashier
check commission and building rental income had decreases totaling $124,000 from year-to-year.
Building rental income decreased $90,000 year to year due to one time income of a lease buy out in
2007 of $100,000. Loss on sale of real estate owned, loss on sale of fixed assets increased
comparing year-to-year by $192,000, thus taking from income. Accounts with improvement from
year-to-year were income from servicing other institutions, loan placement fees and land contract
income, totaling $158,000. Loan placement fees increased $70,000 in the first half of 2008
contributing to other operating income. When comparing the second quarter of 2008 to the second
quarter of 2007, there were notable increases in cash surrender value of bank owned life insurance,
loan placement fees and land contract income. Notable decreases were in cashier check commission.
Losses on the sale of real estate owned and fixed assets increased by $143,000, thus reducing other
income when comparing the second quarter of 2008 to the second quarter of 2007.
Non-Interest Expense
Total non-interest expense increased 1.6% to $11,276,000 in the six months ended June 30, 2008,
compared with $11,094,000 in the same period of 2007. The increase was partially offset by a
decrease in salaries and benefits. Occupancy expenses, loan and collection expenses and other
operating expenses increased year-to-year. These increases were partially offset by decreases in
furniture and equipment, other operations, and advertising. The Corporation has also recognized
year-to-date, $610,000 in other-than-temporary impairment on a DeNovo investment. Comparing the
second quarter of 2008 to 2007, non-interest expenses had a modest decrease of 4.1% or $228,000.
Salary and benefit costs, the Corporations largest non-interest expense category, were $5,937,000
in the first six months of 2008, compared with $6,440,000, or a decrease of 7.8%, for the same time
period in 2007. A difference of about $503,000 was due to staff reduction through attrition and
staff not receiving any performance bonus payments. Decreased cost was due to staff not receiving
any performance bonus payments and staff reduction through attrition. Salary and benefit costs
also decreased when comparing second quarter 2008 to 2007. The decrease of $258,000 or 8.1% were
also a result of staffing changes through resignation or attrition.
Occupancy expenses, at $1,082,000, increased slightly in the six months ended June 30, 2008
compared to the same period in 2008 by $69,000 or 6.8%. The increases were attributable to the
operation of two new affiliate offices in 2008, and the expenses associated with the forthcoming
closure of a leased office. These expenses were partially offset by decreases in insurance
expenses and other occupancy expenses with the closure of a leased office in late 2007. Occupancy
expenses increased $21,000 when comparing the second quarter of 2008 to 2007. This is due to the
expenses associated with the forthcoming closure of a leased office at the end of July 2008.
During the six months ended June 30, 2008, furniture and equipment expenses were $1,030,000
compared to $1,059,000 for the same period in 2007, a decrease of 2.7%. The decreases in expenses
were
20
a result of declines in depreciation expense as assets reach their useful lives and become fully
depreciated, decreases in rental expense with the transfer to an internet based telephone system
and decreases in maintenance contracts. Management continues to scrutinize service providing
vendors, ensuring that necessary services are being paid for, as well as improved negotiation of
contract terms. Furniture and equipment expenses remained nearly flat when comparing the second
quarter of 2008 to the second quarter of 2007.
Loan and collection expenses, at $399,000, were up $223,000 or 126.7% during first six months of
2008 compared to the same time period in 2007. The increase was primarily attributable to an
increase in collection expenses and other loan expense relating to other real estate owned. The
rise in these expenses is a result of the unfavorable economy in Michigan. As the level of these
accounts increase, we anticipate these expenses to be above desired levels until the economic
situation begins to become more favorable. When comparing the second quarter of 2008 to 2007, an
increase of $148,000 or 174.1% has been experienced by the Corporation, again as a result of the
unfavorable changes to the Michigan economy.
Advertising expenses of $249,000 in the six months ended June 30, 2008 decreased 8.1% compared with
$271,000 for the same period in 2007. While maintaining market presence, the Corporation was able
to reduce advertising expense. The Corporation continues to remain focused on targeted advertising
in all of its markets to continue growth. Advertising expenses decreased $14,000 or 8.8% when
comparing the second quarter of 2008 to the second quarter of 2007.
The Corporation has recorded a $610,000 charge to other non-interest expense due to the
other-than-temporary impairment of a DeNovo investment as of June 30, 2008. The Corporation
recorded the impairment due to an inability to definitively forecast a recovery within a reasonable
period of time.
Other operating expenses were $1,969,000 in the six months ended June 30, 2008 compared to
$2,135,000 in the same time period in 2007, a decrease of $166,000 or 7.9%. Reduced expenses of
stationery and supplies, telephone and communication, armored car service, legal and consulting,
other outside services, director compensation, business development expense conference and
education, customer service expense were largely offset by increases in other categories. Expenses
that had notable increases were audit expense, FDIC assessment expense, bond insurance, NSF
expense, other losses and correspondent bank charges. Other operating expenses had a decrease of
$163,000 or 14.6% when comparing the second quarter of 2008 to 2007. The composition of the changes
is similar to the year to date changes.
Financial Condition
Proper management of the volume and composition of the Corporations earning assets and funding
sources is essential for ensuring strong and consistent earnings performance, maintaining adequate
liquidity and limiting exposure to risks caused by changing market conditions. The Corporations
securities portfolio is structured to provide a source of liquidity through maturities and to
generate an income stream with relatively low levels of principal risk. The Corporation does not
engage in securities trading. Loans comprise the largest component of earning assets and are the
Corporations highest yielding assets. Customer deposits are the primary source of funding for
earning assets while short-term debt and other sources of funds could be further utilized if market
conditions and liquidity needs change.
The Corporations total assets were $586 million at June 30, 2008 compared to total assets of $628
million at December 31, 2007. The decrease in total assets is due to a smaller security portfolio
of $14.3 million, loan portfolio of $6.5 million and the reduction of federal funds sold of $7.3
million since December 31, 2007. Loans comprised 79.3% of total assets at June 30, 2008 compared
to 75.1% at December 31, 2007. Loans decreased $6.5 million during the second quarter of 2008. On
the other side of the balance sheet, the ratio of non-interest bearing deposits to total deposits
was 15.6% at June 30, 2008 and 13.8% at December 31, 2007. Interest bearing deposit liabilities
totaled $426.6 million at June 30, 2008 compared to $468.4 million at December 31, 2007. Total
deposits decreased $38.0 million with non-
21
interest bearing demand deposits increasing $3,719,000 and interest bearing deposits decreasing
$41,750,000. Short-term borrowings increased $2,809,000 due to the decrease in deposits, comparing
the two periods. FHLB advances decreased slightly comparing the two periods. Repurchase agreement
balances decreased $5.0 million comparing the two periods. Repurchase agreements are instruments
with deposit type characteristics, which are secured by government securities. The repurchase
agreements were leveraged against securities to increase net interest income.
Bank premises and equipment decreased $794,000 to $19.3 million at June 30, 2008 compared to $20.1
million at December 31, 2007. The decrease was due to the sale of a bank owned rental property
during the first quarter of 2008 and the disposal of check processing equipment in the second
quarter of 2008.
Non-Performing Assets
Non-performing assets include loans on which interest accruals have ceased, loans past due 90 days
or more and still accruing, loans that have been renegotiated, and real estate acquired through
foreclosure. Table 5 reflects the levels of these assets at June 30, 2008 and December 31, 2007.
Non-performing assets increased substantially from December 31, 2007 to June 30, 2008. The increase
of $10,201,000 was primarily due to increases in loans past due 90 days or more and still accruing
and non-accrual loans. Loans past due 90 days or more and still accruing increased $2,137,000 and
non-accrual loans increased $8,304,000. REO-in-Redemption balance is comprised of thirteen
commercial properties and three residential properties for a total of $1,030,000 at June 30, 2008.
Marketability of these properties is dependent on the real estate market. Renegotiated loans
increased $513,000 from December 31, 2007 to a total of $944,000 at June 30, 2008.
The level and composition of non-performing assets are affected by economic conditions in the
Corporations local markets. Non-performing assets, charge-offs, and provisions for loan losses
tend to decline in a strong economy and increase in a weak economy, potentially impacting the
Corporations operating results. In addition to non-performing loans, management carefully monitors
other credits that are current in terms of principal and interest payments but, in managements
opinion, may deteriorate in quality if economic conditions change. As of June 30, 2008, non-accrual
loans were comprised of 56.6% of land development loans. The remaining 36.4% of non-accrual loans
are varied in their purpose and include manufacturers, individuals and other businesses. Of the
non-performing loans, eighteen loans with principal balances totaling $6,462,000 were placed into
non-accrual status during the second quarter. This resulted in a second quarter 2008 loss of
interest income of approximately $136,000 and a year-to-date 2008 loss of interest income of
approximately $193,000.
Certain portions of the Corporations non-performing loans included in Table 5 are considered
impaired. The Corporation measures impairment on all large balance non-accrual commercial loans.
Certain large balance accruing loans rated watch or lower are also measured for impairment.
Impairment losses are believed to be adequately covered by the allowance for loan losses.
The Corporation maintains policies and procedures to identify and monitor non-accrual loans. A
loan is placed on non-accrual status when there is doubt regarding collection of principal or
interest, or when principal or interest is past due 90 days or more. Interest accrued but not
collected is reversed against income for the current quarter, when the loan is placed in
non-accrual status.
22
Table 5 Non-Performing Assets and Past Due Loans
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2008 |
|
2007 |
|
|
|
Non-Performing Loans: |
|
|
|
|
|
|
|
|
Loans Past Due 90 Days or More & Still
Accruing |
|
$ |
2,191 |
|
|
$ |
54 |
|
Non-Accrual Loans |
|
|
21,360 |
|
|
|
13,056 |
|
Renegotiated Loans |
|
|
944 |
|
|
|
431 |
|
|
|
|
Total Non-Performing Loans |
|
|
24,495 |
|
|
|
13,541 |
|
|
|
|
Other Non-Performing Assets: |
|
|
|
|
|
|
|
|
Other Real Estate |
|
|
2,001 |
|
|
|
2,003 |
|
REO in Redemption |
|
|
1,030 |
|
|
|
1,829 |
|
Other Non-Performing Assets |
|
|
203 |
|
|
|
155 |
|
|
|
|
Total Other Non-Performing Assets |
|
|
3,234 |
|
|
|
3,987 |
|
|
|
|
Total Non-Performing Assets |
|
$ |
27,729 |
|
|
$ |
17,528 |
|
|
|
|
Non-Performing Loans as a % of
Total Loans |
|
|
5.26 |
% |
|
|
2.86 |
% |
Allowance for Loan Losses as a % of
Non-Performing Loans |
|
|
52.17 |
% |
|
|
63.18 |
% |
Accruing Loans Past Due 90 Days or
More to Total Loans |
|
|
0.47 |
% |
|
|
0.01 |
% |
Non-performing Assets as a % of
Total Assets |
|
|
4.73 |
% |
|
|
2.79 |
% |
Liquidity and Interest Rate Risk Management
Asset/Liability management is designed to assure liquidity and reduce interest rate risks. The goal
in managing interest rate risk is to maintain a strong and relatively stable net interest margin.
It is the responsibility of the Asset/Liability Management Committee (ALCO) to set policy
guidelines and to establish short-term and long-term strategies with respect to interest rate
exposure and liquidity. The ALCO, which is comprised of key members of management, meets regularly
to review financial performance and soundness, including interest rate risk and liquidity exposure
in relation to present and prospective markets, business conditions, and product lines.
Accordingly, the committee adopts funding and balance sheet management strategies that are intended
to maintain earnings, liquidity, and growth rates consistent with policy and prudent business
standards.
Liquidity maintenance together with a solid capital base and strong earnings performance are key
objectives of the Corporation. The Corporations liquidity is derived from a strong deposit base
comprised of individual and business deposits. Deposit accounts of customers in the mature market
represent a substantial portion of deposits of individuals. The Banks deposit base plus other
funding sources (federal funds purchased, short-term borrowings, FHLB advances, repurchase
agreements, other liabilities and shareholders equity) provided primarily all funding needs in the
first six months of 2008. While these sources of funds are expected to continue to be available to
provide funds in the future, the mix and availability of funds will depend upon future economic
conditions. The Corporation does not foresee any difficulty in meeting its funding requirements.
Primary liquidity is provided through short-term investments or borrowings (including federal funds
sold and purchased) while the securities portfolio provides secondary liquidity. The securities
portfolio has decreased $14.3 million since December 31, 2007 due to the calls and maturities of
securities and pay downs of Mortgage Backed Securities (MBS) and the recording of
other-than-temporary impairment of a security. The Corporation has decided to invest the excess
funds, from the call of these securities, in the
23
securities and loan portfolios to increase yield and income versus keeping the excess funds in
federal funds sold at a lower yield. The Corporation regularly monitors liquidity to ensure
adequate cash flows to cover unanticipated reductions in the availability of funding sources.
The Corporations consolidated securities portfolio is managed to minimize interest rate risk,
maintain sufficient liquidity and maximize return. Total securities fair market value increased
$129,000 from March 31, 2008 and has declined $12,430,125 from December 31, 2007. The decline from
December 31, 2007 to June 30, 2008 is partially due to calls on securities totaling approximately
$11,112,000. Of these calls $5,500,000 was reinvested in securities. Management believes that the
decline in fair market value was attributable to interest rate factors, general market risk
re-pricing, and lack of liquidity in the capital markets versus underlying collateral or credit
quality issues of a particular investment. As such, we do not believe any individual unrealized
losses as of June 30, 2008 represent other-than-temporary impairment based on the following
factors: no holdings have been downgraded below investment grade by any of the rating agencies. We
have no knowledge that any of our direct investments consists of sub prime loans. We continue to
review the cash flow projections on all of our mortgage backed securities. Based on this analysis
and our review, these instruments have cash flows sufficient to cover any scheduled principal and
interest payments. The Corporation has both the intent and the ability to hold each of the
securities for the time necessary to recover its amortized cost.
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.
The Corporation had cash flows from financing activities resulting primarily from the decrease of
demand and savings deposits. In the first six months of 2008, these deposits decreased $38,031,000.
Cash provided by investing activities was $16,522,000 in first six months of 2008 compared to cash
used of $5,976,000 in first six months of 2007. The change in investing activities was due to the
calls on available for sale securities totaling $12,662,000, the maturity of $4,958,000 of
available for sale securities and sales of available for sale securities of $1,999,000. Held to
maturity securities also had maturities of $1,253,000. Proceeds from maturities and calls of
securities, were partially reinvested in available for sale securities of $6,732,000 and held to
maturity securities of $750,000. A portion of the remaining difference was used to offset declines
in deposit balances.
Capital Management
Total shareholders equity decreased 6.1% to $46,499,000 at June 30, 2008 compared with $49,496,000
at December 31, 2007. The Corporations equity to asset ratio was 7.94% at June 30, 2008 and 7.88%
at December 31, 2007. The increase of the ratio was due to a greater decline in assets than the
decline in shareholder equity.
As indicated on the balance sheet at December 31, 2007, the Corporation had an accumulated other
comprehensive loss of $470,000 compared to accumulated other comprehensive loss at June 30, 2008 of
$887,000. The increase in the loss position is attributable to the fluctuation of the market price
of securities held in the available for sale portfolio.
The Corporation has indefinitely suspended payment of dividends until the performance of the
Corporation improves.
24
Regulatory Capital Requirements
Bank holding companies and their bank subsidiaries are required by banking industry regulators to
maintain certain levels of capital. These are expressed in the form of certain ratios. These ratios
are based on the degree of credit risk in the Corporations assets. All assets and off-balance
sheet items such as outstanding loan commitments are assigned risk factors to create an overall
risk-weighted asset total. Capital is separated into two levels, Tier I capital (essentially total
common shareholders equity plus qualifying cumulative preferred securities (limited to 33% of
common equity), less goodwill) and Tier II capital (essentially the allowance for loan losses
limited to 1.25% of gross risk-weighted assets). Capital levels are then measured as a percentage
of total risk weighted assets. The regulatory minimum for Tier I capital to risk weighted assets is
4% and the minimum for Total capital (Tier I plus Tier II) to risk weighted assets is 8%. The Tier
I leverage ratio measures Tier I capital to average assets and must be a minimum of 3%. As
reflected in Table 6, at June 30, 2008 and at December 31, 2007, the Corporation was well in excess
of the minimum capital and leverage requirements necessary to be considered a well capitalized
banking company.
The FDIC has adopted a risk-based insurance premium system based in part on a banks 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 institutions premium levels are based on these classifications and its regulatory
supervisory rating (the higher the classification the lower the premium). It is the Corporations
goal to maintain capital levels sufficient to retain a designation of well capitalized.
Table 6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios |
|
|
|
|
|
|
Fentura Financial, Inc. |
|
|
Regulatory Minimum |
|
June 30, |
|
December 31, |
|
June 30, |
|
|
For
Well Capitalized |
|
2008 |
|
2007 |
|
2007 |
Total
Capital to risk Weighted assets |
|
|
10 |
% |
|
|
11.56 |
% |
|
|
11.60 |
% |
|
|
12.60 |
% |
Tier 1
Capital to risk Weighted assets |
|
|
6 |
% |
|
|
10.31 |
% |
|
|
10.40 |
% |
|
|
11.37 |
% |
Tier 1
Capital to average Assets |
|
|
5 |
% |
|
|
8.98 |
% |
|
|
9.00 |
% |
|
|
9.60 |
% |
Off Balance Sheet Arrangements
At June 30, 2008, the Banks had outstanding standby letters of credit of $6.4 million and unfunded
loan commitments outstanding of $85.7 million. Because these commitments generally have fixed
expiration dates and many will expire without being drawn upon, the total commitment level does not
necessarily represent future cash requirements. If needed to fund these outstanding commitments,
the Banks have the ability to fund these commitments.
25
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information concerning quantitative and qualitative disclosures about market risk contained on
page 54 in the Corporations Annual Report on Form 10-K for the year ended December 31, 2007, is
incorporated herein by reference.
Fentura Financial, Inc. faces market risk to the extent that both earnings and the fair value of
its financial instruments are affected by changes in interest rates. The Corporation manages this
risk with static GAP analysis and has begun simulation modeling. For the first six months of 2008,
the results of these measurement techniques were within the Corporations policy guidelines. The
Corporation does not believe that there has been a material change in the nature of the
Corporations primary market risk exposures, including the categories of market risk to which the
Corporation is exposed and the particular markets that present the primary risk of loss to the
Corporation, or in how those exposures have been managed in 2008 compared to 2007.
The Corporations market risk exposure is mainly comprised of its vulnerability to interest rate
risk. Prevailing interest rates and interest rate relationships in the future will be primarily
determined by market factors, which are outside of the Corporations control. All information
provided in this section consists of forward-looking statements. Reference is made to the section
captioned Forward Looking Statements in this quarterly report for a discussion of the limitations
on the Corporations responsibility for such statements.
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 banks interest rate
sensitivity. The Corporation currently does not utilize derivatives in managing interest rate risk.
An indicator of the interest rate sensitivity structure of a financial institutions balance sheet
is the difference between rate sensitive assets and rate sensitive liabilities, and is referred to
as GAP. Table 7 sets forth the distribution of re-pricing of the Corporations earning assets and
interest bearing liabilities as of June 30, 2008, 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.
26
Table 7 GAP Analysis June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within |
|
Three |
|
One to |
|
After |
|
|
|
|
Three |
|
Months to |
|
Five |
|
Five |
|
|
(000s omitted) |
|
Months |
|
One Year |
|
Years |
|
Years |
|
Total |
Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Funds Sold |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Securities |
|
|
4,603 |
|
|
|
14,196 |
|
|
|
29,484 |
|
|
|
17,924 |
|
|
|
66,207 |
|
Loans |
|
|
82,918 |
|
|
|
79,223 |
|
|
|
230,879 |
|
|
|
71,836 |
|
|
|
464,856 |
|
Loans Held for Sale |
|
|
448 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
448 |
|
FHLB Stock |
|
|
2,032 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2,032 |
|
|
|
|
Total Earning Assets |
|
$ |
90,001 |
|
|
$ |
93,419 |
|
|
$ |
260,363 |
|
|
$ |
89,760 |
|
|
$ |
533,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Demand Deposits |
|
$ |
93,682 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
93,682 |
|
Savings Deposits |
|
|
85,237 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
85,237 |
|
Time Deposits Less than $100,000 |
|
|
27,433 |
|
|
|
56,378 |
|
|
|
30,693 |
|
|
|
93 |
|
|
|
114,597 |
|
Time Deposits Greater than $100,000 |
|
|
18,534 |
|
|
|
35,244 |
|
|
|
79,311 |
|
|
|
0 |
|
|
|
133,089 |
|
Short term borrowings |
|
|
3,458 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
3,458 |
|
Other Borrowings |
|
|
1,000 |
|
|
|
7,026 |
|
|
|
5,091 |
|
|
|
890 |
|
|
|
14,007 |
|
Repurchase agreements |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Subordinated debentures |
|
|
14,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
14,000 |
|
|
|
|
Total Interest Bearing Liabilities |
|
$ |
243,344 |
|
|
$ |
98,648 |
|
|
$ |
115,095 |
|
|
$ |
983 |
|
|
$ |
458,070 |
|
|
|
|
Interest Rate Sensitivity GAP |
|
$ |
(153,343 |
) |
|
$ |
(5,229 |
) |
|
$ |
145,268 |
|
|
$ |
88,777 |
|
|
$ |
75,473 |
|
Cumulative
Interest Rate Sensitivity GAP |
|
$ |
(153,343 |
) |
|
$ |
(158,572 |
) |
|
$ |
(13,304 |
) |
|
$ |
75,473 |
|
|
|
|
|
Interest Rate Sensitivity GAP |
|
|
(0.37 |
) |
|
|
(0.94 |
) |
|
|
2.26 |
|
|
|
91.31 |
|
|
|
|
|
Cumulative
Interest Rate Sensitivity GAP Ratio |
|
|
(0.37 |
) |
|
|
(1.32 |
) |
|
|
0.95 |
|
|
|
92.26 |
|
|
|
|
|
As indicated in Table 7, the short-term (one year and less) cumulative interest rate sensitivity
gap is negative. Accordingly, if market interest rates continue to decrease, this negative gap
position could have a short-term positive impact on interest margin, as more liabilities will
re-price over assets. Conversely, if market rates increase this should theoretically have a
short-term negative impact. However, gap analysis is limited and may not provide an accurate
indication of the impact of general interest rate movements on the net interest margin. This is
due to the re-pricing characteristics of various categories of assets and liabilities, is subject
to the Corporations needs, competitive pressures, and the needs of the Corporations customers. In
addition, various assets and liabilities indicated as re-pricing within the same period may in fact
re-price at different times within such period and at different rate volumes.
Net interest margin decreased when the first six months of 2008 is compared to the same period in
2007. This occurred as interest bearing deposits re-priced at the same time but not at the same
volume as the asset portfolios, resulting in a decrease in net interest margin. The decrease was
further compounded as the banks experienced an increase in loans placed into non-accrual status.
This negatively impacted loan rates. The decrease in asset rates was larger and more rapid than
managements ability to re-price deposits downward, due contractual limitations and due to some of
the liabilities already offering low rates. Management anticipates rates to remain steady for the
duration of the year and begin to increase during the second quarter of 2009. This will provide
the opportunity to re-price term deposits to more favorable rates as they mature in 2008.
In addition to GAP analysis, the Corporation, as part of managing interest rate risk, also performs
simulation modeling, which measures the impact of upward and downward movements of interest rates
on interest margin and the market value of equity. Assuming continued success at achieving
repricing of loans to higher rates at a faster pace than repricing of deposits, simulation modeling
indicates that an upward movement of interest rates could have a positive impact on net interest
income. Management
27
believes that it should be able to continue to reprice these relationships; it anticipates improved
performance in net interest margin.
Forward Looking Statements
This report includes forward-looking statements as that term is used in the securities laws. All
statements regarding our expected financial position, business and strategies are forward-looking
statements. In addition, the words anticipates, believes, estimates, seeks, expects,
plans, intends, and similar expressions, as they relate to us or our management, are intended
to identify forward-looking statements. The presentation and discussion of the provision and
allowance for loan losses and statements concerning future profitability or future growth or
increases, are examples of inherently forward looking statements in that they involve judgments and
statements of belief as to the outcome of future events. Our ability to predict results or the
actual effect of future plans or strategies is inherently uncertain. Factors which could have a
material adverse affect on our operations and our future prospects include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary
and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan
products, deposit flows, competition, demand for financial services in our market area and
accounting principles, policies and guidelines. These risks and uncertainties should be considered
in evaluating forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning us and our business, including additional factors that
could materially affect our financial results, is included in our other filings with the Securities
and Exchange Commission.
28
ITEM 4T CONTROLS AND PROCEDURES
(a) |
|
Evaluation of Disclosure Controls and Procedures. The Corporations Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of the Corporations
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
as of the end of the period covered by this Form 10-Q Quarterly Report, have concluded that
the Corporations disclosure controls and procedures were adequate and effective to ensure
that material information relating to the Corporation would be made known to them by others
within the Corporation, particularly during the period in which this Form 10-Q was being
prepared. |
(b) |
|
Changes in Internal Controls. During the period covered by this report, there have
been no changes in the Corporations internal control over financial reporting that have
materially affected or are reasonably likely to materially affect the Corporations internal
control over financial reporting. |
29
PART II OTHER INFORMATION
|
|
|
Item 1.
|
|
Legal Proceedings. None |
|
|
|
Item 1A.
|
|
Risk Factors With this exception of those risks described below, there have been no
material changes in the risk factors applicable to the Corporation from those disclosed in its
Annual Report on Form 10-K for the year ended December 31, 2007. |
|
|
|
|
|
If economic conditions deteriorate in our primary market, our results of operations
and financial condition could be adversely impacted as borrowers ability to repay
loans declines and the value of the collateral securing loan decreases. |
|
|
|
|
|
Our financial results may be adversely affected by changes in prevailing economic
conditions, including decreases in real estate values, changes in interest rate
which may cause a decrease in interest rate spreads, adverse employment conditions,
the monetary and fiscal policies of federal government and other significant
external events. Decreases in real estate values could potentially adversely affect
the value of property used as collateral for our mortgage loans. In the event that
we are required to foreclose on a property securing a mortgage loan, there can be no
assurance that we will recover funds in an amount equal to any remaining loan
balance as a result of prevailing general economic conditions, real estate values
and other factors associated with the ownership of real property. As a result, the
market value of the real estate underlying the loans may not, at any given time, be
sufficient to satisfy the outstanding principal amount of the loans. Consequently,
we would sustain loan losses and potentially incur a higher provision for loan loss
expense. Adverse changes in the economy may also have a negative effect of the
ability of borrowers to make timely repayments of their loans, which could have an
adverse impact on earnings. |
|
|
|
|
|
Our securities portfolio may be negatively impacted by fluctuations in market value. |
|
|
|
|
|
Our securities portfolio may be impacted by fluctuations in market value,
potentially reducing accumulated other comprehensive income and/or earnings.
Fluctuations in market value may be caused by decreases in interest rates, lower
market prices for securities and lower investor demand. Our securities portfolio is
evaluated for other-than-temporary impairment on at least a quarterly basis. If
this evaluation shows an impairment to cash flow connected with one or more
securities, a potential loss to earnings may occur. |
|
|
|
Item 2.
|
|
Unregistered Sales of Equity Securities and Use of Proceeds. None |
|
|
|
Item 3.
|
|
Defaults Upon Senior Securities. None |
|
|
|
Item 4.
|
|
Submission of Matters to a Vote of Securities Holders. The registrants annual meeting
was held April 22, 2008. Three directors were elected at the meeting, each to a three year
term. The vote was as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VOTE |
Director Nominee |
|
Term Expires |
|
For |
|
Withheld |
Kenneth R. Elston |
|
|
2011 |
|
|
|
1,604,688 |
|
|
|
64,438 |
|
Thomas L. Miller |
|
|
2011 |
|
|
|
1,637,798 |
|
|
|
31,328 |
|
Ian W. Schonsheck |
|
|
2011 |
|
|
|
1,611,236 |
|
|
|
57,889 |
|
|
|
|
|
|
The following directors were not up for re-election and, consequently, their terms
continue after the annual meeting: Donald L. Grill, Douglas W. Rotman, Forrest A.
Shook, Sheryl E. Stephens, J. David Karr, Thomas P. McKenney, Brian P. Petty. |
30
|
|
|
|
|
Item 5. |
|
Other Information. |
|
|
|
|
|
Item 6. |
|
Exhibits. |
|
|
|
|
|
(a) |
|
Exhibits |
|
|
|
|
|
|
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31.1
|
|
Certificate of the President and Chief Executive Officer of
Fentura Financial, Inc. pursuant to 15 U.S.C. Section 7241, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
31.2
|
|
Certificate of the Chief Financial Officer of Fentura
Financial, Inc. pursuant to 15 U.S.C. Section 7241, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
32.1
|
|
Certificate of the Chief Executive Officer of Fentura
Financial, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
|
32.2
|
|
Certificate of the Chief Financial Officer of Fentura
Financial, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
31
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
Fentura Financial Inc.
|
|
Dated: August 12, 2008 |
/s/ Donald L. Grill
|
|
|
Donald L. Grill |
|
|
President & CEO |
|
|
|
|
|
Dated: August 12, 2008 |
/s/ Douglas J. Kelley
|
|
|
Douglas J. Kelley |
|
|
Chief Financial Officer |
|
32
EXHIBIT INDEX
|
|
|
Exhibit |
|
Description |
|
|
|
31.1
|
|
Certificate of the President and Chief Executive Officer of Fentura Financial, Inc. pursuant
to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
|
|
31.2
|
|
Certificate of the Chief Financial Officer of Fentura Financial, Inc. pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certificate of the Chief Executive Officer of Fentura Financial, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certificate of the Chief Financial Officer of Fentura Financial, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
33