UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to _______________
Commission file number 0-23550
Fentura Bancorp, Inc.
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Michigan 38-2806518
----------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Fenton Sq, P.O. Box 725, Fenton, Michigan 48430
(Address of Principal Executive Offices)
(810) 629-2263
---------------------------
(Issuer's telephone number)
None
--------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
__X__ Yes ___ No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: August 10, 2001
Class - Common Stock Shares Outstanding - 1,730,264
Fentura Bancorp, Inc.
Index to Form 10-Q
Page
----
Part I - Financial Information
Item 1 - Consolidated Financial Statements (Unaudited) 3
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 20
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders 23
Item 6 - Exhibits and Reports on Form 8-K 23
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Fentura Bancorp, Inc.
Consolidated Balance Sheets
----------------------------------------------------------------------------------------------------
JUNE 30, DEC. 31,
(000's omitted Except Per Share Data) 2001 2000
(unaudited)
----------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 14,402 13,459
Federal funds sold 21,100 7,250
-------------------------------
Total cash & cash equivalents 35,502 20,709
Securities-available for sale 42,358 53,421
Securities-held to maturity, (market value of $12,680
at June 30, 2001 and $13,419 at December 31, 2000) 12,510 13,283
-------------------------------
Total securities 54,868 66,704
Loans:
Commercial 99,573 101,090
Tax exempt development loans 803 835
Real estate loans - mortgage 16,028 10,514
Real estate loans - construction 23,915 17,471
Consumer loans 61,813 65,198
-------------------------------
Total loans 202,132 195,108
Less: Allowance for loan losses (3,097) (2,932)
-------------------------------
Net loans 199,035 192,176
Loans held for sale 264 187
Bank premises and equipment 7,094 6,547
Accrued interest receivable 1,660 1,924
Other assets 5,372 4,643
-------------------------------
Total assets $ 303,795 292,890
===============================
LIABILITIES
Deposits:
Non-interest bearing deposits $ 35,852 34,762
Interest bearing deposits 226,059 213,894
-------------------------------
Total deposits 261,911 248,656
Federal funds purchased 0 4,680
Other borrowings 2,638 1,151
Accrued taxes, interest and other liabilities 1,844 2,649
-------------------------------
Total liabilities 266,393 257,136
-------------------------------
SHAREHOLDERS' EQUITY
Common stock - $2.5 par value
1,730,264 shares issued (1,722,308 in Dec. 2000) 4,326 4,305
Surplus 26,207 26,016
Retained earnings 6,648 5,648
Accumulated other comprehensive income (loss) 221 (215)
-------------------------------
Total shareholders' equity 37,402 35,754
-------------------------------
Total Liabilities and Shareholders' Equity $ 303,795 292,890
===============================
See notes to consolidated financial statements.
3
Fentura Bancorp, Inc.
Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
(000's omitted except per share data) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 4,497 4,728 $ 9,081 9,181
Interest and dividends on
investment securities:
Taxable 681 829 1,448 1,669
Tax-exempt 166 165 336 336
Interest on federal funds sold 233 197 498 272
----------------------------------- -----------------------------------
Total interest income 5,577 5,919 11,363 11,458
INTEREST EXPENSE
Deposits 2,334 2,275 4,906 4,494
Short-term borrowings 28 237 75 314
----------------------------------- -----------------------------------
Total interest expense 2,362 2,512 4,981 4,808
NET INTEREST INCOME 3,215 3,407 6,382 6,650
Provision for loan losses 255 201 393 370
----------------------------------- -----------------------------------
Net interest income after
provision for loan losses 2,960 3,206 5,989 6,280
NON-INTEREST INCOME
Service charges on deposit accounts 520 486 999 953
Fiduciary income 160 159 325 321
Other operating income 328 356 730 665
Gain on sale of loans 174 52 233 65
Investment gains 157 0 157 0
----------------------------------- -----------------------------------
Total non-interest income 1,339 1,053 2,444 2,004
NON-INTEREST EXPENSE
Salaries and benefits 1,506 1,486 3,085 2,941
Occupancy of bank premises 206 196 421 398
Equipment expense 354 408 680 781
Other operating expenses 891 986 1,747 1,838
----------------------------------- -----------------------------------
Total non-interest expense 2,957 3,076 5,933 5,958
INCOME BEFORE TAXES 1,342 1,183 2,500 2,326
Applicable income taxes 400 353 739 623
----------------------------------- -----------------------------------
NET INCOME $ 942 830 $ 1,761 1,703
=================================== ===================================
Per share:
Net income - basic $ 0.54 0.48 $ 1.02 1.00
Net income - diluted $ 0.54 0.48 $ 1.02 0.99
Dividends $ 0.22 0.21 $ 0.44 0.42
See notes to consolidated financial statements.
4
Fentura Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Six Months Six Months
Ended Ended
-------------------------------------------------------------------------------------------------------
June 30, June 30,
(000's omitted) 2001 2000
-------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance, beginning of period $ 4,305 $ 3,555
Issuance of shares under
Director stock purchase plan,
Stock purchase plan, and
Dividend reinvestment program 21 22
Impact of 20% stock dividend 0 713
---------------- ---------------
Balance, end of period 4,326 4,285
SURPLUS
Balance, beginning of period 26,016 18,317
Issuance of shares under
Director stock purchase plan,
Stock purchase plan, and
Dividend reinvestment program 191 240
Impact of 20% stock dividend 0 7,267
---------------- ---------------
Balance, end of period 26,207 25,824
RETAINED EARNINGS
Balance, beginning of period 5,648 11,078
Net income 1,761 1,703
Cash dividends declared (761) (715)
Impact of 20% stock dividend 0 (7,980)
---------------- ---------------
Balance, end of period 6,648 4,086
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
Balance, beginning of period (215) (1,085)
Change in unrealized gain (loss)
on securities, net of tax 436 (192)
---------------- ---------------
Balance, end of period 221 (1,277)
---------------- ---------------
TOTAL SHAREHOLDERS' EQUITY $ 37,402 $ 32,918
================ ===============
See notes to consolidated financial statements.
5
Fentura Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
June 30,
----------------------------------------------------------------------------------------
(000's omitted,
Except Per Share Data) 2001 2000
----------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $1,761 $1,703
Adjustments to reconcile net income to cash
Provided by Operating Activities:
Depreciation and amortization 427 510
Provision for loan losses 393 370
Amortization (accretion) on securities (25) (25)
Loans originated for sale (1,792) (2,930)
Proceeds from the sale of loans 1,948 2,971
Gain in sales of loans (233) (65)
Gain on investment securities (157) 0
Decrease (increase) in interest receivable 264 (201)
Decrease (increase) in other assets (954) 1,408
Increase (decrease) in accrued taxes,
Interest, and other liabilities (805) (173)
------------------------
Total Adjustments (934) 1,865
------------------------
Net Cash Provided By (Used In) Operating Activities 827 3,568
------------------------
Cash Flows From Investing Activities:
Net decrease in deposits with other banks 0 0
Proceeds from maturities of investment activities - HTM 773 248
Proceeds from maturities of investment activities - AFS 2,998 1,518
Proceeds from calls of investment securities - AFS 12,566 0
Proceeds from sales of investment securities - AFS 3,667 0
Purchases of investment securities - HTM 0 0
Purchases of investment securities - AFS (7,325) 0
Net increase in loans (7,252) (10,282)
Capital expenditures (974) (1,152)
------------------------
Net Cash Provided By (Used in) Investing Activities 4,453 (9,668)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits 13,255 6,263
Net increase (decrease) in borrowings (3,193) 13,435
Proceeds from stock issuance 212 257
Cash dividends (761) (715)
------------------------
Net Cash Provided By (Used In) Financing Activities 9,513 19,240
NET INCREASE IN CASH AND CASH EQUIVALENTS $14,793 $13,140
CASH AND CASH EQUIVALENTS - BEGINNING $20,709 $13,614
CASH AND CASH EQUIVALENTS - ENDING $35,502 $26,754
========================
CASH PAID FOR:
INTEREST $5,051 $4,670
INCOME TAXES $1,100 $627
See notes to consolidated financial statements.
6
Fentura Bancorp, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
Six Months Ended
(000's Omitted) June 30,
2001 2000
----------------------------
Net Income $1,761 $1,703
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising
During period $540 ($192)
Less: reclassification adjustment for
gains included in net income $104 $0
----------------------------
Other comprehensive income (loss) $436 ($192)
----------------------------
Comprehensive income $2,197 $1,511
============================
Fentura Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions for Form - 10Q and Article 9 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. All share and per share amounts have been retroactively
adjusted to reflect the 20% stock dividend paid on May 26, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Corporation's annual report on Form 10-K for the year
ended December 31, 2000.
7
Note 2. 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 are
presented below for the three and six months ended June 30, 2001 and 2000:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Basic Earnings Per Common Share:
Numerator
Net Income $942,000 $830,000 $1,761,000 $1,703,000
======== ======== ========== ==========
Denominator
Weighted average common shares
Outstanding 1,728,190 1,711,525 1,726,006 1,709,593
========= ========= ========= =========
Basic earnings per common share $0.54 $0.48 $1.02 $1.00
===== ===== ===== =====
Diluted Earnings Per Common Share:
Numerator
Net Income $ 942,000 $830,000 $1,761,000 $1,703,000
========= ======== ========== ==========
Denominator
Weighted average common shares
Outstanding for basic earnings per
Common share 1,728,190 1,711,525 1,726,006 1,709,593
Add: Dilutive effects of assumed
Exercises of stock options 3,884 5,126 3,607 5,409
----- ----- ----- -----
Weighted average common shares
And dilutive potential common
Shares outstanding 1,732,074 1,716,651 1,729,614 1,715,002
========= ========= ========= =========
Diluted earnings per common share $0.54 $0.48 $1.02 $0.99
===== ===== ===== =====
Stock options for 6,975 shares of common stock for the three month and the six
month periods ended June 30, 2001 and 2000 were not considered in computing
diluted earnings per common share because they were not dilutive.
Note 3. 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 Corporation's consolidated financial condition or results of
operations.
8
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
This item provides a narrative discussion and analysis of the consolidated
financial condition and results of operations of Fentura Bancorp, Inc. (the
Corporation), together with its operating subsidiaries, The State Bank and
Davison State Bank (the Banks), for the six months ended June 30, 2001 and 2000.
The supplemental financial data included throughout should be read in
conjunction with the primary financial statements presented on pages 3 through
7. It provides a more detailed and comprehensive review of the operating results
and financial position than could be obtained from the financial statements
alone.
Table 1 Selected Financial Data
Six Months Ended
June 30,
$ in thousands except per share data and ratios 2001 2000
(unaudited) (unaudited)
---------------------------------------------------------------------------------------------
Summary of Consolidated Statements of Income:
Interest Income $11,363 $11,458
Interest Expense 4,981 4,808
----------------------------------
Net Interest Income 6,382 6,650
Provision for Loan Losses 393 370
----------------------------------
Net Interest Income after Provision for Loan Losses 5,989 6,280
Total Other Operating Income 2,444 2,004
Total Other Operating Expense 5,933 5,958
----------------------------------
Income Before Income Taxes 2,500 2,326
Provision for Income Taxes 739 623
----------------------------------
Net Income $1,761 $1,703
==================================
Net Income Per Share - Basic $1.02 $1.00
Net Income Per Share - Diluted $1.02 $0.99
Other Financial and Statistical Data:
Tier 1 Capital to Risk Weighted Assets 14.91% 13.85%
Total Capital to Risk Weighted Assets 16.15% 15.10%
Tier 1 Capital to Average Assets 12.19% 12.66%
Total Cash Dividends $760 $715
Book Value Per Share $21.65 $19.21
Cash Dividends Paid Per Share $0.44 $0.42
Period End Market Price Per Share $27.90 $30.00
Dividend Pay-out Ratio 43.15% 41.98%
Return on Average Shareholders' Equity 10.34% 10.40%
Return on Average Assets 1.16% 1.16%
Net Interest Margin (FTE) 4.69% 5.01%
Summary of Consolidated Balance Sheets: June 30, 2001 June 30, 2000
------------- -------------
Assets $303,795 $304,199
Securities 54,868 65,854
Loans 202,132 201,478
Deposits 261,911 253,314
Shareholders' Equity 37,402 32,918
Total Equity to Assets 12.31% 10.82%
9
Results of Operations
Table 1 summarizes selected financial data for the six months ended June 30,
2001 and 2000. As indicated in Table 1 earnings for the six months ended June
30, 2001 were $1,761,000 compared to $1,703,000 for the same period in 2000.
Earnings increased as a result of an increase in operating income and a
reduction in operating expenses. The Corporation continues to work on core
banking activities and new opportunities in our current and surrounding markets
remain strong and accordingly, management believes overall performance will
remain strong throughout 2001. However, performance in 2001 could be negatively
affected by any further softening of the economy.
The banking industry uses standard performance indicators to help evaluate a
banking institution's performance. Return on average assets is one of these
indicators. For the six months ended June 30, 2001 the Corporation's return on
average assets was 1.16% compared to 1.16% for the same period in 2000. Net
income per share-basic was $1.02 in the first six months of 2001 compared to
$1.00 for the same period in 2000.
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, 2001 and 2000 are summarized in Table 4. Net interest income and
average balances and yields on major categories of interest-earning assets and
interest-bearing liabilities for the three months ended June 30, 2001 and 2000
are summarized in Table 3. The effects of changes in average interest rates and
average balances are detailed in Table 2 below.
Table 2
CHANGES IN NET INTEREST INCOME
DUE TO CHANGES IN AVERAGE VOLUME
AND INTEREST RATES
SIX MONTHS ENDED JUNE 30,
2001 COMPARED TO 2000
INCREASE (DECREASE)
DUE TO:
-----------------------------------------
YIELD/
(000'S OMITTED) VOL RATE TOTAL
--------------------------------------------------------------------------------------
TAXABLE SECURITIES ($182) ($39) ($221)
TAX-EXEMPT SECURITIES 0 0 0
FEDERAL FUNDS SOLD 347 (121) 226
TOTAL LOANS 143 (243) (100)
LOANS HELD FOR SALE 0 0 0
-----------------------------------------
TOTAL EARNING ASSETS 308 (403) (95)
INTEREST BEARING DEMAND DEPOSITS (49) 0 (49)
SAVINGS DEPOSITS 17 (117) (100)
TIME CD'S $100,000 AND OVER 106 22 128
OTHER TIME DEPOSITS 233 200 433
OTHER BORROWINGS (239) 0 (239)
-----------------------------------------
TOTAL INTEREST BEARING LIABILITIES 68 105 173
-----------------------------------------
NET INTEREST INCOME $240 ($508) ($268)
=========================================
10
As indicated in Table 2, during the six months ended June 30, 2001, net interest
income decreased compared to the same period in 2000, principally because of the
increase in interest expense resulting from growth of certificate of deposit
balances and the increase in interest rates paid on these deposits, which rose
with market rates throughout 2000.
Net interest income (displayed without consideration of full tax equivalency),
average balance sheet amounts, and the corresponding yields for the three months
ended June 30, 2001 and 2000 are shown in Table 3. Net interest income for the
three months ended June 30, 2001 was $3,215,000 a decrease of $192,000 over the
same period in 2000. This represents a decrease of 5.6%. The primary factor
contributing to the net interest income decrease was an increase in interest
expense from deposit growth and the reduction in interest rates by the Federal
Reserve Board.
Net interest income, average balance sheet amounts, and the corresponding yields
for the six months ended June 30, 2001 and 2000 are shown in Table 4. Net
interest income for the six months ended June 30, 2001 was $6,382,000 a decrease
of $268,000 over the same period in 2000. This represents a decrease of 4.0%.
The primary factor contributing was the reduction in interest rates by the
Federal Reserve Board.
Management expects a continued strong local economy throughout 2001 and because
of this believes loan demand will become stronger in the upcoming year.
Accordingly, the Corporation will aggressively seek out new loan opportunities
while continuing to maintain sound credit quality. Management also believes that
continued loan growth and managing deposit rates will stabilize net interest
income in 2001.
As indicated in Table 3, for the three months ended June 30, 2001, the
Corporation's net interest margin (without consideration of full tax
equivalency) was 4.58% compared with 4.89% for the same period in 2000. This
decline is attributable to the impact of interest rate reductions by the Federal
Reserve Board and the increase in interest expense due to certificate of deposit
growth. The decrease in interest rates impacts the net interest income in the
short term because loans start to reprice quicker than our deposits thus
reducing net interest income.
Average earning assets increased 0.4% or approximately $1,010,000 comparing the
second quarter of 2001 to the same time period in 2000. Loans, the highest
yielding component of earning assets, represented 71.5% of earning assets in
2001 compared to 71.6% in 2000. Average interest bearing liabilities decreased
2.5% or $5,755,000 comparing the second quarter of 2001 to the same time period
in 2000. Non-interest bearing deposits amounted to 14.2% of average earning
assets in the second quarter of 2001 compared with 12.4% in the same time period
on 2000.
Management continually monitors the Corporation's balance sheet in an effort to
insulate net interest income from significant swings caused by interest rate
volatility. If market rates continue to change in 2001, corresponding changes in
funding costs will be considered to limit any potential negative impact on net
interest income. The Corporation's policies in this regard are further discussed
in the section titled "Interest Rate Sensitivity Management".
11
Table 3
THREE MONTHS ENDED JUNE 30,
AVERAGE BALANCES AND RATES 2001 2000
(000's omitted) AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
ASSETS BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------------------------------------------------------------------
Interest bearing deposits in Banks $0 $0 0.00% $0 $0 0.00%
Investment securities:
U.S. Treasury and Government Agencies 43,459 657 6.06% 51,728 824 6.41%
State and Political 13,890 166 4.79% 14,398 165 4.61%
Other 1,302 24 7.39% 1,077 15 5.60%
-------------------------------- --------------------------------
Total Investment Securities 58,651 847 5.79% 66,110 994 6.05%
Fed Funds Sold 21,462 233 4.35% 13,224 197 5.99%
Loans:
Commercial 120,667 2,734 9.09% 104,528 2,517 9.68%
Tax Free 825 11 5.35% 548 7 5.14%
Real Estate-Mortgage 15,060 306 8.15% 26,205 583 8.95%
Consumer 64,663 1,443 8.95% 69,679 1,617 9.33%
-------------------------------- --------------------------------
Total loans 201,215 4,494 8.96% 200,960 4,724 9.45%
Allowance for Loan Loss (2,992) (3,156)
Net Loans 198,223 4,494 9.09% 197,804 4,724 9.61%
-------------------------------- --------------------------------
Loans Held for Sale 177 3 6.80% 201 4 8.00%
-------------------------------- --------------------------------
TOTAL EARNING ASSETS $281,505 $5,577 7.95% $280,495 $5,919 8.49%
-------------------------------------------------------------------
Cash Due from Banks 10,687 11,251
All Other Assets 13,783 13,048
----------- -----------
TOTAL ASSETS $302,983 $301,638
----------- -----------
LIABILITIES & SHAREHOLDERS' EQUITY:
Deposits:
Non-Interest bearing - DDA $39,917 $34,776
Interest bearing - DDA 35,950 150 1.67% 41,660 183 1.77%
Savings Deposits 70,929 502 2.84% 68,122 585 3.45%
Time CD's $100,000 and Over 32,770 450 5.51% 33,263 514 6.22%
Other Time CD's 84,936 1,232 5.82% 74,302 993 5.38%
-------------------------------- --------------------------------
Total Deposits 264,502 2,334 3.54% 252,123 2,275 3.63%
Other Borrowings 1,823 28 6.16% 14,816 237 6.43%
-------------------------------- --------------------------------
INTEREST BEARING LIABILITIES $226,408 $2,362 4.18% $232,163 $2,512 4.35%
-------------------------------------------------------------------
All Other Liabilities 2,118 1,277
Shareholders' Equity 34,540 33,422
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $302,983 $301,638
----------- --------- ----------- ---------
Net Interest Rate Spread 3.76% 4.14%
Impact of Non-Interest Bearing Funds on Margin 0.82% 0.75%
--------- ---------
Net Interest Income /Margin $3,215 4.58% $3,407 4.89%
===================== =====================
12
Table 4
SIX MONTHS ENDED JUNE 30,
AVERAGE BALANCES AND RATES 2001 2000
(000's omitted) AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
ASSETS BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------------------------------------------------------------------
Interest bearing deposits in Banks $0 $0 0.00% $0 $0 0.00%
Investment securities:
U.S. Treasury and Government Agencies 45,486 1,408 6.24% 51,182 1,638 6.44%
State and Political 14,064 336 4.82% 14,580 336 4.63%
Other 1,062 40 7.60% 1,077 31 5.79%
-------------------------------- --------------------------------
Total Investment Securities 60,612 1,784 5.94% 66,839 2,005 6.03%
Fed Funds Sold 20,492 498 4.90% 8,984 272 6.09%
Loans:
Commercial 118,604 5,425 9.22% 103,273 4,885 9.51%
Tax Free 812 21 5.22% 568 16 5.66%
Real Estate-Mortgage 15,291 668 8.81% 25,761 1,118 8.73%
Consumer 65,717 2,960 9.08% 67,747 3,155 9.37%
-------------------------------- --------------------------------
Total loans 200,424 9,074 9.13% 197,349 9,174 9.35%
Allowance for Loan Loss (2,984) (3,070)
Net Loans 197,440 9,074 9.27% 194,279 9,174 9.50%
-------------------------------- --------------------------------
Loans Held for Sale 183 7 7.71% 192 7 7.33%
-------------------------------- --------------------------------
TOTAL EARNING ASSETS $281,711 $11,363 8.13% $273,364 $11,458 8.43%
-------------------------------------------------------------------
Cash Due from Banks 10,852 10,991
All Other Assets 13,753 13,119
----------- -----------
TOTAL ASSETS $303,332 $294,404
----------- -----------
LIABILITIES & SHAREHOLDERS' EQUITY:
Deposits:
Non-Interest bearing - DDA $39,732 $33,718
Interest bearing - DDA 35,977 330 1.85% 41,449 370 1.80%
Savings Deposits 68,855 1,052 3.08% 67,848 1,161 3.44%
Time CD's $100,000 and Over 36,160 1,085 6.05% 32,586 964 5.95%
Other Time CD's 83,937 2,439 5.86% 75,180 1,999 5.35%
-------------------------------- --------------------------------
Total Deposits 264,661 4,906 3.74% 250,781 4,494 3.60%
Other Borrowings 2,284 75 6.62% 9,517 314 6.63%
-------------------------------- --------------------------------
INTEREST BEARING LIABILITIES $227,213 $4,981 4.42% $226,580 $4,808 4.27%
-------------------------------------------------------------------
All Other Liabilities 2,321 1,368
Shareholders' Equity 34,066 32,738
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $303,332 $294,404
----------- --------- ----------- ---------
Net Interest Rate Spread 3.71% 4.16%
Impact of Non-Interest Bearing Funds on Margin 0.86% 0.73%
--------- ---------
Net Interest Income /Margin $6,382 4.57% $6,650 4.89%
===================== =====================
13
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses (ALL) reflects management's judgment as to the
level considered appropriate to absorb losses inherent in the loan portfolio.
Fentura's subsidiary banks' methodology in determining the adequacy of the ALL
includes a review of individual loans, historical loss experience, current
economic conditions, portfolio trends, and other pertinent factors. Although
reserves have been allocated to various portfolio segments, the ALL is general
in nature and is available for the portfolio in its entirety. At June 30, 2001,
the ALL was $3,097,000, or 1.53% of total loans. This compares with $3,257,000,
or 1.62%, at June 30, 2000. The reduction of the ALL as a percentage of total
loans reflects a reduction in the allowance for loan losses and increased loan
totals. Management feels that a lower allowance to gross loans is appropriate
given the changes in the portfolio mix and overall asset quality.
The provision for loan losses was $393,000 in the first six months of 2001 and
$370,000 for the same time period in 2000. The Corporation increased the
provision in 2001 compared to 2000 to fund the allowance for loan losses to a
level management feels is necessary to cover losses inherent in the loan
portfolio, particularly considering the growth in the loan portfolio in the 2001
period.
Table 5 also summarizes loan losses and recoveries for the first six months of
2000 and 2001. During the first six months of 2001 the Corporation experienced
net charge-offs of $228,000, compared with net charge-offs of $74,000 for the
same time period in 2000. Accordingly, the net charge-off ratio for the first
six months of 2001 was .11% compared to .04% for the same time period in 2000.
The Corporation maintains formal policies and procedures to control and monitor
credit risk. Management believes the allowance for loan losses is adequate to
meet normal credit risks in the loan portfolio. The Corporation's loan portfolio
has no significant concentrations in any one industry nor any exposure in
foreign loans. The Corporation has not extended credit to finance highly
leveraged transactions nor does it intend to do so in the future. Employment
levels and other economic conditions in the Corporation's local markets may have
a significant impact on the level of loan losses. Management continues to
identify and devote attention to credits that may not be performing as agreed.
Therefore, in light of the aforementioned, and assuming continued strong
economic conditions and asset quality, management expects a modest reduction to
the allowance for loan losses as a percentage to gross loans in 2001. Of course,
should economic conditions deteriorate management may need to increase the
provision for loan losses and maintain or increase the ALL as a percentage of
gross loans. Non-performing loans are discussed further in the section titled
"Non-Performing Assets".
Table 5 ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Six Months Ended
June 30
(000's omitted) 2001 2000
------------------------------
Balance at Beginning of Period $2,932 $2,961
------------------------------
Charge-Offs:
Commercial, Financial and Agriculture (15) (9)
Real Estate-Mortgage 0 0
Installment Loans to Individuals (278) (176)
Total Charge-Offs (293) (185)
------------------------------
Recoveries:
Commercial, Financial and Agriculture 2 71
Real Estate-Mortgage 0 0
Installment Loans to Individuals 63 40
Total Recoveries 65 111
------------------------------
Net Charge-Offs (228) (74)
------------------------------
Provision 393 370
------------------------------
Balance at End of Period $3,097 $3,257
==============================
Ratio of Net Charge-Offs to Gross Loans 0.11% 0.04%
==============================
14
NON-INTEREST INCOME
TABLE 6
Three Months Ended Six Months Ended
Analysis of Non-Interest Income June 30 June 30
(000's omitted) 2001 2000 2001 2000
----------------------------------------------------------------------------------------------
Service Charges on Deposit Accounts $520 $486 $999 $953
Gain on Sale of Mortgages $174 $52 $233 $65
Mortgage Servicing Fees $1 $63 $34 $128
Fiduciary Income $160 $159 $325 $321
Other Operating Income $327 $293 $696 $537
Investment Gains $157 $0 $157 $0
------------------------------------------------
Total Non-Interest Income $1,339 $1,053 $2,444 $2,004
================================================
Non-interest income increased in the six months ended June 30, 2001 as compared
to the same period in 2000, due to an increase in the gain on sale of mortgage
loans, and an increase in the gain on sale of investment securities.
Non-interest income increased in the second quarter of 2001 as compared to the
same quarter in 2000, due to increase in other operating income, gain on sale of
mortgages and gain on the sale of investment securities. Overall non-interest
income was $2,444,000 in the six months ended June 30, 2001 compared to
$2,004,000 for the same period in 2000. These figures represent an increase of
21.9%. Table 6 provides a more detailed breakdown of the components of
non-interest income than can be found in the income statement on page 4.
The most significant category of non-interest income is service charges on
deposit accounts. These fees were $999,000 in the first six months of 2001
compared to $953,000 for the same period of 2000. This represents an increase of
4.8%. The service charges for the second quarter of 2001 were $520,000 compared
to $486,000 in the same period in 2000.
Gains on the sale of mortgage loans originated by the Banks and sold in the
secondary market were $233,000 in the six months ended June 30, 2001 and $65,000
in the same period in 2000. For the second quarter of 2001, gains on sale of
mortgages were $174,000 compared to $52,000 for the same period in 2000. The
change is due to the increase in residential mortgage refinance activity and new
loan volumes due to the downward movement of market interest rates.
Mortgage servicing fees were $34,000 in the six months ended June 30, 2001
compared to $128,000 in the same time period in 2000. This is a decline of
$94,000 or 73.4%. Mortgage servicing fees for the second quarter of 2001 were
$1,000 compared to $63,000 in the same period of 2000. The decline is
attributable to the sale of a significant portion of the Corporation's serviced
loans, in the last quarter of 2000. There is also a significant decline
comparing these fees from the first quarter of 2001 at $34,000 to the second
quarter 2001 at $1,000. This decline is also attributable to the sale that took
place at the end of 2000. Servicing income was recognized in January of 2001
until these serviced loans were actually transferred to the purchaser.
Fiduciary income increased $4,000 in the six months ended June 30, 2001
comparing to the same period in the prior year. This 0.1% increase in fees is
attributed to growth in the assets under management within the Corporation's
Trust Department.
Investment gains on the sale of securities totaled $157,000 for the six months
ended June 30, 2001 compared to $0 for the same period in 2000. Fentura took
advantage of the interest rate decreases and sold three securities for a gain
totaling $157,000.
Other operating income increased $159,000 to $696,000 in the first six months of
2001 compared to $537,000 in the same time period in 2000. This is an increase
of 29.6%. Other operating income for the second quarter of 2001 of $327,000
compared to $293,000 in the same period of 2000. Other operating income
increased due to increases in income from the sale of official checks and an
increase in income from the sale of consumer investment products.
15
Non-Interest Expense
TABLE 7
Three Months Ended Six Months Ended
Analysis of Non-Interest Expense June 30, June 30,
-------------------------------------------------------------------------------------------------
(000's omitted)
2001 2000 2001 2000
------------------------------------------------------------------------------------------------
Salaries and Benefits $1,506 $1,486 $3,085 $2,941
Equipment $354 $408 $680 $781
Net Occupancy $206 $196 $421 $398
Office Supplies $62 $87 $108 $161
Loan & Collection Expense $56 $85 $82 $206
Advertising $94 $71 $168 $126
Other Operating Expense $679 $743 $1,389 $1,345
--------------------------------------------------
Total Non-Interest Expense $2,957 $3,076 $5,933 $5,958
==================================================
Total non-interest expense was $5,933,000 in the six months ended June 30, 2001
compared with $5,958,000 in the same period of 2000. This is a decrease of 0.4%.
This decrease is largely attributable to an decrease in loan and collection
expense and equipment expenses.
Salary and benefit costs, Fentura's largest non-interest expense category, were
$3,085,000 in the six months ended June 30, 2001, compared with $2,941,000, or
an increase of 4.9%, for the same time period in 2000. Increased costs are
primarily a result of a modest increase in the number of employees. The second
quarter showed a slight increase in the salaries and benefits due to an increase
in employee benefit costs, and an increase in salary costs in connection with
the opening of the Davison State Bank.
During the six months ended June 30, 2001 equipment expenses were $680,000
compared to $781,000 for the same period in 2000, a decrease of 12.9%. The
equipment expenses for the second quarter of 2001 were $354,000 compared to
$408,000 in the same period of 2000. The decreases in expenses are attributable
to a reduction in equipment maintenance contracts and equipment depreciation
which decreased due to the roll off of fully depreciated assets.
Occupancy expenses at $421,000 increased in the six months ended June 30, 2001
comparing to the same period in 2000 by $23,000 or 5.8%. Occupancy expenses for
the second quarter of 2001 were $206,000 compared to $196,000 for the second
quarter of 2000. The increases are attributable to increases in facility repairs
and maintenance contracts expense.
During the six months ended June 30, 2001 office supplies expense at $108,000
decreased $53,000 comparing to the $161,000 in expense for the same period in
2000. Office supplies for the second quarter of 2001 were $62,000 compared to
$87,000 in the same period of 2000. The decreases are attributable to volume
decreases of regular office supplies and preprinted forms in 2001.
Loan and collection expenses, at $82,000, were down $124,000 during the six
months ended June 30, 2001 comparing to the same time period in 2000. The loan
and collection expenses in the second quarter of 2001 were $56,000 compared to
$85,000 for the same period in 2000. The decreases are primarily attributable to
a decrease in legal expenses in connection with collection efforts and a
decrease in fees paid to dealers for indirect lending transactions.
Other operating expenses were $1,389,000 in the six months ended June 30, 2001
compared to $1,345,000 in the same time period in 2000, an increase of $44,000
or 3.3%. Other operating expenses for the second quarter of 2001 were $679,000
compared to $743,000 in the same period of 2000. The increases are attributable
to an increase in the amount of overdrawn deposit account charge-offs and an
increase in legal and consulting expenses.
16
Financial Condition
Proper management of the volume and composition of the Corporation's earning
assets and funding sources is essential for ensuring strong and consistent
earnings performance, maintaining adequate liquidity and limiting exposure to
risks caused by changing market conditions. The Corporation's investment
securities portfolio is structured to provide a source of liquidity through
maturities and generate an income stream with relatively low levels of principal
risk. The Corporation does not engage in securities trading. Loans comprise the
largest component of earning assets and are the Corporation's highest yielding
assets. Client deposits are the primary source of funding for earning assets
while short term debt and other sources of funds could be utilized if market
conditions and liquidity needs change.
The Corporation's total assets equaled $304 million at June 30, 2001 compared to
December 31, 2000 total assets of $293 million. Loans comprised 66.5% of total
assets at June 30, 2001 compared to 66.6% at December 31, 2000. Loans grew $7
million, with real estate and construction loans leading the advance by $12.0
million and the other loan categories experiencing reductions The ratio of
non-interest bearing deposits to total deposits was 13.9% at June 30, 2001
compared to 14.0% at December 31, 2000. Interest bearing deposit liabilities
totaled $226 million at June 30, 2001 compared to $214 million at December 31,
2000. Deposits grew $13.2 million and Fed Funds Purchased decreased $4.7 million
to make up the change in interest bearing liabilities at June 30, 2001.
Bank premises and equipment increased $547,000 to $7.1 million at June 30, 2001
comparing to $6.5 million at December 31, 2000. The increase is attributable to
the renovation of an existing facility and the construction completion of a new
headquarters for Davison State Bank.
NON-PERFORMING ASSETS
Non-performing assets include loans on which interest accruals have ceased,
loans which have been renegotiated, and real estate acquired through
foreclosure. Past due loans are loans which were delinquent 90 days or more, but
have not been placed on non-accrual status. Table 8 represents the levels of
these assets at June 30, 2001 and December 31, 2000.
Non-performing assets decreased modestly at June 30, 2001 compared to December
31, 2000. This decrease is attributable to a decrease in both loans that are
non-accrual and loans which are past due 90 days or more and still accruing. The
non-accrual loans decreased because of both charge-offs taken in the first half
of 2001 and loans which were made current by the borrower, and loans past due 90
days or more and still accruing decreased due to the collection of payments
making certain loans current.
The level and composition of non-performing assets are affected by economic
conditions in the Corporation's local markets. Non-performing assets,
charge-offs, and provisions for loan losses tend to decline in a strong economy
and increase in a weak economy, potentially impacting the Corporation's
operating results. In addition to non-performing loans, management carefully
monitors other credits that are current in terms of principal and interest
payments but, in management's opinion, may deteriorate in quality if economic
conditions change.
17
Table 8
Non-Performing Assets and Past Due Loans
June 30, December 31,
2001 2000
--------------------------------
Non-Performing Loans:
Loans Past Due 90 Days or More & Still
Accruing $155,000 $489,000
Non-Accrual Loans 547,000 731,000
Renegotiated Loans 0 0
--------------------------------
Total Non-Performing Loans 702,000 1,220,000
--------------------------------
Other Non-Performing Assets:
Other Real Estate 37,000 0
REO in Redemption 0 0
Other Non-Performing Assets 114,000 159,000
--------------------------------
Total Other Non-Performing Assets 151,000 159,000
--------------------------------
Total Non-Performing Assets $853,000 $1,379,000
================================
Non-Performing Loans as a % of
Total Loans 0.35% 0.63%
Allowance for Loan Losses as a % of
Non-Performing Loans 441.17% 240.33%
Accruing Loans Past Due 90 Days or
More to Total Loans 0.08% 0.25%
Non-performing Assets as a % of
Total Assets .28% 0.47%
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 Corporation's liquidity
is derived from a strong deposit base comprised of individual and business
deposits. Deposit accounts of customers in the mature market represent a
substantial portion of deposits of individuals. The Banks' deposit base plus
other funding sources (federal funds purchased, other liabilities and
shareholders' equity) provided primarily all funding needs in the first six
months of 2001. While these sources of funds are expected to continue to be
available to provide funds in the future, the mix and availability of funds will
depend upon future economic conditions. The Corporation does not foresee any
difficulty in meeting its funding requirements.
Primary liquidity is provided through short-term investments or borrowings
(including federal funds sold and purchased) while secondary liquidity is
provided by the investment portfolio. As of June 30, 2001 federal funds sold
represented 7.4% of total assets, compared to 2.5% at December 31, 2000. The
Corporation regularly monitors liquidity to ensure adequate cash flows to cover
unanticipated reductions in the availability of funding sources.
18
Interest rate risk is managed by controlling and limiting the level of earnings
volatility arising from rate movements. The Corporation regularly performs
reviews and analysis of those factors impacting interest rate risk. Factors
include maturity and re-pricing frequency of balance sheet components, impact of
rate changes on interest margin and prepayment speeds, market value impacts of
rate changes, and other issues. Both actual and projected performance is
reviewed, analyzed, and compared to policy and objectives to assure present and
future financial viability.
As indicated in the statement of cash flows, cash flows from financing
activities increased $9,513,000 in the first six months of 2001 due to the
increase in deposits. Comparatively, in the first six months of 2000, cash flows
from financing activities increased $19,240,000 because of increases in deposits
and borrowings. Cash flows from investing activities were $3,541,000 during the
first six months of 2000. The increases in investing activities at the end of
the second quarter of 2001, were offset by maturing and called investment
securities.
CAPITAL MANAGEMENT
Total shareholders' equity rose 4.6% to $37,402,000 at June 30, 2001 compared
with $35,754,000 at December 31, 2000. The Corporation's equity to asset ratio
was 12.3% at June 30, 2001 and 12.2% at December 31, 2000. The increase in the
amount of capital was obtained through retained earnings and the proceeds from
the issuance of new shares. In the first six months of 2001, the Corporation
increased its cash dividends by 4.8% to $.44 per share compared with $.42 in the
same period in 2000.
As indicated on the balance sheet at December 31, 2000 the Corporation had
accumulated other comprehensive loss of $215,000 compared to accumulated other
comprehensive income at June 30, 2001 of $221,000. The increase to an income
position is attributable to the downward movement of market interest rates and
the interest rate structures on those securities held in the available for sale
portfolio.
Regulatory Capital Requirements
Bank holding companies and their bank subsidiaries are required by banking
industry regulators to maintain certain levels of capital. These are expressed
in the form of certain ratios. These ratios are based on the degree of credit
risk in the Corporation's assets. All assets and off-balance sheet items such as
outstanding loan commitments are assigned risk factors to create an overall risk
weighted asset total. Capital is separated into two levels, Tier I capital
(essentially total common shareholders' equity less goodwill) and Tier II
capital (essentially the 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 4%. As reflected in Table 9, at June 30,
2001 and at December 31, 2000, the Corporation was well in excess of the minimum
capital and leverage requirements necessary to be considered a "well
capitalized" banking company.
The FDIC has adopted a risk-based insurance premium system based in part on a
bank's capital adequacy. Under this system a depository institution is
classified as well capitalized, adequately capitalized, or undercapitalized
according to its regulatory capital levels. Subsequently, a financial
institution's premium levels are based on these classifications and its
regulatory supervisory rating (the higher the classification the lower the
premium). It is the Corporation's goal to maintain capital levels sufficient to
receive a designation of "well capitalized".
19
Table 9
Capital Ratios
-----------------------------------------------------------------------------
Regulatory Minimum Fentura Bancorp, Inc.
For "Well Capitalized" June 30, December 31, June 30,
2001 2000 2000
Total Capital to risk
weighted assets 10% 16.15% 16.20% 15.10%
Tier 1 Capital to risk 6% 14.91% 15.00% 13.85%
weighted assets
Tier 1 Capital to average
Assets 5% 12.19% 12.10% 12.66%
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information concerning quantitative and qualitative disclosures about market
risk contained and incorporated by reference on pages 40 through 42 in Fentura's
Annual Report on Form 10-K, is here incorporated by reference.
Fentura Bancorp, Inc. faces market risk to the extent that both earnings and the
fair value of its financial instruments are affected by changes in interest
rates. The Corporation manages this risk with static GAP analysis and has begun
simulation modeling. For the first six months of 2001, the results of these
measurement techniques were within the Corporation's policy guidelines. The
Corporation does not believe that there has been a material change in the nature
of the Corporation's primary market risk exposures, including the categories of
market risk to which the Corporation is exposed and the particular markets that
present the primary risk of loss to the Corporation, or in how those exposures
are managed in 2001 compared to 2000.
The Corporation's market risk exposure is mainly comprised of its vulnerability
to interest rate risk. Prevailing interest rates and interest rate relationships
in the future will be primarily determined by market factors which are outside
of the Corporation's control. All information provided in this section consists
of forward looking statements. Reference is made to the section captioned
"Forward Looking Statements" in this quarterly report for a discussion of the
limitations on the Corporation's responsibility for such statements.
20
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity management seeks to maximize net interest income as a
result of changing interest rates, within prudent ranges of risk. The
Corporation attempts to accomplish this objective by structuring the balance
sheet so that re-pricing opportunities exist for both assets and liabilities in
roughly equivalent amounts at approximately the same time intervals. Imbalances
in these re-pricing opportunities at any point in time constitute a bank's
interest rate sensitivity. The Corporation currently does not utilize
derivatives in managing interest rate risk.
An indicator of the interest rate sensitivity structure of a financial
institution's balance sheet is the difference between rate sensitive assets and
rate sensitive liabilities, and is referred to as "GAP".
Table 10 sets forth the distribution of re-pricing of the Corporation's earning
assets and interest bearing liabilities as of June 30, 2001, the interest rate
sensitivity GAP, as defined above, the cumulative interest rate sensitivity GAP,
the interest rate sensitivity GAP ratio (i.e. interest rate sensitive assets
divided by interest rate sensitive liabilities) and the cumulative sensitivity
GAP ratio. The table also sets forth the time periods in which earning assets
and liabilities will mature or may re-price in accordance with their contractual
terms.
Table 10 GAP ANALYSIS JUNE 30, 2001
(000's Omitted) Within Three One to After
Three Months- Five Five
Months One Year Years Years Total
-------------------------------------------------------------
Earning Assets:
Federal Funds Sold $ 21,100 $ 0 $ 0 $ 0 $ 21,100
Investment Securities 5,751 8,074 11,373 29,670 54,868
Loans 78,322 18,846 81,307 23,657 202,132
Loans Held for Sale 264 0 0 0 264
-------------------------------------------------------------
Total Earning Assets $ 105,437 $ 26,920 $ 92,680 $ 53,327 $ 278,364
=============================================================
Interest Bearing Liabilities:
Interest Bearing Demand Deposits $ 39,571 $ 0 $ 0 $ 0 $ 39,571
Savings Deposits 74,695 0 0 0 74,695
Time Deposits Less than $100,000 12,429 43,112 26,029 154 81,724
Time Deposits Greater than $100,000 12,498 13,014 4,557 0 30,069
Other Borrowings 1,500 0 245 893 2,638
-------------------------------------------------------------
Total Interest Bearing Liabilities $ 140,693 $ 56,126 $ 30,831 $ 1,047 $ 228,697
=============================================================
Interest Rate Sensitivity GAP $ (35,256) $ (29,206) $ 61,849 $ 52,280 $ 49,667
Cumulative Interest Rate
Sensitivity GAP $ (35,256) $ (64,462) $ (2,613) $ 49,667
Interest Rate Sensitivity GAP 50.93
(0.75) (0.48) 3.01
Cumulative Interest Rate
Sensitivity GAP Ratio (0.75) (0.67) (0.99) 1.22
As indicated in Table 10, the short-term (one year and less) cumulative interest
rate sensitivity gap is negative. Accordingly, if market interest rates
increase, this negative gap position would have a short- term negative impact on
interest margin. Conversely, if market rates continue to decline this would have
a short-term positive impact. However, gap analysis is limited and may not
provide an accurate indication of the impact of general interest rate movements
on the net interest margin since the re-pricing of various categories of assets
and liabilities is subject to the Corporation's needs, competitive pressures,
and the needs of the Corporation's customers. In addition, various assets and
liabilities indicated as re-pricing within the same period may in fact re-price
at different times within such period and at different rate volumes. These
limitations are evident when considering our Gap position at June 30, 2000 and
the change in net interest income for the six months ended June 30, 2001
compared to the same time period in 2000. At June 30, 2000 the Corporation was
negatively gapped through one year and since that time interest rates have
lowered considerably, yet net interest income declined comparing the first six
months of 2001 to the same period in 2000. This occurred because certain deposit
categories, specifically interest bearing demand and savings, did not re-price
at the same time or at the same level as asset portfolios. Additionally,
simulation modeling, which measures the impact of upward and downward
21
movements of interest rates on interest margin and the market value of equity,
indicates that an upward movement of interest rates would not significantly
reduce net interest income.
FORWARD LOOKING STATEMENTS
This report contains "forward looking statements" as that term is used in the
securities laws. All statements regarding our expected financial position,
performance, business and strategies are forward looking statements. These
statements are based on management's beliefs, assumptions, current expectations,
estimates and projections about the financial services industry, the economy,
and about the Corporation itself. Words such as "anticipates," "believes,"
"estimates," "expects," "forecasts," "intends," "is likely," "plans,"
"projects," variations of such words and similar expressions are intended to
identify such forward looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
("Future Factors") which are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what may be expressed or forecast in such forward looking
statements. The Corporation undertakes no obligation to update, amend or clarify
forward looking statements as a result of new information, future events, or
otherwise.
Future Factors that could cause a difference between an ultimate actual outcome
and a preceding forward looking statement include, but are not limited to,
changes in interest rate and interest rate relationships, demands for products
and services, the degree of competition by traditional and non-traditional
competitors, changes in banking laws or regulations, changes in tax laws,
changes in prices, the impact of technological advances, government and
regulatory policy changes, the outcome of pending and future litigation and
contingencies, trends in customer's behaviors as well as their ability to repay
loans, and the local economy. Further information concerning us and our
business, including additional factors that could materially affect our
financial results, is included in our filings with the Securities and Exchange
Commission.
22
PART II - OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders
The Corporation's annual meeting was held on April 25, 2001. The only matter
submitted to a vote of shareholders at the meeting was the election of
directors. The following directors were each elected to a three year term
expiring in 2004 based on the vote set opposite their names:
Abstentions
For Authority and
--- Withheld Broker Non-Votes
-------- ----------------
David A. Duthie 1,227,645 65,296 -0-
J. David Karr 1,251,984 40,957 -0-
Thomas P. McKenney 1,251,467 41,474 -0-
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - None
b. Report on Form 8-K - None.
23
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fentura Bancorp, Inc.
Date August 14, 2001 By /s/ Donald L. Grill
Donald L. Grill
President & CEO
Date August 14, 2001 By /s/ Ronald L. Justice
Ronald L. Justice
Chief Financial Officer
24