Fentura Financial, Inc.
Years Ended
December 31,
2013 and 2012
Consolidated
Financial
Statements
FENTURA FINANCIAL, INC.
TABLE OF CONTENTS
Independent Auditors’ Report
Consolidated Financial Statements for the Years Ended
December 31, 2013 and 2012
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
PAGE
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Notes to Consolidated Financial Statements
7-43
INDEPENDENT AUDITORS’ REPORT
March 7, 2014
Shareholders and Board of Directors
Fentura Financial, Inc.
Fenton, Michigan
We have audited the accompanying consolidated financial statements of Fentura Financial, Inc. (the
“Corporation”), which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the
related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the
years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the
design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of
consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Independent Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on auditor judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the Corporation’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Corporation’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Fentura Financial, Inc. as of December 31, 2013 and 2012, and the consolidated
results of their operations and their cash flows for the years then ended in accordance with accounting principles
generally accepted in the United States of America.
Emphasis of Matter
As more fully described in Note 9 to the accompanying consolidated financial statements, the reversal of a large
portion of a deferred income tax asset valuation allowance in 2013 had a significant impact on net income for the
year.
Rehmann Robson1500 W. Big Beaver Rd. 2nd Floor Troy, MI 48084 Ph: 248.952.5000 Fx: 248.952.5750 rehmann.com CPAs & Consultants Wealth Advisors Corporate InvestigatorsRehmannisanindependentmemberofNexiaInternational.
FENTURA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
Cash and cash equivalents
Securities, available for sale
Securities, held to maturity
Total securities
Loans held for sale
Loans
Less allowance for loan losses
Net loans
Bank owned life insurance
Premises and equipment, net
Federal Home Loan Bank ("FHLB") stock
Accrued interest receivable
Other real estate owned
Other assets
Deferred tax asset, net
December 31
2013
2012
$
12,856
$
45,712
33,293
2,620
44,530
3,058
35,913
47,588
1,004
262,974
4,900
782
199,744
4,962
258,074
194,782
6,198
10,023
661
983
2,594
1,990
4,929
6,052
10,235
661
902
2,579
1,429
-
Total assets
$
335,225
$
310,722
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing
Interest-bearing
Total deposits
FHLB advances
Subordinated debentures
Accrued interest payable and other liabilities
Total liabilities
Shareholders' equity
Common stock, no par value: 5,000,000 shares authorized,
2,482,431 (2,444,161 in 2012) shares issued and outstanding
Accumulated deficit
Accumulated other comprehensive income
Total shareholders' equity
$
82,585
200,756
$
80,550
195,289
283,341
275,839
10,855
14,000
2,267
891
14,000
3,789
310,463
294,519
43,502
(18,804)
64
43,310
(27,290)
183
24,762
16,203
Total liabilities and shareholders' equity
$
335,225
$
310,722
The accompanying notes are an integral part of these consolidated financial statements.
2
FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Interest and dividend income
Loans, including fees
Investments
Taxable
Tax-exempt
Federal funds sold
Total interest and dividend income
Interest expense
Deposits
Borrowings
Total interest expense
Net interest income
Provision for (reduction of) loan losses
Net interest income, after loan losses
Noninterest income
Service charges on deposit accounts
Net gain on sale of mortgage loans
Trust and investment services
Net gain on sale of securities
Other income and fees
Total noninterest income
Noninterest expenses
Salaries and employee benefits
Occupancy
Furniture and equipment
Loan and collection
Advertising and promotional
Telephone and communication services
Other professional services
Other general and administrative
Total noninterest expenses
Income before income tax
Federal income tax (benefit) expense
Net income
Net income per share
Basic and diluted
Year Ended December 31
2013
2012
$
11,746
$
10,970
560
169
6
1,081
119
23
12,481
12,193
865
589
1,454
11,027
7
11,020
897
1,613
996
-
2,077
5,583
6,925
1,084
1,068
688
314
134
877
2,145
13,235
3,368
(5,118)
1,499
446
1,945
10,248
(508)
10,756
1,030
961
1,071
25
1,755
4,842
6,775
1,079
1,076
944
164
167
1,049
3,007
14,261
1,337
73
$
8,486
$
1,264
$
3.44
$
0.52
The accompanying notes are an integral part of these consolidated financial statements.
3
FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Year Ended December 31
2013
2012
Net income
$
8,486
$
1,264
Other comprehensive (loss) income
Unrealized holding (losses) gains on available for sale
investment securities arising during the year
Reclassification adjustment for net realized
gains included in income
Other comprehensive (loss) income
(119)
-
(119)
185
(25)
160
Comprehensive income
$
8,367
$
1,424
The accompanying notes are an integral part of these consolidated financial statements.
4
FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
Accumulated
Other
Common
Stock
Accumulated Comprehensive
Deficit
Income
Total
Balances, January 1, 2012
$
43,191
$
(28,554)
$
23
$
14,660
Issurance of common shares
under stock purchase and
dividend reinvestment
plans (55,936 shares)
Comprehensive income
119
-
-
1,264
Balances, December 31, 2012
43,310
(27,290)
-
160
183
119
1,424
16,203
Issurance of common shares
under stock purchase and
dividend reinvestment
plans (38,270 shares)
Comprehensive income
192
-
-
-
192
8,486
(119)
8,367
Balances, December 31, 2013
$
43,502
$
(18,804)
$
64
$
24,762
The accompanying notes are an integral part of these consolidated financial statements.
5
FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation
Amortization and accretion on securities, net
Provision for loan losses
Loans originated for sale
Proceeds from sale of loans
Net gain on sales of loans
Net gain on sales of securities
Net (gain) loss on sale of other real estate owned
Provision for other real estate owned losses
Deferred income taxes
Net earnings from bank owned life insurance
Net increase in interest receivable and other assets
Net (decrease) increase in interest payable and other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Proceeds from maturities of securities - HTM
Proceeds from maturities of securities - AFS
Proceeds from calls of securities - HTM
Proceeds from calls of securities - AFS
Proceeds from sales of securities - AFS
Purchases of securities - AFS
Purchase of securities - HTM
Origination of loans, net of principal payments
Purchases of loans
Proceeds from sales of other real estate owned
Purchase of premises and equipment, net
Net cash (used in) provided by investing activities
Cash flows from financing activities
Net increase in deposits
Advances (repayments of advances) from FHLB
Net proceeds from common stock issuance
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flows information
Cash paid for interest
Cash paid for income taxes
Transfers from loans to other real estate
Loans provided for sales of other real estate owned
Year Ended December 31
2013
2012
$
8,486
$
1,264
709
(540)
7
(56,585)
57,976
(1,613)
-
(239)
223
(4,929)
(146)
(640)
(1,522)
1,187
413
13,548
25
2,008
-
(3,898)
-
(64,843)
-
1,543
(497)
(51,701)
7,502
9,964
192
17,658
(32,856)
45,712
677
(695)
(508)
(45,011)
45,313
(961)
(25)
6
159
-
(111)
(233)
392
267
-
13,431
-
6,150
13,991
(18,535)
(95)
11,459
(10,530)
1,605
(710)
16,766
9,958
(32)
119
10,045
27,078
18,634
$
12,856
$
45,712
3,278
$
$
-
$
2,538
$
996
$
$
$
$
1,597
198
2,400
239
The accompanying notes are an integral part of these consolidated financial statements.
6
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation
The consolidated financial statements include Fentura Financial, Inc. (the “Corporation”)
and its wholly owned subsidiaries Fentura Holdings LLC (“FHLLC”) and The State Bank (“the
Bank”) in Fenton, Michigan. Intercompany transactions and balances are eliminated in
consolidation.
The Corporation provides banking and trust services principally to individuals, small businesses
and governmental entities through its eight community banking offices in Genesee, Livingston,
and Oakland Counties in southeastern Michigan. Its primary deposit products are checking,
savings, and term certificate accounts, and its primary lending products are residential
mortgage, commercial, and installment loans. Commercial real estate loans were 50.1% and
51.7% of gross loans, and other commercial loans were 17.1% and 21.7% of gross loans at
December 31, 2013 and 2012, respectively. Substantially all loans are secured by specific
items of collateral including business assets, consumer assets, and real estate. Commercial
loans are expected to be repaid from cash flow from operations of businesses. Real estate
loans are secured by both residential and commercial real estate. The Corporation’s exposure
to credit risk is substantially affected by the economy in the Corporation’s market area and by
changes in commercial real estate values. While the loan portfolio is substantially commercial
based, the Corporation is not dependent on any single borrower. Other financial instruments
which potentially represent concentrations of credit risk in the normal course of business
include deposit accounts in other financial institutions and federal funds sold.
The Bank’s primary sources of liquidity are time deposits and non-maturity deposits. At
December 31, 2013 retail time deposits equal 21.2% of total deposits. This is compared to
December 31, 2012 when retail time deposits consisted of 22.8% of total deposits. Details
regarding deposits are further described in Note 7 of the consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates
and assumptions based on available information. These estimates and assumptions affect the
amounts reported in the consolidated financial statements and the disclosures provided, and
future results could differ. The allowance for loan losses, the fair values of securities and
other financial instruments, other than temporary impairment of securities, the carrying value
of other real estate owned, the valuation of share appreciation rights and deferred taxes are
particularly subject to change.
Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents, includes cash, deposits with other financial institutions under
90 days, and federal funds sold. Net cash flows are reported for customer loan and
deposit transactions and short-term borrowings.
Investment 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
7
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
available for sale are carried at fair value, with unrealized holding gains and losses
reported in other comprehensive income (loss).
Interest income includes amortization of purchase premium or discount. Premiums and
discounts on securities are amortized on the level-yield method without anticipating
prepayments, except for mortgage-backed securities, where prepayments are anticipated.
Premiums are amortized to call date whereby discounts are amortized to maturity. Gains
and losses on sales are based on the amortized cost of the security sold.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least
on a quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation.
In determining OTTI management considers many factors, including: (1) the length of time
and the extent to which the fair value has been less than cost, (2) the financial condition
and near-term prospects of the issuer, (3) whether the market decline was affected by
macroeconomic conditions, and (4) whether the Corporation has the intent to sell the
debt security or it is more likely than not it will be required to sell the debt security
before its anticipated recovery. The assessment of whether an other-than-temporary
decline exists involves a high degree of subjectivity and judgment and is based on the
information available to management at a point in time.
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether the
Corporation intends to sell the security or it is more likely than not it will be required to
sell the security before recovery of its amortized cost basis, less any current-period credit
loss. If the Corporation intends to sell or it is more likely than not it will be required to
sell the security before recovery of its amortized cost basis, less any current-period credit
loss, the OTTI shall be recognized in earnings equal to the entire difference between the
investment’s amortized cost basis and its fair value at the balance sheet date. If the
Corporation does not intend to sell the security and it is not more likely than not that the
Corporation will not be required to sell the security before recovery of its amortized cost
basis less any current-period loss, the OTTI shall be separated into the amount
representing the credit loss and the amount related to all other factors. The amount of
the total OTTI related to the credit loss is determined based on the present value of cash
flows expected to be collected and is recognized in earnings. The amount of the total
OTTI related to other factors is recognized in other comprehensive income, net of
applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings
becomes the new amortized cost basis of the investment.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or
until maturity or payoffs are reported at the principal balance outstanding, net of
unearned interest, deferred loan fees and costs, and an allowance for loan losses. Loans
held for sale are reported at the lower of cost or fair value, on an aggregate basis and are
sold with servicing rights released.
Interest income is reported on the interest method and includes amortization of net
deferred loan fees and costs over the loan term. Loan origination fees, net of certain
direct origination costs, are deferred and recognized in interest income using the level-
yield method without anticipating prepayments. Interest income is not reported when full
loan repayment is in doubt, typically when the loan is impaired or payments are past due
over 90 days (180 days for residential mortgages).
8
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All interest accrued in the current year but not received for loans placed on non-accrual
are reversed against current interest income. Interest received on such loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably assured.
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 management’s judgment, should be charged-off. Loan losses are charged
against the allowance when management believes the uncollectability of a loan balance is
confirmed. Consumer loans are typically charged off no later than 120 days past due.
The allowance consists of specific, general, and unallocated components. The specific
component relates to loans that are individually classified as impaired or loans otherwise
classified as substandard or doubtful. The general component covers non-classified loans
and is based on historical loss experience adjusted for current factors. The historical loss
experience is determined by portfolio segments and is based on the actual weighted
average loss history experienced by the Corporation over a range of the most recent 4
quarters to the most recent 20 quarters. This actual loss experience is supplemented with
other economic factors based on the risks present for each portfolio segment. These
economic factors include consideration of the following: levels of and trends in
delinquencies and impaired loans; levels of and trends in charge-offs and recoveries;
trends in volume and terms of loans; effects of any changes in risk selection and
underwriting standards; other changes in lending policies, procedures, and practices;
experience, ability and depth of lending management and other relevant staff; national
and local economic trends and conditions; industry conditions; and effects of changes in
credit concentrations.
identified:
commercial, commercial real estate, residential mortgage, installment loans, and home
equity loans.
The following portfolio segments have been
A loan is impaired when full payment under the loan terms is not expected. Commercial
and commercial real estate loans are individually evaluated for impairment. 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 loan’s existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Large groups of
smaller balance homogeneous loans, such as consumer and residential real estate loans
are collectively evaluated for impairment, and accordingly, they are not separately
identified for impairment disclosures.
9
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Troubled Debt Restructurings
Under certain circumstances, the Bank will provide borrowers relief through loan
restructurings and modifications. A loan restructuring constitutes a troubled debt
restructuring (“TDR”) if for economic or legal reasons related to the borrower’s financial
difficulties the Corporation grants a concession to the borrower that it would not
otherwise consider. Restructured loans typically present an elevated level of credit risk as
the borrowers are not able to perform according to the original contractual terms. Loans
that are reported as TDRs are considered impaired and are measured for impairment.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the
lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized
through a valuation allowance of which the provision is accounted for in the consolidated
statements of income.
Transfers of Financial Assets
Transfers of financial assets, including mortgage loans held-for-sale, as described above,
are accounted for as sales when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when 1) the assets have been legally
isolated from the Bank, 2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred
assets and 3) the Bank does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity. The Bank has no
substantive continuing involvement related to these loans.
Other Real Estate Owned and Foreclosed Assets
Assets acquired through or instead of loan foreclosure are initially recorded at fair value
less estimated selling costs when acquired, establishing a new cost basis. If fair value
declines, a valuation allowance is recorded through expense. Costs after acquisition are
expensed.
Bank Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated
depreciation. Buildings and related components are depreciated using the straight-line
method with useful lives ranging from 15 to 40 years. Furniture, fixtures, and equipment
are depreciated using the straight-line method with useful lives ranging from 3 to 7 years.
Premises and equipment and other assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at fair value, if lower than carrying amount.
Federal Home Loan Bank (FHLB) stock
The Bank is a member of the FHLB system. Members are required to own a certain
amount of stock based on the level of borrowings and other factors, and may invest
additional amounts. FHLB stock is carried at cost, classified as a restricted security, and
periodically evaluated for impairment based on ultimate recovery of par value. Both cash
and stock dividends are reported as income.
10
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank Owned Life Insurance
The Corporation holds life insurance policies purchased on the lives of key members of
management. In the event of death of one of these individuals, the Corporation, as
beneficiary of the policies, would receive a specified cash payment equal to the face
value of the policy. Such policies are recorded at their cash surrender value, or the
amount that can be currently realized as of the balance sheet date. The change in cash
surrender value is an adjustment of premiums paid in determining the net expense or
income recognized under the contracts for the year and is included in noninterest
expenses.
Stock Based Compensation
Compensation cost is recognized for stock options and stock appreciation rights based on
the fair value of these awards at the date of grant. A valuation model is utilized to
estimate the fair value of stock options and stock appreciation rights. Compensation cost
is recognized over the requisite service period, generally defined as the vesting period.
For awards with graded vesting, compensation cost is recognized on a straight-line basis
over the requisite service period for the entire award.
Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the
change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the
expected future tax amounts for the temporary differences between carrying amounts and
tax bases of assets and liabilities, computed using enacted tax rates. If determined
necessary, a valuation allowance reduces deferred tax assets to the amount expected to
be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax
position would be sustained in a tax examination, with a tax examination being presumed
to occur. The amount recognized is the largest amount of tax benefit that has a greater
than 50% likelihood of being realized on examination including the appeals process. For
tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Corporation recognizes interest and/or penalties related to income tax matters in
income tax expense. Such interest or penalties recorded in 2013 or 2012 were not
significant. As more fully described in Note 9, a reversal of a large portion of a deferred
income tax asset valuation allowance in 2013 had a significant impact on net income for
the year.
Loan Commitments and Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments
to make loans and standby letters of credit, issued to meet customer financing needs.
The face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded when
they are funded.
Earnings Per Common Share
Basic earnings per common share is calculated as net income divided by the weighted
average number of common shares outstanding during the period. Employee Stock
Ownership Plan (ESOP) shares are considered outstanding for this calculation unless
unearned. Stock options were not considered in computing diluted earnings per common
share because they were antidilutive.
Comprehensive Income
11
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive income consists of net income and other comprehensive income (loss).
Other comprehensive income (loss) includes unrealized gains and losses on securities
available for sale, which are also recognized as separate components of equity.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of
business, are recorded as liabilities when the likelihood of loss is probable and an amount
or range of loss can be reasonably estimated.
Restrictions on Cash
Cash on hand or on deposit with the Federal Reserve Bank of $25,000 was required to
meet regulatory reserve and clearing requirements at December 31, 2013 and 2012.
Dividend Restrictions
The Holding Company is under restrictions by the Federal Reserve regarding the
declaration or payment of any dividends to shareholders and the receipt of dividends from
the Bank.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and
other assumptions, as more fully disclosed in Note 12. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for particular
items. Changes in assumptions or in market conditions could significantly affect the
estimates.
Reclassifications
Certain items in the prior year consolidated financial statements were reclassified to
conform to the current year presentation.
Subsequent Events
In preparing these consolidated financial statements, the Corporation has evaluated, for
potential recognition or disclosure, significant events or transactions that occurred during
the period subsequent to December 31, 2013, the most recent balance sheet presented
herein, through March 7, 2014, the date these consolidated financial statements were
available to be issued. No significant such events or transactions were identified.
12
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. EARNINGS PER SHARE
The components in the earnings per share computation follow:
(000s omitted except share and per share data)
2013
2012
Basic
Net income
Weighted average common shares
outstanding
Basic income per common share
Diluted
Net income
Weighted average common shares
outstanding for basic earnings
per common share
Add dilutive effects of assumed
exercises of stock options
Average shares and dilutive potential
common shares
$
8,486 $
1,264
$
$
2,469,176
2,422,261
3.44 $
0.52
8,486 $
1,264
2,469,176
2,422,261
-
-
2,469,176
2,422,261
Diluted income per common share
$
3.44 $
0.52
Options for the purchase of 3,355 and 9,301 shares of common stock were not considered in
computing diluted earnings per common share for 2013 and 2012 respectively, because they
were antidilutive.
13
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3.
INVESTMENT SECURITIES
Year-end securities were as follows:
2013
(000s omitted)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Available-for-sale
U.S. government and
federal agency
State and municipal
Mortgage backed residential
Collateralized mortgage
obligations – agencies
Equity securities
$
2,993 $
6,396
8,202
13,485
2,155
- $
1
87
176
414
(276) $
(197)
(17)
2,717
6,200
8,272
(36)
(90)
13,625
2,479
$
33,231 $
678 $
(616) $
33,293
Held to Maturity
State and municipal
$
2,620 $
29 $
(22) $
2,627
2012
(000s omitted)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Available-for-sale
U.S. government and
federal agency
State and municipal
Mortgage backed residential
Collateralized mortgage
obligations – agencies
Equity securities
$
Held to Maturity
State and municipal
$
$
4,992 $
2,520
11,374
23,306
2,155
19 $
-
197
198
93
- $
(14)
-
(121)
(189)
5,011
2,506
11,571
23,383
2,059
44,347 $
507 $
(324) $
44,530
3,058 $
64 $
(6) $
3,116
Contractual maturities of securities at December 31, 2013 were as follows. Securities not due
at a single maturity date, consisting of mortgage backed, collateralized mortgage obligations,
and equity securities are shown separately.
14
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted)
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Available for Sale
Held to Maturity
U.S. government and federal
agency
Due in one year or less
Due from one to five years
Due from five to ten years
Due after ten years
Mortgage backed residential
Collateralized mortgage
obligations – agencies
Equity securities
$
- $
- $
525 $
5,171
1,225
2,993
8,202
13,485
2,155
5,051
1,150
2,716
8,272
13,625
2,479
1,154
941
-
-
-
-
531
1,163
933
-
-
-
-
$
33,231 $
33,293 $
2,620 $
2,627
Securities pledged at December 31, 2013 and 2012 had a carrying amount of $23,307,000 and
$5,419,000 and were pledged to secure public deposits and borrowings.
Securities with unrealized losses at December 31, 2013 and 2012, including both available for
sale and held to maturity securities, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position are as follows:
Less Than 12 Months
Over 12 Months
2013
(000s omitted)
Fair
Value
Gross
Unrealized
Loss
Fair
Value
Gross
Unrealized
Loss
Fair
Value
Total
Gross
Unrealized
Losses
State and municipal
Mortgage backed residential
Collateralized mortgage
obligations - agencies
U.S. Government and
federal agency
Equity securities
$
5,594 $
4,037
(196) $
(17)
355 $
-
(23) $
-
5,949 $
4,037
2,593
2,717
-
(36)
(276)
-
-
-
563
-
2,593
-
(90)
2,717
563
(219)
(17)
(36)
(276)
(90)
Total
$
14,941 $
(525) $
918 $
(113) $ 15,859 $
(638)
2012
(000s omitted)
State and municipal
Collateralized mortgage
obligations - agencies
Equity securities
Less Than 12 Months
Over 12 Months
Fair
Value
Gross
Unrealized
Loss
Fair
Value
Gross
Unrealized
Loss
Fair
Value
Total
Gross
Unrealized
Losses
$
2,520 $
(14) $
491 $
(6) $
3,011 $
(20)
12,597
-
(121)
-
-
916
-
(189)
12,597
916
(121)
(189)
Total
$
15,117 $
(135) $
1,407 $
(195) $ 16,524 $
(330)
As of December 31, 2013, the Corporation’s security portfolio consisted of 83 securities, 24 of
which were in an unrealized loss position.
15
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other-Than-Temporary-Impairment
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant such an
evaluation. In evaluating OTTI, management additionally considers the factors presented in
Note 1. No OTTI was indicated following analysis in 2013 or 2012.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The Bank originates primarily residential and commercial real estate loans, commercial, and
installment loans. The Corporation estimates that the majority of their loan portfolio is based
in Genesee, Oakland and Livingston counties within southeast Michigan. The ability of the
Corporation's debtors to honor their contracts is dependent upon the real estate and general
economic conditions in these areas.
Activity in the allowance for loan losses, by loan portfolio segment, for the year ended
December 31, 2013 is as follows:
(000s omitted)
Commercial
Commercial
Real
Estate
Residential
Real
Estate
Installment
Loan
Home
Equity
Unallocated
Total
Balance,
January 1, 2013
Provision for
(reduction of)
loan losses
Loans charged off
Loan recoveries
$
520 $
3,394 $
399 $
106 $
184 $
359 $
4,962
96
(154)
145
(197)
(630)
580
338
(73)
19
(71)
(12)
33
25
(33)
56
(184)
-
-
7
(902)
833
Balance,
December 31, 2013 $
607 $
3,147 $
683 $
56 $
232 $
175 $
4,900
Activity in the allowance for loan losses, by loan portfolio segment, for the year ended
December 31, 2012 is as follows:
(000s omitted)
Commercial
Commercial
Real
Estate
Residential
Real
Estate
Installment
Loan
Home
Equity
Unallocated
Total
Balance,
January 1, 2012
Provision for
(reduction of)
loan losses
Loans charged off
Loan recoveries
$
892 $
5,993 $
501 $
214 $
475 $
89 $
8,164
342
(785)
71
(1,326)
319
(2,249)
(424)
976
3
(92)
(37)
21
(21)
(291)
21
270
(508)
-
-
(3,786)
1,092
Balance,
December 31, 2012 $
520 $
3,394 $
399 $
106 $
184 $
359 $
4,962
16
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the balance in the allowance for loan losses and the recorded
investment in loans by loan portfolio segment, and impairment evaluation method at
December 31, 2013:
(000s omitted)
Commercial
Commercial
Real
Estate
Residential
Real
Estate
Installment
Loan
Home
Equity
Unallocated
Total
Allowance for loan
losses
Ending allowance
balance attributable
to loans
Individually
evaluated for
impairment
$
Collectively
evaluated for
impairment
Total ending
allowance
balance
136 $
949 $
120 $
- $
5 $
- $
1,210
471
2,198
563
56
227
175
3,690
$
607 $
3,147 $
683 $
56 $
232 $
175 $
4,900
(000s omitted)
Commercial
Commercial
Real
Estate
Residential
Real
Estate
Installment
Loan
Home
Equity
Unallocated
Total
Loans
Loans individually
evaluated for
impairment
Loans collectively
evaluated for
impairment
Total ending loan
balance
Accrued interest
receivable
Total recorded
investment in
loans
$
520 $
7,182 $
689 $
2 $
264
$
8,657
44,550
124,544
60,153
3,824
21,246
45,070
131,726
60,842
3,826
21,510
162
287
158
14
77
254,317
262,974
698
$
45,232 $
132,013 $
61,000 $
3,840 $ 21,587
$ 263,672
17
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the balance in the allowance for loan losses and the recorded
investment in loans by loan portfolio segment, and based on impairment evaluation method at
December 31, 2012:
(000s omitted)
Commercial
Commercial
Real
Estate
Residential
Real
Estate
Installment
Loan
Home
Equity
Unallocated
Total
Allowance for loan
losses
Ending allowance
balance
attributable
to loans
Individually
evaluated
for
impairment
Collectively
evaluated
for
impairment
Total ending
allowance
balance
Loans
Loans individually
evaluated for
impairment
Loans collectively
evaluated for
impairment
Total ending loan
balance
Accrued interest
receivable
Total recorded
investment in
loans
$
91 $
1,631 $
116 $
36 $
23 $
- $
1,897
429
1,763
283
70
161
359
3,065
$
520 $
3,394 $
399 $
106 $
184 $
359 $
4,962
$
1,476 $
13,534 $
1,126 $
52 $
340
$
16,528
41,829
89,645
28,712
4,751
18,279
43,305
103,179
29,838
4,803
18,619
131
305
68
13
58
183,216
199,744
575
$
43,436 $
103,484 $
29,906 $
4,816 $ 18,677
$ 200,319
18
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents loans individually evaluated for impairment by portfolio class of
loans as of December 31, 2013:
(000s omitted)
With no related allowances
recorded
Commercial
Commercial real estate
Residential real estate
Consumer
Installment loans
Home equity
With an allowance recorded
Commercial
Commercial real estate
Residential real estate
Consumer
Installment loans
Home equity
Unpaid
Principal
Balance
Recorded
Investment
Allowance
For Loan
Losses
Allocated
Average
Recorded
Investment
Interest
Income
Recognized
$
724 $
281 $
6,762
523
43
235
246
5,515
629
-
30
2,058
107
2
234
240
5,396
584
-
31
- $
-
-
-
-
136
949
120
-
5
540 $
3,828
171
3
245
332
4,352
476
10
64
11
202
6
3
15
13
246
30
-
2
Total
$
14,707 $
8,933 $
1,210 $
10,021 $
528
The following table presents loans individually evaluated for impairment by portfolio class of
loans as of December 31, 2012:
(000s omitted)
With no related allowances
recorded
Commercial
Commercial real estate
Residential real estate
Consumer
Installment loans
Home equity
With an allowance recorded
Commercial
Commercial real estate
Residential real estate
Consumer
Installment loans
Home equity
Unpaid
Principal
Balance
Recorded
Investment
Allowance
For Loan
Losses
Allocated
Average
Recorded
Investment
Interest
Income
Recognized
$
2,022 $
12,693
263
30
367
295
6,263
1,300
48
82
1,183 $
7,316
215
5
258
295
6,257
913
48
83
- $
-
-
-
-
91
1,631
116
36
23
1,193 $
9,552
144
10
204
1,168
9,894
283
35
245
51
569
23
3
24
11
233
34
3
5
Total
$
23,363 $
16,573 $
1,897 $
22,728 $
956
Non-accrual loans and loans past due 90 days still on accrual include both smaller balance
homogeneous loans that are collectively evaluated for impairment and individually classified
impaired loans.
19
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the recorded investment in nonaccrual and loans past due over
90 days still on accrual by class of loans as of December 31, 2013:
(000s omitted)
Nonaccrual
Loans Past
Due Over
90 Days
Still Accruing
Commercial
Commercial real estate
Home equity
Installment loans
Residential real estate
Total
$
369 $
1,392
27
2
190
$
1,980 $
-
-
-
-
-
-
The following table presents the recorded investment in nonaccrual and loans past due over
90 days still on accrual by class of loans as of December 31, 2012:
(000s omitted)
Nonaccrual
Loans Past
Due Over
90 Days
Still Accruing(1)
Commercial
Commercial real estate
Home equity
Installment loans
Residential real estate
Total
$
1,771 $
3,182
-
5
625
$
5,583 $
-
-
-
-
102
102
(1)Includes accrued interest receivable of $2
The following table presents the aging of the recorded investment in past due loans by class of
loans as of December 31, 2013:
(000s omitted)
30-59 Days
Past Due
60-89 Days
Past Due
Greater than
90 Days Past
Due
Total Past
Due
Commercial
Commercial real estate
Installment loans
Residential real estate
$
- $
-
-
228
Total
$
228 $
- $
-
-
-
- $
369 $
161
2
83
615 $
369
161
2
311
843
20
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the aging of the recorded investment in past due loans by class of
loans as of December 31, 2012:
(000s omitted)
Commercial
Commercial real estate
Installment loans
Home equity
Residential real estate
30-59 Days
Past Due
60-89 Days
Past Due
Greater than
90 Days Past
Due(1)
Total Past
Due
$
83 $
215
-
30
-
- $
-
-
-
-
1,073 $
1,028
5
-
688
1,156
1,243
5
30
688
Total
$
328 $
- $
2,794 $
3,122
(1)Includes accrued interest receivable of $2
Modifications
A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is
experiencing financial difficulty and the modification constitutes a concession. The
Corporation offers various types of concessions when modifying a loan or lease, however,
forgiveness of principal is rarely granted. Commercial loans modified in a TDR often involve
temporary interest-only payments, term extensions, and converting revolving credit lines to
term loans. Additional collateral, a co-borrower, or a guarantor is often requested.
Commercial real estate loans modified in a TDR often involve reducing the interest rate for
the remaining term of the loan, extending the maturity date at an interest rate lower than
the current market rate for new debt with similar risk, or substituting or adding a new
borrower or guarantor. Residential real estate loans modified in a TDR are primarily
comprised of loans where monthly payments are lowered to accommodate the borrowers’
financial needs through a reduction of interest rate and/or extension of the maturity date.
Installment loans modified in a TDR are primarily comprised of loans where the Corporation
has lowered monthly payments by extending the term.
Loans modified in a TDR are typically already on non-accrual status and partial charge-offs
have in some cases been taken against the outstanding loan balance. As a result, loans
modified in a TDR for the Corporation may have the financial effect of increasing the specific
allowance associated with the loan.
The Corporation allocated $893,000 and $1,690,000 of specific reserves to customers whose
loan terms have been modified in TDRs as of December 31, 2013 and December 31, 2012. The
Corporation does not have material commitments to lend additional funds to borrowers with
loans whose terms have been modified in troubled debt restructurings or whose loans are on
nonaccrual as of December 31, 2013.
21
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents by class, information related to loans modified in a TDR during the
years ended December 31, 2013 and 2012:
Loans Modified as TDR for the Year Ended
December 31, 2013
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
Number of
Loans
3 $
1
4 $
92 $
481
573 $
92
481
573
Loans Modified as TDR for the Year Ended
December 31, 2012
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
Number of
Loans
10 $
2
1
4,211 $
187
36
4,211
187
36
(000s omitted)
Commercial
Commercial real estate
Total
(000s omitted)
Commercial real estate
Residential real estate
Home equity
Total
13 $
4,434 $
4,434
The following presents information on TDRs for which there was a payment default, (i.e. 30
days or more past due following a modification) that had been modified during the 12-month
period prior to the default.
Loans with Payment Defaults
December 31, 2013
Number of
Contracts
Recorded
Investment (as of
Period End)(1)
1
1
2
$
$
4
3
7
(000s omitted)
Commercial
Installment loans
Total
22
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans with Payment Defaults
December 31, 2012
Number of
Contracts
Recorded
Investment (as of
Period End)(1)
$
5
5
1
1,123
2,241
5
11
$
3,369
(000s omitted)
Commercial
Commercial real estate
Installment loans
Total
(1) The period-end balances are inclusive of all partial paydowns and charge-offs since the
modifications date, if any. Loans modified in a TDR that were fully paid down, charged off, or
foreclosed upon by period end are not reported.
Based on the Corporation’s historical loss experience, losses associated with TDRs are not
significantly different than other impaired loans within the same loan segment. As such, TDRs
are analyzed in the same manner as other impaired loans within their respective loan
segment.
The following presents by portfolio loan class, the type of modification made in a TDR:
Loans Modified Through
Reduction of Interest Rate
or Payment
December 31, 2013
Loans Modified Through
Extension of Term
December 31, 2013
Recorded
Investment
(as of Period
End)(1)
Recorded
Investment
(as of Period
End)(1
Number of
Loans
Number of
Loans
2 $
1
3 $
74
481
555
- $
1
1 $
-
18
18
(000s omitted)
Commercial
Commercial real estate
Total
23
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans Modified Through
Reduction of Interest Rate
or Payment
December 31, 2013
Loans Modified Through
Extension of Term
December 31, 2012
Recorded
Investment
(as of Period
End)(1)
Recorded
Investment
(as of Period
End)(1
Number of
Loans
Number of
Loans
7 $
1
1
9 $
3,755
101
36
3,892
3 $
1
-
4 $
456
86
-
542
(000s omitted)
Commercial real estate
Residential real estate
Home equity
Total
(1) The period end balances are inclusive of all partial paydowns and charge-offs since the modification date, if any.
Loans modified in a TDR that were fully paid down, charged-off, or foreclosed upon by period end are not reported.
Credit Quality Indicators
The Corporation categorizes loans into risk categories based on relevant information about the
ability of borrowers to service their debts such as: current financial information, historical
payment experience; credit documentation, public information, and current economic trends,
among other factors. The Corporation analyzes loans individually by classifying the loans as to
credit risk. This analysis includes non-homogeneous loans, such as commercial and
commercial real estate loans. This analysis is performed on a quarterly basis. The
Corporation uses the following definitions for classified risk ratings:
Prime. Loans classified as prime are well seasoned borrowers displaying strong financial
condition, consistently superior earnings performance, and access to a range of financing
alternatives. The borrower’s trends and outlook, as well as those of its industry are
positive.
Pass. Loans classified as pass have a moderate to average risk to established borrowers
that display sound financial condition and operating results. The capacity to service debt
is stable and demonstrated at a level consistent with or above the industry norms.
Borrower and industry trends and outlook are considered good.
Watch. Loans classified as watch have a potential weakness that deserves management’s
close attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the loan or of the institution’s credit
position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so
classified have a well-defined weakness or weaknesses that jeopardize the liquidation of
the debt. They are characterized by the distinct possibility that the institution will
sustain some loss if the deficiencies are not corrected.
24
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified
as substandard, with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. The Corporation does not classify loans as doubtful. Loans
that approach this status are charged-off.
Based on the most recent analysis performed, the recorded investment by risk category of
loans by portfolio class is as follows at December 31:
2013
(000s omitted)
Prime
Pass
Watch
Substandard
Total
Commercial
Commercial real estate
$
5,028 $
4,582
38,699 $
117,208
805 $
8,260
700 $
1,963
45,232
132,013
Total
$
9,610 $ 155,907 $
9,065 $
2,663 $ 177,245
2012
(000s omitted)
Prime
Pass
Watch
Substandard
Total
Commercial
Commercial real estate
$
6,216 $
469
33,737 $
83,580
1,779 $
11,491
1,704 $
7,944
43,436
103,484
Total
$
6,685 $ 117,317 $
13,270 $
9,648 $ 146,920
The Corporation considers the performance of the loan portfolio and its impact on the
allowance for loan losses. For residential and consumer loan classes, the Corporation also
evaluates credit quality based on the aging status of the loan, which was previously
presented, and by payment activity. The following table presents the recorded investment in
residential and consumer loans based on payment activity as of December 31:
2013
(000s omitted)
Home Equity
Installment
Residential
Real Estate
Total
Performing
Non-performing
$
21,560 $
3,838 $
27
2
60,727 $
273
86,125
302
Total
$
21,587 $
3,840 $
61,000 $
86,427
2012
(000s omitted)
Home Equity
Installment
Residential
Real Estate
Total
Performing
Non-performing
$
18,326 $
351
4,763 $
53
28,788 $
1,118
51,877
1,522
Total
$
18,677 $
4,816 $
29,906 $
53,399
25
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans to principal officers, directors, and affiliates at December 31, 2013 and 2012 were
$2,640,000 and $2,750,000, respectively.
5. OTHER REAL ESTATE OWNED
Activity in other real estate owned for the years ended December 31 was:
(000s omitted)
2013
2012
Beginning balance, January 1
Transfers into other real estate
Sales of other real estate owned
Write downs of other real estate owned
$
2,579 $
2,538
(2,300)
(223)
1,949
2,400
(1,611)
(159)
Ending balance
$
2,594 $
2,579
Net gains (losses) on sales of other real estate owned were $239,000 in 2013 and ($6,000) in
2012. Due primarily to declining real estate values, the Corporation experienced write-downs
of other real estate owned of $223,000 in 2013 and $159,000 in 2012. Carrying costs
associated with other real estate owned totaled $75,000 in 2013 and $353,000 in 2012.
6. PREMISES AND EQUIPMENT, NET
Bank premises and equipment, net, is comprised of the following at December 31:
(000s omitted)
2013
2012
Land and land improvements
Building and building improvements
Furniture and equipment
Construction in progress
Less accumulated depreciation
$
2,455 $
11,200
5,437
99
19,191
9,168
2,452
11,107
5,054
81
18,694
8,459
Ending balance
$
10,023 $
10,235
Depreciation expense was $709,000 and $677,000 for 2013 and 2012.
26
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation leases property for certain branches and ATM locations. Rent expense was
$60,000 for both 2013 and 2012. Rent commitments under non-cancelable operating leases
were as follows, before considering renewal options that generally are present at
December 31, 2013 (000s omitted):
2014
2015
2016
2017
2018
$
57
46
23
-
-
$
126
7. DEPOSITS
The following is a summary of deposits of at December 31:
(000s omitted)
2013
2012
Non-interest bearing
Demand
Interest-bearing
Savings
Money market demand
Time, $100,000 and over
Time, $100,000 and under
$
82,585 $
80,550
82,303
58,495
20,897
39,061
76,227
56,194
20,394
42,474
Total interest bearing
200,756
195,289
Total deposits
$ 283,341 $ 275,839
Scheduled maturities of time deposits for years succeeding December 31, 2013 were as follows
(000s omitted):
2014
2015
2016
2017
2018
Thereafter
$ 27,966
13,678
6,328
6,067
5,572
347
$ 59,958
The Corporation held no brokered deposits at December 31, 2013 or 2012.
Deposits from principal officers, directors, and affiliates at December 31, 2013 and 2012 were
$3,663,000 and $3,468,000, respectively.
27
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. BORROWINGS
Federal Home Loan Bank Advances
At year-end, advances from the FHLB were as follows:
Principal Term
(000s omitted)
December 31, 2013
Fixed rate advance
With rate of 1.66%
Fixed rate advance
With rate of 7.34%
December 31, 2012
Fixed rate advance
With rate of 7.34%
Advance
Amount
Maturity
Date
$
10,000 November 2018
855
May 2016
$
10,855
$
891
May 2016
The advances are payable at their maturity date; a prepayment penalty is assessed with early
payoffs of advances. The advances are collateralized by securities totaling $23,173,000 and
$4,743,000 at December 31, 2013 and 2012, respectively.
Maturities over each of the next five years are (000s omitted):
2014
2015
2016
2017
2018
$
39
42
774
-
10,000
$ 10,855
Subordinated Debentures and Trust Preferred Securities
A trust formed by the Corporation issued $12,000,000 of trust preferred securities in 2003 as
part of a pooled offering of such securities. The interest rate is a floating rate (3 month
LIBOR plus 3.00%) and the current rate at December 31, 2013 is 3.31%. The Corporation issued
subordinated debentures at the same terms as the trust preferred securities to the trust in
exchange for the proceeds of the offering; the debentures and related debt issuance costs
represent the sole assets of the trust. The Corporation may redeem the subordinated
debentures, in whole but not in part, any time after 2008 at a price of 100% of face value.
The subordinated debentures must be redeemed no later than 2033.
A trust formed by the Corporation issued $2,000,000 of trust preferred securities in 2005 as
part of a pooled offering of such securities. The interest rate is a floating rate (3 month
LIBOR plus 1.60%) and the current rate at December 31, 2013 is 1.91%. The Corporation issued
subordinated debentures at the same terms as the trust preferred securities to the trust in
exchange for the proceeds of the offering; the debentures and related debt issuance costs
28
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
represent the sole assets of the trust. The Corporation may redeem the subordinated
debentures, in whole but not in part, any time after 2010 at a price of 100% of face value.
The subordinated debentures must be redeemed no later than 2035.
The Corporation is not considered the primary beneficiary of these trusts, therefore the trusts
are not consolidated in the Corporations’ financial statements but rather the subordinated
debentures are shown as a liability.
In the normal course of the interest rate risk management processes, management identified
a possible risk to its interest rate risk profile that exposed the Corporation to a possible rise in
funding costs. Specifically, during management’s review of its Trust Preferred (“Trups”)
facilities referred to above, it noted that the interest rate currently maintains a floating rate
based upon LIBOR. Management determined that the continuation of the Trups facilities at a
floating rate may adversely affect the Corporation’s net interest margin in a possible rising
rate environment, exposing the Corporation to increased interest rate costs.
In the second quarter of 2013, the Corporation entered into an interest rate cap with Wells
Fargo. An interest-rate cap is an over-the-counter derivative that protects the holder from
rises in interest rates by making a payment to the holder when an underlying interest rate
(the "index" interest rate) exceeds a specified strike rate (the "cap rate"). The interest rate
cap is intended to effectively fix the maximum interest rate paid on the Corporation’s trust
preferred securities.
The interest rate cap has a notional amount of $12,000,000 and expires on June 15, 2020.
During the term of the interest rate cap the Corporation will receive quarterly payments from
Wells Fargo, calculated as the excess (if any) of LIBOR over the strike rate of 2.00%.
As of December 31, 2013 the interest rate cap is included in other assets at an amortized cost
of approximately $520,000. Management estimates that the fair value of the interest rate cap
as of December 31, 2013 approximates its amortized cost. The Corporation assessed the
significance of the impact of any credit valuation adjustment (counterparty credit risk) on the
overall valuation of its derivative position, and determined that the credit valuation
adjustment was not significant to the overall valuation of its derivative.
9.
INCOME TAXES
The provision (benefit) for income taxes reflected in the consolidated statements of income
for the years ended December 31 consists of the following:
(000s omitted)
2013
2012
Current (benefit) expense
Deferred benefit
Income tax (benefit) expense
$
(189) $
(4,929)
$
(5,118) $
73
-
73
29
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax (benefit) expense was less than the amount computed by applying the statutory
federal income tax rate to income before income taxes. The reasons for the difference are as
follows:
(000s omitted)
2013
2012
Income tax at statutory rate
Tax exempt status
IRS audit settlement (recoveries)
Reduction in valuation allowance
Other
$
1,130 $
(75)
(230)
(5,943)
-
435
(60)
228
(61)
(469)
$
(5,118) $
73
The net deferred tax asset recorded includes the following amounts of deferred tax assets and
liabilities:
(000s omitted)
2013
2012
Deferred tax assets
Allowance for loan losses
Alternative minimum tax credit
Compensation
Net operating loss carryforwards
Non-accrual interest
Capital loss
ORE write downs
Other
Deferred tax liabilities
Depreciation
Other
Valuation allowance
Net deferred taxes
$
1,666 $
301
271
2,872
16
1,149
191
365
1,687
258
293
3,562
137
1,149
440
295
6,831
7,821
(715)
(38)
(689)
(40)
(753)
(729)
(1,149)
(7,092)
$
4,929 $
-
In assessing whether or not some or all of the deferred tax assets are more likely than not to
be realized in the future, management considers all available positive and negative evidence,
including projected future taxable income, tax planning strategies, and recent financial
performance. Based on an evaluation of the then-available positive and negative evidence,
management determined it was appropriate to establish a full valuation allowance against its
deferred tax asset as of June 30, 2009. At that time, and in subsequent periods, negative
evidence, including a recent cumulative history of operating losses, outweighed the positive
evidence.
30
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
However, as of December 31, 2013, management’s assessment concluded that the positive
evidence outweighed the negative evidence and management determined that a full deferred
tax asset valuation allowance was no longer necessary. The significant positive evidence in
management’s analysis included: consecutive quarters of profitability, termination of the
consent agreement with primary regulators, improved capital levels, solid and improving
credit metrics, strong deposit mix, reduced regulatory risk, and a stabilizing economy. The
federal net operating loss carryforwards of approximately $8,447,000 will expire beginning in
2030 if not previously utilized.
A valuation allowance of $1,149,000 and $7,092,000 was determined to be necessary as
December 31, 2013 and 2012 respectively. A partial valuation allowance as of December 31,
2013 was maintained for tax assets associated with previously generated capital losses for
which management determined it is more likely than not will expire prior to being realized.
The deferred tax assets will continue to be analyzed at each reporting period for changes
affecting realizability, and the valuation allowance may be adjusted in future periods
accordingly. The ultimate realization of these deferred tax assets is primarily dependent on
the generation of future taxable income during the periods in which those temporary
differences become deductible. Changes in existing tax laws could also affect actual tax
results and the valuation of deferred tax assets over time. The accounting for deferred taxes
is based on an estimate of future results. Differences between anticipated and actual
outcomes of these future tax consequences could have an impact on the Corporation’s
consolidated statement of income and balance sheet.
The Corporation concluded that there are no significant uncertain tax positions requiring
recognition in the Corporation’s consolidated financial statements based on the evaluation
performed for the years 2010 through 2013, the years which remain subject to examination by
major tax jurisdictions as of December 31, 2013. The Corporation does not expect the total
amount of unrecognized tax benefits (“UTB”) (e.g. tax deductions, exclusions, or credits
claimed or expected to be claimed) to significantly change in the next 12 months.
At December 31, 2012, amounts accrued for uncertain tax positions under examination by the
IRS were $230,000. The amount recorded was for tax positions previously taken and was the
result of the Corporation’s IRS examination covering the 2009 tax year. During 2013 the
Corporation was successful in discussions with the IRS, and as such, these amounts are no
longer uncertain. Therefore, this liability was reversed when this determination was made.
The Corporation does not expect the total amount of unrecognized or recognized tax benefits
to significantly change within the next twelve months.
The Corporation and its subsidiaries are subject to U.S. federal income taxes as well as
income tax of the state of Michigan. The Corporation is no longer subject to examination by
taxing authorities for years before 2010.
31
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. BENEFIT PLANS
The Corporation has a noncontributory discretionary employee stock ownership plan covering
substantially all of its employees. It is a requirement of the plan to invest principally in the
Corporation's common stock. No contributions were made to the plan in 2013 or 2012.
The Corporation has also established a 401(k) Plan in which 100% of the employees'
contribution can be matched up to 3% of their gross pay and 50% can be matched on the next
2% of their gross pay with a discretionary contribution by the Corporation. Contributions to the
plan were $41,000 in 2013 and $0 in 2012.
The Corporation entered into Supplemental Executive Retirement Agreements (“SERP”) with
certain executives. The SERP Agreements are designed to encourage executives to remain
long term employees of the Corporation, and to provide specified benefits to certain key
executives who contribute materially to the continued growth, development, and future
business success of the Corporation. The retirement benefits are an unsecured obligation of
the Corporation. At year end 2013 and 2012, the accumulated liability for these agreements
totaled $796,000 and $861,000, respectively. The Corporation has also established other Non-
Qualified Deferred Compensation arrangements for employees not covered under the SERP.
The arrangements are designed to encourage certain officers to remain long-term employees
of the Corporation and the Bank, and to provide the officers with supplemental retirement
income. The Corporation’s contributions to the plans in 2013 and 2012 were $64,000 and
$172,000, respectively.
11. COMMON STOCK PURCHASE AND OPTION PLANS
Director and Employee Plans
The Stock Purchase Plan permits directors and employees of the Corporation to purchase
shares of common stock made available for purchase under the plan at the average fair
market value of the shares over the most recent five days prior to the issuance date. The
total number of shares issuable under this plan is limited to 330,000 shares.
The Retainer Stock Plan allows directors to elect to receive shares of common stock in full or
partial payment of the director's retainer fees and fees for attending meetings. The number of
shares is determined by dividing the dollar amount of fees to be paid in shares by the market
value of the stock on the first business day prior to the payment date.
The Executive Stock Bonus Plan permits the administrator of the plan to grant shares of the
Corporation's common stock to eligible employees. Any executive or managerial level
employee is eligible to receive grants under the plan. The Board of Directors administers the
plan and the numbers of shares issued are at the sole discretion of the Board of Directors. No
shares were granted under this plan during 2013 or 2012.
Dividend Investment Plan
The Automatic Dividend Reinvestment Plan ("DRIP") permits enrolled shareholders to
automatically use dividends paid on common stock to purchase additional shares of the
Corporation's common stock at the fair market value on the investment date. Any shareholder
who is the beneficial or record owner of not more than 9.9% of the issued and outstanding
shares of the Corporation's common stock is eligible to participate in the plan.
32
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to a separate agreement with a family who collectively holds more than 9.9% of the
Corporation's stock on or prior to January 31 of each year beginning January 31, 1997, the
Corporation is to advise the family, in a written notice, of the number of shares sold under the
DRIP. Each family member will have the option, until February 28 of the same year, to
purchase from the Corporation one-third of the total number of shares that would be
sufficient to prevent the dilution to all family members as a group that result from the DRIP
shares. The purchase price under this agreement is the fair market value on December 31 of
the year immediately preceding the year in which the written notice is given. Similarly, a
reverse agreement exists which allows the Corporation to redeem family shares to maintain
the family ownership percentage in the event that stock repurchase activity more than offsets
the shares available because of the DRIP.
The following summarizes shares issued under the various plans:
(000s omitted)
2013
2012
Automatic dividend reinvestment plan
Director stock purchase and retainer stock
Stock options
Other issuance of stock
$
- $
37,142
-
1,129
-
54,146
-
1,790
$ 38,271 $ 55,936
Stock Option Plans
The Nonemployee Director Stock Option Plan provides for granting options to nonemployee
directors to purchase the Corporation's common stock. The purchase price of the shares is the
estimated fair 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. No options were granted in 2013
or 2012.
The Employee Stock Option Plan grants options to eligible employees to purchase the
Corporation's 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. No options were
granted in 2013 or 2012.
The fair value of each option award is estimated on the date of grant using a closed form
option valuation (Black-Scholes) model. Expected volatilities are based on historical
volatilities of the Corporation’s common stock. The Corporation uses historical data to
estimate option exercise and post-vesting termination behavior. 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.
33
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock option activity:
(000s omitted)
Options outstanding at
January 1, 2013
Options forfeited during 2013
Options outstanding and
exercisable at
December 31, 2013
(000s omitted)
Options outstanding at
January 1, 2012
Options forfeited during 2012
Options outstanding and
exercisable at
December 31, 2012
Number of
Options
Weighted
Average
Price
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
9,301 $
(5,946)
30.89
22.81
3,355 $
35.45
1.00
-
Number of
Options
Weighted
Average
Price
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
13,786 $
(4,485)
29.60
26.92
9,301 $
30.89
0.90
-
No options were exercised during 2013 or 2012. As of December 31, 2013 and 2012, there was
no unrecognized compensation cost related to non-vested stock options granted under the
Plan.
The Corporation has issued a total of 35,000 stock appreciation rights (“SARs”) to the
executive management team, using a price of $2.00 per share. The terms of the SARs provide
that any appreciation in stock price will be paid in cash on two fixed dates which were subject
to certain performance conditions, which management has determined have been met during
2013. SAR payment dates vary by individual agreement and range from February 2014 through
May 2017. Initial measurement of the SAR’s resulted in recording expense of $120,000 for the
year ended December 31, 2013, which is reflective of vesting through December 31, 2013 and
is recorded in accrued interest payable and other liabilities on the consolidated balance
sheet. Approximately $184,000 of additional estimated liability has yet to be reflected in the
consolidated financial statements as vesting conditions have not yet been met. The liability
will continue to be re-measured each reporting period with changes recorded on a prospective
ratable basis in salaries and employee benefits expense as further vesting transpires over the
remaining SAR terms. The SAR’s vest immediately upon a change in ownership control.
34
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a
liability (exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date. There are
three levels of inputs that may be used to measure fair values.
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 entity’s own assumptions
about the assumptions that market participants would use in pricing an asset or liability.
Securities Available for Sale
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 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). The remaining fair values
of securities (Level 3 inputs) are based on the reporting entity’s own assumptions and basic
knowledge of market conditions and individual investment performance. The Corporation
reviews the performance of the securities that comprise level 3 on a quarterly basis.
Impaired Loans
The fair value of impaired loans with specific allocations of the allowance for loan losses is
generally based on recent real estate appraisals. These appraisals may utilize a single
valuation approach or a combination of approaches including comparable sales and the income
approach. Adjustments are routinely made in the appraisal process by the appraisers to
adjust for differences between the comparable sales and income data available. Such
adjustments are usually significant and typically result in a Level 3 classification of the inputs
for determining fair value.
Other Real Estate Owned
Non-recurring adjustments to certain commercial and residential real estate properties
classified as other real estate owned are measured at the lower of carrying amount or fair
value, less costs to sell. Fair values are generally based on third party appraisals of the
property. Adjustments are routinely made in the appraisal process by the appraisers to adjust
for differences between the comparable sales and income data available, which results in a
Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to
sell, an impairment loss is recognized.
35
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets Measured on a Recurring Basis
Assets measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
2013
(000s omitted)
Total
Available-for-sale securities
U.S. government and
federal agency
State and municipal
Mortgage backed residential
Collateralized mortgage
obligations – agencies
Equity securities
$
2,717 $
6,200
8,272
13,625
2,479
- $
-
-
-
-
2,717 $
6,200
8,272
-
-
-
13,625
1,377
-
1,102
$
33,293 $
- $
32,191 $
1,102
Fair Value Measurements Using
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
2012
(000s omitted)
Total
Available-for-sale securities
U.S. government and
federal agency
State and municipal
Mortgage backed residential
Collateralized mortgage
obligations – agencies
Equity securities
$
5,011 $
2,506
11,571
23,383
2,059
- $
-
-
-
-
5,011 $
2,506
11,571
23,383
1,394
$
44,530 $
- $
43,865 $
-
-
-
665
665
36
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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).
(000s omitted)
Equity Securities
2013
2012
Beginning balance, January 1
Included in other comprehensive income
Transfers in and/or out of Level 3
$
665 $
437
-
1,072
(63)
(344)
Ending balance, December 31
$
1,102 $
665
During 2012, $344,000 of equity securities were transferred from level 3 to level 2 due to
observable trades during the year.
Assets Measured on a Non-Recurring Basis
Assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements Using
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
2013
(000s omitted)
Total
Impaired loans
Commercial
Commercial real estate
Residential real estate
Installment
Home equity
Total impaired loans
Other real estate owned
Commercial real estate
$
103 $
2,759
462
-
26
3,350 $
$
$
- $
-
-
-
-
$
- $
-
-
-
-
103
2,759
462
-
26
$
3,350
535 $
- $
- $
535
37
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements Using
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
2012
(000s omitted)
Total
Impaired loans
Commercial
Commercial real estate
Residential real estate
Installment
Home equity
Total impaired loans
Other real estate owned
Commercial real estate
$
203 $
1,193
796
12
27
2,231 $
$
$
- $
-
-
-
-
- $
- $
-
-
-
-
203
1,193
796
12
27
- $
2,231
229 $
- $
- $
229
The following represent impairment charges recognized during the year:
Impaired loans that are measured for impairment using the fair value of the collateral had a
carrying amount of $4,124,000, with a valuation allowance of $774,000 at December 31, 2013.
Impaired loans that are measured for impairment using the fair value of the collateral had a
carrying amount of $3,101,000, with a valuation allowance of $870,000 at December 31, 2012.
Other real estate owned which is measured at the lower of carrying value or fair value less
costs to sell, had a net carrying amount of $2,594,000, of which $535,000 was at fair value at
December 31, 2013, which resulted from write-downs totaling $117,000. Other real estate
owned which is measured at the lower of carrying value or fair value less costs to sell, had a
net carrying amount of $2,579,000, of which $229,000 was at fair value at December 31, 2012,
which resulted from write-downs totaling $48,000.
Qualitative information about level 3 fair value instruments is as follows as of December 31:
2013
(000’s omitted)
Level 3 Instruments
Instrument
Fair Value
Valuation
Technique
Unobservable
Input
Weighted
Average
Equity securities
Impaired loans
$
$
1,102 Market comparable Price to book ratio
92%
3,350 Appraisal value -
real estate
Discount applied
to appraisal
11.4%
Other real estate
$
535 Appraisal value
Discount applied
to appraisal
0%
38
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2012
(000’s omitted)
Level 3 Instruments
Instrument
Fair Value
Valuation
Technique
Unobservable
Input
Weighted
Average
Equity securities
Impaired loans
$
$
665 Market comparable Price to book ratio
63%
2,231 Appraisal value -
real estate
Discount applied
to appraisal
3%
Other real estate
$
229 Appraisal value
Discount applied
0%
Carrying amount and estimated fair value of financial instruments, not previously presented,
at year-end were as follows:
(000s omitted)
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
2013
2012
$
Assets
Cash and cash equivalents
Securities held to maturity
Loans held for sale
Net loans (including impaired
loans)
FHLB stock
Accrued interest receivable
Liabilities
Deposits
FHLB advances
Subordinated debentures
Accrued interest payable
12,856 $
2,620
1,004
12,856 $
2,627
1,004
45,712 $
3,058
782
258,074
247,305
194,782
661
983
661
983
661
902
45,712
3,116
782
198,737
661
902
$
283,341
10,855
14,000
96
$
283,570
10,873
14,015
96
$
275,839
891
14,000
1,920
$
276,291
1,072
13,999
1,920
The following methods and assumptions were used by the Corporation in estimating its fair
value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the consolidated balance sheets for cash and short-term
instruments approximate their fair values.
Securities Held to Maturity
Fair values for securities held to maturity are based on similar information previously
presented for securities available for sale.
Loans Held for Sale
The fair values of these loans are determined in the aggregate on the basis of existing forward
commitments or fair values attributable to similar loans.
39
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FHLB Stock
It was not practical to determine the fair value of FHLB stock due to restrictions placed on its
transferability.
Loans
For variable rate loans that re-price frequently and with no significant change in credit risk,
fair values are based on carrying values. The fair value of other loans is estimated using
discounted cash flow analysis.
Accrued Interest
The carrying amount of accrued interest approximates its fair value.
Off-Balance-Sheet Instruments
The fair value of off-balance sheet items is not considered material.
Deposits
The fair values disclosed for demand deposits are, by definition equal to the amount payable
on demand at the reporting date. The carrying amounts for variable rate, fixed term money
market accounts and certificates of deposit approximate their fair values at the reporting
date. Fair values for fixed certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on similar certificates.
FHLB Advances
Rates currently available for FHLB advances with similar terms and remaining maturities are
used to estimate the fair value of the existing obligations.
Subordinated Debentures
The estimated fair value of the existing subordinated debentures is calculated by comparing a
current market rate for the instrument compared to the book rate. The difference between
these rates computes the fair value.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the Corporation's
entire holdings of a particular financial instrument. Because no market exists for a significant
portion of the Corporation's financial instruments, fair value estimates are based on
management's judgments regarding future expected loss experience, current economic
conditions, risk characteristics and other factors. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the estimates.
13. REGULATORY MATTERS
The Corporation (on a consolidated basis) and its Bank subsidiary are subject to various
regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possibly
discretionary - actions by regulators that, if undertaken, could have a direct material effect
on the Corporation. Under capital adequacy guidelines and the regulatory framework for
40
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
prompt corrective action, the Corporation and the Bank must meet specific capital guidelines
that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items
that are calculated under regulatory accounting practices. The capital amounts and
classifications are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Prompt corrective action provisions are not applicable to
bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1
capital (as defined) to average assets (as defined). As of December 31, 2013 and 2012, the
most recent notifications from the Federal Deposit Insurance Corporation categorized the Bank
as well capitalized under the regulatory framework for prompt corrective action. Management
believes, as of December 31, 2013 and 2012, that the Corporation and the Bank met all capital
adequacy requirements to which they are subject.
In January 2010, The State Bank entered into a Consent Order with federal and state banking
regulators that contained provisions to foster improvement in The State Bank’s earnings, lower
nonperforming loan levels, increase capital, and require revisions to various policies. This
order was lifted in March 2013 and was replaced with an informal action requiring continuation
of certain reporting as well as continued maintenance of an 8.0% leverage capital ratio.
Effective in November 2010, the Corporation received a notice from the Federal Reserve which
defined restrictions being placed upon the holding company. This order was lifted in August
2013 and was replaced with an informal action requiring permission be requested before
paying or declaring a dividend, incurring debt, or purchasing or redeeming shares of the
Corporation’s common stock and restriction of dividend payments without prior regulatory
approval.
The Corporation’s principal source of funds for dividend payments is dividends received from
the Bank. Banking regulations limit the amount of dividends that may be paid without prior
approval of regulatory agencies.
The tables below illustrate the regulatory capital amounts and ratios as of December 31:
2013
(000s omitted)
Total Capital
(to Risk Weighed Assets)
The State Bank
Tier 1 Capital
(to Risk Weighed Assets)
The State Bank
Tier 1 Capital
(to Average Assets)
The State Bank
Actual
For Capital Adequacy
Purposes
To Be Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
33,487
12.3%
21,783
8.0%
27,228
10.0%
30,065
11.0%
10,891
4.0%
16,337
6.0%
30,065
9.5%
12,705
4.0%
15,881
5.0%
41
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2012
(000s omitted)
Total Capital
(to Risk Weighed Assets)
The State Bank
Tier 1 Capital
(to Risk Weighed Assets)
The State Bank
Tier 1 Capital
(to Average Assets)
The State Bank
Actual
For Capital Adequacy
Purposes
Regulatory
Agreement
Requirements
Amount
Ratio
Amount
Ratio
Amount
Ratio
28,829
13.3%
17,291
8.0%
25,937
12.0%
26,071
12.1%
8,646
4.0%
N/A
N/A
26,071
8.7%
11,944
4.0%
23,888
8.0%
14. LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Off-balance-Sheet Risk
Some financial instruments, such as loan commitments, credit lines, letters of credit, and
overdraft protection, are issued to meet customer financing needs. These are agreements to
provide credit or to support the credit of others, as long as conditions established in the
contract are met, and usually have expiration dates. Commitments may expire without being
used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments,
although material losses are not anticipated. The same credit policies are used to make such
commitments as are used for loans, including obtaining collateral at exercise of the
commitment.
The contractual amount of financial instruments with off-balance-sheet risk was as follows at
year-end:
(000s omitted)
2013
2012
Commitments to make loans (at market rate)
Unused lines of credit and letters of credit
$
33,977 $
39,000
20,653
31,994
Commitments to make loans are generally made for periods of 90 days or less. At
December 31, 2013, loan commitments and unused lines of credit had interest rates ranging
from 2.99% to 6.00% and maturities ranging from 1 month to 30 years.
42
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. CONTINGENCIES
Litigation
The Corporation is party to litigation arising during the normal course of business. In the
opinion of management, based on consultation with legal counsel, the resolution of such
litigation is not expected to have a material effect on the consolidated financial statements.
Environmental Issues
As a result of acquiring real estate from foreclosure proceedings, the Corporation is subject to
potential claims and possible legal proceedings involving environmental matters. No such
claims have been asserted as of December 31, 2013.
43