Fentura Financial, Inc.
Years Ended
December 31,
2015 and 2014
Consolidated
Financial
Statements
FENTURA FINANCIAL, INC.
TABLE OF CONTENTS
Independent Auditors’ Report
Consolidated Financial Statements for the Years Ended
December 31, 2015 and 2014
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
7-44
INDEPENDENT AUDITORS’ REPORT
March 11, 2016
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, 2015 and 2014, 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, 2015 and 2014,
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.
CPAs & Consultants Wealth Advisors Corporate InvestigatorsRehmann is an independent member of Nexia International. Rehmann Robson5800 Gratiot Rd. Suite 201 Saginaw, MI 48638 Ph: 989.799.9580 Fx: 989.799.0227 rehmann.com
FENTURA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
Cash and cash equivalents
Securities, available for sale (AFS)
Securities, held to maturity (HTM)
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
2015
2014
$
19,425
$
19,522
23,532
2,176
25,708
2,905
378,655
3,505
30,312
1,655
31,967
1,320
318,649
4,406
375,150
314,243
6,568
9,720
981
1,133
397
3,054
1,361
6,322
9,810
1,041
1,061
2,488
2,386
3,422
Total assets
$
446,402
$
393,582
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
$
108,102
267,869
$
91,738
236,185
375,971
327,923
20,775
14,000
3,182
20,817
14,000
2,700
413,928
365,440
Common stock, no par value: 5,000,000 shares authorized,
2,517,748 (2,502,731 in 2014) shares issued and outstanding
Accumulated deficit
Accumulated other comprehensive (loss) income
Total shareholders' equity
43,873
(11,277)
(122)
32,474
43,685
(15,668)
125
28,142
Total liabilities and shareholders' equity
$
446,402
$
393,582
The accompanying notes are an integral part of these consolidated financial statements.
2
FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Interest and dividend income
Loans, including fees
Investments
Taxable
Tax-exempt
Federal funds sold
Year Ended December 31
2015
2014
$
15,983
$
13,848
616
50
4
719
85
3
Total interest and dividend income
16,653
14,655
Interest expense
Deposits
Borrowings
Total interest expense
Net interest income
Provision for loan losses
1,331
822
2,153
14,500
(1,000)
1,022
691
1,713
12,942
(450)
Net interest income, after loan losses
15,500
13,392
Noninterest income
Service charges on deposit accounts
Net gain on sales of mortgage loans
Trust and investment services
Net gain on sales 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 federal income taxes
Federal income tax expense
Net income
Net income per share
806
1,156
1,255
461
2,897
6,575
8,826
1,119
1,143
565
413
146
1,130
1,634
882
667
1,228
390
2,558
5,725
7,906
1,045
1,136
652
382
144
1,040
1,724
14,976
14,029
7,099
2,407
5,088
1,728
$
4,692
$
3,360
$
1.87
$
1.35
The accompanying notes are an integral part of these consolidated financial statements.
3
FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive (loss) income
Unrealized (losses) gains on investment securities
available for sale
Net unrealized holding gains arising during the period
Less: Reclassification adjustment for net securities
gains included in net income
Change in net unrealized (losses) gains before income taxes
Net losses on cash flow hedge
Net unrealized cash flow hedge losses arising during the period
Unrealized losses on cash flow hedge before income taxes
Total other comprehensive (loss) income before income
taxes
Income tax (benefit) expense related to other comprehensive
(loss) income
Total other comprehensive (loss) income, net of tax
Year Ended December 31
2015
2014
$
4,692
$
3,360
294
(461)
(167)
(207)
(207)
(374)
(127)
(247)
731
(390)
341
(248)
(248)
93
32
61
Comprehensive income
$
4,445
$
3,421
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)
Common
Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
(Loss)
Income
Total
Balances, January 1, 2014
$
43,502
$
(18,804)
$
64
$
24,762
Issuance of common shares under stock
purchase and dividend reinvestment
plans (20,300 shares)
Cash dividends paid
Comprehensive income
183
-
-
-
(224)
3,360
Balances, December 31, 2014
43,685
(15,668)
Issuance of common shares under stock
purchase and dividend reinvestment
plans (15,017 shares)
Cash dividends paid
Comprehensive income
188
-
-
-
(301)
4,692
-
-
61
125
-
-
183
(224)
3,421
28,142
188
(301)
(247)
4,445
Balances, December 31, 2015
$
43,873
$
(11,277)
$
(122)
$
32,474
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
Mortgage loans originated for sale
Proceeds from sale of mortgage loans
Net gain on sales of mortgage 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 tax expense
Net earnings from bank owned life insurance
Net increase in interest receivable and other assets
Net 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 and sales of securities - AFS
Purchases of securities - AFS
Purchase of securities - HTM
Origination of loans, net of principal payments
Proceeds from redemption of FHLB stock
Purchase of FHLB stock
Proceeds from sale of other real estate owned
Purchase of premises and equipment
Net cash used in investing activities
Cash flows from financing activities
Net increase in deposits
Cash dividends paid
Net (repayments) 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
2015
2014
$
4,692
$
3,360
720
(185)
(1,000)
(86,492)
86,062
(1,156)
(461)
(79)
-
2,186
(246)
(944)
482
3,579
391
7,163
402
1,551
(1,455)
(1,314)
(59,907)
60
-
2,170
(630)
753
(222)
(450)
(56,842)
57,193
(667)
(390)
9
149
1,453
(124)
(700)
433
3,955
528
4,888
437
1,485
(2,439)
-
(56,629)
-
(380)
858
(540)
(51,569)
(51,792)
48,048
(301)
(42)
188
47,893
(97)
19,522
44,582
(224)
9,962
183
54,503
6,666
12,856
$
19,425
$
19,522
$
2,139
$
-
$
-
$
705
$
1,683
$
-
$
1,200
$
290
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 47.3% and 49.3% of gross loans, and other commercial loans were 14.5%
and 15.7% of gross loans at December 31, 2015 and 2014, 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, 2015, retail time deposits equal 22.6% of total deposits. This is compared to
December 31, 2014, when retail time deposits consisted of 24.9% 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 (GAAP) 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 derivatives, and other financial instruments, other-than-temporary
impairment of securities, the carrying value of other real estate owned 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.
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.
Interest income includes amortization of purchase premiums or discounts. Premiums and
discounts on securities are accreted 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 payoff 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.
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.
8
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All interest accrued in the current year but not received for loans placed on nonaccrual
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. The following portfolio segments have been
identified:
commercial, commercial real estate, residential real estate, installment loans and home
equity loans.
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 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.
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 Bank grants a concession to the borrower that it would not otherwise
consider. Restructured loans typically present an elevated level of credit risk as the
9
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Other than servicing,
the Bank has no substantive continuing involvement related to these loans. The Bank sold
residential mortgage loans to an unrelated third party with proceeds of $86,063 and
$57,193 during the years ended December 31, 2015 and 2014, respectively, which
resulted in a net gain of $1,156 and $667 for 2015 and 2014, respectively. Servicing fee
income earned on such loans was $222 and $47 for 2015 and 2014, respectively, and is
included in other noninterest income on the consolidated statements of income.
Derivative Instruments and Hedging Activities
Derivative instruments are carried at fair value on the consolidated balance sheets and
are recorded in either other assets or accrued interest payable and other liabilities. The
accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument
is determined by whether it has been designated and qualifies as part of a hedging
relationship, and, further, by the type of hedging relationship. For derivative instruments
that are designated and qualify as cash flow hedges (i.e., hedging the exposure to
variability in expected future cash flows that are attributable to a particular risk), the
effective portion of the gain or loss on the derivative instrument is reported as a
component of other comprehensive income and reclassified into earnings in the same
period or periods during which the hedged transaction affects earnings. The remaining
gain or loss on the derivative instrument in excess of the cumulative change in the
present value of future cash flows of the hedged item (i.e. the ineffective portion), if
any, is recognized in earnings during the period of change.
For cash flow hedging relationships, the Corporation assesses prospective and
retrospective effectiveness as well as measurement based upon the cumulative
hypothetical derivative method. Under the hypothetical derivative method, the
cumulative change in the fair value of the derivative instrument is compared to the
cumulative change in the fair value of a hypothetical derivative. The Corporation uses
the cumulative dollar-offset ratio resulting from the application of the hypothetical
derivative method to assess effectiveness. In addition, the Corporation assesses whether
the hedged forecasted transactions are still probable of occurring, and monitors the
creditworthiness of the Counterparty to determine whether the risk of default continues
to be remote.
10
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Further information on the Corporation’s derivative instrument and hedging activities is
included in Note 8.
Servicing
Servicing assets are recognized as separate assets when rights are acquired through the
purchase or sale of financial assets. For sales of mortgage loans, a portion of the cost of
originating the loan is allocated to the servicing right based on relative fair value. Fair
value is based on market prices for comparable mortgage servicing contracts when
available, or alternatively, is based on a valuation model that calculates the present
value of estimated future net servicing income. The valuation model incorporates
assumptions that market participants would use in estimating future net servicing
income, such as the cost to service, the discount rate, the custodial earnings rate, an
inflation rate, ancillary income, prepayment speeds and default rates and losses.
Servicing assets or liabilities are amortized in proportion to and over the period of net
servicing income or net servicing loss and are assessed for impairment or increased
obligation based on fair value of rights compared to amortized cost at each reporting
date. Impairment is determined by stratifying rights into tranches based on predominant
risk characteristics, such as interest rate, loan category, and investor type. Impairment is
recognized through a valuation allowance for an individual tranche, to the extent that
fair value is less than the capitalized amount for the tranche. If the Bank later
determines that all or a portion of the impairment no longer exists for a particular
tranche, a reduction of the allowance may be recorded as an increase to income. The
recorded value of mortgage servicing rights was $1,465 and $646 as of December 31, 2015
and 2014, respectively. Loans serviced as of December 31, 2015 and 2014, approximated
$128,745 and $54,720, respectively; such loans are not included in the accompanying
consolidated balance sheets.
Servicing fee income is recorded for fees earned for servicing loans for others. The fees
are based on a contractual percentage of the outstanding principal, or a fixed amount
per loan and are recognized as income when earned. The amortization of mortgage
servicing rights is netted against loan servicing fee income, a component of noninterest
income.
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. Physical
possession of residential real estate property collateralizing a consumer mortgage loan
occurs when legal title is obtained upon completion of foreclosure or when the borrower
conveys all interest in the property to satisfy the loan through completion of a deed in
lieu of foreclosure or through a similar legal agreement. If fair value declines, a valuation
allowance is recorded through expense. Costs after acquisition are expensed, as
incurred.
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
11
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cash flows. If impaired, the assets are recorded at fair value, if lower than the 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.
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
income.
Stock Based Compensation
Compensation cost is recognized for stock options, restricted stock awards issued to
employees, 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 required 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 2015 or 2014 were not
significant.
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
12
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Comprehensive Income
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 and cash flow hedges, 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.
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, 2015, the most recent balance sheet
presented herein, through March 11, 2016, the date these consolidated financial
statements were available to be issued. No significant such events or transactions were
identified.
13
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)
2015
2014
Basic
Net income
$
4,692 $
3,360
Weighted average common shares
outstanding
2,511,817
2,495,156
Basic income per common share
$
1.87 $
1.35
There were no options outstanding at December 31, 2015, or December 31, 2014.
3.
INVESTMENT SECURITIES
Year-end securities were as follows:
2015
(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
$
Held to Maturity
State and municipal
$
$
2,995 $
5,736
7,775
5,534
1,256
- $
13
129
38
156
(12) $
(66)
(10)
(9)
(3)
2,983
5,683
7,894
5,563
1,409
23,296 $
336 $
(100) $
23,532
2,176 $
6 $
- $
2,182
14
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2014
(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
$
Held to Maturity
State and municipal
$
$
2,994 $
6,199
9,281
9,165
2,270
- $
2
189
120
208
(31) $
(68)
(12)
(2)
(3)
2,963
6,133
9,458
9,283
2,475
29,909 $
519 $
(116) $
30,312
1,655 $
11 $
(9) $
1,657
Contractual maturities of securities at December 31, 2015, were as follows. Securities not
due at a single maturity date, collateralized mortgage obligations and equity securities are
shown separately.
Available for Sale
Held to Maturity
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
(000s omitted)
U.S. government and
federal agency
Due from five to ten years
$
2,995 $
2,983 $
- $
-
State and Municipal
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
270
5,131
282
53
7,775
5,534
1,256
271
5,111
253
48
7,894
5,563
1,409
335
1,441
400
-
-
-
-
337
1,445
400
-
-
-
-
$
23,296 $
23,532 $
2,176 $
2,182
Securities pledged at December 31, 2015 and 2014 had a carrying amount of $13,232 and
$18,095, respectively, and were pledged to secure public deposits and borrowings.
15
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities with unrealized losses at December 31, 2015 and 2014, 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
2015
(000s omitted)
Fair
Value
Gross
Unrealized
Loss
Fair
Value
Gross
Unrealized
Loss
Fair
Value
Total
Gross
Unrealized
Losses
$
U.S. government and
federal agency
State and municipal
Mortgage backed residential
Collateralized mortgage
obligations - agencies
Equity
2,983 $
2,871
-
1,103
-
(12) $
(54)
-
(9)
-
- $
738
2,490
- $
(12)
(10)
2,983 $
3,609
2,490
-
3
-
(3)
1,103
3
(12)
(66)
(10)
(9)
(3)
Total
$
6,957 $
(75) $
3,231 $
(25) $
10,188 $
(100)
Less Than 12 Months
Over 12 Months
2014
(000s omitted)
Fair
Value
Gross
Unrealized
Loss
Fair
Value
Gross
Unrealized
Loss
Fair
Value
Total
Gross
Unrealized
Losses
$
U.S. government and
federal agency
State and municipal
Mortgage backed residential
Collateralized mortgage
obligations - agencies
Equity securities
- $
2,518
2,598
1,672
-
- $
(12)
(12)
(2)
-
2,963 $
3,429
-
(31) $
(65)
-
2,963 $
5,947
2,598
-
2
-
(3)
1,672
2
(31)
(77)
(12)
(2)
(3)
Total
$
6,788 $
(26) $
6,394 $
(99) $
13,182 $
(125)
As of December 31, 2015 , the Corporation’s security portfolio consisted of 72 securities, 22
of which were in an unrealized loss position.
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 2015 and 2014.
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.
16
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in the allowance for loan losses, by loan portfolio segment, for the year ended
December 31, 2015, is as follows:
(000s omitted)
Commercial
Commercial
Real
Estate
Residential
Real
Estate
Installment
Home
Equity
Unallocated
Total
Balance,
January 1, 2015
Provision for
loan losses
Loans charged off
Loan recoveries
$
356 $
2,762 $
636 $
45 $
152 $
455 $
4,406
(217)
-
90
(943)
(146)
170
(13)
(33)
-
18
(27)
5
(82)
237
(1,000)
-
40
-
-
(206)
305
Balance,
December 31, 2015 $
229 $
1,843 $
590 $
41 $
110 $
692 $
3,505
Activity in the allowance for loan losses, by loan portfolio segment, for the year ended
December 31, 2014, is as follows:
(000s omitted)
Commercial
Commercial
Real
Estate
Residential
Real
Estate
Installment
Home
Equity
Unallocated
Total
Balance,
January 1, 2014
Provision for
loan losses
Loans charged off
Loan recoveries
$
607 $
3,147 $
683 $
56 $
232 $
175 $
4,900
(304)
(14)
67
(358)
(296)
269
(37)
(12)
2
30
(53)
12
(61)
(39)
20
280
-
-
(450)
(414)
370
Balance,
December 31, 2014 $
356 $
2,762 $
636 $
45 $
152 $
455 $
4,406
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, 2015:
(000s omitted)
Commercial
Commercial
Real
Estate
Residential
Real
Estate
Installment
Home
Equity
Unallocated
Total
Ending allowance
balance attributable
to loans
Individually
evaluated for
impairment
$
Collectively
evaluated for
impairment
Total ending
allowance
balance
27 $
116 $
64 $
- $
6 $
- $
213
202
1,727
526
41
104
692
3,292
$
229 $
1,843 $
590 $
41 $
110 $
692 $
3,505
17
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted)
Commercial
Commercial
Real
Estate
Residential
Real
Estate
Installment
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
$
81 $
3,773 $
345 $
- $
27
$
4,226
54,859
175,140
115,443
2,298
26,689
54,940
178,913
115,788
2,298
26,716
162
439
313
7
97
374,429
378,655
1,018
$
55,102 $
179,352 $ 116,101 $
2,305 $ 26,813
$
379,673
The following tables present the balance in the allowance for loan losses and the recorded
investment in loans by loan portfolio segment and based on impairment method at
December 31, 2014:
(000s omitted)
Commercial
Commercial
Real
Estate
Residential
Real
Estate
Installment
Home
Equity
Unallocated
Total
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
46 $
500 $
90 $
- $
7 $
- $
643
310
2,262
546
45
145
455
3,763
$
356 $
2,762 $
636 $
45 $
152 $
455 $
4,406
$
135 $
5,160 $
493 $
- $
137
$
5,925
49,810
151,813
84,128
3,181
23,792
49,945
156,973
84,621
3,181
23,929
129
385
223
10
84
312,724
318,649
831
$
50,074 $
157,358 $ 84,844 $
3,191 $ 24,013
$
319,480
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, 2015:
(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
$
102 $
- $
2,346
33
-
-
93
2,072
345
-
27
1,600
-
-
-
81
2,072
345
-
27
- $
-
-
-
-
27
116
64
-
6
9 $
1,220
28
-
41
99
3,625
403
-
28
7
139
6
-
1
2
108
15
-
2
Total
$
5,018 $
4,125 $
213 $
5,453 $
280
The following table presents loans individually evaluated for impairment by portfolio class of
loans as of December 31, 2014:
(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
$
113 $
- $
1,645
255
-
130
145
4,276
493
-
62
982
1
-
75
135
4,189
495
-
62
- $
-
-
-
-
46
500
90
-
7
57 $
1,791
44
1
157
230
4,652
535
-
43
10
71
10
1
8
2
192
20
-
4
Total
$
7,119 $
5,939 $
643 $
7,510 $
318
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 loans by class of loans as
of December 31, 2015:
(000s omitted)
Nonaccrual
Commercial
Commercial real estate
Home equity
Installment loans
Residential real estate
Total
$
$
25
201
-
-
-
226
The following table presents the recorded investment in nonaccrual loans by class of loans as
of December 31, 2014:
(000s omitted)
Nonaccrual
Commercial
Commercial real estate
Home equity
Installment loans
Residential real estate
Total
$
$
46
141
-
-
-
187
There were no past due loans over 90 days still accruing interest as of December 31, 2015 or
2014.
The following table presents the aging of the recorded investment in past due loans by class
of loans as of December 31, 2015:
(000s omitted)
Commercial
Commercial real estate
Installment loans
Residential real estate
Total
30-59 Days
Past Due
60-89 Days
Past Due
Greater than
90 Days Past
Due
Total Past
Due
$
$
- $
-
-
-
- $
20
- $
-
-
-
- $
25 $
201
-
-
226 $
25
201
-
-
226
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, 2014:
(000s omitted)
Commercial
Commercial real estate
Installment loans
Residential real estate
Total
30-59 Days
Past Due
60-89 Days
Past Due
Greater than
90 Days Past
Due
Total Past
Due
$
$
- $
-
-
-
- $
- $
-
25
-
46 $
-
-
-
25 $
46 $
46
-
25
-
71
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 nonaccrual 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 $201 and $642 of specific reserves to customers whose loan terms
have been modified in TDRs as of December 31, 2015 and 2014, respectively. 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, 2015.
21
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no loans modified in a TDR during the year ended December 31, 2015. The
following presents by class, information related to loans modified in a TDR during the year
ended December 31, 2014:
Loans Modified as TDR for the Year Ended
December 31, 2014
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
Number of
Loans
(000s omitted)
Residential real estate
1 $
135 $
135
There were no TDRs that defaulted in 2015. 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 during the year
ended December 31, 2014:
Loans with Payment Defaults
December 31, 2014
Number of
Contracts
Recorded
Investment (as of
Period End)(1)
(000s omitted)
Residential real estate
1 $
135
(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.
22
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents by portfolio loan class, the type of modification made in a TDR during
the year ended December 31, 2014:
Loans Modified Through
Reduction of Interest Rate
or Payment
Loans Modified Through
Extension of Term
(000s omitted)
Recorded
Investment (as
of Period End)
(1)
Recorded
Investment (as
of Period End)
(1)
Number of
Loans
Number of
Loans
Residential real estate
1 $
135
- $
-
(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.
23
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 typically 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:
2015
(000s omitted)
Prime
Pass
Watch
Substandard
Total
Commercial
Commercial real estate
$
54,554 $
171,314
403 $
6,190
103 $
1,542
42 $
306
55,102
179,352
Total
$
225,868 $
6,593 $
1,645 $
348 $
234,454
2014
(000s omitted)
Commercial
Commercial real estate
Total
$
$
Prime
Pass
Watch
Substandard
Total
3,924 $
45,368 $
12,266
137,908
712 $
6,708
70 $
476
50,074
157,358
16,190 $
183,276 $
7,420 $
546 $
207,432
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, 2015 and 2014:
2015
(000s omitted)
Home Equity
Installment
Residential
Real Estate
Total
Performing
Non-performing
$
26,813 $
2,305 $
116,101 $
-
-
-
145,219
-
Total
$
26,813 $
2,305 $
116,101 $
145,219
2014
(000s omitted)
Home Equity
Installment
Residential
Real Estate
Total
Performing
Non-performing
$
23,875 $
138
3,191 $
-
84,349 $
495
111,415
633
Total
$
24,013 $
3,191 $
84,844 $
112,048
Loans to principal officers, directors, and affiliates at December 31, 2015 and 2014 were
$5,372 and $4,962, respectively.
24
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. OTHER REAL ESTATE OWNED
Activity in other real estate owned for the years ended December 31 was:
(000s omitted)
2015
2014
Beginning balance, January 1
Transfers into other real estate
Sales of other real estate owned
Provision for other real estate owned losses
Ending balance
$
2,488 $
-
(2,091)
-
2,594
1,200
(1,157)
(149)
$
397 $
2,488
At December 31, 2015, the balance of real estate owned consists entirely of foreclosed
residential real estate properties recorded as a result of obtaining physical possession of the
property. At December 31, 2015, there is no recorded investment of consumer mortgage
loans secured by residential real estate properties for which formal foreclosure proceeds are
in process.
Net gains (losses) on sales of other real estate owned were $79 in 2015 and ($9) in 2014.
Carrying costs associated with other real estate owned totaled $124 in 2015 and $148 in
2014.
6. PREMISES AND EQUIPMENT, NET
Bank premises and equipment, net, is comprised of the following at December 31:
(000s omitted)
2015
2014
Land and land improvements
Building and building improvements
Furniture and equipment
Construction in progress
Less accumulated depreciation
$
2,493 $
11,299
4,846
380
19,018
9,298
2,468
11,206
4,671
137
18,482
8,672
Ending balance
$
9,720 $
9,810
Depreciation expense was $720 and $753 for 2015 and 2014, respectively.
The Corporation leases property for certain branches and ATM locations. Rent expense was
approximately $60 for both 2015 and 2014. Rent commitments under non-cancelable
operating leases were as follows, before considering renewal options that generally are
present at December 31, 2015 (000s omitted):
2016
2017
$
$
38
12
50
25
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEPOSITS
The following is a summary of deposits at December 31:
(000s omitted)
2015
2014
Non-interest bearing
Demand
Interest-bearing
Savings
Money market demand
Time, $100,000 and over
Time, $100,000 and under
Total interest bearing
$
108,102 $
91,738
102,718
67,614
38,563
58,974
89,390
52,076
33,265
61,454
267,869
236,185
Total deposits
$ 375,971 $ 327,923
Scheduled maturities of time deposits for years succeeding December 31, 2015, were as
follows:
(000s omitted)
Amount
2016
2017
2018
2019
2020
Thereafter
$
32,075
27,337
17,896
14,071
5,482
676
$ 97,537
The Corporation held $10,109 in brokered deposits at December 31, 2015 and 2014.
Deposits from principal officers, directors, and affiliates at December 31, 2015 and 2014
were $5,658 and $4,991, respectively.
26
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. BORROWINGS
Federal Home Loan Bank Advance
At year-end, advances from the FHLB were as follows:
Principal Term
(000s omitted)
December 31, 2015
Fixed rate advance
With rate of 7.34%
Fixed rate advance
With rate of 1.19%
Fixed rate advance
With rate of 1.66%
Fixed rate advance
With rate of 1.84%
December 31, 2014
Fixed rate advance
With rate of 7.34%
Fixed rate advance
With rate of 1.19%
Fixed rate advance
With rate of 1.66%
Fixed rate advance
With rate of 1.84%
Advance
Amount
Maturity
Date
$
775
May 2016
$
$
5,000
October 2017
10,000 November 2018
5,000
October 2019
20,775
817
May 2016
5,000
October 2017
10,000 November 2018
5,000
October 2019
$
20,817
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 $13,232 and loans
totaling $72,960 at December 31, 2015 and securities totaling $18,095 and loans totaling
$80,455 at December 31, 2014.
Maturities over each of the next five years are (000s omitted):
2016
2017
2018
2019
27
$
775
5,000
10,000
5,000
$ 20,775
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subordinated Debentures and Trust Preferred Securities
A trust formed by the Corporation issued $12,000 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, 2015 is 3.51%. 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 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, 2015 is 1.98%. 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 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 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 (2.00%). As of
December 31, 2015 and 2014, respectively, the fair value of the interest rate cap was $191
and $398 which is included in other assets on the consolidated balance sheets.
28
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
Current expense
Deferred expense
Income tax expense
2015
2014
$
221 $
2,186
275
1,453
$
2,407 $
1,728
Income tax expense for continuing operations 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)
2015
2014
Income tax at statutory rate
Tax exempt status
Other
Income tax expense
$
2,414 $
(59)
52
1,730
(73)
71
$
2,407 $
1,728
The net deferred tax asset recorded includes the following amounts of deferred tax assets
and liabilities:
(000s omitted)
2015
2014
Deferred tax assets
Allowance for loan losses
Alternative minimum tax credit
Compensation
Net operating loss carryforwards
Non-accrual interest
ORE write downs
Other comprehensive income tax adjustments
Other
Total deferred tax assets
Deferred tax liabilities
Depreciation
Mortgage servicing rights
Other comprehensive income tax adjustments
Other
$
$
1,192 $
532
254
311
20
2
71
226
1,498
401
255
1,764
20
185
-
310
2,608
4,433
(714) $
(498)
-
(35)
(700)
(220)
(54)
(37)
Total deferred tax liabilities
(1,247)
(1,011)
Net deferred taxes
$
1,361 $
3,422
29
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The federal net operating loss carryforwards of approximately $915 will expire beginning in
2031 if not previously utilized.
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 2012 through 2015, the years which remain subject to examination
by major tax jurisdictions as of December 31, 2015. 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.
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 2015 and 2014.
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 $195 and $170 in 2015 and 2014, respectively. The balances in these plans are
included in other liabilities on the consolidated balance sheets.
The Corporation entered into Supplemental Executive Retirement Agreements (“SERP
Agreements”) 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 2015 and 2014, the accumulated
liability for these plans totaled $745 and $749, respectively, and are included in other
liabilities on the accompanying consolidated balance sheets.
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 made no
contributions under these arrangements in 2015 or 2014.
30
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2015 and 2014.
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.
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:
Automatic dividend reinvestment plan
Director stock purchase and retainer stock
Other issuance of stock
2015
2014
6,211
8,075
731
5,366
14,005
929
15,017
20,300
31
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2015
and 2014.
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 2015 and 2014.
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.
There was no stock option activity in 2015. The following table summarizes stock option
activity in 2014:
(000s omitted)
Options outstanding at
January 1, 2014
Options forfeited during 2014
Options outstanding and
exercisable at
December 31, 2014
Number of
Options
Weighted
Average
Price
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
3,355 $
3,355
35.45
35.45
- $
-
-
-
No options were exercised during 2015 or 2014. As of December 31, 2015 and 2014, there was
no unrecognized compensation cost related to non-vested stock options granted under the
Plan.
32
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 determined were met during
2013. SAR payment dates vary by individual agreement and range from February 2014 through
May 2017. Expense of $204 and $85 was recorded in 2015 and 2014, respectively, resulting in
a total liability of $252 and $205 at December 31, 2015, and December 31, 2014,
respectively. These balances are reflective of vesting through the years then ended and are
recorded in accrued interest payable and other liabilities on the consolidated balance sheets.
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.
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 and 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.
Interest Rate Cap
Substantially all of the derivative instruments held by the Corporation for risk management
purposes are traded in over-the-counter markets where quoted market prices are not readily
available. For those derivatives, the Corporation measures fair value using models that use
primarily market observable inputs, such as yield curves and option volatilities, and include
the value associated with counterparty credit risk. As such, the Corporation classifies those
derivative instruments as Level 2.
33
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Nonrecurring 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.
Assets Measured on a Recurring Basis
Assets measured at fair value on a recurring basis are summarized below:
2015
(000s omitted)
Total
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)
Available-for-sale securities
U.S. government and
federal agency
State and municipal
Mortgage backed residential
Collateralized mortgage
obligations – agencies
Equity securities
Interest rate cap
$
$
$
2,983 $
5,683
7,894
5,563
1,409
- $
-
-
-
-
2,983 $
5,683
7,894
5,563
1,018
23,532 $
- $
23,141 $
191 $
- $
191 $
-
-
-
-
391
391
-
34
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2014
(000s omitted)
Total
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)
Available-for-sale securities
U.S. government and
federal agency
State and municipal
Mortgage backed residential
Collateralized mortgage
obligations – agencies
Equity securities
Interest rate cap
$
$
$
2,963 $
6,133
9,458
9,283
2,475
- $
-
-
-
-
2,963 $
6,133
9,458
9,283
2,088
30,312 $
- $
29,925 $
398 $
- $
398 $
-
-
-
-
387
387
-
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
2015
2014
Beginning balance, January 1
Included in net income
Included in other comprehensive income
Exchanges of assets
$
387 $
-
4
-
1,102
(390)
120
(445)
Ending balance, December 31
$
391 $
387
During 2014, a single investment in equity securities with a carrying value of $445 was
exchanged for $935 in another equity security resulting in the recognition of a $390 gain
which is recorded in net gain on the sales of securities in the accompanying consolidated
statements of income.
35
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
2015
(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
2014
(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
$
$
$
$
$
16 $
1,736
281
-
21
2,054 $
- $
-
-
-
-
- $
- $
-
-
-
-
16
1,736
281
-
21
- $
2,054
- $
- $
- $
-
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)
$
30 $
3,683
403
-
55
4,171 $
- $
-
-
-
-
- $
- $
-
-
-
-
30
3,683
403
-
55
- $
4,171
641 $
- $
- $
641
36
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $2,251, with a valuation allowance of $197 at December 31, 2015.
Impaired loans that are measured for impairment using the fair value of the collateral had a
carrying amount of $4,808, with a valuation allowance of $637 at December 31, 2014.
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 $397, none of which was at fair value at
December 31, 2015, as no write-downs were taken during 2015. 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 $2,488, of which $641 was at fair value at December 31, 2014, which
resulted from write-downs totaling $105 during 2014.
Qualitative information about level 3 fair value instruments is as follows as of December 31:
2015
(000s omitted)
Level 3 Instruments
Instrument
Fair Value
Valuation
Technique
Unobservable
Input
Weighted
Average
Equity Securities
Impaired Loans
$
$
391
Market
Comparable
Price to book
ratio
77.0%
2,054 Appraisal value - Discount applied
10.3%
Real Estate
to appraisal
2014
(000s omitted)
Level 3 Instruments
Instrument
Fair Value
Valuation
Technique
Unobservable
Input
Weighted
Average
Equity Securities
Impaired Loans
Other Real Estate
$
$
$
387
Market
Comparable
Price to book
ratio
77.4%
4,171 Appraisal value - Discount applied
8.2%
Real Estate
to appraisal
641 Appraisal value
Discount applied
to appraisal
0%
37
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Carrying amount and estimated fair value of financial instruments, not previously presented,
at year end were as follows:
2015
2014
(000s omitted)
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
Assets
Cash and cash equivalents
Securities held to maturity
Loans held for sale
Net loans (including impaired
loans)
FHLB stock
Accrued interest receivable
19,425 $
2,176
2,905
19,425 $
2,182
2,905
19,522 $
1,655
1,320
19,522
1,657
1,320
375,150
981
1,133
370,863
981
1,133
314,243
1,041
1,061
314,056
1,041
1,061
Liabilities
Deposits
FHLB advances
Subordinated debentures
Accrued interest payable
$
375,971 $
20,775
14,000
139
375,871 $
20,785
13,980
139
327,923 $
20,817
14,000
126
327,926
20,827
13,982
126
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.
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.
38
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 data
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. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents a reconciliation of the changes in the components of
accumulated other comprehensive
income and details the components of other
comprehensive (loss) income for the years ended December 31, 2015 and 2014, including the
amount of
income tax (benefit) expense allocated to each component of other
comprehensive (loss) income:
39
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31
2015
Accumulated net unrealized gains on investment
securities available-for-sale
Balance at beginning of period, net of tax
$
289
Net unrealized holding gains arising
during the period
Income taxes
Net unrealized holding gains arising during
the period, net of tax
Less: Realized gains included in net income
Income taxes
Reclassification adjustment for net securities gains
included in net income, net of tax
Change in net unrealized gains on investment
securities available-for-sale, net of tax
Balance at end of period, net of tax
Accumulated net losses on cash flow hedge:
Balance at beginning of period, net of tax
Net cash flow hedge losses arising during the period
Income taxes
Net cash flow hedge losses arising during
the period, net of tax
Balance at end of period, net of tax
294
(100)
194
(461)
157
(304)
(110)
179
(164)
(207)
70
(137)
(301)
Total accumulated other comprehensive income end of
period, net of tax
$
(122)
40
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31
2014
Accumulated net unrealized gains on investment
securities available-for-sale
Balance at beginning of period, net of tax
$
64
Net unrealized holding gains arising
during the period
Income taxes
Net unrealized holding gains arising during
the period, net of tax
Less: Realized gains included in net income
Income taxes
Reclassification adjustment for net securities gains
included in net income, net of tax
Change in net unrealized gains on investment
securities available-for-sale, net of tax
Balance at end of period, net of tax
Accumulated net losses on cash flow hedge:
Balance at beginning of period, net of tax
Net cash flow hedge losses arising during the period
Income taxes
Net cash flow hedge losses arising during
the period, net of tax
731
(249)
482
(390)
133
(257)
225
289
-
(248)
84
(164)
Total accumulated other comprehensive income end of
period, net of tax
$
125
14. 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 and the Bank. Under capital adequacy guidelines and the regulatory
framework for 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.
41
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Failure to meet capital requirements can initiate regulatory action. The final rules related to
the implementation of the Basel Committee on Banking Supervision’s capital guidelines for
U.S. banks (Basel III rules) became effective for the Corporation on January 1, 2015, with full
compliance of all of the requirements being phased in over a multi-year schedule, and fully
phased in by January 1, 2019. The net unrealized gain or loss on available for sale securities
is not included in computing regulatory capital. Capital amounts and ratios for December 31,
2014, are calculated using Basel I rules.
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, 2015 and 2014, 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, 2015 and 2014, that the Company and the Bank
met all capital adequacy requirements to which they are subject.
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,
2015 and 2014:
2015
(000s omitted)
Total Capital
(to Risk Weighed Assets)
The State Bank
$
Tier 1 (Core) Capital
(to Risk Weighed Assets)
The State Bank
Common Tier 1 (CET1)
The State Bank
Tier 1 (Core) Capital
(to Average Assets)
The State Bank
Actual
For Capital
Adequacy Purposes
To Be Well
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
46,185
11.9% $
31,023
8.0% $
38,779
10.0%
42,673
11.0%
23,267
6.0%
31,023
8.0%
42,673
11.0%
15,512
4.5%
19,390
6.5%
42,673
9.9%
17,235
4.0%
21,544
5.0%
42
FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2014
(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
41,266
12.9% $
25,591
8.0% $
31,989
10.0%
37,259
11.7%
12,738
4.0%
19,107
6.0%
37,259
9.7%
15,365
4.0%
19,206
5.0%
15. 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)
2015
2014
Commitments to make loans (at market rate)
Unused lines of credit and letters of credit
$
43,655 $
53,503
46,067
42,447
Commitments to make loans are generally made for periods of 90 days or less.
16. 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.
43
FENTURA FINANCIAL, INC.
NOTES TO 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, 2015.
44