Fentura Financial, Inc. Announces Second Quarter 2023 Earnings (unaudited)

Dollars in thousands except per share amounts. Certain items in the prior period financial statements have been reclassified to conform with the June 30, 2023 presentation.

FENTON, Mich., July 28, 2023 (GLOBE NEWSWIRE) -- Fentura Financial, Inc. (OTCQX: FETM) announces quarterly net income results of $3,226 and $7,070 for the three and six months ended June 30, 2023.

Ronald L. Justice, President and CEO, stated, “I am proud of our strong second quarter and year-to-date performance, as we successfully navigate a challenging banking environment. This is a direct result of our Bank’s focus on supporting our customers, maintaining solid asset quality, and controlling expenses. While we were able to settle the proxy contest prior to the annual meeting, we incurred $523 in legal and professional fees in the process. Excluding the costs associated with the proxy contest and other non-recurring items, adjusted net income from operations for the quarter was $3,604 as compared to $3,483 for the quarter ended June 30, 2022. Throughout these challenging times, we remain committed to providing long-term shareholder value.”

Mr. Justice continued, “We continue to focus on strengthening our balance sheet by taking a measured approach to loan growth, while maintaining strong asset quality. Gross loans increased 19.4% year-over-year to a record $1.47 billion at June 30, 2023. Our asset quality remains excellent with historically low levels of net charge-offs and nonperforming loans to gross loans of just 0.16%, reflecting our stringent underwriting standards and stable economic trends across our local Michigan markets. In addition, our non-owner occupied commercial office exposure was only 4.22% of gross loans at June 30, 2023 with limited exposure in suburban markets. Overall, our performance throughout the first half of 2023 is encouraging and we continue to believe 2023 will be another good year for Fentura Financial.”

Following is a discussion of our financial performance as of, and for the three and six months ended June 30, 2023. At the end of this document is a list of abbreviations and acronyms.

Results of Operations (unaudited)
The following table outlines our QTD results of operations and provides certain performance measures as of, and for the three months ended:

		6/30/2023				3/31/2023				12/31/2022				9/30/2022				6/30/2022
INCOME STATEMENT DATA
Interest income		$	19,553			$	18,679			$	17,782			$	15,726			$	13,411
Interest expense			6,469				5,335				3,645				1,738				785
Net interest income			13,084				13,344				14,137				13,988				12,626
Provision for loan losses			205				236				847				1,231				525
Noninterest income			2,460				2,328				1,949				2,395				2,794
Noninterest expenses			11,320				10,633				9,781				10,143				10,560
Federal income tax expense			793				959				1,094				1,000				859
Net income		$	3,226			$	3,844			$	4,364			$	4,009			$	3,476
PER SHARE
Earnings		$	0.73			$	0.87			$	0.99			$	0.91			$	0.79
Dividends		$	0.10			$	0.10			$	0.09			$	0.09			$	0.09
Tangible book value(1)		$	27.16			$	26.64			$	26.22			$	25.22			$	24.53
Quoted market value
High		$	21.21			$	24.10			$	23.40			$	25.20			$	27.85
Low		$	18.70			$	21.10			$	21.60			$	23.00			$	24.40
Close(1)		$	19.35			$	21.31			$	22.20			$	23.00			$	25.00
PERFORMANCE RATIOS
Return on average assets			0.76	%			0.92	%			1.06	%			1.02	%			0.96	%
Return on average shareholders' equity			9.89	%			12.32	%			14.01	%			12.96	%			11.55	%
Return on average tangible shareholders' equity			10.67	%			13.34	%			15.21	%			14.10	%			12.60	%
Efficiency ratio			72.83	%			67.85	%			60.80	%			61.91	%			68.48	%
Yield on earning assets (FTE)			4.85	%			4.75	%			4.57	%			4.27	%			3.96	%
Rate on interest bearing liabilities			2.35	%			2.02	%			1.42	%			0.75	%			0.38	%
Net interest margin to earning assets (FTE)			3.25	%			3.40	%			3.63	%			3.79	%			3.73	%
BALANCE SHEET DATA(1)
Total investment securities		$	117,563			$	122,995			$	125,049			$	129,886			$	136,725
Gross loans		$	1,472,288			$	1,457,173			$	1,436,166			$	1,350,851			$	1,232,892
Allowance for credit losses		$	15,400			$	15,220			$	13,000			$	12,200			$	11,000
Total assets		$	1,718,819			$	1,749,073			$	1,688,863			$	1,588,592			$	1,471,454
Total deposits		$	1,380,192			$	1,353,918			$	1,332,883			$	1,345,209			$	1,231,543
Borrowed funds		$	200,550			$	259,050			$	222,350			$	116,600			$	111,000
Total shareholders' equity		$	130,690			$	128,247			$	126,087			$	121,630			$	118,566
Net loans to total deposits			105.56	%			106.50	%			106.77	%			99.51	%			99.22	%
Common shares outstanding			4,460,053				4,453,951				4,439,725				4,434,937				4,429,357
QTD BALANCE SHEET AVERAGES
Total assets		$	1,706,147			$	1,687,175			$	1,637,191			$	1,558,040			$	1,449,874
Earning assets		$	1,617,593			$	1,595,605			$	1,544,880			$	1,464,233			$	1,360,658
Interest bearing liabilities		$	1,105,807			$	1,072,417			$	1,016,876			$	917,888			$	826,708
Total shareholders' equity		$	130,860			$	126,495			$	123,567			$	122,695			$	120,659
Total tangible shareholders' equity		$	121,274			$	116,834			$	113,810			$	112,829			$	110,686
Earned common shares outstanding			4,427,890				4,421,584				4,413,710				4,408,399				4,417,447
Unvested stock grants			29,916				29,007				24,460				24,460				24,460
Total common shares outstanding			4,457,806				4,450,591				4,438,170				4,432,859				4,441,907
ASSET QUALITY
Nonperforming loans to gross loans(1)			0.16	%			0.19	%			0.16	%			0.12	%			0.16	%
Nonperforming assets to total assets(1)			0.16	%			0.17	%			0.15	%			0.12	%			0.16	%
Allowance for credit losses to gross loans(1)			1.05	%			1.04	%			0.91	%			0.90	%			0.89	%
Allowance for credit losses to gross loans, net of PPP loans(1)			1.05	%			1.04	%			0.91	%			0.90	%			0.89	%
Net charge-offs (recoveries) to QTD average gross loans			—	%			—	%			—	%			—	%			0.04	%
Provision for loan losses to QTD average gross loans			0.01	%			0.02	%			0.06	%			0.10	%			0.04	%
CAPITAL RATIOS(1)
Total capital to risk weighted assets			11.31	%			11.08	%			10.87	%			10.96	%			11.36	%
Tier 1 capital to risk weighted assets			10.23	%			10.02	%			9.95	%			10.07	%			10.50	%
CET1 capital to risk weighted assets			9.25	%			9.04	%			8.96	%			9.04	%			9.39	%
Tier 1 leverage ratio			8.55	%			8.47	%			8.58	%			8.91	%			9.30	%
(1)At end of period

The following table outlines our YTD results of operations and provides certain performance measures as of, and for the six months ended (unaudited):

		6/30/2023				6/30/2022				6/30/2021				6/30/2020				6/30/2019
INCOME STATEMENT DATA
Interest income		$	38,232			$	25,712			$	23,577			$	22,285			$	21,225
Interest expense			11,804				1,384				1,438				3,763				4,285
Net interest income			26,428				24,328				22,139				18,522				16,940
Provision for loan losses			441				1,027				218				3,543				477
Noninterest income			4,788				5,602				8,173				9,985				3,772
Noninterest expenses			21,953				20,727				18,342				15,675				13,200
Federal income tax expense			1,752				1,616				2,370				1,894				1,424
Net income		$	7,070			$	6,560			$	9,382			$	7,395			$	5,611
PER SHARE
Earnings		$	1.60			$	1.48			$	2.02			$	1.59			$	1.21
Dividends		$	0.20			$	0.18			$	0.16			$	0.15			$	0.14
Tangible book value(1)		$	27.16			$	24.53			$	25.73			$	22.44			$	19.59
Quoted market value
High		$	24.10			$	29.25			$	27.40			$	26.00			$	21.00
Low		$	18.70			$	24.40			$	21.90			$	12.55			$	20.05
Close(1)		$	19.35			$	25.00			$	26.00			$	17.35			$	20.60
PERFORMANCE RATIOS
Return on average assets			0.84	%			0.91	%			1.47	%			1.32	%			1.20	%
Return on average shareholders' equity			11.08	%			11.05	%			15.75	%			14.13	%			12.14	%
Return on average tangible shareholders' equity			11.98	%			12.05	%			16.25	%			14.69	%			12.75	%
Efficiency ratio			70.33	%			69.25	%			60.51	%			54.99	%			63.73	%
Yield on earning assets (FTE)			4.80	%			3.83	%			3.89	%			4.20	%			4.79	%
Rate on interest bearing liabilities			2.19	%			0.34	%			0.39	%			1.09	%			1.43	%
Net interest margin to earning assets (FTE)			3.32	%			3.63	%			3.65	%			3.49	%			3.82	%
BALANCE SHEET DATA(1)
Total investment securities		$	117,563			$	136,725			$	129,944			$	75,526			$	73,285
Gross loans		$	1,472,288			$	1,232,892			$	986,358			$	1,044,564			$	813,547
Allowance for credit losses		$	15,400			$	11,000			$	10,800			$	8,991			$	5,014
Total assets		$	1,718,819			$	1,471,454			$	1,309,685			$	1,237,694			$	949,790
Total deposits		$	1,380,192			$	1,231,543			$	1,126,496			$	1,018,287			$	792,555
Borrowed funds		$	200,550			$	111,000			$	49,500			$	96,217			$	54,000
Total shareholders' equity		$	130,690			$	118,566			$	122,986			$	108,969			$	95,504
Net loans to total deposits			105.56	%			99.22	%			86.60	%			101.70	%			102.02	%
Common shares outstanding			4,460,053				4,429,357				4,638,594				4,680,920				4,653,343
YTD BALANCE SHEET AVERAGES
Total assets		$	1,696,660			$	1,449,212			$	1,284,534			$	1,125,064			$	940,585
Earning assets		$	1,606,599			$	1,354,652			$	1,225,641			$	1,068,847			$	894,357
Interest bearing liabilities		$	1,089,115			$	828,955			$	744,434			$	692,035			$	604,469
Total shareholders' equity		$	128,673			$	119,711			$	120,134			$	105,276			$	93,239
Total tangible shareholders' equity		$	119,050			$	109,776			$	116,432			$	101,233			$	88,762
Earned common shares outstanding			4,424,737				4,434,527				4,654,863				4,662,113				4,638,208
Unvested stock grants			29,461				25,963				21,297				13,844				9,878
Total common shares outstanding			4,454,198				4,460,490				4,676,160				4,675,957				4,648,086
ASSET QUALITY
Nonperforming loans to gross loans(1)			0.16	%			0.16	%			0.87	%			0.10	%			0.13	%
Nonperforming assets to total assets(1)			0.16	%			0.16	%			0.66	%			0.08	%			0.11	%
Allowance for credit losses to gross loans(1)			1.05	%			0.89	%			1.09	%			0.86	%			0.62	%
Allowance for credit losses to gross loans, net of PPP loans(1)			1.05	%			0.89	%			1.14	%			1.07	%			0.62	%
Net charge-offs (recoveries) to YTD average gross loans			—	%			0.05	%			0.03	%			0.04	%		(0.01		)%
Provision for loan losses to YTD average gross loans			0.03	%			0.09	%			0.02	%			0.38	%			0.06	%
CAPITAL RATIOS(1)
Total capital to risk weighted assets			11.31	%			11.36	%			14.35	%			15.06	%			14.18	%
Tier 1 capital to risk weighted assets			10.23	%			10.50	%			13.27	%			14.00	%			13.53	%
CET1 capital to risk weighted assets			9.25	%			9.39	%			11.87	%			12.34	%			11.73	%
Tier 1 leverage ratio			8.55	%			9.30	%			10.19	%			9.90	%			11.16	%
(1)At end of period

Income Statement Breakdown and Analysis

		Quarter to Date
		6/30/2023				3/31/2023				12/31/2022				9/30/2022				6/30/2022
Net income		$	3,226			$	3,844			$	4,364			$	4,009			$	3,476
Acquisition related items (net of tax)
Accretion on purchased loans			—				—				(20	)			(20	)			(20	)
Amortization of core deposit intangibles			60				60				85				85				85
Amortization on acquired time deposits			—				—				(21	)			(21	)			(21	)
Other acquisition related expenses			—				—				—				—				11
Total acquisition related items (net of tax)			60				60				44				44				55
Other nonrecurring items (net of tax)
Proxy contest related expenses			413				—				—				—				—
Prepayment penalties collected			(95	)			(9	)			(61	)			(119	)			(48	)
Total other nonrecurring items (net of tax)			318				(9	)			(61	)			(119	)			(48	)
Adjusted net income from operations		$	3,604			$	3,895			$	4,347			$	3,934			$	3,483
Net interest income		$	13,084			$	13,344			$	14,137			$	13,988			$	12,626
Accretion on purchased loans			—				—				(25	)			(25	)			(26	)
Prepayment penalties collected			(120	)			(12	)			(77	)			(150	)			(61	)
Amortization on acquired time deposits			—				—				(27	)			(27	)			(26	)
Adjusted net interest income		$	12,964			$	13,332			$	14,008			$	13,786			$	12,513
PERFORMANCE RATIOS
Based on adjusted net income from operations
Earnings per share		$	0.81			$	0.88			$	0.98			$	0.89			$	0.79
Return on average assets			0.85	%			0.94	%			1.05	%			1.00	%			0.96	%
Return on average shareholders' equity			11.05	%			12.49	%			13.96	%			12.72	%			11.58	%
Return on average tangible shareholders' equity			11.92	%			13.52	%			15.15	%			13.83	%			12.62	%
Efficiency ratio			69.51	%			67.41	%			60.62	%			62.02	%			68.19	%
Based on adjusted net interest income
Yield on earning assets (FTE)			4.82	%			4.75	%			4.54	%			4.22	%			3.93	%
Rate on interest bearing liabilities			2.35	%			2.02	%			1.41	%			0.74	%			0.37	%
Net interest margin to earning assets (FTE)			3.22	%			3.40	%			3.60	%			3.74	%			3.70	%

		Year to Date June 30								Variance
		2023				2022				Amount				%
Net income		$	7,070			$	6,560			$	510			7.77	%
Acquisition related items (net of tax)
Accretion on purchased loans			—				(41	)			41			(100.00	)%
Amortization of core deposit intangibles			120				170				(50	)		(29.41	)%
Amortization on acquired time deposits			—				(42	)			42			(100.00	)%
Other acquisition related expenses			—				213				(213	)		(100.00	)%
Total acquisition related items (net of tax)			120				300				(180	)		(60.00	)%
Other nonrecurring items (net of tax)
Proxy contest related expenses			413				—				413			N/M
Prepayment penalties collected			(104	)			(210	)			106			(50.48	)%
Total other nonrecurring items (net of tax)			309				(210	)			519			(247.14	)%
Adjusted net income from operations		$	7,499			$	6,650			$	849			12.77	%
Net interest income		$	26,428			$	24,328			$	2,100			8.63	%
Accretion on purchased loans			—				(51	)			51			(100.00	)%
Prepayment penalties collected			(132	)			(266	)			134			(50.38	)%
Amortization on acquired time deposits			—				(54	)			54			(100.00	)%
Adjusted net interest income		$	26,296			$	23,957			$	2,339			9.76	%
PERFORMANCE RATIOS
Based on adjusted net income from operations
Earnings per share		$	1.69			$	1.50			$	0.19			12.67	%
Return on average assets			0.89	%			0.93	%						(0.04	)%
Return on average shareholders' equity			11.75	%			11.20	%						0.55	%
Return on average tangible shareholders' equity			12.70	%			12.22	%						0.48	%
Efficiency ratio			68.45	%			68.48	%						(0.03	)%
Based on adjusted net interest income
Yield on earning assets (FTE)			4.78	%			3.78	%						1.00	%
Rate on interest bearing liabilities			2.19	%			0.33	%						1.86	%
Net interest margin to earning assets (FTE)			3.30	%			3.57	%						(0.27	)%

Average Balances, Interest Rate, and Net Interest Income

The following tables present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities. These tables also present an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a FTE basis using a federal income tax rate of 21%. Loans in nonaccrual status, for the purpose of the following computations, are included in the average loan balances.

Net interest income is the amount by which interest income on earning assets exceeds the interest expenses on interest bearing liabilities. Net interest income, which includes loan fees, is influenced by changes in the balance and mix of assets and liabilities and market interest rates. We exert some control over these factors; however, FRB monetary policy and competition have a significant impact. For analytical purposes, net interest income is adjusted to a FTE basis by adding the income tax savings from interest on tax exempt loans, and nontaxable investment securities, thus making period-to-period comparisons more meaningful.

		Three Months Ended
		June 30, 2023										March 31, 2023										June 30, 2022
		Average Balance				Tax Equivalent Interest			Average Yield / Rate			Average Balance				Tax Equivalent Interest			Average Yield / Rate			Average Balance				Tax Equivalent Interest			Average Yield / Rate
Interest earning assets
Total loans		$	1,470,156			$	18,725		5.11	%		$	1,447,375			$	17,854		5.00	%		$	1,189,812			$	12,843		4.33	%
Taxable investment securities			107,256				418		1.56	%			109,671				435		1.61	%			129,727				441		1.36	%
Nontaxable investment securities			13,253				76		2.27	%			14,287				81		2.30	%			15,305				85		2.25	%
Interest earning cash and cash equivalents			15,552				208		5.36	%			14,035				153		4.42	%			22,269				40		0.72	%
Federal Home Loan Bank stock			11,376				143		5.04	%			10,237				173		6.85	%			3,545				19		2.15	%
Total earning assets			1,617,593				19,570		4.85	%			1,595,605				18,696		4.75	%			1,360,658				13,428		3.96	%
Nonearning assets
Allowance for credit losses			(15,220	)									(15,145	)									(11,217	)
Premises and equipment, net			15,363										15,453										16,695
Accrued income and other assets			88,411										91,262										83,738
Total assets		$	1,706,147									$	1,687,175									$	1,449,874
Interest bearing liabilities
Interest bearing demand deposits		$	380,224			$	2,619		2.76	%		$	359,223			$	2,078		2.35	%		$	256,856			$	185		0.29	%
Savings deposits			306,195				434		0.57	%			341,154				473		0.56	%			367,917				113		0.12	%
Time deposits			175,607				1,303		2.98	%			166,518				1,012		2.46	%			113,026				140		0.50	%
Borrowed funds			243,781				2,113		3.48	%			205,522				1,772		3.50	%			88,909				347		1.57	%
Total interest bearing liabilities			1,105,807				6,469		2.35	%			1,072,417				5,335		2.02	%			826,708				785		0.38	%
Noninterest bearing liabilities
Noninterest bearing deposits			455,123										474,686										490,863
Accrued interest and other liabilities			14,357										13,577										11,644
Shareholders' equity			130,860										126,495										120,659
Total liabilities and shareholders' equity		$	1,706,147									$	1,687,175									$	1,449,874
Net interest income (FTE)						$	13,101									$	13,361									$	12,643
Net interest margin to earning assets (FTE)									3.25	%									3.40	%									3.73	%

		Six Months Ended
		June 30, 2023										June 30, 2022
		Average Balance				Tax Equivalent Interest			Average Yield / Rate			Average Balance				Tax Equivalent Interest			Average Yield / Rate
Interest earning assets
Total loans		$	1,458,766			$	36,579		5.06	%		$	1,150,284			$	24,582		4.31	%
Taxable investment securities			108,463				853		1.59	%			136,835				881		1.30	%
Nontaxable investment securities			13,769				157		2.28	%			16,008				175		2.24	%
Interest earning cash and cash equivalents			14,794				361		4.92	%			47,969				69		0.29	%
Federal Home Loan Bank stock			10,807				316		5.90	%			3,556				39		2.21	%
Total earning assets			1,606,599				38,266		4.80	%			1,354,652				25,746		3.83	%
Nonearning assets
Allowance for credit losses			(15,183	)									(10,863	)
Premises and equipment, net			15,407										16,818
Accrued income and other assets			89,837										88,605
Total assets		$	1,696,660									$	1,449,212
Interest bearing liabilities
Interest bearing demand deposits		$	369,723			$	4,697		2.56	%		$	266,356			$	322		0.24	%
Savings deposits			323,675				907		0.57	%			366,369				233		0.13	%
Time deposits			171,064				2,315		2.73	%			126,245				327		0.52	%
Borrowed funds			224,653				3,885		3.49	%			69,985				502		1.45	%
Total interest bearing liabilities			1,089,115				11,804		2.19	%			828,955				1,384		0.34	%
Noninterest bearing liabilities
Noninterest bearing deposits			464,905										481,729
Accrued interest and other liabilities			13,967										18,817
Shareholders' equity			128,673										119,711
Total liabilities and shareholders' equity		$	1,696,660									$	1,449,212
Net interest income (FTE)						$	26,462									$	24,362
Net interest margin to earning assets (FTE)									3.32	%									3.63	%

Volume and Rate Variance Analysis

The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows:

Volume - change in volume multiplied by the previous period's rate.
Rate - change in the FTE rate multiplied by the previous period's volume.

The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

		Three Months Ended												Three Months Ended												Six Months Ended
		June 30, 2023												June 30, 2023												June 30, 2023
		Compared To												Compared To												Compared To
		March 31, 2023												June 30, 2022												June 30, 2022
		Increase (Decrease) Due to												Increase (Decrease) Due to												Increase (Decrease) Due to
		Volume				Rate				Net				Volume				Rate				Net				Volume				Rate				Net
Changes in interest income
Total loans		$	363			$	508			$	871			$	3,333			$	2,549			$	5,882			$	7,276			$	4,721			$	11,997
Taxable investment securities			(7	)			(10	)			(17	)			(293	)			270				(23	)			(396	)			368				(28	)
Nontaxable investment securities			(5	)			—				(5	)			(21	)			12				(9	)			(32	)			14				(18	)
Interest earning cash and cash equivalents			19				36				55				(84	)			252				168				(172	)			464				292
Federal Home Loan Bank stock			101				(131	)			(30	)			77				47				124				152				125				277
Total changes in interest income			471				403				874				3,012				3,130				6,142				6,828				5,692				12,520
Changes in interest expense
Interest bearing demand deposits			136				405				541				130				2,304				2,434				169				4,206				4,375
Savings deposits			(91	)			52				(39	)			(128	)			449				321				(86	)			760				674
Time deposits			60				231				291				117				1,046				1,163				153				1,835				1,988
Borrowed funds			410				(69	)			341				1,040				726				1,766				2,067				1,316				3,383
Total changes in interest expense			515				619				1,134				1,159				4,525				5,684				2,303				8,117				10,420
Net change in net interest income (FTE)		$	(44	)		$	(216	)		$	(260	)		$	1,853			$	(1,395	)		$	458			$	4,525			$	(2,425	)		$	2,100

		Average Yield/Rate for the Three Months Ended
		6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Total earning assets		4.85	%		4.75	%		4.57	%		4.27	%		3.96	%
Total interest bearing liabilities		2.35	%		2.02	%		1.42	%		0.75	%		0.38	%
Net interest margin to earning assets (FTE)		3.25	%		3.40	%		3.63	%		3.79	%		3.73	%

		Quarter to Date Net Interest Income (FTE)
		6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Interest income		$	19,553		$	18,679		$	17,782		$	15,726		$	13,411
FTE adjustment			17			17			17			18			17
Total interest income (FTE)			19,570			18,696			17,799			15,744			13,428
Total interest expense			6,469			5,335			3,645			1,738			785
Net interest income (FTE)		$	13,101		$	13,361		$	14,154		$	14,006		$	12,643

Noninterest Income

		Three Months Ended
		6/30/2023				3/31/2023			12/31/2022				9/30/2022				6/30/2022
Service charges and fees
Trust and investment services		$	583			$	549		$	505			$	546			$	458
ATM and debit card income			570				531			559				553				577
Service charges on deposit accounts			224				218			245				270				246
Total			1,377				1,298			1,309				1,369				1,281
Net gain on sales of residential mortgage loans			198				161			24				36				182
Changes in the fair value of MSR			(8	)			107			(129	)			207				433
Net gain on sales of commercial loans			95				—			—				—				—
Change in fair value of equity investments			(16	)			15			2				(39	)			(31	)
Other
Mortgage servicing fees			406				406			415				427				435
Change in cash surrender value of corporate owned life insurance			178				172			175				172				168
Other			230				169			153				223				326
Total			814				747			743				822				929
Total noninterest income		$	2,460			$	2,328		$	1,949			$	2,395			$	2,794
Memo items:
Residential mortgage operations		$	596			$	674		$	310			$	670			$	1,050

		Six Months Ended June 30								Variance
		2023				2022				Amount				%
Service charges and fees
Trust and investment services		$	1,132			$	1,056			$	76			7.20	%
ATM and debit card income			1,101				1,062				39			3.67	%
Service charges on deposit accounts			442				487				(45	)		(9.24	)%
Total			2,675				2,605				70			2.69	%
Net gain on sales of residential mortgage loans			359				665				(306	)		(46.02	)%
Changes in the fair value of MSR			99				752				(653	)		(86.84	)%
Net gain on sales of commercial loans			95				—				95			N/M
Change in fair value of equity investments			(1	)			(79	)			78			(98.73	)%
Other
Mortgage servicing fees			812				879				(67	)		(7.62	)%
Change in cash surrender value of corporate owned life insurance			350				334				16			4.79	%
Other			399				446				(47	)		(10.54	)%
Total			1,561				1,659				(98	)		(5.91	)%
Total noninterest income		$	4,788			$	5,602			$	(814	)		(14.53	)%
Memo items:
Residential mortgage operations		$	1,270			$	2,296			$	(1,026	)		(44.69)%

Residential Mortgage Operations

Residential mortgage operations includes net gains on sales of loans, net mortgage servicing rights income, and mortgage servicing fees.

Net gain on sales of residential mortgage loans represents the income earned on the sale of residential mortgage loans into the secondary market. Increases in interest rates and limited inventories have significantly driven down the volume of new originations and refinancing activity. While a majority of our residential mortgage loans originated have been portfolio loans, we have been actively selling residential mortgage loans into the secondary market, resulting in increased gain on sales in the first half of 2023. We expect this trend to continue in future periods.

Changes in the fair value of MSR are highly correlated to changes in interest rates and prepayment speeds. As a significant portion of the serviced loan portfolio was originated at historically low interest rates, the relative value of the servicing portfolio has increased.   While we experienced an increase in the overall value of the portfolio first quarter of 2023, the overall direction of the fair value of MSR will likely continue to decline due to a reduction in the size of our servicing portfolio. This is a result of reduced levels of secondary market originations and prepayments. During the second quarter of 2023, the serviced loan portfolio declined by $4,103. We expect this trend to continue in future periods.

Mortgage servicing fees includes the fees earned for servicing loans that have been sold into the secondary market. The annual decrease in mortgage servicing fees is directly related to the size of the serviced portfolio. Due to reduced levels of secondary market originations and prepayments, the serviced loan portfolio declined by $46,099 since the second quarter of 2022. We expect mortgage servicing fees to trend modestly downward throughout 2023 due to decreased secondary market originations.

All Other Noninterest Income

Trust and investment services includes income earned from contracts with customers to manage assets for investment and/or to transact on their accounts through the wealth management and trust department. The increase in income in 2023 is a direct result of higher customer demand for annuity products. Additionally, during the second quarter of 2023, we transitioned our wealth management program to Ameriprise Financial, Inc. Ameriprise offers a robust, flexible technology platform and comprehensive financial solutions, which will provide our clients a full range of leading investment services and solutions. Trust services and wealth management fees are subject to market fluctuations and interest rate changes. We expect these fees to continue to increase throughout 2023.

ATM and debit card income represents fees earned on ATM and debit card transactions. We expect these fees to approximate current levels throughout 2023.

Service charges on deposit accounts includes fees earned from deposit customers for transaction-based charges, account maintenance and overdraft services. Service charges on deposit accounts are expected to approximate current levels throughout 2023.

Net gain on sales of commercial loans represents the income earned from the sale of commercial loans into the secondary market. During the second quarter of 2023, we sold the guaranteed portion of three SBA loans. We continually analyze our commercial loan portfolio for opportunistic sales strategies.

Change in cash surrender value of corporate owned life insurance is expected to modestly increase throughout 2023.

Other includes miscellaneous other income items, none of which are individually significant.

Noninterest Expenses

		Three Months Ended
		6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Compensation and benefits		$	5,492		$	5,792		$	5,329		$	5,320		$	5,453
Professional services			1,237			766			594			763			777
Furniture and equipment			685			726			772			822			805
Occupancy			589			635			566			578			579
Data processing			565			513			111			363			665
Advertising and promotional			509			451			580			405			326
Loan and collection			457			240			278			435			600
Other
FDIC insurance premiums			330			201			149			150			172
ATM and debit card			179			161			254			154			160
Telephone and communication			100			119			110			112			112
Amortization of core deposit intangibles			76			76			107			108			107
Other acquisition related expenses			—			—			—			—			14
Other general and administrative			1,101			953			931			933			790
Total		$	1,786		$	1,510		$	1,551		$	1,457		$	1,355
Total noninterest expenses		$	11,320		$	10,633		$	9,781		$	10,143		$	10,560

		Six Months Ended June 30						Variance
		2023			2022			Amount				%
Compensation and benefits		$	11,284		$	10,800		$	484			4.48	%
Professional services			2,003			1,589			414			26.05	%
Furniture and equipment			1,411			1,623			(212	)		(13.06	)%
Occupancy			1,224			1,183			41			3.47	%
Data processing			1,078			1,077			1			0.09	%
Advertising and promotional			960			604			356			58.94	%
Loan and collection			697			927			(230	)		(24.81	)%
Other
FDIC insurance premiums			531			322			85			21.96	%
ATM and debit card			340			303			37			12.21	%
Telephone and communication			219			217			2			0.92	%
Amortization of core deposit intangibles			152			215			(63	)		(29.30	)%
Other acquisition related expenses			—			270			(270	)		(100.00	)%
Other general and administrative			2,054			1,597			457			28.62	%
Total		$	3,296		$	2,924		$	372			12.72	%
Total noninterest expenses		$	21,953		$	20,727		$	1,226			5.91	%

Compensation and benefits includes salaries, commissions and incentives, employee benefits, and payroll taxes. Compensation and benefits increased year-to-date for 2023 due to an increase in the size of the organization, merit increases, and market based adjustments. During the quarter, overall compensation trended downward due to reduced commissions and staff attrition. While there continues to be meaningful wage pressure, we expect a modest increase in overall compensation and benefits due to merit increases and market based adjustments. These increases will be partially offset by decreases in commissions as loan originations continue to slow. This trend is expected to continue throughout 2023.

Professional services include expenses relating to third-party professional services. These services include, but are not limited to, regulatory, auditing, consulting, and legal. The increase in professional services during the second quarter of 2023 was due to an increase in expenses resulting from a proxy contest relating to our 2023 annual meeting of stockholders. The consulting and legal fees related to this matter totaled approximately $523. Professional services expenses are expected to normalize in future periods.

Furniture and equipment and occupancy expenses primarily consist of depreciation, repairs and maintenance, certain service contracts, and other related items. These expenses are expected to approximate current levels in 2023.

Data processing primarily includes the expenses relating to our core data processor. These expenses trended downward during the second half of 2022 due to receipt of renewal incentives from our core data processor. Data processing expenses are expected to normalize in 2023.

Advertising and promotional includes media costs and any donations or sponsorships. The annual increase in such expenses is a result of enhanced marketing efforts to attract new and expand existing customer loan and deposit account relationships. Total advertising and promotional expenses are expected to moderately increase during 2023.

Loan and collection includes expenses related to the origination and collection of loans. These expenses increased during the second quarter of 2023 primarily due to homeownership grants awarded to Habitat for Humanity. Loan and collection expenses are expected to decline in future periods as loan growth is expected to moderate throughout 2023.

FDIC insurance premiums typically fluctuate each period based on the size of the balance sheet, capital position and overall risk profile. FDIC insurance premiums have increased in 2023 due to the FDIC increasing its assessment rate for all insured institutions effective January 1, 2023.

ATM and debit card expenses fluctuate based on customer and non-customer utilization of ATMs and customer debit card volumes. We expect these fees to approximate current levels in 2023.

Telephone and communication includes expenses relating to our communication systems. These expenses are expected to approximate current levels during 2023.

Amortization of core deposit intangibles relates to the core deposits acquired from Community Bancorp, Inc. on December 31, 2016 and FSB on December 1, 2021. These core deposit intangibles are being amortized using an accelerated sum-of-years-digits method over their estimated useful lives of seven years.

Other acquisition related expenses includes expenses incurred during the first half of 2022 related to the acquisition of FSB. We do not anticipate recording additional acquisition expenses in future periods.

Other general and administrative includes miscellaneous other expense items. These expenses increased during the second quarter of 2023 partially due to an increase in fraudulent activity (check, ACH and identity theft) on customer accounts. Other general and administrative expenses are expected to increase slightly in future periods.

Balance Sheet Breakdown and Analysis

		6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
ASSETS
Cash and due from banks		$	59,181		$	100,496		$	57,844		$	43,345		$	38,510
Total investment securities			117,563			122,995			125,049			129,886			136,725
Residential mortgage loans held-for-sale, at fair value			1,106			875			493			62			664
Gross loans			1,472,288			1,457,173			1,436,166			1,350,851			1,232,892
Less allowance for credit losses			15,400			15,220			13,000			12,200			11,000
Net loans			1,456,888			1,441,953			1,423,166			1,338,651			1,221,892
All other assets			84,081			82,754			82,311			76,648			73,663
Total assets		$	1,718,819		$	1,749,073		$	1,688,863		$	1,588,592		$	1,471,454
		.
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits		$	1,380,192		$	1,353,918		$	1,332,883		$	1,345,209		$	1,231,543
Total borrowed funds			200,550			259,050			222,350			116,600			111,000
Accrued interest payable and other liabilities			7,387			7,858			7,543			5,153			10,345
Total liabilities			1,588,129			1,620,826			1,562,776			1,466,962			1,352,888
Total shareholders' equity			130,690			128,247			126,087			121,630			118,566
Total liabilities and shareholders' equity		$	1,718,819		$	1,749,073		$	1,688,863		$	1,588,592		$	1,471,454

		6/30/2023 vs 3/31/2023							6/30/2023 vs 6/30/2022
		Variance							Variance
		Amount				%			Amount				%
ASSETS
Cash and due from banks		$	(41,315	)		(41.11	)%		$	20,671			53.68	%
Total investment securities			(5,432	)		(4.42	)%			(19,162	)		(14.01	)%
Residential mortgage loans held-for-sale, at fair value			231			26.40	%			442			66.57	%
Gross loans			15,115			1.04	%			239,396			19.42	%
Less allowance for credit losses			180			1.18	%			4,400			40.00	%
Net loans			14,935			1.04	%			234,996			19.23	%
All other assets			1,327			1.60	%			10,418			14.14	%
Total assets		$	(30,254	)		(1.73	)%		$	247,365			16.81	%
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits		$	26,274			1.94	%		$	148,649			12.07	%
Total borrowed funds			(58,500	)		(22.58	)%			89,550			80.68	%
Accrued interest payable and other liabilities			(471	)		(5.99	)%			(2,958	)		(28.59	)%
Total liabilities			(32,697	)		(2.02	)%			235,241			17.39	%
Total shareholders' equity			2,443			1.90	%			12,124			10.23	%
Total liabilities and shareholders' equity		$	(30,254	)		(1.73	)%		$	247,365			16.81	%

Cash and due from banks

		6/30/2023				3/31/2023				12/31/2022			9/30/2022			6/30/2022
Cash and due from banks
Noninterest bearing		$	33,028			$	24,376			$	28,216		$	29,530		$	26,085
Interest bearing			26,153				76,120				29,628			13,815			12,425
Total		$	59,181			$	100,496			$	57,844		$	43,345		$	38,510
		6/30/2023 vs 3/31/2023											6/30/2023 vs 6/30/2022
		Variance											Variance
		Amount				%							Amount			%
Cash and due from banks
Noninterest bearing		$	8,652				35.49	%					$	6,943			26.62	%
Interest bearing			(49,967	)		(65.64		)%						13,728			110.49	%
Total		$	(41,315	)		(41.11		)%					$	20,671			53.68	%

Cash and due from banks fluctuates from period to period based on loan demand and variances in deposit account balances.

Primary and secondary liquidity sources

The following table outlines our primary and secondary sources of liquidity as of:

		6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Cash and cash equivalents		$	59,181		$	100,496		$	57,844		$	43,345		$	38,510
Fair value of unpledged investment securities			82,041			102,368			103,819			109,685			115,586
FHLB borrowing availability			170,000			111,500			144,567			78,000			83,000
Unsecured lines of credit			20,000			20,000			26,500			26,500			26,500
Funds available through the Fed Discount Window			119			119			113			115			125
Parent company line of credit			1,450			1,450			1,650			2,400			3,000
PPPLF			—			—			—			—			429
Total liquidity sources		$	332,791		$	335,933		$	334,493		$	260,045		$	267,150

The increase in cash and cash equivalents during the first quarter of 2023 was due to our utilization of wholesale funding (see "Wholesale funding sources" below), which we did not utilize to the same extent during the second quarter of 2023. The decrease in fair value of unpledged investment securities during the second quarter of 2023 is due to pledging additional securities in our investment portfolio for deposit relationships with collateral agreements. The increase in FHLB borrowing availability during the second quarter of 2023 is due to less utilization of FHLB advances as loan growth has recently moderated.

In addition to the above liquidity sources, we also have the option of utilizing wholesale funding sources, such as brokered NOW accounts, brokered time deposits and internet time deposits. Although wholesale funding sources are typically more expensive than core deposits and other liquidity sources, they are an integral part of our funding.

Investment securities

		6/30/2023				3/31/2023				12/31/2022				9/30/2022				6/30/2022
Available-for-sale
U.S. Government and federal agency		$	24,411			$	24,402			$	24,394			$	26,391			$	27,391
State and municipal			21,110				22,649				22,709				22,743				22,863
Mortgage backed residential			52,704				54,595				56,293				58,313				60,672
Certificates of deposit			6,679				7,426				7,426				8,166				8,914
Collateralized mortgage obligations - agencies			24,680				25,275				25,925				26,560				27,733
Unrealized gain/(loss) on available-for-sale securities			(14,536	)			(13,940	)			(14,184	)			(14,698	)			(13,509	)
Total available-for-sale			115,048				120,407				122,563				127,475				134,064
Held-to-maturity state and municipal			1,081				1,168				1,171				1,173				1,386
Equity securities			1,434				1,420				1,315				1,238				1,275
Total investment securities		$	117,563			$	122,995			$	125,049			$	129,886			$	136,725
		6/30/2023 vs 3/31/2023												6/30/2023 vs 6/30/2022
		Variance												Variance
		Amount				%								Amount				%
Available-for-sale
U.S. Government and federal agency			9				0.04	%						$	(2,980	)		(10.88		)%
State and municipal			(1,539	)		(6.80		)%							(1,753	)		(7.67		)%
Mortgage backed residential			(1,891	)		(3.46		)%							(7,968	)		(13.13		)%
Certificates of deposit			(747	)		(10.06		)%							(2,235	)		(25.07		)%
Collateralized mortgage obligations - agencies			(595	)		(2.35		)%							(3,053	)		(11.01		)%
Unrealized gain/(loss) on available-for-sale securities			(596	)			4.28	%							(1,027	)			7.60	%
Total available-for-sale			(5,359	)		(4.45		)%							(19,016	)		(14.18		)%
Held-to-maturity state and municipal			(87	)		(7.45		)%							(305	)		(22.01		)%
Equity securities			14				0.99	%							159				12.47	%
Total investment securities		$	(5,432	)		(4.42		)%						$	(19,162	)		(14.01		)%

The amortized cost and fair value of AFS investment securities as of June 30, 2023 were as follows:

		Maturing
		Due in One Year or Less			After One Year But Within Five Years			After Five Years But Within Ten Years			After Ten Years			Securities with Variable Monthly Payments or Noncontractual Maturities			Total
U.S. Government and federal agency		$	6,523		$	17,888		$	—		$	—		$	—		$	24,411
State and municipal			1,832			16,610			1,287			1,381			—			21,110
Mortgage backed residential			—												52,704			52,704
Certificates of deposit			4,704			1,975			—			—			—			6,679
Collateralized mortgage obligations - agencies			—			—			—			—			24,680			24,680
Total amortized cost		$	13,059		$	36,473		$	1,287		$	1,381		$	77,384		$	129,584
Fair value		$	12,747		$	33,065		$	1,160		$	1,259		$	66,817		$	115,048

The amortized cost and fair value of HTM investment securities as of June 30, 2023 were as follows:

		Maturing
		Due in One Year or Less			After One Year But Within Five Years			After Five Years But Within Ten Years			After Ten Years			Securities with Variable Monthly Payments or Noncontractual Maturities			Total
State and municipal		$	546		$	305		$	230		$	—		$	—		$	1,081
Fair value		$	540		$	294		$	222		$	—		$	—		$	1,056

Total investment securities have declined primarily due to maturities and prepayments, in addition to our unrealized loss position on available-for-sale investments. Due to the current liquidity environment and overall market conditions, we have not replenished maturing securities with new purchases.

Residential mortgage loans held-for-sale, at fair value

Loans HFS represent the fair value of loans that have been committed to be sold to the secondary market, but have not yet been delivered. The level of loans HFS fluctuates based on loan demand as well as the timing of loan deliveries to the secondary market.

Loans and allowance for credit losses

As outlined in the following tables, our loan portfolio has continued to grow throughout the past 12 months, primarily in the commercial real estate and residential mortgage segments. However, due to current market conditions, we expect minimal loan growth for the remainder of 2023. Specifically, our commercial pipeline has declined significantly since December 31, 2022, and the requests that are being presented are lower dollar balances and often carry an SBA guarantee. Our allowance for credit losses increased $2,000 during the first quarter of 2023 as a result of the adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" on January 1, 2023. This was recorded as a cumulative-effect adjustment, net of tax, from retained earnings. Based on analysis, we provided an additional $180 to our allowance for credit losses during the second quarter of 2023.

The following tables outline the composition and changes in the loan portfolio as of:

		6/30/2023				3/31/2023				12/31/2022				9/30/2022				6/30/2022
Commercial, net of PPP loans		$	120,985			$	111,557			$	106,616			$	107,531			$	108,054
PPP loans			—				—				—				—				429
Commercial real estate			870,761				874,690				869,496				820,165				745,416
Total commercial loans			991,746				986,247				976,112				927,696				853,899
Residential mortgage			430,065				418,987				406,408				368,971				327,574
Home equity			45,689				46,909				47,768				47,928				44,648
Total residential real estate loans			475,754				465,896				454,176				416,899				372,222
Consumer			4,788				5,030				5,878				6,256				6,771
Gross loans			1,472,288				1,457,173				1,436,166				1,350,851				1,232,892
Allowance for credit losses			(15,400	)			(15,220	)			(13,000	)			(12,200	)			(11,000	)
Loans, net		$	1,456,888			$	1,441,953			$	1,423,166			$	1,338,651			$	1,221,892
Memo items:
Gross loans, net of PPP loans		$	1,472,288			$	1,457,173			$	1,436,166			$	1,350,851			$	1,232,463
Residential mortgage loans serviced for others		$	632,018			$	636,121			$	647,121			$	660,490			$	678,117
		6/30/2023 vs 3/31/2023												6/30/2023 vs 6/30/2022
		Variance												Variance
		Amount				%								Amount				%
Commercial, net of PPP loans		$	9,428				8.45	%						$	12,931				11.97	%
PPP loans			—			N/M									(429	)		(100.00		)%
Commercial real estate			(3,929	)		(0.45		)%							125,345				16.82	%
Total commercial loans			5,499				0.56	%							137,847				16.14	%
Residential mortgage			11,078				2.64	%							102,491				31.29	%
Home equity			(1,220	)		(2.60		)%							1,041				2.33	%
Total residential real estate loans			9,858				2.12	%							103,532				27.81	%
Consumer			(242	)		(4.81		)%							(1,983	)		(29.29		)%
Gross loans			15,115				1.04	%							239,396				19.42	%
Allowance for credit losses			(180	)			1.18	%							(4,400	)			40.00	%
Loans, net		$	14,935				1.04	%						$	234,996				19.23	%
Memo items:
Gross loans, net of PPP loans		$	15,115				1.04	%						$	239,825				19.46	%
Residential mortgage loans serviced for others		$	(4,103	)		(0.65		)%						$	(46,099	)		(6.80		)%

The following table presents historical loan balances by portfolio segment and impairment evaluation as of:

		6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Loans collectively evaluated for impairment
Commercial and industrial		$	120,854		$	111,426		$	106,616		$	107,531		$	108,483
Commercial real estate			870,580			874,509			869,313			819,982			745,025
Residential mortgage			428,147			416,879			404,308			367,652			326,481
Home equity			45,535			46,761			47,728			47,887			44,607
Consumer			4,788			5,020			5,871			6,251			6,771
Subtotal			1,469,904			1,454,595			1,433,836			1,349,303			1,231,367
Loans individually evaluated for impairment
Commercial and industrial			131			131			—			—			—
Commercial real estate			181			181			183			183			391
Residential mortgage			1,918			2,108			2,100			1,319			1,093
Home equity			154			148			40			41			41
Consumer			—			10			7			5			—
Subtotal			2,384			2,578			2,330			1,548			1,525
Gross Loans		$	1,472,288		$	1,457,173		$	1,436,166		$	1,350,851		$	1,232,892

The following table presents historical allowance for credit losses allocations by portfolio segment and impairment evaluation as of:

		6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Loans collectively evaluated for impairment
Commercial and industrial		$	1,488		$	1,324		$	1,094		$	1,129		$	1,074
Commercial real estate			8,991			8,765			7,480			7,126			6,437
Residential mortgage			4,453			4,576			3,878			3,458			3,061
Home equity			325			416			370			370			345
Consumer			40			49			128			90			74
Unallocated			49			—			—			—			—
Subtotal			15,346			15,130			12,950			12,173			10,991
Loans individually evaluated for impairment
Commercial and industrial			15			3			—			—			—
Commercial real estate			—			—			—			—			—
Residential mortgage			39			77			43			27			9
Home equity			—			—			—			—			—
Consumer			—			10			7			—			—
Unallocated			—			—			—			—			—
Subtotal			54			90			50			27			9
Allowance for credit losses		$	15,400		$	15,220		$	13,000		$	12,200		$	11,000
Commercial and industrial		$	1,503		$	1,327		$	1,094		$	1,129		$	1,074
Commercial real estate			8,991			8,765			7,480			7,126			6,437
Residential mortgage			4,492			4,653			3,921			3,485			3,070
Home equity			325			416			370			370			345
Consumer			40			59			135			90			74
Unallocated			49			—			—			—			—
Allowance for credit losses		$	15,400		$	15,220		$	13,000		$	12,200		$	11,000

Loan concentration analysis

As a result of the current economic conditions, there continues to be a heightened focus in the financial industry for non-owner occupied commercial real estate loans, most specifically retail and office space industries. We continue to monitor various industries that have been impacted by the pandemic but we will now shift attention to new concerns associated with inflation, supply chain disruption, rising interest rates, and office space usage associated with an increased remote workforce. The overall non-owner occupied commercial real estate loan portfolio has remained solid, and performance has not been lacking. Performance is based on debt service coverage ratio, loan to value ratio and payment trends. As of June 30, 2023, delinquencies in the non-owner occupied commercial real estate loan portfolio continue to remain minimal, as only one loan was included in our 30-89 days past due category in the office pool for $179. We expect loan demand in the non-owner occupied commercial real estate loan portfolio to experience insignificant growth, if any, in future periods.

The net lease pool is one of the largest growth pools in the non-owner occupied commercial real estate portfolio and continues to remain strong. Risk associated within this pool is minimal as these are national or regional tenants that are well vetted during origination and annually thereafter. Risk is further minimized in this pool as locations are spread out nationally.

Due to the ongoing pressures on the office sector due to remote work capabilities and less required office space, we continue to monitor the office pool more closely for potential deterioration. It is not expected that there will be much, if any, impact on portfolio performance in this pool in the near future due to existing lease terms, tenant mix, office size, and strong underwriting at origination.

Below is a description of each industry pool within the non-owner occupied commercial real estate loan portfolio:

Net lease: Loans in this pool represent national credit tenants (or franchisees of the same) or large regional tenants with excellent credit. These loans are typically single tenant net lease credits with strong debt service coverage ratios and lease terms that extend beyond the maturity of the loan.

Retail strip centers: Loans in this pool represent loans collateralized by retail strip centers. The tenant base within this pool consists primarily of retail space whose average lease periods run between one and ten years. Larger strip centers are usually anchored by a national or regional tenant. Guarantors in this category typically have large liquid reserves.

Office: Loans in this pool represent loans collateralized by non-owner occupied office buildings. The tenant base includes legal and other professional services whose average lease periods run from three to fifteen years.

Special use: Loans in this pool represent loans collateralized by special use buildings, which include hotels, motels, assisted living and nursing homes that are not classified as construction or SBA loans.

Medical office: Loans in this pool represent loans collateralized by non-owner occupied medical office buildings. The tenant base includes medical services whose average lease periods run from three to fifteen years.

Industrial: Loans in pool represent investment properties used for manufacturing and production.

Self storage: Loans in this pool represent self storage buildings. Loan terms are generally five years or less and the lease terms of the units are typically on a month-to-month basis.

Mixed use: Loans in this pool represent loans collateralized by mixed use real estate. The tenant base within this pool consists primarily of office-retail, office-residential or retail-residential space. The properties are most often purchased by individuals for investment purposes.

Retail: Loans in this pool represent loans collateralized by single tenant retail buildings whose average lease periods run over five years.

The following tables present the composition of current and historical non-owner occupied commercial real estate loans, based on loan collateral, by industry pool:

		6/30/2023				3/31/2023				12/31/2022			9/30/2022				6/30/2022
Net lease		$	159,199			$	161,392			$	165,848		$	160,453			$	162,424
Retail strip centers			96,310				95,726				89,671			85,050				69,598
Office			62,062				59,867				60,166			58,997				42,556
Special use			57,978				41,932				35,284			25,289				26,576
Medical office			28,752				30,363				30,305			29,679				26,890
Industrial			28,661				29,025				30,396			32,222				28,235
Self storage			22,169				22,265				22,285			22,467				10,736
Mixed use			19,412				19,054				19,208			19,405				16,520
Retail			14,998				17,429				15,437			15,279				13,597
Total non-owner occupied commercial loans		$	489,541			$	477,053			$	468,600		$	448,841			$	397,132
		6/30/2023 vs 3/31/2023											6/30/2023 vs 6/30/2022
		Variance											Variance
		Amount				%							Amount				%
Net lease		$	(2,193	)		(1.36		)%					$	(3,225	)		(1.99		)%
Retail strip centers			584				0.61	%						26,712				38.38	%
Office			2,195				3.67	%						19,506				45.84	%
Special use			16,046				38.27	%						31,402				118.16	%
Medical office			(1,611	)		(5.31		)%						1,862				6.92	%
Industrial			(364	)		(1.25		)%						426				1.51	%
Self storage			(96	)		(0.43		)%						11,433				106.49	%
Mixed use			358				1.88	%						2,892				17.51	%
Retail			(2,431	)		(13.95		)%						1,401				10.30	%
Total non-owner occupied commercial loans		$	12,488				2.62	%					$	92,409				23.27	%

The following table presents current and historical non-owner occupied commercial real estate loans by industry as a percentage of gross loans:

		6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Net lease		10.81	%		11.08	%		11.55	%		11.88	%		13.17	%
Retail strip centers		6.54	%		6.57	%		6.24	%		6.30	%		5.65	%
Office		4.22	%		4.11	%		4.19	%		4.37	%		3.45	%
Special use		3.94	%		2.88	%		2.46	%		1.87	%		2.16	%
Medical office		1.95	%		2.08	%		2.11	%		2.20	%		2.18	%
Industrial		1.95	%		1.99	%		2.12	%		2.39	%		2.29	%
Self storage		1.51	%		1.53	%		1.55	%		1.66	%		0.87	%
Mixed use		1.32	%		1.31	%		1.34	%		1.44	%		1.34	%
Retail		1.02	%		1.20	%		1.07	%		1.13	%		1.10	%
Total non-owner occupied commercial loans to gross loans		33.26	%		32.75	%		32.63	%		33.24	%		32.21	%

Asset quality

The following table summarizes our current, past due, and nonaccrual loans as of:

		6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Accruing interest
Current		$	1,466,354		$	1,449,266		$	1,428,691		$	1,346,141		$	1,228,082
Past due 30-89 days			3,550			5,185			5,182			3,131			2,802
Past due 90 days or more			—			144			—			71			525
Total accruing interest			1,469,904			1,454,595			1,433,873			1,349,343			1,231,409
Nonaccrual			2,384			2,578			2,293			1,508			1,483
Total loans		$	1,472,288		$	1,457,173		$	1,436,166		$	1,350,851		$	1,232,892
Total loans past due and in nonaccrual status		$	5,934		$	7,907		$	7,475		$	4,710		$	4,810

The following table summarizes the our nonperforming assets as of:

		6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Nonaccrual loans		$	2,384		$	2,578		$	2,293		$	1,508		$	1,483
Accruing loans past due 90 days or more			—			144			—			71			525
Total nonperforming loans			2,384			2,722			2,293			1,579			2,008
Other real estate owned			345			293			293			293			383
Total nonperforming assets		$	2,729		$	3,015		$	2,586		$	1,872		$	2,391

The following table summarizes our charge-offs, recoveries and provision for loan losses as of, and for the three-month periods ended:

		6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Total charge-offs		$	42		$	28		$	58		$	40		$	533
Total recoveries			17			12			11			9			8
Net charge-offs (recoveries)		$	25		$	16		$	47		$	31		$	525
Provision for loan losses		$	205		$	236		$	847		$	1,231		$	525

The following table summarizes the our primary asset quality measures as of:

		6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Nonperforming loans to gross loans		0.16	%		0.19	%		0.16	%		0.12	%		0.16	%
Nonperforming assets to total assets		0.16	%		0.17	%		0.15	%		0.12	%		0.16	%
Allowance for credit losses to gross loans		1.05	%		1.04	%		0.91	%		0.90	%		0.89	%
Allowance for credit losses to gross loans, net of PPP loans		1.05	%		1.04	%		0.91	%		0.90	%		0.89	%
Net charge-offs (recoveries) to QTD average gross loans		—	%		—	%		—	%		—	%		0.04	%
Provision for loan losses to QTD average gross loans		0.01	%		0.02	%		0.06	%		0.10	%		0.04	%

The following table summarizes our net unamortized premium (discount) on purchased loans as of:

		6/30/2023			3/31/2023			12/31/2022			9/30/2022				6/30/2022
Net unamortized premium (discount) on purchased loans		$	—		$	—		$	—		$	(25	)		$	(51	)

The following table summarizes the average loan size as of:

		6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Commercial and industrial		$	346		$	312		$	311		$	314		$	309
Commercial real estate			885			895			890			851			802
Total commercial loans			743			739			740			711			667
Residential mortgage			234			228			225			217			208
Home equity			51			52			52			52			50
Total residential real estate loans			174			170			166			159			151
Consumer			12			13			13			14			14
Gross loans		$	333		$	328		$	323		$	311		$	292

All other assets

The following tables outline the composition and changes in other assets as of:

		6/30/2023				3/31/2023				12/31/2022			9/30/2022				6/30/2022
Premises and equipment, net		$	15,345			$	15,219			$	15,571		$	16,100			$	16,459
Federal Home Loan Bank stock			11,498				10,958				10,215			5,760				4,140
Corporate owned life insurance			27,047				26,869				26,697			26,522				26,350
Mortgage servicing rights			8,765				8,773				8,666			8,795				8,588
Accrued interest receivable			3,992				3,976				4,002			3,300				2,798
Goodwill			8,853				8,853				8,853			8,853				8,853
Other assets
Core deposit intangibles			684				760				836			943				1,051
Right-of-use assets			1,510				1,107				1,204			1,065				1,159
Other real estate owned			345				293				293			293				383
Other			6,042				5,946				5,974			5,017				3,882
Total			8,581				8,106				8,307			7,318				6,475
All other assets		$	84,081			$	82,754			$	82,311		$	76,648			$	73,663
		6/30/2023 vs 3/31/2023											6/30/2023 vs 6/30/2022
		Variance											Variance
		Amount				%							Amount				%
Premises and equipment, net		$	126				0.83	%					$	(1,114	)		(6.77		)%
Federal Home Loan Bank stock			540				4.93	%						7,358				177.73	%
Corporate owned life insurance			178				0.66	%						697				2.65	%
Mortgage servicing rights			(8	)		(0.09		)%						177				2.06	%
Accrued interest receivable			16				0.40	%						1,194				42.67	%
Goodwill			—				—	%						—				—	%
Other assets
Core deposit intangibles			(76	)		(10.00		)%						(367	)		(34.92		)%
Right-of-use assets			403				36.40	%						351				30.28	%
Other real estate owned			52				17.75	%						(38	)		(9.92		)%
Other			96				1.61	%						2,160				55.64	%
Total			475				5.86	%						2,106				32.53	%
All other assets		$	1,327				1.60	%					$	10,418				14.14	%

The increase in FHLB stock throughout 2022 and into 2023 is a direct result of an increase in FHLB advances to support our continued loan growth. However, as loan growth has recently moderated, our reliance on FHLB advances has declined. As such, we anticipate our FHLB stock balance will remain consistent in future periods.

The increase in right-of-use assets in the second quarter of 2023 was primarily due to a lease renewal for office equipment.

Total deposits

The following tables outline the composition and changes in the deposit portfolio as of:

		6/30/2023				3/31/2023				12/31/2022			9/30/2022				6/30/2022
Noninterest bearing demand		$	457,204			$	457,585			$	461,390		$	500,204			$	493,262
Interest bearing
Savings			301,872				323,254				351,066			380,118				368,849
Money market demand			221,686				214,781				170,459			213,672				144,606
NOW
Retail NOW			161,765				155,659				136,611			148,775				118,707
Brokered NOW			—				60,005				40,009			—				—
Total NOW Accounts			161,765				215,664				176,620			148,775				118,707
Time deposits
Other time deposits			176,280				121,567				102,358			80,454				84,376
Brokered time deposits			60,395				20,077				70,000			20,000				20,000
Internet time deposits			990				990				990			1,986				1,743
Total time deposits			237,665				142,634				173,348			102,440				106,119
Total deposits		$	1,380,192			$	1,353,918			$	1,332,883		$	1,345,209			$	1,231,543
		6/30/2023 vs 3/31/2023											6/30/2023 vs 6/30/2022
		Variance											Variance
		Amount				%							Amount				%
Noninterest bearing demand		$	(381	)		(0.08		)%					$	(36,058	)		(7.31		)%
Interest bearing
Savings			(21,382	)		(6.61		)%						(66,977	)		(18.16		)%
Money market demand			6,905				3.21	%						77,080				53.30	%
NOW
Retail NOW			6,106				3.92	%						43,058				36.27	%
Brokered NOW			(60,005	)		(100.00		)%						—				—	%
Total NOW Accounts			(53,899	)		(24.99		)%						43,058				36.27	%
Time deposits
Other time deposits			54,713				45.01	%						91,904				108.92	%
Brokered time deposits			40,318				200.82	%						40,395				201.98	%
Internet time deposits			—				—	%						(753	)		(43.20		)%
Total time deposits			95,031				66.63	%						131,546				123.96	%
Total deposits		$	26,274				1.94	%					$	148,649				12.07	%

Beginning in March 2022, the FOMC began raising its target federal funds rate in order to combat rising inflation. Since then, the FOMC has raised its target federal funds rate 10 times, from a target range of 0.00-0.25% to 5.00-5.25%, or 500 basis points. This rapid increase in interest rates has led to significant competition amongst financial institutions for deposits. Due to the expectation that interest rates may continue to rise, customers have not sought out long-term funds, leading to a shift in demand to higher-yielding non-maturity deposit accounts as well as short-term time deposits. While overall market liquidity continues to tighten and be extremely competitive, we have strategic initiatives in place to grow core market deposits throughout 2023.

As a result of the competitive deposit market and customer demand shifting to non-maturity deposit accounts and short-term time deposits, we navigated away from brokered NOW accounts and executed two brokered time deposits during the second quarter of 2023 totaling $40,251, which were split between two- and three-year maturities.

Total borrowed funds

The following tables outline the composition and changes in borrowed funds as of:

		6/30/2023				3/31/2023				12/31/2022			9/30/2022			6/30/2022
Federal Home Loan Bank borrowings		$	180,000			$	238,500			$	202,000		$	97,000		$	92,000
Subordinated debentures			14,000				14,000				14,000			14,000			14,000
Other borrowings			6,550				6,550				6,350			5,600			5,000
Total borrowed funds		$	200,550			$	259,050			$	222,350		$	116,600		$	111,000
		6/30/2023 vs 3/31/2023											6/30/2023 vs 6/30/2022
		Variance											Variance
		Amount				%							Amount			%
Federal Home Loan Bank borrowings		$	(58,500	)		(24.53		)%					$	88,000			95.65	%
Subordinated debentures			—				—	%						—			—	%
Other borrowings			—				—	%						1,550			31.00	%
Total borrowed funds		$	(58,500	)		(22.58		)%					$	89,550			80.68	%

We utilize a mix of borrowed funds and organic deposit growth to fund loan demand. The increase in Federal Home Loan Bank borrowings throughout 2022 and into the first quarter of 2023 was the result of the highly competitive deposit landscape and the growth of our loan portfolio, which grew $239,825, or 19.46%, net of PPP loans, since the second quarter of 2022 (see "Wholesale funding sources" below). However, as loan growth has recently moderated, our reliance on FHLB advances declined during the second quarter of 2023.

Wholesale funding sources

Although we have been successful at growing market deposits, we utilize wholesale funding sources when necessary to fill gaps when asset growth outpaces deposit growth. Our wholesale funding sources include Federal Home Loan Bank borrowings, correspondent Fed Funds lines and brokered deposits. Although wholesale funding sources are typically more expensive than core deposits, they are an integral part of our funding.

The following tables outline the composition and changes in wholesale funding sources as of:

		6/30/2023				3/31/2023				12/31/2022			9/30/2022				6/30/2022
Federal Home Loan Bank borrowings		$	180,000			$	238,500			$	202,000		$	97,000			$	92,000
Subordinated debentures			14,000				14,000				14,000			14,000				14,000
Other borrowings			6,550				6,550				6,350			5,600				5,000
Brokered NOW accounts			—				60,005				40,009			—				—
Brokered time deposits			60,395				20,077				70,000			20,000				20,000
Internet time deposits			990				990				990			1,986				1,743
Total wholesale funds		$	261,935			$	340,122			$	333,349		$	138,586			$	132,743
		6/30/2023 vs 3/31/2023											6/30/2023 vs 6/30/2022
		Variance											Variance
		Amount				%							Amount				%
Federal Home Loan Bank borrowings		$	(58,500	)		(24.53		)%						88,000				95.65	%
Subordinated debentures			—				—	%						—				—	%
Other borrowings			—				—	%						1,550				31.00	%
Brokered NOW accounts			(60,005	)		(100.00		)%						—			N/A
Brokered time deposits			40,318				200.82	%						40,395				201.98	%
Internet time deposits			—				—	%						(753	)		(43.20		)%
Total wholesale funds		$	(78,187	)		(22.99		)%					$	129,192				97.32	%

As noted above, the increased competition for deposits, coupled with strong loan growth has led to an increased utilization of wholesale funding sources. During the second quarter of 2023, our reliance on wholesale funding sources decreased, as our outstanding FHLB borrowings declined $58,500 and brokered NOW accounts declined $60,005. However, we replaced a portion of these wholesale funds by executing two brokered time deposits during the second quarter of 2023 totaling $40,251.

Accrued interest payable and other liabilities

Accrued interest payable and other liabilities includes accrued interest payable, federal income taxes payable, deferred federal income taxes payable, and all other liabilities (none of which are individually significant).

Total shareholders' equity

We are considered a “well-capitalized” institution, as our capital ratios exceed the minimum designated standards necessary in accordance with Basel III guidelines. As of June 30, 2023, the Bank's total capital ratio was 11.51%, tier 1 capital ratio was 10.43%, and tier 1 leverage ratio was 8.71%. The minimum requirements to be considered well-capitalized are a total capital ratio of 10.00%, tier 1 capital ratio of 8.00%, and tier 1 leverage ratio of 5.00%. While we continue to be considered well-capitalized, we are focused on enhancing our capital ratios through asset growth moderation strategies.

The following tables outline the composition and changes in shareholders' equity as of:

		6/30/2023				3/31/2023				12/31/2022				9/30/2022				6/30/2022
Common stock		$	73,993			$	73,868			$	73,569			$	73,460			$	73,324
Retained earnings			67,643				64,863				63,044				59,080				55,469
Accumulated other comprehensive (loss) income			(10,946	)			(10,484	)			(10,526	)			(10,910	)			(10,227	)
Total shareholders' equity		$	130,690			$	128,247			$	126,087			$	121,630			$	118,566
		6/30/2023 vs 3/31/2023												6/30/2023 vs 6/30/2022
		Variance												Variance
		Amount				%								Amount				%
Common stock		$	125				0.17	%						$	669				0.91	%
Retained earnings			2,780				4.29	%							12,174				21.95	%
Accumulated other comprehensive (loss) income			(462	)			4.41	%							(719	)			7.03	%
Total shareholders' equity		$	2,443				1.90	%						$	12,124				10.23	%

The Board of Directors has authorized the repurchase of up to $10,000 of common stock. As of June 30, 2023, we had $1,393 of common stock available to repurchase through the program. The following tables outline the number of shares, dollar amount and weighted average share price associated with the common stock repurchase plan for the following periods:

		Three Months Ended
		6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Number of Shares Repurchased			—			—			—			—			35,000
Dollar Amount of Shares Repurchased		$	—		$	—		$	—		$	—		$	935
Weighted Average Share Price		N/A			N/A			N/A			N/A			$	26.71

Stock Performance

The following graph compares the cumulative total shareholder return on our common stock for the last five years with the cumulative total return on the ABA NASDAQ Community Bank Index (NASDAQ: ABAQ) over the same period. The graph assumes the value of an investment in our common stock and the ABA NASDAQ Community Bank Index was $100 at June 30, 2018 and all dividends were reinvested.

The graph accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/eb538d8e-5144-4f8e-b7f3-a54ee300dc61

Date		FETM			ABAQ Index
6/30/2018		$	100.00		$	100.00
6/30/2019			98.86			88.28
6/30/2020			84.83			65.25
6/30/2021			127.30			101.13
6/30/2022			124.17			92.66
6/30/2023			99.19			74.26

Abbreviations and Acronyms

ABA: American Bankers Association	FTE: Fully taxable equivalent
ACH: Automated Clearing House	GAAP: Generally Accepted Accounting Principles
ACL: Allowance for credit losses	HFS: Held-for-sale
AFS: Available-for-sale	HTM: Held-to-maturity
AIR: Accrued interest receivable	HFS: Held-for-sale
AOCI: Accumulated other comprehensive income	HTM: Held-to-maturity
ARRC: Alternative Reference Rates Committee	IRA: Individual retirement account
ASC: Accounting Standards Codification	ITM: Interactive Teller Machine
ASU: Accounting Standards Update	LIBOR: London Interbank Offered Rate
ATM: Automated teller machine	MSR: Mortgage servicing rights
CARES Act: Coronavirus Aid, Relief, and Economic Security Act	N/M: Not meaningful
CDI: Core deposit intangible	NASDAQ: National Association of Securities Dealers Automated Quotations
CET1: Common equity tier 1	NOW: Negotiable order of withdrawal
COLI: Corporate owned life insurance	NSF: Non-sufficient funds
COVID-19: Coronavirus Disease 2019	OCI: Other comprehensive income
DRIP: Dividend Reinvestment Plan	OIS: Overnight Index Swap
EPS: Earnings Per Common Share	OREO: Other real estate owned
ESOP: Employee Stock Ownership Plan	OTTI: Other-than-temporary impairment
FASB: Financial Accounting Standards Board	PPP: Paycheck Protection Program
FDIC: Federal Deposit Insurance Corporation	PPPLF: Paycheck Protection Program Liquidity Facility
FHLB: Federal Home Loan Bank	QTD: Quarter-to-date
FHLLC: Fentura Holdings LLC	SAB: Staff Accounting Bulletin
FHLMC: Federal Home Loan Mortgage Corporation	SBA: U.S. Small Business Administration
FNMA: Federal National Mortgage Association	SEC: Securities and Exchange Commission
FOMC: Federal Open Market Committee	SERP: Supplemental Executive Retirement Plan
FRB: Federal Reserve Bank	SOFR: Secured Overnight Funding Rate
FSB: Farmers State Bank of Munith	TDR: Troubled debt restructuring

About Fentura Financial, Inc. and The State Bank

Fentura Financial, Inc. is the holding company for The State Bank. It was formed in 1987 and is traded on the OTCQX exchange under the symbol FETM, and has been recognized as one of the Top 50 performing stocks on that exchange.

The State Bank is a commercial, retail and trust bank headquartered in Fenton, Michigan. It currently operates 20 full-service offices and one loan production center serving Bay, Genesee, Ingham, Jackson, Livingston, Oakland, Saginaw, and Shiawassee counties. The State Bank believes in the potential of banking to help create better lives, better businesses, and better communities, and works to achieve this through its full array of consumer, mortgage, SBA, commercial and wealth management banking and advisory services, together with philanthropic and volunteer support to organizations and groups within the communities it serves. More information can be found at www.thestatebank.com or www.fentura.com.

Cautionary Statement: This press release contains certain forward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements concerning future growth in earning assets and net income. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including, but not limited to, economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services, interest rates and fees for services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release.

Contacts:		Ronald L. Justice		Aaron D. Wirsing
		President & CEO		Chief Financial Officer
		Fentura Financial, Inc.		Fentura Financial, Inc.
		810.714.3902		810.714.3925
		ron.justice@thestatebank.com		aaron.wirsing@thestatebank.com