Fentura Financial, Inc. Announces Second Quarter 2020 Earnings

Dollars in thousands except per share amounts. Certain items in the prior period financial statements have been reclassified to conform with the June 30, 2020 presentation.

FENTON, Mich., Aug. 04, 2020 (GLOBE NEWSWIRE) -- Fentura Financial, Inc. (OTCQX: FETM) announces quarterly results of net income of $4,043 and $7,395 for the three and six month periods ended June 30, 2020.

“Looking back on the second quarter, I am proud of the Fentura team. We worked hard and will continue efforts to serve our clients and help those in need get through the COVID-19 pandemic,” stated Ronald Justice, President and Chief Executive Officer of the Corporation. “We provided loan payment relief, interest free loans to individuals, significantly lowered and eliminated certain fees, performed daily cash drawings for a month, and provided more than 1,200 PPP loans totaling more than $205,000 to support local communities.”

Justice added, “Looking forward, as we navigate through these challenging times, we will continue to focus on prudent growth, a strong net interest margin, and maintaining credit quality, while supporting our customers and communities.”

Following is a discussion of the Corporation's financial performance as of, and for the quarter ended June 30, 2020. At the end of this document is a list of abbreviations and acronyms.

Results of Operations
The following table outlines the Corporation's QTD results of operations and provides certain performance measures as of, and for the three month periods ended:

		6/30/2020				3/31/2020				12/31/2019				9/30/2019				6/30/2019
INCOME STATEMENT DATA
Interest income		$	11,215			$	11,070			$	11,076			$	11,240			$	10,788
Interest expense		1,618				2,145				2,158				2,184				2,195
Net interest income		9,597				8,925				8,918				9,056				8,593
Provision for loan losses		2,001				1,542				436				422				264
Noninterest income		5,292				4,513				2,129				2,262				2,250
Noninterest expenses		7,809				7,686				7,415				6,608				6,691
Federal income tax expense		1,036				858				644				873				791
Net income		$	4,043			$	3,352			$	2,552			$	3,415			$	3,097
PER SHARE
Earnings		$	0.87			$	0.72			$	0.55			$	0.73			$	0.67
Dividends		$	0.075			$	0.075			$	0.07			$	0.07			$	0.07
Tangible book value(1)		$	22.44			$	21.56			$	20.87			$	20.37			$	19.59
Quoted market value
High		$	18.95			$	26.00			$	25.50			$	21.00			$	21.00
Low		$	14.90			$	12.55			$	20.60			$	20.45			$	20.45
Close(1)		$	17.35			$	15.50			$	25.23			$	21.00			$	20.60
PERFORMANCE RATIOS
Return on average assets		1.35		%		1.28		%		1.02		%		1.40		%		1.31		%
Return on average shareholders' equity		15.20		%		13.01		%		10.03		%		13.83		%		13.14		%
Return on average tangible shareholders' equity		15.79		%		13.54		%		10.46		%		14.47		%		13.79		%
Efficiency ratio		52.45		%		57.20		%		67.12		%		58.38		%		61.71		%
Yield on earning assets (FTE)		3.94		%		4.47		%		4.66		%		4.85		%		4.81		%
Rate on interest bearing liabilities		0.91		%		1.28		%		1.36		%		1.42		%		1.46		%
Net interest margin to earning assets (FTE)		3.37		%		3.61		%		3.75		%		3.91		%		3.83		%
BALANCE SHEET DATA(1)
Total investment securities		$	75,526			$	76,312			$	61,621			$	62,351			$	73,285
Gross loans		$	1,044,564			$	865,577			$	870,555			$	826,597			$	813,547
Total assets		$	1,237,694			$	1,071,180			$	1,034,759			$	978,046			$	949,790
Total deposits		$	1,018,287			$	883,837			$	863,102			$	801,101			$	792,555
Borrowed funds		$	96,217			$	71,500			$	61,500			$	69,000			$	54,000
Total shareholders' equity		$	108,969			$	104,828			$	101,444			$	99,142			$	95,504
Net loans to total deposits		101.70		%		97.11		%		100.19		%		102.51		%		102.02		%
Common shares outstanding		4,680,920				4,675,499				4,664,369				4,658,722				4,653,343
QTD BALANCE SHEET AVERAGES
Total assets		$	1,200,966			$	1,049,245			$	994,094			$	971,074			$	947,095
Earning assets		$	1,146,941			$	997,089			$	944,692			$	920,857			$	900,738
Interest bearing liabilities		$	711,500			$	672,564			$	629,454			$	611,804			$	603,965
Total shareholders' equity		$	106,998			$	103,646			$	100,991			$	97,958			$	94,519
Total tangible shareholders' equity		$	102,999			$	99,558			$	96,796			$	93,650			$	90,098
Earned common shares outstanding		4,664,946				4,659,279				4,652,569				4,646,835				4,641,161
Unvested stock grants		14,208				13,481				9,947				9,967				9,967
Total common shares outstanding		4,679,154				4,672,760				4,662,516				4,656,802				4,651,128
ASSET QUALITY(1)
Nonperforming loans to gross loans		0.10		%		0.10		%		0.17		%		0.11		%		0.13		%
Nonperforming assets to total assets		0.08		%		0.12		%		0.14		%		0.09		%		0.11		%
Allowance for loan losses to gross loans		0.86		%		0.84		%		0.67		%		0.65		%		0.62		%
CAPITAL RATIOS(1)
Total capital to risk weighted assets		15.06		%		14.42		%		14.03		%		14.42		%		14.18		%
Tier 1 capital to risk weighted assets		14.00		%		13.56		%		13.33		%		13.73		%		13.53		%
CET1 capital to risk weighted assets		12.34		%		11.91		%		11.64		%		11.96		%		11.73		%
Tier 1 leverage ratio		9.90		%		10.97		%		11.20		%		11.22		%		11.16		%
(1)At end of period

The following table outlines the Corporation's YTD results of operations and provides certain performance measures as of, and for the six month periods ended:

		6/30/2020				6/30/2019				6/30/2018				6/30/2017				6/30/2016
INCOME STATEMENT DATA
Interest income		$	22,285			$	21,225			$	17,108			$	13,681			$	9,036
Interest expense		3,763				4,285				2,263				1,389				1,158
Net interest income		18,522				16,940				14,845				12,292				7,878
Provision for loan losses		3,543				477				576				125				—
Noninterest income		9,805				3,772				3,814				3,372				3,014
Noninterest expenses		15,495				13,200				12,328				10,837				7,972
Federal income tax expense		1,894				1,424				1,163				1,476				997
Net income		$	7,395			$	5,611			$	4,592			$	3,226			$	1,923
PER SHARE
Earnings		$	1.59			$	1.21			$	1.26			$	0.89			$	0.77
Dividends		$	0.15			$	0.14			$	0.12			$	0.10			$	0.30
Tangible book value(1)		$	22.44			$	19.59			$	16.00			$	13.45			$	13.37
Quoted market value
High		$	26.00			$	21.00			$	21.25			$	18.50			$	14.94
Low		$	12.55			$	20.05			$	18.88			$	15.10			$	12.85
Close(1)		$	17.35			$	20.60			$	21.10			$	18.25			$	13.30
PERFORMANCE RATIOS
Return on average assets		1.32		%		1.20		%		1.16		%		0.90		%		0.85		%
Return on average shareholders' equity		14.13		%		12.14		%		15.13		%		12.36		%		11.58		%
Return on average tangible shareholders' equity		14.69		%		12.75		%		16.47		%		13.16		%		11.58		%
Efficiency ratio		54.70		%		63.73		%		66.07		%		69.18		%		73.19		%
Yield on earning assets (FTE)		4.19		%		4.79		%		4.42		%		4.16		%		4.41		%
Rate on interest bearing liabilities		1.09		%		1.43		%		0.90		%		0.57		%		0.78		%
Net interest margin to earning assets (FTE)		3.47		%		3.82		%		3.82		%		3.73		%		3.84		%
BALANCE SHEET DATA(1)
Total investment securities		$	75,526			$	73,285			$	49,110			$	70,699			$	24,378
Gross loans		$	1,044,564			$	813,547			$	707,364			$	591,753			$	396,565
Total assets		$	1,237,694			$	949,790			$	841,459			$	730,511			$	473,714
Total deposits		$	1,018,287			$	792,555			$	702,035			$	614,167			$	393,578
Borrowed funds		$	96,217			$	54,000			$	74,000			$	59,000			$	44,000
Total shareholders' equity		$	108,969			$	95,504			$	63,078			$	54,255			$	33,919
Net loans to total deposits		101.70		%		102.02		%		100.18		%		95.85		%		99.85		%
Common shares outstanding		4,680,920				4,653,343				3,640,060				3,629,097				2,536,948
YTD BALANCE SHEET AVERAGES
Total assets		$	1,125,064			$	940,585			$	797,594			$	723,786			$	454,152
Earning assets		$	1,072,008			$	894,357			$	749,755			$	631,928			$	410,313
Interest bearing liabilities		$	692,035			$	604,469			$	509,294			$	499,636			$	297,662
Total shareholders' equity		$	105,276			$	93,239			$	61,219			$	52,786			$	33,393
Total tangible shareholders' equity		$	101,233			$	88,762			$	56,221			$	49,586			$	33,393
Earned common shares outstanding		4,662,113				4,638,208				3,635,446				3,624,719				2,497,403
Unvested stock grants		13,844				9,878				—				—				—
Total common shares outstanding		4,675,957				4,648,086				3,635,446				3,624,719				2,497,403
ASSET QUALITY(1)
Nonperforming loans to gross loans		0.10		%		0.13		%		0.14		%		0.09		%		0.02		%
Nonperforming assets to total assets		0.08		%		0.11		%		0.13		%		0.08		%		0.02		%
Allowance for loan losses to gross loans		0.86		%		0.62		%		0.57		%		0.52		%		0.90		%
CAPITAL RATIOS(1)
Total capital to risk weighted assets		15.06		%		14.18		%		11.20		%		11.25		%		12.98		%
Tier 1 capital to risk weighted assets		14.00		%		13.53		%		10.62		%		10.73		%		12.08		%
CET1 capital to risk weighted assets		12.34		%		11.73		%		8.59		%		8.36		%		8.54		%
Tier 1 leverage ratio		9.90		%		11.16		%		9.14		%		8.99		%		10.40		%
(1)At end of period

Income Statement Breakdown and Analysis

		Quarter to Date
		6/30/2020					3/31/2020					12/31/2019					9/30/2019					6/30/2019
GAAP net income		$	4,043				$	3,352				$	2,552				$	3,415				$	3,097
Acquisition related items (net of tax)
Accretion on purchased loans		(110		)			(180		)			(126		)			(189		)			(145		)
Amortization of core deposit intangibles		71					71					89					88					90
Amortization on acquired time deposits		5					5					7					7					7
Amortization on purchased mortgage servicing rights		—					—					3					3					3
Total acquisition related items (net of tax)		(34		)			(104		)			(27		)			(91		)			(45		)
Other nonrecurring items (net of tax)
Interest income on PPP loans		(771		)			—					—					—					—
Net gain from COLI death benefit		(137		)			—					—					—					—
Prepayment penalties collected		(12		)			(36		)			(42		)			(284		)			(9		)
Change in fair value of equity investment due to acquisition transaction		—					(578		)			—					—					—
Change in fair value of mortgage banking instruments		—					(448		)			—					—					—
Interest expense on PPPLF		6					—					—					—					—
Deferred costs recognized for PPP loans		58					—					—					—					—
Mortgage servicing rights impairment		191					173					—					—					—
Total other nonrecurring items (net of tax)		(665		)			(889		)			(42		)			(284		)			(9		)
Adjusted net income from operations		$	3,344				$	2,359				$	2,483				$	3,040				$	3,043
GAAP net interest income		$	9,597				$	8,925				$	8,918				$	9,056				$	8,593
Interest income on PPP loans		(976		)			—					—					—					—
Accretion on purchased loans		(139		)			(228		)			(160		)			(239		)			(183		)
Prepayment penalties collected		(15		)			(46		)			(53		)			(360		)			(12		)
Amortization on acquired time deposits		6					6					9					9					9
Interest expense on PPPLF		8					—					—					—					—
Deferred costs recognized for PPP loans		73					—					—					—					—
Adjusted net interest income		$	8,554				$	8,657				$	8,714				$	8,466				$	8,407
PERFORMANCE RATIOS
Based on adjusted net income from operations
Earnings per share		$	0.72				$	0.51				$	0.53				$	0.65				$	0.66
Return on average assets		1.12			%		0.90			%		0.99			%		1.24			%		1.29			%
Return on average shareholders' equity		12.57			%		9.15			%		9.75			%		12.31			%		12.91			%
Return on average tangible shareholders' equity		13.06			%		9.53			%		10.18			%		12.88			%		13.55			%
Based on adjusted net interest income
Yield on earning assets (FTE)		3.89			%		4.36			%		4.57			%		4.59			%		4.72			%
Rate on interest bearing liabilities		0.91			%		1.28			%		1.37			%		1.43			%		1.47			%
Net interest margin to earning assets (FTE)		3.32			%		3.50			%		3.66			%		3.66			%		3.75			%

		Year to Date June 30										Variance
		2020					2019					Amount					%
GAAP net income		$	7,395				$	5,611				$	1,784				31.79		%
Acquisition related items (net of tax)
Accretion on purchased loans		(290		)			(320		)			30					(9.38	)	%
Amortization of core deposit intangibles		142					179					(37		)			(20.67	)	%
Amortization on acquired time deposits		10					13					(3		)			(23.08	)	%
Amortization on purchased mortgage servicing rights		—					6					(6		)			(100.00	)	%
Total acquisition related items (net of tax)		(138		)			(122		)			(16		)			13.11		%
Other nonrecurring items (net of tax)
Interest income on PPP loans		(771		)			—					(771		)			N/M
Change in fair value of equity investment due to acquisition transaction		(578		)			—					(578		)			N/M
Change in fair value of mortgage banking instruments		(448		)			—					(448		)			N/M
Net gain from COLI death benefit		(137		)			—					(137		)			N/M
Prepayment penalties collected		(48		)			(22		)			(26		)			118.18		%
Interest expense on PPPLF		6					—					6					N/M
Deferred costs recognized for PPP loans		58					—					58					N/M
Mortgage servicing rights impairment		364					—					364					N/M
Total other nonrecurring items (net of tax)		(1,554		)			(22		)			(1,532		)			6,963.64		%
Adjusted net income from operations		$	5,703				$	5,467				$	236				4.32		%
GAAP net interest income		$	18,522				$	16,940				$	1,582				9.34		%
Interest income on PPP loans		(976		)			—					(976		)			N/M
Accretion on purchased loans		(367		)			(405		)			38					(9.38	)	%
Prepayment penalties collected		(61		)			(28		)			(33		)			117.86		%
Amortization on acquired time deposits		12					17					(5		)			(29.41	)	%
Interest expense on PPPLF		8					—					8					N/M
Deferred costs recognized for PPP loans		73					—					73					N/M
Adjusted net interest income		$	17,211				$	16,524				$	687				4.16		%
PERFORMANCE RATIOS
Based on adjusted net income from operations
Earnings per share		$	1.22				$	1.18				$	0.04				3.39		%
Return on average assets		1.02			%		1.17			%							(0.15	)	%
Return on average shareholders' equity		10.89			%		11.82			%							(0.93	)	%
Return on average tangible shareholders' equity		11.33			%		12.42			%							(1.09	)	%
Based on adjusted net interest income
Yield on earning assets (FTE)		4.10			%		4.69			%							(0.59	)	%
Rate on interest bearing liabilities		1.09			%		1.44			%							(0.35	)	%
Net interest margin to earning assets (FTE)		3.39			%		3.73			%							(0.34	)	%

To effectively compare core operating results from period to period, the impact of acquisition related items and other nonrecurring items have been isolated.

The Corporation adopted Staff Accounting Bulletin No. 109 as of January 1, 2020. This standard required the Corporation to record the servicing assets of interest rate lock commitments and loans held for sale at fair value.  The Corporation also opted to recognize the interest rate lock commitments, loans held for sale, and forward commitments at fair value. Changes in the fair value of these instruments is recognized as a component of noninterest income.  As forward loan sales commitments were previously recorded at fair value, the nonrecurring item impact disclosed above represents the change in fair value of interest rate lock commitments and loans held for sale.

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.

		Three Months Ended
		June 30, 2020												March 31, 2020												June 30, 2019
		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		$	1,048,068				$	10,788			4.14	%		$	878,813				$	10,481			4.80	%		$	805,954				$	10,141			5.05	%
Taxable investment securities		62,829					323				2.07	%		56,963					353				2.49	%		67,237					462				2.76	%
Nontaxable investment securities		11,449					84				2.95	%		10,532					81				3.09	%		9,374					70				3.00	%
Federal funds sold		—					—				—	%		33,588					116				1.39	%		10,195					61				2.40	%
Interest earning cash and cash equivalents		21,314					5				0.09	%		14,043					26				0.74	%		4,828					28				2.33	%
Federal Home Loan Bank stock		3,281					33				4.05	%		3,150					30				3.83	%		3,150					41				5.22	%
Total earning assets		1,146,941					11,233				3.94	%		997,089					11,087				4.47	%		900,738					10,803				4.81	%
Nonearning assets
Allowance for loan losses		(7,753		)										(5,821		)										(4,822		)
Fixed assets		15,509												15,538												14,837
Accrued income and other assets		46,269												42,439												36,342
Total assets		$	1,200,966											$	1,049,245											$	947,095
Interest bearing liabilities
Interest bearing demand deposits		$	189,981				$	249			0.53	%		$	170,598				$	475			1.12	%		$	75,495				$	117			0.62	%
Savings deposits		247,687					140				0.23	%		231,188					199				0.35	%		243,795					319				0.52	%
Time deposits		181,661					821				1.82	%		205,485					1,053				2.06	%		229,863					1,319				2.30	%
Borrowed funds		92,171					408				1.78	%		65,293					418				2.57	%		54,812					440				3.22	%
Total interest bearing liabilities		711,500					1,618				0.91	%		672,564					2,145				1.28	%		603,965					2,195				1.46	%
Noninterest bearing liabilities
Noninterest bearing deposits		371,320												264,699												243,010
Accrued interest and other liabilities		11,148												8,336												5,601
Shareholders' equity		106,998												103,646												94,519
Total liabilities and shareholders' equity		$	1,200,966											$	1,049,245											$	947,095
Net interest income (FTE)							$	9,615											$	8,942											$	8,608
Net interest margin to earning assets (FTE)											3.37	%											3.61	%											3.83	%

		Six Months Ended
		June 30, 2020												June 30, 2019
		Average Balance					Tax Equivalent Interest				Average Yield / Rate			Average Balance					Tax Equivalent Interest				Average Yield / Rate
Interest earning assets
Total loans		$	963,400				$	21,269			4.44	%		$	798,511				$	19,882			5.02	%
Taxable investment securities		59,896					676				2.27	%		73,303					1,021				2.81	%
Nontaxable investment securities		10,991					165				3.02	%		9,977					146				2.95	%
Federal funds sold		16,794					116				1.39	%		5,119					61				2.40	%
Interest earning cash and cash equivalents		17,712					31				0.35	%		4,297					53				2.49	%
Federal Home Loan Bank stock		3,215					63				3.94	%		3,150					93				5.95	%
Total earning assets		1,072,008					22,320				4.19	%		894,357					21,256				4.79	%
Nonearning assets
Allowance for loan losses		(6,787		)										(4,706		)
Fixed assets		15,523												14,827
Accrued income and other assets		44,320												36,107
Total assets		$	1,125,064											$	940,585
Interest bearing liabilities
Interest bearing demand deposits		$	180,291				$	724			0.81	%		$	74,454				$	201			0.54	%
Savings deposits		239,438					339				0.28	%		242,805					616				0.51	%
Time deposits		193,574					1,874				1.95	%		227,865					2,539				2.25	%
Borrowed funds		78,732					826				2.11	%		59,345					929				3.16	%
Total interest bearing liabilities		692,035					3,763				1.09	%		604,469					4,285				1.43	%
Noninterest bearing liabilities
Noninterest bearing deposits		318,010												238,640
Accrued interest and other liabilities		9,743												4,237
Shareholders' equity		105,276												93,239
Total liabilities and shareholders' equity		$	1,125,064											$	940,585
Net interest income (FTE)							$	18,557											$	16,971
Net interest margin to earning assets (FTE)											3.48	%											3.83	%

Net Interest Income

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. The Corporation exerts 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 year-to-year comparisons more meaningful.

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, 2020														June 30, 2020																			June 30, 2020
		Compared To														Compared To																			Compared To
		March 31, 2020														June 30, 2019																			June 30, 2019
		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		$	6,947			$	(6,640		)			$	307			$		9,573						$	(8,926				)		$	647			$		6,828					$	(5,441					)		$	1,387
Taxable investment securities		170				(200			)			(30		)		(29						)		(110					)		(139		)		(168					)		(177						)		(345		)
Nontaxable investment securities		21				(18			)			3				20								(8					)		12				15							4								19
Federal funds sold		(58		)		(58			)			(116		)		(30						)		(30					)		(60		)		134							(79						)		55
Interest earning cash and cash equivalents		60				(81			)			(21		)		151								(174					)		(23		)		127							(149						)		(22		)
Federal Home Loan Bank stock		1				2						3				11								(18					)		(7		)		6							(36						)		(30		)
Total changes in interest income		7,141				(6,995			)			146				9,696								(9,266					)		430				6,942							(5,878						)		1,064
Changes in interest expense
Interest bearing demand deposits		317				(543			)			(226		)		245								(113					)		132				387							136								523
Savings deposits		86				(145			)			(59		)		34								(213					)		(179		)		(8					)		(269						)		(277		)
Time deposits		(116		)		(116			)			(232		)		(250						)		(248					)		(498		)		(353					)		(312						)		(665		)
Borrowed funds		585				(595			)			(10		)		934								(966					)		(32		)		567							(670						)		(103		)
Total changes in interest expense		872				(1,399			)			(527		)		963								(1,540					)		(577		)		593							(1,115						)		(522		)
Net change in net interest income (FTE)		$	6,269			$	(5,596		)			$	673			$		8,733						$	(7,726				)		$	1,007			$		6,349					$	(4,763					)		$	1,586

		Average Yield/Rate for the Three Month Periods Ended
		6/30/2020				3/31/2020				12/31/2019				9/30/2019				6/30/2019
Total earning assets		3.94		%		4.47		%		4.66		%		4.85		%		4.81		%
Total interest bearing liabilities		0.91		%		1.28		%		1.36		%		1.42		%		1.46		%
Net interest margin to earning assets (FTE)		3.37		%		3.61		%		3.75		%		3.91		%		3.83		%
Net interest margin to earning assets (FTE) without impact of PPP loans		3.52		%		3.61		%		3.75		%		3.91		%		3.83		%
		Quarter to Date Net Interest Income (FTE)
		6/30/2020				3/31/2020				12/31/2019				9/30/2019				6/30/2019
Interest income		$	11,215			$	11,070			$	11,076			$	11,240			$	10,788
FTE adjustment		18				17				17				15				15
Total interest income (FTE)		11,233				11,087				11,093				11,255				10,803
Total interest expense		1,618				2,145				2,158				2,184				2,195
Net interest income (FTE)		$	9,615			$	8,942			$	8,935			$	9,071			$	8,608

The current low interest rate environment continues to create pressure on the Corporation's net interest margin. At the end of the first quarter of 2020, and into the second quarter of 2020, the Corporation made a concentrated effort to  decrease the interest rates on deposit products.

Noninterest Income

		Quarter to Date
		6/30/2020						3/31/2020								12/31/2019							9/30/2019								6/30/2019
Net gain on sales of mortgage loans		$	2,644					$	970							$	650						$	665							$	422
Change in fair value of mortgage banking instruments		1,225						833								—							—								—
ATM and debit card income		394						355								399							418								404
Trust and investment services		321						389								337							395								459
Mortgage servicing fees		270						262								256							243								230
Net gain from corporate owned life insurance death benefit		173						—								—							—								—
Service charges on deposit accounts		119						219								245							239								222
Change in fair value of equity investments		7						749								(5				)			16								21
Net gain on sales of commercial loans		—						668								—							—								—
Net mortgage servicing rights income		(164				)		(50					)			130							142								344
Other income and fees		303						118								117							144								148
Total noninterest income		$	5,292					$	4,513							$	2,129						$	2,262							$	2,250

		Year to Date June 30									Variance
		2020					2019				Amount					%
Net gain on sales of mortgage loans		$	3,614				$	617			$	2,997				485.74		%
Change in fair value of mortgage banking instruments		2,058					—				2,058					N/M
ATM and debit card income		749					764				(15		)			(1.96	)	%
Trust and investment services		710					787				(77		)			(9.78	)	%
Mortgage servicing fees		532					441				91					20.63		%
Net gain from corporate owned life insurance death benefit		173					—				173					N/M
Service charges on deposit accounts		338					456				(118		)			(25.88	)	%
Change in fair value of equity investments		756					35				721					2060.00		%
Net gain on sales of commercial loans		668					—				668					N/M
Net mortgage servicing rights income		(214		)			352				(566		)			(160.80	)	%
Other income and fees		421					320				101					31.56		%
Total noninterest income		$	9,805				$	3,772			$	6,033				159.94		%

Net gain on sales of mortgage loans represents the income earned on the sale of residential mortgage loans into the secondary market. During 2019, and into 2020, the interest rate environment was very advantageous for residential mortgage originations and refinancing. While the interest rate environment is historically attractive for residential mortgage origination, the uncertainty that many consumers are facing due to the COVID-19 global pandemic is expected to reduce residential mortgage originations. As such, gains from the sales of mortgage loans are expected to decrease through 2020.

On January 1, 2020, the Corporation adopted SAB 109. Because of this adoption, the Corporation now recognizes the value of servicing at the time of commitment, which resulted in an increase in retained earnings of $78 at January 1, 2020. The Corporation also elected the fair value option for its residential mortgage loans HFS on January 1, 2020, which resulted in an increase in retained earnings of $436. Pursuant to this adoption, changes in the fair value of mortgage banking instruments and loans held for sale are included in noninterest income. Change in fair value of mortgage banking instruments will fluctuate with the Corporation's residential mortgage loan originations and interest rate fluctuations. As such, the change in fair value of mortgage banking instruments is expected to decrease through 2020.

ATM and debit card income represents fees earned on ATM and debit card transactions. The Corporation expects these fees to increase modestly throughout the remainder of 2020.

Trust and investment services includes income the Corporation earned from contracts with customers to manage assets for investment and/or to transact on their accounts. The wealth management component is strongly correlated to changes in the stock market and as such, can vary from period to period. Trust and investment services income is expected to approximate current levels throughout the remainder of the year.

Mortgage servicing fees includes the fees earned for servicing loans that have been sold into the secondary market. The increase in mortgage servicing fees is directly related to the increases in the size of the serviced portfolio. Mortgage servicing fees are expected to continue to increase throughout the year.

Net gain from corporate owned life insurance death benefit is recognized in the event of the death of an insured individual. The death on an insured individual occurred in the second quarter of 2020. The Corporation does not expect to receive any gains from COLI death benefits for the remainder of 2020.

Service charges on deposit accounts includes fees earned from deposit customers for transaction-based, account maintenance and overdraft services. The year-over-year decrease in service charges on deposit accounts is primarily due to a shift of customer demand toward deposit accounts with no or reduced service charges, as well as a reduction in fees charged. In order to provide relief to customers during the COVID-19 global pandemic, the Corporation reduced fees charged on NSF transactions by more than 50% through May 31, 2020. Now that this program has ended, service charges on deposit accounts are expected to slightly increase in the foreseeable future.

Change in fair value of equity investments represents the income earned on equities held in the Corporation's investment portfolio. During the first quarter of 2020, an equity position held by the Corporation was bought out through an acquisition, and that transaction generated a gain of $732. The Corporation does not anticipate any significant changes in fair value from equity sales throughout the remainder of 2020.

Net gain on sales of commercial loans represents the income earned from the sale of commercial loans into the secondary market. During the first quarter of 2020, the Corporation sold the guaranteed portion of one SBA loan and one USDA loan. The Corporation continually analyzes its commercial loan portfolio for opportunistic sales strategies.

Net mortgage servicing rights income represents income generated from the capitalization of mortgage servicing rights, net of amortization and impairment. During the second quarter of 2019, the Corporation sold a pool of residential mortgage loans out of its loan portfolio, but retained servicing.  This sale generated $266 of net MSR income. During 2020, the Corporation recognized MSR impairments of $219 and $241 for the quarters ended March 31, 2020 and June 30, 2020, respectively. As interest rates remain at historically low levels, refinance opportunities continue to be very attractive to borrowers, thus driving down the value of MSR associated with the current portfolio.

Other income and fees includes miscellaneous other income items, none of which are individually significant. Other income and fees are expected to approximate current levels throughout 2020.

Noninterest Expenses

		Quarter to Date
		6/30/2020							3/31/2020								12/31/2019								9/30/2019								6/30/2019
Total compensation		$	4,252						$	4,248							$	4,037							$	3,530							$	3,749
Furniture and equipment		618							610								665								579								525
Professional services		571							522								582								494								439
Data processing		535							442								272								323								281
Occupancy		435							476								467								444								426
Advertising and promotional		255							252								232								222								291
Loan and collection		229							162								203								120								119
ATM and debit card		92							108								98								109								100
Amortization of core deposit intangibles		90							90								113								112								114
FDIC insurance premiums		59							55								6								20								17
Telephone and communication		86							96								115								110								108
Other general and administrative		587							625								625								545								522
Total noninterest expenses		$	7,809						$	7,686							$	7,415							$	6,608							$	6,691

		Year to Date June 30								Variance
		2020				2019				Amount					%
Total compensation		$	8,500			$	7,379			$	1,121				15.19		%
Furniture and equipment		1,228				1,016				212					20.87		%
Professional services		1,093				908				185					20.37		%
Data processing		977				454				523					115.20		%
Occupancy		911				863				48					5.56		%
Advertising and promotional		507				535				(28		)			(5.23	)	%
Loan and collection		391				229				162					70.74		%
ATM and debit card		200				195				5					2.56		%
Amortization of core deposit intangibles		180				226				(46		)			(20.35	)	%
FDIC insurance premiums		114				118				(4		)			(3.39	)	%
Telephone and communication		182				219				(37		)			(16.89	)	%
Other general and administrative		1,212				1,058				154					14.56		%
Total noninterest expenses		$	15,495			$	13,200			$	2,295				17.39		%

Total compensation includes salaries, commissions and incentives, employee benefits, and payroll taxes. Total compensation has increased due to annual merit increases and an increase in commissions and incentives paid. Fluctuations in commissions and incentives are primarily driven by residential mortgage originations, which can vary significantly from period to period. Total compensation is expected to moderate throughout 2020 as increases related to the growth in size and complexity of the Corporation will likely be offset by reductions in commissions and incentives.

Furniture and equipment and occupancy expenses primarily consist of depreciation, repairs and maintenance, property taxes, utilities, insurance, certain service contracts, and other related items. These expenses are expected to increase with the size and complexity of the Corporation.

Professional services include expenses relating to third-party professional services. These services include, but are not limited to, regulatory, auditing, consulting, and legal. These expenses are expected to increase in future periods to ensure compliance with audit and regulatory requirements.

Data processing primarily includes the expenses relating to the Corporation's core data processor. These expenses are expected to increase throughout 2020 with the size and complexity of the Corporation.

Advertising and promotional includes the Corporation's media costs and any donations or sponsorships made on behalf of the Corporation. The increase in expenses is a direct result of the Corporation enhancing its marketing efforts to attract new and expand existing customer loans and deposit accounts. These expenses are expected to increase throughout 2020 due to the Corporation's re-branding strategy and continued growth strategy.

Loan and collection includes expenses related to the origination and collection of loans, as well as expenses related to OREO. Given the impact that COVID-19 has had on the economy, the Corporation may experience elevated levels of these expenses in 2020.

ATM and debit card expenses fluctuate based on customer and non-customer utilization of ATMs and customer debit card volumes. The Corporation expects these fees to maintain current levels throughout 2020.

Amortization of core deposit intangibles relates to the core deposits acquired from Community Bancorp, Inc. on December 31, 2016 and is expected to approximate current levels throughout 2020.

FDIC insurance premiums typically fluctuate based on the size of the Corporation's balance sheet, capital position, overall risk profile, and examination ratings. FDIC insurance premiums decreased significantly in 2019 due to a Small Bank Assessment Credit issued by the FDIC in the second quarter of 2019. The credit was fully applied during the first quarter of 2020. Due to a combination of the Small Bank Assessment Credit, and increased asset size largely due to PPP loans, the Corporation expects FDIC insurance premiums to approximate current levels throughout 2020.

Telephone and communication includes expenses relating to the Corporation's communication systems. These expenses are expected to maintain current levels for the remainder of 2020.

Other general and administrative includes miscellaneous other expense items, none of which are individually significant. These expenses are expected to approximate current levels into the foreseeable future.

Balance Sheet Breakdown and Analysis

		6/30/2020				3/31/2020				12/31/2019				9/30/2019				6/30/2019
ASSETS
Cash and cash equivalents		$	35,190			$	71,140			$	46,803			$	37,572			$	20,067
Total investment securities		75,526				76,312				61,621				62,351				73,285
Loans held-for-sale		46,354				21,154				19,491				15,111				6,771
Gross loans		1,044,564				865,577				870,555				826,597				813,547
Less allowance for loan losses		8,991				7,250				5,813				5,413				5,014
Net loans		1,035,573				858,327				864,742				821,184				808,533
All other assets		45,051				44,247				42,102				41,828				41,134
Total assets		$	1,237,694			$	1,071,180			$	1,034,759			$	978,046			$	949,790
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits		$	1,018,287			$	883,837			$	863,102			$	801,101			$	792,555
Total borrowed funds		96,217				71,500				61,500				69,000				54,000
Accrued interest payable and other liabilities		14,221				11,015				8,713				8,803				7,731
Total liabilities		1,128,725				966,352				933,315				878,904				854,286
Total shareholders' equity		108,969				104,828				101,444				99,142				95,504
Total liabilities and shareholders' equity		$	1,237,694			$	1,071,180			$	1,034,759			$	978,046			$	949,790

		6/30/2020 vs 3/31/2020								6/30/2020 vs 6/30/2019
		Variance								Variance
		Amount				%				Amount				%
ASSETS
Cash and cash equivalents		$	(35,950	)		(50.53	)	%		$	15,123			75.36	%
Total investment securities		(786		)		(1.03	)	%		2,241				3.06	%
Loans held-for-sale		25,200				119.13		%		39,583				584.60	%
Gross loans		178,987				20.68		%		231,017				28.40	%
Less allowance for loan losses		1,741				24.01		%		3,977				79.32	%
Net loans		177,246				20.65		%		227,040				28.08	%
All other assets		804				1.82		%		3,917				9.52	%
Total assets		$	166,514			15.54		%		$	287,904			30.31	%
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits		$	134,450			15.21		%		$	225,732			28.48	%
Total borrowed funds		24,717				34.57		%		42,217				78.18	%
Accrued interest payable and other liabilities		3,206				29.11		%		6,490				83.95	%
Total liabilities		162,373				8.78		%		274,439				16.66	%
Total shareholders' equity		4,141				3.95		%		13,465				14.10	%
Total liabilities and shareholders' equity		$	166,514			15.54		%		$	287,904			30.31	%

Cash and cash equivalents

		6/30/2020					3/31/2020					12/31/2019				9/30/2019					6/30/2019
Cash and due from banks
Noninterest bearing		$	20,369				$	33,312				$	17,754			$	21,808				$	12,143
Interest bearing		14,821					37,828					6,049				6,764					4,924
Federal funds sold		—					—					23,000				9,000					3,000
Cash and cash equivalents		$	35,190				$	71,140				$	46,803			$	37,572				$	20,067
		6/30/2020 vs 3/31/2020														6/30/2020 vs 6/30/2019
		Variance														Variance
		Amount					%									Amount					%
Cash and due from banks
Noninterest bearing		$	(12,943	)			(38.85		)	%						$	8,226				67.74			%
Interest bearing		(23,007		)			(60.82		)	%						9,897					201.00			%
Federal funds sold		—					N/M									(3,000		)			(100.00		)	%
Cash and cash equivalents		$	(35,950	)			(50.53		)	%						$	15,123				75.36			%

Cash and cash equivalents, which is comprised of cash and due from banks and federal funds sold, fluctuate from period to period based on loan demand and variances in deposit accounts.

Primary and secondary liquidity sources

While the Corporation continues maintain a strong liquidity position, it is important to monitor all liquidity sources. Because of the funding of PPP loans, the Corporation may have to make significant draws on these sources of liquidity in the near term. The following table outlines the Corporation's primary and secondary sources of liquidity as of:

		6/30/2020				3/31/2020				12/31/2019				9/30/2019				6/30/2019
Cash and cash equivalents		$	35,190			$	71,140			$	46,803			$	37,572			$	20,067
Unpledged investment securities		52,647				51,889				40,094				40,675				50,729
FHLB borrowing availability		97,500				42,500				52,500				45,000				60,000
Federal funds purchased lines of credit		21,500				17,500				17,500				17,500				17,500
Funds available through the Fed Discount Window		10,000				10,000				10,000				10,000				10,000
PPPLF		202,184				—				—				—				—
Total liquidity sources		$	419,021			$	193,029			$	166,897			$	150,747			$	158,296

Total investment securities

		6/30/2020					3/31/2020					12/31/2019				9/30/2019					6/30/2019
Available-for-sale
U.S. Government and federal agency		$	21,339				$	23,610				$	18,867			$	22,854				$	33,842
State and municipal		14,115					10,657					10,691				10,194					8,889
Mortgage backed residential		12,335					10,176					10,748				6,227					6,733
Certificates of deposit		6,665					8,644					6,659				7,155					7,154
Collateralized mortgage obligations - agencies		15,736					18,288					9,527				10,826					11,856
Unrealized gain/(loss) on available-for-sale securities		2,242					1,735					1,092				1,048					776
Total available-for-sale		72,432					73,110					57,584				58,304					69,250
Held-to-maturity state and municipal		1,981					2,091					2,096				2,100					2,104
Equity securities		1,113					1,111					1,941				1,947					1,931
Total investment securities		$	75,526				$	76,312				$	61,621			$	62,351				$	73,285
		6/30/2020 vs 3/31/2020														6/30/2020 vs 6/30/2019
		Variance														Variance
		Amount					%									Amount					%
Available-for-sale
U.S. Government and federal agency		$	(2,271	)			(9.62		)	%						$	(12,503	)			(36.95		)	%
State and municipal		3,458					32.45			%						5,226					58.79			%
Mortgage backed residential		2,159					21.22			%						5,602					83.20			%
Certificates of deposit		(1,979		)			(22.89		)	%						(489		)			(6.84		)	%
Collateralized mortgage obligations - agencies		(2,552		)			(13.95		)	%						3,880					32.73			%
Unrealized gain/(loss) on available-for-sale securities		507					29.22			%						1,466					188.92			%
Total available-for-sale		(678		)			(0.93		)	%						3,182					4.59			%
Held-to-maturity state and municipal		(110		)			(5.26		)	%						(123		)			(5.85		)	%
Equity securities		2					0.18			%						(818		)			(42.36		)	%
Total investment securities		$	(786	)			(1.03		)	%						$	2,241				3.06			%

The amortized cost and fair value of AFS investment securities as of June 30, 2020 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		$	16,411			$	4,928			$	—			$	—			$	—			$	21,339
State and municipal		2,474				5,772				3,777				2,092				—				14,115
Mortgage backed residential		—				—				—				—				12,335				12,335
Certificates of deposit		2,475				4,190				—				—				—				6,665
Collateralized mortgage obligations - agencies		—				—				—				—				15,736				15,736
Total amortized cost		$	21,360			$	14,890			$	3,777			$	2,092			$	28,071			$	70,190
Fair value		$	21,553			$	15,756			$	3,933			$	2,371			$	28,819			$	72,432

The amortized cost and fair value of HTM investment securities as of June 30, 2020 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		$	415			$	1,116			$	370			$	80			$	—			$	1,981
Fair value		$	421			$	1,162			$	396			$	85			$	—			$	2,064

Throughout 2019, yields on bonds that met the Corporation's investment standards declined significantly. As such, the Corporation did not replace the majority of maturing investments in 2019. However, an influx of liquidity in late 2019 and into 2020 led the Corporation to make investment security purchases in order to stabilize net interest margin and generate additional net interest income. Total investment securities are expected to grow with overall balance sheet growth as it is an important source of liquidity and consistent earnings. The following table summarizes information as of June 30, 2020 for investment securities purchased YTD:

		Book Value				Fully Taxable Equivalent Weighted Average Yield			Weighted Average Remaining Maturity (Months)
U.S. Government and federal agency		$	10,421			0.46	%		5
State and municipal		4,510				1.66	%		86
Collateralized mortgage obligations - agencies		8,663				1.80	%		289
Certificates of deposit		1,240				1.05	%		3
Mortgage backed residential		3,132				1.05	%		136
Held-to-maturity state and municipal		—				—	%		—
Total		$	27,966			1.16	%		121

Loans held-for-sale

Loans HFS represent the balance 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. As residential mortgage activity is likely to decrease for the remainder of 2020, the balance of loans HFS will also likely decline.

During the first quarter of 2020, the Corporation opted to recognize loans HFS at fair value. The Corporation believes that fair value is the price at which the loans could be sold in the principal market at the measurement date.

Loans and allowance for loan losses

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

		6/30/2020					3/31/2020					12/31/2019					9/30/2019					6/30/2019
Commercial		$	260,440				$	67,731				$	71,689				$	63,747				$	63,998
Commercial real estate		469,039					462,561					455,289					420,127					408,103
Total commercial loans		729,479					530,292					526,978					483,874					472,101
Residential mortgage		268,295					285,392					292,946					291,401					289,944
Home equity		40,114					43,222					41,987					43,061					42,890
Total residential real estate loans		308,409					328,614					334,933					334,462					332,834
Consumer		6,676					6,671					8,644					8,261					8,612
Gross loans		1,044,564					865,577					870,555					826,597					813,547
Allowance for loan losses		(8,991		)			(7,250		)			(5,813		)			(5,413		)			(5,014		)
Loans, net		$	1,035,573				$	858,327				$	864,742				$	821,184				$	808,533
		6/30/2020 vs 3/31/2020															6/30/2020 vs 6/30/2019
		Variance															Variance
		Amount					%										Amount					%
Commercial		$	192,709				284.52			%							$	196,442				306.95			%
Commercial real estate		6,478					1.40			%							60,936					14.93			%
Total commercial loans		199,187					37.56			%							257,378					54.52			%
Residential mortgage		(17,097		)			(5.99		)	%							(21,649		)			(7.47		)	%
Home equity		(3,108		)			(7.19		)	%							(2,776		)			(6.47		)	%
Total residential real estate loans		(20,205		)			(6.15		)	%							(24,425		)			(7.34		)	%
Consumer		5					0.07			%							(1,936		)			(22.48		)	%
Gross loans		178,987					20.68			%							231,017					28.40			%
Allowance for loan losses		(1,741		)			24.01			%							(3,977		)			79.32			%
Loans, net		$	177,246				20.65			%							$	227,040				28.08			%

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

		6/30/2020					3/31/2020				12/31/2019				9/30/2019				6/30/2019
Originated loans collectively evaluated for impairment
Commercial		$	259,384				$	66,524			$	70,322			$	61,970			$	61,122
Commercial real estate		452,084					446,713				436,626				400,470				386,970
Residential mortgage		263,997					280,265				286,635				285,499				283,638
Home equity		37,663					40,459				39,023				39,586				39,243
Consumer		6,445					6,391				8,330				7,902				8,169
Subtotal		1,019,573					840,352				840,936				795,427				779,142
Originated loans individually evaluated for impairment
Commercial		—					—				—				—				—
Commercial real estate		3,290					1,658				1,668				1,677				1,703
Residential mortgage		663					672				1,362				631				660
Home equity		—					—				—				240				218
Consumer		3					5				—				—				—
Subtotal		3,956					2,335				3,030				2,548				2,581
Acquired loans collectively evaluated for impairment
Commercial		1,057					1,204				1,362				1,753				2,806
Commercial real estate		13,293					13,630				16,346				17,194				18,526
Residential mortgage		2,683					3,459				3,911				4,139				4,388
Home equity		2,432					2,743				2,943				3,213				3,399
Consumer		226					273				314				358				441
Subtotal		19,691					21,309				24,876				26,657				29,560
Acquired loans individually evaluated for impairment
Commercial		—					—				—				—				—
Commercial real estate		—					—				—				—				—
Residential mortgage		—					58				58				61				113
Home equity		—					—				—				—				—
Consumer		—					—				—				—				—
Subtotal		—					58				58				61				113
Acquired loans with deteriorated credit quality
Commercial		(1		)			3				5				24				70
Commercial real estate		372					560				649				786				904
Residential mortgage		952					938				980				1,071				1,145
Home equity		19					20				21				22				30
Consumer		2					2				—				1				2
Subtotal		1,344					1,523				1,655				1,904				2,151
Gross Loans		$	1,044,564				$	865,577			$	870,555			$	826,597			$	813,547
Total originated loans		$	1,023,529				$	842,687			$	843,966			$	797,975			$	781,723
Total acquired loans		21,035					22,890				26,589				28,622				31,824
Gross loans		$	1,044,564				$	865,577			$	870,555			$	826,597			$	813,547

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

		6/30/2020				3/31/2020				12/31/2019				9/30/2019				6/30/2019
Originated loans collectively evaluated for impairment
Commercial		$	535			$	478			$	358			$	301			$	278
Commercial real estate		4,564				3,609				2,790				2,539				2,381
Residential mortgage		3,080				2,442				1,917				1,820				1,662
Home equity		353				280				195				198				191
Consumer		102				89				87				87				90
Subtotal		8,634				6,898				5,347				4,945				4,602
Originated loans individually evaluated for impairment
Commercial		—				—				—				—				—
Commercial real estate		100				111				127				26				—
Residential mortgage		5				6				128				27				28
Home equity		—				—				—				213				218
Consumer		3				5				—				—				—
Subtotal		108				122				255				266				246
Acquired loans collectively evaluated for impairment
Commercial		1				1				1				2				5
Commercial real estate		9				7				5				5				5
Residential mortgage		9				9				8				9				9
Home equity		15				14				12				13				14
Consumer		—				—				—				—				—
Subtotal		34				31				26				29				33
Acquired loans with deteriorated credit quality
Commercial		—				—				—				—				—
Commercial real estate		22				39				34				31				15
Residential mortgage		189				156				147				137				114
Home equity		4				4				4				5				4
Consumer		—				—				—				—				—
Subtotal		215				199				185				173				133
Allowance for loan losses		$	8,991			$	7,250			$	5,813			$	5,413			$	5,014
Total originated loans		$	8,742			$	7,020			$	5,602			$	5,211			$	4,848
Total acquired loans		249				230				211				202				166
Allowance for loan losses		$	8,991			$	7,250			$	5,813			$	5,413			$	5,014
Commercial		$	536			$	479			$	359			$	303			$	283
Commercial real estate		4,695				3,766				2,956				2,601				2,401
Residential mortgage		3,283				2,613				2,200				1,993				1,813
Home equity		372				298				211				429				427
Consumer		105				94				87				87				90
Allowance for loan losses		$	8,991			$	7,250			$	5,813			$	5,413			$	5,014

The following table summarizes the Corporation's current, past due, and nonaccrual loans as of:

		6/30/2020				3/31/2020				12/31/2019				9/30/2019				6/30/2019
Accruing interest
Current		$	1,042,589			$	862,581			$	867,901			$	824,587			$	811,184
Past due 30-89 days		948				2,152				1,213				1,089				1,275
Past due 90 days or more		361				166				239				209				301
Total accruing interest		1,043,898				864,899				869,353				825,885				812,760
Nonaccrual		666				678				1,202				712				787
Total loans		$	1,044,564			$	865,577			$	870,555			$	826,597			$	813,547
Total loans past due and in nonaccrual status		$	1,975			$	2,996			$	2,654			$	2,010			$	2,363

The following table summarizes the Corporation's nonperforming assets as of:

		6/30/2020				3/31/2020				12/31/2019				9/30/2019				6/30/2019
Nonaccrual loans		$	666			$	678			$	1,202			$	712			$	787
Accruing loans past due 90 days or more		361				166				239				209				301
Total nonperforming loans		1,027				844				1,441				921				1,088
Other real estate owned		—				400				—				—				—
Total nonperforming assets		$	1,027			$	1,244			$	1,441			$	921			$	1,088

The following table summarizes the Corporation's primary asset quality measures as of:

		6/30/2020			3/31/2020			12/31/2019			9/30/2019			6/30/2019
Nonperforming loans to gross loans		0.10	%		0.10	%		0.17	%		0.11	%		0.13	%
Nonperforming assets to total assets		0.08	%		0.12	%		0.14	%		0.09	%		0.11	%
Allowance for loan losses to gross loans		0.86	%		0.84	%		0.67	%		0.65	%		0.62	%

The following table summarizes the balance of net unamortized discounts on purchased loans as of:

		6/30/2020				3/31/2020				12/31/2019				9/30/2019				6/30/2019
Net unamortized discount on purchased loans		$	1,058			$	1,233			$	1,462			$	1,626			$	1,914

As outlined in the preceding tables, the Corporation has grown its loan portfolio over the past 12 months with most of the growth coming in the form of commercial and commercial real estate loans. During the second quarter of 2020, the Corporation funded 1,239 PPP loans totaling $206,901. The vast majority of these loans were non-real estate Commercial loans.  Despite the significant growth, the Corporation has not relaxed its underwriting standards.

Despite historically strong credit quality indicators, there continues to be significant uncertainty surrounding the overall impact of COVID-19 on the loan portfolio. This uncertainty resulted in the Corporation increasing the ALLL by $3,178, or 54.67%, since December 31, 2019. Management will continue to monitor the loan portfolio to ensure that the ALLL remains at an appropriate level.

The following table summarizes the average loan size as of:

		6/30/2020				3/31/2020				12/31/2019				9/30/2019				6/30/2019
Commercial		$	171			$	214			$	228			$	204			$	195
Commercial real estate		654				644				641				605				609
Total commercial loans		325				513				514				481				473
Residential mortgage		177				194				198				200				206
Home equity		45				46				44				45				45
Total residential real estate loans		128				137				138				139				140
Consumer		25				26				32				31				32
Gross loans		$	213			$	234			$	234			$	225			$	223

COVID-19, CARES Act and SBA activity

As stated above, the communities which the Corporation serves were not immune to the fallout of the COVID-19 global pandemic. The Corporation  has committed significant efforts to work with customers through temporary loan modifications and participation in the PPP loan program.

The Corporation was extremely active in participating in the PPP loan program. As of June 30, 2020 the Corporation funded 1,239 loans totaling $206,901.

The Corporation also provides a variety of accommodations for loans that the Corporation services for FHLMC including:

• Providing mortgage forbearance for up to 12 months,
• Waiving assessments of penalties and late fees,
• Halting all foreclosure actions and evictions of borrowers until at least May 17, 2020,
• Offering loan modification options that lower payments or keep payments the same after the forbearance period.

The table below outlines the COVID-19 related loan modifications issued by the Corporation through June 30, 2020:

		Number of Modifications			Outstanding Balance
Commercial		123			$	29,380
Commercial real estate		227			152,724
Total commercial loan modifications		350			182,104
Residential mortgage loans serviced for FHLMC		131			28,656
Portfolio residential mortgage loans		157			40,411
Home equity		25			1,982
Total residential real estate loan modifications		313			71,049
Consumer		8			183
Total modifications		671			$	253,336

The Corporation considers the modification type on a loan-by-loan basis. Most modifications for loans held within the Corporation's loan portfolio resulted in the deferment of principal and interest payments for 3 months.

In regards to commercial loan modifications, loan officers are contacting the borrowers to determine and appropriate strategy for the next 3 months.  If an additional 3 months of principal deferral is warranted, the Corporation is generally collecting accrued interest.

Portfolio residential mortgage loans may have their deferral extended an additional 3 months if the borrower is experiencing a hardship. If the borrower has an escrow established, the Corporation is generally continuing to collect escrow payments.

All other assets

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

		6/30/20					3/31/20					12/31/19				9/30/19					6/30/19
Premises and equipment, net		$	15,323				$	15,533				$	15,245			$	15,443				$	14,792
Mortgage servicing rights		3,816					3,980					4,030				3,900					3,758
Accrued interest receivable		5,266					3,124					2,877				2,954					3,350
Corporate owned life insurance		10,115					10,380					10,316				10,248					10,181
Federal Home Loan Bank stock		3,488					3,150					3,150				3,150					3,150
Goodwill		3,219					3,219					3,219				3,219					3,219
Core deposit intangibles		722					812					902				1,015					1,128
Other real estate owned		—					400					—				—					—
Derivatives		1,311					1,063					125				172					—
Right-of-use assets		409					432					475				105					119
Other assets		1,382					2,154					1,763				1,622					1,437
All other assets		$	45,051				$	44,247				$	42,102			$	41,828				$	41,134
		6/30/2020 vs 3/31/2020														6/30/2020 vs 6/30/2019
		Variance														Variance
		Amount					%									Amount					%
Premises and equipment, net		$	(210	)			(1.35		)	%						$	531				3.59			%
Mortgage servicing rights		(164		)			(4.12		)	%						58					1.54			%
Accrued interest receivable		2,142					68.57			%						1,916					57.19			%
Corporate owned life insurance		(265		)			(2.55		)	%						(66		)			(0.65		)	%
Federal Home Loan Bank stock		338					10.73			%						338					10.73			%
Goodwill		—					—			%						—					—			%
Core deposit intangibles		(90		)			(11.08		)	%						(406		)			(35.99		)	%
Other real estate owned		(400		)			(100.00		)							—					N/M
Derivatives		248					23.33			%						1,311					N/M
Right-of-use assets		(23		)			(5.32		)	%						290					243.70			%
Other assets		(772		)			(35.84		)	%						(55		)			(3.83		)	%
All other assets		804					1.82			%						$	3,917				9.52			%

MSR are servicing assets that are recognized from the sales of mortgage loans. A portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. While the volume of residential mortgage loan sales through June 30, 2020 has nearly exceeded the residential mortgage loan sales volume for all of 2019, MSR have decreased in 2020 due to total impairments of $460.  As interest rates remain at historically low levels, refinance opportunities continue to be very attractive to borrowers, thus driving down the value of MSR associated with the current portfolio.

Derivatives are used in the process of hedging the Corporation's mortgage banking activities. The derivatives are recorded at fair value. The Corporation does not expect significant growth in derivatives as residential real estate lending is expected to tighten in 2020.

Right-of-use assets were established pursuant to the adoption of ASU 2016-02, "Leases (Topic 842)", on January 1, 2019. Right-of-use assets are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term, for leases that are longer than 12 months.

Total deposits

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

		6/30/20					3/31/20					12/31/19				9/30/19					6/30/19
Noninterest bearing demand		$	383,452				$	281,848				$	260,503			$	253,784				$	248,795
Interest bearing
Savings		245,957					215,748					215,218				213,494					232,130
Money market demand		90,504					79,070					88,350				80,873					69,374
NOW		122,477					83,910					75,976				39,286					14,925
Time deposits		175,897					223,261					223,055				213,664					227,331
Total deposits		$	1,018,287				$	883,837				$	863,102			$	801,101				$	792,555
		6/30/2020 vs 3/31/2020														6/30/2020 vs 6/30/2019
		Variance														Variance
		Amount					%									Amount					%
Noninterest bearing demand		$	101,604				36.05			%						$	134,657				54.12			%
Interest bearing
Savings		30,209					14.00			%						13,827					5.96			%
Money market demand		11,434					14.46			%						21,130					30.46			%
NOW		38,567					45.96			%						107,552					720.62			%
Time deposits		(47,364		)			(21.21		)	%						(51,434		)			(22.63		)	%
Total deposits		$	134,450				15.21			%						$	225,732				28.48			%

PPP loans are funded into a deposit account for the borrowers. The vast majority of these deposit accounts are noninterest bearing demand accounts. As of June 30, 2020, $37,521 of deposits were attributable to funds from PPP loans. In the second quarter of 2020, the Corporation also brought in $25,000 of FDIC insured deposits from one relationship.

The Corporation has continued its focus of growing non-contractual deposits while supplementing funding with time deposits. The Corporation has been able to drive this meaningful increase through enhanced organic growth strategies. For 2020, the Corporation expects to monitor deposit growth and adjust interest rates to minimize downward pressure on margins.

Schedule of time deposit maturities

The following table summarizes the contractual maturities of the time deposits as of June 30, 2020:

		Maturity Buckets
		3 Months or Less				3 to 6 Months				6 to 9 Months				9 to 12 Months				Beyond 12 Months
Balance		$	66,295			$	36,107			$	29,297			$	12,394			$	31,804
Weighted average yield		1.42		%		1.89		%		1.27		%		1.53		%		1.58		%
		Cumulative Maturities
		3 Months or Less				Up to 6 Months				Up to 9 Months				Up to 12 Months				Total
Balance		$	66,295			$	102,402			$	131,699			$	144,093			$	175,897
Weighted average yield		1.42		%		1.59		%		1.52		%		1.52		%		1.53		%

The repricing of time deposits will have a significant impact on their weighted average yield. Current rates offered by the Corporation have time deposit rates ranging from 0.05% to 0.55% depending of the term and opening balance.

Total borrowed funds

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

		6/30/20				3/31/20				12/31/19				9/30/19				6/30/19
Federal Home Loan Bank borrowings		$	77,500			$	57,500			$	47,500			$	55,000			$	40,000
Subordinated debentures		14,000				14,000				14,000				14,000				14,000
PPPLF		4,717				—				—				—				—
Federal funds purchased		—				—				—				—				—
Total borrowed funds		$	96,217			$	71,500			$	61,500			$	69,000			$	54,000
		6/30/2020 vs 3/31/2020												6/30/2020 vs 6/30/2019
		Variance												Variance
		Amount				%								Amount				%
Federal Home Loan Bank borrowings		$	20,000			34.78		%						$	37,500			93.75		%
Subordinated debentures		—				—		%						—				—		%
PPPLF		4,717				N/M								4,717				N/M
Federal funds purchased		—				—		%						—				—		%
Total borrowed funds		$	24,717			34.57		%						$	42,217			78.18		%

The Corporation  utilizes a mix of borrowed funds and organic deposit growth to fund loan demand. There are times when Federal Home Loan Bank borrowings have extremely attractive interest rates and the Corporation will add to borrow funds for future deployment of funds. The increase in Federal Home Loan Bank borrowings in the second quarter of 2020 is solely due to the Corporation's participation in a PPP loan funding program through the FHLB.

Total borrowed funds are expected to decrease as current Federal Home Loan Bank borrowings mature. The Corporation continually analyzes the market for opportunities and will borrow funds when deemed financially beneficial.

Wholesale funding sources

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

		6/30/20					3/31/20					12/31/19				9/30/19					6/30/19
Federal Home Loan Bank borrowings		$	77,500				$	57,500				$	47,500			$	55,000				$	40,000
Brokered time deposits		28,837					28,605					28,605				16,326					23,484
Subordinated debentures		14,000					14,000					14,000				14,000					14,000
Internet time deposits		11,690					18,005					18,009				21,977					25,058
PPPLF		4,717					—					—				—					—
Total wholesale funds		$	136,744				$	118,110				$	108,114			$	107,303				$	102,542
		6/30/2020 vs 3/31/2020														6/30/2020 vs 6/30/2019
		Variance														Variance
		Amount					%									Amount					%
Federal Home Loan Bank borrowings		$	20,000				34.78			%						$	37,500				93.75			%
Brokered time deposits		232					0.81			%						5,353					22.79			%
Subordinated debentures		—					—			%						—					—			%
Internet time deposits		(6,315		)			(35.07		)	%						(13,368		)			(53.35		)	%
PPPLF		4,717					N/M									4,717					N/M
Total wholesale funds		$	18,634				15.78			%						$	34,202				33.35			%

The Corporation utilizes wholesale funds to fund balance sheet growth. While wholesale funding has historically been more expensive than core deposits, there have been times in 2020 where that is not the case. The Corporation continually analyzes sources of wholesale funding when the increases in interest earning assets out-pace the increases in core deposits.

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).  Accrued interest payable and other liabilities are not expected to fluctuate significantly in future periods.

Total shareholders' equity

Total shareholders' equity includes common stock, retained earnings, and AOCI. Total shareholders' equity is expected to continue to grow in 2020 through the Corporation's earnings. In April 2020, the Corporation's Board of Directors amended its common stock repurchase plan to authorize the repurchase of up to $5,000 of common stock.

Stock Performance

The following graph compares the cumulative total shareholder return on the Corporation's common stock for the last five years with the cumulative total return on the ABA NASDAQ Community Bank Index (NASDAQ: XX:ABAQ) over the same period. The graph assumes the value of an investment in the Corporation's common stock and the ABA NASDAQ Community Bank Index was $100 at June 30, 2015 and all dividends were reinvested.

A graph accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/4e71e085-6a4c-4e45 ...

Date		FETM		ABQ Index
6/30/2015		100.00		100.00
6/30/2016		96.00		97.31
6/30/2017		132.14		131.04
6/30/2018		153.68		142.79
6/30/2019		152.00		126.05
6/30/2020		131.23		93.17

Abbreviations and Acronyms

ABA: American Bankers Association		HTM: Held-to-maturity
AFS: Available-for-sale		IRA: Individual retirement account
ALLL: Allowance for loan losses		ITM: Interactive teller machine
AOCI: Accumulated other comprehensive income		MSR: Mortgage servicing rights
ASU: Accounting Standards Update		N/M: Not meaningful
ATM: Automated teller machine		NASDAQ: National Association of Securities Dealers Automated Quotations
CARES Act: Coronavirus Aid, Relief, and Economic Security Act
		NOW: Negotiable order of withdrawal
CET1: Common equity tier 1		NSF: Non-sufficient funds
COVID-19: Coronavirus Disease 2019		OREO: Other real estate owned
FDIC: Federal Deposit Insurance Corporation		PPP: Paycheck Protection Program
FHLB: Federal Home Loan Bank		PPPLF: Paycheck Protection Program Liquidity Facility
FHLMC: Federal Home Loan Mortgage Corporation		QTD: Quarter-to-date
FRB: Federal Reserve Bank		SAB: Staff Accounting Bulletin
FTE: Fully taxable equivalent		SBA: Small Business Association
GAAP: Generally Accepted Accounting Principles		USDA: United States Department of Agriculture
HFS: Held-for-sale		YTD: Year-to-date

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 was recognized as one of the Top 50 performing stocks in 2018 and 2019 on that exchange.

The State Bank is a full-service, 5-Star Bauer Financial rated commercial, retail and trust bank headquartered in Fenton, Michigan. It currently operates 15 full-service branches in Genesee, Livingston, Oakland, Saginaw, and Shiawassee Counties and a loan production office in Saginaw County. The State Bank was ranked #22 by S&P Global in terms of 2019 performance for banks under $2 billion in assets. The State Bank’s commercial department provides a complete array of products including lines of credit, term loans, commercial mortgages, SBA loans and a full-suite of cash management products. The retail department offers personal checking, savings, time and IRA deposit accounts and a wide array of loan products including home equity, auto and personal loans. The residential loan department offers construction, purchase and refinance residential mortgage loans. The wealth management department offers a full-service suite of trust and portfolio management services. 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
	[e-mail]	[e-mail]