Fentura Financial, Inc. Announces Third 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 September 30, 2023 presentation.

FENTON, Mich., Oct. 27, 2023 (GLOBE NEWSWIRE) -- Fentura Financial, Inc. (OTCQX: FETM) announces quarterly net income results of $3,775 and $10,845 for the three and nine months ended September 30, 2023.

Ronald L. Justice, President and CEO, stated, “September 2023 marked the 125th anniversary of The State Bank. As one of the largest Michigan-based community banks, we are proud to serve our local communities by providing families, small businesses and commercial customers with safe, sound, and expert financial advice and solutions. We are committed to upholding these core operating principles, which have driven our success over the past 125 years and will continue to power our performance into the future.”

“Despite continued pressure on funding costs, as a result of the rapid growth of interest rates over the past year and a half, and significant competition for deposits, I am encouraged by how our team has responded to maintain solid operating performance throughout 2023. For the 2023 third quarter, net interest income after the provision for credit losses increased 1.7% to $13.0 million, from the same quarter a year ago, reflecting the benefits of our profitable financial model and stable asset quality. We also continue to strengthen our balance sheet and I am pleased with the progress we made during the quarter improving our capital ratios and reducing our loan-to-deposit ratio from second quarter levels – even as gross loans and total assets increased over the past three months. While we expect rates to remain high into 2024, we are focused on continuing to support our customers, strengthening our balance sheet, and maintaining solid levels of profitability,” concluded Mr. Justice.

Following is a discussion of our financial performance as of, and for the three and nine months ended September 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:

	9/30/2023				6/30/2023				3/31/2023				12/31/2022				9/30/2022
INCOME STATEMENT DATA
Interest income	$	20,416			$	19,553			$	18,679			$	17,782			$	15,726
Interest expense		7,757				6,469				5,335				3,645				1,738
Net interest income		12,659				13,084				13,344				14,137				13,988
Provision for loan losses		(309	)			205				236				847				1,231
Noninterest income		2,338				2,460				2,328				1,949				2,395
Noninterest expenses		10,594				11,320				10,633				9,781				10,143
Federal income tax expense		937				793				959				1,094				1,000
Net income	$	3,775			$	3,226			$	3,844			$	4,364			$	4,009
PER SHARE
Earnings	$	0.85			$	0.73			$	0.87			$	0.99			$	0.91
Dividends	$	0.10			$	0.10			$	0.10			$	0.09			$	0.09
Tangible book value(1)	$	27.64			$	27.16			$	26.64			$	26.22			$	25.22
Quoted market value
High	$	23.74			$	21.21			$	24.10			$	23.40			$	25.20
Low	$	19.10			$	18.70			$	21.10			$	21.60			$	23.00
Close(1)	$	23.74			$	19.35			$	21.31			$	22.20			$	23.00
PERFORMANCE RATIOS
Return on average assets		0.86	%			0.76	%			0.92	%			1.06	%			1.02	%
Return on average shareholders' equity		11.27	%			9.89	%			12.32	%			14.01	%			12.96	%
Return on average tangible shareholders' equity		12.14	%			10.67	%			13.34	%			15.21	%			14.10	%
Efficiency ratio		70.64	%			72.83	%			67.85	%			60.80	%			61.91	%
Yield on earning assets (FTE)		4.92	%			4.85	%			4.75	%			4.57	%			4.27	%
Rate on interest bearing liabilities		2.66	%			2.35	%			2.02	%			1.42	%			0.75	%
Net interest margin to earning assets (FTE)		3.05	%			3.25	%			3.40	%			3.63	%			3.79	%
BALANCE SHEET DATA(1)
Total investment securities	$	109,543			$	117,563			$	122,995			$	125,049			$	129,886
Gross loans	$	1,483,720			$	1,472,288			$	1,457,173			$	1,436,166			$	1,350,851
Allowance for credit losses	$	15,400			$	15,400			$	15,220			$	13,000			$	12,200
Total assets	$	1,744,939			$	1,718,819			$	1,749,073			$	1,688,863			$	1,588,592
Total deposits	$	1,401,797			$	1,380,192			$	1,353,918			$	1,332,883			$	1,345,209
Borrowed funds	$	201,050			$	200,550			$	259,050			$	222,350			$	116,600
Total shareholders' equity	$	132,902			$	130,690			$	128,247			$	126,087			$	121,630
Net loans to total deposits		104.75	%			105.56	%			106.50	%			106.77	%			99.51	%
Common shares outstanding		4,466,221				4,460,053				4,453,951				4,439,725				4,434,937
QTD BALANCE SHEET AVERAGES
Total assets	$	1,739,510			$	1,706,147			$	1,687,175			$	1,637,191			$	1,558,040
Earning assets	$	1,646,848			$	1,617,593			$	1,595,605			$	1,544,880			$	1,464,233
Interest bearing liabilities	$	1,156,835			$	1,105,807			$	1,072,417			$	1,016,876			$	917,888
Total shareholders' equity	$	132,860			$	130,860			$	126,495			$	123,567			$	122,695
Total tangible shareholders' equity	$	123,349			$	121,274			$	116,834			$	113,810			$	112,829
Earned common shares outstanding		4,437,415				4,427,890				4,421,584				4,413,710				4,408,399
Unvested stock grants		26,668				29,916				29,007				24,460				24,460
Total common shares outstanding		4,464,083				4,457,806				4,450,591				4,438,170				4,432,859
ASSET QUALITY
Nonperforming loans to gross loans (1)		0.24	%			0.16	%			0.19	%			0.16	%			0.12	%
Nonperforming assets to total assets (1)		0.23	%			0.16	%			0.17	%			0.15	%			0.12	%
Allowance for credit losses to gross loans (1)		1.04	%			1.05	%			1.04	%			0.91	%			0.90	%
Net charge-offs (recoveries) to QTD average gross loans	(0.03		)%			—	%			—	%			—	%			—	%
Provision for loan losses to QTD average gross loans	(0.02		)%			0.01	%			0.02	%			0.06	%			0.10	%
CAPITAL RATIOS(1)
Total capital to risk weighted assets		11.59	%			11.31	%			11.08	%			10.87	%			10.96	%
Tier 1 capital to risk weighted assets		10.51	%			10.23	%			10.02	%			9.95	%			10.07	%
CET1 capital to risk weighted assets		9.53	%			9.25	%			9.04	%			8.96	%			9.04	%
Tier 1 leverage ratio		8.58	%			8.55	%			8.47	%			8.58	%			8.91	%
(1)At end of period

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

	9/30/2023				9/30/2022				9/30/2021				9/30/2020				9/30/2019
INCOME STATEMENT DATA
Interest income	$	58,648			$	41,438			$	35,161			$	34,355			$	32,465
Interest expense		19,561				3,122				2,091				4,952				6,469
Net interest income		39,087				38,316				33,070				29,403				25,996
Provision for loan losses		132				2,258				(218	)			4,652				899
Noninterest income		7,126				7,997				11,092				15,190				6,034
Noninterest expenses		32,547				30,870				27,815				23,939				19,808
Federal income tax expense		2,689				2,616				3,328				3,271				2,297
Net income	$	10,845			$	10,569			$	13,237			$	12,731			$	9,026
PER SHARE
Earnings	$	2.45			$	2.39			$	2.86			$	2.73			$	1.94
Dividends	$	0.300			$	0.270			$	0.240			$	0.225			$	0.210
Tangible book value(1)	$	27.64			$	25.22			$	26.53			$	23.50			$	20.37
Quoted market value
High	$	24.10			$	29.25			$	27.40			$	26.00			$	21.00
Low	$	18.70			$	23.00			$	21.90			$	12.55			$	20.05
Close(1)	$	23.74			$	23.00			$	25.75			$	16.93			$	21.00
PERFORMANCE RATIOS
Return on average assets		0.85	%			0.95	%			1.36	%			1.45	%			1.27	%
Return on average shareholders' equity		11.15	%			11.71	%			14.55	%			15.79	%			12.73	%
Return on average tangible shareholders' equity		12.03	%			12.75	%			15.00	%			16.40	%			13.35	%
Efficiency ratio		70.43	%			66.66	%			62.98	%			53.68	%			61.84	%
Yield on earning assets (FTE)		4.84	%			3.99	%			3.83	%			4.12	%			4.81	%
Rate on interest bearing liabilities		2.35	%			0.49	%			0.37	%			0.93	%			1.43	%
Net interest margin to earning assets (FTE)		3.23	%			3.69	%			3.60	%			3.52	%			3.85	%
BALANCE SHEET DATA(1)
Total investment securities	$	109,543			$	129,886			$	138,476			$	78,179			$	62,351
Gross loans	$	1,483,720			$	1,350,851			$	1,015,177			$	1,060,885			$	826,597
Allowance for credit losses	$	15,400			$	12,200			$	10,500			$	10,100			$	5,413
Total assets	$	1,744,939			$	1,588,592			$	1,329,300			$	1,284,845			$	978,046
Total deposits	$	1,401,797			$	1,345,209			$	1,144,291			$	1,061,470			$	801,101
Borrowed funds	$	201,050			$	116,600			$	50,000			$	96,217			$	69,000
Total shareholders' equity	$	132,902			$	121,630			$	124,809			$	114,081			$	99,142
Net loans to total deposits		104.75	%			99.51	%			87.80	%			98.99	%			102.51	%
Common shares outstanding		4,466,221				4,434,937				4,569,935				4,691,142				4,658,722
YTD BALANCE SHEET AVERAGES
Total assets	$	1,710,941			$	1,485,489			$	1,297,657			$	1,171,415			$	950,749
Earning assets	$	1,620,015			$	1,391,179			$	1,230,553			$	1,116,861			$	903,192
Interest bearing liabilities	$	1,111,687			$	858,600			$	748,472			$	711,449			$	606,912
Total shareholders' equity	$	130,068			$	120,704			$	121,659			$	107,711			$	94,815
Total tangible shareholders' equity	$	120,482			$	110,792			$	117,991			$	103,712			$	90,394
Earned common shares outstanding		4,428,963				4,425,818				4,630,709				4,665,951				4,641,084
Unvested stock grants		28,530				25,462				21,088				13,966				9,907
Total common shares outstanding		4,457,493				4,451,280				4,651,797				4,679,917				4,650,991
ASSET QUALITY
Nonperforming loans to gross loans (1)		0.24	%			0.12	%			0.82	%			0.07	%			0.11	%
Nonperforming assets to total assets (1)		0.23	%			0.12	%			0.63	%			0.06	%			0.09	%
Allowance for credit losses to gross loans (1)		1.04	%			0.90	%			1.03	%			0.95	%			0.65	%
Net charge-offs (recoveries) to YTD average gross loans	(0.03		)%			0.05	%			0.02	%			0.03	%			—	%
Provision for loan losses to YTD average gross loans		0.01	%			0.19	%		(0.02		)%			0.44	%			0.11	%
CAPITAL RATIOS(1)
Total capital to risk weighted assets		11.59	%			10.96	%			13.63	%			15.57	%			14.42	%
Tier 1 capital to risk weighted assets		10.51	%			10.07	%			12.64	%			14.40	%			13.73	%
CET1 capital to risk weighted assets		9.53	%			9.04	%			11.33	%			12.77	%			11.96	%
Tier 1 leverage ratio		8.58	%			8.91	%			10.21	%			9.86	%			11.22	%
(1)At end of period

Income Statement Breakdown and Analysis

	Quarter to Date
	9/30/2023				6/30/2023				3/31/2023				12/31/2022				9/30/2022
Net income	$	3,775			$	3,226			$	3,844			$	4,364			$	4,009
Acquisition related items (net of tax)
Accretion on purchased loans		—				—				—				(20	)			(20	)
Amortization of core deposit intangibles		60				60				60				85				85
Amortization on acquired time deposits		—				—				—				(21	)			(21	)
Other acquisition related expenses		—				—				—				—				—
Total acquisition related items (net of tax)		60				60				60				44				44
Other nonrecurring items (net of tax)
Proxy contest related expenses		—				413				—				—				—
Prepayment penalties collected		(29	)			(95	)			(9	)			(61	)			(119	)
Total other nonrecurring items (net of tax)		(29	)			318				(9	)			(61	)			(119	)
Adjusted net income from operations	$	3,806			$	3,604			$	3,895			$	4,347			$	3,934
Net interest income	$	12,659			$	13,084			$	13,344			$	14,137			$	13,988
Accretion on purchased loans		—				—				—				(25	)			(25	)
Prepayment penalties collected		(37	)			(120	)			(12	)			(77	)			(150	)
Amortization on acquired time deposits		—				—				—				(27	)			(27	)
Adjusted net interest income	$	12,622			$	12,964			$	13,332			$	14,008			$	13,786
PERFORMANCE RATIOS
Based on adjusted net income from operations
Earnings per share	$	0.86			$	0.81			$	0.88			$	0.98			$	0.89
Return on average assets		0.87	%			0.85	%			0.94	%			1.05	%			1.00	%
Return on average shareholders' equity		11.37	%			11.05	%			12.49	%			13.96	%			12.72	%
Return on average tangible shareholders' equity		12.24	%			11.92	%			13.52	%			15.15	%			13.83	%
Efficiency ratio		70.31	%			69.51	%			67.41	%			60.62	%			62.02	%
Based on adjusted net interest income
Yield on earning assets (FTE)		4.91	%			4.82	%			4.75	%			4.54	%			4.22	%
Rate on interest bearing liabilities		2.66	%			2.35	%			2.02	%			1.41	%			0.74	%
Net interest margin to earning assets (FTE)		3.04	%			3.22	%			3.40	%			3.60	%			3.74	%

	Year to Date September 30								Variance
		2023				2022			Amount				%
Net income	$	10,845			$	10,569			$	276			2.61	%
Acquisition related items (net of tax)
Accretion on purchased loans		—				(60	)			60			(100.00	)%
Amortization of core deposit intangibles		180				254				(74	)		(29.13	)%
Amortization on acquired time deposits		—				(63	)			63			(100.00	)%
Other acquisition related expenses		—				213				(213	)		(100.00	)%
Total acquisition related items (net of tax)		180				344				(164	)		(47.67	)%
Other nonrecurring items (net of tax)
Proxy contest related expenses		413				—				413			N/M
Prepayment penalties collected		(133	)			(329	)			196			(59.57	)%
Total other nonrecurring items (net of tax)		280				(329	)			609			(185.11	)%
Adjusted net income from operations	$	11,305			$	10,584			$	721			6.81	%
Net interest income	$	39,087			$	38,316			$	771			2.01	%
Accretion on purchased loans		—				(76	)			76			(100.00	)%
Prepayment penalties collected		(169	)			(416	)			247			(59.38	)%
Amortization on acquired time deposits		—				(80	)			80			(100.00	)%
Adjusted net interest income	$	38,918			$	37,744			$	1,174			3.11	%
PERFORMANCE RATIOS
Based on adjusted net income from operations
Earnings per share	$	2.55			$	2.39			$	0.16			6.69	%
Return on average assets		0.88	%			0.95	%						(0.07	)%
Return on average shareholders' equity		11.62	%			11.72	%						(0.10	)%
Return on average tangible shareholders' equity		12.55	%			12.77	%						(0.22	)%
Efficiency ratio		69.06	%			66.20	%						2.86	%
Based on adjusted net interest income
Yield on earning assets (FTE)		4.83	%			3.94	%						0.89	%
Rate on interest bearing liabilities		2.35	%			0.48	%						1.87	%
Net interest margin to earning assets (FTE)		3.22	%			3.64	%						(0.42	)%

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
	September 30, 2023										June 30, 2023										September 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	$	1,477,343			$	19,170		5.15	%		$	1,470,156			$	18,725		5.11	%		$	1,294,302			$	15,004		4.60	%
Taxable investment securities		101,549				397		1.55	%			107,256				418		1.56	%			121,704				443		1.44	%
Nontaxable investment securities		12,670				70		2.19	%			13,253				73		2.30	%			14,517				79		2.27	%
Interest earning cash and cash equivalents		43,865				594		5.37	%			15,552				208		5.36	%			28,384				160		2.24	%
Federal Home Loan Bank stock		11,421				199		6.91	%			11,376				143		5.04	%			5,326				54		4.02	%
Total earning assets		1,646,848				20,430		4.92	%			1,617,593				19,567		4.85	%			1,464,233				15,740		4.27	%
Nonearning assets
Allowance for credit losses		(15,503	)									(15,220	)									(11,478	)
Premises and equipment, net		15,210										15,363										16,315
Accrued income and other assets		92,955										88,411										88,970
Total assets	$	1,739,510									$	1,706,147									$	1,558,040
Interest bearing liabilities
Interest bearing demand deposits	$	416,500			$	3,230		3.08	%		$	380,224			$	2,619		2.76	%		$	318,771			$	818		1.02	%
Savings deposits		290,939				429		0.59	%			306,195				434		0.57	%			371,020				126		0.13	%
Time deposits		248,389				2,280		3.64	%			175,607				1,303		2.98	%			102,472				121		0.47	%
Borrowed funds		201,007				1,818		3.59	%			243,781				2,113		3.48	%			125,625				673		2.13	%
Total interest bearing liabilities		1,156,835				7,757		2.66	%			1,105,807				6,469		2.35	%			917,888				1,738		0.75	%
Noninterest bearing liabilities
Noninterest bearing deposits		435,398										455,123										505,435
Accrued interest and other liabilities		14,417										14,357										12,022
Shareholders' equity		132,860										130,860										122,695
Total liabilities and shareholders' equity	$	1,739,510									$	1,706,147									$	1,558,040
Net interest income (FTE)					$	12,673									$	13,098									$	14,002
Net interest margin to earning assets (FTE)								3.05	%									3.25	%									3.79	%

	Nine Months Ended
	September 30, 2023										September 30, 2022
	Average Balance				Tax Equivalent Interest			Average Yield / Rate			Average Balance				Tax Equivalent Interest			Average Yield / Rate
Interest earning assets
Total loans	$	1,464,959			$	55,749		5.09	%		$	1,198,290			$	39,586		4.42	%
Taxable investment securities		106,158				1,250		1.57	%			131,792				1,324		1.34	%
Nontaxable investment securities		13,403				227		2.26	%			15,511				254		2.25	%
Interest earning cash and cash equivalents		24,484				955		5.21	%			41,440				229		0.74	%
Federal Home Loan Bank stock		11,011				515		6.25	%			4,146				93		3.00	%
Total earning assets		1,620,015				58,696		4.84	%			1,391,179				41,486		3.99	%
Nonearning assets
Allowance for credit losses		(15,290	)									(11,068	)
Premises and equipment, net		15,342										16,650
Accrued income and other assets		90,874										88,728
Total assets	$	1,710,941									$	1,485,489
Interest bearing liabilities
Interest bearing demand deposits	$	385,316			$	7,927		2.75	%		$	283,828			$	1,140		0.54	%
Savings deposits		312,762				1,336		0.57	%			367,920				359		0.13	%
Time deposits		196,838				4,595		3.12	%			118,320				448		0.51	%
Borrowed funds		216,771				5,703		3.52	%			88,532				1,175		1.77	%
Total interest bearing liabilities		1,111,687				19,561		2.35	%			858,600				3,122		0.49	%
Noninterest bearing liabilities
Noninterest bearing deposits		455,069										489,631
Accrued interest and other liabilities		14,117										16,554
Shareholders' equity		130,068										120,704
Total liabilities and shareholders' equity	$	1,710,941									$	1,485,489
Net interest income (FTE)					$	39,135									$	38,364
Net interest margin to earning assets (FTE)								3.23	%									3.69	%

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												Nine Months Ended
	September 30, 2023												September 30, 2023												September 30, 2023
	Compared To												Compared To												Compared To
	June 30, 2023												September 30, 2022												September 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	$	171			$	274			$	445			$	2,257			$	1,909			$	4,166			$	9,614			$	6,549			$	16,163
Taxable investment securities		(19	)			(2	)			(21	)			(215	)			169				(46	)			(361	)			287				(74	)
Nontaxable investment securities		(1	)			(2	)			(3	)			(7	)			(2	)			(9	)			(30	)			3				(27	)
Interest earning cash and cash equivalents		385				1				386				122				312				434				(188	)			914				726
Federal Home Loan Bank stock		1				55				56				89				56				145				255				167				422
Total changes in interest income		537				326				863				2,246				2,444				4,690				9,290				7,920				17,210
Changes in interest expense
Interest bearing demand deposits		276				335				611				318				2,094				2,412				545				6,242				6,787
Savings deposits		(75	)			70				(5	)			(179	)			482				303				(96	)			1,073				977
Time deposits		637				340				977				376				1,783				2,159				476				3,671				4,147
Borrowed funds		(704	)			409				(295	)			535				610				1,145				2,691				1,837				4,528
Total changes in interest expense		134				1,154				1,288				1,050				4,969				6,019				3,616				12,823				16,439
Net change in net interest income (FTE)	$	403			$	(828	)		$	(425	)		$	1,196			$	(2,525	)		$	(1,329	)		$	5,674			$	(4,903	)		$	771

	Average Yield/Rate for the Three Months Ended
	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
Total earning assets	4.92	%		4.85	%		4.75	%		4.57	%		4.27	%
Total interest bearing liabilities	2.66	%		2.35	%		2.02	%		1.42	%		0.75	%
Net interest margin to earning assets (FTE)	3.05	%		3.25	%		3.40	%		3.63	%		3.79	%

	Quarter to Date Net Interest Income (FTE)
	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
Interest income	$	20,416		$	19,553		$	18,679		$	17,782		$	15,726
FTE adjustment		14			17			17			17			18
Total interest income (FTE)		20,430			19,570			18,696			17,799			15,744
Total interest expense		7,757			6,469			5,335			3,645			1,738
Net interest income (FTE)	$	12,673		$	13,101		$	13,361		$	14,154		$	14,006

Noninterest Income

	Three Months Ended
	9/30/2023				6/30/2023				3/31/2023			12/31/2022				9/30/2022
Service charges and fees
Trust and investment services	$	572			$	583			$	549		$	505			$	546
ATM and debit card income		568				570				531			559				553
Service charges on deposit accounts		244				224				218			245				270
Total		1,384				1,377				1,298			1,309				1,369
Net gain on sales of residential mortgage loans		164				198				161			24				36
Changes in the fair value of MSR		119				(8	)			107			(129	)			207
Net gain on sales of commercial loans		—				95				—			—				—
Change in fair value of equity investments		(28	)			(16	)			15			2				(39	)
Other
Mortgage servicing fees		398				406				406			415				427
Change in cash surrender value of corporate owned life insurance		181				178				172			175				172
Other		120				230				169			153				223
Total		699				814				747			743				822
Total noninterest income	$	2,338			$	2,460			$	2,328		$	1,949			$	2,395
Memo items:
Residential mortgage operations	$	681			$	596			$	674		$	310			$	670

	Nine Months Ended September 30								Variance
		2023				2022			Amount				%
Service charges and fees
Trust and investment services	$	1,704			$	1,602			$	102			6.37	%
ATM and debit card income		1,669				1,615				54			3.34	%
Service charges on deposit accounts		686				757				(71	)		(9.38	)%
Total		4,059				3,974				85			2.14	%
Net gain on sales of residential mortgage loans		523				701				(178	)		(25.39	)%
Changes in the fair value of MSR		218				959				(741	)		(77.27	)%
Net gain on sales of commercial loans		95				—				95			N/M
Change in fair value of equity investments		(29	)			(118	)			89			(75.42	)%
Other
Mortgage servicing fees		1,210				1,306				(96	)		(7.35	)%
Change in cash surrender value of corporate owned life insurance		531				506				25			4.94	%
Other		519				669				(150	)		(22.42	)%
Total		2,260				2,481				(221	)		(8.91	)%
Total noninterest income	$	7,126			$	7,997			$	(871	)		(10.89	)%
Memo items:
Residential mortgage operations	$	1,951			$	2,966			$	(1,015	)		(34.22)        %

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 in 2023. 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 2023 compared to the second half of 2022. 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 in the third quarter of 2023, the overall direction of the fair value of MSR is expected to 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 third quarter of 2023, the serviced loan portfolio declined by $321. 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 $28,793, or 4.36%, since the third quarter of 2022. We expect mortgage servicing fees to trend modestly downward throughout the remainder of 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 trust and investment services fees to moderate throughout the remainder of 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 will continue to 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
	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
Compensation and benefits	$	5,592		$	5,492		$	5,792		$	5,329		$	5,320
Professional services		726			1,237			766			594			763
Furniture and equipment		668			685			726			772			822
Occupancy		591			589			635			566			578
Data processing		576			565			513			111			363
Advertising and promotional		506			509			451			580			405
Loan and collection		232			457			240			278			435
Other
FDIC insurance premiums		330			330			201			149			150
ATM and debit card		153			179			161			254			154
Telephone and communication		115			100			119			110			112
Amortization of core deposit intangibles		75			76			76			107			108
Other acquisition related expenses		—			—			—			—			—
Other general and administrative		1,030			1,101			953			931			933
Total	$	1,703		$	1,786		$	1,510		$	1,551		$	1,457
Total noninterest expenses	$	10,594		$	11,320		$	10,633		$	9,781		$	10,143

	Nine Months Ended September 30						Variance
		2023			2022		Amount				%
Compensation and benefits	$	16,876		$	16,120		$	756			4.69	%
Professional services		2,729			2,352			377			16.03	%
Furniture and equipment		2,079			2,445			(366	)		(14.97	)%
Occupancy		1,815			1,761			54			3.07	%
Data processing		1,654			1,440			214			14.86	%
Advertising and promotional		1,466			1,009			457			45.29	%
Loan and collection		929			1,362			(433	)		(31.79	)%
Other
FDIC insurance premiums		861			472			85			21.96	%
ATM and debit card		493			457			36			7.88	%
Telephone and communication		334			329			5			1.52	%
Amortization of core deposit intangibles		227			323			(96	)		(29.72	)%
Other acquisition related expenses		—			270			(270	)		(100.00	)%
Other general and administrative		3,084			2,530			554			21.90	%
Total	$	4,999		$	4,381		$	618			14.11	%
Total noninterest expenses	$	32,547		$	30,870		$	1,677			5.43	%

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. 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 approximate current levels 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 in the second half of 2022 due to receipt of renewal incentives from our core data processor. Data processing expenses are expected to approximate current levels throughout the remainder of 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 throughout the remainder of 2023.

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

Telephone and communication includes expenses relating to our communication systems. These expenses are expected to approximate current levels in future periods.

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.

Other general and administrative includes miscellaneous other expense items. These expenses have increased in 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 approximate current levels in future periods.

Balance Sheet Breakdown and Analysis

	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
ASSETS
Cash and due from banks	$	83,365		$	59,181		$	100,496		$	57,844		$	43,345
Total investment securities		109,543			117,563			122,995			125,049			129,886
Residential mortgage loans held-for-sale, at fair value		1,037			1,106			875			493			62
Gross loans		1,483,720			1,472,288			1,457,173			1,436,166			1,350,851
Less allowance for credit losses		15,400			15,400			15,220			13,000			12,200
Net loans		1,468,320			1,456,888			1,441,953			1,423,166			1,338,651
All other assets		82,674			84,081			82,754			82,311			76,648
Total assets	$	1,744,939		$	1,718,819		$	1,749,073		$	1,688,863		$	1,588,592
	.
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits	$	1,401,797		$	1,380,192		$	1,353,918		$	1,332,883		$	1,345,209
Total borrowed funds		201,050			200,550			259,050			222,350			116,600
Accrued interest payable and other liabilities		9,190			7,387			7,858			7,543			5,153
Total liabilities		1,612,037			1,588,129			1,620,826			1,562,776			1,466,962
Total shareholders' equity		132,902			130,690			128,247			126,087			121,630
Total liabilities and shareholders' equity	$	1,744,939		$	1,718,819		$	1,749,073		$	1,688,863		$	1,588,592

	9/30/2023 vs 6/30/2023							9/30/2023 vs 9/30/2022
	Variance							Variance
	Amount				%			Amount				%
ASSETS
Cash and due from banks	$	24,184			40.86	%		$	40,020			92.33	%
Total investment securities		(8,020	)		(6.82	)%			(20,343	)		(15.66	)%
Residential mortgage loans held-for-sale, at fair value		(69	)		(6.24	)%			975			1,572.58	%
Gross loans		11,432			0.78	%			132,869			9.84	%
Less allowance for credit losses		—			—	%			3,200			26.23	%
Net loans		11,432			0.78	%			129,669			9.69	%
All other assets		(1,407	)		(1.67	)%			6,026			7.86	%
Total assets	$	26,120			1.52	%		$	156,347			9.84	%
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits	$	21,605			1.57	%		$	56,588			4.21	%
Total borrowed funds		500			0.25	%			84,450			72.43	%
Accrued interest payable and other liabilities		1,803			24.41	%			4,037			78.34	%
Total liabilities		23,908			1.51	%			145,075			9.89	%
Total shareholders' equity		2,212			1.69	%			11,272			9.27	%
Total liabilities and shareholders' equity	$	26,120			1.52	%		$	156,347			9.84	%

Cash and due from banks

	9/30/2023			6/30/2023				3/31/2023			12/31/2022			9/30/2022
Cash and due from banks
Noninterest bearing	$	35,121		$	33,028			$	24,376		$	28,216		$	29,530
Interest bearing		48,244			26,153				76,120			29,628			13,815
Total	$	83,365		$	59,181			$	100,496		$	57,844		$	43,345
	9/30/2023 vs 6/30/2023										9/30/2023 vs 9/30/2022
	Variance										Variance
	Amount			%							Amount			%
Cash and due from banks
Noninterest bearing	$	2,093			6.34	%					$	5,591			18.93	%
Interest bearing		22,091			84.47	%						34,429			249.21	%
Total	$	24,184			40.86	%					$	40,020			92.33	%

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:

	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
Cash and cash equivalents	$	83,365		$	59,181		$	100,496		$	57,844		$	43,345
Fair value of unpledged investment securities		82,103			82,041			102,368			103,819			109,685
FHLB borrowing availability		170,000			170,000			111,500			144,567			78,000
Unsecured lines of credit		20,000			20,000			20,000			26,500			26,500
Funds available through the Fed Discount Window		110			119			119			113			115
Parent company line of credit		950			1,450			1,450			1,650			2,400
Total liquidity sources	$	356,528		$	332,791		$	335,933		$	334,493		$	260,045

The increase in cash and cash equivalents during the third quarter of 2023 was due to an increase in total deposits (see "Total deposits" below). The decrease in fair value of unpledged investment securities during the second quarter of 2023 was 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 was due to less utilization of FHLB advances as loan growth has moderated in recent periods.

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

	9/30/2023				6/30/2023				3/31/2023				12/31/2022				9/30/2022
Available-for-sale
U.S. Government and federal agency	$	23,420			$	24,411			$	24,402			$	24,394			$	26,391
State and municipal		20,992				21,110				22,649				22,709				22,743
Mortgage backed residential		50,786				52,704				54,595				56,293				58,313
Certificates of deposit		3,956				6,679				7,426				7,426				8,166
Collateralized mortgage obligations - agencies		24,062				24,680				25,275				25,925				26,560
Unrealized gain/(loss) on available-for-sale securities		(15,958	)			(14,536	)			(13,940	)			(14,184	)			(14,698	)
Total available-for-sale		107,258				115,048				120,407				122,563				127,475
Held-to-maturity state and municipal		879				1,081				1,168				1,171				1,173
Equity securities		1,406				1,434				1,420				1,315				1,238
Total investment securities	$	109,543			$	117,563			$	122,995			$	125,049			$	129,886
	9/30/2023 vs 6/30/2023												9/30/2023 vs 9/30/2022
	Variance												Variance
	Amount				%								Amount				%
Available-for-sale
U.S. Government and federal agency		(991	)		(4.06		)%						$	(2,971	)		(11.26		)%
State and municipal		(118	)		(0.56		)%							(1,751	)		(7.70		)%
Mortgage backed residential		(1,918	)		(3.64		)%							(7,527	)		(12.91		)%
Certificates of deposit		(2,723	)		(40.77		)%							(4,210	)		(51.56		)%
Collateralized mortgage obligations - agencies		(618	)		(2.50		)%							(2,498	)		(9.41		)%
Unrealized gain/(loss) on available-for-sale securities		(1,422	)			9.78	%							(1,260	)			8.57	%
Total available-for-sale		(7,790	)		(6.77		)%							(20,217	)		(15.86		)%
Held-to-maturity state and municipal		(202	)		(18.69		)%							(294	)		(25.06		)%
Equity securities		(28	)		(1.95		)%							168				13.57	%
Total investment securities	$	(8,020	)		(6.82		)%						$	(20,343	)		(15.66		)%

The amortized cost and fair value of AFS investment securities as of September 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	$	5,522		$	17,898		$	—		$	—		$	—		$	23,420
State and municipal		1,798			16,582			1,286			1,326			—			20,992
Mortgage backed residential		—												50,786			50,786
Certificates of deposit		1,979			1,977			—			—			—			3,956
Collateralized mortgage obligations - agencies		—			—			—			—			24,062			24,062
Total amortized cost	$	9,299		$	36,457		$	1,286		$	1,326		$	74,848		$	123,216
Fair value	$	9,068		$	32,768		$	1,128		$	1,151		$	63,143		$	107,258

The amortized cost and fair value of HTM investment securities as of September 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	$	344		$	305		$	230		$	—		$	—		$	879
Fair value	$	339		$	290		$	214		$	—		$	—		$	843

Total investment securities have declined primarily due to maturities and prepayments, in addition to increases in our unrealized loss position on available-for-sale investments resulting from increases in market interest rates. 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 $1,870 as a result of the adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", as amended, on January 1, 2023. This was recorded as a cumulative-effect adjustment, net of tax, from retained earnings.

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

	9/30/2023				6/30/2023				3/31/2023				12/31/2022				9/30/2022
Commercial	$	125,330			$	120,985			$	111,557			$	106,616			$	107,531
Commercial real estate		874,870				870,761				874,690				869,496				820,165
Total commercial loans		1,000,200				991,746				986,247				976,112				927,696
Residential mortgage		431,740				430,065				418,987				406,408				368,971
Home equity		47,069				45,689				46,909				47,768				47,928
Total residential real estate loans		478,809				475,754				465,896				454,176				416,899
Consumer		4,711				4,788				5,030				5,878				6,256
Gross loans		1,483,720				1,472,288				1,457,173				1,436,166				1,350,851
Allowance for credit losses		(15,400	)			(15,400	)			(15,220	)			(13,000	)			(12,200	)
Loans, net	$	1,468,320			$	1,456,888			$	1,441,953			$	1,423,166			$	1,338,651
Memo items:
Residential mortgage loans serviced for others	$	631,697			$	632,018			$	636,121			$	647,121			$	660,490
	9/30/2023 vs 6/30/2023												9/30/2023 vs 9/30/2022
	Variance												Variance
	Amount				%								Amount				%
Commercial	$	4,345				3.59	%						$	17,799				16.55	%
Commercial real estate		4,109				0.47	%							54,705				6.67	%
Total commercial loans		8,454				0.85	%							72,504				7.82	%
Residential mortgage		1,675				0.39	%							62,769				17.01	%
Home equity		1,380				3.02	%							(859	)		(1.79		)%
Total residential real estate loans		3,055				0.64	%							61,910				14.85	%
Consumer		(77	)		(1.61		)%							(1,545	)		(24.70		)%
Gross loans		11,432				0.78	%							132,869				9.84	%
Allowance for credit losses		—				—	%							(3,200	)			26.23	%
Loans, net	$	11,432				0.78	%						$	129,669				9.69	%
Memo items:
Residential mortgage loans serviced for others	$	(321	)		(0.05		)%						$	(28,793	)		(4.36		)%

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

	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
Loans collectively evaluated for impairment
Commercial and industrial	$	124,860		$	120,854		$	111,426		$	106,616		$	107,531
Commercial real estate		874,701			870,580			874,509			869,313			819,982
Residential mortgage		428,927			428,147			416,879			404,308			367,652
Home equity		46,898			45,535			46,761			47,728			47,887
Consumer		4,711			4,788			5,020			5,871			6,251
Subtotal		1,480,097			1,469,904			1,454,595			1,433,836			1,349,303
Loans individually evaluated for impairment
Commercial and industrial		470			131			131			—			—
Commercial real estate		169			181			181			183			183
Residential mortgage		2,813			1,918			2,108			2,100			1,319
Home equity		171			154			148			40			41
Consumer		—			—			10			7			5
Subtotal		3,623			2,384			2,578			2,330			1,548
Gross Loans	$	1,483,720		$	1,472,288		$	1,457,173		$	1,436,166		$	1,350,851

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

	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
Loans collectively evaluated for impairment
Commercial and industrial	$	1,362		$	1,488		$	1,324		$	1,094		$	1,129
Commercial real estate		8,703			8,991			8,765			7,480			7,126
Residential mortgage		4,439			4,453			4,576			3,878			3,458
Home equity		315			325			416			370			370
Consumer		36			40			49			128			90
Unallocated		294			49			—			—			—
Subtotal		15,149			15,346			15,130			12,950			12,173
Loans individually evaluated for impairment
Commercial and industrial		248			15			3			—			—
Commercial real estate		—			—			—			—			—
Residential mortgage		3			39			77			43			27
Home equity		—			—			—			—			—
Consumer		—			—			10			7			—
Unallocated		—			—			—			—			—
Subtotal		251			54			90			50			27
Allowance for credit losses	$	15,400		$	15,400		$	15,220		$	13,000		$	12,200
Commercial and industrial	$	1,610		$	1,503		$	1,327		$	1,094		$	1,129
Commercial real estate		8,703			8,991			8,765			7,480			7,126
Residential mortgage		4,442			4,492			4,653			3,921			3,485
Home equity		315			325			416			370			370
Consumer		36			40			59			135			90
Unallocated		294			49			—			—			—
Allowance for credit losses	$	15,400		$	15,400		$	15,220		$	13,000		$	12,200

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. While we continue to monitor various industries that have been impacted by the pandemic, we have shifted 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 September 30, 2023, there were no delinquencies in the non-owner occupied commercial real estate loan portfolio. 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:

	9/30/2023				6/30/2023				3/31/2023			12/31/2022				9/30/2022
Net lease	$	160,077			$	159,199			$	161,392		$	165,848			$	160,453
Retail strip centers		96,567				96,310				95,726			89,671				85,050
Office		62,959				62,062				59,867			60,166				58,997
Special use		57,612				57,978				41,932			35,284				25,289
Medical office		28,591				28,752				30,363			30,305				29,679
Industrial		28,906				28,661				29,025			30,396				32,222
Self storage		21,993				22,169				22,265			22,285				22,467
Mixed use		19,833				19,412				19,054			19,208				19,405
Retail		14,115				14,998				17,429			15,437				15,279
Total non-owner occupied commercial real estate loans	$	490,653			$	489,541			$	477,053		$	468,600			$	448,841
	9/30/2023 vs 6/30/2023											9/30/2023 vs 9/30/2022
	Variance											Variance
	Amount				%							Amount				%
Net lease	$	878				0.55	%					$	(376	)		(0.23		)%
Retail strip centers		257				0.27	%						11,517				13.54	%
Office		897				1.45	%						3,962				6.72	%
Special use		(366	)		(0.63		)%						32,323				127.81	%
Medical office		(161	)		(0.56		)%						(1,088	)		(3.67		)%
Industrial		245				0.85	%						(3,316	)		(10.29		)%
Self storage		(176	)		(0.79		)%						(474	)		(2.11		)%
Mixed use		421				2.17	%						428				2.21	%
Retail		(883	)		(5.89		)%						(1,164	)		(7.62		)%
Total non-owner occupied commercial real estate loans	$	1,112				0.23	%					$	41,812				9.32	%

The following table presents the average aggregate loan size of current and historical non-owner occupied commercial real estate loans, based on loan collateral, by industry pool:

	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
Net lease	$	1,300		$	1,292		$	1,299		$	1,307		$	1,286
Retail strip centers		2,115			2,081			2,087			2,092			1,994
Office		1,294			1,332			1,409			1,422			1,405
Special use		2,134			2,342			1,951			1,703			1,335
Medical office		1,145			1,159			1,193			1,212			1,187
Industrial		1,072			1,025			1,038			1,050			1,120
Self storage		1,692			1,583			1,590			1,714			1,605
Mixed use		1,240			1,294			1,466			1,478			1,493
Retail		429			450			474			459			449
Total non-owner occupied commercial real estate loans	$	1,362		$	1,366		$	1,352		$	1,346		$	1,304

The following table presents current and historical non-owner occupied commercial real estate loans, based on loan collateral, by industry pool as a percentage of gross loans:

	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
Net lease	10.79	%		10.81	%		11.08	%		11.55	%		11.88	%
Retail strip centers	6.51	%		6.54	%		6.57	%		6.24	%		6.30	%
Office	4.24	%		4.22	%		4.11	%		4.19	%		4.37	%
Special use	3.88	%		3.94	%		2.88	%		2.46	%		1.87	%
Medical office	1.93	%		1.95	%		2.08	%		2.11	%		2.20	%
Industrial	1.95	%		1.95	%		1.99	%		2.12	%		2.39	%
Self storage	1.48	%		1.51	%		1.53	%		1.55	%		1.66	%
Mixed use	1.34	%		1.32	%		1.31	%		1.34	%		1.44	%
Retail	0.95	%		1.02	%		1.20	%		1.07	%		1.13	%
Total non-owner occupied commercial real estate loans to gross loans	33.07	%		33.26	%		32.75	%		32.63	%		33.24	%

Asset quality

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

	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
Accruing interest
Current	$	1,477,386		$	1,466,354		$	1,449,266		$	1,428,691		$	1,346,141
Past due 30-89 days		2,711			3,550			5,185			5,182			3,131
Past due 90 days or more		—			—			144			—			71
Total accruing interest		1,480,097			1,469,904			1,454,595			1,433,873			1,349,343
Nonaccrual		3,623			2,384			2,578			2,293			1,508
Total loans	$	1,483,720		$	1,472,288		$	1,457,173		$	1,436,166		$	1,350,851
Total loans past due and in nonaccrual status	$	6,334		$	5,934		$	7,907		$	7,475		$	4,710

The following table summarizes the our nonperforming assets as of:

	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
Nonaccrual loans	$	3,623		$	2,384		$	2,578		$	2,293		$	1,508
Accruing loans past due 90 days or more		—			—			144			—			71
Total nonperforming loans		3,623			2,384			2,722			2,293			1,579
Other real estate owned		345			345			293			293			293
Total nonperforming assets	$	3,968		$	2,729		$	3,015		$	2,586		$	1,872

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

	9/30/2023				6/30/2023			3/31/2023			12/31/2022			9/30/2022
Total charge-offs	$	16			$	41		$	28		$	58		$	40
Total recoveries		455				16			12			11			9
Net charge-offs (recoveries)	$	(439	)		$	25		$	16		$	47		$	31
Provision for loan losses	$	(309	)		$	205		$	236		$	847		$	1,231

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

	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
Nonperforming loans to gross loans	0.24	%		0.16	%		0.19	%		0.16	%		0.12	%
Nonperforming assets to total assets	0.23	%		0.16	%		0.17	%		0.15	%		0.12	%
Allowance for credit losses to gross loans	1.04	%		1.05	%		1.04	%		0.91	%		0.90	%
Net charge-offs (recoveries) to QTD average gross loans	(0.03	)%		—	%		—	%		—	%		—	%
Provision for loan losses to QTD average gross loans	(0.02	)%		0.01	%		0.02	%		0.06	%		0.10	%

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

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

The following table summarizes the average loan size as of:

	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
Commercial and industrial	$	353		$	346		$	312		$	311		$	314
Commercial real estate		896			885			895			890			851
Total commercial loans		751			743			739			740			711
Residential mortgage		234			234			228			225			217
Home equity		52			51			52			52			52
Total residential real estate loans		174			174			170			166			159
Consumer		12			12			13			13			14
Gross loans	$	335		$	333		$	328		$	323		$	311

All other assets

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

	9/30/2023				6/30/2023				3/31/2023			12/31/2022				9/30/2022
Premises and equipment, net	$	14,928			$	15,345			$	15,219		$	15,571			$	16,100
Federal Home Loan Bank stock		9,179				11,498				10,958			10,215				5,760
Corporate owned life insurance		27,274				27,047				26,869			26,697				26,522
Mortgage servicing rights		8,884				8,765				8,773			8,666				8,795
Accrued interest receivable		4,485				3,992				3,976			4,002				3,300
Goodwill		8,853				8,853				8,853			8,853				8,853
Other assets
Core deposit intangibles		609				684				760			836				943
Right-of-use assets		1,426				1,510				1,107			1,204				1,065
Other real estate owned		345				345				293			293				293
Other		6,691				6,042				5,946			5,974				5,017
Total		9,071				8,581				8,106			8,307				7,318
All other assets	$	82,674			$	84,081			$	82,754		$	82,311			$	76,648
	9/30/2023 vs 6/30/2023											9/30/2023 vs 9/30/2022
	Variance											Variance
	Amount				%							Amount				%
Premises and equipment, net	$	(417	)		(2.72		)%					$	(1,172	)		(7.28		)%
Federal Home Loan Bank stock		(2,319	)		(20.17		)%						3,419				59.36	%
Corporate owned life insurance		227				0.84	%						752				2.84	%
Mortgage servicing rights		119				1.36	%						89				1.01	%
Accrued interest receivable		493				12.35	%						1,185				35.91	%
Goodwill		—				—	%						—				—	%
Other assets
Core deposit intangibles		(75	)		(10.96		)%						(334	)		(35.42		)%
Right-of-use assets		(84	)		(5.56		)%						361				33.90	%
Other real estate owned		—				—	%						52				17.75	%
Other		649				10.74	%						1,674				33.37	%
Total		490				5.71	%						1,753				23.95	%
All other assets	$	(1,407	)		(1.67		)%					$	6,026				7.86	%

The decrease in FHLB stock during the third quarter of 2023 was due to our participation in a voluntary repurchase program offered by the FHLB. 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:

	9/30/2023				6/30/2023				3/31/2023			12/31/2022				9/30/2022
Noninterest bearing demand	$	425,820			$	457,204			$	457,585		$	461,390			$	500,204
Interest bearing
Savings		293,310				301,872				323,254			351,066				380,118
Money market demand		225,138				221,686				214,781			170,459				213,672
NOW
Retail NOW		198,271				161,765				155,659			136,611				148,775
Brokered NOW		—				—				60,005			40,009				—
Total NOW Accounts		198,271				161,765				215,664			176,620				148,775
Time deposits
Other time deposits		198,509				176,280				121,567			102,358				80,454
Brokered time deposits		60,251				60,395				20,077			70,000				20,000
Internet time deposits		498				990				990			990				1,986
Total time deposits		259,258				237,665				142,634			173,348				102,440
Total deposits	$	1,401,797			$	1,380,192			$	1,353,918		$	1,332,883			$	1,345,209
	9/30/2023 vs 6/30/2023											9/30/2023 vs 9/30/2022
	Variance											Variance
	Amount				%							Amount				%
Noninterest bearing demand	$	(31,384	)		(6.86		)%					$	(74,384	)		(14.87		)%
Interest bearing
Savings		(8,562	)		(2.84		)%						(86,808	)		(22.84		)%
Money market demand		3,452				1.56	%						11,466				5.37	%
NOW
Retail NOW		36,506				22.57	%						49,496				33.27	%
Brokered NOW		—				—	%						—				—	%
Total NOW Accounts		36,506				22.57	%						49,496				33.27	%
Time deposits
Other time deposits		22,229				12.61	%						118,055				146.74	%
Brokered time deposits		(144	)		(0.24		)%						40,251				201.26	%
Internet time deposits		(492	)		(49.70		)%						(1,488	)		(74.92		)%
Total time deposits		21,593				9.09	%						156,818				153.08	%
Total deposits	$	21,605				1.57	%					$	56,588				4.21	%

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 11 times, from a target range of 0.00-0.25% to 5.25-5.50%, or 525 basis points. This rapid increase in interest rates has led to significant competition amongst financial institutions for deposits. Due to the overall uncertainty regarding potential rate changes in the future, 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 the remainder of 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:

	9/30/2023			6/30/2023				3/31/2023			12/31/2022			9/30/2022
Federal Home Loan Bank borrowings	$	180,000		$	180,000			$	238,500		$	202,000		$	97,000
Subordinated debentures		14,000			14,000				14,000			14,000			14,000
Other borrowings		7,050			6,550				6,550			6,350			5,600
Total borrowed funds	$	201,050		$	200,550			$	259,050		$	222,350		$	116,600
	9/30/2023 vs 6/30/2023										9/30/2023 vs 9/30/2022
	Variance										Variance
	Amount			%							Amount			%
Federal Home Loan Bank borrowings	$	—			—	%					$	83,000			85.57	%
Subordinated debentures		—			—	%						—			—	%
Other borrowings		500			7.63	%						1,450			25.89	%
Total borrowed funds	$	500			0.25	%					$	84,450			72.43	%

We utilize a mix of borrowed funds and organic deposit growth to fund loan demand. The increase in Federal Home Loan Bank borrowings in the fourth quarter of 2022 and first quarter of 2023 was the result of the highly competitive deposit landscape and the growth of our loan portfolio. However, as loan growth has recently moderated, our reliance on FHLB advances has declined in recent periods.

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:

	9/30/2023				6/30/2023				3/31/2023			12/31/2022				9/30/2022
Federal Home Loan Bank borrowings	$	180,000			$	180,000			$	238,500		$	202,000			$	97,000
Subordinated debentures		14,000				14,000				14,000			14,000				14,000
Other borrowings		7,050				6,550				6,550			6,350				5,600
Brokered NOW accounts		—				—				60,005			40,009				—
Brokered time deposits		60,251				60,395				20,077			70,000				20,000
Internet time deposits		498				990				990			990				1,986
Total wholesale funds	$	261,799			$	261,935			$	340,122		$	333,349			$	138,586
	9/30/2023 vs 6/30/2023											9/30/2023 vs 9/30/2022
	Variance											Variance
	Amount				%							Amount				%
Federal Home Loan Bank borrowings	$	—				—	%						83,000				85.57	%
Subordinated debentures		—				—	%						—				—	%
Other borrowings		500				7.63	%						1,450				25.89	%
Brokered NOW accounts		—			N/A								—			N/A
Brokered time deposits		(144	)		(0.24		)%						40,251				201.26	%
Internet time deposits		(492	)		(49.70		)%						(1,488	)		(74.92		)%
Total wholesale funds	$	(136	)		(0.05		)%					$	123,213				88.91	%

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 and brokered NOW accounts declined. 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 September 30, 2023, the Bank's total capital ratio was 11.79%, tier 1 capital ratio was 10.70%, and tier 1 leverage ratio was 8.73%. 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:

	9/30/2023				6/30/2023				3/31/2023				12/31/2022				9/30/2022
Common stock	$	74,118			$	73,993			$	73,868			$	73,569			$	73,460
Retained earnings		70,972				67,643				64,863				63,044				59,080
Accumulated other comprehensive (loss) income		(12,188	)			(10,946	)			(10,484	)			(10,526	)			(10,910	)
Total shareholders' equity	$	132,902			$	130,690			$	128,247			$	126,087			$	121,630
	9/30/2023 vs 6/30/2023												9/30/2023 vs 9/30/2022
	Variance												Variance
	Amount				%								Amount				%
Common stock	$	125				0.17	%						$	658				0.90	%
Retained earnings		3,329				4.92	%							11,892				20.13	%
Accumulated other comprehensive (loss) income		(1,242	)			11.35	%							(1,278	)			11.71	%
Total shareholders' equity	$	2,212				1.69	%						$	11,272				9.27	%

The Board of Directors has authorized the repurchase of up to $10,000 of common stock. As of September 30, 2023, we had $1,393 of common stock available to repurchase through the program. We have not executed any repurchases of our common stock during 2023.
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 September 30, 2018 and all dividends were reinvested.

The graph accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/380dec10-60c8-4484 ...

	Date		FETM			ABAQ Index
	9/30/2018		$	100.00		$	100.00
	9/30/2019			100.57			90.25
	9/30/2020			82.74			60.24
	9/30/2021			125.91			105.71
	9/30/2022			114.56			95.90
	9/30/2023			119.91			76.52

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
CDI: Core deposit intangible	N/M: Not meaningful
CET1: Common equity tier 1	NASDAQ: National Association of Securities Dealers Automated Quotations
COLI: Corporate owned life insurance	NOW: Negotiable order of withdrawal
DRIP: Dividend Reinvestment Plan	NSF: Non-sufficient funds
EPS: Earnings Per Common Share	OCI: Other comprehensive income
ESOP: Employee Stock Ownership Plan	OIS: Overnight Index Swap
FASB: Financial Accounting Standards Board	OREO: Other real estate owned
FDIC: Federal Deposit Insurance Corporation	OTTI: Other-than-temporary impairment
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
	[e-mail]	[e-mail]