Fentura Financial, Inc. Announces Second Quarter 2021 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, 2021 presentation.

FENTON, Mich., July 30, 2021 (GLOBE NEWSWIRE) — Fentura Financial, Inc. (OTCQX: FETM) announces quarterly results of net income of $4,726 and $9,382 for the three and six month periods ended June 30, 2021.

Ronald Justice, President and CEO, stated, “Once again, I am pleased with our operating results for the quarter. Opportunities for new loan and core deposit relationships remain strong. Our team’s outstanding efforts generated an increase in total loans (net of PPP loans) of $45,629 during the quarter and $62,446 on a year to date basis. These growth trends, along with continued strong residential mortgage activity and a solid net interest margin actively contributed to our strong operating results. While the COVID-19 pandemic continues to create uncertainties, client relationship growth, consistent asset quality, and stock performance trends are encouraging indicators.”

Following is a discussion of the Corporation’s financial performance as of, and for the three and six month periods ended June 30, 2021. 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:

		6/30/2021				3/31/2021				12/31/2020				9/30/2020				6/30/2020
INCOME STATEMENT DATA
Interest income		$	11,658			$	11,919			$	11,624			$	12,070			$	11,215
Interest expense		762				676				972				1,189				1,618
Net interest income		10,896				11,243				10,652				10,881				9,597
Provision for loan losses		6				212				982				1,109				2,001
Noninterest income		4,230				3,854				4,676				5,159				5,292
Noninterest expenses		9,222				9,031				10,971				8,218				7,809
Federal income tax expense		1,172				1,198				642				1,377				1,036
Net income		$	4,726			$	4,656			$	2,733			$	5,336			$	4,043
PER SHARE
Earnings		$	1.02			$	1.00			$	0.58			$	1.14			$	0.87
Dividends		$	0.080			$	0.080			$	0.075			$	0.075			$	0.075
Tangible book value(1)		$	25.73			$	24.75			$	23.88			$	23.50			$	22.44
Quoted market value
High		$	27.40			$	24.75			$	22.25			$	17.99			$	18.95
Low		$	23.55			$	21.90			$	16.93			$	16.80			$	14.90
Close(1)		$	26.00			$	23.30			$	22.00			$	16.93			$	17.35
PERFORMANCE RATIOS
Return on average assets		1.45		%		1.50		%		0.84		%		1.68		%		1.35		%
Return on average shareholders’ equity		15.64		%		15.86		%		9.27		%		18.86		%		15.20		%
Return on average tangible shareholders’ equity		16.12		%		16.38		%		9.58		%		19.54		%		15.79		%
Efficiency ratio		60.97		%		59.82		%		71.57		%		51.23		%		52.45		%
Yield on earning assets (FTE)		3.79		%		4.01		%		3.75		%		3.97		%		3.94		%
Rate on interest bearing liabilities		0.41		%		0.37		%		0.50		%		0.63		%		0.91		%
Net interest margin to earning assets (FTE)		3.55		%		3.79		%		3.44		%		3.58		%		3.37		%
BALANCE SHEET DATA(1)
Total investment securities		$	129,944			$	89,772			$	76,111			$	78,179			$	75,526
Gross loans		$	986,358			$	1,028,117			$	1,066,562			$	1,060,885			$	1,044,564
Total assets		$	1,309,685			$	1,303,175			$	1,251,446			$	1,284,845			$	1,237,694
Total deposits		$	1,126,496			$	1,122,508			$	1,071,976			$	1,061,470			$	1,018,287
Borrowed funds		$	49,500			$	49,000			$	49,000			$	96,217			$	96,217
Total shareholders’ equity		$	122,986			$	119,360			$	115,868			$	114,081			$	108,969
Net loans to total deposits		86.60		%		90.60		%		98.48		%		98.99		%		101.70		%
Common shares outstanding		4,638,614				4,673,932				4,694,275				4,691,142				4,680,920
QTD BALANCE SHEET AVERAGES
Total assets		$	1,309,942			$	1,259,119			$	1,288,199			$	1,264,105			$	1,200,966
Earning assets		$	1,234,827			$	1,206,411			$	1,235,895			$	1,210,274			$	1,146,941
Interest bearing liabilities		$	753,706			$	735,159			$	773,132			$	750,281			$	711,500
Total shareholders’ equity		$	121,235			$	119,034			$	117,263			$	112,565			$	106,998
Total tangible shareholders’ equity		$	117,567			$	115,298			$	113,444			$	108,655			$	102,999
Earned common shares outstanding		4,644,833				4,664,893				4,682,063				4,673,629				4,664,946
Unvested stock grants		20,671				21,922				14,208				14,208				14,208
Total common shares outstanding		4,665,504				4,686,815				4,696,271				4,687,837				4,679,154
ASSET QUALITY(1)
Nonperforming loans to gross loans		0.87		%		0.79		%		0.75		%		0.07		%		0.10		%
Nonperforming assets to total assets		0.66		%		0.62		%		0.64		%		0.06		%		0.08		%
Allowance for loan losses to gross loans		1.09		%		1.08		%		1.02		%		0.95		%		0.86		%
Allowance for loan losses to gross loans, net of PPP loans		1.14		%		1.23		%		1.23		%		1.19		%		1.07		%
CAPITAL RATIOS(1)
Total capital to risk weighted assets		14.35		%		15.02		%		15.14		%		15.57		%		15.06		%
Tier 1 capital to risk weighted assets		13.27		%		13.84		%		13.93		%		14.40		%		14.00		%
CET1 capital to risk weighted assets		11.87		%		12.34		%		12.38		%		12.77		%		12.34		%
Tier 1 leverage ratio		10.19		%		10.31		%		9.80		%		9.86		%		9.90		%
(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:

		6/30/2021				6/30/2020				6/30/2019				6/30/2018				6/30/2017
INCOME STATEMENT DATA
Interest income		$	23,577			$	22,285			$	21,225			$	17,108			$	13,681
Interest expense			1,438				3,763				4,285				2,263				1,389
Net interest income			22,139				18,522				16,940				14,845				12,292
Provision for loan losses			218				3,543				477				576				125
Noninterest income			8,084				9,805				3,772				3,814				3,372
Noninterest expenses			18,253				15,495				13,200				12,328				10,837
Federal income tax expense			2,370				1,894				1,424				1,163				1,476
Net income		$	9,382			$	7,395			$	5,611			$	4,592			$	3,226
PER SHARE
Earnings		$	2.02			$	1.59			$	1.21			$	1.26			$	0.89
Dividends		$	0.160			$	0.150			$	0.140			$	0.120			$	0.100
Tangible book value(1)		$	25.73			$	22.44			$	19.59			$	16.00			$	13.45
Quoted market value
High		$	27.40			$	26.00			$	21.00			$	21.25			$	18.50
Low		$	21.90			$	12.55			$	20.05			$	18.88			$	15.10
Close(1)		$	26.00			$	17.35			$	20.60			$	21.10			$	18.25
PERFORMANCE RATIOS
Return on average assets		1.47		%		1.32		%		1.20		%		1.16		%		0.90		%
Return on average shareholders’ equity		15.75		%		14.13		%		12.14		%		15.13		%		12.32		%
Return on average tangible shareholders’ equity		16.25		%		14.69		%		12.75		%		16.47		%		13.12		%
Efficiency ratio		60.39		%		54.70		%		63.73		%		66.07		%		69.18		%
Yield on earning assets (FTE)		3.89		%		4.20		%		4.79		%		4.42		%		4.16		%
Rate on interest bearing liabilities		0.39		%		1.09		%		1.43		%		0.90		%		0.57		%
Net interest margin to earning assets (FTE)		3.65		%		3.49		%		3.82		%		3.82		%		3.73		%
BALANCE SHEET DATA(1)
Total investment securities		$	129,944			$	75,526			$	73,285			$	49,110			$	70,699
Gross loans		$	986,358			$	1,044,564			$	813,547			$	707,364			$	591,753
Total assets		$	1,309,685			$	1,237,694			$	949,790			$	841,459			$	730,511
Total deposits		$	1,126,496			$	1,018,287			$	792,555			$	702,035			$	614,167
Borrowed funds		$	49,500			$	96,217			$	54,000			$	74,000			$	59,000
Total shareholders’ equity		$	122,986			$	108,969			$	95,504			$	63,078			$	54,255
Net loans to total deposits		86.60		%		101.70		%		102.02		%		100.18		%		95.85		%
Common shares outstanding		4,638,614				4,680,920				4,653,343				3,640,060				3,629,097
YTD BALANCE SHEET AVERAGES
Total assets		$	1,284,534			$	1,125,064			$	940,585			$	797,594			$	723,786
Earning assets		$	1,225,641			$	1,068,847			$	894,357			$	749,755			$	631,928
Interest bearing liabilities		$	744,434			$	692,035			$	604,469			$	509,294			$	499,636
Total shareholders’ equity		$	120,134			$	105,276			$	93,239			$	61,219			$	52,786
Total tangible shareholders’ equity		$	116,432			$	101,233			$	88,762			$	56,221			$	49,586
Earned common shares outstanding		4,654,863				4,662,113				4,638,208				3,635,446				3,624,719
Unvested stock grants		21,297				13,844				9,878				—				—
Total common shares outstanding		4,676,160				4,675,957				4,648,086				3,635,446				3,624,719
ASSET QUALITY(1)
Nonperforming loans to gross loans		0.87		%		0.10		%		0.13		%		0.14		%		0.09		%
Nonperforming assets to total assets		0.66		%		0.08		%		0.11		%		0.13		%		0.08		%
Allowance for loan losses to gross loans		1.09		%		0.86		%		0.62		%		0.57		%		0.52		%
Allowance for loan losses to gross loans, net of PPP loans		1.14		%		1.07		%		0.62		%		0.57		%		0.52		%
CAPITAL RATIOS(1)
Total capital to risk weighted assets		14.35		%		15.06		%		14.18		%		11.20		%		11.25		%
Tier 1 capital to risk weighted assets		13.27		%		14.00		%		13.53		%		10.62		%		10.73		%
CET1 capital to risk weighted assets		11.87		%		12.34		%		11.73		%		8.59		%		8.36		%
Tier 1 leverage ratio		10.19		%		9.90		%		11.16		%		9.14		%		8.99		%
(1)At end of period

Income Statement Breakdown and Analysis

		Quarter to Date
		6/30/2021					3/31/2021					12/31/2020					9/30/2020					6/30/2020
GAAP net income		$	4,726				$	4,656				$	2,733				$	5,336				$	4,043
Acquisition related items (net of tax)
Accretion on purchased loans		(152			)		(151			)		(82			)		(144			)		(110			)
Amortization of core deposit intangibles		53					54					71					72					71
Amortization on acquired time deposits		2					2					5					5					5
Total acquisition related items (net of tax)		(97			)		(95			)		(6			)		(67			)		(34			)
Other nonrecurring items (net of tax)
FHLB prepayment penalties		—					—					1,507					—					—
Change in fair value of equity investment due to acquisition transaction		—					—					—					—					—
Change in fair value of mortgage banking instruments		—					—					—					—					—
Interest writeoff from loan transferred to nonaccrual		—					—					265					—					—
Net gain from COLI death benefit		—					—					—					—					(173			)
Prepayment penalties collected		(33			)		(17			)		(97			)		(16			)		(12			)
Mortgage servicing rights impairment (reduction of impairment)		—					—					(188			)		(176			)		191
Total other nonrecurring items (net of tax)		(33			)		(17			)		1,487					(192			)		6
Adjusted net income from operations		$	4,596				$	4,544				$	4,214				$	5,077				$	4,015
GAAP net interest income		$	10,896				$	11,243				$	10,652				$	10,881				$	9,597
Accretion on purchased loans		(192			)		(191			)		(104			)		(182			)		(139			)
Interest writeoff from loan transferred to nonaccrual		—					—					335					—					—
Prepayment penalties collected		(42			)		(21			)		(123			)		(20			)		(15			)
Amortization on acquired time deposits		3					3					6					6					6
Adjusted net interest income		$	10,665				$	11,034				$	10,766				$	10,685				$	9,449
PERFORMANCE RATIOS
Based on adjusted net income from operations
Earnings per share		$	0.99				$	0.97				$	0.90				$	1.09				$	0.86
Return on average assets		1.41		%			1.46		%			1.30		%			1.60		%			1.34		%
Return on average shareholders’ equity		15.21		%			15.48		%			14.30		%			17.94		%			15.09		%
Return on average tangible shareholders’ equity		15.68		%			15.98		%			14.78		%			18.59		%			15.68		%
Efficiency ratio		61.46		%			60.20		%			59.02		%			52.03		%			52.12		%
Based on adjusted net interest income
Yield on earning assets (FTE)		3.72		%			3.94		%			3.78		%			3.91		%			3.89		%
Rate on interest bearing liabilities		0.41		%			0.37		%			0.50		%			0.63		%			0.92		%
Net interest margin to earning assets (FTE)		3.47		%			3.71		%			3.47		%			3.52		%			3.32		%

		Year to Date June 30										Variance
		2021					2020					Amount				%
GAAP net income		$	9,382				$	7,395				$	1,987			26.87	%
Acquisition related items (net of tax)
Accretion on purchased loans		(303			)		(290			)		(13		)		4.48	%
Amortization of core deposit intangibles		107					142					(35		)		(24.65	)%
Amortization on acquired time deposits		4					10					(6		)		(60.00	)%
Total acquisition related items (net of tax)		(192			)		(138			)		(54		)		39.13	%
Other nonrecurring items (net of tax)
FHLB prepayment penalties		—					—					—				—	%
Change in fair value of equity investment due to acquisition transaction		—					(578			)		578				(100.00	)%
Change in fair value of mortgage banking instruments		—					(448			)		448				(100.00	)%
Interest writeoff from loan transferred to nonaccrual		—					—					—				—	%
Net gain from COLI death benefit		—					(173			)		173				(100.00	)%
Prepayment penalties collected		(50			)		(48			)		(2		)		4.17	%
Mortgage servicing rights impairment (reduction of impairment)		—					364					(364		)		(100.00	)%
Total other nonrecurring items (net of tax)		(50			)		(883			)		833				(94.34	)%
Adjusted net income from operations		$	9,140				$	6,374				$	2,766			43.40	%
GAAP net interest income		$	22,139				$	18,522				$	3,617			19.53	%
Accretion on purchased loans		(383			)		(367			)		(16		)		4.36	%
Interest writeoff from loan transferred to nonaccrual		—					—					—				—	%
Prepayment penalties collected		(63			)		(61			)		(2		)		3.28	%
Amortization on acquired time deposits		6					12					(6		)		(50.00	)%
Adjusted net interest income		$	21,699				$	18,106				$	3,593			19.84	%
PERFORMANCE RATIOS
Based on adjusted net income from operations
Earnings per share		$	1.96				$	1.37				$	0.59			43.07	%
Return on average assets		1.43		%			1.14		%							0.29	%
Return on average shareholders’ equity		15.34		%			12.18		%							3.16	%
Return on average tangible shareholders’ equity		15.83		%			12.66		%							3.17	%
Efficiency ratio		60.84		%			56.94		%							3.90	%
Based on adjusted net interest income
Yield on earning assets (FTE)		3.81		%			4.12		%							(0.31	)%
Rate on interest bearing liabilities		0.39		%			1.10		%							(0.71	)%
Net interest margin to earning assets (FTE)		3.58		%			3.41		%							0.17	%

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. 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 period-to-period comparisons more meaningful.

		Three Months Ended
		June 30, 2021										March 31, 2021										June 30, 2020
		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		$	1,023,620			$	11,220		4.40	%		$	1,074,096			$	11,598		4.38	%		$	1,048,068			$	10,788		4.14	%
Taxable investment securities		89,467				322			1.44	%		58,859				202			1.39	%		62,829				323			2.07	%
Nontaxable investment securities		17,234				100			2.33	%		17,165				105			2.48	%		11,449				84			2.95	%
Federal funds sold		—				—			—	%		—				—			—	%		—				—			—	%
Interest earning cash and cash equivalents		101,018				23			0.09	%		52,803				11			0.08	%		21,314				5			0.09	%
Federal Home Loan Bank stock		3,488				14			1.61	%		3,488				25			2.91	%		3,281				33			4.05	%
Total earning assets		1,234,827				11,679			3.79	%		1,206,411				11,941			4.01	%		1,146,941				11,233			3.94	%
Nonearning assets
Allowance for loan losses		(11,193		)								(11,143		)								(7,753		)
Fixed assets		16,104										15,757										15,509
Accrued income and other assets		70,204										48,094										46,269
Total assets		$	1,309,942									$	1,259,119									$	1,200,966
Interest bearing liabilities
Interest bearing demand deposits		$	223,420			$	122		0.22	%		$	206,565			$	121		0.24	%		$	189,981			$	249		0.53	%
Savings deposits		320,000				108			0.14	%		310,830				109			0.14	%		247,687				140			0.23	%
Time deposits		161,197				377			0.94	%		168,764				291			0.70	%		181,661				821			1.82	%
Borrowed funds		49,089				155			1.27	%		49,000				155			1.28	%		92,171				408			1.78	%
Total interest bearing liabilities		753,706				762			0.41	%		735,159				676			0.37	%		711,500				1,618			0.91	%
Noninterest bearing liabilities
Noninterest bearing deposits		425,353										393,751										371,320
Accrued interest and other liabilities		9,648										11,175										11,148
Shareholders’ equity		121,235										119,034										106,998
Total liabilities and shareholders’ equity		$	1,309,942									$	1,259,119									$	1,200,966
Net interest income (FTE)						$	10,917									$	11,265									$	9,615
Net interest margin to earning assets (FTE)									3.55	%									3.79	%									3.37	%

		Six Months Ended
		June 30, 2021										June 30, 2020
		Average Balance				Tax Equivalent Interest			Average Yield / Rate			Average Balance				Tax Equivalent Interest			Average Yield / Rate
Interest earning assets
Total loans		$	1,048,858			$	22,818		4.39	%		$	963,400			$	21,269		4.44	%
Taxable investment securities		74,162				524			1.42	%		59,896				676			2.27	%
Nontaxable investment securities		17,200				205			2.40	%		10,991				165			3.02	%
Federal funds sold		—				—			—	%		16,794				116			1.39	%
Interest earning cash and cash equivalents		81,933				34			0.08	%		14,551				31			0.43	%
Federal Home Loan Bank stock		3,488				39			2.25	%		3,215				63			3.94	%
Total earning assets		1,225,641				23,620			3.89	%		1,068,847				22,320			4.20	%
Nonearning assets
Allowance for loan losses		(11,168		)								(6,787		)
Fixed assets		15,930										15,523
Accrued income and other assets		54,131										47,481
Total assets		$	1,284,534									$	1,125,064
Interest bearing liabilities
Interest bearing demand deposits		$	214,993			$	243		0.23	%		$	180,291			$	724		0.81	%
Savings deposits		315,415				217			0.14	%		239,438				339			0.28	%
Time deposits		164,981				668			0.82	%		193,574				1,874			1.95	%
Borrowed funds		49,045				310			1.27	%		78,732				826			2.11	%
Total interest bearing liabilities		744,434				1,438			0.39	%		692,035				3,763			1.09	%
Noninterest bearing liabilities
Noninterest bearing deposits		409,553										318,010
Accrued interest and other liabilities		10,413										9,743
Shareholders’ equity		120,134										105,276
Total liabilities and shareholders’ equity		$	1,284,534									$	1,125,064
Net interest income (FTE)						$	22,182									$	18,557
Net interest margin to earning assets (FTE)									3.65	%									3.49	%

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, 2021												June 30, 2021												June 30, 2021
		Compared To												Compared To												Compared To
		March 31, 2021												June 30, 2020												June 30, 2020
		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		$	(736	)		$	358			$	(378	)		$	(1,359	)		$	1,791			$	432			$	2,230			$	(681	)		$	1,549
Taxable investment securities		112				8				120				460				(461		)		(1		)		337				(489		)		(152		)
Nontaxable investment securities		3				(8		)		(5		)		112				(96		)		16				129				(89		)		40
Federal funds sold		—				—				—				—				—				—				(58		)		(58		)		(116		)
Interest earning cash and cash equivalents		11				1				12				18				—				18				89				(86		)		3
Federal Home Loan Bank stock		—				(11		)		(11		)		13				(32		)		(19		)		14				(38		)		(24		)
Total changes in interest income		(610		)		348				(262		)		(756		)		1,202				446				2,741				(1,441		)		1,300
Changes in interest expense
Interest bearing demand deposits		41				(40		)		1				243				(370		)		(127		)		341				(822		)		(481		)
Savings deposits		(1		)		—				(1		)		177				(209		)		(32		)		213				(335		)		(122		)
Time deposits		(84		)		170				86				(84		)		(360		)		(444		)		(245		)		(961		)		(1,206		)
Borrowed funds		2				(2		)		—				(157		)		(96		)		(253		)		(251		)		(265		)		(516		)
Total changes in interest expense		(42		)		128				86				179				(1,035		)		(856		)		58				(2,383		)		(2,325		)
Net change in net interest income (FTE)		$	(568	)		$	220			$	(348	)		$	(935	)		$	2,237			$	1,302			$	2,683			$	942			$	3,625

		Average Yield/Rate for the Three Month Periods Ended
		6/30/2021			3/31/2021			12/31/2020			9/30/2020			6/30/2020
Total earning assets		3.79	%		4.01	%		3.75	%		3.97	%		3.94	%
Total interest bearing liabilities		0.41	%		0.37	%		0.50	%		0.63	%		0.91	%
Net interest margin to earning assets (FTE)		3.55	%		3.79	%		3.44	%		3.58	%		3.37	%

		Quarter to Date Net Interest Income (FTE)
		6/30/2021				3/31/2021				12/31/2020				9/30/2020				6/30/2020
Interest income		$	11,658			$	11,919			$	11,624			$	12,070			$	11,215
FTE adjustment		21				22				22				21				18
Total interest income (FTE)		11,679				11,941				11,646				12,091				11,233
Total interest expense		762				676				972				1,189				1,618
Net interest income (FTE)		$	10,917			$	11,265			$	10,674			$	10,902			$	9,615

Noninterest Income

		Quarter to Date
		6/30/2021			3/31/2021				12/31/2020				9/30/2020			6/30/2020
Net gain on sales of mortgage loans		$	1,253		$	1,845			$	2,545			$	3,064		$	3,869
Net mortgage servicing rights income		1,119			138				509				559			(163		)
ATM and debit card income		511			448				437				460			394
Trust and investment services		403			468				445				464			321
Mortgage servicing fees		362			335				325				293			270
PPP referral fees		74			351				—				—			—
Service charges on deposit accounts		168			166				194				177			119
Net gain on sales of commercial loans		—			—				—				—			—
Net gain from corporate owned life insurance death benefit		—			—				—				—			173
Change in fair value of equity investments		2			(19		)		(3		)		2			7
Other income and fees		338			122				224				140			302
Total noninterest income		$	4,230		$	3,854			$	4,676			$	5,159		$	5,292
Residential mortgage operations		$	2,734		$	2,318			$	3,379			$	3,916		$	3,976

		Year to Date June 30								Variance
		2021				2020				Amount				%
Net gain on sales of mortgage loans		$	3,098			$	5,672			$	(2,574	)		(45.38	)%
Net mortgage servicing rights income		1,257				(214		)		1,471				(687.38	)%
ATM and debit card income		959				749				210				28.04	%
Trust and investment services		871				710				161				22.68	%
Mortgage servicing fees		697				532				165				31.02	%
PPP referral fees		425				—				425				—	%
Service charges on deposit accounts		334				338				(4		)		(1.18	)%
Net gain on sales of commercial loans		—				668				(668		)		(100.00	)%
Net gain from corporate owned life insurance death benefit		—				173				(173		)		(100.00	)%
Change in fair value of equity investments		(17		)		756				(773		)		(102.25	)%
Other income and fees		460				421				39				9.26	%
Total noninterest income		$	8,084			$	9,805			$	(1,721	)		(17.55	)%
Residential mortgage operations		$	5,052			$	5,990			(938		)		(15.66	)%

Residential Mortgage Operations

Net gain on sales of mortgage loans represents the income earned on the sale of residential mortgage loans into the secondary market. Throughout 2020, the interest rate environment was advantageous for residential mortgage originations and refinancing, resulting in record gains. While residential mortgage originations and refinancing activity continues to be strong during the first half of 2021, it is likely to slow down due to lower housing inventory and expected increases in interest rates.

Net mortgage servicing rights income represents income generated from the capitalization of MSR, net of amortization. In each of the first two quarters of 2020, the Corporation recognized impairments in its servicing portfolio as a direct result of the low interest rate environment and a record level of refinancing activity. During the third and fourth quarters of 2020, these impairments had recovered.

In 2021 the Corporation elected to adopt the fair value measurement option for all MSR pursuant to ASC 860. This election resulted in a transfer of $301 to retained earnings to reflect the difference between the fair value and the carrying amount of MSR as of January 1, 2021, net of tax. Changes in the fair value of MSR are highly correlated to changes in interest rates. As a significant portion of the serviced loan portfolio has been originated over the past two years at low interest rates, management expects the value of the servicing portfolio to remain strong.

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 increase in the size of the serviced portfolio. Mortgage servicing fees are expected to increase throughout the remainder of 2021 as the Corporation continues to add to the serviced portfolio. During the second quarter of 2021, the Corporations added a net $35,268 to its serviced loan portfolio

Throughout the remainder of 2021, overall revenues from residential mortgage operations (net gain from sale of mortgage loans, mortgage servicing fees, and net mortgage servicing rights income) are expected to remain strong, but are not expected to reach the elevated levels experienced during 2020 due to the constrained housing inventory and rising interest rates.

All Other Noninterest Income

ATM and debit card income represents fees earned on ATM and debit card transactions. The Corporation expects these fees to increase modestly throughout 2021, as customers begin to venture out with the easing of COVID restrictions and spend more freely.

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 through the wealth management and trust department. Income generated from trust services has remained stable from fiduciary fees for estate settlement services and portfolio management. Revenue from wealth management has increased in 2021 due to strong demand from customers for annuities. Both the trust services and wealth management programs are subject to market fluctuations and interest rate changes. Trust and investment services income is expected to increase modestly throughout the remainder of 2021.

PPP referral fees represent referral fees the Corporation earned from the second round of the PPP loan program through the SBA. Due to strong portfolio loan demand, management elected to refer the second round of PPP requests to a third party for processing and funding. As such, the associated referral fees were recognized as a component of noninterest income. As the second round of the PPP loan program ended on May 31, 2021, the Corporation does not expect to earn additional PPP referral fees throughout the remainder of 2021.

Service charges on deposit accounts includes fees earned from deposit customers for transaction-based, account maintenance and overdraft services. Service charges on deposit accounts are expected to approximate current levels throughout the remainder of 2021.

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 does not expect to sell any commercial loans over the remainder of 2021.

Net gain from corporate owned life insurance death benefit is recognized in the event of the death of an insured individual. The death of an insured individual occurred in the second quarter of 2020. The Corporation does not expect to receive any gains from COLI death benefits in 2021.

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, the Corporation recorded a $732 gain from an equity investment in a financial institution that was sold. The Corporation does not anticipate any significant changes in fair value from equity sales in the foreseeable future.

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 2021.

Noninterest Expenses

		Quarter to Date
		6/30/2021				3/31/2021				12/31/2020				9/30/2020				6/30/2020
Total compensation		$	5,000			$	5,004			$	4,958			$	4,531			$	4,252
Furniture and equipment		712				637				607				614				618
Professional services		703				624				938				524				571
Data processing		583				509				501				503				535
Occupancy		508				495				475				491				435
Loan and collection		337				406				359				292				229
Advertising and promotional		304				284				184				284				255
ATM and debit card		144				122				125				109				92
FDIC insurance premiums		79				155				59				55				59
Telephone and communication		130				94				64				91				86
Amortization of core deposit intangibles		67				68				90				91				90
FHLB prepayment penalty		—				—				1,907				—				—
Other general and administrative		655				633				704				633				587
Total noninterest expenses		$	9,222			$	9,031			$	10,971			$	8,218			$	7,809

		Year to Date June 30						Variance
		2021			2020			Amount				%
Total compensation		$	10,004		$	8,500		$	1,504			17.69	%
Furniture and equipment		1,349			1,228			121				9.85	%
Professional services		1,327			1,093			234				21.41	%
Data processing		1,092			977			115				11.77	%
Occupancy		1,003			911			92				10.10	%
Loan and collection		743			391			352				90.03	%
Advertising and promotional		588			507			81				15.98	%
ATM and debit card		266			200			66				33.00	%
FDIC insurance premiums		234			114			120				105.26	%
Telephone and communication		224			182			42				23.08	%
Amortization of core deposit intangibles		135			180			(45		)		(25.00	)%
FHLB prepayment penalty		—			—			—				—	%
Other general and administrative		1,288			1,212			76				6.27	%
Total noninterest expenses		$	18,253		$	15,495		$	2,758			17.80	%

Total compensation includes salaries, commissions and incentives, employee benefits, and payroll taxes. Total compensation has increased due to additional employees, a reduction of deferred loan costs, annual merit increases and an increase in employee benefits. Fluctuations in commissions and incentives are primarily driven by residential mortgage originations, which can vary significantly from period to period, however, commissions are expected to decline throughout the remainder of 2021 as mortgage originations decline.

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 continue 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 continue to increase in future periods to ensure compliance with audit and regulatory requirements. Professional services are also expected to be temporarily elevated over the remainder of 2021 from expenditures related to the acquisition of the Farmers State Bank of Munith.

Data processing primarily includes the expenses relating to the Corporation’s core data processor. These expenses are expected to increase throughout the remainder of 2021 with the size and complexity of the Corporation.

Loan and collection includes expenses related to the origination and collection of loans. The increase in expenses throughout 2020 and into 2021 is a direct result of increased loan volume due to the low interest rate environment created by the Federal Reserve Bank’s response to the COVID-19 pandemic. Loan and collections cost are expected to decline through the remainder of 2021, due to the declining loan volumes.

Advertising and promotional includes the Corporation’s media costs and any donations or sponsorships made on behalf of the Corporation. The annual increase in expenses is a direct result of the Corporation enhancing its marketing efforts to attract new and expand existing customer loan and deposit account relationships. In addition to traditional marketing strategies, the Corporation rolled out a new branding strategy in 2020, which resulted in elevated advertising and promotional expenses in both 2020 and 2021. Total advertising and promotional expenses are expected to increase modestly throughout the remainder of 2021 due to the growth of the Corporation.

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 increase modestly throughout the remainder of 2021.

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 are expected to moderate throughout the remainder of 2021.

Telephone and communication includes expenses relating to the Corporation’s communication systems. These expenses are expected to increase throughout 2021 primarily due to the growth of the Corporation.

Amortization of core deposit intangibles relates to the core deposits acquired from Community Bancorp, Inc. on December 31, 2016 and is expected to continue to decline as the core deposit intangible is being amortized based on the sum-of-years-digits method.

During the fourth quarter of 2020, the Corporation paid off three Federal Home Loan Bank borrowings, totaling $30,000. The Corporation incurred a one-time early payoff fee in the amount $1,907. The payoff was executed to enhance net interest income and net interest margins in each of the next three years. The weighted average rate of the three FHLB borrowings was 2.17%. As a result of the early payoffs, the Corporation is expected to reduce interest expense by approximately $660 during 2021.

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

Balance Sheet Breakdown and Analysis

		6/30/2021			3/31/2021			12/31/2020			9/30/2020			6/30/2020
ASSETS
Cash and cash equivalents		$	132,676		$	121,477		$	46,757		$	75,032		$	35,190
Total investment securities		129,944			89,772			76,111			78,179			75,526
Residential mortgage loans held-for-sale, at fair value		7,670			26,322			27,306			34,833			46,354
Gross loans		986,358			1,028,117			1,066,562			1,060,885			1,044,564
Less allowance for loan and lease losses		10,800			11,100			10,900			10,100			8,991
Net loans		975,558			1,017,017			1,055,662			1,050,785			1,035,573
All other assets		63,837			48,587			45,610			46,016			45,051
Total assets		$	1,309,685		$	1,303,175		$	1,251,446		$	1,284,845		$	1,237,694
LIABILITIES AND SHAREHOLDERS’ EQUITY
Total deposits		$	1,126,496		$	1,122,508		$	1,071,976		$	1,061,470		$	1,018,287
Total borrowed funds		49,500			49,000			49,000			96,217			96,217
Accrued interest payable and other liabilities		10,703			12,307			14,602			13,077			14,221
Total liabilities		1,186,699			1,183,815			1,135,578			1,170,764			1,128,725
Total shareholders’ equity		122,986			119,360			115,868			114,081			108,969
Total liabilities and shareholders’ equity		$	1,309,685		$	1,303,175		$	1,251,446		$	1,284,845		$	1,237,694

		6/30/2021 vs 3/31/2021							6/30/2021 vs 6/30/2020
		Variance							Variance
		Amount				%			Amount				%
ASSETS
Cash and cash equivalents		$	11,199			9.22	%		$	97,486			277.03	%
Total investment securities		40,172				44.75	%		54,418				72.05	%
Residential mortgage loans held-for-sale, at fair value		(18,652		)		(70.86	)%		(38,684		)		(83.45	)%
Gross loans		(41,759		)		(4.06	)%		(58,206		)		(5.57	)%
Less allowance for loan and lease losses		(300		)		(2.70	)%		1,809				20.12	%
Net loans		(41,459		)		(4.08	)%		(60,015		)		(5.80	)%
All other assets		15,250				31.39	%		18,786				41.70	%
Total assets		$	6,510			0.50	%		$	71,991			5.82	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Total deposits		$	3,988			0.36	%		$	108,209			10.63	%
Total borrowed funds		500				1.02	%		(46,717		)		(48.55	)%
Accrued interest payable and other liabilities		(1,604		)		(13.03	)%		(3,518		)		(24.74	)%
Total liabilities		2,884				0.13	%		57,974				2.70	%
Total shareholders’ equity		3,626				3.04	%		14,017				12.86	%
Total liabilities and shareholders’ equity		$	6,510			0.50	%		$	71,991			5.82	%

Cash and cash equivalents

		6/30/2021				3/31/2021				12/31/2020				9/30/2020			6/30/2020
Cash and cash equivalents
Noninterest bearing		$	22,454			$	25,698			$	23,102			$	22,108		$	20,369
Interest bearing			110,222				95,779				23,655				52,924			14,821
Cash and cash equivalents		$	132,676			$	121,477			$	46,757			$	75,032		$	35,190
		6/30/2021 vs 3/31/2021												6/30/2021 vs 6/30/2020
		Variance												Variance
		Amount				%								Amount			%
Cash and cash equivalents
Noninterest bearing		$	(3,244	)			(12.62	)%						$	2,085			10.24	%
Interest bearing			14,443				15.08	%							95,401			643.69	%
Cash and cash equivalents		$	11,199				9.22	%						$	97,486			277.03	%

Cash and cash equivalents, which is comprised of cash and due from banks, fluctuate from period to period based on loan demand and variances in deposit accounts. In recent periods, the Corporation has experienced an inflow of customer deposits resulting in historically high levels of cash and cash equivalents. The increase in interest bearing cash in the first and second quarters of 2021 is primarily due to funds received from the SBA for forgiveness of PPP loans. The Corporation expects cash and cash equivalents to remain elevated throughout the remainder of the year primarily due to additional forgiveness of outstanding PPP loans totaling $35,195 as of June 30, 2021.

Primary and secondary liquidity sources

While the Corporation continues to maintain a strong liquidity position, it is important to monitor all liquidity sources. The following table outlines the Corporation’s primary and secondary sources of liquidity as of:

		6/30/2021				3/31/2021				12/31/2020				9/30/2020				6/30/2020
Cash and cash equivalents		$	132,676			$	121,477			$	46,757			$	75,032			$	35,190
Unpledged investment securities		118,019				76,384				59,025				58,739				52,647
FHLB borrowing availability		140,000				140,000				140,000				97,500				97,500
Federal funds purchased lines of credit		21,500				21,500				21,500				21,500				21,500
Funds available through the Fed Discount Window		10,000				10,000				10,000				10,000				10,000
PPPLF		35,195				122,583				177,845				206,343				202,184
Total liquidity sources		$	457,390			$	491,944			$	455,127			$	469,114			$	419,021

Total investment securities

		6/30/2021				3/31/2021				12/31/2020			9/30/2020				6/30/2020
Available-for-sale
U.S. Government and federal agency		$	5,917			$	5,942			$	7,935		$	19,311			$	21,339
State and municipal		23,096					17,080				15,768			15,729				14,115
Mortgage backed residential		60,390					32,135				19,101			20,886				12,335
Certificates of deposit		4,932					4,932				5,180			5,921				6,665
Collateralized mortgage obligations – agencies		31,281					25,505				23,110			11,141				15,736
Unrealized gain/(loss) on available-for-sale securities		1,334					1,117				1,932			2,099				2,242
Total available-for-sale		126,950					86,711				73,026			75,087				72,432
Held-to-maturity state and municipal		1,859					1,968				1,973			1,977				1,981
Equity securities		1,135					1,093				1,112			1,115				1,113
Total investment securities		$	129,944			$	89,772			$	76,111		$	78,179			$	75,526
		6/30/2021 vs 3/31/2021											6/30/2021 vs 6/30/2020
		Variance											Variance
		Amount				%							Amount				%
Available-for-sale
U.S. Government and federal agency		$	(25	)		(0.42		)%					$	(15,422	)		(72.27		)%
State and municipal		6,016				35.22		%					8,981				63.63		%
Mortgage backed residential		28,255				87.93		%					48,055				389.58		%
Certificates of deposit		—				—		%					(1,733		)		(26.00		)%
Collateralized mortgage obligations – agencies		5,776				22.65		%					15,545				98.79		%
Unrealized gain/(loss) on available-for-sale securities		217				19.43		%					(908		)		(40.50		)%
Total available-for-sale		40,239				46.41		%					54,518				75.27		%
Held-to-maturity state and municipal		(109		)		(5.54		)%					(122		)		(6.16		)%
Equity securities		42				3.84		%					22				1.98		%
Total investment securities		$	40,172			44.75		%					$	54,418			72.05		%

The amortized cost and fair value of AFS investment securities as of June 30, 2021 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		$	3,981			$	971			$	965			$	—			$	—			$	5,917
State and municipal		2,301				8,272				10,639				1,884				—				23,096
Mortgage backed residential		—				—				—				—				60,390				60,390
Certificates of deposit		1,726				3,206				—				—				—				4,932
Collateralized mortgage obligations – agencies		—				—				—				—				31,281				31,281
Total amortized cost		$	8,008			$	12,449			$	11,604			$	1,884			$	91,671			$	125,616
Fair value		$	8,141			$	13,015			$	11,719			$	2,147			$	91,928			$	126,950

The amortized cost and fair value of HTM investment securities as of June 30, 2021 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		$	676			$	803			$	380			$	—			$	—			$	1,859
Fair value		$	682			$	840			$	402			$	—			$	—			$	1,924

During the first and second quarters of 2021, the Corporation expanded its investment portfolio to generate additional interest income. Total investment securities are expected to continue to grow throughout the remainder of 2021 as management expects deposits to continue to grow at historically high levels. The following table summarizes information as of June 30, 2021 for investment securities purchased YTD:

		Book Value				Fully Taxable Equivalent Weighted Average Yield
U.S. Government and federal agency		$	965			1.04	%
State and municipal		8,967				1.15	%
Collateralized mortgage obligations – agencies		12,760				1.28	%
Mortgage backed residential		45,447				1.50	%
Total		$	68,139			1.41	%

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 loan losses

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

		6/30/2021				3/31/2021				12/31/2020				9/30/2020				6/30/2020
Commercial	$	101,070			$	183,276			$	241,424			$	271,113			$	260,440
Commercial real estate		573,598				541,428				517,054				483,275				469,039
Total commercial loans		674,668				724,704				758,478				754,388				729,479
Residential mortgage		265,323				258,333				262,770				261,375				268,295
Home equity		41,771				40,205				39,900				39,456				40,114
Total residential real estate loans		307,094				298,538				302,670				300,831				308,409
Consumer		4,596				4,875				5,414				5,666				6,676
Gross loans		986,358				1,028,117				1,066,562				1,060,885				1,044,564
Allowance for loan and lease losses		(10,800	)			(11,100	)			(10,900	)			(10,100	)			(8,991	)
Loans, net	$	975,558			$	1,017,017			$	1,055,662			$	1,050,785			$	1,035,573
		6/30/2021 vs 3/31/2021												6/30/2021 vs 6/30/2020
		Variance												Variance
		Amount				%								Amount				%
Commercial	$	(82,206	)			(44.85	)%						$	(159,370	)			(61.19	)%
Commercial real estate		32,170				5.94	%							104,559				22.29	%
Total commercial loans		(50,036	)			(6.90	)%							(54,811	)			(7.51	)%
Residential mortgage		6,990				2.71	%							(2,972	)			(1.11	)%
Home equity		1,566				3.90	%							1,657				4.13	%
Total residential real estate loans		8,556				2.87	%							(1,315	)			(0.43	)%
Consumer		(279	)			(5.72	)%							(2,080	)			(31.16	)%
Gross loans		(41,759	)			(4.06	)%							(58,206	)			(5.57	)%
Allowance for loan losses		300				(2.70	)%							(1,809	)			20.12	%
Loans, net	$	(41,459	)			(4.08	)%						$	(60,015	)			(5.80	)%

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

		6/30/2021				3/31/2021				12/31/2020				9/30/2020				6/30/2020
Loans collectively evaluated for impairment
Commercial		$	100,424			$	183,203			$	241,424			$	271,113			$	260,440
Commercial real estate		564,781				532,294				508,182				481,071				465,749
Residential mortgage		264,448				257,543				262,017				260,665				267,632
Home equity		41,708				40,141				39,874				39,456				40,114
Consumer		4,596				4,875				5,412				5,663				6,673
Subtotal		975,957				1,018,056				1,056,909				1,057,968				1,040,608
Loans individually evaluated for impairment
Commercial		$	646			$	73			$	—			$	—			$	—
Commercial real estate		8,817				9,134				8,872				2,204				3,290
Residential mortgage		875				790				753				710				663
Home equity		63				64				26				—				—
Consumer		—				—				2				3				3
Subtotal		10,401				10,061				9,653				2,917				3,956
Gross Loans		$	986,358			$	1,028,117			$	1,066,562			$	1,060,885			$	1,044,564

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

		6/30/2021				3/31/2021				12/31/2020				9/30/2020				6/30/2020
Loans collectively evaluated for impairment
Commercial		$	585			$	626			$	673			$	633			$	536
Commercial real estate		6,264				6,026				5,602				5,152				4,595
Residential mortgage		2,814				3,280				3,480				3,479				3,278
Home equity		440				453				440				438				372
Consumer		85				92				97				101				102
Subtotal		10,188				10,477				10,292				9,803				8,883
Loans individually evaluated for impairment
Commercial		$	42			$	—			$	—			$	—			$	—
Commercial real estate		566				619				602				289				100
Residential mortgage		4				4				4				5				5
Home equity		—				—				—				—				—
Consumer		—				—				2				3				3
Subtotal		612				623				608				297				108
Allowance for loan losses		$	10,800			$	11,100			$	10,900			$	10,100			$	8,991

Commercial		$	627			$	626			$	673			$	633			$	536
Commercial real estate		6,830				6,645				6,204				5,441				4,695
Residential mortgage		2,818				3,284				3,484				3,484				3,283
Home equity		440				453				440				438				372
Consumer		85				92				99				104				105
Allowance for loan losses		$	10,800			$	11,100			$	10,900			$	10,100			$	8,991

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

		6/30/2021				3/31/2021				12/31/2020				9/30/2020				6/30/2020
Accruing interest
Current		$	976,852			$	1,018,343			$	1,057,404			$	1,058,437			$	1,042,589
Past due 30-89 days		923				1,636				1,165				1,703				948
Past due 90 days or more		36				120				50				86				361
Total accruing interest		977,811				1,020,099				1,058,619				1,060,226				1,043,898
Nonaccrual		8,547				8,018				7,943				659				666
Total loans		$	986,358			$	1,028,117			$	1,066,562			$	1,060,885			$	1,044,564
Total loans past due and in nonaccrual status		$	9,506			$	9,774			$	9,158			$	2,448			$	1,975

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

		6/30/2021				3/31/2021				12/31/2020				9/30/2020				6/30/2020
Nonaccrual loans		$	8,547			$	8,018			$	7,943			$	659			$	666
Accruing loans past due 90 days or more		36				120				50				86				361
Total nonperforming loans		8,583				8,138				7,993				745				1,027
Other real estate owned		—				—				—				—				—
Total nonperforming assets		$	8,583			$	8,138			$	7,993			$	745			$	1,027

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

		6/30/2021			3/31/2021			12/31/2020			9/30/2020			6/30/2020
Nonperforming loans to gross loans		0.87	%		0.79	%		0.75	%		0.07	%		0.10	%
Nonperforming assets to total assets		0.66	%		0.62	%		0.64	%		0.06	%		0.08	%
Allowance for loan losses to gross loans		1.09	%		1.08	%		1.02	%		0.95	%		0.86	%
Allowance for loan losses to gross loans, less PPP loans		1.14	%		1.23	%		1.23	%		1.19	%		1.07	%

During the fourth quarter of 2020, the Corporation transferred one commercial real estate loan with an outstanding principal balance of $7,214 to nonaccrual. The underlying collateral for this loan is an extended stay hotel. It was determined in the fourth quarter of 2020 that the hotel’s cash flow was insufficient to service the debt in accordance with the contractual terms of the note. However, as COVID-19 restrictions eased in the second quarter of 2021, the hotel has begun making regular, consecutive principal and interest payments. A specific reserve has been established for the estimated collateral deficiency (based on a current appraisal), net of a 70% USDA guarantee and the loan will remain in a nonaccrual status until it is deemed that sufficient improvements in cash flows can be established.

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

		6/30/2021				3/31/2021				12/31/2020				9/30/2020				6/30/2020
Net unamortized discount on purchased loans		$	388			$	580			$	773			$	877			$	1,058

The following table summarizes the balance of PPP loans included in commercial loans as of:

		6/30/2021				3/31/2021				12/31/2020				9/30/2020				6/30/2020
Outstanding PPP loans		$	35,195			$	122,583			$	177,845			$	211,060			$	206,901

Despite historically strong credit quality indicators, there continues to be significant uncertainty surrounding the overall impact of the COVID-19 pandemic on the loan portfolio. This uncertainty resulted in the Corporation increasing the ALLL by $1,809, or 20.12%, since June 30, 2020. Management will continue to monitor the loan portfolio to ensure that the ALLL remains appropriate.

The following table summarizes the average loan size as of:

		6/30/2021				3/31/2021				12/31/2020				9/30/2020				6/30/2020
Commercial		$	168			$	206			$	169			$	166			$	171
Commercial real estate		761				727				707				672				654
Total commercial loans		498				444				351				321				325
Residential mortgage		199				183				182				180				177
Home equity		47				46				45				45				45
Total residential real estate loans		138				131				130				129				128
Consumer		24				22				22				22				25
Gross loans		$	262			$	249			$	226			$	215			$	213

COVID-19, CARES Act and SBA activity

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

The Corporation considered 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 6 months or less.

The Corporation also provided 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 foreclosure actions and evictions, and offering loan modification options that lower payments or keep payments the same after the forbearance period.

As outlined in the following table, the majority of the Corporation’s portfolio and serviced loans have returned to normal principal and interest payments. The balance of those loans with deferrals are actively monitored and specific reserves have been established where appropriate.

The table below outlines the active COVID-19 related loan modifications as of June 30, 2021:

		Number of Modifications			Outstanding Balance				% of Portfolio
Commercial real estate		1			104				0.02	%
Portfolio residential mortgage loans		5			1,356				0.51	%
Total portfolio modifications		6			$	1,460			0.15	%
Residential mortgage loans serviced for FHLMC		25			$	5,922			1.02	%

The accommodation industry was particularly impacted by the COVID-19 pandemic. Due to executive action put in place by the government, including stay-at-home orders and travel restrictions, hotel occupancy rates were reduced drastically. The Corporation has 15 commercial loans in its portfolio in the accommodation industry with a book balance of $19,634. Of these loans, approximately 52% are at least partially government-backed by guarantees from either the SBA or USDA.

The Corporation was extremely active in participating in the PPP loan program. The Corporation funded 1,370 PPP loans totaling $216,205. During the fourth quarter of 2020, the SBA began processing PPP forgiveness applications, which reduced the outstanding balance of PPP loans to $35,195 as of June 30, 2021.

The Corporation generated $6,799 in fees from the SBA through the first round of the PPP loan program since April 2020. The income is being recognized over the life of the PPP loans (24 to 60 months) based on the level yield method or upon forgiveness. As of June 30, 2021, the Corporation has recognized $6,337 in income, with $462 remaining as unearned income.

During the first quarter of 2021, the SBA began processing applications for a second round of PPP loans. The Corporation is utilizing a third-party for the processing of applications and funding of these loans. The Corporation is generating referral fee income for the second round of the PPP loan program. As of June 30, 2021, the Corporation generated $425 in referral fees.

All other assets

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

			6/30/2021				3/31/2021				12/31/2020			9/30/2020				6/30/2020
Corporate owned life insurance		$	25,638			$	10,354			$	10,291		$	10,225			$	10,115
Premises and equipment, net			16,231				15,969				15,461			15,267				15,323
Mortgage servicing rights			6,523				5,404				4,885			4,376				3,816
Accrued interest receivable			4,423				5,451				5,068			5,645				5,266
Federal Home Loan Bank stock			3,488				3,488				3,488			3,488				3,488
Goodwill			3,219				3,219				3,219			3,219				3,219
Right-of-use assets			1,364				1,139				364			387				409
Derivatives			601				1,009				1,331			1,772				1,311
Core deposit intangibles			406				474				541			632				722
Other assets			1,944				2,080				962			1,005				1,382
All other assets		$	63,837			$	48,587			$	45,610		$	46,016			$	45,051
			6/30/2021 vs 3/31/2021											6/30/2021 vs 6/30/2020
			Variance											Variance
			Amount				%							Amount				%
Corporate owned life insurance		$	15,284				147.61	%					$	15,523				153.47	%
Premises and equipment, net			262				1.64	%						908				5.93	%
Mortgage servicing rights			1,119				20.71	%						2,707				70.94	%
Accrued interest receivable			(1,028	)			(18.86	)%						(843	)			(16.01	)%
Federal Home Loan Bank stock			—				—	%						—				—	%
Goodwill			—				—	%						—				—	%
Right-of-use assets			225				19.75	%						955				233.50	%
Derivatives			(408	)			(40.44	)%						(710	)			(54.16	)%
Core deposit intangibles			(68	)			(14.35	)%						(316	)			(43.77	)%
Other assets			(136	)			(6.54	)%						562				40.67	%
All other assets		$	15,250				31.39	%					$	18,786				41.70	%

Corporate owned life insurance represents the cash surrender value of life insurance policies owned by the Corporation on the lives of key members of management. The increase in Corporate owned life insurance in the second quarter of 2021 is due to the purchase of $15,000 in additional policies.

Mortgage servicing rights are servicing assets that are recognized from the sales of mortgage loans. The increase in mortgage servicing rights is due to the increased volume of residential mortgage loan sales. The Corporation expects the serviced loan portfolio to continue to grow throughout the remainder of 2021 as mortgage loan demand has remained elevated.

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. The increase in the Corporation’s right-of-use assets in the first quarter of 2021 is due to the recognition of two additional lease obligations.

Derivatives represent the fair value of interest rate lock commitments and mandatory forward loan sales commitments that are in a gain position. These balances can fluctuate from period to period based on changes in interest rates and the volume of the Corporation’s loan pipeline.

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

Total deposits

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

			6/30/2021				3/31/2021				12/31/2020			9/30/2020				6/30/2020
Noninterest bearing demand		$	435,588			$	422,013			$	378,733		$	391,706			$	383,452
Interest bearing
Savings			305,409				309,454				290,343			269,051				245,957
Money market demand			113,088				109,101				113,729			99,252				90,504
NOW			102,046				103,342				101,419			120,681				122,477
Time deposits			170,365				178,598				187,752			180,780				175,897
Total deposits		$	1,126,496			$	1,122,508			$	1,071,976		$	1,061,470			$	1,018,287
			6/30/2021 vs 3/31/2021											6/30/2021 vs 6/30/2020
			Variance											Variance
			Amount				%							Amount				%
Noninterest bearing demand		$	13,575				3.22	%					$	52,136				13.60	%
Interest bearing
Savings			(4,045	)			(1.31	)%						59,452				24.17	%
Money market demand			3,987				3.65	%						22,584				24.95	%
NOW			(1,296	)			(1.25	)%						(20,431	)			(16.68	)%
Time deposits			(8,233	)			(4.61	)%						(5,532	)			(3.15	)%
Total deposits		$	3,988				0.36	%					$	108,209				10.63	%

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. Total deposits also increased due to government related stimulus programs. The Corporation will continue to monitor deposit growth and adjust interest rates in order 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, 2021:

		Maturity Buckets
		3 Months or Less				3 to 6 Months				6 to 9 Months				9 to 12 Months				Beyond 12 Months
Balance		$	72,467			$	23,247			$	17,262			$	30,222			$	27,167
Weighted average yield		0.44		%		0.46		%		0.55		%		0.48		%		0.90		%
		Cumulative Maturities
		3 Months or Less				Up to 6 Months				Up to 9 Months				Up to 12 Months				Total
Balance		$	72,467			$	95,714			$	112,976			$	143,198			$	170,365
Weighted average yield		0.44		%		0.44		%		0.46		%		0.46		%		0.53		%

Included in balances of 3 months or less is a brokered time deposit for $20,000, related to the Corporation’s derivatives. 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 on the term and opening balance.

Total borrowed funds

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

		6/30/21			3/31/21				12/31/20			9/30/20				6/30/20
Federal Home Loan Bank borrowings		$	35,000		$	35,000			$	35,000		$	77,500			$	77,500
Subordinated debentures		14,000				14,000			14,000			14,000					14,000
PPPLF		—				—			—			4,717					4,717
Other borrowings		500				—			—			—					—
Total borrowed funds		$	49,500		$	49,000			$	49,000		$	96,217			$	96,217
		6/30/2021 vs 3/31/2021										6/30/2021 vs 6/30/2020
		Variance										Variance
		Amount			%							Amount				%
Federal Home Loan Bank borrowings		$	—			—	%					$	(42,500	)			(54.84	)%
Subordinated debentures		—				—	%					—					—	%
PPPLF		—				—	%					(4,717		)			(100.00	)%
Other borrowings		500				N/M						500					N/M
Total borrowed funds		$	500			1.02	%					$	(46,717	)			(48.55	)%

The Corporation utilizes a mix of borrowed funds and organic deposit growth to fund loan demand. The decrease in Federal Home Loan Bank borrowings in the fourth quarter of 2020 was primarily due to early payoffs of three FHLB borrowings totaling $30,000.

Total borrowed funds are expected to approximate current levels throughout 2021 as there are no scheduled maturities. 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:

		6/30/21				3/31/21				12/31/20				9/30/20				6/30/20
Federal Home Loan Bank borrowings		$	35,000			$	35,000			$	35,000			$	77,500			$	77,500
Subordinated debentures		14,000					14,000			14,000				14,000					14,000
PPPLF		—					—			—				4,717					4,717
Other borrowings		500					—			—				—					—
Brokered money market demand		—					—			—				25,029					25,010
Brokered time deposits		20,000					20,234			20,000				28,605					28,837
Internet time deposits		2,739					2,739			2,839				10,208					11,690
Total wholesale funds		$	72,239			$	71,973			$	71,839			$	160,059			$	161,754
		6/30/2021 vs 3/31/2021												6/30/2021 vs 6/30/2020
		Variance												Variance
		Amount				%								Amount				%
Federal Home Loan Bank borrowings		$	—				—	%						$	(42,500	)			(54.84	)%
Subordinated debentures		—					—	%						—					—	%
PPPLF		—					—	%						(4,717		)			(100.00	)%
Other borrowings		500					N/M							500					N/M
Brokered money market demand		—					—	%						(25,010		)			(100.00	)%
Brokered time deposits		(234		)			(1.16	)%						(8,837		)			(30.64	)%
Internet time deposits		—					—	%						(8,951		)			(76.57	)%
Total wholesale funds		$	266				0.37	%						$	(89,515	)			(55.34	)%

The Corporation utilizes wholesale funds to manage balance sheet growth. Wholesale funding has historically been more expensive than core deposits, however, due to the COVID-19 pandemic, the FRB has kept Fed funds rates near zero. 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 throughout 2021 through the Corporation’s earnings. As of June 30, 2021, the Corporation’s capital ratios remained strong and are expected to exceed well capitalized provisions for the foreseeable future, inclusive of the projected impact of the acquisition of The Farmers State Bank of Munith in the fourth quarter.

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. The following table outlines the number shares and dollar amount associated with the Corporation’s common stock repurchase plan for the quarters ended:

		6/30/21				3/31/21			12/31/20				9/30/20				6/30/20
Number of Shares Repurchased		40,383				37,315			5,342				—				—
Dollar Amount of Shares Repurchased		$	1,059			$	880		$	110			$	—			$	—

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, 2016 and all dividends were reinvested.

The graph accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/5ffc65ef-6755-4ffd-aca9-10334f71da96

Date		FETM		ABAQ Index
6/30/2016		100.00		100.00
6/30/2017		141.88		134.65
6/30/2018		164.96		146.73
6/30/2019		163.16		129.53
6/30/2020		140.90		95.74
6/30/2021		208.27		148.38

Abbreviations and Acronyms

ABA: American Bankers Association	HTM: Held-to-maturity
AFS: Available-for-sale	IRA: Individual retirement account
ALLL: Allowance for loan and lease 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: U.S. Small Business Administration
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 Best 50 performing stocks in 2018 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 17 full-service branches in Genesee, Livingston, Oakland, Saginaw, and Shiawassee Counties. 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:

Aaron D. Wirsing Chief Financial Officer Fentura Financial, Inc. 810.714.3925 aaron.wirsing@thestatebank.com

Ronald L. Justice President & CEO Fentura Financial, Inc. 810.714.3902 ron.justice@thestatebank.com