Fentura Financial, Inc.

Table of Contents

Interim Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands)

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

Interim Condensed Consolidated Statements of Income (Unaudited)

(Dollars in thousands except per share amounts)

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

Interim Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

Interim Condensed Consolidated Statements of Shareholders' Equity (Unaudited)

(Dollars in thousands except per share amounts)

For the three months ended September 30,

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

Interim Condensed Consolidated Statements of Shareholders' Equity (Unaudited)

(Dollars in thousands except per share amounts)

For the nine months ended September 30,

(1) Effective January 1, 2023, we adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This election resulted in a reclassification of $1,580 from retained earnings, net of tax.

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

Interim Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

Interim Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)

(Dollars in thousands)

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands except per share amounts)

Note 1 - Nature of Operations and Summary of Significant Accounting Policies

Glossary of Abbreviations and Acronyms

The following abbreviations and acronyms may be used throughout these Notes to Interim Condensed Consolidated Financial Statements (Unaudited).

Nature of Operations and Principles of Consolidation

The unaudited interim condensed consolidated financial statements include references to the "Corporation", "Company", "Fentura", "we", "our", "us", and similar terms refer to the consolidated entity consisting of Fentura Financial, Inc. (the "Parent") and its subsidiaries. References to The State Bank or the "Bank" refer to Fentura Financial, Inc.'s subsidiary, The State Bank.

We provide banking and trust services principally to individuals, small businesses and governmental entities through our twenty community banking offices and one loan production center serving Bay, Genesee, Ingham, Jackson, Livingston, Oakland, Saginaw and Shiawassee Counties in locations of central and southeastern Michigan. Our primary deposit products are checking, savings, and term certificate accounts, and our primary lending products are residential mortgage, commercial real estate, commercial, home equity, and consumer loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and real estate. Commercial loans are expected to be repaid from cash flows from operations of businesses. Real estate loans are secured by both residential and commercial real estate. Our exposure to credit risk is substantially affected by the economy in our market area and by changes in commercial real estate values. While the loan portfolio is substantially commercial based, we are not dependent on any single borrower or industry.

The unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included. Operating results for the

three and nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. For further information, refer to our audited consolidated financial statements for the year ended December 31, 2023.

Our accounting policies are materially the same as those discussed in Note 1 to the Consolidated Financial Statements included in our audited consolidated financial statements for the year ended December 31, 2023.

Use of Estimates

The preparation of the unaudited interim condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and future results could differ. Significant estimates include but are not limited to the determination of the ACL, the fair values of residential mortgage loans held-for-sale and associated mortgage derivatives, credit impairment of securities, goodwill and the carrying value of deferred income taxes.

Allowance for Credit Losses - Loans

The allowance for credit losses ("allowance") is a valuation account that is deducted from, or added to, the loans' amortized cost basis to present the net amount expected to be ultimately collected on the loans. Loan losses are charged-off against the allowance when management determines the loan balance to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Cash received on previously charged-off amounts is recorded as a recovery to the allowance.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. We adjust for current and forecasted factors based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, concentrations of credit and changes in the value of collateral.

Reasonable and supportable economic forecasts are incorporated in determining our expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult and may not be possible in later periods. Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. As of September 30, 2024 and December 31, 2023, we used a two-year reasonable and supportable economic forecast period, with a reversion back to historical immediately following the two year forecasted period.

We are not required to develop and use our own economic forecast model and elected to utilize economic forecasts from our third party CECL provider that analyzes and develops forecasts of the economy for the entire United States on at least a quarterly basis.

We measure the allowance on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogenous segments, or pools, for analysis. After analyzing our loans, we determined the asset type or product type was the best pooling option that utilizes product-based call codes as the pooling / segmentations choice within the CECL model. Comparison of loan attributes and loss experience to peers was facilitated by this pooling choice.

We also consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Interim Condensed Consolidated Balance Sheets and is increased or decreased through other noninterest expense on our Interim Condensed Consolidated Statements of Income. No allowance is recognized if we have the unconditional right to cancel the obligation. The calculation includes consideration of the likelihood that funding will occur and then applying the expected credit loss as calculated using the weighted-average rate methodology for the corresponding balance sheet loan pool. Adjustments to the allowance are reported in the Interim Condensed Consolidated Statements of Income as a component of credit loss expense. As of September 30, 2024 and December 31, 2023, the allowance for off-balance sheet credit exposures included on our Interim Condensed Consolidated Balance Sheets was not material.

Accrued interest receivable for loans is $4,338 at September 30, 2024 and $4,641 at December 31, 2023, and is included in accrued interest receivable on our Interim Condensed Consolidated Balance Sheets. We elected not to measure an allowance for accrued interest receivable. We elected to reverse interest income for loans that are placed on nonaccrual status, which is generally when the loan becomes 120 days past due, or earlier if we believe the collection of interest is doubtful. We believe this election results in the timely reversal of uncollectible interest.

The allowance for expected credit losses is a valuation account that is deducted from the loans amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged-off against the allowance when we believe the uncollectability of a loan balance is confirmed.

Debt Securities

Debt securities are classified as HTM and carried at amortized cost when we have the positive intent and the ability to hold them to maturity. Debt securities are classified as AFS when they might be sold before maturity. Debt securities AFS are carried at fair value, with unrealized holding gains and losses reported in OCI.

Allowance for Credit Losses - Held-to-Maturity Securities

We measure credit losses on HTM debt securities on a collective basis by major security type with each type sharing similar risk characteristics, and consider historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. HTM debt securities are charged-off against the ACL when deemed uncollectible. Adjustments to the ACL are reported on our Interim Condensed Consolidated Statements of Income in the provision for credit losses. We measure expected credit losses on HTM debt securities on a collective basis by major security type. Our HTM debt security portfolio consists of local municipal issued debt securities. The local municipalities are reviewed at least quarterly for credit worthiness. We utilize a third party vendor to provide a detailed credit write-up for our HTM debt securities. The third party vendor utilizes a proprietary scale between 1 and 8, whereas 1 is the strongest rating and 8 is the weakest rating assigned to a HTM debt security. All of our HTM debt securities were given a 1 rating as of September 30, 2024 and December 31, 2023. At September 30, 2024 and December 31, 2023, there was no ACL related to HTM debt securities.

Allowance for Credit Losses - Available-for-Sale Securities

For AFS debt securities in an unrealized loss position, we determine whether we intend to sell or if it is more likely than not that we will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with an allowance being established under CECL. Our AFS debt securities consist of multiple agency's debt securities, as well as bank CDs that have minimal credit quality risk, as they are guaranteed by the federal government or backed by FDIC insurance. These government backed AFS debt securities were not assessed for credit deterioration. Our population of AFS debt securities that are not agency backed are assessed for credit quality risk and they consist of debt securities issued by municipalities. For AFS debt securities with unrealized losses not meeting these criteria, we evaluate whether any decline in fair value is due to credit loss factors. In making this assessment, we consider any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the debt security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL under ASU Topic 326-30 are recorded as provisions for credit loss expense. Losses are charged-off against the allowance when the collectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes. The local municipalities are reviewed at least quarterly for credit worthiness. We utilize a third party vendor to provide a detailed credit write-up for our AFS debt securities that are not supported by the federal government or backed by FDIC insurance. The third party vendor utilizes a proprietary scale between 1 and 8, whereas 1 is the strongest rating and 8 is the weakest rating assigned to an AFS debt security. All of our AFS debt securities were given a 3 rating or better. At September 30, 2024 and December 31, 2023, there was no ACL related to AFS debt securities.

Derivative Instruments and Hedging Activities

ASC 815 provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (1) how and why an entity uses derivative instruments, (2) how the entity accounts for derivative instruments and related hedged items, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain our objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

Mortgage Banking Derivatives

Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and mandatory forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. The fair value of the interest rate lock is recorded at the time the commitment is executed and is adjusted for the expected exercise of the commitment before the loan is funded. In order to hedge the change in interest rates resulting from our commitments to fund loans, we enter into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair values of these derivatives are included in net gain on sales of residential mortgage loans included on our Interim Condensed Consolidated Statements of Income.

Earnings Per Common Share

Basic and diluted EPS are calculated as net income divided by the weighted average number of common shares outstanding during the year. Common stock grants that have a grant date prior to the date of earnings per common share calculation, and ESOP shares, are considered outstanding for this calculation. Unvested common stock grants are not considered outstanding for this calculation.

Reclassification

Certain items in the interim condensed consolidated financial statements of prior years were reclassified to conform to the current year presentation.

Note 2 - Recent Accounting Pronouncements

Pending Implementation

ASU 2023-09, "Income Taxes (Topic 740) - Improvements to Income Tax Disclosures"

In December 2023, ASU 2023-09 was issued and enhances transparency by requiring consistent categorization, greater disaggregation, and detailed disclosure related to income taxes paid. These changes aim to help users of financial statements understand factors contributing to differences between effective and statutory tax rates. The adoption of ASU 2023-09 is effective for annual reporting periods beginning after December 15, 2024 and is not expected to have a significant impact on our consolidated financial statements.

ASU 2024-03, "Income Statement (Subtopic 220-40) - Disaggregation of Income Statement Expenses"

In November 2024, ASU 2024-03 was issued and enhances transparency by requiring greater disaggregation and detailed disclosure related to certain costs and expenses. These changes require entities to disclose amounts of purchases of inventory, employee compensation, depreciation, intangible asset amortization, and depreciation, depletion and amortization recognized as part of oil and gas-producing activities included in each relevant expense caption presented on the face of the income statement. The adoption of ASU 2024-03 is effective for annual reporting periods beginning after December 15, 2026 and is not expected to have a significant impact on our consolidated financial statements.

Note 3 - Investment Securities

The following is a summary of the amortized cost and fair value of investment securities as of:

There was no allowance for credit losses recorded for available-for-sale or held-to-maturity debt securities in the three or nine month periods ended September 30, 2024 or 2023.

The amortized cost and fair value of AFS debt securities grouped by contractual maturity were as follows as of September 30, 2024:

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. As a result of their variable monthly payments, mortgage backed residential and collateralized mortgage obligations are not reported by a specific maturing group.

The amortized cost and fair value of state and municipal HTM debt securities grouped by contractual maturity were as follows as of September 30, 2024:

Information pertaining to AFS debt securities with unrealized losses aggregated by investment category for which an allowance for credit losses has not been recorded and the length of time that individual securities have been in a continuous loss position is as follows as of:

There were no sales of AFS or HTM debt securities in the three or nine months ended September 30, 2024 or 2023.

The fair values of equity securities were as follows as of:

As of September 30, 2024 and December 31, 2023, securities with a carrying amount of $21,099 and $25,868, respectively, were pledged to secure public deposits and borrowings.

As of September 30, 2024 and December 31, 2023, there were no holdings of securities of any one issuer, other than the U.S. Government and federal agencies, in an amount greater than 10% of shareholders' equity.

Allowance for Credit Losses ‐ Available‐for‐Sale Securities

As of September 30, 2024 and December 31, 2023, no allowance for credit losses was recognized on AFS debt securities in an unrealized loss position, as we do not believe any of the AFS debt securities are impaired due to reasons of credit quality. This is based on our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our AFS debt securities and consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, we do not have the intent to sell any of the debt securities classified as AFS in the table above, and believe it is more likely than not that we will not have to sell any such debt securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying debt securities were purchased. The fair value is expected to recover as the debt securities approach their respective maturity date or repricing date, or if the market yields for such investments decline. We utilize a third party vendor to provide a detailed credit write-up for our AFS debt securities that are not supported by the federal government or backed by FDIC insurance. The third party vendor utilizes a proprietary scale between 1 and 8, whereas 1 is the strongest rating and 8 is the weakest rating assigned to an AFS debt security. All of our AFS debt securities were given a 3 rating or better.

Allowance for Credit Losses – Held‐to‐Maturity Securities

Although all of the HTM debt securities held have been in an unrealized loss position for over 12 months as of September 30, 2024 and December 31, 2023, no allowance for credit losses was recognized, as we do not believe any of the HTM debt securities are impaired due to reasons of credit quality. We measure expected credit losses on HTM debt securities on a collective basis by major security type. Our HTM debt security portfolio consists of local municipal issued debt securities. The local municipalities are reviewed at least quarterly for credit worthiness. We utilize a third party vendor to provide a detailed credit write-up for our HTM debt securities. The third party vendor utilizes a proprietary scale between 1 and 8, whereas 1 is the strongest rating and 8 is the weakest rating assigned to a HTM debt security. All of our HTM debt securities were given a 1 rating as of September 30, 2024 and December 31, 2023.

Note 4 - Loans and Allowance for Credit Losses

We primarily originate residential and commercial real estate, commercial and industrial, and consumer loans. The majority of our loan portfolio is based in Genesee, Oakland, Saginaw, Shiawassee, Livingston, Ingham and Jackson counties within central and southeast Michigan. The ability of our debtors to honor their contracts is dependent upon the real estate values and general economic conditions in these areas. A significant amount of our consumer and residential real estate loans are secured by various items of real property. Commercial loans are secured primarily by real estate and business assets. Some of our loans are unsecured.

Total loans by class are summarized as follows as of:

Included in total loans above are net deferred loan (fees) costs as of:

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debts such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans and is performed on a quarterly basis.

We use the following definitions for classified risk ratings for commercial and industrial and commercial real estate loans:

1: Loans of Exceptional Credit Quality - Loans supported by strong firms/individuals characterized as having minimum credit risk representing a prime credit. Generally fully secured by liquid, properly margined collateral.

2: Loans of High Quality - Loans protected by the borrower's net worth representing desirable banking risk. Well-seasoned borrowers displaying strong financial condition, consistently superior earning performance, and access to a range of financing alternatives. The borrower's trends and outlook, as well as those of its industry group, are positive.

3: Loans of Satisfactory Quality - Loans representing a reasonable credit risk. Characterized as being moderate to average risk to established borrowers that display sound financial condition and operating results. The capacity to service debt is stable and demonstrated at a level consistent with or above the industry norms. Borrower and industry trends and outlook are considered good.

4: Satisfactory - Acceptable - Loans to persons or entities with an average financial condition, adequate collateral margins, adequate cash flow to service long-term debt, and net worth comprised mainly of fixed assets are included in the category. These entities are minimally profitable now, with projections indicating continued profitability into the foreseeable future.

5: Satisfactory - Acceptable - Monitor - Loans that are characterized by borrowers who have marginal, but adequate cash flow, marginal profitability, and currently have been meeting the obligations of their loan structure. Adverse changes in the borrower’s circumstances and/or current economic conditions are more likely to impair their capacity for repayment. The borrower has, in the past, satisfactorily handled debts with us, but may be experiencing some minor delinquency in making payments, or other signs of temporary cash flow issues. Borrower may be experiencing declining margins or other negative financial trends, despite the borrower’s continued satisfactory condition and positive cash flow. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement, or declining but positive repayment capacity. This classification includes loans to new or established borrowers with satisfactory loan structure, but where near term economic or business issues appears to remain stable and the near-term projections would limit the ability for an improvement in the financial trends of the borrower.

6: Special Mention - Loans in this class have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in our credit position at some future date. These potential weaknesses may result in a deterioration of the repayment of the loan and increase the credit risk. Special mention assets are not adversely classified and do not expose us to sufficient risk to warrant adverse classification.

7: Substandard - Loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

8: Doubtful - Loans are classified as doubtful because they have all the weaknesses inherent in those classified “Substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

9: Loss - Loans are classified as loss because they are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. Charge-off is recommended.

We use the following definitions for classified risk ratings for residential mortgage, home equity and consumer loans:

Current - Loans are classified as current when payments are made on a timely basis and are not delinquent or in nonaccrual status.

30-89 days past due - Loans are classified as 30-89 days past due when payments are not paid in a timely manner and are considered delinquent.

90+ days past due - Loans are classified as 90+ days past due when payments continue to be delinquent beyond 89 days.

Nonaccrual - Loans are reviewed for nonaccrual when they become delinquent beyond 120 days. When a loan is placed in nonaccrual status, interest income recognized during the current period is reversed out of interest income on our Interim

Condensed Consolidated Statements of Income and interest income recognized in prior periods is reversed out of ACL on our Interim Condensed Consolidated Balance Sheets.

The following tables present the amortized cost basis of loans by credit quality risk rating, class of financing receivable, and year of origination for term loans as of: