##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the transition period from  to
 Commission file number 000-23550
 Fentura Financial, Inc.
  Michigan
    
    38-2806518(State or other jurisdiction of

incorporation or organization)
    
    (IRS Employee Identification No.)
 175 N Leroy, P.O. Box 725, Fenton, Michigan 48430
 (810) 629-2263 (Registrants telephone number)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ
  Class  Common Stock
    
    Shares Outstanding  2,175,664




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##### 



Fentura Financial Inc.
Index to Form 10-Q
 PagePart I  Financial Information
    
    
    3Item 1  Consolidated Financial Statements (Unaudited)
    
    
    3-12Item 2  Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    13-25Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    26-28Item 4T  Controls and Procedures
    
    
    29Part II  Other Information
    
    
    30Item 1  Legal Proceedings
    
    
    30Item 1A  Risk Factors
    
    
    30Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3  Defaults Upon Senior Securities
    
    
    30Item 4 Submission of Matters to a Vote of Security Holders
    
    
    30Item 5  Other Information
    
    
    31Item 6  Exhibits
    
    
    31Signatures
    
    
    32Exhibit Index
    
    
    33Certificate of the President and CEOCertificate of the CFOSection 1350 Certificate of the CEOSection 1350 Certificate of the CFO
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 Fentura Financial, Inc.
Consolidated Balance Sheets
 June 30,
    
    
    Dec 31,2008
    
    
    2007(000s omitted except share data)
    
    (unaudited)ASSETSCash and due from banks
    
    $
    16,147
    
    
    $
    22,734Federal funds sold
    
    
    0
    
    
    
    7,300Total cash & cash equivalents
    
    
    16,147
    
    
    
    30,034Securities-available for sale
    
    
    58,028
    
    
    
    71,792Securities-held to maturity, (fair value of $8,151
at June 30, 2008 and $8,714 at December 31, 2007)
    
    
    8,179
    
    
    
    8,685Total securities
    
    
    66,207
    
    
    
    80,477Loans held for sale
    
    
    448
    
    
    
    1,655Loans:Commercial
    
    
    318,109
    
    
    
    313,642Real estate loans  construction
    
    
    51,569
    
    
    
    59,805Real estate loans  mortgage
    
    
    37,023
    
    
    
    39,817Consumer loans
    
    
    58,155
    
    
    
    58,139Total loans
    
    
    464,856
    
    
    
    471,403Less: Allowance for loan losses
    
    
    (12,778
    )
    
    
    (8,554
    )Net loans
    
    
    452,078
    
    
    
    462,849Bank Owned Life Insurance
    
    
    7,150
    
    
    
    7,042Bank premises and equipment
    
    
    19,307
    
    
    
    20,101Federal Home Loan Bank stock
    
    
    2,032
    
    
    
    2,032Accrued interest receivable
    
    
    2,506
    
    
    
    2,813Goodwill
    
    
    7,955
    
    
    
    7,955Acquisition intangibles
    
    
    377
    
    
    
    485Equity Investment
    
    
    2,631
    
    
    
    3,089Other assets
    
    
    9,069
    
    
    
    9,487Total Assets
    
    $
    585,907
    
    
    $
    628,019LIABILITIESDeposits:Non-interest bearing deposits
    
    $
    78,867
    
    
    $
    75,148Interest bearing deposits
    
    
    426,605
    
    
    
    468,355Total deposits
    
    
    505,472
    
    
    
    543,503Short term borrowings
    
    
    3,458
    
    
    
    649Federal Home Loan Bank Advances
    
    
    14,007
    
    
    
    11,030Repurchase Agreements
    
    
    0
    
    
    
    5,000Subordinated debentures
    
    
    14,000
    
    
    
    14,000Accrued taxes, interest and other liabilities
    
    
    2,471
    
    
    
    4,341Total liabilities
    
    
    539,408
    
    
    
    578,523SHAREHOLDERS EQUITYCommon stock  no par value
2,175,184 shares issued (2,163,385 at Dec. 31, 2007)
    
    
    42,695
    
    
    
    42,478Retained earnings
    
    
    4,691
    
    
    
    7,488Accumulated other comprehensive income (loss)
    
    
    (887
    )
    
    
    (470
    )Total shareholders equity
    
    
    46,499
    
    
    
    49,496Total Liabilities and Shareholders Equity
    
    $
    585,907
    
    
    $
    628,019
  3




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##### Table of Contents



Fentura Financial, Inc.
Consolidated Statements of Income (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 30(000s omitted except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007INTEREST INCOMEInterest and fees on loans
    
    $
    7,457
    
    
    $
    8,917
    
    
    $
    15,561
    
    
    $
    17,564Interest and dividends on securities:Taxable
    
    
    565
    
    
    
    801
    
    
    
    1,193
    
    
    
    1,718Tax-exempt
    
    
    151
    
    
    
    180
    
    
    
    268
    
    
    
    395Interest on federal funds sold
    
    
    16
    
    
    
    44
    
    
    
    114
    
    
    
    211Total interest income
    
    
    8,189
    
    
    
    9,942
    
    
    
    17,136
    
    
    
    19,888INTEREST EXPENSEDeposits
    
    
    3,285
    
    
    
    3,990
    
    
    
    7,312
    
    
    
    7,951Borrowings
    
    
    439
    
    
    
    560
    
    
    
    935
    
    
    
    1,145Total interest expense
    
    
    3,724
    
    
    
    4,550
    
    
    
    8,247
    
    
    
    9,096NET INTEREST INCOME
    
    
    4,465
    
    
    
    5,392
    
    
    
    8,889
    
    
    
    10,792Provision for loan losses
    
    
    3,811
    
    
    
    649
    
    
    
    4,892
    
    
    
    1,088Net interest income after
Provision for loan losses
    
    
    654
    
    
    
    4,743
    
    
    
    3,997
    
    
    
    9,704NON-INTEREST INCOMEService charges on deposit accounts
    
    
    715
    
    
    
    836
    
    
    
    1,489
    
    
    
    1,687Gain on sale of mortgage loans
    
    
    100
    
    
    
    119
    
    
    
    218
    
    
    
    203Trust and investment services income
    
    
    518
    
    
    
    461
    
    
    
    974
    
    
    
    968Other income and fees
    
    
    220
    
    
    
    612
    
    
    
    430
    
    
    
    1,035Total non-interest income
    
    
    1,553
    
    
    
    2,028
    
    
    
    3,111
    
    
    
    3,893NON-INTEREST EXPENSESalaries and employee benefits
    
    
    2,935
    
    
    
    3,193
    
    
    
    5,937
    
    
    
    6,440Occupancy
    
    
    531
    
    
    
    510
    
    
    
    1,082
    
    
    
    1,013Furniture and equipment
    
    
    536
    
    
    
    534
    
    
    
    1,030
    
    
    
    1,059Loan and collection
    
    
    378
    
    
    
    85
    
    
    
    544
    
    
    
    176Advertising and promotional
    
    
    145
    
    
    
    159
    
    
    
    249
    
    
    
    271Loss on security impairment
    
    
    36
    
    
    
    0
    
    
    
    610
    
    
    
    0Other operating expenses
    
    
    954
    
    
    
    1,117
    
    
    
    1,969
    
    
    
    2,135Total non-interest expense
    
    
    5,515
    
    
    
    5,598
    
    
    
    11,421
    
    
    
    11,094INCOME (LOSS) BEFORE TAXES
    
    
    (3,308
    )
    
    
    1,173
    
    
    
    (4,313
    )
    
    
    2,503Federal income taxes/(benefit)
    
    
    (1,140
    )
    
    
    329
    
    
    
    (1,516
    )
    
    
    711NET INCOME (LOSS)
    
    $
    (2,168
    )
    
    $
    844
    
    
    $
    (2,797
    )
    
    $
    1,792Per share:Net income (loss)  basic
    
    $
    (1.00
    )
    
    $
    0.39
    
    
    $
    (1.29
    )
    
    $
    0.83Net income (loss)   diluted
    
    $
    (1.00
    )
    
    $
    0.39
    
    
    $
    (1.29
    )
    
    $
    0.83Cash Dividends declared
    
    $
    0.00
    
    
    $
    0.25
    
    
    $
    0.00
    
    
    $
    0.50
  4




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Fentura Financial, Inc.
Consolidated Statements of Changes in Shareholders Equity (Unaudited)
 Six Months EndedJune 30,(000s omitted)
    
    2008
    
    
    2007COMMON STOCKBalance, beginning of period
    
    $
    42,478
    
    
    $
    42,158Issuance of shares underDirector stock purchase plan &
Dividend reinvestment program(11,799 and 14,677 shares)
    
    
    213
    
    
    
    458Stock repurchase (0 and 3,784 shares)
    
    
    0
    
    
    
    (112
    )Stock options exercised (0 and 295 shares)
    
    
    0
    
    
    
    6Stock compensation expense
    
    
    4
    
    
    
    28Balance, end of period
    
    
    42,695
    
    
    
    42,538RETAINED EARNINGSBalance, beginning of period
    
    
    7,488
    
    
    
    10,118Net income (loss)
    
    
    (2,797
    )
    
    
    1,792Cash dividends declared
    
    
    0
    
    
    
    (1,083
    )Balance, end of period
    
    
    4,691
    
    
    
    10,827ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)Balance, beginning of period
    
    
    (470
    )
    
    
    (958
    )Change in unrealized gain (loss)
on securities available for sale, net of tax
    
    
    (417
    )
    
    
    (80
    )Balance, end of period
    
    
    (887
    )
    
    
    (1,038
    )TOTAL SHAREHOLDERS EQUITY
    
    $
    46,499
    
    
    $
    52,327
  5




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##### Table of Contents



Fentura Financial, Inc.
Consolidated Statements of Cash Flows (Unaudited)
 Six Months EndedJune 30,(000s omitted)
    
    2008
    
    
    2007OPERATING ACTIVITIES:Net income (loss)
    
    $
    (2,797
    )
    
    $
    1,792Adjustments
to reconcile net income (loss) to cash Provided by Operating Activities:Stock compensation expense
    
    
    4
    
    
    
    28Depreciation and amortization
    
    
    505
    
    
    
    882Provision for loan losses
    
    
    4,892
    
    
    
    1,088Loans originated for sale
    
    
    (16,999
    )
    
    
    (10,328
    )Proceeds from the sale of loans
    
    
    18,424
    
    
    
    11,703(Gain) Loss on sales of loans
    
    
    (218
    )
    
    
    (203
    )Gain (Loss) on sale of fixed assets
    
    
    (118
    )
    
    
    0Loss on security impairment
    
    
    610
    
    
    
    0Loss on equity investment
    
    
    458
    
    
    
    0Earnings from bank owned life insurance
    
    
    (108
    )
    
    
    (105
    )Net (increase) decrease in interest receivable & other assets
    
    
    3,629
    
    
    
    (541
    )Net increase (decrease) in interest payable & other liabilities
    
    
    (1,659
    )
    
    
    (2,762
    )Total Adjustments
    
    
    9,420
    
    
    
    (238
    )Net Cash Provided By (Used In) Operating Activities
    
    
    6,623
    
    
    
    1,554Cash Flows From Investing Activities:Proceeds from maturities of securities  AFS
    
    
    4,958
    
    
    
    5,746Proceeds from maturities of securities  HTM
    
    
    1,253
    
    
    
    1,570Proceeds from calls of securities  AFS
    
    
    12,662
    
    
    
    1,700Proceeds from calls of securities  HTM
    
    
    0
    
    
    
    140Proceeds from sales of securities  AFS
    
    
    1,999
    
    
    
    0Purchases of securities  AFS
    
    
    (6,732
    )
    
    
    (4,071
    )Purchases of securities  HTM
    
    
    (750
    )
    
    
    0Purchase of FHLB Stock
    
    
    0
    
    
    
    0Net (increase) decrease in loans
    
    
    2,987
    
    
    
    (7,761
    )Acquisition of premises and equipment, net
    
    
    145
    
    
    
    (3,300
    )Net Cash Provided By (Used in) Investing Activities
    
    
    16,522
    
    
    
    (5,976
    )Cash Flows From Financing Activities:Net increase (decrease) in deposits
    
    
    (38,031
    )
    
    
    4,063Net increase (decrease) in short term borrowings
    
    
    2,809
    
    
    
    (426
    )Net increase (decrease) in repurchase agreements
    
    
    (5,000
    )
    
    
    (5,000
    )Purchase of advances from FHLB
    
    
    11,001
    
    
    
    7,000Repayments of advances from FHLB
    
    
    (8,024
    )
    
    
    (7,022
    )Net proceeds from stock issuance and purchase
    
    
    213
    
    
    
    352Cash dividends
    
    
    0
    
    
    
    (1,083
    )Net Cash Provided By (Used In) Financing Activities
    
    
    (37,032
    )
    
    
    (2,116
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    $
    (13,887
    )
    
    $
    (6,538
    )CASH AND CASH EQUIVALENTS  BEGINNING
    
    $
    30,034
    
    
    $
    29,446CASH AND CASH EQUIVALENTS  ENDING
    
    $
    16,147
    
    
    $
    22,908CASH PAID FOR:INTEREST
    
    $
    8,250
    
    
    $
    9,212INCOME TAXES
    
    $
    0
    
    
    $
    831NONCASH DISCLOSURES:Transfers from loans to other real estate
    
    $
    2,892
    
    
    $
    78
  6




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Fentura Financial, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(000s Omitted)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net Income (loss)
    
    $
    (2,168
    )
    
    $
    844
    
    
    $
    (2,797
    )
    
    $
    1,792Other comprehensive income (loss), net of tax:Unrealized holding gains (losses) arising
during period
    
    
    (791
    )
    
    
    (343
    )
    
    
    (1,027
    )
    
    
    (80
    )Less: Impairment loss recognized during
period
    
    
    (36
    )
    
    
    0
    
    
    
    (610
    )
    
    
    0Other comprehensive income (loss)
    
    
    (755
    )
    
    
    (343
    )
    
    
    (417
    )
    
    
    (80
    )Comprehensive income (loss)
    
    $
    (2,923
    )
    
    $
    501
    
    
    $
    (3,214
    )
    
    $
    1,712
 Fentura Financial, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 Note 1 Basis of Presentation
   Reclassifications:
 Securities
   7




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Allowance for Loan Losses:
  Stock Option Plans
     Number of
    
    WeightedOptions
    
    Average PriceOptions outstanding at December 31, 2007
    
    
    40,228
    
    
    $
    29.74Options forfeited 2008
    
    
    (3,004
    )
    
    $
    30.35Options outstanding at June 30, 2008
    
    
    37,224
    
    
    $
    29.69
 8




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Note 2 Adoption of New Accounting Standards
 Fair Value Option and Fair Value Measurements
 Fair Value Measurements Effective Date of FASB
Statement No. 157
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Note 3 Fair Value
      9




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Assets and Liabilities Measured on a Recurring Basis
  Fair Value Measurements at June 30, 2008 UsingQuoted Pricesin Active
    
    Significant Other
    
    SignificantMarkets for
    
    Observable
    
    UnobservableJune 30,
    
    Identical Assets
    
    Inputs
    
    Inputs(000s omitted)
    
    2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Assets:Available for sale
securities
    
    $
    58,028
    
    
    $
    11
    
    
    $
    56,046
    
    
    $
    1,971
     Fair Value Measurements Using SignificantUnobservable Inputs(Level 3)(000s omitted)
    
    Asset
    
    Liability
    
    TotalBeginning balance, Jan. 1, 2008
    
    $
    2,721
    
    
    $
    0
    
    
    $
    2,721Total gains or losses (realized / unrealized)Included in earningsLoss on security impairment
    
    
    (610
    )
    
    
    0
    
    
    
    (610
    )Included in other comprehensive income
    
    
    (140
    )
    
    
    0
    
    
    
    (140
    )Purchases, issuances, and settlementsTransfers in and / or out of Level 3
    
    
    0
    
    
    
    0
    
    
    
    0Ending balance, June 30, 2008
    
    $
    1,971
    
    
    $
    0
    
    
    $
    1,971
 Assets and Liabilities Measured on a Non-Recurring Basis
  Fair Value Measurements at June 30, 2008 UsingSignificantQuoted Prices in
    
    Other
    
    SignificantActive Markets for
    
    Observable
    
    UnobservableJune 30,
    
    Identical Assets
    
    Inputs
    
    Inputs(000s omitted)
    
    2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Assets:Impaired loans
    
    $
    24,490
    
    
    $
    0
    
    
    $
    0
    
    
    $
    24,490
 10




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Note 4 Securities
  Note 5 Allowance for Loan Losses
  2008
    
    
    2007Balance, beginning of year
    
    $
    8,554
    
    
    $
    6,692Provision for loan losses
    
    
    4,892
    
    
    
    1,088Loans charged off
    
    
    (933
    )
    
    
    (755
    )Loan recoveries
    
    
    265
    
    
    
    149Balance, end of period
    
    $
    12,778
    
    
    $
    7,174
  June 30,
    
    
    December2008
    
    
    31, 2007Period end loans not requiring allocation
    
    $
    11,068
    
    
    $
    11,197Period end loans requiring allocation
    
    
    26,968
    
    
    
    18,186$
    38,036
    
    
    $
    29,383Amount of the allowance for loan losses
allocated
    
    $
    6,133
    
    
    $
    2,751
  11




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Note 6 Earnings Per Common Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,($ in thousands except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Basic Earnings Per Common Share:NumeratorNet Income (loss)
    
    $
    (2,168,000
    )
    
    $
    844,000
    
    
    $
    (2,797,000
    )
    
    $
    1,792,000DenominatorWeighted average common shares
Outstanding
    
    
    2,172,177
    
    
    
    2,162,599
    
    
    
    2,169,692
    
    
    
    2,160,016Basic earnings (loss) per common share
    
    $
    (1.00
    )
    
    $
    0.39
    
    
    $
    (1.29
    )
    
    $
    0.83Diluted Earnings Per Common Share:NumeratorNet Income (loss)
    
    $
    (2,168,000
    )
    
    $
    844,000
    
    
    $
    (2,797,000
    )
    
    $
    1,792,000DenominatorWeighted average common shares
Outstanding for basic earnings per
Common share
    
    
    2,172,177
    
    
    
    2,162,599
    
    
    
    2,169,692
    
    
    
    2,160,016Add: Dilutive effects of assumed
exercises of stock options
    
    
    0
    
    
    
    3,068
    
    
    
    0
    
    
    
    3,281Weighted average common shares
and dilutive potential common
shares outstanding
    
    
    2,172,177
    
    
    
    2,165,667
    
    
    
    2,169,873
    
    
    
    2,163,297Diluted earnings (loss) per common
share
    
    $
    (1.00
    )
    
    $
    0.39
    
    
    $
    (1.29
    )
    
    $
    0.83
  Note 7 Commitments and Contingencies
  12




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ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Results of Operations
     13




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Net Interest Income
  Table 1
 SIX MONTHS ENDEDJUNE 30,2008 COMPARED TO 2007INCREASE (DECREASE)DUE TOYIELD/(000S OMITTED)
    
    VOL
    
    
    RATE
    
    
    TOTALTaxable Securities
    
    $
    (481
    )
    
    $
    (48
    )
    
    $
    (529
    )Tax-Exempt Securities
    
    
    (128
    )
    
    
    (64
    )
    
    
    (192
    )Federal Funds Sold
    
    
    (16
    )
    
    
    (81
    )
    
    
    (97
    )Total Loans
    
    
    473
    
    
    
    (2,466
    )
    
    
    (1,993
    )Loans Held for Sale
    
    
    (5
    )
    
    
    (5
    )
    
    
    (10
    )Total Earning Assets
    
    
    (157
    )
    
    
    (2,664
    )
    
    
    (2,821
    )Interest Bearing Demand Deposits
    
    
    (49
    )
    
    
    (471
    )
    
    
    (520
    )Savings Deposits
    
    
    (47
    )
    
    
    (139
    )
    
    
    (186
    )Time CDs $100,000 and Over
    
    
    346
    
    
    
    (45
    )
    
    
    301Other Time Deposits
    
    
    (148
    )
    
    
    (86
    )
    
    
    (234
    )Other Borrowings
    
    
    (112
    )
    
    
    (98
    )
    
    
    (210
    )Total Interest Bearing Liabilities
    
    
    (10
    )
    
    
    (839
    )
    
    
    (849
    )Net Interest Income
    
    $
    (147
    )
    
    $
    (1,825
    )
    
    $
    (1,972
    )
   14




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15




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##### Table of Contents



Table 2 Average Balance and Rates
 SIX MONTHS ENDED June 30,2008
    
    
    2007AVERAGE
    
    
    INCOME/
    
    
    YIELD/
    
    
    AVERAGE
    
    
    INCOME/
    
    
    YIELD/(000s omitted)(Annualized)
    
    BALANCE
    
    
    EXPENSE
    
    
    RATE
    
    
    BALANCE
    
    
    EXPENSE
    
    
    RATEASSETSSecurities:U.S. Treasury and Government Agencies
    
    $
    54,088
    
    
    $
    1,128
    
    
    
    4.19
    %
    
    $
    77,242
    
    
    $
    1,673
    
    
    
    4.37
    %State and Political (1)
    
    
    15,369
    
    
    
    406
    
    
    
    5.31
    %
    
    
    19,435
    
    
    
    598
    
    
    
    6.21
    %Other
    
    
    7,987
    
    
    
    65
    
    
    
    1.64
    %
    
    
    4,881
    
    
    
    49
    
    
    
    2.02
    %Total Securities
    
    
    77,444
    
    
    
    1,599
    
    
    
    4.15
    %
    
    
    101,558
    
    
    
    2,320
    
    
    
    4.61
    %Fed Funds Sold
    
    
    7,685
    
    
    
    114
    
    
    
    2.98
    %
    
    
    8,244
    
    
    
    211
    
    
    
    5.16
    %Loans:Commercial
    
    
    370,267
    
    
    
    12,232
    
    
    
    6.64
    %
    
    
    354,834
    
    
    
    13,717
    
    
    
    7.80
    %Tax Free (1)
    
    
    3,278
    
    
    
    109
    
    
    
    6.69
    %
    
    
    3,748
    
    
    
    121
    
    
    
    6.52
    %Real Estate-Mortgage
    
    
    38,885
    
    
    
    1,245
    
    
    
    6.44
    %
    
    
    36,259
    
    
    
    1,223
    
    
    
    6.80
    %Consumer
    
    
    57,944
    
    
    
    1,970
    
    
    
    6.84
    %
    
    
    60,358
    
    
    
    2,488
    
    
    
    8.31
    %Total loans
    
    
    470,374
    
    
    
    15,556
    
    
    
    6.65
    %
    
    
    455,199
    
    
    
    17,549
    
    
    
    7.77
    %Allowance for Loan Losses
    
    
    (9,100
    )
    
    
    
    
    
    
    
    
    
    
    (6,843
    )Net Loans
    
    
    461,274
    
    
    
    15,556
    
    
    
    6.78
    %
    
    
    448,356
    
    
    
    17,549
    
    
    
    7.89
    %Loans Held for Sale
    
    
    1,444
    
    
    
    42
    
    
    
    5.85
    %
    
    
    1,599
    
    
    
    52
    
    
    
    6.56
    %TOTAL EARNING ASSETS
    
    $
    556,947
    
    
    $
    17,311
    
    
    
    6.25
    %
    
    $
    566,600
    
    
    $
    20,132
    
    
    
    7.17
    %Cash Due from Banks
    
    
    15,361
    
    
    
    
    
    
    
    
    
    
    
    17,234All Other Assets
    
    
    47,670
    
    
    
    
    
    
    
    
    
    
    
    44,151TOTAL ASSETS
    
    $
    610,878
    
    
    
    
    
    
    
    
    
    
    $
    621,142LIABILITIES & SHAREHOLDERS EQUITY:Deposits:Interest bearing  DDA
    
    $
    96,564
    
    
    $
    669
    
    
    
    1.39
    %
    
    $
    100,091
    
    
    $
    1,189
    
    
    
    2.40
    %Savings Deposits
    
    
    83,190
    
    
    
    391
    
    
    
    0.95
    %
    
    
    89,820
    
    
    
    577
    
    
    
    1.30
    %Time CDs $100,000 and Over
    
    
    150,553
    
    
    
    3,642
    
    
    
    4.86
    %
    
    
    135,472
    
    
    
    3,341
    
    
    
    4.97
    %Other Time CDs
    
    
    119,657
    
    
    
    2,610
    
    
    
    4.39
    %
    
    
    125,369
    
    
    
    2,844
    
    
    
    4.57
    %Total Deposits
    
    
    449,964
    
    
    
    7,312
    
    
    
    3.27
    %
    
    
    450,752
    
    
    
    7,951
    
    
    
    3.56
    %Other Borrowings
    
    
    34,759
    
    
    
    935
    
    
    
    5.41
    %
    
    
    38,264
    
    
    
    1,145
    
    
    
    6.03
    %INTEREST BEARING LIABILITIES
    
    $
    484,723
    
    
    $
    8,247
    
    
    
    3.42
    %
    
    $
    489,016
    
    
    $
    9,096
    
    
    
    3.75
    %Non-Interest bearing  DDA
    
    
    73,003
    
    
    
    
    
    
    
    
    
    
    
    74,830All Other Liabilities
    
    
    3,353
    
    
    
    
    
    
    
    
    
    
    
    4,468Shareholders Equity
    
    
    49,799
    
    
    
    
    
    
    
    
    
    
    
    52,828TOTAL LIABILITIES & SHAREHOLDERS EQUITY
    
    $
    610,878
    
    
    
    
    
    
    
    
    
    
    $
    621,142Net Interest Rate Spread
    
    
    
    
    
    
    
    
    
    
    2.83
    %
    
    
    
    
    
    
    
    
    
    
    3.42
    %Net Interest Income /Margin
    
    
    
    
    
    $
    9,064
    
    
    
    3.27
    %
    
    
    
    
    
    $
    11,036
    
    
    
    3.93
    %
 
 (1)
    
    Presented on a fully taxable equivalent basis using a federal income tax rate of 34%. 16




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##### Table of Contents



Table 3 Average Balance and Rates
 THREE MONTHS ENDED June 30,2008
    
    
    2007AVERAGE
    
    
    INCOME/
    
    
    YIELD/
    
    
    AVERAGE
    
    
    INCOME/
    
    
    YIELD/(000s omitted)(Annualized)
    
    BALANCE
    
    
    EXPENSE
    
    
    RATE
    
    
    BALANCE
    
    
    EXPENSE
    
    
    RATEASSETSSecurities:U.S. Treasury and Government Agencies
    
    $
    50,780
    
    
    $
    532
    
    
    
    4.21
    %
    
    $
    76,091
    
    
    $
    782
    
    
    
    4.12
    %State and Political (1)
    
    
    15,355
    
    
    
    229
    
    
    
    5.99
    %
    
    
    18,092
    
    
    
    273
    
    
    
    6.05
    %Other
    
    
    7,666
    
    
    
    33
    
    
    
    1.75
    %
    
    
    5,365
    
    
    
    20
    
    
    
    1.50
    %Total Securities
    
    
    73,801
    
    
    
    794
    
    
    
    4.32
    %
    
    
    99,548
    
    
    
    1,075
    
    
    
    4.33
    %Fed Funds Sold
    
    
    2,969
    
    
    
    16
    
    
    
    2.11
    %
    
    
    3,366
    
    
    
    44
    
    
    
    5.24
    %Loans:Commercial
    
    
    369,877
    
    
    
    5,854
    
    
    
    6.37
    %
    
    
    360,535
    
    
    
    6,996
    
    
    
    7.78
    %Tax Free (1)
    
    
    3,247
    
    
    
    54
    
    
    
    6.69
    %
    
    
    3,686
    
    
    
    59
    
    
    
    6.43
    %Real Estate-Mortgage
    
    
    38,307
    
    
    
    612
    
    
    
    6.42
    %
    
    
    36,303
    
    
    
    628
    
    
    
    6.94
    %Consumer
    
    
    57,813
    
    
    
    941
    
    
    
    6.55
    %
    
    
    59,425
    
    
    
    1,230
    
    
    
    8.30
    %Total loans
    
    
    469,244
    
    
    
    7,461
    
    
    
    6.39
    %
    
    
    459,949
    
    
    
    8,913
    
    
    
    7.77
    %Allowance for Loan Losses
    
    
    (9,421
    )
    
    
    
    
    
    
    
    
    
    
    (6,950
    )Net Loans
    
    
    459,823
    
    
    
    7,461
    
    
    
    6.53
    %
    
    
    452,999
    
    
    
    8,913
    
    
    
    7.89
    %Loans Held for Sale
    
    
    916
    
    
    
    14
    
    
    
    5.93
    %
    
    
    1,501
    
    
    
    23
    
    
    
    6.15
    %TOTAL EARNING ASSETS
    
    $
    546,930
    
    
    $
    8,285
    
    
    
    6.09
    %
    
    $
    564,364
    
    
    $
    10,055
    
    
    
    7.15
    %Cash Due from Banks
    
    
    14,398
    
    
    
    
    
    
    
    
    
    
    
    16,704All Other Assets
    
    
    47,175
    
    
    
    
    
    
    
    
    
    
    
    45,131TOTAL ASSETS
    
    $
    599,082
    
    
    
    
    
    
    
    
    
    
    $
    619,249LIABILITIES & SHAREHOLDERS EQUITY:Deposits:Interest bearing  DDA
    
    $
    97,132
    
    
    $
    325
    
    
    
    1.35
    %
    
    $
    100,345
    
    
    $
    600
    
    
    
    2.39
    %Savings Deposits
    
    
    83,606
    
    
    
    169
    
    
    
    0.81
    %
    
    
    89,038
    
    
    
    290
    
    
    
    1.31
    %Time CDs $100,000 and Over
    
    
    138,635
    
    
    
    1,635
    
    
    
    4.74
    %
    
    
    134,374
    
    
    
    1,659
    
    
    
    4.95
    %Other Time CDs
    
    
    116,576
    
    
    
    1,156
    
    
    
    3.99
    %
    
    
    125,523
    
    
    
    1,441
    
    
    
    4.60
    %Total Deposits
    
    
    435,949
    
    
    
    3,285
    
    
    
    3.03
    %
    
    
    449,280
    
    
    
    3,990
    
    
    
    3.56
    %Other Borrowings
    
    
    36,383
    
    
    
    439
    
    
    
    4.85
    %
    
    
    36,907
    
    
    
    560
    
    
    
    6.09
    %INTEREST BEARING LIABILITIES
    
    $
    472,332
    
    
    $
    3,724
    
    
    
    3.17
    %
    
    $
    486,187
    
    
    $
    4,550
    
    
    
    3.75
    %Non-Interest bearing  DDA
    
    
    74,166
    
    
    
    
    
    
    
    
    
    
    
    75,714All Other Liabilities
    
    
    2,840
    
    
    
    
    
    
    
    
    
    
    
    4,124Shareholders Equity
    
    
    49,744
    
    
    
    
    
    
    
    
    
    
    
    53,224TOTAL LIABILITIES & SHAREHOLDERS EQUITY
    
    $
    599,082
    
    
    
    
    
    
    
    
    
    
    $
    619,249Net Interest Rate Spread
    
    
    
    
    
    
    
    
    
    
    2.92
    %
    
    
    
    
    
    
    
    
    
    
    3.40
    %Net Interest Income /Margin
    
    
    
    
    
    $
    4,561
    
    
    
    3.35
    %
    
    
    
    
    
    $
    5,505
    
    
    
    3.91
    %
 
 (1)
    
    Presented on a fully taxable equivalent basis using a federal income tax rate of 34%. 17




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##### Table of Contents



Allowance and Provision For Loan Losses
    18




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##### Table of Contents



Table 4 Analysis of the Allowance for Loan Losses
 Six Months Ended June 30,(000s omitted)
    
    2008
    
    2007Balance at Beginning of Period
    
    $
    8,554
    
    
    $
    6,692Charge-Offs:Commercial, Financial and Agriculture
    
    
    (630
    )
    
    
    (534
    )Real Estate-Mortgage
    
    
    (88
    )
    
    
    (30
    )Installment Loans to Individuals
    
    
    (215
    )
    
    
    (191
    )Total Charge-Offs
    
    
    (933
    )
    
    
    (755
    )Recoveries:Commercial, Financial and Agriculture
    
    
    201
    
    
    
    102Real Estate-Mortgage
    
    
    0
    
    
    
    0Installment Loans to Individuals
    
    
    64
    
    
    
    47Total Recoveries
    
    
    265
    
    
    
    149Net Charge-Offs
    
    
    (668
    )
    
    
    (606
    )Provision for loan losses
    
    
    4,892
    
    
    
    1,088Balance at End of Period
    
    $
    12,778
    
    
    $
    7,174Ratio of Net Charge-Offs to Gross Loans
    
    
    0.14
    %
    
    
    0.13
    %
 Non-Interest Income
      19




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##### Table of Contents



Non-Interest Expense
     20




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##### Table of Contents



Financial Condition
   21




---



##### Table of Contents



Non-Performing Assets
      22




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##### Table of Contents



Table 5 Non-Performing Assets and Past Due Loans
 June 30,
    
    December 31,2008
    
    2007Non-Performing Loans:Loans Past Due 90 Days or More & Still
Accruing
    
    $
    2,191
    
    
    $
    54Non-Accrual Loans
    
    
    21,360
    
    
    
    13,056Renegotiated Loans
    
    
    944
    
    
    
    431Total Non-Performing Loans
    
    
    24,495
    
    
    
    13,541Other Non-Performing Assets:Other Real Estate
    
    
    2,001
    
    
    
    2,003REO in Redemption
    
    
    1,030
    
    
    
    1,829Other Non-Performing Assets
    
    
    203
    
    
    
    155Total Other Non-Performing Assets
    
    
    3,234
    
    
    
    3,987Total Non-Performing Assets
    
    $
    27,729
    
    
    $
    17,528Non-Performing Loans as a % of
Total Loans
    
    
    5.26
    %
    
    
    2.86
    %Allowance for Loan Losses as a % of
Non-Performing Loans
    
    
    52.17
    %
    
    
    63.18
    %Accruing Loans Past Due 90 Days or
More to Total Loans
    
    
    0.47
    %
    
    
    0.01
    %Non-performing Assets as a % of
Total Assets
    
    
    4.73
    %
    
    
    2.79
    %
 Liquidity and Interest Rate Risk Management
    23




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##### Table of Contents



Capital Management
    24




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##### Table of Contents



Regulatory Capital Requirements
   Table 6
 Capital RatiosFentura Financial, Inc.Regulatory Minimum
    
    June 30,
    
    December 31,
    
    June 30,For
Well Capitalized
    
    2008
    
    2007
    
    2007Total
Capital to risk Weighted assets
    
    
    10
    %
    
    
    11.56
    %
    
    
    11.60
    %
    
    
    12.60
    %Tier 1
Capital to risk  Weighted assets
    
    
    6
    %
    
    
    10.31
    %
    
    
    10.40
    %
    
    
    11.37
    %Tier 1
Capital to average  Assets
    
    
    5
    %
    
    
    8.98
    %
    
    
    9.00
    %
    
    
    9.60
    %
 Off Balance Sheet Arrangements
  25




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##### Table of Contents



ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    Interest Rate Sensitivity Management
   26




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##### Table of Contents



Table 7 GAP Analysis  June 30, 2008
 Within
    
    Three
    
    One to
    
    AfterThree
    
    Months to
    
    Five
    
    Five(000s omitted)
    
    Months
    
    One Year
    
    Years
    
    Years
    
    TotalEarning Assets:Federal Funds Sold
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Securities
    
    
    4,603
    
    
    
    14,196
    
    
    
    29,484
    
    
    
    17,924
    
    
    
    66,207Loans
    
    
    82,918
    
    
    
    79,223
    
    
    
    230,879
    
    
    
    71,836
    
    
    
    464,856Loans Held for Sale
    
    
    448
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    448FHLB Stock
    
    
    2,032
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    2,032Total Earning Assets
    
    $
    90,001
    
    
    $
    93,419
    
    
    $
    260,363
    
    
    $
    89,760
    
    
    $
    533,543Interest Bearing Liabilities:Interest Bearing Demand Deposits
    
    $
    93,682
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    93,682Savings Deposits
    
    
    85,237
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    85,237Time Deposits Less than $100,000
    
    
    27,433
    
    
    
    56,378
    
    
    
    30,693
    
    
    
    93
    
    
    
    114,597Time Deposits Greater than $100,000
    
    
    18,534
    
    
    
    35,244
    
    
    
    79,311
    
    
    
    0
    
    
    
    133,089Short term borrowings
    
    
    3,458
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    3,458Other Borrowings
    
    
    1,000
    
    
    
    7,026
    
    
    
    5,091
    
    
    
    890
    
    
    
    14,007Repurchase agreements
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Subordinated debentures
    
    
    14,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    14,000Total Interest Bearing Liabilities
    
    $
    243,344
    
    
    $
    98,648
    
    
    $
    115,095
    
    
    $
    983
    
    
    $
    458,070Interest Rate Sensitivity GAP
    
    $
    (153,343
    )
    
    $
    (5,229
    )
    
    $
    145,268
    
    
    $
    88,777
    
    
    $
    75,473Cumulative
Interest Rate Sensitivity GAP
    
    $
    (153,343
    )
    
    $
    (158,572
    )
    
    $
    (13,304
    )
    
    $
    75,473Interest Rate Sensitivity GAP
    
    
    (0.37
    )
    
    
    (0.94
    )
    
    
    2.26
    
    
    
    91.31Cumulative
Interest Rate  Sensitivity GAP Ratio
    
    
    (0.37
    )
    
    
    (1.32
    )
    
    
    0.95
    
    
    
    92.26
    27




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##### Table of Contents



Forward Looking Statements
  28




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##### Table of Contents



ITEM 4T CONTROLS AND PROCEDURES
 (a)
    
    Evaluation of Disclosure Controls and Procedures. The Corporations Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of the Corporations
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
as of the end of the period covered by this Form 10-Q Quarterly Report, have concluded that
the Corporations disclosure controls and procedures were adequate and effective to ensure
that material information relating to the Corporation would be made known to them by others
within the Corporation, particularly during the period in which this Form 10-Q was being
prepared.
 (b)
    
    Changes in Internal Controls. During the period covered by this report, there have
been no changes in the Corporations internal control over financial reporting that have
materially affected or are reasonably likely to materially affect the Corporations internal
control over financial reporting.
 29




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings. None
 
 Item 1A.
    
    Risk Factors With this exception of those risks described below, there have been no
material changes in the risk factors applicable to the Corporation from those disclosed in its
Annual Report on Form 10-K for the year ended December 31, 2007.
 If economic conditions deteriorate in our primary market, our results of operations
and financial condition could be adversely impacted as borrowers ability to repay
loans declines and the value of the collateral securing loan decreases.Our financial results may be adversely affected by changes in prevailing economic
conditions, including decreases in real estate values, changes in interest rate
which may cause a decrease in interest rate spreads, adverse employment conditions,
the monetary and fiscal policies of federal government and other significant
external events. Decreases in real estate values could potentially adversely affect
the value of property used as collateral for our mortgage loans. In the event that
we are required to foreclose on a property securing a mortgage loan, there can be no
assurance that we will recover funds in an amount equal to any remaining loan
balance as a result of prevailing general economic conditions, real estate values
and other factors associated with the ownership of real property. As a result, the
market value of the real estate underlying the loans may not, at any given time, be
sufficient to satisfy the outstanding principal amount of the loans. Consequently,
we would sustain loan losses and potentially incur a higher provision for loan loss
expense. Adverse changes in the economy may also have a negative effect of the
ability of borrowers to make timely repayments of their loans, which could have an
adverse impact on earnings.Our securities portfolio may be negatively impacted by fluctuations in market value.Our securities portfolio may be impacted by fluctuations in market value,
potentially reducing accumulated other comprehensive income and/or earnings.
Fluctuations in market value may be caused by decreases in interest rates, lower
market prices for securities and lower investor demand. Our securities portfolio is
evaluated for other-than-temporary impairment on at least a quarterly basis. If
this evaluation shows an impairment to cash flow connected with one or more
securities, a potential loss to earnings may occur.
 
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds. None
 
 Item 3.
    
    Defaults Upon Senior Securities. None
 
 Item 4.
    
    Submission of Matters to a Vote of Securities Holders. The registrants annual meeting
was held April 22, 2008. Three directors were elected at the meeting, each to a three year
term. The vote was as follows:
 VOTEDirector Nominee
    
    Term Expires
    
    For
    
    WithheldKenneth R. Elston
    
    
    2011
    
    
    
    1,604,688
    
    
    
    64,438Thomas L. Miller
    
    
    2011
    
    
    
    1,637,798
    
    
    
    31,328Ian W. Schonsheck
    
    
    2011
    
    
    
    1,611,236
    
    
    
    57,889
 The following directors were not up for re-election and, consequently, their terms
continue after the annual meeting: Donald L. Grill, Douglas W. Rotman, Forrest A.
Shook, Sheryl E. Stephens, J. David Karr, Thomas P. McKenney, Brian P. Petty.
 30




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##### Table of Contents



Item 5.
    
    Other Information.

Item 6.
    


    Exhibits.(a)
    
    Exhibits31.1
    
    Certificate of the President and Chief Executive Officer of
Fentura Financial, Inc. pursuant to 15 U.S.C. Section 7241, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certificate of the Chief Financial Officer of Fentura
Financial, Inc. pursuant to 15 U.S.C. Section 7241, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of the Chief Executive Officer of Fentura
Financial, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certificate of the Chief Financial Officer of Fentura
Financial, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 31




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##### Table of Contents



Fentura Financial Inc.Dated:  August 12, 2008
    /s/ Donald L. GrillDonald L. GrillPresident & CEODated:  August 12, 2008
    /s/ Douglas J. KelleyDouglas J. KelleyChief Financial Officer 32




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    Description31.1
    
    Certificate of the President and Chief Executive Officer of Fentura Financial, Inc. pursuant
to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certificate of the Chief Financial Officer of Fentura Financial, Inc. pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of the Chief Executive Officer of Fentura Financial, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certificate of the Chief Financial Officer of Fentura Financial, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 33