2 0 1 8 A N N U A L R E P O R T A S TATE OF GROW TH PR E SIDEN T A ND CEO R EPOR T GROW IN G OUR NEI GHBOR HOODS “I a m proud that the tea m at Fentura continues to work together to achieve outsta nding returns through growth of relationships a nd partnerships in the commu nities we serve.” I am excited to report that 2018 was another year of strong growth and record earnings for Fentura Financial. We grew net income for the year to $10.1 million, up from the $8.7 in 2017. This 16.6% improvement was achieved through a $3.5 million increase in net interest income, which was driven by above market growth in loans and deposits. Loans increased 14.8% for the year, ending at $772.2 million. This growth was achieved as a direct result of the team’s efforts to grow both business and residential mortgage loans in the markets we serve. Deposits increased $89.6 million throughout the year, ending at $763.1 million. Deposit growth was the direct result of an initiative to enhance our municipal deposits in local markets. This strategy, along with several other deposit growth initiatives, are expected to continue to help provide organic funding to meet future loan demand. During the year, we enhanced our capital position through record earnings and a private placement stock offering. On November 26, 2018, we released the closing of our efforts to raise capital, announcing the issuance of 980,828 shares of common stock at $22.00 per share for a total of $21.6 million, net proceeds were $20.5 million. We used the proceeds from this offering to invest in The State Bank to allow for continued organic growth, opportunistic strategic growth, and to enhance our overall capital position. The growth and performance highlighted above supported the strengthening of the Company’s stock price as well. Fentura stock closed the year at $21.00 per share, up $2.12 over the close at the end of 2017. Along with dividends, this is a 12.5% total return. 2 I am pleased to report that our outstanding 2018 performance earned the Company recognition in the industry as well. Fentura was named to the OTCQX Best 50, a ranking of top performing companies traded on the OTCQX market for the year. We were ranked 13th overall for U.S. and international companies traded on this market. Additionally, The State Bank was ranked 4th for overall financial performance for Michigan based banks for the year, as ranked by Financial Management Consulting Group. This type of recognition confirms that our operating results are outperforming most others in the industry. Recognizing the importance of technology to our future success, we have continued to grow the services delivered online, and protections we offer to secure technology-based transactions. During the year we launched online account opening, eliminating the need to visit a branch to begin or expand deposit relationships with the Bank. We expanded our network of Interactive Teller Machines (ITMs) to increase the hours each day that our clients can receive personal service. Additionally, we enhanced our capacity to monitor, flag, and proactively research potential fraudulent transactions initiated online, including bill payments. I am proud that the team at Fentura continues to work together to achieve outstanding returns through growth of relationships and partnerships in the communities we serve. Our growth, financial position, and reputation position us for a bright future. Once again, we hope you are pleased with our results and we are thankful for your continued support. Ronald L. Justice, President and CEO T H E N E I G H B O R H O O D I M PAC T PR O G R A M The Neighborhood Impact Program (NIP) through FHLBank Indianapolis (FHLBI) assists homeowners with repairs including new windows, furnaces, roofs, siding, and other deferred maintenance types of repairs with grants of up to $7,500. NIP assists existing homeowners with incomes at or below 80% of area median income to rehabilitate their homes. FHLBI works with eligible homeowners directly or through one or more community housing organizations. NIP is a good way to help preserve property values in local communities. Recently, The State Bank partnered with the Habitat for Humanity of Genesee County through the NIP to make some needed repairs and updates to the home of Edna Sabucco of Flint, Michigan. Improvements included a new roof, a handicap ramp in the front of her home, as well as handicap accessibility to her bathroom. “I had wanted to make these improvements for quite some time but didn’t have the means to do it,” said Sabucco. “The State Bank and Habitat for Humanity made my dreams a reality.” “The State Ba nk a nd Ha bitat for Hu ma nity made my drea ms a reality.” Edna Sabucco 3 GROW T H IN NUMBERS G R OW I N G CO R E D E P O S I T S Retail Accounts Opened in 2018 3,714 $14.3 MILLION in Kasasa Accounts G R OW I N G I N N OVAT I O N 11,000 Average Monthly ITM Transactions New Retail Technologies: Online Account Opening Notifi Alert System Instant Issue Debit Cards Additional ITMs in the Great Lakes Bay Region G R OW I N G H O M E OW N E R S H I P G ROW I N G LO C A L B U S I N E S S G R OW I N G W E A LT H 919 New Mortgage Loans for $235 MILLION G R OW I N G CO M M U N I T Y $33,000 12 LOCAL SCHOOL DISTRICTS donated to to support the needs of low to moderate income children and families from the staff-directed fundraising effort through the Change for Kids Program. $37,842 donated to the Food Bank of Eastern Michigan through their 2018 holiday fundraising efforts. This is the 17th year of partnership with Food Bank of Eastern Michigan. $18.3 MILLION Small Business Administration (SBA) and US Department of Agriculture Loans $132 MILLION Commercial Loans Feelin’ On Top The State Bank was ranked 14/160 in units closed and 15/160 in loan amount in the Detroit Region by the SBA. 11.8% INCREASE in Wealth Management and Trust Combined Revenue 16.8% INCREASE in Annuity Asset Totals $9.2 MILLION INCREASE in Trust Assets Under Management G ROW I N G PU B L I C F U N DS $62 Million added in funds from municipalities from the efforts of our new Public Funds Management Program added in 2018. 4 5 GROWING A S A FIN A NCI A L PA R T NER COMMERCIAL LOAN | Grand Ridge Galleria “When my loan came up for renewal at my previous bank, John Daig, my accountant, said I should check with Andy Gavulic at The State Bank. I’ve dealt with The State Bank for 40 years as a real estate attorney, but never for my Grand Ridge Complex. I was AMAZED how simple and fast the entire refinancing process took. The terms and conditions were better than the other two banks competing for my business. I definitely recommend Andy Gavulic and The State Bank to anyone in need of business and real estate financing, no matter how large the project.” RONALD W. SABO, ESQ. SBA LOAN | Cross Veterinary Clinic “I recently acquired an SBA loan from The State Bank. I was amazed at how easy and seamless the process was. Their staff was very helpful and informative requiring very little work on my end. This loan allowed me to accomplish one of my long term goals.” DR. FLEMING, Cross Veterinary Clinic SBA LOAN | Family Physical Therapy “We purchased a new building for our physical therapy clinic last fall with the help of The State Bank. They were very easy to work with and did everything they could to make things more convenient for us. The staff is very friendly and knowledgeable. Because of our experience with The State Bank, we also used them when purchasing our new home last year. We couldn’t be happier with our decision to use them for our banking needs! “ EARL AND AMBER MAYHEW, Earl Mayhew Real Estate, LLC DBA Family Physical Therapy COMMERCIAL LOAN | Alex’s Market “The State Bank financed our loan for Alex’s market in Clarkston. We wanted to go with a bank that we worked with daily. Stephanie Claborn has been awesome to work with. She always keeps us updated and is very accommodating to the daily challenges of everyday business and construction. It is a testimony to how a local business and bank can and should work together.” STEVE NANNOSHI, Owner SBA LOAN | Rejuv Ave. Skin Spa “The State Bank has been extremely helpful in educating us on our options! They helped us get a loan that best fit our business, and helped us save - making the process easy and helping every step of the way!” TRACY AUBUCHON, Owner COMMERCIAL LOAN | Morley Companies, Inc “This was Morley’s first experience with The State Bank. Morley was looking for funding for some furniture additions and The State Bank offered a very competitive loan package. With Morley’s past experience with Kevin Neumeyer, it made sense to get into this relationship. Kevin and his team were great to work with; things were seamless from the start of the process until funding was received. Morley looks forward to using The State Bank for our next funding need.” JEFF BERTULEIT, Morley Companies, Inc. COMMERCIAL LOAN | Woodhaven Senior Community ”The State Bank in Fenton has exceeded all of our business banking needs. Specifically, their team has a very good understanding of our long-term business goals. They help us achieve very efficient banking practices, whether it be with our new construction or simply our daily transactions.” DAVID DIXNER, Woodhaven Senior Community 6 7 SBA LOAN | Main Street Redevelopment GROW T H & PER FOR M A N CE R ECOGNIZED “Living in Brighton, we have always wanted to build or remodel downtown for our development company. We came across this wonderful downtown building site with the existing 1930 circa building and additional property. The two-story buildings would include offices and two high-end apartments on the second floors and possible restaurants with courtyards on the main levels. Once the concepts hit the paper, it seemed to be another common building site — so we added a pedestrian walkway between the buildings from the public parking lot to Main Street. Our vision is turning out wonderfully. Looking for a strong local bank to work with — we approached The State Bank. After seeing our vision, they knew this site was going to be the focal point of Brighton and wanted to be the bank to see our vision through. They handled everything. It was very easy working with every aspect of the bank, especially Stephanie Claborn. She was very professional and walked us through the entire project with ease. Thank you again for all of your help. The City of Brighton and surrounding communities will do nothing but gain from this project.” DAN & DONNA CHERESKO, Cheresko Development COMMERCIAL LOAN | The Naples Group “We have been very pleased with The State Bank for the past 15 years, especially the personal attention they have extended to our banking needs. Corey Ruthig has guided us through many of our complex transactions, including re- mortgaging a million dollar loan when the economy was in distress, and an SBA loan. Corey and The State Bank staff are a valuable asset to our family and we are grateful for the service and professionalism that has been extended to us.” DON LEWIS, The Naples Group 8 O T CQ X B E S T 50 Fentura Financial, Inc, was named to the OTCQX Best 50 in their annual ranking of the top 50 U.S. and international companies traded on the OTCQX market. The ranking is calculated based on an equal weighting of one-year total return and average daily dollar volume growth in the previous calendar year. “We are proud that our strong fina ncial performa nce a nd the value that we have generated for our shareholders, helped achieve this recognition as a n OTCQX Best 50. It is a n honor to be na med to this elite group of top performing national a nd international compa nies. This type of recognition confirms the continued need a nd de ma nd for commu nity ba nking in the markets we serve a nd similar markets across the nation.” Ron Justice, CEO R A N K E D #4 BY F M C The State Bank was ranked 4th overall in community banks out of 91 in Michigan by the Financial Management Consulting Group (FMC). The performance report considers many key factors such as bank size, margin, fee income, efficiency, asset quality, and earnings. #4 R A I S E D C A PI TA L On November 26, 2018, Fentura Financial, Inc. announced the final closing of the issuance of 980,828 shares at $22.00 per share for a total of $21.6 million to accredited investors private placement. 980,828 shares at $22/SHARE $21.6 MILLION TO ACCREDITED INVESTORS = 9 2018 GROW T H HIGHLIGH TS Dollars in Thousands Except Per Share Amounts B A L A N C E S H E E T A N D A S S E T Q UA L I T Y R AT I O S Net Loan to Total Deposits ALLL to Gross Loans Net Loans Charge off to Gross Loans Nonperforming Loans to Gross Loans PE R S H A R E DATA Earnings per Share Book Value per Share Tangible Book Value per Share Market Price per Share Dividends per Share 12/31/18 12/31/17 12/31/16 12/31/15 12/31/14 100.60% 99.32% 85.01% 99.98% 95.83% 0.58% 0.02% 0.17% 0.54% 0.56% 0.92% (0.02)% (0.05)% (0.03)% 0.09% 0.39% 0.09% 1.38% 0.01% 0.06% 12/31/18 12/31/17 12/31/16 12/31/15 12/31/14 $2.65 $19.31 $18.32 $21.00 $0.24 $2.39 $16.37 $14.95 $18.88 $0.20 $1.70 $14.00 $12.41 $16.00 $0.40 $1.87 $12.90 $12.90 $13.86 $0.12 $1.35 $11.24 $11.24 $9.90 $0.09 CONDENSED CONSOLIDATED BAL ANCE SHEETS A S S E T S 12/31/18 12/31/17 12/31/16 12/31/15 12/31/14 Cash and Cash Equivalents $23,412 $15,928 $78,313 $19,425 $19,522 Total Securities Loans held for Sale Gross Loans 94,721 903 55,323 2,067 72,458 3,869 25,708 2,176 33,008 1,320 772,227 672,530 515,775 379,384 318,654 Less Allowance for Loan Losses 4,488 3,603 2,851 3,505 4,406 Net Loans All Other Assets Total Assets 767,739 668,927 512,924 375,879 314,248 39,675 39,198 35,786 23,214 25,484 $926,450 $781,443 $703,350 $446,402 $393,582 L I A B I L I T I E S A N D S H A R E H O L D E R S’ E Q U I T Y Total Deposits Total Borrowed Funds Accrued Interest and Other Liabilities 12/31/18 12/31/17 12/31/16 12/31/15 12/31/14 $763,124 $673,505 $603,367 $375,971 $327,923 69,000 4,810 46,000 45,000 2,491 4,323 34,775 3,182 34,817 2,700 Total 1 Year Return to Shareholders (%) 12.50% 19.25% 18.33% 41.21% 43.33% Total Liabilities 836,934 721,996 652,690 413,928 365,440 Common Shares Outstanding 4,636,455 3,631,933 3,619,282 2,517,748 2,502,731 Total Shareholders' Equity 89,516 59,447 50,660 32,474 28,142 Average Common Shares Outstanding 3,812,433 3,625,568 2,608,903 2,508,556 2,495,156 Total Liabilities and Shareholders' Equity $926,450 $781,443 $703,350 $446,402 $393,582 PE R FO R M A N C E R AT I O S 12/31/18 12/31/17 12/31/16 12/31/15 12/31/14 CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED Return on Average Assets 1.20% 1.19% Return on Average Shareholders' Equity 15.05% 15.38% Net Interest Margin Yield (FTE) 3.86% 4.08% 0.93% 9.99% 3.81% 1.12% 15.48% 3.90% Efficiency Ratio 65.23% 66.20% 74.56% 71.06% 0.94% 13.03% 4.04% 75.15% C A PI TA L R AT I O S 12/31/18 12/31/17 12/31/16 12/31/15 12/31/14 Total Capital to Risk Weighted Assets* Tier 1 Capital to Risk Weighted Assets* CET1 Capital to Risk Weighted Assets* Tier 1 Capital to Average Assets* 12.76% 12.15% 12.15% 9.91% 10.46% 9.91% 9.91% 8.57% 11.24% 10.72% 10.72% 11.69% 11.91% 11.00% 11.00% 9.90% 13.05% 11.80% 11.80% 9.83% *Indicates ratios attributable to The State Bank I N T E R E S T & D I V I D E N D I N CO M E 12/31/18 12/31/17 12/31/16 12/31/15 12/31/14 $34,371 $28,765 $18,119 $15,983 $13,848 Loans, Including Fees Investments Total Interest and Dividend Income Total Interest Expense Net Interest Income Provision for Loan Losses 1,979 36,350 5,827 30,523 1,057 Net Interest Income, After Provision for Loan Losses 29,466 Total Non-Interest Income Total Non-Interest Expenses Income Before Federal Income Taxes Federal Income Taxes Net Income 8,277 25,310 12,433 2,319 $10,114 1,346 30,111 3,120 26,991 609 26,382 8,988 23,818 11,552 2,876 $8,676 526 18,645 2,372 16,273 (900) 17,173 6,658 17,097 6,734 2,293 670 16,653 2,153 14,500 (1,000) 15,500 6,575 14,976 7,099 2,407 807 14,655 1,713 12,942 (450) 13,392 5,725 14,029 5,088 1,728 $4,441 $4,692 $3,360 (Dollars in Thousands) Balance Sheet Gross Loans Total Deposits Total Assets 3 4 4 1 8 7 , 7 2 2 2 7 7 , , 4 2 1 3 6 7 0 5 3 3 0 7 , 0 3 5 2 7 6 , 5 0 5 3 7 6 , , 7 6 3 3 0 6 5 7 7 5 1 5 , , 2 0 4 6 4 4 4 8 3 9 7 3 , , 1 7 9 5 7 3 2 8 5 3 9 3 , 3 2 9 7 2 3 , 4 5 6 8 1 3 , 0 5 4 6 2 9 , Net Income (Dollars in Thousands) 10,114 Total One Year Return to Shareholders (%) Market Price Per Share Return on Average Assets Efficiency Ratio 8,676 43.33% 41.21% 4,692 4,441 3,360 18.33% 19.25% 12.50% $21.00 $18.88 1.12% 1.19% 1.20% 0.94% 0.93% 75.15% 71.06% 74.56% 66.20% 65.23% $16.00 $13.86 $9.90 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 10 11 LOC AT I ONS B R A N C H E S Main Branch 175 N. Leroy Street Fenton, MI 48430 (810) 629-2263 Silver Parkway Branch 15095 Silver Parkway Fenton, MI 48430 (810) 750-5605 Vg’s Food Center Branch 18005 Silver Parkway Fenton, MI 48430 (810) 750-8781 Linden Branch 107 Main Street Linden, MI 48451 (810) 750-8794 Holly Branch 4043 Grange Hall Road Holly, MI 48442 (810) 750-8701 Grand Blanc South Branch 7606 S. Saginaw Street Grand Blanc, MI 48439 (810) 695-9601 Grand Blanc North Branch 1401 E. Hill Road Grand Blanc, MI 48439 (810) 603-9500 Brighton Branch 134 N. First Street Brighton, MI 48116 (810) 534-0800 New Lothrop Branch 9380 Genesee Street New Lothrop, MI 48460 (810) 638-3003 Montrose Branch 200 W. State Street Montrose, MI 48457 (810) 639-6101 Birch Run Branch 8412 Main Street Birch Run, MI 48415 (989) 624-6280 Burt Branch 10811 Albee Road Burt, MI 48417 (989) 770-4050 Chesaning Branch 12771 Brady Road Chesaning, MI 48616 (989) 845-7070 St. Charles Branch 207 S. Saginaw Street St. Charles, MI 48655 (989) 865-9434 Thomas Township Branch 7590 Gratiot Road Saginaw, MI 48609 (989) 781-2350 AT M O N LY LO C AT I O N S Thompson Road 3237 W. Thompson Road Fenton, MI 48430 Alpine Food Plaza 606 W. Broad Street Linden, MI 48451 Chesaning 148 Chapman Street Chesaning, MI 48616 L OA N PR O D U C T I O N O F F I C E S Saginaw Loan Center 301 E. Genesee Avenue, Suite 01 Saginaw, MI 48607 Flint Loan Center Flint Ferris Wheel Building 615 S. Saginaw St, 7th Floor Flint, MI 48502 (800) 535-0517 www.fentura.com www.thestatebank.com