Fentura Financial, Inc. Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[x]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

OR

[ ] 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.
(Exact name of registrant as specified in its charter)
Michigan
(State or other jurisdiction of
incorporation or organization)		 38-2806518
(IRS Employer Identification No.)

175 N Leroy, P.O. Box 725, Fenton, Michigan 48430
(Address of Principal Executive Offices)

            (810) 629-2263            
(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [__] No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes [X] No [__]

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: November 1, 2004

Class — Common Stock Shares Outstanding — 1,888,488

Fentura Financial Inc.

Index to Form 10-Q

                                                                            

Part I - Financial Information

         Item 1 - Consolidated Financial Statements (Unaudited)

         Item 2 - Management's Discussion and Analysis of
                        Financial Condition and Results of Operations

         Item 3 - Quantitative and Qualitative Disclosures about Market Risk

         Item 4 - Controls and Procedures


Part II - Other Information

         Item 1 - Legal Proceedings

         Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

         Item 3 - Defaults Upon Senior Securities

         Item 4 - Submission of Matters to a Vote of Security Holders

         Item 5 - Other Information

         Item 6 - Exhibits and Reports on Form 8-K

Signatures

Exhibit Index 		Page



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12

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25

25

25

25

25

25

25

26

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2

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Fentura Financial, Inc.
Consolidated Balance Sheets

(000's omitted Except share data)		 SEPT 30,
2004
(unaudited)		 DEC 31,
2003
ASSETS            
   Cash and due from banks   $ 23,842   $ 16,509  
   Federal funds sold    17,500    3,650  
     Total cash & cash equivalents    41,342    20,159  
   Securities-available for sale    106,085    113,833  
   Securities-held to maturity, (fair value of $18,856  
      at Sept. 30, 2004 and $12,519 at December 31, 2003)    18,583    12,169  
       Total securities    124,668    126,002  
   Loans held for sale    497    1,095  
   Loans:  
     Commercial    235,493    146,450  
     Real estate loans - mortgage    28,586    18,335  
     Real estate loans - construction    55,989    32,913  
     Consumer loans    74,489    55,547  
   Total loans    394,557    253,245  
   Less: Allowance for loan losses    (5,173 )  (3,414 )
   Net loans    389,384    249,831  
    Bank Owned Life Insurance    6,787    6,458  
   Bank premises and equipment    14,034    9,606  
    Federal Home Loan Bank stock    2,219    854  
   Accrued interest receivable    2,271    1,884  
    Goodwill and other intangible assets    9,383    0  
   Other assets    3,289    4,077  
     Total assets   $ 593,874   $ 419,966  
   
LIABILITIES  
   Deposits:  
        Non-interest bearing deposits   $ 83,264   $ 58,708  
     Interest bearing deposits    421,793    289,817  
       Total deposits    505,057    348,525  
   Borrowings    2,762    3,449  
   Federal Home Loan Bank Advances    19,091    1,108  
    Repurchase Agreements    10,000    12,500  
    Subordinated debentures    12,000    12,000  
   Accrued taxes, interest and other liabilities    2,944    1,502  
       Total liabilities    551,854    379,084  
SHAREHOLDERS' EQUITY  
   Common stock - no par value  
   1,885,662 shares issued (1,880,485 in Dec. 2003)    32,962    32,769  
   Retained earnings    9,431    8,238  
   Accumulated other comprehensive loss    (373 )  (125 )
     Total shareholders' equity    42,020    40,882  
       Total Liabilities and Shareholders' Equity   $ 593,874   $ 419,966  

See notes to consolidated financial statements.

3

Fentura Financial, Inc.
Consolidated Statements of Income (Unaudited)

Three Months Ended
   September 30, 		Nine Months Ended
   September 30,
(000's omitted except per share data) 2004 2003 2004 2003
INTEREST INCOME                    
   Interest and fees on loans   $ 5,969   $ 3,925   $ 15,799   $ 11,827  
   Interest and dividends on  
     securities:  
     Taxable    699    587    2,274    1,247  
     Tax-exempt    188    175    531    515  
   Interest on federal funds sold    50    86    71    147  
         Total interest income    6,906    4,773    18,675    13,736  
   
   INTEREST EXPENSE  
   Deposits    1,896    1,368    5,110    3,957  
   Borrowings    331    81    893    131  
         Total interest expense    2,227    1,449    6,003    4,088  
   
   NET INTEREST INCOME    4,679    3,324    12,672    9,648  
   Provision for loan losses    383    122    1,019    1,086  
     Net interest income after  
       Provision for loan losses    4,296    3,202    11,653    8,562  
   
   NONINTEREST INCOME  
     Service charges on deposit accounts    975    964    2,847    2,706  
     Gain on sale of mortgages    124    373    365    1,161  
     Trust income    254    140    703    373  
     Gain (Loss) on sale of securities    0    0    0    31  
       Gain (Loss) on sale of fixed assets    0    0    (2 )  201  
     Other income and fees    344    330    1,226    963  
       Total noninterest income    1,697    1,807    5,139    5,435  
   
   NONINTEREST EXPENSE  
     Salaries and employee benefits    2,675    1,818    7,332    5,416  
     Occupancy    425    275    1,193    836  
     Furniture and equipment    572    365    1,559    1,088  
     Loan and collection    56    70    240    213  
     Advertising and promotional    128    83    386    270  
     Other operating expenses    969    814    2,702    2,270  
       Total noninterest expense    4,825    3,425    13,412    10,093  
   
   INCOME BEFORE TAXES    1,168    1,584    3,380    3,904  
   Applicable income taxes    312    417    882    1,006  
   NET INCOME   $ 856   $ 1,167   $ 2,498   $ 2,898  
   
   Per share:  
   Net income - basic   $ 0.45   $ 0.62   $ 1.33   $ 1.54  
  
 
 
 
   Net income - diluted   $ 0.45   $ 0.62   $ 1.32   $ 1.53  
  
 
 
 
   Cash Dividends declared   $ 0.23   $ 0.21   $ 0.69   $ 0.84  
  
 
 
 

See notes to consolidated financial statements.

4

Fentura Financial, Inc.
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Nine Months
Ended		 Nine Months
Ended
(000's omitted) September 30,
2004		 September 30,
2003
COMMON STOCK            
   Balance, beginning of period   $ 32,769   $ 30,236  
   Issuance of shares under  
     Director stock purchase plan &  
     Dividend reinvestment program    315    308  
    Repurchase stock    (122 )  (873 )
   Balance, end of period    32,962    29,671  
   
RETAINED EARNINGS  
   Balance, beginning of period    8,238    9,395  
     Net income    2,498    2,898  
        Cash dividends declared    (1,305 )  (1,582 )
   Balance, end of period    9,431    10,711  
   
ACCUMULATED OTHER COMPREHENSIVE  
   INCOME (LOSS)  
   Balance, beginning of period    (125 )  297  
     Change in unrealized gain (loss)  
     on securities, net of tax    (248 )  (241 )
   Balance, end of period    (373 )  56  
TOTAL SHAREHOLDERS' EQUITY   $ 42,020   $ 40,438  

See notes to consolidated financial statements.

5

Fentura Financial, Inc.
Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended
September 30,
(000's omitted) 2004 2003
             
OPERATING ACTIVITIES:  
   
   Net income   $ 2,498   $ 2,898  
   Adjustments to reconcile net income to cash  
     Provided by Operating Activities:  
       Depreciation and amortization    1,050    744  
       Provision for loan losses    1,019    1,086  
       Amortization (accretion) on securities    461    625  
       Loans originated for sale    (23,544 )  (66,092 )
       Proceeds from the sale of loans    25,208    70,588  
            Gain on sale of securities    0    (31 )
            Gain on sales of fixed assets    2    (201 )
       Gain on sales of loans    (366 )  (1,161 )
            Net increase in bank owned life insurance    (145 )  (170 )
       Net (increase) decrease in interest receivable &  
       other assets    1,691    (1,183 )
       Net increase (decrease) in interest payable &  
       other liabilities    (172 )  96  
Total Adjustments    5,204    4,301  
Net Cash Provided By (Used In) Operating Activities    7,702    7,199  
   
Cash Flows From Investing Activities:  
   
   Proceeds from maturities of securities - HTM    3,565    5,788  
   Proceeds from maturities of securities - AFS    2,626    6,027  
    Proceeds from calls of securities - HTM    3    613  
   Proceeds from calls of securities - AFS    45,840    19,400  
    Proceeds from sales of securities - AFS    0    10,998  
   Purchases of securities - HTM    (9,966 )  (4,366 )
   Purchases of securities - AFS    (15,751 )  (100,685 )
   Net increase in loans    (43,995 )  (13,016 )
    Net cash from acquisition of WMFC    2,080    0  
   Capital expenditures    (743 )  (60 )
Net Cash Provided By (Used in) Investing Activities    (16,341 )  (75,301 )
   
Cash Flows From Financing Activities:  
   
   Net increase (decrease) in deposits    46,706    71,525  
   Net increase (decrease) in borrowings    (13,272 )  (99 )
   Net increase (decrease) in repurchase agreements    (2,500 )  12,500  
   Net proceeds from stock issuance and purchase    193    (565 )
   Cash dividends    (1,305 )  (1,582 )
Net Cash Provided By (Used In) Financing Activities    29,822    81,779  
   
NET INCREASE IN CASH AND CASH EQUIVALENTS   $ 21,183   $ 13,677  
   
CASH AND CASH EQUIVALENTS - BEGINNING   $ 20,159   $ 30,562  
CASH AND CASH EQUIVALENTS - ENDING   $ 41,342   $ 44,239  
   
CASH PAID FOR:  
   INTEREST   $ 5,511   $ 4,021  
   INCOME TAXES   $ 430   $ 688  
Noncash investing and financing activities:  
   Securities acquired (including FHLB)   $ 26,973  
   Loans acquired    97,277  
   Premises and equipment acquired    4,737  
   Acquisition intangibles recorded    9,578  
   Other assets acquired    900  
   Deposits assumed    109,828  
   Borrowings assumed    30,568  
   Other liabilities assumed    1,149  
   Equity Value    8,220  

6

Fentura Financial, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)


(000's Omitted)		 Three Months Ended
September 30,		 Nine Months Ended
September 30,
2004 2003 2004 2003

Net Income		     $ 856   $ 1,167   $ 2,498   $ 2,898  
Other comprehensive income (loss), net of tax:  
   Unrealized holding gains (losses) arising  
       during period    1,212    (342 )  (248 )  (272 )
   Less: reclassification adjustment for  
       gains/losses included in net income    0    0    0    31  
Other comprehensive income (loss)    1,212    (342 )  (248 )  (241 )
Comprehensive income (loss)   $ 2,068   $ 825   $ 2,250   $ 2,657  

Fentura Financial, Inc.
Notes to Consolidated Financial Statements (Unaudited)

Note 1. Basis of presentation

The consolidated financial statements at December 31, 2003 include Fentura Financial, Inc. (the Corporation) and its wholly owned subsidiaries, The State Bank in Fenton, Michigan and Davison State Bank in Davison, Michigan. The September 30, 2004 consolidated financial statements also include West Michigan Community Bank in Hudsonville, Michigan (collectively the Banks). As further discussed in Note 5, on March 15, 2004, the Corporation completed the acquisition of West Michigan Financial Corporation (WMFC) and its subsidiary, West Michigan Community Bank (WMCB). WMFC was merged with and into the Corporation on the date of the acquisition. WMCB remains a subsidiary of the Corporation. The acquisition was accounted for as a purchase and accordingly, these financial statements include the results of operations of WMFC and WMCB subsequent to March 15, 2004. Intercompany transactions and balances are eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions for Form — 10Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s annual report on Form 10-K for the year ended December 31, 2003.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.

All share and per share data has been adjusted for the 10% stock dividend paid on February 13, 2004.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

7

Stock Option Plans

The Nonemployee Director Stock Option Plan provides for the grant of options to nonemployee directors to purchase the Corporation’s common stock on April 1 each year. The purchase price of the shares is the fair market value at the date of the grant, and there is a three-year vesting period before options may be exercised. Options to acquire no more than 7,392 shares of stock may be granted under the Plan in any calendar year and options to acquire not more than 73,920 shares in the aggregate may be outstanding at any one time.

The Employee Stock Option Plan provides for the grant of options to eligible employees to purchase the Corporation’s common stock at or above, the fair market value of the stock at the date of the grant. Awards granted under this plan are limited to an aggregate of 79,200 shares. The administrator of the plan is a committee of directors. The administrator has the power to determine the number of options to be granted, the exercise price of the options and other terms of the options, subject to consistency with the terms of the plan. Options covering 14,575 shares were granted under this Plan on June 26, 2003.

The following table summarizes stock option activity:

Number of
Options		 Weighted
Average Price
Options outstanding at December 31, 2002      25,044   $ 23.83  
Options granted 2003    14,575    31.14  
Options exercised 2003    (1,822 )  17.58  
Options forfeited 2003    (3,036 )  23.96  
Options outstanding at December 31, 2003    34,761    26.99  
Options granted 2004    0    0.00  
Options forfeited 2004    (110 )  34.25  
Options outstanding at September 30, 2004    34,651   $ 26.99  

The stock option plans are accounted for in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) as permitted under Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS 123). In accordance with APB 25, no compensation expense is required nor has been recognized for the options issued under existing plans. Had the Corporation chosen not to elect APB 25, SFAS 123 would apply and compensation expense would have been recognized, and the Corporation’s earnings would have been as follows (in thousands, except per share data):

Three Months Ended
September 30,		 Nine Months Ended
September 30,
2004 2003 2004 2003
     Net Income                    
          As reported   $ 856   $ 1,167   $ 2,498   $ 2,898  
          Proforma    850    1,150    2,480    2,862  
   
     Basic net income per  
          share  
          As reported    0.45    0.62    1.33    1.54  
          Proforma    0.45    0.61    1.32    1.52  
   
     Diluted net income per  
          share  
          As reported    0.45    0.62    1.32    1.53  
          Proforma    0.45    0.61    1.31    1.50  

Proforma net income includes compensation cost for the Corporation’s stock option plan based on the fair values of the grants as of the dates of the awards consistent with the method prescribed by SFAS 123. The fair value of each option grant is estimated using the Black-Scholes option-pricing model. Assumptions used in the model for options granted during 2003 were as follows: an expected life of 6 years, a dividend yield of 3.6%, a risk free return of 2.78% and expected volatility of 24% resulting in a value of $5.97 per option.

8

Note 2. Earnings per common share

A reconciliation of the numerators and denominators used in the computation of basic earnings per common share and diluted earnings per common share is presented below. Earnings per common share are presented below for the three and nine months ended September 30, 2004 and 2003:

Three Months Ended
September 30,		 Nine Months Ended
September 30,
2004 2003 2004 2003
Basic Earnings Per Common Share:                    
Numerator  
   Net Income   $ 856,000   $ 1,167,000   $ 2,498,000   $ 2,898,000  
Denominator  
   Weighted average common shares  
   Outstanding    1,885,114    1,877,550    1,883,040    1,884,262  
Basic earnings per common share   $ 0.45   $ 0.62   $ 1.33   $ 1.54  
Diluted Earnings Per Common Share:  
Numerator  
   Net Income   $ 856,000   $ 1,167,000   $ 2,498,000   $ 2,898,000  
Denominator  
   Weighted average common shares  
   Outstanding for basic earnings per  
   Common share    1,885,114    1,877,550    1,883,040    1,884,262  
   
Add: Dilutive effects of assumed  
   Exercises of stock options    12,582    6,709    9,329    6,817  
   Weighted average common shares  
   And dilutive potential common  
   Shares outstanding    1,897,696    1,884,259    1,892,369    1,891,079  
Diluted earnings per common share   $ 0.45   $ 0.62   $ 1.32   $ 1.53  

Stock options for 264 shares and 5,096 shares of common stock for the three and nine month periods ended September 30, 2004 and stock options for 20,886 shares and 6,311 shares of common stock for the three and nine month periods ended September 30, 2003 were not considered in computing diluted earnings per common share because they were not dilutive.

Note 3. Commitments and contingencies

There are various contingent liabilities that are not reflected in the financial statements including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the Corporation’s consolidated financial condition or results of operations.

9

Note 4. Securities

September 30, 2004 securities and year-end 2003 securities are as follows:

Available for Sale
September 30, 2004		 Fair Value Gross Unrealized Gains Gross Unrealized Losses
U.S. Government & federal agency     $ 44,659   $ 73   $ (138 )
  State and Municipal    6,975    127    (12 )
  Mortgage-backed    53,406    70    (686 )
  Corporate    0    0    0  
  Equity securities    1,045    0    0  
      Total   $ 106,085   $ 155   $ (836 )
December 31, 2003  
  U.S. Government & federal agency   $ 62,882   $ 243   $ (38 )
  State and Municipal    6,791    83    (5 )
  Mortgage-backed    42,744    82    (571 )
  Corporate    1,021    16    0  
  Equity securities    395    0    0  
      Total   $ 113,833   $ 424   $ (614 )

Held to Maturity
September 30, 2004		 Amortized Cost Gross Unrealized Gain Gross Unrealized Losses Fair Value
State & municipal     $ 18,558   $ 309   $ (38 ) $ 18,829  
Mortgage-backed    25   $ 2   $ 0   $ 27  
      Total   $ 18,583   $ 311   $ (38 ) $ 18,856  
December 31, 2003  
State & municipal   $ 12,169   $ 364   $ (14 ) $ 12,519  
      Total   $ 12,169   $ 364   $ (14 ) $ 12,519  

Note 5. Acquisition

On October 15, 2003, the Corporation announced the signing of a definitive agreement to acquire West Michigan Financial Corporation (“WMFC”), a commercial bank headquartered in Hudsonville, Michigan. The purpose of the acquisition was to establish a presence in the West Michigan market resulting in a foundation to grow the Corporations asset base, primarily loans, in that market. Under the terms of the transaction, the Corporation acquired all of the outstanding stock of WMFC in exchange for cash. The total cost of the transaction was $12.9 million. The Corporation closed the transaction on March 15, 2004.

The acquisition has been accounted for using the purchase method of accounting, and, accordingly, the purchase price has been allocated to the tangible and identified intangible assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. Identified intangible assets and purchase accounting fair value adjustments are being amortized under various methods over the expected lives of the corresponding assets and liabilities. Goodwill will not be amortized, but will be reviewed for impairment on a yearly basis. Identified intangible assets aggregate to $1.7 million and include a core deposit intangible and customer relationship value related to WMFC’s loan, deposit and wealth management customers. Goodwill aggregates to $7.9 million.

In conjunction with the acquisition, the fair values of significant assets and liabilities assumed are as follows, stated in thousands of dollars:

Cash and cash equivalents     $ 15,926  
Securities    26,973  
Loans    97,277  
Acquisition intangibles    9,578  
Deposits    109,828  
Other borrowings    27,368  

10

The following table presents pro forma information stated in thousands of dollars for the nine months ended September 30, 2004 and the year ended December 31, 2003 as if the acquisition of WMFC had occurred at the beginning of 2004 and 2003. The pro forma information includes adjustments for the amortization of intangibles arising from the transaction, the elimination of acquisition related expenses, and the related income tax effects. WMFC has been included in the results since March 15, 2004. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed dates.

2004 2003
Interest income     $ 20,066   $ 25,333  
Interest expense    6,431    8,185  
     Net interest income    13,635    17,148  
Provision for loan losses    1,056    2,464  
     Net interest income after provision    12,579    14,684  
Noninterest income    5,402    8,739  
Noninterest expense    14,403    18,905  
     Income before federal income tax    3,578    4,518  
Federal income tax expense    944    1,131  
Net income   $ 2,634   $ 3,387  
   
Basic earnings per share   $ 1.40   $ 1.80  
Diluted earnings per share    1.39    1.79  


11

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances, which could affect these judgments, include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and determining the fair value of securities and other financial instruments.

As indicated in the income statement, earnings for the three months ended September 30, 2004 were $856,000 compared to $1,167,000 for the same period in 2003. Year to date earnings for the first nine months of 2004 were $2,498,000 compared to $2,898,000 for the same period in 2003. Earnings decreased in the third quarter of 2004 due to lower noninterest income and higher noninterest expense. The most significant increase in net interest income is due to the Corporation completing the acquisition of West Michigan Financial Corporation (“WMFC”) on March 15, 2004. Also net interest income did increase in the other two subsidiaries due to higher loan and security balances during the first nine months of 2004 compared with the same period in 2003. WMFC experienced operating losses in 2002 and 2003. The company has operated profitably during the first nine months of 2004 prior to and after the acquisition by Fentura Financial. Carrying costs associated with the Trust Preferred Securities issued in connection with the acquisition, coupled with legal, accounting and consulting acquisition expenses more than offset the income contribution of West Michigan Community Bank since the date of acquisition. The Corporation continues to focus on core banking activities and new opportunities in current and surrounding markets.

Net income per share — basic was $0.45 in the third quarter of 2004 compared to $0.62 net income per share – basic for the same period in 2003. Net income per share – basic was $1.33 and diluted was $1.32 in the first nine months of 2004 compared to $1.54 for net income – basic and diluted was $1.53 for the same period in 2003.

Net Interest Income

Net interest income and average balances and yields on major categories of interest-earning assets and interest-bearing liabilities for the nine months ended September 30, 2004 and 2003 are summarized in Table 2. The effects of changes in average interest rates and average balances are detailed in Table 1 below.

Table 1   NINE MONTHS ENDED
    SEPTEMBER 30,
2004 COMPARED TO 2003
 INCREASE (DECREASE)
       DUE TO:
(000'S OMITTED) VOL YIELD/
RATE		 TOTAL
TAXABLE SECURITIES     $ 954   $ 73   $ 1,027  
TAX-EXEMPT SECURITIES    32    (6 )  26  
FEDERAL FUNDS SOLD    (86 )  10    (76 )
   
TOTAL LOANS    6,006    (1,989 )  4,017  
LOANS HELD FOR SALE    (62 )  3    (59 )
   TOTAL EARNING ASSETS    6,844    (1,909 )  4,935  
   
INTEREST BEARING DEMAND DEPOSITS    333    196    529  
SAVINGS DEPOSITS    302    92    394  
TIME CD'S $100,000 AND OVER    200    (4 )  196  
OTHER TIME DEPOSITS    431    (397 )  34  
OTHER BORROWINGS    714    48    762  
   TOTAL INTEREST BEARING LIABILITIES    1,980    (65 )  1,915  
      NET INTEREST INCOME   $ 4,864   $(1,844 ) $ 3,020  


12

As indicated in Table 1, during the nine months ended September 30, 2004, net interest income increased compared to the same period in 2003, principally because of the increase in securities interest income and the increase in loan interest income. Both loan and investment interest income increased due to higher balances during the first nine months of 2004 compared to the same period in 2003. Interest expense increased compared to the first nine months of 2003 due to the increase in deposit balances and an increase in borrowings for the Corporation.

Net interest income (displayed with consideration of full tax equivalency), average balance sheet amounts, and the corresponding yields for the three months ended September 30, 2004 and 2003 are shown in Table 2. Actual net interest income for the nine months ended September 30, 2004 was $13,020,000, an increase of $3,020,000, or 23.2%, over the same period in 2003. The primary factor contributing to the net interest income increase was the addition of West Michigan Community Bank, which increased net interest income $2,478,000. Higher interest income also resulted in part from an increase in loan and investment income resulting from higher balances carried at the Corporation’s other subsidiary banks during the first nine months of 2004 compared to the same period in 2003. However, the increased volume was at a lower spread and as a result the net interest margin declined during the 2004 period.

Management reviews economic forecasts and strategy on a monthly basis. Accordingly, the Corporation will continue to strategically manage the balance sheet structure in an effort to create stability in net interest income. The Corporation expects to continue to seek out new loan opportunities while continuing to maintain sound credit quality.

As indicated in Table 2, for the nine months ended September 30, 2004, the Corporation’s net interest margin (with consideration of full tax equivalency) was 3.60% compared with 4.02% for the same period in 2003. This decline is attributable to the impact of an increase in volume at a lower spread, which helped increase net interest income but decreased the net interest margin. The Corporation’s net interest margin has increased during the last three months with the Federal Reserve increasing interest rates during the third quarter of 2004.

Average earning assets increased 45.1% or approximately $150,144,000, of which $95,160,000 was attributable to West Michigan Community Bank, comparing the first nine months of 2004 to the same time period in 2003. Loans, the highest yielding component of earning assets, represented 72.9% of earning assets in 2004 compared to 70.0% in 2003. Average interest bearing liabilities increased 53.0% or $145,482,000, of which $71,719,000 was attributable to West Michigan Community Bank, comparing the first nine months of 2004 to the same time period in 2003. Non-interest bearing deposits amounted to 15.1% of average earning assets in the first nine months of 2004 compared with 15.5% in the same time period of 2003.

Management continually monitors the Corporation’s balance sheet to insulate net interest income from significant swings caused by interest rate volatility. If market rates change in 2004, corresponding changes in funding costs will be considered to avoid any potential negative impact on net interest income. The Corporation’s policies in this regard are further discussed in the section titled “Interest Rate Sensitivity Management.”

13

Table 2
 NINE MONTHS ENDED SEPTEMBER 30,
AVERAGE BALANCES AND RATES
(000's omitted)(Annualized)
ASSETS 		AVERAGE
BALANCE 		2004
INCOME/
EXPENSE 		YIELD/
RATE 		AVERAGE
BALANCE 		2003
INCOME/
EXPENSE 		YIELD/
 RATE
   Securities:                            
     U.S. Treasury and Government Agencies   $ 99,478   $ 2,157    2.90 % $ 54,272   $ 1,150    2.83 %
     State and Political (1)    21,716    805    4.95 %  20,859    779    4.99 %
     Other    1,498    117    10.43 %  2,959    97    4.38 %
     Total Securities    122,692    3,079    3.35 %  78,090    2,026    3.47 %
     Fed Funds Sold    7,967    71    1.19 %  19,146    147    1.03 %
   Loans:  
     Commercial    250,252    11,059    5.90 %  158,533    7,898    6.66 %
     Tax Free (1)    4,707    221    6.27 %  5,280    259    6.56 %
     Real Estate-Mortgage    26,482    1,295    6.53 %  14,361    791    7.36 %
     Consumer    69,299    3,240    6.25 %  54,319    2,850    7.01 %
   Total loans    350,740    15,815    6.02 %  232,493    11,798    6.78 %
   Allowance for Loan Losses    (4,638 )  (3,229 )
   Net Loans    346,102    15,815    6.10 %  229,264    11,798    6.88 %
   Loans Held for Sale    1,369    58    5.66 %  2,895    117    5.40 %
   TOTAL EARNING ASSETS   $ 482,768   $ 19,023    5.26 % $ 332,624   $ 14,088    5.66 %
   Cash Due from Banks    25,405            18,282
   All Other Assets    32,407            19,983
TOTAL ASSETS   $ 535,942           $367,660
LIABILITIES & SHAREHOLDERS' EQUITY:  
   Deposits:  
   Interest bearing - DDA   $ 102,293    868    1.13 % $ 51,633    339    0.88 %
   Savings Deposits    147,009    1,348    1.22 %  111,601    954    1.14 %
   Time CD's $100,000 and Over    39,012    870    2.98 %  30,074    674    3.00 %
   Other Time CD's    90,910    2,024    2.97 %  74,708    1,990    3.56 %
   Total Deposits    379,224    5,110    1.80 %  268,016    3,957    1.97 %
   Other Borrowings    40,567    893    2.94 %  6,293    131    2.78 %
   INTEREST BEARING LIABILITIES   $ 419,791   $ 6,003    1.91 % $ 274,309   $ 4,088    1.99 %
   Non-Interest bearing - DDA    72,723            51,458
   All Other Liabilities    1,988            1,440
   Shareholders' Equity    41,440            40,453
   TOTAL LIABILITIES & SHAREHOLDERS'
   EQUITY		   $ 535,942           $367,660
Net Interest Rate Spread              3.35 %            3.67 %
Net Interest Income /Margin        $ 13,020    3.60 %      $ 10,000    4.02 %

(1)     – Presented on a fully taxable equivalent basis using a federal income tax rate of 34%.

14

Table 3
 THREE MONTHS ENDED SEPTEMBER 30,
AVERAGE BALANCES AND RATES
(000's omitted)(Annualized)
ASSETS 		AVERAGE
BALANCE 		2004
INCOME/
EXPENSE 		YIELD/
RATE 		AVERAGE
BALANCE 		2003
INCOME/
EXPENSE 		YIELD/
 RATE
   Securities:                            
     U.S. Treasury and Government Agencies   $ 89,319   $ 642    2.89 % $ 72,943   $ 563    3.06 %
     State and Political (1)    23,067    277    4.97 %  20,481    261    5.13 %
     Other    3,262    57    7.03 %  2,281    24    4.17 %
     Total Securities    115,648    984    3.42 %  95,705    852    3.53 %
     Fed Funds Sold    14,679    50    1.37 %  35,921    86    0.95 %
   Loans:  
     Commercial    283,684    4,262    6.04 %  162,396    2,614    6.39 %
     Tax Free (1)    4,655    73    6.31 %  5,105    85    6.61 %
     Real Estate-Mortgage    25,288    432    6.87 %  16,461    292    7.04 %
     Consumer    73,422    1,188    6.51 %  54,346    924    6.75 %
   Total loans    387,049    5,955    6.19 %  238,308    3,915    6.52 %
   Allowance for Loan Losses    (5,011 )  (3,184 )
   Net Loans    382,038    5,955    6.27 %  235,124    3,915    6.61 %
   Loans Held for Sale    3,175    38    4.81 %  2,822    39    5.48 %
   TOTAL EARNING ASSETS   $ 520,551   $ 7,027    5.43 % $ 372,756   $ 4,892    5.21 %
   Cash Due from Banks    23,998    19,601  
   All Other Assets    34,676    20,636  
TOTAL ASSETS   $ 574,214   $ 409,809  
LIABILITIES & SHAREHOLDERS' EQUITY:  
   Deposits:  
   Interest bearing - DDA   $ 122,248    345    1.14 % $ 58,337    152    1.03 %
   Savings Deposits    151,707    458    1.21 %  133,451    363    1.08 %
   Time CD's $100,000 and Over    47,501    365    3.09 %  28,102    139    1.96 %
   Other Time CD's    96,034    728    3.05 %  74,357    714    3.81 %
   Total Deposits    417,490    1,896    1.83 %  294,247    1,368    1.84 %
   Other Borrowings    42,732    331    3.12 %  14,327    81    2.24 %
   INTEREST BEARING LIABILITIES   $ 460,222   $ 2,227    1.95 % $ 308,574   $ 1,449    1.86 %
   Non-Interest bearing - DDA    72,488    58,017  
   All Other Liabilities    782    2,213  
   Shareholders' Equity    40,722    41,005  
   TOTAL LIABILITIES &
   SHAREHOLDERS' EQUITY		   $ 574,214   $ 409,809  
Net Interest Rate Spread    3.48 %  3.35 %
Net Interest Income /Margin   $ 4,800    3.71 % $3,443  3.66 %

(2)     – Presented on a fully taxable equivalent basis using a federal income tax rate of 34%.

15

ALLOWANCE AND PROVISION FOR LOAN LOSSES

The Corporation maintains formal policies and procedures to control and monitor credit risk. Management believes the allowance for loan losses is adequate to provide for probable incurred losses in the loan portfolio. The Corporation’s loan portfolio has no significant concentrations in any one industry or any exposure in foreign loans. The Corporation has not extended credit to finance highly leveraged transactions nor does it intend to do so in the future. Employment levels and other economic conditions in the Corporation’s local markets may have a significant impact on the level of loan losses. Management continues to identify and devote attention to credits that are not performing as agreed. Of course, deterioration of economic conditions could have an impact on the Corporation’s credit quality, which could impact the need for greater provision for loan losses and the level of the allowance for loan losses as a percentage of gross loans. Non-performing loans are discussed further in the section titled “Non-Performing Assets.”

The allowance for loan losses (ALL) reflects management’s judgment as to the level considered appropriate to absorb probable losses in the loan portfolio. Fentura’s subsidiary banks’methodology in determining the adequacy of the ALL relies on several key elements. These include specific allowances for identified problem loans and a formula-based risk allocated allowance for the reminder of the portfolio. This involves a review of individual loans, historical loss experience, current economic conditions, portfolio trends and other pertinent factors. The amount of the provision for loan losses is based on our review of the historical credit loss experience and factors that, in our judgment, deserve consideration under existing economic conditions in estimating probable credit losses. While management considers the allowance for loan losses to be adequate based on information currently available, future adjustments to the allowance may be necessary due to changes in economic conditions, delinquencies or loss rates. At September 30, 2004, the ALL was $5,173,000, or 1.31% of total loans. This compares with $3,414,000, or 1.35%, at December 31, 2003. The decrease of the ALL as a percentage of total loans reflects a small increase in the allowance for loan losses and a large increase in total loans. The increase of $1.9 million in allowance for loan losses is due to the acquisition of the West Michigan Community Bank allowance of $1.2 million and the rest of the increase is due to loan growth in the Corporation’s other subsidiary banks. Management believes that the allowance to gross loans percentage is appropriate given identified risk in the loan portfolio based on asset quality.

Table 4 also summarizes loan losses and recoveries for the first nine months of 2004 and 2003. During the first nine months of 2004 the Corporation experienced net charge-offs of $419,000 or .11% of loans (annualized) compared with net charge-offs of $1,026,000 or .43% in the first nine months of 2003. The reduction in net charge-offs, relates to the charge-off in 2003 of one large commercial credit of $846,000. The provision for loan losses was $1,019,000 in the first nine months of 2004 and $1,086,000 for the same time period in 2003. The reduction is due to better loan quality in all of the Corporation’s subsidiaries’ loan portfolios.

Table 4 ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

(000's omitted) Nine Months Ended
September 30,
2004 		Nine Months Ended
September 30,
2003
Balance at Beginning of Period     $ 3,414   $ 3,184  
Charge-Offs:  
     Commercial, Financial and Agriculture    (347 )  (924 )
     Real Estate-Mortgage    0    0  
     Installment Loans to Individuals    (245 )  (362 )
         Total Charge-Offs    (592 )  (1,286 )
Recoveries:  
     Commercial, Financial and Agriculture    31    154  
     Real Estate-Mortgage    0    0  
     Installment Loans to Individuals    142    106  
         Total Recoveries    173    260  
Net Charge-Offs    (419 )  (1,026 )
Provision    1,019    1,086  
Addition from WMCB acquisition    1,159    0  
Balance at End of Period   $ 5,173   $ 3,244  
Ratio of Net Charge-Offs to Gross Loans    0.11 %  0.43 %


16

NON-INTEREST INCOME

Non-interest income decreased during the nine months ended September 30, 2004 as compared to the same period in 2003, primarily due to the decrease in gain on sale of mortgages and gains taken on securities and fixed assets in 2003. Overall non-interest income was $5,139,000 for the nine months ended September 30, 2004 compared to $5,435,000 for the same period in 2003. These figures represent a decrease of 5.4%. Non-interest income declined 6.1% in the third quarter of 2004 compared to the same period in 2003. The income statement provides a detailed breakdown of the components of non-interest income.

The most significant category of non-interest income is service charges on deposit accounts. These fees were $2,847,000 in the first nine months of 2004 compared to $2,706,000 for the same period of 2003. This represents an increase of 5.2%. In the third quarter of 2004 services charges increased 3.2% over the same period in 2003. Increases are attributable to a full two quarters of service charges from West Michigan Community Bank of $178,000.

Gains on the sale of mortgage loans originated by the Banks and sold in the secondary market were $365,000 in the nine months ended September 30, 2004 and $1,161,000 in the same period in 2003. In the third quarter of 2004 gain on the sale of mortgages decreased 66.8% over the same period in 2003. The decline resulted from the decline in residential mortgage refinance activity and lower new loan volumes due to the higher interest rates compared to the historically low market interest rates during the first nine months of 2003. The addition of West Michigan Community Bank did not materially affect the decline in gain on sale of mortgage loans.

Trust income increased $330,000 (88.5%) in the first nine months of 2004 compared to the same period in the prior year. In the third quarter of 2004 trust fees increased $114,000 compared with the same period in 2003. The increase in fees is attributable to a full two quarters of trust income from West Michigan Community Bank of $275,000.

Gain on sale of securities decreased $31,000 in the first nine months of 2004, due to the Banks not selling any securities in the first nine months of 2004. The Banks sold securities in the first nine months of 2003, which produced a gain of $31,000; this gain made up less than 1 percent of the 2003 first nine months non–interest income.

A loss on sale of fixed assets of $2,000 was recorded in the first nine months of 2004, due to the sale of equipment in one of the Bank subsidiaries. The Corporation had a gain of $201,000 in the first nine months of 2003 due to the sale of a branch location in one of the Bank subsidiaries.

Other operating income increased $263,000 (27.3%) to $1,226,000 in the first nine months of 2004 compared to $963,000 in the same time period in 2003. In the third quarter of 2004 other operating income decreased 0.2% over the same period in 2003. Other operating income increased due to the gain of $79,000 resulting from the surrender of insurance related to a terminated benefit plan, an insurance claim for damage to other real estate property in one of the Bank subsidiaries, increased cash surrender value of life insurance, an the increase in debit and ATM income and West Michigan Community Bank other operating income of $87,000.

17

Non-Interest Expense

Total non-interest expense increased 32.9% to $13,412,000 in the nine months ended September 30, 2004, compared with $10,093,000 in the same period of 2003. In the third quarter of 2004 total non-interest expenses were $4,825,000 compared to $3,425,000 in the same quarter of 2003. This increase was largely attributable to an increase in salaries and benefits expense, occupancy expenses and other operating expenses.

Salary and benefit costs, Fentura’s largest non-interest expense category, were $7,332,000 in the first nine months of 2004, compared with $5,416,000, or an increase of 35.4%, for the same time period in 2003. In the third quarter of 2004 salary and benefit costs were $2,675,000 compared with $1,818,000, or an increase of 47.1% for the same quarter in 2003. Increased costs were primarily a result of the addition of two full quarters of salaries for West Michigan Community Bank totaling $681,000. A modest salary increase for employees and an increase in employee benefit costs and modest staffing increases also affected salary and benefit costs in both quarters.

Occupancy expenses at $1,193,000 increased in the nine months ended September 30, 2004 compared to the same period in 2003 by $357,000 or 42.7%. Occupancy expenses increased 54.5% in the third quarter of 2004 compared to 2003. The increases were attributable to increases in facility repairs, an increase in rent due to the opening of the Grand Blanc executive office in November of 2003, maintenance contracts expense and two full quarters of occupancy expenses for West Michigan Community Bank, which totaled $106,000.

During the nine months ended September 30, 2004 furniture and equipment expenses were $1,559,000 compared to $1,088,000 for the same period in 2003, an increase of 43.3%. In the third quarter of 2004 furniture and equipment expenses increased 56.7% from the third quarter of 2003. The increases in expenses were attributable to increases in equipment maintenance contracts, equipment depreciation and two full quarters of furniture and equipment expenses for West Michigan Community Bank, which totaled $131,000.

Loan and collection expenses, at $240,000, were up $27,000 during the nine months ended September 30, 2004 compared to the same time period in 2003. In the third quarter loan and collection expense decreased 20.0% compared to the third quarter of 2003. The decrease was primarily attributable to stronger loan quality throughout the organization including West Michigan Community Bank.

Advertising expenses were $386,000 in the nine months ended September 30, 2004, up 43.0% compared with $270,000 for the same period in 2003. Advertising expenses increased 54.2% in the third quarter of 2004 compared to the same quarter in 2003. The increases were primarily due to the addition of West Michigan Community Bank to the Fentura Financial family, which increased the advertising expense by $45,000.

Other operating expenses were $2,702,000 in the nine months ended September 30, 2004 compared to $2,270,000 in the same time period in 2003, an increase of $432,000 or 19.0%. Other operating expenses were $969,000 in the third quarter of 2004 compared to $814,000 in the same period of 2003. The increases were primarily attributable to the costs for two full quarters of West Michigan Community Bank expenses, the majority of which were for outside services and consulting.

18

Financial Condition

Proper management of the volume and composition of the Corporation’s earning assets and funding sources is essential for ensuring strong and consistent earnings performance, maintaining adequate liquidity and limiting exposure to risks caused by changing market conditions. The Corporation’s securities portfolio is structured to provide a source of liquidity through maturities and to generate an income stream with relatively low levels of principal risk. The Corporation does not engage in securities trading. Loans comprise the largest component of earning assets and are the Corporation’s highest yielding assets. Customer deposits are the primary source of funding for earning assets while short-term debt and other sources of funds could be further utilized if market conditions and liquidity needs change.

On March 15, 2004, the Corporation acquired WMFC, as more fully described in Note 5. This transaction significantly increased the Corporation’s consolidated assets and liabilities, as compared to year-end 2003.

The Corporation’s total assets were $593 million at September 30, 2004 compared to December 31, 2003 total assets of $420 million. Loans comprised 66.5% of total assets at September 30, 2004 compared to 60.3% at December 31, 2003. Loans grew $141.3 million for the Corporation with $97.3 million due to the acquisition of West Michigan Financial Corporation. The loans for the other two subsidiary banks grew $40.6 million with commercial loans and real estate- construction loans leading the advance. The ratio of non-interest bearing deposits to total deposits was 16.5% at September 30, 2004 compared to 16.8% at December 31, 2003. Interest bearing deposit liabilities totaled $422 million at September 30, 2004 compared to $290 million at December 31, 2003. Total deposits increased $156.5 million with non-interest bearing demand deposits increasing $24.6 million and interest bearing deposits increasing $131.9 million due to the acquisition of West Michigan Financial Corporation. Short-term borrowings decreased $687,000 due to the decrease in TT&L. FHLB advance balances increased $18.0 million during the period due to the acquisition of West Michigan Financial Corporation. Repurchase agreement balances deceased during the period by $2.5 million. Repurchase agreements are instruments with deposit type characteristics, which are secured by bank securities. The repurchase agreements were leveraged against securities to increase net interest income.

Bank premises and equipment increased $4.4 million to $14.0 million at September 30, 2004 compared to $9.6 million at December 31, 2003. The increase was due to the acquisition of West Michigan Financial Corporation. The other bank subsidiaries’ fixed assets declined due to depreciation expense.

NON-PERFORMING ASSETS

Non-performing assets are assets that have more than a normal risk of loss and include loans on which interest accruals have ceased, loans that have been renegotiated, and real estate acquired through foreclosure. Past due loans are loans which are delinquent 90 days or more, but have not been placed on non-accrual status. Table 5 reflects the levels of these assets at September 30, 2004 and December 31, 2003.

Non-performing assets increased at September 30, 2004 compared to December 31, 2003. The level of non-performing loans increased as compared to December 31, 2003 primarily due to the increase in non-accrual loans. Non-accrual loans include a $970,000 real estate secured commercial credit. Renegotiated loans were reduced significantly due to reclassification of a real estate secured loan to REO-in-Redemption.

Other non-performing assets decreased, primarily due to a significant decrease in Other Real Estate due to the sale of several properties in the first nine months of 2004. REO-in-Redemption increased $614,000 primarily due to the reclassification of a single-family residential loan from the renegotiated category.

The level and composition of non-performing assets are affected by economic conditions in the Corporation’s local markets. Non-performing assets, charge-offs, and provisions for loan losses tend to decline in a strong economy and increase in a weak economy, potentially impacting the Corporation’s operating results. In addition to non-performing loans, management carefully monitors other credits that are current in terms of principal and interest payments but, in management’s opinion, may deteriorate in quality if economic conditions change.

19

Table 5
Non-Performing Assets and Past Due Loans
 		 September 30,
2004		 December 31,
2003
Non-Performing Loans:            
     Loans Past Due 90 Days or More & Still  
         Accruing   $ 49   $ 47  
     Non-Accrual Loans    1,785    229  
     Renegotiated Loans    477    1,262  
         Total Non-Performing Loans    2,311    1,538  
Other Non-Performing Assets:  
     Other Real Estate    337    1,081  
     REO in Redemption    798    184  
     Other Non-Performing Assets    3    79  
         Total Other Non-Performing Assets    1,138    1,344  
Total Non-Performing Assets   $ 3,449   $ 2,882  
Non-Performing Loans as a % of  
     Total Loans    0.87 %  0.61 %
Allowance for Loan Losses as a % of  
     Non-Performing Loans    329.70 %  221.98 %
Accruing Loans Past Due 90 Days or  
     More to Total Loans    0.01 %  0.02 %
Non-performing Assets as a % of  
     Total Assets    0.58 %  0.69 %

LIQUIDITY AND INTEREST RATE RISK MANAGEMENT

Asset/Liability management is designed to assure liquidity and reduce interest rate risks. The goal in managing interest rate risk is to maintain a strong and relatively stable net interest margin. It is the responsibility of the Asset/Liability Management Committee (ALCO) to set policy guidelines and to establish short-term and long-term strategies with respect to interest rate exposure and liquidity. The ALCO, which is comprised of key members of management, meets regularly to review financial performance and soundness, including interest rate risk and liquidity exposure in relation to present and prospective markets, business conditions, and product lines. Accordingly, the committee adopts funding and balance sheet management strategies that are intended to maintain earnings, liquidity, and growth rates consistent with policy and prudent business standards.

Liquidity maintenance together with a solid capital base and strong earnings performance are key objectives of the Corporation. The Corporation’s liquidity is derived from a strong deposit base comprised of individual and business deposits. Deposit accounts of customers in the mature market represent a substantial portion of deposits of individuals. The Banks’ deposit base plus other funding sources (federal funds purchased, other liabilities and shareholders’ equity) provided primarily all funding needs in the first nine months of 2004. While these sources of funds are expected to continue to be available to provide funds in the future, the mix and availability of funds will depend upon future economic conditions. The Corporation does not foresee any difficulty in meeting its funding requirements.

Primary liquidity is provided through short-term investments or borrowings (including federal funds sold and purchased) while the securities portfolio provides secondary liquidity. The securities portfolio has decreased $1.3 million due to the higher loan demand in the bank subsidiaries. The Corporation has decided to invest the excess funds in the security or loan portfolio to increase yield and income versus keeping the excess funds in federal funds sold at a lower yield. As of September 30, 2004 federal funds sold represented less than 3 percent of total assets, which is up 2.08% from December 31, 2003. The Corporation regularly monitors liquidity to ensure adequate cash flows to cover unanticipated reductions in the availability of funding sources.

Interest rate risk is managed by controlling and limiting the level of earnings volatility arising from rate movements. The Corporation entered into a leverage strategy in the second quarter of 2003, which was purchasing securities funded by repurchase agreements. This strategy helped leverage more capital of the Corporation and limit volatility if interest rates dropped further. The Corporation regularly performs reviews and analysis of those factors impacting interest rate risk. Factors include maturity and re-pricing frequency of balance sheet components, impact of rate changes on interest margin and prepayment speeds, market value impacts of rate changes, and other issues. Both actual and projected performance are reviewed, analyzed, and compared to policy and objectives to assure present and future financial viability.

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CAPITAL MANAGEMENT

Total shareholders’ equity increased 2.8% to $42,020,000 at September 30, 2004 compared with $40,882,000 at December 31, 2003. The Corporation’s equity to asset ratio was 7.1% at September 30, 2004 and 9.7% at December 31, 2003. The increase in the amount of capital resulted primarily from net income minus the dividends paid during the first nine months of the year.

As indicated on the balance sheet at December 31, 2003 the Corporation had an accumulated other comprehensive loss of $125,000 compared to an accumulated other comprehensive loss at September 30, 2004 of $373,000. The decline to a further loss position is attributable to the fluctuation of the market price of securities held in the available for sale portfolio.

The Corporation issued trust preferred securities in the fourth quarter of 2003 to help fund the acquisition of West Michigan Financial Corporation. The Corporation acquired West Michigan Financial Corporation in Hudsonville, Michigan, on March 15, 2004, following approval by West Michigan Financial Corporation shareholders and receipt of regulatory approvals.

West Michigan Financial Corporation was a one-bank holding company for West Michigan Community Bank, which became the third affiliate bank owned by Fentura Financial, Inc.

Regulatory Capital Requirements

Bank holding companies and their bank subsidiaries are required by banking industry regulators to maintain certain levels of capital. These are expressed in the form of certain ratios. These ratios are based on the degree of credit risk in the Corporation’s assets. All assets and off-balance sheet items such as outstanding loan commitments are assigned risk factors to create an overall risk-weighted asset total. Capital is separated into two levels, Tier I capital (essentially total common shareholders’ equity plus qualifying cumulative preferred securities (limited to 33% of common equity), less goodwill) and Tier II capital (essentially the allowance for loan losses limited to 1.25% of gross risk-weighted assets). Capital levels are then measured as a percentage of total risk weighted assets. The regulatory minimum for Tier I capital to risk weighted assets is 4% and the minimum for Total capital (Tier I plus Tier II) to risk weighted assets is 8%. The Tier I leverage ratio measures Tier I capital to average assets and must be a minimum of 4%. As reflected in Table 7, at September 30, 2004 and at December 31, 2003, the Corporation was well in excess of the minimum capital and leverage requirements necessary to be considered a “well capitalized” banking company.

The FDIC has adopted a risk-based insurance premium system based in part on a bank’s capital adequacy. Under this system a depository institution is classified as well capitalized, adequately capitalized, or undercapitalized according to its regulatory capital levels. Subsequently, a financial institution’s premium levels are based on these classifications and its regulatory supervisory rating (the higher the classification the lower the premium). It is the Corporation’s goal to maintain capital levels sufficient to retain a designation of “well capitalized.”

Table 7

Capital Ratios
Regulatory Minimum
For "Well Capitalized"
 		 Sept. 30,
2004		 Fentura Financial, Inc.
December 31,
2003		 Sept. 30,
2003
Total Capital to risk                    
     Weighted assets    10%  11.17%  18.00%  14.50%
Tier 1 Capital to risk    6%  10.04%  16.90%  13.42%
     Weighted assets  
Tier 1 Capital to average  
     Assets    5%  7.43%  14.00%  10.98%

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The information concerning quantitative and qualitative disclosures about market risk contained on page 47 in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003, is here incorporated by reference.

Fentura Financial, Inc. faces market risk to the extent that both earnings and the fair value of its financial instruments are affected by changes in interest rates. The Corporation manages this risk with static GAP analysis and has begun simulation modeling. For the first nine months of 2004, the results of these measurement techniques were within the Corporation’s policy guidelines. The Corporation does not believe that there has been a material change in the nature of the Corporation’s primary market risk exposures, including the categories of market risk to which the Corporation is exposed and the particular markets that present the primary risk of loss to the Corporation, or in how those exposures have been managed in 2004 compared to 2003.

The Corporation’s market risk exposure is mainly comprised of its vulnerability to interest rate risk. Prevailing interest rates and interest rate relationships in the future will be primarily determined by market factors, which are outside of the Corporation’s control. All information provided in this section consists of forward-looking statements. Reference is made to the section captioned “Forward Looking Statements” in this quarterly report for a discussion of the limitations on the Corporation’s responsibility for such statements.

INTEREST RATE SENSITIVITY MANAGEMENT

Interest rate sensitivity management seeks to maximize net interest income as a result of changing interest rates, within prudent ranges of risk. The Corporation attempts to accomplish this objective by structuring the balance sheet so that re-pricing opportunities exist for both assets and liabilities in roughly equivalent amounts at approximately the same time intervals. Imbalances in these re-pricing opportunities at any point in time constitute a bank’s interest rate sensitivity. The Corporation currently does not utilize derivatives in managing interest rate risk.

An indicator of the interest rate sensitivity structure of a financial institution’s balance sheet is the difference between rate sensitive assets and rate sensitive liabilities, and is referred to as “GAP.”

Table 8 sets forth the distribution of re-pricing of the Corporation’s earning assets and interest bearing liabilities as of September 30, 2004, the interest rate sensitivity GAP, as defined above, the cumulative interest rate sensitivity GAP, the interest rate sensitivity GAP ratio (i.e. interest rate sensitive assets divided by interest rate sensitive liabilities) and the cumulative sensitivity GAP ratio. The table also sets forth the time periods in which earning assets and liabilities will mature or may re-price in accordance with their contractual terms.

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Table 8 GAP ANALYSIS SEPTEMBER 30, 2004

(000's Omitted)

 		 Within
Three
Months 		  Three
Months to
One Year 		One to
 Five
 Years 		After
Five
Years 		Total
Earning Assets:                        
    Federal Funds Sold   $ 17,500   $ 0   $ 0   $ 0   $ 17,500  
    Securities    17,739    29,314    33,697    43,918    124,668  
    Loans    236,542    31,333    75,722    50,960    394,557  
    Loans Held for Sale    497    0    0    0    497  
    FHLB Stock    2,219    0    0    0    2,219  
       Total Earning Assets   $ 274,497   $ 60,647   $ 109,419   $ 94,878   $ 539,441  
   
Interest Bearing Liabilities:  
    Interest Bearing Demand Deposits   $ 123,642   $ 0   $ 0   $ 0   $ 123,642  
    Savings Deposits    154,562    0    0    0    154,562  
    Time Deposits Less than $100,000    14,637    28,367    31,242    17,822    92,068  
    Time Deposits Greater than $100,000    21,378    10,993    10,417    8,733    51,521  
    Short term borrowings    2,762    0    0    0    2,762  
    Other Borrowings    4,000    6,015    6,045    3,031    19,091  
    Repurchase agreements    0    5,000    5,000    0    10,000  
    Subordinated debentures    12,000    0    0    0    12,000  
       Total Interest Bearing Liabilities   $ 332,981   $ 50,375   $ 52,704   $ 29,586   $ 465,646  
Interest Rate Sensitivity GAP    ($ 54,484 ) $ 10,272   $ 56,715   $ 65,292   $ 73,795  
Cumulative Interest Rate  
    Sensitivity GAP    ($ 54,484 )  ($48,212 ) $ 8,503   $ 73,795  
Interest Rate Sensitivity GAP Ratio    (0.82 )  1.20  2.08  3.21
Cumulative Interest Rate  
    Sensitivity GAP Ratio    (0.82 )  (0.87 )  1.02  1.16

As indicated in Table 8, the short-term (one year and less) cumulative interest rate sensitivity gap is negative. Accordingly, if market interest rates increase, this negative gap position would have a short-term negative impact on interest margin. Conversely, if market rates decline this should theoretically have a short-term positive impact. However, gap analysis is limited and may not provide an accurate indication of the impact of general interest rate movements on the net interest margin since the re-pricing of various categories of assets and liabilities is subject to the Corporation’s needs, competitive pressures, and the needs of the Corporation’s customers. In addition, various assets and liabilities indicated as re-pricing within the same period may in fact re-price at different times within such period and at different rate volumes. These limitations are evident when considering the Corporation’s Gap position at September 30, 2004 and the change in net interest margin for the nine months ended September 30, 2004 compared to the same time period in 2003. At September 30, 2003 the Corporation was negatively gapped through one year and since that time interest rates have stayed steady through June and just recently increased in the third quarter of 2004, yet net interest margin decreased when the first nine months of 2004 is compared to the same period in 2003. But when reviewing the quarterly net interest margin it has risen in 2004 compared to 2003. This occurred because certain deposit categories, specifically interest bearing demand and savings deposits, repriced at the same time but not at the same level as the asset portfolios resulting in a increase in net interest margin. Additionally, simulation modeling, which measures the impact of upward and downward movements of interest rates on interest margin and the market value of equity, indicates that an upward movement of interest rates would not significantly impact net interest income.

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FORWARD LOOKING STATEMENTS

This report includes “forward-looking statements” as that term is used in the securities laws. All statements regarding our expected financial position, business and strategies are forward-looking statements. In addition, the words “anticipates,” “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends,” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. The presentation and discussion of the provision and allowance for loan losses and statements concerning future profitability or future growth or increases, are examples of inherently forward looking statements in that they involve judgments and statements of belief as to the outcome of future events. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and our future prospects include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning us and our business, including additional factors that could materially affect our financial results, is included in our other filings with the Securities and Exchange Commission.

ITEM 4: 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-Quarterly Report 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.

24

PART II — OTHER INFORMATION

Item 1.       Legal Proceedings. — None

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. — None

Item 5.       Other Information. — None

Item 6.       Exhibits and Reports on Form 8-K.

  (a) Exhibits

  31.1 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.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




Date November 11, 2004





Date November 11, 2004		 Fentura Financial, Inc.


By: /s/ Donald L. Grill
      ——————————————
      Donald L. Grill
      President & CEO


By: /s/ Douglas J. Kelley
      ——————————————
      Douglas J. Kelley
      Chief Financial Officer




26

EXHIBIT INDEX

Exhibit Description

31.1 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.

27

Exhibit 31.1

I, Donald L. Grill, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Fentura Financial, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

  (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

  (b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

  (c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

  (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting;

Dated: November 11, 2004

/s/ Donald L. Grill
——————————————
Donald L. Grill
President and Chief Executive Officer

28

Exhibit 31.2

I, Douglas J. Kelley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Fentura Financial, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

  (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

  (b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

  (c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

  (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting;

Dated: November 11, 2004

/s/ Douglas J. Kelley
——————————————
Douglas J. Kelley
Chief Financial Officer

29

Exhibit 32.1

I, Donald L. Grill, Chief Executive Officer of Fentura Financial Inc. certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2) the information contained in the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 fairly presents, in all material respects, the financial condition and results of operations of Fentura Financial, Inc.

Dated: November 11, 2004

/s/ Donald L. Grill
——————————————
Donald L. Grill
Chief Executive Officer

30

Exhibit 32.2

I, Douglas J. Kelley, Chief Financial Officer of Fentura Financial, Inc. certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2) the information contained in the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 fairly presents, in all material respects, the financial condition and results of operations of Fentura Financial, Inc.

Dated: November 11, 2004

/s/ Douglas J. Kelley
——————————————
Douglas J. Kelley
Chief Financial Officer

31