<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
FENTURA BANCORP, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
[COMPANY NAME]
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[FENTURA BANCORP, INC. LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MARCH 18, 1998
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Fentura Bancorp, Inc. will be held at the St. John Activity Center, 610 N.
Adelaide St., Fenton, Michigan 48430, on Wednesday, March 18, 1998, at 7:00
p.m., for the following purposes:
1. To elect four Directors constituting the "Class I Directors" of
the Board of Directors, to serve for three years until the 2001
Annual Meeting of Shareholders and until their respective
successors are elected and have qualified.
2. To transact such other business as may properly come before the
Meeting or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on February 14,
1998, as the record date for the determination of shareholders entitled to
notice of and to vote at the Annual Meeting.
You are cordially invited to attend the Annual Meeting in person, but
whether or not you plan to attend, please complete, sign and date the enclosed
Proxy and mail it in the return envelope which is enclosed for that purpose. It
will assist us in preparing for the Annual Meeting if shareholders will return
their signed Proxies promptly, whether they own few or many shares. If you do
attend the Annual Meeting, you may, if you wish, revoke your Proxy and vote your
shares in person.
By Order of the Board of Directors
RICHARD A. BAGNALL
Secretary
Fenton, Michigan
February 20, 1998
<PAGE> 3
[FENTURA BANCORP, INC. LOGO]
PROXY STATEMENT
MEETING OF SHAREHOLDERS
1998
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of Fentura Bancorp, Inc. (the "Corporation") of
Proxies to be voted at the 1998 Annual Meeting of Shareholders of the
Corporation (the "Annual Meeting") and any adjournment or adjournments thereof.
The Annual Meeting will be held on March 18, 1998, at the time and place and for
the purposes set forth in the accompanying Notice of Annual Meeting of
Shareholders. The mailing address of the principal executive office of the
Corporation is One Fenton Square, Fenton, Michigan 48430-0725.
This Proxy Statement, the Proxy, and Notice of Annual Meeting is being
first mailed to shareholders on February 20, 1998.
SHAREHOLDERS ENTITLED TO VOTE
Only shareholders of record at the close of business on February 14,
1998, are entitled to notice of and to vote at the Annual Meeting. On February
14, 1998, there were 692,343 shares of Common Stock of the Corporation
outstanding and entitled to vote at the Annual Meeting held by approximately 500
holders of record. Each share of Common Stock is entitled to one vote. The
Common Stock constitutes the only voting security of the Corporation entitled to
vote upon the proposals to be presented at the Annual Meeting. The presence at
the Annual Meeting, whether in person or by proxy, of the holders of a majority
of the shares of the Corporation's Common Stock outstanding and entitled to vote
on the record date will constitute a quorum.
VOTING SHARES REPRESENTED BY PROXIES
The only matters known to the Board of Directors to be presented at the
Annual Meeting are the election of Directors. If any other matter is presented
upon which a vote properly may be taken, the persons named in the accompanying
form of Proxy intend to vote the shares represented by such Proxies in
accordance with their judgment. Shares represented by properly executed Proxies
received by the Corporation will be voted at the Annual Meeting in the manner
specified therein. If no instructions are specified in the Proxy, the shares
represented thereby will be voted in favor of the proposals presented at the
Annual Meeting by the Board of Directors. Any Proxy may be revoked by the person
giving it at any time prior to being voted.
ELECTION OF DIRECTORS
The sole matter to be considered at the Annual Meeting will be the
election of Directors. In accordance with the Corporation's Articles of
Incorporation and Bylaws, the Board of Directors is divided into three classes.
Each year, on a rotating basis, the terms of office of the Directors in one of
the three classes expire. Successors to the class of Directors whose terms have
expired are elected for a three-year term. The Directors whose terms expire at
the Annual Meeting ("Class I Directors") are Philip J. Lasco, Jon S. Gerych,
Thomas P. McKenney and Glen J. Pieczynski.
The Board of Directors has nominated these same individuals for
re-election as Class I Directors. Those persons who are elected as Class I
Directors at the Annual Meeting will hold office for three years. Their terms
will expire at the 2001 Annual Meeting of Shareholders and upon the election and
qualification of their successors. If
2
<PAGE> 4
any of the nominees is unable to serve, the number of Directors to be elected at
the Annual Meeting may be reduced by the number unable to serve and for whom no
substitute is recommended by the Board of Directors.
So far as the Board is advised, only the four persons named above as
nominees will be nominated for election as Directors at the Annual Meeting. The
shares represented by Proxies in the accompanying form will be voted for the
election of such nominees unless a contrary direction is indicated. If any of
the nominees are unable to serve, which the Board does not contemplate, the
Proxies may be voted for the election of such other person or persons as the
Board of Directors recommends.
Directors will be elected by a plurality of the votes cast at the
Annual Meeting. Abstentions and broker nonvotes will have no effect on the
election of directors.
INFORMATION CONCERNING NOMINEES AND INCUMBENT DIRECTORS
The name and age of each nominee and each incumbent or nominee
Director, his five-year business experience and the year he became a Director of
the Corporation, according to information furnished to the Corporation by him,
are as follows:
<TABLE>
<CAPTION>
NAME AGE BUSINESS EXPERIENCE DIRECTOR SINCE
---- --- ------------------- --------------
DIRECTOR NOMINEES - TERMS EXPIRING IN 1998 (CLASS I)
<S> <C> <C> <C>
Philip J. Lasco(1) 51 Owner, Lasco Ford Chrysler 1995
Jon S. Gerych(1) 46 President, Gerych Greenhouse, Inc. 1992
Thomas P. McKenney(1) 45 Attorney, Kohl, Secrest, Wardle, Lynch, Clark & Hampton 1992
Glen J. Pieczynski(1) 56 Owner, Linden True Value Hardware, Inc. 1992
INCUMBENT DIRECTORS - TERMS EXPIRING IN 1999 (CLASS II)
Brian P. Petty(1) 40 Owner, Fenton Glass Service, Inc. 1995
Richard A. Bagnall 56 Executive Vice President, 1988 to present; Director of 1990
The State Bank, 1989 to present; Secretary of The State
Bank, 1990 to present; Treasurer of Fentura Bancorp, Inc.,
1989 to present; Director & Secretary of Fentura Bancorp,
Inc. 1990 to present
Russell H. Van Gilder, Jr. 63 Chairman of the Board of Fentura Bancorp, Inc., 1997 to 1987
present; Vice Chairman of the Board of Fentura Bancorp,
Inc., 1995 to 1997; Chairman of the Board of The State
Bank, 1997 to present; Vice Chairman of the Board of The
State Bank, 1995 to 1997; Director of Fentura Bancorp,
Inc., 1987 to present; Director of The State Bank, 1981
to present; President (1975 to 1996) and Chairman (1996
to present) VG's Food Center, Inc.
</TABLE>
3
<PAGE> 5
INCUMBENT DIRECTORS - TERMS EXPIRING IN 2000 (CLASS III)
<TABLE>
<S> <C> <C> <C>
Donald L. Grill 50 President and Chief Executive Officer of the Corporation 1996
and The State Bank, 1996 to present; Director, The State
Bank, 1996 to present. Various executive positions
(including Vice President, Executive Vice President,
President and Chief Executive Officer) with First of
America Bank Corporation and its subsidiaries, 1983-1996
Corporation and its subsidiaries, 1983-1996
Forrest A. Shook 55 Vice Chairman of the Board of Fentura Bancorp, Inc., 1997 1997
to present; Vice Chairman of the Board of The State Bank,
1997 to present; President, NLB Corporation, 1971 to
present; Director, The State Bank, 1996 to present
</TABLE>
(1) Each person has been so occupied for more than five years.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS OF THE CORPORATION
The Corporation itself has no standing committees of the Board of
Directors. The Board of Directors of the Corporation's sole operating bank
subsidiary, The State Bank (the "Bank") has Executive, Audit, Compensation,
Director Loan, Trust, Investment, Forward Planning and Director Selection
Committees.
The Executive Committee during 1997 was composed of Russell H. Van
Gilder, Jr., Donald L. Grill, Forrest A. Shook, and Thomas P. McKenney, and met
8 times during 1997. The Executive Committee oversees the day-to-day management
of the Bank between Board meetings.
The Audit Committee met 5 times during 1997 and is composed of Philip
J. Lasco, Thomas P. McKenney, and Glen J. Pieczynski. The responsibilities of
the Audit Committee are to participate with the management of the Bank in
selecting and recommending to the Board of Directors the outside audit firm to
be retained; to review with management and auditors the scope of the proposed
audit; to review the annual audit with management and the outside auditors
before final figures are published; to review with management the periodic
examinations made by supervisory authorities and any replies required in
connection with such examination; to review quarterly the role and scope of the
work performed by the Bank's internal auditor; and to review programs and
procedures with management to avoid conflicts of interest and any other aspects
of business ethics.
The Compensation Committee met 4 times during 1997 and is composed of
Russell H. Van Gilder, Jr., Forrest A. Shook and Brian P. Petty. The
responsibility of the Compensation Committee is to recommend to the Board of
Directors of the Bank the compensation of Bank officers.
The Director Loan Committee met 19 times during 1997 and each Director
serves a total of six months during the year on this Committee. The
responsibility of the Director Loan Committee is to review, approve and
recommend loan decisions within Board delegated authority.
The Trust Committee met 12 times during 1997 and is composed of Philip
J. Lasco, Jon S. Gerych, and Glen J. Pieczynski. The responsibility of the
Trust Committee is to oversee and monitor all activities of the Trust and
Investment Management Department.
The Investment Committee met once during 1997 and is composed of Jon
S. Gerych, Richard A. Bagnall, and Philip J. Lasco. The responsibility of the
Investment Committee is to review and monitor Bank investment activity and
establish Bank investment guidelines.
The Forward Planning Committee met 5 times during 1997 and is composed
of Forrest A. Shook, Jon S. Gerych, Donald L. Grill, and Brian P. Petty. The
Forward Planning Committee evaluates and directs the strategic planning
initiatives of the Bank and Corporation.
The Director Selection Committee met 3 times during 1997 and is
composed of Russell H. Van Gilder, Jr., Brian P. Petty, Jon S. Gerych, Glen J.
Pieczynski, and Donald L. Grill. The Director Selection Committee monitors the
process of identifying, interviewing, and recommending new Director candidates.
Twelve regular and 3 special meetings of the Board of Directors of the
Bank were held during 1997. The Board of Directors of the Corporation held 10
regular and 2 special meetings during 1997.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 14, 1998, the
shareholdings of (a) each person known to the Corporation to be the beneficial
owner of more than 5% of the Corporation's Common Stock, (b) each of the
incumbent Directors and Director nominees, (c) each person named in the Summary
Compensation Table below, and (d) all Directors and Executive Officers as a
group, according to information furnished to the Corporation by these persons.
4
<PAGE> 6
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) CLASS (2)
<S> <C> <C>
Jon S. Gerych 1,656 *
13168 Sam Hill Lane
Fenton, Michigan 48430
Thomas P. McKenney 694(3) *
304 E. Maple Street
Holly, Michigan 48442
Glen J. Pieczynski 1,337(3) *
506 Riverside Drive
Linden, Michigan 48451
Philip J. Lasco 1,619(3) *
1020 East Street
Fenton, Michigan 48430
Brian P. Petty 1,983(3) *
10488 Jayne Valley Lane
Fenton, Michigan 48430
Richard A. Bagnall 3,055(3) *
4186 Owen Rd.
Fenton, Michigan 48430
Russell H. VanGilder, Jr. 5,976(3) *
4707 Vincent Dr.
Holly, Michigan 48442
Donald L. Grill 1,886(3) *
One Fenton Square
Fenton, Michigan 48430
Forrest A. Shook
29830 Beck Rd. 2,363(3) *
Wixom, MI 48393
Donald E. Johnson, Jr. 74,404 10.75
Trustee u/a/d 5/18/93
SNB Trust Operations
101 N. Washington Avenue
Saginaw, Michigan 48607
Linda J. Lemieux 38,153 5.51
SNB Trust Operations
101 N. Washington Avenue
Saginaw, Michigan 48607
Mary Alice Heaton, 38,146 5.51
Trustee of the Mary Alice
Heaton Trust dtd 8/29/91
c/o Second National Bank
101 N. Washington Avenue
Saginaw, Michigan 48607
All Directors and Executive Officers as a 20,798 3.00
Group (10 persons)
</TABLE>
(footnotes on following page)
5
<PAGE> 7
(1) The number of shares in this column includes shares owned directly
or indirectly, through any contract, arrangement, understanding or
relationship, or the indicated beneficial owner otherwise has the
power to vote, or direct the voting of, and/or has investment
power.
(2) The symbol *, shown in this column, indicates ownership of less
than 1%.
(3) Ownership and voting rights of all shares are joint with spouse.
EXECUTIVE OFFICERS
The table below sets forth certain information as to the present
Executive Officers of the Corporation and the Bank. Executive Officer
appointments are made or reaffirmed annually at the organizational meeting of
the Board of Directors immediately following the Annual Meeting of Shareholders.
At its regular meetings, the Board may also make other Executive Officer
appointments.
<TABLE>
<CAPTION>
YEAR BECAME
EXECUTIVE
NAME AGE BUSINESS EXPERIENCE OFFICER
---- --- ------------------- ------------
<S> <C> <C> <C>
Russell H. Van Gilder, Jr. 63 Chairman of the Board of Fentura Bancorp, Inc., 1997 to 1995
present; Vice Chairman of the Board of Fentura Bancorp,
Inc., 1995 to 1997; Chairman of the Board of The State
Bank, 1997 to present; Vice Chairman of the Board of The
State Bank, 1995 to 1997; Director of Fentura Bancorp,
Inc., 1987 to present; Director of The State Bank, 1981 to
present; President (1975 to 1996) and Chairman (1996 to
present) VG's Food Center, Inc.
Forrest A. Shook 55 Vice Chairman of the Board of Fentura Bancorp, Inc., 1997 1997
to present; Vice Chairman of the Board of The State Bank,
1997 to present; President, NLB Corporation, 1971 to
present; Director, The State Bank, 1996 to present
Donald L. Grill 50 President and Chief Executive Officer of the Corporation 1996
and The State Bank, 1996 to present; Director, The State
Bank, 1996 to present. Various executive positions
(including Vice President, Executive Vice President,
President and Chief Executive Officer) with First of
America Bank Corporation and its subsidiaries, 1983-1996
Richard A. Bagnall 56 Executive Vice President, 1988 to present; Director of The 1988
State Bank, 1989 to present; Secretary of The State Bank,
1990 to present; Treasurer of Fentura Bancorp, Inc., 1989
to present; Director & Secretary of Fentura Bancorp,
Inc. 1990 to present Vice President and Chief Financial
Officer of Fentura
Ronald L. Justice 33 Bancorp, Inc. and The State Bank, 1995 to present; Vice 1995
President of Corporate Administration, 1992 to 1994;
Controller and Cashier, 1990 to 1992; Chief Auditor, 1989
to 1990
</TABLE>
6
<PAGE> 8
EXECUTIVE COMPENSATION
The Corporation paid no cash compensation in 1997 to any Director or
Executive Officer other than compensation paid by the Bank, and management has
no present intention of instituting any such compensation. However, if
substantial duties unrelated to the operation of the Bank develop, this policy
will be reexamined as necessary in order to attract and retain qualified
Directors and Executive Officers for the Corporation. All of the current
officers of the Corporation are also Directors and/or employees of the Bank, and
all such officers have been compensated by the Bank.
The following table sets forth the aggregate cash remuneration paid or
accrued by the Bank during 1997 to the Chief Executive Officer of the
Corporation, and the only other executive officer of the Corporation whose
aggregate cash remuneration for 1997 exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------------------------
All other
Other Annual Compensation
Name and Principal Position Year Salary($) Bonus($) Compensation($) ($)(1)
=========================== ==== ========= ======== =============== ======
<S> <C> <C> <C> <C> <C>
Donald L. Grill 1997 $160,000 $86,240(2) $10,250 -0-
President and Chief Executive Officer 1996 6,717 -0- -0- -0-
(from December 1996)
Richard A. Bagnall 1997 $129,000 $47,472 $10,250 $2,375
Executive Vice President - Senior Lender 1996 109,000 65,299 10,250 2,119
1995 105,000 68,600 9,500 2,250
</TABLE>
(1) Employer contribution amount to 401(k) plan for employee's account.
(2) Mr. Grill's 1997 bonus of $86,240 consists of a performance-based
component of $66,240, and an incentive compensation payment of $20,000
offered to encourage Mr. Grill to leave his prior employment and join the
Bank. The Bank also reimbursed Mr. Grill in the amount of $42,000, for
certain taxes he incurred as a result of accepting employment with the
Bank.
DIRECTORS' FEES
The Corporation paid no fees during 1997 to Directors of the
Corporation for their services as Directors. However, each of the Directors of
the Corporation was also a Director of the Bank. The Bank paid its Directors
fees of $16,250 for the Chairman, $11,750 for the Vice Chairman, and $10,250 for
other Directors. All such fees paid to the individuals named in the above
Summary Compensation Table during 1997 are included in that Table.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Corporation and the Bank have entered into a Severance Compensation
Agreement with each of Donald L. Grill and Richard A. Bagnall. Under these
agreements, if a "change in control" (as defined in the agreements) occurs while
the executive is an employee of the Bank or the Corporation, and if within five
years thereafter the executive's employment is terminated by the Bank without
"cause", by the executive for "good reason", or by either party because of the
executive's death or "disability" (in each case, as such terms are defined in
the agreements), then the Bank shall thereafter pay the executive an annual
amount equal to 50% of the highest amount of the executive's "annual
compensation" (as defined in the agreements) in the five preceding calendar
years, for a period of five years after the termination date (or until the first
day of the month immediately preceding the executive's "normal retirement date",
if earlier). If the executive dies after this payment obligation begins, or if
the executive so elects, the Bank will be obligated to make a lump sum payment
of these payments, discounted to the then present value using a 10% per year
discount rate. In addition, the Bank shall provide the executive with hospital
and medical coverage for the full "COBRA" period. However, if the payments
exceed the ceiling amount for deductibility under Section 280G of the Internal
Revenue Code of 1986, then the payments shall be reduced to the maximum amount
allowable under Section 280G.
7
<PAGE> 9
TRANSACTIONS WITH CERTAIN INTERESTED PARTIES
Certain Directors and Executive Officers of the Corporation, including
their associates, were loan customers of the Bank during 1997, 1996 and 1995.
Such loans were made in the ordinary course of business at the Bank's normal
credit terms and interest rates, and do not represent more than a normal risk of
collection. Total loans to these persons at December 31, 1997, 1996 and 1995
amounted to $1,466,396, $1,448,047, and $1,645,412, respectively. During 1997,
$129,505 of new loans were made and repayments totaled $110,490. At December 31,
1997, these loans aggregated 5.48% of consolidated stockholders' equity.
SHAREHOLDER PROPOSALS
Any proposal by a shareholder of the Corporation to be considered for
inclusion in the Proxy Statement for the 1999 Annual Meeting of Shareholders
must be received by Richard A. Bagnall, Secretary, at the principal executive
offices of the Corporation by October 24, 1998.
ANNUAL REPORT ON FORM 10-KSB
Copies of the Corporation's Annual Report on Form 10-KSB for the year
ended December 31, 1997 (including the financial statements and financial
statement schedules, which are also included in this Proxy Statement) may be
obtained upon request from Donald L. Grill, President, at the Corporation's
principal office, One Fenton Square, Fenton, Michigan 48430-0725, telephone
number (810) 750-8725.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Certain parties are required to file under Section 16 of the Securities
Exchange Act of 1934 reports of ownership and changes of ownership with the
Securities and Exchange Commission, and to provide copies of such reports to the
Corporation. Based solely on information provided to the Corporation by the
responsible individuals, the Corporation believes that during the preceding year
all responsible persons timely filed all reports required by Section 16.
INDEPENDENT ACCOUNTANTS
Grant Thornton, the Corporation's independent public accountants for
1997, will attend the Annual Meeting, will have the opportunity to make a
statement if they desire to do so and will be available to answer questions that
may be asked by shareholders.
COST OF SOLICITING PROXIES
The cost of soliciting Proxies will be borne by the Corporation. The
solicitation of Proxies will be made primarily by mail. Proxies may also be
solicited by officers and regular employees of the Corporation and the Bank
personally and by telephone, telegraph or other means, for which they will
receive no additional compensation and at a minimal cost to the Corporation.
Arrangements may also be made directly by the Corporation with banks, brokerage
houses, custodians, nominees and fiduciaries to forward soliciting matter to the
beneficial owners of stock held of record by them and to obtain authorization
for the execution of Proxies. The Corporation may reimburse such institutional
holders for reasonable expenses incurred by them in connection therewith.
By Order of the Board of Directors
RICHARD A. BAGNALL
Secretary
February 20, 1998
8
<PAGE> 10
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FENTURA BANCORP, INC.
DECEMBER 31, 1997, 1996 AND 1995
CONTENTS
PAGE
----
Report of Independent Certified Public Accountants....................... 3
FINANCIAL STATEMENTS
Consolidated Balance Sheets.......................................... 4
Consolidated Statements of Income.................................... 5
Consolidated Statements of Stockholders' Equity...................... 6
Consolidated Statements of Cash Flows................................ 7
Notes to Consolidated Financial Statements........................... 8
<PAGE> 11
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
[GRANT THORNTON L.L.P. LETTERHEAD]
Board of Directors
Fentura Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Fentura Bancorp,
Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Fentura
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the results
of their consolidated operations and their consolidated cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
GRANT THORNTON L.L.P.
Detroit, Michigan
January 16, 1998
<PAGE> 12
FENTURA BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
-------- --------
<S> <C> <C>
Cash and due from banks (Note B) $ 11,047 $ 11,921
Federal funds sold 5,400 8,450
-------- ---------
Cash and cash equivalents 16,447 20,371
Time deposits with other banks 95 95
Loans held for sale 3,525 1,007
Investment securities-held to maturity, at cost (market value
of $9,699 and $6,594 in 1997 and 1996, respectively)
(Note C) 9,590 6,530
Investment securities-available for sale, at market (Note C) 46,460 44,355
Loans (Note D) 180,673 175,229
Less allowance for possible credit losses (2,955) (2,836)
-------- --------
Net loans 177,718 172,393
Bank premises and equipment, net (Note E) 3,990 4,794
Accrued interest receivable 1,907 1,835
Other assets 3,066 3,001
-------- --------
Total assets $262,798 $254,381
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note F)
Interest bearing $199,462 $195,843
Noninterest bearing 31,072 28,206
-------- --------
Total deposits 230,534 224,049
Short-term borrowings 1,500 1,174
FHLB Advances (Note G) 1,185 1,195
Accrued taxes, interest and other liabilities (Note H) 2,837 3,854
-------- --------
Total liabilities 236,056 230,272
STOCKHOLDERS' EQUITY
Common stock, $5 par value; 2,000,000 shares authorized,
692,343 and 677,147 shares issued and outstanding in
1997 and 1996, respectively 3,462 3,386
Capital surplus 16,913 16,266
Retained earnings 6,308 4,632
Unrealized gain (loss) on securities available for sale (Note C) 59 (175)
-------- --------
Total stockholders' equity 26,742 24,109
-------- --------
Total liabilities and stockholders' equity $262,798 $254,381
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE> 13
FENTURA BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Interest income
Loans $18,036 $17,337 $ 15,974
Investment securities
Taxable 2,886 2,378 2,431
Tax exempt 390 434 462
Short-term investments 289 353 121
------- ------- -------
Total interest income 21,601 20,502 18,988
Interest expense
Deposits 8,994 8,389 7,522
Short-term borrowings 173 182 371
------- ------- -------
Total interest expense 9,167 8,571 7,893
------- ------- -------
Net interest income 12,434 11,931 11,095
Provision for possible credit losses (Note D) 624 648 540
------- ------- -------
Net interest income after provision for possible
credit losses 11,810 11,283 10,555
Other operating income
Service charges on deposit accounts 1,584 1,439 1,314
Gain on sale of mortgages 215 326 243
Mortgage servicing income 314 364 396
Fiduciary income 490 350 271
Other 869 993 953
------- ------- -------
Total other operating income 3,472 3,472 3,177
Other operating expenses
Salaries and employee benefits (Note I) 4,925 4,661 4,289
Net occupancy costs 682 645 580
Net furniture and equipment costs 1,423 1,317 1,091
Office supplies 262 320 233
FDIC assessment 28 2 222
Advertising and promotional 305 354 293
Loss on security transactions (Note C) 12 67 117
Other 2,605 2,824 2,492
------- ------- -------
Total other operating expenses 10,242 10,190 9,317
------- ------- -------
Income before income taxes 5,040 4,565 4,415
Provision for income taxes (Note H) 1,580 1,332 1,390
------- ------- -------
Net income $ 3,460 $ 3,233 $ 3,025
======== ======== ========
Per share amounts
Net income $ 5.06 $ 4.84 $ 4.53
Cash dividends $ 2.61 $ 1.93 $ 1.67
Average number of common shares outstanding 683,994 668,106 667,079
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
<PAGE> 14
FENTURA BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
UNREALIZED
GAIN
(LOSS) ON
SECURITIES TOTAL
COMMON CAPITAL RETAINED AVAILABLE STOCKHOLDERS'
STOCK SURPLUS EARNINGS FOR SALE EQUITY
------- ------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 2,901 $13,132 $3,991 $(1,007) $19,017
Net income - - 3,025 - 3,025
Cash dividends, $1.67
per share - - (1,114) - (1,114)
Stock dividend 434 2,778 (3,212) - -
Unrealized gain on securities,
net of tax of $491 (Note C) - - - 952 952
------ ------- ------ ------ -------
Balance, December 31, 1995 3,335 15,910 2,690 (55) 21,880
Net income - - 3,233 - 3,233
Cash dividends, $1.93 per
share - - (1,291) - (1,291)
Issuance of shares under stock
purchase plans (Note J):
Automatic Dividend
Reinvestment Plan 18 125 - - 143
Directors Stock
Purchase Plan 20 144 - - 164
Retainer Stock Plan 7 44 - - 51
Issuance of shares 6 43 - - 49
Unrealized loss on securities,
net of tax of $62 (Note C) - - - (120) (120)
------ ------- ------ ------ -------
Balance, December 31, 1996 3,386 16,266 4,632 (175) 24,109
Net income - - 3,460 - 3,460
Cash dividends, $2.61 per
share (1,784) (1,784)
Issuance of shares under
stock purchase plans (Note J):
Automatic Dividend
Reinvestment Plan 43 384 - - 427
Directors Stock
Purchase Plan 20 154 - - 174
Retainer Stock Plan 8 72 - - 80
Issuance of shares 5 37 - - 42
Unrealized gain on
securities, net of
tax of $120 (Note C) - - - 234 234
------ ------- ------ ------ -------
Balance, December 31, 1997 $3,462 $16,913 $6,308 $ 59 $26,742
====== ======= ====== ====== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
6
<PAGE> 15
FENTURA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,460 $ 3,233 $ 3,025
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 999 949 726
Deferred income taxes (16) (120) (71)
Provision for possible credit losses 624 648 540
Amortization on securities 100 129 98
Realized loss on sale of investment securities 12 67 117
Increase in loans held for sale (2,518) (82) (221)
Increase in accrued interest receivable (72) (158) (87)
(Increase) decrease in other assets (168) 445 383
Increase (decrease) in accrued taxes, interest
and other liabilities (1,017) 1,291 895
------- ------- -------
Total adjustments (2,056) 3,169 2,380
------- ------- -------
Net cash provided by operating activities 1,404 6,402 5,405
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in time deposits with other banks - 95 196
Proceeds from sales of investment securities 7,491 5,449 17,436
Proceeds from maturities of investment securities 12,713 11,966 12,007
Purchase of investment securities (25,128) (22,849) (19,566)
Originations of loans, net of principal repayments (22,211) (8,847) (30,159)
Proceeds from sales of loans 16,262 724 4,955
Acquisition of premises and equipment (229) (1,832) (1,235)
Proceeds from sales of premises and equipment 34 - 68
------- ------- -------
Net cash used in investing activities (11,068) (15,294) (16,298)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW accounts, and savings accounts 5,637 2,382 (885)
Net increase in certificates of deposit 848 10,182 17,717
Net increase (decrease) in short-term borrowings 326 543 (869)
Net increase (decrease) in FHLB advances (10) (805) 2,000
Cash dividends (1,784) (1,291) (1,114)
Proceeds from issuance of stock 723 407 -
------- ------- -------
Net cash provided by financing activities 5,740 11,418 16,849
------- ------- -------
Net increase (decrease) in cash and cash equivalents (3,924) 2,526 5,956
Cash and cash equivalents at beginning of year 20,371 17,845 11,889
------- ------- -------
Cash and cash equivalents at end of year $16,447 $20,371 $17,845
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 8,954 $ 9,382 $ 7,740
Income taxes $ 1,477 $ 1,575 $ 1,516
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
7
<PAGE> 16
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND OPERATIONS
Fentura Bancorp, Inc. (the Corporation) began operations as a bank holding
company in 1988 by issuance of its common stock in exchange for all of the
common stock of The State Bank. The State Bank has been in existence since 1898
and operates nine community banking offices offering banking and trust services
principally to individuals, small business, and government entities primarily in
Genesee, Livingston and Oakland counties.
A summary of the significant accounting policies applied in the preparation of
the accompanying consolidated financial statements follows.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary, The State Bank (the Bank). All significant
intercompany transactions are eliminated in consolidation.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of cost or market. Market value is
determined in the aggregate on the basis of existing forward commitments.
INVESTMENT SECURITIES
Investment securities are classified based on the Corporation's intent with
respect to holding securities.
Securities purchased, where the Corporation has both the positive intent and
ability to hold to maturity, are classified as held to maturity and are recorded
at cost, adjusted for amortization of premium and accretion of discount.
All other securities purchased by the Corporation are classified as available
for sale and carried at market value. Unrealized gains and losses on available
for sale securities are excluded from income and recorded as an amount, net of
tax, in a separate component of stockholders' equity until realized.
INTEREST INCOME ON LOANS
Interest on loans is accrued and credited to income based upon the principal
amount outstanding. The accrual of interest on loans is discontinued when, in
the opinion of management, there is an indication that the borrower may be
unable to meet payments as they become due. Upon such discontinuance, all unpaid
interest accrued during the current quarter is reversed, and unpaid interest
accrued during prior quarters is charged to the allowance for possible credit
losses. Interest accruals are generally resumed when all delinquent principal
and/or interest has been brought current or the loan becomes both well secured
and in the process of collection.
8
<PAGE> 17
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and certain direct loan origination costs are capitalized
and recognized over the life of the related loans as a yield adjustment.
LOAN IMPAIRMENT
A loan is identified as impaired when it is probable in the opinion of
management that interest and principal may not be collected according to the
contractual terms of the loan agreement.
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The allowance is maintained at a level considered by management to be adequate
to provide for reasonably foreseeable loan losses based on an evaluation of the
loan portfolio, loan loss experience and the economic environment.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights represent the cost of acquiring the right to service
mortgage loans. These costs are initially capitalized and subsequently amortized
in proportion to, and over the period of, the estimated net loan servicing
income. The value of the mortgage servicing rights are periodically evaluated in
relation to the estimated discounted net future servicing revenues. Any
valuation adjustment is recorded as an offset to the asset.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over useful lives
ranging from 3 to 50 years.
INCOME TAXES
The Corporation files a consolidated Federal income tax return. The Corporation
utilizes the asset and liability method of accounting for income taxes. Deferred
tax assets and liabilities are recorded based on the difference between the tax
bases of assets and liabilities and their carrying amounts for financial
reporting purposes. Tax planning strategies are utilized in the computation of
deferred federal income taxes. In addition, the current or deferred tax
consequences of a transaction are measured by applying the provisions of enacted
tax laws to determine the amount of taxes receivable or payable currently or in
future years.
9
<PAGE> 18
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME PER SHARE
The Corporation adopted SFAS No. 128, "Earnings Per Share" which is effective
for financial statements issued after December 31, 1997. The adoption of this
standard did not have a significant effect on income per share. Basic income per
share is calculated by dividing net income by the weighted average number of
common shares outstanding.
USE OF ESTIMATES
In the preparation of financial statements, management is required to make
estimates and assumptions that affect reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Corporation
considers cash on hand, cash due from banks and federal funds sold to be cash
equivalents.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
ISSUED BUT NOT YET ADOPTED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued SFAS No. 130,
"Comprehensive Income". The statement requires that entities present items of
other comprehensive income in a financial statement with the same prominence as
other financial statements. The statement is effective in 1998 for the
Corporation.
The FASB has also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement is effective for the
Corporation in 1998; however, management does not expect this pronouncement to
have a significant impact on the Corporation's financial presentation.
NOTE B - RESTRICTED CASH BALANCES
Aggregate reserves of $2,155,000 were maintained in the form of vault cash and
deposits with the Federal Reserve Bank to satisfy regulatory requirements at
December 31, 1997.
10
<PAGE> 19
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE C - INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities held to
maturity at December 31, 1997, by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less $3,432 $3,429
Due in one year through five years 2,942 2,995
Due after five years through ten years 2,078 2,100
Due after ten years 1,138 1,175
------ ------
$9,590 $9,699
====== ======
</TABLE>
The amortized cost and estimated market value of investments in securities held
to maturity, by major category, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Obligations of states and political
subdivisions $9,590 $121 $12 $9,699
====== ==== === ======
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Obligations of states and political
subdivisions $6,530 $ 82 $18 $6,594
====== ===== === ======
</TABLE>
11
<PAGE> 20
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE C - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market value of investment securities available
for sale at December 31, 1997, by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less $ 8,990 $ 8,954
Due in one year through five years 20,000 20,026
Due after five years through ten years 13,075 13,185
------- -------
42,065 42,165
Equity securities 760 760
Mortgage backed securities 3,547 3,535
------- -------
$46,372 $46,460
======= =======
</TABLE>
The amortized cost and estimated market value of investments in debt securities
available for sale, by major category, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Obligations of US government corporations and
agencies $42,065 $167 $67 $42,165
Equity securities 760 - - 760
Mortgage backed securities 3,547 9 21 3,535
------- ---- ---- -------
$46,372 $176 $88 $46,460
======= ==== === =======
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Obligations of US government corporations and
agencies $41,030 $66 $290 $40,806
Equity securities 716 - - 716
Mortgage backed securities 2,874 - 41 2,833
------- ---- ---- -------
$44,620 $66 $331 $44,355
======= === ==== =======
</TABLE>
12
<PAGE> 21
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE C - INVESTMENT SECURITIES (CONTINUED)
Securities having a carrying value of $2,510,000 (market value of $2,508,000)
were pledged at December 31, 1997 to secure public deposits, repurchase
agreements, and for other purposes required by law.
Gross gains on sales of securities of $24,000, $41,000 and $78,000 and gross
losses of $36,000, $108,000 and $195,000 were recognized in 1997, 1996 and 1995,
respectively.
NOTE D - LOANS
Major categories of loans included in the portfolio at December 31, are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Commercial $ 81,544 $ 79,450
Real estate - construction 14,589 15,467
Real estate - mortgage 15,007 15,924
Consumer 69,533 64,388
-------- --------
$180,673 $175,229
======== ========
</TABLE>
Final loan maturities and rate sensitivity of the loan portfolio at December 31,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
WITHIN ONE- AFTER
ONE FIVE FIVE
YEAR YEARS YEARS TOTAL
------- -------- ------- --------
<S> <C> <C> <C> <C>
Commercial $29,831 $ 56,754 $ 3,121 $ 89,706
Real Estate 6,918 4,947 9,569 21,434
Consumer 7,759 50,722 11,052 69,533
------- -------- ------- --------
$44,508 $112,423 $23,742 $180,673
======= ======== ======= ========
Loans at fixed interest rates $15,930 $ 87,714 $22,099 $125,743
Loans at variable interest rates 28,578 24,709 1,643 54,930
------- -------- ------- --------
$44,508 $112,423 $23,742 $180,673
======= ======== ======= ========
</TABLE>
13
<PAGE> 22
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE D - LOANS (CONTINUED)
The aggregate balances on nonaccrual loans and the reduction of interest income
associated with these loans at December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Nonaccrual $1,866 $575
====== ====
As a percentage of total loans 1.03% .33%
====== ====
Income in accordance with original loan terms $ 173 $ 46
Income recognized - -
------ ----
Reduction in interest income $ 173 $ 46
====== ====
</TABLE>
Certain directors and executive officers of the Corporation, including their
associates, were loan customers of the Bank during 1997 and 1996. Such loans
were made in the ordinary course of business at the Bank's normal credit terms
and interest rates, and do not represent more than a normal risk of collection.
Total loans to these persons at December 31, 1997, 1996 and 1995 amounted to
$1,466,000, $1,448,000, and $1,645,000, respectively. During 1997, $130,000 of
new loans were made, repayments totaled $111,000, and directors with loans (or
associated loans) aggregating $1,000 were removed. At December 31, 1997 these
loans aggregated 5.5% of consolidated stockholders' equity.
Transactions in the allowance for possible credit losses for the years ended
December 31, were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year $2,836 $2,618 $2,158
Provision for possible credit losses charged to
operations 624 648 540
------ ------ ------
3,460 3,266 2,698
Loans charged off, net of recoveries of $64
$79 and $210 for 1997, 1996 and 1995,
respectively 505 430 80
------ ------ ------
Balance, end of year $2,955 $2,836 $2,618
====== ====== ======
As a percent of total loans 1.64% 1.62% 1.56%
====== ====== ======
</TABLE>
14
<PAGE> 23
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE D - LOANS (CONTINUED)
Loan impairment is measured by estimating the expected future cash flows and
discounting them at the respective effective interest rate or by valuing the
underlying collateral. The recorded investment in these loans is as follows at
December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Principal amount not requiring allowance $ 5 $300
Principal amount requiring specific allowance 3,216 659
------ ----
3,221 959
Less: valuation allowance 840 451
------ ----
$2,381 $508
====== ====
</TABLE>
The above valuation allowance related to impaired loans is included in the total
allowance for possible credit losses.
Interest income recognized on impaired loans based on cash collections totaled
approximately $199,000, $123,000, and $23,000 for the years ended December 31,
1997, 1996, and 1995, respectively. The average recorded investment in impaired
loans was $2,090,000, $758,000, and $278,000 during the years ended December 31,
1997, 1996 and 1995.
NOTE E - BANK PREMISES AND EQUIPMENT
Bank premises and equipment are comprised of the following at December 31, (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land and land improvements $ 355 $ 355
Building and building improvements 2,754 2,703
Furniture and equipment 6,560 6,492
------ ------
9,669 9,550
Less accumulated depreciation 5,679 4,756
------ ------
$3,990 $4,794
======= =======
</TABLE>
15
<PAGE> 24
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE F - DEPOSITS
The following is a summary of deposits at December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Interest bearing:
Savings $ 61,026 $ 58,642
Money market demand 33,258 32,871
Time, $100,000 and over 25,605 27,258
Time, $100,000 and under 79,573 77,072
-------- --------
$199,462 $195,843
======== ========
Noninterest bearing:
Demand $ 31,072 $ 28,206
======== ========
</TABLE>
At December 31, 1997, scheduled maturity of time deposits were as follows (in
thousands):
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
Less than 1 year $ 72,080
1 - 5 years 32,750
Over 5 years 348
--------
$105,178
========
</TABLE>
NOTE G - FHLB ADVANCES
The Bank has the authority and approval from the FHLB to utilize $15,000,000 in
collateralized borrowings. Advances at December 31, 1997 mature in 2016.
Pursuant to collateral agreements with the FHLB, advances are collateralized by
the unpaid principal balance of permanent 1-4 family whole mortgage loans, the
outstanding balance of U.S. government and agency securities, and the
outstanding balance of mortgage backed securities. The average monthly amount of
outstanding advances approximated $1,200,000 and $1,300,000 during 1997 and
1996, respectively. Interest expense for advances totaled approximately $87,000
and $93,000 during 1997 and 1996, respectively.
NOTE H - INCOME TAXES
The provision for income taxes reflected in the consolidated statements of
income for the years ended December 31, consists of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current $1,596 $1,452 $1,461
Deferred (16) (120) (71)
------ ------ ------
$1,580 $1,332 $1,390
====== ====== ======
</TABLE>
16
<PAGE> 25
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE H - INCOME TAXES (CONTINUED)
Income tax expense was less than the amount computed by applying the statutory
federal income tax rate to income before income taxes. The reasons for the
difference are as follows:
<TABLE>
<CAPTION>
% OF PRETAX INCOME
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax at statutory rate 34% 34% 34%
Tax exempt interest (2) (3) (3)
Other (1) (2) -
---- ---- ----
Actual income tax expense 31% 29% 31%
==== ==== ====
</TABLE>
The deferred tax asset and current liability are reflected in the balance sheet
in other assets and accrued taxes, interest and other liabilities,
respectively. The details of the net deferred tax asset and current
liability at December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets
Provision for possible credit losses $ 811 $ 771
Deferred loan fees 11 7
Deferred compensation 92 88
Unrealized losses on investment securities available for sale - 90
Other 62 16
----- -----
Total deferred tax assets 976 972
Deferred tax liabilities
Depreciation (90) (126)
Gain on sale of mortgage servicing rights (105) -
Unrealized gains on investment securities available for sale (30) -
Other (91) (82)
----- -----
Total deferred tax liabilities (316) (208)
----- -----
Net deferred tax asset 660 764
Current liability (126) (22)
----- -----
$ 534 $ 742
===== =====
</TABLE>
The tax effect of the unrealized losses on investment securities available for
sale is credited directly to its related component of stockholders' equity.
17
<PAGE> 26
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE I - BENEFIT PLANS
The Corporation has a noncontributory discretionary employee stock ownership
plan (Plan) covering substantially all of its employees. It is the Plan's
intention to invest principally in the Corporation's common stock. The
contribution to the Plan in 1997, 1996 and 1995 was $145,000, $135,000 and
$125,000, respectively.
The Corporation has also established a 401(k) Plan where 25% of the employees'
contribution can be matched with a discretionary contribution by the Corporation
up to a maximum of 6% of gross wages. The contribution to the 401(k) Plan for
1997, 1996 and 1995 was $32,000, $31,000 and $30,000, respectively.
NOTE J - STOCK PURCHASE AND OPTION PLANS
The Corporation implemented the following stock purchase and option plans in
1997.
The Automatic Dividend Reinvestment Plan ("DRIP") permits enrolled shareholders
to automatically use dividends paid on common stock to purchase additional
shares of the Corporation's common stock at the fair market value on the
investment date. Any shareholder who is the beneficial or record owner of not
more than 9.9% of the issued and outstanding shares of the Corporation's common
stock is eligible to participate in the plan.
The Directors Stock Purchase Plan permits directors of the Corporation to
purchase shares of common stock made available for purchase under the plan at
the fair market value on the fifteenth day prior to the annual issuance date.
The total number of shares issuable under this plan is limited to 4,000 shares
in any calendar year.
The Retainer Stock Plan for Directors allows directors to elect to receive
shares of common stock in full or partial payment of the directors' retainer
fees and fees for attending meetings. The number of shares is determined by
dividing the dollar amount of fees to be paid in shares by the market value of
the stock on the first business day prior to the payment date.
The Executive Stock Bonus Plan permits the administrator of the plan to grant
shares of the Corporation's common stock to eligible employees. Any executive or
managerial level employee is eligible to receive grants under the plan. The plan
is administered by the Board of Directors.
The Nonemployee Director Stock Option Plan grants 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 2,800 shares of stock may be granted under the
Plan in any calendar year and options to acquire not more than 28,000 shares in
the aggregate may be outstanding at any one time. There were 1,610 options
outstanding under this plan at December 31, 1997.
18
<PAGE> 27
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE J - STOCK PURCHASE AND OPTION PLANS (CONTINUED)
The Employee Stock Option Plan grants 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 30,000 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. There were no options
outstanding under this plan at December 31, 1997.
Pursuant to a separate agreement with a family who collectively hold more than
9.9% of the Corporation's stock, on or prior to January 31 of each year
beginning January 31, 1997, the Corporation is to advise the family, in a
written notice, of the number of shares sold under the DRIP . Each family member
will have the option, until February 28 of the same year, to purchase from the
Corporation one-third of the total number of shares that would be sufficient to
prevent the dilution to all family members as a group that would otherwise
result solely as a result of the DRIP shares. The purchase price under this
agreement is the fair market value on December 31 of the year immediately
preceding the year in which the written notice is given.
The options granted under the above described option plans are not significant
to the Corporation, consequently pro forma disclosures under SFAS No. 123,
"Accounting for Stock Based Compensation," have not been presented.
NOTE K - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets its capital adequacy requirements to which it is subject.
19
<PAGE> 28
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE K - REGULATORY MATTERS (CONTINUED)
As of December 31, 1997, the most recent notification from Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $28,168 13.47% $ 16,726 8.00% $20,907 1000%
Tier 1 Capital
(to Risk Weighted Assets) $25,555 12.22% $ 8,363 4.00% $12,544 6.00%
Tier 1 Capital
(to Average Assets) $25,555 9.99% $ 10,233 4.00% $12,791 5.00%
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $26,414 13.01% $ 16,246 8.00% $20,307 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $23,876 11.76% $ 8,123 4.00% $12,184 6.00%
Tier 1 Capital
(to Average Assets) $23,876 9.86% $ 9,688 4.00% $12,110 5.00%
</TABLE>
20
<PAGE> 29
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE L - FINANCIAL INSTRUMENTS
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporation's financial instruments at December
31, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 16,447 $ 16,447 $ 20,371 $ 20,371
Time deposits with other banks 95 95 95 95
Loans held for sale 3,525 3,533 1,007 1,010
Securities 56,050 56,159 50,882 50,949
Loans 177,718 181,159 172,393 174,900
Liabilities:
Deposits 230,534 231,154 224,049 223,993
Short-term borrowings 1,500 1,500 1,174 1,174
FHLB advances 1,185 1,254 1,195 1,236
</TABLE>
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and short-term instruments approximate their fair values.
Investment securities and time deposits with other banks (including
mortgage-backed securities): Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans held for sale: The market value of these loans represents estimated fair
value. The market value is determined in the aggregate on the basis of existing
forward commitments.
Loans: For variable rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for other loans are estimated using discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. The carrying amount of accrued interest receivable
approximates its fair value.
Off-balance-sheet instruments: The Corporation's off-balance-sheet instruments
approximate their fair values.
21
<PAGE> 30
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE L - FINANCIAL INSTRUMENTS (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Deposit liabilities: The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date. The
carrying amounts for variable rate, fixed term money market accounts and
certificates of deposit approximate their fair values at the reporting date.
Fair values for fixed rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on similar certificates. The carrying amount of accrued interest payable
approximates its fair value.
Short-term borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
approximate their fair values.
FHLB advances: Rates currently available for debt with similar terms and
remaining maturities are used to estimate the fair value of the existing debt.
Limitations: Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on
management's judgments regarding future expected loss experience, current
economic conditions, risk characteristics and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
OFF-BALANCE-SHEET RISK
The Corporation is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and financial guarantees. These
instruments involve, to varying degrees, elements of credit and interest rate
risk that are not recognized in the statement of financial condition.
Exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and financial guarantees
written is represented by the contractual notational amount of those items. The
Corporation generally requires collateral to support such financial instruments
in excess of the contractual notational amount of those instruments and,
therefore, is in a fully collateralized position.
22
<PAGE> 31
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE L - FINANCIAL INSTRUMENTS (CONTINUED)
OFF-BALANCE-SHEET RISK (CONTINUED)
The Corporation had outstanding unfunded loan origination commitments
aggregating $30,853,000 and $37,973,000 at December 31, 1997 and 1996,
respectively. Commitments to extend credit are agreements to lend to a customer
as long as there are no violations of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require a payment of a fee. Fees from issuing these commitments to
extend credit are recognized over the period to maturity. Since a portion of the
commitments are expected to expire without being drawn upon, the total
commitments do not necessarily represent future cash requirements. The
Corporation evaluates each customer's creditworthiness on a case by case basis.
The amount of collateral obtained upon extension of credit is based on
management's credit evaluation of the customer.
The Corporation originates primarily residential and commercial real estate
loans, commercial loans, and installment loans. The Corporation estimates that
80% of their loan portfolio is based in Genessee, Livingston, and Oakland
counties within Southeast Michigan with the remainder of the portfolio
distributed throughout Michigan.
At December 31, 1997, the Corporation has consumer loans collateralized by real
estate aggregating approximately $23,296,000 and construction loans relating to
commercial, residential and land development properties of approximately
$14,589,000.
NOTE M - PARENT ONLY CONDENSED FINANCIAL INFORMATION
The condensed financial information that follows presents the financial
condition of Fentura Bancorp, Inc. (parent company only), along with the results
of its operations and its cash flows.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
1997 1996
---- ----
[S] [C] [C]
ASSETS
Cash $ 1,128 $ 407
Investment in subsidiary 25,614 23,702
------- -------
$26,742 $24,109
======= =======
STOCKHOLDERS' EQUITY $26,742 $24,109
======= =======
23
<PAGE> 32
FENTURA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE M - PARENT ONLY CONDENSED FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Dividends from subsidiary $1,784 $1,291 $1,114
Interest income 19 - -
Operating expense (reimbursement for transfer pricing) (21) - -
Equity in undistributed income of subsidiary 1,678 1,942 1,911
------ ------ ------
Net income $3,460 $3,233 $3,025
====== ====== ======
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $3,460 $ 3,233 $ 3,025
Adjustment to reconcile net income to net
cash provided by operating activities
Equity in undistributed income of subsidiary (1,678) (1,942) (1,911)
------ ------- ------
Net cash provided by operating activities 1,782 1,291 1,114
Cash flows used for financing activities
Dividends paid (1,784) (1,291) (1,114)
Proceeds from stock issuance 723 407 -
------ ------- ------
Net cash used in financing activities (1,061) (884) (1,114)
Net change in cash and cash equivalents 721 407 -
Cash and cash equivalents at beginning of year 407 - -
------ ------- ------
Cash and cash equivalents at end of year $1,128 $ 407 $ -
====== ======= =======
</TABLE>
24
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This section provides a narrative discussion and analysis of the consolidated
financial condition and results of operations of Fentura Bancorp, Inc. ((the
Corporation), together with its sole operating subsidiary, The State Bank (the
Bank), the Corporation), for the years ended December 31, 1997, 1996, and 1995.
The supplemental financial data included throughout this discussion should be
read in conjunction with the primary financial statements presented on pages 4
through 24 of this report. It provides a more detailed and comprehensive review
of operating results and financial position than could be obtained from an
examination of the financial statements alone.
PERFORMANCE SUMMARY
Selected financial data as of December 31, 1997 and 1996 and for the years then
ended, are presented on page 9 of the Corporation's 1997 Annual Report. As
indicated, the Corporation experienced an increase in net income caused
primarily by earning asset growth, and accordingly, an increase in net interest
income.
Net Interest Income
Net interest income, the principal source of earnings, is the amount of interest
income generated by earning assets (principally investment securities and loans)
less interest expense paid on interest bearing liabilities (largely deposits and
other borrowings). Table 1 summarizes the changes in net interest income
resulting from changes in volume and rates for the years ended December 31,
1997, 1996, and 1995. Net interest income (displayed without consideration of
full tax equivalency), average balance sheet amounts, and the corresponding
yields for the last three years are shown in Table 2. Net interest income
increased $503,000 in 1997, or 4.2% to $12,434,000 as compared with an increase
of $836,000 or 7.5% to $11,931,000, in 1996 and $1,684,000, or 17.9%, in 1995.
The primary factor contributing to the interest income increase is growth in the
loan portfolio (the largest group of earning assets) and growth of the
investment securities portfolio. The increase in interest income was partially
offset by an increase in interest expense. Growth in certificate of deposit,
savings, and interest bearing checking balances and a minor increase in average
rates paid on deposits resulted in the increase in interest expense. Balances
increased principally due to greater market penetration in existing markets.
As indicated in Table 2, for the year ended December 31, 1997, the Corporation's
net interest margin was 5.18% compared with 5.24% and 5.30% for the same period
in 1996 and 1995 respectively. The decrease in margin is attributable to the
change in the interest rate environment. Asset yields are slightly lower because
certain earning assets have matured or paid down throughout the year and new
assets have been recorded at lower interest rates. Additionally, certain assets
have repriced as market rates fluctuated during the year. Additionally, rates on
savings deposits increased as the Bank experienced growth in market rate based
savings products.
Average earning assets increased 5.6% in 1997, 8.7% in 1996, and 10.2% in 1995.
Loans, the highest yielding component of earning assets, represented 74.1% of
earning assets in 1997 down from 75.5% in 1996 and 75.0% in 1995. Average
interest bearing liabilities increased 6.1% in 1997, 8.4% in 1996, and 11.3% in
1995. Non-interest bearing deposits amounted to 11.2% of average earning assets
in 1997 compared with 11.8% in 1996 and 12.4% in 1995.
25
<PAGE> 34
TABLE 1 CHANGES IN NET INTEREST INCOME
DUE TO CHANGES IN AVERAGE VOLUME
AND INTEREST RATES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
1997 1996 1995
DUE TO: DUE TO: DUE TO:
------------------------------------------------------------------------------
TWELVE MONTHS ENDED DECEMBER 31, YIELD/ YIELD/ YIELD/
(000's omitted) VOL RATE TOTAL VOL RATE TOTAL VOL RATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST BEARING DEPOSITS IN BANKS ($4) $0 ($4) ($20) $1 ($19) ($7) $1 ($6)
TAXABLE SECURITIES 432 77 509 (52) (2) (54) (332) 176 (156)
TAX-EXEMPT SECURITIES (42) (3) (45) (29) 2 (27) (3) (4) (7)
FEDERAL FUNDS SOLD (65) 4 (61) 286 (34) 252 (107) 36 (71)
TOTAL LOANS 627 (19) 608 1,503 (146) 1,357 2,666 1,157 3,823
LOANS HELD FOR SALE 98 (6) 92 12 (7) 5 17 (7) 10
-----------------------------------------------------------------------------
TOTAL EARNING ASSETS 1,046 53 1,099 1,700 (186) 1,514 2,234 1,359 3,593
INTEREST BEARING DEMAND DEPOSITS 46 (59) (13) 29 6 35 (37) (48) (85)
SAVINGS DEPOSITS 104 116 220 (48) (136) (184) (26) 38 12
TIME CD'S $100,000 AND OVER (34) 10 (24) 550 (23) 527 366 254 620
OTHER TIME DEPOSITS 413 9 422 479 10 489 597 476 1,073
OTHER BORROWINGS (13) 4 (9) (179) (10) (189) 185 104 289
-----------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES 516 80 596 831 (153) 678 1,085 824 1,909
-----------------------------------------------------------------------------
NET INTEREST INCOME $530 ($27) $503 $869 ($33) $836 $1,149 $535 $1,684
=============================================================================
</TABLE>
26
<PAGE> 35
TABLE 2 AVERAGE BALANCES AND RATE
(000's omitted) YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
ASSETS AVG BAL INC/EXP YIELD AVG BAL INC/EXP YIELD AVG BAL INC/EXP YIELD
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST BEARING DEPOSITS IN
BANKS $95 $9 9.47% $138 $13 9.42% $370 $32 8.65%
INVESTMENT SECURITIES:
U.S. TREASURY AND
GOVERNMENT AGENCIES 46,204 2,826 6.12% 39,024 2,322 5.95% 39,946 2,379 5.96%
STATE AND POLITICAL 7,704 390 5.06% 8,517 435 5.11% 9,080 462 5.09%
OTHER 748 60 8.02% 707 55 7.78% 661 52 7.87%
------------------------ -------------------------- ------------------------
TOTAL INVESTMENT SECURITIES 54,656 3,276 5.99% 48,248 2,812 5.83% 49,687 2,893 5.82%
FED FUNDS SOLD 5,176 280 5.41% 6,403 341 5.33% 1,521 89 5.85%
LOANS: (INCLUDING NON-ACCRUAL
BALANCES AND INCOME RECEIVED)
COMMERCIAL 87,746 8,586 9.79% 85,087 8,417 9.89% 78,226 7,928 10.13%
TAX FREE 635 36 5.67% 1,001 56 5.59% 983 61 6.21%
REAL ESTATE-MORTGAGE 22,280 2,413 10.83% 24,715 2,651 10.73% 22,103 2,407 10.89%
CONSUMER 67,401 6,836 10.14% 61,018 6,139 10.06% 55,671 5,510 9.90%
------------------------ -------------------------- ------------------------
TOTAL LOANS 178,062 17,871 10.04% 171,821 17,263 10.05% 156,983 15,906 10.13%
ALLOWANCE FOR LOAN LOSS (2,924) (2,758) (2,406)
NET LOANS 175,138 17,871 10.20% 169,063 17,263 10.21% 154,577 15,906 10.29%
------------------------ -------------------------- ------------------------
LOANS HELD FOR SALE 2,266 165 7.28% 966 73 7.56% 815 68 8.35%
------------------------ -------------------------- -------------------------
TOTAL EARNING ASSETS $240,255 $21,601 8.99% $227,576 $20,502 9.01% $209,375 $18,988 9.07%
------------------------------------------------------------------------------------
CASH DUE FROM BANKS 9,620 8,724 7,829
ALL OTHER ASSETS 9,678 9,439 8,828
-------- -------- --------
TOTAL ASSETS $256,629 $242,981 $223,626
======== ======== ========
LIABILITIES & SHAREHOLDERS' EQUITY:
DEPOSITS:
NON-INTEREST BEARING - DDA $26,794 $26,895 $26,041
INTEREST BEARING - DDA 32,380 745 2.30% 30,534 758 2.48% 29,349 723 2.46%
SAVINGS DEPOSITS 59,892 1,980 3.31% 56,536 1,760 3.11% 57,974 1,944 3.35%
TIME CD'S $100,000 AND OVER 27,715 1,637 5.91% 28,290 1,661 5.87% 19,052 1,134 5.95%
OTHER TIME CD'S 79,673 4,632 5.81% 72,550 4,210 5.80% 64,278 3,721 5.79%
------------------------ -------------------------- ------------------------
TOTAL DEPOSITS 226,454 8,994 3.97% 214,805 8,389 3.91% 196,694 7,522 3.82%
OTHER BORROWINGS 2,462 173 7.03% 2,655 182 6.85% 5,130 371 7.23%
------------------------- -------------------------- -------------------------
INTEREST BEARING LIABILITIES $202,122 $9,167 4.54% $190,565 $8,571 4.50% $175,783 $7,893 4.49%
------------------------------------------------------------------------------------
ALL OTHER LIABILITIES 2,561 2,501 1,118
SHAREHOLDERS EQUITY 25,152 23,020 20,684
-------- -------- --------
TOTAL LIABILITIES and S/H $256,629 $242,981 $223,626
EQUITY
======== ------- ======== ------- ======== -------
Net Interest Rate Spread 4.46% 4.51% 4.58%
Impact of Non-Int Bearing
Funds on Margin 0.72% 0.73% 0.72%
------- ------- -------
Net Interest Income/Margin $12,434 5.18% $11,931 5.24% $11,095 5.30%
=============== ================ ===============
</TABLE>
27
<PAGE> 36
ALLOWANCE AND PROVISION FOR POSSIBLE CREDIT LOSSES
The allowance for possible credit losses reflects management's judgment as to
the level considered appropriate to absorb potential losses inherent in the loan
portfolio. The Bank's methodology in determining the adequacy of the allowance
includes a review of individual loans and off-balance sheet arrangements,
historical loss experience, current economic conditions, portfolio trends, and
other pertinent factors. Although reserves have been allocated to various
portfolio segments, the allowance is general in nature and is available for the
portfolio in its entirety. At December 31, 1997, the allowance for possible
credit losses was $2,955,000, or 1.64% of total loans. This compares with
$2,836,000, or 1.62%, at December 31, 1996 and $2,618,000, or 1.56%, at December
31, 1995.
The provision for possible credit losses was $624,000 in 1997 and $648,000 and
$540,000 in 1996 and 1995 respectively. The Bank reduced the provision in 1997
while maintaining a higher reserve to gross loan total due to moderate growth in
loan outstandings. Table 3 summarizes loan losses and recoveries during 1997,
1996, and 1995. During 1997 the Bank experienced net charge-offs of $505,000,
compared with net charge-offs of $430,000 and $80,000 in 1996 and 1995
respectively. Accordingly, the net charge-off ratio for 1997 was .27% compared
to .24% and .05% at the end of 1996 and 1995 respectively. An increase in
charge-offs of installment loans to individuals most significantly impacted 1997
totals. Specific procedures have been implemented to strengthen consumer loan
underwriting and enhance collection efforts.
<TABLE>
<CAPTION>
TABLE 3
ANALYSIS OF THE ALLOWANCE FOR POSSIBLE CREDIT LOSSES YEARS ENDED
(000'S OMITTED) DECEMBER 31,
1997 1996 1995
-------------------------------------------------
Balance Beginning of Period $2,836 $2,618 $2,158
-------------------------------------------------
<S> <C> <C> <C>
Charge-offs:
Domestic:
Commercial, Financial and Agricultural (69) (154) (151)
Real Estate-Construction 0 0 0
Real Estate-Mortgage 0 (50) (14)
Installment Loans to Individuals (500) (304) (125)
Lease Financing 0 0 0
-------------------------------------------------
Total Charge-offs (569) (508) (290)
-------------------------------------------------
Recoveries:
Domestic:
Commercial, Financial and Agricultural 15 7 127
Real Estate-Construction 0 0 0
Real Estate-Mortgage 4 8 9
Installment Loans to Individuals 45 63 74
Lease Financing 0 0 0
-------------------------------------------------
Total Recoveries 64 78 210
-------------------------------------------------
Net Charge-offs (505) (430) (80)
-------------------------------------------------
Provision 624 648 540
-------------------------------------------------
Balance at End of Period $2,955 $2,836 $2,618
=================================================
Ration of Net Charge-offs During the Period 0.28% 0.24% 0.05%
=================================================
</TABLE>
28
<PAGE> 37
NON-INTEREST INCOME
Non-interest income was $3,472,000 in 1997, $3,472,000 and $3,177,000 in 1996
and 1995 respectively. These amounts represent no increase in 1997, a 9.3%
increase in 1996, and a 16.6% increase in 1995. As detailed below, the Bank
experienced growth in service charges on deposit accounts, fiduciary activities,
and other operating income matched by declines in mortgage servicing and sales
and gains on other real estate owned.
The most significant category of non-interest income is service charges on
deposit accounts. These fees were $1,584,000 compared to $1,439,000 in 1996 and
$1,314,000 in 1995. This is an increase of $145,000 or 10.1% in 1997 and
$125,000 or 9.5% in 1996. Growth in deposit totals, the number of accounts and
certain account activities account for the increase.
Gain on the sale of mortgage loans originated by the Bank and sold in the
secondary market were $215,000 in 1997, $326,000 in 1996, and $243,000 in 1995.
The 34.0% decrease in 1997 occurred because of strong competitive pressures and
a reduction in the margins of these sold mortgage loans. The increase in 1996
occurred primarily due to the recognition of income from the value of mortgage
servicing rights which began with the implementation of Financial Accounting
Standard No. 122.
Gain on the sale of real estate owned declined to $1,000 in 1997, compared to
$145,000 in 1996 and $297,000 in 1995. A decline in the amount of real estate
owned and associated sales transactions account for the declines in 1997 and
1996.
Fees from servicing sold mortgage loans decreased $50,000 to $314,000 in 1997
compared to $364,000 in 1996 and $396,000 in 1995. The decreases occurred
because of an increase in sold mortgage loan payoffs.
Fiduciary income increased $140,000 in 1997 to $490,000 compared to $350,000 in
1996 and $271,000 in 1995. The 40% fee increase in 1997 and the 29.2% increase
in 1996 is attributable to growth in the assets under management within the
Corporation's Investment Trust Department.
Income derived from merchant services and visa interchange fees, included in
other operating income, was $202,000, in 1997 up from $146,000 in 1996 and
$101,000 in 1995. These increases are attributable to an increase in new
merchant accounts and an increase in customer debit card activity resulting in
higher visa interchange fees.
<TABLE>
<CAPTION>
TABLE 4 TWELVE MONTHS ENDED
ANALYSIS OF NON-INTEREST INCOME DECEMBER 31,
- ---------------------------------------------------------------------------------------
(000'S OMITTED)
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
SERVICE CHARGES ON DEPOSIT ACCOUNTS $1,584 $1,439 $1,314
GAIN ON SALE OF MORTGAGES 215 326 243
GAIN ON SALE OF REAL ESTATE OWNED 1 145 297
MORTGAGE SERVICING FEES 314 364 396
FIDUCIARY INCOME 490 350 271
OTHER OPERATING INCOME 868 848 656
----------------------------------
TOTAL NON-INTEREST INCOME $3,472 $3,472 $3,177
==================================
</TABLE>
29
<PAGE> 38
NON-INTEREST EXPENSE
Total non-interest expense was $10,242,000 in 1997 compared with $10,190,000 in
1996 and $9,317,000 in 1995. This is an increase of .5% in 1997, an increase of
9.4% in 1996, and an increase of 13.2% in 1995.
Salary and benefit costs, the Corporation's largest non-interest expense
category, were $4,925,000 in 1997, compared with $4,661,000 in 1996 and
$4,289,000 in 1995. 1997 salary costs represent an increase of 5.7% over 1996,
and 1996 salary costs represent an increase of 8.7% over 1995. Increased costs
are a result of annual salary increases and additional staff to more effectively
develop and sell products and services.
In 1997 equipment expenses were $1,423,000 compared to $1,317,000 in 1996 and
$1,091,000 in 1995, an increase of 8.0% in 1997 and 20.7% in 1996. Equipment
depreciation expense increased due to 1997 purchases and the increase in
depreciation for assets purchased in 1996 in connection with the opening of two
new supermarket locations. Maintenance contracts on computer systems and
equipment lease expense also increased in 1997.
Occupancy expenses associated with the Corporation's facilities were $682,000 in
1997 compared to $645,000 in 1996 and $580,000 in 1995. This represents an
increase of 5.7% in 1997 and 11.2% in 1996. The primary reason for the increases
is the lease expense associated with the two new supermarket locations and
increased depreciation expense associated with the renovation of existing
facilities.
In 1995, the Federal Deposit Insurance Corporation (FDIC) reviewed and
restructured its premium assessments. Because of this restructuring, many banks
received lower assessment factors. Accordingly, 1996 FDIC assessments dropped
to $2,000 compared to $222,000 in 1995. In 1997, the FDIC reviewed and
reinstated required reserve assessments. Accordingly, in 1997 expenses
associated with the FDIC assessment increased to $28,000 from $2,000 in 1996.
Office supplies expense decreased in 1997 to $262,000 compared to $320,000 in
1996 and $233,000 in 1995. This 18.1% decrease in 1997 is attributable to a
consolidation of regular office supplies and preprinted forms. The increase in
1996 is attributable to cost and volume increases of regular office supplies and
preprinted forms.
Loan and collection expenses were $430,000 in 1997 compared to $383,000 in 1996
and $418,000 in 1995. The $47,000 or 12.3% increase in 1997 is primarily
attributable to an increase in indirect consumer loan volume and accordingly, an
increase in dealer reserve fees.
Advertising and promotional expenses were $305,000 in 1997 compared to $354,000
in 1996 and $293,000 in 1995. The $49,000 or 13.8% decrease in 1997 is
attributable to decreases in the use of various types of media to advertise
products and services and for promotional items to be given to existing and
potential customers as an additional form of advertisement. The increase in 1996
is attributable to increases in media costs associated with advertising products
and services.
In 1997, the Company experienced a $12,000 loss on security transactions
compared to a $67,000 loss in 1996 and a $117,000 loss in 1995. The losses
were associated with the sale of investment securities which the Company
sold in order to reinvest in issues with higher interest rates or more
predictable rate structures. There were fewer of these transactions in 1997
than in 1996 or 1995.
The final category of non-interest expense is other operating expenses.
These expenses were $2,175,000 in 1997 compared to $2,441,000 and $2,074,000
in 1996 and 1995 respectively. The $266,000 decrease in 1997 is primarily
attributable to the 1996 second quarter loss of $125,000 on a litigation
settlement. The increase in 1996 is primarily attributable to the litigation
settlement and increases in legal and consulting fees.
30
<PAGE> 39
<TABLE>
<CAPTION>
TABLE 5 TWELVE MONTHS ENDED
ANALYSIS OF NON-INTEREST EXPENSE DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(000'S OMITTED)
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALARIES AND BENEFITS $4,925 $4,661 $4,289
EQUIPMENT 1,423 1,317 1,091
NET OCCUPANCY 682 645 580
FDIC ASSESSMENT 28 2 222
OFFICE SUPPLIES 262 320 233
LOAN & COLLECTION EXPENSE 430 383 418
ADVERTISING AND PROMOTIONAL 305 354 293
LOSS ON SECURITIES TRANSACTIONS 12 67 117
OTHER OPERATING EXPENSES 2,175 2,441 2,074
------- ------- -------
TOTAL NON-INTEREST EXPENSE $10,242 $10,190 $9,317
======= ======= =======
</TABLE>
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 senior
management, meets regularly to review financial performance and soundness,
including interest rate risk and liquidity exposure in relation to present and
perspective 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 Bank'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 Bank's deposit base plus
other funding sources (federal funds purchased, other liabilities and
shareholders' equity) provided primarily all funding needs in 1997 and 1996.
Primary liquidity is provided through short term investments or borrowings
(including federal funds sold and purchased) and secondary liquidity is provided
by the investment portfolio. As of December 31, 1997 federal funds sold
represented 2.1% of total assets, compared to 3.3% at the end of 1996. 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 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.
The Corporation had cash flows from financing activities resulting primarily
from the growth of demand and savings deposits. In 1997 these deposits increased
$5,637,000 compared with an increase of $2,382,000 in 1996 and a decrease of
$885,000 in 1995. In 1996, cash flows from financing activities were primarily
due to growth of certificates of deposit. During 1996 these deposits increased
$10,182,000 compared to growth of only $848,000 in 1997. Throughout 1997, a more
conservative pricing strategy was established with regard to certificates
because of the negative interest margin impact of previously being a
31
<PAGE> 40
market rate leader in this deposit category. Cash used in investing activities
was $11,068,000 in 1997 and $15,294,000 in 1996. The primary reason for the
decrease in investing activities was a decrease in the origination's of loans,
net of principal repayments comparing 1997 to 1996.
RISK ELEMENTS AND MANAGEMENT
Credit risk is managed via specific credit approvals and monitoring procedures.
The Bank's credit administration function reviews the portfolio on a periodic
basis for compliance with credit policies and for identification of problem
loans. These procedures provide management with information for setting
appropriate direction and taking corrective action as needed.
Construction and Real Estate Loans
The Bank closely monitors its construction and commercial mortgage loan
portfolios. Construction loans at December 31, 1997 which comprised 8.1% of
total loans, totaled $14,589,000 as compared to $15,467,000 at the end of 1996.
The construction and commercial real estate loan portfolios are located
principally in the Bank's local markets. Included are loans to various
industries and professional organizations. The Bank believes that these
portfolios are well diversified and do not present a significant risk to the
institution.
NON-PERFORMING ASSETS
Non-performing assets include loans on which interest accruals have ceased,
loans which have been re-negotiated, and real estate acquired through
foreclosure. Past due loans are loans which were delinquent 90 days or more, but
have not been placed on non-accrual status. Table 6 represents the levels of
these assets at December 31, 1997, 1996, and 1995.
The increase in non-performing loans is primarily due to several delinquent
single-family mortgage loans which have sufficient equity and no expected loss.
Additionally, the increase in non-accrual loans is due to two large commercial
loan facilities wherein agreements have been executed that require specific
action plans, collateral pledges, and related performance expectations. The
loans will be closely monitored. While the non-performing loan increase is of
concern, overall asset quality remains satisfactory.
The ratio trends listed below support the above mentioned loan facilities that
are included in the non-performing category.
32
<PAGE> 41
<TABLE>
<CAPTION>
TABLE 6
NON-PERFORMING ASSETS AND PAST DUE LOANS
DECEMBER 31,
1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C>
NON-PERFORMING LOANS:
LOANS PAST DUE 90 DAYS OR MORE & STILL
ACCRUING $ 618,000 $123,000 $462,000
NON-ACCRUAL LOANS 1,866,000 575,000 320,000
RENEGOTIATED LOANS 8,000 0 0
---------------------------------------------------------
TOTAL NON-PERFORMING LOANS 2,492,000 698,000 782,000
---------------------------------------------------------
OTHER NON-PERFORMING ASSETS:
OTHER REAL ESTATE 0 56,000 207,000
REO IN REDEMPTION 0 0 131,000
OTHER NON-PERFORMING ASSETS 94,000 28,000 0
---------------------------------------------------------
TOTAL OTHER NON-PERFORMING ASSETS 94,000 84,000 338,000
---------------------------------------------------------
TOTAL NON-PERFORMING ASSETS $2,586,000 $782,000 $1,120,000
=========================================================
NON-PERFORMING LOANS AS A % OF
TOTAL LOANS 1.38% 0.40% 0.47%
NON-PERFORMING ASSETS AS A % OF
TOTAL LOANS AND OTHER REAL ESTATE 1.43% 0.45% 0.67%
ALLOWANCE FOR LOAN LOSSES AS A % OF
NON-PERFORMING LOANS 118.58% 406.30% 334.78%
ALLOWANCE FOR LOAN LOSSES, OTHER REAL
ESTATE, AND IN-SUBSTANCE FORECLOSURES
AS A % OF NON-PERFORMING ASSETS 114.27% 369.82% 263.93%
ACCRUING LOANS PAST DUE 90 DAYS OR
MORE TO TOTAL LOANS 0.34% 0.07% 0.28%
NONPERFORMING ASSETS AS A % OF
TOTAL ASSETS 0.98% 0.31% 0.47%
</TABLE>
CAPITAL MANAGEMENT
Total shareholders' equity rose 10.9% to $26,742,000 at December 31, 1997
compared with $24,109,000 at December 31, 1996. The Corporation's equity to
asset ratio was 10.2% at December 31, 1997 compared to 9.5% at December 31,
1996. The increase in the amount of capital was obtained through retained
earnings and the proceeds from the issuance of new shares. In 1997 the
Corporation increased its cash dividends by 35.2% to $2.61 per share compared
with $1.93 in 1996.
At December 31, 1997 the Corporation's tier 1 and total risk-based capital
ratios were 12.2% and 13.5%, respectively, compared with 11.8% and 13.0% in
1996. The Corporation's tier 1 leverage ratio was 10.0% at December 31, 1997
compared with 9.9% at December 31, 1996. These increases are largely
attributable to larger capital growth rate than the growth rate of risk weighted
assets. Regulations prescribed under the Federal Deposit Insurance Corporation
Improvement Act of 1991 have defined "well capitalized" institutions as those
having total risk-based ratios, tier 1 risk-based capital ratios and tier 1
leverage ratios of at least 10%, 6%, and 5% respectively. At December 31, 1997,
the Corporation was well in excess of the minimum capital and leverage
requirements necessary to be considered a "well capitalized" banking company as
defined by federal law.
At December 31, 1997 the Corporation had an unrealized gain on securities
available for sale (AFS) of $59,000 compared to an unrealized loss at December
31, 1996 of $175,000. This change from an unrealized loss to an unrealized gain
is attributable to an overall decrease of market interest rates throughout 1997.
With lower market rates, the market value adjustment changed from the
unrecognized loss based on book value to market value to an unrecognized gain.
33
<PAGE> 42
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. As a matter of practice, the Bank doesn't use
derivative transactions in managing interest rate risk.
An indicator of the interest rate sensitivity structure of a financial
institution's balance sheet is the difference between its interest rate
sensitive assets and interest rate sensitive liabilities, and is referred to as
"GAP".
Table 7 sets forth the distribution of re-pricing of the Corporation's earning
assets and interest bearing liabilities as of December 31, 1997, 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. However, the table does not necessarily indicate 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 rates or indices.
<TABLE>
<CAPTION>
TABLE 7 GAP ANALYSIS
DECEMBER 31, 1997
(000'S OMITTED) WITHIN THREE ONE TO AFTER
THREE MONTHS- FIVE FIVE
MONTHS ONE YEAR YEARS YEARS TOTAL
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
INTEREST BEARING BANK DEPOSITS $95 $0 $0 $0 95
FEDERAL FUNDS SOLD 5,400 0 0 0 5,400
INVESTMENT SECURITIES 3,721 9,499 17,450 25,380 56,050
LOANS 61,124 9,736 87,714 22,099 180,673
LOANS HELD FOR SALE 3,525 0 0 0 3,525
---------------------------------------------------------------------------
TOTAL EARNING ASSETS $73,865 $19,235 $105,164 $47,479 $245,743
===========================================================================
INTEREST BEARING LIABILITIES:
INTEREST BEARING DEMAND DEPOSITS $33,258 $0 $0 $0 $33,258
SAVINGS DEPOSITS 19,452 0 0 41,575 61,027
TIME DEPOSITS LESS THAN $100,000 18,545 35,738 19,112 6,177 79,572
TIME DEPOSITS GREATER THAN $100,000 8,329 10,700 5,410 1,166 25,605
OTHER BORROWINGS 1,500 10 40 1,135 2,685
---------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES $81,084 $46,448 $24,562 $50,053 $202,147
===========================================================================
INTEREST RATE SENSITIVITY GAP ($7,219) ($27,213) $80,602 ($2,574) $43,596
CUMULATIVE INTEREST RATE
SENSITIVITY GAP ($7,219) ($34,432) $46,170 $43,596
INTEREST RATE SENSITIVITY GAP 0.91 0.41 4.28 0.95
CUMULATIVE INTEREST RATE
SENSITIVITY GAP RATIO 0.91 0.73 1.30 1.22
</TABLE>
34
<PAGE> 43
FENTURA BANCORP, INC. COMMON STOCK
Table 8 sets forth the high and low market information for each quarter of 1997,
1996 and 1995, as provided by Roney & Co. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down, or commission and may not represent
actual transactions. As of January 9, 1998, there were 516 shareholders of
record, not including participants in the Company's employee stock option
program.
<TABLE>
<CAPTION>
TABLE 8
DIVIDENDS
MARKET INFORMATION PAID
YEAR QUARTER HIGH LOW PER SHARE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
FIRST QUARTER $40.00 $40.00 $0.33
SECOND QUARTER $41.00 $40.00 $0.33
1995 THIRD QUARTER $43.00 $41.00 $0.33
FOURTH QUARTER $43.00 $41.50 $0.68
------
$1.67
FIRST QUARTER $37.50 $36.50 $0.36
1996 SECOND QUARTER $37.50 $37.50 $0.36
THIRD QUARTER $38.75 $37.50 $0.36
FOURTH QUARTER $42.00 $40.00 $0.85
------
$1.93
FIRST QUARTER $43.75 $43.75 $0.38
1997 SECOND QUARTER $49.00 $44.75 $0.38
THIRD QUARTER $51.00 $48.00 $0.38
FOURTH QUARTER $52.25 $51.00 $1.47
------
$ 2.61
</TABLE>
NOTE: DIVIDEND PER SHARE FIGURES HAVE BEEN ADJUSTED TO REFLECT THE 15% STOCK
DIVIDEND PAYABLE IN JANUARY 1996.
35
<PAGE> 44
[FENTURA BANCORP, INC LOGO]
P R O X Y
ONE FENTON SQUARE
FENTON, MICHIGAN 48430-0725
This Proxy is Solicited on Behalf of the Board of Directors of
Fentura Bancorp, Inc.
The undersigned hereby appoints Richard A. Shook and Brian P. Petty as
Proxies, each with power to appoint his substitute, and hereby authorizes each
and any of them to represent and to vote with respect to the matters set forth
below and in their discretion as to such other matters as may properly be
brought before the meeting or any adjournment thereof, all the shares of Common
Stock of Fentura Bancorp, Inc. held of record by the undersigned at the Annual
Meeting of Shareholders to be held on March 18, 1998, or any adjournment or
adjournments thereof.
This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned shareholder(s). If no direction is made, this
Proxy will be voted FOR the election of the below named individuals. The Board
of Directors recommends a vote FOR the election of the below named individuals.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE
ENCLOSED ENVELOPE.
ELECTION OF DIRECTORS
1. To elect two Directors to serve as "Class I Directors" for a term
until the 2001 Annual Meeting of Shareholders and until their
successors are elected and have qualified.
Nominees:
John S. Gerych Thomas P. McKenney Glen J. Pieczynski Philip J. Lasco
FOR [ ] ALL NOMINEES WITHHOLD [ ]ALL NOMINEES ABSTAIN [ ]
FOR [ ]ALL NOMINEES, except vote withheld from the following
nominee(s):
____________________________________________________________
(type or print name(s) of nominees for whom vote is withheld)
When shares are held by joint tenants, both should sign. When signing
as attorney, executor, administrator, trustee or guardian or in other
representative capacity, please give full title as such. If a corporation,
please sign in full corporate name by president or other authorized officer. If
a partnership, please sign in partnership name by authorized person.
___________________________________
Signature
___________________________________
Signature, if held jointly
Dated:____________________, 1998
TOTAL SHARES:______________________
