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: - -------------------------------------------------------------------------------- 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 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 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: NAME AGE BUSINESS EXPERIENCE DIRECTOR SINCE ---- --- ------------------- -------------- DIRECTOR NOMINEES - TERMS EXPIRING IN 1998 (CLASS I) 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. 3 5 INCUMBENT DIRECTORS - TERMS EXPIRING IN 2000 (CLASS III) 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 (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 6 NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) CLASS (2) 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) (footnotes on following page) 5 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. YEAR BECAME EXECUTIVE NAME AGE BUSINESS EXPERIENCE OFFICER ---- --- ------------------- ------------ 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 6 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 $100,000. Annual Compensation ----------------------------------------------------- All other Other Annual Compensation Name and Principal Position Year Salary($) Bonus($) Compensation($) ($)(1) =========================== ==== ========= ======== =============== ====== 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 (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 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 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 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 12 FENTURA BANCORP, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, - ---------------------------------------------------------------------------------------------------------- ASSETS 1997 1996 -------- -------- 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 ======== ======== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 4 13 FENTURA BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------- 1997 1996 1995 ------- ------- ------- 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 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 5 14 FENTURA BANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - ---------------------------------------------------------------------------------------------------------- UNREALIZED GAIN (LOSS) ON SECURITIES TOTAL COMMON CAPITAL RETAINED AVAILABLE STOCKHOLDERS' STOCK SURPLUS EARNINGS FOR SALE EQUITY ------- ------- -------- --------- ----------- 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 ====== ======= ====== ====== ======= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 6 15 FENTURA BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------ 1997 1996 1995 -------- -------- -------- 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 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 7 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 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 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 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. ESTIMATED AMORTIZED MARKET COST VALUE --------- --------- 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 ====== ====== The amortized cost and estimated market value of investments in securities held to maturity, by major category, are as follows (in thousands): 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 ====== ==== === ====== DECEMBER 31, 1996 --------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- Obligations of states and political subdivisions $6,530 $ 82 $18 $6,594 ====== ===== === ====== 11 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. ESTIMATED AMORTIZED MARKET COST VALUE --------- --------- 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 ======= ======= The amortized cost and estimated market value of investments in debt securities available for sale, by major category, are as follows (in thousands): DECEMBER 31, 1997 -------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- 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 ======= ==== === ======= DECEMBER 31, 1996 ------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- 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 ======= === ==== ======= 12 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): 1997 1996 -------- -------- 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 ======== ======== Final loan maturities and rate sensitivity of the loan portfolio at December 31, 1997 are as follows (in thousands): WITHIN ONE- AFTER ONE FIVE FIVE YEAR YEARS YEARS TOTAL ------- -------- ------- -------- 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 ======= ======== ======= ======== 13 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): 1997 1996 ------ ------ 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 ====== ==== 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): 1997 1996 1995 ------- ------- ------- 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% ====== ====== ====== 14 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): 1997 1996 ------ ----- 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 ====== ==== 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): 1997 1996 ------- ------- 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 ======= ======= 15 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): 1997 1996 -------- -------- 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 ======== ======== At December 31, 1997, scheduled maturity of time deposits were as follows (in thousands): AMOUNT --------- Less than 1 year $ 72,080 1 - 5 years 32,750 Over 5 years 348 -------- $105,178 ======== 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): 1997 1996 1995 ------ ------ ------ Current $1,596 $1,452 $1,461 Deferred (16) (120) (71) ------ ------ ------ $1,580 $1,332 $1,390 ====== ====== ====== 16 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: % OF PRETAX INCOME -------------------------- 1997 1996 1995 ---- ---- ---- Income tax at statutory rate 34% 34% 34% Tax exempt interest (2) (3) (3) Other (1) (2) - ---- ---- ---- Actual income tax expense 31% 29% 31% ==== ==== ==== 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): 1997 1996 ---- ---- 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 ===== ===== The tax effect of the unrealized losses on investment securities available for sale is credited directly to its related component of stockholders' equity. 17 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 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 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. TO BE WELL FOR CAPITAL CAPITALIZED UNDER ADEQUACY PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS ------------------ ----------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------------------ ----------------- ----------------- 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% TO BE WELL FOR CAPITAL CAPITALIZED UNDER ADEQUACY PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS ------------------ ----------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------------------ ----------------- ----------------- 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% 20 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): 1997 1996 ---------------------- ---------------------- ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- --------- -------- --------- 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 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 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 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 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) 1997 1996 1995 ------ ------ ------ 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 ====== ====== ====== CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS) 1997 1996 1995 ------ ------ ------ 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 $ - ====== ======= ======= 24 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 34 TABLE 1 CHANGES IN NET INTEREST INCOME DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES 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 - ---------------------------------------------------------------------------------------------------------------------- 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 ============================================================================= 26 35 TABLE 2 AVERAGE BALANCES AND RATE (000's omitted) YEARS ENDED DECEMBER 31, 1997 1996 1995 ASSETS AVG BAL INC/EXP YIELD AVG BAL INC/EXP YIELD AVG BAL INC/EXP YIELD ------------------------------------------------------------------------------------ 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% =============== ================ =============== 27 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 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 ------------------------------------------------- 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% ================================================= 28 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 4 TWELVE MONTHS ENDED ANALYSIS OF NON-INTEREST INCOME DECEMBER 31, - --------------------------------------------------------------------------------------- (000'S OMITTED) 1997 1996 1995 - --------------------------------------------------------------------------------------- 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 ================================== 29 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 39 TABLE 5 TWELVE MONTHS ENDED ANALYSIS OF NON-INTEREST EXPENSE DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------------ (000'S OMITTED) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ 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 ======= ======= ======= 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 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 41 TABLE 6 NON-PERFORMING ASSETS AND PAST DUE LOANS DECEMBER 31, 1997 1996 1995 ----------------------------------------------------------- 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% 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 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 7 GAP ANALYSIS DECEMBER 31, 1997 (000'S OMITTED) WITHIN THREE ONE TO AFTER THREE MONTHS- FIVE FIVE MONTHS ONE YEAR YEARS YEARS TOTAL 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 34 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 8 DIVIDENDS MARKET INFORMATION PAID YEAR QUARTER HIGH LOW PER SHARE - ----------------------------------------------------------------------------------- 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 NOTE: DIVIDEND PER SHARE FIGURES HAVE BEEN ADJUSTED TO REFLECT THE 15% STOCK DIVIDEND PAYABLE IN JANUARY 1996. 35 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:______________________