<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)

 X       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
----     EXCHANGE ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended DECEMBER 31, 1997

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
----     EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                         Commission file number 33-46573
                                                --------

                             CAPITAL HOLDINGS, INC.
                             ----------------------
             (Exact name of Registrant as specified in its Charter)


               OHIO                                    34-1588902
               ----                                    ----------
      (State of incorporation)            (I.R.S. Employer Identification No.)


                       5520 MONROE ST., SYLVANIA, OH 43560
                       -----------------------------------
          (Address of principal executive offices, including zip code)


                                 (419) 885-7379
                                 --------------
              (Registrant's telephone number, including area code)


        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:   NONE

        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                         COMMON STOCK, WITHOUT PAR VALUE
                         -------------------------------
                                (Title of Class)

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  X
                             ---

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

         The aggregate market value of the voting stock held by non-affiliates
of the Registrant at March 10, 1998 was $94,023,970.

         The number of shares of Registrant's Common Stock outstanding on March
10, 1998 was 2,000,510.


                       DOCUMENTS INCORPORATED BY REFERENCE
                       -----------------------------------

Annual Report to Shareholders for fiscal year ended December 31, 1997 - Parts II
and IV. 
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May
7, 1998 - Part III.


<PAGE>   2


                             CAPITAL HOLDINGS, INC.
                          1997 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                   PAGE
                                                                                                 NUMBER
                                                                                                 ------


                                     PART I

<S>               <C>                                                                                <C>
Item 1.           Business............................................................................3
Item 2.           Properties..........................................................................4
Item 3.           Legal Proceedings...................................................................4
Item 4.           Submission of Matters to a Vote of Security Holders.................................4




                                     PART II

Item 5.           Market for Registrant's Common Equity and Related
                           Shareholder Matters........................................................4
Item 6.           Selected Financial Data.............................................................5
Item 7.           Management's Discussion and Analysis of Financial
                           Condition and Results of Operations........................................6
Item 8.           Financial Statements and Supplementary Data........................................19
Item 9.           Changes in and Disagreements with Accountants
                           on Accounting and Financial Disclosure....................................21




                                    PART III

Item 10.          Directors and Executive Officers of the Registrant.................................21
Item 11.          Executive Compensation.............................................................21
Item 12.          Security Ownership of Certain Beneficial Owners
                           and Management............................................................21
Item 13.          Certain Relationships and Related Transactions.....................................21




                                     PART IV

Item 14.          Exhibits, Financial Statement Schedules and Reports
                           on Form 8-K...............................................................22

Signatures...........................................................................................23
</TABLE>


<PAGE>   3


                                     PART I.

ITEM 1.  BUSINESS
-------  --------

GENERAL
-------

         Capital Holdings, Inc. (the "Company") is a one-bank holding company
with headquarters in Sylvania, Ohio. The Company was formed in July, 1988, for
the purpose of owning and organizing Capital Bank, N.A. (the "Bank"), a national
banking association which is a wholly-owned subsidiary of the Company.

         The Bank opened for business on August 24, 1989, with $12.4 million in
equity capital contributed by the Company. As of December 31, 1997, the total
assets of the Company were $669.5 million with equity capital of $50.5 million.
At December 31, 1996, the Company's total assets were $559.7 million with equity
capital of $41.6 million. On December 31, 1997 and 1996, the Bank paid the
parent Company a $4.0 million and $10.0 million, respectively, cash dividend
which was then subordinated back into the Bank. See "Capital Resources and
Dividends" narrative in Management's Discussion and Analysis of Financial
Condition and Results of Operations for further discussion.

         The Bank has focused its business on corporate, executive and
professional customers while pursuing a deposit gathering strategy of offering
money market checking and savings accounts in addition to certificates of
deposits at attractive rates to mid-sized to large depositors with an emphasis
of minimizing the operating costs of obtaining these deposits.

         The Bank is located in Sylvania, Ohio, a suburban community northwest
of Toledo, Ohio. In addition to drawing customers from Sylvania, the Bank also
draws customers from Southeast Michigan as well as Lucas and Wood counties in
Ohio. The Bank has defined its market niche as serving small to mid-sized
businesses, professionals and their families.

         The Company owns its main office facility located at 5520 Monroe
Street, Sylvania, Ohio through a wholly-owned subsidiary, CBNA Building Company.
The Company and the Bank operate no other offices.

COMPETITION
-----------

         The Bank's primary competition for banking services comes from other
financial institutions located in Lucas and Wood counties. There are currently
14 commercial banks, 5 savings and loans, 1 savings bank and 48 credit unions
believed to be operating physical facilities in these counties. Many of these
institutions are affiliates of companies which have significantly greater assets
than the Bank. As of June 30, 1997 (the most recent date for which information
is readily available), total deposits held by financial institutions in Lucas
and Wood counties approximated $7.1 billion. Since its opening on August 24,
1989, the Bank has grown from $12.4 million in assets to $669.7 million in
assets as of December 31, 1997. The management of the Bank believes the primary
reason for the Bank's success in deposit and loan growth is tied directly to its
niche orientation, and the fact that its products are delivered through highly
personalized service, as well as being very competitive with other financial
institutions in its market area.

EMPLOYEES
---------

         The Company's primary purpose is to operate as a bank holding company
for its bank subsidiary, Capital Bank, N.A. Therefore, the Company has no
compensated employees. As of December 31, 1997, the Bank had 98 full-time
equivalent employees, which represents a 26% increase in staff since December
31, 1996, at which time there were 78 full-time equivalent employees, and a 654%
increase in staff since the Bank opened in August of 1989 with 13 full-time
equivalent employees. None of the employees are covered by a collective
bargaining agreement.

REGULATION
----------

         The Company is a registered bank holding company under the Bank Holding
Company Act of 1956 (the "Banking Act") as amended, and as such is subject to
regulation by the Federal Reserve Board. A bank holding company is required to
file with the Federal Reserve Board annual reports and other information
regarding its business operations and those of its subsidiaries. A bank holding
company and its subsidiary banks are also subject to examination by the Federal
Reserve Board.

         The Bank is regulated by the Office of the Comptroller of the Currency
("OCC") as a National Banking Association. Additionally, the Bank is regulated
by the Board of Governors of the Federal Reserve System ("FRS") as a member of
the Federal Reserve System. The regulatory agencies have the authority to
regularly examine the Bank and the Bank is subject to the regulations
promulgated by its supervisory agencies. In addition, the deposits of the Bank
are insured by the Federal Deposit Insurance Corporation ("FDIC") and,
therefore, the Bank is subject to FDIC regulations.


<PAGE>   4


ITEM 2.  PROPERTIES
-------  ----------

         The Company, through its wholly-owned subsidiary, CBNA Building
Company, owns real estate at 5520 Monroe Street which includes a 50,000 square
foot main office facility. A building expansion of 25,000 square feet was
started in the third quarter of 1996 with final occupancy taken in the second
quarter of 1997. The facility provides the Bank with Class A office space and
all necessary technological supports to operate an effective, personalized bank
which meets the goals of the Company and the Bank. Management of the Company and
Bank as well as the respective Boards of Directors of these organizations,
believe that the facility will be sufficient for expected growth in the Bank for
the foreseeable future.



ITEM 3.  LEGAL PROCEEDINGS
-------  -----------------

         The Company and the Bank from time to time become involved in such
legal proceedings as are incurred in and incidental to the ordinary course of
business. In the opinion of management, any losses resulting from such
proceedings will not be material to the financial condition, liquidity, or
results of operations of the Company or the Bank.




ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------  ---------------------------------------------------

         NONE.



                                    PART II.


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
-------  ---------------------------------------------------------------------

         There is no established public market for the common stock of the
Company.

         There were 980 shareholders of record as of March 10, 1998.

         In 1997, three quarterly cash dividends totaling $984,487 were declared
on the Company's common stock. As of December 31, 1997, $645,860 of those
dividends had been paid out in cash. The dividend declared represented $.17 per
share per quarter for 1997. The Company expects to continue paying quarterly
cash dividends at approximately the current rate. The ability of the Company to
pay cash dividends is dependent in large part on the ability of the Bank to pay
dividends to the Company. The Bank is a national banking association and, as
such, is subject to restrictions and limitations on the amount and timing of the
dividends it may pay pursuant to the national banking laws and regulations. See
"Liquidity" narrative in Management's Discussion and Analysis of Financial
Condition and Results of Operations for further discussion.

         Valuation of the Company's Common Stock is performed by an independent
financial consulting firm experienced in appraisals of commercial banks and bank
holding companies. The fair value of the Company's Common Stock was $47.00,
$37.50 and $29.95 per share at December 31, 1997, 1996 and 1995, respectively,
after giving retroactive effect to a 6% stock dividend issued during 1996 and
1995.


<PAGE>   5


ITEM 6.  SELECTED FINANCIAL DATA
-------  -----------------------

                  (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
                    AS OF AND FOR THE YEAR-ENDED DECEMBER 31

<TABLE>
<CAPTION>
                                               1997              1996              1995              1994              1993
                                         ----------        ----------        ----------        ----------        ----------
<S>                                      <C>               <C>               <C>               <C>               <C>       
CONSOLIDATED RESULTS
   OF OPERATIONS:
Interest income                          $   47,593        $   39,639        $   34,752        $   26,330        $   19,508
Interest expense                             27,026            22,305            19,964            13,188             9,261
                                         ----------        ----------        ----------        ----------        ----------
Net interest income                          20,567            17,334            14,788            13,142            10,247
Provision for credit losses                   1,005               980               850               993               920
                                         ----------        ----------        ----------        ----------        ----------
Net interest income after
   provision for credit losses               19,562            16,354            13,938            12,149             9,327
Other income                                  1,205               874               753               636               589
Other expense                                10,752             8,821             7,590             6,860             5,612
                                         ----------        ----------        ----------        ----------        ----------
Income before income taxes                   10,015             8,407             7,101             5,925             4,304
Income taxes                                  3,234             2,681             2,256             1,844             1,362
                                         ----------        ----------        ----------        ----------        ----------
Net income                               $    6,781        $    5,726        $    4,845        $    4,081        $    2,942
                                         ==========        ==========        ==========        ==========        ==========


CONSOLIDATED BALANCE
   SHEET DATA:
Total assets                             $  669,540        $  559,726        $  483,170        $  417,832        $  322,517
Cash and cash equivalents                    23,292            13,958            13,048            10,847             5,730
Securities available for sale (1)           167,521           159,209           140,627            77,982            54,318
Securities held to maturity                       -                 -                 -            71,920            63,945
Loans, net of deferred loan fees            469,036           380,160           324,788           251,184           194,870
Allowance for credit losses                   6,947             5,942             4,960             4,110             3,117
Deposits                                    579,661           470,743           407,622           357,533           262,732
Shareholders' equity                         50,547            41,590            36,136            27,565            26,947


PER SHARE DATA (2):
Net income:
       Basic                             $     3.57        $     3.04        $     2.59        $     2.20        $     1.61
       Diluted                                 3.43              2.94              2.51              2.14              1.56

Book value at period end                      25.38             21.92             19.18             14.75             14.56

Average shares outstanding:
       Basic                              1,899,904         1,884,278         1,869,017         1,853,856         1,832,886
       Diluted                            1,975,818         1,947,655         1,927,679         1,910,310         1,883,615
</TABLE>

 (1)      The Company adopted Financial Accounting Standards No. 115 in 1993.
          See "Securities" narrative in Management's Discussion and Analysis of
          Financial Condition and Results of Operations.

 (2)      The Company adopted Financial Accounting Standards No. 128, Earnings
          Per Share effective December 31, 1997. Basic per share amounts are
          based upon weighted-average number of common shares outstanding for
          each period, after giving retroactive effect to a 6% stock dividend
          issued during 1996, 1995, 1994 and 1993. Diluted per share amounts are
          based upon weighted-average number of common shares outstanding
          including dilutive effects of options, warrants and convertible
          securities for each period, after giving retroactive effect to a 6%
          stock dividend issued during 1996, 1995, 1994 and 1993. All earnings
          per share amounts for all periods have been restated to conform to the
          Statement 128 requirements. Book value at period end per share amounts
          are based upon year-end shares outstanding for each period.



<PAGE>   6


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------  ---------------------------------------------------------------
               RESULTS OF OPERATIONS
               ---------------------


         The following narrative presents Management's discussion and analysis
of the Company's financial position and results of operations for the past three
years. The objective of this financial review is to enhance the reader's
understanding of the accompanying tables, consolidated financial statements, the
related notes thereto, and statistical information presented elsewhere in this
report.

         The Company was organized in July 1988 and commenced banking operations
in August 1989. The Company achieved profitable operations during 1990 and
continued to experience significant growth in assets, deposits and profitability
during the three years ended December 31, 1997.


                              RESULTS OF OPERATIONS
                              ---------------------


NET INTEREST INCOME
-------------------

         Net interest income, the difference between revenue generated from
earning assets and the interest cost of funding those assets, is the Company's
primary source of earnings. Net interest income increased 19%, 17% and 13% in
1997, 1996 and 1995, respectively. TABLE 1 is an analysis of factors affecting
this change. TABLE 2 sets forth an analysis of the changes in interest earned
and interest paid resulting from changes in volume and rates during each of the
two years in the period ended December 31, 1997. Net interest margin (net
interest income divided by average earning assets) was 3.58% for 1997, 3.59% for
1996 and 3.54% for 1995.

         Average loans outstanding increased 23%, 20% and 31% in 1997, 1996 and
1995, respectively. Average yield on these loans was 8.83%, 8.79% and 8.98%,
respectively. The changes in yield are reflective of the change in market rates
and the refinancing opportunities available during these periods. Securities
represent 28% of the total average earning assets of the Company at December 31,
1997, and the average yields were 6.62%, 6.65% and 6.71% as of December 31,
1997, 1996 and 1995, respectively. The changes in yield are due to changes in
market rates and portfolio mix.

         Average total interest bearing liabilities increased to $517 million in
1997 compared with $432 million in 1996 and $376 million in 1995. The average
cost of interest bearing liabilities was 5.23%, 5.17% and 5.30% for the same
periods. The increase in yield is a direct reflection of the increased volume
and increasing short term rates.


<PAGE>   7


                TABLE 1 - CONSOLIDATED AVERAGE BALANCE SHEETS AND
                         ANALYSIS OF NET INTEREST INCOME
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                1997                          1996                               1995
                                --------------------------------  ----------------------------   ----------------------------------
                                              INTEREST   AVERAGE            INTEREST   AVERAGE                 INTEREST     AVERAGE
                                   AVERAGE    EARNED OR  YIELD OR  AVERAGE  EARNED OR  YIELD OR    AVERAGE     EARNED OR    YIELD OR
                                   BALANCE      PAID       COST    BALANCE    PAID       COST      BALANCE       PAID         COST
                                --------------------------------  ----------------------------   ----------------------------------

<S>                                 <C>          <C>       <C>    <C>         <C>        <C>       <C>           <C>         <C>  
Interest Earning Assets:
   Securities:
      Taxable                       $148,361     $9,671    6.52%  $136,202    $8,915     6.55%     $126,943      $8,386      6.61%
      Tax exempt                      13,623      1,058    7.77%    13,321     1,035     7.77%       13,121       1,017      7.75%
   Loans                             418,029     36,924    8.83%   340,035    29,899     8.79%      283,577      25,466      8.98%
   Federal funds sold                  5,268        300    5.69%     2,660       142     5.34%        3,873         229      5.91%
                                   --------------------           ------------------              ---------------------
Total Interest Earning Assets        585,281     47,953    8.19%   492,218    39,991     8.12%      427,514      35,098      8.21%

Noninterest Earning Assets:
   Cash and due from banks            13,191                        10,641                            9,593
   Bank premises and
         equipment-net                 8,723                         4,797                            4,211
   Other assets                        7,073                         6,051                            5,662
   Less allowance for credit losses   (6,388)                       (5,380)                          (4,574)
                                   ---------                      --------                        ---------
                                    $607,880                      $508,327                         $442,406
                                   =========                      ========                        =========

Interest Bearing Liabilities:
   Interest checking                $138,910      5,847    4.21%   $99,839     3,799     3.81%      $89,608       3,728      4.16%
   Savings deposits                   17,671        509    2.88%    19,449       566     2.91%       20,729         674      3.25%
   Time deposits                     333,114     19,296    5.79%   278,101    16,086     5.78%      236,607      13,897      5.87%
   Short-term borrowings              26,849      1,374    5.12%    34,423     1,854     5.39%       29,457       1,665      5.65%
                                   --------------------           ------------------              ---------------------
Total Interest Bearing Liabilities   516,544     27,026    5.23%   431,812    22,305     5.17%      376,401      19,964      5.30%

Noninterest Bearing Liabilities:
   Demand deposits                    42,372                        35,307                           31,282
   Other                               4,404                         3,517                            3,054
                                   ---------                      --------                        ---------
Total Liabilities                    563,320                       470,636                          410,737

Shareholders' Equity                  44,560                        37,691                           31,669
                                   ---------                      --------                        ---------
                                    $607,880                      $508,327                         $442,406
                                   =========                      ========                        =========

Net Interest Income                             $20,927                      $17,686                            $15,134
                                                =======                      =======                            =======

Net Yield on Interest Earning Assets                       3.58%                         3.59%                               3.54%
                                                         ======                        ======                              ======
</TABLE>



NOTE:    Nonaccrual loans are included in average loan balances. Interest income
         includes the effect of tax equivalent adjustments amounting to $360 in
         1997, $352 in 1996 and $346 in 1995, using a 34% tax rate. This rate is
         based upon the statutory rate and is not necessarily intended to
         represent the Company's effective or incremental rate.

<PAGE>   8

                TABLE 2 - ANALYSIS OF NET INTEREST INCOME CHANGES
                             (DOLLARS IN THOUSANDS)



<TABLE>
<CAPTION>
                                                   1997 COMPARED TO 1996                           1996 COMPARED TO 1995
                                                    INCREASE (DECREASE)                             INCREASE (DECREASE)
                                          -------------------------------------            ------------------------------------
                                            VOLUME          RATE          NET                VOLUME         RATE         NET
                                          -------------------------------------            ------------------------------------


<S>                                         <C>             <C>         <C>                  <C>            <C>         <C>   
Interest on Earning Assets:
   Securities                                 $821          ($42)         $779                 $620          ($73)        $547
   Loans                                     6,888           137         7,025                4,960          (527)       4,433
   Federal funds sold                          148            10           158                  (67)          (20)         (87)
                                          -------------------------------------            ------------------------------------

Total Interest Income Changes               $7,857          $105        $7,962               $5,513         ($620)      $4,893
                                          =====================================            ====================================



Expense on Interest Bearing Liabilities:
   Deposits                                 $4,746          $455        $5,201               $2,621         ($469)      $2,152
   Short-term borrowings                      (391)          (89)         (480)                 260           (71)         189
                                          -------------------------------------            ------------------------------------

Total Interest Expense Changes              $4,355          $366        $4,721               $2,881         ($540)      $2,341
                                          =====================================            ====================================
</TABLE>






NOTE:    The change in interest not due solely to volume or rate has been
         allocated between the factors in proportion to the absolute dollar
         amounts of the change in each. Changes in securities reflect taxable
         equivalent adjustments.





<PAGE>   9

PROVISION FOR CREDIT LOSSES
---------------------------

         The provision for credit losses was $1,005,000, $980,000 and $850,000
for the years ended December 31, 1997, 1996 and 1995, respectively. Total
allowance for credit losses as a percentage of total loans outstanding at year
end was 1.5%, 1.6% and 1.5% for the years ended December 31, 1997, 1996 and
1995, respectively.

         Management maintains the allowance for credit losses at a level
adequate to absorb potential future losses. The evaluation performed is based
upon a continuous review of historical credit loss experience, specifically
identified problem loans, composition and growth of the loan portfolio, current
and projected economic conditions and other pertinent factors.

         Due to its focus on credit quality, the Company has experienced minimal
problems with asset quality and loan charge-offs. The Company has had four
consecutive years of no loan charge-offs and a total of only $216,000 in
charge-offs since its inception. Additional information regarding the provision
and allowance for credit losses is contained in the "Earning Assets" narrative.


OTHER INCOME
------------

         Other income consists primarily of merchant fees, credit card
interchange fees and service fees on deposit accounts. Total other income of
approximately $1,205,000 for 1997 increased approximately $331,000 or 38% when
compared to 1996 and 16% when 1996 is compared to 1995. Merchant and credit card
interchange fees combined was approximately $777,000, $620,000 and $374,000 in
1997, 1996 and 1995, respectively. Service charges on deposit accounts were
approximately $313,000, $253,000 and $252,000 in 1997, 1996 and 1995,
respectively.


OTHER EXPENSES
--------------

         Noninterest expense increased 22% in 1997 and 16% in 1996. Salaries and
benefits, which accounted for 53% in both 1997 and 1996 of noninterest expenses,
increased by 22% in 1997 and 24% in 1996. Full-time equivalent employees
increased 26% in 1997 and 22% in 1996. Management continues to control overhead
expense without impairing the quality of service provided to customers.
Operating from a single location has proven both efficient and effective. The
Company's total assets per employee approximated $6.8 million and $7.2 million
at December 31, 1997 and 1996, respectively; this compares very favorably to
banks of similar asset size.

         The Company's efficiency ratio, computed by dividing other expenses by
net interest income plus other income, was 49.4% for 1997 and 48.4% for 1996.
The increase in the efficiency ratio for 1997 is due primarily to the increased
occupancy costs of the building expansion. This ratio should improve going
forward as we anticipate continued growth in earnings from this single operating
facility. The Company's low ratio is indicative of efficient overhead cost
control

         In 1997, occupancy costs increased 88% over 1996 levels, due to the
building expansion becoming fully occupied in the second quarter of 1997.
Depreciation expense for 1997 was approximately $470,000. This represented a 56%
increase over 1996's balance of approximately $302,000.

         During 1997, the assessment paid by the Company to the Federal Deposit
Insurance Corporation (FDIC) was $62,000. This compares to only $2,000 being
paid in 1996 due to an August 1995 FDIC vote to reduce premiums banks pay on
deposits in that year. The FDIC returned to charging an assessment per $100 of
deposits, based on your risk classification, in 1997, per the Deposit Insurance
Act of 1996. The Company is currently being assessed the lowest premium rate
established by the FDIC because it is classified in the highest capital rating
category.


PROVISION FOR FEDERAL INCOME TAXES
----------------------------------

         The Federal income tax expense was $3,234,000, $2,681,000 and
$2,256,000 in 1997, 1996 and 1995, respectively. During each of these years, the
Company realized tax savings from the purchase of tax-free municipal bonds and
from a tax-exempt loan. The effective tax rate was 32.3%, 31.9% and 31.8% in
1997, 1996 and 1995, respectively.


                               FINANCIAL CONDITION
                               -------------------

         The following discussions address key elements of financial condition,
including earning assets, the sources of funds supporting earning assets, credit
quality and experience, asset and liability management, and capital adequacy.


<PAGE>   10


                                 EARNING ASSETS
                                 --------------

LOANS
-----

         Loans comprised 71%, 69% and 66% of the Company's average earning
assets in 1997, 1996 and 1995, respectively. Loan volume and quality continue to
be strong as the Company grows. The increase in net loans outstanding over the
prior year was $88 million, $54 million and $73 million in 1997, 1996 and 1995,
respectively.

         The commercial loan portfolio represents loans to business interests,
located primarily within the Company's defined market area, with no significant
industry concentration. The residential real estate portfolio is primarily
adjustable rate mortgages that qualify for sale into the secondary market;
however, the Company has chosen to retain all residential mortgage loans in its
portfolio.

         TABLES 3 and 4 show the composition of the loan portfolio at the end of
each of the last five years and the loan maturities and rate sensitivities at
December 31, 1997.



                     TABLE 3 - LOAN PORTFOLIO AT DECEMBER 31
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                         1997             1996             1995             1994             1993
                                         ----             ----             ----             ----             ----

<S>                                  <C>              <C>              <C>              <C>              <C>     
Commercial                           $103,061         $ 79,492         $ 74,347         $ 59,290         $ 47,893

Real Estate:
   Residential-first mortgage         104,659           86,750           70,969           56,168           47,710
   Commercial-owner occupied           99,537           76,673           70,121           54,480           47,195
   Commercial-investment              130,108          105,275           78,531           57,553           32,981
                                     --------         --------         --------         --------         --------
                                      334,304          268,698          219,621          168,201          127,886

Consumer                               27,849           26,995           25,653           22,757           18,205
Other                                   4,507            5,614            5,767            1,533            1,433
                                     --------         --------         --------         --------         --------

Total Loans                           469,721          380,799          325,388          251,781          195,417

Less deferred loan fees                   685              639              600              597              547
                                     --------         --------         --------         --------         --------
Total loans net of
   deferred loan fees                 469,036          380,160          324,788          251,184          194,870

Less allowance for
   credit losses                        6,947            5,942            4,960            4,110            3,117
                                     --------         --------         --------         --------         --------
Net Loans                            $462,089         $374,218         $319,828         $247,074         $191,753
                                     ========         ========         ========         ========         ========
</TABLE>


<PAGE>   11


        The maturity distribution and sensitivity to interest rates of the loan
portfolio are two factors in management's evaluation of the risk characteristics
and the future profitability of the portfolio.


      TABLE 4 - LOAN MATURITIES AND RATE SENSITIVITIES AT DECEMBER 31, 1997
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                 WITHIN            1 - 5          OVER 5
                                                 1 YEAR            YEARS           YEARS               TOTAL
                                                 ------            -----           -----               -----
<S>                                            <C>              <C>             <C>                 <C>     
Loan maturities by type (A,C):

   Commercial                                  $ 48,938         $ 38,337        $ 15,786            $103,061

   Real Estate:
      Residential-first mortgage                  7,071            1,340          96,248             104,659
      Commercial-owner occupied                   2,809           29,293          67,435              99,537
      Commercial-investment                      20,527           20,634          88,947             130,108
                                               --------         --------        --------            --------
                                                 30,407           51,267         252,630             334,304

   Consumer                                      18,445            6,333           3,071              27,849

   Other                                            436             -              4,072               4,508
                                               --------         --------        --------            --------

      TOTAL                                    $ 98,226         $ 95,937        $275,559            $469,722
                                               ========         ========        ========            ========

Rate Sensitivities (B,C):
   Fixed Rate Loans                           $  59,926         $253,493       $  21,987            $335,406
   Variable Rate Loans                          134,316           -               -                  134,316
                                               --------         --------        --------            --------
      TOTAL                                    $194,242         $253,493       $  21,987            $469,722
                                               ========         ========       =========            ========

Percent of Total                                 41.35%           53.97%           4.68%             100.00%
                                               ========         ========       =========            ========
</TABLE>


(A)  Maturities based on ending contractual maturity dates.
(B)  Loans are reported at the earliest of maturity or repricing opportunity.
(C)  Occasionally extensions or renewals of loan obligations are requested.
     These are reviewed on an individual basis and granted if deemed
     appropriate. Such extensions, however, do not materially alter the
     anticipated loan maturity tables as reported.


        The Bank's credit policy establishes guidelines to manage credit risk
and asset quality. These guidelines include loan review and early identification
of problem loans to ensure sound credit decisions. The Bank's credit policies
and procedures are meant to minimize the risk and uncertainties inherent in
lending. In following these policies and procedures, management must rely on
estimates, appraisals and evaluations of loans and the possibility that changes
in these could occur quickly because of changing economic conditions.

         Nonperforming assets consist of loans on nonaccrual and loans over
90-days past due as to principal and interest and still in an accrual status.
Nonaccrual loans are loans which are 90-days past due and with respect to which,
in management's opinion, collection of interest is doubtful. These loans no
longer accrue interest and are accounted for on a cash basis. Loans which are
90-days or more past due and still accruing interest are loans which, in
management's opinion, are well secured and are in the process of collection.
Nonperforming loans amounted to $673,000, $454,000, $138,000 and $25,000 at
December 31, 1997, 1996, 1995 and 1994, respectively, which consistently
represents less than .15% of total loans for the same periods.

         Potential problem loans are those loans which are on the Bank's "Watch
List" and exhibit characteristics that could cause the loans to become
nonperforming or require restructuring in the future. Management reviews this
list regularly and adjusts for changing conditions.


<PAGE>   12


TABLE 5 is a summary of credit loss experience for the five years ending
December 31, 1997.


                      TABLE 5 - ALLOWANCE FOR CREDIT LOSSES
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                        1997            1996            1995            1994            1993
                                                        ----            ----            ----            ----            ----

<S>                                                <C>             <C>             <C>             <C>             <C>      
Balance at beginning of year                       $   5,942       $   4,960       $   4,110       $   3,117       $   2,249

Loans charged off:
   Commercial                                              -               -               -               -               -
   Residential real estate                                 -               -               -               -             (25)
   Consumer and other                                      -               -               -               -             (27)
                                                   ---------       ---------       ---------       ---------       ---------
      Total loans charged off                              -               -               -               -             (52)

Recoveries:
   Consumer and other                                      -               2               -               -               -
                                                   ---------       ---------       ---------       ---------       ---------
      Total recoveries                                     -               2               -               -               -

      Net loans charged off                                -               -               -               -             (52)

Provision for credit losses                            1,005             980             850             993             920
                                                   ---------       ---------       ---------       ---------       ---------
Balance at end of year                             $   6,947       $   5,942       $   4,960       $   4,110       $   3,117
                                                   =========       =========       =========       =========       =========

Total loans outstanding at year-end                $ 469,722       $ 380,799       $ 325,388       $ 251,781       $ 195,417
                                                   =========       =========       =========       =========       =========
Average loans                                      $ 418,029       $ 340,035       $ 283,577       $ 216,702       $ 163,313
                                                   =========       =========       =========       =========       =========

As a percent of average loans:
   Net charge-offs                                       N/A             N/A             N/A             N/A            0.03%
   Provision for credit losses                          0.24%           0.29%           0.30%           0.46%           0.56%

As a percent of total loans outstanding 
at year-end:
   Year-end allowance for credit losses                 1.48%           1.56%           1.52%           1.64%           1.60%
</TABLE>


<PAGE>   13


TABLE 6 is an allocation of the allowance for credit losses for the five years
ended December 31, 1997:


             TABLE 6 - ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                           1997                  1996                 1995                 1994                 1993
                                   -------------       --------------        -------------        -------------        -------------

                                            % OF                 % OF                 % OF                 % OF                 % OF
                                        LOANS TO             LOANS TO             LOANS TO             LOANS TO             LOANS TO
                                  AMT  TTL LOANS       AMT  TTL LOANS        AMT TTL LOANS        AMT TTL LOANS        AMT TTL LOANS
                                  ---  ---------       ---  ---------        -------------        -------------        --- ---------


<S>                            <C>           <C>    <C>           <C>     <C>          <C>     <C>          <C>     <C>          <C>
Commercial                     $  714        22%    $  720        21%     $  957       23%     $  774       23%     $  996       25%

Real Estate:
   Residential - first mortgage   362        22%       240        23%        179       22%        140       22%        126       24%
   Commercial - owner occupied    573        21%       542        20%        422       22%        310       22%        280       24%
   Commercial - investment      1,464        28%     1,263        28%        844       24%        624       23%        368       17%
                             --------      -----     -----      -----     ------     -----     ------      ----     ------      ----

                                2,399        71%     2,045        71%      1,445       68%      1,074       67%        774       65%

Consumer and other                275         7%       293         8%        318        9%        228       10%        184       10%
                             --------      -----    ------      -----     ------      ----     ------      ----     ------      ----


Total allocated                 3,388       100%     3,058       100%      2,720      100%      2,076      100%      1,954      100%
                                            ====                 ====                 ====                 ====                 ====

Total unallocated               3,559                2,884                 2,240                2,034                1,163
                              -------               ------                ------               ------               ------

Total                          $6,947               $5,942                $4,960               $4,110               $3,117
                               ======               ======                ======               ======               ======
</TABLE>



         The loan portfolio contains no foreign loans nor any concentration to
identified borrowers engaged in the same or similar industries exceeding 10% of
total loans.



SECURITIES
----------

         During December 1993, the Company elected to adopt Financial Accounting
Standards Board Standard No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (FAS No. 115). Securities available for sale are stated
at fair value, with the unrealized gains and losses, net of income tax, reported
as a separate component of shareholders' equity. The unrealized gain recorded at
December 31, 1997, approximated $1,357,000 (net of $698,000 in deferred income
taxes); the unrealized gain recorded at December 31, 1996, approximated $531,000
(net of $273,000 in deferred income taxes); and the unrealized gain recorded at
December 31, 1995, approximated $1,233,000 (net of $635,000 in deferred income
taxes). The designation of such securities is made by management based upon
liquidity needs at the time of purchase. There was no designation of securities
as available for sale prior to 1992.

         In November of 1995, the Financial Accounting Standards Board issued "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities" (the Guide). In implementing the Guide, a one
time opportunity was available for a company to reassess its securities
classifications and transfer any or all held to maturity securities to available
for sale. In accordance with the provisions of the Guide, the Company elected to
transfer all of its held to maturity investment securities at December 28, 1995,
to available for sale, at fair value of approximately $67.3 million.

         The securities available for sale (SAFS) portfolio at December 31,
1997, is composed primarily of U.S. Treasury (19.5%) and U.S. Government Agency
Securities (60.4%). The remaining 20.1% is composed of certain other securities.
The quality of this portfolio is 80% AAA rated bonds with an average maturity of
2.3 years. The SAFS portfolio represented 25% of total assets at December 31,
1997, and 28% at December 31, 1996.



<PAGE>   14


         The SAFS portfolio at December 31, 1997, includes securities issued by
the State of Ohio and the State of Michigan with the following values:

<TABLE>
<CAPTION>
                                       FAIR                 AMORTIZED
                                      VALUE                    COST
                                      -----                    ----
                                            (DOLLARS IN THOUSANDS)

<S>                                  <C>                       <C>   
     State of Ohio                   $8,840                    $8,455
     State of Michigan                4,221                     4,083
</TABLE>


         TABLES 7 and 8 set forth the carrying value of the SAFS portfolio at
the dates indicated, and provide an analysis of the maturities and average
yields on a fully taxable equivalent basis (assuming a 34% tax rate) as of
December 31, 1997. Classification by maturity is determined by the earlier of
maturity date or call date.


                     TABLE 7 - SECURITIES AVAILABLE FOR SALE
                             (DOLLARS IN THOUSANDS)

                         CARRYING VALUE AT DECEMBER 31,

<TABLE>
<CAPTION>
                                    1997          1996          1995          1994          1993
                                    ----          ----          ----          ----          ----
<S>                             <C>           <C>           <C>           <C>           <C>     
U.S. government securities
   and agency obligations       $130,023      $121,195      $107,759      $ 75,753      $ 49,034

Corporate debt securities         15,614        17,494        13,685             -         3,883

Municipal obligations             14,038        13,661        13,619             -             -

Mortgage-backed securities         3,088         3,087         3,163             -             -

Other securities                   4,758         3,772         2,401         2,229         1,401
                                --------      --------      --------      --------      --------

   TOTAL                        $167,521      $159,209      $140,627      $ 77,982      $ 54,318
                                ========      ========      ========      ========      ========
</TABLE>


                TABLE 8 - MATURITY ANALYSIS AT DECEMBER 31, 1997
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                   AFTER 1        AFTER 5
                                                  YEAR BUT      YEARS BUT
                                    WITHIN         WITHIN         WITHIN          AFTER
                                    1 YEAR        5 YEARS       10 YEARS       10 YEARS          TOTAL
                                    ------        -------       --------       --------          -----
<S>                             <C>              <C>            <C>                           <C>     
U.S. government securities
   and agency obligations       $   49,801       $ 75,994       $  4,228              -       $130,023
Corporate debt securities            4,556          8,970          2,088              -         15,614
Municipal obligations                  386          8,323          4,945            384         14,038
Mortgage-backed securities           1,093          1,995              -              -          3,088
Other securities                         -              8              -          4,750          4,758
                                ----------       --------       --------       --------       --------
   TOTAL                        $   55,836       $ 95,290       $ 11,261       $  5,134       $167,521
                                ==========       ========       ========       ========       ========

WEIGHTED AVERAGE YIELD:
U.S. government securities
   and agency obligations             6.23%          6.64%          6.91%             -           6.49%
Corporate debt securities             6.54%          6.57%          7.14%             -           6.64%
Municipal obligations                 6.22%          7.28%          6.92%          8.07%          7.14%
Mortgage-backed securities            5.58%          5.71%             -              -           5.67%
Other securities                         -           9.00%             -           6.17%          6.17%
   TOTAL                                                                                          6.54%
</TABLE>


<PAGE>   15


         The securities held to maturity (SHTM) portfolio represented 17% of
total assets at December 31, 1994, and 20% at December 31, 1993. As discussed
above, the entire SHTM portfolio was transferred to SAFS during 1995. During
1993, approximately $49 million of SHTM were transferred to SAFS in connection
with the implementation of FAS No. 115.


         TABLE 9 sets forth the carrying value of the SHTM portfolio at the
dates indicated.


                      TABLE 9 - SECURITIES HELD TO MATURITY
                             (DOLLARS IN THOUSANDS)

                         CARRYING VALUE AT DECEMBER 31,

<TABLE>
<CAPTION>
                                                   1997             1996            1995             1994          1993
                                                   ----             ----            ----             ----          ----
<S>                                                   <C>              <C>             <C>        <C>           <C>
U.S. government securities
   and agency obligations                             -                -               -          $42,441       $36,432

Corporate debt securities                             -                -               -           13,749        13,250
Municipal obligations                                 -                -               -           12,475        10,890
Mortgage-backed securities                            -                -               -            3,225         3,348
Other securities                                      -                -               -               30            25
                                              ---------         --------        --------          -------       -------

   TOTAL                                              -                -               -          $71,920       $63,945
                                              =========         ========        ========          =======       =======
</TABLE>




FEDERAL FUNDS SOLD
------------------

         Short-term Federal funds sold are used to manage interest rate
sensitivity and to meet liquidity needs. During 1997, 1996 and 1995, the average
balance of these funds represented less than 1% of average total assets for the
same periods. As the Bank has grown, the ability to manage daily liquidity needs
has become stable and the use of daily Federal funds sold has been maintained at
a very manageable level.

DEFERRED FEDERAL INCOME TAXES
-----------------------------

         Deferred Federal income taxes represent a net asset of $1,086,000 at
December 31, 1997. This amount is comprised primarily of deferred taxes relating
to the nondeductible portion of the credit allowance offset by the unrealized
gains on available for sale securities which total $2,113,000 and $698,000,
respectively. Certain limits exist for deduction of the provision related to
credit losses that exceeds actual experience. With insignificant loan
charge-offs, the Company's tax deduction to date, has been minimal. Sufficient
taxable income in prior years exists to realize the deferred tax assets that are
recorded.


<PAGE>   16


                                SOURCES OF FUNDS
                                ----------------
DEPOSITS
--------

         The Company's major source of investable funds is core deposits from
retail and business customers. These core deposits consist of interest bearing
and noninterest bearing deposits, excluding certificates of deposit equal to or
greater than $100,000. These core deposits grew to $373 million in 1997 from
$332 million in 1996 and $297 million in 1995.

         Certificates of deposit equal to or greater than $100,000 grew to $206
million in 1997 from $138 million in 1996 and $110 million in 1995. The
continued strong marketing effort to secure customers willing to consolidate
deposits into a single investment (ie. certificate of deposit) has allowed the
Company to support a strong loan growth. These funds are used to balance rate
sensitivity and as a supplement to core deposits.

         Since the Company places less emphasis on mass marketing of retail
products, its customer base consists of higher net worth individuals and their
related companies, and retirees. The net growth, since the Company opened in
1989, has been without significant fluctuation and the deposit base has been
reliable. Management anticipates a continuation of these trends. Average
deposits increased 23% in 1997, 15% in 1996 and 21% in 1995.

TABLE 10 is a summary of the average amount of, and the average rate paid on,
each of the Bank's deposit categories.


                           TABLE 10 - AVERAGE DEPOSITS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                      1997                          1996                          1995
                                                      ----                          ----                          ----
                                               AMOUNT       RATE             AMOUNT       RATE             AMOUNT      RATE
                                               ------       ----             ------       ----             ------      ----
<S>                                           <C>          <C>             <C>           <C>             <C>          <C>
Noninterest
   bearing deposits                           $42,372                      $ 35,307                      $ 31,282
Money market accounts                         138,910      4.21%             99,839      3.81%             89,608     4.16%
Savings                                        17,671      2.88%             19,449      2.91%             20,729     3.25%
Other time deposits                           333,114      5.79%            278,101      5.78%            236,607     5.87%
                                             --------                      --------                      --------
   TOTAL                                     $532,067                      $432,696                      $378,226
                                             ========                      ========                      ========
</TABLE>

         The increase (decrease) in average deposits by category for 1997 was as
follows: Noninterest bearing deposits, 20%; money market accounts, 39%; savings,
(9%) and other time deposits, 20%.

         Certificates of deposit of $100,000 or more grew 49% in 1997. As the
Company grows, the market penetration of the retail customer base expands. In
addition, customers are continually consolidating banking relationships, taking
advantage of the Company's competitively priced deposit products. The maturity
distribution of certificates of deposit of $100,000 or more at December 31,
1997, is reflective of the interest rate environment during 1997, which had more
favorable rates in long-term investments.

      TABLE 11 - CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AT DECEMBER 31
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                             1997                    1996                  1995
                                             ----                    ----                  ----
<S>                                      <C>                     <C>                   <C>     
Maturing:
   3 months or less                      $ 93,831                $ 61,849              $ 54,946
   Over 3 to 6 months                      34,268                  28,243                17,077
   Over 6 to 12 months                     34,534                  28,737                20,374
   Over 12 months                          43,819                  19,495                17,806
                                        ---------               ---------              --------

TOTAL                                    $206,452                $138,324              $110,203
                                         ========                ========              ========
</TABLE>


<PAGE>   17


SHORT-TERM BORROWINGS
---------------------

         Short-term borrowings were $30 million, $42 million and $35 million at
December 31, 1997, 1996 and 1995, respectively.

         Short-term borrowings are primarily composed of advances from The
Federal Home Loan Bank (52.5%). The remaining 47.5% is composed of securities
sold under agreements to repurchase which are secured transactions, a majority
of which mature within one year or less and Federal funds borrowings. Additional
information regarding securities sold under agreements to repurchase and Federal
Home Loan Bank borrowings is summarized below:


<TABLE>
<CAPTION>
                                             SECURITIES SOLD UNDER
                                            AGREEMENTS TO REPURCHASE                      FEDERAL HOME LOAN BANK
                                            ------------------------                      ----------------------

                                           1997       1996        1995                 1997        1996       1995
                                           ----       ----        ----                 ----        ----       ----
                                                                      (DOLLARS IN THOUSANDS)
<S>                                     <C>        <C>         <C>                  <C>         <C>         <C>   
Weighted average interest rate
   at year-end                            4.20%      4.31%       5.34%                5.61%       5.56%      5.58%
Amount outstanding at year-end          $14,395    $15,531     $24,203              $15,900     $19,000     $8,000
Maximum amount outstanding at
   any month end                         14,395     26,012      26,003               18,860      19,000      9,000
Daily average amount outstanding
   during the year                       12,926     21,255      23,098               12,216      12,015      5,759
Weighted average interest rate
   for the year                           4.57%      5.30%       5.69%                5.60%       5.51%      5.45%
</TABLE>



CAPITAL RESOURCES AND DIVIDENDS
-------------------------------

         Shareholders' equity is a stable, noninterest bearing source of funds
which provides support for asset growth and is the primary component of capital.
Shareholders' equity at December 31, 1997, 1996 and 1995 was $50.5 million,
$41.6 million and $36.1 million, respectively. During 1997 and 1996, the Bank
paid a $4,000,000 and $10,000,000, respectively, cash dividend to the parent
company. The parent company then issued $4,000,000 and $10,000,000 in 1997 and
1996, respectively, in subordinated debt to the Bank. Principal is due at
maturity, January 1, 2008, and January 1, 2007, respectively, with interest
payable at 6.75%.

         In April 1993, shareholders voted to increase the authorized common
stock from 1.5 million shares to 3.0 million shares. The Company issued a 6%
stock dividend in June of 1996, 1995, 1994 and 1993. In June 1997, the Company
began to issue quarterly cash dividends of $.17 per share. This totaled $984,487
for 1997.

         The following shows consolidated operating and capital ratios of the
Company for each of the past three years ended December 31:

<TABLE>
<CAPTION>
                                                 1997              1996             1995
                                                 ----              ----             ----

<S>                                            <C>               <C>              <C>   
Return on average assets                        1.12%             1.13%            1.10%
Return on average equity                       15.22%            15.19%           15.30%
Average equity to average assets                7.33%             7.41%            7.16%
Tier 1 capital  (1)                             9.81%            10.14%           10.19%
Tier 2 capital  (2)                            11.06%            11.39%           11.44%
Leverage  (3)                                   7.67%             7.60%            7.47%
</TABLE>


(1)  Shareholders' equity less the effect of securities available for sale
     market value adjustment per FAS No. 115 and intangibles, if applicable,
     computed as a ratio to risk-adjusted assets, as defined in the 1994
     risk-based capital guidelines.
(2)  Tier 1 capital plus qualifying credit loss allowance, computed as a ratio
     to risk-adjusted assets, as defined in the 1994 risk- based capital
     guidelines. 
(3)  Tier 1 capital, computed as a ratio to the latest quarter's average assets,
     less goodwill, if applicable.

     The Company's capital ratios are well in excess of the minimum regulatory
risk-based capital requirements of 4% for Tier 1 capital and leverage and 8% for
Tier 2 capital. 

<PAGE>   18


YEAR 2000
---------

         The Company has determined that it will need to modify or replace
portions of its software and hardware so that its computer systems will function
properly with respect to dates in the year 2000 and beyond. The Company has
initiated discussions with third-party software and hardware suppliers and
determined that the Company will have available the operating systems that are
fully compliant. The Company has developed a plan to modify its information
technology and will begin the conversion by the middle of 1998. All applications
and hardware upgrades will be substantially complete by early 1999 at an
estimated cost of $100,000 to $250,000, which will be capitalized, that is
attributable to Year 2000 issues. We do not expect this project to have a
significant effect on operations. The Company's Year 2000 initiative is being
managed by a team of internal staff and the internal costs of this activity,
which will be expensed, is not expected to be material to the Company's
financial position.

         The Company is currently evaluating the Year 2000 readiness of its
significant suppliers, large customers and other financial institutions to
ensure that those parties have appropriate plans to remediate Year 2000 issues
where their systems interface with the Company's systems or otherwise impact its
operations. The Company is assessing the extent to which its operations are
vulnerable should those organizations fail to remediate properly their computer
systems.

         While the Company believes its planning efforts are adequate to address
its Year 2000 concerns, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis and will not have a material effect on the Company. The costs
of Year 2000 modifications and date of completion will be closely monitored and
are based on management's best estimates. Actual results, however, could differ
from those anticipated.


                     LIQUIDITY AND INTEREST RATE SENSITIVITY
                     ---------------------------------------


LIQUIDITY
---------

         Liquidity is measured by the Company's ability to raise funds through
deposits, borrowed funds, capital or cash flow from the repayment of loans.
These funds are used to meet deposit withdrawals, maintain reserve requirements,
fund loans and operate the Company. Liquidity is achieved through the growth of
core deposits and liquid assets, including securities available for sale,
matured securities and Federal funds sold. Asset and liability management is the
process of managing the balance sheet to achieve a mix of earning assets and
liabilities that maximizes profitability, while providing adequate liquidity.

         The Company's major source of funds is a substantial base of core
funds, defined as core deposits plus shareholders' equity and other liabilities.
The Company supplements core funds by regularly issuing certificates of deposit
and repurchase agreements. The Company also has the ability to borrow money on a
daily basis through correspondent banks and the Federal Home Loan Bank to
satisfy short-term liquidity needs. At December 31, 1997, and 1996, the Company
had $36.2 million and $8.2 million, respectively, of unused lines of credit.
During January 1997, the Company's Board of Directors approved an increase in
the investment by the Bank in the Federal Home Loan Bank from $2.9 million to
$6.0 million. This increased the Company's available line of credit with the
Federal Home Loan Bank to $36.0 million. The Company currently holds $3.6
million in Federal Home Loan Bank stock.

         In addition to normal loan funding and deposit flow, the Company also
needs to maintain liquidity to meet the demands of certain unfunded loan
commitments and standby letters of credit. As of December 31, 1997, the Company
had a total of $186.9 million in unfunded loan commitments and $13.4 million in
unfunded standby letters of credit. Of the total unfunded loan commitments,
$136.5 million were commitments available as lines of credit to be drawn at any
time as customers' cash needs vary, and $50.4 million were for loan commitments
scheduled to close and become funded within the next six months. The Company
monitors fluctuations in balances and manages its overall liquidity, taking into
account these unfunded commitments.

         On a parent company basis, the Company's primary source of funds is
dividends paid by the subsidiary Bank. The ability of the Bank to pay dividends
is subject to limitations under various laws and regulations and to prudent and
sound banking principles. As of January 1, 1998, the Bank must earn $911,000 or
obtain the prior regulatory approval of the Comptroller of the Currency for
payment of dividends to the Company.



<PAGE>   19


INTEREST RATE RISK
------------------

         Balance sheet structure and interest rate changes play important roles
in the growth of net interest income. The Company's Asset/Liability Committee
(ALCO) manages the overall rate sensitivity and mix of the balance sheet to
anticipate and minimize the effects of interest rate fluctuations and maintain a
consistent net interest margin. The relative measure of assets and liabilities
that will mature or are scheduled to reprice within various time categories is
known as "GAP." Because the Company has more liabilities than assets repricing
within one year at December 31, 1997, it has a negative GAP and is considered
liability sensitive. In a rising rate environment, this liability surplus would
most likely detract from net interest income. In a declining rate environment,
the effect would most likely be favorable. Experience has shown that this
generalization does not fully capture the true dynamics of interest rate changes
since asset and liability rates do not adjust equally.


INTEREST RATE SENSITIVITY
-------------------------

         A number of measures are used to monitor and manage interest rate risk,
including income simulation and interest sensitivity (GAP) analyses. An income
simulation model is management's primary tool used to assess the direction and
magnitude of variations in net interest income resulting from changes in
interest rates. Key assumptions in the model include prepayment speeds on
various loan and investment assets; cash flows and maturities of financial
instruments held for purposes other than trading; changes in market conditions,
loan volumes, and pricing; deposit sensitivity; client preferences; and
management's financial capital plans. These assumptions are inherently
uncertain, subject to fluctuation and revision in a dynamic environment and , as
a result, the model cannot precisely estimate net interest income or exactly
predict the impact of higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes and changes in market conditions and
management strategies, among other factors.

         Results of the multiple simulations done as of December 31, 1997,
suggest that the Corporation could expect net interest income to increase by
approximately $754,000 (if interest rates gradually decline by 100 basis points
over the next twelve months) and, to decrease by approximately $744,000 (if
interest rates gradually increase by 100 basis points over the next twelve
months) from 1997 levels of net interest income. These variances in net interest
income were well within the Company's policy parameters established to manage
such risk. In addition to changes in interest rates, the level of future net
interest income is also dependent on a number of other variables, including the
growth, composition and absolute levels of deposits, loans, and other earning
assets and interest bearing liabilities, economic and competitive conditions,
client preferences and other factors.


         TABLE 12, Interest Rate Sensitivity Analysis, shows as of December 31,
1997, assets and liabilities which are maturing at various periods in time and
which will be subject to repricing. A formal asset/liability management analysis
is performed on a monthly basis by Austin Advisors, Inc., a firm specializing in
consulting and providing assistance to banks. This information is presented and
reviewed by the "ALCO" Committee.


FORWARD-LOOKING STATEMENTS
--------------------------

         The foregoing disclosure contains "forward-looking statements" within
the meaning of the Securities Act of 1933 and the Securities Exchange Act of
1934, both as amended, with respect to expectations for future periods. These
forward looking statements relate to the impact of Year 200 and the interest
rate sensitivity analysis, all changes which are subject to risks and
uncertainties that could cause actual results to differ. These risks and
uncertainties include unanticipated changes in the competitive environment and
relationships with third party vendors and clients and certain other factors
discussed in this report.





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------  -------------------------------------------

         The Report of Independent Auditors and Consolidated Financial
Statements included on pages 9 through 20 of the 1997 Annual Report to
Shareholders are incorporated herein by reference.


<PAGE>   20


                  TABLE 12 - INTEREST RATE SENSITIVITY ANALYSIS
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                           DECEMBER 31, 1997
                                       -----------------------------------------------------------------------------------------

                                           1 TO 4             4 MONTHS            1 TO 5              OVER
                                           MONTHS            TO 1 YEAR            YEARS              5 YEARS           TOTAL
                                       -------------       --------------    --------------       -------------    -------------


<S>                                        <C>                 <C>               <C>                  <C>             <C>     
Assets:
   Loans, gross                            $165,000            $29,242           $253,493             $21,987         $469,722
   Securities available for sale (1)         28,471             27,365             95,290              16,395          167,521
   Other assets                                                                                        32,297           32,297
                                       ----------------------------------------------------------------------------------------

Total Assets                               $193,471            $56,607           $348,783             $70,679         $669,540
                                       ========================================================================================

Liabilities:
   Savings, time and interest
      checking                             $221,278            $64,848            $37,213                  $0         $323,339
   CD's $100,000 & over                     108,634             53,999             43,711                 108          206,452
   Borrowed funds                            16,500              1,000              5,895               6,900           30,295
   Other liabilities                                                                                   58,907           58,907
                                       ----------------------------------------------------------------------------------------

Total Liabilities                           346,412            119,847             86,819              65,915          618,993

Shareholders' Equity                                                                                   50,547           50,547
                                       ----------------------------------------------------------------------------------------

Total Sources of Funds                     $346,412           $119,847            $86,819            $116,462         $669,540
                                       ========================================================================================

Maturity/rate sensitivity GAP             ($152,941)          ($63,240)          $261,964            ($45,783)

Cumulative GAP                             (152,941)          (216,181)            45,783

Percent of cumulative GAP to
   total assets                                 -23%               -32%                 7%
</TABLE>




 (1) This table classifies securities according to sensitivity to changes in
interest rates.



<PAGE>   21


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-------  ---------------------------------------------------------------
                FINANCIAL DISCLOSURE
                --------------------

         NONE.


                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------  --------------------------------------------------

         The following table lists the Non-Director, Executive Officers of the
Company and its subsidiary, Capital Bank, N.A., and certain other information
with respect to each individual, as of December 31, 1997. The information
required by this item with respect to Directors of the Company and its
subsidiary, Capital Bank, N.A., is incorporated herein by reference to the
information under the heading "Election of Directors and Information with
Respect to Directors and Officers" in the definitive Proxy Statement of the
Company.


<TABLE>
<CAPTION>
NAME                                AGE       PRINCIPAL OCCUPATION AND DIRECTORSHIP
----                                ---       -------------------------------------

<S>                                  <C>      <C>
Michael P. Killian                   46       Chief Financial Officer of the Company, Senior Vice President - Operations
                                              and Chief Financial Officer of the Bank

Stephen J. Kovatch                   55       Assistant Secretary of the Company, Senior Vice President - Marketing of the Bank


Bruce K. Lee                         37       Executive Vice President - Lending of the Bank
</TABLE>



ITEM 11.  EXECUTIVE COMPENSATION
--------  ----------------------

           Information required by this item is incorporated herein by reference
to the information under the heading "Executive Compensation and Other
Information" in the definitive Proxy Statement of the Company.




ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------  --------------------------------------------------------------


         Information required by this item is incorporated herein by reference
to the information under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the definitive Proxy Statement of the Company.




ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------  ----------------------------------------------

         Information required by this item is incorporated herein by reference
to the information under the heading "Certain Relationships and Related
Transactions" in the definitive Proxy Statement of the Company.


<PAGE>   22


                                    PART IV.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K
--------  --------------------------------------------------------------

(A)      INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
         --------------------------------------------------------

         The following consolidated financial statements included in the 1997
Annual Report to Shareholders of Capital Holdings, Inc., are incorporated by
reference in ITEM 8:
                      Consolidated Balance Sheets at December 31, 1997 and 1996.
                      Consolidated Statements of Income for the years ended
                      December 31, 1997, 1996 and 1995. 
                      Consolidated Statements of Shareholders' Equity for the 
                      years ended December 31, 1997, 1996 and 1995. 
                      Consolidated Statements of Cash Flows for the years ended 
                      December 31, 1997, 1996 and 1995.
                      Notes to Consolidated Financial Statements.
         Schedules are omitted because they are inapplicable, not required, or
the information is included in the consolidated financial statements or notes
thereto.

(B)      REPORTS ON FORM 8-K
         -------------------

             None

(C)      EXHIBITS
         --------

<TABLE>
<CAPTION>
         EXHIBIT NO.
         -----------

<S>                   <C>                                                                        <C>
              3.1     Articles of Incorporation of Capital Holdings, Inc.                          *
                                                                                                 ---
              3.2     Code of Regulations of Capital Holdings, Inc.                                *
                                                                                                 ---
              3.3     Articles of Incorporation of Capital Holdings, Inc., as amended              +
                           May 18, 1993                                                          ---
              4.0     Certificate for Common Shares of Capital Holdings, Inc.                      *
                                                                                                 ---
             10       Nonemployee Director Stock Option Plan                                       &
                           of Capital Holdings, Inc.                                             ---

             10.4     1988 Incentive Stock Option Plan of Capital Holdings, Inc.                   *
                                                                                                 ---
             10.5     Lease between Capital Bank, N.A. and CBNA Building Company,                  *
                           a wholly-owned subsidiary of Capital Holdings, Inc.                   ---

             10.6     Supplemental Executive Retirement Plan of Capital Holdings, Inc.             $
                                                                                                 ---
             13       The Company's 1997 Annual Report to Shareholders - Except
                           for the portions of the report expressly incorporated
                           by reference, the Report is furnished solely for the
                           information of the Commission and is not deemed
                           "filed" as part hereof

             21       List of Subsidiaries                                                         *
                                                                                                 ---
                           (i)  Capital Bank, N.A., a national banking
                                association chartered by the Office of the
                                Comptroller of the Currency of the United States
                           (ii)  CBNA Building Company, an Ohio corporation

             23.1     Consent of Independent Auditors

             27       Financial Data Schedule
</TABLE>

*  Documents incorporated by reference from the Company's S-1 Registration
   Statement, File Number 33-46573, effective May 8, 1992.
+  Document incorporated by reference from the Company's Annual Report on Form
   10-K for the year ended December 31, 1993.
&  Document incorporated by reference from the Company's Quarterly Report on
   Form 10-Q for the quarter ended September 30, 1995.
$  Document incorporated by reference from the Company's Annual Report on Form
   10-K for the year ended December 31, 1995.

(D)      FINANCIAL STATEMENT SCHEDULES
         -----------------------------

             None required.


<PAGE>   23



                                   SIGNATURES



Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on the dates indicated.



                             CAPITAL HOLDINGS, INC.





            By
                 ---------------------------------------------------------------
                 John S. Szuch                                           Date
                 Chairman and Chief Executive Officer
                 Director





            By
                 ---------------------------------------------------------------
                 Robert A. Sullivan                                      Date
                 President and Chief Operating Officer
                 Director





            By
                 ---------------------------------------------------------------
                 Michael P. Killian                                      Date
                 Senior Vice President and Chief Financial Officer


<PAGE>   24



Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
Capital Holdings, Inc. and Subsidiaries and in the capacities and on the dates
indicated.






            By
                 ---------------------------------------------------------------
                  James M. Appold                                        Date
                  Director




            By
                 ---------------------------------------------------------------
                  David P. Bennett                                       Date
                  Director




            By
                 ---------------------------------------------------------------
                  Yale M. Feniger                                        Date
                  Director




            By
                 ---------------------------------------------------------------
                  George A. Isaac, III                                   Date
                  Director



            By
                 ---------------------------------------------------------------
                  Michael C. Landin                                      Date
                  Director




            By
                 ---------------------------------------------------------------
                  Ronald R. Langenderfer                                 Date
                  Director


<PAGE>   25







            By
                 ---------------------------------------------------------------
                  Joel A. Levine                                         Date
                  Director



            By
                 ---------------------------------------------------------------
                  W. G. Lyden, III                                       Date
                  Director




            By
                 ---------------------------------------------------------------
                  Thomas W. Noe                                          Date
                  Director




            By
                 ---------------------------------------------------------------
                  Noel Romanoff                                          Date
                  Director




            By
                 ---------------------------------------------------------------
                  James D. Sayre                                         Date
                  Director




            By
                 ---------------------------------------------------------------
                  James M. Tuschman                                      Date
                  Director