SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1994
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________ to __________
Commission File Number: 0-16444
SHORELINE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2758932
(State of incorporation) (I.R.S. Employer Identification No.)
823 Riverview Drive
Benton Harbor, Michigan 49022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 927-2251
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
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 _____
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. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by
reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to
the date of filing.
Aggregate Market Value as of February 28, 1995: $89,810,694
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock outstanding at February 28, 1995: 4,989,483 shares
Documents Incorporated By Reference
Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1994, are incorporated by reference in Part II.
Portions of the registrant's definitive Proxy Statement for its May 4,
1995, annual meeting of shareholders are incorporated by reference in Part
III.
PART I
Item 1. Business
General
Shoreline Financial Corporation ("Shoreline" or the
"Corporation") is a bank holding company. Shoreline was formed on April 23,
1987, for the purpose of effecting the affiliation of Inter-City Bank
("Inter-City") of Benton Harbor, Michigan, and Citizens Trust and Savings
Bank ("Citizens") of South Haven, Michigan.
Effective at the close of business on May 27, 1994, Shoreline's
two subsidiary banks, Inter-City and Citizens, were consolidated into a
single banking corporation (the "Consolidation"). At the effective date of
the Consolidation, Inter-City had, on a consolidated basis, assets totaling
approximately $406.8 million and deposits of approximately $356.8 million,
and Citizens had, on a consolidated basis, assets totaling approximately
$216.4 million and deposits of approximately $195.3 million. The purpose
of the Consolidation was to allow Shoreline to further realize operational
efficiencies and provide more consistent and improved service to the market
areas that Shoreline had been servicing. The Consolidation resulted in a
single bank named "Shoreline Bank." On December 31, 1994, Shoreline Bank
represented Shoreline's only operating subsidiary. Shoreline had assets at
December 31, 1994, totaling $633.9 million, deposits of $566.1 million and
shareholders' equity of $56.2 million.
Shoreline's business is concentrated exclusively in the
commercial banking industry segment. Shoreline's subsidiary bank offers
individuals, businesses, institutions and government agencies a wide range
of commercial banking services, including time, savings and demand
deposits; commercial, consumer and real estate financing; bank credit
cards; safe deposit services; automated transaction machine services and
trust services. No material part of the business of Shoreline and
Shoreline Bank is dependent upon a single customer or very few customers,
the loss of which would have a materially adverse effect on Shoreline.
The principal markets for Shoreline's financial services are
presently the Michigan communities in which Shoreline Bank is located and
the areas immediately surrounding these communities. Shoreline and
Shoreline Bank serve these markets through 23 offices located in and around
these communities. Shoreline and Shoreline Bank have no material foreign
assets or income.
On December 7, 1993, the Corporation announced an agreement with
Great Lakes Bancorp, Ann Arbor, Michigan, under which Shoreline will
purchase and assume from Great Lakes Bancorp certain assets and liabilities
associated with its branch located in South Haven, Michigan. This branch
has deposits totaling approximately $10 million. On March 25, 1994, the
Corporation announced an agreement with Old Kent Bank, Grand Rapids,
Michigan, under which Shoreline will purchase and assume from Old Kent Bank
certain assets and liabilities associated with its branch located in
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Adamsville, Michigan. This branch has deposits totaling approximately
$12 million. Both of these transactions are subject to regulatory approval
and other customary conditions, and are anticipated to close during the
second or third quarter of 1995.
The principal source of revenue for Shoreline and its subsidiary
is interest and fees on loans. On a consolidated basis, interest and fees
on loans accounted for 73.2% of total revenues in 1994, 70.7% in 1993 and
69.2% in 1992. Interest on investment securities accounted for 16.2% of
total revenues in 1994, 17.8% in 1993 and 21.4% in 1992.
Competition
The business of banking is highly competitive. In addition to
competition from other commercial banks, banks face significant competition
from saving and loan associations, credit unions, finance companies,
insurance companies and investment and brokerage firms. The principal
methods of competition for financial services are price (interest rates
paid on deposits, interest rates charged on borrowings and fees charged for
services) and service (convenience and quality of services rendered to
customers).
Supervision and Regulation
Banks and bank holding companies are extensively regulated.
Shoreline Bank is chartered under state law and is supervised, examined and
regulated by both the Financial Institutions Bureau of the Michigan
Department of Commerce and the Federal Deposit Insurance Corporation
("FDIC"). Shoreline is regulated by the Federal Reserve System. Deposits
of Shoreline Bank are insured by the FDIC to the extent provided by law.
Federal and state laws which govern banks significantly limit
their business activities in a number of respects. Prior approval of the
Board of Governors of the Federal Reserve System ("Federal Reserve Board"),
and in some cases various other government agencies, is required for
Shoreline to acquire control of any additional banks or other operating
subsidiaries. The business activities of Shoreline and Shoreline Bank are
limited to banking and other activities which are determined by the Federal
Reserve Board to be closely related to banking.
Shoreline is a legal entity separate and distinct from Shoreline
Bank. There are legal limitations on the extent to which Shoreline Bank
can lend or otherwise supply funds to Shoreline. In addition, payment of
dividends to Shoreline by Shoreline Bank is subject to various state and
federal regulatory limitations.
Under Federal Reserve Board policy, Shoreline is expected to act
as a source of financial strength to Shoreline Bank and to commit resources
to support it. Under federal law, the FDIC also has authority to impose
special assessments on insured depository institutions to repay FDIC
borrowings from the United States Treasury or other sources and to
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establish semiannual assessment rates on Bank Insurance Fund ("BIF") member
banks to maintain the BIF at the designated reserve ratio required by law.
Recently, the FDIC proposed a substantial reduction in assessment
rates on deposits covered by the BIF. The amount and timing of that
reduction is uncertain, but a reduction is not, in any event, expected to
occur before the fourth quarter of 1995. If the proposal is adopted and
implemented as announced, the lowering of assessment rates on Shoreline
Bank's deposits covered by the BIF may have a favorable effect on
Shoreline's results of operations. Shoreline Bank also has some deposits
insured under the FDIC's Savings Association Insurance Fund ("SAIF"). The
FDIC does not presently propose to reduce assessment rates on SAIF insured
deposits.
Banks are subject to a number of federal and state laws and
regulations which have a material impact on their business. These include,
among others, state usury laws, state laws relating to fiduciaries, the
Truth in Lending Act, the Truth in Savings Act, the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds
Availability Act, the Community Reinvestment Act, electronic funds transfer
laws, redlining laws, antitrust laws, environmental laws and privacy laws.
The instruments of monetary policy of authorities such as the Federal
Reserve Board may influence the growth and distribution of bank loans,
investments and deposits, and may also affect interest rates on loans and
deposits. These policies may have a significant effect on the operating
results of banks.
The nature of the business of Shoreline Bank is such that it
holds title, on a temporary or permanent basis, to a number of parcels of
real property. These include properties owned for branch offices and other
business purposes as well as properties taken in or in lieu of foreclosure
to satisfy loans in default. Under current state and federal laws, present
and past owners of real property are exposed to liability for the cost of
clean up of contamination on or originating from those properties, even if
they are wholly innocent of the actions that caused the contamination.
These liabilities can be material and can exceed the value of the
contaminated property.
Currently, Shoreline is authorized to acquire subsidiary banks in
any state in which state laws permit such acquisitions. Out-of-state bank
holding companies in any state are permitted to acquire banks located in
Michigan if the laws of the state in which the out-of-state bank holding
company is located authorize a bank holding company located in Michigan to
acquire ownership of banks in that state on a reciprocal basis. Under the
recent Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("IBBEA"), a bank holding company may, after September 29, 1995, make
certain interstate acquisitions even if state law would otherwise prohibit
it. Starting June 1, 1997, IBBEA permits a bank in one state to acquire
an out-of-state bank unless one of the states has enacted legislation
prohibiting interstate bank acquisitions. IBBEA also permits a bank to
establish a de novo branch in another state if the state has a law
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expressly permitting all of out-of-state banks to establish de novo
branches in that state.
Shoreline and Shoreline Bank employed approximately 314 persons
(on a full-time equivalent basis) at December 31, 1994.
Additional statistical information describing the business of
Shoreline appears in Management's Discussion and Analysis of Financial
Condition and Results of Operations incorporated by reference in Item 7 and
the Selected Financial Data incorporated by reference in Item 6.
Item 2. Properties
Shoreline maintains its offices and conducts its business
operations from the principal banking office of Shoreline Bank in Benton
Harbor, Michigan. The holding company neither owns nor has any present plan
to acquire any real property.
Shoreline Bank's principal office is located at 823 Riverview
Drive, Benton Harbor, Michigan. The Riverview Drive premises encompasses
approximately 21,000 square feet on three floors, all of which are occupied
by Shoreline Bank and Shoreline. Shoreline Bank owns the premises occupied
by each of its 23 branch offices. During 1994, Shoreline Bank constructed
an 8,000-square-foot addition to its Pleasant Street location in
St. Joseph, Michigan, to house its mortgage, consumer loan, collections and
trust departments.
Item 3. Legal Proceedings
Shoreline Bank is party, as plaintiff or as defendant, to a
number of legal proceedings, none of which is considered material and all
of which arose in the normal course of operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders
during the three months ended December 31, 1994.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The information under the captions "Common Stock Information" on
page 14 and "Cash Dividends" on page 25 of Shoreline's annual report to
shareholders for the year ended December 31, 1994, is here incorporated by
reference.
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Item 6. Selected Financial Data
The information under the caption "Financial Highlights" on
page 1 of Shoreline's annual report to shareholders for the year ended
December 31, 1994, is here incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and all
subheadings on pages 16 through 27 of Shoreline's annual report to
shareholders for the year ended December 31, 1994, is here incorporated by
reference.
Item 8. Financial Statements and Supplementary Data
The financial statements, notes and the report of the independent
auditors on pages 28 through 40 of Shoreline's annual report to
shareholders for the year ended December 31, 1994, are here incorporated by
reference.
The information under the caption "Quarterly Financial Data" on
page 14 of Shoreline's annual report to shareholders for the year ended
December 31, 1994, is here incorporated by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the captions "Directors and
Executive Officers" and "Section 16(a) Reporting Delinquencies" in the
registrant's definitive Proxy Statement for its May 4, 1995, annual meeting
of shareholders is here incorporated by reference.
Item 11. Executive Compensation
The information set forth under the caption "Compensation of
Executive Officers and Directors" in the registrant's definitive Proxy
Statement for its May 4, 1995, annual meeting of shareholders is here
incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Voting Securities"
in the registrant's definitive Proxy Statement for its May 4, 1995, annual
meeting of shareholders is here incorporated by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain
Relationships and Related Transactions" in the registrant's definitive
Proxy Statement for its May 4, 1995, annual meeting of shareholders is here
incorporated by reference.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements. The following financial statements
and independent auditors' report of Shoreline Financial Corporation and its
subsidiary are filed as part of this report:
Consolidated Balance Sheets--December 31, 1994 and 1993
Consolidated Statements of Income for the years ended
December 31, 1994, 1993, and 1992
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1994, 1993, and
1992
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1993, and 1992
Notes to Consolidated Financial Statements
Report of Independent Auditors dated February 9, 1995
The financial statements, the notes to financial statements, and
the report of independent auditors listed above are incorporated by
reference in Item 8 of this report.
(2) Financial Statement Schedules. Not applicable.
(3) Exhibits. The following exhibits are filed as part of this
report:
Number Exhibit
3(a) Restated Articles of Incorporation. Previously filed
as Exhibit 3(a) to the registrant's Form S-4
Registration Statement filed September 25, 1987. Here
incorporated by reference.
(b) Bylaws. Previously filed as Exhibit 3(b) to the
registrant's Form S-1 Registration Statement filed
March 23, 1990. Here incorporated by reference.
4 Long-term debt. The registrant has outstanding long-
term debt which at the time of this report does not
exceed 10% of the registrant's total consolidated
assets. The registrant agrees to furnish copies of the
agreements defining the rights of holders of such long-
term indebtedness to the Securities and Exchange
Commission upon request.
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10(a) Form of Indemnity Agreement. Previously filed as
Exhibit 10(d) to the registrant's Form S-4 Registration
Statement filed September 25, 1987. Here incorporated
by reference.
(b) Employment Agreement.*
(c) Bonus Program.* Previously filed as Exhibit 10(c) to
the registrant's Form S-1 Registration Statement filed
March 23, 1990. Here incorporated by reference.
(d) 1989 Stock Option Plan.* Previously filed as Exhibit
28 to the registrant's Form S-8 Registration Statement
filed May 31, 1989. Here incorporated by reference.
(e) Deferred Compensation Agreements.* Previously filed as
Exhibit 10(e) to the registrant's 1991 Form 10-K Annual
Report filed March 27, 1992. Here incorporated by
reference.
(f) Bonus Program-1993.* Previously filed as Exhibit 10(f)
to the registrant's 1993 Form 10-K Annual Report filed
March 30, 1994. Here incorporated by reference.
(g) Bonus Program-1994.*
11 Statement Re Computation of Earnings per Common Share.
12 Statement Re Computation of Other Ratios.
13 Annual Report to Shareholders of Shoreline Financial
Corporation for the year ended December 31, 1994.
21 List of Subsidiaries.
23 Consent of Independent Auditors.
24 Powers of Attorney.
27 Financial Data Schedule.
_________________________________
* These agreements are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-K.
Shoreline will furnish a copy of any exhibit listed above to any
shareholder of the registrant without charge upon written request to
Secretary, Shoreline Financial Corporation, 823 Riverview Drive, Benton
Harbor, Michigan 49022.
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(b) Reports on Form 8-K.
Shoreline filed no Current Reports on Form 8-K during the last
quarter of the period covered by this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 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.
SHORELINE FINANCIAL CORPORATION
(registrant)
Date: March 29, 1995 By /s/ Dan L. Smith
Dan L. Smith
Chairman, President and
Chief Executive Officer
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Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
March 29, 1995 /s/ Louis A. Desenberg*
Louis A. Desenberg
Director
March 29, 1995 /s/ Merlin Hanson*
Merlin Hanson
Director
March 29, 1995 /s/ Thomas T. Huff*
Thomas T. Huff
Director
March 29, 1995 /s/ Ronald F. Kinney*
Ronald F. Kinney
Director
March 29, 1995 /s/ James E. LeBlanc*
James E. LeBlanc
Director
March 29, 1995 /s/ L. Richard Marzke*
L. Richard Marzke
Director
March 29, 1995 /s/ James F. Murphy*
James F. Murphy
Director
March 29, 1995 /s/ Dan L. Smith
Dan L. Smith
Chairman, President and
Chief Executive Officer and Director
(Principal Executive Officer)
March 29, 1995 /s/ Robert L. Starks*
Robert L. Starks
Director
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March 29, 1995 /s/ Jeffrey H. Tobian*
Jeffrey H. Tobian
Director
March 29, 1995 /s/ Harry C. Vorys*
Harry C. Vorys
Director
March 29, 1995 /s/ Hyman Warshawsky*
Hyman Warshawsky
Director
March 29, 1995 /s/ Ronald L. Zile*
Ronald L. Zile
Director
March 29, 1995 /s/ Wayne R. Koebel
Wayne R. Koebel
Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer (Principal Financial Officer
and Principal Accounting Officer)
*By /s/ Dan L. Smith
Dan L. Smith
Attorney-in-Fact for
the indicated persons
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<TABLE>
EXHIBIT INDEX
<CAPTION>
Number Exhibit
<S> <C>
3(a) Restated Articles of Incorporation. Previously filed
as Exhibit 3(a) to the registrant's Form S-4
Registration Statement filed September 25, 1987. Here
incorporated by reference.
(b) Bylaws. Previously filed as Exhibit 3(b) to the
registrant's Form S-1 Registration Statement filed
March 23, 1990. Here incorporated by reference.
4 Long-term debt. The registrant has outstanding long-
term debt which at the time of this report does not
exceed 10% of the registrant's total consolidated
assets. The registrant agrees to furnish copies of the
agreements defining the rights of holders of such long-
term indebtedness to the Securities and Exchange
Commission upon request.
10(a) Form of Indemnity Agreement. Previously filed as
Exhibit 10(d) to the registrant's Form S-4
Registration Statement filed September 25, 1987.
Here incorporated by reference.
(b) Employment Agreement.*
(c) Bonus Program.* Previously filed as Exhibit 10(c) to
the registrant's Form S-1 Registration Statement filed
March 23, 1990. Here incorporated by reference.
(d) 1989 Stock Option Plan.* Previously filed as Exhibit
28 to the registrant's Form S-8 Registration Statement
filed May 31, 1989. Here incorporated by reference.
(e) Deferred Compensation Agreements.* Previously filed as
Exhibit 10(e) to the registrant's 1991 Form 10-K Annual
Report filed March 27, 1992. Here incorporated by
reference.
(f) Bonus Program-1993.* Previously filed as Exhibit 10(f)
to the registrant's 1993 Form 10-K Annual Report filed
March 30, 1994. Here incorporated by reference.
(g) Bonus Program-1994.*
11 Statement Re Computation of Earnings per Common Share.
12 Statement Re Computation of Other Ratios.
13 Annual Report to Shareholders of Shoreline Financial
Corporation for the year ended December 31, 1994
21 List of Subsidiaries.
23 Consent of Independent Auditors.
24 Powers of Attorney.
27 Financial Data Schedule.
_________________________________
<FN>
* These agreements are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-K.
</TABLE>
EXHIBIT 10(b)
EMPLOYMENT AGREEMENT
THIS IS AN AGREEMENT dated as of December 28, 1988, by and
between SHORELINE FINANCIAL CORPORATION, a Michigan corporation
("Shoreline"), and DAN L. SMITH ("Employee").
Employee is currently serving as President of Shoreline and
President of Inter-City Bank ("Inter-City"), a Michigan banking corporation
and wholly owned subsidiary of Shoreline. In view of Employee's knowledge,
reputation and substantial experience, the Board of Directors of Shoreline
(the "Board") has determined that it is in the best interests of Shoreline
and Inter-City to obtain the continued services of, and the availability of
objective advice and counsel from, Employee.
ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS:
1. Employment. Shoreline agrees to employ Employee, effective as of
the date of this Agreement (the "Employment"), to serve as the President of
Shoreline and the President of Inter-City, or to serve such other
subsidiary or subsidiaries of Shoreline as may be mutually agreed by
Shoreline and Employee. Employee accepts the Employment on the terms and
conditions set forth in this Agreement. Employee agrees to devote
substantially his entire time and attention to the management and operation
of Shoreline and Inter-City, or such other duties as may be assigned to him
by the Board pursuant to this Agreement. The Board may assign such other
duties and responsibilities as are substantially consistent with the
services being performed by Employee for Shoreline and Inter-City on the
date of this Agreement. Notwithstanding the foregoing, Employee's
expenditure of reasonable amounts of time for personal or outside business,
charitable and professional activities shall not be deemed to constitute a
breach of this Agreement, so long as such activities do not materially
interfere with the services required to be rendered by Employee under this
Agreement.
2. Compensation.
(a) Salary and Bonus or Incentive Compensation. In consideration
for his services, Employee shall be paid a salary and such bonus or
incentive compensation as may be determined from time to time by the
Board upon the recommendation of its Compensation Committee. In
determining Employee's compensation, the Compensation Committee shall
consider the prevailing compensation for comparable positions with
peer group banks. During the term of this Agreement, Employee's
salary shall not be decreased without his consent except pursuant to a
general decrease in the salary of all senior officers of Shoreline.
The Board may cause any Shoreline subsidiary to which Employee is
rendering services pursuant to this Agreement to pay all or any part
of Employee's salary, bonus, fringe benefits or other compensation
under this Agreement in lieu of payment by Shoreline. Such payment by
a subsidiary of Shoreline shall discharge the obligation of Shoreline
under this Agreement to the extent of such payment.
(b) Benefits. Employee shall enjoy all rights, benefits and
privileges to which he may be entitled as an employee of either or
both of Shoreline or Inter-City, as the case may be, under any
retirement, deferred compensation, pension, profit sharing or other
employee benefit plan, or under any policy of health, life,
disability, hospitalization or other insurance which may now be in
effect or which may hereafter be adopted, on a basis at least as
favorable as is enjoyed by other employees of Shoreline or Inter-City
during the Employment. Employee shall be provided other fringe
benefits on the same basis and at a level commensurate with those
generally available to executive officers of Shoreline and Inter-City.
3. Term and Termination. The Employment shall commence as of the
date of this Agreement and shall continue until this Agreement is
terminated in accordance with any of the following provisions:
(a) Death. If Employee shall die while this Agreement is in
effect, this Agreement shall terminate as of the date of death.
Shoreline shall cause Employee's compensation and benefits pursuant to
Paragraph 2 of this Agreement to be paid through the last day of the
calendar month in which Employee's death occurs.
(b) Disability. If Employee shall be unable to substantially
perform his employment duties for a period of nine (9) successive
months by reason of any physical or mental disability resulting from
accident or illness, this Agreement may be terminated as of the end of
any calendar month following the expiration of such nine- month
period: (i) by Shoreline based upon a determination that Employee is
disabled and by notice in writing to that effect to Employee; or (ii)
by Employee by his resignation in writing to Shoreline. Any
determination as to whether Employee is disabled shall be made by a
licensed physician selected by agreement of Shoreline and Employee or,
if they cannot agree upon a physician, then by a majority of a panel
of three (3) licensed physicians, consisting of one physician selected
by Shoreline, one physician selected by Employee, and the third
selected by the first two. All rights of Employee to compensation
under this Agreement shall terminate immediately upon termination of
this Agreement pursuant to this Subparagraph 3(b).
(c) Termination for Cause. Shoreline shall have the right to
terminate the Employment and this Agreement for "Cause." For purposes
of this Agreement, "Cause" shall be limited to (i) the willful and
continued failure by Employee to substantially perform such employment
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duties as are reasonable and appropriate to his positions (other than
any failure resulting from a disability described in Subparagraph
3(b)), after a demand for substantial performance is delivered to
Employee on behalf of the Board which specifically identifies the
manner in which it is alleged that Employee has not substantially
performed his duties, or (ii) the willful engaging by Employee in
misconduct which is materially injurious to Shoreline or Inter-City,
monetarily or otherwise, including without limitation,
misappropriation of property or funds, conviction of a felony or
violation of banking statutes or regulations. For purposes of this
Subparagraph, no act or failure to act on Employee's part shall be
considered "willful" unless done or omitted to be done by Employee not
in good faith and without reasonable belief that his action or
omission was in the best interests of Shoreline and Inter-City.
Notwithstanding the foregoing, this Agreement shall not be deemed to
have been terminated for Cause unless and until there shall have been
delivered to Employee written notice of termination on behalf of the
Board after reasonable notice to him, an opportunity for him to be
heard before the Board, and a finding that in the reasonable opinion
of at least two-thirds (2/3) of the entire Board, Employee was guilty
of conduct set forth above in clauses (i) or (ii) above and describing
such conduct in detail.
(d) Termination by Employee for Good Reason. Employee shall have
the right to terminate this Agreement for "Good Reason" by delivering
to Shoreline written notice of termination within three (3) years
after the occurrence of any of the events described in this
Subparagraph. For purposes of this Agreement, "Good Reason" shall
mean the occurrence of any of the following without Employee's express
written consent:
(i) The assignment to Employee of any position or duties of
materially less responsibility and status than Employee's present
positions, duties, responsibilities and status with Shoreline or
Inter-City, or a materially adverse change in Employee's
reporting responsibilities, titles or offices as presently in
effect, or any removal of Employee from or any failure to reelect
Employee to any of such positions, except in connection with the
termination of this Agreement by reason of Employee's death or
disability or for Cause, or by Employee pursuant to Subparagraph
3(e);
(ii) The failure by Shoreline to consider Employee for an
increase in salary no less frequently than annually, or a
material reduction or termination by Shoreline of Employee's
salary, bonus, incentive compensation or any other forms of
compensation payable to Employee pursuant to Subparagraph 2(a);
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(iii) The relocation of Shoreline's principal executive
offices to a location outside Berrien County, Michigan, or
Shoreline's imposition of any requirement that Employee be based
anywhere other than Inter-City's principal executive offices; or
(iv) The failure of Shoreline to fulfill any of its
obligations under this Agreement.
(e) Voluntary Termination by Employee. Employee shall have the
right to voluntarily terminate this Agreement and the Employment for
reasons other than those set forth in the foregoing Subparagraphs of
this Paragraph 3 by giving thirty (30) days' written notice to
Shoreline specifying the date of termination.
(f) Termination by Shoreline. Shoreline shall have the right to
terminate this Agreement at any time (with or without also terminating
the Employment), upon the affirmative vote of two-thirds (2/3) of the
entire Board, by giving sixty (60) days' written notice to Employee
specifying the date of termination of this Agreement.
4. Severance Benefits. If this Agreement shall be terminated by
Employee for Good Reason pursuant to Subparagraph 3(d), or by Shoreline
pursuant to notice given in accordance with Subparagraph 3(f), Employee
shall be entitled to receive severance benefits consisting of the
following:
(a) Severance Payments. Severance payments in accordance with
either (i) or (ii), whichever is applicable:
(i) Unless such termination occurs within three (3) years
after a "Change in Control," as defined below, monthly severance
payments equal to the average of Employee's aggregate monthly
cash compensation received from Shoreline and Inter-City during
the five (5) fiscal years of Shoreline immediately preceding
termination of this Agreement. Such severance payments shall be
paid for and over the number of months equal to the number of
years for which Employee has been employed by Shoreline or Inter-
City; or
(ii) If such termination occurs within three (3) years after
a Change in Control, monthly severance payments in an amount
determined in accordance with Subparagraph (a)(i) above, payable
for 36 months or the number of months determined in accordance
with Subparagraph (a)(i) above, whichever is greater.
-4-
(b) Accrued Bonus. Any bonus that was or would have been
accrued by Shoreline or Inter-City, as the case may be, for the
benefit of Employee on the date of termination of this Agreement
pursuant to Shoreline's or Inter-City's standard practices for
computing bonuses.
(c) Benefits. Continued participation, during the period over
which severance payments are required pursuant to Subparagraph 4(a),
in any employee welfare benefit plan or other fringe benefit plan in
which Employee is participating on the date of termination; provided,
that if for any reason Employee's participation in any such plan or
program is barred or otherwise prevented, Shoreline shall provide
Employee with benefits or payments of substantially the same value.
(d) Change in Control Defined. For purposes of this Agreement,
a "Change in Control" shall mean:
(i) A change in the control of Shoreline of a nature that
would be required to be reported in response to Item 5(f) of
Schedule 14A of Regulation 14a promulgated under the Securities
Exchange Act of 1934, as amended ("Exchange Act"), provided that,
without limitation, such a change in control shall be deemed to
have occurred if (A) any "person" (as that term is used in
Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes
the beneficial owner, directly or indirectly, of securities of
Shoreline representing 25 percent or more of the combined voting
power of Shoreline's then outstanding securities, or (B) during
any period of two (2) consecutive years, individuals who at the
beginning of such period constitute the Board cease for any
reason to constitute at least a majority thereof (unless the
election or nomination for election by Shoreline's shareholders
of each new director was approved by a vote of at least two-
thirds (2/3) of the directors then still in office who were
directors at the beginning of such period);
(ii) Receipt by the Board of any notice or other
communication from any individual, corporation, partnership,
joint venture or other entity expressing a desire to propose,
negotiate or discuss any tender offer, exchange offer, merger,
consolidation, sale of shares, sale of assets not in the ordinary
course, or other business combination involving Shoreline or any
of Shoreline's subsidiaries ("Business Combination"); or
(iii) Public announcement by any individual,
corporation, partnership, joint venture or other entity
expressing an intent to seek any Business Combination.
-5-
Except as expressly provided in this Paragraph, upon termination
of this Agreement, Employee shall cease to be an employee of Shoreline or
Inter-City for all purposes and shall have no further rights as an employee
after such termination.
5. Parachute Payments. Notwithstanding any other provision of this
Agreement, if (i) part or all of any compensation and benefits to be paid
to Employee by or on behalf of Shoreline, whether under this Agreement or
otherwise, constitute a "parachute payment" (or payments) under Section
280G or any other similar provision of the Code, and (ii) if the aggregate
present value of such parachute payments (the "Parachute Amount") exceeds
2.99 times Employee's "base amount" as defined in Section 280G of the Code,
then the amounts otherwise payable to or for the benefit of Employee
subsequent to the termination of this Agreement and taken into account in
calculating the Parachute Amount (the "termination payments"), shall be
adjusted to the extent necessary to equate the Parachute Amount with 2.99
times Employee's "base amount." The adjustments permitted under this
Paragraph 5 may include the elimination of payments, the reduction of the
amount of any payments, and the extension of the date upon which the
payments would otherwise be due to reduce the present value of such
payments. Payment of the amount by which any compensation or benefit to
Employee is reduced pursuant to this Paragraph shall be deferred for one or
more fiscal years thereafter and shall be paid to Employee in the next
following fiscal year or years to the extent that he receives no parachute
payment subject to an excise tax in any such year.
6. No Solicitation. Following the termination of the Employment or
this Agreement for any reason, Employee shall not, individually or on
behalf of any corporation, partnership, joint venture or other entity,
directly or indirectly solicit or induce any officer or other employee of
Shoreline or any of its affiliates to leave his or her employment with
Shoreline or such affiliate.
7. Successors; Binding Agreement.
(a) Shoreline shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business, assets or both of Shoreline or
InterCity, by agreement in form and substance reasonably satisfactory
to Employee, expressly to assume and agree to perform this Agreement
in the same manner and to the same extent that Shoreline would be
required to perform it if no such succession had taken place. Failure
of Shoreline to obtain such agreement prior to the effectiveness of
any succession shall be a breach of this Agreement and shall entitle
Employee to compensation in the same amount and on the same terms as
Employee would be entitled hereunder if Employee terminated his
employment for Good Reason, except that for purposes of implementing
the foregoing, the date on which any such succession becomes effective
shall be deemed the date of termination. As used in this Agreement,
"Shoreline" shall mean Shoreline and any successor to Shoreline's
business, assets or both which executes and delivers the agreement
-6-
provided for in this Paragraph 7 or which otherwise becomes bound by
all of the terms and provisions of this Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be
enforceable by Employee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees
and legatees. If Employee should die while any amount would still be
payable to him under this Agreement if he had continued to live, all
such amounts, except as otherwise provided in this Agreement, shall be
paid in accordance with the terms of this Agreement to his devisee,
legatee or other designee or, if there be no such designee, to his
estate.
8. Notice. All notices and other communications provided for in
this Agreement shall be in writing and shall be deemed to have been duly
given when delivered or mailed by United States registered mail, return
receipt requested, postage prepaid, addressed to Employee at his residence
address as reflected in the personnel records of Shoreline, or to Shoreline
at its principal executive offices to the attention of the Chief Executive
Officer of Shoreline with a copy to the Secretary of Shoreline, or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be
effective only upon receipt.
9. Entire Agreement. No agreements or representations, written or
oral, express or implied, with respect to the subject matter of this
Agreement have been made by either party which are not set forth expressly
in this Agreement, and this Agreement supersedes all prior agreements and
understandings between the parties with respect to the subject matter
hereof.
10. Amendment and Waiver. No provisions of this Agreement may be
amended, modified, waived or discharged unless such waiver, modification or
discharge is agreed to in a writing signed by Employee and such officer as
may be specifically designated by the Board. No waiver by either party
hereto at any time of any breach by the other party hereto of any condition
or provision of this Agreement to be satisfied or performed by such other
party shall be deemed a waiver of similar or dissimilar conditions or
provisions at the time or at any prior or subsequent time.
11. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect.
12. Governing Law. The validity, interpretation, construction and
enforcement of this Agreement shall be governed by the laws of the State of
Michigan.
-7-
IN WITNESS WHEREOF, the parties have signed this Agreement as of
the date and year first above written.
SHORELINE FINANCIAL CORPORATION
By /S/ James F. Murphy
Its Chairman - James F. Murphy
/S/ Dan L. Smith
Dan L. Smith
"Employee"
Signed this 28th day of December, 1988
/S/ Jane Kolberg
Jane Ko1berg, a Notary Public for the
County of Berrien, State of Michigan
My Commission Expires May 11th, 1991
-8-
EXHIBIT 10(g)
SHORELINE FINANCIAL CORPORATION BONUS PROGRAM
(Approved November 16, 1994)
The Organization, Compensation, and Stock Option Committee of the
Board of Directors has approved a cash bonus program for selected bank
officers. The program is designed as an incentive for key individuals to
ensure that important corporate performance goals are achieved.
The bonus formula consists of three components--net income
growth, overhead control, and asset quality. A cash bonus may be earned
under any or all of these three components.
Bonuses accrued for a given year are payable the following
January.
SPECIFIC BONUS FORMULA
The first component of the bonus formula rewards participants for
producing steady growth in net income.
Shoreline's net income history is as follows:
<TABLE>
<CAPTION>
3 Year Compounded
Net Income Annual Net Income Growth
<S> <C> <C> <C>
1987 3,950
1988 4,807
1989 4,916
1990 4,707 + 6.0% ('90 vs '87)
1991 5,335 + 3.6% ('91 vs '88)
1992 5,931 + 6.5% ('92 vs '89)
1993 6,537 + 11.6% ('93 vs '90)
1994 (Budget) 7,177 + 10.4% ('94 vs '91)
</TABLE>
The change in net income (compounded growth rate over most recent
3 years) is used to produce a bonus according to the following formula:
<TABLE>
<CAPTION>
Senior Mgmt. Group Other Participants
<S> <C> <C>
Decline in Net Income = 0% bonus = 0% bonus
0 - 2.99% Increase = 3% bonus = 2% bonus
3 - 4.99% Increase = 6% bonus = 4% bonus
5 - 7.99% Increase = 9% bonus = 6% bonus
8 - 9.99% Increase = 12% bonus = 8% bonus
10% + Increase = 15% bonus = 10% bonus
</TABLE>
The second component of the bonus formula rewards participants
for controlling overhead. The non-interest expense to asset ratio is used
as the measurement. A bonus will be paid as follows:
<TABLE>
<CAPTION>
Non-Interest Expense/Assets Senior Mgmt. Group Other Participants
<S> <C> <C> <C>
3.45% or less * 3% bonus 2% bonus
3.30% or less 6% bonus 4% bonus
3.15% or less 9% bonus 6% bonus
3.00% or less 12% bonus 8% bonus
2.85% or less 15% bonus 10% bonus
<FN>
*Peer group average in 1993 was 3.67%
</TABLE>
The third and final component of the bonus formula rewards bonus
participants for maintaining high asset quality. In order to receive any
bonus payout under this component of the formula, net loan charge-offs for
the year must be .25% or less of average loans outstanding. If that
standard is met, then a bonus may be paid if the ratio of non-performing
assets to total loans on the four quarter-end reporting dates averages as
follows:
<TABLE>
<CAPTION>
Average Non-Performing
Assets/Loans Senior Mgmt. Group Other Participants
<S> <C> <C> <C>
1.00% or less 3% Bonus 2% Bonus
.75% or less 6% Bonus 4% Bonus
.50% or less 9% Bonus 6% Bonus
</TABLE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER COMMON SHARE
Earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding. Earnings per share
on a fully diluted basis are computed by dividing net income by the
weighted average number of common shares outstanding and common equivalent
shares with a dilutive effect. Common equivalent shares are shares which
may be issuable to employees upon exercise of outstanding stock options.
Earnings and dividends per share are restated for all stock splits and
dividends paid.
Shoreline Financial Corporation is not required to present
earnings per share on a fully diluted basis in the Consolidated Statements
of Income included in Item 8, Financial Statements and Supplementary Data, under
the provisions of Accounting Principles Board Opinion No. 15. That Opinion
provides that any reduction of less than 3% need not be considered as
dilution.
<TABLE>
<CAPTION>
1994 1993 1992
For the year ended
December 31:
<S> <C> <C> <C>
Net Income $7,198,322 $6,537,522 $5,931,589
Weighted average number
of common shares 4,970,952 4,914,205 4,891,935
Weighted average number
of common equivalent
shares 94,001 52,255 42,727
Earnings per share $1.45 $1.33 $1.21
Fully diluted earnings
per share $1.42 $1.31 $1.20
</TABLE>
EXHIBIT 12
STATEMENT OF COMPUTATION OF OTHER RATIOS
<TABLE>
<CAPTION>
(In thousands, except
per share data) 1994 1993 1992
<S> <C> <C> <C>
For the year ended
December 31:
Net income $ 7,198 $6,538 $5,932
Net interest income* 26,782 24,785 23,965
Cash dividends declared 3,181 2,727 2,422
Average shareholders'
equity 55,286 50,868 46,463
Average interest-earning
assets 576,549 528,316 486,063
Average assets 620,430 569,271 523,719
Earnings per share $ 1.45 $ 1.33 $ 1.21
Dividends per share $ .64 $ .55 $ .49
Ratios:
Return on average 13.02% 12.85% 12.77%
shareholders' equity
(net income divided by
average shareholders'
equity)
Return on average assets 1.16% 1.15% 1.13%
(net income divided by
average assets)
Average equity capital to
average assets 8.91% 8.94% 8.87%
Dividend payout ratio 44.19 41.72% 40.83%
(net income divided by
cash dividends declared)
Net interest margin 4.65% 4.69% 4.93%
(net interest income
divided by average
interest-earning assets)
______________
<FN>
*On a fully tax equivalent
basis using a federal income
rate of 34% for all years
presented.
</TABLE>
EXHIBIT 13
[LOGO]
Shoreline Financial Corporation
ANNUAL REPORT 1994
"Record Growth & Profitability. Again."
TABLE OF CONTENTS
1 Financial Highlights
2 To Our Shareholders
4 Business of Shoreline
6 Vision of Shoreline
14 Quarterly Financial Data
14 Common Stock Information
16 Management's Discussion
and Analysis of
Financial Condition
and Results of Operations
28 Consolidated Balance Sheets
29 Consolidated Statements of Income
30 Consolidated Statements of Changes
in Shareholders' Equity
31 Consolidated Statements of Cash Flows
32 Notes to Consolidated Financial Statements
40 Report of Independent Auditors
41 Directors
42 Officers
43 Employees
44 Banking Locations
<TABLE>
FINANCIAL HIGHLIGHTS
(In thousands except financial ratios and per share data)
<CAPTION>
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
At Year End:(1)
Total assets $633,854 $620,620 $533,004 $507,129 $475,691
Net loans 430,577 408,107 350,174 340,043 312,617
Total deposits 566,096 557,409 480,458 458,913 431,295
Long-term debt 5,000 5,000 0 0 0
Shareholders' equity 56,208 52,607 48,194 44,360 40,861
Tier 1 risk-based capital 13.62% 12.90% 14.46% 13.95% 14.11%
For The Year:(1)
Net interest income 25,356 23,066 22,130 19,980 18,458
Provision for loan losses (750) (1,380) (1,380) (1,270) (1,185)
Other income 4,593 4,754 3,968 3,188 2,895
Other expense (19,721) (17,987) (17,496) (15,411) (14,437)
Income before income taxes 9,478 8,453 7,222 6,487 5,731
Income tax expense (2,280) (1,915) (1,290) (1,152) (1,024)
Net income $ 7,198 $ 6,538 $ 5,932 $ 5,335 $ 4,707
-1-
Financial Ratios:
Return on average
shareholders' equity 13.02% 12.85% 12.77% 12.55% 11.95%
Return on average assets 1.16% 1.15% 1.13% 1.09% 1.05%
Net interest margin 4.65% 4.69% 4.93% 4.78% 4.88%
Average equity capital
to average assets 8.91% 8.94% 8.87% 8.72% 8.75%
Dividend payout ratio 44.19% 41.72% 40.83% 39.78% 40.77%
Per Share Data:
Earnings per share(2) $ 1.45 $ 1.33 $ 1.21 $ 1.10 $ .97
Cash dividends declared
per share(2) .64 .55 .49 .43 .39
Book value per share(3) 11.26 10.63 9.83 9.09 8.43
<FN>
(1) See Note 1 to the Consolidated Financial Statements for basis of reporting consolidated financial information
(2) Based on average annual shares outstanding adjusted to reflect stock splits and stock dividends. See Note 1 to the
Consolidated Financial Statements
(3) Based on shares outstanding at period end adjusted to reflect stock splits and stock dividends. See Note 1 to the
Consolidated Financial Statements
</TABLE>
On the Cover:
Bridges are more than structures spanning waterways. Bridges help people
and businesses reach their financial goals. Bridges unite us with our customers
and the communities we share. Bridges expand our present growth and link it to
an even better tomorrow.
To Our Shareholders
"Leading by Doing Continues to be our Watchword."
We are pleased to report that Shoreline Financial Corporation had another
excellent year in 1994. Net income was a record $7,198,000, 10.1 percent more
than 1993 earnings of $6,538,000. This marks the fourth consecutive year in
which we set a new earnings record. Both our return on equity of 13.02 percent
and our return on assets of 1.16 percent represent the best levels attained by
Shoreline during the past five years.
While there is no single factor that is responsible for this success,
financial results have benefited immensely from growth and improved loan
quality. Shoreline's net interest income increased $2.3 million in 1994,
entirely as a result of growth in earning assets. Compared to 1993, average
earning assets increased 9.1 percent, average loans increased 11.3 percent and
average deposits increased 8.3 percent. A portion of this growth was due to the
July, 1993 acquisition of four offices from Standard Federal Bank. The remainder
resulted from attracting new customers and from selling additional services to
existing customers.
Dramatic improvement in loan quality is reflected in a non-performing
asset-to-loan ratio of .51 percent on December 31, 1994, compared to 1.31
percent on December 31, 1993. For the second consecutive year, net charged-off
-2-
loans were only .09 percent of average total loans. As a result of this
favorable experience, Shoreline was able to reduce its provision for loan losses
from $1,380,000 in 1993 to only $750,000 in 1994.
With earnings per share having increased from $1.33 in 1993 to $1.45 in
1994, the Board of Directors raised cash dividends per share from $.55 to $.64,
an increase of approximately 16 percent. As shareholders you are, of course,
concerned about both the return on, and the value of, your investment. Bank
stocks, as a group, began to fall sharply late in the summer of 1994. Not unlike
many of our peers, Shoreline's stock price also declined. The primary reason for
the decline in bank stocks appears to be the fear of rising interest rates and
the effect they will have on banks' earnings. As we have stated, 1994 earnings
set a new record and we expect 1995 to be another good year for your company.
Shoreline has proven to be a good investment since our beginning in
December of 1987. We will continue to pursue the same sound strategies that have
created value for you in the past and that, in turn, should translate into a
growing share price when bank stocks come into favor again.
On May 28, 1994, Shoreline's affiliate banks, Inter-City Bank and Citizens
Trust and Savings Bank, merged to become Shoreline Bank. The result is an
organization that has the ability to enhance customer service, to increase the
effectiveness of marketing efforts and to achieve the level of efficiency
required to compete effectively in the ever-changing and highly competitive
banking industry. In July, the expansion of the downtown Saint Joseph office was
completed and, in October, a very successful grand re-opening celebration was
held. In addition to a state-of-the-art branch, Shoreline's Consumer Loan,
Mortgage Loan and Trust departments are housed at this location.
Shoreline Bank enhanced its leadership position during 1994 by introducing
important new products and services. Bank-by-Phone and Shoreline Access extend
the bank's services into the homes and offices of our customers by allowing them
to access their accounts by telephone or personal computer. The Equity Edge 100
percent home equity loan and the Capital Club savings account are just two
examples of the loan and deposit products which set Shoreline Bank apart from
many of its competitors.
Another way that we set ourselves apart from competitors is through our
commitment to the communities in which we do business. The people of Shoreline
have a very deep sense of commitment to their respective communities. That
commitment is demonstrated by the fact that over 150 Shoreline employees
participated in community efforts such as United Way campaigns, the Benton
Harbor Soup Kitchen and the National Blueberry Festival in South Haven, to name
just a few. Community involvement has clearly become a tradition in our
organization, and we believe, it is one of the ways we can work to insure our
future success.
During 1994, Shoreline invested in its people by promoting a number of
individuals. We congratulate them and wish them well in their positions of
additional responsibility and thank them for the contributions they made to
Shoreline's current success. Two senior officers and one director retired during
the past year. These individuals made significant contributions to the
-3-
Corporation's growth. You will find them listed on page 42, and to each we
extend our gratitude for many years of dedicated service. A special mention here
is appropriate for our Vice Chairman, Ronald L. Zile, who retired on December
31, 1994. Ron was instrumental in the formation of Shoreline Financial
Corporation. His support and counsel were invaluable over the past seven years.
We look forward to his continued involvement on the Board of Directors.
We are gratified by what Shoreline Financial Corporation has accomplished
in 1994 and since its beginning in December of 1987. As we look to the future,
we feel that we are better equipped than ever to build upon the tradition of
performance our shareholders have come to expect.
The directors and officers of your corporation and its affiliate bank look
forward to seeing you at the Annual Shareholders' Meeting at 3 p.m. on Thursday,
May 4, 1995, at Lake Michigan College. We always welcome this opportunity to
visit with you and answer your questions.
Dan L. Smith
Chairman of the Board
President and CEO
BUSINESS OF SHORELINE
Where to Bank (Service Mark)
It's the "where" that makes Shoreline Bank different from any other
financial institution in the area. With deep roots in southwest Michigan,
Shoreline Bank is in a unique position to know where to find new opportunities.
To determine where our area is heading. To take strength from our past successes
and meet the future head-on.
All possible because we not only do business here, we live here, too. So
Shoreline Bank can better respond with the branch locations, services and
products that are right for all of us.
Which means, for southwest Michigan's financial community, Shoreline Bank
is "Where to Bank."
"Building on a Strong Foundation."
General
Shoreline Financial Corporation ("Shoreline" or the "Corporation") is a
bank holding company. Shoreline was formed on April 23, 1987, for the purpose of
affecting the affiliation of Inter-City Bank of Benton Harbor, Michigan, and
Citizens Trust and Savings Bank of South Haven, Michigan. On May 28, 1994,
Inter-City Bank and Citizens Trust and Savings Bank merged, resulting in a
single bank named Shoreline Bank (the "Bank"). On December 31, 1994, Shoreline
Bank represented Shoreline's only operating subsidiary. Shoreline had assets at
December 31, 1994 totaling $633.9 million, deposits of $566.1 million and
shareholders' equity of $56.2 million.
-4-
Shoreline's business is concentrated exclusively in the commercial banking
industry segment. Shoreline's subsidiary bank offers individuals, businesses,
institutions and government agencies a full range of commercial banking
services including time, savings and demand deposits; commercial, consumer and
real estate financing; bank credit cards; trust services; investment services;
safe deposit services; automated transaction machine services; electronic and
telephone banking services; and other banking services. The business of
Shoreline Bank is mildly seasonal due to the recreational and agricultural
components of the local economy. No material part of the business of Shoreline
and its subsidiary is dependent upon a single customer or very few customers,
the loss of which would have a materially adverse effect on Shoreline.
The principal markets for Shoreline's financial services are the Michigan
communities in which Shoreline Bank is located, and the areas immediately
surrounding these communities. Shoreline and its subsidiary serve these markets
through 23 offices located in and around these communities. Shoreline and its
subsidiary have no material foreign assets or income.
On December 7, 1993, Shoreline announced an agreement with Great Lakes
Bancorp, Ann Arbor, Michigan, under which Shoreline will purchase and assume
from Great Lakes Bancorp certain assets and liabilities associated with its
branch located in South Haven, Michigan. This branch has deposits totaling
approximately $10 million. On March 25, 1994, the Corporation announced an
agreement with Old Kent Bank, Grand Rapids, Michigan under which Shoreline will
purchase and assume from Old Kent Bank certain assets and liabilities associated
with its branch in Adamsville, Michigan. This branch has deposits totaling
approximately $12 million. Both of these transactions are subject to regulatory
approvals and other customary conditions. Delays encountered in the regulatory
approval process have extended the consummation date of these transactions
beyond management's initial expectations. Barring further delays in obtaining
regulatory approval, these transactions are anticipated to close during the
second or third quarter of 1995.
The principal source of revenue for Shoreline and its subsidiary is
interest and fees on loans. On a consolidated basis, interest and fees on loans
accounted for 73.2 percent of Shoreline's total revenues in 1994, 70.7 percent
in 1993 and 69.2 percent in 1992. Interest on investment securities accounted
for 16.2 percent of Shoreline's total revenues in 1994, 17.8 percent in 1993 and
21.4 percent in 1992.
Competition
The business of banking is highly competitive. Banks face significant
competition from other commercial banks and, in some product lines, savings and
loan associations, credit unions, finance companies, insurance companies and
investment and brokerage firms. The principal forms of competition for financial
services are price and the convenience and quality of services rendered to
customers.
Supervision and Regulation
A state or national bank may generally open a branch office anywhere in the
State of Michigan without regard to its proximity to that bank's home office.
-5-
Regulatory approval is required, but approval is based primarily upon the
adequacy of the bank's capital and the prospects for success of the branch.
Michigan banks or bank holding companies may acquire or be acquired by banks or
bank holding companies located in any state that passes a banking statute
granting reciprocal privileges.
On September 29, 1994, The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 became law. This law permits bank holding companies to
acquire banks nationwide after September 29, 1995 and allows interstate
branching for national banks after June 1, 1997 without any state legislative
action. States retain their current authority over the branching structure for
state-chartered banks, but may allow interstate branching for both state and
national banks before June 1, 1997.
Banks and bank holding companies are extensively regulated. Shoreline Bank
is chartered under state law and is supervised, examined and regulated by both
the Financial Institutions Bureau of the Michigan Department of Commerce and the
Federal Deposit Insurance Corporation. Shoreline Financial Corporation is
regulated by the Federal Reserve System. The business activities of Shoreline
Bank are significantly limited in a number of respects by federal and state laws
governing banks. Deposits of the Bank are insured by the Federal Deposit
Insurance Corporation to the extent provided by law.
Prior approval of the Federal Reserve Board, and in some cases various
other government agencies, will be required for Shoreline to acquire control of
any additional banks or other operating subsidiaries. The business activities of
Shoreline and its subsidiary will be limited to banking and other activities
which are determined by the Federal Reserve Board to be closely related to
banking.
Banks are subject to a number of federal and state laws and regulations
which have a material impact upon their business. These include among others;
state usury laws, state laws relating to fiduciaries, the Truth in Lending Act,
the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Community Reinvestment Act, the Financial Institutions
Reform, Recovery and Enforcement Act of 1989, the FDIC Improvement Act of 1991,
electronic funds transfer laws, redlining laws, antitrust laws and privacy laws.
The instruments of monetary policy of authorities, such as the Federal
Reserve System, may be used to influence the growth and distribution of bank
loans, investments and deposits, and may also affect interest rates on loans and
deposits. These policies may have a significant effect on the operating results
of banks.
Shoreline and its subsidiary employ approximately 314 persons.
Properties
Shoreline maintains its offices and conducts its operations from the
principal banking office of Shoreline Bank in Benton Harbor, Michigan. The
holding company neither owns nor has any present plan to acquire any real
property.
-6-
Shoreline Bank's principal office is located at 823 Riverview Drive, Benton
Harbor, Michigan. This location encompasses approximately 21,000 square feet on
three floors, all of which are occupied by Shoreline Bank and Shoreline
Financial Corporation. Shoreline Bank owns the premises occupied by each of its
23 branch offices. During 1994, Shoreline Bank constructed an 8,000 square foot
addition to its Pleasant Street location in St. Joseph, to house its mortgage,
consumer loan, collections and trust departments.
Legal Proceedings
Shoreline's subsidiary is party, as plaintiff or as defendant, to a number
of legal proceedings, none of which is considered material and all of which
arise in the normal course of operations.
Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
three months ended December 31, 1994.
[SHAREHOLDERS' EQUITY GROWTH CHART]
[ASSET GROWTH CHART]
VISION OF SHORELINE
strategy (strat' i je) n., pl. strategies. The art or skill of using a
series of goals in endeavors such as politics and business. syn: idea, plan,
project, design, layout, schema, blueprint. The way we define it is "to utilize
every resource to its utmost advantage to insure that Shoreline Bank remains the
leading financial institution of southwest Michigan."
"Gaining Strength with an aggressive Strategy."
Shoreline Financial Corporation started 1994 with a vision. To create
southwest Michigan's strongest financial resource by forging two established and
recognized area banks into one dedicated leader: Shoreline Bank. A leader that
prospers by the axiom: "the sum is greater than its parts."
Goals were set. Among them, to establish high recognition for the
"Shoreline" name, to maintain deposit levels, to create a positive first
experience for people coming into our branches, to create and sell new services
to fulfill our customer needs and, most importantly, to gain new relationships.
Goals were met. And we are pleased with the results. Our new name has been
established and recognition is high. In addition, promotions such as the
$10,000 Where to Win Sweepstakes and the Instant Win Game were met with
enthusiastic consumer response. As a result, these and other accomplishments led
to sustained deposit levels throughout the merger.
-7-
Our primary strategy is to improve earnings.
Our main goal is to insure that Shoreline Financial Corporation remains a
profitable investment for our shareholders.
In seeking this goal, we constantly strive to produce strong earnings,
maintain asset quality and maximize shareholder value. We pursue any change
that will increase efficiency and help us compete more aggressively. Our motive?
Conventional wisdom tells us that banks with low operating costs and excellent
service quality will beat the high cost, low service provider every time. And we
firmly believe this to be true.
The end result is obvious: new and improved services, strengthening of our
leadership position and another record year.
[EARNINGS PER SHARE GROWTH CHART]
[DIVIDENDS PER SHARE GROWTH CHART]
Yes, the customer is always right.
Which is why we give them a variety of service options. Whether they prefer
face-to-face meetings with customer service representatives who know them by
name or the most up-to-date technological interfaces, the personality of
Shoreline Bank changes to fit each individual customer.
"Meeting the needs of a Dynamic Market."
With every passing year financial options and services are becoming
increasingly complex. At the same time, bank customers are demanding both easier
access and a more user-friendly approach to these services. These two realities
have shaped Shoreline Bank's approach to customer service: to leverage every
resource available to provide accessible, easy-to-use service. Service that's
second to none.
We're there - when and where you need us.
Our service begins by offering southwest Michigan more branches, in more
cities, open more hours. Shoreline Bank's Orchards Mall branch, for example, is
open extended hours on Saturdays. In addition, this branch is open during peak
shopping hours on Sundays to provide customers with complete banking service.
Of course, customers no longer need to visit a branch to obtain many
Shoreline Bank services. We've expanded ATM service to places like McDonald's
(Registered Trademark), Meijer (Registered Trademark) and Wal-Mart (Registered
Trademark). And we've recently introduced Shoreline Bank's free Bank-by-Phone
service so customers can inquire about their savings, checking, CDs, IRAs and
loans. As well as transfer funds, make loan payments and more. And do it 24
hours a day, 365 days a year.
-8-
For business customers, Shoreline Bank has taken the concept of off-site
banking one step further. It's called Shoreline Access and it allows businesses
to link their company's personal computer to access all their accounts. By
electronically connecting these customers to Shoreline Bank we have helped
increase their operating efficiency. Not to mention strengthened our
partnership.
Relationship banking is built on customer service.
We continually search for new innovative packaged accounts that make
banking easier and save more money for our customers. When these customers
choose Shoreline Bank for more of their banking needs, they receive numerous
value-added benefits. The end result is increased and improved service for our
customers.
We're committed to building long-term relationships with all of our
customers by providing them with the products and services they want and need.
That's what today's market demands. And what Shoreline Bank delivers.
It's making a house call when a customer with disabilities is unable to
come to the branch on their own. It's driving a customer home to retrieve a
spare set of keys after he locked his originals in the car while it was still
running. As Saugatuck Branch Manager Jon Weston put it after he changed a tire
for a customer in need, "It's all part of being a full service bank."
"It's not just being a good neighbor, it's good business."
"Our Biggest Asset is our People."
It's the one Shoreline Financial Corporation asset that can't be assigned a
dollar amount. One that's invisible on the balance sheet. And, at the same time,
priceless.
It's the uncompromising commitment our people have to our customers, our
neighbors and our community.
It all stems from the fact that we live here, too. With many other
financial institutions, important decisions affecting customers are made by
people from the other side of the state or even the other side of the country.
Not with us. When a customer needs a loan locally, the decision is
made locally.
Yet it's not just during banking hours that our employees serve customers.
We support and encourage employees to contribute to the community. In virtually
every southwest Michigan fundraising drive, business development association,
youth activity and cultural event, you'll find employees of Shoreline Financial
Corporation helping to lead the way.
By strengthening the community, we strengthen ourselves.
The way we see it, it's not just being a good neighbor, it's good business.
-9-
It's also good business to give employees the resources necessary to
benefit themselves as well as their communities. Which is why Shoreline
Financial Corporation takes pride in offering employees opportunities through
incentive programs, tuition reimbursement and scholarship programs for their
children.
All of this helps us attract and retain southwestern Michigan's best and
brightest people, who are truly the most important element of our success.
Help wanted...and help given. Each Shoreline Bank Note, our employee
newsletter, publishes a list of organizations where help is needed throughout
southwest Michigan. We call it, "Lend a Helping Hand," and it offers employees
the opportunity to donate everything from baby clothes to administrative
expertise.
Today, forty thousand feet above the Rocky Mountains, a Shoreline Bank
customer can transfer funds by simply pushing buttons on a phone. Sitting at an
office computer, a small business owner can receive up-to-date cash management
information using Shoreline Access. And across the world, in a remote
Mediterranean village, a customer can withdraw 20,000 lira from an ATM machine
with a piece of plastic that reads "Shoreline Bank." And all can get just a
hint of what Shoreline Financial Corporation will bring
them in the future.
"Meeting the future head-on."
In our first year under the "Shoreline Bank" banner, we can look back with
pride at our many accomplishments. How we've gained name recognition.
Strengthened our leadership position. Maintained and expanded accounts.
But the one thing we can't do is let those achievements allow us to become
complacent. Indeed, we need to plan for the challenges and opportunities that
await us in the years to come.
The past decade has taught us, and the entire banking industry, that change
is the only constant. And that those who anticipate the changes thrive and
prosper. Those who don't, get left behind.
We will continue to lead the charge and encourage our staff to closely
scrutinize and question the way we do things. In fact, many of the changes and
innovations that have come about are exclusive to Shoreline Financial
Corporation - created by employees, management and board members alike.
Our constant goal is to become the most efficient, effective provider of
financial services in southwest Michigan. It's the only way we know how to put
ourselves in a better position to increase growth and market share, and to
provide rewarding jobs for our employees.
In the years to come, our staff, our customers, and the communities in
which we live will continue to reap the benefits of how we do business.
And so, too, will our shareholders.
-10-
It is more important to look ahead than to look back.
QUARTERLY FINANCIAL DATA
The following is a summary of selected quarterly results of operations for
the years ended December 31, 1994 and 1993. The per share data for the first
quarter of 1993 has been restated to reflect the five percent stock dividend
paid in April of 1993. Additionally, the per share data for 1993 and the first
quarter of 1994 have been restated to reflect the three-for-two stock split paid
in May of 1994.
<TABLE>
<CAPTION>
(In thousands, except per share data)
1994 March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
Interest income $10,028 $10,799 $11,365 $11,879
Net interest income 5,714 6,344 6,610 6,688
Provision for loan losses 175 175 200 200
Income before income taxes 2,064 2,264 2,544 2,606
Net income 1,609 1,742 1,915 1,932
Net income per common share $ .32 $ .35 $ .39 $ .39
</TABLE>
<TABLE>
<CAPTION>
(In thousands, except per share data)
1993 March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
Interest income $9,840 $9,732 $10,437 $10,415
Net interest income 5,625 5,613 5,952 5,876
Provision for loan losses 375 375 345 285
Income before income taxes 1,991 2,032 2,419 2,011
Net income 1,595 1,587 1,814 1,542
Net income per common share $ .33 $ .32 $ .37 $ .31
</TABLE>
COMMON STOCK INFORMATION
Shoreline common stock is traded on the NASDAQ Stock Market under the
symbol SLFC. Prices are based on reports published for representative quotations
supplied by the National Association of Securities Dealers, Inc. In all
periods, the prices shown reflect interdealer prices and do not include
retail markups, markdowns or commissions, and may not necessarily represent
actual transactions. There may have been transactions or quotations at higher or
lower prices of which management is not aware. Market prices have been adjusted
to give retroactive effect to the five percent stock dividend paid in April of
1993 and the three-for-two stock split paid in May of 1994. As of February 28,
1995, there were approximately 1,340 shareholders of record owning common stock
of Shoreline.
-11-
<TABLE>
Market Price of Common Stock (bid price)
<CAPTION>
1994 1993
Quarter Ended High Low High Low
<S> <C> <C> <C> <C>
March 31 $20.67 $18.67 $18.83 $14.29
June 30 20.50 19.00 18.67 17.50
September 30 20.25 17.50 20.00 18.00
December 31 18.50 16.50 19.67 18.67
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion provides information about the Corporation's
financial condition and results of operations which may not otherwise be
apparent from the consolidated financial statements included elsewhere in this
annual report. This discussion should be read in conjunction with the
consolidated financial statements beginning on page 28 and the related
footnotes.
1994 Highlights
Net income in 1994 totaled $7,198,322, an increase of 10.1 percent over the
$6,537,522 earned in 1993. Growth in average earning assets of $48.2 million
played a significant role in this improved performance, helping to produce a 9.9
percent or $2.3 million increase in net interest income. Another significant
factor in the increase in net income in 1994 was the reduction in the provision
for loan losses from $1,380,000 in 1993 to $750,000 in 1994. Reduced problem
assets and the modest level of net charge-offs experienced in 1994 supported
this decrease. Non-performing assets as a percentage of total loans was .51
percent at December 31, 1994, the lowest level attained in Shoreline's history.
Net charge-offs as a percent of average loans equaled 1993's ratio of only .09
percent.
Earnings per share increased from $1.33 in 1993 to $1.45 in 1994. Also
showing improvement, the return on average shareholders' equity for 1994 was
13.02 percent versus 12.85 percent in 1993. The Corporation's return on average
assets increased slightly in 1994 to 1.16 percent from 1.15 percent in 1993.
Total assets were $633.9 million at December 31, 1994, a 2.1 percent
increase over the $620.6 million reported at December 31, 1993. Total loans
increased 5.5 percent in 1994 to $436.5 million. This increase was primarily
the result of an 11.8 percent increase in residential real estate loans
outstanding at year-end. Total shareholders' equity amounted to $56.2 million on
December 31, 1994, an increase of 6.8 percent from year-end 1993. This increase
was obtained despite recording a $1 million negative mark-to-market adjustment,
net of tax, to equity. This mark-to-market adjustment resulted from adopting
Financial Accounting Statement No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Book value per share was $11.26 at December 31,
1994, compared to $10.63 at December 31, 1993. Cash dividends per share
increased 16.4 percent to $.64 per share in 1994.
-12-
Summary of Operating Results
The major components of the Corporation's operating results for 1994, 1993
and 1992 have been provided in the following table to establish a framework for
further discussion on subsequent pages.
<TABLE>
<CAPTION>
Years ended December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Net interest income $25,356 $23,066 $22,130
Add: Taxable equivalent adjustment(1) 1,426 1,719 1,835
Taxable equivalent net interest income 26,782 24,785 23,965
Provision for loan losses (750) (1,380) (1,380)
Other income 4,594 4,754 3,968
Other expenses (19,721) (17,987) (17,496)
Income taxes, including taxable
equivalent adjustment (1) (3,707) (3,634) (3,125)
Net income $ 7,198 $ 6,538 $ 5,932
<FN>
(1) Tax equivalent adjustment based upon federal tax rate of 34 percent.
</TABLE>
Net Interest Income
Net interest income, the difference between interest and fees earned on
earning assets and the interest paid on deposits and other borrowed funds, is
the principal source of income for Shoreline Financial Corporation. There are a
number of factors (which management may or may not be able to affect) which
influence net interest income, including changes in the volume and mix of
interest-earning assets and interest-bearing liabilities, market interest rates,
monetary and fiscal policies and customer preference.
The following table presents interest income from average earning
assets, expressed in dollars and yields on a fully taxable equivalent basis, and
interest expense on average interest-bearing liabilities expressed in dollars
and rates.
<TABLE>
AVERAGE CONSOLIDATED BALANCE SHEETS/INTEREST RATES
<CAPTION>
Years ended December 31(In thousands) 1994 1993 1992
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning Assets
Federal funds sold $ 13,766 $ 571 4.15% $ 15,799 $ 468 2.96% $ 9,164 $ 305 3.33%
Securities:
Taxable 91,497 5,038 5.51% 86,375 5,119 5.93% 82,832 6,707 8.10%
Tax-exempt(2) 42,808 4,079 9.53% 41,004 4,408 10.75% 42,899 4,634 10.80%
-13-
Loans - net of unearned
income(1)(2) 428,478 35,809 8.36% 385,138 32,148 8.35% 351,168 31,870 9.08%
Total interest-earning assets 576,549 45,497 7.89% 528,316 42,143 7.98% 486,063 43,516 8.95%
Non-earning Assets
Cash and due from banks 28,864 28,075 25,746
Other assets 20,786 18,062 16,120
Allowance for loan losses (5,769) (5,182) (4,210)
Total assets $620,430 $569,271 $523,719
Interest-bearing Liabilities
Demand deposits $ 59,816 877 1.47% $ 59,255 1,169 1.97% $ 54,822 1,691 3.08%
Savings deposits 183,885 5,549 3.02% 153,033 4,262 2.79% 122,174 4,152 3.40%
Time deposits 248,522 11,950 4.81% 239,789 11,809 4.92% 241,560 13,680 5.66%
Short-term borrowed funds 2,702 87 3.22% 1,943 42 2.16% 877 28 3.19%
Long-term debt 5,000 252 5.04% 1,548 76 4.91% -- -- --
Total interest-bearing
liabilities 499,925 18,715 3.74% 455,568 17,358 3.81% 419,433 19,551 4.66%
Non-interest-bearing Liabilities
Demand deposits 62,591 59,987 54,501
Other liabilities 2,628 2,848 3,322
Shareholders' equity 55,286 50,868 46,463
Total liabilities and
Shareholders' equity $620,430 $569,271 $523,719
Net Interest Income $26,782 $24,785 $23,965
Net Interest Income as a Percentage
of Interest-earning Assets 4.65% 4.69% 4.93%
<FN>
(1) Nonaccrual loans are included in the daily average loans outstanding for purposes of this calculation. See Note 1 to the
Consolidated Financial Statements, page 32 regarding recognition of loan fee income.
(2) Yields are computed on a fully tax-equivalent basis using a federal income tax rate of 34 percent in all years presented.
</TABLE>
Net interest income on a fully taxable equivalent basis totaled $26.8
million in 1994, an increase of $2 million or 8.1 percent over the previous
year. Growth in interest-earning assets helped to produce this increase in net
interest income. Shoreline's interest-earning assets averaged $576.5 million in
1994, an increase of $48.2 million or 9.1 percent over the previous year. Growth
in average total loans accounted for $43.3 million of this increase. In 1993,
net interest income increased $820,000 over the prior year, primarily the result
of an 8.7 percent or $42.3 million increase in average earning assets. The
purchase of approximately $42 million of residential mortgage loans in mid-1993
from Standard Federal Bank favorably impacted 1993's average earning assets.
Net interest margin is calculated by dividing fully taxable equivalent
net interest income by average interest-earning assets. Shoreline's net interest
margin was 4.65 percent in 1994 compared to 4.69 percent in 1993 and 4.93
percent in 1992. 1993's net interest margin was negatively impacted by the
purchase of $42 million of mortgage loans from Standard Federal Bank at current
market rates during the third quarter of 1993 and the leveling off of interest
rates at historically low levels. Shoreline's earning assets generally respond
more rapidly to changes in interest rates than do its interest-bearing
liabilities. As a result, the rise in interest rates in 1994 helped to
-14-
strengthen the Corporation's net interest margin during the year. Shoreline's
net interest margin during the fourth quarter of 1994 was 4.80 percent compared
to the first quarter's margin of 4.33 percent. Management continually monitors
Shoreline's balance sheet and employs other methods of analysis to protect net
interest income from significant fluctuations caused by interest rate
volatility.
The following table sets forth the changes in fully taxable equivalent
interest income and in interest expense as they relate to changes in volume and
changes in rate. The change due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
<TABLE>
<CAPTION>
1994 Compared 1993 Compared
to 1993 to 1992
Increase (Decrease) Increase (Decrease)
(Fully taxable equivalent Due Due Due Due
basis, in thousands) to Volume to Rate Net to Volume to Rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ (66) $ 169 $ 103 $ 200 $ (37) $ 163
Securities:
Taxable 294 (375) (81) 276 (1,864) (1,588)
Tax-exempt 188 (517) (329) (204) (22) (226)
Loans - net of
unearned income 3,621 40 3,661 2,948 (2,670) 278
Change in interest income 4,037 (683) 3,354 3,220 (4,593) (1,373)
Interest-bearing liabilities:
Demand deposits 11 (303) (292) 128 (650) (522)
Savings deposits 910 377 1,287 938 (828) 110
Time deposits 424 (283) 141 (100) (1,771) (1,871)
Short-term borrowings 20 25 45 25 (11) 14
Long-term debt 174 2 176 76 N/A 76
Change in interest expense 1,539 (182) 1,357 1,067 (3,260) (2,193)
Change in net interest income $2,498 $(501) $1,997 $2,153 $(1,333) $ 820
</TABLE>
Provision for Loan Losses
The provision for loan losses is the amount added to the allowance for loan
losses to absorb possible losses that are currently anticipated. The amount of
the loan loss provision is based on loan loss experience and such other factors
which, in management's judgment, deserve current recognition in maintaining an
adequate allowance for loan losses. These factors include, but are not limited
to, a review of current economic conditions as they relate to loan
collectibility and reviews of specific loans to evaluate their collectibility.
The following table summarizes loan balances at the end of each period
and daily averages, changes in the allowance for loan losses arising from loans
charged off and recoveries on loans previously charged off by loan category and
additions to the allowance which have been charged to expense.
-15-
<TABLE>
<CAPTION>
December 31,
(In thousands) 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Amount of loans
outstanding at end of period $436,529 $413,693 $354,740 $343,877 $316,106
Daily average amount
of loans outstanding
for the period $428,478 $385,138 $351,168 $324,911 $302,483
Balance of allowance for
loan losses at
beginning of period $ 5,586 $ 4,566 $ 3,834 $ 3,489 $ 3,121
Loans charged off:
Commercial, financial
and agricultural 391 186 437 279 194
Residential real estate 105 84 2 8 0
Real estate construction 0 0 0 0 0
Consumer 517 332 392 808 773
Total loans charged off 1,013 602 831 1,095 967
Recoveries of loans
previously charged off:
Commercial, financial
and agricultural 367 107 55 63 59
Residential real estate 0 1 0 0 0
Real estate construction 0 0 0 0 0
Consumer 262 134 128 107 91
Total loan recoveries 629 242 183 170 150
Net loans charged off 384 360 648 925 817
Additions to allowance charged
to operating expense 750 1,380 1,380 1,270 1,185
Allowance at end of period $ 5,952 $ 5,586 $ 4,566 $ 3,834 $ 3,489
Ratio of net charge-offs
during the period to
average loans outstanding 0.09% 0.09% 0.18% 0.28% 0.27%
</TABLE>
Management decreased 1994's provision for loan losses to $750,000, its
lowest level in seven years. This was in response to continued modest net
charge-offs, lower non-performing assets (discussed further in the section
titled "Non-performing Assets and Problem Loans") and generally improved
economic conditions. Net charge-offs totaled $384,000 in 1994. This represents
only .09 percent of total average loans for the second consecutive year. This
favorable loss experience helped to produce an allowance for loan losses as a
percent of total loans outstanding at December 31, 1994 of 1.36 percent. This
ratio was 1.35 percent at December 31, 1993 and 1.29 percent at December 31,
1992.
The Corporation performs a periodic detailed written analysis of the
adequacy of the allowance for loan losses. While management's analysis may
allocate portions of the allowance to specific problem loan situations, the
entire allowance is available for any loan charge-offs that occur. Management
-16-
has allocated the allowance for loan losses within the following categories at
the dates indicated:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993 December 31, 1992 December 31, 1991 December 31, 1990
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in each in each in each in each in each
Category Category Category Category Category
to to to to to
Total Total Total Total Total
(In thousands) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $2,044 41.20% $2,112 40.31% $2,003 45.61% $1,775 47.11% $1,688 43.07%
Residential real estate 559 41.18 423 38.87 317 33.19 357 33.31 300 34.97
Real estate construction 100 6.11 106 6.61 75 7.22 51 5.94 46 6.06
Consumer 995 11.51 1,103 14.21 845 13.98 762 13.64 593 15.90
Unallocated 2,254 -- 1,842 -- 1,326 -- 889 -- 862 --
Total $5,952 100.00% $5,586 100.00% $4,566 100.00% $3,834 100.00% $3,489 100.00%
</TABLE>
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." SFAS No. 114 requires that
allowances for loan losses on impaired loans be determined using the present
value of estimated future cash flows on the loan, discounted at the loan's
effective interest rate. A loan is considered to be impaired when it is probable
that all principal and interest amounts will not be collected according to the
contract. SFAS No. 114 is required to be adopted by the Corporation for its
fiscal year beginning January 1, 1995. Management believes adoption of this new
standard in 1995 will not have a material impact on the Corporation's
consolidated financial statements.
OTHER INCOME
Total other income amounted to $4.6 million in 1994, a decrease of $160,000
from 1993. Excluding the impact of gains on the sale of assets, total other
income increased $387,000 or 9.7 percent in 1994. The increase in total other
income in 1993, excluding gains on the sale of assets, was $607,000 or 17.8
percent over 1992. An analysis of the components of other income is provided in
the following table:
<TABLE>
<CAPTION>
Year ended December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Service charges on deposit accounts $1,860 $1,731 $1,490
Trust income 1,346 1,181 1,123
Securities gains/(losses) (165) 370 399
Credit card fees and discounts 575 518 319
Gain on sale of mortgage loans 0 295 140
Gain on sale of other loans 302 0 0
-17-
Safe deposit box income 151 147 128
Other customer service fees 123 127 105
Credit life insurance premiums 82 98 114
Gain on sale of other real estate owned 62 81 28
Other 258 206 122
Total other income $4,594 $4,754 $3,968
</TABLE>
Higher interest rates in 1994 caused a reduction in the fair value of
Shoreline's securities portfolio, thus resulting in a loss of $165,000 on
securities transactions compared to gains recorded in 1993 and 1992 of $370,000
and $399,000, respectively. In addition, rising interest rates negatively
impacted Shoreline's ability to generate gains from the sale of mortgage loans
to the secondary market. Shoreline realized no gain or loss from the sale of
mortgage loans in 1994 compared to gains realized in 1993 and 1992 of $295,000
and $140,000, respectively. However, gains of $302,000 from the sale of
Shoreline's credit card portfolio and a portion of its student loan portfolio
helped to offset the declines in these two areas.
Service charge income on deposit accounts increased $129,000 or 7.4
percent in 1994. The introduction of a revised fee schedule in mid-1994 along
with growth in deposits helped to produce this increase. The increase in 1993's
service charge income of 16.2 percent was generated largely from increased
income from overdraft fees. Trust income increased $165,000 or 14 percent in
1994 which compares to increases of $58,000 and $138,000 in 1993 and 1992. Trust
income is impacted by revisions in fee schedules, changes in market values of
trust assets and increased customer relationships. Other income totaled $258,000
in 1994, a $52,000 or 25.2 percent increase over the prior year. Increased ATM
network income resulting from Shoreline's expanded ATM network helped to produce
this increase.
OTHER EXPENSES
Total other expenses amounted to $19.7 million in 1994, an increase of $1.7
million or 9.6 percent. Shoreline's ratio of total other expenses to total
average assets increased slightly from 3.16 percent in 1993 to 3.18 percent in
1994. This ratio was 3.34 percent in 1992. An analysis of the major components
of other expense is provided in the following table:
<TABLE>
<CAPTION>
Year ended December 31 (In thousands) 1994 1993 1992
<S> <C> <C> <C>
Salaries $ 7,375 $ 6,915 $ 6,532
Employee benefits 2,794 2,203 2,229
Occupancy 1,221 1,245 1,149
Equipment 1,227 1,023 1,085
Data processing 407 316 445
Professional fees 758 586 505
FDIC deposit insurance 1,225 1,139 1,042
Other insurance 196 186 204
-18-
Supplies 554 453 464
Advertising 526 345 242
Marketing and public relations 190 250 249
Postage 372 359 316
Telephone 261 265 252
Michigan Single Business Tax 403 368 349
Other taxes 99 101 85
Credit card expense 427 412 296
Amortization of goodwill and core
deposit intangibles 264 316 251
Other 1,422 1,505 1,801
Total other expense $19,721 $17,987 $17,496
</TABLE>
Salaries increased $460,000 or 6.7 percent in 1994. Approximately
$250,000 of this increase relates to the additional staff associated with the
1993 branch acquisitions. As a percent of average assets, salary expense has
declined over the three year period shown. This ratio was 1.19 percent in 1994,
1.21 percent in 1993 and 1.25 percent in 1992.
Employee benefits increased $591,000 or 26.8 percent in 1994. Rising
medical insurance costs combined with unusually high claims submitted by
Shoreline employees caused group insurance expense to increase $254,000 in 1994.
This compares to increases in this area of $82,000 and $85,000 in 1993 and 1992,
respectively. Increased pension expense, resulting from significant lump sum
distributions, worker's compensation and profit sharing expense also contributed
to the overall increase in employee benefits in 1994. As of January 1, 1994,
Shoreline adopted Statement of Financial Accounting Standards (SFAS) No. 112,
"Employers Accounting For Postemployment Benefits" with no material impact on
its financial statements. SFAS No. 112 requires the recognition on the accrual
basis of expected costs of providing benefits to employees during the years that
the employee renders the necessary services. The effect of adopting this
pronouncement did not have a material impact on the Corporation's benefit
expense.
Equipment and data processing expense totaled $1,634,000 in 1994, an
increase of $295,000 or 22.0 percent over the prior year. Higher levels of
equipment depreciation and software maintenance expense combined with increased
repairs and maintenance charges contributed to this increase. Equipment and data
processing expense decreased $190,000 in 1993 following 1992's high level which
resulted from the conversion of Corporation's mainframe computer hardware and
software system.
Professional fees expense totaled $758,000 in 1994, an increase of
$172,000 or 29.4 percent. This high level of increase resulted primarily from
professional services related to the proposed branch acquisitions, increased
legal and collection expense related to the lending function as well as
consulting fees related to a non-interest income study completed in 1994.
Professional fees expense totaled $586,000 in 1993, an increase of $81,000 over
1992's total.
-19-
Costs associated with the merger of Shoreline's two affiliate banks in
1994 resulted in an increase in supplies expense of 22.3 percent and advertising
expense of 52.5 percent. FDIC insurance expense totaled $1.2 million in 1994, an
increase of 7.6 percent over 1993's expense of $1.1 million. This increase was
caused strictly by the growth in deposits as Shoreline continued to be assessed
at the FDIC's most favored level of $.23 per $100 of deposits requiring
insurance coverage. Other expense totaled $1.6 million in 1994. This category
includes various expense items including employee business expenses, directors
fees, other real estate owned and other collection expenses, dues, training, and
other items. An increase of $92,000 or 6.1 percent in 1994 was partially the
result of increased other real estate owned expenses incurred in 1994. Other
expense in 1993 declined $296,000 as 1992's total of $1.8 million included
$200,000 of expense related to the deductible portions of two claims submitted
under the bankers blanket bond insurance coverage.
The Federal Deposit Insurance Corporation ("FDIC") has proposed a
substantial reduction in deposit insurance assessment rates on deposits covered
by its Bank Insurance Fund. The amount and timing of any such reduction is
uncertain, but a reduction is not expected to occur before the second half of
1995. A reduction in deposit insurance rates would be expected to have a
beneficial effect on expenses and results of operations.
FEDERAL INCOME TAXES
Shoreline's federal income tax expense was $2.3 million in 1994, compared
to $1.9 million in 1993 and $1.3 million in 1992. The Corporation's effective
tax rate was 24.1 percent in 1994, 22.7 percent in 1993 and 17.9 percent in
1992. The statutory federal tax rate during these same years was 34 percent. The
lower effective tax rates are largely the result of tax-exempt income earned on
state and municipal bonds. The relative level of tax-exempt income to income
before income taxes decreased during 1994 and 1993, increasing the Corporation's
effective rate.
As of January 1, 1993, the Corporation adopted SFAS No. 109, "Accounting
for Income Taxes" with no material impact on its consolidated financial
statements. SFAS No. 109 requires an asset and liability approach for accounting
for income taxes. At December 31, 1994, Shoreline had a consolidated net
deferred tax asset in the amount of $1.8 million. Management has no concerns
regarding the realization of the net deferred tax asset, after considering the
historical and anticipated future levels of pretax earnings.
LOANS
Shoreline Financial Corporation maintains a diversified loan portfolio of
commercial, real estate and consumer loans provided to customers primarily in
the Michigan communities in which Shoreline Bank branches are located. Exposure
to any single borrower, as well as industry concentration, is continually
monitored by management. Shoreline Bank has no foreign loans.
The following table summarizes year-end totals for the major categories
of the Corporation's total loan portfolio over the last five years. The
-20-
principal change in the mix of the loan portfolio since 1990 is the increasing
importance of residential mortgage loans and the decline in the consumer loan
portfolio.
<TABLE>
<CAPTION>
December 31,
1994 1993 1992 1991 1990
% of % of % of % of % of
(In thousands) Amt. Total Amt. Total Amt. Total Amt. Total Amt. Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $179,850 41.20% $166,745 40.31% $161,787 45.61% $161,996 47.11% $136,141 43.07%
Residential real estate 179,772 41.18 160,790 38.87 117,722 33.19 114,546 33.31 110,541 34.97
Real estate construction 26,679 6.11 27,337 6.61 25,618 7.22 20,424 5.94 19,164 6.06
Consumer 50,228 11.51 58,821 14.21 49,613 13.98 46,911 13.64 50,260 15.90
Total loans $436,529 100.00% $413,693 100.00% $354,740 100.00% $343,877 100.00% $316,106 100.00%
</TABLE>
The following table summarizes the maturity distribution and interest rate
sensitivity of the loan portfolio, excluding real estate mortgage and consumer
loans.
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
Due in One Due in One Due After Due in One Due in One Due After
(in thousands) Year or Less to Five Years Five Years Year or Less to Five Years Five Years
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $34,168 $109,351 $36,331 $34,931 $ 93,703 $38,111
Real estate construction 10,178 12,810 3,691 11,329 14,097 1,911
Total $44,346 $122,161 $40,022 $46,260 $107,800 $40,022
Loans due after one year:
with fixed rates $ 54,163 $ 7,942 $ 38,354 $ 4,309
with floating rates $ 67,998 $32,080 $ 69,446 $35,713
</TABLE>
Under an agreement with Shoreline's regulators, certain revisions are being
made in Shoreline's lending and documentation procedures. Management does not
expect these revisions to materially impact Shoreline's operations.
NON-PERFORMING ASSETS
AND PROBLEM LOANS
Non-performing assets include non-accrual loans, renegotiated loans, other
real estate owned and loans 90 days or more past due but still accruing
interest. The trend of such loans over the past five years is shown in the table
below:
-21-
<TABLE>
<CAPTION>
(In thousands) 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 802 $1,962 $2,934 $2,591 $3,275
Accruing loans past due
90 days or more 856 2,233 1,497 1,749 2,347
Restructured loans 2 211 222 442 0
Other real estate owned 552 1,026 640 1,162 976
Total non-performing assets $2,212 $5,432 $5,293 $5,944 $6,598
As a percentage of total loans:
Non-accrual loans .18% .47% .83% .75% 1.04%
Accruing loans past due
90 days or more .20 .54 .42 .51 .74
Restructured loans .00 .05 .06 .13 .00
Other real estate owned .13 .25 .18 .34 .31
Total non-performing assets .51% 1.31% 1.49% 1.73% 2.09%
</TABLE>
The year-end 1994 non-performing asset ratio of .51 percent is the
lowest level attained in Shoreline's history and marked the fifth consecutive
year of improvement in this ratio. This steady improvement is primarily
attributable to improved economic conditions, consistent underwriting standards
and timely attention to potential problem credits.
When reasonable doubt exists concerning the collectibility of interest
or principal, a loan is placed on a non-accrual basis. Any interest accrued but
not collected is reversed and charged against current earnings. Interest income
which would have been recorded in 1994 under original terms on non-accrual loans
outstanding at December 31, 1994 was approximately $64,000. Interest income of
$37,000 was recorded in 1994 on non-accrual loans outstanding at December 31,
1994.
At December 31, 1994, the Corporation had approximately $945,000 in
loans for which payments were current, but the borrowers are experiencing severe
financial difficulties. These loans, along with any other loans classified for
regulatory purposes that are not included in the table above, are subject to
constant management attention and their classification is reviewed on a monthly
basis. At December 31, 1994, Shoreline had no foreign loans, no significant
concentration of loans within one industry and no other interest-earning assets
which would be required to be disclosed if such assets were loans.
SECURITIES
Effective January 1, 1994, Shoreline adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." This statement requires that
equity and debt securities be classified in the following three categories with
the corresponding accounting treatment:
1. Held to maturity recorded at amortized cost.
2. Available for sale recorded at fair value, with unrealized gains and losses
reported as a separate component of shareholders' equity, net of income
taxes.
-22-
3. Trading securities recorded at fair value, with unrealized gains and losses
included in earnings.
During 1994, Shoreline did not hold any securities that would be
categorized as trading securities.
The aggregate book value of the securities of no single issuer except
the U.S. Government and its agencies exceeds 10 percent of Shoreline Financial
Corporation's shareholders' equity.
The book value of securities available for sale, held to maturity, and held
for sale is presented below:
<TABLE>
Securities Portfolio
<CAPTION>
December 31,
1994 1993 1992
(In thousands) Available Held to Held for Held to Held for Held to
for Sale Maturity Sale Maturity Sale Maturity
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agencies $11,642 $ 8,998 $ 0 $ 12,537 $1,000 $ 12,557
States and political subdivisions 31,107 13,458 6,354 32,184 1,321 45,296
Mortgage-backed securities:
U.S. Government agencies 29,128 22,676 6,146 57,996 6,290 44,386
Collateralized mortgage obligations 4,565 2,324 0 8,108 0 6,962
Other securities 4,734 1,018 0 7,626 0 4,453
Total $81,176 $48,474 $12,500 $118,451 $8,611 $113,654
</TABLE>
MATURITY ANALYSIS
The following tables set forth the maturities and weighted average interest
rates of Shoreline's securities as of December 31, 1994:
<TABLE>
Available for Sale
<CAPTION>
MATURING
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
(In thousands) Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agencies $ 0 N/A $11,642 6.16% $ 0 N/A $ 0 N/A
States and political subdivisions 682 10.78% 11,649 10.59% 6,071 9.89% 12,705 8.98%
Mortgage-backed securities:(2)
U.S. Government agencies 4,930 6.47% 19,002 6.01% 4,216 7.55% 979 7.56%
Collateralized mortgage obligations 542 5.97% 4,023 6.47% 0 N/A 0 N/A
Other securities 1,245 6.68% 1,156 6.65% 0 N/A 2,333 7.00%
Total $7,399 6.87% $47,472 7.22% $10,287 8.93% $16,017 8.60%
</TABLE>
-23-
<TABLE>
Held to Maturity
<CAPTION>
MATURING
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
(In thousands) Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agencies $3,000 5.17% $ 5,998 6.82% $ 0 N/A $ 0 N/A
States and political subdivisions 2,001 12.74% 4,500 12.55% 1,607 10.65% 5,351 9.22%
Mortgage-backed securities:(2)
U.S. Government agencies 3,590 7.83% 17,570 7.25% 1,516 9.24% 0 N/A
Collateralized mortgage obligations 321 9.13% 2,003 7.44% 0 N/A 0 N/A
Other securities 0 N/A 1,017 7.65% 0 N/A 0 N/A
Total $8,912 8.08% $31,088 7.96% $3,123 9.96% $5,351 9.22%
<FN>
(1) The effective yields are weighted for the scheduled maturity of each security and weighted average yields are calculated on
the basis of cost. Weighted interest rates have been computed on a fully taxable equivalent basis. The rates shown on
securities issued by states and political subdivisions have been restated, assuming a 34 percent tax rate.
(2) Maturity based upon estimated weighted average life.
</TABLE>
CAPITAL RESOURCES
On December 31, 1994, total equity capital of Shoreline was $56.2 million.
This total includes an unrealized loss of $1.0 million for the mark-to-market
adjustment of the Corporation's available for sale securities portfolio at
December 31, 1994. A mark-to-market adjustment to this portfolio is required
under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The rise in interest rates during 1994 resulted in a decline in the
overall market value of Shoreline's available for sale portfolio.
Management monitors its capital levels to comply with regulatory
requirements and to provide for current and future business opportunities. As
shown below, Shoreline's capital ratios were well in excess of regulatory
standards for classification as "well-capitalized." Being considered
"well-capitalized" is one condition for assessing the federal deposit insurance
premium at the lowest available rate.
<TABLE>
<CAPTION>
Shoreline
Regulatory Well- December 31,
Minimum Capitalized 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Risk based:
Tier I capital 4.00% 6.00% 13.62% 12.90% 14.46%
Total capital 8.00% 10.00% 14.87% 14.15% 15.84%
Tier I leverage 3.00% 5.00% 8.65% 8.05% 8.94%
</TABLE>
-24-
CASH DIVIDENDS
The following table summarizes the quarterly cash dividends paid to common
shareholders during the last three years, adjusted for stock dividends and
stock splits.
<TABLE>
<CAPTION>
Quarter 1994 1993 1992
<S> <C> <C> <C> <C>
1st $ .16 $ .13 $ .11
2nd .16 .14 .12
3rd .16 .14 .13
4th .16 .14 .13
$ .64 $ .55 $ .49
</TABLE>
Shoreline's principal source of funds to pay cash dividends is the earnings
of its subsidiary bank. State and federal laws and regulations limit the amount
of dividends that banks can pay. Cash dividends are dependent upon the earnings,
capital needs, regulatory constraints and other factors affecting the bank.
Based on projected earnings, management expects Shoreline to declare and pay
regular quarterly dividends on its common shares in 1995.
RATE SENSITIVITY, LIQUIDITY AND IMPACT OF INFLATION
Monitoring the maturities and repricing opportunities of interest-earning
assets and interest-bearing liabilities is the focus of managing interest rate
sensitivity. The following table summarizes the interest rate repricing gaps for
selected maturity periods as of December 31, 1994:
<TABLE>
<CAPTION>
Repriceable or Maturing Within:
(In thousands) 0-90 Days 91-365 Days 1 to 5 Years Over 5 Years Total
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $176,936 $ 68,132 $158,050 $33,411 $436,529
Securities 14,803 15,439 71,065 28,343 129,650
Federal funds sold 20,350 0 0 0 20,350
Total interest-earning assets 212,089 83,571 229,115 61,754 586,529
Interest-bearing liabilities:
Time deposits 54,998 108,510 85,064 1,411 249,983
Money market accounts 56,505 0 0 0 56,505
Demand and savings accounts 188,634 0 0 0 188,634
Securities sold under agreements
to repurchase 2,875 0 0 0 2,875
Long-term debt 0 0 5,000 0 5,000
Total interest-bearing
liabilities 303,012 108,510 90,064 1,411 502,997
Asset (liability) gap $(90,923) $ (24,939) $139,051 $60,343 $ 83,532
-25-
Cumulative asset (liability) gap $(90,923) $(115,862) $ 23,189 $83,532
</TABLE>
The table above shows that total liabilities maturing or repricing
within one year exceed assets maturing or repricing within one year by $115.9
million. Competitive pressures and other influences may cause certain assets and
liabilities to mature or reprice in other periods or at different volumes than
indicated above. Specifically, all demand and savings accounts are presented as
repricing in the 0-90 day period. It is management's belief that these types of
accounts are not as sensitive to changes in interest rate in the short term as
this presentation would indicate.
The positive gap position in the 1-5 year period was more reflective of
the Corporation's experience during 1994. Shoreline's quarterly net interest
margin increased from 4.33 percent in the first quarter of 1994 to 4.80 percent
in the fourth quarter of 1994. This general improvement in the net interest
margin followed the overall increase in interest rates during this same time
period, (i.e. Shoreline's prime lending rate increased from 6.00 percent in the
first quarter of 1994 to 8.50 percent in the fourth quarter of 1994),
demonstrating a sensitivity on the asset side of Shoreline's balance sheet.
Liquidity is generally defined as the ability to meet cash flow
requirements. The Corporation manages liquidity at two levels, the parent
company and its subsidiary. The parent company's primary source of funds is
dividends received from its subsidiary bank as well as payments received for
services provided by the parent to the bank. The parent's liquidity position is
managed to provide the cash necessary to pay dividends to Shoreline's
shareholders and to meet other operating requirements.
The liquidity position of the subsidiary bank reflects its ability to
provide funds to satisfy customer credit needs, meet depositor withdrawal
requests and other operating requirements. Sources of liquidity include federal
funds sold, repayments and maturities of loans and securities and sales of loans
and securities as well as its ability to raise funds through the federal funds
market, deposit growth and borrowing from the Federal Home Loan Bank of
Indianapolis. During 1994, average federal funds sold represented 2.2 percent of
Shoreline's total average assets and as of December 31, 1994, was $20.4 million.
The Corporation's 1994 loan to deposit ratio averaged 77.2 percent. In addition,
approximately 50 percent of Shoreline's securities are invested in
mortgage-backed securities which provide a continual stream of principal payment
reductions. During 1994, principal reductions, maturities and calls of
securities totaled $34.2 million. Another source of liquidity is net cash
generated from operating activities. This source has remained relatively stable
over the past three years, totaling $11.4 million, $8.4 million and $10.3
million in 1994, 1993 and 1992, respectively.
Large deposits that experience volatile rate changes are closely
monitored. These deposits consist of time certificates in denominations of
$100,000 or more. The time remaining until maturity of time certificates of
deposit $100,000 or more is as follows:
-26-
<TABLE>
<CAPTION>
Time until maturity (In thousands)
<S> <C>
Three months or less $14,128
Over three through six months 11,234
Over six through twelve months 8,625
Over 12 months 9,616
Total $43,603
</TABLE>
Effective January 1, 1994, Shoreline classified approximately $88.2 million
of securities as available for sale under the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." During 1994,
approximately $18.4 million of these securities were sold or called generating a
net loss of approximately $183,000. During 1993, $11.8 million of securities
were sold, generating a net gain of $370,000.
Upon consummation of the pending agreements to purchase the South Haven
branch from Great Lakes Bancorp and the Adamsville branch from Old Kent Bank,
(See Business of Shoreline), Shoreline will receive cash for the excess of the
deposit liabilities assumed over the assets purchased. This amount is
anticipated to be approximately $22 million. During 1993, Shoreline received
$11.4 million of cash relative to the acquisition of four branches from Standard
Federal Bank.
During 1994, the Corporation constructed an addition to its St. Joseph,
Michigan, Pleasant Street location. The cost of this 8,000 square foot addition
was approximately $1.2 million.
Reported earnings are affected by inflation, indirectly through
changing interest rates, and directly by increased operating expenses. However,
in the opinion of management, the effects of general price level inflation have
not had a material effect on the information presented herein.
SOURCES AND USES OF FUNDS TRENDS
The following table of average balances summarizes the trends in sources
and uses of funds:
<TABLE>
<CAPTION>
1994 1993
Increase (Decrease) Increase (Decrease)
(In thousands) Avg. Bal. Amt. Percent Avg. Bal. Amt. Percent
<S> <C> <C> <C> <C> <C> <C>
Funding uses:
Loans - net of
unearned income $428,478 $43,340 11.3% $385,138 $33,970 9.7%
Taxable securities 91,497 5,122 5.9% 86,375 3,543 4.3%
Tax-exempt securities 42,808 1,804 4.4% 41,004 (1,895) (4.4%)
Federal funds sold 13,766 (2,033) (12.9%) 15,799 6,635 72.4%
Total uses $576,549 $48,233 9.1% $528,316 $42,253 8.7%
-27-
Funding sources:
Non-interest-bearing
demand deposits $ 62,591 $ 2,604 4.3% $ 59,987 $ 5,486 10.1%
Interest-bearing demand
and savings deposits 243,701 31,413 14.8% 212,288 35,292 19.9%
Time deposits 248,522 8,733 3.6% 239,789 (1,771) (.7%)
Securities sold under
agreements to repurchase 2,667 724 37.3% 1,943 1,066 121.6%
Long-term debt 5,000 3,452 223.0% 1,548 1,548 N/A
Other 14,068 1,307 10.2% 12,761 632 5.2%
Total sources $576,549 $48,233 9.1% $528,316 $42,253 8.7%
</TABLE>
During 1994, total deposits averaged $554.8 million. This is an
increase of 8.3 percent or $42.7 million over 1993's average of $512.1 million.
1993's increase in average deposits was $39 million or 8.2 percent. Both years'
average balances were positively impacted by the 1993 branch acquisitions from
Standard Federal Bank. These acquisitions accounted for approximately $30
million and $22 million of the total growth in average deposits in 1994 and
1993, respectively. The majority of additional growth in deposits attained
during 1994 and 1993 occurred in the interest-bearing demand and savings deposit
categories. Shoreline's Capital Club Account, a premium rate savings account
product produced the majority of the increase in this area. Introduced in the
first quarter of 1993, Shoreline had $84.5 million in this product at December
31, 1994 compared to $47.4 million at year-end 1993. The popularity of this
product has not only attracted new customers to Shoreline, but prompted many
existing customers to transfer balances from time and money market deposit
categories.
During 1994, the Corporation increased the average balance of
securities sold under agreement to repurchase to $2.7 million from $1.9 million
in 1993. In addition, the increase in long-term debt reflects the $5 million
Federal Home Loan Bank advance received in September of 1993. This advance is a
5 year, fixed rate commitment with a prepayment option at each anniversary date.
Average total loans increased 11.3 percent or $43.3 million in 1994.
The purchase of approximately $42 million of mortgage loan products associated
with the 1993 Standard Federal Bank branch acquisition accounted for
approximately $20 million of this increase. This purchase helped to increase
Shoreline's average mortgage loan portfolio 21 percent or $29.4 million in 1994.
In addition, reduced sales of mortgage loans to the secondary market in 1994 and
increased originations of loans held for portfolio impacted 1994's growth.
During 1994, the Corporation originated $8.2 million of loans for sale compared
to 1993 loans originated for sale of $18.9 million. At December 31, 1994,
Shoreline had no mortgage loans for sale to the secondary market. Average
commercial loans increased 4.8 percent or $9.1 million in 1994. This compares to
an increase of 1.3 percent in 1993. 1993's increase in average total loans was
$33.9 million or 9.7 percent and was produced primarily by the loan purchase in
1993.
Federal funds sold averaged $13.8 million in 1994. This represents 2.2
percent of total average assets and compares to 1993's ratio of 2.8 percent.
Shoreline strives to maintain federal funds sold between one and three percent
-28-
of total assets. The average balance in taxable securities increased $5.1
million or 5.9 percent in 1994 which compares to 1993's increase of $3.5 million
or 4.3 percent. Investments in U.S. Treasury and agency securities produced
1994's increase in taxable securities. Average tax-exempt securities increased
$1.8 million during 1994, as the rise in interest rates made this investment
more attractive in 1994. In 1993, Shoreline experienced a decline in this area
of $1.9 million.
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31 1994 1993
<S> <C> <C>
Assets
Cash and due from banks (Note 2) $ 31,287,807 $ 27,428,786
Federal funds sold 20,350,000 33,600,000
Total cash and cash equivalents 51,637,807 61,028,786
Securities available for sale (carried at fair value in 1994;
fair value of $13,195,000 in 1993) (Note 3) 81,175,780 12,499,969
Securities held to maturity (fair values of $47,948,707 and
$122,771,000 in 1994 and 1993, respectively) (Note 3) 48,474,113 118,450,871
Total loans (Note 4) 436,529,139 413,693,278
Less allowance for loan losses (Note 5) 5,951,969 5,586,090
Net loans 430,577,170 408,107,188
Premises and equipment-net (Note 6) 9,875,374 8,924,619
Other assets 12,113,418 11,608,340
Total Assets $633,853,662 $620,619,773
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Non-interest-bearing $ 70,973,801 $ 66,991,766
Interest-bearing (Note 7) 495,121,822 490,416,878
Total deposits 566,095,623 557,408,644
Securities sold under agreement to repurchase 2,875,112 2,410,920
Other liabilities 3,674,459 3,193,090
Long-term debt (Note 8) 5,000,000 5,000,000
Total Liabilities 577,645,194 568,012,654
Commitments, off-balance sheet risk and contingencies (Note 11)
Shareholders' Equity
Preferred stock, no par value; 1,000,000 shares authorized;
no shares outstanding
Common stock, par value $1; 5,000,000 shares authorized and
3,300,645 shares outstanding (Note 1) 3,300,645
Common stock; 10,000,000 shares authorized and
4,989,483 outstanding (Note 1) 0
Additional paid-in capital 45,591,999 41,684,562
Net unrealized loss on securities available for sale, net of
tax effect (Note 1) (1,016,801) 0
Retained earnings 11,633,270 7,621,912
Total Shareholders' Equity 56,208,468 52,607,119
Total Liabilities and Shareholders' Equity $633,853,662 $620,619,773
</TABLE>
See accompanying notes to consolidated financial statements
-29-
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years ended December 31 1994 1993 1992
<S> <C> <C> <C>
Interest Income
Interest and fees on loans $35,624,574 $31,928,435 $31,609,978
Interest on securities:
Taxable 5,037,912 5,118,720 6,707,278
Tax-exempt 2,837,000 2,908,548 3,058,150
Interest on federal funds sold 571,474 468,320 305,227
Total interest income 44,070,960 40,424,023 41,680,633
Interest Expense
Interest on deposits (Note 7) 18,375,377 17,239,464 19,523,356
Interest on short-term borrowings 87,267 41,767 27,646
Interest on long-term debt 252,500 76,788 0
Total interest expense 18,715,144 17,358,019 19,551,002
Net Interest Income 25,355,816 23,066,004 22,129,631
Provision for loan losses (Note 5) 750,000 1,380,000 1,380,000
Net Interest Income After Provision for Loan Losses 24,605,816 21,686,004 20,749,631
Other Income
Service charges on deposit accounts 1,859,778 1,731,423 1,490,379
Trust income 1,346,244 1,180,927 1,123,084
Securities gains/(losses) (Notes 3 and 9) (164,944) 370,402 398,878
Credit card fees and discounts 575,397 518,348 318,750
Other 977,299 952,446 636,645
Total other income 4,593,774 4,753,546 3,967,736
Other Expenses
Salaries and employee benefits (Note 10) 10,169,411 9,117,703 8,761,247
Occupancy expense 1,220,742 1,245,279 1,148,928
Equipment expense 1,634,372 1,339,826 1,529,834
Insurance expense 1,421,033 1,325,694 1,246,200
Professional fees 757,689 586,486 504,995
Supplies expense 553,740 453,265 464,070
Advertising expense 525,565 344,521 242,439
Other 3,438,716 3,573,754 3,598,065
Total other expenses 19,721,268 17,986,528 17,495,778
Income Before Income Taxes 9,478,322 8,453,022 7,221,589
Federal income tax expense (Note 9) 2,280,000 1,915,500 1,290,000
Net Income $ 7,198,322 $ 6,537,522 $ 5,931,589
Earnings Per Share(Note 1) $ 1.45 $ 1.33 $ 1.21
</TABLE>
See accompanying notes to consolidated financial statements.
-30-
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Net Unrealized
Loss on
Additional Securities Total
Common Paid-in Available Retained Shareholders'
Three years ended December 31, 1994 Stock Capital For Sale Earnings Equity
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1992 $2,065,887 $36,550,412 N/A $ 5,743,641 $44,359,940
Net income for year 5,931,589 5,931,589
Cash dividends declared:
$0.49 per common share (Note 1) (2,422,068) (2,422,068)
3-for-2 stock split 1,034,223 0 (1,039,571) (5,348)
Shares issued under
dividend reinvestment plan 14,252 315,484 329,736
Balance at December 31, 1992 3,114,362 36,865,896 N/A 8,213,591 48,193,849
Net income for year 6,537,522 6,537,522
Cash dividends declared:
$0.55 per common share (Note 1) (2,727,181) (2,727,181)
5% stock dividend 155,260 4,230,835 (4,402,020) (15,925)
Shares issued under
dividend reinvestment plan 14,683 396,653 411,336
Shares issued under
stock option plan 16,340 191,178 207,518
Balance at December 31, 1993 3,300,645 41,684,562 N/A 7,621,912 52,607,119
Transfer to Additional Paid-in Capital (3,300,645) 3,300,645
Net income for year 7,198,322 7,198,322
Cash dividends declared:
$0.64 per common share (Note 1) (3,181,208) (3,181,208)
3-for-2 stock split-fractional shares (5,756) (5,756)
Shares issued under
dividend reinvestment plan 504,961 504,961
Shares issued under stock option plan 101,831 101,831
Net unrealized losses on securities
available-for-sale, net of tax effect (1,016,801) (1,016,801)
Balance at December 31, 1994 $ 0 $45,591,999 $(1,016,801) $11,633,270 $56,208,468
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31 1994 1993 1992
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 7,198,322 $ 6,537,522 $ 5,931,589
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization 1,329,203 1,154,280 1,127,939
Provision for loan losses 750,000 1,380,000 1,380,000
-31-
Net amortization and accretion on securities held to maturity 629,983 1,374,006 426,205
Net amortization and accretion on securities available for sale 985,178 139,551 16,441
Amortization of goodwill and related core deposit intangibles 264,339 186,113 121,385
Gains on calls of securities held to maturity (17,760) (10,223) (113,300)
(Gain)Loss on sales and calls of securities available for sale 182,704 (360,179) (285,578)
Mortgage loans originated for sale (8,178,797) (18,888,024) (7,236,600)
Proceeds from sale of mortgage loans 8,178,928 18,112,864 8,074,293
Gains on sale of mortgage loans (131) (294,840) (139,693)
Gains on sale of credit card and student loans (302,220) 0 0
Increase in income taxes receivable (458,315) (339,500) (543,000)
(Increase)Decrease in other assets 314,835 (554,332) 1,411,034
Increase in other liabilities 481,369 5,954 130,197
Total adjustments 4,159,316 1,905,670 4,369,323
Net cash from operating activities 11,357,638 8,443,192 10,300,912
Cash flows from investing activities:
Net increase in loans (29,070,877) (16,442,366) (12,457,716)
Proceeds from sale of credit card and student loan portfolios 5,441,036 0 0
Recoveries on loans charged-off 629,412 241,830 182,820
Purchase of securities held to maturity (23,052,958) (71,306,826) (51,414,927)
Purchase of securities available for sale (31,568,095) (1,582,627) 0
Proceeds from sales of securities held to maturity 0 2,027,125 7,197,380
Proceeds from sale of securities available for sale 18,383,241 9,733,983 10,606,988
Proceeds from maturities, calls and principal reductions
of securities held to maturity 16,695,605 43,129,539 34,100,023
Proceeds from maturities, calls and principal reductions of
securities available for sale 17,522,447 8,169,762 899,843
Premises and equipment expenditures (2,299,427) (1,427,847) (2,021,875)
Cash received for net liabilities assumed in acquisition
of branches 0 11,369,958 0
Net cash from investing activities (27,319,616) (16,087,469) (12,907,464)
Cash flows from financing activities:
Net increase in deposits 8,686,979 20,381,191 21,545,884
Net increase in short-term borrowing 464,192 1,246,729 364,191
Proceeds from long-term debt 0 5,000,000 0
Dividends paid (3,181,208) (2,727,181) (2,422,068)
Stock dividends and splits - cash paid for fractional shares (5,756) (15,925) (5,348)
Proceeds from shares issued under dividend reinvestment plan 504,961 411,336 329,736
Proceeds from shares issued under stock option plan 101,831 207,518 0
Net cash from financing activities 6,570,999 24,503,668 19,812,395
Net change in cash and cash equivalents (9,390,979) 16,859,391 17,205,843
Cash and cash equivalents at beginning of year 61,028,786 44,169,395 26,963,552
Cash and cash equivalents at end of year $51,637,807 $61,028,786 $44,169,395
Cash paid during the year for:
Interest $18,509,997 $17,516,332 $19,931,518
Income taxes $ 2,738,313 $ 2,255,000 $ 1,833,000
<FN>
Supplementary information:
Supplemental Schedule of Non-Cash Investing Activities: During 1994, $88,221,857 was reclassified from securities held to
maturity and securities held for sale to securities available for sale. During 1993 and 1992, $19,989,527 and $13,168,469
respectively, was reclassified from investment securities to securities held for sale.
The branch acquisitions in 1993 resulted in an increase in loans of $40,824,114 and deposits of $56,568,954.
See accompanying notes to consolidated financial statements.
</TABLE>
-32-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Accounting Policies
The accounting and reporting policies and practices of Shoreline Financial
Corporation and its subsidiary conform with generally accepted accounting
principles and prevailing practices within the banking industry. The following
summaries describe the significant accounting and reporting policies which are
employed in the preparation of the financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Shoreline Financial Corporation and its wholly owned subsidiary, Shoreline Bank
(together referred to as "the Corporation"). All material inter-company
accounts and transactions have been eliminated in consolidation. On May 28,
1994 Shoreline's subsidiary banks Inter-City Bank and Citizens Trust and Savings
Bank were merged to form Shoreline Bank.
Securities
On January 1, 1994, the Corporation adopted the provisions of the Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Corporation now classifies
securities into held to maturity, available for sale and trading categories.
Held to maturity securities are those which the Corporation has the positive
intent and ability to hold to maturity, and are reported at amortized cost.
Available for sale securities are those the Corporation may decide to sell if
needed for liquidity, asset-liability management or for other reasons.
Available for sale securities are reported at fair value, with unrealized gains
and losses included as a separate component of shareholders' equity, net of tax
effect. Trading securities are bought principally for sale in the near term,
and are reported at fair value with unrealized gains and losses included in
earnings. The effect of adopting this new accounting guidance increased
shareholders' equity by $2.4 million, net of tax, at January 1, 1994. Prior to
January 1, 1994, securities were reported at amortized cost except for
securities held for sale, which were reported at the lower of cost or market.
Securities held for sale at December 31, 1993 are shown as available for sale in
these financial statements. Realized gains and losses resulting from the sale of
securities are computed by the specific identification method. Interest and
dividend income, adjusted by amortization of purchase premium or discount, is
included in earnings.
Loans Held for Sale
Loans originated and intended for sale are carried at the lower of cost or
estimated market value in the aggregate. Net unrealized losses are recognized
in a valuation allowance by charges to income.
-33-
Allowance for Loan Losses
Because some loans may not be repaid in full, an allowance for loan losses
is recorded. Increases to the allowance are recorded by a provision for loan
losses charged to expense. Estimating the risk of loss and the amount of loss
on any loan is necessarily subjective. Accordingly, the allowance is maintained
by management at a level considered adequate to cover possible losses that are
currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position and collateral values, and other factors and estimates which
are subject to change over time. While management may periodically allocate
portions of the allowance for specific problem loan situations, the whole
allowance is available for any loan charge-offs that occur. A problem loan is
charged-off by management as a loss when deemed uncollectible, although
collection efforts continue and future recoveries may occur.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114 requires that allowances for
loan losses on impaired loans be determined using the present value of estimated
future cash flows on the loan, discounted at the loan's effective interest rate.
A loan is considered to be impaired when it is probable that all principal and
interest amounts will not be collected according to the contract. SFAS No. 114
is required to be adopted by the Corporation for its year beginning January 1,
1995. Management believes adoption of this new standard in 1995 will not have a
material impact on the Corporation's consolidated financial statements.
Interest and Fees on Loans
Interest on loans is accrued over the term of the loans based on principal
amounts outstanding, except where serious doubt exists as to the collectibility
of a loan, in which case the accrual of interest is discontinued. Loan
origination and commitment fees and related lending costs are deferred, and the
net amount is amortized as an adjustment of the related loan's yield using the
level yield method over its original term. The net amount of deferred income
($760,000 and $677,000, at December 31, 1994 and 1993, respectively) is reported
in the consolidated balance sheet as part of loans.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed using a combination of straight-line
and accelerated methods with useful lives ranging primarily from 10 to 50 years
for bank premises, and 5 to 20 years for furniture and fixtures. Maintenance,
repairs and minor alterations are charged to current operations as expenditures
occur, and major improvements are capitalized.
Other Real Estate
Other real estate represents properties acquired through a foreclosure
proceeding, acceptance of a deed in lieu of foreclosure, or loans which have
-34-
been deemed to be in substance foreclosed. Other real estate is initially
recorded at fair value at the date of acquisition. Any excess of the loan
balance over fair value is charged against the allowance for loan losses when
the loan is transferred to other real estate. After acquisition a valuation
allowance is recorded through a charge to income for the amount of estimated
selling costs. Valuations are periodically performed by management, and
valuation allowances are adjusted through a charge to income for changes in fair
value or estimated costs to sell. Subsequent declines in value and gains and
losses on sales are recognized in current earnings. Other real estate owned
amounted to approximately $552,000 and $1,026,000 at December 31, 1994 and 1993,
respectively.
Intangible Assets
Intangible assets consist of goodwill representing the excess of the
purchase price over the net value of tangible assets acquired and related core
deposit intangibles identified in branch acquisitions. Goodwill is being
amortized on a straight-line basis for a period of 10 years. The related core
deposit intangibles are amortized on an accelerated basis over the estimated
life of the deposits acquired. As of December 31, 1994, the remaining
unamortized goodwill and core deposit intangibles totaled approximately $222,000
and $2,369,000 respectively.
Trust Income
Trust income is recognized as income when received. The amounts recognized
under this method are not significantly different from amounts that would have
been recognized on the accrual basis.
Employee Benefits
Shoreline Financial Corporation maintains a noncontributory pension plan
covering all eligible employees. The Corporation's policy is to fund the plan
based upon annual actuarial computations and within Internal Revenue Service
guidelines. Shoreline also maintains a profit sharing plan and 401(k) salary
reduction plan for which contributions are made and expensed annually. In
addition, the Corporation sponsors a post-retirement health care plan that
covers both salaried and nonsalaried employees. Effective January 1, 1993, the
Corporation adopted the provisions of SFAS No. 106, "Employers' Accounting For
Post-Retirement Benefits Other Than Pensions." SFAS No. 106 requires the
accrual, during the years that employees render the necessary service, of the
expected cost of providing post-retirement health care benefits to employees and
their beneficiaries and covered dependents. The Corporation's post-retirement
health care plan provides that retired employees may remain on the Corporation's
health care plan with each retiree's out-of-pocket contribution to the
Corporation equal to their premium expense determined exclusively on the loss
experience of the retirees in the plan. The impact of adopting the new standard
was not material.
-35-
Income Taxes
The Corporation files annual consolidated federal income tax returns. For
periods prior to January 1, 1993, income tax expense was calculated using the
deferred method (APB 11). Under APB 11, the Corporation computed deferred taxes
for the tax effects of timing differences between financial reporting and tax
return taxable income. Effective January 1, 1993 the Corporation applied the
provisions of SFAS No. 109, "Accounting For Income Taxes." Accordingly, income
tax expense for the years ended December 31, 1994 and 1993, is based upon the
asset and liability method. The asset and liability method requires the
Corporation to record income tax expense based on the amount of taxes due on its
consolidated tax return plus deferred taxes computed based on the expected
future tax consequences of temporary differences between the carrying amounts
and tax bases of assets and liabilities, using enacted tax rates. The effect of
the adoption of SFAS No. 109 was not material to the Corporation's consolidated
financial position or results of operations.
Earnings and Dividends Per Share
Earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding and common equivalent shares with a
dilutive effect. Common equivalent shares are shares which may be issuable to
employees upon exercise of outstanding stock options. Earnings and dividends
per share are restated for all stock splits and dividends paid. After
restatement, the average number of shares used in this calculation was 4,970,952
in 1994, 4,914,205 in 1993 and 4,891,935 in 1992.
Stock Splits and Dividends
On May 5, 1994, shareholders of the Corporation approved an Amendment to
the Articles of Incorporation to increase the number of authorized shares of
Common Stock from 5,000,000 shares to 10,000,000 shares. In addition, the
Articles of Incorporation were amended to delete the Common Stock designation of
$1 par value per share. As a result, the outstanding balance in Common Stock was
transferred to Additional Paid-In Capital. On May 31, 1994, a three-for-two
stock split was paid to shareholders of record on May 16, 1994. In 1993, the
Corporation declared a 5 percent stock dividend. Stock dividends are accounted
for by transferring the fair market value of the stock from retained earnings to
additional paid in capital. In 1992, the Corporation declared a three-for-two
stock split in the form of a stock dividend. This stock split was accounted for
by transferring the par value of the stock from retained earnings to common
stock. Fractional shares are paid in cash for all stock splits and dividends.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents is defined
to include the Corporation's cash on hand, its demand deposits in other
institutions, and its federal funds sold with a maturity of 90 days or less.
The Corporation reports net cash flows for customer loan transactions, deposit
transactions and interest-bearing balances with other financial institutions.
-36-
Concentrations of Credit Risk
The Corporation's subsidiary bank, Shoreline Bank, grants commercial, real
estate, and consumer loans to customers primarily in the Michigan communities in
which the bank is located and in areas immediately surrounding these
communities. The majority of loans are secured by specific items of collateral,
primarily residential properties and other types of real estate but are also
secured by business assets and consumer assets.
Financial Instruments with Off-Balance-Sheet Risk
The Corporation, in the normal course of business, makes commitments to
extend credit which are not reflected in the financial statements. See Note 11
for a summary of these commitments.
Business Segment
Shoreline Financial Corporation is engaged in the business of commercial
and retail banking, which accounts for more than 90% of its revenues, operating
income and assets. There are no foreign loans.
Note 2. Restrictions on Cash and Due From Banks
A summary of the Corporation's subsidiary bank's legal reserve requirements
established by the Federal Reserve System is as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
<S> <C> <C>
Portion of requirement satisfied
by non-interest earning vault cash $4,774,000 $3,735,000
Additional balances maintained
with the Federal Reserve 250,000 500,000
Total reserve requirements $5,024,000 $4,235,000
</TABLE>
Note 3. Securities
The amortized cost and fair value of securities is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities Available for Sale
at December 31, 1994
U.S. Treasury and agencies $ 11,992,803 $ 1,458 $ (352,386) $ 11,641,875
States and political subdivisions 30,981,840 868,132 (742,905) 31,107,067
-37-
Mortgage-backed securities:
U.S. Government agencies 30,342,836 11,407 (1,226,475) 29,127,768
Collateralized mortgage
obligations 4,664,420 0 (99,790) 4,564,630
Other securities 4,734,440 0 0 4,734,440
Total 82,716,339 $ 880,997 $(2,421,556) $ 81,175,780
Securities Held to Maturity
at December 31, 1994
U.S. Treasury and agencies $ 8,998,180 $ 0 $ (319,658) $ 8,678,522
States and political subdivisions 13,458,322 377,869 (209,670) 13,626,521
Mortgage-backed securities:
U.S. Government agencies 22,675,808 135,294 (460,030) 22,351,072
Collateralized mortgage
obligations 2,324,347 0 (49,211) 2,275,136
Other securities 1,017,456 0 0 1,017,456
Total $ 48,474,113 $ 513,163 $(1,038,569) $ 47,948,707
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities Held for Sale
at December 31, 1993
States and political subdivisions $ 6,354,384 $ 679,616 $ 0 $ 7,034,000
Mortgage-backed securities:
U.S. Government agencies 6,145,585 45,145 (29,730) 6,161,000
Total $ 12,499,969 $ 724,761 $ (29,730) $ 13,195,000
Securities Held to Maturity
at December 31, 1993
U.S. Treasury and agencies $ 12,537,273 $ 87,784 $ (16,057) $ 12,609,000
States and political subdivisions 32,183,401 3,270,265 (3,666) 35,450,000
Mortgage-backed securities:
U.S. government agencies 57,996,036 1,017,022 (136,058) 58,877,000
Collateralized mortgage
obligations 8,108,444 37,373 (25,817) 8,120,000
Other securities 7,625,717 95,497 (6,214) 7,715,000
Total $118,450,871 $4,507,941 $ (187,812) $122,771,000
</TABLE>
Information regarding the amortized cost and fair value of securities by
contractual maturity at December 31, 1994 is presented below. Maturity
information is based on contractual maturity for all securities other than
mortgage-backed securities. Actual maturities of mortgage-backed securities may
differ from contractual maturities because borrowers have the right to prepay
the underlying obligation without prepayment penalty.
-38-
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
December 31, 1994 December 31, 1994
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 1,909,812 $ 1,926,714 $ 5,000,744 $ 4,818,783
Due after one year through five years 24,319,361 24,446,695 11,515,126 11,619,648
Due after five years through ten years 5,865,245 6,070,685 1,606,828 1,689,142
Due after ten years 15,614,665 15,039,288 5,351,262 5,194,928
Subtotal 47,709,083 47,483,382 23,473,960 23,322,501
Mortgage-backed securities 35,007,256 33,692,398 25,000,153 24,626,206
Total $ 82,716,339 $ 81,175,780 $ 48,474,113 $ 47,948,707
Proceeds, gross gains and gross losses from sales and calls of securities are as
follows:
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
<S> <C> <C> <C>
Available for Sale
Proceeds from sales $ 18,383,241
Gross gains from sales $ 150,801
Gross losses from sales (336,005)
Net losses from sales (185,204)
Net gains from calls 2,500
Net loss $ (182,704)
Held for Sale
Proceeds from sales $ 9,733,983 $10,606,988
Gross gains from sales $ 356,379 $ 311,321
Gross losses from sales (2,500) (25,743)
Net gains from sales 353,879 285,578
Net gain from calls 6,300 0
Net gain $ 360,179 $ 285,578
Held to Maturity
Proceeds from sales $ 0 $ 2,027,125 $ 7,197,380
Gross gains from sales $ 0 $ 10,893 $ 141,490
Gross losses from sales 0 (670) (29,604)
Net gains from sales 0 10,223 111,886
Net gains from calls 17,760 0 1,414
Net gain $ 17,760 $ 10,223 $ 113,300
</TABLE>
Debt securities having an amortized cost of approximately $21,095,000 at
December 31, 1994 were pledged to secure public and trust deposits, securities
sold under agreements to repurchase, advances from the Federal Home Loan Bank
and for other purposes as required by law.
-39-
Note 4. Loans
The composition of the loan portfolio is as follows:
<TABLE>
<CAPTION>
December 31 1994 1993
<S> <C> <C>
Commercial, financial
and agricultural $179,849,788 $166,745,574
Residential real estate 179,772,006 160,789,531
Real estate construction 26,679,742 27,337,567
Consumer 50,227,603 58,820,606
Total Loans $436,529,139 $413,693,278
</TABLE>
At December 31, 1994 and 1993, the Corporation had approximately $802,000
and $1,962,000, respectively, of loans for which no interest income was being
recognized due to the uncertainty of the collectibility of the loans. If
interest on such loans had been accrued, the income would have approximated
$64,000, $131,000 and $162,000 in 1994, 1993 and 1992, respectively.
Certain directors, executive officers and principal shareholders of the
Corporation, including associates of such persons, were loan customers of the
Corporation during 1994. A summary of aggregate related party loan activity,
for loans aggregating $60,000 or more to any one related party, is as follows
for the year ended December 31, 1994:
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1 $10,623,378
New loans 4,218,920
Repayments (3,141,122)
Other changes, net (1,756,198)
Balance at December 31 $ 9,944,978
</TABLE>
Other changes include adjustments for persons included in one reporting
period that are not included in the other reporting period.
At December 31, 1994 and 1993, the Corporation had approximately
$667,000 and $1,800,000, respectively of loans with an estimated market value of
$710,000 and $1,820,000, respectively which it intends to sell.
Note 5. Allowance for Loan Losses
A summary of the activity in the allowance for loan losses is as follows:
-40-
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Balance, at beginning of year $5,586,090 $4,565,840 $3,834,065
Provision charged to operating expense 750,000 1,380,000 1,380,000
6,336,090 5,945,840 5,214,065
Loan charge-offs (1,013,533) (601,580) (831,045)
Loan recoveries 629,412 241,830 182,820
Net loan charge-offs (384,121) (359,750) (648,225)
Balance, at end of year $5,951,969 $5,586,090 $4,565,840
</TABLE>
Note 6. Premises and Equipment
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
December 31 1994 1993
<S> <C> <C>
Land $ 903,904 $ 903,904
Building and improvements 9,311,183 8,382,975
Furniture and equipment 9,590,401 8,282,465
19,805,488 17,569,344
Less accumulated depreciation
and amortization 9,930,114 8,644,725
Net premises and equipment $ 9,875,374 $ 8,924,619
</TABLE>
Depreciation and amortization expense charged to operations was $1,329,203,
$1,154,280 and $1,127,939, in 1994, 1993 and 1992, respectively.
Note 7. Interest on Deposits
Certificates of deposit in denominations of $100,000 or more totaled
approximately $43,603,000 and $37,991,000 at December 31, 1994 and 1993,
respectively. Interest expense on deposits is as follows:
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
<S> <C> <C> <C>
Interest-bearing demand $ 877,108 $ 1,169,122 $ 1,691,202
Savings 5,548,495 4,261,699 4,151,905
Time deposits less than $100,000 10,310,384 10,330,579 11,741,124
Time deposits of $100,000 or more 1,639,390 1,478,064 1,939,125
Total $18,375,377 $17,239,464 $19,523,356
</TABLE>
-41-
Note 8. Long-Term Debt
At December 31, 1994 and 1993, the Corporation had advances from the
Federal Home Loan Bank of Indianapolis (FHLB) totaling $5,000,000. The terms of
the advances include monthly interest payments at annual percentage rates of
5.05%. Prepayment options exist on the anniversary date of the advances,
without incurring penalty. The principal balances mature in September of 1998.
The FHLB advances are collateralized by qualified 1-4 family whole mortgage
loans and U.S. Government agency mortgage-backed securities.
Note 9. Income Taxes
Components of the provision for federal taxes on income are as follows:
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
<S> <C> <C> <C>
Taxes currently payable $1,935,000 $2,329,050 $1,822,771
Deferred tax expense(benefit) 345,000 (413,550) (532,771)
Total $2,280,000 $1,915,500 $1,290,000
</TABLE>
Taxes allocated to securities transactions were $(56,081) in 1994, $125,937
in 1993 and $79,776 in 1992.
Components of the 1992 deferred tax benefit of $533,000 included
$309,000 related to the provision for loan losses, $131,000 related to deferred
compensation and $93,000 of other items.
The difference between the provision in these financial statements and
amounts computed by applying the statutory federal income tax rate to pre-tax
income is as follows:
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
<S> <C> <C> <C>
Statutory federal tax rate 34% 34% 34%
Income computed at the statutory
federal tax rate 3,222,629 $2,874,027 $2,455,340
Add(subtract) tax effect of:
Tax-exempt securities income (934,191) (979,854) (1,030,775)
Tax-exempt loan income (142,991) (144,974) (171,013)
Non-deductible interest
expense 100,932 97,411 116,905
Other 33,621 68,890 (11,264)
Effect of alternative minimum tax 0 0 (69,193)
Total $2,280,000 $1,915,500 $1,290,000
The components of the net deferred tax asset recorded in the balance sheet are
as follows:
</TABLE>
-42-
<TABLE>
<CAPTION>
December 31 1994 1993
<S> <C> <C>
Deferred tax assets
Provision for loan losses $1,780,152 $1,474,898
Net deferred loans fees 258,260 230,152
Deferred compensation 287,411 283,424
Other 164,778 59,275
Net unrealized losses on securities
available for sale 523,758 0
Total deferred tax assets 3,014,359 2,047,749
Deferred tax liabilities
Accretion of bond discount (41,422) (34,813)
Depreciation (153,137) (239,669)
Other (140,563) (127,372)
Pension (212,247) 0
Mark-to-market adjustment for
securities held for sale (671,622) 0
Total deferred tax liabilities (1,218,991) (401,854)
Valuation Allowance 0 0
Net deferred tax asset $1,795,368 $1,645,895
</TABLE>
Note 10. Employee Benefits
The Corporation has a defined benefit, noncontributory pension plan which
provides retirement benefits for essentially all employees. The following sets
forth the plan's funded status and amounts recognized in the balance sheet.
<TABLE>
<CAPTION>
December 31 1994 1993
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $2,162,753 in 1994 and $2,498,023
in 1993 $2,206,244 $2,575,281
Projected benefit obligation for service rendered
to date $3,117,184 $3,694,315
Plan assets at fair value, primarily money-
market funds, listed stocks, bonds and
U.S. Government securities 3,248,276 3,886,235
Excess of plan assets over projected
benefit obligation 131,092 191,920
Unrecognized transition asset (204,310) (291,270)
Unrecognized prior service benefit (271,911) (73,324)
Unrecognized net loss 645,108 532,020
Net pension asset $ 299,979 $ 359,346
</TABLE>
-43-
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
<S> <C> <C> <C>
Net pension cost included the following:
Service cost-benefits earned
during the year $230,654 $209,627 $191,028
Interest cost on projected
benefit obligation 254,801 290,111 268,486
Actual return on plan assets (42,650) (346,852) (382,789)
Net amortization and deferral (291,219) 351 67,761
Additional liability recognized
due to settlement 123,316 115,442 0
Net pension cost $274,902 $268,679 $144,486
</TABLE>
The weighted average discount rate was 7.25 percent for 1994 and 1993, and
7.50 for 1992.
The rate of increase in future compensation used in determining the
actuarial present value of the projected benefit obligation was 4.50 percent for
1994, 4.75 percent for 1993 and 5 percent for 1992.
The expected long-term rate of return on assets was 7.50 percent for 1994
and 7.75 percent for 1993.
Unrecognized prior service cost is amortized on a straight line basis,
based on the expected future service years of plan participants to receive
benefits.
Other Employee Benefit Plans
The Corporation maintains a profit-sharing plan for qualified employees
with at least two years of service. Contributions equal 3 percent of net
profits before federal income taxes and securities gains or losses, or as
determined at the discretion of the Board of Directors of the Corporation
limited to the maximum permitted by the Internal Revenue Code. Under this plan,
$298,960, $248,878 and $206,496 was expensed in 1994, 1993 and 1992,
respectively.
In addition, the Corporation maintains a 401(k) salary reduction plan
for qualified employees with at least one year of service. Participants may
make deferrals up to 15% of compensation. The Corporation matches 50 percent of
elective deferrals on the first 4 percent of the participants' compensation.
Expense under this plan was $108,991, $97,467 and $91,736 in 1994, 1993 and
1992, respectively.
A stock option plan exists under which options may be issued at market
prices to officers and other key employees. The right to exercise the options
vests over a five year period. The options outstanding at December 31, 1994 are
as follows:
-44-
<TABLE>
<CAPTION>
Number
Price of Options
Issue Date Expiration Date Per Share(1) Outstanding(1)
<S> <C> <C> <C>
August 10, 1989 August 10, 1999 $11.02 2,857
December 1, 1990 December 1, 2000 $ 8.47 79,188
January 1, 1994 January 1, 2004 $19.17 7,926
89,971
</TABLE>
The following is a summary of the transactions for the period January 1,
1992 through December 31, 1994:
<TABLE>
<CAPTION>
Available Options Exercise Price
for Grant Outstanding Per Share(1)
<S> <C> <C> <C>
Balance January 1, 1992 15,015 51,535 $8.47-11.02
Effect of 3 for 2 stock split 7,507 25,768 0
Balance December 31, 1992 22,522 77,303 $8.47-11.02
Effect of 5% stock dividend 1,126 3,865 0
Options exercised 0 (16,340) 8.47
Balance December 31, 1993 23,648 64,828 $8.47-11.02
Options issued (5,284) 5,284 19.17
Effect of 3-for-2 stock split 9,182 31,778 0
Options exercised (8,748) 8.47
Options cancelled 3,171 (3,171) 8.47
Balance December 31, 1994 30,717 89,971 $8.47-19.17
<FN>
(1) Restated for stock dividends and stock splits.
</TABLE>
Note 11. Commitments, Off-Balance-Sheet Risk and Contingencies
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet financing needs of its customers.
These financial instruments include commitments to make loans, unused lines of
credit and standby letters of credit. The Corporation's exposure to credit loss
in the event of non-performance by the other party to financial instruments for
commitments to make loans, unused lines of credit and standby letters of credit
is represented by the contractual amount of those instruments. The Corporation
follows the same credit policy to make such commitments as it uses for
on-balance-sheet items.
The Corporation has the following commitments outstanding:
-45-
<TABLE>
<CAPTION>
December 31 1994
<S> <C>
Fixed rate loan commitments $ 3,475,000
Variable rate loan commitments 7,749,000
Unused lines of credit 64,064,000
Standby letters of credit 3,762,000
$79,050,000
</TABLE>
Fixed rate loan commitments at December 31, 1994 are at current rates,
primarily from 9.00 percent to 10.00 percent, and terms from 5 to 15 years.
Variable rate loan commitments at December 31, 1994 are at current rates ranging
from 7.00 percent to 9.50 percent indexed primarily to Shoreline's prime lending
rate or other U.S. Treasury rate indices. Terms range primarily from 5 to 15
years.
Since many commitments to make loans expire without being used, the
amount does not necessarily represent future cash commitments. No losses are
anticipated as a result of these transactions. Collateral obtained upon
exercise of commitments is determined using management's credit evaluation of
the borrowers and may include real estate, business assets, deposits and other
items.
Rental expense for the years ended December 31, 1994, 1993 and 1992
totaled $80,426, $90,650 and $82,333, respectively. As of December 31, 1994
there were no significant future rental commitments.
Note 12. Fair Values of Financial Instruments
The following table shows the estimated fair values and the related
carrying value of the Corporation's financial instruments at December 31, 1994
and 1993. Items which are not financial instruments are not included.
<TABLE>
<CAPTION>
1994 1993
Carrying Estimated Carrying Estimated
December 31 Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 51,637,807 $ 51,638,000 $ 61,028,786 $ 61,029,000
Securities available for sale 81,175,780 81,176,000 12,499,969 13,195,000
Securities held to maturity 48,474,113 47,949,000 118,450,871 122,771,000
Loans, net of allowance
for loan losses 430,577,170 425,345,000 408,107,188 412,150,000
Demand and savings
deposits (316,113,048) (316,113,000) (303,377,004) (303,377,000)
Time deposits (249,982,575) (248,183,000) (254,031,640) (258,364,000)
Securities sold under
agreement to repurchase (2,875,112) (2,875,000) (2,410,920) (2,411,000)
Long-term debt (5,000,000) (4,457,000) (5,000,000) (4,849,000)
</TABLE>
-46-
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 1994 and 1993. The estimated
fair value for cash and cash equivalents is considered to approximate cost. The
estimated fair value for held to maturity securities and securities available
for sale is based on quoted market values for the individual securities or for
equivalent securities. The estimated fair value for commercial loans is based
on estimates of the difference in interest rates the Corporation would charge
the borrowers for similar loans with similar maturities made at December 31,
1994 and 1993, applied for an estimated time period until the loan is assumed to
reprice or be paid. The estimated fair value for other loans is based on
estimates of the rate the Corporation would charge for similar loans at December
31, 1994 and 1993, applied for the time period until estimated repayment. The
estimated fair value for demand, savings deposits, and securities sold under
agreement to repurchase is based on their carrying value. The estimated fair
value for time deposits and long-term debt is based on estimates of the rate the
Corporation would pay on such deposits or borrowings at December 31, 1994 and
1993, applied for the time period until maturity. The estimated fair value for
other financial instruments and off-balance-sheet loan commitments approximate
cost and are not considered significant to this presentation.
While these estimates of fair value are based on management's judgement
of the most appropriate factors, there is no assurance that if the Corporation
had disposed of such items at December 31, 1994, the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair values at December 31,
1994 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Corporation that are
not defined as financial instruments are not included in the above disclosures,
such as property and equipment. Also, non-financial instruments typically not
recognized in financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the earnings potential of
loan servicing rights, the earnings potential of the Corporation's subsidiary
bank's trust department, the trained work force, customer goodwill, and similar
items.
Note 13. Condensed Financial Information of the Parent Company
The condensed financial information of the parent company, Shoreline
Financial Corporation, is summarized below.
<TABLE>
Condensed Balance Sheets
<CAPTION>
December 31 1994 1993
<S> <C> <C>
Assets:
Cash and cash equivalents $ 509,161 $ 429,751
Investment in subsidiary 54,324,689 50,428,533
Premises and equipment-net 1,486,747 1,680,980
Other assets 110,427 195,504
Total Assets $56,431,024 $52,734,768
-47-
Liabilities and Shareholders' Equity:
Liabilities:
Other liabilities $ 222,556 $ 127,649
Total Liabilities 222,556 127,649
Shareholders' Equity 56,208,468 52,607,119
Total Liabilities and
Shareholders' Equity $56,431,024 $52,734,768
</TABLE>
<TABLE>
Condensed Statements of Income
<CAPTION>
Years ended December 31 1994 1993 1992
<S> <C> <C> <C>
Income:
Dividends from subsidiary-cash $3,362,695 $2,937,264 $3,879,232
Corporate service fees 3,308,086 3,078,686 2,861,937
Total income 6,670,781 6,015,950 6,741,169
Expense:
Salaries and employee benefits 3,037,186 2,566,378 2,356,917
Other 1,861,229 1,629,775 1,569,888
Total expense 4,898,415 4,196,153 3,926,805
Income before income tax benefit
and equity in undistributed
income of subsidiary 1,772,366 1,819,797 2,814,364
Income tax benefit 513,000 215,000 388,000
Net income before equity in
undistributed income of subsidiary 2,285,366 2,034,797 3,202,364
Equity in undistributed net
income of subsidiary 4,912,956 4,502,725 2,729,225
Net income $7,198,322 $6,537,522 $5,931,589
</TABLE>
<TABLE>
Condensed Statements of Cash Flows
<CAPTION>
Years ended December 31 1994 1993 1992
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $7,198,322 $6,537,522 $5,931,589
Adjustments to reconcile net income
to net cash from operating activities:
Equity in undistributed income of
subsidiary (4,912,956) (4,502,725) (2,729,225)
Depreciation and amortization 464,073 372,009 312,940
(Increase)/Decrease in
income taxes receivable (67,809) 28,702 23,000
Losses on disposal of assets 18,840 25,203 51,122
Decrease in other assets 152,885 12,404 50,703
Increase(Decrease) in other liabilities 94,908 (16,654) 14,134
Total adjustments (4,250,059) (4,081,061) (2,277,326)
Net cash from operating activities 2,948,263 2,456,461 3,654,263
-48-
Cash flows from investing activities:
Property and equipment expenditures (290,981) (654,788) (1,364,181)
Proceeds from disposal of assets 2,300 13,556 27,551
Net cash from investing activities (288,681) (641,232) (1,336,630)
Cash flows from financing activities
Dividends paid (3,181,208) (2,727,181) (2,422,068)
Stock dividend and splits-cash
paid for fractional shares (5,756) (15,925) (5,348)
Proceeds from shares issued under
dividend reinvestment plan 504,961 411,336 329,736
Proceeds from shares issued under
stock option plan 101,831 207,518 0
Net cash from financing activities (2,580,172) (2,124,252) (2,097,680)
Net change in cash and cash
equivalents 79,410 (309,023) 219,953
Cash and cash equivalents at
beginning of year 429,751 738,774 518,821
Cash and cash equivalents at
end of year $ 509,161 $ 429,751 $ 738,774
Federal income tax refund $ 262,373 $ 243,702 $ 411,000
</TABLE>
Shoreline Financial Corporation's primary source of revenue is its
wholly-owned subsidiary, Shoreline Bank. The payment of dividends by Shoreline
Bank is restricted to net profits, as defined by the Michigan Banking Code, then
on hand after deducting losses and bad debts, as also defined by the Michigan
Banking Code. Accordingly, in 1995, the subsidiary bank may distribute to
Shoreline, in addition to 1995 net profits, approximately $29,000,000 in
dividends without prior approval from bank regulatory agencies.
Report of Independent Auditors
Shareholders and Board of Directors
Shoreline Financial Corporation
Benton Harbor, Michigan
We have audited the accompanying consolidated balance sheets of SHORELINE
FINANCIAL CORPORATION as of December 31, 1994 and 1993 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years ended December 31, 1994, 1993 and 1992. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
-49-
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SHORELINE
FINANCIAL CORPORATION as of December 31, 1994 and 1993, and the results of its
operations and its cash flows for the years ended December 31, 1994, 1993 and
1992 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, Shoreline Financial
Corporation changed its method of accounting for securities in 1994 to comply
with new accounting guidance.
CROWE, CHIZEK AND COMPANY
South Bend, Indiana
February 9, 1995
DIRECTORS
SHORELINE FINANCIAL CORPORATION
BOARD OF DIRECTORS
Louis A. Desenberg, Attorney, Desenberg & Colip
Merlin J. Hanson, Chairman, Hanson International
Thomas T. Huff, Attorney, Varnum, Riddering, Schmidt and Howlett
Ronald F. Kinney, Chairman, All-Phase Electric Supply Co., Inc.
James E. LeBlanc, Chairman, President and CEO, Whirlpool Financial Corp.
L. Richard Marzke, President, Pri-Mar Petroleum
James F. Murphy, Retired Chairman and CEO
Dan L. Smith, Chairman of the Board, President and CEO
Robert L. Starks, President, Kerley & Starks Funeral Homes, Inc.
Jeffery H. Tobian, President, Tobian Metals, Inc.
Harry C. Vorys, Retired Executive Vice President and Treasurer
Hyman Warshawsky, President, Shellbea Company
Ronald L. Zile, Retired Vice Chairman
SHORELINE BANK
BOARD OF DIRECTORS
Arthur J. Bolt, Retired President, Quality Refuse Service, Inc.
Donald G. Braschler, Chairman, Golden Brown Bakery, Inc.
James D. Christenson, Retired President, Saugatuck Drug Co.
Louis A. Desenberg, Attorney, Desenberg & Colip
Richard J. Dougherty, Retired Educator
Merlin J. Hanson, Chairman, Hanson International
Ronald L. Hartgerink, President, Wyckoff Chemical Company
Thomas T. Huff, Attorney, Varnum, Riddering, Schmidt and Howlett
Ronald F. Kinney, Chairman, All-Phase Electric Supply Co., Inc.
James E. LeBlanc, Chairman, President and CEO, Whirlpool Financial Corp.
L. Richard Marzke, President, Pri-Mar Petroleum
James F. Murphy, Retired Chairman and CEO, Shoreline Financial Corp.
Dr. Gladys Peeples-Burks, Retired School Administrator
Dan L. Smith, Chairman, President and CEO
-50-
Donald E. Spencer, President, Spencer Fruit &Fertilizer Sales, Inc.
Robert L. Starks, President, Kerley & Starks Funeral Homes, Inc.
Hyman Warshawsky, President, Shellbea Company
Ronald L. Zile, Retired Vice Chairman
OFFICERS
SHORELINE FINANCIAL CORPORATION
OFFICERS
Dan L. Smith, Chairman of the Board, President and CEO
Wayne R. Koebel, Executive Vice President,
Chief Financial Officer, Secretary and Treasurer
James R. Milroy, Senior Vice President and Controller
Steven G. Getzfrid, Vice President and Auditor
SHORELINE BANK OFFICERS
Dan L. Smith, Chairman of the Board, President and CEO
Wayne R. Koebel, Executive Vice President and Chief Financial Officer
Robert K. Burch, Executive Vice President, Retail Banking
Richard D. Bailey II, Senior Vice President, Corporate Banking
James R. Milroy, Senior Vice President, Controller and Cashier
Joseph S. Calvaruso, Senior Vice President, Loan Administration
David Daugherty, Senior Vice President, Commercial Lending
Gary A. Dolezan, Senior Vice President, Mortgage Lending
Jerry Globensky, Senior Vice President, Commercial Lending
William L. Rockhold, Senior Vice President and Trust Officer
Ronald D. Sonneman, Senior Vice President and Trust Officer
Hilda L. Banyon, First Vice President and Director of Personnel
William Asche, Vice President, Mortgage Lending
Harold E. Borlik, Vice President and Trust Officer
Steve Brinks, Vice President, Facilities
Jeffrey Curry, Vice President, Commercial Services
Patrick G. Duffy, Vice President and Compliance Officer
Michael G. Doherty, Vice President, Commercial Lending
Steven G. Getzfrid, Vice President and Auditor
Kenneth W. Johnson, Vice President, Regional Manager and
Branch Manager, South Haven
Mark Keech, Vice President, Data Processing
Garry P. Kempker, Vice President and Trust Officer
Timothy B. Merker, Vice President, Commercial Lending
Alan Newcomb, Vice President, Operations
Jennifer Postello, Vice President, Mortgage Lending
Barbara J. Stelter, Vice President, Regional Manager and
Branch Manager, South St. Joseph
Robert D. Sykora, Vice President, Commercial Lending
David Van Strien, Vice President, Consumer Lending
Fred D. Wagner, Vice President, Commercial Lending
Mary Brinks, Assistant Vice President, Trust Operations
Janet A. Dickerson, Assistant Vice President, Mortgage Lending
Jane Kolberg, Assistant Vice President and Secretary to the Board
Patrick A. Mangold, Assistant Vice President, Consumer Lending
-51-
Clara Morris, Assistant Vice President and Branch Manager,
South Haven Suburban
Timothy O. Puro, Assistant Vice President and Trust Officer
Cheryl A. Stieve, Assistant Vice President, Director of Training
Cathryn A. Thaler, Assistant Vice President, Director of Marketing
Margaret A. Thornton, Assistant Vice President and Branch Manager,
Berrien Springs
Eileen M. Toney, Assistant Vice President, Regional Manager and
Branch Manager, Edwardsburg
Susanne K. Treacy, Assistant Vice President and Mortgage Loan Originator
Laura Watkins, Assistant Vice President and Branch Manager, Orchards
John S. Wilk, Assistant Vice President and Branch Manager, Baroda
Leonardo A. Amat, Commercial Loan Officer
Jacquie Amicarelli-Godush, Branch Manager, Lakeshore
Pamela J. Dolezan, Assistant Trust Officer
Sharon Gillette, Branch Manager, Allegan
Michael J. Griffin, Branch Manager, Paw Paw
Scott E. Johnson, Trust Officer
Earl Kasischke, Security Officer
Lynn M. Kerber, Manager, Credit Department
Alice C. Konkey, Manager, Loan Operations
Stephen R. Lison, Branch Manager, Eau Claire
Elice J. Menear, Branch Manager, Fennville
Patricia L. Miller, Branch Manager, Riverview
Peggy A. Roberts, Mortgage Loan Officer
Peggy Santoro, Branch Manager, Hartford
Ronald T. Schramm, Mortgage Loan Officer
Martha Speer, Branch Manager, Fairplain
Diana L. Swartz, Branch Manager, Three Oaks
Frances K. Terry, Branch Manager, Buchanan
Jon P. Weston, Branch Manager, Saugatuck
Rodger A. Young, Branch Manager, Oak Street
To those directors and senior officers who have recently retired,
we offer our thanks for their years of dedicated service.
SHORELINE BANK
RETIRED DIRECTORS
Burton H. Pearson
SHORELINE BANK
RETIRED SENIOR OFFICERS
Ronald L. Zile
James M. Behlen
EMPLOYEES
Cynthia Adent
Monica Adkins
Andrea Aleman
-52-
Patricia Allred
Nancy Alti
Kathy Anchor
Melissa Anderson
Mary Arnold
Kathy Austin
Sandra Austin
Bonnie Babor
Mia Bancroft
Mary A Barnes
Kathy Barnett
Robin Barz
Cassie Bell
Alice Blake
Joan Blake
Linda Bolton
Marilyn Booker
Kim Bosch
Kathy Bower
Christina Bowles
Laura Braley
Teresa Branson
Janice Briese
Kathleen Brinks
Brian Brown
Adeline Brown
Henrietta Bruce
Brian Bythrow
Kim Caid
Helen Calhoun
Vicky L. Camp
Nichole Carpenter
Todd Carter
Cheryl Carter
Bonita L. Cicilian
Sarah Clark
Sally Clevenger
Rachel A.Crowder
Anika Cunningham
Richard Curtis
Dorothy Cutshaw
Sharon Dalrymple
Mary J. Dannenberg
Nicole Davis
Sharon Deja
Norma DeKryger
Joe DeMeulenaere
Jack A. Den Uyl
Marlene Denekas
Joanne M. Devries
James Dew
Sandra Diaz
Patricia L. Diepenhorst
-53-
Beth Dissette
Barbara Ehrenberg
Lori Ellmer
Karen Emerson
Christi Eppard
Cathy Eppard
Cheron Diane Evans
Roberta Faher
Shirely Fender
Peter S. Ferguson
Rebecca Fisette
Teresa Fitzgerald
John Fitzgerald
Janis Fleisher
Phyllis Flowers
Pam Foster
Sandra French
Deanne Fridley
Debbie Gagliardo
Barbara Gardner
Charlotte G. Gardner
Mary B. Garlanger
Kenya Gavin
Nelson Goodwin
Mary Goril
Barbara Gray-Maruk
Diane Green
Ellen Gregory
Deborah L. Griffin
Nikki Gruber
Katrina Guidry
Cynthia Guminiski
Deena L. Hay
Jayne Hayden
Kandyce Hays
Roberta Henry
Irene Hills
Sarah Hodgkins
Natalie Hollomon
Peggy Holsten
Jane Hope
Marc Horton
Cynthia House
Dwight Huber
Margo Humes
Jennifer Hunt
Peggy Hunt
Evelyn Husek
Richard Iversen
Michael Janniere
Joan L. Jason
Teresa Johnson
Pamela Jones
-54-
Anita T. Jones
Kimberly Kaltz
Denise Kantaukas
Karen Karr
Patricia Keith
Allison Klank
Evelyn Klingerman
Ann M. Kneeland
Jill Koole
Sharon Kridler
Linda Kronenberger
Norma Krumrie
Tammy Lausman
Grace Lawson-Little
Mitzi Layman
Regenia Leedy
Lori Leiter
Patricia Lewis
Mariann Litznerski
Karen Lohrmann
Lorie Looney
Alfonso Lopez
Rodney L. Lynch Jr.
Marcia Mantei
Aaron Markos
Mirna F. Marquez
Lisa Martin
Mary Martin
Michelle Mason
Rhonda Mauchmar
Maria McDaniel
Mary McEnaney
Kathryn McGrew
Shirley McKinley
Lena McNees
Terry McNeil
Sarah Melcher
Vesna Mihailovic
Bonnie Miller
Kathleen Miller
Shelley Ann Miller
Cindy Mitchell
Bridget Moore
Kimberly Moore
Ruth Morrison
Larry Morrow
Elizabeth Mundt
Kathy Murdock
Meryl Nave
James Newell
Mildred L. Nicholson
Amy Nitz
Marilyn Nye
-55-
Cheryl O'Hara
Stacy Ostenson
Lorraine Outlaw
Jo Ann Pallas
Mabel Palmer
Beverly Pastrick
Janet F. Perlstein
Kristeen Peterson
Dawn Phairas
Rosalyn Phillips
Cecilia Pinne
Marcy Pinne
Virginia Pipoly
Linda Polmounter
Penny Popp
Joan Priebe
Sandra J. Ransom
Julio Rebollo
Monika Reimers
Elizabeth Remington
Robert Richards
Diane L. Rigozzi
Charlene Rogers
Myra Ross
Michelle Rouse
Wendy Rummel
Shella Ryan
Shirley Ryder
Richard Sadler
Charles Sawyer
Barabara Scalf
Jannith Schadler
Carole Schlutt
Carolyn Shoemaker
Debbie Shuemake
Thomas Siewert
Christine Simeck
Deborah Simpson
Joyce Skidmore
Ada Skoda
Gary Smith
Ginger Smith
Julie Soderquist
Cynthia A. Sorensen
Lora Spencer
Jennie Stezowski
Brenda J. Stickels
Judith Stowell
Deborah Streeter
Christine Sunday
Kimberly Swisher
Diane M. Talsma
Anna Tanner
-56-
Sue Tecklenburg
Christine Terry
Frances Terry
Mary Lou Thomas
Sandra L. Thompson
Susan Thompson
Karen Tipton
Patricia Tobias
Karen Tollas
Robin Torres
Susan Tropp
Sharon Tyson
Judy Uphues
Doraine Wade
Nancy Wagner
Susan Walantyn
Eunice Walker
Helen B. Wallace
Lori Wallace
Cheri Watson
Deborah Webb
Linda Weber
Angela Wells
Kayla White
LaVetta White
September Wilkins
Monique Williams
Sandra Windmon
Larry Wismer
Sheila Wolford
Nancy Wroblewski
Lance Wycoff
Karen Zielke
BANKING LOCATIONS
Allegan 673-6691
Baroda 422-1105
Benton Harbor, Fairplain* 927-2584
Benton Harbor, Oak Street 925-1200
Benton Harbor, Orchards Mall* 927-3788
Benton Harbor, Riverview 927-2251
Berrien Springs 471-7749
Bloomingdale* 521-7733
Buchanan, Auto Bank
Buchanan, Downtown* 695-3815
Eau Claire 461-6907
Edwardsburg* 663-3343
Fennville* 561-8431
Galien 545-3355
Hartford 621-3196
Paw Paw* 657-2511
Saugatuck* 857-2116
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South Haven, Downtown* 637-2141
South Haven, Suburban* 637-6625
Stevensville* 429-1527
St. Joseph, Downtown* 983-8970
St. Joseph, South* 429-6174
Three Oaks 756-9539
* Automated Teller Machine. Shoreline ATMs are also located at Lake Michigan
College and Meijer (Registered Trademark) in Benton Harbor. Shoreline
Cash-Dispensing Machines are located at McDonald's (Registered Trademark)
Restaurants in Stevensville and Bridgman, Pri-Mart Quik Shop in South Haven,
Andrews University in Berrien Springs, and Wal-Mart (Registered Trademark)
Stores in South Haven and Benton Harbor.
[LOGO]
Shoreline Financial Corporation
-58-
EXHIBIT 21
List of Subsidiaries
(as of December 31, 1994)
Shoreline Bank
Jurisdiction of Incorporation: Michigan
Name under which subsidiary does business: Shoreline Bank
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference and use of
our report, dated February 9, 1995, on the consolidated financial
statements of Shoreline Financial Corporation which appears on page 40 of
Shoreline Financial Corporation's Annual Report to Shareholders for the
year ended December 31, 1994, in Shoreline Financial Corporation's
previously filed registration statements for its 1989 Stock Option Plan
(Registration No. 33-29052) and Dividend Reinvestment Plan (Registration
No. 33-34008).
/s/ Crowe, Chizek and Company
Crowe, Chizek and Company
South Bend, Indiana
March 24, 1995
EXHIBIT 24
FORM OF POWER OF ATTORNEY
The undersigned, in his capacity as a director or officer, or
both, as the case may be, of Shoreline Financial Corporation, does hereby
appoint DAN L. SMITH and WAYNE R. KOEBEL and each of them severally, his
attorneys or attorney to execute in his name, place and stead an Annual
Report of Shoreline Financial Corporation on Form 10-K for its fiscal year
ended December 31, 1994, and any and all amendments thereto, and to file it
with the Securities and Exchange Commission.
Date Signature
_________________, 1995 ___________________________________
A power of attorney in substantially similar form to that above
has been executed by the following persons:
Louis A. Desenberg
Merlin Hanson
Thomas T. Huff
Ronald F. Kinney
James E. LeBlanc
L. Richard Marzke
James F. Murphy
Robert L. Starks
Jeffrey H. Tobian
Harry C. Vorys
Hyman Warshawsky
Ronald L. Zile
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENTS OF
INCOME, CHANGES IN SHAREHOLDERS' EQUITY AND CASH FLOWS, OF SHORELINE
FINANCIAL CORPORATION AND ITS SUBSIDIARY AS OF AND FOR THE YEAR ENDED DECEMBER
31, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1994
<PERIOD-END> Dec-31-1994
<CASH> 31,288
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 20,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81,176
<INVESTMENTS-CARRYING> 48,474
<INVESTMENTS-MARKET> 47,949
<LOANS> 436,529
<ALLOWANCE> 5,952
<TOTAL-ASSETS> 633,854
<DEPOSITS> 566,096
<SHORT-TERM> 2,875
<LIABILITIES-OTHER> 3,674
<LONG-TERM> 5,000
<COMMON> 0
0
0
<OTHER-SE> 56,208
<TOTAL-LIABILITIES-AND-EQUITY> 633,854
<INTEREST-LOAN> 35,625
<INTEREST-INVEST> 7,875
<INTEREST-OTHER> 571
<INTEREST-TOTAL> 44,071
<INTEREST-DEPOSIT> 18,375
<INTEREST-EXPENSE> 18,715
<INTEREST-INCOME-NET> 25,356
<LOAN-LOSSES> 750
<SECURITIES-GAINS> (165)
<EXPENSE-OTHER> 19,721
<INCOME-PRETAX> 9,478
<INCOME-PRE-EXTRAORDINARY> 9,478
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,198
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.45
<YIELD-ACTUAL> 3.76
<LOANS-NON> 802
<LOANS-PAST> 856
<LOANS-TROUBLED> 2
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,586
<CHARGE-OFFS> 1,014
<RECOVERIES> 629
<ALLOWANCE-CLOSE> 5,952
<ALLOWANCE-DOMESTIC> 3,698
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,254
</TABLE>
