<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
===================
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _____________ to ______________.
Commission File No.: 0-16444
SHORELINE FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-2758932
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
823 RIVERVIEW DRIVE
BENTON HARBOR, MICHIGAN 49022
(Address of Principal Executive Offices) (Zip Code)
(616) 927-2251
(Registrant's Telephone Number, Including Area Code)
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 _____
As of July 31, 1997, there were 5,901,032 issued and outstanding shares of
the Registrant's Common Stock.
<PAGE>
SHORELINE FINANCIAL CORPORATION
FORM 10-Q
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets,
June 30, 1997 and December 31, 1996 3-4
Condensed Consolidated Statements of Income,
Three Months and Six Months Ended June 30,
1997 and 1996 5
Condensed Consolidated Statements of Cash Flows,
Six Months Ended June 30, 1997 and 1996 6-7
Notes to Condensed Consolidated Financial
Statements 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
PART II. OTHER INFORMATION 18-19
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18-19
SIGNATURES 20
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 38,101,653 $ 38,266,519
Interest-earning deposits 3,473,970 18,142,151
Federal funds sold 1,650,000 5,150,000
------------ ------------
Total cash and cash equivalents 43,225,623 61,558,670
Securities held to maturity
(fair values of $46,022,753 and
$48,588,454 on June 30, 1997 and
December 31, 1996, respectively) 45,066,689 47,582,337
Securities available for sale (carried at fair value) 120,421,200 90,254,236
Total loans 620,536,961 500,591,353
Less allowance for loan loss 7,648,824 6,894,945
------------ ------------
Net loans 612,888,137 493,696,408
Premises and equipment, net 13,692,369 10,975,483
Other assets 23,601,322 12,027,685
------------ ------------
Total Assets $858,895,340 $716,094,819
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non interest-bearing $ 74,046,139 $ 74,142,067
Interest-bearing 654,967,321 542,335,458
------------ ------------
Total deposits 729,013,460 616,477,525
Securities sold under agreements to repurchase 7,274,156 7,166,563
Other liabilities 5,975,921 5,032,529
FHLB advances 44,185,646 18,000,000
------------ ------------
Total Liabilities 786,449,183 646,676,617
------------ ------------
</TABLE>
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<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS - CONTINUED
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
Shareholders' Equity
Common Stock:
10,000,000 shares authorized;
5,894,625 and 5,555,672 shares issued
at June 30, 1997 and December 31, 1996,
respectively
Additional Paid-in Capital 64,365,908 56,388,553
Stock Incentive Plan (unearned shares) (555,725)
Unrealized gain on securities
available for sale, net 1,014,268 1,378,327
Retained earnings 7,621,706 11,651,322
------------ ------------
Total Shareholders' Equity 72,446,157 69,418,202
------------ ------------
Total Liabilities & Shareholders' Equity $858,895,340 $716,094,819
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $11,711,992 $10,909,908 $22,674,067 $21,556,648
Securities 2,569,756 2,408,231 5,064,534 4,827,292
Deposits with banks 382,560 104,172 677,483 150,686
Federal funds sold 123,910 107,415 250,596 194,080
----------- ----------- ----------- -----------
Total interest income 14,788,218 13,529,726 28,666,680 26,728,706
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 6,641,187 5,961,549 12,881,773 12,002,047
Other 455,355 228,506 776,536 359,743
----------- ----------- ----------- -----------
Total interest expense 7,096,542 6,190,055 13,658,309 12,361,790
----------- ----------- ----------- -----------
NET INTEREST INCOME 7,691,676 7,339,671 15,008,371 14,366,916
Provision for loan losses 120,000 150,000 240,000 300,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,571,676 7,189,671 14,768,371 14,066,916
----------- ----------- ----------- -----------
OTHER INCOME
Service charges on deposit
accounts 549,975 449,003 1,017,686 866,735
Trust fees 415,816 407,201 818,864 779,889
Securities gains 77,602 113,705 112,903 184,344
Other 386,566 117,513 669,397 267,382
----------- ----------- ----------- -----------
Total other income 1,429,959 1,087,422 2,618,850 2,098,350
----------- ----------- ----------- -----------
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<PAGE>
OTHER EXPENSES
Personnel 2,761,345 2,641,053 5,454,689 5,282,615
Occupancy 333,228 327,767 693,501 677,439
Equipment 534,216 489,880 1,033,017 963,896
Other 1,616,470 1,464,338 2,913,291 2,638,703
----------- ----------- ----------- -----------
Total other expense 5,245,259 4,923,038 10,094,498 9,562,653
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,756,376 3,354,055 7,292,723 6,602,613
Federal income tax expense 1,107,000 960,800 2,101,000 1,851,800
----------- ----------- ----------- -----------
NET INCOME $ 2,649,376 $ 2,393,255 $ 5,191,723 $ 4,750,813
=========== =========== =========== ===========
EARNINGS PER SHARE $ .45 $ .41 $ .88 $ .82
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,191,723 $ 4,750,813
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 785,572 744,647
Provision for loan losses 240,000 300,000
Net amortization and accretion on securities 144,556 332,116
Amortization of goodwill and related core
deposit intangible 128,139 141,165
Stock incentive expense 50,525
Gains on sales and calls of securities (112,903) (184,344)
Increase in other assets (593,980) (388,042)
Increase in other liabilities (372,273) (1,273,614)
------------ ------------
NET CASH FROM OPERATING ACTIVITIES 5,461,359 4,422,741
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisition of SJS (See Note 2) (20,436,447)
Net increase in loans (7,139,217) (30,755,890)
Securities available for sale:
Purchases (22,592,526) (11,183,902)
Proceeds from sales 13,320,287 6,870,805
Proceeds from maturities, calls and principal
reductions 7,349,079 11,478,113
Securities held to maturity:
Purchases (3,000,000) (8,681,583)
Proceeds from maturities, calls and principal
reductions 5,482,882 6,161,325
Premises and equipment expenditures (1,329,203) (1,159,056)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (28,345,145) (27,270,188)
------------ ------------
</TABLE>
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<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 1,793,380 13,156,513
Net (increase) decrease in short-term borrowing 107,593 (90,416)
Proceeds from FHLB advances 9,000,000 11,000,000
Repayment of FHLB advances (4,500,000)
Dividends paid (2,418,073) (2,153,897)
Proceeds from shares issued 567,839 461,291
Payments to retire common stock (354,725)
------------ ------------
NET CASH FROM FINANCING ACTIVITIES 4,550,739 22,018,766
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (18,333,047) (828,681)
Cash and Cash Equivalents at Beginning of Year 61,558,670 42,760,198
------------ ------------
Cash and Cash Equivalents at June 30 $ 43,225,623 $ 41,931,517
============ ============
CASH PAID DURING THE YEAR FOR:
Interest $ 13,297,673 $ 12,441,797
Income Taxes $ 1,577,000 $ 2,459,000
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Shares issued under stock incentive plan in the amount of $606,250.
The accompanying notes are an integral part of these consolidated financial
statements
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<PAGE>
SHORELINE FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements were prepared in accordance with Rule 10-01 of Regulation S-X
and the instructions for Form 10-Q and, therefore, do not include all
disclosures required by generally accepted accounting principles for
complete presentation of financial statements. In the opinion of
management, the condensed consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to
present fairly the financial condition of Shoreline Financial Corporation
as of June 30, 1997 and December 31, 1996, and the results of its
operations for the three and six months ended June 30, 1997 and 1996, and
its cash flows for the six months then ended. The results of operations
for the six months ended June 30, 1997 are not necessarily indicative of
the results to be expected for the year ending December 31, 1997.
The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities."
This pronouncement revises the accounting for transfers of financial
assets, such as loans and securities, and for distinguishing between sales
and secured borrowings. SFAS No. 125, as amended by SFAS No. 127, is
effective for some transactions in 1997 and others in 1998. The effect of
adopting this standard was not material to the consolidated financial
statements of Shoreline Financial Corporation.
In June 1997, the FASB issued SFAS No. 128, "Earnings Per
Share," which revises the accounting requirements for calculating earnings
per share. Effective beginning with year-end 1997, basic earnings per
share will be calculated solely on average common shares outstanding.
Diluted earnings per share will reflect the potential dilution of stock
options and other common stock equivalents. All prior calculations will be
restated to be comparable to the new methods. Since the Corporation has not
had significant dilution from stock options, the new calculation methods
will not significantly affect future basic earnings per share or diluted
earnings per share.
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 "Shoreline." All material
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<PAGE>
intercompany accounts and transactions have been eliminated in
consolidation.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Securities are classified into held to maturity, available for
sale and trading categories. Held to maturity securities are those which
Shoreline has the positive intent and ability to hold to maturity and are
reported at amortized cost. Available for sale securities are those which
Shoreline may decide to sell if needed for liquidity, asset-liability
management or other reasons. Available for sale securities are reported at
fair value, with unrealized gains or losses included as a separate
component of equity, net of tax. Trading securities are bought principally
for sale in the near term and are reported at fair value with unrealized
gains or losses included in earnings. Shoreline did not hold any
securities considered for this category at any time during the second
quarter of 1997.
Realized gains or losses are determined based on the amortized
cost of the specific security sold.
During the six month period ended June 30, 1997, the proceeds
from sales of available for sale securities were $13,320,287, with gross
realized gains of $112,457 and gross realized losses of $10,040 from those
sales. Gross gains of $10,486 were realized on calls of securities during
the same period. For this period, the change in net unrealized holding
gains on available for sale securities was a decrease of approximately
$552,000. There were no sales or transfers of securities classified as
held to maturity.
INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the net
value of tangible assets acquired and related core deposit intangibles
identified in acquisitions. Goodwill is expensed on the straight-line
method over no more than 25 years. The related core deposit intangibles are
amortized on an accelerated basis over the estimated life of the deposits
acquired. Goodwill and core deposit intangibles totaled approximately
$12,385,000 and $2,377,000 at June 30, 1997 and December 31, 1996,
respectively. The increase is attributable to the acquisition of SJS
Bancorp, Inc. as discussed below. These amounts are included in Other
Assets in the accompanying balance sheets.
INCOME TAXES
Income tax expense for the periods ended June 30, 1997 and 1996
is based upon the asset and liability method. Shoreline records income tax
expense based on the amount of taxes due on its tax return plus deferred
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<PAGE>
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 rates.
EARNINGS PER SHARE
Earnings per share is 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.
The average number of shares was 5,886,002 in the second quarter of 1997
and 5,791,059 in the second quarter of 1996. The average number of shares
was 5,872,630 in the six months ended June 30, 1997 and 5,790,038 in the
six months ended June 30, 1996.
NOTE 2 - ACQUISITION
On June 13, 1997, Shoreline completed the acquisition of all the
outstanding stock of SJS Bancorp, Inc. ("SJS"), headquartered in St. Joseph,
Michigan for approximately $24.8 million in cash.
The acquisition is accounted for as a purchase. Intangibles are
amortized on various methods over their estimated lives. The fair values of
assets and liabilities assumed were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Cash acquired, net of cash paid for acquisition $ (20,436)
Securities 28,794
Loans, net 112,293
Premises and equipment, net 2,173
Acquisition intangibles 10,619
Other assets 301
Deposits (110,743)
FHLB advances (21,686)
Other liabilities (1,315)
</TABLE>
-11-
<PAGE>
NOTE 3 - INCOME TAXES
Components of the provision for federal income taxes are as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C> <C>
Taxes currently payable $1,894,000
Deferred tax expense 207,000
----------
Income tax expense $2,101,000
==========
</TABLE>
The deferred income taxes are due primarily to the temporary
difference related to depreciation, bad debt deductions, mark-to-market of
securities held for sale and deferred loan fees.
The difference between the provision for income taxes shown on
the statement of income and amounts computed by applying the statutory
federal income tax rate to income before income taxes is as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C> <C>
Income tax calculated at statutory federal rate of 34% $2,480,000
Increase (decrease) due to tax effect of
Tax-exempt income (445,000)
Nondeductible expense and other 66,000
----------
Income tax expense $2,101,000
==========
</TABLE>
The components of the net deferred tax asset recorded in the
balance sheet as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Total deferred tax liabilities $ (950,500)
Total deferred tax assets 3,288,000
Total valuation allowance 0
----------
Net deferred tax asset $2,337,500
==========
</TABLE>
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion compares the financial condition of
Shoreline Financial Corporation ("Shoreline") at June 30, 1997 to December
31, 1996 and the results of operations for the three and six months ended
June 30, 1997 with the same periods in 1996. The acquisition of SJS
Bancorp, Inc. ("SJS") in the quarter ended June 30, 1997 is reflected in
the balance sheet of Shoreline with the addition of approximately $134
million in market valued assets and liabilities (see Note 2). As such,
average balance comparisons normally used in the balance sheet discussion
provide limited usefulness due to the SJS transaction. Therefore, the
discussion relating to the financial condition of Shoreline will compare
actual balances of selected items.
FINANCIAL CONDITION
Total assets of Shoreline were $858.9 million as of June
30, 1997, a 19.9% increase compared to the level of $716.1 million at
December 31, 1996. The acquisition of SJS accounted for $133.7 million of
growth. Various components of the balance sheet impacted by the merger are
analyzed below.
Total deposits on June 30, 1997 were $729.0 million, an increase
of $112.5 million from December 31, 1996. Deposits added to the balance
sheet as a result of the SJS acquisition were $110.7 million.
Approximately 75% of these deposits were interest-bearing time deposits.
Only $1.3 million of the SJS deposits were non-interest bearing. Without
considering the SJS deposits, total deposits have increased a modest $1.8
million from December 31, 1996. Reduction in Shoreline's Super Public Fund
account, an interest-bearing demand deposit account geared toward
municipalities, during the second quarter of 1997 offset the majority of
the growth in deposits obtained during the first quarter. The decline in
these accounts is somewhat tied to seasonal funding patterns of the
municipalities.
Borrowings from the Federal Home Loan Bank of Indianapolis ("FHLB")
increased to $44.2 million as of June 30, 1997 from $18.0 million as of
December 31, 1996. The majority of this increase resulted from the addition
of $21.7 million in outstanding borrowings of SJS. Shoreline also increased
its borrowings in the first quarter of 1997 by $5.0 million. This source of
wholesale funding provides an alternative to conventional retail funding at
comparable cost.
Total loans increased $119.9 million to $620.5 million as of June
30, 1997 from $500.6 million as of December 31, 1996. Of this increase,
$112.3 million was attributable to the acquisition of SJS. Removing this
effect, Shoreline's loan portfolios increased $7.1 million over the six
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<PAGE>
month period. The majority of this increase occurred in the consumer loan
portfolio where volume rose $5.8 million, primarily the result of a promotion
program held during the second quarter. Commercial loans increased $2.3
million while the volume of mortgage loans held in the portfolio declined by
$1.0 million. Approximately $86 million of the $112.3 million of loans
acquired from SJS were added to Shoreline's mortgage loan portfolio.
Total investment securities were $165.5 million as of June 30, 1997,
an increase of $27.7 million from December 31, 1996. The SJS transaction
added $28.8 million to Shoreline's securities portfolio, of which $27.6
million were U.S. Government Agency securities designated as available for
sale. Shoreline's short-term investments were impacted by the payment of
$24.8 million for the purchase of all of the outstanding common stock of SJS.
Total cash and cash equivalents at June 30, 1997 is more representative of
the level at which Shoreline will normally operate.
Other assets increased $11.6 million to $23.6 million as of June
30, 1997 from $12.0 million as of December 31, 1997. The purchase
accounting method was used in the acquisition of SJS, resulting in the
addition of related intangibles totaling $10.6 million.
Total non-performing assets at June 30, 1997 were $2.0 million,
which represents .32% of Shoreline's total loan portfolio at that date.
This level of non-performing assets is down from the ratio of .38% at
December 1996. Non-performing assets include loans that are classified for
regulatory purposes as contractually past due 90 days or more, on non-
accrual status or "troubled debt restructurings" and other real estate
owned.
During the second quarter of 1997, Shoreline enjoyed net recoveries
on charged-off loans of $113,155. This reduced net charge-offs on a
year-to-date basis to only $26,715, which represents .01% of average total
loans for the same period. The provision for loan losses for the second
quarter of 1997 was $120,000, consistent with that of the first quarter of
the year. At June 30, 1997, Shoreline's allowance for loan losses totaled
$7,648,824, which provides a coverage ratio of 3.9 times the level of
non-performing assets identified at that date. The SJS transaction added
approximately $540,000 to Shoreline's allowance. Despite this increase,
Shoreline's allowance as a percentage of total loans declined to 1.23% at
June 30, 1997 from 1.38% at March 31, 1997. Management believes the level of
the loan loss reserve is adequate to cover the risk associated with its loan
portfolio.
LIQUIDITY AND RATE SENSITIVITY
During the second quarter of 1997, Shoreline's loan to deposit
ratio was 81.4%, up slightly from the previous quarter's ratio of 80.6%.
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<PAGE>
During the second quarter of 1997, average interest-earning deposits and
federal funds sold represented 4.8% of Shoreline's total assets. On June
30, 1997, however, interest-earning deposits and federal funds sold totaled
$5.1 million, representing less than 1% of total assets. This decline
reflects the impact of the cash purchase of SJS. Approximately $120 million
or 73% of Shoreline's total securities portfolio was classified as
available for sale on June 30, 1997 and $624,000 of loans were classified
as held for sale. On June 30, 1997, Shoreline had commitments to make or
purchase loans, including the unused portions of lines of credit, totaling
approximately $125 million.
On June 30, 1997, the cumulative funding gaps of interest-earning
assets and interest-bearing liabilities for selected maturity periods are
illustrated as follows:
<TABLE>
<CAPTION>
REPRICEABLE OR MATURING WITHIN:
--------------------------------------
0 TO 3 0 TO 12 0 TO 5
(000S) MONTHS MONTHS YEARS
------ ------ -----
<S> <C> <C> <C>
Interest-earning assets
Loans $ 155,038 $ 254,586 $539,085
Securities 22,021 33,619 91,845
Federal funds sold 1,650 1,650 1,650
Interest-earning deposits 3,474 3,474 3,474
--------- --------- --------
Total $ 182,183 $ 293,329 $636,054
========= ========= ========
Interest-bearing liabilities
Time deposits $ 108,832 $ 242,825 $377,504
Demand and savings deposits 272,783 272,783 272,783
Other borrowings 17,224 29,974 51,274
--------- --------- --------
Total $ 398,839 $ 545,582 $701,561
========= ========= ========
Asset/(Liability) Gap $(216,656) $(252,253) $(65,507)
========= ========= ========
</TABLE>
As shown, Shoreline had a cumulative liability gap position of
$252.3 million within the one-year time frame. At March 31, 1997, Shoreline
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<PAGE>
reported a liability gap position within this same time frame of $182.2
million. The increase reflects the addition of SJS rate sensitive assets
and liabilities. This position suggests that if market interest rates
decline in the next 12 months, Shoreline has the potential to earn more net
interest income. A limitation of the traditional static gap analysis,
however, is that it does not consider the timing or magnitude of
noncontractual repricing. Because of these and other limitations of the
static gap analysis, Shoreline's Asset/Liability Committee utilizes
simulation modeling as its primary tool to project how changes in interest
rates will impact net interest income. These models indicate, and
management believes, that Shoreline is positioned such that changes in
rates within anticipated ranges and under anticipated circumstances would
not severely alter operating results.
CAPITAL RESOURCES
Total shareholders' equity was $72.4 million on June 30,
1997. Included in this total are net unrealized gains on securities
available for sale totaling $1 million, a decrease of approximately
$364,000 from December 31, 1996. During the second quarter of 1997,
Shoreline's Board of Directors approved and paid a cash dividend of $.21
per share. Shoreline's capital ratios declined from March 31, 1997
reflecting the impact of its purchase of SJS. However, Shoreline's capital
position still remains strong and is well above minimum regulatory
standards. Shoreline remains classified as a "well-capitalized" institution
under these standards.
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Equity to assets 8.43% 9.69%
Tier I leverage 6.97% 9.30%
Risk-based:
Tier I Capital 11.35% 15.10%
Total Capital 12.59% 16.33%
</TABLE>
RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 1997 was $2,649,376, an
increase of 10.7%, or $256,121, over the same period in 1996. Revenue
growth, both in net interest income and non-interest income, was the primary
reason behind the improved profitability. The following table illustrates
the effect that changes in rates and volumes of interest-earning assets and
interest-bearing liabilities had on net interest income:
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<PAGE>
<TABLE>
THREE MONTHS ENDED JUNE 30
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
(000S)
Interest income (taxable equivalent) $ 15,030 $ 13,831
Interest expense 7,096 6,190
-------- --------
Net interest income $ 7,934 $ 7,640
======== ========
Average volume:
Interest-earning assets $709,718 $647,917
Interest-bearing liabilities 610,864 553,903
-------- --------
Net differential $ 98,854 $ 94,014
======== ========
Average yields/rates:
Yield on earning assets 8.49% 8.56%
Rate paid on liabilities 4.66% 4.48%
-------- --------
Interest spread 3.83% 4.08%
======== ========
Net interest margin 4.48% 4.73%
======== ========
</TABLE>
The change in net interest income (in thousands) is attributable
to the following:
<TABLE>
<CAPTION>
VOLUME RATE INC/(DEC)
------ ---- ---------
<S> <C> <C> <C>
Interest-earning assets $1,313 $(114) $1,199
Interest-bearing liabilities 650 255 905
------ ----- ------
Net Interest $ 663 $(369) $ 294
====== ===== ======
</TABLE>
-17-
<PAGE>
Net income for the six months ended June 30, 1997, was
$5,191,723, an increase of 9.3% over the same period in 1996. Increased
revenue from net interest income and other income provided this increase.
The following table illustrates the effect that changes in rates and
volumes of interest-earning assets and interest-bearing liabilities had on
net interest income for the six months ended June 30, 1997 and 1996.
<TABLE>
SIX MONTHS ENDED JUNE 30
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
(000S)
Interest income (taxable equivalent) $ 29,072 $ 27,243
Interest expense 13,658 12,362
-------- --------
Net interest income $ 15,414 $ 14,881
======== ========
Average volume:
Interest-earning assets $629,283 $640,455
Interest-bearing liabilities 594,465 547,693
-------- --------
Net differential $ 97,818 $ 92,762
======== ========
Average yields/rates:
Yield on earning assets 8.47% 8.55%
Rate paid on liabilities 4.63% 4.55%
-------- --------
Interest spread 3.84% 4.00%
======== ========
Net interest margin 4.49% 4.69%
======== ========
</TABLE>
The change in net interest income (in thousands) is attributable
to the following:
-18-
<PAGE>
<TABLE>
<CAPTION>
VOLUME RATE INC/(DEC)
------ ---- ---------
<S> <C> <C> <C>
Interest-earning assets $2,095 $(266) $1,829
Interest-bearing liabilities 1,075 221 1,296
------ ----- ------
Net interest $1,020 $(487) $ 533
====== ===== ======
</TABLE>
Shoreline expensed $120,000 for the provision for loan losses in
the second quarter of 1997, unchanged from the previous quarter. The
provision for loan losses is based upon loan loss experience and such other
factors which, in management's judgment, deserve current recognition in
maintaining an adequate allowance for loan losses.
Total other income for the quarter ended June 30, 1997 was $1,429,959,
an increase of $342,537, or 31.5% over the second quarter in 1996. Increased
other income accounted for approximately $269,000 of this increase. Increased
gains from the sale of mortgage loans as well as increased ATM fee income
provided the majority of the increase in other income. Increased deposit
service charge income contributed $101,000 to the increase in total other
income. For the six months ended June 30, total other income was $2,618,850
in 1997 compared to $2,098,350 in 1996. This is an increase of 24.8% or
$520,500. Again, increased other income provided the majority of growth in
this area. Other income for the six months ended June 30, 1997 totaled
$669,397, an increase of $402,000 over same period in 1996. Gains on the sale
of mortgage loans accounted for $295,000 of this increase with ATM fee income
and investment and insurance sale income also contributing to the $402,000
increase. Deposit service charge income increased $151,000 or 17.4% in first
six months of 1997 compared to the same period in 1996. Trust fee income
provided an additional $39,000 in 1997. As a percentage of average assets,
other income for the first six months of 1997 totaled .68% compared to .56%
in 1996.
Total other expense was $5,245,259 during the second quarter of 1997,
an increase of $322,221 or 6.5% over the same period in 1996. Increased use
of professional services related to outsource arrangements and consulting
projects along with increased advertising, personnel and other expenses
related to the SJS acquisition contributed to the increase. For the six
months ended June 30, 1997, total other expense was $10,094,498, which is an
increase of 5.6% or $532,000 over the six months ended June 30, 1996. Again,
advertising, personnel expense and professional fees accounted for the
majority of this increase. As a percentage of average assets, total other
expense was 2.75% through June 1997. This compares to the prior year's ratio
-19-
<PAGE>
over the same time period of 2.82%. Shoreline's efficiency ratio also
declined from 56.6% in the first half of 1996 to 55.8% in the first half of
1997.
In summary, Shoreline's net income of $2,649,376 in the second
quarter of 1997 produced a return on average shareholders' equity of 14.93%
and a return on average assets of 1.40%. On a year-to-date basis,
Shoreline's return on average shareholders' equity stands at 14.77% and its
return on average assets was 1.42%, which favorably compare to 1996 ratios
of 14.53% and 1.39%, respectively. Earnings per share through June 30, 1997
was $.88 and dividends per share was $.41. These compare to earnings per
share and dividends per share through June 30, 1996 of $.82 and $.37,
respectively.
-20-
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of Shoreline Financial
Corporation was held on May 1, 1997. The purpose of the meeting was to
elect directors and to transact any other business that properly came
before the meeting.
(a) The name of each director elected (along with the number of
votes cast for or authority withheld) and the name of each other director
whose term of office as a director continued after the meeting follows:
<TABLE>
<CAPTION>
VOTES CAST
AUTHORITY BROKER
FOR WITHHELD NON-VOTES
--- --------- ---------
<S> <C> <C> <C>
ELECTED DIRECTORS
Louis A. Desenberg 4,717,325 12,424 0
Merlin J. Hanson 4,720,525 9,224 0
Jeffrey H. Tobian 4,585,158 144,591 0
</TABLE>
DIRECTORS WHO CONTINUE TO SERVE
Thomas T. Huff James E. LeBlanc
L. Richard Marzke James F. Murphy
Dan L. Smith Robert L. Starks
Ronald L. Zile
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following documents are filed as exhibits to
this report on Form 10-Q:
-21-
<PAGE>
EXHIBIT
NUMBER DOCUMENT
------ --------
2.1 Agreement and Plan of Merger, dated as of November 6,
1996 between Registrant, SJS Acquisition Corporation, and
SJS Bancorp, Inc. Previously filed as Exhibit 2.1 to the
Registrant's Form 8-K filed on June 27, 1997. Here
incorporated by reference.
3.1 Restated Articles of Incorporation. Previously filed as
Exhibit 1(a) to the registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1994. Here
incorporated by reference.
3.2 Bylaws. Previously filed as Exhibit 3(b) to the
registrant's Form S-1 Registration Statement filed March
23, 1990. Here incorporated by reference.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K. Shoreline filed a Form 8-K on June 27,
1997 reporting the acquisition of SJS Bancorp, Inc. As of the date of the
filing, it was impracticable for the registrant to provide financial
statement information as well as pro forma financial information required
in Form 8-K. In accordance with Item 7(a)(4) of Form 8-K, these financial
statements will be filed by amendment to this Form 8-K as soon as
practicable, but no later than 60 days after the date of the report.
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SHORELINE FINANCIAL CORPORATION
(Registrant)
Date August 13, 1997 /S/ DAN L. SMITH
Dan L. Smith
Chairman, President and Chief Executive
Officer
Date August 13, 1997 /S/ WAYNE R. KOEBEL
Wayne R. Koebel
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer (Principal
Financial and Accounting Officer)
-23-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
- ------ --------
2.1 Agreement and Plan of Merger, dated as of November 6,
1996 between Registrant, SJS Acquisition Corporation, and
SJS Bancorp, Inc. Previously filed as Exhibit 2.1 to the
Registrant's Form 8-K filed on June 27, 1997. Here
incorporated by reference.
3.1 Restated Articles of Incorporation. Previously filed as
Exhibit 1(a) to the registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1994. Here
incorporated by reference.
3.2 Bylaws. Previously filed as Exhibit 3(b) to the registrant's
Form S-1 Registration Statement filed March 23, 1990. Here
incorporated by reference.
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF SHORELINE
FINANCIAL CORPORATION FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 38,102
<INT-BEARING-DEPOSITS> 3,474
<FED-FUNDS-SOLD> 1,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 120,421
<INVESTMENTS-CARRYING> 45,067
<INVESTMENTS-MARKET> 46,023
<LOANS> 620,537
<ALLOWANCE> 7,649
<TOTAL-ASSETS> 858,895
<DEPOSITS> 729,013
<SHORT-TERM> 28,474
<LIABILITIES-OTHER> 5,976
<LONG-TERM> 22,986
<COMMON> 0
0
0
<OTHER-SE> 72,446
<TOTAL-LIABILITIES-AND-EQUITY> 858,895
<INTEREST-LOAN> 22,674
<INTEREST-INVEST> 5,064
<INTEREST-OTHER> 928
<INTEREST-TOTAL> 28,667
<INTEREST-DEPOSIT> 12,882
<INTEREST-EXPENSE> 777
<INTEREST-INCOME-NET> 15,008
<LOAN-LOSSES> 240
<SECURITIES-GAINS> 113
<EXPENSE-OTHER> 10,094
<INCOME-PRETAX> 7,293
<INCOME-PRE-EXTRAORDINARY> 7,293
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,192
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
<YIELD-ACTUAL> 2.95
<LOANS-NON> 705
<LOANS-PAST> 1,074
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,355
<ALLOWANCE-OPEN> 6,895
<CHARGE-OFFS> 295
<RECOVERIES> 269
<ALLOWANCE-CLOSE> 7,649
<ALLOWANCE-DOMESTIC> 5,146
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,503
</TABLE>
