<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1996
[ ] 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 or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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. [ ]
<PAGE>
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, 1997: $139,088,575
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, 1997: 5,563,543 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1996, are incorporated by reference in Part II.
Portions of the registrant's definitive Proxy Statement for its May 1,
1997, annual meeting of shareholders are incorporated by reference in Part
III.
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<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Shoreline Financial Corporation ("Shoreline" or the "Corporation") is
a bank holding company. Shoreline had assets at December 31, 1996, totaling
$716.1 million, deposits of $616.5 million and shareholders' equity of
$69.4 million.
Shoreline's business is concentrated exclusively in the commercial
banking industry segment. Shoreline's primary subsidiary, Shoreline 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
- Other banking services
On November 7, 1996, Shoreline announced it had signed a plan of
merger under which SJS Bancorp, Inc. would merge with and into Shoreline.
SJS Bancorp, Inc. is a holding company with assets of approximately $150
million and is the parent company of SJS Federal Savings Bank, which
provides banking services through its main office in St. Joseph, Michigan
and branches in South Haven and Stevensville, Michigan. Completion of the
transaction is subject to regulatory approvals and other customary
conditions and is anticipated to be consummated during the second quarter
of 1997.
The business of Shoreline 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.
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Shoreline's principal markets for financial services are the
communities in which Shoreline Bank is located and the areas immediately
surrounding these communities. Shoreline serves these markets through 25
offices located in southwestern Michigan. Shoreline has no material
foreign assets or income.
The principal source of revenue for Shoreline is interest and fees on
loans. On a consolidated basis, interest and fees on loans accounted for
74.5% of Shoreline's total revenues in 1996, 73.7% of Shoreline's total
revenues in 1995, and 73.2% in 1994. Interest on investment securities
accounted for 16.6% of Shoreline's total revenues in 1996, 17.4% in 1995,
and 16.2% in 1994. See the Consolidated Financial Statements incorporated
by reference in Item 8 of this report for more information about the
revenues, profits and assets of Shoreline.
Shoreline and Shoreline Bank employed approximately 325 persons at
December 31, 1996.
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 (interest rates paid on
deposits, interest rates charged on borrowings and fees charged for
services) and the 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
Consumer and Industry Services and the Federal Deposit Insurance
Corporation ("FDIC"). Shoreline 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
Shoreline Bank are insured by the FDIC to the extent provided by law. Prior
approval of the Board of Governors of the Federal Reserve System ("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.
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 from Shoreline Bank is subject to various state and federal
regulatory limitations.
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Under Federal Reserve 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 establish
semiannual assessment rates on Bank Insurance Fund ("BIF") member banks to
maintain the BIF at the designated reserve ratio required by law.
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 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 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.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") substantially changed the geographic
constraints applicable to the banking industry. Effective September 29,
1995, the Riegle-Neal Act allows bank holding companies to acquire banks
located in any state in the United States without regard to geographic
restrictions or reciprocity requirements imposed by state law. Effective
June 1, 1997 (or earlier if expressly authorized by applicable state law),
the Riegle-Neal Act also allows banks to establish interstate branch
networks through acquisitions of other banks. The establishment of DE NOVO
interstate branches or the acquisition of individual branches of a bank in
another state (rather than the acquisition of an out-of-state bank in its
entirety) is allowed by the Riegle-Neal Act only if specifically authorized
by state law. The legislation allows individual states to "opt-out" of
certain provisions of the Riegle-Neal Act by enacting appropriate
legislation prior to June 1, 1997.
Michigan exercised its right to opt-in early to the Riegle-Neal Act,
and now permits both U.S. and non-U.S. banks to establish branch offices in
Michigan. Effective November 29, 1995, the Michigan Banking Code permits,
in appropriate circumstances and with the approval of the Commissioner of
the Financial Institutions Bureau, (1) acquisition of Michigan banks by
FDIC-insured banks, savings banks or savings and loan associations located
in other states, (2) sale by a Michigan bank of branches to an FDIC-insured
bank, savings bank or savings and loan association located in a state in
which a Michigan bank could purchase branches of the purchasing entity,
(3) consolidation of Michigan banks and FDIC-insured banks, savings banks
or savings and loan associations located in other states having laws
permitting such consolidation, (4) establishment of branches in Michigan by
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FDIC-insured banks located in other states, the District of Columbia or
U.S. territories or protectorates having laws permitting a Michigan bank to
establish a branch in such jurisdiction, and (5) establishment by foreign
banks of branches located in Michigan.
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 may be 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.
Additional statistical information describing the business of
Shoreline appears on the following pages and in Management's Discussion and
Analysis of Financial Condition and Results of Operations incorporated by
reference in Item 7 of this report and the Selected Financial Data
incorporated by reference in Item 6 of this report.
AVERAGE CONSOLIDATED BALANCE SHEETS/INTEREST RATES
The following table presents interest income from average earning assets,
expressed in dollars and yields on a fully tax equivalent basis at 34%, and
interest expense on average interest-bearing liabilities expressed in
dollars and rates.
<TABLE>
<CAPTION>
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YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
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
Interest-earnings deposits $ 9,214 $ 480 5.21% $ 83 $ 3 3.61%
Federal funds sold 8,066 424 5.26% 15,187 889 5.85% $ 13,766 $ 571 4.15%
Securities:
Taxable 105,229 7,358 6.99% 99,814 6,774 6.79% 91,497 5,038 5.51%
Tax-exempt <F2> 37,691 3,577 9.49% 43,924 4,040 9.20% 42,808 4,079 9.53%
Loans - net of unearned
income <F1><F2> 490,200 43,835 8.94% 447,329 40,657 9.09% 428,478 35,717 8.34%
-------- ------- --------- ------- --------- -------
Total interest-earning assets 650,400 55,674 8.56% 606,337 52,363 8.64% 576,549 45,405 7.88%
------- ------- -------
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NON-EARNING ASSETS
Cash and due from banks 28,606 27,337 28,864
Other assets 21,800 20,404 20,786
Allowance for loan losses (6,764) (6,309) (5,769)
-------- --------- ---------
Total assets $694,042 $ 647,769 $ 620,430
======== ========= =========
INTEREST-BEARING LIABILITIES
Demand deposits $ 86,450 2,275 2.63% $ 70,587 1,745 2.47% $ 59,816 877 1.47%
Savings deposits 169,959 5,729 3.37% 183,480 7,113 3.88% 183,885 5,549 3.02%
Time deposits 279,235 16,234 5.81% 254,338 14,594 5.74% 248,522 11,950 4.81%
Short-term borrowed funds 5,327 216 4.05% 3,468 143 4.12% 2,702 87 3.22%
FHLB advances 13,800 731 5.30% 5,000 252 5.04% 5,000 252 5.04%
-------- ------- --------- ------- --------- -------
Total interest-bearing
liabilities 554,771 25,185 4.54% 516,873 23,847 4.61% 499,925 18,715 3.74%
------- ------- -------
NON-INTEREST-BEARING LIABILITIES
Demand deposits 68,621 66,181 62,591
Other Liabilities 3,988 4,453 2,628
Shareholders' equity 66,662 60,262 55,286
-------- --------- ---------
Total liabilities and
shareholders' equity $694,042 $ 647,769 $ 620,430
======== ========= =========
NET INTEREST INCOME $30,489 $28,516 $26,690
======= ======= =======
NET INTEREST INCOME AS A PERCENTAGE
OF INTEREST-EARNING ASSETS 4.69% 4.70% 4.63%
==== ==== ====
<FN>
<F1> Nonaccrual loans are included in the daily average loans outstanding for purposes of this calculation. See Note 1 to the
Consolidated Financial Statements regarding recognition of loan fee income. Included in interest on loans are fees in the
amount of $667,000, $471,000 and $506,000 in 1996, 1995 and 1994, respectively.
<F2> Yields are computed on a fully tax-equivalent basis using a federal income tax rate of 34 percent in all years presented.
</FN>
</TABLE>
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<PAGE>
LOANS
The following table summarizes year-end totals for the major categories of
Shoreline's total loan portfolio for the last five years.
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
(IN THOUSANDS) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
- -------------------------- ------------------ ------------------ ------------------ ------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 211,953 42.34% $ 191,437 41.08% $ 179,850 41.20% $ 166,745 40.31% $ 161,787 45.61%
Real estate mortgage 214,201 42.79% 194,784 41.80% 175,912 40.30% 156,509 37.83% 114,453 32.26%
Real estate construction 10,243 2.05% 18,704 4.01% 26,679 6.11% 27,337 6.61% 25,618 7.22%
Consumer 64,194 12.82% 61,070 13.11% 54,088 12.39% 63,102 15.25% 52,882 14.91%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total loans $ 500,591 100.00% $ 465,995 100.00% $ 436,529 100.00% $ 413,693 100.00% $ 354,740 100.00%
========= ====== ========= ====== ========= ====== ========= ====== ========= ======
</TABLE>
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<PAGE>
LOAN MATURITY
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, 1996 DECEMBER 31, 1995
- --------------------------------------------------------------------------------------------------------------------------
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 $ 30,723 $ 139,352 $ 41,878 $ 35,243 $ 114,181 $ 42,013
Real estate construction 6,933 1,195 2,115 12,259 3,652 2,793
-------- --------- -------- -------- --------- --------
Total $ 37,656 $ 140,547 $ 43,993 $ 47,502 $ 117,833 $ 44,806
======== ========= ======== ======== ========= ========
Loans due after one year:
with fixed rates $ 84,803 $ 12,818 $ 51,743 $ 10,933
========= ======== ========= ========
with floating rates $ 55,744 $ 31,175 $ 66,090 $ 33,873
========= ======== ========= ========
</TABLE>
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<PAGE>
ALLOWANCE ALLOCATION
The following table summarizes management's allocation of the allowance for
loan losses over the past five years. The amounts indicated for each loan
type include amounts allocated for specific loans as well as general
allocations.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
- ----------------------------------------------------------------------------------------------------------------------------------
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 TOTAL TO TOTAL TO TOTAL IN TOTAL IN 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 $ 2,491 42.34% $ 2,361 41.08% $ 2,044 41.20% $ 2,112 40.31% $ 2,003 45.61%
Real estate mortgage 743 42.79% 698 41.80% 559 40.30% 423 37.83% 317 32.26%
Real estate construction 115 2.05% 107 4.01% 100 6.11% 106 6.61% 75 7.22%
Consumer 1,166 12.82% 1,111 13.11% 995 12.39% 1,103 15.25% 845 14.91%
Unallocated 2,380 2,323 2,254 1,842 1,326
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
$ 6,895 100.00% $ 6,600 100.00% $ 5,952 100.00% $ 5,586 100.00% $ 4,566 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======= ======
</TABLE>
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<PAGE>
ALLOWANCE ACTIVITY
The following table summarizes loan and allowance information for each
period shown.
<TABLE>
<CAPTION>
DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans outstanding, end
of period $500,591 $465,995 $436,529 $413,693 $354,740
======== ======== ======== ======== ========
Daily average of loans
outstanding for the
period $490,200 $447,329 $428,478 $385,138 $351,168
======== ======== ======== ======== ========
Allowance for loan losses,
balance at beginning
of period $ 6,600 $ 5,952 $ 5,586 $ 4,566 $ 3,834
-------- -------- -------- -------- --------
Charge-offs:
Commercial, financial
and agricultural 240 151 391 186 437
Real estate mortgage 35 70 105 84 2
Real estate construction 0 0 0 0 0
Consumer 318 271 517 332 392
-------- -------- -------- -------- --------
Total charge-offs 593 492 1,013 602 831
-------- -------- -------- -------- --------
Recoveries:
Commercial, financial
and agricultural 97 200 367 107 55
Real estate mortgage 57 14 0 1 0
Real estate construction 0 0 0 0 0
Consumer 134 176 262 134 128
-------- -------- -------- -------- --------
Total recoveries 288 390 629 242 183
-------- -------- -------- -------- --------
Net charge-offs 305 102 384 360 648
-------- -------- -------- -------- --------
Provision charged to
income 600 750 750 1,380 1,380
-------- -------- -------- -------- --------
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Balance at end of period $ 6,895 $ 6,600 $ 5,952 $ 5,586 $ 4,566
======== ======== ======== ======== ========
Key Ratios:
Net charge-offs to
average loans 0.06% 0.02% 0.09% 0.09% 0.18%
Recoveries to total
charge-offs 48.57% 79.27% 62.09% 40.20% 22.02%
Allowance to total loans
at end of period 1.38% 1.42% 1.36% 1.35% 1.29%
Allowance to total non-
performing loans at end
of period 423.52% 458.65% 358.55% 126.78% 98.13%
Provision to average loans 0.12% 0.17% 0.17% 0.36% 0.39%
</TABLE>
The provision for loan losses is the amount added to the allowance for loan
losses to absorb 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.
MATURITY ANALYSIS
The following tables set forth the maturities and weighted average interest
rates of Shoreline's securities as of December 31, 1996.
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<TABLE>
<CAPTION>
AVAILABLE FOR SALE
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 $ 6,053 6.69% $12,191 6.79% $19,270 7.37% $ 0 N/A
States and political sub-
divisions <F1> 3,628 10.66% 9,074 10.41% 9,775 9.63% 7,417 8.61%
Mortgage-backed
securities: <F2>
U.S. Government
agencies 3,082 7.45% 11,742 7.42% 3,069 7.44% 924 6.04%
Collateralized mortgage
obligations 1,222 9.17% 68 7.89% 0 N/A 0 N/A
Other securities 0 N/A 0 N/A 0 N/A 2,739 7.81%
------- ------- ------- -------
Total $13,985 8.11% $33,075 8.01% $32,114 8.07% $11,080 8.19%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY
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 $ 4,000 7.48% $11,000 7.56% $ 0 N/A
States and political sub-
divisions <F1> 1,845 12.04% 1,343 11.40% 1,046 9.57% 3,430 9.74%
Mortgage-backed
securities: <F2>
U.S. Government
agencies 3,468 7.58% 14,705 7.37% 3,956 7.38% 0 N/A
Collateralized mortgage
obligations 1,037 7.44% 751 7.63% 0 N/A 0 N/A
Other securities 1,002 7.65% 0 N/A 0 N/A 0 N/A
------- ------- ------- -------
Total $ 7,352 8.69% $20,799 7.66% $16,002 7.65% $ 3,430 9.74%
======= ======= ======= =======
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<FN>
<F1> 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.
<F2> Maturity based upon estimated weighted average life.
</FN>
</TABLE>
TIME DEPOSITS $100,000 OR MORE
The time remaining until maturity of time certificates of deposit $100,000
or more at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------
TIME UNTIL MATURITY (IN THOUSANDS)
- ----------------------------------------------
<S> <C>
Three months or less $34,553
Over three through six months 14,180
Over six through twelve months 11,964
Over twelve months 17,055
-------
Total $77,752
=======
</TABLE>
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<PAGE>
ITEM 2. PROPERTIES
Shoreline maintains its offices and conducts its operations from the
principal banking office of Shoreline Bank in Benton Harbor, Michigan.
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 all but one of its 25 branch offices.
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
Not Applicable.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information under the caption "Common Stock Information" on page 8
and under the subheading "Cash Dividends" on page 18 of Shoreline's annual
report to shareholders for the year ended December 31, 1996, is here
incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Financial Highlights" in
Shoreline's annual report to shareholders for the year ended December 31,
1996, 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 9 through 18 of Shoreline's annual report to
shareholders for the year ended December 31, 1996, is here incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, notes and report of the independent auditors
on pages 19 through 37 of Shoreline's annual report to shareholders for the
year ended December 31, 1996, are here incorporated by reference.
The information under the caption "Quarterly Financial Data" on 8 of
Shoreline's annual report to shareholders for the year ended December 31,
1996, is here incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE>
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) Beneficial Ownership Reporting Compliance" in
the Registrant's definitive Proxy Statement for its May 1, 1997, 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 1, 1997, 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 1, 1997, 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 1, 1997, annual meeting of shareholders is here incorporated by
reference.
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<PAGE>
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, 1996 and 1995
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors dated February 14, 1997
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 Quarterly Report on Form
10-Q for the period ended June 30, 1994. Here incorporated
by reference.
3(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.
-17-
<PAGE>
NUMBER EXHIBIT
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.
10(b) Employment Agreements.<F*> Previously filed as Exhibit 10(b)
to the Registrant's 1995 Form 10-K Annual Report filed March
28, 1996. Here incorporated by reference.
10(c) 1989 Stock Option Plan.<F*> Previously filed as Exhibit 28
to the Registrant's Form S-8 Registration Statement filed
May 31, 1989. Here incorporated by reference.
10(d) Deferred Compensation Agreements.<F*> Previously filed as
Exhibit 10(e) to the Registrant's 1991 Form 10-K Annual
Report filed March 27, 1992. Here incorporated by
reference.
10(e) Bonus Program-1996.<F*>
10(f) Stock Incentive Plan of 1996.<F*> Previously filed as an
appendix to the Registrant's definitive proxy statement for
its May 1, 1996, annual meeting of shareholders. Here
incorporated by reference.
10(g) Directors' Deferred Compensation Plan.<F*>
11 Statement Regarding Computation of Earnings per Common
Share. The computation of earnings per common share is
fully described in Note 1 to the Consolidated Financial
Statements incorporated by reference in Item 8 of this
report.
13 Annual Report to Shareholders of Shoreline Financial
Corporation for the year ended December 31, 1996.
21 List of Subsidiaries. Previously filed as Exhibit 21 to the
Registrant's 1994 Form 10-K Annual Report filed March 29,
1995. Here incorporated by reference.
23 Consent of Independent Auditors.
24 Powers of Attorney.
27 Financial Data Schedule.
_________________________________
-18-
<PAGE>
<F*> 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.
(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.
-19-
<PAGE>
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 26, 1997 By /S/ DAN L. SMITH
Dan L. Smith
Chairman, President and
Chief Executive Officer
-20-
<PAGE>
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 26, 1997 /S/ LOUIS A. DESENBERG*
Louis A. Desenberg
Director
March 26, 1997 /S/ MERLIN J. HANSON*
Merlin J. Hanson
Director
March 26, 1997 /S/ THOMAS T. HUFF*
Thomas T. Huff
Director
March __, 1997 ___________________________
Ronald F. Kinney
Director
March 26, 1997 /S/ JAMES E. LEBLANC*
James E. LeBlanc
Director
March 26, 1997 /S/ L. RICHARD MARZKE*
L. Richard Marzke
Director
March 26, 1997 /S/ JAMES F. MURPHY*
James F. Murphy
Director
March 26, 1997 /S/ DAN L. SMITH
Dan L. Smith
Chairman, President, Chief
Executive
Officer and Director (Principal
Executive Officer)
-21-
<PAGE>
March __, 1997 ___________________________
Robert L. Starks
Director
March 26, 1997 /S/ JEFFERY H. TOBIAN*
Jeffery H. Tobian
Director
March 26, 1997 /S/ HARRY C. VORYS*
Harry C. Vorys
Director
March __, 1997 ___________________________
Ronald L. Zile
Director
March 26, 1997 /S/ WAYNE R. KOEBEL
Wayne R. Koebel
Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer (Principal Financial
and Accounting Officer)
*By /S/ DAN L. SMITH
Dan L. Smith
Attorney-in-Fact for
the indicated persons
-22-
<PAGE>
EXHIBIT INDEX
NUMBER EXHIBIT
3(a) Restated Articles of Incorporation. Previously filed as
Exhibit 3(a) to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 1994. Here incorporated
by reference.
3(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.
10(b) Employment Agreements.<F*> Previously filed as Exhibit 10(b)
to the Registrant's 1995 Form 10-K Annual Report filed March
28, 1996. Here incorporated by reference.
10(c) 1989 Stock Option Plan.<F*> Previously filed as Exhibit 28
to the Registrant's Form S-8 Registration Statement filed
May 31, 1989. Here incorporated by reference.
10(d) Deferred Compensation Agreements.<F*> Previously filed as
Exhibit 10(e) to the Registrant's 1991 Form 10-K Annual
Report filed March 27, 1992. Here incorporated by
reference.
10(e) Bonus Program-1996.<F*>
10(f) Stock Incentive Plan of 1996.<F*> Previously filed as an
appendix to the Registrant's definitive proxy statement for
its May 1, 1996, annual meeting of shareholders. Here
incorporated by reference.
10(g) Directors' Deferred Compensation Plan.<F*>
<PAGE>
11 Statement Regarding Computation of Earnings per Common
Share. The computation of earnings per common share is
fully described in Note 1 to the Consolidated Financial
Statements incorporated by reference in Item 8 of this
report.
13 Annual Report to Shareholders of Shoreline Financial
Corporation for the year ended December 31, 1996.
21 List of Subsidiaries. Previously filed as Exhibit 21 to the
Registrant's 1994 Form 10-K Annual Report filed March 29,
1995. Here incorporated by reference.
23 Consent of Independent Auditors.
24 Powers of Attorney.
27 Financial Data Schedule.
________________________________
<F*> These agreements are management contracts or compensation plans
or arrangements required to be filed as exhibits to this Form 10-K.
<PAGE>
EXHIBIT 10(e)
SHORELINE FINANCIAL CORPORATION BONUS PROGRAM
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.
PARTICIPATION GUIDELINES:
1. Shoreline's Organization, Compensation, and Stock Option Committee
will approve the list of plan participants each November, for the
following plan year.
2. To receive a bonus, the participant must be employed on December 31st
of the year for which the bonus is accrued.
3. Bonus payments are based on the participant's year-end salary level,
which may differ from annual compensation if any salary adjustments
have been made during the year.
<PAGE>
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>
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 7,198 +10.5% ('94 vs '91)
1995 8,607 +13.2% ('95 vs '92)
</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>
-2-
<PAGE>
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
</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>
-3-
<PAGE>
EXHIBIT 10(G)
SHORELINE FINANCIAL CORPORATION
DIRECTORS' DEFERRED COMPENSATION PLAN
SECTION 1
ESTABLISHMENT OF PLAN
1.1 ESTABLISHMENT OF PLAN. Shoreline Financial Corporation
("Shoreline") hereby establishes the Shoreline Financial Corporation
Directors' Deferred Compensation Plan (the "Plan"), a deferred compensation
plan for the nonemployee directors of Shoreline and its subsidiaries.
1.2 EFFECTIVE DATE. The Plan shall become effective July 1, 1996.
1.3 PURPOSE. The purpose of the Plan is to provide Eligible
Directors with the means of deferring compensation to be paid by Shoreline
or its subsidiaries to a later date and to provide an incentive for the
Eligible Directors to remain directors with Shoreline or its subsidiaries.
SECTION 2
DEFINITIONS
As used in this Plan, the following words and phrases shall have the
meanings stated below:
2.1 ACCOUNT. "Account" means the account reflected in the accounting
records maintained for each Participant under Section 5 of this Plan.
2.2 BENEFICIARY. "Beneficiary" means the individual, trust or other
entity designated by the Participant pursuant to the Plan to receive any
benefits payable under the Plan after a Participant's death. If a
designation has not been properly completed and filed with Shoreline as
required under Section 8.4 of the Plan or is ineffective for any other
reason, the Beneficiary shall be the Participant's surviving spouse.
2.3 BOARD. "Board" means the Board of Directors of Shoreline or any
of its subsidiaries.
2.4 CODE. "Code" means the Internal Revenue Code of 1986, as
amended.
<PAGE>
2.5 DIRECTOR'S FEES. "Director's Fees" shall mean all amounts
payable to a Participant for services of a Director including, without
limitation, any annual retainer fees, any amounts payable to a director for
attendance at any meeting of the Board or of a committee of the Board, or
any amount payable for service as a chairperson or vice-chairperson of the
Board or of any committee.
2.6 ELECTION AGREEMENT. "Election Agreement" shall mean each and
every election as to the form of payment of deferred Director's Fees that
is executed by an Eligible Director and delivered to Shoreline hereunder.
2.7 ELIGIBLE DIRECTOR. "Eligible Director" shall mean any present or
future Director of Shoreline or any of its subsidiaries who is not an
employee of Shoreline or any of its subsidiaries.
2.8 PARTICIPANT. "Participant" shall mean an Eligible Director who
has executed and delivered an Election Agreement to Shoreline. An Eligible
Director shall be eligible to become a Participant on the first day of the
individual's term as a Director. A Participant's status as a Participant
shall continue until the Participant ceases to be a director of Shoreline
or any of its subsidiaries for any reason.
2.9 PLAN YEAR. "Plan Year" shall be the twelve-month period
beginning each January 1.
SECTION 3
ELIGIBILITY TO PARTICIPATE
3.1 DESIGNATION AS A PARTICIPANT. An Eligible Director shall be
eligible to become a Participant on the first day of the individual's term
as a member of the Board. An Eligible Director shall be eligible to
participate only if (i) the Eligible Director is a resident of Michigan or
any other state designated by Shoreline for this purpose and (ii) the
corporation to which the Eligible Director serves as a director has adopted
this Plan. Adoption of this Plan by a Shoreline subsidiary shall be
effective as of the date approved and specified in resolutions by Shoreline
and by the adopting subsidiary. Adoption of this Plan by a Shoreline
subsidiary shall not create a separate plan.
3.2 STATUS AS A PARTICIPANT. A Participant's Status as a Participant
shall continue until the Participant (1) ceases to be an Eligible Director,
or (2) is suspended or terminated from participation in the Plan. The
Board may suspend or terminate participation in the Plan at any time with
or without a meeting.
-2-
<PAGE>
SECTION 4
ACCOUNTING
Shoreline shall maintain separate accounting records for each
Participant (each, an "Account"). Shoreline shall credit to each
Participant's Account Deferred Amounts under Section 5 under this Plan and
Earnings Credits as provided under Section 6 of this Plan. Shoreline will
provide to the Participant a written accounting, at least annually,
reflecting the balance of the Participant's Account.
SECTION 5
DEFERRED AMOUNTS
5.1 ELECTION TO DEFER. An Eligible Director may elect to defer
payment of either all or fifty percent (50%) of the Director's Fees for a
Plan Year. For each amount deferred (each, a "Deferred Amount"), Shoreline
shall credit the Participant with a corresponding dollar amount in the
Participant's Account.
5.2 ELECTION EFFECTIVENESS.
(a) EXECUTION OF ELECTION AGREEMENT. To make an effective
election under this Plan to defer Director's Fees, a Participant must
deliver to Shoreline a properly completed and executed Election
Agreement prior to the beginning of the Plan Year. The Participant
must deliver the Election Agreement to participate in the Plan for a
particular Plan Year prior to the first day of applicable Plan Year
except that the election for the first Plan Year may be made at any
time prior to the first day of the Effective Date. In no event shall
an election to defer Director's Fees become effective sooner than the
date of the Election Agreement.
(b) NEW DIRECTORS. Notwithstanding Section 5.2(a), any Director
who first becomes eligible to participate in the Plan during the
middle of a Plan Year may elect to defer Director's Fees for that Plan
Year on or before the date which is 30 days after the date of
eligibility to participate and such election shall apply only to
Director's Fees earned following the date of the election. If such
Director does not make an election during this 30 day period, the
Director may not make an election effective earlier than the beginning
of the next Plan Year.
-3-
<PAGE>
(c) EFFECTIVENESS. As of the beginning of each Plan Year, an
election to defer shall become irrevocable for that Plan Year. The
election to defer shall continue in effect for each Plan Year
following the date of election until the Participant, in writing,
revokes the election, in whole or in part, provided that the
revocation shall only apply to compensation payable on or after the
date of revocation. Upon making an election to defer compensation,
the Participant shall have no claim or right to any Deferred Amount
except according to the rights and benefits conferred under the terms
of the Plan.
5.3 TIMING OF DEFERRALS. Shoreline shall credit Deferred Amounts to
the Participant's Account on the first day of each calendar quarter
following the date on which the Director's Fees would have been payable to
the Participant if the Participant had not made the election to defer the
Director's Fees.
SECTION 6
EARNINGS CREDITS FOR AMOUNTS IN PARTICIPANTS' ACCOUNTS
6.1 EARNINGS CREDITS. Each quarter, Shoreline shall credit to each
Participant's Account a credit based on all amounts in the Participant's
Account (each amount credited shall be "Earnings Credits"). Each
Participant's Account shall be credited with Earnings Credits from the date
it is credited with any Deferred Amounts to the date all amounts are
distributed from a Participant's account.
6.2 TIMING OF EARNINGS CREDITS. As of the last day of each calendar
quarter, Shoreline shall credit to each Participant's Account an amount (an
"Earnings Credit") based on the amount in the Participant's account on the
first day of that quarter (the amount in the Participant's Account as of
the first day of each quarter shall be deemed the "Balance Amount").
6.3 AMOUNT. The Earnings Credit as of the last day of each quarter
by Shoreline shall equal the amount that would have accrued on the Balance
Amount if interest were paid on the Balance Amount at a rate equal to the
yield on the U.S. Treasury Security next maturing on or after a date ten
(10) years from the last day of the quarter, as that yield is listed in THE
WALL STREET JOURNAL on the last day of the quarter or, if the yield is not
listed in THE WALL STREET JOURNAL on that date, the next preceding date on
which such a yield is listed in THE WALL STREET JOURNAL.
-4-
<PAGE>
SECTION 7
VESTING
A Participant's right to be paid an amount equal to the total amount
credited to the Participant's Account as provided in this Plan shall not be
subject to forfeiture for any reason.
SECTION 8
PAYMENTS
8.1 EVENT OF DISTRIBUTION. If the Participant ceases to be a
Director for any reason, all amounts credited to the Participant under the
Plan shall be distributed at the time and in the manner specified below.
8.2 FORM OF PAYMENT
(a) DISTRIBUTION ELECTION. At the time of a Participant's
initial election to defer Director's Fees under this Plan, each
Participant shall elect on the Election Agreement or other form
prescribed by Shoreline one of the following forms of payment:
(i) LUMP SUM. A single lump sum payment to be paid
within thirty (30) days of the date the Participant ceases
to be a Director in an amount equal to the Balance Amount in
the Participant's Account as of the first day of the quarter
in which the Participant ceases to be a Director (a "Lump
Sum Payment"),
(ii) DEFERRED LUMP SUM. A single lump sum payment to
be paid after a time interval selected by the Participant on
the Election Agreement which shall be within six (6) years
after the date the Participant ceases to be a Director in an
amount equal to the Balance Amount as of the first day of
the quarter in which payment is made.
(iii) INSTALLMENT PAYMENT. Payment in five annual
installments ("Installments") to be made on the first,
second, third, fourth and fifth year anniversaries of the
date the Participant ceases to be a Director. The amount
paid to the Participant in each installment shall equal the
Balance Amount of the Participant's Account for the quarter
in which the payment is to be made divided by the number of
installment payments remaining to be made.
-5-
<PAGE>
(b) AUTOMATIC LUMP SUM PAYMENTS.
(i) DE MINIMIS. If the Balance Amount of the
Participant's Account in the quarter in which the
Participant ceases to be a Director does not exceed $10,000,
the Participant shall be paid a Lump Sum Payment.
(ii) FAILURE TO MAKE AN ELECTION. If the Participant
fails to make an election of a form of payment Shoreline
shall pay any amounts due under this Plan to the Participant
in a Lump Sum Payment.
(iii) PARTICIPANT BECOMES COMPETITOR. If an
Eligible Director ceases to be a director and becomes a
proprietor, officer, partner, employee or otherwise becomes
affiliated with any business that is in competition with the
Company or any of its subsidiaries Shoreline may, if
directed by the Board in its sole discretion, immediately
pay any remaining balance to the Participant in a lump sum.
(c) CHANGE IN FORM OF PAYMENT.
(i) DISTRIBUTION CHANGE. Subject to Shoreline's right
to decline to accept a Participant's election to change the
form of payments as provided in Section 8.2(c)(ii), a
Participant may elect to change the form of payment prior to
each Plan Year, but such election shall not become effective
if the Participant ceases to be a Director within thirteen
months after the date of the election. Any election to
change the form of payment subsequent to the initial
election shall change the form of payment for all Deferred
Amounts and Earnings Credits in the Participant's Account.
(ii) ACCEPTANCE OF CHANGE. Shoreline may decline to
accept a Participant's election to change the form of
payment if such election could cause the Participant to be
taxed on any payments made under this Plan prior to actual
receipt by the Participant. If Shoreline declines to accept
a Participant's election to change the form of payment, such
refusal shall only affect the Deferred Amounts and Earnings
Credits credited to the Participant's Account in the quarter
in which the Participant elected to change the form of
payment and any prior quarter. The change of election shall
still be effective for any Deferred Amounts or Earning
Credits credited to the Participant's account in quarters
subsequent to the one in which the Participant made the
change in election.
-6-
<PAGE>
8.3 MANNER OF PAYMENT. All amounts due to the Participant under the
Plan shall be paid in cash. Shoreline may make any payment by check mailed
to an address designated by the Participant.
8.4 DEATH.
(a) DESIGNATION OF BENEFICIARY. The Participant may designate
or change a Beneficiary to receive any amounts in the Participant's
Account by filing a signed designation with Shoreline on the Election
Agreement or on a form approved by Shoreline.
(b) PAYMENT TO BENEFICIARY. If the Participant dies prior to
payment of all amounts due to the Participant under this Plan,
Shoreline shall pay all remaining amounts due under the Plan to the
Participant's Beneficiary. Payments to a Beneficiary following a
Participant's death shall be in the form elected by the Participant
and shall be made or shall begin on the date specified in Section 8.2
above.
(c) PAYMENT TO ESTATE. If there is no effective designation and
the Participant does not have a surviving spouse, the remaining
benefits, if any, shall be paid to the Participant's estate. If
payment is to be made to the estate of a Participant, Shoreline shall
pay the estate in a Lump Sum Payment as of the date that is no later
than 90 days after the date of the Participant's death.
(d) GENERATION-SKIPPING TRANSFER TAX. Notwithstanding any other
provision in this Plan, Shoreline may withhold any benefits payable to
a Beneficiary as a result of the death of a Participant or any other
Beneficiary until Shoreline determines to its satisfaction in its sole
discretion whether a generation-skipping transfer tax, as defined in
Chapter 13 of the Code, or any substitute provision therefor, is
payable by Shoreline and the amount of generation-skipping transfer
tax, including interest, that is due. If such tax is payable,
Shoreline shall reduce the benefits otherwise payable hereunder by an
amount equal to the generation-skipping transfer tax and interest.
Shoreline shall pay any benefits withheld as soon as Shoreline makes a
final determination of the applicable generation-skipping transfer tax
and interest. Shoreline shall not pay interest on any Deferred Amount
to any Beneficiary for the period from the date of the Participant's
death to the time when the amount that is payable to a Beneficiary can
be fully determined pursuant to this Section 8.4.
-7-
<PAGE>
SECTION 9
GENERAL PROVISIONS
9.1 AMENDMENT; TERMINATION. Shoreline reserves the right to amend
this Plan prospectively or retroactively, or to terminate this Plan,
provided that an amendment or termination may not reduce or revoke the
amounts to be paid to Participants under this Plan that have accrued as of
the later of the date of adoption of the amendment or the effective date of
the amendment or termination. Upon termination of this Plan, Shoreline
shall administer the Accounts and pay any benefits in the Accounts of
Participants according to the provisions of this Plan.
9.2 PROHIBITION AGAINST ASSIGNMENT. No Participant nor any personal
representative, conservator, heir, legatee, beneficiary, distributee or
other person claiming through or representing a Participant or a
Participant's estate shall have the right to assign, pledge, hypothecate or
transfer the Plan or the rights of a Participant under this Plan. The
rights of a Participant under this Plan shall not be subject to execution,
attachment, levy, garnishment or other similar process. Any attempted
assignment, pledge, hypothecation or other transfer or the attempted levy
of any attachment or similar process on the rights of a Participant under
this Plan shall be null and void and without effect, and Shoreline shall
have no liability or obligation in connection therewith.
9.3 UNSECURED OBLIGATION. A Participant shall be an unsecured
general creditor of Shoreline as to the payment of any benefit under this
Plan. The right of any Participant or Beneficiary to be paid the amount
promised in this Plan shall be not greater than the right of any other
general, unsecured creditor of Shoreline.
9.4 NO TRUST OR FIDUCIARY RELATIONSHIP. Nothing contained in this
Plan shall create a trust or fiduciary relationship of any kind for the
benefit of any Participant or Beneficiary.
9.5 DISPUTES. In the event that a dispute arises regarding the
eligibility to participate in the plan or any other matter relating to plan
participation, such dispute may be resolved by the Board. Any
determination made by the Board with respect to such disputes shall be
final and binding on all parties.
In the event that a dispute arises regarding the amount of any
benefit payment under this plan that is not related to Participant
eligibility disputes, the Board of Directors of Shoreline may appoint a
qualified independent certified public accountant, who may be Shoreline's
regular accountant to determine the amount of payment, to resolve the
dispute. Any determination made by the accountant be final and binding on
all parties.
-8-
<PAGE>
9.6 CONSTRUCTION. The singular includes the plural, and the plural
includes the singular, unless the context clearly indicates the contrary.
Capitalized terms (except those at the beginning of a sentence or part of a
heading) have the meaning specified in this Plan. If a capitalized term is
not defined in this Plan, the term shall have the general, accepted meaning
of the term.
9.7 SEVERABILITY. If a court of proper jurisdiction determines that
any provision of this Plan or any portion of a provision is void or
unenforceable, only such provision or portion shall be rendered void or
unenforceable. The remainder of this Plan will continue in full force and
effect.
9.8 BINDING EFFECT. This Plan shall be binding upon and inure to the
benefit of any successor to Shoreline, and any successor shall be deemed
substituted for Shoreline under the terms of this Plan. "Successor"
includes any person, firm, corporation or other business entity that at any
time, whether by merger, purchase, liquidation or otherwise, acquires all
or substantially all of the assets or business of Shoreline.
9.9 GOVERNING LAW. This Plan shall be interpreted, construed,
enforced and performed in accordance with applicable federal law and, to
the extent not preempted by federal law, in accordance with the laws of the
State of Michigan.
9.10 UNFUNDED PLAN. This shall be an unfunded Plan within the meaning
of ERISA. Benefits provided herein constitute only an unsecured contractual
promise to pay in accordance with the terms of this Plan by Shoreline.
-9-
<PAGE>
[SHORELINE LOGO]
SHORELINE FINANCIAL
CORPORATION
1996 ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
To Our Shareholders. . . . . . . . . . . . . . . . . . . . 1
Business of Shoreline. . . . . . . . . . . . . . . . . . . 5
Quarterly Financial Data . . . . . . . . . . . . . . . . . 8
Common Stock Information . . . . . . . . . . . . . . . . . 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . 9
Consolidated Balance Sheets. . . . . . . . . . . . . . . .19
Consolidated Statements of Income. . . . . . . . . . . . .20
Consolidated Statements of
Shareholders' Equity . . . . . . . . . . . . . . . . . . .21
Consolidated Statements of Cash Flows. . . . . . . . . . .22
Notes to Consolidated Financial Statements . . . . . . . .23
Report of Independent Auditors . . . . . . . . . . . . . .37
Management's Responsibility
for Financial Statements . . . . . . . . . . . . . . . . .38
Directors. . . . . . . . . . . . . . . . . . . . . . . . .39
Officers . . . . . . . . . . . . . . . . . . . . . . . . .40
Shoreline Locations. . . . . . . . . . . . . . . . . . . .41
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
(In thousands except financial ratios and per share data)
1996 1995 1994 1993 1992
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AT YEAR END:
Total assets $ 716,095 $ 671,173 $ 633,854 $ 620,620 $ 533,004
Net loans 493,696 459,395 430,577 408,107 350,174
Total deposits 616,478 592,300 566,096 557,409 480,458
FHLB advances 18,000 5,000 5,000 5,000 0
Shareholders' equity 69,418 64,360 56,208 52,607 48,194
Tier I risk-based capital 15.10% 14.56% 13.62% 12.90% 14.46%
FOR THE YEAR:
Net interest income 29,083 27,126 25,263 23,066 22,130
Provision for loan losses (600) (750) (750) (1,380) (1,380)
Other income 4,347 4,082 4,686 4,754 3,968
Other expense (19,433) (18,720) (19,721) (17,987) (17,496)
--------- ---------- ---------- ----------- ----------
Income before income taxes 13,397 11,738 9,478 8,453 7,222
Income tax expense (3,792) (3,131) (2,280) (1,915) (1,290)
--------- ---------- ---------- ----------- ---------
Net income $ 9,605 $ 8,607 $ 7,198 $ 6,538 $ 5,932
========= ========== ========== =========== =========
FINANCIAL RATIOS:
Return on average shareholders' equity 14.37% 14.28% 13.02% 12.85% 12.77%
Return on average assets 1.38% 1.33% 1.16% 1.15% 1.13%
Average equity capital to average assets 9.60% 9.30% 8.91% 8.94% 8.87%
Dividend payout ratio 45.47% 43.39% 44.19% 41.72% 40.83%
PER SHARE DATA:
Earnings per share $ 1.74 $ 1.56 $ 1.31 $ 1.21 $ 1.10
Cash dividends declared per share .79 .68 .58 .50 .45
Book value per share (year end) 12.50 11.68 10.21 9.64 8.91
</TABLE>
See Notes to the Consolidated Financial Statements. All per share data
adjusted to reflect stock splits and stock dividends.
<PAGE>
[DAN L. SMITH PHOTO]
TO OUR SHAREHOLDERS
By any standards one might choose, 1996 was a banner year for
Shoreline Financial Corporation. Net income was $9,605,429 or $1.74
per common share. This was an 11.6% increase over 1995 net income of
$8,607,456 ($1.56 per share). Moreover, our 1996 earnings established
a new record high for the sixth consecutive year.
NOT ONLY DID INCOME REACH RECORD LEVELS, BUT TOTAL ASSETS, TOTAL
LOANS, TOTAL DEPOSITS AND SHAREHOLDERS' EQUITY ALSO REACHED NEW HIGHS.
At the end of the year, total assets were $716,094,819 - 6.7% more
than they had been one year earlier. Total loans were $500,591,353,
up 7.4% from the previous 12 months and total deposits were
$616,477,525, representing a year-to-year growth of 4.1%. For the
year, the return on average assets was 1.38% and the return on average
equity was 14.37%. These returns were 1.33% and 14.28%, respectively,
for 1995.
Shareholders' equity was $69,418,202 on December 31, 1996 - 7.9%
more than it had been on the same date in 1995. Note 14 to the
Financial Statements shows how favorably the company's
capital-to-asset ratios compare to those recommended by banking
regulators.
We believe our shareholders received appropriate benefits from
this success. The combination of an increase in the quarterly cash
dividend to $.20 per share and the 5% stock dividend distributed in
May resulted in a 16% dividend increase during 1996. Moreover, the
market price of Shoreline Financial common stock, adjusted for the
stock dividend, increased 30.7% during the year. As a consequence,
the total annual return to our shareholders was 35.1%, a figure that
compares quite favorably to the total return on other investments in
the financial services industry. At the end of 1996, our common stock
was trading at 13.5 times trailing 12 months earnings per share and
188% of book value.
Our directors and senior officers are pleased to report on their
performance in 1996 and encourage you to review the financial
statements in this Annual Report carefully. IN PARTICULAR, WE INVITE
YOUR ATTENTION TO OUR IMPROVED NET INTEREST INCOME, THE QUALITY OF OUR
LOAN PORTFOLIO (AS INDICATED BY THE LOW LEVEL OF NET CHARGE-OFFS AS A
PERCENT OF TOTAL LOANS AND THE COVERAGE THAT THE ALLOWANCE FOR LOAN
LOSSES PROVIDES FOR NON-PERFORMING LOANS) AND THE MODEST INCREASE IN
OVERHEAD EXPENSES.
<PAGE>
While these results are very satisfying, they also represent a
standard that we must strive to meet and exceed in the years ahead.
To do that, we must know where and what we are, where we want to go as
an organization and how best to get there.
WE ARE WHAT IS NOW MOST FREQUENTLY DESCRIBED AS A "SUPER
COMMUNITY BANK." As consolidation among both the nation's largest and
smallest banks continues unabated, we believe that we occupy an
important middle ground between the two extremes. Super community
banks specialize in serving smaller markets that do not offer the
volume potential that makes them especially attractive to the largest
regional banks. One of the country's largest banking companies, for
instance, recently announced that it would sell or close all of its
offices in markets with populations of less than 100,000 because its
approach to doing business does not lend itself to profitable
operations in these communities.
A super community bank, however, can do very well in these
smaller cities and towns because it costs us considerably less to do
business there. WE DO NOT REQUIRE MULTIPLE LAYERS OF MIDDLE
MANAGEMENT AND CORRESPONDINGLY SUCH A "FLAT" ORGANIZATION OFFERS
SIGNIFICANT COST SAVINGS. Equally important is the fact that this
type of organization keeps our decision makers close to our customers.
In addition, banking companies like ours rely on proven technology.
We do not need to be nor can we afford to be on the cutting edge of
technological change. Instead, we wait for new developments to be
proven in the largest metropolitan cities. Then, we adopt those with
demonstrated customer appeal by acquiring the necessary support
systems from a vendor on a cost-efficient basis. (This is the
approach we used, for example, in offering our ONE CHECK card and the
new EASY PAY bill-paying service.)
In the first years of the next century, we expect the U.S.
banking industry to begin looking like a barbell. At one end, there
will be a very few multi-state giants and large money center
institutions. Most of these organizations will have total assets of
considerably more than $100 billion. At the other end will be several
thousand independent community banks operating in small towns and
so-called niche banks specializing in service to narrowly defined
market segments in the largest urban areas. Very few of them will
have more than $500 million in assets and most will have less than
$250 million. Along the bar between these two extremes will be a few
hundred super community banks with total assets from just under $1
billion to around $5 billion. WITH THE NATURAL GROWTH OUR COMPANY IS
EXPERIENCING, WITH CAREFULLY-PLANNED EXPANSION INTO ADDITIONAL MARKETS
SUCH AS NILES AND KALAMAZOO, AND WITH SELECTED ACQUISITIONS SUCH AS
OUR PENDING TRANSACTION WITH SJS BANCORP, INC., WE BELIEVE SHORELINE
FINANCIAL CLEARLY FALLS WITHIN THE SUPER COMMUNITY BANK CATEGORY.
2
<PAGE>
From time to time, some independent community banks will affiliate
with super community banks and a handful will merge with each other to
form additional super community banks. Occasionally, niche banks in major
cities will sell out to the largest banking companies, but others will
likely be chartered to take their place. We also expect that the largest
banks will shed some of their operations in smaller communities. For the
most part, we think that they will sell them to super community banks like
ours. Overall, though, we believe that this barbell structure will be
relatively stable as far as we can see into the future.
Given what we see as our logical position within the banking industry
of the 21st Century, our challenge is to structure our operations so that
we can provide our owners with an attractive return on their investment in
our company. IN THE YEARS AHEAD, WE BELIEVE THAT COMPANIES LIKE SHORELINE
FINANCIAL WILL BE JUDGED, PRIMARILY, BY THE RETURNS THEY EARN ON EQUITY. We
are already taking steps to maximize our return on equity and we are
contemplating other opportunities that could arise as banking laws and
regulations are changed.
One key strategy we are adopting is to leverage our capital to the
maximum extent consistent with maintaining our status as a well-capitalized
institution. The purchase of SJS Bancorp for cash instead of merging with it
in an exchange of stock is a good example of this approach. We also expect to
have other opportunities to expand through cash purchases in the future as the
largest banks shift their resources to the largest urban areas.
A second key strategy is to expand into new lines of business whenever
changes in laws and regulations permit it. We are particularly interested in
activities that produce fee income without major capital investments. During
the past year, we made a modest investment in a title insurance sales opera-
tion and we are looking for similar opportunities. We have also entered into
agreements with Security First Group to offer our customers annuities and life
insurance products and with Corelink Financial, Inc., to offer them mutual
funds and other securities. During the coming years, we expect these
activities, and others like them, to become increasingly important contributors
to our net income.
Our final key strategy is to focus our attention on the three groups
which will be most important to our future success and prosperity: our
customers, our employees and our owners.
CUSTOMER SATISFACTION IS, AND MUST REMAIN, OUR HIGHEST PRIORITY.
Our customers are entitled to first rate service at a fair price whenever
they favor us with their business. We will never be the lowest cost
provider of financial services but we can be competitive. As mentioned above,
our organizational structure keeps our top decision makers close to our
customers. This means that they have a good
3
<PAGE>
understanding of our customers' changing attitudes and opinions without the
filter of extensive research studies. A combination of competitive prices
and a clear understanding of our customers' expectations will allow us to
offer the best value even when our rates are neither the highest nor the
lowest.
OUR EMPLOYEES ARE THE KEY FACTOR IN SATISFYING OUR CUSTOMERS, DAY
IN AND DAY OUT. We will not be successful unless our officers and staff
members constantly strive to provide our customers with a level of service
that regularly exceeds their reasonable expectations. Consequently, we
must provide our employees with satisfying jobs, competitive compensation
and opportunities for advancement. We do not believe that we can expect our
employees to do everything that we expect of them unless we also do what they
have a right to expect of us, and this is the principle that guides our human
resources policies and practices.
Finally, we must ensure that our owners receive a fair return on their
investment in our company. We intend to pay them a generous cash dividend
each year while striving to achieve a level of performance that will increase
intrinsic values and allow our stock to outperform the market. In the final
analysis, our organization will be judged on the basis of how well we serve
the interests of our owners. But we are convinced that advancing the
interests of our owners requires us to do many things better than most and
everything at least as well as our peers.
Before closing this letter, I would like to acknowledge the contribu-
tions of our corporate and bank directors, the efforts of our officers and
staff and the support and cooperation of you, our shareholders. BANKING
IS, FIRST AND FOREMOST, A PERSONAL SERVICES BUSINESS. That means that
people make the difference between mediocrity and superiority. SHORELINE
FINANCIAL CORPORATION IS FORTUNATE THAT SO MANY GOOD PEOPLE HAVE A STAKE IN
OUR ORGANIZATION.
I look forward to seeing you, hearing your comments and answering
your questions at our Annual Meeting. It will be held at 3:00 p.m. on
Thursday, May 1, 1997 at Lake Michigan College.
Sincerely, Shoreline Financial Corporation
/s/ Dan L. Smith
Dan L. Smith
Chairman of the Board
President and CEO
<TABLE>
SHORELINE MANAGEMENT COMMITTEE
<CAPTION>
<S> <C> <C> <C> <C>
DAN L. SMITH WAYNE R. KOEBEL ROBERT K. BURCH RICHARD D. BAILEY II JAMES R. MILROY
Chairman of Executive Executive Senior Senior
the Board, Vice President, Vice President, Vice President, Vice President,
President and CEO Chief Financial Officer Retail Banking Corporate Banking Controller and Cashier
</TABLE>
4
<PAGE>
BUSINESS OF SHORELINE
Shoreline Financial Corporation ("Shoreline" or the "Corporation") is
a bank holding company. Shoreline's business is concentrated exclusively in
the commercial banking industry segment. Shoreline's subsidiary, Shoreline
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
On November 7, 1996, Shoreline announced a signed plan of merger
under which SJS Bancorp, Inc. would merge with and into Shoreline. SJS
Bancorp, Inc. is a holding company with assets of approximately $150 million
and is the parent company of SJS Federal Savings Bank, which provides banking
services through its main office in St. Joseph, Michigan and branches in
South Haven and Stevensville, Michigan. Completion of the transaction is
subject to regulatory approval and other customary conditions, and is
anticipated to be consummated during the second quarter of 1997.
The business of Shoreline 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.
Shoreline's principal markets for financial services are the
communities in which Shoreline Bank is located, and the areas immediately
surrounding these communities. Shoreline serves these markets through 27
offices located in southwestern Michigan. Shoreline has no material
foreign assets or income.
The principal source of revenue for Shoreline is interest and fees on
loans. On a consolidated basis, interest and fees on loans accounted for
74.5% of Shoreline's total revenues in 1996, 73.7% in 1995, and 73.2% in
1994. Interest on investment securities accounted for 16.6% of Shoreline's
total revenues in 1996, 17.4% in 1995, and 16.2% in 1994.
[SHAREHOLDERS' EQUITY GROWTH BAR GRAPH]
[ASSET GROWTH BAR GRAPH]
5
<PAGE>
STRENGTHENING FOUNDATIONS. EXPANDING RELATIONSHIPS
It started in 1994 with a mission: to become one of southwest
Michigan's most important financial resources by forging two
established banks into one dedicated leader. In three short years,
Shoreline has established a solid leadership position in the markets
we serve. We know it's more than the size of the bank that makes it
strong; it's the size of the bank's ideas. It's the depth of its
roots. It's the synergy of its relationships.
[EARNINGS PER SHARE GROWTH BAR GRAPH]
SOUND, SENSIBLE INNOVATION...
By incorporating demonstrated, time-tested technology, we're
empowered to offer advanced services and proven innovations that are
competitive with any bank, of any size, anywhere in southwest
Michigan. For example:
- - Shoreline installed the first ever fully-automated loan machines
operating in the state of Michigan.
- - We have introduced the One Check (debit) card which looks like a
credit card, but is used in place of checks or cash.
- - In February 1996, with a team of on-hand investment specialists, we
began offering a variety of investment options, including annuities
and mutual funds to our customers.
- - Easy Pay, introduced in the fall of 1996, allows customers to pay
bills from their home, office or any remote location through either
a personal computer or a touch tone phone.
...LEVERAGING LOCAL ADVANTAGES...
Even though technology has helped level the playing field, in
southwest Michigan, we enjoy a definite home court advantage. Day in
and day out you'll hear us saying to our customers "Have you
considered this?" or "I know someone who can help you with that." It's
the advantage we gain from living and doing business here.
That's because to some banks, customers are a statistic. To us,
they're our neighbors. That means we're better at anticipating their
needs, more adept at adapting
6
<PAGE>
[DIVIDENDS PER SHARE GROWTH BAR GRAPH]
our services, better able to offer advice on important financial
decisions. That's true whether the customer is a young family
starting out or one of the leading manufacturers in the region. More
likely than not, we also know the people they do business with and can
offer insights on the "big picture" when discussing their financial
decisions.
We see it as a strength. And so do our customers.
...TO CREATE A STRONGER TOMORROW.
And now we're able to do more for more people. Our new branch in
Niles opened on January 13th, 1997. Another branch, scheduled to open
on March 31st in Portage, will establish a niche market by
concentrating on credit services. Our previously announced plans to
acquire SJS Bancorp, Inc. are moving forward on schedule.
In 1997 we're able to look forward to more growth, more
opportunity and we're able to do so because the foundation is strong,
indeed. Our earnings, service, and the efficiencies gained have met,
and often exceeded, the goals we set at the time of the merger in
1994.
If there's anything the past three years have taught us, it's
this: our strength isn't just a matter of what we have. It's also a
matter of who we are, how we think, and how well we serve. We are
people committed to raising the practice of community banking to even
higher levels. And we know we have the strength to do it.
7
QUARTERLY FINANCIAL DATA
The following is a summary of selected quarterly results of operations for
the years ended December 31, 1996 and 1995. All information has been
adjusted to reflect stock splits and stock dividends. Amounts reported for
Interest Income and Net Interest Income below vary from amounts previously
reported in the Corporation's form 10-Q Reports because of reclassification
of certain loan fees from Interest Income to Other Income.
<TABLE>
<CAPTION>
1996 (In thousands except per share data) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 13,199 $ 13,530 $ 13,734 $ 13,807
Net interest income 7,027 7,340 7,393 7,324
Provision for loan losses 150 150 150 150
Income before income taxes 3,249 3,354 3,254 3,541
Net income 2,358 2,393 2,335 2,519
Net income per common share $ .43 $ .43 $ .42 $ .46
</TABLE>
<TABLE>
<CAPTION>
1995 (In thousands except per share data) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 12,234 $ 13,041 $ 12,887 $ 12,811
Net interest income 6,665 6,932 6,829 6,700
Provision for loan losses 200 200 175 175
Income before income taxes 2,797 2,820 3,196 2,925
Net income 2,043 2,096 2,331 2,137
Net income per common share $ .37 $ .38 $ .42 $ .39
</TABLE>
COMMON STOCK INFORMATION
Shoreline common stock is traded on The NASDAQ Stock Market under the symbol
SLFC. The following table shows the high and low bid prices on a quarterly
basis as reported on that system. Prices shown are interdealer prices
without retail mark-ups, mark-downs or commissions, and may not necessarily
represent actual transactions. Market prices have been adjusted to reflect
stock splits and stock dividends. At January 31, 1997, there were approxi-
mately 1,360 shareholders of record.
<TABLE>
<CAPTION>
QUARTER ENDED 1996 1995
Market Price of Common Stock (bid price) HIGH LOW HIGH LOW
--------------------------------------------
<S> <C> <C> <C> <C>
March 31 $ 19.76 $ 17.74 $ 17.24 $ 14.06
June 30 23.00 19.28 17.24 15.42
September 30 23.00 20.75 18.57 16.43
December 31 23.50 20.00 18.57 17.86
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion provides further information about the financial
condition and results of operations of Shoreline Financial Corporation. It
should be read in conjunction with the financial statements included
elsewhere in this annual report.
1996 HIGHLIGHTS
Net income for 1996 was $9,605,429, 11.6% or $998,000 more than the
$8,607,456 earned in 1995. The primary reason for the growth in earnings
in 1996 was $2 million of increased net interest income. Growth in average
earning assets of 7.3% produced the increase in net interest income.
Earnings per share increased to $1.74 in 1996 from $1.56 in 1995. Return
on average shareholders' equity was 14.37% in 1996, an increase of 9 basis
points over the previous year. Return on average assets also improved from
1.33% in 1995 to 1.38% in 1996.
Total assets at December 31, 1996 were $716.1 million, an increase of $44.9
million (6.7%) over year-end 1995. Virtually all of the increase in
earning assets in 1996 was provided by growth in Shoreline's loan
portfolio. Asset quality remained strong in the current year.
Non-performing assets as a percent of total loans were .38% at year-end
which compares to 1995's year-end percentage of .35%. At December 31,
1996, the allowance for loan losses provided a coverage of over 4 times the
level of non-performing loans.
On November 7, 1996, Shoreline announced a signed plan of merger under
which SJS Bancorp, Inc. would merge with and into Shoreline. SJS Bancorp,
Inc. is a holding company with assets of approximately $150 million and is
the parent company of SJS Federal Savings Bank, which provides banking
services through its main office in St. Joseph, Michigan, and branches in
South Haven and Stevensville, Michigan. Completion of the transaction,
which will be accounted for as a purchase, is subject to regulatory
approval and other customary conditions, and is anticipated to be
consummated during the second quarter of 1997. Management anticipates the
transaction will not significantly impact projected operating results in
1997.
SUMMARY OF OPERATING RESULTS
The major components of Shoreline's operating results for 1996, 1995 and
1994 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) 1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Net interest income $ 29,084 $ 27,126 $ 25,264
Add: Taxable equivalent adjustment<F1> 1,405 1,390 1,426
--------- --------- ---------
Taxable equivalent net interest income 30,489 28,516 26,690
Provision for loan losses (600) (750) (750)
Other income 4,347 4,082 4,686
Other expenses (19,433) (18,720) (19,721)
Income taxes, including taxable
equivalent adjustment<F1> (5,198) (4,521) (3,707)
--------- --------- ---------
Net income $ 9,605 $ 8,607 $ 7,198
========= ========= =========
<FN>
<F1> Tax equivalent adjustment based upon federal tax rate of 34%
</FN>
</TABLE>
NET INTEREST INCOME
The largest component of Shoreline's operating income is net interest
income. Net interest income is the difference between interest and fees
earned on earning assets and the interest paid on deposits and other
borrowed funds. A number of factors influence net interest income, such as
changes in the volume and mix of interest-earning assets and
interest-bearing liabilities, market interest rates, governmental monetary
and fiscal policies, and customer preference.
9
<PAGE>
Net interest income on a fully tax equivalent basis was $30.5 million in
1996, an increase of $2 million (6.9%) over 1995. Net interest income
increased $1.8 million (6.8%) in 1995 and $1.9 million (7.7%) in 1994.
Shoreline's annual increases in net interest income result primarily from
growth in the volume of earning assets. Average earning assets increased
7.3%, 5.2% and 9.1% in 1996, 1995 and 1994, respectively.
Changes in interest income (fully tax equivalent) and interest expense are
due to changes in volume and changes in rate. The following table shows
these changes. Changes due to both volume and rate are allocated to volume
and rate in proportion to the relationship of the absolute dollar amount of
the change in each.
<TABLE>
<CAPTION>
1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE/(DECREASE) INCREASE/(DECREASE)
-----------------------------------------------------------------
DUE TO DUE TO DUE TO DUE TO
(In thousands) VOLUME RATE NET VOLUME RATE NET
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits $ 475 $ 2 $ 477 $ 3 $ 0 $ 3
Fed funds sold (382) (83) (465) 65 253 318
Securities:
Taxable 375 209 584 488 1,248 1,736
Tax-exempt (588) 125 (463) 105 (144) (39)
Loans-net of unearned income 3,843 (665) 3,178 1,617 3,323 4,940
------- ------ ------- ------- ------- -------
Change in interest income 3,723 (412) 3,311 2,278 4,680 6,958
------- ------ ------- ------- ------- -------
Interest-bearing liabilities:
Demand deposits 412 118 530 180 688 868
Savings deposits (499) (885) (1,384) (12) 1,576 1,564
Time deposits 1,445 195 1,640 285 2,359 2,644
Short-term borrowings 75 (2) 73 28 28 56
FHLB advances 466 13 479 0 0 0
------- ------ ------- ------- ------ -------
Change in interest expense 1,899 (561) 1,338 481 4,651 5,132
------- ------ ------- ------- ------ -------
Change in net interest income $ 1,824 $ 149 $ 1,973 $ 1,797 $ 29 $ 1,826
======= ====== ======= ======= ====== =======
</TABLE>
Net interest margin is net interest income (fully tax equivalent) divided
by average earning assets. Management continually monitors Shoreline's
balance sheet and employs other methods of analysis to protect net interest
income from fluctuations caused by interest rate volatility. These methods
have produced stable net interest margins of 4.69%, 4.70% and 4.63% in
1996, 1995 and 1994, respectively. Historically, Shoreline's interest
sensitive assets respond slightly more rapidly to changes in interest rates
than its interest sensitive liabilities. The upward swing in interest
rates during the last half of 1994 and first half of 1995 contributed to
the increase in 1995's net interest margin.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the amount added to the allowance for loan
losses to absorb losses that are currently anticipated. The loan loss
provision is based on historical loss experience and such other factors
which, in management's judgment, deserve current recognition in maintaining
an adequate allowance for loan losses. The provision for loan losses was
$600,000 in 1996 and $750,000 in both 1995 and 1994. Continued overall
strength in asset quality measures, along with another year of relatively
modest levels of net charge-offs, helped to support the $150,000 reduction
in the provision for losses in 1996. At year-end 1996, the ratio of the
allowance for loan losses to non-performing loans was strong at 424%
compared to year-end 1995's ratio of 459%.
OTHER INCOME
Total other income was $4.3 million in 1996, an increase of $265,000 (6.5%)
from 1995. Excluding gains on the sale of assets, total other income
increased $117,000 (2.9%). The components of other income are shown in the
following table:
10
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(In thousands) 1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Service charges on
deposit accounts $ 1,820 $ 1,787 $ 1,860
Trust income 1,500 1,388 1,346
Net gain on sale
of securities 191 (36) (165)
Gain on sale of loans (21) 56 302
Gain on sale of other
real estate owned 24 26 62
Credit card fees 37 108 575
Safe deposit
box income 150 137 151
ATM network
fee income 157 149 114
Other customer
service fees 91 96 123
Other 398 371 318
-------- -------- --------
Total other income $ 4,347 $ 4,082 $ 4,686
======== ======== ========
</TABLE>
The increase in other income in 1996 is primarily attributable to two
factors. First, Shoreline realized $191,000 of securities gains in 1996, a
$227,000 increase from 1995's securities losses of $36,000. Second, trust
income increased $112,000 (8.1%) in 1996. Growth in trust assets managed,
aided by improved market values and increased customer relationships,
helped to produce this increase. Service charge income on deposit
accounts, the largest component of other income, increased a modest $33,000
(1.8%) in 1996.
In 1995, total other income decreased $604,000 from 1994. Three primary
factors resulted in this decline. First, Shoreline sold its credit card
portfolio in December of 1994 and discontinued providing related services
to merchants during the first quarter of 1995. This change resulted in a
decline in credit card fee income of $467,000 in 1995. Second, the sale of
credit cards along with the sale of student loans produced gains of
$302,000 in 1994. Similar gains totaled only $32,000 in 1995. Third,
service charge income on deposit accounts declined $73,000 in 1995.
Emphasis on relationship business contributed to a 4% decline in this area.
The declines discussed above were offset by reduced losses from the sales
of securities in 1995 compared to 1994.
OTHER EXPENSE
Total other expense was $19.4 million in 1996, an increase of $713,000
(3.8%) from 1995. This relatively modest level of increase in overhead
expense helped Shoreline to realize improvements in both its efficiency
ratio and overhead ratio in 1996. The components of other expense and key
ratios are shown in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (In thousands) 1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
Salaries $ 8,215 $ 7,587 $ 7,734
Employee benefits 2,435 2,305 2,408
Occupancy 1,329 1,281 1,221
Equipment 1,316 1,191 1,122
Data processing 604 579 532
Professional fees 1,007 774 785
FDIC deposit insurance 438 729 1,225
Michigan Single Business Tax 517 571 403
Supplies 386 426 554
Postage 380 338 372
Telephone 345 310 249
Advertising 284 301 526
Amortization of goodwill and core deposit intangibles 266 256 264
Marketing and public relations 341 188 190
Other insurance 134 140 196
Other taxes 24 103 99
Credit card expense 0 71 427
Other 1,412 1,570 1,414
--------- -------- --------
Total other expense $ 19,433 $ 18,720 $ 19,721
========= ======== ========
KEY RATIOS:
Efficiency Ratio 56.09% 56.88% 62.03%
Other expense as a percent of average assets 2.80% 2.89% 3.18%
Salary and employee benefits as a percent of average assets 1.53% 1.53% 1.63%
</TABLE>
11
<PAGE>
Three primary factors resulted in the $713,000 increase in other expense.
First, salary and employee benefits expense increased $758,000 (7.7%) in
1996. Increased staffing levels combined with normal salary administration
adjustments contributed to the increase. As a percent of average assets,
salary and employee benefits expense remained stable at 1.53%. Second,
professional fees expense increased $233,000 (30.1%) in 1996. Use of
selected outsourcing services, combined with consulting fees expended to
review Shoreline's branch network operations, as well as to further develop
its sales training efforts, produced 1996's increase. Third, a decline in
Federal Deposit Insurance Corporation (FDIC) premium expense of $291,000 in
1996 helped to offset the previous two increases discussed. The decline in
1996 expense was incurred despite a $302,000 one-time assessment in 1996 to
recapitalize the Savings Association Insurance Fund (SAIF). For the
semiannual assessment period beginning January 1, 1997, the FDIC will
assess an insurance rate of zero for banks meeting the eligibility
requirements, and an additional assessment of $.01296 per $100 of insured
deposits. This new rate is intended to finance the interest obligations of
the Financing Corporation ("FICO") resultant from the Deposit Insurance Act
of 1966. This new assessment is not expected to have a material impact on
Shoreline's operating results for 1997.
In 1995, total other expense declined $1 million (5.1%) from 1994. This
reduction significantly improved Shoreline's efficiency ratio from 62.03%
in 1994 to 56.88% in 1995. Three significant events contributed to this
decline. First, the reduction in FDIC insurance premiums in 1995 resulted
in a $496,000 reduction in FDIC deposit insurance expense. Second, the
sale of Shoreline's credit card portfolio and related merchant services in
late 1994 and early 1995 resulted in a reduction of $356,000 of related
expense. Third, reductions in advertising, supplies and personnel expense
resulted following the 1994 merger of Shoreline's two affiliate banks.
INCOME TAX EXPENSE
Shoreline's federal income tax expense was $3.8 million in 1996, compared
to $3.1 million in 1995 and $2.3 million in 1994. The statutory federal
tax rate during these three years was 34%. However, Shoreline's effective
tax rates were 28.3%, 26.7% and 24.1% in 1996, 1995 and 1994, respectively.
The lower effective tax rates are largely the result of tax-exempt income
earned on state and municipal bonds. A decline in the relative level of
tax-exempt income to income before income taxes has resulted in higher
effective tax rates in all three years presented.
LOAN PORTFOLIO
Shoreline's management understands that credit risk is a fundamental
element of its business. Conservative lending philosophies supported by
comprehensive policies and administrative functions help Shoreline lenders
adhere to strict credit underwriting standards. Shoreline concentrates its
lending efforts primarily in the Michigan communities in which Shoreline
Bank branches are located and maintains a diversified loan portfolio of
commercial, real estate and consumer loans. Shoreline Bank has no foreign
loans. Exposures to any single borrower, as well as industry
concentrations, are continually monitored by management.
At December 31, 1996, Shoreline's total loan portfolio was $500.6 million,
an increase of $34.6 million (7.4%) over year-end 1995. Strong growth in
commercial and residential real estate mortgage loans and modest growth in
consumer loans offset the $8 million decline in real estate construction
loans. Commercial loans and residential mortgage loans produced the
majority of growth in 1996, increasing $20.5 million (10.7%) and $19.4
million (10.0%), respectively. Total loans increased $29.5 million (6.7%)
in 1995. Retail lending, primarily mortgage and consumer loans, provided
the majority of the growth. Residential real estate mortgage loans
increased $18.9 million (10.7%) from year-end 1994. Shoreline's
residential mortgage loan portfolio consistently has the strongest credit
quality when compared to other portfolios.
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------
DECEMBER 31 (In thousands) AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 211,953 42.34% $ 191,437 41.08% $ 179,850 41.20%
Residential real estate mortgage 214,201 42.79 194,784 41.80 175,912 40.30
Real estate construction 10,243 2.05 18,704 4.01 26,679 6.11
Consumer 64,194 12.82 61,070 13.11 54,088 12.39
--------- ------ -------- ------ --------- ------
Total loans $ 500,591 100.00% $465,995 100.00% $ 436,529 100.00%
========= ====== ======== ====== ========= ======
</TABLE>
12
<PAGE>
ASSET QUALITY
Non-performing assets, including non-accrual loans, loans 90 days or more
past due, renegotiated loans and other real estate owned, totaled $1.9
million or .38% of total loans at December 31, 1996. This compares with
the previous year-end ratio of .35%. During the five year period shown
below, Shoreline's non-performing asset ratio has been well below other
bank holding companies of similar asset size.
<TABLE>
<CAPTION>
DECEMBER 31 (In thousands) 1996 1995 1994 1993 1992
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 524 $ 235 $ 802 $ 1,962 $ 2,934
Accruing loans past due 90 days or more 1,104 1,204 856 2,233 1,497
Restructured loans 0 0 2 211 222
Other real estate owned 273 170 552 1,026 640
-------- -------- -------- -------- --------
Total non-performing assets $ 1,901 $ 1,609 $ 2,212 $ 5,432 $ 5,293
======== ======== ======== ======== ========
AS A PERCENTAGE OF TOTAL LOANS:
Non-accrual loans .11% .05% .18% .47% .83%
Accruing loans past due 90 days or more .22 .26 .20 .54 .42
Restructured loans .00 .00 .00 .05 .06
Other real estate owned .05 .04 .13 .25 .18
-------- -------- -------- --------- -------
Total non-performing assets .38% .35% .51% 1.31% 1.49%
======== ======== ======== ========= =======
</TABLE>
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 1996 under original terms
on non-accrual loans outstanding at December 31, 1996 was approximately
$67,000. There was no interest income recorded in 1996 on non-accrual
loans outstanding at December 31, 1996.
At year-end 1996, Shoreline had approximately $8.3 million in loans for
which payments are current, but known financial difficulties of the
borrowers cause management concern about the ability to comply with
existing loan repayment terms. Two large commercial borrower situations
caused the increase from the $3.2 million reported at year-end 1995. 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.
Under the guidelines of SFAS No. 114 and 118, "Accounting by Creditors for
Impairment of a Loan" and "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," Shoreline identified $384,000 of
loans considered impaired at December 31, 1996. No allocation of the
allowance for loan losses was necessary for these loans, however.
ALLOWANCE FOR LOAN LOSSES
Management considers such factors as historical charge-off experience,
problem loan levels, current and projected economic conditions, portfolio
mix and specific loan reviews in determining its allowance for loan losses.
Quarterly, management evaluates the adequacy of the allowance for loan
losses with a detailed written analysis. Management's allocation of the
allowance for loan losses over the past three years is shown in the
following table. The amounts indicated for each loan type include amounts
allocated for specific loans as well as general allocations.
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
DECEMBER 31 (In thousands) ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 2,491 42.34% $ 2,361 41.08% $ 2,044 41.20%
Real estate - mortgage 743 42.79 698 41.80 559 40.30
Real estate - construction 115 2.05 107 4.01 100 6.11
Consumer 1,166 12.82 1,111 13.11 995 12.39
Unallocated 2,380 2,323 2,254
-------- ------ -------- ------ -------- ------
Total $ 6,895 100.00% $ 6,600 100.00% $ 5,952 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
13
<PAGE>
Net charge-offs in 1996 represented only .06% of average total loans and
marked the fourth consecutive year this ratio was below 10 basis points.
The allowance for loan losses at December 31, 1996 was $6.9 million, an
increase of $295,000 over year-end 1995 and represented 1.38% of total
loans at the same date. This is a slight decline from year-end 1995's
ratio of 1.42% but still provides a high level of coverage of non-
performing loans. At December 31, 1996, the allowance for loan losses
as a percentage of non-performing loans was 424%. The following table
summarizes loan and allowance information for the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 (In thousands) 1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Loans outstanding, end of period $ 500,591 $ 465,995 $ 436,529
========= ========= =========
Daily average of loans outstanding for the period $ 490,200 $ 447,329 $ 428,478
========= ========= =========
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 6,600 $ 5,952 $ 5,586
--------- --------- ---------
Charge-offs:
Commercial, financial and agricultural 240 151 391
Real estate - mortgage 35 70 105
Real estate - construction 0 0 0
Consumer 318 271 517
--------- --------- ---------
Total charge-offs 593 492 1,013
--------- --------- ---------
Recoveries:
Commercial, financial and agricultural 97 200 367
Real estate - mortgage 57 14 0
Real estate - construction 0 0 0
Consumer 134 176 262
--------- --------- ---------
Total recoveries 288 390 629
--------- --------- ---------
Net charge-offs 305 102 384
--------- --------- ---------
Provision charged to income 600 750 750
--------- --------- ---------
Balance at end of period $ 6,895 $ 6,600 $ 5,952
========= ======== =========
KEY RATIOS:
Net charge-offs to average loans .06% .02% .09%
Recoveries to total charge-offs 48.57% 79.27% 62.09%
Allowance to total loans at end of period 1.38% 1.42% 1.36%
Allowance to total non-performing loans at end of period 423.52% 458.65% 358.55%
Provision to average loans .12% .17% .17%
</TABLE>
14
<PAGE>
SECURITIES
A summary of Shoreline's securities portfolio for the past three years is
shown in the table below. On December 1, 1995, Shoreline reclassified
approximately $25.4 million of securities from held to maturity to
available for sale. This one time reassessment and reclassification was
made in accordance with FASB's "Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" issued
November 15, 1995. Shoreline had previously adopted SFAS No. 115 on
January 1, 1994.
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------------------------
AVAILABLE HELD TO AVAILABLE HELD TO AVAILABLE HELD TO
DECEMBER 31 (In thousands) FOR SALE MATURITY FOR SALE MATURITY FOR SALE MATURITY
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agencies $ 37,514 $ 15,000 $ 32,682 $ 6,830 $ 11,642 $ 8,998
States and political subdivisions 29,895 7,664 33,355 9,560 31,107 13,458
Mortgage-backed securities:
U.S. Government agencies 18,816 22,129 30,974 24,180 29,128 22,676
Collateralized mortgage obligations 1,290 2,789 3,320 3,895 4,565 2,324
Other securities 2,739 0 2,540 0 4,734 1,018
-------- -------- --------- -------- -------- --------
Total $ 90,254 $ 47,582 $ 102,871 $ 44,465 $ 81,176 $ 48,474
======== ======== ========= ======== ======== ========
</TABLE>
Securities totaled $137.8 million at December 31, 1996, a reduction of $9.5
million from December 31, 1995. Reduced holdings in state and political
subdivisions and mortgage-backed agency securities classified as available
for sale were the primary cause in the overall reduction in securities.
Shoreline's Investment Committee is responsible for establishing guidelines
and strategies related to securities investments. At December 31, 1996,
Shoreline held no securities it would consider to be impaired. In
addition, Shoreline does not invest in derivatives or related types of
financial instruments except for U.S. Government agency mortgage-backed
securities and collateralized mortgage obligations. The aggregate value of
securities of no single issuer, except the U.S. government and its
agencies, exceeded 10% of Shoreline's shareholder equity.
SOURCES AND USES OF FUNDS
The following table of average balances summarizes the sources and uses of
funds for 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------------------------------
INCREASE/ INCREASE/ INCREASE/ INCREASE/
(DECREASE) (DECREASE) (DECREASE) (DECREASE)
(In thousands) AVG BAL AMOUNT PERCENT AVG BAL AMOUNT PERCENT
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FUNDING USES:
Loans-net of unearned income $ 490,200 $ 42,871 9.6% $ 447,329 $ 18,851 4.4%
Taxable securities 105,229 5,415 5.4% 99,814 8,317 9.1%
Tax-exempt securities 37,691 (6,233) (14.2%) 43,924 1,116 2.6%
Federal funds sold 8,066 (7,121) (46.9%) 15,187 1,421 10.3%
Interest-earning deposits 9,214 9,131 11,101.2% 83 83 100.0%
--------- -------- -------- --------- --------
Total uses $ 650,400 $ 44,063 7.3% $ 606,337 $ 29,788 5.2%
========= ======== ========= ========
FUNDING SOURCES:
Non-interest-bearing demand deposits $ 68,621 $ 2,440 3.7% $ 66,181 $ 3,590 5.7%
Interest-bearing demand
and savings deposits 256,409 2,342 .9% 254,067 10,366 4.3%
Time deposits 279,235 24,897 9.8% 254,338 5,816 2.3%
Securities sold under
agreements to repurchase 5,327 1,859 53.6% 3,468 801 30.0%
FHLB advances 13,800 8,800 276.0% 5,000 0 0%
Other 27,008 3,725 16.0% 23,283 9,215 65.5%
--------- -------- ------- --------- -------
Total sources $ 650,400 $ 44,063 7.3% $ 606,337 $ 29,788 5.2%
========= ======== ========= ========
</TABLE>
15
<PAGE>
The primary source of funding for Shoreline is increased deposits. Total
deposits averaged $604.3 million in 1996, an increase of $30 million
(5.2%). Approximately $10 million of 1996's growth relates to the
Adamsville, Michigan branch acquisition completed in December of 1995. The
majority of the remaining growth in deposits in 1996 was provided by
interest-bearing demand and time deposits. More specifically, continued
popularity of Shoreline's Super Public Fund account, an interest-bearing
demand deposit account geared toward municipalities, and time deposits
greater than $100,000 produced the majority of the growth in these two
areas. Total average deposits increased $19.8 million (3.6%) in 1995.
Super Public Fund growth along with increased savings deposits produced the
majority of the growth in that year. Other funding sources, including
repurchase agreements, long-term debt and other sources, increased $14.4
million (45.3%) in 1996. Increased use of FHLB advances accounted for the
majority of the growth in this source of funds. Use of alternative funding
sources is continually evaluated in conjunction with Shoreline's deposit
growth strategy.
Average total loans increased $42.9 million (9.6%) in 1996. All three of
Shoreline's general lending areas contributed to this increase. However,
as in 1995, retail lending continued to provide the majority of the growth.
Shoreline's residential mortgage loan portfolio averaged $212.6 million in
1996, an increase of $25.7 million (13.7%). This compares to 1994's
increase of $17.4 million (10.3%). In addition, $19.4 million of mortgage
loans were originated for sale to the secondary market compared to $11.4
million of loans originated for sale in 1995. At December 31, 1996,
Shoreline had $518,000 of mortgage loans held for sale to the secondary
market. Average consumer loans increased $6.8 million (11.9%) in 1996
compared to 1995's decrease of $1.5 million. Average commercial loans grew
$10.4 million (5.1%) in 1996, an increase over 1995's growth of $2.9
million. With the proposed acquisition of SJS Bancorp, Inc., retail
lending will continue to play a significant role in the growth of
Shoreline's total loan portfolio.
Average federal funds sold declined $7.1 million (46.9%) in 1996. The
decline resulted from Shoreline's use of an interest-earning deposit
account with the Federal Home Loan Bank as an alternative daily investment
vehicle to federal funds sold. This accounted for the corresponding
increase in interest-bearing deposits of $9.1 million in 1996. The
majority of 1996's decline in tax-exempt securities was offset by an
increase in taxable securities.
LIQUIDITY
Liquidity is generally defined as the ability to meet cash flow
requirements. Shoreline primarily manages liquidity at two levels, the
parent company and its subsidiary, Shoreline Bank. The parent company's
primary cash requirement is to pay dividends to Shoreline's shareholders.
Its primary source of funds is dividends received from its subsidiary bank.
Shoreline Bank's primary liquidity consideration is to meet the cash flow
needs of its customers, such as borrowings and deposit withdrawals. To
meet cash flow requirements, sufficient sources of liquid funds must be
available. These sources include short-term investments, repayments and
maturities of loans and securities; sales of assets; growth in deposits and
other liabilities; and bank profits. At December 31, 1996, Shoreline had
$5.2 million of federal funds sold and $18 million of interest-earning
deposits available on demand. In addition, Shoreline had over $90 million
of securities classified as available for sale. Net cash provided from
operating activities is a consistent source of liquidity as evidenced by
$14.5 million of net cash provided in 1996. Principal reductions received
on loans and mortgage-backed securities also provide a continual stream of
cash flows. Finally, as a member of the Federal Home Loan Bank of
Indianapolis, Shoreline Bank can access up to approximately $50 million of
borrowings. At December 31, 1996, the bank had $18 million of borrowings
with the FHLB.
16
<PAGE>
ASSET/LIABILITY MANAGEMENT
Asset/liability management involves developing, implementing and monitoring
strategies to maintain sufficient liquidity, maximize net interest income
and minimize the impact of significant fluctuations in market interest
rates have on earnings. Shoreline's Asset/Liability Committee is
responsible for managing this process. Much of this committee's efforts
are focused on minimizing Shoreline's sensitivity to changes in interest
rates. One method of gauging sensitivity is by a static gap analysis.
Shoreline's static gap position at December 31, 1996 is shown in the
following table:
<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 $ 143,498 $ 101,030 $ 233,164 $ 22,899 $ 500,591
Securities 8,474 20,909 82,408 26,046 137,837
Federal funds sold 5,150 0 0 0 5,150
Interest-earning deposits 18,142 0 0 0 18,142
---------- ---------- --------- -------- ---------
Total interest-earning assets $ 175,264 $ 121,939 $ 315,572 $ 48,945 $ 661,720
---------- ---------- --------- -------- ---------
INTEREST-BEARING LIABILITIES:
Time deposits 75,197 118,082 95,980 1,078 290,337
Demand and savings accounts 252,687 0 0 0 252,687
Other 11,167 4,000 10,000 0 25,167
---------- ---------- --------- -------- ---------
Total interest-bearing liabilities 339,051 122,082 105,980 1,078 568,191
---------- ---------- --------- -------- ---------
Asset (liability) gap $ (163,787) $ (143) $ 209,592 $ 47,867 $ 93,529
========== ========== ========= ======== =========
Cumulative asset (liability) gap $ (163,787) $ (163,930) $ 45,662 $ 93,529
========== ========== ========= ========
</TABLE>
As shown, Shoreline had a cumulative liability gap position of $163.9
million within the one-year time frame. 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. In addition, the static
gap analysis treats demand and savings accounts as repriceable within 90
days, while experience suggests that these categories of deposits are
actually comparatively resistant to rate sensitivity. 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. However,
management believes that Shoreline is slightly more exposed to downward
changes from current interest rate levels. Shoreline has demonstrated
effective asset/liability management by maintaining relatively stable net
interest margins of 4.69%, 4.70% and 4.63% in 1996, 1995 and 1994.
CAPITAL RESOURCES
At December 31, 1996, total equity capital of Shoreline was $69.4 million.
This includes an unrealized gain of $1.4 million for the mark-to-market
adjustment of Shoreline's available for sale securities portfolio. Total
equity capital was $64.4 million at December 31, 1995 with an unrealized
gain of $2.2 million for available for sale securities. During 1996,
Shoreline issued 41,502 shares under its Dividend Reinvestment Plan and
purchased 18,191 under its stock repurchase program.
17
<PAGE>
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>
REGULATORY WELL-
DECEMBER 31 MINIMUM CAPITALIZED 1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Risk based:
Tier I capital 4.00% 6.00% 15.10% 14.56% 13.62%
Total capital 8.00% 10.00% 16.33% 15.81% 14.87%
Tier I leverage 3.00% 5.00% 9.30% 8.91% 8.65%
</TABLE>
The proposed acquisition of SJS Bancorp, Inc. will be accounted for as a
purchase and will have the affect of reducing Shoreline's capital ratios.
However, management projects that Shoreline's capital ratios upon
consummation of the transaction will remain above regulatory standards to
be considered a "well-capitalized" institution.
CASH DIVIDENDS
Cash dividends declared increased 16.2% to $.79 per share in 1996. 1995's
cash dividends totaled $.68 per share, an increase of 17.2% over 1994. The
following table summarizes the quarterly cash dividends per share
paid to common shareholders during the last three years, adjusted for stock
dividends and stock splits.
<TABLE>
<CAPTION>
QUARTER 1996 1995 1994
--------------------------------------
<S> <C> <C> <C> <C>
1st $ .19 $ .17 $ .15
2nd .20 .17 .15
3rd .20 .17 .14
4th .20 .17 .14
----- ----- -----
Total $ .79 $ .68 $ .58
===== ===== =====
</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 1997.
FORWARD-LOOKING STATEMENTS
This discussion and analysis of financial condition and results of
operations, and other sections of this annual report, contain
forward-looking statements that are based on management's beliefs,
assumptions, current expectations, estimates and projections about the
financial services industry, the economy, and about the Corporation itself.
Words such as "anticipates", "believes", "estimates", "expects",
"forecasts", "intends", "is likely", "plans", "product", "projects",
variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
("Future Factors") that are difficult to predict with regard to timing,
extent, likelihood and degree of occurrence. Therefore, actual results and
outcomes may materially differ from what may be expressed or forecasted in
such forward-looking statements. Furthermore, Shoreline undertakes no
obligation to update, amend or clarify forward-looking statements, whether
as a result of new information, future events, or otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition
by traditional and non-traditional competitors; changes in banking
regulations; change in tax laws; changes in prices, levies, and
assessments; the impact of technological advances; governmental and
regulatory policy changes; the outcomes of pending and future litigation
and contingencies; trends in customer behavior as well as their ability to
repay loans; and vicissitudes of the national economy. These are
representative of the Future Factors that could cause a difference between
an ultimate actual outcome and a preceding forward-looking statement.
18
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31 1996 1995
---------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 38,266,519 $ 29,795,036
Interest-earning deposits 18,142,151 15,162
Federal funds sold 5,150,000 12,950,000
------------- -------------
Total cash and cash equivalents 61,558,670 42,760,198
Securities available for sale (carried at fair value) 90,254,236 102,870,733
Securities held to maturity (fair values of $48,588,454
and $45,875,132 in 1996 and 1995, respectively) 47,582,337 44,465,217
Loans, net of allowance for loan losses
($6,894,945-1996;$6,600,119-1995) 493,696,408 459,395,145
Premises and equipment, net 10,975,483 10,143,851
Other assets 12,027,685 11,537,594
------------- -------------
Total Assets $ 716,094,819 $ 671,172,738
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest-bearing $ 74,142,067 $ 69,236,346
Interest-bearing 542,335,458 523,063,666
------------- -------------
Total deposits 616,477,525 592,300,012
Securities sold under agreement to repurchase 7,166,563 4,690,818
Other liabilities 5,032,529 4,822,065
FHLB advances 18,000,000 5,000,000
------------- -------------
Total Liabilities 646,676,617 606,812,895
------------- -------------
Shareholders' equity
Preferred stock, no par value; 1,000,000 shares authorized;
none issued or outstanding 0 0
Common stock; 10,000,000 shares authorized;
5,555,672 and 5,251,018 issued and outstanding at
December 31, 1996 and 1995, respectively 0 0
Additional paid-in capital 56,388,553 50,147,966
Unrealized gain on securities available for sale, net 1,378,327 2,160,403
Retained earnings 11,651,322 12,051,474
------------- -------------
Total Shareholders' Equity 69,418,202 64,359,843
------------- -------------
Total Liabilities and Shareholders' Equity $ 716,094,819 $ 671,172,738
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 43,646,323 $ 40,481,930 $ 35,531,796
Securities:
Taxable 7,357,686 6,774,289 5,037,912
Tax-exempt 2,361,306 2,824,779 2,837,000
Federal funds sold 423,787 889,631 571,474
Deposits with banks 480,410 2,777 0
------------- ------------- -------------
Total interest income 54,269,512 50,973,406 43,978,182
------------- ------------- -------------
INTEREST EXPENSE
Deposits 24,237,818 23,451,256 18,375,377
Short-term borrowings 216,501 143,164 87,267
FHLB advances 731,463 252,502 252,500
------------- ------------- ------------
Total interest expense 25,185,782 23,846,922 18,715,144
------------- ------------- ------------
NET INTEREST INCOME 29,083,730 27,126,484 25,263,038
Provision for loan losses 600,000 750,000 750,000
------------- ------------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 28,483,730 26,376,484 24,513,038
------------- ------------- ------------
OTHER INCOME
Service charges on deposit accounts 1,819,736 1,787,405 1,859,778
Trust fees 1,500,147 1,387,819 1,346,244
Securities gains/(losses) 190,717 (35,812) (164,944)
Other 836,419 943,000 1,645,474
------------- ------------- ------------
Total other income 4,347,019 4,082,412 4,686,552
------------- ------------- ------------
OTHER EXPENSES
Salaries and employee benefits 10,650,227 9,891,918 10,142,120
Occupancy 1,328,968 1,281,079 1,220,742
Equipment 1,920,303 1,770,636 1,654,780
Insurance 572,090 868,495 1,421,033
Professional fees 1,006,897 774,153 784,980
Other taxes 540,738 673,778 501,522
Other 3,413,874 3,460,381 3,996,091
------------- ------------- ------------
Total other expenses 19,433,097 18,720,440 19,721,268
------------- ------------- ------------
INCOME BEFORE INCOME TAXES 13,397,652 11,738,456 9,478,322
Federal income tax expense 3,792,223 3,131,000 2,280,000
------------- ------------- ------------
NET INCOME $ 9,605,429 $ 8,607,456 $ 7,198,322
============= ============= =============
EARNINGS PER SHARE $ 1.74 $ 1.56 $ 1.31
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
NET UNREALIZED
ADDITIONAL GAIN/(LOSS) ON
COMMON PAID-IN SECURITIES AVAILABLE RETAINED
THREE YEARS ENDED DECEMBER 31, 1996 STOCK CAPITAL FOR SALE, NET EARNINGS TOTAL
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 $ 3,300,645 $ 41,684,562 $ 7,621,912 $ 52,607,119
Transfer to Additional
Paid-in Capital (3,300,645) 3,300,645
Effect of adoption of SFAS
No. 115, net of taxes $ 2,366,171 2,366,171
Net income for year 7,198,322 7,198,322
Cash dividends declared:
$0.58 per share (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
Change in unrealized losses on
securities available for sale,
net of tax effect (3,382,972) (3,382,972)
----------- ------------ ---------- ------------ ------------
BALANCE AT DECEMBER 31, 1994 0 45,591,999 (1,016,801) 11,633,270 56,208,468
Net income for year 8,607,456 8,607,456
Cash dividends declared:
$0.68 per share (3,734,978) (3,734,978)
5% stock dividend-fractional shares 4,447,710 (4,454,274) (6,564)
Shares issued under dividend
reinvestment plan 639,541 639,541
Transfer of securities from held to
maturity to available for sale 302,642 302,642
Shares issued under stock option plan 72,682 72,682
Change in unrealized gains on securities
available for sale, net of tax effect 2,874,562 2,874,562
Common stock retired (603,966) (603,966)
----------- ----------- ---------- ------------ ------------
BALANCE AT DECEMBER 31, 1995 0 50,147,966 2,160,403 12,051,474 64,359,843
Net income for year 9,605,429 9,605,429
Cash dividends declared:
$0.79 per share (4,368,023) (4,368,023)
5% stock dividend-fractional shares 5,629,933 (5,637,558) (7,625)
Shares issued under dividend
reinvestment plan 824,889 824,889
Shares issued under stock option plan 140,490 140,490
Change in unrealized gains on
securities available for sale,
net of tax effect (782,076) (782,076)
Common stock retired (354,725) (354,725)
----------- ----------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 1996 $ 0 $ 56,388,553 $ 1,378,327 $ 11,651,322 $ 69,418,202
============ ============ =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31 1996 1995 1994
------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 9,605,429 $ 8,607,456 $ 7,198,322
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 1,495,103 1,413,972 1,329,203
Provision for loan losses 600,000 750,000 750,000
Net amortization and accretion on securities 534,548 744,864 1,615,161
Amortization of goodwill and related core deposit intangibles 265,782 255,686 264,339
(Gain)/loss on sales, calls and maturities of securities (190,717) 35,812 164,944
Mortgage loans originated for sale (17,241,221) (13,552,773) (8,178,797)
Proceeds from sale of mortgage loans 19,428,338 11,380,687 8,178,928
(Gain)/loss on sale of mortgage loans 26,895 (23,518) (131)
Gains on sale of credit card and student loan portfolios (6,277) (32,088) (302,220)
Increase in other assets (222,147) (1,009,854) (143,480)
Increase in other liabilities 210,464 1,094,522 481,369
------------- ------------ ------------
NET CASH FROM OPERATING ACTIVITIES 14,506,197 9,664,766 11,357,638
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (37,664,188) (28,171,998) (28,441,465)
Proceeds from sale of credit card and student loan portfolios 424,687 847,223 5,441,036
Securities available for sale:
Purchases (20,049,790) (6,309,595) (31,568,095)
Proceeds from sale 9,843,773 6,708,546 18,383,241
Proceeds from maturities, calls and principal reductions 21,453,835 7,697,973 17,522,447
Securities held to maturity:
Purchases (13,682,208) (38,121,538) (23,052,958)
Proceeds from maturities, calls and principal reductions 10,404,637 16,371,828 16,695,605
Premises and equipment expenditures (2,326,735) (1,545,649) (2,299,427)
Net cash received in acquisition of branches 0 9,765,976 0
------------- ------------ ------------
NET CASH FROM INVESTING ACTIVITIES (31,595,989) (32,757,234) (27,319,616)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 24,177,513 16,032,438 8,686,979
Net increase in short-term borrowing 2,475,745 1,815,706 464,192
Proceeds from FHLB advances 13,000,000 0 0
Dividends paid (4,368,023) (3,734,978) (3,181,208)
Proceeds from shares issued 957,754 705,659 601,036
Payments to retire common stock (354,725) (603,966) 0
------------- ------------ ------------
NET CASH FROM FINANCING ACTIVITIES 35,888,264 14,214,859 6,570,999
------------- ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 18,798,472 (8,877,609) (9,390,979)
Cash and cash equivalents at beginning of year 42,760,198 51,637,807 61,028,786
------------- ------------- ------------
Cash and cash equivalents at end of year $ 61,558,670 $ 42,760,198 $ 51,637,807
============= ============= ============
CASH PAID DURING THE YEAR FOR:
Interest $ 25,174,339 $ 23,447,129 $ 18,509,997
Income taxes $ 3,777,000 $ 4,270,000 $ 2,738,313
</TABLE>
SUPPLEMENTARY INFORMATION: Supplemental Schedule of Non-Cash Investing
Activities: During 1995, $25,444,120 was reclassified from securities held
to maturity to securities available for sale. During 1994, $88,221,857 was
reclassified from securities held to maturity and securities held for sale
to securities available for sale upon adoption of SFAS No. 115. The branch
acquisition in 1995 resulted in an increase in deposits of $10,171,951.
See accompanying notes to consolidated financial statements.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
The accounting and reporting policies and practices of Shoreline Financial
Corporation and its subsidiaries conform with generally accepted accounting
principles. Significant accounting and reporting policies employed in the
preparation of these financial statements are described below.
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 inter-company
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
Management must make estimates and assumptions in preparing financial
statements that affect the amounts reported therein and the disclosures
provided. These estimates and assumptions may change in the future and
future results could differ. Areas involving the use of management's
estimates and assumptions include the allowance for loan losses, the
realization of deferred tax assets, fair values of certain securities and
other financial instruments, the determination and carrying value of
impaired loans, the carrying value of loans held for sale, the carrying
value of other real estate, the accrued liability for deferred
compensation, the accrued liability for incurred but unreported medical
claims, the determination of premises and equipment, the carrying value and
amortization of intangibles, the recognition and measurement of loss
contingencies, the actuarial present value of pension benefit obligations
and net periodic pension expense and prepaid pension costs recognized in
Shoreline's financial statements.
SECURITIES
Shoreline classifies securities 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
Shoreline 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. Securities held to maturity are written down to fair value when
a decline in fair value is not temporary. Realized gains and losses
resulting from the sale of securities are computed by the specific
identification method. The level yield method is used to amortize the
purchase premium or discount and is included in earnings.
LOANS HELD FOR SALE
Loans originated and intended for sale are carried at the lower of cost or
estimated market in the aggregate. Net unrealized losses are recognized in
a valuation allowance by charges to income.
LOANS
Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, the allowance for loan losses and charge-offs.
Interest on loans is accrued over the term of the loans based on principal
amounts outstanding and includes amortization of net deferred loan fees and
costs over the loan term.
Interest income is not reported when full loan repayment is in doubt,
typically when payments are past due over 90 days, unless the loan is both
well secured and in the process of collection. Payments received on such
loans are reported as principal reductions.
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 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
23
<PAGE>
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.
Effective January 1, 1995, Shoreline adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Under SFAS No. 114 and 118, a loan is considered to be
impaired when it is probable that Shoreline will be unable to collect all
principal and interest amounts according to the contractual terms of the
loan agreement. Impaired loans are carried at the present value of
expected cash flows discounted at the loan's effective interest rate or at
the fair value of the collateral if the loan is collateral dependent. A
portion of the allowance for the loan losses may be allocated to impaired
loans. The effect of adopting these standards was not considered material.
Smaller-balance homogeneous loans are evaluated for impairment in total.
Such loans include residential first mortgage loans secured by one-to-four
family residences, residential construction loans, and automobile, home
equity and second mortgage loans. Commercial loans and mortgage loans
secured by other properties are evaluated individually for impairment.
When analysis of borrower operating results and financial condition
indicates that underlying cash flows of the borrower's business are not
adequate to meet its debt service requirements, the loan is evaluated for
impairment. Loans are generally moved to nonaccrual status when 90 days or
more past due. These loans are often considered impaired. Impaired loans,
or portions thereof, are charged off when deemed uncollectible. Cash
received on impaired loans is first applied to principal and then to
interest.
SERVICING RIGHTS
Effective January 1, 1996, Shoreline adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." Prior to adopting SFAS No. 122, servicing right
assets were recorded only for purchasing rights to service mortgage loans.
Subsequent to adopting this standard, servicing rights represent both
purchased rights and the allocated value of servicing rights retained on
loans sold. Servicing rights are expensed in proportion to, and over the
period of, estimated net servicing revenues. Impairment is evaluated based
on the fair value of the rights, using groupings of the underlying loans as
to interest rates and then, secondarily, as to geographic and prepayment
characteristic. Any impairment of a grouping is reported as a valuation
allowance. The effect of adopting this standard was not material to the
consolidated financial statements.
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 40 years for bank premises, and 3 to 10 years for furniture and
fixtures. These assets are reviewed for impairment under SFAS No. 121 when
events indicate the carrying amount may not be recoverable. 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 or acceptance of a deed in lieu of foreclosure. 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
$273,000 and $170,000 at December 31, 1996 and 1995, respectively.
GOODWILL AND IDENTIFIED INTANGIBLES
Goodwill is the excess of purchase price over identified net assets in
business acquisitions. Goodwill is expensed on the straight-line method
over no more than 25 years. Identified intangibles represent the value of
depositor relationships purchased and is expensed on accelerated methods
over 10 years. Goodwill and identified intangibles are assessed for
impairment based on estimated undiscounted cash flows, and written down if
necessary. The unamortized core deposit intangibles were $2,377,000 and
$2,642,000 at December 31, 1996 and 1995, respectively.
24
<PAGE>
EMPLOYEE BENEFITS
Shoreline has a noncontributory pension plan covering substantially all
employees. It funds the plan based on annual actuarial computations.
Expense of this plan is reported by spreading the expected contributions to
the plan less long-term earnings on plan assets over the employees' service
period. In addition, Shoreline has a profit sharing plan and 401(k) salary
reduction plan for which contributions are made and expensed annually.
Also, Shoreline has a post-retirement health care plan that covers both
salaried and nonsalaried employees. Retiree contributions approximate
their premium expense determined exclusively on the loss experience of the
retirees in the plan.
Expense for employee compensation under stock option plans is based on APB
Opinion 25, with expense reported only if options are granted below market
price at grant date. Pro forma disclosures of net income and earnings per
share are provided as if the fair value method of SFAS No. 123 were used
for stock-based compensation.
INCOME TAXES
Income tax expense 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 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.
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 5,524,504 in 1996; 5,508,380 in 1995 and 5,480,475 in 1994.
STOCK SPLITS AND DIVIDENDS
In 1994, shareholders of Shoreline approved an Amendment to the Articles of
Incorporation 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. A 5% stock dividend was
declared in 1996 and 1995 and a three-for-two stock split was declared in
1994. Stock dividends are accounted for by transferring the fair market
value of the stock from retained earnings to additional paid in capital.
Stock splits are recorded by adjusting par value. 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 includes
the cash on hand, demand deposits in other institutions, interest-earning
deposits in other institutions, and federal funds sold with a maturity of
90 days or less. Shoreline reports net cash flows for customer loan
transactions, deposit transactions and interest-earning balances with other
financial institutions.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in Note 13.
Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments, and other
factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect
the estimates. The fair value estimates of existing on- and off-balance
sheet financial instruments does not include the value of anticipated
future business or the values of assets and liabilities not considered
financial instruments.
RECLASSIFICATIONS
Some items in prior financial statements have been reclassified to conform
with the current presentation.
NOTE 2. NATURE OF OPERATIONS
Shoreline Financial Corporation is a bank holding company. Shoreline's
business is concentrated in the commercial banking industry segment. The
business of commercial and retail banking accounts for more than 90% of its
revenues, operating income and assets. Shoreline's subsidiary bank,
Shoreline Bank, offers individuals, businesses, institutions and government
agencies a full range of commercial banking services primarily in the
southwestern Michigan communities in which the bank is located and in areas
immediately surrounding these communities.
25
<PAGE>
Shoreline Bank grants commercial, real estate and consumer loans to
customers. 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. There
are no foreign loans.
NOTE 3. RESTRICTIONS ON CASH AND DUE FROM BANKS
A summary of Shoreline's subsidiary bank's legal reserve requirements
established by the Federal Reserve System is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
----------------------------
<S> <C> <C>
Portion of requirement satisfied by non-interest earning vault cash $ 6,985,000 $ 6,616,000
Additional balances maintained with the Federal Reserve 4,280,000 2,419,000
Total reserve requirements $ 11,265,000 $ 9,035,000
</TABLE>
NOTE 4. SECURITIES
The amortized cost and fair value of securities is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED COST UNREALIZED GAINS UNREALIZED LOSSES FAIR VALUE
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE AT DECEMBER 31, 1996
U.S. Treasury and agencies $ 37,168,906 $ 414,770 $ (69,870) $ 37,513,806
States and political subdivisions 28,404,014 1,493,977 (3,425) 29,894,566
Mortgage-backed:
U.S. Government agencies 18,603,576 252,394 (39,689) 18,816,281
Collateralized mortgage obligations 1,250,064 40,314 (95) 1,290,283
Other 2,739,300 0 0 2,739,300
------------ ----------- ----------- -------------
Total $ 88,165,860 $ 2,201,455 $ (113,079) $ 90,254,236
============ =========== =========== =============
HELD TO MATURITY AT DECEMBER 31, 1996
U.S. Treasury and agencies $ 15,000,413 $ 137,399 $ (74,687) $ 15,063,125
States and political subdivisions 7,664,249 561,548 0 8,225,797
Mortgage-backed:
U.S. Government agencies 22,128,466 417,596 (57,978) 22,488,084
Collateralized mortgage obligations 2,789,209 22,239 0 2,811,448
------------ ---------- ---------- ------------
Total $ 47,582,337 $ 1,138,782 $ (132,665) $ 48,588,454
============ =========== =========== =============
AVAILABLE FOR SALE AT DECEMBER 31, 1995
U.S. Treasury and agencies $ 31,953,847 $ 738,657 $ (10,312) $ 32,682,192
States and political subdivisions 31,303,696 2,054,634 (3,726) 33,354,604
Mortgage-backed:
U.S. Government agencies 30,531,203 505,091 (62,792) 30,973,502
Collateralized mortgage obligations 3,268,316 52,926 (803) 3,320,439
Other 2,539,996 0 0 2,539,996
------------ ----------- ----------- -------------
Total $ 99,597,058 $ 3,351,308 $ (77,633) $ 102,870,733
============ =========== =========== =============
HELD TO MATURITY AT DECEMBER 31, 1995
U.S. Treasury and agencies $ 6,830,171 $ 144,920 $ 0 $ 6,975,091
States and political subdivisions 9,559,578 737,247 (1,227) 10,295,598
Mortgage-backed:
U.S. Government agencies 24,180,308 488,152 (3,692) 24,664,768
Collateralized mortgage obligations 3,895,160 44,515 0 3,939,675
------------ ----------- ----------- -------------
Total $ 44,465,217 $ 1,414,834 $ (4,919) $ 45,875,132
============ =========== =========== =============
</TABLE>
26
<PAGE>
Information regarding the amortized cost and fair value of securities by
contractual maturity at December 31, 1996 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.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE DECEMBER 31, 1996 HELD TO MATURITY DECEMBER 31, 1996
--------------------------------------------------------------------------------
AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 9,590,076 $ 9,681,330 $ 2,847,470 $ 2,902,471
Due after one year through five years 20,615,200 21,264,588 5,343,403 5,467,888
Due after five years through ten years 28,208,435 29,045,757 12,046,224 12,171,192
Due after ten years 9,898,509 10,155,997 3,429,915 3,756,271
------------ ------------ ------------ ------------
Subtotal 68,312,220 70,147,672 23,667,012 24,297,822
Mortgage-backed 19,853,640 20,106,564 23,915,325 24,290,632
------------ ------------ ------------ ------------
Total $ 88,165,860 $ 90,254,236 $ 47,582,337 $ 48,588,454
============ ============ ============ ============
</TABLE>
Proceeds, gross gains and gross losses from sales and calls of securities
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
AVAILABLE FOR SALE
Proceeds from sales $ 9,843,773 $ 6,708,546 $ 18,383,241
=========== =========== ============
Gross gains from sales $ 156,041 $ 14,333 $ 150,801
Gross losses from sales (22,468) (140,822) (336,005)
----------- ----------- ------------
Net gain/(loss) from sales 133,573 (126,489) (185,204)
Net gain from calls/maturities 38,379 20,050 2,500
----------- ----------- ------------
Net gain/(loss) $ 171,952 $ (106,439) $ (182,704)
=========== =========== ============
HELD TO MATURITY
Net gain from calls/maturities $ 18,765 $ 70,626 $ 17,760
=========== ========== ============
</TABLE>
Securities having an amortized cost of $27,800,000 at December 31, 1996
were pledged to secure public trust deposits, securities sold under
agreements to repurchase, and advances from the Federal Home Loan Bank.
In November 1995, the Financial Accounting Standards Board issued a special
report titled "A Guide to Implementation of Statement No. 115 on Accounting
for Certain Investments in Debt and Equity Securities." Concurrent with
the initial adoption of this implementation guidance, but no later than
December 31, 1995, a company was allowed to reassess the appropriateness of
the classification of all securities held at that time and account for any
resulting reclassification at fair value. On December 1, 1995, Shoreline
transferred securities with an amortized cost of $25,444,120 and a net
unrealized gain of $458,549 from the held to maturity category to the
available for sale category, increasing equity by $302,642, net of taxes.
NOTE 5. LOANS
The composition of the loan portfolio is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
---------------------------------
<S> <C> <C>
Commercial, financial and agricultural $ 211,953,091 $ 191,437,205
Residential real estate 214,201,444 194,783,996
Real estate construction 10,243,243 18,704,202
Consumer 64,193,575 61,069,861
------------- -------------
Total loans 500,591,353 465,995,264
------------- -------------
Allowance for loan losses (6,894,945) (6,600,119)
------------- -------------
Net loans $ 493,696,408 $ 459,395,145
============= =============
</TABLE>
27<PAGE>
<PAGE>
Certain directors, executive officers and principal shareholders of
Shoreline, including associates of such persons, were loan customers of
Shoreline during 1996. 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 years ended December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------------
<S> <C> <C>
Balance at January 1 $ 8,756,188 $ 9,944,978
New loans 6,661,247 997,742
Repayments (4,962,428) (2,074,350)
Other changes, net 188,577 (112,182)
------------ -----------
BALANCE AT DECEMBER 31 $ 10,643,584 $ 8,756,188
============ ===========
</TABLE>
Loans held for sale at year-end 1996 and 1995 totaled $518,000 and
$2,863,000.
NOTE 6. ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
Balance, at beginning of year $ 6,600,119 $ 5,951,969 $ 5,586,090
Provision charged to operating expense 600,000 750,000 750,000
----------- ----------- -----------
7,200,119 6,701,969 6,336,090
----------- ----------- -----------
Loan charge-offs (593,350) (491,943) (1,013,533)
Loan recoveries 288,176 390,093 629,412
----------- ----------- -----------
Net loan charge-offs (305,174) (101,850) (384,121)
----------- ----------- -----------
Balance, at end of year $ 6,894,945 $ 6,600,119 $ 5,951,969
=========== =========== ===========
</TABLE>
Impaired loans were as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------
<S> <C> <C>
Year-end loans with no allowance for loan losses allocated $ 0 $ 0
Year-end loans with allowance for loan losses allocated 384,196 538,247
========= =========
Total impaired loans $ 384,196 $ 538,247
Amount of the allowance allocated $ 57,629 $ 80,737
Average of impaired loans during the year $ 548,515 $ 752,107
Interest income recognized during impairment $ 57,854 $ 50,583
Cash-basis interest income recognized $ 60,548 $ 38,731
</TABLE>
Loans with carrying values of $389,500 and $380,650 were transferred to
foreclosed real estate in 1996 and 1995.
NOTE 7. PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
----------------------------------
<S> <C> <C>
Land $ 1,124,773 $ 903,904
Building and improvements 10,882,955 9,954,873
Furniture and equipment 11,756,589 10,583,582
------------ ------------
23,764,317 21,442,359
Less accumulated depreciation and amortization 12,788,834 11,298,508
------------ ------------
Net premises and equipment $ 10,975,483 $ 10,143,851
============ ============
</TABLE>
Depreciation and amortization expense charged to operations was $1,495,103;
$1,413,972 and $1,329,203 in 1996, 1995 and 1994, respectively.
28
<PAGE>
NOTE 8. DEPOSITS
Time deposit accounts individually exceeding $100,000 totaled $77,752,500
and $57,751,000 at year-end 1996 and 1995.
At year-end 1996, stated maturities of time deposits for the next five
years and thereafter:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 $ 183,092,410
1998 53,825,271
1999 21,801,062
2000 19,305,058
2001 11,282,438
Thereafter 1,030,590
-------------
$ 290,336,829
=============
</TABLE>
Related party deposits totaled $8,836,500 at year-end 1996.
NOTE 9. OTHER BORROWINGS
REPURCHASE AGREEMENTS
Federal funds purchased, securities sold under agreements to repurchase,
and treasury tax and loan deposits are financing arrangements. Shoreline's
primary use of these types of financing arrangements has been limited to
securities sold under agreement to repurchase, which are all one-day retail
repurchase agreements. Shoreline retains custody of the securities
pledged. Information concerning securities sold under agreements to
repurchase is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------
<S> <C> <C>
Average daily balance during the year $ 5,318,300 $ 3,388,500
Average interest rate during the year 4.06% 3.96%
Maximum month-end balance during the year $ 7,526,750 $ 4,887,950
Securities underlying these agreements
at year-end were as follows:
Carrying value of securities $ 11,652,300 $ 7,169,500
Fair value $ 11,817,300 $ 7,299,100
</TABLE>
FHLB ADVANCES
At December 31, 1996 and 1995, Shoreline had advances from the Federal Home
Loan Bank of Indianapolis (FHLB) totaling $18,000,000 and $5,000,000,
respectively. These advances are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------
<S> <C> <C>
5.56%, due March 1997 $ 4,000,000
5.50%, due November 1997 4,000,000
5.05%, due September 1998 5,000,000 $ 5,000,000
5.87%, due November 1998 2,000,000
5.26%, due February 1999 3,000,000
------------ -----------
Total $ 18,000,000 $ 5,000,000
============ ===========
</TABLE>
The advance due March 1997 carries a floating rate which is 3 basis points
under the three month LIBOR index and adjusts quarterly. The advance due
November 1997 carries a floating rate that is 5 basis points under the six
month LIBOR index and adjusts semi-annually. Rates on the other three
advances are fixed. The advance due September 1998 may be prepaid on the
anniversary date, without incurring a prepayment penalty. The FHLB
advances are collateralized by a blanket lien on qualified 1-to-4 family
whole mortgage loans and U.S Government agency mortgage-backed securities
with the approximate carrying value of $268 million at December 31, 1996.
Interest on the advances is payable monthly. The principal is payable at
maturity.
29
<PAGE>
NOTE 10. INCOME TAXES
Components of the provision for federal taxes on income are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
Taxes currently payable $ 3,524,196 $ 5,194,400 $ 1,935,000
Deferred tax expense/(benefit) 268,027 (2,063,400) 345,000
----------- ----------- -----------
Total $ 3,792,223 $ 3,131,000 $ 2,280,000
=========== =========== ===========
</TABLE>
Taxes allocated to securities transactions were $64,844 in 1996, $(12,176)
in 1995 and $(56,081) in 1994.
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 1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 34% 34% 34%
Income computed at the
statutory federal tax rate $ 4,555,202 $ 3,991,075 $ 3,222,629
Add(subtract) tax effect of:
Tax-exempt securities income (792,783) (948,785) (934,191)
Tax-exempt loan income (124,794) (138,623) (142,991)
Non-deductible interest expense 88,757 122,278 100,932
Other 65,841 105,055 33,621
----------- ----------- -----------
Total $ 3,792,223 $ 3,131,000 $ 2,280,000
=========== =========== ===========
</TABLE>
The components of the net deferred tax asset recorded in the balance sheet
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
----------------------------------
<S> <C> <C>
Deferred tax assets
Provision for loan losses $ 2,344,281 $ 2,244,040
Net deferred loan fees 145,688 187,898
Deferred compensation 281,009 288,791
Mark-to-market adjustment for securities held for sale 660,771 1,014,383
Other 131,690 63,407
------------ ------------
Total deferred tax assets 3,563,439 3,798,519
------------ ------------
Deferred tax liabilities
Accretion of bond discount (68,220) (66,068)
Depreciation (261,525) (277,770)
Pension (123,610) (119,684)
Net unrealized gains on securities available for sale (710,050) (1,113,272)
Mortgage servicing rights (43,114) 0
------------ ------------
Total deferred tax liabilities (1,206,519) (1,576,794)
------------ ------------
Valuation allowance 0 0
------------ ------------
Net deferred tax asset $ 2,356,920 $ 2,221,725
============ =============
</TABLE>
30
<PAGE>
NOTE 11. EMPLOYEE BENEFITS
PENSION PLAN
Shoreline 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 financial
statements.
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
-----------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$3,007,353 in 1996 and $2,549,225 in 1995 $ 3,053,491 $ 2,584,679
=========== ===========
Projected benefit obligation for service rendered to date $ 4,224,078 $ 3,592,861
Plan assets at fair value, primarily money market funds,
listed stocks, bonds and U.S. Government securities 4,425,345 3,912,237
----------- -----------
Excess of plan assets over projected benefit obligation 201,267 319,376
Unrecognized transition asset (157,732) (181,021)
Unrecognized prior service benefit (235,759) (253,835)
Unrecognized net loss 506,156 417,865
----------- -----------
Net pension asset $ 313,932 $ 302,385
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Net pension cost included the following:
Service cost-benefits earned during the year $ 244,085 $ 221,152 $ 230,654
Interest cost on projected benefit obligation 293,842 245,773 254,801
Actual return on plan assets (542,927) (722,581) (42,650)
Net amortization and deferral 208,545 471,836 (291,219)
Additional liability recognized due to settlement 0 0 123,316
--------- --------- ---------
Net pension cost $ 203,545 $ 216,180 $ 274,902
========= ========= =========
</TABLE>
The weighted average discount rate was 7.50% for 1996, and 7.25% for 1995
and 1994. The rate of increase in future compensation used in determining
the actuarial present value of the projected benefit obligation was 4.50%
for 1996, 1995 and 1994.
The expected long-term rate of return on assets was 8.00% for 1996, and
7.50% for 1995 and 1994.
Unrecognized prior service cost is amortized on a straight line basis,
based on the expected future service years of plan participants to receive
benefits.
STOCK OPTION PLAN
A stock option plan exists under which options may be issued at market
prices to employees. The right to exercise the options vests over a five
year period. The options outstanding at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
NUMBER
PRICE OF OPTIONS
ISSUE DATE EXPIRATION DATE PER SHARE<F1> OUTSTANDING<F1>
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
August 10, 1989 August 10, 1999 $ 10.00 3,150
December 1, 1990 December 1, 2000 $ 7.69 57,628
January 1, 1994 January 1, 2004 $ 17.39 8,738
November 22, 1996 November 22, 2006 $ 20.75 28,738
------
98,254
======
</TABLE>
SFAS No. 123, which became effective for 1996, requires pro forma
disclosures for companies that do not adopt its fair value accounting
method for stock-based employee compensation. Accordingly, the following
pro forma information presents net income and earnings per share had the
fair value method been used to measure compensation
31
<PAGE>
cost for stock option plans. The exercise price of options granted is
equivalent to the market value of underlying stock at the grant date.
Accordingly, compensation cost actually recognized for stock options was $0
for 1996, 1995 and 1994.
The fair value of options granted during 1996 is estimated using the
following weighted-average information: risk-free interest rate of 6.51%,
expected life of 8 years, expected volatility of stock price of 53.6%, and
expected dividends of 3.5% per year. There were no options granted in
1995.
<TABLE>
<CAPTION>
1996
-----------
<S> <C> <C>
Net income as reported $ 9,605,429
Pro forma net income $ 9,571,769
Earnings per share as reported $ 1.74
Pro forma earnings per share $ 1.73
</TABLE>
The weighted-average fair value of options granted in 1996 was $9.37. In
future years, the pro forma effect of applying this standard is expected to
increase as additional options are granted.
The following is a summary of the option transactions for the period
January 1, 1994 through December 31, 1996:
<TABLE>
<CAPTION>
AVAILABLE OPTIONS WEIGHTED-AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE<F1>
----------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1994 23,648 64,828 $ 7.76
Options issued (5,284) 5,284 17.39
Effect of 3-for-2 stock split 9,182 31,778 0
Options exercised (8,748) 7.69
Options canceled 3,171 (3,171) 7.69
------- ------- -------
Balance at December 31, 1994 30,717 89,971 $ 8.62
Effect of 5% stock dividend 1,536 4,357 0
Options exercised 0 (8,867) 7.69
------- ------- -------
Balance at December 31, 1995 32,253 85,461 $ 8.72
Options issued (28,738) 28,738 20.75
Effect of 5% stock dividend 1,613 3,836 0
Options exercised 0 (19,781) 7.69
------- ------- -------
Balance at December 31, 1996 5,128 98,254 $ 12.45
======= ======= =======
<FN>
<F1> Restated for stock dividends and stock splits.
</FN>
</TABLE>
Options exerciseable at year-end are as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
---------------------------------
<S> <C> <C> <C>
1994 83,630 $7.95
1995 80,468 $8.18
1996 71,768 $9.55
</TABLE>
OTHER EMPLOYEE BENEFIT PLANS
Shoreline maintains a profit-sharing plan for qualified employees with at
least two years of service. Contributions to the profit sharing plan are
determined at the discretion of the Board of Directors and equaled 3% of
net profits before federal income taxes and securities gains or losses in
1996, 1995, and 1994. Under this plan, $409,633; $366,851 and $298,960 was
expensed in 1996; 1995 and 1994; respectively.
Participants in Shoreline's 401(k) salary reduction plan may make deferrals
up to 15% of compensation. Shoreline matches 50% of elective deferrals on
the first 4% of the participants' compensation. Expense under this plan
was $111,050; $109,529 and $108,991 in 1996; 1995 and 1994; respectively.
32
<PAGE>
NOTE 12. COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the
financial statements, including claims and legal actions arising in the
ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters
is not expected to have a material effect on the financial condition or
results of operations.
Shoreline 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. Shoreline'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. Shoreline follows the same credit policy to make such
commitments as it uses for on-balance-sheet items. Since many commitments
to make loans expire without being used, the amount of commitments shown
below do 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.
Shoreline has the following commitments outstanding:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
---------------------------------
<S> <C> <C>
Fixed rate loan commitments $ 9,200,000 $ 10,111,000
Variable rate loan commitments 4,648,000 8,876,000
Unused lines of credit 85,195,000 65,225,000
Standby letters of credit 2,255,000 2,250,000
------------- ------------
Total $ 101,298,000 $ 86,462,000
============= ============
</TABLE>
Fixed rate loan commitments have interest rates ranging from 6.75% to 9.50%
and terms ranging from 6 months to 30 years.
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair value and the related carrying
amount of Shoreline's financial instruments at December 31, 1996 and 1995.
Items which are not financial instruments are not included.
<TABLE>
<CAPTION>
1996 1995
CARRYING ESTIMATED CARRYING ESTIMATED
DECEMBER 31 AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 61,558,670 $ 61,559,000 $ 42,760,198 $ 42,760,000
Securities available for sale 90,254,236 90,254,000 102,870,733 102,871,000
Securities held to maturity 47,582,337 48,588,000 44,465,217 45,875,000
Loans, net of allowance
for loan losses 493,696,408 502,360,000 459,395,145 460,119,000
Demand and savings deposits (326,140,696) (326,141,000) (325,386,319) (325,386,000)
Time deposits (290,336,829) (291,675,000) (266,913,693) (269,383,000)
Securities sold under agreement
to repurchase (7,166,563) (7,167,000) (4,690,818) (4,691,000)
FHLB advances (18,000,000) (17,988,000) (5,000,000) (4,946,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 1996 and 1995. 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 Shoreline would charge the borrowers for similar loans with
similar maturities made at December 31, 1996 and 1995, applied for an
estimated time period until the loan is assumed to
33
<PAGE>
reprice or be paid. The estimated fair value for other loans is based on
estimates of the rate Shoreline would charge for similar loans at December
31, 1996 and 1995, 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 Shoreline would pay on such deposits or borrowings at
December 31, 1996 and 1995, 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 judgment of
the most appropriate factors, there is no assurance that if Shoreline had
disposed of such items at December 31, 1996, 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, 1996 should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of Shoreline 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 Shoreline's subsidiary
bank's trust department, the trained work force, customer goodwill and
similar items.
NOTE 14. REGULATORY MATTERS
Shoreline Financial Corporation and Shoreline Bank are subject to
regulatory capital requirements administered by federal banking agencies.
Capital adequacy guidelines and prompt corrective action regulations
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases.
Failure to meet various capital requirements can initiate regulatory action
that could have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly under capitalized, and critically undercapitalized, although
these terms are not used to represent overall financial condition. If
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as is
asset growth and expansion, and plans for capital restoration are required.
The minimum requirements are:
<TABLE>
<CAPTION>
CAPITAL TO RISK-WEIGHTED ASSETS
-------------------------------------------------------------------------------
TOTAL TIER 1 TIER 1 CAPITAL TO AVERAGE ASSETS
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
34
<PAGE>
Shoreline Bank capital levels approximate the consolidated capital levels
of Shoreline Financial Corporation. At year end, consolidated actual
capital levels (in millions) and minimum required levels were:
<TABLE>
<CAPTION>
MINIMUM REQUIRED
FOR CAPITAL ADEQUACY MINIMUM REQUIRED TO
ACTUAL PURPOSES BE WELL CAPITALIZED
-----------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996
- ----
Total capital to risk assets $ 71.1 16.3% $ 34.9 8.0% $ 43.6 10.0%
Tier 1 capital to risk assets 65.7 15.1% 17.4 4.0% 26.2 6.0%
Tier 1 capital to average assets 65.7 9.3% 27.7 4.0% 34.6 5.0%
1995
- ----
Total capital to risk assets $ 64.7 15.8% $ 32.7 8.0% $ 40.9 10.0%
Tier 1 capital to risk assets 59.6 14.6% 16.4 4.0% 24.5 6.0%
Tier 1 capital to average assets 59.6 8.9% 26.7 4.0% 33.4 5.0%
</TABLE>
At year-end 1996, Shoreline was categorized as well capitalized.
NOTE 15. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
The condensed financial information of the parent company, Shoreline
Financial Corporation, is summarized below.
<TABLE>
CONDENSED BALANCE SHEET
<CAPTION>
DECEMBER 31 1996 1995
------------------------------
<S> <C> <C>
ASSETS
Cash $ 533,737 $ 799,936
Investment in subsidiary 68,750,811 63,561,443
Other assets 137,339 9,508
------------ ------------
Total Assets $ 69,421,887 $ 64,370,887
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 3,685 $ 11,044
Shareholders' equity 69,418,202 64,359,843
------------ ------------
Total Liabilities and Shareholders' Equity $ 69,421,887 $ 64,370,887
============ ============
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
<CAPTION>
YEARS ENDED DECEMBER 31 1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from subsidiary - cash $ 3,817,098 $ 4,212,961 $ 3,362,695
Corporate service fees 0 0 3,308,086
----------- ----------- -----------
Total income 3,817,098 4,212,961 6,670,781
----------- ----------- -----------
EXPENSE
Salaries and employee benefits 0 0 3,037,186
Other 317,498 315,838 1,861,229
----------- ----------- -----------
Total expense 317,498 315,838 4,898,415
----------- ----------- -----------
Income before income tax and
undistributed subsidiary income 3,499,600 3,897,123 1,772,366
Income tax benefit 97,000 108,000 513,000
Equity in undistributed net income of subsidiary 6,008,829 4,602,333 4,912,956
----------- ----------- -----------
Net Income $ 9,605,429 $ 8,607,456 $ 7,198,322
=========== =========== ===========
</TABLE>
35
<PAGE>
<TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31 1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 9,605,429 $ 8,607,456 $ 7,198,322
Adjustments:
Equity in undistributed income of subsidiary (6,008,829) (4,602,333) (4,912,956)
Depreciation and amortization 0 0 464,073
Other (97,805) (81,063) 198,824
------------ ------------ ------------
Total adjustments (6,106,634) (4,683,396) (4,250,059)
------------ ------------ ------------
NET CASH FROM OPERATING ACTIVITIES 3,498,795 3,924,060 2,948,263
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net property and equipment expenditures 0 0 (288,681)
------------ ------------ ------------
NET CASH FROM INVESTING ACTIVITIES 0 0 (288,681)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (4,368,023) (3,734,978) (3,181,208)
Net shares issued 603,029 101,693 601,036
------------ ------------ ------------
NET CASH FROM FINANCING ACTIVITIES (3,764,994) (3,633,285) (2,580,172)
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (266,199) 290,775 79,410
Cash and cash equivalents at beginning of year 799,936 509,161 429,751
------------ ------------ ------------
Cash and cash equivalents at end of year $ 533,737 $ 799,936 $ 509,161
============ ============ ============
</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 1997, the subsidiary
bank may distribute to Shoreline, in addition to 1997 net profits,
approximately $27,000,000 in dividends without prior approval from bank
regulatory agencies.
NOTE 16. FUTURE TRANSACTION
On November 7, 1996, Shoreline announced a signed plan of merger under
which SJS Bancorp, Inc. would merge with and into Shoreline. SJS Bancorp,
Inc. is a holding company with assets of approximately $150 million and is
the parent company of SJS Federal Savings Bank, which provides banking
services. Completion of the transaction, which will be accounted for as a
purchase, is subject to regulatory approval and other customary conditions,
and is anticipated during the second quarter of 1997.
NOTE 17. IMPACT OF NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board issued SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS No. 125 revises the accounting for transfers of
financial assets, such as loans and securities, and for distinguishing
between sales and secured borrowings. This pronouncement is effective for
some transactions in 1997 and others in 1998. While the affect on the
financial statements has not yet been determined, it is not anticipated to
have a material impact on Shoreline's financial position or results of
operations in 1997.
36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
[CROWE CHIZEK LOGO]
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, 1996 and
1995 and the related consolidated statements of income,
shareholders' equity and cash flows for the years ended December
31, 1996, 1995 and 1994. These financial statements are the
responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of SHORELINE FINANCIAL CORPORATION as of
December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years ended December 31, 1996, 1995 and
1994 in conformity with generally accepted accounting principles.
/s/ Crowe Chizek and Company LLP
Crowe Chizek and Company LLP
South Bend, Indiana
February 14, 1997
37
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR
FINANCIAL STATEMENTS
Management is responsible for the preparation of Shoreline's
consolidated financial statements and related information
appearing in this annual report. Management believes that the
consolidated financial statements fairly reflect the form and
substance of transactions, and that the financial statements
reasonably present Shoreline's financial position and results of
operations, and were prepared in conformity with generally
accepted accounting principles. Management also has included in
Shoreline's financial statements, amounts that are based on
estimates and judgments, which it believes are reasonable under
the circumstances.
Shoreline maintains a system of internal controls designed
to provide reasonable assurance that all assets are safeguarded
and financial records are reliable for preparing the consolidated
financial statements. Shoreline complies with laws and
regulations relating to safety and soundness which are designated
by the FDIC and other appropriate federal banking agencies. The
selection and training of qualified personnel and the
establishment and communication of accounting and administrative
policies and procedures are elements of this control system. The
effectiveness of internal controls is monitored by a program of
internal audit and by independent certified public accountants.
Management recognizes that the cost of a system of internal
controls should not exceed the benefits derived and that there
are inherent limitations to be considered in the potential
effectiveness of any system. Management believes that
Shoreline's system provides the appropriate balance between costs
of controls and the related benefits.
The independent auditors have audited Shoreline's
consolidated financial statements in accordance with generally
accepted auditing standards and provide an objective, independent
review of the fairness of the reported operating results and
financial position. The Board of Directors of Shoreline has an
Audit Committee composed of four non-management Directors. The
Committee meets periodically with the internal auditors and the
independent auditors.
38
<PAGE>
<TABLE>
DIRECTORS
<CAPTION>
<S> <C>
SHORELINE FINANCIAL CORPORATION SHORELINE BANK
BOARD OF DIRECTORS BOARD OF DIRECTORS
LOUIS A. DESENBERG, ARTHUR J. BOLT,
Attorney, Desenberg & Colip Retired President, Quality Refuse Service, Inc.
MERLIN J. HANSON, DONALD G. BRASCHLER,
Chairman, Hanson Group Chairman, Golden Brown Bakery, Inc.
THOMAS T. HUFF, JAMES D. CHRISTENSON,
Attorney, Varnum, Riddering, Schmidt and Howlett Retired President, Saugatuck Drug Co.
RONALD F. KINNEY, LOUIS A. DESENBERG,
Chairman, All-Phase Electric Supply Co., Inc. Attorney, Desenberg & Colip
JAMES E. LEBLANC, RICHARD J. DOUGHERTY,
Chairman, President and CEO, Whirlpool Financial Corp. Retired Educator
L. RICHARD MARZKE, MERLIN J. HANSON,
President, Pri-Mar Petroleum Chairman, Hanson Group
JAMES F. MURPHY, RONALD L. HARTGERINK,
Retired Chairman and CEO President, Wyckoff Chemical Company
DAN L. SMITH, THOMAS T. HUFF,
Chairman of the Board, President and CEO Attorney, Varnum, Riddering, Schmidt and Howlett
ROBERT L. STARKS, JAMES E. LEBLANC,
President, Kerley & Starks Funeral Homes, Inc. Chairman, President and CEO, Whirlpool Financial Corp.
JEFFERY H. TOBIAN, L. RICHARD MARZKE,
Retired President, Tobian Metals, Inc. President, Pri-Mar Petroleum
HARRY C. VORYS, JAMES F. MURPHY,
Retired Executive Vice President and Treasurer Retired Chairman and CEO, Shoreline Financial Corp.
RONALD L. ZILE, DR. GLADYS PEEPLES-BURKS,
Retired Vice Chairman Retired School Administrator
DAN L. SMITH,
Chairman, President and CEO
ROBERT L. STARKS,
President, Kerley & Starks Funeral Homes, Inc.
RONALD L. ZILE,
Retired Vice Chairman
</TABLE>
39
<PAGE>
<TABLE>
OFFICERS
<CAPTION>
<S> <C>
SHORELINE FINANCIAL CORPORATION OFFICERS SCOTT E. JOHNSON, Assistant Vice President and Trust Officer
DAN L. SMITH, Chairman of the Board, President and CEO JANE KOLBERG, Assistant Vice President and Secretary to
WAYNE R. KOEBEL, Executive Vice President, the Board
Chief Financial Officer, Secretary and Treasurer BARBARA J. STELTER, Assistant Vice President
JAMES R. MILROY, Senior Vice President and Controller and Branch Manager, St. Joseph
MARGARET A. THORNTON, Assistant Vice President and Branch
Manager, Berrien Springs
SHORELINE BANK OFFICERS JOHN S. WILK, Assistant Vice President
DAN L. SMITH, Chairman of the Board, President and CEO and Branch Manager, Baroda
WAYNE R. KOEBEL, Executive Vice President CHRISTOPHER BLANCHARD, Branch Manager, Orchards Mall
and Chief Financial Officer KATHLEEN M. BRINKS, Manager - Computer Operations
ROBERT K. BURCH, Executive Vice President - KAREN BROVOLD, Branch Manager, Niles South
Retail Banking BRIAN C. BROWN, Consumer Loan Officer
RICHARD D. BAILEY II, Senior Vice President - CAROL CONROY, Branch Manager, Fennville
Corporate Banking PAMELA J. DOLEZAN, Trust Officer
JAMES R. MILROY, Senior Vice President, Controller and SHARON GILLETTE, Branch Manager, Allegan
Cashier JACQUIE AMICARELLI-GODUSH, Branch Manager, Lakeshore
JOSEPH S. CALVARUSO, Senior Vice JOANNE HARTL, Director of Training
President - Loan Administration NATALIE HOLLOMON, Consumer Loan Officer
GARY A. DOLEZAN, Senior Vice President and CRA Officer JANE HOPE, Assistant Branch Administrator
JERRY GLOBENSKY, Senior Vice President - Commercial Loans TROY A. IGNELZI, Branch Manager, Suburban
RONALD D. SONNEMAN, Senior Vice President and Trust LYNN M. KERBER, Commercial Loan Officer
Officer ALICE C. KONKEY, Manager - Loan Operations
HILDA L. BANYON, First Vice President and Director of JETHROW D. KYLES, SR., Community Development
Personnel Officer/CRA Coordinator
GARRY P. KEMPKER, First Vice President and Trust Officer STEPHEN R. LISON, Branch Manager, Eau Claire
HAROLD E. BORLIK, Vice President - Trust Investments ANNETTE L. MAKLEY, Loan Review Officer
STEVE BRINKS, Vice President - Facilities PATRICIA L. MILLER, Branch Manager, Fairplain
JEFFREY CURRY, Vice President - Commercial Services JANEECE MINOTT, Security Officer
MICHAEL G. DOHERTY, Vice President - Commercial Loans LAWRENCE P. MORROW, Branch Manager, South St. Joseph
DAVID C. EIFLER, Vice President - Commercial Loans RICHARD REMUS, Manager - Credit Department
KENNETH W. JOHNSON, Vice President and PEGGY A. ROBERTS, Mortgage Loan Officer
North Regional Manager PEGGY SANTORO, Branch Manager, Hartford
MARK KEECH, Vice President - Data Processing KAREN SCHOUWINK, Branch Manager, Saugatuck
TIMOTHY B. MERKER, Vice President - Agriculture Loans RONALD T. SCHRAMM, Mortgage Loan Officer
ALAN NEWCOMB, Vice President - Operations MARTHA SPEER, Consumer Loan Officer
JENNIFER POSTELLO, Vice President - Mortgages DIANA L. SWARTZ, Branch Manager, Buchanan
GARY TESKE, Vice President - Consumer Loans FRANCES K. TERRY, Branch Manager, Galien
CATHRYN A. THALER, Vice President - Director of Marketing LORI A. WALLACE, Manager - Deposit Operations
EILEEN M. TONEY, Vice President and South Regional Manager LAURA WATKINS, Training Instructor
FRED D. WAGNER, Vice President - Commercial Loans
LEONARDO A. AMAT, Assistant Vice President - Commercial
Loans
CHRISTOPHER BELCHER, Assistant Vice President and Trust
Officer
MICHAEL J. GRIFFIN, Assistant Vice President and Branch
Manager, Paw Paw
</TABLE>
40
<PAGE>
<TABLE>
SHORELINE LOCATIONS
<CAPTION>
<S> <C>
ADAMSVILLE NILES
22405 U.S. 12 1835 S. 11th Street
ALLEGAN PAW PAW
128 Locust Street 212 S. Kalamazoo Street
BARODA PORTAGE
9061 First Street 1306 W. Centre Avenue -
Open March 31, 1997
BENTON HARBOR
834 Nickerson Avenue SAUGATUCK
100 Oak Street 249 Mason Street
1882 Pipestone Road SOUTH HAVEN
823 Riverview Drive 433 Phoenix Street
CASH MACHINES: Blue Star Memorial Highway
Berrien County Court House - and M-43
811 Port Street CASH MACHINES:
Lake Michigan College - Primart Quik Shop and Amoco
2755 E. Napier Avenue Station - 73241 Phoenix Street
Meijer - 1920 Pipestone Road Wal-Mart - 03383 73rd
BERRIEN SPRINGS STEVENSVILLE
9190 U.S. 31-33 5609 S. Cleveland Avenue
CASH MACHINE:
Primart Quik Shop and Amoco ST. JOSEPH
Station - U.S. 31-33 720 Pleasant Street
2003 Niles Road
BLOOMINGDALE 2600 S. Cleveland Avenue
101 Spring Street CASH MACHINES:
Ace Hardware - 4032 M-139
BRIDGMAN Roger's Foodland -
CASH MACHINE: 1155 Vineland Avenue
McDonald's -
10280 Red Arrow Highway THREE OAKS
11 E. Linden
BUCHANAN
1101 E. Front Street
128 N. Main Street
EAU CLAIRE
6534 Main Street
CASH MACHINE:
Harding's - Pipestone Road
EDWARDSBURG [MAP OF SOUTHWESTERN LOWER MICHIGAN]
Gateway Shopping Center
FENNVILLE
125 S. Maple
GALIEN
206 S. Cleveland Avenue
HARTFORD
18 N. Center Street
MATTAWAN
Primart Quik Shop and
Amoco Station -
24039 Red Arrow
Highway
</TABLE>
41
<PAGE>
SHORELINE FINANCIAL CORPORATION
1996 ANNUAL REPORT
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference and use of our report,
dated February 14, 1997, on the consolidated financial statements of
Shoreline Financial Corporation which appears on page 37 of Shoreline
Financial Corporation's Annual Report to Shareholders for the year ended
December 31, 1996, in Shoreline Financial Corporation's previously filed
registration statements for its 1989 Stock Option Plan (Registration No.
33-29052), Dividend Reinvestment Plan (Registration No. 33-34008), 401(k)
Profit Sharing Plan (Registration No. 333-10629) and Stock Incentive Plan
of 1996 (Registration No. 333-09819).
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
March 21, 1997
<PAGE>
EXHIBIT 24
LIMITED POWER OF ATTORNEY
The undersigned, in his or her 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, or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Shoreline Financial Corporation on Form 10-K for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: MARCH 4TH , 1997 /S/ LOUIS A. DESENBERG
(signature)
LOUIS A. DESENBERG
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her 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, or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Shoreline Financial Corporation on Form 10-K for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: MARCH 18, , 1997 /S/ MERLIN HANSON
(signature)
MERLIN HANSON
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her 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, or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Shoreline Financial Corporation on Form 10-K for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: 2/28/ , 1997 /S/ THOMAS T. HUFF
(signature)
THOMAS T. HUFF
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her 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, or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Shoreline Financial Corporation on Form 10-K for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: 3-19 , 1997 /S/ JAMES E. LEBLANC
(signature)
JAMES E. LEBLANC
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her 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, or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Shoreline Financial Corporation on Form 10-K for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: 3-17 , 1997 /S/ L. RICHARD MARZKE
(signature)
L. RICHARD MARZKE
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her 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, or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Shoreline Financial Corporation on Form 10-K for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: 3-4 , 1997 /S/ JAMES F. MURPHY
(signature)
JAMES F. MURPHY
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her 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, or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Shoreline Financial Corporation on Form 10-K for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: 3-1 , 1997 /S/ JEFF TOBIAN
(signature)
JEFF TOBIAN
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her 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, or either of them, his or
her attorneys or attorney to execute in his or her name an Annual Report of
Shoreline Financial Corporation on Form 10-K for its fiscal year ended
December 31, 1996, and any amendments to that report, and to file it with
the Securities and Exchange Commission. Each attorney shall have power and
authority to do and perform in the name and on behalf of the undersigned,
in any and all capacities, every act to be done in the premises as fully
and to all intents and purposes as the undersigned could do in person, and
the undersigned hereby ratifies and approves the acts of such attorneys.
Dated: 3-21 , 1997 /S/ HARRY C. VORYS
(signature)
HARRY C. VORYS
(type or print name)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF SHORELINE FINANCIAL
CORPORATION AND SUBSIDIARIES FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 38,267
<INT-BEARING-DEPOSITS> 18,142
<FED-FUNDS-SOLD> 5,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 90,254
<INVESTMENTS-CARRYING> 47,582
<INVESTMENTS-MARKET> 48,588
<LOANS> 500,591
<ALLOWANCE> 6,895
<TOTAL-ASSETS> 716,095
<DEPOSITS> 616,478
<SHORT-TERM> 15,167
<LIABILITIES-OTHER> 5,032
<LONG-TERM> 10,000
<COMMON> 0
0
0
<OTHER-SE> 69,418
<TOTAL-LIABILITIES-AND-EQUITY> 716,095
<INTEREST-LOAN> 43,646
<INTEREST-INVEST> 9,718
<INTEREST-OTHER> 904
<INTEREST-TOTAL> 54,270
<INTEREST-DEPOSIT> 24,238
<INTEREST-EXPENSE> 25,186
<INTEREST-INCOME-NET> 29,084
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 191
<EXPENSE-OTHER> 19,433
<INCOME-PRETAX> 13,398
<INCOME-PRE-EXTRAORDINARY> 13,398
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,605
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.74
<YIELD-ACTUAL> 3.40
<LOANS-NON> 524
<LOANS-PAST> 1,104
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 8,300
<ALLOWANCE-OPEN> 6,600
<CHARGE-OFFS> 593
<RECOVERIES> 288
<ALLOWANCE-CLOSE> 6,895
<ALLOWANCE-DOMESTIC> 4,515
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,380
</TABLE>
