<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
==================================
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________.
Commission File Number: 0-16444
SHORELINE FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-2758932
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
823 RIVERVIEW DRIVE
BENTON HARBOR, MICHIGAN 49022
(Address of Principal Executive Offices) (Zip Code)
(616) 927-2251
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No _____
As of October 31, 1997, there were 5,910,459 issued and outstanding shares
of the Registrant's Common Stock.
<PAGE>
SHORELINE FINANCIAL CORPORATION
FORM 10-Q
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets,
September 30, 1997 and December 31, 1996 2-3
Condensed Consolidated Statements of Income,
Three Months and Nine Months Ended September 30, 1997
and 1996 4
Condensed Consolidated Statements of Cash Flows,
Nine Months Ended September 30, 1997 and 1996 5-6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 36,659,953 $ 38,266,519
Interest-earning deposits 10,232,428 18,142,151
Federal funds sold 14,625,000 5,150,000
-------------- --------------
Total cash and cash equivalents 61,517,381 61,558,670
Securities available for sale (carried at
fair value) 124,816,203 90,254,236
Securities held to maturity
(fair values of $44,648,604 and
$48,588,454 on September 30, 1997 and
December 31, 1996, respectively) 43,433,503 47,582,337
Total loans 617,996,347 500,591,353
Less allowance for loan losses 7,781,515 6,894,945
-------------- --------------
Net loans 610,214,832 493,696,408
Premises and equipment, net 13,577,516 10,975,483
Other assets 23,104,560 12,027,685
-------------- --------------
Total assets $ 876,663,995 $ 716,094,819
============== ==============
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing $ 77,816,189 $ 74,142,067
Interest-bearing 660,207,817 542,335,458
-------------- --------------
Total deposits 738,024,006 616,477,525
Securities sold under agreements to repurchase 8,883,840 7,166,563
Other liabilities 4,687,638 5,032,529
FHLB advances 50,259,407 18,000,000
-------------- --------------
Total liabilities 801,854,891 646,676,617
-------------- --------------
</TABLE>
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<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS - CONTINUED
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- ---------------
(unaudited)
<S> <C> <C>
Shareholders' equity
Common stock:
10,000,000 shares authorized;
5,910,459 and 5,555,672 shares issued
at September 30, 1997 and December 31, 1996,
respectively
Additional paid-in capital 64,639,186 56,388,553
Stock incentive plan (unearned shares) (525,410)
Unrealized gain on securities
available for sale, net 1,518,288 1,378,327
Retained earnings 9,177,040 11,651,322
-------------- --------------
Total shareholders' equity 74,809,104 69,418,202
-------------- --------------
Total liabilities & shareholders' equity $ 876,663,995 $ 716,094,819
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 13,869,295 $ 11,102,467 $ 36,543,362 $ 32,708,641
Securities 2,880,386 2,478,463 7,944,920 7,305,755
Deposits with banks 104,537 111,609 355,133 306,638
Federal funds sold 112,320 69,735 789,803 219,472
------------- -------------- ------------- -------------
Total interest income 16,966,538 13,762,274 45,633,218 40,540,506
------------- -------------- ------------- -------------
INTEREST EXPENSE
Deposits 7,664,832 6,056,129 20,546,605 18,058,176
Other 761,072 283,939 1,537,608 643,682
------------- -------------- ------------- -------------
Total interest expense 8,425,904 6,340,068 22,084,213 18,701,858
------------- -------------- ------------- -------------
NET INTEREST INCOME 8,540,634 7,422,206 23,549,005 21,838,648
Provision for loan losses 180,000 150,000 420,000 450,000
------------- -------------- ------------- -------------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 8,360,634 7,272,206 23,129,005 21,388,648
------------- -------------- ------------- -------------
OTHER INCOME
Service charges on deposit
accounts 533,588 458,317 1,551,274 1,325,052
Trust fees 423,637 385,501 1,242,501 1,165,390
Securities gains 9,785 6,316 122,688 190,660
Other 546,274 298,962 1,215,671 516,818
------------- -------------- ------------- -------------
Total other income 1,513,284 1,149,096 4,132,134 3,197,920
------------- -------------- ------------- -------------
OTHER EXPENSES
Personnel 2,991,317 2,696,819 8,446,006 7,979,434
Occupancy 402,416 338,241 1,095,917 1,015,680
Equipment 557,685 470,810 1,590,702 1,434,706
Other 1,780,201 1,661,088 4,693,494 4,299,791
------------- -------------- ------------- -------------
Total other expense 5,731,619 5,166,958 15,826,119 14,729,611
------------- -------------- ------------- -------------
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INCOME BEFORE INCOME
TAXES 4,142,297 3,254,344 11,435,020 9,856,957
Federal income tax expense 1,289,500 919,000 3,390,500 2,770,800
------------- -------------- ------------- -------------
NET INCOME $ 2,852,797 $ 2,335,344 $ 8,044,520 $ 7,086,157
============= ============== ============= =============
EARNINGS PER SHARE $ .49 $ .40 $ 1.37 $ 1.22
============= ============== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,044,520 $ 7,086,157
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 1,215,992 1,118,301
Provision for loan losses 420,000 450,000
Net amortization and accretion on securities 199,600 441,912
Amortization of goodwill and related core
deposit intangibles 368,425 211,749
Stock incentive expense 80,840 0
Gains on sales and calls of securities (122,688) (190,660)
Decrease in other assets (597,150) (702,862)
(Decrease)/increase in other liabilities (1,660,556) 322,649
------------ -------------
NET CASH FROM OPERATING ACTIVITIES 7,948,983 8,737,246
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisition of SJS (See Note 2) (20,436,447) 0
Sale of mortgage loan pool 8,842,810 0
Net increase in loans (13,488,722) (33,633,324)
Securities available for sale:
Purchases (33,394,954) (17,657,433)
Proceeds from sales 15,771,748 7,859,399
Proceeds from maturities, calls and principal
reductions 12,035,611 13,730,504
Securities held to maturity:
Purchases (4,276,335) (8,681,583)
Proceeds from sales 0 354,060
Proceeds from maturities, calls and principal
reductions 8,380,242 8,241,754
Premises and equipment expenditures (1,644,770) (1,453,370)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES (28,210,817) (31,239,993)
------------ -------------
</TABLE>
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<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
------------ -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 10,803,926 22,344,020
Net increase in short-term borrowings 1,717,277 5,205,359
Proceeds from FHLB advances 19,500,000 7,000,000
Repayment of FHLB advances (8,926,239) 0
Dividends paid (3,715,536) (3,259,396)
Proceeds from shares issued 841,117 697,492
Payments to retire common stock 0 (354,725)
------------ -------------
NET CASH FROM FINANCING ACTIVITIES 20,220,545 31,632,750
------------ -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (41,289) 9,130,003
Cash and Cash Equivalents at Beginning of Year 61,558,670 42,760,198
------------ -------------
Cash and Cash Equivalents at September 30 $ 61,517,381 $ 51,890,201
============ =============
CASH PAID DURING THE YEAR FOR:
Interest $ 21,653,560 $ 18,627,922
Income Taxes $ 3,077,000 $ 2,809,000
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Shares issued under stock incentive plan in
the amount of $606,250
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
SHORELINE FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements were prepared in accordance with Rule 10-01 of Regulation S-X
and the instructions for Form 10-Q and, therefore, do not include all
disclosures required by generally accepted accounting principles for
complete presentation of financial statements. In the opinion of
management, the condensed consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to
present fairly the financial condition of Shoreline Financial Corporation
("Shoreline" or the "Corporation") as of September 30, 1997 and December 31,
1996, and the results of its operations for the three and nine months ended
September 30, 1997 and 1996, and its cash flows for the nine months then
ended. The results of operations for the nine months ended September 30,
1997 are not necessarily indicative of the results to be expected for the
year ending December 31, 1997.
The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities."
This pronouncement revises the accounting for transfers of financial
assets, such as loans and securities, and for distinguishing between sales
and secured borrowings. SFAS No. 125, as amended by SFAS No. 127, is
effective for some transactions in 1997 and others in 1998. The effect of
adopting this standard was not material to the consolidated financial
statements of Shoreline Financial Corporation.
In June 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which revises the accounting requirements for calculating earnings per
share. Effective beginning with year-end 1997, basic earnings per share
will be calculated solely on average common shares outstanding. Diluted
earnings per share will reflect the potential dilution of stock options and
other common stock equivalents. All prior calculations will be restated to
be comparable to the new methods. Since the Corporation has not had
significant dilution from stock options, the new calculation methods will
not significantly affect future basic earnings per share or diluted
earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for reporting
and display of comprehensive income and its components (revenue, expenses,
gains and losses) in a full set of general-purpose financial statements.
SFAS No. 130 requires that all items that are required to be recognized
-8-
<PAGE>
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. Income tax effects must also be
shown. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 130 is not expected to have a
material impact on the results of operations or financial condition of the
Corporation.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. The
adoption of SFAS No. 131 is not expected to have a material impact on the
results of operations or financial condition of the Corporation.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Shoreline Financial Corporation and its wholly owned
subsidiary, Shoreline Bank, together referred as "Shoreline." All material
intercompany accounts and transactions have been eliminated in
consolidation.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Securities are classified into held to maturity, available for
sale and trading categories. Held to maturity securities are those which
Shoreline has the positive intent and ability to hold to maturity, and are
reported at amortized cost. Available for sale securities are those which
Shoreline may decide to sell if needed for liquidity, asset-liability
management or other reasons. Available for sale securities are reported at
fair value, with unrealized gains or losses included as a separate
component of equity, net of tax. Trading securities are bought principally
for sale in the near term, and are reported at fair value with unrealized
gains or losses included in earnings. Shoreline did not hold any
securities considered for this category at any time during the third
quarter of 1997.
Realized gains or losses are determined based on the amortized
cost of the specific security sold.
During the nine-month period ended September 30, 1997, the
proceeds from sales of available for sale securities were $15,771,748, with
gross realized gains of $120,634 and gross realized losses of $10,040 from
-9-
<PAGE>
those sales. Gross gains of $12,094 were realized on calls of securities
during the same period. For this period, the change in net unrealized
holding gains on available for sale securities was an increase of
approximately $212,000. There were no sales or transfers of securities
classified as held to maturity.
INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the net
value of tangible assets acquired and related core deposit intangibles
identified in acquisitions. Goodwill is expensed on the straight-line
method over no more than 25 years. The related core deposit intangibles are
amortized on an accelerated basis over the estimated life of the deposits
acquired. Goodwill and core deposit intangibles totaled approximately
$12,077,000 and $2,377,000 at September 30, 1997 and December 31, 1996,
respectively. The increase is attributable to the acquisition of SJS
Bancorp, Inc. as discussed below. These amounts are included in Other
Assets in the accompanying balance sheets.
INCOME TAXES
Income tax expense for the periods ended September 30, 1997 and
1996 is based upon the asset and liability method. Shoreline records
income tax expense based on the amount of taxes due on its tax return plus
deferred taxes computed based on the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets
and liabilities, using enacted rates.
EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding and common equivalent
shares with a dilutive effect. Common equivalent shares are shares which
may be issuable to employees upon exercise of outstanding stock options.
The average number of shares outstanding was 5,904,372 in the third quarter
of 1997 and 5,803,970 in the third quarter of 1996. The average number of
shares outstanding was 5,882,553 in the nine months ended September 30, 1997
and 5,794,082 in the nine months ended September 30, 1996.
NOTE 2 - ACQUISITION
On June 13, 1997, Shoreline completed the acquisition of all of the
outstanding stock of SJS Bancorp, Inc. ("SJS"), headquartered in St. Joseph,
Michigan, for approximately $24.8 million in cash.
The acquisition is accounted for as a purchase. Intangibles are
amortized under various methods over their estimated lives. The fair values
of assets and liabilities assumed were as follows (in thousands):
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<TABLE>
<CAPTION>
<S> <C> <C>
Cash acquired, net of cash paid for acquisition $ (20,436)
Securities 28,794
Loans, net 112,293
Premises and equipment, net 2,173
Acquisition intangibles 10,619
Other assets 301
Deposits (110,743)
FHLB advances (21,686)
Other liabilities (1,315)
</TABLE>
NOTE 3 - INCOME TAXES
Components of the provision for federal income taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
Taxes currently payable $ 3,350,000
Deferred tax expense 40,500
-------------
Income tax expense $ 3,390,500
=============
</TABLE>
The deferred income taxes are due primarily to the temporary difference
related to depreciation, bad debt deductions, mark-to-market of securities
held for sale and deferred loan fees.
The difference between the provision for income taxes shown on the
statement of income and amounts computed by applying the statutory federal
income tax rate to income before income taxes is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
Income tax calculated at statutory federal rate of 34% $ 3,888,000
Increase (decrease) due to tax effect of
Tax-exempt income (643,000)
Nondeductible expense and other 145,500
-------------
Income tax expense $ 3,390,500
=============
</TABLE>
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<PAGE>
The components of the net deferred tax asset recorded in the balance
sheet as of September 30, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Total deferred tax liabilities $ (1,281,000)
Total deferred tax assets 3,606,000
Total valuation allowance 0
--------------
Net deferred tax asset $ 2,325,000
==============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion compares the financial condition of
Shoreline Financial Corporation ("Shoreline") at September 30, 1997 to
December 31, 1996 and the results of operations for the three and nine
months ended September 30, 1997 with the same periods in 1996. The
acquisition of SJS Bancorp, Inc. ("SJS") in the quarter ended June 30, 1997
is reflected in the balance sheet of Shoreline with the addition of
approximately $134 million in market valued assets and liabilities (see
Note 2). As such, average balance comparisons normally used in the balance
sheet discussion provide limited usefulness due to the SJS transaction.
Therefore, the discussion relating to the financial condition of Shoreline
compares actual balances of selected items.
FINANCIAL CONDITION
Total assets of Shoreline were $876.7 million as of September 30,
1997, a 22.4% increase compared to the balance of $716.1 million at December
31, 1996. The acquisition of SJS accounted for $133.7 million of such growth.
Total deposits on September 30, 1997 were $738.0 million, an
increase of $121.5 million from December 31, 1996. Deposits added to the
balance sheet as a result of the SJS acquisition totaled $110.7 million.
Approximately 75% of these deposits were interest-bearing time deposits.
Only $1.3 million of the SJS deposits were noninterest-bearing. Without
considering the SJS deposits, total deposits have increased $10.8 million
from December 31, 1996. The majority of this increase ($9.0 million) occurred
in the third quarter of 1997. Growth in Shoreline's Super Public Fund
account, an interest-bearing demand deposit account geared toward
municipalities, as well as increases in core deposit accounts including
demand deposits and personal checking accounts provided retail funding
sources. Gains in the Super Public Fund account can be attributed to
seasonal funding patterns of the municipalities. Growth in these deposits
was partially offset by declines in money market, savings and certificates
of deposit accounts during the third quarter of 1997.
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<PAGE>
Borrowings from the Federal Home Loan Bank of Indianapolis ("FHLB")
increased to $50.3 million as of September 30, 1997 from $18.0 million as
of December 31, 1996. The majority of this increase resulted from the
addition of $21.7 million in outstanding borrowings of SJS. Shoreline has
also taken advantage of its membership in the FHLB by increasing its
borrowings as an alternative source of funds throughout 1997. This source
of wholesale funding provides an alternative to conventional retail funding
at comparable or reduced cost.
Total loans increased $117.4 million to $618.0 million as of
September 30, 1997 from $500.6 million as of December 31, 1996. Of this
increase, $112.3 million was attributable to the acquisition of SJS.
Eliminating this effect, Shoreline's loan portfolios increased $5.1 million
over the nine-month period ended September 30, 1997. The majority of this
increase occurred in the commercial loan portfolio, where volume rose $15
million - $10.6 million of which occurred in the third quarter of 1997.
Eliminating the impact of the SJS merger, consumer loans increased $6.7
million primarily as a result of a promotional program held early in the
second quarter and repeated in the third quarter of 1997. The mortgage loan
portfolio declined $16.6 million primarily due to ongoing sales of originated
fixed rate loans in the secondary market in conformity with the bank's
asset-liability policy and the block sale of $8.8 million of low rate 30 year
loans in the third quarter of 1997. This sale was comprised of all secondary
market eligible loans with rates ranging from 6.75% through 7.475%.
Management believes this transaction will allow Shoreline to more effectively
manage and distribute the mix of its assets through prudent asset-liability
management. Management believes reinvestment of these assets is enhanced by
the transaction.
Total investment securities were $168.3 million as of
September 30, 1997, an increase of $30.4 million from December 31, 1996.
The SJS transaction added $28.8 million to Shoreline's securities portfolio,
of which $27.6 million were U.S. Government Agency securities designated as
available for sale. Shoreline's short-term investments were impacted by the
payment of $24.8 million for the purchase of all of the outstanding common
stock of SJS. Total cash and cash equivalents at September 30, 1997,
approximating the level at year end 1996, is representative of the level at
which Shoreline will normally operate.
Other assets increased $11.1 million to $23.1 million as of
September 30, 1997 from $12.0 million as of December 31, 1997. The purchase
accounting method was used in the acquisition of SJS, resulting in the
addition of related intangibles totaling $10.6 million.
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<PAGE>
Total non-performing assets at September 30, 1997 were $2.8
million, which represents .47% of Shoreline's total loan portfolio at that
date. Non-performing assets include loans that are classified for
regulatory purposes as contractually past due 90 days or more, on
non-accrual status or "troubled debt restructurings" and other real estate
owned.
During the third quarter of 1997, Shoreline recorded charge-offs
net of recoveries totalling $47,309. Total net charge-offs on a fiscal
year-to-date basis were only $74,024, which represents .01% of
average total loans for the same period. The provision for loan losses for
the third quarter of 1997 was $180,000, an increase of $60,000 over the
second quarter of the year. Management believes the increased provision
provides stability to the allowance for loan losses as a percentage of total
loans after the addition of loans from SJS. At September 30, 1997,
Shoreline's allowance for loan losses was $7,781,515, which provides a
coverage ratio of 2.8 times the level of non-performing assets identified at
that date. The SJS transaction added approximately $540,000 to Shoreline's
allowance. This amount, as well as the increased provision in the third
quarter of 1997, raised Shoreline's allowance as a percentage of total loans
to 1.24% at September 30, 1997 from 1.23% at June 30, 1997. Management
believes the level of the loan loss reserve is adequate to cover the risk
associated with its loan portfolio.
LIQUIDITY AND RATE SENSITIVITY
During the third quarter of 1997, Shoreline's loan to deposit
ratio was 85.1%, up from the previous quarter's ratio of 81.4%. During the
third quarter of 1997, average interest-earning deposits and federal funds
sold represented 1.7% of Shoreline's total assets. Shoreline built its
level of interest-earning deposits and federal funds sold to a much higher
level during the second quarter of 1997 in anticipation of the cash purchase
of SJS in June. Approximately $125 million or 74% of Shoreline's total
securities portfolio was classified as available for sale on September 30,
1997 and $1,751,000 of loans were classified as held for sale. On September
30, 1997, Shoreline had commitments to make or purchase loans, including
the unused portions of lines of credit, totaling approximately $116
million.
On September 30, 1997, the cumulative funding gaps of
interest-earning assets and interest-bearing liabilities for selected
maturity periods are illustrated as follows:
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<TABLE>
<CAPTION>
REPRICEABLE OR MATURING WITHIN:
------------------------------------
0 TO 3 0 TO 12 0 TO 5
(000S) MONTHS MONTHS YEARS
------ ------- ------
<S> <C> <C> <C>
Interest-earning assets
Loans $ 160,274 $ 271,178 $ 558,700
Securities 18,225 32,777 94,318
Federal funds sold 14,625 14,625 14,265
Interest-earning deposits 10,232 10,232 10,232
--------- --------- ---------
Total $ 203,356 $ 328,812 $ 677,875
========= ========= =========
Interest-bearing liabilities
Time deposits $ 80,025 $ 241,555 $ 368,575
Demand and savings deposits 288,448 288,448 288,448
Other borrowings 20,134 33,884 59,143
--------- --------- ---------
Total $ 388,607 $ 563,887 $ 716,166
========= ========= =========
Asset/(liability) gap $(185,251) $(235,075) $ (38,291)
========= ========= =========
</TABLE>
As shown, Shoreline had a cumulative liability gap position of
$235.1 million within the one-year maturity period. At September 30, 1996,
Shoreline reported a liability gap position in the same maturity period of
$170.4 million. The increase reflects the addition of SJS rate sensitive
assets and liabilities. This position suggests that if market interest
rates decline in the next 12 months, Shoreline has the potential to earn
more net interest income. A limitation of the traditional static gap
analysis, however, is that it does not consider the timing or magnitude of
noncontractual repricing. In addition, the static gap analysis treats
demand and savings accounts as 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.
CAPITAL RESOURCES
Total shareholders' equity was $74.8 million on September
30, 1997. Included in this total are net unrealized gains on securities
available for sale totaling $1.5 million, an increase of approximately
$140,000 from December 31, 1996. During the third quarter of 1997,
Shoreline's Board of Directors approved and paid a cash dividend of $.22
-15-
<PAGE>
per share. Shoreline's capital ratios declined from December 31, 1996
reflecting the impact of its purchase of SJS. However, Shoreline's capital
position still remains strong and is well above minimum regulatory
standards. Shoreline remains classified as a "well-capitalized"
institution under these standards.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Equity to assets 8.53% 9.69%
Tier I leverage 7.08% 9.30%
Risk-based:
Tier I Capital 11.59% 15.10%
Total Capital 12.83% 16.33%
</TABLE>
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 1997 was
$2,852,797, an increase of 22.2%, or $517,453, over the same period in
1996. Revenue growth, both in net interest income and noninterest income,
was the primary reason behind the improved profitability. The following
table illustrates the effect that changes in rates and volumes of interest
earning assets and interest-bearing liabilities had on net interest income
for the three months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
1997 1996
---- ----
<S> <C> <C>
(000S)
Interest income (taxable equivalent) $ 17,306 $ 14,075
Interest expense 8,426 6,340
---------- ---------
Net interest income $ 8,880 $ 7,735
========== =========
Average volume
Interest-earning assets $ 804,361 $ 654,693
Interest-bearing liabilities 709,240 557,376
---------- ---------
Net differential $ 95,121 $ 97,317
========== =========
Average yields/rates:
Yield on earning assets 8.54% 8.55%
Rate paid on liabilities 4.71% 4.53%
========== =========
Interest spread 3.83% 4.02%
========== =========
Net interest margin 4.38% 4.70%
========== =========
-16-
<PAGE>
The change in net interest income (in thousands) is attributable to the
following:
</TABLE>
<TABLE>
<CAPTION>
VOLUME RATE INC/(DEC)
------ ---- --------
<S> <C> <C> <C>
Interest-earning assets $ 3,247 $ (16) $ 3,231
Interest-bearing liabilities 1,821 265 2,086
---------- --------- ---------
Net interest income $ 1,426 $ (281) $ 1,145
========== ========= =========
</TABLE>
Net income for the nine months ended September 30, 1997, was
$8,044,520, an increase of 13.5% over the same period in 1996. Increased
revenue from net interest income and other income provided this increase.
The following table illustrates the effect that changes in rates and
volumes of interest earning assets and interest-bearing liabilities had on
net interest income for the nine months ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
1997 1996
---- ----
<S> <C> <C>
(000S)
Interest income (taxable equivalent) $ 46,328 $ 41,359
Interest expense 22,084 18,702
------------ ------------
Net interest income $ 24,244 $ 22,657
============ ============
Average volume
Interest-earning assets $ 730,045 $ 645,290
Interest-bearing liabilities 633,137 550,952
------------ ------------
Net differential $ 96,908 $ 94,338
============ ============
Average yields/rates:
Yield on earning assets 8.48% 8.56%
Rate paid on liabilities 4.66% 4.53%
============ ============
Interest spread 3.82% 4.03%
============ ============
Net interest margin 4.44% 4.69%
============ ============
</TABLE>
The change in net interest income (in thousands) is attributable to the
following:
-17-
<PAGE>
<TABLE>
<CAPTION>
VOLUME RATE INC/(DEC)
------ ---- --------
<S> <C> <C> <C>
Interest-earning assets $ 5,360 $ (391) $ 4,969
Interest-bearing liabilities 2,834 548 3,382
----------- --------- ----------
Net interest income $ 2,526 $ (939) $ 1,587
=========== ========= ==========
</TABLE>
Shoreline expensed $180,000 for the provision for loan losses in
the third quarter of 1997, up $60,000 from the previous quarter. The
provision for loan losses is based upon loan loss experience and such other
factors which, in management's judgment, deserve current recognition in
maintaining an adequate allowance for loan losses.
Total other income for the quarter ended September 30, 1997
was $1,513,284, an increase of $364,188, or 31.7% over the third
quarter in 1996. Increased other income accounted for approximately
$247,000 of this increase. Increased gains from the sale of mortgage loans
as well as increased ATM fee income provided the majority of the increase
in other income. Increased deposit service charge income contributed
$75,000 to the increase in total other income. For the nine months ended
September 30, total other income was $4,132,134 in 1997 compared to
$3,197,920 in 1996. This is an increase of 29.2% or $934,214. Again,
increased other income provided the majority of growth in this area. Other
income for the nine months ended September 30, 1997 totaled $1,215,671, an
increase of $698,853 over same period in 1996. Gains on the sale of
mortgage loans accounted for $338,957 of this increase, with ATM fee income
and investment and insurance sale income also contributing to the $710,706
increase. Deposit service charge income increased $226,222 or 17.1% in the
nine months ended September 30, 1997 compared to the same period in 1996.
Trust fee income provided an additional $77,000 in 1997 year-to-date. As a
percentage of average assets, other income for the first nine months in 1997
totaled .69% compared to .59% in 1996.
Total other expense was $5,731,619 during the third quarter of
1997, an increase of $564,661 or 10.9% over the same period in 1996.
Assimilation of the SJS merger, including increased personnel costs
which amount to over 50% of the increased expense, contributed to the
total. For the nine months ended September 30, 1997, total other expense
was $15,826,119, which is an increase of 7.4% or $1,096,508 over the
nine months ended September 30, 1996. Increased use of professional
services related to outsource arrangements and consulting projects along
with increased advertising, personnel and other expenses related to the SJS
acquisition contributed to the increase. As a percentage of average assets,
total other expense was 2.71% through September 1997. This compares to the
-18-
<PAGE>
prior year's ratio over the same time period of 2.86%. Shoreline's
efficiency ratio also declined from 57.2% in the first nine months of 1996
to 55.7% in the first nine months of 1997.
In summary, Shoreline's net income of $2,852,797 in the third
quarter of 1997 produced a return on average shareholders' equity of 15.31%
and a return on average assets of 1.31%. On a year-to-date basis,
Shoreline's return on average shareholders' equity was 14.94% and its
return on average assets was 1.38% for 1997 which favorably compare to 1996
ratios of 14.39% and 1.38%, respectively. Earnings per share through
September 30, 1997 was $1.37 and dividends per share was $.63. These compare
to earnings per share and dividends per share through September 30, 1996 of
$1.22 and $.56, respectively.
-19-
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following documents are filed as exhibits to
this report on Form 10-Q:
EXHIBIT
NUMBER DOCUMENT
3.1 Restated Articles of Incorporation. Previously filed as Exhibit
1(a) to the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1994. Here incorporated by reference.
3.2 Bylaws. Previously filed as Exhibit 3(b) to the Registrant's
Form S-1 Registration Statement filed March 23, 1990. Here
incorporated by reference.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. On August 26, 1997, Shoreline filed
Amendment No. 1 relating to its Form 8-K filed on June 27, 1997 reporting the
acquisition of SJS Bancorp, Inc. This amendment provided pro forma financial
information under Item 7 that was permitted to be omitted from the original
Form 8-K filing. The pro forma financial information included in that report
was:
(1) The Consolidated Condensed Balanced Sheets of
Shoreline Financial Corporation at June 30, 1997, filed as part of
Shoreline's quarterly report on Form 10-Q for the quarter ended June
30, 1997, reflect the effect of the transaction. Therefore, no pro
forma balance sheet was required;
(2) Pro Forma Condensed Statements of Income for the
year ended December 31, 1996, and the quarter ended June 30, 1997;
and
(3) Notes to Pro Forma Condensed Combined Financial
Statements.
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SHORELINE FINANCIAL CORPORATION
(Registrant)
Date November 13, 1997 /s/Dan L. Smith
Dan L. Smith
Chairman, President and Chief Executive
Officer
Date November 13, 1997 /s/Wayne R. Koebel
Wayne R. Koebel
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
-21-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
3.1 Restated Articles of Incorporation. Previously filed as Exhibit
1(a) to the registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1994. Here incorporated by reference.
3.2 Bylaws. Previously filed as Exhibit 3(b) to the registrant's
Form S-1 Registration Statement filed March 23, 1990. Here
incorporated by reference.
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF SHORELINE
FINANCIAL CORPORATION FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 36,660
<INT-BEARING-DEPOSITS> 10,232
<FED-FUNDS-SOLD> 14,625
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 124,816
<INVESTMENTS-CARRYING> 43,434
<INVESTMENTS-MARKET> 44,649
<LOANS> 617,996
<ALLOWANCE> 7,782
<TOTAL-ASSETS> 876,664
<DEPOSITS> 738,024
<SHORT-TERM> 33,884
<LIABILITIES-OTHER> 4,688
<LONG-TERM> 25,259
<COMMON> 0
0
0
<OTHER-SE> 74,809
<TOTAL-LIABILITIES-AND-EQUITY> 876,664
<INTEREST-LOAN> 36,543
<INTEREST-INVEST> 7,945
<INTEREST-OTHER> 1,145
<INTEREST-TOTAL> 45,633
<INTEREST-DEPOSIT> 20,547
<INTEREST-EXPENSE> 1,538
<INTEREST-INCOME-NET> 23,549
<LOAN-LOSSES> 420
<SECURITIES-GAINS> 123
<EXPENSE-OTHER> 15,826
<INCOME-PRETAX> 11,435
<INCOME-PRE-EXTRAORDINARY> 11,435
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,045
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
<YIELD-ACTUAL> 2.61
<LOANS-NON> 1,059
<LOANS-PAST> 1,576
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 9,791
<ALLOWANCE-OPEN> 6,895
<CHARGE-OFFS> 498
<RECOVERIES> 424
<ALLOWANCE-CLOSE> 7,782
<ALLOWANCE-DOMESTIC> 5,896
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,886
</TABLE>
