<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
823 RIVERVIEW DRIVE
BENTON HARBOR, MICHIGAN 49022
(Address of principal executive offices) (Zip Code)
(616) 927-2251
(Registrant's telephone number, including area code)
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 common 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 March 10, 1998: $261,696,638.25
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 March 10, 1998: 5,930,802 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1997, are incorporated by reference in Part II.
Portions of the registrant's Definitive Proxy Statement for its May 14,
1998, annual meeting of shareholders are incorporated by reference in Part
III.
<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, 1997, totaling
$857.8 million, deposits of $722.7 million and shareholders' equity of
$76.9 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
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 Shoreline Bank 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 29
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
73.7% of Shoreline's total revenues in 1997, 74.5% of Shoreline's total
-2-
<PAGE>
revenues in 1996, and 73.5% in 1995. Interest on investment securities
accounted for 15.8% of Shoreline's total revenues in 1997, 16.6% in 1996,
and 17.4% in 1995. 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 350 persons at
December 31, 1997.
RECENT DEVELOPMENTS
Effective June 13, 1997, Shoreline acquired SJS Bancorp, Inc. ("SJS"),
a bank holding company, and its subsidiary, SJS Federal Savings Bank. The
acquisition was effected by a merger of SJS into Shoreline. This
transaction was accounted for as a purchase for accounting purposes. At
the effective date, SJS had assets totaling approximately $134 million and
deposits of approximately $111 million. The principal market for financial
services offered by SJS was St. Joseph, South Haven and Stevensville,
Michigan.
On December 8, 1997, Shoreline signed an Affiliation Agreement with
The State Bank of Coloma ("Coloma"). Under that Agreement, Coloma would
merge with and into Shoreline Bank. The merger is anticipated to be
treated as a pooling of interests for accounting purposes. Coloma has
assets of approximately $29 million and provides banking services to
Coloma, Michigan and surrounding areas. Completion of the transaction is
subject to regulatory approvals and other customary conditions and is
anticipated to be consummated in the second quarter of 1998.
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 ("FIB") 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.
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<PAGE>
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"), the FDIC, the FIB, 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.
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 that 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 Board, 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. 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. 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 allowed individual states to "opt-out" of certain provisions of
the Riegle-Neal Act by enacting appropriate legislation prior to June 1,
1997.
-4-
<PAGE>
Michigan permits both U.S. and non-U.S. banks to establish branch
offices in Michigan. The Michigan Banking Code permits, in appropriate
circumstances and with the approval of the Commissioner of the FIB, (i)
acquisition of Michigan banks by FDIC-insured banks, savings banks or
savings and loan associations located in other states, (ii) 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, (iii) consolidation of
Michigan banks and FDIC-insured banks, savings banks or savings and loan
associations located in other states having laws permitting such
consolidation, (iv) establishment of branches in Michigan by 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 (v) 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.
Shoreline is currently addressing a potential problem facing all users
of automated information systems. The problem is how existing application
software programs and operating systems can accommodate the date value for
the year 2000. Shoreline, by nature, is highly dependent upon computer
systems because of significant transaction volumes and date dependency for
interest calculations on financial instruments such as loans and deposits.
Shoreline developed and implemented a plan to address the year 2000
issue during 1997. The plan includes four general phases: raising
awareness, assessing existing systems, renovating or replacing non-compliant
systems and validating and testing. As Shoreline does not
develop or write its own software systems, Shoreline must rely on third
party vendors to bring systems into compliance with the year 2000.
Shoreline has initiated formal communications with its third party vendors
as a part of its assessment phase to determine which of its systems may be
vulnerable to third parties' failure to resolve year 2000 issues.
Shoreline will continue to assess the impact of year 2000 issues on
its computer-based systems and applications throughout 1998. Its goal is
to have all critical systems and applications compliant with the century
change by the fourth quarter of 1998, allowing for full validation and
testing during 1999. Shoreline will incur costs associated with this
-5-
<PAGE>
project in the form of personnel expense, professional fees and
investments in new or upgraded technology. Based upon information
currently available, management does not presently anticipate that the
costs to address year 2000 issues will have a material impact on
Shoreline's financial position, results of operations or cash flows.
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.
-6-
<PAGE>
<TABLE>
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.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-earning deposits $ 18,484 $ 1,022 5.53% $ 9,214 $ 480 5.21%
Federal funds sold 8,511 457 5.37% 8,066 424 5.26%
Securities:
Taxable 119,327 8,586 7.20% 105,229 7,358 6.99%
Tax-exempt <F2> 35,783 3,352 9.37% 37,691 3,577 9.49%
Loans - net of unearned income <F1><F2> 567,528 50,524 8.90% 490,200 43,835 8.94%
---------- --------- --------- --------
Total interest-earning assets 749,633 63,941 8.53% 650,400 55,674 8.56%
--------- --------
NON-EARNING ASSETS
Cash and due from banks 30,478 28,606
Other assets 30,501 21,800
Allowance for loan losses (7,367) (6,764)
---------- ---------
Total assets $ 803,245 $ 694,042
========== =========
INTEREST-BEARING LIABILITIES
Demand deposits $ 102,956 3,081 2.99% $ 86,450 2,275 2.63%
Savings deposits 169,264 5,776 3.41% 169,959 5,729 3.37%
Time deposits 337,382 19,332 5.73% 279,235 16,234 5.81%
Short-term borrowed funds 7,674 328 4.27% 5,327 216 4.05%
FHLB advances 34,668 1,929 5.56% 13,800 731 5.30%
--------- --------- --------- --------
Total interest-bearing liabilities 651,944 30,446 4.67% 554,771 25,185 4.54%
--------- --------
NON-INTEREST-BEARING LIABILITIES
Demand deposits 74,046 68,621
Other liabilities 4,224 3,988
Shareholders' equity 73,031 66,662
---------- ---------
Total liabilities and shareholders'
equity $ 803,245 $ 694,042
========== =========
NET INTEREST INCOME $ 33,495 $ 30,489
========= ========
NET INTEREST INCOME AS A PERCENTAGE
OF INTEREST-EARNING ASSETS 4.47% 4.69%
-7- ===== =====
<PAGE>
- ------------------------------------
1995
- ------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
----------------------------------
<C> <C> <C>
$ 83 $ 3 3.61%
15,187 889 5.85%
99,814 6,774 6.79%
43,924 4,040 9.20%
447,329 40,657 9.09%
--------- --------
606,337 52,363 8.64%
--------
27,337
20,404
(6,309)
---------
$ 647,769
=========
$ 70,587 1,745 2.47%
183,480 7,113 3.88%
254,338 14,594 5.74%
3,468 143 4.12%
5,000 252 5.04%
--------- ---------
516,873 23,847 4.61%
---------
66,181
4,453
60,262
---------
$ 647,769
=========
$ 28,516
=========
4.70%
=====
<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
$1,098,000, $667,000 and $471,000 in 1997, 1996 and 1995, respectively.
-8-
<PAGE>
<F2>Yields are computed on a fully tax-equivalent basis using a federal
income tax rate of 34% in all years presented.
</FN>
</TABLE>
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,
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
% OF % OF % OF
(IN THOUSANDS) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
- ---------------------------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 230,338 37.17% $ 211,953 42.34% $ 191,437 41.08%
Real estate mortgage 273,241 44.10% 214,201 42.79% 194,784 41.80%
Real estate construction 14,765 2.38% 10,243 2.05% 18,704 4.01%
Consumer 101,292 16.35% 64,194 12.82% 61,070 13.11%
---------- ------ ---------- ------ ----------- -------
Total loans $ 619,636 100.00% $ 500,591 100.00% $ 465,995 100.00%
========== ====== ========== ====== =========== =======
-9-
<PAGE>
- -------------------------------------------------
1994 1993
- -------------------------------------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
----------------- -----------------
<C> <C> <C> <C>
$ 179,850 41.20% $ 166,745 40.31%
175,912 40.30% 156,509 37.83%
26,679 6.11% 27,337 6.61%
54,088 12.39% 63,102 15.25%
----------- ------ ----------- ------
$ 436,529 100.00% $ 413,693 100.00%
=========== ====== =========== ======
</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, 1997
- --------------------------------------------------------------------------------------------
DUE IN ONE DUE IN ONE DUE AFTER
(IN THOUSANDS) YEAR OR LESS TO FIVE YEARS FIVE YEARS
- --------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
Commercial, financial and
agricultural $ 44,777 $ 133,332 $ 52,230
Real estate construction 8,144 6,133 488
------------ ------------ ----------
Total $ 52,921 $ 139,465 $ 52,718
============ ============ ==========
Loans due after one year:
with fixed rates $ 99,967 $ 15,260
------------ ----------
with floating rates $ 39,498 $ 37,458
------------ ----------
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<PAGE>
DECEMBER 31, 1996
- ---------------------------------------------------
DUE IN ONE DUE IN ONE DUE AFTER
YEAR OR LESS TO FIVE YEARS FIVE YEARS
- ---------------------------------------------------
<C> <C> <C>
$ 30,723 $ 139,352 $ 41,878
6,933 1,195 2,115
- ------------ ------------ -----------
$ 37,656 $ 140,547 $ 43,993
============ ============ ===========
$ 84,803 $ 12,818
------------ -----------
$ 55,744 $ 31,175
------------ -----------
</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, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
(IN THOUSANDS) ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
- ----------------------------- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 1,742 37.17% $ 2,491 42.34% $ 2,361 41.08%
Real estate mortgage 1,328 44.10% 743 42.79% 698 41.80%
Real estate construction 130 2.38% 115 2.05% 107 4.01%
Consumer 2,073 16.35% 1,166 12.82% 1,111 13.11%
Unallocated 2,315 2,380 2,323
--------- ------- --------- ------ -------- ------
$ 7,588 100.00% $ 6,895 100.00% $ 6,600 100.00%
========= ======= ========= ====== ======== ======
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<PAGE>
- ---------------------------------------------------
DECEMBER 31, 1994 DECEMBER 31, 1993
- ---------------------------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
IN EACH IN EACH
CATEGORY CATEGORY
TO TOTAL TO TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS
- ---------------------------------------------------
<C> <C> <C> <C>
$ 2,044 41.20% $ 2,112 40.31%
559 40.30% 423 37.83%
100 6.11% 106 6.61%
995 12.39% 1,103 15.25%
2,254 1,842
-------- ------ --------- ------
$ 5,952 100.00% $ 5,586 100.00%
======== ====== ========= ======
</TABLE>
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<PAGE>
ALLOWANCE ACTIVITY
The following table summarizes loan and allowances information for each period
shown.
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans outstanding, end
of period $ 619,636 $ 500,591 $ 465,995 $ 436,529 $ 413,693
=========== =========== =========== ========== ===========
Daily average of loans
outstanding for the
period $ 567,528 $ 490,200 $ 447,329 $ 428,478 $ 385,138
=========== =========== =========== ========== ===========
Allowance for loan losses,
balance at beginning of
period $ 6,895 $ 6,600 $ 5,952 $ 5,586 $ 4,566
----------- ----------- ----------- ---------- -----------
Additions from acquisition 540
Charge-offs:
Commercial, financial
and agricultural 379 240 151 391 186
Real estate mortgage 535 35 70 105 84
Real estate construction 0 0 0 0 0
Consumer 44 318 271 517 332
----------- ----------- ----------- ---------- -----------
Total charge-offs 958 593 492 1,013 602
----------- ----------- ----------- ---------- -----------
Recoveries:
Commercial, financial
and agricultural 302 97 200 367 107
Real estate mortgage 184 57 14 0 1
Real estate construction 0 0 0 0 0
Consumer 25 134 176 262 134
----------- ----------- ----------- ---------- -----------
Total recoveries 511 288 390 629 242
----------- ----------- ----------- ---------- -----------
Net charge-offs 447 305 102 384 360
----------- ----------- ----------- ---------- -----------
Provision charged to
income 600 600 750 750 1,380
----------- ----------- ----------- ---------- -----------
Balance at end of period $ 7,588 $ 6,895 $ 6,600 $ 5,952 $ 5,586
=========== =========== =========== ========== ===========
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<PAGE>
Key Ratios:
Net charge-offs to average
loans 0.08% 0.06% 0.02% 0.09% 0.09%
Recoveries to total
charge-offs 53.30% 48.57% 79.27% 62.09% 40.20%
Allowance to total loans
at end of period 1.22% 1.38% 1.42% 1.36% 1.35%
Allowance to total non-
performing loans at end
of period 349.84% 423.52% 458.65% 358.55% 126.78%
Provision to average loans 0.11% 0.12% 0.17% 0.17% 0.36%
</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.
-16-
<PAGE>
MATURITY ANALYSIS
The following tables set forth the maturities and weighted average
interest rates of Shoreline's securities as of December 31, 1997.
<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. Treasuries $ 4,016 6.22% $ 17,273 6.69% $ 0 N/A $ 0 N/A
Agencies<F1> 21,400 7.23% 13,113 7.33% 0 N/A 0 N/A
States and political subdivisions<F2> 3,490 10.70% 8,532 10.15% 9,170 9.39% 6,518 8.27%
Mortgage-backed securities:<F3>
U.S. Government agencies 2,093 5.71% 23,722 6.94% 4,840 6.29% 6,981 6.98%
Collateralized mortgage
obligations 27 8.60% 0 N/A 0 N/A 0 N/A
Other securities 0 N/A 0 N/A 0 N/A 4,360 8.03%
--------- -------- --------- --------
Total $ 31,026 $ 62,640 $ 14,010 $ 17,859
========= ======== ========= ========
</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 $ 0 N/A $ 0 N/A $ 0 N/A $ 0 N/A
Agencies<F1> 11,999 7.51% 2,000 7.92% 0 N/A 0 N/A
States and political subdivisions<F2> 257 11.11% 2,024 9.88% 1,921 9.22% 2,681 9.74%
Mortgage-backed securities:<F3>
U.S. Government agencies 1,292 7.16% 15,647 8.11% 0 N/A 0 N/A
Collateralized mortgage
obligations 29 3.10% 536 7.53% 0 N/A 0 N/A
Other securities 0 N/A 0 N/A 0 N/A 0 N/A
-------- -------- ---------
Total $ 13,577 $ 20,207 $ 1,921 $ 2,681
========= ======== ========= ========
<FN>
<F1>Maturity distribution based on call option of the issuer. Management
believes that the exercise of call options on these securities by the
issuing agency is probable given the current interest rate environment.
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<PAGE>
<F2>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% tax rate.
<F3> Maturity based upon estimated weighted average life.
</FN>
</TABLE>
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<PAGE>
TIME DEPOSITS OF $100,000 OR MORE
The time remaining until maturity of time certificates of deposit of $100,000 or
more at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------
TIME UNTIL MATURITY (IN THOUSANDS)
- --------------------------------------------------
<S> <C>
Three months or less $ 39,896
Over three through six months 17,763
Over six through twelve months 12,784
Over twelve months 29,276
-----------
Total $ 99,719
===========
</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 29 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
9 and under the subheading "Cash Dividends" in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on page 21
of Shoreline's annual report to shareholders for the year ended December 31,
1997, is here incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Financial Highlights" on page 3 in
Shoreline's annual report to shareholders for the year ended December 31,
1997, 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 21, inclusive, of Shoreline's annual report
to shareholders for the year ended December 31, 1997, is here incorporated
by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the subheading "Quantitative and Qualitative
Disclosures about Market Risk" in "Management's Discussion and Analysis
of Financial Conditions and Results of Operations" on pages
18 to 20 of Shoreline's annual report to shareholders for the year ended
December 31, 1997, is here incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, notes and report of the independent
auditors on pages 22 through 42 of Shoreline's annual report to
shareholders for the year ended December 31, 1997, are here incorporated
by reference.
The information under the caption "Quarterly Financial Data" on page
8 of Shoreline's annual report to shareholders for the year ended
December 31, 1997, is here incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-21-
<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
Shoreline's Definitive Proxy Statement for its May 14, 1998, 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 Shoreline's Definitive Proxy
Statement for its May 14, 1998, 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
Shoreline's Definitive Proxy Statement for its May 14, 1998, 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 Shoreline's Definitive Proxy Statement
for its May 14, 1998, annual meeting of shareholders is here incorporated
by reference.
-22-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS. The following consolidated financial
statements and independent auditors' report of Shoreline Financial Corporation
are filed as part of this report:
Consolidated Balance Sheets--December 31, 1997 and 1996
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Auditors dated February 20, 1998
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
3.1 Restated Articles of Incorporation. Previously filed as Exhibit
3(a) to Shoreline's Quarterly Report on Form 10-Q for the
period ended June 30, 1994. Here incorporated by reference.
3.2 Bylaws. Previously filed as Exhibit 3(b) to Shoreline's
Form S-1 Registration Statement filed March 23, 1990. Here
incorporated by reference.
4 Long-term debt. Shoreline has outstanding long-term debt
which at the time of this report does not exceed 10% of
Shoreline's total consolidated assets. Shoreline 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.
-23-
<PAGE>
NUMBER EXHIBIT
10.1 Form of Indemnity Agreement. Previously filed as Exhibit 10(d)
to Shoreline's Form S-4 Registration Statement filed
September 25, 1987. Here incorporated by reference.
10.2 Employment Agreements.<F*> Previously filed as Exhibit 10(b) to
Shoreline's 1995 Form 10-K Annual Report filed March 28, 1996.
Here incorporated by reference.
10.3 1989 Stock Option Plan.<F*> Previously filed as Exhibit 28 to
Shoreline's Form S-8 Registration Statement filed May 31, 1989.
Here incorporated by reference.
10.4 Deferred Compensation Agreements.<F*> Previously filed as
Exhibit 10(e) to Shoreline's 1991 Form 10-K Annual Report
filed March 27, 1992. Here incorporated by reference.
10.5 Bonus Program-1997.<F*>
10.6 Stock Incentive Plan of 1996.<F*> Previously filed as an
appendix to Shoreline's Definitive Proxy Statement for its
May 1, 1996, annual meeting of shareholders. Here incorporated
by reference.
10.7 Directors' Deferred Compensation Plan.<F*> Previously filed as
Exhibit 10(g) to Shoreline's 1996 Form 10-K Annual Report
filed March 26, 1997. Here incorporated by reference.
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, 1997.
21 List of Subsidiaries.
23 Consent of Independent Auditors.
24 Powers of Attorney.
27.1 Financial Data Schedule for Year Ended December 31, 1997.
27.2 Restated Financial Data Schedule for Year Ended December 31,
1995.
_________________________________
-24-
<PAGE>
[FN]
<F*> These agreements are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-K.
</FN>
Shoreline will furnish a copy of any exhibit listed above to any
shareholder of Shoreline without charge upon written request to Mr. Wayne
Koebel, 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.
-25-
<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 31, 1998 By /s/Dan L. Smith
Dan L. Smith
Chairman, President and
Chief Executive Officer
-26-
<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 31, 1998 */s/Louis A. Desenberg
Louis A. Desenberg
Director
March 31, 1998 */s/Merlin J. Hanson
Merlin J. Hanson
Director
March 31, 1998 */s/Thomas T. Huff
Thomas T. Huff
Director
March 31, 1998 */s/James E. LeBlanc
James E. LeBlanc
Director
March 31, 1998 */s/L. Richard Marzke
L. Richard Marzke
Director
March 31, 1998 */s/James F. Murphy
James F. Murphy
Director
March 31, 1998 /s/Dan L. Smith
Dan L. Smith
Chairman, President, Chief
Executive Officer and Director
(Principal Executive Officer)
March 31, 1998 */s/Robert L. Starks
Robert L. Starks
Director
-27-
<PAGE>
March 31, 1998 */s/Jeffery H. Tobian
Jeffery H. Tobian
Director
March 31, 1998 */s/Ronald L. Zile
Ronald L. Zile
Director
March 31, 1998 /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
-28-
<PAGE>
EXHIBIT INDEX
NUMBER EXHIBIT
3.1 Restated Articles of Incorporation. Previously filed as
Exhibit 3(a) to Shoreline's Quarterly Report on Form
10-Q for the period ended June 30, 1994. Here incorporated
by reference.
3.2 Bylaws. Previously filed as Exhibit 3(b) to
Shoreline's Form S-1 Registration Statement filed March 23,
1990. Here incorporated by reference.
4 Long-term debt. Shoreline has outstanding long-term
debt which at the time of this report does not exceed 10% of
Shoreline's total consolidated assets. Shoreline
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.
10.1 Form of Indemnity Agreement. Previously filed as Exhibit
10(d) to Shoreline's Form S-4 Registration Statement
filed September 25, 1987. Here incorporated by reference.
10.2 Employment Agreements.<F*> Previously filed as Exhibit 10(b)
to Shoreline's 1995 Form 10-K Annual Report filed March
28, 1996. Here incorporated by reference.
10.3 1989 Stock Option Plan.<F*> Previously filed as Exhibit 28
to Shoreline's Form S-8 Registration Statement filed
May 31, 1989. Here incorporated by reference.
10.4 Deferred Compensation Agreements.<F*> Previously filed as
Exhibit 10(e) to Shoreline's 1991 Form 10-K Annual
Report filed March 27, 1992. Here incorporated by
reference.
10.5 Bonus Program-1997.<F*>
10.6 Stock Incentive Plan of 1996.<F*> Previously filed as an
appendix to Shoreline's Definitive Proxy Statement for
its May 1, 1996, annual meeting of shareholders. Here
incorporated by reference.
10.7 Directors' Deferred Compensation Plan.<F*> Previously filed
as Exhibit 10(g) to Shoreline's 1996 Form 10-K Annual
Report filed March 26, 1997. Here incorporated by
reference.
-29-
<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, 1997.
21 List of Subsidiaries.
23 Consent of Independent Auditors.
24 Powers of Attorney.
27.1 Financial Data Schedule for Year Ended December 31, 1997.
27.2 Restated Financial Data Schedule for Year Ended December 31, 1995.
________________________________
<F*> These agreements are management contracts or compensation plans
or arrangements required to be filed as exhibits to this Form 10-K.
-30-
<PAGE>
EXHIBIT 10.5
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)
1996 9,605 +13.7% ('96 vs '93)
</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>
SHORELINE FINANCIAL CORPORATION
1997 ANNUAL REPORT
[PICTURE OF HOUSE]
[PICTURE OF WOMAN INSERTING CARD KEY]
[PICTURE OF KIDS]
[PICTURE OF DRILL PRESS]
[SHORELINE FINANCIAL CORPORATION LOGO]
[PICTURE OF MARINA]
[PICTURE OF LOTS]
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Business of Shoreline . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Common Stock Information . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Management's Discussion and Analysis of Financial Condition and Results
of Financial Operations . . . . . . . . . . . . . . . . . . . . . . . . . 9
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . .22
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . .23
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . .24
Consolidated Statements of Shareholders' Equity . . . . . . . . . . . . . . .25
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . .26
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . .27
Management's Responsibility for Financial Statements . . . . . . . . . . . .43
Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Shoreline Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(In thousands except financial ratios and per share data)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
At Year End:
Total assets $857,843 $716,095 $671,173 $633,854 $620,620
Net loans 612,048 493,696 459,395 430,577 408,107
Total deposits 722,664 616,478 592,300 566,096 557,409
<PAGE>
FHLB advances 45,176 18,000 5,000 5,000 5,000
Shareholders' equity 76,882 69,418 64,360 56,208 52,607
Tier I risk-based capital 11.90% 15.10% 14.56% 13.62% 12.90%
For The Year:
Net interest income $ 32,193 $ 29,083 $ 27,126 $ 25,263 $ 23,066
Provision for loan losses (600) (600) (750) (750) (1,380)
Other income 5,713 4,347 4,082 4,686 4,754
Other expense (21,521) (19,433) (18,720) (19,721) (17,987)
-------- -------- -------- ---------- --------
Income before income taxes 15,785 13,397 11,738 9,478 8,453
Income tax expense (4,774) (3,792) (3,131) (2,280) (1,915)
-------- -------- -------- ---------- --------
Net income $ 11,011 $ 9,605 $ 8,607 $ 7,198 $ 6,538
======== ======== ======== ========== =========
Financial Ratios:
Return on average
shareholders' equity 15.08% 14.37% 14.28% 13.02% 12.85%
Return on average assets 1.37% 1.38% 1.33% 1.16% 1.15%
Average equity capital to
average assets 8.94% 9.60% 9.30% 8.91% 8.94%
Dividend payout ratio 45.57% 45.47% 43.39% 44.19% 41.72%
Per Share Data:
Basic earnings per share $1.25 $1.10 $.99 $.83 $.77
Diluted earnings per share 1.24 1.10 .98 .83 .76
Cash dividends declared
per share .57 .50 .43 .37 .32
Book value per share (year
end) 8.66 7.94 7.42 6.48 6.12
</TABLE>
See notes to the consolidated financial statements. All per
share data adjusted to reflect stock splits and stock
dividends.
SJS Bancorp, Inc. is included from June 13, 1997,
the date of acquisition.
3
<PAGE>
[SHORELINE FINANCIAL CORPORATION LOGO]
TO OUR SHAREHOLDERS
Everyone associated with Shoreline Financial Corporation shares my pleasure
in reporting that our Company's performance in 1997 exceeded all of our
expectations. For the seventh consecutive year, our annual earnings
increased by more than 10 percent. Net income for 1997 was $11,011,269,
or $1.25 of basic earnings per share, 14.6 percent more than reported net
income of $9,605,429, or $1.10 of basic earnings per share, in 1996.
Not only did our earnings reach record levels, but so did every other
significant number on our balance sheet. At the end of the year, our
total assets stood at $857,842,802, 19.8 percent more than they had been
one year earlier. During the same 12 months, total deposits increased
by 17.2 percent to $722,664,354, total loans went up 23.8 percent to
$619,636,155 and shareholders' equity grew by 10.8 percent to $76,882,403.
Our 1997 return on average equity was 15.08 percent and return on average
assets was 1.37 percent. This was the first year that the company
posted a return on average equity in excess of 15 percent, which has become
the banking industry's "standard of excellence." In the years ahead, we
intend to make return on average equity the single most important measure
of our performance.
We provided $600,000 for loan losses during 1997 even though charge-offs,
net of recoveries, were only $447,000. In addition, we transferred an
additional $540,000, to the reserve at the time of the SJS Federal
Savings Bank acquisition. Consequently, we ended the year with an
allowance of $7,588,127. This figure represents 1.22 percent of all
loans and 350 percent of non-performing loans.
Another measure of financial strength is our strong capital position.
Note 16 to the Financial Statements shows how favorably Shoreline's
regulatory capital ratios compare to those prescribed by banking regulators.
Because of our strong performance, we were able to increase cash dividends
on our common stock to $.57 per share. This figure is 14 percent more than
the dividend of $.50 per share that we paid from 1996 earnings.
[PICTURE OF DAN L. SMITH, CHAIRMAN]
4
<PAGE>
[PICTURE OF FARM]
There were a number of reasons why we did so well in 1997. The most important
of these included:
-The acquisition of SJS Federal Savings Bank in June added
$133 million to our total assets and proportionate amounts
to our deposit and loan totals.
- New branch offices in Niles and Portage that were opened
during the year began to contribute to our overall growth.
-A 15.8 percent increase in average loan balances resulted in
a $3,109,689 increase in net interest income.
-Non-interest income was up significantly as a result of
increases in the gains on sales of mortgage loans and the
fees generated by our trust department and our investment
and insurance activities.
-In spite of the non-recurring costs associated with the SJS
Federal Savings Bank acquisition, we were able to hold the
year-to-year increase in non-interest expenses to 10.7
percent, slightly more than half the rate of increase in our
assets.
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
[PICTURE OF DRILL PRESS]
[PICTURE OF FARM]
While the primary focus of this Annual Report is on our
Company's performance in the past year, it is also an
opportunity to review certain assumptions that are the basis
for many of the decisions that are made by our board of
directors and executive officers.
The first of these assumptions is that long-term planning is an
essential prerequisite to long-term success. Because of that,
we completed an update of our strategic plan in 1997. While we
recognize that there are many forces beyond our control that
could affect us, we believe that we have anticipated the most
likely developments and determined how best to use them to our
advantage.
The second assumption is that we should leverage our capital to
provide a superior return on our shareholders' investment in
<PAGE>
our Company. In the past, banking companies measured their
relative performance by their return on average assets. Today,
however, we believe the most meaningful measurement of
performance is return on average equity. That is why we are
particularly pleased that our return on average equity exceeded
15 percent in 1997 and why we are determined to achieve even
higher rates of return in future years.
The third assumption is that we must earn the right to remain
independent. This means that we must perform significantly
better than our peers and other organizations that might be
interested in acquiring us. It also means that we must do
everything possible to ensure that a superior performance
translates into a corresponding market price for our common
stock. During 1997, the value of our common stock increased
67.6 percent to a year-end closing price of $25.00 per share.
This followed a 30.7 percent increase in the per share price in
1996. At the present time, our common stock sells for approximately
3 times book value and 23 times earnings per share. Both of these
multiples compare quite favorably with those of our peers in
the Great Lakes region.
[PICTURE OF MARINA]
5
<PAGE>
[PICTURE OF HOUSE]
[The first of these assumptions is that long-term planning is
an essential prerequisite to long-term success.]
[The second assumption is that we should leverage our capital
to provide a superior return on our shareholders' investment
in our Company]
[The third assumption is that we must earn the right to remain
independent.]
[The fourth assumption is that we must supplement internal
growth and expansion with acquisitions.]
[The fifth and final assumption is that we must ensure our
ongoing financial strength through diversification.]
The fourth assumption is that we must supplement internal
growth and expansion with acquisitions. That is why we were
very pleased to complete the acquisition of SJS Federal Savings
Bank in June and to announce in December that we have agreed to
acquire The State Bank of Coloma, subject to approval by state
and federal bank regulators. We want to ensure that we achieve
the size and resultant economies of scale which are
prerequisites to superior financial performance. If we are to
be as successful as we want to be, we must have a first rate
management team, which we believe we have, and modern
technology. While we will not take the risks associated with
"cutting edge" innovation, we are committed to remaining in the
technological mainstream of our industry. For this reason, we
invested over $1 million in technology during 1997 and are
prepared to make additional investments as they are needed in
the future.
The fifth and final assumption is that we must ensure our
ongoing financial strength through diversification. To us,
diversification means two things. The first is to seek sources
of income beyond our traditional business as a depository and a
lender. The second is that we must strive to capture the
largest share of traditional business from every segment of the
economy in our market area.
To diversify our income, we are putting new emphasis on the
business of making mortgage loans which we then sell in the
secondary market while retaining the servicing rights to those
loans. By managing this mortgage banking activity properly, we
can add significant amounts to our net income from gains on the
sale of loans as well as the fees we will earn from servicing
the mortgages that we have sold.
<PAGE>
Increasing our fee income from trust and investment services
is another area where we see potential. We believe that the
growing use of market investments as a savings vehicle by the
"Baby Boom" generation will provide us with new opportunities
to provide asset management and allocation services. We also
believe that we can be successful in marketing mutual funds,
stocks, bonds and annuities to our customers.
Insurance sales is another area that holds promise of
additional fee income. With several other banks, we own a
title insurance agency and our share of the earnings of this
entity are an addition to the income from our mortgage lending
business. While an appropriate opportunity to begin offering
property, casualty, auto and life insurance has not yet
presented itself, we remain mindful of the profit potential of
a successful insurance agency operation.
Because we are the dominant financial institution in our
primary market area, our deposit and lending business is
already well diversified.
While we do not consider ourselves an "agricultural bank," we
do a significant volume of business lending to farmers to
finance land, production and equipment. Nearly five percent of
our loans have been made to farmers.
6
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS
TIME DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST
SERVICES COMMERCIAL SERVICES
We have the expertise to be successful financing construction
and land development and have a portfolio of loans in this
category. We also finance commercial real estate, primarily
buildings occupied by owner-managed businesses and quality
investment properties. More than 17 percent of our loans were
made for these purposes.
Financing manufacturers, distributors and retail enterprise is
another area where we have enjoyed considerable success. About
14 percent of our loans were made to these types of business to
provide working capital and pay for purchases of machinery and
equipment.
We also do a sizable volume of business with local school
districts, cities, villages and other units of government. We
have invested more than $28 million in the securities issued by
these entities and we have made more than $4 million in direct
loans to them. In this way, we have financed municipal
buildings, fire fighting apparatus, school buses, community
redevelopment projects and numerous other public investments
and activities that enhance the quality of life in southwest
Michigan.
[PICTURE OF WOMAN USING ATM MACHINE]
Consumer credit is another specialty of our Company. We
provide indirect financing through dealers and direct loans to
individuals and families so that they can buy cars, boats and
recreational vehicles. We make student loans to help young
people afford higher education. We make other loans for just
about any worthwhile purpose.
Residential mortgage lending is one of the most important parts
of our business. More than 40 percent of the loans in our
portfolio are secured by first mortgages on residential
property. We also have a sizable volume of home equity loans
and lines of credit. Given the history of our organization and
the various banks that were our predecessors, that is not
surprising. Because residential mortgage and home equity
lending involves so little risk, we believe that our leadership
in this market is a major advantage for us. And we believe
that our enhanced mortgage banking capabilities will be a
highly profitable adjunct to traditional mortgage lending.
<PAGE>
[PICTURE OF DRILL PRESS]
In the final analysis, we believe that this diversification by
the types of lending that we do gives strength and stability to
our Company and positions us well to seize a large share of
whatever new business develops in our market area in the years
ahead.
In summary, we are well pleased by our performance in 1997 and
by the condition of our Company at the present time. We have
performed better than most of our peers as measured by key ratios.
We have done well in all of the traditional banking areas and have
the expertise on staff to take advantage of new opportunities as
they arise. We recognize the need to seek additional fee income to
complement the interest income we earn on our loans and investments
and are moving aggressively to do so. We have the management team
and the technological capabilities to succeed, and we are optimistic
about our future.
Our board, our senior officers and our staff join me in thanking
you for the cooperation and support that has made the positive
developments in our Company possible. I look forward to seeing you,
hearing your comments and answering your questions at our Annual
Meeting. It will be held at 2:30 p.m. on Thursday, May 14th, 1998,
at Lake Michigan College.
[PICTURE OF MARINA]
Sincerely,
/s/ DAN L. SMITH
Dan L. Smith
Chairman of the Board,
President and Chief Executive officer
7
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CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS
TIME DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
BUSINESS OF SHORELINE
GENERAL
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 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; and other banking
services
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 29 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 73.7% of Shoreline's total revenues in
1997, 74.5% in 1996, and 73.5% in 1995. Interest on investment
securities accounted for 15.8% of Shoreline's total revenues in
1997, 16.6% in 1996, and 17.4% in 1995.
Shoreline and Shoreline Bank employed approximately 350
persons at December 31, 1997.
<PAGE>
QUARTERLY FINANCIAL DATA
The following is a summary of selected quarterly results
of operations for the years ended December 31, 1997 and 1996.
All per share information has been adjusted to reflect stock
splits and stock dividends.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income $13,878 $14,788 $16,967 $17,005
Net interest income 7,317 7,692 8,541 8,643
Provision for loan losses 120 120 180 180
Income before income taxes 3,536 3,756 4,142 4,351
Net income 2,542 2,649 2,853 2,967
Basic earnings per share $ .30 $ .30 $ .32 $ .33
Diluted earnings per share $ .30 $ .30 $ .32 $ .32
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 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
Basic earnings per share $ .27 $ .27 $ .27 $ .29
Diluted earnings per share $ .27 $ .27 $ .27 $ .29
</TABLE>
8
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CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS
TIME DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
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 December 31,
1997, there were approximately 1,390 shareholders of record.
<TABLE>
Market Price of Common Stock (bid price)
<CAPTION>
1997 1996
---- ----
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
March 31 $16.51 $14.60 $12.55 $11.26
June 30 19.50 15.75 14.60 12.24
September 30 23.17 19.00 14.60 13.17
December 31 25.67 20.33 14.92 12.70
</TABLE>
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.
1997 HIGHLIGHTS
Net income for 1997 was $11,011,269, 14.64% or $1,405,840 more
than the $9,605,429 earned in 1996. Net interest income
increased $3.1 million while non-interest income increased
$1.4 million in 1997. Growth in average earning assets of
$99.2 million (approximately $65 million from the acquisition
of SJS Bancorp, Inc.) produced the increase in net interest
income. Basic earnings per share increased to $1.25 in 1997
from $1.10 in 1996. Return on average shareholders' equity was
15.08% in 1997, a significant increase of 71 basis points over
<PAGE>
the previous year. Considering the growth of Shoreline relating
to the acquisition of SJS, return on average assets remained
stable at 1.37% in 1997, declining only one basis point from
1.38% in 1996.
Total assets at December 31, 1997 were $857.8 million, an
increase of $141.7 million (19.8%) over year-end 1996. The
majority of this growth was provided by the acquisition of SJS
Bancorp, Inc. ($133.7 million). Growth in the loan portfolio of
$119 million (primarily from SJS) accounted for the majority of
increase in earning assets in 1997. Asset quality remained
strong in the current year. Non-performing loans as a percent
of total loans were .41% at year-end which compares to 1996's
year-end percentage of .38%. At December 31, 1997, the
allowance for loan losses provided a coverage of approximately
3.5 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. The merger occurred on June 13, 1997. SJS Bancorp,
Inc., a thrift holding company with assets of $133.7 million
and the parent company of SJS Federal Savings Bank, provided
banking services through its main office in St. Joseph,
Michigan, and branches in South Haven and Stevensville,
Michigan. The transaction was accounted for as a purchase.
9
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
SUMMARY OF OPERATING RESULTS
The major components of Shoreline's operating results for 1997,
1996 and 1995 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) 1997 1996 1995
- -------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Net interest income $ 32,193 $ 29,084 $ 27,126
Add: Taxable equivalent adjustment<F1> 1,302 1,405 1,390
----------- ----------- ----------
Taxable equivalent net interest income 33,495 30,489 28,516
Provision for loan losses (600) (600) (750)
Other income 5,713 4,347 4,082
Other expenses (21,521) (19,433) (18,720)
Income taxes, including taxable
equivalent adjustment<F1> (6,076) (5,198) (4,521)
----------- ----------- ----------
Net income $ 11,011 $ 9,605 $ 8,607
=========== =========== ==========
- --------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Tax equivalent adjustment based upon federal tax rate of 34 percent
</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.
Net interest income on a fully taxable equivalent basis was
$33.5 million in 1997, an increase of $3.0 million (9.99%) over
1996. Net interest income increased $2.0 million (6.9%) in 1996
and $1.8 million (6.8%) in 1995. Shoreline's annual increases
in net interest income result primarily from growth in the
volume of earning assets. Average earning assets increased
15.3%, 7.3% and 5.2% in 1997, 1996 and 1995, respectively.
<PAGE>
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>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
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 $ 511 $ 31 $ 542 $ 475 $ 2 $ 477
Fed funds sold 24 9 33 (382) (83) (465)
Securities:
Taxable 1,009 220 1,229 375 209 584
Tax-exempt (179) (46) (225) (588) 125 (463)
Loans-net of unearned income 6,885 (197) 6,688 3,843 (665) 3,178
------- ------ ------- ------- -------- -----
Change in interest income 8,250 17 8,267 3,723 (412) 3,311
------- ------ ------- ------- -------- -----
Interest-bearing liabilities:
Demand deposits 469 337 806 412 118 530
Savings deposits (23) 71 48 (499) (885) (1,384)
Time deposits 3,337 (238) 3,099 1,445 195 1,640
Short-term borrowings 100 11 111 75 (2) 73
FHLB advances 1,158 39 1,197 466 13 479
------- ------ ------- ------- -------- -----
Change in interest expense 5,041 220 5,261 1,899 (561) 1,338
------- ------ ------- ------- -------- -----
Change in net interest income $ 3,209 $(203) $3,006 $ 1,824 $ 149 $ 1,973
======= ====== ======= ======= ======== =======
</TABLE>
10
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CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
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 net interest margins of 4.47%, 4.69% and 4.70%
in 1997, 1996 and 1995, respectively. Shoreline's net interest
margin was negatively impacted in 1997 by the acquisition of
SJS Bancorp. SJS, like many thrift institutions, had a net
interest margin substantially below that of the commercial
banking industry, due to its mix of earning assets and rate
sensitive liabilities.
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 1997, $600,000 in 1996 and $750,000 in
1995. Continued overall strength in asset quality measures
along with another year of relatively modest levels of net
charge-offs helped to support the consistent level of provision
for losses in 1997. At year-end 1997, the ratio of the
allowance for loan losses to non-performing loans was strong at
350% and compared to year-end 1996's ratio of 424%.
OTHER INCOME
Total other income was $5.7 million in 1997, an increase of
$1.4 million (31.4%) from 1996. The components of other income
are shown in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service charges on deposit accounts $ 2,081 $ 1,820 $ 1,787
Trust income 1,673 1,500 1,388
Net gain/(loss) on security sales 171 191 (36)
Net gain/(loss) on loan sales 526 (21) 56
Net gain on sale of other real estate owned 11 24 26
Credit card fees 46 37 108
Safe deposit box income 118 150 137
<PAGE>
ATM network fee income 263 157 149
Other customer service fees 83 91 96
Credit life income 140 68 86
Insurance agency income 85 19 -
Net gain on sale of other assets 97 6 32
Other 419 305 253
--------- -------- --------
Total other income $ 5,713 $ 4,347 $ 4,082
========= ======== ========
</TABLE>
The increase in other income in 1997 is attributable to
significant growth in a number of categories. The largest
increase occurred in net gain/(loss) on sale of loans as strong
activity involving the sales of mortgage loans in the secondary
market produced gains of $526,000 in 1997, an increase of
$547,000 over losses of $21,000 in 1996. Trust income
increased $173,000 (11.5%) in 1997 primarily due to continued
growth in the trust assets managed, aided by improved market
values and increased customer relationships. Service charge
income on deposit accounts, the largest component of other
income, increased $261,000 (14.3%) in 1997 due to increased
deposit levels resulting from the SJS merger as well as
increased overdraft charges. ATM network fee income amounted
to $263,000, an increase of $106,000 (67.5%) resulting from the
implementation of surcharge fees in May for non-customer use of
Shoreline's ATM's. Credit life income amounted to $140,000,
an increase of $72,000 (105.9%) over 1996 as a concerted effort
was focused on the sale of insurance products to borrowers in
1997. Insurance agency income rose significantly to $85,000,
an increase of $66,000 due to improved results from Shoreline's
partial ownership in a title insurance company. Net gain on
sale of other assets increased to $97,000 due to gain on sale
of a portion of one of the branch properties of the bank.
Other income amounted to $419,000, an increase of $114,000
(37.4%) primarily due to increased mortgage loan servicing
fees.
In 1996, total other income increased $265,000 from 1995's
level of $4.1 million. Two primary factors resulted in this
increase. First, Shoreline realized $191,000 of securities
gains in 1996, a $227,000 increase from 1995's level of $36,000
in losses. Second, trust income increased $112,000 in 1996
compared to 1995 due to the same reasons stated above.
11
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CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
OTHER EXPENSE
Total other expense was $21.5 million in 1997, an increase of
$2.1 million (10.7%) from 1996. Despite this increase in
overhead expense, Shoreline was still able to realize
improvements in both efficiency ratio and overhead ratio in
1997. This was primarily due to an increased level of earning
assets relating to the SJS acquisition offsetting the impact of
associated expenses. The components of other expense and key
ratios are shown in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Salaries $ 8,970 $ 8,215 $ 7,587
Employee benefits 2,539 2,435 2,305
Occupancy 1,459 1,329 1,281
Equipment 1,522 1,316 1,191
Data processing 628 604 579
Professional fees 1,454 1,007 774
FDIC deposit insurance 104 438 729
Michigan Single Business Tax 598 517 571
Supplies 408 386 426
Postage 365 380 338
Telephone 376 345 310
Advertising 416 284 301
Amortization of goodwill and core
deposit intangibles 549 266 256
Marketing and public relations 310 341 188
Other insurance 189 134 140
Other taxes 22 24 103
Credit card expense 79 0 71
Other 1,533 1,412 1,570
---------- ----------- ----------
Total other expense $21,521 $19,433 $18,720
========== =========== ==========
KEY RATIOS:
Efficiency Ratio 54.89% 56.09% 56.88%
Other expense as a percent of average
assets 2.68% 2.80% 2.89%
Salary and employee benefits as a percent
of average assets 1.43% 1.53% 1.53%
</TABLE>
<PAGE>
A number of factors contributed to the $2.1 million increase in
other expense. The largest dollar increase was in salary and
employee benefits expense which increased $859,000 (8.1%) in
1997. The effect of increased staffing levels relating to the
SJS acquisition, as well as normal compensation and fringe
benefit cost adjustments, contributed to the result.
Notwithstanding these increases, salary and employee benefit
expense (as a percentage of average assets) declined 10 basis
points to 1.43% due to growth in the size of the bank.
Occupancy expense increased $130,000 (9.8%) and equipment
expense rose $206,000 (15.7%) primarily due to the addition of
three SJS offices acquired in the merger, as well as the
opening of the Niles and Portage branch offices in early 1997.
Shoreline's ongoing commitment to technology also resulted in
additional equipment expense for the year. Professional fees
increased $447,000 (44.4%) primarily due to additional expense
in 1997 for expanded outsourcing services related to the
internal audit and trust functions. Other increases in
professional fees are attributed to additional consulting
services essential to further develop Shoreline's sales and
service culture. Advertising expense rose $132,000 (46.5%)
primarily due to a specialized campaign related to the SJS
acquisition. Amortization of goodwill and core deposit
intangibles increased $283,000 (106.4%) in 1997. This increase
is directly related to purchase accounting adjustments applied
to the acquisition of SJS. Intangibles related to the
acquisition totaled $10.6 million and consisted of
approximately $9 million of goodwill, $1 million of core
deposit premium and $500,000 of mortgage servicing rights.
Goodwill and core deposit premium will be amortized on the
straight-line method over 20 years and on an accelerated basis
over 10 years, respectively. Partially offsetting these
increases was a decline in Federal Deposit Insurance
Corporation (FDIC) expense of $334,000 (76.3%) in 1997. This
decline was the result of an FDIC premium assessment rate of
zero in 1997 for bank deposits insured by the Bank Insurance
Fund (BIF) pursuant to eligibility requirements being met. The
majority of 1997's FDIC expense of $104,000 is the assessment
on deposits, acquired in the SJS merger, as well as other
deposits which are insured by the Savings Association Insurance
Fund (SAIF).
12
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
Three primary factors resulted in the $713,000 increase in
other expense for 1996. 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. As was the case in 1997, this increase was due to
expanded use of selected outsourcing and consulting services
for certain areas of the bank. Consultants were engaged to
review Shoreline's branch network operations as well as develop
further sales training efforts. 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's expense was incurred despite
a $302,000 one-time assessment to recapitalize the Savings
Association Insurance Fund (SAIF).
INCOME TAX EXPENSE
Shoreline's federal income tax expense was $4.8 million in
1997, compared to $3.8 million in 1996 and $3.1 million in
1995. The statutory federal tax rate during these three years
was 34%. However, Shoreline's effective tax rates were 30.2%,
28.3% and 26.7% in 1997, 1996 and 1995, 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 gradually 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.
<PAGE>
At December 31, 1997, Shoreline's total loan portfolio was
$619.6 million, an increase of $119.0 million (23.8%) over
year-end 1996. Lending activity was strong in all loan
categories during 1997. Total residential real estate mortgage
loans increased $59.0 million (27.5%), from $214.2 million at
year-end 1996 to $273.2 million at year end 1997. The addition
of approximately $86 million of residential mortgage loans from
the SJS acquisition was off-set by increased sales to the
secondary market of loans originated during the year, as well
as a one time sale of approximately $8.8 million of lower,
fixed rate mortgages held in portfolio. The relatively low
interest rate environment experienced throughout 1997 combined
with the impact of the SJS acquisition on Shoreline's overall
asset mix made it advantageous to sell the majority of all
fixed rate loans originated during the year to the secondary
market. Shoreline originated approximately $39.8 million of
mortgage loans for sale to the secondary market in 1997, which
compares to approximately $17.2 million in 1996. Consumer
loans totaled $101.3 million at December 31, 1997, an increase
of $37.1 million from year-end 1996. The addition of
approximately $26 million from SJS, along with a greater focus
on consumer lending, helped produce this growth. Commercial
loans, which were not significantly impacted by the SJS
acquisition, experienced growth of $18.4 million (8.7%) in
1997.
Shoreline's loan portfolio was $500.6 million as of December
31, 1996, an increase of $34.6 million (7.4%) for the year.
Strong growth in commercial lending and residential real estate
mortgage loans offset modest growth in consumer 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.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
DECEMBER 31, (IN THOUSANDS) AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 230,338 37.17% $ 211,953 42.34% $ 191,437 41.08%
Residential real estate mortgage 273,241 44.10 214,201 42.79 194,784 41.80
Real estate construction 14,765 2.38 10,243 2.05 18,704 4.01
Consumer 101,292 16.35 64,194 12.82 61,070 13.11
--------- ------ --------- ------ --------- ------
Total loans $ 619,636 100.00% $ 500,591 100.00% $ 465,995 100.00%
========= ====== ========= ====== ========= ======
</TABLE>
13
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
ASSET QUALITY
Non-performing assets, including non-accrual loans, loans 90 days or
more past due, renegotiated loans and other real estate owned,
totaled $2.6 million or .41% of total loans at December 31, 1997.
This compares with the previous year-end ratio of .38%. During the
five year period shown below, Shoreline's non-performing asset ratio
has been well below the average of other bank holding companies of
similar asset size.
<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 1,301 $ 524 $ 235 $ 802 $ 1,962
Accruing loans past due 90
days or more 868 1,104 1,204 856 2,233
Restructured loans 0 0 0 2 211
Other real estate owned 387 273 170 552 1,026
------- -------- ------- -------- -------
Total non-performing assets $ 2,556 $ 1,901 $ 1,609 $ 2,212 $ 5,432
======= ======== ======= ======== =======
AS A PERCENTAGE OF TOTAL LOANS:
Non-accrual loans .21% .11% .05% .18% .47%
Accruing loans past due 90
days or more .14 .22 .26 .20 .54
Restructured loans .00 .00 .00 .00 .05
Other real estate owned .06 .05 .04 .13 .25
--- --- --- --- ----
Total non-performing assets .41% .38% .35% .51% 1.31%
=== === === === ====
</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 1997 under original terms on non-accrual loans
outstanding at December 31, 1997 was approximately $61,000.
Approximately $2,000 in interest income was recorded in 1997 on
non-accrual loans outstanding at December 31, 1997.
At year-end 1997, Shoreline had approximately $6.5 million in
loans for which payments are current, but known financial
difficulties of the borrowers cause management concern about
<PAGE>
the ability to comply with existing loan repayment terms. 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 $706,000 of loans considered
impaired at December 31, 1997. A portion of the allowance for
loan losses in the amount of $228,000 was allocated for these
loans.
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>
1997 1996 1995
---- ---- ----
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 $ 1,742 37.17% $ 2,491 42.34% $ 2,361 41.08%
Real estate - mortgage 1,328 44.10 743 42.79 698 41.80
Real estate - construction 130 2.38 115 2.05 107 4.01
Consumer 2,073 16.35 1,166 12.82 1,111 13.11
Unallocated 2,315 2,380 2,323
------- ------ -------- ------ -------- ------
Total $ 7,588 100.00% $ 6,895 100.00% $ 6,600 100.00%
======= ====== ======== ====== ======== ======
</TABLE>
14
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
Net charge-offs in 1997 represented only .08% of average total
loans and marked the fifth consecutive year this ratio was
below 10 basis points. The allowance for loan losses at
December 31, 1997 was $7.6 million, an increase of $693,000
over year-end 1996. Included in the increase in the allowance
was the addition of $540,000 from the acquisition of SJS.
Despite the increase in dollar amount, the allowance for loan
losses as a percentage of total loans declined 16 basis points,
from 1.38% at December 31, 1996 to 1.22% at December 31, 1997.
This reduction resulted from the relatively low percentage of
allowance to total loans carried by SJS due to its high
concentration in residential mortgage loans and the overall
portfolio quality. At December 31, 1997, the allowance for loan
losses as a percentage of non-performing loans was 350%. The
following table summarizes loan and allowance information for
the past three years.
<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Loans outstanding, end of period $ 619,636 $ 500,591 $ 465,995
=========== ========== ==========
Daily average of loans outstanding for the period $ 567,528 $ 490,200 $ 447,329
=========== ========== ==========
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 6,895 $ 6,600 $ 5,952
Additions from acquisition 540 0 0
Charge-offs:
Commercial, financial and agricultural 379 240 151
Real estate - mortgage 535 35 70
Real estate - construction 0 0 0
Consumer 44 318 271
----------- ---------- ----------
Total charge-offs 958 593 492
----------- ---------- ----------
Recoveries:
Commercial, financial and agricultural 302 97 200
Real estate - mortgage 184 57 14
Real estate - construction 0 0 0
Consumer 25 134 176
----------- ---------- ----------
<PAGE>
Total recoveries 511 288 390
----------- ---------- ----------
Net charge-offs 447 305 102
----------- ---------- ----------
Provision charged to income 600 600 750
----------- ---------- ----------
Balance at end of period $ 7,588 $ 6,895 $ 6,600
=========== ========== ==========
KEY RATIOS:
Net charge-offs to average loans .08% .06% .02%
Recoveries to total charge-offs 53.30% 48.57% 79.27%
Allowance to total loans at end of period 1.22% 1.38% 1.42%
Allowance to total non-performing loans at end of period 349.84% 423.52% 458.65%
Provision to average loans .11% .12% .17%
</TABLE>
15
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
SECURITIES
A summary of Shoreline's securities portfolio for the past
three years is shown in the table below.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
DECEMBER 31, (IN THOUSANDS) AVAILABLE HELD TO AVAILABLE HELD TO AVAILABLE HELD TO
FOR SALE MATURITY FOR SALE MATURITY FOR SALE MATURITY
--------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agencies $ 55,802 $ 13,999 $ 37,514 $ 15,000 $ 32,682 $ 6,830
States and political subdivisions 27,710 6,883 29,895 7,664 33,355 9,560
Mortgage-backed:
U.S. Government agencies 37,636 16,939 18,816 22,129 30,974 24,180
Collateralized mortgage obligations 27 565 1,290 2,789 3,320 3,895
Other 4,360 0 2,739 0 2,540 0
---------- --------- ---------- --------- ---------- ---------
Total $ 125,535 $ 38,386 $ 90,254 $ 47,582 $ 102,871 $ 44,465
========== ========= ========== ========= ========== =========
</TABLE>
Securities totaled $163.9 million at December 31, 1997, an
increase of $26.1 million (18.9%) from December 31, 1996. The
SJS transaction added $28.8 million to Shoreline's investment
securities portfolio and, consisted primarily of U.S. agency
and mortgage-backed securities. Of this total, approximately
$27.6 million were classified as available for sale by SJS.
Reduced holdings in state and political subdivisions and
mortgage-backed agency securities classified as available for
sale partially offset the growth in the securities portfolio.
Shoreline's Investment Committee is responsible for
establishing guidelines and strategies related to securities
investments. At December 31, 1997, 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. No
aggregate value of a single security issuer, except the U.S.
government and its agencies, exceeded 10% of Shoreline's
shareholders' equity.
<PAGE>
SOURCES AND USES OF FUNDS
The following table of average balances summarizes the sources
and uses of funds for 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
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 $ 567,528 $ 77,328 15.8% $ 490,200 $ 42,871 9.6%
Taxable securities 119,327 14,098 13.4% 105,229 5,415 5.4%
Tax-exempt securities 35,783 (1,908) (5.1%) 37,691 (6,233) (14.2%)
Federal funds sold 8,511 445 5.5% 8,066 (7,121) (46.9%)
Interest-earning deposits 18,484 9,270 100.6% 9,214 9,131 11,001.2%
--------- -------- ----- --------- -------- --------
Total uses $ 749,633 $ 99,233 15.3% $ 650,400 $ 44,063 7.3%
========= ======== ========= ========
Funding sources:
Non-interest-bearing
demand deposits $ 74,046 $ 5,425 7.9% $ 68,621 $ 2,440 3.7%
Interest-bearing demand
and savings deposits 272,220 15,811 6.2% 256,409 2,342 .9%
Time deposits 337,382 58,147 20.8% 279,235 24,897 9.8%
Securities sold under
agreements to repurchase 7,674 2,347 44.1% 5,327 1,859 53.6%
FHLB advances 34,668 20,868 151.2% 13,800 8,800 276.0%
Other 23,643 (3,365) (12.5%) 27,008 3,725 16.0%
--------- -------- ----- --------- -------- --------
Total sources $ 749,633 $ 99,233 15.3% $ 650,400 $ 44,063 7.3%
========= ======== ========= ========
</TABLE>
16
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
The primary source of funding for Shoreline is increased
deposits. Total deposits averaged $683.6 million in 1997, an
increase of $79.4 million (13.1%). The significant growth in
average deposits in 1997 was primarily due to the acquisition
of SJS in June of 1997. SJS provided $110.7 million in
deposits, the majority of which were time deposits.
Shoreline's popular Super Public Fund account, an interest-bearing
demand deposit account geared toward municipalities,
had growth of greater than 10%. Total average deposits
increased $30.0 million (5.2%) in 1996. Along with the growth
in the Super Public Fund category, time deposits greater than
$100,000 were primarily responsible for the increased deposit
levels in that year. Other funding sources, including
repurchase agreements, long-term debt and other sources,
increased $19.9 million (43.0%) in 1997. Increased use of FHLB
advances accounted for the majority of the growth in this
source of funds, with SJS providing $21.7 million in the merger
transaction. Use of alternative wholesale funding sources is
continually evaluated in conjunction with Shoreline's retail
deposit growth strategy.
Average total loans increased $77.3 million (15.8%) in 1997.
As discussed elsewhere, all three of Shoreline's general
lending areas contributed to this increase. Retail lending was
a significant component of the overall growth in Shoreline's
total loan portfolio in 1997, aided by the merger with SJS.
With the addition of approximately $86 million in residential
mortgage loans from SJS as well as strong loan origination
volume, Shoreline's mortgage portfolio averaged $256.9 million
in 1997, an increase of $44.4 million (20.9%) from 1996's
average of $212.6 million. Retail lending was further enhanced
as average consumer loans increased $18.7 million (29.1%). The
growth was impacted by the addition of $26 million in consumer
loans from SJS. Average commercial loans grew $14.2 million
(6.6%) in 1997, an increase over 1996's growth of
$10.4 million.
Average taxable securities increased $14.1 million (13.4%) in
1997 primarily due to the addition of $28.8 million from the
SJS securities portfolio. Average interest-earning deposits
increased $9.3 million (100.6%) as additional funds were
maintained in the first half of 1997 in anticipation of the
cash purchase of SJS. Shoreline utilized an interest-earning
deposit account with the Federal Home Loan Bank which serves as
an alternative daily investment vehicle for this purpose.
<PAGE>
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, 1997,
Shoreline had $8.7 million of federal funds sold and $6.3
million of interest-earning deposits available on demand. In
addition, Shoreline had over $125 million of securities
classified as available for sale. Net cash provided from
operating activities is a consistent source of liquidity as
evidenced by $10.9 million of net cash provided in 1997.
Principal reductions received on loans and mortgage-backed
securities also provide a continual stream of cash flows.
Finally, based on its investment in the Federal Home Loan Bank
of Indianapolis, Shoreline Bank can utilize this wholesale
funding source to access up to approximately $87 million of
borrowings. At December 31, 1997, the bank had $45.2 million of
borrowings with the FHLB.
ASSET/LIABILITY MANAGEMENT
Asset/liability management involves developing, implementing
and monitoring strategies to maintain sufficient liquidity,
maximize net interest income and minimize the impact
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, 1997 is shown in the following table:
17
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
<TABLE>
<CAPTION>
REPRICEABLE OR MATURING WITHIN:
-------------------------------
(IN THOUSANDS) 0-90 91-365 1 TO 5 OVER 5
DAYS DAYS YEARS YEARS TOTAL
---- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 146,539 $ 103,363 $ 318,610 $ 51,124 $ 619,636
Securities 18,299 19,748 51,407 74,467 163,921
Federal funds sold 8,675 0 0 0 8,675
Interest-earning deposits 6,344 0 0 0 6,344
----------- ----------- ---------- ---------- ----------
Total interest-earning assets 179,857 123,111 370,017 125,591 798,576
----------- ----------- ---------- ---------- ----------
Interest-bearing liabilities:
Time deposits $ 96,726 $ 145,115 $ 122,927 $ 2,322 $ 367,090
Demand and savings accounts 276,602 0 0 0 276,602
Other 23,145 12,000 17,558 0 52,703
----------- ----------- ---------- ---------- ----------
Total interest-bearing liabilities 396,473 157,115 140,485 2,322 696,395
----------- ----------- ---------- ---------- ----------
Asset (liability) gap $ (216,616) $ (34,004) $ 229,532 $ 123,269 $ 102,181
=========== =========== ========== ========== ==========
Cumulative asset (liability) gap $ (216,990) $ (250,620) $ (21,088) $ 102,181
=========== =========== ========== ==========
</TABLE>
As shown, Shoreline had a cumulative liability gap position of
$250.6 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, Shoreline is
positioned to absorb significant changes in rates without
<PAGE>
severely altering operating results. However, management
recognizes that, at the present time, Shoreline's net interest
margin may decline slightly under either a modest increase or
decrease in interest rates from the current levels. Net
interest margins of 4.47%, 4.69% and 4.70% were recorded in
1997, 1996 and 1995 respectively. As discussed elsewhere,
Shoreline's net interest margin was negatively impacted by the
acquisition of SJS in 1997.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Shoreline's primary market risk exposure is interest rate risk
and, to a lesser extent, liquidity risk. All of Shoreline's
transactions are denominated in U.S. dollars with no specific
foreign exchange exposure. Shoreline has only limited
agricultural loan assets and therefore has no significant
exposure to changes in commodity prices. Any impact that
changes in foreign exchange rate and commodity prices would
have on interest rates is assumed to be insignificant.
Interest rate risk is the exposure of a banking organization's
financial condition to adverse movements in interest rates.
Accepting the risk can be an important source of profitability
and stockholder value, however excessive levels of interest
rate risk could pose a significant threat to Shoreline's
earnings and capital base. Accordingly, effective risk
management that maintains interest rate risk at prudent levels
is essential to Shoreline's safety and soundness.
Evaluating a financial institution's exposure to changes in
interest rates includes assessing both the adequacy of the
management process used to control interest rate risk and the
organization's quantitative level of exposure. When assessing
the interest rate risk management process, Shoreline seeks to
ensure that appropriate policies, procedures, management
information systems and internal controls are in place to
maintain interest rate risk at prudent levels with consistency
and continuity. Evaluating the quantitative level of interest
rate risk exposure requires Shoreline to assess the existing
and potential future effects of changes in interest rates on
its consolidated financial condition, including capital
adequacy, earnings, liquidity, and, where appropriate, asset
quality.
18
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
The Federal Reserve Board, together with the Office of the
Comptroller of the Currency and the Federal Deposit Insurance
Corporation, adopted a Joint Agency Policy Statement on
interest rate risk, effective June 26, 1996. The policy
statement provides guidance to examiners and bankers on sound
practices for managing interest rate risk, which will form the
basis for ongoing evaluation of the adequacy of interest rate
risk management at supervised institutions. The policy
statement also outlines fundamental elements of sound
management that have been identified in prior Federal Reserve
guidance and discusses the importance of these elements in the
context of managing interest rate risk. Specifically, the
guidance emphasizes the need for active board of director and
senior management oversight and a comprehensive risk management
process that effectively identifies, measures, and controls
interest rate risk.
Financial institutions derive their income primarily from the
excess of interest collected over interest paid. The rates of
interest an institution earns on its assets and owes on its
liabilities generally are established contractually for a
period of time. Since market interest rates change over time,
an institution is exposed to lower profit margins (or losses)
if it cannot adapt to interest rate changes. For example,
assume that an institution's assets carry intermediate or long-term
fixed rates and that those assets are funded with short-term liabilities.
If market interest rates rise by the time the short-term liabilities
must be refinanced, the increase in the institution's interest expense
on its liabilities may not be sufficiently offset if assets continue to
earn at the long-term fixed rates. Accordingly, an institution's
profits could decrease on existing assets because the institution will
either have lower net interest income or, possibly, net interest expense.
Similar risks exist when assets are subject to contractual interest
rate ceilings, or rate sensitive assets are funded by longer-term, fixed
rate liabilities in a decreasing rate environment.
Various techniques might be used by an institution to minimize
interest rate risk. One approach used by Shoreline is to
periodically analyze its assets and liabilities based on
payment streams, interest rates, contractual maturities, and
estimated sensitivity to actual or potential changes in market
interest rates by means of a static gap analysis. Static gap
is defined as the difference between the cash flow amounts of
interest-sensitive assets and liabilities that will be
refinanced or repriced during a given period. For example, if
<PAGE>
the asset amount to be repriced exceeds the corresponding
liability amount for a certain time period, the institution is
in an asset-sensitive gap position. In this situation, net
interest income would increase if market interest rates rose or
decrease if market interest rates fell. If, alternatively,
more liabilities than assets will reprice, the institution is
in a liability-sensitive position. Accordingly, net interest
income would decline when rates rose and increase when rates
fell. However, the repricing and cash flows of certain
categories of assets and liabilities are subject to competitive
and other influences that are beyond the control of Shoreline.
As a result, certain assets and liabilities indicated as
maturing or repricing within a stated period in the static gap
analysis, may, in fact, mature or reprice in other periods or
at different volumes.
Several ways an institution can manage interest rate risk
include: selling existing assets or repaying certain
liabilities; matching repricing periods for new assets and
liabilities for example, by shortening terms of new loans or
investments; hedging existing assets, liabilities, or
anticipated transactions. An institution might also invest in
more complex financial instruments intended to hedge or
otherwise change interest rate risk. Interest rate swaps,
futures contracts, options on futures, and other such
derivative financial instruments often are used for this
purpose. Because these instruments are sensitive to interest
rate changes, they require management expertise to be
effective. Shoreline has not purchased derivative financial
instruments in the past and does not presently intend to
purchase such instruments.
Financial institutions are also subject to prepayment risk in
falling rate environments. For example, mortgage loans and
other financial assets may be prepaid by a debtor so that the
debtor may refund its obligations at new, lower rates.
Prepayments of assets carrying higher rates reduce the
financial institution's interest income and overall asset
yields. Certain portions of an institution's liabilities may
be short-term or due on demand, while most of its assets may be
invested in long-term loans or investments. Accordingly,
Shoreline seeks to have in place sources of cash to meet short-term
demands. These funds can be obtained by increasing deposits,
borrowing, or selling assets. Also, Federal Home Loan Bank
(FHLB) advances and short-term borrowings provide additional
sources of liquidity for Shoreline.
<PAGE>
Recognizing the limitations of static gap analysis as a method
of managing interest rate risk, Shoreline utilizes simulation
analysis as the primary method of measuring its interest rate
risk. These simulation techniques involve changes in interest
rate relationships and levels on all interest rate sensitive
assets and liabilities, prepayment assumptions inherent in
financial instruments, as well as changes in interest rate
levels in order to quantify risk potential. Based on these
analyses, Shoreline's management believes that the effect on
future net interest income would be similarly impacted by
directional changes in prevailing interest rates.
19
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
The following table illustrates the projected change in
Shoreline's net interest income during the next twelve months
if all market rates were to uniformly and gradually increase or
decrease by as much as 2.0% (over the same time period) compared
to results under a flat rate environment. These projections, based
on Shoreline's balance sheet as of December 31, 1997, were prepared
using the simulation analysis model and assumptions which Shoreline
was using for asset/liability management purposes. As of this date,
Shoreline had no derivative financial instruments, or trading
portfolio. The table indicates that if rates were to gradually and
uniformly increase or decrease by 2.0%, net interest income would be
expected to decrease by 2.6% under a rising rate scenario as well as
decrease by 1.2% under a declining rate scenario compared to results
forecast under a current rate environment. This relatively modest
projected exposure to interest rate risk is consistent with
management's desire to limit the sensitivity of net interest income
to changes in interest rates in order to reduce risk to earnings.
The model is based solely on gradual, uniform changes in market
rates and does not reflect the levels of interest rate risk that
may arise from other factors such as changes in the spreads between
key market rates or in the shape of the treasury yield curve. The
expected maturity date values for loans receivable, mortgage-backed
securities, and investment securities were calculated by adjusting
the instrument's contractual maturity date for expectations of
prepayments and call dates. Expected maturity date values for
interest-bearing core deposits were not based upon estimates of
the period over which the deposits would be outstanding, but
rather the opportunity for repricing. Similarly, with respect
to its variable rate instruments, Shoreline believes that
repricing dates, as opposed to expected maturity dates may be
more relevant in analyzing the value of such instruments.
Borrowings from the FHLB are reported based on repricing dates
if variable rate in nature.
<TABLE>
SIMULATION OF INTEREST RATE SENSITIVITY
PROJECTED EFFECT ON NET INTEREST INCOME
(In Thousands)
<CAPTION>
DECREASE IN INCREASE IN
DECEMBER 31, 1997 EXISTING FLAT RATE RATE RATE
-------- --------- ----------- -----------
<S> <C> <C> <C> <C>
CHANGE IN INTEREST RATE FROM
CURRENT (EXISTING) LEVEL N/A 0.00% (2.00)% 2.00%
<PAGE>
NET INTEREST INCOME $33,134 $32,644 $32,742 $32,268
% CHANGE IN NET INTEREST
INCOME FROM EXISTING LEVEL N/A (1.5)% (1.2)% (2.6)%
</TABLE>
CAPITAL RESOURCES
At December 31, 1997, total equity capital of Shoreline was
$76.9 million. This includes an unrealized gain of $1.6 million
for Shoreline's available for sale securities portfolio. Total
equity capital was $69.4 million at December 31, 1996 with an
unrealized gain of $1.4 million from available for sale
securities. During 1997, Shoreline issued 34,761 shares under
its Dividend Reinvestment Plan.
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". However, the
acquisition of SJS (which was accounted for as a purchase) had
the affect of reducing Shoreline's capital ratios in 1997.
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 1997 1996 1995
---------- ----------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Risk based:
Tier I capital 4.00% 6.00% 11.9% 15.1% 14.6%
Total capital 8.00% 10.00% 13.1% 16.3% 15.8%
Tier I leverage 4.00% 5.00% 8.0% 9.3% 8.9%
</TABLE>
20
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
CASH DIVIDENDS
Cash dividends declared increased 14.0% to $.57 per share in
1997. 1996's cash dividends totaled $.50 per share, an increase
of 16.3% over 1995. Effectively, the amount of cash payout has
been increased each year during Shoreline's existence. 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 1997 1996 1995
--- ---- ----
<S> <C> <C> <C>
1st $ .14 $ .12 $ .10
2nd .14 .12 .11
3rd .14 .13 .11
4th .15 .13 .11
------ ------- -------
Total $ .57 $ .50 $ .43
====== ======= =======
</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 1998.
YEAR 2000
Shoreline is currently addressing a potential problem facing
all users of automated information systems. The problem is how
existing application software programs and operating systems
can accommodate the date value for the year 2000. Shoreline,
by nature, is highly dependent upon computer systems because of
significant transaction volumes and date dependency for
interest calculations on financial instruments such as loans
and deposits.
<PAGE>
Shoreline developed and implemented a plan to address the year
2000 issue during 1997. The plan includes four general phases:
raising awareness, assessing existing systems, renovating or
replacing non-compliant systems and validating and testing. As
Shoreline does not develop or write its own software systems,
it must rely on third party vendors to bring systems
into compliance with the year 2000. Shoreline has initiated
formal communications with its third party vendors as a part of
its assessment phase to determine which of its systems may be
vulnerable to third parties' failure to resolve year 2000
issues.
Shoreline will continue to assess the impact of year 2000
issues on its computer-based systems and applications
throughout 1998. Its goal is to have all critical systems and
applications compliant with the century change by the fourth
quarter of 1998, allowing for full validation and testing
during 1999. Shoreline will incur costs associated with this
project in the form of personnel expense, professional fees and
investments in new or upgraded technology. Based upon
information currently available, management does not presently
anticipate that the costs to address year 2000 issues will have
a material impact on Shoreline's financial position, results of
operations or cash flows.
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.
<PAGE>
Future Factors include changes in interest rates and interest
rate relationship; 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.
21
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
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, 1997 and
1996 and the related consolidated statements of income,
shareholders' equity and cash flows for the years ended
December 31, 1997, 1996 and 1995. 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, 1997 and 1996, and the results of its operations
and its cash flows for the years ended December 31, 1997, 1996
and 1995 in conformity with generally accepted accounting
principles.
/S/CROWE, CHIZEK AND COMPANY LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
February 20, 1998
22
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 29,961,993 $ 38,266,519
Interest-earning deposits 6,344,447 18,142,151
Federal funds sold 8,675,000 5,150,000
------------ ------------
Total cash and cash equivalents 44,981,440 61,558,670
Securities available for sale (carried at fair value) 125,534,904 90,254,236
Securities held to maturity (fair values of $39,572,300
and $48,588,454 in 1997 and 1996, respectively) 38,385,568 47,582,337
Loans, net of allowance for loan losses
($7,588,127-1997;$6,894,945-1996) 612,048,028 493,696,408
Premises and equipment, net 13,560,859 10,975,483
Intangible assets, net 11,901,520 2,376,611
Other assets 11,430,483 9,651,074
------------ ------------
Total Assets $857,842,802 $716,094,819
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest-bearing $ 78,971,373 $ 74,142,067
Interest-bearing 643,592,981 542,335,458
------------ ------------
Total deposits 722,664,354 616,477,525
Securities sold under agreements to repurchase 7,526,582 7,166,563
Other liabilities 5,593,571 5,032,529
Federal Home Loan Bank (FHLB) Advances 45,175,892 18,000,000
------------ ------------
Total Liabilities 780,960,399 646,676,617
------------ ------------
Shareholders' Equity
Preferred stock, no par value; 1,000,000 shares authorized;
none issued or outstanding 0 0
Common stock; no par value, 10,000,000 shares authorized; 5,921,509 and
5,555,672 issued and outstanding at December 31, 1997 and 1996, respectively 0 0
Additional paid-in capital 65,273,177 56,388,553
Unearned stock incentive plan shares (495,095) 0
Unrealized gain on securities available for sale, net 1,604,270 1,378,327
Retained earnings 10,500,051 11,651,322
------------ ------------
<PAGE>
Total Shareholders' Equity 76,882,403 69,418,202
------------ ------------
Total Liabilities and Shareholders' Equity $857,842,802 $716,094,819
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 50,361,000 $ 43,646,323 $ 40,481,930
Securities:
Taxable 8,586,235 7,357,686 6,774,289
Tax-exempt 2,211,790 2,361,306 2,824,779
Federal funds sold 456,747 423,787 889,631
Deposits with banks 1,022,486 480,410 2,777
---------------- --------------- ---------------
Total interest income 62,638,258 54,269,512 50,973,406
---------------- --------------- ---------------
INTEREST EXPENSE
Deposits 28,188,914 24,237,818 23,451,256
Short-term borrowings 327,422 216,501 143,164
FHLB advances 1,928,503 731,463 252,502
---------------- --------------- ---------------
Total interest expense 30,444,839 25,185,782 23,846,922
---------------- --------------- ---------------
NET INTEREST INCOME 32,193,419 29,083,730 27,126,484
Provision for loan losses 600,000 600,000 750,000
---------------- --------------- ---------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 31,593,419 28,483,730 26,376,484
---------------- --------------- ---------------
OTHER INCOME
Service charges on deposit accounts 2,080,888 1,819,736 1,787,405
Trust fees 1,673,189 1,500,147 1,387,819
Net gain/(loss) on security sales 171,373 190,717 (35,812)
Net gain/(loss) on loan sales 525,549 (20,618) 55,606
Other 1,262,033 857,037 887,394
---------------- --------------- ---------------
Total other income 5,713,032 4,347,019 4,082,412
---------------- --------------- ---------------
OTHER EXPENSES
Salaries and employee benefits 11,509,005 10,650,227 9,891,918
Occupancy 1,458,661 1,328,968 1,281,079
Equipment 2,149,917 1,920,303 1,770,636
Insurance 293,045 572,090 868,495
Professional fees 1,454,412 1,006,897 774,153
Other taxes 619,819 540,738 673,778
<PAGE>
Amortization of intangibles 548,736 265,782 255,686
Other 3,487,387 3,148,092 3,204,695
---------------- --------------- ---------------
Total other expenses 21,520,982 19,433,097 18,720,440
---------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 15,785,469 13,397,652 11,738,456
Federal income tax expense 4,774,200 3,792,223 3,131,000
---------------- --------------- ---------------
NET INCOME $ 11,011,269 $ 9,605,429 $ 8,607,456
================ =============== ===============
BASIC EARNINGS PER SHARE $ 1.25 $ 1.10 $ .99
================ =============== ===============
DILUTED EARNINGS PER SHARE $ 1.24 $ 1.10 $ .98
================ =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1997 NET UNREALIZED
UNEARNED GAIN/(LOSS) ON
ADDITIONAL STOCK SECURITIES
PAID-IN INCENTIVE AVAILABLE FOR RETAINED
CAPITAL PLAN SHARES SALE EARNINGS TOTAL
----------- ----------- --------------- -------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $ 45,591,999 $ 0 $ (1,016,801) $ 11,633,270 $ 56,208,468
Net income for year 8,607,456 8,607,456
Cash dividends declared:
$0.43 per common 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 gain (loss) 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 50,147,966 0 2,160,403 12,051,474 64,359,843
Net income for year 9,605,429 9,605,429
Cash dividends declared:
$0.50 per common 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 gain 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 56,388,553 0 1,378,327 11,651,322 69,418,202
Net income for year 11,011,269 11,011,269
Cash dividends declared:
$0.57 per common share (5,008,864) (5,008,864)
5% stock dividend-fractional shares 7,144,743 (7,153,676) (8,933)
Shares issued under dividend reinvestment plan 981,292 981,292
Shares issued under stock option plan 152,339 152,339
Shares awarded under stock incentive plan 606,250 (606,250)
Shares earned under stock incentive plan 111,155 111,155
Change in unrealized gain on securities
available for sale, net of tax effect 225,943 225,943
----------- -------------- ------------ ------------ ------------
<PAGE>
BALANCE AT DECEMBER 31, 1997 $65,273,177 $ (495,095) $ 1,604,270 $ 10,500,051 $ 76,882,403
=========== ============== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 11,011,269 $ 9,605,429 $ 8,607,456
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 1,596,601 1,495,103 1,413,972
Provision for loan losses 600,000 600,000 750,000
Stock incentive expense 111,155 0 0
Net amortization and accretion on securities 229,778 534,548 744,864
Amortization of goodwill and related core deposit intangibles 548,736 265,782 255,686
(Gain)/loss on sales, calls and maturities of securities (171,373) (190,717) 35,812
Mortgage loans originated for sale (39,750,896) (17,241,221) (13,552,773)
Proceeds from sale of mortgage loans 39,020,657 19,428,338 11,380,687
(Gain) loss on sale of mortgage loans (525,549) 26,895 (23,518)
Gains on sale of credit card and student loan portfolios 0 (6,277) (32,088)
Increase in other assets (919,753) (222,147) (1,009,854)
Increase in other liabilities (871,018) 210,464 1,094,522
-------------- -------------- -------------
NET CASH FROM OPERATING ACTIVITIES 10,879,607 14,506,197 9,664,766
-------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (5,524,670) (37,664,188) (28,171,998)
Proceeds from sale of credit card and student loan portfolios 0 424,687 847,223
Securities available for sale:
Purchase (46,455,854) (20,049,790) (6,309,595)
Proceeds from sales 17,796,416 9,843,773 6,708,546
Proceeds from maturities, calls and principal reductions 22,604,556 21,453,835 7,697,973
Securities held to maturity:
Purchase (4,276,335) (13,682,208) (38,121,538)
Proceeds from maturities, calls and principal reductions 13,433,846 10,404,637 16,371,828
Premises and equipment expenditures (2,008,722) (2,326,735) (1,545,649)
Net cash (paid) / received in acquisitions (20,436,447) 0 9,765,976
-------------- -------------- -------------
NET CASH FROM INVESTING ACTIVITIES (24,867,210) (31,595,989) (32,757,234)
-------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (4,555,726) 24,177,513 16,032,438
Net increase in securities sold under agreements to repurchase 360,019 2,475,745 1,815,706
Proceeds from FHLB advances 19,500,000 13,000,000 0
Repayment of FHLB advances (14,009,754) 0 0
Dividends paid (5,008,864) (4,368,023) (3,734,978)
<PAGE>
Proceeds from shares issued 1,124,698 957,754 705,659
Payments to retire common stock 0 (354,725) (603,966)
-------------- -------------- -------------
NET CASH FROM FINANCING ACTIVITIES (2,589,627) 35,888,264 14,214,859
------------- -------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (16,577,230) 18,798,472 (8,877,609)
Cash and cash equivalents at beginning of year 61,558,670 42,760,198 51,637,807
-------------- -------------- -------------
Cash and cash equivalents at end of year $ 44,981,440 $ 61,558,670 $ 42,760,198
============== ============== =============
CASH PAID DURING THE YEAR FOR:
Interest $ 30,151,004 $ 25,174,339 $ 23,447,129
Income taxes $ 4,677,000 $ 3,777,000 $ 4,270,000
</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. The acquisition in 1995 resulted in an increase in
deposits of $10,171,951. Activity related to the 1997 acquisition is
described in a separate note.
See accompanying notes to consolidated financial statements.
26
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
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 may change in
the future and future results could differ. Areas involving
the use of management's estimates and assumptions which are
particularly subject to change include the allowance for loan
losses, fair values of financial instruments, the carrying
value and amortization of intangibles, and the pension benefit
obligations 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. Trading securities are bought principally for sale in
the near term, and are reported as 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
interest income.
<PAGE>
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
The allowance for loan losses is a valuation allowance for
probable credit losses, increased by the provision for loan
losses and decreased by charge-offs less recoveries.
Estimating the risk of loss and the amount of loss on any loan
is necessarily subjective. Accordingly, management estimates
the allowance balance required based on past loan loss
experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated
collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans,
but the entire allowance is available for any loan that, in
management's judgment, should be charged-off. A problem loan
is charged-off by management as a loss when deemed
uncollectible, although collection efforts continue and future
recoveries may occur.
Loan impairment is reported when full payment under the loan
terms is not expected. Impairment is evaluated in total for
smaller-balance loans of similar nature such as residential
mortgage and consumer loans and on an individual loan basis for
other loans. If a loan is impaired, a portion of the allowance
is allocated so that the loan is reported, net, at the present
value of estimated future cash flows using the loan's existing
rate or at the fair value of collateral if repayment is
expected solely from the collateral. Loans are evaluated for
impairment when payments are delayed, typically 90 days or
more, or when it is probable that all principal and interest
amounts will not be collected according to the original terms
of the loan.
27
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
SERVICING RIGHTS
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 rights, using groupings of
the underlying loans as to interest rates and then,
secondarily, as to geographic and prepayment characteristics.
Any impairment of a grouping is reported as a valuation
allowance.
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 equipment. These
assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted
cash flows. 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 in collection
of a loan through foreclosure 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 accounted for as a loan loss. After
acquisition, a valuation allowance reduces the reported amount
to the lower of the initial amount or fair value less costs to
sell. Expenses related to the maintenance of other real
estate, gains and losses on disposition, and changes in the
valuation allowance are recognized in current earnings. Other
real estate amounted to approximately $387,000 and $273,000 at
December 31, 1997 and 1996, 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
<PAGE>
necessary. Goodwill was $8,812,000 and $143,000, and the
unamortized core deposit intangibles were $3,089,000 and
$2,234,000 at December 31, 1997 and 1996, respectively.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
All of these liabilities represent amounts advanced by various
customers and secured by securities owned, as they are not
covered by federal deposit insurance.
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
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 options' fair value had been
recorded using an option pricing model.
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. A
valuation allowance, if needed, reduces deferred tax assets to
the amount expected to be realized.
EARNINGS AND DIVIDENDS PER SHARE
Basic earnings per share is based on weighted-average common
shares outstanding. Diluted earnings per share further assumes
issue of any potentially dilutive common shares. The accounting
standard for computing earnings per share was revised for 1997,
and all earnings per share previously reported are restated to follow
the new standard. Earnings and dividends per share and weighted-
average shares outstanding are restated for all stock dividends and
stock splits. The reconciliation of the weighted-average number of
shares used for basic and diluted earnings per share is shown in Note 13.
28
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
STOCK SPLITS AND DIVIDENDS
A 5% stock dividend was declared in 1997, 1996, and 1995.
Stock dividends are accounted for by transferring the fair
market value of the stock from retained earnings to additional
paid in capital. Fractional shares are paid in cash for all
stock splits and dividends. On February 17, 1998, the Board of
Directors declared a three-for-two stock split, effective April
3, 1998, to shareholders of record on March 23, 1998. Earnings
and dividends per share have been restated for this stock
split.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents
includes cash on hand, demand deposits and interest-earning
deposits in other institutions, and federal funds sold with a
maturity of 90 days or less. Net cash flows are reported for
customer loan and deposit transactions and securities sold
under agreements to repurchase.
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 15. 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,
<PAGE>
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.
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. ACQUISITIONS
In June 1997, Shoreline completed the acquisition of all the
outstanding stock of SJS Bancorp, Inc. ("SJS"), headquartered
in St. Joseph, Michigan, for approximately $24.8 million in
cash. The acquisition was accounted for as a purchase, and,
accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the
estimated fair values at the date of acquisition. The excess
of the purchase price over the fair values of the net assets
acquired was approximately $10.6 million and has been recorded
as goodwill and core deposit intangibles, which are being
amortized on a straight-line basis over 20 years and on an
accelerated basis over 10 years, respectively. The purchase
accounting adjustments are being amortized under various
methods and over the lives of the corresponding assets and
liabilities. Following are the fair values of assets acquired
and liabilities assumed as of the June, 1997 acquisition date.
<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>
29
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
The consolidated statements of income reflect the operating
results of Shoreline since the effective date of the
acquisition. Following is unaudited pro forma information (in
thousands, except for per share amounts) as if the acquisition
of SJS had occurred at the beginning of both 1997 and 1996.
The pro forma information is based on actual performance of
Shoreline and SJS for the periods indicated and includes
adjustments for lost interest on funds paid to consummate the
acquisition, the amortization of intangibles arising from the
transaction, the elimination of acquisition related expenses,
and the related income tax effects. The pro forma financial
information is not necessarily indicative of the results of
operations as they would have been had the transaction been
effected on the assumed dates.
<TABLE>
<CAPTION>
1997 1996
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Interest income $ 66,935 $ 64,343
Interest expense 33,366 31,773
----------- -----------
NET INTEREST INCOME 33,569 32,570
Provision for loan losses 709 758
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 32,860 31,812
Other income 5,798 4,928
Other expense 24,875 24,200
----------- -----------
INCOME BEFORE FEDERAL INCOME TAX EXPENSE 13,783 12,540
Federal income tax expense 4,116 3,522
----------- -----------
NET INCOME $ 9,667 $ 9,018
=========== ===========
Pro forma basic earnings per share $ 1.10 $ 1.04
=========== ===========
Pro forma dilutive earnings per share $ 1.09 $ 1.03
=========== ===========
</TABLE>
On January 28, 1998, Shoreline signed a definitive agreement
under which The State Bank of Coloma ("State Bank") would merge
with and into Shoreline Bank. State Bank has approximately $29
million in assets and provides banking services primarily in
southwestern Michigan. Completion of this transaction will be
<PAGE>
accounted for as a pooling of interests, is subject to
regulatory approval and other customary conditions, and is
anticipated during the second quarter of 1998.
NOTE 4. 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 1997 1996
------------ -------------
<S> <C> <C>
Portion of requirement satisfied by non-interest earning vault cash $ 8,336,000 $ 6,985,000
Additional balances maintained with the Federal Reserve 4,447,000 4,280,000
------------ ------------
Total reserve requirements $ 12,783,000 $ 11,265,000
============ ============
</TABLE>
30
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
NOTE 5. SECURITIES
The amortized cost and fair value of securities is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE AT DECEMBER 31, 1997
U.S. Treasury and agencies $ 55,232,215 $ 588,349 $ (19,119) $ 55,801,445
States and political subdivisions 26,148,844 1,561,700 (194) 27,710,350
Mortgage-backed:
U.S. Government agencies 37,336,123 448,188 (148,312) 37,635,999
------------- ------------ ----------- -------------
Collateralized mortgage obligations 27,308 102 0 27,410
------------- ------------ ----------- -------------
Other 4,359,700 0 0 4,359,700
------------- ------------ ----------- -------------
Total $ 123,104,190 $ 2,598,339 $ (167,625) $ 125,534,904
============= ============ =========== =============
HELD TO MATURITY AT DECEMBER 31, 1997
U.S. Treasury and agencies $ 13,998,757 $ 101,599 $ (3,488) $ 14,096,868
States and political subdivisions 6,882,781 606,992 (136) 7,489,637
Mortgage-backed:
U.S. Government agencies 16,939,025 469,236 (688) 17,407,573
Collaterlized mortgage obligations 565,005 13,217 0 578,222
------------- ------------ ----------- -------------
Total $ 38,385,568 $ 1,191,044 $ (4,312) $ 39,572,300
============= ============ =========== =============
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES 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
<PAGE>
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
Collaterlized mortgage obligations 2,789,209 22,239 0 2,811,448
------------- ------------ ----------- -------------
Total $ 47,582,337 $ 1,138,782 $ (132,665) $ 48,588,454
============= ============ =========== =============
</TABLE>
Information regarding the amortized cost and fair value of
securities by contractual maturity at December 31, 1997 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.
31
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- -----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 9,677,565 $ 9,721,573 $ 256,310 $ 257,890
Due after one year through five years 28,103,552 28,899,949 5,024,291 5,147,473
Due after five years through ten years 35,841,900 36,784,747 12,920,074 13,187,451
Due after ten years 12,117,742 12,465,226 2,680,863 2,993,692
-------------- -------------- -------------- -------------
Subtotal 85,740,759 87,871,495 20,881,538 21,586,506
Mortgage-backed 37,363,431 37,663,409 17,504,030 17,985,795
-------------- -------------- -------------- -------------
Total $ 123,104,190 $ 125,534,904 $ 38,385,568 $ 39,572,301
============== ============== ============== =============
</TABLE>
Proceeds, gross gains and gross losses from sales and calls of
securities are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
AVAILABLE FOR SALE
Proceeds from sales $ 17,796,416 $ 9,843,773 $ 6,708,546
============= ============ =============
Gross gains from sales $ 169,290 $ 156,041 $ 14,333
Gross losses from sales (39,985) (22,468) (140,822)
------------- ------------ -------------
Net gain/(losses) from sales 129,305 133,573 (126,489)
------------- ------------ -------------
Net gain from calls 27,518 38,379 20,050
------------- ------------ -------------
Net gain/(loss) $ 156,823 $ 171,952 $ (106,439)
============= ============ =============
HELD TO MATURITY
Net gain from calls/maturities $ 14,550 $ 18,765 $ 70,626
============= ============ =============
</TABLE>
<PAGE>
Securities having an amortized cost of $28,974,000 at December
31, 1997 were pledged to secure public trust deposits,
securities sold under agreements to repurchase, and advances
from the Federal Home Loan Bank.
NOTE 6. LOANS
The composition of the loan portfolio is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
--------------- --------------
<S> <C> <C>
Commercial, financial and agricultural $ 230,338,334 $ 211,953,091
Residential real estate 273,240,696 214,201,444
Real estate construction 14,764,756 10,243,243
Consumer 101,292,369 64,193,575
--------------- --------------
Total loans 619,636,155 500,591,353
--------------- --------------
Allowance for loan losses (7,588,127) (6,894,945)
--------------- --------------
Net loans $ 612,048,028 $ 493,696,408
=============== ==============
</TABLE>
Loans held for sale at year-end 1997 and 1996 were
approximately $1,653,000 and $518,000. Loans serviced for
others were approximately $106,609,000 and $49,729,000 at
year-end 1997 and 1996.
Certain directors, executive officers and principal
shareholders of Shoreline, including associates of such
persons, were loan customers of Shoreline during 1997. A
summary of aggregate related party loan activity, for loans
aggregating $60,000 or more to any one related party, is as
follows for the year ended December 31:
<TABLE>
<CAPTION>
1997 1996
-------------- ------------
<S> <C> <C>
Balance at January 1 $ 10,643,584 $ 8,756,188
New loans 7,224,378 6,661,247
Repayments (6,551,449) (4,962,428)
Other changes, net (4,102,164) 188,577
============== ============
Balance at December 31 $ 7,214,349 $ 10,643,584
============== ============
</TABLE>
32
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
NOTE 7. ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Balance, at beginning of year $ 6,894,945 $ 6,600,119 $ 5,951,969
Additions from acquisitions 540,595 0 0
Provision charged to operating expense 600,000 600,000 750,000
------------- ------------- ------------
8,035,540 7,200,119 6,701,969
------------- ------------- ------------
Loan charge-offs (957,926) (593,350) (491,943)
Loan recoveries 510,513 288,176 390,093
------------- ------------- ------------
Net loan charge-offs (447,413) (305,174) (101,850)
------------- ------------- ------------
Balance, at end of year $ 7,588,127 $ 6,894,945 $ 6,600,119
============= ============= ============
</TABLE>
Impaired loans were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Total impaired loans at year-end $ 706,362 $ 384,196
=========== ==========
Amount of the allowance allocated $ 228,454 $ 57,629
=========== ==========
Average of impaired loans during the year $ 902,255 $ 548,515
=========== ==========
Interest income recognized during impairment $ 87,085 $ 57,854
=========== ==========
Cash-basis interest income recognized $ 81,566 $ 60,548
=========== ==========
</TABLE>
<PAGE>
Loans with carrying values of approximately $653,200 and
$389,500 were transferred to foreclosed real estate in 1997 and
1996, respectively.
NOTE 8. PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
-------------- -------------
<S> <C> <C>
Land $ 1,450,179 $ 1,124,773
Building and improvements 13,433,856 10,882,955
Furniture and equipment 13,823,178 11,756,589
-------------- -------------
28,707,213 23,764,317
Less accumulated depreciation and amortization 15,146,354 12,788,834
-------------- -------------
Net premises and equipment $ 13,560,859 $ 10,975,483
============== =============
</TABLE>
Depreciation and amortization expense charged to operations was
$1,596,601, $1,495,103 and $1,413,972 in 1997, 1996 and 1995,
respectively.
NOTE 9. DEPOSITS
Time deposit accounts individually exceeding $100,000
approximated $99,719,000 and $77,752,500 at year-end 1997 and
1996, respectively.
At year-end 1997, stated maturities of time deposits for the
next five years and thereafter is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $ 231,994,813
1999 74,524,829
2000 32,212,421
2001 13,467,706
2002 14,573,714
Thereafter 316,796
-----------------
$ 367,090,279
=================
</TABLE>
<PAGE>
Brokered deposits totaled approximately $20,900,000 and
$24,900,000 at year-end 1997 and 1996. At year-end 1997,
brokered deposits had interest rates ranging from 5.09% to
7.00% and maturities ranging from five days to 36 months.
Related party deposits totaled approximately $6,449,000 and
$8,837,000 at year-end 1997 and 1996.
33
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
NOTE 10. 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 type of
financing arrangements has been limited to securities sold
under agreements 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>
1997 1996
---- ----
<S> <C> <C>
Average daily balance during the year $ 7,673,700 $ 5,318,300
Average interest rate during the year 4.27% 4.06%
Maximum month-end balance during the year $ 8,883,840 $ 7,526,750
</TABLE>
Securities underlying these agreements at year-end were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Carrying value $ 15,992,700 $ 11,652,300
Fair value $ 16,171,300 $ 11,817,300
</TABLE>
FEDERAL HOME LOAN BANK (FHLB) ADVANCES
At December 31, 1997 and 1996, Shoreline had advances from the
FHLB of Indianapolis as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- -----------------
<S> <C> <C>
FIXED RATE
- ---------------------------
5.23%, due January 1998 $ 1,000,000 $ -
5.88%, due February 1998 750,000 -
5.97%, due March 1998 5,000,000 -
<PAGE>
6.07%, due June 1998 1,000,000 -
6.28%, due August 1998 500,000 -
5.05%, due September 1998 5,000,000 5,000,000
6.05%, due October 1998 1,500,000 -
5.87%, due November 1998 2,000,000 2,000,000
5.45%, due November 1998 500,000 -
5.44%, due December 1998 1,000,000 -
5.26%, due February 1999 3,000,000 3,000,000
6.23%, due June 2000 1,000,000 -
6.61%, due August 2000 1,146,995 -
6.33%, due September 2000 1,548,659 -
6.35%, due October 2000 2,033,021 -
5.77%, due January 2001 947,217 -
---------------- ----------------
27,925,892 10,000,000
---------------- ----------------
CONVERTIBLE FIXED RATE
- ---------------------------
5.57%, due August 2000 2,500,000 -
5.82%, due September 2002 5,000,000 -
5.68%, due September 2002 3,000,000 -
---------------- ----------------
10,500,000 -
---------------- ----------------
VARIABLE RATE
- ---------------------------
5.56%, due March 1997 - 4,000,000
5.50%, due November 1997 - 4,000,000
5.85%, due March 1998 1,000,000 -
5.91%, due March 1998 450,000 -
5.88%, due March 1998 4,800,000 -
5.74%, due April 1998 500,000 -
---------------- ----------------
6,750,000 8,000,000
---------------- ----------------
Total $ 45,175,892 $ 18,000,000
================ ================
</TABLE>
34
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
Interest on the advances is payable monthly. The convertible
fixed rate advance due August 2000 is subject to conversion by
the FHLB to a variable rate advance in August 1998 or quarterly
thereafter. The convertible fixed rate advances due September
2002 are subject to conversion by the FHLB to variable rate
advances in September 1999 or quarterly thereafter. If
converted, these convertible fixed rate advances will carry an
interest rate equal to the three month London Interbank Offered
Rate (LIBOR) and adjust quarterly. The variable rate advances
carry an interest rate equal to the three month LIBOR rate less
3 basis points and adjust quarterly. Several of the advances
are subject to various prepayment penalties as disclosed in the
agreements with the FHLB.
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 a combined
approximate carrying value of $356 million at December 31,
1997.
At year-end 1997, scheduled principal reductions on these
advances are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $ 25,638,021
1999 3,684,697
2000 7,232,154
2001 621,020
2002 8,000,000
----------------
$ 45,175,892
================
</TABLE>
<PAGE>
NOTE 11. INCOME TAXES
Components of the provision for federal taxes on income are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C>
Taxes currently payable $ 4,609,241 $ 3,524,196 $ 5,194,400
Deferred tax expense/(benefit) 164,959 268,027 (2,063,400)
--------------- --------------- --------------
Total $ 4,774,200 $ 3,792,223 $ 3,131,000
=============== =============== ==============
</TABLE>
Taxes allocated to securities transactions were $58,267 in
1997, $64,844 in 1996 and $(12,176) in 1995.
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 1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Statutory federal tax rate 34% 34% 34%
Income computed at the statutory federal tax rate $ 5,367,059 $ 4,555,202 $ 3,991,075
Add(subtract) tax effect of:
Tax-exempt securities income (686,323) (728,495) (877,372)
Tax-exempt loan income (162,077) (189,082) (210,036)
Non-deductible interest expense 88,759 88,757 122,278
Goodwill amortization 89,713 13,536 13,536
Other 77,069 52,305 91,519
--------------- --------------- --------------
Total $ 4,774,200 $ 3,792,223 $ 3,131,000
=============== =============== ==============
</TABLE>
35
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
The components of the net deferred tax asset recorded in the
balance sheet are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
-------------- --------------
<S> <C>
Deferred tax assets
Provision for loan losses $ 2,401,029 $ 2,344,281
Net deferred loan fees 114,500 145,688
Deferred compensation 286,158 281,009
Mark-to-market adjustment for securities held for sale 832,961 660,771
Other 227,314 131,690
-------------- -------------
Total deferred tax assets 3,861,962 3,563,439
-------------- -------------
Deferred tax liabilities
Accretion of bond discount (98,130) (68,220)
Depreciation (241,314) (261,525)
Pension (129,334) (123,611)
Net unrealized gains on securities available for sale (826,444) (710,049)
Purchase accounting adjustments (347,241) -
Mortgage servicing rights (110,547) (43,114)
-------------- -------------
Total deferred tax liabilities (1,753,010) (1,206,519
-------------- -------------)
Valuation allowance 0 0
-------------- -------------
Net deferred tax asset $ 2,108,952 $ 2,356,920
============== =============
</TABLE>
NOTE 12. 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.
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
--------------- ---------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $3,195,062 in 1997 and $3,007,353 in 1996 $ 3,257,808 $ 3,053,491
=============== ==============
Projected benefit obligation for service rendered to date $ 4,461,621 $ 4,224,078
Plan assets at fair value, primarily money market funds,
listed stocks, bonds and U.S. Government securities 5,293,488 4,425,345
--------------- --------------
Excess of plan assets over projected benefit obligation 831,867 201,267
Unrecognized transition asset (134,443) (157,732)
Unrecognized prior service benefit (217,683) (235,759)
Unrecognized net (gain)/loss (93,345) 506,156
--------------- --------------
Net pension asset $ 386,396 $ 313,932
=============== ==============
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Net pension cost includes the following:
Service cost-benefits earned during the year $ 244,988 $ 244,085 $ 221,152
Interest cost on projected benefit obligation 316,011 293,842 245,773
Actual return on plan assets (956,302) (542,927) (722,581)
Net amortization and deferral 560,713 208,545 471,836
Additional liability recognized due to settlement 0 0 0
------------ ----------- -----------
Net pension cost $ 165,410 $ 203,545 $ 216,180
============ =========== ===========
</TABLE>
The weighted average discount rate was 7.50% for 1997 and 1996
and 7.25% for 1995. The rate of increase in future
compensation used in determining the actuarial present value of
the projected benefit obligation was 4.50% for 1997, 1996 and
1995. The expected long-term rate of return on assets was
8.00% for 1997 and 1996 and 7.50% for 1995. The unrecognized
prior service cost is amortized on a straight line basis, based
on the expected future service years of plan participants to
receive benefits.
36
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
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, 1997 are as follows:
<TABLE>
<CAPTION>
NUMBER
PRICE OF OPTIONS
ISSUE DATE EXPIRATION DATE PER SHARE<F1> OUTSTANDING<F1>
--------------- ------------- ---------------
<S> <C> <C> <C>
December 1, 1990 December 1, 2000 $ 4.88 52,262
January 1, 1994 January 1, 2004 $ 11.04 13,222
November 22, 1996 November 22, 2006 $ 13.17 44,003
--------
109,487
========
</TABLE>
Statement of Financial Accounting Standard ("SFAS") No. 123,
"ACCOUNTING FOR STOCK BASED COMPENSATION" 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 awarded after December
15, 1995. Accordingly, the following pro forma information
presents net income and earnings per share had the fair value
method been used to measure compensation 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 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C> <C>
Net income as reported $11,011,269 $9,605,429
Pro forma net income $10,975,725 $9,571,769
Basic earnings per share as reported $1.25 $1.10
Pro forma basic earnings per share $1.24 $1.10
Diluted earnings per share as reported $1.24 $1.10
Pro forma diluted earnings per share $1.23 $1.10
</TABLE>
<PAGE>
No options were granted during 1997 or 1995. The weighted-average fair value
of options granted in 1996 was $5.95.<F1> 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
quarterly volatility of stock price of 53.6%, and expected dividends of 3.5%
per year. 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, 1995 through December 31, 1997:
<TABLE>
<CAPTION>
AVAILABLE OPTIONS WEIGHTED-AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE<F1>
---------- ----------- ------------------
<S> <C> <C> <C>
Balance at January 1, 1995 30,717 89,971 $ 5.47
Effect of 5% stock dividend 1,536 4,357 0
Options exercised 0 (8,867) 4.88
------- ------- --------
Balance at December 31, 1995 32,253 85,461 5.53
Options issued (28,738) 28,738 13.17
Effect of 5% stock dividend 1,613 3,836 0
Options exercised 0 (19,781) 4.88
------- ------- --------
Balance at December 31, 1996 5,128 98,254 7.91
Effect of 5% stock dividend 256 4,205 0
Options exercised 0 (29,468) 5.36
------- ------- --------
Balance at December 31, 1997 5,384 72,991 8.96
Effect of subsequent three-for-two
stock split(1) 2,692 36,496 0
------- ------- --------
Restated balance at December 31, 1997 8,076 109,487 $ 8.96
======= ======= ========
</TABLE>
<PAGE>
Options exercisable at year-end are as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS<F1> EXERCISE PRICE<F1>
----------- ------------------
<S> <C> <C> <C>
1995 126,737 $5.19
1994 113,034 $6.07
1993 79,613 $7.44
<FN>
<F1> Restated for stock dividends and stock splits, including the three-for-two
stock split effective April 3, 1998.
</FN>
</TABLE>
37
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS
TIME DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST
SERVICES COMMERCIAL SERVICES
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 profits before federal
income taxes and securities gains or losses in 1997, 1996, and
1995. Under this plan, $482,942, $409,633, and $366,851 was
expensed in 1997, 1996, and 1995, 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 $145,919, $111,050,
and $109,529 in 1997, 1996 and 1995, respectively.
A stock incentive plan is maintained for key members of
management. In January of 1997, 39,375 shares were awarded
under the restricted stock provisions of the plan. The shares
were awarded at the market price of Shoreline's stock on the
date of award and vest in accordance with Shoreline's
achievement of predetermined performance measures, as approved
by the Board. Shares are earned and compensation expense is
recorded over the expected vesting period of the awards.
During 1997, 7,220 shares were earned under the plan, resulting
in compensation expense of $111,155. All shares have been
restated for stock dividends and stock splits.
NOTE 13. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the
basic earnings per share and diluted earnings per share
computations for the years ended is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------ ------------
<S> <C> <C> <C>
Basic earnings per share:
Net income available to common shareholders $ 11,011,269 $ 9,605,429 $ 8,607,456
============= ============ ===========
Weighted average common shares outstanding 8,835,564 8,701,094 8,675,699
Less: Non-vested stock incentive plan shares (32,155) 0 0
------------- ------------ -----------
<PAGE>
Weighted-average common shares outstanding
for basic earnings per share 8,803,409 8,701,094 8,675,699
============= ============ ===========
Basic earnings per share $1.25 $1.10 $.99
============= ============ ===========
Diluted earnings per share:
Net income available to common shareholders $ 11,011,269 $ 9,605,429 $ 8,607,456
============= ============ ===========
Weighted-average common shares outstanding
for basic earnings per share 8,803,409 8,701,094 8,675,699
Add: Dilutive effect of assumed exercise of
stock options 58,374 61,527 70,104
Add: Dilutive effect of non-vested stock
incentive plan shares 6,351 0 0
------------- ------------ -----------
Weighted-average common and potentially
dilutive common shares outstanding 8,868,134 8,762,621 8,745,803
============= ============ ===========
Diluted earnings per share $1.24 $1.10 $.98
============= ============ ===========
</TABLE>
38
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
NOTE 14. 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 Shoreline's 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 1997 1996
----------------- ------------------
<S> <C> <C>
Unfunded loan commitments $ 33,110,000 $ 13,848,000
Unused lines of credit 74,633,000 85,195,000
Standby letters of credit 7,799,000 2,255,000
----------------- -----------------
Total $ 115,542,000 $ 101,298,000
================= =================
</TABLE>
Fixed rate loan commitments have interest rates ranging from
6.25% to 8.25% and terms ranging from 6 months to 30 years.
<PAGE>
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair value and the
related carrying amount of the Shoreline's financial
instruments at December 31, 1997 and 1996. Items which are not
financial instruments are not included.
<TABLE>
<CAPTION>
1997 1996
---- ----
CARRYING ESTIMATED CARRYING ESTIMATED
DECEMBER 31 AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 44,981,440 $ 44,981,000 $ 61,558,670 $ 61,559,000
Securities available for sale 125,534,904 125,535,000 90,254,236 90,254,000
Securities held to maturity 38,385,568 39,572,000 47,582,337 48,588,000
Loans, net of allowance for loan
losses 612,048,028 614,277,000 493,696,408 502,360,000
Demand and savings deposits (355,574,075) (355,574,000) (326,140,696) (326,141,000)
Time deposits (367,090,279) (369,041,000) (290,336,829) (291,675,000)
Securities sold under agreement to
repurchase (7,526,582) (7,527,000) (7,166,563) (7,167,000)
FHLB advances (45,175,892) (45,033,000) (18,000,000) (17,988,000)
</TABLE>
For purposes of the above disclosures of estimated fair
value, the following assumptions were used as of December
31, 1997 and 1996. The estimated fair value for cash and
cash equivalents is considered to approximate cost. The
estimated fair value for securities held to maturity 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, 1997 and 1996,
applied for an estimated time period until the loan is
assumed to reprice or be paid. The estimated fair value for
other loans is based on estimates of the rate Shoreline
would charge for similar loans at December 31, 1997 and
1996, applied for the time period until estimated repayment.
The estimated fair value for demand, savings deposits and
securities sold under agreements 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, 1997 and 1996, applied for the time period
<PAGE>
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.
39
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
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, 1997, 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, 1997 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 16. 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.
<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>
1997
Total capital to risk assets $ 70.0 13.1% $ 42.7 8.0% $ 53.4 10.0%
Tier 1 capital to risk assets 63.3 11.9% 21.4 4.0% 32.1 6.0%
Tier 1 capital to average assets 63.3 8.0% 31.8 4.0% 39.7 5.0%
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%
</TABLE>
At year-end 1997, Shoreline was categorized as well capitalized.
40
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
NOTE 17. CONDENSED FINANCIAL INFORMATION OF THE PARENT
COMPANY
The condensed financial information of the parent company,
Shoreline Financial Corporation, is summarized below.
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
DECEMBER 31 1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
Cash $ 1,144,727 $ 533,737
Investment in subsidiary 75,808,453 68,750,811
Other assets 0 137,339
--------------- ---------------
Total Assets $ 76,953,180 $ 69,421,887
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 70,777 $ 3,685
Shareholders' equity 76,882,403 69,418,202
--------------- ---------------
Total Liabilities and Shareholders' Equity $ 76,953,180 $ 69,421,887
=============== ===============
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
<CAPTION>
YEARS ENDED DECEMBER 31 1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C>
INCOME
Dividends from subsidiary - cash $ 4,461,491 $ 3,817,098 $ 4,212,961
--------------- --------------- --------------
EXPENSE
Total expense 414,416 317,498 315,838
--------------- --------------- --------------
Income before income tax and undistributed
subsidiary income 4,047,075 3,499,600 3,897,123
Income tax benefit 132,500 97,000 108,000
Equity in undistributed net income of subsidiary 6,831,694 6,008,829 4,602,333
--------------- --------------- --------------
NET INCOME $ 11,011,269 $ 9,605,429 $ 8,607,456
=============== =============== ==============
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31 1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 11,011,269 $ 9,605,429 $ 8,607,456
Adjustments:
Equity in undistributed income of subsidiary (6,831,694) (6,008,829) (4,602,333)
Other 315,581 (97,805) (81,063)
--------------- --------------- ---------------
Total adjustments (6,516,113) (6,106,634) (4,683,396)
--------------- --------------- ---------------
Net cash from operating activities 4,495,156 3,498,795 3,924,060
Cash flows from financing activities:
Dividends paid (5,008,864) (4,368,023) (3,734,978)
Proceeds from shares issued 1,124,698 603,029 101,693
--------------- --------------- ---------------
Net cash from financing activities (3,884,166) (3,764,994) (3,633,285)
--------------- --------------- ---------------
Net change in cash and cash equivalents 610,990 (266,199) 290,775
Cash and cash equivalents at beginning of year 533,737 799,936 509,161
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 1,144,727 $ 533,737 $ 799,936
=============== =============== ===============
</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 1998 net profits,
approximately $34.2 million in dividends without prior approval
from bank regulatory agencies.
41
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
NOTE 18. IMPACT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) 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 was 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 1998.
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. This Statement
requires that all items that are required to be recognized
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. This Statement 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 Company.
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. This Statement 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 Company.
42
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
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.
43
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
DIRECTORS
SHORELINE FINANCIAL CORPORATION - BOARD OF DIRECTORS
LOUIS A. DESENBERG
ATTORNEY, DESENBERG & COLIP
MERLIN J. HANSON
CHAIRMAN, HANSON GROUP
(A DIVERSIFIED MANUFACTURING COMPANY)
THOMAS T. HUFF
ATTORNEY, VARNUM, RIDDERING, SCHMIDT AND HOWLETT
JAMES E. LEBLANC
RETIRED CHAIRMAN, PRESIDENT AND CEO,
WHIRLPOOL FINANCIAL CORPORATION
L. RICHARD MARZKE
PRESIDENT, PRI-MAR PETROLEUM
(WHOLESALE AND RETAIL DISTRIBUTOR
OF PETROLEUM PRODUCTS)
JAMES F. MURPHY
RETIRED CHAIRMAN AND CEO
DAN L. SMITH
CHAIRMAN OF THE BOARD, PRESIDENT AND CEO
ROBERT L. STARKS
PRESIDENT, KERLEY & STARKS FUNERAL HOMES, INC.
JEFFERY H. TOBIAN
RETIRED PRESIDENT, TOBIAN METALS, INC.
RONALD L. ZILE
RETIRED VICE CHAIRMAN
SHORELINE BANK - BOARD OF DIRECTORS
ARTHUR J. BOLT
RETIRED PRESIDENT, QUALITY REFUSE SERVICE, INC.
DONALD G. BRASCHLER
CHAIRMAN, GOLDEN BROWN BAKERY, INC.
<PAGE>
JAMES D. CHRISTENSON
RETIRED PRESIDENT, SAUGATUCK DRUG CO.
LOUIS A. DESENBERG
ATTORNEY, DESENBERG & COLIP
MERLIN J. HANSON
CHAIRMAN, HANSON GROUP
(A DIVERSIFIED MANUFACTURING COMPANY)
RONALD L. HARTGERINK
PRESIDENT, WYCKOFF CHEMICAL COMPANY
THOMAS T. HUFF
ATTORNEY, VARNUM, RIDDERING, SCHMIDT AND HOWLETT
L. RICHARD MARZKE
PRESIDENT, PRI-MAR PETROLEUM
(WHOLESALE AND RETAIL DISTRIBUTOR OF PETROLEUM PRODUCTS)
JAMES F. MURPHY
RETIRED CHAIRMAN AND CEO, SHORELINE FINANCIAL CORP.
DR. GLADYS PEEPLES-BERKS
RETIRED SCHOOL ADMINISTRATOR
DAN L. SMITH
CHAIRMAN, PRESIDENT AND CEO
ROBERT L. STARKS
PRESIDENT, KERLEY & STARKS FUNERAL HOMES, INC.
JOSEPH A. WASSERMAN
PRESIDENT & CEO, LAKELAND REGIONAL HEALTH SYSTEM
RONALD L. ZILE
RETIRED VICE CHAIRMAN
44
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
OFFICERS
SHORELINE FINANCIAL CORPORATION OFFICERS
DAN L. SMITH
CHAIRMAN OF THE BOARD, PRESIDENT AND CEO
WAYNE R. KOEBEL
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, SECRETARY AND TREASURER
JAMES R. MILROY
EXECUTIVE VICE PRESIDENT
SHORELINE BANK EXECUTIVE OFFICERS
DAN L. SMITH
CHAIRMAN OF THE BOARD, PRESIDENT AND CEO
RICHARD D. BAILEY II
EXECUTIVE VICE PRESIDENT
ROBERT K. BURCH
EXECUTIVE VICE PRESIDENT
WAYNE R. KOEBEL
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
JAMES R. MILROY
EXECUTIVE VICE PRESIDENT AND CASHIER
45
<PAGE>
CHECKING ACCOUNT SERVICES SAVINGS ACCOUNT SERVICES RELATIONSHIP ACCOUNTS TIME
DEPOSITS INDIVIDUAL RETIREMENT ACCOUNTS CREDIT SERVICES TRUST SERVICES
COMMERCIAL SERVICES
SHORELINE LOCATIONS
ALLEGAN
128 Locust Street
BARODA
9061 First Street
BENTON HARBOR
834 Nickerson Avenue
100 Oak Street
1882 Pipestone Road
823 Riverview Drive
CASH MACHINES:
Lake Michigan College - 2755 E. Napier Avenue
Meijer - 1920 Pipestone Road
BERRIEN SPRINGS
9190 U.S. 31-33
CASH MACHINE:
Primart Quik Shop and Amoco Station -
U.S. 31-33
BLOOMINGDALE
101 Spring Street
BRIDGMAN
CASH MACHINE:
McDonald's - 10280 Red Arrow Highway
BUCHANAN
1101 E. Front Street
128 N. Main Street
EAU CLAIRE
6534 Main Street
CASH MACHINE:
Hardings - Pipestone Road
EDWARDSBURG
Gateway Shopping Center
FENNVILLE
125 S. Maple
<PAGE>
GALIEN
206 S. Cleveland Avenue
HARTFORD
18 N. Center Street
CASH MACHINE:
Shell Service Station at I-94
MATTAWAN
CASH MACHINE:
Primart Quik Shop and Amoco Station -
24039 Red Arrow Highway
NILES
1835 S. 11th Street
PAW PAW
212 S. Kalamazoo Street
PORTAGE
1306 W. Centre Avenue
SAUGATUCK
249 Mason Street
SOUTH HAVEN
433 Phoenix Street
Blue Star Memorial Highway and M-43
CASH MACHINES:
Primart Quik Shop and Amoco Station -
73241 Phoenix Street
Walmart - 03383 73rd
STEVENSVILLE
1711 W. John Beers Road
ST. JOSEPH
720 Pleasant Street
2717 S. State Street
301 State Street
2017 Niles Avenue
2600 S. Cleveland Avenue
CASH MACHINES:
Ace Hardware - 4032 M-139
Berrien County Court House -
811 Port Street
<PAGE>
THREE OAKS
11 E. Linden
PENDING LOCATIONS
COLOMA
209 N. Paw Paw Avenue
GRANGER
16658 Cleveland Avenue
[MAP OF LOCATIONS]
46
[SHORELINE FINANCIAL CORPORATION LOGO]
SHORELINE FINANCIAL CORPORATION
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF SHORELINE FINANCIAL CORPORATION
The following lists the subsidiaries of the Registrant and the state or
jurisdiction of incorporation.
NAME OF SUBSIDIARY INCORPORATED
Shoreline Bank Michigan
Shoreline Insurance Services, Inc. Michigan
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference and use of our report,
dated February 20, 1998, which appears in Shoreline Financial Corporation's
Annual Report to Shareholders for the year ended December 31, 1997, 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 25, 1998
<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, with full power of substitution, 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, 1997, 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: February 12, 1998 /S/ THOMAS T. HUFF
(signature)
THOMAS T. HUFF
(type or print name)
-1-
<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, with full power of substitution, 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, 1997, 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: February 21, 1998 /S/ MERLIN J. HANSON
(signature)
MERLIN J. HANSON
(type or print name)
-2-
<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, with full power of substitution, 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, 1997, 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: February 25, 1998 /S/ LOUIS A. DESENBERG
(signature)
LOUIS A. DESENBERG
(type or print name)
-3-
<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, with full power of substitution, 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, 1997, 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: February 14, 1998 /S/ ROBERT L. STARKS
(signature)
ROBERT L. STARKS
(type or print name)
-4-
<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, with full power of substitution, 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, 1997, 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: February 20, 1998 /S/ L. RICHARD MARZKE
(signature)
L. RICHARD MARZKE
(type or print name)
-5-
<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, with full power of substitution, 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, 1997, 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: February 22, 1998 /S/ DAN L. SMITH
(signature)
DAN L. SMITH
(type or print name)
-6-
<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, with full power of substitution, 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, 1997, 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: February 12, 1998 /S/ JEFFERY H. TOBIAN
(signature)
JEFFERY H. TOBIAN
(type or print name)
-7-
<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, with full power of substitution, 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, 1997, 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: February 13, 1998 /S/ RONALD L. ZILE
(signature)
RONALD L. ZILE
(type or print name)
-8-
<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, with full power of substitution, 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, 1997, 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: February 14, 1998 /S/ JAMES F. MURPHY
(signature)
JAMES F. MURPHY
(type or print name)
-9-
<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, with full power of substitution, 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, 1997, 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: February 16, 1998 /S/ JAMES E. LEBLANC
(signature)
JAMES E. LEBLANC
(type or print name)
-10-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE AUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF SHORELINE
FINANCIAL CORPORATION, INC. AND SUBSIDIARIES FOR THE PERIOD ENDED DECEMBER
31, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 29,962
<INT-BEARING-DEPOSITS> 6,344
<FED-FUNDS-SOLD> 8,675
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 125,535
<INVESTMENTS-CARRYING> 38,385
<INVESTMENTS-MARKET> 39,572
<LOANS> 619,636
<ALLOWANCE> 7,588
<TOTAL-ASSETS> 857,843
<DEPOSITS> 722,664
<SHORT-TERM> 32,526
<LIABILITIES-OTHER> 5,594
<LONG-TERM> 20,176
<COMMON> 0
0
0
<OTHER-SE> 76,882
<TOTAL-LIABILITIES-AND-EQUITY> 857,843
<INTEREST-LOAN> 50,361
<INTEREST-INVEST> 10,798
<INTEREST-OTHER> 1,479
<INTEREST-TOTAL> 62,638
<INTEREST-DEPOSIT> 28,189
<INTEREST-EXPENSE> 30,445
<INTEREST-INCOME-NET> 32,193
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 171
<EXPENSE-OTHER> 21,521
<INCOME-PRETAX> 15,785
<INCOME-PRE-EXTRAORDINARY> 15,785
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,011
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.24
<YIELD-ACTUAL> 2.35
<LOANS-NON> 1,301
<LOANS-PAST> 868
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 8,334
<ALLOWANCE-OPEN> 6,895
<CHARGE-OFFS> 958
<RECOVERIES> 511
<ALLOWANCE-CLOSE> 7,588
<ALLOWANCE-DOMESTIC> 5,273
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,315
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AND RELATED CONSOLIDATED STATEMENTS OF
INCOME, CHANGES IN SHAREHOLDERS' EQUITY AND CASH FLOWS, OF SHORELINE
FINANCIAL CORPORATION AND ITS SUBSIDIARY AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1995 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-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 29,810
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 102,871
<INVESTMENTS-CARRYING> 44,465
<INVESTMENTS-MARKET> 45,875
<LOANS> 465,995
<ALLOWANCE> 6,600
<TOTAL-ASSETS> 671,173
<DEPOSITS> 592,300
<SHORT-TERM> 4,691
<LIABILITIES-OTHER> 4,822
<LONG-TERM> 5,000
<COMMON> 0
0
0
<OTHER-SE> 64,860
<TOTAL-LIABILITIES-AND-EQUITY> 671,173
<INTEREST-LOAN> 40,585
<INTEREST-INVEST> 9,599
<INTEREST-OTHER> 892
<INTEREST-TOTAL> 51,076
<INTEREST-DEPOSIT> 23,451
<INTEREST-EXPENSE> 23,847
<INTEREST-INCOME-NET> 27,230
<LOAN-LOSSES> 750
<SECURITIES-GAINS> (36)
<EXPENSE-OTHER> 18,720
<INCOME-PRETAX> 11,738
<INCOME-PRE-EXTRAORDINARY> 11,738
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,607
<EPS-PRIMARY> .99
<EPS-DILUTED> .98
<YIELD-ACTUAL> 3.81
<LOANS-NON> 235
<LOANS-PAST> 1,204
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,952
<CHARGE-OFFS> 492
<RECOVERIES> 390
<ALLOWANCE-CLOSE> 6,600
<ALLOWANCE-DOMESTIC> 4,277
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,323
</TABLE>
