<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _____________ to ______________.
Commission File No.: 0-16444
SHORELINE FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-2758932
(State or Other Jurisdiction (I.R.S. Employer 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)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _______
As of July 31, 1998, there were 8,920,541 issued and outstanding shares of
the Registrant's Common Stock.
<PAGE>
SHORELINE FINANCIAL CORPORATION
FORM 10-Q
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets,
June 30, 1998 and December 31, 1997 3-4
Condensed Consolidated Statements of Income,
Three Months and Six Months Ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Comprehensive Income
Three Months and Six Months Ended June 30, 1998 and 1997 6
Condensed Consolidated Statements of Cash Flows,
Six Months Ended June 30, 1998 and 1997 7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 18
PART II. OTHER INFORMATION 19-20
Item 2. Changes in Securities and Use of Proceeds 19
Item 4. Submission of Matters to a Vote of Security Holders 19-20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 37,798,441 $ 29,961,993
Interest-earning deposits 27,865,540 6,344,447
Federal funds sold 0 8,675,000
--------------- ------------
Total cash and cash equivalents 65,663,981 44,981,440
Securities held to maturity
(fair values of $33,806,198 and $39,572,300 on
June 30, 1998 and December 31, 1997, respectively) 32,802,513 38,385,568
Securities available for sale (carried at fair value)
145,835,689 125,534,904
Total loans 616,037,886 619,636,155
Less allowance for loan losses 7,679,060 7,588,127
--------------- ------------
Net loans 608,358,826 612,048,028
Premises and equipment, net 13,557,498 13,560,859
Intangible assets, net 11,694,197 11,901,520
Other assets 11,515,224 11,430,483
--------------- ------------
Total Assets $ 889,427,928 $857,842,802
=============== ============
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non interest-bearing $ 81,735,882 $78,971,373
Interest-bearing 654,667,639 643,692,981
--------------- ------------
Total deposits 736,403,521 722,664,354
Securities sold under agreements to repurchase 15,536,837 7,526,582
Other liabilities 6,169,600 5,593,571
FHLB advances 50,585,419 45,175,892
--------------- ------------
Total Liabilities 808,695,377 780,960,399
--------------- ------------
</TABLE>
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<PAGE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
(unaudited)
<S> <C> <C>
Shareholders' Equity
Common stock:
No par value, 10,000,000 shares authorized;
8,919,976 and 8,882,264 shares issued and
outstanding at June 30, 1998 and December 31,
1997, respectively 0 0
Additional paid-in capital 65,909,454 65,273,177
Stock incentive plan (unearned shares) (434,465) (495,095)
Unrealized gain on securities
available for sale, net 1,563,660 1,604,270
Retained earnings 13,693,902 10,500,051
-------------- --------------
Total Shareholders' Equity 80,732,551 76,882,403
-------------- --------------
Total Liabilities & Shareholders' Equity $ 889,427,928 $ 857,842,802
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
SHORELINE FINANCIAL CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ----------------------------------
1998 1997 1998 1997
----------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $13,515,587 $ 11,711,992 $ 26,975,363 $ 22,674,067
Securities 2,797,151 2,569,756 5,629,820 5,064,534
Deposits with banks 461,687 382,560 723,207 677,483
Federal funds sold 117,677 123,910 239,705 250,596
----------- ------------- -------------- ---------------
Total interest income 16,892,102 14,788,218 33,568,095 28,666,680
----------- ------------- -------------- ---------------
INTEREST EXPENSE
Deposits 7,572,439 6,641,187 15,182,079 12,881,773
Other 943,849 455,355 1,798,311 776,536
----------- ------------- -------------- ---------------
Total interest expense 8,516,288 7,096,542 16,980,390 13,658,309
----------- ------------- -------------- ---------------
NET INTEREST INCOME 8,375,814 7,691,676 16,587,705 15,008,371
Provision for loan losses 150,000 120,000 300,000 240,000
----------- ------------- -------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,225,814 7,571,676 16,287,705 14,768,371
----------- ------------- -------------- ---------------
OTHER INCOME
Service charges on deposit
accounts 555,846 549,975 1,057,106 1,017,686
Trust fees 512,284 415,816 994,431 818,864
Gain on sales and calls of
securities 0 77,602 3,237 112,903
Gain on sales of mortgages 362,441 77,097 734,427 109,910
Other 497,067 309,469 950,161 559,487
----------- ------------- -------------- ---------------
Total other income 1,927,638 1,429,959 3,739,362 2,618,850
----------- ------------- -------------- ---------------
OTHER EXPENSES
Personnel 2,980,086 2,761,345 5,946,137 5,454,689
Occupancy 410,375 333,228 828,677 693,501
-5-
<PAGE>
Equipment 522,466 534,216 1,068,675 1,033,017
Other 1,847,056 1,616,470 3,453,211 2,913,291
----------- ------------- -------------- ---------------
Total other expense 5,759,983 5,245,259 11,296,700 10,094,498
----------- ------------- -------------- ---------------
INCOME BEFORE INCOME TAXES 4,393,469 3,756,376 8,730,367 7,292,723
Federal income tax expense 1,378,000 1,107,000 2,682,450 2,101,000
----------- ------------- -------------- ---------------
NET INCOME $ 3,015,469 $ 2,649,376 $ 6,047,917 $ 5,191,723
=========== ============= ============== ===============
EARNINGS PER SHARE
Basic $ .34 $ .30 $ .68 $ .60
=========== ============= ============== ===============
Diluted $ .34 $ .30 $ .68 $ .60
=========== ============= ============== ===============
DIVIDENDS PER SHARE $ .16 $ .14 $ .32 $ .28
=========== ============= ============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ----------------------------------
1998 1997 1998 1997
----------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
NET INCOME $ 3,015,469 $ 2,649,376 $ 6,047,917 $ 5,191,723
Other comprehensive income, net of tax:
Change in unrealized gains (losses)
on securities (124,730) 188,971 (40,610) (364,059)
------------- ---------------- --------------- ---------------
COMPREHENSIVE INCOME $ 2,890,739 $ 2,838,347 $ 6,007,307 $ 4,827,664
============= ================ =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,047,917 $ 5,191,723
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 820,267 785,572
Provision for loan losses 300,000 240,000
Net amortization and accretion on securities 103,641
144,556
Amortization of intangibles 413,871 128,139
Stock incentive expense 60,630 50,525
Gain on sales and calls of securities (3,237) (112,903)
Increase in other assets (270,369) (593,980)
Increase (decrease) in other liabilities 576,029 (372,273)
------------ -------------
NET CASH FROM OPERATING ACTIVITIES 8,048,749 5,461,359
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase)/decrease in loans 3,389,202 (7,139,217)
Securities available for sale:
Purchase (37,170,623) (22,592,526)
Proceeds from sale 0 13,320,287
Proceeds from maturities, calls and principal
reductions 16,723,771 7,349,079
Securities held to maturity:
Purchase (4,954,285) (3,000,000)
Proceeds from maturities, calls and principal
reductions 10,521,473 5,482,882
Premises and equipment expenditures (816,906) (1,329,203)
Net cash paid for acquisitions 0 (20,436,447)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES (12,307,368) (28,345,145)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 13,739,167 1,793,380
Net decrease in short-term borrowings 8,010,255 107,593
Proceeds from FHLB advances 20,000,000 9,000,000
Repayment of FHLB advances (14,590,473) (4,500,000)
-8-
<PAGE>
Dividends paid (2,854,066) (2,418,073)
Proceeds from shares issued 706,140 567,839
Payments to retire common stock (69,863) 0
------------ -------------
NET CASH FROM FINANCING ACTIVITIES 24,941,160 4,550,739
------------ -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 20,682,541 (18,333,047)
Cash and Cash Equivalents at Beginning of Year 44,981,440 61,558,670
------------ -------------
Cash and Cash Equivalents at June 30 $ 65,663,981 $ 43,225,623
============ =============
CASH PAID DURING THE YEAR FOR:
Interest $ 17,113,328 $ 13,297,673
Income Taxes $ 2,650,000 $ 1,577,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-9-
<PAGE>
SHORELINE FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements were prepared in accordance with Rule 10-01 of Regulation
S-X and the instructions for Form 10-Q and, therefore, do not include
all disclosures required by generally accepted accounting principles
for complete presentation of financial statements. In the opinion of
management, the condensed consolidated financial statements contain
all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial condition of Shoreline
Financial Corporation as of June 30, 1998 and December 31, 1997, and
the results of its operations for the three and six months ended June
30, 1998 and 1997, and its cash flows for the six months ended June
30, 1998 and 1997. The results of operations for the six months ended
June 30, 1998 are not necessarily indicative of the results to be
expected for the full year. The accompanying consolidated financial
statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in Shoreline
Financial Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and
major customers. SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997. The adoption of SFAS
No. 131 did not have a material impact on the results of operations or
financial condition of Shoreline Financial Corporation.
SFAS No. 133, Acounting for Derivative Instruments and Hedging
Activities, was issued in June 1998. SFAS No. 133 is effective for all
fiscal quarters beginning after June 15, 1999. SFAS No. 133
standardizes the accounting for derivative instruments embedded in
other contracts by requiring the recognition of those items as assets
or liabilities in the statement of financial position and measuring
them at fair value. SFAS No. 133 generally provides for matching the
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<PAGE>
timing of gain or loss recognition on the hedging instrument with the
recognition of (a) changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk, or (b) the
earnings effect of the hedged forecasted transaction. The adoption of
SFAS No. 133 is currently expected to have no effect on the financial
position, liquidity or results of operations of Shoreline. As of June
30, 1998, Shoreline held no derivative financial instruments.
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 intercompany accounts and transactions have been eliminated
in consolidation.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Securities are classified into held to maturity, available for
sale and trading categories. Held to maturity securities are those
that Shoreline has the positive intent and ability to hold to
maturity, and are reported at amortized cost. Available for sale
securities are those that Shoreline may decide to sell if needed for
liquidity, asset-liability management or other reasons. Available for
sale securities are reported at fair value, with unrealized gains or
losses included as a separate component of equity, net of tax.
Trading securities are bought principally for sale in the near term
and are reported at fair value with unrealized gains or losses
included in earnings. Shoreline did not hold any securities
considered for this category at any time during the first six months
of 1998.
Realized gains or losses are determined based on the amortized
cost of the specific security sold.
During the six-month period ended June 30, 1998, there were no
sales of available for sale securities. Gross gains of $3,237 were
realized on calls of securities during the period. For this period,
the net unrealized holding gains on available for sale securities
decreased $40,610. There were no sales or transfers of securities
classified as held to maturity.
INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the net
value of tangible assets acquired and related core deposit intangibles
identified in branch acquisitions. Goodwill is being amortized on a
straight-line basis for a period of ten years. The related core
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<PAGE>
deposit intangibles are amortized on an accelerated basis over the
estimated life of the deposits acquired.
INCOME TAXES
Income tax expense for the periods ended June 30, 1998 and 1997
is based upon the asset and liability method. Shoreline records
income tax expense based on the amount of taxes due on its tax return
plus deferred taxes computed based on the expected future tax
consequences of temporary differences between the carrying amounts and
tax bases of assets and liabilities, using enacted rates.
EARNINGS PER SHARE
Basic earnings per share is computed based on weighted average
common shares outstanding during the period. Diluted earnings per
share further assumes the issue of any potentially dilutive common
shares.
COMPREHENSIVE INCOME
Under a new accounting standard, comprehensive income is now
reported for all periods. Comprehensive income includes both net
income and other comprehensive income. Other comprehensive income
includes the change in unrealized gains and losses on securities
available for sale.
NOTE 2 - ACQUISITIONS
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. This transaction will be accounted for as a pooling of
interests and was completed on July 31, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
On June 30, 1998, total deposits were $736.4 million, up $13.7
million from December 31, 1997. Total deposits averaged $736.5
million during the second quarter of 1998, an increase of $3.5 million
over the previous quarter's average of $733.0 million and $6.3 million
over the quarter ended December 31, 1997 average of $730.3 million. A
comparison of the quarterly averages for the past three quarters
follows:
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<PAGE>
<TABLE>
<CAPTION>
AVG BAL AVG BAL AVG BAL
2ND QTR 98 1ST QTR 98 4TH QTR 97
<S> <C> <C> <C>
(000S)
Noninterest-Bearing Demand Deposits $ 79,017 $ 77,303 $ 78,698
Interest-Bearing Demand Deposits 146,749 143,398 137,256
Savings Deposits 146,492 145,062 145,483
Time Deposits 364,286 367,280 368,818
--------- ---------- ---------
Total $ 736,544 $ 733,043 $ 730,255
========= ========== =========
</TABLE>
As was the case in the first quarter of 1998, Shoreline's growth
in average deposits during the quarter ended June 30, 1998 continued
to come primarily from its Super Public Fund account, an interest-
bearing demand deposit account geared toward municipalities. Deposit
levels in this category increased $2.9 million in the second quarter
of 1998, primarily attributable to seasonal funding patterns of the
municipalities. Average deposits in the Super Public Fund category
grew $12.6 million in the first six months of 1998. In the first half
of 1998, the growth in this category was partially offset by declines
of $6.3 million in other categories of the retail deposit base, most
notably a decline of $4.5 million in average time deposits.
In addition to the deposit funding sources above, Shoreline
capitalized on the favorable interest rate environment by utilizing
its membership with the Federal Home Loan Bank of Indianapolis (the
"FHLB") as an alternative wholesale funding source. Average
borrowings from the FHLB increased by $6.3 million in the first six
months of 1998. At June 30, 1998, Shoreline had $50.6 million of
advances outstanding with the FHLB.
The additional funds made available through increased deposits
and FHLB advances have initially been invested in interest-earning
deposits. Increased cash and cash equivalents, primarily related to
these interest-earning deposits, provided the majority of growth in
Shoreline's total assets during the first half of 1998. Cash and cash
equivalents averaged $74.5 million in the second quarter of 1998, up
$12.7 million from the previous quarter's average of $61.8 million.
Interest-earning deposits and federal funds sold accounted for this
increase, averaging $42.2 million for the second quarter of 1998, up
$12.8 million from the previous quarter.
The total investment securities portfolio averaged $170.4 million
in the second quarter of 1998, an increase of $3.4 million from the
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<PAGE>
quarter ended March 31, 1998. Increased investments in U.S.
Government Agency and Treasury securities accounted for this growth.
Total loans averaged $615.5 million during the second quarter of
1998, a reduction of $3.7 million from the previous quarter's average
of $619.2 million. Significant growth in the commercial loan
portfolio during the quarter ended June 30, 1998 of $9.2 million was
offset by a decline in mortgage loan average balances of $17.1
million. The low interest rate environment in the first half of 1998
has spurred high levels of mortgage refinancing into longer-term fixed
rate loans, resulting in sales of the majority of loan originations in
the secondary market. Aware of the impact that the current interest
rate environment has had on the mortgage loan portfolio, Shoreline
purchased $5.4 million of annually adjustable mortgage loans in the
second quarter of 1998 partially to offset the decline noted above.
As opportunities exist, Shoreline anticipates purchasing additional
balloon and adjustable mortgages to augment loan originations for the
portfolio and to offset the effect of fixed rate sales in the
secondary market. Consumer loan average balances increased by $3.8
million during the first half of 1998.
Total non-performing assets at June 30, 1998 were $1.6 million,
which represents .27% of Shoreline's total loan portfolio at that
date. This level of non-performing assets has declined from the
December 31, 1997 ratio of .41%. Non-performing assets include loans
that are classified for regulatory purposes as contractually past due
90 days or more, on non-accrual status or as "troubled debt
restructurings" and other real estate owned.
During the second quarter of 1998, Shoreline experienced net loan
charge-offs of $150,397, which represents only .02% of average total
loans for the quarter. The provision for loan losses for the second
quarter of 1998 was $150,000, equal to the provision in the first
quarter of the year. At June 30, 1998, Shoreline's allowance for loan
losses was $7,679,060, which provides a coverage of over 4.8 times the
level of non-performing assets identified at June 30, 1998. As a
percentage of total loans, the allowance for loan losses was 1.25% at
June 30, 1998, which compares favorably to the December 31, 1997 level
of 1.22%.
LIQUIDITY AND RATE SENSITIVITY
As of June 30, 1998, Shoreline's loan-to-deposit ratio was 83.7%,
down slightly from the December 31, 1997 ratio of 85.7%. Interest-
earning deposits and Federal funds sold of $27.9 million at June 30,
1998 represented 3.1% of Shoreline's total assets, as compared to
$15.0 million or 1.8% of total assets at December 31, 1997.
Approximately $145.8 million, or 81.6%, of Shoreline's total
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<PAGE>
securities portfolio was classified as available for sale on June 30, 1998
and $1.4 million of loans were classified as held for sale. On June 30,
1998, Shoreline had commitments to make or purchase loans, including the
unused portions of lines of credit, totaling $148.1 million.
The cumulative funding gaps on June 30, 1998 of interest-earning assets
and interest-bearing liabilities for selected maturity periods are
illustrated as follows:
<TABLE>
<CAPTION>
REPRICEABLE OR MATURING WITHIN:
---------------------------------
0 to 3 0 to 12 0 to 5
(000S) MONTHS MONTHS YEARS
--------- --------- ---------
<S> <C> <C> <C>
Interest-earning assets
Loans $ 152,669 $ 252,708 $ 561,968
Securities 26,724 47,518 113,654
Federal funds sold 0 0 0
Interest-earning deposits 27,000 27,000 27,000
--------- --------- ---------
Total $ 206,393 $ 327,226 $ 702,622
========= ========= =========
Interest-bearing liabilities
Time deposits $ 103,454 $ 256,717 $ 362,753
Demand and savings deposits 289,606 289,606 289,606
Other borrowings 46,537 59,537 66,122
--------- --------- ---------
Total $ 439,597 $ 605,860 $ 718,481
========= ========= =========
Asset/(Liability) Gap $(233,204) $(278,634) $ (15,859)
========= ========= =========
</TABLE>
As shown, Shoreline had a cumulative liability gap position of
$278.6 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. The same
presentation at December 31, 1997 produced a similar liability gap
position of $250.6 million within the one- year time frame. A
limitation of the traditional static gap analysis, however, is that it
does not consider the timing or magnitude of noncontractual repricing.
In addition, the static gap analysis treats demand and savings
accounts as resistant to rate sensitivity. Because of these and other
limitations of the static gap analysis, Shoreline's Asset/Liability
Committee utilizes simulation modeling as its primary tool to project
how changes in interest rates will impact net interest income. These
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<PAGE>
models indicate, and management believes, that Shoreline is positioned
such that changes in rates within anticipated ranges and under
anticipated circumstances would not severely alter operating results.
CAPITAL RESOURCES
Total shareholders' equity was $80.7 million on June 30, 1998.
Included in this total are net unrealized gains on securities
available for sale totaling $1,563,660, a decrease of $40,610 from
December 31, 1997. During the first six months of 1998, Shoreline's
Board of Directors approved and paid a cash dividend of $.32 per
share. Shoreline's capital position remained strong as of June 30,
1998. The pending third quarter acquisition of The State Bank of
Coloma is projected to have no material effect on Shoreline's capital
position. Shoreline's capital ratios remain above regulatory
standards to be considered a "well-capitalized" institution. A
summary of its capital position follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
<S> <C> <C>
Equity to assets 9.08% 8.96%
Tier I leverage 7.71% 7.42%
Risk-based:
Tier I Capital 12.32% 11.85%
Total Capital 13.56% 13.10%
</TABLE>
RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 1998 was $3,015,469, an
increase of 13.8% or $366,093 over the same period in 1997. Revenue
growth, both in net interest income and non-interest income, was the
primary reason behind the improved profitability. Increased non-
interest income was offset by increased non-interest expense. The
following table illustrates the effect that changes in rates and
volumes of earning assets and interest-bearing liabilities had on net
interest income for the quarters ended June 30, 1998 and 1997:
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<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
1998 1997
---- ----
(000S)
<S> <C> <C>
Interest income (taxable equivalent) $ 17,063 $ 15,030
Interest expense 8,516 7,096
------------ --------
Net interest income $ 8,547 $ 7,934
============ ========
Average volume:
Interest-earning assets $ 827,983 $709,718
Interest-bearing liabilities 724,052 610,864
------------ --------
Net differential $ 103,931 $98,854
============ ========
Average yields/rates:
Yield on earning assets 8.28% 8.49%
Rate paid on liabilities 4.72% 4.66%
------------ --------
Interest spread 3.56% 3.83%
============ ========
Net interest margin 4.15% 4.48%
============ ========
</TABLE>
The change in net interest income (in thousands) is attributable
to the following:
<TABLE>
<CAPTION>
VOLUME RATE INC/(DEC)
------ ---- --------
<S> <C> <C> <C>
Interest-earning assets $ 2,421 $ (388) $ 2,033
Interest-bearing liabilities 1,328 92 1,420
---------- -------- ----------
Net interest income $ 1,093 $ (480) $ 613
========== ======== ==========
</TABLE>
Net income for the six months ended June 30, 1998, was
$6,047,917, an increase of 16.5% over the same period in 1997.
Increased revenue from net interest income and other income provided
this increase. Increased non-interest income was offset by increased
non-interest expense. The following table illustrates the effect that
changes in rates and volumes of earning assets and interest-bearing
-17-
<PAGE>
liabilities had on net interest income for the six months ended
June 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
1998 1997
---- ----
(000S)
<S> <C> <C>
Interest income (taxable equivalent) $ 33,887 $ 29,072
Interest expense 16,980 13,658
------------ --------
Net interest income $ 16,907 $ 15,414
============ ========
Average volume:
Interest-earning assets $ 821,526 $692,283
Interest-bearing liabilities 720,243 594,465
------------ --------
Net differential $ 101,283 $ 97,818
============ ========
Average yields/rates:
Yield on earning assets 8.32% 8.47%
Rate paid on liabilities 4.75% 4.63%
------------ --------
Interest spread 3.57% 3.84%
============ ========
Net interest margin 4.15% 4.49%
============ ========
</TABLE>
The change in net interest income (in thousands) is attributable
to the following:
<TABLE>
<CAPTION>
VOLUME RATE INC/(DEC)
------ ---- --------
<S> <C> <C> <C>
Interest-earning assets $ 5,339 $ (524) $ 4,815
Interest-bearing liabilities 2,960 362 3,322
---------- -------- -------
Net interest income $ 2,379 $ (886) $ 1,493
========== ======== =======
</TABLE>
Shoreline expensed $150,000 for the provision for loan losses in
the second quarter of 1998, unchanged from the previous quarter. The
provision for loan losses is based upon loan loss experience and such
other factors which, in management's judgment, deserve current
recognition in maintaining an adequate allowance for loan losses.
-18-
<PAGE>
Total other income for the quarter ended June 30, 1998 totaled
$1,927,638, an increase of $497,679 or 34.8% over the second quarter
in 1997. The majority of the increase was the result of an increase
in gains on the sale of mortgage loans of $285,344, gains on the
sale of other assets of $127,512, and trust income of $96,468.
For the six months ended June 30, 1998, total other income totaled
$3,739,362, an increase of $1,120,512 over the same period in 1997.
Again, an increase in gains on the sale of mortgage loans of
$624,517, gains on the sale of other assets of $263,330, and trust
income of $175,568 accounted for the majority of the increase. The
increase in the gain on sales of mortgage loans for both the quarter
and six months ended June 30, 1998 over the prior year was largely the
result of low interest rates spurring a significant volume of
refinancing activity, resulting in increased sales of fixed rate loans
to the secondary market. The increase in trust income for both the
quarter and six months ended June 30, 1998 was a result of growth in
managed assets and the favorable interest rate environment. The
increase in gains on the sales of other assets for both the quarter
and six months ended June 30, 1998 was largely the result of the sale
of branch office assets of Shoreline Bank.
Total other expense totaled $5,759,983 during the second
quarter of 1998, an increase of $514,724 or 9.8% over the same period
in 1997. An increase in salaries and employee benefits of $218,741
and an increase in the amortization of intangible assets of $142,866,
both largely due to the acquisition of SJS Bancorp, Inc. in June 1997,
accounted for the majority of the increase. A moderate increase in
occupancy expense also contributed to the overall increase. For the
six months ended June 30, 1998, total other expense totaled
$11,296,700, which is an increase of $1,202,202 over the six months
ended June 30, 1997. Increased salaries and benefits of $491,448,
increased amortization of intangible assets of $285,732 and increased
occupancy expense of $135,176 accounted for the majority of the
increase. As also mentioned above, the increases in such other
expense categories are a direct result of the SJS Bancorp, Inc.
acquisition in June of 1997.
Shoreline's ratio of total other expense to total average assets
declined from 2.73% for the six months ended June 30, 1997 to 2.56%
for the six months ended June 30, 1998. Over the same period of time,
the efficiency ratio declined from 55.79% to 54.00%.
In summary, Shoreline's net income of $3,015,469 in the second
quarter of 1998 produced a return on average shareholders' equity of
15.05% and a return on average assets of 1.36%. On a year-to-date
basis, Shoreline's return on average shareholders' equity stands at
15.41% and its return on average assets at 1.38%, which favorably
compares to 1997 ratios of 14.78% and 1.42%, respectively. Basic and
-19-
<PAGE>
diluted earnings per share through June 30, 1998 were $.68 and
dividends per share were $.32. This compares to basic and diluted
earnings per share and dividends per share through June 30, 1997 of
$.60 and $.28, respectively.
FORWARD-LOOKING STATEMENTS
This discussion and analysis of financial condition and results
of operations, and other sections of this report, contain forward-
looking statements that are based on management's beliefs,
assumptions, current expectations, estimates and projections about the
financial services industry, that economy, and about the Corporation
itself. Words such as "anticipates," "believes," "estimates,"
"expects," "forecasts," "intends," "is likely," "plans," "predicts,"
"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. Future Factors include changes in
interest rates and interest rate relationships; demand for products
and services; the degree of competition by traditional and non-
traditional competitors; changes in banking regulations; changes 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 abilities 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.
Furthermore, Shoreline undertakes no obligation to update, amend or
clarify forward-looking statements, whether as a result of new
information, future events, or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information concerning quantitative and qualitative
disclosures about market risk contained under the caption
"Quantitative and Qualitative Disclosures About Market Risk" on pages
18 through 20 (inclusive) of Shoreline's Annual Report to Shareholders
for the year ended December 31, 1997 is here incorporated by
reference. Such Annual Report was previously filed as Exhibit 13 to
Shoreline's Annual Report on Form 10-K for the year ended
December 31, 1997.
-20-
<PAGE>
Shoreline faces market risk to the extent that both earnings and
the fair values of its financial instruments are affected by changes
in interest rates. Shoreline manages this risk with static GAP
analysis and simulation modeling. Throughout the first six months of
1998, the results of these measurement techniques were within
Shoreline's policy guidelines. Shoreline does not believe that there
has been material changes in the nature of Shoreline's primary market
risk exposures, including the categories of market risk to which
Shoreline is exposed and the particular markets that present the
primary risk of loss to Shoreline. As of the date of this Form 10-Q
Quarterly Report, Shoreline does not know of or expect there to be any
material change in the general nature of its primary market risk
exposure in the near term.
The methods by which Shoreline manages its primary market risk
exposures, as described in the sections of its annual report
incorporated by reference in response to this item, have not changed
materially during the current year. As of the date of this Form 10-Q
Quarterly Report, Shoreline does not expect to change those methods in
the near term. However, Shoreline may change those methods in the
future to adapt to changes in circumstances or to implement new
techniques.
Shoreline's market risk exposure is mainly comprised of its
vulnerability to interest rate risk. Prevailing interest rates and
interest rate relationships in the future will be primarily determined
by market factors which are outside of Shoreline's control. All
information provided in response to this item consists of forward-
looking statements. Reference is made to the section captioned
"Forward-Looking Statements" at the end of Management's Discussion and
Analysis of Financial Condition and Results of Operations in this Form
10-Q Quarterly Report for a discussion of the limitations on
Shoreline's responsibility for such statements.
-21-
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 14, 1998, Shoreline's shareholders approved an amendment
to Shoreline's Restated Articles of Incorporation increasing the
number of authorized shares of common stock, no par value ("Common
Stock"), from 10 million to 15 million shares.
All of the additional shares resulting from the increase in
Shoreline's authorized Common Stock are of the same class, with the
same dividend, voting and liquidation rights, as the shares of Common
Stock previously outstanding.
The newly authorized shares are unreserved and available for
issuance. No further shareholder authorization is required prior to
the issuance of such shares by Shoreline. Shareholders have no
preemptive rights to acquire shares issued by Shoreline under its
Restated Articles of Incorporation, and shareholders did not acquire
any such rights with respect to such additional shares under the
amendment to Shoreline's Restated Articles of Incorporation. Under
some circumstances, the issuance of additional shares of Common Stock
could dilute the voting rights, equity and earnings per share of
existing shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of Shoreline Financial
Corporation was held on May 14, 1998. The purpose of the meeting was
to elect directors and to amend Shoreline's Restated Articles of
Incorporation to increase the number of authorized shares of Common
Stock from 10 million to 15 million shares.
(a) The name of each director elected (along with the
number of votes cast for or authority withheld) and the name of each
other director whose term of office as a director continued after the
meeting follows:
-22-
<PAGE>
<TABLE>
<CAPTION>
VOTES CAST
AUTHORITY
FOR WITHHELD
--- ---------
<S> <C> <C>
ELECTED DIRECTORS
Thomas T. Huff 5,013,651 64,950
L. Richard Marzke 5,015,642 62,959
Dan L. Smith 5,063,444 15,157
Ronald L. Zile 5,057,551 21,050
</TABLE>
DIRECTORS WHO CONTINUE TO SERVE
Louis A. Desenberg James E. LeBlanc
Merlin J. Hanson James F. Murphy
Jeffery H. Tobian Robert L. Starks
(b) The shareholders also voted to approve the amendment to
the Restated Articles of Incorporation to increase the amount of
authorized stock as described in Item 2 of Part II of this Report on
Form 10-Q. The following sets forth the results of the voting with
respect to that matter:
<TABLE>
<CAPTION>
SHARES VOTED
<S> <C> <C>
For 5,026,605
Against 31,517
Abstentions 18,033
Broker Non-Votes 2,446
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following documents are filed as
exhibits to this Report on Form 10-Q:
EXHIBIT
NUMBER DOCUMENT
3.1 Restated Articles of Incorporation.
3.2 Bylaws. Previously filed as Exhibit 3(b) to the
Registrant's Form S-1 Registration Statement filed
March 23, 1990. Here incorporated by reference.
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<PAGE>
4.1 Restated Articles of Incorporation. See Exhibit 3.1
above.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed
during the quarter covered by this report.
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SHORELINE FINANCIAL CORPORATION
(Registrant)
Date August 14, 1998 /S/DAN L. SMITH
Dan L. Smith
Chairman, President and Chief Executive
Officer
Date August 14, 1998 /S/WAYNE R. KOEBEL
Wayne R. Koebel
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
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<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
3.1 Restated Articles of Incorporation.
3.2 Bylaws. Previously filed as Exhibit 3(b) to the
Registrant's Form S-1 Registration Statement filed
March 23, 1990. Here incorporated by reference.
4.1 Restated Articles of Incorporation. See Exhibit 3.1
above.
27 Financial Data Schedule.
<PAGE>
EXHIBIT 3
RESTATED ARTICLES OF INCORPORATION
OF
SHORELINE FINANCIAL CORPORATION
(Composite as amended through May 14, 1998)
ARTICLE I
The name of the corporation is
Shoreline Financial Corporation
ARTICLE II
The purpose of the corporation is to engage in any one or more
lawful acts or activities within the purposes for which corporations may be
organized under the Michigan Business Corporation Act.
ARTICLE III
The total authorized capital stock of the corporation is fifteen
million (15,000,000) shares of common stock, all of one class with equal
voting rights, and one million (1,000,000) shares of preferred stock.
The following provisions are applicable to the authorized stock
of the corporation:
(a) PROVISIONS APPLICABLE TO COMMON STOCK:
(i) All shares of common stock shall be of one class.
Each holder of common stock shall be entitled to one vote
for each share held by him.
(ii) Subject to the preferential dividend rights, if
any, applicable to shares of preferred stock and subject to
applicable requirements, if any, with respect to the setting
aside of sums for purchase, retirement or sinking funds for
preferred stock, the holders of common stock shall be
entitled to receive, to the extent permitted by law, such
dividends as may be declared from time to time by the board
of directors.
<PAGE>
(iii) In the event of the voluntary or involuntary
liquidation, dissolution, distribution of assets or winding
up of the corporation, after distribution in full of the
preferential amounts, if any, to be distributed to the
holders of shares of preferred stock, holders of common
stock shall be entitled to receive all of the remaining
assets of the corporation of whatever kind available for
distribution to stockholders ratably in proportion to the
number of shares of common stock held by them. The board of
directors may distribute in kind to the holders of common
stock such remaining assets of the corporation or may sell,
transfer or otherwise dispose of all or any part of such
remaining assets to any person and may sell all or any part
of the consideration so received and distribute any balance
thereof in kind to holders of common stock. The merger or
consolidation of the corporation into or with any other
corporation, or the merger of any other corporation into it,
or any purchase or redemption of shares of stock of the
corporation of any class, shall not be deemed to be a
dissolution, liquidation or winding up of the corporation
for the purposes of this paragraph.
(b) PROVISIONS APPLICABLE TO PREFERRED STOCK:
(i) PROVISIONS TO BE FIXED BY THE BOARD DIRECTORS:
The board of directors is expressly authorized at
any time, and from time to time, to provide for the issuance
of shares of preferred stock in one or more series, each
with such voting powers, full or limited, or without voting
powers, and with such designations, preferences and
relative, participating, conversion, optional or other
rights, and such qualifications, limitations or restrictions
thereof, as shall be stated in the resolution or resolutions
providing for the issue thereof adopted by the board of
directors, and as are not stated in these Articles, or any
amendments thereto, including (but without limiting the
generality of the foregoing) the following:
(1) The distinctive designation and number of
shares comprising such series, which number may (except
where otherwise provided by the board of directors in
creating such series) be increased or decreased (but
not below the number of shares then outstanding) from
time to time by action of the board of directors.
-2-
<PAGE>
(2) The dividend rate or rates on the shares of
such series and the relation which such dividends shall
bear to the dividends payable on any other class of
capital stock or on any other series of preferred
stock, the terms and conditions upon which and the
periods in respect of which dividends shall be payable,
whether and upon what conditions such dividends shall
be cumulative and, if cumulative, the date or dates
from which dividends shall accumulate.
(3) Whether the shares of such series shall be
redeemable, and, if redeemable, whether redeemable for
cash, property or rights, including securities of any
other corporation, and whether redeemable at the option
of the holder or the corporation or upon the happening
of a specified event, the limitations and restrictions
with respect to such redemption, the time or times
when, the price or prices or rate or rates at which,
the adjustments with which and the manner in which such
shares shall be redeemable, including the manner of
selecting shares of such series for redemption if less
than all shares are to be redeemed.
(4) The rights to which the holders of shares of
such series shall be entitled, and the preferences, if
any, over any other series (or of any other series over
such series), upon the voluntary or involuntary
liquidation, dissolution, which rights may vary
depending on whether such liquidation, dissolution,
distribution or winding up is voluntary or involuntary,
and, if voluntary, may vary at different dates.
(5) Whether the shares of such series shall be
subject to the operation of a purchase, retirement or
sinking fund and, if so, whether and upon what
conditions such fund shall be cumulative or
noncumulative, the extent to which and the manner in
which such fund shall be applied to the purchase or
redemption of the shares of such series for retirement
or to other corporation purposes and the terms and
provisions relative to the operation thereof.
(6) Whether the shares of such series shall be
convertible into or exchangeable for shares of any
other class or of any other series of any class of
capital stock of the corporation, and, if so
convertible or exchangeable, the price or prices or the
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<PAGE>
rate or rates of conversion or exchange and the method,
if any, of adjusting the same, and any other terms and
conditions of such conversion or exchange.
(7) The voting powers, full and/or limited, if
any, of the shares of such series, and whether and
under what conditions the shares of such series (alone
or together with the shares of one or more other series
having similar provisions) shall be entitled to vote
separately as a single class, for the election of one
or more additional directors of the corporation in case
of dividend arrearages or other specified events, or
upon other matters.
(8) Whether the issuance of any additional shares
of such series, or of any shares of any other series,
shall be subject to restrictions as to issuance, or as
to the powers, preferences or rights of any such other
series.
(9) Any other preferences, privileges and powers
and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions
of such series, as the board of directors may deem
advisable and as shall not be inconsistent with the
provisions of these Articles.
(ii) PROVISIONS APPLICABLE TO ALL PREFERRED STOCK:
(1) All preferred stock shall rank equally and be
identical in all respects except as to the matters
permitted to be fixed by the board of directors, and
all shares of any one series thereof shall be identical
in every particular except as to the date, if any, from
which dividends on such shares shall accumulate.
(2) Shares of preferred stock redeemed,
converted, exchanged, purchased, retired or surrendered
to the corporation, or which have been issued and
reacquired in any manner, may, upon compliance with any
applicable provisions of the Michigan Business
Corporation Act be given the status of authorized and
unissued shares of preferred stock and may be reissued
by the board of directors as part of the series of
which they were originally a part or may be
reclassified into and reissued as part of a new series
or as a part of any other series, all subject to the
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<PAGE>
protective conditions or restrictions of any
outstanding series preferred stock.
ARTICLE IV
The address (which is the mailing address) of the current
registered office of the corporation is 823 Riverview Drive, Benton Harbor,
Michigan 49022.
The name of the current resident agent at the registered office
is Mr. Dan L. Smith.
ARTICLE V
When a compromise or arrangement or a plan of reorganization of
this corporation is proposed between this corporation and its creditors or
any class of them or between this corporation and its shareholders or any
class of them, a court of equity jurisdiction within the state, on
application of this corporation or of a creditor or shareholder thereof, or
on application of a receiver appointed for the corporation, may order a
meeting of the creditors or class of creditors or of the shareholders or
class of shareholders to be affected by the proposed compromise or
arrangement or reorganization, to be summoned in such manner as the court
directs. If a majority in number representing three-fourths (3/4) in value
of the creditors or class of creditors, or of the shareholders or class of
shareholders to be affected by the proposed compromise or arrangement or a
reorganization, agree to a compromise or arrangement or a reorganization of
this corporation as a consequence of the compromise or arrangement, the
compromise or arrangement and the reorganization, if sanctioned by the
court to which the application has been made, shall be binding on all the
creditors or class of creditors, or on all the shareholders or class of
shareholders and also on this corporation.
ARTICLE VI
Members of the Board of Directors of the corporation shall be
selected, replaced, and removed as follows:
(a) NUMBER OF DIRECTORS. The number of the directors of
the corporation shall be fixed from time to time by resolution
adopted by the affirmative vote of at least two-thirds (2/3) of
the entire Board of Directors but shall not be less than three.
(b) CLASSIFICATION. The Board of Directors shall be
divided into three classes as nearly equal in number as possible,
-5-
<PAGE>
with the term of office of one class expiring each year. At each
annual meeting of the shareholders, the successors of the class
of directors whose term expires at that meeting shall be elected
to hold office for a term expiring at the annual meeting of
shareholders held in the third year following the year of their
election.
(c) NOMINATIONS OF DIRECTOR CANDIDATES.
(i) Nominations of candidates for election for
directors of the corporation at any meeting of shareholders
called for election of directors (an "Election Meeting") may
be made by the Board of Directors or by any stockholder
entitled to vote at such Election Meeting.
(ii) Nominations made by the Board of Directors shall
be made at a meeting of the Board of Directors, or by
written consent of the directors in lieu of a meeting, not
less than 20 days prior to the date of the Election Meeting,
and such nominations shall be reflected in the minute books
of the corporation as of the date made.
(iii) Any shareholder who intends to make a nomination
at the Election Meeting shall deliver, not less than 120
days prior to the date of the Election Meeting in the case
of an annual meeting, and not more than 7 days following the
date of notice of the meeting in the case of a special
meeting, a notice to the Secretary of the corporation
setting forth (1) the name, age, business address and
residence address of each nominee proposed in such notice;
(2) the principal occupation or employment of each such
nominee; (3) the number of shares of capital stock of the
corporation which are beneficially owned by each such
nominee; (4) a statement that each such nominee is willing
to be nominated; and (5) such other information concerning
each such nominee as would be required under the rules of
the Securities and Exchange Commission in a proxy statement
soliciting proxies for the election of such nominees.
(iv) If the chairman of the Election Meeting determines
that a nomination was not made in accordance with the
foregoing procedures, such nomination shall be void and,
upon the chairman's instruction, all votes cast in favor of
a person so nominated shall be disregarded.
(d) VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Subject to
the rights of the holders of any series of preferred stock then
-6-
<PAGE>
outstanding, any vacancy occurring in the Board of Directors
caused by resignation, removal, death, disqualification, or other
incapacity, and any newly created directorships resulting from an
increase in the number of directors, shall be filled by a
majority vote of directors then in office, whether or not a
quorum. Each director chosen to fill a vacancy or a newly
created directorship shall hold office until the next election of
directors by the shareholders. When the number of directors is
changed, any newly created or eliminated directorships shall be
so apportioned by the Board of Directors among the classes as to
make all classes as nearly equal in number as possible. No
decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
(e) REMOVAL. Any director may be removed from office at
any time, but only for cause, and only if removal is approved as
set forth below.
Except as may be provided otherwise by law, cause for
removal shall be construed to exist only if: (i) the director
whose removal is proposed has been convicted of a felony by a
court of competent jurisdiction and such conviction is no longer
subject to direct appeal; (ii) such director has been adjudicated
by a court of competent jurisdiction to be liable for negligence
or misconduct in the performance of his duty to the corporation
in a matter of substantial importance to the corporation and such
adjudication is no longer subject to direct appeal; (iii) such
director has become mentally incompetent, whether or not so
adjudicated, which mental incompetency directly affects his
ability as a director of the corporation; (iv) such director's
actions or failure to act are deemed by the Board of Directors to
be in derogation of the director's duties; or (v) such director's
removal is required or recommended by the Board of Governors of
the Federal Reserve System or its delegate.
Whether cause for removal exists shall be determined by
the affirmative vote of two-thirds (2/3) of the total number of
directors. Any action to remove a director pursuant to (i) or
(ii) above shall be taken within one year of such conviction or
adjudication. For purposes of this paragraph, the total number
of directors will not include the director who is the subject of
the removal determination, nor will such director be entitled to
vote thereon.
-7-
<PAGE>
ARTICLE VII
No director of the corporation shall be personally liable to the
corporation or its shareholders for monetary damages for breach of the
director's fiduciary duty. However, this Article VII shall not eliminate
or limit the liability of a director for any breach of duty, act or
omission for which the elimination or limitation of liability is not
permitted by the Michigan Business Corporation Act, as amended from time to
time. No amendment, alteration, modification or repeal of this Article VII
shall have any effect on the liability of any director of the corporation
with respect to any act or omission of such director occurring prior to
such amendment, alteration, modification or repeal.
ARTICLE VIII
Directors of the corporation shall be indemnified as of right to
the fullest extent now or hereafter permitted by law in connection with any
actual or threatened civil, criminal, administrative or investigative
action, suit or proceeding (whether brought by or in the name of the
corporation, a subsidiary, or otherwise) arising out of their service as a
director or in any other capacity to the corporation or a subsidiary, or to
another organization at the request of the corporation or a subsidiary.
Persons who are not directors of the corporation may be similarly
indemnified in respect of such service to the extent authorized at any time
by the board of directors of the corporation. The corporation may purchase
and maintain insurance to protect itself and any such director or other
person against any liability asserted against him and incurred by him in
respect of such service whether or not the corporation would have the power
to indemnify him against such liability by law or under the provisions of
this paragraph. The provisions of this Article VIII shall be applicable to
actions, suits or proceedings, whether arising from acts or omissions
occurring before or after the adoption hereof, and to directors and other
persons who have ceased to render such service, and shall inure to the
benefit of the heirs and personal representatives of the directors, and
other persons referred to in this paragraph.
ARTICLE IX
The Board of Directors shall not initiate, approve, adopt, or
recommend any offer of any party other than the corporation to make a
tender or exchange offer for any equity security of the corporation, or to
engage in any Business Combination, as defined in paragraph (b) below,
unless and until it shall have first evaluated the proposed offer and
determined in its judgment that the proposed offer would be in compliance
with all applicable laws. In evaluating a proposed offer to determine
-8-
<PAGE>
whether it would be in compliance with law, the Board of Directors shall
consider all aspects of the proposed offer, including the manner in which
the offer is proposed to be made, the documents proposed for the
communication of the offer, and the effects and consequences of the offer
if consummated, in light of the laws of the United States of America and
affected states and foreign countries. In connection with this evaluation,
the Board may seek and rely upon the opinion of independent legal counsel,
and may test the legality of the proposed offer in any state, federal or
foreign court or before any state, federal or foreign administrative agency
which may have jurisdiction. If the Board of Directors determines in its
judgment that a proposed offer would be in compliance with all applicable
laws, the Board of Directors shall then evaluate the proposed offer and
determine whether the proposed offer is in the best interests of the
corporation and its shareholders, and the Board of Directors shall not
initiate, approve, adopt or recommend any such offer which in its judgment
would not be in the best interests of the corporation and its shareholders.
(a) FACTORS. In evaluating a proposed offer to determine
whether it would be in the best interests of the corporation and
its shareholders, the Board of Directors shall consider all
factors which it deems relevant including:
(i) The fairness of the consideration to be received
by the corporation and its shareholders under the proposed
offer, taking into account the trading price of the
corporation's stock immediately prior to the announcement of
the proposed offer, the historical trading prices of the
corporation's stock, the price that might be achieved in a
negotiated sale of the corporation as a whole, premiums over
the trading price of their securities which have been
proposed or offered to other companies in the past in
connection with similar offers, and the future prospects of
the corporation;
(ii) The possible social and economic impact of the
proposed offer and its consummation on the corporation and
its employees, customers and suppliers;
(iii) The possible social and economic impact of the
proposed offer and its consummation on the communities in
which the corporation and its subsidiaries operate or are
located;
(iv) The business and financial conditions and earning
prospects of the offering party, including, but not limited
to, debt service and other existing or likely financial
obligations of the offering party;
-9-
<PAGE>
(v) The competence, experience and integrity of the
offering party and its management; and
(vi) The intentions of the offering party regarding the
use of the assets of the corporation to finance the
transaction.
(b) DEFINITION OF BUSINESS COMBINATION. For purposes of
this Article, the term "Business Combination" shall mean:
(i) Any merger or consolidation of the corporation
into another person or entity;
(ii) The sale, exchange, lease, mortgage, pledge,
transfer or other disposition (in a single transaction or a
series of related transactions) of all or substantially all
of the assets of the corporation;
(iii) The adoption of any plan or proposal for the
liquidation or dissolution of the corporation;
(iv) Any transactions or series of related transactions
having, directly or indirectly, the same effect as any of
the foregoing;
(v) Any agreement, contract or other arrangement
providing for any of the transactions described in this
definition of Business Combination.
ARTICLE X
The corporation reserves the right to amend, alter, change or
repeal any provision contained in these Restated Articles of Incorporation,
and to add additional Articles hereto, in the manner now or hereafter
prescribed by statute and these Restated Articles of Incorporation, and all
rights conferred upon shareholders herein are granted subject to this
reservation. Notwithstanding the preceding sentence, no amendment to these
Restated Articles of Incorporation shall alter, modify, or repeal any or
all of the provisions of Article VI, VII, VIII, IX or this Article X of
these Restated Articles of Incorporation, and the shareholders of the
corporation shall not have the right to alter, modify, or repeal any or all
provisions of the bylaws of the corporation, unless such amendment,
alteration, modification, or repeal is adopted by the affirmative vote of
the holders of not less than 80% of the outstanding shares of stock
entitled to be voted thereon; provided, however, that this sentence shall
not apply to, and such 80% vote shall not be required for, any amendment,
-10-
<PAGE>
alteration, modification, or repeal which has first been approved by the
affirmative vote of two-thirds (2/3) of the entire Board of Directors,
which shall include the affirmative vote of at least one director of each
class of the Board of Directors.
-11-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF SHORELINE
FINANCIAL CORPORATION FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S>
<C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 37,798
<INT-BEARING-DEPOSITS> 27,866
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 145,836
<INVESTMENTS-CARRYING> 32,803
<INVESTMENTS-MARKET> 33,806
<LOANS> 616,038
<ALLOWANCE> 7,679
<TOTAL-ASSETS> 889,428
<DEPOSITS> 736,404
<SHORT-TERM> 29,037
<LIABILITIES-OTHER> 6,170
<LONG-TERM> 37,085
<COMMON> 0
0
0
<OTHER-SE> 80,733
<TOTAL-LIABILITIES-AND-EQUITY> 889,428
<INTEREST-LOAN> 26,975
<INTEREST-INVEST> 5,630
<INTEREST-OTHER> 963
<INTEREST-TOTAL> 33,568
<INTEREST-DEPOSIT> 15,182
<INTEREST-EXPENSE> 1,798
<INTEREST-INCOME-NET> 16,588
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 11,297
<INCOME-PRETAX> 8,730
<INCOME-PRE-EXTRAORDINARY> 8,730
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,048
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
<YIELD-ACTUAL> 2.11
<LOANS-NON> 600
<LOANS-PAST> 1,030
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,317
<ALLOWANCE-OPEN> 7,588
<CHARGE-OFFS> 379
<RECOVERIES> 170
<ALLOWANCE-CLOSE> 7,679
<ALLOWANCE-DOMESTIC> 4,581
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,098
</TABLE>
