<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 MARCH 31, 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 of (I.R.S. Employer Identification No.)
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 April 30, 1998, there were 8,909,573 issued and outstanding shares of
the Registrant's Common Stock.
<PAGE>
INDEX
SHORELINE FINANCIAL CORPORATION
FORM 10-Q
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets,
March 31, 1998, and December 31, 1997 3
Condensed Consolidated Statements of Income,
Three Months Ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of Comprehensive
Income, Three Months Ended March 31, 1998 and 1997 6
Condensed Consolidated Statements of Cash Flows,
Three Months Ended March 31, 1998 and 1997 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 36,618,936 $ 29,961,993
Interest-earning deposits 39,503,670 6,344,447
Federal funds sold 7,200,000 8,675,000
------------ ------------
Total cash and cash equivalents 83,322,606 44,981,440
Securities held to maturity
(fair values of $35,007,524 and
$39,572,300 on March 31, 1998 and
December 31, 1997, respectively) 33,920,369 38,385,568
Securities available for sale (carried at fair value) 133,369,380 125,534,904
Total loans 620,114,240 619,636,155
Less allowance for loan losses 7,679,457 7,588,127
------------ ------------
Net loans 612,434,783 612,048,028
Premises and equipment, net 13,422,254 13,560,859
Intangible assets 11,694,585 11,901,520
Other assets 11,442,028 11,430,483
------------ ------------
Total Assets $899,606,005 $857,842,802
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non interest-bearing $ 80,071,492 $ 78,971,373
Interest-bearing 669,628,775 643,692,981
------------ ------------
Total deposits 749,700,267 722,664,354
Securities sold under agreements to repurchase 13,100,703 7,526,582
Other liabilities 5,841,715 5,593,571
FHLB advances 52,070,860 45,175,892
------------ ------------
Total Liabilities 820,713,545 780,960,399
------------ ------------
</TABLE>
3
<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS - CONTINUED
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Shareholders' equity
Common Stock:
No par value, 10,000,000 shares authorized;
8,906,262 and 8,882,264 shares issued and
outstanding at March 31, 1998 and December 31,
1997, respectively 0 0
Additional paid-in capital $ 65,559,745 $ 65,273,177
Stock incentive plan (unearned shares) (464,780) (495,095)
Unrealized gain on securities
available for sale, net 1,688,390 1,604,270
Retained earnings 12,109,105 10,500,051
------------ ------------
Total Shareholders' Equity 78,892,460 76,882,403
------------ ------------
Total Liabilities & Shareholders' Equity $899,606,005 $857,842,802
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $13,459,776 $10,962,075
Securities 2,832,669 2,494,778
Deposits with banks 261,520 294,923
Federal funds sold 122,028 126,686
----------- -----------
Total interest income 16,675,993 13,878,462
----------- -----------
INTEREST EXPENSE
Deposits 7,609,640 6,240,586
Other 854,462 321,181
----------- -----------
Total interest expense 8,464,102 6,561,767
----------- -----------
NET INTEREST INCOME 8,211,891 7,316,695
Provision for loan losses 150,000 120,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,061,891 7,196,695
OTHER INCOME
Service charges on deposit accounts 501,260 467,711
Trust fees 482,147 403,048
Gains on sales and calls of securities 3,237 35,301
Gain on sale of mortgages 371,986 32,813
Other 453,094 250,891
----------- -----------
Total other income 1,811,724 1,188,891
----------- -----------
5
<PAGE>
OTHER EXPENSES
Personnel 2,966,051 2,693,344
Occupancy 418,302 360,273
Equipment 546,209 498,801
Other 1,606,155 1,296,821
----------- -----------
Total other expense 5,536,717 4,849,239
----------- -----------
INCOME BEFORE INCOME TAXES 4,336,898 3,536,347
Federal income tax expense 1,304,450 994,000
----------- -----------
NET INCOME $ 3,032,448 $ 2,542,347
=========== ===========
EARNINGS PER SHARE
Basic $ .34 $ .30
=========== ===========
Diluted $ .34 $ .30
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET INCOME $ 3,032,448 $ 2,542,347
Other comprehensive income, net of tax:
Change in unrealized gains on securities 84,120 (553,030)
----------- -----------
COMPREHENSIVE INCOME $ 3,116,568 $ 1,989,317
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,032,448 $ 2,542,347
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 410,108 384,259
Provision for loan losses 150,000 120,000
Net amortization and accretion on securities (11,086) 80,999
Amortization of goodwill and related core
deposit intangibles 206,935 64,069
Stock incentive expense 30,315 20,210
Gains on sales and calls of securities (3,237) (35,301)
Increase in other assets (54,880) (746,677)
Increase in other liabilities 248,144 132,817
----------- -----------
NET CASH FROM OPERATING ACTIVITIES 4,008,747 2,562,723
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase)/decrease in loans (536,755) 689,961
Securities available for sale:
Purchase (19,423,465) (12,725,693)
Proceeds from sale 0 455,608
Proceeds from maturities, calls and principal
reductions 10,844,647 2,561,901
Securities held to maturity:
Purchase 0 (3,000,000)
Proceeds from maturities, calls and principal
reductions 5,351,319 2,730,781
Premises and equipment expenditures (271,503) (492,936)
----------- -----------
NET CASH FROM INVESTING ACTIVITIES (4,035,757) (9,780,378)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 27,035,913 15,363,765
Net increase/(decrease) in short-term borrowing 5,574,121 (779,321)
Proceeds from FHLB advances 20,000,000 9,000,000
Repayment of FHLB advances (13,105,032) (4,000,000)
8
<PAGE>
Dividends paid (1,423,394) (1,173,594)
Proceeds from shares issued 356,431 311,555
Payments to retire common stock (69,863) 0
----------- -----------
NET CASH FROM FINANCING ACTIVITIES 38,368,176 18,722,405
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 38,341,166 11,504,750
Cash and Cash Equivalents at Beginning of Year 44,981,440 61,558,670
----------- -----------
Cash and Cash Equivalents at March 31 $83,322,606 $73,063,420
=========== ===========
CASH PAID DURING THE YEAR FOR:
Interest $ 8,559,489 $ 6,554,346
Income Taxes $ 0 $ 0
</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 March 31,
1998 and December 31, 1997, and the results of its operations and its cash
flows for the three months ended March 31, 1998 and 1997. The results of
operations for the three months ended March 31, 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 FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. The
adoption of SFAS No. 131 did not have a material impact on the results of
operations or financial condition of the Corporation.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Shoreline Financial Corporation and its wholly owned
subsidiary, Shoreline Bank, together referred to as "Shoreline". All
material intercompany accounts and transactions have been eliminated in
consolidation.
10
<PAGE>
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
quarter of 1998.
Realized gains or losses are determined based on the amortized cost of
the specific security sold.
During the three-month period ended March 31, 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
change in net unrealized holding gains on available for sale securities was
an increase of $84,000. There were no sales or transfers of securities
classified as held to maturity.
INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the net
value of tangible assets acquired and related core deposit intangibles
identified in branch acquisitions. Goodwill is being amortized on a
straight-line basis for a period of ten years. The related core deposit
intangibles are amortized on an accelerated basis over the estimated life
of the deposits acquired.
INCOME TAXES
Income tax expense for the quarters ended March 31, 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.
11
<PAGE>
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. Completion
of this transaction will be 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
On March 31, 1998, total deposits were $749.7 million, up $27.0
million from December 31, 1997. Total deposits averaged $733.0 million
during the first quarter of 1998, an increase of $2.7 million over the
previous quarter's average of $730.3 million. A comparison of the
quarterly averages for the past two quarters follows:
<TABLE>
<CAPTION>
AVG BAL AVG BAL
1ST QTR 98 4TH QTR 97
---------- ----------
<S> <C> <C>
(000S)
Non-Interest Bearing Demand Deposits $ 77,303 $ 78,698
Interest-Bearing Demand Deposits 143,398 137,256
Savings Deposits 145,062 145,483
Time Deposits 367,280 368,818
-------- --------
Total $733,043 $730,255
======== ========
</TABLE>
Shoreline's growth in average deposits during the first quarter of
1998 came from its Super Public Fund account, an interest-bearing demand
deposit account geared toward municipalities. Deposit levels in this
12
<PAGE>
category increased $9.7 million during the first quarter, primarily
attributable to seasonal funding patterns of the municipalities. The
growth in this area was offset by declines of $7.0 million in all other
categories of the retail deposit base.
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 ("FHLB") as an
alternative wholesale funding source. Average borrowings from the FHLB
increased by $4.0 million over the quarter ended December 31, 1997. At
March 31, 1998, Shoreline had $52.1 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 quarter of 1998. Cash and cash equivalents averaged
$61.8 million, up $6.4 million from the previous quarter's average of $55.4
million. Interest-earning deposits and federal funds sold accounted for
the majority of this increase, averaging $29.4 million for the first
quarter of 1998, up $5.3 million from the previous quarter.
The total investment securities portfolio averaged $167.0 million in
the first quarter of 1998, an increase of $2.7 million from the quarter
ended December 31, 1997. Increased investments in U.S. government and
Treasury securities accounted for this growth.
Total loans averaged $619.2 million during the first quarter of 1998,
comparable to the previous quarter's average of $619.8 million.
Significant growth in the commercial loan portfolio of $8.9 million was
offset by a decline in mortgage loan average balances of $9.0 million.
Continued reductions in interest rates in the recently completed quarter
spurred high levels of mortgage refinancing resulting in sales of the
majority of loan originations in the secondary market. Consumer loan
average balances declined by $398,000 during the first quarter of 1998.
Total non-performing assets at March 31, 1998 were $2.7 million, which
represents .43% of Shoreline's total loan portfolio at that date. This
level of non-performing assets approximates December 31, 1997's 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 "troubled debt restructurings" and other real estate
owned.
During the first quarter of 1998, Shoreline experienced net loan
charge-offs of $58,670, which represents only .01% of average total loans
for the quarter. The provision for loan losses for the first quarter of
13
<PAGE>
1998 was $150,000, compared to $180,000 in the fourth quarter of 1997. At
March 31, 1998, Shoreline's allowance for loan losses was $7,679,457, which
provides a coverage of over 2.5 times the level of non-performing assets
identified at March 31, 1998. As a percentage of total loans, the
allowance for loan losses is 1.24% at March 31, 1998, which compares
favorably to the December 31, 1997 level of 1.22%.
LIQUIDITY AND RATE SENSITIVITY
During the first quarter of 1998, Shoreline's loan to deposit ratio
was 84.5%, down slightly from the previous quarter's ratio of 84.9%.
During the first quarter of 1998, average interest-earning deposits and
federal funds sold represented 3.3% of Shoreline's total average assets.
On March 31, 1998, interest-earning deposits and federal funds sold totaled
$39.5 million and $7.2 million, respectively. Approximately $133.4
million, or 79.7% of Shoreline's total securities portfolio, was classified
as available for sale on March 31, 1998 and $4.7 million of loans were
classified as held for sale. On March 31, 1998, Shoreline had commitments
to make or purchase loans, including the unused portion of lines of credit,
totaling $122.5 million.
On March 31, 1998, the cumulative funding gaps of interest-earning
assets and interest-bearing liabilities for selected maturity periods are
illustrated as follows:
<TABLE>
<CAPTION>
REPRICEABLE OR MATURING WITHIN:
0 TO 3 0 TO 12 0 TO 5
(000S) MONTHS MONTHS YEARS
------ ------ -----
<S> <C> <C> <C>
Interest-earning assets
Loans $ 161,906 $ 261,636 $556,259
Securities 21,743 39,812 69,202
Federal funds sold 7,200 7,200 7,200
Interest-earning deposits 39,504 39,504 39,504
--------- --------- --------
Total $ 230,353 $ 348,152 $672,165
========= ========= ========
Interest-bearing liabilities
Time deposits $ 91,877 $ 250,228 $363,572
Demand and savings deposits 304,552 304,552 304,552
Other borrowings 45,101 58,601 65,172
--------- --------- --------
Total $ 441,530 $ 613,381 $733,296
========= ========= ========
14
<PAGE>
Asset/(liability) gap $(211,177) $(265,229) $(61,131)
</TABLE>
As shown, Shoreline had a cumulative liability gap position of $265.2
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 as of
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 non-contractual repricings. In addition, the static gap
analysis treats demand and savings accounts as resistant to rate
sensitivity. Because of these and other limitations of the static gap
analysis, Shoreline's Asset/Liability Committee utilizes simulation
modeling as its primary tool to project how changes in interest rates will
impact net interest income. These models indicate, and management believes,
that Shoreline is positioned such that changes in rates within anticipated
ranges and under anticipated circumstances would not severely affect
operating results.
CAPITAL RESOURCES
Total shareholders' equity was $78.9 million on March 31, 1998.
Included in this total are net unrealized gains on securities available for
sale totaling $1,688,390, an increase of approximately $84,000 from
December 31, 1997. During the first quarter of 1998, Shoreline's Board of
Directors approved and paid a cash dividend of $.16 per share. Shoreline's
capital position remained strong as of March 31, 1998. The pending second
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>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Equity to assets 8.77% 8.96%
Tier I leverage 7.59% 7.42%
Risk-based:
Tier I Capital 12.01% 11.85%
Total Capital 13.25% 13.10%
</TABLE>
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 1998 was $3,032,448, an
increase of 19.3%, or $490,101, over the same period in 1997. Revenue
15
<PAGE>
growth provided by net 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:
<TABLE>
THREE MONTHS ENDED MARCH 31
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
(000S)
Interest income (taxable equivalent) $ 16,824 $ 14,051
Interest expense 8,464 6,562
-------- --------
Net interest income $ 8,360 $ 7,489
======== ========
Average volume:
Interest-earning assets $815,003 $674,918
Interest-bearing liabilities 716,382 578,172
-------- --------
Net differential $ 98,621 $ 96,746
======== ========
Average yields/rates:
Yield on earning assets 8.37% 8.44%
Rate paid on liabilities 4.79% 4.60%
Interest spread 3.58% 3.84%
Net interest margin 4.16% 4.50%
</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 $2,891 $(118) $2,773
Interest-bearing liabilities 1,622 280 1,902
------ ----- ------
Net interest income $1,269 $(398) $ 871
====== ===== ======
</TABLE>
16
<PAGE>
Increased volumes of assets and liabilities and the resultant effect on net
interest income are primarily related to the acquisition of SJS Bancorp,
Inc. in June of 1997.
Shoreline expensed $150,000 for the provision for loan losses in the
first quarter of 1998 as compared to $120,000 for the first quarter of
1997. The provision for loan losses is based upon loan loss experience and
such other factors which, in management's judgment, deserve current
recognition in maintaining an adequate allowance for loan losses.
Total other income for the quarter ended March 31, 1998 was
$1,811,724, an increase of $622,833 or 52.4% from the first quarter in
1997. Increased gains on the sale of mortgage loans and other assets
primarily accounted for the overall increase in this category. Gains on
the sale of mortgage loans were $371,986 in the first quarter of 1998, an
increase of $339,173 or 1033.7% over the same period last year. This was
largely the result of low interest rates spurring a significant volume of
refinancing activity resulting in increased sales of fixed rate loans in
the secondary market. Gain on the sale of other assets increased $135,818
over the first quarter of 1997, a result of the sale of a branch office of
Shoreline Bank. In addition to such gains, trust income increased $79,099
over the first quarter of 1997 as growth in managed assets and the
favorable interest rate environment combined to produce the improvement.
ATM fees increased $28,900 in the first quarter of 1998 compared to the
same period last year primarily due to the implementation of surcharge fees
in the second quarter of 1997.
Total other expense was $5,536,717 for the quarter ended March 31,
1998, an increase of $687,478 or 14.2% over the same period in 1997.
Increased salaries and employee benefits and intangible asset amortization
accounted for the majority of this increase. Salaries and employee benefit
costs increased approximately $273,000 in the first quarter of 1998
compared to the same period last year largely due to additional employees
as a result of the SJS Bancorp, Inc. merger in June of 1997. Intangible
asset amortization, included in the other expense category, increased
$142,866 in the quarter ended March 31, 1998 compared to the same period
last year as a result of the SJS merger. Moderate increases in occupancy
and equipment expense also contributed to the overall increase in other
expense.
Shoreline's ratio of total other expenses to total average assets
declined from 2.74% for the quarter ended March 31, 1997 to 2.56% for the
quarter ended March 31, 1998. Over the same period of time, Shoreline's
efficiency ratio also declined from 55.33% to 53.65%.
Comprehensive income is impacted by an increase of $637,132 in
unrealized gains on investment securities for the quarter ended March 31,
1998 compared to the same period last year. This improvement is due to the
17
<PAGE>
lower interest rate environment thus far in 1998 and its effect on
Shoreline's market value of investment securities classified as available
for sale.
In summary, Shoreline's net income of $3,032,448 for the first quarter
of 1998 produced a return on average shareholders' equity of 15.73% and a
return on average assets of 1.40%. This compares to the prior year's
ratios of 14.60% and 1.43%, respectively. Basic and diluted earnings per
share were $.34 and dividends per share was $.16, which produces a dividend
pay-out ratio of 47.1%. Basic and diluted earnings per share were $.30 and
dividends per share was $.14 for the same period in 1997.
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. Furthermore, Shoreline undertakes no obligation to
update, amend or clarify forward-looking statements, whether as a result of
new information, future events, or otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition
by traditional and non-traditional competitors; changes in banking
regulations; 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 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.
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,
18
<PAGE>
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.
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 quarter 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 relationship 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.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following documents are filed as exhibits to
this report on Form 10-Q:
EXHIBIT
NUMBER DOCUMENT
3.1 Restated Articles of Incorporation. Previously filed as Exhibit
1(a) to the registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1994. Here incorporated by reference.
3.2 Bylaws. Previously filed as Exhibit 3(b) to the registrant's
Form S-1 Registration Statement filed March 23, 1990. Here
incorporated by reference.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed
during the quarter covered by this report.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SHORELINE FINANCIAL CORPORATION
(Registrant)
Date May 15, 1998 /S/ DAN L. SMITH
Dan L. Smith
Chairman, President and Chief Executive
Officer
Date May 15, 1998 /S/ WAYNE R. KOEBEL
Wayne R. Koebel
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer (Principal
Financial and Accounting Officer)
21
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
3.1 Restated Articles of Incorporation. Previously filed as Exhibit
1(a) to the registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1994. Here incorporated by reference.
3.2 Bylaws. Previously filed as Exhibit 3(b) to the registrant's
Form S-1 Registration Statement filed March 23, 1990. Here
incorporated by reference.
27 Financial Data Schedule
22
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<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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