<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 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 Number: 0-16444
SHORELINE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2758932
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
823 RIVERVIEW DRIVE
BENTON HARBOR, MICHIGAN 49022
(Address of principal executive offices) (Zip Code)
(616) 927-2251
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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State the aggregate market value of the common stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by
reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to
the date of filing.
Aggregate Market Value as of March 16, 1999: $178,385,104
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock outstanding at March 16, 1999: 8,990,023 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement for its May 13,
1999, annual meeting of shareholders are incorporated by reference in Part
III.
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FORWARD-LOOKING STATEMENTS
This Form 10-K Annual Report and the documents incorporated in this report
by reference contain forward-looking statements that are based on
management's beliefs, assumptions, current expectations, estimates, and
projections about the financial services industry, the economy, and about
Shoreline itself. Words such as "anticipates," "believes," "estimates,"
"expects," "plans," "projects," variations of such words and similar
expressions are intended to identify such forward-looking statements.
Year 2000 related remediation, cost and risk assessments are necessarily
statements of belief as to the outcome of future events, based in part on
information provided by vendors and others that Shoreline has not
independently verified. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions 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, implied, or forecasted in
such forward-looking statements.
Future factors that could cause a difference between an ultimate actual
outcome and a preceding forward-looking statement 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 behaviors as well
as their ability to repay loans; the ability of the companies on which
Shoreline relies to make their computer systems Year 2000 compliant; the
ability to locate and convert all relevant computer codes and data; the
vicissitudes of the national economy; the possibility that expected cost
savings from mergers might not be fully realized within the expected time
frame; and similar uncertainties. Shoreline undertakes no obligation to
update, amend or clarify forward-looking statements, whether as a result of
new information, future events, or otherwise.
PART I
ITEM 1. BUSINESS OF SHORELINE FINANCIAL CORPORATION
GENERAL
Shoreline Financial Corporation (referred to as Shoreline or the
Corporation) is a bank holding company headquartered in Benton Harbor,
Michigan. Its principal activity consists of owning and supervising its
subsidiary bank, which operates general, commercial banking businesses from
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30 offices and facilities located in Michigan and Indiana. At December 31,
1998, Shoreline had assets of $955 million, deposits of $796 million and
shareholders' equity of $87 million.
The Corporation has responsibility for the overall conduct, direction and
performance of Shoreline Bank. Shoreline derives its income principally
from dividends upstreamed from its principal subsidiary, Shoreline Bank.
Shoreline recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Potential software
failures due to processing errors arising from calculations using the Year
2000 date are a known risk. Further discussion of this issue is presented
within "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing later in this document.
In July 1998, Shoreline completed the acquisition of The State Bank of
Coloma, Coloma, Michigan in exchange for 242,299 shares of Shoreline Common
Stock, with a market value of $7 million. The acquisition was accounted
for as a purchase. The excess of the purchase price over the fair value of
the net assets acquired was $3.7 million. The acquisition of The State
Bank of Coloma is not considered material to the consolidated financial
position or results of operations of Shoreline, therefore, no pro forma
information is considered necessary.
Shoreline Bank
Shoreline's business is concentrated exclusively in the commercial banking
industry segment. Shoreline's primary subsidiary is Shoreline Bank.
Shoreline Bank is a general commercial bank with 29 offices in southwestern
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Michigan and one loan production office in Indiana. Shoreline has no
material foreign assets or income. At December 31, 1998, Shoreline Bank
had total assets of $955 million, $635 million in loans and $798 million in
deposits. Shoreline Bank offers a broad range of lending, depository and
related financial services to individual, commercial, industrial,
financial, and governmental customers. The range of services offered
includes, among others, the following:
- Time, savings and demand deposits
- Commercial, consumer and real estate financing
- Letters of credit
- Money transfers
- Trust services
- Cash management services
- Investment services
- Safe deposit services
- Automated transaction machine services
- Electronic and telephone banking services
- Other banking services
The business of Shoreline is mildly seasonal due to the recreational and
agricultural components of the local economy. No material part of the
business of Shoreline and its subsidiary, Shoreline Bank, is dependent upon
a single customer, or a very few customers, where the loss of any one would
have a materially adverse effect on the Corporation.
The principal source of revenue for Shoreline is interest and fees on
loans. On a consolidated basis, interest and fees on loans accounted for
79.1%, 73.7% and 74.5% of Shoreline's total revenues in 1998, 1997 and
1996, respectively. Interest on investment securities accounted for 16.0%,
15.8% and 16.6% of Shoreline's total revenues in 1998, 1997 and 1996,
respectively.
Shoreline and Shoreline Bank employed 341 full-time equivalent persons at
December 31, 1998.
COMPETITION
The business of banking is highly competitive. Banks face significant
competition from other commercial banks and, in some product lines, savings
and loan associations, credit unions, finance companies, insurance
companies and investment and brokerage firms. The principal forms of
competition for financial services are price (interest rates paid on
deposits, interest rates charged on borrowings and fees charged for
services) and the convenience and quality of services rendered to
customers.
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Shoreline Bank has 28 automated teller machines (ATMs) located on bank
premises and on off-premise sites located in high volume retail and service
locations.
SUPERVISION AND REGULATION
Shoreline and its subsidiary, Shoreline Bank, are subject to supervision,
regulation and periodic examination by federal banking regulatory agencies,
including, primarily, the Board of Governors of the Federal Reserve System
(FRB) and the Federal Deposit Insurance Corporation (FDIC).
The following is a summary of certain statutes and regulations affecting
Shoreline and Shoreline Bank. This summary is qualified in its entirety by
such statutes and regulations, which are subject to change based on pending
and future legislation and actions by regulatory agencies.
BANK HOLDING COMPANIES - As a bank holding company, Shoreline is subject to
regulation under the Bank Holding Company Act of 1956, as amended (BHCA)
and by the FRB. Among other things, the BHCA imposes requirements for the
maintenance of capital adequate to support a bank holding company's
operations. The BHCA also restricts the product range of bank holding
companies by circumscribing the types of institutions bank holding
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companies may own or acquire. The BHCA limits bank holding companies to
owning and managing banks or companies engaged in activities determined by
the FRB to be closely related to banking. The BHCA requires bank holding
companies to obtain the prior approval of the FRB before acquiring
substantially all of the assets of any bank or bank holding company or
direct or indirect ownership or control of more than 5% of the voting
shares of a bank or bank holding company.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the Riegle-Neal Act), bank holding companies were allowed to acquire
banks located in any state in the United States without regard to
geographic restrictions or reciprocity requirements imposed by state law.
The Riegle-Neal Act also provided for the nationwide interstate branching
of banks. Under the Riegle-Neal Act both national and state chartered
banks were also allowed to merge across state lines (thereby creating
interstate branches) commencing June 1, 1997. States were permitted to
"opt out" of the interstate branching authority by taking action prior to
the commencement date. The states of Michigan and Indiana did not opt out
of the Riegle-Neal Act provisions.
BANKS - Shoreline Bank is chartered under state law and is supervised,
examined and regulated by both the Financial Institutions Bureau (FIB) of
the Michigan Department of Consumer and Industry Services and the FDIC.
The business activities of Shoreline Bank are significantly limited in a
number of respects by federal and state laws governing banks.
DEPOSIT INSURANCE ASSESSMENTS AND OTHER FEDERAL REGULATION - Deposits held
by Shoreline Bank are insured, to the extent permitted by law, by the Bank
Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) of
the FDIC.
A substantial portion (78%) of the deposits of Shoreline Bank are insured
by the BIF, with the remaining portion (22%) insured by the SAIF. Pursuant
to the Federal Deposit Insurance Corporation Improvement Act of 1991, the
FDIC is required to set deposit insurance rates at a level that will
maintain the BIF and SAIF reserve ratio at a mandated level and has
implemented a risk-based assessment scheme. Under this arrangement, each
depository institution is assigned to one of nine categories (based upon
three categories of capital adequacy and three categories of perceived risk
to the applicable insurance fund). For 1998, the effective BIF and SAIF
assessment rates ranged from 0 basis points for well-capitalized
institutions displaying little risk, to 27 basis points for
undercapitalized institutions displaying high risk. Both BIF insured banks
and SAIF insured banks and thrifts are required to pay interest on
Financing Corporation (FICO) bonds issued in connection with the federal
government's bailout of the thrift industry.
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ECONOMIC CONDITIONS AND GOVERNMENTAL POLICY - Shoreline's earning are
affected not only by the extensive regulation described above, but also by
general economic conditions. These economic conditions influence and are
influenced by the monetary and fiscal policies of the United States
government and its various agencies, particularly the FRB. Shoreline
cannot predict changes in monetary policies or their impact on its
operations and earnings.
CAPITAL ADEQUACY - Reference is made to Note 16 of the Notes to
Consolidated Financial Statements included under "Item 8. Financial
Statements and Supplementary Data" appearing later in this document.
STATISTICAL INFORMATION - The statistical information contained in the
tables appearing or incorporated by reference in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
and the descriptive text accompanying those tables, is incorporated herein
by reference.
ITEM 2. PROPERTIES
Shoreline is headquartered in Benton Harbor, Michigan.
Shoreline's subsidiary, Shoreline Bank, operates 29 banking offices in
southwestern Michigan and one loan production office in Indiana. Of these
offices, 28 are owned and two are leased. All of the offices are
considered by management to be well maintained and adequate for the purpose
intended.
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ITEM 3. LEGAL PROCEEDINGS
Shoreline and its subsidiary, Shoreline Bank, are parties to routine
litigation arising in the normal course of their respective businesses. In
the opinion of management after consultation with counsel, liabilities
arising from these proceedings, if any, are not expected to be material to
Shoreline's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
three months ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Shoreline common stock is traded on The Nasdaq Stock Market under the
symbol SLFC. The range of high and low bid prices on a quarterly basis as
reported on that system appear under the subcaptions "Market Price of
Common Stock" under the caption "Supplementary Quarterly Financial and
Common Stock Data" included in "Item 8. Financial Statements and
Supplementary Data" appearing later in this document. That information is
incorporated herein by reference in this Item.
Common stock dividends, payable in cash, were declared on a quarterly basis
during 1998 and 1997. The dividends declared per common share totaled $.66
during 1998 and $.57 during 1997. Restrictions on Shoreline's ability to
pay dividends are described in Note 17 of the Notes to Consolidated
Financial Statements included in "Item 8. Financial Statements and
Supplementary Data" and after Table XVII in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included later in this document. Dividends paid, by quarter, are included
within "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Table XVII" appearing later in this document.
That information is incorporated herein by reference in this Item.
At December 31, 1998, there were 1,520 shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to the information included in "Item 7. Management's
Discussion and Analysis of Financial Conditions and Results of Operations
- - Table I" appearing later in this document.
5
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides further information about the financial
condition and results of operations of Shoreline Financial Corporation. It
should be read in conjunction with the financial statements included
elsewhere in this annual report.
1998 HIGHLIGHTS
Shoreline's net income for 1998 was $12.1 million, up 10.0% from last
year's $11.0 million while diluted earnings per share were $1.34 compared
with the $1.24 earned last year. The main reason for the increase was a
33.9% increase in non-interest income as net interest income, on a tax
equivalent basis, was up only 5.1% and non-interest expenses were higher
for 1998 compared with 1997. The return on average assets was 1.33% for
1998 and 1.37% for 1997. The return on average equity ratio was 14.46% and
15.08%, respectively.
Total assets were $955.3 million at December 31, 1998, an increase of 11.4%
from the $857.8 million reported at December 31, 1997. The increase was
the result of the purchase of The State Bank of Coloma on July 31, 1998 and
general growth within earning assets. Growth in the loan and investment
securities portfolios of $15.5 million and $52.0 million, respectively,
accounted for the increase in earning assets.
Asset quality strengthened during 1998 with non-performing assets
decreasing to $1.9 million, or .29% of loans from $2.6 million, or .41% of
loans at year end 1997. In addition, the allowance for loan losses at year
end 1998 was 1.24%, up from 1997's ratio of 1.22%, and coverage of non-
performing assets by the allowance was 423% compared with 350%.
At December 31, 1998, shareholders' equity was $87.2 million, $10.3 million
higher than at year end 1997 mainly due to net earnings retention and the
shares issued for the acquisition of The State Bank of Coloma. On July 31,
1998, Shoreline completed its acquisition of The State Bank of Coloma, a
state-chartered commercial bank with assets of $29 million. The
transaction was accounted for as a purchase under Generally Accepted
Accounting Principles and, accordingly, the bank's assets, liabilities and
operations have been included since the date of acquisition.
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<TABLE>
Table I
FINANCIAL HIGHLIGHTS
(In thousands except financial ratios and per share data)
<CAPTION>
1998 1997 1996 1995 1994
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At Year End:
Total assets $955,264 $857,843 $716,095 $671,173 $633,854
Net loans 627,276 612,048 493,696 459,395 430,577
Total deposits 795,842 722,664 616,478 592,300 566,096
FHLB advances 49,478 45,176 18,000 5,000 5,000
Shareholders' equity 87,211 76,882 69,418 64,360 56,208
Tier I risked-based capital 12.29% 11.90% 15.10% 14.56% 13.62%
For The Year:
Net interest income $33,991 $32,193 $29,083 $27,126 $25,263
Provision for loan losses (600) (600) (600) (750) (750)
Other income 7,651 5,713 4,347 4,082 4,686
Other expense (23,452) (21,521) (19,433) (18,720) (19,721)
---------------------------------------------------------------------
Income before income taxes 17,590 15,785 13,397 11,738 9,478
Income tax expense (5,476) (4,774) (3,792) (3,131) (2,280)
---------------------------------------------------------------------
Net income $12,114 $11,011 $9,605 $8,607 $7,198
=====================================================================
Financial Ratios:
Return on average
Shareholders' equity 14.46% 15.08% 14.37% 14.28% 13.02%
Net interest margin 4.17% 4.47% 4.69% 4.70% 4.63%
Return on average assets 1.33% 1.37% 1.38% 1.33% 1.16%
Efficiency 54.83% 54.89% 56.09% 56.88% 62.03%
Average equity capital to
Average assets 9.15% 9.09% 9.60% 9.30% 8.91%
Dividend payout ratio 49.29% 45.48% 45.47% 43.39% 44.19%
Per Share Data:
Basic earnings per share $1.35 $1.25 $1.10 $0.99 $0.83
Diluted earnings per share 1.34 1.24 1.10 0.98 0.83
Cash dividends declared
per share 0.66 0.57 0.50 0.43 0.37
Book value per share (year
end) 9.63 8.66 7.94 7.42 6.48
</TABLE>
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All per share data adjusted to reflect stock splits and stock dividends.
The acquisitions of The State Bank of Coloma (July, 1998) and SJS Bancorp,
Inc. (June, 1997) were accounted for as purchases. Results of these
acquired companies are included from their dates of acquisition.
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SUMMARY OF OPERATING RESULTS
NET INTEREST INCOME
The largest component of Shoreline's operating income is net interest
income. Net interest income is the difference between interest and fees
earned on earning assets and the interest paid on deposits and other
borrowed funds. A number of factors influence net interest income, such as
changes in the volume and mix of interest-earning assets and interest-
bearing liabilities, market interest rates, governmental monetary and
fiscal policies, and customer preference.
Net interest income on a fully taxable equivalent basis was $35.2 million
in 1998, an increase of $1.7 million, or 5.1% over 1997's net interest
income of $33.5 million. Net interest income (FTE) for 1996 was $30.5
million. Shoreline's annual increases in net interest income resulted
primarily from growth in the volume of earning assets. Average earning
assets increased 12.6% and 15.3% for 1998 over 1997 and 1997 over 1996,
respectively, mainly from acquisitions completed during 1998 and 1997.
Table II details the impact that the changes in volume and rate had on net
interest income. Changes due to both volume and rate were allocated to
volume and rate in proportion to the relationship of the absolute dollar
amount of the change in each. Net interest income (FTE), average balance
amounts and the corresponding yields and costs for 1998, 1997 and 1996 are
presented in Table III.
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<TABLE>
Table II
<CAPTION>
98 COMPARED TO 97 97 COMPARED TO 96
INCREASE/(DECREASE) INCREASE/(DECREASE)
------------------- -------------------
DUE TO DUE TO DUE TO DUE TO
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest-earning assets:
Interest-earning deposits $ 612 $ (23) $ 589 $ 511 $ 31 $ 542
Fed funds sold (5) (4) (9) 24 9 33
Securities:
Taxable 2,217 (632) 1,585 1,009 220 1,229
Tax-exempt (222) (159) (381) (179) (46) (225)
Loans-net of unearned income 4,657 (1,059) 3,598 6,885 (197) 6,688
---------------------------------------------------------------
Change in interest income 7,259 (1,877) 5,382 8,250 17 8,267
---------------------------------------------------------------
Interest-bearing liabilities:
Demand deposits 577 (43) 534 469 337 806
Savings deposits 340 (118) 222 (23) 71 48
Time deposits 1,772 (245) 1,527 3,337 (238) 3,099
Short-term borrowings 276 (5) 271 100 11 111
FHLB advances 960 154 1,114 1,158 39 1,197
---------------------------------------------------------------
Change in interest expenses 3,925 (257) 3,668 5,041 220 5,261
---------------------------------------------------------------
Change in net interest income $3,334 $(1,620) $1,714 $3,209 $(203) $3,006
===============================================================
</TABLE>
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<TABLE>
Table III
AVERAGE CONSOLIDATED BALANCE SHEETS / INTEREST RATES
The following table presents interest income from average earning assets, expressed in dollars and yields on a fully tax
equivalent basis and interest expense on average interest-bearing liabilities expressed in dollars and rates.
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest bearing deposits $ 29,786 $ 1,611 5.41% $ 18,485 $ 1,022 5.53% $ 9,214 $ 480 5.21%
Federal funds sold 8,426 448 5.32% 8,511 457 5.37% 8,066 424 5.26%
Securities:
Taxable 151,957 10,171 6.69% 119,327 8,586 7.20% 105,229 7,358 6.99%
Tax-exempt <F2> 33,347 2,971 8.91% 35,783 3,352 9.37% 37,691 3,577 9.49%
Loans - net of unearned
income <F1> <F2> 620,745 54,121 8.72% 567,528 50,523 8.90% 490,200 43,835 8.94%
-------- ------- -------- ------- -------- -------
Total interest-earning assets 844,261 69,322 8.21% 749,634 63,940 8.53% 650,400 55,674 8.56%
------- ------- -------
NON-EARNING ASSETS
Cash and due from banks 34,547 30,478 28,606
Other assets 37,374 30,501 21,800
Allowance for loan losses (7,732) (7,367) (6,764)
-------- -------- --------
Total assets $908,450 $803,246 $694,042
======== ======== ========
INTEREST-BEARING LIABILITIES
Demand deposits $122,471 $ 3,615 2.95% $102,956 $ 3,081 2.99% $ 86,450 $ 2,275 2.63%
Savings deposits 179,378 5,998 3.34% 169,264 5,776 3.41% 169,959 5,729 3.37%
Time deposits 368,651 20,858 5.66% 337,382 19,331 5.73% 279,235 16,234 5.81%
Short-term borrowed funds 14,220 599 4.21% 7,674 328 4.27% 5,327 216 4.05%
Long-term debt 50,872 3,043 5.98% 34,668 1,929 5.56% 13,800 731 5.30%
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 735,592 34,113 4.64% 651,944 30,445 4.67% 554,771 25,185 4.54%
------- ------- -------
<PAGE>
NON-INTEREST-BEARING LIABILITIES
Demand deposits 83,833 72,968 68,621
Other liabilities 5,264 5,303 3,988
Shareholders' equity 83,761 73,031 66,662
-------- -------- --------
Total liabilities and share-
holders' equity $908,450 $803,246 $694,042
======== ======== ========
NET INTEREST INCOME $35,209 $33,495 $30,489
======= ======= =======
NET INTEREST INCOME AS A PERCENT
OF INTEREST-EARNING ASSETS 4.17% 4.47% 4.69%
===== ===== =====
<FN>
<F1> Nonaccrual loans are included in the daily average loans outstanding for purposes of this calculation. See Note 1 to
the Consolidated Financial Statements regarding recognition of loan fee income. Included in interest on loans are fees
in the amount of $1,000,000, $1,098,000 and $667,000 for 1998, 1997 and 1996, respectively.
<F2> Yields are computed on a fully tax-equivalent basis using a federal income tax rate of 34 percent for all years presented
</FN>
</TABLE>
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NET INTEREST MARGIN
The net interest margin is calculated by dividing net interest income (FTE)
by average earning assets. Management continually monitors Shoreline's
balance sheet and employs other methods of analysis to protect net interest
income from fluctuations caused by interest rate volatility. These methods
have produced net interest margins of 4.17%, 4.47% and 4.69% for 1998, 1997
and 1996, respectively. The net interest margin for 1998 was lower than
1997's margin as the lower interest rate environment of 1998 caused both
the yields on earning assets and the rates paid on interest bearing
liabilities to decline. For 1997 compared with 1996, the net interest
margin was negatively impacted by the acquisition of SJS Bancorp. SJS,
like many thrift institutions, had a net interest margin substantially
below that of the commercial banking industry due to its mix of earning
assets and rate sensitive liabilities.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the amount added to the allowance for loan
losses to absorb losses that are currently anticipated. The loan loss
provision is based on historical loss experience and such other factors,
which, in management's judgment, deserve current recognition in maintaining
an adequate allowance for loan losses. The provision for loan losses was
$600,000 for 1998, 1997 and 1996. Continued overall strength in asset
quality measures along with another year of relatively modest levels of net
charge-offs helped to support the consistent level of provision for loan
losses. At year-end 1998, the ratio of the allowance for loan losses to
non-performing loans was strong at 423% compared with year end 1997's ratio
of 350%. The same ratio for year end 1996 was 424%.
Additional information on the provision for loan losses, net charge-offs
and non-performing assets is provided in Tables IX and XII presented later
in this discussion
OTHER INCOME
Non-interest income for 1998 was 33.9% higher than last year as gains
realized on the sale of mortgages were significantly higher than in 1997,
and fees for trust, investments and deposit services continued to grow.
For 1997 compared with 1996, non-interest income increased 31.4%. The
components of other income are shown in Table IV.
<PAGE>
<TABLE>
<CAPTION>
Table IV
YEARS ENDED DECEMBER 31 (In thousands) 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Service charges on deposit accounts $2,190 $2,081 $1,820
Trust income 1,985 1,673 1,500
Net gain on security sales 65 171 191
Net gain/(loss) on loan sales 1,633 526 (21)
Other 1,777 1,262 857
------ ------ ------
Total other income $7,650 $5,713 $4,347
====== ====== ======
</TABLE>
Service charges on deposit accounts, which increased 5.2% from 1997,
remained the largest component of non-interest income in 1998.
Trust income increased 18.6% from a year ago as trust assets under
management increased to $439.8 million from $375.5 million.
Gains on the sale of mortgages increased $1.1 million over 1997's reported
gains of $.5 million as a favorable interest rate environment kept new
originations as well as refinancings high. During 1998, $178.0 million of
mortgage loans were originated with $87.0 million being sold servicing
released and $30.2 million servicing retained. The remaining loans
originated were retained by Shoreline for its mortgage portfolio.
Other income increased 40.1% primarily from gains on the sale of other
assets, Business Manager income, ATM fees, investment services income and
insurance agency income. The Business Manager program, an accounts-
receivable management program was introduced in 1998. This product helps
cement relationships with customers while they improve their cash flows and
avoids billing hassles.
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The increase in other income for 1997 over 1996 was due primarily to gains
on the sale of loans, an 11.5% increase in trust income and a 14.3%
increase in service charge income. Other income also increased year over
year due to a higher level of mortgage loan servicing fees.
OTHER EXPENSE
Non-interest expense was up $1.9 million, or 9.0% compared with 1997. Of
this increase, approximately $.5 million was directly attributable to the
ongoing operating costs added as a result of the acquisitions made in mid
1997 and 1998. Excluding these costs from both 1998 and 1997, non-interest
expense would have increased 6.9%.
<TABLE>
<CAPTION>
Table V
YEARS ENDED DECEMBER 31 (In thousands) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Salaries $ 9,519 $ 8,970 $ 8,215
Employee benefits 2,852 2,539 2,435
Occupancy 1,613 1,459 1,329
Equipment 2,165 2,150 1,920
Insurance 345 293 572
Professional fees 1,486 1,454 1,007
Other taxes 683 620 541
Goodwill amortization 899 549 266
Other 3,890 3,487 3,148
------- ------- -------
Total other expense $23,452 $21,521 $19,433
======= ======= =======
KEY RATIOS:
Efficiency Ratio 54.83% 54.89% 56.09%
Other expense as a percent of average assets 2.58% 2.68% 2.80%
Salary and employee benefits as a percent of average assets 1.36% 1.43% 1.53%
</TABLE>
Personnel costs, the largest category of non-interest expense was up 7.5%
including the staffing costs added from acquisitions (5.0% excluding these
costs). The primary reasons for the increase was normal compensation and
fringe benefit cost adjustments, additional staff necessitated by new and
expanded business opportunities and, as mentioned, acquisitions.
Two ratios that measure internal efficiencies are the number of full time
equivalent employees per one million dollars of average assets and net
income per FTE employee. For 1998, there were .36 FTE employees per one
million dollars of average assets compared with .41 a year ago and $35,500
of net income per FTE employee versus $33,600 a year ago. These ratios
were .41 and $29,900 for 1996.
<PAGE>
The remaining categories within non-interest expense were up basically due
to acquisitions and the investments made in technology during 1998 to
better serve an expanding customer base and to resolve year 2000 issues.
The efficiency ratio measures non-interest expense as a percent of the sum
of net interest income (fully taxable equivalent) and non-interest income.
The lower the ratio, the more efficiently a company's resources produce
revenue. Table V includes the efficiency ratio over the past three years.
In 1998, the efficiency ratio was 54.83% compared with 56.09% in 1996.
This 137 basis point improvement was mainly the result of steady growth in
non-interest income.
The burden ratio measures the relationship of non-interest expense, net of
non-interest income, to average assets. The burden ratio improved 22 basis
points since 1996.
INCOME TAX EXPENSE
Income tax expense was $5.5 million for 1998 compared with $4.8 million in
1997 and $3.8 million in 1996. A summary of significant tax components is
provided in Note 11 of the Notes to Consolidated Financial Statements
included later in this document.
11
<PAGE>
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
Table VI
AVAILABLE FOR SALE AT DECEMBER 31, 1998 1997 1996
-------- -------- -------
(in thousands)
<S> <C> <C> <C>
U.S. Treasury and agencies $ 66,716 $ 55,801 $37,514
States and political subdivisions 26,489 27,710 29,895
Mortgage-backed:
U.S. Government agencies 91,658 37,636 18,816
Collateralized mortgage obligations 1,010 27 1,290
Other 4,862 4,360 2,739
-------- -------- -------
Total $190,735 $125,534 $90,254
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY AT DECEMBER 31, 1998 1997 1996
-------- -------- -------
(in thousands)
<S> <C> <C> <C>
U.S. Treasury and agencies $ 2,000 $ 13,999 $15,000
States and political subdivisions 6,472 6,883 7,664
Mortgage-backed:
U.S. Government agencies 16,431 16,939 22,129
Collateralized mortgage obligations 263 565 2,789
-------- -------- -------
Total $ 25,166 $ 38,386 $47,582
======== ======== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Table VII
AVAILABLE FOR SALE MATURING
------------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
(IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasuries $ 9,123 6.83% $ 15,365 5.95% $ 0 N/A $ 0 N/A
Agencies 0 N/A 13,073 6.10% 29,155 6.66% 0 N/A
States and political subdivisions 3,158 10.67% 6,684 9.42% 11,367 9.02% 6,873 8.17%
Mortgage-backed securities:
U.S. Government agencies 13,481 6.42% 63,827 6.42% 7,506 5.87% 5,251 6.49%
Collateralized mortgage
obligations 0 N/A 1,010 6.10% 0 N/A 0 N/A
Other 0 N/A 502 6.00% 0 N/A 4,360 8.03%
------- -------- ------- -------
Total $25,762 $100,461 $48,028 $16,484
======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY MATURING
------------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
(IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasuries $ 0 N/A $ 0 N/A $ 0 N/A $ 0 N/A
Agencies 0 N/A 0 N/A 2,000 7.92% 0 N/A
States and political subdivisions 250 9.99% 1,908 9.58% 3,106 9.47% 1,209 9.90%
Mortgage-backed securities:
U.S. Government agencies 607 6.29% 15,823 7.65% 0 N/A 0 N/A
Collateralized mortgage
obligations 263 6.07% 0 N/A 0 N/A 0 N/A
Other 0 N/A 0 N/A 0 N/A 0 N/A
------- -------- ------- -------
Total $ 1,120 $ 17,731 $ 5,106 $ 1,209
======= ======== ======= =======
</TABLE>
12
<PAGE>
At December 31, 1998, the aggregate book value of the securities of no
issuer exceeded 10% of Shoreline's shareholders' equity.
CREDIT RISK
LOAN PORTFOLIO
Shoreline's management understands that credit risk is a fundamental
element of its business. Conservative lending philosophies supported by
comprehensive policies and administrative functions help Shoreline lenders
adhere to strict credit underwriting standards. Shoreline concentrates its
lending efforts primarily in the communities in which Shoreline Bank
branches are located and maintains a diversified loan portfolio of
commercial, real estate and consumer loans. Shoreline Bank has no foreign
loans. Exposures to any single borrower, as well as industry
concentrations, are continually monitored by management.
<TABLE>
<CAPTION>
Table VIII
DECEMBER 31, (In thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
% OF % OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $264,807 41.69% $230,338 37.17% $211,953 42.34% $191,437 41.08% $179,850 41.20%
Residential real
estate mortgage 247,454 38.96% 273,241 44.10% 214,201 42.79% 194,784 41.80% 175,912 40.30%
Real estate
construction 18,169 2.86% 14,765 2.38% 10,243 2.05% 18,704 4.01% 26,679 6.11%
Consumer 104,729 16.49% 101,292 16.35% 64,194 12.82% 61,070 13.11% 54,088 12.39%
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total loans $635,159 100.00% $619,636 100.00% $500,591 100.00% $465,995 100.00% $436,529 100.00%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
Total loans, net of
allowance for loan
losses $627,276 $612,048 $493,696 $459,395 $430,577
======== ======== ======== ======== ========
</TABLE>
Shoreline's commercial portfolio is comprised primarily of loans to small
and mid-size businesses within its local markets. At December 31, 1998,
41.7% of the total loan portfolio was classified commercial, up from 37.2%
a year ago. The maturity and rate sensitivity for commercial and other
selected loan categories is presented in Table VII.
<PAGE>
At December 31, 1998, residential mortgage loans totaled $247.5 million
compared with $273.2 million at year-end 1997. The decrease was the result
of management's decision to sell more mortgages in the secondary market.
This decision was influenced in part by the borrower's preference for long
term fixed rate loans.
Consumer loans, which make up 16.5% of the total portfolio, increased $3.4
million between December 31, 1997 and December 31, 1998. Included in
consumer loans are direct and indirect auto loans, home equity loans and
other secured and unsecured personal loans.
13
<PAGE>
<TABLE>
<CAPTION>
Table IX
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------- ------------------------------------
DUE IN ONE DUE IN ONE DUE AFTER DUE IN ONE DUE IN ONE DUE AFTER
YEAR OR LESS TO FIVE YRS FIVE YRS. YEAR OR LESS TO FIVE YRS FIVE YRS.
-------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Commercial, financial and
Agricultural $46,618 $154,747 $63,442 $44,777 $133,332 $52,230
Real estate construction 8,727 2,780 6,662 8,144 6,133 488
---------------------------------- --------------------------------
Total $55,345 $157,527 $70,104 $52,921 $139,465 $52,718
================================== ================================
Loans due after one year:
with fixed rates $127,440 $32,827 $99,967 $15,260
====================== ===================
with floating rates $30,087 $37,277 $39,498 $37,458
====================== ===================
</TABLE>
ASSET QUALITY
Non-performing assets, including non-accrual loans, accruing loans past due
90 days or more, restructured loans and other real estate owned, totaled
$1.9 million or .29% of total assets. Non-performing loans were .41% and
.38% of total assets at year end 1997 and 1996, respectively. The
breakdown of non-performing assets for the past five years is detailed in
Table X.
<PAGE>
<TABLE>
<CAPTION>
Table X
DECEMBER 31, (In thousands) 1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $1,080 $1,301 $ 524 $ 235 $ 802
Accruing loans past due 90 days or more 427 868 1,104 1,204 856
Restructured loans 0 0 0 0 2
Other real estate owned 356 387 273 170 552
------ ------ ------ ------ ------
Total non-performing assets $1,863 $2,556 $1,901 $1,609 $2,212
====== ====== ====== ====== ======
AS A PERCENTAGE OF TOTAL LOANS:
Non-accrual loans 0.17% 0.21% 0.11% 0.05% 0.18%
Accruing loans past due 90 days or more 0.06% 0.14% 0.22% 0.26% 0.20%
Restructured loans 0.00% 0.00% 0.00% 0.00% 0.00%
Other real estate owned 0.06% 0.06% 0.05% 0.04% 0.13%
------ ------ ------ ------ ------
Total non-performing assets 0.29% 0.41% 0.38% 0.35% 0.51%
====== ====== ====== ====== ======
</TABLE>
If all loans had been current in accordance with their original terms
throughout the period, an additional $97,300 in pretax interest income
would have been recorded. During 1998, no interest income on non-accrual
loans was included in net income. See also Note 1 of the Notes to
Consolidated Financial Statements incorporated herein by reference.
ALLOWANCE FOR LOAN LOSSES
Management considers such factors as historical charge-off experience,
problem loan levels, current and projected economic conditions, portfolio
mix and specific loan reviews in determining its allowance for loan losses.
Quarterly, management evaluates the adequacy of the allowance for loan
losses with a detailed written analysis. Management's allocation of the
allowance for loan losses over the past five years is shown in Table XI.
The amounts indicated for each loan type include amounts allocated for
specific loans as well as general allocations.
14
<PAGE>
<TABLE>
<CAPTION>
Table XI
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
% OF % OF % OF % OF % OF
LOANS TO LOANS TO LOANS TO LOANS TO LOANS TO
TOTAL TOTAL TOTAL TOTAL TOTAL
DECEMBER 31, (In thousands) ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $1,571 41.69% $1,742 37.17% $2,491 42.34% $2,361 41.08% $2,044 41.20%
Real estate
mortgage 1,043 38.96% 1,328 44.10% 743 42.79% 698 41.80% 559 40.30%
Real estate
construction 35 2.86% 130 2.38% 115 2.05% 107 4.01% 100 6.11%
Consumer 2,090 16.49% 2,073 16.35% 1,166 12.82% 1,111 13.11% 995 12.39%
Unallocated 3,145 2,315 2,380 2,323 2,254
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total $7,884 100.00% $7,588 100.00% $6,895 100.00% $6,600 100.00% $5,952 100.00%
====== ======= ====== ======= ====== ======= ====== ======= ====== =======
</TABLE>
Net charge-offs in 1998 represented only .08% of average total loans and
marked the sixth consecutive year this ratio was below 10 basis points. The
allowance for loan losses at December 31, 1998 was $7.9 million, an
increase of $295,000 over year-end 1997. Included in the increase was the
addition of $189,000 from the acquisition of The State Bank of Coloma. At
December 31, 1998, the allowance for loan losses as a percentage of non-
performing loans was 423%. Table XII summarizes loan and allowance
information for the past five years. Information on impaired loans is
included in Note 6 of the Notes to Consolidated Financial Statements
included later in this report.
15
<PAGE>
<TABLE>
<CAPTION>
Table XII
DECEMBER 31, (In thousands) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Loans outstanding, end of period $635,159 $619,636 $500,591 $465,995 $436,529
======== ======== ======== ======== ========
Daily average of loans outstanding for
the period $620,745 $567,528 $490,200 $447,329 $428,478
======== ======== ======== ======== ========
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $7,588 $6,895 $6,600 $5,952 $5,586
Additions from acquisition 189 540 0 0 0
Charge-offs:
Commercial, financial and agricultural 121 379 240 151 391
Real estate mortgage 67 535 35 70 105
Real estate construction 0 0 0 0 0
Consumer 602 44 318 271 517
-------- -------- -------- -------- --------
Total charge-offs 790 958 593 492 1,013
-------- -------- -------- -------- --------
Recoveries:
Commercial, financial and agricultural 33 302 97 200 367
Real estate mortgage 46 184 57 14 0
Real estate construction 0 0 0 0 0
Consumer 217 25 134 176 262
-------- -------- -------- -------- --------
Total recoveries 296 511 288 390 629
-------- -------- -------- -------- --------
Net charge-offs 494 447 305 102 384
-------- -------- -------- -------- --------
Provision charged to income 600 600 600 750 750
-------- -------- -------- -------- --------
Balance at end of period $7,883 $7,588 $6,895 $6,600 $5,952
======== ======== ======== ======== ========
<PAGE>
KEY RATIOS:
Net charge-offs to average loans 0.08% 0.08% 0.06% 0.02% 0.09%
Recoveries to total charge-offs 37.39% 53.30% 48.57% 79.27% 62.09%
Allowance to total loans at end of period 1.24% 1.22% 1.38% 1.42% 1.36%
Allowance to total non-performing loans
at end of period 423.13% 349.84% 423.52% 458.65% 358.55%
Provision to average loans 0.10% 0.11% 0.12% 0.17% 0.17%
</TABLE>
16
<PAGE>
FUNDING, LIQUIDITY AND INTEREST RATE RISK
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital or the sale of assets. Funding
is achieved through growth in deposits and accessibility to the money and
capital markets.
DEPOSITS
Shoreline's primary source of funding is its deposits. The average deposit
balances outstanding and the rates paid on those deposits for the three
years ended December 31, 1998 are presented as part of Table II, appearing
earlier in this document.
The time remaining until maturity of time certificates of deposit of
$100,000 or more at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Table XIII
--------------------------------------------------------------
TIME UNTIL MATURITY (IN THOUSANDS)
--------------------------------------------------------------
<S> <C> <C>
Three months or less $ 65,269
Over three through six months 13,755
Over six through twelve months 11,627
Over twelve months 15,519
--------
Total $106,170
========
</TABLE>
In addition to deposits, Shoreline's sources of funding include both short
and long term debt. Additional information regarding Shoreline's debt is
included in Note 10 of the Notes to Consolidated Financial Statements
included later in this document.
17
<PAGE>
ASSET/LIABILITY MANAGEMENT
Asset/liability management involves developing, implementing and monitoring
strategies to maintain sufficient liquidity, maximize net interest income
and minimize the impact significant fluctuations in market interest rates
have on earnings. Shoreline's Asset/Liability Committee is responsible for
managing this process. Much of this committee's efforts are focused on
minimizing Shoreline's sensitivity to changes in interest rates. One
method of gauging sensitivity is a static gap analysis. Shoreline's static
gap position at December 31, 1998 is shown in Table XIV.
<TABLE>
<CAPTION>
Table XIV
REPRICEABLE OR MATURING WITHIN:
-------------------------------
0-90 91-365 1 to 5 Over 5
(In thousands) Days Days Years Years Total
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 24,557 $ 85,832 $ 324,020 $200,750 $635,159
Securities 2,608 24,274 118,193 70,827 215,902
Federal funds sold 15,775 0 0 0 15,775
Interest-earning deposits 20,301 0 0 0 20,301
------------------------------------------------------------------
Total interest-earning assets 63,241 110,106 442,213 271,577 887,137
------------------------------------------------------------------
Interest-bearing liabilities:
Time deposits $ 109,219 $ 142,201 $ 116,503 $ 158 $368,081
Demand and savings accounts 334,610 0 0 0 334,610
Other 21,191 0 18,478 28,000 67,669
------------------------------------------------------------------
Total interest-bearing liabilities 465,020 142,201 134,981 28,158 770,360
------------------------------------------------------------------
Asset(liability) gap $(401,779) $ (32,095) $ 307,232 $243,419 $116,777
==================================================================
Cumulative asset(liability) gap $(401,779) $(433,874) $(126,642) $116,777
==================================================================
</TABLE>
At December 31, 1998, Shoreline had a cumulative liability gap position of
$433.9 million within the one-year time frame. This position suggests that
if market interest rates decline in the next 12 months, Shoreline has the
potential to earn more net interest income. A limitation of the
traditional static gap analysis, however, is that it does not consider the
timing or magnitude of noncontractual repricing. In addition, the static
<PAGE>
gap analysis treats demand and savings accounts as repriceable within 90
days, while experience suggests that these categories of deposits are
actually comparatively resistant to rate sensitivity. Because of these and
other limitations of the static gap analysis, Shoreline's Asset/Liability
Committee utilizes simulation modeling as its primary tool to project how
changes in interest rates will impact net interest income. These models
indicate, and management believes, Shoreline is properly positioned against
significant changes in rates without severely altering operating results.
However, management recognizes that, at the present time, Shoreline's net
interest margin may decline slightly under either a modest increase or
decrease in interest rates from the current levels. As discussed
elsewhere, Shoreline's net interest margin was negatively impacted by the
decline in interest rates experienced during 1998.
INTEREST RATE RISK
Shoreline's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of Shoreline's transactions are
denominated in U.S. dollars with no specific foreign exchange exposure.
Shoreline has only limited agricultural loan assets and, therefore, has no
significant exposure to changes in commodity prices. Any impact that
changes in foreign exchange rate and commodity prices would have on
interest rates is assumed to be insignificant.
Interest rate risk (IRR) is the exposure of a banking organization's
financial condition to adverse movements in interest rates. Accepting the
risk can be an important source of profitability and shareholder value,
however, excessive levels of IRR could pose a significant threat to
Shoreline's earnings and capital base. Accordingly, effective risk
management that maintains IRR at prudent levels is essential to Shoreline's
safety and soundness.
18
<PAGE>
Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process used to
control IRR and the organization's quantitative level of exposure. When
assessing the IRR management process, Shoreline seeks to ensure that
appropriate policies, procedures, management information systems and
internal controls are in place to maintain IRR at prudent levels with
consistency and continuity. Evaluating the quantitative level of IRR
exposure requires Shoreline to assess the existing and potential future
effects of changes in interest rates on its consolidated financial
condition, including capital adequacy, earnings, liquidity, and, where
appropriate, asset quality.
Various techniques may be used by an institution to measure and manage IRR.
Recognizing the limitations of static gap analysis, Shoreline utilizes
simulation analysis as the primary method of measuring its interest rate
risk. These simulation techniques involve changes in interest rate
relationships and levels on all interest rate sensitive assets and
liabilities, prepayment assumptions inherent in financial instruments, as
well as changes in interest rate levels in order to quantify risk potential.
Table XV illustrates the projected change in Shoreline's net interest
income during the next twelve months if all market rates were to uniformly
and gradually increase or decrease by as much as 2.0% (over the same time
period) compared to results under a flat rate environment. These
projections, based on Shoreline's balance sheet as of December 31, 1998,
were prepared using the simulation analysis model and assumptions that
Shoreline was using for asset/liability management purposes. As of this
date, Shoreline had no derivative financial instruments, or trading
portfolio. The table indicates that if rates were to gradually and
uniformly increase or decrease by 2.0%, net interest income would be
expected to remain essentially flat under a rising rate scenario and
increase by 2.7% under a declining rate scenario compared to results
forecasted under a current rate environment. This relatively modest
projected exposure to interest rate risk is consistent with management's
desire to limit the sensitivity of net interest income to changes in
interest rates in order to reduce risk to earnings. The model is based
solely on gradual, uniform changes in market rates and does not reflect the
levels of interest rate risk that may arise from other factors such as
changes in the spreads between key market rates or in the shape of the
treasury yield curve. The expected maturity date values for loans
receivable, mortgage-backed securities, and investment securities were
calculated by adjusting the instrument's contractual maturity date for
expectations of prepayments and call dates. Expected maturity date values
for interest-bearing core deposits were not based upon estimates of the
period over which the deposits would be outstanding, but rather the
opportunity for repricing. Similarly, with respect to its variable rate
instruments, Shoreline believes that repricing dates, as opposed to
expected maturity dates may be more relevant in analyzing the value of such
<PAGE>
instruments. Borrowings from the FHLB are reported based on repricing
dates if variable rate in nature.
<TABLE>
<CAPTION>
Table XV
Projected Effect on Net Interest Income
(In thousands)
DECREASE IN INCREASE IN
DECEMBER 31, 1998 EXISTING FLAT RATE RATE RATE
---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Change in Interest Rate from
current (existing) level N/A 0.0% -2.0% 2.0%
Net interest income $35,209 $36,621 $36,177 $35,202
% Change in net interest
income from existing level N/A 4.0% 2.7% N/A
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
DECREASE IN INCREASE IN
DECEMBER 31, 1997 EXISTING FLAT RATE RATE RATE
---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Change in Interest Rate from
current (existing) level N/A 0.00% (2.00)% 2.00%
Net interest income $33,134 $32,644 $32,742 $32,268
% Change in net interest
income from existing level N/A (1.5)% (1.2)% (2.6)%
</TABLE>
For comparison purposes, Table XV also presents the comparable simulation
analysis as of December 31, 1997. This comparison suggests that Shoreline
is somewhat more sensitive to a decrease in rates, but considerably less
sensitive to an increase in rates, at December 31, 1998 than at
December 31, 1997.
Shoreline is also subject to liquidity risk. Certain portions of an
institution's liabilities may be short-term or due on demand, while most of
its assets may be invested in long-term loans or investments. Accordingly,
Shoreline seeks to have in place sources of cash to meet short-term
demands. These funds can be obtained by increasing deposits, borrowings,
or selling assets. Also, Federal Home Loan Bank (FHLB) advances and short-
term borrowings provide additional sources of liquidity for Shoreline.
CAPITAL RESOURCES
At December 31, 1998, total equity capital of Shoreline was $87.2 million.
This includes an unrealized gain of $1.7 million for Shoreline's available
for sale securities portfolio. Total equity capital was $76.9 million at
December 31, 1997 with an unrealized gain of $1.6 million from available
for sale securities. During 1998, Shoreline issued 242,299 shares for the
purchase of The State Bank of Coloma and retired 166,102 shares under its
current repurchase program.
Management monitors its capital levels to comply with regulatory
requirements and to provide for current and future business opportunities.
As shown in Table XVII, Shoreline's capital ratios were well in excess of
regulatory standards for classification as "well-capitalized." Being
considered "well-capitalized" is one condition for being assessed insurance
premiums by the Federal Deposit Insurance Corporation at its lowest
available rate.
<PAGE>
<TABLE>
<CAPTION>
Table XVI
REGULATORY WELL-
DECEMBER 31 MINIMUM CAPITALIZED 1998 1997 1996
------- ----------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Risk based:
Tier I capital 4.00% 6.00% 12.3% 11.9% 15.1%
Total capital 8.00% 10.00% 13.5% 13.1% 16.3%
Tier I leverage 4.00% 5.00% 7.6% 8.0% 9.3%
</TABLE>
CASH DIVIDENDS
Cash dividends paid increased 15.8% to $.66 per share in 1998. 1997's cash
dividends totaled $.57 per share, an increase of 14.0% over 1996. Table
XVIII summarizes the quarterly cash dividends per share paid to common
shareholders during the last three years, adjusted for stock dividends and
stock splits.
20
<PAGE>
<TABLE>
<CAPTION>
Table XVII
Quarter 1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
1st $0.16 $0.14 $0.12
2nd 0.16 0.14 0.12
3rd 0.17 0.14 0.13
4th 0.17 0.15 0.13
----- ----- -----
Total $0.66 $0.57 $0.50
===== ===== =====
</TABLE>
Shoreline's principal source of funds to pay cash dividends is the earnings
of its subsidiary bank. State and federal laws and regulations limit the
amount of dividends that banks can pay. Cash dividends are dependent upon
the earnings, capital needs, regulatory constraints and other factors
affecting the bank. Based on projected earnings, management expects
Shoreline to declare and pay regular quarterly dividends on its common
shares in 1999.
IMPACT OF INFLATION
Reported earnings are affected by inflation, indirectly through changing
interest rates, and directly by increased operating expenses. However, in
the opinion of management, the effects of general price level inflation
have not had a material effect on the information presented in this report.
YEAR 2000 READINESS DISCLOSURE
STATE OF READINESS
Shoreline does not develop or write its own software systems and programs.
It utilizes off-the-shelf systems developed by third-party vendors. In
addition, it relies on third-party vendors for various hardware and other
services in executing daily operations. A total inventory of all third-
party systems and services has been prepared. Using this inventory,
Shoreline has asked for and received responses from all third-party
software, hardware and service providers as to their Year 2000 readiness
and an assessment of those responses has been completed. In the majority
of cases, Shoreline's vendors have indicated their systems or services to
be Year 2000 compliant. Shoreline has successfully completed its first
phase of testing on its mainframe software system, and believes that the
favorable response received from the third-party provider was appropriate.
During the first quarter of 1999, testing of other systems management
considered critical to its state of readiness was completed satisfactorily.
<PAGE>
COSTS
Shoreline has incurred expenses throughout 1998 related to this project and
will continue to incur expenses over the next year. Based on available
information, these expenses are not expected to have a materially adverse
impact on operating results, financial condition, or liquidity. Existing
staff that has been redeployed represents a significant portion of these
expenses to this project. Through December 31, 1998, total expenses
accrued for remediation and testing relating to the Year 2000 issue were
$67,000. Estimates of incremental costs for remediation over the remaining
period of this project is projected to be between $300,000 and $400,000,
which will be recorded as expense when and as accrued.
RISKS
Shoreline believes its management has taken, and will continue to take, all
prudent actions needed to address Year 2000 issues. In addition, it is
acting to comply with directives provided by its regulators with respect to
Year 2000 and has received on-site examinations from its regulators to
determine its readiness. While management anticipates successful
implementation of its Year 2000 Readiness Plan and believes its current
estimates of cost reasonable, it can not guarantee actual results will not
materially differ from those anticipated, and it can not assure that all
third parties upon which Shoreline relies will not have business
interruptions due to Year 2000 issues.
CONTINGENCY PLANS
Shoreline currently has a disaster recovery plan for its information
technology system. Additional contingency plans for other mission critical
or high risk systems not covered in the current Disaster Recovery Plan are
expected to be completed by April 30, 1999.
21
<PAGE>
In addition to reviewing its own computer operating systems and
applications, Shoreline has initiated formal communications with its
significant suppliers and large customers to determine the extent to which
Shoreline's interface systems are vulnerable to those third parties'
failure to resolve their Year 2000 issues. There is no assurance that the
systems of other companies on which Shoreline's systems rely will be timely
converted. If such modifications and conversions are not made, or are not
completed in a timely manner, the Year 2000 issue could have an adverse
impact on the operations of Shoreline.
The costs of the project and the date on which Shoreline believes it will
complete the Year 2000 modifications are based on management's best
estimates. There can be no guarantee that these estimates will be achieved
and actual results could differ from those anticipated. Specific factors
that might cause differences include, but are not limited to, the ability
of other companies on which Shoreline's systems rely to modify or convert
their systems to be Year 2000 compliant, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
This Year 2000 Readiness Disclosure is based upon and partially repeats
information provided by Shoreline's outside consultants, vendors and others
regarding the Year 2000 readiness of Shoreline and its customers, vendors
and other parties. Although Shoreline believes this information to be
accurate, it has not in each case independently verified such information.
The Year 2000 statements contained in this report and in other reports and
materials filed with the Securities and Exchange Commission by Shoreline
are "Year 2000 Readiness Disclosures" under the Year 2000 Information and
Readiness Disclosure Act
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information presented under the subcaptions "Asset/Liability
Management" and "Interest Rate Risk" in "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" is
incorporated herein by reference.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of Shoreline's consolidated
financial statements and related information appearing in this annual
report. Management believes that the consolidated financial statements
fairly reflect the form and substance of transactions and that the
financial statements reasonably present Shoreline's financial position and
results of operations and was prepared in conformity with generally
accepted accounting principles. Management also has included in
Shoreline's financial statements amounts that are based on estimates and
judgments that management believes are reasonable under the circumstances.
Shoreline maintains a system of internal controls designed to provide
reasonable assurance that all assets are safeguarded and financial records
are reliable for preparing the consolidated financial statements. Shoreline
complies with laws and regulations relating to safety and soundness which
are designated by the FDIC and other appropriate federal banking agencies.
The selection and training of qualified personnel and the establishment and
communication of accounting and administrative policies and procedures are
elements of this control system. The effectiveness of internal controls is
monitored by an internal audit program and annual review by our independent
certified public accountants. Management recognizes that the cost of a
system of internal controls should not exceed the benefits derived and that
there are inherent limitations to be considered in the potential
effectiveness of any system. Management believes that Shoreline's system
provides the appropriate balance between costs of controls and the related
benefits.
The independent auditors have audited Shoreline's consolidated financial
statements in accordance with generally accepted auditing standards to
provide an objective, independent review of the fairness of the reported
operating results and financial position. The Board of Directors of
Shoreline has an Audit Committee composed of four non-management Directors.
The Committee meets periodically with the internal auditors and the
independent auditors.
s/ Dan L. Smith s/ Wayne R. Koebel
Dan L. Smith Wayne R. Koebel
Chairman, President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
<PAGE>
REPORT OF INDEPENDENT AUDITORS
SHAREHOLDERS AND BOARD OF DIRECTORS
SHORELINE FINANCIAL CORPORATION
BENTON HARBOR, MICHIGAN
We have audited the accompanying consolidated balance sheets of SHORELINE
FINANCIAL CORPORATION as of December 31, 1998 and 1997 and the related
consolidated statements of income, comprehensive income, shareholders'
equity and cash flows for the years ended December 31, 1998, 1997 and 1996.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
SHORELINE FINANCIAL CORPORATION as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for the years ended
December 31, 1998, 1997 and 1996 in conformity with generally accepted
accounting principles.
s/ Crowe Chizek and Company LLP
South Bend, Indiana Crowe Chizek and Company LLP
February 12, 1999
23
<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31 1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 35,813,823 $ 29,961,993
Interest-earning deposits 20,300,564 6,344,447
Federal funds sold 15,775,000 8,675,000
------------ ------------
Total cash and cash equivalents 71,889,387 44,981,440
Securities available for sale (carried at fair value) 190,735,213 125,534,904
Securities held to maturity (fair values of $26,180,495
and $39,572,300 in 1998 and 1997, respectively) 25,166,431 38,385,568
Loans, net of allowance for loan losses
($7,882,967-1998;$7,588,127-1997) 627,276,457 612,048,028
Premises and equipment, net 13,728,130 13,560,859
Intangible assets, net 14,928,455 11,901,520
Other assets 11,540,291 11,430,483
------------ ------------
Total Assets $955,264,364 $857,842,802
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest-bearing $ 93,151,433 $ 78,971,373
Interest-bearing 702,690,404 643,692,981
------------ ------------
Total deposits 795,841,837 722,664,354
Securities sold under agreements to repurchase 18,191,030 7,526,582
Federal Home Loan Bank (FHLB) Advances 49,478,214 45,175,892
Other liabilities 4,542,157 5,593,571
------------ ------------
Total Liabilities 868,053,238 780,960,399
------------ ------------
<PAGE>
Shareholders' Equity
Preferred stock, no par value; 1,000,000 shares authorized;
none issued or outstanding 0 0
Common stock; no par value, 15,000,000 shares authorized in 1998
and 10,000,000 in 1997; 9,056,769 and 8,882,264 issued and
Outstanding at December 31, 1998 and 1997, respectively 0 0
Additional paid-in capital 69,759,199 65,273,177
Unearned stock incentive plan shares (903,119) (495,095)
Unrealized gain on securities available for sale, net 1,717,608 1,604,270
Retained earnings 16,637,438 10,500,051
------------ ------------
Total Shareholders' Equity 87,211,126 76,882,403
------------ ------------
Total Liabilities and Shareholders' Equity $955,264,364 $857,842,802
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $53,933,701 $50,361,000 $43,646,323
Securities:
Taxable 10,171,094 8,586,235 7,357,686
Tax-exempt 1,961,239 2,211,790 2,361,306
Federal funds sold 447,620 456,747 423,787
Deposits with banks 1,610,616 1,022,486 480,410
----------- ----------- -----------
Total interest income 68,124,270 62,638,258 54,269,512
----------- ----------- -----------
INTEREST EXPENSE
Deposits 30,490,714 28,188,914 24,237,818
Short-term borrowings 599,503 327,422 216,501
FHLB advances 3,042,848 1,928,503 731,463
----------- ----------- -----------
Total interest expense 34,133,065 30,444,839 25,185,782
----------- ----------- -----------
NET INTEREST INCOME 33,991,205 32,193,419 29,083,730
Provision for loan losses 600,000 600,000 600,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 33,391,205 31,593,419 28,483,730
----------- ----------- -----------
OTHER INCOME
Service charges on deposit accounts 2,190,194 2,080,888 1,819,736
Trust fees 1,985,026 1,673,189 1,500,147
Net gain on security sales 64,913 171,373 190,717
Net gain/(loss) on loan sales 1,633,430 525,549 (20,618)
Other 1,776,754 1,262,033 857,037
----------- ----------- -----------
Total other income 7,650,317 5,713,032 4,347,019
----------- ----------- -----------
<PAGE>
OTHER EXPENSES
Salaries and employee benefits 12,371,335 11,509,005 10,650,227
Occupancy 1,613,138 1,458,661 1,328,968
Equipment 2,164,888 2,149,917 1,920,303
Insurance 345,242 293,045 572,090
Professional fees 1,485,430 1,454,412 1,006,897
Other taxes 683,093 619,819 540,738
Amortization of intangibles 899,346 548,736 265,782
Other 3,889,086 3,487,387 3,148,092
----------- ----------- -----------
Total other expenses 23,451,558 21,520,982 19,433,097
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 17,589,964 15,785,469 13,397,652
FEDERAL INCOME TAX EXPENSE 5,476,250 4,774,200 3,792,223
----------- ----------- -----------
NET INCOME $12,113,714 $11,011,269 $ 9,605,429
=========== =========== ===========
BASIC EARNINGS PER SHARE $ 1.35 $ 1.25 $ 1.10
=========== =========== ===========
DILUTED EARNINGS PER SHARE $ 1.34 $ 1.24 $ 1.10
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
25
<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET INCOME $12,113,714 $11,011,269 $ 9,605,429
Other comprehensive income:
Unrealized gains/losses on securities arising
During the year 106,811 170,965 (1,375,681)
Reclassification adjustment for accumulated
Gains/losses included in net income 64,913 171,373 190,717
Tax effect (58,386) (116,395) 402,888
----------- ----------- -----------
Other comprehensive income 113,338 225,943 (782,076)
----------- ----------- -----------
COMPREHENSIVE INCOME $12,227,052 $11,237,212 $ 8,823,353
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
NET UNREALIZED
UNEARNED GAIN/(LOSS) ON
ADDITIONAL STOCK SECURITIES
PAID-IN INCENTIVE AVAILABLE FOR RETAINED
THREE YEARS ENDED DECEMBER 31, 1998 CAPITAL PLAN SHARES SALE EARNINGS TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $50,147,966 $ - $2,160,403 $12,051,474 $64,359,843
Net income for year 9,605,429 9,605,429
Cash dividends declared:
$0.50 per common share (4,368,023) (4,368,023)
5% stock dividend-fractional shares 5,629,933 (5,637,558) (7,625)
Shares issued under dividend reinvestment plan 824,889 824,889
Shares issued under stock option plan 140,490 140,490
Change in unrealized gain on securities available
for sale, net of tax effect (782,076) (782,076)
Common stock retired (354,725) (354,725)
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 56,388,553 0 1,378,327 11,651,322 69,418,202
Net income for year 11,011,269 11,011,269
Cash dividends declared: (5,008,864) (5,008,864)
$0.57 per common share
5% stock dividend-fractional shares 7,144,743 (7,153,676) (8,933)
Shares issued under dividend reinvestment plan 981,292 981,292
Shares issued under stock option plan 152,339 152,339
Shares awarded under stock incentive plan 606,250 (606,250) 0
Shares earned under stock incentive plan 111,155 111,155
Change in unrealized gain on securities available for 225,943 225,943
sale, net of tax effect
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 65,273,177 (495,095) 1,604,270 10,500,051 76,882,403
Net income for year 12,113,714 12,113,714
Cash dividends declared:
$0.66 per common share (5,970,946) (5,970,946)
Three-for-two stock split-fractional shares (5,381) (5,381)
Shares issued under dividend reinvestment plan 1,275,831 1,275,831
Shares issued under stock option plan 81,157 81,157
Shares awarded under stock incentive plan 570,000 (570,000) -
Shares earned under stock incentive plan 161,976 161,976
Shares issued for The State Bank of Coloma 7,000,000 7,000,000
<PAGE>
Change in unrealized gain on securities available
for sale, net of tax effect 113,338 113,338
Common stock retired (4,440,966) (4,440,966)
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $69,759,199 $(903,119) $1,717,608 $16,637,438 $87,211,126
======================================================================
</TABLE>
See accompanying notes to consolidated financial statements
27
<PAGE>
<TABLE>
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
NET INCOME $ 12,113,714 $11,011,269 $ 9,605,429
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 1,644,655 1,596,601 1,495,103
Provision for loan losses 600,000 600,000 600,000
Stock incentive expense 161,976 111,155 0
Net amortization and accretion on securities 345,296 229,778 534,548
Amortization of goodwill and related core deposit intangibles 899,346 548,736 265,782
(Gain)/loss on sales, calls and maturities of securities (64,913) (171,373) (190,717)
Mortgage loans originated for sale (121,254,675) (39,750,896) (17,241,221)
Proceeds from sale of mortgage loans 118,692,008 39,020,657 19,428,338
(Gain)/loss on sale of mortgage loans (1,633,430) (525,549) 26,895
Gains on sale of credit card and student loan portfolios 0 0 (6,277)
Increase in other assets (165,022) (919,753) (222,147)
Increase in other liabilities (1,320,911) (871,018) 210,464
------------ ----------- -----------
NET CASH FROM OPERATING ACTIVITIES 10,018,044 10,879,607 14,506,197
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (1,561,314) (5,524,670) (37,664,188)
Proceeds from sale of credit card and student loan portfolios 0 0 424,687
Securities available for sale:
Purchase (104,117,621) (46,455,854) (20,049,790)
Proceeds from sales 3,241,013 17,796,416 9,843,773
Proceeds from maturities, calls and principal reductions 44,951,428 22,604,556 21,453,835
Securities held to maturity:
Purchase (4,954,285) (4,276,335) (13,682,208)
Proceeds from maturities, calls and principal reductions 18,128,284 13,433,846 10,404,637
Premises and equipment expenditures (1,510,178) (2,008,722) (2,326,735)
Net cash (paid)/received in acquisitions 7,389,275 (20,436,447) 0
------------ ----------- -----------
NET CASH FROM INVESTING ACTIVITIES (38,433,398) (24,867,210) (31,595,989)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 49,416,835 (4,555,726) 24,177,513
Net increase in securities sold under agreements to repurchase 10,664,448 360,019 2,475,745
Proceeds from FHLB advances 30,000,000 19,500,000 13,000,000
Repayment of FHLB advances (25,697,678) (14,009,754) 0
Dividends paid (5,976,327) (5,008,864) (4,368,023)
<PAGE>
Proceeds from shares issued 1,356,989 1,124,698 957,754
Payments to retire common stock (4,440,966) 0 (354,725)
------------ ----------- -----------
NET CASH FROM FINANCING ACTIVITIES 55,323,301 (2,589,627) 35,888,264
------------ ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 26,907,947 (16,577,230) 18,798,472
Cash and cash equivalents at beginning of year 44,981,440 61,558,670 42,760,198
------------ ----------- -----------
Cash and cash equivalents at end of year $ 71,889,387 $44,981,440 $61,558,670
============ =========== ===========
CASH PAID DURING THE YEAR FOR:
Interest $ 34,051,885 $30,151,004 $25,174,339
Income taxes $ 5,935,000 $ 4,677,000 $ 3,777,000
</TABLE>
See accompanying notes to consolidated financial statements
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
The accounting and reporting policies and practices of Shoreline Financial
Corporation and its subsidiaries conform with generally accepted accounting
principles. Significant accounting and reporting policies employed in the
preparation of these financial statements are described below.
NATURE OF BUSINESS AND INDUSTRY SEGMENTS
Shoreline Financial Corporation is a single bank holding company.
Shoreline's business is concentrated in the commercial banking industry
segment. Since the business of commercial and retail banking accounts for
more than 90% of its revenues, operating income and assets, and internal
financial information is primarily reported and aggregated along this line
of business, no special segment reporting has been presented. Shoreline's
subsidiary bank, Shoreline Bank, offers individuals, businesses,
institutions and government agencies a full range of commercial banking
services primarily in the southwestern Michigan communities in which the
bank is located and in areas immediately surrounding these communities.
Shoreline Bank grants commercial, real estate and consumer loans to
customers. The majority of these loans are secured by residential
properties; however, other business and consumer assets are sometimes used
to collateralize loans. Shoreline Bank has no foreign loans.
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," after elimination of significant
inter-company accounts and transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements. Actual results could differ from these
estimates.
SECURITIES
Shoreline designates an investment security as held to maturity or
available for sale at the time of acquisition. The held to maturity
classification includes securities, which are carried at amortized cost,
that the company has the positive intent and ability to hold to maturity.
These securities are written down to fair value only when a decline in fair
<PAGE>
value is considered not temporary. The available for sale classification
includes securities which are carried at estimated fair value. Unrealized
gains or losses on securities available for sale are reported in other
comprehensive income and are included as a separate component of
shareholders' equity, net of tax. Realized gains or losses on the sale of
securities are recognized by the specific identification method and
recorded in investment securities gains, net.
Securities included as trading account assets are held to benefit from
short-term changes in market prices and carried at market value. Gains or
losses on trading account activities, including market value adjustments,
are reported as trading account profits/losses.
LOANS HELD FOR SALE
Loans originated with the intent to sell are carried at the lower of cost
or estimated market in the aggregate. Net unrealized losses are provided
for in a valuation allowance created through charges to operating income.
LOANS
Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, the allowance for loan losses and charge-offs.
Interest on loans is accrued over the term of the loans based on the
principal amount outstanding and includes amortization of net deferred loan
fees and costs over the loan term. Interest income is not reported when
full loan repayment is in doubt (typically when payments are past due 90
days or more) unless the loan is both well secured and in the process of
collection. Payments received on such loans are reported as principal
reductions.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of
similar nature such as residential mortgage and consumer loans and on an
individual loan basis for other loans. If a loan is impaired, a portion of
the allowance is allocated so that the loan is
29
<PAGE>
reported net, at the present value of estimated future cash flows using the
loan's existing rate or at the fair value of the underlying collateral if
repayment is expected solely from the collateral. Loans are evaluated for
impairment when payments are delayed, 90 days or more, or when it is probable
that all principal and interest amounts will not be collected according to the
original terms of the loan.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation allowance for probable credit
losses, increased by the provision for loan losses and decreased by charge-
offs less recoveries. Estimating the risk of loss and the amount of loss
on any loan is necessarily subjective. Accordingly, management estimates
the allowance balance required based on past loan loss experience, known
and inherent risks in the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
such factors. Allocations of the allowance may be made for specific loans,
but the entire allowance is available for any loan that, in management's
judgment, should be charged-off. A problem loan is charged-off by
management as a loss when it is deemed uncollectible, although collection
efforts continue and future recoveries may occur.
MORTGAGE SERVICING RIGHTS
Servicing rights represent both purchased rights and the allocated value of
servicing rights retained on loans sold. Servicing rights are amortized in
proportion to, and over the period of, the estimated net servicing
revenues. Impairment is evaluated based on the fair value of the rights,
using groupings of the underlying loans as to interest rates and then,
secondarily, as to geographic and prepayment characteristics. Any
impairment of a grouping is reported as a valuation allowance.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed using a combination of straight-
line and accelerated methods with useful lives ranging from 10 to 40 years
for bank premises, and 3 to 10 years for furniture and equipment. These
assets are reviewed for impairment when events indicate their carrying
amount may not be recoverable from future undiscounted cash flows.
Maintenance, repairs and minor alterations are charged to current
operations as expenditures occur. Major improvements are capitalized. The
carrying values of Shoreline's long-lived assets are periodically evaluated
for impairment. At December 31, 1998, no impairment write-downs were
deemed necessary.
OTHER REAL ESTATE
Other real estate represents properties acquired in collection of a loan
through foreclosure or acceptance of a deed in lieu of foreclosure. Other
real estate owned is reported in other assets and is recorded at the lower
of cost or estimated fair value less estimated costs to sell the property.
<PAGE>
Any write-down of the loan balance to fair value when the property is
acquired is charged to the allowance for possible loan losses. Subsequent
market write-downs, operating expenses, and gains or losses on the sale of
other real estate owned are charged or credited to other operating expense.
Other real estate amounted to $356,000 and $387,000 at December 31, 1998
and 1997, respectively.
INTANGIBLES
Goodwill is the excess of the purchase price over identified net assets in
business acquisitions and is amortized, using the straight-line method,
over no more than 25 years. Core deposit intangibles, which represent the
value of purchased depositor relationships, are amortized using an
accelerated method over 10 years. Goodwill and core deposit intangibles
are periodically assessed for impairment based on estimated undiscounted
cash flows. Goodwill was $11,479,000 and $8,812,000, and core deposit
intangibles were $3,449,000 and $3,089,000 at December 31, 1998 and 1997,
respectively.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase represent amounts advanced
by customers, and are secured by securities owned, as they are not covered
by federal deposit insurance.
30
<PAGE>
EMPLOYEE BENEFITS
Shoreline has a noncontributory pension plan covering substantially all of
its employees. It funds the plan based on annual actuarial computations.
Expense for this plan is reported by spreading the expected contributions
to the plan less long-term earnings on plan assets over the employees'
service period. In addition, Shoreline has a profit sharing plan and
401(k) salary reduction plan for which contributions are made and expensed
annually. Also, Shoreline has a post-retirement health care plan that
covers both salaried and nonsalaried employees. Retiree contributions
approximate the premium expense determined exclusively on the loss
experience of the retirees in the plan.
Expense for employee compensation under stock option plans is reported only
if options are granted below market price on the grant date. Additional
stock option information is presented in Note 12, Employee Benefits.
INCOME TAXES
Income tax expense is based on 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 financial statement
carrying amounts of existing assets and liabilities and their respective
tax basis, using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents includes
cash on hand, demand deposits and interest-earning deposits in other
institutions, and federal funds sold with a maturity of 90 days or less.
Net cash flows are reported for customer loan and deposit transactions and
securities sold under agreements to repurchase.
COMPREHENSIVE INCOME
Comprehensive income consists of net income and unrealized gains and losses
on securities available for sale, which are also recognized as a separate
component of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information
restated for comparability.
RECLASSIFICATIONS
Some items in prior financial statements have been reclassified to conform
to the current presentation.
NOTE 2. ACQUISITIONS
In June 1997, Shoreline completed the acquisition of SJS Bancorp, Inc. and
its principal subsidiary, St Joseph Savings and Loan, located in St.
Joseph, Michigan for approximately $24.8 million in cash. The excess of
<PAGE>
the purchase price over the fair value of the net assets acquired was $10.6
million.
The following pro-forma information assumes SJS Bancorp, Inc. had been
acquired at the start of 1997 or the start of 1996 (dollars in thousands,
except per share data):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Interest income $33,569 $32,570
Net income 9,667 9,018
Basic earnings per share 1.10 1.04
Diluted earnings per share 1.09 1.03
</TABLE>
31
<PAGE>
NOTE 3. RESTRICTIONS ON CASH AND DUE FROM BANKS
A summary of Shoreline's subsidiary bank's legal reserve requirements
established by the Federal Reserve System follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Portion of requirement satisfied by non-interest earning vault cash $ 9,322,000 $ 8,336,000
Additional balances maintained with the Federal Reserve 7,303,000 4,447,000
----------- -----------
Total reserve requirements $16,625,000 $12,783,000
=========== ===========
</TABLE>
NOTE 4. SECURITIES
The amortized cost and fair value of securities follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE AT DECEMBER 31, 1998
U.S. Treasury and agencies $ 66,043,106 $ 736,759 $ (63,707) $ 66,716,158
States and political subdivisions 24,732,778 1,756,116 0 26,488,894
Mortgage-backed:
U.S. Government agencies 91,475,805 533,847 (351,328) 91,658,324
Collateralized mortgage obligations 1,021,386 0 (11,386) 1,010,000
Other 4,859,700 2,137 0 4,861,837
------------ ---------- --------- ------------
Total $188,132,775 $3,028,859 $(426,421) $190,735,213
============ ========== ========= ============
HELD TO MATURITY AT DECEMBER 31, 1998
U.S. Treasury and agencies $2,000,000 $ 19,469 $ 0 $ 2,019,469
States and political subdivisions 6,472,474 636,257 0 7,108,731
Mortgage-backed:
U.S. Government agencies 16,430,955 358,999 (1,654) 16,788,300
Collateralized mortgage obligations 263,002 993 0 263,995
------------ ---------- --------- ------------
Total $ 25,166,431 $1,015,718 $ (1,654) $ 26,180,495
============ ========== ========= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE AT DECEMBER 31, 1997
U.S. Treasury and agencies $ 55,232,215 $ 588,349 $ (19,119) $ 55,801,445
States and political subdivisions 26,148,844 1,561,700 (194) 27,710,350
Mortgage-backed:
U.S. Government agencies 37,336,123 448,188 (148,312) 37,635,999
Collateralized mortgage obligations 27,308 102 0 27,410
Other 4,359,700 0 0 4,359,700
------------ ---------- --------- ------------
Total $123,104,190 $2,598,339 $(167,625) $125,534,904
============ ========== ========= ============
HELD TO MATURITY AT DECEMBER 31, 1997
U.S. Treasury and agencies $ 13,998,757 $ 101,599 $ (3,488) $ 14,096,868
States and political subdivisions 6,882,781 606,992 (136) 7,489,637
Mortgage-backed:
U.S. Government agencies 16,939,025 469,236 (688) 17,407,573
Collateralized mortgage obligations 565,005 13,217 0 578,222
------------ ---------- --------- ------------
Total $38,385,568 $1,191,044 $ (4,312) $ 39,572,300
============ ========== ========= ============
</TABLE>
32
<PAGE>
Information regarding the amortized cost and fair value of securities by
contractual maturity at December 31, 1998 is presented below. Maturity
information is based on contractual maturity for all securities other than
mortgage-backed securities. Actual maturities of mortgage-backed
securities may differ from contractual maturities because the borrowers
have the right to prepay the underlying obligation without prepayment
penalty.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
DECEMBER 31,1998 DECEMBER 31,1998
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ 12,076,561 $ 12,281,319 $ 250,000 $ 255,967
Due after one year through five years 34,866,335 35,642,188 1,907,639 2,016,514
Due after five years through ten years 39,442,466 40,521,796 5,105,603 5,482,284
Due after ten years 9,239,512 9,610,875 1,209,232 1,373,434
------------ ------------ ----------- -----------
Subtotal 95,624,874 98,056,178 8,472,474 9,128,199
Mortgage-backed 92,507,901 92,679,035 16,693,957 17,052,296
------------ ------------ ----------- -----------
Total $188,132,775 $190,735,213 $25,166,431 $26,180,495
============ ============ =========== ===========
</TABLE>
Proceeds, gross gains and gross losses from sales and calls of securities
follows:
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
AVAILABLE FOR SALE
Proceeds from sales $3,241,013 $17,796,416 $9,843,773
========== =========== ==========
Gross gains from sales $ 34,660 $ 169,290 $ 156,041
Gross losses from sales 0 (39,985) (22,468)
---------- ----------- ----------
Net gains/(losses) from sales 34,660 129,305 133,573
Net gains from calls 27,050 27,518 38,379
---------- ----------- ----------
Net gain/(loss) $ 61,710 $ 156,823 $ 171,952
========== =========== ==========
HELD TO MATURITY
Net gains from calls/maturities $ 3,203 $ 14,550 $ 18,765
========== =========== ==========
</TABLE>
Securities having an amortized cost of $35,952,000 at December 31, 1998
were pledged to secure public trust deposits and securities sold under
agreements to repurchase.
33
<PAGE>
NOTE 5. LOANS
The composition of the loan portfolio follows:
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
<S> <C> <C>
Commercial, financial and agricultural $264,806,716 $230,338,334
Residential real estate 247,454,303 273,240,696
Real estate construction 18,168,965 14,764,756
Consumer 104,729,440 101,292,369
------------ ------------
Total loans 635,159,424 619,636,155
Allowance for loan losses (7,882,967) (7,588,127)
------------ ------------
Net loans $627,276,457 $612,048,028
============ ============
</TABLE>
Loans held for sale at year-end 1998 and 1997 were approximately
$5,624,000 and $1,653,000.
Certain directors, executive officers and principal shareholders of
Shoreline, including associates of such persons, were loan customers of
Shoreline Bank during 1998. A summary of aggregate related party loan
activity, for loans aggregating $60,000 or more to any one related party,
is as follows for the year ended December 31:
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
<S> <C> <C>
Balance at January 1 $ 6,913,000 $10,644,000
New loans 9,884,000 7,224,000
Repayments (10,220,000) (6,551,000)
Other changes, net (59,000) (4,404,000)
----------- -----------
Balance at December 31 $ 6,518,000 $ 6,913,000
=========== ===========
</TABLE>
NOTE 6. ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses follows:
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, at beginning of year $7,588,127 $6,894,945 $6,600,119
Additions from acquisitions 188,900 540,595 0
Provision charged to operating expense 600,000 600,000 600,000
---------- ---------- ----------
8,377,027 8,035,540 7,200,119
---------- ---------- ----------
Loan charge-offs (789,626) (957,926) (593,350)
Loan recoveries 295,566 510,513 288,176
---------- ---------- ----------
Net loan charge-offs (494,060) (447,413) (305,174)
---------- ---------- ----------
Balance, at end of year $7,882,967 $7,588,127 $6,894,945
========== ========== ==========
</TABLE>
Impaired loans were as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Year-end loans with allowance for loan losses allocated $210,471 $706,362
Year-end loans with no allowance for loan losses allocated 0 0
-------- --------
Total impaired loans $210,471 $706,362
======== ========
Amount of the allowance allocated $105,236 $228,454
======== ========
Average of impaired loans during the year $672,711 $902,255
======== ========
Interest income recognized during impairment $ 13,507 $ 87,085
======== ========
Cash-basis interest income recognized $ 14,272 $ 81,566
======== ========
</TABLE>
34
<PAGE>
Loans with carrying values of approximately $459,300 and $653,200 were
transferred to foreclosed real estate in 1998 and 1997.
NOTE 7. SECONDARY MORTGAGE MARKET ACTIVITIES
Loans serviced for others, which are not reported as assets, totaled
$107,954,000 and $106,609,000 at year end 1998 and 1997.
Activity for capitalized mortgage servicing rights and the related
valuation allowance was as follows.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Servicing Rights:
Beginning of year $773,341 $126,807 $ -
Additions from acquisitions 0 482,679 0
Additions 277,468 224,191 126,807
Amortized to expense (174,220) (60,336) 0
-------- -------- --------
End of year $876,589 $773,341 $126,807
======== ======== ========
</TABLE>
A valuation allowance for mortgage servicing rights was not considered
necessary for 1998, 1997 and 1996.
NOTE 8. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
DECEMBER 31 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,484,143 $ 1,450,179
Building and improvements 13,422,475 13,433,856
Furniture and equipment 14,874,647 13,823,178
----------- -----------
29,781,265 28,707,213
Accumulated depreciation and amortization (16,053,135) (15,146,354)
----------- -----------
Net premises and equipment $13,728,130 $13,560,859
=========== ===========
</TABLE>
<PAGE>
Depreciation and amortization expense charged to operations was $1,644,655,
$1,596,601 and $1,495,103 in 1998, 1997 and 1996, respectively.
NOTE 9. DEPOSITS
Time deposit accounts individually exceeding $100,000 approximated
$106,170,000 and $99,719,000 at year-end 1998 and 1997.
At year-end 1998, stated maturities of time deposits for the next five
years and thereafter is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 $251,419,230
2000 46,265,744
2001 20,215,056
2002 12,775,258
2003 37,247,756
Thereafter 157,656
------------
$368,080,700
============
</TABLE>
Brokered deposits totaled approximately $6,575,700 and $20,900,000 at year-
end 1998 and 1997. At year-end 1998, brokered deposits had interest rates
ranging from 4.5% to 6.5% and maturities ranging from five days to 36
months.
Related party deposits totaled approximately $6,616,500 and $6,449,000 at
year-end 1998 and 1997.
35
<PAGE>
NOTE 10. OTHER BORROWINGS
REPURCHASE AGREEMENTS AND OTHER SHORT TERM BORROWINGS
Federal funds purchased, securities sold under agreements to repurchase,
and treasury tax and loan deposits are financing arrangements. Shoreline's
primary use of these types of financing arrangements has been limited to
securities sold under agreements to repurchase, which are all one-day
retail repurchase agreements. Shoreline retains custody of the securities
pledged. Summarized information concerning securities sold under
agreements to repurchase follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Average daily balance during the year $14,219,500 $7,673,700
Average interest rate during the year 4.21% 4.27%
Maximum month-end balance during the year $18,191,000 $8,883,840
</TABLE>
Securities underlying these agreements at year-end follow:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Carrying value $23,717,775 $15,992,700
Fair value $24,075,104 $16,171,300
</TABLE>
FEDERAL HOME LOAN BANK (FHLB) ADVANCES
At December 31, 1998 and 1997, Shoreline had advances from the FHLB of
Indianapolis as follows:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
FIXED RATE
5.23%, due January 1998 $ - $ 1,000,000
5.88%, due February 1998 0 750,000
5.97%, due March 1998 0 5,000,000
6.07%, due June 1998 0 1,000,000
6.28%, due August 1998 0 500,000
5.05%, due September 1998 0 5,000,000
6.05%, due October 1998 0 1,500,000
5.87%, due November 1998 0 2,000,000
5.45%, due November 1998 0 500,000
5.44%, due December 1998 0 1,000,000
5.26%, due February 1999 3,000,000 3,000,000
6.23%, due June 2000 1,000,000 1,000,000
6.61%, due August 2000 995,208 1,146,995
6.33%, due September 2000 1,345,830 1,548,659
6.35%, due October 2000 1,809,551 2,033,021
5.77%, due January 2001 827,625 947,217
----------- -----------
8,978,214 27,925,892
----------- -----------
CONVERTIBLE FIXED RATE
5.57%, due August 2000 2,500,000 2,500,000
5.21%, due January 2001 2,000,000 0
5.82%, due September 2002 5,000,000 5,000,000
5.68%, due September 2002 3,000,000 3,000,000
5.42%, due January 2003 3,000,000 0
5.53%, due January 2008 5,000,000 0
4.88%, due February 2008 5,000,000 0
5.33%, due March 2008 5,000,000 0
4.99%, due July 2008 5,000,000 0
4.99%, due December 2008 5,000,000 0
----------- -----------
40,500,000 10,500,000
----------- -----------
36
<PAGE>
VARIABLE RATE
5.56%, due March 1997 0 0
5.50%, due November 1997 0 0
5.85%, due March 1998 0 1,000,000
5.91%, due March 1998 0 450,000
5.88%, due March 1998 0 4,800,000
5.74%, due April 1998 0 500,000
----------- -----------
0 6,750,000
----------- -----------
Total $49,478,214 $45,175,892
=========== ===========
</TABLE>
Interest on the advances is payable monthly. The convertible fixed rate
advance due August 2000 was subject to conversion by the FHLB to a variable
rate advance in August 1998 or quarterly thereafter. Various convertible
fixed rate advances due January 2001 through July 2008 are subject to
conversion by the FHLB to variable rate advances beginning in January 1999
or quarterly thereafter. If converted, these convertible fixed rate
advances will carry an interest rate equal to the three month London
Interbank Offered Rate (LIBOR) and adjust quarterly. The variable rate
advances carry an interest rate equal to the three month LIBOR rate less 3
basis points and adjust quarterly. Several of the advances are subject to
various prepayment penalties as disclosed in the agreements with the FHLB.
The FHLB advances are collateralized by a blanket lien on qualified 1-to-4
family whole mortgage loans and U.S. Government agency mortgage-backed
securities with a combined approximate carrying value of $382 million at
December 31, 1998.
At year-end 1998, scheduled principal reductions on these advances are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 $ 3,000,000
2000 7,650,589
2001 2,827,625
2002 8,000,000
2003 and thereafter 28,000,000
-----------
$49,478,214
===========
</TABLE>
<PAGE>
NOTE 11. INCOME TAXES
Components of the provision for federal taxes on income are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Taxes currently payable $5,560,127 $4,609,241 $3,524,196
Deferred tax expense/(benefit) (83,877) 164,959 268,027
---------- ---------- ----------
Total $5,476,250 $4,774,200 $3,792,223
========== ========== ==========
</TABLE>
Taxes allocated to securities transactions were $22,070 in 1998, $58,267
in 1997 and $64,844 in 1996.
The difference between the provision in these financial statements and
amounts computed by applying the statutory federal income tax rate to pre-
tax income is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 34% 34% 34%
Income computed at the statutory federal tax rate $5,980,588 $5,367,059 $4,555,202
Add(subtract) tax effect of:
Tax-exempt securities income (657,635) (686,323) (728,495)
Tax-exempt loan income (123,717) (162,077) (189,082)
Non-deductible interest expense 99,517 88,759 88,757
Goodwill amortization 176,383 89,713 13,536
Other 1,114 77,069 52,305
---------- ---------- ----------
Total $5,476,250 $4,774,200 $3,792,223
========== ========== ==========
</TABLE>
37
<PAGE>
The components of the net deferred tax asset recorded in the balance sheet
are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
DECEMBER 31 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Provision for loan losses $2,466,871 $2,401,029
Net deferred loan fees 142,943 114,500
Deferred compensation 286,448 286,158
Mark-to-market adjustment for securities held for sale 860,449 832,961
Other 272,796 227,314
---------- ----------
Total deferred tax assets 4,029,507 3,861,962
---------- ----------
Deferred tax liabilities
Accretion of bond discount (90,888) (98,130)
Depreciation (270,351) (241,314)
Pension (86,323) (129,334)
Net unrealized gains on securities available for sale (884,828) (826,444)
Purchase accounting adjustments (746,500) (347,241)
Mortgage servicing rights (169,094) (110,547)
---------- ----------
Total deferred tax liabilities (2,247,984) (1,753,010)
Valuation allowance 0 0
---------- ----------
Net deferred tax asset $1,781,523 $2,108,952
========== ==========
</TABLE>
NOTE 12. EMPLOYEE BENEFITS
PENSION PLAN
Shoreline has a defined benefit, noncontributory pension plan that provides
retirement benefits for essentially all employees. In addition, Shoreline
has a supplemental deferred compensation plan for certain former Citizens
Trust and Savings Bank employees and a supplemental executive retirement
plan for certain executive officers of Shoreline Bank. The following sets
forth, on a combined basis, the plans' funded status and amounts recognized
in the financial statements.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
DECEMBER 31 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $5,164,959 $5,006,090
Service cost 326,811 258,334
Interest cost 386,267 374,393
Actuarial loss/(gain) 17,344 0
Benefits paid (253,204) (491,664)
---------- ----------
Benefit obligation at end of year $5,642,177 $5,147,153
========== ==========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $5,293,488 $4,425,345
Actual return on plan assets 993,647 956,302
Employer contributions 72,712 403,505
Benefits paid (253,204) (491,664)
---------- ----------
Fair value of plan assets at end of year $6,106,643 $5,293,488
========== ==========
NET AMOUNT RECOGNIZED:
Funded status $464,466 $146,335
Unrecognized prior service cost (57,889) (54,544)
Unrecognized transition asset (71,273) (73,307)
Unrecognized net actuarial loss/(gain) (448,643) 107,836
---------- ----------
Prepaid (accrued) benefit cost ($113,339) $126,320
========== ==========
38
<PAGE>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 7.5% 7.5%
Expected return on plan assets 8.0% 8.0%
Rate of compensation increase 4.5% 4.5%
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $326,811 $258,334
Interest cost 386,267 374,393
Expected return on plan assets (426,510) (358,473)
Amortization of prior service cost 8,558 8,558
Amortization of transition (asset)/obligation (7,247) (7,247)
Recognized net actuarial loss/(gain) 24,492 22,406
---------- ----------
Net periodic benefit cost $312,371 $297,971
========== ==========
</TABLE>
The net periodic pension benefit cost for 1996 was $313,054.
STOCK OPTION PLAN
A stock option plan exists under which options may be issued at market
prices to employees. The right to exercise the options vests over a four
year period, with 20% vesting on the date of the grant and 20% vesting each
year after. The options outstanding at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
NUMBER
PRICE OF OPTIONS
ISSUE DATE EXPIRATION DATE PER SHARE OUTSTANDING
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 1, 1990 December 1, 2000 $ 4.88 16,164
January 1, 1994 January 1, 2004 $11.04 10,999
November 22, 1996 November 22, 2006 $13.17 37,400
August 12, 1998 August 12, 2008 $26.75 1,500
------
66,063
======
</TABLE>
The weighted-average remaining contractual life of options outstanding at
December 31, 1998 was six years. The following pro forma information
presents net income and earnings per share had the fair value method been
used to measure compensation cost for stock option plans. The exercise
price of options granted is equivalent to the market value of underlying
stock at the grant date. Accordingly, compensation cost actually
recognized for stock options was $0 for 1998, 1997 and 1996.
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income as reported $12,113,714 $11,011,269 $9,605,429
Pro forma net income $12,056,505 $10,903,560 $9,542,225
Basic earnings per share as reported $1.35 $1.25 $1.10
Pro forma basic earnings per share $1.34 $1.24 $1.10
Diluted earnings per share as reported $1.34 $1.24 $1.10
Pro forma diluted earnings per share $1.33 $1.23 $1.09
</TABLE>
No options were granted during 1997. The weighted-average fair values of
options granted in 1998 and 1996 were $8.86 and $5.95. The fair value of
options granted during 1998 and 1996 was estimated using the following
weighted-average information: risk-free interest rates of 5.42% and 6.51%,
expected lives of 8 years, expected quarterly volatilities of stock price
of 30.0% and 53.6%, and expected dividends of 2.6% and 3.5% per year. In
future years, the pro forma effect of applying this standard is expected to
increase as additional options are granted.
39
<PAGE>
The following is a summary of the option transactions for the period
January 1, 1996 through December 31, 1998:
<TABLE>
<CAPTION>
AVAILABLE OPTIONS WEIGHTED-AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1996 53,338 141,331 $5.53
Options issued (45,262) 45,262 13.17
Options exercised 0 (31,843) 4.88
------- ------- ------
Balance at December 31, 1996 8,076 154,750 7.91
Options exercised 0 (45,263) 5.36
------- ------- ------
Balance at December 31, 1997 8,076 109,487 8.96
Options issued (1,500) 1,500 26.75
Options exercised 0 (43,034) 6.10
Options forfeited 1,890 (1,890) 13.17
------- ------- ------
Balance at December 31, 1998 8,466 66,063 $11.10
------- ------- ------
</TABLE>
Options exercisable at year-end are as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
1996 113,034 $6.07
1997 79,613 $7.44
1998 46,578 $9.89
</TABLE>
OTHER EMPLOYEE BENEFIT PLANS
Shoreline maintains a profit-sharing plan for qualified employees with at
least two years of service. Contributions to the profit sharing plan are
determined at the discretion of the Board of Directors and equaled 3% of
profits before federal income taxes and securities gains or losses in 1998,
1997, and 1996. Under this plan, $542,102, $482,942 and $409,633 was
expensed in 1998, 1997, and 1996, respectively.
Participants in Shoreline's 401(k) salary reduction plan may make deferrals
up to 15% of compensation. Shoreline matches 50% of elective deferrals on
the first 4% of the participants' compensation. Expense under this plan was
$156,851, $145,919 and $111,050 in 1998, 1997 and 1996, respectively.
<PAGE>
A stock incentive plan is maintained for key members of management. In
January of 1997, 39,375 shares were awarded under the restricted stock
provisions of the plan. The shares were awarded at the market price of
Shoreline's stock on the date of award and vest in accordance with
Shoreline's achievement of predetermined performance measures, as approved
by the Board. Shares are earned and compensation expense is recorded over
the expected vesting period of the awards. During 1998 and 1997, 9,231 and
7,220 shares were earned under the plan, resulting in compensation expense
of $161,976 and $115,155, respectively. All shares have been restated for
stock dividends and stock splits.
40
<PAGE>
NOTE 13. EARNINGS PER SHARE
The accounting standard for computing earnings per share was revised for
1997. As a result of this change, all previously reported earnings per
share information has been restated. A reconciliation of the numerators
and denominators of the basic earnings per share and diluted earnings per
share computations is presented below:
On December 31, 1998 and 1997, there were 9,056,769 and 8,882,264 common
shares outstanding, respectively. For the same dates a maximum of
15,000,000 and 10,000,000 shares of no par value common stock was
authorized.
On February 17, 1998, the Board of Directors declared a three for two stock
split, effected as a 50% stock dividend, effective April 3, 1998, to
shareholders of record on March 31, 1998. Additionally, during 1997 and
1996 a 5% stock dividend was declared and paid. Dividends per share were
restated for these events.
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Net income available to common shareholders $12,113,714 $11,011,269 $9,605,429
=========== =========== ==========
Weighted average common shares outstanding 9,023,302 8,835,564 8,701,094
Less: Non-vested stock incentive plan shares (41,924) (32,155) 0
----------- ----------- ----------
Weighted-average common shares outstanding
For basic earnings per share 8,981,378 8,803,409 8,701,094
=========== =========== ==========
Basic earnings per share $1.35 $1.25 $1.10
=========== =========== ==========
Diluted earnings per share:
Net income available to common shareholders $12,113,714 $11,011,269 $9,605,429
=========== =========== ==========
Weighted-average common shares outstanding
for basic earnings per share 8,981,378 8,803,409 8,701,094
For basic earnings per share
Add: Dilutive effect of assumed exercise of
stock options 40,032 58,374 61,527
Add: Dilutive effect of non-vested stock
Incentive plan shares 11,028 6,351 0
----------- ----------- ----------
Weighted-average common and potentially
Dilutive common shares outstanding 9,032,438 8,868,134 8,762,621
=========== =========== ==========
Diluted earnings per share $1.34 $1.24 $1.10
=========== =========== ==========
</TABLE>
41
<PAGE>
NOTE 14. COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the
financial statements, including claims and legal actions arising in the
ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters
is not expected to have a material effect on Shoreline's financial
condition or results of operations.
Shoreline is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet financing needs of its customers.
These financial instruments include commitments to make loans, unused lines
of credit and standby letters of credit. Shoreline's exposure to credit
loss in the event of non-performance by the other party to financial
instruments for commitments to make loans, unused lines of credit and
standby letters of credit is represented by the contractual amount of those
instruments. Shoreline follows the same credit policy to make such
commitments as it uses for on-balance-sheet items. Since many commitments
to make loans expire without being used, the amount of commitments shown
below do not necessarily represents future cash commitments. No losses are
anticipated as a result of these transactions. Collateral obtained upon
exercise of commitments is determined using management's credit evaluation
of the borrowers and may include real estate, business assets, deposits and
other items.
Shoreline has the following commitments outstanding:
<TABLE>
<CAPTION>
DECEMBER 31 1998 1997
---- ----
<S> <C> <C>
Unfunded loan commitments $ 33,394,000 $ 33,110,000
Unused lines of credit 98,759,000 74,633,000
Standby letters of credit 9,456,000 7,799,000
------------ ------------
Total $145,609,000 $115,542,000
============ ============
</TABLE>
Fixed rate loan commitments have interest rates ranging from 6.00% to 8.75%
and terms ranging from 6 months to 30 years.
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair value and the related carrying
amount of the Shoreline's financial instruments at December 31, 1998 and
1997. Items that are not financial instruments are not included.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1998 1997
CARRYING ESTIMATED CARRYING ESTIMATED
DECEMBER 31 AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $71,889,387 $71,889,000 $44,981,440 $44,981,000
Securities available for sale 190,735,213 190,735,000 125,534,904 125,535,000
Securities held to maturity 25,166,431 26,180,000 38,385,568 39,572,000
Loans, net of allowance for loan losses 627,276,457 634,368,000 612,048,028 614,277,000
Demand and savings deposits (427,761,137) (427,761,000) (355,574,075) (355,574,000)
Time deposits (368,080,700) (372,784,000) (367,090,279) (369,041,000)
Securities sold under agreements
to repurchase (18,191,030) (18,191,000) (7,526,582) (7,527,000)
FHLB advances (49,478,214) (49,442,000) (45,175,892) (45,033,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the
following assumptions were used as of December 31, 1998 and 1997. The
estimated fair value for cash and cash equivalents is considered to
approximate cost. The estimated fair value for securities held to maturity
and securities available for sale is based on quoted market values for the
individual securities or for equivalent securities. The estimated fair
value for commercial loans is based on estimates of the difference in
interest rates Shoreline would charge the borrowers for similar loans with
similar maturities made at December 31, 1998 and 1997, applied for an
estimated time period until the loan is assumed to reprice or be paid. The
estimated fair value for other loans is based on estimates of the rate
Shoreline would charge for similar loans at December 31, 1998 and 1997,
applied for the time period until estimated repayment. The estimated fair
value for demand, savings deposits and securities sold under agreements to
repurchase is based on their carrying value. The estimated fair value for
time deposits and long-term debt is based on estimates of the rate that
Shoreline would pay on such deposits or borrowings at December 31, 1998 and
1997, applied for the time period until maturity. The estimated fair value
for other financial instruments and off-balance-sheet loan commitments
approximate cost and are not considered significant to this presentation.
42
<PAGE>
While these estimates of fair value are based on management's judgment of
the most appropriate factors, there is no assurance that if Shoreline had
disposed of such items at December 31, 1998, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances. The estimated fair values at
December 31, 1998 should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of Shoreline that are not defined
as financial instruments are not included in the above disclosures, such as
property and equipment. Also, non-financial instruments typically not
recognized in financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the earnings potential
of loan servicing rights, the earnings potential of Shoreline's subsidiary
bank's trust department, the trained work force, customer goodwill and
similar items.
NOTE 16. REGULATORY MATTERS
Shoreline Financial Corporation and Shoreline Bank are subject to
regulatory capital requirements administered by federal banking agencies.
Capital adequacy guidelines and prompt corrective action regulations
involve quantitative measures of assets, liabilities, and certain off-
balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases.
Failure to meet various capital requirements can initiate regulatory action
that could have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly under capitalized, and critically undercapitalized, although
these terms are not used to represent overall financial condition. If
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as is
asset growth and expansion, and plans for capital restoration are required.
Shoreline Bank capital levels approximate the consolidated capital levels
of Shoreline Financial Corporation. At year end, consolidated actual
capital levels (in millions) and minimum required levels were:
<PAGE>
<TABLE>
<CAPTION>
MINIMUM REQUIRED MINIMUM REQUIRED
FOR CAPITAL ADEQUACY TO BE
ACTUAL PURPOSES WELL CAPITALIZED
1998 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk assets $77.6 13.5% $45.9 8.0% $57.4 10.0%
Tier 1 capital to risk assets 70.5 12.3% 23.0 4.0% 34.4 6.0%
Tier 1 capital to average assets 70.5 7.6% 37.2 4.0% 46.5 5.0%
1997
- ----
Total capital to risk assets $70.0 13.1% $42.7 8.0% $53.4 10.0%
Tier 1 capital to risk assets 63.3 11.9% 21.4 4.0% 32.1 6.0%
Tier 1 capital to average assets 63.3 8.0% 31.8 4.0% 39.7 5.0%
</TABLE>
At year-end 1998, Shoreline was categorized as well capitalized.
43
<PAGE>
NOTE 17. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
The condensed financial information of the parent company, Shoreline
Financial Corporation, is summarized below.
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
- -----------------------------------------------------------------------------------------------
DECEMBER 31 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 1,833,667 $ 1,144,727
Investment in subsidiary 85,351,303 75,808,453
Other assets 87,148 0
----------- -----------
Total Assets $87,272,118 $76,953,180
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 60,991 $ 70,777
Shareholders' equity 87,211,127 76,882,403
----------- -----------
Total Liabilities and Shareholders' Equity $87,272,118 $76,953,180
=========== ===========
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
<CAPTION>
- --------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from subsidiary - cash $ 9,953,587 $ 4,461,491 $3,817,098
----------- ----------- ----------
EXPENSE
Total expense 403,004 414,416 317,498
----------- ----------- ----------
Income before income tax and undistributed
Subsidiary income 9,550,583 4,047,075 3,499,600
Income tax benefit 132,750 132,500 97,000
Equity in undistributed net income of subsidiary 2,430,381 6,831,694 6,008,829
----------- ----------- ----------
NET INCOME $12,113,714 $11,011,269 $9,605,429
=========== =========== ==========
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $12,113,714 $11,011,269 $9,605,429
Adjustments:
Equity in undistributed income of subsidiary (2,430,381) (6,831,694) (6,008,829)
Other 65,911 315,581 (97,805)
----------- ----------- ----------
Total adjustments (2,364,465) (6,516,113) (6,106,634)
----------- ----------- ----------
Net cash from operating activities 9,749,244 4,495,156 3,498,795
Cash flows from financing activities:
Dividends paid (5,976,327) (5,008,864) (4,368,023)
Proceeds from shares issued 1,356,989 1,124,698 957,754
Payments to retire common stock (4,440,966) 0 (354,725)
----------- ----------- ----------
Net cash from financing activities (9,060,304) (3,884,166) (3,764,994)
----------- ----------- ----------
Net change in cash and cash equivalents 688,940 610,990 (266,199)
Cash and cash equivalents at beginning of year 1,144,727 533,737 799,936
----------- ----------- ----------
Cash and cash equivalents at end of year $ 1,833,667 $ 1,144,727 $ 533,737
=========== =========== ==========
</TABLE>
Shoreline Financial Corporation's primary source of revenue is its wholly
owned subsidiary, Shoreline Bank. The payment of dividends by Shoreline
Bank is restricted to net profits, as defined by the Michigan Banking Code,
then on hand after deducting losses and bad debts, as also defined by the
Michigan Banking Code. Accordingly, in 1999, the subsidiary bank may
distribute to Shoreline, in addition to 1999 net profits, approximately
$36.6 million in dividends without prior approval from bank regulatory
agencies.
44
<PAGE>
NOTE 18. IMPACT OF NEW ACCOUNTING STANDARDS
Effective for fiscal periods (both years and quarters) beginning after June
15, 1999 Statement of Financial Accounting Standards No. 133 "Accounting
for Derivative Instruments and Hedging Activities" establishes accounting
and reporting standards for derivative instruments, including derivative
instruments that are embedded in other contracts, and hedging activities,
by standardizing the accounting for derivative instruments, including those
imbedded in other contracts, and by requiring the recognition of all
derivatives (both assets and liabilities) in the statement of financial
position at fair value. The adoption of SFAS No. 133 is not expected to
have an impact of Shoreline's financial position or results of operations
as the company does not at this time engage in the type of activities
covered by the Statement.
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise" amends Statement of
Financial Accounting Standard No. 65, "Accounting for Certain Mortgage
Banking Activities" and requires that after the securitization of a
mortgage loan held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage backed security as a trading
security. This Statement further amends SFAS No. 65 to require that after
the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage backed
securities or other retained interests based on its ability and intent to
sell or hold those investments. This Statement conforms the subsequent
accounting for securities retained after the securitization of mortgage
loans by a mortgage banking entity with the subsequent accounting for
securities retained after the securitization of other types of assets by
nonmortgage banking enterprises. This means that such securities can be
classified as held to maturity if they conform to the requirements of SFAS
No. 115. The Statement is effective for the first fiscal quarter beginning
after December 15, 1998. The adoption of SFAS No. 134 is not expected to
have a material impact on the results of operations or financial condition
of the company.
<PAGE>
<TABLE>
SUPPLEMENTARY QUARTERLY FINANCIAL AND COMMON STOCK DATA
<CAPTION>
$ in Thousands,
Except per share data
1998 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income $16,676 $16,892 $17,270 $17,286
Net interest income 8,212 8,376 8,608 8,795
Provision for loan losses 150 150 150 150
Income before income taxes 4,337 4,394 4,403 4,456
Net income 3,032 3,016 3,010 3,056
Basic earnings per share $ 0.34 $ 0.34 $ 0.33 $ 0.34
Diluted earnings per share $ 0.34 $ 0.34 $ 0.33 $ 0.33
Market Price of Common Stock<F1>:
High $ 29.83 $ 34.50 $ 31.12 $ 29.38
Low $ 23.33 $ 28.50 $ 24.50 $ 25.38
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income $13,878 $14,788 $16,967 $17,005
Net interest income 7,317 7,692 8,541 8,643
Provision for loan losses 120 120 180 180
Income before income taxes 3,536 3,756 4,142 4,351
Net income 2,542 2,649 2,853 2,967
Basic earnings per share $ 0.30 $ 0.30 $ 0.32 $ 0.33
Diluted earnings per share $ 0.30 $ 0.30 $ 0.32 $ 0.32
Market Price of Common Stock<F1>:
High $ 16.51 $ 19.50 $ 23.17 $ 25.67
Low $ 14.60 $ 15.75 $ 19.00 $ 20.33
<FN>
<F1> These are the high and low bid prices reported on The Nasdaq Stock
Market for each quarterly period. These prices are interdealer
prices, without retail mark-ups, mark-downs or commissions, and may
not necessarily represent actual transactions.
</FN>
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF SHORELINE
The information set forth under the captions "Directors and Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
Shoreline's Definitive Proxy Statement for its May 13, 1999, annual meeting
of shareholders is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Compensation of Executive
Officers and Directors" in Shoreline's Definitive Proxy Statement for its
May 13, 1999, annual meeting of shareholders is hereby incorporated by
reference.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Voting Securities" in
Shoreline's Definitive Proxy Statement for its May 13, 1999, annual meeting
of shareholders is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" in Shoreline's Definitive Proxy Statement for its May
13, 1999, annual meeting of shareholders in hereby incorporated by
reference.
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements - The following consolidated financial
statements, notes to consolidated financial statements and
independent auditors' report of Shoreline Financial Corporation
are filed as part of this report:
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December
31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Auditors dated February 12, 1999
(2) Financial Statement Schedules - Not Applicable
(3) Exhibits - The following exhibits are filed as part of this
report
NO. EXHIBIT
3.1 Restated Articles of Incorporation. Previously filed as Exhibit
3.1 to Shoreline's Quarterly Report on Form 10-Q for the period
ended June 30, 1998. Herein incorporated by reference.
3.2 Bylaws. Previously filed as Exhibit 3(b) to Shoreline's Form S-1
Registration Statement filed March 23, 1990. Herein incorporated
by reference.
<PAGE>
4 Long term debt. Shoreline has outstanding long term debt which
at the time of this report does not exceed 10% of Shoreline's
total consolidated assets. Shoreline agrees to furnish copies of
the agreements defining the rights of holders of such long term
indebtedness to the Securities and Exchange Commission upon
request.
10.1 Form of Indemnity Agreement. Previously filed as Exhibit 10(d)
to Shoreline's Form S-4 Registration Statement filed September
25, 1987. Herein incorporated by reference.
10.2 Employment Agreements.<F*> Previously filed as Exhibit 10(b) to
Shoreline's 1995 Form 10-K Annual Report filed March 28, 1996.
Herein incorporated by reference.
10.3 1989 Stock Option Plan.<F*> Previously filed as Exhibit 28 to
Shoreline's Form S-8 Registration Statement filed May 31, 1989.
Herein incorporated by reference.
47
<PAGE>
10.4 Deferred Compensation Agreements.<F*>
10.5 Bonus Program - 1998.<F*>
10.6 Stock Incentive Plan of 1996.<F*> Previously filed as an
appendix to Shoreline's Definitive Proxy Statement for its May 1,
1996, annual meeting of shareholders. Herein incorporated by
reference.
10.7 Directors' Deferred Compensation Plan.<F*> Previously filed as
Exhibit 10(g) to Shoreline's 1996 Form 10-K Annual Report filed
March 26, 1997. Herein incorporated by reference.
11 Statement Regarding Computation of Earnings per Common Share.
The computation of earnings per common share is fully described
in Note 13 to the Consolidated Financial Statements contained in
Item 8 of this report.
21 List of Subsidiaries. Previously filed as Exhibit 21 to
Shoreline's 1997 Form 10-K Annual Report filed March 31, 1998.
Herein incorporated by reference.
23 Consent of Independent Auditors
24 Powers of Attorney
27 Financial Data Schedule for Year Ended December 31, 1998
<F*>These agreements are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-K.
Shoreline will furnish a copy of any exhibit listed above to any
shareholder of Shoreline without charge upon written request to Mr. Wayne
R. Koebel, Executive Vice President and Chief Financial Officer, Shoreline
Financial Corporation, 823 Riverview Dr., Benton Harbor, Michigan 49022
(b) Reports on Form 8-K
Shoreline filed no Current Reports on Form 8-K during the last quarter
of the period covered by this report.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SHORELINE FINANCIAL CORPORATION
(Registrant)
Date: March 26, 1999 /S/ Dan L. Smith
Dan L. Smith
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/ Dan L. Smith Director, Chairman, March 26, 1999
Dan L. Smith President and Chief
Executive Officer
/S/ Wayne R. Koebel Executive Vice President March 26, 1999
Wayne R. Koebel and Chief Financial Officer
(Principal Financial Officer
and Principal Accounting
Officer)
*DIRECTORS
Louis A. Desenberg Merlin J. Hanson
Thomas T. Huff James E. LeBlanc
L. Richard Marzke James F. Murphy
Robert L. Starks Jeffery H. Tobian
Ronald L. Zile
*By /S/ Wayne R. Koebel
Wayne R. Koebel
Attorney-in-Fact
49
<PAGE>
EXHIBIT INDEX
NO. EXHIBIT
3.1 Restated Articles of Incorporation. Previously filed as Exhibit
3.1 to Shoreline's Quarterly Report on Form 10-Q for the period
ended June 30, 1998. Herein incorporated by reference.
3.2 Bylaws. Previously filed as Exhibit 3(b) to Shoreline's Form S-1
Registration Statement filed March 23, 1990. Herein incorporated
by reference.
4 Long term debt. Shoreline has outstanding long term debt which
at the time of this report does not exceed 10% of Shoreline's
total consolidated assets. Shoreline agrees to furnish copies of
the agreements defining the rights of holders of such long term
indebtedness to the Securities and Exchange Commission upon
request.
10.1 Form of Indemnity Agreement. Previously filed as Exhibit 10(d)
to Shoreline's Form S-4 Registration Statement filed September
25, 1987. Herein incorporated by reference.
10.2 Employment Agreements.<F*> Previously filed as Exhibit 10(b) to
Shoreline's 1995 Form 10-K Annual Report filed March 28, 1996.
Herein incorporated by reference.
10.3 1989 Stock Option Plan.<F*> Previously filed as Exhibit 28 to
Shoreline's Form S-8 Registration Statement filed May 31, 1989.
Herein incorporated by reference.
10.4 Deferred Compensation Agreements.<F*>
10.5 Bonus Program - 1998.<F*>
10.6 Stock Incentive Plan of 1996.<F*> Previously filed as an
appendix to Shoreline's Definitive Proxy Statement for its May 1,
1996, annual meeting of shareholders. Herein incorporated by
reference.
10.7 Directors' Deferred Compensation Plan.<F*> Previously filed as
Exhibit 10(g) to Shoreline's 1996 Form 10-K Annual Report filed
March 26, 1997. Herein incorporated by reference.
11 Statement Regarding Computation of Earnings per Common Share.
The computation of earnings per common share is fully described
in Note 13 to the Consolidated Financial Statements contained in
Item 8 of this report.
<PAGE>
21 List of Subsidiaries. Previously filed as Exhibit 21 to
Shoreline's 1997 Form 10-K Annual Report filed March 31, 1998.
Herein incorporated by reference.
23 Consent of Independent Auditors
24 Powers of Attorney
27 Financial Data Schedule for Year Ended December 31, 1998
<F*>These agreements are management contracts or compensation plans or
arrangements required to be filed as exhibits to this Form 10-K.
<PAGE>
EXHIBIT 10.4
AMENDED AND REAFFIRMED
DEFERRED COMPENSATION PLAN
This Agreement made this 23rd day of August, A.D. 1991, by and between
SHORELINE FINANCIAL CORPORATION, a Michigan Corporation, of 823 Riverview
Drive, Benton Harbor, Michigan 49022, hereinafter referred to as
"Corporation", and RONALD L. ZILE, of 77329 Pinewood Lane, South Haven,
Michigan 49090, hereinafter referred to as "Employee".
WITNESSETH, That:
WHEREAS, The Employee is a key senior administrative officer of the
Corporation and a participant in a deferred compensation program adopted by
the Board of Directors of Citizens Trust & Savings Bank, a wholly owned
subsidiary of Corporation.
WHEREAS, the Corporation wishes to consolidate at the Corporate level
the Deferred Compensation Agreements of its senior administrative officers,
amend certain provisions thereof, and to ratify said arrangements as
currently exist pursuant to action of said Board of Directors taken August
16th, 1983.
Now, therefore, in consideration of the promises and covenants herein
contained, Corporation and Employee hereby executed this Amended and
Reaffirmed Deferred Compensation Agreement to be effective as of August
16th, 1983, and the date of this Agreement as follows:
1. CONTINUATION OF EMPLOYMENT. The Employee shall remain an employee
of the Corporation until the age of sixty (60) years or the date of his
retirement as mutually agreed between the Employee and the Corporation as to
continued service and subject to the policies of the Corporation. Until such
time as specified above, the Employee shall continue to devote his time and
attention to the service of the Corporation, at the rate of compensation as
established pursuant to the Compensation Committee of the Corporation, from
time to time. Any change in the compensation shall not be deemed a violation
or waiver of any of the provisions of this Agreement.
The Employee has entered into an agreement contract under which he may
be entitled to certain benefits or severance payments. It is not the
intent of this Agreement to cancel or amend such employment contract and
payments may be made under both contracts simultaneously depending on the
circumstances.
Nothing contained in this Agreement shall be deemed to give the
Employee any right to be retained by the Corporation as an Employee.
2. PAYMENT UPON RETIREMENT. The benefits, based on Employee's
participation in the Plan as originally adopted by the Board of Directors
<PAGE>
of Citizens Trust & Savings Bank, on August 16th, 1983, shall be paid as
Deferred Compensation as follows:
(a) The Compensation Committee hereby accepts the insured
participation plan previously approved and accepted by the Board of
Directors of Citizens Trust & Savings Bank on August 16th, 1983, for
the Employee which provides for fixed compensation to the Employee for
a fixed period of years. In the event the Employee retires from the
Corporation pursuant to the policies of the Corporation related to
retirement at or after age sixty (60), the Employee shall have fully
accrued deferred compensation credit. At the election of the
Employee; but in no event later than six (6) months from the date of
retirement, the Corporation shall pay to the Employee the sum of Two
Hundred Fifty Thousand and No/100s ($250,000.00) Dollars, in equally
monthly installments of Two Thousand Eighty-three and 33/100s
($2,083.33) Dollars, payable on the first business day of each month
for a period not to exceed one hundred twenty (120) months from date
of commencement. If Employee so retires, but dies before receiving
one hundred twenty (120) monthly payments, the Corporation shall
continue to make such monthly payments to the beneficiary designated
in Paragraph 5 herein, until the total payments made to Employee or
his beneficiary equal Two Hundred Fifty Thousand and No/100s
($250,000.00) Dollars.
(b) If the Employee's employment hereunder is terminated for any
reason other than death, but before the Employee shall have attained
the age of sixty (60) years, then the amount in the Deferred
Compensation Program shall continue to be invested as the Compensation
Committee shall so direct in its sole discretion, and no payments
shall be made until the Employee shall have attained the age of sixty
(60), at which time payments shall be made in the manner and to the
same extent as herein set forth above. Notwithstanding the foregoing,
or if prior to attaining said age, the Employee should die, then
payments shall be made in the manner and to the same extent as set
forth in paragraph (a) above.
3. PAYMENT UPON DISABILITY. If the Employee's employment is
terminated because of disability before he has obtained the age of sixty
(60), and while he is serving in the employment of the Corporation, then
the Board may make monthly or annual payments of substantially equal
amounts to the Employee (in the event of his disability) in the same manner
and to the same extent as provided in paragraph (a) above; provided,
however, said benefits shall be actuarially reduced for a sum equivalent to
the benefit if received at age sixty (60) and shall be payable only for a
period of one hundred twenty (120) months from the date of commencement.
4. PAYMENT UPON DEATH. If such Employee should die before receiving
any of the deferred compensation or before receiving the entire amount of
the deferred compensation payments set forth in paragraph 2, then the
<PAGE>
entire balance of such deferred compensation shall be paid to the
designated beneficiary pursuant to paragraph 2.
If at the date of death of the Employee, none of the payments have
been made and the designated beneficiary is deceased, then such amount
shall be paid to the estate of such Employee or as designated in a power of
appointment in the Last Will of the Employee or under a separate power of
appointment.
If the named beneficiary has become entitled to the monthly payments
and such named beneficiary should die before receiving the entire balance
of such payments, then the entire balance shall be paid to the estate of
such beneficiary or as designated in a power of appointment in such
beneficiary's Will or by separate exercise of such power of appointment.
5. BENEFICIARY. Payments of the monthly sums herein provided in
paragraphs 2, 3, and 4, shall be made to the Employee, if living, and
otherwise to GRACE W. ZILE, if living; otherwise as specified in paragraph
4. The beneficiary named herein may be changed at any time by the
Employee, with the agreement of the Corporation, by written amendment.
6. "TOTAL DISABILITY" DEFINED. For purposes of this Agreement,
"total disability" shall be deemed to have occurred if the Compensation
Committee shall find on the basis of medical evidence satisfactory to it
that the Employee is so totally mentally or physically disabled as to be
unable to engage in further employment by the Corporation and that such
disability shall be permanent and continuous during the remainder of his
life.
7. ACCELERATION OF PAYMENTS. The Employee may request and the
Corporation may grant an acceleration of the payments or any of the sums
specified in paragraphs 2, 3 and 4 above; provided, however, the benefits
shall be actuarially reduced based on employee's age at the date benefits
are to begin to a sum equivalent to the benefit amount if received at age
sixty (60).
8. RESTRICTIVE COVENANT. Employee expressly agrees, as a condition
to the performance by the Corporation of its obligations hereunder, that
during the term of this Agreement and during the period for which monthly
payments are to be made, the Employee will not, directly or indirectly,
render any service of an advisory nature or otherwise, to, or become
employed by, or participate or engage in, any business competitive with the
business of the Corporation, without the prior written consent of the
Corporation.
9. PROHIBITION OF ASSIGNMENT. Except as otherwise provided in this
Agreement, the Employee agrees on behalf of himself, his heirs, executors
and assigns, and any other person claiming benefits under him by virtue of
this Agreement, that this Agreement, the rights, interest and benefits
<PAGE>
hereunder, shall not be assigned, transferred, pledged or hypothecated in
any way by Employee or other person claiming under him by virtue of this
Agreement and shall not be subject to execution, attachment or similar
process. Any attempt at assignment, transfer, pledge or hypothecation or
other disposition of this Agreement or of such rights, interests and
benefits contrary to the foregoing provision, or the levy or any attachment
or similar process thereupon, shall be null and void and without effect.
10. EMPLOYMENT RIGHTS. This Agreement creates no right in the
Employee to continue in the Corporation's employ for any specific length of
time nor does it create any other rights in the Employee or obligations on
the part of the Corporation except those set forth in this Agreement.
11. RELEASE. Employee acknowledges that this Amended and Reaffirmed
Deferred Compensation Agreement is the sole and only Agreement between
Employee and Corporation, whether written or oral, concerning Deferred
Compensation and stands instead, substitution and place of any said
Agreements, either written or oral, with the subsidiaries of the
Corporation, excluding valid written employment contracts, pension or
profit sharing plans.
12. BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of any successor of the Corporation under the terms of this
Agreement. As used in this Agreement, the term "successor" shall include
any person, firm, corporation, or other business entity which at any time,
whether by merger, purchase or otherwise, acquires all or substantially all
of the assets or business of the Corporation. It shall also be binding
upon the beneficiaries, heirs, executors and administrators of the
Employee.
13. CONSTRUCTION. This Agreement shall be construed by and under the
laws of the State of Michigan.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed in its corporate name by its corporate officers, duly authorized,
and the Employee has set his hand and seal, as of the day and year above
written.
SHORELINE FINANCIAL CORPORATION, a
Michigan Corporation, "Corporation"
By: /s/ James F. Murphy
Its: Chairman of The Board
/s/ Ronald L. Zile
Ronald L. Zile, "Employee"
<PAGE>
AMENDED AND REAFFIRMED
DEFERRED COMPENSATION PLAN
This Agreement made this 23rd day of August, A.D. 1991, by and between
SHORELINE FINANCIAL CORPORATION, a Michigan Corporation, of 823 Riverview
Drive, Benton Harbor, Michigan 49022, hereinafter referred to as
"Corporation", and DAN L. SMITH, of 12157 North Red Bud Trail, Buchanan,
Michigan 49107, hereinafter referred to as "Employee".
WITNESSETH, That:
WHEREAS, The Employee is a key senior administrative officer of the
Corporation and a participant in a deferred compensation program adopted by
the Board of Directors of Inter-City Bank, a wholly owned subsidiary of
Corporation.
WHEREAS, the Corporation wishes to consolidate at the Corporate level
the Deferred Compensation Agreements of its senior administrative officers,
amend certain provisions thereof, and to ratify said arrangements as
currently exist pursuant to action of said Board of Directors taken June
16, 1983 and amended May 20th, 1986.
Now, therefore, in consideration of the promises and covenants herein
contained, Corporation and Employee hereby executed this Amended and
Reaffirmed Deferred Compensation Agreement to be effective as of June 16th,
1983, and the date of this Agreement as follows:
1. CONTINUATION OF EMPLOYMENT. The Employee shall remain an
employee of the Corporation until the age of sixty (60) years or the date
of his retirement as mutually agreed between the Employee and the
Corporation as to continued service and subject to the policies of the
Corporation. Until such time as specified above, the Employee shall
continue to devote his time and attention to the service of the
Corporation, at the rate of compensation as established pursuant to the
Compensation Committee of the Corporation, from time to time. Any change
in the compensation shall not be deemed a violation or waiver of any of the
provisions of this Agreement.
The Employee has entered into an agreement contract under which he may
be entitled to certain benefits or severance payments. It is not the
intent of this Agreement to cancel or amend such employment contract and
payments may be made under both contracts simultaneously depending on the
circumstances.
Nothing contained in this Agreement shall be deemed to give the
Employee any right to be retained by the Corporation as an Employee.
2. PAYMENT UPON RETIREMENT. The benefits, based on Employee's
participation in the Plan as originally adopted by the Board of Directors
<PAGE>
of Inner-City Bank on June 16th, 1983, shall be paid as Deferred
Compensation as follows:
(a) The Compensation Committee hereby accepts the insured
participation plan previously approved and accepted by the Board of
Directors of Inter-City Bank on June 16th, 1983 and amended May 20th, 1986,
for the Employee which provides for fixed compensation to the Employee for
a fixed period of years. In the event the Employee retires from the
Corporation pursuant to the policies of the Corporation related to
retirement at or after age sixty (60), the Employee shall have fully
accrued deferred compensation credit. At the election of the Employee; but
in no event later than six (6) months from the date of retirement, the
Corporation shall pay to the Employee the sum of Two Hundred Fifty Thousand
($250,000.00) Dollars, in equally monthly installments of Two Thousand
Eighty Three and Thirty Three Cents ($2,083.33) Dollars, payable on the
first business day of each month for a period not to exceed one hundred
twenty (120) months from date of commencement. If Employee so retires, but
dies before receiving one hundred twenty (120) monthly payments, the
Corporation shall continue to make such monthly payments to the beneficiary
designated in Paragraph 5 herein, until the total payments made to Employee
or his beneficiary equal Two Hundred Fifty Thousand ($250,000.00) Dollars.
(b) If the Employee's employment hereunder is terminated for any
reason other than death, but before the Employee shall have attained the
age of sixty (60) years, then the amount in the Deferred Compensation
Program shall continue to be invested as the Compensation Committee shall
so direct in its sole discretion, and no payments shall be made until the
Employee shall have attained the age of sixty (60), at which time payments
shall be made in the manner and to the same extent as herein set forth
above. Notwithstanding the foregoing, or if prior to attaining said age,
the Employee should die, then payments shall be made in the manner and to
the same extent as set forth in paragraph (a) above.
3. PAYMENT UPON DISABILITY. If the Employee's employment is
terminated because of disability before he has obtained the age of sixty
(60), and while he is serving in the employment of the Corporation, then
the Board may make monthly or annual payments of substantially equal
amounts to the Employee (in the event of his disability) in the same manner
and to the same extent as provided in paragraph (a) above; provided,
however, said benefits shall be actuarially reduced for a sum equivalent to
the benefit if received at age sixty (60) and shall be payable only for a
period of one hundred twenty (120) months from the date of commencement.
4. PAYMENT UPON DEATH. If such Employee should die before receiving
any of the deferred compensation or before receiving the entire amount of
the deferred compensation payments set forth in paragraph 2, then the
entire balance of such deferred compensation shall be paid to the
designated beneficiary pursuant to paragraph 2.
<PAGE>
If at the date of death of the Employee, none of the payments have
been made and the designated beneficiary is deceased, then such amount
shall be paid to the estate of such Employee or as designated in a power of
appointment in the Last Will of the Employee or under a separate power of
appointment.
If the named beneficiary has become entitled to the monthly payments
and such named beneficiary should die before receiving the entire balance
of such payments, then the entire balance shall be paid to the estate of
such beneficiary or as designated in a power of appointment in such
beneficiary's Will or by separate exercise of such power of appointment.
5. BENEFICIARY. Payments of the monthly sums herein provided in
paragraphs 2, 3, and 4, shall be made to the Employee, if living, and
otherwise to PATRICIA JEAN SMITH, if living; otherwise as specified in
paragraph 4. The beneficiary named herein may be changed at any time by
the Employee, with the agreement of the Corporation, by written amendment.
6. "TOTAL DISABILITY" DEFINED. For purposes of this Agreement,
"total disability" shall be deemed to have occurred if the Compensation
Committee shall find on the basis of medical evidence satisfactory to it
that the Employee is so totally mentally or physically disabled as to be
unable to engage in further employment by the Corporation and that such
disability shall be permanent and continuous during the remainder of his
life.
7. ACCELERATION OF PAYMENTS. The Employee may request and the
Corporation may grant an acceleration of the payments or any of the sums
specified in paragraphs 2, 3 and 4 above; provided, however, the benefits
shall be actuarially reduced based on employee's age at the date benefits
are to begin to a sum equivalent to the benefit amount if received at age
sixty (60).
8. RESTRICTIVE COVENANT. Employee expressly agrees, as a condition
to the performance by the Corporation of its obligations hereunder, that
during the term of this Agreement and during the period for which monthly
payments are to be made, the Employee will not, directly or indirectly,
render any service of an advisory nature or otherwise, to, or become
employed by, or participate or engage in, any business competitive with the
business of the Corporation, without the prior written consent of the
Corporation.
9. PROHIBITION OF ASSIGNMENT. Except as otherwise provided in this
Agreement, the Employee agrees on behalf of himself, his heirs, executors
and assigns, and any other person claiming benefits under him by virtue of
this Agreement, that this Agreement, the rights, interest and benefits
hereunder, shall not be assigned, transferred, pledged or hypothecated in
any way by Employee or other person claiming under him by virtue of this
<PAGE>
Agreement and shall not be subject to execution, attachment or similar
process. Any attempt at assignment, transfer, pledge or hypothecation or
other disposition of this Agreement or of such rights, interests and
benefits contrary to the foregoing provision, or the levy or any attachment
or similar process thereupon, shall be null and void and without effect.
10. EMPLOYMENT RIGHTS. This Agreement creates no right in the
Employee to continue in the Corporation's employ for any specific length of
time nor does it create any other rights in the Employee or obligations on
the part of the Corporation except those set forth in this Agreement.
11. RELEASE. Employee acknowledges that this Amended and Reaffirmed
Deferred Compensation Agreement is the sole and only Agreement between
Employee and Corporation, whether written or oral, concerning Deferred
Compensation and stands instead, substitution and place of any said
Agreements, either written or oral, with the subsidiaries of the
Corporation, excluding valid written employment contracts, pension or
profit sharing plans.
12. BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of any successor of the Corporation under the terms of this
Agreement. As used in this Agreement, the term "successor" shall include
any person, firm, corporation, or other business entity which at any time,
whether by merger, purchase or otherwise, acquires all or substantially all
of the assets or business of the Corporation. It shall also be binding
upon the beneficiaries, heirs, executors and administrators of the
Employee.
13. CONSTRUCTION. This Agreement shall be construed by and under the
laws of the State of Michigan.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed in its corporate name by its corporate officers, duly authorized,
and the Employee has set his hand and seal, as of the day and year above
written.
SHORELINE FINANCIAL CORPORATION, a
Michigan Corporation, "Corporation"
By: /s/ James F. Murphy
Its: Chairman of the Board
/s/ Dan L. Smith
Dan L. Smith, "Employee"
<PAGE>
AMENDED AND REAFFIRMED
DEFERRED COMPENSATION PLAN
This Agreement made this 23rd day of August, A.D. 1991, by and between
SHORELINE FINANCIAL CORPORATION, a Michigan Corporation, of 823 Riverview
Drive, Benton Harbor, Michigan 49022, hereinafter referred to as
"Corporation", and JAMES F. MURPHY, of 1557 North Bonny Bruce Drive,
Stevensville, Michigan 49127, hereinafter referred to as "Employee".
WITNESSETH, That:
WHEREAS, The Employee is a key senior administrative officer of the
Corporation and a participant in a deferred compensation program adopted by
the Board of Directors of Inter-City Bank, a wholly owned subsidiary of
Corporation.
WHEREAS, the Corporation wishes to consolidate at the Corporate level
the Deferred Compensation Agreements of its senior administrative officers,
amend certain provisions thereof, and to ratify said arrangements as
currently exist pursuant to action of said Board of Directors taken June
16th, 1983 and amended May 20th, 1986.
Now, therefore, in consideration of the promises and covenants herein
contained, Corporation and Employee hereby executed this Amended and
Reaffirmed Deferred Compensation Agreement to be effective as of June 16th,
1983, and the date of this Agreement as follows:
1. CONTINUATION OF EMPLOYMENT. The Employee shall remain an
employee of the Corporation until the age of sixty (60) years or the date
of his retirement as mutually agreed between the Employee and the
Corporation as to continued service and subject to the policies of the
Corporation. Until such time as specified above, the Employee shall
continue to devote his time and attention to the service of the
Corporation, at the rate of compensation as established pursuant to the
Compensation Committee of the Corporation, from time to time. Any change
in the compensation shall not be deemed a violation or waiver of any of the
provisions of this Agreement.
The Employee has entered into an agreement contract under which he may
be entitled to certain benefits or severance payments. It is not the
intent of this Agreement to cancel or amend such employment contract and
payments may be made under both contracts simultaneously depending on the
circumstances.
Nothing contained in this Agreement shall be deemed to give the
Employee any right to be retained by the Corporation as an Employee.
2. PAYMENT UPON RETIREMENT. The benefits, based on Employee's
participation in the Plan as originally adopted by the Board of Directors
<PAGE>
of Inter-City Bank on June 16, 1983, shall be paid as Deferred Compensation
as follows:
(a) The Compensation Committee hereby accepts the insured
participation plan previously approved and accepted by the Board of
Directors of Inter-City Bank on June 16, 1983, and amended May 20th, 1986,
for the Employee which provides for fixed compensation to the Employee for
a fixed period of years. In the event the Employee retires from the
Corporation pursuant to the policies of the Corporation related to
retirement at or after age sixty (60), the Employee shall have fully
accrued deferred compensation credit. At the election of the Employee; but
in no event later than six (6) months from the date of retirement, the
Corporation shall pay to the Employee the sum of Two Hundred and Fifty
Thousand and No/100s ($250,000.00) Dollars, in equally monthly installments
of Two Thousand and Eighty Three and thirty three cents ($2,083.33)
Dollars, payable on the first business day of each month for a period not
to exceed one hundred twenty (120) months from date of commencement. If
Employee so retires, but dies before receiving one hundred twenty (120)
monthly payments, the Corporation shall continue to make such monthly
payments to the beneficiary designated in Paragraph 5 herein, until the
total payments made to Employee or his beneficiary equal Two Hundred and
Fifty Thousand and No/100s ($250,000.00) Dollars.
(b) If the Employee's employment hereunder is terminated for any
reason other than death, but before the Employee shall have attained the
age of sixty (60) years, then the amount in the Deferred Compensation
Program shall continue to be invested as the Compensation Committee shall
so direct in its sole discretion, and no payments shall be made until the
Employee shall have attained the age of sixty (60), at which time payments
shall be made in the manner and to the same extent as herein set forth
above. Notwithstanding the foregoing, or if prior to attaining said age,
the Employee should die, then payments shall be made in the manner and to
the same extent as set forth in paragraph (a) above.
3. PAYMENT UPON DISABILITY. If the Employee's employment is
terminated because of disability before he has obtained the age of sixty
(60), and while he is serving in the employment of the Corporation, then
the Board may make monthly or annual payments of substantially equal
amounts to the Employee (in the event of his disability) in the same manner
and to the same extent as provided in paragraph (a) above; provided,
however, said benefits shall be actuarially reduced for a sum equivalent to
the benefit if received at age sixty (60) and shall be payable only for a
period of one hundred twenty (120) months from the date of commencement.
4. PAYMENT UPON DEATH. If such Employee should die before receiving
any of the deferred compensation or before receiving the entire amount of
the deferred compensation payments set forth in paragraph 2, then the
entire balance of such deferred compensation shall be paid to the
designated beneficiary pursuant to paragraph 2.
<PAGE>
If at the date of death of the Employee, none of the payments have
been made and the designated beneficiary is deceased, then such amount
shall be paid to the estate of such Employee or as designated in a power of
appointment in the Last Will of the Employee or under a separate power of
appointment.
If the named beneficiary has become entitled to the monthly payments
and such named beneficiary should die before receiving the entire balance
of such payments, then the entire balance shall be paid to the estate of
such beneficiary or as designated in a power of appointment in such
beneficiary's Will or by separate exercise of such power of appointment.
5. BENEFICIARY. Payments of the monthly sums herein provided in
paragraphs 2, 3, and 4, shall be made to the Employee, if living, and
otherwise to FRANCES J. MURPHY, if living; otherwise as specified in
paragraph 4. The beneficiary named herein may be changed at any time by
the Employee, with the agreement of the Corporation, by written amendment.
6. "TOTAL DISABILITY" DEFINED. For purposes of this Agreement,
"total disability" shall be deemed to have occurred if the Compensation
Committee shall find on the basis of medical evidence satisfactory to it
that the Employee is so totally mentally or physically disabled as to be
unable to engage in further employment by the Corporation and that such
disability shall be permanent and continuous during the remainder of his
life.
7. ACCELERATION OF PAYMENTS. The Employee may request and the
Corporation may grant an acceleration of the payments or any of the sums
specified in paragraphs 2, 3 and 4 above; provided, however, the benefits
shall be actuarially reduced based on employee's age at the date benefits
are to begin to a sum equivalent to the benefit amount if received at age
sixty (60).
8. RESTRICTIVE COVENANT. Employee expressly agrees, as a condition
to the performance by the Corporation of its obligations hereunder, that
during the term of this Agreement and during the period for which monthly
payments are to be made, the Employee will not, directly or indirectly,
render any service of an advisory nature or otherwise, to, or become
employed by, or participate or engage in, any business competitive with the
business of the Corporation, without the prior written consent of the
Corporation.
9. PROHIBITION OF ASSIGNMENT. Except as otherwise provided in this
Agreement, the Employee agrees on behalf of himself, his heirs, executors
and assigns, and any other person claiming benefits under him by virtue of
this Agreement, that this Agreement, the rights, interest and benefits
hereunder, shall not be assigned, transferred, pledged or hypothecated in
any way by Employee or other person claiming under him by virtue of this
<PAGE>
Agreement and shall not be subject to execution, attachment or similar
process. Any attempt at assignment, transfer, pledge or hypothecation or
other disposition of this Agreement or of such rights, interests and
benefits contrary to the foregoing provision, or the levy or any attachment
or similar process thereupon, shall be null and void and without effect.
10. EMPLOYMENT RIGHTS. This Agreement creates no right in the
Employee to continue in the Corporation's employ for any specific length of
time nor does it create any other rights in the Employee or obligations on
the part of the Corporation except those set forth in this Agreement.
11. RELEASE. Employee acknowledges that this Amended and Reaffirmed
Deferred Compensation Agreement is the sole and only Agreement between
Employee and Corporation, whether written or oral, concerning Deferred
Compensation and stands instead, substitution and place of any said
Agreements, either written or oral, with the subsidiaries of the
Corporation, excluding valid written employment contracts, pension or
profit sharing plans.
12. BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of any successor of the Corporation under the terms of this
Agreement. As used in this Agreement, the term "successor" shall include
any person, firm, corporation, or other business entity which at any time,
whether by merger, purchase or otherwise, acquires all or substantially all
of the assets or business of the Corporation. It shall also be binding
upon the beneficiaries, heirs, executors and administrators of the
Employee.
13. CONSTRUCTION. This Agreement shall be construed by and under the
laws of the State of Michigan.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed in its corporate name by its corporate officers, duly authorized,
and the Employee has set his hand and seal, as of the day and year above
written.
SHORELINE FINANCIAL CORPORATION, a
Michigan Corporation, "Corporation"
By: /s/ James F. Murphy
Its: Chairman of the Board
/s/ James F. Murphy
James F. Murphy, "Employee"
<PAGE>
EXHIBIT 10.5
SHORELINE FINANCIAL CORPORATION
ANNUAL INCENTIVE COMPENSATION PLAN
1998
<PAGE>
STATEMENT OF EXECUTIVE COMPENSATION OBJECTIVES
BUSINESS GOALS AND OBJECTIVES
Shoreline is a "super community bank" operating in Southwestern
Michigan. The Company has enjoyed good growth and has produced above
average results as measured by various indices of financial performance.
The Company identifies superior financial performance as one of
its primary business objectives. Relative total return to stockholders
(i.e. dividends plus market appreciation) is Shoreline's most important
long-term financial objective. In this context "relative" is indicative of
measurement against similar super community banking organizations.
OBLIGATION TO SHAREHOLDERS
Shoreline's primary obligation to its shareholders is to provide
a competitive "total return." However, due to factors beyond the influence
of management (e.g. overall movement of the stock market, public "favor" or
"disfavor" of industries within the market), relative total return to
stockholders is difficult to control.
On the other hand, return on equity, which has a high degree of
correlation with stock price, especially for banks, is a factor that can be
controlled by management. Based on the relationship of ROE to stock price,
Shoreline focus on improving its ROE as a means by which to ensure the
highest possible relative total return to shareholders.
To attract and retain quality management talent, the Company
should provide base salaries that are at the 50th percentile. Any
additional compensation above and beyond the 50th percentile will be
provided through the Company's annual (and long-term) incentive programs.
However, above average incentives will be paid only if the Company's
performance is above average.
Finally, a corporate performance threshold should be established,
below which no incentive awards would be paid. This will help contain
compensation costs and prevent negative shareholder reactions to paying a
bonus in a year of poor performance.
<PAGE>
SPECIFICATIONS FOR THE ANNUAL INCENTIVE PLAN
1998
CONCEPT: An annual incentive plan for key officers of the Company.
Performance objectives and award opportunities will be
specified and communicated prior to the beginning of each
plan year (the calendar year).
PURPOSE: The primary purpose of the Plan is to reward the outstanding
performance of key officers. Specific objectives include:
- reward executives for achieving specific predetermined goals
- motivate participants to work more effectively
- focus the attention of officers and key managers on
items of major importance to their lines of business
PLAN GOVERNANCE: The Organization, Compensation, Stock Option
Committee (OCS) will be responsible for the governance of the
Plan. The OCS will be responsible for final determination of
eligibility, participation, award opportunity and earned
awards under the Plan. The determination of the OCS shall
be conclusive and binding on all participants.
ELIGIBILITY: The OCS has determined the following individuals to be
eligible for participation in the Plan in 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
Dan L. Smith Chairman, CEO & President
Richard D. Bailey Executive Vice President
Robert K. Burch Executive Vice President
Wayne R. Koebel Executive Vice President, CFO
James R. Milroy Executive Vice President, Cashier
Hilda Banyon First Vice President, Human Resources
Joseph Calvaruso Senior Vice President, Loan Administration
Michael Doherty First Vice President, Commercial Loans
Gary Dolezan Senior Vice President, Mortgage Loans
Ken Johnson Vice President, Regional Manager
Al Newcomb Vice President, Operations
Ron Sonneman Senior Vice President, Trust
Gary Teske Vice President, Consumer Loans
Eileen Toney Vice President, Regional Manager
</TABLE>
PARTICIPATION: Each individual's participation in the Plan will be
subject to annual approval by the OCS.
-2-
<PAGE>
PERFORMANCE
ASSESSMENT: Performance will be assessed at three levels:
- corporate
- business unit (or position function)
- individual
The weighting of each level of assessment for each
participant will be approved annually by the OCS. For 1998,
levels of assessment for eligible participants are as
follows:
<TABLE>
<CAPTION>
PARTICIPANT CORPORATE BUSINESS UNIT INDIVIDUAL
- ----------- --------- ------------- ----------
<S> <C> <C> <C>
Smith 100% --- ---
Bailey 60% 30% 10%
Burch 60% 30% 10%
Koebel 60% 30% 10%
Milroy 60% 30% 10%
Banyon 60% 30% 10%
Calvaruso 60% 30% 10%
Doherty 50% 40% 10%
Dolezan 50% 40% 10%
Johnson 50% 40% 10%
Newcomb 60% 30% 10%
Sonneman 50% 40% 10%
Teske 50% 40% 10%
Toney 50% 40% 10%
</TABLE>
AWARD
DETERMINATION: At the beginning of each plan year, a target award
will be established for each participant. Target
awards are expressed as a percent of annual base
pay.
Target awards for participants in the 1998 Plan are:
-3-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Smith 50% Newcomb 27%
Bailey 40% Sonneman 27%
Burch 40% Banyon 10%
Koebel 40% Doherty 10%
Milroy 40% Johnson 10%
Calvaruso 27% Teske 10%
Dolezan 27% Toney 10%
</TABLE>
Performance factors (goals) will be established at the
beginning of each plan year. The corporate performance factor
will be established by the Chief Executive Officer and approved
by the OCS.
Business unit (or position function) and individual performance
factors will be established and discussed and agreed to by each
participant at the beginning of each plan year.
These corporate, business unit (or position function), and
individual performance factors (goals) will be used by the
Chief Executive Officer and the OCS for assessing corporate,
business unit (or position function) and individual results
under the Plan.
During the plan year, at least one mid-year review will be
conducted with participants to assess progress toward
corporate, business unit (or position function) and individual
objectives.
At the end of each plan, the Chief Executive Officer and the
OCS assess corporate, business unit (or position function) and
individual results using the performance factors set at the
beginning of the year.
The award payable to each participant will be the total of the
three performance assessments. An illustration follows:
-4-
<PAGE>
ILLUSTRATION:
<TABLE>
<CAPTION>
COMPONENT WEIGHTING ASSESSMENT FACTOR
--------- --------- ---------- ------
<S> <C> <C> <C> <C>
Corporate 50% 100% 50%
Business Unit 40% 90% 36%
Individual 10% 110% 11%
---
Total 97%
===
Base Pay $70,000
Target 25%
</TABLE>
Award Earned:
$70,000 x 25% (Target) x 97% (Weighted Score) = $16,975
MINIMUM LEVEL
OF CORPORATE
PERFORMANCE: The OCS will specify a minimum level of corporate performance
below which no award will be paid for the applicable plan year.
MAXIMUM AWARD: A cap will be placed on individual awards payable to
participants. Even when performance exceeds predetermined
levels, no individual's total award will exceed 150% of target.
NOTE: As 1998 is the first year of the plan, an initial cap
of 125% will be used.
VESTING OF
AWARDS: Awards under the Plan will vest as of the last day of each
plan year. Participants who leave the employ of the Company
during a plan year forfeit any rights to an award for that
year. The OCS may, in its sole discretion, make a partial
award to a participant who leaves the employ of the Company
during a plan year due to death, total and permanent
disability, or retirement.
PAYMENT OF
AWARDS: The payment of awards will be made as soon as practicable
after the Chief Executive Officer and the OCS complete their
assessment of performance and approve individual awards.
TERMS OF
EMPLOYMENT: Nothing in the Plan shall interfere with or limit in any way
the right of the Company to terminate any participant's
employment at any time, nor confer on any participant any
right to continue in the employ of the Company.
-5-
<PAGE>
EXHIBIT 23
[CROWE, CHIZEK LOGO]
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference and use of our report,
dated February 12, 1999, on the consolidated financial statements of
Shoreline Financial Corporation which appears on page 23 of Shoreline
Financial Corporation's Form 10-K for the year ended December 31, 1998, in
Shoreline Financial Corporation's previously filed registration statements
for its 1989 Stock Option Plan (Registration No. 33-29052), Dividend
Reinvestment Plan (Registration No. 33-34008), 401(k) Profit Sharing Plan
(Registration No. 333-10629) and Stock Incentive Plan of 1996 (Registration
No. 333-09819).
s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
March 16, 1999
<PAGE>
EXHIBIT 24
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Shoreline Financial Corporation, does
hereby appoint DAN L. SMITH and WAYNE R. KOEBEL, or either of them, his or
her attorneys or attorney, with full power of substitution, to execute in
his or her name an Annual Report of Shoreline Financial Corporation on Form
10-K for its fiscal year ended December 31, 1998, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Each attorney shall have power and authority to do and perform in the name
and on behalf of the undersigned, in any and all capacities, every act to
be done in the premises as fully and to all intents and purposes as the
undersigned could do in person, and the undersigned hereby ratifies and
approves the acts of such attorneys.
Dated: 2/17/99 /S/ JEFF TOBIAN
(signature)
JEFF TOBIAN
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Shoreline Financial Corporation, does
hereby appoint DAN L. SMITH and WAYNE R. KOEBEL, or either of them, his or
her attorneys or attorney, with full power of substitution, to execute in
his or her name an Annual Report of Shoreline Financial Corporation on Form
10-K for its fiscal year ended December 31, 1998, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Each attorney shall have power and authority to do and perform in the name
and on behalf of the undersigned, in any and all capacities, every act to
be done in the premises as fully and to all intents and purposes as the
undersigned could do in person, and the undersigned hereby ratifies and
approves the acts of such attorneys.
Dated: 2/17/99 /S/ ROBERT L. STARKS
(signature)
ROBERT L. STARKS
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Shoreline Financial Corporation, does
hereby appoint DAN L. SMITH and WAYNE R. KOEBEL, or either of them, his or
her attorneys or attorney, with full power of substitution, to execute in
his or her name an Annual Report of Shoreline Financial Corporation on Form
10-K for its fiscal year ended December 31, 1998, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Each attorney shall have power and authority to do and perform in the name
and on behalf of the undersigned, in any and all capacities, every act to
be done in the premises as fully and to all intents and purposes as the
undersigned could do in person, and the undersigned hereby ratifies and
approves the acts of such attorneys.
Dated: 2/17/99 /S/ L. RICHARD MARZKE
(signature)
L. RICHARD MARZKE
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Shoreline Financial Corporation, does
hereby appoint DAN L. SMITH and WAYNE R. KOEBEL, or either of them, his or
her attorneys or attorney, with full power of substitution, to execute in
his or her name an Annual Report of Shoreline Financial Corporation on Form
10-K for its fiscal year ended December 31, 1998, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Each attorney shall have power and authority to do and perform in the name
and on behalf of the undersigned, in any and all capacities, every act to
be done in the premises as fully and to all intents and purposes as the
undersigned could do in person, and the undersigned hereby ratifies and
approves the acts of such attorneys.
Dated: 2/25/99 /S/ JAMES F. MURPHY
(signature)
JAMES F. MURPHY
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Shoreline Financial Corporation, does
hereby appoint DAN L. SMITH and WAYNE R. KOEBEL, or either of them, his or
her attorneys or attorney, with full power of substitution, to execute in
his or her name an Annual Report of Shoreline Financial Corporation on Form
10-K for its fiscal year ended December 31, 1998, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Each attorney shall have power and authority to do and perform in the name
and on behalf of the undersigned, in any and all capacities, every act to
be done in the premises as fully and to all intents and purposes as the
undersigned could do in person, and the undersigned hereby ratifies and
approves the acts of such attorneys.
Dated: 3/05/99 /S/ JAMES E. LEBLANC
(signature)
JAMES E. LEBLANC
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Shoreline Financial Corporation, does
hereby appoint DAN L. SMITH and WAYNE R. KOEBEL, or either of them, his or
her attorneys or attorney, with full power of substitution, to execute in
his or her name an Annual Report of Shoreline Financial Corporation on Form
10-K for its fiscal year ended December 31, 1998, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Each attorney shall have power and authority to do and perform in the name
and on behalf of the undersigned, in any and all capacities, every act to
be done in the premises as fully and to all intents and purposes as the
undersigned could do in person, and the undersigned hereby ratifies and
approves the acts of such attorneys.
Dated: 2/19/99 /S/ THOMAS T. HUFF
(signature)
THOMAS T. HUFF
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Shoreline Financial Corporation, does
hereby appoint DAN L. SMITH and WAYNE R. KOEBEL, or either of them, his or
her attorneys or attorney, with full power of substitution, to execute in
his or her name an Annual Report of Shoreline Financial Corporation on Form
10-K for its fiscal year ended December 31, 1998, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Each attorney shall have power and authority to do and perform in the name
and on behalf of the undersigned, in any and all capacities, every act to
be done in the premises as fully and to all intents and purposes as the
undersigned could do in person, and the undersigned hereby ratifies and
approves the acts of such attorneys.
Dated: 2/24/99 /S/ LOUIS A. DESENBERG
(signature)
LOUIS A. DESENBERG
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Shoreline Financial Corporation, does
hereby appoint DAN L. SMITH and WAYNE R. KOEBEL, or either of them, his or
her attorneys or attorney, with full power of substitution, to execute in
his or her name an Annual Report of Shoreline Financial Corporation on Form
10-K for its fiscal year ended December 31, 1998, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Each attorney shall have power and authority to do and perform in the name
and on behalf of the undersigned, in any and all capacities, every act to
be done in the premises as fully and to all intents and purposes as the
undersigned could do in person, and the undersigned hereby ratifies and
approves the acts of such attorneys.
Dated: 2/20/99 /S/ RONALD L. ZILE
(signature)
RONALD L. ZILE
(type or print name)
<PAGE>
LIMITED POWER OF ATTORNEY
The undersigned, in his or her capacity as a director or officer,
or both, as the case may be, of Shoreline Financial Corporation, does
hereby appoint DAN L. SMITH and WAYNE R. KOEBEL, or either of them, his or
her attorneys or attorney, with full power of substitution, to execute in
his or her name an Annual Report of Shoreline Financial Corporation on Form
10-K for its fiscal year ended December 31, 1998, and any amendments to
that report, and to file it with the Securities and Exchange Commission.
Each attorney shall have power and authority to do and perform in the name
and on behalf of the undersigned, in any and all capacities, every act to
be done in the premises as fully and to all intents and purposes as the
undersigned could do in person, and the undersigned hereby ratifies and
approves the acts of such attorneys.
Dated: 2/24/99 /S/ MERLIN J. HANSON
(signature)
MERLIN J. HANSON, DIRECTOR
(type or print name)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE AUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF SHORELINE
FINANCIAL CORPORATION, INC. AND SUBSIDIARIES FOR THE PERIOD ENDED DECEMBER
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 35,814
<INT-BEARING-DEPOSITS> 20,301
<FED-FUNDS-SOLD> 15,775
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 190,735
<INVESTMENTS-CARRYING> 25,166
<INVESTMENTS-MARKET> 26,180
<LOANS> 635,159
<ALLOWANCE> 7,883
<TOTAL-ASSETS> 955,264
<DEPOSITS> 795,842
<SHORT-TERM> 21,191
<LIABILITIES-OTHER> 4,542
<LONG-TERM> 46,478
<COMMON> 0
0
0
<OTHER-SE> 87,211
<TOTAL-LIABILITIES-AND-EQUITY> 955,264
<INTEREST-LOAN> 53,934
<INTEREST-INVEST> 12,132
<INTEREST-OTHER> 2,058
<INTEREST-TOTAL> 68,124
<INTEREST-DEPOSIT> 30,491
<INTEREST-EXPENSE> 34,133
<INTEREST-INCOME-NET> 33,991
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 65
<EXPENSE-OTHER> 23,452
<INCOME-PRETAX> 17,590
<INCOME-PRE-EXTRAORDINARY> 17,590
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,114
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.34
<YIELD-ACTUAL> 2.50
<LOANS-NON> 1,080
<LOANS-PAST> 427
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,556
<ALLOWANCE-OPEN> 7,588
<CHARGE-OFFS> 790
<RECOVERIES> 296
<ALLOWANCE-CLOSE> 7,883
<ALLOWANCE-DOMESTIC> 4,739
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,145
</TABLE>
