SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
======================
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _____________ to ______________.
Commission File No.: 0-16444
SHORELINE FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-2758932
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
823 RIVERVIEW DRIVE
BENTON HARBOR, MICHIGAN 49022
(Address of Principal Executive Offices) (Zip Code)
(616) 927-2251
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ___X___ No _______
As of October 31, 1998, there were 9,179,220 issued and outstanding shares
of the Registrant's Common Stock.
SHORELINE FINANCIAL CORPORATION
FORM 10-Q
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets,
September 30, 1998 and December 31, 1997 3-4
Condensed Consolidated Statements of Income,
Three Months and Nine Months Ended Sept 30,
1998 and 1997 5
Condensed Consolidated Statements of
Comprehensive Income Three Months and Nine
Months Ended Sept 30, 1998 and 1997 6
Condensed Consolidated Statements of Cash
Flows, Nine Months Ended September 30, 1998
and 1997 7
Notes to Condensed Consolidated Financial
Statements 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 22
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
ASSETS
Cash and due from banks $ 30,532,808 $ 29,961,993
Interest-earning deposits 36,608,242 6,344,447
Federal funds sold 1,375,000 8,675,000
------------ ------------
Total cash and cash equivalents 68,516,050 44,981,440
Securities held to maturity
(fair values of $30,963,000 and
$39,572,300 on September 30, 1998 and
December 31, 1997, respectively) 29,773,638 38,385,568
Securities available for sale (carried at fair value) 178,869,600 125,534,904
Total loans 632,299,514 619,636,155
Less allowance for loan losses 7,901,798 7,588,127
------------ ------------
Net loans 624,397,716 612,048,028
Premises and equipment, net 13,694,492 13,560,859
Intangible assets, net 15,189,606 11,901,520
Other assets 11,870,451 11,430,483
------------ ------------
Total Assets $942,311,553 $857,842,802
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non interest-bearing $ 85,812,129 $ 78,971,373
Interest-bearing 695,682,338 643,692,981
------------ ------------
Total deposits 781,494,467 722,664,354
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Securities sold under agreements to repurchase 15,575,559 7,526,582
Other liabilities 5,315,974 5,593,571
FHLB advances 49,745,362 45,175,892
------------ ------------
Total Liabilities 852,131,362 780,960,399
------------ ------------
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SHORELINE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS - CONTINUED
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
Shareholders' Equity
Common stock:
15,000,000 shares authorized; 9,206,397
and 8,882,264 shares issued and
outstanding at September 30, 1998 and
December 31, 1997, respectively 0 0
Additional paid-in capital 73,851,380 65,273,177
Stock incentive plan (unearned shares) (953,792) (495,095)
Unrealized gain on securities
available for sale, net 2,142,253 1,604,270
Retained earnings 15,140,350 10,500,051
------------ ------------
Total Shareholders' Equity 90,180,191 76,882,403
------------ ------------
Total Liabilities & Shareholders' Equity $942,311,553 $857,842,802
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
INTEREST INCOME
Loans, including fees $13,496,716 $13,869,295 $40,472,079 $36,543,362
Securities 3,087,835 2,880,386 8,717,655 7,944,920
Deposits with banks 553,898 104,537 1,277,105 355,133
Federal funds sold 131,180 112,320 370,885 789,803
----------- ----------- ----------- -----------
Total interest income 17,269,629 16,966,538 50,837,724 45,633,218
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 7,673,698 7,664,832 22,855,777 20,546,605
Other 987,867 761,072 2,786,178 1,537,608
----------- ----------- ----------- -----------
Total interest expense 8,661,565 8,425,904 25,641,955 22,084,213
----------- ----------- ----------- -----------
NET INTEREST INCOME 8,608,064 8,540,634 25,195,769 23,549,005
Provision for loan losses 150,000 180,000 450,000 420,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,458,064 8,360,634 24,745,769 23,129,005
----------- ----------- ----------- -----------
OTHER INCOME
Service charges on deposit accounts 560,356 533,588 1,617,462 1,551,274
Trust fees 505,433 423,637 1,499,864 1,242,501
Gain on sales and calls of securities 0 9,785 3,237 122,688
Gain on sales of mortgages 335,631 229,047 1,070,058 338,957
Other 419,855 317,227 1,370,016 876,714
----------- ----------- ----------- -----------
Total other income 1,821,275 1,513,284 5,560,637 4,132,134
----------- ----------- ----------- -----------
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OTHER EXPENSES
Personnel 3,173,507 2,991,317 9,119,644 8,446,006
Occupancy 394,765 402,416 1,223,442 1,095,917
Equipment 525,044 557,685 1,593,719 1,590,702
Other 1,782,860 1,780,201 5,236,071 4,693,494
----------- ----------- ----------- -----------
Total other expense 5,876,176 5,731,619 17,172,876 15,826,119
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 4,403,163 4,142,299 13,133,530 11,435,020
Federal income tax expense 1,393,500 1,289,500 4,075,950 3,390,500
----------- ----------- ----------- -----------
NET INCOME $ 3,009,663 $ 2,852,799 $ 9,057,580 $ 8,044,520
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic $ .33 $ .32 $ 1.01 $ .92
=========== =========== =========== ===========
Diluted $ .33 $ .32 $ 1.01 $ .92
=========== =========== =========== ===========
DIVIDENDS PER SHARE $ .17 $ .14 $ .49 $ .42
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
NET INCOME $ 3,009,663 $ 2,852,799 $ 9,057,580 $ 8,044,520
Other comprehensive income, net of tax:
Change in unrealized gains (losses)
on securities 578,594 504,019 537,984 139,962
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 3,588,257 $ 3,356,818 $ 9,595,564 $ 8,184,482
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-8-
SHORELINE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 9,057,580 $ 8,044,520
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 1,232,692 1,215,992
Provision for loan losses 450,000 420,000
Net amortization and accretion on securities 207,797 199,600
Amortization of intangibles 621,711 368,425
Stock incentive expense 111,303 80,840
Gain on sales and calls of securities (3,237) (122,688)
Increase in other assets (921,658) (597,150)
Increase (decrease) in other liabilities (547,093) (1,660,556)
----------- -----------
NET CASH FROM OPERATING ACTIVITIES 10,209,095 7,948,983
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase)/decrease in loans (2,504,466) (13,488,722)
Sale of mortgage loan pool 0 8,842,810
Securities available for sale:
Purchase (77,342,853) (33,394,954)
Proceeds from sale 0 15,771,748
Proceeds from maturities, calls and principal
reductions 33,983,822 12,035,611
Securities held to maturity:
Purchase (4,954,285) (4,276,335)
Proceeds from maturities, calls and principal
reductions 13,539,765 8,380,242
Premises and equipment expenditures (1,064,577) (1,644,770)
Net cash paid for acquisitions 7,389,275 (20,436,447)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (30,953,319) (28,210,817)
----------- -----------
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 35,069,465 10,803,926
Net increase in short-term borrowings 8,048,977 1,717,277
Proceeds from FHLB advances 25,000,000 19,500,000
Repayment of FHLB advances (20,430,530) (8,926,239)
Dividends paid (4,417,281) (3,715,536)
Proceeds from shares issued 1,078,066 841,117
Payments to retire common stock (69,863) 0
----------- -----------
NET CASH FROM FINANCING ACTIVITIES 44,278,834 20,220,545
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 23,534,610 (41,289)
Cash and Cash Equivalents at Beginning of Year 44,981,440 61,558,670
----------- -----------
Cash and Cash Equivalents at September 30 $68,516,050 $61,517,381
=========== ===========
CASH PAID DURING THE YEAR FOR:
Interest $25,617,897 $21,653,560
Income Taxes $ 4,035,000 $ 3,077,000
The accompanying notes are an integral part of these consolidated financial
statements.
-10-
SHORELINE FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
were prepared in accordance with Rule 10-01 of Regulation S-X and the
instructions for Form 10-Q and, therefore, do not include all disclosures
required by generally accepted accounting principles for complete
presentation of financial statements. In the opinion of management, the
condensed consolidated financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly
the financial condition of Shoreline Financial Corporation as of September
30, 1998 and December 31, 1997, and the results of its operations for the
three and nine months ended September 30, 1998 and 1997, and its cash flows
for the nine months ended September 30, 1998 and 1997. The results of
operations for the nine months ended September 30, 1998 are not necessarily
indicative of the results to be expected for the full year. The
accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes
thereto included in Shoreline Financial Corporation's Annual Report on Form
10-K for the year ended December 31, 1997.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. This
Statement need not be applied to interim financial statements in the
initial year of its application, but comparative information for interim
periods in the initial year of application is to be reported in financial
statements for interim periods in the second year of application.
Management is in the process of determining whether any identified business
segments will require future reporting.
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June, 1998. SFAS No. 133 is effective for all
fiscal quarters beginning after June 15, 1999. SFAS No. 133 standardizes
the accounting for derivative instruments embedded in other contracts by
-11-
requiring the recognition of those items as assets or liabilities in the
statement of financial position and measuring them at fair value. SFAS No.
133 generally provides for matching the timing of gain or loss recognition
on the hedging instrument with the recognition of (a) changes in the fair
value of the hedged asset or liability that are attributable to the hedged
risk, or (b) the earnings effect of the hedged forecasted transaction. The
adoption of SFAS No. 133 is not expected to have a material impact on the
financial position, liquidity or results of operations of Shoreline.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Shoreline Financial Corporation and its wholly owned
subsidiary, Shoreline Bank, together referred to as "Shoreline". All
material intercompany accounts and transactions have been eliminated in
consolidation.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Securities are classified into held to maturity, available for sale
and trading categories. Held to maturity securities are those that
Shoreline has the positive intent and ability to hold to maturity, and are
reported at amortized cost. Available for sale securities are those that
Shoreline may decide to sell if needed for liquidity, asset-liability
management or other reasons. Available for sale securities are reported at
fair value, with unrealized gains or losses included as a separate
component of equity, net of tax. Trading securities are bought principally
for sale in the near term and are reported at fair value with unrealized
gains or losses included in earnings. Shoreline did not hold any trading
securities at any time during the first nine months of 1998.
Realized gains or losses are determined based on the amortized cost of
the specific security sold.
During the nine-month period ended September 30, 1998, there were no
sales of available for sale securities. Gross gains of $3,237 were
realized on calls of securities during the period. For this period, the
net unrealized holding gains on available for sale securities increased
$537,983. There were no sales or transfers of securities classified as
held to maturity.
ACQUISITION INTANGIBLES
Goodwill represents the excess of the purchase price over the net
value of tangible assets acquired and related core deposit intangibles
identified in branch acquisitions. Goodwill is being amortized on a
straight-line basis for a period of no more than 25 years. The related
-12-
core deposit intangibles are amortized on an accelerated basis over the
estimated life of the deposits acquired. Goodwill and identified
intangibles are assessed for impairment based on estimated undiscounted
cash flows, and written down if necessary.
INCOME TAXES
Income tax expense for the periods ended September 30, 1998 and 1997
is based upon the asset and liability method. Shoreline records income tax
expense based on the amount of taxes due on its tax return plus deferred
taxes computed based on the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, using enacted rates.
EARNINGS PER SHARE
Basic earnings per share is computed based on weighted average common
shares outstanding during the period. Diluted earnings per share further
assumes the issue of any potentially dilutive common shares.
COMPREHENSIVE INCOME
Under a new accounting standard, comprehensive income is now reported
for all periods. Comprehensive income includes both net income and other
comprehensive income. Other comprehensive income includes the change in
unrealized gains and losses on securities available for sale.
NOTE 2 - ACQUISITIONS
In July of 1998, Shoreline completed the acquisition of The State Bank
of Coloma ("State Bank") 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, and accordingly, the purchase price has been allocated
to the assets purchased and the liabilities assumed based upon the
estimated fair values at the date of the acquisition. The excess of the
purchase price over the fair values of the net assets acquired was
approximately $3.7 million and has been recorded as goodwill and core
deposit intangibles, which are being amortized on a straight-line basis
over 20 years and on an accelerated basis over 10 years, respectively. The
purchase accounting adjustments are being amortized under various methods
and over the lives of the corresponding assets and liabilities. Following
are the fair values (in thousands of dollars) of the assets acquired and
the liabilities assumed as of the July, 1998 acquisition date.
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Cash acquired $ 7,389
Securities 9,339
Loans, net 10,295
Premises and equipment, net 302
Acquisition intangibles 3,714
Other assets (9)
Deposits (23,761)
Other Liabilities (269)
NOTE 3 - OTHER EMPLOYEE BENEFITS
During the third quarter of 1998, 19,000 additional shares were
awarded under the restricted stock provisions of the stock incentive plan.
The shares were awarded at the market price of Shoreline's stock on the
date of the 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.
NOTE 4 - STOCK REPURCHASE PROGRAM
Shoreline's Board of Directors, at its August 18, 1998 meeting,
authorized the purchase of up to 225,000 shares of the Corporation's common
stock. It is anticipated that these shares will be purchased by the
Corporation in a systematic program of open market and privately negotiated
purchases, and that they will be reserved for later reissue in connection
with possible future stock dividends, employee benefit plans, the company's
dividend reinvestment plan, and other general corporate purposes.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion compares the financial condition of Shoreline
Financial Corporation ("Shoreline") at September 30, 1998 to December 31,
1997 and the results of operations for the three and nine months ended
September 30, 1998 with the same periods in 1997. The acquisition of The
State Bank of Coloma ("State Bank") in the quarter ended September 30, 1998
is reflected in the Balance Sheet of Shoreline, with the addition of
approximately $31.0 million in market value adjusted assets, and in the
results of operations from the date of acquisition (See Note 2).
FINANCIAL CONDITION
On September 30, 1998, total deposits were $781.5 million, up $58.5
million from December 31, 1997. Total deposits averaged $759.7 million
during the third quarter of 1998, an increase of $23.2 million over the
previous quarter's average of $736.5 million and $29.4 million over the
quarter ended December 31, 1997 average of $730.3 million. A comparison of
the quarterly averages for the past three quarters follows:
AVG BAL AVG BAL AVG BAL
2RD QTR 98 2ND QTR 98 1ST QTR 97
- --------------------------------------------------------------------------------------
(000S)
Noninterest-Bearing Demand Deposits $ 87,566 $ 79,017 $ 77,303
Interest-Bearing Demand Deposits 148,457 146,749 143,398
Savings Deposits 153,971 146,492 145,062
Time Deposits 369,748 364,286 367,280
-------- -------- --------
Total $759,742 $736,544 $733,043
======== ======== ========
All categories of the retail deposit base participated in Shoreline's
growth in average deposits during the quarter ended September 30, 1998.
Non interest-bearing demand deposits increased $8.5 million in the third
quarter primarily due to additional commercial account relationships being
developed. Growth in the savings deposit category of $7.5 million in the
third quarter was largely impacted by increased balances of $5.3 million in
Shoreline's Capital Club account, a tiered-rate savings product targeted at
consumers maintaining average balances in excess of $7500. The increase in
average time deposit balances of $5.5 million in the quarter ending
September 30, 1998 was primarily the result of the acquisition of State
Bank and the associated addition of $3.8 million in average time deposits.
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In addition to the deposit funding sources above, Shoreline
capitalized on the favorable interest rate environment by utilizing its
membership with the Federal Home Loan Bank of Indianapolis ("FHLB") as an
alternative wholesale funding source. Average borrowings from the FHLB
increased by $7.2 million in the first nine months of 1998. At September
30, 1998, Shoreline had $49.7 million of advances outstanding with the
FHLB.
The additional funds made available through increased deposits and
FHLB advances have primarily been invested in interest-earning deposits
along with the investment securities portfolio. Increased cash and cash
equivalents, primarily related to interest-earning deposits, provided the
majority of growth in Shoreline's total assets during the first nine months
of 1998. Cash and cash equivalents averaged $85.4 million in the third
quarter of 1998, up $10.9 million from the previous quarter's average of
$74.5 million. Interest-earning deposits and federal funds sold accounted
for the majority of this increase, averaging $50.5 million for the third
quarter of 1998, up $8.3 million from the previous quarter.
Funds have also been significantly invested in the investment
securities portfolio during 1998. The total investment securities
portfolio averaged $189.3 million in the third quarter of 1998, an increase
of $18.9 million from the quarter ended June 30, 1998. Increased
investments in U.S. Government Agency securities accounted for this growth.
Total average investments have increased $11.7 million for the nine months
ended September 30, 1998.
Total loans averaged $615.6 million during the third quarter of 1998,
basically the same as the previous quarter's average of $615.5 million. The
low interest rate environment in the first half of 1998 has spurred high
levels of mortgage refinancing into longer term fixed rate loans resulting
in sales of the majority of loan originations in the secondary market.
Aware of the impact that the current interest rate environment has had on
the mortgage loan portfolio, Shoreline purchased $5.9 million of balloon
mortgage loans in the third quarter of 1998 partially to offset the decline
noted above. Also, the addition of State Bank's loan portfolio provided
growth of $3.4 million in average balances for the third quarter of 1998.
As opportunities exist, Shoreline anticipates purchasing additional balloon
and adjustable mortgages to augment loan originations for the portfolio and
to offset the effect of fixed rate sales in the secondary market. Consumer
loan average balances increased by $3.2 million during the first nine
months of 1998.
Total non-performing assets at September 30, 1998 were $1.8 million,
which represents .28% of Shoreline's total loan portfolio at that date.
This level of non-performing assets has declined from the December 31, 1997
ratio of .41%. Non-performing assets include loans that are classified for
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regulatory purposes as contractually past due 90 days or more, on non-
accrual status or as "troubled debt restructurings," and other real estate
owned.
During the third quarter of 1998, Shoreline experienced net loan
charge-offs of $116,162, which represents only .02% of average total loans
for the quarter. The provision for loan losses for the third quarter of
1998 was $150,000, equal to the provision in each of the first two quarters
of the year. At September 30, 1998, Shoreline's allowance for loan losses
was $7,901,798, which provides coverage of over 4.6 times the level of non-
performing assets identified at September 30, 1998. As a percentage of
total loans, the allowance for loan losses was 1.25% at September 30, 1998,
which compares favorably to the December 31, 1997 level of 1.22%.
LIQUIDITY AND RATE SENSITIVITY
As of September 30, 1998, Shoreline's loan to deposit ratio was 80.9%,
down from the December 31, 1997 ratio of 85.7%. Interest-earning deposits
and Federal funds sold of $38.0 million at September 30, 1998 represented
4.0% of Shoreline's total assets, as compared to $15.0 million or 1.8% of
total assets at December 31, 1997. Approximately $178.9 million, or 85.7%,
of Shoreline's total securities portfolio was classified as available for
sale on September 30, 1998 and $3.0 million of loans were classified as
held for sale. On September 30, 1998, Shoreline had commitments to make or
purchase loans, including the unused portions of lines of credit, totaling
$161.2 million.
The cumulative funding gaps on September 30, 1998 of interest-earning
assets and interest-bearing liabilities for selected maturity periods are
illustrated as follows:
REPRICEABLE OR MATURING WITHIN:
----------------------------------------------
0 TO 3 0 TO 12 0 TO 5
(000S) MONTHS MONTHS YEARS
------ ------ -----
Interest-earning assets
Loans $ 142,557 $ 251,123 $ 568,763
Securities 22,694 51,232 123,755
Federal funds sold 1,375 1,375 1,375
Interest-earning deposits 36,000 36,000 36,000
--------- --------- ---------
Total $ 202,626 $ 339,730 $ 729,893
========= ========= =========
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Interest-bearing liabilities
Time deposits $ 94,808 $ 275,000 $ 377,415
Demand and savings deposits 315,986 315,986 315,986
Other borrowings 56,076 59,076 65,396
--------- --------- ---------
Total $ 466,870 $ 650,062 $ 758,797
========= ========= =========
Asset/(Liability) Gap $(264,244) $(310,332) $ (28,904)
========= ========= =========
As shown, Shoreline had a cumulative liability gap position of $310.3
million within the one-year time frame. This position suggests that if
market interest rates decline in the next 12 months, Shoreline has the
potential to earn more net interest income. The same presentation at
December 31, 1997 produced a similar liability gap position of $250.6
million within the one year time frame. A limitation of the traditional
static gap analysis, however, is that it does not consider the timing or
magnitude of noncontractual repricing. In addition, the static gap
analysis treats demand and savings accounts as resistant to rate
sensitivity. Because of these and other limitations of the static gap
analysis, Shoreline's Asset/Liability Committee utilizes simulation
modeling as its primary tool to project how changes in interest rates will
impact net interest income. These models indicate, and management believes,
that Shoreline is positioned such that changes in rates within anticipated
ranges and under anticipated circumstances would not severely alter
operating results.
CAPITAL RESOURCES
Total shareholders' equity was $90.2 million on September 30, 1998, up
$13.3 million as compared to December 31, 1997. The overall increase was
largely the result of the third quarter of 1998 acquisition of State Bank
which resulted in an increase in capital stock of $7 million. In addition,
net unrealized gains on securities available for sale totaling $2,142,253
at September 30, 1998 increased $537,983 from December 31, 1997. During
the first nine months of 1998, Shoreline's Board of Directors approved and
paid a cash dividend of $.49 per share. Shoreline's capital position
remained strong as of September 30, 1998. Shoreline's capital ratios
remain above regulatory standards to be considered a "well-capitalized"
institution. A summary of its capital position follows:
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SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
Equity to assets 9.57% 8.96%
Tier I leverage 8.08% 7.42%
Risk-based:
Tier I Capital 12.85% 11.85%
Total Capital 14.09% 13.10%
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 1998 was $3,009,663, an
increase of 5.5% or $156,866 over the same period in 1997. Revenue growth,
both in net interest income and non-interest income, was the primary reason
behind the improved profitability. Increased non-interest income was
offset by increased non-interest expense. The following table illustrates
the effect that changes in rates and volumes of earning assets and
interest-bearing liabilities had on net interest income for the quarters
ended September 30, 1998 and 1997:
THREE MONTHS ENDED SEPTEMBER 30
1998 1997
---- ----
(000S)
Interest income (taxable equivalent) $ 17,555 $ 17,306
Interest expense 8,662 8,426
-------- --------
Net interest income $ 8,893 $ 8,880
======== ========
Average volume:
Interest-earning assets $854,550 $804,361
Interest-bearing liabilities 742,939 709,240
-------- --------
Net differential $111,611 $ 95,121
======== ========
Average yields/rates:
Yield on earning assets 8.15% 8.54%
Rate paid on liabilities 4.63% 4.71%
-------- --------
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Interest spread 3.52% 3.83%
======== ========
Net interest margin 4.13% 4.38%
======== ========
The change in net interest income (in thousands) is attributable to
the following:
VOLUME RATE INC/(DEC)
------ ---- ---------
Interest-earning assets $1,052 $(803) $249
Interest-bearing liabilities 395 (159) 236
------ ----- ----
Net interest income $ 657 $(644) $ 13
====== ===== ====
Net income for the nine months ended September 30, 1998, was
$9,057,580, an increase of 12.6% over the same period in 1997. The
increase was a result of increased net interest income and other income
offset partially by increased non-interest expense. The following table
illustrates the effect that changes in rates and volumes of earning assets
and interest-bearing liabilities had on net interest income for the nine
months ended September 30, 1998 and 1997:
NINE MONTHS ENDED SEPTEMBER 30
1998 1997
---- ----
Interest income (taxable equivalent) $ 51,442 $ 46,328
Interest expense 25,642 22,084
-------- --------
Net interest income $ 25,800 $ 24,244
======== ========
Average volume:
Interest-earning assets $832,655 $730,045
Interest-bearing liabilities 727,891 633,137
-------- --------
Net differential $104,764 $ 96,908
======== ========
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Average yields/rates:
Yield on earning assets 8.26% 8.48%
Rate paid on liabilities 4.71% 4.66%
-------- --------
Interest spread 3.55% 3.82%
======== ========
Net interest margin 4.14% 4.44%
======== ========
The change in net interest income (in thousands) is attributable to
the following:
VOLUME RATE INC/(DEC)
------ ---- ---------
Interest-earning assets $6,367 $(1,253) $5,114
Interest-bearing liabilities 3,336 222 3,558
------ ------- ------
Net interest income $3,031 $(1,475) $1,556
====== ======= ======
Shoreline expensed $150,000 for the provision for loan losses in the
third quarter of 1998, unchanged from the previous quarter. The provision
for loan losses is based upon loan loss experience and other factors which,
in management's judgment, deserve current recognition in maintaining an
adequate allowance for loan losses.
Total other income for the quarter ended September 30, 1998 amounted
to $1,821,275, an increase of $307,991 or 20.4% over the third quarter in
1997. The majority of the difference was due to an increase in gains on the
sale of mortgage loans of $106,584, increased other income of $102,628, and
trust income of $81,796. For the nine months ended September 30, 1998,
total other income amounted to $5,560,637, an increase of $1,428,503, or
34.6% over the same period in 1997. Again, an increase in gains on the
sale of mortgage loans of $731,101, increased other income of $493,302, and
trust income of $257,363 accounted for the increase. The increase in the
gain on sales of mortgage loans for both the quarter and nine months ended
September 30, 1998 over the prior year was largely the result of low
interest rates spurring a significant volume of refinancing activity,
resulting in increased sales of fixed rate loans to the secondary market.
The increase in trust income for both the quarter and nine months ended
-21-
September 30, 1998 was a result of growth in managed assets and the
favorable interest rate environment. The increase in other income for the
nine months ended September 30, 1998 was primarily the result of the sale
of branch office assets of Shoreline Bank along with the sale of a non-
performing commercial loan property.
Total other expense amounted to $5,876,176 during the third quarter of
1998, an increase of $144,557 over the same period in 1997. An increase in
salaries and employee benefits of $182,190, primarily attributed to the
State Bank acquisition at the end of July, 1998, accounted for the
increase. Moderate reduction in occupancy and equipment expense partially
offset the effect of this increase. For the nine months ended September
30, 1998, total other expense totaled $17,172,876, which is an increase of
$1,346,759, or 8.5% over the nine months ended September 30, 1997.
Increased salaries and benefits of $673,638, increased amortization of
intangible assets of $253,286 and increased occupancy expense of $127,525
accounted for the majority of the increase. The increases in such other
expense categories are a direct result of the SJS Bancorp, Inc. acquisition
in June of 1997.
Shoreline's ratio of total other expense to total average assets
declined from 2.71% for the nine months ended September 30, 1997 to 2.56%
for the nine months ended September 30, 1998. Over the same period of
time, the efficiency ratio declined from 55.7% to 54.3%.
In summary, Shoreline's net income of $3,009,663 in the third quarter
of 1998 produced a return on average shareholders' equity of 14.08% and a
return on average assets of 1.31%. On a year-to-date basis, Shoreline's
return on average shareholders' equity stands at 14.95% and its return on
average assets at 1.35%, which compares to 1997 ratios of 14.94% and 1.38%,
respectively. Basic and diluted earnings per share through September 30,
1998 were $1.01 and dividends per share were $.49. This compares to basic
and diluted earnings per share and dividends per share through September
30, 1997 of $.92 and $.42, respectively.
YEAR 2000 READINESS DISCLOSURE
During 1997, Shoreline formed a Year 2000 Committee to specifically
address issues related to the Year 2000 date change. The Committee
developed and implemented a Year 2000 Readiness Plan to provide guidance in
this company-wide effort. This plan follows the five phase approach
(awareness, assessment, renovation, validation and implementation)
recommended by regulators and contains specific goals and target dates.
Progress on this plan is reviewed quarterly by Shoreline's Board of
Directors.
-22-
SHORELINE'S STATE OF READINESS - Shoreline does not develop or write
its own software systems. 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. It is currently in the process of testing all other systems
it considers mission critical or high risk to confirm the state of
readiness. In those cases where the vendor has indicated it is not Year
2000 compliant, plans have been established to upgrade or purchase another
vendor's replacement software. Shoreline is targeting to complete all
mission critical and high risk system testing or replacement by December
31, 1998. Testing of replacement systems is expected to be completed by
February 29, 1999.
Shoreline's Year 2000 Readiness Plan includes the assessment of non-
information and technology systems including various building, security and
equipment issues. Third-party suppliers and major borrower or funds
provider relationships are also being considered. On-going assessments of
these issues and relationships are currently in process and, to-date, have
not indicated significant concerns.
COSTS TO ADDRESS YEAR 2000 ISSUES - 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. A significant portion of these expenses
are represented by existing staff that have been redeployed to this project.
Estimates of incremental costs for remediation over the remaining period of
this project are $400,000.
RISKS OF SHORELINE'S YEAR 2000 ISSUES - 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 the Year 2000 and
expects to receive 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 cannot guarantee actual results will not materially differ
from those anticipated, as it cannot assure that all third parties upon
which Shoreline relies will not have business interruptions due to Year
2000 issues.
-23-
SHORELINE'S CONTINGENCY PLANS - Shoreline currently has a disaster
recovery plan for its information technology system. Management is in the
process of modifying this plan for Year 2000 issues. Additional
contingency plans will be developed for other mission critical or high risk
systems not covered in the disaster recovery plan. All contingency plans
will be completed by April 30, 1999.
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, registration statements 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. The Year
2000 disclosures contained in Shoreline's 1997 annual report and
incorporated by reference in Shoreline's Form 10-K for the year ended
December 31, 1997 is filed as an exhibit to this Form 10-Q and here
incorporated by reference. That Readiness Disclosure is updated by the
discussion in this report.
FORWARD-LOOKING STATEMENTS
This discussion and analysis of financial condition and results of
operations, and other sections of this report, contain forward-looking
-24-
statements that are based on management's beliefs, assumptions, current
expectations, estimates and projections about the financial services
industry, that economy, and about the Corporation itself. Words such as
"anticipates," "believes," "estimates," "expects," "forecasts," "indicates,"
"intends," "is likely," "plans," "predicts," "projects," "targets,"
variations of such words and indicates similar expressions are intended to
identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties
and assumptions ("Future Factors") that are difficult to predict with regard
to timing, extent, likelihood and degree of occurrence. Therefore, actual
results and outcomes may materially differ from what may be expressed or
forecasted in such forward-looking statements. Future Factors include
changes in interest rates and interest rate relationships; demand for
products and services; the degree of competition by traditional and
non-traditional competitors; changes in banking regulations; changes in
tax laws; changes in prices, levies, and assessments; the impact of
technological advances; governmental and regulatory policy changes; the
outcomes of pending and future litigation and contingencies; trends in
customer behavior as well as their abilities to repay loans; software
failure, errors or miscalculations; and vicissitudes of the national
economy. These are representative of the Future Factors that could cause
a difference between an ultimate actual outcome and a preceding forward-
looking statement. Furthermore, Shoreline undertakes no obligation to
update, amend or clarify forward-looking statements, whether as a result
of new information, future events, or otherwise.
-25-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information concerning quantitative and qualitative disclosures
about market risk contained under the caption "Quantitative and Qualitative
Disclosures About Market Risk" on pages 18 through 20 (inclusive) of
Shoreline's Annual Report to Shareholders for the year ended December 31,
1997 is here incorporated by reference. Such Annual Report was previously
filed as Exhibit 13 to Shoreline's Annual Report on Form 10-K for the year
ended December 31, 1997.
Shoreline faces market risk to the extent that both earnings and the
fair values of its financial instruments are affected by changes in
interest rates. Shoreline manages this risk with static GAP analysis and
simulation modeling. Throughout the first nine months of 1998, the results
of these measurement techniques were within Shoreline's policy guidelines.
Shoreline does not believe that there has been material changes in the
nature of Shoreline's primary market risk exposures, including the
categories of market risk to which Shoreline is exposed and the particular
markets that present the primary risk of loss to Shoreline. As of the date
of this Form 10-Q Quarterly Report, Shoreline does not know of or expect
there to be any material change in the general nature of its primary market
risk exposure in the near term.
The methods by which Shoreline manages its primary market risk
exposures, as described in the sections of its annual report incorporated
by reference in response to this item, have not changed materially during
the current year. As of the date of this Form 10-Q Quarterly Report,
Shoreline does not expect to change those methods in the near term.
However, Shoreline may change those methods in the future to adapt to
changes in circumstances or to implement new techniques.
Shoreline's market risk exposure is mainly comprised of its
vulnerability to interest rate risk. Prevailing interest rates and
interest rate relationships in the future will be primarily determined by
market factors which are outside of Shoreline's control. All information
provided in response to this item consists of forward-looking statements.
Reference is made to the section captioned "Forward-Looking Statements" at
the end of Management's Discussion and Analysis of Financial Condition and
Results of Operations in this Form 10-Q Quarterly Report for a discussion
of the limitations on Shoreline's responsibility for such statements.
-26-
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 31, 1998, Shoreline acquired State Bank, a Michigan banking
corporation. In the acquisition, Shoreline issued 242,299 shares of its
common stock to the shareholders of State Bank. The shares of Shoreline
common stock issued in the acquisition were offered and sold by Shoreline
without registration in reliance upon the exemption from registration made
available under Section 4(2) of the Securities Act of 1933 and Rules 501-503
and Rules 506-508 of Regulation D promulgated thereunder. On August 11, 1998,
Shoreline filed with the Securities and Exchange Commission a Form D with
respect to the exempt offering in accordance with the requirements of Rule
503.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following documents are filed as exhibits to
this Report on Form 10-Q:
EXHIBIT
NUMBER DOCUMENT
------ --------
3.1 Restated Articles of Incorporation. Previously filed as
Exhibit 3.1 to the Registrant's Quarterly Report on
Form 10-Q for the period ended June 30, 1998. Here
incorporated by reference.
3.2 Bylaws. Previously filed as Exhibit 3(b) to the
Registrant's Form S-1 Registration Statement filed March
23, 1990. Here incorporated by reference.
27 Financial Data Schedule.
99.1 Prior Year 2000 Readiness Disclosures.
(b) REPORTS ON FORM 8-K. The following reports on Form 8-K were
filed during the quarter covered by this report:
DATE OF EVENT ITEMS FINANCIAL STATEMENTS
REPORTED REPORTED FILED
-------- -------- -----
August 3, 1998 5, 7 Not applicable
September 30, 1998 5, 7 Not applicable
-27-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SHORELINE FINANCIAL CORPORATION
(Registrant)
Date November 13, 1998 /S/DAN L. SMITH
Dan L. Smith
Chairman, President and Chief Executive
Officer
Date November 13, 1998 /S/WAYNE R. KOEBEL
Wayne R. Koebel
Executive Vice President, Chief Financial
Officer and Treasurer (Principal Financial
and Accounting Officer)
-28-
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
- ------ --------
3.1 Restated Articles of Incorporation. Previously filed as
Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 1998. Here incorporated by
reference.
3.2 Bylaws. Previously filed as Exhibit 3(b) to the Registrant's
Form S-1 Registration Statement filed March 23, 1990. Here
incorporated by reference.
27 Financial Data Schedule.
99.1 Prior Year 2000 Readiness Disclosures