Annual Report (Form 10-K), fiscal year 1993

Item 1. Business
GENERAL
Shoreline Financial Corporation ("Shoreline" or the "Corporation") is a bank holding company. Shoreline was formed on April 23, 1987, for the purpose of affecting the affiliation of Inter-City Bank ("Inter-City") of Benton Harbor, Michigan, and Citizens Trust and Savings Bank ("Citizens") of South Haven, Michigan. On December 31, 1993, these banks represented Shoreline's only operating subsidiaries. Shoreline had assets at December 31, 1993, totaling $620.6 million, deposits of $557.4 million and shareholders' equity of $52.6 million.
Shoreline's business is concentrated exclusively in the commercial banking industry segment. Shoreline's subsidiary banks offer individuals, businesses, institutions and government agencies a full range of commercial banking services including time, savings and demand deposits; commercial, consumer and real estate financing; bank credit cards; safe deposit services; automated transaction machine services and trust services. The business of Citizens is mildly seasonal due to the recreational and agricultural components of the local economy. No material part of the business of Shoreline and its subsidiaries is dependent upon a single customer or very few customers, the loss of which would have a materially adverse effect on Shoreline.
The principal markets for Shoreline's financial services are presently the Michigan communities in which Inter-City and Citizens are located, and the areas immediately surrounding these communities. Shoreline and its subsidiaries serve these markets through 23 offices located in and around these communities. Shoreline and its subsidiaries have no material foreign assets or income.
During 1993, Shoreline expanded its branch network with the acquisition of four branches from Standard Federal Bank located in Berrien Springs, Three Oaks, Edwardsburg and Hartford. This acquisition was completed in July 1993.
On May 5, 1993, Shoreline announced its intention to affect a merger between its two subsidiary banks, Inter-City and Citizens. The resulting single bank will be named Shoreline Bank. It is believed that the merger of the two banks will allow Shoreline to further realize operational efficiencies and provide more consistent and improved service to the market areas that Shoreline currently services. Completion of the transaction is subject to regulatory approval and is anticipated to be consummated during the second quarter of 1994.
On December 7, 1993, the Corporation announced an agreement with Great Lakes Bancorp, Ann Arbor, Michigan, under which Shoreline will purchase and
assume from Great Lakes Bancorp certain assets and liabilities associated with its branch located in South Haven, Michigan. This branch has deposits totaling approximately $13 million. Completion of the transaction, which will be accounted for as a purchase, is subject to regulatory approval and a number of other conditions, and is anticipated to be consummated during the second quarter of 1994.
The principal source of revenue for Shoreline and its subsidiaries is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 70.7 percent of Shoreline's total revenues in 1993, 69.2 percent in 1992 and 71.2 percent in 1991. Interest on investment securities accounted for 17.8 percent of Shoreline's total revenues in 1993, 21.4 percent in 1992 and 20.3 percent in 1991.
COMPETITION
The business of banking is highly competitive. Banks face significant competition from other commercial banks and, in some product lines, saving and loan associations, credit unions, finance companies, insurance companies and investment and brokerage firms. The principal forms of competition for financial services are price and the convenience and quality of services rendered to customers.
SUPERVISION AND REGULATION
A state or national bank may generally open a branch office anywhere in the State of Michigan without regard to its proximity to that bank's home office. Regulatory approval is required, but approval is based primarily upon the adequacy of the bank's capital and the prospects for success of the branch. Michigan banks or bank holding companies may acquire or be acquired by banks or bank holding companies located in any state that passes a banking statute granting reciprocal privileges.
Banks and bank holding companies are extensively regulated. Inter- City and Citizens are chartered under state law and are supervised, examined and regulated by both the Financial Institutions Bureau of the Michigan Department of Commerce and the Federal Deposit Insurance Corporation. Shoreline is regulated by the Federal Reserve System. The business activities of Inter-City Bank and Citizens are significantly limited in a number of respects by federal and state laws governing banks. Deposits of both banks are insured by the Federal Deposit Insurance Corporation to the extent provided by law.
Prior approval of the Federal Reserve Board, and in some cases various other government agencies, will be required for Shoreline to acquire control of any additional banks or other operating subsidiaries. The business activities of Shoreline and its subsidiaries will be limited to banking and other activities which are determined by the Federal Reserve Board to be closely related to banking.
Banks are subject to a number of federal and state laws and regulations which have a significant impact upon their business. These include among others: state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Community Reinvestment Act, the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the FDIC Improvement Act of 1991, electronic funds transfer laws, redlining laws, antitrust laws and privacy laws.
The instruments of monetary policy of authorities, such as the Federal Reserve System, may be used to influence the growth and distribution of bank loans, investments and deposits, and may also affect interest rates on loans and deposits. These policies may have a significant effect on the operating results of banks.
Shoreline and its subsidiaries employ approximately 320 persons.
A detailed discussion and statistical presentation of certain financial aspects of Shoreline's business is contained in Items 6 and 7.
Item 2.



Item 2. Properties
Shoreline maintains its offices and conducts its business operations from the principal banking office of Inter-City in Benton Harbor, Michigan. The holding company neither owns nor has any present plan to acquire any real property.
Inter-City's principal office is located at 823 Riverview Drive, Benton Harbor, Michigan. The Riverview Drive premises encompass approximately 21,000 square feet on three floors, all of which are occupied by Inter-City and Shoreline. Inter-City owns the premises occupied by each of its 15 branch offices. During 1994, Inter-City will construct an 8,000- square-foot addition to its Pleasant Street location, St. Joseph, Michigan, to house the consolidated mortgage, consumer loan, collections and trust departments upon the merger of Inter-City and Citizens. The cost of this project is estimated to be $1.2 million.
Citizens' principal office is located at 433 Phoenix Street, South Haven, Michigan. The principal office occupies approximately 36,000 square feet, all of which is occupied by Citizens' banking operations and Shoreline's EDP operations. In addition to its principal office, Citizens owns each of its seven branch offices.
Item 3.

Item 3. Legal Proceedings
Shoreline's subsidiaries are parties, as plaintiff or as defendant, to a number of legal proceedings, none of which is considered material and, all of which arise in the normal course of operations.
Item 4.

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, 1993.
PART II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Shoreline common stock is traded in the over-the-counter market and quoted on the National Association of Securities Dealers Automated Quotation System (NASDAQ) under the trading symbol SLFC. Prices are based on reports published for representative quotations in the over-the-counter market supplied by the National Association of Securities Dealers, Inc. In all periods, the prices shown reflect interdealer prices and do not include retail markups, markdowns or commissions, and may not necessarily represent actual transactions. There may have been transactions or quotations at higher or lower prices of which management is not aware. Market prices have been adjusted to give retroactive effect to the three-for-two stock split paid in April of 1992 and the 5 percent stock dividend paid in April of 1993. A proposed three-for-two stock split payable on May 31, 1994 to shareholders of record on May 16, 1994 has been declared, subject to shareholder approval of an increase in authorized capital. The prices shown have not been adjusted for this future stock split. As of February 28, 1994, there were approximately 1,260 shareholders of record owning common stock of Shoreline.
The following table summarizes the quarterly cash dividends paid to common shareholders during the last two years, adjusted for the 5 percent stock dividend paid in April of 1993 and the three-for two stock split paid in April of 1992:
Shoreline's principal source of funds to pay cash dividends is the earnings of its subsidiary banks. 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 each of the banks. Based on projected earnings, management expects Shoreline to declare and pay regular quarterly dividends on its common shares in 1994.
Item 6.

Item 6. Selected Financial Data.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides additional information about the Corporation's financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing in Item 8.


Item 8. Financial Statements and Supplementary Data
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, 1993 and 1992 and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 1993, 1992 and 1991. 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, 1993 and 1992, and the results of its operations and its cash flows for the years ended December 31, 1993, 1992 and 1991, in conformity with generally accepted accounting principles.
CROWE, CHIZEK AND COMPANY South Bend, Indiana February 11, 1994, except for Note 1 (stock splits and dividends) as to which the date is February 16, 1994
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
Supplementary information:
Supplemental Schedule of Non-Cash Investing Activities: During 1993, 1992 and 1991, $19,989,527, $13,168,469 and $6,680,154, respectively, was reclassified from investment securities to securities held for sale, on a net basis.
The branch acquisitions in 1993 resulted in an increase in loans of $41,986,783, premises and equipment of $782,800, core deposit intangibles of $2,429,413 and deposits of $56,568,954.
See accompanying notes to consolidated financial statements.
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 and prevailing practices within the banking industry. The following summaries describe the significant accounting and reporting policies which are employed in the preparation of the financial statements.
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Shoreline Financial Corporation and its wholly owned subsidiaries, Inter-City Bank and Citizens Trust and Savings Bank (together referred to as "the Corporation"). All material inter- company accounts and transactions have been eliminated in consolidation.
Investment Securities. Investment securities are those securities which the Corporation has the ability to hold to maturity and the intent to hold for the foreseeable future. These securities are stated at cost adjusted for amortization of premium and accretion of discount, both computed by methods approximating the interest method. Gains and losses on the sale or disposal of investment securities are computed on the basis of specific identification of the adjusted cost of each security.
Securities Held for Sale. Securities held for sale are those securities which management does not intend to hold for the foreseeable future. These securities are carried at the lower of amortized cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income.
Loans Held for Sale. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income.
Allowance for Loan Losses. Because some loans may not be repaid in full, an allowance for loan losses is recorded. Increases to the allowance are recorded by a provision for loan losses charged to expense. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover possible losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time. While management may periodically allocate portions of the allowance for specific problem loan situations, the whole allowance is available for any loan charge-offs that occur. A problem loan is charged-off by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur.
Interest and Fees on Loans. Interest on loans is accrued over the term of the loans based on principal amounts outstanding except, where serious doubt exists as to the collectibility of a loan, in which case the accrual of interest is discontinued. Loan origination and commitment fees and related lending costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield using the level yield method over its original term. The net amount of deferred income ($676,918 and $732,923 at December 31, 1993 and 1992, respectively) is reported in the consolidated balance sheet as part of loans.
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 for book purposes and accelerated methods for income tax purposes with useful lives ranging primarily from 10 to 50 years for bank premises, and 5 to 20 years for furniture and fixtures. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur, and major improvements are capitalized.
Other Real Estate. Other real estate represents properties acquired through a foreclosure proceeding, acceptance of a deed in lieu of foreclosure, or loans which have been deemed to be in substance foreclosed. Other real estate is initially recorded at fair value at the date of acquisition. Any excess of the loan balance over fair value is charged against the allowance for loan losses when the loan is transferred to other real estate. After acquisition, a valuation allowance is recorded through a charge to income for the amount of estimated selling costs. Valuations are periodically performed by management, and valuation allowances are adjusted through a charge to income for changes in fair value or estimated costs to sell. Subsequent declines in value, and gains and losses on sales, are recognized in current earnings. Other real estate owned amounted to approximately $1,026,000 and $640,000 at December 31, 1993 and 1992, respectively.
Intangible Assets. Intangible assets consist of goodwill representing 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 amortized on a straight-line basis for a period of 10 years. The related core deposit intangibles are amortized on an accelerated basis over the estimated life of the deposits acquired. As of December 31, 1993, the remaining unamortized goodwill and core deposit intangibles totaled $262,103 and $2,593,564, respectively.
Trust Income. Trust income is recognized as income when received. The amounts recognized under this method are not significantly different from amounts that would have been recognized on the accrual basis.
Employee Benefits. The Corporation maintains a noncontributory pension plan covering all eligible employees. The Corporation accounts for its pension costs under Statement of Financial Accounting Standards (SFAS) No. 87. The Corporation's policy is to fund the plan based upon annual actuarial computations and within Internal Revenue Service guidelines. The Corporation also maintains a profit sharing plan and 401(k) salary reduction plan for which contributions are made and expensed annually. In addition, the Corporation sponsors a postretirement health care plan that covers both salaried and nonsalaried employees. Effective January 1, 1993, the Corporation adopted the provisions of SFAS No. 106, "Employers' Accounting For Post Retirement Benefits Other Than Pensions." SFAS No. 106 requires the accrual, during the years that employees render the necessary service, of the expected cost of providing postretirement health care benefits to employees and their beneficiaries and covered dependents. The Corporation's postretirement health care plan provides that retired employees may remain on the Corporation's health care plan with each retiree's out-of-pocket contribution to the Corporation equal to their premium expense determined exclusively on the loss experience of the retirees in the plan. The impact of adopting the new standard was not material.
Income Taxes. The Corporation files annual consolidated federal income tax returns. For periods prior to January 1, 1993, income tax expense was calculated using the deferred method (APB 11). Under APB 11, the Corporation computed deferred taxes for the tax effects of timing differences between financial reporting and tax return taxable income. Effective January 1, 1993, the Corporation applied the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Accordingly, income tax expense for the year ended December 31, 1993 is based upon the asset and liability method. The asset and liability method requires the Corporation to record income tax expense based on the amount of taxes due on its consolidated tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates. The effect of the adoption of SFAS No. 109 was not material to the Corporation's consolidated financial position or results of operations.
Earnings and Dividends Per Share. Earnings per share are computed by dividing net income by the weighted average number of common shares outstanding and common equivalent shares with a dilutive effect. Common equivalent shares are shares which may be issuable to employees upon exercise of outstanding stock options. Earnings and dividends per share are restated for all stock splits and dividends paid. After restatement, the average number of shares used in this calculation was 3,276,137 in 1993, 3,261,290 in 1992, and 3,242,839 in 1991.
Stock Splits and Dividends. In 1993, the Corporation declared a 5 percent stock dividend. Stock dividends are accounted for by transferring the fair market value of the stock from retained earnings to common stock and additional paid-in capital. In 1992, the Corporation declared a three- for-two stock split in the form of a stock dividend. This stock split was accounted for by transferring the par value of the stock from retained earnings to common stock. The Corporation declared a 10 percent stock dividend in 1991. Fractional shares were paid in cash for all stock splits and dividends. On February 16, 1994 the Board of Directors declared a three-for-two stock split, effective May 31, 1994 to shareholders of record on May 16, 1994 subject to shareholder approval of an increase in authorized capital. Earnings and dividends per share have not been restated for the three-for-two stock split to be effective May 31, 1994.
Statement of Cash Flows. For purposes of reporting cash flows, cash and cash equivalents is defined to include the Corporation's cash on hand, its demand deposits in other institutions, and its federal funds sold with a maturity of 90 days or less. The Corporation reports net cash flows for customer loan transactions, deposit transactions, short-term borrowings with a maturity of 90 days or less and interest-bearing balances with other financial institutions.
Concentrations of Credit Risk. The Corporation grants commercial, real estate, and consumer loans to customers primarily in the Michigan communities in which the banks are located and in areas immediately surrounding these communities. The majority of loans are secured by specific items of collateral, primarily residential properties and other types of real estate, but are also secured by business assets and consumer assets.
Financial Instruments with Off-Balance-Sheet Risk. The Corporation, in the normal course of business, makes commitments to extend credit which are not reflected in the financial statements. See Note 12 for a summary of these commitments.
Business Segment. The Corporation is engaged in the business of commercial and retail banking, which accounts for more than 90% of its revenues, operating income and assets. There are no foreign loans.
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
A summary of the Corporation's subsidiary banks' legal cash reserve requirements established by the Federal Reserve System as of December 31 follows:
NOTE 3. INVESTMENT SECURITIES
The amortized cost and estimated market value of investments in debt securities are as follows:
The amortized cost and estimated market value of debt securities at December 31, 1993, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Proceeds, gross gains and gross losses realized from sales and calls of investments in debt securities for the years ending December 31, 1993, 1992 and 1991 are as follows:
Debt securities having an amortized cost of approximately $22,273,000 at December 31, 1993, were pledged to secure public and trust deposits, securities sold under agreements to repurchase, advances from Federal Home Loan Bank and for other purposes as required by law.
NOTE 4. SECURITIES HELD FOR SALE
The amortized cost and estimated market value of debt securities held for sale are as follows:
The amortized cost and estimated market value of debt securities held for sale at December 31, 1993, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Proceeds, gross gains and gross losses realized from sales and calls of debt securities held for sale for the years ending December 31, 1993, 1992 and 1991, are as follows:
NOTE 5. LOANS
At December 31, 1993 and 1992, the Corporation had approximately $l,962,000 and $2,934,000, respectively, of loans for which no interest income was being recognized due to the uncertainty of the collectibility of the loans. If interest on such loans had been accrued, the income would have approximated $131,000, $162,000 and $245,000 in 1993, 1992 and 1991, respectively.
Certain directors, executive officers and principal shareholders of the Corporation, including associates of such persons, were loan customers of the Corporation during 1993. 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, 1993:
Other changes include adjustments for persons included in one reporting period that are not included in the other reporting period.
At December 31, 1993 and 1992, the Corporation had approximately $1,800,000 and $730,000, respectively, of mortgage loans with an estimated market value of $1,820,000 and $743,000, respectively, which were held for sale.
NOTE 6. ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses is as follows:
NOTE 7. PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
Depreciation and amortization expense charged to operations was $1,154,280, $1,127,939 and $874,182 in 1993, 1992 and 1991, respectively.
NOTE 8. DEPOSITS
Certificates of deposit in denominations of $100,000 or more totaled approximately $37,991,000 and $36,921,000 at December 31, 1993 and 1992, respectively. Interest expense on deposits for the years ended December 31 is as follows:
NOTE 9. LONG-TERM DEBT
At December 31, 1993, the Corporation had advances from the Federal Home Loan Bank of Indianapolis (FHLB) totaling $5,000,000. The terms of the advances include monthly interest payments at annual percentage rates of 5.05%. Prepayment options exist on the anniversary dates of the advances, without incurring penalty. The principal balances mature in September of 1998. The FHLB advances are collateralized by U.S. Government agency mortgage-backed securities with a book value of approximately $7,600,000 as of December 31, 1993.
NOTE 10. INCOME TAXES
Components of the provision for federal income taxes are as follows:
Taxes allocated to securities transactions were $125,937 in 1993, $79,776 in 1992 and $27,275 in 1991.
The sources and related tax effects of the components of the deferred federal income tax benefits are as follows:
The difference between the provision in these financial statements and amounts computed by applying the statutory federal income tax rate to pretax income is as follows:
The components of the net deferred tax asset recorded in the balance sheet as of December 31, 1993 are as follows:
NOTE 11. EMPLOYEE BENEFITS
The Corporation has a defined benefit, noncontributory pension plan which provides retirement benefits for substantially all employees. The following sets forth the plan's funded status and amounts recognized in the balance sheet at December 31.
Net pension cost included the following:
The weighted average discount rate was 7.25 percent for 1993, 7.5 percent for 1992, and 8.25 percent for 1991, and the rate of increase in future compensation used in determining the actuarial present value of the projected benefit obligation was 4.75 percent for 1993, 5 percent for 1992, and 5.5 percent for 1991.
The expected long-term rate of return on assets was 7.75 percent for 1993, and 8 percent for 1992.
Unrecognized prior service cost is amortized on a straight-line basis, based on the expected future service years of plan participants to receive benefits.
OTHER EMPLOYEE BENEFIT PLANS
In 1988, the Corporation established a profit-sharing plan for qualified employees with at least two years of service. Contributions equal 3 percent of "Net Profits" before federal income taxes and securities gains or losses, or as determined at the discretion of the Board of Directors of the Corporation limited to the maximum permitted by the Internal Revenue Code. Under this plan, $248,878, $206,496 and $199,600 was expensed in 1993, 1992 and 1991, respectively.
In 1989, the Corporation established a 401(k) salary reduction plan for qualified employees with at least one year of service. Participants may make deferrals up to 15 percent of compensation. The Corporation matches 50 percent of elective deferrals on the first 4 percent of the participants' compensation. Expense under this plan was $97,467, $91,736 and $78,889 in 1993, 1992 and 1991, respectively.
On May 16, 1989, the shareholders approved a stock-option plan under which options may be issued at market prices to officers and other key employees. The right to exercise the options vests over a five-year period. The options outstanding at December 31, 1993, are as follows:
The following is a summary of the transactions for the period January 1,1991 through December 31, 1993:
NOTE 12. COMMITMENTS, OFF-BALANCE-SHEET RISK AND CONTINGENCIES
The Corporation 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. The Corporation's exposure to credit loss in the event of nonperformance 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. The Corporation follows the same credit policy to make such commitments as it uses for on-balance-sheet items.
As of December 31, 1993, commitments to make loans and unused lines of credit amounted to approximately $72,820,000 and commitments under outstanding standby letters of credit amounted to approximately $2,632,000. Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. No losses are anticipated as a result of these transactions. Collateral obtained upon exercise of commitments is determined using management's credit evaluation of the borrowers and may include real estate, business assets, deposits and other items.
Rental expense for the years ended December 31, 1993, 1992 and 1991 totaled $90,650, $82,333 and $45,078, respectively. As of December 31, 1993, there were no significant future rental commitments.
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair values and the related carrying values of the Corporation's financial instruments at December 31, 1993 and 1992. Items which are not financial instruments are not included.
For purposes of the above disclosures of estimated fair value, the following assumptions were used as of December 31, 1993 and 1992. The estimated fair value for cash and cash equivalents is considered to approximate cost. The estimated fair value for investment securities and securities held 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 the Corporation would charge the borrowers for similar such loans with similar maturities made at December 31, 1993 and 1992, 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 the Corporation would charge for similar such loans at December 31, 1993 and 1992, applied for the time period until estimated repayment. The
estimated fair value for demand and savings deposits, is based on their carrying value. The estimated fair value for time deposits, securities sold under agreements to repurchase and long-term debt, is based on estimates of the rate the Corporation would pay on such deposits or borrowings at December 31, 1993 and 1992, applied for the time period until maturity. The estimated fair value of other financial instruments and off-balance-sheet loan commitments approximate cost and are not considered significant to this presentation.
While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that were the Corporation to have disposed of such items at December 31, 1993 and 1992, 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, 1993 and 1992, should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Corporation 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 the Corporation's subsidiary banks' trust departments, the trained work force, customer goodwill and similar items.
NOTE 14. CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
The condensed financial information of the parent company, Shoreline Financial Corporation, is summarized below.
NOTE 14. CONDENSED FINANCIAL INFORMATION ON PARENT COMPANY (Continued)
Shoreline Financial Corporation's primary source of revenue is its wholly owned subsidiaries, Inter-City Bank and Citizens Trust and Savings Bank. The payment of dividends by these banks is restricted to "net profits" as defined by the Michigan Banking Code, then on hand after deducting their losses and "bad debts," as also defined by the Michigan Banking Code. Accordingly, in 1994, the subsidiary banks may distribute to Shoreline, in addition to their 1994 "net profits," approximately $24,000,000 in dividends without prior approval from bank regulatory agencies.
NOTE 15. FUTURE TRANSACTIONS
On May 5, 1993, the Corporation announced its intention to effect a merger between its two subsidiary banks, Inter-City Bank and Citizens Trust & Savings Bank. The resulting single bank will be named Shoreline Bank. Completion of the transaction is subject to regulatory approval and is anticipated to be consummated during the second quarter of 1994.
On December 7, 1993, the Corporation announced an agreement with Great Lakes Bancorp, Ann Arbor, Michigan under which the Corporation will purchase and assume from Great Lakes Bancorp certain assets and liabilities associated with its branch located in South Haven, Michigan. This branch has deposits totaling approximately $13 million. Completion of the transaction, which will be accounted for as a purchase, is subject to regulatory approval and a number of other conditions, and is anticipated to be consummated during the second quarter of 1994.
NOTE 16. IMPACT OF NEW ACCOUNTING STANDARD
In May 1993, the Financial Accounting Standards Board issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 focuses on the accounting and reporting treatment of investment securities. Securities classified as "available for sale" will be those the Corporation does not have the positive intent and ability to hold to maturity. These securities will be accounted for at fair value with unrealized gains and losses, net of deferred income taxes, reported as a separate component of shareholders' equity. Securities classified as "held to maturity" will be those the Corporation has the positive intent and ability to hold to maturity. These securities will be accounted for at amortized cost. Securities classified as "trading securities" include those purchased and held principally to sell in the near term. These securities will be accounted for at fair value with unrealized gains and losses included in current earnings. SFAS No. 115 is effective for fiscal years beginning after December 15, 1993. The Corporation plans to adopt SFAS No. 115, as required, on January 1, 1994. The effect of adopting the new standard will be to increase shareholders' equity by approximately $2.4 million on January 1, 1994.
QUARTERLY FINANCIAL DATA (Unaudited)
The following is a summary of selected quarterly results of operations for the years ended December 31, 1993 and 1992. The per share data for the first quarter of 1992 has been restated to reflect the three-for-two stock split paid in April of 1992. Additionally, the per share data for 1992 and the first quarter of 1993 have been restated to reflect the 5 percent stock dividend paid in April of 1993. The per share data has not been restated to reflect the proposed three-for-two stock split payable May 31, 1994.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10.



Item 10. Directors and Executive Officers of the Registrant.
The information set forth under the caption "Directors and Executive Officers" in the registrant's definitive Proxy Statement for its May 5, 1994, annual meeting of shareholders is here incorporated by reference.
Item 11.

Item 11. Executive Compensation.
The information set forth under the caption "Compensation of Executive Officers and Directors" in the registrant's definitive Proxy Statement for its May 5, 1994, annual meeting of shareholders is here incorporated by reference.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "Voting Securities" in the registrant's definitive Proxy Statement for its May 5, 1994, annual meeting of shareholders is here incorporated by reference.
Item 13.

Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Relationships and Related Transactions" in the registrant's definitive Proxy Statement for its May 5, 1994, annual meeting of shareholders is here incorporated by reference.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements. The following financial statements and independent auditors' report of Shoreline Financial Corporation and its subsidiaries are filed as part of this report:
Report of Independent Auditors dated February 11, 1994, except for Note 1 (Stock Splits and Dividends) as to which the date is February 16,1994 Consolidated Balance Sheets--December 31, 1993 and 1992 Consolidated Statements of Income for the years ended December 31, 1993, 1992, and 1991 Consolidated Statements of changes in Shareholders' Equity for the years ended December 31, 1993, 1992, and 1991 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992, and 1991 Notes to Consolidated Financial Statements
The financial statements, the notes to financial statements, and the report of independent auditors listed above are set forth in Item 8 of this report.
(2) Financial Statement Schedules. Not applicable.
(3) Exhibits. The following exhibits are filed as part of this report:
Shoreline will furnish a copy of any exhibit listed above to any shareholder of the registrant without charge upon written request to Secretary, Shoreline Financial Corporation, 823 Riverview Drive, Benton Harbor, Michigan 49022.
(b) Reports on Form 8-K.
Shoreline filed no Current Reports on Form 8-K during the last quarter of the period covered by this report.
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 23, 1994 By /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.
March 23, 1994 /s/ Louis A. Desenberg* Louis A. Desenberg Director
March 23, 1994 /s/ Merlin Hanson* Merlin Hanson Director
March 23, 1994 /s/ Thomas T. Huff* Thomas T. Huff Director
March 23, 1994 /s/ Ronald F. Kinney* Ronald F. Kinney Director
March 23, 1994 /s/ James E. LeBlanc* James E. LeBlanc Director
March 23, 1994 /s/ L. Richard Marzke* L. Richard Marzke Director
March 23, 1994 /s/ James F. Murphy* James F. Murphy Director
March 23, 1994 /s/ Dan L. Smith Dan L. Smith Chairman, President and Chief Executive Officer and Director (Principal Executive Officer)
March 23, 1994 /s/ Robert L. Starks* Robert L. Starks Director
March 23, 1994 /s/ Harry C. Vorys* Harry C. Vorys Director
March 23, 1994 /s/ Hyman Warshawsky* Hyman Warshawsky Director
March 23, 1994 /s/ Ronald L. Zile* Ronald L. Zile Vice Chairman of the Board and Director
March 23, 1994 /s/ Wayne R. Koebel Wayne R. Koebel Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)
*By /s/ Dan L. Smith Dan L. Smith Attorney-in-Fact for the indicated persons
Commission File No. 0-16444
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
EXHIBITS
TO
FORM 10-K
For the Fiscal Year Ended December 31, 1993
SHORELINE FINANCIAL CORPORATION 823 Riverview Drive Benton Harbor, Michigan 49022