January 19, 2010


Dear Shareholders and Customers:

Effective December 29, 2009 Shoreline Bank entered into a formal agreement with the FDIC and State of Washington Department of Financial Institutions to improve the financial condition of the Bank. This agreement is known as a “Consent Order.”

The Order stipulates the major areas of focus for management and the Board of Directors. It is very consistent with the action steps we have been taking during 2008-09. These areas of focus are: asset quality, capital, earnings, management and liquidity.

You may already be familiar with the numerous regulatory orders being agreed to by many banks in the State. As I have mentioned in previous communication, our industry is under severe pressure due to weakness in real estate and construction the past two years. Frankly, we anticipate more distressing news about other local banks during 2010.

Our Board, management and staff have worked very hard and are now building momentum resolving problem loans. We expect this momentum to continue during 2010. However, there is still significant uncertainty about real estate values and related aspects of our economy. In addition to progress on problem loans during 2009, we have reduced operating expenses further, raised capital, grown the community base of account holders, managed down asset totals to conserve capital, strengthened liquidity and effectively worked with depositors to maximize FDIC insurance coverage. We will continue to work hard on all these factors as part of our plan to return to profitability in a reasonable period of time.

Critical to our future is capital. Despite the success on this front in 2009 when we raised $3.6 million, raising more tier one capital in 2010 will be very important to the improvement plan. We will keep you advised of our recapitalization steps as they become final.

In summary, we remain committed to serving you and the community with loan and deposit services. We will take all required steps to improve the financial condition of the Bank. Raising more capital will be a critical element to assuring our future during this difficult time.

We appreciate your ongoing support and welcome any questions or comments.

Sincerely,

Jeffrey P. Lewis
President and CEO