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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

OR

 

o         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from <> to <>

 

Commission file number: 0-20167

 

MACKINAC FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

MICHIGAN

 

38-2062816

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

130 SOUTH CEDAR STREET, MANISTIQUE, MI

 

49854

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (888) 343-8147

 

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 periods 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  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   x    No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large Accelerated Filer o

Accelerated Filer o

 

 

Non-accelerated Filer o

Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o    No  x

 

As of June 30, 2015, there were outstanding 6,239,250 shares of the registrant’s common stock, no par value.

 

 

 



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

 

INDEX

 

 

Page No.

 

 

PART I.                          FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets - June 30, 2015 (Unaudited), December 31, 2014 and June 30, 2014 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2015 (Unaudited) and June 30, 2014 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — Three and Six Months Ended June 30, 2015 (Unaudited) and June 30, 2014 (Unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity — Three and Six Months Ended June 30, 2015 (Unaudited) and June 30, 2014 (Unaudited)

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2015 (Unaudited) and June 30, 2014 (Unaudited)

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

9

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

39

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

49

 

 

 

Item 4.

Controls and Procedures

52

 

 

 

PART II.                       OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

53

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

53

 

 

 

SIGNATURES

54

 

2



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

 

PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

2015

 

2014

 

2014

 

 

 

(Unaudited)

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

16,658

 

$

21,947

 

$

20,744

 

Federal funds sold

 

3

 

 

2

 

Cash and cash equivalents

 

16,661

 

21,947

 

20,746

 

 

 

 

 

 

 

 

 

Interest-bearing deposits in other financial institutions

 

5,338

 

5,797

 

235

 

Securities available for sale

 

60,561

 

65,832

 

47,374

 

Federal Home Loan Bank stock

 

2,169

 

2,973

 

3,060

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

Commercial

 

447,086

 

433,566

 

374,565

 

Mortgage

 

150,998

 

148,984

 

113,332

 

Consumer

 

17,163

 

18,385

 

15,043

 

Total Loans

 

615,247

 

600,935

 

502,940

 

Allowance for loan losses

 

(5,600

)

(5,140

)

(5,097

)

Net loans

 

609,647

 

595,795

 

497,843

 

 

 

 

 

 

 

 

 

Premises and equipment

 

12,584

 

12,658

 

9,790

 

Other real estate held for sale

 

2,392

 

3,010

 

1,947

 

Deferred tax asset

 

10,013

 

11,498

 

9,097

 

Deposit based intangibles

 

1,136

 

1,196

 

 

Goodwill

 

3,805

 

3,805

 

 

Other assets

 

11,032

 

19,274

 

5,777

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

735,338

 

$

743,785

 

$

595,869

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

108,068

 

$

95,498

 

$

73,732

 

NOW, money market, interest checking

 

198,482

 

212,565

 

148,242

 

Savings

 

29,921

 

28,015

 

15,658

 

CDs<$100,000

 

133,582

 

134,951

 

143,140

 

CDs>$100,000

 

28,731

 

30,316

 

23,151

 

Brokered

 

90,037

 

105,628

 

80,093

 

Total deposits

 

588,821

 

606,973

 

484,016

 

 

 

 

 

 

 

 

 

Fed funds purchased

 

15,000

 

 

 

Borrowings

 

49,483

 

49,846

 

42,087

 

Other liabilities

 

6,288

 

12,970

 

3,289

 

Total liabilities

 

659,592

 

669,789

 

529,392

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Preferred stock - No par value:

 

 

 

 

 

 

 

Authorized - 500,000 shares , none issued and outstanding

 

 

 

 

Common stock and additional paid in capital - No par value

 

 

 

 

 

 

 

Authorized - 18,000,000 shares

 

 

 

 

 

 

 

Issued and outstanding - 6,239,250; 6,266,756 and 5,527,690 respectively

 

61,461

 

61,679

 

53,703

 

Retained earnings

 

13,851

 

11,804

 

12,325

 

Accumulated other comprehensive income

 

 

 

 

 

 

 

Unrealized gains(losses) on available for sale securities

 

483

 

562

 

 

Minimum pension liability

 

(49

)

(49

)

449

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

75,746

 

73,996

 

66,477

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

735,338

 

$

743,785

 

$

595,869

 

 

3



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except per Share Data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(Unaudited)

 

(Unaudited)

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

Interest and fees on loans:

 

 

 

 

 

 

 

 

 

Taxable

 

$

7,742

 

$

6,373

 

$

15,967

 

$

12,654

 

Tax-exempt

 

3

 

 

6

 

23

 

Interest on securities:

 

 

 

 

 

 

 

 

 

Taxable

 

261

 

244

 

563

 

481

 

Tax-exempt

 

53

 

14

 

94

 

27

 

Other interest income

 

40

 

32

 

102

 

80

 

Total interest income

 

8,099

 

6,663

 

16,732

 

13,265

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

Deposits

 

801

 

800

 

1,624

 

1,622

 

Borrowings

 

298

 

204

 

588

 

391

 

Total interest expense

 

1,099

 

1,004

 

2,212

 

2,013

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

7,000

 

5,659

 

14,520

 

11,252

 

Provision for loan losses

 

200

 

191

 

505

 

374

 

Net interest income after provision for loan losses

 

6,800

 

5,468

 

14,015

 

10,878

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

 

 

Deposit service fees

 

244

 

192

 

428

 

349

 

Income from loans sold on the secondary market

 

282

 

139

 

449

 

242

 

SBA/USDA loan sale gains

 

282

 

166

 

400

 

548

 

Mortgage servicing income

 

199

 

89

 

230

 

102

 

Net security gains

 

259

 

 

269

 

 

Other

 

84

 

64

 

198

 

100

 

Total other income

 

1,350

 

650

 

1,974

 

1,341

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSE:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

2,916

 

2,523

 

5,963

 

5,064

 

Occupancy

 

626

 

546

 

1,202

 

1,084

 

Furniture and equipment

 

390

 

303

 

789

 

622

 

Data processing

 

359

 

288

 

714

 

574

 

Advertising

 

120

 

123

 

246

 

230

 

Professional service fees

 

279

 

276

 

580

 

607

 

Loan and deposit

 

125

 

83

 

263

 

162

 

Writedowns and losses on other real estate held for sale

 

20

 

14

 

37

 

14

 

FDIC insurance assessment

 

140

 

90

 

248

 

175

 

Telephone

 

106

 

82

 

238

 

164

 

Other

 

619

 

570

 

1,176

 

1,309

 

Total other expenses

 

5,700

 

4,898

 

11,456

 

10,005

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

2,450

 

1,220

 

4,533

 

2,214

 

Provision for income taxes

 

836

 

414

 

1,548

 

748

 

 

 

 

 

 

 

 

 

 

 

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

 

1,614

 

806

 

2,985

 

1,466

 

 

 

 

 

 

 

 

 

 

 

INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

$

.26

 

$

.15

 

$

.48

 

$

.27

 

Diluted

 

$

.26

 

$

.14

 

$

.48

 

$

.26

 

 

4



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,614

 

$

806

 

$

2,985

 

$

1,466

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

Change in securities available for sale:

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

(461

)

150

 

72

 

345

 

Reclassification adjustment for securities gains included in net income

 

(259

)

 

(269

)

 

Tax effect

 

380

 

(45

)

118

 

(112

)

Unrealized gains (losses) on available for sale securities

 

(340

)

105

 

(79

)

233

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

1,274

 

$

911

 

$

2,906

 

$

1,699

 

 

5



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2015

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

Shares of

 

Stock and

 

 

 

Other

 

 

 

 

 

Common

 

Additional

 

Retained

 

Comprehensive

 

 

 

 

 

Stock

 

Paid in Capital

 

Earnings

 

Income

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

6,257,450

 

$

61,558

 

$

12,706

 

$

774

 

$

75,038

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 

 

1,614

 

 

1,614

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 

 

 

(340

)

(340

)

Actuarial loss on defined benefit pension obligation

 

 

 

 

 

 

Total comprehensive income

 

 

 

1,614

 

(340

)

1,274

 

Stock compensation

 

 

144

 

 

 

144

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

3,000

 

 

 

 

 

Repurchase of common stock

 

(21,200

)

(241

)

 

 

(241

)

Dividend on common stock

 

 

 

(469

)

 

(469

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

6,239,250

 

$

61,461

 

$

13,851

 

$

434

 

$

75,746

 

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2014

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

Shares of

 

Stock and

 

 

 

Other

 

 

 

 

 

Common

 

Additional

 

Retained

 

Comprehensive

 

 

 

 

 

Stock

 

Paid in Capital

 

Earnings

 

Income

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

5,527,690

 

$

53,590

 

$

11,796

 

$

344

 

$

65,730

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 

 

806

 

 

806

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 

 

 

105

 

105

 

Actuarial loss on defined benefit pension obligation

 

 

 

 

 

 

Total comprehensive income

 

 

 

806

 

105

 

911

 

Stock compensation

 

 

113

 

 

 

113

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

 

 

 

 

 

Repurchase of common stock

 

 

 

 

 

 

Dividend on common stock

 

 

 

(277

)

 

(277

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

5,527,690

 

$

53,703

 

$

12,325

 

$

449

 

$

66,477

 

 

6



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2015

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

Shares of

 

Stock and

 

 

 

Other

 

 

 

 

 

Common

 

Additional

 

Retained

 

Comprehensive

 

 

 

 

 

Stock

 

Paid in Capital

 

Earnings

 

Income

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

6,266,756

 

$

61,679

 

$

11,804

 

$

513

 

$

73,996

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 

 

2,985

 

 

2,985

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 

 

 

(79

)

(79

)

Actuarial loss on defined benefit pension obligation

 

 

 

 

 

 

Total comprehensive income

 

 

 

2,985

 

(79

)

2,906

 

Stock compensation

 

 

288

 

 

 

288

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

16,194

 

 

 

 

 

Repurchase of common stock

 

(43,700

)

(506

)

 

 

(506

)

Dividend on common stock

 

 

 

(938

)

 

(938

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

6,239,250

 

$

61,461

 

$

13,851

 

$

434

 

$

75,746

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2014

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

Shares of

 

Stock and

 

 

 

Other

 

 

 

 

 

Common

 

Additional

 

Retained

 

Comprehensive

 

 

 

 

 

Stock

 

Paid in Capital

 

Earnings

 

Income

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

5,541,390

 

$

53,621

 

$

11,412

 

$

216

 

$

65,249

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 

 

1,466

 

 

1,466

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 

 

 

233

 

233

 

Actuarial loss on defined benefit pension obligation

 

 

 

 

 

 

Total comprehensive income

 

 

 

1,466

 

233

 

1,699

 

Stock compensation

 

 

225

 

 

 

225

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

 

 

 

 

 

Repurchase of common stock

 

(13,700

)

(143

)

 

 

(143

)

Dividend on common stock

 

 

 

(553

)

 

(553

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

5,527,690

 

$

53,703

 

$

12,325

 

$

449

 

$

66,477

 

 

7



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2015

 

2014

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

2,985

 

$

1,466

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

841

 

751

 

Provision for loan losses

 

505

 

374

 

Deferred income taxes, net

 

1,548

 

748

 

(Gain) on sales/calls of securities

 

(269

)

 

(Gain) on sale of loans sold to secondary market

 

(362

)

(191

)

Origination of loans held for sale in the secondary market

 

(22,420

)

(11,170

)

Proceeds from sale of loans in the secondary market

 

22,782

 

11,361

 

Loss on sale of premises, equipment, and other real estate held for sale

 

12

 

41

 

Writedown of other real estate held for sale

 

25

 

2

 

Stock compensation

 

288

 

225

 

Change in other assets

 

8,574

 

149

 

Change in other liabilities

 

(6,682

)

(111

)

Net cash provided by operating activities

 

7,827

 

3,645

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Net (increase) in loans

 

(14,715

)

(19,354

)

Net decrease (increase) in interest bearing deposits in other financial institutions

 

459

 

(225

)

Purchase of securities available for sale

 

(10,016

)

(3,243

)

Proceeds from maturities, sales, calls or paydowns of securities available for sale

 

14,939

 

504

 

Proceeds from FHLBI repurchases of excess capital stock

 

804

 

 

Capital expenditures

 

(674

)

(798

)

Proceeds from sale of premises, equipment, and other real estate

 

1,049

 

742

 

Net cash (used in) investing activities

 

(8,154

)

(22,374

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Net (decrease) increase in deposits

 

(18,152

)

17,717

 

Increase in fed funds purchased

 

15,000

 

 

Net activity on lines of credit

 

(163

)

 

Net (decrease) increase in borrowings

 

(200

)

4,235

 

Repurchase of common stock

 

(506

)

(143

)

Dividend on common stock

 

(938

)

(553

)

Net cash provided by (used in) financing activities

 

(4,959

)

21,256

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(5,286

)

2,527

 

Cash and cash equivalents at beginning of period

 

21,947

 

18,219

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

16,661

 

$

20,746

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest

 

$

2,218

 

$

2,009

 

Income taxes

 

150

 

25

 

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

Transfers of Foreclosures from Loans to Other Real Estate Held for Sale (net of adjustments made through the allowance for loan losses)

 

495

 

282

 

 

8



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the “Corporation”) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the six-month period ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.  The unaudited consolidated financial statements and footnotes thereto should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

In order to properly reflect some categories of other income and other expenses, reclassifications of expense and income items have been made to prior period numbers.  The “net” other income and other expenses was not changed due to these reclassifications.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of investment securities, the valuation of foreclosed real estate, deferred tax assets, and mortgage servicing rights.

 

Acquired Loans

 

Loans acquired with evidence of credit deterioration since inception and for which it is probable that all contractual payments will not be received are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).  These loans are recorded at fair value at the time of acquisition, with no carryover of the related allowance for loan losses.  Fair value of acquired loans is determined using a discounted cash flow methodology based on assumptions about the amount and timing of principal and interest payments, principal prepayments and principal defaults and losses, and current market rates.  In recording the fair values of acquired impaired loans at acquisition date, management calculates a non-accretable difference (the credit component of the purchased loans) and an accretable difference (the yield component of the purchased loans).

 

Over the life of the acquired loans, management continues to estimate cash flows expected to be collected on pools of loans sharing common risk characteristics, which are treated in the aggregate when applying various valuation techniques.  Management evaluates at each balance sheet date whether the present value of our pools of loans determined using the effective interest rates has decreased significantly and if so, recognize a provision for loan loss in our consolidated statement of income.  For any significant increases in cash flows expected to be collected, we adjust the amount of the accretable yield recognized on a prospective basis over the pool’s remaining life.

 

Performing acquired loans are accounted for under FASB Topic 310-20, Receivables — Nonrefundable Fees and Other Costs.  Performance of certain loans may be monitored and based on management’s assessment of the cash flows and other facts available, portions of the accretable difference may be delayed or suspended if management deems appropriate.  The Corporation’s policy for determining when to discontinue accruing interest on performing acquired loans and the subsequent accounting for such loans is essentially the same as the policy for originated loans.

 

9



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Allowance for Loan Losses

 

The allowance for loan losses includes specific allowances related to commercial loans, when they have been judged to be impaired.  A loan is impaired when, based on current information, it is probable that the Corporation will not collect all amounts due in accordance with the contractual terms of the loan agreement.  These specific allowances are based on discounted cash flows of expected future payments using the loan’s initial effective interest rate or the fair value of the collateral if the loan is collateral dependent.

 

The Corporation continues to maintain a general allowance for loan losses for loans not considered impaired.  The allowance for loan losses is maintained at a level which management believes is adequate to provide for possible loan losses.  Management periodically evaluates the adequacy of the allowance using the Corporation’s past loan loss experience, known and inherent risks in the portfolio, composition of the portfolio, current economic conditions, and other factors.  The allowance does not include the effects of expected losses related to future events or future changes in economic conditions.  This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change.  Loans are charged against the allowance for loan losses when management believes the collectability of the principal is unlikely.  In addition, various regulatory agencies periodically review the allowance for loan losses.  These agencies may require additions to the allowance for loan losses based on their judgments of collectability.

 

In management’s opinion, the allowance for loan losses is adequate to cover probable losses relating to specifically identified loans, as well as probable losses inherent in the balance of the loan portfolio as of the balance sheet date.

 

Stock Compensation Plans

 

On May 22, 2012, the Company’s shareholders approved the Mackinac Financial Corporation 2012 Incentive Compensation Plan, under which current and prospective employees, non-employee directors and consultants may be awarded incentive stock options, non-statutory stock options, shares of restricted stock units (“RSUs”), or stock appreciation rights.  The aggregate number of shares of the Company’s common stock issuable under the plan is 575,000, which included 392,152 option shares outstanding at that time.  Awards are made at the discretion of management.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

 

The Corporation, in August 2012 and March 2014, granted Restricted Stock Units (“RSUs”) to members of the Board of Directors and Management.  In August 2012, 148,500 RSUs were granted at a market value of $7.91 and will vest equally over a four year term.  In exchange for the grant of these RSUs various previously issued stock option awards were surrendered.  In March 2014, 52,774 RSUs were granted at a market value of $12.95, also vesting equally over a four year term.   In March 2015, 37,730 RSUs were granted at a market value of $11.15, also vesting over a four year term. The RSUs were awarded at no cost to the employee.  Compensation cost to be recognized over the four year vesting periods, is $1.175 million, $.683 million and $.421 million, respectively.  On August 31, 2013 and 2014, the Corporation issued 37,125 shares and 37,125 shares of its common stock for vested RSUs, respectively.  In March 2015, the Corporation issued 13,194 shares of its common stock for vested RSUs.  In May 2015, the Corporation granted 3,000 shares, which were immediately vested and issued.

 

2.              RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on the recognition of revenue from contracts with customers. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The guidance is effective January 1, 2018 and early adoption is not permitted. The company is currently evaluating the impact of the new guidance and the method of adoption in the consolidated financial results.

 

10



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.              EARNINGS PER SHARE

 

Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and stock awards were fully vested and resulted in the issuance of common stock that then shared in our earnings, is computed by dividing net income by the weighted average number of common shares outstanding and common stock equivalents, after giving effect for dilutive shares issued.

 

The following shows the computation of basic and diluted earnings per share for the three and six months ended June 30, 2015 and 2014 (dollars in thousands, except per share data):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

(Numerator):

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

1,614

 

$

806

 

$

2,985

 

$

1,466

 

(Denominator):

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

6,247,004

 

5,527,690

 

6,251,713

 

5,529,290

 

Effect of dilutive stock options and vesting of restricted stock units

 

42,594

 

90,001

 

27,514

 

55,642

 

Weighted average shares outstanding - diluted

 

6,289,598

 

5,617,691

 

6,279,227

 

5,584,932

 

Income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

.26

 

$

.15

 

$

.48

 

$

.27

 

Diluted

 

$

.26

 

$

.14

 

$

.48

 

$

.26

 

 

4.              INVESTMENT SECURITIES

 

The amortized cost and estimated fair value of investment securities available for sale as of June 30, 2015, December 31, 2014 and June 30, 2014 are as follows (dollars in thousands):

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Agencies

 

$

24,876

 

$

87

 

$

(42

)

$

24,921

 

Corporate Bonds

 

12,433

 

87

 

(1

)

12,519

 

US Agencies - MBS

 

12,604

 

227

 

(71

)

12,760

 

Obligations of states and political subdivisions

 

9,916

 

591

 

(146

)

10,361

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

59,829

 

$

992

 

$

(260

)

$

60,561

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury

 

$

5,287

 

$

3

 

$

(10

)

$

5,280

 

US Agencies

 

22,667

 

144

 

(94

)

22,717

 

Corporate Bonds

 

12,558

 

116

 

 

12,674

 

US Agencies - MBS

 

13,461

 

262

 

(35

)

13,688

 

Obligations of states and political subdivisions

 

10,930

 

685

 

(142

)

11,473

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

64,903

 

$

1,210

 

$

(281

)

$

65,832

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Agencies - MBS

 

$

6,598

 

$

253

 

$

 

$

6,851

 

US Agencies

 

17,755

 

91

 

(258

)

17,588

 

Corporate Bonds

 

15,691

 

189

 

 

15,880

 

Obligations of states and political subdivisions

 

6,441

 

400

 

(2

)

6,839

 

Other

 

216

 

 

 

216

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

46,701

 

$

933

 

$

(260

)

$

47,374

 

 

The Corporation has evaluated gross unrealized losses that exist within the portfolio and considers them temporary in nature.  The Corporation has both the ability and the intent to hold the investment securities until their respective maturities and therefore does not anticipate the realization of the temporary losses.

 

The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $4.276 million and $4.456 million, respectively, at June 30, 2015.

 

11



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.              LOANS

 

The composition of loans is as follows (dollars in thousands):

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

2015

 

2014

 

2014

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

320,013

 

$

315,387

 

$

274,500

 

Commercial, financial, and agricultural

 

107,205

 

101,895

 

89,515

 

One to four family residential real estate

 

142,276

 

139,553

 

105,868

 

Construction :

 

 

 

 

 

 

 

Consumer

 

8,722

 

9,431

 

7,464

 

Commerical

 

19,868

 

16,284

 

10,550

 

Consumer

 

17,163

 

18,385

 

15,043

 

 

 

 

 

 

 

 

 

Total loans

 

$

615,247

 

$

600,935

 

$

502,940

 

 

The Corporation completed the acquisition of Peninsula Financial Corporation on December 5, 2014.  The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (“acquired impaired”) and loans that do not meet that criteria, which are accounted for under ASC 310-20 (“acquired nonimpaired”).  The acquired impaired loans totaled $10.312 million.  The Corporation recorded these loans at fair value taking into account a number of factors, including remaining life, estimated loss, estimated value of the underlying collateral and net present values of cash flows.  In the first half of 2015, the Corporation had positive resolution of one acquired nonperforming loan which resulted in the recognition of approximately $.429 million of the accretable interest.

 

The table below details the acquired portfolio at June 30, 2015 (dollars in thousands):

 

 

 

Acquired

 

Acquired

 

Acquired

 

 

 

Impaired

 

Non-impaired

 

Total

 

 

 

 

 

 

 

 

 

Loans acquired - contractual payments

 

$

11,433

 

$

52,515

 

$

63,948

 

Nonaccretable difference

 

(1,509

)

 

(1,509

)

Expected cash flows

 

9,924

 

52,515

 

62,439

 

Accretable yield

 

(503

)

(1,692

)

(2,195

)

Carrying balance at June 30, 2015

 

$

9,421

 

$

50,823

 

$

60,244

 

 

The table below presents a rollforward of the accretable yield on acquired loans for the six months ended June 30, 2015 (dollars in thousands):

 

 

 

Acquired

 

Acquired

 

Acquired

 

 

 

Impaired

 

Non-impaired

 

Total

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

$

744

 

$

2,042

 

$

2,786

 

Accretion

 

(429

)

(350

)

(779

)

Reclassification from nonaccretable difference

 

188

 

 

188

 

Balance at June 30, 2015

 

$

503

 

$

1,692

 

$

2,195

 

 

12



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.              LOANS (Continued)

 

An analysis of the allowance for loan losses for the six months ended June 30, 2015, the year ended December 31, 2014, and the six months ended June 30, 2014 is as follows (dollars in thousands):

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

2015

 

2014

 

2014

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

5,140

 

$

4,661

 

$

4,661

 

Loans charged off

 

(158

)

(1,046

)

(115

)

Recoveries on loans previously charged off

 

113

 

325

 

177

 

Provision

 

505

 

1,200

 

374

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

5,600

 

$

5,140

 

$

5,097

 

 

In the first half of 2015, net charge-offs were $.045 million, .01% of average loans, compared to net recoveries of $62,000 in the same period in 2014.   In the first half of 2015, the Corporation recorded a provision for loan loss of $.505 million compared to $.374 million in the first half of 2014.  The Corporation’s allowance for loan loss reserve policy calls for a measurement of the adequacy of the reserve at each quarter end.  This process includes an analysis of the loan portfolio to take into account increases in loans outstanding and portfolio composition, historical loss rates, and specific reserve requirements of nonperforming loans.

 

A breakdown of the allowance for loan losses and recorded balances in loans at June 30, 2015 is as follows (dollars in thousands):

 

 

 

 

 

Commercial,

 

 

 

One to four

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

financial and

 

Commercial

 

family residential

 

Consumer

 

 

 

 

 

 

 

 

 

real estate

 

agricultural

 

construction

 

real estate

 

construction

 

Consumer

 

Unallocated

 

Total

 

Three Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan loss reserve:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance ALLR

 

$

2,770

 

$

2,353

 

$

144

 

$

244

 

$

6

 

$

19

 

$

(9

)

$

5,527

 

Charge-offs

 

 

(110

)

 

(30

)

 

(7

)

 

(147

)

Recoveries

 

11

 

 

 

1

 

 

8

 

 

20

 

Provision

 

(231

)

328

 

(16

)

67

 

(1

)

7

 

46

 

200

 

Ending balance ALLR

 

$

2,550

 

$

2,571

 

$

128

 

$

282

 

$

5

 

$

27

 

$

37

 

$

5,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan loss reserve:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance ALLR

 

$

2,813

 

$

1,539

 

$

142

 

$

285

 

$

6

 

$

13

 

$

342

 

$

5,140

 

Charge-offs

 

 

(110

)

 

(30

)

 

(18

)

 

(158

)

Recoveries

 

92

 

 

 

1

 

1

 

19

 

 

113

 

Provision

 

(355

)

1,142

 

(14

)

26

 

(2

)

13

 

(305

)

505

 

Ending balance ALLR

 

$

2,550

 

$

2,571

 

$

128

 

$

282

 

$

5

 

$

27

 

$

37

 

$

5,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30,2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

320,013

 

$

107,205

 

$

19,868

 

$

142,276

 

$

8,722

 

$

17,163

 

$