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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 September 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 November 10, 2015, there were outstanding 6,217,620 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 - September 30, 2015 (Unaudited), December 31, 2014 and September 30, 2014 (Unaudited)

1

 

 

 

 

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

2

 

 

 

 

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

3

 

 

 

 

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

4

 

 

 

 

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

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

Item 2.

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

36

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46

 

 

 

Item 4.

Controls and Procedures

49

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

50

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

50

 

 

 

SIGNATURES

51

 



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

 

PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

 

 

September 30,

 

December 31,

 

September 30,

 

 

 

2015

 

2014

 

2014

 

 

 

(Unaudited)

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

28,581

 

$

21,947

 

$

22,399

 

Federal funds sold

 

10,000

 

 

2

 

Cash and cash equivalents

 

38,581

 

21,947

 

22,401

 

 

 

 

 

 

 

 

 

Interest-bearing deposits in other financial institutions

 

5,089

 

5,797

 

235

 

Securities available for sale

 

54,432

 

65,832

 

48,742

 

Federal Home Loan Bank stock

 

2,169

 

2,973

 

3,060

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

Commercial

 

446,327

 

433,566

 

383,759

 

Mortgage

 

156,764

 

148,984

 

119,039

 

Consumer

 

16,815

 

18,385

 

15,575

 

Total Loans

 

619,906

 

600,935

 

518,373

 

Allowance for loan losses

 

(5,779

)

(5,140

)

(5,279

)

Net loans

 

614,127

 

595,795

 

513,094

 

 

 

 

 

 

 

 

 

Premises and equipment

 

12,670

 

12,658

 

9,821

 

Other real estate held for sale

 

2,296

 

3,010

 

1,843

 

Deferred tax asset

 

9,326

 

11,498

 

8,681

 

Deposit based intangibles

 

1,106

 

1,196

 

 

 

Goodwill

 

3,805

 

3,805

 

 

 

Other assets

 

11,371

 

19,274

 

6,066

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

754,972

 

$

743,785

 

$

613,943

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

114,769

 

$

95,498

 

$

84,073

 

NOW, money market, interest checking

 

213,737

 

212,565

 

173,793

 

Savings

 

31,742

 

28,015

 

15,263

 

CDs<$100,000

 

129,715

 

134,951

 

130,821

 

CDs>$100,000

 

27,272

 

30,316

 

24,891

 

Brokered

 

105,099

 

105,628

 

62,365

 

Total deposits

 

622,334

 

606,973

 

491,206

 

 

 

 

 

 

 

 

 

Federal funds purchased

 

 

 

7,500

 

Borrowings

 

49,593

 

49,846

 

44,909

 

Other liabilities

 

6,954

 

12,970

 

3,196

 

Total liabilities

 

678,881

 

669,789

 

546,811

 

 

 

 

 

 

 

 

 

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 - 6,249,595; 6,266,756 and 5,564,815 respectively

 

61,320

 

61,679

 

53,800

 

Retained earnings

 

14,229

 

11,804

 

12,923

 

Accumulated other comprehensive income

 

 

 

 

 

 

 

Unrealized gains (losses) on available for sale securities

 

591

 

562

 

409

 

Minimum pension liability

 

(49

)

(49

)

 

 

 

 

 

 

 

 

 

Total shareholders’ equity

 

76,091

 

73,996

 

67,132

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

754,972

 

$

743,785

 

$

613,943

 

 

1



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except per Share Data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

Interest and fees on loans:

 

 

 

 

 

 

 

 

 

Taxable

 

$

8,019

 

$

6,651

 

$

23,986

 

$

19,305

 

Tax-exempt

 

3

 

4

 

9

 

27

 

Interest on securities:

 

 

 

 

 

 

 

 

 

Taxable

 

282

 

230

 

845

 

711

 

Tax-exempt

 

35

 

14

 

129

 

41

 

Other interest income

 

46

 

34

 

148

 

114

 

Total interest income

 

8,385

 

6,933

 

25,117

 

20,198

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

Deposits

 

843

 

813

 

2,467

 

2,435

 

Borrowings

 

307

 

234

 

895

 

625

 

Total interest expense

 

1,150

 

1,047

 

3,362

 

3,060

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

7,235

 

5,886

 

21,755

 

17,138

 

Provision for loan losses

 

350

 

187

 

855

 

561

 

Net interest income after provision for loan losses

 

6,885

 

5,699

 

20,900

 

16,577

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

 

 

Deposit service fees

 

196

 

168

 

624

 

517

 

Income from loans sold on the secondary market

 

301

 

212

 

750

 

455

 

SBA/USDA loan sale gains

 

40

 

 

440

 

548

 

Mortgage servicing income

 

9

 

313

 

239

 

415

 

Net security gains

 

133

 

 

402

 

 

Other

 

94

 

75

 

292

 

174

 

Total other income

 

773

 

768

 

2,747

 

2,109

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSE:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

3,139

 

2,481

 

9,102

 

7,545

 

Occupancy

 

602

 

511

 

1,804

 

1,595

 

Furniture and equipment

 

370

 

305

 

1,159

 

927

 

Data processing

 

327

 

288

 

1,041

 

862

 

Advertising

 

153

 

114

 

399

 

344

 

Professional service fees

 

348

 

276

 

928

 

883

 

Loan and deposit

 

136

 

144

 

399

 

306

 

Writedowns and losses on other real estate held for sale

 

104

 

176

 

141

 

190

 

FDIC insurance assessment

 

135

 

92

 

383

 

267

 

Telephone

 

108

 

84

 

346

 

248

 

Other

 

692

 

655

 

1,868

 

1,964

 

Total other expenses

 

6,114

 

5,126

 

17,570

 

15,131

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

1,544

 

1,341

 

6,077

 

3,555

 

Provision for income taxes

 

526

 

455

 

2,074

 

1,203

 

 

 

 

 

 

 

 

 

 

 

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

 

$

1,018

 

$

886

 

$

4,003

 

$

2,352

 

 

 

 

 

 

 

 

 

 

 

INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

$

.16

 

$

.16

 

$

.64

 

$

.43

 

Diluted

 

$

.16

 

$

.16

 

$

.64

 

$

.42

 

 

2



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,018

 

$

886

 

$

4,003

 

$

2,352

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

Change in securities available for sale:

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

297

 

(53

)

370

 

292

 

Reclassification adjustment for gains included in net income

 

(133

)

 

(402

)

 

Tax effect

 

(56

)

13

 

61

 

(99

)

Other comprehensive income (loss)

 

108

 

(40

)

29

 

193

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

1,126

 

$

846

 

$

4,032

 

$

2,545

 

 

3



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2015

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

Shares of

 

Stock and

 

 

 

Other

 

 

 

 

 

Common

 

Additional

 

Retained

 

Comprehensive

 

 

 

 

 

Stock

 

Paid in Capital

 

Earnings

 

Income

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

6,239,250

 

$

61,461

 

$

13,851

 

$

434

 

$

75,746

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 

 

1,018

 

 

1,018

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 

 

 

108

 

108

 

Actuarial loss on defined benefit pension obligation

 

 

 

 

 

 

Total comprehensive income

 

 

 

1,018

 

108

 

1,126

 

Stock compensation

 

 

144

 

 

 

144

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

37,125

 

 

 

 

 

Repurchase of common stock

 

(26,780

)

(285

)

 

 

(285

)

Dividend on common stock

 

 

 

(640

)

 

(640

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

6,249,595

 

$

61,320

 

$

14,229

 

$

542

 

$

76,091

 

 

 

 

Three Months Ended

 

 

 

September 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

 

$

53,703

 

$

12,325

 

$

449

 

$

66,477

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 

 

886

 

 

886

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

Net unrealized loss on securities available for sale

 

 

 

 

(40

)

(40

)

Actuarial loss on defined benefit pension obligation

 

 

 

 

 

 

Total comprehensive income

 

 

 

886

 

(40

)

846

 

Stock compensation

 

 

96

 

 

 

96

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

37,125

 

 

 

 

 

Repurchase of common stock

 

 

 

 

 

 

Dividend on common stock

 

 

 

(287

)

 

(287

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

5,564,815

 

$

53,799

 

$

12,924

 

$

409

 

$

67,132

 

 

4



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 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

 

 

 

4,003

 

 

4,003

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 

 

 

29

 

29

 

Actuarial loss on defined benefit pension obligation

 

 

 

 

 

 

Total comprehensive income

 

 

 

4,003

 

29

 

4,032

 

Stock compensation

 

 

432

 

 

 

432

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

53,319

 

 

 

 

 

Repurchase of common stock

 

(70,480

)

(791

)

 

 

(791

)

Dividend on common stock

 

 

 

(1,578

)

 

(1,578

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

6,249,595

 

$

61,320

 

$

14,229

 

$

542

 

$

76,091

 

 

 

 

Nine Months Ended

 

 

 

September 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

 

 

 

2,352

 

 

2,352

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 

 

 

193

 

193

 

Actuarial loss on defined benefit pension obligation

 

 

 

 

 

 

Total comprehensive income

 

 

 

2,352

 

193

 

2,545

 

Stock compensation

 

 

321

 

 

 

321

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

37,125

 

 

 

 

 

Repurchase of common stock

 

(13,700

)

(143

)

 

 

(143

)

Dividend on common stock

 

 

 

(840

)

 

(840

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

5,564,815

 

$

53,799

 

$

12,924

 

$

409

 

$

67,132

 

 

5



Table of Contents

 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2015

 

2014

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

4,003

 

$

2,352

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,265

 

1,115

 

Provision for loan losses

 

855

 

561

 

Deferred income taxes, net

 

2,074

 

1,203

 

(Gain) on sales/calls of securities

 

(402

)

 

(Gain) on sale of loans sold in the secondary market

 

(604

)

(358

)

Origination of loans held for sale in the secondary market

 

(36,827

)

(21,395

)

Proceeds from sale of loans in the secondary market

 

37,431

 

21,753

 

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

 

6

 

77

 

Writedown of other real estate held for sale

 

135

 

142

 

Stock compensation

 

432

 

321

 

Change in other assets

 

7,993

 

(141

)

Change in other liabilities

 

(6,016

)

(204

)

Net cash provided by operating activities

 

10,345

 

5,426

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Net (increase) in loans

 

(19,185

)

(35,022

)

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

 

708

 

(225

)

Purchase of securities available for sale

 

(16,390

)

(8,257

)

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

 

27,546

 

4,059

 

Proceeds from FHLBI repurchases of excess stock

 

804

 

 

 

Capital expenditures

 

(1,123

)

(1,156

)

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

 

1,190

 

876

 

Net cash (used in) investing activities

 

(6,450

)

(39,725

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Net increase in deposits

 

15,361

 

24,907

 

Increase in federal funds purchased

 

 

7,500

 

Net activity on lines of credit

 

121

 

7,330

 

Net (decrease) in borrowings

 

(374

)

(273

)

Repurchase of common stock

 

(791

)

(143

)

Dividend on common stock

 

(1,578

)

(840

)

Net cash provided by financing activities

 

12,739

 

38,481

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

16,634

 

4,182

 

Cash and cash equivalents at beginning of period

 

21,947

 

18,219

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

38,581

 

$

22,401

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest

 

$

3,345

 

$

3,058

 

Income taxes

 

150

 

75

 

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

Transfers of Foreclosures from Loans to Other Real Estate Held for Sale

 

674

 

488

 

 

6



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 nine-month period ended September 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, recognizes 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 Financial Accounting Standards Board (“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.

 

7



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 Corporation’s 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, March 2014 and March 2015, granted 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, 2014 and 2015, the Corporation issued 37,125 shares of its common stock for vested RSUs, in each year.  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 under the Incentive Compensation Plan, which were immediately vested and issued.

 

2.     RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the 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 permitted only as of January 1, 2017. The company is currently evaluating the impact of the new guidance and the method of adoption in the consolidated financial results.

 

8



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 nine months ended September 30, 2015 and 2014 (dollars in thousands, except per share data):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

(Numerator):

 

 

 

 

 

 

 

 

 

Net income

 

$

1,018

 

$

886

 

$

4,003

 

$

2,352

 

(Denominator):

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

6,238,963

 

5,540,200

 

6,247,416

 

5,532,966

 

Effect of dilutive stock options and vesting of restricted stock units

 

39,046

 

71,722

 

31,400

 

70,268

 

Weighted average shares outstanding - diluted

 

6,278,009

 

5,611,922

 

6,278,816

 

5,603,234

 

Income per common share

 

 

 

 

 

 

 

 

 

Basic

 

$

.16

 

$

.16

 

$

.64

 

$

.43

 

Diluted

 

$

.16

 

$

.16

 

$

.64

 

$

.42

 

 

 

4.  INVESTMENT SECURITIES

 

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

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Agencies - MBS

 

$

3,543

 

$

22

 

$

(8

)

$

3,557

 

US Agencies

 

25,321

 

277

 

 

25,598

 

Corporate Bonds

 

14,742

 

75

 

(2

)

14,815

 

Obligations of states and political subdivisions

 

9,929

 

536

 

(3

)

10,462

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

53,535

 

$

910

 

$

(13

)

$

54,432

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Agencies - MBS

 

$

6,142

 

$

241

 

$

 

$

6,383

 

US Agencies

 

22,725

 

41

 

(273

)

22,493

 

Corporate Bonds

 

12,621

 

172

 

 

12,793

 

Obligations of states and political subdivisions

 

6,383

 

439

 

 

6,822

 

Other

 

251

 

 

 

251

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

48,122

 

$

893

 

$

(273

)

$

48,742

 

 

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 $5.394 million and $5.460 million, respectively, at September 30, 2015.

 

9



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):

 

 

 

September 30,

 

December 31,

 

September 30,

 

 

 

2015

 

2014

 

2014

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

310,025

 

$

315,387

 

$

272,803

 

Commercial, financial, and agricultural

 

120,804

 

101,895

 

98,714

 

One to four family residential real estate

 

144,807

 

139,553

 

110,310

 

Construction :

 

 

 

 

 

 

 

Consumer

 

11,957

 

9,431

 

8,729

 

Commerical

 

15,498

 

16,284

 

12,242

 

Consumer

 

16,815

 

18,385

 

15,575

 

 

 

 

 

 

 

 

 

Total loans

 

$

619,906

 

$

600,935

 

$

518,373

 

 

The Corporation completed the acquisition of Peninsula Financial Corporation (“PFC”) 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 all acquired 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 nine months 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 September 30, 2015 (dollars in thousands):

 

 

 

Acquired

 

Acquired

 

Acquired

 

 

 

Impaired

 

Non-impaired

 

Total

 

 

 

 

 

 

 

 

 

Loans acquired - contractual payments

 

$

10,391

 

$

47,660

 

$

58,051

 

Nonaccretable difference

 

(1,370

)

 

(1,370

)

Expected cash flows

 

9,021

 

47,660

 

56,681

 

Accretable yield

 

(503

)

(1,517

)

(2,020

)

Carrying balance at September 30, 2015

 

$

8,518

 

$

46,143

 

$

54,661

 

 

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

 

 

 

Acquired

 

Acquired

 

Acquired

 

 

 

Impaired

 

Non-impaired

 

Total

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

$

744

 

$

2,042

 

$

2,786

 

Accretion

 

(429

)

(525

)

(954

)

Reclassification from nonaccretable difference

 

188

 

 

188

 

Balance at September 30, 2015

 

$

503

 

$

1,517

 

$

2,020

 

 

10



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 nine months ended September 30, 2015, the year ended December 31, 2014 and the nine months ended September 30, 2014 is as follows (dollars in thousands):

 

 

 

September 30,

 

December 31,

 

September 30,

 

 

 

2015

 

2014

 

2014

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

5,140

 

$

4,661

 

$

4,661

 

Loans charged off

 

(365

)

(1,046

)

(185

)

Recoveries on loans previously charged off

 

149

 

325

 

242

 

Provision

 

855

 

1,200

 

561

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

5,779

 

$

5,140

 

$

5,279

 

 

In the first nine months of 2015, net charge-offs were $.216 million, or .05% of average loans, compared to net recoveries of $.057 million, in the same period in 2014.   In the first nine months of 2015, the Corporation recorded a provision for loan loss of $.855 million compared to $.561 million in the first nine months 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 September 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 September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan loss reserve:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance ALLR

 

$

2,550

 

$

2,571

 

$

128

 

$

282

 

$

5

 

$

27

 

$

37

 

$

5,600

 

Charge-offs

 

(52

)

(57

)

 

(62

)

 

(36

)

 

(207

)

Recoveries

 

28

 

3

 

 

 

 

5

 

 

36

 

Provision

 

(221

)

355

 

(17

)

74

 

2

 

46

 

111

 

350

 

Ending balance ALLR

 

$

2,305

 

$

2,872

 

$

111

 

$

294

 

$

7

 

$

42

 

$

148

 

$

5,779

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan loss reserve:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance ALLR

 

$

2,813

 

$

1,539

 

$

142

 

$

285

 

$

6

 

$

13

 

$

342

 

$

5,140

 

Charge-offs

 

(52

)

(157

)

 

(92

)

 

(64

)

 

(365

)

Recoveries

 

120

 

3

 

 

1

 

1

 

24

 

 

149

 

Provision

 

(576

)

1,487

 

(31

)

100

 

 

69

 

(194

)

855

 

Ending balance ALLR

 

$

2,305

 

$

2,872

 

$

111

 

$

294

 

$

7

 

$

42

 

$

148

 

$

5,779

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30,2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

310,025

 

$

120,804

 

$

15,498

 

$

144,807

 

$

11,957

 

$

16,815

 

$

 

$

619,906