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EX-32.2 - EX-32.2 - MACKINAC FINANCIAL CORP /MI/mfnc-20170331ex322ace0d5.htm
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EX-31.2 - EX-31.2 - MACKINAC FINANCIAL CORP /MI/mfnc-20170331ex312428579.htm
EX-31.1 - EX-31.1 - MACKINAC FINANCIAL CORP /MI/mfnc-20170331ex3119e33fa.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2017

 

OR

 

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  ☒     No  ☐

 

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  ☒     No  ☐

 

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

 

Large Accelerated Filer  ☐

 

Accelerated Filer  ☐

 

 

 

Non-accelerated Filer     ☐  (Do not check if a smaller reporting company)

 

Smaller reporting company  ☒

 

Emerging growth company  ☐ 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

Yes  ☐     No  ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

 

As of May 10, 2017, there were outstanding 6,294,930 shares of the registrant’s common stock, no par value.

 

 

 

 

 


 

MACKINAC FINANCIAL CORPORATION

 

INDEX

 

 

 

 

 

 

 

    

Page No.

 

 

 

 

PART I. 

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – March 31, 2017 (Unaudited), December 31, 2016

 

1

 

 

 

 

 

Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2017 (Unaudited) and March 31, 2016 (Unaudited)

 

2

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — Three Months Ended March 31, 2017 (Unaudited) and March 31, 2016 (Unaudited)

 

3

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity — Three Months Ended March 31, 2017 (Unaudited) and March 31, 2016 (Unaudited)

 

4

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2017 (Unaudited) and March 31, 2016 (Unaudited)

 

5

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

Item 2. 

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

 

26

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

37

 

 

 

 

Item 4. 

Controls and Procedures

 

40

 

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

41

 

 

 

 

Item 6. 

Exhibits and Reports on Form 8-K

 

41

 

 

 

 

SIGNATURES 

 

42

 

 

 

 

 


 

MACKINAC FINANCIAL CORPORATION

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2017

 

2016

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

41,166

 

$

44,620

 

Federal funds sold

 

 

 3

 

 

2,135

 

Cash and cash equivalents

 

 

41,169

 

 

46,755

 

 

 

 

 

 

 

 

 

Interest-bearing deposits in other financial institutions

 

 

13,448

 

 

14,047

 

Securities available for sale

 

 

83,882

 

 

86,273

 

Federal Home Loan Bank stock

 

 

2,719

 

 

2,911

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

Commercial

 

 

552,483

 

 

543,573

 

Mortgage

 

 

215,042

 

 

218,171

 

Consumer

 

 

19,021

 

 

20,113

 

Total Loans

 

 

786,546

 

 

781,857

 

Allowance for loan losses

 

 

(5,146)

 

 

(5,020)

 

Net loans

 

 

781,400

 

 

776,837

 

 

 

 

 

 

 

 

 

Premises and equipment

 

 

15,970

 

 

15,891

 

Other real estate held for sale

 

 

4,466

 

 

4,782

 

Deferred tax asset

 

 

7,651

 

 

8,760

 

Deposit based intangibles

 

 

2,110

 

 

2,172

 

Goodwill

 

 

5,694

 

 

5,694

 

Other assets

 

 

18,126

 

 

19,398

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

976,635

 

$

983,520

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

147,106

 

$

164,179

 

NOW, money market, interest checking

 

 

283,314

 

 

286,622

 

Savings

 

 

61,171

 

 

58,315

 

CDs<$250,000

 

 

141,569

 

 

141,629

 

CDs>$250,000

 

 

8,802

 

 

8,489

 

Brokered

 

 

179,858

 

 

164,278

 

Total deposits

 

 

821,820

 

 

823,512

 

 

 

 

 

 

 

 

 

Federal funds purchased

 

 

3,000

 

 

6,000

 

Borrowings

 

 

66,279

 

 

67,579

 

Other liabilities

 

 

5,527

 

 

7,820

 

Total liabilities

 

 

896,626

 

 

904,911

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares Issued and outstanding - 6,294,930 and 6,270,034 respectively

 

 

61,683

 

 

61,583

 

Retained earnings

 

 

18,176

 

 

17,206

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

Unrealized (losses) gains on available for sale securities

 

 

228

 

 

(102)

 

Minimum pension liability

 

 

(78)

 

 

(78)

 

Total shareholders’ equity

 

 

80,009

 

 

78,609

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

976,635

 

$

983,520

 

 

1


 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except per Share Data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

    

2016

 

 

 

(Unaudited)

 

INTEREST INCOME:

 

 

 

 

 

 

 

Interest and fees on loans:

 

 

 

 

 

 

 

Taxable

 

$

9,957

 

$

7,960

 

Tax-exempt

 

 

33

 

 

 2

 

Interest on securities:

 

 

 

 

 

 

 

Taxable

 

 

399

 

 

262

 

Tax-exempt

 

 

79

 

 

31

 

Other interest income

 

 

128

 

 

55

 

Total interest income

 

 

10,596

 

 

8,310

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

Deposits

 

 

959

 

 

769

 

Borrowings

 

 

471

 

 

253

 

Total interest expense

 

 

1,430

 

 

1,022

 

 

 

 

 

 

 

 

 

Net interest income

 

 

9,166

 

 

7,288

 

Provision for loan losses

 

 

150

 

 

 —

 

Net interest income after provision for loan losses

 

 

9,016

 

 

7,288

 

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

Deposit service fees

 

 

272

 

 

216

 

Income from mortgage loans sold on the secondary market

 

 

298

 

 

267

 

SBA/USDA loan sale gains

 

 

60

 

 

 —

 

Net mortgage servicing (amortization) income

 

 

(8)

 

 

(54)

 

Net realized security gains

 

 

 —

 

 

97

 

Other

 

 

154

 

 

101

 

Total other income

 

 

776

 

 

627

 

 

 

 

 

 

 

 

 

OTHER EXPENSE:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,797

 

 

3,387

 

Occupancy

 

 

785

 

 

640

 

Furniture and equipment

 

 

481

 

 

383

 

Data processing

 

 

461

 

 

345

 

Advertising

 

 

123

 

 

156

 

Professional service fees

 

 

321

 

 

241

 

Loan origination expenses and deposit and card related fees

 

 

179

 

 

127

 

Writedowns and losses on other real estate held for sale

 

 

12

 

 

16

 

FDIC insurance assessment

 

 

157

 

 

108

 

Telephone

 

 

157

 

 

112

 

Transaction related expenses

 

 

 —

 

 

106

 

Other

 

 

704

 

 

577

 

Total other expenses

 

 

7,177

 

 

6,198

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

2,615

 

 

1,717

 

Provision for  income taxes

 

 

889

 

 

585

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

1,726

 

$

1,132

 

 

 

 

 

 

 

 

 

INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

Basic

 

$

.28

 

$

.18

 

Diluted

 

$

.28

 

$

.18

 

 

 

2


 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,726

 

$

1,132

 

Other comprehensive income

 

 

 

 

 

 

 

Change in securities available for sale:

 

 

 

 

 

 

 

Unrealized gains arising during the period

 

 

500

 

 

424

 

Reclassification adjustment for securities gains included in net income

 

 

 —

 

 

(97)

 

Tax effect

 

 

(170)

 

 

(110)

 

Net change in unrealized gains on available for sale securities

 

 

330

 

 

217

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

2,056

 

$

1,349

 

 

 

3


 

 

 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

Shares of

 

Stock and

 

 

 

Other

 

 

 

 

 

Common

 

Additional

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Paid in Capital

    

Earnings

    

Income (loss)

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

6,263,371

 

$

61,583

 

$

17,206

 

$

(180)

 

$

78,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 —

 

 

 —

 

 

1,726

 

 

 —

 

 

1,726

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 —

 

 

 —

 

 

 —

 

 

330

 

 

330

 

Actuarial loss on defined benefit pension obligation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total comprehensive income

 

 —

 

 

 —

 

 

1,726

 

 

330

 

 

2,056

 

Stock compensation

 

 —

 

 

100

 

 

 —

 

 

 —

 

 

100

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

31,559

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Dividend on common stock

 

 —

 

 

 —

 

 

(756)

 

 

 —

 

 

(756)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

6,294,930

 

$

61,683

 

$

18,176

 

$

150

 

$

80,009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

Shares of

 

Stock and

 

 

 

Other

 

 

 

 

 

Common

 

Additional

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Paid in Capital

    

Earnings

    

Income (Loss)

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

6,217,620

 

$

61,133

 

$

15,221

 

$

248

 

$

76,602

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 —

 

 

 —

 

 

1,132

 

 

 —

 

 

1,132

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 —

 

 

 —

 

 

 —

 

 

217

 

 

217

 

Actuarial loss on defined benefit pension obligation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total comprehensive income

 

 —

 

 

 —

 

 

1,132

 

 

217

 

 

1,349

 

Stock compensation

 

 —

 

 

150

 

 

 —

 

 

 —

 

 

150

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

22,626

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Repurchase of common stock

 

(9,000)

 

 

(99)

 

 

 —

 

 

 —

 

 

(99)

 

Dividend on common stock

 

 —

 

 

 —

 

 

(607)

 

 

 —

 

 

(607)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

6,231,246

 

$

61,184

 

$

15,746

 

$

465

 

$

77,395

 

 

4


 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

    

2016

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

1,726

 

$

1,132

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

572

 

 

395

 

Provision for loan losses

 

 

150

 

 

 —

 

Deferred tax expense

 

 

889

 

 

585

 

Gain on sales/calls of securities

 

 

 —

 

 

(97)

 

Gain on sale of loans sold in the secondary market

 

 

(298)

 

 

(228)

 

Origination of loans held for sale in the secondary market

 

 

(15,026)

 

 

(13,802)

 

Proceeds from sale of loans in the secondary market

 

 

15,324

 

 

14,030

 

(Gain) loss on sale of premises, equipment, and other real estate held for sale

 

 

(4)

 

 

16

 

Writedown of other real estate held for sale

 

 

16

 

 

 —

 

Stock compensation

 

 

100

 

 

150

 

Change in other assets

 

 

1,334

 

 

(513)

 

Change in other liabilities

 

 

(2,293)

 

 

(485)

 

Net cash provided by operating activities

 

 

2,490

 

 

1,183

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Net increase in loans

 

 

(5,099)

 

 

(946)

 

Net decrease in interest bearing deposits in other financial institutions

 

 

599

 

 

100

 

Purchase of securities available for sale

 

 

 —

 

 

(5,225)

 

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

 

 

2,776

 

 

5,238

 

Redemption of FHLBI stock

 

 

192

 

 

 —

 

Capital expenditures

 

 

(536)

 

 

(337)

 

Proceeds from life insurance

 

 

 —

 

 

99

 

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

 

 

740

 

 

247

 

Net cash used in investing activities

 

 

(1,328)

 

 

(824)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net decrease in deposits

 

 

(1,692)

 

 

(17,345)

 

Net activity on line of credit

 

 

(750)

 

 

800

 

(Decrease) increase in fed funds purchased

 

 

(3,000)

 

 

10,000

 

Principal payments on borrowings

 

 

(550)

 

 

(100)

 

Repurchase of common stock

 

 

 —

 

 

(99)

 

Dividend on common stock

 

 

(756)

 

 

(607)

 

Net cash used in financing activities

 

 

(6,748)

 

 

(7,351)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(5,586)

 

 

(6,992)

 

Cash and cash equivalents at beginning of period

 

 

46,755

 

 

25,008

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

41,169

 

$

18,016

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

1,411

 

$

1,013

 

Income taxes

 

 

 —

 

 

50

 

 

 

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

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

 

 

576

 

 

623

 

 

 

5


 

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 three month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.  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, 2016.

 

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, mortgage servicing rights, and the assessment of goodwill for impairment.

 

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.

 

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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 also has an unallocated 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 incurred 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 Corporation’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 awards (“RSAs”), or stock appreciation rights.  The aggregate number of shares of the Corporation’s common stock issuable under the plan is 575,000.  Awards are made to certain other senior officers at the discretion of the Corporation’s management.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

 

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 permitted only as of January 1, 2017. In this regard, management has completed a preliminary analysis of the impact of implementation.  The key revenue streams affected by implementation would include service charges and mortgage banking income. The new guidance is not expected to have a significant impact on the Corporation’s financial results. Interest income is outside of the scope of the new standard and will not be impacted upon adoption.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”).  ASU 2016-01 amends current guidance by requiring companies to recognize changes in fair value for equity investments that have a readily determinable fair value through net income rather than through other comprehensive income.  Under ASU 2016-01, equity investments that do not have a readily determinable fair value will either be accounted for in the same manner as equity investments that have a readily determinable fair value, with changes in fair value recognized through net income or carried at cost, adjusted for changes in observable prices based on orderly transactions for identical or similar investments issued by the same issuer and further adjusted for impairment, if applicable.  ASU 2016-01 also requires a qualitative assessment of impairment indicators each reporting period.  If this assessment indicates that impairment exists, companies must adjust the investment to fair value and recognize an impairment loss in net income, even if the impairment is determined to be temporary.  ASU 2016-01 is effective for public companies for interim and annual periods beginning after December 15, 2017.   The Corporation’s adoption of ASU 2016-01 is not expected to have a material impact on the Corporation’s consolidated financial condition or results of operations.

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In February 2016, the FASB issued ASU 2016-02, Leases, which will supersede the current lease requirements in ASC 840.  The ASU requires lessees to recognize an asset with the right of use and related lease liability for all leases, with a limited exception for short-term leases.  Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations.  Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet.  The reporting of lease related expenses in the statements of operations and cash flows will be generally consistent with the current guidance.  The new lease guidance will be effective for the Corporation’s year ending December 31, 2019 and will be applied using modified retrospective transition method to the beginning of the earliest period presented.  The effect of applying the new lease guidance on the financial statements has not yet been determined.

 

In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.

 

ASU 2016-13 requires an entity to measure expected credit losses for financial assets over the estimated lifetime of expected credit loss and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The standard includes the following core concepts in determining the expected credit loss.  The estimate must: (a) be based on an asset’s amortized cost (including premiums or discounts, net deferred fees and costs, foreign exchange and fair value hedge accounting adjustments), (b) reflect losses expected over the remaining contractual life of an asset (considering the effect of voluntary prepayments), (c) consider available relevant information about the estimated collectability of cash flows (including information about past events, current conditions, and reasonable and supportable forecasts), and (d) reflect the risk of loss, even when that risk is remote.

 

ASU 2016-13 also amends the recording of purchased credit-deteriorated assets. Under the new guidance, an allowance will be recognized at acquisition through a gross-up approach whereby an entity will record as the initial amortized cost the sum of (a) the purchase price and (b) an estimate of credit losses as of the date of acquisition. In addition, the guidance also requires immediate recognition in earnings of any subsequent changes, both favorable and unfavorable, in expected cash flows by adjusting this allowance.

 

ASU 2016-13 also amends the impairment model for available-for-sale debt securities and requires entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. Management may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists, as is currently permitted. In addition, an entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. As a result, entities will recognize improvements to credit losses on available-for-sale debt securities immediately in earnings rather than as interest income over time under current practice.

 

New disclosures required by ASU 2016-13 include: (a) for financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes, (b) for financial receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year or the asset’s origination or vintage for as many as five annual periods, and (c) for available-for-sale debt securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due.

 

Upon adoption of ASU 2016-13, a cumulative-effect adjustment to retained earnings will be recorded as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for public companies for interim and annual periods beginning after December 15, 2019, with early adoption permitted for annual periods beginning after December 15, 2018. The Corporation is currently evaluating the provisions of ASU 2016-13 to determine the potential impact on the Corporation's consolidated financial condition and results of operations.

 

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

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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 months ended March 31, 2017 and 2016 (dollars in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2017

    

2016

 

 

 

 

 

 

 

 

 

(Numerator):

 

 

 

 

 

 

 

Net income

 

$

1,726

 

$

1,132

 

 

 

 

 

 

 

 

 

(Denominator):

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

6,270,034

 

 

6,214,083

 

Effect of dilutive stock options, and vesting of restricted stock awards

 

 

10,343

 

 

13,902

 

Diluted weighted average shares outstanding

 

 

6,280,377

 

 

6,227,985

 

Income per common share:

 

 

 

 

 

 

 

Basic

 

$

.28

 

$

.18

 

Diluted

 

$

.28

 

$

.18

 

 

 

4.INVESTMENT SECURITIES

 

The amortized cost and estimated fair value of investment securities available for sale as of March 31, 2017 and December 31, 2016 are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

$

19,849

 

$

118

 

$

(15)

 

$

19,952

 

Equity

 

 

500

 

 

 —

 

 

 —

 

 

500

 

US Agencies

 

 

22,991

 

 

77

 

 

(15)

 

 

23,053

 

US Agencies - MBS

 

 

15,903

 

 

64

 

 

(111)

 

 

15,856

 

Obligations of states and political subdivisions

 

 

24,293

 

 

405

 

 

(177)

 

 

24,521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale 

 

$

83,536

 

$

664

 

$

(318)

 

$

83,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

$

19,899

 

$

49

 

$

(38)

 

$

19,910

 

Equity

 

 

500

 

 

 —

 

 

 —

 

 

500

 

US Agencies

 

 

23,991

 

 

47

 

 

(86)

 

 

23,952

 

US Agencies - MBS

 

 

16,980

 

 

48

 

 

(195)

 

 

16,833

 

Obligations of states and political subdivisions

 

 

25,057

 

 

447

 

 

(426)

 

 

25,078