FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
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) |
Registrants 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 þ 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 during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes o 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 the 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 (Do not check if a smaller reporting company) |
|
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes o No þ
As of July 31, 2009, there were outstanding 3,419,736 shares of the registrants common stock, no
par value.
MACKINAC FINANCIAL CORPORATION
INDEX
MACKINAC FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
|
(unaudited) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
12,189 |
|
|
$ |
10,112 |
|
|
$ |
7,115 |
|
Federal funds sold |
|
|
|
|
|
|
|
|
|
|
19,274 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
12,189 |
|
|
|
10,112 |
|
|
|
26,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits in other financial institutions |
|
|
618 |
|
|
|
582 |
|
|
|
387 |
|
Securities available for sale |
|
|
95,620 |
|
|
|
47,490 |
|
|
|
23,230 |
|
Federal Home Loan Bank stock |
|
|
3,794 |
|
|
|
3,794 |
|
|
|
3,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
296,392 |
|
|
|
296,088 |
|
|
|
292,645 |
|
Mortgage |
|
|
71,777 |
|
|
|
70,447 |
|
|
|
65,869 |
|
Installment |
|
|
3,835 |
|
|
|
3,745 |
|
|
|
3,608 |
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
|
|
372,004 |
|
|
|
370,280 |
|
|
|
362,122 |
|
Allowance for loan losses |
|
|
(4,119 |
) |
|
|
(4,277 |
) |
|
|
(3,585 |
) |
|
|
|
|
|
|
|
|
|
|
Net loans |
|
|
367,885 |
|
|
|
366,003 |
|
|
|
358,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
11,064 |
|
|
|
11,189 |
|
|
|
11,377 |
|
Other real estate held for sale |
|
|
4,950 |
|
|
|
2,189 |
|
|
|
3,395 |
|
Other assets |
|
|
10,184 |
|
|
|
10,072 |
|
|
|
10,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
506,304 |
|
|
|
451,431 |
|
|
$ |
437,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits |
|
$ |
33,368 |
|
|
$ |
30,099 |
|
|
$ |
27,741 |
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
NOW, money market, checking |
|
|
75,974 |
|
|
|
70,584 |
|
|
|
78,703 |
|
Savings |
|
|
21,411 |
|
|
|
20,730 |
|
|
|
15,171 |
|
CDs<$100,000 |
|
|
72,139 |
|
|
|
73,752 |
|
|
|
78,678 |
|
CDs>$100,000 |
|
|
25,455 |
|
|
|
25,044 |
|
|
|
28,252 |
|
Brokered |
|
|
184,805 |
|
|
|
150,888 |
|
|
|
128,431 |
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
413,152 |
|
|
|
371,097 |
|
|
|
356,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings |
|
|
36,210 |
|
|
|
36,210 |
|
|
|
36,280 |
|
Other liabilities |
|
|
3,003 |
|
|
|
2,572 |
|
|
|
3,096 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
452,365 |
|
|
|
409,879 |
|
|
|
396,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock outstanding |
|
|
10,418 |
|
|
|
|
|
|
|
|
|
Common stock and additional paid in capital No par
value |
|
|
|
|
|
|
|
|
|
|
|
|
Authorized 18,000,000 shares |
|
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding 3,419,736 shares |
|
|
43,468 |
|
|
|
42,815 |
|
|
|
42,773 |
|
Accumulated deficit |
|
|
(1,158 |
) |
|
|
(1,708 |
) |
|
|
(1,672 |
) |
Accumulated other comprehensive income (loss) |
|
|
1,211 |
|
|
|
445 |
|
|
|
(126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
53,939 |
|
|
|
41,552 |
|
|
|
40,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
|
$ |
506,304 |
|
|
$ |
451,431 |
|
|
$ |
437,327 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
1.
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except per Share Data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
(Dollars in thousands except per share data) |
|
(Unaudited) |
|
|
(Unaudited) |
|
INTEREST INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
5,104 |
|
|
$ |
5,604 |
|
|
$ |
10,106 |
|
|
$ |
11,704 |
|
Tax-exempt |
|
|
84 |
|
|
|
102 |
|
|
|
174 |
|
|
|
210 |
|
Interest on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
673 |
|
|
|
271 |
|
|
|
1,132 |
|
|
|
537 |
|
Tax-exempt |
|
|
3 |
|
|
|
2 |
|
|
|
4 |
|
|
|
3 |
|
Other interest income |
|
|
14 |
|
|
|
81 |
|
|
|
16 |
|
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
5,878 |
|
|
|
6,060 |
|
|
|
11,432 |
|
|
|
12,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
1,566 |
|
|
|
2,551 |
|
|
|
3,344 |
|
|
|
5,616 |
|
Borrowings |
|
|
261 |
|
|
|
391 |
|
|
|
542 |
|
|
|
845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
1,827 |
|
|
|
2,942 |
|
|
|
3,886 |
|
|
|
6,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
4,051 |
|
|
|
3,118 |
|
|
|
7,546 |
|
|
|
6,163 |
|
Provision for loan losses |
|
|
150 |
|
|
|
750 |
|
|
|
700 |
|
|
|
750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
3,901 |
|
|
|
2,368 |
|
|
|
6,846 |
|
|
|
5,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees |
|
|
271 |
|
|
|
194 |
|
|
|
514 |
|
|
|
368 |
|
Net security gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65 |
|
Net gains on sale of secondary market loans |
|
|
84 |
|
|
|
49 |
|
|
|
142 |
|
|
|
97 |
|
Proceeds from lawsuit settlement |
|
|
|
|
|
|
3,475 |
|
|
|
|
|
|
|
3,475 |
|
Other |
|
|
84 |
|
|
|
29 |
|
|
|
174 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
439 |
|
|
|
3,747 |
|
|
|
830 |
|
|
|
4,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
1,561 |
|
|
|
2,075 |
|
|
|
3,158 |
|
|
|
3,882 |
|
Occupancy |
|
|
355 |
|
|
|
348 |
|
|
|
733 |
|
|
|
703 |
|
Furniture and equipment |
|
|
222 |
|
|
|
190 |
|
|
|
411 |
|
|
|
368 |
|
Data processing |
|
|
224 |
|
|
|
216 |
|
|
|
444 |
|
|
|
437 |
|
Professional service fees |
|
|
144 |
|
|
|
79 |
|
|
|
297 |
|
|
|
232 |
|
Loan and deposit |
|
|
512 |
|
|
|
144 |
|
|
|
773 |
|
|
|
254 |
|
Telephone |
|
|
46 |
|
|
|
39 |
|
|
|
89 |
|
|
|
84 |
|
Advertising |
|
|
80 |
|
|
|
60 |
|
|
|
158 |
|
|
|
120 |
|
Other |
|
|
326 |
|
|
|
320 |
|
|
|
646 |
|
|
|
582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
3,470 |
|
|
|
3,471 |
|
|
|
6,709 |
|
|
|
6,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
870 |
|
|
|
2,644 |
|
|
|
967 |
|
|
|
2,808 |
|
Provision for income taxes |
|
|
271 |
|
|
|
875 |
|
|
|
278 |
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
599 |
|
|
|
1,769 |
|
|
|
689 |
|
|
|
1,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividend expense |
|
|
138 |
|
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS |
|
$ |
461 |
|
|
$ |
1,769 |
|
|
$ |
551 |
|
|
$ |
1,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.13 |
|
|
$ |
.52 |
|
|
$ |
.16 |
|
|
$ |
.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
.13 |
|
|
$ |
.52 |
|
|
$ |
.16 |
|
|
$ |
.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
2.
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Dollars in Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Balance, beginning of period |
|
$ |
41,864 |
|
|
$ |
39,633 |
|
|
$ |
41,551 |
|
|
$ |
39,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for period |
|
|
461 |
|
|
|
1,769 |
|
|
|
551 |
|
|
|
1,908 |
|
Net unrealized gain (loss) on securities available for sale |
|
|
561 |
|
|
|
(338 |
) |
|
|
766 |
|
|
|
(186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
1,022 |
|
|
|
1,431 |
|
|
|
1,317 |
|
|
|
1,722 |
|
Stock option compensation |
|
|
17 |
|
|
|
21 |
|
|
|
35 |
|
|
|
42 |
|
Repurchase of common stock oddlot shares |
|
|
|
|
|
|
(110 |
) |
|
|
|
|
|
|
(110 |
) |
Issuance of preferred stock |
|
|
10,382 |
|
|
|
|
|
|
|
10,382 |
|
|
|
|
|
Issuance of common stock warrants |
|
|
618 |
|
|
|
|
|
|
|
618 |
|
|
|
|
|
Accretion of preferred stock discount |
|
|
36 |
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
53,939 |
|
|
$ |
40,975 |
|
|
$ |
53,939 |
|
|
$ |
40,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
3.
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
551 |
|
|
$ |
1,908 |
|
Adjustments to reconcile net income to
net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,000 |
|
|
|
607 |
|
Provision for deferred taxes |
|
|
218 |
|
|
|
900 |
|
Provision for loan losses |
|
|
700 |
|
|
|
750 |
|
(Gain) on sales/calls of securities available for sale |
|
|
|
|
|
|
(65 |
) |
(Gain) loss on sale of premises, equipment and other real estate |
|
|
4 |
|
|
|
(5 |
) |
Writedown of other real estate |
|
|
|
|
|
|
201 |
|
Stock option compensation |
|
|
35 |
|
|
|
42 |
|
Change in other assets |
|
|
(762 |
) |
|
|
283 |
|
Change in other liabilities |
|
|
430 |
|
|
|
313 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
2,176 |
|
|
|
4,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Net (increase) in loans |
|
|
(5,383 |
) |
|
|
(10,792 |
) |
Net (increase) decrease in interest-bearing deposits in other financial institutions |
|
|
(36 |
) |
|
|
1,423 |
|
Purchase of securities available for sale |
|
|
(50,216 |
) |
|
|
(24,481 |
) |
Proceeds from sales, maturities or calls of securities available for sale |
|
|
2,856 |
|
|
|
22,766 |
|
Capital expenditures |
|
|
(463 |
) |
|
|
(266 |
) |
Proceeds from sale of premises, equipment, and other real estate |
|
|
88 |
|
|
|
73 |
|
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(53,154 |
) |
|
|
(11,277 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
42,055 |
|
|
|
36,149 |
|
Issuance of Preferred Stock Series A Capital |
|
|
11,000 |
|
|
|
|
|
Net (decrease) in federal funds purchased |
|
|
|
|
|
|
(7,710 |
) |
Net (decrease) in line of credit |
|
|
|
|
|
|
(1,959 |
) |
Net (decrease) repurchase of common stock oddlot shares |
|
|
|
|
|
|
(110 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
53,055 |
|
|
|
26,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
2,077 |
|
|
|
20,027 |
|
Cash and cash equivalents at beginning of period |
|
|
10,112 |
|
|
|
6,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
12,189 |
|
|
$ |
26,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
3,989 |
|
|
$ |
5,086 |
|
Income taxes |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
$ |
3,276 |
|
|
$ |
2,237 |
|
See accompanying notes to condensed consolidated financial statements.
4.
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,
2009 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2009. 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 Corporations Annual Report on Form 10-K for the year ended December 31, 2008.
The preparation of financial statements in conformity with generally accepted accounting
principles 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
period. Actual results could differ from those estimates.
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 were not changed due to these classifications.
Allowance for Loan Losses
The allowance for loan losses includes specific allowances related to commercial loans, which
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 loans 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 Corporations 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 managements 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 Option Plans
The Corporation sponsors three stock option plans. One plan was approved in 2000 and applies to
officers, employees, and nonemployee directors. This plan was amended as a part of the December
2004 stock offering
and recapitalization. The amendment, approved by shareholders, increased the shares available
under this plan by 428,587 shares from the original 25,000 (adjusted for the 1:20 reverse stock
split), to a total authorized share balance of 453,587. The other two plans, one for officers
and employees and the other for nonemployee
5.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
directors, were approved in 1997. A total of 30,000 shares (adjusted for the 1:20 reverse stock
split), were made available for grant under these plans. Options under all of the plans are
granted at the discretion of a committee of the Corporations Board of Directors. Options to
purchase shares of the Corporations stock are granted at a price equal to the market price of
the stock at the date of grant. The committee determines the vesting of the options when they
are granted as established under the plan.
2. |
|
RECENT ACCOUNTING PRONOUNCEMENTS |
In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS 165 establishes general
standards of accounting for and disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. Although there is new
terminology, the standard is based on the same principles as those that currently exist in the
auditing standards. The standard also includes a required disclosure of the date through which
the entity has evaluated subsequent events and whether the evaluation date is the date of
issuance or the date the financial statements were available to be issued. The standard is
effective for interim or annual periods ending after June 15, 2009. The Corporation has
complied with the disclosure requirements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. (FIN) 46(R).
SFAS No. 167 was issued to improve financial reporting for enterprises with variable interest
entities to address (1) the effects of certain provisions of FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, as a result of the elimination of
the qualifying special-purpose entity concept in SFAS No. 166, Accounting for Transfers of
Financial Assets an amendment of FASB Statement No. 140, and (2) constituent concerns about
the application of certain key provisions of FIN 46(R), including those in which the accounting
and disclosures under FASB Interpretation No. 46 do not always provide timely and useful
information about an enterprises involvement in a variable interest entity. SFAS No. 167 is
effective as of the beginning of each reporting entitys first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual reporting period,
and for interim and annual reporting periods thereafter. Earlier adoption of SFAS No. 167 is
prohibited. The Corporation is currently evaluating the effect the adoption of SFAS No. 167
will have on its consolidated financial statements.
In June 2009, the FASB Issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No.
162. The FASB Accounting Standards Codification (Codification) will become the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority
of the federal securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of this Statement, the Codification will supersede all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC accounting literature
not included in the Codification will become non-authoritative. This Statement is effective for
financial statements issued for interim and annual periods ending after September 15, 2009. The
Corporation will comply with the requirements of the Statement beginning in the third quarter of
2009.
In April 2009, the FASB issued the following three FSPs intended to provide additional
application guidance and enhance disclosures regarding fair value measurements and impairments
of securities:
FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,
provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the
volume and level of activity for the asset or liability have decreased significantly. FSP FAS
157-4 also provides guidance on identifying circumstances that indicate a transaction is not
orderly. The provisions of FSP FAS 157-4 were effective for the Corporations interim period
ending on June 30, 2009. The adoption of FSP FAS 157-4 did not affect the consolidated
financial statements for the Corporation as of June 30, 2009.
6.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. |
|
RECENT ACCOUNTING PRONOUNCEMENTS (Continued) |
FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments,
requires disclosures about fair value of financial instruments in interim reporting periods of
publicly traded companies that were previously only required to be disclosed in annual financial
statements. The provisions of FSP FAS 107-1 and APB 28-1 were effective for the Corporations
interim period ending on June 30, 2009. As FSP FAS 107-1 and APB 28-1 amended only the
disclosure requirements about fair value of financial instruments in interim periods, the
adoption of FSP FAS 107-1 and APB 28-1 did not affect the consolidated financial statements for
the Corporation as of June 30, 2009.
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments,
amends current other-than-temporary impairment guidance in GAAP for debt securities to make the
guidance more operational and to improve the presentations and disclosure of
other-than-temporary impairments on debt and equity securities in the financial statements.
This FSP does not amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities. The provisions of FSP FAS 115-2 and FAS
124-2 were effective for the Corporations interim period ending on June 30, 2009. The adoption
of FSP FAS 115-2 and FAS
124-2 did not affect the consolidated financial statements for the
Corporation as of June 30, 2009.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent
Events, we have evaluated subsequent events through the date of this filing, August 13, 2009.
We do not believe there are any material subsequent events which would require further
disclosure, other than the subsequent sale of two branch offices. Please refer to footnote 12
for further discussion.
Earnings per share are based upon the weighted average number of shares outstanding. Additional
shares issued as a result of option exercises would not be dilutive in either period.
The following shows the computation of basic and diluted earnings per share for the three and
six months ended June 30, 2009 and 2008 (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
599 |
|
|
$ |
1,769 |
|
|
$ |
689 |
|
|
$ |
1,908 |
|
Preferred stock dividends |
|
|
138 |
|
|
|
|
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
461 |
|
|
$ |
1,769 |
|
|
$ |
551 |
|
|
$ |
1,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
3,419,736 |
|
|
|
3,419,933 |
|
|
|
3,419,736 |
|
|
|
3,424,314 |
|
Effect of dilutive stock options outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
3,419,736 |
|
|
|
3,419,933 |
|
|
|
3,419,736 |
|
|
|
3,424,314 |
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.13 |
|
|
$ |
.52 |
|
|
$ |
.16 |
|
|
$ |
.56 |
|
Diluted |
|
$ |
.13 |
|
|
$ |
.52 |
|
|
$ |
.16 |
|
|
$ |
.56 |
|
7.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The amortized cost and estimated fair value of investment securities available for sale as of
June 30, 2009, December 31, 2008 and June 30, 2008 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
June 30, 2008 |
|
|
|
Amortized |
|
|
Estimated |
|
|
Amortized |
|
|
Estimated |
|
|
Amortized |
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
US Agencies MBS |
|
$ |
74,390 |
|
|
$ |
75,788 |
|
|
$ |
46,316 |
|
|
$ |
46,941 |
|
|
$ |
22,696 |
|
|
$ |
22,623 |
|
Asset backed government guaranteed |
|
|
13,936 |
|
|
|
14,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions |
|
|
1,259 |
|
|
|
1,287 |
|
|
|
498 |
|
|
|
549 |
|
|
|
550 |
|
|
|
607 |
|
Corporate bonds |
|
|
4,201 |
|
|
|
4,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
93,786 |
|
|
$ |
95,620 |
|
|
$ |
46,814 |
|
|
$ |
47,490 |
|
|
$ |
23,246 |
|
|
$ |
23,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of investment securities pledged to secure FHLB
borrowings and customer relationships were $18.095 million and $18.730 million, respectively, at
June 30, 2009.
The composition of loans at June 30, 2009, December 31, 2008 and June 30, 2008 is as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Commercial real estate |
|
$ |
196,895 |
|
|
$ |
185,241 |
|
|
$ |
186,108 |
|
Commercial, financial, and agricultural |
|
|
73,372 |
|
|
|
79,734 |
|
|
|
77,473 |
|
One to four family residential real estate |
|
|
65,564 |
|
|
|
65,595 |
|
|
|
60,882 |
|
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
26,125 |
|
|
|
31,113 |
|
|
|
29,064 |
|
Consumer |
|
|
6,213 |
|
|
|
4,852 |
|
|
|
4,987 |
|
Consumer |
|
|
3,835 |
|
|
|
3,745 |
|
|
|
3,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
372,004 |
|
|
$ |
370,280 |
|
|
$ |
362,122 |
|
|
|
|
|
|
|
|
|
|
|
LOANS Allowance for loan losses
An analysis of the allowance for loan losses for the six months ended June 30, 2009,
the year ended December 31, 2008, and the six months ended June 30, 2008 is as follows: (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Balance at beginning of period |
|
$ |
4,277 |
|
|
$ |
4,146 |
|
|
$ |
4,146 |
|
Recoveries on loans |
|
|
45 |
|
|
|
121 |
|
|
|
9 |
|
Loans charged off |
|
|
(903 |
) |
|
|
(2,290 |
) |
|
|
(1,320 |
) |
Provision for loan losses |
|
|
700 |
|
|
|
2,300 |
|
|
|
750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
4,119 |
|
|
$ |
4,277 |
|
|
$ |
3,585 |
|
|
|
|
|
|
|
|
|
|
|
8.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In the first half of 2009, net charge off activity was $.858 million, or .23% of average loans
outstanding compared to net charge-offs of $1.311 million, or .36% of average loans, in the
first half of 2008. In the first half of 2009, the Corporation recorded a provision for loan
loss in the amount of $700,000 compared to $750,000 in the first half of 2008, which is
discussed in more detail under Managements Discussion and Analysis.
LOANS Impaired loans
Nonperforming loans are those which are contractually past due 90 days or more as to interest or
principal payments, on nonaccrual status, or loans, the terms of which have been renegotiated to
provide a reduction or deferral on interest or principal.
Information regarding impaired loans as of June 30, 2009, December 31, 2008 and June 30, 2008 is
as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Reserve |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Balances, at period end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with specific valuation reserve |
|
$ |
7,708 |
|
|
$ |
3,730 |
|
|
$ |
4,052 |
|
|
$ |
1,556 |
|
|
$ |
994 |
|
|
$ |
946 |
|
Impaired loans with no specific valuation reserve |
|
|
2,167 |
|
|
|
1,157 |
|
|
|
561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
9,875 |
|
|
$ |
4,887 |
|
|
$ |
4,613 |
|
|
$ |
1,556 |
|
|
$ |
994 |
|
|
$ |
946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans on nonaccrual basis |
|
$ |
9,277 |
|
|
$ |
4,887 |
|
|
$ |
4,613 |
|
|
$ |
1,556 |
|
|
$ |
994 |
|
|
$ |
946 |
|
Impaired loans on accrual basis |
|
|
598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
9,875 |
|
|
$ |
4,887 |
|
|
$ |
4,613 |
|
|
$ |
1,556 |
|
|
$ |
994 |
|
|
$ |
946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average investment in impaired loans |
|
$ |
9,452 |
|
|
$ |
4,834 |
|
|
$ |
4,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized during impairment |
|
|
11 |
|
|
|
60 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income that would have been recognized
on an accrual basis |
|
|
338 |
|
|
|
377 |
|
|
|
225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-basis interest income recognized |
|
|
11 |
|
|
|
60 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The average investment in impaired loans was approximately $9.452 million for the six months
ended June 30, 2009, $4.834 million for the year ended December 31, 2008, and $4.779 million for
the six months ended June 30, 2008, respectively. Additional discussion on impaired loans is
presented in the Managements Discussion and Analysis section of this report.
9.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
LOANS Related parties
The Bank, in the ordinary course of business, grants loans to the Corporations executive
officers and directors, including their families and firms in which they are principal owners.
Activity in such loans is summarized below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Loans outstanding beginning of period |
|
$ |
6,516 |
|
|
$ |
1,720 |
|
|
$ |
1,720 |
|
New loans |
|
|
900 |
|
|
|
372 |
|
|
|
|
|
Net activity on revolving lines of credit |
|
|
398 |
|
|
|
2,378 |
|
|
|
479 |
|
Repayment |
|
|
(205 |
) |
|
|
(687 |
) |
|
|
(41 |
) |
Change in related party interest |
|
|
|
|
|
|
2,733 |
|
|
|
2,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding end of period |
|
$ |
7,609 |
|
|
$ |
6,516 |
|
|
$ |
4,891 |
|
|
|
|
|
|
|
|
|
|
|
There were no loans to related parties classified substandard at June 30, 2009, December 31,
2008 or June 30, 2008, respectively. In addition to the outstanding balances above, there were
unused commitments of $.197 million to related parties at June 30, 2009.
Long-term borrowings consist of the following at June 30, 2009,
December 31, 2008 and June 30, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Federal Home Loan Bank fixed rate advances at rates ranging from 4.98% to 5.16%
maturing in December 2010 |
|
$ |
15,000 |
|
|
$ |
15,000 |
|
|
$ |
15,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home
Loan Bank variable rate advances at rates ranging from 1.04% to 1.16% maturing in January and February 2011 |
|
|
20,000 |
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmers Home Administration, fixed-rate note payable, maturing August 24, 2024
interest payable at 1% |
|
|
1,210 |
|
|
|
1,210 |
|
|
|
1,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
36,210 |
|
|
$ |
36,210 |
|
|
$ |
36,280 |
|
|
|
|
|
|
|
|
|
|
|
The Federal Home Loan Bank borrowings are collateralized at June 30, 2009, by the following: a
collateral agreement on the Corporations one to four family residential real estate loans with
a book value of approximately $26.839 million; mortgage related and municipal securities with an
amortized cost and estimated fair value of $17.020 million and $17.655 million, respectively;
and Federal Home Loan Bank stock owned by the Bank totaling $3.794 million. Prepayment of the
remaining advances is subject to the provisions and conditions of the credit policy of the
Federal Home Loan Bank of Indianapolis in effect as of June 30, 2009.
The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $.300 million
originated and held by the Corporations wholly owned subsidiary, First Rural Relending, and an
assignment of a demand deposit account in the amount of $1.012 million, and guaranteed by the
Corporation.
10.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of stock option transactions for the six months ended June 30, 2009 and 2008, and the
year ended December 31, 2008, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Outstanding shares at beginning of year |
|
|
446,237 |
|
|
|
446,417 |
|
|
|
446,417 |
|
Granted during the period |
|
|
|
|
|
|
|
|
|
|
|
|
Expired during the period |
|
|
35,180 |
|
|
|
180 |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding shares at end of period |
|
|
411,057 |
|
|
|
446,237 |
|
|
|
446,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price per share at end of period |
|
$ |
12.03 |
|
|
$ |
12.14 |
|
|
$ |
12.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available for grant at end of period |
|
|
24,780 |
|
|
|
18,488 |
|
|
|
18,488 |
|
|
|
|
|
|
|
|
|
|
|
There were no options granted in the first six months of 2009 and 2008.
Following is a summary of the options outstanding and exercisable at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
Number |
|
|
Remaining |
|
|
Weighted Average |
|
Price Range |
|
Outstanding |
|
|
Exercisable |
|
|
Contractual Life-Years |
|
|
Exercise Price |
|
$9.16 |
|
|
12,500 |
|
|
|
5,000 |
|
|
|
6.5 |
|
|
$ |
9.16 |
|
$9.75 |
|
|
257,152 |
|
|
|
120,861 |
|
|
|
5.5 |
|
|
|
9.75 |
|
$10.65 |
|
|
57,500 |
|
|
|
11,500 |
|
|
|
7.5 |
|
|
|
10.65 |
|
$11.50 |
|
|
40,000 |
|
|
|
8,000 |
|
|
|
6.3 |
|
|
|
11.50 |
|
$12.00 |
|
|
40,000 |
|
|
|
8,000 |
|
|
|
6.0 |
|
|
|
12.00 |
|
$156.00 - $240.00 |
|
|
3,545 |
|
|
|
3,545 |
|
|
|
1.7 |
|
|
|
186.75 |
|
$300.00 |
|
|
360 |
|
|
|
360 |
|
|
|
.8 |
|
|
|
300.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
411,057 |
|
|
|
157,266 |
|
|
|
5.9 |
|
|
$ |
12.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A valuation allowance is provided against deferred tax assets when it is more likely than not
that some or all of the deferred tax asset will not be realized. At June 30, 2009, the
Corporation evaluated the valuation allowance against the net deferred tax asset which would
require future taxable income in order to be utilized. The Corporation, as of June 30, 2009 had
a net operating loss and tax credit carryforwards for tax purposes of approximately $32.1
million, and $2.1 million, respectively.
The Corporation utilized NOL carryforwards to offset taxable income for the first nine months of
2007. In the third quarter of 2007, the Corporation reversed a portion of the valuation
allowance, $7.500 million that pertained to the deferred tax benefit of NOL and tax credit
carryforwards. This valuation adjustment was recorded as a current period income tax benefit.
In 2006, the Corporation recorded a $.500 million tax benefit and utilized additional NOL
carryforwards to offset current taxable income. The recognition of the deferred tax
benefit in 2007 and 2006 was in accordance with generally accepted accounting principles, and
considered among other things, the probability of utilizing the NOL and credit carryforwards.
11.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. |
|
INCOME TAXES (Continued) |
The Corporation recorded the future benefits from these carryforwards at such time as it became
more likely than not that they would be utilized prior to expiration. Please refer to further
discussion on income taxes contained in Managements Discussion and Analysis. The net
operating loss carryforwards expire twenty years from the date they originated. These
carryforwards, if not utilized, will begin to expire in the year 2023. A portion of the NOL,
approximately $20 million, and all of the credit carryforwards are subject to the limitations
for utilization as set forth in Section 382 of the Internal Revenue Code. The annual limitation
is $1.4 million for the NOL and the equivalent value of tax credits, which is approximately
$.477 million. These limitations for use were established in conjunction with the
recapitalization of the Corporation in December, 2004.
9. |
|
FAIR VALUE MEASUREMENTS |
Fair value estimates, methods, and assumptions are set forth below for the Corporations
financial instruments:
Cash, cash equivalents, and interest-bearing deposits The carrying values approximate the fair
values for these assets.
Securities Fair values are based on quoted market prices where available. If a quoted market
price is not available, fair value is estimated using quoted market prices for similar
securities.
Federal Home Loan Bank stock Federal Home Loan Bank stock is carried at cost, which
is its redeemable value and approximates its fair value, since the market for this stock is
limited.
Loans Fair values are estimated for portfolios of loans with similar financial characteristics.
Loans are segregated by type such as commercial, residential mortgage, and other consumer. The
fair value of loans is calculated by discounting scheduled cash flows using discount rates
reflecting the credit and interest rate risk inherent in the loan.
The methodology in determining fair value of nonaccrual loans is to average them into the blended
interest rate at 0% interest. This has the effect of decreasing the carrying amount below the
risk-free rate amount and, therefore, discounts the estimated fair value.
Impaired loans are measured at the estimated fair value of the expected future cash flows at the
loans effective interest rate or the fair value of the collateral for loans which are collateral
dependent. Therefore, the carrying values of impaired loans approximate the estimated fair
values for these assets.
Deposits The fair value of deposits with no stated maturity, such as noninterest-bearing demand
deposits and savings, is equal to the amount payable on demand at the reporting date. The fair
value of time deposits is based on the discounted value of contractual cash flows applying
interest rates currently being offered on similar time deposits.
Borrowings Rates currently available for debt with similar terms and remaining maturities are
used to estimate the fair value of existing debt. The fair value of borrowed funds due on demand
is the amount payable at the reporting date.
Accrued interest The carrying amount of accrued interest approximates fair value.
Off-balance-sheet instruments The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into account the remaining terms of
the agreements, the current interest rates, and the present creditworthiness of the
counterparties. Since the differences in the current fees and those reflected to the
off-balance-sheet instruments at year-end are immaterial, no amounts for fair value are
presented.
12.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. |
|
FAIR VALUE MEASUREMENTS (Continued) |
The following table presents information for financial instruments at June 30, 2009 and December
31, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
12,189 |
|
|
$ |
12,189 |
|
|
$ |
10,112 |
|
|
$ |
10,112 |
|
Interest bearing deposits |
|
|
618 |
|
|
|
618 |
|
|
|
582 |
|
|
|
582 |
|
Securities available for sale |
|
|
95,620 |
|
|
|
95,620 |
|
|
|
47,490 |
|
|
|
47,490 |
|
Federal Home Loan Bank stock |
|
|
3,794 |
|
|
|
3,794 |
|
|
|
3,794 |
|
|
|
3,794 |
|
Net loans |
|
|
367,885 |
|
|
|
371,578 |
|
|
|
366,003 |
|
|
|
372,080 |
|
Cash surrender value life insurance |
|
|
1,421 |
|
|
|
1,421 |
|
|
|
1,397 |
|
|
|
1,397 |
|
Other Real Estate |
|
|
4,950 |
|
|
|
4,950 |
|
|
|
2,189 |
|
|
|
2,189 |
|
Accrued interest receivable |
|
|
1,595 |
|
|
|
1,595 |
|
|
|
1,457 |
|
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets |
|
$ |
488,072 |
|
|
$ |
491,765 |
|
|
$ |
433,024 |
|
|
$ |
439,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
413,152 |
|
|
$ |
412,674 |
|
|
$ |
371,097 |
|
|
$ |
371,434 |
|
Borrowings |
|
|
36,210 |
|
|
|
36,669 |
|
|
|
36,210 |
|
|
|
36,846 |
|
Directors deferred compensation |
|
|
869 |
|
|
|
869 |
|
|
|
912 |
|
|
|
912 |
|
Accrued interest payable |
|
|
385 |
|
|
|
385 |
|
|
|
488 |
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
financial liabilities |
|
$ |
450,616 |
|
|
$ |
450,597 |
|
|
$ |
408,707 |
|
|
$ |
409,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limitations Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at one time the
Corporations entire holdings of a particular financial instrument. Because no market exists
for a significant portion of the Corporations financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly affect the
estimates. Fair value estimates are based on existing on-and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments. Significant
assets and liabilities that are not considered financial assets or liabilities include premises
and equipment, other assets, and other liabilities. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the estimates.
The following tables present information about the Corporations assets and liabilities measured
at fair value on a recurring basis at June 30, 2009, and the valuation techniques used by the
Corporation to determine those fair values.
|
|
|
|
|
|
|
Level 1:
|
|
In general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical assets or liabilities that the Corporation has the ability to access. |
|
|
|
|
|
|
|
Level 2:
|
|
Fair values determined by Level 2 inputs use other inputs that are observable,
either directly or indirectly. These Level 2 inputs include quoted prices for similar
assets and liabilities in active markets, and other inputs such as interest rates and yield
curves that are observable at commonly quoted intervals. |
|
|
|
|
|
|
|
Level 3:
|
|
Level 3 inputs are unobservable inputs, including inputs available in situations
where there is little, if any, market activity for the related asset or liability. |
13.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. |
|
FAIR VALUE MEASUREMENTS (Continued) |
In instances where inputs used to measure fair value fall into different levels in the above
fair value hierarchy, fair value measurements in their entirety are categorized based on the
lowest level input that is significant to the valuation. The Corporations assessment of the
significance of particular inputs to these fair value measurements requires judgment and
considers factors specific to each asset or liability.
Disclosures concerning assets and liabilities measured at fair value are as follows (dollars in
thousands):
Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active |
|
Significant Other |
|
Significant |
|
|
|
|
Markets for Identical |
|
Observable Inputs |
|
Unobservable Inputs |
|
Balance at |
|
|
Assets (Level 1) |
|
(Level 2) |
|
(Level 3) |
|
June 30, 2009 |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale |
|
$ |
|
|
|
$ |
95,620 |
|
|
$ |
|
|
|
$ |
95,620 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31,
2008 or June 30, 2009.
The Corporation also has assets that under certain conditions are subject to measurement at fair
value on a non-recurring basis. These assets include held to maturity investments and loans.
The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically
discounted cash flow projections.
Assets Measured at Fair Value on a Nonrecurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
in Active Markets |
|
|
Other Observable |
|
|
Unobservable |
|
|
Total Losses for |
|
|
|
Balance at |
|
|
for Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Three Months Ended |
|
|
Six Months Ended |
|
(dollars in thousands) |
|
June 30, 2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
June 30, 2009 |
|
|
June 30, 2009 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans accounted for under FAS 114 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,142 |
|
|
$ |
43 |
|
|
$ |
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
43 |
|
|
$ |
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation had no investments subject to fair value measurement on a nonrecurring basis.
Impaired loans accounted for under FAS 114 categorized as Level 3 assets consist of
non-homogeneous loans that are considered impaired. The Corporation estimates the fair value of
the loans based on the present value of expected future cash flows using managements best
estimate of key assumptions. These assumptions include future payment ability, timing of
payment streams, and estimated realizable values of available collateral (typically based on
outside appraisals).
Participation in the TARP Capital Purchase Program
On April 24, 2009, the Corporation entered into and closed a Letter Agreement, including the
Securities Purchase Agreement-Standard Terms (collectively, the Securities Purchase
Agreement), related to the CPP.
Pursuant to the Securities Purchase Agreement, the Corporation issued and sold to the Treasury
(i) 11,000 shares of the Corporations Series A Preferred Shares, and (ii) the Warrant to
purchase 379,310 shares of the
14.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. |
|
SHAREHOLDERS EQUITY (Continued) |
Corporations Common Shares, at an exercise price of $4.35 per share (subject to certain
anti-dilution and other adjustments), for an aggregate purchase price of $11.000 million in
cash. The Warrant has a ten-year term.
As a result of the CPP transaction, the Corporation is required to take certain actions, for so
long as the Treasury holds any securities acquired from the Corporation pursuant to the CPP
(excluding any period in which the Treasury holds only the Warrant to purchase Common Shares of
the Corporation) (the CPP Period), to ensure that its executive compensation and benefit plans
with respect to Senior Executive Officers (as defined in the relevant agreements) comply with
Section 111(b) of Emergency Economic Stabilization Act of 2008 (EESA), as implemented by any
guidance or regulations issued under Section 111(b) of EESA, and not adopt any benefit
plans with respect to, or which cover, the Corporations Senior Executive Officers that do not
comply with EESA, as amended by the American Recovery and Reinvestment Act of 2009 (the ARRA),
which was passed by Congress and signed by the President on February 17, 2009. The applicable
executive compensation standards generally remain in effect during the CPP Period and apply to
the Corporations Senior Executive Officers (which for purposes of the ARRA and the CPP
agreements, includes the Corporations Chief Executive Officer, its Chief Financial Officer, and
the next three most highly-compensated executive officers, even though the Corporations senior
executive officers consist of a smaller group of executives for purposes of the other
compensation disclosures in this proxy statement).
Amounts recorded for Preferred Stock and Warrant Common Stock were estimated based on an
allocation of the total proceeds from the issuance on the relative fair values of both
instruments. Fair value of the Preferred Stock was determined based on assumptions regarding
the discount rate (market rate) on the Preferred Stock (estimated 12%). Fair value of the
Warrant Common Stock is based on the value of the underlying Preferred Stock based on an
estimate for a three year term. The allocation of the proceeds received resulted in the
recording of a discount on the Preferred Stock and a premium on the Warrant Common Stock. The
discount on the preferred will be accreted on an effective yield basis over a three-year term.
The allocated carrying value of the Preferred Stock and Warrant Common Stock on the date of
issuance (based on their relative fair values) was $10.382 million and $.618 million,
respectively. Cumulative dividends on the Preferred Stock are payable at 5% annum for the first
five years and at a rate of 9% per annum thereafter on the liquidation preference of $1,000 per
share. The Company is prohibited from paying any dividend with respect to shares of common
stock unless all accrued and unpaid dividends are paid in full on the Preferred Stock for all
past dividend periods. The Preferred Stock is non-voting, other than class voting rights on
matters that could adversely affect the Preferred Stock. The Preferred Stock may be redeemed at
any time with regulatory approval. The Treasury may also transfer the Preferred Stock to a
third party at any time. The preferred stock qualifies as Tier 1 Capital for regulatory
purposes at the holding company.
The Corporation has the right to redeem the Series A Preferred Shares at any time after
consulting with its primary regulator, in which case the executive compensation standards would
no longer apply to the Corporation.
This capital will be used to increase the strong capital position of the Bank. The Bank will
use the capital to grow loans. In addition, the capital will allow the Corporation to consider
acquisitions of deposit franchisees that would enhance our funding mix.
11. |
|
COMMITMENTS, CONTINGENCIES AND CREDIT RISK |
Financial Instruments With Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit risk in excess of the amount recognized in the
consolidated balance sheets.
15.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. |
|
COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued) |
The Corporations exposure to credit loss, in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit and standby letters of credit, is
represented by the contractual amount of those instruments. The Corporation uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. These commitments are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Commitments to extend credit: |
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate |
|
$ |
31,337 |
|
|
$ |
40,036 |
|
|
$ |
40,215 |
|
Fixed rate |
|
|
7,005 |
|
|
|
4,487 |
|
|
|
8,601 |
|
Standby letters of credit Variable rate |
|
|
1,742 |
|
|
|
1,838 |
|
|
|
6,693 |
|
Credit card commitments Fixed rate |
|
|
2,528 |
|
|
|
2,438 |
|
|
|
2,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
42,612 |
|
|
$ |
48,799 |
|
|
$ |
58,030 |
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Corporation evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Corporation upon extension of credit, is based on managements credit
evaluation of the party. Collateral held varies but may include accounts receivable; inventory;
property, plant, and equipment; and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers. The
commitments are structured to allow for 100% collateralization on all standby letters of credit.
Credit card commitments are commitments on credit cards issued by the Corporations subsidiary
and serviced by other companies. These commitments are unsecured.
Contingencies
In the normal course of business, the Corporation is involved in various legal proceedings. For
expanded discussion on the Corporations legal proceedings, see Part II, Item 1, Legal
Proceedings in this report.
Concentration of Credit Risk
The Bank grants commercial, residential, agricultural, and consumer loans throughout Michigan.
The Banks most prominent concentration in the loan portfolio relates to commercial real estate
loans to operators of nonresidential buildings. This concentration at June 30, 2009 represents
$44.087 million, or 14.87%, compared to $41.778 million, or 15.85%, of the commercial loan
portfolio on June 30, 2008. The remainder of the commercial loan portfolio is diversified in
such categories as hospitality and tourism, real estate agents and managers, new car dealers,
gaming, petroleum, forestry, agriculture and construction. Due to the diversity of the Banks
locations, the ability of debtors of residential and consumer loans to honor their obligations
is not tied to any particular economic sector.
16.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On May 19, 2009, mBank, the banking subsidiary of the Corporation entered into a
definitive Purchase and Assumption Agreement with The Miners State Bank of Iron River, Michigan,
for the sale of two of their Northwest Upper Peninsula branch offices.
The Asset Purchase and Assumption Agreements call for The Miners State Bank of Iron River, Michigan
to purchase the branch buildings and assume approximately $30 million of deposits associated with
both branches. These transactions are expected to close in the third quarter of 2009 and will
result in a gain for the Corporation.
17.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The Corporation intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities Litigation Reform Act
of 1995 and is including this statement for purposes of these safe harbor provisions.
Forward-looking statements which are based on certain assumptions and describe future plans,
strategies, or expectations of the Corporation, are generally identifiable by use of the words
believe, expect, intend, anticipate, estimate, project, or similar expressions. The
Corporations ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors that could cause actual results to differ from the results in
forward-looking statements include, but are not limited to:
|
|
|
The highly regulated environment in which the Corporation operates could adversely
affect its ability to carry out its strategic plan due to restrictions on new products,
funding opportunities or new market entrances; |
|
|
|
|
General economic conditions, either nationally or in the state(s) in which the
Corporation does business; |
|
|
|
|
Legislation or regulatory changes which affect the business in which the Corporation is
engaged; |
|
|
|
|
Changes in the interest rate environment which increase or decrease interest rate
margins; |
|
|
|
|
Changes in securities markets with respect to the market value of financial assets and
the level of volatility in certain markets such as foreign exchange; |
|
|
|
|
Significant increases in competition in the banking and financial services industry
resulting from industry consolidation, regulatory changes and other factors, as well as
action taken by particular competitors; |
|
|
|
|
The ability of borrowers to repay loans; |
|
|
|
|
The effects on liquidity of unusual decreases in deposits; |
|
|
|
|
Changes in consumer spending, borrowing, and saving habits; |
|
|
|
|
Technological changes; |
|
|
|
|
Acquisitions and unanticipated occurrences which delay or reduce the expected benefits
of acquisitions; |
|
|
|
|
Difficulties in hiring and retaining qualified management and banking personnel; |
|
|
|
|
The Corporations ability to increase market share and control expenses; |
|
|
|
|
The effect of compliance with legislation or regulatory changes; |
|
|
|
|
The effect of changes in accounting policies and practices; |
|
|
|
|
The costs and effects of existing and future litigation and of adverse outcomes in such
litigation. |
These risks and uncertainties should be considered in evaluating forward-looking statements.
Further information concerning the Corporation and its business, including additional factors that
could materially affect the Corporations financial results, is included in the Corporations
filings with the Securities and Exchange Commission. All forward-looking statements contained in
this report are based upon information presently available and the Corporation assumes no
obligation to update any forward-looking statements.
18.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The following discussion will cover results of operations, asset quality, financial position,
liquidity, interest rate sensitivity, and capital resources for the periods indicated. The
information included in this discussion is intended to assist readers in their analysis of, and
should be read in conjunction with, the consolidated financial statements and related notes and
other supplemental information presented elsewhere in this report. This discussion should be read
in conjunction with the consolidated financial statements and footnotes contained in the
Corporations Annual Report and Form 10-K for the year-ended December 31, 2008. Throughout this
discussion, the term Bank refers to mBank, the principal banking subsidiary of the Corporation.
FINANCIAL OVERVIEW
The Corporation recorded second quarter 2009 income of $.461 million or $ .13 per share compared
to net income of $1.769 million, or $.52 per share for the second quarter of 2008. Net income for
the first six months of 2009 totaled $ .551 million, or $.16 per share, compared to $1.908
million, or $.56 per share, for the same period in 2008.
The quarter and six month results for 2009 includes the FDIC special assessment which was charged
to all banking organizations based upon asset size, and amounted to $.215 million for mBank. The
quarter and six month results for 2008 include the positive effect, $3.475 million, of a lawsuit
settlement and the negative effect, $.425 million, of a severance agreement. Operating results for
the six month period in 2009 includes a $.700 million provision compared to $.750 million in the
same period in 2008.
Weighted average shares totaled 3,419,736 year to date and for the second quarter in 2009 compared
to 3,424,314 for the six month period and 3,419,935 at the second quarter of 2008.
Total assets of the Corporation at June 30, 2009 were $506.304 million, up $68.977 million, or
15.77% from the $437.327 million in total assets reported at June 30, 2008 and up $54.873 million,
or 12.16%, from total assets of $451.431 million at year-end 2008. Asset totals at June 30, 2009
reflect increased balances of investment securities of approximately $48 million. The loan
portfolio increased $1.724 million in the first six months of 2009, from December 31, 2008 balances
of $370.280 million. Deposits totaled $413.152 million at June 30, 2009, an increase from the
$371.097 million at December 31, 2008.
FINANCIAL CONDITION
Cash and Cash Equivalents
Cash and cash equivalents increased $2.077 million in 2009. See further discussion of the change
in cash and cash equivalents in the Liquidity section.
Investment Securities
Securities available-for-sale increased $48.130 million, or 101.35%, from December 31, 2008 to June
30, 2009, with the balance on June 30, 2009, totaling $95.620 million. Investment securities are
utilized in an effort to manage interest rate risk and liquidity. In the second quarter of 2009,
the Corporation increased its investment portfolio in combination with the funding received,
$11.000 million, from the issuance of preferred stock. The Corporation expects to reduce the
current level of investment securities as loan funding increases later in 2009. As of June 30,
2009, investment securities with an estimated fair value of $18.730 million were pledged.
Loans
Through the first half of 2009, loan balances increased by $1.724 million, or .47%, from December
31, 2008 balances of $370.280 million. During the first six months of 2009, the Bank had total
loan production of $27.436 million. This loan production, however, was significantly offset by
normal principal runoff and amortization, $11.785 million, and large paydowns and refinancing,
which totaled $7.520 million. Management continues to actively manage the loan portfolio, seeking
to identify and resolve problem assets at an early stage. Management believes a properly
positioned loan portfolio provides the most attractive earning asset yield available to the
Corporation and, with changes to the loan approval process and exception reporting, management can
effectively manage the risk in the loan portfolio. Management intends to continue loan growth
within its markets for mortgage,
19.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
consumer, and commercial loan products while concentrating on loan quality, industry concentration
issues, and competitive pricing.
Following is a summary of the loan portfolio at June 30, 2009, December 31, 2008 and June 30, 2008
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
Percent of |
|
|
December 31, |
|
|
Percent of |
|
|
June 30, |
|
|
Percent of |
|
|
|
2009 |
|
|
Total |
|
|
2008 |
|
|
Total |
|
|
2008 |
|
|
Total |
|
Commercial real estate |
|
$ |
196,895 |
|
|
|
52.93 |
% |
|
$ |
185,241 |
|
|
|
50.03 |
% |
|
$ |
186,108 |
|
|
|
51.39 |
% |
Commercial,
financial, and
agricultural |
|
|
73,372 |
|
|
|
19.72 |
|
|
|
79,734 |
|
|
|
21.53 |
|
|
|
77,473 |
|
|
|
21.39 |
|
One to four family
residential real
estate |
|
|
65,564 |
|
|
|
17.63 |
|
|
|
65,595 |
|
|
|
17.71 |
|
|
|
60,882 |
|
|
|
16.81 |
|
Consumer |
|
|
3,835 |
|
|
|
1.03 |
|
|
|
3,745 |
|
|
|
1.01 |
|
|
|
3,608 |
|
|
|
1.00 |
|
Construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
26,125 |
|
|
|
7.02 |
|
|
|
31,113 |
|
|
|
8.40 |
|
|
|
29,064 |
|
|
|
8.03 |
|
Consumer |
|
|
6,213 |
|
|
|
1.67 |
|
|
|
4,852 |
|
|
|
1.31 |
|
|
|
4,987 |
|
|
|
1.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
372,004 |
|
|
|
100.00 |
% |
|
$ |
370,280 |
|
|
|
100.00 |
% |
|
$ |
362,122 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is a table showing the significant industry types in the commercial loan portfolio as of
June 30, 2009, December 31, 2008 and June 30, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
Percent of |
|
|
|
Outstanding |
|
|
Commerical |
|
|
Shareholders |
|
|
Outstanding |
|
|
Commercial |
|
|
Shareholders |
|
|
Outstanding |
|
|
Commerical |
|
|
Shareholders |
|
|
|
Balance |
|
|
Loans |
|
|
Equity |
|
|
Balance |
|
|
Loans |
|
|
Equity |
|
|
Balance |
|
|
Loans |
|
|
Equity |
|
R/E oper. of
nonresidential
bldgs. |
|
$ |
44,087 |
|
|
|
14.87 |
% |
|
|
81.74 |
% |
|
$ |
41,299 |
|
|
|
13.95 |
% |
|
|
105.79 |
% |
|
$ |
41,778 |
|
|
|
15.85 |
% |
|
|
101.96 |
% |
Hospitality and
tourism |
|
|
35,033 |
|
|
|
11.82 |
|
|
|
64.95 |
|
|
|
35,086 |
|
|
|
11.85 |
|
|
|
95.63 |
|
|
|
35,053 |
|
|
|
13.30 |
|
|
|
85.55 |
|
Real estate agents
and managers |
|
|
24,614 |
|
|
|
8.30 |
|
|
|
45.63 |
|
|
|
29,292 |
|
|
|
9.89 |
|
|
|
75.20 |
|
|
|
27,495 |
|
|
|
10.43 |
|
|
|
67.10 |
|
Commercial
construction |
|
|
26,125 |
|
|
|
8.81 |
|
|
|
48.43 |
|
|
|
31,113 |
|
|
|
10.51 |
|
|
|
99.06 |
|
|
|
10,716 |
|
|
|
4.07 |
|
|
|
26.15 |
|
Other |
|
|
166,533 |
|
|
|
56.20 |
|
|
|
308.74 |
|
|
|
159,298 |
|
|
|
53.80 |
|
|
|
358.88 |
|
|
|
148,539 |
|
|
|
56.35 |
|
|
|
362.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial
Loans |
|
$ |
296,392 |
|
|
|
100.00 |
% |
|
|
|
|
|
$ |
296,088 |
|
|
|
100.00 |
% |
|
|
|
|
|
$ |
263,581 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management recognizes the additional risk presented by the concentration in certain segments of the
portfolio. On a historical basis, the Corporations highest concentration of credit risk was the
hospitality and tourism industry. Management does not consider the current loan concentrations in
hospitality and gaming to be problematic, and has no intention of further reducing loans to this
industry segment. Management does not believe that its current portfolio composition has increased
exposure related to any specific industry concentration as of June 30, 2009. The current
concentration of real estate related loans represents a broad customer base composed of a high
percentage of owner occupied developments.
Credit Quality
Management analyzes the allowance for loan losses in detail on a monthly basis to determine whether
the losses inherent in the portfolio are properly reserved for. Net charge-offs for the first half
of 2009 amounted to $.858 million, or .23% of average loans outstanding, compared to $1.311
million, .36% of average loans outstanding, for
the first half of 2008. The current reserve balance is representative of the relevant risk
inherent within the Corporations loan portfolio. Additions or reductions to the reserve in future
periods will be dependent upon a combination of future loan growth, nonperforming loan balances and
charge-off activity. The $7.749 million increase in nonperforming assets from 2008 year end
balances of $7.076 million includes two large credit relationships in Southeast Michigan that
account for $5.7 million of the June 30, 2009 nonperforming asset balances.
20.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The table below shows period end balances of nonperforming assets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Nonperforming Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual Loans |
|
$ |
9,283 |
|
|
$ |
4,887 |
|
|
$ |
4,613 |
|
Loans past due 90 days or more |
|
|
|
|
|
|
|
|
|
|
|
|
Restructured loans |
|
|
592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
9,875 |
|
|
|
4,887 |
|
|
|
4,613 |
|
Other real estate owned |
|
|
4,950 |
|
|
|
2,189 |
|
|
|
3,395 |
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
14,825 |
|
|
$ |
7,076 |
|
|
$ |
8,008 |
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans as a % of loans |
|
|
2.66 |
% |
|
|
1.32 |
% |
|
|
1.27 |
% |
|
|
|
|
|
|
|
|
|
|
Nonperforming assets as a % of assets |
|
|
2.93 |
% |
|
|
1.57 |
% |
|
|
1.83 |
% |
|
|
|
|
|
|
|
|
|
|
Reserve for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
At period end |
|
$ |
4,119 |
|
|
$ |
4,227 |
|
|
$ |
3,585 |
|
|
|
|
|
|
|
|
|
|
|
As a % of loans |
|
|
1.11 |
% |
|
|
1.16 |
% |
|
|
0.99 |
% |
|
|
|
|
|
|
|
|
|
|
As a % of nonperforming loans |
|
|
41.71 |
% |
|
|
87.52 |
% |
|
|
77.72 |
% |
|
|
|
|
|
|
|
|
|
|
As a % of nonaccrual loans |
|
|
44.37 |
% |
|
|
87.52 |
% |
|
|
77.72 |
% |
|
|
|
|
|
|
|
|
|
|
The following ratios assist management in the determination of the Corporations credit quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Total loans, at period end |
|
$ |
372,004 |
|
|
$ |
370,280 |
|
|
$ |
362,122 |
|
|
|
|
|
|
|
|
|
|
|
Average loans for the year |
|
|
371,278 |
|
|
|
361,324 |
|
|
|
360,176 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
4,119 |
|
|
|
4,277 |
|
|
|
3,585 |
|
|
|
|
|
|
|
|
|
|
|
Allowance to total loans at period end |
|
|
1.11 |
% |
|
|
1.16 |
% |
|
|
0.99 |
% |
|
|
|
|
|
|
|
|
|
|
Net charge-offs during the period |
|
$ |
858 |
|
|
$ |
2,169 |
|
|
$ |
1,311 |
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans |
|
|
.23 |
% |
|
|
.60 |
% |
|
|
.36 |
% |
|
|
|
|
|
|
|
|
|
|
Net charge-offs to beginning allowance balance |
|
|
20.06 |
% |
|
|
52.32 |
% |
|
|
31.62 |
% |
|
|
|
|
|
|
|
|
|
|
Management continues to address market issues impacting its loan customer base. In conjunction
with the Corporations senior lending staff and the bank regulatory examinations, management
reviews the Corporations loans, related collateral evaluations, and the overall lending process.
The Corporation also utilizes a loan review consultant to perform a review of the loan portfolio.
The opinion of this consultant upon completion of the
independent review in 2008 provided findings similar to management on the overall adequacy of the
reserve. The Corporation has engaged this same consultant for loan review during 2009.
21.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The following table will provide additional information with respect to our nonperforming assets as
of June 30, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Most |
|
|
|
|
|
|
|
|
|
|
Recent |
|
|
Reserve |
|
Collateral Type |
|
Balance |
|
|
Apprasial |
|
|
Allocation |
|
Nonaccrual Loans |
|
|
|
|
|
|
|
|
|
|
|
|
Non-farm / non-residential (SEM) |
|
$ |
4,742 |
|
|
$ |
5,200 |
|
|
$ |
520 |
|
Non-farm / non-residential (NLP) |
|
|
1,405 |
|
|
|
1,675 |
|
|
|
25 |
|
Construction / development (SEM) |
|
|
1,000 |
|
|
|
460 |
|
|
|
400 |
|
Cabins / land (NLP) |
|
|
451 |
|
|
|
425 |
|
|
|
|
|
Land development (NLP) |
|
|
443 |
|
|
|
N/A |
|
|
|
350 |
|
Non-farm / non-residential & commercial unsecured (SEM) |
|
|
371 |
|
|
|
450 |
|
|
|
15 |
|
Conv 5+ residential properties (UP) |
|
|
311 |
|
|
|
100 |
|
|
|
160 |
|
Non-farm / non-residential (UP) |
|
|
172 |
|
|
|
314 |
|
|
|
|
|
Commercial general (UP) |
|
|
129 |
|
|
|
50 |
|
|
|
71 |
|
Commercial general (SEM) |
|
|
114 |
|
|
|
N/A |
|
|
|
|
|
1-4 family (NLP) |
|
|
68 |
|
|
|
163 |
|
|
|
|
|
Land (NLP) |
|
|
40 |
|
|
|
130 |
|
|
|
|
|
Business equipment (UP) |
|
|
32 |
|
|
|
25 |
|
|
|
15 |
|
Recreational (UP) |
|
|
5 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans |
|
|
9,283 |
|
|
|
8,992 |
|
|
|
1,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-farm / non-residential (UP) |
|
|
592 |
|
|
|
920 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
Land development (SEM) |
|
|
2,133 |
|
|
|
2,370 |
|
|
|
|
|
Land development / condo (NLP) |
|
|
630 |
|
|
|
700 |
|
|
|
|
|
Land development (NLP) |
|
|
511 |
|
|
|
645 |
|
|
|
|
|
Non-farm / non-residential (SEM) |
|
|
508 |
|
|
|
620 |
|
|
|
|
|
Construction/development (NLP) |
|
|
448 |
|
|
|
485 |
|
|
|
7 |
|
1-4 family (UP) |
|
|
400 |
|
|
|
490 |
|
|
|
|
|
Non-farm / non-residential (UP) |
|
|
215 |
|
|
|
248 |
|
|
|
|
|
Downtown store frontage / 2 / 1-4 family (UP) |
|
|
77 |
|
|
|
85 |
|
|
|
|
|
1-4 family (NLP) |
|
|
28 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other real estate owned |
|
|
4,950 |
|
|
|
5,678 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
14,825 |
|
|
$ |
15,590 |
|
|
$ |
1,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REGIONAL BREAKOUT OF NONPERFORMING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
NLP NORTHERN LOWER PENINSULA |
|
$ |
4,024 |
|
|
$ |
4,258 |
|
|
$ |
382 |
|
UP UPPER PENINSULA |
|
|
1,933 |
|
|
|
2,232 |
|
|
|
251 |
|
SEM SOUTHEAST MICHIGAN |
|
|
8,868 |
|
|
|
9,100 |
|
|
|
935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
14,825 |
|
|
$ |
15,590 |
|
|
$ |
1,568 |
|
|
|
|
|
|
|
|
|
|
|
The schedule above shows the detail of nonperforming assets categorized by type of loan/collateral.
In determining estimated liquidation value, management considered existing appraisals, the date of
the appraisals, and current market conditions, along with related selling costs. Personal
guarantees are also in place for various nonperforming assets, which will also help mitigate
losses.
Following is the allocation for loan losses as of June 30, 2009, December 31, 2008, and June 30,
2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Commercial, financial and agricultural loans |
|
$ |
3,769 |
|
|
$ |
3,819 |
|
|
$ |
3,276 |
|
One to four family residential real estate loans |
|
|
5 |
|
|
|
27 |
|
|
|
27 |
|
Consumer loans |
|
|
5 |
|
|
|
40 |
|
|
|
15 |
|
Unallocated and general reserves |
|
|
340 |
|
|
|
391 |
|
|
|
267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
4,119 |
|
|
$ |
4,277 |
|
|
$ |
3,585 |
|
|
|
|
|
|
|
|
|
|
|
22.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
As of June 30, 2009, the allowance for loan losses represented 1.11% of total loans. In
managements opinion, the allowance for loan losses is adequate to cover probable losses related to
specifically identified loans, as well as probable losses inherent in the balance of the loan
portfolio.
As part of the process of resolving problem credits, the Corporation may acquire ownership of
collateral which secured such credits. The Corporation carries this collateral in other real
estate on the balance sheet.
The following table represents the activity in other real estate for the periods indicated (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Year Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
June 30, 2008 |
|
Balance at beginning of period |
|
$ |
2,189 |
|
|
$ |
1,226 |
|
|
$ |
1,226 |
|
Other real estate transferred from
loans due to foreclosure |
|
|
3,276 |
|
|
|
2,849 |
|
|
|
2,439 |
|
Reclassification of redemption OREO |
|
|
(475 |
) |
|
|
|
|
|
|
|
|
Other real estate sold/written down |
|
|
(37 |
) |
|
|
(1,886 |
) |
|
|
(270 |
) |
Loss on sale of other real estate |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
4,950 |
|
|
$ |
2,189 |
|
|
$ |
3,395 |
|
|
|
|
|
|
|
|
|
|
|
During the first six months of 2009, the Corporation received real estate in lieu of loan payments
of $3.276 million. Other real estate is initially valued at the lower of cost or the fair value
less selling costs. After the initial receipt, management periodically re-evaluates the recorded
balance. Any additional reduction in the fair value results in a write-down of other real estate.
Deposits
The Corporation had an increase in deposits in the first six months of 2009. Total deposits
increased by $42.055 million, or 11.33%, in the first six months of 2009. The increase in deposits
for the first six months of 2009 is composed of an increase in noncore deposits of $34.328 million
and an increase in core deposits of $7.727 million. The core deposit balance increases are
primarily in transactional account deposits, our lowest cost of funds. Management continues to
monitor existing deposit products in order to stay competitive as to both terms and pricing. It is
the intent of management to be aggressive in its markets to grow core deposits with an emphasis
placed on transactional deposits.
The following table represents detail of deposits at the end of the periods indicated (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2009 |
|
|
% of Total |
|
|
2008 |
|
|
% of Total |
|
|
2008 |
|
|
% of Total |
|
Non-interest-bearing |
|
$ |
33,368 |
|
|
|
8.08 |
% |
|
$ |
30,099 |
|
|
|
8.11 |
% |
|
$ |
27,741 |
|
|
|
7.77 |
% |
NOW, money market,
checking |
|
|
75,974 |
|
|
|
18.39 |
|
|
|
70,584 |
|
|
|
19.02 |
|
|
|
78,703 |
|
|
|
22.05 |
|
Savings |
|
|
21,411 |
|
|
|
5.18 |
|
|
|
20,730 |
|
|
|
5.59 |
|
|
|
15,171 |
|
|
|
4.25 |
|
Certificates of Deposit
<$100,000 |
|
|
72,139 |
|
|
|
17.46 |
|
|
|
73,752 |
|
|
|
19.87 |
|
|
|
78,678 |
|
|
|
22.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
202,892 |
|
|
|
49.11 |
|
|
|
195,165 |
|
|
|
52.59 |
|
|
|
200,293 |
|
|
|
56.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
>$100,000 |
|
|
25,455 |
|
|
|
6.16 |
|
|
|
25,044 |
|
|
|
6.75 |
|
|
|
28,252 |
|
|
|
7.92 |
|
Brokered CDs |
|
|
184,805 |
|
|
|
44.73 |
|
|
|
150,888 |
|
|
|
40.66 |
|
|
|
128,431 |
|
|
|
35.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-core deposits |
|
|
210,260 |
|
|
|
50.89 |
|
|
|
175,932 |
|
|
|
47.41 |
|
|
|
156,683 |
|
|
|
43.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
413,152 |
|
|
|
100.00 |
% |
|
$ |
371,097 |
|
|
|
100.00 |
% |
|
$ |
356,976 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Borrowings
The Corporation historically used alternative funding sources to provide long-term, stable sources
of funds. Current borrowings total $35.000 million with stated maturities ranging through February
2011. Borrowings at quarter end include $20.000 million with adjustable rates that reprice
quarterly based upon the three month LIBOR. The FHLB has the option to convert the remaining
$15.000 million fixed-rate advances to adjustable rate advances on the original call date and
quarterly thereafter. The Corporation also has a USDA Rural Development loan held by its wholly
owned subsidiary, First Rural Relending that has a fixed interest rate of 1% and matures in August
2024.
Shareholders Equity
Total shareholders equity increased $12.387 million from December 31, 2008 to June 30, 2009. This
increase includes the increase from the Preferred Stock issue, $10.382 million, along with the
issuance of common stock warrants, $.618 million. Also contributing to the increase in
shareholders equity was net income of $.551 million, contributed capital of $35,000, in
recognition of stock option expense, an increase in the market value of securities of $.766 million
and the accretion of the discount on preferred stock of $36,000.
RESULTS OF OPERATIONS
Summary
The Corporation reported income of $.551 million for the first half of 2009, $.16 per share,
compared to net income of $1.908 million, $.56 per share, in the first half of 2008. In the second
quarter of 2009, net income was $.461, $.13 per share, compared to $1.769 million, $.52 per share,
in the second quarter of 2008.
Net Interest Income
Net interest income is the Corporations primary source of core earnings. Net interest income
represents the difference between the average yield earned on interest earning assets and the
average rate paid on interest bearing obligations. The net interest income is impacted by economic
and competitive factors that influence rates, loan demand, and the availability of funding.
Net interest margin increased to $4.051 million, 3.58% of average earning assets, in the second
quarter of 2009, compared to $3.118 million, 3.19% of average earning assets, in the second quarter
of 2008. In the first six months of 2009, net interest margin increased to $7.546 million, 3.47%
of average earning assets, compared to $6.163 million, 3.16% of average earning assets, for the
same period in 2008. Margin improvement in 2009 was primarily due to a reduction in funding costs
between periods as average interest rates on brokered deposits declined more than rates on earning
assets.
While a majority of the Corporations loan portfolio is repriced with each prime rate change due to
floating rate loans, interest paid on similar rate changes does not impact the pricing of interest
bearing liabilities to nearly the same degree. The mix of time deposits reflects the Corporations
need to utilize the brokered certificate of deposit markets for loan funding when core deposits did
not provide adequate sources.
24.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The following tables present the amount of interest income from average interest-earning assets and
the yields earned on those assets, as well as the interest expense on average interest-bearing
obligations and the rates paid on those obligations. All average balances are daily average
balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009-2008 |
|
|
|
Average Balances |
|
|
Average Rates |
|
|
Interest |
|
|
Income/ |
|
|
|
|
|
|
|
|
|
|
Rate/ |
|
|
|
June 30, |
|
|
Increase/ |
|
|
June 30, |
|
|
June 30, |
|
|
Expense |
|
|
Volume |
|
|
Rate |
|
|
Volume |
|
(dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
|
Variance |
|
|
Variance |
|
|
Variance |
|
Loans (1,2,3) |
|
$ |
371,609 |
|
|
$ |
362,574 |
|
|
$ |
9,035 |
|
|
|
5.65 |
% |
|
|
6.39 |
% |
|
$ |
5,231 |
|
|
$ |
5,759 |
|
|
$ |
(528 |
) |
|
$ |
144 |
|
|
$ |
(671 |
) |
|
|
(1 |
) |
Taxable securities |
|
|
76,092 |
|
|
|
23,960 |
|
|
|
52,132 |
|
|
|
3.56 |
|
|
|
4.58 |
|
|
|
675 |
|
|
|
273 |
|
|
|
402 |
|
|
|
596 |
|
|
|
(61 |
) |
|
|
(133 |
) |
Nontaxable securities (2) |
|
|
1,939 |
|
|
|
69 |
|
|
|
1,870 |
|
|
|
0.41 |
|
|
|
5.83 |
|
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
|
27 |
|
|
|
(1 |
) |
|
|
(25 |
) |
Federal funds sold |
|
|
|
|
|
|
1,923 |
|
|
|
(1,923 |
) |
|
|
|
|
|
|
2.09 |
|
|
|
|
|
|
|
10 |
|
|
|
(10 |
) |
|
|
(10 |
) |
|
|
(10 |
) |
|
|
10 |
|
Other interest-earning assets |
|
|
4,399 |
|
|
|
4,183 |
|
|
|
216 |
|
|
|
1.28 |
|
|
|
6.73 |
|
|
|
14 |
|
|
|
70 |
|
|
|
(56 |
) |
|
|
4 |
|
|
|
(57 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
454,039 |
|
|
|
392,709 |
|
|
|
61,330 |
|
|
|
5.23 |
|
|
|
6.26 |
|
|
|
5,922 |
|
|
|
6,113 |
|
|
|
(191 |
) |
|
|
761 |
|
|
|
(800 |
) |
|
|
(152 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for loan losses |
|
|
(4,847 |
) |
|
|
(3,886 |
) |
|
|
(961 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
17,708 |
|
|
|
6,053 |
|
|
|
11,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
16 |
|
|
|
94 |
|
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
24,289 |
|
|
|
23,276 |
|
|
|
1,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
491,205 |
|
|
$ |
418,246 |
|
|
$ |
72,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposits |
|
$ |
69,098 |
|
|
$ |
80,379 |
|
|
$ |
(11,281 |
) |
|
|
.81 |
|
|
|
1.53 |
|
|
|
140 |
|
|
|
306 |
|
|
|
(166 |
) |
|
|
(43 |
) |
|
|
(144 |
) |
|
|
21 |
|
Interest checking |
|
|
5,884 |
|
|
|
|
|
|
|
5,884 |
|
|
|
1.91 |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
28 |
|
Savings deposits |
|
|
21,363 |
|
|
|
13,310 |
|
|
|
8,053 |
|
|
|
.66 |
|
|
|
.94 |
|
|
|
35 |
|
|
|
31 |
|
|
|
4 |
|
|
|
19 |
|
|
|
(9 |
) |
|
|
(6 |
) |
CDs <$100,000 |
|
|
71,608 |
|
|
|
81,746 |
|
|
|
(10,138 |
) |
|
|
2.85 |
|
|
|
4.25 |
|
|
|
508 |
|
|
|
863 |
|
|
|
(355 |
) |
|
|
(107 |
) |
|
|
(285 |
) |
|
|
37 |
|
CDs >$100,000 |
|
|
25,939 |
|
|
|
26,773 |
|
|
|
(834 |
) |
|
|
2.35 |
|
|
|
3.97 |
|
|
|
152 |
|
|
|
264 |
|
|
|
(112 |
) |
|
|
(8 |
) |
|
|
(108 |
) |
|
|
4 |
|
Brokered deposits |
|
|
176,940 |
|
|
|
104,187 |
|
|
|
72,753 |
|
|
|
1.59 |
|
|
|
4.20 |
|
|
|
703 |
|
|
|
1,087 |
|
|
|
(384 |
) |
|
|
761 |
|
|
|
(676 |
) |
|
|
(469 |
) |
Borrowings |
|
|
36,376 |
|
|
|
42,430 |
|
|
|
(6,054 |
) |
|
|
2.88 |
|
|
|
3.71 |
|
|
|
261 |
|
|
|
391 |
|
|
|
(130 |
) |
|
|
(56 |
) |
|
|
(88 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
407,208 |
|
|
|
348,825 |
|
|
|
58,383 |
|
|
|
1.80 |
|
|
|
3.39 |
|
|
|
1,827 |
|
|
|
2,942 |
|
|
|
(1,115 |
) |
|
|
566 |
|
|
|
(1,310 |
) |
|
|
(371 |
) |
Demand deposits |
|
|
30,678 |
|
|
|
26,331 |
|
|
|
4,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
3,464 |
|
|
|
2,691 |
|
|
|
773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
49,855 |
|
|
|
40,399 |
|
|
|
9,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity |
|
$ |
491,205 |
|
|
$ |
418,246 |
|
|
$ |
72,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.43 |
% |
|
|
2.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin/revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.62 |
% |
|
|
3.25 |
% |
|
$ |
4,095 |
|
|
$ |
3,171 |
|
|
$ |
924 |
|
|
$ |
195 |
|
|
$ |
510 |
|
|
$ |
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For purposes of these computations, nonaccruing loans are included in the daily average loan
amounts outstanding. |
|
(2) |
|
The amount of interest income on loans and nontaxable securities has been adjusted to a tax
equivalent basis, using a 34% tax rate |
|
(3) |
|
Interest income on loans includes fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009-2008 |
|
|
|
Average Balances |
|
|
Average Rates |
|
|
Interest |
|
|
Income/ |
|
|
|
|
|
|
|
|
|
|
Rate/ |
|
|
|
June 30, |
|
|
Increase/ |
|
|
June 30, |
|
|
June 30, |
|
|
Expense |
|
|
Volume |
|
|
Rate |
|
|
Volume |
|
(dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Variance |
|
|
Variance |
|
|
Variance |
|
|
Variance |
|
Loans (1,2,3) |
|
$ |
371,278 |
|
|
$ |
360,176 |
|
|
$ |
11,102 |
|
|
|
5.63 |
% |
|
|
6.71 |
% |
|
$ |
10,370 |
|
|
$ |
12,022 |
|
|
$ |
(1,652 |
) |
|
$ |
370 |
|
|
$ |
(1,929 |
) |
|
|
(93 |
) |
Taxable securities |
|
|
61,906 |
|
|
|
23,930 |
|
|
|
37,976 |
|
|
|
3.69 |
|
|
|
4.51 |
|
|
|
1,132 |
|
|
|
537 |
|
|
|
595 |
|
|
|
850 |
|
|
|
(98 |
) |
|
|
(157 |
) |
Nontaxable securities (2) |
|
|
975 |
|
|
|
70 |
|
|
|
905 |
|
|
|
1.24 |
|
|
|
11.49 |
|
|
|
6 |
|
|
|
4 |
|
|
|
2 |
|
|
|
52 |
|
|
|
(4 |
) |
|
|
(46 |
) |
Federal funds sold |
|
|
|
|
|
|
3,641 |
|
|
|
(3,641 |
) |
|
|
|
|
|
|
2.93 |
|
|
|
|
|
|
|
53 |
|
|
|
(53 |
) |
|
|
(53 |
) |
|
|
(53 |
) |
|
|
53 |
|
Other interest-earning assets |
|
|
4,383 |
|
|
|
4,436 |
|
|
|
(53 |
) |
|
|
.74 |
|
|
|
5.30 |
|
|
|
16 |
|
|
|
117 |
|
|
|
(101 |
) |
|
|
(1 |
) |
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
438,542 |
|
|
|
392,253 |
|
|
|
46,289 |
|
|
|
5.30 |
|
|
|
6.53 |
|
|
|
11,524 |
|
|
|
12,733 |
|
|
|
(1,209 |
) |
|
|
1,218 |
|
|
|
(2,184 |
) |
|
|
(243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for loan losses |
|
|
(4,627 |
) |
|
|
(3,982 |
) |
|
|
(645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
15,539 |
|
|
|
6,127 |
|
|
|
9,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
26 |
|
|
|
104 |
|
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
23,594 |
|
|
|
23,462 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
473,074 |
|
|
$ |
417,964 |
|
|
$ |
55,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposits |
|
$ |
68,677 |
|
|
$ |
81,107 |
|
|
$ |
(12,430 |
) |
|
|
.79 |
|
|
|
1.85 |
|
|
$ |
270 |
|
|
$ |
748 |
|
|
$ |
(478 |
) |
|
$ |
(114 |
) |
|
$ |
(427 |
) |
|
$ |
63 |
|
Interest checking |
|
|
5,124 |
|
|
|
|
|
|
|
5,124 |
|
|
|
1.97 |
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
50 |
|
Savings deposits |
|
|
20,545 |
|
|
|
12,668 |
|
|
|
7,877 |
|
|
|
.74 |
|
|
|
.89 |
|
|
|
75 |
|
|
|
56 |
|
|
|
19 |
|
|
|
35 |
|
|
|
(10 |
) |
|
|
(6 |
) |
CDs <$100,000 |
|
|
71,642 |
|
|
|
82,146 |
|
|
|
(10,504 |
) |
|
|
2.99 |
|
|
|
4.44 |
|
|
|
1,061 |
|
|
|
1,813 |
|
|
|
(752 |
) |
|
|
(231 |
) |
|
|
(591 |
) |
|
|
70 |
|
CDs >$100,000 |
|
|
25,846 |
|
|
|
24,962 |
|
|
|
884 |
|
|
|
2.57 |
|
|
|
4.25 |
|
|
|
329 |
|
|
|
527 |
|
|
|
(198 |
) |
|
|
19 |
|
|
|
(208 |
) |
|
|
(9 |
) |
Brokered deposits |
|
|
164,517 |
|
|
|
107,105 |
|
|
|
57,412 |
|
|
|
1.91 |
|
|
|
4.64 |
|
|
|
1,559 |
|
|
|
2,471 |
|
|
|
(912 |
) |
|
|
1,321 |
|
|
|
(1,449 |
) |
|
|
(784 |
) |
Borrowings |
|
|
36,511 |
|
|
|
40,906 |
|
|
|
(4,395 |
) |
|
|
2.99 |
|
|
|
4.15 |
|
|
|
542 |
|
|
|
845 |
|
|
|
(303 |
) |
|
|
(91 |
) |
|
|
(235 |
) |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities |
|
|
392,862 |
|
|
|
348,894 |
|
|
|
43,968 |
|
|
|
1.99 |
|
|
|
3.72 |
|
|
|
3,886 |
|
|
|
6,460 |
|
|
|
(2,574 |
) |
|
|
939 |
|
|
|
(2,920 |
) |
|
|
(593 |
) |
Demand deposits |
|
|
30,819 |
|
|
|
26,383 |
|
|
|
4,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
3,537 |
|
|
|
2,742 |
|
|
|
795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
45,856 |
|
|
|
39,945 |
|
|
|
5,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity |
|
$ |
473,074 |
|
|
$ |
417,964 |
|
|
$ |
55,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.31 |
% |
|
|
2.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin/revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.51 |
% |
|
|
3.22 |
% |
|
$ |
7,638 |
|
|
$ |
6,273 |
|
|
$ |
1,365 |
|
|
$ |
279 |
|
|
$ |
736 |
|
|
$ |
350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For purposes of these computations, nonaccruing loans are included in the daily average loan
amounts outstanding. |
|
(2) |
|
The amount of interest income on loans and nontaxable
securities has been adjusted to a tax
equivalent basis, using a 34% tax rate |
|
(3) |
|
Interest income on loans includes fees |
Approximately 65% of the Corporations loan portfolio repriced downward with prime rate reductions
that occurred in 2008. The reduced rates of the Corporations loan portfolio are reflected in the
overall decrease in rates on earning assets from 6.53% in the first six months of 2008 to 5.30% in
the first six months of 2009. In the three month comparative periods, rates declined on earning
assets from 6.26% in 2008 to 5.23% in 2009. During the period of prime rate reductions, the
Corporation reduced bank deposit rates in order to mitigate the impact on earnings. The
Corporation is somewhat reliant on wholesale funding sources, specifically brokered deposits. The
25.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Corporation had average balances of $164.517 million in the first six months of 2009 with an
average cost of 1.91% compared to $107.105 million at 4.64% in the first six months of 2008. The
Corporation had average balances of $176.940 million in the second quarter of 2009 with an average
cost of 1.59% compared to $104.187 million at 4.20% in the second quarter of 2008.
This repricing of wholesale deposits is the primary reason for the margin improvement in the three
and six month periods ending June 30, 2009.
Provision for Loan Losses
The Corporation records a provision for loan losses when it believes it is necessary to adjust the
allowance for loan losses to maintain an adequate level after considering factors such as loan
charge-offs and recoveries, changes in identified levels of risk in the loan portfolio, changes in
the mix of loans in the portfolio, loan growth, and other economic factors. During the first six
months of 2009, the Corporation recorded a $.700 million provision for loan loss. During the first
six months of 2008, the Corporation recorded a $.750 million provision for loan loss. In future
periods, loan loss provisions will be required if there is further market deterioration that
impacts the credit quality on the existing portfolio.
Noninterest Income
Other income decreased by $3.227 million for the six months ended June 30, 2009, compared to the
six months ended June 30, 2008. The Corporation recognized a benefit from the settlement of a
shareholder lawsuit in the first half of 2008, which amounted to $3.475 million. Service fees
increased $.146 million in the first six months of 2009, while other noninterest income decreased
$.122 million. Revenue due to loans produced and sold in the
secondary market amounted to $.142 million compared to $.097 million a year ago. We expect to
continue to benefit from secondary market activity in future periods as the refinancing boom
continues. The Corporation is also expecting to increase other income from sources such as fees
from the sale of SBA guaranteed loans.
During the second quarter of 2009, the Corporation recognized $.439 million in noninterest income,
compared to $3.747 million for the second quarter of 2008. The second quarter 2008 noninterest
income includes the $3.475 million lawsuit settlement. Service fees increased for the second
quarter of 2009 by $77,000 to $.271 million when compared to $.194 million in the second quarter of
2008. Management continues to evaluate deposit products and services for ways to better serve its
customer base and also enhance service fee income through a broad array of products that price
services based on income contribution and cost attributes.
The following table details noninterest income for the three and six months ended June 30, 2008 and
2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
% Increase |
|
|
Six Months Ended |
|
|
% Increase |
|
|
|
June 30, |
|
|
(Decrease) |
|
|
June 30, |
|
|
(Decrease) |
|
|
|
2009 |
|
|
2008 |
|
|
2009-2008 |
|
|
2009 |
|
|
2008 |
|
|
2009-2008 |
|
Service fees |
|
$ |
271 |
|
|
$ |
194 |
|
|
|
39.69 |
|
|
$ |
514 |
|
|
$ |
368 |
|
|
|
39.67 |
|
Net gains on sale of secondary
market loans |
|
|
84 |
|
|
|
49 |
|
|
|
71.43 |
|
|
|
142 |
|
|
|
97 |
|
|
|
46.39 |
|
Proceeds from lawsuit settlements |
|
|
|
|
|
|
3,475 |
|
|
|
(100.00 |
) |
|
|
|
|
|
|
3,475 |
|
|
|
(100.00 |
) |
Other noninterest income |
|
|
84 |
|
|
|
29 |
|
|
|
189.66 |
|
|
|
174 |
|
|
|
52 |
|
|
|
234.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
439 |
|
|
|
3,747 |
|
|
|
(88.28 |
) |
|
|
830 |
|
|
|
3,992 |
|
|
|
(79.22 |
) |
Net security gain (loss) |
|
|
|
|
|
|
|
|
|
|
0.00 |
|
|
|
|
|
|
|
65 |
|
|
|
(100.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
439 |
|
|
$ |
3,747 |
|
|
|
(88.28 |
) |
|
$ |
830 |
|
|
$ |
4,057 |
|
|
|
(79.54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense
Other expenses increased $47,000 for the six months ended June 30, 2009, compared to the same
period in 2008. Salaries and employee benefits decreased $.724 million, during the first six
months and $.514 million for the second quarter of 2009, when compared to the same periods in 2008.
The 2008 six month and second quarter salary and benefit expenses include a $.425 million
severance expense. The most significant increase in noninterest expense was in the loan and
deposit expense category, primarily from increases in FDIC insurance premiums. In the second
26.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
quarter of 2009, the Corporation recorded a $.215 million FDIC special assessment. Other increases
in loan and deposit expense resulted from costs associated with higher levels of nonperforming
assets. In the second quarter of
2008, the Corporation settled a long standing derivative shareholder lawsuit. As a part of this
settlement, the Corporation received funds amounting to $3.475 million,
recorded as other income, and a dismissal of unpaid legal fees, totaling $95,000, related to the
defense of prior directors of the Corporation. Management continually reviews all areas of
noninterest expense for cost reduction opportunities that will not impact service quality and
employee morale.
The following table details noninterest expense for the three and six months ended June 30, 2009
and June 30, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
% Increase |
|
|
Six Months Ended |
|
|
% Increase |
|
|
|
June 30, |
|
|
(Decrease) |
|
|
June 30, |
|
|
(Decrease) |
|
|
|
2009 |
|
|
2008 |
|
|
2009-2008% |
|
|
2009 |
|
|
2008 |
|
|
2009-2008% |
|
Salaries and employee benefits |
|
$ |
1,561 |
|
|
$ |
2,075 |
|
|
|
(24.77 |
) |
|
$ |
3,158 |
|
|
$ |
3,882 |
|
|
|
(18.65 |
) |
Occupancy |
|
|
355 |
|
|
|
348 |
|
|
|
2.01 |
|
|
|
733 |
|
|
|
703 |
|
|
|
4.27 |
|
Furniture and equipment |
|
|
222 |
|
|
|
190 |
|
|
|
16.84 |
|
|
|
411 |
|
|
|
368 |
|
|
|
11.68 |
|
Data processing |
|
|
224 |
|
|
|
216 |
|
|
|
3.70 |
|
|
|
444 |
|
|
|
437 |
|
|
|
1.60 |
|
Professional service fees |
|
|
144 |
|
|
|
79 |
|
|
|
82.28 |
|
|
|
297 |
|
|
|
232 |
|
|
|
28.02 |
|
Loan and deposit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FDIC insurance premiums |
|
|
340 |
|
|
|
9 |
|
|
|
N/M |
|
|
|
465 |
|
|
|
18 |
|
|
|
N/M |
|
Other loan and deposit |
|
|
172 |
|
|
|
135 |
|
|
|
27.41 |
|
|
|
308 |
|
|
|
254 |
|
|
|
21.26 |
|
Telephone |
|
|
46 |
|
|
|
39 |
|
|
|
17.95 |
|
|
|
89 |
|
|
|
84 |
|
|
|
5.95 |
|
Advertising |
|
|
80 |
|
|
|
60 |
|
|
|
33.33 |
|
|
|
158 |
|
|
|
120 |
|
|
|
31.67 |
|
Other |
|
|
326 |
|
|
|
320 |
|
|
|
1.88 |
|
|
|
646 |
|
|
|
564 |
|
|
|
14.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
3,470 |
|
|
$ |
3,471 |
|
|
|
(.03 |
) |
|
$ |
6,709 |
|
|
$ |
6,662 |
|
|
|
.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Income Taxes
Current Federal Tax Provision
The Corporation recorded a current period federal tax provision of $.278 million in the first half
of 2009, compared to a $.900 million provision for the same period in 2008.
Deferred Tax Benefit
The Corporation recognized a federal deferred tax benefit of $7.500 million in the third quarter of
2007. The recognition of this deferred tax benefit relates to the generally accepted accounting
principles applicable to the probability of utilizing the NOL and tax credit carryforwards of the
Corporation. The Corporation, based upon current profitability trends largely supported by
expansion of the net interest margin and controlled expenses, determined that the utilization of
the NOL carryforward was probable. This tax benefit was recorded by reducing the valuation
allowance that was recorded against the deferred tax assets of the Corporation. In 2006, the
Corporation recognized a portion of this benefit, $.500 million, based upon the then current
probabilities. The $7.500 million recognition is based upon assumptions of a sustained level of
taxable income within the NOL carryforward period and takes into account Section 382, establishing
annual limitations. A valuation allowance is provided against deferred tax assets when it is more
likely than not that some or all of the deferred tax assets will not be realized. As of June 30,
2009, the Corporation had an NOL carryforward of approximately $32.1 million along with various
credit carryforwards of $2.1 million. This NOL and credit carryforward benefit is dependent upon
the future profitability of the Corporation. A portion of the NOL, approximately $22 million, and
all of the tax credit carryforwards are also subject to the use limitations of Section 382 of the
Internal Revenue Code since they originated prior to the December 2004 recapitalization of the
Corporation. The Corporation intends to further evaluate the utilization of the NOL and credit
carryforwards in subsequent periods to determine if any further adjustment to the valuation
allowance is necessary. The determination criteria for recognition of deferred tax benefits will
include the assumption of future period taxable income based upon the projected profitability of
the Corporation.
27.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
LIQUIDITY
Liquidity is defined as the ability to generate cash at a reasonable cost to fulfill lending
commitments and support asset growth, while satisfying the withdrawal demands of customers and make
payments on existing borrowing commitments. The Banks principal sources of liquidity are core
deposits and loan and investment payments and prepayments. Providing a secondary source of
liquidity is the available for sale investment portfolio. As a final source of liquidity, the Bank
can exercise existing credit arrangements.
During the first half of 2009, the Corporation increased cash and cash equivalents by $2.077
million. As shown on the Corporations condensed consolidated statement of cash flows, liquidity
was impacted by cash provided by financing activities, with a net increase in deposits of $42.055
million, an increase of $11.000 million from the issuance of preferred stock. Offsetting the
increases provided by financing activities were uses in investing activities, most significantly
increase of $50.216 million in securities available for sale, along with an increase in loans of
$5.383 million. The increase in deposits was composed of an increase in brokered deposits of
$33.917 million combined with an increase in bank deposits of $8.138 million. The management of
bank liquidity for funding of loans and deposit maturities and withdrawals includes monitoring
projected loan fundings and scheduled prepayments and deposit maturities within a 30 day period, a
30 to 90 day period and from 90 days until the end of the year. This funding forecast model is
completed weekly.
It is anticipated that during the remainder of 2009, the Corporation will fund anticipated loan
production with a combination of core deposit growth and noncore funding, primarily brokered CDs.
The Corporations primary source of liquidity on a stand-alone basis is dividends from the Bank.
The Bank is currently prohibited from paying dividends because of a deficit in retained earnings.
The Bank, in order to pay dividends in future periods, will need to restate its capital accounts,
which requires the approval of the Office of Financial and Insurance Regulation of the State of
Michigan. The Corporation currently has a cash balance of approximately $8.000 million, which
represents the remaining balance of the $11.000 million proceeds from the issuance of preferred
stock.
Liquidity is managed by the Corporation through its Asset and Liability Committee (ALCO). The
ALCO Committee meets monthly to discuss asset and liability management in order to address
liquidity and funding needs to provide a process to seek the best alternatives for investments of
assets, funding costs, and risk management. The liquidity position of the Bank is managed daily,
thus enabling the Bank to adapt its position according to market fluctuations. Core deposits are
important in maintaining a strong liquidity position as they represent a stable and relatively low
cost source of funds. The Banks liquidity is best illustrated by the mix in the Banks core and
non-core funding dependence ratio, which explain the degree of reliance on non-core liabilities to
fund long-term assets. Core deposits are herein defined as demand deposits, NOW (negotiable order
withdrawals), money markets, savings and certificates of deposit under $100,000. Non-core funding
consists of certificates of deposit greater than $100,000, brokered deposits, and FHLB and Farmers
Home Administration borrowings. At June 30, 2009, the Banks core deposits in relation to total
funding were 45.15% compared to 50.93% at June 30, 2008. These ratios indicated at June 30, 2009,
that the Bank increased its reliance on non-core deposits and borrowings to fund the Banks
long-term assets, namely loans and investments. The Bank believes that by maintaining adequate
volumes of short-term investments and implementing competitive pricing strategies on deposits, it
can ensure adequate liquidity to support future growth. The Bank also has correspondent lines of
credit available to meet unanticipated short-term liquidity needs. As of June 30, 2009, the Bank
had $13.375 million of unsecured lines available and another $10.100 million available if secured.
As of June 30, 2009, the Bank had no borrowings against these available lines. The Bank believes
that its liquidity position remains strong to meet both present and future financial obligations
and commitments, events or uncertainties that have resulted or are reasonably likely to result in
material changes with respect to the Banks liquidity.
From a long-term perspective, the Corporations liquidity plan for 2009 includes strategies to
increase core deposits in the Corporations local markets. The new deposit products and strategic
advertising are expected to aid in efforts of management in growing core deposits to reduce the
dependency on non-core deposits, while also reducing interest costs. The Corporations liquidity
plan for 2009 calls for augmenting local deposit growth efforts with wholesale CD funding to the
extent necessary.
28.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
CAPITAL AND REGULATORY
As a bank holding company, the Corporation is required to maintain certain levels of capital under
government regulation. There are several measurements of regulatory capital and the Corporation is
required to meet minimum requirements under each measurement. The federal banking regulators have
also established capital classifications beyond the minimum requirements in order to risk-rate
deposit insurance premiums and to provide trigger points for prompt corrective action in the event
an institution becomes financially troubled. As of June 30, 2008, the Corporation and Bank were
well capitalized. The Corporation is currently exploring its alternatives for the possible
issuance of equity or debt in order to provide a broader base to support future asset growth.
During the first half of 2009, total capitalization increased by $12.425 million.
On April 24, 2009, the Corporation issued $11.000 million in perpetual preferred stock and 379,310
common stock warrants in the Capital Purchase Program (CPP) under the Troubled Asset Relief
Program. Mackinac Financial Corporation believes that participation in the CPP will provide a
stronger base of capital for future growth. The June 30, 2009 capital ratios for the Corporation
include the increased capital from the issuance of the preferred stock.
The following table details sources of capital for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Capital Structure |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
$ |
53,939 |
|
|
$ |
41,552 |
|
|
$ |
40,975 |
|
|
|
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
53,939 |
|
|
$ |
41,552 |
|
|
$ |
40,975 |
|
|
|
|
|
|
|
|
|
|
|
Tangible capital |
|
$ |
53,932 |
|
|
$ |
41,507 |
|
|
$ |
40,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit premium |
|
$ |
7 |
|
|
$ |
46 |
|
|
$ |
85 |
|
Other identifiable intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles |
|
$ |
7 |
|
|
$ |
46 |
|
|
$ |
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory capital |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital: |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
$ |
53,939 |
|
|
$ |
41,552 |
|
|
$ |
40,975 |
|
Net
unrealized (gains) losses on available for sale securities |
|
|
(1,211 |
) |
|
|
(445 |
) |
|
|
126 |
|
Less: disallowed deferred tax asset |
|
|
(6,000 |
) |
|
|
(6,200 |
) |
|
|
(5,731 |
) |
Less: intangibles |
|
|
(7 |
) |
|
|
(46 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
Total Tier 1 capital |
|
$ |
46,721 |
|
|
$ |
34,861 |
|
|
$ |
35,285 |
|
|
|
|
|
|
|
|
|
|
|
Tier 2 Capital: |
|
|
|
|
|
|
|
|
|
|
|
|
Allowable reserve for loan losses |
|
$ |
4,119 |
|
|
$ |
4,277 |
|
|
$ |
3,585 |
|
Qualifying long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 2 capital |
|
|
4,119 |
|
|
|
4,277 |
|
|
|
3,585 |
|
|
|
|
|
|
|
|
|
|
|
Total capital |
|
$ |
50,840 |
|
|
$ |
39,138 |
|
|
$ |
38,870 |
|
|
|
|
|
|
|
|
|
|
|
Risk-adjusted assets |
|
$ |
391,160 |
|
|
$ |
376,986 |
|
|
$ |
372,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital to average assets |
|
|
9.65 |
% |
|
|
8.01 |
% |
|
|
8.56 |
% |
Tier 1 Capital to risk weighted assets |
|
|
11.94 |
% |
|
|
9.25 |
% |
|
|
9.48 |
% |
Total Capital to risk weighted assets |
|
|
13.00 |
% |
|
|
10.38 |
% |
|
|
10.45 |
% |
Regulatory capital is not the same as shareholders equity reported in the accompanying condensed
consolidated financial statements. Certain assets cannot be considered assets for regulatory
purposes, such as acquisition intangibles and noncurrent deferred tax benefits.
29.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Presented below is a summary of the capital position in comparison to generally applicable
regulatory requirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders |
|
Tangible |
|
Tier 1 |
|
Tier 1 |
|
Total |
|
|
Equity to |
|
Equity to |
|
Capital to |
|
Capital to |
|
Capital to |
|
|
Quarter-end |
|
Quarter-end |
|
Average |
|
Risk-Weighted |
|
Risk-Weighted |
|
|
Assets |
|
Assets |
|
Assets |
|
Assets |
|
Assets |
Regulatory minumum
for capital
adequacy purposes |
|
|
N/A |
|
|
|
N/A |
|
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
8.00 |
% |
Regulatory defined
well capitalized
guideline |
|
|
N/A |
|
|
|
N/A |
|
|
|
5.00 |
% |
|
|
6.00 |
% |
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
10.65 |
% |
|
|
10.65 |
% |
|
|
9.65 |
% |
|
|
11.94 |
% |
|
|
13.00 |
% |
June 30, 2008 |
|
|
9.37 |
% |
|
|
9.35 |
% |
|
|
8.56 |
% |
|
|
9.48 |
% |
|
|
10.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
9.17 |
% |
|
|
9.17 |
% |
|
|
8.12 |
% |
|
|
10.03 |
% |
|
|
11.07 |
% |
June 30, 2008 |
|
|
9.27 |
% |
|
|
9.26 |
% |
|
|
8.26 |
% |
|
|
9.13 |
% |
|
|
10.08 |
% |
30.
MACKINAC FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
In general, the Corporation attempts to manage interest rate risk by investing in a variety of
assets which afford it an opportunity to reprice assets and increase interest income at a rate
equal to or greater than the interest expense associated with repricing liabilities.
Interest rate risk is the exposure of the Corporation to adverse movements in interest rates. The
Corporation derives its income primarily from the excess of interest collected on its
interest-earning assets over the interest paid on its interest-bearing obligations. The rates of
interest the Corporation earns on its assets and owes on its obligations generally are established
contractually for a period of time. Since market interest rates change over time, the Corporation
is exposed to lower profitability if it cannot adapt to interest rate changes. Accepting interest
rate risk can be an important source of profitability and shareholder value; however, excess levels
of interest rate risk could pose a significant threat to the Corporations earnings and capital
base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is
essential to the Corporations safety and soundness.
Loans are the most significant earning asset. Management offers commercial and real estate loans
priced at interest rates which fluctuate with various indices such as the prime rate or rates paid
on various government issued securities. In addition, the Corporation prices the majority of fixed
rate loans so it has an opportunity to reprice the loan within 12 to 36 months.
The Corporation also has $95.620 million of securities providing for scheduled monthly principal
and interest payments as well as unanticipated prepayments of principal. These cash flows are then
reinvested into other earning assets at current market rates. The Corporation also has federal
funds sold to correspondent banks as well as other interest-bearing deposits with correspondent
banks. These funds are generally repriced on a daily basis.
The Corporation offers deposit products with a variety of terms ranging from deposits whose
interest rates can change on a weekly basis to certificates of deposit with repricing terms of up
to five years. Longer term deposits generally include penalty provisions for early withdrawal.
Beyond general efforts to shorten the loan pricing periods and extend deposit maturities,
management can manage interest rate risk by the maturity periods of securities purchased, selling
securities available for sale, and borrowing funds with targeted maturity periods, among other
strategies. Also, the rate of interest rate changes can impact the actions taken since the rate
environment affects borrowers and depositors differently.
Exposure to interest rate risk is reviewed on a regular basis. Interest rate risk is the potential
of economic losses due to future interest rate changes. These economic losses can be reflected as a
loss of future net interest income and/or a loss of current fair market values. The objective is to
measure the effect of interest rate changes on net interest income and to structure the composition
of the balance sheet to minimize interest rate risk and at the same time maximize income.
Management realizes certain risks are inherent and that the goal is to identify and minimize the
risks. Tools used by management include maturity and repricing analysis and interest rate
sensitivity analysis. The Bank has monthly asset/liability meetings with an outside consultant to
review its current position and strategize about future opportunities on risks relative to pricing
and positioning of assets and liabilities.
The difference between repricing assets and liabilities for a specific period is referred to as the
gap. An excess of repricable assets over liabilities is referred to as a positive gap. An excess of
repricable liabilities over assets is referred to as a negative gap. The cumulative gap is the
summation of the gap for all periods to the end of the period for which the cumulative gap is being
measured.
Assets and liabilities scheduled to reprice are reported in the following time frames. Those
instruments with a variable interest rate tied to an index and considered immediately repricable
are reported in the 1- to 90-day time frame. The estimates of principal amortization and
prepayments are assigned to the following time frames.
31.
MACKINAC FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
The following is the Corporations opportunities at June 30, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-90 |
|
|
91 - 365 |
|
|
>1-5 |
|
|
Over 5 |
|
|
|
|
|
|
Days |
|
|
Days |
|
|
Years |
|
|
Years |
|
|
Total |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
252,966 |
|
|
$ |
13,084 |
|
|
$ |
26,858 |
|
|
$ |
79,096 |
|
|
$ |
372,004 |
|
Securities |
|
|
3,323 |
|
|
|
|
|
|
|
76,759 |
|
|
|
15,538 |
|
|
|
95,620 |
|
Other (1) |
|
|
618 |
|
|
|
|
|
|
|
|
|
|
|
3,794 |
|
|
|
4,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
256,907 |
|
|
|
13,084 |
|
|
|
103,617 |
|
|
|
98,428 |
|
|
|
472,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, money market, savings, interest checking |
|
|
97,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,385 |
|
Time deposits |
|
|
36,337 |
|
|
|
44,253 |
|
|
|
16,268 |
|
|
|
736 |
|
|
|
97,594 |
|
Brokered CDs |
|
|
77,391 |
|
|
|
84,719 |
|
|
|
22,695 |
|
|
|
|
|
|
|
184,805 |
|
Borrowings |
|
|
20,000 |
|
|
|
|
|
|
|
15,000 |
|
|
|
1,210 |
|
|
|
36,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing obligations |
|
|
231,113 |
|
|
|
128,972 |
|
|
|
53,963 |
|
|
|
1,946 |
|
|
|
415,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gap |
|
$ |
25,794 |
|
|
$ |
(115,888 |
) |
|
$ |
49,654 |
|
|
$ |
96,482 |
|
|
$ |
56,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap |
|
$ |
25,794 |
|
|
$ |
(90,094 |
) |
|
$ |
(40,440 |
) |
|
$ |
56,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Federal Home Loan Bank Stock |
The above analysis indicates that at June 30, 2009, the Corporation had a cumulative liability
sensitivity gap position of $90.094 million within the one-year time frame. The Corporations
cumulative liability sensitive gap suggests that if market interest rates continue to decline in
the next twelve months, the Corporation has the potential to earn more net interest income. A
limitation of the traditional gap analysis is that it does not consider the timing or magnitude of
non-contractual repricing or expected prepayments. In addition, the gap analysis treats savings,
NOW, and money market accounts as repricing within 90 days, while experience suggests that these
categories of deposits are actually comparatively resistant to rate sensitivity. With the
Corporations current portfolio of variable rate loans, approximately 67%, or $250 million,
increasing interest rates will result in increased net interest income because repricing on the
majority of deposits will lag asset repricing.
A portion, approximately 33%, of the Corporations variable rate loans contain interest rate floors
that are higher than the current prime and LIBOR rates that they are indexed to. The majority of
these loans with floor rates will reprice with increases in interest rates greater than 150 basis
points. These floors are in place to mitigate margin erosion with additional rate decreases.
At December 31, 2008, the Corporation had a cumulative liability sensitivity gap position of
$47.708 million within the one-year time frame.
The borrowings in the gap analysis include $15 million of the FHLB advances as fixed-rate advances.
These advances give the FHLB the option to convert from a fixed-rate advance to an adjustable rate
advance with quarterly repricing at three-month LIBOR Flat. The exercise of this conversion feature
by the FHLB would impact the repricing dates currently assumed in the analysis. In 2006, the FHLB
converted $20 million of the $25 million total FHLB borrowings from fixed to variable rate.
The Corporations primary market risk exposure is interest rate risk and, to a lesser extent,
liquidity risk and foreign exchange risk. The Corporation has no market risk sensitive instruments
held for trading purposes. The Corporation has limited agricultural-related loan assets and
therefore has minimal significant exposure to changes in commodity prices. Any impact that changes
in foreign exchange rates and commodity prices would have on interest rates are assumed to be
insignificant.
Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the
process used to control interest rate risk and the quantitative level of exposure. The
Corporations interest rate risk management process seeks to ensure that appropriate policies,
procedures, management information systems, and internal
32.
MACKINAC FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
controls are in place to maintain interest rate risk at prudent levels with consistency and
continuity. In evaluating the quantitative level of interest rate risk, the Corporation assesses
the existing and potential future effects of changes in interest rates on its financial condition,
including capital adequacy, earnings, liquidity, and asset quality.
In addition to changes in interest rates, the level of future net interest income is also dependent
on a number of variables, including: the growth, composition and levels of loans, deposits, and
other earning assets and interest-bearing obligations, and economic and competitive conditions;
potential changes in lending, investing, and deposit strategies; customer preferences; and other
factors.
FOREIGN EXCHANGE RISK
In addition to managing interest rate risk, management also actively manages risk associated with
foreign exchange. The Corporation provides foreign exchange services, makes loans to, and accepts
deposits from, Canadian customers primarily at its banking offices in Sault Ste. Marie, Michigan.
To protect against foreign exchange risk, the Corporation monitors the volume of Canadian deposits
it takes in and then invests these Canadian funds in Canadian commercial loans and securities. As
of June 30, 2009, the Corporation had excess Canadian liabilities of $56,000 (or $63,000 in U.S.
dollars). Management believes the exposure to short-term foreign exchange risk is minimal and at an
acceptable level for the Corporation.
OFF-BALANCE-SHEET RISK
Derivative financial instruments include futures, forwards, interest rate swaps, option contracts
and other financial instruments with similar characteristics. The Corporation currently does not
enter into futures, forwards, swaps or options. However, the Corporation is party to financial
instruments with off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and
standby letters of credit and involve to varying degrees, elements of credit and interest rate risk
in excess of the amount recognized in the condensed consolidated balance sheets. Commitments to
extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates and may
require collateral from the borrower if deemed necessary by the Corporation. Standby letters of
credit are conditional commitments issued by the Corporation to guarantee the performance of a
customer to a third party up to a stipulated amount and with specified terms and conditions.
Commitments to extend credit and standby letters of credit are not recorded as an asset or
liability by the Corporation until the instrument is exercised.
IMPACT OF INFLATION AND CHANGING PRICES
The accompanying condensed consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, which require the measurement of financial position and
results of operations in historical dollars, without considering the change in the relative
purchasing power of money over time, due to inflation. The impact of inflation is reflected in the
increased cost of the Corporations operations. Nearly all the assets and liabilities of the
Corporation are financial, unlike industrial or commercial companies. As a result, the
Corporations performance is directly impacted by changes in interest rates, which are indirectly
influenced by inflationary expectations. The Corporations ability to match the interest
sensitivity of its financial assets to the interest sensitivity of its financial liabilities tends
to minimize the effect of changes in interest rates on the Corporations performance. Changes in
interest rates do not necessarily move to the same extent as changes in the price of goods and
services.
33.
MACKINAC FINANCIAL CORPORATION
ITEM 4 CONTROLS AND PROCEDURES
An evaluation was performed under the supervision of and with the participation of the
Corporations management, including the Chairman and Chief Executive Officer, and the Chief
Financial Officer, of the effectiveness of the design and operation of the Corporations disclosure
controls and procedures (as such term is defined in Rules 13-a 15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period
covered by this report. Based on that evaluation, the Corporations management, including the
Chairman and Chief Executive Officer, have concluded that, as of the end of such period, the
Corporations disclosure controls and procedures were effective in timely alerting them to material
information relating to the Corporation (including its consolidated subsidiaries) required to be
disclosed by the Corporation in the reports that it files or submits under the Exchange Act.
There was no change in the Corporations internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the
Corporations fiscal quarter ended June 30, 2009 that has materially affected, or is reasonably
likely to materially affect, the Corporations internal control over financial reporting.
34.
MACKINAC FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation and its subsidiaries are subject to routine litigation incidental to the business
of banking. The litigation that is not routine and incidental to the business of banking is
described below.
Shareholders Derivative Litigation
This matter has been resolved and concluded with the Corporation receiving $3.475 million in
settlement proceeds during the second quarter of 2008.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the Registrants shareholders was held on May 27, 2009. The purpose of the
meeting was to elect directors, as shown below, each for a three-year term expiring in 2012, and to
approve, in a nonbinding advisory vote, the Corporations executive compensation plan. The number
of shares voted is presented in the table below.
|
|
|
|
|
|
|
|
|
Proposal |
|
For |
|
Withheld |
Walter J. Aspatore |
|
|
2,122,734 |
|
|
|
15,937 |
|
Robert H. Orley |
|
|
2,122,619 |
|
|
|
16,052 |
|
Randolph C. Paschke |
|
|
2,122,819 |
|
|
|
15,852 |
|
Executive Compensation Plan |
|
|
1,774,184 |
|
|
|
341,313 |
|
35.
MACKINAC FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
|
|
|
Exhibit 3.1
|
|
Articles of Incorporation and all amendments (most recent amendment filed December 14,
2004) incorporated herein by reference to exhibit 3.1 of the Corporations Annual Report on
Form 10-K for the year ended December 31, 2008 |
|
|
|
Exhibit 3.2(a)
|
|
Amended and Restated Bylaws as
revised June 27, 2001 incorporated herein by
reference to exhibit 3.2(a) of the Corporations Annual Report on Form 10-K for the year
ended December 31, 2008 |
|
|
|
Exhibit 3.2(b)
|
|
Amendment to the Amended and Restated Bylaws adopted August 9, 2004 incorporated
herein by reference to exhibit 3.2(b) of the Corporations Annual Report on Form 10-K for
the year ended December 31, 2008 |
|
|
|
Exhibit 3.2(c)
|
|
Second Amendment to the Amended and Restated Bylaws adopted December 2007
incorporated herein by reference to exhibit 3.2(c) of the Corporations Annual Report on
Form 10-K for the year ended December 31, 2008 |
|
|
|
Exhibit 31.1
|
|
Rule 13a-14(a) Certification of Chief Executive Officer |
|
|
|
Exhibit 31.2
|
|
Rule 13a-14(a) Certification of Chief Financial Officer |
|
|
|
Exhibit 32.1
|
|
Section 1350 Certification of Chief Executive Officer |
|
|
|
Exhibit 32.2
|
|
Section 1350 Certification of Chief Financial Officer |
36.
MACKINAC FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
MACKINAC FINANCIAL CORPORATION
(Registrant)
|
|
Date: August 13, 2009 |
By: |
/s/ Paul D. Tobias
|
|
|
|
PAUL D. TOBIAS, |
|
|
|
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(principal executive officer) |
|
|
|
|
|
|
By: |
/s/ Ernie R. Krueger
|
|
|
|
ERNIE R. KRUEGER, |
|
|
|
EVP / CHIEF FINANCIAL OFFICER
(principal accounting officer) |
|
|
37.