Attached files
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EXCEL - IDEA: XBRL DOCUMENT - MACKINAC FINANCIAL CORP /MI/ | Financial_Report.xls |
EX-31.1 - EX-31.1 - MACKINAC FINANCIAL CORP /MI/ | k50493aexv31w1.htm |
EX-31.2 - EX-31.2 - MACKINAC FINANCIAL CORP /MI/ | k50493aexv31w2.htm |
EX-32.1 - EX-32.1 - MACKINAC FINANCIAL CORP /MI/ | k50493aexv32w1.htm |
EX-32.2 - EX-32.2 - MACKINAC FINANCIAL CORP /MI/ | k50493aexv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2011
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 (State or other jurisdiction of incorporation or organization) |
38-2062816 (I.R.S. Employer Identification No.) |
|
130 SOUTH CEDAR STREET, MANISTIQUE, MI (Address of principal executive offices) |
49854 (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 (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer 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 June 30, 2011, there were outstanding 3,419,736 shares of the registrants common stock, no
par value.
MACKINAC FINANCIAL CORPORATION
INDEX
Page No. | ||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
22 | ||||||||
33 | ||||||||
36 | ||||||||
37 | ||||||||
37 | ||||||||
38 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
Table of Contents
MACKINAC FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Dollars in Thousands)
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
(Unaudited) | (Unaudited) | |||||||||||
ASSETS |
||||||||||||
Cash and due from banks |
$ | 22,294 | $ | 22,719 | $ | 39,165 | ||||||
Federal funds sold |
12,000 | 12,000 | 12,000 | |||||||||
Cash and cash equivalents |
34,294 | 34,719 | 51,165 | |||||||||
Interest-bearing deposits in other financial institutions |
10 | 713 | 678 | |||||||||
Securities available for sale |
38,613 | 33,860 | 34,942 | |||||||||
Federal Home Loan Bank stock |
3,060 | 3,423 | 3,794 | |||||||||
Loans: |
||||||||||||
Commercial |
305,752 | 297,047 | 302,228 | |||||||||
Mortgage |
83,194 | 80,756 | 78,428 | |||||||||
Consumer |
5,866 | 5,283 | 4,183 | |||||||||
Total Loans |
394,812 | 383,086 | 384,839 | |||||||||
Allowance for loan losses |
(6,155 | ) | (6,613 | ) | (6,371 | ) | ||||||
Net loans |
388,657 | 376,473 | 378,468 | |||||||||
Premises and equipment |
9,623 | 9,660 | 10,085 | |||||||||
Other real estate held for sale |
4,806 | 5,562 | 5,676 | |||||||||
Other assets |
13,310 | 14,286 | 15,966 | |||||||||
TOTAL ASSETS |
$ | 492,373 | $ | 478,696 | $ | 500,774 | ||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||
LIABILITIES: |
||||||||||||
Deposits: |
||||||||||||
Noninterest bearing deposits |
$ | 49,769 | $ | 41,264 | $ | 41,434 | ||||||
NOW, money market, checking |
149,448 | 134,703 | 118,909 | |||||||||
Savings |
16,526 | 17,670 | 20,110 | |||||||||
CDs<$100,000 |
114,215 | 96,977 | 90,573 | |||||||||
CDs>$100,000 |
23,102 | 22,698 | 23,652 | |||||||||
Brokered |
46,607 | 73,467 | 111,106 | |||||||||
Total deposits |
399,667 | 386,779 | 405,784 | |||||||||
Borrowings: |
||||||||||||
Federal Home Loan Bank |
35,000 | 35,000 | 35,000 | |||||||||
Other |
1,069 | 1,069 | 1,140 | |||||||||
Total borrowings |
36,069 | 36,069 | 36,140 | |||||||||
Other liabilities |
1,853 | 1,966 | 2,619 | |||||||||
Total liabilities |
437,589 | 424,814 | 444,543 | |||||||||
Shareholders equity: |
||||||||||||
Preferred stock No par value: |
||||||||||||
Authorized 500,000 shares, 11,000 shares issued and outstanding |
10,811 | 10,706 | 10,610 | |||||||||
Common stock and additional paid in capital No par value |
| |||||||||||
Authorized - 18,000,000 shares |
||||||||||||
Issued and outstanding 3,419,736 shares |
43,525 | 43,525 | 43,509 | |||||||||
Retained earnings (accumulated deficit) |
(102 | ) | (961 | ) | 1,236 | |||||||
Accumulated other comprehensive income |
550 | 612 | 876 | |||||||||
Total shareholders equity |
54,784 | 53,882 | 56,231 | |||||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 492,373 | $ | 478,696 | $ | 500,774 | ||||||
See accompanying notes to condensed consolidated financial statements.
1
Table of Contents
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except per Share Data)
(Dollars in Thousands, Except per Share Data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
INTEREST INCOME: |
||||||||||||||||
Interest and fees on loans: |
||||||||||||||||
Taxable |
$ | 5,198 | $ | 5,227 | $ | 10,334 | $ | 10,418 | ||||||||
Tax-exempt |
37 | 47 | 79 | 99 | ||||||||||||
Interest on securities: |
||||||||||||||||
Taxable |
292 | 356 | 574 | 753 | ||||||||||||
Tax-exempt |
7 | 7 | 14 | 14 | ||||||||||||
Other interest income |
30 | 37 | 63 | 77 | ||||||||||||
Total interest income |
5,564 | 5,674 | 11,064 | 11,361 | ||||||||||||
INTEREST EXPENSE: |
||||||||||||||||
Deposits |
1,231 | 1,439 | 2,449 | 2,896 | ||||||||||||
Borrowings |
155 | 212 | 296 | 420 | ||||||||||||
Total interest expense |
1,386 | 1,651 | 2,745 | 3,316 | ||||||||||||
Net interest income |
4,178 | 4,023 | 8,319 | 8,045 | ||||||||||||
Provision for loan losses |
600 | 2,800 | 600 | 3,700 | ||||||||||||
Net interest income after provision for loan losses |
3,578 | 1,223 | 7,719 | 4,345 | ||||||||||||
OTHER INCOME: |
||||||||||||||||
Service fees |
219 | 252 | 436 | 474 | ||||||||||||
Net security gains |
| | | 215 | ||||||||||||
Income from loans sold |
1,070 | 309 | 1,385 | 625 | ||||||||||||
Other |
59 | 32 | 104 | 86 | ||||||||||||
Total other income |
1,348 | 593 | 1,925 | 1,400 | ||||||||||||
OTHER EXPENSE: |
||||||||||||||||
Salaries and employee benefits |
1,806 | 1,781 | 3,630 | 3,501 | ||||||||||||
Occupancy |
349 | 345 | 714 | 690 | ||||||||||||
Furniture and equipment |
221 | 197 | 415 | 391 | ||||||||||||
Data processing |
179 | 205 | 355 | 394 | ||||||||||||
Professional service fees |
232 | 161 | 385 | 334 | ||||||||||||
Loan and deposit |
252 | 198 | 431 | 466 | ||||||||||||
ORE writedowns and (gains) losses on sale |
(35 | ) | 1,845 | 432 | 1,993 | |||||||||||
FDIC insurance assessment |
255 | 221 | 540 | 443 | ||||||||||||
Telephone |
58 | 45 | 109 | 92 | ||||||||||||
Advertising |
111 | 72 | 199 | 144 | ||||||||||||
Other |
301 | 260 | 578 | 511 | ||||||||||||
Total other expense |
3,729 | 5,330 | 7,788 | 8,959 | ||||||||||||
Income before provision for (benefit of) income taxes |
1,197 | (3,514 | ) | 1,856 | (3,214 | ) | ||||||||||
Provision for (benefit of) income taxes |
402 | (1,212 | ) | 616 | (4,623 | ) | ||||||||||
NET INCOME (LOSS) |
795 | (2,302 | ) | 1,240 | 1,409 | |||||||||||
Preferred dividend and accretion of discount |
192 | 186 | 381 | 371 | ||||||||||||
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS |
$ | 603 | $ | (2,488 | ) | $ | 859 | $ | 1,038 | |||||||
INCOME (LOSS) PER COMMON SHARE: |
||||||||||||||||
Basic |
$ | .18 | $ | (.73 | ) | $ | .25 | $ | .30 | |||||||
Diluted |
$ | .17 | $ | (.73 | ) | $ | .25 | $ | .30 | |||||||
See accompanying notes to condensed consolidated financial statements.
2
Table of Contents
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Dollars in Thousands)
(Unaudited)
(Dollars in Thousands)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Balance, beginning of period |
$ | 54,097 | $ | 58,722 | $ | 53,882 | $ | 55,299 | ||||||||
Net income (loss) for period |
795 | (2,302 | ) | 1,240 | 1,409 | |||||||||||
Net unrealized gain (loss) on securities available for sale |
30 | (58 | ) | (62 | ) | (217 | ) | |||||||||
Total comprehensive income (loss) |
825 | (2,360 | ) | 1,178 | 1,192 | |||||||||||
Dividend on preferred stock |
(192 | ) | (186 | ) | (381 | ) | (371 | ) | ||||||||
Stock option compensation |
| 7 | | 15 | ||||||||||||
Accretion of preferred stock discount |
54 | 48 | 105 | 96 | ||||||||||||
Balance, end of period |
$ | 54,784 | $ | 56,231 | $ | 54,784 | $ | 56,231 | ||||||||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
(Dollars in Thousands)
(Unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Cash Flows From Operating Activities: |
||||||||
Net income |
$ | 1,240 | $ | 1,409 | ||||
Adjustments to reconcile net income to |
||||||||
net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
749 | 706 | ||||||
Provision for (benefit of) deferred taxes |
616 | (4,623 | ) | |||||
Provision for loan losses |
600 | 3,700 | ||||||
(Gain) on sales/calls of securities available for sale |
| (215 | ) | |||||
(Gain) loss on sale of secondary market loans held for sale |
(122 | ) | (126 | ) | ||||
Origination of secondary market loans held for sale |
(11,247 | ) | (9,720 | ) | ||||
Proceeds from secondary market loans held for sale |
11,446 | 9,896 | ||||||
Loss on sales of other real estate |
(64 | ) | 47 | |||||
Writedown of other real estate |
496 | 1,947 | ||||||
Stock option compensation |
| 15 | ||||||
Change in other assets |
392 | 12,673 | ||||||
Change in other liabilities |
(113 | ) | 70 | |||||
Net cash provided by operating activities |
3,993 | 15,779 | ||||||
Cash Flows From Investing Activities: |
||||||||
Net (increase) decrease in loans |
(14,966 | ) | (6,136 | ) | ||||
Net (increase) decrease in interest-bearing deposits in other financial institutions |
703 | | ||||||
Purchase of securities available for sale |
(12,875 | ) | | |||||
Proceeds from sales, maturities or calls of securities available for sale |
7,843 | 11,277 | ||||||
Capital expenditures |
(527 | ) | (445 | ) | ||||
Redemption of FHLB stock |
363 | | ||||||
Proceeds from sale of premises, equipment, and other real estate |
2,429 | 1,137 | ||||||
Net cash provided by (used in) investing activities |
(17,030 | ) | 5,833 | |||||
Cash Flows From Financing Activities: |
||||||||
Net increase (decrease) in deposits |
12,888 | (15,605 | ) | |||||
Dividend on preferred stock and accretion of discount |
(276 | ) | (275 | ) | ||||
Net cash provided by (used in) financing activities |
12,612 | (15,880 | ) | |||||
Net increase in cash and cash equivalents |
(425 | ) | 5,732 | |||||
Cash and cash equivalents at beginning of period |
34,719 | 45,433 | ||||||
Cash and cash equivalents at end of period |
$ | 34,294 | $ | 51,165 | ||||
Supplemental Cash Flow Information: |
||||||||
Cash paid during the year for: |
||||||||
Interest |
$ | 2,720 | $ | 3,319 | ||||
Income taxes |
50 | 25 | ||||||
Noncash Investing and Financing Activities: |
||||||||
Transfers of foreclosures from loans to other real estate held for sale
(net of adjustments made through the allowance for loan losses) |
2,105 | 3,003 |
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Basis of Presentation | ||
The unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the Corporation) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. 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, 2010. | ||
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 was not changed due to these reclassifications. | ||
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period, and actual results could differ. The allowance for loan losses, foreclosed properties, mortgage servicing rights, income tax expense and fair values of financial instruments are particularly subject to change. | ||
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 also has 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 probable 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. |
5
Table of Contents
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) | |
Stock Option Plans | ||
The Corporation sponsors three stock option plans. One plan was approved during 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 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. All three option plans have expired, and therefore no new shares may be granted. Options to purchase shares of the Corporations stock were granted at a price equal to the market price of the stock at the date of grant. The committee determined the vesting of the options when they were granted as established under the plan. |
2. | RECENT ACCOUNTING PRONOUNCEMENTS | |
In May 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The ASU is intended to improve financial reporting of repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments to the Codification in this ASU are intended to improve the accounting for these transactions by removing them from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets. The guidance in the ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The provisions of this guidance are not expected to have a significant impact on the Corporations consolidated financial condition, results of operation or liquidity. | ||
The FASB has issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term fair value. The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the Codification in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The impact of adoption of this ASU is not expected to be material. | ||
FASB ASU 2011-05, Presentation of Comprehensive Income. In June 2011, the FASB issued ASU 2011-05, which provides entities with the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income, along with a total for other comprehensive income, and a total amount for comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This update should be applied retrospectively effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 As the Corporation currently reports comprehensive income in a single continuous statement with all of the components required by ASU 2011-05, the adoption of this guidance will not have an impact on its consolidated financial statements. |
6
Table of Contents
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. | EARNINGS PER SHARE | |
Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and stock awards were fully vested and resulted in the issuance of common stock that then shared in our earnings, is computed by dividing net income by the weighted average number of common shares outstanding and common stock equivalents, after giving effect for dilutive shares issued. | ||
The following shows the computation of basic and diluted earnings per share for the three and six months ended June 30, 2011 and 2010 (dollars in thousands, except per share data): |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Numerator): |
||||||||||||||||
Net income (loss) |
$ | 795 | $ | (2,302 | ) | $ | 1,240 | $ | 1,409 | |||||||
Preferred stock dividends and accretion of discount |
192 | 186 | 381 | 371 | ||||||||||||
Net income (loss) available to common shareholders |
$ | 603 | $ | (2,488 | ) | $ | 859 | $ | 1,038 | |||||||
(Denominator): |
||||||||||||||||
Weighted average shares outstanding basic |
3,419,736 | 3,419,736 | 3,419,736 | 3,419,736 | ||||||||||||
Dilutive effect of stock options |
| | | | ||||||||||||
Dilutive effect of common stock warrants |
90,074 | | 84,831 | 64,425 | ||||||||||||
Weighted average shares outstanding diluted |
3,509,810 | 3,419,736 | 3,504,567 | 3,484,161 | ||||||||||||
Income per common share: |
||||||||||||||||
Basic |
$ | .18 | $ | (.73 | ) | $ | .25 | $ | .30 | |||||||
Diluted |
$ | .17 | $ | (.73 | ) | $ | .25 | $ | .30 |
4. | INVESTMENT SECURITIES |
The amortized cost and estimated fair value of investment securities available for sale as of
June 30, 2011, December 31, 2010 and June 30, 2010 are as follows (dollars in thousands):
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
June 30, 2011 |
||||||||||||||||
US Agencies |
$ | 10,478 | $ | 157 | $ | | $ | 10,635 | ||||||||
US Agencies MBS |
18,842 | 660 | | 19,502 | ||||||||||||
Obligations of states and political subdivisions |
3,163 | 34 | (17 | ) | 3,180 | |||||||||||
Corporate Bonds |
5,297 | | (1 | ) | 5,296 | |||||||||||
Total securities available for sale |
$ | 37,780 | $ | 851 | $ | (18 | ) | $ | 38,613 | |||||||
December 31, 2010 |
||||||||||||||||
US Agencies |
$ | 5,000 | $ | | $ | (27 | ) | $ | 4,973 | |||||||
US Agencies MBS |
26,787 | 923 | | 27,710 | ||||||||||||
Obligations of states and political subdivisions |
1,146 | 35 | (4 | ) | 1,177 | |||||||||||
Total securities available for sale |
$ | 32,933 | $ | 958 | $ | (31 | ) | $ | 33,860 | |||||||
June 30, 2010 |
||||||||||||||||
US Agencies MBS |
$ | 32,416 | $ | 1,232 | $ | | $ | 33,648 | ||||||||
Obligations of states and political subdivisions |
1,199 | 95 | | 1,294 | ||||||||||||
Total securities available for sale |
$ | 33,615 | $ | 1,327 | $ | | $ | 34,942 | ||||||||
When gross unrealized losses exist within the portfolio, we evaluate whether the loss should be considered other-than-temporary. As of each of the dates reported above, the Corporation considers them temporary in nature and related to interest rate fluctuations. The Corporaiton has both the ability and the intent to hold the investment securities until their respective maturities and therefore does not anticipate the realization of the temporary losses. | ||
The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $11.893 million and $12.429 million, respectively, at June 30, 2011. |
7
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MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. | LOANS | |
The composition of loans at June 30, 2011, December 31, 2010 and June 30, 2010 is as follows (dollars in thousands): |
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
Commercial real estate |
$ | 198,285 | $ | 194,859 | $ | 208,596 | ||||||
Commercial, financial, and agricultural |
84,405 | 68,858 | 66,413 | |||||||||
One to four family residential real estate |
79,013 | 75,074 | 71,613 | |||||||||
Construction: |
||||||||||||
Commercial |
23,062 | 33,330 | 27,219 | |||||||||
Consumer |
4,181 | 5,682 | 6,815 | |||||||||
Consumer |
5,866 | 5,283 | 4,183 | |||||||||
Total loans |
$ | 394,812 | $ | 383,086 | $ | 384,839 | ||||||
An analysis of the allowance for loan losses for the six months ended June 30, 2011, the year ended December 31, 2010, and the six months ended June 30, 2010 is as follows (dollars in thousands): |
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
Balance at beginning of period |
$ | 6,613 | $ | 5,225 | $ | 5,225 | ||||||
Recoveries on loans previously charged off |
21 | 374 | 33 | |||||||||
Loans charged off |
(1,079 | ) | (5,486 | ) | (2,587 | ) | ||||||
Provision for loan losses |
600 | 6,500 | 3,700 | |||||||||
Balance at end of period |
$ | 6,155 | $ | 6,613 | $ | 6,371 | ||||||
In the first half of 2011, net charge off activity was $1.058 million, or .28% of average loans outstanding compared to net charge-offs of $2.554 million, or .67% of average loans, in the same period in 2010. In the first half of 2011, the Corporation recorded a $.600 million provision for loan loss compared to $3.700 million in the first half of 2010. The Corporations allowance for loan loss reserve policy calls for a measurement of the adequacy of the reserve at each quarter end. This process includes an analysis of the loan portfolio to take into account increases in loans outstanding and portfolio composition, historical loss rates, and specific reserve requirements of nonperforming loans. | ||
A breakdown of the allowance for loan losses and recorded balances in loans at June 30, 2011 is as follows (dollars in thousands): |
Commercial, | One to four | |||||||||||||||||||||||||||||||
Commercial | financial and | Commercial | family residential | Consumer | ||||||||||||||||||||||||||||
real estate | agricultural | construction | real estate | construction | Consumer | Unallocated | Total | |||||||||||||||||||||||||
Allowance for loan loss reserve: |
||||||||||||||||||||||||||||||||
Beginning balance ALLR |
$ | 3,460 | $ | 1,018 | $ | 389 | $ | 1,622 | $ | | $ | | $ | 124 | $ | 6,613 | ||||||||||||||||
Charge-offs |
(344 | ) | (407 | ) | (62 | ) | (255 | ) | | (11 | ) | (1,079 | ) | |||||||||||||||||||
Recoveries |
14 | 2 | | | | 5 | | 21 | ||||||||||||||||||||||||
Provision |
(178 | ) | 541 | (64 | ) | 419 | | 6 | (124 | ) | 600 | |||||||||||||||||||||
Ending balance ALLR |
$ | 2,952 | $ | 1,154 | $ | 263 | $ | 1,786 | $ | | $ | | $ | | $ | 6,155 | ||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||
Ending balance |
$ | 198,285 | $ | 84,405 | $ | 23,062 | $ | 79,013 | $ | 4,181 | $ | 5,866 | $ | | $ | 394,812 | ||||||||||||||||
Ending balance ALLR |
(2,952 | ) | (1,154 | ) | (263 | ) | (1,786 | ) | | | | (6,155 | ) | |||||||||||||||||||
Net loans |
$ | 195,333 | $ | 83,251 | $ | 22,799 | $ | 77,227 | $ | 4,181 | $ | 5,866 | $ | | $ | 388,657 | ||||||||||||||||
Ending balance ALLR |
||||||||||||||||||||||||||||||||
Individually evaluated |
$ | 1,144 | $ | 361 | $ | 39 | $ | 845 | $ | | $ | | $ | | $ | 2,389 | ||||||||||||||||
Collectively evaluated |
1,808 | 793 | 224 | 941 | | | | 3,766 | ||||||||||||||||||||||||
Total |
$ | 2,952 | $ | 1,154 | $ | 263 | $ | 1,786 | $ | | $ | | $ | | $ | 6,155 | ||||||||||||||||
8
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MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. | LOANS (Continued) | |
A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2010 is as follows (dollars in thousands): |
Commercial, | One to four | |||||||||||||||||||||||||||||||
Commercial | financial and | Commercial | family residential | Consumer | ||||||||||||||||||||||||||||
real estate | agricultural | construction | real estate | construction Consumer | Unallocated | Total | ||||||||||||||||||||||||||
Allowance for loan loss reserve: |
||||||||||||||||||||||||||||||||
Beginning balance ALLR |
$ | 3,284 | $ | 1,135 | $ | 386 | $ | 23 | $ | | $ | 13 | $ | 384 | $ | 5,225 | ||||||||||||||||
Charge-offs |
(2,426 | ) | (1,804 | ) | (720 | ) | (416 | ) | | (9 | ) | (111 | ) | (5,486 | ) | |||||||||||||||||
Recoveries |
18 | 260 | 67 | | | 15 | 14 | 374 | ||||||||||||||||||||||||
Provision |
2,584 | 1,427 | 656 | 2,015 | | (19 | ) | (163 | ) | 6,500 | ||||||||||||||||||||||
Unallocated assignment |
| | | | | | | | ||||||||||||||||||||||||
Ending balance ALLR |
$ | 3,460 | $ | 1,018 | $ | 389 | $ | 1,622 | $ | | $ | | $ | 124 | $ | 6,613 | ||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||
Ending balance |
$ | 194,859 | $ | 68,858 | $ | 33,330 | $ | 75,074 | $ | 5,682 | $ | 5,283 | $ | | $ | 383,086 | ||||||||||||||||
Ending balance ALLR (3, |
460 | ) | (1,018 | ) | (389 | ) | (1,622 | ) | | | (124 | ) | (6,613 | ) | ||||||||||||||||||
Net loans |
$ | 191,399 | $ | 67,840 | $ | 32,941 | $ | 73,452 | $ | 5,682 | $ | 5,283 | $ | (124 | ) | $ | 376,473 | |||||||||||||||
Ending balance ALLR |
||||||||||||||||||||||||||||||||
Individually evaluated |
$ | 1,601 | $ | 330 | $ | 39 | $ | 696 | $ | | $ | | $ | | $ | 2,666 | ||||||||||||||||
Collectively evaluated |
1,859 | 688 | 350 | 926 | | | 124 | 3,947 | ||||||||||||||||||||||||
Total |
$ | 3,460 | $ | 1,018 | $ | 389 | $ | 1,622 | $ | | $ | | $ | 124 | $ | 6,613 | ||||||||||||||||
As part of the management of the loan portfolio, risk ratings are assigned to all commercial
loans. Through the loan review process, ratings are modified as believed to be appropriate to
reflect changes in the credit. Our ability to manage credit risk depends in large part on our
ability to properly identify and manage problem loans. To do so, we operate a credit risk rating
system under which our credit management personnel assign a credit risk rating to each loan at the
time of origination and review loans on a regular basis to determine each loans credit risk rating
on a scale of 1 through 8, with higher scores indicating higher risk. The credit risk rating
structure used is shown below.
In the context of the credit risk rating structure, the term Classified is defined as a problem
loan which may or may not be in a nonaccrual status, dependent upon current payment status and
collectability.
Excellent (1)
Borrower is not vulnerable to sudden economic or technological changes and is in a non-seasonal
business or industry. These loans generally would be characterized by having good experienced
management and a strong liquidity position with minimal leverage.
Good (2)
Borrower shows limited vulnerability to sudden economic change with modest seasonal effect.
Borrower has above average financial statements and an acceptable repayment history with minimal
leverage and a profitability that exceeds peers.
Average (3)
Generally, a borrower rated as average may be susceptible to unfavorable changes in the economy and
somewhat affected by seasonal factors. Some product lines may be affected by technological change.
Borrowers in this category exhibit stable earnings, with a satisfactory payment history.
Acceptable (4)
The loan is an otherwise acceptable credit that warrants a higher level of administration due to
various underlying weaknesses. These weaknesses, however, have not and may never deteriorate to
the point of a Special Mention rating or Classified status. This rating category may include new
businesses not yet having established a firm performance record.
9
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MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. | LOANS (Continued) |
Special Mention (5)
The loan is not considered as a Classified status, however may exhibit material weaknesses that, if
not corrected, may cause future problems. Borrowers in this category warrant special attention but
have not yet reached the point of concern for loss. The borrower may have deteriorated to the
point that they would have difficulty refinancing elsewhere. Similarly, purchasers of these
businesses would not be eligible for bank financing unless they represent a significantly lessened
credit risk.
Substandard (6)
The loan is Classified and exhibits a number of well-defined weaknesses that jeopardize normal
repayment. The assets are no longer adequately protected due to declining net worth, lack of
earning capacity or insufficient collateral offering the distinct possibility of the loss of a
portion of the loan principal. Loans within this category clearly represent troubled and
deteriorating credit situations requiring constant supervision and an action plan must be developed
and approved by the appropriate officers to mitigate the risk.
Doubtful (7)
Loans in this category exhibit the same weaknesses used to describe the substandard credit;
however, the traits are more pronounced. Loans are frozen with collection improbable. Such loans
are not yet rated as Charge-off because certain actions may yet occur which would salvage the loan.
Charge-off/Loss (8)
Loans in this category are largely uncollectible and should be charged against the loan loss
reserve immediately.
General Reserves:
For loans with a credit risk rating of 5 or better and any loans with a risk rating of 6 or 7 with
no specific reserve, reserves are established based on the type of loan collateral, if any, and the
assigned credit risk rating. Determination of the allowance is inherently subjective as it
requires significant estimates, including the amounts and timing of expected future cash flows on
impaired loans, estimated losses on pools of homogenous loans based on historical loss experience,
and consideration of current environmental factors and economic trends, all of which may be
susceptible to significant change.
Using a historical average loss by loan type as a base, each loan graded as higher risk is assigned
a specific percentage. Within the commercial loan portfolio, the historical loss rates are used
for specific industries such as hospitality, gaming, petroleum, and forestry. The residential real
estate and consumer loan portfolios are assigned a loss percentage as a homogenous group. If,
however, on an individual loan the projected loss based on collateral value and payment histories
are in excess of the computed allowance, the allocation is increased for the higher
anticipated loss. These computations provide the basis for the allowance for loan losses as
recorded by the Corporation.
Below is a breakdown of loans by risk category as of June 30, 2011 (dollars in thousands):
(1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | Rating | ||||||||||||||||||||||||||||||||
Excellent | Good | Average | Acceptable | Sp. Mention | Substandard | Doubtful | Loss | Unassigned | Total | |||||||||||||||||||||||||||||||
Commercial real estate |
$ | 6,223 | $ | 16,963 | $ | 43,625 | $ | 115,724 | $ | 5,109 | $ | 7,934 | $ | 2,576 | $ | | $ | 131 | $ | 198,285 | ||||||||||||||||||||
Commercial, financial
and agricultural |
2,821 | 11,501 | 29,121 | 38,223 | 211 | 2,136 | | | 392 | 84,405 | ||||||||||||||||||||||||||||||
Commercial construction |
514 | 559 | 5,250 | 12,022 | 1,715 | | | | 3,002 | 23,062 | ||||||||||||||||||||||||||||||
One to four family
residential real estate |
| 3,330 | 3,084 | 5,412 | | 3,904 | | | 63,283 | 79,013 | ||||||||||||||||||||||||||||||
Consumer construction |
| | | | | | | | 4,181 | 4,181 | ||||||||||||||||||||||||||||||
Consumer |
| 38 | 87 | 473 | | 27 | | | 5,241 | 5,866 | ||||||||||||||||||||||||||||||
Total loans |
$ | 9,558 | $ | 32,391 | $ | 81,167 | $ | 171,854 | $ | 7,035 | $ | 14,001 | $ | 2,576 | $ | | $ | 76,230 | $ | 394,812 | ||||||||||||||||||||
10
Table of Contents
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. | LOANS (Continued) |
Below is a breakdown of loans by risk category as of December 31, 2010 (dollars in thousands):
(1) | (2) | (3) | (4) | (5) | (6) | (7) | Rating | |||||||||||||||||||||||||||||
Excellent | Good | Average | Acceptable | Sp. Mention | Substandard | Doubtful | Unassigned | Total | ||||||||||||||||||||||||||||
Commercial real estate |
$ | 4,745 | $ | 16,975 | $ | 44,408 | $ | 109,911 | $ | 3,789 | $ | 10,997 | $ | 3,956 | $ | 78 | $ | 194,859 | ||||||||||||||||||
Commercial, financial
and agricultural |
3,726 | 5,275 | 16,466 | 39,844 | 259 | 2,636 | | 652 | 68,858 | |||||||||||||||||||||||||||
Commercial construction |
| 579 | 4,416 | 22,280 | 1,921 | 568 | | 3,566 | 33,330 | |||||||||||||||||||||||||||
One-to-four family
residential real estate |
33 | 3,589 | 3,146 | 4,271 | 1,464 | 3,941 | | 58,630 | 75,074 | |||||||||||||||||||||||||||
Consumer construction |
| | | | | | | 5,682 | 5,682 | |||||||||||||||||||||||||||
Consumer |
| | 34 | 368 | | | | 4,881 | 5,283 | |||||||||||||||||||||||||||
Total loans |
$ | 8,504 | $ | 26,418 | $ | 68,470 | $ | 176,674 | $ | 7,433 | $ | 18,142 | $ | 3,956 | $ | 73,489 | $ | 383,086 | ||||||||||||||||||
The breakdown of loans by risk category for the period ended June 30, 2010 is not available.
This disclosure was not required on June 30, 2010, and the Corporation no longer has this detail
available for historical periods.
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. The interest income recorded during impairment and that which
would have been recognized were $.068 million and $.271 million for the six months ended June 30,
2011. For the six months ended June 30, 2010, the amounts were $7,000 and $.328 million.
The accrual of interest on loans is discontinued when, in managements opinion, the borrower may be
unable to meet payment obligations as they become due, as well as when required by regulatory
provisions. When interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are received in excess
of principal due. Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably assured.
Loans are considered impaired when, based on current information and events, it is probable the
Corporation will be unable to collect all amounts due in accordance with the original contractual
terms of the loan agreement, including scheduled principal and interest payments. Impairment is
evaluated in total for smaller-balance loans of a similar nature and on an individual loans basis
for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary,
so that the loan is reported net, at the present value of estimated future cash flows using the
loans existing rate or at the fair value of collateral if repayment is expected solely from the
collateral. Interest payments on impaired loans are typically applied to principal unless
collectability of the principal amount is reasonably assured, in which case interest is recognized
on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
11
Table of Contents
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. LOANS (Continued)
The following is a summary of impaired loans and their effect on interest income (dollars in
thousands):
Interest Income | Interest Income | |||||||||||||||||||||||
Nonaccrual | Accrual | Average | Related | Recognized | on | |||||||||||||||||||
For the six months ended: | Basis | Basis | Investment | Valuation Reserve | During Impairment | Accrual Basis | ||||||||||||||||||
June 30, 2011 |
||||||||||||||||||||||||
With no valuation reserve: |
||||||||||||||||||||||||
Commercial real estate |
$ | 78 | $ | 600 | $ | 2,726 | $ | | $ | 67 | $ | 14 | ||||||||||||
Commercial, financial and agricultural |
48 | 1,098 | 521 | | | 2 | ||||||||||||||||||
Commercial construction |
| | 327 | | | 11 | ||||||||||||||||||
One to four family residential real estate |
34 | | 33 | | | 2 | ||||||||||||||||||
Consumer construction |
| | 7 | | | | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
With a valuation reserve: |
||||||||||||||||||||||||
Commercial real estate |
$ | 3,038 | $ | | $ | 2,906 | $ | 1,170 | $ | | $ | 87 | ||||||||||||
Commercial, financial and agricultural |
542 | | 862 | 251 | | 33 | ||||||||||||||||||
Commercial construction |
| | | | | | ||||||||||||||||||
One to four family residential real estate |
3,872 | 104 | 3,199 | 834 | 1 | 122 | ||||||||||||||||||
Consumer construction |
| | | | | | ||||||||||||||||||
Consumer |
27 | | 4 | 27 | | | ||||||||||||||||||
Total: |
||||||||||||||||||||||||
Commercial real estate |
$ | 3,116 | $ | 600 | $ | 5,632 | $ | 1,170 | $ | 67 | $ | 101 | ||||||||||||
Commercial, financial and agricultural |
590 | 1,098 | 1,383 | 251 | | 35 | ||||||||||||||||||
Commercial construction |
| | 327 | | | 11 | ||||||||||||||||||
One to four family residential real estate |
3,906 | 104 | 3,232 | 834 | 1 | 124 | ||||||||||||||||||
Consumer construction |
| | 7 | | | | ||||||||||||||||||
Consumer |
27 | | 4 | 27 | | | ||||||||||||||||||
Total |
$ | 7,639 | $ | 1,802 | $ | 10,585 | $ | 2,282 | $ | 68 | $ | 271 | ||||||||||||
For the year ended: |
||||||||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
With no valuation reserve: |
||||||||||||||||||||||||
Commercial real estate |
$ | 960 | $ | | $ | 987 | $ | | $ | | $ | 71 | ||||||||||||
Commercial, financial and agricultural |
51 | | 13 | | | 1 | ||||||||||||||||||
Commercial construction |
458 | | 1,186 | | 11 | 33 | ||||||||||||||||||
One to four family residential real estate |
362 | 105 | 237 | | 1 | 13 | ||||||||||||||||||
Consumer construction |
| | | | | | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
With a valuation reserve: |
||||||||||||||||||||||||
Commercial real estate |
$ | 2,562 | $ | 4,537 | $ | 6,531 | $ | 1,258 | $ | 117 | $ | 306 | ||||||||||||
Commercial, financial and agricultural |
709 | | 1,660 | 279 | | 95 | ||||||||||||||||||
Commercial construction |
| | | | | 21 | ||||||||||||||||||
One to four family residential real estate |
767 | | 730 | 230 | 12 | 39 | ||||||||||||||||||
Consumer construction |
52 | | 52 | 1 | | 4 | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
Total: |
||||||||||||||||||||||||
Commercial real estate |
$ | 3,522 | $ | 4,537 | $ | 7,518 | $ | 1,258 | $ | 117 | $ | 377 | ||||||||||||
Commercial, financial and agricultural |
760 | | 1,673 | 279 | | 96 | ||||||||||||||||||
Commercial construction |
458 | | 1,186 | | 11 | 54 | ||||||||||||||||||
One to four family residential real estate |
1,129 | 105 | 967 | 230 | 13 | 52 | ||||||||||||||||||
Consumer construction |
52 | | 52 | 1 | | 4 | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
Total |
$ | 5,921 | $ | 4,642 | $ | 11,396 | $ | 1,768 | $ | 141 | $ | 583 | ||||||||||||
12
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MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. LOANS (Continued)
Interest Income | Interest Income | |||||||||||||||||||||||
Nonaccrual | Accrual | Average | Related | Recognized | on | |||||||||||||||||||
For the six months ended | Basis | Basis | Investment | Valuation Reserve | During Impairment | Accrual Basis | ||||||||||||||||||
June 30, 2010 |
||||||||||||||||||||||||
With no valuation reserve: |
||||||||||||||||||||||||
Commercial real estate |
$ | 4,326 | $ | 869 | $ | 5,544 | $ | | $ | 7 | $ | 134 | ||||||||||||
Commercial, financial and agricultural |
88 | | 1,291 | | | 45 | ||||||||||||||||||
Commercial construction |
382 | | 458 | | | 13 | ||||||||||||||||||
One to four family residential real estate |
486 | | 371 | | | 13 | ||||||||||||||||||
Consumer construction |
52 | | 52 | | | 2 | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
With a valuation reserve: |
||||||||||||||||||||||||
Commercial real estate |
$ | 2,514 | $ | | $ | 1,754 | $ | 1,135 | $ | | $ | 80 | ||||||||||||
Commercial, financial and agricultural |
1,677 | | 1,780 | 838 | | 24 | ||||||||||||||||||
Commercial construction |
437 | | 437 | 50 | | 16 | ||||||||||||||||||
One to four family residential real estate |
212 | | 30 | | | 1 | ||||||||||||||||||
Consumer construction |
| | | | | | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
Total: |
||||||||||||||||||||||||
Commercial real estate |
$ | 6,840 | $ | 869 | $ | 7,298 | $ | 1,135 | $ | 7 | $ | 214 | ||||||||||||
Commercial, financial and agricultural |
1,765 | | 3,071 | 838 | | 69 | ||||||||||||||||||
Commercial construction |
819 | | 895 | 50 | | 29 | ||||||||||||||||||
One to four family residential real estate |
698 | | 401 | | | 14 | ||||||||||||||||||
Consumer construction |
52 | | 52 | | | 2 | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
Total |
$ | 10,174 | $ | 869 | $ | 11,717 | $ | 2,023 | $ | 7 | $ | 328 | ||||||||||||
A summary of past due loans at June 30, 2011, December 31, 2010 and June 30, 2010 is as
follows (dollars in thousands):
June 30, | December 31, | June 30, | ||||||||||||||||||||||||||||||||||
2011 | 2010 | 2010 | ||||||||||||||||||||||||||||||||||
30-89 days | 90+ days | 30-89 days | 90+ days | 30-89 days | 90+ days | |||||||||||||||||||||||||||||||
Past Due | Past Due/ | Past Due | Past Due/ | Past Due | Past Due/ | |||||||||||||||||||||||||||||||
(accruing) | Nonaccrual | Total | (accruing) | Nonaccrual | Total | (accruing) | Nonaccrual | Total | ||||||||||||||||||||||||||||
Commercial real estate |
$ | 1,473 | $ | 3,101 | $ | 4,574 | $ | 19 | $ | 3,522 | $ | 3,541 | $ | 713 | $ | 6,840 | $ | 7,553 | ||||||||||||||||||
Commercial, financial and agricultural |
62 | 605 | 667 | 382 | 760 | 1,142 | | 1,765 | 1,765 | |||||||||||||||||||||||||||
Commercial construction |
20 | | 20 | | 458 | 458 | | 870 | 870 | |||||||||||||||||||||||||||
One to four family residential real estate |
96 | 3,906 | 4,002 | 923 | 1,129 | 2,052 | 50 | 699 | 749 | |||||||||||||||||||||||||||
Consumer construction |
| | | | 52 | 52 | | | | |||||||||||||||||||||||||||
Consumer |
| 27 | 27 | 20 | | 20 | 1 | | 1 | |||||||||||||||||||||||||||
Total past due loans |
$ | 1,651 | $ | 7,639 | $ | 9,290 | $ | 1,344 | $ | 5,921 | $ | 7,265 | $ | 764 | $ | 10,174 | $ | 10,938 | ||||||||||||||||||
A roll-forward of nonaccrual activity for the first six months ended June 30, 2011 (dollars in
thousands):
For the Six Months Ended June 30, 2011 | ||||||||||||||||||||||||||||
Commercial, | One to four | |||||||||||||||||||||||||||
Commercial | Financial and | Commercial | family residential | Consumer | ||||||||||||||||||||||||
Real Estate | Agricultural | Construction | real estate | Construction | Consumer | Total | ||||||||||||||||||||||
NONACCRUAL |
||||||||||||||||||||||||||||
Beginning balance |
$ | 3,522 | $ | 760 | $ | 458 | $ | 1,129 | $ | 52 | $ | | $ | 5,921 | ||||||||||||||
Principal payments |
(938 | ) | (155 | ) | (14 | ) | (445 | ) | | | (1,552 | ) | ||||||||||||||||
Charge-offs |
(326 | ) | (407 | ) | (62 | ) | (90 | ) | | | (885 | ) | ||||||||||||||||
Advances |
| | | | | | | |||||||||||||||||||||
Class transfers |
| | | | | | | |||||||||||||||||||||
Transfers to OREO |
(989 | ) | | (382 | ) | (332 | ) | (52 | ) | | (1,755 | ) | ||||||||||||||||
Transfers to accruing |
(892 | ) | | | | | | (892 | ) | |||||||||||||||||||
Transfers from accruing |
2,724 | 389 | | 3,631 | | 27 | 6,771 | |||||||||||||||||||||
Other |
15 | 3 | | 13 | | | 31 | |||||||||||||||||||||
Ending balance |
$ | 3,116 | $ | 590 | $ | | $ | 3,906 | $ | | $ | 27 | $ | 7,639 | ||||||||||||||
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MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. LOANS (Continued)
A roll-forward of nonaccrual activity for the first six months ended June 30, 2010 (dollars in
thousands):
For the Six Months Ended June 30, 2010 | ||||||||||||||||||||||||||||
Commercial, | One to four | |||||||||||||||||||||||||||
Commercial | Financial and | Commercial | family residential | Consumer | ||||||||||||||||||||||||
Real Estate | Agricultural | Construction | real estate | Construction | Consumer | Total | ||||||||||||||||||||||
NONACCRUAL |
||||||||||||||||||||||||||||
Beginning balance |
$ | 8,290 | $ | 2,644 | $ | 1,919 | $ | 1,461 | $ | 52 | $ | 2 | $ | 14,368 | ||||||||||||||
Principal payments |
(4,478 | ) | (690 | ) | (83 | ) | (22 | ) | | (2 | ) | (5,275 | ) | |||||||||||||||
Charge-offs |
(1,119 | ) | (751 | ) | (19 | ) | (1,121 | ) | | | (3,010 | ) | ||||||||||||||||
Advances |
| | | | | | | |||||||||||||||||||||
Class transfers |
| | | | | | | |||||||||||||||||||||
Transfers to OREO |
(466 | ) | (102 | ) | (1,003 | ) | (226 | ) | | | (1,797 | ) | ||||||||||||||||
Transfers to accruing |
(55 | ) | | | | | | (55 | ) | |||||||||||||||||||
Transfers from accruing |
4,636 | 662 | | 602 | | | 5,900 | |||||||||||||||||||||
Other |
32 | 2 | 4 | 5 | | | 43 | |||||||||||||||||||||
Ending balance |
$ | 6,840 | $ | 1,765 | $ | 818 | $ | 699 | $ | 52 | $ | | $ | 10,174 | ||||||||||||||
Troubled Debt Restructuring
The Corporation, at June 30, 2011, had loans totaling $1.802 million for which repayment terms
were modified to the extent that they were deemed to be restructured loans. The Corporation
will, in accordance with generally accepted accounting principles and per recently enacted
accounting standard updates, evaluate any loan modifications to determine the fair value impact
of the underlying asset. As of June 30, 2011, this evaluation showed no material impact related
to the current balances of restructured loans.
Insider Loans
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, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
Loans outstanding beginning of period |
$ | 9,532 | $ | 8,552 | $ | 8,552 | ||||||
New loans |
705 | 5,243 | 1,267 | |||||||||
Net activity on revolving lines of credit |
124 | 2,065 | 2,068 | |||||||||
Repayment |
(1,216 | ) | (6,328 | ) | (2,267 | ) | ||||||
Loans outstanding, end of period |
$ | 9,145 | $ | 9,532 | $ | 9,620 | ||||||
There were no loans to related parties classified substandard at June 30, 2011, December 31,
2010 or June 30, 2010, respectively. In addition to the outstanding balances above, there were
unused commitments of $.405 million to related parties at June 30, 2011.
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MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. | BORROWINGS | |
Borrowings consist of the following at June 30, 2011, December 31, 2010 and June 30, 2010 (dollars in thousands): |
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
Federal Home Loan Bank fixed rate advances at a weighted average
rate of 1.73% maturing from December 2011 to January 2016 |
$ | 35,000 | $ | 35,000 | $ | 35,000 | ||||||
USDA Rural Development, fixed-rate note payable, maturing
August 24, 2024, interest payable at 1% |
1,069 | 1,069 | 1,140 | |||||||||
$ | 36,069 | $ | 36,069 | $ | 36,140 | |||||||
The Federal Home Loan Bank borrowings are collateralized at June 30, 2011 by the following: a collateral agreement on the Corporations one to four family residential real estate loans with a book value of approximately $35.718 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $11.589 million and $12.129 million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $3.060 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, 2011. | ||
The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $.165 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 $1.015 million, and guaranteed by the Corporation. |
7. | STOCK OPTION PLANS | |
A summary of stock option transactions for the six months ended June 30, 2011 and 2010, and the year ended December 31, 2010, is as follows: |
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
Outstanding shares at beginning of year |
394,072 | 411,057 | 411,057 | |||||||||
Granted during the period |
| | | |||||||||
Expired/forfeited during the period |
| (16,985 | ) | (1,485 | ) | |||||||
Outstanding shares at end of period |
394,072 | 394,072 | 409,572 | |||||||||
Exercisable shares at end of period |
150,781 | 150,781 | | |||||||||
Weighted average exercise price per share at end of period |
$ | 10.98 | $ | 10.98 | $ | 11.15 | ||||||
Shares available for grant at end of period |
| | | |||||||||
There were no options granted in the first six months of 2011 and 2010. |
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MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. | STOCK OPTION PLANS (Continued) | |
Following is a summary of the options outstanding and exercisable at June 30, 2011: |
Weighted Average | ||||||||||||||||
Exercise | Number | Unvested | Remaining | |||||||||||||
Price | Outstanding | Exercisable | Options | Contractual Life-Years | ||||||||||||
$9.16 |
5,000 | 2,000 | 3,000 | 4.46 | ||||||||||||
$9.75 |
257,152 | 120,861 | 136,291 | 3.46 | ||||||||||||
$10.65 |
50,000 | 10,000 | 40,000 | 5.46 | ||||||||||||
$11.50 |
40,000 | 8,000 | 32,000 | 4.25 | ||||||||||||
$12.00 |
40,000 | 8,000 | 32,000 | 3.96 | ||||||||||||
$156.00 - $185.00 |
1,920 | 1,920 | | .33 | ||||||||||||
394,072 | 150,781 | 243,291 | 3.84 | |||||||||||||
8. | INCOME TAXES | |
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 March 31, 2010 Management evaluated the valuation allowance. An analysis of the deferred tax asset was made to determine the utilization of those tax benefits based upon projected future taxable income. At that time, based upon managements determination and in accordance with the generally accepted accounting principles, that it was more likely than not that a portion of these benefits would be utilized, a $3.500 million valuation adjustment was made as a credit to income tax expense. Among the criteria that management considered in evaluating the deferred tax asset was taxable income for the three most recent taxable years ending December 31, 2009 which totaled $8.2 million. This taxable income allowed the Corporation to utilize NOL carryforwards. | ||
Management assessed the valuation allowance for the second and third quarters of 2010 and determined that no additional adjustment was deemed appropriate. At December 31, 2010, based upon further analysis, and in recognition of the current period operating loss before taxes, management determined that an adjustment to the valuation was appropriate and increased the valuation allowance by $1.364 million with an increase to current tax expense. | ||
Management evaluated the deferred tax valuation allowance as of June 30, 2011 and determined that no adjustment to the valuation was warranted. The Corporation, as of June 30, 2011 had a net operating loss and tax credit carryforwards for tax purposes of approximately $27.0 million, and $2.1 million, respectively. | ||
The Corporation will continue to evaluate the future benefits from these carryforwards and at such time as it became more likely than not that they would be utilized prior to expiration will recognize the additional benefits as an adjustment to the valuation allowance. 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 $17.0 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 $1.400 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. |
16
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MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
in active markets, and other inputs such as interest rates and yield curves that are observable
at commonly quoted intervals.
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.
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MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. FAIR VALUE MEASUREMENTS (Continued)
The following table presents information for financial instruments at June 30, 2011 and December
31, 2010 (dollars in thousands):
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 34,294 | $ | 34,294 | $ | 34,719 | $ | 34,719 | ||||||||
Interest bearing deposits |
10 | 10 | 713 | 713 | ||||||||||||
Securities available for sale |
38,613 | 38,613 | 33,860 | 33,860 | ||||||||||||
Federal Home Loan Bank stock |
3,060 | 3,060 | 3,423 | 3,423 | ||||||||||||
Net loans |
388,657 | 388,814 | 376,473 | 376,713 | ||||||||||||
Accrued interest receivable |
1,326 | 1,326 | 1,155 | 1,155 | ||||||||||||
Total financial assets |
$ | 465,960 | $ | 466,117 | $ | 450,343 | $ | 450,583 | ||||||||
Financial liabilities: |
||||||||||||||||
Deposits |
$ | 399,667 | $ | 400,811 | $ | 386,779 | $ | 387,885 | ||||||||
Borrowings |
36,069 | 35,663 | 36,069 | 36,234 | ||||||||||||
Accrued interest payable |
258 | 258 | 232 | 232 | ||||||||||||
Total financial liabilties |
$ | 435,994 | $ | 436,732 | $ | 423,080 | $ | 424,351 | ||||||||
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 is information about the Corporations assets and liabilities measured at fair
value on a recurring basis at June 30, 2011, 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. |
The fair value of all investment securities at June 30, 2011 and June 30, 2010 were based on
level 2 inputs. There are no other assets or liabilities measured on a recurring basis at fair
value. For additional information regarding investment securities, please refer to Note 4
Investment Securities.
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MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. FAIR VALUE MEASUREMENTS (Continued)
The Corporation had no Level 3 assets or liabilities on a recurring basis as of June 30, 2011,
December 31, 2010 or June 30, 2010.
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.
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, other real
estate 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 | ||||||||||||||||||||||
(dollars in thousands) | in Active Markets | Other Observable | Unobservable | Total Losses for | ||||||||||||||||||||
Balance at | for Identical Assets | Inputs | Inputs | Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, 2011 | (Level 1) | (Level 2) | (Level 3) | June 30, 2011 | June 30, 2011 | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Impaired loans |
$ | 9,441 | $ | | $ | | $ | 9,441 | $ | 449 | $ | 875 | ||||||||||||
Other real estate
owned |
4,806 | | | 4,806 | (35 | ) | 432 | |||||||||||||||||
$ | 414 | $ | 1,307 | |||||||||||||||||||||
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2010 | ||||||||||||||||||||
Quoted Prices | Significant | Significant | ||||||||||||||||||
(dollars in thousands) | in Active Markets | Other Observable | Unobservable | Total Losses for | ||||||||||||||||
Balance at | for Identical Assets | Inputs | Inputs | Year Ended | ||||||||||||||||
December 31, 2010 | (Level 1) | (Level 2) | (Level 3) | December 31, 2010 | ||||||||||||||||
Assets |
||||||||||||||||||||
Impaired loans |
$ | 10,563 | $ | | $ | | $ | 10,563 | $ | 1,666 | ||||||||||
Other real estate
owned |
5,562 | | | 5,562 | 2,753 | |||||||||||||||
$ | 4,419 | |||||||||||||||||||
The Corporation had no investments subject to fair value measurement on a nonrecurring basis.
Impaired loans 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).
10. SHAREHOLDERS EQUITY
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
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MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
The Corporation is considering whether or not to participate in the U.S. Treasurys Small
Business Lending Fund program (SBLF). The Corporation has applied for funding under the SBLF,
but has not yet received approval, nor has the Corporation determined if it will participate if
approved. This SBLF program would allow the Corporation to pay off the TARP preferred and also
requires an injection of capital into the Bank which is dependent upon the amount of the total
SBLF funding less the $11 million of TARP preferred.
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.
20
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MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
Commitments to extend credit: |
||||||||||||
Variable rate |
$ | 23,727 | $ | 18,092 | $ | 22,702 | ||||||
Fixed rate |
11,516 | 13,034 | 9,423 | |||||||||
Standby letters of credit Variable rate |
2,527 | 2,192 | 1,470 | |||||||||
Credit card commitments Fixed rate |
3,094 | 2,737 | 2,694 | |||||||||
$ | 40,864 | $ | 36,055 | $ | 36,289 | |||||||
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, 2011 represents
$59.587 million, or 19.49%, compared to $58.114 million, or 19.56% at December 31, 2010 and
$50.000 million, or 16.54%, of the commercial loan portfolio on June 30, 2010. 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. Additional discussion regarding the concentration of credit risk is presented in the
Managements Discussion and Analysis section of this report.
21
Table of Contents
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 level and volatility of interest rates which may negatively affect the Corporations interest margin; | ||
| 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; | ||
| An increase in the Corporations FDIC insurance premiums, or the collection of special assessments by the FDIC. |
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.
22
Table of Contents
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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, 2010. Throughout this
discussion, the term Bank refers to mBank, the principal banking subsidiary of the Corporation.
FINANCIAL OVERVIEW
The Corporation recorded a second quarter 2011 income available to common shareholders of $.603
million or $.18 per share compared to net loss of $2.488 million, or $.73 per share for the second
quarter of 2010. Net income available to common shareholders for the first six months of 2011
totaled $.859 million, or $.25 per share, compared to $1.038 million, or $.30 per share, for the
same period in 2010.
Weighted average shares totaled 3,419,736 for all periods. The common stock warrants outstanding of
379,310 shares were slightly dilutive, at approximately $.01 per share, for the 2011 second
quarter, as the market value of our stock moved above the $4.35 strike price.
The second quarter results included a provision for loan losses of $.600 million compared to $2.800
million for the same three month period in 2010. Operating results for the three month period in
2011 included a gain of $.035 million on the sale of OREO, compared to $1.845 million in losses in
the 2010 second quarter. Operating results for the first six months of 2011 include the $.600
million loan loss provision and losses on OREO of $.432 million, compared to a 2010 six month loan
loss provision of $3.700 million and OREO losses of $1.993 million. The six months operations for
2010 also include a $3.500 million deferred tax benefit.
The net interest margin for the second quarter of 2011 increased to $4.178 million, or 3.79%,
compared to $4.023 million, of 3.56% in the second quarter of 2010. The six month margin in 2011
was $8.319 million, or 3.85% compared to $8.045 million, or 3.66% in the 2010 six month period.
Total assets of the Corporation at June 30, 2011 were $492.373 million, up by $13.677 million, or
2.86%, from total assets of $478.696 million at December 31, 2010. Asset totals at June 30, 2011
reflect increased balances of investment securities of approximately $4.753 million and increased
loan balances of $11.726 million from December 31, 2010 balances. Deposits totaled $399.667
million at June 30, 2011, an increase from the $386.779 million at December 31, 2010.
FINANCIAL CONDITION
Cash and Cash Equivalents
Cash and cash equivalents decreased $.425 million in 2011. See further discussion of the change in
cash and cash equivalents in the Liquidity section.
Investment Securities
Securities available for sale increased $4.753 million, or 14.04%, from December 31, 2010 to June
30, 2011, with the balance on June 30, 2011, totaling $38.613 million. The Corporation purchased
$12.875 million of investments in the first six months of 2011 and had reductions of $7.843 million
due primarily from maturities and paydowns. Investment securities are utilized in an effort to
manage interest rate risk and liquidity. As of June 30, 2011, investment securities with an
estimated fair value of $12.429 million were pledged.
Loans
Through the first half of 2011, loan balances increased by $11.726 million, or 3.06%, from December
31, 2010 balances of $383.086 million. During the first six months of 2011, the Bank had total
loan production of $72.892 million.
23
Table of Contents
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
This loan production, of $72.892 million, was significantly offset by amortization, paydowns and
payoffs totaling $44.776 million. The loan production was also impacted by secondary market
mortgage loan sales of $11.187 million and the sale of $15.112 million of SBA loans.
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 a diligent 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, 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, 2011, December 31, 2010 and June 30, 2010
(dollars in thousands):
June 30, | Percent of | December 31, | Percent of | June 30, | Percent of | |||||||||||||||||||
2011 | Total | 2010 | Total | 2010 | Total | |||||||||||||||||||
Commercial real estate |
$ | 198,285 | 50.22 | % | $ | 194,859 | 50.87 | % | $ | 208,596 | 54.20 | % | ||||||||||||
Commercial, financial, and agricultural |
84,405 | 21.38 | 68,858 | 17.97 | 66,413 | 17.26 | ||||||||||||||||||
One to four family residential real estate |
79,013 | 20.01 | 75,074 | 19.60 | 71,613 | 18.61 | ||||||||||||||||||
Construction: |
||||||||||||||||||||||||
Commercial |
23,062 | 5.84 | 33,330 | 8.70 | 27,219 | 7.07 | ||||||||||||||||||
Consumer |
4,181 | 1.06 | 5,682 | 1.48 | 6,815 | 1.77 | ||||||||||||||||||
Consumer |
5,866 | 1.49 | 5,283 | 1.38 | 4,183 | 1.09 | ||||||||||||||||||
Total loans |
$ | 394,812 | 100.00 | % | $ | 383,086 | 100.00 | % | $ | 384,839 | 100.00 | % | ||||||||||||
Following is a table showing the significant industry types in the commercial loan portfolio as of
June 30, 2011, December 31, 2010 and June 30, 2010 (dollars in thousands):
June 30, 2011 | December 31, 2010 | June 30, 2010 | ||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||
Real estate operators of nonres bldgs |
$ | 59,587 | 19.49 | % | 108.77 | % | $ | 58,114 | 19.56 | % | 107.85 | % | $ | 50,000 | 16.54 | % | 88.92 | % | ||||||||||||||||||
Hospitality and tourism |
33,467 | 10.94 | 61.09 | 37,737 | 12.70 | 70.04 | 43,883 | 14.52 | 78.04 | |||||||||||||||||||||||||||
Commercial construction |
23,062 | 7.54 | 42.10 | 33,330 | 11.22 | 61.86 | 27,219 | 9.01 | 48.41 | |||||||||||||||||||||||||||
Operators of nonresidential buildings |
16,316 | 5.34 | 29.78 | 16,598 | 5.59 | 30.80 | 14,794 | 4.89 | 26.31 | |||||||||||||||||||||||||||
Real estate agents and managers |
14,909 | 4.88 | 27.21 | 15,857 | 5.34 | 29.43 | 20,727 | 6.86 | 36.86 | |||||||||||||||||||||||||||
Other |
158,411 | 51.81 | 289.16 | 135,411 | 45.59 | 251.31 | 145,605 | 48.18 | 258.94 | |||||||||||||||||||||||||||
Total Commercial Loans |
$ | 305,752 | 100.00 | % | $ | 297,047 | 100.00 | % | $ | 302,228 | 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 tourism 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, 2011. The
current concentration of real estate related loans represents a broad customer base composed of a
high percentage of owner occupied developments.
Our residential real estate portfolio predominantly includes one-to-four family adjustable rate
mortgages that have repricing terms generally from one to three years, construction loans to
individuals and bridge financing loans for qualifying customers. As of June 30, 2011, our
residential loan portfolio totaled $83.194 million, or 21.07% of our total outstanding loans.
The Corporation has also extended credit to governmental units, including Native American
organizations. Tax-exempt loans and leases decreased from $2.471 million at the end of December
31, 2010 to $2.189 million at June 30, 2011. The Corporation has elected to reduce its tax-exempt
portfolio, since it provides no current tax benefit, due to tax net operating loss carryforwards.
Due to the seasonal nature of many of the Corporations commercial loan customers, loan payment
terms provide flexibility by structuring payments to coincide with the customers business cycle.
The lending staff evaluates the collectability of the past due loans based on documented collateral
values and payment history. The Corporation
24
Table of Contents
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
discontinues the accrual of interest on loans when, in the opinion of management, there is an
indication that the borrower may be unable to meet the payments as they become due. Upon such
discontinuance, all unpaid accrued interest is reversed. Loans are returned to accrual status when
all principal and interest amounts contractually due are brought current and future payments are
reasonably assured.
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 six months
ended June 30, 2011 amounted to $1.058 million, or .28% of average loans outstanding, compared to
$2.554 million, .67% of average loans outstanding, for the same period in 2010. 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 table below shows period end balances of nonperforming assets (dollars in thousands):
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
Nonperforming Assets: |
||||||||||||
Nonaccrual Loans |
$ | 7,639 | $ | 5,921 | $ | 10,174 | ||||||
Loans past due 90 days or more |
| | | |||||||||
Restructured loans |
1,802 | 4,642 | 869 | |||||||||
Total nonperforming loans |
9,441 | 10,563 | 11,043 | |||||||||
Other real estate owned |
4,806 | 5,562 | 5,676 | |||||||||
Total nonperforming assets |
$ | 14,247 | $ | 16,125 | $ | 16,719 | ||||||
Nonperforming loans as a % of loans |
2.39 | % | 2.76 | % | 2.87 | % | ||||||
Nonperforming assets as a % of assets |
2.89 | % | 3.37 | % | 3.34 | % | ||||||
Reserve for Loan Losses: |
||||||||||||
At period end |
$ | 6,155 | $ | 6,613 | $ | 6,371 | ||||||
As a % of loans |
1.56 | % | 1.73 | % | 1.66 | % | ||||||
As a % of nonperforming loans |
65.19 | % | 62.61 | % | 57.69 | % | ||||||
As a % of nonaccrual loans |
80.57 | % | 111.69 | % | 62.62 | % | ||||||
Texas ratio* |
23.38 | % | 26.66 | % | 26.71 | % | ||||||
* | calculated by taking total nonperforming assets divided by total equity plus reserve for loan losses |
The following ratios provide additional information relative to the Corporations credit
quality:
At Period End | ||||||||||||
June 30, 2011 | December 31, 2010 | June 30, 2010 | ||||||||||
Total loans, at period end |
$ | 394,812 | $ | 386,086 | $ | 384,839 | ||||||
Average loans for the year |
379,153 | 384,347 | 383,398 | |||||||||
For the Period Ended | ||||||||||||
Six Months Ended | Twelve Months Ended | Six Months Ended | ||||||||||
June 30, 2011 | December 31, 2010 | June 30, 2010 | ||||||||||
Net charge-offs during the period |
$ | 1,058 | $ | 5,112 | $ | 2,554 | ||||||
Net charge-offs to average loans |
.28 | % | 1.33 | % | .67 | % | ||||||
Net charge-offs to beginning allowance balance |
16.00 | % | 97.84 | % | 48.88 | % | ||||||
25
Table of Contents
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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 2010 provided findings similar to management on the overall
adequacy of the reserve. The Corporation has also engaged a consultant for loan review during
2011.
As of June 30, 2011, the allowance for loan losses represented 1.56% of total loans. At June 30,
2011, the allowance included specific reserves in the amount of $2.389 million, as compared to
$2.666 million at December 31, 2010 and $2.023 million at June 30, 2010. 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, 2011 | December 31, 2010 | June 30, 2010 | ||||||||||
Balance at beginning of period |
$ | 5,562 | $ | 5,804 | $ | 5,804 | ||||||
Other real estate transferred from loans due to foreclosure |
2,105 | 5,373 | 3,003 | |||||||||
Other real estate sold |
(2,429 | ) | (2,862 | ) | (1,137 | ) | ||||||
OREO write downs |
(496 | ) | (2,703 | ) | (1,947 | ) | ||||||
Loss on sale of other real estate |
64 | (50 | ) | (47 | ) | |||||||
Balance at end of period |
$ | 4,806 | $ | 5,562 | $ | 5,676 | ||||||
During the first six months of 2011, the Corporation received real estate in lieu of loan payments
of $2.105 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
balances and any additional reductions in the fair value result in a write-down of other real
estate.
Deposits
The Corporation had an increase in deposits in the first six months of 2011. Total deposits
increased by $12.888 million, or 3.33%, in the first six months of 2011. The increase in deposits
for the first six months of 2011 is composed of a decrease in noncore deposits of $26.456 million
and an increase in core deposits of $39.344 million. In 2011, the Corporation continued to
strategically emphasize the growth of core deposits. This strategic initiative was supported with
an individual incentive plan, along with the introduction of several new deposit products and
competitive deposit pricing. 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.
26
Table of Contents
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The following table represents detail of deposits at the end of the periods indicated (dollars in
thousands):
June 30, | December 31, | June 30, | ||||||||||||||||||||||
2011 | % of Total | 2010 | % of Total | 2010 | % of Total | |||||||||||||||||||
Non-interest-bearing |
$ | 49,769 | 12.45 | % | $ | 41,264 | 10.67 | % | $ | 41,434 | 10.21 | % | ||||||||||||
NOW, money market, checking |
149,448 | 37.40 | 134,703 | 34.83 | 118,909 | 29.30 | ||||||||||||||||||
Savings |
16,526 | 4.13 | 17,670 | 4.57 | 20,110 | 4.96 | ||||||||||||||||||
Certificates of Deposit <$100,000 |
114,215 | 28.58 | 96,977 | 25.07 | 90,573 | 22.32 | ||||||||||||||||||
Total core deposits |
329,958 | 82.56 | 290,614 | 75.14 | 271,026 | 66.79 | ||||||||||||||||||
Certificates of Deposit >$100,000 |
23,102 | 5.78 | 22,698 | 5.87 | 23,652 | 5.83 | ||||||||||||||||||
Brokered CDs |
46,607 | 11.66 | 73,467 | 18.99 | 111,106 | 27.38 | ||||||||||||||||||
Total non-core deposits |
69,709 | 17.44 | 96,165 | 24.86 | 134,758 | 33.21 | ||||||||||||||||||
Total deposits |
$ | 399,667 | 100.00 | % | $ | 386,779 | 100.00 | % | $ | 405,784 | 100.00 | % | ||||||||||||
Borrowings
The Corporation also uses FHLB borrowings to provide long-term, stable sources of funds. Current
FHLB borrowings total $35.000 million with stated maturities ranging through January 2016. 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 $.902 million from December 31, 2010 to June 30, 2011.
Contributing to the increase in shareholders equity was net income of $.859 million, a decrease in
the market value of securities of $.062 million and the accretion of the discount on preferred
stock of $.105 million.
RESULTS OF OPERATIONS
Summary
The Corporation reported net income available to common shareholders of $.859 million, or $.25 per
share, in the first half of 2011, compared to $1.038 million, or $.30 per share for the first half
of 2010. In the first half of 2011 a provision for loan losses of $.600 million was booked in
comparison to a provision of $3.700 million in the first half of 2010. Operating results for the
first half of 2010 included the recognition of a $3.500 million deferred tax benefit related to NOL
carry-forwards. This deferred tax benefit was recognized in accordance with accounting principles
generally accepted in the United States of America, which requires the benefit to be recognized
when it is more likely than not that the NOL will be utilized within the carry-forward period.
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 on a fully taxable equivalent basis amounted to $4.201 million, 3.81% of
average earning assets, in the second quarter of 2011, compared to $4.051 million, 3.59% of average
earning assets, in the second quarter of 2010. In the first six months of 2011, net interest
margin increased to $8.367 million, 3.87% of average earning assets, compared to $8.113 million,
3.56% of average earning assets, for the same period in 2010. Margin improvement in 2011 was
primarily due to a reduction in funding costs between periods.
27
Table of Contents
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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 | ||||||||||||||||||||||||||||||||||||||||||||
2011-2010 | ||||||||||||||||||||||||||||||||||||||||||||
Average Balances | Average Rates | Interest | Income/ | Rate/ | ||||||||||||||||||||||||||||||||||||||||
June 30, | Increase/ | June 30, | June 30, | Expense | Volume | Rate | Volume | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2011 | 2010 | (Decrease) | 2011 | 2010 | 2011 | 2010 | Variance | Variance | Variance | Variance | |||||||||||||||||||||||||||||||||
Loans (1,2,3) |
$ | 378,250 | $ | 382,169 | $ | (3,919 | ) | 5.57 | % | 5.56 | % | $ | 5,254 | $ | 5,298 | $ | (44 | ) | $ | (54 | ) | $ | 10 | $ | | |||||||||||||||||||
Taxable securities |
37,248 | 35,291 | 1,957 | 3.14 | 4.05 | 292 | 356 | (64 | ) | 21 | (80 | ) | (5 | ) | ||||||||||||||||||||||||||||||
Nontaxable securities (2) |
849 | 845 | 4 | 4.72 | 5.22 | 10 | 11 | (1 | ) | | (1 | ) | | |||||||||||||||||||||||||||||||
Federal funds sold |
22,286 | 30,308 | (8,022 | ) | .13 | .25 | 7 | 19 | (12 | ) | (5 | ) | (9 | ) | 2 | |||||||||||||||||||||||||||||
Other interest-earning assets |
3,753 | 4,488 | (735 | ) | 2.56 | 1.61 | 24 | 18 | 6 | (3 | ) | 11 | (2 | ) | ||||||||||||||||||||||||||||||
Total earning assets |
442,386 | 453,101 | (10,715 | ) | 5.07 | 5.05 | 5,587 | 5,702 | (115 | ) | (41 | ) | (69 | ) | (5 | ) | ||||||||||||||||||||||||||||
Reserve for loan losses |
(6,135 | ) | (5,159 | ) | (976 | ) | ||||||||||||||||||||||||||||||||||||||
Cash and due from banks |
29,608 | 22,096 | 7,512 | |||||||||||||||||||||||||||||||||||||||||
Fixed Assets |
9,693 | 10,096 | (403 | ) | ||||||||||||||||||||||||||||||||||||||||
Other Real Estate |
4,721 | 7,589 | (2,868 | ) | ||||||||||||||||||||||||||||||||||||||||
Other assets |
14,208 | 15,219 | (1,011 | ) | ||||||||||||||||||||||||||||||||||||||||
Total assets |
$ | 494,481 | $ | 502,942 | $ | (8,461 | ) | |||||||||||||||||||||||||||||||||||||
NOW and money market deposits |
$ | 123,819 | $ | 97,069 | $ | 26,750 | .70 | % | 1.06 | % | $ | 216 | $ | 257 | $ | (41 | ) | $ | 71 | $ | (88 | ) | $ | (24 | ) | |||||||||||||||||||
Interest checking |
25,993 | 17,860 | 8,133 | 1.02 | 1.63 | 66 | 72 | (6 | ) | 33 | (27 | ) | (12 | ) | ||||||||||||||||||||||||||||||
Savings deposits |
17,123 | 20,070 | (2,947 | ) | .23 | .60 | 10 | 30 | (20 | ) | (5 | ) | (18 | ) | 3 | |||||||||||||||||||||||||||||
CDs <$100,000 |
110,175 | 83,241 | 26,934 | 1.85 | 2.10 | 508 | 435 | 73 | 141 | (51 | ) | (17 | ) | |||||||||||||||||||||||||||||||
CDs >$100,000 |
22,569 | 26,101 | (3,532 | ) | 1.69 | 1.68 | 95 | 109 | (14 | ) | (15 | ) | 1 | | ||||||||||||||||||||||||||||||
Brokered deposits |
59,861 | 124,325 | (64,464 | ) | 2.24 | 1.73 | 335 | 536 | (201 | ) | (278 | ) | 160 | (83 | ) | |||||||||||||||||||||||||||||
Borrowings |
36,069 | 36,140 | (71 | ) | 1.73 | 2.35 | 156 | 212 | (56 | ) | | (56 | ) | | ||||||||||||||||||||||||||||||
Total interest-bearing liabilities |
395,609 | 404,806 | (9,197 | ) | 1.41 | 1.64 | 1,386 | 1,651 | (265 | ) | (53 | ) | (79 | ) | (133 | ) | ||||||||||||||||||||||||||||
Demand deposits |
42,009 | 36,784 | 5,225 | |||||||||||||||||||||||||||||||||||||||||
Other liabilities |
2,725 | 3,463 | (738 | ) | ||||||||||||||||||||||||||||||||||||||||
Shareholders equity |
54,138 | 57,889 | (3,751 | ) | ||||||||||||||||||||||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 494,481 | $ | 502,942 | $ | (8,461 | ) | |||||||||||||||||||||||||||||||||||||
Rate spread |
3.66 | % | 3.41 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin/revenue |
3.81 | % | 3.59 | % | $ | 4,201 | $ | 4,051 | $ | 150 | $ | 12 | $ | 10 | $ | 128 | ||||||||||||||||||||||||||||
(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 | ||||||||||||||||||||||||||||||||||||||||||||
2011-2010 | ||||||||||||||||||||||||||||||||||||||||||||
Average Balances | Average Rates | Interest | Income/ | Rate/ | ||||||||||||||||||||||||||||||||||||||||
June 30, | Increase/ | June 30, | June 30, | Expense | Volume | Rate | Volume | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2011 | 2010 | (Decrease) | 2011 | 2010 | 2011 | 2010 | Variance | Variance | Variance | Variance | |||||||||||||||||||||||||||||||||
Loans (1,2,3) |
$ | 379,153 | $ | 383,398 | $ | (4,245 | ) | 5.56 | % | 5.56 | % | $ | 10,454 | $ | 10,579 | $ | (125 | ) | $ | (117 | ) | $ | (8 | ) | $ | | ||||||||||||||||||
Taxable securities |
34,773 | 36,336 | (1,563 | ) | 3.33 | 4.17 | 574 | 752 | (178 | ) | (33 | ) | (152 | ) | 7 | |||||||||||||||||||||||||||||
Nontaxable securities (2) |
852 | 844 | 8 | 4.97 | 5.02 | 21 | 21 | | | | | |||||||||||||||||||||||||||||||||
Federal funds sold |
16,978 | 34,050 | (17,072 | ) | .17 | .25 | 14 | 42 | (28 | ) | (21 | ) | (14 | ) | 7 | |||||||||||||||||||||||||||||
Other interest-earning assets |
3,946 | 4,479 | (533 | ) | 2.56 | 1.58 | 50 | 35 | 15 | (4 | ) | 22 | (3 | ) | ||||||||||||||||||||||||||||||
Total earning assets |
435,702 | 459,107 | (23,405 | ) | 5.14 | 5.02 | 11,113 | 11,429 | (316 | ) | (175 | ) | (152 | ) | 11 | |||||||||||||||||||||||||||||
Reserve for loan losses |
(6,410 | ) | (5,116 | ) | (1,294 | ) | ||||||||||||||||||||||||||||||||||||||
Cash and due from banks |
28,437 | 20,940 | 7,497 | |||||||||||||||||||||||||||||||||||||||||
Fixed Assets |
9,689 | 10,113 | (424 | ) | ||||||||||||||||||||||||||||||||||||||||
Other Real Estate |
4,821 | 6,684 | (1,863 | ) | ||||||||||||||||||||||||||||||||||||||||
Other assets |
14,475 | 13,975 | 500 | |||||||||||||||||||||||||||||||||||||||||
Total assets |
$ | 486,714 | $ | 505,703 | $ | (18,989 | ) | |||||||||||||||||||||||||||||||||||||
NOW and money market deposits |
$ | 121,937 | $ | 92,410 | $ | 29,527 | .74 | % | 1.05 | % | $ | 450 | $ | 481 | $ | (31 | ) | $ | 154 | $ | (140 | ) | $ | (45 | ) | |||||||||||||||||||
Interest checking |
24,918 | 16,674 | 8,244 | 1.10 | 1.67 | 136 | 138 | (2 | ) | 68 | (47 | ) | (23 | ) | ||||||||||||||||||||||||||||||
Savings deposits |
17,430 | 19,229 | (1,799 | ) | .25 | .63 | 22 | 60 | (38 | ) | (5 | ) | (36 | ) | 3 | |||||||||||||||||||||||||||||
CDs <$100,000 |
103,492 | 74,761 | 28,731 | 1.87 | 2.15 | 961 | 797 | 164 | 306 | (103 | ) | (39 | ) | |||||||||||||||||||||||||||||||
CDs >$100,000 |
22,347 | 29,587 | (7,240 | ) | 1.71 | 1.70 | 190 | 249 | (59 | ) | (61 | ) | 3 | (1 | ) | |||||||||||||||||||||||||||||
Brokered deposits |
63,102 | 141,816 | (78,714 | ) | 2.21 | 1.67 | 691 | 1,171 | (480 | ) | (650 | ) | 382 | (212 | ) | |||||||||||||||||||||||||||||
Borrowings |
36,069 | 36,140 | (71 | ) | 1.65 | 2.34 | 296 | 420 | (124 | ) | (1 | ) | (123 | ) | ||||||||||||||||||||||||||||||
Total interest-bearing liabilities |
389,295 | 410,617 | (21,322 | ) | 1.42 | 1.63 | 2,746 | 3,316 | (570 | ) | (189 | ) | (64 | ) | (317 | ) | ||||||||||||||||||||||||||||
Demand deposits |
40,961 | 35,173 | 5,788 | |||||||||||||||||||||||||||||||||||||||||
Other liabilities |
2,453 | 3,407 | (954 | ) | ||||||||||||||||||||||||||||||||||||||||
Shareholders equity |
54,005 | 56,506 | (2,501 | ) | ||||||||||||||||||||||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 486,714 | $ | 505,703 | $ | (18,989 | ) | |||||||||||||||||||||||||||||||||||||
Rate spread |
3.72 | % | 3.39 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin/revenue |
3.87 | % | 3.56 | % | $ | 8,367 | $ | 8,113 | $ | 254 | $ | 14 | $ | (88 | ) | $ | 328 | |||||||||||||||||||||||||||
(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 adjsuted to a tax equivalent basis, using a 34% tax rate | |
(3) | Interet income on loans includes fees |
Throughout 2011 and 2010 there have been no changes to the prime rate. The Corporation, during
this period, repriced all of its brokered deposits along with the majority of its bank time
deposits. This repricing of liabilities is the primary reason for the increased interest margin
from 3.56% in the first six months of 2010 to 3.87% in the first six months of 2011.
28
Table of Contents
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
During this relatively low interest environment, the Corporation has also repriced a significant
portion of its loan portfolio. Management has been diligent when repricing maturing or new loans
in establishing interest rate floors in order to maintain our improved interest rate spread.
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 2011, the Corporation determined through this analysis that a provision for loan loss of
$.600 million was required, compared to a $3.700 million provision in the first six months
of 2010. Impacting the loan loss provision for both six month periods were loans charged off which
totaled $1.078 million in 2011 compared to $2.587 million in 2010. The 2011 six months charge-offs
include $.691 million of loans charged off which were specifically reserved for at 2010 year end.
Other Income
Other income increased by $.525 million for the six months ended June 30, 2011, compared to the six
months ended June 30, 2010. Revenue due to loans produced and sold in the secondary market, along
with the sale of SBA guaranteed loans, amounted to $1.385 million compared to $.625 million a year
ago. We expect to continue to benefit from SBA loan sales and secondary market activity in future
periods. Service fees decreased $.038 million in the first six months of 2011, while other
noninterest income increased $.018 million.
During the second quarter of 2011, the Corporation recognized $1.348 million in other income,
compared to $.593 million for the second quarter of 2010. The increase between periods was
attributed entirely to gains on the sale of SBA and secondary market loans. Service fees decreased
for the second quarter of 2011 by $.033 million to $.219 million when compared to $.252 million in
the second quarter of 2010. 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 other income for the three and six months ended June 30, 2011 and 2010
(dollars in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||||||||
Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||||||||
2011 | 2010 | Dollars | Percentage | 2011 | 2010 | Dollars | Percentage | |||||||||||||||||||||||||
Service fees |
$ | 219 | $ | 252 | $ | (33 | ) | (13.10 | )% | $ | 436 | $ | 474 | $ | (38 | ) | (8.02 | )% | ||||||||||||||
Income from loans sold |
1,070 | 309 | 761 | 246.28 | 1,385 | 625 | 760 | 121.60 | ||||||||||||||||||||||||
Other noninterest income |
59 | 32 | 27 | 84.38 | 104 | 86 | 18 | 20.93 | ||||||||||||||||||||||||
Subtotal |
1,348 | 593 | 755 | 127.32 | 1,925 | 1,185 | 740 | 62.45 | ||||||||||||||||||||||||
Net security gain (loss) |
| | | N/A | | 215 | (215 | ) | N/A | |||||||||||||||||||||||
Total noninterest income |
$ | 1,348 | $ | 593 | $ | 755 | 127.32 | % | $ | 1,925 | $ | 1,400 | $ | 525 | 37.50 | % | ||||||||||||||||
Other Expense
Other expenses decreased by $1.171 million for the six months ended June 30, 2011, compared to the
same period in 2010. Salaries and employee benefits also increased between periods, largely
reflective of annual salary increases along with increased incentive pay related to compensation
plans in place for 2011 that incent employees for core deposit growth. The most significant
decrease in other expense was in the loan and deposit expense category from costs associated with
higher levels of nonperforming assets. During the second quarter of 2011, the Corporation recorded
a gain of $.035 million on OREO properties, as compared to a loss of $1.845 million in the second
quarter of 2010. In the six month period in 2011 OREO losses totaled $.432 million compared to
$1.993 million in the same period in 2010. Management continually reviews all areas of other
expense for cost reduction opportunities that will not impact service quality and employee morale.
29
Table of Contents
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The following table details other expense for the three and six months ended June 30, 2011 and June
30, 2010 (dollars in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||||||||
Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||||||||||
2011 | 2010 | Dollars | Percentage | 2011 | 2010 | Dollars | Percentage | |||||||||||||||||||||||||
Salaries and employee benefits |
$ | 1,806 | $ | 1,781 | $ | 25 | 1.40 | % | $ | 3,630 | $ | 3,501 | $ | 129 | 3.68 | % | ||||||||||||||||
Occupancy |
349 | 345 | 4 | 1.16 | 714 | 690 | 24 | 3.48 | ||||||||||||||||||||||||
Furniture and equipment |
221 | 197 | 24 | 12.18 | 415 | 391 | 24 | 6.14 | ||||||||||||||||||||||||
Data processing |
179 | 205 | (26 | ) | (12.68 | ) | 355 | 394 | (39 | ) | (9.90 | ) | ||||||||||||||||||||
Professional service fees |
232 | 161 | 71 | 44.10 | 385 | 334 | 51 | 15.27 | ||||||||||||||||||||||||
Loan and deposit |
252 | 198 | 54 | 27.27 | 431 | 466 | (35 | ) | (7.51 | ) | ||||||||||||||||||||||
OREO writedowns and (gains) losses on sale |
(35 | ) | 1,845 | (1,880 | ) | (101.90 | ) | 432 | 1,993 | (1,561 | ) | (78.32 | ) | |||||||||||||||||||
FDIC insurance premiums |
255 | 221 | 34 | 15.38 | 540 | 443 | 97 | 21.90 | ||||||||||||||||||||||||
Telephone |
58 | 45 | 13 | 28.89 | 109 | 92 | 17 | 18.48 | ||||||||||||||||||||||||
Advertising |
111 | 72 | 39 | 54.17 | 199 | 144 | 55 | 38.19 | ||||||||||||||||||||||||
Other operating expenses |
301 | 260 | 41 | 15.77 | 578 | 511 | 67 | 13.11 | ||||||||||||||||||||||||
Total noninterest expense |
$ | 3,729 | $ | 5,330 | $ | (1,601 | ) | (30.04 | )% | $ | 7,788 | $ | 8,959 | $ | (1,171 | ) | (13.07 | )% | ||||||||||||||
Federal Income Taxes
Current Federal Tax Provision
In the first six months of 2011, management evaluated the deferred tax benefits associated with the
net operating loss and tax credit carryforwards based upon the Corporations foreseen ability to
utilize the benefits of these carryforwards prior to their expiration. As a part of this analysis,
management considered, among other things, current asset levels and projected loan and deposit
growth, current interest rate spreads and projected net interest income levels, and other income
and expense, along with managements ability to control expenses and the potential for increasing
contributions of noninterest income. Management also considered the impact of nonperforming assets
and future period charge-off activity relative to projected provisions. Based upon the analysis of
projected taxable income and the probability of achieving these projected taxable income levels, no
adjustment to the valuation allowance was deemed necessary.
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, 2011, the Corporation had an NOL carryforward of approximately $27.0
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 $18.0 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.
Subsequent to June 30, 2011, in deference to the loss recorded in the 2011 second quarter, an
analysis of the deferred tax asset was performed in order to determine if there was any impairment
relative to ultimate utilization during the carryforward period. As a part of this analysis,
management reviewed projected levels of taxable income and assessed the probability of attaining
these projected levels. Based upon this analysis, it was determined that there was no impairment
of this deferred tax asset.
30
Table of Contents
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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.
Current balance sheet liquidity consists of $22.294 million in cash and due from balances, $12.000
million in federal funds sold and $26.184 million of unpledged investment securities. The
Corporation has also experienced significant deposit inflows during the first half of 2011.
Management anticipates reducing liquidity levels in future periods through payments of maturing
brokered deposits and funding loan growth.
Late in 2010 and early in 2011, the $35.000 million of FHLB borrowings matured. These borrowings
were refinanced with the FHLB and now carry a weighted average maturity of three years and a
weighted average rate of 1.75%.
During the first half of 2011, the Corporation decreased cash and cash equivalents by $.425
million. As shown on the Corporations condensed consolidated statement of cash flows, liquidity
was impacted by cash used by investing activities, with a net increase in investment securities of
$5.032 million and a net increase in loans of $14.966 million. Offsetting the increases provided
by investing activities were uses in financing activities, with a net decrease in deposits of
$12.888 million. The decrease in deposits was composed of a decrease in brokered deposits of
$26.860 million combined with an increase in bank deposits of $39.748 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 2011, the Corporation will fund anticipated loan
production by reducing current balances of liquidity.
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 completely eliminate the
negative balance of retained earnings through future profits.
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
noncore funding dependence ratio, which explains the degree of reliance on noncore 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. Noncore funding consists of
certificates of deposit greater than $100,000, brokered deposits, and FHLB and Farmers Home
Administration borrowings. At June 30, 2011, the Banks core deposits in relation to total funding
were 75.72% compared to 61.33% at June 30, 2010. These ratios indicated at June 30, 2011, that the
Bank has decreased its reliance on noncore 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, 2011, the Bank
had $15.875 million of unsecured lines available and another $2.500 million available if secured.
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 operating plan for 2011 includes strategies to increase core deposits in the
Corporations local markets. New deposit products and strategic advertising is expected to aid in efforts of
management in growing core deposits which will then reduce the dependency on noncore deposits. The Corporations operating
plan for 2011 calls for augmenting local deposit growth efforts with wholesale CD funding, to the extent necessary.
31
Table of Contents
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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, 2011, the Corporation and Bank were
well capitalized. During the first half of 2011, total capitalization increased by $.902
million.
The following table details sources of capital for the periods indicated (dollars in thousands):
June 30, | December 31, | June 30, | ||||||||||
2011 | 2010 | 2010 | ||||||||||
Capital Structure |
||||||||||||
Shareholders equity |
$ | 54,784 | $ | 53,882 | $ | 56,231 | ||||||
Total capitalization |
$ | 54,784 | $ | 53,882 | $ | 56,231 | ||||||
Tangible capital |
$ | 54,784 | $ | 53,882 | $ | 56,231 | ||||||
Intangible Assets |
||||||||||||
Core deposit premium |
$ | | $ | | $ | | ||||||
Other identifiable intangibles |
| | | |||||||||
Total intangibles |
$ | | $ | | $ | | ||||||
Regulatory capital |
||||||||||||
Tier 1 capital: |
||||||||||||
Shareholders equity |
$ | 54,784 | $ | 53,882 | $ | 56,231 | ||||||
Net unrealized (gains) losses on
available for sale securities |
(550 | ) | (612 | ) | (876 | ) | ||||||
Less: disallowed deferred tax
asset |
(8,100 | ) | (9,028 | ) | (9,200 | ) | ||||||
Less: intangibles |
| | | |||||||||
Total Tier 1 capital |
$ | 46,134 | $ | 44,242 | $ | 46,155 | ||||||
Tier 2 Capital: |
||||||||||||
Allowable reserve for loan losses |
$ | 5,071 | $ | 4,890 | $ | 4,968 | ||||||
Qualifying long-term debt |
| | | |||||||||
Total Tier 2 capital |
5,071 | 4,890 | 4,968 | |||||||||
Total capital |
$ | 51,205 | $ | 49,132 | $ | 51,123 | ||||||
Risk-adjusted assets |
$ | 404,593 | $ | 389,468 | $ | 396,037 | ||||||
Capital ratios: |
||||||||||||
Tier 1 Capital to average assets |
9.50 | % | 9.25 | % | 9.38 | % | ||||||
Tier 1 Capital to risk weighted
assets |
11.40 | % | 11.36 | % | 11.65 | % | ||||||
Total Capital to risk weighted
assets |
12.66 | % | 12.62 | % | 12.91 | % |
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.
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, 2011 |
11.13 | % | 11.13 | % | 9.50 | % | 11.40 | % | 12.66 | % | ||||||||||
June 30, 2010 |
11.23 | % | 11.23 | % | 9.38 | % | 11.65 | % | 12.91 | % | ||||||||||
The Bank: |
||||||||||||||||||||
June 30, 2011 |
10.22 | % | 10.22 | % | 8.51 | % | 10.21 | % | 11.46 | % | ||||||||||
June 30, 2010 |
9.93 | % | 9.93 | % | 7.98 | % | 9.91 | % | 11.16 | % |
32
Table of Contents
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 has established interest rate floors on approximately $165 million, or 73.85% of
its variable rate commercial loans. These interest rate floors will result in a lag on the
repricing of these variable rate loans when and if interest rates increase in future periods.
Approximately $67 million of the floor rate loan balances will reprice with a 100 basis point
increase on the prime rate, with another $96 million repricing in the next 100 basis point prime
rate increase.
The Corporation also has $38.613 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 has $216 million of transactional accounts, of which $50 million consists of
non-interest bearing demand deposit balances. Transaction account balances have increased
significantly in the last year due in part to the Corporations focus on these low costs accounts
by developing new attractive products and increased sales efforts to municipalities, schools and
businesses. These transactional account balances provide additional repricing flexibility in
changing interest rate environments since they have no scheduled maturities and interest rates can
be reset at any time.
Other deposit products have 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.
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MACKINAC FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
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.
The following is the Corporations opportunities at June 30, 2011 (dollars in thousands):
1-90 | 91 - 365 | >1-5 | Over 5 | |||||||||||||||||
Days | Days | Years | Years | Total | ||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||
Loans |
$ | 281,018 | $ | 7,594 | $ | 32,004 | $ | 74,196 | $ | 394,812 | ||||||||||
Securities |
326 | 13,620 | 22,647 | 2,020 | 38,613 | |||||||||||||||
Other (1) |
12,010 | | | 3,060 | 15,070 | |||||||||||||||
Total interest-earning assets |
293,354 | 21,214 | 54,651 | 79,276 | 448,495 | |||||||||||||||
Interest-bearing obligations: |
||||||||||||||||||||
NOW, money market, savings, interest checking |
165,974 | | | | 165,974 | |||||||||||||||
Time deposits |
15,921 | 50,202 | 70,910 | 284 | 137,317 | |||||||||||||||
Brokered CDs |
12,530 | 27,686 | 6,391 | | 46,607 | |||||||||||||||
Borrowings |
| 5,000 | 30,000 | 1,069 | 36,069 | |||||||||||||||
Total interest-bearing obligations |
194,425 | 82,888 | 107,301 | 1,353 | 385,967 | |||||||||||||||
Gap |
$ | 98,929 | $ | (61,674 | ) | $ | (52,650 | ) | $ | 77,923 | $ | 62,528 | ||||||||
Cumulative gap |
$ | 98,929 | $ | 37,255 | $ | (15,395 | ) | $ | 62,528 | |||||||||||
(1) | Includes Federal Home Loan Bank Stock |
The above analysis indicates that at June 30, 2011, the Corporation had a cumulative asset
sensitivity gap position of $37.255 million within the one-year time frame. The Corporations
cumulative asset sensitive gap suggests that if market interest rates continue to decline in the
next twelve months, the Corporation has the potential to decrease 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.
At December 31, 2010, the Corporation had a cumulative liability sensitivity gap position of $1.258
million within the one-year time frame.
The borrowings in the gap analysis include $35.000 million of FHLB advances that were refinanced in
late 2010 and early 2011 to fixed rate advances. These borrowings now have a weighted average
maturity of 3.0 years with a weighted average rate of 1.75%.
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.
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MACKINAC FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
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 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.
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.
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MACKINAC FINANCIAL CORPORATION
ITEM 4 CONTROLS AND PROCEDURES
As of June 30, 2011, we carried out an evaluation, under the supervision and with the participation
of our management, including our principal executive officer and principal financial officers, of
the effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-15 of the Securities Exchange Act of 1934. Our management, which includes our principal
executive officer and our principal financial officer, does not expect that our disclosure controls
and procedures will prevent all errors and all fraud.
A control system, no matter how well conceived and operated, can provide only reasonable, but not
absolute, assurance that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints; additionally, the
benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Corporation have been detected.
These inherent limitations include the realities that judgments in decision making can be faulty,
and that breakdowns can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, but collusion of two or more people, or by
management override of the controls. The design of any system of controls is also based, in part,
upon certain assumptions about the likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated foals under all potential future conditions. Over
time, controls may become inadequate due to changes in conditions; also the degree of compliance
with policies or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Our principal executive officer and principal accounting officer have concluded, based on our
evaluation of our disclosure controls and procedures, that our disclosure controls and procedures,
as defined, under Rule 13a-15 of the Securities Exchange Act of 1934 are effective at the
reasonable assurance levels as of June 30, 2011.
Changes in Internal Control Over Financial Reporting
There were no changes in the Corporations internal control over financial reporting that occurred
during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to
materially affect, the Corporations internal control over financial reporting.
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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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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. |
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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 15, 2011 | 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 financial and accounting officer) |
||||
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