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

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2017

 

OR

 

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

 

For the transition period from <> to <>

 

Commission file number: 0-20167

 

MACKINAC FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

MICHIGAN

 

38-2062816

(State or other jurisdiction of

 

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

incorporation or organization)

 

 

 

 

130 SOUTH CEDAR STREET, MANISTIQUE, MI

 

49854

(Address of principal executive offices)

 

(Zip Code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  ☒     No  ☐

 

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

 

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

 

Large Accelerated Filer  ☐

 

Accelerated Filer  ☐

 

 

 

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

 

Smaller reporting company  ☒

 

Emerging growth company  ☐ 

 

 

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

 

Yes  ☐     No  ☒

 

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

 

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

 

 

 

 

 


 

MACKINAC FINANCIAL CORPORATION

 

INDEX

 

 

 

 

 

 

 

    

Page No.

 

 

 

 

PART I. 

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

 

 

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

 

1

 

 

 

 

 

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

 

2

 

 

 

 

 

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

 

3

 

 

 

 

 

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

 

4

 

 

 

 

 

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

 

5

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

Item 2. 

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

 

26

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

37

 

 

 

 

Item 4. 

Controls and Procedures

 

40

 

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

41

 

 

 

 

Item 6. 

Exhibits and Reports on Form 8-K

 

41

 

 

 

 

SIGNATURES 

 

42

 

 

 

 

 


 

MACKINAC FINANCIAL CORPORATION

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2017

 

2016

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

41,166

 

$

44,620

 

Federal funds sold

 

 

 3

 

 

2,135

 

Cash and cash equivalents

 

 

41,169

 

 

46,755

 

 

 

 

 

 

 

 

 

Interest-bearing deposits in other financial institutions

 

 

13,448

 

 

14,047

 

Securities available for sale

 

 

83,882

 

 

86,273

 

Federal Home Loan Bank stock

 

 

2,719

 

 

2,911

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

Commercial

 

 

552,483

 

 

543,573

 

Mortgage

 

 

215,042

 

 

218,171

 

Consumer

 

 

19,021

 

 

20,113

 

Total Loans

 

 

786,546

 

 

781,857

 

Allowance for loan losses

 

 

(5,146)

 

 

(5,020)

 

Net loans

 

 

781,400

 

 

776,837

 

 

 

 

 

 

 

 

 

Premises and equipment

 

 

15,970

 

 

15,891

 

Other real estate held for sale

 

 

4,466

 

 

4,782

 

Deferred tax asset

 

 

7,651

 

 

8,760

 

Deposit based intangibles

 

 

2,110

 

 

2,172

 

Goodwill

 

 

5,694

 

 

5,694

 

Other assets

 

 

18,126

 

 

19,398

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

976,635

 

$

983,520

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

147,106

 

$

164,179

 

NOW, money market, interest checking

 

 

283,314

 

 

286,622

 

Savings

 

 

61,171

 

 

58,315

 

CDs<$250,000

 

 

141,569

 

 

141,629

 

CDs>$250,000

 

 

8,802

 

 

8,489

 

Brokered

 

 

179,858

 

 

164,278

 

Total deposits

 

 

821,820

 

 

823,512

 

 

 

 

 

 

 

 

 

Federal funds purchased

 

 

3,000

 

 

6,000

 

Borrowings

 

 

66,279

 

 

67,579

 

Other liabilities

 

 

5,527

 

 

7,820

 

Total liabilities

 

 

896,626

 

 

904,911

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

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

 

 

61,683

 

 

61,583

 

Retained earnings

 

 

18,176

 

 

17,206

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

Unrealized (losses) gains on available for sale securities

 

 

228

 

 

(102)

 

Minimum pension liability

 

 

(78)

 

 

(78)

 

Total shareholders’ equity

 

 

80,009

 

 

78,609

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

976,635

 

$

983,520

 

 

1


 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except per Share Data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

    

2016

 

 

 

(Unaudited)

 

INTEREST INCOME:

 

 

 

 

 

 

 

Interest and fees on loans:

 

 

 

 

 

 

 

Taxable

 

$

9,957

 

$

7,960

 

Tax-exempt

 

 

33

 

 

 2

 

Interest on securities:

 

 

 

 

 

 

 

Taxable

 

 

399

 

 

262

 

Tax-exempt

 

 

79

 

 

31

 

Other interest income

 

 

128

 

 

55

 

Total interest income

 

 

10,596

 

 

8,310

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

Deposits

 

 

959

 

 

769

 

Borrowings

 

 

471

 

 

253

 

Total interest expense

 

 

1,430

 

 

1,022

 

 

 

 

 

 

 

 

 

Net interest income

 

 

9,166

 

 

7,288

 

Provision for loan losses

 

 

150

 

 

 —

 

Net interest income after provision for loan losses

 

 

9,016

 

 

7,288

 

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

Deposit service fees

 

 

272

 

 

216

 

Income from mortgage loans sold on the secondary market

 

 

298

 

 

267

 

SBA/USDA loan sale gains

 

 

60

 

 

 —

 

Net mortgage servicing (amortization) income

 

 

(8)

 

 

(54)

 

Net realized security gains

 

 

 —

 

 

97

 

Other

 

 

154

 

 

101

 

Total other income

 

 

776

 

 

627

 

 

 

 

 

 

 

 

 

OTHER EXPENSE:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,797

 

 

3,387

 

Occupancy

 

 

785

 

 

640

 

Furniture and equipment

 

 

481

 

 

383

 

Data processing

 

 

461

 

 

345

 

Advertising

 

 

123

 

 

156

 

Professional service fees

 

 

321

 

 

241

 

Loan origination expenses and deposit and card related fees

 

 

179

 

 

127

 

Writedowns and losses on other real estate held for sale

 

 

12

 

 

16

 

FDIC insurance assessment

 

 

157

 

 

108

 

Telephone

 

 

157

 

 

112

 

Transaction related expenses

 

 

 —

 

 

106

 

Other

 

 

704

 

 

577

 

Total other expenses

 

 

7,177

 

 

6,198

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

2,615

 

 

1,717

 

Provision for  income taxes

 

 

889

 

 

585

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

1,726

 

$

1,132

 

 

 

 

 

 

 

 

 

INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

Basic

 

$

.28

 

$

.18

 

Diluted

 

$

.28

 

$

.18

 

 

 

2


 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,726

 

$

1,132

 

Other comprehensive income

 

 

 

 

 

 

 

Change in securities available for sale:

 

 

 

 

 

 

 

Unrealized gains arising during the period

 

 

500

 

 

424

 

Reclassification adjustment for securities gains included in net income

 

 

 —

 

 

(97)

 

Tax effect

 

 

(170)

 

 

(110)

 

Net change in unrealized gains on available for sale securities

 

 

330

 

 

217

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

2,056

 

$

1,349

 

 

 

3


 

 

 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

Shares of

 

Stock and

 

 

 

Other

 

 

 

 

 

Common

 

Additional

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Paid in Capital

    

Earnings

    

Income (loss)

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

6,263,371

 

$

61,583

 

$

17,206

 

$

(180)

 

$

78,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 —

 

 

 —

 

 

1,726

 

 

 —

 

 

1,726

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 —

 

 

 —

 

 

 —

 

 

330

 

 

330

 

Actuarial loss on defined benefit pension obligation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total comprehensive income

 

 —

 

 

 —

 

 

1,726

 

 

330

 

 

2,056

 

Stock compensation

 

 —

 

 

100

 

 

 —

 

 

 —

 

 

100

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

31,559

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Dividend on common stock

 

 —

 

 

 —

 

 

(756)

 

 

 —

 

 

(756)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

6,294,930

 

$

61,683

 

$

18,176

 

$

150

 

$

80,009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

Shares of

 

Stock and

 

 

 

Other

 

 

 

 

 

Common

 

Additional

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Paid in Capital

    

Earnings

    

Income (Loss)

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

6,217,620

 

$

61,133

 

$

15,221

 

$

248

 

$

76,602

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 —

 

 

 —

 

 

1,132

 

 

 —

 

 

1,132

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 —

 

 

 —

 

 

 —

 

 

217

 

 

217

 

Actuarial loss on defined benefit pension obligation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total comprehensive income

 

 —

 

 

 —

 

 

1,132

 

 

217

 

 

1,349

 

Stock compensation

 

 —

 

 

150

 

 

 —

 

 

 —

 

 

150

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

22,626

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Repurchase of common stock

 

(9,000)

 

 

(99)

 

 

 —

 

 

 —

 

 

(99)

 

Dividend on common stock

 

 —

 

 

 —

 

 

(607)

 

 

 —

 

 

(607)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

6,231,246

 

$

61,184

 

$

15,746

 

$

465

 

$

77,395

 

 

4


 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2017

    

2016

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

1,726

 

$

1,132

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

572

 

 

395

 

Provision for loan losses

 

 

150

 

 

 —

 

Deferred tax expense

 

 

889

 

 

585

 

Gain on sales/calls of securities

 

 

 —

 

 

(97)

 

Gain on sale of loans sold in the secondary market

 

 

(298)

 

 

(228)

 

Origination of loans held for sale in the secondary market

 

 

(15,026)

 

 

(13,802)

 

Proceeds from sale of loans in the secondary market

 

 

15,324

 

 

14,030

 

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

 

 

(4)

 

 

16

 

Writedown of other real estate held for sale

 

 

16

 

 

 —

 

Stock compensation

 

 

100

 

 

150

 

Change in other assets

 

 

1,334

 

 

(513)

 

Change in other liabilities

 

 

(2,293)

 

 

(485)

 

Net cash provided by operating activities

 

 

2,490

 

 

1,183

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Net increase in loans

 

 

(5,099)

 

 

(946)

 

Net decrease in interest bearing deposits in other financial institutions

 

 

599

 

 

100

 

Purchase of securities available for sale

 

 

 —

 

 

(5,225)

 

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

 

 

2,776

 

 

5,238

 

Redemption of FHLBI stock

 

 

192

 

 

 —

 

Capital expenditures

 

 

(536)

 

 

(337)

 

Proceeds from life insurance

 

 

 —

 

 

99

 

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

 

 

740

 

 

247

 

Net cash used in investing activities

 

 

(1,328)

 

 

(824)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net decrease in deposits

 

 

(1,692)

 

 

(17,345)

 

Net activity on line of credit

 

 

(750)

 

 

800

 

(Decrease) increase in fed funds purchased

 

 

(3,000)

 

 

10,000

 

Principal payments on borrowings

 

 

(550)

 

 

(100)

 

Repurchase of common stock

 

 

 —

 

 

(99)

 

Dividend on common stock

 

 

(756)

 

 

(607)

 

Net cash used in financing activities

 

 

(6,748)

 

 

(7,351)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(5,586)

 

 

(6,992)

 

Cash and cash equivalents at beginning of period

 

 

46,755

 

 

25,008

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

41,169

 

$

18,016

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

1,411

 

$

1,013

 

Income taxes

 

 

 —

 

 

50

 

 

 

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

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

 

 

576

 

 

623

 

 

 

5


 

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the “Corporation”) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.  The unaudited consolidated financial statements and footnotes thereto should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

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

 

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

 

Acquired Loans

 

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

 

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

 

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

 

6


 

Allowance for Loan Losses

 

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

 

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

 

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

 

Stock Compensation Plans

 

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

 

2.RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on the recognition of revenue from contracts with customers. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The guidance is effective January 1, 2018 and early adoption is permitted only as of January 1, 2017. In this regard, management has completed a preliminary analysis of the impact of implementation.  The key revenue streams affected by implementation would include service charges and mortgage banking income. The new guidance is not expected to have a significant impact on the Corporation’s financial results. Interest income is outside of the scope of the new standard and will not be impacted upon adoption.

 

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

7


 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

3.EARNINGS PER SHARE

 

Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and stock awards were fully vested and resulted in the issuance of common stock that then shared in our

8


 

earnings, is computed by dividing net income by the weighted average number of common shares outstanding and common stock equivalents, after giving effect for dilutive shares issued.

 

The following shows the computation of basic and diluted earnings per share for the three months ended March 31, 2017 and 2016 (dollars in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2017

    

2016

 

 

 

 

 

 

 

 

 

(Numerator):

 

 

 

 

 

 

 

Net income

 

$

1,726

 

$

1,132

 

 

 

 

 

 

 

 

 

(Denominator):

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

6,270,034

 

 

6,214,083

 

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

 

 

10,343

 

 

13,902

 

Diluted weighted average shares outstanding

 

 

6,280,377

 

 

6,227,985

 

Income per common share:

 

 

 

 

 

 

 

Basic

 

$

.28

 

$

.18

 

Diluted

 

$

.28

 

$

.18

 

 

 

4.INVESTMENT SECURITIES

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

$

19,849

 

$

118

 

$

(15)

 

$

19,952

 

Equity

 

 

500

 

 

 —

 

 

 —

 

 

500

 

US Agencies

 

 

22,991

 

 

77

 

 

(15)

 

 

23,053

 

US Agencies - MBS

 

 

15,903

 

 

64

 

 

(111)

 

 

15,856

 

Obligations of states and political subdivisions

 

 

24,293

 

 

405

 

 

(177)

 

 

24,521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale 

 

$

83,536

 

$

664

 

$

(318)

 

$

83,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

$

19,899

 

$

49

 

$

(38)

 

$

19,910

 

Equity

 

 

500

 

 

 —

 

 

 —

 

 

500

 

US Agencies

 

 

23,991

 

 

47

 

 

(86)

 

 

23,952

 

US Agencies - MBS

 

 

16,980

 

 

48

 

 

(195)

 

 

16,833

 

Obligations of states and political subdivisions

 

 

25,057

 

 

447

 

 

(426)

 

 

25,078

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

86,427

 

$

591

 

$

(745)

 

$

86,273

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $19.902 million and $19.869 million, respectively, at March 31, 2017.

 

9


 

5.LOANS

 

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

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2017

    

2016

    

 

 

 

 

 

 

 

 

Commercial real estate

 

$

397,192

 

$

389,420

 

Commercial, financial, and agricultural

 

 

144,673

 

 

142,648

 

Commercial construction

 

 

10,618

 

 

11,505

 

One to four family residential real estate

 

 

202,654

 

 

205,945

 

Consumer

 

 

19,021

 

 

20,113

 

Consumer construction

 

 

12,388

 

 

12,226

 

 

 

 

 

 

 

 

 

Total loans

 

$

786,546

 

$

781,857

 

 

The Corporation completed the acquisition of Peninsula Financial Corporation (“PFC”) on December 5, 2014, The First National Bank of Eagle River (“Eagle River”) on April 29, 2016 and Niagara Bancorporation (“Niagara”) on August 31, 2016.    The PFC acquired impaired loans totaled $13.290 million, the Eagle River acquired impaired loans totaled $3.401 million, and the Niagara acquired impaired loans totaled $2.105 million.  In the first three months of 2017, the Corporation had positive resolution of acquired nonperforming loans, which resulted in the recognition of $100,000 of accretable interest.  In the first three months of 2016, the Corporation had positive resolution of one PFC acquired nonperforming loan which resulted in the recognition of approximately $96,000 of accretable interest.

 

The table below details the outstanding balances of the PFC acquired portfolio and the fair value adjustments at acquisition date (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Acquired

    

Acquired

    

Acquired

 

 

 

Impaired

 

Non-impaired

 

Total

 

Loans acquired - contractual payments

 

$

13,290

 

$

53,849

 

$

67,139

 

Nonaccretable difference

 

 

(2,234)

 

 

 —

 

 

(2,234)

 

Expected cash flows

 

 

11,056

 

 

53,849

 

 

64,905

 

Accretable yield

 

 

(744)

 

 

(2,100)

 

 

(2,844)

 

Carrying balance at acquisition date

 

$

10,312

 

$

51,749

 

$

62,061

 

 

The table below details the outstanding balances of the Eagle River acquired portfolio and the fair value adjustments at acquisition date (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Acquired

    

Acquired

    

Acquired

 

 

 

Impaired

 

Non-impaired

 

Total

 

Loans acquired - contractual payments

 

$

3,401

 

$

80,737

 

$

84,138

 

Nonaccretable difference

 

 

(1,172)

 

 

 —

 

 

(1,172)

 

Expected cash flows

 

 

2,229

 

 

80,737

 

 

82,966

 

Accretable yield

 

 

(391)

 

 

(1,700)

 

 

(2,091)

 

Carrying balance at acquisition date

 

$

1,838

 

$

79,037

 

$

80,875

 

 

The table below details the outstanding balances of the Niagara acquired portfolio and the fair value adjustments at acquisition date (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Acquired

    

Acquired

    

Acquired

 

 

Impaired

 

Non-impaired

 

Total

Loans acquired - contractual payments

 

$

2,105

 

$

30,555

 

$

32,660

Nonaccretable difference

 

 

(265)

 

 

 —

 

 

(265)

Expected cash flows

 

 

1,840

 

 

30,555

 

 

32,395

Accretable yield

 

 

(88)

 

 

(600)

 

 

(688)

Carrying balance at acquisition date

 

$

1,752

 

$

29,955

 

$

31,707

 

 

 

 

 

 

 

 

 

 

 

10


 

The table below presents a rollforward of the accretable yield on acquired loans for the three months ended March 31, 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PFC

 

 

Eagle River

 

 

Niagara

 

 

    

Acquired

    

Acquired

    

Acquired

    

 

Acquired

    

Acquired

    

Acquired

    

 

Acquired

    

Acquired

    

Acquired

 

 

 

Impaired

 

Non-impaired

 

Total

 

 

Impaired

 

Non-impaired

 

Total

 

 

Impaired

 

Non-impaired

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

$

282

 

$

642

 

$

924

 

 

$

236

 

$

1,221

 

$

1,457

 

 

$

52

 

$

505

 

$

557

 

Accretion

 

 

(100)

 

 

(175)

 

 

(275)

 

 

 

 —

 

 

(179)

 

 

(179)

 

 

 

 —

 

 

(72)

 

 

(72)

 

Reclassification from nonaccretable difference

 

 

57

 

 

 —

 

 

57

 

 

 

 —

 

 

 —

 

 

 —

 

 

 

(8)

 

 

 —

 

 

(8)

 

Balance, March 31, 2017

 

$

239

 

$

467

 

$

706

 

 

$

236

 

$

1,042

 

$

1,278

 

 

$

44

 

$

433

 

$

477

 

 

The table below presents a rollforward of the accretable yield on acquired loans for the three months ended March 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

PFC

 

 

 

Acquired

 

Acquired

 

Acquired

 

 

 

Impaired

 

Non-impaired

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

$

426

 

$

1,342

 

$

1,768

 

Accretion

 

 

 —

 

 

(175)

 

 

(175)

 

Reclassification from nonaccretable difference

 

 

(17)

 

 

 —

 

 

(17)

 

Balance, March 31, 2016

 

$

409

 

$

1,167

 

$

1,576

 

 

Allowance for Loan Losses

 

An analysis of the allowance for loan losses for the three months ended March 31, 2017 and the year ended December 31, 2016 is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

March 31,

 

 

    

2017

    

2016

    

 

 

 

 

 

 

 

 

Balance, January 1

 

$

5,020

 

$

5,004

 

Recoveries on loans previously charged off

 

 

102

 

 

56

 

Loans charged off

 

 

(126)

 

 

(236)

 

Provision

 

 

150

 

 

0

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

5,146

 

$

4,824

 

 

In the first three months of 2017, net charge-offs were $24,000, compared to net charge-offs of $.180 million in the same period in 2016.   In the first three  months of 2017, the Corporation recorded a provision for loan loss of $.150 million compared to no provision in the first three months of 2016.  The Corporation’s allowance for loan loss reserve policy calls for a measurement of the adequacy of the reserve at each quarter end.  This process includes an analysis of the loan portfolio to take into account increases in loans outstanding and portfolio composition, historical loss rates, and specific reserve requirements of nonperforming loans.

 

11


 

A breakdown of the allowance for loan losses and recorded balances in loans at March 31, 2017 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

 

$

1,345

 

$

614

 

$

57

 

$

296

 

$

 6

 

$

90

 

$

2,612

 

$

5,020

 

Charge-offs

 

 

 —

 

 

 —

 

 

 —

 

 

(49)

 

 

 —

 

 

(77)

 

 

 —

 

 

(126)

 

Recoveries

 

 

34

 

 

 1

 

 

 —

 

 

61

 

 

 —

 

 

 6

 

 

 —

 

 

102

 

Provision

 

 

(19)

 

 

35

 

 

38

 

 

(43)

 

 

 1

 

 

(4)

 

 

142

 

 

150

 

Ending balance ALLR

 

$

1,360

 

$

650

 

$

95

 

$

265

 

$

 7

 

$

15

 

$

2,754

 

$

5,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

397,192

 

$

144,673

 

$

10,618

 

$

202,654

 

$

12,388

 

$

19,021

 

$

 —

 

$

786,546

 

Ending balance ALLR

 

 

(1,360)

 

 

(650)

 

 

(95)

 

 

(265)

 

 

(7)

 

 

(15)

 

 

(2,754)

 

 

(5,146)

 

Net loans

 

$

395,832

 

$

144,023

 

$

10,523

 

$

202,389

 

$

12,381

 

$

19,006

 

$

(2,754)

 

$

781,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance ALLR:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

525

 

$

394

 

$

38

 

$

 3

 

$

 —

 

$

 5

 

$

 —

 

$

965

 

Collectively evaluated

 

 

835

 

 

256

 

 

57

 

 

262

 

 

 7

 

 

10

 

 

2,754

 

 

4,181

 

Total

 

$

1,360

 

$

650

 

$

95

 

$

265

 

$

 7

 

$

15

 

$

2,754

 

$

5,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

1,564

 

$

1,464

 

$

382

 

$

403

 

$

 —

 

$

22

 

$

 —

 

$

3,835

 

Collectively evaluated

 

 

392,409

 

 

143,209

 

 

8,228

 

 

202,196

 

 

12,388

 

 

18,996

 

 

 —

 

 

777,426

 

Acquired with deteriorated credit quality

 

 

3,219

 

 

 —

 

 

2,008

 

 

55

 

 

 —

 

 

 3

 

 

 —

 

 

5,285

 

Total

 

$

397,192

 

$

144,673

 

$

10,618

 

$

202,654

 

$

12,388

 

$

19,021

 

$

 —

 

$

786,546

 

 

Impaired loans, by definition, are individually evaluated.

 

A breakdown of the allowance for loan losses and recorded balances in loans at March 31, 2016 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

 

$

1,611

 

$

645

 

$

79

 

$

274

 

$

 7

 

$

64

 

$

2,324

 

$

5,004

 

Charge-offs

 

 

 —

 

 

(185)

 

 

 —

 

 

(39)

 

 

 —

 

 

(12)

 

 

 —

 

 

(236)

 

Recoveries

 

 

 7

 

 

31

 

 

 7

 

 

 1

 

 

 —

 

 

10

 

 

 —

 

 

56

 

Provision

 

 

(3)

 

 

89

 

 

(12)

 

 

21

 

 

 —

 

 

(22)

 

 

(73)

 

 

 —

 

Ending balance ALLR

 

$

1,615

 

$

580

 

$

74

 

$

257

 

$

 7

 

$

40

 

$

2,251

 

$

4,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

317,081

 

$

124,005

 

$

14,489

 

$

135,641

 

$

11,959

 

$

15,450

 

$

 —

 

$

618,625

 

Ending balance ALLR

 

 

(1,615)

 

 

(580)

 

 

(74)

 

 

(257)

 

 

(7)

 

 

(40)

 

 

(2,251)

 

 

(4,824)

 

Net loans

 

$

315,466

 

$

123,425

 

$

14,415

 

$

135,384

 

$

11,952

 

$

15,410

 

$

(2,251)

 

$

613,801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance ALLR:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

533

 

$

185

 

$

 —

 

$

45

 

$

 —

 

$

31

 

$

 —

 

$

794

 

Collectively evaluated

 

 

1,082

 

 

395

 

 

74

 

 

212

 

 

 7

 

 

 9

 

 

2,251

 

 

4,030

 

Total

 

$

1,615

 

$

580

 

$

74

 

$

257

 

$

 7

 

$

40

 

$

2,251

 

$

4,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated

 

$

2,001

 

$

392

 

$

 —

 

$

750

 

$

 —

 

$

36

 

$

 —

 

$

3,179

 

Collectively evaluated

 

 

310,709

 

 

123,436

 

 

14,489

 

 

132,242

 

 

11,957

 

 

15,413

 

 

 —

 

 

608,246

 

Acquired with deteriorated credit quality

 

 

4,371

 

 

177

 

 

 —

 

 

2,649

 

 

 2

 

 

 1

 

 

 —

 

 

7,200

 

Total

 

$

317,081

 

$

124,005

 

$

14,489

 

$

135,641

 

$

11,959

 

$

15,450

 

$

 —

 

$

618,625

 

 

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 loan’s 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.

12


 

 

Strong (1)

 

Borrower is not vulnerable to sudden economic or technological changes.  They have “strong” balance sheets and are within an industry that is very typical for our markets or type of lending culture.  Borrowers also have “strong” financial and cash flow performance and excellent collateral (low loan to value or readily available to liquidate collateral) in conjunction with an impeccable repayment history.

 

Good (2)

 

Borrower shows limited vulnerability to sudden economic change.  These borrowers have “above average” financial and cash flow performance and a very good repayment history.  The balance sheet of the company is also very good as compared to peer and the company is in an industry that is familiar to our markets or our type of lending.  The collateral securing the deal is also very good in terms of its type, loan to value, and other relevant characteristics.

 

Average (3)

 

Borrower is typically a well-seasoned business, however may be susceptible to unfavorable changes in the economy, and could be somewhat affected by seasonal factors.  The borrowers within this category exhibit financial and cash flow performance that appear “average” to “slightly above average” when compared to peer standards and they show an adequate payment history.  Collateral securing this type of credit is good, exhibiting above average loan to values, and other relevant characteristics.

 

Acceptable/Acceptable Watch (4)

 

A borrower within this category exhibits financial and cash flow performance that appear adequate and satisfactory when compared to peer standards and they show a satisfactory payment history.  The collateral securing the request is within supervisory limits and overall is acceptable.  Borrowers rated acceptable could also be newer businesses that are typically susceptible to unfavorable changes in the economy, and more than likely could be affected by seasonal factors.

 

Special Mention (5)

 

The borrower may have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.  Examples of this type of credit include a start-up company fully based on projections, a documentation issue that needs to be corrected or a general market condition that the borrower is working through to get corrected.

 

Substandard (6)

 

Substandard loans are classified assets exhibiting 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 classified as substandard clearly represent troubled and deteriorating credit situations requiring constant supervision.

 

Doubtful (7)

 

Loans in this category exhibit the same, if not more pronounced weaknesses used to describe the substandard credit.  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.

 

13


 

General Reserves:

 

For loans with a credit risk rating of 5 or better and any loans with a risk rating of 6 or 7 not considered impaired, 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. 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 March 31, 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

(4)

    

 

    

 

    

 

    

 

    

 

 

 

 

(1)

 

(2)

 

(3)

 

Acceptable/

 

(5) 

 

(6)  

 

(7)  

 

Rating

 

 

 

 

 

Strong

 

Good

 

Average

 

Acceptable Watch

 

Special Mention

 

Substandard

 

Doubtful

 

Unassigned

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

3,309

 

$

24,533

 

$

149,448

 

$

204,557

 

$

10,582

 

$

4,763

 

$

 —

 

$

 —

 

$

397,192

 

Commercial, financial and agricultural

 

 

10,616

 

 

13,463

 

 

48,226

 

 

68,018

 

 

2,463

 

 

1,887

 

 

 —

 

 

 —

 

 

144,673

 

Commercial construction

 

 

 —

 

 

875

 

 

3,163

 

 

1,961

 

 

756

 

 

382

 

 

 —

 

 

3,481

 

 

10,618

 

One-to-four family residential real estate

 

 

825

 

 

1,367

 

 

3,190

 

 

7,128

 

 

2,798

 

 

4,165

 

 

 —

 

 

183,181

 

 

202,654

 

Consumer construction

 

 

28

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

16

 

 

 —

 

 

12,344

 

 

12,388

 

Consumer

 

 

15

 

 

 —

 

 

14

 

 

39

 

 

12

 

 

59

 

 

 —

 

 

18,882

 

 

19,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

14,793

 

$

40,238

 

$

204,041

 

$

281,703

 

$

16,611

 

$

11,272

 

$

 —

 

$

217,888

 

$

786,546

 

 

Below is a breakdown of loans by risk category as of December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

(4)  

    

 

    

 

    

 

    

 

    

 

 

 

 

(1)

 

(2)

 

(3)

 

Acceptable/

 

(5)

 

(6)

 

(7)

 

Rating

 

 

 

 

 

Strong

 

Good

 

Average

 

Acceptable Watch

 

Special Mention

 

Substandard

 

Doubtful

 

Unassigned

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

3,021

 

$

23,940

 

$

140,618

 

$

216,518

 

$

 

 

$

5,323

 

$

 —

 

$

 —

 

$

389,420

 

Commercial, financial and agricultural

 

 

10,421

 

 

13,434

 

 

49,434

 

 

67,582

 

 

 

 

 

1,777

 

 

 —

 

 

 —

 

 

142,648

 

Commercial construction

 

 

 —

 

 

900

 

 

3,146

 

 

2,660

 

 

 

 

 

385

 

 

 —

 

 

4,414

 

 

11,505

 

One-to-four family residential real estate

 

 

740

 

 

1,373

 

 

3,412

 

 

9,585

 

 

 

 

 

5,493

 

 

 —

 

 

185,342

 

 

205,945

 

Consumer construction

 

 

28

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

17

 

 

 —

 

 

12,181

 

 

12,226

 

Consumer

 

 

20

 

 

 —

 

 

15

 

 

55

 

 

 

 

 

103

 

 

 —

 

 

19,920

 

 

20,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

14,230

 

$

39,647

 

$

196,625

 

$

296,400

 

$

 —

 

$

13,098

 

$

 —

 

$

221,857

 

$

781,857

 

 

14


 

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. 

 

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 loan’s 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.

 

The following is a summary of impaired loans and their effect on interest income (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

    

 

    

QTD

    

 

    

Interest Income

 

 

 

Nonaccrual

 

 

Nonaccrual

 

Accrual

 

Average

 

Related

 

on

 

 

 

Recorded Balance

 

 

Unpaid Balance

 

Basis

 

Investment

 

Valuation Reserve

 

Accrual Basis

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no valuation reserve:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

1,391

 

$

1,834

 

$

2,097

 

$

4,086

 

$

 —

 

$

121

 

Commercial, financial and agricultural

 

 

 9

 

 

 9

 

 

 —

 

 

 9

 

 

 —

 

 

 —

 

Commercial construction

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

One to four family residential real estate

 

 

1,253

 

 

1,607

 

 

1,903

 

 

3,981

 

 

 —

 

 

104

 

Consumer construction

 

 

16

 

 

21

 

 

55

 

 

73

 

 

 —

 

 

 1

 

Consumer

 

 

15

 

 

19

 

 

 3

 

 

52

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With a valuation reserve:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

301

 

$

310

 

$

 —

 

$

302

 

$

50

 

$

 —

 

Commercial, financial and agricultural

 

 

335

 

 

335

 

 

 —

 

 

327

 

 

261

 

 

 —

 

Commercial construction

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

One to four family residential real estate

 

 

386

 

 

387

 

 

 —

 

 

235

 

 

27

 

 

 —

 

Consumer construction

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Consumer

 

 

24

 

 

24

 

 

 —

 

 

12

 

 

11

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

1,692

 

$

2,144

 

$

2,097

 

$

4,388

 

$

50

 

$

121

 

Commercial, financial and agricultural

 

 

344

 

 

344

 

 

 —

 

 

336

 

 

261

 

 

 —

 

Commercial construction

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

One to four family residential real estate

 

 

1,639

 

 

1,994

 

 

1,903

 

 

4,216

 

 

27

 

 

104

 

Consumer construction

 

 

16

 

 

21

 

 

55

 

 

73

 

 

 —

 

 

 1

 

Consumer

 

 

39

 

 

43

 

 

 3

 

 

64

 

 

11

 

 

 —

 

Total

 

$

3,730

 

$

4,546

 

$

4,058

 

$

9,077

 

$

349

 

$

226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

    

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no valuation reserve:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

1,426

 

$

1,891

 

$

3,234

 

$

5,318

 

$

 

$

232

 

Commercial, financial and agricultural

 

 

11

 

 

11

 

 

 —

 

 

116

 

 

 —

 

 

 3

 

Commercial construction

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

One to four family residential real estate

 

 

1,623

 

 

2,198

 

 

2,792

 

 

4,500

 

 

 —

 

 

196

 

Consumer construction

 

 

17

 

 

22

 

 

57

 

 

36

 

 

 —

 

 

 4

 

Consumer

 

 

82

 

 

86

 

 

4

 

 

127

 

 

 —

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With a valuation reserve:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

306

 

$

328

 

$

 —

 

$

103

 

$

50

 

$

 —

 

Commercial, financial and agricultural

 

 

326

 

 

357

 

 

 —

 

 

109

 

 

231

 

 

 —

 

Commercial construction

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

One to four family residential real estate

 

 

333

 

 

333

 

 

 —

 

 

171

 

 

94

 

 

 —

 

Consumer construction

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Consumer

 

 

0

 

 

0

 

 

 —

 

 

5

 

 

5

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

1,732

 

$

2,219

 

$

3,234

 

$

5,421

 

$

50

 

$

232

 

Commercial, financial and agricultural

 

 

337

 

 

368

 

 

 —

 

 

225

 

 

231

 

 

 3

 

Commercial construction

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

One to four family residential real estate

 

 

1,956

 

 

2,531

 

 

2,792

 

 

4,671

 

 

94

 

 

196

 

Consumer construction

 

 

17

 

 

22

 

 

57

 

 

36

 

 

 —

 

 

 4

 

Consumer

 

 

82

 

 

86

 

 

 4

 

 

132

 

 

 5

 

 

 2

 

Total

 

$

4,124

 

$

5,226

 

$

6,087

 

$

10,485

 

$

380

 

$

437

 

 

15


 

A summary of past due loans at March 31, 2017 and December 31, 2016 is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

 

    

30-89 days

    

90+ days

    

 

    

30-89 days

    

90+ days

    

 

    

 

 

Past Due

 

Past Due/

 

 

 

Past Due

 

Past Due/

 

 

 

 

 

(accruing)

 

Nonaccrual

 

Total

 

(accruing)

 

Nonaccrual

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

822

 

$

1,692

 

$

2,514

 

$

942

 

$

1,732

 

$

2,674

 

Commercial, financial and agricultural

 

 

150

 

 

344

 

 

494

 

 

186

 

 

337

 

 

523

 

Commercial construction

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

One to four family residential real estate

 

 

2,206

 

 

1,639

 

 

3,845

 

 

2,113

 

 

1,956

 

 

4,069

 

Consumer construction

 

 

52

 

 

16

 

 

68

 

 

 —

 

 

17

 

 

17

 

Consumer

 

 

71

 

 

39

 

 

110

 

 

133

 

 

82

 

 

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total past due loans

 

$

3,301

 

$

3,730

 

$

7,031

 

$

3,374

 

$

4,124

 

$

7,498

 

 

Troubled Debt Restructuring

 

Troubled debt restructurings (“TDR”) are determined on a loan-by-loan basis.  Generally restructurings are related to interest rate reductions, loan term extensions and short term payment forbearance as means to maximize collectability of troubled credits.  If a portion of the TDR loan is uncollectible (including forgiveness of principal), the uncollectible amount will be charged off against the allowance at the time of the restructuring.  In general, a borrower must make at least six consecutive timely payments before the Corporation would consider a return of a restructured loan to accruing status in accordance with FDIC guidelines regarding restoration of credits to accrual status.

 

The Corporation has, in accordance with generally accepted accounting principles and per recently enacted accounting standard updates, evaluated all loan modifications to determine the fair value impact of the underlying asset.  The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral.

 

There were no troubled debt restructurings that occurred during the three months ended March 31, 2017 or March 31, 2016.

 

Insider Loans

 

The Bank, in the ordinary course of business, grants loans to the Corporation’s 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):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

    

2017

    

2016

    

Loans outstanding, January 1

 

$

9,195

 

$

6,887

 

New loans

 

 

 —

 

 

 —

 

Net activity on revolving lines of credit

 

 

500

 

 

510

 

Repayment

 

 

(313)

 

 

(2,034)

 

 

 

 

 

 

 

 

 

Loans outstanding at end of period

 

$

9,382

 

$

5,363

 

 

There were no loans to related parties classified substandard as of March 31 2017 or March 31, 2016.  In addition to the outstanding balances above, there were unfunded commitments of $91,000 to related parties at March 31, 2017.

 

6.GOODWILL AND OTHER INTANGIBLE ASSETS

 

During the fourth quarter of 2014, the Corporation recorded $3.805 million of goodwill and $1.206 million of deposit based intangible assets associated with the acquisition of PFC.  During 2016, the Corporation recorded $1.839 million of goodwill and $.993 million of deposit based intangible assets associated with the acquisition of Eagle River.  Also in 2016, the Corporation recorded $50,000 of goodwill and $.300 million of deposit based intangible assets associated with the acquisition of Niagara.

 

16


 

The deposit based intangible is reported net of accumulated amortization at $2.110 million at March 31, 2017.  Amortization expense in the first three months of 2017 is $62,000.  Amortization expense for the next five years is expected to be at $.250 million per year.

 

7.SERVICING RIGHTS

 

Mortgage Loans

 

Mortgage servicing rights (“MSRs”) are recorded when loans are sold in the secondary market with servicing retained.  As of March 31, 2017, the Corporation had obligations to service approximately $215.730 million of residential first mortgage loans.  The valuation of MSRs is based upon the net present value of the projected revenues over the expected life of the loans being serviced, as reduced by estimated internal costs to service these loans.  The fair value of the capitalized servicing rights approximates the carrying value. On a quarterly basis, management evaluates the MSRs for impairment. The key economic assumptions used in determining the fair value of the MSRs include an annual constant prepayment speed of 10.74% and a discount rate of 9.59% for March 31, 2017. In 2016, management decided to no longer retain the servicing on mortgage loans sold.

 

The following table summarizes MSRs capitalized and amortized, along with the aggregate activity in related valuation allowances (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

    

2017

    

2016

    

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,573

 

$

1,965

 

Additions from loans sold with servicing retained

 

 

 —

 

 

 —

 

Acquired MSRs

 

 

 —

 

 

 —

 

Amortization

 

 

(141)

 

 

(196)

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

1,432

 

$

1,769

 

Balance of loan servicing portfolio

 

$

215,730

 

$

219,080

 

Mortgage servicing rights as % of portfolio

 

 

.66%

 

 

.81%

 

 

Commercial Loans

 

The Corporation also retains the servicing on certain commercial loans that have been sold.  These loans were originated and underwritten under the SBA and USDA government guarantee programs, in which the guaranteed portion of the loan was sold to a third party with servicing retained.  The balance of these sold loans with servicing retained at March 31 2017 and March 31, 2016 was approximately $55.000 million and $49.500 million, respectively. The Corporation valued these servicing rights at $.132 million as of March 31, 2017 and at $.162 million as of March 31, 2016.  This valuation was established in consideration of the discounted cash flow of net expected servicing income over the life of the loans.

 

8.BORROWINGS

 

Borrowings consist of the following at March 31, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

    

March 31,

 

December 31,

 

 

    

2017

    

2016

    

 

 

 

 

 

 

 

 

Federal Home Loan Bank fixed rate advances

 

$

45,000

 

$

45,000

 

Correspondent bank line of credit

 

 

 —

 

 

750

 

Correspondent bank term note

 

 

20,649

 

 

21,199

 

USDA Rural Development note

 

 

630

 

 

630

 

 

 

 

 

 

 

 

 

 

 

$

66,279

 

$

67,579

 

 

The Federal Home Loan Bank borrowings bear a weighted average of 2.10% and mature in 2017, 2018, 2019 and 2020. They are collateralized at March 31, 2017 by the following:  a collateral agreement on the Corporation’s one to four

17


 

family residential real estate loans with a book value of approximately  $42.506 million; mortgage related and municipal securities with an amortized cost and estimated fair value of  $12.000 million and  $11.991 million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $2.719 million.  Prepayment of the advances is subject to the provisions and conditions of the credit policy of the Federal Home Loan Bank of Indianapolis and the Federal Home Loan Bank of Chicago in effect as of March 31, 2017.

 

The Corporation currently has one banking borrowing relationship.  The relationship consists of a $5.0 million revolving line of credit and a term note. The line of credit bears interest at a rate of LIBOR plus 2.75% and has an initial term that expires on April 30, 2018.  The term note bears the same interest and matures on April 30, 2019 and requires quarterly principal payments of $.550 million beginning March 31, 2017.  This relationship is secured by all of the outstanding mBank stock.  

 

The USDA Rural Development borrowing bears an interest rate of 1.00% and matures in August, 2024. It is collateralized by loans totaling $.108 million originated and held by the Corporation’s wholly owned subsidiary, First Rural Relending, and an assignment of a demand deposit account in the amount of $.593 million, and guaranteed by the Corporation.

 

9.DEFINED BENEFIT PENSION PLAN

 

The Corporation acquired the Peninsula Financial Corporation noncontributory defined benefit pension plan in 2014.  Effective December 31, 2005, the plan was amended to freeze participation in the plan; therefore, no additional employees are eligible to become participants in the plan.  The benefits are based on years of service and the employee’s compensation at the time of retirement.  The Plan was amended effective December 31, 2010, to freeze benefit accrual for all participants.  Expected contributions to the Plan in 2017 are $19,000.

 

The anticipated distributions over the next five years and through December 31, 2026 are detailed in the table below (dollars in thousands):

 

 

 

 

 

 

2017

    

$

128

 

2018

 

 

125

 

2019

 

 

122

 

2020

 

 

121

 

2021

 

 

120

 

2022-2026

 

 

723

 

Total

 

$

1,339

 

 

At March 31, 2017, the plan’s assets had a fair value of $2.049 million and the Corporation had a net unfunded liability of $1.138 million.  The accumulated benefit obligation at March 31, 2017 was $3.187 million.  At March 31, 2016, the plan’s assets had a fair value of $2.033 million and the Corporation had a net unfunded liability of $1.147 million.  The accumulated benefit obligation at March 31, 2016 was $3.180 million.

 

Assumptions in the actuarial valuation are:

 

 

 

 

 

 

 

 

    

2017

    

2016

 

Weighted average discount rate

 

3.78%

 

3.99%

 

Rate of increase in future compensation levels

 

N/A

 

N/A

 

Expected long-term rate of return on plan assets

 

8.00%

 

8.00%

 

 

The expected long-term rate of return on plan assets reflects management’s expectations of long-term average rates of return on funds invested to provide for benefits included in the projected benefit obligation.  The expected return is based on the outlook for inflation, fixed income returns and equity returns, while also considering historical returns, asset allocation and investment strategy.  The discount rate assumption is based on investment yields available on AA rated long-term corporate bonds.

 

The primary investment objective is to maximize growth of the pension plan assets to meet the projected obligations to the beneficiaries over a long period of time, and to do so in a manner that is consistent with the Corporation’s risk

18


 

tolerance.  The intention of the plan sponsor is to invest the plan assets in mutual funds with the following asset allocation; which was in place at both March 31, 2017 and December 31, 2016.

 

 

 

 

 

 

 

 

    

Target

    

Actual

 

 

 

Allocation 

 

Allocation

 

Equity securities

 

50% to 70%

 

60%

 

Fixed income securities

 

30% to 50%

 

40%

 

 

 

10.STOCK COMPENSATION PLANS

 

Restricted Stock Awards

 

The Corporation’s restricted stock awards require certain service-based or performance requirements and have a vesting period of four years.  Compensation expense is recognized on a straight-line basis over the vesting period.  Shares are subject to certain restrictions and risk of forfeiture by the participants.

 

The Corporation has historically granted RSAs to members of the Board of Directors and management. Awards granted are set to vest equally over their award terms and are issued at no cost to the recipient.  The table below summarizes each of the grant awards:

 

 

 

 

 

 

 

 

Date of Award

 

Units Granted

 

Market Value at grant date

 

Vesting Term

March, 2014

 

52,774

 

12.95

 

4 years

March, 2015

 

37,730

 

11.15

 

4 years

May, 2015

 

3,000

 

10.77

 

Immediate

February, 2016

 

35,733

 

9.91

 

4 years

February, 2017

 

28,427

 

13.39

 

4 years

 

On August 31, 2013, 2014, 2015 and 2016, the Corporation issued 37,125 shares of its common stock for vested RSAs, in each year. In March 2015, the Corporation issued 13,194 shares of its common stock for vested RSAs. In May 2015, the Corporation granted 3,000 shares, which were immediately vested and issued.  In March 2016, the Corporation issued 22,626 shares of its common stock for vested RSAs. In the first quarter of 2017, the Corporation issued 31,559 shares of its common stock for vested RSAs.

 

A summary of changes in our nonvested shares for the period follows:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted Average

 

 

 

Number

 

Grant Date

 

 

 

Outstanding

 

Fair Value

 

Nonvested balance at January 1, 2017

 

90,417

 

$

11.19

 

Granted during the quarter

 

28,427

 

 

13.39

 

Vested during the quarter

 

(31,559)

 

 

11.55

 

Nonvested balance at March 31, 2017

 

87,285

 

$

11.78

 

 

 

11.INCOME TAXES

 

The Corporation has reported deferred tax assets of $7.651 million at March 31, 2017. 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.  The Corporation, as of March 31, 2017 had a net operating loss and tax credit carryforwards for tax purposes of approximately $9.1 million, and $2.2 million, respectively.  The Corporation evaluated the future benefits from these carryforwards as of March 31, 2017 and determined that it was “more likely than not” that they would be utilized prior to expiration.  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 and credit carryforwards are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue Code.  The annual limitation is $1.404 million for the NOL and the equivalent value of tax credits, which is approximately $.476 million.  These limitations for use were established in conjunction with the recapitalization of the Corporation in December 2004.  The Corporation will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted.

19


 

 

The Corporation recognized a federal income tax expense of approximately $.889 million for the three months ended March 31, 2017 and $.585 million for the three months ended March 31, 2016. 

 

12.FAIR VALUE MEASUREMENTS

 

Fair value estimates, methods, and assumptions are set forth below for the Corporation’s 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 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 loan’s 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.

 

20


 

The following table presents information for financial instruments at March 31, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

    

Level in Fair

    

Carrying

    

Estimated

    

Carrying

    

Estimated

 

 

 

Value Hierarchy

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

Level 1

 

$

41,169

 

$

41,169

 

$

46,755

 

$

46,755

 

Interest-bearing deposits

 

Level 2

 

 

13,448

 

 

13,448

 

 

14,047

 

 

14,047

 

Securities available for sale

 

Level 2

 

 

82,232

 

 

82,232

 

 

84,623

 

 

84,623

 

Securities available for sale

 

Level 3

 

 

1,650

 

 

1,650

 

 

1,650

 

 

1,650

 

Federal Home Loan Bank stock

 

Level 2

 

 

2,719

 

 

2,719

 

 

2,911

 

 

2,911

 

Net loans

 

Level 3

 

 

781,400

 

 

780,377

 

 

776,837

 

 

778,377

 

Accrued interest receivable

 

Level 3

 

 

2,026

 

 

2,026

 

 

2,016

 

 

2,016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financial assets

 

 

 

$

924,644

 

$

923,621

 

$

928,839

 

$

930,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

Level 2

 

$

821,820

 

$

814,259

 

$

823,512

 

$

815,960

 

Borrowings

 

Level 2

 

 

66,279

 

 

66,853

 

 

67,579

 

 

68,293

 

Accrued interest payable

 

Level 3

 

 

287

 

 

287

 

 

267

 

 

267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financial liabilities

 

 

 

$

888,386

 

$

881,399

 

$

891,358

 

$

884,520

 

 

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 Corporation’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Corporation’s 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 Corporation’s assets and liabilities measured at fair value on a recurring basis at March 31, 2017, 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 March 31, 2017 and December 31, 2016 were based on level 2 and level 3 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.”

 

21


 

The table below shows investment securities measured at fair value on a recurring basis (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices

 

Significant

 

Significant

 

Total (Gains)

 

 

 

 

 

in Active Markets

 

Other Observable

 

Unobservable

 

Losses for

 

 

Balance at

 

for Identical Assets

 

Inputs

 

Inputs

 

Three Months Ended

(dollars in thousands) 

    

March 31,  2017

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

March 31, 2017

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

$

19,952

 

$

 —

 

$

19,952

 

$

 —

 

$

 —

Equity

 

 

500

 

 

 —

 

 

 —

 

 

500

 

 

 —

US Agencies

 

 

23,053

 

 

 —

 

 

23,053

 

 

 —

 

 

 —

US Agencies - MBS

 

 

15,856

 

 

 —

 

 

14,706

 

 

1,150

 

 

 —

Obligations of state and political subdivisions

 

 

24,521

 

 

 —

 

 

24,521

 

 

 —

 

 

 —

 

 

$

83,882

 

 

 

 

 

 

 

 

 

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Quoted Prices

    

Significant

    

Significant

    

 

 

 

 

 

 

 

in Active Markets

 

Other Observable

 

Unobservable

 

Total Losses for

 

 

Balance at

 

for Identical Assets

 

Inputs

 

Inputs

 

Twelve months ended

(dollars in thousands)

 

December 31, 2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

December 31, 2016

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

$

19,910

 

$

 —

 

$

19,910

 

$

 —

 

$

 —

Equity

 

 

500

 

 

 —

 

 

 —

 

 

500

 

 

 —

US Agencies

 

 

23,952

 

 

 —

 

 

23,952

 

 

 —

 

 

 —

US Agencies - MBS

 

 

16,833

 

 

 —

 

 

15,683

 

 

1,150

 

 

 —

Obligations of state and political subdivisions

 

 

25,078

 

 

 —

 

 

25,078

 

 

 —

 

 

 —

 

 

$

86,273

 

 

 

 

 

 

 

 

 

 

$

 —

 

The Corporation had no Level 3 assets or liabilities measured at fair value on a recurring basis as of March 31, 2017, or December 31, 2016 other than as described above.

 

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 Corporation’s 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 certain impaired loans and other real estate owned.  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 at March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices

 

Significant

 

Significant

 

Total (Gains)

 

 

 

 

 

in Active Markets

 

Other Observable

 

Unobservable

 

Losses for

 

 

Balance at

 

for Identical Assets

 

Inputs

 

Inputs

 

Three Months Ended

(dollars in thousands) 

    

March 31, 2017

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

March 31, 2017

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans 

 

$

7,788

 

$

 —

 

$

 —

 

$

7,788

 

$

37

Other real estate owned 

 

 

4,466

 

 

 —

 

 

 —

 

 

4,466

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

49

 

22


 

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Quoted Prices

    

Significant

    

Significant

    

 

 

 

 

 

 

 

in Active Markets

 

Other Observable

 

Unobservable

 

Total Losses for

 

 

Balance at

 

for Identical Assets

 

Inputs

 

Inputs

 

Twelve months ended

(dollars in thousands)

 

December 31, 2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

December 31, 2016

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

9,856

 

$

 —

 

$

 —

 

$

9,856

 

$

643

Other real estate held for sale

 

 

4,782

 

 

 —

 

 

 —

 

 

4,782

 

 

202

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

845

 

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 management’s 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).

 

13.SHAREHOLDERS’ EQUITY

 

The Corporation currently has a share repurchase program.  The program is conducted under authorizations by the Board of Directors.  The Corporation repurchased 14,000 shares in 2016, 102,455 shares in 2015, 13,700 shares in 2014 and 55,594 shares in 2013.  The share repurchases were conducted under Board authorizations made and publically announced of $.600 million on February 27, 2013, $.600 million on December 17, 2013 and an additional $.750 million on April 28, 2015.  None of these authorizations has an expiration date.  As of March 31, 2017, $26,000 of the total authorization was available for future purchases.

 

14.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.

 

The Corporation’s 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):

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2017

    

2016

    

Commitments to extend credit:

 

 

 

 

 

 

 

Variable rate

 

$

60,204

 

$

59,496

 

Fixed rate

 

 

27,407

 

 

28,737

 

Standby letters of credit - Variable rate

 

 

7,926

 

 

8,252

 

Credit card commitments - Fixed rate

 

 

5,677

 

 

5,533

 

 

 

 

 

 

 

 

 

 

 

$

101,214

 

$

102,018

 

 

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 customer’s 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 management’s credit evaluation of the party.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

 

23


 

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 Corporation’s subsidiary and serviced by other companies.  These commitments are unsecured.

 

Legal Proceedings and Contingencies

 

In the normal course of business, the Corporation is involved in various legal proceedings.  For expanded discussion on the Corporation’s 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 Bank’s most prominent concentration in the loan portfolio relates to commercial real estate loans to operators of nonresidential buildings.  This concentration at March 31, 2017 represents $114.650 million, or  20.75%, compared to  $121.861 million, or 22.42%, of the commercial loan portfolio on December 31, 2016.  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 Bank’s locations, the ability of debtors of residential and consumer loans to honor their obligations is not tied to any particular economic sector.

 

15.  BUSINESS COMBINATIONS

 

The First National Bank of Eagle River

 

The Corporation completed its acquisition of The First National Bank of Eagle River (“Eagle River”) in April 2016.  Eagle River had three branch offices and approximately $125 million in assets as of April 29, 2016, including total loans of $84 million and total deposits of $105 million. The results of operations due to the merger have been included in the Corporation’s results since the acquisition date.  The merger was effected by a cash payment of $12.500 million. The Corporation recorded a $.933 million core deposit intangible asset and $1.839 million of goodwill in conjunction with the acquisition. Goodwill was recorded due to the synergies and economies of scale expected from combining operations of the Corporation with Eagle River.

 

Niagara Bancorporation

 

The Corporation completed its acquisition of Niagara Bancorporation, Inc. (“Niagara”) in August 2016.  Niagara had four branch offices and approximately $67 million in assets as of August 31, 2016 including total loans of $33 million and total deposits of $59 million. The results of operations due to the merger have been included in the Corporation’s results since the acquisition date. The merger was effected by a cash payment of $7.325 million. The corporation recorded a $.300 million core deposit intangible asset and $50,000 of goodwill in conjunction with the acquisition. Goodwill was recorded due to the synergies and economies of scale expected from combining operations of the Corporation with Niagara.

 

Forward Looking Statements/Risk Factors

 

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 Corporation’s 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:

 

24


 

RISK FACTORS

 

Risks Related to our Lending and Credit Activities

 

·

Our business may be adversely affected by conditions in the financial markets and economic conditions generally, as our borrowers’ ability to repay loans and the value of the collateral securing our loans decline.

 

·

Weakness in the markets for residential or commercial real estate, including the secondary residential mortgage loan markets, could reduce our net income and profitability.

 

·

As a community banking organization, the Corporation’s success depends upon local and regional economic conditions and has different lending risks than larger banks.

 

We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries and through loan approval and review procedures.  We have established an evaluation process designed to determine the adequacy of our allowance for loan losses.  While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is estimated based on experience, judgment and expectations regarding borrowers and economic conditions, as well as regulator judgments.  We can make no assurance that our loan loss reserves will be sufficient to absorb future loan losses or prevent a material adverse effect on our business, profitability or financial condition.

 

·

Our allowance for loan losses may be insufficient.

 

Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our control, may require an increase in our allowance for loan losses.

 

Risks Related to Our Operations

 

·

We are subject to interest rate risk.

 

Our earnings and cash flows are largely dependent upon our net interest income, which is the difference between interest income on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds.  There are many factors which influence interest rates that are beyond our control, including but not limited to general economic conditions and governmental policy, in particular, the policies of the FRB.

 

·

Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition.

 

·

We may not realize the expected benefits of our recent acquisitions of The First National Bank of Eagle River and Niagara Bancorporation, Inc.

 

·

Our controls and procedures may fail or be circumvented.

 

·

Impairment of deferred income tax assets could require charges to earnings, which could result in an adverse impact on our results of operations.

 

In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some allowance requires management to evaluate all available evidence, both negative and positive.  Positive evidence necessary to overcome the negative evidence includes whether future taxable income in sufficient amounts and character within the carry back and carry forward periods is available under the tax law, including the use of tax planning strategies.  When negative evidence (e.g. cumulative losses in recent years, history of operating loss or tax credit carry forwards expiring unused) exists, more positive evidence than negative evidence will be necessary.  At March 31, 2017, net deferred tax assets were approximately $7.651 million.  If a valuation allowance becomes necessary with respect to such balance, it could have a material adverse effect on our business, results of operations and financial condition.

25


 

 

·

Our information systems may experience an interruption of breach in security.

 

Risks Related to Legal and Regulatory Compliance

 

·

We operate in a highly regulated environment, which could increase our cost structure or have other negative impacts on our operations.

 

Strategic Risks

 

·

Maintaining or increasing our market share may depend on lowering prices and market acceptance of new products and services.

 

·

Future growth or operating results may require us to raise additional capital but that capital may not be available.

 

Reputation Risks

 

·

Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of our computer system or otherwise, could severely harm our business.

 

Liquidity Risks

 

·

We could experience an unexpected inability to obtain needed liquidity.

 

The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds.  We seek to ensure our funding needs are met by maintaining an appropriate level of liquidity through asset/liability management.

 

Risks Related to an Investment in Our Common Stock

 

·

Limited trading activity for shares of our common stock may contribute to price volatility.

 

·

Our securities are not an insured deposit.

 

·

You may not receive dividends on your investment in common stock.

 

Our ability to pay dividends is dependent upon our receipt of dividends from the Bank, which is subject to regulatory restrictions.  Such restrictions, which govern state-chartered banks, generally limit the payment of dividends on bank stock to the bank’s undivided profits after all payments of all necessary expenses, provided that the bank’s surplus equals or exceeds its capital.

 

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 Corporation’s financial results, is included in the Corporation’s 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.

 

MACKINAC FINANCIAL CORPORATION

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion covers 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, the related notes, and other supplemental information presented elsewhere in this report.  It should be noted that there are non-GAAP disclosures presented within this discussion to further assist readers in their analysis of the financial condition of the

26


 

Corporation.  These disclosures are specifically noted where present.  This discussion should also be read in conjunction with the consolidated financial statements and footnotes contained in the Corporation’s Annual Report and Form 10-K for the year-ended December 31, 2016.  Throughout this discussion and elsewhere in this report, the term “Bank” refers to mBank, the principal banking subsidiary of the Corporation.

 

FINANCIAL OVERVIEW

 

The Corporation recorded first quarter 2017 net income of $1.726 million, or $.28 per share, compared to net income available to common shareholders of $1.132 million, or $.18 per share for the first quarter of 2016.

 

Weighted average shares for the three month period in 2017 totaled 6,270,034, compared to 6,214,083 shares in the same period of 2016. 

 

The net interest margin for the first quarter of 2017 was $9.166 million, or 4.19%, compared to $7.288 million, or 4.33% in the first quarter of 2016. 

 

Total assets of the Corporation at March 31, 2017 were $976.635 million, down by $6.885 million, or 0.70%, from the $983.520 million in total assets reported at year-end 2016.

 

FINANCIAL CONDITION

 

Cash and Cash Equivalents

 

Cash and cash equivalents decreased $5.586 million during the first three months of 2017, when compared to 2016 year end.  See further discussion of the change in cash and cash equivalents in the Liquidity section.

 

Investment Securities

 

Securities available for sale decreased $2.391 million from December 31, 2016 to March 31, 2017, with the balance on March 31, 2017 totaling $83.882 million.  Investment securities are utilized in an effort to manage interest rate risk and liquidity.  As of March 31, 2017, investment securities with an estimated fair value of $19.869 million were pledged against borrowings at the FHLB and certain customer relationships.

 

Loans

 

Through the first three months of 2017, loan balances increased by $4.689 million from December 31, 2016 balances of $781.857 million.  During the first three months of 2017, the Bank had total loan production of $52.6 million, which included $15.0 million of secondary market loan production.  This loan production, however, was offset by loan amortization and pay-offs.

 

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. The Corporation is highly competitive in structuring loans to meet borrowing needs and satisfy strong underwriting requirements.

 

27


 

Following is a summary of the loan portfolio at March 31, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

Percent of

 

December 31,

 

Percent of

 

 

    

2017

    

Total

    

2016

    

Total

    

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

397,192

 

50.50%

 

$

389,420

 

49.81%

 

Commercial, financial, and agricultural

 

 

144,673

 

18.39

 

 

142,648

 

18.24

 

One to four family residential real estate

 

 

202,654

 

25.77

 

 

205,945

 

26.34

 

Consumer construction

 

 

12,388

 

1.57

 

 

12,226

 

1.56

 

Commercial construction

 

 

10,618

 

1.35

 

 

11,505

 

1.47

 

Consumer

 

 

19,021

 

2.42

 

 

20,113

 

2.57

 

Total loans

 

$

786,546

 

100.00%

 

$

781,857

 

100.00%

 

 

Following is a table showing the significant industry types in the commercial loan portfolio as of March 31, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

Outstanding

 

Percent of

 

Percent of

 

Outstanding

 

Percent of

 

Percent of

 

 

    

Balance

    

Loans

    

Capital

    

Balance

    

Loans

    

Capital

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate - operators of nonresidential buildings

 

 

114,650

 

20.75%

 

143.30%

 

 

121,861

 

22.42%

 

155.02%

 

Hospitality and tourism

 

 

69,568

 

12.59

 

86.95

 

 

68,025

 

12.51

 

86.54

 

Lessors of residential buildings

 

 

30,118

 

5.45

 

37.64

 

 

27,590

 

5.08

 

35.10

 

Gasoline stations and convenience stores

 

 

20,187

 

3.65

 

25.23

 

 

20,509

 

3.77

 

26.09

 

Logging

 

 

16,096

 

2.91

 

20.12

 

 

19,903

 

3.66

 

25.32

 

Commercial construction

 

 

10,618

 

1.92

 

13.27

 

 

11,505

 

2.12

 

14.64

 

Other

 

 

291,246

 

52.73

 

364.02

 

 

274,180

 

50.44

 

348.79

 

Total Commercial Loans

 

$

552,483

 

100.00%

 

 

 

$

543,573

 

100.00%

 

 

 

 

Management recognizes the additional risk presented by the concentration in certain segments of the portfolio.  Management does not believe that its current portfolio composition has increased exposure related to any specific industry concentration as of March 31, 2017.  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 March 31, 2017, our residential loan portfolio totaled $215.042 million, or 27.34% of our total outstanding loans.

 

Due to the seasonal nature of many of the Corporation’s commercial loan customers, loan payment terms provide flexibility by structuring payments to coincide with the customer’s business cycle.  The lending staff evaluates the collectability of the past due loans based on documented collateral values and payment history.  The Corporation 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.

 

28


 

Credit Quality

 

The table below shows period end balances of nonperforming assets (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

    

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Nonperforming Assets:

 

 

 

 

 

 

 

Nonaccrual loans

 

$

3,691

 

$

3,959

 

Loans past due 90 days or more

 

 

 —

 

 

 —

 

Restructured loans

 

 

39

 

 

165

 

Total nonperforming loans

 

 

3,730

 

 

4,124

 

Other real estate owned

 

 

4,466

 

 

4,782

 

Total nonperforming assets

 

$

8,196

 

$

8,906

 

Nonperforming loans as a % of loans

 

 

0.47%

 

 

0.53%

 

Nonperforming assets as a % of assets

 

 

0.84%

 

 

0.91%

 

Reserve for Loan Losses:

 

 

 

 

 

 

 

At period end

 

$

5,146

 

$

5,020

 

As a % of outstanding loans

 

 

.65%

 

 

.64%

 

As a % of nonperforming loans

 

 

137.96%

 

 

121.73%

 

As a % of nonaccrual loans

 

 

139.42%

 

 

126.80%

 

Texas Ratio

 

 

10.60%

 

 

11.76%

 

 

The following ratios provide additional information relative to the Corporation’s credit quality (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

At Period End

 

    

March 31, 2017

    

December 31, 2016

    

 

 

 

 

 

 

 

 

Total loans, at period end

 

$

786,546

 

 

781,857

 

Average loans for the period

 

$

782,477

 

$

703,047

 

 

 

 

 

 

 

 

 

 

 

For the Period Ended

 

 

Three Months Ended

 

Twelve Months Ended

 

 

    

March 31, 2017

    

December 31, 2016

    

 

 

 

 

 

 

 

 

Net charge-offs during the period

 

$

24

 

 

584

 

Net charge-offs to average loans, annualized

 

.01%

 

.08%

 

 

Management continues to address market issues impacting its loan customer base.  In conjunction with the Corporation’s senior lending staff and bank regulatory examinations, management reviews the Corporation’s loans, related collateral evaluations, and the overall lending process.  The Corporation also utilizes an outside loan consultant to perform a review of the loan portfolio.  The opinion of this consultant upon completion of the 2016 independent review provided findings similar to management with respect to credit quality.  In 2017, the Corporation will continue to utilize a consultant for loan review.

 

As of March 31, 2017, the allowance for loan losses represented .65% of total loans.  At March 31, 2017, the allowance included specific reserves in the amount of $.965 million, as compared to specific reserves of $.958 million at December 31, 2016.  In management’s 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. Purchased impaired credits do not have an effect on the allowance for loan losses, in accordance with ASC 310-30.

 

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.

 

29


 

The following table represents the activity in other real estate for the periods indicated (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Year Ended

 

 

    

March 31, 2017

    

December 31, 2016

    

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

4,782

 

$

2,324

 

Other real estate acquired, net of purchase accounting

 

 

 —

 

 

1,205

 

Other real estate transferred from loans due to foreclosure

 

 

576

 

 

3,292

 

Proceeds from sale of other real estate

 

 

(740)

 

 

(1,640)

 

Transfer to premise and equipment

 

 

 —

 

 

(197)

 

Writedowns on other real estate held for sale

 

 

(148)

 

 

(212)

 

Gain (loss) on other real estate held for sale

 

 

(4)

 

 

10

 

 

 

 

 

 

 

Balance at end of period

 

$

4,466

 

$

4,782

 

 

During the first three months of 2017, the Corporation received real estate in lieu of loan payments of $.576 million.  In determining the carrying value of other real estate held for sale, the Corporation generally starts with a third party appraisal of the underlying collateral and then deducts estimated selling costs to arrive at a net asset value. After the initial receipt, management periodically re-evaluates the recorded balances and records any additional reductions in the fair value as a write-down of other real estate held for sale.

 

Deposits

 

The Corporation had an decrease in deposits in the first three months of 2017.  Total deposits decreased by $1.692 million, or 0.20%, in the first three months of 2017.  The decrease in deposits for the first three months of 2017 is composed of an decrease in core deposits of $17.585 million and an increase in noncore deposits of $15.893 million.  In recent years, the Corporation has strategically emphasized the growth of core deposits with the introduction of several new deposit products and competitive deposit pricing.    Management also utilizes brokered deposits as a funding source, which provides flexibility in managing interest rate risk for fixed rate longer term loan fundings.

 

Management continues to monitor existing deposit products in order to stay competitive, both as to terms and pricing.  It is the intent of management to be aggressive in its markets to grow core deposits with an emphasis placed on transactional deposits.

 

The following table represents detail of deposits at the end of the periods indicated (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

December 31,

 

 

 

 

    

2017

    

% of Total

    

2016

    

% of Total

    

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing

 

$

147,106

 

17.90%

 

$

164,179

 

19.94%

 

NOW, money market, checking

 

 

283,314

 

34.47

 

 

286,622

 

34.80

 

Savings

 

 

61,171

 

7.44

 

 

58,315

 

7.08

 

Certificates of Deposit <$250,000

 

 

141,569

 

17.23

 

 

141,629

 

17.20

 

Total core deposits

 

 

633,160

 

77.04

 

 

650,745

 

79.02

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of Deposit >$250,000

 

 

8,802

 

1.07

 

 

8,489

 

1.03

 

Brokered CDs

 

 

179,858

 

21.89

 

 

164,278

 

19.95

 

Total non-core deposits

 

 

188,660

 

22.96

 

 

172,767

 

20.98

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

821,820

 

100.00%

 

$

823,512

 

100.00%

 

 

Borrowings

 

The Corporation also utilizes FHLB borrowings as a source of funding.  At March 31, 2017, this source of funding totaled $45 million and the Corporation secured this funding by pledging loans and investments.  The $45 million of

30


 

FHLB borrowings has a weighted average maturity of 1.62 years and a weighted average rate of 2.10% at March 31, 2017.  The Corporation also has a USDA Rural Development loan held by its wholly owned subsidiary, First Rural Relending, that has an outstanding balance of $.630 million, with a fixed interest rate of 1% that matures in August 2024.

 

The Corporation currently has one correspondent banking borrowing relationship.  The relationship consists of a $5.0 million revolving line of credit and a term note. The line of credit bears interest at a rate of LIBOR plus 2.75% and has an initial term that expires on April 30, 2018.  The term note had a balance of $20.649 million at March 31, 2017 and bears the same interest as the line of credit. The term note matures on April 30, 2019 and requires quarterly principal payments of $.550 million beginning March 31, 2017.  This relationship is secured by all of the outstanding mBank stock.  

 

Shareholders’ Equity

 

Total shareholders’ equity increased $1.400 million from December 31, 2016 to March 31, 2017.  Contributing to the increase in shareholders’ equity was net income available to common shareholders of $1.726 million, a reduction for cash dividends on common stock of $.756 million,  an increase due to stock compensation of $100,000, and an increase in the market value of securities of $.330 million.

 

RESULTS OF OPERATIONS

 

Summary

 

The Corporation reported net income available to common shareholders of $1.726 million, or $.28 per share, in the first three months of 2016, compared to $1.132 million, or $.18 per share, for the first three months of 2016.

 

Net Interest Income

 

Net interest income is the Corporation’s 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 $9.223 million, 4.21% of average earning assets, in the first three months of 2017, compared to $7.306 million, and 4.34% of average earning assets, in the first three months of 2017. 

 

31


 

The following table presents 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017-2016

 

 

 

Average Balances

 

Average Rates

 

Interest

 

Income/

 

 

 

 

 

Rate/

 

 

 

March 31,

 

Increase/

 

March 31,

 

March 31,

 

Expense

 

Volume

 

Rate

 

Volume

 

(dollars in thousands)

    

2017

    

2016

    

(Decrease)

    

2017

    

2016

    

2017

    

2016

    

Variance

    

Variance

    

Variance

    

Variance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1,2,3)

 

$

782,477

 

$

615,684

 

$

166,793

 

5.19%

 

5.20%

 

$

10,007

 

$

7,965

 

$

2,042

 

$

2,140

 

$

(25)

 

$

(73)

 

Taxable securities

 

 

70,954

 

 

50,965

 

 

19,989

 

2.28

 

2.07

 

 

399

 

 

262

 

 

137

 

 

102

 

 

27

 

 

 8

 

Nontaxable securities (2)

 

 

14,923

 

 

2,466

 

 

12,457

 

3.26

 

7.34

 

 

120

 

 

45

 

 

75

 

 

225

 

 

(25)

 

 

(125)

 

Federal funds sold

 

 

2,899

 

 

1169

 

 

1,730

 

.42

 

0.34

 

 

 3

 

 

 1

 

 

 2

 

 

 1

 

 

 —

 

 

 1

 

Other interest-earning assets

 

 

16,615

 

 

7,224

 

 

9,391

 

3.05

 

3.01

 

 

125

 

 

54

 

 

71

 

 

70

 

 

 1

 

 

 —

 

Total earning assets

 

 

887,868

 

 

677,508

 

 

210,360

 

4.87

 

4.94

 

 

10,654

 

 

8,327

 

 

2,327

 

 

2,538

 

 

(22)

 

 

(189)

 

Reserve for loan losses

 

 

(5,018)

 

 

(4,937)

 

 

(81)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

43,374

 

 

27,416

 

 

15,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Assets

 

 

15,945

 

 

12,500

 

 

3,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Real Estate

 

 

4,326

 

 

2,747

 

 

1,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

33,995

 

 

21,854

 

 

12,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

980,490

 

$

737,088

 

$

243,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW and money market deposits

 

$

221,154

 

$

161,785

 

$

59,369

 

.33

 

.34

 

$

179

 

$

137

 

$

42

 

$

50

 

$

(5)

 

$

(3)

 

Interest checking

 

 

67,604

 

 

47,662

 

 

19,942

 

.15

 

.17

 

 

25

 

 

20

 

 

 5

 

 

 8

 

 

(2)

 

 

(1)

 

Savings deposits

 

 

58,938

 

 

31,084

 

 

27,854

 

.07

 

.12

 

 

10

 

 

9

 

 

 1

 

 

 8

 

 

(4)

 

 

(3)

 

Certificates of deposit

 

 

147,283

 

 

131,700

 

 

15,583

 

.85

 

0.97

 

 

309

 

 

319

 

 

(10)

 

 

37

 

 

(40)

 

 

(7)

 

Brokered deposits

 

 

173,166

 

 

112,140

 

 

61,026

 

1.02

 

1.01

 

 

437

 

 

283

 

 

154

 

 

153

 

 

 2

 

 

(1)

 

Borrowings

 

 

70,194

 

 

52,157

 

 

18,037

 

2.72

 

1.95

 

 

471

 

 

253

 

 

218

 

 

87

 

 

99

 

 

32

 

Total interest-bearing liabilities

 

 

738,339

 

 

536,528

 

 

201,811

 

.79

 

.77

 

 

1,431

 

 

1,021

 

 

410

 

 

343

 

 

50

 

 

17

 

Demand deposits

 

 

157,164

 

 

119,992

 

 

37,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

5,694

 

 

3,284

 

 

2,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

79,293

 

 

77,284

 

 

2,009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

980,490

 

$

737,088

 

$

243,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate spread

 

 

 

 

 

 

 

 

 

 

4.08%

 

4.17%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin/revenue

 

 

 

 

 

 

 

 

 

 

4.21%

 

4.34%

 

$

9,223

 

$

7,306

 

$

1,917

 

$

2,195

 

$

(72)

 

$

(206)

 


(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.

 

In 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.  The Corporation is anticipating some margin pressure in future periods as we continue to see extremely competitive pricing on new and renewable loans.

 

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 three months of 2017, the Corporation recorded a loan loss provision of $.150 million, compared to no provision in the first three months of 2016.  There were net charge-offs of $24,000 in the first three months of 2017, compared to net charge-offs of $.180 million for the same period in 2016.

 

32


 

Other Income

 

Other income was $.776 million in the first three months of 2017, compared to $.627 million in the same period in 2016.  The increases year over year was largely a result of increased SBA/USDA loan sale gains and increased secondary market mortgage income, as well as additional deposit service fees garnered.

 

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 months ended March 31, 2017 and 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

Increase/(Decrease)

 

 

    

2017

    

2016

    

Dollars

    

Percent

    

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposit service fees

 

$

272

 

$

216

 

$

56

 

25.93%

 

Income from loans sold in the secondary market

 

 

298

 

 

267

 

 

31

 

11.61

 

SBA/USDA loan sale gains

 

 

60

 

 

 —

 

 

60

 

N/A

 

Net mortgage servicing (amortization) income

 

 

(8)

 

 

(54)

 

 

46

 

(85.19)

 

Net realized security gains

 

 

 —

 

 

97

 

 

(97)

 

N/A

 

Other noninterest income

 

 

154

 

 

101

 

 

53

 

52.48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other income

 

$

776

 

$

627

 

$

149

 

23.76%

 

 

Other Expense

 

For the first three months of 2017, the Corporation recorded other expenses of $7.177 million, compared to $6.198 million in 2016, an increase of $.979 million.  The 2017 increase from the first three months of 2016 was largely attributable to the increased employee base from the two recent acquisitions and customary operating expenses necessary to ensure our platform infrastructure keeps pace with our growing asset base and the associated regulatory and risk management needs.

 

The following table details other expense for the three months ended March 31, 2017 and 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

Increase/(Decrease)

 

 

    

2017

    

2016

    

Dollars

    

Percentage

    

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

3,797

 

$

3,387

 

$

410

 

12.11%

 

Occupancy

 

 

785

 

 

640

 

 

145

 

22.66

 

Furniture and equipment

 

 

481

 

 

383

 

 

98

 

25.59

 

Data processing

 

 

461

 

 

345

 

 

116

 

33.62

 

Advertising

 

 

123

 

 

156

 

 

(33)

 

(21.15)

 

Professional service fees

 

 

321

 

 

241

 

 

80

 

33.20

 

Loan origination expenses and deposit and card related fees

 

 

179

 

 

127

 

 

52

 

40.94

 

Writedowns and losses on other real estate held for sale

 

 

12

 

 

16

 

 

(4)

 

(25.00)

 

FDIC insurance assessment

 

 

157

 

 

108

 

 

49

 

45.37

 

Telephone

 

 

157

 

 

112

 

 

45

 

40.18

 

Transaction related expenses

 

 

 —

 

 

106

 

 

(106)

 

N/A

 

Other

 

 

704

 

 

577

 

 

127

 

22.01

 

Total other expense

 

$

7,177

 

$

6,198

 

$

979

 

15.80%

 

 

33


 

Federal Income Taxes

 

The Corporation recognized a federal income tax expense for the three months ended March 31, 2017 of $.889 million, compared to $.585 million a year earlier.

 

The Corporation has reported deferred tax assets of $7.651 million at March 31, 2017.  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.  The Corporation, as of March 31, 2017 had a net operating loss and tax credit carryforwards for tax purposes of approximately $9.1 million and $2.2 million, respectively.  The Corporation evaluated the future benefits from these carryforwards as of March 31, 2017 and determined it was “more likely than not” that they would be utilized prior to expiration.  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 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 $1.404 million for the NOL and the equivalent value of tax credits, which is approximately $.476 million.  These limitations for use were established in conjunction with the recapitalization of the Corporation in December 2004.  The Corporation will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted.

 

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 Bank’s 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 $41.169 million in cash and cash equivalents and $64.013 million of unpledged investment securities.   Although current liquidity is deemed adequate, management has the ability to increase on hand liquidity by acquiring brokered CDs in order to fund any anticipated loan growth.

 

During the first three months of 2017, the Corporation decreased cash and cash equivalents by $5.586 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.

 

The Corporation’s primary source of liquidity on a stand-alone basis is dividends from the Bank. During the first quarter of 2017, the Bank paid a dividend to the Corporation of $3.0 million. Bank capital after the payment of this dividend remained strong and above the “well capitalized” regulatory level. The Corporation also has a line of credit with a correspondent bank with current availability of $5.000 million.  The Corporation’s current plan for dividends from the Bank are dependent upon the profitability of the Bank, growth of assets at the Bank and the level of capital needed to stay “adequately capitalized.” The Corporation will continue to explore alternative opportunities for longer term sources of liquidity and permanent equity to support projected asset growth.

 

Liquidity is managed by the Corporation through its Asset and Liability Committee (“ALCO”).  The ALCO Committee meets regularly 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 Bank’s liquidity is best illustrated by the mix in the Bank’s 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 $250,000. Noncore funding consists of certificates of deposit greater than $250,000, brokered deposits, and FHLB and Farmers’ Home Administration borrowings.  At March 31, 2017, the Bank’s core deposits in relation to total funding were 71.05% compared to 72.54% at December 31, 2016.  These ratios indicate that at March 31, 2017, that the Bank had slightly increased its reliance on noncore deposits and borrowings to fund the Bank’s long-term assets, namely loans and investments.  The Bank believes that by maintaining adequate volumes of

34


 

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 March 31, 2017, the Bank had $43.000 million of unsecured lines available and additional funding sources 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 Bank’s liquidity.

 

From a long-term perspective, the Corporation’s strategy is to increase core deposits in the Corporation’s local markets.  Management continually evaluates deposit products offered in order to remain competitive in its goal of increasing core deposits. The Corporation also has the ability to augment local deposit growth efforts with wholesale CD funding.

 

CAPITAL AND REGULATORY

 

The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Corporation’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets.  Management has determined that, as of March 31, 2017, the Corporation is adequately capitalized.

 

Effective January 1, 2015, the Corporation became subject to new capital requirements due to the Basel III regulation, including:

 

·

A new minimum ratio of Common Equity Tier I Capital to risk-weighted assets of 4.5%;

·

An increase in the minimum required amount of Additional Tier 1 Capital to 6% of risk-weighted assets;

·

A continuation of the current minimum required amount of Total Capital (Tier 1 plus Tier 2) of 8% of risk-weighted assets; and

·

A minimum leverage ratio of Tier I Capital to total assets equal to 4% in all circumstances.

 

In order to be “well-capitalized” under the current guidelines, a depository institution must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more; an Additional Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10% or more; and a leverage ratio of 5% or more.

 

35


 

The Corporation’s and the Bank’s actual capital and ratios compared to generally applicable regulatory requirements as of March 31, 2017 are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

Adequacy Purposes

 

Well-Capitalized

 

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk weighted assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated 

 

$

71,503

 

9.2%

> 

$

62,202

> 

8.0%

> 

$

77,752

> 

10.0%

 

mBank 

 

$

90,806

 

11.7%

> 

$

62,162

> 

8.0%

> 

$

77,703

> 

10.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital to risk weighted assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated 

 

$

66,357

 

8.5%

> 

$

46,651

> 

6.0%

> 

$

62,202

> 

8.0%

 

mBank 

 

$

85,701

 

11.0%

> 

$

46,622

> 

6.0%

> 

$

62,162

> 

8.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity Tier 1 capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated 

 

$

66,357

 

8.5%

> 

$

34,988

> 

4.5%

> 

$

50,539

> 

6.5%

 

mBank 

 

$

85,701

 

11.0%

> 

$

34,966

> 

4.5%

> 

$

50,507

> 

6.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital to average assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated 

 

$

66,357

 

6.9%

> 

$

38,680

> 

4.0%

> 

$

48,349

> 

5.0%

 

mBank 

 

$

85,701

 

8.9%

> 

$

38,651

> 

4.0%

> 

$

48,314

> 

5.0%

 

 

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.

36


 

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 Corporation’s earnings and capital base.  Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to the Corporation’s safety and soundness.

 

Loans are the Corporation’s 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 its fixed rate loans so it has an opportunity to reprice the loan within 12 to 36 months.

 

As of March 31, 2017, the Corporation had established interest rate floors on approximately $146.206 million 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 $127.303 million of the “floor rate” loan balances will reprice with a 100 basis point increase on the prime rate, with another $20.478 million repricing in the next 100 basis point prime rate increase.

 

The Corporation also has $83.882 million of securities providing for scheduled monthly principal and interest payments as well as unanticipated prepayments of principal as of March 31, 2017.  These cash flows are then reinvested into other earning assets at current market rates.  The Corporation also has federal funds sold to correspondent banks as well as other interest-bearing deposits with correspondent banks.  These funds are generally repriced on a daily basis.

 

The Corporation offers deposit products with a variety of terms ranging from deposits whose interest rates can change on a weekly basis to certificates of deposit with repricing terms of up to five years.  Longer term deposits generally include penalty provisions for early withdrawal.

 

Beyond general efforts to shorten the loan pricing periods and extend deposit maturities, management can manage interest rate risk by managing 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 interest rate risks are inherent in the business of banking 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 regular asset/liability meetings with an outside consultant to review its current position and strategize about future opportunities on risks relative to pricing and positioning of assets and liabilities.

 

The difference between repricing assets and liabilities for a specific period is referred to as the gap.  An excess of repricable assets over liabilities is referred to as a positive gap.  An excess of repricable liabilities over assets is referred to as a negative gap.  The cumulative gap is the summation of the gap for all periods to the end of the period for which the cumulative gap is being measured.

 

37


 

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 Corporation’s repricing opportunities at March 31, 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

1-90

    

91-365

    

>1-5

    

Over 5

    

 

 

 

 

Days

 

Days

 

Years

 

Years

 

Total

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

297,383

 

 

161,526

 

 

323,761

 

 

3,876

 

$

786,546

 

Securities

 

 

6,336

 

 

5,034

 

 

50,023

 

 

22,489

 

 

83,882

 

Other (1)

 

 

5,843

 

 

2,919

 

 

7,161

 

 

247

 

 

16,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

 

309,562

 

 

169,479

 

 

380,945

 

 

26,612

 

 

886,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW, money market, savings and interest checking

 

 

344,485

 

 

 —

 

 

 —

 

 

 —

 

 

344,485

 

Time deposits

 

 

28,390

 

 

71,643

 

 

47,942

 

 

2,396

 

 

150,371

 

Brokered CDs

 

 

39,583

 

 

115,698

 

 

24,577

 

 

 —

 

 

179,858

 

Borrowings and fed funds purchased

 

 

3,550

 

 

21,726

 

 

43,759

 

 

244

 

 

69,279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing obligations

 

 

416,008

 

 

209,067

 

 

116,278

 

 

2,640

 

 

743,993

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gap

 

$

(106,446)

 

$

(39,588)

 

$

264,667

 

$

23,972

 

$

142,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative gap

 

$

(106,446)

 

$

(146,034)

 

$

118,633

 

$

142,605

 

 

 

 


(1)

Includes Federal Home Loan Bank Stock.

 

The above analysis indicates that at March 31, 2017, the Corporation had a cumulative liability sensitivity gap position of $146.034 million within the one-year time frame.  The Corporation’s cumulative liability sensitive gap suggests that if market interest rates were to increase in the next twelve months, the Corporation has the potential to earn less net interest income.  This is because more liabilities would reprice at higher rates than assets.  Conversely, if market interest rates decrease in the next twelve months, the above gap position suggests the Corporation’s net interest income would increase.  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, 2016, the Corporation had a cumulative liability sensitivity gap position of $115.670 million within the one-year time frame.

 

The borrowings in the gap analysis include $45.000 million of FHLB advances that have a weighted average maturity of 1.62 years and a weighted average rate of 2.10%.

 

The Corporation’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk and foreign exchange risk.  The Corporation has no market risk sensitive instruments held for trading purposes.  The Corporation has limited agricultural-related loan assets and therefore has minimal significant exposure to changes in commodity prices.  Any impact that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be insignificant.

 

Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure.  The Corporation’s 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

38


 

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 Corporation’s operations.  Nearly all the assets and liabilities of the Corporation are financial, unlike industrial or commercial companies.  As a result, the Corporation’s performance is directly impacted by changes in interest rates, which are indirectly influenced by inflationary expectations.  The Corporation’s 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 Corporation’s performance.  Changes in interest rates do not necessarily move to the same extent as changes in the price of goods and services.

39


 

MACKINAC FINANCIAL CORPORATION

ITEM 4  CONTROLS AND PROCEDURES

 

As of March 31, 2017, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, 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, by 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 goals 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 as of March 31, 2017.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Corporation’s internal control over financial reporting that occurred during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

40


 

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. Although the results of litigation and claims cannot be predicted, management believes there are no legal proceedings, the outcome of which, if determined adversely to the Corporation, would individually or in the aggregate be reasonably expected to have a material adverse effect on the Corporation’s result of operations.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

The Corporation currently has a share repurchase program.  The program is conducted under authorizations from time to time by the Board of Directors.  The shares reported in the table below are covered by Board authorizations made and publically announced for $600,000 on February 27, 2013, an additional $600,000 on December 17, 2013 and an additional $750,000 on April 28, 2015.  None of these authorizations has an expiration date. As presented below, there were no purchases during the first quarter of 2017.

 

Issuer purchase of Equity Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Total number of

    

 

 

 

 

 

 

 

 

 

 

shares purchased

 

Maximum

 

 

 

 

 

 

 

 

as part of a

 

dollars

 

 

 

 

 

 

 

 

publically

 

yet to

 

 

 

Total number of

 

Average price

 

announced

 

be used for

 

Period of purchases

 

shares purchased

 

paid per share

 

plan or program

 

stock purchases

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2017 to January 31, 2017

 

 —

 

$

 —

 

 —

 

$

25,335

 

February 1, 2017 to February 28, 2017

 

 —

 

$

 —

 

 —

 

 

25,335

 

March 1, 2017 to March 31, 2017

 

 —

 

$

 —

 

 —

 

 

25,335

 

 

 

 

 

 

 

 

 

 

 

 

 

Total First Quarter 2017

 

 —

 

$

 —

 

 —

 

 

 

 

 

 

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.

 

 

 

 

101.INS

XBRL Instance Document.

 

 

 

 

101.SCH

XBRL Taxonomy Extension Schema Document.

 

 

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

 

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document.

 

 

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

 

41


 

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:     May 15, 2017

By:

/s/ Paul D. Tobias

 

 

PAUL D. TOBIAS,

 

 

CHAIRMAN AND CHIEF EXECUTIVE OFFICER

 

 

(principal executive officer)

 

 

 

 

 

 

 

By:

/s/ Jesse A. Deering

 

 

JESSE A. DEERING

 

 

EVP/CHIEF FINANCIAL OFFICER

 

 

(principal financial and accounting officer)

 

 

42