e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
OR
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o |
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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)
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MICHIGAN
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38-2062816 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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130 SOUTH CEDAR STREET, MANISTIQUE, MI
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49854 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (800) 200-7032
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for
such shorter periods that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate
by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer
o Accelerated filer
o
Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o
No o
As of April 30, 2007, there were outstanding 3,428,695 shares of the registrants common stock, no
par value.
MACKINAC FINANCIAL CORPORATION
INDEX
MACKINAC FINANCIAL CORPORATION
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
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March 31, |
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December 31, |
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March 31, |
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2007 |
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2006 |
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2006 |
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(unaudited) |
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(unaudited) |
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ASSETS |
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Cash and due from banks |
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$ |
5,647 |
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$ |
4,865 |
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$ |
6,220 |
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Federal funds sold |
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6,330 |
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5,841 |
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12,000 |
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Cash and cash equivalents |
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11,977 |
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10,706 |
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18,220 |
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Interest-bearing deposits in other financial institutions |
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856 |
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856 |
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853 |
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Securities available for sale |
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28,511 |
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32,769 |
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34,140 |
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Federal Home Loan Bank stock |
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3,794 |
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3,794 |
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4,855 |
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Loans: |
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Commercial |
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261,246 |
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261,726 |
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212,052 |
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Mortgage |
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54,204 |
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58,014 |
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50,119 |
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Installment |
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2,971 |
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2,841 |
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2,300 |
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Total Loans |
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318,421 |
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322,581 |
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264,471 |
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Allowance for loan losses |
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(4,975 |
) |
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(5,006 |
) |
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(5,415 |
) |
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Net loans |
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313,446 |
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317,575 |
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259,056 |
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Premises and equipment |
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12,252 |
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12,453 |
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12,318 |
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Other real estate held for sale |
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127 |
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26 |
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952 |
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Other assets |
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4,681 |
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4,612 |
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4,197 |
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TOTAL ASSETS |
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$ |
375,644 |
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382,791 |
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$ |
334,591 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Liabilities: |
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Non-interest-bearing deposits |
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$ |
23,416 |
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$ |
23,471 |
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$ |
20,463 |
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Interest-bearing deposits: |
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NOW and Money Market |
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70,558 |
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73,188 |
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67,467 |
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Savings |
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13,488 |
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13,365 |
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15,304 |
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CDs<$100,000 |
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94,067 |
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89,585 |
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80,204 |
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CDs>$100,000 |
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24,475 |
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23,645 |
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15,246 |
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Brokered |
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78,408 |
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89,167 |
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69,270 |
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Total deposits |
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304,412 |
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312,421 |
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267,954 |
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Borrowings |
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38,307 |
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38,307 |
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36,417 |
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Other liabilities |
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2,993 |
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3,273 |
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3,047 |
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Total liabilities |
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345,712 |
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354,001 |
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307,418 |
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Shareholders equity: |
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Preferred stock No par value: |
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Authorized 500,000 shares, no shares outstanding |
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Common stock and additional paid in capital No par
value |
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Authorized
18,000,000 shares |
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Issued and outstanding 3,428,695 shares |
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42,750 |
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42,722 |
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42,489 |
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Accumulated deficit |
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(12,709 |
) |
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(13,745 |
) |
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(14,961 |
) |
Accumulated other comprehensive (loss) |
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(109 |
) |
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(187 |
) |
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(355 |
) |
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Total shareholders equity |
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29,932 |
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28,790 |
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27,173 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
375,644 |
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$ |
382,791 |
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$ |
334,591 |
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See accompanying notes to condensed consolidated financial statements.
1.
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except per Share Data)
(Unaudited)
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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INTEREST INCOME: |
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Interest and fees on loans: |
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Taxable |
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$ |
6,233 |
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$ |
4,499 |
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Tax-exempt |
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|
171 |
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194 |
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Interest on securities: |
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Taxable |
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301 |
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273 |
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Tax-exempt |
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41 |
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Other interest income |
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200 |
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168 |
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Total interest income |
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6,905 |
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5,175 |
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INTEREST EXPENSE: |
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Deposits |
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3,222 |
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|
2,080 |
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Borrowings |
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|
505 |
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|
416 |
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Total interest expense |
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3,727 |
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2,496 |
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Net interest income |
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3,178 |
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|
2,679 |
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Provision for loan losses |
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(600 |
) |
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Net interest income after provision for loan losses |
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3,178 |
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3,279 |
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OTHER INCOME: |
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Service fees |
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161 |
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111 |
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Net gains on sale of secondary market loans |
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108 |
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40 |
|
Proceeds from settlement of lawsuit |
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470 |
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Other |
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174 |
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65 |
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Total other income |
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913 |
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216 |
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OTHER EXPENSE: |
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Salaries and employee benefits |
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1,738 |
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1,594 |
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Occupancy |
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334 |
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317 |
|
Furniture and equipment |
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|
157 |
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|
156 |
|
Data processing |
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171 |
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154 |
|
Professional service fees |
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151 |
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|
200 |
|
Loan and deposit |
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72 |
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129 |
|
Telephone |
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58 |
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49 |
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Advertising |
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92 |
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70 |
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Other |
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283 |
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328 |
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Total other expenses |
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3,056 |
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2,997 |
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Income before provision for income taxes |
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1,035 |
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|
|
498 |
|
Provision for (benefit of) income taxes |
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NET INCOME |
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$ |
1,035 |
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$ |
498 |
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INCOME PER COMMON SHARE: |
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Basic |
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$ |
.30 |
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$ |
.15 |
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Diluted |
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$ |
.30 |
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$ |
.15 |
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See accompanying notes to condensed consolidated financial statements.
2.
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Dollars in Thousands)
(Unaudited)
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Three Months Ended |
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|
March 31, |
|
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|
2007 |
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|
2006 |
|
Balance, beginning of period |
|
$ |
28,790 |
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|
$ |
26,588 |
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|
|
|
|
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|
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Net income for period |
|
|
1,035 |
|
|
|
498 |
|
Stock option compensation |
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|
30 |
|
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|
79 |
|
Net unrealized gain on securities available for sale |
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|
77 |
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|
8 |
|
|
|
|
|
|
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Total comprehensive income |
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1,142 |
|
|
|
585 |
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|
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|
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|
|
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Balance, end of period |
|
$ |
29,932 |
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|
$ |
27,173 |
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|
|
|
|
|
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|
See accompanying notes to condensed consolidated financial statements.
3.
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
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Three Months Ended |
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March 31, |
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|
2007 |
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|
2006 |
|
Cash Flows from Operating Activities: |
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|
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|
Net income |
|
$ |
1,035 |
|
|
$ |
498 |
|
Adjustments to reconcile net income to
net cash provided by (used in) operating activities: |
|
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Depreciation and amortization |
|
|
199 |
|
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|
243 |
|
(Gain) loss on sale of premises, equipment and other real estate |
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|
(5 |
) |
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|
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|
Stock option compensation |
|
|
30 |
|
|
|
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|
Provision for loan losses |
|
|
|
|
|
|
(600 |
) |
Change in other assets |
|
|
(92 |
) |
|
|
(134 |
) |
Change in other liabilities |
|
|
(280 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
887 |
|
|
|
(31 |
) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash Flows from Investing Activities: |
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|
|
|
|
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|
Net (increase) decrease in loans |
|
|
4,028 |
|
|
|
(24,800 |
) |
Net (increase) decrease in interest-bearing deposits in other financial
institutions |
|
|
|
|
|
|
172 |
|
Purchase of securities available for sale |
|
|
(13,564 |
) |
|
|
|
|
Proceeds from sales, maturities or calls of securities available for sale |
|
|
17,940 |
|
|
|
70 |
|
Capital expenditures |
|
|
(302 |
) |
|
|
(535 |
) |
Proceeds from sale of premises, equipment, and other real estate |
|
|
291 |
|
|
|
|
|
Purchase of minority interest in subsidiary of bank |
|
|
|
|
|
|
79 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
8,393 |
|
|
|
(25,014 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from financing activities: |
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits |
|
$ |
(8,009 |
) |
|
$ |
35,322 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(8,009 |
) |
|
|
35,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
1,271 |
|
|
|
10,277 |
|
Cash and cash equivalents at beginning of period |
|
|
10,706 |
|
|
|
7,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
11,977 |
|
|
$ |
18,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
2,017 |
|
|
$ |
2,382 |
|
Income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
Transfers of Foreclosures from Loans to Other Real Estate Held for Sale |
|
|
109 |
|
|
|
7 |
|
See accompanying notes to condensed consolidated financial statements.
4.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
|
|
Basis of Presentation |
|
|
|
The unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the
Corporation) have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month period ended March
31, 2007 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2007. The unaudited consolidated financial statements and footnotes thereto should
be read in conjunction with the audited consolidated financial statements and footnotes thereto
included in the Corporations Annual Report on Form 10-K for the year ended December 31, 2006. |
|
|
|
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and expenses during the
period. Actual results could differ from those estimates. |
|
|
|
In order to properly reflect some categories of other income and other expenses,
reclassifications of expense and income items have been made to prior period numbers. The
net other income and other expenses was not changed due to these reclassifications. |
|
|
|
Allowance for Loan Losses |
|
|
|
The allowance for loan losses includes specific allowances related to commercial loans, which
have been judged to be impaired. A loan is impaired when, based on current information, it is
probable that the Corporation will not collect all amounts due in accordance with the
contractual terms of the loan agreement. These specific allowances are based on discounted
cash flows of expected future payments using the loans initial effective interest rate or the
fair value of the collateral if the loan is collateral dependent. |
|
|
|
The Corporation continues to maintain a general allowance for loan losses for loans not
considered impaired. The allowance for loan losses is maintained at a level which management
believes is adequate to provide for possible loan losses. Management periodically evaluates
the adequacy of the allowance using the Corporations past loan loss experience, known and
inherent risks in the portfolio, composition of the portfolio, current economic conditions, and
other factors. The allowance does not include the effects of expected losses related to future
events or future changes in economic conditions. This evaluation is inherently subjective
since it requires material estimates that may be susceptible to significant change. Loans are
charged against the allowance for loan losses when management believes the collectibility 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 collectibility. |
|
|
|
In managements opinion, the allowance for loan losses is adequate to cover probable losses
relating to specifically identified loans, as well as probable losses inherent in the balance
of the loan portfolio as of the balance sheet date. |
|
|
|
Stock Option Plans |
|
|
|
The Corporation sponsors three stock option plans. One plan was approved during 2000 and
applies to officers, employees, and nonemployee directors. This plan was amended as a part of
the December 2004 stock offering and recapitalization. The amendment, approved by shareholders, increased the shares available
under this plan by 428,587 shares from the original 25,000 (adjusted for the 1:20 reverse stock
split), to a total authorized share balance of 453,587. The other two plans, one for officers
and employees and the other for nonemployee directors, were approved in 1997. A total of 30,000
shares (adjusted for the 1:20 reverse stock split), were |
5.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
|
|
|
made available for grant under these plans. Options under all of the plans are granted at the
discretion of a committee of the Corporations Board of Directors. Options to purchase shares
of the Corporations stock are granted at a price equal to the market price of the stock at the
date of grant. The committee determines the vesting of the options when they are granted as
established under the plan. |
|
|
|
The Corporation adopted SFAS No. 123 (Revised) Share Based Payments in the first quarter of
2006. This Statement supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees
and its related implementation guidance. Under Opinion No. 25, issuing stock options to
employees generally resulted in recognition of no compensation cost. This adoption resulted in
the recognition of before tax compensation expense in the amount of $30,000 for the three months
ended March 31, 2007 and $79,000 for the same period in 2006. The expense recorded recognizes
the current period vesting of options outstanding. The per share impact of this accounting
change was $.01 and $.02 in the first quarter of 2007 and 2006, respectively. |
|
2. |
|
RECENT ACCOUNTING PRONOUNCEMENTS |
|
|
|
FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes |
|
|
|
In July 2006, the Financial Accounting Standards Board (FASB) issued this interpretation to
clarify the accounting for uncertainty in tax positions. FIN 48 requires, among other matters,
that the Corporation recognize in its financial statements the impact of a tax position, if that
position is more likely than not of being sustained on an audit, based on the technical merits
of the position. The provisions of FIN 48 were effective as of the beginning of the
Corporations 2007 fiscal year and required any cumulative effect of the change in accounting
principle to be recorded as an adjustment to opening retained earnings. The Corporation did not
record an adjustment to retained earnings upon adoption of FIN 48. In future periods, The
Corporation will, in accordance with FIN 48, evaluate its tax positions to determine whether or
not an adjustment to deferred tax balances and related valuation accounts is warranted. |
|
|
|
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS
No. 159) |
|
|
|
SFAS No. 159 permits an entity to measure certain financial assets and financial liabilities at
fair value. The Statements objective is to improve financial reporting by allowing entities to
mitigate volatility in reported earnings caused by the measurement of related assets and
liabilities using different attributes, without having to apply complex hedge accounting
provisions. Under SFAS No. 159, entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting date. The fair value
option may be elected on an instrument-by-instrument basis, with a few exceptions, as long as it
is applied to the instrument in its entirety. The fair value option election is irrevocable,
unless a new election date occurs. The new Statement establishes presentation and disclosure
requirements to help financial statement users understand the effect of the entitys election on
its earnings but does not eliminate disclosure requirements of other accounting standards.
Assets and liabilities that are measured at fair value must be displayed on the face of the
balance sheet. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year
beginning after November 15, 2007. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity (a) makes that choice in the first 120 days of
that fiscal year, (2) has not yet issued financial statements, and (3) elects to apply the
provisions of SFAS No. 157. The Corporation did not adopt SFAS No. 159 during this early
adoption period, and has not determined the impact, if any; the implementation of SFAS No. 159
will have on the consolidated financial statements. |
|
3. |
|
EARNINGS PER SHARE |
|
|
|
Earnings per share are based upon the weighted average number of shares outstanding. |
|
|
|
Additional shares issued as a result of option exercises would not be dilutive in either three
month period. |
6.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. |
|
EARNINGS PER SHARE (Continued) |
|
|
|
The following shows the computation of basic and diluted earnings per share for the three months
ended March 31, 2007 and 2006 (dollars in thousands, except per share data): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Income |
|
|
|
Net Income |
|
|
Number of Shares |
|
|
Per Share |
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Income per share Basic and diluted |
|
$ |
1,035 |
|
|
|
3,428,695 |
|
|
$ |
.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Income per share Basic and diluted |
|
$ |
498 |
|
|
|
3,428,695 |
|
|
$ |
.15 |
|
|
|
|
|
|
|
|
|
|
|
4. |
|
INVESTMENT SECURITIES |
|
|
|
The amortized cost and estimated fair value of investment securities available for sale as of
March 31, 2007, December 31, 2006, and March 31, 2006 are as follows (dollars in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
December 31, 2006 |
|
|
March 31, 2006 |
|
|
|
Amortized |
|
|
Estimated |
|
|
Amortized |
|
|
Estimated |
|
|
Amortized |
|
|
Estimated |
|
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
US Agencies |
|
$ |
28,110 |
|
|
$ |
27,920 |
|
|
$ |
32,445 |
|
|
$ |
32,176 |
|
|
$ |
30,971 |
|
|
$ |
30,338 |
|
Obligations of states and political
subdivisions |
|
|
511 |
|
|
|
591 |
|
|
|
511 |
|
|
|
593 |
|
|
|
3,524 |
|
|
|
3,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
28,621 |
|
|
$ |
28,511 |
|
|
$ |
32,956 |
|
|
$ |
32,769 |
|
|
$ |
34,495 |
|
|
$ |
34,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of investment securities pledged to secure FHLB
borrowings and customer relationships were $24.413 million and $.900 million respectively at
March 31, 2007. |
|
5. |
|
LOANS |
|
|
|
The composition of loans at March 31, 2007, December 31, 2006, and March 31, 2006 is as follows
(dollars in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Commercial real estate |
|
$ |
153,587 |
|
|
$ |
154,332 |
|
|
$ |
134,089 |
|
Commercial, financial and agricultural |
|
|
67,683 |
|
|
|
71,385 |
|
|
|
56,958 |
|
One to four family residential real estate |
|
|
54,204 |
|
|
|
58,014 |
|
|
|
50,119 |
|
Construction |
|
|
39,976 |
|
|
|
36,009 |
|
|
|
21,005 |
|
Consumer |
|
|
2,971 |
|
|
|
2,841 |
|
|
|
2,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
318,421 |
|
|
$ |
322,581 |
|
|
$ |
264,471 |
|
|
|
|
|
|
|
|
|
|
|
7.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. |
|
LOANS (Continued) |
|
|
|
LOANS Allowance for loan losses |
|
|
|
An analysis of the allowance for loan losses for the three months ended March 31, 2007, the year
ended December 31, 2006, and the three months ended March 31, 2006 is as follows (dollars in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Balance at beginning of period |
|
$ |
5,006 |
|
|
$ |
6,108 |
|
|
$ |
6,108 |
|
Recoveries on loans |
|
|
6 |
|
|
|
91 |
|
|
|
12 |
|
Loans charged off |
|
|
(37 |
) |
|
|
(332 |
) |
|
|
(105 |
) |
Provision for loan losses |
|
|
|
|
|
|
(861 |
) |
|
|
(600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
4,975 |
|
|
$ |
5,006 |
|
|
$ |
5,415 |
|
|
|
|
|
|
|
|
|
|
|
In the first quarter of 2007, net charge-off activity was minimal at $31,000, or .01% of average
loans outstanding compared to net charge-offs of $93,000, or .04% of average loans, in the first
quarter of 2006. In the first quarter of 2006 the Corporation reduced the allowance for loan
losses by recording a negative provision amounting to $600,000. This reduction in the reserve
was made in recognition of the improved credit quality existent in the loan portfolio and is
discussed in more detail under Managements Discussion and Analysis.
LOANS
Impaired loans
Nonperforming loans are those which are contractually past due 90 days or more as to interest or
principal payments, on nonaccrual status, or loans, the terms of which have been renegotiated to
provide a reduction or deferral on interest or principal. The interest income recorded and that
which would have been recorded had nonaccrual and renegotiated loans been current, or not
troubled was not material to the consolidated financial statements for the three months ended
March 31, 2007 and 2006.
Information regarding impaired loans as of March 31, 2007, December 31, 2006, and March 31, 2006
is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Reserve |
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Balances, at period end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with specific valuation reserve |
|
$ |
1,804 |
|
|
$ |
1,804 |
|
|
$ |
|
|
|
$ |
493 |
|
|
$ |
493 |
|
|
$ |
|
|
Impaired loans with no specific valuation
reserve |
|
|
3,058 |
|
|
|
1,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
4,862 |
|
|
$ |
2,940 |
|
|
$ |
|
|
|
$ |
493 |
|
|
$ |
493 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans on nonaccrual basis |
|
$ |
4,142 |
|
|
$ |
2,900 |
|
|
$ |
|
|
|
$ |
493 |
|
|
$ |
493 |
|
|
$ |
|
|
Impaired loans on accrual basis |
|
|
720 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
4,862 |
|
|
$ |
2,940 |
|
|
$ |
|
|
|
$ |
493 |
|
|
$ |
493 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average investment in impaired loans |
|
$ |
3,416 |
|
|
$ |
1,192 |
|
|
$ |
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized during impairment |
|
|
13 |
|
|
|
7 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income that would have been recognized
on an accrual basis |
|
|
82 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-basis interest income recognized |
|
|
7 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. |
|
LOANS (Continued) |
|
|
|
The average investment in impaired loans was approximately $3.416 million for the three-months
ended March 31, 2007, $1.2 million for the year ended December 31, 2006, and $.071 million for
the three months ended March 31, 2006, respectively. The increase in impaired loans in the
first quarter of 2007 relates to the deterioration of several large commercial credits which are
well collateralized. Nonperforming assets are discussed in more detail under Managements
Discussion and Analysis. |
|
|
|
LOANS Related parties |
|
|
|
The Bank, in the ordinary course of business, grants loans to the Corporations executive
officers and directors, including their families and firms in which they are principal owners. |
|
|
|
Activity in such loans is summarized below (dollars in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Loans outstanding, beginning of period |
|
$ |
1,621 |
|
|
$ |
578 |
|
|
$ |
578 |
|
New loans |
|
|
|
|
|
|
1,647 |
|
|
|
|
|
Net activity on revolving lines of
credit |
|
|
|
|
|
|
271 |
|
|
|
805 |
|
Repayment |
|
|
(8 |
) |
|
|
(875 |
) |
|
|
|
|
Change in related party interest |
|
|
|
|
|
|
|
|
|
|
(491 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding, end of period |
|
$ |
1,613 |
|
|
$ |
1,621 |
|
|
$ |
892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no loans to related parties classified substandard at March 31, 2007, December
31, 2006, and March 31, 2006 respectively. |
|
6. |
|
BORROWINGS |
|
|
|
Borrowings consist of the following at March 31, 2007, December 31, 2006, and March 31, 2006
(dollars in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Federal Home Loan Bank advances at rates ranging from 4.98%
to 5.38% maturing in 2010 and 2011 |
|
$ |
35,000 |
|
|
$ |
35,000 |
|
|
$ |
35,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmers Home Administration, fixed-rate note payable, maturing
August 24, 2024, interest payable at 1% |
|
|
1,348 |
|
|
|
1,348 |
|
|
|
1,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance outstanding on line of credit with a correspondent bank,
interest payable
at the prime rate, 8.25% as of March 31, 2007, maturing May 21, 2008 |
|
|
1,959 |
|
|
|
1,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,307 |
|
|
$ |
38,307 |
|
|
$ |
36,417 |
|
|
|
|
|
|
|
|
|
|
|
The Federal Home Loan Bank borrowings are collateralized at March 31, 2007, by the following: a
collateral agreement on the Corporations one to four family residential real estate loans with
a book value of approximately $21.660 million; U.S. government agencies with an amortized cost
and estimated fair value of $24.598 million and $24.413 million, respectively; and Federal Home
Loan Bank stock owned by the Bank totaling $3.794 million. Prepayment of the remaining advances
is subject to the provisions and conditions of the credit policy of the Federal Home Loan Bank
of Indianapolis in effect as of March 31, 2007.
The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $788,000 originated
and held by the Corporations wholly owned subsidiary, First Rural Relending, an assignment of a
demand deposit account in the amount of $686,000, and guaranteed by the Corporation.
9.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. |
|
STOCK OPTION PLANS |
|
|
|
A summary of stock option transactions for the three months ended March 31, 2007 and 2006 and
the year ended December 31, 2006, is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Outstanding shares, at beginning of period |
|
|
446,417 |
|
|
|
375,417 |
|
|
|
375,417 |
|
Granted during the period |
|
|
|
|
|
|
72,500 |
|
|
|
|
|
Expired/forefited during the period |
|
|
|
|
|
|
1,500 |
|
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding shares at end of period |
|
|
446,417 |
|
|
|
446,417 |
|
|
|
373,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price per share
at end of period |
|
$ |
12.29 |
|
|
$ |
12.29 |
|
|
$ |
12.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available for grant, at end of period |
|
|
18,488 |
|
|
|
18,488 |
|
|
|
90,988 |
|
|
|
|
|
|
|
|
|
|
|
There were no options granted or exercised in the first quarter of 2007 or 2006.
Following is a summary of the options outstanding and exercisable at March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Average |
Exercise |
|
Number of Shares |
|
Contractual |
|
Exercise |
Price Range |
|
Outstanding |
|
Exercisable |
|
Life-Years |
|
Price |
$9.16
|
|
|
12,500 |
|
|
|
5,000 |
|
|
|
9.0 |
|
|
$ |
9.16 |
|
$9.75
|
|
|
257,152 |
|
|
|
120,861 |
|
|
|
8.0 |
|
|
|
9.75 |
|
$10.65
|
|
|
72,500 |
|
|
|
14,500 |
|
|
|
10.0 |
|
|
|
10.65 |
|
$11.50
|
|
|
40,000 |
|
|
|
8,000 |
|
|
|
8.8 |
|
|
|
11.50 |
|
$12.00
|
|
|
60,000 |
|
|
|
12,000 |
|
|
|
8.5 |
|
|
|
12.00 |
|
$156.00 $240.00
|
|
|
3,545 |
|
|
|
3,545 |
|
|
|
4.3 |
|
|
|
186.75 |
|
$300.00 $400.00
|
|
|
720 |
|
|
|
720 |
|
|
|
2.5 |
|
|
|
345.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
446,417 |
|
|
|
164,626 |
|
|
|
8.2 |
|
|
$ |
12.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. |
|
INCOME TAXES |
|
|
|
A valuation allowance is provided against deferred tax assets when it is more likely than not that
some or all of the deferred tax asset will not be realized. As of March 31, the Corporation had a
net operating loss and tax credit carryforwards for tax purposes of approximately $32.6 million,
and $2.1 million, respectively. The deferred tax benefits related to the net operating loss and
tax credit carryforwards will, at a minimum, be utilized to offset future taxable expense. In the
first quarter of 2007 and 2006, the Corporation reversed a portion of the valuation
allowance pertaining to the NOL carryforward to offset current federal tax, $.305 million and
$.102 million, respectively. The Corporation will record future benefits from these carryforwards
at such time as it becomes more likely than not that they will be utilized prior to expiration.
Please refer to further discussion on income taxes contained in Managements Discussion and
Analysis. This net operating loss carryforward expires twenty years from the date that it
originated. A portion of the NOL, approximately $22 million, and all of the credit carryforwards
are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue
Code. The annual limitation is $1.4 million for the NOL and the equivalent value of tax credits,
which is approximately $.477 million. These limitations for use were established in conjunction
with the recapitalization of the Corporation in December, 2004. |
10.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. |
|
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 Corporations exposure to credit loss, in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit and standby letters of credit, is
represented by the contractual amount of those instruments. The Corporation uses the same credit
policies in making commitments and conditional obligations as it does for on-balance-sheet
instruments. These commitments are as follows (dollars in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Commitments to extend credit: |
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate |
|
$ |
55,517 |
|
|
$ |
44,141 |
|
|
$ |
37,889 |
|
Fixed rate |
|
|
9,975 |
|
|
|
9,288 |
|
|
|
1,815 |
|
Standby letters of credit Variable rate |
|
|
6,094 |
|
|
|
6,233 |
|
|
|
9,290 |
|
Credit card commitments Fixed rate |
|
|
2,451 |
|
|
|
2,391 |
|
|
|
3,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
74,037 |
|
|
$ |
62,053 |
|
|
$ |
52,062 |
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Corporation evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Corporation upon extension of credit, is based on managements credit
evaluation of the party. Collateral held varies, but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers. The
commitments are structured to allow for 100% collateralization on all standby letters of credit.
Credit card commitments are commitments on credit cards issued by the Corporations subsidiary
and serviced by other companies. These commitments are unsecured.
Contingencies
In the normal course of business, the Corporation is involved in various legal proceedings. For
expanded discussion on the Corporations legal proceedings, see Part II, Item 1, Legal
Proceedings in this report.
11.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. |
|
COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (Continued) |
|
|
|
Concentration of Credit Risk |
|
|
|
The Bank grants commercial, residential, agricultural, and consumer loans throughout Michigan.
The Banks most prominent concentration in the loan portfolio relates to commercial real estate
loans. This concentration at March 31, 2007 represents $44.2 million, or 13.9%, compared to
$32.4 million, or 12.3%, of the commercial loan portfolio on March 31, 2006. The remainder of
the commercial loan portfolio is diversified in such categories as hospitality and tourism, real
estate agents and managers, new car dealers, gaming, petroleum, forestry, agriculture and
construction. Due to the diversity of the Banks locations, the ability of debtors of
residential and consumer loans to honor their obligations is not tied to any particular economic
sector. |
12.
MACKINAC FINANCIAL CORPORATION
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The Corporation intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities Litigation Reform Act
of 1995 and is including this statement for purposes of these safe harbor provisions.
Forward-looking statements which are based on certain assumptions and describe future plans,
strategies, or expectations of the Corporation, are generally identifiable by use of the words
believe, expect, intend, anticipate, estimate, project, or similar expressions. The
Corporations ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors that could cause actual results to differ from the results in
forward-looking statements include, but are not limited to:
|
|
|
The highly regulated environment in which the Corporation operates could adversely
affect its ability to carry out its strategic plan due to restrictions on new products,
funding opportunities or new market entrances; |
|
|
|
|
General economic conditions, either nationally or in the state(s) in which the Corporation does business; |
|
|
|
|
Legislation or regulatory changes which affect the business in which the Corporation is engaged; |
|
|
|
|
Changes in the interest rate environment which increase or decrease interest rate margins; |
|
|
|
|
Changes in securities markets with respect to the market value of financial assets and
the level of volatility in certain markets such as foreign exchange; |
|
|
|
|
Significant increases in competition in the banking and financial services industry
resulting from industry consolidation, regulatory changes and other factors, as well as
action taken by particular competitors; |
|
|
|
|
The ability of borrowers to repay loans; |
|
|
|
|
The effects on liquidity of unusual decreases in deposits; |
|
|
|
|
Changes in consumer spending, borrowing, and saving habits; |
|
|
|
|
Technological changes; |
|
|
|
|
Acquisitions and unanticipated occurrences which delay or reduce the expected benefits of acquisitions; |
|
|
|
|
Difficulties in hiring and retaining qualified management and banking personnel; |
|
|
|
|
The Corporations ability to increase market share and control expenses; |
|
|
|
|
The effect of compliance with legislation or regulatory changes; |
|
|
|
|
The effect of changes in accounting policies and practices; |
|
|
|
|
The costs and effects of existing and future litigation and of adverse outcomes in such litigation. |
These risks and uncertainties should be considered in evaluating forward-looking statements.
Further information concerning the Corporation and its business, including additional factors that
could materially affect the Corporations financial results, is included in the Corporations
filings with the Securities and Exchange Commission. All forward-looking statements contained in
this report are based upon information presently available and the Corporation assumes no
obligation to update any forward-looking statements.
13.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The following discussion will cover results of operations, asset quality, financial position,
liquidity, interest rate sensitivity, and capital resources for the periods indicated. The
information included in this discussion is intended to assist readers in their analysis of, and
should be read in conjunction with, the consolidated financial statements and related notes and
other supplemental information presented elsewhere in this report. This discussion should be read
in conjunction with the consolidated financial statements and footnotes contained in the
Corporations Annual Report and Form 10-K for the year-ended December 31, 2006. Throughout this
discussion, the term Bank refers to mBank, formerly known as North Country Bank and Trust, the
principal banking subsidiary of the Corporation.
FINANCIAL OVERVIEW
Consolidated net income for the first quarter of 2007 was $1.035 million or $.30 per share compared
to net income of $.498 million, or $.15 per share for the first quarter of 2006. Weighted average
shares outstanding amounted to 3,428,695 in both periods. The results of operations for the first
quarter of 2007 include the proceeds received, $470,000, in the settlement of a lawsuit against the
Corporations former accountants. The first quarter 2006 results include a $600,000 negative loan
loss provision. Excluding the lawsuit settlement and the provision adjustment, the net income in
the first quarter of 2007 amounted to $.568 million, compared to a loss of .102 million for the
same period in 2006.
Total assets of the Corporation at March 31, 2007 were $375.644 million, up 12.27 percent from the
$334.591 million in total assets reported at March 31, 2006. First quarter-end total assets were
down 1.87 percent from the $382.791 million of total assets at year-end 2006.
FINANCIAL CONDITION
Cash and Cash Equivalents
Cash and cash equivalents increased $1.271 million in the first quarter of 2007. See further
discussion of the change in cash and cash equivalents in the Liquidity section.
Investment Securities
Available-for-sale securities decreased $4.258 million, or 12.99%, from December 31, 2006, to March
31, 2007, with the balance on March 31, 2007, totaling $28.511 million. The decrease during the
first quarter was due to a combination of maturities, calls, and paydowns of securities.
Investment securities are utilized in an effort to manage interest rate risk and liquidity. During
the first quarter of 2007, the Corporation utilized a higher proportion of federal funds to
maintain liquidity since yields were comparable to those offered on short term investment
securities. As of March 31, 2007, investment securities with an estimated fair value of $25.563
million were pledged.
Loans
Through the first quarter of 2007, loan balances decreased by $4.160 million, or 1.29% from
December 31, 2006 balances of $322.581 million. During the first quarter, the Bank had new loan
production of $30.1 million, however experienced paydowns and external loan refinancings which
reduced existing portfolio loan balances by approximately $26.6 million. Enhancements to the loan
approval process and exception reporting further provide for a more effective management of risk in
the loan portfolio. Management continues to actively manage the loan portfolio, seeking to
identify and resolve problem assets at an early stage. Management believes a properly positioned
loan portfolio provides the most attractive earning asset yield available to the Corporation and,
with changes to the loan approval process and exception reporting, management can effectively
manage the risk in the loan portfolio. Management intends to continue loan growth within its
markets for mortgage, consumer, and commercial loan products while concentrating on loan quality,
industry concentration issues, and competitive pricing.
14.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Following is a summary of the loan portfolio at March 31, 2007,
December 31, 2006, and March 31, 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
Percent of |
|
|
December 31, |
|
|
Percent of |
|
|
March 31, |
|
|
Percent of |
|
|
|
2007 |
|
|
Total |
|
|
2006 |
|
|
Total |
|
|
2006 |
|
|
Total |
|
Commercial real estate |
|
$ |
153,587 |
|
|
|
48.24 |
% |
|
$ |
154,332 |
|
|
|
47.84 |
% |
|
$ |
134,089 |
|
|
|
50.70 |
% |
Commercial, financial, and agricultural |
|
|
67,683 |
|
|
|
21.26 |
|
|
|
71,385 |
|
|
|
22.13 |
|
|
|
56,958 |
|
|
|
21.54 |
|
1-4 family residential real estate |
|
|
54,204 |
|
|
|
17.02 |
|
|
|
58,014 |
|
|
|
17.98 |
|
|
|
50,119 |
|
|
|
18.95 |
|
Construction |
|
|
39,976 |
|
|
|
12.55 |
|
|
|
36,009 |
|
|
|
11.16 |
|
|
|
21,005 |
|
|
|
7.94 |
|
Consumer |
|
|
2,971 |
|
|
|
.93 |
|
|
|
2,841 |
|
|
|
.88 |
|
|
|
2,300 |
|
|
|
.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
318,421 |
|
|
|
100.00 |
% |
|
$ |
322,581 |
|
|
|
100.00 |
% |
|
$ |
264,471 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is a table showing the significant industry types in the
commercial loan portfolio as of March 31, 2007, December 31, 2006, and March 31, 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
December 31, 2006 |
|
|
March 31, 2006 |
|
|
|
|
|
|
|
Percent of |
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
Percent of |
|
|
|
Outstanding |
|
|
Commerical |
|
|
Shareholders |
|
|
Outstanding |
|
|
Commercial |
|
|
Shareholders |
|
|
Outstanding |
|
|
Commercial |
|
|
Shareholders |
|
|
|
Balance |
|
|
Loans |
|
|
Equity |
|
|
Balance |
|
|
Loans |
|
|
Equity |
|
|
Balance |
|
|
Loans |
|
|
Equity |
|
Real estate operators of nonres bldgs |
|
$ |
44,155 |
|
|
|
16.90 |
% |
|
|
147.52 |
% |
|
$ |
44,308 |
|
|
|
16.93 |
% |
|
|
153.90 |
% |
|
$ |
32,440 |
|
|
|
15.30 |
% |
|
|
119.38 |
% |
Hospitality and tourism |
|
|
33,726 |
|
|
|
12.91 |
|
|
|
112.68 |
|
|
|
30,826 |
|
|
|
11.78 |
|
|
|
107.07 |
|
|
|
38,045 |
|
|
|
17.94 |
|
|
|
140.01 |
|
Real estate agents and managers |
|
|
27,313 |
|
|
|
10.45 |
|
|
|
91.25 |
|
|
|
25,071 |
|
|
|
9.58 |
|
|
|
87.08 |
|
|
|
12,350 |
|
|
|
5.82 |
|
|
|
45.45 |
|
New car dealers |
|
|
10,139 |
|
|
|
3.88 |
|
|
|
33.87 |
|
|
|
10,086 |
|
|
|
3.85 |
|
|
|
35.03 |
|
|
|
9,988 |
|
|
|
4.71 |
|
|
|
36.76 |
|
Other |
|
|
145,913 |
|
|
|
55.86 |
|
|
|
487.48 |
% |
|
|
151,435 |
|
|
|
57.86 |
|
|
|
526.00 |
% |
|
|
119,229 |
|
|
|
56.23 |
|
|
|
438.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Loans |
|
$ |
261,246 |
|
|
|
100.00 |
% |
|
|
|
|
|
$ |
261,726 |
|
|
|
100.00 |
% |
|
|
|
|
|
$ |
212,052 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management recognizes the additional risk presented by the concentration
in certain segments of the portfolio. On a historical basis, the Corporations highest concentration of credit risk was the hospitality and
tourism industry. Management does not consider the current loan concentrations in hospitality and gaming to be problematic, and has
no intention of further reducing loans to this industry segment. Management does not believe that its current portfolio composition has
increased exposure related to any specific industry concentration as of March 31, 2007. The current concentration of real estate related
loans represents a broad customer base composed of a high percentage of owner occupied developments.
Credit Quality
Management analyzes the allowance for loan losses on a monthly basis to
determine whether the losses inherent in the portfolio are properly reserved for. The Corporation utilizes a loan review consultant to
perform a review of the loan portfolio. The opinion of this consultant, upon completion of the independent review in 2006, provided
findings similar to management on the overall adequacy of the reserve. The Corporation will utilize this same consultant for loan
review during 2007.
Management analyzes the allowance for loan losses in detail on a monthly
basis to determine whether the losses inherent in the portfolio are properly reserved for. Net charge-offs amounted to $.031 million,
..01% of average loans outstanding, compared to $.093 million, .04% of average loans outstanding, for the three months ended
March 31, 2007 and 2006, respectively. In the first quarter of 2006, the Corporation, in recognition of the continued
improvement in credit quality, reduced the reserve for loan loss by $600,000. The current reserve balance is representative of the
relevant risk inherent within the Corporations loan portfolio. The current level of charge-offs is below historical levels and projected
charge-off activity, based upon current levels of nonperforming loans, is not expected to attain historical levels. Additions or
reductions to the reserve in future periods will be dependent upon a combination of future loan growth, nonperforming loan balances
and charge-off activity. The increase in nonperforming loans in the first quarter of 2007 is not indicative of an overall deterioration of
portfolio credit quality. Management believes these additions to problem loans are somewhat isolated and are due mainly to these
individual credit situations and not to an industry, geographic or economic decline.
15.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The table below shows period end balances of nonperforming assets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Nonperforming Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
$ |
4,142 |
|
|
$ |
2,899 |
|
|
$ |
|
|
Loans past due 90 days or more |
|
|
720 |
|
|
|
40 |
|
|
|
|
|
Restructured loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
4,862 |
|
|
|
2,939 |
|
|
|
|
|
Other real estate owned |
|
|
127 |
|
|
|
26 |
|
|
|
952 |
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
4,989 |
|
|
$ |
2,965 |
|
|
$ |
952 |
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans as a % of loans |
|
|
1.53 |
% |
|
|
.91 |
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
Nonperforming assets as a % of assets |
|
|
1.33 |
% |
|
|
.77 |
% |
|
|
.28 |
% |
|
|
|
|
|
|
|
|
|
|
Reserve for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
At period end |
|
$ |
4,975 |
|
|
$ |
5,006 |
|
|
$ |
5,415 |
|
|
|
|
|
|
|
|
|
|
|
As a % of loans |
|
|
1.56 |
% |
|
|
1.55 |
% |
|
|
2.05 |
% |
|
|
|
|
|
|
|
|
|
|
As a % of nonperforming loans |
|
|
102.32 |
% |
|
|
170.30 |
% |
|
|
N/M |
% |
|
|
|
|
|
|
|
|
|
|
As a % of nonaccrual loans |
|
|
120.11 |
% |
|
|
172.68 |
% |
|
|
N/M |
% |
|
|
|
|
|
|
|
|
|
|
Following is the allocation of the allowance for loan losses as of March 31, 2007, December
31, 2006, and March 31, 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Commercial, financial, and agricultural loans |
|
$ |
3,906 |
|
|
$ |
3,600 |
|
|
$ |
1,279 |
|
One to four family residential real estate loans |
|
|
29 |
|
|
|
23 |
|
|
|
43 |
|
Consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated and general reserves |
|
|
1,040 |
|
|
|
1,383 |
|
|
|
4,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
4,975 |
|
|
$ |
5,006 |
|
|
$ |
5,415 |
|
|
|
|
|
|
|
|
|
|
|
The Corporation has experienced a significant decline in historical loan charge-offs in the
past several years. During this same period, the commercial loan portfolio has grown by
approximately $105 million. The increased allocation of the reserve from unallocated and general
reserves to commercial, financial and agricultural is in recognition of this growth.
The following ratios assist management in the determination of the Corporations credit quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Total loans, at period end |
|
$ |
318,421 |
|
|
$ |
322,581 |
|
|
$ |
264,471 |
|
|
|
|
|
|
|
|
|
|
|
Average loans for the year |
|
$ |
318,072 |
|
|
$ |
301,508 |
|
|
$ |
250,735 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
4,975 |
|
|
$ |
5,006 |
|
|
$ |
5,415 |
|
|
|
|
|
|
|
|
|
|
|
Allowance to total loans at period end |
|
|
1.56 |
% |
|
|
1.55 |
% |
|
|
2.05 |
% |
|
|
|
|
|
|
|
|
|
|
Net charge-offs during the period |
|
$ |
31 |
|
|
$ |
241 |
|
|
$ |
93 |
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans |
|
|
.01 |
% |
|
|
.08 |
% |
|
|
.04 |
% |
|
|
|
|
|
|
|
|
|
|
Net charge-offs to beginning allowance balance |
|
|
.62 |
% |
|
|
3.95 |
% |
|
|
1.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans at end of period |
|
$ |
4,142 |
|
|
$ |
2,899 |
|
|
$ |
|
|
Loans past due 90 days or more |
|
|
720 |
|
|
|
40 |
|
|
|
|
|
Restructured loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
$ |
4,862 |
|
|
$ |
2,939 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans at end of period |
|
|
1.53 |
% |
|
|
.91 |
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
16.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Total nonperforming loans increased $1.923 million since December 31, 2006. The increase was due
to several specific commercial credits that were added in the quarter. Management believes that
these loans are well secured and does not expect any material loss on these loans.
Management continues to address market issues impacting its loan customer base. In conjunction
with the Corporations senior lending staff and the bank regulatory examinations, management
reviews the Corporations loans, related collateral evaluations, and the overall lending process.
The Corporation also utilizes a loan review consultant to perform a review of the loan portfolio. The opinion of this consultant upon
completion of the independent review provided findings similar to management on the overall
adequacy of the reserve. The Corporation has engaged this same consultant for loan review during
2007.
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 which is grouped with other assets on the condensed consolidated balance sheet.
The following table represents the activity in other real estate for the periods indicated (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Year Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2007 |
|
|
December 31, 2006 |
|
|
March 31, 2006 |
|
Balance at beginning of period |
|
$ |
26 |
|
|
$ |
945 |
|
|
$ |
945 |
|
Other real estate transferred from loans due to foreclosure |
|
|
109 |
|
|
|
23 |
|
|
|
7 |
|
Other real estate transferred to premises and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate sold/written down |
|
|
(8 |
) |
|
|
(942 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
127 |
|
|
$ |
26 |
|
|
$ |
952 |
|
|
|
|
|
|
|
|
|
|
|
During the first three months of 2007, the Corporation received real estate in lieu of loan
payments of $109,000. Other real estate is initially valued at the lower of cost or the fair value
less selling costs. After the initial receipt, management periodically reevaluates the recorded
balance. Any additional reduction in the fair value results in a write-down of other real estate.
Write-downs on other real estate may be recorded based on subsequent evaluations of current
realizable fair values.
Deposits
The Corporation had a decrease in deposits in the first quarter of 2007. Total deposits decreased
by $8.009 million, or 2.56%, in the first quarter of 2007. This decrease in deposits included a
reduction of $10.759 million in brokered deposits. The Corporation utilizes brokered deposits to
fulfill loan funding needs. During the first quarter of 2007, actual loan balances decreased and
the Corporation was able to reduce its reliance on brokered deposits. In the first quarter, core
deposits, as shown in the table below, increased by $1.920 million over year end balances.
Management continues to monitor existing deposit products in order to stay competitive, as to both
terms and pricing. It is the intent of management to be aggressive in its markets to grow core
deposits with an emphasis placed on transactional accounts.
17.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The following table represents detail of deposits at the end of the periods indicated (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2007 |
|
|
% of Total |
|
|
2006 |
|
|
% of Total |
|
|
2006 |
|
|
% of Total |
|
Non-interest-bearing |
|
$ |
23,416 |
|
|
|
7.69 |
% |
|
$ |
23,471 |
|
|
|
7.51 |
% |
|
$ |
20,463 |
|
|
|
7.64 |
% |
NOW and money market |
|
|
70,558 |
|
|
|
23.18 |
|
|
|
73,188 |
|
|
|
23.43 |
|
|
|
67,467 |
|
|
|
25.18 |
|
Savings |
|
|
13,488 |
|
|
|
4.43 |
|
|
|
13,365 |
|
|
|
4.28 |
|
|
|
15,304 |
|
|
|
5.71 |
|
Certificates of Deposit <$100,000 |
|
|
94,067 |
|
|
|
30.90 |
|
|
|
89,585 |
|
|
|
28.67 |
|
|
|
80,204 |
|
|
|
29.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
201,529 |
|
|
|
66.20 |
|
|
|
199,609 |
|
|
|
63.89 |
|
|
|
183,438 |
|
|
|
68.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit >$100,000 |
|
|
24,475 |
|
|
|
8.04 |
|
|
|
23,645 |
|
|
|
7.57 |
|
|
|
15,246 |
|
|
|
5.69 |
|
Brokered CDs |
|
|
78,408 |
|
|
|
25.76 |
|
|
|
89,167 |
|
|
|
28.54 |
|
|
|
69,270 |
|
|
|
25.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-core deposits |
|
|
102,883 |
|
|
|
33.80 |
|
|
|
112,812 |
|
|
|
36.11 |
|
|
|
84,516 |
|
|
|
31.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
304,412 |
|
|
|
100.00 |
% |
|
$ |
312,421 |
|
|
|
100.00 |
% |
|
$ |
267,954 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
The Corporation historically used alternative funding sources to provide long-term, stable sources
of funds. These borrowings were initially carried with fixed interest rates and stated maturities
through 2011. The advances gave the FHLB the option to convert the above listed
convertible-fixed-rate advances to adjustable rate advances, repricing quarterly at three month
LIBOR Flat, on the original call date and quarterly thereafter. During 2006, $20.0 million of the
advances were converted from fixed to adjustable rate by the FHLB. This shift from fixed to
variable rate did not have a material impact on the Corporations net interest margin.
Shareholders Equity
Total shareholders equity increased $1.142 million from December 31, 2006 to March 31, 2007. The
increase is comprised of net income, contributed capital of $30,000 in recognition of stock option
expense and an increase in the market value of securities of $77,000. The Board of Directors does
not anticipate declaring any dividends in the near future. The declaration of dividends is
contingent on a variety of factors including regulatory and state statutes, and the Corporations
return to profitability.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income before provision for loan losses for the quarter ended March 31, 2007,
increased by $.499 million, or 18.63% compared to the same period one year ago. This increase in
net interest income was a result of the combination of increased average balances and increased
rates. The Corporation, throughout most of 2006, benefited from prime rate increases as more
assets were repricing upwards than liabilities. This asset sensitive position has been declining
in recent periods as the Corporation initiated steps as a part of its ALCO Committee to reduce
interest rate risk. More discussion is included relative to repricing and asset sensitivity under
the caption Interest Rate Risk elsewhere in this report.
18.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007-2006 |
|
|
|
Average Balances |
|
|
Average Rates |
|
|
Interest |
|
|
Income/ |
|
|
|
|
|
|
|
|
|
|
Rate/ |
|
|
|
March 31, |
|
|
Increase/ |
|
|
March 31, |
|
|
March 31, |
|
|
Expense |
|
|
Volume |
|
|
Rate |
|
|
Volume |
|
(dollars in thousands) |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
2006 |
|
|
Variance |
|
|
Variance |
|
|
Variance |
|
|
Variance |
|
Loans (1,2) |
|
$ |
318,072 |
|
|
$ |
250,735 |
|
|
$ |
67,337 |
|
|
|
8.17 |
% |
|
|
7.59 |
% |
|
$ |
6,404 |
|
|
$ |
4,693 |
|
|
$ |
1,711 |
|
|
$ |
1,260 |
|
|
$ |
355 |
|
|
|
95 |
|
Taxable securities |
|
|
29,454 |
|
|
|
31,029 |
|
|
|
(1,575 |
) |
|
|
4.14 |
|
|
|
3.57 |
|
|
|
301 |
|
|
|
273 |
|
|
|
28 |
|
|
|
(14 |
) |
|
|
44 |
|
|
|
(2 |
) |
Nontaxable securities |
|
|
|
|
|
|
3,214 |
|
|
|
(3,214 |
) |
|
|
|
|
|
|
5.17 |
|
|
|
|
|
|
|
41 |
|
|
|
(41 |
) |
|
|
(41 |
) |
|
|
(40 |
) |
|
|
41 |
|
Federal funds sold |
|
|
10,465 |
|
|
|
9,424 |
|
|
|
1,041 |
|
|
|
5.34 |
|
|
|
4.43 |
|
|
|
138 |
|
|
|
103 |
|
|
|
35 |
|
|
|
11 |
|
|
|
21 |
|
|
|
2 |
|
Other interest-earning assets |
|
|
4,961 |
|
|
|
5,776 |
|
|
|
(815 |
) |
|
|
5.05 |
|
|
|
4.63 |
|
|
|
62 |
|
|
|
65 |
|
|
|
(3 |
) |
|
|
(8 |
) |
|
|
7 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
362,952 |
|
|
|
300,178 |
|
|
|
62,774 |
|
|
|
7.72 |
|
|
|
6.99 |
|
|
|
6,905 |
|
|
|
5,175 |
|
|
|
1,730 |
|
|
|
1,208 |
|
|
|
387 |
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for loan losses |
|
|
(4,999 |
) |
|
|
(6,049 |
) |
|
|
1,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
5,846 |
|
|
|
6,339 |
|
|
|
(493 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
194 |
|
|
|
319 |
|
|
|
(125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
16,410 |
|
|
|
18,222 |
|
|
|
(1,812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
380,403 |
|
|
$ |
319,009 |
|
|
$ |
61,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposits |
|
$ |
72,192 |
|
|
$ |
67,892 |
|
|
$ |
4,300 |
|
|
|
3.48 |
|
|
|
2.86 |
|
|
|
620 |
|
|
|
478 |
|
|
|
142 |
|
|
|
30 |
|
|
|
105 |
|
|
|
7 |
|
Savings deposits |
|
|
13,280 |
|
|
|
15,336 |
|
|
|
(2,056 |
) |
|
|
1.65 |
|
|
|
1.22 |
|
|
|
54 |
|
|
|
46 |
|
|
|
8 |
|
|
|
(6 |
) |
|
|
16 |
|
|
|
(2 |
) |
CDs <$100,000 |
|
|
92,020 |
|
|
|
77,668 |
|
|
|
14,352 |
|
|
|
4.89 |
|
|
|
3.92 |
|
|
|
1,110 |
|
|
|
750 |
|
|
|
360 |
|
|
|
139 |
|
|
|
187 |
|
|
|
35 |
|
CDs >$100,000 |
|
|
23,882 |
|
|
|
13,808 |
|
|
|
10,074 |
|
|
|
4.94 |
|
|
|
4.38 |
|
|
|
291 |
|
|
|
149 |
|
|
|
142 |
|
|
|
109 |
|
|
|
19 |
|
|
|
14 |
|
Brokered deposits |
|
|
84,773 |
|
|
|
57,632 |
|
|
|
27,141 |
|
|
|
5.49 |
|
|
|
4.62 |
|
|
|
1,147 |
|
|
|
657 |
|
|
|
490 |
|
|
|
309 |
|
|
|
123 |
|
|
|
58 |
|
Borrowings |
|
|
38,376 |
|
|
|
36,417 |
|
|
|
1,959 |
|
|
|
5.34 |
|
|
|
4.63 |
|
|
|
505 |
|
|
|
416 |
|
|
|
89 |
|
|
|
22 |
|
|
|
63 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
324,523 |
|
|
|
268,753 |
|
|
|
55,770 |
|
|
|
4.66 |
|
|
|
3.77 |
|
|
|
3,727 |
|
|
|
2,496 |
|
|
|
1,231 |
|
|
|
603 |
|
|
|
513 |
|
|
|
115 |
|
Demand deposits |
|
|
23,473 |
|
|
|
19,384 |
|
|
|
4,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
3,153 |
|
|
|
3,817 |
|
|
|
(664 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
29,254 |
|
|
|
27,055 |
|
|
|
2,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
380,403 |
|
|
$ |
319,009 |
|
|
$ |
61,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.06 |
% |
|
|
3.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin/revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.55 |
% |
|
|
3.62 |
% |
|
$ |
3,178 |
|
|
$ |
2,679 |
|
|
$ |
499 |
|
|
$ |
605 |
|
|
$ |
(126 |
) |
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. |
|
(2) |
|
Interest income on loans includes loan fees. |
Provision for Loan Losses
The Corporation records a provision for loan losses at a level it believes is necessary to maintain
the allowance at an adequate level after considering factors such as loan charge-offs and
recoveries, changes in the mix of loans in the portfolio, loan growth, and other economic factors.
There was no provision for loan losses in the first quarter of 2007. In recognition of the
improved credit quality, the Corporation reduced its loan loss reserve by $600,000 in the first
quarter of 2006. Management continues to monitor the loan portfolio for changes which may impact
the required allowance for loan losses. A provision for loan losses may be required for future
periods if credit quality should deteriorate or loan growth is such that the general reserve is no
longer deemed adequate.
Other Income
Other income increased by $.697 million for the quarter ended March 31, 2007, compared to the
quarter ended March 31, 2006. The Corporation recognized a benefit from the settlement of a
lawsuit against its former accountants in the first quarter of 2007, which amounted to $.470
million. Service fees increased $.050 million, while other noninterest income increased $.579
million. Revenue due to mortgage loans produced and sold in the secondary market amounted to $.108
million compared to $.040 million a year ago. We expect to continue to benefit from secondary
market activity in future periods. The Corporation is also expecting to increase other income from
other sources such as fees from the sale of SBA guaranteed loans. Other noninterest income in the
first quarter amounted to $.174 million, an increase of $.109 million from the first quarter of
2006. This increase was due primarily from several one-time items.
19.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The following table details noninterest income for the three months ended March 31, 2007, and March
31, 2006 (dollars in thousands):
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
% Increase |
|
|
|
March 31, |
|
|
(Decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
2007-2006 |
|
Service fees |
|
$ |
161 |
|
|
$ |
111 |
|
|
|
45.05 |
% |
Net gains on sale of secondary market loans |
|
|
108 |
|
|
|
40 |
|
|
|
170.00 |
|
Proceeds from settlement of lawsuit |
|
|
470 |
|
|
|
|
|
|
|
100.00 |
|
Other noninterest income |
|
|
174 |
|
|
|
65 |
|
|
|
890.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
913 |
|
|
$ |
216 |
|
|
|
322.69 |
% |
|
|
|
|
|
|
|
|
|
|
Other Expenses
Other expenses increased $.059 million for the quarter ended March 31, 2007, compared to the same
period in 2006. Salaries, commissions, and related benefits increased by $.144 million, during
the first quarter of 2007, compared to the first quarter of 2006. This increase reflects the
annual salary increases and staffing additions. The Corporation, in an attempt to increase core
deposit balances, added three Treasury Management Specialists to focus on generating business
related transactional deposit balances. The $17,000 increase in data processing costs is the
result of increased deposit balances and activity, along with added data processing services. The
$57,000 decrease in loan and deposit expense is due in large part to the reduction in FDIC
insurance premiums which amounted to $23,000 in the first quarter of 2006 compared to $9,000 in
2007, a reduction of $14,000. This reduction in premium was due to lower premium assessments and
is expected to continue for the near term. Management continually reviews all areas of noninterest
expense for cost reduction opportunities that will not impact service quality and employee morale.
The following table details noninterest expense for the three months ended March 31, 2007 and March
31, 2006 (dollars in thousands):
Noninterest Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
% Increase |
|
|
|
March 31, |
|
|
(Decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
2007-2006 |
|
Salaries and employee benefits |
|
$ |
1,738 |
|
|
$ |
1,594 |
|
|
|
9.03 |
% |
Occupancy |
|
|
334 |
|
|
|
317 |
|
|
|
5.36 |
|
Furniture and equipment |
|
|
157 |
|
|
|
156 |
|
|
|
.64 |
|
Data processing |
|
|
171 |
|
|
|
154 |
|
|
|
11.04 |
|
Professional service fees |
|
|
151 |
|
|
|
200 |
|
|
|
(24.50 |
) |
Loan and deposit |
|
|
72 |
|
|
|
129 |
|
|
|
(44.19 |
) |
Telephone |
|
|
58 |
|
|
|
49 |
|
|
|
18.37 |
|
Advertising |
|
|
92 |
|
|
|
70 |
|
|
|
31.43 |
|
Other |
|
|
283 |
|
|
|
328 |
|
|
|
(13.72 |
) |
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
3,056 |
|
|
$ |
2,997 |
|
|
|
1.97 |
% |
|
|
|
|
|
|
|
|
|
|
20.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Federal Income Taxes
There was no tax provision for the first
quarter of 2007 and 2006. The Corporations results of operations for 2007 and 2006 do not reflect
the impact of federal income taxes due to large NOL carryforwards, a portion of which was utilized
in each period to offset current federal taxes. The
differences in each year between the tax provision or benefit and the federal corporate income tax
rate of 34% are primarily due to permanent and temporary differences between book and taxable
income. A valuation allowance is provided against deferred tax assets when it is more likely than
not that some or all of the deferred tax assets will not be realized. As of March 31, 2007, the
Corporation had an NOL carryforward of approximately $32.6 million along with various credit
carryforwards of $2.1 million. This NOL and credit carryforward benefit is dependent upon the
future profitability of the Corporation. A portion of the NOL, approximately $22 million, and all
of the tax credit carryforwards are also subject to the use limitations of Section 382 of the
Internal Revenue Code since they originated prior to the December 2004 recapitalization of the
Corporation. In 2006, a $500,000 benefit was recognized and a portion of the NOL carryforward was
utilized to offset current year tax expense. The deferred tax benefit was recognized in accordance
with generally accepted accounting principles which allow for
recognition when it is more likely
than not that such benefit will in fact be realized in future periods. The Corporation intends to
further evaluate the utilization of the NOL and credit carryforwards in subsequent periods and
recognize the related tax benefits when appropriate.
LIQUIDITY
Liquidity is defined as the ability to
generate cash at a reasonable cost to fulfill lending commitments and support asset growth, while
satisfying the withdrawal demands of customers and make payments on existing borrowing
commitments. The Banks principal sources of liquidity are core deposits and loan and investment
payments and prepayments. Providing a secondary source of liquidity is the available for sale
investment portfolio. As a final source of liquidity, the Bank can exercise existing credit
arrangements.
During the first quarter of 2007, the
Corporation increased cash and cash equivalents by
$1.271 million. As shown on the Corporations
condensed consolidated statement of cash flows, liquidity was primarily impacted by cash
provided by investing activities, a net decrease in loans of
$4.028 million and a net
reduction in securities available for sale of $4.376 million. These decreases in assets
were offset by a similar decrease in deposit liabilities of $8.109 million. This reduction
in deposits was composed of a decrease in brokered deposits of $10.759 million combined with
an increase in bank deposits of $2.750 million. The management of bank liquidity for funding
of loans and deposit maturities and withdrawals includes monitoring projected loan fundings
and scheduled prepayments and deposit maturities within a 30 day period, a 30 to 90 day period
and from 90 days until the end of the year. This funding forecast model is completed weekly.
It is anticipated that during the
remainder of 2007, the Corporation will fund anticipated loan production with a combination
of core deposit growth and noncore funding, primarily brokered CDs.
The
Corporations primary source of
liquidity on a stand-alone basis is dividends from the Bank. The Bank is currently prohibited
from paying dividends because of a deficit in retained earnings. The Bank, in order to pay
dividends in future periods, will need to restate its capital accounts, which requires the
approval of the Office of Financial and Insurance Services of the State of Michigan. The
Corporation has a $6 million correspondent bank line of credit available for short-term
liquidity. This line of credit has an outstanding balance of $1.959 million as of
March 31, 2007. The Corporation is currently exploring 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
monthly to discuss asset and liability management in order to address liquidity and funding
needs to provide a process to seek the best alternatives for investments of assets, funding
costs, and risk management. The liquidity position of the Bank is managed daily, thus
enabling the Bank to adapt its position according to market fluctuations. Core deposits
are important in maintaining a strong liquidity position as they represent a stable and
relatively low cost source of funds. The Banks liquidity position increased in 2006 to
provide the level of liquidity needed to support the balance sheet expansion. The Banks
liquidity is best illustrated by the mix in the Banks core and non-core funding dependence
ratio, which explain the degree of reliance on non-core liabilities to fund long-term assets.
Core deposits are herein defined as demand deposits, NOW (negotiable order withdrawals),
money markets, savings and certificates of deposit under $100,000. Non-core funding consists
of certificates of deposit greater than $100,000, brokered deposits,
and FHLB and Farmers
Home Administration borrowings. At March 31, 2007, the Banks core deposits in relation to
total funding was 58.8% compared to 60.3% at March 31, 2006. These
21.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
ratios
indicated at March 31, 2007,
that the Bank has decreased its reliance on non-core deposits and
borrowings to fund the Banks
long-term assets, namely loans and investments. The Bank believes that by maintaining adequate
volumes of short-term investments and implementing competitive pricing strategies on deposits,
it can ensure adequate liquidity to support future growth. The Bank also has correspondent lines
of credit available to meet unanticipated short-term liquidity needs. As of March 31, 2007, the
Bank had $14.875 million of unsecured lines available and another $8.125 million available if
secured. The Bank believes that its liquidity position remains strong to meet both present and
future financial obligations and commitments, events or uncertainties that have resulted or are
reasonably likely to result in material changes with respect to the Banks liquidity.
From a long-term perspective, the
Corporations liquidity plan for 2007 includes strategies to increase core deposits in the
Corporations local markets. The new deposit products and strategic advertising is expected to
aid in efforts of management in growing core deposits to reduce the dependency on non-core
deposits, while also reducing interest costs. The Corporations liquidity plan for 2007 calls
for augmenting local deposit growth efforts with wholesale CD funding, to the extent necessary.
CAPITAL AND REGULATORY
As a bank holding company, the
Corporation is required to maintain certain levels of capital under government regulation.
There are several measurements of regulatory capital and the Corporation is required to
meet minimum requirements under each measurement. The federal banking regulators have also
established capital classifications beyond the minimum requirements in order to risk-rate
deposit insurance premiums and to provide trigger points for prompt corrective action in
the event an institution becomes financially troubled. As of
March 31, 2007, the Corporation
and Bank were well capitalized. The Corporation is currently exploring its alternatives for
the possible issuance of equity or debt in order to provide a broader base to support future
asset growth. During the first quarter of 2007, total capitalization
increased by $1.142 million.
22.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The following table details sources of capital for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Capital Structure |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
$ |
29,932 |
|
|
$ |
28,790 |
|
|
$ |
27,173 |
|
|
|
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
29,932 |
|
|
$ |
28,790 |
|
|
$ |
27,173 |
|
|
|
|
|
|
|
|
|
|
|
Tangible capital |
|
$ |
29,756 |
|
|
$ |
28,585 |
|
|
$ |
26,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit premium |
|
$ |
182 |
|
|
$ |
205 |
|
|
$ |
299 |
|
Other identifiable intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles |
|
$ |
182 |
|
|
$ |
205 |
|
|
$ |
299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory capital |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital: |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
$ |
29,932 |
|
|
$ |
28,790 |
|
|
$ |
27,173 |
|
Net unrealized (gains) losses on
available for sale securities |
|
|
109 |
|
|
|
187 |
|
|
|
355 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
60 |
|
Less: intangibles |
|
|
(182 |
) |
|
|
(205 |
) |
|
|
(299 |
) |
|
|
|
|
|
|
|
|
|
|
Total Tier 1 capital |
|
$ |
29,859 |
|
|
$ |
28,772 |
|
|
$ |
27,289 |
|
|
|
|
|
|
|
|
|
|
|
Tier 2 Capital: |
|
|
|
|
|
|
|
|
|
|
|
|
Allowable reserve for loan losses |
|
$ |
4,087 |
|
|
$ |
4,113 |
|
|
$ |
3,517 |
|
Qualifying long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 2 capital |
|
|
4,087 |
|
|
|
4,113 |
|
|
|
3,517 |
|
|
|
|
|
|
|
|
|
|
|
Total capital |
|
$ |
33,946 |
|
|
$ |
32,885 |
|
|
$ |
30,806 |
|
|
|
|
|
|
|
|
|
|
|
Risk-adjusted assets |
|
$ |
326,101 |
|
|
$ |
328,133 |
|
|
$ |
279,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital to average assets |
|
|
7.85 |
% |
|
|
7.85 |
% |
|
|
8.54 |
% |
Tier 1 Capital to risk weighted assets |
|
|
9.16 |
% |
|
|
8.77 |
% |
|
|
9.74 |
% |
Total Capital to risk weighted assets |
|
|
10.41 |
% |
|
|
10.02 |
% |
|
|
11.00 |
% |
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.
Presented below is a summary of the capital position in comparison to generally applicable
regulatory requirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 |
|
Tier 1 |
|
Total |
|
|
Capital to |
|
Capital to |
|
Capital to |
|
|
Average |
|
Risk-Weighted |
|
Risk-Weighted |
|
|
Assets |
|
Assets |
|
Assets |
Regulatory minimum for capital adequacy purposes |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
8.00 |
% |
Regulatory defined well capitalized guideline |
|
|
5.00 |
% |
|
|
6.00 |
% |
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation: |
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
7.85 |
% |
|
|
9.16 |
% |
|
|
10.41 |
% |
December 31, 2006 |
|
|
7.85 |
% |
|
|
8.77 |
% |
|
|
10.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank: |
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
8.22 |
% |
|
|
9.61 |
% |
|
|
10.86 |
% |
December 31, 2006 |
|
|
8.33 |
% |
|
|
9.31 |
% |
|
|
10.57 |
% |
23.
MACKINAC FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
In general, the Corporation attempts to manage interest rate risk by investing in a variety of
assets which afford it an opportunity to reprice assets and increase interest income at a rate
equal to or greater than the interest expense associated with repricing liabilities.
Interest rate risk is the exposure of the Corporation to adverse movements in interest rates. The
Corporation derives its income primarily from the excess of interest collected on its
interest-earning assets over the interest paid on its interest-bearing obligations. The rates of
interest the Corporation earns on its assets and owes on its obligations generally are established
contractually for a period of time. Since market interest rates change over time, the Corporation
is exposed to lower profitability if it cannot adapt to interest rate changes. Accepting interest
rate risk can be an important source of profitability and shareholder value; however, excess levels
of interest rate risk could pose a significant threat to the Corporations earnings and capital
base. Accordingly, effective risk management that maintains interest rate risk at prudent levels
is essential to the Corporations safety and soundness.
Loans are the most significant earning asset. Management offers commercial and real estate loans
priced at interest rates which fluctuate with various indices such as the prime rate or rates paid
on various government issued securities. In addition, the Corporation prices the majority of fixed
rate loans so it has an opportunity to reprice the loan within 12 to 36 months.
The Corporation also has $28.511 million of securities providing for scheduled monthly principal
and interest payments as well as unanticipated prepayments of principal. These cash flows are then
reinvested into other earning assets at current market rates. The Corporation also has federal
funds sold to correspondent banks as well as other interest-bearing deposits with correspondent
banks. These funds are generally repriced on a daily basis.
The Corporation offers deposit products with a variety of terms ranging from deposits whose
interest rates can change on a weekly basis to certificates of deposit with repricing terms of up
to five years. Longer term deposits generally include penalty provisions for early withdrawal.
Beyond general efforts to shorten the loan pricing periods and extend deposit maturities,
management can manage interest rate risk by the maturity periods of securities purchased, selling
securities available for sale, and borrowing funds with targeted maturity periods, among other
strategies. Also, the rate of interest rate changes can impact the actions taken since the speed
of change affects borrowers and depositors differently.
Exposure to interest rate risk is reviewed on a regular basis. Interest rate risk is the potential
of economic losses due to future interest rate changes. These economic losses can be reflected as
a loss of future net interest income and/or a loss of current fair market values. The objective is
to measure the effect of interest rate changes on net interest income and to structure the
composition of the balance sheet to minimize interest rate risk and at the same time maximize
income. Management realizes certain risks are inherent and that the goal is to identify and
minimize the risks. Tools used by management include maturity and repricing analysis and interest
rate sensitivity analysis. The Bank has monthly asset/liability meetings with an outside
consultant to review its current position and strategize about future opportunities on risks
relative to pricing and positioning of assets and liabilities.
The difference between repricing assets and liabilities for a specific period is referred to as the
gap. An excess of repricable assets over liabilities is referred to as a positive gap. An excess
of repricable liabilities over assets is referred to as a negative gap. The cumulative gap is the
summation of the gap for all periods to the end of the period for which the cumulative gap is being
measured.
Assets and liabilities scheduled to reprice are reported in the following time frames. Those
instruments, with a variable interest rate tied to an index and considered immediately repricable,
are reported in the 1- to 90-day time frame. The estimates of principal amortization and
prepayments are assigned to the following time frames.
24.
MACKINAC FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
The following is the Corporations repricing opportunities at March 31, 2007 (dollars in thousand):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-90 |
|
|
91 - 365 |
|
|
>1-5 |
|
|
Over 5 |
|
|
|
|
|
|
Days |
|
|
Days |
|
|
Years |
|
|
Years |
|
|
Total |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
218,003 |
|
|
$ |
8,154 |
|
|
$ |
28,785 |
|
|
$ |
63,479 |
|
|
$ |
318,421 |
|
Securities |
|
|
4,498 |
|
|
|
16,612 |
|
|
|
7,000 |
|
|
|
401 |
|
|
|
28,511 |
|
Other (1) |
|
|
7,186 |
|
|
|
|
|
|
|
|
|
|
|
3,794 |
|
|
|
10,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
229,687 |
|
|
|
24,766 |
|
|
|
35,785 |
|
|
|
67,674 |
|
|
|
357,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, Money Market and Savings |
|
|
84,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,046 |
|
Time deposits |
|
|
46,211 |
|
|
|
60,969 |
|
|
|
10,573 |
|
|
|
789 |
|
|
|
118,542 |
|
Brokered deposits |
|
|
44,676 |
|
|
|
33,732 |
|
|
|
|
|
|
|
|
|
|
|
78,408 |
|
Borrowings |
|
|
21,348 |
|
|
|
|
|
|
|
|
|
|
|
16,959 |
|
|
|
38,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing obligations |
|
|
196,281 |
|
|
|
94,701 |
|
|
|
10,573 |
|
|
|
17,748 |
|
|
|
319,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gap |
|
$ |
33,406 |
|
|
$ |
(69,935 |
) |
|
$ |
25,212 |
|
|
$ |
49,926 |
|
|
$ |
38,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap |
|
$ |
33,406 |
|
|
$ |
(36,529 |
) |
|
$ |
(11,317 |
) |
|
$ |
38,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Federal Home Loan Bank Stock |
The above analysis indicates that at March 31, 2007, the Corporation had a cumulative
liability sensitivity gap position of $36.529 million within the one-year time frame. The
Corporations cumulative liability sensitive gap suggests that if market interest rates continue to
increase in the next twelve months, the Corporation has the potential to earn less net interest
income. Conversely, if market interest rates decrease in the next twelve months, the above GAP
position suggests the Corporations 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 savings
accounts as repricing within 90 days, while experience suggests that these categories of deposits
are actually comparatively resistant to rate sensitivity.
At December 31, 2006, the Corporation had a cumulative liability sensitivity gap position of
$36.811 million within the one-year time frame. The decrease in the gap position from December 31,
2006 to March 31, 2007 was insignificant.
The borrowings in the gap analysis include $15 million of the FHLB advances as fixed-rate advances.
These advances give the FHLB the option to convert from a fixed-rate advance to an adjustable rate
advance with quarterly repricing at three-month LIBOR Flat. The exercise of this conversion
feature by the FHLB would impact the repricing dates currently assumed in the analysis. In 2006,
the FHLB converted $20 million of the $35 million total FHLB borrowings from fixed to variable
rate.
The Corporations primary market risk exposure is interest rate risk and, to a lesser extent,
liquidity risk and foreign exchange risk. The Corporation has no market risk sensitive instruments
held for trading purposes. The Corporation has limited agricultural-related loan assets and
therefore has minimal significant exposure to changes in commodity prices. Any impact that changes
in foreign exchange rates and commodity prices would have on interest rates are assumed to be
insignificant.
Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the
process used to control interest rate risk and the quantitative level of exposure. The
Corporations interest rate risk management process seeks to ensure that appropriate policies,
procedures, management information systems, and internal
controls are in place to maintain interest rate risk at prudent levels with consistency and
continuity. In evaluating the quantitative level of interest rate risk, the Corporation assesses
the existing and potential future effects of changes in interest rates on its financial condition,
including capital adequacy, earnings, liquidity, and asset quality.
25.
MACKINAC FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
In addition to changes in interest rates, the level of future net interest income is also dependent
on a number of variables, including: the growth, composition and levels of loans, deposits, and
other earning assets and interest-bearing obligations, and economic and competitive conditions;
potential changes in lending, investing, and deposit strategies; customer preferences; and other
factors.
FOREIGN EXCHANGE RISK
In addition to managing interest rate risk, management also actively manages risk associated with
foreign exchange. The Corporation provides foreign exchange services, makes loans to, and accepts
deposits from, Canadian customers primarily at its banking offices in Sault Ste. Marie, Michigan.
To protect against foreign exchange risk, the Corporation monitors the volume of Canadian deposits
it takes in and then invests these Canadian funds in Canadian commercial loans and securities. As
of March 31, 2007, the Corporation had excess Canadian assets of $.312 million (or $.270 million in
U.S. dollars). Management believes the exposure to short-term foreign exchange risk is minimal and
at an acceptable level for the Corporation.
OFF-BALANCE-SHEET RISK
Derivative financial instruments include futures, forwards, interest rate swaps, option contracts
and other financial instruments with similar characteristics. The Corporation currently does not
enter into futures, forwards, swaps, or options. However, the Corporation is party to financial
instruments with off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and
standby letters of credit and involve to varying degrees, elements of credit and interest rate risk
in excess of the amount recognized in the condensed consolidated balance sheets. Commitments to
extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates and may
require collateral from the borrower if deemed necessary by the Corporation. Standby letters of
credit are conditional commitments issued by the Corporation to guarantee the performance of a
customer to a third party up to a stipulated amount and with specified terms and conditions.
Commitments to extend credit and standby letters of credit are not recorded as an asset or
liability by the Corporation until the instrument is exercised.
IMPACT OF INFLATION AND CHANGING PRICES
The accompanying condensed consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, which require the measurement of financial position and
results of operations in historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Corporations operations. Nearly all the assets and liabilities of the
Corporation are financial, unlike industrial or commercial companies. As a result, the
Corporations performance is directly impacted by changes in interest rates, which are indirectly
influenced by inflationary expectations. The Corporations ability to match the interest
sensitivity of its financial assets to the interest sensitivity of its financial liabilities tends
to minimize the effect of changes in interest rates on the Corporations performance. Changes in
interest rates do not necessarily move to the same extent as changes in the price of goods and
services.
26.
MACKINAC FINANCIAL CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under
the supervision of and with the participation of the Corporations management, including the
Chairman and Chief Executive Officer, and the Chief Financial Officer, of the effectiveness
of the design and operation of the Corporations disclosure controls and procedures (as such
term is defined in Rules 13-a 15(e) and 15d-15(e) under the Securities and Exchange Act of 1934,
as amended (the Exchange Act)) as of the end of the period covered by this report. Based on
that evaluation the Corporations management, including the Chairman and Chief Executive
Officer, have concluded that, as of the end of such period, the Corporations disclosure
controls and procedures were effective in timely alerting them to material information
relating to the Corporation (including its consolidated subsidiaries) required to be disclosed
but the Corporation in the reports that it files or submits under the Exchange Act.
There was
no change in the Corporations internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) that occurred during the Corporations fiscal
quarter ended March 31, 2007 that has materially affected, or is
reasonably likely to materially affect, the Corporations internal control
over financial reporting.
27.
MACKINAC FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation and its subsidiaries are subject to routine litigation incidental to the business
of banking. The litigation that is not routine and incidental to the business of banking is
described below.
Shareholders Derivative Litigation
Damon Trust v. Bittner, et al.
In an action styled Virginia M. Damon Trust v. North Country Financial Corporation, Nominal
Defendant, and Dennis Bittner, Bernard A. Bouschor, Ronald G. Ford, Sherry L. Littlejohn, Stanley
J. Gerou II, John D. Lindroth, Stephen Madigan, Spencer Shunk, Michael Hendrickson, Glen Tolksdorf,
and Wesley Hoffman, filed in the U.S. District Court for the Western District of Michigan on July
1, 2003, a shareholder of the Corporation has brought a shareholders derivative action under
Section 27 of the Exchange Act against the Corporation and certain of its current and former
directors and senior executive officers.
On November 11, 2003, the Corporation filed a motion, as permitted by section 495 of the MBCA,
M.C.L.§ 450.1495, requesting the Court to appoint a disinterested person to conduct a reasonable
investigation of the claims made by the plaintiff and to make a good faith determination whether
the maintenance of the derivative action is in the best interests of the Corporation. After
additional written submissions to the Court by the defendants and the plaintiff concerning the
issues presented by this motion, and after several conferences with the Court, on May 20, 2004, the
Court entered an Order adopting the parties written stipulations concerning the appointment of a
disinterested person and the manner of conducting the investigation of the claims made by the
plaintiff and making recommendations as to whether the maintenance of the derivative action is in
the best interests of the Corporation. The Corporation is a named nominal defendant which
requires the Corporation to cooperate with the defendants defense of the plaintiffs action. The
Corporation is assisting the defendants in the discovery phase of this litigation and is incurring
legal fees as a consequence of that cooperation. However, in total, the Corporations primary
purpose will be to monitor the process of this legal action and the Corporation does not expect to
incur substantial legal fees related to the case.
Damon Trust v. Wipfli
This matter has been resolved and concluded with the Corporation receiving $470,000 in settlement
proceeds. Please refer to the Annual Report for a more detailed description and explanation of
this litigation.
28.
MACKINAC FINANCIAL CORPORATION
PART II. OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
|
|
|
Exhibit 3.1 Articles of Incorporation, as amended, incorporated herein by
reference to exhibit 3.1 of the Corporations Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999. |
|
|
|
|
Exhibit 3.2 Amended and Restated Bylaws, incorporated herein by reference
to exhibit 3.1 of the Corporations Quarterly Report on Form
10-Q for the quarter ended September 30, 2001. |
|
|
|
|
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. |
29.
MACKINAC FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
MACKINAC FINANCIAL CORPORATION |
|
|
(Registrant)
|
|
|
Date: May 15, 2007 |
By: |
/s/ Paul D. Tobias
|
|
|
|
PAUL D. TOBIAS, |
|
|
|
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(principal executive officer) |
|
|
|
|
|
|
By: |
/s/ Ernie R. Krueger
|
|
|
|
ERNIE R. KRUEGER |
|
|
|
EXECUTIVE VICE PRESIDENT /CONTROLLER
(principal accounting officer) |
|
|
30.