BUSINESS COMBINATIONS

9 Months Ended

Sep. 30, 2016

Business Combinations

BUSINESS COMBINATIONS

15.  BUSINESS COMBINATIONS

The First National Bank of Eagle River

The Corporation completed its acquisition of The First National Bank of Eagle River (“Eagle”) in April 2016.  Eagle had three branch offices and approximately $125 million in assets as of April 29, 2016.  The results of operations due to the merger have been included in the Corporation’s results since the acquisition date.  The merger was effected by a cash payment of $12.500 million. 

The table below highlights the allocation of the purchase price (dollars in thousands, except per share data):

Purchase Price:
Eagle shares outstanding		85,776
Price per share/Cash price	$	145.73
Total purchase price			$	12,500
Reimbursement of termination fees				(1,763)
Cash consideration			$	10,737
Net assets acquired:
Cash and cash equivalents	$	10,600
Securities available for sale		24,046
Valuation mark		(750)
FRB & FHLB Stock		575
Total Loans		84,138
Allowance for loan losses		(611)
Valuation mark   -  ASC 310-30, nonperforming		(1,563)
-  ASC 310-20, performing		(1,700)
Allowance for loan loss reversal		611
Premises and equipment		1,931
Other real estate owned		1,795
Valuation mark		(891)
Deposit based intangible		993
Mortgage servicing rights		120
Deferred tax benefit - book for valuation marks		948
Bank owned life insurance		4,132
Other assets		323
Total assets		124,697
Non-interest bearing deposits		22,349
Interest bearing deposits		82,165
Total deposits		104,514
FHLB Borrowings		11,000
Other liabilities		285
Total liabilities		115,799
Net assets acquired				8,898
Goodwill			$	1,839

The results of operations for the nine months ended September 30, 2016 include the operating results of the acquired assets and assumed liablities for the 153 days subsequent to the acquisition date.  Eagle’s results of operations prior to the acquisition date are not included in the Corporation’s consolidated statement of comprehensive income.

In addition to the data processing termination fees of $1.763 million, the Corporation incurred other Eagle transaction related expenses of $.890 million, for a total of $2.653 million, or $1.751 million on an after tax basis during the nine months ended September 30, 2016.  These expenses included professional services such as legal, accounting, employee severance payments and contractual arrangements for consulting services. 

Niagara Bancorporation

The Corporation completed its acquisition of Niagara Bancorporation, Inc. (“Niagara”) in August 2016.  Niagara had four branch offices and approximately $67 million in assets as of August 31, 2016. The results of operations due to the merger have been included in the Corporation’s results since the acquisition date.  The merger was effected by a cash payment of $7.325 million. 

The table below highlights the allocation of the purchase price (dollars in thousands, except per share data):

Purchase Price:
Eagle shares outstanding		4,354
Price per share/Cash price	$	1,682.36
Total purchase price			$	7,325
Net assets acquired:
Cash and cash equivalents	$	9,778
Securities available for sale		21,491
FRB & FHLB Stock		287
Total Loans		32,660
Allowance for loan losses		(358)
Valuation mark   -  ASC 310-30, nonperforming		(353)
-  ASC 310-20, performing		(600)
Allowance for loan loss reversal		358
Premises and equipment		926
Other real estate owned		450
Valuation mark		(149)
Deposit based intangible		300
Mortgage servicing rights		87
Deferred tax benefit - book for valuation marks		273
Deferred tax benefit		124
Bank owned life insurance		1,109
Other assets		302
Total assets		66,685
Non-interest bearing deposits		5,396
Interest bearing deposits		53,788
Total deposits		59,184
Other liabilities		226
Total liabilities		59,410
Net assets acquired				7,275
Goodwill			$	50

The results of operations for the nine months ended September 30, 2016 include the operating results of the acquired assets and assumed liablities for the 30 days subsequent to the acquisition date.  Niagara’s results of operations prior to the acquisition date are not included in the Corporation’s consolidated statement of comprehensive income.

The Corporation incurred Niagara  transaction related expenses of $.275 million, $.182 million on an after tax basis during the nine months ended September 30, 2016.  These expenses included professional services such as data processing, legal, accounting, employee severance payments, and contractual arrangements for consulting services. 

The following table provides the unaudited pro forma information for the results of operations for the nine months ended September 30, 2016, and the year ended December 31, 2015 as if both the Eagle acquisition and Niagara acquistion had occurred on January 1 of each year.  These adjustments reflect the impact of certain purchase accounting fair value measurements, primarily on the loan and deposit portfolios of Eagle.  In addition, the merger related costs noted above are excluded from the nine months ended September 30, 2016 results of operations, for comparative proforma purposes.  Further operating cost savings are expected along with additional business synergies as a result of the merger which are not presented in the pro forma amounts.  These unaudited pro forma results are presented for illustrative purposes only and are not intended to represent or be indicative of the actual results of operations of the combined banking organization that would have been achieved had the merger occurred at the beginning of the period presented, nor are the intended to represent or be indicative of future results of the Corporation.

Proforma Mackinac Financial Combined with Eagle River and Niagara

	Nine months ended		Year Ended
	September 30, 2016		December 31, 2015
Net interest income	$	26,833	$	35,492
Noninterest income		3,744		5,533
Noninterest expense		25,431		30,691
Net income		3,396		7,117
Net income per diluted share	$	.54		1.13

Fair Value

In most instances, determining the fair value of the acquired assets and assumed liabilities required the Corporation to estimate the cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest.  The most significant of those determinations is related to the valuation of acquired loans.  For such loans, the excess cash flows expected at merger over the estimated fair value is recognized as interest income over the remaining lives of the loans.  The difference between contractually required payments at merger and the cash flows expected to be collected at merger reflects the impact of estimated credit losses and other factors, such as prepayments.  In accordance with the applicable accounting guidance for business combinations, there was no carry-over of either Eagle’s or Niagara’s previously established allowance for loan losses.

The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (“acquired impaired”) and loans that do not meet the criteria, which are accounted for under ASC 310-20 (“acquired non-impaired”).  In addition, the loans are further categorized into different pools based primarily on the type and purpose of the loan.