0001558370-18-007070.txt : 20180814 0001558370-18-007070.hdr.sgml : 20180814 20180814154420 ACCESSION NUMBER: 0001558370-18-007070 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 74 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180814 DATE AS OF CHANGE: 20180814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MACKINAC FINANCIAL CORP /MI/ CENTRAL INDEX KEY: 0000036506 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382062816 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20167 FILM NUMBER: 181017008 BUSINESS ADDRESS: STREET 1: 130 SOUTH CEDAR STREET STREET 2: PO BOX 369 CITY: MANISTIQUE STATE: MI ZIP: 49854 BUSINESS PHONE: 9063418401 MAIL ADDRESS: STREET 1: 130 S CEDAR ST STREET 2: P O BOX 369 CITY: MANISTIQUE STATE: MI ZIP: 49854 FORMER COMPANY: FORMER CONFORMED NAME: NORTH COUNTRY FINANCIAL CORP DATE OF NAME CHANGE: 19990409 FORMER COMPANY: FORMER CONFORMED NAME: FIRST MANISTIQUE CORP DATE OF NAME CHANGE: 19920703 10-Q 1 mfnc-20180630x10q.htm 10-Q mfnc_Current folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2018

 

OR

 

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

 

For the transition period from <> to <>

 

Commission file number: 0-20167

 

MACKINAC FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

MICHIGAN

 

38-2062816

(State or other jurisdiction of

 

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

incorporation or organization)

 

 

 

 

130 SOUTH CEDAR STREET, MANISTIQUE, MI

 

49854

(Address of principal executive offices)

 

(Zip Code)

 

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

 

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

 

Yes  ☒     No  ☐

 

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

 

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

 

Large Accelerated Filer  ☐

 

Accelerated Filer  ☐

 

 

 

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

 

Smaller reporting company  ☒

 

Emerging growth company  ☐ 

 

 

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

 

Yes  ☐     No  ☒

 

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

 

As of August 13, 2018, there were outstanding 10,712,745 shares of the registrant’s common stock, no par value.

 

 

 

 

 


 

MACKINAC FINANCIAL CORPORATION

 

INDEX

 

 

 

 

 

 

 

    

Page No.

 

 

 

 

PART I. 

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – June 30, 2018 (Unaudited), December 31, 2017

 

1

 

 

 

 

 

Condensed Consolidated Statements of Operations — Three  and Six Months Ended June 30, 2018 (Unaudited) and June 30, 2017 (Unaudited)

 

2

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — Three and Six Months Ended June 30, 2018 (Unaudited) and June 30, 2017 (Unaudited)

 

3

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity — Six Months Ended June 30, 2018 (Unaudited) and June 30, 2017 (Unaudited)

 

4

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2018 (Unaudited) and June 30, 2017 (Unaudited)

 

5

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

Item 2. 

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

 

29

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

43

 

 

 

 

Item 4. 

Controls and Procedures

 

46

 

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

47

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds 

 

47

 

 

 

 

Item 6. 

Exhibits and Reports on Form 8-K

 

47

 

 

 

 

SIGNATURES 

 

48

 

 

 

 

 


 

MACKINAC FINANCIAL CORPORATION

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2018

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

64,874

 

$

37,420

 

Federal funds sold

 

 

15

 

 

 6

 

Cash and cash equivalents

 

 

64,889

 

 

37,426

 

 

 

 

 

 

 

 

 

Interest-bearing deposits in other financial institutions

 

 

10,873

 

 

13,374

 

Securities available for sale

 

 

114,182

 

 

75,397

 

Other securities

 

 

500

 

 

500

 

Federal Home Loan Bank stock

 

 

4,860

 

 

3,112

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

Commercial

 

 

684,725

 

 

572,936

 

Mortgage

 

 

299,450

 

 

220,708

 

Consumer

 

 

19,202

 

 

17,434

 

Total Loans

 

 

1,003,377

 

 

811,078

 

Allowance for loan losses

 

 

(5,141)

 

 

(5,079)

 

Net loans

 

 

998,236

 

 

805,999

 

 

 

 

 

 

 

 

 

Premises and equipment

 

 

21,790

 

 

16,290

 

Other real estate held for sale

 

 

2,461

 

 

3,558

 

Deferred tax asset

 

 

8,000

 

 

4,970

 

Deposit based intangibles

 

 

4,504

 

 

1,922

 

Goodwill

 

 

20,389

 

 

5,694

 

Other assets

 

 

23,411

 

 

17,125

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,274,095

 

$

985,367

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

220,176

 

$

148,079

 

NOW, money market, interest checking

 

 

337,344

 

 

280,309

 

Savings

 

 

106,022

 

 

61,097

 

CDs<$250,000

 

 

181,352

 

 

142,159

 

CDs>$250,000

 

 

18,930

 

 

11,055

 

Brokered

 

 

151,677

 

 

175,299

 

Total deposits

 

 

1,015,501

 

 

817,998

 

 

 

 

 

 

 

 

 

Federal funds purchased

 

 

10,000

 

 

 —

 

Borrowings

 

 

91,747

 

 

79,552

 

Other liabilities

 

 

7,980

 

 

6,417

 

Total liabilities

 

 

1,125,228

 

 

903,967

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares                                            Issued and outstanding - 10,712,745 and 6,294,930 respectively

 

 

128,880

 

 

61,981

 

Retained earnings

 

 

19,602

 

 

19,711

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

Unrealized gains (losses) on available for sale securities

 

 

606

 

 

(71)

 

Minimum pension liability

 

 

(221)

 

 

(221)

 

Total shareholders’ equity

 

 

148,867

 

 

81,400

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

1,274,095

 

$

985,367

 

 

1


 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

(Unaudited)

 

(Unaudited)

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

12,071

 

$

10,260

 

$

22,461

 

$

20,217

 

Tax-exempt

 

 

31

 

 

19

 

 

56

 

 

52

 

Interest on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

560

 

 

396

 

 

932

 

 

795

 

Tax-exempt

 

 

79

 

 

75

 

 

148

 

 

154

 

Other interest income

 

 

197

 

 

116

 

 

396

 

 

244

 

Total interest income

 

 

12,938

 

 

10,866

 

 

23,993

 

 

21,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,602

 

 

1,054

 

 

2,838

 

 

2,013

 

Borrowings

 

 

523

 

 

493

 

 

1,033

 

 

964

 

Total interest expense

 

 

2,125

 

 

1,547

 

 

3,871

 

 

2,977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

10,813

 

 

9,319

 

 

20,122

 

 

18,485

 

Provision for loan losses

 

 

100

 

 

50

 

 

150

 

 

200

 

Net interest income after provision for loan losses

 

 

10,713

 

 

9,269

 

 

19,972

 

 

18,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposit service fees

 

 

323

 

 

268

 

 

592

 

 

540

 

Income from mortgage loans sold on the secondary market

 

 

277

 

 

316

 

 

454

 

 

614

 

SBA/USDA loan sale gains

 

 

83

 

 

89

 

 

134

 

 

149

 

Net mortgage servicing amortization

 

 

(2)

 

 

(9)

 

 

(10)

 

 

(17)

 

Other

 

 

182

 

 

131

 

 

307

 

 

285

 

Total other income

 

 

863

 

 

795

 

 

1,477

 

 

1,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,923

 

 

3,658

 

 

9,077

 

 

7,455

 

Occupancy

 

 

928

 

 

776

 

 

1,739

 

 

1,561

 

Furniture and equipment

 

 

644

 

 

544

 

 

1,175

 

 

1,025

 

Data processing

 

 

586

 

 

489

 

 

1,090

 

 

950

 

Advertising

 

 

192

 

 

174

 

 

387

 

 

297

 

Professional service fees

 

 

397

 

 

405

 

 

701

 

 

726

 

Loan origination expenses and deposit and card related fees

 

 

148

 

 

155

 

 

274

 

 

334

 

Writedowns and losses on other real estate held for sale

 

 

40

 

 

243

 

 

66

 

 

255

 

FDIC insurance assessment

 

 

187

 

 

189

 

 

343

 

 

346

 

Telephone

 

 

152

 

 

134

 

 

307

 

 

291

 

Transaction related expenses

 

 

1,976

 

 

 —

 

 

2,165

 

 

 —

 

Other

 

 

904

 

 

750

 

 

1,681

 

 

1,454

 

Total other expenses

 

 

11,077

 

 

7,517

 

 

19,005

 

 

14,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

499

 

 

2,547

 

 

2,444

 

 

5,162

 

Provision for  income taxes

 

 

103

 

 

867

 

 

511

 

 

1,756

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

396

 

$

1,680

 

$

1,933

 

$

3,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

$

0.27

 

$

0.27

 

$

0.54

 

Diluted

 

$

0.05

 

$

0.27

 

$

0.27

 

$

0.54

 

 

 

2


 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2018

    

2017

 

2018

    

2017

 

Net income

 

$

396

 

$

1,680

 

$

1,933

 

$

3,406

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains arising during the period

 

 

1,392

 

 

424

 

 

857

 

 

924

 

Tax effect

 

 

(292)

 

 

(144)

 

 

(180)

 

 

(314)

 

Net change in unrealized gains on available for sale securities

 

 

1,100

 

 

280

 

 

677

 

 

610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

1,496

 

$

1,960

 

$

2,610

 

$

4,016

 

 

 

3


 

 

 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

Shares of

 

Stock and

 

 

 

Other

 

 

 

 

 

Common

 

Additional

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Paid in Capital

    

Earnings

    

Income (loss)

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

6,294,930

 

$

61,981

 

$

19,711

 

$

(292)

 

$

81,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 —

 

 

 —

 

 

1,933

 

 

 —

 

 

1,933

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 —

 

 

 —

 

 

 —

 

 

677

 

 

677

 

Actuarial loss on defined benefit pension obligation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total comprehensive income

 

 —

 

 

 —

 

 

1,933

 

 

677

 

 

2,610

 

Stock compensation

 

 —

 

 

274

 

 

 —

 

 

 —

 

 

274

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

45,630

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

FFNM acquisition

 

2,146,378

 

 

34,101

 

 

 —

 

 

 —

 

 

34,101

 

Capital raise, net of offering costs

 

2,225,807

 

 

32,524

 

 

 —

 

 

 —

 

 

32,524

 

Dividend on common stock

 

 —

 

 

 —

 

 

(2,042)

 

 

 —

 

 

(2,042)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

10,712,745

 

$

128,880

 

$

19,602

 

$

385

 

$

148,867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

Shares of

 

Stock and

 

 

 

Other

 

 

 

 

 

Common

 

Additional

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

   

Paid in Capital

    

Earnings

    

Income (Loss)

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

6,263,371

 

$

61,583

 

$

17,206

 

$

(180)

 

$

78,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 —

 

 

 —

 

 

3,406

 

 

 —

 

 

3,406

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 —

 

 

 —

 

 

 —

 

 

610

 

 

610

 

Actuarial loss on defined benefit pension obligation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total comprehensive income

 

 —

 

 

 —

 

 

3,406

 

 

610

 

 

4,016

 

Stock compensation

 

 —

 

 

199

 

 

 —

 

 

 —

 

 

199

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

31,559

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Repurchase of common stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Dividend on common stock

 

 —

 

 

 —

 

 

(1,511)

 

 

 —

 

 

(1,511)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

6,294,930

 

$

61,782

 

$

19,101

 

$

430

 

$

81,313

 

 

4


 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

    

2018

    

2017

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

1,933

 

$

3,406

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,298

 

 

1,173

 

Provision for loan losses

 

 

150

 

 

200

 

Deferred tax expense, net

 

 

511

 

 

1,756

 

Gain on sales/calls of securities

 

 

 —

 

 

 —

 

Gain on sale of loans sold in the secondary market

 

 

(454)

 

 

(614)

 

Origination of loans held for sale in the secondary market

 

 

(20,613)

 

 

(30,012)

 

Proceeds from sale of loans in the secondary market

 

 

21,067

 

 

30,626

 

Loss on sale of other real estate held for sale

 

 

19

 

 

 2

 

Writedown of other real estate held for sale

 

 

47

 

 

253

 

Stock compensation

 

 

274

 

 

199

 

Change in other assets

 

 

1,191

 

 

1,529

 

Change in other liabilities

 

 

34

 

 

(1,952)

 

Net cash provided by operating activities

 

 

5,457

 

 

6,566

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Net increase in loans

 

 

(7,343)

 

 

(9,420)

 

Net increase (decrease) in interest bearing deposits in other financial institutions

 

 

2,501

 

 

(265)

 

Purchase of securities available for sale

 

 

(1,063)

 

 

 —

 

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

 

 

58,760

 

 

4,781

 

Redemption of FHLBI stock

 

 

 —

 

 

192

 

Capital expenditures

 

 

(1,484)

 

 

(1,716)

 

Purchase additional FHLBI stock

 

 

 —

 

 

(531)

 

Acquisition of FFNM

 

 

13,267

 

 

 —

 

Proceeds from sale of other real estate, premises and fixed assets

 

 

1,624

 

 

949

 

Net cash provided by (used in) investing activities

 

 

66,262

 

 

(6,010)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net (decrease) increase in deposits

 

 

(56,212)

 

 

24,733

 

Net activity on line of credit

 

 

(1,000)

 

 

545

 

Increase (decrease) in fed funds purchased

 

 

10,000

 

 

(6,000)

 

New term debt issuance

 

 

 —

 

 

25,000

 

Principal payments on borrowings

 

 

(27,527)

 

 

(1,100)

 

Proceeds of common stock offering

 

 

32,524

 

 

 —

 

Dividend on common stock

 

 

(2,041)

 

 

(1,511)

 

Net cash used in financing activities

 

 

(44,256)

 

 

41,667

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

27,463

 

 

42,223

 

Cash and cash equivalents at beginning of period

 

 

37,426

 

 

46,755

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

64,889

 

$

88,978

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

3,777

 

$

2,968

 

Income taxes

 

 

625

 

 

 —

 

 

 

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

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

 

 

400

 

 

659

 

 

5


 

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the “Corporation”) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and six month periods ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.  The unaudited consolidated financial statements and footnotes thereto should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

In order to properly reflect some categories of other income and other expenses, reclassifications of expense and income items have been made to prior period numbers.  The “net” other income and other expenses were unchanged by these reclassifications.

 

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

 

Acquired Loans

 

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

 

In recording the fair values of acquired impaired loans at acquisition date, management calculates a non-accretable difference (the credit component of the purchased loans) and an accretable difference (the yield component of the purchased loans).

 

Over the life of the acquired loans, management continues to estimate cash flows expected to be collected.  We evaluate at each balance sheet date whether it is probable that we will be unable to collect all cash flows expected at acquisition and if so, recognize a provision for loan loss in our consolidated statement of operations. For any significant increases in cash flows expected to be collected, we adjust the amount of the accretable yield recognized on a prospective basis over the pool’s remaining life.

 

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

 

6


 

Allowance for Loan Losses

 

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

 

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

 

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

 

Stock Compensation Plans

 

On May 22, 2012, the Corporation’s shareholders approved the Mackinac Financial Corporation 2012 Incentive Compensation Plan, under which current and prospective employees, non-employee directors and consultants may be awarded incentive stock options, non-statutory stock options, shares of restricted stock awards (“RSAs”), stock grants,or stock appreciation rights.  The aggregate number of shares of the Corporation’s common stock issuable under the plan is 575,000. At June 30, 2018 there were 247,279 shares available for issuance under this plan. Awards are made to certain other senior officers at the discretion of the Corporation’s management.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

 

2.RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on the recognition of revenue from contracts with customers. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Corporation adopted the new guidance on January 1, 2018.  Management’s analysis included: identification of all revenue streams included in the financial statements; determination of scope exclusions to identify “in-scope” revenue streams; determination of size, timing and amount of revenue recognition for in-scope items.  Key revenue streams identified include service charges on deposit accounts, and credit card income.  The new guidance did not have a material impact on the Corporation’s consolidated financial condition or results of operation.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”).  ASU 2016-01 amends current guidance by requiring companies to recognize changes in fair value for equity investments that have a readily determinable fair value through net income rather than through other comprehensive income.  Under ASU 2016-01, equity investments that do not have a readily determinable fair value will either be accounted for in the same manner as equity investments that have a readily determinable fair value, with changes in fair value recognized through net income or carried at cost, adjusted for changes in observable prices based on orderly transactions for identical or similar investments issued by the same issuer and further adjusted for impairment, if applicable.  ASU 2016-01 also requires a qualitative assessment of impairment indicators each reporting period.  If this assessment indicates that impairment exists, companies must adjust the investment to fair value and recognize an impairment loss in net income, even if the impairment is determined to be temporary.  ASU 2016-01 was effective for public companies for interim and annual periods beginning after June 30, 2018.  The Corporation adopted the new guidance on January 1, 2018.  As such, the Corporation reclassified $.500

7


 

million of equity securities from available-for-sale securities to other securities on its unaudited condensed consolidated balance sheet.  There were no unrealized gains or losses on those securities that required reclassification from accumulated other comprehensive income to retained earnings.   The Corporation’s adoption of ASU 2016-01 did not have a material impact on the Corporation’s consolidated financial condition or results of operations.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which will supersede the current lease requirements in ASC 840.  The ASU requires lessees to recognize an asset with the right of use and related lease liability for all leases, with a limited exception for short-term leases.  Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations.  Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet.  The reporting of lease related expenses in the statements of operations and cash flows will be generally consistent with the current guidance.  The new lease guidance will be effective for the Corporation’s year ending December 31, 2019 and will be applied using modified retrospective transition method to the beginning of the earliest period presented.  The effect of applying the new lease guidance on the financial statements should be determined soon.

 

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

 

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

 

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

 

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

 

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

 

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

 

 

8


 

 

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715).  ASU 2017-07 provides