2012
A n n uA l R e p o Rt
Table of Contents
To Our Shareholders ..............................................................................................................................1
Five-Year Overview...............................................................................................................................6
Regional Review ....................................................................................................................................8
Selected Financial Highlights ..............................................................................................................14
Quarterly Financial Summary ..............................................................................................................15
Report of Independent Registered Public Accounting Firm ................................................................16
Consolidated Balance Sheets ...............................................................................................................17
Consolidated Statements of Operations ...............................................................................................18
Consolidated Statements Comprehensive Income ...............................................................................19
Consolidated Statements of Changes in Shareholders’ Equity ............................................................20
Consolidated Statements of Cash Flows ..............................................................................................21
Notes to Consolidated Financial Statements........................................................................................22
Selected Financial Data........................................................................................................................53
Summary Quarterly Financial Information ..........................................................................................54
Market Information ..............................................................................................................................56
Shareholder Return Performance Graph ..............................................................................................57
Forward-Looking Statements...............................................................................................................58
Management’s Discussion and Analysis of Financial
Condition and Results of Operations ................................................................................................60
Directors and Officers ..........................................................................................................................81
______________________________________________________________________________________
BUSINESS OF THE CORPORATION
Mackinac Financial Corporation is a registered bank holding company formed under the Bank Holding Company
Act of 1956 with assets in excess of $540 million and whose common stock is traded on the NASDAQ stock market
as “MFNC.” The principal subsidiary of the Corporation is mBank. Headquartered in Manistique, Michigan,
mBank has 11 branch locations; seven in the Upper Peninsula, three in the Northern Lower Peninsula and one in
Oakland County, Michigan. The Company’s banking services include commercial lending and treasury
management products and services geared toward small to mid-sized businesses, retail and commercial, title
insurance, as well as a full array of personal and business deposit products and consumer loans.
FORM 10-K
A copy of the Annual Report to the Securities and Exchange Commission on Form 10-K is available without
charge by writing the Shareholders’ Relations Department, Mackinac Financial Corporation, 130 South
Cedar Street, Manistique, Michigan, 49854.
MARKET SUMMARY
The Corporation’s common stock is traded on the Nasdaq Capital Market under the symbol MFNC. The
Corporation had approximately 1,200 shareholders of record as of March 29, 2013.
To Our Shareholders
March 29, 2013
Dear Shareholders:
We are proud of our 2012 operating results, as discussed in this letter, which provides you with an overview of our
performance. We have seen continued progress in reducing nonperforming assets, limiting balance sheet risk, improving
our net interest margin and increasing noninterest revenue to build franchise value. We view 2012 as another positive step
forward in our mission of enhancing shareholder value.
The various charts and graphs following this letter track the performance of the company through the last five years in
terms of key shareholder metrics and operating performance levels. During this period of highly challenging economic
times for banks across the country and especially in the State of Michigan, the Corporation increased its common stock
book value from $7.75 per share at December 31, 2005 to $11.05 at 2012 year end, an increase of $3.30 per share, or 43%.
During this five year period, we also significantly increased total assets, loans, and core deposits which provide the
foundation for future organic growth. This organic growth, along with future initiatives, including possible accretive
acquisitions, will add shareholder value. At the end of 2012, the Corporation and the Bank had strong equity positions.
The Corporation had a Tier 1 ratio of 11.98% and total risk based capital of 14.93%. The Bank’s Tier 1 capital ratio stood
at 9.63% with a total risk based capital ratio of 12.21%.
Listed below are some key performance highlights and events that shaped 2012.
Capital Offering
(cid:2) Consummation of a common stock rights offering and the investment by Steinhardt Capital Investors, LLLP with
the issuance of 2.140 million shares for net proceeds of $11.500 million.
Dividend Declaration
(cid:2)
In December, the Corporation announced its first quarterly dividend since the recapitalization at $.04 per share.
Strong Loan Production
(cid:2) We continued to experience loan demand with approximately $214 million of new loan production split between
commercial related credits accounting for $103 million, and consumer/mortgage loans totaling $111 million. Our
total outstanding loans increased by $47.931 million after reductions for loan sales, (SBA/USDA and secondary
market) amortization and payoffs. Most importantly, we continue to be successful in producing well priced high
quality loans in the Upper Peninsula with 2012 loan production of $134 million. In 2012, we began to see
resurgence in loan opportunities in Northern Lower Michigan with production of $38 million and also Southeast
Michigan with production of $42 million.
(cid:2) Balance sheet growth equated to $47.9 million for 2012, an 11.9% increase in loans outstanding from 2011 year-
end.
Growth in Noninterest Income
(cid:2)
In 2012 we continued to be a state leader in the origination of sound SBA and USDA guaranteed loans with total
gain on sales of $1.176 million in 2012 compared to $1.500 million during 2011. Sold guaranteed loans totaled
$12 million in 2012 compared to $19 million in 2011.
1
To Our Shareholders
(cid:2) We generated higher levels of secondary market income of $1.390 million in 2012 compared to $.700 million in
2011. At 2012 year-end, our mortgage loan servicing portfolio totaled $97 million which provides future
refinancing/cross selling opportunities and also provides a stable source of core deposits since many of these
clients maintain various transactional accounts.
Core Deposit Growth
(cid:2) Total deposits of $434.557 million at 2012 year-end increased 7.35% from deposits of $404.789 million at 2011
year-end. The overall increase in deposits for 2012 is comprised of an increase in core deposits of $23.772 million
and increased noncore deposits of $5.996 million. The largest increase in core deposits was in non-interest bearing
demand deposits.
Margin Improvement
(cid:2) Net interest income and the net interest margin in 2012 increased to $19.824 million, and 4.17%, compared to
$17.929 million, and 4.06%, in 2011. The interest margin increase was largely due to decreased funding costs
from 1.33% in 2011 to 1.15% in 2012.
Improved Credit Quality
(cid:2) We had an overall reduction in nonperforming assets from $11.155 million at the end of 2011 to $7.899 million at
the end of 2012 as we continued with our timely and aggressive problem asset remediation plans to strengthen our
balance sheet. Our Texas Ratio at 2012 year-end was reduced to 10.25% and is one of the lowest amongst the 15
largest public banks headquartered in Michigan.
New Escanaba and Traverse City Locations
(cid:2) Opening of our new standalone Escanaba branch banking center relocated from an in-store Menards location in
August, and the opening of our new loan production office in Traverse City. Both locations are considered core
commerce center hubs in their respective markets.
Other events
(cid:2) We were pleased to win the “Restructuring Community Impact Award of the Year” from the annual M&A
Turnaround Awards Ceremony for our participation in the refinancing and recapitalization of Manistique Papers
Incorporated. As we previously discussed in our 2011 Report to Shareholders, this project saved a significant
number of jobs in our headquarter market of Manistique, Michigan and created significant goodwill for mBank,
accompanied by a positive financial impact.
2012 Earnings Recap
In 2012, we reported net income of $6.458 million, or $1.51 per share. This was an increase of $5.006 million, or $1.09 per
share from 2011 income of $1.452 million, $.42 per share. The Corporation’s primary asset, its subsidiary bank, mBank,
recorded earnings of $7.884 million which was an improvement of $5.228 million from 2011 earnings of $2.656 million.
The 2012 results included a $3.0 million deferred tax valuation adjustment. In recent years, we have benefitted from
improvements in our core banking platform to including product flexibility and services to our client base. We have also
added top quality revenue drivers in key markets in both commercial and mortgage lending, and consolidated several
operational areas to provide better efficiencies.
The following table illustrates the marked improvement in several key performance areas.
Net Interest Margin
Efficiency Ratio
Credit Quality (Texas Ratio)
2012
2011
2010
4.17%
67.95%
10.25%
4.06%
68.43%
18.56%
3.66%
72.57%
26.66%
2
To Our Shareholders
Loan Growth/Production
As stated previously, we continue to experience strong loan demand as demonstrated with approximately $214 million in
new loan production during 2012, including mortgage loans sold in the secondary market. The table below details the 2012
activity (dollars in thousands):
Loan balances as of December 31, 2011
$
401,246
Total production
Secondary market sales
SBA loan sales
Loans transferred to OREO
Loans charged off, net of recoveries
Normal amortization/paydowns and payoffs
214,102
(74,142)
(11,962)
(1,352)
(978)
(77,737)
Loan balances as of December 31, 2012
$
449,177
Loan production, including secondary market mortgage loans of $74 million, in our three geographical regions is shown
below.
(dollars in thousands)
For the Year Ending December 31,
REGION
Upper Peninsula
Northern Lower Peninsula
Southeast Michigan
2012
2011
2010
$
134,257
37,856
41,989
$
95,024
48,226
29,327
$
55,475
10,972
10,646
TOTAL
$
214,102
$
172,577
$
77,093
As you will note from the chart, we started in 2012 to see good loan production in all regions from the slowing economy of
previous years. We will continue to evaluate growth potential in markets where we can grow loans with good credit quality
and acceptable loan pricing enhanced by fee income to maintain and improve our margin.
Government Guaranteed Lending Programs
# Loans
2012
SBA Amount
Premium
SBA Loans Originated
For the Year Ended December 31,
2011
SBA Amount
# Loans
Premium
# Loans
2010
SBA Amount
Premium
$
$
$
$
$
$
UP
NLP
SEM
Total
13
2
2
17
8,993
354
2,615
11,962
881
14
281
1,176
12
8
1
21
8,620
9,024
1,326
18,970
776
585
139
1,500
13
8
-
21
8,733
3,838
-
12,571
609
258
-
867
$
$
$
$
$
$
In 2012, the Corporation continued its success as a premier SBA/USDA lender throughout the State of Michigan. As you
noted in the chart shown above, the 2012 level of SBA production totaled $11.962 million of loans sold, which generated
$1.176 million in fees. Our total for the last three years was $43 million loans sold, with $3.543 million in fees. The
Corporation does not sell all the loan guarantees from every credit, only those where acceptable market rates are paid above
par that generate an acceptable internal rate of return. We are pleased with our success in this area of lending; first in terms
to the benefit of the Corporation, but also for the many local businesses that through these programs are provided the
capital to grow and help rebuild the economic base of the State.
3
To Our Shareholders
Core Deposit Growth
In 2012 core deposits grew by more than $23 million, or 6.82%. Shown below is the mix of our deposits for the three most
recent years.
DEPOSIT MIX
CORE DEPOSITS
Transactional accounts:
Noninterest bearing
NOW, money market, checking
Savings
Total transactional accounts
Certificates of deposit <$100,000
Total core deposits
NONCORE DEPOSITS
Certificates of deposit >$100,000
Brokered CDs
Total noncore deposits
2012
Mix
As of December 31,
2011
Mix
2010
Mix
2012/2011
2011/2010
Percent Change
$
67,652
155,465
13,829
236,946
135,550
372,496
24,355
37,706
62,061
15.57
35.78
3.18
54.53
31.19
85.72
5.60
8.68
14.28
%
$
51,273
152,563
14,203
218,039
130,685
348,724
23,229
32,836
56,065
12.67
37.69
3.51
53.87
32.28
86.15
5.74
8.11
13.85
%
$
41,264
134,703
17,670
193,637
96,977
290,614
22,698
73,467
96,165
%
10.67
34.83
4.57
50.07
25.07
75.14
5.87
18.99
24.86
%
31.94
1.90
(2.63)
8.67
3.72
6.82
4.85
14.83
10.69
%
24.26
13.26
(19.62)
12.60
34.76
20.00
2.34
(55.31)
(41.70)
TOTAL DEPOSITS
$
434,557
100.00
%
$
404,789
100.00
%
$
386,779
100.00
%
7.35
%
4.66
%
Noninterest Expense
Controlling noninterest expense is ever more challenging with increased regulatory burdens and demands of technological
enhancements; however, we believe we have made satisfactory progress in terms of balancing costs to drive more revenue
to the Corporation on a cost-benefit basis. In 2012, we reduced our efficiency ratio to 67.95% from 68.43%, which is a
product of our cost control efforts and growth in noninterest income. The Corporation’s overall non-interest expense base
remains slightly below peer at 2.88% of total assets and should continue to move downward with the improvements in asset
quality noted above. In terms of personnel expense, the Corporation continues to operate at below peer levels as it has for
several years at 1.50% as a percentage of total assets compared to peer levels of 1.56%. We have been successful in
controlling most other areas of noninterest expense and will continue to focus on becoming even more efficient.
Capital
In August 2012, we issued 2.140 million shares of common stock in a rights offering and through a capital investment by
Steinhardt Capital Investors, LLLP which netted $11.500 million. This issuance of common stock gives us the capital
necessary for exploring several 2013 initiatives, including a partial redemption of our preferred stock.
Looking Forward
In 2013, we will continue with the execution of our core banking plan to further enhance earnings and ensure balance sheet
risk on both sides is prudently managed and controlled. This basic initiative includes maintaining strong credit quality and
discipline in pricing and structure in the management of our assets to maintain margins and limit interest rate risk. We look
for increased momentum from the successes in 2012 and continue to pivot to a more offensive strategy while still
maintaining strong risk management systems to keep pace with the changing risk profile of the company, in order to
accelerate growth in shareholder value.
The Corporation is, and will remain dedicated to the primary strategic objective of enhancing franchise and shareholder
value by building a strong banking franchise in our local markets and serving the communities that provide the business
opportunities for the company to prosper.
We graciously thank you for your continued support as a shareholder, and many who are clients as well, we thank you for
your steadfast trust in being a customer of the corporation.
Sincerely,
Paul D. Tobias
Chairman and CEO
Mackinac Financial Corporation
Kelly W. George
President and CEO
mBank
4
(This page has been left blank intentionally.)
5
Five Year Overview
6
Five Year Overview
7
Regional Review – Upper Peninsula
BRANCH LOCATIONS
ESCANABA
2224 N. Lincoln Road
Escanaba, MI 49829
(906) 233-9443
Manager: April J. Stropich
MANISTIQUE
130 South Cedar Street
Manistique, MI 49854
(906) 341-2413
Manager: Kendra L. Lander
MARQUETTE
300 North McClellan
Marquette, MI 49855
(906) 226-5000
Manager: Teresa M. Same
NEWBERRY
414 Newberry Avenue
Newberry, MI 49868
(906) 293-5165
Manager: Angie E. Buckingham
MANISTIQUE - LAKESHORE
Located in Jack’s Supervalu
Manistique, MI 49854
(906) 341-7190
Manager: Kendra L. Lander
SAULT STE. MARIE
138 Ridge Street
Sault Ste. Marie, MI 49783
(906) 635-3992
Manager: Lori A. McKerchie
STEPHENSON
S216 Menominee Street
Stephenson, MI 49887
(906) 753-2225
Manager: Barbara A. Parrett
BALANCE SHEET HIGHLIGHTS
(dollars in thousands)
Loans
Core Deposits
Loan Production*
Core Deposit Growth
At December 31, 2012
2012 Activity
Escanaba
Manistique
Marquette
Newberry
Sault Ste. Marie
Stephenson
$
11,121
82,779
99,396
15,540
32,915
9,032
$
5,134
40,990
43,966
34,213
22,069
35,520
$
15,436
28,495
75,389
4,336
8,823
1,779
$
(65)
5,663
33
288
(497)
(1,047)
TOTAL UPPER PENINSULA
$
250,783
$
181,892
$
134,258
$
4,375
* Includes production of mortgage loans sold on the secondary market.
CONTRIBUTION TO OTHER INCOME
(dollars in thousands)
Production/Sold
Gains/Fee Income
Production/Sold
Gains/Fee Income
Secondary Market
SBA/USDA
Escanaba
Manistique
Marquette
Newberry
Sault Ste. Marie
Stephenson
$
8,030
6,319
34,996
1,580
2,770
1,189
$
163
121
623
34
64
26
-
$
6,654
2,036
-
302
-
-
$
640
207
-
33
-
TOTAL UPPER PENINSULA
$
54,884
$
1,031
$
8,992
$
880
8
Regional Review – Upper Peninsula
Excluding the branch sales, which were predominantly transactional accounts, total deposits grew $58.4 million in the five
year period.
Core deposits are defined as demand deposits, interest bearing checking accounts, money markets, savings and CDs less
than $100,000.
Total loan production over the five year period amounted to $365.6 million.
Nonperforming assets in the Upper Peninsula totaled $3.445 million at the end of 2012, which included $1.315 million of
OREO and $2.130 million of nonperforming loans. Nonperforming loans as a percent of total loans was .85%.
9
Regional Review – Northern Lower Peninsula
BRANCH LOCATIONS
GAYLORD
1955 South Otsego Avenue
Gaylord, MI 49735
(989) 732-3750
TRAVERSE CITY
3530 North Country Drive
Traverse City, MI 49684
(231) 929-5600
Manager: Daniel P. Galbraith
KALEVA
14429 Wuoksi Avenue
Kaleva, MI
(231) 362-3223
Manager: Barb J. Miller
BALANCE SHEET HIGHLIGHTS
(dollars in thousands)
Loans
Core Deposits
Loan Production*
Core Deposit Growth
At December 31, 2012
2012Activity
Gaylord
Kaleva
Traverse City
$
36,942
415
50,727
$
60,604
15,242
63,949
$
19,249
88
18,519
$
6,802
1,142
2,060
TOTAL NORTHERN LOWER PENINSULA
$
88,084
$
139,795
$
37,856
$
10,004
* Includes production of mortgage loans sold on the secondary market.
CONTRIBUTION TO OTHER INCOME
(dollars in thousands)
Production/Sold
Gains/Fee Income
Production/Sold
Gains/Fee Income
Secondary Market
SBA/USDA
Gaylord
Kaleva
Traverse City
$
12,580
-
6,678
$
198
-
137
-
$
-
354
-
$
-
14
TOTAL NORTHERN LOWER PENINSULA
$
19,258
$
335
$
354
$
14
10
Regional Review – Northern Lower Peninsula
Total core deposit growth amounted to $104.6 million over the five year period, largely in transactional accounts.
Core deposits are defined as demand deposits, interest bearing checking accounts, money markets, savings and CDs less
than $100,000.
Total loan production over the five year period amounted to $146.3 million.
Nonperforming assets in the Northern Lower Peninsula totaled $2.687 million at the end of 2012 which included $.147
million of OREO and $2.540 million of nonperforming loans. Nonperforming loans as a percent of total loans was 2.88%.
11
Regional Review – Southeast Michigan
BRANCH LOCATION
BIRMINGHAM
260 East Brown Street, Suite 300
Birmingham, MI 48009
(248) 290-5900
Manager: Elena Dritsas
(dollars in thousands)
Birmingham
At December 31, 2012
2012 Activity
Loans
Core Deposits
Loan Production
Core Deposit Growth
$
110,310
$
50,809
$
41,989
$
9,393
BALANCE SHEET HIGHLIGHTS
CONTRIBUTION TO OTHER INCOME
(dollars in thousands)
Production/Sold
Gains/Fee Income
Production/Sold
Gains/Fee Income
Secondary Market
SBA/USDA
Birmingham
$
-
$
-
$
2,615
$
281
12
Regional Review – Southeast Michigan
Total core deposit growth amounted to $38.9 million over the five year period, largely in transactional accounts.
Core deposits are defined as demand deposits, interest bearing checking accounts, money markets, savings and CDs less
than $100,000.
Total loan production over the five year period amounted to $101.7 million.
Nonperforming assets in Southeast Michigan totaled $1.7658 million at the end of 2012, which included $1.751 million of
OREO and $.017 million of nonperforming loans. Nonperforming loans as a percent of total loans was negligible.
13
Selected Financial Highlights
(Dollars in Thousands, Except Per Share Data)
(Dollars in thousands, except per share data)
Selected Financial Condition Data (at end of period) :
Assets
Loans
Investment securities
Deposits
Borrowings
Common Shareholders' Equity
Shareholders' equity
Selected Statements of Income Data:
Net interest income
Income before taxes and preferred dividend
Net income available to common shareholders
Income per common share - Basic
Income per common share - Diluted
Weighted average shares outstanding
Weighted average shares outstanding- Diluted
Selected Financial Ratios and Other Data:
Performance Ratios:
Net interest margin
Efficiency ratio
Return on average assets
Return on average common equity
Return on average equity
Average total assets
Average common shareholders' equity
Average total shareholders' equity
Average loans to average deposits ratio
Common Share Data at end of period:
Market price per common share
Book value per common share
Common shares outstanding
Other Data at end of period:
Allowance for loan losses
Non-performing assets
Allowance for loan losses to total loans
Non-performing assets to total assets
Texas ratio
Number of:
Branch locations
FTE Employees
December 31,
2012
December 31,
2011
(Unaudited)
$
545,980
449,177
43,799
434,557
35,925
61,448
72,448
$
19,824
6,165
6,458
1.51
1.51
4,285,043
4,285,043
$
498,311
401,246
38,727
404,789
35,997
44,342
55,263
$
17,929
3,316
1,452
.42
.41
3,419,736
3,500,204
4.17
67.95
1.23
12.43
10.26
$
526,740
51,978
62,939
99.45
%
%
4.06
68.43
.30
3.30
2.66
$
489,539
43,940
54,561
98.05
%
%
$
$
7.09
11.05
5,559,859
$
$
5.42
12.97
3,419,736
$
$
5,218
7,899
1.16
1.47
10.25
$
$
5,251
11,155
1.31
2.24
18.56
%
%
%
%
%
%
11
121
11
116
The above summary should be read in connection with the related consolidated financial statements and notes included
elsewhere in this report.
14
Quarterly Financial Summary
Quarter Ended
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
September 30, 2011
June 30, 2011
March 31, 2011
December 31, 2010
Average
Assets
Average
Loans
Average
Deposits
$
545,661
545,788
511,681
503,412
487,304
497,333
494,481
478,861
488,320
$
438,168
424,461
422,887
404,048
396,197
397,665
378,250
380,066
385,296
$
433,573
439,327
416,657
409,250
390,941
403,957
404,549
386,743
393,266
Average
Shareholders'
Equity
$
72,936
67,327
55,915
55,418
55,219
54,998
54,138
53,870
55,015
%
Return on Average
Assets
Equity
5.03
5.29
29.39
3.62
(.82)
5.10
4.47
1.92
(15.09)
.67 %
.65
3.21
.40
(.09)
.56
.49
.22
(1.70)
Net Interest
Margin
Efficiency
Ratio
%
4.11
4.10
4.30
4.17
4.38
4.14
3.79
3.92
3.88
% 70.52
67.29
63.61
71.01
67.51
67.39
67.84
75.73
65.05
Net Income Book Value
Per Share
Per Share*
11.05
.21
$
$
11.14
.21
14.43
.97
13.19
.12
12.97
(.03)
13.05
.21
12.86
.18
12.67
.07
12.63
(.61)
*Net income per share data for 2012 restated for common stock issuance
___________________________________________________________________________________________________
15
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Board of Directors
Mackinac Financial Corporation, Inc.
We have audited the consolidated statement of financial condition of Mackinac Financial Corporation, Inc. as of December
31, 2012 and 2011 and the related consolidated statements of income, comprehensive income, changes in stockholders’
equity, and cash flows for each year in the three-year period ended December 31, 2012. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Mackinac Financial Corporation, Inc. as of December 31, 2012 and 2011 and the
consolidated results of their operations and their cash flows for each year in the three-year period ended December 31,
2012, in conformity with accounting principles generally accepted in the United States of America.
Grand Rapids, Michigan
March 29, 2013
16
Consolidated Balance Sheets
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 2012 and 2011
(Dollars in Thousands)
_____________________________________________________________________________________________
ASSETS
Cash and due from banks
Federal funds sold
Cash and cash equivalents
Interest-bearing deposits in other financial institutions
Securities available for sale
Federal Home Loan Bank stock
Loans:
Commercial
Mortgage
Installment
Total Loans
Allowance for loan losses
Net loans
Premises and equipment
Other real estate held for sale
Deferred tax asset
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Non-interest-bearing deposits
Interest-bearing deposits:
NOW, Money Market, Checking
Savings
CDs<$100,000
CDs>$100,000
Brokered
Total deposits
Borrowings
Other liabilities
Total liabilities
Shareholders' equity:
Preferred stock - No par value:
Authorized 500,000 shares, 11,000 shares issued and outstanding
Common stock and additional paid in capital - No par value
Authorized - 18,000,000 shares
Issued and outstanding - 5,559,859 and 3,419,736 shares respectively
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
December 31,
2012
December 31,
2011
$
26,958
3
26,961
$
20,071
13,999
34,070
10
43,799
3,060
342,841
95,413
10,923
449,177
(5,218)
443,959
10,633
3,212
9,131
5,215
10
38,727
3,060
311,215
83,106
6,925
401,246
(5,251)
395,995
9,627
3,162
8,427
5,233
$
545,980
$
498,311
$
67,652
$
51,273
155,465
13,829
135,550
24,355
37,706
434,557
35,925
3,050
473,532
152,563
14,203
130,685
23,229
32,836
404,789
35,997
2,262
443,048
11,000
10,921
53,797
6,727
924
72,448
43,525
492
325
55,263
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
545,980
$
498,311
See accompanying notes to consolidated financial statements.
17
Consolidated Statements of Operations
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands, Except Per Share Data)
___________________________________________________________________________________________________
For the Years Ended December 31,
2011
2010
2012
INTEREST INCOME:
Interest and fees on loans:
Taxable
Tax-exempt
Interest on securities:
Taxable
Tax-exempt
Other interest income
Total interest income
INTEREST EXPENSE:
Deposits
Borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
OTHER INCOME:
Deposit service fees
Net security gains (losses)
Income from secondary market loans sold
SBA/USDA loan sale gains
Mortgage servicing income
Other
Total other income
OTHER EXPENSE:
Salaries and employee benefits
Occupancy
Furniture and equipment
Data processing
Professional service fees
Loan and deposit
Writedowns and losses on other real estate held for sale
FDIC insurance assessment
Telephone
Advertising
Other
Total other expenses
Income (loss) before provision for income taxes
Provision for (benefit of) income taxes
NET INCOME (LOSS)
Preferred dividend and accretion of discount
$
23,197
116
$
21,627
147
$
21,091
188
948
27
139
24,427
3,946
657
4,603
19,824
945
18,879
699
-
1,390
1,176
417
361
4,043
8,288
1,372
885
991
1,196
877
489
459
233
376
1,591
16,757
6,165
(922)
7,087
629
1,162
28
108
23,072
4,530
613
5,143
17,929
2,300
15,629
832
(1)
700
1,500
400
225
3,656
7,275
1,376
827
761
756
1,137
1,137
849
215
351
1,285
15,969
3,316
1,098
2,218
766
1,406
28
127
22,840
5,607
848
6,455
16,385
6,500
9,885
990
215
539
868
-
183
2,795
6,918
1,313
806
740
627
910
2,753
957
193
297
1,084
16,598
(3,918)
(3,500)
(418)
742
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
$
6,458
$
1,452
$
(1,160)
INCOME (LOSS) PER COMMON SHARE:
Basic
Diluted
$
$
1.51
1.51
$
$
.42
.41
$
$
(.34)
(.34)
See accompanying notes to consolidated financial statements.
18
Consolidated Statements of Comprehensive Income
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands)
_____________________________________________________________________________________________
December 31,
2011
2010
2012
Net income
$
7,087
$
2,218
$
(418)
Net change in net unrealized gains and losses on securities available for sale:
Unrealized gains (losses) arising during the period
Less: reclassification adjustment for gains included in net income
Net securities gain (loss) during the period
Tax effect
Other comprehensive income (loss)
907
-
907
(308)
599
(433)
1
(432)
145
(287)
(944)
215
(729)
248
(481)
Total comprehensive income
$
7,686
$
1,931
$
(899)
See accompanying notes to consolidated financial statements.
19
Consolidated Statements of Changes in Shareholders’ Equity
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands)
__________________________________________________________________________________________
Shares of
Common
Stock
Preferred
Stock
Series A
Common Stock
and Additional
Paid in Capital
Retained
Earnings
(Accumulated Deficit)
Accumulated
Other
Comprehensive
Income
Total
Balance, January 1, 2010
3,419,736
$
10,514
$
43,493
$
199
$
1,093
$
55,299
Net (loss)
Other comprehensive income (loss):
Net unrealized (loss) on
securities available for sale
Total comprehensive (loss)
Stock compensation
Dividend on preferred stock
Accretion of preferred stock discount
-
-
-
-
-
-
-
-
-
192
-
-
32
-
-
Balance, December 31, 2010
3,419,736
10,706
43,525
Net income
Other comprehensive income (loss):
Net unrealized (loss) on
securities available for sale
Total comprehensive income
Dividend on preferred stock
Accretion of preferred stock discount
Other
-
-
-
-
-
-
-
-
215
-
-
-
-
-
-
Balance, December 31, 2011
3,419,736
10,921
43,525
Net income
Other comprehensive income:
Net unrealized income on
securities available for sale
Total comprehensive income
Stock compensation
Issuance of common stock
Divided on common stock
Purchase of common stock warrants
Dividend on preferred stock
Accretion of preferred stock discount
-
-
2,140,123
-
-
-
-
-
-
-
-
-
-
79
-
66
11,506
-
(1,300)
-
-
(418)
-
(418)
-
(481)
-
(550)
(192)
(961)
2,218
-
-
-
612
-
-
(287)
(551)
(215)
1
492
7,087
-
-
-
(223)
-
(550)
(79)
-
-
-
325
599
-
-
-
-
-
-
(481)
(899)
32
(550)
-
53,882
2,218
(287)
1,931
(551)
-
1
55,263
7,087
599
7,686
66
11,506
(223)
(1,300)
(550)
-
Balance, December 31, 2012
5,559,859
$
11,000
$
53,797
$
6,727
$
924
$
72,448
See accompanying notes to consolidated financial statements.
20
Consolidated Statements of Cash Flows
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands)
_____________________________________________________________________________________________
Cash Flows from Operating Activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization
Provision for loan losses
Provision for (benefit of) income taxes
(Gain) loss on sales/calls of securities available for sale
(Gain) on sale of secondary market loans
Origination of loans held for sale in secondary market
Proceeds from secondary market loans held for sale
Loss on sale of premises, equipment, and other real estate held for sale
Writedown of other real estate held for sale
Stock compensation
Change in other assets
Change in other liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities:
Net (increase) in loans
Net (increase) decrease in interest-bearing deposits in other financial institutions
Purchase of securities available for sale
Proceeds from maturities, sales, calls or paydowns of securities available for sale
Capital expenditures
Proceeds from sale of premises, equipment, and other real estate
Redemption of FHLB stock
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities:
Net increase (decrease) in deposits
Net proceeds from common stock issuance
Dividend on common stock
Repurchase of common stock warrants
Dividend on preferred stock
Principal payments on borrowings
Net cash provided by (used in) financing activities
Net (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
2012
2011
2010
$
7,087
$
2,218
$
(418)
1,547
945
(922)
-
(1,077)
(74,142)
75,219
31
496
66
(61)
788
9,977
(50,351)
-
(15,209)
10,668
(2,098)
775
-
(56,215)
29,768
11,506
(223)
(1,300)
(550)
(72)
39,129
(7,109)
34,070
1,419
2,300
1,098
1
(477)
(38,971)
39,448
282
855
-
(325)
296
8,144
(26,015)
703
(21,260)
15,607
(1,034)
5,456
363
(26,180)
18,010
-
-
-
(551)
(72)
17,387
(649)
34,719
1,643
6,500
(3,500)
(215)
(445)
(36,678)
37,217
48
2,703
32
13,174
(583)
19,478
(9,355)
(35)
(5,000)
16,788
(606)
2,876
371
5,039
(34,610)
-
-
-
(550)
(71)
(35,231)
(10,714)
45,433
Cash and cash equivalents at end of period
$
26,961
$
34,070
$
34,719
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest
Income taxes
Noncash Investing and Financing Activities:
Transfers of Foreclosures from Loans to Other Real Estate Held for Sale
(net of adjustments made through the allowance for loan losses)
$
4,172
125
$
4,664
75
$
6,548
75
1,352
4,194
5,373
See accompanying notes to consolidated financial statements.
21
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Mackinac Financial Corporation (the “Corporation”) and Subsidiaries conform to accounting
principles generally accepted in the United States and prevailing practices within the banking industry. Significant
accounting policies are summarized below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries, mBank
(the “Bank”) and other minor subsidiaries, after elimination of intercompany transactions and accounts.
Nature of Operations
The Corporation’s and the Bank’s revenues and assets are derived primarily from banking activities. The Bank’s primary
market area is the Upper Peninsula, the northern portion of the Lower Peninsula of Michigan, and Oakland County in
Lower Michigan. The Bank provides to its customers commercial, real estate, agricultural, and consumer loans, as well as
a variety of traditional deposit products. A portion, less than 1.0% of the Bank’s commercial loan portfolio consists of
leases to commercial and governmental entities, which are secured by various types of equipment. These leases are
dispersed geographically throughout the country. Less than 1.0% of the Corporation’s business activity is with Canadian
customers and denominated in Canadian dollars.
While the Corporation’s chief decision makers monitor the revenue streams of the various Corporation products and
services, operations are managed and financial performance is evaluated on a Corporation-wide basis. Accordingly, all of
the Corporation’s banking operations are considered by management to be aggregated in one reportable operating segment.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
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.
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,
and mortgage servicing rights.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, noninterest-bearing deposits in
correspondent banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.
Securities
The Corporation’s securities are classified and accounted for as securities available for sale. These securities are stated at
fair value. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.
Unrealized holding gains and losses on securities available for sale are reported as accumulated other comprehensive
income within shareholders’ equity until realized. When it is determined that securities or other investments are impaired
and the impairment is other than temporary, an impairment loss is recognized in earnings and a new basis in the affected
security is established. Gains and losses on the sale of securities are recorded on the trade date and determined using the
specific-identification method.
22
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required to hold stock in the FHLB based on
the anticipated level of borrowings to be advanced. This stock is recorded at cost, which approximates fair value. Transfer
of the stock is substantially restricted.
Interest Income and Fees on Loans
Interest income on loans is reported on the level-yield method and includes amortization of deferred loan fees and costs
over the loan term. Net loan commitment fees or costs for commitment periods greater than one year are deferred and
amortized into fee income or other expense on a straight-line basis over the commitment period. The accrual of interest on
loans is discontinued when, in the opinion of management, it is probable that the borrower may be unable to meet
payments as they become due as well as when required by regulatory provisions. Upon such discontinuance, all unpaid
accrued interest is reversed. Loans are returned to accrual status when all principal and interest amounts contractually due
are brought current and future payments are reasonably assured. Interest income on impaired and nonaccrual loans is
recorded on a cash basis.
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial
assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to,
and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are
evaluated for impairment based on the fair value of the rights compared to amortized cost. Impairment is determined by
using prices for similar assets with similar characteristics, such as interest rates and terms. Fair value is determined by
using prices for similar assets with similar characteristics, when available, or based on discounted cash flows using market-
based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that
fair value is less than the capitalized amount for the stratum.
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 loan’s initial effective interest rate or the fair value of the
collateral if the loan is collateral dependent.
The Corporation also has a general allowance for loan losses for loans not considered impaired. The allowance for loan
losses is maintained at a level which management believes is adequate to provide for probable loan losses. Management
periodically evaluates the adequacy of the allowance using the 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.
23
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Troubled Debt Restructuring
Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the
modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine
whether the loans should be reported as a Troubled Debt Restructure (TDR). A loan is a TDR when the Corporation, for
economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying
or renewing a loan that the Corporation would not otherwise consider. To make this determination, the Corporation must
determine whether (a) the borrower is experiencing financial difficulties and (b) the Corporation granted the borrower a
concession. This determination requires consideration of all of the facts and circumstances surrounding the modification.
An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically
mean the borrower is experiencing financial difficulties.
Other Real Estate Held for Sale
Other real estate held for sale consists of assets acquired through, or in lieu of, foreclosure and other long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired. Other real estate held for sale is initially
recorded at the lower of cost or fair value, less costs to sell, establishing a new cost basis. Valuations are periodically
performed by management, and the assets’ carrying values are adjusted to the lower of cost basis or fair value less costs to
sell. Impairment losses are recognized for any initial or subsequent write-downs. Net revenue and expenses from
operations of other real estate held for sale are included in other expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Maintenance and repair costs are charged to
expense as incurred. Gains or losses on disposition of premises and equipment are reflected in income. Depreciation is
computed on the straight-line method over the estimated useful lives of the assets.
Stock Compensation Plans
On May 22, 2012, the Company’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 units (“RSUs”), or stock
appreciation rights. The aggregate number of shares of the Company’s common stock issuable under the plan is 757,848.
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 split), were made available for grant under these plans. Options under all of the plans are
granted at the discretion of a committee of the Corporation’s Board of Directors. Options to purchase shares of the
Corporation’s stock were granted at a price equal to the market price of the stock at the date of grant. The committee
determined the vesting of the options when they were granted as established under the plan. No new options may be issued
under the plans.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive
income (loss) is composed of unrealized gains and losses on securities available for sale, net of tax.
24
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per Common Share
Earnings per share are based upon the weighted average number of shares outstanding. The issuance of shares as a result of
stock options, restricted stock units and common stock warrants issued under the TARP Capital Purchase Program is shown
in the table below. The common stock warrants were retired in December 2012.
The following shows the computation of basic and diluted earnings per share for the year ended December 31, 2012, 2011
and 2010 (dollars in thousands, except per share data):
Year Ended December 31,
2012
2011
2010
Net income (loss)
Preferred stock dividends and accretion of discount
Net income (loss) available to common shareholders
$
$
$
$
7,087
629
6,458
2,218
766
1,452
$
(418)
742
(1,160)
$
Weighted average shares outstanding
Effect of dilutive stock options, vesting of restricted stock units,
and common stock warrants outstanding
Diluted weighted average shares outstanding
Income (loss) per common share:
Basic
Diluted
4,285,043
3,419,736
3,419,736
-
4,285,043
80,468
3,500,204
60,161
3,479,897
$
$
1.51
1.51
$
$
.42
.41
$
$
(.34)
(.34)
The effect of dilutive common stock warrants was not taken into account when calculating the loss per share in 2010, since
it was anti-dilutive.
Income Taxes
Deferred income taxes have been provided under the liability method. Deferred tax assets and liabilities are determined
based upon the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted
tax rates which will be in effect when these differences are expected to reverse. Deferred tax expense (benefit) is the result
of changes in the deferred tax asset and liability. A valuation allowance is provided against deferred tax assets when it is
more likely than not that some or all of the deferred asset will not be realized.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Corporation has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements, commercial letters of credit, and standby
letters of credit. For letters of credit, the Corporation recognizes a liability for the fair market value of the obligations it
assumes under that guarantee.
Recent Developments
During 2012, the Corporation adopted new guidance related to the presentation of comprehensive income in the financial
statements. Among other changes, the new guidance eliminated the option to only present comprehensive income in the
statement of equity. The Corporation has elected to report comprehensive income in a separate statement of comprehensive
income that begins with net income. The change in presentation has been applied retrospectively and the 2011 financial
statements have been restated to conform to the new presentation method. Other than the change in presentation of
comprehensive income and related disclosures, the new guidance did not have a material effect on the financial statements.
25
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-02,
A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This update applies to all
creditors, both public and non-public, and was introduced to provide clarification surrounding troubled debt restructurings
(“TDR”). The primary characteristics that previously caused a restructuring to qualify as a TDR still exist: (1) the
restructuring constitutes a concession to the borrower and (2) the borrower is experiencing financial difficulties. The
update provides additional details and examples to provide clarity surrounding these items. The update also prohibits the
use of the effective interest rate test when determining whether the restructuring constitutes a concession. The update is
effective for annual reporting periods ending on or after December 15, 2012 (therefore, December 31, 2012, for the
Corporation). Lastly, the disclosure requirements set forth by ASU 2010-20 regarding troubled debt restructurings, and
later deferred by ASU 2011-1 until December 31, 2012 for the Corporation, are included in Note 4, “Loans”. Other than
the additional disclosures, these updates did not have a significant impact on the financial statements.
In 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This update to Fair Value Measurement
(Topic 820) results in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. The
amendments in this update explain how to measure fair value. They do not require additional fair value measurements and
are not intended to establish valuation standards or affect valuation practices outside of financial reporting. However, this
update does require expanded disclosure related to the nature and significance of inputs that are used in estimating and
measuring the fair value of financial instruments. The amendments in this update are to be applied prospectively and are
effective for annual reporting periods beginning after December 15, 2011 (therefore, December 31, 2012, for the
Corporation). This update did not have a significant impact on the financial statements.
Reclassifications
Certain amounts in the 2011 and 2010 consolidated financial statements have been reclassified to conform to the 2012
presentation.
NOTE 2 – RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $4.049 million were restricted on December 31, 2012 to meet the reserve
requirements of the Federal Reserve System.
In the normal course of business, the Corporation maintains cash and due from bank balances with correspondent banks.
Balances in these accounts may exceed the Federal Deposit Insurance Corporation’s insured limit of $250,000.
Management believes that these financial institutions have strong credit ratings and the credit risk related to these deposits
is minimal.
26
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 3 – SECURITIES AVAILABLE FOR SALE
The carrying value and estimated fair value of securities available for sale are as follows (dollars in thousands):
December 31, 2012
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
Corporate
US Agencies
US Agencies - MBS
Obligations of states and political subdivisions
$
18,763
10,267
7,962
5,407
$
237
137
412
637
$
(23)
-
-
-
$
18,977
10,404
8,374
6,044
Total securities available for sale
$
42,399
$
1,423
$
(23)
$
43,799
December 31, 2011
US Agencies - MBS
US Agencies
Corporate
Obligations of states and political subdivisions
Other asset backed
$
11,111
10,407
8,314
5,448
2,954
$
387
168
-
110
-
-
$
-
(136)
(2)
(34)
$
11,498
10,575
8,178
5,556
2,920
Total securities available for sale
$
38,234
$
665
$
(172)
$
38,727
At December 31, 2012 and 2011, the mortgage backed securities portfolio was $8.374 million (19.12%) and $11.498
million (29.69%), respectively, of the securities portfolio. At December 31, 2012, the entire mortgage backed securities
portfolio consisted of securities issued and guaranteed by either the Federal National Mortgage Association (FNMA) or the
Federal Home Loan Mortgage Corporation (FHLMC); United States government-sponsored agencies. Other asset backed
securities are collateralized with government guaranteed student loans.
Following is information pertaining to securities with gross unrealized losses at December 31, 2012 and 2011 aggregated
by investment category and length of time these individual securities have been in a loss position (dollars in thousands):
Less Than Twelve Months
Gross
Unrealized
Losses
Fair
Value
Over Twelve Months
Gross
Unrealized
Losses
Fair
Value
December 31, 2012
Corporate
US Agencies - MBS
Obligations of states and political subdivisions
$
(23)
-
-
$
5,566
-
-
$
-
-
-
$
-
-
-
Total securities available for sale
$
(23)
$
5,566
$
-
$
-
December 31, 2011
US Agencies - MBS
Corporate
Obligations of states and political subdivisions
-
$
(136)
-
$
2,920
8,178
-
-
-
(2)
-
-
250
Total securities available for sale
$
(136)
$
11,098
$
(2)
$
250
There was one security in an unrealized loss position in 2012 and three in 2011. The gross unrealized losses in the current
portfolio are considered temporary in nature and related to interest rate fluctuations. The Corporation has both the ability
and intent to hold the investment securities until their respective maturities and therefore does not anticipate the realization
of the temporary losses.
27
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 3 – SECURITIES AVAILABLE FOR SALE (CONTINUED)
Following is a summary of the proceeds from sales and calls of securities available for sale, as well as gross gains and
losses for the years ended December 31 (dollars in thousands):
Proceeds from sales and calls
Gross gains on sales
Gross (losses) on sales and calls
2012
2011
2010
$
2,601
-
-
$
76
-
(1)
$
8,302
216
(1)
The carrying value and estimated fair value of securities available for sale at December 31, 2012, by contractual maturity,
are shown below (dollars in thousands):
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Subtotal
US Agencies - MBS
Amortized
Cost
Estimated
Fair Value
$
7,569
22,411
-
4,457
34,437
7,962
$
7,629
22,745
-
5,051
35,425
8,374
Total
$
42,399
$
43,799
Contractual maturities may differ from expected maturities because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties. See Note 9 for information on securities pledged to secure borrowings from
the Federal Home Loan Bank.
NOTE 4 - LOANS
The composition of loans at December 31 is as follows (dollars in thousands):
Commercial real estate
Commercial, financial, and agricultural
One to four family residential real estate
Construction :
Consumer
Commerical
Consumer
2012
2011
$
244,966
80,646
87,948
$
199,201
92,269
77,332
7,465
17,229
10,923
5,774
19,745
6,925
Total loans
$
449,177
$
401,246
An analysis of the allowance for loan losses for the years ended December 31 is as follows (dollars in thousands):
2012
2011
2010
Balance, January 1
Recoveries on loans previously charged off
Loans charged off
Provision
$
5,251
278
(1,256)
945
$
6,613
138
(3,800)
2,300
$
5,225
374
(5,486)
6,500
Balance, December 31
$
5,218
$
5,251
$
6,613
28
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
In 2012, net charge off activity was $.978 million, or .23% of average loans outstanding compared to net charge-offs of
$3.662 million, or .94% of average loans, in the same period in 2011 and $5.112 million, or 1.33% of average loans, in
2010. During 2012, a provision of $.945 million was made to increase the allowance. This provision was made in
accordance with the Corporation’s allowance for loan loss reserve policy, which calls for a measurement of the adequacy of
the reserve at each quarter end. This process includes an analysis of the loan portfolio to take into account increases in
loans outstanding and portfolio composition, historical loss rates, and specific reserve requirements of nonperforming
loans.
A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2012 is as follows (dollars in
thousands):
Commercial
real estate
Commercial,
financial and
agricultural
Commercial
construction
One to four
family residential
real estate
Consumer
construction
Consumer
Unallocated
Total
Allowance for loan loss reserve:
Beginning balance ALLR
Charge-offs
Recoveries
Provision
Ending balance ALLR
Loans:
Ending balance
Ending balance ALLR
Net loans
Ending balance ALLR:
Individually evaluated
Collectively evaluated
Total
Ending balance Loans:
Individually evaluated
Collectively evaluated
Total
2,823
(729)
52
1,121
3,267
244,966
(3,267)
241,699
1,662
1,605
3,267
22,910
222,056
244,966
1,079
(40)
201
(548)
692
80,646
(692)
79,954
155
537
692
6,070
74,576
80,646
207
(6)
-
(76)
125
17,229
(125)
17,104
10
115
125
858
16,371
17,229
$
$
$
$
$
$
1,114
(399)
7
258
980
$
-
-
-
-
$
-
$
-
(82)
18
64
$
-
28
-
-
126
154
5,251
(1,256)
278
945
5,218
$
$
$
$
$
$
$
$
$
$
$
$
87,948
(980)
86,968
7,465
-
7,465
10,923
-
10,923
$
-
(154)
(154)
$
$
$
449,177
(5,218)
443,959
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
112
868
980
796
87,152
87,948
-
$
-
$
-
-
$
-
$
-
-
$
154
154
$
-
$
7,465
7,465
$
-
$
10,923
10,923
$
-
$
-
$
-
$
$
1,939
3,279
5,218
$
30,634
418,543
449,177
$
Impaired loans, by definition, are individually evaluated.
A breakdown of the allowance for loan losses, the activity for the period, and recorded balances in loans for the year ended
December 31, 2011 is as follows (dollars in thousands):
Commercial
real estate
Commercial,
financial and Commercial
construction
agricultural
One to four
family residential
real estate
Consumer
construction Consumer Unallocated
Total
Allowance for loan loss reserve:
Beginning balance ALLR
Charge-offs
Recoveries
Provision
Ending balance ALLR
Loans:
Ending balance
Ending balance ALLR
Net loans
Ending balance ALLR:
Individually evaluated
Collectively evaluated
Total
Ending balance Loans:
Individually evaluated
Collectively evaluated
Total
$
$
$
$
$
$
3,460
(2,267)
32
1,598
2,823
1,018
(579)
21
619
1,079
389
(412)
75
155
207
1,622
(490)
1
(19)
1,114
-
$
-
-
-
$
-
-
$
(52)
9
43
$
-
124
-
-
(96)
28
6,613
(3,800)
138
2,300
5,251
$
$
$
$
$
$
$
$
$
$
$
$
$
199,201
(2,823)
196,378
92,269
(1,079)
91,190
19,745
(207)
19,538
77,332
(1,114)
76,218
5,774
-
5,774
6,925
-
6,925
$
-
(28)
(28)
$
$
$
401,246
(5,251)
395,995
$
$
$
$
$
$
$
$
$
$
$
926
1,897
2,823
160
919
1,079
1,707
90,562
92,269
$
$
13,628
185,573
199,201
$
$
114
1,000
1,114
$
-
-
$
-
$
-
-
$
-
$
-
28
28
$
-
$
5,774
5,774
$
-
$
6,925
6,925
$
-
$
-
$
-
$
$
1,200
4,051
5,251
$
17,265
383,981
401,246
$
$
$
1,930
75,402
77,332
Impaired loans, by definition, are individually evaluated.
$
-
207
207
$
$
-
19,745
19,745
$
29
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
A breakdown of the allowance for loan losses, the activity for the period, and recorded balances in loans for the year ended
December 31, 2010 is as follows (dollars in thousands):
Commercial
real estate
Commercial,
financial and Commercial
construction
agricultural
One to four
family residential
real estate
Consumer
construction Consumer Unallocated
Total
Allowance for loan loss reserve:
Beginning balance ALLR
Charge-offs
Recoveries
Provision
Ending balance ALLR
Loans:
Ending balance
Ending balance ALLR
Net loans
Ending balance ALLR:
Individually evaluated
Collectively evaluated
Total
Ending balance Loans:
Individually evaluated
Collectively evaluated
Total
3,284
(2,426)
18
2,584
3,460
$
$
194,859
(3,460)
191,399
1,601
1,859
3,460
18,610
176,249
194,859
1,135
(1,804)
260
1,427
1,018
68,858
(1,018)
67,840
330
688
1,018
2,696
66,162
68,858
386
(720)
67
656
389
33,330
(389)
32,941
39
350
389
2,437
30,893
33,330
$
$
$
$
$
$
$
$
$
$
$
$
23
(416)
-
2,015
1,622
-
$
-
-
-
$
-
$
13
(9)
15
(19)
$
-
384
(111)
14
(163)
124
5,225
(5,486)
374
6,500
6,613
$
$
$
$
$
$
$
$
$
$
75,074
(1,622)
73,452
5,682
-
5,682
5,283
-
5,283
$
-
(124)
(124)
$
$
$
383,086
(6,613)
376,473
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
696
926
1,622
5,238
69,836
75,074
-
$
-
$
-
-
$
-
$
-
-
$
124
124
$
-
$
5,682
5,682
$
-
$
5,283
5,283
$
-
$
-
$
-
$
$
2,666
3,947
6,613
$
28,981
354,105
383,086
$
Impaired loans, by definition, are individually evaluated.
As part of the management of the loan portfolio, risk ratings are assigned to all commercial loans. Through the loan review
process, ratings are modified as believed to be appropriate to reflect changes in the credit. Our ability to manage credit risk
depends in large part on our ability to properly identify and manage problem loans. To do so, we operate a credit risk rating
system under which our credit management personnel assign a credit risk rating to each loan at the time of origination and
review loans on a regular basis to determine each loan’s credit risk rating on a scale of 1 through 8, with higher scores
indicating higher risk. The credit risk rating structure used is shown below.
In the context of the credit risk rating structure, the term Classified is defined as a problem loan which may or may not be
in a nonaccrual status, dependent upon current payment status and collectability.
Excellent (1)
Borrower is not vulnerable to sudden economic or technological changes and is in a non-seasonal business or industry.
These loans generally would be characterized by having good experienced management and a strong liquidity position with
minimal leverage.
Good (2)
Borrower shows limited vulnerability to sudden economic change with modest seasonal effect. Borrower has “above
average” financial statements and an acceptable repayment history with minimal leverage and a profitability that exceeds
peers.
Average (3)
Generally, a borrower rated as average may be susceptible to unfavorable changes in the economy and somewhat affected
by seasonal factors. Some product lines may be affected by technological change. Borrowers in this category exhibit stable
earnings, with a satisfactory payment history.
Acceptable (4)
The loan is an otherwise acceptable credit that warrants a higher level of administration due to various underlying
weaknesses. These weaknesses, however, have not and may never deteriorate to the point of a Special Mention rating or
Classified status. This rating category may include new businesses not yet having established a firm performance record.
30
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
Special Mention (5)
The loan is not considered as a Classified status, however may exhibit material weaknesses that, if not corrected, may cause
future problems. Borrowers in this category warrant special attention but have not yet reached the point of concern for loss.
The borrower may have deteriorated to the point that they would have difficulty refinancing elsewhere. Similarly,
purchasers of these businesses would not be eligible for bank financing unless they represent a significantly lessened credit
risk.
Substandard (6)
The loan is Classified and exhibits a number of well-defined weaknesses that jeopardize normal repayment. The assets are
no longer adequately protected due to declining net worth, lack of earning capacity or insufficient collateral offering the
distinct possibility of the loss of a portion of the loan principal. Loans within this category clearly represent troubled and
deteriorating credit situations requiring constant supervision and an action plan must be developed and approved by the
appropriate officers to mitigate the risk.
Doubtful (7)
Loans in this category exhibit the same weaknesses used to describe the substandard credit; however, the traits are more
pronounced. Loans are frozen with collection improbable. Such loans are not yet rated as Charge-off because certain
actions may yet occur which would salvage the loan.
Charge-off/Loss (8)
Loans in this category are largely uncollectible and should be charged against the loan loss reserve immediately.
General Reserves:
For loans with a credit risk rating of 5 or better and any loans with a risk rating of 6 or 7 with no specific reserve, reserves
are established based on the type of loan collateral, if any, and the assigned credit risk rating. Determination of the
allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future
cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, and
consideration of current environmental factors and economic trends, all of which may be susceptible to significant change.
Using a historical average loss by loan type as a base, each loan graded as higher risk is assigned a specific percentage.
Within the commercial loan portfolio, the historical loss rates are used for specific industries such as hospitality, gaming,
petroleum, and forestry. The residential real estate and consumer loan portfolios are assigned a loss percentage as a
homogenous group. If, however, on an individual loan the projected loss based on collateral value and payment histories
are in excess of the computed allowance, the allocation is increased for the higher anticipated loss. These computations
provide the basis for the allowance for loan losses as recorded by the Corporation. In 2012 and 2011, commercial
construction loans of $3.468 million and $3.694 million, respectively, did not receive a specific risk rating. These amounts
represent loans made for land development and unimproved land purchases.
Below is a breakdown of loans by risk category as of December 31, 2012 (dollars in thousands):
Commercial real estate
Commercial, financial
and agricultural
Commercial construction
One-to-four family
residential real estate
Consumer construction
Consumer
(1)
Excellent
(2)
Good
(3)
Average
(4)
Acceptable
(5)
Sp. Mention
(6)
Substandard
(7)
Doubtful
Rating
Unassigned
Total
$
4,807
$
20,491
$
84,164
$
113,379
$
16,754
$
5,189
$
182
$
-
$
244,966
5,026
-
-
-
-
3,936
1,038
1,969
-
359
23,821
5,103
3,635
-
71
41,785
5,784
4,791
-
257
4,296
759
-
-
-
1,782
1,077
646
-
6
-
-
-
-
-
-
3,468
76,907
7,465
10,230
80,646
17,229
87,948
7,465
10,923
Total loans
$
9,833
$
27,793
$
116,794
$
165,996
$
21,809
$
8,700
$
182
$
98,070
$
449,177
31
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
Below is a breakdown of loans by risk category as of December 31, 2011 (dollars in thousands)
Commercial real estate
Commercial, financial
and agricultural
Commercial construction
One-to-four family
residential real estate
Consumer construction
Consumer
(1)
Excellent
(2)
Good
(3)
Average
(4)
Acceptable
(5)
Sp. Mention
(6)
Substandard
(7)
Doubtful
Rating
Unassigned
Total
$
3,083
$
16,946
$
47,154
$
118,259
$
5,198
$
7,642
$
919
$
-
$
199,201
4,416
209
7,875
552
17,738
4,542
-
-
-
-
-
-
3,359
-
105
60,498
10,415
5,910
-
599
201
313
2,023
-
-
1,541
20
-
-
-
-
-
-
-
-
-
3,694
66,040
5,774
6,221
92,269
19,745
77,332
5,774
6,925
Total loans
$
7,708
$
25,373
$
72,898
$
195,681
$
7,735
$
9,203
$
919
$
81,729
$
401,246
Impaired Loans
Nonperforming loans are those which are contractually past due 90 days or more as to interest or principal payments, on
nonaccrual status, or loans, the terms of which have been renegotiated to provide a reduction or deferral on interest or
principal. The interest income recorded during impairment and that which would have been recognized were $.054 million
and $.313 million for the year ended December 31, 2012. For the year ended December 31, 2011, the amounts were $.118
million and $.363 million.
The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet
payment obligations as they become due, as well as when required by regulatory provisions. When interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash
payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably assured.
Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable
to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled
principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an
individual loans basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that
the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value
of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied
to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a
cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
32
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
The following is a summary of impaired loans and their effect on interest income (dollars in thousands):
Nonaccrual
Basis
Accrual
Basis
Average
Investment
Related
Valuation Reserve
Interest Income
Recognized
During Impairment
Interest Income
on
Accrual Basis
December 31, 2012
With no valuation reserve:
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
With a valuation reserve:
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
Total:
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
Total
December 31, 2011
With no valuation reserve:
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
With a valuation reserve:
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
Total:
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
Total
$
132
-
675
230
-
-
$
2,939
436
-
275
-
-
3,071
436
675
505
-
-
4,687
$
1,313
16
-
608
-
-
$
1,049
1,095
-
1,389
20
-
2,362
1,111
-
1,997
20
-
5,490
-
$
-
-
-
-
-
-
$
-
-
-
-
-
-
$
-
-
-
-
-
$
-
$
-
-
-
-
-
-
$
2,400
-
-
103
-
-
2,400
-
-
103
-
-
2,503
$
1,550
1,063
675
1,074
16
3
$
3,173
504
-
281
-
-
-
$
-
-
-
-
-
-
$
-
-
-
-
-
$
37
19
15
41
1
-
$
1,315
109
-
95
-
-
$
54
-
-
-
-
-
$
177
17
-
6
-
-
$
$
$
$
$
$
$
$
$
$
54
-
-
-
-
-
54
86
29
-
3
-
-
118
214
36
15
47
1
-
313
147
49
11
155
1
-
363
$
2,519
542
176
1,727
4
2
$
807
282
-
1,121
9
-
$
-
-
-
-
-
-
$
700
173
-
150
4
-
$
66
29
-
-
-
-
$
20
-
-
3
-
-
$
116
35
11
99
-
-
$
31
14
-
56
1
-
$
$
$
$
$
$
$
$
$
$
$
$
1,315
109
-
95
-
-
1,519
700
173
-
150
4
-
1,027
4,723
1,567
675
1,355
16
3
8,339
3,326
824
176
2,848
13
2
7,189
33
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
A summary of past due loans at December 31, is as follows (dollars in thousands):
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
30-89 days
Past Due
(accruing)
2012
90+ days
Past Due/
Nonaccrual
$
575
71
-
291
-
14
$
3,071
436
675
505
-
-
Total
$
3,646
507
675
796
-
14
30-89 days
Past Due
(accruing)
2011
90+ days
Past Due/
Nonaccrual
$
15
137
-
188
-
14
$
2,362
1,111
-
1,997
20
-
Total
$
2,377
1,248
-
2,185
20
14
Total past due loans
$
951
$
4,687
$
5,638
$
354
$
5,490
$
5,844
A roll-forward of nonaccrual activity during the year ended December 31, 2012 (dollars in thousands):
Commercial
Real Estate
Commercial,
Financial and
Agricultural
Commercial
Construction
One to four
family residential
real estate
Consumer
Construction
Consumer
Total
NONACCRUAL
Beginning balance
$
2,362
$
1,111
$
-
$
1,997
$
20
$
-
$
5,490
Principal payments
Charge-offs
Advances
Class transfers
Transfers to OREO
Transfers to accruing
Transfers from accruing
Other
(1,569)
(463)
-
-
(675)
-
3,377
39
(1,385)
-
-
-
-
-
716
(6)
-
-
-
-
-
-
675
-
(1,068)
(387)
-
-
(662)
-
617
8
-
(5)
-
-
(15)
-
-
-
-
(3)
-
-
-
-
3
(4,022)
(858)
-
-
(1,352)
-
5,388
41
Ending balance
$
3,071
$
436
$
675
$
505
$
-
$
-
$
4,687
A roll-forward of nonaccrual activity during the year ended December 31, 2011 (dollars in thousands):
Commercial
Real Estate
Commercial,
Financial and
Agricultural
Commercial
Construction
One to four
family residential
real estate
Consumer
Construction
Consumer
Total
NONACCRUAL
Beginning balance
$
3,522
$
760
$
458
$
1,129
$
52
$
-
$
5,921
Principal payments
Charge-offs
Advances
Class transfers
Transfers to OREO
Transfers to accruing
Transfers from accruing
Other
(1,458)
(1,950)
-
-
(1,203)
(892)
4,301
42
(767)
(557)
-
-
(262)
-
1,938
(1)
(14)
(62)
-
-
(382)
-
-
-
(47)
(601)
-
-
(1,948)
-
3,273
191
-
-
-
-
(53)
-
20
1
-
(27)
-
-
-
-
27
-
(2,286)
(3,197)
-
-
(3,848)
(892)
9,559
233
Ending balance
$
2,362
$
1,111
$
-
$
1,997
$
20
$
-
$
5,490
34
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
Troubled Debt Restructuring
Troubled debt restructurings (“TDR”) are determined on a loan-by-loan basis. Generally, restructurings are related to
interest rate reductions, loan term extensions and short term payment forbearance as means to maximize collectability of
troubled credits. If a portion of the TDR loan is uncollectible (including forgiveness of principal), the uncollectible amount
will be charged off against the allowance at the time of the restructuring. In general, a borrower must make at least six
consecutive timely payments before the Corporation would consider a return of a restructured loan to accruing status in
accordance with FDIC guidelines regarding restoration of credits to accrual status.
The Corporation has, in accordance with generally accepted accounting principles and per recently enacted accounting
standard updates, evaluated all loan modifications to determine the fair value impact of the underlying asset. The carrying
amount of the loan is compared to the expected payments to be received, discounted at the loan’s original rate, or for
collateral dependent loans, to the fair value of the collateral.
A summary of troubled debt restructurings that occurred during the years ended December 31 is as follows (dollars in
thousands):
2012
2011
Number of
Modifications
Recorded
Investment
Number of
Modifications
Recorded
Investment
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
Total troubled debt restructurings
3
1
3
1
-
-
8
$
4,614
1,221
860
102
-
-
$
6,797
1
-
-
-
-
-
1
$
2,400
-
-
-
-
-
$
2,400
35
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
A roll-forward of troubled debt restructuring during the year ended December 31, 2012 (dollars in thousands):
Commercial
Real Estate
Commercial,
Financial and
Agricultural
Commercial
Construction
One to four
family residential
real estate
Consumer and
Consumer
Construction
Total
ACCRUING
Beginning balance
$
2,400
$
-
$
-
$
103
$
-
$
2,503
Principal payments
Charge-offs
Advances
New restructured
Transferred out of TDR
Transfers to nonaccrual
Ending Balance
NONACCRUAL
(84)
-
-
3,695
-
(2,400)
-
-
-
1,221
-
-
(2)
-
-
860
-
-
(1)
-
-
-
-
-
-
-
-
-
-
-
(87)
-
-
5,776
-
(2,400)
$
3,611
$
1,221
$
858
$
102
$
-
$
5,792
Beginning balance
$
-
$
-
$
-
$
-
$
-
$
-
Principal payments
Charge-offs
Advances
New restructured
Transfers to foreclosed properties
Transfers from accruing
Ending Balance
TOTALS
(432)
(772)
47
919
-
2,400
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
102
-
-
-
-
-
-
-
-
(432)
(772)
47
1,021
-
2,400
$
2,162
$
-
$
-
$
102
$
-
$
2,264
Beginning balance
$
2,400
$
-
$
-
$
103
$
-
$
2,503
Principal payments
Charge-offs
Advances
New restructured
Transfers out of TDRs
Tansfers to nonaccrual
Transfers to foreclosed properties
Transfers from accruing
(516)
(772)
47
4,614
-
(2,400)
-
2,400
-
-
-
1,221
-
-
-
-
(2)
-
-
860
-
-
-
-
(1)
-
-
102
-
-
-
-
-
-
-
-
-
-
-
-
(519)
(772)
47
6,797
-
(2,400)
-
2,400
Ending Balance
$
5,773
$
1,221
$
858
$
204
$
-
$
8,056
36
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
A roll-forward of troubled debt restructuring during the year ended December 31, 2011 (dollars in thousands):
Commercial
Real Estate
Commercial,
Financial and
Agricultural
Commercial
Construction
One to four
family residential
real estate
Consumer and
Consumer
Construction
Total
ACCRUING
Beginning balance
$
4,537
$
-
$
-
$
105
$
-
$
4,642
Principal payments
Charge-offs
Advances
New restructured
Transferred out of TDRs
Transfers to nonaccrual
Ending Balance
NONACCRUAL
Beginning balance
Principal payments
Charge-offs
Advances
New restructured
Transfers to foreclosed properties
Transfers from accruing
-
-
-
2,400
(582)
(3,955)
-
-
-
-
-
-
-
-
-
-
-
-
(2)
-
-
-
-
-
-
-
-
-
-
-
(2)
-
-
2,400
(582)
(3,955)
$
2,400
$
-
$
-
$
103
$
-
$
2,503
$
-
$
-
$
-
$
-
$
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Ending Balance
$
-
$
-
$
-
$
-
$
-
$
-
TOTALS
Beginning balance
$
4,537
$
-
$
-
$
105
$
-
$
4,642
Principal payments
Charge-offs
Advances
New restructured
Transfers out of TDRs
Transfers to nonaccrual
Transfers to foreclosed properties
Transfers from accruing
-
-
-
2,400
(582)
(3,955)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2)
-
-
2,400
(582)
(3,955)
-
-
Ending Balance
$
2,400
$
-
$
-
$
103
$
-
$
2,503
Insider Loans
The Bank, in the ordinary course of business, grants loans to the Corporation’s executive officers and directors, including
their families and firms in which they are principal owners. Activity in such loans is summarized below (dollars in
thousands):
Loans outstanding, January 1
New loans
Net activity on revolving lines of credit
Repayment
2012
2011
$
8,827
3,911
233
(1,674)
$
9,532
933
69
(1,707)
Loans outstanding, December 31
$
11,297
$
8,827
There were no loans to related-parties classified substandard as of December 31, 2012 and 2011. In addition to the
outstanding balances above, there were unfunded commitments of $.058 million to related parties at December 31, 2012.
37
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 5 – PREMISES AND EQUIPMENT
Details of premises and equipment at December 31 are as follows (dollars in thousands):
Land
Buildings and improvements
Furniture, fixtures, and equipment
Construction in progress
Total cost basis
Less - accumulated depreciation
2012
2011
$
2,062
13,151
5,916
19
21,148
10,515
$
1,811
12,141
4,933
196
19,081
9,454
Net book value
$
10,633
$
9,627
Depreciation of premises and equipment charged to operating expenses amounted to $1.092 million in 2012, $1.067 million
in 2011, and $1.098 million in 2010.
NOTE 6 – OTHER REAL ESTATE HELD FOR SALE
An analysis of other real estate held for sale for the years ended December 31 is as follows (dollars in thousands):
2012
2011
Balance, January 1
Other real estate transferred from loans due to foreclosure
Other real estate sold
Writedowns of other real estate held for sale
Loss on other real estate held for sale
$
3,162
1,352
(775)
(496)
(31)
$
5,562
4,194
(5,457)
(855)
(282)
Balance, December 31
$
3,212
$
3,162
NOTE 7 – DEPOSITS
The distribution of deposits at December 31 is as follows (dollars in thousands):
Noninterest bearing
NOW, money market, checking
Savings
CDs <$100,000
CDs >$100,000
Brokered
Total deposits
2012
2011
$
67,652
155,465
13,829
135,550
24,355
37,706
$
51,273
152,563
14,203
130,685
23,229
32,836
$
434,557
$
404,789
Maturities of non-brokered time deposits outstanding at December 31, 2012 are as follows (dollars in thousands):
2013
2014
2015
2016
2017
Thereafter
Total
$
71,289
43,892
18,900
23,827
1,997
-
$
159,905
38
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 8 – MORTGAGE SERVICING RIGHTS
Mortgage servicing rights (“MSRs”) are recorded when loans are sold in the secondary market with servicing retained. As
of December 31, 2012, the Corporation had obligations to service approximately $97 million of residential first mortgage
loans. The valuation is based upon the net present value of the projected revenues over the expected life of the loans being
serviced, as reduced by estimated internal costs to service these loans. The fair value of the capitalized servicing rights
approximates the carrying value. The key economic assumptions used in determining the fair value of the mortgage
servicing rights include an annual constant prepayment speed of 15.90 months and a discount rate of 7.50% for December
31, 2012.
The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related
valuation allowances (dollars in thousands):
December 31,
2012
December 31,
2011
Balance at beginning of period
Additions from loans sold with servicing retained
Amortization
$
400
344
(106)
-
$
415
(15)
Book value of MSRs at end of period
$
638
$
400
NOTE 9 – BORROWINGS
Borrowings consist of the following at December 31 (dollars in thousands):
Federal Home Loan Bank fixed rate advances at December 31, 2012 with a weighted average
rate of 1.82% maturing in 2013, 2014 and 2016
USDA Rural Development, fixed-rate note payable, maturing August 24, 2024
interest payable at 1%
2012
2011
$
35,000
$
35,000
925
997
$
35,925
$
35,997
The Federal Home Loan Bank borrowings are collateralized at December 31, 2012 by the following: a collateral agreement
on the Corporation’s one to four family residential real estate loans with a book value of approximately $42.231 million;
mortgage related and municipal securities with an amortized cost and estimated fair value of $6.770 million and $7.136
million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $3.060 million. Prepayment of the
advances is subject to the provisions and conditions of the credit policy of the Federal Home Loan Bank of Indianapolis in
effect as of December 31, 2012.
The USDA Rural Development borrowing is collateralized by loans totaling $.152 million originated and held by the
Corporation’s wholly owned subsidiary, First Rural Relending and an assignment of a demand deposit account in the
amount of $.857 million, and guaranteed by the Corporation.
Maturities and principal payments of borrowings outstanding at December 31, 2012 are as follows (dollars in thousands):
2013
2014
2015
2016
2017
Thereafter
Total
$
10,073
10,074
74
15,075
76
553
$
35,925
39
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 10 – INCOME TAXES
The components of the federal income tax provision (credit) for the years ended December 31 are as follows (dollars in
thousands):
Current tax expense (benefit)
Change in valuation allowance
Deferred tax expense (benefit)
2012
2011
2010
-
$
(3,000)
2,078
$
314
-
784
$
-
(2,136)
(1,364)
Provision for (benefit of) income taxes
$
(922)
$
1,098
$
(3,500)
A summary of the source of differences between income taxes at the federal statutory rate and the provision (credit) for
income taxes for the years ended December 31 is as follows (dollars in thousands):
Tax expense at statutory rate
Increase (decrease) in taxes resulting from:
Tax-exempt interest
Change in valuation allowance
Other
2012
2011
2010
$
2,096
$
1,127
$
(1,332)
(49)
(3,000)
31
(59)
-
30
(73)
(2,136)
41
Provision for (benefit of) income taxes, as reported
$
(922)
$
1,098
$
(3,500)
Deferred income taxes are provided for the temporary differences between the financial reporting and tax bases of the
Corporation’s assets and liabilities. The major components of net deferred tax assets at December 31 are as follows (dollars
in thousands):
Deferred tax assets:
NOL carryforward
Allowance for loan losses
Alternative Minimum Tax Credit
OREO Tax basis > book basis
Tax credit carryovers
Deferred compensation
Stock compensation
Depreciation
Intangible assets
Other
Total deferred tax assets
Valuation allowance
Deferred tax liabilities:
FHLB stock dividend
Unrealized gain on securities
Mortgage servicing rights
Total deferred tax liabilities
2012
2011
$
7,149
1,774
1,463
1,025
672
185
265
174
60
170
$
9,073
1,785
1,463
1,050
672
217
172
225
77
110
12,937
14,844
$
(3,010)
$
(6,010)
(103)
(476)
(217)
(796)
(103)
(168)
(136)
(407)
Net deferred tax asset
$
9,131
$
8,427
40
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 10 – INCOME TAXES (CONTINUED)
A valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred
tax asset will not be realized. The Corporation, as of December 31, 2012 had a net operating loss and tax credit
carryforwards for tax purposes of approximately $21.235 million, and $2.136 million, respectively. The Corporation will
continue to evaluate the future benefits from these carryforwards and at such time as it becomes “more likely than not” that
they would be utilized prior to expiration will recognize the additional benefits as an adjustment to the valuation allowance.
The net operating loss carryforwards expire twenty years from the date they originated. These carryforwards, if not
utilized, will begin to expire in the year 2023. A portion of the NOL, approximately $8.4 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 $1.404 million for the NOL and the equivalent value of tax credits, which is approximately $.476
million. These limitations for use were established in conjunction with the recapitalization of the Corporation in December
2004.
The Corporation recognized a deferred tax benefit of approximately $.922 million for the year ended December 31, 2012
and a deferred tax liability of $1.098 million for the year ended December 31, 2011. The valuation allowance at December
31, 2012 was approximately $3.0 million. The Corporation reduced the valuation allowance by $3.0 million at June 30,
2012 since it was determined that it was “more likely than not” that these benefits would be realized. The Corporation
made this determination after a thorough review of projected earnings and the composition and sustainability of those
earnings over the projected tax carryover period. This analysis substantiated the ability to utilize these deferred tax assets.
Management evaluated the deferred tax valuation allowance as of December 31, 2012 and determined that an adjustment to
the valuation allowance was not warranted. The Corporation will continue to evaluate the future benefits from these
carryforwards and at such time as it becomes “more likely than not” that they would be utilized prior to expiration will
recognize the additional benefits as an adjustment to the valuation allowance.
NOTE 11 – OPERATING LEASES
The Corporation currently maintains three operating leases for office locations. The first operating lease, for our location in
Birmingham, was originated in September 2005 and had an original term of 66 months with an option to renew for an
additional five year period. The original term of this was extended during 2011 for an additional three year term.
The second operating lease, for a second location in Manistique, was executed in April 2010, the terms of which began at
that time. The original term of this lease is three years and will automatically renew and extend for four additional
consecutive terms of two years each.
The third operating lease, for a loan production office in Traverse City, was executed in May 2012, the terms of which
began in August 2012. The original term of this lease is three years with options for two consecutive renewal terms of
three years each.
Future minimum payments, by year and in the aggregate, under the initial terms of the operating lease agreements, consist
of the following (dollars in thousands):
2013
2014
2015
Total
$
249
190
34
$
473
Rent expense for all operating leases amounted to $269,000 in 2012, $260,000 in 2011, and $270,000 in 2010.
41
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 12 – RETIREMENT PLAN
The Corporation has established a 401(k) profit sharing plan. Employees who have completed three months of service and
attained the age of 18 are eligible to participate in the plan. Eligible employees can elect to have a portion, not to exceed
80%, of their annual compensation paid into the plan. In addition, the Corporation may make discretionary contributions
into the plan. Retirement plan contributions charged to operations totaled $161,000, $125,000, and $110,000 in 2012,
2011, and 2010, respectively.
NOTE 13 – DEFERRED COMPENSATION PLAN
Prior to the recapitalization in 2004, as an incentive to retain key members of management and directors, the Corporation
established a deferred compensation plan, with benefits based on the number of years the individuals have served the
Corporation. This plan was discontinued and no longer applies to current officers and directors. A liability was recorded
on a present value basis and discounted using the rates in effect at the time the deferred compensation agreement was
entered into. The liability may change depending upon changes in long-term interest rates. The liability at December 31,
2012 and 2011, for vested benefits under this plan, was $.545 million and $.638 million, respectively. These benefits were
originally contracted to be paid over a ten to fifteen-year period. The final payment is scheduled to occur in 2023. The
deferred compensation plan is unfunded; however, the Bank maintains life insurance policies on the majority of the plan
participants. The cash surrender value of the policies was $1.545 million and $1.626 million at December 31, 2012 and
2011, respectively. Deferred compensation expense for the plan was $30,000, $35,000, and $43,000 for 2012, 2011, and
2010, respectively.
NOTE 14 – REGULATORY MATTERS
The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by
regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet
specific capital guidelines that involve quantitative measures of the Corporation’s assets, liabilities, and certain off-balance-
sheet items as calculated under regulatory accounting practices. The Corporation’s capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to
average assets. Management has determined that, as of December 31, 2012, the Corporation is well capitalized.
To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. In addition, federal banking regulators have established capital classifications
beyond the minimum requirements in order to risk-rate deposit insurance premiums and to provide trigger points for
prompt corrective action.
42
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 14 – REGULATORY MATTERS (CONTINUED)
The Corporation’s and the Bank’s actual capital and ratios compared to generally applicable regulatory requirements as of
December 31 are as follows (dollars in thousands):
Actual
Amount
Ratio
Adequacy Purposes
Amount
Ratio
Action Provisions
Amount
Ratio
2012
Total capital to risk
weighted assets:
Consolidated
mBank
Tier 1 capital to
risk weighted assets:
Consolidated
mBank
Tier 1 capital to
average assets:
Consolidated
mBank
2011
Total capital to risk
weighted assets:
Consolidated
mBank
Tier 1 capital to
risk weighted assets:
Consolidated
mBank
Tier 1 capital to
average assets:
Consolidated
mBank
$
$
69,573
56,879
14.9% >
12.2% >
$
$
37,283
37,262
> 8.0%
> 8.0% >
N/A
$
46,577
N/A
10.0%
$
$
64,355
51,701
13.8% >
11.1% >
$
$
18,642
18,631
> 4.0%
> 4.0% >
N/A
$
27,946
N/A
6.0%
$
$
64,355
51,701
12.0% >
9.6% >
$
$
21,486
21,481
> 4.0%
> 4.0% >
N/A
$
26,851
N/A
5.0%
$
$
53,604
49,551
12.9%
11.9%
>
>
$
$
33,314
33,309
> 8.0%
> 8.0%
N/A
$
41,637
>
N/A
10.0%
$
$
48,398
44,346
11.6%
10.7%
>
>
$
$
16,657
16,655
> 4.0%
> 4.0%
N/A
$
24,982
>
N/A
6.0%
$
$
48,398
44,346
10.1%
9.2%
>
>
$
$
19,205
19,196
> 4.0%
> 4.0%
N/A
$
23,995
>
N/A
5.0%
NOTE 15 – STOCK COMPENSATION PLANS
On May 22, 2012, the Company’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 units (“RSUs”), or stock
appreciation rights. The aggregate number of shares of the Company’s common stock issuable under the plan is 757,848.
The Corporation also has three various stock compensation plans which are now expired. One plan was approved during
2000 and applied 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 split), were made available for grant under these plans.
Options under all of the plans were granted at the discretion of a committee of the Corporation’s Board of Directors.
Options to purchase shares of the Corporation’s stock were granted at a price equal to the market price of the stock at the
date of grant. The committee determined the vesting of the options when they were granted as established under the plan.
43
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 15 – STOCK COMPENSATION PLANS (CONTINUED)
The Corporation, in August 2012, granted 148,500 Restricted Stock Units (“RSU’s”) to members of the Board of Directors
and Management. These RSU’s were granted at a market value of $7.91 and will vest equally over a four year term. In
exchange for the grant of RSU’s various previously issued stock option awards were surrendered. The RSUs were awarded
at no cost to the employee and vest ratably over a four-year period. Compensation cost to be recognized over the four –year
vesting period, net of income tax, is $.775 million. As of December 31, 2012, none of the RSUs were vested and
unrecognized compensation expense, net of income tax, was $.709 million.
A summary of stock option transactions for the years ended December 31 is as follows:
Outstanding shares at beginning of year
Granted during the year
Exercised during the year
Expired / forfeited during the year
Surrendered/exchanged for restricted stock
2012
2011
392,152
-
-
-
(150,000)
394,072
-
-
(1,920)
-
Outstanding shares at end of year
242,152
392,152
Exercisable shares at end of year
126,361
148,861
Weighted average exercise price per share
at end of year
$
9.88
$
10.27
Shares available for grant at end of year
-
-
Following is a summary of the options outstanding and exercisable at December 31, 2012:
Exercise
Price
$
$
$
$
9.16
9.75
10.65
12.00
Outstanding
Number of Shares
Exercisable
Unvested Options
2,500
217,152
12,500
10,000
242,152
1,000
120,861
2,500
2,000
126,361
1,500
96,291
10,000
8,000
115,791
Weighted
Average
Remaining
Contractual
Life-Years
2.96
1.96
2.75
2.46
2.10
Options issued since the Corporation’s recapitalization in December of 2004 call for 20% immediate vesting upon issue and
subsequent vesting to occur over a two to five year period, based upon the market value appreciation of the underlying
Corporation’s stock. Compensation related to these options was expensed based upon the vesting period without
consideration given to market value appreciation. There are no future compensation expenses related to existing option
programs.
44
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 16 – SHAREHOLDERS’ EQUITY
In August 2012 the corporation consummated the previously announced $7.000 million rights offering and the investment
by Steinhardt Capital Investors, LLLP (“SCI”) by issuing 2,140,123 shares of common stock for net proceeds of $11.506
million. Also, in August 2012, the Corporation exited the TARP Capital Purchase Program (“CPP”) when the Corporations
11,000 Series A Preferred Shares, issued in April, 2009 to the U.S. Treasury, were publically offered and sold. The
Corporation repurchased the 379,310 of Common Stock Warrants issued to the U.S. Treasury under the CPP in December,
2012 for $1.3 million.
Participation in the TARP Capital Purchase Program
On April 24, 2009, the Corporation entered into and closed a Letter Agreement, including the Securities Purchase
Agreement-Standard Terms (collectively, the “Securities Purchase Agreement”), related to the CPP. Pursuant to the
Securities Purchase Agreement, the Corporation issued and sold to the Treasury (i) 11,000 shares of the Corporation’s
Series A Preferred Shares, and (ii) a 10-year Warrant to purchase 379,310 shares of the Corporation’s Common Shares, at
an exercise price of $4.35 per share (subject to certain anti-dilution and other adjustments), for aggregate proceeds of
$11.000 million in cash.
Amounts recorded for Preferred Stock and Warrant Common Stock were estimated based on an allocation of the total
proceeds from the issuance on the relative fair values of both instruments. Fair value of the Preferred Stock was determined
based on assumptions regarding the discount rate (market rate) on the Preferred Stock (estimated 12%). Fair value of the
Warrant Common Stock is based on the value of the underlying Preferred Stock based on an estimate for a three year term.
The allocation of the proceeds received resulted in the recording of a discount on the Preferred Stock and a premium on the
Warrant Common Stock. The discount on the preferred was accreted on an effective yield basis over a three-year term.
The allocated carrying value of the Preferred Stock and Warrant Common Stock on the date of issuance (based on their
relative fair values) was $10.382 million and $.618 million, respectively. Cumulative dividends on the Preferred Stock are
payable at 5% annum for the first five years and at a rate of 9% per annum thereafter on the liquidation preference of
$1,000 per share. The Company is prohibited from paying any dividend with respect to shares of common stock unless all
accrued and unpaid dividends are paid in full on the Preferred Stock for all past dividend periods. The Preferred Stock is
non-voting, other than class voting rights on matters that could adversely affect the Preferred Stock. The Preferred Stock
was auctioned by the Treasury in 2012 and is now held by various investors. The Preferred Stock may be redeemed at any
time with regulatory approval.
NOTE 17 - 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.
45
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 17 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
The Corporation’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments.
The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-
balance-sheet instruments. These commitments at December 31 are as follows (dollars in thousands):
Commitments to extend credit:
Variable rate
Fixed rate
Standby letters of credit - Variable rate
Credit card commitments - Fixed rate
2012
2011
$
39,782
18,427
2,879
3,060
$
28,495
15,453
3,523
3,019
$
64,148
$
50,490
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer
to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The commitments are structured to allow for 100% collateralization on all standby letters of credit.
Credit card commitments are commitments on credit cards issued by the Corporation’s subsidiary and serviced by other
companies. These commitments are unsecured.
Legal Proceedings and Contingencies
At December 31, 2012, there were no pending material legal proceedings to which the Corporation is a party or to which
any of its property was subject, except for proceedings which arise in the ordinary course of business. In the opinion of
management, pending legal proceedings will not have a material effect on the consolidated financial position or results of
operations of the Corporation.
Concentration of Credit Risk
The Bank grants commercial, residential, agricultural, and consumer loans throughout Michigan. The Bank’s most
prominent concentration in the loan portfolio relates to commercial real estate loans to operators of nonresidential
buildings. This concentration at December 31, 2012 represents $95.151 million, or 27.75%, compared to $75.391 million,
or 24.22%, of the commercial loan portfolio on December 31, 2011. The remainder of the commercial loan portfolio is
diversified in such categories as hospitality and tourism, real estate agents and managers, new car dealers, gaming,
petroleum, forestry, agriculture, and construction. Due to the diversity of the Bank’s locations, the ability of debtors of
residential and consumer loans to honor their obligations is not tied to any particular economic sector.
46
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 18 - FAIR VALUE
Fair value estimates, methods, and assumptions are set forth below for the Corporation’s financial instruments:
Cash, cash equivalents, and interest-bearing deposits - The carrying values approximate the fair values for these assets.
Securities - Fair values are based on quoted market prices where available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities and other inputs such as interest rates and yield curves
that are observable at commonly quoted intervals.
Federal Home Loan Bank stock – Federal Home Loan Bank stock is carried at cost, which is its redeemable value and
approximates its fair value, since the market for this stock is limited.
Loans - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type
such as commercial, residential mortgage, and other consumer. The fair value of loans is calculated by discounting
scheduled cash flows using discount rates reflecting the credit and interest rate risk inherent in the loan.
The methodology in determining fair value of nonaccrual loans is to average them into the blended interest rate at 0%
interest. This has the effect of decreasing the carrying amount below the risk-free rate amount and, therefore, discounts the
estimated fair value.
Impaired loans are measured at the estimated fair value of the expected future cash flows at the loan’s effective interest rate
or the fair value of the collateral for loans which are collateral dependent. Therefore, the carrying values of impaired loans
approximate the estimated fair values for these assets.
Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits and savings, is
equal to the amount payable on demand at the reporting date. The fair value of time deposits is based on the discounted
value of contractual cash flows applying interest rates currently being offered on similar time deposits.
Borrowings - Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair
value of existing debt. The fair value of borrowed funds due on demand is the amount payable at the reporting date.
Accrued interest - The carrying amount of accrued interest approximates fair value.
Off-balance-sheet instruments - The fair value of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present
creditworthiness of the counterparties. Since the differences in the current fees and those reflected to the off-balance-sheet
instruments at year-end are immaterial, no amounts for fair value are presented.
47
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 18 - FAIR VALUE (CONTINUED)
The following table presents information for financial instruments at December 31 (dollars in thousands):
Financial assets:
Cash and cash equivalents
Interest-bearing deposits
Securities available for sale
Federal Home Loan Bank stock
Net loans
Accrued interest receivable
Total financial assets
Financial liabilities:
Deposits
Borrowings
Accrued interest payable
Total financial liabilties
Level in Fair
Value Hierarchy
Carrying
Amount
Estimated
Fair Value
December 31, 2012
December 31, 2011
Carrying
Amount
Estimated
Fair Value
Level 1
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
$
26,961
10
43,799
3,060
443,959
1,319
$
26,961
10
43,799
3,060
439,239
1,319
$
34,070
10
38,727
3,060
395,995
1,261
$
34,070
10
38,727
3,060
394,463
1,261
$
519,108
$
514,388
$
473,123
$
471,591
$
434,557
35,925
214
$
434,227
35,729
214
$
404,789
35,997
202
$
404,821
35,634
202
$
470,696
$
470,170
$
440,988
$
440,657
Limitations - Fair value estimates are made at a specific point in time based on relevant market information and
information about the financial instrument. These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Because no market exists
for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value
estimates are based on existing on-and off-balance-sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant
assets and liabilities that are not considered financial assets or liabilities include premises and equipment, other assets, and
other liabilities. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the estimates.
The following is information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at
December 31, 2012 and the valuation techniques used by the Corporation to determine those fair values.
Level 1:
liabilities that the Corporation has the ability to access.
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or
Level 2: Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly.
These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as
interest rates and yield curves that are observable at commonly quoted intervals.
Level 3: Level 3 inputs are unobservable inputs, including inputs available in situations where there is little, if any,
market activity for the related asset or liability.
The fair value of all investment securities at December 31, 2012 and December 31, 2011 were based on level 2 inputs.
There are no other assets or liabilities measured on a recurring basis at fair value. For additional information regarding
investment securities, please refer to “Note 3 – Investment Securities.”
The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31, 2012 or December 31, 2011.
48
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 18 - FAIR VALUE (CONTINUED)
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value
measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The
Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and
considers factors specific to each asset or liability.
The Corporation also has assets that under certain conditions are subject to measurement at fair value on a non-recurring
basis. These assets include loans and other real estate held for sale. The Corporation has estimated the fair values of these
assets using Level 3 inputs, specifically discounted cash flow projections.
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2012
Balance at
December 31, 2012
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Significant
Other Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Total Losses for
Year Ended
December 31, 2012
(dollars in thousands)
Assets
Impaired loans
Other real estate held for sale
$
4,687
3,212
$
-
-
$
-
-
$
4,687
3,212
$
1,151
489
$
1,640
(dollars in thousands)
Assets
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2011
Balance at
December 31, 2011
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Losses for
Year Ended
December 31, 2011
Impaired loans
Other real estate held for sale
$
7,993
3,162
-
$
-
-
$
-
$
7,993
3,162
$
3,200
1,137
$
4,337
The Corporation had no investments subject to fair value measurement on a nonrecurring basis.
Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The
Corporation estimates the fair value of the loans based on the present value of expected future cash flows using
management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment
streams, and estimated realizable values of available collateral (typically based on outside appraisals).
49
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 2012 and 2011
(Dollars in Thousands)
ASSETS
Cash and cash equivalents
Investment in subsidiaries
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities
Shareholders' equity:
Preferred stock - no par value:
Authorized 500,000 shares, 11,000 shares issued and outstanding
Common stock and additional paid in capital - no par value
Authorized 18,000,000 shares
Issued and outstanding - 5,559,859 and 3,419,736 shares respectively
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
2012
2011
$
12,943
59,854
117
$
4,301
51,381
245
$
72,914
$
55,927
$
466
$
664
11,000
10,921
53,797
6,727
924
72,448
43,525
492
325
55,263
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
72,914
$
55,927
50
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands)
INCOME:
Interest income
Total income
EXPENSES:
Salaries and benefits
Professional service fees
Other
Total expenses
Income (loss) before income taxes and equity in undistributed net
income (loss) of subsidiaries
Provision for (benefit of) income taxes
2012
2011
2010
$
3
$
3
$
11
$
3
$
3
$
11
280
562
340
1,182
(1,179)
(393)
180
245
223
648
(645)
(211)
218
136
147
501
(490)
-
(490)
72
(418)
742
(Loss) before equity in undistributed net income (loss) of subsidiaries
(786)
(434)
Equity in undistributed net income of subsidiaries
Net income (loss)
Preferred dividend and accretion of discount
7,873
7,087
629
2,652
2,218
766
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
$
6,458
$
1,452
$
(1,160)
51
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2012, 2011, and 2010
(Dollars in Thousands)
Cash Flows from Operating Activities:
Net income (loss)
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net (income) of subsidiaries
Increase in capital from stock compensation
Change in other assets
Change in other liabilities
Net cash (used in) operating activities
Cash Flows from Financing Activities:
Proceeds from issuance of common stock
Purchase of common stock warrants
Dividend on preferred stock
Dividend on common stock
Investments in subsidiaries
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
2012
2011
2010
$
7,087
$
2,218
$
(418)
(7,873)
66
92
(163)
(791)
11,506
(1,300)
(550)
(223)
-
9,433
8,642
4,301
(2,652)
-
29
(97)
(502)
-
-
(551)
-
-
(551)
(1,053)
5,354
(72)
32
31
(149)
(576)
-
-
(550)
-
(1,000)
(1,550)
(2,126)
7,480
Cash and cash equivalents at end of period
$
12,943
$
4,301
$
5,354
52
Selected Financial Data
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Years Ended December 31
SELECTED FINANCIAL CONDITION DATA:
Total assets
Loans
Securities
Deposits
Borrowings
Common shareholders' equity
Total shareholders' equity
2012
2011
2010
2009
2008
$
545,980
449,177
43,799
434,557
35,925
61,448
72,448
$
498,311
401,246
38,727
404,789
35,997
44,342
55,263
$
478,696
383,086
33,860
386,779
36,069
43,176
53,882
$
515,377
384,310
46,513
421,389
36,140
44,785
55,299
$
451,431
370,280
47,490
371,097
36,210
41,552
41,552
SELECTED OPERATIONS DATA:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net security gains (losses)
Other income
Other expenses
Income (loss) before income taxes
Provision (credit) for income taxes
Net income (loss)
Preferred dividend and accretion of discount
Net income available to common shareholders
PER SHARE DATA:
Earnings (loss) - Basic
Earnings (loss) - Diluted
Cash dividends declared
Book value
Market value - closing price at year end
FINANCIAL RATIOS:
Return on average common equity
Return on average total equity
Return on average assets
Dividend payout ratio
Average equity to average assets
Efficiency ratio
Net interest margin
$
$
$
$
$
24,427
4,603
19,824
945
-
4,043
(16,757)
6,165
(922)
7,087
629
6,458
23,072
5,143
17,929
2,300
(1)
3,657
(15,969)
3,316
1,098
2,218
766
1,452
22,840
6,455
16,385
6,500
215
2,580
(16,598)
(3,918)
(3,500)
(418)
742
(1,160)
23,708
7,421
16,287
3,700
1,471
3,280
(13,802)
3,536
1,120
2,416
509
1,907
24,562
11,698
12,864
2,300
64
4,589
(12,558)
2,659
787
1,872
-
1,872
$
$
$
$
$
$
1.51
1.46
.04
11.05
7.09
$
.42
.41
-
12.97
5.42
$
(.34)
(.34)
-
12.63
4.58
$
.56
.56
-
13.10
4.64
$
.55
.55
-
12.15
4.40
%
12.43
10.26
1.23
2.65
11.95
67.95
4.17
%
3.30
2.66
.30
N/A
11.15
68.43
4.06
%
(2.64)
(2.06)
(.23)
N/A
11.17
72.57
3.66
%
4.42
3.77
.39
N/A
10.24
72.24
3.59
%
4.61
4.61
.44
N/A
9.55
85.51
3.23
53
Summary Quarterly Financial Information
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in Thousands, Except per Share Data)
BALANCE SHEET
Total loans
Allowance for loan losses
Total loans, net
Intangible assets
Total assets
Core deposits
Noncore deposits (1)
Total deposits
Total borrowings
Common shareholder' equity
Total shareholders' equity
Total tangible equity
Total shares outstanding
Weighted average shares outstanding
AVERAGE BALANCE SHEET
Total loans
Allowance for loan losses
Total loans, net
Intangible assets
Total assets
Core deposits
Noncore deposits (1)
Total deposits
Total borrowings
Total shareholders' equity
ASSET QUALITY RATIOS
Nonperforming loans/total loans
Nonperforming assets/total assets
Allowance for loan losses/total loans
Allowance for loan losses/nonperforming loans
Net charge-offs/average loans
Texas Ratio (2)
CAPITAL ADEQUACY RATIOS
Tier 1 leverage ratio
Tier 1 capital to risk weighted assets
Total capital to risk weighted assets
Average equity/average assets
Tangible equity/tangible assets
FOR THE QUARTER ENDED
2012
FOR THE QUARTER ENDED
2011
12/31
9/30
6/30
3/31
12/31
9/30
6/30
3/31
$
449,177
(5,218)
443,959
-
545,980
372,496
62,061
434,557
35,925
61,448
72,448
71,810
5,559,859
5,559,859
$
433,958
(5,186)
428,772
-
551,117
372,500
66,863
439,363
35,925
61,945
72,945
72,374
5,559,859
4,722,029
$
419,453
(5,083)
414,370
-
524,366
357,933
67,448
425,381
35,997
49,352
60,352
59,827
3,419,736
3,419,736
$
414,402
(5,382)
409,020
-
506,496
355,186
56,902
412,088
35,997
45,119
56,095
55,645
3,419,736
3,419,736
$
401,246
(5,251)
395,995
-
498,311
348,724
56,065
404,789
35,997
55,263
55,263
54,863
3,419,736
3,419,736
$
391,903
(5,838)
386,065
-
498,598
346,843
58,215
405,058
35,997
55,479
55,479
55,179
3,419,736
3,419,736
$
394,812
(6,155)
388,657
-
492,373
329,958
69,709
399,667
36,069
54,784
54,784
54,784
3,419,736
3,419,736
$
374,609
(6,184)
368,425
-
492,790
315,638
85,145
400,783
36,069
54,097
54,097
54,097
3,419,736
3,419,736
$
438,168
(5,287)
432,881
-
545,661
371,684
61,889
433,573
35,925
72,936
$
424,461
(5,212)
419,249
-
545,788
369,994
69,333
439,327
35,973
67,327
$
422,887
(5,187)
417,700
-
511,681
358,133
58,524
416,657
35,997
55,915
$
404,048
(5,277)
398,771
-
503,412
357,298
57,048
409,250
35,997
55,418
$
396,197
(5,251)
390,946
-
487,304
347,700
43,241
390,941
38,117
55,219
$
397,665
(6,070)
391,595
-
497,333
342,294
61,663
403,957
36,045
54,998
$
378,250
(6,371)
371,879
-
494,481
322,119
82,430
404,549
36,069
54,138
$
380,066
(6,687)
373,379
-
478,861
298,241
88,502
386,743
36,609
53,870
%
1.04
1.45
1.16
111.33
.23
10.25
%
11.98
13.81
14.93
13.37
13.17
%
%
1.23
1.61
1.20
96.99
.28
11.35
10.16
12.87
14.12
10.93
13.15
%
%
1.28
1.70
1.21
94.57
.20
13.70
9.95
11.55
12.80
11.01
11.42
%
1.65
2.04
1.30
78.49
.10
16.96
%
10.08
11.62
12.87
11.33
11.00
%
1.99
2.24
1.18
65.69
.48
18.56
%
10.08
11.62
12.87
11.33
11.33
%
%
2.47
2.99
1.49
60.35
.18
24.39
9.73
11.65
12.97
11.06
11.06
%
%
2.39
2.89
1.56
65.19
.17
23.38
9.50
11.40
12.66
10.95
10.95
%
2.47
2.99
1.49
60.35
.11
24.96
%
9.70
11.69
12.94
11.25
11.25
(1) Noncore deposits include brokered deposits and CDs greater than $100,000
(2) Texas Ratio: Nonperforming Assets Divided by Total Tangible Equity plus Allowance for Loan Losses
54
Summary Quarterly Financial Information
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in Thousands, Except per Share Data)
FOR THE QUARTER ENDED 2012
FOR THE QUARTER ENDED 2011
12/31
9/30
6/30
3/31
12/31
9/30
6/30
3/31
INCOME STATEMENT
Net interest income
Provision for loan losses
Net interest income after provision
Total noninterest income
Total noninterest expense
Income before taxes
Provision for income taxes
Net income
$
5,112
$
4,930
$
5,019
$
4,763
$
4,901
$
4,709
$
4,178
$
4,141
150
4,962
983
4,349
1,596
536
1,060
150
4,780
1,149
4,367
1,562
528
1,034
150
4,869
1,305
4,207
1,967
(2,335)
4,302
495
4,268
606
3,834
1,040
349
691
1,300
3,601
725
4,221
105
27
78
400
4,309
1,006
3,960
1,355
455
900
600
3,578
1,348
3,729
1,197
402
795
-
4,141
577
4,059
659
214
445
Preferred dividend and accretion of discount
Net income available to common shareholders
138
922
$
137
897
$
161
4,141
$
193
498
$
192
(114)
$
193
707
$
192
603
$
189
256
$
PER SHARE DATA
Earnings (loss) - basic*
Earnings (loss) - diluted*
Book value
Market value
PROFITABILITY RATIOS
Return on average assets
Return on average common equity
Return on average total equity
Net interest margin
Efficiency ratio
Average loans/average deposits
$
.21
$
.21
$
.97
$
.12
$
(.03)
$
.21
$
.18
$
.07
.21
11.05
7.09
.20
11.14
7.60
.94
14.43
5.99
.11
13.19
7.00
.03
12.97
5.42
.20
13.05
5.46
.17
12.86
6.00
.07
12.67
6.02
.67
%
.65
%
3.21
%
.40
%
(.09)
%
.56
%
.49
%
.22
%
5.93
5.03
4.11
70.52
99.45
6.33
5.29
4.10
67.29
96.62
36.57
29.39
4.30
63.61
101.50
4.53
3.62
4.17
71.01
98.73
(1.02)
(.82)
4.38
67.51
101.34
6.35
5.10
4.14
67.39
96.96
5.58
4.47
3.79
67.84
96.19
2.40
1.92
3.92
75.73
98.27
*Earnings per share data for 2012 restated for common stock issuance
55
Market Information
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
MARKET INFORMATION
(Unaudited)
The Corporation’s common stock is traded on the NASDAQ Capital Market under the symbol MFNC. The following table
sets forth the range of high and low trading prices of the Corporation’s common stock from January 1, 2011 through
December 31, 2012, as reported by NASDAQ.
2012
High
Low
Close
Book value
2011
High
Low
Close
Book value
For the Quarter Ended
March 31
$
7.74
5.00
7.00
13.19
June 30
$
7.28
5.61
5.99
14.43
September 30
8.00
$
5.73
7.60
11.14
December 31
7.90
$
6.81
7.09
11.05
$
6.52
4.58
6.02
12.67
$
6.20
4.85
6.00
12.86
$
7.01
4.96
5.46
13.05
$
5.94
4.63
5.42
12.97
The Corporation had approximately 1,200 shareholders of record as of March 30, 2013.
The holders of the Corporation’s common stock are entitled to dividends when, and if declared by the Board of Directors of
the Corporation, out of funds legally available for that purpose. In determining dividends, the Board of Directors considers
the earnings, capital requirements and financial condition of the Corporation and its subsidiary bank, along with other
relevant factors. The Corporation’s principal source of funds for cash dividends is the dividends paid by the Bank. The
ability of the Corporation and the Bank to pay dividends is subject to regulatory restrictions and requirements. There were
no dividends declared or paid by the Bank in 2010, 2011 and 2012. The Corporation declared a $.04 dividend per share on
its common stock in the fourth quarter of 2012. There were no sales of unregistered securities in 2012, nor were there any
repurchases of the Corporation’s common stock in 2012.
56
Shareholder Return Performance Graph
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Shown below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the
Corporation’s common stock with that of the cumulative total return on the NASDAQ Bank Index and the NASDAQ
Composite Index for the five-year period ended December 31, 2012. The following information is based on an investment
of $100, on December 31, 2007 in the Corporation’s common stock, the NASDAQ Bank Index, and the NASDAQ
Composite Index, with dividends reinvested.
This graph and other information contained in this section shall not be deemed to be “soliciting” material or to be “filed”
with the Securities and Exchange Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the
Securities Exchange Act of 1934, as amended.
57
Forward Looking Statements/Risk Factors
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 Corporation’s ability to predict results or the actual effect of future plans or strategies
is inherently uncertain. Factors that could cause actual results to differ from the results in forward-looking statements
include, but are not limited to:
RISK FACTORS
Risks Related to our Lending and Credit Activities
(cid:2) Our business may be adversely affected by conditions in the financial markets and economic conditions generally,
as our borrowers’ ability to repay loans and the value of the collateral securing our loans decline.
(cid:2) Weakness in the markets for residential or commercial real estate, including the secondary residential mortgage
loan markets, could reduce our net income and profitability.
(cid:2) Our allowance for loan losses may be insufficient.
Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans,
identification of additional problem loans, and other factors, both within and outside of our control, may require an
increase in our allowance for loan losses.
Risks Related to Our Operations
(cid:2) We are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon our net interest income, which is the difference between
interest income on interest-earning assets such as loans and securities and interest expense paid on interest-bearing
liabilities such as deposits and borrowed funds. There are many factors which influence interest rates that are
beyond our control, including but not limited to general economic conditions and governmental policy, in
particular, the policies of the FRB.
(cid:2) Changes in our accounting policies or in accounting standards could materially affect how we report our financial
results and condition.
(cid:2) Our controls and procedures may fail or be circumvented.
(cid:2)
Impairment of deferred income tax assets could require charges to earnings, which could result in an adverse
impact on our results of operations.
In assessing the realizability of deferred income tax assets, management considers whether it is more likely than
not that some allowance requires management to evaluate all available evidence, both negative and positive.
Positive evidence necessary to overcome the negative evidence includes whether future taxable income in
sufficient amounts and character within the carry back and carry forward periods is available under the tax law,
including the use of tax planning strategies. When negative evidence (e.g. cumulative losses in recent years,
history of operating loss or tax credit carry forwards expiring unused) exists, more positive evidence than negative
evidence will be necessary. At December 31, 2012, net deferred tax assets are approximately $9.131 million. If a
valuation allowance becomes necessary with respect to such balance, it could have a material adverse effect on our
business, results of operations and financial condition.
(cid:2) Our information systems may experience an interruption of breach in security.
58
Forward Looking Statements/Risk Factors
Risks Related to Legal and Regulatory Compliance
(cid:2) We operate in a highly regulated environment, which could increase our cost structure or have other negative
impacts on our operations.
(cid:2) The full impact of the recently enacted Dodd-Frank Act is currently unknown given that many of the details and
substance of the new laws will be implemented through agency rulemaking.
Among the many requirements if the Dodd-Frank Act for new banking regulations is a requirement for new capital
regulations to be adopted within 18 months. These regulations must be at least as stringent as, and may call for
higher levels of capital than, current regulations.
Strategic Risks
(cid:2) Maintaining or increasing our market share may depend on lowering prices and market acceptance of new
products and services.
(cid:2) Future growth or operating results may require us to raise additional capital but that capital may not be
available.
Reputation Risks
(cid:2) Unauthorized disclosure of sensitive of confidential client or customer information, whether through a breach of
our computer system or otherwise, could severely harm our business.
Liquidity Risks
(cid:2) We could experience an unexpected inability to obtain needed liquidity.
The ability of a financial institution to meet its current financial obligations is a function of its balance sheet
structure, its ability to liquidate assets and its access to alternative sources of funds. We seek to ensure our
funding needs are met by maintaining an appropriate level of liquidity through asset/liability management.
Risks Related to an Investment in Our Common Stock
(cid:2) Limited trading activity for shares of our common stock may contribute to price volatility.
(cid:2) Our securities are not an insured deposit.
(cid:2) You may not receive dividends on your investment in common stock.
Our ability to pay dividends is dependent upon our receipt of dividends from the Bank, which is subject to
regulatory restrictions. Such restrictions, which govern state-chartered banks, generally limit the payment of
dividends on bank stock to the bank’s undivided profits after all payments of all necessary expenses, provided that
the bank’s surplus equals or exceeds its capital.
These risks and uncertainties should be considered in evaluating forward-looking statements. Further information
concerning the Corporation and its business, including additional factors that could materially affect the Corporation’s
financial results, is included in the Corporation’s filings with the Securities and Exchange Commission. All forward-
looking statements contained in this report are based upon information presently available and the Corporation assumes no
obligation to update any forward-looking statements.
59
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
The following discussion and analysis presents the more significant factors affecting the Corporation’s financial condition
as of December 31, 2012 and 2011 and the results of operations for 2010 through 2012. This discussion also covers asset
quality, liquidity, interest rate sensitivity, and capital resources for the years 2011 and 2012. 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. Throughout
this discussion, the term “Bank” refers to mBank, the principal banking subsidiary of the Corporation.
Taxable equivalent adjustments are the result of increasing income from tax-free loans and investments by an amount equal
to the taxes that would be paid if the income were fully taxable based on a 34% federal tax rate, thus making tax-exempt
yields comparable to taxable asset yields.
Dollar amounts in tables are stated in thousands, except for per share data.
EXECUTIVE SUMMARY
The purpose of this section is to provide a brief summary of the 2012 results of operations and financial condition. A more
detailed analysis of the results of operations and financial condition follows this summary.
The Corporation reported a profit available to common shareholders in 2012 of $6.458 million, or $1.51 per share,
compared to $1.452 million, $.42 per share, in 2011 and net loss in 2010 of $1.160 million, $.34 per share.
Total assets of the Corporation at December 31, 2012, were $545.980 million, an increase of $47.699 million, or 9.57%
from total assets of $498.311 million reported at December 31, 2011. In 2012, the Corporation showed increased balances
in both investments and loans, which were funded primarily with Bank core deposit growth.
At December 31, 2012, the Corporation’s loans stood at $449.177 million, an increase of $47.931 million, or 11.95%, from
2011 year-end balances of $401.246 million. Total loan production in 2012 amounted to $214.102 million, which included
$74.142 million of secondary market mortgage loans sold. The Corporation also sold $11.962 million of SBA/USDA
guaranteed loans. Loan balances were also impacted by normal amortization and paydowns, some of which related to
payoffs on participation loans.
Nonperforming loans totaled $4.687million, or 1.04% of total loans at December 31, 2012. Nonperforming assets at
December 31, 2012, were $7.899 million, 1.45% of total assets, compared to $11.155 million or 2.24% of total assets at
December 31, 2011.
Total deposits increased from $404.789 million at December 31, 2011, to $434.557 million at December 31, 2012, an
increase of 7.35%. The increase in deposits in 2012 was comprised of a decrease in wholesale deposits of $5.996 million
and an increase in core deposits of $23.772 million.
Shareholders’ equity totaled $72.448 million at December 31, 2012, compared to $55.263 million at the end of 2011, an
increase of $17.185 million. This increase reflects the proceeds from a common stock rights offering of $11.506 million,
consolidated net income of $6.458 million, the redemption at $1.300 million of the common stock warrants previously
issued as part of TARP, the after tax decrease in the market value of available-for-sale investments, which amounted to
$.599 million, the increase from the accretion of the discount on preferred stock of $.079 million, and recognition of
compensation expense associated with restricted stock awards if $.066 million. The book value per common share at
December 31, 2012, amounted to $11.05 compared to $12.97 at the end of 2011.
60
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
(dollars in thousands, except per share data)
2012
2011
2010
Taxable-equivalent net interest income
Taxable-equivalent adjustment
Net interest income, per income statement
Provision for loan losses
Other income
Other expense
Income before provision for income taxes
Provision for (benefit of) income taxes
Net income (loss)
Preferred dividend expense
$
19,898
(74)
$
18,019
(90)
$
16,496
(111)
19,824
945
4,043
16,757
6,165
(922)
17,929
2,300
3,656
15,969
3,316
1,098
16,385
6,500
2,795
16,598
(3,918)
(3,500)
$
7,087
629
$
2,218
766
$
(418)
742
Net income (loss) available to common shareholders
$
6,458
$
1,452
$
(1,160)
Earnings (loss) per common share
Basic
Diluted
Return on average assets
Return on average common equity
Return on average equity
$
$
1.51
1.51
$
$
.42
.41
$
$
(.34)
(.34)
%
1.23
12.43
10.26
%
.30
3.30
2.66
%
(.23)
(2.64)
(2.06)
Summary
The Corporation reported net income available to common shareholders of $6.458 million in 2012, compared to net income
of $1.452 million in 2011 and a net loss of $1.160 million in 2010. The 2012 results include significantly reduced credit
related expenses and a decreased loan loss provision. In 2012, the loan loss provision was $.945 million, with write-downs
and losses on other real estate of $.489 million. In 2012, the Corporation also recognized income from SBA/USDA loan
sales of $1.176 million and fees and gains on the sale of secondary market loans of $1.390 million. In 2011, the loan loss
provision was $2.300 million, with write-downs and losses on other real estate held for sale of $1.137 million. Also
included in 2011 results are income of $1.500 million from SBA/USDA loan sales and the initial valuation of mortgage
servicing rights of $.400 million. The 2010 results reflected elevated costs associated with nonperforming assets, including
loan loss provisions of $6.500 million and write-downs and losses on other real estate held for sale of $2.753 million.
Net Interest Income
Net interest income is the Corporation’s primary source of core earnings. Net interest income represents the difference
between the average yield earned on interest-earning assets and the average rate paid on interest-bearing funding sources.
Net interest revenue is the Corporation’s principal source of revenue, representing 86% of total revenue in 2012. The net
interest income is impacted by economic and competitive factors that influence rates, loan demand, and the availability of
funding.
Net interest income on a taxable equivalent basis increased $1.879 million from $18.019 million in 2011 to $19.898 million
in 2012. In 2012, interest rates were stable with the prime rate at 3.25% for the entire year. The Corporation experienced a
decrease, 9 basis points, in the overall rates on earnings assets from 5.24% in 2011 to 5.15% in 2012. Interest bearing
funding sources declined, by 18 basis points, from 1.33% in 2011 to 1.15% in 2012. The combination of these effective
rate changes resulted in an improved net interest margin from 4.08% in 2011 to 4.18% in 2012. In 2011, the Corporation
realized an increase of $1.544 million in net interest income. This increase was largely attributed to lower rates on funding
liabilities with an increased level of earning assets.
61
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
In 2012, the Corporation benefited from higher levels of low interest transactional deposit instruments and repricing of term
deposits. In addition to the benefits derived from repriced deposit liabilities and a higher level of transactional deposits, the
corporation experienced solid loan growth.
The following table details sources of net interest income for the three years ended December 31 (dollars in thousands):
Interest Income
Loans
Funds sold
Taxable securities
Nontaxable securities
Other interest-earning assets
Total earning assets
Interest Expense
NOW, money markets, checking
Savings
CDs <$100,000
CDs >$100,000
Brokered deposits
Borrowings
Total interest-bearing funds
2012
Mix
2011
Mix
2010
Mix
$
23,313
18
948
27
121
24,427
548
16
2,429
433
520
657
4,603
95.44
.07
3.88
.11
.50
100.00
11.91
0.35
52.77
9.41
11.30
14.27
100.00
%
%
%
%
$
21,774
21
1,162
28
87
23,072
1,002
36
2,064
383
1,045
613
5,143
94.37
.09
5.04
.12
.38
100.00
19.48
0.70
40.13
7.45
20.32
11.92
100.00
%
%
%
%
$
21,279
58
1,406
28
69
22,840
1,218
97
1,756
449
2,087
848
6,455
93.17
.25
6.16
.12
.30
100.00
18.87
1.50
27.20
6.96
32.34
13.14
100.00
%
%
%
%
Net interest income
$
19,824
$
17,929
$
16,385
Average Rates
Earning assets
Interest-bearing funds
Interest rate spread
%
5.14
1.15
3.99
%
5.22
1.33
3.89
%
5.10
1.60
3.50
As shown in the table above, income on loans provides more than 95% of the Corporation’s interest revenue. The
Corporation’s loan portfolio has approximately $297.380 of variable rate loans that predominantly reprice with changes in
the prime rate and $151.797 million of fixed rate loans. A majority of the variable rate loans, 58%, or $173.832 million,
have interest rate floors. These loans will not reprice until the prime rate increases to the extent necessary to surpass the
interest rate floor. A prime rate increase of 100 basis points or more will reprice $98.105 million of these loans with floors,
while the remainder will reprice with an additional 100 basis point increase in the prime rate.
The majority of interest bearing liabilities do not reprice automatically with changes in interest rates, which provides
flexibility to manage interest income. Management monitors the interest sensitivity of earning assets and interest bearing
liabilities to minimize the risk of movements in interest rates.
62
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table presents the amount of taxable equivalent 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.
(dollars in thousands)
ASSETS:
Loans (1,2,3)
Taxable securities
Nontaxable securities (2)
Federal Funds sold
Other interest-earning assets
Total earning assets
Reserve for loan losses
Cash and due from banks
Fixed assets
Other real estate owned
Other assets
Years ended December 31,
Average
Balance
2012
Interest
Average
Rate
Average
Balance
$
422,440
38,094
850
11,127
3,070
475,581
(5,232)
28,561
10,254
3,392
14,184
51,159
$
23,373
948
41
18
121
24,501
%
5.53
2.49
4.82
.16
3.94
5.15
$
388,115
36,155
850
13,102
3,504
441,726
(6,027)
25,622
9,630
4,581
14,007
47,813
2011
Interest
$
21,850
1,162
42
21
87
23,162
Average
Rate
Average
Balance
%
5.63
3.21
4.94
.16
2.48
5.24
$
384,347
35,475
853
22,934
4,448
448,057
(5,539)
29,291
10,002
6,196
14,986
54,936
2010
Interest
$
21,376
1,406
42
58
69
22,951
Average
Rate
%
5.56
3.96
4.92
.25
1.55
5.12
TOTAL ASSETS
$
526,740
$
489,539
$
502,993
LIABILITIES AND SHAREHOLDERS' EQUITY:
NOW and Money Markets
Interest checking
Savings deposits
CDs <$100,000
CDs >$100,000
Brokered deposits
Borrowings
Total interest-bearing liabilities
Demand deposits
Other liabilities
Shareholders' equity
$
406
142
16
2,429
433
520
657
4,603
$
119,053
31,837
13,682
138,767
25,128
36,569
35,973
401,009
59,730
3,062
62,939
125,731
%
.34
.45
.12
1.75
1.72
1.42
1.83
1.15
%
$
762
240
36
2,064
383
1,045
613
5,143
$
124,575
26,962
16,242
112,464
22,909
45,906
36,579
385,637
46,773
2,568
54,561
103,902
%
.61
.89
.22
1.84
1.67
2.28
1.68
1.33
$
99,411
18,987
19,503
84,841
26,273
118,615
36,116
403,746
39,704
3,372
56,171
99,247
$
943
275
97
1,756
449
2,087
848
6,455
%
.95
1.45
.50
2.07
1.71
1.76
2.35
1.60
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
526,740
$
489,539
$
502,993
Rate spread
Net interest margin/revenue, tax equivalent basis
$
19,898
4.00
4.18
%
$
18,019
3.91
4.08
%
%
$
16,496
3.52
3.68
%
%
(1)
(2)
(3)
For purposes of these computations, non-accruing loans are included in the daily average loan amounts outstanding.
The amount of interest income on nontaxable securities and loans has been adjusted to a tax equivalent basis, using a 34% tax rate.
Interest income on loans includes loan fees.
63
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table presents the dollar amount, in thousands, of changes in taxable equivalent interest income and interest
expense for major components of interest-earning assets and interest-bearing obligations. It distinguishes between changes
related to higher or lower outstanding balances and changes due to the levels and fluctuations in interest rates. For each category
of interest-earning assets and interest-bearing obligations, information is provided for changes attributable to (i) changes in
volume (i.e. changes in volume multiplied by prior period rate) and (ii) changes in rate (i.e. changes in rate multiplied by prior
period volume). For purposes of this table, changes attributable to both rate and volume are shown as a separate variance.
2012 vs. 2011
2011 vs. 2010
Years ended December 31,
Increase (Decrease)
Due to
Increase (Decrease)
Due to
Volume
Rate
$
1,932
62
-
(3)
(11)
$
(376)
(262)
(1)
-
51
Volume
and Rate
$
(33)
(14)
-
-
(6)
Total
Increase
(Decrease)
Volume
Rate
Volume
and Rate
Total
Increase
(Decrease)
$
1,523
(214)
(1)
(3)
34
$
210
27
-
(25)
(15)
$
262
(266)
-
(21)
41
2
$
(5)
-
9
(8)
$
474
(244)
-
(37)
18
Interest earning assets:
Loans
Taxable securities
Nontaxable securities
Federal funds sold
Other interest earning assets
Total interest earning assets
$
1,980
$
(588)
$
(53)
$
1,339
$
197
$
16
$
(2)
$
211
Interest bearing obligations:
NOW and money market deposits
Interest checking
Savings deposits
CDs <$100,000
CDs >$100,000
Brokered deposits
Borrowings
$
(34)
43
(6)
483
37
(213)
(10)
$
(337)
(120)
(17)
(95)
12
(392)
55
$
15
(22)
3
(22)
1
80
(1)
$
(356)
(99)
(20)
366
50
(525)
44
$
239
116
(16)
573
(57)
(1,278)
11
$
(335)
(106)
(54)
(199)
(10)
612
(243)
$
(85)
(45)
9
(66)
1
(376)
(3)
$
(181)
(35)
(61)
308
(66)
(1,042)
(235)
Total interest bearing obligations
$
300
$
(894)
$
54
$
(540)
$
(412)
$
(335)
$
(565)
$
(1,312)
Net interest income, tax equivalent basis
$
1,879
$
1,523
Provision for Loan Losses
The Corporation records a provision for loan losses when it believes it is necessary to adjust the allowance for loan losses
to maintain an adequate level after considering factors such as loan charge-offs and recoveries, changes in identified levels
of risk in the loan portfolio, changes in the mix of loans in the portfolio, loan growth, and other economic factors. During
2012, the Corporation recorded a provision for loan loss of $.945 million, compared to a provision of $2.300 million in
2011 and $6.500 million in 2010.
Noninterest Income
Noninterest income was $4.043 million, $3.656 million, and $2.795 million in 2012, 2011, and 2010, respectively. The
principal recurring sources of noninterest income are the gains on the sale of SBA/USDA guaranteed loans and secondary
market loans. In 2012, revenues from these two business lines totaled $2.566 million compared to $2.200 million in 2011
and $1.407 million in 2010. The Corporation, in recent years, expanded its efforts to generate increased income from
secondary market loans by adding additional staff and centralizing processing activities. In 2010, the Bank initiated the
new business of retaining the servicing rights on mortgage loans sold to the secondary market. This line of business
attained profitability during 2011, and as such, a valuation of the future revenue stream was recognized as income and
booked as an asset at the Bank. In 2012, income from servicing mortgages amounted to $.417 million, compared to $.400
million in 2011. Late in 2011, the bank also established its own title insurance agency which offers title services for both
commercial and retail based mortgage transactions. Income from this line of business in 2012 was $.060 million, and it is
expected that this line of business will provide increased revenues in 2013 and beyond.
Deposit related income totaled $.699 million in 2012 compared to $.832 million in 2011 and $.990 million in 2010. The
Corporation has experienced continued decline in deposit related income as a result of changes in the assessments mandated
by new consumer regulations. The current regulatory environment may limit the Corporation’s ability to grow these
revenue sources.
64
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table details noninterest income for the three years ended December 31 (dollars in thousands):
Deposit service charges
NSF Fees
Gain on sale of secondary market loans
Secondary market fees generated
SBA Fees
Mortgage servicing rights
Other
Subtotal
Net security gains
2012
2011
2010
2012-2011
2011-2010
$
110
$
123
$
128
(10.57)
%
(3.91)
%
% Increase (Decrease)
589
1,077
313
1,176
417
361
4,043
-
709
477
223
1,500
400
225
3,657
(1)
862
445
94
868
-
183
2,580
215
(16.93)
125.79
40.36
(21.60)
4.25
60.44
10.56
(17.75)
7.19
137.23
72.81
-
22.95
41.74
(100.00)
(100.47)
Total noninterest income
$
4,043
$
3,656
$
2,795
10.59
%
30.81
%
Noninterest Expense
Noninterest expense was $16.757 million in 2012, compared to $15.969 million and $16.598 million in 2011 and 2010,
respectively. In 2012, the increase in noninterest expense totaled $.788 million, or 4.93%. Salaries and benefits, at $8.288
million, increased by $1.013 million, 13.92%, from the 2011 expenses of $7.275 million and compared to $6.918 million in
2010. Expense increases on salaries and benefits in 2012 were largely due to increase staffing combined with increased
employee benefits costs relative to health insurance premium increases and stock compensation expenses related to the
issuance of restricted stock. Professional service fees increased in 2012 largely due to increased costs associated with
various strategic initiatives. The largest decrease in noninterest expense for 2012 occurred in write-downs and losses on the
sale of other real estate, which decreased from $1.137 million in 2011 to $.489 million in 2012. We also had increased
costs in data processing, which was related to technological upgrades and service changes to maintain our competitive edge.
We also experienced a significant decline in our FDIC insurance premiums due to our improved asset quality and operating
performance.
Management will continue to review all areas of noninterest expense in order to evaluate where opportunities may exist
which could reduce expenses without compromising service to customers.
The following table details noninterest expense for the three years ended December 31 (dollars in thousands):
Salaries and benefits
Occupancy
Furniture and equipment
Data processing
Professional service fees:
Accounting
Legal
Consulting and other
Total professional service fees
Loan and deposit
OREO writedowns and (gains) losses on sale
FDIC insurance premiums
Telephone
Advertising
Other operating expenses
Total noninterest expense
2012
$
8,288
1,372
885
991
2011
$
7,275
1,376
827
761
2010
$
6,918
1,313
806
740
368
396
432
1,196
877
489
459
233
376
1,591
16,757
$
260
207
289
756
1,137
1,137
849
215
351
1,285
15,969
$
269
98
260
627
910
2,753
957
193
297
1,084
16,598
$
% Increase (Decrease)
%
2012 - 2011
13.92
(.29)
7.01
30.22
2011 - 2010
5.16
4.80
2.61
2.84
%
41.54
91.30
49.48
58.20
(22.87)
(56.99)
(45.94)
8.37
7.12
23.81
4.93
%
(3.35)
111.22
11.15
20.57
24.95
(58.70)
(11.29)
11.40
18.18
18.54
(3.79)
%
65
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Federal Income Taxes
A deferred tax asset is recognized for temporary differences that will result in deductible amounts in future years and
contain tax carryforwards including past net operating losses and tax credits. For example, a temporary difference is
created between the reported amount and the tax basis of a liability for estimated expenses if, for tax purposes, those
estimated expenses are not deductible until a future year. Settlement of that liability will result in tax deductions in future
years, and a deferred tax asset is recognized based on the weight of available evidence. All available evidence, both
positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is
needed for some portion or all of a deferred tax asset. Judgment must be used in considering the relative impact of negative
and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate
with the extent to which it can be objectively verified. The more negative evidence that exists, (a) the more positive
evidence is necessary and (b) the more difficult it is to support a conclusion that a valuation allowance is not needed.
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. The Corporation, as of December 31, 2012, had net operating loss (“NOL”) and tax credit
carryforwards of approximately $21.235 million and $2.136 million, respectively.
Current Federal Tax Provision
In 2012, the Corporation recorded a benefit for income taxes of $.922 million, compared to a provision of $1.098 million in
2011 and a $3.500 million tax benefit in 2010. The valuation allowance at December 31, 2012 was approximately $3.0
million. Management evaluated the deferred tax valuation allowance as of December 31, 2012 and determined that an
adjustment to the valuation was not warranted. The Corporation reduced the valuation allowance by $3.0 million at June
30, 2012 since it was determined that it was “more likely than not” that these benefits would be realized. The Corporation
made this determination after a thorough review of projected earnings and the composition and sustainability of those
earnings over the projected tax carryover period. In this assessment, the Corporation reviewed current levels of
nonperforming assets, the impact of increased levels of nonperforming assets along with other factors that may negatively
impact the probability of future earnings. This analysis substantiated the ability to utilize these deferred tax assets. The
Corporation will continue to evaluate the future benefits from these carryforwards and at such time as it becomes “more
likely than not” that they would be utilized prior to expiration will recognize the additional benefits as an adjustment to the
valuation allowance.
Deferred Tax Benefit – Historical Commentary
The Corporation recorded a current period federal tax benefit of $3.500 million in 2010, compared to a $1.120 million
provision in the same period a year earlier. In the first quarter of 2010, management evaluated the deferred tax assets
associated with the net operating loss and tax credit carryforwards based upon the Corporation’s foreseen ability to utilize
the benefits of these carryforwards prior to their expiration. At that time, the Corporation had net deferred tax assets of
approximately $13.4 million and a valuation allowance of $8.1 million against these assets. As a part of this analysis,
management considered, among other things, current asset levels and projected loan and deposit growth, current interest
rate spreads and projected net interest income levels, and noninterest income and expense, along with management’s ability
to control expenses and the potential for increasing contributions of noninterest income. Management also considered the
impact of nonperforming assets and future period charge-off activity relative to projected provisions. Based upon the
analysis of projected taxable income and the probability of achieving these projected taxable income levels, the Corporation
reduced the valuation allowance on its deferred tax assets by $3.500 million. Among the criteria that management
considered in evaluating the deferred tax asset was taxable income for the three most recent taxable years ending December
31, 2009 which totaled $8.2 million. This taxable income allowed the Corporation to utilize NOL carryforwards. At 2010
year end, management, in recognition of the net operating loss before taxes of $3.918 million and based upon additional
analysis of deferred tax balances and future taxable income projections, made the determination to increase the valuation
allowance by approximately $1.364 million, resulting in a net decrease in the valuation allowance of $2.136 million for the
year.
66
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The Corporation recognized a federal deferred tax benefit of $7.500 million in the third quarter of 2007. The recognition of
this deferred tax benefit relates to the generally accepted accounting principles applicable to the probability of utilizing the
NOL and tax credit carryforwards of the Corporation. The Corporation, based upon current profitability trends largely
supported by expansion of the net interest margin and controlled expenses, determined that a portion, $7.500 million, of the
NOL carryforward was probable. The $7.500 million recognition was based upon assumptions of a sustained level of
taxable income within the NOL carryforward period and took into account Section 382, annual limitations. This tax benefit
was recorded by reducing the valuation allowance that was recorded against the deferred tax assets of the Corporation. In
2006, the Corporation recognized a portion of this benefit, $.500 million, based upon the then current probabilities.
The table below details the Corporation’s deferred tax assets and liabilities (dollars in thousands):
Deferred tax assets:
NOL carryforward
Allowance for loan losses
Alternative Minimum Tax Credit
OREO Tax basis > book basis
Tax credit carryovers
Deferred compensation
Stock compensation
Depreciation
Intangible assets
Other
Total deferred tax assets
Valuation allowance
Deferred tax liabilities:
FHLB stock dividend
Unrealized gain on securities
Mortgage servicing rights
Total deferred tax liabilities
2012
2011
$
7,149
1,774
1,463
1,025
672
185
265
174
60
170
$
9,073
1,785
1,463
1,050
672
217
172
225
77
110
12,937
14,844
$
(3,010)
$
(6,010)
(103)
(476)
(217)
(796)
(103)
(168)
(136)
(407)
Net deferred tax asset
$
9,131
$
8,427
As shown in the table above, the NOL and tax credit carryforwards comprise the majority of the deferred tax asset, which is
reduced by the $3.000 million valuation adjustment.
As of December 31, 2012, the Corporation had an NOL carryforward of approximately $21.2 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 $15.6 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. These carryforwards, if not utilized, will begin to expire in the year 2023. The annual
limitation is $1.4 million for the NOL carryforwards and the equivalent value of tax credits, which is approximately $.477
million.
The Corporation will continue to evaluate the utilization of the NOL and credit carryforwards in subsequent periods to
determine if any further adjustment to the valuation allowance is necessary. The determination criteria for recognition of
deferred tax benefits will include the assumption of future period taxable income based upon the projected profitability of
the Corporation. The valuation allowance, which stands at $3.0 million as of December 31, 2012 is a measurement of the
uncertainty related to the ultimate realization of a portion of the NOL and credit carryforwards.
67
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL POSITION
The table below illustrates the relative composition of various liability funding sources and asset make-up.
(dollars in thousands)
2012
December 31,
2011
2010
Sources of funds:
Deposits:
Non-interest bearing transactional deposits
Interest-bearing transactional depopsits
CD's <$100,000
Total core deposit funding
CD's >$100,000
Brokered deposits
Total noncore deposit funding
FHLB and other borrowings
Other liabilities
Shareholders' equity
Balance
Mix
Balance
Mix
Balance
Mix
$
67,652
169,294
135,550
372,496
24,355
37,706
62,061
35,925
3,050
72,448
%
12.39
31.01
24.83
68.23
4.46
6.91
11.37
6.58
.56
13.27
$
51,273
166,766
130,685
348,724
23,229
32,836
56,065
35,997
2,262
55,263
%
10.29
33.47
26.23
69.99
4.66
6.59
11.25
7.22
.45
11.09
$
41,264
152,373
96,977
290,614
22,698
73,467
96,165
36,069
1,966
53,882
%
8.62
31.83
20.26
60.71
4.74
15.35
20.09
7.53
.41
11.26
Total
$
545,980
100.00
%
$
498,311
100.00
%
$
478,696
100.00
%
Uses of Funds:
Net Loans
Securities available for sale
Federal funds sold
Federal Home Loan Bank Stock
Interest-bearing deposits
Cash and due from banks
Other assets
$
443,959
43,799
3
3,060
10
26,958
28,191
%
81.32
8.02
.00
.56
.00
4.94
5.16
$
395,995
38,727
13,999
3,060
10
20,071
26,449
%
79.47
7.77
2.81
.61
.00
4.03
5.31
$
376,473
33,860
12,000
3,423
713
22,719
29,508
%
78.64
7.07
2.51
.72
.15
4.75
6.16
Total
$
545,980
100.00
%
$
498,311
100.00
%
$
478,696
100.00
%
Securities
The securities portfolio is an important component of the Corporation’s asset composition to provide diversity in its asset
base and provide liquidity. Securities increased $5.072 million in 2012, from $38.727 million at December 31, 2011 to
$43.799 million at December 31, 2012.
The carrying value of the Corporation’s securities is as follows at December 31 (dollars in thousands):
Corporate
US Agencies
US Agencies - MBS
Obligations of states and political subdivisions
Total securities
2012
2011
$
18,977
10,404
8,374
6,044
$
8,178
10,575
14,418
5,556
$
43,799
$
38,727
The Corporation’s policy is to purchase securities of high credit quality, consistent with its asset/liability management
strategies. The Corporation classifies all securities as available for sale, in order to maintain adequate liquidity and to
maximize its ability to react to changing market conditions. At December 31, 2012, investment securities with an estimated
fair market value of $7.286 million were pledged.
68
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Loans
The Bank is a full service lender and offers a variety of loan products in all of its markets. The majority of its loans are
commercial, which represents approximately 76% of total loans outstanding at December 31, 2012.
The Corporation continued to experience strong loan demand in 2012 with approximately $214.102 million of new loan
production, including $74.142 million of mortgage loans sold in the secondary market. At 2012 year-end, the
Corporation’s loans stood at $449.177 million, an increase from the 2011 year-end balances of $401.246 million. In 2012,
the secondary mortgage loans that were produced and sold totaled $74.142 million while the SBA/USDA loan sales
amounted to $11.962 million. The production of loans was distributed among the regions, with the Upper Peninsula at
$134.257 million, $37.856 million in the Northern Lower Peninsula and $41.989 million in Southeast Michigan where the
market has been hit the hardest by the recession.
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. The
Corporation is highly competitive in structuring loans to meet borrowing needs and satisfy strong underwriting
requirements.
The following table details the loan activity for 2011 and 2012 (dollars in thousands):
Loan balances as of December 31, 2010
$
383,086
Total production
Secondary market sales
SBA loan sales
Loans transferred to OREO
Loans charge off, net of recoveries
Normal amortization/paydowns and payoffs
Loan balances as of December 31, 2011
Total production
Secondary market sales
SBA loan sales
Loans transferred to OREO
Loans charge off, net of recoveries
Normal amortization/paydowns and payoffs
172,577
(38,971)
(18,790)
(4,193)
(3,662)
(88,801)
401,246
214,102
(74,142)
(11,962)
(1,352)
(978)
(77,737)
Loan balances as of December 31, 2012
$
449,177
Following is a table that illustrates the balance changes in the loan portfolio from 2010 through 2012 year end (dollars in
thousands):
Commercial real estate
Commercial, financial, and agricultural
One-to-four family residential real estate
Construction:
Consumer
Commercial
Consumer
2012
2011
2010
2012-2011
2011-2010
Percent Change
$
244,966
80,646
87,948
$
199,201
92,269
77,332
$
194,859
68,858
75,074
22.97 % 2.23 %
(12.60)
13.73
34.00
3.01
7,465
17,229
10,923
5,774
19,745
6,925
5,682
33,330
5,283
29.29
(12.74)
57.73
1.62
(40.76)
31.08
Total
$
449,177
$
401,246
$
383,086
11.95 % 4.74 %
69
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Our commercial real estate loan portfolio predominantly relates to owner occupied real estate, and our loans are generally
secured by a first mortgage lien. Commercial real estate market conditions continued to be under stress in 2012, and we
expect this trend to continue. These conditions may negatively affect our commercial real estate loan portfolio in future
periods. We make commercial loans for many purposes, including: working capital lines, which are generally renewable
annually and supported by business assets, personal guarantees and additional collateral. Commercial business lending is
generally considered to involve a higher degree of risk than traditional consumer bank lending.
Following is a table showing the composition of loans by significant industry types in the commercial loan portfolio as of
December 31 (dollars in thousands):
Real estate - operators of nonres bldgs
Hospitality and tourism
Commercial construction
Lessors of residential buildings
Real estate agents and managers
Other
2012
% of
Loans
% of
Capital
%
27.75
11.90
5.03
3.54
3.70
48.09
%
131.34
56.30
23.78
16.74
17.49
227.58
Balance
$
75,391
33,306
19,745
16,499
10,617
155,657
2011
% of
Loans
% of
Capital
%
24.22
10.70
6.34
5.30
3.41
50.03
%
135.53
59.87
35.50
29.66
19.09
279.83
Balance
$
58,114
37,737
33,330
16,598
15,857
135,411
2010
% of
Loans
%
19.56
12.70
11.22
5.59
5.34
45.60
% of
Capital
107.85
70.04
61.86
30.80
29.43
251.31
Balance
$
95,151
40,787
17,229
12,128
12,672
164,874
Total commercial loans
$
342,841
100.00
%
$
311,215
100.00
%
$
297,047
100.00
%
Management recognizes the additional risk presented by the concentration in certain segments of the portfolio. On a
historical basis, the Corporation’s highest concentration of credit risk was the hospitality and tourism industry.
Management does not consider the current loan concentrations in hospitality and tourism to be problematic, and has no
intention of further reducing loans to this industry segment. Management does not believe that its current portfolio
composition has increased exposure related to any specific industry concentration as of 2012 year-end. The current
concentration of real estate related loans represents a broad customer base composed of a high percentage of owner-
occupied developments.
Our residential real estate portfolio predominantly includes one-to-four family adjustable rate mortgages that have repricing
terms generally from one to three years, construction loans to individuals and bridge financing loans for qualifying
customers. As of December 31, 2012, our residential loan portfolio totaled $95.413 million, or 21% of our total
outstanding loans.
The Corporation has also extended credit to governmental units, including Native American organizations. Tax-exempt
loans and leases decreased from $1.991 million at the end of 2011 to $1.542 million at 2012 year-end. The Corporation has
elected to refrain from making tax-exempt loans, since they provide no current tax benefit, due to tax net operating loss
carryforwards.
Due to the seasonal nature of many of the Corporation’s commercial loan customers, loan payment terms provide flexibility
by structuring payments to coincide with the customer’s business cycle. The lending staff evaluates the collectability of the
past due loans based on documented collateral values and payment history. The Corporation discontinues the accrual of
interest on loans when, in the opinion of management, there is an indication that the borrower may be unable to meet the
payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed. Loans are returned to
accrual status when all principal and interest amounts contractually due are brought current and future payments are
reasonably assured.
Troubled debt restructurings (“TDR”) are determined on a loan-by-loan basis. Generally restructurings are related to
interest rate reductions, loan term extensions and short term payment forbearance as means to maximize collectability of
troubled credits. If a portion of the TDR loan is uncollectible (including forgiveness of principal), the uncollectible amount
will be charged off against the allowance at the time of the restructuring. In general, a borrower must make at least six
consecutive timely payments before the Corporation would consider a return of a restructured loan to accruing status in
accordance with FDIC guidelines regarding restoration of credits to accrual status.
70
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The Corporation has, in accordance with generally accepted accounting principles and per recently enacted accounting
standard updates, evaluated all loan modifications to determine the fair value impact of the underlying asset. The carrying
amount of the loan is compared to the expected payments to be received, discounted at the loan’s original rate, or for
collateral dependent loans, to the fair value of the collateral.
The Corporation, at December 31, 2012, had loans totaling $8.056 million for which repayment terms were modified to the
extent that they were deemed to be “restructured” loans. The $8.056 million is comprised of 11 loans, the largest of which
had a December 31, 2012 balance of $2.602 million.
Credit Quality
The table below shows balances of nonperforming assets for the three years ended December 31 (dollars in thousands):
December 31,
2012
(Unaudited)
December 31,
2011
(Audited)
December 31,
2010
(Audited)
Nonperforming Assets :
Nonaccrual loans
Loans past due 90 days or more
Restructured loans
Total nonperforming loans
Other real estate owned
Total nonperforming assets
Nonperforming loans as a % of loans
Nonperforming assets as a % of assets
Reserve for Loan Losses:
At period end
As a % of average loans
As a % of nonperforming loans
As a % of nonaccrual loans
Texas Ratio
$
$
$
4,687
-
-
4,687
3,212
7,899
5,490
-
2,503
7,993
3,162
11,155
5,921
-
4,642
10,563
5,562
16,125
$
$
$
1.04
1.45
%
%
1.99
2.24
%
%
2.76
3.37
%
%
$
5,218
1.24
111.33
111.33
10.17
$
5,251
1.35
65.69
95.65
18.43
$
$
388,115
3,662
.94
%
%
%
%
%
$
6,613
1.72
62.61
111.69
26.66
$
$
384,347
5,112
1.33
%
%
%
%
%
%
%
%
%
%
Charge-off Information (year to date):
Average loans
Net charge-offs
Charge-offs as a % of average loans
$
$
422,440
978
.23
Management continues to address market issues impacting its loan customer base. In conjunction with the Corporation’s
senior lending staff and the bank regulatory examinations, management reviews the Corporation’s 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 2012 independent review provided findings
similar to management on the overall adequacy of the reserve. The Corporation will again utilize a consultant for loan
review in 2013.
The following table details the impact of nonperforming loans on interest income for the three years ended December 31
(dollars in thousands):
Interest income that would have
been recorded at original rate
Interest income that was
actually recorded
2012
2011
2010
$
313
$
363
$
583
54
118
141
Net interest lost
$
259
$
245
$
442
71
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Allowance for Loan Losses
Management analyzes the allowance for loan losses on a quarterly basis to determine whether the losses inherent in the
portfolio are properly reserved for. Net charge-offs in 2012 amounted to $.978 million, or .23% of average loans
outstanding, compared to $3.662 million, or .94% of loans outstanding in 2011. The current reserve balance is
representative of the relevant risk inherent within the Corporation’s loan portfolio. Additions or reductions to the reserve in
future periods will be dependent upon a combination of future loan growth, nonperforming loan balances and charge-off
activity.
A three year history of relevant information on the Corporation’s credit quality is displayed in the following table (dollars
in thousands):
Allowance for Loan Losses
2012
2011
2010
Balance at beginning of period
Loans charged off:
Commercial, financial & agricultural
One-to-four family residential real estate
Consumer
Total loans charged off
Recoveries of loans previously charged off:
Commercial, financial & agricultural
One-to-four family residential real estate
Consumer
Total recoveries of loans previously charged off
Net loans charged off
Provision for loan losses
$
5,251
$
6,613
$
5,225
775
399
82
1,256
253
7
18
278
978
945
3,258
490
52
3,800
128
1
9
138
3,662
2,300
5,027
410
48
5,485
346
11
16
373
5,112
6,500
Balance at end of period
$
5,218
$
5,251
$
6,613
Total loans, period end
Average loans for the year
Allowance to total loans at end of year
Net charge-offs to average loans
Net charge-offs to beginning allowance balance
$
449,177
422,440
1.16
.23
18.63
%
$
401,246
388,115
1.31
.94
55.38
%
$
383,086
384,347
1.73
1.33
97.84
%
The computation of the required allowance for loan losses as of any point in time is one of the critical accounting estimates
made by management in the financial statements. As such, factors used to establish the allowance could change
significantly from the assumptions made and impact future earnings positively or negatively. The future of the national and
local economies and the resulting impact on borrowers’ ability to repay their loans and the value of collateral are examples
of areas where assumptions must be made for individual loans, as well as the overall portfolio.
The allowance for loan losses consists of specific and general components. Our internal risk system is used to identify
loans that meet the criteria for being “impaired” as defined in the accounting guidance. The specific component relates to
loans that are individually classified as impaired and where expected cash flows are less than carrying value. The general
component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. These
qualitative factors include: 1) changes in the nature, volume and terms of loans, 2) changes in lending personnel, 3) changes
in the quality of the loan review function, 4) changes in nature and volume of past-due, nonaccrual and/or classified loans,
5) changes in concentration of credit risk, 6) changes in economic and industry conditions, 7) changes in legal and
regulatory requirements, 8) unemployment and inflation statistics, and 9) underlying collateral values.
At the end of 2012, the allowance for loan losses represented 1.16% of total loans. In management’s opinion, the
allowance for loan losses is adequate to cover probable losses related to specifically identified loans, as well as probable
losses inherent in the balance of the loan portfolio.
As part of the process of resolving problem credits, the Corporation may acquire ownership of real estate collateral which
secured such credits. The Corporation carries this collateral in other real estate held for sale on the balance sheet.
72
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table represents the activity in other real estate held for sale (dollars in thousands):
Balance at January 1, 2011
Other real estate transferred from loans due to foreclosure
Other real estate sold
Writedowns on other real estate held for sales
Loss on other real estate held for sale
Balance at December 31, 2011
Other real estate transferred from loans due to foreclosure
Other real estate sold
Writedowns on other real estate held for sales
Loss on other real estate held for sale
$
5,562
4,194
(5,457)
(855)
(282)
3,162
1,352
(775)
(496)
(31)
Balance at December 31, 2012
$
3,212
During 2012, the Corporation received real estate in lieu of loan payments of $1.352 million. In determining the carrying
value of other real estate held for sale, the Corporation generally starts with a third party appraisal of the underlying
collateral and then deducts estimated selling costs to arrive at a net asset value. After the initial receipt, management
periodically re-evaluates the recorded balance and records any additional reductions in the fair value as a write-down of
other real estate held for sale.
Deposits
Total deposits at December 31, 2012 were $434.557 million, an increase of $29.768 million, or 7.35% from December 31,
2011 deposits of $404.789 million. The table below shows the deposit mix for the periods indicated (dollars in thousands):
2012
Mix
2011
Mix
2010
Mix
CORE:
Non-interest-bearing
NOW, money market, checking
Savings
Certificates of Deposit <$100,000
Total core deposits
NONCORE:
Certificates of Deposit >$100,000
Brokered CDs
Total non-core deposits
$
67,652
155,465
13,829
135,550
372,496
24,355
37,706
62,061
15.57
35.78
3.18
31.19
85.72
5.60
8.68
14.28
%
$
51,273
152,563
14,203
130,685
348,724
23,229
32,836
56,065
12.67
37.69
3.51
32.28
86.15
5.74
8.11
13.85
%
$
41,264
134,703
17,670
96,977
290,614
22,698
73,467
96,165
%
10.67
34.83
4.57
25.07
75.14
5.87
18.99
24.86
Total deposits
$
434,557
100.00
%
$
404,789
100.00
%
$
386,779
100.00
%
The increase in deposits, as illustrated above, is composed of an increase in noncore deposits of $5.996 million, while core
deposits increased by $23.772 million.
Management has increased its efforts to grow core deposits in recent years by introducing several new deposit products and
implementing a bank-wide deposit incentive program. As shown in the table above, core deposits now represent
approximately 86% of total deposits. The Corporation will continue to emphasize core deposit growth in its funding
sources, but will also supplement this funding with strategic utilization of wholesale brokered deposits to help manage
interest rate risk.
Management continues to monitor existing deposit products in order to stay competitive, both as to terms and pricing. It is
the intent of management to be aggressive in its markets to grow core deposits with an emphasis placed on transactional
accounts.
Borrowings
The Corporation also utilizes FHLB borrowings as a source of funding. At 2012 year end, this source of funding totaled
$35.000 million and the Corporation secured this funding by pledging loans and investments. The $35.000 million of
FHLB borrowings had a weighted average maturity of 2 years, with a weighted average rate of 1.82% at December 31,
2012.
Shareholders’ Equity
Changes in shareholders’ equity are discussed in detail in the “Capital and Regulatory” section of this report.
73
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
In general, the Corporation attempts to manage interest rate risk by investing in a variety of assets which afford it an
opportunity to reprice assets and increase interest income at a rate equal to or greater than the interest expense associated
with repricing liabilities.
Interest rate risk is the exposure of the Corporation to adverse movements in interest rates. The Corporation derives its
income primarily from the excess of interest collected on its interest-earning assets over the interest paid on its interest-
bearing obligations. The rates of interest the Corporation earns on its assets and owes on its obligations generally are
established contractually for a period of time. Since market interest rates change over time, the Corporation is exposed to
lower profitability if it cannot adapt to interest rate changes. Accepting interest rate risk can be an important source of
profitability and shareholder value; however, excess levels of interest rate risk could pose a significant threat to the
Corporation’s earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent
levels is essential to the Corporation’s safety and soundness.
Loans are the 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. When
loans are made with longer-term fixed rates, the Corporation attempts to match these balances with sources of funding with
similar maturities in order to mitigate interest rate risk. In addition, the Corporation prices loans so it has an opportunity to
reprice the loan within 12 to 36 months.
At December 31, 2012 the Bank had $43.799 million of securities, with a weighted average maturity of 41.8 months. The
investment portfolio is intended to provide a source of liquidity to the Corporation with limited interest rate risk. The
Corporation may also elect to sell monies as investments in federal funds sold to correspondent banks, and has 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 (“ALCO”) meetings, whose membership includes senior management, board representation and third party
investment consultants. During these monthly meetings, we review the current ALCO 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 timeframes. Those instruments with a variable
interest rate tied to an index and considered immediately repricable are reported in the 1 to 90 day timeframe. The
estimates of principal amortization and prepayments are assigned to the following time frames.
74
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following is the Corporation’s repricing opportunities at December 31, 2012 (dollars in thousands):
Interest-earning assets:
Loans
Securities
Other (1)
1-90
Days
91-365
Days
>1-5
Years
Over 5
Years
Total
$
287,081
-
$
10,702
7,629
$
48,749
26,058
13
-
-
$
102,645
10,112
3,060
$
449,177
43,799
3,073
Total interest-earning assets
287,094
18,331
74,807
115,817
496,049
Interest-bearing obligations:
NOW, money market, savings and interest checking
Time deposits
Brokered CDs
Borrowings
169,294
15,372
-
10,000
-
55,921
-
10,000
-
88,407
37,706
15,000
-
205
-
925
169,294
159,905
37,706
35,925
Total interest-bearing obligations
194,666
65,921
141,113
1,130
402,830
Gap
Cumulative gap
$
92,428
$
(47,590)
$
(66,306)
$
114,687
$
93,219
$
92,428
$
44,838
$
(21,468)
$
93,219
(1) includes Federal Home Loan Bank stock
The above analysis indicates that at December 31, 2012, the Corporation had a cumulative asset sensitivity gap position of
$44.838 million within the one-year timeframe. The Corporation’s cumulative asset sensitive gap suggests that if market
interest rates were to increase in the next twelve months, the Corporation has the potential to earn more net interest income
since more assets would reprice at higher rates than liabilities. Conversely, if market interest rates decrease in the next
twelve months, the above gap position suggests the Corporation’s net interest income would decrease. A limitation of the
traditional gap analysis is that it does not consider the timing or magnitude of non-contractual repricing or unexpected
prepayments. In addition, the gap analysis treats savings, NOW and money market accounts as repricing within 90 days,
while experience suggests that these categories of deposits are actually comparatively resistant to rate sensitivity.
At December 31, 2012, the Corporation had $297.380 million of variable rate loans that reprice primarily with the prime
rate index. Approximately $173.832 million of these variable rate loans have interest rate floors. This means that the prime
rate will have to increase above the floor rate before these loans will reprice. At year end, $98.105 million of these floor-
rate loans would reprice with a 100 basis point prime rate increase, with $173.410 million repricing with an additional 100
basis point prime rate increase.
At December 31, 2011, the Corporation had a cumulative liability asset gap position of $69.219 million within the one-year
time frame.
The Corporation’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk and foreign
exchange risk. The Corporation has no market risk sensitive instruments held for trading purposes. The Corporation has
limited agricultural-related loan assets, and therefore, has minimal significant exposure to changes in commodity prices.
Any impact that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be
insignificant.
Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control
interest rate risk and the quantitative level of exposure. The Corporation’s interest rate risk management process seeks to
ensure that appropriate policies, procedures, management information systems, and internal controls are in place to
maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest
rate risk, the Corporation assesses the existing and potential future effects of changes in interest rates on its financial
condition, including capital adequacy, earnings, liquidity, and asset quality. In addition to changes in interest rates, the
level of future net interest income is also dependent on a number of variables, including: the growth, composition and
levels of loans, deposits, and other earning assets and interest-bearing obligations, and economic and competitive
conditions; potential changes in lending, investing, and deposit strategies; customer preferences; and other factors.
75
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The table below measures current maturity levels of interest-earning assets and interest-bearing obligations, along with
average stated rates and estimated fair values at December 31, 2012 (dollars in thousands). Nonaccrual loans of $4.687
million are included in the table at an average interest rate of 0.00% and a maturity greater than five years.
Rate Sensitive Assets
Fixed interest rate
securities
Average interest rate
Principal/Notional Amount Maturing/Repricing In:
2013
2014
2015
2016
2017
Thereafter
Total
Fair Value
12/31/2012
$ 7,629
$ 8,728
1.44 % 1.74 % 1.54 %
$ 8,859
$
8,312
3.59
%
$
159
5.14
$ 10,112
$ 43,799
$ 43,799
% 3.08 % 2.32 %
Fixed interest rate loans
Average interest rate
20,186
6.07
5,594
6.27
8,361
5.84
22,394
5.48
64,654
4.94
30,608
5.18
151,797
5.32
153,586
Variable interest rate loans
Average interest rate
297,380
4.94
-
-
-
-
-
-
-
-
-
-
297,380
4.94
285,653
Other assets
Average interest rate
13
.15
-
-
-
-
-
-
-
-
3,060
-
3,073
.15
3,073
Total rate sensitive assets
Average interest rate
$ 325,208
4.93 %
$ 14,322
$ 17,220
$ 30,706
$ 64,813
$ 43,780
$ 496,049
$ 486,111
3.51 %
3.63 % 4.97 %
4.94 % 4.51 % 4.41 %
Rate Sensitive Liabilities
Interest-bearing savings,
NOW, MMAs, interest
Average interest rate
Time deposits
Average interest rate
Fixed interest rate
borrowings
Average interest rate
Total rate sensitive
liabilities
Average interest rate
$ 169,294
.34 % - % - % - %
$ -
$ -
$ -
$
-
% - % .34 %
-
$ -
$ 169,294
$ 169,294
71,293
1.42
50,986
1.57
30,052
1.95
41,431
1.79
3,644
1.82
205
4.60
197,611
1.67
197,281
10,000
1.22
10,000
2.10
-
-
15,000
2.03
-
-
925
1.00
35,925
1.80
35,729
$ 250,587
.68 %
$ 60,986
$ 30,052
$ 56,431
$ 3,644
$ 1,130
$ 402,830
$ 402,304
1.65 %
1.95 % 1.86 %
1.82 % 1.65 % 1.10 %
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 office in Sault Ste. Marie. 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
December 31, 2012, the Corporation had excess Canadian liabilities of $.071 million, which equated to approximately the
same valuation in U.S. dollars. Management believes the exposure to short-term foreign exchange risk is minimal and at an
acceptable level for the Corporation. Management intends to limit the Corporation’s foreign exchange risk by acquiring
deposit liabilities approximately equal to its Canadian assets.
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 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.
76
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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. See Note 17 to the consolidated financial statements for additional information.
LIQUIDITY
Liquidity is defined as the ability to generate cash at a reasonable cost to fulfill lending commitments and support asset
growth, while satisfying the withdrawal demands of customers and make payments on existing borrowing commitments.
The Bank’s principal sources of liquidity are core deposits and loan and investment payments and prepayments. Providing
a secondary source of liquidity is the available for sale investment portfolio. As a final source of liquidity, the Bank can
exercise existing credit arrangements.
During 2012, the Corporation decreased cash and cash equivalents by $7.109 million. As shown on the Corporation’s
consolidated statement of cash flows, liquidity was primarily impacted by cash used in investing activities. The net change
in investing activities included a net increase in loans of $50.351 million and a “net” increase in securities available for sale
of $4.541 million. The net increases in assets were offset by a similar increase in deposit liabilities of $29.768 million.
This increase in deposits was composed of an increase in non-core deposits of $5.996 million combined with an increase in
core deposits of $23.772 million. The management of bank liquidity for funding of loans and deposit maturities and
withdrawals includes monitoring projected loan fundings and scheduled prepayments and deposit maturities within a 30
day period, a 30 to 90 day period and from 90 days until the end of the year. This funding forecast model is completed
weekly.
The Bank’s investment portfolio provides added liquidity during periods of market turmoil and overall liquidity concerns in
the financial markets. As of December 31, 2012, $36.513 million of the Bank’s investment portfolio was unpledged, which
makes them readily available for sale to address any short term liquidity needs.
It is anticipated that during 2012, the Corporation will fund anticipated loan production with a combination of core-deposit
growth and noncore funding, primarily brokered CDs.
The Corporation’s 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 regulatory approval. 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 Bank’s liquidity is best illustrated by the mix in the Bank’s core and non-core funding dependency ratio, which
explains 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 other borrowings.
At December 31, 2012, the Bank’s core deposits in relation to total funding were 79.17% compared to 79.11% in 2011.
These ratios indicated at December 31, 2012, that the Bank has decreased its reliance on non-core deposits and borrowings
to fund the Bank’s 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 December 31, 2012, the Bank had $28.375 million of unsecured lines available and additional
amounts available if secured. Management believes that its liquidity position remains strong to meet both present and
future financial obligations and commitments, events or uncertainties that have resulted or are reasonably likely to result in
material changes with respect to the Bank’s liquidity.
From a long-term perspective, the Corporation’s liquidity plan for 2012 includes strategies to increase core deposits in the
Corporation’s local markets and will continue to augment local deposit growth efforts with wholesale CD funding, to the
extent necessary.
77
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As disclosed in the Notes to the Consolidated Financial Statements, the Corporation has certain obligations and
commitments to make future payments under contracts. At December 31, 2012, the aggregate contractual obligations and
commitments are (dollars in thousands):
Contractual Obligations
Total deposits
Federal Home Loan Bank borrowings
Preferred stock (1)
Other borrowings
Directors' deferred compensation
Annual rental / purchase commitments
under noncancelable leases / contracts
TOTAL
Other Commitments
Less than 1
Year
Payments Due by Period
4 to 5
Years
1 to 3
Years
After 5
Years
Total
$
308,239
10,000
$
81,038
10,000
$
45,075
15,000
$
205
-
$
434,557
35,000
-
-
123
249
11,000
-
217
224
-
-
169
-
-
925
36
-
11,000
925
545
473
$
318,611
$
102,479
$
60,244
$
1,166
$
482,500
Letters of credit
Commitments to extend credit
Credit card commitments
$
2,879
3,060
58,209
$
-
-
-
$
-
-
-
$
-
-
-
$
2,879
3,060
58,209
TOTAL
$
64,148
$
-
$
-
$
-
$
64,148
(1)The Corporation issued preferred stock in April of 2009 as part of its participation in TARP. The initial term of this preferred stock is five
years with an interest rate of 5%, which increases to 9% after the initial term. Although there is no contractual obligation to do so, the
Corporation intends to repay this obligation within the initial term.
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 December 31, 2012, the Corporation and the Bank were well
capitalized. During 2012, total capitalization increased by $17.185 million, with $11.506 million of this increase due to the
issuance of common stock. Other changes in total capital occurred from recognition of net income and market value
decrease of the Corporation’s investment securities. During 2012, risk based capital increased by $15.969 million, while
Tier 1 Capital increased by $15.957 million.
The increase in capital was also impacted by the disallowed portion of the Corporation’s deferred tax asset. The portion of
the deferred tax asset which is allowed to be included in regulatory capital is only that portion that can be utilized within the
next 12-month period.
78
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table details sources of capital for the three years ended December 31 (dollars in thousands):
2012
2011
2010
Capital Structure
Common shareholders' equity
Preferred stock
Total shareholders' equity
Total capitalization
Tangible capital
Intangible Assets
Subsidiaries:
Core deposit premium
Other identifiable intangibles
Total intangibles
Risk-Based Capital
Tier 1 capital:
Total shareholders' equity
Net unrealized (gains) losses on
available for sale securities
Less: disallowed deferred tax asset
Less: disallowed intangibles
Total Tier 1 capital
Tier 2 Capital:
Allowable reserve for loan losses
Qualifying long-term debt
Total Tier 2 capital
Total risk-based capital
Risk-weighted assets
Capital Ratios:
Tier 1 Capital to average assets
Tier 1 Capital to risk-weighted assets
Total Capital to risk-weighted assets
$
$
$
61,448
11,000
72,448
72,448
71,800
$
$
44,342
10,921
55,263
55,263
54,863
$
$
43,176
10,706
53,882
53,882
53,882
$
$
-
$
688
688
$
-
$
400
400
$
-
$
-
$
-
$
72,448
$
55,263
$
53,882
(924)
(7,100)
(69)
64,355
$
(325)
(6,500)
(40)
48,398
$
(612)
(9,028)
-
44,242
$
$
$
$
5,218
-
5,218
69,573
466,039
$
$
5,206
-
5,206
53,604
416,423
$
$
4,890
-
4,890
49,132
389,468
$
$
11.98%
13.81%
14.93%
10.08%
11.62%
12.87%
9.25%
11.36%
12.62%
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. The Corporation’s acquisition intangibles
and a portion of the deferred tax asset are examples of such assets, which was discussed earlier.
Presented below is a summary of the Corporation’s and Bank’s capital position in comparison to generally applicable
regulatory requirements:
Regulatory minimum for capital adequacy purposes
Regulatory defined well capitalized guideline
The Corporation:
December 31, 2012
December 31, 2011
The Bank:
December 31, 2012
December 31, 2011
Equity to
Year-end
Assets
N/A
N/A
Tangible
Equity to
Year-end
Assets
N/A
N/A
Tier 1
Capital to
Average
Assets
Tier 1
Capital to
Risk Weighted
Assets
Total
Capital to
Risk Weighted
Assets
4.00%
5.00%
4.00%
6.00%
8.00%
10.00%
13.27%
11.09%
13.14%
11.01%
11.98%
10.08%
13.81%
11.62%
14.93%
12.87%
10.96%
10.30%
10.83%
10.22%
9.63%
9.24%
11.10%
10.65%
12.21%
11.90%
The Corporation intends to maintain the Bank’s Tier I Capital at 8% and total capital to risk-weighted assets at a minimum
of 10.00% in order to qualify for reduced FDIC deposit based insurance.
79
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
IMPACT OF INFLATION AND CHANGING PRICES
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and results of operations in historical dollars without considering the
change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Corporation’s operations. Nearly all the assets and liabilities of the Corporation are financial, unlike
industrial or commercial companies. As a result, the Corporation’s performance is directly impacted by changes in interest
rates, which are indirectly influenced by inflationary expectations. The Corporation’s ability to match the interest
sensitivity of its financial assets to the interest sensitivity of its financial liabilities tends to minimize the effect of changes
in interest rates on the Corporation’s performance. Changes in interest rates do not necessarily move to the same extent as
changes in the prices of goods and services.
80
Directors and Officers
DIRECTORS
Mackinac Financial Corporation and mBank
Walter J. Aspatore - Lead Director
Chairman
Methode Electronics Corp
Director Since: 2004
Dennis B. Bittner
Owner and President
Bittner Engineering, Inc.
Director Since: 2001
Joseph D. Garea
Managing Partner
Hancock Securities
Director Since: 2007
Robert H. Orley
Founding Partner
O2 Investment Partners, LLC
Director Since: 2004
L. Brooks Patterson
County Executive
Oakland County
Director Since: 2006
Randolph C. Paschke
Director of Community Relations & External Engagement
Wayne State University, School of Business Administration
Director Since: 2004
Kelly W. George
President, Mackinac Financial Corporation
President and CEO, mBank
Director Since: 2006
David R. Steinhardt
Founder and President
KCPS & Company Ltd.
Director Since: 2012
Robert E. Mahaney
President and Owner
Veridea Group, LLC
Director Since: 2008
Paul D. Tobias
Chairman and CEO, Mackinac Financial Corporation
Chairman, mBank
Director Since: 2004
81
Directors and Officers
Name
Paul D. Tobias
Kelly W. George
Ernie R. Krueger
Name
Bernadette C. Beaudre
Shelby J. Bischoff
Linda K. Bolda
Catherine M. Bolm
Angela E. Buckingham
Jesse A. Deering
Richard B. Demers
Trisha L. Demars
George J. Demou
Elena C. Dritsas
Jeremy W. Flodin
Laura L. Garvin
Kelly W. George
Clarice A. Ghiardi
Joseph T. Havican
Michael J. Hoar
Ernie R. Krueger
David W. Leslie
Magan L. MacArthur
Boris Martysz
Tamara R. McDowell
Jacquelyn R. Menhennick
Robert J. Needham
Barbara A. Parrett
Debra L. Peterson
Scott A. Ravet
Jason J. Rolling
Andrew P. Sabatine
Michael J. Saporito
Teresa M. Same
Gregory D. Schuetter
Joanna B. Slaght
Michael A. Slaght
Jennifer A. Stempki
Ann M. Stepp
Daniel L. Stoudt
David R. Thomas
Paul D. Tobias
Nicole A. Tryan
Janet M. Willbee
OFFICERS
Mackinac Financial Corporation
Title
Chairman and Chief Executive Officer
President
EVP - Chief Financial Officer
mBank
Title
AVP - Deposit Compliance/BSA Officer
AVP - Business Development Officer
SVP - Human Resources Director
VP - Mortgage Loan Officer
AVP - Branch Sales Manager
SVP - Managing Director of Retail Branch Banking/Ops/IT
VP - Commercial Banking Officer
AVP - Sr. Deposit Operations Specialist
VP - Senior Commercial Banking Officer
AVP - Branch Sales Manager /Treasury Management Officer
VP - Sr. Credit Administrator/Credit Risk Analyst
VP - Commercial Portfolio Manager
President and CEO
VP - Mortgage Loan Officer
VP - Commercial Banking Officer
SVP - Information Technology/Communications Manager
EVP - Chief Financial Officer
SVP - SEM/Gaylord Commercial Lending Manager
AVP - Mortgage Loan Officer
SVP - Marquette Regional Executive
EVP - Chief Credit Officer
SVP - Mortgage and Consumer Lending Manager
AVP - Commercial Banking Officer
AVP - Branch Sales Manager/Retail Banking Officer
VP - Mortgage Loan Officer
VP - Commercial Banking Officer
VP - Premier Client Services
Regional President - NLP
SVP- Chief Operations Officer
AVP - Branch Sales Manager
SVP - UP Commercial Lending Manager
SVP - Compliance/Risk Manager
VP - Commercial Banking Officer
VP - Controller
SVP - Branch Administration/Incentive Program Officer
AVP - Mortgage Loan Officer
VP - Commercial Banking Officer
Chairman
AVP - Sr. Loan Operations Officer
VP - Mortgage Loan Officer
Location
Birmingham
Manistique
Manistique
Location
Manistique
Marquette
Manistique
Marquette
Newberry
Birmingham
Manistique
Manistique
Birmingham
Birmingham
Manistique
Birmingham
Manistique
Marquette
Marquette
Manistique
Manistique
Birmingham
Manistique
Marquette
Manistique
Marquette
Traverse City
Stephenson
Escanaba
Escanaba
Marquette
Traverse City
Manistique
Marquette
Manistique
Manistique
Newberry
Manistique
Gaylord
Traverse City
Sault Ste. Marie
Birmingham
Manistique
Gaylord
82
(This page has been left blank intentionally.)
83
(This page has been left blank intentionally.)
84
Corporate Information
CORPORATE HEADQUARTERS
Mackinac Financial Corporation
130 South Cedar Street
Manistique, Michigan 49854
(888) 343-8147
INVESTOR RELATIONS
Ernie R. Krueger
EVP/CFO
(906) 341-7158
ekrueger@bankmbank.com
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(800) 368-5948
WEBSITE
www.bankmbank.com
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Plante Moran, PLLC
Grand Rapids, Michigan
STOCK LISTING AND SYMBOL
NASDAQ Capital Market
Symbol: MFNC
SHAREHOLDER INFORMATION
Copies of the Corporation’s 10-K and 10-Q reports as filed with the Securities and Exchange Commission are available
upon request from the Corporation.
ANNUAL SHAREHOLDERS’ MEETING
The 2013 Annual Meeting of the Shareholders of Mackinac Financial Corporation will be held on May 29, 2013.
Visit our website, www.bankmbank.com, for updated news releases, financial reports, SEC filings, corporate governance
and other investor information.
bankmbank.com
906.341.8401 | 130 S Cedar Street, Manistique, MI 49854-1438