Table of Contents
To Our Shareholders .............................................................................................................................. 1
Five-Year Overview .............................................................................................................................. 6
Regional Review ................................................................................................................................... 8
Selected Financial Highlights .............................................................................................................. 14
Report of Independent Registered Public Accounting Firm ............................................................... 15
Consolidated Balance Sheets ............................................................................................................... 16
Consolidated Statements of Operations ............................................................................................... 17
Consolidated Statements Comprehensive Income .............................................................................. 18
Consolidated Statements of Changes in Shareholders’ Equity ........................................................... 19
Consolidated Statements of Cash Flows ............................................................................................. 20
Notes to Consolidated Financial Statements ....................................................................................... 21
Selected Financial Data ....................................................................................................................... 52
Summary Quarterly Financial Information ......................................................................................... 53
Market Information ............................................................................................................................. 55
Shareholder Return Performance Graph ............................................................................................. 56
Forward-Looking Statements .............................................................................................................. 57
Management’s Discussion and Analysis of Financial
Condition and Results of Operations ................................................................................................ 59
Directors and Officers ......................................................................................................................... 80
______________________________________________________________________________________
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 $570 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 28, 2014.
March 28, 2014
TO OUR SHAREHOLDERS:
2013 OVERVIEW
We are pleased to report another year of solid operating performance in 2013 with net income of $5.629 million, or $1.01
per share. Our results, built on successes from 2012, were achieved in what continues to be an extremely challenging
economic and regulatory environment for community banking. Uncertain national economic direction and an overall
depressed interest rate environment continue, in various ways, to inhibit some businesses’ growth and development. Our
accomplishments in 2013 amid these challenges included sustained loan growth and production totaling approximately
$191 million with net balance sheet growth of $34.7 million. Further, significant contributions to noninterest income from
loan sales from residential mortgage and SBA/USDA guaranteed lending programs totaling $1.979 million helped drive our
favorable results in 2013. Total assets of the Corporation also grew 4.91% year over year, equating to $572.800 million as
of December 31, 2013.
We further improved our already strong credit quality position which is illustrated by very low and manageable levels of
nonperforming assets which equated to $3.908 million or .68% of total assets at the end of the period. Our asset quality
metrics remain well below our peers even as we continue to navigate the highly competitive lending environment within
our various business regions and grow our credit book. Our balance sheet remains strong with low levels of interest rate
risk and capital levels for both the Bank and Corporation are well above regulatory guidelines. This strong capital position,
driven by an improving earnings stream, allowed for a dividend payment from the Bank for the first time in over 10 plus
years and also allowed us to redeem all of our $11.0 million of outstanding preferred stock. Earnings momentum and
balance sheet strength allowed us to increase our common stock dividend to shareholders to $.20 annually on a per share
basis.
We were also pleased that the divesture of our two older branch and mortgage offices in Marquette MI, our largest Upper
Peninsula market, will be complete in the first quarter of 2014 after consolidating the two locations into a new, full-service
leased facility in December 2013. We believe this will allow for a much better overall client banking experience and
provide some operating efficiencies and spur business growth and development in this key market. Our overall efficiency
ratio improved to 67.46% this year, despite some increased technological and regulatory costs. Specifically, investments
were made that ensure the comprehensive risk management systems of the company continue to keep pace with the overall
risk profile of the organization and the industry as a whole.
Late in the year, we successfully launched our asset based lending subsidiary, Mackinac Commercial Credit, LLC (MCC)
which will be headquartered in Troy, MI. We believe the addition of MCC will provide another diversified line of business
and revenue stream to augment overall company earnings in the future.
All of the aforementioned strategic initiatives and the operating metrics that they will most directly impact are focused on
creating increased long term value for our stakeholders. We believe your company is both well positioned to achieve
continued success in the ever changing banking landscape within our state and will provide good operating results through
a stable low risk operating platform, a well embedded company culture, and a highly experienced management team and
Board of Directors.
EARNINGS / FUNDING RECAP
In 2013 we recorded net income of $5.629 million, or $1.01 per share, compared to the $6.458 million, or $1.51 per share
for 2012. The results for 2013 and 2012 included adjustments to the deferred tax valuation which totaled $2.250 million,
$.40 per share, in 2013 and $3.0 million in 2012, $.70 per share. In 2013 weighted average shares outstanding increased to
5,558,313 compared to 2012 of 4,285,625 shares. The Corporation’s primary asset, mBank, recorded net income of $7.189
million for the fiscal year 2013 compared to $7.884 million for 2012. Excluding the aforementioned deferred tax asset, the
Bank subsidiary’s core operations improved year over year from 2012 earnings of $4.884 million to $4.939 million in 2013.
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In 2013, we continued our net interest income growth with $21.399 million compared to 2012 net interest income of
$19.824 million. This margin expansion reflects solid growth in earning assets along with a stable, above peer, net interest
margin as a result of proactive, in-market disciplined pricing of loans and deposits. Our actual net interest margin in 2013
was 4.17%, the same as 2012. We do expect to have continued margin pressure with a current national economic policy that
fosters low interest rates providing few other prudent investment alternatives. The Bank saw increased levels of
transactional deposits as we pushed to increase deposit share with our high value relationship clients. We also experienced
some larger withdrawals from commercial clients that used their excess liquidity to fund business expansion or pay down
debt. We augmented our funding sources this year as well with some nominal and manageable levels of brokered and
internet deposits, primarily to extend the maturities of some of our liabilities to support fixed rate lending structures to
better mitigate any long term interest rate risk.
Noninterest income, at $3.938 million for 2013, was slightly lower than the $4.043 million recorded in 2012. Our results
were somewhat impacted by an abatement of the mortgage refinancing activities in the latter part of 2013 when rates
increased. Noninterest expense at $18.128 million in 2013 increased by $1.371 million, or 8.18%, from 2012. This increase
in 2013 reflects some extraordinary expenses related to strategic initiatives including approximately $.671 million in start-
up costs for our asset based lending venture and the write-down of our old mortgage loan office in our Marquette market of
$.270 million as we moved to our new facility. We also incurred approximately $.162 million in the exploration of an
acquisition opportunity. We will continue with our efforts to manage our operating expenses in the ongoing evaluation of
our personnel infrastructure and banking lines of business to improve future efficiencies and to keep pace with ongoing
regulatory requirements.
In 2013, we recorded the tax benefit, $2.250 million associated with a deferred tax valuation adjustment. This adjustment
compares with a 2012 valuation adjustment of $3.0 million. These valuation adjustments were made in accordance with
generally accepted accounting principles in order to recognize the benefits of tax loss and credit carry-forwards when it
becomes “more likely than not” that they will be realized. This benefit recognition in recent periods is reflecting both the
current strength of our balance sheet and the sustainability of earnings.
LOAN GENERATION / CREDIT QUALITY
Loans at 2013 year-end, totaled $483.832 million, an increase of 7.7%, from the $449.177 million at 2012 year-end. The
Corporation had total loan production for all loan types of $191 million in 2013. Production included $88 million in
commercial loans, and $103 million in consumer loans, $95 million of which were mortgages. The Upper Peninsula
continues to drive a large majority of the new originations, with $125 million, followed by our Northern Lower Region
with $48 million and Southeast Michigan Region at $18 million. Our success in 2013 and the excellent credit metrics were
the result of a sustained proactive business development culture coupled with an efficient, disciplined underwriting process.
As was the case with many banks, our mortgage pipeline decreased in the latter half of the year with the increasing
mortgage rates which slowed refinance business. We did see a good deal of new home purchases and remain optimistic that
certain segments of the retail mortgage lending business within our markets will rebound some in 2014. Furthermore, the
government shutdown in the early part of the fourth quarter also stymied some of our momentum of SBA loan transactions.
This line of business has become a core competency of the Corporation and we expect to continue to pursue and execute on
the growth of these loans in future years. The Corporation remains a state leader in the origination of these government
lending programs which the bank recognizes are critical for many small businesses to obtain the capital they need to grow
or improve their operations and create jobs in our communities. In addition to the $484 million in balance sheet loans, $59
million of SBA/USDA loans and $133 million of secondary market mortgage loans were sold with retained servicing. This
increased our loans under management to $676 million for the end of the year.
Nonperforming loans totaled $2.024 million, .42% of total loans at December 31, 2013 compared to $4.789 million, or
1.07% of total loans at December 31, 2012. The company remains diligent and aggressive in resolving our problem credit
relationships which is illustrated with the low manageable levels of overall nonperforming assets and loan delinquencies
residing at a nominal .38% of total loans for the end of the year.
It should be noted the Corporation recorded a provision for loan losses of $1.675 million in 2013 compared to $.945 million
in 2012. The increase in provision this year is not indicative of the current underwriting or loan performance standards. The
reason for the increased provision in 2013 comparatively is solely due to the divesture of a distressed legacy hotel loan in
the Northern Lower Peninsula that was originated in 2002 prior to MFNC’s recapitalization. The Corporation elected to
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divest of this loan after all other attempts to minimize exposure and loss related to this property were exhausted through the
years. The final charge-off in the fourth quarter of 2013 totaled $.698 million which had been previously reserved for.
The following tables and commentary further illustrate our on-going performance record in developing our loan
production, core lines of business and other key drivers to increase shareholder value.
Loan Growth/Production
Three year loan production for our geographical regions is shown below: The Corporation has seen strong sustained loan
production throughout the last several years with good diversification between commercial and consumer type assets.
Secondary Mortgage Market
The table below shows the success that we have had in building our consumer mortgage products. As a community bank,
we consider this one of the areas critical in which to add value in your franchise by building a strong retail client base and
capturing core deposit relationships and other banking services with the origination of these home loans.
Government Guaranteed Lending Programs
Our total production for the last three years was $39 million loans sold, with $3.627 million in fees. The Corporation does
not sell all the loan guarantees from every credit, only those where acceptable market rates are paid above par that generates
an acceptable internal rate of return. We are continuing to experience strong levels of premiums given our ability to
effectively price and structure these transactions to garner maximum returns for both the sold portion of the loan, and what
remains on our balance sheet.
Key Performance Metrics
The following table illustrates the improving and stable operating metrics in several key performance areas.
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(dollars in thousands)201320122011Production55,973$ 74,142$ 38,971$ Income1,028 1,390 700 Servicing portfolio balance133,012 97,391 49,982 SBA/USDA Loans OriginatedFor the Year Ended December 31,201320122011# LoansSBA AmountPremium# LoansSBA AmountPremium# LoansSBA AmountPremiumUP11 7,285$ 819$ 13 8,993$ 881$ 12 8,620$ 776$ NLP2 750 89 2 354 14 8 9,024 585 SEM1 359 43 2 2,615 281 1 1,326 139 Total14 8,394$ 951$ 17 11,962$ 1,176$ 21 18,970$ 1,500$ 201320122011Net Interest Margin4.17%4.17%4.06%Efficiency Ratio67.46%67.95%68.43%Credit Quality (Texas Ratio)5.59%10.25%18.56%(dollars in thousands)201320122011REGIONUpper Peninsula124,836$ 134,257$ 95,024$ Northern Lower Peninsula48,004 37,856 48,226 Southeast Michigan18,078 41,989 29,327 TOTAL190,918$ 214,102$ 172,577$ For the Year Ending December 31,
Capital
The Corporation and Bank’s capital levels are strong and exceed regulatory well capitalized levels as shown in the table
below. The holding company remains a solid source of strength to support both bank and non-bank subsidiaries as needed.
In 2013 to further augment shareholder value we redeemed all of our $11.0 million Series A Preferred Stock, initiated a
conservative stock buyback program, and increased our quarterly common stock dividend from $.04 per share to $.05.
LOOKING FORWARD:
In 2014, we will continue with the execution of our core banking plan to further enhance earnings while operating the
company in a safe and sound manner. This basic initiative includes maintaining strong credit quality through discipline in
pricing and structure in the management of our assets to maintain margins and limit interest rate risk. It also entails
continued focus on building relationships and understanding the needs of our clients in order to provide best in class
products and services to our valued customers.
Further shareholder value enhancement initiatives will include the exploration of expansion opportunities within our current
markets through full bank or individual branch acquisitions that may complement our current footprint along with growing
our new asset based lending and factoring subsidiary. We have a stable management team and experienced personnel with
additional bandwidth to support growth, while still maintaining a strong company culture which remains dedicated to
serving the communities in which we live and work. We will be patient in evaluating and executing any external growth
strategy while continuing with the day to day execution of organic franchise development with increased operational
efficiencies.
In closing we would like to first say thank you to our employees whose strong work commitment to the organization,
coupled with the time they volunteer in our communities, provide the impetus for our daily execution and successes. We
also thank our loyal customers for their continued patronage and the opportunity to attend to their varying financial needs.
Lastly, thank you to our shareholders, for your steadfast trust and confidence in our team and supporting the Corporation
through the good, along with the more challenging times of our evolution. We sincerely value all of our constituencies, and
look forward to serving all of you well in 2014.
Sincerely,
Paul D. Tobias
Chairman and CEO
Mackinac Financial Corporation
Kelly W. George
President and CEO, mBank
President, Mackinac Financial Corporation
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Tier 1 CapitalTier 1 CapitalTotal Capitalto Averageto Risk Weightedto Risk WeighedAssetsAssetsAssetsBank10.01%11.49%12.44%Consolidated10.31%11.83%12.79%
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Five Year Overview
6
Five Year Overview
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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
* Includes production of mortgage loans sold on the secondary market.
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BALANCE SHEET HIGHLIGHTSAt December 31, 20132013 Activity(dollars in thousands)LoansCore DepositsLoan ProductionCore Deposit GrowthEscanaba14,571$ 4,375$ 14,407$ (759)$ Manistique91,119 49,169 33,038 8,179 Marquette105,591 43,667 51,077 (299) Newberry16,343 35,264 5,094 1,051 Sault Ste. Marie 42,785 23,898 19,066 1,829 Stephenson9,402 34,412 2,154 (1,108) TOTAL UPPER PENINSULA279,811$ 190,785$ 124,836$ 8,893$ CONTRIBUTION TO OTHER INCOMESecondary MarketSBA/USDA(dollars in thousands)Production/SoldGains/Fee IncomeProduction/SoldGains/Fee IncomeEscanaba5,284$ 101$ 711$ 84$ Manistique4,688 83 2,635 229 Marquette23,121 422 3,217 436 Newberry1,934 44 - - Sault Ste. Marie1,272 27 722 70 Stephenson1,302 27 - - TOTAL UPPER PENINSULA37,601$ 704$ 7,285$ 819$
Regional Review – Upper Peninsula
Excluding the branch sales, which were predominantly transactional accounts, total deposits grew $75.6 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 $453.4 million.
Nonperforming assets in the Upper Peninsula totaled $3.184 million at the end of 2013, which included $1.884 million of
OREO and $1.740 million of nonperforming loans. Nonperforming loans as a percent of total loans was .62%.
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Regional Review – Northern Lower Peninsula
BRANCH LOCATIONS
GAYLORD
1955 South Otsego Avenue
Gaylord, MI 49735
(989) 732-3750
Manager: Jessica M. Noeske
TRAVERSE CITY
3530 North Country Drive
Traverse City, MI 49684
(231) 929-5600
Manager: Daniel P. Galbraith
KALEVA
14429 Wuoksi Avenue
Kaleva, MI
(231) 362-3223
Manager: Barb J. Miller
* Includes production of mortgage loans sold on the secondary market.
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CONTRIBUTION TO OTHER INCOMESecondary MarketSBA/USDA(dollars in thousands)Production/SoldGains/Fee IncomeProduction/SoldGains/Fee IncomeGaylord11,047$ 189$ -$ -$ Kaleva- - - - Traverse City7,325 135 750 89 TOTAL NORTHERN LOWER PENINSULA18,372$ 324$ 750$ 89$ BALANCE SHEET HIGHLIGHTSAt December 31, 20132013 Activity(dollars in thousands)LoansCore DepositsLoan Production*Core Deposit GrowthGaylord36,456$ 60,001$ 18,482$ (603)$ Kaleva437 16,210 100 968 Traverse City59,299 63,234 29,422 (715) TOTAL NORTHERN LOWER PENINSULA96,192$ 139,445$ 48,004$ (350)$
Regional Review – Northern Lower Peninsula
Total core deposit growth amounted to $100.2 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 $180.1 million.
Nonperforming assets in the Northern Lower Peninsula totaled $.274 million at the end of 2013, all nonperforming loans.
Nonperforming loans as a percent of total loans was .31%.
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Regional Review – Southeast Michigan
BRANCH LOCATION
BIRMINGHAM
260 East Brown Street, Suite 300
Birmingham, MI 48009
(248) 290-5900
Manager: Elena C. Dritsas
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CONTRIBUTION TO OTHER INCOMESecondary MarketSBA/USDA(dollars in thousands)Production/SoldGains/Fee IncomeProduction/SoldGains/Fee IncomeBirmingham-$ -$ 358$ 43$ BALANCE SHEET HIGHLIGHTSAt December 31, 20132013 Activity(dollars in thousands)LoansCore DepositsLoan ProductionCore Deposit GrowthBirmingham107,829$ 45,363$ 18,078$ (5,446)$
Regional Review – Southeast Michigan
Total core deposit growth amounted to $33.9 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 $109.4 million.
Nonperforming assets in Southeast Michigan totaled $10,000 at the end of 2013, all in nonperforming loans.
Nonperforming loans as a percent of total loans was negligible.
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Selected Financial Highlights
(Dollars in Thousands, Except Per Share Data)
The above summary should be read in connection with the related consolidated financial statements and notes included
elsewhere in this report.
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December 31,December 31,(Dollars in thousands, except per share data)20132012(Unaudited)Selected Financial Condition Data (at end of period):Assets572,800$ 545,980$ Loans483,832 449,177 Investment securities44,388 43,799 Deposits466,299 434,557 Borrowings37,852 35,925 Common Shareholders' Equity65,249 61,448 Shareholders' equity65,249 72,448 Selected Statements of Income Data:Net interest income21,399$ 19,824$ Income before taxes and preferred dividend5,534 6,165 Net income5,629 6,458 Income per common share - Basic1.01 1.51 Income per common share - Diluted1.00 1.46 Weighted average shares outstanding5,558,313 4,285,043 Weighted average shares outstanding- Diluted5,650,058 4,412,625 Selected Financial Ratios and Other Data:Performance Ratios: Net interest margin4.17 %4.17 %Efficiency ratio67.46 67.95 Return on average assets1.01 1.23 Return on average common equity9.07 12.43 Return on average equity8.26 10.26 Average total assets555,152$ 526,740$ Average common shareholders' equity62,082 51,978 Average total shareholders' equity68,172 62,939 Average loans to average deposits ratio103.46 %99.45 %Common Share Data:Market price per common share9.90$ 7.09$ Book value per common share11.77 11.05 Dividends paid per share.20 - Common shares outstanding5,541,390 5,559,859 Other Data at end of period:Allowance for loan losses4,661$ 5,218$ Non-performing assets3,908$ 7,899$ Allowance for loan losses to total loans.96 %1.16 %Non-performing assets to total assets.68 %1.45 %Texas ratio5.59 %10.25 %Number of: Branch locations11 11 FTE Employees133 121
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 accompanying consolidated balance sheet of Mackinac Financial Corp. (the Corporation) as of
December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in
shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2013. These
financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on
these 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 Corporation is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit 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 Corporation’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes 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 financial
position of Mackinac Financial Corp. as of December 31, 2013 and 2012, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2013, in conformity with accounting principles generally
accepted in the United States of America.
March 28, 2014
Auburn Hills, Michigan
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Consolidated Balance Sheets
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 2013 and 2012
(Dollars in Thousands)
_____________________________________________________________________________________________
See accompanying notes to consolidated financial statements.
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December 31,December 31,20132012ASSETSCash and due from banks18,216$ 26,958$ Federal funds sold3 3 Cash and cash equivalents18,219 26,961 Interest-bearing deposits in other financial institutions10 10 Securities available for sale44,388 43,799 Federal Home Loan Bank stock3,060 3,060 Loans: Commercial359,368 342,841 Mortgage110,663 95,413 Consumer13,801 10,923 Total Loans483,832 449,177 Allowance for loan losses(4,661) (5,218) Net loans479,171 443,959 Premises and equipment10,210 10,633 Other real estate held for sale1,884 3,212 Deferred Tax Asset9,933 9,131 Other assets5,925 5,215 TOTAL ASSETS572,800$ 545,980$ LIABILITIES AND SHAREHOLDERS' EQUITYLIABILITIES:Deposits: Noninterest bearing deposits72,936$ 67,652$ NOW, money market, interest checking149,123 155,465 Savings13,039 13,829 CDs<$100,000140,495 135,550 CDs>$100,00023,159 24,355 Brokered67,547 37,706 Total deposits466,299 434,557 Borrowings37,852 35,925 Other liabilities3,400 3,050 Total liabilities507,551 473,532 SHAREHOLDERS' EQUITY: Preferred stock - No par value: Authorized 500,000 shares, Issued and outstanding - none and 11,000 shares- 11,000 Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares Issued and outstanding - 5,541,390 and 5,559,914, shares respectively53,621 53,797 Retained earnings11,412 6,727 Accumulated other comprehensive income216 924 Total shareholders' equity65,249 72,448 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY572,800$ 545,980$
Consolidated Statements of Operations
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2013, 2012, and 2011
(Dollars in Thousands, Except Per Share Data)
___________________________________________________________________________________________________
See accompanying notes to consolidated financial statements.
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For the Year Ended December 31,201320122011INTEREST INCOME: Interest and fees on loans: Taxable24,295$ 23,197$ 21,627$ Tax-exempt105 116 147 Interest on securities: Taxable961 948 1,162 Tax-exempt34 27 28 Other interest income128 139 108 Total interest income25,523 24,427 23,072 INTEREST EXPENSE: Deposits3,468 3,946 4,530 Borrowings656 657 613 Total interest expense4,124 4,603 5,143 Net interest income21,399 19,824 17,929 Provision for loan losses1,675 945 2,300 Net interest income after provision for loan losses19,724 18,879 15,629 OTHER INCOME: Deposit service fees667 699 832 Income from loans sold on secondary market1,028 1,390 700 SBA/USDA loan sale gains951 1,176 1,500 Mortgage servicing income790 417 400 Net security gains (losses)73 - (1) Other 429 361 225 Total other income3,938 4,043 3,656 OTHER EXPENSE: Salaries and employee benefits9,351 8,288 7,275 Occupancy 1,481 1,372 1,376 Furniture and equipment 1,102 885 827 Data processing1,071 991 761 Professional service fees1,069 1,196 756 Loan and deposit617 877 1,137 Writedowns and losses on other real estate held for sale265 489 1,137 FDIC insurance assessment385 459 849 Telephone303 233 215 Advertising436 376 351 Other2,048 1,591 1,285 Total other expenses18,128 16,757 15,969 Income before income taxes5,534 6,165 3,316 Provision for (benefit of) for income taxes(403) (922) 1,098 NET INCOME5,937 7,087 2,218 Preferred dividend and accretion of discount308 629 766 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS5,629$ 6,458$ 1,452$ INCOME PER COMMON SHARE: Basic1.01$ 1.51$ .42$ Diluted1.00$ 1.51$ .41$
Consolidated Statements of Comprehensive Income
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2013, 2012, and 2011
(Dollars in Thousands)
_____________________________________________________________________________________________
See accompanying notes to consolidated financial statements.
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For the year endedDecember 31,201320122011Net income5,937$ 7,087$ 2,218$ Net change in net unrealized gains and losses on securities available for sale: Unrealized gains (losses) arising during the period(999) 907 (433) Less: reclassification adjustment for gains included in net income(73) - 1 Net securities gain (loss) during the period(1,072) 907 (432) Tax effect364 (308) 145 Other comprehensive income (loss)(708) 599 (287) Total comprehensive income5,229$ 7,686$ 1,931$
Consolidated Statements of Changes in Shareholders’ Equity
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2013, 2012, and 2011
(Dollars in Thousands)
__________________________________________________________________________________________
See accompanying notes to consolidated financial statements.
19
AccumulatedShares ofPreferred Common StockRetainedOtherCommonStockand AdditionalEarningsComprehensiveStockSeries APaid in Capital(Accumulated Deficit)IncomeTotalBalance, January 1, 20113,419,736 10,706$ 43,525$ (961)$ 612$ 53,882$ Net income - - - 2,218 - 2,218 Other comprehensive income (loss): Net unrealized (loss) on securities available for sale- - - - (287) (287) Total comprehensive income 1,931 Dividend on preferred stock- - - (551) - (551) Accretion of preferred stock discount- 215 - (215) - - Other- - - 1 - 1 Balance, December 31, 20113,419,736 10,921 43,525 492 325 55,263 Net income 7,087 7,087 Other comprehensive income: Net unrealized income on securities available for sale- - - - 599 599 Total comprehensive income7,686 Stock compensation- - 66 - - 66 Issuance of common stock2,140,123 - 11,506 - - 11,506 Divided on common stock- - - (223) - (223) Purchase of common stock warrants- - (1,300) - - (1,300) Dividend on preferred stock- - - (550) - (550) Accretion of preferred stock discount- 79 - (79) - - Balance, December 31, 20125,559,859 11,000 53,797 6,727 924 72,448 Net income 5,937 5,937 Other comprehensive income (loss): Net unrealized loss on securities available for sale- - - - (708) (708) Total comprehensive income5,229 Stock compensation- - 333 - - 333 Issuance of common stock37,125 - - - - - Repurchase of common stock(55,594) (509) - - (509) Dividend on common stock- - - (944) - (944) Dividend on preferred stock- - - (308) - (308) Redemption of Preferred Series A- (11,000) - - - (11,000) Balance, December 31, 20135,541,390 -$ 53,621$ 11,412$ 216$ 65,249$
Consolidated Statements of Cash Flows
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2013, 2012, and 2011
(Dollars in Thousands)
_____________________________________________________________________________________________
See accompanying notes to consolidated financial statements.
20
For the year ended December 31,201320122011Cash Flows from Operating Activities: Net income 5,937$ 7,087$ 2,218$ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization1,657 1,547 1,419 Provision for loan losses1,675 945 2,300 Deferred income taxes, net(403) (922) 1,098 (Gain) loss on sales/calls of securities(73) - 1 (Gain) on sale of secondary market loans(794) (1,077) (477) Origination of loans held for sale in secondary market(55,973) (74,142) (38,971) Proceeds from sale of loans in the secondary market56,767 75,219 39,448 Loss on sale of premises, equipment, and other real estate held for sale304 31 282 Writedown of other real estate held for sale231 496 855 Stock compensation333 66 - Change in other assets(710) (61) (325) Change in other liabilities 350 788 296 Net cash provided by operating activities9,301 9,977 8,144 Cash Flows from Investing Activities: Net increase in loans(37,853) (50,351) (26,015) Net decrease in interest-bearing deposits in other financial institutions- - 703 Purchase of securities available for sale(15,709) (15,209) (21,260) Proceeds from maturities, sales, calls or paydowns of securities available for sale13,698 10,668 15,607 Capital expenditures(1,497) (2,098) (1,034) Proceeds from sale of premises, equipment, and other real estate2,410 775 5,456 Redemption of FHLB stock- - 363 Net cash (used in) investing activities(38,951) (56,215) (26,180) Cash Flows from Financing Activities: Net increase in deposits31,742 29,768 18,010 Net activity on line of credit2,000 - - Net proceeds from stock issuance- 11,506 - Repurchase of common stock(509) - - Dividend on common stock(944) (223) - Redemption of Series A Preferred Stock(11,000) - - Repurchase of common stock warrants- (1,300) - Dividend on preferred stock(308) (550) (551) Principal payments on borrowings(73) (72) (72) Net cash provided by financing activities20,908 39,129 17,387 Net (decrease) in cash and cash equivalents(8,742) (7,109) (649) Cash and cash equivalents at beginning of period26,961 34,070 34,719 Cash and cash equivalents at end of period18,219$ 26,961$ 34,070$ Supplemental Cash Flow Information:Cash paid during the year for: Interest4,157$ 4,172$ 4,664$ Income taxes149 125 75 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)932 1,352 4,194
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”), Mackinac Commercial Credit, LLC (“MCC”, formed in late 2013) 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.
21
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.
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.
22
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 Corporation’s shareholders approved the Mackinac Financial Corporation 2012 Incentive
Compensation Plan, under which current and prospective employees, non-employee directors and consultants may be
awarded incentive stock options, non-statutory stock options, shares of restricted stock units (“RSUs”), or stock
appreciation rights. The aggregate number of shares of the Corporation’s common stock issuable under the plan was set at
575,000, which included 392,152 option shares outstanding at that time. Awards are made at the discretion of the Board of
Directors. Compensation cost equal to the fair value of the award is recognized over the vesting period.
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, during the period.
Accumulated other comprehensive income, a component of equity, consists solely of net unrealized gains and losses on
securities, net of tax.
23
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per Common Share
Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options and warrants
were exercised and stock awards were fully vested and resulted in the issuance of common stock that then shared in our
earnings, is computed by dividing net income by the weighted average number of common shares outstanding and common
stock equivalents, after giving effect for dilutive shares issued.
The following shows the computation of basic and diluted earnings per share for the year ended December 31, 2013, 2012
and 2011 (dollars in thousands, except per share data):
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
In January 2014, the FASB issued ASU No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic
310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a
consensus of the FASB Emerging Issues Task Force). The amendments in the ASU clarify when an in-substance
repossession or foreclosure occurs – that is, when a creditor should be considered to have received physical possession of
residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be
derecognized and the real estate property recognized. The new ASU requires a creditor to reclassify a collateralized
consumer mortgage loan to real estate property upon obtaining legal titled to the real estate collateral, or the borrower
voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of
foreclosure or similar legal agreement. The ASU is effective for the Corporation beginning January 1, 2015. The
provisions of this guidance are not expected to have a significant impact on the consolidated financial condition, results of
operation or the liquidity of the Corporation.
24
201320122011Net income 5,937$ 7,087$ 2,218$ Preferred stock dividends and accretion of discount308 629 766 Net income available to common shareholders5,629$ 6,458$ 1,452$ Weighted average shares outstanding5,558,313 4,285,043 3,419,736 Effect of dilutive stock options, vesting of restricted stock units, and common stock warrants outstanding91,745 - 80,468 Diluted weighted average shares outstanding5,650,058 4,285,043 3,500,204 Income per common share: Basic1.01$ 1.51$ .42$ Diluted1.00$ 1.51$ .41$ Year Ended December 31,
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit
When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the
Emerging Issues Task Force). ASU 2013-11 requires that an unrecognized tax benefit be presented in the financial
statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward except as follows: To the extent a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward is not available at the reporting date under the tax law of the applicable jurisdiction does not require the entity
to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be
presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of
whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the
reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in
this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early
adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the
effective date. Retrospective application is permitted. The provisions of this guidance are not expected to have a
significant impact on the consolidated financial condition, results of operation or the liquidity of the Corporation.
In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-02, Reporting
of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”), to improve the reporting of
reclassifications out of accumulated other comprehensive income. ASU 2013-02 requires that an entity report the effect of
significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if
the amount being reclassified is required under U.S. generally accepted accounting principles (“GAAP”) to be reclassified
in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to
net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S.
GAAP that provide additional detail about these amounts. ASU 2013-02 is effective prospectively for reporting periods
beginning after December 15, 2012. The Corporation adopted ASU 2013-02 as of January 1, 2013.
Reclassifications
Certain amounts in the 2012 and 2011 consolidated financial statements have been reclassified to conform to the 2013
presentation.
NOTE 2 – RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $6.345 million were restricted on December 31, 2013 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.
25
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):
At December 31, 2013 and 2012, the mortgage backed securities portfolio was $7.359 million (16.58%) and $8.374 million
(19.12%), respectively, of the securities portfolio. At December 31, 2013, the entire mortgage backed securities portfolio
consisted of securities issued and guaranteed by either the Federal National Mortgage Association (FNMA) or the Federal
Home Loan Mortgage Corporation (FHLMC), United States government-sponsored agencies.
Following is information pertaining to securities with gross unrealized losses at December 31, 2013 and 2012 aggregated
by investment category and length of time these individual securities have been in a loss position (dollars in thousands):
There were six securities in an unrealized loss position in 2013 and three in 2012. The gross unrealized losses in the
current portfolio are considered temporary in nature and related to interest rate fluctuations. The Corporation has both the
ability and intent to hold the investment securities until their respective maturities and therefore does not anticipate the
realization of the temporary losses.
26
AmortizedUnrealizedUnrealizedEstimatedCostGainsLossesFair ValueDecember 31, 2013Corporate 15,862$ 218$ (1)$ 16,079$ US Agencies15,227 - (372) 14,855 US Agencies - MBS7,078 281 - 7,359 Obligations of states and political subdivisions5,893 202 - 6,095 Total securities available for sale44,060$ 701$ (373)$ 44,388$ December 31, 2012Corporate 18,763$ 237$ (23)$ 18,977$ US Agencies10,267 137 - 10,404 US Agencies - MBS7,962 412 - 8,374 Obligations of states and political subdivisions5,407 637 - 6,044 Total securities available for sale42,399$ 1,423$ (23)$ 43,799$ GrossGrossUnrealizedFairUnrealizedFairLossesValueLossesValueDecember 31, 2013Corporate(1)$ 1,390$ -$ -$ US Agencies(372) 14,855 - - US Agencies - MBS- - - - Obligations of states and political subdivisions- - - - Total securities available for sale(373)$ 16,245$ -$ -$ December 31, 2012US Agencies - MBS-$ -$ - - Corporate(23) 5,566 - - Obligations of states and political subdivisions- - - - Total securities available for sale(23)$ 5,566$ -$ -$ Less Than Twelve MonthsOver Twelve Months
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):
The carrying value and estimated fair value of securities available for sale at December 31, 2013, by contractual maturity,
are shown below (dollars in thousands):
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):
An analysis of the allowance for loan losses for the years ended December 31 is as follows (dollars in thousands):
27
201320122011Proceeds from sales and calls10,156$ 2,601$ 76$ Gross gains on sales73 - - Gross (losses) on sales and calls- - (1) AmortizedEstimatedCostFair ValueDue in one year or less3,140$ 3,166$ Due after one year through five years21,433 21,535 Due after five years through ten years9,893 9,771 Due after ten years2,516 2,557 Subtotal36,982 37,029 US Agencies - MBS7,078 7,359 Total44,060$ 44,388$ 20132012Commercial real estate268,809$ 244,966$ Commercial, financial, and agricultural79,655 80,646 One to four family residential real estate103,768 87,948 Commercial construction10,904 17,229 Consumer13,801 10,923 Consumer construction6,895 7,465 Total loans483,832$ 449,177$ 201320122011Balance, January 15,218$ 5,251$ 6,613$ Recoveries on loans previously charged off200 278 138 Loans charged off(2,432) (1,256) (3,800) Provision1,675 945 2,300 Balance, December 314,661$ 5,218$ 5,251$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
In 2013, net charge off activity was $2.232 million, or .48% of average loans outstanding compared to net charge-offs of
$.978 million, or .23% of average loans, in the same period in 2012 and $3.662 million, or .94% of average loans, in 2011.
During 2013, a provision of $1.675 million was made to increase the allowance. This provision was made in accordance
with the Corporation’s allowance for loan loss reserve policy, which calls for a measurement of the adequacy of the reserve
at each quarter end. This process includes an analysis of the loan portfolio to take into account increases in loans
outstanding and portfolio composition, historical loss rates, and specific reserve requirements of nonperforming loans.
A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2013 is as follows (dollars in
thousands):
A breakdown of the allowance for loan losses, the activity for the period, and recorded balances in loans for the year ended
December 31, 2012 is as follows (dollars in thousands):
28
Commercial,One to fourCommercialfinancial andCommercialfamily residentialConsumerreal estateagriculturalconstructionreal estateconstructionConsumerUnallocatedTotalAllowance for loan loss reserve:Beginning balance ALLR3,267$ 692$ 125$ 980$ -$ -$ 154$ 5,218$ Charge-offs(1,539) (632) - (141) - (120) - (2,432) Recoveries92 56 2 26 2 22 - 200 Provision29 1,262 (47) (349) 23 246 511 1,675 Ending balance ALLR1,849$ 1,378$ 80$ 516$ 25$ 148$ 665$ 4,661$ Loans:Ending balance268,809$ 79,655$ 10,904$ 103,768$ 6,895$ 13,801$ -$ 483,832$ Ending balance ALLR(1,849) (1,378) (80) (516) (25) (148) (665) (4,661) Net loans266,960$ 78,277$ 10,824$ 103,252$ 6,870$ 13,653$ (665)$ 479,171$ Ending balance ALLR:Individually evaluated99$ 891$ -$ 103$ -$ 18$ -$ 1,111$ Collectively evaluated1,750 487 80 413 25 130 665 3,550 Total1,849$ 1,378$ 80$ 516$ 25$ 148$ 665$ 4,661$ Ending balance Loans:Individually evaluated649$ 1,830$ -$ 385$ -$ 42$ -$ 2,906$ Collectively evaluated268,160 77,825 10,904 103,383 6,895 13,759 - 480,926 Total268,809$ 79,655$ 10,904$ 103,768$ 6,895$ 13,801$ -$ 483,832$ Impaired loans, by definition, are individually evaluated.Commercial,One to fourCommercialfinancial andCommercialfamily residentialConsumerreal estateagriculturalconstructionreal estateconstructionConsumerUnallocatedTotalAllowance for loan loss reserve:Beginning balance ALLR2,823$ 1,079$ 207$ 1,114$ -$ -$ 28$ 5,251$ Charge-offs(729) (40) (6) (399) - (82) - (1,256) Recoveries52 201 - 7 - 18 - 278 Provision1,121 (548) (76) 258 - 64 126 945 Ending balance ALLR3,267$ 692$ 125$ 980$ -$ -$ 154$ 5,218$ Loans:Ending balance244,966$ 80,646$ 17,229$ 87,948$ 7,465$ 10,923$ -$ 449,177$ Ending balance ALLR(3,267) (692) (125) (980) - - (154) (5,218) Net loans241,699$ 79,954$ 17,104$ 86,968$ 7,465$ 10,923$ (154)$ 443,959$ Ending balance ALLR:Individually evaluated1,662$ 155$ 10$ 112$ -$ -$ -$ 1,939$ Collectively evaluated1,605 537 115 868 - - 154 3,279 Total3,267$ 692$ 125$ 980$ -$ -$ 154$ 5,218$ Ending balance Loans:Individually evaluated22,910$ 6,070$ 858$ 796$ -$ -$ -$ 30,634$ Collectively evaluated222,056 74,576 16,371 87,152 7,465 10,923 - 418,543 Total244,966$ 80,646$ 17,229$ 87,948$ 7,465$ 10,923$ -$ 449,177$ Impaired loans, by definition, are individually evaluated.
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, 2011 is as follows (dollars in thousands):
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.
Strong (1)
Borrower is not vulnerable to sudden economic or technological changes. They have “strong” balance sheets and are
within an industry that is very typical for our markets or type of lending culture. Borrowers also have “strong” financial
and cash flow performance and excellent collateral (low loan to value or readily available to liquidate collateral) in
conjunction with an impeccable repayment history.
Good (2)
Borrower shows limited vulnerability to sudden economic change. These borrowers have “above average” financial and
cash flow performance and a very good repayment history. The balance sheet of the company is also very good as
compared to peer and the company is in an industry that is familiar to our markets or our type of lending. The collateral
securing the deal is also very good in terms of its type, loan to value, etc.
Average (3)
Borrower is typically a well-seasoned business, however may be susceptible to unfavorable changes in the economy, and
could be somewhat affected by seasonal factors. The borrowers within this category exhibit financial and cash flow
performance that appear “average” to “slightly above average” when compared to peer standards and they show an
adequate payment history. Collateral securing this type of credit is good, exhibiting above average loan to values, etc.
29
Commercial,One to fourCommercialfinancial andCommercialfamily residentialConsumerreal estateagriculturalconstructionreal estateconstructionConsumerUnallocatedTotalAllowance for loan loss reserve:Beginning balance ALLR3,460$ 1,018$ 389$ 1,622$ -$ -$ 124$ 6,613$ Charge-offs(2,267) (579) (412) (490) - (52) - (3,800) Recoveries32 21 75 1 - 9 - 138 Provision1,598 619 155 (19) - 43 (96) 2,300 Ending balance ALLR2,823$ 1,079$ 207$ 1,114$ -$ -$ 28$ 5,251$ Loans:Ending balance199,201$ 92,269$ 19,745$ 77,332$ 5,774$ 6,925$ -$ 401,246$ Ending balance ALLR(2,823) (1,079) (207) (1,114) - - (28) (5,251) Net loans196,378$ 91,190$ 19,538$ 76,218$ 5,774$ 6,925$ (28)$ 395,995$ Ending balance ALLR:Individually evaluated926$ 160$ -$ 114$ -$ -$ -$ 1,200$ Collectively evaluated1,897 919 207 1,000 - - 28 4,051 Total2,823$ 1,079$ 207$ 1,114$ -$ -$ 28$ 5,251$ Ending balance Loans:Individually evaluated13,628$ 1,707$ -$ 1,930$ -$ -$ -$ 17,265$ Collectively evaluated185,573 90,562 19,745 75,402 5,774 6,925 - 383,981 Total199,201$ 92,269$ 19,745$ 77,332$ 5,774$ 6,925$ -$ 401,246$ Impaired loans, by definition, are individually evaluated.
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
Acceptable (4)
A borrower within this category exhibits financial and cash flow performance that appear adequate and satisfactory when
compared to peer standards and they show a satisfactory payment history. The collateral securing the request is within
supervisory limits and overall is acceptable. Borrowers rated acceptable could also be newer businesses that are typically
susceptible to unfavorable changes in the economy, and more than likely could be affected by seasonal factors.
Special Mention (5)
The borrower may have potential weaknesses that deserve management’s close attention. If left uncorrected, these
potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit
position at some future date. Special mention assets are not adversely classified and do not expose an institution to
sufficient risk to warrant adverse classification. Examples of this type of credit include a start-up company fully based on
projections, a documentation issue that needs to be corrected or a general market condition that the borrower is working
through to get corrected.
Substandard (6)
Substandard loans are classified assets exhibiting a number of well-defined weaknesses that jeopardize normal repayment.
The assets are no longer adequately protected due to declining net worth, lack of earning capacity, or insufficient collateral
offering the distinct possibility of the loss of a portion of the loan principal. Loans classified as substandard clearly
represent troubled and deteriorating credit situations requiring constant supervision.
Doubtful (7)
Loans in this category exhibit the same, if not more pronounced weaknesses used to describe the substandard credit. Loans
are frozen with collection improbable. Such loans are not yet rated as Charge-off because certain actions may yet occur
which would salvage the loan.
Charge-off/Loss (8)
Loans in this category are largely uncollectible and should be charged against the loan loss reserve immediately.
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 2013 and 2012, commercial
construction loans of $2.951 million and $3.468 million, respectively, did not receive a specific risk rating. These amounts
represent loans made for land development and unimproved land purchases.
30
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, 2013 (dollars in thousands):
Below is a breakdown of loans by risk category as of December 31, 2012 (dollars in thousands)
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. There was no interest income recorded during impairment, and that which would have been recognized was
$.228 million for the year ended December 31, 2013. For the year ended December 31, 2012, the amounts of interest
recorded during impairment was $.054 million and that which would have been recognized was $.313 million.
The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet
payment obligations as they become due, as well as when required by regulatory provisions. When interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash
payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably assured.
Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable
to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled
principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an
individual loans basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that
the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value
of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied
to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a
cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
31
(4)(1)(2)(3)Acceptable/(5)(6)(7)RatingStrongGoodAverageAcceptable WatchSp. MentionSubstandardDoubtfulUnassignedTotalCommercial real estate1,502$ 23,310$ 116,702$ 125,010$ -$ 2,285$ -$ -$ 268,809$ Commercial, financial and agricultural3,741 4,348 27,455 39,070 - 5,041 - - 79,655 Commercial construction30 479 2,702 4,340 - 402 - 2,951 10,904 One-to-four family residential real estate251 3,074 1,275 4,482 - 710 - 93,976 103,768 Consumer construction- - - - - - - 6,895 6,895 Consumer10 - 37 43 - 30 - 13,681 13,801 Total loans5,534$ 31,211$ 148,171$ 172,945$ -$ 8,468$ -$ 117,503$ 483,832$ (4)(1)(2)(3)Acceptable/(5)(6)(7)RatingStrongGoodAverageAcceptable WatchSp. MentionSubstandardDoubtfulUnassignedTotalCommercial real estate4,807$ 20,491$ 84,164$ 113,379$ 16,754$ 5,189$ 182$ -$ 244,966$ Commercial, financial and agricultural5,026 3,936 23,821 41,785 4,296 1,782 - - 80,646 Commercial construction- 1,038 5,103 5,784 759 1,077 - 3,468 17,229 One-to-four family residential real estate- 1,969 3,635 4,791 - 646 - 76,907 87,948 Consumer construction- - - - - - - 7,465 7,465 Consumer- 359 71 257 - 6 - 10,230 10,923 Total loans9,833$ 27,793$ 116,794$ 165,996$ 21,809$ 8,700$ 182$ 98,070$ 449,177$
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):
32
Interest IncomeInterest IncomeNonaccrualAccrualAverageRelatedRecognizedonBasisBasisInvestmentValuation ReserveDuring ImpairmentAccrual BasisDecember 31, 2013With no valuation reserve: Commercial real estate513$ -$ 3,045$ -$ -$ 153$ Commercial, financial and agricultural59 - 505 - - 13 Commercial construction- - 626 - - 3 One to four family residential real estate361 - 625 - - 16 Consumer construction- - - - - - Consumer- - 2 - - - With a valuation reserve: Commercial real estate59$ -$ 71$ 14$ -$ 5$ Commercial, financial and agricultural752 - 834 265 - 18 Commercial construction- - - - - - One to four family residential real estate250 - 261 78 - 20 Consumer construction- - - - - - Consumer30 - 30 13 - - Total: Commercial real estate572$ -$ 3,116$ 14$ -$ 158$ Commercial, financial and agricultural811 - 1,339 265 - 31 Commercial construction- - 626 - - 3 One to four family residential real estate611 - 886 78 - 36 Consumer construction- - - - - - Consumer30 - 32 13 - - Total2,024$ -$ 5,999$ 370$ -$ 228$ December 31, 2012With no valuation reserve: Commercial real estate132$ -$ 1,550$ -$ -$ 37$ Commercial, financial and agricultural- - 1,063 - - 19 Commercial construction675 - 675 - - 15 One to four family residential real estate230 - 1,074 - - 41 Consumer construction- - 16 - - 1 Consumer- - 3 - - - With a valuation reserve: Commercial real estate2,939$ -$ 3,173$ 1,315$ 54$ 177$ Commercial, financial and agricultural436 - 504 109 - 17 Commercial construction- - - - - - One to four family residential real estate275 - 281 95 - 6 Consumer construction- - - - - - Consumer- - - - - - Total: Commercial real estate3,071$ -$ 4,723$ 1,315$ 54$ 214$ Commercial, financial and agricultural436 - 1,567 109 - 36 Commercial construction675 - 675 - - 15 One to four family residential real estate505 - 1,355 95 - 47 Consumer construction- - 16 - - 1 Consumer- - 3 - - - Total4,687$ -$ 8,339$ 1,519$ 54$ 313$
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):
A roll-forward of nonaccrual activity during the year ended December 31, 2013 (dollars in thousands):
A roll-forward of nonaccrual activity during the year ended December 31, 2012 (dollars in thousands):
33
2013201230-89 days90+ days30-89 days90+ daysPast DuePast Due/Past DuePast Due/(accruing)NonaccrualTotal(accruing)NonaccrualTotalCommercial real estate-$ 572$ 572$ 575$ 3,071$ 3,646$ Commercial, financial and agricultural4 811 815 71 436 507 Commercial construction20 - 20 - 675 675 One to four family residential real estate201 611 812 291 505 796 Consumer construction- - - - - - Consumer14 30 44 14 - 14 Total past due loans239$ 2,024$ 2,263$ 951$ 4,687$ 5,638$ Commercial,One to fourCommercialFinancial andCommercialfamily residentialConsumerReal EstateAgriculturalConstructionreal estateConstructionConsumerTotalNONACCRUALBeginning balance3,071$ 436$ 675$ 505$ -$ -$ 4,687$ Principal payments(1,478) (319) (100) (88) - (2) (1,987) Charge-offs(1,304) (616) - (141) - (4) (2,065) Advances- - - - - - - Transfers to OREO(208) (37) (580) (107) - - (932) Transfers to accruing- - - - - - - Transfers from accruing443 1,346 - 434 - 36 2,259 Other48 1 5 8 - - 62 Ending balance572$ 811$ -$ 611$ -$ 30$ 2,024$ Commercial,One to fourCommercialFinancial andCommercialfamily residentialConsumerReal EstateAgriculturalConstructionreal estateConstructionConsumerTotalNONACCRUALBeginning balance2,362$ 1,111$ -$ 1,997$ 20$ -$ 5,490$ Principal payments(1,569) (1,385) - (1,068) - - (4,022) Charge-offs(463) - - (387) (5) (3) (858) Advances- - - - - - - Class transfers- - - - - - - Transfers to OREO(675) - - (662) (15) - (1,352) Transfers to accruing- - - - - - - Transfers from accruing3,377 716 675 617 - 3 5,388 Other39 (6) - 8 - - 41 Ending balance3,071$ 436$ 675$ 505$ -$ -$ 4,687$
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):
34
20132012Number ofRecordedNumber ofRecordedModificationsInvestmentModificationsInvestmentCommercial real estate- -$ 3 4,614$ Commercial, financial and agricultural1 528 1 1,221 Commercial construction- - 3 860 One to four family residential real estate- - 1 102 Consumer construction- - - - Consumer- - - - Total troubled debt restructurings1 528$ 8 6,797$
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, 2013 (dollars in thousands):
35
Commercial,One to fourConsumer andCommercialFinancial andCommercialfamily residentialConsumerReal EstateAgriculturalConstructionreal estateConstructionTotalACCRUINGBeginning balance3,611$ 1,221$ 858$ 102$ -$ 5,792$ Principal payments(91) (460) (3) - (554) Charge-offs- - - - - Advances- - - - - New restructured- 953 - - 953 Transferred out of TDR- - - - - Transfers to nonaccrual- (528) - - (528) Ending Balance3,520$ 1,186$ 858$ 99$ -$ 5,663$ NONACCRUALBeginning balance2,162$ -$ -$ 102$ -$ 2,264$ - Principal payments(1,376) (5) - (15) - (1,396) Charge-offs(793) - - - - (793) Advances- - - - - - New restructured7 528 - 4 - 539 Transfers to foreclosed properties- - - - - - Transfers from accruing- - - - - - Ending Balance-$ 523$ -$ 91$ -$ 614$ TOTALS Beginning balance5,773$ 1,221$ 858$ 204$ -$ 8,056$ Principal payments(1,467) (465) - (18) - (1,950) Charge-offs(793) - - - - (793) Advances- - - - - - New restructured7 1,481 - 4 - 1,492 Transfers out of TDRs- - - - - - Tansfers to nonaccrual- (528) - - - (528) Transfers to foreclosed properties- - - - - - Transfers from accruing- - - - - - Ending Balance3,520$ 1,709$ 858$ 190$ -$ 6,277$
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):
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):
There were no loans to related-parties classified substandard as of December 31, 2013 and 2012. In addition to the
outstanding balances above, there were unfunded commitments of $5,000 to related parties at December 31, 2013.
36
Commercial,One to fourConsumer andCommercialFinancial andCommercialfamily residentialConsumerReal EstateAgriculturalConstructionreal estateConstructionTotalACCRUINGBeginning balance2,400$ -$ -$ 103$ -$ 2,503$ Principal payments(84) - (2) (1) - (87) Charge-offs- - - - - - Advances- - - - - - New restructured3,695 1,221 860 - - 5,776 Transferred out of TDRs- - - - - - Transfers to nonaccrual(2,400) - - - - (2,400) Ending Balance3,611$ 1,221$ 858$ 102$ -$ 5,792$ NONACCRUALBeginning balance-$ -$ -$ -$ -$ -$ Principal payments(432) - - - - (432) Charge-offs(772) - - - - (772) Advances47 - - - - 47 New restructured919 - - 102 - 1,021 Transfers to foreclosed properties- - - - - - Transfers from accruing2,400 - - - - 2,400 Ending Balance2,162$ -$ -$ 102$ -$ 2,264$ TOTALSBeginning balance2,400$ -$ -$ 103$ -$ 2,503$ Principal payments(516) - (2) (1) - (519) Charge-offs(772) - - - - (772) Advances47 - - - - 47 New restructured4,614 1,221 860 102 - 6,797 Transfers out of TDRs- - - - - - Transfers to nonaccrual(2,400) - - - - (2,400) Transfers to foreclosed properties- - - - - - Transfers from accruing2,400 - - - - 2,400 Ending Balance5,773$ 1,221$ 858$ 204$ -$ 8,056$ 20132012Loans outstanding, January 111,297$ 8,827$ New loans496 3,911 Net activity on revolving lines of credit(266) 233 Repayment(2,484) (1,674) Loans outstanding, December 319,043$ 11,297$
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):
Depreciation of premises and equipment charged to operating expenses amounted to $1.231million in 2013, $1.092 million
in 2012, and $1.067 million in 2011.
NOTE 6 – OTHER REAL ESTATE HELD FOR SALE
An analysis of other real estate held for sale for the years ended December 31 is as follows (dollars in thousands):
NOTE 7 – DEPOSITS
The distribution of deposits at December 31 is as follows (dollars in thousands):
Maturities of non-brokered time deposits outstanding at December 31, 2013 are as follows (dollars in thousands):
37
20132012Land1,781$ 2,062$ Buildings and improvements12,911 13,151 Furniture, fixtures, and equipment6,833 5,916 Construction in progress145 19 Total cost basis21,670 21,148 Less - accumulated depreciation 11,460 10,515 Net book value10,210$ 10,633$ 20132012Balance, January 13,212$ 3,162$ Other real estate transferred from loans due to foreclosure932 1,352 Other real estate sold(1,996) (775) Writedowns of other real estate held for sale(231) (496) Loss on other real estate held for sale(33) (31) Balance, December 311,884$ 3,212$ 20132012Noninterest bearing72,936$ 67,652$ NOW, money market, checking149,123 155,465 Savings13,039 13,829 CDs <$100,000140,495 135,550 CDs >$100,00023,159 24,355 Brokered67,547 37,706 Total deposits466,299$ 434,557$ 201487,574$ 201538,887 201632,558 20174,077 2018397 Thereafter161 Total163,654$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 8 – SERVICING RIGHTS
Mortgage Loans
Mortgage servicing rights (“MSRs”) are recorded when loans are sold in the secondary market with servicing retained. As
of December 31, 2013, the Corporation had obligations to service $133 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 10.13% and a discount rate of 8.16% for December 31, 2013.
The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related
valuation allowances (dollars in thousands):
Commercial Loans
The Corporation also retains the servicing on commercial loans that have been sold. These loans were originated and
underwritten under the SBA and USDA government guarantee programs, in which the guaranteed portion of the loan was
sold to a third party with servicing retained. The balance of these sold loans with servicing retained at December 31, 2013
and December 31, 2012 was approximately $59 million and $62 million. The Corporation valued these servicing rights at
$.200 million as of December 31, 2013 and $.050 million at December 31, 2012. This valuation was established in
consideration of the discounted cash flow of expected servicing income over the life of the loans.
NOTE 9 – BORROWINGS
Borrowings consist of the following at December 31 (dollars in thousands):
The Federal Home Loan Bank borrowings are collateralized at December 31, 2013 by the following: a collateral agreement
on the Corporation’s one to four family residential real estate loans with a book value of approximately $43.454 million;
mortgage related and municipal securities with an amortized cost and estimated fair value of $4.610 million and $4.755
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, 2013.
The USDA Rural Development borrowing is collateralized by loans totaling $.128million 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 $.790 million, and guaranteed by the Corporation.
38
December 31,December 31,20132012Balance at beginning of period638$ 400$ Additions from loans sold with servicing retained675 344 Amortization(184) (106) Book value of MSRs at end of period1,129$ 638$ 20132012Federal Home Loan Bank fixed rate advances at December 31, 2013 with a weighted average35,000$ 35,000$ rate of 1.82% maturing in 2014, 2016 and 2018Line of Credit2,000 - USDA Rural Development, fixed-rate note payable, maturing August 24, 2024 interest payable at 1%852 925 37,852$ 35,925$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 9 – BORROWINGS (CONTINUED)
The line of credit (“LOC”) was established with a correspondent bank and bears interest at 90-day LIBOR plus 2.75%, with
a floor rate of 4.00%. The LOC has an initial term of two years, with all outstanding balances on the LOC converted to a
term note on the one-year anniversary date, March 22, 2014.
Maturities and principal payments of borrowings outstanding at December 31, 2013 are as follows (dollars in thousands):
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):
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):
39
201412,074$ 201574 201615,075 201776 201810,077 Thereafter476 Total37,852$ 201320122011Current tax expense (benefit)-$ -$ 314$ Change in valuation allowance(2,250) (3,000) - Deferred tax expense (benefit)1,847 2,078 784 Provision for (benefit of) income taxes(403)$ (922)$ 1,098$ 201320122011Tax expense at statutory rate1,882$ 2,096$ 1,127$ Increase (decrease) in taxes resulting from: Tax-exempt interest(47) (49) (59) Change in valuation allowance(2,250) (3,000) - Other12 31 30 Provision for (benefit of) income taxes, as reported(403)$ (922)$ 1,098$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 10 – INCOME TAXES (CONTINUED)
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):
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, 2013 had a net operating loss and tax credit
carryforwards for tax purposes of approximately $19.815 million, and $2.135 million, respectively. The Corporation will
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 and recognizes 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 $12.8 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 $.403 million for the year ended December 31, 2013
and a deferred tax benefit of $.922 million for the year ended December 31, 2012. The valuation allowance at December
31, 2013 was approximately $.760 million. The Corporation has reduced the valuation allowance as it was determined that
it was “more likely than not” that these benefits would be realized. In December 2013, the Corporation reduced the
valuation by $2.250 million and in June 2012 a reduction of $3.0 million was recorded. The Corporation made these
determinations after a thorough review of projected earnings and the composition and sustainability of those earnings over
the projected tax carryover period. This analysis substantiated the ability to utilize these deferred tax assets. The remaining
valuation allowance pertains to the existing tax credit carryovers, which will only be utilized after all net operating loss
carryforwards. Since a portion of these tax credits may expire before that occurs, a valuation allowance for these has been
established. The Corporation will continue to evaluate the future benefits from these carryforwards in order to determine if
any adjustment to the deferred tax asset is warranted.
40
20132012Deferred tax assets: NOL carryforward6,737$ 7,149$ Allowance for loan losses1,585 1,774 Alternative Minimum Tax Credit1,463 1,463 OREO Tax basis > book basis138 1,025 Tax credit carryovers672 672 Deferred compensation152 185 Stock compensation267 265 Depreciation157 174 Intangible assets33 60 Other155 170 Total deferred tax assets11,359 12,937 Valuation allowance(760)$ (3,010)$ Deferred tax liabilities: FHLB stock dividend(103) (103) Unrealized gain on securities(111) (476) Mortgage servicing rights(452) (217) Total deferred tax liabilities(666) (796) Net deferred tax asset 9,933$ 9,131$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 11 – OPERATING LEASES
The Corporation currently maintains four 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.
The fourth operating lease was initiated in December 2013 as the Corporation consolidated its banking offices in
Marquette. The original term of this lease is 15 years with options for two consecutive renewal terms of four years each.
Future minimum payments for base rent, by year and in the aggregate, under the initial terms of the operating lease
agreements, consist of the following (dollars in thousands):
Rent expense for all operating leases amounted to $280,000 in 2013, $269,000 in 2012, and $260,000 in 2011.
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 $198,000, $161,000, and $125,000 in 2013,
2012, and 2011, 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,
2013 and 2012, for vested benefits under this plan, was $.447 million and $.545 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 $1.506 million and $1.545 million at December 31, 2013 and
2012, respectively. Deferred compensation expense for the plan was $25,000, $30,000, and $35,000 for 2013, 2012, and
2011, respectively.
41
2014515$ 2015447 2016426 2017435 2018444 Thereafter4,954 Total7,221$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
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, 2013, 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.
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):
42
ActualAdequacy PurposesAction ProvisionsAmountRatioAmountRatioAmountRatio2013Total capital to risk weighted assets: Consolidated62,581$ 12.8%>39,153$ > 8.0%N/AN/A mBank60,537$ 12.4%>38,944$ > 8.0%>48,680$ 10.0%Tier 1 capital to risk weighted assets: Consolidated57,920$ 11.8%>19,576$ > 4.0%N/AN/A mBank55,947$ 11.5%>19,472$ > 4.0%>29,208$ 6.0%Tier 1 capital to average assets: Consolidated57,920$ 10.3%>22,469$ > 4.0%N/AN/A mBank55,947$ 10.0%>22,352$ > 4.0%>27,940$ 5.0%2012Total capital to risk weighted assets: Consolidated69,573$ 14.9%>37,283$ > 8.0%N/AN/A mBank56,879$ 12.2%>37,262$ > 8.0%>46,577$ 10.0%Tier 1 capital to risk weighted assets: Consolidated64,355$ 13.8%>18,642$ > 4.0%N/AN/A mBank51,701$ 11.1%>18,631$ > 4.0%>27,946$ 6.0%Tier 1 capital to average assets: Consolidated64,355$ 12.0%>21,486$ > 4.0%N/AN/A mBank51,701$ 9.6%>21,481$ > 4.0%>26,851$ 5.0%
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
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 575,000,
which included 392,152 option shares outstanding at that time.
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.
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, is $.776 million. On August 31, 2013, the Corporation issued 37,125 shares of its common stock for vested
RSUs. As of December 31, 2013, RSUs totaling 111,375 were unvested and unrecognized compensation expense, net of
income tax, was $.512 million.
A summary of stock option transactions for the years ended December 31 is as follows:
43
20132012Outstanding shares at beginning of year242,152 392,152 Granted during the year- - Exercised during the year- - Expired / forfeited during the year(5,000) - Surrendered/exchanged for restricted stock- (150,000) Outstanding shares at end of year237,152 242,152 Exercisable shares at end of year124,861126,361 Weighted average exercise price per share at end of year9.88$ 9.88$ Shares available for grant at end of year- -
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 15 – STOCK COMPENSATION PLANS (CONTINUED)
Following is a summary of the options outstanding and exercisable at December 31, 2013:
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.
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. During 2013, the Corporation redeemed all of the outstanding Series A Preferred Shares.
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
$1,000 per share. The Corporation was prohibited from paying any dividend with respect to shares of common stock unless
all accrued and unpaid dividends are paid in full on the Preferred Stock for all past dividend periods. The Preferred Stock
was non-voting, other than class voting rights on matters that could adversely affect the Preferred Stock. The Preferred
Stock was auctioned by the Treasury in 2012. The Corporation redeemed all of its outstanding Preferred stock in 2013.
44
WeightedAverageRemainingExercise ContractualPriceOutstandingExercisableUnvested OptionsLife-Years9.75$ 217,152 120,861 96,291 .96 10.65$ 10,000 2,000 8,000 1.54 12.00$ 10,000 2,000 8,000 2.96 237,152 124,861 112,291 1.07 Number of Shares
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
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.
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 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, 2013, 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, 2013 represents $100.333 million, or 27.92%, compared to $95.151 million,
or 27.75%, of the commercial loan portfolio on December 31, 2012. The remainder of the commercial loan portfolio is
diversified in such categories as hospitality and tourism, real estate agents and managers, new car dealers, gaming,
petroleum, forestry, agriculture, and construction. Due to the diversity of the Bank’s locations, the ability of debtors of
residential and consumer loans to honor their obligations is not tied to any particular economic sector.
45
20132012Commitments to extend credit: Variable rate36,039$ 39,782$ Fixed rate15,070 18,427 Standby letters of credit - Variable rate5,077 2,879 Credit card commitments - Fixed rate3,152 3,060 59,338$ 64,148$
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.
46
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):
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, 2013 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, 2013 and December 31, 2012 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, 2013 or December 31, 2012.
47
December 31, 2013December 31, 2012Level in FairCarryingEstimatedCarryingEstimatedValue HierarchyAmountFair ValueAmountFair ValueFinancial assets: Cash and cash equivalentsLevel 118,219$ 18,219$ 26,961$ 26,961$ Interest-bearing depositsLevel 210 10 10 10 Securities available for saleLevel 244,388 44,388 43,799 43,799 Federal Home Loan Bank stockLevel 23,060 3,060 3,060 3,060 Net loansLevel 3479,171 479,538 443,959 439,239 Accrued interest receivableLevel 31,351 1,351 1,319 1,319 Total financial assets546,199$ 546,566$ 519,108$ 514,388$ Financial liabilities: DepositsLevel 2466,299$ 465,431$ 434,557$ 434,227$ BorrowingsLevel 237,852 37,487 35,925 35,729 Accrued interest payableLevel 3182 182 214 214 Total financial liabilties504,333$ 503,100$ 470,696$ 470,170$
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.
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).
48
(dollars in thousands)Quoted PricesSignificantSignificantin Active MarketsOther ObservableUnobservableTotal Losses forBalance atfor Identical AssetsInputsInputsYear EndedDecember 31, 2013(Level 1)(Level 2)(Level 3)December 31, 2013AssetsImpaired loans2,024$ -$ -$ 2,024$ 2,075$ Other real estate held for sale1,884 - - 1,884 265 2,340$ Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2013(dollars in thousands)Quoted PricesSignificantSignificantin Active MarketsOther ObservableUnobservableTotal Losses forBalance atfor Identical AssetsInputsInputsYear EndedDecember 31, 2012(Level 1)(Level 2)(Level 3)December 31, 2012AssetsImpaired loans4,687$ -$ -$ 4,687$ 1,151$ Other real estate held for sale3,212 - - 3,212 489 1,640$ Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2012
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 2013 and 2012
(Dollars in Thousands)
49
ASSETS20132012Cash and cash equivalents1,301$ 12,943$ Investment in subsidiaries65,881 59,854 Other assets567 117 TOTAL ASSETS67,749$ 72,914$ LIABILITIES AND SHAREHOLDERS' EQUITYLine of Credit2,000$ -$ Other liabilities500 466 Total liabilities2,500 466 Shareholders' equity: Preferred stock - no par value: Authorized 500,000 shares, 11,000 shares issued and outstanding- 11,000 Common stock and additional paid in capital - no par value Authorized 18,000,000 shares Issued and outstanding - 5,541,390 and 5,559,859 shares respectively53,621 53,797 Retained earnings11,412 6,727 Accumulated other comprehensive income216 924 Total shareholders' equity65,249 72,448 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY67,749$ 72,914$
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, 2013, 2012, and 2011
(Dollars in Thousands)
50
201320122011INCOME: Interest income1$ 3$ 3$ Total income1$ 3$ 3$ EXPENSES: Salaries and benefits482 280 180 Professional service fees208 562 245 Other520 340 223 Total expenses1,210 1,182 648 Loss before income taxes and equity in undistributed net income (loss) of subsidiaries(1,209) (1,179) (645) Provision for (benefit of) income taxes(411) (393) (211) Loss before equity in undistributed net income of subsidiaries(798) (786) (434) Equity in undistributed net income of subsidiaries6,735 7,873 2,652 Net income 5,937 7,087 2,218 Preferred dividend and accretion of discount308 629 766 NET INCOME AVAILABLE TO COMMON SHAREHOLDERS5,629$ 6,458$ 1,452$
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, 2013, 2012, and 2011
(Dollars in Thousands)
51
201320122011Cash Flows from Operating Activities: Net income5,937$ 7,087$ 2,218$ Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net (income) of subsidiaries(6,735) (7,873) (2,652) Increase in capital from stock compensation333 66 - Change in other assets2,587 92 29 Change in other liabilities1,997 (163) (97) Net cash provided by (used in) operating activities4,119 (791) (502) Cash Flows from Investing Activities: Investments in subsidiaries(3,000) - - Cash Flows from Financing Activities: Proceeds from issuance of common stock- 11,506 - Repurchase of common stock(509) - - Purchase of common stock warrants- (1,300) - Dividend on common stock(944) (223) - Dividend on preferred stock(308) (550) (551) Redemption of Series A Preferred Stock(11,000) - - Net cash provided by (used in) financing activities(12,761) 9,433 (551) Net increase (decrease) in cash and cash equivalents(11,642) 8,642 (1,053) Cash and cash equivalents at beginning of period12,943 4,301 5,354 Cash and cash equivalents at end of period1,301$ 12,943$ 4,301$
Selected Financial Data
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
52
Years Ended December 3120132012201120102009SELECTED FINANCIAL CONDITION DATA: Total assets572,800$ 545,980$ 498,311$ 478,696$ 515,377$ Loans483,832 449,177 401,246 383,086 384,310 Securities44,388 43,799 38,727 33,860 46,513 Deposits466,299 434,557 404,789 386,779 421,389 Borrowings37,852 35,925 35,997 36,069 36,140 Common shareholders' equity65,249 61,448 44,342 43,176 44,785 Total shareholders' equity65,249 72,448 55,263 53,882 55,299 SELECTED OPERATIONS DATA: Interest income25,523$ 24,427$ 23,072$ 22,840$ 23,708$ Interest expense4,124 4,603 5,143 6,455 7,421 Net interest income21,399 19,824 17,929 16,385 16,287 Provision for loan losses1,675 945 2,300 6,500 3,700 Net security gains (losses)73 - (1) 215 1,471 Other income3,865 4,043 3,657 2,580 3,280 Other expenses(18,128) (16,757) (15,969) (16,598) (13,802) Income (loss) before income taxes5,534 6,165 3,316 (3,918) 3,536 Provision (credit) for income taxes(403) (922) 1,098 (3,500) 1,120 Net income (loss)5,937 7,087 2,218 (418) 2,416 Preferred dividend and accretion of discount308 629 766 742 509 Net income available to common shareholders5,629$ 6,458$ 1,452$ (1,160)$ 1,907$ PER SHARE DATA: Earnings (loss) - Basic1.01$ 1.51$ .42$ (.34)$ .56$ Earnings (loss) - Diluted1.00 1.46 .41 (.34) .56 Cash dividends declared.17 .04 - - - Book value11.77 11.05 12.97 12.63 13.10 Market value - closing price at year end9.90 7.09 5.42 4.58 4.64 FINANCIAL RATIOS: Return on average common equity9.07 %12.43 %3.30 %(2.64) %4.42 % Return on average total equity8.26 10.26 2.66 (2.06) 3.77 Return on average assets1.01 1.23 .30 (.23) .39 Dividend payout ratio16.83 2.65 N/AN/AN/A Average equity to average assets 12.28 11.95 11.15 11.17 10.24 Efficiency ratio67.46 67.95 68.43 72.57 72.24 Net interest margin4.17 4.17 4.06 3.66 3.59 Texas ratio6.59 10.25 18.56 26.66 34.76 ASSET QUALITY RATIOS: Nonperforming loans to total loans.42 %1.04 %1.99 %2.76 %3.96 % Nonperforming assets to total assets.58 1.45 2.24 3.37 4.08 Allowance for loan losses to total loans.96 1.16 1.18 1.73 1.36 Allowance for loan losses to nonperforming loans230.29 111.33 65.69 62.61 34.29 Net charge-offs to average loans.48 .23 .94 1.33 .73 Texas ratio5.59 10.25 18.56 26.66 34.76
Summary Quarterly Financial Information
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in Thousands, Except per Share Data)
53
12/319/306/303/3112/319/306/303/31BALANCE SHEETTotal loans483,832$ 472,495$ 455,555$ 454,051$ 449,177$ 433,958$ 419,453$ 414,402$ Allowance for loan losses(4,661) (4,959) (5,177) (5,037) (5,218) (5,186) (5,083) (5,382) Total loans, net479,171 467,536 450,378 449,014 443,959 428,772 414,370 409,020 Total assets572,800 567,917 553,501 541,896 545,980 551,117 524,366 506,496 Core deposits375,593 375,166 357,935 362,911 372,496 372,500 357,933 355,186 Noncore deposits (1)90,706 86,522 89,972 62,325 62,061 66,863 67,448 56,902 Total deposits466,299 461,688 447,907 425,236 434,557 439,363 425,381 412,088 Total borrowings37,852 35,852 35,925 40,925 35,925 35,925 35,997 35,997 Common shareholder' equity65,249 63,045 62,520 62,039 61,448 61,945 49,352 45,119 Total shareholders' equity65,249 67,045 66,520 73,039 72,448 72,945 60,352 56,095 Total tangible equity65,249 67,045 66,520 73,039 71,810 72,374 59,827 55,645 Total shares outstanding5,541,390 5,581,339 5,554,459 5,557,859 5,559,859 5,559,859 3,419,736 3,419,736 Weighted average shares outstanding5,555,952 5,562,835 5,556,133 5,559,859 5,559,859 4,722,029 3,419,736 3,419,736 AVERAGE BALANCE SHEETTotal loans479,321$ 464,324$ 456,937$ 449,065$ 438,168$ 424,461$ 422,887$ 404,048$ Allowance for loan losses(4,872) (5,094) (5,180) (5,127) (5,287) (5,212) (5,187) (5,277) Total loans, net474,449 459,230 451,757 443,938 432,881 419,249 417,700 398,771 Total assets569,443 560,089 548,455 541,279 545,661 545,788 511,681 503,412 Core deposits375,455 372,375 361,721 366,838 371,684 369,994 358,133 357,298 Noncore deposits (1)86,175 83,816 78,059 62,336 61,889 69,333 58,524 57,048 Total deposits461,630 456,191 439,780 429,174 433,573 439,327 416,657 409,250 Total borrowings37,573 36,449 40,656 36,681 35,925 35,973 35,997 35,997 Total shareholders' equity66,906 66,134 67,483 72,238 72,936 67,327 55,915 55,418 ASSET QUALITY RATIOSNonperforming loans/total loans.42 %.91 %.87 %.84 %1.04 %1.23 %1.28 %1.65 %Nonperforming assets/total assets.68 1.21 1.17 1.41 1.45 1.61 1.70 2.04 Allowance for loan losses/total loans.96 1.09 1.14 1.11 1.16 1.20 1.21 1.30 Allowance for loan losses/nonperforming loans230.29 114.98 129.98 131.41 111.33 96.99 94.57 78.49 Net charge-offs/average loans.93 .50 (.04) .50 .23 .28 .20 .10 Texas Ratio (2)5.59 9.56 9.02 9.81 10.25 11.35 13.70 16.96 CAPITAL ADEQUACY RATIOSTier 1 leverage ratio10.31 %10.90 %11.01 %12.23 %11.98 %10.16 %9.95 %10.08 %Tier 1 capital to risk weighted assets11.83 12.45 12.74 13.98 13.81 12.87 11.55 11.62 Total capital to risk weighted assets12.79 13.47 13.85 15.06 14.93 14.12 12.80 12.87 Average equity/average assets11.75 11.81 12.30 13.35 13.37 10.93 11.01 11.33 Tangible equity/tangible assets11.75 11.81 12.30 13.35 13.37 10.93 11.01 11.33 (1) Noncore deposits include brokered deposits and CDs greater than $100,000(2) Texas Ratio: Nonperforming Assets Divided by Total Tangible Equity plus Allowance for Loan Losses2013FOR THE QUARTER ENDEDFOR THE QUARTER ENDED2012
Summary Quarterly Financial Information
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in Thousands, Except per Share Data)
54
12/319/306/303/3112/319/306/303/31INCOME STATEMENTNet interest income5,626$ 5,348$ 5,269$ 5,156$ 5,112$ 4,930$ 5,019$ 4,763$ Provision for loan losses825 375 100 375 150 150 150 495 Net interest income after provision4,801 4,973 5,169 4,781 4,962 4,780 4,869 4,268 Total noninterest income1,191 738 1,251 758 983 1,149 1,305 606 Total noninterest expense4,935 4,359 4,523 4,311 4,349 4,367 4,207 3,834 Income before taxes1,057 1,352 1,897 1,228 1,596 1,562 1,967 1,040 Provision for income taxes(1,911) 456 637 415 536 528 (2,335) 349 Net income2,968 896 1,260 813 1,060 1,034 4,302 691 Preferred dividend and accretion of discount58 50 63 137 138 137 161 193 Net income available to common shareholders2,910$ 846$ 1,197$ 676$ 922$ 897$ 4,141$ 498$ PER SHARE DATAEarnings (loss) - basic*.52$ .15$ .22$ .12$ .21$ .21$ .97$ .12$ Earnings (loss) - diluted*.51 .15 .22 .12 .21 .20 .94 .11 Book value 11.77 11.30 11.26 11.16 11.05 11.14 14.43 13.19 Market value9.90 9.10 8.88 9.21 7.09 7.60 5.99 7.00 PROFITABILITY RATIOSReturn on average assets2.03 %.60 %.88 %.51 %.67 %.65 %3.21 %.40 %Return on average common equity18.34 5.40 7.69 4.47 5.93 6.33 36.57 4.53 Return on average total equity17.26 5.08 7.12 3.79 5.03 5.29 29.39 3.62 Net interest margin4.24 4.12 4.16 4.18 4.11 4.10 4.30 4.17 Efficiency ratio66.94 70.64 68.02 72.65 70.52 67.29 63.61 71.01 Average loans/average deposits103.83 101.78 103.90 104.63 99.45 96.62 101.50 98.73 *Earnings per share data for 2012 restated for common stock issuanceFOR THE QUARTER ENDED 2013FOR THE QUARTER ENDED 2012
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, 2012 through
December 31, 2013, as reported by NASDAQ.
The Corporation had approximately 1,200 shareholders of record as of March 28, 2014.
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 2011 and 2012. The Bank paid a $3.0 million dividend in 2013.
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 2013. In 2013, the Corporation approved a stock buyback program. During 2013, the
Corporation repurchased 55,594 shares of its common stock at a total purchase price of $509,334.
55
2013March 31June 30September 30December 31High9.25$ 9.25$ 10.09$ 10.14$ Low7.09 8.25 8.61 8.38 Close9.04 8.88 9.05 9.90 Dividends delcared per share.04 .04 .04 .05 Book value11.16 11.26 11.30 11.77 2012High7.74$ 7.28$ 8.00$ 7.90$ Low5.00 5.61 5.73 6.81 Close7.00 5.99 7.60 7.09 Book value13.19 14.43 11.14 11.05 For the Quarter Ended
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, 2013. The following information is based on an investment
of $100, on December 31, 2008 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.
56
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
Our business may be adversely affected by conditions in the financial markets and economic conditions generally,
as our borrowers’ ability to repay loans and the value of the collateral securing our loans decline.
Weakness in the markets for residential or commercial real estate, including the secondary residential mortgage
loan markets, could reduce our net income and profitability.
Our allowance for loan losses may be insufficient.
Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans,
identification of additional problem loans, and other factors, both within and outside of our control, may require an
increase in our allowance for loan losses.
Risks Related to Our Operations
We are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon our net interest income, which is the difference between
interest income on interest-earning assets such as loans and securities and interest expense paid on interest-bearing
liabilities such as deposits and borrowed funds. There are many factors which influence interest rates that are
beyond our control, including but not limited to general economic conditions and governmental policy, in
particular, the policies of the FRB.
Changes in our accounting policies or in accounting standards could materially affect how we report our financial
results and condition.
Our controls and procedures may fail or be circumvented.
Impairment of deferred income tax assets could require charges to earnings, which could result in an adverse
impact on our results of operations.
In assessing the realizability of deferred income tax assets, management considers whether it is more likely than
not that some allowance requires management to evaluate all available evidence, both negative and positive.
Positive evidence necessary to overcome the negative evidence includes whether future taxable income in
sufficient amounts and character within the carry back and carry forward periods is available under the tax law,
including the use of tax planning strategies. When negative evidence (e.g. cumulative losses in recent years,
history of operating loss or tax credit carry forwards expiring unused) exists, more positive evidence than negative
evidence will be necessary. At December 31, 2013, net deferred tax assets are approximately $9.933 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.
Our information systems may experience an interruption of breach in security.
57
Forward Looking Statements/Risk Factors
Risks Related to Legal and Regulatory Compliance
We operate in a highly regulated environment, which could increase our cost structure or have other negative
impacts on our operations.
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
Maintaining or increasing our market share may depend on lowering prices and market acceptance of new
products and services.
Future growth or operating results may require us to raise additional capital but that capital may not be
available.
Reputation Risks
Unauthorized disclosure of sensitive of confidential client or customer information, whether through a breach of
our computer system or otherwise, could severely harm our business.
Liquidity Risks
We could experience an unexpected inability to obtain needed liquidity.
The ability of a financial institution to meet its current financial obligations is a function of its balance sheet
structure, its ability to liquidate assets and its access to alternative sources of funds. We seek to ensure our
funding needs are met by maintaining an appropriate level of liquidity through asset/liability management.
Risks Related to an Investment in Our Common Stock
Limited trading activity for shares of our common stock may contribute to price volatility.
Our securities are not an insured deposit.
You may not receive dividends on your investment in common stock.
Our ability to pay dividends is dependent upon our receipt of dividends from the Bank, which is subject to
regulatory restrictions. Such restrictions, which govern state-chartered banks, generally limit the payment of
dividends on bank stock to the bank’s undivided profits after all payments of all necessary expenses, provided that
the bank’s surplus equals or exceeds its capital.
These risks and uncertainties should be considered in evaluating forward-looking statements. Further information
concerning the Corporation and its business, including additional factors that could materially affect the Corporation’s
financial results, is included in the Corporation’s filings with the Securities and Exchange Commission. All forward-
looking statements contained in this report are based upon information presently available and the Corporation assumes no
obligation to update any forward-looking statements.
58
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, 2013 and 2012 and the results of operations for 2011 through 2013. This discussion also covers asset
quality, liquidity, interest rate sensitivity, and capital resources for the years 2012 and 2013. 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 2013 results of operations and financial condition. A more
detailed analysis of the results of operations and financial condition follows this summary.
The Corporation reported net income of $5.629 million or $1.01 per share, for the year ended December 31, 2013,
compared to net income of $6.458 million, or $1.51 per share, for 2012 and $1.452 million, or $.42 per share, in 2011. The
2013 and 2012 consolidated and bank results include a deferred tax valuation adjustment of $2.250 million, or $.40 per
share and $3.000 million, $.70 per share, respectively.
Total assets of the Corporation at December 31, 2013, were $572.800 million, an increase of $26.820 million, or 4.91%
from total assets of $545.980 million reported at December 31, 2012.
At December 31, 2013, the Corporation’s loans stood at $483.832 million, an increase of $34.655 million, or 7.72%, from
2012 year-end balances of $449.177 million. Total loan production in 2013 amounted to $190.918 million, which included
$55.973 million of secondary market mortgage loans sold. The Corporation also sold $8.393 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 $2.024 million, or .42% of total loans at December 31, 2013. Nonperforming assets at
December 31, 2013, were $3.908 million, .68% of total assets, compared to $7.899 million or 1.45% of total assets at
December 31, 2012.
Total deposits increased from $434.557 million at December 31, 2012, to $466.299 million at December 31, 2013, an
increase of 7.30%. The increase in deposits in 2013 was comprised of an increase in wholesale deposits of $28.645 million
and an increase in core deposits of $3.097 million. In 2013, the Corporation utilized wholesale deposits in order to better
manage interest rate risk in funding fixed rate loans.
Shareholders’ equity totaled $65.249 million at December 31, 2013, compared to $72.448 million at the end of 2012, a
decrease of $7.199 million. This change reflects the net income available to common shareholders of $5.629 million, the
redemption of the $11.000 million of outstanding Preferred Series A stock, the after tax decrease in the market value of
available-for-sale investments, which amounted to $.708 million, the cost associated with the repurchase of common stock
of $.509 million, dividends on common stock of $.944 million, and recognition of compensation expense associated with
restricted stock awards if $.333 million. The book value per common share at December 31, 2013, amounted to $11.87
compared to $11.05 at the end of 2012.
59
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Summary
The Corporation reported net income available to common shareholders of $5.629 million in 2013, compared to $6.458
million in 2012 and $1.452 million in 2011. The 2013 results include a deferred tax valuation adjustment of $2.250
million, and reduced nonperforming costs. 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.
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 84% of total revenue in 2013. 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 $1.573 million from $19.898 million in 2012 to $21.471 million
in 2013. In 2013, interest rates were stable with the prime rate at 3.25% for the entire year. The Corporation experienced a
decrease, 16 basis points, in the overall rates on earnings assets from 5.15% in 2012 to 4.99% in 2013. Interest bearing
funding sources also declined by 16 basis points, from 1.15% in 2012 to .99% in 2013. The combination of these effective
rate changes resulted in a slight increase in net interest margin from 4.18% in 2012 to 4.19% in 2013. In 2012, the
Corporation realized an increase of $1.879 million in net interest income. This increase was largely attributed to lower
rates on funding liabilities with an increased level of earning assets.
60
(dollars in thousands, except per share data)201320122011Taxable-equivalent net interest income21,471$ 19,898$ 18,019$ Taxable-equivalent adjustment(72) (74) (90) Net interest income, per income statement21,399 19,824 17,929 Provision for loan losses1,675 945 2,300 Other income3,938 4,043 3,656 Other expense18,128 16,757 15,969 Income before provision for income taxes5,534 6,165 3,316 Provision for (benefit of) income taxes(403) (922) 1,098 Net income 5,937$ 7,087$ 2,218$ Preferred dividend expense308 629 766 Net income available to common shareholders5,629$ 6,458$ 1,452$ Earnings per common share Basic1.01$ 1.51$ .42$ Diluted1.00$ 1.51$ .41$ Return on average assets1.01 %1.23 %.30 %Return on average common equity9.07 12.43 3.30 Return on average equity8.26 10.26 2.66
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
In 2013, 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):
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 $278.080 million of variable rate loans that predominantly reprice with
changes in the prime rate and $205.752 million of fixed rate loans. A majority of the variable rate loans, 54%, or $150.087
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 $93.170 million of these loans
with floors, while the remainder will reprice with an additional 100 basis point increase in the prime rate.
The majority of interest bearing liabilities do not reprice automatically with changes in interest rates, which provides
flexibility to manage interest income. Management monitors the interest rate sensitivity of earning assets and interest
bearing liabilities to minimize the risk of movements in interest rates.
61
2013Mix2012Mix2011MixInterest Income Loans24,400$ 95.60 %23,313$ 95.44 %21,774$ 94.37 % Funds sold- - 18 .07 21 .09 Taxable securities961 3.77 948 3.88 1,162 5.04 Nontaxable securities34 .13 27 .11 28 .12 Other interest-earning assets128 .50 121 .50 87 .38 Total earning assets25,523 100.00 %24,427 100.00 %23,072 100.00 %Interest Expense NOW, money markets, checking388 9.41 %548 11.90 %1,002 19.48 % Savings13 .31 16 .35 36 .70 CDs <$100,0002,033 49.30 2,429 52.77 2,064 40.13 CDs >$100,000380 9.21 433 9.41 383 7.45 Brokered deposits654 15.86 520 11.30 1,045 20.32 Borrowings656 15.91 657 14.27 613 11.92 Total interest-bearing funds4,124 100.00 %4,603 100.00 %5,143 100.00 %Net interest income21,399$ 19,824$ 17,929$ Average Rates Earning assets4.98 %5.14 %5.22 % Interest-bearing funds.99 1.15 1.33 Interest rate spread3.99 3.99 3.89
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.
(1) For purposes of these computations, non-accruing loans are included in the daily average loan amounts outstanding.
(2) The amount of interest income on nontaxable securities and loans has been adjusted to a tax equivalent basis, using a 34% tax rate.
(3) Interest income on loans includes loan fees.
62
(dollars in thousands)AverageAverage AverageAverage AverageAverage BalanceInterestRateBalanceInterestRateBalanceInterestRateASSETS:Loans (1,2,3)462,500$ 24,454$ 5.29 %422,440$ 23,373$ 5.53 %388,115$ 21,850$ 5.63 %Taxable securities46,294 961 2.08 38,094 948 2.49 36,155 1,162 3.21 Nontaxable securities (2)1,002 51 5.09 850 41 4.82 850 42 4.94 Federal Funds sold3 - - 11,127 18 .16 13,102 21 .16 Other interest-earning assets3,070 128 4.17 3,070 121 3.94 3,504 87 2.48 Total earning assets512,869 25,594 4.99 475,581 24,501 5.15 441,726 23,162 5.24 Reserve for loan losses(5,045) (5,232) (6,027) Cash and due from banks20,535 28,561 25,622 Fixed assets10,632 10,254 9,630 Other real estate owned2,800 3,392 4,581 Other assets13,361 14,184 14,007 42,283 51,159 47,813 TOTAL ASSETS555,152$ 526,740$ 489,539$ LIABILITIES AND SHAREHOLDERS' EQUITY:NOW and Money Markets120,401$ 289$ .24 %119,053$ 406$ .34 %124,575$ 762$ .61 %Interest checking35,242 99 .28 31,837 142 .45 26,962 240 .89 Savings deposits13,052 13 .10 13,682 16 .12 16,242 36 .22 CDs <$100,000133,082 2,032 1.53 138,767 2,429 1.75 112,464 2,064 1.84 CDs >$100,00024,243 380 1.57 25,128 433 1.72 22,909 383 1.67 Brokered deposits53,435 654 1.22 36,569 520 1.42 45,906 1,045 2.28 Borrowings37,838 656 1.73 35,973 657 1.83 36,579 613 1.68 Total interest-bearing liabilities417,293 4,123 .99 %401,009 4,603 1.15 385,637 5,143 1.33 Demand deposits67,596 59,730 46,773 Other liabilities2,091 3,062 2,568 Shareholders' equity68,172 62,939 54,561 137,859 125,731 103,902 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY555,152$ 526,740$ 489,539$ Rate spread4.00 4.00 %3.91 %Net interest margin/revenue, tax equivalent basis21,471$ 4.19 %19,898$ 4.18 %18,019$ 4.08 %201120122013Years ended December 31,
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.
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
2013, the Corporation recorded a provision for loan loss of $1.675 million, compared to a provision of $.945 million in
2012 and $2.300 million in 2011.
Noninterest Income
Noninterest income was $3.938 million, $4.043 million, and $3.656 million in 2013, 2012, and 2011, respectively. The
principal recurring sources of noninterest income are the gains on the sale of SBA/USDA guaranteed loans and secondary
market loans. In 2013, revenues from these two business lines totaled $1.979 million compared to $2.566 million in 2012
and $2.200 million in 2011. The Corporation, in recent years, expanded its efforts to generate increased income from
secondary market loans by adding additional staff and centralizing processing activities. The Corporation also retains the
servicing for the majority of mortgage loans sold to the secondary market. In 2013, income from servicing mortgages
amounted to $.790 million, compared to $.417 million in 2012 and $.400 million in 2011.
Deposit related income totaled $.667 million in 2013 compared to $.699 million in 2012 and $.832 million in 2011. The
Corporation has experienced continued decline in deposit related income as a result of changes in the assessments mandated
by new consumer regulations. The current regulatory environment may limit the Corporation’s ability to grow these
revenue sources.
63
TotalTotalVolumeIncreaseVolumeIncreaseVolumeRateand Rate(Decrease)VolumeRateand Rate(Decrease)Interest earning assets:Loans2,216$ (1,037)$ (98)$ 1,081$ 1,932$ (376)$ (33)$ 1,523$ Taxable securities204 (157) (34) 13 62 (262) (14) (214) Nontaxable securities7 2 1 10 - (1) - (1) Federal funds sold(18) (18) 18 (18) (3) - - (3) Other interest earning assets- 7 - 7 (11) 51 (6) 34 Total interest earning assets2,409$ (1,203)$ (113)$ 1,093$ 1,980$ (588)$ (53)$ 1,339$ Interest bearing obligations:NOW and money market deposits5$ (120)$ (2)$ (117)$ (34)$ (337)$ 15$ (356)$ Interest checking15 (53) (5) (43) 43 (120) (22) (99) Savings deposits(1) (2) - (3) (6) (17) 3 (20) CDs <$100,000(100) (310) 13 (397) 483 (95) (22) 366 CDs >$100,000(15) (39) 1 (53) 37 12 1 50 Brokered deposits240 (72) (34) 134 (213) (392) 80 (525) Borrowings34 (33) (2) (1) (10) 55 (1) 44 Total interest bearing obligations178$ (629)$ (29)$ (480)$ 300$ (894)$ 54$ (540)$ Net interest income, tax equivalent basis1,573$ 1,879$ Increase (Decrease)Years ended December 31,2012 vs. 2011Increase (Decrease)Due to2013 vs. 2012Due to
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):
Noninterest Expense
Noninterest expense was $18.128 million in 2013, compared to $16.757 million and $15.969 million in 2012 and 2011,
respectively. In 2013, the increase in noninterest expense totaled $1.371 million, or 8.18%. This increase was higher than
normal due to several initiatives undertaken during the year including start-up costs for our asset based lending subsidiary
of approximately $.671 million, the write down of the old mortgage loan office, of $.270 million, in our Marquette market
as we moved to the new leased facility, and other costs incurred in the exploration of a possible acquisition which totaled
approximately $.162 million. Salaries and benefits, at $9.351 million, increased by $1.063 million, 12.83%, from the 2012
expenses of $8.288 million and compared to $7.275 million in 2011. Expense increases on salaries and benefits in 2013
were largely due to increased staffing (due to the additions at our asset based lending subsidiary), combined with increased
employee benefits costs relative to health insurance premium increases and stock compensation expenses related to the
issuance of restricted stock. The largest decrease in noninterest expense for 2013 occurred in write-downs and losses on the
sale of other real estate, which decreased from $.489 million in 2012 to $.265 million in 2013. We also experienced a
decline in our FDIC insurance premiums due to our improved asset quality and operating performance.
Management will continue to review all areas of noninterest expense in order to evaluate where opportunities may exist
which could reduce expenses without compromising service to customers.
The following table details noninterest expense for the three years ended December 31 (dollars in thousands):
64
% Increase (Decrease)2013201220112013 - 20122012- 2011Salaries and benefits9,351$ 8,288$ 7,275$ 12.83 %13.92 %Occupancy1,481 1,372 1,376 7.94 (.29) Furniture and equipment1,102 885 827 24.52 7.01 Data processing1,071 991 761 8.07 30.22 Professional service fees: Accounting362 368 260 (1.63) 41.54 Legal264 396 207 (33.33) 91.30 Consulting and other443 432 289 2.55 49.48 Total professional service fees1,069 1,196 756 (10.62) 58.20 Loan and deposit617 877 1,137 (29.65) (22.87) Writedowns and losses on OREO held for sale265 489 1,137 (45.81) (56.99) FDIC insurance assessment385 459 849 (16.12) (45.94) Telephone303 233 215 30.04 8.37 Advertising436 376 351 15.96 7.12 Other operating expenses2,048 1,591 1,285 28.72 23.81 Total noninterest expense18,128$ 16,757$ 15,969$ 8.18 %4.93 %2013201220112013-20122012-2011Deposit service charges109$ 110$ 123$ (.91) %(10.57) %NSF Fees558 589 709 (5.26) (16.93) Gain on sale of secondary market loans794 1,077 477 (26.28) 125.79 Secondary market fees generated234 313 223 (25.24) 40.36 SBA Fees951 1,176 1,500 (19.13) (21.60) Mortgage servicing rights790 417 400 89.45 4.25 Other 429 361 225 18.84 60.44 Subtotal3,865 4,043 3,657 (4.40) 10.56 Net security gains 73 - (1) 100.00 (100.00) Total noninterest income3,938$ 4,043$ 3,656$ (2.60) %10.59 %% Increase (Decrease)
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 asset will not be realized. The Corporation, as of December 31, 2013 had a net operating loss and tax credit
carryforwards for tax purposes of approximately $19.815 million, and $2.135 million, respectively. The Corporation will
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 and 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 $12.8 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.
Current Federal Tax Provision
The Corporation recognized a deferred tax benefit of approximately $.403 million for the year ended December 31, 2013
and a deferred tax benefit of $.922 million for the year ended December 31, 2012. The valuation allowance at December
31, 2013 was approximately $.760 million. The Corporation has reduced the valuation allowance as it was determined that
it was “more likely than not” that these benefits would be realized. In December 2013, the Corporation reduced the
valuation by $2.250 million and in June 2012 a reduction of $3.0 million was recorded. The Corporation made these
determinations after a thorough review of projected earnings and the composition and sustainability of those earnings over
the projected tax carryover period. This analysis substantiated the ability to utilize these deferred tax assets.
The table below details the Corporation’s deferred tax assets and liabilities (dollars in thousands):
65
20132012Deferred tax assets: NOL carryforward6,737$ 7,149$ Allowance for loan losses1,585 1,774 Alternative Minimum Tax Credit1,463 1,463 OREO Tax basis > book basis138 1,025 Tax credit carryovers672 672 Deferred compensation152 185 Stock compensation267 265 Depreciation157 174 Intangible assets33 60 Other155 170 Total deferred tax assets11,359 12,937 Valuation allowance(760)$ (3,010)$ Deferred tax liabilities: FHLB stock dividend(103) (103) Unrealized gain on securities(111) (476) Mortgage servicing rights(452) (217) Total deferred tax liabilities(666) (796) Net deferred tax asset 9,933$ 9,131$
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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 $.760 million valuation adjustment as of December 31, 2013. The remaining valuation allowance pertains
to the existing tax credit carryovers, which will only be utilized after all net operating loss carryforwards. Since a portion
of these tax credits may expire before that occurs, a valuation allowance for those credits that may expire has been
established. The Corporation will continue to evaluate the future benefits from these carryforwards in order to determine if
any adjustment to the deferred tax asset is warranted.
66
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.
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 $.589 million in 2013, from $43.799 million at December 31, 2012 to
$44.388 million at December 31, 2013.
The carrying value of the Corporation’s securities is as follows at December 31 (dollars in thousands):
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. The current portfolio has a weighted average maturity of 50.5
months. At December 31, 2013, investment securities with an estimated fair market value of $4.830 million were pledged.
67
December 31,(dollars in thousands)201320122011Sources of funds:BalanceMixBalanceMixBalanceMixDeposits: Non-interest bearing transactional deposits72,936$ 12.73 %67,652$ 12.39 %51,273$ 10.29 % Interest-bearing transactional depopsits162,162 28.31 169,294 31.01 166,766 33.47 CD's <$100,000140,495 24.53 135,550 24.83 130,685 26.23 Total core deposit funding375,593 65.57 372,496 68.23 348,724 69.99 CD's >$100,00023,159 4.04 24,355 4.46 23,229 4.66 Brokered deposits67,547 11.79 37,706 6.91 32,836 6.59 Total noncore deposit funding90,706 15.84 62,061 11.37 56,065 11.25 FHLB and other borrowings37,852 6.61 35,925 6.58 35,997 7.22 Other liabilities3,400 .59 3,050 .56 2,262 .45 Shareholders' equity65,249 11.39 72,448 13.27 55,263 11.09 Total572,800$ 100.00 %545,980$ 100.00 %498,311$ 100.00 %Uses of Funds:Net Loans479,171$ 83.66 %443,959$ 81.32 %395,995$ 79.47 %Securities available for sale44,388 7.75 43,799 8.02 38,727 7.77 Federal funds sold3 .00 3 .00 13,999 2.81 Federal Home Loan Bank Stock3,060 .53 3,060 .56 3,060 .61 Interest-bearing deposits10 .00 10 .00 10 .00 Cash and due from banks18,216 3.18 26,958 4.94 20,071 4.03 Other assets27,952 4.88 28,191 5.16 26,449 5.31 Total572,800$ 100.00 %545,980$ 100.00 %498,311$ 100.00 %20132012Corporate16,079$ 18,977$ US Agencies14,855 10,404 US Agencies - MBS7,359 8,374 Obligations of states and political subdivisions6,095 6,044 Total securities44,388$ 43,799$
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 74% of total loans outstanding at December 31, 2013.
The Corporation continued to experience strong loan demand in 2013 with approximately $190.918 million of new loan
production, including $55.973 million of mortgage loans sold in the secondary market. At 2013 year-end, the
Corporation’s loans stood at $483.832 million, an increase from the 2012 year-end balances of $449.177 million. In 2013,
the secondary mortgage loans that were produced and sold totaled $55.973 million while the SBA/USDA loan sales
amounted to $8.393 million. The production of loans was distributed among the regions, with the Upper Peninsula at
$124.836 million, $48.004 million in the Northern Lower Peninsula and $18.078 million in Southeast Michigan where the
market has been hit the hardest by the recession.
Management believes a properly positioned loan portfolio provides the most attractive earning asset yield available to the
Corporation and, with changes to the loan approval process and exception reporting, management can effectively manage
the risk in the loan portfolio. Management intends to continue loan growth within its markets for mortgage, consumer, and
commercial loan products while concentrating on loan quality, industry concentration issues, and competitive pricing. The
Corporation is highly competitive in structuring loans to meet borrowing needs and satisfy strong underwriting
requirements.
The following table details the loan activity for 2012 and 2013 (dollars in thousands):
Following is a table that illustrates the balance changes in the loan portfolio from 2011 through 2013 year end (dollars in
thousands):
Our commercial real estate loan portfolio predominantly relates to owner occupied real estate, and our loans are generally
secured by a first mortgage lien. Commercial real estate market conditions improved in 2013, and we expect this trend to
continue. We make commercial loans for many purposes, including: working capital lines, which are generally renewable
annually and supported by business assets, personal guarantees and additional collateral. Commercial business lending is
generally considered to involve a higher degree of risk than traditional consumer bank lending.
68
Loan balances as of December 31, 2011401,246$ Total production214,102 Secondary market sales(74,142) SBA loan sales(11,962) Loans transferred to OREO(1,352) Loans charged off, net of recoveries(978) Normal amortization/paydowns and payoffs(77,737) Loan balances as of December 31, 2012449,177 Total production190,918 Secondary market sales(54,736) SBA loan sales(8,393) Loans transferred to OREO(932) Loans charged off, net of recoveries(2,232) Normal amortization/paydowns and payoffs(89,970) Loan balances as of December 31, 2013483,832$ 2013201220112013-20122012-2011Commercial real estate268,809$ 244,966$ 199,201$ 9.73 % 22.97 %Commercial, financial, and agricultural79,655 80,646 92,269 (1.23) (12.60)One-to-four family residential real estate103,768 87,948 77,332 17.99 13.73 Construction: Consumer6,895 7,465 5,774 (7.64) 29.29 Commercial10,904 17,229 19,745 (36.71) (12.74)Consumer13,801 10,923 6,925 26.35 57.73 Total483,832$ 449,177$ 401,246$ 7.72 % 11.95 %Percent Change
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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):
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 2013 year-end. The current
concentration of real estate related loans represents a broad customer base composed of a high percentage of owner-
occupied developments.
As of December 31, 2013, the 20 largest commercial loan relationships of the Corporation represented approximately
$122.0 million of the $359.4 million commercial loans, or 34.0%. There is good diversification of these top 20 loan
relationships from both a geographical perspective and industrial classification.
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, 2013, our residential loan portfolio totaled $110.663 million, or 23% 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 $1.542 million at the end of 2012 to $1.526 million at 2013 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.
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.
69
% of% of% of% ofBalanceLoansCapitalBalanceLoansCapitalReal estate - operators of nonres bldgs100,333$ 27.92 %153.77 %95,151$ 27.75 %131.34 Hospitality and tourism45,360 12.62 69.52 40,787 11.90 56.30 Lessors of residential buildings14,191 3.95 21.75 12,128 3.54 16.74 Gasoline stations and convenience stores11,534 3.21 17.68 11,393 3.32 15.73 Real estate agents and managers10,922 3.04 16.74 10,597 3.09 14.63 Commercial construction10,904 3.03 16.71 17,229 5.03 23.78 Other166,124 46.23 254.60 155,556 45.37 214.71 Total commercial loans359,368$ 100.00 %342,841$ 100.00 %20132012
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The Corporation, at December 31, 2013, had performing loans of $5.663 million and nonperforming loans totaling $.614
million for which repayment terms were modified to the extent that they were deemed to be “restructured” loans. The total
restructured loans of $6.277 million is comprised of 11 loans, the largest of which had a December 31, 2013 balance of
$2.511 million.
Credit Quality
The table below shows balances of nonperforming assets for the three years ended December 31 (dollars in thousands):
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 2013 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 2014.
The following table details the impact of nonperforming loans on interest income for the three years ended December 31
(dollars in thousands):
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 2013 amounted to $2.232 million, or .48% of average loans
outstanding, compared to $.978 million, or .23% of loans outstanding in 2012. Attributing to the increase in net charge-offs
to average loans was the divestiture of a distressed legacy hotel loan, with no personal recourse, in the Northern Lower
Peninsula. This loan was originated in 2002 prior to the recapitalization and has been long identified as a problem asset.
The company elected to divest of this loan after all other attempts to minimize exposure and loss related to this property
were exhausted. The current reserve balance is representative of the relevant risk inherent within the Corporation’s loan
portfolio. Additions or reductions to the reserve in future periods will be dependent upon a combination of future loan
growth, nonperforming loan balances and charge-off activity.
70
December 31,December 31,December 31,201320122011Nonperforming Assets :Nonaccrual loans1,410$ 4,687$ 5,490$ Loans past due 90 days or more- - - Restructured loans614 - 2,503 Total nonperforming loans2,024 4,687 7,993 Other real estate owned1,884 3,212 3,162 Total nonperforming assets3,908$ 7,899$ 11,155$ Nonperforming loans as a % of loans.42 %1.04 %1.99 %Nonperforming assets as a % of assets.68 %1.45 %2.24 %Reserve for Loan Losses:At period end4,661$ 5,218$ 5,251$ As a % of average loans.96 %1.24 %1.35 %As a % of nonperforming loans230.29 %111.33 %65.69 %As a % of nonaccrual loans330.57 %111.33 %95.65 %Texas Ratio5.59 %10.17 %18.43 %Charge-off Information (year to date): Average loans462,500$ 422,440$ 388,115$ Net charge-offs2,232$ 978$ 3,662$ Charge-offs as a % of average loans.48 %.23 %.94 %201320122011Interest income that would have been recorded at original rate228$ 313$ 363$ Interest income that was actually recorded- 54 118 Net interest lost228$ 259$ 245$
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
A three year history of relevant information on the Corporation’s credit quality is displayed in the following table (dollars
in thousands):
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 2013, the allowance for loan losses represented .96% of total loans. The allowance for loan losses at the end
of 2013 as a percentage of nonperforming assets was 119.27% compared to 66.06% at 2012 year end. 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. This position is further illustrated with the ratio of the
allowance as a percent of nonperforming loans, which stood at 230.29% at December 31, 2013, compared to 111.33% at
2012 year end.
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.
71
Allowance for Loan Losses201320122011Balance at beginning of period5,218$ 5,251$ 6,613$ Loans charged off: Commercial2,1717753,258 One-to-four family residential real estate141399490 Consumer1208252 Total loans charged off2,432 1,256 3,800 Recoveries of loans previously charged off: Commercial150253128 One-to-four family residential real estate26 7 1 Consumer24 18 9 Total recoveries of loans previously charged off200 278 138 Net loans charged off2,232 978 3,662 Provision for loan losses1,675 945 2,300 Balance at end of period4,661$ 5,218$ 5,251$ Total loans, period end483,832$ 449,177$ 401,246$ Average loans for the year462,500 422,440 388,115 Allowance to total loans at end of year.96 %1.16 %1.31 %Net charge-offs to average loans.48 .23 .94 Net charge-offs to beginning allowance balance42.78 18.63 55.38
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):
During 2013, the Corporation received real estate in lieu of loan payments of $.932 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, 2013 were $466.299 million, an increase of $31.742 million, or 7.30% from December 31,
2012 deposits of $434.557 million. The table below shows the deposit mix for the periods indicated (dollars in thousands):
The increase in deposits, as illustrated above, is composed of an increase in noncore deposits of $28.645 million, while core
deposits increased by $3.097 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 81% 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 2013 year end, this source of funding totaled
$35.000 million and the Corporation secured this funding by pledging loans and investments. The $35.000 million of
FHLB borrowings had a weighted average maturity of 2.5 years, with a weighted average rate of 1.79% at December 31,
2013.
Shareholders’ Equity
Changes in shareholders’ equity are discussed in detail in the “Capital and Regulatory” section of this report.
72
Balance at December 31, 20113,162$ Other real estate transferred from loans due to foreclosure1,352 Other real estate sold(775) Writedowns on other real estate held for sales(496) Loss on other real estate held for sale(31) Balance at December 31, 20123,212 Other real estate transferred from loans due to foreclosure932 Other real estate sold(1,996) Writedowns on other real estate held for sales(231) Loss on other real estate held for sale(33) Balance at December 31, 20131,884$ 2013Mix2012Mix2011MixCORE:Non-interest-bearing72,936$ 15.64 %67,652$ 15.57 %51,273$ 12.67 %NOW, money market, checking149,123 31.98 155,465 35.78 152,563 37.69 Savings13,039 2.80 13,829 3.18 14,203 3.51 Certificates of Deposit <$100,000140,495 30.13 135,550 31.19 130,685 32.28 Total core deposits375,593 80.55 372,496 85.72 348,724 86.15 NONCORE:Certificates of Deposit >$100,00023,159 4.97 24,355 5.60 23,229 5.74 Brokered CDs67,547 14.49 37,706 8.68 32,836 8.11 Total non-core deposits90,706 19.45 62,061 14.28 56,065 13.85 Total deposits466,299$ 100.00 %434,557$ 100.00 %404,789$ 100.00 %
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, 2013 the Bank had $44.388 million of securities, with a weighted average maturity of 50.5 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.
73
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following is the Corporation’s repricing opportunities at December 31, 2013 (dollars in thousands):
The above analysis indicates that at December 31, 2013, the Corporation had a cumulative asset sensitivity gap position of
$24.272 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, 2013, the Corporation had $278.080 million of variable rate loans that reprice primarily with the prime
rate index. Approximately $150.087 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, $93.170 million of these floor-
rate loans would reprice with a 100 basis point prime rate increase, with $148.197 million repricing with an additional 100
basis point prime rate increase.
At December 31, 2012, the Corporation had a cumulative liability asset gap position of $44.838 million within the one-year
time frame.
The Corporation’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk and foreign
exchange risk. The Corporation has no market risk sensitive instruments held for trading purposes. The Corporation has
limited agricultural-related loan assets, and therefore, has minimal significant exposure to changes in commodity prices.
Any impact that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be
insignificant.
Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control
interest rate risk and the quantitative level of exposure. The Corporation’s interest rate risk management process seeks to
ensure that appropriate policies, procedures, management information systems, and internal controls are in place to
maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest
rate risk, the Corporation assesses the existing and potential future effects of changes in interest rates on its financial
condition, including capital adequacy, earnings, liquidity, and asset quality. In addition to changes in interest rates, the
level of future net interest income is also dependent on a number of variables, including: the growth, composition and
levels of loans, deposits, and other earning assets and interest-bearing obligations, and economic and competitive
conditions; potential changes in lending, investing, and deposit strategies; customer preferences; and other factors.
74
1-9091-365>1-5Over 5DaysDaysYearsYearsTotalInterest-earning assets: Loans278,981$ 13,678$ 63,531$ 127,642$ 483,832$ Securities- 6,182 23,860 14,346 44,388 Other (1)13 - - 3,060 3,073 Total interest-earning assets278,994 19,860 87,391 145,048 531,293 Interest-bearing obligations: NOW, money market, savings and interest checking162,162 - - - 162,162 Time deposits18,000 69,576 75,918 160 163,654 Brokered CDs- 12,844 54,703 - 67,547 Borrowings2,000 10,000 25,000 852 37,852 Total interest-bearing obligations182,162 92,420 155,621 1,012 431,215 Gap96,832$ (72,560)$ (68,230)$ 144,036$ 100,078$ Cumulative gap96,832$ 24,272$ (43,958)$ 100,078$ (1) includes Federal Home Loan Bank stock
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, 2013 (dollars in thousands). Nonaccrual loans of $2.024
million are included in the table at an average interest rate of 0.00% and a maturity greater than five years.
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, 2013, the Corporation had excess Canadian assets of $.074 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
75
Fair Value20142015201620172018ThereafterTotal12/31/2013 $ 3,166 $ 8,704 $ 5,097 10$ 7,723$ $ 19,688 $ 44,388 $ 44,388 2.10 % 1.54 % 2.25 %7.00 %1.23 % 2.95 % 2.23 %12,7036,69224,26755,539 78,213 28,338 205,752 206,069 5.39 5.43 5.32 2.87 4.60 5.05 4.35 278,080 - - - - - 278,080 278,130 4.78 - - - - - 4.78 13 - - - - 3,060 3,073 3,073 .25 - - - - 3.53 3.52 $ 293,962 $ 15,396 $ 29,364 $ 55,549 $ 85,936 $ 51,086 $ 531,293 $ 531,660 4.78 %3.23%4.79% 2.87 %4.30%% 4.15 % 4.00 % $ 162,162 $ - $ - $ - -$ $ - 162,162 $ 162,162 .24 % - % - %%- % - % .24 %100,42056,790 49,906 18,529 5,396 160 231,201 230,333 1.64 1.29 1.64 1.38 0.96 4.49 1.52 2,000 - - - - - 2,000 2,000 4.00 - - - - - 4.00 10,000 - 15,000 - 10,000 852 35,852 35,487 2.10 - 2.07 - 1.11 1.00 1.78 $ 272,582 $ 56,790 $ 64,906 $ 18,529 $ 15,396 $ 1,012 $ 429,215 $ 427,982 .85 %1.29%1.74% 1.38 %1.06% 1.55 % 1.07 % Average interest ratePrincipal/Notional Amount Maturing/Repricing In:Rate Sensitive AssetsFixed interest rate loans Average interest rateFixed interest rate securities Average interest rate Variable interest rate loans Average interest rate Total rate sensitive assets Average interest rateOther assets Average interest rate NOW, MMAs, checking Rate Sensitive LiabilitiesAverage interest rateInterest-bearing savings, borrowings Average interest rateTime depositsVariable interest rateAverage interest rate Total rate sensitive liabilities Average interest rateFixed interest rate borrowings
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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.
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 2013, the Corporation decreased cash and cash equivalents by $8.742 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 $37.853 million and a net increase in securities available for sale of
$2.011 million. The net increases in assets were offset by a similar increase in deposit liabilities of $31.742 million. This
increase in deposits was composed of an increase in non-core deposits of $28.645 million combined with an increase in
core deposits of $3.097 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, 2013, $39.558 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 2013, 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. In December 2013, the
Bank paid a $3.0 million dividend. Bank capital, after payment of this dividend, was strong and above the “well
capitalized” regulatory level. The Corporation, in 2013, established and $8.0 million line of credit with a correspondent
bank, which also serves as a source of liquidity. As of December 31, 2013, $6.0 million was available under this line. The
Corporation will continue to explore alternative opportunities for longer term sources of liquidity and permanent equity to
support projected asset growth.
Liquidity is managed by the Corporation through its Asset and Liability Committee (“ALCO”). The ALCO Committee
meets 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, 2013, the Bank’s core deposits in relation to total funding were 74.50% compared to 79.17% in 2012.
These ratios indicated at December 31, 2013, that the Bank has increased 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, 2013, 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.
76
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
From a long-term perspective, the Corporation’s liquidity plan for 2013 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.
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, 2013, the aggregate contractual obligations and
commitments are (dollars in thousands):
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, 2013, the Corporation and the Bank were well
capitalized.
The Corporation and Bank capital is 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.
77
Contractual ObligationsLess than 1 Year1 to 3 Years4 to 5 YearsAfter 5 YearsTotalTotal deposits335,518$ 106,696$ 23,925$ 160$ 466,299$ Federal Home Loan Bank borrowings10,000 15,000 10,000 - 35,000 Other borrowings2,074 149 153 476 2,852 Directors' deferred compensation115 204 99 29 447 Annual rental / purchase commitments under noncancelable leases / contracts515 873 879 4,954 7,221 TOTAL348,222$ 122,922$ 35,056$ 5,619$ 511,819$ Other CommitmentsLetters of credit5,077$ -$ -$ -$ 5,077$ Commitments to extend credit51,109 - - - 51,109 Credit card commitments3,152 - - - 3,152 TOTAL59,338$ -$ -$ -$ 59,338$ Payments Due by Period
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):
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:
78
201320122011Capital StructureCommon shareholders' equity65,249$ 61,448$ 44,342$ Preferred stock- 11,000 10,921 Total shareholders' equity65,249 72,448 55,263 Total capitalization65,249$ 72,448$ 55,263$ Tangible capital65,249$ 72,448$ 55,263$ Intangible AssetsSubsidiaries: Core deposit premium-$ -$ -$ Other identifiable intangibles1,129 688 400 Total intangibles1,129$ 688$ 400$ Risk-Based CapitalTier 1 capital: Total shareholders' equity65,249$ 72,448$ 55,263$ Net unrealized (gains) losses on available for sale securities(216)(924)(325) Less: disallowed deferred tax asset(7,000)(7,100)(6,500) Less: disallowed intangibles(113) (69) (40) Total Tier 1 capital57,920$ 64,355$ 48,398$ Tier 2 Capital: Allowable reserve for loan losses4,661$ 5,218$ 5,206$ Qualifying long-term debt- - - Total Tier 2 capital4,661 5,218 5,206 Total risk-based capital62,581$ 69,573$ 53,604$ Risk-weighted assets489,407$ 466,039$ 416,423$ Capital Ratios: Tier 1 Capital to average assets10.31%11.98%10.08% Tier 1 Capital to risk-weighted assets11.83%13.81%11.62% Total Capital to risk-weighted assets12.79%14.93%12.87%TangibleTier 1Tier 1TotalEquity toEquity to Capital toCapital toCapital to Year-endYear-endAverageRisk WeightedRisk WeightedAssetsAssetsAssetsAssetsAssetsRegulatory minimum for capital adequacy purposesN/AN/A4.00%4.00%8.00%Regulatory defined well capitalized guidelineN/AN/A5.00%6.00%10.00%The Corporation: December 31, 201311.39%11.39%10.31%11.83%12.79% December 31, 201213.27%13.27%11.98%13.81%14.93%The Bank: December 31, 201311.11%11.11%10.01%11.49%12.44% December 31, 201210.96%10.96%9.63%11.10%12.21%
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.
79
Directors and Officers
80
Walter J. Aspatore - Lead DirectorRobert H. OrleyChairmanFounding PartnerMethode Electronics CorpO2 Investment Partners, LLCDirector Since: 2004Director Since: 2004Dennis B. BittnerL. Brooks PattersonOwner and PresidentCounty ExecutiveBittner Engineering, Inc.Oakland CountyDirector Since: 2001Director Since: 2006Joseph D. GareaRandolph C. PaschkeManaging DirectorDirector of Community Relations & External EngagementHancock Securities and related entitiesWayne State University, School of Business AdministrationDirector Since: 2007Director Since: 2004Kelly W. GeorgeDavid R. SteinhardtPresident, Mackinac Financial CorporationFounder and PresidentPresident and CEO, mBankKCPS & Company Ltd.Director Since: 2006Director Since: 2012Robert E. MahaneyPaul D. TobiasPresident and OwnerChairman and CEO, Mackinac Financial CorporationVeridea Group, LLCChairman, mBankDirector Since: 2008Director Since: 2004DIRECTORSMackinac Financial Corporation and mBankPaul D. TobiasKelly W. GeorgeChairman and Chief Executive OfficerPresidentBirmingham, MIManistique, MIErnie R. KruegerExecutive Vice President/Chief Financial OfficerManistique, MIOFFICERSMackinac Financial CorporationMackinac Commercial Credit, LLCOfficersBoard of ManagersPaul D. TobiasPaul TobiasTamara R. McDowellChairman and ManagerChairman and CEOEVP - Managing DirectorMackinac Financial CorporationCredit Administration/OperationsPaul A. BarrDon Barr, Jr.Walter J. AspatoreCredit ManagerPresidentChairmanBaywood Holdings, LLCMethode Electronics CorpEdward P. LewanKelly W. GeorgeRobert H. OrleyEVP/Chief Lending OfficerPresident and CEOFounding PartnermBankO2 Investment Partners, LLCMichael J. GallagherErnie R. KruegerFrank N. SheckellRegional Vice PresidentEVP - Chief Financial OfficerManaging DirectormBankOakland Capital Partners, LLCStephen D. ReichmuthRegional Vice PresidentDarlene GoyController
Directors and Officers
81
mBank OfficersBernadette C. BeaudreClarice A. GhiardiJason J. RollingAssistant Vice PresidentVice PresidentVice PresidentDeposit Compliance/BSA OfficerMortgage Loan OfficerPremier Client ServicesLinda K. BoldaJoseph T. HavicanAndrew P. SabatineSenior Vice PresidentVice PresidentRegional PresidentHuman Resources DirectorCommercial Banking OfficerNorthern Lower PeninsulaCatherine M. BolmMichael J. HoarTeresa M. SameVice PresidentSenior Vice PresidentAssistant Vice PresidentMortgage Loan OfficerInformation Technology/Branch Sales ManagerCommunications DirectorAngela E. BuckinghamErnie R. KruegerGregory D. SchuetterAssistant Vice PresidentExecutive Vice PresidentSenior Vice PresidentBranch Sales Manager, NewberryChief Financial OfficerUpper Peninsula Commercial Lending MangaerJesse A. DeeringDavid W. LeslieJoanna B. SlaghtSenior Vice PresidentSenior Vice PresidentSenior Vice PresidentManaging Director of Retail Branch Banking,Southeast Michigan/GaylordCompliance/Risk ManagerMarketing & Information TechnologyCommercial Lending ManagerRichard B. DemersMagan L. MacArthurMichael A. SlaghtVice PresidentAssistant Vice PresidentVice PresidentCommercial Banking OfficerMortgage Loan OfficerCommercial Banking OfficerTrisha L. DeMarsBoris MartyszJennifer A. StempkiAssistant Vice PresidentSenior Vice PresidentVice PresidentSenior Operations SpecialistMarquette Regional ExecutiveControllerGeorge J. DemouTamara R. McDowellDaniel L. StoudtVice PresidentExecutive Vice PresidentAssistant Vice PresidentCommercial Banking OfficerManaging Director, Credit Administration/Mortgage Loan OfficerOperationsElena C. DritsasJacquelyn R. MenhennickDavid R. ThomasAssistant Vice PresidentSenior Vice PresidentVice PresidentBranch Sales Manager/Mortgage and Consumer Lending ManagerCommercial Banking OfficerTreasury Management OfficerJeremy W. FlodinBarbara A. ParrettPaul D. TobiasVice PresidentAssistant Vice PresidentChairmanSenior Credit Administrator/Branch Sales ManagerCredit Risk AnalystLaura L. GarvinDebra L. PetersonNicole A. TryanVice PresidentVice PresidentAssistant Vice PresidentCommercial Banking OfficerMortgage Loan OfficerSenior Loan Operations OfficersKelly W. GeorgeJoan M. Pitera-PowellJanet M. WillbeePresident and Chief Executive OfficerVice PresidentVice PresidentCommercial Banking OfficerMortgage Loan OfficerScott A. RavetVice PresidentCommercial Banking Officer
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 2014 Annual Meeting of the Shareholders of Mackinac Financial Corporation will be held on May 28, 2014.
Visit our website, www.bankmbank.com, for updated news releases, financial reports, SEC filings, corporate governance
and other investor information.