A N N U A L R E P O R T
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 ....................................................................................................................... 57
Summary Quarterly Financial Information ......................................................................................... 58
Market Information ............................................................................................................................. 60
Shareholder Return Performance Graph ............................................................................................. 61
Forward-Looking Statements .............................................................................................................. 62
Management’s Discussion and Analysis of Financial
Condition and Results of Operations ................................................................................................ 64
Directors and Officers ......................................................................................................................... 85
______________________________________________________________________________________
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 $740 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 17 branch
locations; thirteen 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, 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 1,600 shareholders of record as of March 30, 2015.
To Our Shareholders
March 30, 2015
TO OUR SHAREHOLDERS:
It was an eventful and productive year on numerous fronts for your company. We successfully completed the corporation’s
first acquisition (Peninsula Financial Corporation) since the 2004 recapitalization. We are very pleased with the transaction
and believe our patience has been rewarded (we will comment more about this later in the letter). We also maintained
focus on core operations without materially increasing the overall risk profile of the company. Total assets surpassed $740
million in part to the acquisition as well as the $50 million of organic balance sheet loan growth at the bank. Your
company earned $1.7 million or $.30 per share despite onetime deal related expenses having a negative $1.810 million
impact on earnings. Excluding these expenses your company earned about $3.5 million or $.62 per share, this would be an
improvement over 2013 earnings of $.61 per share when excluding onetime gains.
Even with the aforementioned acquisition activity, the per share book price increased from $11.77 at year end 2013 to
$11.81 at year end 2014. By increasing the book price in the same year as executing an acquisition, we believe we have
created intrinsic shareholder value and strengthened future earnings capability of the corporation through increased scale.
We believe this will bode well for long-term value creation.
2014 OVERVIEW
We are pleased with the progress in 2014 in what continues to be a very challenging economic, regulatory and overall
community banking environment. The following are some specific highlights from the year:
(cid:2) In a compressed and stagnant interest rate environment our Net Interest Margin increased from 4.17% in 2013 to
4.19% in 2014. We attribute the ability to maintain spread to continued discipline of loan and deposit pricing at
the bank level. As we move closer to a potential raising rate environment, we believe we are well positioned in
terms of our loan and funding mix to mitigate interest rate risk. Increased interest rates will likely benefit your
company and should increase overall profitability.
(cid:2) Total loan production at the bank remained fairly consistent and did not suffer greatly as a result of loan pricing
parameters and the significant industry-wide slowdown in mortgage lending. 2014 saw sustained loan growth and
production totaling approximately $183 million with net organic balance sheet growth of about $50 million. All
three regions within Michigan contributed to loan origination success. Total assets of the corporation grew
29.85% to $743.785 as of December 31, 2014 due to both organic growth and the acquisition.
(cid:2) Credit quality remains an important focus for the company as we believe the loan book is truly the cornerstone of
risk management within any community bank. Nonperforming assets equated to $6.949 million or .93% of total
assets at the end of the period. All of our asset quality metrics compare very favorably to our peers even as we
continue to navigate the highly competitive lending environment within our various regions. We continue to be
true to our underwriting and credit culture, which has proven to be effective over time.
(cid:2) As the company increases in size, we maintain a close eye on financial efficiency i.e. how efficient operations are
in creating profits. We pay particular attention to Non-interest Expense as a percentage of Average Assets as an
indicator of success and the company continues to compare favorably to peers in this metric. This is another area
where scale is beneficial given increased overall cyber security, regulatory and compliance oversight has
contributed to generally higher operating expenses across the industry. Increased size allows us to spread these
costs over more earning assets and create more efficient earnings.
1
To Our Shareholders
(cid:2) Capital levels for both the Bank and Corporation remain above regulatory guidelines following the acquisition.
Strong capital levels as well as earnings allowed for an annualized dividend payment increase from $.20 per
common share in 2013 to $.30 per common share in 2014.
(cid:2) We also experienced growth in our deposits at the bank, primarily through the acquisition. As we grow our asset
base, we prefer to fund our loans by using core deposits that are generally less expensive than alternative funding
sources. The increased core deposit portfolio should support future loan origination in the markets we entered
through the acquisition.
(cid:2) Due to competition and difficult market conditions (a shortage of work out loans from other banks), our asset
based lending subsidiary, Mackinac Commercial Credit, LLC (MCC) took longer to reach profitability than
anticipated. However, the company was on-track to reach sustained profitability beginning in January 2015. We
still believe the addition of MCC provides another diversified line of business and revenue stream to augment
overall company earnings in the future.
PENINSULA BANK ACQUISITION
As we have communicated in the past, our posture on M&A activity is to be opportunistic but also mindful of strategic and
financial benefits of any transaction. In early December 2014 we successfully completed the acquisition of Peninsula
Financial Corporation the holding company for Peninsula Bank (Pen), a company that met both requirements. Pen was a
127-year old state chartered bank located in Ishpeming, Michigan. Ishpeming is located in western Marquette County in
the Upper Peninsula. The bank was deeply rooted in the communities it served and shared similar customer centric cultures
with your company.
The $125 million asset size and $100 million in core deposits were a good fit and the price allowed for immediate earnings
accretion and an acceptable tangible book value earn back period. Given mBank’s presence in the city of Marquette in the
eastern part of the county, the acquisition added complimentary markets to the current footings with low execution risk in
the largest economic center in the Upper Peninsula. It is believed that there continues to be growth opportunities through
the new branch network which all remained open and staffed by many of the same employees who worked for Pen.
We believe the employee and cultural transition and data system conversion processes have gone well with much of the
credit going to the employees and management who have worked tirelessly on the project. The goal is to continue to serve
our new clients and communities and offer best in class banking products and services to meet their needs.
GENERAL COMMENTARY
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 continues to be well positioned to
achieve continued success in the ever changing banking landscape 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 RECAP
To add further detail to earnings commentary and the impact of “one-time” items, 2014 income of the company was $1.700
million, or $.30 per share, compared to net income available to common shareholders of $5.629 million, or $1.01, per share
for 2013. In 2013, a deferred tax benefit of $2.250 million was recorded which equated to $.40 per share. In connection
with this acquisition and other strategic initiatives, the Corporation had nonrecurring transaction related expenses totaling
$2.475 million. These “one-time” costs reduced the reported net income in 2014 by $1.810 million, or $.32 per share, on an
after tax basis. The adjusted net income for 2014 (not inclusive of the nonrecurring transaction related expenses) would
equate to $3.510 million, or $.62 per share, compared to adjusted net income of $3.379 million in 2013 (not including the
deferred tax benefit), or $.61 per share. Weighted average shares for 2014 totaled 5,592,738 compared to 5,558,383 shares
in 2013.
2
To Our Shareholders
The Bank recorded net income of $4.070 million for 2014 compared to $4.939 million in 2013, as adjusted for the $2.250
million deferred tax benefit. In 2014, the Bank recorded $.786 million, after tax, of nonrecurring transaction related
expenses. The adjusted income for 2014 would have been $4.856 million, compared to the adjusted income of $4.939
million in 2013. The slight reduction in core income for the bank was largely attributable to large reductions year to year in
secondary market mortgage lending activities seen throughout the industry and some smaller reductions in our SBA
originations for sale. While our performance in these lines of business remains solid, external economic factors will effect,
to a certain extent, the volume of these products both on a macro (industry) and micro (bank) scale. These reductions were
offset by strong gains in net interest income of approximately $1.1 million through continued strong balance sheet growth
and sustained margin. Total assets of the Corporation at December 31, 2014 were $743.785 million, up 29.85% from the
$572.800 million reported at December 31, 2013.
LOAN GENERATION / CREDIT QUALITY
Total loans at December 31, 2014 were $600.935 million compared to $483.832 million at 2013 year end. Loans acquired
from Peninsula Bank were $67 million, and the Corporation had organic growth in 2014 of $50 million. In addition to the
aforementioned balance sheet totals, the company services $224 million of sold mortgage loans and $46 million of sold
SBA and USDA loans. Total loans under management total $871 million as of year end.
New loan production totaled $183 million with the Upper Peninsula contributing $105 million, the Northern Lower
Peninsula $40 million and Southeast Michigan $38 million. Commercial loan production accounted for $110 million of the
2014 total, with consumer loans, primarily 1-4 family mortgages, of $73 million.
Nonperforming loans totaled $3.939 million, .66% of total loans at December 31, 2014 compared to $2.024 million, or
.42% of total loans at December 31, 2013. Nonperforming assets were $6.949 million, .93% of total assets compared to
$3.908 million, .68% of assets at 2013 year end with the increase primarily a result of the Pen acquisition.
DEPOSITS
Total deposits of $606.973 million at 2014 year end included $101 million deposits acquired with the Pen acquisition. The
organic growth of deposits was approximately $40 million from 2013 year-end and was comprised primarily of wholesale
deposit funding.
THE FOLLOWING TABLES AND COMMENTARY FURTHER ILLUSTRATE OUR ON-GOING PERFORMANCE
IN DEVELOPING OUR LOAN PRODUCTION, CORE LINES OF BUSINESS’S 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 continue over the three year period even with the recent increasingly competitive landscape.
(dollars in thousands)
For the Year Ending December 31,
2014
2013
2012
REGION
Upper Peninsula
Northern Lower Peninsula
Southeast Michigan
$
104,601
40,133
38,669
$
124,836
48,004
18,078
$
134,257
37,856
41,989
TOTAL
$
183,403
$
190,918
$
214,102
3
To Our Shareholders
Government Guaranteed Lending Programs
Our total production of sold loans for the last three years was $27 million, with $2.837 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. Continued demand from buyers has kept pricing strong and we believe there
is opportunity in this line of business for further growth.
# Loans
2014
SBA Amount
Premium
SBA/USDA Loans Originated
For the Year Ended December 31,
2013
SBA Amount
# Loans
Premium
# Loans
2012
SBA Amount
Premium
UP
NLP
SEM
Total
8
1
4
13
Key Performance Metrics
$
$
$
$
$
$
4,123
149
2,803
7,075
424
8
278
710
11
2
1
14
7,285
750
359
8,394
819
89
43
951
13
2
2
17
8,993
354
2,615
11,962
881
14
281
1,176
$
$
$
$
$
$
The following table illustrates stable operating metrics in several key performance areas. The Efficiency Ratio for year end
is slightly skewed given the period-end fell in the middle of the operations integration of Pen and the slightly longer than
expected period for Mackinac Commercial Credit to reach profitability. We expect that number to normalize over the first
half of 2015.
Net Interest Margin
Efficiency Ratio
Credit Quality (Texas Ratio)
Noninterest Expense to Average Assets
2014
2013
2012
4.19%
74.43%
9.37%
3.28%
4.17%
67.46%
5.59%
3.22%
4.17%
67.95%
10.25%
3.09%
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
and, perhaps most importantly, we maintain strong capital position post transaction.
Tier 1 Capital
to Average
Assets
Tier 1 Capital
to Risk Weighted
Assets
Total Capital
to Risk Weighed
Assets
Bank
Consolidated
9.11%
8.57%
10.98%
10.23%
11.82%
11.07%
LOOKING FORWARD:
As we look forward to 2015, we are keeping a close watch on industry trends that may potentially affect the company.
Interest rate pressure and the potential for rates to begin to increase in 2015 will necessitate continued focus on Net Interest
Margin, funding and loan portfolio pricing especially the ratio of fixed to floating rate loans. It will be important to
maintain consistent underwriting and credit culture as competitive and interest rate pressure continues across the industry.
Increased use of technology and banking solutions including mobile & online banking will require attention to customer
demand for new products and services. IT infrastructure and capabilities must keep pace with demand as security will
remain a high priority with the increased use of technology as a banking platform and given the continued increase in
attempted cybercrimes across all industries.
Your management team continues to look for ways to enhance shareholder value through exploration of expansion
opportunities within our current markets by way of bank or branch acquisition and potentially additional complimentary
lines of business. We have a stable management team and experienced personnel with capacity to support future growth.
4
To Our Shareholders
We will continue to cultivate strong company culture which remains dedicated to serving the communities in which we live
and work. Finally, as we have committed to in the past, we will be patient in evaluating and executing any external growth
strategy while continuing with the daily execution of organic franchise development with increased operational efficiencies.
In closing, on behalf of the mBank Board of Directors, Management and employees, we would like to both thank our long
time shareholders and welcome new owners to the company for their both their support and patronage as clients of the
bank. We are fortunate to work for Mackinac Financial Corporation with a talented and hardworking team, we are all
looking forward to success in 2015 and beyond.
Sincerely,
Paul D. Tobias
Chairman and CEO
Mackinac Financial Corporation
Kelly W. George
President and CEO
mBank
5
Five Year Overview
6
Five Year Overview
Loans outstanding at 2014 year end include
$64.123 million of PFC loans outstanding.
(1) Mackinac Financial Corporation acquired Peninsula Financial Corporation (“PFC”) on December 5, 2014. The data above reflects the
impact of the acquisition.
7
Regional Review – Upper Peninsula
BRANCH LOCATIONS
ESCANABA
2224 N. Lincoln Road
Escanaba, MI 49829
(906) 233-9443
Manager: April J. Stropich
ISHPEMING – DOWNTOWN
100 S. Main Street
Ishpeming, MI 49849
(906) 485-6333
Manager: Anita G. Sandberg
ISHPEMING – JUBILEE
Located in Jubilee Foods
Ishpeming, MI 49849
(906) 486-9595
Manager: Jill C. Dompierre
MANISTIQUE – LAKESHORE
Located in Jack’s Supervalu
Manistique, MI 49854
(906) 341-7190
Manager: Kendra L. Lander
MARQUETTE
857 W. Washington Street
Marquette, MI 49855
(906) 226-5000
Manager: Teresa M. Same
MARQUETTE – MCCLELLAN
175 S. McClellan Avenue
Marquette, MI 49855
(906) 228-3933
Manager: Tia M. Rodda
NEWBERRY
414 Newberry Avenue
Newberry, MI 49868
(906) 293-5165
Manager: Angela E. Buckingham
ISHPEMING – WEST
US 41 West & 170 N. Daisy Street
Ishpeming, MI 49849
(906) 485-5717
Manager: Jill C. Dompierre
MARQUETTE – MEDICAL CENTER
1414 W. Fair Avenue, Suite 140
Marquette, MI 49855
(906) 226-0581
Manager: Tia M. Rodda
SAULT STE. MARIE
138 Ridge Street
Sault Ste. Marie, MI 49783
(906) 635-3992
Manager: Lori A. McKerchie
MANISTIQUE
130 South Cedar Street
Manistique, MI 49854
(906) 341-8401
Manager: Kendra L. Lander
NEGAUNEE
Located in Super One Foods
Negaunee, MI 49866
(906) 475-0120
Manager: Jill C. Dompierre
STEPHENSON
S216 Menominee Street
Stephenson, MI 49887
(906) 753-2225
Manager: Barbara A. Parrett
(dollars in thousands)
Escanaba
Ishpeming
Manistique
Marquette
Negaunee
Newberry
Sault Ste. Marie
Stephenson
BALANCE SHEET HIGHLIGHTS
At December 31, 2014
Loans
Core Deposits
2014
Loan Production*
$
21,934
41,466
93,315
140,080
1,166
16,505
44,303
9,168
$
17,221
73,267
42,919
64,063
2,490
34,945
22,344
35,868
$
17,772
-
27,195
45,599
-
4,338
8,604
1,093
TOTAL UPPER PENINSULA
$
367,937
$
293,117
$
104,601
* Includes production of mortgage loans sold on the secondary market.
8
Regional Review – Upper Peninsula
Core deposit increases were primarily a result of the acquisition of PFC on December 5, 2014.
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 $514.2 million.
Nonperforming assets in the Upper Peninsula totaled $6.705 million at the end of 2014, which included $3.010 million of
OREO and $3.695 million of nonperforming loans. Nonperforming loans as a percent of total loans was 1.32%.
9
Regional Review – Northern Lower Peninsula
BRANCH LOCATIONS
GAYLORD
1955 South Otsego Avenue
Gaylord, MI 49735
(989) 732-3750
Manager: Jessica M. Beals
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
(dollars in thousands)
Gaylord
Kaleva
Traverse City
BALANCE SHEET HIGHLIGHTS
At December 31, 2014
Loans
Core Deposits
2014
Loan Production*
$
35,044
412
63,022
$
59,727
16,717
57,438
$
9,015
79
31,039
TOTAL NORTHERN LOWER PENINSULA
$
98,478
$
133,882
$
40,133
* Includes production of mortgage loans sold on the secondary market.
10
Regional Review – Northern Lower Peninsula
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 $185.2 million.
Nonperforming assets in the Northern Lower Peninsula totaled $.244 million at the end of 2014, all nonperforming loans.
Nonperforming loans as a percent of total loans was .25%.
11
Regional Review – Southeast Michigan
BRANCH LOCATION
BIRMINGHAM
260 East Brown Street, Suite 300
Birmingham, MI 48009
(248) 290-5900
Manager: Mary B. Schroeder
BALANCE SHEET HIGHLIGHTS
At December 31, 2014
(dollars in thousands)
Loans
Core Deposits
2014
Loan Production
Birmingham
$
125,816
$
44,030
$
38,669
The Corporation’s asset based lending subsidiary, Mackinac Commercial Credit (“MCC”), is also based in Southeast Michigan.
The subsidiary began operations late in 2013, with 2014 year end loan balances of $8.704 million. The subsidiary reached
sustained profitability in early 2015.
12
Regional Review – Southeast Michigan
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 $138.7 million.
There were no nonperforming assets in Southeast Michigan at 2014 year end.
13
Selected Financial Highlights
(Dollars in Thousands, Except Per Share Data)
(Dollars in thousands, except per share data)
Selected Financial Condition Data (at end of period) :
Assets
Loans
Investment securities
Deposits
Borrowings
Common Shareholders' Equity
Shareholders' equity
December 31,
2014
December 31,
2013
(Unaudited)
$
743,785
600,935
65,832
606,973
49,846
73,996
73,996
$
572,800
483,832
44,388
466,299
37,852
65,249
65,249
Selected Statements of Income Data:
Net interest income
Income before taxes and preferred dividend
Net income
Income per common share - Basic
Income per common share - Diluted
Dividends paid per share
Weighted average shares outstanding
Weighted average shares outstanding- Diluted
Selected Financial Ratios and Other Data:
Performance Ratios:
Net interest margin
Efficiency ratio
Return on average assets
Return on average common equity
Return on average equity
Average total assets
Average common shareholders' equity
Average total shareholders' equity
Average loans to average deposits ratio
Common Share Data at end of period:
Market price per common share
Book value per common share
Tangible book value per share
Common shares outstanding
Other Data at end of period:
Allowance for loan losses
Non-performing assets
Allowance for loan losses to total loans
Non-performing assets to total assets
Texas ratio
Number of:
Branch locations
FTE Employees
$
$
23,527
2,829
1,700
.30
.30
.225
5,592,738
5,653,811
21,399
5,534
5,629
1.01
1.00
.170
5,558,313
5,650,058
$
$
%
4.19
74.43
.28
2.57
2.57
%
4.17
67.46
1.01
9.07
8.26
$
605,612
66,249
66,249
103.98
$
555,152
62,082
68,172
103.46
%
%
$
$
$
11.85
11.81
11.01
6,266,756
$
$
$
9.90
11.77
11.77
5,541,390
$
$
$
$
%
%
%
%
%
%
5,140
4,668
.86
.63
9.37
4,661
3,908
.96
.68
5.59
17
160
11
133
The above summary should be read in connection with the related consolidated financial statements and notes included
elsewhere in this report.
14
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, 2014 and 2013, 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, 2014. 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, 2014 and 2013, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2014, in conformity with accounting principles generally
accepted in the United States of America.
March 30, 2015
Auburn Hills, Michigan
15
Consolidated Balance Sheets
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 2014 and 2013
(Dollars in Thousands)
_____________________________________________________________________________________________
ASSETS
Cash and due from banks
Federal funds sold
Cash and cash equivalents
Interest-bearing deposits in other financial institutions
Securities available for sale
Federal Home Loan Bank stock
Loans:
Commercial
Mortgage
Consumer
Total Loans
Allowance for loan losses
Net loans
Premises and equipment
Other real estate held for sale
Deferred Tax Asset
Deposit based intangible
Goodwill
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest bearing deposits
NOW, money market, interest checking
Savings
CDs<$100,000
CDs>$100,000
Brokered
Total deposits
Borrowings
Other liabilities
Total liabilities
SHAREHOLDERS' EQUITY:
Preferred stock - No par value:
Authorized 500,000 shares, Issued and outstanding - none and 11,000 shares
Common stock and additional paid in capital - No par value
Authorized - 18,000,000 shares
Issued and outstanding - 6,266,756 and 5,541,390, shares respectively
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
December 31,
2014
December 31,
2013
$
21,947
-
21,947
$
18,216
3
18,219
5,797
65,832
2,973
433,566
148,984
18,385
600,935
(5,140)
595,795
12,658
3,010
11,498
1,196
3,805
19,274
10
44,388
3,060
359,368
110,663
13,801
483,832
(4,661)
479,171
10,210
1,884
9,933
-
-
5,925
$
743,785
$
572,800
$
95,498
212,565
28,015
134,951
30,316
105,628
606,973
$
72,936
149,123
13,039
140,495
23,159
67,547
466,299
49,846
12,970
669,789
-
61,679
11,804
513
73,996
37,852
3,400
507,551
-
53,621
11,412
216
65,249
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
743,785
$
572,800
See accompanying notes to consolidated financial statements.
16
Consolidated Statements of Operations
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2014, 2013, and 2012
(Dollars in Thousands, Except Per Share Data)
___________________________________________________________________________________________________
INTEREST INCOME:
Interest and fees on loans:
Taxable
Tax-exempt
Interest on securities:
Taxable
Tax-exempt
Other interest income
Total interest income
INTEREST EXPENSE:
Deposits
Borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
OTHER INCOME:
Deposit service fees
Income from loans sold on the secondary market
SBA/USDA loan sale gains
Mortgage servicing income
Net security gains
Other
Total other income
OTHER EXPENSE:
Salaries and employee benefits
Occupancy
Furniture and equipment
Data processing
Advertising
Professional service fees
Loan and deposit
Writedowns and losses on other real estate held for sale
FDIC insurance assessment
Telephone
Nonrecurring transaction related expenses
Other
Total other expenses
Income before income taxes
Provision (benefit of) for income taxes
NET INCOME
Preferred dividend and accretion of discount
For the Years Ended December 31,
2013
2014
2012
$
26,461
30
$
24,295
105
$
23,197
116
962
64
152
27,669
3,218
924
4,142
23,527
1,200
22,327
701
637
757
675
54
288
3,112
10,303
2,129
1,268
1,150
449
1,163
699
280
362
327
2,475
2,005
22,610
2,829
1,129
1,700
-
961
34
128
25,523
3,468
656
4,124
21,399
1,675
19,724
667
1,028
951
790
73
429
3,938
9,351
1,481
1,102
1,071
436
1,069
617
265
385
303
-
2,048
18,128
5,534
(403)
5,937
308
948
27
139
24,427
3,946
657
4,603
19,824
945
18,879
699
1,390
1,176
417
-
361
4,043
8,288
1,372
885
991
376
1,196
877
489
459
233
-
1,591
16,757
6,165
(922)
7,087
629
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
$
1,700
$
5,629
$
6,458
INCOME PER COMMON SHARE:
Basic
Diluted
Cash dividends per share
$
$
$
.30
.30
.225
$
$
$
1.01
1.00
.170
$
$
$
1.51
1.51
.120
See accompanying notes to consolidated financial statements.
17
Consolidated Statement of Comprehensive Income
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2014, 2013, and 2012
(Dollars in Thousands)
_____________________________________________________________________________________________
Net income
Other comprehensive income
Change in securities available for sale:
Unrealized gains (losses) arising during the period
Reclassification adjustment for securities gains included in net income
Tax effect
Unrealized gains (losses) on available for sale securities
Defined benefit pension plans:
Net unrealized actuarial loss on defined benefit pension obligation
Amortization of net loss and settlement cost recognized in income
Tax effect
Changes from defined benefit pension plans
Other comprehensive income (loss), net of tax
For the year ended
December 31,
2013
2014
2012
$
1,700
$
5,937
$
7,087
578
(54)
(178)
346
(74)
-
25
(49)
297
(999)
(73)
364
(708)
-
-
-
-
(708)
907
-
(308)
599
-
-
-
-
599
Total comprehensive income
$
1,997
$
5,229
$
7,686
See accompanying notes to consolidated financial statements.
18
Consolidated Statements of Changes in Shareholders’ Equity
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2014, 2013, and 2012
(Dollars in Thousands)
__________________________________________________________________________________________
Balance, January 1, 2012
3,419,736
$
10,921
$
43,525
$
492
$
325
$
55,263
Shares of
Common
Stock
Preferred
Stock
Series A
Common Stock
and Additional
Paid in Capital
Retained
Earnings
(Accumulated Deficit)
Accumulated
Other
Comprehensive
Income
Total
Net income
Other comprehensive income:
Net unrealized income on
securities available for sale
Total comprehensive income
Stock compensation
Issuance of common stock
Divided on common stock
Purchase of common stock warrants
Dividend on preferred stock
Accretion of preferred stock discount
-
-
2,140,123
-
-
-
-
-
-
-
-
-
-
79
Balance, December 31, 2012
5,559,859
11,000
Net income
Other comprehensive income (loss):
Net unrealized gain on
securities available for sale
Total comprehensive income
Stock compensation
Issuance of common stock
Repurchase of common stock
Dividend on common stock
Dividend on preferred stock
Redemption of Preferred Series A
-
-
37,125
(55,594)
-
-
-
-
-
-
-
-
(11,000)
-
66
11,506
-
(1,300)
-
-
53,797
-
333
-
(509)
-
-
-
7,087
-
-
-
(223)
-
(550)
(79)
6,727
5,937
-
-
-
-
(944)
(308)
-
7,087
599
7,686
66
11,506
(223)
(1,300)
(550)
-
72,448
5,937
(708)
5,229
333
-
(509)
(944)
(308)
(11,000)
599
-
-
-
-
-
-
924
(708)
-
-
-
-
-
-
Balance, December 31, 2013
5,541,390
$
-
$
53,621
$
11,412
$
216
$
65,249
Net income
Other comprehensive income (loss):
Net unrealized gain on
securities available for sale
Actuarial loss on defined benefit
pension obligation
Total comprehensive income
Stock compensation
Issuance of common stock:
Acquisition - Peninsula Financial Corp
Stock option exercise
Restricted stock award vesting
Total issuance of common stock
Repurchase of common stock
Dividend on common stock
-
-
-
-
-
695,361
6,580
37,125
739,066
(13,700)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
429
7,804
(32)
-
7,772
(143)
-
1,700
-
1,700
-
-
-
-
-
-
-
-
-
(1,308)
346
(49)
297
-
-
-
-
-
-
346
-
(49)
1,997
429
-
7,804
(32)
-
7,772
(143)
(1,308)
Balance, December 31, 2014
6,266,756
$
-
$
61,679
$
11,804
$
513
$
73,996
See accompanying notes to consolidated financial statements.
19
Consolidated Statements of Cash Flows
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2014, 2013, and 2012
(Dollars in Thousands)
_____________________________________________________________________________________________
For the year ended December 31,
2013
2014
2012
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Provision for loan losses
Deferred income taxes, net
(Gain) loss on sales/calls of securities
(Gain) on sale of loans sold in the secondary market
Origination of loans held for sale in secondary market
Proceeds from sale of loans in the secondary market
Loss on sale of premises, equipment, and other real estate held for sale
Writedown of other real estate held for sale
Stock compensation
Change in other assets
Change in other liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities:
Net increase in loans
Net decrease in interest-bearing deposits in other financial institutions
Purchase of securities available for sale
Proceeds from maturities, sales, calls or paydowns of securities available for sale
Capital expenditures
Net cash used in Peninsula acquisition
Proceeds from sale of premises, equipment, and other real estate
Redemption of FHLB stock
Net cash (used in) investing activities
Cash Flows from Financing Activities:
Net increase in deposits
Net activity on line of credit
Net proceeds from stock issuance
Repurchase of common stock
Dividend on common stock
Redemption of Series A Preferred Stock
Repurchase of common stock warrants
Dividend on preferred stock
Proceeds from term borrowing
Principal payments on borrowings
Net cash provided by financing activities
Net (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
$
1,700
$
5,937
$
7,087
1,503
1,200
1,129
(54)
(493)
(29,871)
30,364
81
228
429
(4,112)
6,337
8,441
(50,969)
(225)
(8,317)
9,449
(1,433)
(4,484)
912
87
(54,980)
39,724
9,367
-
(143)
(1,308)
-
-
-
3,000
(373)
50,267
3,728
18,219
1,657
1,675
(403)
(73)
(794)
(55,973)
56,767
304
231
333
(710)
350
9,301
(37,853)
-
(15,709)
13,698
(1,497)
-
2,410
-
(38,951)
31,742
2,000
-
(509)
(944)
(11,000)
-
(308)
-
(73)
20,908
(8,742)
26,961
1,547
945
(922)
-
(1,077)
(74,142)
75,219
31
496
66
(61)
788
9,977
(50,351)
-
(15,209)
10,668
(2,098)
-
775
-
(56,215)
29,768
-
11,506
-
(223)
-
(1,300)
(550)
-
(72)
39,129
(7,109)
34,070
Cash and cash equivalents at end of period
$
21,947
$
18,219
$
26,961
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest
Income taxes
Noncash Investing and Financing Activities:
Transfers of Foreclosures from Loans to Other Real Estate Held for Sale
(net of adjustments made through the allowance for loan losses)
$
4,119
100
$
4,157
149
$
4,172
125
588
932
1,352
See accompanying notes to consolidated financial statements.
20
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.
Acquired Loans
Loans acquired with evidence of credit deterioration since inception and for which it is probable that all contractual
payments will not be received are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with
Deteriorated Credit Quality (“ASC 310-30”). These loans are recorded at fair value at the time of acquisition, with no
carryover of the related allowance for loan losses. Fair value of acquired loans is determined using a discounted cash flow
methodology based on assumptions about the amount and timing of principal and interest payments, principal prepayments
and principal defaults and losses, and current market rates. In recording the fair values of acquired impaired loans at
acquisition date, management calculates a non-accretable difference (the credit component of the purchased loans) and an
accretable difference (the yield component of the purchased loans).
Over the life of the acquired loans, we continue to estimate cash flows expected to be collected on pools of loans sharing
common risk characteristics, which are treated in the aggregate when applying various valuation techniques. We evaluate
at each balance sheet date whether the present value of our pools of loans determined using the effective interest rates has
decreased significantly and if so, recognize a provision for loan loss in our consolidated statement of income. For any
significant increases in cash flows expected to be collected, we adjust the amount of the accretable yield recognized on a
prospective basis over the pool’s remaining life.
Performing acquired loans are accounted for under FASB Topic 310-20, Receivables – Nonrefundable Fees and Other
Costs. Performance of certain loans may be monitored and based on management’s assessment of the cash flows and other
facts available, portions of the accretable difference may be delayed or suspended if management deems appropriate. The
Corporation’s policy for determining when to discontinue accruing interest on performing acquired loans and the
subsequent accounting for such loans is essentially the same as the policy for originated loans.
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.
22
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
23
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill and Other Intangible Assets
The excess of the cost of acquired entities over the fair value of identifiable assets acquired less liabilities assumed is
recorded as goodwill. In accordance with FASB ASC 350 (SFAS No. 142, Goodwill and Other Intangible Assets),
amortization of goodwill and indefinite-lived assets is not recorded. However, the recoverability of goodwill and other
intangible assets are annually tested for impairment. The Corporation’s core deposit intangible is currently being
amortized over its estimated useful life, ten years.
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. 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, and unrecognized actuarial gains
and losses in the defined benefit pension plan, arising during the period. These gains and losses for the period are shown as
a component of other comprehensive income. The accumulated gains and losses are reported as a component of equity, net
of any tax effect. At December 31, 2014, the balance in accumulated other comprehensive income consisted of an
unrealized gain on available for sales securities of $.562 million and actuarial losses on the defined benefit pension
obligation of $.049 million.
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, 2014, 2013
and 2012 (dollars in thousands, except per share data):
Year Ended December 31,
2014
2013
2012
Net income
Preferred stock dividends and accretion of discount
Net income available to common shareholders
$
$
$
1,700
-
1,700
5,937
308
5,629
7,087
629
6,458
$
$
$
Weighted average shares outstanding
Effect of dilutive stock options, vesting of restricted stock units,
and common stock warrants outstanding
Diluted weighted average shares outstanding
Income per common share:
Basic
Diluted
5,592,738
5,558,313
4,285,043
61,073
5,653,811
91,745
5,650,058
-
4,285,043
$
$
.30
.30
$
$
1.01
1.00
$
$
1.51
1.51
24
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 May 2014, the Financial Accounting Standards Board (FASB) issued guidance on the recognition of revenue from
contracts with customers. Revenue recognition will depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising
from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting
period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of
initial application. The guidance is effective January 1, 2017 and early adoption is not permitted. The company is currently
evaluating the impact of the new guidance and the method of adoption in the consolidated financial results.
Reclassifications
Certain amounts in the 2013 and 2012 consolidated financial statements have been reclassified to conform to the 2014
presentation.
NOTE 2 – RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $9.519 million were restricted on December 31, 2014 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):
December 31, 2014
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
US Treasury
Corporate
US Agencies
US Agencies - MBS
Obligations of states and political subdivisions
$
5,287
12,558
22,667
13,461
10,930
3
$
116
144
262
685
$
(10)
-
(94)
(35)
(142)
$
5,280
12,674
22,717
13,688
11,473
Total securities available for sale
$
64,903
$
1,210
$
(281)
$
65,832
December 31, 2013
Corporate
US Agencies
US Agencies - MBS
Obligations of states and political subdivisions
$
15,862
15,227
7,078
5,893
$
218
-
281
202
$
(1)
(372)
-
-
$
16,079
14,855
7,359
6,095
Total securities available for sale
$
44,060
$
701
$
(373)
$
44,388
At December 31, 2014 and 2013, the mortgage backed securities portfolio was $13.688 million (20.79%) and $7.359
million (16.58%), respectively, of the securities portfolio. At December 31, 2014, 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, 2014 and 2013 aggregated
by investment category and length of time these individual securities have been in a loss position (dollars in thousands):
Less Than Twelve Months
Gross
Unrealized
Losses
Fair
Value
Over Twelve Months
Gross
Unrealized
Losses
Fair
Value
December 31, 2014
US Treasury
Corporate
US Agencies
US Agencies - MBS
Obligations of states and political subdivisions
$
(10)
-
(9)
(35)
(142)
$
3,958
-
1,494
4,511
386
-
$
-
(85)
-
-
-
$
-
7,411
-
-
Total securities available for sale
$
(196)
$
10,349
$
(85)
$
7,411
December 31, 2013
Corporate
US Agencies
US Agencies - MBS
Obligations of states and political subdivisions
$
(1)
(372)
-
-
$
1,390
14,855
-
-
-
$
-
-
-
-
$
-
-
-
Total securities available for sale
$
(373)
$
16,245
$
-
$
-
There were 17 securities in an unrealized loss position in 2014 and six in 2013. 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
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 3 – SECURITIES AVAILABLE FOR SALE (CONTINUED)
Following is a summary of the proceeds from sales and calls of securities available for sale, as well as gross gains and
losses for the years ended December 31 (dollars in thousands):
Proceeds from sales and calls
Gross gains on sales
Gross (losses) on sales and calls
2014
2013
2012
$
5,200
54
-
$
10,156
73
-
$
2,601
-
-
The carrying value and estimated fair value of securities available for sale at December 31, 2014, by contractual maturity,
are shown below (dollars in thousands):
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Subtotal
US Agencies - MBS
Amortized
Cost
Estimated
Fair Value
$
8,986
28,744
10,129
3,583
51,442
13,461
$
8,824
29,081
10,460
3,779
52,144
13,688
Total
$
64,903
$
65,832
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 10 for information on securities pledged to secure borrowings from
the Federal Home Loan Bank.
NOTE 4 - LOANS
The composition of loans at December 31 is as follows (dollars in thousands):
Commercial real estate
Commercial, financial, and agricultural
One to four family residential real estate
Commercial construction
Consumer
Consumer construction
2014
2013
$
315,387
101,895
139,553
16,284
18,385
9,431
$
268,809
79,655
103,768
10,904
13,801
6,895
Total loans
$
600,935
$
483,832
The Corporation completed the acquisition of Peninsula Financial Corporation on December 5, 2014. The acquired loans
were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (“acquired
impaired”) and loans that do not meet that criteria, which are accounted for under ASC 310-20 (“acquired nonimpaired”).
The acquired impaired loans totaled $10.312 million. The Corporation recorded these loans at fair value taking into
account a number of factors, including remaining life, estimated loss, estimated value of the underlying collateral and net
present values of cash flows. For the period of December 5, 2014 to December 31, 2014, recorded interest compared to
accretable interest on acquired impaired loans was immaterial and no significant payments of principal were recorded.
The table below details the acquired portfolio at acquisition date:
Acquired
Impaired
Acquired
Non-impaired
Acquired
Total
Loans acquired - contractual payments
Nonaccretable difference
Expected cash flows
Accretable yield
Carrying balance at acquisition date
$
$
$
13,290
(2,234)
11,056
(744)
10,312
53,849
(1,575)
52,274
(525)
51,749
$
$
$
67,139
(3,809)
63,330
(1,269)
62,061
27
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
An analysis of the allowance for loan losses for the years ended December 31 is as follows (dollars in thousands):
2014
2013
2012
Balance, January 1
Recoveries on loans previously charged off
Loans charged off
Provision
$
4,661
325
(1,046)
1,200
$
5,218
200
(2,432)
1,675
$
5,251
278
(1,256)
945
Balance, December 31
$
5,140
$
4,661
$
5,218
In 2014, net charge off activity was $.721 million, or .14% of average loans outstanding compared to net charge-offs of
$2.232 million, or .48% of average loans, in the same period in 2013 and $.978 million, or .23% of average loans, in 2012.
During 2014, a provision of $1.200 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, 2014 is as follows (dollars in
thousands):
Allowance for loan loss reserve:
Beginning balance ALLR
Charge-offs
Recoveries
Provision
Ending balance ALLR
Loans:
Ending balance
Ending balance ALLR
Net loans
Ending balance ALLR:
Individually evaluated
Collectively evaluated
Acquired with deteriorated
credit quality
Total
Ending balance Loans:
Individually evaluated
Collectively evaluated
Acquired with deteriorated
credit quality
Total
$
$
$
$
$
$
$
Commercial
real estate
Commercial,
financial and
agricultural
Commercial
construction
One to four
family residential
real estate
1,849
(19)
131
852
2,813
1,378
(663)
78
746
1,539
80
-
50
12
142
Consumer
construction
$
25
-
-
(19)
$
6
516
(290)
22
37
285
Consumer
Unallocated
Total
148
(74)
44
(105)
13
665
-
-
(323)
342
4,661
(1,046)
325
1,200
5,140
$
$
$
$
$
$
$
$
$
$
$
$
$
315,387
(2,813)
312,574
101,895
(1,539)
100,356
16,284
(142)
16,142
139,553
(285)
139,268
9,431
(6)
9,425
18,385
(13)
18,372
-
$
(342)
(342)
$
$
$
600,935
(5,140)
595,795
$
$
$
$
$
$
$
704
2,109
$
492
1,047
$
-
142
$
19
266
-
$
6
1
$
12
-
$
342
$
1,216
3,924
$
-
2,813
$
-
1,539
$
-
142
$
-
285
-
$
6
$
-
13
$
-
342
$
-
5,140
$
1,374
308,661
$
863
100,330
$
-
16,126
$
768
134,908
-
$
9,216
$
72
18,305
-
$
-
$
3,077
587,546
$
5,352
315,387
702
101,895
$
158
16,284
$
$
3,877
139,553
215
9,431
$
8
18,385
$
-
$
-
10,312
600,935
$
Impaired loans, by definition, are individually evaluated.
28
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2013 is as follows (dollars in
thousands):
Commercial
real estate
Commercial,
financial and
agricultural
Commercial
construction
One to four
family residential
real estate
Consumer
construction
Consumer
Unallocated
Total
Allowance for loan loss reserve:
Beginning balance ALLR
Charge-offs
Recoveries
Provision
Ending balance ALLR
Loans:
Ending balance
Ending balance ALLR
Net loans
Ending balance ALLR:
Individually evaluated
Collectively evaluated
Total
Ending balance Loans:
Individually evaluated
Collectively evaluated
Total
$
$
$
$
$
$
980
(141)
26
(349)
516
-
$
-
2
23
25
$
-
$
(120)
22
246
148
$
154
-
-
511
665
5,218
(2,432)
200
1,675
4,661
$
$
$
$
$
$
3,267
(1,539)
92
29
1,849
268,809
(1,849)
266,960
99
1,750
1,849
649
268,160
268,809
692
(632)
56
1,262
1,378
79,655
(1,378)
78,277
125
-
2
(47)
80
10,904
(80)
10,824
891
487
1,378
1,830
77,825
79,655
-
$
80
80
$
$
-
10,904
10,904
$
$
$
$
$
$
$
$
$
$
$
$
$
103,768
(516)
103,252
6,895
(25)
6,870
13,801
(148)
13,653
$
$
$
$
$
$
$
$
$
$
$
$
103
413
516
385
103,383
103,768
-
$
25
25
$
$
-
6,895
6,895
$
$
$
18
130
148
$
42
13,759
13,801
$
-
$
(665)
(665)
$
-
$
665
665
$
$
-
-
$
-
$
$
483,832
(4,661)
479,171
$
$
1,111
3,550
4,661
$
2,906
480,926
483,832
$
Impaired loans, by definition, are individually evaluated.
A breakdown of the allowance for loan losses, the activity for the period, and recorded balances in loans for the year ended
December 31, 2012 is as follows (dollars in thousands):
Commercial
real estate
Commercial,
financial and Commercial
construction
agricultural
One to four
family residential
real estate
Consumer
construction Consumer Unallocated
Total
Allowance for loan loss reserve:
Beginning balance ALLR
Charge-offs
Recoveries
Provision
Ending balance ALLR
Loans:
Ending balance
Ending balance ALLR
Net loans
Ending balance ALLR:
Individually evaluated
Collectively evaluated
Total
Ending balance Loans:
Individually evaluated
Collectively evaluated
Total
$
$
$
$
$
$
2,823
(729)
52
1,121
3,267
1,079
(40)
201
(548)
692
207
(6)
-
(76)
125
1,114
(399)
7
258
980
-
$
-
-
-
$
-
-
$
(82)
18
64
$
-
28
-
-
126
154
5,251
(1,256)
278
945
5,218
$
$
$
$
$
$
$
$
$
$
$
$
244,966
(3,267)
241,699
80,646
(692)
79,954
17,229
(125)
17,104
87,948
(980)
86,968
7,465
-
7,465
$
$
10,923
-
10,923
-
$
(154)
(154)
$
$
$
449,177
(5,218)
443,959
$
$
$
$
$
$
$
$
$
$
$
$
1,662
1,605
3,267
22,910
222,056
244,966
155
537
692
6,070
74,576
80,646
10
115
125
858
16,371
17,229
$
$
$
$
$
$
$
$
112
868
980
796
87,152
87,948
-
$
-
$
-
-
$
-
$
-
-
$
154
154
$
$
-
7,465
7,465
$
$
-
10,923
10,923
$
$
-
-
$
-
$
$
1,939
3,279
5,218
$
30,634
418,543
449,177
$
Impaired loans, by definition, are individually evaluated.
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.
29
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
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.
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.
30
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
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 2014 and 2013, commercial
construction loans of $3.251 million and $2.951 million, respectively, did not receive a specific risk rating. These amounts
represent loans made for land development and unimproved land purchases.
Below is a breakdown of loans by risk category as of December 31, 2014 (dollars in thousands):
(1)
Strong
(2)
Good
(3)
Average
(4)
Acceptable/
Acceptable Watch
(5)
Sp. Mention
(6)
Substandard
(7)
Doubtful
Rating
Unassigned
Total
$
859
$
28,740
$
129,791
$
147,624
$
-
$
8,373
$
-
$
-
$
315,387
3,227
80
297
-
53
4,577
441
1,074
-
-
33,794
2,282
3,207
-
3
57,295
9,324
5,882
-
10
-
-
-
-
-
3,002
906
5,745
-
11
-
-
-
-
-
-
3,251
123,348
9,431
18,308
101,895
16,284
139,553
9,431
18,385
Commercial real estate
Commercial, financial
and agricultural
Commercial construction
One-to-four family
residential real estate
Consumer construction
Consumer
Total loans
$
4,516
$
34,832
$
169,077
$
220,135
$
-
$
18,037
$
-
$
154,338
$
600,935
Below is a breakdown of loans by risk category as of December 31, 2013 (dollars in thousands)
(1)
Strong
(2)
Good
(3)
Average
(4)
Acceptable/
Acceptable Watch
(5)
Sp. Mention
(6)
Substandard
(7)
Doubtful
Rating
Unassigned
Total
$
1,502
$
23,310
$
116,702
$
125,010
$
-
$
2,285
$
-
$
-
$
268,809
3,741
30
251
-
10
4,348
479
3,074
-
-
27,455
2,702
1,275
-
37
39,070
4,340
4,482
-
43
-
-
-
-
-
5,041
402
710
-
30
-
-
-
-
-
-
2,951
93,976
6,895
13,681
79,655
10,904
103,768
6,895
13,801
Commercial real estate
Commercial, financial
and agricultural
Commercial construction
One-to-four family
residential real estate
Consumer construction
Consumer
Total loans
$
5,534
$
31,211
$
148,171
$
172,945
$
-
$
8,468
$
-
$
117,503
$
483,832
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
$.130 million for the year ended December 31, 2014. For the year ended December 31, 2013, there was no interest
recorded during impairment and that which would have been recognized was $.228 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
31
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
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.
Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date with no
carryover of the related allowance for loan losses. In determining the estimated fair value of purchased loans, management
considers a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated loss
ratios, estimated value of the underlying collateral, net present value of cash flows expected to be received, among others.
Purchased loans are accounted for in accordance with guidance for certain loans acquired in a transfer (ASC 310-30), when
the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer
will not collect all contractually required principal and interest payments. The difference between contractually required
payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference.
Subsequent decreases to the expected cash flows will general result in a provision for loan losses. Subsequent increase in
expected cash flows will results in a reversal of the provision for loan losses to the extent of prior charges and then an
adjustment to accretable yield, which would have a positive impact on interest income. The ASC 310-30 mark on impaired
loans totaled $2.978 million. The accretable yield in this impaired loans was estimated at $.744 million. The Corporation
recorded no accretable yield of the loan mark in 2014.
The following table reflects the contractually required payments receivable, cash flows expected to be collected, and fair
value of the credit impaired Peninsula loans at acquisition date:
$
$
13,290
(2,234)
11,056
(744)
10,312
Contractually required payments including interest
Less: nonaccretable difference
Cash flows expected to be collected
Less: accretable yield
Fair value of credit impaired loans acquired
32
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
The following is a summary of impaired loans and their effect on interest income (dollars in thousands):
Nonaccrual
Basis
Accrual
Basis
Average
Investment
Related
Valuation Reserve
Interest Income
Recognized
During Impairment
Interest Income
on
Accrual Basis
December 31, 2014
With no valuation reserve:
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
With a valuation reserve:
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
Total:
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
Total
December 31, 2013
With no valuation reserve:
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
With a valuation reserve:
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
Total:
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
Total
$
632
74
-
1,844
274
-
$
227
774
-
114
-
-
$
5,352
702
158
3,877
215
8
-
$
-
-
-
-
-
$
532
685
11
656
15
1
-
$
-
-
-
-
-
-
$
-
-
-
-
-
7
$
27
-
25
-
1
$
229
1,109
-
116
-
-
$
227
484
-
9
-
-
$
18
45
-
7
-
-
$
$
$
$
$
-
$
-
-
-
-
-
-
$
-
-
-
-
-
$
-
227
484
-
9
-
-
720
859
848
-
1,958
274
-
3,939
5,352
702
158
3,877
215
8
10,312
761
1,794
11
772
15
1
3,354
$
$
$
$
$
$
513
59
-
361
-
-
$
59
752
-
250
-
30
572
811
-
611
-
30
2,024
-
$
-
-
-
-
-
-
$
-
-
-
-
-
-
$
-
-
-
-
-
$
-
$
3,045
505
626
625
-
2
-
$
-
-
-
-
-
-
$
-
-
-
-
-
$
153
13
3
16
-
-
$
71
834
-
261
-
30
$
14
265
-
78
-
13
-
$
-
-
-
-
-
5
$
18
-
20
-
-
$
$
$
$
3,116
1,339
626
886
-
32
5,999
14
265
-
78
-
13
370
-
$
-
-
-
-
-
$
-
$
$
$
$
25
72
-
32
-
1
130
158
31
3
36
-
-
228
A summary of past due loans at December 31, is as follows (dollars in thousands):
30-89 days
Past Due
(accruing)
2014
90+ days
Past Due/
Nonaccrual
$
1,857
104
-
1,412
38
88
$
859
848
-
1,958
274
-
Total
$
2,716
952
-
3,370
312
88
30-89 days
Past Due
(accruing)
-
$
4
20
201
-
14
2013
90+ days
Past Due/
Nonaccrual
$
572
811
-
611
-
30
Total
$
572
815
20
812
-
44
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
Total past due loans
$
3,499
$
3,939
$
7,438
$
239
$
2,024
$
2,263
33
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
The Corporation acquired loans 30-89 days past due and nonaccrual loans with December 31, 2014 balance of $2.908
million and $2.281 million, respectively.
A roll-forward of nonaccrual activity during the year ended December 31, 2014 (dollars in thousands):
Commercial
Real Estate
Commercial,
Financial and
Agricultural
Commercial
Construction
One to four
family residential
real estate
Consumer
Construction
Consumer
Total
NONACCRUAL
Beginning balance
$
572
$
811
$
-
$
611
$
-
$
30
$
2,024
Principal payments
Charge-offs
Advances
Transfers to OREO
Transfers to accruing
Transfers from accruing
Acquired impaired loans
Other
(104)
(18)
-
(233)
-
-
632
10
(692)
(435)
-
-
(10)
1,167
-
7
-
-
-
-
-
-
-
-
(35)
(206)
-
(357)
(127)
685
1,375
12
-
-
-
-
-
-
274
-
(4)
(32)
-
-
-
6
-
-
(835)
(691)
-
(590)
(137)
1,858
2,281
29
Ending balance
$
859
$
848
$
-
$
1,958
$
274
$
-
$
3,939
A roll-forward of nonaccrual activity during the year ended December 31, 2013 (dollars in thousands):
Commercial
Real Estate
Commercial,
Financial and
Agricultural
Commercial
Construction
One to four
family residential
real estate
Consumer
Construction
Consumer
Total
NONACCRUAL
Beginning balance
$
3,071
$
436
$
675
$
505
$
-
$
-
$
4,687
Principal payments
Charge-offs
Advances
Transfers to OREO
Transfers to accruing
Transfers from accruing
Other
(1,478)
(1,304)
-
(208)
-
443
48
(319)
(616)
-
(37)
-
1,346
1
(100)
-
-
(580)
-
-
5
(88)
(141)
-
(107)
-
434
8
-
-
-
-
-
-
-
(2)
(4)
-
-
-
36
-
(1,987)
(2,065)
-
(932)
-
2,259
62
Ending balance
$
572
$
811
$
-
$
611
$
-
$
30
$
2,024
Loans accounted for under ASC 310-30 accrue interest as any nonpayment of contractual principal or interest is considered
in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period loan loss
provision or prospective yield adjustments.
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.
34
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
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):
2014
2013
Number of
Modifications
Recorded
Investment
Number of
Modifications
Recorded
Investment
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
Total troubled debt restructurings
-
-
-
-
-
-
-
-
$
-
-
-
-
-
$
-
-
1
-
-
-
-
1
-
$
528
-
-
-
-
$
528
A roll-forward of troubled debt restructuring during the year ended December 31, 2014 (dollars in thousands):
Commercial
Real Estate
Commercial,
Financial and
Agricultural
Commercial
Construction
One to four
family residential
real estate
Consumer and
Consumer
Construction
Total
ACCRUING
Beginning balance
$
3,520
$
1,186
$
858
$
99
$
-
$
5,663
Principal payments
Charge-offs
Advances
New restructured
Transferred out of TDR
Transfers to nonaccrual
Ending Balance
NONACCRUAL
(2,513)
-
-
-
-
-
-
-
-
-
-
-
(6)
-
-
-
-
-
(4)
(37)
-
-
91
(89)
-
-
-
-
-
-
(2,523)
(37)
-
-
91
(89)
$
1,007
$
1,186
$
852
$
60
$
-
$
3,105
Beginning balance
$
-
$
523
$
-
$
91
$
-
$
614
Principal payments
Charge-offs
Advances
New restructured
Transfers to foreclosed properties
Transfers from accruing
Ending Balance
TOTALS
-
-
-
-
-
-
(319)
(204)
-
-
-
-
-
-
-
-
-
-
-
(37)
-
-
(143)
89
-
-
-
-
-
-
(319)
(241)
-
-
(143)
89
$
-
$
-
$
-
$
-
$
-
$
-
Beginning balance
$
3,520
$
1,709
$
858
$
190
$
-
$
6,277
Principal payments
Charge-offs
Advances
New restructured
Transfers out of TDRs
Tansfers to nonaccrual
Transfers to foreclosed properties
Transfers from accruing
(2,513)
-
-
-
-
-
-
-
(319)
(204)
-
-
-
-
-
-
(6)
-
-
-
-
-
-
-
(4)
(74)
-
-
91
(89)
(143)
89
-
-
-
-
-
-
-
-
(2,842)
(278)
-
-
91
(89)
(143)
89
Ending Balance
$
1,007
$
1,186
$
852
$
60
$
-
$
3,105
35
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
A roll-forward of troubled debt restructuring during the year ended December 31, 2013 (dollars in thousands):
Commercial
Real Estate
Commercial,
Financial and
Agricultural
Commercial
Construction
One to four
family residential
real estate
Consumer and
Consumer
Construction
Total
ACCRUING
Beginning balance
$
3,611
$
1,221
$
858
$
102
$
-
$
5,792
Principal payments
Charge-offs
Advances
New restructured
Transferred out of TDR
Transfers to nonaccrual
Ending Balance
NONACCRUAL
Beginning balance
Principal payments
Charge-offs
Advances
New restructured
Transfers to foreclosed properties
Transfers from accruing
Ending Balance
TOTALS
(91)
-
-
-
-
-
(460)
-
-
953
-
(528)
(3)
-
-
-
-
-
-
-
-
-
-
-
(554)
-
-
953
-
(528)
$
3,520
$
1,186
$
858
$
99
$
-
$
5,663
$
2,162
$
-
(1,376)
(793)
-
7
-
-
(5)
-
-
528
-
-
-
$
-
-
-
-
-
-
-
$
102
$
-
$
2,264
(15)
-
-
4
-
-
-
-
-
-
-
-
(1,396)
(793)
-
539
-
-
$
-
$
523
$
-
$
91
$
-
$
614
Beginning balance
$
5,773
$
1,221
$
858
$
204
$
-
$
8,056
Principal payments
Charge-offs
Advances
New restructured
Transfers out of TDRs
Tansfers to nonaccrual
Transfers to foreclosed properties
Transfers from accruing
(1,467)
(793)
-
7
-
-
-
-
(465)
-
-
1,481
-
(528)
-
-
-
-
-
-
-
-
-
-
(18)
-
-
4
-
-
-
-
-
-
-
-
-
-
-
-
(1,950)
(793)
-
1,492
-
(528)
-
-
Ending Balance
$
3,520
$
1,709
$
858
$
190
$
-
$
6,277
The above includes loans with revolving privileges which are scoped out of 310-30 and certain loans which the Corporation
elected to treat under the cost recovery method of accounting.
Loans were recorded at fair value in accordance with FASB ASC 805, Business Combinations. No allowance for loan
losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates
assumptions regarding credit. Loans acquired are recorded at fair value in accordance with the fair value methodology
prescribed in FASB ASC 820. The fair value estimated associated with the loans include estimates related to expected
prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.
36
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
Insider Loans
The Bank, in the ordinary course of business, grants loans to the Corporation’s executive officers and directors, including
their families and firms in which they are principal owners. Activity in such loans is summarized below (dollars in
thousands):
Loans outstanding, January 1
New loans
Net activity on revolving lines of credit
Repayment
2014
2013
$
9,043
33
1,390
(1,677)
$
11,297
496
(266)
(2,484)
Loans outstanding, December 31
$
8,789
$
9,043
There were no loans to related-parties classified substandard as of December 31, 2014 and 2013. In addition to the
outstanding balances above, there were unfunded commitments of $.372 million to related parties at December 31, 2014.
NOTE 5 – PREMISES AND EQUIPMENT
Details of premises and equipment at December 31 are as follows (dollars in thousands):
Land
Buildings and improvements
Furniture, fixtures, and equipment
Construction in progress
Total cost basis
Less - accumulated depreciation
2014
2013
$
1,812
15,069
7,892
87
24,860
12,202
$
1,781
12,911
6,833
145
21,670
11,460
Net book value
$
12,658
$
10,210
Depreciation of premises and equipment charged to operating expenses amounted to $1.337 million in 2014, $1.231 million
in 2013, and $1.092 million in 2012.
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):
Balance, January 1
Other real estate transferred from loans due to foreclosure
Other real estate acquired, net of purchase accounting
Other real estate sold
Writedowns of other real estate held for sale
Loss on sale of other real estate held for sale
2014
2013
$
1,884
588
1,193
(375)
(228)
(52)
$
3,212
932
-
(1,996)
(231)
(33)
Balance, December 31
$
3,010
$
1,884
37
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 7 – DEPOSITS
The distribution of deposits at December 31 is as follows (dollars in thousands):
Noninterest bearing
NOW, money market, checking
Savings
CDs <$100,000
CDs >$100,000
Brokered
Total deposits
2014
2013
$
95,498
212,565
28,015
134,951
30,316
105,628
$
72,936
149,123
13,039
140,495
23,159
67,547
$
606,973
$
466,299
The aggregate amount of deposits that meet or exceed the $250,000 FDIC insurance limit was $6.610 million and $5.056
million at December 31, 2014 and 2013, respectively.
Maturities of non-brokered time deposits outstanding at December 31, 2014 are as follows (dollars in thousands):
2015
2016
2017
2018
2019
Thereafter
Total
$
91,426
58,464
10,733
3,875
650
119
$
165,267
NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS
During the fourth quarter, the Corporation recorded $3.805 million of goodwill and $1.206 million of deposit based
intangible assets associated with the acquisition of Peninsula.
The excess of the cost of acquired entities over the fair value of identifiable assets acquired less liabilities assumed is
recorded as goodwill. In accordance with FASB ASC 350 (SFAS No. 142, Goodwill and Other Intangible Assets),
amortization of goodwill and indefinite-lived assets is not recorded. However, the recoverability of goodwill and other
intangible assets are annually tested for impairment. Intangible assets, including core deposits and customer business
relationships, are amortized primarily on an accelerated cash flow basis over their estimated useful lives. The Corporation
is currently amortizing the deposit based intangible over a ten-year estimated life.
The deposit based intangible is reported net of accumulated amortization at $1.196 million at December 31, 2014.
Amortization expense in 2014 is $.010 million. Amortization expense for the next five years is expected to be at $.121
million per year.
38
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 9 – 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, 2014, the Corporation had obligations to service $224 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 10.75% and a discount rate of 8.90% for December 31, 2014.
The following summarizes the fair value of the mortgage servicing rights capitalized and amortized. There was no
valuation allowance required (dollars in thousands):
December 31,
December 31,
2014
2013
Balance at beginning of period
Additions from loans sold with servicing retained
MSRs acquired in Peninsula transaction
Amortization
$
1,129
636
539
(310)
$
638
675
-
(184)
Book value of MSRs at end of period
$
1,994
$
1,129
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, 2014
and December 31, 2013 was approximately $46 million and $59 million. The Corporation valued these servicing rights at
$.198 million as of December 31, 2014 and $.200 million at December 31, 2013. This valuation was established in
consideration of the discounted cash flow of expected servicing income over the life of the loans.
NOTE 10 – BORROWINGS
Borrowings consist of the following at December 31 (dollars in thousands):
Federal Home Loan Bank fixed rate advances at December 31, 2014 with a weighted average
$
35,000
$
35,000
2014
2013
rate of 1.68% maturing in 2016, 2018 and 2019
Correspondent bank line of credit - holding company
Bank line of credit - wholly owned asset based lending subsidiary
Correspondent bank term note, current floor rate of 4%, maturing December 28, 2017
USDA Rural Development, fixed-rate note payable, maturing August 24, 2024
interest payable at 1%
8,000
3,367
2,700
2,000
-
-
779
852
$
49,846
$
37,852
The Federal Home Loan Bank borrowings are collateralized at December 31, 2014 by the following: a collateral agreement
on the Corporation’s one to four family residential real estate loans with a book value of approximately $40.582 million;
mortgage related and municipal securities with an amortized cost and estimated fair value of $3.983 million and $4.181
million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $2.973 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, 2014.
39
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 10 – BORROWINGS (CONTINUED)
The USDA Rural Development borrowing is collateralized by loans totaling $.121 million originated and held by the
Corporation’s wholly owned subsidiary, First Rural Relending, and an assignment of a demand deposit account in the
amount of $.724 million, and guaranteed by the Corporation.
The Corporation currently has two banking borrowing relationships. The first relationship consists of a non-revolving line
of credit and a term note. The line of credit bears interest at 90-day LIBOR plus 2.75%, with a floor rate of 4.00% and has
an initial term that expires on December 28, 2017. The term note bears the same interest and matures on March 22, 2017
and requires quarterly principal payments of $100,000 beginning June 30, 2014. This relationship is secured by all of the
outstanding mBank stock. The second borrowing relationship consists of a $10 million revolving line of credit, which can
be increased to $25 million upon request, used to support asset based lending activities at a wholly-owned subsidiary that
currently bears interest at 90-day LIBOR plus 2.75% and has an initial term that expires on September 10, 2016. This line
of credit it secured by an assignment of all collateral securing the outstanding loan balances of our asset based lending
subsidiary.
Maturities and principal payments of borrowings outstanding at December 31, 2014 are as follows (dollars in thousands):
2015
2016
2017
2018
2019
Thereafter
Total
$
474
18,842
9,976
10,077
10,077
400
$
49,846
NOTE 11 – INCOME TAXES
The components of the federal income tax provision (credit) for the years ended December 31 are as follows (dollars in
thousands):
Current tax expense (benefit)
Change in valuation allowance
Deferred tax expense (benefit)
2014
2013
2012
$
-
-
1,129
$
-
(2,250)
1,847
$
-
(3,000)
2,078
Provision for (benefit of) income taxes
$
1,129
$
(403)
$
(922)
A summary of the source of differences between income taxes at the federal statutory rate and the provision (credit) for
income taxes for the years ended December 31 is as follows (dollars in thousands):
Tax expense at statutory rate
Increase (decrease) in taxes resulting from:
Tax-exempt interest
Change in valuation allowance
Nondeductible transaction expenses
Other
2014
2013
2012
$
962
$
1,882
$
2,096
(25)
-
176
16
(47)
(2,250)
-
12
(49)
(3,000)
-
31
Provision for (benefit of) income taxes, as reported
$
1,129
$
(403)
$
(922)
40
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 11 – 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):
Deferred tax assets:
NOL carryforward
Allowance for loan losses
Alternative Minimum Tax Credit
OREO Tax basis > book basis
Tax credit carryovers
Deferred compensation
Pension liability
Stock compensation
Depreciation
Purchase accounting adjustments
Other
Total deferred tax assets
Valuation allowance
Deferred tax liabilities:
Core deposit premium
FHLB stock dividend
Unrealized gain on securities
Mortgage servicing rights
Other
Total deferred tax liabilities
2014
2013
$
5,500
2,194
1,586
474
767
576
475
247
(88)
2,095
33
$
6,737
1,585
1,463
138
672
152
-
267
157
-
188
13,859
11,359
$
(760)
$
(760)
(407)
(103)
(363)
(658)
(70)
(1,601)
-
(103)
(111)
(452)
-
(666)
Net deferred tax asset
$
11,498
$
9,933
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, 2014 had a net operating loss and tax credit
carryforwards for tax purposes of approximately $16.2 million, and $2.353 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 $10.5 million, and the majority 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 expense of approximately $1.129 million for the year ended December 31, 2014
and a deferred tax benefit of $.403 million for the year ended December 31, 2013. The valuation allowance at December
31, 2014 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.
In connection with the Peninsula acquisition in December 2014, the Corporation acquired $.933 million of NOL
carryforward and approximately $.217 million of various tax credits, which it expects to utilize prior to expiration.
41
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 12 – OPERATING LEASES
The Corporation currently maintains seven 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 and again
in 2014 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.
With the acquisition, the Corporation acquired three additional operating leases for office locations. The first, for an
additional location in Marquette, was executed in February 2011 with a term of five years. The second, for the location in
Negaunee was executed in September 2012 with an initial term of five years, with option to renew for one additional term
of five years. The final, for a location in Ishpeming was executed in April 2008 for an initial term of five years. This lease
was renewed in May 2013 for an additional five years.
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):
2015
2016
2017
2018
2019
Thereafter
Total
$
724
680
571
455
458
4,232
$
7,120
Rent expense for all operating leases amounted to $.885 million in 2014, $.280 million in 2013, and $.269 million in 2012.
NOTE 13 – 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 $214,000, $198,000, and $161,000 in 2014,
2013, and 2012, respectively.
42
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 14 – DEFINED BENEFIT PENSION PLAN
The Corporation acquired the Peninsula Financial Corporation noncontributory defined benefit pension plan. Effective
December 31, 2005, the plan was amended to freeze participation in the plan; therefore, no additional employees are
eligible to become participants in the plan. The benefits are based on years of service and the employee’s compensation at
the time of retirement. The Plan was amended effective December 31, 2010, to freeze benefit accrual for all participants.
Expected contributions to the Plan in 2015 are $.114 million. The anticipated distributions over the next five years and
thereafter are detailed in the table below (dollars in thousands):
2015
2016
2017
2018
2019
Thereafter
Total
$
132,026
130,003
127,902
128,608
126,361
701,944
1,346,844
$
The following table sets forth the plan’s funded status and amounts recognized in the Corporation’s balance sheets and the
activity from date of acquisition (dollars in thousands):
2014
$
3,229
-
9
52
-
3,290
2,118
(11)
-
-
2,107
(1,183)
-
$
(1,183)
Change in benefit obligation:
Benefit obligation when acquired
Service cost
Interest cost
Actuarial gain (loss)
Benefits paid
Benefit (asset) obligation at end of year
Change in plan assets:
Fair value of plan assets when acquired
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status
Unrecognized net actuarial loss
Prepaid (accrued) pension expense, included with other
assets or liabilities
The accumulated benefit obligation at December 31, 2014 was $3.290 million.
Net pension costs included in the Corporation’s results of operations was immaterial.
43
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 14 – DEFINED BENEFIT PENSION PLAN (CONTINUED)
Assumptions in the actuarial valuation are:
Weighted average discount rate
Rate of increase in future compensation levels
Expected long-term rate of return on plan assets
2014
3.98%
N/A
8.00%
The expected long-term rate of return on plan assets reflects management’s expectations of long-term average rates of
return on funds invested to provide for benefits included in the projected benefit obligation. The expected return is based
on the outlook for inflation, fixed income returns and equity returns, while also considering historical returns, asset
allocation and investment strategy. The discount rate assumption is based on investment yields available on AA rated long-
term corporate bonds.
The primary investment objective is to maximize growth of the pension plan assets to meet the projected obligations to the
beneficiaries over a long period of time, and to do so in a manner that is consistent with the Corporation’s risk tolerance.
The intention of the plan sponsor is to invest the plan assets in mutual funds with the following asset allocation:
Target
Allocation
Actual
Allocation
Equity securities
Fixed income securities
50% to 70 %
30% to 50%
60%
40%
NOTE 15 – 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,
2014 and 2013, for vested benefits under this plan, was $.362 million and $.447 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 $1.572 million and $1.506 million at December 31, 2014 and
2013, respectively. Deferred compensation expense for the plan was $16,000, $25,000, and $30,000 for 2014, 2013, and
2012, respectively.
The Peninsula Financial Corporation, acquired by the Corporation in December 2014, also had a deferred compensation
plan, which was similar in nature to the Corporation’s discontinued plan. The liability for this plan as of 2014 year end was
$1.340 million and the bank owned life insurance policy as a cash surrender value of $1.666 million. This Plan was also
discontinued by the Corporation and will not apply to future employees or directors of the Corporation.
44
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 16 – 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, 2014, the Corporation is well capitalized.
Regulatory guidelines require bank holding companies to maintain a minimum ratio of qualifying total capital to risk-
weighted assets of 8.0%, of which at least 4.0% must be in the form of Tier 1 Capital. Guidelines also mandate a minimum
tangible Tier 1 leverage ratio of 3.0% for strong bank holding companies. For all other bank holding companies, the
minimum tangible Tier 1 leverage ratio is 4.0%. In addition, regulatory guidelines continue to consider the tangible Tier 1
leverage ratio in evaluating proposals for expansion or new activities.
Effective January 1, 2015, the Corporation will be subject to new capital requirements due to the Basel III regulation,
including:
(cid:2) A new minimum ratio of Common Equity Tier I Capital to risk-weighted assets of 4.5%;
(cid:2) An increase in the minimum required amount of Additional Tier 1 Capital to 6% of risk-weighted assets;
(cid:2) A continuation of the current minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-
weighted assets; and
(cid:2) A minimum leverage ratio of Tier I Capital to total assets equal to 4% in all circumstances.
In order to be “well-capitalized” under the new guidelines, a depository institution must maintain a Common Equity Tier 1
Capital ratio of 6.5% or more; an Additional Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10% or more; and a
leverage ratio of 5% or more.
The Corporation’s and the Bank’s actual capital and ratios compared to generally applicable regulatory requirements as of
December 31, 2014 are as follows (dollars in thousands):
Total capital to risk
weighted assets:
Consolidated
mBank
Tier 1 capital to
risk weighted assets:
Consolidated
mBank
Tier 1 capital to
average assets:
Consolidated
mBank
Actual
Amount
Ratio
Adequacy Purposes
Amount
Ratio
Well-Capitalized
Amount
Ratio
$
$
67,427
70,320
11.1% >
11.8% >
$
$
48,717
47,611
> 8.0% >
> 8.0% >
$
$
60,896
59,513
10.0%
10.0%
$
$
62,287
65,345
10.2% >
11.0% >
$
$
36,538
35,708
> 6.0% >
> 6.0% >
$
$
36,538
35,708
6.0%
6.0%
$
$
62,287
65,355
8.6% >
9.1% >
$
$
29,065
28,680
> 4.0% >
> 4.0% >
$
$
36,332
35,850
5.0%
5.0%
45
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 16 – REGULATORY MATTERS (CONTINUED)
The Corporation’s and the Bank’s actual capital and ratios compared to generally applicable regulatory requirements as of
December 31, 2013 are as follows (dollars in thousands):
Actual
Amount
Ratio
Adequacy Purposes
Amount
Ratio
Action Provisions
Amount
Ratio
Total capital to risk
weighted assets:
Consolidated
mBank
Tier 1 capital to
risk weighted assets:
Consolidated
mBank
Tier 1 capital to
average assets:
Consolidated
mBank
$
$
62,581
60,537
12.8%
12.4%
>
>
$
$
39,153
38,944
> 8.0%
> 8.0%
N/A
$
48,680
>
N/A
10.0%
$
$
57,920
55,947
11.8%
11.5%
>
>
$
$
19,576
19,472
> 4.0%
> 4.0%
N/A
$
29,208
>
N/A
6.0%
$
$
57,920
55,947
10.3%
10.0%
>
>
$
$
22,469
22,352
> 4.0%
> 4.0%
N/A
$
27,940
>
N/A
5.0%
NOTE 17 – 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. Awards are made at the discretion of management.
Compensation cost equal to the fair value of the award is recognized over the vesting period.
Restricted Stock Awards
The Corporation’s restricted stock awards require certain service-based or performance requirements and have a vesting
period of four years. Compensation expense is recognized on a straight-line basis over the vesting period. Shares are
subject to certain restrictions and risk of forfeiture by the participants.
The Corporation, in August 2012 and March 2014, granted Restricted Stock Units (“RSUs”) to members of the Board of
Directors and Management. In August 2012, 148,500 RSUs were granted at a market value of $7.91 and will vest equally
over a four year term. In exchange for the grant of these RSUs various previously issued stock option awards were
surrendered. In March 2014, 52,774 RSUs were granted at a market value of $12.95, also vesting equally over a four year
term. The RSUs were awarded at no cost to the employee. Compensation cost to be recognized over the four –year
vesting periods, is $1.175 million and $.683 million, respectively. On August 31, 2013 and 2014, the Corporation issued
37,125 shares and 37,125 shares of its common stock for vested RSUs, respectively.
A summary of changes in our nonvested shares for the year follows:
Number
Outstanding
Weighted Average
Grant Date
Fair Value
Nonvested balance at January 1, 2014
Granted during the year
Vested during the year
Nonvested balance at December 31, 2014
111,375
52,774
(37,125)
127,024
46
$
$
7.91
12.95
7.91
10.07
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 17 – STOCK COMPENSATION PLANS (CONTINUED)
As of December 31, 2014, unrecognized compensation expense allotted to the Bank was $1.038 million.
The Corporation also has outstanding stock options. A summary of stock option transactions for the years ended December
31 is as follows:
Outstanding shares at beginning of year
Granted during the year
Exercised during the year
Expired during the year
2014
2013
237,152
-
(70,502)
(146,650)
242,152
-
-
(5,000)
Outstanding shares at end of year
20,000
237,152
Exercisable shares at end of year
4,000
124,861
Weighted average exercise price per share
at end of year
$
11.33
$
9.88
Shares available for grant at end of year
-
-
Following is a summary of the options outstanding and exercisable at December 31, 2014:
Exercise
Price
Outstanding
Number
Exercisable
Unvested Options
Weighted Average
Remaining
Contractual Life-Years
$
$
10.65
12.00
10,000
10,000
20,000
2,000
2,000
4,000
8,000
8,000
16,000
.54
.96
.75
NOTE 18 – SHAREHOLDERS’ EQUITY
In December 2014, the Corporation consummated the previously announced acquisition of Peninsula Financial Corporation
with a combination of cash and MFNC stock. Peninsula Financial Corporation was a bank holding company with The
Peninsula Bank as its wholly-owned subsidiary. Peninsula was headquartered in Ishpeming, Michigan with six branch
locations. The purchase price of the acquisition was $12.420 million with a combination of cash and MFNC common
stock. MFNC issued 695,361 shares of its common stock and an increase shareholder equity of $7.804 million in recording
this transaction, after the reduction for issuance costs of $.130 million. The Corporation recorded assets with a fair value of
$112.766 million, including loans of $67.139 million, as well as $100.950 million of deposits.
The Corporation currently has a share repurchase program. The program is conducted under authorizations from time to
time by the Board of Directors. The Corporation repurchased 13,700 shares in 2014 and 55,594 shares in 2013. The share
repurchases were conducted under Board authorizations made and publically announced of $600,000 on February 27, 2013
and an additional $600,000 on December 17, 2013. Neither of these authorizations has an expiration date. In 2014, MFNC
paid cash dividends of $.225 per share which decreased equity by $1.308 million.
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.
47
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 - 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:
Variable rate
Fixed rate
Standby letters of credit - Variable rate
Credit card commitments - Fixed rate
2014
2013
$
44,134
24,191
6,072
3,267
$
36,039
15,070
5,077
3,152
$
77,664
$
59,338
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, 2014, 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, 2014 represents $107.835 million, or 26.47%, compared to $100.333
million, or 27.92%, of the commercial loan portfolio on December 31, 2013. 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.
48
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 20 - 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.
49
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 20 - FAIR VALUE (CONTINUED)
The following table presents information for financial instruments at December 31 (dollars in thousands):
Financial assets:
Cash and cash equivalents
Interest-bearing deposits
Securities available for sale
Federal Home Loan Bank stock
Net loans
Accrued interest receivable
Total financial assets
Financial liabilities:
Deposits
Borrowings
Accrued interest payable
Total financial liabilties
Level in Fair
Value Hierarchy
Carrying
Amount
Estimated
Fair Value
December 31, 2014
December 31, 2013
Carrying
Amount
Estimated
Fair Value
Level 1
Level 2
Level 2
Level 2
Level 3
Level 3
Level 2
Level 2
Level 3
$
21,947
5,797
65,832
2,973
595,795
1,680
$
21,947
5,797
65,832
2,973
596,429
1,680
$
18,219
10
44,388
3,060
479,171
1,351
$
18,219
10
44,388
3,060
479,538
1,351
$
694,024
$
694,658
$
546,199
$
546,566
$
606,973
49,846
205
$
606,534
50,280
205
$
466,299
37,852
182
$
465,431
37,487
182
$
657,024
$
657,019
$
504,333
$
503,100
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, 2014 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, 2014 and December 31, 2013 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, 2014 or December 31, 2013.
50
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 20 - FAIR VALUE (CONTINUED)
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value
measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The
Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and
considers factors specific to each asset or liability.
The Corporation also has assets that under certain conditions are subject to measurement at fair value on a non-recurring
basis. These assets include loans and other real estate held for sale. The Corporation has estimated the fair values of these
assets using Level 3 inputs, specifically discounted cash flow projections.
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2014
Balance at
December 31, 2014
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Significant
Other Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Total Losses for
Year Ended
December 31, 2014
(dollars in thousands)
Assets
Impaired loans
Other real estate held for sale
$
1,658
3,010
-
$
-
-
$
-
$
1,658
3,010
$
857
280
$
1,137
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2013
Balance at
December 31, 2013
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Losses for
Year Ended
December 31, 2013
(dollars in thousands)
Assets
Impaired loans
Other real estate held for sale
$
2,024
1,884
-
$
-
-
$
-
$
2,024
1,884
$
2,075
265
$
2,340
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).
NOTE 21 – BUSINESS COMBINATIONS
The Corporation completed its acquisition of Peninsula Financial Corporation (“PFC”) and its wholly owned subsidiary,
The Peninsula Bank. PFC had six branch offices and $126 million in assets of December 5, 2014. The results of
operations due to the merger have been included in the Corporation’s results since the acquisition date. The merger was
effected by a combination of cash and the issuance of shares of the Corporation’s common stock to PFC shareholders.
Each share of PFC’s 288,000 shares of common stock was converted into the right to receive 3.64 shares of the
Corporation’s common stock, with cash paid in lieu of fractional shares. PFC shareholders also had the option to receive
cash at $46.13 per share of common stock. The conversion of PFC’s shares resulted in the issuance of 695,361 shares of
the Corporation’s common stock and $4.484 million in total for all shares exchanged for cash.
51
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 21 – BUSINESS COMBINATIONS (CONTINUED)
The table below highlights the allocation of the purchase price:
Purchase Price:
Peninsula shares outstanding at December 5, 2014
Price per share /Cash Price
Aggregate value of Mackinac stock issued,
695,361 shares, at a market value of $11.41 in exch for 190,800 shares
Cash consideration $46.13 for 97,200 shares
Cash for partial shares
Total purchase price
Net assets acquired:
Cash and cash equivalents
Securities available for sale
Federal Home Loan Bank stock
Loans
Premises and equipment
Other real estate owned
Deposit based intangible
Other assets
Total assets
Non-interest bearing deposits
Interest bearing deposits
Total deposits
Other liabilities
Total liabilities
Net assets acquired
Goodwill
288,000
46.13
$
$
7,934
4,484
2
$
6,295
27,768
394
67,139
2,918
1,011
1,206
6,035
112,766
10,250
90,700
100,950
3,201
104,151
$
12,420
8,615
$
3,805
The results of operations for the twelve months ended December 31, 2014, include the operating results of the acquired
assets and assumed liabilities for the 26 days subsequent to the acquisition date. PFC’s results of operations prior to the
acquisition date are not included in the Corporation’s consolidated statement of comprehensive income.
The Corporation recorded merger related expenses of $1.622 million after tax during the twelve months ended December
31, 2014. These expenses were for professional services such as legal, accounting and contractual arrangements for
consulting services and data processing termination fees.
The following table provides the unaudited pro forma information for the results of operations for the twelve months ended
December 31, 2014, as if the acquisition had occurred on January 1. These adjustments reflect the impact of certain
purchase accounting fair value measurements, primarily on the loan and deposit portfolios of PFC. In addition, the merger-
related costs noted above are excluded from the 2014 results of operations, for comparative purposes. Further operating
cost savings are expected along with additional business synergies as a result of the merger which are not presented in the
pro forma amounts. These unaudited pro forma results are presented for illustrative purposes only and are not intended to
represent or be indicative of the actual results of operations of the combined banking organization that would have been
achieved had the merger occurred at the beginning of the period presented, nor are they intended to represent or be
indicative of future results of the Corporation.
2014
2013
$
$
27,952
4,647
7,740
1.22
$
$
26,387
4,733
6,706
1.06
Net interest income
Noninterest income
Net income
Net income per diluted share
52
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 21 – BUSINESS COMBINATIONS (CONTINUED)
In most instances, determining the fair value of the acquired assets and assumed liabilities required the Corporation to
estimate the cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate
rates of interest. The most significant of those determinations is related to the valuation of acquired loans. For such loans,
the excess cash flows expected at merger over the estimated fair value is recognized as interest income over the remaining
lives of the loans. The difference between contractually required payments at merger and the cash flows expected to be
collected at merger reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance
with the applicable accounting guidance for business combinations, there was no carry-over of PFC’s previously
established allowance for loan losses.
The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under
ASC 310-30 (“acquired impaired”) and loans that do not meet the criteria, which are accounted for under ASC 310-20
(“acquired non-impaired”). In addition, the loans are further categorized into different pools based primarily on the type
and purpose of the loan.
53
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 22 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 2014 and 2013
(Dollars in Thousands)
ASSETS
Cash and cash equivalents
Investment in subsidiaries
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Line of Credit
Other borrowing
Other liabilities
Total liabilities
Shareholders' equity:
Preferred stock - no par value:
Authorized 500,000 shares, 11,000 shares issued and outstanding
Common stock and additional paid in capital - no par value
Authorized 18,000,000 shares
Issued and outstanding - 6,266,756 and 5,541,390 shares respectively
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
2014
2013
$
1,693
83,226
5,884
$
1,301
65,881
567
$
90,803
$
67,749
$
8,000
2,700
6,107
16,807
$
2,000
-
500
2,500
-
-
61,679
11,804
513
73,996
53,621
11,412
216
65,249
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
90,803
$
67,749
54
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 22 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
Years Ended December 31, 2014, 2013, and 2012
(Dollars in Thousands)
INCOME:
Interest income
Total income
EXPENSES:
Interest expense on borrowings
Salaries and benefits
Professional service fees
Nonrecurring transaction related expenses
Other
Total expenses
Loss before income taxes and equity in undistributed net
income of subsidiaries
(Benefit of) income taxes
2014
2013
2012
$
-
$
1
$
3
$
-
$
1
$
3
210
609
247
1,284
304
2,654
-
482
208
-
520
-
280
562
-
340
1,210
1,182
(2,654)
(1,209)
(1,179)
(726)
(411)
(393)
Loss before equity in undistributed net income of subsidiaries
(1,928)
(798)
(786)
Equity in undistributed net income of subsidiaries
Net income
Preferred dividend and accretion of discount
3,628
1,700
-
6,735
5,937
308
7,873
7,087
629
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
$
1,700
$
5,629
$
6,458
55
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 22 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2014, 2013, and 2012
(Dollars in Thousands)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net (income) of subsidiaries
Increase in capital from stock compensation
Change in other assets
Change in other liabilities
Net cash provided by (used in) operating activities
Cash Flows from Investing Activities:
Investments in subsidiaries
Net cash paid for acquisition of Peninsula
Net cash (used in) investing activities
Cash Flows from Financing Activities:
Increase on term borrowing
Principal payments on borrowings
Net activity on line of credit
Proceeds from issuance of common stock
Repurchase of common stock
Purchase of common stock warrants
Dividend on common stock
Dividend on preferred stock
Redemption of Series A Preferred Stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
2014
2013
2012
$
1,700
$
5,937
$
7,087
(3,628)
429
(5,664)
8,603
1,440
(4,000)
(4,484)
(8,484)
3,000
(300)
6,000
-
(143)
-
(1,121)
-
-
7,436
392
1,301
(6,735)
333
2,587
(3)
2,119
(3,000)
-
(3,000)
-
-
2,000
-
(509)
-
(944)
(308)
(11,000)
(10,761)
(11,642)
12,943
(7,873)
66
92
(163)
(791)
-
-
-
-
-
-
11,506
-
(1,300)
(223)
(550)
-
9,433
8,642
4,301
Cash and cash equivalents at end of period
$
1,693
$
1,301
$
12,943
56
Selected Financial Data
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
SELECTED FINANCIAL CONDITION DATA:
Total assets
Loans
Securities
Deposits
Borrowings
Common shareholders' equity
Total shareholders' equity
SELECTED OPERATIONS DATA:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net security gains (losses)
Other income
Other expenses
Income (loss) before income taxes
Provision (credit) for income taxes
Net income (loss)
Preferred dividend and accretion of discount
Net income available to common shareholders
PER SHARE DATA:
Earnings (loss) - Basic
Earnings (loss) - Diluted
Cash dividends declared
Book value
Market value - closing price at year end
FINANCIAL RATIOS:
Return on average common equity
Return on average total equity
Return on average assets
Dividend payout ratio
Average equity to average assets
Efficiency ratio
Net interest margin
ASSET QUALITY RATIOS:
Nonperforming loans to total loans
Nonperforming assets to total assets
Allowance for loan losses to total loans
Allowance for loan losses to nonperforming loans
Net charge-offs to average loans
Texas ratio
Years Ended December 31
2014
2013
2012
2011
2010
$
743,785
600,935
65,832
606,973
49,846
73,996
73,996
$
572,800
483,832
44,388
466,299
37,852
65,249
65,249
$
545,980
449,177
43,799
434,557
35,925
61,448
72,448
$
498,311
401,246
38,727
404,789
35,997
44,342
55,263
$
478,696
383,086
33,860
386,779
36,069
43,176
53,882
$
$
$
$
$
27,669
4,142
23,527
1,200
54
3,058
(22,610)
2,829
1,129
1,700
-
1,700
25,523
4,124
21,399
1,675
73
3,865
(18,128)
5,534
(403)
5,937
308
5,629
24,427
4,603
19,824
945
-
4,043
(16,757)
6,165
(922)
7,087
629
6,458
23,072
5,143
17,929
2,300
(1)
3,657
(15,969)
3,316
1,098
2,218
766
1,452
22,840
6,455
16,385
6,500
215
2,580
(16,598)
(3,918)
(3,500)
(418)
742
(1,160)
$
$
$
$
$
$
.30
.30
.225
11.81
11.85
$
1.01
1.00
0.170
11.77
9.90
$
1.51
1.46
0.040
11.05
7.09
$
.42
.41
-
12.97
5.42
$
(.34)
(.34)
-
12.63
4.58
%
2.57
2.57
.28
75.00
10.94
74.43
4.19
%
.66
.93
.86
130.49
.14
9.37
%
%
9.07
8.26
1.01
16.83
12.28
67.46
4.17
.42
.58
.96
230.29
.48
5.59
%
%
12.43
10.26
1.23
2.65
11.95
67.95
4.17
1.04
1.45
1.16
111.33
.23
10.25
%
%
3.30
2.66
.30
N/A
11.15
68.43
4.06
1.99
2.24
1.18
65.69
.94
18.56
%
(2.64)
(2.06)
(.23)
N/A
11.17
72.57
3.66
%
2.76
3.37
1.73
62.61
1.33
26.66
57
Summary Quarterly Financial Information
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in Thousands, Except per Share Data)
BALANCE SHEET
Total loans
Allowance for loan losses
Total loans, net
Total assets
Core deposits
Noncore deposits (1)
Total deposits
Total borrowings
Common shareholder' equity
Total shareholders' equity
Total tangible equity
Total shares outstanding
Weighted average shares outstanding
AVERAGE BALANCE SHEET
Total loans
Allowance for loan losses
Total loans, net
Total assets
Core deposits
Noncore deposits (1)
Total deposits
Total borrowings
Total shareholders' equity
ASSET QUALITY RATIOS
Nonperforming loans/total loans
Nonperforming assets/total assets
Allowance for loan losses/total loans
Allowance for loan losses/nonperforming loans
Net charge-offs/average loans
Texas Ratio (2)
CAPITAL ADEQUACY RATIOS
Tier 1 leverage ratio
Tier 1 capital to risk weighted assets
Total capital to risk weighted assets
Average equity/average assets
Tangible equity/tangible assets
FOR THE QUARTER ENDED
2014
FOR THE QUARTER ENDED
2013
12/31
9/30
6/30
3/31
12/31
9/30
6/30
3/31
$
600,935
(5,140)
595,795
743,785
471,029
135,944
606,973
49,846
73,996
73,996
68,995
6,266,756
5,770,104
$
518,373
(5,279)
513,094
613,943
403,950
87,256
491,206
52,409
67,132
67,132
67,132
5,564,815
5,540,200
$
502,940
(5,097)
497,843
595,869
380,772
103,244
484,016
42,087
66,477
66,477
66,477
5,527,690
5,527,690
$
485,862
(4,883)
480,979
583,592
384,846
90,864
475,710
38,852
65,730
65,730
65,730
5,527,690
5,530,908
$
483,832
(4,661)
479,171
572,800
375,593
90,706
466,299
37,852
65,249
65,249
65,249
5,541,390
5,555,952
$
472,495
(4,959)
467,536
567,917
375,166
86,522
461,688
35,852
63,045
67,045
67,045
5,581,339
5,562,835
$
455,555
(5,177)
450,378
553,501
357,935
89,972
447,907
35,925
62,520
66,520
66,520
5,554,459
5,556,133
$
454,051
(5,037)
449,014
541,896
362,911
62,325
425,236
40,925
62,039
73,039
73,039
5,557,859
5,559,859
$
549,411
(5,674)
543,737
651,935
414,459
107,696
522,155
55,487
67,397
$
509,618
(5,084)
504,534
607,840
400,202
95,512
495,714
35,685
66,558
$
492,923
(4,858)
488,065
581,150
374,935
96,010
470,945
37,901
66,553
$
486,354
(4,776)
481,578
580,717
384,951
90,762
475,713
35,000
65,462
$
479,321
(4,872)
474,449
569,443
375,455
86,175
461,630
37,573
66,906
$
464,324
(5,094)
459,230
560,089
372,375
83,816
456,191
36,449
66,134
$
456,937
(5,180)
451,757
548,455
361,721
78,059
439,780
40,656
67,483
$
449,065
(5,127)
443,938
541,279
366,838
62,336
429,174
36,681
72,238
.66
.93
.86
130.49
.57
9.37
8.57
10.23
11.07
10.34
9.25
.52
0.74
1.02
195.88
N/M
6.27
10.23
11.68
12.68
10.95
10.93
.53
0.77
1.01
192.19
N/M
6.43
10.50
11.86
12.87
11.28
11.16
%
.31
0.63
1.01
327.50
N/M
5.18
%
10.25
11.79
12.79
11.27
11.26
%
.42
.68
.96
230.29
.93
5.59
%
10.31
11.83
12.79
11.75
11.75
%
.91
1.21
1.09
114.98
.50
9.56
%
10.90
12.45
13.47
11.81
11.81
%
.87
1.17
1.14
129.98
(.04)
9.02
%
11.01
12.74
13.85
12.30
12.30
%
.84
1.41
1.11
131.41
.50
9.81
%
12.23
13.98
15.06
13.35
13.35
(1) Noncore deposits include brokered deposits and CDs greater than $100,000
(2) Texas Ratio: Nonperforming Assets Divided by Total Tangible Equity plus Allowance for Loan Losses
58
Summary Quarterly Financial Information
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in Thousands, Except per Share Data)
FOR THE QUARTER ENDED 2014
FOR THE QUARTER ENDED 2013
12/31
9/30
6/30
3/31
12/31
9/30
6/30
3/31
INCOME STATEMENT
Net interest income
Provision for loan losses
Net interest income after provision
Total noninterest income
Total noninterest expense
Income before taxes
Provision for income taxes
Net income
$
6,389
$
5,886
$
5,659
$
5,593
$
5,626
$
5,348
$
5,269
$
5,156
639
5,750
1,003
7,479
(726)
(74)
(652)
187
5,699
768
5,126
1,341
455
886
191
5,468
650
4,898
1,220
414
806
183
5,410
691
5,107
994
334
660
825
4,801
1,191
4,935
1,057
(1,911)
2,968
375
4,973
738
4,359
1,352
456
896
100
5,169
1,251
4,523
1,897
637
1,260
375
4,781
758
4,311
1,228
415
813
Preferred dividend and accretion of discount
Net income available to common shareholders
-
(652)
$
-
886
$
-
806
$
-
660
$
58
2,910
$
50
846
$
63
1,197
$
137
676
$
PER SHARE DATA
Earnings (loss) - basic*
Earnings (loss) - diluted*
Book value
Market value
PROFITABILITY RATIOS
Return on average assets
Return on average common equity
Return on average total equity
Net interest margin
Efficiency ratio
Average loans/average deposits
$
(.13)
$
.16
$
.15
$
.12
$
.52
$
.15
$
.22
$
.12
(.13)
11.81
11.85
.16
12.06
11.30
.15
12.03
12.90
.12
11.89
12.54
.51
11.77
9.90
.15
11.30
9.10
.22
11.26
8.88
.12
11.16
9.21
(.40)
%
.58
%
.56
%
.46
%
2.03
%
.60
%
.88
%
.51
%
(3.84)
(3.84)
4.19
70.27
105.22
5.28
5.28
4.20
73.83
103.03
4.94
4.93
4.18
77.55
104.94
4.09
4.09
4.25
80.57
102.62
18.34
17.26
4.24
66.94
103.83
5.40
5.08
4.12
70.64
101.78
7.69
7.12
4.16
68.02
103.90
4.47
3.79
4.18
72.65
104.63
59
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, 2013 through
December 31, 2014, as reported by NASDAQ.
2014
High
Low
Close
Dividends delcared per share
Book value
2013
High
Low
Close
Dividends delcared per share
Book value
For the Quarter Ended
March 31
June 30
$
15.06
9.86
12.54
.050
11.89
$
14.19
11.35
12.90
.050
12.03
September 30
13.70
$
10.28
11.30
.050
12.06
December 31
12.10
$
9.95
11.85
.075
11.81
$
9.25
7.09
9.04
.04
11.16
$
9.25
8.25
8.88
.04
11.26
$
10.09
8.61
9.05
.04
11.30
$
10.14
8.38
9.90
.05
11.77
The Corporation had approximately 1,600 shareholders of record as of March 30, 2015.
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.
The Bank paid a $3.0 million dividend in 2013 and 2014. The Corporation declared a $.075 dividend per share on its
common stock in the fourth quarter of 2014. There were no sales of unregistered securities in 2014. In 2013, the
Corporation approved a stock buyback program. In 2014, the Corporation repurchased 13,700 shares of its common stock
at a total purchase price of $143,298. During 2013, the Corporation repurchased 55,594 shares of its common stock at a
total purchase price of $509,334.
60
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, 2014. The following information is based on an investment
of $100, on December 31, 2009 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.
61
Forward Looking Statements/Risk Factors
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation intends such forward-
looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995 and is including this statement for purposes of these safe harbor provisions.
Forward-looking statements which are based on certain assumptions and describe future plans, strategies, or expectations of
the Corporation, are generally identifiable by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”,
“project”, or similar expressions. The Corporation’s ability to predict results or the actual effect of future plans or strategies
is inherently uncertain. Factors that could cause actual results to differ from the results in forward-looking statements
include, but are not limited to:
RISK FACTORS
Risks Related to our Lending and Credit Activities
(cid:2) Our business may be adversely affected by conditions in the financial markets and economic conditions generally,
as our borrowers’ ability to repay loans and the value of the collateral securing our loans decline.
(cid:2) Weakness in the markets for residential or commercial real estate, including the secondary residential mortgage
loan markets, could reduce our net income and profitability.
(cid:2) As a community banking organization, the Corporation’s success depends upon local and regional economic
conditions and has different lending risks than larger banks.
We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular
industries and through loan approval and review procedures. We have established an evaluation process designed
to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other
objective information, the classification of loans and the establishment of loan losses is an estimated based on
experience, judgment and expectations regarding borrowers and economic conditions, as well as regulator
judgments. We can make no assurance that our loan loss reserves will be sufficient to absorb future loan losses of
prevent a material adverse effect on its business, profitability or financial condition.
(cid:2) Our allowance for loan losses may be insufficient.
Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans,
identification of additional problem loans, and other factors, both within and outside of our control, may require an
increase in our allowance for loan losses.
Risks Related to Our Operations
(cid:2) We are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon our net interest income, which is the difference between
interest income on interest-earning assets such as loans and securities and interest expense paid on interest-bearing
liabilities such as deposits and borrowed funds. There are many factors which influence interest rates that are
beyond our control, including but not limited to general economic conditions and governmental policy, in
particular, the policies of the FRB.
(cid:2) Changes in our accounting policies or in accounting standards could materially affect how we report our financial
results and condition.
(cid:2) Our controls and procedures may fail or be circumvented.
(cid:2)
Impairment of deferred income tax assets could require charges to earnings, which could result in an adverse
impact on our results of operations.
In assessing the realizability of deferred income tax assets, management considers whether it is more likely than
not that some allowance requires management to evaluate all available evidence, both negative and positive.
Positive evidence necessary to overcome the negative evidence includes whether future taxable income in
sufficient amounts and character within the carry back and carry forward periods is available under the tax law,
including the use of tax planning strategies. When negative evidence (e.g. cumulative losses in recent years,
history of operating loss or tax credit carry forwards expiring unused) exists, more positive evidence than negative
evidence will be necessary. At December 31, 2014, net deferred tax assets are approximately $11.498 million. If
62
Forward Looking Statements/Risk Factors
a valuation allowance becomes necessary with respect to such balance, it could have a material adverse effect on
our business, results of operations and financial condition.
(cid:2) Our information systems may experience an interruption of breach in security.
Risks Related to Legal and Regulatory Compliance
(cid:2) We operate in a highly regulated environment, which could increase our cost structure or have other negative
impacts on our operations.
(cid:2) The full impact of the recently enacted Dodd-Frank Act is currently unknown given that many of the details and
substance of the new laws will be implemented through agency rulemaking.
Among the many requirements if the Dodd-Frank Act for new banking regulations is a requirement for new capital
regulations to be adopted within 18 months. These regulations must be at least as stringent as, and may call for
higher levels of capital than, current regulations.
Strategic Risks
(cid:2) Maintaining or increasing our market share may depend on lowering prices and market acceptance of new
products and services.
(cid:2) Future growth or operating results may require us to raise additional capital but that capital may not be
available.
Reputation Risks
(cid:2) Unauthorized disclosure of sensitive of confidential client or customer information, whether through a breach of
our computer system or otherwise, could severely harm our business.
Liquidity Risks
(cid:2) We could experience an unexpected inability to obtain needed liquidity.
The ability of a financial institution to meet its current financial obligations is a function of its balance sheet
structure, its ability to liquidate assets and its access to alternative sources of funds. We seek to ensure our
funding needs are met by maintaining an appropriate level of liquidity through asset/liability management.
Risks Related to an Investment in Our Common Stock
(cid:2) Limited trading activity for shares of our common stock may contribute to price volatility.
(cid:2) Our securities are not an insured deposit.
(cid:2) You may not receive dividends on your investment in common stock.
Our ability to pay dividends is dependent upon our receipt of dividends from the Bank, which is subject to
regulatory restrictions. Such restrictions, which govern state-chartered banks, generally limit the payment of
dividends on bank stock to the bank’s undivided profits after all payments of all necessary expenses, provided that
the bank’s surplus equals or exceeds its capital.
These risks and uncertainties should be considered in evaluating forward-looking statements. Further information
concerning the Corporation and its business, including additional factors that could materially affect the Corporation’s
financial results, is included in the Corporation’s filings with the Securities and Exchange Commission. All forward-
looking statements contained in this report are based upon information presently available and the Corporation assumes no
obligation to update any forward-looking statements.
63
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, 2014 and 2013 and the results of operations for 2012 through 2014. This discussion also covers asset
quality, liquidity, interest rate sensitivity, and capital resources for the years 2013 and 2014. 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 2014 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 $1.700 million or $.30 per share, for the year ended December 31, 2014, compared
to net income of $5.629 million, or $1.01 per share, for 2013 and $6.458 million, or $1.51 per share, in 2012. The 2014
results include nonrecurring transaction related expenses of $2.475 million. 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, 2014, were $743.785 million, an increase of $170.985 million, or 29.85%
from total assets of $572.800 million reported at December 31, 2013.
At December 31, 2014, the Corporation’s loans stood at $600.935 million, an increase of $117.103 million, or 24.20%,
from 2013 year-end balances of $483.832 million. Acquired loans, net of purchase accounting adjustments had a balance
of $64.123 million at December 31, 2014. Total loan production in 2014 amounted to $183.403 million, which included
$29.871 million of secondary market mortgage loans sold. The Corporation also sold $7.075 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 $3.939 million, or .66% of total loans at December 31, 2014. Nonperforming assets at
December 31, 2014, were $6.949 million, .93% of total assets, compared to $3.908 million or .68% of total assets at
December 31, 2013.
Total deposits increased from $466.299 million at December 31, 2013, to $606.973 million at December 31, 2014, an
increase of 30.17%. The increase in deposits in 2014 was comprised of an increase in wholesale deposits of $45.238
million and an increase in core deposits of $95.436 million, largely a result of the Peninsula transaction. In 2014, the
Corporation utilized wholesale deposits in order to better manage interest rate risk in funding fixed rate loans.
Shareholders’ equity totaled $73.996 million at December 31, 2014, compared to $65.249 million at the end of 2013, an
increase of $8.747 million. This change reflects the net income available to common shareholders of $1.700 million, other
comprehensive income of $.297 million, an increase related to stock compensation expense of $.429 million, the impact
acquisition of Peninsula of $7.804 million, the exercise of stock options of $.032 million, the repurchase of common stock
of $.143 million and dividends declared on common stock of $1.308 million. The book value per common share at
December 31, 2014, amounted to $11.81 compared to $11.87 at the end of 2013.
64
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
(dollars in thousands, except per share data)
2014
2013
2012
Taxable-equivalent net interest income
Taxable-equivalent adjustment
Net interest income, per income statement
Provision for loan losses
Other income
Other expense
Income before provision for income taxes
Provision for (benefit of) income taxes
Net income
Preferred dividend expense
$
23,575
(48)
$
21,471
(72)
$
19,898
(74)
23,527
1,200
3,112
22,610
2,829
1,129
21,399
1,675
3,938
18,128
5,534
(403)
19,824
945
4,043
16,757
6,165
(922)
$
1,700
-
$
5,937
308
$
7,087
629
Net income available to common shareholders
$
1,700
$
5,629
$
6,458
Earnings per common share
Basic
Diluted
Return on average assets
Return on average common equity
Return on average equity
$
$
.30
.30
$
$
1.01
1.00
$
$
1.51
1.51
%
.28
2.57
2.57
%
1.01
9.07
8.26
%
1.23
12.43
10.26
Summary
The Corporation reported net income available to common shareholders of $1.700 million in 2014, compared to $5.629
million in 2013 and $6.458 million in 2012. The 2014 results include a provision for loan loss of $1.200 million and
nonrecurring transaction related expense of $2.475 million. 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.
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 88% of total revenue in 2014. 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 $2.104 million from $21.471 million in 2013 to $23.575 million
in 2014. In 2014, interest rates were stable with the prime rate at 3.25% for the entire year. The Corporation experienced a
decrease, five basis points, in the overall rates on earnings assets from 4.99% in 2013 to 4.94% in 2014. Interest bearing
funding sources declined by nine basis points, from .99% in 2013 to .90% in 2014. The combination of these effective rate
changes resulted in a slight increase in net interest margin from 4.19% in 2013 to 4.20 in 2014.
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.
65
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table details sources of net interest income for the three years ended December 31 (dollars in thousands):
Interest Income
Loans
Funds sold
Taxable securities
Nontaxable securities
Other interest-earning assets
Total earning assets
Interest Expense
NOW, money markets, checking
Savings
CDs <$100,000
CDs >$100,000
Brokered deposits
Borrowings
Total interest-bearing funds
2014
Mix
2013
Mix
2012
Mix
$
26,491
-
962
64
152
27,669
404
15
1,680
304
815
924
4,142
95.74
-
3.48
.23
.55
100.00
9.75
.35
40.56
7.34
19.68
22.31
100.00
%
%
%
%
$
24,400
-
961
34
128
25,523
388
13
2,033
380
654
656
4,124
95.60
-
3.77
.13
.50
100.00
9.41
.32
49.29
9.21
15.86
15.91
100.00
%
%
%
%
$
23,313
18
948
27
121
24,427
548
16
2,429
433
520
657
4,603
95.44
0.07
3.88
0.11
.50
100.00
11.91
0.35
52.77
9.41
11.30
14.27
100.00
%
%
%
%
Net interest income
$
23,527
$
21,399
$
19,824
Average Rates
Earning assets
Interest-bearing funds
Interest rate spread
%
4.93
.90
4.03
%
4.98
.99
3.99
%
5.14
1.15
3.99
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 $333.009 million of variable rate loans that predominantly reprice with
changes in the prime rate and $267.926 million of fixed rate loans. A large portion of the variable rate loans, 44%, or
$148.120 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 $104.337 million
of these loans with floors, while the majority of 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.
66
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table presents the amount of taxable equivalent interest income from average interest-earning assets and the
yields earned on those assets, as well as the interest expense on average interest-bearing obligations and the rates paid on
those obligations. All average balances are daily average balances.
(dollars in thousands)
ASSETS:
Loans (1,2,3)
Taxable securities
Nontaxable securities (2)
Federal Funds sold
Other interest-earning assets
Total earning assets
Reserve for loan losses
Cash and due from banks
Fixed assets
Other real estate owned
Other assets
Years ended December 31,
Average
Balance
2014
Interest
Average
Rate
Average
Balance
$
509,749
45,172
2,062
78
3,810
560,871
(5,187)
23,124
10,174
2,088
14,542
44,741
$
26,506
962
97
-
152
27,717
%
5.20
2.13
4.70
-
3.99
4.94
$
462,500
46,294
1,002
3
3,070
512,869
(5,045)
20,535
10,632
2,800
13,361
42,283
2013
Interest
$
24,454
961
51
-
128
25,594
Average
Rate
Average
Balance
%
5.29
2.08
5.09
-
4.17
4.99
$
422,440
38,094
850
11,127
3,070
475,581
(5,232)
28,561
10,254
3,392
14,184
51,159
2012
Interest
$
23,373
948
41
18
121
24,501
Average
Rate
%
5.53
2.49
4.82
.16
3.94
5.15
TOTAL ASSETS
$
605,612
$
555,152
$
526,740
LIABILITIES AND SHAREHOLDERS' EQUITY:
NOW and Money Markets
Interest checking
Savings deposits
CDs <$100,000
CDs >$100,000
Brokered deposits
Borrowings
Total interest-bearing liabilities
Demand deposits
Other liabilities
Shareholders' equity
$
309
95
15
1,680
304
815
924
4,142
$
114,313
45,158
15,717
144,061
24,288
69,833
45,451
458,821
76,880
3,662
66,249
146,791
%
.27
.21
.10
1.17
1.25
1.17
2.03
.90
%
$
289
99
13
2,032
380
654
656
4,123
$
120,401
35,242
13,052
133,082
24,243
53,435
37,838
417,293
67,596
2,091
68,172
137,859
%
.24
.28
.10
1.53
1.57
1.22
1.73
.99
$
119,053
31,837
13,682
138,767
25,128
36,569
35,973
401,009
59,730
3,062
62,939
125,731
$
406
142
16
2,429
433
520
657
4,603
%
.34
.45
.12
1.75
1.72
1.42
1.83
1.15
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
605,612
$
555,152
$
526,740
Rate spread
Net interest margin/revenue, tax equivalent basis
$
23,575
4.04
4.20
%
$
21,471
4.00
4.19
%
%
$
19,898
4.00
4.18
%
%
(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.
67
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.
2014 vs. 2013
2013 vs. 2012
Years ended December 31,
Increase (Decrease)
Due to
Increase (Decrease)
Due to
Volume
Rate
$
2,498
(23)
54
-
31
$
(405)
25
(4)
-
(6)
Volume
and Rate
$
(41)
(1)
(4)
-
(1)
Total
Increase
(Decrease)
Volume
Rate
Volume
and Rate
Total
Increase
(Decrease)
$
2,052
1
46
-
24
$
2,216
204
7
(18)
-
$
(1,037)
(157)
2
(18)
7
$
(98)
(34)
1
18
-
$
1,081
13
10
(18)
7
Interest earning assets:
Loans
Taxable securities
Nontaxable securities
Federal funds sold
Other interest earning assets
Total interest earning assets
$
2,560
$
(390)
$
(47)
$
2,123
$
2,409
$
(1,203)
$
(113)
$
1,093
Interest bearing obligations:
NOW and money market deposits
Interest checking
Savings deposits
CDs <$100,000
CDs >$100,000
Brokered deposits
Borrowings
$
(15)
28
3
168
1
200
132
$
37
(25)
(1)
(480)
(77)
(30)
113
$
(2)
(7)
-
(40)
-
(9)
23
$
20
(4)
2
(352)
(76)
161
268
5
$
15
(1)
(100)
(15)
240
34
$
(120)
(53)
(2)
(310)
(39)
(72)
(33)
$
(2)
(5)
-
13
1
(34)
(2)
$
(117)
(43)
(3)
(397)
(53)
134
(1)
Total interest bearing obligations
$
517
$
(463)
$
(35)
$
19
$
178
$
(629)
$
(29)
$
(480)
Net interest income, tax equivalent basis
$
2,104
$
1,573
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
2014, the Corporation recorded a provision for loan loss of $1.200 million, compared to a provision of $1.675 million in
2013 and $.945 million in 2012.
Noninterest Income
Noninterest income was $3.112 million, $3.938 million, and $4.043 million in 2014, 2013, and 2012, respectively. The
principal recurring sources of noninterest income are the gains on the sale of SBA/USDA guaranteed loans and secondary
market loans. In 2014, revenues from these two business lines totaled $1.394 million compared to $1.979 million in 2013
and $2.566 million in 2012. 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 2014, income from servicing mortgages
amounted to $.675 million, compared to $.790 million in 2013 and $.417 million in 2012.
Deposit related income totaled $.701 million in 2014 compared to $.667 million in 2013 and $.699 million in 2012. 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.
68
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table details noninterest income for the three years ended December 31 (dollars in thousands):
Deposit service charges
NSF Fees
Gain on sale of secondary market loans
Secondary market fees generated
SBA Fees
Mortgage servicing rights
Other
Subtotal
Net security gains
2014
2013
2012
2014-2013
2013-2012
$
150
$
109
$
110
37.61
%
(.91)
%
% Increase (Decrease)
551
493
144
757
675
288
3,058
54
558
794
234
951
790
429
3,865
73
589
1,077
313
1,176
417
361
4,043
-
(1.25)
(37.91)
(38.46)
(20.40)
(14.56)
(32.87)
(20.88)
(26.03)
(5.26)
(26.28)
(25.24)
(19.13)
89.45
18.84
(4.40)
100.00
Total noninterest income
$
3,112
$
3,938
$
4,043
(20.98)
%
(2.60)
%
Noninterest Expense
Noninterest expense was $22.610 million in 2014, compared to $18.128 million and $16.757 million in 2013 and 2012,
respectively. In 2014, the increase in noninterest expense totaled $4.481 million, or 24.72%. This increase was higher
than normal due in large part to nonrecurring transaction related expenses of $2.475 million, along with other costs related
to strategic initiatives. Salaries and benefits, at $10.303 million, increased by $.952 million, 10.18%, from the 2013
expenses of $9.351 million and compared to $8.288 million in 2012. 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.
Management will continue to review all areas of noninterest expense in order to evaluate where opportunities may exist
which could reduce expenses without compromising service to customers.
The following table details noninterest expense for the three years ended December 31 (dollars in thousands):
Salaries and benefits
Occupancy
Furniture and equipment
Data processing
Professional service fees:
Accounting
Legal
Consulting and other
Total professional service fees
Loan and deposit
Writedowns and losses on OREO held for sale
FDIC insurance assessment
Telephone
Advertising
Nonrecurring transaction related expenses
Other operating expenses
Total noninterest expense
Federal Income Taxes
2014
$
10,303
2,129
1,268
1,150
2013
$
9,351
1,481
1,102
1,071
2012
$
8,288
1,372
885
991
375
205
583
1,163
699
280
362
327
449
2,475
2,005
22,610
$
362
264
443
1,069
617
265
385
303
436
-
2,048
18,128
$
368
396
432
1,196
877
489
459
233
376
-
1,591
16,757
$
% Increase (Decrease)
2014 - 2013
%
10.18
43.75
15.06
7.38
3.59
(22.35)
31.60
8.79
13.29
5.66
(5.97)
7.92
2.98
100.00
(2.10)
24.72
%
%
2013 - 2012
12.83
7.94
24.52
8.07
(1.63)
(33.33)
2.55
(10.62)
(29.65)
(45.81)
(16.12)
30.04
15.96
-
28.72
8.18
%
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
69
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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, 2014 had a net operating loss and tax credit
carryforwards for tax purposes of approximately $16.2 million, and $2.353 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 $10.5 million, and the majority 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 expense of approximately $1.129 million for the year ended December 31, 2014
and a deferred tax benefit of $.403 million for the year ended December 31, 2013. The valuation allowance at December
31, 2014 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.
In connection with the Peninsula acquisition in December 2014, the Corporation acquired $.933 million of NOL
carryforward and approximately $.217 million of various tax credits, which it expects to utilize prior to expiration.
70
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The table below details the Corporation’s deferred tax assets and liabilities (dollars in thousands):
Deferred tax assets:
NOL carryforward
Allowance for loan losses
Alternative Minimum Tax Credit
OREO Tax basis > book basis
Tax credit carryovers
Deferred compensation
Pension liability
Stock compensation
Depreciation
Purchase accounting adjustments
Other
Total deferred tax assets
Valuation allowance
Deferred tax liabilities:
Core deposit premium
FHLB stock dividend
Unrealized gain on securities
Mortgage servicing rights
Other
Total deferred tax liabilities
2014
2013
$
5,500
2,194
1,586
474
767
576
475
247
(88)
2,095
33
$
6,737
1,585
1,463
138
672
152
-
267
157
-
188
13,859
11,359
$
(760)
$
(760)
(407)
(103)
(363)
(658)
(70)
(1,601)
-
(103)
(111)
(452)
-
(666)
Net deferred tax asset
$
11,498
$
9,933
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, 2014. 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.
71
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL POSITION
The table below illustrates the relative composition of various liability funding sources and asset make-up.
(dollars in thousands)
2014
December 31,
2013
2012
Sources of funds:
Deposits:
Non-interest bearing transactional deposits
Interest-bearing transactional deposits
CD's <$100,000
Total core deposit funding
CD's >$100,000
Brokered deposits
Total noncore deposit funding
FHLB and other borrowings
Other liabilities
Shareholders' equity
Balance
Mix
Balance
Mix
Balance
Mix
$
95,498
240,580
134,951
471,029
30,316
105,628
135,944
49,846
12,970
73,996
%
12.84
32.35
18.14
63.33
4.08
14.20
18.28
6.70
1.74
9.95
$
72,936
162,162
140,495
375,593
23,159
67,547
90,706
37,852
3,400
65,249
%
12.73
28.31
24.53
65.57
4.04
11.79
15.84
6.61
.59
11.39
$
67,652
169,294
135,550
372,496
24,355
37,706
62,061
35,925
3,050
72,448
%
12.39
31.01
24.83
68.23
4.46
6.91
11.37
6.58
.56
13.27
Total
$
743,785
100.00
%
$
572,800
100.00
%
$
545,980
100.00
%
Uses of Funds:
Net Loans
Securities available for sale
Federal funds sold
Federal Home Loan Bank Stock
Interest-bearing deposits
Cash and due from banks
Other assets
$
595,795
65,832
-
2,973
5,797
21,947
51,441
%
80.11
8.85
-
.40
.78
2.95
6.92
$
479,171
44,388
3
3,060
10
18,216
27,952
%
83.66
7.75
.00
.53
.00
3.18
4.88
$
443,959
43,799
3
3,060
10
26,958
28,191
%
81.32
8.02
.00
.56
.00
4.94
5.16
Total
$
743,785
100.00
%
$
572,800
100.00
%
$
545,980
100.00
%
Securities
The securities portfolio is an important component of the Corporation’s asset composition to provide diversity in its asset
base and provide liquidity. Securities increased $21.444 million in 2014, from $44.388 million at December 31, 2013 to
$65.832 million at December 31, 2014. Acquired securities, net of purchase accounting adjustments, totaled $22.144
million at year-end.
The carrying value of the Corporation’s securities is as follows at December 31 (dollars in thousands):
US Agencies
US Agencies - MBS
Corporate
Obligations of states and political subdivisions
US Treasury
Total securities
2014
2013
$
22,717
13,688
12,674
11,473
5,280
$
14,855
7,359
16,079
6,095
-
$
65,832
$
44,388
The Corporation’s policy is to purchase securities of high credit quality, consistent with its asset/liability management
strategies. The Corporation classifies all securities as available for sale, in order to maintain adequate liquidity and to
maximize its ability to react to changing market conditions. At December 31, 2014, investment securities with an estimated
fair market value of $4.181 million were pledged.
72
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 72% of total loans outstanding at December 31, 2014.
The Corporation continued to experience strong loan demand in 2014 with approximately $183.403 million of new loan
production, including $29.871 million of mortgage loans sold in the secondary market. At 2014 year-end, the
Corporation’s loans stood at $600.935 million, an increase from the 2013 year-end balances of $483.832 million. In 2014,
the secondary mortgage loans that were produced and sold totaled $29.871 million while the SBA/USDA loan sales
amounted to $7.075 million. The production of loans was distributed among the regions, with the Upper Peninsula at
$104.601 million, $40.133 million in the Northern Lower Peninsula and $38.669 million in Southeast Michigan.
The December 2014 acquisition of loans added $72.289 million to our consolidated loan portfolio. These acquired loans
consisted of approximately $30 million commercial loans and $34 million consumer loans. These acquired loans did not
results in any concentration risk.
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 2013 and 2014(dollars in thousands):
Loan balances as of December 31, 2012
Total production
Secondary market sales
SBA loan sales
Loans transferred to OREO
Loans charged off, net of recoveries
Normal amortization/paydowns and payoffs
449,177
190,918
(54,736)
(8,393)
(932)
(2,232)
(89,970)
Loan balances as of December 31, 2013
$
483,832
Total production
Total loans acquired
Secondary market sales
SBA loan sales
Loans transferred to OREO
Loans charged off, net of recoveries
Normal amortization/paydowns and payoffs
183,403
72,289
(29,871)
(7,075)
(588)
(721)
(100,334)
Loan balances as of December 31, 2014
$
600,935
Following is a table that illustrates the balance changes in the loan portfolio from 2012 through 2014 year end (dollars in
thousands):
2014
2013
2012
2014-2013
2013-2012
Percent Change
Commercial real estate
Commercial, financial, and agricultural
$
315,387
101,895
$
268,809
79,655
$
244,966
80,646
17.33 % 9.73 %
27.92
(1.23)
One-to-four family residential real estate
Construction:
Consumer
Commercial
Consumer
139,553
103,768
87,948
34.49
17.99
9,431
16,284
18,385
6,895
10,904
13,801
7,465
17,229
10,923
36.78
49.34
33.21
(7.64)
(36.71)
26.35
Total
$
600,935
$
483,832
$
449,177
24.20 % 7.72 %
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 2014, and we expect this trend to
73
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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.
Following is a table showing the composition of loans by significant industry types in the commercial loan portfolio as of
December 31 (dollars in thousands):
Real estate - operators of nonres bldgs
Hospitality and tourism
Lessors of residential buildings
Commercial construction
Gasoline stations and convenience stores
Real estate agents and managers
Other
Balance
$
106,644
46,211
19,776
16,284
13,841
9,454
221,356
2014
% of
Loans
% of
Capital
%
24.60
10.66
4.56
3.76
3.19
2.18
51.05
%
144.12
62.45
26.73
22.01
18.71
12.78
299.15
Balance
$
100,333
45,360
14,191
10,904
11,534
10,922
166,124
2013
% of
Loans
%
27.92
12.62
3.95
3.03
3.21
3.04
46.23
% of
Capital
153.77
69.52
21.75
16.71
17.68
16.74
254.60
Total commercial loans
$
433,566
100.00
%
$
359,368
100.00
%
Management recognizes the additional risk presented by the concentration in certain segments of the portfolio. On a
historical basis, the Corporation’s highest concentration of credit risk was the hospitality and tourism industry.
Management does not consider the current loan concentrations in hospitality and tourism to be problematic, and has no
intention of further reducing loans to this industry segment. Management does not believe that its current portfolio
composition has increased exposure related to any specific industry concentration as of 2014 year-end. The current
concentration of real estate related loans represents a broad customer base composed of a high percentage of owner-
occupied developments.
Our residential real estate portfolio predominantly includes one-to-four family adjustable rate mortgages that have repricing
terms generally from one to three years, construction loans to individuals and bridge financing loans for qualifying
customers. As of December 31, 2014, our residential loan portfolio totaled $148.984 million, or 25% 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 $1.526 million at the end of 2013 to $.858 million at 2014 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.
74
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The Corporation, at December 31, 2014, had performing loans of $3.105 million and no nonperforming loans for which
repayment terms were modified to the extent that they were deemed to be “restructured” loans. The total restructured loans
of $3.105 million is comprised of six performing loans, the largest of which had a December 31, 2014 balance of $1.186
million.
Credit Quality
The table below shows balances of nonperforming assets for the three years ended December 31 (dollars in thousands):
December 31,
2014
(Unaudited)
December 31,
2013
(Unaudited)
December 31,
2012
(Unaudited)
Nonperforming Assets :
Nonaccrual loans
Loans past due 90 days or more
Restructured loans
Total nonperforming loans
Other real estate owned
Total nonperforming assets
Nonperforming loans as a % of loans
Nonperforming assets as a % of assets
Reserve for Loan Losses:
At period end
As a % of average loans
As a % of nonperforming loans
As a % of nonaccrual loans
Texas Ratio
$
$
$
3,939
-
-
3,939
3,010
6,949
1,410
-
614
2,024
1,884
3,908
4,687
-
-
4,687
3,212
7,899
$
$
$
.66
.93
%
%
.42
.68
%
%
1.04
1.45
$
5,140
1.01
130.49
130.49
9.37
%
%
%
%
$
4,661
.96
230.29
330.57
5.59
$
5,218
1.24
111.33
111.33
10.17
%
%
%
%
Charge-off Information (year to date):
Average loans
Net charge-offs
Charge-offs as a % of average
loans, annualized
$
$
509,749
721
$
$
462,500
2,232
$
$
442,440
978
.14
%
.48
%
.23
Management continues to address market issues impacting its loan customer base. In conjunction with the Corporation’s
senior lending staff and the bank regulatory examinations, management reviews the Corporation’s loans, related collateral
evaluations, and the overall lending process. The Corporation also utilizes a loan review consultant to perform a review of
the loan portfolio. The opinion of this consultant upon completion of the 2014 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 2015.
The following table details the impact of nonperforming loans on interest income for the three years ended December 31
(dollars in thousands):
Interest income that would have
been recorded at original rate
Interest income that was
actually recorded
2014
2013
2012
$
130
$
228
$
313
-
-
54
Net interest lost
$
130
$
228
$
259
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 2014 amounted to $.721 million, or .14% of average loans
outstanding, compared to $2.232 million, or .48% of loans outstanding in 2012. The current reserve balance is
representative of the relevant risk inherent within the Corporation’s loan portfolio. Additions or reductions to the reserve in
75
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
future periods will be dependent upon a combination of future loan growth, nonperforming loan balances and charge-off
activity.
A three year history of relevant information on the Corporation’s credit quality is displayed in the following table (dollars
in thousands):
Allowance for Loan Losses
2014
2013
2012
Balance at beginning of period
Loans charged off:
Commercial
One-to-four family residential real estate
Consumer
Total loans charged off
Recoveries of loans previously charged off:
Commercial
One-to-four family residential real estate
Consumer
Total recoveries of loans previously charged off
Net loans charged off
Provision for loan losses
$
4,661
$
5,218
$
5,251
682
290
74
1,046
259
22
44
325
721
1,200
2,171
141
120
2,432
150
26
24
200
2,232
1,675
775
399
82
1,256
253
7
18
278
978
945
Balance at end of period
$
5,140
$
4,661
$
5,218
Total loans, period end
Average loans for the year
Allowance to total loans at end of year
Net charge-offs to average loans
Net charge-offs to beginning allowance balance
$
600,935
509,749
.86
%
.14
15.47
$
483,832
462,500
.96
.48
42.78
%
$
449,177
422,440
1.16
.23
18.63
%
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 2014, the allowance for loan losses represented .86% of total loans. The allowance for loan losses at the end
of 2014 as a percentage of nonperforming assets was 110.11% compared to 119.27% at 2013 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 310.00% at December 31, 2014, compared to 230.29% at
2013 year end.
The Corporation completed the acquisition of Peninsula Financial Corporation on December 5, 2014. The acquired loans
were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (“acquired
impaired”) and loans that do not meet that criteria, which are accounted for under ASC 310-20 (“acquired nonimpaired”).
The acquired impaired loans totaled $10.321 million. The Corporation recorded these loans at fair value taking into
account a number of factors, including remaining life, estimated loss, estimated value of the underlying collateral and net
present values of cash flows. For the period of December 5, 2014 to December 31, 2014, recorded interest compared to
accretable interest on acquired impaired loans was immaterial and no significant payments of principal were recorded.
76
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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.
The following table represents the activity in other real estate held for sale (dollars in thousands):
Balance at December 31, 2012
Other real estate transferred from loans due to foreclosure
Other real estate sold
Writedowns on other real estate held for sales
Loss on other real estate held for sale
3,212
932
(1,996)
(231)
(33)
Balance at December 31, 2013
$
1,884
Other real estate transferred from loans due to foreclosure
Other real estate acquired, net of purchase accounting
Other real estate sold
Writedowns on other real estate held for sales
Loss on other real estate held for sale
588
1,193
(375)
(228)
(52)
Balance at December 31, 2014
$
3,010
During 2014, the Corporation received real estate in lieu of loan payments of $.588 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, 2014 were $606.973 million, an increase of $140.674 million, or 30.17% from December
31, 2013 deposits of $466.299 million. Deposits acquired totaled $102.482 million at 2014 year end. The table below
shows the deposit mix for the periods indicated (dollars in thousands):
2014
Mix
2013
Mix
2012
Mix
CORE:
Non-interest-bearing
NOW, money market, checking
Savings
Certificates of Deposit <$100,000
Total core deposits
NONCORE:
Certificates of Deposit >$100,000
Brokered CDs
Total non-core deposits
$
95,498
212,565
28,015
134,951
471,029
30,316
105,628
135,944
15.73
35.02
4.62
22.23
77.60
4.99
17.40
22.40
%
$
72,936
149,123
13,039
140,495
375,593
23,159
67,547
90,706
15.64
31.98
2.80
30.13
80.55
4.97
14.48
19.45
%
$
67,652
155,465
13,829
135,550
372,496
24,355
37,706
62,061
%
15.57
35.78
3.18
31.19
85.72
5.60
8.68
14.28
Total deposits
$
606,973
100.00
%
$
466,299
100.00
%
$
434,557
100.00
%
The increase in deposits, as illustrated above, is composed of an increase in noncore deposits of $45.238 million, while core
deposits increased by $95.436 million. Through the acquisition of Peninsula, the Corporation has enhanced its core deposit
portfolio with additional stable deposit relationships from Peninsula’s long term customer base.
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 78% 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 2014 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
77
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
FHLB borrowings had a weighted average maturity of 2.6 years, with a weighted average rate of 1.68% at December 31,
2014.
Shareholders’ Equity
Changes in shareholders’ equity are discussed in detail in the “Capital and Regulatory” section of this report.
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, 2014 the Bank had $65.832 million of securities, with a weighted average maturity of 73.9 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
78
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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.
The following are the Corporation’s repricing opportunities at December 31, 2014 (dollars in thousands):
Interest-earning assets:
Loans
Securities
Other (1)
1-90
Days
91-365
Days
>1-5
Years
Over 5
Years
Total
$
209,577
5,137
4,470
$
168,091
9,430
$
220,494
29,175
$
2,773
22,090
$
600,935
65,832
908
3,392
-
8,770
Total interest-earning assets
219,184
178,429
253,061
24,863
675,537
Interest-bearing obligations:
NOW, money market, savings and interest checking
Time deposits
Brokered CDs
Borrowings
240,580
23,720
20,831
11,767
-
67,910
24,404
374
-
73,518
60,393
37,305
Total interest-bearing obligations
296,898
92,688
171,216
-
119
-
400
519
240,580
165,267
105,628
49,846
561,321
Gap
Cumulative gap
$
(77,714)
$
85,741
$
81,845
$
24,344
$
114,216
$
(77,714)
$
8,027
$
89,872
$
114,216
(1) includes Federal Home Loan Bank stock
The above analysis indicates that at December 31, 2014, the Corporation had a cumulative asset sensitivity gap position of
$8.027 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, 2014, the Corporation had $333.009 million of variable rate loans that reprice primarily with the prime
rate index. Approximately $148.120 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, $104.337 million of these floor-
rate loans would reprice with a 100 basis point prime rate increase, with $41.336 million repricing with an additional 100
basis point prime rate increase.
At December 31, 2013, the Corporation had a cumulative asset sensitive gap position of $24.272 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
79
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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.
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, 2014 (dollars in thousands). Nonaccrual loans of $3.939
million are included in the table at an average interest rate of 0.00% and a maturity greater than five years.
Rate Sensitive Assets
Fixed interest rate
securities
Average interest rate
Fixed interest rate loans
Average interest rate
Principal/Notional Amount Maturing/Repricing In:
2015
2016
2017
2018
2019
Thereafter
Total
Fair Value
12/31/2013
$ 8,880
1.59
$ 5,055
2.27
$ 2,203
1.60
$
11,986
1.51
$
12,541
2.12
$ 25,167
3.01
$ 65,832
2.27 %
$ 65,832
17,807
4.97
27,265
5.60
58,265
5.13
86,314
4.71
55,622
4.79
22,653
4.92
267,926
4.94
268,209
Variable interest rate loans
Average interest rate
333,009
4.67
-
-
-
-
-
-
-
-
-
-
333,009
4.67
333,360
Other assets
Average interest rate
5,372
2.38
924
.86
1,729
1.78
498
1.33
247
2.04
-
-
8,770
2.11
8,770
Total rate sensitive assets
Average interest rate
$ 365,068
4.58 %
$ 33,244
$ 62,197
$ 98,798
$ 68,410
$ 47,820
$ 675,537
$ 676,171
4.96 %
4.91 % 4.30 %
4.30% % 3.53 % 4.23 %
Rate Sensitive Liabilities
Interest-bearing savings,
NOW, MMAs, checking
Average interest rate
Time deposits
Average interest rate
Variable interest rate
borrowings
Average interest rate
Fixed interest rate
borrowings
Average interest rate
Total rate sensitive
liabilities
Average interest rate
$ 240,580
.16
$ -
-
$ -
-
$ -
0
$
-
-
$ -
- % .16 %
240,580
$ 240,580
136,660
1.10
94,797
1.41
29,794
1.49
14,067
3.82
-
-
-
-
8,875
1.70
-
-
650
2.28
119
2.29
270,895
1.28
270,456
-
-
-
-
14,067
3.82
14,067
-
-
15,000
2.03
-
-
10,000
1.11
10,000
1.72
779
1.00
35,779
1.66
36,213
$ 377,240
.62 %
$ 109,797
$ 29,794
$ 18,875
$ 10,650
$ 898
$ 547,254
$ 547,249
1.49 %
1.49 % 1.39 %
1.75 % 1.17 % .88 %
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, 2014, the Corporation had excess Canadian assets of $.091 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.
80
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Off-Balance-Sheet Risk
Derivative financial instruments include futures, forwards, interest rate swaps, option contracts and other financial
instruments with similar characteristics. The Corporation currently does not enter into futures, forwards, swaps or options.
However, the Corporation is party to financial instruments with off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby
letters of credit and involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized
in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may
require collateral from the borrower if deemed necessary by the Corporation. Standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance of a customer to a third party up to a stipulated
amount and with specified terms and conditions.
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 19 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 2014, the Corporation increased cash and cash equivalents by $3.728 million. As shown on the Corporation’s
consolidated statement of cash flows, liquidity was primarily impacted by cash used in investing activities and cash
provided by financing activities. The net change in investing activities included a net increase in loans of $50.969 million
and a net increase in securities available for sale of $1.132 million. The net increases in assets were offset by a similar
increase in deposit liabilities of $39.724 million. This increase in deposits was composed of an increase in non-core
deposits of $45.238 million combined with an increase in core deposits of $95.436 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, 2014, $61.651 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 2015, 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 and
2014, 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, has a $12.0 million line of credit with a correspondent bank, which also
serves as a source of liquidity. As of December 31, 2014, $4.0 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, 2014, the Bank’s core deposits in relation to total funding were 71.71% compared to 74.50% in 2013.
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
81
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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, 2014, the Bank had $28.375 million of unsecured lines available and additional
amounts available if secured. Management believes that its liquidity position remains strong to meet both present and
future financial obligations and commitments, events or uncertainties that have resulted or are reasonably likely to result in
material changes with respect to the Bank’s liquidity.
From a long-term perspective, the Corporation’s liquidity plan for 2014 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, 2014, the aggregate contractual obligations and
commitments are (dollars in thousands):
Contractual Obligations
Less than 1 Year
1 to 3 Years
4 to 5 Years
Payments Due by Period
Total deposits
Federal Home Loan Bank borrowings
Other borrowings
Directors' deferred compensation
Annual rental / purchase commitments
under noncancelable leases / contracts
TOTAL
Other Commitments
$
472,943
-
474
287
$
124,386
15,000
13,818
491
$
9,525
20,000
154
441
After 5
Years
$
119
-
400
1,022
Total
$
606,973
35,000
14,846
2,241
724
1,251
913
4,232
7,120
$
474,428
$
154,946
$
31,033
$
5,773
$
666,180
Letters of credit
Commitments to extend credit
Credit card commitments
$
6,072
68,325
3,267
$
-
-
-
$
-
-
-
$
-
-
-
$
6,072
68,325
3,267
TOTAL
$
77,664
$
-
$
-
$
-
$
77,664
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, 2014, 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.
82
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):
2014
2013
2012
Capital Structure
Common shareholders' equity
Preferred stock
Total shareholders' equity
Total capitalization
Tangible capital
Intangible Assets
Subsidiaries:
Core deposit premium
Goodwill
Other identifiable intangibles
Total intangibles
Risk-Based Capital
Tier 1 capital:
Total shareholders' equity
Accumulated other
comprehensive income
Less: disallowed deferred tax asset
Less: disallowed intangibles
Total Tier 1 capital
Tier 2 Capital:
Allowable reserve for loan losses
Qualifying long-term debt
Total Tier 2 capital
Total risk-based capital
Risk-weighted assets
Capital Ratios:
Tier 1 Capital to average assets
Tier 1 Capital to risk-weighted assets
Total Capital to risk-weighted assets
$
$
$
73,996
-
73,996
73,996
68,800
$
$
$
$
65,249
-
65,249
65,249
65,249
61,448
11,000
72,448
72,448
72,448
$
$
$
$
1,196
3,805
195
5,196
-
$
-
1,129
1,129
$
-
$
-
688
688
$
$
73,996
$
65,249
$
72,448
(513)
(6,000)
(5,196)
62,287
$
(216)
(7,000)
(113)
57,920
$
(924)
(7,100)
(69)
64,355
$
$
$
$
5,140
-
5,140
67,427
608,961
$
$
4,661
-
4,661
62,581
489,407
$
$
5,218
-
5,218
69,573
466,039
$
$
8.57%
10.23%
11.07%
10.31%
11.83%
12.79%
11.98%
13.81%
14.93%
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.
The Corporation’s and the Bank’s actual capital and ratios compared to generally applicable regulatory requirements as of
December 31, 2014 are as follows (dollars in thousands):
Total capital to risk
weighted assets:
Consolidated
mBank
Tier 1 capital to
risk weighted assets:
Consolidated
mBank
Tier 1 capital to
average assets:
Consolidated
mBank
Actual
Amount
Ratio
Adequacy Purposes
Amount
Ratio
Well-Capitalized
Amount
Ratio
$
$
67,427
70,320
11.1% >
11.8% >
$
$
48,717
47,611
> 8.0% >
> 8.0% >
$
$
60,896
59,513
10.0%
10.0%
$
$
62,287
65,355
10.2% >
11.0% >
$
$
36,538
35,708
> 6.0% >
> 6.0% >
$
$
36,538
35,708
6.0%
6.0%
$
$
62,287
65,355
9.6% >
9.1% >
$
$
29,065
28,680
> 4.0% >
> 4.0% >
$
$
36,332
35,850
5.0%
5.0%
83
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The Corporation’s and the Bank’s actual capital and ratios compared to generally applicable regulatory requirements as of
December 31, 2013 are as follows (dollars in thousands):
Actual
Amount
Ratio
Adequacy Purposes
Amount
Ratio
Action Provisions
Amount
Ratio
Total capital to risk
weighted assets:
Consolidated
mBank
Tier 1 capital to
risk weighted assets:
Consolidated
mBank
Tier 1 capital to
average assets:
Consolidated
mBank
$
$
62,581
60,537
12.8%
12.4%
>
>
$
$
39,153
38,944
> 8.0%
> 8.0%
N/A
$
48,680
>
N/A
10.0%
$
$
57,920
55,947
11.8%
11.5%
>
>
$
$
19,576
19,472
> 4.0%
> 4.0%
N/A
$
29,208
>
N/A
6.0%
$
$
57,920
55,947
10.3%
10.0%
>
>
$
$
22,469
22,352
> 4.0%
> 4.0%
N/A
$
27,940
>
N/A
5.0%
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.
84
Corporate Information
DIRECTORS
Mackinac Financial Corporation and mBank
Walter J. Aspatore - Lead Director
Chairman
Methode Electronics Corp
Director Since: 2004
Dennis B. Bittner
Owner and President
Bittner Engineering, Inc.
Director Since: 2001
Robert H. Orley
Founding Partner
O2 Investment Partners, LLC
Director Since: 2004
L. Brooks Patterson
County Executive
Oakland County
Director Since: 2006
Joseph D. Garea
Managing Director
Hancock Securities and related entities
Director Since: 2007
Randolph C. Paschke
Director of Community Relations & External Engagement
Wayne State University, School of Business Administration
Director Since: 2004
Kelly W. George
President, Mackinac Financial Corporation
President and CEO, mBank
Director Since: 2006
David R. Steinhardt
Founder and President
KCPS & Company Ltd.
Director Since: 2012
Robert E. Mahaney
President and Owner
Veridea Group, LLC
Director Since: 2008
Paul D. Tobias
Chairman and CEO, Mackinac Financial Corporation
Chairman, mBank
Director Since: 2004
OFFICERS
Mackinac Financial Corporation
Paul D. Tobias
Chairman and Chief Executive Officer
Birmingham, MI
Kelly W. George
President
Manistique, MI
Ernie R. Krueger
Executive Vice President/Chief Financial Officer
Manistique, MI
Mackinac Commercial Credit, LLC
Officers
Board of Managers
Paul D. Tobias
Chairman and Manager
Paul A. Barr
Credit Manager
Edward P. Lewan
EVP/Chief Lending Officer
Michael J. Gallagher
Regional Vice President
Darlene Goy
Controller
Paul D. Tobias
Chairman and CEO
Mackinac Financial Corporation
Don Barr, Jr.
President
Baywood Holdings, LLC
Kelly W. George
President and CEO
mBank
Ernie R. Krueger
EVP - Chief Financial Officer
mBank
85
Tamara R. McDowell
EVP - Managing Director
Credit Administration/Operations
Walter J. Aspatore
Chairman
Methode Electronics Corp
Robert H. Orley
Founding Partner
O2 Investment Partners, LLC
Frank N. Sheckell
Managing Director
Oakland Capital Partners, LLC
Directors and Officers
Bernadette C. Beaudre
Assistant Vice President
Deposit Compliance/BSA Officer
Manistique
Linda K. Bolda
Senior Vice President
Human Resources Director
Manistique
Catherine M. Bolm
Vice President
Mortgage Loan Officer
Marquette
Julie L. Bosanic
Assistant Vice President
Underwriting Supervisor
Manistique
Angela E. Buckingham
Assistant Vice President
District Branch Supervisor
Newberry
Michael A. Caruso
Vice President
Senior Commercial Banking Officer
Traverse City
Jesse A. Deering
Senior Vice President
Managing Director of Retail Branch
Banking/Marketing
Birmingham
Richard B. Demers
Vice President
Commercial Banking Officer
Manistique
Trisha L. DeMars
Assistant Vice President
Senior Deposit Operations Specialist
Manistique
George J. Demou
Vice President
Senior Commercial Banking Officer
Birmingham
Elena C. Dritsas
Assistant Vice President
Branch Administrator
Birmingham
Jeremy W. Flodin
Vice President
Senior Credit Administrator/
Credit Risk Analyst
Manistique
Daniel P. Galbraith
Assistant Vice President
District Branch Supervisor
Traverse City
mBank Officers
Laura L. Garvin
Vice President
Commercial Portfolio Manager
Birmingham
Kelly W. George
President and Chief Executive Officer
Manistique, Marquette
Clarice A. Ghiardi
Vice President
Mortgage Loan Officer
Marquette
Joseph T. Havican
Vice President
Commercial Banking Officer
Marquette
Michael J. Hoar
Senior Vice President
Information Technology/
Communications Manager
Manistique
Ernie R. Krueger
Executive Vice President
Chief Financial Officer
Manistique
David W. Leslie
Senior Vice President
Southeast Michigan/Gaylord
Commercial Lending Manager
Birmingham
Magan L. MacArthur
Assistant Vice President
Mortgage Loan Officer
Manistique
Boris Martysz
Senior Vice President
Marquette Regional Executive
Marquette
Tamara R. McDowell
Executive Vice President
Managing Director, Credit Administration/
Operations/Information Technology
Manistique, Marquette
Joan M. Pitera-Powell
Vice President
Commercial Banking Officer
Birmingham
Scott A. Ravet
Vice President
Commercial Banking Officer
Escanaba
Jason J. Rolling
Vice President
Premier Client Services
Marquette
Andrew P. Sabatine
Regional President
Northern Lower Peninsula
Traverse City
Teresa M. Same
Assistant Vice President
District Branch Supervisor
Marquette
Gregory D. Schuetter
Senior Vice President
Upper Peninsula
Commercial Lending Manager
Manistique, Marquette
Joanna B. Slaght
Senior Vice President
Compliance/Risk Manager
Manistique
Michael A. Slaght
Vice President
Commercial Banking Officer
Newberry
Jennifer A. Stempki
Vice President
Controller
Manistique
Daniel L. Stoudt
Assistant Vice President
Mortgage Loan Officer
Traverse City
Jacquelyn R. Menhennick
Senior Vice President
Mortgage and Consumer Lending Manager
Marquette
David R. Thomas
Vice President
Commercial Banking Officer
Sault Ste. Marie
Barbara A. Parrett
Assistant Vice President
District Branch Supervisor
Stephenson
Clay V. Peterson
Senior Vice President
Delta County Regional Executive
Escanaba
Paul D. Tobias
Chairman
Birmingham
Nicole A. Tryan
Assistant Vice President
Senior Loan Operations Officer
Manistique
Janet M. Willbee
Vice President
Mortgage Loan Officer
Gaylord
Terry L. Garceau
Senior Vice President
Ishpeming/Negaunee Market Executive
Ishpeming
Debra L. Peterson
Vice President
Mortgage Loan Officer
Escanaba
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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
Computershare
480 Washington Blvd., 29th Floor
Jersey City, NJ 07310
(800) 368-5948
WEBSITE
www.bankmbank.com
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Plante Moran, PLLC
Auburn Hills, 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 2015 Annual Meeting of the Shareholders of Mackinac Financial Corporation will be held on May 27, 2015.
Visit our website, www.bankmbank.com, for updated news releases, financial reports, SEC filings, corporate governance
and other investor information.
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130 S. Cedar St., Manistique, MI 49854-1438 906.341.8401 | bankmbank.com