0
About the Company
Mackinac Financial Corporation is a registered bank holding company
formed under the Bank Holding Company Act of 1956. The principal
subsidiary of the Company is mBank, and remains the largest bank
headquartered in Manistique, Michigan. Mackinac’s common stock is
publicly traded on the NASDAQ under the ticker “MFNC”. The Company
currently holds assets in excess of $980 million, and has a total of 23
branches, including 7 branches in Northern Wisconsin. The Company’s
banking services include commercial lending, treasury management
products, services geared toward small to mid-sized businesses, and a full
array of personal and business deposit products and consumer loans.
“Our people always
have, and always
will be, the
cornerstone of our
strength as a
community bank.”
Kelly W. George,
President and Chief Executive
Officer of mBank
Form 10-K
A copy of the Annual Report that was filed with 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 Company’s common stock is traded on the Nasdaq Capital Market under the symbol MFNC.
1
April 6, 2017
Dear Fellow Shareholders,
It is gratifying that 2016 was a year of
continued progress and success for your
company. We executed
two successful
strategic acquisitions in Northern Wisconsin
resulting in a significant increase in assets,
branch footprint and earnings potential. We
continued to increase organic loan production
and new customer generation at the legacy bank. And as always, we actively made contributions of time and
resources in all communities, former and acquired, in which we have a presence. We believe the Company’s
competitive position, foundation for growth and ability to create value are the strongest since the recapitalization
in 2004.
Increasing Shareholder Value
In 2016, we integrated two organizations that perfectly aligned with our acquisitions strategy. The acquisitions of
Niagara Bancorporation, Inc. (“Niagara”) and First National Bank of Eagle River (“Eagle River”) added
approximately $194 million in assets, $115 million in loan balances and $163 million in core deposits to the
MARKET CAP & SHARE PRICE
Company.
$90
$80
$70
$60
$50
$40
$30
$20
$10
2012
2013
2014
2015
2016
Market Capitalization ($M)
Closing Price ($)
$14
$13
$12
$11
$10
$9
$8
$7
$6
$5
Our required criteria as we seek these strategic
acquisitions is to identify partners that allow us to
utilize our capital and achieve a significant return
on our investment (well in excess of our cost of
capital) and carry acceptable risk levels. We also
look for organizations that can add locations that
complement our current footprint and those that
have similar business philosophies and company
culture. In addition to acquiring the earnings of the
purchased banks, we also anticipate the creation of
efficiencies that will enable us to increase revenue
2
without increasing costs at the same rate. By nature, whole bank acquisitions, like the ones we completed, often
have an enhanced impact over loan or other earning asset purchases that could be used to increase scale.
While we were identifying and moving forward with both transactions outside of the state, we were
simultaneously generating organic growth and record new loan production in our Michigan markets. Growing
our legacy Bank platform in Michigan has and will continue to be a priority in creating long-term and sustainable
earnings quality.
As of December 31, 2016, total assets of the Company were $983.52 million, compared to $739.27 million at
December 31, 2015. Shareholders’ equity at December 31, 2016 totaled $78.61 million, compared to $76.60
million at December 31, 2015.
Financial Health
As we execute our growth strategy and strengthen our financial position, our litmus test remains rooted in how
our decisions affect the creation of value for our shareholders. We are proud to report that we have increased our
dividend from $0.04 per share in 2012 to $0.40 per share in 2016 while also increasing our book value per
DIVIDENDS PER SHARE
BASIC BOOK VALUE PER SHARE
$0.40
$0.35
$12.55
$12.32
$11.77
$11.81
$0.23
$0.17
$11.05
$0.04
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
3
common share during the same period. Our disciplined approach to growth has also caused our market price per
share to see steady appreciation, driving our market capitalization up 53 percent in the same period. Your
company and its subsidiary bank also remain in a strong capital position, a main point of emphasis for financial
institutions.
Earnings
As with any acquisition, there are transaction-related expenses that are attributed to completing the acquisitions
and integrating the operations. Our 2016 acquisitions were no different in this regard. The benefit, in addition to
the natural earnings accretion, was the addition of seven new branches and the added markets that provide new
opportunities for growth. With both acquisitions, we were able to control transaction-expenses and expeditiously
complete the operational integration that included data processing platform conversion and branch rebranding.
Even with significant transaction-related costs impacting our earnings, your Corporation achieved Net income of
$4.48 million, or $0.72 per share, compared to net income $5.60 million, or $0.90 per share, in 2015. The 2016
results included total transaction-related expenses, largely associated with the early termination of the Eagle River
data processing system, of $3.10 million with an after-tax impact of $2.05 million on earnings that equated to
$.33 per share. Adjusted core net income (exclusive of all transaction-related expenses) for 2016 was $6.53
million, or $1.05 per share.
RETURN ON AVERAGE ASSETS
RETURN ON AVERAGE EQUITY
ROA
Adjusted
ROAE
Adjusted
1.23%
1.01%
12.43%
9.07%
0.76%
0.75%
0.28%
0.52%
2.57%
7.41%
8.34%
5.73%
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
When comparing the adjusted earnings number to those of 2015, we are very pleased with our year-over-year
progress and expect that our 2017 results will further show the accretive impact of the acquisitions. No further
transaction-related expenses are anticipated from Niagara or Eagle River in 2017.
Our adjusted earnings growth positively impacted Return on Average Equity (ROAE), which improved to 8.34%
in 2016. Return on Average Assets (ROAA) remained flat, but that we believe will improve in 2017.
4
Loan & Deposit Activity
LOANS BY REGION
Our community presence remains a pillar of our
UP
NLP
SEM WISC
brand. Helping the citizens and businesses in
Northern Michigan,
the Upper Peninsula,
Southeast Michigan and most recently Northern
Wisconsin meet
their financial goals
is an
extremely important part of our mission. In 2016,
we remained committed to the financial and social
wellbeing of the communities we serve by offering
competitive loan and deposit products.
$113,158
$167,070
$119,611
$134,520
$141,466
$98,478
$114,175
$367,937
$362,753
$382,018
$110,310
$88,084
$107,829
$96,192
$250,783
$279,811
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
We are proud to share that loan production of $302 million is up over $67 million from the prior year with all
business lines experiencing increases from 2015 levels. Philosophically, we believe that while acquisitions are
very beneficial, they are somewhat unpredictable in when they will be available. Our opportunistic and disciplined
approach is complemented by our ability to consistently grow our platform organically. We believe this two-
pronged approach will serve us well and allow for progress regardless of the state of the merger and acquisition
landscape.
Notably, our legacy bank footprint in Michigan had a strong year of loan production and generated solid organic
growth to augment the increase in loans from both acquisitions. We were also pleased with the momentum we
gained in our Wisconsin markets with only a partial year of operating in these communities. This increase included
SBA lending, which outpaced prior year results. Helping our local markets and businesses get access to capital to
expand and grow their economic bases remains a key initiative for our Bank that will continue into the future.
Historical Loan Production by Region
REGION
2012
2013
2014
2015
2016
TOTAL
Upper Peninsula
$
134,257
$
124,836
$
104,601
$
133,737
$
163,338
Northern Lower Peninsula
37,856
48,004
40,133
56,142
58,896
Southeast Michigan
29,327
41,989
38,669
44,392
60,881
Wisconsin
Total
-
-
-
-
18,778
$
201,440
$
214,829
$
183,403
$
234,271
$
301,893
$
1,135,836
$
$
$
$
660,769
241,031
215,258
18,778
Production inclues SBA/USDA and secondary market
5
Total loans at year-end 2016 were $781.86 million, a $163.46 million increase equating to 26% from $618.39
million at December 31, 2015. In addition to the aforementioned balance sheet totals, the Company services
$221.36 million of sold mortgage loans and $41.30 million of sold SBA and USDA loans for total loans under
management of over $1 billion.
DEPOSITS BY REGION
UP
NLP
SEM WISC
Building off our organic production,
the
acquisitions helped with the overall loan size and
industry diversification and
improved
the
granularity of both our loan and deposit portfolio.
$131,662
$50,809
$45,363
$139,795
$139,445
$181,892
$190,785
$44,030
$133,882
$54,890
$63,669
We believe core deposits will become
$121,244
$115,407
increasingly important and we are pleased with
$316,823
$304,391
$318,426
our progress in growing this low-cost funding
source over the past few years. It will remain an
equally important priority to loan activity. We
are also excited about the loan and deposits
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
prospects in our Wisconsin markets and the
opportunities to develop new client relationships and deepen established relationships now that all operational
and cultural items have been fully integrated.
Credit Quality
Our credit quality metrics remain strong with no systematic issues within our loan book. We remain vigilant to
ensure continued stringent underwriting standards that are not influenced by competitor activities and remain
disciplined as to not stretch for loans that do not meet our policy guidelines and structure criteria.
CREDIT QUALITY
$10,000
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
13.00%
11.00%
9.00%
7.00%
5.00%
3.00%
1.00%
2012
2013
2014
2015
2016
NPAs
Texas Ratio
6
Nonperforming loans totaled $4.12 million, 0.53% of total loans at December 31, 2016, up $1.585 million from
2015 balances of $2.539 million. Total loan delinquencies greater than 30 days resided at a nominal 0.83%, or
$6.47 million.
The slight increase in non-performing metrics is related to the acquired loan portfolios through our 2016
acquisitions. These metrics are expected to normalize in 2017 as they did with the Peninsula Financial Corporation
acquisition that we completed in late 2014. We remain comfortable with our purchase accounting marks and
corresponding accretion levels from both transactions in 2016, which helps mitigate the risk of the acquired loans
and are a significant part of pre-transaction due diligence.
Maintained Expenses and Margin
Our net interest margin has continued to generally outperform peers at 4.19%. While we receive some positive
impact from the accounting treatment of our properly marked-to-market acquired loan portfolios, the ability to
maintain the spread is mainly attributable to our continued discipline of loan and deposit pricing and a strong loan
to deposit ratio. We expect increased interest rates to benefit your Corporation and increase overall profitability
given we would expect rising rates to expand industry-wide margins over time.
We have remained consistent in the management of both total overhead and personnel expense as a percent of
average assets. Even as our operation evolve to support a larger infrastructure and risk profile, we continue to
manage this to meet or exceed historical levels. As previously discussed, increased scale of our asset base should
allow gradual improvement in this area as we spread these costs over a greater number of assets.
NONINTEREST EXPENSE AS %
OF TOTAL AVERAGE ASSETS
NET INTEREST MARGIN & NET
INTEREST INCOME
4.50%
3.50%
2.50%
1.50%
0.50%
2012
2013
2014
2015
2016
Salaries and Benefits
Total Overhead
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
4.35%
4.30%
4.25%
4.20%
4.15%
4.10%
2012
2013
2014
2015
2016
Net Interest Income
Net Interest Margin
7
Operational Initiatives
As we seek opportunities for growth and actively assess the health of our current business, we understand that
our results are not only predicated on what we do but how we do it. To become the great organization that we
continuously aspire to be, we need to be well rounded in all aspects of our business and strive for constant
improvement. Currently, several operational initiatives have been deployed to help maximize shareholder value
and to work towards the desired financial performance and growth that the Company is positioned for and capable
of, including:
(cid:120) Maintaining both data/cyber security and client information will remain an essential initiative with the
growing external threats for the protection of our client and shareholder information.
(cid:120) Providing continuous development of the mBank brand and integrating additional sales channels for increased
product and service delivery to drive higher levels of non-interest income and overall client growth.
(cid:120) Fostering existing momentum in our asset based lending business, Mackinac Commercial Credit, a division
of mBank.
(cid:120) Partnering with the Small Business Administration (SBA), United States Department of Agriculture (USDA)
and the Michigan and Wisconsin Economic Development Corporations, as a state leader, to provide even
more needed capital to local small businesses for expansion and operating needs.
(cid:120) Continuing to develop and grow the knowledge base of our talented staff to ensure they have the necessary
training, skills, and knowledge to be effective in their various positions.
Cultural Consistency & Community Impact
We would be remiss if we didn’t give credit to our skilled and dedicated
workforce who helped us produce our 2016 results. Collectively, the group
of nearly 250 employees, exhibits tremendous passion and creativity which
translates to exceptional customer service and helps contribute to our bottom
line results.
Our people always have and always will be the cornerstone of our strength
as a community-focused organization. Even at our larger size, we take pride
in providing a positive work environment and the necessary training to
develop the skills and knowledge each employee needs to be successful in
their various positions. In turn, they deliver personalized and informed
“Our experienced
management team will
remain focused on
developing
shareholder value
through sound
decision making and
execution.”
Paul D. Tobias,
Chairman and Chief Executive
Officer
service to our clients, helping us achieve our overall performance and risk management objectives.
8
Our commitment to cultivating a strong company culture also translates to serving the communities in which we
operate. The Company makes investments of time and money in areas that meet community needs, including but
not limited to: education, literacy, human services, animal welfare and health care organizations. Many valuable
nonprofit organizations throughout our markets have a positive impact on the local residents. We continuously
look for opportunities to help magnify their impact.
Outlook
Moving forward, our entire team at Mackinac Financial Corporation will continue to be guided by our resolve to
further your shareholder interests. We believe that patient and deliberate market decisions will allow for increased
scale through both organic business growth, as well as the right strategic acquisitions. In turn, we expect to
continue to yield economics that will drive higher earnings per share, returns on equity and long-term value. 2017
will likely present a changing industry landscape, including the probable continuance of increasing interest rates.
We will remain mindful and proactive in monitoring all areas that may impact the business.
Thank you for your continued support as shareholders. We are very proud to work for you every day as your
management team – growing and improving your Corporation.
Sincerely,
Paul D. Tobias
Chairman and CEO
Mackinac Financial Corporation
Chairman
mBank
Kelly W. George
President
Mackinac Financial Corporation
President and CEO
mBank
9
Selected Financial Highlights – Annual Comparison
(Dollars in thousands, except per share data)
Selected Financial Condition Data (at end of period):
Assets
Loans
Investment securities
Deposits
Borrowings
Shareholders' equity
Selected Statements of Income Data:
Net interest income
Income before taxes
Net income
Income per common share - Basic
Income per common share - Diluted
Weighted average shares outstanding
Weighted average shares outstanding- Diluted
Selected Financial Ratios and Other Data:
Performance Ratios:
Net interest margin
Return on average assets
Return on average equity
Average total assets
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
Dividends per share, annualized
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
As of and for the
Year Ending
December 31,
2016
(Unaudited)
$ 983,520
781,857
86,273
823,512
67,579
78,609
$ 33,098
6,766
4,483
.72
.72
6,236,067
6,268,703
As of and for the
Year Ending
December 31,
2015
(Unaudited)
$ 739,269
618,394
53,728
610,323
45,754
76,602
$ 29,120
7,929
5,596
.90
.89
6,241,921
6,273,321
4.19 %
.52
5.73
$ 865,573
78,300
98.14 %
4.30 %
.76
7.41
$ 738,688
75,545
100.52 %
$ 13.47
12.55
11.29
.400
6,263,371
$ 11.49
12.32
11.54
.400
6,217,620
$ 5,020
$ 8,906
.64 %
.91 %
11.76 %
$ 5,004
$ 4,863
.81 %
.66 %
6.34 %
23
222
17
173
10
Selected Financial Highlights – Quarterly Comparison
QUARTER ENDED
(Unaudited)
BALANCE SHEET (Dollars in thousands)
Total loans
Allowance for loan losses
Total loans, net
Total assets
Core deposits
Noncore deposits
Total deposits
Total borrowings
Total shareholders' equity
Total tangible equity
Total shares outstanding
Weighted average shares outstanding
AVERAGE BALANCES (Dollars in thousands)
Assets
Loans
Deposits
Equity
December 31
2016
September 30
2016
June 30,
2016
March 31,
2016
December 31,
2015
$ 781,857
(5,020)
776,837
983,520
650,745
172,767
823,512
67,579
78,609
70,743
6,263,371
6,263,371
$ 756,804
(4,862)
751,942
959,121
660,867
146,313
807,180
67,730
78,285
70,356
6,263,371
6,238,756
$ 725,635
(4,733)
720,902
892,328
579,606
158,757
738,363
70,604
77,081
69,916
6,226,246
6,227,730
$ 618,625
(4,824)
613,801
732,932
473,761
119,217
592,978
56,454
77,395
72,544
6,231,246
6,214,083
$ 618,394
(5,004)
613,390
739,269
480,525
129,798
610,323
45,754
76,602
71,721
6,217,620
6,225,614
$ 958,781
771,279
800,508
78,406
$ 930,353
734,702
780,265
78,027
$ 834,674
689,462
679,183
79,481
$ 737,088
615,684
604,363
77,284
$ 733,035
613,846
602,857
75,871
INCOME STATEMENT (Dollars in thousands)
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 available to common shareholders
Income pre-tax, pre-provision
$ 9,118
250
8,868
1,141
7,509
2,500
802
$ 1,698
$ 2,750
$ 8,696
200
8,496
1,489
7,285
2,700
922
$ 1,778
$ 2,900
$ 7,996
150
7,846
896
8,893
(151)
(26)
$ (125)
$ (1)
$ 7,288
-
7,288
627
6,198
1,717
585
$ 1,132
$ 1,717
$ 7,365
349
7,016
1,142
6,306
1,852
259
$ 1,593
$ 2,201
PER SHARE DATA
Earnings
Book value per common share
Tangible book value per share
Market value, closing price
Dividends per share
ASSET QUALITY RATIOS
Nonperforming loans/total loans
Nonperforming assets/total assets
Allowance for loan losses/total loans
Allowance for loan losses/nonperforming loans
Texas ratio
PROFITABILITY RATIOS
Return on average assets
Return on average equity
Net interest margin
Average loans/average deposits
CAPITAL ADEQUACY RATIOS
Tier 1 leverage ratio
Tier 1 capital to risk weighted assets
Total capital to risk weighted assets
Average equity/average assets (for the quarter)
Tangible equity/tangible assets (at quarter end)
$ .27
12.55
11.29
13.47
.100
$ .29
12.50
11.23
11.49
.100
$ (.02)
12.38
11.23
11.01
.100
$ .18
12.42
11.64
10.25
.100
$ .26
12.32
11.54
11.49
.100
1.14 % .62 % .46 %
.83
.91
.64
.64
104.13
121.73
10.55
11.76
.76
.65
142.52
9.13
.28 %
.60
.78
280.96
5.61
.50 %
.73
.81
197.09
6.34
.70 % .76 % (.06) %
8.62
4.14
96.35
(.63)
4.19
101.51
9.06
4.18
94.16
.62 %
5.89
4.33
101.87
.86 %
8.33
4.34
101.82
7.18 % 7.29 % 7.68 %
8.22
8.80
8.81
9.45
8.39
8.18
7.40
7.25
8.76
9.39
9.52
7.90
9.55 %
10.82
11.57
10.49
9.96
9.81 %
10.23
11.94
11.19
9.77
11
Branch Locations
Michigan - Upper Peninsula
ESCANABA
2224 N. Lincoln Road
Escanaba, MI 49829
(906) 233-9443
ISHPEMING – DOWNTOWN
100 S. Main Street
Ishpeming, MI 49849
(906) 485-6333
ISHPEMING – JUBILEE
Located in Jubilee Foods
Ishpeming, MI 49849
(906) 486-9595
ISHPEMING – WEST
US 41 West & 170 N. Daisy Street
Ishpeming, MI 49849
(906) 485-5717
MANISTIQUE (HEADQUARTERS)
130 South Cedar Street
Manistique, MI 49854
(906) 341-8401
MANISTIQUE – LAKESHORE
Located in Jack’s Supervalu
Manistique, MI 49854
(906) 341-7190
MARQUETTE
857 W. Washington Street
Marquette, MI 49855
(906) 226-5000
MARQUETTE – MCCLELLAN
175 S. McClellan Avenue
Marquette, MI 49855
(906) 228-3933
SAULT STE. MARIE
138 Ridge Street
Sault Ste. Marie, MI 49783
(906) 635-3992
NEGAUNEE
Located in Super One Foods
Negaunee, MI 49866
(906) 475-0120
STEPHENSON
S216 Menominee Street
Stephenson, MI 49987
(906) 753-2225
NEWBERRY
414 Newberry Avenue
Newberry, MI 49868
(906) 293-5165
Michigan - Northern Lower Peninsula/Southeastern
KALEVA
14429 Wuoksi Avenue
Kaleva, MI
(231) 362-3223
TRAVERSE CITY
3530 North Country Drive
48009 Traverse City, MI 49684
(231) 929-5600
GAYLORD
1955 South Otsego Avenue
Gaylord, MI 49735
(989) 732-3750
BIRMINGHAM
260 East Brown Street, Suite 300
Birmingham, MI
(248) 290-5900
Wisconsin
EAGLE RIVER
400 E Wall St, PO Box 1209
Eagle River, WI 54521
(715) 479-4406
ST. GERMAIN
240 Hwy 70 E, PO Box 365
Saint Germain, WI 54558-8999
(715) 479-5201
THREE LAKES
1811 Superior St, PO Box 627
Three Lakes, WI 54562-9284
(715) 546-2413
12
AURORA
W563 County Rd N,
Niagara, WI 54151
(715) 589-4381
NIAGARA
900 Roosevelt Rd,
Niagara, WI 54151-1227
(715) 251-3113
FLORENCE
845 Central Ave,
Florence, WI 54121-9492
(715) 528-5670
SPREAD EAGLE 4
93 US Hwy 2,
Spread Eagle, WI 54121
(715) 696-6566
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(cid:95)(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
For the fiscal year ended December 31, 2016
OR
(cid:134)(cid:134) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-20167
MACKINAC FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN
(State or other jurisdiction of
incorporation or organization)
38-2062816
(I.R.S. Employer
Identification No.)
130 South Cedar Street
Manistique, Michigan 49854
(888) 343-8147
(Address, including Zip Code, and telephone number,
including area (cid:70)(cid:82)(cid:71)(cid:72)(cid:15)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:3)(cid:72)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:82)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:86)(cid:12)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, no par value
Securities registered pursuant to Section 12(g) of the Act: None
Name of Each Exchange on Which Registered
The NASDAQ Stock Market, LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134) No (cid:95)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134) No (cid:95)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:95)
No (cid:134)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files.) Yes (cid:95) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be
(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:15)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:72)(cid:86)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:78)(cid:81)(cid:82)(cid:90)(cid:79)(cid:72)(cid:71)(cid:74)(cid:72)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:71)(cid:72)(cid:73)(cid:76)(cid:81)(cid:76)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:91)(cid:92)(cid:3)(cid:82)(cid:85)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)Part III of this Form 10-K or any amendments to
this Form 10-K. Yes (cid:95) No (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-(cid:68)(cid:70)(cid:70)(cid:72)(cid:79)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:76)(cid:79)(cid:72)(cid:85)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:68)(cid:3)(cid:86)(cid:80)(cid:68)(cid:79)(cid:79)(cid:72)(cid:85)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:17)(cid:3)(cid:3)(cid:54)(cid:72)(cid:72)(cid:3)(cid:71)(cid:72)(cid:73)(cid:76)(cid:81)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:179)(cid:79)(cid:68)(cid:85)(cid:74)(cid:72)(cid:3)
(cid:68)(cid:70)(cid:70)(cid:72)(cid:79)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:76)(cid:79)(cid:72)(cid:85)(cid:180)(cid:15)(cid:3)(cid:179)(cid:68)(cid:70)(cid:70)(cid:72)(cid:79)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:76)(cid:79)(cid:72)(cid:85)(cid:180)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:179)(cid:86)(cid:80)(cid:68)(cid:79)(cid:79)(cid:72)(cid:85)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:180)(cid:3)(cid:76)(cid:81)(cid:3)(cid:53)(cid:88)(cid:79)(cid:72) 12b-2 of the Exchange Act.
Large accelerated filer (cid:134)
Accelerated filer (cid:134)
Non-accelerated filer (cid:134)
(Do not check if a smaller
Reporting company)
Smaller reporting
company (cid:95)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:134) No (cid:95)
The aggregate market value of the common stock held by non-affiliates of the Registrant, based on a per share price of $11.01 as of June 30, 2016, was $42.498 million. As
of March (cid:21)(cid:27)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:85)(cid:72)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:15)(cid:3)(cid:25)(cid:15)(cid:21)(cid:28)(cid:23)(cid:15)(cid:28)(cid:22)(cid:19)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:11)(cid:81)(cid:82)(cid:3)(cid:83)(cid:68)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:12)(cid:17)
Documents Incorporated by Reference:
(cid:51)(cid:82)(cid:85)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:51)(cid:85)(cid:82)(cid:91)(cid:92)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)(cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:48)(cid:72)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)are incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. (cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:53)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:48)(cid:68)(cid:87)(cid:87)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:44)(cid:86)(cid:86)(cid:88)(cid:72)(cid:85)(cid:3)(cid:51)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)s of
Equity Securities
Item 6. Selected Financial Data
Item 7. (cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:39)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:36)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:76)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships, Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
2
2
12
12
13
13
14
14
16
17
36
40
80
80
80
81
81
81
81
82
82
83
83
1
Item 1.
Business
PART I
(cid:48)(cid:68)(cid:70)(cid:78)(cid:76)(cid:81)(cid:68)(cid:70)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:180)(cid:12)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:68)(cid:90)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:48)(cid:76)(cid:70)(cid:75)(cid:76)(cid:74)(cid:68)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)
December 16, 1974. The Corporation changed its (cid:81)(cid:68)(cid:80)(cid:72)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:179)(cid:41)(cid:76)(cid:85)(cid:86)(cid:87)(cid:3)(cid:48)(cid:68)(cid:81)(cid:76)(cid:86)(cid:87)(cid:76)(cid:84)(cid:88)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:180)(cid:3)(cid:87)(cid:82)(cid:3)(cid:179)(cid:49)(cid:82)(cid:85)(cid:87)(cid:75)(cid:3)(cid:38)(cid:82)(cid:88)(cid:81)(cid:87)(cid:85)(cid:92)(cid:3)
(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:180)(cid:3)(cid:82)(cid:81)(cid:3)(cid:36)(cid:83)(cid:85)(cid:76)(cid:79) 14, 1998. On December 16, 2004, the Corporation changed its name from North
Country Financial Corporation to Mackinac Financial Corporation. The Corporation is headquartered and located in
Manistique, Michigan. The mailing address of the Corporation is 130 South Cedar Street, Manistique, Michigan 49854.
In December of 2004, the Corporation was recapitalized with the net proceeds, approximately $26.2 million, from the
issuance of $30 million of common stock in a private placement. Commensurate with this recapitalization, the
Corporation changed its name from North Country Financial Corporation to Mackinac Financial Corporation, and its
subsidiary bank adopted the (cid:179)(cid:80)(cid:37)(cid:68)(cid:81)(cid:78)(cid:180)(cid:3)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:76)(cid:87)(cid:92)(cid:3)(cid:72)(cid:68)(cid:85)(cid:79)(cid:92)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:19)(cid:24)(cid:17)
On December (cid:24)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:23)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:51)(cid:72)(cid:81)(cid:76)(cid:81)(cid:86)(cid:88)(cid:79)(cid:68)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:179)(cid:51)(cid:41)(cid:38)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)
wholly owned subsidiary, The Peninsula Bank. PFC had six branch offices and $126 million in assets as of the
(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:72)(cid:85)(cid:74)(cid:72)(cid:85)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:86)(cid:76)(cid:81)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
acquisition date. The merger was effected by a combination of cash payments and the issuance of shares of the
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(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:72)(cid:15)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:182)(cid:86)(cid:3)(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:11)(cid:76)(cid:12) approximately 3.64 shares of
(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:15)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:70)(cid:68)(cid:86)h paid in lieu of fractional shares, or (ii) cash at $46.13 per share of common
(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:51)(cid:41)(cid:38)(cid:182)(cid:86)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:25)(cid:28)(cid:24)(cid:15)(cid:22)(cid:25)(cid:20)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)
and payment of $4.484 million in cash to the former PFC shareholders.
(cid:50)(cid:81)(cid:3)(cid:36)(cid:83)(cid:85)(cid:76)(cid:79)(cid:3)(cid:21)(cid:28)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:41)(cid:76)(cid:85)(cid:86)(cid:87)(cid:3)(cid:49)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:82)(cid:73)(cid:3)(cid:40)(cid:68)(cid:74)(cid:79)(cid:72)(cid:3)(cid:53)(cid:76)(cid:89)(cid:72)(cid:85)(cid:3)(cid:11)(cid:179)(cid:40)(cid:68)(cid:74)(cid:79)(cid:72)(cid:3)(cid:53)(cid:76)(cid:89)(cid:72)(cid:85)(cid:17)(cid:180)(cid:12)(cid:3)(cid:3)
Eagle River had three branch offices and approximately $125 million in assets as of the acquisition date. The results of
op(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:72)(cid:85)(cid:74)(cid:72)(cid:85)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:86)(cid:76)(cid:81)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:80)(cid:72)(cid:85)(cid:74)(cid:72)(cid:85)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)
effected by a cash payment of $12.5 million.
(cid:50)(cid:81)(cid:3)(cid:36)(cid:88)(cid:74)(cid:88)(cid:86)(cid:87)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:49)(cid:76)(cid:68)(cid:74)(cid:68)(cid:85)(cid:68)(cid:3)(cid:37)(cid:68)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:179)(cid:49)(cid:76)(cid:68)(cid:74)(cid:68)(cid:85)(cid:68)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:90)(cid:75)(cid:82)(cid:79)(cid:79)(cid:92)(cid:3)
owned subsidiary, First National Bank of Niagara. Niagara had four branch offices and approximately $67 million in
assets. (cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:72)(cid:85)(cid:74)(cid:72)(cid:85)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:86)(cid:76)(cid:81)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)ition
date. The merger was effected by a cash payment of $7.325 million.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:90)(cid:81)(cid:86)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:15)(cid:3)(cid:80)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:37)(cid:68)(cid:81)(cid:78)(cid:180)(cid:12)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)
has 12 branch offices located in the Upper Peninsula of Michigan(cid:15)(cid:3)(cid:23)(cid:3)(cid:69)(cid:85)(cid:68)(cid:81)(cid:70)(cid:75)(cid:3)(cid:82)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)(cid:79)(cid:82)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:48)(cid:76)(cid:70)(cid:75)(cid:76)(cid:74)(cid:68)(cid:81)(cid:182)(cid:86)(cid:3)(cid:47)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3)
Peninsula and 7 branches in Wisconsin. The Bank maintains offices in the Michigan counties of: Chippewa, Grand
Traverse, Luce, Manistee, Marquette, Menominee, Oakland, Otsego, and Schoolcraft. The Bank maintains offices in the
Wisconsin counties of: Florence, Marinette, Oneida and Vilas. The Bank provides drive-in convenience at 17 branch
locations and has 25 automated teller machines. The Bank has no foreign offices.
The Corporation also owns three non-bank subsidiaries: First Manistique Agency, presently inactive; First Rural
Relending Company, a relending company for nonprofit organizations; and North Country Capital Trust, a statutory
business trust which was formed solely for the issuance of trust preferred securities (none of which remain outstanding).
The Bank represents the principal asset of the Corporation. The Bank has one wholly owned subsidiary, mBank Title
Insurance Agency, LLC, which provided title insurance services until 2014 and is currently inactive. The Corporation
and the Bank are engaged in a single industry segment, commercial banking, broadly defined to include commercial and
retail banking activities, along with other permitted activities closely related to banking.
Operations
Th(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:72)(cid:85)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:15)(cid:3)(cid:70)(cid:82)(cid:81)(cid:71)(cid:88)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)
provision of a full range of loan and deposit products. These banking services include customary retail and commercial
banking services, including checking and savings accounts, time deposits, interest bearing transaction accounts, safe
deposit facilities, real estate mortgage lending, commercial lending, commercial and governmental lease financing, and
direct and indirect consumer financing. F(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:69)(cid:85)(cid:82)(cid:78)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:71)(cid:72)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
2
(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:41)(cid:72)(cid:71)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:43)(cid:82)(cid:80)(cid:72)(cid:3)(cid:47)(cid:82)(cid:68)(cid:81)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:11)(cid:179)(cid:41)(cid:43)(cid:47)(cid:37)(cid:180)(cid:12)(cid:3)(cid:86)(cid:92)(cid:86)(cid:87)(cid:72)(cid:80)(cid:15)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
mortgage-backed and other securities, funds from repayment of outstanding loans and earnings from operations.
Earnings depend primarily upon the difference between (i) revenues from loans, investments, and other interest-bearing
assets and (ii) expenses incurred in payment of interest on deposit accounts and borrowings, an adequate allowance for
loan losses, and general operating expenses.
Competition
Banking is a highly competitive business. The Bank competes for loans and deposits with other banks, savings and loan
associations, credit unions, mortgage bankers, and investment firms in the scope and type of services offered, pricing of
loans, interest rates paid on deposits, and number and location of branches, among other things. The Bank also faces
(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:87)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:82)(cid:85)(cid:86)(cid:182)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:80)(cid:88)(cid:87)(cid:88)(cid:68)(cid:79)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:74)(cid:82)(cid:89)(cid:72)(cid:85)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87) securities.
The Bank competes for loans principally through interest rates and loan fees, the range and quality of the services it
provides and the locations of its branches. In addition, the Bank actively solicits deposit-related clients and competes for
deposits by offering depositors a variety of savings accounts, checking accounts, and other services.
Employees
As of December 31, 2016, the Corporation and its subsidiaries employed, in the aggregate, 222 employees. The
Corporation provides its employees with comprehensive medical and dental benefit plans, a life insurance plan, and a
401(k) (cid:83)(cid:79)(cid:68)(cid:81)(cid:17)(cid:3)(cid:3)(cid:49)(cid:82)(cid:81)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:79)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:69)(cid:68)(cid:85)(cid:74)(cid:68)(cid:76)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
Corporation. Management believes its relationship with its employees to be good.
Business
The Bank makes mortgage, commercial, and installment loans to customers throughout Michigan and Northeastern
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relates to commercial loans to entities within the real estate (cid:178) operators of nonresidential buildings industry. This
concentration represented $121.861 million or 22.42% of the commercial loan portfolio at December 31, 2016. The
Bank also supports the service industry, with its hospitality and related businesses, as well as gaming, forestry,
restaurants, farming, fishing, and many other activities important to growth in the regions we service. The economy of
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The Bank has become a premier SBA/USDA lender in our regions. Many of these SBA/USDA guaranteed loans are
sold at a premium on the secondary market, with the Bank retaining the servicing. The Bank does not sell the loan
guarantees on every credit, rather only those where acceptable market rates are above par.
The Bank also offers various consumer loan products including installment, mortgages and home equity loans. In
addition to making consumer portfolio loans, the Bank engages in the business of making residential mortgage loans for
sale to the secondary market.
On December 5, 2014, upon the consummation of the merger of PFC with and into the Corporation, the Corporation
consolidated Peninsula Bank with the Bank. The (cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:81)(cid:72)(cid:68)(cid:85)(cid:79)(cid:92)(cid:3)(cid:71)(cid:82)(cid:88)(cid:69)(cid:79)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:56)(cid:83)(cid:83)(cid:72)(cid:85)(cid:3)(cid:51)(cid:72)(cid:81)(cid:76)(cid:81)(cid:86)(cid:88)(cid:79)(cid:68)(cid:3)
to 13 total branches and increased the total number of branches in Michigan from 11 to 17.
On April 29, 2016, the Corporation consummated the merger of Eagle River into the Bank. On August 31, 2016, upon
consummation of the purchase of all outstanding stock of Niagara Bancorporation, Inc., the Corporation consolidated
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The Ba(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:92)(cid:3)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:79)(cid:72)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:15)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:83)(cid:88)(cid:85)(cid:83)(cid:82)(cid:86)(cid:72)(cid:86)(cid:3)(cid:76)(cid:86)(cid:3)(cid:71)(cid:72)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:82)(cid:73)(cid:73)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:3)
wide range of interest bearing and non-interest bearing accounts, including commercial and retail checking accounts,
negotiable order of withd(cid:85)(cid:68)(cid:90)(cid:68)(cid:79)(cid:3)(cid:11)(cid:179)(cid:49)(cid:50)(cid:58)(cid:180)(cid:12)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:15)(cid:3)(cid:80)(cid:82)(cid:81)(cid:72)(cid:92)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:76)(cid:81)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:88)(cid:68)(cid:79)(cid:3)
retirement accounts, regular interest-bearing statement savings accounts, certificates of deposit with a range of maturity
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(cid:86)(cid:82)(cid:79)(cid:76)(cid:70)(cid:76)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:82)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:15)(cid:3)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:3)(cid:80)(cid:68)(cid:76)(cid:79)(cid:3)(cid:86)(cid:82)(cid:79)(cid:76)(cid:70)(cid:76)(cid:87)(cid:68)tion and limited advertisements published in the local
3
media. The Bank also utilizes the wholesale deposit market for any shortfalls in loan funding. No material portions of
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The Bank is a member of the FHLB. The FHLB provides an additional source of liquidity and long-term funds.
Membership in the FHLB has provided access to attractive rate advances, as well as advantageous lending programs.
The Community Investment Program makes advances to be used for funding community-oriented mortgage lending, and
the Affordable Housing Program grants advances to fund lending for long-term low and moderate income owner
occupied and affordable rental housing at subsidized interest rates.
The Bank has secondary borrowing lines of credit available to respond to deposit fluctuations and temporary loan
demands. The unsecured lines totaled $48.0 million at December 31, 2016, with additional amounts available if
collateralized.
As of December (cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:75)(cid:68)(cid:71)(cid:3)(cid:81)(cid:82)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:73)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)(cid:54)(cid:72)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:53)(cid:68)(cid:87)(cid:72)(cid:3)(cid:53)(cid:76)(cid:86)(cid:78)(cid:180)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
(cid:179)(cid:41)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:53)(cid:76)(cid:86)(cid:78)(cid:180)(cid:3)(cid:86)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:39)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:36)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:76)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)
Operations unde(cid:85)(cid:3)(cid:44)(cid:87)(cid:72)(cid:80)(cid:3)(cid:26)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:15)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:71)(cid:72)(cid:87)(cid:68)(cid:76)(cid:79)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:92)(cid:17)
Compliance with federal, state, and local statutes and/or ordinances relating to the protection of the environment is not
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Supervision and Regulation
As a registered bank holding company, the Corporation is subject to regulation and examination by the Board of
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(cid:68)(cid:80)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:37)(cid:43)(cid:38)(cid:36)(cid:180)(cid:12)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:76)(cid:86)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:91)(cid:68)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:48)(cid:76)(cid:70)(cid:75)(cid:76)(cid:74)(cid:68)(cid:81)(cid:3)(cid:39)(cid:72)(cid:83)(cid:68)(cid:85)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:44)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)
(cid:68)(cid:81)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:39)(cid:44)(cid:41)(cid:54)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:41)(cid:72)(cid:71)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:39)(cid:72)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:3)(cid:44)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:41)(cid:39)(cid:44)(cid:38)(cid:180)(cid:12)(cid:17)
Under the BHCA, the Corporation is subject to periodic examination by the Federal Reserve Board, and is required to
file with the Federal Reserve Board periodic reports of its operations and such additional information as the Federal
Reserve Board may require. In accordance with Federal Reserve Board policy, the Corporation is expected to act as a
source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the
Corporation might not do so absent such policy. In addition, there are numerous federal and state laws and regulations
which regulate the activities of the Corporation, the Bank and the non-bank subsidiaries, including requirements and
limitations relating to capital and reserve requirements, permissible investments and lines of business, transactions with
affiliates, loan limits, mergers and acquisitions, issuances of securities, dividend payments, inter-affiliate liabilities,
extensions of credit and branch banking.
Federal banking regulatory agencies have established risk-based capital guidelines for banks and bank holding
companies that are designed to make regulatory capital requirements more sensitive to differences in risk profiles among
banks and bank holding companies. The resulting capital ratios represent qualifying capital as a percentage of total risk-
weighted assets and off-balance sheet items. The guidelines are minimums, and the federal regulators have noted that
banks and bank holding companies contemplating expansion programs should not allow expansion to diminish their
capital ratios and should maintain all ratios well in excess of the minimums. The current ratios have recently been
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The Federal Deposit Insurance Corporation Im(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:86)(cid:3)(cid:179)(cid:83)(cid:85)(cid:82)(cid:80)(cid:83)(cid:87)(cid:3)(cid:70)(cid:82)(cid:85)(cid:85)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:180)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:83)(cid:88)(cid:85)(cid:86)(cid:88)(cid:68)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)
(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:82)(cid:81)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:73)(cid:76)(cid:89)(cid:72)(cid:3)(cid:70)(cid:68)(cid:87)(cid:72)(cid:74)(cid:82)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:88)(cid:83)(cid:82)(cid:81)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:71)(cid:72)(cid:84)(cid:88)(cid:68)(cid:70)(cid:92)(cid:15)(cid:3)(cid:85)(cid:68)(cid:81)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:179)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:180)(cid:3)
(cid:87)(cid:82)(cid:3)(cid:179)(cid:70)(cid:85)(cid:76)(cid:87)(cid:76)(cid:70)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:180)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:3)(cid:11)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)o certain exceptions) the appropriate federal banking agency
(cid:87)(cid:82)(cid:3)(cid:87)(cid:68)(cid:78)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:80)(cid:83)(cid:87)(cid:3)(cid:70)(cid:82)(cid:85)(cid:85)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:81)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:76)(cid:87)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:69)(cid:72)(cid:70)(cid:82)(cid:80)(cid:72)(cid:86)(cid:3)(cid:179)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:180)(cid:3)(cid:82)(cid:85)(cid:3)
(cid:179)(cid:70)(cid:85)(cid:76)(cid:87)(cid:76)(cid:70)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:180)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:41)(cid:39)(cid:44)(cid:38)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:15)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:3)(cid:82)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:88)(cid:81)(cid:76)(cid:87)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:3)(cid:75)(cid:72)(cid:68)(cid:85)(cid:76)(cid:81)(cid:74), has authority to downgrade an
(cid:76)(cid:81)(cid:86)(cid:87)(cid:76)(cid:87)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:179)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:180)(cid:3)(cid:87)(cid:82)(cid:3)(cid:179)(cid:68)(cid:71)(cid:72)(cid:84)(cid:88)(cid:68)(cid:87)(cid:72)(cid:79)(cid:92)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:180)(cid:3)(cid:82)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:68)(cid:81)(cid:3)(cid:179)(cid:68)(cid:71)(cid:72)(cid:84)(cid:88)(cid:68)(cid:87)(cid:72)(cid:79)(cid:92)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:180)(cid:3)(cid:82)(cid:85)(cid:3)
(cid:179)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:180)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:76)(cid:87)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:88)(cid:83)(cid:72)(cid:85)(cid:89)(cid:76)(cid:86)(cid:82)(cid:85)(cid:92)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:83)(cid:83)(cid:79)(cid:76)(cid:70)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:81)(cid:72)(cid:91)(cid:87)(cid:3)(cid:79)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3)(cid:70)(cid:68)(cid:87)(cid:72)(cid:74)(cid:82)(cid:85)(cid:92)(cid:15)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:86)(cid:88)(cid:83)(cid:72)(cid:85)(cid:89)(cid:76)(cid:86)(cid:82)(cid:85)(cid:92)(cid:3)(cid:70)(cid:82)ncerns.
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(cid:36)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:76)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:180)(cid:3)(cid:76)(cid:81)(cid:3)(cid:44)(cid:87)(cid:72)(cid:80)(cid:3)(cid:26)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:68)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:20)(cid:25)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)
Consolidated Financial Statements in Item 8 below.
4
Current federal law provides that adequately capitalized and managed bank holding companies from any state may
acquire banks and bank holding companies located in any other state, subject to certain conditions.
In 1999, Congress enacted the Gramm-Leach-(cid:37)(cid:79)(cid:76)(cid:79)(cid:72)(cid:92)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:11)(cid:179)(cid:42)(cid:47)(cid:37)(cid:36)(cid:180)(cid:12)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:72)(cid:79)(cid:76)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:69)(cid:68)(cid:85)(cid:85)(cid:76)(cid:72)(cid:85)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)
on affiliations between banks and securities firms, insurance companies and other financial service organizations.
Among other things, GLBA repealed certain Glass-Steagall Act restrictions on affiliations between banks and securities
(cid:73)(cid:76)(cid:85)(cid:80)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:80)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:43)(cid:38)(cid:36)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:72)(cid:85)(cid:80)(cid:76)(cid:87)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:76)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:73)(cid:92)(cid:3)(cid:68)(cid:86)(cid:3)(cid:179)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:76)(cid:72)(cid:86)(cid:180)(cid:3)(cid:87)(cid:82)(cid:3)
(cid:72)(cid:81)(cid:74)(cid:68)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:69)(cid:85)(cid:82)(cid:68)(cid:71)(cid:3)(cid:79)(cid:76)(cid:86)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:179)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:15)(cid:180)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:81)(cid:92)(cid:3)non-financial activity that the Federal Reserve Board, in
(cid:70)(cid:82)(cid:81)(cid:86)(cid:88)(cid:79)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:85)(cid:72)(cid:87)(cid:68)(cid:85)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:55)(cid:85)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:92)(cid:15)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:86)(cid:3)(cid:76)(cid:86)(cid:3)(cid:179)(cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:85)(cid:92)(cid:180)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:82)(cid:86)(cid:72)(cid:86)(cid:3)(cid:81)(cid:82)(cid:3)
substantial risk to the safety and soundness of depository institutions or the financial system. GLBA treats lending,
insurance underwriting, insurance company portfolio investment, financial advisory, securities underwriting, dealing and
market-making, and merchant banking activities as financial in nature for this purpose.
Under GLBA, a bank holding company may become certified as a financial holding company by filing a notice with the
Federal Reserve Board, together with a certification that the bank holding company meets certain criteria, including
capital, management, and Community Reinvestment Act requirements. The Corporation is not currently required to
qualify as a financial holding company.
Privacy Restrictions
GLBA, in addition to the previously described changes in permissible non-banking activities permitted to banks, bank
holding companies and financial holding companies, also requires financial institutions in the U.S. to provide certain
privacy disclosures to customers and consumers, to comply with certain restrictions on sharing and usage of personally
identifiable information, and to implement and maintain commercially reasonable customer information safeguarding
standards. The Corporation believes that it complies with all provisions of GLBA and all implementing regulations, and
the Bank has developed appropriate policies and procedures to meet its responsibilities in connection with the privacy
provisions of GLBA.
The USA PATRIOT Act
In 2001, Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Te(cid:85)(cid:85)(cid:82)(cid:85)(cid:76)(cid:86)(cid:80)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:21)(cid:19)(cid:19)(cid:20)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:56)(cid:54)(cid:36)(cid:3)(cid:51)(cid:36)(cid:55)(cid:53)(cid:44)(cid:50)(cid:55)(cid:3)(cid:36)(cid:70)(cid:87)(cid:180)(cid:12)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:56)(cid:54)(cid:36)(cid:3)(cid:51)(cid:36)(cid:55)(cid:53)(cid:44)(cid:50)(cid:55)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:71)(cid:72)(cid:86)(cid:76)(cid:74)(cid:81)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:72)(cid:81)(cid:92)(cid:3)(cid:87)(cid:72)(cid:85)(cid:85)(cid:82)(cid:85)(cid:76)(cid:86)(cid:87)(cid:86)(cid:3)
and criminals the ability to obtain access to the United States financial system, and has significant implications for
depository institutions, brokers, dealers and other businesses involved in the transfer of money. The USA PATRIOT
Act mandates financial services companies to implement additional policies and procedures with respect to, or additional
measures designed to address, any or all of the following matters, among others: money laundering, terrorist financing,
identifying and reporting suspicious activities and currency transactions, and currency crimes.
Sarbanes-Oxley Act
On July 30, 2002, President Bush signed into law The Sarbanes-Oxley Act of 2002. This legislation addresses
accounting oversight and corporate governance matters, including:
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The creation of a five-member oversight board that will set standards for accountants and have
investigative and disciplinary powers;
The prohibition of accounting firms from providing various types of consulting services to public
clients and requiring accounting firms to rotate partners among public client assignments every five
years;
Increased penalties for financial crimes;
Expanded disclosure of corporate operations and internal controls and certification of financial
statements;
Enhanced controls on, and reporting of, insider training; and
Prohibition on lending to officers and directors of public companies, although the Bank may continue
to make these loans within the constraints of existing banking regulations.
Among other provisions, Section 302(a) of the Sarbanes-Oxley Act requires that our Chief Executive Officer and Chief
Financial Officer certify that our quarterly and annual reports do not contain any untrue statement or omission of a
5
material fact. Specific requirements of the certifications include having these officers confirm that they are responsible
for establishing, maintaining and regularly evaluating the effectiveness of our disclosure controls and procedures; they
have made certain disclosures to our auditors and Audit Committee about our internal controls; and they have included
information in our quarterly and annual reports about their evaluation and whether there have been significant changes in
our internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation.
In addition, Section 404 of the Sarbanes-(cid:50)(cid:91)(cid:79)(cid:72)(cid:92)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:40)(cid:38)(cid:182)(cid:86)(cid:3)(cid:85)(cid:88)(cid:79)(cid:72)(cid:86) and regulations thereunder require our
management to evaluate, with the participation of our principal executive and principal financial officers, the
effectiveness, as of the end of each fiscal year, of our internal control over financial reporting. Our management must
then provide a report of management on our internal over financial reporting that contains, among other things, a
statement of their responsibility for establishing and maintaining adequate internal control over financial reporting, and a
statement identifying the framework they used to evaluate the effectiveness of our internal control over financial
reporting.
Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:39)(cid:82)(cid:71)d-(cid:41)(cid:85)(cid:68)(cid:81)(cid:78)(cid:3)(cid:36)(cid:70)(cid:87)(cid:180)(cid:12)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:79)(cid:68)(cid:90)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:39)(cid:82)(cid:71)(cid:71)-Frank Act resulted in sweeping changes in the regulation of financial
institutions aimed at strengthening safety and soundness for the financial services sector. A summary of certain
provisions of the Dodd-Frank Act is set forth below:
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Increased Capital Standards and Enhanced Supervision.
The federal banking agencies are required to establish minimum leverage and risk-based capital
requirements for banks and bank holding companies. These new standards are described below. The
Dodd-Frank Act also increased regulatory oversight, supervision and examination of banks, bank
holding companies and their respective subsidiaries by the appropriate regulatory agency.
Federal Deposit Insurance.
The Dodd-Frank Act made permanent the $250,000 deposit insurance limit for insured deposits and
provided unlimited federal deposit insurance on noninterest bearing transaction accounts at all insured
depository institutions through December 31, 2012. Subsequent to 2012, these amounts reverted from
unlimited insurance to $250,000 coverage per separately insured depositor. The Dodd-Frank Act also
changed the assessment base for federal deposit insurance from the amount of insured deposits to
consolidated assets less tangible equity, eliminated the ceiling on the size of the Deposit Insurance
(cid:41)(cid:88)(cid:81)(cid:71)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:39)(cid:44)(cid:41)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:79)(cid:82)(cid:82)(cid:85)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:76)(cid:93)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:39)(cid:44)(cid:41)(cid:17)
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:88)(cid:80)(cid:72)(cid:85)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:51)(cid:85)(cid:82)(cid:87)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:37)(cid:88)(cid:85)(cid:72)(cid:68)(cid:88)(cid:3)(cid:11)(cid:179)(cid:38)(cid:41)(cid:51)(cid:37)(cid:180)(cid:12)(cid:17)
The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new
agency, the CFPB, responsible for implementing, examining and, for large financial institutions of $10
billion or more in total assets, enforcing compliance with federal consumer financial laws. Because
we have under $10 billion in total assets, however, the Federal Deposit Insurance Corporation will still
continue to examine us at the federal level for compliance with such laws.
Interest on Demand Deposit Accounts.
The Dodd-Frank Act repealed the prohibition on the payment of interest on demand deposit accounts
effective July 21, 2011, thereby permitting depository institutions to now pay interest on business
checking and other accounts.
Mortgage Reform.
The Dodd-(cid:41)(cid:85)(cid:68)(cid:81)(cid:78)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:80)(cid:82)(cid:85)(cid:87)(cid:74)(cid:68)(cid:74)(cid:72)(cid:3)(cid:85)(cid:72)(cid:73)(cid:82)(cid:85)(cid:80)(cid:3)(cid:68)(cid:71)(cid:71)(cid:85)(cid:72)(cid:86)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:182)(cid:86)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:83)ay, restricted
variable-rate lending by requiring the ability to repay to be determined for variable rate loans by using
6
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the maximum rate that will apply during the first five years of a variable-rate loan term, and made
more loans subject to requirements for higher-cost loans, new disclosures and certain other restrictions.
Interstate Branching.
The Dodd-Frank Act allows banks to engage in de novo interstate branching, a practice that was
previously significantly limited.
Interchange Fee Limitations.
The Dodd-Frank Act gave the Federal Reserve Board the authority to establish rules regarding
interchange fees charged for electronic debit transactions by a payment card issuer that, together with
its affiliates, has assets of $10 billion or more and to enforce a new statutory requirement that such fees
be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve
Board has rules under this provision that limit the swipe fees that a debit card issuer can charge a
merchant for a transaction to the sum of 21 cents and five basis points times the value of the
transaction, plus up to one cent for fraud prevention costs. While we are not directly subject to such
regulations since our total assets do not exceed $10 billion, these regulations may impact our ability to
compete with larger institutions who are subject to the restrictions.
The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the
United States and requires the CFPB and other federal agencies to implement many new and
significant rules and regulations in addition to those discussed above. The CFPB has issued significant
new regulations that impact consumer mortgage lending and servicing. Those regulations became
effective in January 2014. In addition, the CFPB issued new regulations that changed the disclosure
requirements and forms used under the Truth in Lending Act and Real Estate Settlement and
Procedures Act effective October 3, 2015. Compliance with these new laws and regulations and other
regulations under consideration by the CFPB will likely result in additional costs, which could be
significant and could adversely impact our results of operations, financial condition or liquidity.
Basel III
On July 2, 2013, the Federal Reserve and OCC approved a final rule to establish a new comprehensive regulatory capital
framework for all US banking organizations, with an effective date of January 1, 2015. The Regulatory Capital
(cid:41)(cid:85)(cid:68)(cid:80)(cid:72)(cid:90)(cid:82)(cid:85)(cid:78)(cid:3)(cid:11)(cid:179)(cid:37)(cid:68)(cid:86)(cid:72)(cid:79)(cid:3)(cid:44)(cid:44)(cid:44)(cid:180)(cid:12)(cid:3)(cid:76)(cid:80)(cid:83)(cid:79)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:86)(cid:72)(cid:89)(cid:72)(cid:85)(cid:68)(cid:79) changes to the US regulatory capital framework required by the Dodd-
Frank Act. The new US capital framework imposes higher minimum capital requirements, additional capital buffers
above those minimum requirements, a more restrictive definition of capital, and higher risk weights for various
enumerated classifications of assets, the combined impact of which effectively results in substantially more demanding
capital standards for US banking organizations.
The Basel III final rule establishes a common equi(cid:87)(cid:92)(cid:3)(cid:55)(cid:76)(cid:72)(cid:85)(cid:3)(cid:20)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:11)(cid:179)(cid:38)(cid:40)(cid:55)(cid:20)(cid:180)(cid:12)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:68)(cid:3)(cid:55)(cid:76)(cid:72)(cid:85)(cid:3)(cid:20)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)
6.0% and an 8.0% total capital requirement. The new CET1 and minimum Tier 1 capital requirements became effective
January 1, 2015. In addition to these minimum risk-based capital ratios, the Basel III final rule requires that all banking
(cid:82)(cid:85)(cid:74)(cid:68)(cid:81)(cid:76)(cid:93)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:80)(cid:68)(cid:76)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:179)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:72)(cid:85)(cid:89)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:69)(cid:88)(cid:73)(cid:73)(cid:72)(cid:85)(cid:180)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:40)(cid:55)(cid:20)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:81)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:72)(cid:84)(cid:88)(cid:68)(cid:79)(cid:3)(cid:87)(cid:82)(cid:3)(cid:21)(cid:17)(cid:24)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)-weighted
assets in order to avoid restrictions on their ability to make capital distributions and to pay certain discretionary bonus
payments to executive officers. In order to avoid those restrictions, the capital conservation buffer effectively increased
the minimum CET1 capital, Tier 1 capital and total capital ratios for US banking organizations to 7.0%, 8.5% and
10.5%, respectively. Banking organizations with capital levels that fall within the buffer will be required to limit
dividends, shares repurchases or redemptions (unless replaced within the same calendar quarter by capital instruments of
7
equal or higher quality), and discretionary bonus payments. The capital conservation buffer is phased in over a 5-year
period, beginning January 1, 2016.
Leverage
CET1
Tier 1
Total Capital
Adequately
Capitalized
Requirement
4.0%
4.5%
6.0%
8.0%
Requirement
Well-Capitalized
Well-Capitalized with Buffer, fully
phased in 2019
5.0%
7.0%
8.5%
10.5%
5.0%
6.5%
8.0%
10.0%
As required by Dodd-Frank, the Basel III final rule requires that capital instruments such as trust preferred securities and
cumulative preferred shares be phased out of Tier 1 capital by January 1, 2016, for banking organizations that had $15
billion or more in total consolidated assets as of December 31, 2009 and permanently grandfathers as Tier 1 capital such
instruments issued by these smaller entities prior to May 19, 2010 (provided they do not exceed 25% of Tier 1 capital).
The Basel III final rule provides banking organizations under $250 billion in total consolidated assets or under $10
billion in foreign exposures with a one-(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:179)(cid:82)(cid:83)(cid:87)-(cid:82)(cid:88)(cid:87)(cid:180)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:36)(cid:70)(cid:70)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:85)(cid:72)(cid:75)(cid:72)(cid:81)(cid:86)(cid:76)(cid:89)(cid:72)(cid:3)
income from CET1 capital. The election to opt-(cid:82)(cid:88)(cid:87)(cid:3)(cid:80)(cid:88)(cid:86)(cid:87)(cid:3)(cid:69)(cid:72)(cid:3)(cid:80)(cid:68)(cid:71)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:85)(cid:74)(cid:68)(cid:81)(cid:76)(cid:93)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:73)(cid:76)(cid:85)(cid:86)(cid:87)(cid:3)(cid:38)(cid:68)(cid:79)(cid:79)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:73)(cid:76)(cid:79)(cid:72)(cid:71)(cid:3)
after January 1, 2015. The Corporation has elected to opt-out and continues to exclude Accumulated Other
Comprehensive Income from its regulatory capital.
The Basel III final rule requires that goodwill and other intangible assets (other than mortgage servicing assets), net of
associated deferred tax liabilities, be deducted from CET1 capital. Additionally, deferred tax assets that arise from net
operating loss and tax credit carryforwards, net of associated deferred tax liabilities and valuation allowances, are fully
deducted from CET1 capital. However, deferred tax assets arising from temporary differences that could not be realized
(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:3)(cid:70)(cid:68)(cid:85)(cid:85)(cid:92)(cid:69)(cid:68)(cid:70)(cid:78)(cid:86)(cid:15)(cid:3)(cid:68)(cid:79)(cid:82)(cid:81)(cid:74)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:80)(cid:82)(cid:85)(cid:87)(cid:74)(cid:68)(cid:74)(cid:72)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:179)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:81)(cid:87)(cid:180)(cid:3)(cid:11)(cid:71)(cid:72)(cid:73)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:3)(cid:74)(cid:85)(cid:72)(cid:68)(cid:87)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)
10% of the issued and outstanding common stock of the unconsolidated financial institution) investments in the common
(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:82)(cid:73)(cid:3)(cid:88)(cid:81)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:179)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:76)(cid:87)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:180)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:38)(cid:40)(cid:55)(cid:20)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:15)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:72)(cid:71)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:71)(cid:72)(cid:73)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)
the final rule.
Info(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:72)(cid:74)(cid:68)(cid:85)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:70)(cid:68)(cid:81)(cid:3)(cid:69)(cid:72)(cid:3)(cid:73)(cid:82)(cid:88)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:20)(cid:25)(cid:3)(cid:177) Regulatory Matters
in the financial statements included herein.
Monetary Policy
The earnings and business of the Corporation and the Bank depends on interest rate differentials. In general, the
difference between the interest rates paid by the Bank to obtain its deposits and other borrowings, and the interest rates
(cid:85)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:82)(cid:81)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:72)(cid:91)(cid:87)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:75)(cid:72)(cid:79)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:73)olio, comprises the
(cid:80)(cid:68)(cid:77)(cid:82)(cid:85)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:79)(cid:92)(cid:3)(cid:86)(cid:72)(cid:81)(cid:86)(cid:76)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:68)(cid:81)(cid:92)(cid:3)(cid:73)(cid:68)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:69)(cid:72)(cid:92)(cid:82)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
Bank, and accordingly, its earnings and growth will be subject to the influence of economic conditions, generally, both
domestic and foreign, including inflation, recession, unemployment, and the monetary policies of the Federal Reserve
Board. The Federal Reserve Board implements national monetary policies designed to curb inflation, combat recession,
and promote growth through, among other means, its open-market dealings in US government securities, by adjusting
the required level of reserves for financial institutions subject to reserve requirements, through adjustments to the
discount rate applicable to borrowings by banks that are members of the Federal Reserve System, and by adjusting the
Federal Funds Rate, the rate charged in the interbank market for purchase of excess reserve balances. In addition,
legislative and economic factors can be expected to have an ongoing impact on the competitive environment within the
financial services industry. The nature and timing of any future changes in such policies and their impact on the Bank
cannot be predicted with certainty.
8
Selected Statistical Information
I.
Distri(cid:69)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:36)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:15)(cid:3)(cid:50)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:30)(cid:3)(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:53)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:39)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)
The key components of net interest income, the daily average balance sheet for each year (cid:178) including the components
of earning assets and supporting obligations (cid:178) the related interest income on a fully tax equivalent basis and interest
expense, as well as the average rates earned and paid on these assets and obligations is contained under the caption
(cid:179)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:39)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:36)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:76)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81) (cid:68)(cid:81)(cid:71)(cid:3)(cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:180)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:44)(cid:87)(cid:72)(cid:80)(cid:3)(cid:26)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:17)
An analysis of the changes in net interest income from period-to-period and the relative effect of the changes in interest
income and expense due to changes in the average balances of earning assets and interest-bearing obligations and
(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:76)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:68)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:179)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:39)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:36)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:76)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)
(cid:68)(cid:81)(cid:71)(cid:3)(cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:180)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:44)(cid:87)(cid:72)(cid:80)(cid:3)(cid:26)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:17)
II.
Investment Portfolio
A.
Investment Portfolio Composition
The following table presents the carrying value of investment securities available for sale as of December 31 of the years
set forth below (dollars in thousands):
2016
2015
2015
US Treasuries
Corporate
Equity
US Agencies
US Agencies - MBS
State and political subdivisions
Total
$
(cid:178) $
(cid:178) $ 5,280
12,674
(cid:178)
22,717
13,688
11,473
$ 86,273 $ 53,728 $ 65,832
12,646
(cid:178)
27,377
3,759
9,946
19,910
500
23,952
16,833
25,078
B.
Relative Maturities and Weighted Average Interest Rates
The following table presents the maturity schedule of securities held and the weighted average yield of those securities,
as of December 31, 2016 (fully taxable equivalent, dollars in thousands):
$
US Treasuries
US Agencies
US Agencies - MBS
Corporate
Equity
State and political
subdivisions
In one
year
or less
After one, After five,
but within but within
ten years
five years
Over
ten years
(cid:178) $
(cid:178) $
401
305
(cid:178)
(cid:178)
23,051
12,632
16,365
(cid:178)
(cid:178) $
500
1,996
3,545
(cid:178)
(cid:178) $
(cid:178)
1,900
(cid:178)
500
Total
Weighted
Average
Yield (1)
(cid:178) (cid:178)%
1.62%
2.03%
2.68%
4.61%
23,952
16,833
19,910
500
265
8,664
10,008
6,141
25,078
3.54%
Total
$ 971 $ 60,712 $ 16,049 $ 8,541 $ 86,273
Weighted average yield (1)
3.19%
2.04%
3.72%
3.50%
2.51%
(1) Weighted average yield includes the effect of tax-equivalent adjustments using a 34% tax rate.
9
III.
Loan Portfolio
A.
Type of Loans
The following table sets forth the major categories of loans outstanding for each category at December 31 (dollars in
thousands):
Commercial real estate
Commercial, financial and agricultural
One to four family residential real estate
Construction
Consumer
2015
2016
2014
$ 389,420 $ 312,805 $ 315,387 $ 268,809 $ 244,966
80,646
101,895
87,948
139,553
24,694
25,715
10,923
18,385
142,648
205,945
23,731
20,113
79,655
103,768
17,799
13,801
122,140
140,502
27,100
15,847
2013
2012
Total
$ 781,857 $ 618,394 $ 600,935 $ 483,832 $ 449,177
B.
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table presents the remaining maturity of total loans outstanding for the categories shown at December 31,
2016, based on scheduled principal repayments (dollars in thousands):
Commercial,
Financial,
and
1-4 Family
Residential
Commercial
Real Estate Agricultural Real Estate Consumer Construction
Total
In one year or less:
Variable interest rates
Fixed interest rates
After one year but within five years:
Variable interest rates
Fixed interest rates
After five years:
Variable interest rates
Fixed interest rates
$ 19,601 $ 49,296 $
2,199 $ 2,446 $
35,675
14,934
10,240
1,464
2,099 $ 75,641
74,006
11,693
82,883
191,815
16,230
43,108
3,248
24,842
56
12,431
2,212
4,593
104,629
276,789
26,647
32,799
7,532
11,548
144,726
20,690
101
3,615
2,900
234
181,906
68,886
Total
$ 389,420 $ 142,648 $ 205,945 $ 20,113 $ 23,731 $ 781,857
C.
Risk Elements
The following table presents a summary of nonperforming assets and problem loans as of December 31 (dollars in
thousands):
2016
2015
2014
2013
2012
Nonaccrual loans
$
4,124 $
2,353 $
3,939 $
1,406 $
4,687
Interest income recorded during period for nonaccrual loans
437
795
Accruing loans past due 90 days or more
(cid:178)
32
(cid:178)
(cid:178)
(cid:178)
(cid:178)
54
(cid:178)
Restructured loans on nonaccrual not included above
165
154
3,105
614
(cid:178)
10
IV.
Summary of Loan Loss Experience
A.
Analysis of the Allowance for Loan Losses
Changes in the allowance for loan losses arise from loans charged off, recoveries on loans previously charged off by
loan category, and additions to the allowance for loan losses through provisions charged to expense. Factors which
(cid:76)(cid:81)(cid:73)(cid:79)(cid:88)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:77)(cid:88)(cid:71)(cid:74)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3)(cid:72)(cid:86)(cid:87)(cid:68)(cid:69)(cid:79)(cid:76)(cid:86)(cid:75)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:3)
allowances for selected loans (including large loans, nonaccrual loans, and problem and delinquent loans) and
consideration of historical loss information and local economic conditions.
The following table presents information relative to the allowance for loan losses for the years ended December 31,
(dollars in thousands):
2016
2015
2014
2013
2012
Balance of allowance for loan
losses at beginning of period
$
5,004 $
5,140 $
4,661 $
5,218 $
5,251
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
Net loans charged off
Provisions charged to expense
477
1,801
682
2,171
775
133
113
723
142
87
2,030
290
74
1,046
141
120
2,432
399
82
1,256
102
662
259
150
253
5
32
139
584
600
2
26
690
22
44
325
26
24
200
1,340
1,204
721
1,200
2,232
1,675
7
18
278
978
945
Balance at end of period
$
5,020 $
5,004 $
5,140 $
4,661 $
5,218
Average loans outstanding
703,047
602,904
509,749
462,500
422,440
Ratio of net charge-offs
.08%
.22%
.14%
.48%
0.23
11
B.
Allocation of Allowance for Loan Losses
The allocation of the allowance for loan losses for the years ended December 31, is shown on the following table. The
percentages shown represent the percent of each loan category to total loans (dollars in thousands):
2016
2015
2014
2013
2012
Amount %
Amount %
Amount %
Amount %
Amount %
Commercial real estate
$ 1,345 49.81% $ 1,611 50.58% $ 2,813 52.48% $ 1,849 55.56% $ 3,267 54.54%
Commercial, financial, and
agricultural
614
18.25
645
19.75 1,539
16.96 1,378
16.46
692
17.95
Commercial construction
57
1.47
79
2.48
142
2.71
80
2.25
125
1-4 family residential real estate
296
26.34
274
22.72
285
23.22
516
21.45
980
3.84
19.58
Consumer construction
6
1.56
7
1.91
6
1.57
25
1.43
(cid:178)
1.66
Consumer
90
2.57
64
2.56
13
3.06
148
2.85
(cid:178)
2.43
Unallocated general reserves
2,612
(cid:178) 2,324
(cid:178)
342
(cid:178)
665
(cid:178)
154
(cid:178)
Total
$ 5,020 100.00% $ 5,004 100.00% $ 5,140 100.00% $ 4,661 100.00% $ 5,218 100.00%
V.
Deposits
Deposit informat(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:26)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:44)(cid:87)(cid:72)(cid:80)(cid:3)(cid:27)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)
Form 10-K below.
VI.
Return on Equity and Assets
See Item 6 of this Form 10-(cid:46)(cid:15)(cid:3)(cid:179)(cid:54)(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:39)(cid:68)(cid:87)(cid:68)(cid:180)
VII.
Financial Instruments with Off-Balance Sheet Risk
(cid:44)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:15)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:72)(cid:81)(cid:70)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:20)(cid:28)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)
Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:75)(cid:72)(cid:68)(cid:71)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:79)(cid:82)(cid:70)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:20)(cid:22)(cid:19)(cid:3)(cid:54)(cid:82)(cid:88)(cid:87)(cid:75)(cid:3)(cid:38)(cid:72)(cid:71)(cid:68)(cid:85)(cid:3)(cid:54)(cid:87)(cid:85)(cid:72)(cid:72)(cid:87)(cid:15)(cid:3)(cid:48)(cid:68)(cid:81)(cid:76)(cid:86)(cid:87)(cid:76)(cid:84)(cid:88)(cid:72)(cid:15)(cid:3)(cid:48)(cid:76)(cid:70)(cid:75)(cid:76)(cid:74)(cid:68)(cid:81)(cid:3)(cid:23)(cid:28)(cid:27)(cid:24)(cid:23)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:75)(cid:72)(cid:68)(cid:71)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:86)(cid:3)
location is owned by the Corporation and not subject to any mortgage.
All of the branch locations are designed for use and operation as a bank, are well maintained, and are suitable for current
operations. Of the 23 branch locations 17 are owned and 6 are leased. The Corporation has additional office space to
12
house administrative operational support. The Corporation also leases two offices that support our commercial lending.
Below is a comprehensive listing of our branch locations:
Aurora
Birmingham
W563 County Road N
260 E. Brown Street,
Aurora, WI
Birmingham, MI
Owned
Leased
Suite 300
Eagle River, WI
400 E. Wall Street
Escanaba, MI
2224 N. Lincoln Road
845 Central Ave
Florence, WI
1955 S. Otsego Avenue Gaylord, MI
Eagle River
Escanaba
Florence
Gaylord
Ishpeming - Downtown 100 S. Main Street
Ishpeming - Jubilee
Ishpeming - West
900 US 41 West
US West & 170 N.
Ishpeming, MI
Ishpeming, MI
Ishpeming, MI
Daisy Street
Kaleva
Manistique
Manistique - Ja(cid:70)(cid:78)(cid:182)(cid:86)
Marquette
14429 Wuoksi Avenue
Kaleva, MI
130 South Cedar Street
Manistique, MI
735 E. Lakeshore Drive Manistique, MI
Marquette, MI
857 W. Washington
Marquette - McClellan 175 S. McClellan
Marquette, MI
Street
Negaunee
Newberry
Niagara
Sault Ste. Marie
Spread Eagle
Stephenson
St. Germain
Three Lakes
Traverse City
Avenue
Negaunee, MI
Newberry, MI
Niagara, WI
Sault Ste. Marie, MI
Spread Eagle, WI
440 US 41 East
414 Newberry Avenue
900 Roosevelt Road
138 Ridge Street
493 US Highway 2
S216 Menominee Street Stephenson, MI
St. Germain, WI
240 HWY 70 East
Three Lakes, WI
1811 Superior Street
Traverse City, MI
3530 North Country
Drive
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Owned
Owned
Leased
Leased
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Item 3.
Legal Proceedings
There are 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.
Item 4. Mine Safety Disclosures
Not applicable.
13
Item 5. (cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:53)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:48)(cid:68)(cid:87)(cid:87)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:44)(cid:86)(cid:86)(cid:88)(cid:72)(cid:85)(cid:3)(cid:51)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)
Equity Securities
PART II
MARKET INFORMATION
(Unaudited)
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:85)(cid:68)(cid:71)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:49)(cid:36)(cid:54)(cid:39)(cid:36)(cid:52)(cid:3)(cid:38)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:92)(cid:80)(cid:69)(cid:82)(cid:79)(cid:3)(cid:48)(cid:41)(cid:49)(cid:38)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)
(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:79)(cid:82)(cid:90)(cid:3)(cid:87)(cid:85)(cid:68)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92) 1, 2015
through December 31, 2016, as reported by NASDAQ.
2016
High
Low
Close
Dividends declared per share
Book value
2015
High
Low
Close
Dividends declared per share
For the Quarter Ended
March 31 June 30 September 30 December 31
$ 11.69 $ 11.97 $
9.90
10.25
0.100
12.42
10.00
11.01
0.100
12.38
11.98 $
10.64
11.49
0.100
12.50
14.07
11.00
13.47
0.100
12.55
$ 12.75 $ 12.25 $
10.18
11.39
0.075
10.12
10.53
0.075
10.96 $
9.90
10.10
0.100
12.03
9.91
11.49
0.100
The Corporation had approximately 1,600 shareholders of record as of March 24, 2017. A substantially greater number
of holders are beneficial owners whose shares are held of record by banks, brokers and other nominees.
Dividends
(cid:55)(cid:75)(cid:72)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:72)(cid:81)(cid:87)(cid:76)(cid:87)(cid:79)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:73)(cid:3)(cid:71)(cid:72)(cid:70)(cid:79)(cid:68)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:39)(cid:76)rectors
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 (cid:85)(cid:72)(cid:79)(cid:72)(cid:89)(cid:68)(cid:81)(cid:87)(cid:3)(cid:73)(cid:68)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:3)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
Bank. The ability of the Corporation and the Bank to pay dividends is subject to regulatory restrictions and
requirements. In 2016, the Bank paid dividends to the Corporation totaling $11.825 million.
Issuer Purchases of Equity Securities
The Corporation currently has a share repurchase program. The program is conducted under authorizations from time to
time by the Board of Directors. Shares repurchased to date are covered by Board authorizations made and publically
announced for $600,000 on February 27, 2013, an additional $600,000 on December 17, 2013, and an additional
$750,000 on April 28, 2015. None of these authorizations has an expiration date. The Corporation purchased 14,000
shares for $.150 million in 2016, 102,455 shares for $1.122 million in 2015, 13,700 shares of its common stock for $.143
million in 2014, and $.509 million in 2013. There were no repurchases made during the 4th quarter of 2016. As of
December 31, 2016 the Corporation had $25,000 remaining of the previously authorized buyback amount.
For information regarding securities authorized for issuance under equity compensation plans, see Item 12 of this
Form 10-K.
14
Performance Graph
Shown below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the
(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:87)(cid:88)(cid:85)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:49)(cid:36)(cid:54)(cid:39)(cid:36)(cid:52)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:44)(cid:81)(cid:71)(cid:72)(cid:91)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:49)(cid:36)(cid:54)(cid:39)(cid:36)(cid:52)(cid:3)
Composite Index for the five-year period ended December 31, 2016. The following information is based on an
investment of $100, on December (cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:49)(cid:36)(cid:54)(cid:39)(cid:36)(cid:52)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:44)(cid:81)(cid:71)(cid:72)(cid:91)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
NASDAQ Composite Index, with dividends reinvested.
T(cid:75)(cid:76)(cid:86)(cid:3)(cid:74)(cid:85)(cid:68)(cid:83)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:86)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:86)(cid:75)(cid:68)(cid:79)(cid:79)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:69)(cid:72)(cid:3)(cid:71)(cid:72)(cid:72)(cid:80)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:179)(cid:86)(cid:82)(cid:79)(cid:76)(cid:70)(cid:76)(cid:87)(cid:76)(cid:81)(cid:74)(cid:180)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:82)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:179)(cid:73)(cid:76)(cid:79)(cid:72)(cid:71)(cid:180)(cid:3)
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.
15
Item 6.
Selected Financial Data
SELECTED FINANCIAL DATA
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Year Ended December 31,
2016
2015
2014
2013
2012
SELECTED FINANCIAL CONDITION DATA:
Total assets
Loans
Securities
Deposits
Borrowings
(cid:38)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)quity
SELECTED OPERATIONS DATA:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net security gains (losses)
Other income
Other expenses
Income before income taxes
Provision (credit) for income taxes
Net income
Preferred dividend and accretion of discount
Net income available to common shareholders
PER SHARE DATA:
Earnings (cid:178) Basic
Earnings (cid:178) Diluted
Cash dividends declared
Book value
Tangible 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
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
$ 983,520 $ 739,269 $ 743,785 $ 572,800 $ 545,980
449,177
600,935
43,799
65,832
434,557
606,973
35,925
49,846
61,448
73,996
72,448
73,996
483,832
44,388
466,299
37,852
65,249
65,249
618,394
53,728
610,323
45,754
76,602
76,602
781,857
86,273
823,512
67,579
78,609
78,609
$ 37,983 $ 33,513 $ 27,669 $ 25,523 $ 24,427
4,603
19,824
945
(cid:178)
4,043
(16,757)
6,165
(922)
7,087
629
6,458
4,142
23,527
1,200
54
3,058
(22,610)
2,829
1,129
1,700
(cid:178)
5,596 $ 1,700 $ 5,629 $
4,885
33,098
600
150
4,003
(29,885)
6,766
2,283
4,483
(cid:178)
4,393
29,120
1,204
455
3,434
(23,876)
7,929
2,333
5,596
(cid:178)
4,124
21,399
1,675
73
3,865
(18,128)
5,534
(403)
5,937
308
$ 4,483 $
$
0.72 $
0.72
0.40
12.55
11.29
13.47
0.90 $
0.89
0.35
12.32
11.54
11.49
0.30 $
0.30
0.225
11.81
11.01
11.85
1.01 $
1.00
0.17
11.77
11.77
9.90
1.51
1.46
0.04
11.05
11.05
7.09
5.73%
5.73
0.52
55.56
9.05
4.19
7.41%
7.41
0.76
41.67
10.23
4.30
2.57%
2.57
0.28
75.00
10.94
4.19
9.07%
8.26
1.01
16.83
12.28
4.17
12.43%
10.26
1.23
2.65
11.95
4.17
1.14%
0.91
0.64
121.73
0.08
11.76
.41%
0.66
0.81
197.09
0.22
6.34
.66%
0.93
0.86
130.49
0.14
9.37
.42%
0.58
0.96
230.29
0.48
5.59
1.04%
1.45
1.16
111.33
0.23
10.25
16
Item 7. (cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:39)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:36)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:76)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:53)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)
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 (cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:76)(cid:73)(cid:76)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:69)(cid:92)(cid:3)(cid:88)(cid:86)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:90)(cid:82)(cid:85)(cid:71)(cid:86)(cid:3)(cid:179)(cid:69)(cid:72)(cid:79)(cid:76)(cid:72)(cid:89)(cid:72)(cid:180)(cid:15)(cid:3)(cid:179)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:180)(cid:15)(cid:3)(cid:179)(cid:76)(cid:81)(cid:87)(cid:72)(cid:81)(cid:71)(cid:180)(cid:15)(cid:3)
(cid:179)(cid:68)(cid:81)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:87)(cid:72)(cid:180)(cid:15)(cid:3)(cid:179)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:180)(cid:15)(cid:3)(cid:179)(cid:83)(cid:85)(cid:82)(cid:77)(cid:72)(cid:70)(cid:87)(cid:180)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:86)(cid:76)(cid:80)(cid:76)(cid:79)(cid:68)(cid:85)(cid:3)(cid:72)(cid:91)(cid:83)(cid:85)(cid:72)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:85)(cid:72)(cid:71)(cid:76)(cid:70)(cid:87)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:87)(cid:88)(cid:68)(cid:79)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)ct
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:120)
(cid:120)
(cid:120)
Our business may be adversely affected by conditions in the financial markets and economic
(cid:70)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:92)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:83)(cid:68)(cid:92)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:79)(cid:79)(cid:68)(cid:87)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)
our loans decline.
Weakness in the markets for residential or commercial real estate, including the secondary residential
mortgage loan markets, could reduce our net income and profitability.
(cid:36)(cid:86)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:88)(cid:81)(cid:76)(cid:87)(cid:92)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:85)(cid:74)(cid:68)(cid:81)(cid:76)(cid:93)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:86)(cid:88)(cid:70)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:71)(cid:72)(cid:83)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3)(cid:88)(cid:83)(cid:82)(cid:81)(cid:3)(cid:79)(cid:82)(cid:70)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)
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 estimate 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 or prevent a material adverse effect
on our business, profitability or financial condition.
(cid:120)
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:120)
(cid:120)
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, and in particular, the policies of the FRB.
Changes in our accounting policies or in accounting standards could materially affect how we report
our financial results and condition.
17
(cid:120)
(cid:120)
(cid:120)
(cid:120)
We may not realize the expected benefits of our recent acquisition of The First National Bank of Eagle
River and the First National Bank of Niagara.
Our controls and procedures may fail or be circumvented.
Impairment of deferred income tax assets could require charges to earnings, which could result in an
adverse impact on our results of operations.
In assessing the realizability of deferred income tax assets, management considers whether it is more
likely than not that some valuation allowance is necessary, which 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, 2016, net deferred tax assets are approximately $10.035 million. If a
valuation allowance becomes necessary with respect to such balance, it could have a material adverse
effect on our business, results of operations and financial condition.
Our information systems may experience an interruption of breach in security.
Risks Related to Legal and Regulatory Compliance
(cid:120)
We operate in a highly regulated environment, which could increase our cost structure or have other
negative impacts on our operations.
Strategic Risks
(cid:120)
(cid:120)
Reputation Risks
(cid:120)
Liquidity Risks
Maintaining or increasing our market share may depend on lowering prices and market acceptance of
new products and services.
Future growth or operating results may require us to raise additional capital but that capital may not
be available.
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.
(cid:120)
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:120)
(cid:120)
Limited trading activity for shares of our common stock may contribute to price volatility.
Our securities are not an insured deposit.
18
(cid:120)
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
(cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:88)(cid:81)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:73)(cid:76)(cid:87)(cid:86)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)
necessary expenses, provided (cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:86)(cid:88)(cid:85)(cid:83)(cid:79)(cid:88)(cid:86)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:87)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:87)(cid:3)(cid:21)(cid:19)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3)
payment of the dividend.
These risks and uncertainties should be considered in evaluating forward-looking statements. Further information
concerning the Corporation and its business, in(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:73)(cid:68)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:70)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:68)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)
(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:15)(cid:3)(cid:76)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:73)(cid:76)(cid:79)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)(cid:3)(cid:36)(cid:79)(cid:79)(cid:3)(cid:73)(cid:82)(cid:85)(cid:90)(cid:68)(cid:85)(cid:71)-
looking statements contained in this report are based upon information presently available and the Corporation assumes
no obligation to update any forward-looking statements.
Overview
(cid:55)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:76)(cid:86)(cid:3)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:73)(cid:68)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:68)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)
condition as of December 31, 2016 and 2015 and the results of operations for 2014 through 2016. This discussion also
covers asset quality, liquidity, interest rate sensitivity, and capital resources for the years 2015 and 2016. 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
(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:82)(cid:88)(cid:87)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:179)(cid:37)(cid:68)(cid:81)(cid:78)(cid:180)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:37)(cid:68)(cid:81)(cid:78)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
Corporation.
The acquisition of Eagle River in April 2016 added approximately $125 million in assets, $81 million in loan balances
and $105 million in deposits to the Corporation. The acquisition of Niagara added $67 million in assets, $32 million in
loan balances and $59 million in deposits.
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 2016 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 $4.483 million, or $.72 per share, for the year ended December 31, 2015,
compared to $5.596 million, or $.90 per share, in 2015, and net income of $1.700 million, or $.30 per share, for 2014.
The 2016 results include costs related to the acquisitions of Eagle River and Niagara in the amount of $3.101 million.
The 2015 results include one-time charges related to regulatory audit costs incurred in connection with our approval as
an SBA preferred lender and the transfer of our asset based lending subsidiary assets to mBank, which included a
prepayment penalty on its line of credit. The 2014 results include transaction related expenses of $2.475 million.
Total assets of the Corporation at December 31, 2016, were $983.520 million, an increase of $244.251 million, or
33.04%, from total assets of $739.269 million reported at December 31, 2015, largely a result of the acquisitions of
Eagle River and Niagara.
At December (cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:86)(cid:87)(cid:82)(cid:82)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:7)(cid:26)(cid:27)(cid:20)(cid:17)(cid:27)(cid:24)(cid:26)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:68)(cid:81)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:20)(cid:25)(cid:22)(cid:17)(cid:23)(cid:25)(cid:22)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:21)(cid:25)(cid:17)(cid:23)(cid:22)(cid:8)(cid:15)(cid:3)
from 2015 year-end balances of $618.394 million. Total loan production in 2016 amounted to $301.893 million, which
included $81.694 million of secondary market mortgage loans sold. The Corporation also sold $7.202 million of
SBA/USDA guaranteed loans. Loan balances were also impacted by normal amortization and paydowns, some of which
related to payoffs on participation loans.
Nonperforming loans totaled $4.124 million, or 1.14%, of total loans at December 31, 2016 compared to $2.539 million,
or .41% of total loans at December 31, 2015. Nonperforming assets at December 31, 2016, were $8.906 million, .91%
of total assets, compared to $4.863 million or .66% of total assets at December 31, 2015.
19
Total deposits increased from $610.323 million at December 31, 2015 to $823.512 million at December 31, 2016, an
increase of 34.93%. The increase in deposits in 2016 was comprised of an increase in wholesale deposits of $42.969
million and an increase in core deposits of $170.220 million, the latter of which was largely a result of the acquisitions of
Eagle River and Niagara. In 2016, the Corporation utilized wholesale deposits in order to better manage interest rate risk
in funding fixed rate loans.
(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:72)(cid:71)(cid:3)(cid:7)(cid:26)(cid:27)(cid:17)(cid:25)(cid:19)(cid:28)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:87)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85) 31, 2016, compared to $76.602 million at the end of 2015, an
increase of $2.007 million. This change reflects the net income available to common shareholders of $4.483 million,
other comprehensive loss of $.428 million, an increase related to stock compensation expense of $.600 million, the
repurchase of common stock of $.150 million and dividends declared on common stock of $2.498 million. The book
value per common share at December 31, 2016, amounted to $12.55 compared to $12.32 at the end of 2015.
For a description of our significant accounting policies, see Note 1 to the financial statements included herein.
RESULTS OF OPERATIONS
(dollars in thousands, except per share data)
2016
2015
2014
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
$ 33,244 $ 29,210 $ 23,575
(48)
(146)
(90)
33,098
600
4,153
29,885
29,120
1,204
3,889
23,876
23,527
1,200
3,112
22,610
6,766
2,283
7,929
2,333
2,829
1,129
Net income
$ 4,483 $ 5,596 $ 1,700
Earnings per common share
Basic
Diluted
Return on average assets
Return on average equity
Summary
$ 0.72 $ 0.90 $ 0.30
$ 0.72 $ 0.89 $ 0.30
.52%
5.73
.76%
7.41
.28%
2.57
The Corporation reported net income available to common shareholders of $4.483 million in 2016, compared to $5.596
million in 2015 and $1.700 million in 2014. The 2016 results include costs related to the acquisition of Eagle River and
Niagara in the amount of $3.101 million. The 2015 results include a provision for loan loss of $1.204 million. The 2014
results include a provision for loan loss of $1.200 million and costs related to the PFC acquisition of $2.475 million.
Net Interest Income
Net interes(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:92)(cid:3)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:85)(cid:72)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:17)(cid:3)(cid:3)(cid:49)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)
between the average yield earned on interest-earning assets and the average rate paid on interest-bearing funding
sources. Net interest revenue i(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:3)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:15)(cid:3)(cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:28)(cid:19)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)
2016. 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 $4.034 million from $29.210 million in 2015 to $33.244
million in 2016. In 2016, interest rates were stable with the prime rate at 3.25% for nearly the entire year. There was a
25 basis point increase in mid-December 2016. The Corporation experienced a decrease of 14 basis points in the overall
rates on earning assets from 4.97% in 2015 to 4.83% in 2016. Interest bearing funding sources declined by four basis
20
points, from .80% in 2015 to .76% in 2016. The combination of these effective rate changes resulted in a decrease in net
interest margin from 4.32% in 2015 to 4.21% in 2016.
The following table details sources of net interest income for the three years ended December 31 (dollars in thousands):
2016
Mix
2015
Mix
2014
Mix
Interest Income
Loans
Funds sold
Taxable securities
Nontaxable securities
Other interest-earning assets
Total earning assets
Interest Expense
NOW, money markets, checking
Savings
Certificates of deposit
Brokered deposits
Borrowings
Total interest-bearing funds
$ 36,142
10
1,322
210
299
0.03
3.48
0.55
0.79
37,983 100.00%
95.15% $ 32,047
1
1,095
162
208
(cid:178)
3.27
0.48
0.62
33,513 100.00%
95.63% $ 26,491
(cid:178)
962
64
152
95.74%
(cid:178)
3.48
0.23
0.55
27,669 100.00%
14.96%
731
0.84
41
25.71
1,256
26.49
1,294
1,563
32.00
4,885 100.00%
13.27%
583
0.70
31
37.04
1,627
22.99
1,010
1,142
26.00
4,393 100.00%
404
15
1,984
815
924
9.75%
0.36
47.90
19.68
22.31
4,142 100.00%
Net interest income
$ 33,098
$ 29,120
$ 23,527
Average Rates
Earning assets
Interest-bearing funds
Interest rate spread
4.81%
0.76
4.05
4.95%
0.80
4.15
4.93%
0.90
4.03
For purposes of this presentation, non-taxable interest income has not been restated on a tax-equivalent basis.
(cid:36)(cid:86)(cid:3)(cid:86)(cid:75)(cid:82)(cid:90)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:15)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:86)(cid:3)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:28)(cid:24)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)
(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:73)(cid:82)(cid:79)(cid:76)(cid:82)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:91)(cid:76)(cid:80)(cid:68)(cid:87)ely $362.176 million of variable rate loans that predominantly reprice with
changes in the prime rate and $419.681 million of fixed rate loans. A large portion of the variable rate loans, 41%, or
$149.588 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 $127.490
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.
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.
21
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.
(dollars in thousands)
ASSETS:
Loans (1,2,3)
Taxable securities
Nontaxable securities (2)
Other interest-earning assets
Total earning assets
Reserve for loan losses
Cash and due from banks
Fixed assets
Other real estate owned
Other assets
2016
Year Ended December 31,
2015
2014
Average
Balance
Average Average
Average Average
Interest
Rate
Balance
Interest
Rate
Balance
Interest
Average
Rate
$ 703,047 $ 36,174
1,322
333
300
38,129
56,058
15,606
14,579
789,290
(4,971)
36,878
14,441
3,360
26,575
76,283
2.36
2.13
2.06
4.83
5.15% $ 608,938 $ 32,053
1,095
55,057
245
3,466
209
9,255
676,716
33,602
(5,265)
25,985
12,704
2,364
26,183
61,971
1.99
7.07
2.26
4.97
5.26% $ 509,749 $ 26,506
962
45,172
97
2,062
152
3,888
560,871
27,717
(5,187)
23,124
10,174
2,088
14,542
44,741
5.20%
2.13
4.7
3.91
4.94
TOTAL AVERAGE ASSETS
$ 865,573
$ 738,687
$ 605,612
(cid:47)(cid:44)(cid:36)(cid:37)(cid:44)(cid:47)(cid:44)(cid:55)(cid:44)(cid:40)(cid:54)(cid:3)(cid:36)(cid:49)(cid:39)(cid:3)(cid:54)(cid:43)(cid:36)(cid:53)(cid:40)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:54)(cid:182)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)(cid:29)
NOW and Money Markets
Interest checking
Savings deposits
Certificates of deposit
Brokered deposits
Borrowings
Total interest-bearing liabilities
Demand deposits
Other liabilities
(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)
(cid:55)(cid:50)(cid:55)(cid:36)(cid:47)(cid:3)(cid:36)(cid:57)(cid:40)(cid:53)(cid:36)(cid:42)(cid:40)(cid:3)(cid:47)(cid:44)(cid:36)(cid:37)(cid:44)(cid:47)(cid:44)(cid:55)(cid:44)(cid:40)(cid:54)(cid:3)(cid:36)(cid:49)(cid:39)(cid:3)(cid:54)(cid:43)(cid:36)(cid:53)(cid:40)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:54)(cid:182)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)
644
87
41
1,256
1,294
1,563
4,885
$ 195,314 $
55,237
47,025
138,877
135,303
68,361
640,117
144,622
2,534
78,300
225,456
$ 865,573
489
94
31
1,626
1,010
1,142
4,392
0.33% $ 157,781 $
0.16
0.09
0.90
0.96
2.29
0.76
51,438
30,020
156,828
101,789
53,896
551,752
107,958
3,432
75,545
186,935
$ 738,687
.31% $ 114,313 $
0.18
0.1
1.04
0.99
2.12
.80%
45,158
15,717
168,349
69,833
45,451
458,821
76,880
3,662
66,249
146,791
$ 605,612
309
95
15
1,984
815
924
4,142
.27%
0.21
0.1
1.18
1.17
2.03
0.9
Rate spread
Net interest margin/revenue, tax equivalent basis
$ 33,244
4.07
4.21%
$ 29,210
4.17
4.32%
$ 23,575
4.04%
4.20%
(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.
22
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.
Year ended December 31,
2016 vs. 2015
Increase (Decrease)
Due to
Total
Volume Increase
2015 vs. 2014
Increase (Decrease)
Due to
Total
volume Increase
(Decrease)
and Rate
Volume
Rate
and Rate
(Decrease) Volume
Rate
Interest earning assets:
Loans
Taxable securities
Nontaxable securities
Other interest earning assets
Total interest earning assets
Interest bearing obligations:
NOW and money market deposits
Interest checking
Savings deposits
Certificates of deposit
Brokered deposits
Borrowings
$ 4,954 $ (721) $ (111) $ 4,122 $ 5,158 $
20
858
72
203
(171)
11
4
(600)
8
227
87
91
211
66
160
$ 5,904 $ (678) $ (699) $ 4,527 $ 5,595 $
326 $
(64)
49
(50)
261 $
63 $ 5,547
133
(14)
33
148
57
(53)
29 $ 5,885
$
116 $
7
18
(186)
333
306
31 $
(13)
(5)
(208)
(37)
90
8 $
(1)
(3)
24
(12)
25
155 $
(7)
10
(370)
284
421
117 $
13
14
(131)
373
172
45 $
(12)
1
(240)
(122)
39
17 $
(2)
1
13
(55)
7
179
(1)
16
(358)
196
218
Total interest bearing obligations
$
594 $ (142) $
41 $
493 $
558 $ (289) $
(19) $
250
Net interest income, tax equivalent basis
$ 4,034
$ 5,635
23
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 2016, the Corporation recorded a provision for loan loss of $.600 million, compared to a
provision of $1.204 million in 2015 and $1.200 million in 2014. There was no provision for loan losses for acquired
loans as a result of acquisition fair value adjustments.
Noninterest Income
Noninterest income was $4.153 million, $3.889 million, and $3.112 million in 2016, 2015, and 2014, respectively. The
principal recurring sources of noninterest income are the gains on the sale of SBA/USDA guaranteed loans and
secondary market loans. In 2016, revenues from these two business lines totaled $2.472 million compared to $1.681
million in 2015 and $1.394 million in 2014. The Corporation, in recent years, expanded its efforts to generate increased
income from secondary market loans by adding additional staff and streamlining processing activities.
Deposit related income totaled $.995 million in 2016 compared to $.836 million in 2015 and $.701 million in 2014.
During 2016, the Corporation reviewed and made changes to the fee structure for deposit accounts; however the current
(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:72)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:86)(cid:82)(cid:88)rces.
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
(amortization) income
Other
Subtotal
Net security gains
Total noninterest income
2015
2014
2016
$
348 $
647
200 $
636
2016-2015% 2015-2014
33.33%
15.43
74.00%
1.73
150
551
1,340
235
897
873
198
610
493
144
757
53.49
18.69
47.05
77.08
37.50
(19.42)
(40)
576
4,003
150
675
288
3,058
54
$ 4,153 $ 3,889 $ 3,112
547
370
3,434
455
(107.31)
55.68
16.57
(67.03)
6.79%
(18.96)
28.47
12.30
742.59
24.97%
Noninterest Expense
Noninterest expense was $29.885 million in 2016, compared to $23.876 million and $22.610 million in 2015 and 2014,
respectively. In 2016, the Corporation incurred $3.101 million of costs related to the acquisition of Eagle River and
Niagara. Salaries and benefits, at $14.625 million, increased by $2.176 million, or 17.48%, from the 2015 expenses of
$12.449 million and compared to $10.303 million in 2014. The increased salaries and benefits expense was largely a
result of an increased number of staff as a result of the acquisitions, as well as customary annual increases to legacy
employees. In 2015, the increase in noninterest expense totaled $1.266 million, or 5.60%.
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.
24
The following table details noninterest expense for the three years ended December 31 (dollars in thousands):
% Increase (Decrease)
Salaries and benefits
Occupancy
Furniture and equipment
Data processing
Professional service fees:
Accounting
Legal
Consulting and other
Total professional service fees
Loan origination expenses and deposit and card related fees
Writedowns and losses on OREO held for sale
FDIC insurance assessment
Telephone
Advertising
Transaction related expenses
Other operating expenses
Total noninterest expense
Federal Income Taxes
Current Federal Tax Provision
2015
2016
2016-2015 2015-2014
2014
$ 14,625 $ 12,449 $ 10,303 17.48% 20.83%
13.86
22.32
20.09
2,129
1,268
1,150
2,680
1,749
1,620
10.56
12.77
17.31
2,424
1,551
1,381
415
62
692
1,169
1,100
202
488
528
620
3,101
2,003
(6.32)
(55.40)
0.58
(7.95)
15.18
(39.16)
(3.56)
16.04
22.29
100.00
(2.10)
$ 29,885 $ 23,876 $ 22,610 25.17%
375
205
583
1,163
699
280
362
327
449
2,475
2,005
443
139
688
1,270
955
332
506
455
507
(cid:178)
2,046
18.13
(32.20)
18.01
9.20
36.62
18.57
39.78
39.14
12.92
(100.00)
2.04
5.60%
The Corporation recognized a federal income tax expense of approximately $2.283 million for the year ended
December 31, 2016 and $2.333 million for the year ended December 31, 2015.
The Corporation has reported deferred tax assets of $8.760 million at December 31, 2016. 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, 2016, had a net operating loss and tax credit carryforwards for tax
purposes of approximately $9.1 million, and $2.2 million, respectively. The Corporation evaluated the future benefits
from these carryforwards as of December (cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:76)(cid:87)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:179)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:79)(cid:76)(cid:78)(cid:72)(cid:79)(cid:92)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:81)(cid:82)(cid:87)(cid:180)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:92)(cid:3)(cid:90)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:69)(cid:72)(cid:3)
utilized prior to expiration. 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 and 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 will continue to evaluate the future benefits from these carryforwards in order to
determine if any adjustment to the deferred tax asset is warranted.
25
(cid:55)(cid:75)(cid:72)(cid:3)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3)(cid:71)(cid:72)(cid:87)(cid:68)(cid:76)(cid:79)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:68)(cid:77)(cid:82)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:82)(cid:81)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:71)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:11)(cid:71)(cid:82)(cid:79)(cid:79)(cid:68)(cid:85)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)ousands):
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
Unrealized gain (loss) on securities
Purchase accounting adjustments
Other
Total deferred tax assets
Valuation allowance
Deferred tax liabilities:
Core deposit premium
FHLB stock dividend
Depreciation
Mortgage servicing rights
Other
Total deferred tax liabilities
Net deferred tax asset
2016
2015
$ 3,080 $ 4,331
1,705
1,999
162
338
517
384
141
(153)
955
141
1,413
1,944
142
235
443
387
116
52
1,791
805
10,408
10,520
$
(cid:178) $
(cid:178)
(739)
(91)
(208)
(583)
(27)
(1,648)
(366)
(100)
(113)
(667)
(61)
(1,307)
$ 8,760 $ 9,213
26
FINANCIAL POSITION
The table below illustrates the relative composition of various liability funding sources and asset make-up.
(dollars in thousands)
Sources of funds:
Deposits:
Non-interest bearing transactional
deposits
Interest-bearing transactional deposits
(cid:38)(cid:39)(cid:182)(cid:86)(cid:3)(cid:31)(cid:7)(cid:21)(cid:24)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19)
Total core deposit funding
(cid:38)(cid:39)(cid:182)(cid:86)(cid:3)(cid:33)(cid:7)(cid:21)(cid:24)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19)
Brokered deposits
Total noncore deposit funding
FHLB and other borrowings
Other liabilities
(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)
2016
December 31,
2015
2014
Balance
Mix
Balance
Mix
Balance
Mix
$ 164,179 16.69% $ 122,775 16.61% $ 95,498 12.84%
32.35
18.14
63.33
4.08
14.2
18.28
6.7
1.74
9.95
233,666
105,859
462,300
26,757
121,266
148,023
45,754
6,590
76,602
240,580
134,951
471,029
30,316
105,628
135,944
49,846
12,970
73,996
344,937
141,629
650,745
8,489
164,278
172,767
73,579
7,820
78,609
35.07
14.40
66.16
0.86
16.71
17.57
7.48
0.80
7.99
31.61
14.32
62.54
3.62
16.4
20.02
6.19
0.89
10.36
Total
$ 983,520 100.00% $ 739,269 100.00% $ 743,785 100.00%
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
Total
Securities
$ 776,837 78.99% $ 613,390 82.29% $ 595,795 80.11%
8.85
(cid:178)
0.4
0.78
2.95
6.92
65,832
(cid:178)
2,973
5,797
21,947
51,441
53,728
3
2,169
5,089
25,005
39,885
86,273
2,135
2,911
14,047
44,620
56,697
8.77
0.22
0.30
1.43
4.54
5.75
7.27
(cid:178)
0.29
0.69
3.38
5.4
$ 983,520 100.00% $ 739,269 100.00% $ 743,785 100.00%
The securities portfolio is an important component of the Corporation(cid:182)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:3)(cid:71)(cid:76)(cid:89)(cid:72)(cid:85)(cid:86)(cid:76)(cid:87)(cid:92)(cid:3)(cid:76)(cid:81)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:3)
base and provide liquidity. Securities increased $32.545 million in 2016, from $53.728 million at December 31, 2015 to
$86.273 million at December 31, 2016, largely a result of the acquisitions of Eagle River and Niagara.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:70)(cid:68)(cid:85)(cid:85)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85) 31 (dollars in thousands) is as follows:
US Agencies
US Agencies - MBS
Corporate
Equity
Obligations of states and political subdivisions
Total securities
2016
2015
$ 23,952 $ 27,377
3,759
12,646
(cid:178)
9,946
16,833
19,910
500
25,078
$ 86,273 $ 53,728
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:92)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:86)(cid:87)(cid:72)(cid:81)(cid:87)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:68)sset/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, 2016, investment securities with an
estimated fair market value of $17.425 million were pledged as collateral for FHLB borrowings and certain customer
relationships.
27
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 70% of total loans outstanding at December 31, 2016.
The Corporation continued to experience strong loan demand in 2016 with approximately $301.893 million of new
organic loan production, including $81.693 million of mortgage loans sold in the secondary market. At 2016 year-end,
(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:86)(cid:87)(cid:82)(cid:82)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:7)(cid:26)(cid:27)(cid:20)(cid:17)(cid:27)(cid:24)(cid:26)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:68)(cid:81)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)-end balances of $618.394 million.
The production of loans was distributed among the regions, with the Upper Peninsula at $163.338 million, $58.896
million in the Northern Lower Peninsula, $60.881 million in Southeast Michigan and $18.778 million in Wisconsin.
The December 2016 acquisitions of Eagle River and Niagara added loans of $112.582 million to our consolidated loan
portfolio. These acquired loans did not result in any significant concentration risk.
Management believes a properly positioned loan portfolio provides the most attractive earning asset yield available to
the Corporation and, with the current 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 2015 and 2016 (dollars in thousands):
Loan balances as of December 31, 2014
Total production
Secondary market sales
SBA loan sales
Loans transferred to OREO
Loans charged off, net of recoveries
Normal amortization/paydowns and payoffs
Loan balances as of December 31, 2015
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
$ 600,935
234,271
(53,229)
(8,959)
(1,376)
(1,340)
(151,908)
$ 618,394
301,893
112,582
(81,693)
(7,202)
(3,292)
(584)
(158,241)
Loan balances as of December 31, 2016
$ 781,857
28
Following is a table that illustrates the balance changes in the loan portfolio from 2014 through 2016 year-end (dollars in
thousands):
Commercial real estate
Commercial, financial, and
agricultural
One-to-four family residential real
estate
Construction:
Consumer
Commercial
Consumer
2016
2015
2014
Percent Change
2016-2015 2015-2014
$ 389,420 $ 312,805 $ 315,387 24.49% (0.82)%
142,648
122,140
101,895
16.79
19.87
205,945
140,502
139,553
46.58
0.68
12,226
11,505
20,113
11,770
15,330
15,847
9,431
16,284
18,385
3.87
(24.95)
26.92
24.80
(5.86)
(13.80)
Total
$ 781,857 $ 618,394 $ 600,935 26.43%
2.91%
Our commercial real estate loan portfolio predominantly relates to owner occupied real estate, and our loans are
generally secured by a first mortgage lien. 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):
2016
2015
Balance
% of
Loans
% of
Capital
Balance
% of
Loans
% of
Capital
Real estate - operators of
nonres bldgs
Hospitality and tourism
Lessors of residential
buildings
Gasoline stations and
convenience stores
Logging
Commercial construction
Other
$ 121,861 22.42%
12.51
68,025
155.02 $ 102,620 22.79%
9.17
41,300
86.54
133.97
53.92
27,590
5.08
35.10
25,930
5.76
33.85
20,509
19,903
11,505
274,180
3.77
3.66
2.12
50.44
26.09
25.32
14.64
348.79
21,647
17,346
15,330
226,102
4.81
3.85
3.40
50.22
28.26
22.64
20.01
295.16
Total commercial loans $ 543,573 100.00%
$ 450,275 100.00%
Management recognizes the additional risk presented by the concentration in certain segments of the portfolio.
Management does not believe that its current portfolio composition has increased exposure related to any specific
industry concentration as of 2016 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, 2016, our residential loan portfolio totaled $218.171 million, or 28%, of our
total outstanding loans.
The Corporation has also extended credit to governmental units, including Native American organizations. Tax-exempt
loans and leases increased from $1.153 million at the end of 2015 to $7.634 million at 2016 year-end. The Corporation
has elected to make limited tax-exempt loans, since they provide no current tax benefit due to tax net operating loss
carryforwards.
29
(cid:39)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:72)(cid:68)(cid:86)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:81)(cid:68)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:80)(cid:68)(cid:81)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:72)(cid:85)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:3)
flexibility by structuring (cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:76)(cid:81)(cid:70)(cid:76)(cid:71)(cid:72)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:182)(cid:86)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:70)(cid:92)(cid:70)(cid:79)(cid:72)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:79)(cid:72)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:87)(cid:68)(cid:73)(cid:73)(cid:3)(cid:72)(cid:89)(cid:68)(cid:79)(cid:88)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
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.
(cid:55)(cid:85)(cid:82)(cid:88)(cid:69)(cid:79)(cid:72)(cid:71)(cid:3)(cid:71)(cid:72)(cid:69)(cid:87)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:88)(cid:70)(cid:87)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:11)(cid:179)(cid:55)(cid:39)(cid:53)(cid:180)(cid:12)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)-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 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
(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:72)(cid:71)(cid:15)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:182)(cid:86)(cid:3)(cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:79)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:70)(cid:82)(cid:79)(cid:79)(cid:68)(cid:87)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:71)(cid:72)(cid:83)(cid:72)(cid:81)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:15)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)
value of the collateral.
The Corporation, at December 31, 2016, had performing loans of $6.864 million and $.292 million of nonperforming
(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:85)(cid:72)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:86)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:80)(cid:82)(cid:71)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:87)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:92)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:71)(cid:72)(cid:72)(cid:80)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:179)(cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:88)(cid:70)(cid:87)(cid:88)(cid:85)(cid:72)(cid:71)(cid:180)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)
restructured loans of $7.156 million is comprised of 31 performing loans, the largest of which had a December 31, 2016
balance of $1.136 million and seven nonperforming loans.
Credit Quality
The table below shows balances of nonperforming assets for the years ended December 31 (dollars in thousands):
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 outstanding loans
As a % of nonperforming loans
As a % of nonaccrual loans
Texas Ratio
December 31, December 31,
2016
2015
$
$
3,959 $
(cid:178)
165
4,124
4,782
8,906 $
1.14%
0.91%
2,353
32
154
2,539
2,324
4,863
0.41%
0.66%
$
5,020 $
.64%
121.73%
126.80%
11.76%
5,004
.81%
197.09%
212.66%
6.34%
Management continues to address market issues impacting its loan customer base. In conjunction with (cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)
(cid:86)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:79)(cid:72)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:87)(cid:68)(cid:73)(cid:73)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:72)(cid:91)(cid:68)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:85)(cid:72)(cid:89)(cid:76)(cid:72)(cid:90)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:15)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)
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 2016 independent review provided
findings similar to management with respect to credit quality. The Corporation will again utilize a consultant for loan
review in 2017.
30
The following table details the impact of nonperforming loans on interest income for the three years ended December 31
(dollars in thousands):
2016
2015
2014
Interest income that would have been recorded at original rate
Interest income that was actually recorded
$ 640 $ 1,125 $ 130
(cid:178)
437
795
Net interest lost
$ 203 $ 330 $ 130
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 2016 amounted to $.584 million, or .08% of average loans
outstanding, compared to $1.340 million, or .22% of loans outstanding in 2015. The current reserve balance is
(cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:79)(cid:72)(cid:89)(cid:68)(cid:81)(cid:87)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:76)(cid:81)(cid:75)(cid:72)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:73)(cid:82)(cid:79)(cid:76)(cid:82)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:69)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)
loan losses does not contemplate acquisition fair value adjustments, as detailed in Note 4 (cid:177) (cid:179)(cid:47)(cid:82)(cid:68)(cid:81)(cid:86)(cid:17)(cid:180)(cid:3)(cid:3)(cid:3)(cid:36)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)
reductions to the reserve in future periods will be dependent upon a combination of future loan growth, nonperforming
loan balances and charge-off activity.
(cid:36)(cid:3)(cid:87)(cid:90)(cid:82)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:75)(cid:76)(cid:86)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:79)(cid:72)(cid:89)(cid:68)(cid:81)(cid:87)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:76)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:83)(cid:79)(cid:68)(cid:92)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)ollowing table (dollars
in thousands):
Allowance for Loan Losses
2016
2015
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
Balance at end of period
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
$
5,004 $
5,140
477
133
113
723
102
5
32
139
584
600
1,801
142
87
2,030
662
2
26
690
1,340
1,204
$
5,020 $
5,004
$ 781,857 $
703,047
0.64%
0.08
11.67
618,394
608,938
.81%
0.22
26.07
*The above does not include information regarding the quality of acquired impaired loans.
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
(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:79)(cid:82)(cid:70)(cid:68)(cid:79)(cid:3)(cid:72)(cid:70)(cid:82)(cid:81)(cid:82)(cid:80)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:68)(cid:69)ility 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
(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:80)(cid:72)(cid:72)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:85)(cid:76)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:69)(cid:72)(cid:76)(cid:81)(cid:74)(cid:3)(cid:179)(cid:76)(cid:80)(cid:83)(cid:68)(cid:76)(cid:85)(cid:72)(cid:71)(cid:180)(cid:3)(cid:68)(cid:86)(cid:3)(cid:71)(cid:72)(cid:73)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:74)(cid:88)(cid:76)(cid:71)(cid:68)(cid:81)(cid:70)(cid:72)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:73)(cid:76)(cid:70)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:82)(cid:81)(cid:72)(cid:81)(cid:87)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)
31
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.
(cid:36)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:72)(cid:71)(cid:3)(cid:17)(cid:25)(cid:23)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:17)(cid:3)(cid:3)(cid:44)(cid:81)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:82)(cid:83)(cid:76)(cid:81)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
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 by the ratio of the allowance as a
percent of nonperforming loans, which stood at 121.73% at December 31, 2016.
The Corporation completed the acquisition of PFC on December 5, 2014, Eagle River on April 29, 2016 and Niagara on
August 31, 2016. The PFC acquired impaired loans totaled $13.290 million, the Eagle River acquired impaired loans
totaled $3.401 million, and the Niagara acquired impaired loans totaled $2.105 million. In 2016, the Corporation had
positive resolution of acquired nonperforming loans, which resulted in the recognition of approximately $96,000 of
accretable interest. In 2015, the Corporation had positive resolution of acquired nonperforming loans, which resulted in
the recognition of approximately $.578 million of the accretable interest.
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, 2014
Other real estate transferred from loans due to foreclosure
Proceeds from sale of other real estate
Writedowns on other real estate held for sales
Loss on other real estate held for sale
Balance at December 31, 2015
Other real estate transferred from loans due to foreclosure
Other real estate acquired, net of purchase accounting
Proceeds from sale of other real estate
Transfer to premise and equipment
Writedowns on other real estate held for sales
Gain (loss) on other real estate held for sale
$
3,010
1,376
(1,702)
(295)
(65)
$
2,324
3,292
1,205
(1,640)
(197)
(212)
10
Balance at December 31, 2016
$
4,782
During 2016, the Corporation received real estate in lieu of loan payments of $3.292 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.
32
Deposits
Total deposits at December 31, 2016 were $823.512 million, an increase of $213.189 million, or 34.93%, from
December 31, 2015 deposits of $610.323 million. The table below shows the deposit mix for the periods indicated
(dollars in thousands):
2016
Mix
2015
Mix
CORE:
Non-interest-bearing
NOW, money market, checking
Savings
Certificates of Deposit <$250,000
Total core deposits
NONCORE:
Certificates of Deposit >$250,000
Brokered CDs
Total non-core deposits
$ 164,179 19.94% $ 122,775 20.12%
33.23
5.06
20.33
78.73
202,784
30,882
124,084
480,525
286,622
58,315
141,629
650,745
34.80
7.08
17.20
79.02
8,489
164,278
172,767
1.03
19.95
20.98
8,532
121,266
129,798
1.40
19.87
21.27
Total deposits
$ 823,512 100.00% $ 610,323 100.00%
The increase in deposits, resulting primarily from the acquisitions of Eagle River and Niagara, is composed of an
increase in noncore deposits of $42.969 million, and an increase in core deposits of $170.220 million. Through the
acquisitions of Eagle River and Niagara, the Corporation has enhanced its core deposit portfolio with additional stable
(cid:71)(cid:72)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:75)(cid:76)(cid:83)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:76)(cid:87)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:182)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:86)(cid:17)
Management has increased its efforts to grow core deposits in recent years by introducing several new deposit products.
As shown in the table above, core deposits now represent approximately 79% 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 2016 year end, this source of funding totaled
$45.000 million and the Corporation secured this funding by pledging loans and investments. The $45.000 million of
FHLB borrowings had a weighted average maturity of 1.9 years, with a weighted average rate of 2.10% at December 31,
2016.
The Corporation currently has one banking borrowing relationship. The 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 April 30, 2018. The term note bears the same interest and matures on April 30, 2019 and
requires quarterly principal payments of $550,000 beginning March 31, 2017. The credit facility is secured by all of the
outstanding mBank stock.
(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)
(cid:38)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:71)(cid:72)(cid:87)(cid:68)(cid:76)(cid:79)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:38)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:53)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:180)(cid:3)(cid:86)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:17)
33
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 making payments on existing borrowing
(cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:3)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:79)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:85)(cid:72)(cid:3)(cid:71)(cid:72)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
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.
(cid:39)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:89)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:69)(cid:92)(cid:3)(cid:7)(cid:21)(cid:20)(cid:17)(cid:26)(cid:23)(cid:26)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)(cid:3)(cid:36)(cid:86)(cid:3)(cid:86)(cid:75)(cid:82)(cid:90)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)
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 $56.237
million and a net decrease in securities available for sale of $10.584 million. The net increase in assets was partially
offset by an increase in deposit liabilities of $49.491 million. This increase in deposits was composed of an increase in
non-core deposits of $42.969 million combined with an increase in core deposits of $170.220 million. Deposits garnered
in the acquisitions of Eagle River and Niagara amounted to $163.698 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.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:73)(cid:82)(cid:79)(cid:76)(cid:82)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:86)(cid:3)(cid:68)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:79)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:3)(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:80)arket turmoil and overall liquidity concerns
in the financial markets. As of December (cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:7)(cid:25)(cid:27)(cid:17)(cid:27)(cid:23)(cid:27)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:73)(cid:82)(cid:79)(cid:76)(cid:82)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:88)(cid:81)(cid:83)(cid:79)(cid:72)(cid:71)(cid:74)(cid:72)(cid:71)(cid:15)(cid:3)
which makes them readily available for sale to address any short term liquidity needs.
It is anticipated that during 2017, the Corporation will fund anticipated loan production with a combination of core-
deposit growth and noncore funding, primarily brokered CDs to the extent the level of brokered CDs remains within our
conservative policy limitations.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:92)(cid:3)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:79)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:3)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)-alone basis is dividends from the Bank. In 2016, the Bank paid
an $11.825 million dividend to the Corporation, the majority of which was utilized to fund the acquisition of Niagara.
Bank (cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:15)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:15)(cid:3)(cid:85)(cid:72)(cid:80)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:86)(cid:87)(cid:85)(cid:82)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:180)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:79)(cid:72)(cid:89)(cid:72)(cid:79)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)
Corporation has a $5.0 million line of credit with a correspondent bank, which also serves as a source of liquidity. As of
December 31, 2016, $4.250 million was available to the Corporation 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 C(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:36)(cid:86)(cid:86)(cid:72)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:47)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:36)(cid:47)(cid:38)(cid:50)(cid:180)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)(cid:12)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)
ALCO Committee meets regularly 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
(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:3)(cid:79)(cid:82)(cid:90)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:79)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:3)(cid:76)(cid:86)(cid:3)(cid:69)(cid:72)(cid:86)(cid:87)(cid:3)(cid:76)(cid:79)(cid:79)(cid:88)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:76)(cid:91)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:85)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:81)(cid:82)(cid:81)-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 $250,000. Non-core funding consists of certificates of deposit greater than $250,000,
brokered deposits, and FHLB and other borrowings.
At December (cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:85)(cid:72)(cid:3)(cid:71)(cid:72)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:26)(cid:21)(cid:17)(cid:24)(cid:23)(cid:8)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:26)(cid:19)(cid:17)(cid:24)(cid:25)(cid:8)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:17)(cid:3)(cid:3)
These ratios indicated at December 31, 2016, that the Bank has decreased its reliance on non-core deposits and
(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)-term assets, namely loans and investments. The Bank believes that by maintaining
adequate volumes of short-term investments and implementing competitive pricing strategies on deposits, it can ensure
adequate liquidity to support future growth. The Bank also has correspondent lines of credit available to meet
unanticipated short-term liquidity needs. As of December 31, 2016, the Bank had $42.0 million of unsecured overnight
borrowing 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 resu(cid:79)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:79)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:17)
34
From a long-(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:83)(cid:72)(cid:85)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:79)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:86)(cid:3)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:74)(cid:76)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:70)(cid:82)(cid:85)(cid:72)(cid:3)(cid:71)(cid:72)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)
(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:79)(cid:82)(cid:70)(cid:68)(cid:79)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:73)(cid:73)(cid:82)(cid:85)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:88)(cid:74)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)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, 2016, the aggregate contractual obligations
and commitments are (dollars in thousands):
Less than 1 Year 1 to 3 Years 4 to 5 Years
After 5
Years
Total
Payments Due by Period
Contractual Obligations
Total deposits
Federal Home Loan Bank borrowings
Other borrowings
(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:182)(cid:3)(cid:71)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)
Annual rental / purchase commitments under
noncancelable leases / contracts
$
741,086 $ 64,666 $ 15,256 $ 2,504 $ 823,512
10,000
45,000
10,000
28,579
156
9,026
300
1,820
419
25,000
19,153
494
(cid:178)
244
607
717
1,094
932
3,570
6,313
TOTAL
$
761,129 $ 110,407 $ 26,763 $ 6,925 $ 905,224
Other Commitments
Letters of credit
Commitments to extend credit
Credit card commitments
$
8,252 $
88,233
5,533
(cid:178) $
(cid:178)
(cid:178)
(cid:178) $
(cid:178)
(cid:178)
(cid:178) $
(cid:178)
(cid:178)
8,252
88,233
5,533
TOTAL
$
102,018 $
(cid:178) $
(cid:178) $
(cid:178) $ 102,018
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.
The Corporation and Bank capital is a(cid:79)(cid:86)(cid:82)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:76)(cid:86)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:72)(cid:71)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:71)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:17)(cid:3)(cid:3)
The portion of the deferred tax asset which is allowed to be included in regulatory capital is based on the amount of the
asset, net of any valuation allowance and deferred tax liabilities. The amount included is phased in through 2018. See
(cid:179)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:178) (cid:54)(cid:88)(cid:83)(cid:72)(cid:85)(cid:89)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:53)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:180)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:179)(cid:178) Basel III for additional information regarding regulatory capital, as
(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:68)(cid:86)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:20)(cid:25)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)in Item 8 of this Form 10-K below.
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
(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:17) Nearly all the assets and liabilities of the Corporation are financial,
unlike industrial or commercial companies. (cid:36)(cid:86)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:79)(cid:92)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3)
in interest rates, which are indirectly influenced by inflationary expectations. The C(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:68)(cid:87)(cid:70)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
interest sensitivity of its financial assets to the interest sensitivity of its financial liabilities tends to minimize the effect of
(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:17) Changes in interest rates do not necessarily move to the
same extent as changes in the prices of goods and services.
35
Item 7A. 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
(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:17)(cid:3)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:85)(cid:71)(cid:76)(cid:81)(cid:74)(cid:79)(cid:92)(cid:15)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)that maintains interest rate risk at
(cid:83)(cid:85)(cid:88)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:79)(cid:72)(cid:89)(cid:72)(cid:79)(cid:86)(cid:3)(cid:76)(cid:86)(cid:3)(cid:72)(cid:86)(cid:86)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:86)(cid:68)(cid:73)(cid:72)(cid:87)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:82)(cid:88)(cid:81)(cid:71)(cid:81)(cid:72)(cid:86)(cid:86)(cid:17)
(cid:47)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:80)(cid:82)(cid:86)(cid:87)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:17)(cid:3)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:73)(cid:72)(cid:85)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:72)(cid:85)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:68)(cid:79)(cid:3)(cid:72)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:71)(cid:3)
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, 2016 the Bank had $86.273 million of securities, with a weighted average maturity of 55.32 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 cash to correspondent banks as investments in federal funds. The Corporation also
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/
(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:11)(cid:179)(cid:36)(cid:47)(cid:38)(cid:50)(cid:180)(cid:12)(cid:3)(cid:80)(cid:72)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:86)(cid:15)(cid:3)(cid:90)(cid:75)(cid:82)(cid:86)(cid:72)(cid:3)(cid:80)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:86)(cid:3)(cid:86)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:69)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:76)(cid:85)(cid:71)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:92)(cid:3)
investment consultants. During these monthly meetings, we review the current ALCO position and strategize about
future opportunities on risks relative to pricing and positioning of assets and liabilities.
The difference between repricing assets and liabilities for a specific period is referred to as the gap. An excess of
repricable assets over liabilities is referred to as a positive gap. An excess of repricable liabilities over assets is referred
to as a negative gap. The cumulative gap is the summation of the gap for all periods to the end of the period for which
the cumulative gap is being measured.
Assets and liabilities scheduled to reprice are reported in the following timeframes. Those instruments with a variable
interest rate tied to an index and considered immediately repricable are reported in the 1 to 90 day timeframe. The
estimates of principal amortization and prepayments are assigned to the following time frames.
36
(cid:55)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:85)(cid:76)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:88)(cid:81)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85) 31, 2016 (dollars in thousands):
Interest-earning assets:
Loans
Securities
Other (1)
1-90
Days
91-365
Days
>1-5
Years
Over 5
Years
Total
$ 275,939
6,796
8,917
184,650
2,184
1,777
318,552
53,854
8,152
2,716 $ 781,857
86,273
23,439
19,093
247
Total interest-earning assets
291,652
188,611
380,558
26,402
887,223
Interest-bearing obligations:
NOW, money market, savings and interest
checking
Time deposits
Brokered CDs
Borrowings
344,937
22,561
32,590
6,000
(cid:178)
65,708
111,111
13,026
(cid:178)
59,345
20,577
54,309
(cid:178)
2,504
(cid:178)
244
344,937
150,118
164,278
73,579
Total interest-bearing obligations
406,088
189,845
134,231
2,748
732,912
Gap
$ (114,436) $
(1,234) $ 246,327 $ 23,654 $ 154,311
Cumulative gap
$ (114,436) $ (115,670) $ 130,657 $ 154,311
(1) includes Federal Home Loan Bank stock
The above analysis indicates that at December 31, 2016, the Corporation had a cumulative liability sensitivity gap
position of $115.670 million within the one-(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:73)(cid:85)(cid:68)(cid:80)(cid:72)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:88)(cid:80)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:86)(cid:72)(cid:81)(cid:86)(cid:76)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:74)(cid:68)(cid:83)(cid:3)
suggests that if market interest rates were to increase in the next twelve months, the Corporation has the potential to earn
less net interest income since more liabilities would reprice at higher rates than assets. Conversely, if market interest
rates decrea(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:81)(cid:72)(cid:91)(cid:87)(cid:3)(cid:87)(cid:90)(cid:72)(cid:79)(cid:89)(cid:72)(cid:3)(cid:80)(cid:82)(cid:81)(cid:87)(cid:75)(cid:86)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3)(cid:74)(cid:68)(cid:83)(cid:3)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:86)(cid:88)(cid:74)(cid:74)(cid:72)(cid:86)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:90)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)
increase. 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, 2016, the Corporation had $362.176 million of variable rate loans that reprice primarily with the prime
rate index. Approximately $149.588 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, $127.490 million of
these floor-rate loans would reprice with a 100 basis point prime rate increase, with the majority of the remainder
repricing with an additional 100 basis point prime rate increase.
At December 31, 2015, the Corporation had a cumulative liability sensitive gap position of $37.492 million within the
one-year time frame.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:92)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:72)(cid:91)(cid:83)(cid:82)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:68)(cid:81)(cid:71)(cid:15)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:79)(cid:72)(cid:86)(cid:86)(cid:72)(cid:85)(cid:3)(cid:72)(cid:91)(cid:87)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:79)(cid:76)(cid:84)(cid:88)(cid:76)dity 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
(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:84)(cid:88)(cid:68)(cid:81)(cid:87)(cid:76)(cid:87)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:79)(cid:72)(cid:89)(cid:72)(cid:79)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:91)(cid:83)(cid:82)(cid:86)(cid:88)(cid:85)(cid:72)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:86)(cid:72)(cid:72)(cid:78)(cid:86)(cid:3)
to ensure that appropriate policies, procedures, management information systems, and internal controls are in place to
maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of
interest rate risk, the Corporation assesses the existing and potential future effects of changes in interest rates on its
financial condition, including capital adequacy, earnings, liquidity, and asset quality. In addition to changes in interest
37
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, 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, 2016 (dollars in thousands). Nonaccrual loans of $4.124
million are included in the table at an average interest rate of 0.00% and a maturity greater than five years.
Principal/Notional Amount Maturing/Repricing In:
2017
2018
2019
2020
2021
Thereafter
Total
Fair Value
12/31/2016
$
1,498 $ 13,551 $ 16,430 $ 17,693 $ 13,003 $ 24,098 $ 86,273 $
86,273
0.89
1.19
1.41
1.70
1.66
2.71
1.83%
153,227
4.50
129,763
4.52
97,539
4.65
25,129
4.39
11,306
4.47
2,717
4.61
419,681
4.55
420,513
362,176
4.67
10,694
1.97
(cid:178)
(cid:178)
4,548
1.59
(cid:178)
(cid:178)
1,439
1.59
(cid:178)
(cid:178)
1,965
1.59
(cid:178)
(cid:178)
200
1.59
(cid:178)
(cid:178)
247
1.57
362,176
4.67
19,093
1.80
$ 527,595 $ 147,862 $ 115,408 $ 44,787 $ 24,509 $ 27,062 $ 887,223 $
3.20%
4.15%
4.12%
4.18%
4.55%
2.96%
2.89%
362,894
19,093
888,773
$ 344,937 $
0.15
(cid:178) $
(cid:178)
(cid:178) $
(cid:178)
(cid:178) $
(cid:178)
(cid:178) $
(cid:178)
(cid:178) $ 344,937 $
(cid:178)
0.15%
344,937
231,970
0.01
2,950
4.00
10,076
4.10
46,502
0.01
2,200
4.00
10,077
1.11
18,164
1.51
16,799
4.00
15,077
1.77
12,121
1.40
(cid:178)
(cid:178)
10,078
1.59
3,135
1.32
(cid:178)
(cid:178)
78
1.00
2,504
0.30
(cid:178)
(cid:178)
244
1.00
314,396
0.96
21,949
4.00
45,630
1.66
312,090
22,204
46,159
$ 589,933 $ 58,779 $ 50,040 $ 22,199 $ 3,213 $
2.42%
1.12%
0.53%
1.49%
1.31%
2,748 $ 726,912 $
0.36%
0.74%
725,390
Rate Sensitive Assets
Fixed interest rate securities
Average interest rate
Fixed interest rate loans
Average interest rate
Variable interest rate loans
Average interest rate
Other assets
Average interest rate
Total rate sensitive assets
Average interest rate
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
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 interest bearing accounts.
Management believes the exposure to short-term foreign exchange risk is minimal and at an acceptable level for the
Corporation.
Off-Balance-Sheet Risk
Derivative financial instruments include futures, forwards, interest rate swaps, option contracts and other financial
instruments with similar characteristics. In 2016, the Corporation did 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
38
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.
39
Item 8.
Financial Statements and Supplementary Data
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 Corporation (the Corporation) as
of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, changes
(cid:76)(cid:81)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:73)(cid:79)ows for each of the years in the three-year period ended December 31, 2016. These
(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:76)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:17)(cid:3)(cid:3)(cid:50)(cid:88)(cid:85)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:76)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:91)(cid:83)(cid:85)(cid:72)(cid:86)(cid:86)(cid:3)(cid:68)(cid:81)(cid:3)(cid:82)(cid:83)(cid:76)(cid:81)(cid:76)(cid:82)(cid:81)(cid:3)
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
(cid:83)(cid:88)(cid:85)(cid:83)(cid:82)(cid:86)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:91)(cid:83)(cid:85)(cid:72)(cid:86)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:3)(cid:82)(cid:83)(cid:76)(cid:81)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:17)(cid:3)
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, 2016 and 2015, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with accounting
principles generally accepted in the United States of America.
/s/Plante & Moran, PLLC
March 28, 2017
Auburn Hills, Michigan
40
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2016 and 2015
(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 intangibles
Goodwill
Other assets
TOTAL ASSETS
(cid:47)(cid:44)(cid:36)(cid:37)(cid:44)(cid:47)(cid:44)(cid:55)(cid:44)(cid:40)(cid:54)(cid:3)(cid:36)(cid:49)(cid:39)(cid:3)(cid:54)(cid:43)(cid:36)(cid:53)(cid:40)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:54)(cid:182)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)
LIABILITIES:
Deposits:
Noninterest bearing deposits
NOW, money market, interest checking
Savings
CDs<$250,000
CDs>$250,000
Brokered
Total deposits
Federal funds purchased
Borrowings
Other liabilities
Total liabilities
(cid:54)(cid:43)(cid:36)(cid:53)(cid:40)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:54)(cid:182)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)(cid:29)
Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares Issued and
outstanding - 6,263,371 and 6,217,620, respectively
Retained earnings
Accumulated other comprehensive income
Unrealized (losses) gains on available for sale securities
Minimum pension liability
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)
December 31, December 31,
2016
2015
$
$
44,620
2,135
46,755
14,047
86,273
2,911
25,005
3
25,008
5,089
53,728
2,169
543,573
218,171
20,113
781,857
(5,020)
776,837
15,891
4,782
8,760
2,172
5,694
19,398
450,275
152,272
15,847
618,394
(5,004)
613,390
12,524
2,324
9,213
1,076
3,805
10,943
$
983,520
$
739,269
$
$
164,179
286,622
58,315
141,629
8,489
164,278
823,512
6,000
67,579
7,820
904,911
61,583
17,206
(102)
(78)
78,609
122,775
202,784
30,882
124,084
8,532
121,266
610,323
-
45,754
6,590
662,667
61,133
15,221
297
(49)
76,602
TOTAL LIABILITIES AND SHAREHO(cid:47)(cid:39)(cid:40)(cid:53)(cid:54)(cid:182)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)
$
983,520
$
739,269
See accompanying notes to consolidated financial statements.
41
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2016, 2015, and 2014
(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 mortgage loans sold on the secondary market
SBA/USDA loan sale gains
Mortgage servicing (amortization) income
Net realized security gains
Other
Total other income
OTHER EXPENSE:
Salaries and employee benefits
Occupancy
Furniture and equipment
Data processing
Advertising
Professional service fees
Loan origination expenses and deposit and card related fees
Writedowns and losses on other real estate held for sale
FDIC insurance assessment
Telephone
Transaction related expenses
Other
Total other expenses
Income before provision for income taxes
Provision for income taxes
NET INCOME
INCOME PER COMMON SHARE:
Basic
Diluted
For the Year Ended December 31,
2014
2015
2016
$
36,078
64
$
32,034
13
$
26,461
30
1,322
220
299
37,983
3,322
1,563
4,885
33,098
600
32,498
995
1,575
897
(40)
150
576
4,153
14,625
2,680
1,749
1,620
620
1,169
1,100
202
488
528
3,101
2,003
29,885
6,766
2,283
1,095
162
209
33,513
3,251
1,142
4,393
29,120
1,204
27,916
836
1,071
610
547
455
370
3,889
12,449
2,424
1,551
1,381
507
1,270
955
332
506
455
(cid:178)
2,046
23,876
7,929
2,333
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
$
4,483
$
5,596
$
1,700
$
$
.72
.72
$
$
.90
.89
$
$
.30
.30
See accompanying notes to consolidated financial statements.
42
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2016, 2015, and 2014
(Dollars in Thousands)
Net income
Other comprehensive income
Change in securities available for sale:
Unrealized (losses) gains arising during the period
Reclassification adjustment for securities gains included in net income
Tax effect
Net change in unrealized gains on available for sale securities
Defined benefit pension plan:
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 plan
Other comprehensive (loss) income, net of tax
2016
December 31,
2015
2014
$ 4,483 $ 5,596 $ 1,700
(455)
(150)
206
(399)
(44)
(cid:178)
15
(29)
(428)
(24)
(455)
214
(265)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(265)
578
(54)
(178)
346
(74)
(cid:178)
25
(49)
297
Total comprehensive income
$ 4,055 $
5,331 $ 1,997
See accompanying notes to consolidated financial statements.
43
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
(cid:38)(cid:50)(cid:49)(cid:54)(cid:50)(cid:47)(cid:44)(cid:39)(cid:36)(cid:55)(cid:40)(cid:39)(cid:3)(cid:54)(cid:55)(cid:36)(cid:55)(cid:40)(cid:48)(cid:40)(cid:49)(cid:55)(cid:54)(cid:3)(cid:50)(cid:41)(cid:3)(cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40)(cid:54)(cid:3)(cid:44)(cid:49)(cid:3)(cid:54)(cid:43)(cid:36)(cid:53)(cid:40)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:54)(cid:182)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)
Years Ended December 31, 2016, 2015, and 2014
(Dollars in Thousands)
Shares of Common Stock
Common and Additional
Paid in Capital
Stock
Retained
Earnings
(Accumulated Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance, January 1, 2014
5,541,390 $
53,621 $
11,412 $
216 $
65,249
Net income
Other comprehensive income (loss):
Net change in 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
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
695,361
6,580
37,125
739,066
(13,700)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
429
7,804
(32)
(cid:178)
7,772
(143)
(cid:178)
1,700
(cid:178)
1,700
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(1,308)
346
(cid:178)
(49)
297
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
346
(cid:178)
(49)
1,997
429
7,804
(32)
(cid:178)
7,772
(143)
(1,308)
Balance, December 31, 2014
6,266,756 $
61,679 $
11,804 $
513 $
73,996
Net income
Other comprehensive income (loss):
Net change in unrealized gain on securities available
for sale
Actuarial loss on defined benefit pension obligation
Total comprehensive income
Stock compensation
Issuance of common stock:
Restricted stock award vesting
Repurchase of common stock
Dividend on common stock
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
53,319
(102,455)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
576
(cid:178)
(1,122)
(cid:178)
5,596
(cid:178)
5,596
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(2,179)
(265)
(cid:178)
(265)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(265)
(cid:178)
5,331
576
(cid:178)
(1,122)
(2,179)
Balance, December 31, 2015
6,217,620 $
61,133 $
15,221 $
248 $
76,602
Net income
Other comprehensive income (loss):
Net change in unrealized gain on securities
available for sale
Actuarial loss on defined benefit pension
obligation
Total comprehensive income
Stock compensation
Issuance of common stock:
Restricted stock award vesting
Repurchase of common stock
Dividend on common stock
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
59,751
(14,000)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
600
(cid:178)
(150)
(cid:178)
4,483
(cid:178)
4,483
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(2,498)
(399)
(399)
(29)
(428)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(29)
4,055
600
(cid:178)
(150)
(2,498)
Balance, December 31, 2016
6,263,371 $
61,583 $
17,206 $
(180) $
78,609
See accompanying notes to consolidated financial statements.
44
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS CASH FLOWS
Years Ended December 31, 2016, 2015, and 2014
(Dollars in Thousands)
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 tax expense
(Gain) 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
(Gain) 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 (increase) in interest-bearing deposits in other financial institutions
Purchase of securities available for sale
Proceeds from maturities, sales, calls or paydowns of securities available for sale
Capital expenditures
Proceeds from life insurance
Net cash used in Peninsula acquisition
Net cash used in Eagle acquisition and reimbursement of contract termination fee
Net cash received in Niagara 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
Increase in fed funds purchased
Repurchase of common stock
Dividend on common stock
Proceeds from term borrowing
Principal payments on borrowings
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest
Income taxes
Business Combinations
Fair value of tangible assets acquired (noncash)
Goodwill and identifiable intangible assets acquired
Liabilities assumed
Common stock issued
For the year ended December 31,
2014
2015
2016
$
4,483
$
5,596
$
1,700
1,921
600
2,283
(150)
(1,575)
(81,693)
83,268
(10)
212
600
(10,282)
720
377
(56,237)
3,015
(16,105)
26,689
(2,137)
301
(cid:178)
(1,900)
2,453
1,608
15
(42,298)
49,491
(8,801)
6,000
(150)
(2,498)
19,800
(174)
63,668
21,747
25,008
46,755
4,792
1,100
$
$
$ 188,537
2,845
175,209
(cid:178)
1,670
1,204
2,333
(455)
(873)
(53,229)
54,102
65
295
576
8,188
(6,380)
13,092
(19,321)
708
(23,894)
35,091
(1,341)
263
(cid:178)
(cid:178)
(cid:178)
1,702
804
(5,988)
3,350
(3,367)
(cid:178)
(1,122)
(2,179)
(cid:178)
(725)
(4,043)
3,061
21,947
25,008
4,423
150
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)
(cid:178)
(4,484)
(cid:178)
(cid:178)
912
87
(54,980)
39,724
9,367
(cid:178)
(143)
(1,308)
3,000
(373)
50,267
3,728
18,219
21,947
4,119
100
$
$
(cid:178)
(cid:178)
(cid:178)
(cid:178)
$ 105,265
5,011
104,151
695,361
$
$
$
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)
$
3,292
$
1,376
$
588
See accompanying notes to consolidated financial statements.
45
NOTE 1 (cid:178) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(cid:55)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:76)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:48)(cid:68)(cid:70)(cid:78)(cid:76)(cid:81)(cid:68)(cid:70)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:54)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)
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
(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:37)(cid:68)(cid:81)(cid:78)(cid:180)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:80)(cid:76)(cid:81)(cid:82)(cid:85)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3)(cid:72)(cid:79)(cid:76)mination of intercompany transactions and accounts.
Nature of Operations
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:71)(cid:72)(cid:85)(cid:76)(cid:89)(cid:72)(cid:71)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:92)(cid:3)
market area is the Upper Peninsula, the northern portion of the Lower Peninsula of Michigan, Northeastern Wisconsin
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. Less than 1.(cid:19)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:92)(cid:3)
is with Canadian customers and denominated in Canadian dollars.
(cid:58)(cid:75)(cid:76)(cid:79)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:71)(cid:72)(cid:70)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:80)(cid:68)(cid:78)(cid:72)(cid:85)(cid:86)(cid:3)(cid:80)(cid:82)(cid:81)(cid:76)(cid:87)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:86)(cid:87)(cid:85)(cid:72)(cid:68)(cid:80)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:89)(cid:68)(cid:85)(cid:76)(cid:82)(cid:88)(cid:86)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
services, operations are managed and financial performance is evaluated on a Corporation-wide basis. Accordingly, all
(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:71)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:68)(cid:74)(cid:74)(cid:85)(cid:72)(cid:74)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:82)(cid:81)(cid:72)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)
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, mortgage servicing rights, and the assessment of goodwill for impairment.
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
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:86)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)t
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
(cid:70)(cid:82)(cid:80)(cid:83)(cid:85)(cid:72)(cid:75)(cid:72)(cid:81)(cid:86)(cid:76)(cid:89)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:88)(cid:81)(cid:87)(cid:76)(cid:79)(cid:3)(cid:85)(cid:72)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:17)(cid:3)(cid:3)(cid:58)(cid:75)(cid:72)(cid:81)(cid:3)(cid:76)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)
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.
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.
46
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
(cid:39)(cid:72)(cid:87)(cid:72)(cid:85)(cid:76)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:38)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:52)(cid:88)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:11)(cid:179)(cid:36)(cid:54)(cid:38)(cid:3)(cid:22)(cid:20)(cid:19)-(cid:22)(cid:19)(cid:180)(cid:12)(cid:17)(cid:3) These loans are recorded at fair value at the time of acquisition, with no
carryover of the related allowance for loan losses. Fair value of acquired loans is determined using a discounted cash
flow methodology based on assumptions about the amount and timing of principal and interest payments, principal
prepayments and principal defaults and losses, and current market rates. In recording the fair values of acquired
impaired loans at acquisition date, management calculates a non-accretable difference (the credit component of the
purchased loans) and an accretable difference (the yield component of the purchased loans).
Over the life of the acquired loans, management continues to estimate cash flows expected to be collected 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 operations. For any significant increases in cash flows expected to be collected, we adjust the amount of
the accretable yield recognized on a prospective basis over (cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:82)(cid:82)(cid:79)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:80)(cid:68)(cid:76)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:17)
Performing acquired loans are accounted for under ASC Topic 310-20, Receivables (cid:177) Nonrefundable Fees and Other
(cid:38)(cid:82)(cid:86)(cid:87)(cid:86)(cid:17)(cid:3)(cid:3)(cid:51)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:69)(cid:72)(cid:3)(cid:80)(cid:82)(cid:81)(cid:76)(cid:87)(cid:82)(cid:85)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:86)(cid:86)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:73)(cid:79)(cid:82)(cid:90)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
other facts available, portions of the accretable difference may be delayed or suspended if management deems
(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:83)(cid:85)(cid:76)(cid:68)(cid:87)(cid:72)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:3)(cid:68)(cid:70)(cid:70)(cid:85)(cid:88)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)
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.
Allowance for Loan Losses
The allowance for loan losses includes specific allowances related to 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
(cid:73)(cid:79)(cid:82)(cid:90)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:88)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:76)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:79)(cid:79)(cid:68)(cid:87)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:76)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)
loan is collateral dependent.
The Corporation also has an unallocated allowance for loan losses for loans not considered impaired. The allowance for
loan losses is maintained at a level which management believes is adequate to provide for probable loan losses.
(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:76)(cid:70)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:72)(cid:89)(cid:68)(cid:79)(cid:88)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:71)(cid:72)(cid:84)(cid:88)(cid:68)(cid:70)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:83)(cid:68)(cid:86)(cid:87)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:85)(cid:76)(cid:72)(cid:81)(cid:70)(cid:72)(cid:15)(cid:3)
47
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.
(cid:44)(cid:81)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:82)(cid:83)(cid:76)(cid:81)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:71)(cid:72)(cid:84)(cid:88)(cid:68)(cid:87)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:83)(cid:85)(cid:82)(cid:69)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)
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
(cid:72)(cid:70)(cid:82)(cid:81)(cid:82)(cid:80)(cid:76)(cid:70)(cid:3)(cid:82)(cid:85)(cid:3)(cid:79)(cid:72)(cid:74)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:68)(cid:86)(cid:82)(cid:81)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:72)(cid:85)(cid:182)(cid:86)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:71)(cid:76)(cid:73)(cid:73)(cid:76)(cid:70)(cid:88)(cid:79)(cid:87)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:74)(cid:85)(cid:68)(cid:81)ts 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. (cid:36)(cid:81)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:71)(cid:72)(cid:70)(cid:79)(cid:76)(cid:81)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:70)(cid:82)(cid:81)(cid:82)(cid:80)(cid:92)(cid:3)(cid:82)(cid:85)(cid:3)(cid:86)(cid:82)(cid:80)(cid:72)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:76)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:72)(cid:85)(cid:182)(cid:86)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)
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 fair value, less costs to sell, establishing a new cost basis. Valuations are periodically performed by
management or a third party, and th(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:182)(cid:3)(cid:70)(cid:68)(cid:85)(cid:85)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:79)(cid:72)(cid:86)(cid:86)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3)
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.
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 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 is annually
t(cid:72)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:76)(cid:85)(cid:80)(cid:72)(cid:81)(cid:87)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:85)(cid:72)(cid:3)(cid:71)(cid:72)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:3)(cid:76)(cid:81)(cid:87)(cid:68)(cid:81)(cid:74)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)(cid:69)(cid:72)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:80)(cid:82)(cid:85)(cid:87)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:88)(cid:86)(cid:72)(cid:73)(cid:88)(cid:79)(cid:3)
life of ten years.
Stock Compensation Plans
On May (cid:21)(cid:21)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:21)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:48)(cid:68)(cid:70)(cid:78)(cid:76)(cid:81)(cid:68)(cid:70)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)n 2012 Incentive
Compensation Plan, under which current and prospective employees, non-employee directors and consultants may be
awarded incentive stock options, non-(cid:86)(cid:87)(cid:68)(cid:87)(cid:88)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:82)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:68)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:11)(cid:179)(cid:53)(cid:54)(cid:36)(cid:86)(cid:180)(cid:12)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)
appreciation (cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:68)(cid:74)(cid:74)(cid:85)(cid:72)(cid:74)(cid:68)(cid:87)(cid:72)(cid:3)(cid:81)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:3)(cid:76)(cid:86)(cid:3)
575,000. Awards are made to certain other senior officers at the discretion of the Corporation's management.
Compensation cost equal to the fair value of the award is recognized over the vesting period.
48
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, 2016, the balance in accumulated other
comprehensive income consisted of a unrealized losses on available for sales securities of $.102 million and actuarial
losses on the defined benefit pension obligation of $78,000. At December 31, 2015, the balance in accumulated other
comprehensive income consisted of unrealized gains on available for sale securities of $.297 million and actuarial losses
on the defined benefit pension obligation of $49,000.
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 years ended December 31, 2016,
2015 and 2014 (dollars in thousands, except per share data):
Year Ended December 31,
2015
2014
2016
(Numerator):
Net income
(Denominator):
Weighted average shares outstanding
Effect of dilutive stock options, and vesting of restricted stock awards
Diluted weighted average shares outstanding
Income per common share:
Basic
Diluted
Income Taxes
$
4,483 $
5,596 $
1,700
6,236,067
32,636
6,268,703
6,241,921
31,400
6,273,321
5,592,738
61,073
5,653,811
$
$
.72 $
.72 $
.90 $
.89 $
.30
.30
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, 2018 and early adoption is permitted, only as of
49
January 1, 2017. In this regard, management has completed a preliminary analysis of the impact of implementation. The
key revenue streams identified include service charges and mortgage banking income. The new guidance is not expected
(cid:87)(cid:82)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:17)(cid:3)(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:76)(cid:71)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:70)(cid:82)(cid:83)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)
standard and will not be impacted upon adoption.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments (cid:177) Overall (Subtopic 825-10): Recognition and
(cid:48)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:36)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:47)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:11)(cid:179)(cid:36)(cid:54)(cid:56)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)-(cid:19)(cid:20)(cid:180)(cid:12)(cid:17)(cid:3)(cid:3)(cid:36)(cid:54)(cid:56)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)-01 amends current guidance
by requiring companies to recognize changes in fair value for equity investments that have a readily determinable fair
value through net income rather than through other comprehensive income. Under ASU 2016-01, equity investments
that do not have a readily determinable fair value will either be accounted for the same as equity investments that have a
readily determinable fair value, with changes in fair value recognized through net income or carried at cost, adjusted for
changes in observable prices based on orderly transactions for identical or similar investments issued by the same issuer
and further adjusted for impairment, if applicable. ASU 2016-01 also requires a qualitative assessment of impairment
indicators each reporting period. If this assessment indicates that impairment exists, companies must adjust the
investment to fair value and recognize an impairment loss in net income, even if the impairment is determined to be
temporary. ASU 2016-01 is effective for public companies for interim and annual periods beginning after December 15,
(cid:21)(cid:19)(cid:20)(cid:26)(cid:17)(cid:3)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:68)(cid:71)(cid:82)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:36)(cid:54)(cid:56)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)-01 is no(cid:87)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)
consolidated financial condition or results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases, which will supersede the current lease requirements in ASC
840. The ASU requires lessees to recognize an asset with right of use and related lease liability for all leases, with a
limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification
affecting the pattern of expense recognition in the statement of operations. Currently, leases are classified as either
capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease related expenses in
the statements of operations and cash flows will be generally consistent with the current guidance. The new lease
(cid:74)(cid:88)(cid:76)(cid:71)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:69)(cid:72)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:72)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:69)(cid:72)(cid:3)(cid:68)(cid:83)(cid:83)(cid:79)(cid:76)(cid:72)(cid:71)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:80)(cid:82)(cid:71)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)
retrospective transition method to the beginning of the earliest period presented. The Corporation currently has no
capital leases, but does maintain seven operating leases for branch locations that will be impacted by the implementation
of this guidance. The effect of applying the new lease guidance on the financial statements has not yet been determined.
In September, the FASB issued ASU No. 2016-13, Financial Instruments (cid:177) Credit Losses (Topic 326): Measurement of
(cid:38)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:47)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:44)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:11)(cid:179)(cid:36)(cid:54)(cid:56)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)-(cid:20)(cid:22)(cid:180)(cid:12)(cid:17)(cid:3)(cid:3)(cid:36)(cid:54)(cid:56)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)-13 changes how entities will measure credit losses
for most financial assets and certain other instruments that are not measured at fair value through net income.
ASU 2016-13 requires an entity to measure expected credit losses for financial assets over the estimated lifetime of
expected credit loss and record an allowance that, when deducted from the amortized cost basis of the financial asset,
presents the net amount expected to be collected on the financial asset. The standard includes the following core
concepts in determining the expected cre(cid:71)(cid:76)(cid:87)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3)(cid:80)(cid:88)(cid:86)(cid:87)(cid:29)(cid:3)(cid:11)(cid:68)(cid:12)(cid:3)(cid:69)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:182)(cid:86)(cid:3)(cid:68)(cid:80)(cid:82)(cid:85)(cid:87)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:11)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)
premiums or discounts, net deferred fees and costs, foreign exchange and fair value hedge accounting adjustments), (b)
reflect losses expected over the remaining contractual life of an asset (considering the effect of voluntary prepayments),
(c) consider available relevant information about the estimated collectability of cash flows (including information about
past events, current conditions, and reasonable and supportable forecasts), and (d) reflect the risk of loss, even when that
risk is remote.
ASU 2016-13 also amends the recording of purchased credit-deteriorated assets. Under the new guidance, an allowance
will be recognized at acquisition through a gross-up approach whereby an entity will record as the initial amortized cost
the sum of (a) the purchase price and (b) an estimate of credit losses as of the date of acquisition. In addition, the
guidance also requires immediate recognition in earnings of any subsequent changes, both favorable and unfavorable, in
expected cash flows by adjusting this allowance.
ASU 2016-13 also amends the impairment model for available-for-sale debt securities and requires entities to determine
whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. Management may not
use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss
exists, as is currently permitted. In addition, an entity will recognize an allowance for credit losses on available-for-sale
debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis
of the investment, as is currently required. As a result, entities will recognize improvements to credit losses on available-
for-sale debt securities immediately in earnings rather than as interest income over time under current practice.
50
New disclosures required by ASU 2016-13 include: (a) for financial assets measured at amortized cost, an entity will be
required to disclose information about how it developed its allowance, including changes in the factors that influenced
(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:68)(cid:86)(cid:82)(cid:81)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:82)(cid:86)(cid:72)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:15)(cid:3)(cid:11)(cid:69)(cid:12)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)financial receivables and net
investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it
(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:79)(cid:82)(cid:86)(cid:72)(cid:86)(cid:3)(cid:68)(cid:69)(cid:82)(cid:88)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:69)(cid:92)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:182)(cid:86)(cid:3)(cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:85)(cid:3)(cid:89)(cid:76)(cid:81)(cid:87)(cid:68)(cid:74)(cid:72) for as many as five
annual periods, and (c) for available-for-sale debt securities, an entity will be required to provide a roll-forward of the
allowance for credit losses and an aging analysis for securities that are past due.
Upon adoption of ASU 2016-13, a cumulative-effect adjustment to retained earnings will be recorded as of the
beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for public companies
for interim and annual periods beginning after December 15, 2019, with early adoption permitted for annual periods
beginning after December 15, 2018. The Corporation is currently evaluating the provisions of ASU 2016-13 to
determine the potential impact on the Corporation's consolidated financial condition and results of operations.
Reclassifications
Certain amounts in the 2015 and 2014 consolidated financial statements have been reclassified to conform to the 2016
presentation.
NOTE 2 (cid:178) RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $17.518 million were restricted on December 31, 2016 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.
(cid:37)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:41)(cid:72)(cid:71)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:39)(cid:72)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:3)(cid:44)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:21)(cid:24)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19)(cid:17)(cid:3)(cid:3)
Management believes that these financial institutions have strong credit ratings and the credit risk related to these
deposits is minimal.
NOTE 3 (cid:178) SECURITIES AVAILABLE FOR SALE
The carrying value and estimated fair value of securities available for sale are as follows (dollars in thousands):
December 31, 2016
Amortized Unrealized Unrealized Estimated
Fair Value
Cost
Losses
Gains
Corporate
Equity
US Agencies
US Agencies - MBS
Obligations of states and political subdivisions
500
23,991
16,980
25,057
$ 19,899 $
49 $
(cid:178)
47
48
447
(38) $ 19,910
500
(cid:178)
23,952
(86)
16,833
(195)
25,078
(426)
Total securities available for sale
$ 86,427 $
591 $
(745) $ 86,273
December 31, 2015
Corporate
US Agencies
US Agencies - MBS
Obligations of states and political subdivisions
12,710
27,358
3,738
9,472
(cid:178)
62
31
592
(64)
(43)
(10)
(118)
12,646
27,377
3,759
9,946
Total securities available for sale
$ 53,278 $
685 $
(235) $ 53,728
51
Following is information pertaining to securities with gross unrealized losses at December 31, 2016 and 2015 aggregated
by investment category and length of time these individual securities have been in a loss position (dollars in thousands):
December 31, 2016
Losses
Less Than Twelve Months Over Twelve Months
Gross
Unrealized
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Corporate
Equity
US Agencies
US Agencies - MBS
Obligations of states and political subdivisions
$
(38) $ 12,085 $
(cid:178)
(86)
(192)
(426)
(cid:178)
19,153
11,589
13,328
(cid:178) $
(cid:178)
(cid:178)
(3)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
932
(cid:178)
Total securities available for sale
$
(742) $ 56,155 $
(3) $ 932
December 31, 2015
Corporate
US Agencies
US Agencies - MBS
Obligations of states and political subdivisions
(64)
(43)
(10)
(118)
11,299
15,957
1,651
573
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
Total securities available for sale
$
(235) $ 29,480 $
(cid:178) $
(cid:178)
There were 118 securities in an unrealized loss position in 2016 and 13 in 2015. 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.
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):
2016
2015
2014
Proceeds from sales and calls
Gross gains on sales and calls
Gross (losses) on sales and calls
$ 19,719 $ 25,628 $ 5,200
54
(cid:178)
190
(40)
455
(cid:178)
The carrying value and estimated fair value of securities available for sale at December 31, 2016, 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
Total
Amortized Estimated
Fair Value
Cost
$ 1,010 $
48,665
13,469
6,303
69,447
16,980
902
48,587
13,633
6,318
69,440
16,833
$ 86,427 $ 86,273
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. Securities with a market value of $11.931 million are pledged
as collateral to the Federal Home Loan Bank and $5.494 million are pledged to certain customer relationships. See Note
10 for information on securities pledged to secure borrowings from the Federal Home Loan Bank.
52
NOTE 4 (cid:178) LOANS
The composition of loans at December 31 is as follows (dollars in thousands):
Commercial real estate
Commercial, financial, and agricultural
Commercial construction
One to four family residential real estate
Consumer
Consumer construction
Total loans
2016
2015
$ 389,420 $ 312,805
122,140
142,648
15,330
11,505
140,502
205,945
15,847
20,113
11,770
12,226
$ 781,857 $ 618,394
The Corporation comp(cid:79)(cid:72)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:51)(cid:72)(cid:81)(cid:76)(cid:81)(cid:86)(cid:88)(cid:79)(cid:68)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:11)(cid:179)(cid:51)(cid:41)(cid:38)(cid:180)(cid:12)(cid:15)(cid:3)(cid:82)(cid:81)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:24)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:23)(cid:15)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:41)(cid:76)(cid:85)(cid:86)(cid:87)(cid:3)
(cid:49)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:3)(cid:82)(cid:73)(cid:3)(cid:40)(cid:68)(cid:74)(cid:79)(cid:72)(cid:3)(cid:53)(cid:76)(cid:89)(cid:72)(cid:85)(cid:3)(cid:11)(cid:179)(cid:40)(cid:68)(cid:74)(cid:79)(cid:72)(cid:3)(cid:53)(cid:76)(cid:89)(cid:72)(cid:85)(cid:180)(cid:12)(cid:3)(cid:82)(cid:81)(cid:3)(cid:36)(cid:83)(cid:85)(cid:76)(cid:79)(cid:3)(cid:21)(cid:28)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:49)(cid:76)(cid:68)(cid:74)(cid:68)(cid:85)(cid:68)(cid:3)(cid:37)(cid:68)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:179)(cid:49)(cid:76)(cid:68)(cid:74)(cid:68)(cid:85)(cid:68)(cid:180)(cid:12)(cid:3)(cid:82)(cid:81)(cid:3)(cid:36)(cid:88)(cid:74)(cid:88)(cid:86)(cid:87)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)
2016. The PFC acquired impaired loans totaled $13.290 million, the Eagle River acquired impaired loans totaled $3.401
million, and the Niagara acquired impaired loans totaled $2.105 million. In 2016, the Corporation had positive
resolution of acquired nonperforming loans, which resulted in the recognition of approximately $96,000 of accretable
interest. In 2015, the Corporation had positive resolution of acquired nonperforming loans, which resulted in the
recognition of approximately $.578 million of the accretable interest.
The table below details the outstanding balances of the PFC acquired portfolio and the acquisition fair value adjustments
at acquisition date (dollars in thousands):
Acquired Acquired
Impaired 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 $ 67,139
(cid:178)
(2,234)
53,849
64,905
(2,844)
(2,100)
51,749 $ 62,061
53
The table below details the outstanding balances of the Eagle River acquired portfolio and the acquisition fair value
adjustments at acquisition date (dollars in thousands):
Acquired Acquired
Impaired Non-impaired
Acquired
Total
Loans acquired - contractual payments
Nonaccretable difference
Expected cash flows
Accretable yield
Carrying balance at acquisition date
$ 3,401 $
(1,172)
2,229
(391)
$ 1,838 $
80,737 $ 84,138
(1,172)
(cid:178)
82,966
80,737
(1,700)
(2,091)
79,037 $ 80,875
The table below details the outstanding balances of the Niagara acquired portfolio and the acquisition fair value
adjustments at acquisition date (dollars in thousands):
Loans acquired - contractual payments
Nonaccretable difference
Expected cash flows
Accretable yield
Carrying balance at acquisition date
Acquired Acquired
Acquired
Impaired Non-impaired
Total
$ 2,105 $
(265)
1,840
(88)
$ 1,752 $
(cid:178)
30,555
(600)
30,555 $ 32,660
(265)
32,395
(688)
29,955 $ 31,707
The table below presents a rollforward of the accretable yield on acquired loans for year ended December 31, 2016
(dollars in thousands):
Acquired Acquired
Impaired Non-impaired
PFC
Eagle River
Acquired Acquired Acquired
Niagara
Acquired Acquired Acquired
Total
Impaired Non-impaired
Total
Impaired Non-impaired
Acquired
Total
Balance,
December 31,
2015
Acquisitions
Accretion
Reclassification
from
nonaccretable
difference
Balance,
December 31,
2016
$ 426 $
(cid:178)
(50)
1,342 $ 1,768
(cid:178)
(750)
(cid:178)
(700)
$
(cid:178) $
391
(46)
(cid:178) $
1,700
(479)
(cid:178)
2,091
(525)
$
(cid:178) $
88
(cid:178)
(cid:178) $
600
(95)
(cid:178)
688
(95)
94
(cid:178)
94
109
(cid:178)
109
36
(cid:178)
36
$ 282 $
642 $ 924
$ 236 $
1,221 $ 1,457
$
52 $
505 $ 557
The table below presents a rollforward of the accretable yield on acquired loans for year ended December 31, 2015
(dollars in thousands):
Balance, December 31, 2014
Accretion
Reclassification from nonaccretable difference
Balance, December 31, 2015
Acquired Acquired
Impaired Non-impaired
Acquired
Total
$ 744 $
(578)
260
$ 426 $
2,042 $ 2,786
(1,278)
(700)
260
(cid:178)
1,342 $ 1,768
54
A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2016 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
Total
Commercial,
One to four
Commercial
financial and Commercial
real estate agricultural construction
family residential Consumer
real estate
construction Consumer Unallocated
Total
$
$
1,611 $
(245)
54
(75)
1,345 $
645 $
(232)
41
160
614 $
79 $
(cid:178)
7
(29)
57 $
274 $
(133)
5
150
296 $
7 $
(cid:178)
(cid:178)
(1)
6 $
64 $
(113)
32
107
90 $
2,324 $
(cid:178)
(cid:178)
288
2,612 $
5,004
(723)
139
600
5,020
$
$
389,420 $
(1,345)
388,075 $
142,648 $
(614)
142,034 $
11,505 $
(57)
11,448 $
205,945 $
(296)
205,649 $
12,226 $ 20,113 $
(6)
(90)
12,220 $ 20,023 $
(cid:178) $ 781,857
(2,612)
(5,020)
(2,612) $ 776,837
$
$
470 $
875
1,345 $
365 $
249
614 $
(cid:178) $
57
57 $
43 $
253
296 $
(cid:178) $
6
6 $
80 $
10
90 $
(cid:178) $
2,612
2,612 $
958
4,062
5,020
Ending balance Loans:
Individually evaluated
Collectively evaluated
Acquired with deteriorated credit quality
Total
$
$
1,304 $
384,882
3,234
389,420 $
1,461 $
141,187
(cid:178)
142,648 $
(cid:178) $
11,505
(cid:178)
11,505 $
1,125 $
202,028
2,792
205,945 $
(cid:178) $
181 $
12,169
57
19,928
4
12,226 $ 20,113 $
4,071
(cid:178) $
771,699
(cid:178)
(cid:178)
6,087
(cid:178) $ 781,857
Impaired loans, by definition, are individually evaluated.
A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2015 is as follows (dollars
in thousands):
Commercial,
One to four
Commercial
real estate
financial and Commercial
agricultural construction
family residential Consumer
real estate
construction Consumer Unallocated Total
Allowance for loan loss reserve:
Beginning balance ALLR
$
2,813 $
1,539 $
142 $
285 $
(52)
588
(1,749)
22
(cid:178)
52
(1,738)
1,611 $
$
833
645 $
(115)
79 $
(142)
2
129
274 $
6 $
(cid:178)
(cid:178)
1
7 $
13 $
342 $
5,140
(87)
26
112
64 $
(cid:178)
(cid:178)
(2,030)
690
1,982
2,324 $
1,204
5,004
$
312,805 $
122,140 $
15,330 $
140,502 $
(1,611)
311,194 $
(645)
121,495 $
(79)
15,251 $
$
(274)
140,228 $
11,770 $ 15,847 $
(7)
(64)
11,763 $ 15,783 $
(cid:178) $ 618,394
(2,324)
(5,004)
(2,324) $ 613,390
$
420 $
192 $
1,191
1,611 $
$
453
645 $
(cid:178) $
79
79 $
60 $
214
274 $
(cid:178) $
7
7 $
55 $
9
64 $
(cid:178) $
727
2,324
2,324 $
4,277
5,004
$
1,086 $
617 $
(cid:178) $
325 $
83 $
(cid:178) $
(cid:178) $
2,111
307,336
121,345
15,330
136,940
15,845
(cid:178)
608,482
11,686
1
11,770 $ 15,847 $
2
(cid:178)
7,801
(cid:178) $ 618,394
Acquired with deteriorated credit quality
Total
4,383
312,805 $
178
122,140 $
(cid:178)
15,330 $
$
3,237
140,502 $
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.
55
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
To do so, we operate a credit risk rating system under which our credit management personnel assign a credit risk rating
(cid:87)(cid:82)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:89)(cid:76)(cid:72)(cid:90)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:85)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:3)
scale of 1 through 8, with higher scores indicating higher risk. The credit risk rating structure used is shown below.
In the context of the credit risk rating structure, the term Classified is defined as a problem loan which may or may not
be in a nonaccrual status, dependent upon current payment status and collectability.
Strong (1)
(cid:37)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3)(cid:76)(cid:86)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:89)(cid:88)(cid:79)(cid:81)(cid:72)(cid:85)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:88)(cid:71)(cid:71)(cid:72)(cid:81)(cid:3)(cid:72)(cid:70)(cid:82)(cid:81)(cid:82)(cid:80)(cid:76)(cid:70)(cid:3)(cid:82)(cid:85)(cid:3)(cid:87)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:92)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:179)(cid:86)(cid:87)(cid:85)(cid:82)(cid:81)(cid:74)(cid:180)(cid:3)(cid:69)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:86)(cid:75)(cid:72)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)
within an industry that is very typical for our markets or type of lending culture. Borrowers also (cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:179)(cid:86)(cid:87)(cid:85)(cid:82)(cid:81)(cid:74)(cid:180)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)
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 econ(cid:82)(cid:80)(cid:76)(cid:70)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:72)(cid:85)(cid:86)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:179)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3)(cid:68)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:180)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
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
(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:83)(cid:83)(cid:72)(cid:68)(cid:85)(cid:3)(cid:179)(cid:68)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:180)(cid:3)(cid:87)(cid:82)(cid:3)(cid:179)(cid:86)(cid:79)(cid:76)(cid:74)(cid:75)(cid:87)(cid:79)(cid:92)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3)(cid:68)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:180)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:72)(cid:72)(cid:85)(cid:3)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:92)(cid:3)(cid:86)(cid:75)(cid:82)(cid:90)(cid:3)(cid:68)(cid:81)(cid:3)
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)
(cid:55)(cid:75)(cid:72)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:83)(cid:82)(cid:87)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)(cid:90)(cid:72)(cid:68)(cid:78)(cid:81)(cid:72)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:71)(cid:72)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:70)(cid:79)(cid:82)(cid:86)(cid:72)(cid:3)(cid:68)(cid:87)(cid:87)(cid:72)(cid:81)(cid:87)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)(cid:3)(cid:44)(cid:73)(cid:3)(cid:79)(cid:72)(cid:73)(cid:87)(cid:3)(cid:88)(cid:81)(cid:70)(cid:82)(cid:85)(cid:85)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)
potential weaknesses may result in deterioration (cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:85)(cid:82)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:3)(cid:82)(cid:85)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:76)(cid:87)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)
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.
56
Charge-off/Loss (8)
Loans in this category are largely uncollectible and should be charged against the loan loss reserve immediately.
General Reserves:
For loans with a credit risk rating of 5 or better and any loans with a risk rating of 6 or 7 with no specific reserve,
reserves are established based on the type of loan collateral, if any, and the assigned credit risk rating. Determination of
the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected
future cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience,
and consideration of current environmental factors and economic trends, all of which may be susceptible to significant
change.
Using a historical average loss by loan type as a base, each loan graded as higher risk is assigned a specific percentage.
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.
Commercial construction loans in the amount of $4.414 million and $2.409 million at December 31, 2016, and 2015,
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, 2016 (dollars in thousands):
(1)
(2)
Strong Good
(3)
(4)
Acceptable/
(5)
(6)
(7)
Rating
Average Acceptable Watch Sp. Mention Substandard Doubtful Unassigned
Total
Commercial real
estate
$ 3,021 $ 23,940 $ 140,618 $
205,710 $
10,808 $
5,323 $
(cid:178) $
(cid:178) $ 389,420
Commercial,
financial and
agricultural
Commercial
construction
One-to-four
family
residential real
estate
Consumer
construction
Consumer
10,421
13,434
49,434
65,097
2,485
1,777
(cid:178)
900
3,146
1,877
783
385
740
1,373
3,412
6,927
2,658
5,493
28
20
(cid:178)
(cid:178)
(cid:178)
15
(cid:178)
42
(cid:178)
13
17
103
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
142,648
4,414
11,505
185,342
205,945
12,181
19,920
12,226
20,113
Total loans
$ 14,230 $ 39,647 $ 196,625 $
279,653 $
16,747 $
13,098 $
(cid:178) $ 221,857 $ 781,857
57
Below is a breakdown of loans by risk category as of December 31, 2015 (dollars in thousands)
(1)
(2)
Strong Good
(3)
(4)
Acceptable/
(5)
(6)
(7)
Rating
Average Acceptable Watch Sp. Mention Substandard Doubtful Unassigned
Total
$
2,072 $ 26,197 $ 113,868 $
164,954 $
(cid:178) $
5,714 $
(cid:178) $
(cid:178) $ 312,805
13,067
5,954
47,194
(cid:178)
400
3,869
53,791
8,257
591
1,222
3,172
4,078
(cid:178)
24
(cid:178)
(cid:178)
(cid:178)
19
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
2,134
395
4,093
(cid:178)
61
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
122,140
2,409
15,330
127,346
140,502
11,770
15,743
11,770
15,847
Commercial real
estate
Commercial,
financial and
agricultural
Commercial
construction
One-to-four family
residential real
estate
Consumer
construction
Consumer
Total loans
$ 15,754 $ 33,773 $ 168,122 $
231,080 $
(cid:178) $
12,397 $
(cid:178) $ 157,268 $ 618,394
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.
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
necessa(cid:85)(cid:92)(cid:15)(cid:3)(cid:86)(cid:82)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:3)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:72)(cid:71)(cid:3)(cid:81)(cid:72)(cid:87)(cid:15)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:88)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:73)(cid:79)(cid:82)(cid:90)(cid:86)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:182)(cid:86)(cid:3)(cid:72)(cid:91)(cid:76)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)
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.
The following is a summary of impaired loans and their effect on interest income (dollars in thousands):
Nonaccrual
Nonaccrual
Accrual Average
Related
Interest Income
on
Recorded Balance Unpaid Balance
Basis Investment Valuation Reserve Accrual Basis
December 31, 2016
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
1,891 $ 3,234 $
11
(cid:178)
2,198
22
86
(cid:178)
(cid:178)
2,792
57
4
5,318 $
116
(cid:178)
4,500
36
127
328 $
357
(cid:178)
333
(cid:178)
(cid:178)
(cid:178) $
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
103 $
109
(cid:178)
171
(cid:178)
5
2,219 $ 3,234 $
368
(cid:178)
2,531
22
86
(cid:178)
(cid:178)
2,792
57
4
5,226 $ 6,087 $
5,421 $
225
(cid:178)
4,671
36
132
10,485 $
(cid:178) $
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
50 $
231
(cid:178)
94
(cid:178)
5
50 $
231
(cid:178)
94
(cid:178)
5
380 $
232
3
(cid:178)
196
4
2
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
232
3
(cid:178)
196
4
2
437
$
$
$
$
1,426 $
11
(cid:178)
1,623
17
82
306 $
326
(cid:178)
333
(cid:178)
(cid:178)
1,732 $
337
(cid:178)
1,956
17
82
4,124 $
58
December 31, 2015
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
$
$
$
$
471 $
(cid:178)
(cid:178)
1,267
20
50
(cid:178) $
460
(cid:178)
229
(cid:178)
10
471 $
460
(cid:178)
1,496
20
60
2,507 $
803 $ 4,051 $
(cid:178)
(cid:178)
1,598
22
51
1,778
(cid:178)
2,385
2
1
7,205 $
4,849
260
5,413
99
102
(cid:178) $
1,139
(cid:178)
244
(cid:178)
9
(cid:178) $
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178) $
699
(cid:178)
232
(cid:178)
10
803 $ 4,051 $
1,139
(cid:178)
1,842
22
60
1,778
(cid:178)
2,385
2
1
3,866 $ 8,217 $
7,205 $
5,548
260
5,645
99
112
18,869 $
(cid:178) $
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178) $
192
(cid:178)
58
(cid:178)
1
(cid:178) $
192
(cid:178)
58
(cid:178)
1
251 $
224
9
(cid:178)
128
(cid:178)
0
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
224
9
(cid:178)
128
(cid:178)
(cid:178)
361
A summary of past due loans at December 31, is as follows (dollars in thousands):
2016
2015
30-89 days 90+ days
Past Due Past Due/
(accruing) Nonaccrual Total
30-89 days 90+ days
Past Due/
Past Due
(accruing) Nonaccrual
Total
Commercial real estate
Commercial, financial and agricultural
Commercial construction
One to four family residential real estate
Consumer construction
Consumer
$
942 $
186
(cid:178)
2,113
(cid:178)
133
1,732 $ 2,674 $
337
(cid:178)
1,956
17
82
523
(cid:178)
4,069
17
215
521 $
222
270
807
(cid:178)
130
471 $ 992
682
460
270
(cid:178)
2,335
1,528
20
20
190
60
Total past due loans
$
3,374 $
4,124 $ 7,498 $
1,950 $
2,539 $ 4,489
Troubled Debt Restructuring
(cid:55)(cid:85)(cid:82)(cid:88)(cid:69)(cid:79)(cid:72)(cid:71)(cid:3)(cid:71)(cid:72)(cid:69)(cid:87)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:88)(cid:70)(cid:87)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:11)(cid:179)(cid:55)(cid:39)(cid:53)(cid:180)(cid:12)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)-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 (cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:72)(cid:71)(cid:15)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:182)(cid:86)(cid:3)(cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:79)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:15)(cid:3)
or for collateral dependent loans, to the fair value of the collateral.
There were no troubled debt restructurings that occurred during the years ended December 31 2016, and December 31,
2015.
59
Insider Loans
(cid:55)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:85)(cid:71)(cid:76)(cid:81)(cid:68)(cid:85)(cid:92)(cid:3)(cid:70)(cid:82)(cid:88)(cid:85)(cid:86)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:15)(cid:3)(cid:74)(cid:85)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:72)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:82)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:15)(cid:3)
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
Loans outstanding at end of period
2016
2015
$ 6,887 $ 8,789
0
2,510
778
2,119
(2,680)
(2,321)
$ 9,195 $ 6,887
There were no loans to related-parties classified substandard as of December 31, 2016 and 2015. In addition to the
outstanding balances above, there were unfunded commitments of $.592 million to related parties at December 31, 2016.
NOTE 5 (cid:178) 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
Net book value
2016
2015
$ 2,566 $ 1,812
15,497
8,567
142
26,018
13,494
18,001
9,142
310
30,019
14,128
$ 15,891 $ 12,524
Depreciation of premises and equipment charged to operating expenses amounted to $1.617 million in 2016, $1.457
million in 2015, and $1.337 million in 2014.
NOTE 6 (cid:178) 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
Proceeds from other real estate sold
Transfer to premise and equipment
Writedowns of other real estate held for sale
Gain (loss) on sale of other real estate held for sale
Total other real estate held for sale
2016
2015
$ 2,324 $ 3,010
1,376
-
(1,702)
-
(295)
(65)
3,292
1,205
(1,640)
(197)
(212)
10
$ 4,782 $ 2,324
Foreclosed residential real estate property of $2.094 million is included in other real estate as of December 31, 2016.
The recorded investment in consumer mortgage loans secured by residential real estate property that are in the process of
foreclosure according to local requirements of the applicable jurisdictions was $.195 million as of December 31, 2016.
60
NOTE 7 (cid:178) DEPOSITS
The distribution of deposits at December 31 is as follows (dollars in thousands):
Noninterest bearing deposits
NOW, money market, interest checking
Savings
CDs <$250,000
CDs >$250,000
Brokered
Total deposits
2016
2015
$ 164,179 $ 122,775
202,784
30,882
124,084
8,532
121,266
286,622
58,315
141,629
8,489
164,278
$ 823,512 $ 610,323
Maturities of non-brokered time deposits outstanding at December 31, 2016 are as follows (dollars in thousands):
2017
2018
2019
2020
2021
Thereafter
Total
$ 88,269
33,427
10,662
12,121
3,135
2,504
$ 150,118
NOTE 8 (cid:178) GOODWILL AND OTHER INTANGIBLE ASSETS
During the fourth quarter of 2014, the Corporation recorded $3.805 million of goodwill and $1.206 million of deposit
based intangible assets associated with the acquisition of Peninsula. During 2016, the Corporation recorded $1.839
million of goodwill and $.993 million of deposit based intangible assets associated with the acquisition of Eagle River.
Also in 2016, the Corporation recorded $50,000 of goodwill and $.300 million of deposit based intangible assets with the
acquisition of Niagara.
The deposit based intangible is reported net of accumulated amortization at $2.172 million at December 31, 2016,
compared to $1.076 million at December 31, 2015. Amortization expense in 2016 is $.197 million, compared to $.121
million in 2015 and $10,000 in 2014. Amortization expense for the next five years is expected to be at $.250 million per
year.
NOTE 9 (cid:177) SERVICING RIGHTS
Mortgage Loans
(cid:48)(cid:82)(cid:85)(cid:87)(cid:74)(cid:68)(cid:74)(cid:72)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:86)(cid:3)(cid:11)(cid:179)(cid:48)(cid:54)(cid:53)(cid:86)(cid:180)(cid:12)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:85)(cid:71)(cid:72)(cid:71)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:86)(cid:82)(cid:79)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:72)(cid:70)(cid:82)(cid:81)(cid:71)(cid:68)(cid:85)(cid:92)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:17)(cid:3)(cid:3)
As of December 31, 2016, the Corporation had obligations to service $221.355 million of residential first mortgage
loans. The valuation of MSRs 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. On a quarterly basis, management evaluates the MSRs for impairment.
The key economic assumptions used in determining the fair value of the mortgage servicing rights include an annual
constant prepayment speed of 10.74% and a discount rate of 9.59% for December 31, 2016.
In 2016, management decided to no longer retain the servicing on mortgage loans sold.
61
The following summarizes the fair value of the mortgage servicing rights capitalized and amortized. There was no
valuation allowance required (dollars in thousands):
Balance at beginning of period
Additions from loans sold with servicing retained
Acquired MSRs
Amortization
Balance at end of period
Balance of loan servicing portfolio
Mortgage servicing rights as % of portfolio
Commercial Loans
December 31, December 31,
2016
2015
$
1,965 $
(cid:178)
207
(599)
1,994
585
(cid:178)
(614)
1,573 $
$
1,965
$ 221,355 $ 224,612
.87%
0.71%
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, 2016 and December 31, 2015 was approximately $41 million and $63 million, respectively. The Corporation valued
these servicing rights at $.140 million as of December 31, 2016 and $.170 million at December 31, 2015. This valuation
was established in consideration of the discounted cash flow of expected servicing income over the life of the loans.
NOTE 10 (cid:178) BORROWINGS
Borrowings consist of the following at December 31 (dollars in thousands):
Federal Home Loan Bank fixed rate advances
Correspondent bank line of credit
Correspondent bank term note
USDA Rural Development note
2016
2015
$ 45,000 $ 35,000
7,750
2,300
704
750
21,199
630
$ 67,579 $ 45,754
The Federal Home Loan Bank borrowings bear a weighted average rate of 2.10% and mature in 2017, 2018, 2019 and
2020. They are collateralized at December 31(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:29)(cid:3)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:79)(cid:79)(cid:68)(cid:87)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:82)(cid:81)(cid:72)(cid:3)
to four family residential real estate loans with a book value of approximately $44.042 million; mortgage related and
municipal securities with an amortized cost and estimated fair value of $11.966 million and $11.931 million,
respectively; and Federal Home Loan Bank stock owned by the Bank totaling $2.911 million. Prepayment of the
advances is subject to the provisions and conditions of the credit policies of the Federal Home Loan Bank of
Indianapolis and the Federal Home Loan Bank of Chicago in effect as of December 31, 2016.
The Corporation currently has one banking borrowing relationship. The relationship consists of a $5.0 million 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 April 30, 2018. The term note bears the same interest and matures on April 30,
2019 and requires quarterly principal payments of $550,000 beginning March 31, 2017. This relationship is secured by
all of the outstanding common stock of mBank.
The USDA Rural Development borrowing bears an interest rate of 1.00% and matures in August, 2024. It is
collateralized by loans totaling $.106 (cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:75)(cid:72)(cid:79)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:90)(cid:75)(cid:82)(cid:79)(cid:79)(cid:92)(cid:3)(cid:82)(cid:90)(cid:81)(cid:72)(cid:71)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:15)(cid:3)(cid:41)(cid:76)(cid:85)(cid:86)(cid:87)(cid:3)
Rural Relending, and an assignment of a demand deposit account in the amount of $.583 million, and guaranteed by the
Corporation.
62
Maturities and principal payments of borrowings outstanding at December 31, 2016 are as follows (dollars in
thousands):
2017
2018
2019
2020
2021
Thereafter
Total
$ 13,026
12,277
31,876
10,078
78
244
$ 67,579
NOTE 11 (cid:178) INCOME TAXES
The components of the federal income tax provision (credit) for the years ended December 31 are as follows (dollars in
thousands):
2016
2015
2014
Current tax expense
Change in valuation allowance
Deferred tax expense
$
485 $
1,798
(cid:178) $ (cid:178)
(cid:178)
1,129
(760)
3,093
Provision for income taxes
$ 2,283 $ 2,333 $ 1,129
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
Expiration of deferred tax assets
Nondeductible transaction expenses
Other
2016
2015
2014
$ 2,301 $ 2,695 $ 962
(96)
(cid:178)
(cid:178)
95
(17)
(60)
(760)
429
(cid:178)
29
(25)
(cid:178)
(cid:178)
176
16
Provision for income taxes, as reported
$ 2,283 $ 2,333 $ 1,129
63
Deferred income taxes are provided for the temporary differences between the financial reporting and tax bases of the
(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:80)(cid:68)(cid:77)(cid:82)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:82)(cid:81)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)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
Unrealized gain (loss) on securities
Purchase accounting adjustments
Other
Total deferred tax assets
Valuation allowance
Deferred tax liabilities:
Core deposit premium
FHLB stock dividend
Depreciation
Mortgage servicing rights
Other
Total deferred tax liabilities
Net deferred tax asset
2016
2015
$ 3,080 $ 4,331
1,705
1,999
162
338
517
384
141
(153)
955
141
1,413
1,944
142
235
443
387
116
52
1,791
805
10,408
10,520
$
(cid:178) $
(cid:178)
(739)
(91)
(208)
(583)
(27)
(1,648)
(366)
(100)
(113)
(667)
(61)
(1,307)
$ 8,760 $ 9,213
The Corporation has reported deferred tax assets of $8.760 million at December 31, 2016. 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, 2016 had a net operating loss and tax credit carryforwards for tax
purposes of approximately $9.1 million, and $2.2 million, respectively. The Corporation evaluated the future benefits
from these ca(cid:85)(cid:85)(cid:92)(cid:73)(cid:82)(cid:85)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:76)(cid:87)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:179)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:79)(cid:76)(cid:78)(cid:72)(cid:79)(cid:92)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:81)(cid:82)(cid:87)(cid:180)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:92)(cid:3)(cid:90)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:69)(cid:72)(cid:3)
utilized prior to expiration. 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 and 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 will continue to evaluate the future benefits from these carryforwards in order to
determine if any adjustment to the deferred tax asset is warranted.
NOTE 12 (cid:178) OPERATING LEASES
The Corporation currently maintains seven operating leases for office locations. The first operating lease, for the
Corporation's 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 expired in 2013, and the second of the four consecutive renewal terms of two
years each is in place.
64
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 expired in 2015 and automatically renewed at that time. The lease
was renegotiated in 2016 for a term of 36-months, with two consecutive options to extend the lease for 36 months 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.
The fifth operating lease, located in Troy, for the asset based lending office, was initiated in December 2013 and expires
on May 31, 2019.
With the acquisition of PFC, 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 and expired in 2016.
The Corporation opted not to renew this lease, and subsequently closed that office location. The second, for the location
in Negaunee was executed in September 2012 with an initial term of five years, expiring in 2017, 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):
2017
2018
2019
2020
2021
Thereafter
Total
$
722
587
517
467
476
3,609
$ 6,378
Rent expense for all operating leases amounted to $1.053 million in 2016, $.985 million in 2015, and $.885 million in
2014.
NOTE 13 (cid:178) 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 $300,000, $288,000, and
$214,000 in 2016, 2015, and 2014, respectively.
NOTE 14 (cid:178) 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 (cid:82)(cid:73)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)
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 2017 are $19,000.
65
The anticipated distributions over the next five years and through December 31, 2016 are detailed in the table below
(dollars in thousands):
2017
2018
2019
2020
2021
2022-2026
Total
$
128
125
122
121
120
723
$ 1,339
The following tab(cid:79)(cid:72)(cid:3)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:182)(cid:86)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:88)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:69)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:86)(cid:75)(cid:72)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
the activity from date of acquisition (dollars in thousands):
Change in benefit obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial loss
Benefits paid
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets, beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
2016
2015
$ 3,180 $ 3,290
(cid:178)
24
(cid:178)
(134)
3,180
(cid:178)
187
(44)
(136)
3,187
2,033
103
49
(136)
2,049
2,107
(8)
68
(134)
2,033
Funded status, included with other liabilities
$ (1,138) $ (1,147)
(cid:49)(cid:72)(cid:87)(cid:3)(cid:83)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:76)(cid:80)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:17)
Assumptions in the actuarial valuation were:
Weighted average discount rate
Rate of increase in future compensation levels
Expected long-term rate of return on plan assets
2015
2016
3.78% 3.99%
N/A N/A
8.00% 8.00%
The expected long-(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:87)(cid:88)(cid:85)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:73)(cid:79)(cid:72)(cid:70)(cid:87)(cid:86)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)-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
(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:70)(cid:76)(cid:68)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:68)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:76)(cid:80)(cid:72)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:82)(cid:3)(cid:86)(cid:82)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:80)(cid:68)(cid:81)(cid:81)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:86)(cid:87)(cid:72)(cid:81)(cid:87)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)
tolerance. The intention of the plan sponsor is to invest the plan assets in mutual funds with the following asset
allocation, which was in place at both December 31, 2016 and December 31, 2015:
Equity securities
Fixed income securities
66
Target
Allocation
50% to 70%
30% to 50%
Actual
Allocation
60%
40%
NOTE 15 (cid:178) 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, 2016 and 2015, for vested benefits under this plan, was $.179 million and $.273 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 $1.398 million and $1.545 million at
December 31, 2016 and 2015, respectively.
Peninsula Financial Corporation, acquired by the Corporation in December 2014, also had a deferred compensation plan,
(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:86)(cid:76)(cid:80)(cid:76)(cid:79)(cid:68)(cid:85)(cid:3)(cid:76)(cid:81)(cid:3)(cid:81)(cid:68)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)ontinued plan. The liability for this plan at December 31, 2016 and
2015, for vested benefits under this plan was $1.124 million and $1.219 million, respectively. The bank owned life
insurance policy as of December 31, 2016 and 2015 had cash surrender values of $1.722 million and $1.692 million,
respectively. This Plan was also discontinued by the Corporation and will not apply to future employees or directors of
the Corporation.
Deferred compensation expense for both plans was $77,000 and $27,000 for 2016 and 2015, respectively.
NOTE 16 (cid:178) 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(cid:178)and possibly additional discretionary(cid:178)
(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:69)(cid:92)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:15)(cid:3)(cid:76)(cid:73)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:87)(cid:68)(cid:78)(cid:72)(cid:81)(cid:15)(cid:3)(cid:70)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:3)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:80)(cid:88)(cid:86)(cid:87)(cid:3)(cid:80)(cid:72)(cid:72)(cid:87)(cid:3)(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:73)(cid:76)(cid:70)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:74)(cid:88)(cid:76)(cid:71)(cid:72)(cid:79)(cid:76)(cid:81)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:76)(cid:81)(cid:89)(cid:82)(cid:79)(cid:89)(cid:72)(cid:3)(cid:84)(cid:88)(cid:68)(cid:81)(cid:87)(cid:76)(cid:87)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:15)(cid:3)
liabilities, and certain off-balance-(cid:86)(cid:75)(cid:72)(cid:72)(cid:87)(cid:3)(cid:76)(cid:87)(cid:72)(cid:80)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:70)(cid:68)(cid:79)(cid:70)(cid:88)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:68)(cid:70)(cid:87)(cid:76)(cid:70)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)
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, 2016, the Corporation is well
capitalized.
Effective January 1, 2015, the Corporation was subject to new capital requirements due to the Basel III regulation,
including:
(cid:120) A new minimum ratio of Common Equity Tier I Capital to risk-weighted assets of 4.5%;
(cid:120) An increase in the minimum required amount of Additional Tier 1 Capital to 6% of risk-weighted assets;
(cid:120) A continuation of the current minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-
weighted assets; and
(cid:120) A minimum leverage ratio of Tier I Capital to total assets equal to 4% in all circumstances.
(cid:44)(cid:81)(cid:3)(cid:82)(cid:85)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:179)(cid:90)(cid:72)(cid:79)(cid:79)-(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:180)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)(cid:74)(cid:88)(cid:76)(cid:71)(cid:72)(cid:79)(cid:76)(cid:81)(cid:72)(cid:86)(cid:15)(cid:3)(cid:68)(cid:3)(cid:71)(cid:72)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:76)(cid:87)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:80)(cid:88)(cid:86)(cid:87)(cid:3)(cid:80)(cid:68)(cid:76)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:55)(cid:76)(cid:72)(cid:85)(cid:3)
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.
67
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:68)(cid:70)(cid:87)(cid:88)(cid:68)(cid:79)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:68)(cid:83)(cid:83)(cid:79)(cid:76)(cid:70)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)
of December 31, 2016 are as follows (dollars in thousands):
Total capital to risk weighted assets:
Consolidated
mBank
Tier 1 capital to risk weighted assets:
Consolidated
mBank
Common equity Tier 1 capital to risk weighted
assets
Consolidated
mBank
Tier 1 capital to average assets:
Consolidated
mBank
Actual
Adequacy Purposes
Well-Capitalized
Amount Ratio Amount
Ratio Amount Ratio
9.5% > $ 62,503 > 8.0% > $ 78,128 10.0%
$ 73,811
$ 92,521 11.9% > $ 62,102 > 8.0% > $ 77,627 10.0%
8.8% > $ 46,877 > 6.0% > $ 62,503 8.0%
$ 68,791
$ 87,542 11.3% > $ 46,576 > 6.0% > $ 62,102 8.0%
8.8% > $ 35,158 > 4.5% > $ 50,783
$ 68,791
$ 87,542 11.3% > $ 34,932 > 4.5% > $ 50,458
6.5%
6.5%
$ 68,791
$ 87,542
7.3% > $ 37,939 > 4.0% > $ 47,242 5.0%
9.2% > $ 37,889 > 4.0% > $ 47,361 5.0%
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:68)(cid:70)(cid:87)(cid:88)(cid:68)(cid:79)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:68)(cid:83)(cid:83)(cid:79)(cid:76)(cid:70)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)
of December 31, 2015 are as follows (dollars in thousands):
Actual
Adequacy Purposes
Well-Capitalized
Amount Ratio Amount
Ratio Amount Ratio
$ 75,122 11.8% > $ 51,017 > 8.0% > $ 63,772 10.0%
$ 82,217 13.0% > $ 50,763 > 8.0% > $ 63,454 10.0%
$ 70,118 11.0% > $ 38,263 > 6.0% > $ 51,017 8.0%
$ 77,254 12.2% > $ 38,072 > 6.0% > $ 50,763 8.0%
$ 70,118 11.0% > $ 28,697 > 4.5% > $ 41,451
$ 77,254 12.2% > $ 28,554 > 4.5% > $ 41,245
6.5%
6.5%
$ 70,118 9.7% > $ 29,000 > 4.0% > $ 36,251 5.0%
$ 77,254 10.6% > $ 29,528 > 4.0% > $ 36,572 5.0%
Total capital to risk weighted assets:
Consolidated
mBank
Tier 1 capital to risk weighted assets:
Consolidated
mBank
Common equity Tier 1 capital to risk weighted assets
Consolidated
mBank
Tier 1 capital to average assets:
Consolidated
mBank
NOTE 17 (cid:178) STOCK COMPENSATION PLANS
Restricted Stock Awards
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:85)(cid:76)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:68)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)-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.
68
The Corporation has historically granted RSAs to members of the Board of Directors and management. Awards granted
are set to vest equally over their award terms and are issued at no cost to the recipient. The table below summarizes each
of the grant awards.
Date of Award
August, 2012
March, 2014
March, 2015
May, 2015
February, 2016
Units Granted
148,500
52,774
37,730
3,000
35,733
Market Value at
grant date
$ 7.91
12.95
11.15
10.77
9.91
Vesting Term
4 years
4 years
4 years
Immediate
4 years
On August 31, 2013, 2014, 2015 and 2016, the Corporation issued 37,125 shares of its common stock for vested RSAs,
in each year. In March 2015, the Corporation issued 13,194 shares of its common stock for vested RSAs. In May 2015,
the Corporation granted 3,000 shares, which were immediately vested and issued. In March 2016, the Corporation
issued 22,626 shares of its common stock for vested RSAs.
The Corporation recognized annual compensation expense of $.600 million in 2016, $.576 million in 2015 and $.480
million. Unrecognized compensation expense at the end of 2016 was $.669 million.
A summary of changes in our nonvested awards for the year follows:
Nonvested balance at January 1, 2016
Granted during the year
Vested during the year
Nonvested balance at December 31, 2016
NOTE 18 (cid:178) (cid:54)(cid:43)(cid:36)(cid:53)(cid:40)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:54)(cid:182)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)
Number
Outstanding
Weighted Average
Grant Date
Fair Value
114,435 $
35,733
(59,751)
90,417 $
10.72
9.91
9.53
11.19
The Corporation currently has a share repurchase program. The program is conducted under authorizations by the Board
of Directors. The Corporation repurchased 14,000 shares in 2016, 102,455 shares in 2015, 13,700 shares in 2014 and
55,594 shares in 2013. The share repurchases were conducted under Board authorizations made and publicly announced
of $600,000 on February 27, 2013, $600,000 on December 17, 2013 and an additional $750,000 on April 28, 2015.
None of these authorizations has an expiration date. As of December 31, 2016, $26,000 of the total authorization was
available for future purchases.
NOTE 19 (cid:178) 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.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:72)xposure 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
69
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
2016
2015
$ 59,496 $ 53,628
26,846
6,390
3,747
28,737
8,252
5,533
$ 102,018 $ 90,611
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
(cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:71)(cid:82)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:81)(cid:72)(cid:70)(cid:72)(cid:86)(cid:86)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3)(cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:88)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:72)(cid:89)(cid:68)(cid:79)(cid:88)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:182)(cid:86)(cid:3)
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation
(cid:88)(cid:83)(cid:82)(cid:81)(cid:3)(cid:72)(cid:91)(cid:87)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:15)(cid:3)(cid:76)(cid:86)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:72)(cid:89)(cid:68)(cid:79)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:92)(cid:17)(cid:3)(cid:3)(cid:38)(cid:82)(cid:79)(cid:79)(cid:68)(cid:87)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:75)(cid:72)(cid:79)(cid:71)(cid:3)(cid:89)(cid:68)(cid:85)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:69)(cid:88)(cid:87)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)
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 comm(cid:76)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:70)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)
companies. These commitments are unsecured.
Legal Proceedings and Contingencies
At December 31, 2016, 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 and Northeastern
(cid:58)(cid:76)(cid:86)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:81)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)(cid:80)(cid:82)(cid:86)(cid:87)(cid:3)(cid:83)(cid:85)(cid:82)(cid:80)(cid:76)(cid:81)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:81)(cid:70)(cid:72)(cid:81)(cid:87)(cid:85)ation in the loan portfolio relates to commercial real estate loans to
operators of nonresidential buildings. This concentration at December 31, 2016 represents $121.861 million, or 22.42%,
compared to $102.620 million, or 22.79%, of the commercial loan portfolio on December 31, 2015. 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 (cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:76)(cid:89)(cid:72)(cid:85)(cid:86)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:182)(cid:86)(cid:3)
locations, the ability of debtors of residential and consumer loans to honor their obligations is not tied to any particular
economic sector.
NOTE 20 (cid:178) FAIR VALUE
Fair value estimates, methods, and assumptions are set forth (cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:29)
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.
70
Federal Home Loan Bank stock (cid:178) 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.
(cid:44)(cid:80)(cid:83)(cid:68)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:88)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:73)(cid:79)(cid:82)(cid:90)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:182)(cid:86)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)
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.
The following table presents information for financial instruments at December 31 (dollars in thousands):
December 31, 2016
December 31, 2015
Level in Fair
Value Hierarchy
Carrying Estimated Carrying Estimated
Fair Value
Fair Value
Amount
Amount
Financial assets:
Cash and cash equivalents
Interest-bearing deposits
Securities available for sale
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 liabilities
Level 1
Level 2
Level 2
Level 3
Level 2
Level 3
Level 3
Level 2
Level 2
Level 3
$ 46,755 $ 46,755 $ 25,008 $ 25,008
5,089
53,728
(cid:178)
2,169
614,187
1,416
5,089
53,728
(cid:178)
2,169
613,390
1,416
14,047
84,623
1,650
2,911
778,377
2,016
14,047
84,623
1,650
2,911
776,837
2,016
$ 928,839 $ 930,379 $ 700,800 $ 701,597
$ 823,512 $ 815,960 $ 610,323 $ 607,636
45,989
174
45,754
174
68,293
267
67,579
267
$ 891,358 $ 884,520 $ 656,251 $ 653,799
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 ti(cid:80)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:72)(cid:81)(cid:87)(cid:76)(cid:85)(cid:72)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:88)(cid:79)(cid:68)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:17)(cid:3)(cid:3)(cid:37)(cid:72)(cid:70)(cid:68)(cid:88)(cid:86)(cid:72)(cid:3)(cid:81)(cid:82)(cid:3)
(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:72)(cid:91)(cid:76)(cid:86)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:15)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)
71
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.
(cid:55)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:86)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:69)(cid:82)(cid:88)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87) fair value on a recurring basis at
December 31, 2016 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, 2016 were based on level 2 and level 3 inputs. In December
31, 2015 all investment securities were based on level 2 inputs. There are no other assets or liabilities measured on a
(cid:85)(cid:72)(cid:70)(cid:88)(cid:85)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:17)(cid:3)(cid:3)(cid:41)(cid:82)(cid:85)(cid:3)(cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:72)(cid:74)(cid:68)(cid:85)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:83)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:179)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:22)(cid:3)(cid:178)
(cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:17)(cid:180)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3)(cid:86)(cid:75)(cid:82)(cid:90)(cid:86)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)a recurring basis (dollars
in thousands):
Quoted Prices
Significant
Significant
(dollars in thousands)
Assets
Corporate
Equity
US Agencies
US Agencies - MBS
Obligations of state and
political subdivisions
Balance at
December 31, 2016
in Active Markets Other Observable Unobservable
for Identical Assets
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Total Losses for
Twelve months ended
December 31, 2016
$
19,910 $
500
23,952
16,833
25,078
86,273
(cid:178) $
(cid:178)
(cid:178)
(cid:178)
19,910 $
(cid:178)
23,952
15,683
(cid:178) $
500
(cid:178)
1,150
(cid:178)
25,078
(cid:178)
$
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31, 2015.
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
(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:86)(cid:86)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:88)(cid:79)(cid:68)(cid:85)(cid:3)(cid:76)(cid:81)(cid:83)(cid:88)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:86)(cid:3)(cid:77)(cid:88)(cid:71)(cid:74)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
considers factors specific to each asset or liability.
72
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, 2016
Quoted Prices
Significant
Significant
(dollars in thousands) December 31, 2016
Assets
Balance at
in Active Markets Other Observable Unobservable
for Identical Assets
(Level 1)
Inputs
(Level 3)
Inputs
(Level 2)
Total Losses for
Twelve months ended
December 31, 2016
Impaired loans
Other real estate
held for sale
$
9,856 $
(cid:178) $
(cid:178) $
9,856 $
4,782
(cid:178)
(cid:178)
4,782
$
643
202
845
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2015
Quoted Prices
Significant
Significant
(dollars in thousands) December 31, 2015
Assets
Balance at
in Active Markets Other Observable Unobservable
for Identical Assets
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Total Losses for
Year Ended
December 31, 2015
Impaired loans
Other real estate
held for sale
$
10,724 $
(cid:178) $
(cid:178) $ 10,724 $
1,852
2,324
(cid:178)
(cid:178)
2,324
$
332
2,184
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
(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:69)(cid:72)(cid:86)(cid:87)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:78)(cid:72)(cid:92)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:80)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:80)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3)(cid:73)(cid:88)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:87)(cid:76)(cid:80)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)
streams, and estimated realizable values of available collateral (typically based on outside appraisals).
NOTE 21 (cid:178) BUSINESS COMBINATIONS
The First National Bank of Eagle River
The Corporation completed its acquisition of Eagle River on April 29, 2016. Eagle River had three branch offices and
approximately $125 million in assets of April 29, 2016. The results of operations due to the merger have been included
(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:86)(cid:76)(cid:81)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:80)(cid:72)(cid:85)(cid:74)(cid:72)(cid:85)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:68)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:20)(cid:21)(cid:17)(cid:24)(cid:19)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:17)
73
The table below highlights the allocation of the purchase price:
Purchase Price:
Eagle River shares outstanding
Price per share/Cash price
Total purchase price
Reimbursement of termination fees
Cash consideration
Net assets acquired:
Cash and cash equivalents
Securities available for sale, net of purchase accounting marks
FRB & FHLB Stock
Total Loans, net of purchase accounting marks
Premises and equipment
Other real estate owned, net of purchase accounting marks
Deposit based intangible
Mortgage servicing rights
Deferred tax asset
Bank owned life insurance
Other assets
Total assets
Non-interest bearing deposits
Interest bearing deposits
Total deposits
FHLB Borrowings
Other liabilities
Total liabilities
Net assets acquired
Goodwill
85,776
145.73
$
$
$
12,500
(1,763)
10,737
$
10,600
23,296
575
80,875
1,931
904
993
120
948
4,132
323
124,697
22,349
82,165
104,514
11,000
285
115,799
8,898
$
1,839
The results of operations for the twelve months ended December 31, 2016, include the operating results of the acquired
assets and a(cid:86)(cid:86)(cid:88)(cid:80)(cid:72)(cid:71)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:21)(cid:23)(cid:24)(cid:3)(cid:71)(cid:68)(cid:92)(cid:86)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:72)(cid:84)(cid:88)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:17)(cid:3)(cid:3)(cid:40)(cid:68)(cid:74)(cid:79)(cid:72)(cid:3)(cid:53)(cid:76)(cid:89)(cid:72)(cid:85)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)
(cid:83)(cid:85)(cid:76)(cid:82)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:85)(cid:72)(cid:75)(cid:72)(cid:81)(cid:86)(cid:76)(cid:89)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:17)
In addition to the data processing termination fees of $1.763 million, the Corporation incurred other Eagle River
transaction related expenses of $.954 million, for a total of $2.717 million, or $1.793 million on an after tax basis during
2016. These expenses included professional services such as legal, accounting, employee severance payments and
contractual arrangements for consulting services.
Niagara Bancorporation
The Corporation completed its acquisition of Niagara on August 31, 2016. Niagara had four branch offices and
approximately $67 million in assets as of August 31, 2016. The results of operations due to the merger have been
(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:86)(cid:76)(cid:81)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:80)(cid:72)(cid:85)(cid:74)(cid:72)(cid:85)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:68)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:26)(cid:17)(cid:22)(cid:21)(cid:24)(cid:3)
million.
74
The table below highlights the allocation of the purchase price (dollars in thousands, except per share data):
Purchase Price:
Niagara shares outstanding
Price per share/Cash price
Total purchase price
Net assets acquired:
Cash and cash equivalents
Securities available for sale
FRB & FHLB Stock
Total Loans, net of purchase accounting marks
Premises and equipment
Other real estate owned, net of purchase accounting marks
Deposit based intangible
Mortgage servicing rights
Deferred tax assets
Bank owned life insurance
Other assets
Total assets
Non-interest bearing deposits
Interest bearing deposits
Total deposits
Other liabilities
Total liabilities
Net assets acquired
Goodwill
4,354
$ 1,682.36
$
7,325
$
9,778
21,491
287
31,707
926
301
300
87
397
1,109
302
66,685
5,396
53,788
59,184
226
59,410
7,275
$
50
The results of operations for the twelve months ended December 31, 2016, include the operating results of the acquired
(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:80)(cid:72)(cid:71)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:20)(cid:21)(cid:21)(cid:3)(cid:71)(cid:68)(cid:92)(cid:86)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:72)(cid:84)(cid:88)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:17)(cid:3)(cid:3)(cid:49)(cid:76)(cid:68)(cid:74)(cid:68)(cid:85)(cid:68)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)ations prior to
(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:85)(cid:72)(cid:75)(cid:72)(cid:81)(cid:86)(cid:76)(cid:89)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:17)
The Corporation incurred Niagara transaction related expenses of $.384 million, or $.253 million on an after tax basis
during 2016. These expenses included professional services such as legal, accounting, employee severance payments
and contractual arrangements for consulting services.
75
The following table provides the unaudited pro forma information for the results of operations for the twelve months
ended December 31, 2016 and 2015, as if both the Eagle River acquisition and Niagara 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 Eagle River and Niagara. In addition, the merger-related costs noted above are
excluded from the 2016 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.
2016
2015
Net interest income
Noninterest income
Noninterest expense
Net income
Net income per diluted share
Fair Value
$ 36,902 $ 32,924
4,865
26,851
7,219
1.15
5,129
30,857
7,375
1.18 $
$
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, interest rate changes, and other factors,
such as prepayments. In accordance with the applicable accounting guidance for business combinations, there was no
carry-(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:86)(cid:182)(cid:3)(cid:83)(cid:85)(cid:72)(cid:89)(cid:76)(cid:82)(cid:88)(cid:86)(cid:79)(cid:92)(cid:3)(cid:72)(cid:86)(cid:87)(cid:68)(cid:69)(cid:79)(cid:76)(cid:86)(cid:75)(cid:72)(cid:71)(cid:3)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:17)
Goodwill recognized in these acquisitions was based primarily due to the synergies and economies of scale expected
from combining the operations of the Corporation with Eagle River and Niagara.
76
NOTE 22 (cid:178) PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 2016 and 2015
(Dollars in Thousands)
2016
2015
ASSETS
Cash and cash equivalents
Investment in subsidiaries
Other assets
TOTAL ASSETS
(cid:47)(cid:44)(cid:36)(cid:37)(cid:44)(cid:47)(cid:44)(cid:55)(cid:44)(cid:40)(cid:54)(cid:3)(cid:36)(cid:49)(cid:39)(cid:3)(cid:54)(cid:43)(cid:36)(cid:53)(cid:40)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:54)(cid:182)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)
Line of Credit
Other borrowing
Other liabilities
Total liabilities
(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:29)
$
106 $
97,407
4,014
986
83,786
2,981
$ 101,527 $ 87,753
$
750 $
21,199
969
22,918
7,750
2,300
1,101
11,151
Common stock and additional paid in capital - no par value
Authorized 18,000,000 shares
Issued and outstanding - 6,263,371 and 6,217,620 shares respectively
Retained earnings
Accumulated other comprehensive income
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)
61,583
17,206
(180)
61,133
15,221
248
78,609
76,602
(cid:55)(cid:50)(cid:55)(cid:36)(cid:47)(cid:3)(cid:47)(cid:44)(cid:36)(cid:37)(cid:44)(cid:47)(cid:44)(cid:55)(cid:44)(cid:40)(cid:54)(cid:3)(cid:36)(cid:49)(cid:39)(cid:3)(cid:54)(cid:43)(cid:36)(cid:53)(cid:40)(cid:43)(cid:50)(cid:47)(cid:39)(cid:40)(cid:53)(cid:54)(cid:182)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)
$ 101,527 $ 87,753
77
STATEMENTS OF OPERATIONS
Years Ended December 31, 2016, 2015, and 2014
(Dollars in Thousands)
INCOME:
Interest income
Total income
EXPENSES:
Interest expense on borrowings
Salaries and benefits
Professional service fees
Transaction related expenses
Other
Total expenses
2016
2015
2014
$
2 $
(cid:178) $
(cid:178)
$
2 $
(cid:178) $
(cid:178)
707
900
173
443
152
453
876
256
(cid:178)
184
210
609
247
1,284
304
2,375
1,769
2,654
Loss before income taxes and equity in undistributed net income of subsidiaries
(2,373)
(1,769)
(2,654)
(Benefit of) income taxes
(807)
(602)
(726)
Loss before equity in undistributed net income of subsidiaries
(1,566)
(1,167)
(1,928)
Equity in undistributed net income of subsidiaries
6,049
6,763
3,628
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
$ 4,483 $ 5,596 $ 1,700
78
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2016, 2015, and 2014
(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 based 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 in acquisitions
Net cash (used in) investing activities
Cash Flows from Financing Activities:
Increase on term borrowing
Principal payments on term borrowings
Net activity on line of credit
Repurchase of common stock
Dividend on common 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
2016
2015
2014
$
4,483 $ 5,596 $ 1,700
(6,049)
600
(1,033)
(132)
(2,131)
(6,763)
576
2,903
(4,907)
(2,595)
(3,628)
429
(5,664)
8,790
1,627
11,825
(19,825)
(8,000)
5,839
(cid:178)
5,839
(4,000)
(4,484)
(8,484)
19,799
(100)
(7,800)
(150)
(2,498)
9,251
(cid:178)
(100)
(550)
(1,122)
(2,179)
(3,951)
3,000
(300)
6,000
(143)
(1,308)
7,249
(880)
986
(707)
1,693
392
1,301
Cash and cash equivalents at end of period
$
106 $
986 $ 1,693
79
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, management of the company, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of
(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:72)(cid:86)(cid:76)(cid:74)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:79)(cid:82)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:71)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:71)(cid:72)(cid:73)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:53)(cid:88)(cid:79)(cid:72)(cid:86) 13a-15(e) and
15d-15(e) (cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:20)(cid:28)(cid:22)(cid:23)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:36)(cid:70)(cid:87)(cid:180)(cid:12)(cid:17)(cid:3)(cid:3)(cid:37)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:88)(cid:83)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:72)(cid:89)(cid:68)(cid:79)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:3)(cid:70)(cid:82)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:79)(cid:82)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:71)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)
effective, in ensuring the information relating to the Corporation (and its consolidated subsidiaries) required to be
disclosed by the Corporation in the reports it files or submits under the Exchange Act was recorded, processed,
summarized and reported to the Corporat(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)
Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
(cid:55)(cid:75)(cid:72)(cid:85)(cid:72)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:81)(cid:82)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)internal control over financial reporting that occurred during the quarter
ended December (cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:68)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:85)(cid:72)(cid:68)(cid:86)(cid:82)(cid:81)(cid:68)(cid:69)(cid:79)(cid:92)(cid:3)(cid:79)(cid:76)(cid:78)(cid:72)(cid:79)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:68)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)
internal control over financial reporting.
Report on Managem(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:36)(cid:86)(cid:86)(cid:72)(cid:86)(cid:86)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)
Mackinac Financial Corporation is responsible for the preparation, integrity, and fair presentation of the consolidated
financial statements included in this Form 10-K. The consolidated financial statements and notes included in this
Form 10-K have been prepared in conformity with generally accepted accounting principles in the United States and
(cid:81)(cid:72)(cid:70)(cid:72)(cid:86)(cid:86)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3)(cid:86)(cid:82)(cid:80)(cid:72)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:69)(cid:72)(cid:86)(cid:87)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:77)(cid:88)(cid:71)(cid:74)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)
We, as management of Mackinac Financial Corporation, are responsible for establishing and maintaining effective
internal control over financial reporting that is designed to produce reliable financial statements in conformity with
generally accepted accounting principles in the United States. The system of internal control over financial reporting as
it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a
program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of
internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be
circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of
changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with respect to financial statement preparation.
(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:86)(cid:92)(cid:86)(cid:87)(cid:72)(cid:80)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85) 31, 2016, in
(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:85)(cid:76)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:86)(cid:3)(cid:71)(cid:72)(cid:86)(cid:70)(cid:85)(cid:76)(cid:69)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:179)(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)l (cid:178)
(cid:44)(cid:81)(cid:87)(cid:72)(cid:74)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:85)(cid:68)(cid:80)(cid:72)(cid:90)(cid:82)(cid:85)(cid:78)(cid:15)(cid:180)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:83)(cid:82)(cid:81)(cid:86)(cid:82)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:50)(cid:85)(cid:74)(cid:68)(cid:81)(cid:76)(cid:93)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:55)(cid:85)(cid:72)(cid:68)(cid:71)(cid:90)(cid:68)(cid:92)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)(cid:3)(cid:37)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)
this assessment, management concludes that, as of December 31, 2016, its system of internal control over financial
reporting is effective a(cid:81)(cid:71)(cid:3)(cid:80)(cid:72)(cid:72)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:85)(cid:76)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:178) (cid:44)(cid:81)(cid:87)(cid:72)(cid:74)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:85)(cid:68)(cid:80)(cid:72)(cid:90)(cid:82)(cid:85)(cid:78)(cid:17)(cid:180)
Item 9B. Other Information
None.
80
Item 10. Directors, Executive Officers, and Corporate Governance
Executive Officers of the Registrant
PART III
The executive officers of the Corporation are listed below. The executive officers serve at the pleasure of the Board of
Directors and are appointed by the Board annually. There are no arrangements or understandings between any officer
and any other person pursuant to which the officer was selected.
Name
Age
Position
Paul D. Tobias
66 Chairman and Chief Executive Officer
Kelly W. George
49 President
Jesse A. Deering
37 Executive Vice President/Chief Financial Officer
Additional information for (cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:82)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:51)(cid:85)(cid:82)(cid:91)(cid:92)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)
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(cid:55)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:86)(cid:72)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:87)(cid:75)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:68)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:179)(cid:44)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:36)(cid:69)(cid:82)(cid:88)(cid:87)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:49)(cid:82)(cid:80)(cid:76)(cid:81)(cid:72)(cid:72)(cid:86)(cid:15)(cid:180)(cid:3)(cid:179)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:3)(cid:44)(cid:81)(cid:71)(cid:72)(cid:83)(cid:72)(cid:81)(cid:71)(cid:72)(cid:81)(cid:70)(cid:72)(cid:15)(cid:180)(cid:3)
(cid:179)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)(cid:86)(cid:15)(cid:180)(cid:3)(cid:179)(cid:44)(cid:81)(cid:71)(cid:72)(cid:69)(cid:87)(cid:72)(cid:71)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:55)(cid:85)(cid:68)(cid:81)(cid:86)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:180)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
(cid:179)(cid:54)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81) 16(a) (cid:37)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:90)(cid:81)(cid:72)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:79)(cid:76)(cid:68)(cid:81)(cid:70)(cid:72)(cid:180)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:71)(cid:72)(cid:73)(cid:76)(cid:81)(cid:76)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:51)(cid:85)(cid:82)(cid:91)(cid:92)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)
2017 Annual Meeting (cid:82)(cid:73)(cid:3)(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:51)(cid:85)(cid:82)(cid:91)(cid:92)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:180)(cid:12)(cid:15)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:83)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:69)(cid:72)(cid:3)(cid:73)(cid:76)(cid:79)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:40)(cid:38)(cid:3)(cid:83)(cid:85)(cid:76)(cid:82)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
meeting date, is incorporated herein by reference.
Item 11. Executive Compensation
(cid:44)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:72)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:82)(cid:73)(cid:73)(cid:76)(cid:70)ers and directors is contained under the caption
(cid:179)(cid:38)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:180)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:51)(cid:85)(cid:82)(cid:91)(cid:92)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:75)(cid:72)(cid:85)(cid:72)(cid:76)(cid:81)(cid:3)(cid:69)(cid:92)(cid:3)
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information relating to security ownership of certain beneficial owners and management is contained under the caption
(cid:179)(cid:37)(cid:72)(cid:81)(cid:72)(cid:73)(cid:76)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:90)(cid:81)(cid:72)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:180)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:51)(cid:85)(cid:82)(cid:91)(cid:92)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:75)(cid:72)(cid:85)(cid:72)(cid:76)(cid:81)(cid:3)(cid:69)(cid:92)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)e.
81
The following table provides information as of December 31, 2016 with respect to compensation plans (including
individual compensation arrangements) under which equity securities of the Corporation are authorized for issuance. All
such compensation plans were previously approved by security holders.
Plan Category
Equity stock based compensation plans approved by
security holders:
Issued and outstanding:
Restricted stock awards - August 2012
Restricted stock awards - March 2014
Restricted stock awards - March 2015
Restricted stock awards - February 2016
Shares available for future issuance
Weighted average
Number of securities to exercise issue price
be issued upon exercise
of outstanding options,
warrants and rights
(a)
of outstanding
options, warrants
and rights
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
37,125
39,580
37,730
35,733
(cid:178)
7.91
12.95
11.15
9.91
(cid:178)
(cid:178)
(cid:178)
(cid:178)
(cid:178)
165,299
Total
150,168 $
10.53
165,299 (cid:178)
Item 13. Certain Relationships, Related Transactions and Director Independence
(cid:44)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:75)(cid:76)(cid:83)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:76)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:68)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:179)(cid:44)(cid:81)(cid:71)(cid:72)(cid:69)(cid:87)(cid:72)(cid:71)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
(cid:55)(cid:85)(cid:68)(cid:81)(cid:86)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:180)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:51)(cid:85)(cid:82)(cid:91)(cid:92)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:75)(cid:72)(cid:85)(cid:72)(cid:76)(cid:81)(cid:3)(cid:69)(cid:92)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)nce.
(cid:36)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:68)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:179)(cid:44)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:69)(cid:82)(cid:88)(cid:87)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:49)(cid:82)(cid:80)(cid:76)(cid:81)(cid:72)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:179)(cid:37)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)
(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:48)(cid:72)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)(cid:86)(cid:17)(cid:180)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:51)(cid:85)(cid:82)(cid:91)(cid:92)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:75)(cid:72)(cid:85)(cid:72)(cid:76)(cid:81)(cid:3)(cid:69)(cid:92)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:17)
Item 14. Principal Accountant Fees and Services
(cid:44)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:68)(cid:81)(cid:87)(cid:3)(cid:73)(cid:72)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)(cid:76)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:68)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:179)(cid:51)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:68)(cid:81)(cid:87)(cid:3)(cid:41)(cid:72)(cid:72)(cid:86)(cid:3)
(cid:68)(cid:81)(cid:71)(cid:3)(cid:54)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:180)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:51)(cid:85)(cid:82)(cid:91)(cid:92)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:75)(cid:72)(cid:85)(cid:72)(cid:76)(cid:81)(cid:3)(cid:69)(cid:92)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:17)
82
Item 15. Exhibits and Financial Statement Schedules
(commission file number for all incorporated documents: 0-20167)
PART IV
(a)
The following documents are filed as a part of this report.
1.
Consolidated Financial Statements
Part II, Item 8.
(i)
The financial statements of the Corporation included in this Form 10-K are listed in
2.
All of the schedules for which provision is made in the applicable accounting regulations of
the Securities and Exchange Commission are either not required under the related instruction,
the required information is contained elsewhere in the Form 10-K, or the schedules are
inapplicable, and therefore have been omitted.
3.
Exhibits
The exhibits required to be filed as part of this Form 10-K are listed in the attached
Exhibit Index.
83
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Corporation has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, dated March 30, 2017.
SIGNATURES
MACKINAC FINANCIAL CORPORATION
/s/ Paul D. Tobias
Paul D. Tobias
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 30,
2017, by the following persons on behalf of the Corporation and in the capacities indicated. Each director of the
Corporation, whose signature appears below, hereby appoints Paul D. Tobias and Jesse A. Deering, and each of them
severally, as his attorney-in-fact, to sign in his name and on his behalf, as a director of the Corporation, and to file with
the Commission any and all Amendments to this Report on Form 10-K.
Signature
/s/ Paul D. Tobias
Paul D. Tobias (cid:178) Chairman,
Chief Executive Officer & Director
(principal executive officer)
/s/ Walter J. Aspatore
Walter J. Aspatore - Director
/s/ Robert E. Mahaney
Robert E. Mahaney (cid:178) Director
/s/ Dennis B. Bittner
Dennis B. Bittner (cid:178) Director
/s/ Jesse A. Deering
Executive Vice President/Chief Financial Officer
(principal financial and accounting officer)
/s/ Joseph D. Garea
Joseph D. Garea (cid:178) Director
/s/ Robert H. Orley
Robert H. Orley - Director
/s/ L. Brooks Patterson
L. Brooks Patterson (cid:178) Director
/s/ Kelly W. George
Kelly W. George (cid:178) President & Director
/s/ Randolph C. Paschke
Randolph C. Paschke (cid:178) Director
/s/ David R. Steinhardt
David R. Steinhardt (cid:178) Director
84
INDEX TO EXHIBITS
Incorporated by Reference
Form
8-K
File No.
000-20167
2.1 1/19/2016
Exhibit Filing Date Filed Herewith
Exhibit
Number
2.1
2.2
3.1
3.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
Exhibit Description
Stock Purchase Agreement, dated as of January
19, 2016, by and between Ellis Bankshares,
Inc. and Mackinac Financial Corporation
Stock Purchase Agreement, dated as of May
24, 2016, by and among Mackinac Financial
Corporation, the Sellers named therein, and
Niagara Bancorporation, Inc.
Articles of Incorporation and all amendments
(most recent amendment filed December 14,
2004)
Third Amended and Restated Bylaws adopted
March 18, 2014
Deferred Compensation, Deferred Stock, and
Current Stock Purchase Plan for the
(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:182)(cid:86)(cid:3)(cid:49)(cid:82)(cid:81)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:3)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)tors**
North Country Financial Corporation
Supplemental Executive Retirement Plan**
Form of Director and Officer Indemnification
Agreement**
Mackinac Financial Corporation 2012
Incentive Compensation Plan**
Employment Agreement, dated as of
August 10, 2012, by and between Mackinac
Financial Corporation and Paul D. Tobias**
Employment Agreement, dated as of
August 10, 2012, by and between Mackinac
Financial Corporation and Kelly W. George**
First Amendment to Employment Agreement,
dated as of March 24, 2015, by and between
Mackinac Financial Corporation and Paul D.
Tobias **
First Amendment to Employment Agreement,
dated as of March 24, 2015, by and between
Mackinac Financial Corporation and Kelly W.
George **
Amended and Restated Employment
Agreement, dated as of August 1, 2016, by and
between Mackinac Financial Corporation and
Jesse A. Deering **
Form of Restricted Stock Unit Award
Agreement under the Mackinac Financial
Corporation 2012 Incentive Compensation
Plan**
8-K
000-20167
2.1 5/24/2016
10-K
000-20167
3.1 3/31/2009
8-K
000-20167
3.1 3/24/2014
10-K
000-20167 10.2 3/28/2000
10-Q
000-20167 10.6 11/5/1999
8-K
000-20167 10.1 3/24/2014
DEF14A 000-20167 Annex
I
4/25/2012
8-K
000-20167 10.1 8/15/2012
8-K
000-20167 10.2 8/15/2012
8-K
000-20167 10.1 3/27/2015
8-K
000-20167 10.2 3/27/2015
8-K
000-20167 10.1 8/1/2016
8-K
000-20167 10.3 8/13/2012
21 Subsidiaries of the Corporation
23.1 Consent of Plante & Moran, PLLC
31 Rule 13(a) (cid:178) 14(a) Certifications
*
*
*
85
32.1
32.2
Section 1350 Chief Executive Officer
Certification
Section 1350 Chief Financial Officer
Certification
101.INS XBRL Instance Document
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Taxonomy Extension Schema
Document***
XBRL Taxonomy Extension Calculation
Linkbase Document***
XBRL Taxonomy Extension Definition
Linkbase Document***
XBRL Taxonomy Extension Labels Linkbase
Document***
XBRL Taxonomy Extension Presentation
Linkbase Document***
*
*
*
*
*
*
*
*
* Filed herewith.
** Management compensatory plan, contract, or arrangement.
*** As provided in Rule 406T of Regulation S-(cid:55)(cid:15)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:86)(cid:75)(cid:68)(cid:79)(cid:79)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:69)(cid:72)(cid:3)(cid:71)(cid:72)(cid:72)(cid:80)(cid:72)(cid:71)(cid:3)(cid:179)(cid:73)(cid:76)(cid:79)(cid:72)(cid:71)(cid:180)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:88)(cid:85)(cid:83)oses of
Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or
otherwise subject to liability under those Sections.
86
Exhibit 21
Subsidiaries of Mackinac Financial Corporation
First Manistique Agency, Inc. - 100% owned
(incorporated as a Michigan corporation)
First Rural Relending Company - 100% owned
(incorporated as a Michigan corporation)
North Country Capital Trust (cid:178) 100% owned
(organized as a Delaware business trust)
mBank - 100% owned
(incorporated as a Michigan banking corporation)
Mackinac Financial Corporation directly owns the four subsidiaries listed above.
87
Consent of Independent Public Accountants
Indepe(cid:81)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:36)(cid:88)(cid:71)(cid:76)(cid:87)(cid:82)(cid:85)(cid:182)(cid:86)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:72)(cid:81)(cid:87)
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (no. 333-183199) of
Mackinac Financial Corporation, of our reported dated March 28, 2017 on the financial statements of Mackinac
Financial Corporation and Subsidiaries for the year ended December 31, 2016, appearing in this Form 10-K.
Exhibit 23.1
/s/ Plante & Moran, PLLC
Plante & Moran, PLLC
Auburn Hills, Michigan
March 28, 2017
88
RULE 13(a) (cid:178) 14 (a) CERTIFICATIONS
EXHIBIT 31
I, Paul D. Tobias, Chairman and Chief Executive Officer of Mackinac Financial Corporation certify that:
1.
I have reviewed this report on Form 10-(cid:46)(cid:3)(cid:82)(cid:73)(cid:3)(cid:48)(cid:68)(cid:70)(cid:78)(cid:76)(cid:81)(cid:68)(cid:70)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:180)(cid:12)(cid:30)
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report fairly
present, in all material respects, the financial condition, results of operations, and cash flows of the registrant as of,
and for, the periods presented in this report;
4. (cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:76)(cid:73)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:11)(cid:86)(cid:12) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) (cid:40)(cid:89)(cid:68)(cid:79)(cid:88)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:79)(cid:82)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:71)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) (cid:39)(cid:76)(cid:86)(cid:70)(cid:79)(cid:82)(cid:86)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:68)(cid:81)(cid:92)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:82)(cid:70)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)
(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:80)(cid:82)(cid:86)(cid:87)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:76)(cid:86)(cid:70)(cid:68)(cid:79)(cid:3)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:73)(cid:82)(cid:88)(cid:85)(cid:87)(cid:75)(cid:3)(cid:73)(cid:76)(cid:86)(cid:70)(cid:68)(cid:79)(cid:3)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:81)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)
(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:12)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:68)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:68)(cid:86)(cid:82)(cid:81)(cid:68)(cid:69)(cid:79)(cid:92)(cid:3)(cid:79)(cid:76)(cid:78)(cid:72)(cid:79)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:68)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)
over financial reporting; and
5. (cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:76)(cid:73)(cid:92)(cid:76)ng officer(s) and I have disclosed, based on our most recent evaluation of internal
(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:15)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:69)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:85)(cid:72)(cid:68)(cid:86)(cid:82)(cid:81)(cid:68)(cid:69)(cid:79)(cid:92)(cid:3)(cid:79)(cid:76)(cid:78)(cid:72)(cid:79)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:71)(cid:89)(cid:72)(cid:85)(cid:86)(cid:72)(cid:79)(cid:92)(cid:3)(cid:68)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:85)(cid:71)(cid:15)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:86)(cid:86)(cid:15)(cid:3)(cid:86)(cid:88)(cid:80)(cid:80)(cid:68)(cid:85)(cid:76)(cid:93)(cid:72)(cid:3)
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:17)
Date: March 30, 2017
/s/ Paul D. Tobias
Paul D. Tobias
Chairman and Chief Executive Officer
(principal executive officer)
89
I, Jesse A. Deering, Executive Vice President/Chief Financial Officer of Mackinac Financial Corporation, certify that:
1.
I have reviewed this report on Form 10-K of Mackinac Financial Corpo(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:180)(cid:12)(cid:30)
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. (cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:76)(cid:73)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:11)(cid:86)(cid:12) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) (cid:40)(cid:89)(cid:68)(cid:79)(cid:88)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:79)(cid:82)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:71)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) (cid:39)(cid:76)(cid:86)(cid:70)(cid:79)(cid:82)(cid:86)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:68)(cid:81)(cid:92)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87) occurred
(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:80)(cid:82)(cid:86)(cid:87)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:76)(cid:86)(cid:70)(cid:68)(cid:79)(cid:3)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:73)(cid:82)(cid:88)(cid:85)(cid:87)(cid:75)(cid:3)(cid:73)(cid:76)(cid:86)(cid:70)(cid:68)(cid:79)(cid:3)(cid:84)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:81)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)
(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:12)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:68)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:68)(cid:86)(cid:82)(cid:81)(cid:68)(cid:69)(cid:79)(cid:92)(cid:3)(cid:79)(cid:76)(cid:78)(cid:72)(cid:79)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:68)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)
over financial reporting; and
5. (cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:76)(cid:73)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72)(cid:85)(cid:11)(cid:86)(cid:12) and I have disclosed, based on our most recent evaluation of internal
(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:15)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:82)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:69)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:85)(cid:72)(cid:68)(cid:86)(cid:82)(cid:81)(cid:68)(cid:69)(cid:79)(cid:92)(cid:3)(cid:79)(cid:76)(cid:78)(cid:72)(cid:79)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:71)(cid:89)(cid:72)(cid:85)(cid:86)(cid:72)(cid:79)(cid:92)(cid:3)(cid:68)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:85)(cid:68)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:17)
Date: March 30, 2017
/s/ Jesse A. Deering
Jesse A. Deering
Executive Vice President/
Chief Financial Officer
(principal financial officer)
90
MACKINAC FINANCIAL CORPORATION
CERTIFICATION PERSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C § 1350, and
accompanies the annual report on Form 10-K for the year ended December 31, 2016(cid:15)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:41)(cid:82)(cid:85)(cid:80) 10-(cid:46)(cid:180)(cid:12) of Mackinac
(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:44)(cid:86)(cid:86)(cid:88)(cid:72)(cid:85)(cid:180)(cid:12)(cid:17)
I, Paul D. Tobias, Chairman and Chief Executive Office of the Issuer, certify that to the best of my knowledge:
(1) The Form 10-K fully complies with the requirements of Section 13(a) or Section 15(d), as
applicable, of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(2) The information contained in the Form 10-K fairly presents, in all material respects, the
financial condition and results of operation of the Issuer.
Date: March 30, 2017
/s/ Paul D. Tobias
Paul D. Tobias
Chairman and Chief Executive Officer
(chief executive officer)
91
MACKINAC FINANCIAL CORPORATION
CERTIFICATION PERSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C § 1350, and
accompanies the annual report on Form 10-K for the year ended December 31, 2016(cid:15)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:41)(cid:82)(cid:85)(cid:80) 10-K(cid:180)(cid:12)(cid:3)(cid:82)(cid:73)(cid:3)(cid:48)(cid:68)(cid:70)(cid:78)(cid:76)(cid:81)(cid:68)(cid:70)(cid:3)
(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:44)(cid:86)(cid:86)(cid:88)(cid:72)(cid:85)(cid:180)(cid:12)(cid:17)
I, Jesse A. Deering, Executive Vice President/Chief Financial Officer of the Issuer, certify that to the best of my
knowledge:
(1) The Form 10-K fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the
Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and
results of operation of the Issuer.
Date: March 30, 2017
/s/ Jesse A. Deering
Jesse A. Deering
Executive Vice President/
Chief Financial Officer
(chief financial officer)
92
Directors
Walter J. Aspatore
Lead Director
Kelly W. George
Randolph C.
Paschke
Dennis B. Bittner
Robert E. Mahaney
David R. Steinhardt
Joseph D. Garea
Robert H. Orley
Paul D. Tobias
L. Brooks Patterson
Officers
Paul D. Tobias
Kelly W. George
Jesse A. Deering
Officers
Paul D. Tobias
Kelly W. George
Jesse A. Deering
Tamara R.
McDowell
Directors and Officers
Occupation
Date Joined
Chairman
Methode Electronics Corp
President, Mackinac Financial Corporation
President and CEO, mBank
Executive-in-Residence, Mike Ilitch School of Business
Wayne State University
Owner and President
Bittner Engineering, Inc.
Owner and President
Veridea Group, LLC
Founder and President
KCPS & Company Ltd.
Managing Director
Detalus Institutional
Founding Partner
O2 Investment Partners, LLC
Chairman and CEO, Mackinac Financial Corporation
Chairman, mBank
County Executive
Oakland County
Mackinac Financial Corporation
Chairman
Chief Executive Officer
President
Executive Vice President
Chief Financial Officer
mBank Executive Management
Chairman
President
Chief Executive Officer
Executive Vice President
Chief Financial Officer
Executive Vice President
Managing Director Credit Admin/Operations/IT
2004
2006
2004
2001
2008
2012
2007
2004
2004
2006
Location
Birmingham
Manistique
Birmingham/Manistique
Location
Birmingham
Manistique/Marquette
Birmingham/Manistique
Manistique/Marquette
Senior Officers
Clay Peterson
Joanna Slaght
Title
Senior Vice President-Western UP & WI Market Exec./
Managing Director of Retail Banking
Senior Vice President-Managing Director of Administration &
Regulatory Compliance Risk
Andrew Sabatine
Regional President - Traverse City
David Leslie
Gregory Schuetter
Boris Martysz
Michael Hoar
Linda Bolda
Edward Lewan
Jason Rolling
Jeremy Flodin
Jennifer Stempki
Additional
Officers
Sherry Arnold
Bernadette
Beaudre
Julie Bosanic
Senior Vice President-Southeast Michigan &
Mid-Michigan Market Executive
Senior Vice President-Marquette County Executive/
Eastern UP Commercial Lending Manager
Senior Vice President -
Senior Commercial Banking Officer
Senior Vice President-Director of Information Technology/
Communications/Facility Maintenance
Senior Vice President -
Director of Human Resources
President MCC
Asset Based Lending Division of mBank
Senior Vice President-Premier Client Services/
Business Development
Senior Vice President - Senior Credit Administrator/
Credit Risk Analyst
Senior Vice President-Controller/
Liquidity Funding Manager
Central Departments
Vice President- Bank Administration/Training & Dev. Manager
Vice President-Deposit Compliance/BSA Officer
Assistant Vice President-Underwriting Supervisor
Shannon O'Brien
Assistant Vice President-Sr. Credit Analyst Supv/Asst. Credit Risk Manager
Nicole Tryan
Bethany Cody
Trisha DeMars
Amy Lee
Assistant Vice President-Senior Loan Operations Officer
Assistant Vice President-Marketing Officer
Assistant Vice President-Senior Deposit Operations Specialist
Assistant Vice President-Human Resources Administrator
Ryan Valiquette
Assistant Vice President-Senior Network Administrator
Laura Garvin
George Demou
Amy Gennaro
South East Michigan
Vice President-Senior Commercial Portfolio Manager
Vice President-Senior Commercial Banking Officer
Vice President-Senior Commercial Banking Officer
Location
Escanaba
Manistique
Traverse City
Birmingham
Manistique
Marquette
Manistique
Manistique
Troy
Marquette
Manistique
Manistique
Location/
Department
Compliance/
Administration
Compliance/
Administration
Central Credit
Central Credit
Central Credit
Marketing
Operations
Human
Resources
Manistique
Birmingham
Birmingham
Birmingham
Janet Willbee
Michael Caruso
Daniel Galbraith
Daniel Stoudt
Ann Deming
Scott Ravet
April Stropich
Northern Lower Peninsula
Vice President-Mortgage Loan Officer
Vice President-Senior Commercial Banking Officer
Assistant Vice President-District Branch Supervisor
Assistant Vice President-Mortgage Loan Officer
Upper Peninsula
Vice President-Mortgage & Consumer Lending Manager
Vice President-Commercial Banking Officer
Assistant Vice President-Mortgage Loan Officer
Magan MacArthur
Vice President-Mortgage Loan Officer
Rick Demers
Joseph Havican
Teresa Same
Jeremy Hinkson
Matthew Nord
Ross Anthony
Catherine Bolm
Angela
Buckingham
Michael Slaght
David Thomas
Barbara Parrett
Sue Paoli
Eric Wozny
Patrick Nickel
John Hletko
Vice President-Commercial Banking Officer
Vice President-Commercial Banking Officer
Vice President-Branch Administrator
Assistant Vice President-Commercial Banking Officer
Assistant Vice President-Commercial Banking Officer
Assistant Vice President-Mortgage Loan Officer
Vice President-Mortgage Loan Officer
Assistant Vice President-Branch Manager/Mortgage & Consumer Lender
Vice President-Commercial Banking Officer
Vice President-Commercial Banking Officer
Vice President-Branch Administrator
Wisconsin
Vice President-Regional Market Administrator
Assistant Vice President-Commercial Banking Officer
Vice President- Senior Commercial Banking Officer
Assistant Vice President-Mortgage Loan Officer
Cathy Humbaugh
Assistant Vice President-Mortgage Loan Officer
Debbie Vold
Assistant Vice President-Branch Manager/Mortgage & Consumer Lender
Gaylord
Traverse City
Traverse City
Traverse City
Escanaba
Escanaba
Escanaba
Manistique
Manistique
Ishpeming
Marquette
Marquette
Marquette
Marquette
Marquette
Newberry
Newberry
Sault Ste. Marie
Stephenson
Niagara
Niagara
Eagle River
Eagle River
St. Germain
Three Lakes
Corporate Information
Corporate Headquarters
Mackinac Financial Corporation
130 South Cedar Street
Manistique, Michigan 49854
(888) 343-8147
Investor Relations
Jesse A. Deering
EVP/CFO
(248) 462-5112
jdeering@bankmbank.com
Transfer Agent
Broadridge
51 Mercedes Way
Edgewood, NY 11717
(844) 318-0133
Website
www.bankmbank.com
Independent Registered Public Accounting Firm
Stock Listing and Symbol
Plante Moran, PLLC
Auburn Hills, Michigan
NASDAQ Capital Market
Symbol: MFNC
Shareholder Information
Copies of the Company’s 10-K and 10-Q reports as filed with the Securities and Exchange Commission are
available upon request from the Company.
Annual Shareholders’ Meeting
The 2017 Annual Meeting of the Shareholders of Mackinac Financial Corporation will be held on May 23,
2017.
Visit our website, www.bankmbank.com, for updated news releases, financial reports, SEC filings, corporate
governance and other investor information.