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Section 1: 10-Q (10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2019

 

OR

 

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

 

For the transition period from <> to <>

 

Commission file number: 0-20167

 

MACKINAC FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

MICHIGAN

 

38-2062816

(State or other jurisdiction of

 

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

incorporation or organization)

 

 

 

 

130 SOUTH CEDAR STREET, MANISTIQUE, MI

 

49854

(Address of principal executive offices)

 

(Zip Code)

 

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

 

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

 

Yes  ☒     No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes  ☒     No  ☐

 

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

 

Large Accelerated Filer  ☐

 

Accelerated Filer  ☒

 

 

 

Non-accelerated Filer     ☐    

 

Smaller reporting company  ☒

 

Emerging growth company  ☐ 

 

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

 

Yes  ☐     No  ☒

 

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

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Commmon Stock, No par value

 

MFNC

 

The NASDAQ Stock Market, LLC

 

As of May 9, 2019, there were outstanding 10,740,712 shares of the registrant’s common stock, no par value.

 

 

 


 

Table of Contents

MACKINAC FINANCIAL CORPORATION

 

INDEX

 

 

 

 

 

 

 

    

Page No.

 

 

 

 

PART I. 

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – March 31, 2019 (Unaudited), December 31, 2018

 

1

 

 

 

 

 

Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2019 (Unaudited) and March 31, 2018 (Unaudited)

 

2

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — Three Months Ended March 31, 2019 (Unaudited) and March 31, 2018 (Unaudited)

 

3

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity — Three Months Ended March 31, 2019 (Unaudited) and March 31, 2018 (Unaudited)

 

4

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2019 (Unaudited) and March 31, 2018 (Unaudited)

 

5

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

Item 2. 

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

 

28

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

40

 

 

 

 

Item 4. 

Controls and Procedures

 

43

 

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

44

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds 

 

44

 

 

 

 

Item 6. 

Exhibits and Reports on Form 8-K

 

44

 

 

 

 

SIGNATURES 

 

45

 

 

 

 

 


 

Table of Contents

MACKINAC FINANCIAL CORPORATION

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2019

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

55,923

 

$

64,151

 

Federal funds sold

 

 

1,040

 

 

 6

 

Cash and cash equivalents

 

 

56,963

 

 

64,157

 

 

 

 

 

 

 

 

 

Interest-bearing deposits in other financial institutions

 

 

12,712

 

 

13,452

 

Securities available for sale

 

 

113,460

 

 

116,748

 

Federal Home Loan Bank stock

 

 

4,924

 

 

4,924

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

Commercial

 

 

732,678

 

 

717,032

 

Mortgage

 

 

293,126

 

 

301,461

 

Consumer

 

 

19,624

 

 

20,371

 

Total Loans

 

 

1,045,428

 

 

1,038,864

 

Allowance for loan losses

 

 

(5,154)

 

 

(5,183)

 

Net loans

 

 

1,040,274

 

 

1,033,681

 

 

 

 

 

 

 

 

 

Premises and equipment

 

 

23,479

 

 

22,783

 

Other real estate held for sale

 

 

1,961

 

 

3,119

 

Deferred tax asset

 

 

6,906

 

 

5,763

 

Deposit based intangibles

 

 

5,549

 

 

5,720

 

Goodwill

 

 

19,224

 

 

22,024

 

Other assets

 

 

31,544

 

 

25,669

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,316,996

 

$

1,318,040

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

245,201

 

$

241,556

 

NOW, money market, interest checking

 

 

363,753

 

 

368,890

 

Savings

 

 

110,978

 

 

111,358

 

CDs<$250,000

 

 

245,427

 

 

225,236

 

CDs>$250,000

 

 

12,706

 

 

13,737

 

Brokered

 

 

119,183

 

 

136,760

 

Total deposits

 

 

1,097,248

 

 

1,097,537

 

 

 

 

 

 

 

 

 

Federal funds purchased

 

 

6,780

 

 

2,905

 

Borrowings

 

 

46,878

 

 

57,536

 

Other liabilities

 

 

11,344

 

 

7,993

 

Total liabilities

 

 

1,162,250

 

 

1,165,971

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares                                            Issued and outstanding - 10,740,712 and 10,712,745 respectively

 

 

129,204

 

 

129,066

 

Retained earnings

 

 

25,347

 

 

23,466

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

Unrealized gains (losses) on available for sale securities

 

 

413

 

 

(245)

 

Minimum pension liability

 

 

(218)

 

 

(218)

 

Total shareholders’ equity

 

 

154,746

 

 

152,069

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

1,316,996

 

$

1,318,040

 

 

1


 

Table of Contents

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except per Share Data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2019

    

2018

 

 

 

(Unaudited)

 

INTEREST INCOME:

 

 

 

 

 

 

 

Interest and fees on loans:

 

 

 

 

 

 

 

Taxable

 

$

14,595

 

$

10,390

 

Tax-exempt

 

 

47

 

 

25

 

Interest on securities:

 

 

 

 

 

 

 

Taxable

 

 

703

 

 

372

 

Tax-exempt

 

 

98

 

 

69

 

Other interest income

 

 

385

 

 

199

 

Total interest income

 

 

15,828

 

 

11,055

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

Deposits

 

 

2,354

 

 

1,236

 

Borrowings

 

 

238

 

 

510

 

Total interest expense

 

 

2,592

 

 

1,746

 

 

 

 

 

 

 

 

 

Net interest income

 

 

13,236

 

 

9,309

 

Provision for loan losses

 

 

100

 

 

50

 

Net interest income after provision for loan losses

 

 

13,136

 

 

9,259

 

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

Deposit service fees

 

 

406

 

 

269

 

Income from mortgage loans sold on the secondary market

 

 

312

 

 

177

 

SBA/USDA loan sale gains

 

 

125

 

 

51

 

Net mortgage servicing fees (amortization)

 

 

(8)

 

 

(8)

 

Other

 

 

282

 

 

125

 

Total other income

 

 

1,117

 

 

614

 

 

 

 

 

 

 

 

 

OTHER EXPENSE:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,435

 

 

4,154

 

Occupancy

 

 

1,081

 

 

811

 

Furniture and equipment

 

 

718

 

 

531

 

Data processing

 

 

709

 

 

504

 

Advertising

 

 

309

 

 

195

 

Professional service fees

 

 

434

 

 

304

 

Loan origination expenses and deposit and card related fees

 

 

179

 

 

126

 

Writedowns and losses on other real estate held for sale

 

 

28

 

 

26

 

FDIC insurance assessment

 

 

134

 

 

156

 

Communications

 

 

228

 

 

155

 

Transaction related expenses

 

 

 —

 

 

189

 

Other

 

 

989

 

 

777

 

Total other expenses

 

 

10,244

 

 

7,928

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

4,009

 

 

1,945

 

Provision for  income taxes

 

 

842

 

 

408

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

3,167

 

$

1,537

 

 

 

 

 

 

 

 

 

INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

Basic

 

$

0.30

 

$

0.24

 

Diluted

 

$

0.30

 

$

0.24

 

 

 

2


 

Table of Contents

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

    

2018

 

Net income

 

$

3,167

 

$

1,537

 

Other comprehensive income

 

 

 

 

 

 

 

Change in securities available for sale:

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

 

973

 

 

(537)

 

Tax effect

 

 

(315)

 

 

113

 

Net change in unrealized gains (losses) on available for sale securities

 

 

658

 

 

(424)

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

3,825

 

$

1,113

 

 

 

3


 

Table of Contents

 

 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

Shares of

 

Stock and

 

 

 

Other

 

 

 

 

 

Common

 

Additional

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Paid in Capital

    

Earnings

    

Income (loss)

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

10,712,745

 

$

129,066

 

$

23,466

 

$

(463)

 

$

152,069

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 —

 

 

 —

 

 

3,167

 

 

 —

 

 

3,167

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 —

 

 

 —

 

 

 —

 

 

658

 

 

658

 

Total comprehensive income

 

 —

 

 

 —

 

 

3,167

 

 

658

 

 

3,825

 

Stock compensation

 

 —

 

 

138

 

 

 —

 

 

 —

 

 

138

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

27,967

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Dividend on common stock

 

 —

 

 

 —

 

 

(1,286)

 

 

 —

 

 

(1,286)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

10,740,712

 

$

129,204

 

$

25,347

 

$

195

 

$

154,746

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

Shares of

 

Stock and

 

 

 

Other

 

 

 

 

 

Common

 

Additional

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Paid in Capital

    

Earnings

    

Income (Loss)

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

6,294,930

 

$

61,981

 

$

19,711

 

$

(292)

 

$

81,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 —

 

 

 —

 

 

1,537

 

 

 —

 

 

1,537

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on securities available for sale

 

 —

 

 

 —

 

 

 —

 

 

(424)

 

 

(424)

 

Total comprehensive income

 

 —

 

 

 —

 

 

1,537

 

 

(424)

 

 

1,113

 

Stock compensation

 

 —

 

 

99

 

 

 —

 

 

 —

 

 

99

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

37,630

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Dividend on common stock

 

 —

 

 

 —

 

 

(755)

 

 

 —

 

 

(755)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

6,332,560

 

$

62,080

 

$

20,493

 

$

(716)

 

$

81,857

 

 

4


 

Table of Contents

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2019

    

2018

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

3,167

 

$

1,537

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

618

 

 

631

 

Provision for loan losses

 

 

100

 

 

50

 

Deferred tax expense, net

 

 

324

 

 

408

 

Gain on sale of loans sold in the secondary market

 

 

(258)

 

 

(139)

 

Origination of loans held for sale in the secondary market

 

 

(13,604)

 

 

(8,201)

 

Proceeds from sale of loans in the secondary market

 

 

13,862

 

 

8,340

 

Loss on sale of other real estate held for sale

 

 

28

 

 

26

 

Stock compensation

 

 

138

 

 

99

 

Change in other assets

 

 

(2,386)

 

 

513

 

Change in other liabilities

 

 

3,351

 

 

(1,144)

 

Net cash provided by operating activities

 

 

5,340

 

 

2,120

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Net decrease (increase) in loans

 

 

(9,291)

 

 

(1,454)

 

Net decrease in interest bearing deposits in other financial institutions

 

 

740

 

 

1,983

 

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

 

 

4,306

 

 

1,336

 

Capital expenditures

 

 

(346)

 

 

(548)

 

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

 

 

415

 

 

1,070

 

Net cash (used in) provided by investing activities

 

 

(4,176)

 

 

2,387

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net (decrease) increase in deposits

 

 

(289)

 

 

(11,201)

 

Net activity on line of credit

 

 

 —

 

 

1,000

 

Increase in fed funds purchased

 

 

3,875

 

 

10,000

 

Principal payments on borrowings

 

 

(10,658)

 

 

(550)

 

Dividend on common stock

 

 

(1,286)

 

 

(755)

 

Net cash used in financing activities

 

 

(8,358)

 

 

(1,506)

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

(7,194)

 

 

3,001

 

Cash and cash equivalents at beginning of period

 

 

64,157

 

 

37,426

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

56,963

 

$

40,427

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

2,523

 

$

1,746

 

Income taxes

 

 

 —

 

 

40

 

 

 

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

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

 

 

298

 

 

64

 

 

5


 

Table of Contents

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the “Corporation”) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three month period ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.  The unaudited consolidated financial statements and footnotes thereto should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

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

 

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

 

Acquired Loans

 

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

 

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

 

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

 

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

 

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Allowance for Loan Losses

 

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

 

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

 

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

 

Stock Compensation Plans

 

On May 22, 2012, the Corporation’s shareholders approved the Mackinac Financial Corporation 2012 Incentive Compensation Plan, under which current and prospective employees, non-employee directors and consultants may be awarded incentive stock options, non-statutory stock options, shares of restricted stock awards (“RSAs”), stock grants, or stock appreciation rights.  The aggregate number of shares of the Corporation’s common stock issuable under the plan is 575,000. At March 31, 2019 there were 216,310 shares available for issuance under this plan. Awards are made to certain other senior officers at the discretion of the Corporation’s management.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

 

2.RECENT ACCOUNTING PRONOUNCEMENTS

 

In February 2016, the FASB issued ASU 2016-02, Leases, which will supersede the current lease requirements in ASC 840.  The ASU requires lessees to recognize an asset with the right of use and related lease liability for all leases, with a limited exception for short-term leases.  Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations.  Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet.  The reporting of lease related expenses in the statements of operations and cash flows will be generally consistent with the current guidance.  The new lease guidance was adopted January 1, 2019, and accordingly an asset and liability of $4.838 million were recognized.  The asset is included in other assets and the liability is included within other liabilities.

 

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

 

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

 

ASU 2016-13 also amends the recording of purchased credit-deteriorated assets. Under the new guidance, an allowance will be recognized at acquisition through a gross-up approach whereby an entity will record as the initial amortized cost

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the sum of (a) the purchase price and (b) an estimate of credit losses as of the date of acquisition. In addition, the guidance also requires immediate recognition in earnings of any subsequent changes, both favorable and unfavorable, in expected cash flows by adjusting this allowance.

 

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

 

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

 

Upon adoption of ASU 2016-13, a cumulative-effect adjustment to retained earnings will be recorded as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for SEC registrants 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.  The Corporation has formed a cross-functional implementation team consisting of individuals from finance, credit and information systems.  A project plan and timeline has been developed and the implementation team meets regularly to assess the project status to ensure adherence to the timeline.  The implementation team has also been working with a software vendor to assist in implementing required changes to credit loss estimation models and proceses, an is finalizing the historical data collected to be utilized in the credit loss models.  The Corporation expects to recognize a cumulative effect adjustment to the opening balance of retained earnings as of the beginning of the first reporting period in which ASU 2016-13 is effective.  The Corporation has not yet determined the magnitude of any such one-time adjustment or ther potential impact of ASU 2016-13 on its condensed consolidated financial statements.

 

3.EARNINGS PER SHARE

 

Diluted earnings per share, which reflects the potential dilution that could occur if 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 three months ended March 31, 2019 and 2018 (dollars in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2019

    

2018

 

 

 

 

 

 

 

 

 

(Numerator):

 

 

 

 

 

 

 

Net income

 

$

3,167

 

$

1,537

 

 

 

 

 

 

 

 

 

(Denominator):

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

10,720,127

 

 

6,304,203

 

Effect of restricted stock awards

 

 

3,794

 

 

26,007

 

Diluted weighted average shares outstanding

 

 

10,723,921

 

 

6,330,210

 

Income per common share:

 

 

 

 

 

 

 

Basic

 

$

0.30

 

$

0.24

 

Diluted

 

$

0.30

 

$

0.24

 

 

 

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4.INVESTMENT SECURITIES

 

At March 31, 2019 the Corporation has an investment security portfolio totaling $113.460 million, a decrease of $3.288 million from December 31, 2018 balance of $116.748 million. The amortized cost and estimated fair value of investment securities available for sale as of March 31, 2019 and December 31, 2018 are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

$

20,172

 

$

30

 

$

(44)

 

$

20,158

 

US Agencies

 

 

15,952

 

 

13

 

 

(118)

 

 

15,847

 

US Agencies - MBS

 

 

31,158

 

 

345

 

 

(126)

 

 

31,377

 

Obligations of states and political subdivisions

 

 

45,654

 

 

587

 

 

(163)

 

 

46,078

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale 

 

$

112,936

 

$

975

 

$

(451)

 

$

113,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

$

20,198

 

$

24

 

$

(158)

 

$

20,064

 

US Agencies

 

 

16,198

 

 

 5

 

 

(233)

 

 

15,970

 

US Agencies - MBS

 

 

32,974

 

 

124

 

 

(258)

 

 

32,840

 

Obligations of states and political subdivisions

 

 

47,828

 

 

341

 

 

(295)

 

 

47,874

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

117,198

 

$

494

 

$

(944)

 

$

116,748

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

Amortized

 

Estimated

 

 

Amortized

 

Estimated

 

 

Cost

    

Fair Value

    

 

Cost

    

Fair Value

    

Available -for-sale securities