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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 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

 

OR

 

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

 

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

 

Securities registered pursuant to Section 12(b) of the 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

 

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  ☐ 

 

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.☐

 

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

Yes  ☐     No  ☒

 

As of May 11, 2020, there were outstanding 10,533,589 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, 2020 (Unaudited), December 31, 2019

 

1

 

 

 

 

 

Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2020 (Unaudited) and March 31, 2019 (Unaudited)

 

2

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — Three Months Ended March 31, 2020 (Unaudited) and March 31, 2019 (Unaudited)

 

3

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity — Three Months Ended March 31, 2020 (Unaudited) and March 31, 2019 (Unaudited)

 

4

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2020 (Unaudited) and March 31, 2019 (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

 

39

 

 

 

 

Item 4. 

Controls and Procedures

 

42

 

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

43

 

 

 

 

Item 1A. 

Risk Factors

 

43

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds 

 

43

 

 

 

 

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,

 

 

 

2020

 

2019

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

97,041

 

$

49,794

 

Federal funds sold

 

 

31

 

 

32

 

Cash and cash equivalents

 

 

97,072

 

 

49,826

 

 

 

 

 

 

 

 

 

Interest-bearing deposits in other financial institutions

 

 

8,825

 

 

10,295

 

Securities available for sale

 

 

114,734

 

 

107,972

 

Federal Home Loan Bank stock

 

 

4,924

 

 

4,924

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

Commercial

 

 

760,357

 

 

765,524

 

Mortgage

 

 

263,445

 

 

272,014

 

Consumer

 

 

20,375

 

 

21,238

 

Total Loans

 

 

1,044,177

 

 

1,058,776

 

Allowance for loan losses

 

 

(5,292)

 

 

(5,308)

 

Net loans

 

 

1,038,885

 

 

1,053,468

 

 

 

 

 

 

 

 

 

Premises and equipment

 

 

24,522

 

 

23,608

 

Other real estate held for sale

 

 

2,228

 

 

2,194

 

Deferred tax asset

 

 

3,154

 

 

3,732

 

Deposit based intangibles

 

 

4,874

 

 

5,043

 

Goodwill

 

 

19,574

 

 

19,574

 

Other assets

 

 

37,589

 

 

39,433

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,356,381

 

$

1,320,069

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest bearing deposits

 

$

278,191

 

$

287,611

 

NOW, money market, interest checking

 

 

369,003

 

 

373,165

 

Savings

 

 

109,818

 

 

109,548

 

CDs<$250,000

 

 

227,924

 

 

233,956

 

CDs>$250,000

 

 

14,152

 

 

12,775

 

Brokered

 

 

96,293

 

 

58,622

 

Total deposits

 

 

1,095,381

 

 

1,075,677

 

 

 

 

 

 

 

 

 

Federal funds purchased

 

 

22,790

 

 

6,225

 

Borrowings

 

 

67,120

 

 

64,551

 

Other liabilities

 

 

11,030

 

 

11,697

 

Total liabilities

 

 

1,196,321

 

 

1,158,150

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares                                            Issued and outstanding - 10,533,589 and 10,748,712 respectively

 

 

127,003

 

 

129,564

 

Retained earnings

 

 

33,316

 

 

31,740

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

Unrealized gains on available for sale securities

 

 

151

 

 

1,025

 

Minimum pension liability

 

 

(410)

 

 

(410)

 

Total shareholders’ equity

 

 

160,060

 

 

161,919

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

1,356,381

 

$

1,320,069

 

 

1

Table of Contents

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except per Share Data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2020

    

2019

 

 

 

(Unaudited)

 

INTEREST INCOME:

 

 

 

 

 

 

 

Interest and fees on loans:

 

 

 

 

 

 

 

Taxable

 

$

14,613

 

$

14,595

 

Tax-exempt

 

 

74

 

 

47

 

Interest on securities:

 

 

 

 

 

 

 

Taxable

 

 

621

 

 

703

 

Tax-exempt

 

 

87

 

 

98

 

Other interest income

 

 

270

 

 

385

 

Total interest income

 

 

15,665

 

 

15,828

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

Deposits

 

 

1,927

 

 

2,354

 

Borrowings

 

 

341

 

 

238

 

Total interest expense

 

 

2,268

 

 

2,592

 

 

 

 

 

 

 

 

 

Net interest income

 

 

13,397

 

 

13,236

 

Provision for loan losses

 

 

100

 

 

100

 

Net interest income after provision for loan losses

 

 

13,297

 

 

13,136

 

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

Deposit service fees

 

 

403

 

 

406

 

Income from mortgage loans sold on the secondary market

 

 

538

 

 

312

 

SBA/USDA loan sale gains

 

 

710

 

 

125

 

Net mortgage servicing fees

 

 

259

 

 

120

 

Other

 

 

27

 

 

154

 

Total other income

 

 

1,937

 

 

1,117

 

 

 

 

 

 

 

 

 

OTHER EXPENSE:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,051

 

 

5,435

 

Occupancy

 

 

1,124

 

 

1,081

 

Furniture and equipment

 

 

802

 

 

718

 

Data processing

 

 

825

 

 

709

 

Advertising

 

 

212

 

 

309

 

Professional service fees

 

 

498

 

 

434

 

Loan origination expenses and deposit and card related fees

 

 

381

 

 

179

 

Writedowns and losses on other real estate held for sale

 

 

 3

 

 

28

 

FDIC insurance assessment

 

 

150

 

 

134

 

Communications

 

 

213

 

 

228

 

Other

 

 

1,113

 

 

989

 

Total other expenses

 

 

11,372

 

 

10,244

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

3,862

 

 

4,009

 

Provision for  income taxes

 

 

811

 

 

842

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

3,051

 

$

3,167

 

 

 

 

 

 

 

 

 

INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

Basic

 

$

0.28

 

$

0.30

 

Diluted

 

$

0.28

 

$

0.30

 

 

 

2

Table of Contents

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

    

2019

 

Net income

 

$

3,051

 

$

3,167

 

Other comprehensive income

 

 

 

 

 

 

 

Change in securities available for sale:

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period

 

 

(1,106)

 

 

973

 

Tax effect

 

 

232

 

 

(315)

 

Net change in unrealized gains on available for sale securities

 

 

(874)

 

 

658

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

2,177

 

$

3,825

 

 

 

3

Table of Contents

 

 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

 

 

 

Common

 

 

 

Accumulated

 

 

 

 

 

Shares of

 

Stock and

 

 

 

Other

 

 

 

 

 

Common

 

Additional

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Paid in Capital

    

Earnings

    

Income (loss)

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

10,748,712

 

$

129,564

 

$

31,740

 

$

615

 

$

161,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for period

 

 —

 

 

 —

 

 

3,051

 

 

 —

 

 

3,051

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized loss on securities available for sale

 

 —

 

 

 —

 

 

 —

 

 

(874)

 

 

(874)

 

Total comprehensive income

 

 —

 

 

 —

 

 

3,051

 

 

(874)

 

 

2,177

 

Stock compensation

 

 —

 

 

168

 

 

 —

 

 

 —

 

 

168

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock award vesting

 

25,521

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Repurchase of common stock

 

(240,644)

 

 

(2,729)

 

 

 —

 

 

 —

 

 

(2,729)

 

Dividend on common stock

 

 —

 

 

 —

 

 

(1,475)

 

 

 —

 

 

(1,475)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

10,533,589

 

$

127,003

 

$

33,316

 

$

(259)

 

$

160,060

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

4

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

MACKINAC FINANCIAL CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

    

2020

    

2019

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

3,051

 

$

3,167

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

687

 

 

618

 

Provision for loan losses

 

 

100

 

 

100

 

Deferred tax expense, net

 

 

456

 

 

324

 

Gain on sale of loans sold in the secondary market

 

 

(447)

 

 

(258)

 

Origination of loans held for sale in the secondary market

 

 

(18,997)

 

 

(13,604)

 

Proceeds from sale of loans in the secondary market

 

 

16,900

 

 

13,862

 

Loss on sale of other real estate held for sale

 

 

 

 

 

28

 

Writedown of other real estate held for sale

 

 

 3

 

 

 —

 

Stock compensation

 

 

168

 

 

138

 

Change in other assets

 

 

2,090

 

 

(2,386)

 

Change in other liabilities

 

 

(667)

 

 

3,351

 

Net cash provided by operating activities

 

 

3,344

 

 

5,340

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Net decrease (increase) in loans

 

 

17,200

 

 

(9,291)

 

Net decrease in interest bearing deposits in other financial institutions

 

 

1,470

 

 

740

 

Purchase of securities available for sale

 

 

(17,873)

 

 

 —

 

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

 

 

9,988

 

 

4,306

 

Capital expenditures

 

 

(1,584)

 

 

(346)

 

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

 

 

67

 

 

415

 

Net cash (used in) provided by investing activities

 

 

9,268

 

 

(4,176)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net increase (decrease) in deposits

 

 

19,704

 

 

(289)

 

Net activity on line of credit

 

 

3,000

 

 

 —

 

Net increase in fed funds purchased

 

 

16,565

 

 

3,875

 

New term debt issuance

 

 

10,000

 

 

 —

 

Principal payments on borrowings

 

 

(10,431)

 

 

(10,658)

 

Repurchase of common stock

 

 

(2,729)

 

 

 —

 

Dividend on common stock

 

 

(1,475)

 

 

(1,286)

 

Net cash provided by (used in) financing activities

 

 

34,634

 

 

(8,358)

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

47,246

 

 

(7,194)

 

Cash and cash equivalents at beginning of period

 

 

49,826

 

 

64,157

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

97,072

 

$

56,963

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

2,242

 

$

2,523

 

Income taxes

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

155

 

 

298

 

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

 

 

 —

 

 

 —

 

Transfers of Other Real Estate Held for Sale to Fixed Assets

 

 

 

 

 

 

 

 

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 periods ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.  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, 2019.

 

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, 2020 there were 76,310 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 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 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

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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. 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, and 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 the potential impact of ASU 2016-13 on its condensed consolidated financial statements.  In October 2019 the Financial Accounting Standards Board (FASB) voted to defer the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for smaller reporting companies (as defined by the Securities Exchange Commission).  As the Corporation qualifies as a smaller reporting company, management plans to delay the implementation of CECL beyond 2020 and adjust the timetable of the various CECL implementation tasks.  Management believes that the Corporation will benefit from additional time to run parallel testing and refine credit loss estimation models.

 

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, 2020 and 2019 (dollars in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2020

    

2019

 

 

 

 

 

 

 

 

 

(Numerator):

 

 

 

 

 

 

 

Net income

 

$

3,051

 

$

3,167

 

 

 

 

 

 

 

 

 

(Denominator):

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

10,717,967

 

 

10,720,127

 

Effect of restricted stock awards

 

 

96,824

 

 

3,794

 

Diluted weighted average shares outstanding

 

 

10,814,791

 

 

10,723,921

 

Income per common share:

 

 

 

 

 

 

 

Basic

 

$

0.28

 

$

0.30

 

Diluted

 

$

0.28

 

$

0.30

 

 

 

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4.INVESTMENT SECURITIES

 

At March 31, 2020 the Corporation had an investment security portfolio totaling $114.734 million, a increase of $6.762 million from the December 31, 2019 balance of $107.972 million. The amortized cost and estimated fair value of investment securities available for sale as of March 31, 2020 and December 31, 2019 are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

$

20,265

 

$

78

 

$

(319)

 

$

20,024

 

US Agencies

 

 

9,457

 

 

154

 

 

 —

 

 

9,611

 

US Agencies - MBS

 

 

36,743

 

 

788

 

 

(816)

 

 

36,715

 

Obligations of states and political subdivisions

 

 

48,078

 

 

518

 

 

(212)

 

 

48,384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale 

 

$

114,543

 

$

1,538

 

$

(1,347)

 

$

114,734

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

$

20,779

 

$

160

 

$

(1)

 

$

20,938

 

US Agencies

 

 

14,450

 

 

47

 

 

(1)

 

 

14,496

 

US Agencies - MBS

 

 

34,063

 

 

492

 

 

(29)

 

 

34,526

 

Obligations of states and political subdivisions

 

 

37,382

 

 

630

 

 

 —

 

 

38,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

106,674

 

$

1,329

 

$

(31)

 

$

107,972

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The following table presents the amortized cost and estimated fair value of investment securities by contractual maturity as of March 31, 2020 and December 31, 2019 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

2020

 

2019

 

Amortized

 

Estimated

 

 

Amortized

 

Estimated

 

 

Cost

    

Fair Value

    

 

Cost

    

Fair Value

    

Available -for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

    Under 1 year

$

15,383

 

$

15,398

 

 

$

21,532

 

$

21,575

 

    After 1 year through five years

 

38,919

 

 

39,653

 

 

 

40,063

 

 

40,664

 

    After 5 years through 10 years

 

11,898

 

 

11,281

 

 

 

10,019

 

 

10,189

 

    After 10 years

 

11,600

 

 

11,687

 

 

 

997

 

 

1,018

 

           Subtotal

 

77,800

 

 

78,019

 

 

 

72,611

 

 

73,446

 

US Agencies - MBS

 

36,743

 

 

36,715

 

 

 

34,063

 

 

34,526