FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number 0-20167
MACKINAC FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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MICHIGAN
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38-2062816
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(State of other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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130 South Cedar Street, Manistique, Michigan 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: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes
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No
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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
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No
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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
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No
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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 contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendments to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
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No
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The aggregate market value of the common stock held by non-affiliates of the Registrant, based on a
per share price of $7.00 as of June 30, 2008, was $10.6 million. As of March 30, 2009, there were
outstanding, 3,419,736 shares of the Corporation’s Common Stock (no par value).
Documents Incorporated by Reference:
Portions of the Corporation’s Annual Report to Shareholders for the year ended December 31, 2008,
are incorporated by reference into Parts I and II of this Report.
Portions of the Corporation’s Proxy Statement for the 2009 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
Mackinac Financial Corporation (the “Corporation”) was incorporated under the laws of the state of
Michigan on December 16, 1974. The Corporation changed its name from “First Manistique
Corporation” to “North Country Financial Corporation” on April 14, 1998. On December 16, 2004, the
Corporation changed its name from North Country Financial Corporation to Mackinac Financial
Corporation. The Corporation owns all of the outstanding stock of its banking subsidiary, mBank
(the “Bank”). 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. The Bank also has four non-bank subsidiaries: NCB Real
Estate Company, which owns real estate used by the Bank; mBank Mortgage Company, LLC, an entity
engaged in the business of mortgage lending and brokering; and mBank Employee Services, LLC, a
company that leases employees to mBank. The Bank represents the principal asset of the
Corporation. The Corporation and its subsidiary 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.
HISTORY
The Corporation became a registered bank holding company under the Bank Holding Company Act of
1956, as amended, on April 1, 1976, when it acquired First Northern Bank and Trust (“First
Northern”). On May 1, 1986, Manistique Lakes Bank merged with First Northern. The Corporation
acquired all of the outstanding stock of the Bank of Stephenson on February 8, 1994, in exchange
for cash and common stock. The Bank of Stephenson was operated as a separate banking subsidiary of
the Corporation until September 30, 1995, when it was merged into First Northern. First Northern
acquired Newberry State Bank on December 8, 1994, in exchange for cash. On September 15, 1995,
First Northern acquired the fixed assets and assumed the deposits of the Rudyard branch of First of
America Bank, in exchange for cash. The Corporation acquired all of the outstanding stock of South
Range State Bank (“South Range”) on January 31, 1996, in exchange for cash and notes. On August
12, 1996, First Northern and South Range changed their names to North Country Bank and Trust and
North Country Bank, respectively. On February 4, 1997, the Corporation acquired all of the
outstanding stock of UP Financial Inc., the parent holding company of First National Bank of
Ontonagon (“Ontonagon”). Ontonagon was merged into North Country Bank. North Country Bank was
operated as a separate banking subsidiary of the Corporation until March 10, 1998, when it was
merged into North Country Bank and Trust. On June 25, 1999, North Country Bank and Trust acquired
the fixed assets and assumed the deposits of the Kaleva and Mancelona branches of Huntington
National Bank in exchange for cash. On July 23, 1999, North Country Bank and Trust sold the fixed
assets and deposits of the Rudyard and Cedarville branches to Central Savings Bank in exchange for
cash.
On January 14, 2000, North Country Bank and Trust sold the fixed assets and deposits of the Garden
branch to First Bank, Upper Michigan in exchange for cash. On June 16, 2000, North Country Bank
and Trust acquired the fixed assets and assumed the deposits of the Glen Arbor and Alanson branches
of Old Kent Bank, in exchange for cash. On July 13, 2001, North Country
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Bank and Trust sold the fixed assets and deposits of the St. Ignace and Mackinac Island branches to
Central Savings Bank in exchange for cash. On November 9, 2001, North Country Bank and Trust sold
the fixed assets and deposits of the Curtis and Naubinway branches to State Savings Bank in
exchange for cash. On November 22, 2002, North Country Bank and Trust sold the fixed assets and
deposits of the Menominee branch to Stephenson National Bank and Trust in exchange for cash.
During 2003, the Bank closed branch locations at Glen Arbor, Ishpeming, L’Anse, and Petoskey.
In 2004, the Bank sold the fixed assets and deposits of the Mancelona and Alanson branches to First
Federal of Northern Michigan in exchange for cash, the fixed assets and deposits of the Munising
branch to People’s State Bank in exchange for cash, and the fixed assets and deposits of the Iron
Mountain and Escanaba branches to the State Bank of Escanaba in exchange for cash. The Bank also
closed the branch locations of Boyne City, Cadillac, Calumet, Sault Ste. Marie Cascade, and one of
its branch locations in Traverse City.
RECAPITALIZATION — RECENT HISTORY
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 with the Bank adopting the “mBank” identity early in
2005.
In 2007, the Bank sold the fixed assets and deposits of the Ripley branch office located in
Hancock, Michigan.
The Bank currently has 8 branch offices located in the Upper Peninsula of Michigan and 4 branch
offices located in Michigan’s Lower Peninsula. The Bank maintains offices in Antrim, Chippewa,
Emmet, Grand Traverse, Houghton, Luce, Manistee, Marquette, Menominee, Oakland, Ontonagon, Otsego,
and Schoolcraft Counties. The Bank provides drive-in convenience at 10 branch locations and has 10
automated teller machines. The Bank has no foreign offices.
The Corporation is headquartered and located in Manistique, Michigan. The mailing address of the
Corporation is 130 South Cedar Street, Manistique, Michigan 49854.
Operations
The principal business the Corporation is engaged in, through the Bank, is the general commercial
banking business, providing 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. Funds for the Bank’s operation are also provided by brokered deposits and
through borrowings from the Federal Home Loan Bank (“FHLB”) system, proceeds from the sale of loans
and 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, maintaining an adequate allowance for loan losses, and general
operating expenses.
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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 competition for investors’ funds
from mutual funds and corporate and government 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, 2008, the Corporation and its subsidiaries employed, in the aggregate, 104
employees equating to 100 full-time equivalents. The Corporation provides its employees with
comprehensive medical and dental benefit plans, a life insurance plan, and a 401(k) plan. None of
the Corporation’s employees are covered by a collective bargaining agreement with the Corporation.
Management believes its relationship with its employees to be good.
Business
The Bank makes mortgage, commercial, and installment loans to customers throughout Michigan. Fees
may be charged for these services. The Bank’s most prominent concentration in the loan portfolio
relates to commercial loans to entities within the real estate — operators of nonresidential
buildings industry. This concentration represented $41.299 million or 13.95% of the commercial
loan portfolio at December 31, 2008. 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 Michigan. The economy of the Bank’s market areas is
affected by summer and winter tourism activities.
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.
The Corporation may pursue new lease opportunities through unrelated entities, where the credit
quality and rate of return on the transactions for its current business strategies. The Bank
accounts for lease transactions as loans.
The Bank’s primary source for lending, investments, and other general business purposes is
deposits. The Bank offers a wide range of interest bearing and non-interest bearing accounts,
including commercial and retail checking accounts, negotiable order of withdrawal (“NOW”) accounts,
money market accounts with limited transactions, individual retirement accounts, regular
interest-bearing statement savings accounts, certificates of deposit with a range of maturity date
options, and accessibility to a customer’s deposit relationship through online banking. The
sources of deposits are residents, businesses and employees of businesses within the Bank’s market
areas, obtained through the personal solicitation of the Bank’s officers and directors, direct mail
solicitation and limited advertisements published in the local media. The
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Bank also utilizes the wholesale deposit market for any shortfalls in loan funding. No material
portions of the Bank’s deposits have been received from a single person, industry, group, or
geographical location.
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 $13.375 million at December 31, 2008, with an
additional $10.185 million available if collateralized.
As of December 31, 2008, the Bank had no material risks relative to foreign sources. See the
“Interest Rate Risk” and “Foreign Exchange Risk” sections in Management’s Discussion and Analysis
of Financial Condition and Results of Operations in the Corporation’s 2008 Annual Report to
Shareholders, which sections are incorporated herein by reference, for details on the Corporation’s
foreign account activity.
Compliance with federal, state, and local statutes and/or ordinances relating to the protection of
the environment is not expected to have a material effect upon the Bank’s capital expenditures,
earnings, or competitive position.
Supervision and Regulation
As a registered bank holding company, the Corporation is subject to regulation and examination by
the Board of Governors of the Federal Reserve System (Federal Reserve Board) under the Bank Holding
Company Act, as amended (BHCA). The Bank is subject to regulation and examination by the Michigan
Office of Financial and Insurance Services (OFIS) and the Federal Deposit Insurance Corporation
(FDIC).
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
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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 guidelines require all bank holding companies and federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital.
Tier 1 capital includes common shareholders’ equity, qualifying perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most
other intangibles and excludes the allowance for loan and lease losses. Tier 2 includes the excess
of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid
capital instruments, subordinated debt and intermediate term-preferred stock, and general reserves
for loan and lease losses up to 1.25% of risk-weighted assets.
FDICIA contains “prompt corrective action” provisions pursuant to which banks are to be classified
into one of five categories based upon capital adequacy, ranging from “well capitalized” to
“critically undercapitalized” and which require (subject to certain exceptions) the appropriate
federal banking agency to take prompt corrective action with respect to an institution which
becomes “significantly undercapitalized” or “critically undercapitalized”.
In general, the regulations define the five capital categories as follows: (i) an institution is
“well capitalized” if it has a total risk-based capital ratio of 10% or greater, has a Tier 1
risk-based capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not subject
to any written capital order or directive to meet and maintain a specific capital level for any
capital measures; (ii) an institutions is “adequately capitalized” if it has a total risk-based
capital ratio of 8% or greater, has Tier 1 risk-based capital ratio of 4% or greater, and has a
leverage ratio of 4% or greater; (iii) an institution is “undercapitalized” if it has a total
risk-based capital ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less than
4% or has a leverage ratio that is less than 4%; (iv) an institution is “significantly
undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier I
risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; (v) an
institution is “critically undercapitalized” if its “tangible equity” is equal to or less than 2%
of its total assets. The FDIC also, after an opportunity for a hearing, has authority to downgrade
an institution from “well capitalized to “adequately capitalized” or to subject an “adequately
capitalized” or “undercapitalized” institution to the supervisory actions applicable to the next
lower category, for supervisory concerns.
Information pertaining to the Corporation’s capital is contained in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” under the caption “Capital and
Regulatory” in the Corporation’s 2008 Annual Report to Shareholders, and is incorporated herein by
reference.
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-Bliley Act (“GLBA”), which eliminated certain barriers to
and restrictions 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 firms, and amended the BHCA to permit
bank holding companies that qualify as “financial holding companies” to engage in a broad list of
“financial activities,” and any non-financial activity that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines is
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“complementary” to a financial activity and poses no 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 does not qualify as a financial holding company at this time.
Privacy Restrictions
GLBA, in addition to the previous 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 Terrorism Act of 2001 (the “USA PATRIOT Act”). The USA PATRIOT
Act is designed to deny terrorists 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;
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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;
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Increased penalties for financial crimes;
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Expanded disclosure of corporate operations and internal controls and certification
of financial statements;
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Enhanced controls on, and reporting of, insider training; and
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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.
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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 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-Oxley Act and the SEC’s rules 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.
Extraordinary Government Programs
Troubled Asset Relief Program.
On October 3, 2008, the Emergency Economic Stabilization Act of
2008 (“EESA”) was enacted, which, among other things, provided the United States Department of the
Treasury (“Treasury”) access to up to $700 billion to stabilize the U.S. banking system. On
October 14, 2008, Treasury announced its intention to inject capital into nine large U.S. financial
institutions under the Capital Purchase Program (the “CPP”) as part of the Troubled Asset Relief
Program (“TARP”) implementing the EESA, and since has injected capital into many other financial
institutions.
Mackinac Financial Corporation filed an application with the Federal Deposit Insurance Corporation
(“FDIC”) on November 4, 2008, for participation in the Capital Purchase Program (“CPP”) under the
Troubled Asset Relief Program (“TARP”). The FDIC responded and recommended approval for our
participation and forwarded our application to the Department of the Treasury (“Treasury”). We
received preliminary approval from the Treasury on January 30, 2009 for our maximum requested
participation amount of $11,000,000.
Under the CPP, the Corporation will issue previously authorized preferred stock with a 5% annual
dividend rate to the Treasury. The Corporation will also, as a required part of this transaction,
issue 379,093 common stock warrants with an exercise price of $4.35 per share. The preferred stock
and common stock warrants will be issued on the expected closing date in May, 2009.
The Corporation intends to utilize the proceeds, $11,000,000, to support future growth of the
Corporation by generating new loan growth through its principal subsidiary, mBank. Additional
information pertaining to Supervision and Regulation is contained in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” under the caption “Capital and
Regulatory” in the Corporation’s 2008 Annual Report to Shareholders, and is incorporated herein by
reference.
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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 received by the Bank on loans extended to its customers
and on securities held in the Bank’s portfolio, comprises the major portion of the Bank’s earnings.
These rates are highly sensitive to many factors that are beyond the control of the 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.
Selected Statistical Information
I. Distribution of Assets, Obligations, and Shareholders’ Equity; Interest Rates and Interest
Differential
The key components of net interest income, the daily average balance sheet for each year —
including the components of earning assets and supporting obligations — 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 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in the Corporation’s 2008 Annual Report
to Shareholders, and is incorporated herein by reference.
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 changes in interest rates is contained under the caption
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the
Corporation’s 2008 Annual Report to Shareholders, and is incorporated herein by reference.
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II. Investment Portfolio
A. Investment Portfolio Composition
The following table presents the carrying value of investment securities available for sale as of
December 31 (dollars in thousands):
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2008
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2007
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2006
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U.S. Agencies — MBS
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$
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46,941
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$
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20,969
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$
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32,176
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State and political subdivisions
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549
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628
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593
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TOTAL
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$
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47,490
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$
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21,597
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$
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32,769
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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, 2008 (fully taxable equivalent, dollars in
thousands):
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After one,
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After five,
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Weighted
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In one year
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but within
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but within
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Over
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Average
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year or less
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five years
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ten years
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10 years
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TOTAL
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Yield (1)
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U.S. Agencies — MBS
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$
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—
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$
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—
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$
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—
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$
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46,942
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$
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46,942
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3.69
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%
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State and political
subdivisions
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5
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26
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517
|
|
|
|
—
|
|
|
|
548
|
|
|
|
7.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
5
|
|
|
$
|
26
|
|
|
$
|
517
|
|
|
$
|
46,942
|
|
|
$
|
47,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average yield (1)
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
|
|
8.40
|
%
|
|
|
3.69
|
%
|
|
|
3.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Weighted average yield includes the effect of tax-equivalent adjustments using a 34% tax rate.
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Commercial real estate
|
|
$
|
185,241
|
|
|
$
|
171,695
|
|
|
$
|
154,332
|
|
|
$
|
118,637
|
|
|
$
|
105,619
|
|
|
Commercial, financial and
agricultural
|
|
|
79,734
|
|
|
|
78,192
|
|
|
|
71,385
|
|
|
|
56,686
|
|
|
|
47,446
|
|
|
One-to-four family residential
real estate
|
|
|
65,595
|
|
|
|
57,613
|
|
|
|
58,014
|
|
|
|
44,660
|
|
|
|
45,292
|
|
|
Construction
|
|
|
35,965
|
|
|
|
44,042
|
|
|
|
36,009
|
|
|
|
17,503
|
|
|
|
3,096
|
|
|
Consumer
|
|
|
3,745
|
|
|
|
3,537
|
|
|
|
2,841
|
|
|
|
2,285
|
|
|
|
2,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
370,280
|
|
|
$
|
355,079
|
|
|
$
|
322,581
|
|
|
$
|
239,771
|
|
|
$
|
203,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
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, 2008, based on scheduled principal repayments (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
|
|
|
1-4 Family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Financial, and
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Agricultural
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Construction
|
|
|
Total
|
|
|
In one year or less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest
rates
|
|
$
|
38,445
|
|
|
$
|
35,609
|
|
|
$
|
6,726
|
|
|
$
|
688
|
|
|
$
|
18,104
|
|
|
$
|
99,572
|
|
|
Fixed interest rates
|
|
|
15,937
|
|
|
|
16,779
|
|
|
|
3,247
|
|
|
|
611
|
|
|
|
3,151
|
|
|
|
39,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year but
within five years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest
rates
|
|
|
66,833
|
|
|
|
9,455
|
|
|
|
4,115
|
|
|
|
173
|
|
|
|
7,214
|
|
|
|
87,790
|
|
|
Fixed interest rates
|
|
|
43,878
|
|
|
|
12,725
|
|
|
|
8,201
|
|
|
|
2,170
|
|
|
|
2,127
|
|
|
|
69,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After five years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest
rates
|
|
|
17,049
|
|
|
|
2,258
|
|
|
|
37,535
|
|
|
|
—
|
|
|
|
4,993
|
|
|
|
61,835
|
|
|
Fixed interest rates
|
|
|
3,099
|
|
|
|
2,908
|
|
|
|
5,771
|
|
|
|
103
|
|
|
|
376
|
|
|
|
12,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
185,241
|
|
|
$
|
79,734
|
|
|
$
|
65,595
|
|
|
$
|
3,745
|
|
|
$
|
35,965
|
|
|
$
|
370,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Risk Elements
The following table presents a summary of nonperforming assets and problem loans as of December 31
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Nonaccrual loans
|
|
$
|
4,887
|
|
|
$
|
3,298
|
|
|
$
|
2,899
|
|
|
$
|
15
|
|
|
$
|
4,307
|
|
|
|
|
Interest income that would have been
recorded for nonaccrual loans
under original terms
|
|
|
377
|
|
|
|
391
|
|
|
|
114
|
|
|
|
134
|
|
|
|
803
|
|
|
|
|
Interest income recorded during
period for nonaccrual loans
|
|
|
60
|
|
|
|
129
|
|
|
|
7
|
|
|
|
78
|
|
|
|
1,053
|
|
|
|
|
Accruing
loans past due 90 days or more
|
|
|
—
|
|
|
|
710
|
|
|
|
40
|
|
|
|
99
|
|
|
|
—
|
|
|
|
|
Restructured loans not included above
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
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 influence management’s judgment in determining
the provision for loan losses include establishing specified loss allowances for selected loans
(including large loans, nonaccrual loans, and problem and delinquent loans) and consideration of
historical loss information and local economic conditions.
11
The following table presents information relative to the allowance for loan losses for the years
ended December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance of allowance for loan
losses at beginning of period
|
|
$
|
4,146
|
|
|
$
|
5,006
|
|
|
$
|
6,108
|
|
|
$
|
6,966
|
|
|
$
|
22,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and
agricultural
|
|
|
2,062
|
|
|
|
1,148
|
|
|
|
199
|
|
|
|
448
|
|
|
|
10,187
|
|
|
Real estate — construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Real estate — mortgage
|
|
|
157
|
|
|
|
89
|
|
|
|
88
|
|
|
|
493
|
|
|
|
3,118
|
|
|
Consumer
|
|
|
71
|
|
|
|
73
|
|
|
|
45
|
|
|
|
51
|
|
|
|
2,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans charged off
|
|
|
2,290
|
|
|
|
1,310
|
|
|
|
332
|
|
|
|
992
|
|
|
|
15,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries of loans previously
charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commerical, financial, and
agricultural
|
|
|
114
|
|
|
|
15
|
|
|
|
53
|
|
|
|
102
|
|
|
|
312
|
|
|
Real estate — construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Real estate — mortgage
|
|
|
—
|
|
|
|
—
|
|
|
|
13
|
|
|
|
23
|
|
|
|
148
|
|
|
Consumer
|
|
|
7
|
|
|
|
35
|
|
|
|
25
|
|
|
|
9
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
121
|
|
|
|
50
|
|
|
|
91
|
|
|
|
134
|
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged off
|
|
|
2,169
|
|
|
|
1,260
|
|
|
|
241
|
|
|
|
858
|
|
|
|
15,039
|
|
|
Provisions charged to expense
|
|
|
2,300
|
|
|
|
400
|
|
|
|
(861
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
4,277
|
|
|
$
|
4,146
|
|
|
$
|
5,006
|
|
|
$
|
6,108
|
|
|
$
|
6,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding
|
|
|
361,324
|
|
|
|
333,415
|
|
|
|
278,953
|
|
|
|
207,928
|
|
|
|
244,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs
during period to average
loans outstanding
|
|
|
.60
|
%
|
|
|
.38
|
%
|
|
|
.08
|
%
|
|
|
.41
|
%
|
|
|
6.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Commercial,
financial and
agricultural
|
|
$
|
3,819
|
|
|
|
89.29
|
%
|
|
$
|
3,808
|
|
|
|
91.85
|
%
|
|
$
|
3,600
|
|
|
|
71.91
|
%
|
|
$
|
1,492
|
|
|
|
24.42
|
%
|
|
$
|
1,419
|
|
|
|
20.40
|
%
|
|
|
|
Real estate —
construction
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
1-4 family
residential
real estate
|
|
|
27
|
|
|
|
.63
|
|
|
|
22
|
|
|
|
.53
|
%
|
|
|
23
|
|
|
|
.46
|
%
|
|
|
17
|
|
|
|
.28
|
%
|
|
|
97
|
|
|
|
1.40
|
%
|
|
|
|
Consumer
|
|
|
40
|
|
|
|
.94
|
|
|
|
20
|
|
|
|
.48
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Specific reserve on
loans sold
subsequent
to year end
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Unallocated
and general reserves
|
|
|
391
|
|
|
|
9.14
|
%
|
|
|
296
|
|
|
|
7.14
|
%
|
|
|
1,383
|
|
|
|
27.63
|
%
|
|
|
4,599
|
|
|
|
75.30
|
%
|
|
|
5,450
|
|
|
|
78.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
4,277
|
|
|
|
100.00
|
%
|
|
$
|
4,146
|
|
|
|
100.00
|
%
|
|
$
|
5,006
|
|
|
|
100.00
|
%
|
|
$
|
6,108
|
|
|
|
100.0
|
%
|
|
$
|
6,966
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
V. Deposits
Deposit
information is contained in Note 8 to the Corporation’s Consolidated Financial Statements
contained in the Corporation’s 2008 Annual Report to Shareholders, and is incorporated herein by
reference.
VI. Return on Equity and Assets
Selected financial data of the Corporation is contained in the Corporation’s 2008 Annual Report to
Shareholders under the caption “Selected Financial Data,” and is incorporated herein by reference.
See Item 6 of this Form 10-K, “Selected Financial Data”
VII. Financial Instruments with Off-Balance Sheet Risk
Information
relative to commitments, contingencies, and credit risk are discussed
in Note 18 to the
Corporation’s Consolidated Financial Statements contained in the Corporation’s 2008 Annual Report
to Shareholders and is incorporated herein by reference.
13
ITEM 2. PROPERTIES
The Corporation’s headquarters are located at 130 South Cedar Street, Manistique, Michigan 49854.
The headquarters location is owned by the Corporation and not subject to any mortgage.
Information regarding specific branch locations is contained in the Corporation’s 2008 Annual
Report to Shareholders, and is incorporated herein by reference.
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 13 branch locations, 11 are owned and 2 are leased.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings is contained in Note 18 of the Corporation’s 2008 Annual
Report to Shareholders, and is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
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
|
|
|
58
|
|
|
Chairman and Chief Executive Officer
|
|
|
|
Kelly W. George
|
|
|
41
|
|
|
President
|
|
|
|
Ernie R. Krueger
|
|
|
59
|
|
|
Executive Vice President/Chief Financial Officer
|
Additional information for the executive officers of the registrant is included in the
Corporation’s Proxy Statement to its 2009 Annual Meeting of Shareholders under the caption
“Information about Directors and Executive Officers.”
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCK HOLDER MATTERS, AND ISSUER PURCHASES
OF EQUITY
Market information pertaining to the Corporation’s common stock is contained under the caption
“Market Information” in the Corporation’s 2008 Annual Report to Shareholders, and is incorporated
herein by reference.
The holders of the Corporation’s common stock are entitled to dividends when, and if declared by
the Board of Directors of the Corporation out of funds legally available for that purpose. In
determining dividends, the Board of Directors considers the earnings, capital requirements and
financial condition of the Corporation and its subsidiary bank, along with other relevant factors.
The Corporation’s principal source of funds for cash dividends is the dividends paid by the Bank.
14
The ability of the Corporation and the Bank to pay dividends is subject to regulatory restrictions
and requirements. The Bank currently has a negative retained earnings position which precludes
payment of dividends. The Bank, in order to pay dividends, would need to seek regulatory approval
for the restatement of its equity to eliminate the negative retained earnings position. There were
no dividends declared or paid in 2006, 2007 and 2008. There were no sales of unregistered
securities in 2008, nor were there any repurchases of the Corporation’s common stock in the fourth
quarter of 2008.
Additional information regarding the Corporation’s common stock is contained in the Corporation’s
2008 Annual Report under the Caption “Market Information.”
Information regarding securities authorized for issuance under equity compensation plans may be
found under Item 12 of this report.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data of the Corporation is contained in the Corporation’s 2008 Annual Report to
Shareholders, under the caption “Selected Financial Data,” and is incorporated herein by reference.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Incorporated by reference to the Management’s Discussion and Analysis of Financial Condition and
Results of Operations in the Corporation’s 2008 Annual Report to Shareholders
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to the Management’s Discussion and Analysis of Financial Condition and
Results of Operations in the Corporation’s 2008 Annual Report to Shareholders
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference to the Corporation’s Consolidated Financial Statements for the years
ended December 31, 2008, 2007, and 2006, in the Corporation’s 2008 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change in the Corporation’s independent public accountants since 2002. The
change was reported on Form 8-Ks filed during 2002.
15
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 the design and operation of the Corporation’s
disclosure controls and procedures as defined under Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures
were 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 Corporation’s management,
including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the Corporation’s internal control over financial reporting that occurred
during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely
to materially affect, the Corporation’s internal control over financial reporting.
16
Report on Management’s Assessment of Internal Control Over Financial Reporting
Mackinac Financial Corporation is responsible for the preparation, integrity, and fair presentation
of the consolidated financial statements included in this annual report. The consolidated
financial statements and notes included in this annual report have been prepared in conformity with
generally accepted accounting principles in the United States and necessarily include some amounts
that are based on management’s best estimates and judgments.
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.
Management assessed the Corporation’s system of internal control over financial reporting as of
December 31, 2008, in relation to criteria for the effective internal control over financial
reporting as described in “Internal Control — Integrated Framework,” issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment, management
concludes that, as of December 31, 2008, its system of internal control over financial reporting is
effective and meets the criteria of the “Internal Control — Integrated Framework.”
This annual report does not include an attestation report of the Corporation’s registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by the Corporation’s registered public accounting firm pursuant to
temporary rules of the SEC that permit the Corporation to provide only management’s report in this
annual report.
|
|
|
|
|
|
|
|
|
/s/ Paul D. Tobias
|
|
|
|
/s/ Ernie R. Krueger
|
|
|
|
|
|
|
|
Ernie R. Krueger
|
|
|
|
Chairman and Chief Executive Officer
|
|
|
|
Executive Vice President and
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
Manistique, Michigan
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
|
|
|
|
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
The information set forth under the captions “Information About Directors and Nominees” and
“Section 16(a) Beneficial Ownership Reporting Compliance” in the Corporation’s definitive
Proxy Statement for its May 27, 2009, Annual Meeting of Shareholders (the “Proxy Statement”), a
copy of which will be filed with the SEC prior to the meeting date, is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to compensation of the Corporation’s executive officers and directors is
contained under the captions “Remuneration of Directors” and “Executive Compensation,” in the
Corporation’s Proxy Statement for its 2009 Annual Meeting of Shareholders and is incorporated
herein by 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 “Beneficial Ownership of Common Stock” in the Corporation’s Proxy Statement for
its 2009 Annual Meeting of Shareholders and is incorporated herein by reference.
The following table provides information as of December 31, 2008, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
|
|
|
|
|
remaining available
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
for future issuance
|
|
|
|
|
Number of securities to
|
|
|
exercise price of
|
|
|
under equity
|
|
|
|
|
be issued upon exercise
|
|
|
outstanding
|
|
|
compensation plans
|
|
|
|
|
of outstanding options,
|
|
|
options, warrants
|
|
|
(excluding securities
|
|
|
Plan Category
|
|
warrants and rights
|
|
|
and rights
|
|
|
reflected in column (a))
|
|
|
|
|
( a )
|
|
|
( b )
|
|
|
( c )
|
|
|
Equity
compensation plans
approved by
security holders
|
|
|
446,237
|
|
|
$
|
12.14
|
|
|
|
18,488
|
|
|
|
|
Equity
compensation plans
not approved by
security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
446,237
|
|
|
$
|
12.14
|
|
|
|
18,488
|
|
|
|
|
|
|
|
|
|
|
|
|
18
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information relating to certain relationships and related transactions is contained under the
caption “Indebtedness of and Transactions with Management” in the Corporation’s Proxy Statement and
is incorporated herein by reference.
Additional information is contained under the caption, “Information about Directors and Executive
Officers” within the Corporation’s Proxy Statement for its 2009 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information relating to principal accountant fees and services is contained under the caption
“Principal Accountant Fees and Services” in the Corporation’s Proxy Statement for its 2009 Annual
Meeting of Shareholders and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(commission file number for all incorporated documents: 0-20167)
|
|
(a)
|
|
The following documents are filed as a part of this report.
|
|
|
1.
|
|
Consolidated Financial Statements (contained in the Annual Report attached hereto as Exhibit 13 and
incorporated herein by reference)
|
|
|
(i)
|
|
Report on Independent Registered Public Accounting Firm
|
|
|
|
|
(ii)
|
|
Consolidated Balance Sheets as of December 31, 2008, and 2007
|
|
|
|
|
(iii)
|
|
Consolidated Statements of Operations for the years ended December 31, 2008, 2007, and
2006
|
|
|
|
|
(iv)
|
|
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December
31, 2008, 2007, and 2006
|
|
|
|
|
(v)
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007, and
2006
|
|
|
|
|
(vi)
|
|
Notes to Consolidated Financial Statements
|
|
|
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.
|
19
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Document
|
|
|
|
3.1*
|
|
Articles of Incorporation and all amendments (most
recent amendment filed December 14, 2004)
|
|
|
|
|
|
3.2(a)*
|
|
Amended and Restated Bylaws as revised June 27, 2001
|
|
|
|
|
|
3.2(b)*
|
|
Amendment to the Amended and Restated Bylaws
adopted August 9, 2004
|
|
|
|
|
|
3.2(c)*
|
|
Second Amendment to the Amended and Restated Bylaws
adopted December 2007
|
|
|
|
|
|
4.1
|
|
Rights Agreement dated as of June 21, 2000 between
the Corporation and Registrar and Transfer Company,
as Rights Agent (incorporated by reference to
Exhibit 4 to the Corporation’s Form 8-K filed July
31, 2000)
|
|
|
|
|
|
4.2
|
|
Amendment to Rights Agreement dated August 9, 2004
(incorporated by reference to Exhibit 10.1 to the
Corporation’s Form 8-K filed August 13, 2004)
|
|
|
|
|
|
4.3
|
|
Amendment No. 2 to Rights Agreement dated December
2004 ( incorporated by reference to Exhibit 4.1 to
the Corporation’s Form 8-K filed December 16, 2004)
|
|
|
|
|
|
10.1
|
|
Stock Option Agreement dated June 10, 2005, between
Kelly W. George and Mackinac Financial Corporation
(incorporated by reference to Exhibit 10.2 to the
Corporation’s Form 10-K filed March 31, 2006**
|
|
|
|
|
|
10.2
|
|
Stock Option Agreement dated June 10, 2005, between
Ernie R. Krueger and Mackinac Financial Corporation
(incorporated by reference to Exhibit 10.3 to the
Corporation’s Form 10-K filed March 31, 2006**
|
|
|
|
|
|
10.3
|
|
Stock Option Agreement dated September 20, 2005,
between Walter J. Aspatore and Mackinac Financial
Corporation (incorporated by reference to Exhibit
10.4 to the Corporation’s Form 10-K filed March 31,
2006**
|
|
|
|
|
|
10.4
|
|
Stock Option Agreement dated September 20, 2005,
between Dennis B. Bittner and Mackinac Financial
Corporation (incorporated by reference to Exhibit
10.5 to the Corporation’s Form 10-K filed March 31,
2006**
|
20
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Document
|
|
|
|
|
|
10.5
|
|
Stock Option Agreement dated September 20, 2005,
between Randolph C. Paschke and Mackinac Financial
Corporation (incorporated by reference to Exhibit
10.6 to the Corporation’s Form 10-K filed March 31,
2006**
|
|
|
|
|
|
10.6
|
|
Stock Option Agreement dated September 20, 2005,
between Robert H. Orley and Mackinac Financial
Corporation (incorporated by reference to Exhibit
10.7 to the Corporation’s Form 10-K filed March 31,
2006**
|
|
|
|
|
|
10.7
|
|
Form of Stock Option Agreement for Paul D. Tobias
and the Corporation (incorporated by reference to
Exhibit 10.2 to the Corporation’s Form 8-K filed
December 16, 2004)**
|
|
|
|
|
|
10.8
|
|
Form of Indemnity Agreement for the Corporation’s
Directors (incorporated by reference to Exhibit
10.3 to the Corporation’s Form 8-K filed December
16, 2004)
|
|
|
|
|
|
10.9
|
|
Form of Registration Rights Agreement (incorporated
by reference to Exhibit 10.4 to the Corporation’s
Form 8-K filed December 16, 2004)
|
|
|
|
|
|
10.10
|
|
Deferred Compensation, Deferred Stock, and Current
Stock Purchase Plan for the Corporation’s
nonemployee directors (incorporated by reference to
Exhibit 10.2 of the Corporation’s Annual Report on
Form 10-K filed March 28, 2000)**
|
|
|
|
|
|
10.11
|
|
North Country Financial Corporation Stock
Compensation Plan (incorporated by reference to
Exhibit 10.3 of the Corporation’s Annual Report on
Form 10-K for the fiscal year ended December 31,
1999 and filed March 28, 2000**
|
|
|
|
|
|
10.12
|
|
North Country Financial Corporation 2000 Stock
Incentive Plan (incorporated by reference to
Exhibit 10.1 of the Corporation’s Form 10-Q filed
May 12, 2000)**
|
|
|
|
|
|
10.13
|
|
North Country Financial Corporation Supplemental
Executive Retirement Plan (incorporated by
reference to Exhibit 10.6 of the Corporation’s Form
10-Q filed November 5, 1999 for the quarter ended
September 30, 1999)**
|
|
|
|
|
|
10.14
|
|
Amended and Restated Employment Agreement dated
December 21, 2006, between the Corporation and
Kelly W. George (incorporated by reference to
Exhibit 10.1 to the Corporation’s Form 8-K filed
January 4, 2007)**
|
|
|
|
|
|
10.15
|
|
Amended and Restated Employment Agreement dated
December 21, 2006, between the Corporation and
Ernie R. Krueger (incorporated by reference to
Exhibit 10.1 to the Corporation’s Form 8-K filed
February 6, 2007)**
|
21
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Document
|
|
|
|
|
|
10.16
|
|
Stock Option Agreement dated December 15, 2006,
between the Corporation and L. Brooks Patterson
(incorporated by reference to Exhibit 10.30 of the
Corporation’s Form 10-K filed March 30,2007)**
|
|
|
|
|
|
10.17
|
|
Stock Option Agreement dated December 15, 2006,
between the Corporation and Kelly W. George
(incorporated by reference to Exhibit 10.31 of the
Corporation’s Form 10-K filed March 30, 2007)**
|
|
|
|
|
|
10.18
|
|
Stock Option Agreement dated December 15, 2006
between the Corporation and Ernie R. Krueger
(incorporated by reference to Exhibit 10.32 of the
Corporation’s Form 10-K filed March 30, 2007)**
|
|
|
|
|
|
10.19
|
|
Separation Agreement dated June 19, 2008, between
the Corporation and Eliot Stark (incorporated by
reference to Exhibit 5.1 to the Corporation’s Form
8-K filed July 3, 2008)**
|
|
|
|
|
|
11
|
|
(not applicable)
|
|
|
|
|
|
12
|
|
(not applicable)
|
|
|
|
|
|
13
|
|
2008 Annual Report to Shareholders. This exhibit,
except for those portions expressly incorporated by
reference in this filing, is furnished for the
information of the Securities and Exchange
Commission and is not deemed “filed” as part of
this filing
|
|
|
|
|
|
14
|
|
(not applicable)
|
|
|
|
|
|
16
|
|
(not applicable)
|
|
|
|
|
|
18
|
|
(not applicable)
|
|
|
|
|
|
21
|
|
Subsidiaries of the Corporation
|
|
|
|
|
|
22
|
|
(not applicable)
|
|
|
|
|
|
23.1
|
|
Consent of Independent Public Accountants — Plante
& Moran, PLLC
|
|
|
|
|
|
24
|
|
(not applicable)
|
|
|
|
|
|
31
|
|
Rule 13(a) — 14(a) Certifications
|
|
|
|
|
|
32.1
|
|
Section 1350 Chief Executive Officer Certification
|
22
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Document
|
|
|
|
|
|
32.2
|
|
Section 1350 Chief Financial Officer Certification
|
|
|
|
|
|
33
|
|
(not applicable)
|
|
|
|
|
|
34
|
|
(not applicable)
|
|
|
|
|
|
35
|
|
(not applicable)
|
|
|
|
|
|
99
|
|
(not applicable)
|
|
|
|
|
|
100
|
|
(not applicable)
|
|
|
|
|
|
*
|
|
filed herewith
|
|
|
|
**
|
|
management compensatory plan, contract, or arrangement
|
23
SIGNATURES
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 31, 2009.
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 31, 2009, 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 Ernie R. Krueger, 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
|
|
/s/ Ernie R. Krueger
|
|
|
|
|
|
Paul D. Tobias — Chairman,
|
|
Executive Vice President/Chief
Financial Officer
|
|
Chief Executive Officer & Director
|
|
(principal financial officer)
|
|
(principal executive officer)
|
|
|
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/s/ Walter J. Aspatore
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/s/ Joseph D. Garea
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Walter J. Aspatore — Director
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Joseph D. Garea — Director
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/s/ Robert E. Mahaney
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/s/ Robert H. Orley
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Robert E. Mahaney — Director
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Robert H. Orley — Director
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Officer
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/s/ Dennis B. Bittner
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/s/ L. Brooks Patterson
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Dennis B. Bittner — Director
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L. Brooks Patterson — Director
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/s/ Kelly W. George
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/s/ Randolph C. Paschke
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Kelly W. George — President & Director
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Randolph C. Paschke — Director
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24
Exhibit 3.1 —Articles of Incorporation and all amendments
C & S-101
(Profit Domestic Corporation)
ARTICLES OF INCORPORATION
These
Articles of Incorporation are signed by the incorporator(s) for the purpose of forming a
profit corporation pursuant to the provisions of Act 284, Public Acts
of 1972, as follows:
ARTICLE I
The name of the corporation is FIRST MANISTIQUE CORPORATION
ARTICLE II.
The
purpose or purposes for which the corporation is organized is to
engage in any activity within
the purposes for which corporations may be organized under the Business Corporation Act of
Michigan, as amended from time to time, and including without limitation the power to act as a bank
holding company as permitted by the Federal Bank Holding Company Act
of 1956, as amended, or hereafter
supplemented or amended.
ARTICLE
III.
(Use the
following if the shares are to consist of
one class
only.)
The total authorized capital stock is:
(1) Common shares 150,000 Par value $1.00 per share
No. of shares
OR (2) Common shares
without par value.
No. of shares
(3) A statement of all or any of the relative rights, preferences and limitations of the
shares is as follows:
Shareholders shall have no preemptive right to subscribe for any additional shares of capital stock
or other obligations convertible into shares to be issued by the corporation.
ARTICLE IV.
(Use the following only if the shares are to be divided into two or more classes.)
The total authorized capital stock is:
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{
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Preferred shs.
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Par value
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$
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}
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(1)
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{
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}
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per share
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{
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Common shs.
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Par value
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$
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}
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{
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Preferred
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}
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and/or shs. of (2)
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{
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}
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no par value.
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{
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Common
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}
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(3)
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A statement of all or any of the relative rights, preferences and limitations of the shares of each class is as follows:
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ARTICLE V.
The address of the initial registered office is:
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900 American Bank [ILLEGIBLE] Trust Bldg., Lansing
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,
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Michigan
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48933
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(No. and street)
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(Town or City)
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(Zip Code)
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The mailing address of the initial registered office is (need not be completed unless different
from the above address):
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,
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Michigan
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(No. and street)
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(Town or City)
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(Zip Code)
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The name of the initial resident agent at the registered office is:
David W. McKeague
ARTICLE VI.
The name(s) and address(es) of the incorporator(s) are as follows:
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Name
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Residence or Business Address
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David W. McKeague
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900 American Bank & Trust Bldg.
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Lansing, Michigan 48933
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ARTICLE VII.
OPTIONAL (Delete Article VII if not applicable.)
When a compromise or arrangement or a plan of reorganization of this corporation is proposed
between this corporation and its creditors or any class of them or between this corporation and its
shareholders o. any class of them, a court of equity jurisdiction within the state, on application
of this corporation or of a creditor or shareholder thereof, or on application of a receiver
appointed for the corporation, may order a meeting of the creditors
or class of creditors or of the
shareholders or class of shareholders to be affected by the proposed compromise or arrangement or
reorganization, to be summoned in such manner as the court directs. If a majority in number
representing 3/4 in value of the creditors or class of creditors, or of the shareholders or class
of shareholders to be affected by the proposed compromise or arrangement or a reorganization, agree
to a compromise or arrangement or a reorganization of this corporation as a consequence of the
compromise or arrangement, the compromise or arrangement and the reorganization, if sanctioned by
the court to which the application has been made, shall be binding on all the creditors or class of
creditors, or on all the shareholders or class of shareholders and also on this
corporation.
ARTICLE VIII.
(Here insert any desired additional provisions authorized by the Act)
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I (We), the incorporator(s), sign my (our) name(s) this 29th day of November, 1974
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/s/ David W. McKeague
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David W. McKeague
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(See Instructions on Reverse Side)
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(Please do not write in spaces below – for Department use)
MICHIGAN DEPARTMENT OF COMMERCE – CORPORATION AND SECURITIES BUREAU
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Date Received
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FILED
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DEC – 3 1974
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Michigan Department of Commerce
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DEC – 6 1974
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DIRECTOR
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C & S-101
INFORMATION AND INSTRUCTIONS
Articles of Incorporation — Profit Domestic Corporations
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1.
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Article I-The corporate name of a domestic profit corporation is required to contain one of
the following words or abbreviations: “Corporation”,
“Company”, “Incorporated”, “Limited”,
“Corp.”, “Co.”, “Inc.” or “Ltd.”
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2.
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Article II may state, in general terms, the character of the particular [ILLEGIBLE] to be carried
on. Under section 202(b) of the law. It is a sufficient compliance to
state substantially, alone
or with specifically enumerated purposes, that the corporation may engage in any activity within
the purposes for which corporations may be organized under the Business Corporation Act. The
law requires, however, that educational corporations must state their specific purposes.
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3.
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Articles III and IV — The law requires the
incorporations of a domestic corporation having shares without par value to submit in writing the amount of consideration proposed to be
received for each share which shall be allocated to stated capital.
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4.
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Article VI - The law requires one or more incorporators.
The addresses should include a street
number and name (or other designation). In addition to the name of the city and state.
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5.
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The [ILLEGIBLE] of the corporation should be stated in the Articles only if the duration is not
perpetual.
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6.
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The Articles must be signed in [ILLEGIBLE] by each incorporator. The names of the incorporators as set
out in Article VI should correspond with the signatures.
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7.
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One original copy of the Articles is required. A true copy will be prepared by the Corporation
and Securities Bureau and returned to the person submitting the Articles for filing.
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8.
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An effective date, not later than 90 days subsequent to the date of filing, may be stated in
the Articles of Incorporation.
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9.
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FEES:
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Filing Fee
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$
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10.00
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Franchise
Fee — % will on each dollar of authorized capital stock,
with a minimum franchise fee of
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$
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25.00
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(Make fee
payable to State of Michigan)
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10.
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Mail Articles of Incorporation and fees to:
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Michigan Department of Commerce
Corporation and Securities Bureau
Corporation Division
P.O. Drawer C
Lansing Michigan 48904
C&S - 113
(Rev. 1/74)
(For use by Domestic and Foreign Corporations)
CERTIFICATE OF CHANGE OF REGISTERED OFFICE
AND/OR CHANGE OF RESIDENT AGENT
The undersigned corporation, in accordance with the provisions of Section 242 of Act 284, public
Acts of 1972, as amended, does here certify as follows:
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1.
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The name of the corporation is
FIRST MANISTIQUE CORPORATION
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2.
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The address of its former registered office is: (See instructions on reverse side)
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900 American
Bank & Trust Bldg., Lansing
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,
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Michigan
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48933
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(No. and Street) (Town or City)
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(Zip Code)
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The mailing address of its former registered office is: (Need not be completed unless
different from the above address)
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,
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Michigan
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(No. and Street or P. O. Box) (Town of City)
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(Zip Code)
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3.
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(The following is to be completed if the address of the registered offices is
changed.)
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The address of the registered office is changed to:
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130 S. Cedar St.,
Manistique
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Michigan
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49854
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(No. and Street
)
(Town or City)
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(Zip Code)
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The mailing address of the registered office is changed to: (Need not be completed
unless different from the above address)
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P O Box 31
Manistique
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Michigan
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49854
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(No. and Street or P.O. Box)
(Town or City)
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(Zip Code)
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4.
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The name of the former resident agent is
David M. Mckeague
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5.
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(The following is to be completed if the resident agent is changed.)
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The name of successor resident agent is
Gerald G. Graphos
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6.
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The Corporation further states that the address of its registered
office and the address of the business office of its resident agent, as changed,
are identical.
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7.
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The changes designated above were authorized by resolution duly
adopted by its board of directors.
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Signed this 23
rd
day of May, 1975
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FIRST MANISTIQUE CORPORATION
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(Name of Corporation)
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By:
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/s/ Fred H. Hahne
(Signature of President, Vice-President, Chairman or Vice-Chairman)
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Fred H. Hahne, President
(Type of Print Name and Title)
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(See Instructions on Reverse Side)
C&S - 113
(Please do not write in spaces below — for Department use)
MICHIGAN DEPARTMENT OF COMMERCE – CORPORATION AND SECURITIES BUREAU
Date Received
20 1975
FILED
Michigan Department of Commerce
Jun - 2 1975
DIRECTOR
C & S-113
(Rev. 1/74)
INFORMATION AND INSTRUCTIONS
Certificate of Change of Registered Office and/or Change of Resident Agent
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1.
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Insert the present address of the registered office in part 2 of the certificate.
This address must agree with the address of the registered office as designated in the
articles of incorporation or subsequent corporate certificate reflecting a change as
filed with the Corporation and Securities Bureau.
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2.
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The mailing address of the registered office should be the same address as the
registered office unless a post office box is designated as the mailing address.
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3.
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Insert the name of the present resident agent in part 4 of the certificate. This
name must agree with the name of the resident agent as designated in the articles of
incorporation or subsequent corporate certificate reflecting a change as filed with the
Corporation and Securities Bureau.
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4.
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The Certificate is required to be signed in ink by the chairman or vice-chairman
of the board,
or the president or a vice-president of the corporation.
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5.
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One original copy is required. A true copy will be prepared by the Corporation and
Securities Bureau and returned to the person submitting the Certificate for filing.
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6.
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Filing fee $5.00
(Make fee payable to State of Michigan)
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7.
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Mail form and fee to:
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Michigan Department of Commerce
Corporation and Securities Bureau
Corporation Division
P. O. Drawer C
Lansing, Michigan 48904
(for Use by Domestic Corporations)
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
The undersigned corporation executes the following Certificate of Amendment to its Articles of
Incorporation pursuant to the provisions of Section 631, Act 284, Public Acts of 1972, as amended:
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1.
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The name of the corporation is FIRST MANISTIQUE CORPORATION
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2.
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The location of the registered office is
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130 S. Cedar
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Manistique
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,
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Michigan
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49854
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(No. and Street)
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(Town or City)
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(Zip Code)
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3.
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The following amendment to the Articles of Incorporation was
adopted on the
20th day of August, l975: (Check one of the following)
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þ
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[ILLEGIBLE]
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o
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[ILLEGIBLE]
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o
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[ILLEGIBLE]
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Resolved, than Article III of the Articles of Incorporation be amended to read as follows:
(Any article being amended is required to be set forth in its entirety.)
The total authorized capital stock of the Corporation is:
Common shares, 50,000, par value $10 per share.
A statement of all or any of the relative rights, preferences and limitations of the shares is as follows:
Shareholders shall have no preemptive right to subscribe for any additional shares of capital stock or other obligations convertible into shares to be
issued by the corporation.
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FIRST MANISTIQUE CORPORATION
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(Corporate Name)
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BY
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/s/ Fred H. Hahne
(Signature of President, Vice-President, Chairman or Vice-Chairman)
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Fred H. Hahne, President
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(Type or Print Names and Title)
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Signed this 20th day of August, 1975
C&S-111 (Rev. 2.74)
(See Instructions on Reverse Side)
(Please do not write in spaces below — for Department use)
MICHIGAN DEPARTMENT OF COMMERCE — CORPORATION AND SECURITIES BUREAU
Date Received
AUG 28 1975
FILED
Michigan Department of Commerce
SEP – 3 1975
DIRECTOR
C & S-111 (Rev. 2.74)
INFORMATION AND INSTRUCTIONS
Certificate of Amendment - Domestic Corporations
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1.
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This form may be used by both profit and non-profit corporations. In case of a non-profit
corporation organized on a non-stock basis. “shareholders” shall be construed to be
synonymous with “members”.
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2.
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An effective date, not later show 90 days subsequent to the date of filing may be
stated in the Certificate of Amendment.
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3.
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The Certificate of Amendment is required to be signed in ink by the chairman or
vice-chairman of the board of directors or the president or a vice-president of the
corporation.
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4.
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One original copy is required. A true copy will be prepared by the Corporation and
Securities Bureau and returned to the person submitting the Certificate of Amendment
for filing.
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5.
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FEES: Filing Fee $10.00
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Franchise Fee
(payable only in case of increase in authorized capital stock) -
1
/
2
mill on each dollar of increase over
highest previous authorized capital stock
(Make
fee payable to State of Michigan)
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6.
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Mail form and fee to:
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Michigan Department of Commerce
Corporation and Securities Bureau
Corporation Division
P. O. Drawer C
Lansing, Michigan 48904
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C&S-515 (Rev. 1-84)
MICHIGAN DEPARTMENT OF COMMERCE — CORPORATION AND SECURITIES BUREAU
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(FOR BUREAU USE ONLY)
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Date Received
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FILED
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APR 29 1986
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APR 29 1986
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Administrator
MICHIGAN DEPARTMENT OF COMMERCE
Corporation & Securities Bureau
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CERTIFICATE
OF AMENDMENT TO THE ARTICLES OF INCORPORATION
For use by Domestic Corporations
(Please read instructions and Paperwork Reduction Act notice on last page)
Pursuant to the provisions of Act 284, Public Acts of 1972, as amended (profit corporations),
or Act 162, Public Acts of 1982 (nonprofit corporations), the undersigned corporation executes the
following Certificate:
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1.
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The present name of the corporation is: First Manistique Corporation
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2.
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The corporation identification number (CID) assigned by the Bureau is:
063-316
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3.
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The location of its registered office is:
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130 S. Cedar, P O BOX 31
(Street Address)
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Manistique
(City)
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,
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Michigan
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49854
(Zip Code)
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4.
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Article III of the Articles of Incorporation is hereby amended to read
as follows:
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The total authorized
capital stock of the Corporation is:
Common Shares 100,000
Par Value $5 per share
A statement of all or any of the relative rights, preferences, and limitations of the shares is as
follows:
Shareholders shall have no preemptive right to subscribe for any additional shares of capital stock
or other obligations convertible into shares to be issued by the Corporation.
|
5.
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COMPLETE SECTION (a) IF THE AMENDMENT WAS ADOPTED BY THE UNANIMOUS CONSENT OF THE
INCORPORATOR(S)
BEFORE THE
FIRST MEETING OF THE BOARD OF DIRECTORS OR TRUSTEES;
OTHERWISE, COMPLETE SECTION (b)
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a.
o
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The foregoing amendment to the Articles of Incorporation was duly adopted on the
day
of
,
19
,
in accordance with the provisions of the Act by the unanimous
consent of the incorporator(s) before the first meeting of the board of directors or trustees.
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Signed this
day of
, 19
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(Signatures of
all
incorporators; type or print name under each signature)
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b.
þ
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The foregoing amendment to the Articles of Incorporation was duly adopted on the 15th
day of April,
1986.
The amendment: (check one of the following)
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þ
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was duly adopted in accordance with Section 611(2) of the Act by the vote of the shareholders
if a profit corporation, or by the vote of the shareholders or members if a nonprofit corporation,
or by the vote of the directors if a nonprofit corporation organized on a nonstock directorship
basis. The necessary votes were cast in favor of the amendment.
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o
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was duly adopted by the written consent of
all
the directors pursuant to Section 525 of the
Act and the corporation is a nonprofit corporation organized on a nonstock directorship basis.
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o
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was duly adopted by the written consent of the shareholders
or members having not less than
the minimum number of votes required by statute in accordance with Section 407(1) and (2) of the
Act. Written notice to shareholders or members who have not consented in writing has been given.
(Note: Written consent by less than all of the shareholders or members is permitted only if such
provision appears in the Articles of Incorporation.)
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|
|
o
|
|
was duly adopted by the written consent of
all
the shareholders or members entitled to vote in
accordance with Section 407(3) of the Act.
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|
Signed this 2lst day of April, 1986
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By
|
|
/s/ Gerald G. Graphos
Wilson T. Tyler
(Signature)
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|
Gerald G. Graphos, Secretary Wilson
T. Tyler, President
(Type or Print Name and Title)
|
|
|
C&S-515 (Rev. 1-84)
|
|
|
|
|
DOCUMENT WILL BE
RETURNED TO NAME AND MAILING ADDRESS
INDICATED IN THE BOX BELOW.
Include name, street and number
|
|
Name of person or organization
remitting fees:
|
|
(or P.O. box), city, state and ZIP code.
|
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First
National Bank at Manistique
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|
Preparer’s name and business telephone number:
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P. O. Box 369,
Manistique, Mi 49854
|
|
|
|
Att: Gerald G.
Graphos, Secretary
|
|
Gerald G. Graphos, Secretary
(906) 341-2188
|
INFORMATION AND INSTRUCTIONS
|
|
1.
|
|
This form is issued under the authority of Act 284, P.A. of 1972, as amended, and Act 162,
P.A. of 1982. The amendment cannot be filed until this form, or a comparable document, is submitted.
|
|
|
|
|
2.
|
|
Submit one original copy of this document. Upon filing, a microfilm copy will be prepared
for the records of the Corporation and Securities Bureau. The original copy will be returned to the
address appearing in the box above as evidence of filing.
|
|
|
|
|
|
|
Since this document must be microfilmed, it is important that the filing be legible. Documents
with poor black and white contrast, or otherwise illegible, will be rejected.
|
|
|
|
|
3.
|
|
This document is to be used pursuant to the provisions of section 631 of the Act for the
purpose of amending the articles of incorporation of a domestic profit or nonprofit corporation. A
nonprofit corporation is one incorporated to carry out any lawful purpose or purposes not involving
pecuniary profit or gain for its directors, officers, shareholders, or members. A nonprofit
corporation organized on a nonstock directorship basis, as authorized by Section 302 of the Act,
may or may not have members, but if it has members, the members are not entitled to vote.
|
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|
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|
4.
|
|
Item 2 — Enter the identification number previously assigned by the Bureau. If this number
is unknown, leave it blank.
|
|
|
|
|
5.
|
|
Item 4 — The entire article being amended must be set forth in its entirety. However, if
the article being amended is divided into separately identifiable sections, only the sections being
amended need be included.
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|
|
|
|
6.
|
|
This document is effective on the date approved and filed by the Bureau. A later effective
date, no more than 90 days after the date of delivery, may be stated.
|
|
|
|
|
7.
|
|
If the amendment is adopted before the first meeting of the board of directors, item 5(a)
must be completed and signed in ink by all of the incorporators. If the amendment is otherwise
adopted, item 5(b) must be completed and signed in ink by the president,
vice-president,
chairperson, or vice-chairperson of the corporation.
|
|
|
|
|
8.
|
|
FEES: Filing fee (Make remittance payable to State of Michigan) $10.00
|
Franchise fee for
profit corporations (payable only if authorized capital stock has
increased) — ½ mill (.0005) on
each dollar of increase over highest previous authorized capital stock.
Michigan Department of Commerce
Corporation and Securities Bureau
Corporation Division
P.O. Box 30054
Lansing, MI 48909
Telephone: (517) 373-0493
[ILLEGIBLE]
884E#4809
0602 ORG&FI $ 10.00
884E#4810 0602
ORG&FI $1000.00
MICHIGAN DEPARTMENT OF
COMMERCE — CORPORATION AND SECURITIES BUREAU
|
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|
|
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|
(FOR BUREAU USE ONLY)
|
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|
|
Date Received
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|
FILED
|
|
MAY 16 1988
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|
JUN 1 1988
|
|
JUN 1 1988
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|
|
Administrator
MICHIGAN DEPARTMENT OF COMMERCE
Corporation & Securities Bureau
|
|
|
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
For use by Domestic Corporations
(Please read instructions and Paperwork Reduction Act notice on last page)
Pursuant to the
provisions of Act 284. Public Acts of 1972, as amended (profit corporations), or
Act 162. Public Acts of 1982, as amended (nonprofit corporations), the undersigned corporation
executes the following Certificate:
|
1.
|
|
The present name of the corporation is: First Manistique Corporation
|
|
|
|
2.
|
|
The corporation identification number (CID) assigned by
the Bureau is: 063 — 316
|
|
|
|
3.
|
|
The location of its registered office is:
|
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|
|
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|
|
130 S. Cedar St., P. O. Box 31,
(Street Address)
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|
Manistique
(City)
|
,
|
|
Michigan
|
|
49854
(ZIP Code)
|
|
|
|
4.
|
|
Article III of the Articles of Incorporation is hereby amended to read as follows:
|
The total authorized capital stock of the Corporation is:
Common Shares: 500,000 Par Value per share: $5.00
A statement of all
or any of the relative rights, preferences, and limitations of the shares is as
follows:
Shareholders shall have no preemptive right to subscribe for any additional shares of capital stock
or other obligations convertible into shares to be issued by the
Corporation.
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5.
|
|
COMPLETE SECTION (a) IF THE AMENDMENT WAS ADOPTED BY THE UNANIMOUS CONSENT OF THE
INCORPORATOR(S)
BEFORE THE
FIRST MEETING OF THE BOARD OF DIRECTORS OR TRUSTEES;
OTHERWISE, COMPLETE SECTION (b)
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a.
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|
o
|
|
The foregoing amendment to the Articles of Incorporation was duly adopted on the
day of
, 19
, in accordance with the provisions of the Act by the unanimous
consent of the incorporator(s) before the first meeting of the board of directors or
trustees.
|
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Signed this
day
of
, 19
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(Signatures of
all
incorporators; type or print name under each signature)
|
|
b.
|
þ
|
The foregoing amendment to the Articles of Incorporation was duly adopted on the
day of
,
1988. The amendment: (check one of the following)
|
|
|
þ
|
|
was duly adopted in accordance with Section 611(2) of the Act by the vote of
the shareholders if a profit corporation, or by the vote of the shareholders or
members if a nonprofit corporation, or by the vote of the directors if a
nonprofit corporation organized on a nonstock directorship basis. The necessary
votes were cast in favor of the amendment.
|
|
|
|
|
o
|
|
was duly adopted by the written consent of
all
the directors pursuant
to Section 525 of the Act and the corporation is a nonprofit corporation
organized on a nonstock directorship basis.
|
|
|
|
|
o
|
|
was duly adopted by the written consent of the shareholders or members having
not less than the minimum number of votes required by statute in accordance
with Section 407(1) and (2) of the Act. Written notice to shareholders or
members who have not consented in writing has been given. (Note: Written
consent by less than
all
of the shareholders or members is permitted
only if such provision appears in the Articles of Incorporation.)
|
|
|
|
|
o
|
|
was duly adopted by the written consent of all the shareholders or members
entitled to vote in accordance with Section 407(3) of the Act.
|
|
|
|
|
|
|
|
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|
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|
|
Signed this 6th day of May, 1988
|
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|
By
|
|
/s/ Ronald G. Ford
|
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|
|
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|
|
|
|
(Signature)
|
|
|
|
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|
|
|
|
|
|
Ronald G. Ford
(Type or Print Name)
|
|
President
(Type or Print Title)
|
|
|
C&S-515
|
|
|
|
|
DOCUMENT WILL
BE RETURNED TO NAME
AND MAILING ADDRESS INDICATED IN THE
BOX BELOW
. Include
name, street and number (or P.O. box), city, state and ZIP code.
|
|
Name of person or organization
remitting tees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
Preparer’s name and business
telephone number:
|
|
|
|
|
|
Leslie A. Kelly
|
|
|
|
|
|
|
|
Foster, Swift, Collins & Coey, P. C.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313 S. Washington Square
Lansing, MI 48933
|
|
(517) 372-8050
|
|
|
|
|
|
|
|
|
|
|
INFORMATION AND INSTRUCTIONS
|
|
1.
|
|
The amendment cannot be filed until this form, or a comparable document, is submitted.
|
|
|
|
|
2.
|
|
Submit one original copy of this document. Upon filing, a microfilm copy will be
prepared for the records of the Corporation and Securities Bureau. The original copy will
be returned to the address appearing in the box above as evidence of filing.
|
|
|
|
|
|
|
Since this document must be microfilmed, it is important that the filing be legible.
Documents with poor black and white contrast, or otherwise illegible, will be rejected.
|
|
|
|
|
3.
|
|
This document is to be used pursuant to the provisions of section 631 of the Act for
the purpose of amending the articles of incorporation of a domestic profit or nonprofit
corporation. Do not use this form for restated articles. A nonprofit corporation is one
incorporated to carry out any lawful purpose or purposes not involving pecuniary profit or
gain for its directors, officers, shareholders, or members. A nonprofit corporation
organized on a nonstock directorship basis, as authorized by Section 302 of the Act, may or
may not have members, but if it has members, the members are not entitled to vote.
|
|
|
|
|
4.
|
|
Item 2 — Enter the identification number previously assigned by the Bureau. If this
number is unknown, leave it blank.
|
|
|
|
|
5.
|
|
Item 4 — The article being amended must be set forth in its entirety. However, if the
article being amended is divided into separately identifiable sections, only the sections
being amended need be included.
|
|
|
|
|
6.
|
|
This document is effective on the date approved and filed by the Bureau. A later
effective date, no more than 90 days after the date of delivery, may be stated.
|
|
|
|
|
7.
|
|
If the amendment is adopted before the first meeting of the board of directors, item
5(a) must be completed and signed in ink by all of the incorporators listed in Article V of
the Articles of Incorporation. If the amendment is otherwise adopted, item 5(b) must be
completed and signed in ink by the president, vice-president, chairperson, or
vice-chairperson of the corporation.
|
|
|
|
|
8.
|
|
FEES: Filing fee (Make remittance payable to State of
Michigan) $10.00
|
|
|
|
|
Franchise fee for profit corporations (payable only if authorized capital stock has
increased) — 1/2 mill (.0005) on each dollar of increase over highest previous
authorized capital stock.
|
Michigan Department of Commerce
Corporation and Securities Bureau
Corporation Division
P.O. Box 30054
6546 Mercantile Way
Lansing. MI 48909
Telephone: (517) 334-6302
C&S-515 [ILLEGIBLE]
894E#7759 0601 ORG&FI $10.00
MICHIGAN DEPARTMENT OF COMMERCE — CORPORATION AND SECURITIES BUREAU
|
(FOR BUREAU USE ONLY)
|
|
FILED
MAY 31 1989
[ILLEGIBLE]
|
|
|
Date Received
MAY 31 1989
|
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
For use by Domestic Corporations
(Please read information and instructions on last page)
Pursuant
to the provisions of Act 284, Public Acts of 1972 (profit
corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the
undersigned corporation executes the following Certificate:
|
1.
|
|
The present name of the corporation is: First Manistique Corporation
|
|
|
|
2.
|
|
The corporation identification number (CID) assigned by
the Bureau is: 063 — 316
|
|
|
|
3.
|
|
The location of its registered office is:
|
|
|
|
|
|
|
|
|
|
|
|
130 S. Cedar St., P.O. Box 31,
|
|
Manistique
|
,
|
Michigan
|
|
|
49854
|
|
|
|
|
|
|
|
|
|
|
|
|
(Street Address)
|
|
(City)
|
|
|
|
(ZIP Code)
|
|
4.
|
|
Article III of the Articles of Incorporation is hereby amended to read
as follows:
|
The total authorized capital stock of the Corporation is: Common
Shares: 500,000. Par Value per share is: $2.50 A statement of all
or any of the relative rights, preferences, and limitations of the
shares is as follows:
Shareholders shall have no preemptive right to subscribe for any
additional shares of capital stock or other obligations
convertible into shares to be issued by the Corporation.
|
5.
|
|
COMPLETE SECTION (a) IF THE AMENDMENT WAS ADOPTED BY THE UNANIMOUS CONSENT OF THE
INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD OF DIRECTORS OR TRUSTEES; OTHERWISE,
COMPLETE SECTION (b)
|
|
|
|
a.
|
|
o
The foregoing amendment to the Articles of Incorporation
was duly adopted on the
day of
,
19
, in
accordance with the provisions of the Act by the unanimous
consent of the incorporator(s) before the first meeting of the board of directors or trustees.
Signed this
day of
,
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Signatures of
all
incorporators; type or print name under each signature)
|
|
b.
|
|
þ
The foregoing amendment to the Articles of Incorporation was duly adopted on the
18th
day of, April, 1989. The amendment: (check one of the following)
|
|
|
þ
|
|
was duly adopted in accordance with Section 611(2) of the Act by the vote of the
shareholders if a profit corporation, or by the vote of the shareholders or members if a
nonprofit corporation, or by the vote of the directors if a nonprofit corporation organized on
a nonstock directorship basis. The necessary votes were cast in favor of the amendment.
|
|
|
|
|
o
|
|
was duly adopted by the written consent of
all
the directors pursuant to Section 525 of
the Act and the corporation is a nonprofit corporation organized on a nonstock directorship
basis.
|
|
|
|
|
o
|
|
was duly adopted by the written consent of the shareholders or members having not less
than the minimum number of votes required by statute in accordance with Section 407(1) and (2)
of the Act. Written notice to shareholders or members who have not consented in writing has
been given. (Note: Written consent by less than
all
of the shareholders or members is
permitted only if such provision appears in the Articles of Incorporation.)
|
|
|
|
|
o
|
|
was duly adopted by the written consent of all the shareholders or members entitled to
vote in accordance with Section 407(3) of the Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Signed this [ILLEGIBLE]th day of MAY, 1989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By
|
|
/s/ Ronald G. Ford
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Signature)
|
|
|
|
|
|
|
|
|
|
|
|
Ronald G. Ford, President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Type or Print Name)
|
|
(Type or Print Title)
|
|
|
|
|
|
DOCUMENT WILL BE RETURNED
TO NAME AND MAILING ADDRESS INDICATED
IN THE BOX BELOW.
Include name, street and number
|
|
Name of person or organization
remitting fees:
|
|
(or P.O. box). city, state and ZIP code.
|
|
|
Leslie A. Kelly
Foster, Swift, Collins & Smith, P.C.
313 South Washington Square
Lansing, MI 48933
Preparer’s name and business telephone number:
(517) 372-8050
INFORMATION AND INSTRUCTIONS
|
1.
|
|
The amendment cannot be filed until this form, or a comparable document, is submitted.
|
|
|
|
2.
|
|
Submit one original copy of this document. Upon filing, a microfilm copy will be
prepared for the records
of the Corporation and Securities Bureau. The original copy will be returned to the
address appearing in
the box above as evidence of filing.
|
|
|
|
|
|
Since this document must be microfilmed, it is important that the filing be legible.
Documents with poor black and white contrast, or otherwise illegible, will be rejected.
|
|
|
|
3.
|
|
This document is to be used pursuant to the provisions of section 631 of the Act
for the purpose of
amending the articles of incorporation of a domestic profit or nonprofit corporation. Do
not use this form
for restated articles. A nonprofit corporation is one incorporated to carry out any lawful
purpose or
purposes not involving pecuniary profit or gain for its directors, officers, shareholders,
or members. A
nonprofit corporation organized on a nonstock directorship basis, as authorized by Section
302 of the Act,
may or may not have members, but if it has members, the members are not entitled to vote.
|
|
|
|
4.
|
|
Item 2 — Enter the identification number previously assigned by the Bureau. If this
number is unknown,
leave it blank.
|
|
|
|
5.
|
|
Item 4 — The article being amended must be set forth in its entirety. However, if
the article being
amended is divided into separately identifiable sections, only the sections being amended
need be included.
|
|
|
|
6.
|
|
This document is effective on the date approved and filed by the Bureau. A later
effective date, no more
than 90 days after the date of delivery, may be stated.
|
|
|
|
7.
|
|
If the amendment is adopted before the first meeting of the board of directors,
item 5(a) must be
completed and signed in ink by all of the incorporators listed in Article V of the Articles of Incorporation. If
the amendment is otherwise adopted, item 5(b) must be completed and signed in ink by the president,
vice-president, chairperson, or vice-chairperson of the corporation.
|
|
|
|
8.
|
|
FEES: Filing fee (Make remittance payable to State of Michigan) $10.00
|
|
|
|
|
Franchise fee for profit corporations (payable only if authorized capital stock has
increased) —
1
/
2
mill (.0005) on each dollar of increase over highest previous
authorized capital stock.
|
|
|
|
|
Michigan Department of Commerce
|
|
|
|
|
|
|
Corporation and Securities Bureau
|
|
|
|
|
|
|
Corporation Division
|
|
|
|
|
|
|
P.O. Box 30054
|
|
|
|
|
|
|
6546 Mercantile Way
|
|
|
|
|
|
|
Lansing, MI 48909
|
|
|
|
|
|
|
Telephone: (517) 334-6302
|
944E#2999 0502 ORG&FI $2310.00
C&S 515 (Rev. 2.92)
944E#3000 0502 ORG&FI $12.50
MICHIGAN DEPARTMENT OF COMMERCE — CORPORATION AND SECURITIES BUREAU
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Received
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APR 29 1994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Matt G. Hrebec, Esq.
|
|
|
|
|
|
|
|
Foster, Swift, Collins & Smith, P.C.
|
|
|
|
|
|
|
|
|
|
Address
|
|
|
|
|
|
|
|
|
|
|
|
313 S. Washington Square
|
|
|
|
|
|
|
|
|
|
City
|
|
|
|
State
|
|
ZIP Code
|
|
|
|
|
|
Lansing
|
|
Michigan
|
|
48933
|
|
|
|
|
|
(FOR BUREAU USE ONLY)
FILED
APR 29 1994
Administrator
MICHIGAN DEPARTMENT OF COMMERCE
Corporation & Securities Bureau
EFFECTIVE DATE:
DOCUMENT WILL BE RETURNED TO NAME AND ADDRESS INDICATED ABOVE
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
For use by Domestic Corporations
(Please read information and instructions on last page)
Pursuant to the provisions of Act 284, Public Acts of 1972 (profit
corporations), or Act
162,
Public Acts of 1982
(nonprofit corporations), the undersigned corporation executes the following Certificate:
|
1.
|
|
The present name of the corporation is: First Manistique Corporation
|
|
|
|
2.
|
|
The corporation identification number (CID) assigned by the Bureau is: 063—316
|
|
|
|
3.
|
|
The location of its registered office is:
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130 S. Cedar Street, P.O. Box 369, Manistique
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,
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Michigan
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49854
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(Street Address)
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(City)
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(ZIP Code)
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4.
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Articles III and VIII of the Articles of Incorporation is hereby amended to read
as follows:
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See attached Exhibit A
232J.50 CK 9821
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5.
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COMPLETE SECTION (a) IF THE AMENDMENT WAS ADOPTED BY THE UNANIMOUS CONSENT OF THE
INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD OF DIRECTORS OR TRUSTEES; OTHERWISE,
COMPLETE SECTION (b)
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a.
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o
The foregoing amendment to the Articles of
Incorporation was duly adopted on the
day of
, 19
, in accordance with the provisions of the Act by the unanimous consent
of the incorporator(s) before the first meeting of the board of directors or trustees.
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Signed this
day of
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(Signature)
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(Signature)
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(Type or Print Name)
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(Type or Print Name)
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(Signature)
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(Signature)
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(Type or Print Name)
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(Type or Print Name)
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b.
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þ
The foregoing amendment to the Articles of Incorporation was duly
adopted on the 19th day of
April, 1994. The amendment: (check one of the following)
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þ
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was duly adopted in accordance with Section 611(2) of the Act by the vote
of the shareholders if a profit corporation, or by the vote of the shareholders or
members if a nonprofit corporation, or by the vote of the directors if a nonprofit
corporation organized on a nonstock directorship basis. The necessary votes were
cast in favor of the amendment.
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was duly adopted by the written consent of all the directors pursuant to
Section 525 of the Act and the corporation is a nonprofit corporation organized on a
nonstock directorship basis.
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was duly adopted by the written consent of the shareholders or members having
not less than the
minimum number of votes required by statute in accordance with Section 407 (1)
and (2) of the Act if a nonprofit corporation, and Section 407 (1) of the Act if
a profit corporation. Written notice to shareholders or member who have not
consented in writing has been given. (Note: Written consent by less than all of
the shareholders or members is permitted only if such provision appears in the
Articles of Incorporation.)
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was duly adopted by the written consent of all the shareholders or members
entitled to vote in accordance with Section 407 (3) of the Act if a non-profit
corporation, and Section 407 (2) of the Act if a profit corporation.
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Signed this
day of April, 1994
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By
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/s/ Ronald G. Ford
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(Only signature of: President, Vice-President, Chairperson and Vice-Chairperson)
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Ronald G. Ford, President
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(Type or Print Name)
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(Type or Print Title)
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EXHIBIT A
Certificate of Amendment to the Articles of Incorporation
for
First Manistique Corporation
Amendment to Article III:
Article III
The total authorized shares:
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1.
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Common Shares
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2,000,000
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Preferred Shares
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25,000
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2.
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A statement of all or any of the relative rights,
preferences and limitations of the shares of each class
is as follows:
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The Board of Directors may cause the Corporation to issue Preferred Shares
in one or more series, each series to bear a distinctive designation and to
have such relative rights and preferences as shall be prescribed by
resolution of the Board. Such resolutions, when filed, shall constitute
amendments to these Articles of Incorporation.
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Amendment to Article VIII:
Article VIII
A director of the Corporation shall not be personally liable to the Corporation or its
shareholders for monetary damages for a breach of fiduciary duty as a director, except for
liability: (a) for any breach of the director’s duty of loyalty to the Corporation or its
shareholders; (b) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (c) resulting from a violation of §551(1) of the
Michigan Business Corporation Act; or (d) for any transaction from which the director
derived an improper personal benefit. In the event the Michigan Business Corporation Act is
amended, after approval by the shareholders of this Article VIII, to authorize corporate
action further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Michigan Business Corporation Act, as so amended. Any repeal,
modification or adoption of any provision in these Articles of Incorporation inconsistent
with this Article VIII shall not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal, modification or adoption.
096D#1093
0104 ORG&FI $10.00
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FILED
JAN 09 1996
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[ILLEGIBLE]
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Administrator
MICHIGAN DEPARTMENT OF COMMERCE
Corporation & Securities Bureau
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JAN 1 - 1996
MICHIGAN DEPT. OF COMMERCE
CORPORATION & SECURITIES BUREAU
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RESTATED ARTICLES OF INCORPORATION
OF
FIRST MANISTIQUE CORPORATION
The following Restated Articles of Incorporation are executed by the undersigned corporation
pursuant to the provisions of Sections 641-651, Act 284, Public Acts of 1972, as amended.
1. The present name of the corporation, and its only name since its incorporation
is First Manistique Corporation.
2. The corporation identification number (CID) assigned by the bureau is 063-316.
3. All of the former names of the corporation are: None
4. The
date of filing the original Articles of Incorporation was December 6, 1974.
5. The following Restated Articles of Incorporation supersede the original
Articles of Incorporation, as heretofore amended, and shall be the Articles of Incorporation
of the corporation.
ARTICLE I
The name of the corporation is First Manistique Corporation.
ARTICLE II
The purpose or purposes for which the corporation is organized is to engage in any activity
within the purposes for which corporations may be organized under the Business Corporation Act of
Michigan, as amended from time to time, and including without limitation the power to act as a
bank holding company as permitted by the Federal Bank Holding Company Act of 1956, as amended, or
hereafter supplemented or amended.
ARTICLE III
The total authorized shares:
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1.
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Common Shares
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2,000,000
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Preferred Shares
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25,000
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2.
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A statement of all or any of the relative rights, preferences and
limitations of the shares of each class is as follows:
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The Board of Directors may cause the Corporation to issue Preferred
Shares in one or more series, each series to bear a distinctive
designation and to have such relative rights and preferences as
shall be prescribed by resolution of the Board. Such resolutions,
when filed, shall constitute amendments to these Articles of
Incorporation.
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ARTICLE IV
1. The address of the current registered office is: 130 South Cedar Street, P.O.
Box 369, Manistique, Michigan 49854, which is also the mailing address of the current
registered office.
2. The name of the current resident agent is: Ronald G. Ford
ARTICLE V
When a compromise or arrangement or a plan of reorganization of this corporation is proposed
between this corporation and its creditors or any class of them or between this corporation and
its shareholders or any class of them, a court of equity jurisdiction within the state, on
application of this corporation or of a creditor or shareholder thereof, or on application of a
receiver appointed for the corporation, may order a meeting of the creditors or class of creditors
or of the shareholders or class of shareholders to be affected by the proposed compromise or
arrangement or reorganization, to be summoned in such manner as the court directs. If a majority
in number representing 3/4 in value of the creditors or class of creditors, or of the shareholders
or class of shareholders to be affected by the proposed compromise or arrangement, agree to a
compromise or arrangement, or a reorganization of this corporation as a consequence of the
compromise or arrangement, the compromise or arrangement and the reorganization, if sanctioned by
the court to which the application has been made, shall be binding on all the creditors or class
of creditors, or on all the shareholders or class of shareholders and also on this corporation.
ARTICLE VI
A director of the Corporation shall not be personally liable to the Corporation or its
shareholders for monetary damages for a breach of fiduciary duty as a director, except for
liability: (a) for any breach of the director’s duty of loyalty to the Corporation or its
shareholders; (b) for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law; (c) resulting from a violation
§551(1)
of the Michigan Business
Corporation Act; or (d) for any transaction from which the director derived an improper personal
benefit. In the event the Michigan Business Corporation Act is amended, after approval by the
shareholders of this Article VI to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of
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a director of the Corporation shall be eliminated or limited to the fullest extent permitted by
the Michigan Business Corporation Act, as so amended. Any repeal, modification or adoption of any
provision in these Articles of Incorporation inconsistent with this Article VI shall not adversely
affect any right or protection of a director of the Corporation existing at the time of such
repeal, modification or adoption.
These Restated Articles of incorporation were duly adopted by the Board of Directors without a
vote of the shareholders in accordance with the provisions of Section 642, Act 284, Public Acts of
1972, as amended. These Restated Articles of Incorporation only restate and integrate and do not
further amend the provisions of the Articles of Incorporation as heretofore amended and there is no
material discrepancy between those provisions and the provisions of these Restated Articles.
Signed this 28th day of December, 1995.
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FIRST MANISTIQUE CORPORATION
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By:
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/s/
[ILLEGIBLE]
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(Name)
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Its: President & CEO
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-3-
C & S 515
FILED
MAY 22 1996
096D#8260 0510 ORG&FI $5010.00
RECEIVED
MAY 10 1996
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Administrator
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MICHIGAN DEPT. OF COMMERCE
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MI DEPT. OF CONSUMER & INDUSTRY SERVICES
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CORPORATION & SECURITIES BUREAU
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Corporation & Securities Bureau
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CERTIFICATE OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
Pursuant to the provisions of Act 284, Public Acts of 1972, as amended, the undersigned
corporation executes the following Certificate:
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1.
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The present name of the corporation is:
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First Manistique Corporation
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2.
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The identification number assigned by the Bureau is: 063 316
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3.
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The location of the registered office is:
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130 South Cedar
P.O. Box 369
Manistique, MI 49854
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4. The following amendments to the Articles of Incorporation were duly adopted on the 23rd
day of April, 1996. The amendments were duly adopted in accordance with Section 611(2) of the Act
by the vote of the shareholders. The necessary votes were cast in favor of the amendments.
Article III of the Corporation’s Articles of Incorporation is hereby amended to
read as follows:
ARTICLE III
The total number of shares of all classes of stock which the corporation shall
have authority to issue is 6,500,000 shares, of which 6,000,000 shares shall be of
a single class of common stock and 500,000 shares shall be series preferred stock.
The authorized shares of common stock are all of one class with equal voting
power, and each such share shall be equal to every other such share. The Board of
Directors of the corporation may cause the corporation to issue preferred shares in
one or more series, each series to bear a distinctive designation and to have such
relative rights and preferences as shall be prescribed by resolution of the Board.
Such resolutions, when filed, shall constitute amendments to these Articles of
Incorporation.
A new Article VII is added to the Corporation’s Articles of Incorporation and reads as
follows:
ARTICLE VII
BOARD OF DIRECTORS
Section 1
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Authority and Size of Board
. The business and affairs of the
corporation shall be managed by or under the direction of the Board of Directors.
The number of directors of the corporation that shall constitute the Board of
Directors shall be determined from time to time by resolution adopted by the
affirmative vote of:
A. At least eighty percent (80%) of the Board of Directors,
and
B. A majority of the Continuing Directors (as hereinafter defined).
Section 2
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Classification of Board and Filling of Vacancies
. Subject to
applicable law, the directors shall be divided into three (3) classes, each class to
be as nearly equal in number as possible. At each annual meeting of shareholders,
the successors to the class of directors whose term shall then expire shall be
elected to hold office for a term expiring at the third succeeding annual meeting
and until their successors shall be duly elected and qualified or their resignation
or removal. Any vacancies in the Board of Directors for any reason, and any newly
created directorships resulting from any increase in the number of directors, may be
filled only by the Board of Directors, acting by an affirmative vote of a majority
of the Continuing Directors (as hereinafter defined) and an eighty percent (80%)
majority of all of the directors then in office, although less than a quorum, and
any director so chosen shall hold office until the next election of the class for
which the director was chosen and until his successor shall be duly elected and
qualified or his resignation or removal. No decrease in the number of directors shall
shorten the term of any incumbent director.
Section 3
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Removal of Directors
. Notwithstanding any other provisions
of these Articles of Incorporation or the Bylaws of the corporation (and
notwithstanding the fact that some
lesser percentage may be specified by
law or by these Articles of Incorporation or the Bylaws of the corporation), any
one or more directors of the corporation may be removed at any time, with or
without cause, but only by either (i) the affirmative vote of a majority of the
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Continuing Directors and at least eighty percent (80%) of the Board of Directors or (ii) the
affirmative vote, at a meeting of the shareholders called for that purpose, of the holders
of at least eighty percent (80%) of the voting power of the then outstanding shares of
capital stock of the corporation entitled to vote generally in the election of directors
(the “Voting Stock”) voting together as a single class.
Section 4
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Certain Definitions
. For the purposes of this Article VII:
A. A “person” shall mean any individual, firm, corporation
or other entity.
B. “Interested Shareholder” shall mean any person,
other
than
the corporation or any Subsidiary, who or which:
(i) is the beneficial owner, directly or indirectly, of ten percent
(10%) or more of the voting power of the outstanding Voting Stock; or
(ii) is an Affiliate of the corporation and at any time within the
two (2) year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of ten percent (10%) or more of
the voting power of the then outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares of
Voting Stock which were at any time within the two (2) year period
immediately prior to the date in question beneficially owned by any
Interested Shareholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act of
1933.
C. A person shall be a “beneficial owner” of any Voting Stock:
(i) which such person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or
indirectly; or
(ii) which such person or any of its Affiliates or Associates has (a)
the right to acquire (whether such right is
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exercisable immediately or only after the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement,
arrangement or understanding; or
(iii) which are beneficially owned, directly or indirectly, by any other person with
which such person or any of its Affiliates or Associates has any agreement, arrangement
or understanding for the purpose of acquiring, holding, voting or
disposing of any shares
of Voting Stock.
D. For the purposes of determining whether a person is an Interested Shareholder pursuant to
paragraph B of this Section 4, the number of shares of Voting Stock deemed to be outstanding shall
include shares deemed owned through application of paragraph C of this Section 4 but shall not
include any other shares of Voting Stock which may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion rights, warrants or options, or
otherwise.
E. “Affiliate” or “Associate” shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as in effect
on the date this Article of the Articles of Incorporation is filed with the
Corporation Division of the Michigan Department of Commerce.
F. “Subsidiary” means any corporation of which a majority
of any class of equity security is owned, directly or indirectly, by the
corporation;
provided
,
however
, that for the purposes of the definition
of Interested Shareholder set forth in paragraph B of this Section 4, the
term “Subsidiary” shall mean only a corporation of which a majority of
each class of equity security is owned, directly or indirectly, by the
corporation.
G. “Continuing Director” means any member of the Board
of Directors of the corporation (the “Board”) who is unaffiliated with
the Interested Shareholder and was a member of the Board prior to the
time that the Interested Shareholder became an Interested Shareholder,
and any successor of a Continuing Director who is unaffiliated with the
Interested Shareholder and is recommended to succeed a Continuing
Director by a majority of Continuing Directors then on the Board.
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Section 5
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Powers of Continuing Directors
. A majority of the Continuing Directors of
the corporation shall have the power and duty to determine, on the basis of information known to
them after reasonable inquiry, all facts necessary to determine compliance with this Article VII,
including without limitation (i) whether a person is an Interested Shareholder, (ii) the number of
shares of Voting Stock beneficially owned by any person and (iii) whether a person is an Affiliate
or Associate of another; and the good faith determination of a majority of the Continuing
Directors on such matters shall be conclusive and binding for all the purposes of this Article
VII.
Section 6
.
Nominations for Board
. Nominations for the election of directors may be
made by the Board of Directors or by a shareholder entitled to vote in the election of directors. A
shareholder entitled to vote in the election of directors, however, may make such a nomination only
if written notice of such shareholder’s intent to do so has been given, either by personal delivery
or by United States mail, postage prepaid, and received by the corporation (a) with respect to an
election to be held at an annual meeting of shareholders, not later than sixty (60) nor more than
ninety (90) days prior to the first anniversary of the preceding year’s annual meeting (or, if the
date of the annual meeting is changed by more than twenty (20) days from such anniversary date,
within ten (10) days after the date the corporation mails or
otherwise gives notice of the date of
such meeting), and (b) with respect to an election to be held at a special meeting of shareholders
called for that purpose, not later than the close of business on the tenth (10th) day following the
date on which notice of the special meeting was first mailed to the shareholders by the
corporation.
Each shareholder’s notice of intent to make a nomination shall set forth: (i) the name(s) and
address(es) of the shareholder who intends to make the nomination and of the person or persons to
be nominated; (ii) a representation that the shareholder (a) is a holder of record of stock of the
corporation entitled to vote at such meeting, (b) will continue to hold such stock through the
date on which the meeting is held, and (c) intends to appear in person or by proxy at the meeting
to nominate the person or persons specified in the notice; (iii) a description of all arrangements
or understandings between the shareholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination is to be made by the shareholder; (iv)
such other information regarding each nominee proposed by such shareholder as would be required to
be included in a proxy statement filed pursuant to Regulation 14A promulgated under Section 14 of
the Securities Exchange Act of 1934, as amended, as now in effect or hereafter modified; and (v)
the consent of each nominee to serve as a director of the corporation if so
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elected. The corporation may require any proposed nominee to furnish such other
information as may reasonably be required by the corporation to determine the
qualifications of such proposed nominee to serve as a director.
No person shall be eligible for election as a director unless nominated (i) by
a shareholder in accordance with the foregoing procedure or (ii) by the Board of
Directors.
A
new Article VIII is added to the Corporation’s Articles of Incorporation and reads
as follows:
ARTICLE VIII
NOTIFICATION OF SHAREHOLDER PROPOSALS
The Board of Directors of the corporation shall submit for consideration and
vote by the shareholders, at annual meetings of the shareholders, only those
proposals that are first brought before the meeting by or at the direction of the
Board of Directors, or by any shareholder entitled to vote at such meeting (a) who
submits to the corporation a timely Notice of Proposal in accordance with the
requirements of this Article VIII and the proposal is a proper subject for action by
shareholders under Michigan law, or (b) whose proposal is included in the
corporation’s proxy materials in compliance with all the
requirements set forth in
the applicable rules and regulations in the Securities and Exchange Commission.
Each shareholder’s Notice of Proposal shall set forth:
(a)
The name and address of the shareholder submitting the
proposal, as they appear on the corporation’s books and records;
(b) A representation that the shareholder (i) is a holder of
record of stock of the corporation entitled to vote at such meeting, (ii)
will continue to hold such stock through the date on which the meeting
is held, and (iii) intends to appear in person or by proxy at the meeting
to submit the proposal for shareholder vote;
(c) A brief description of the proposal desired to be
submitted to the meeting for shareholder vote and the reasons for
conducting such business at the meeting; and
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(d) A description of any financial or other interest of such
shareholder in the proposal.
A Notice of Proposal must be given, either by personal delivery or by United
States mail, postage prepaid, and received by the corporation not less than thirty
(30) days prior to the date of the originally scheduled meeting, regardless of any
adjournments thereof to a later date; provided that, if less than forty (40) days’
notice of the meeting of shareholders is given by the corporation, the Notice of
Proposal must be received by the corporation not later than the close of business
on the tenth (10th) day following the date on which the notice of the scheduled
meeting was first mailed to the shareholders.
The secretary of the corporation shall notify a shareholder in writing
whether his or her Notice of Proposal has been made in accordance with all the
requirements of this Article VIII. The chairman of the meeting may refuse to
acknowledge the proposal of any shareholder not made in compliance with all
such requirements.
A
new Article IX is added to the Corporation’s Articles of Incorporation and reads as
follows:
ARTICLE IX
AMENDMENT OF ARTICLES VII, VIII OR IX
Notwithstanding anything contained in these Articles of Incorporation to the
contrary, the affirmative vote of at least 80% of the outstanding shares of voting
stock of the corporation, voting as a single class, shall be required to amend or
repeal Article VII, Article VIII or Article IX of these Articles of Incorporation
or to adopt any provision inconsistent therewith, unless, such amendment or repeal
or inconsistent provision has been recommended for approval by at least 80% of all
directors then holding office and by a majority of the Continuing Directors. The
term “Continuing Directors” is defined in Article VII.
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A new Article X is added to the Corporation’s Articles of Incorporation and reads as follows:
ARTICLE X
BOARD EVALUATION OF CERTAIN OFFERS
Section 1
.
Matters to be Evaluated
. The Board of Directors of this
corporation shall not approve, adopt or recommend any offer of any person or entity,
other than the corporation, to make a tender or exchange offer for any capital stock
of the corporation, to merge or consolidate the corporation with any other entity or
to purchase or otherwise acquire all or substantially all of the assets or business
of the corporation unless and until the Board of Directors shall have first
evaluated the offer and determined that the offer would be in compliance with all
applicable laws and that the offer is in the best interests of the corporation and
its shareholders. In connection with its evaluation as to compliance with laws, the
Board of Directors may seek and rely upon an opinion of legal counsel independent
from the offeror and it may test such compliance with laws in any state or federal
court or before any state or federal administrative agency which may have
appropriate jurisdiction. In connection with its evaluation as to the best interests
of the corporation and its shareholders, the Board of Directors shall consider all
factors which it deems relevant, including without limitation: (i) the adequacy and
fairness of the consideration to be received by the corporation and/or its
shareholders under the offer considering historical trading prices of the
corporation’s stock, the price that might be achieved in a negotiated sale of the
corporation as a whole, premiums over trading prices which have been proposed or
offered with respect to the securities of other companies in the past in connection
with similar offers and the future prospects for this corporation and its business;
(ii) the potential social and economic impact of the offer and its consummation on
this corporation, and its subsidiaries and their respective employees, depositors and
other customers and vendors; (iii) the potential social and economic impact of the
offer and its consummation on the communities in which the corporation and any
subsidiaries operate or are located; (iv) the business and financial condition and
earnings prospects of the proposed acquiror or acquirors; and (v) the competence,
experience and integrity of the proposed acquiror or acquirors and its or their
management.
Section 2
.
Amendment, Repeal, etc
. Notwithstanding any other
provision of these Articles of Incorporation or the Bylaws of the corporation to
the contrary (and notwithstanding the fact that a lesser percentage may be
specified by law, these Articles of Incorporation or the Bylaws of the
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corporation), the affirmative vote of the holders of eighty percent (80%) or more of the
outstanding shares of capital stock entitled to vote for the election of directors, voting
together as a single class, shall be required to amend, repeal or adopt any provision
inconsistent with this Article X;
provided
,
however
, that this Section 2 of Article
X shall be of no force or effect if the proposed amendment, repeal or other action has been
recommended for approval by at least eighty percent (80%) of all directors then holding
office.
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Signed this 25th day of April, 1996.
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By:
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/s/ Ronald G. Ford
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Ronald G. Ford, President and
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Chief Executive Officer
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Return to:
Donald L. Johnson
Varnum, Riddering, Schmidt & Howlett
P.O. Box 352
Grand Rapids, MI 49501-0352
-9-
Michigan Department of Consumer and Industry Services
Filing Endorsement
This is to Certify that the CERTIFICATE OF AMENDMENT — CORPORATION
for
NORTH COUNTRY FINANCIAL CORPORATION
ID NUMBER: 063316
received by facsimile transmission on April 20, 1998 is hereby endorsed
Filed on April 20, 1998 by the Administrator.
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In testimony whereof, I have hereunto set my
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hand and affixed the Seal of the Department,
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in the City of Lansing, this 20th day
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of April, 1998.
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, Director
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Corporation, Securities and Land Development Bureau
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CERTIFICATE OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
Pursuant to the provisions of Act 284, Public Acts of 1972, as amended, the
undersigned corporation executes the following Certificate:
1. The present name of the corporation is:
First Manistique Corporation
2. The identification number assigned by the Bureau is: 063 316
3. The location of the registered office is:
130 South Cedar
Manistique, MI 49854
4. The following amendments to the Articles of Incorporation were duly adopted
on the 14th day of April, 1998. The amendment was duly adopted in accordance
with Section 611(2) of the Act by the vote of the shareholders. The necessary votes
were cast in favor of the amendment.
Article I is hereby amended to read as follows:
ARTICLE I
The name of the Corporation is North Country Financial Corporation.
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Signed this 18th day of April, 1998.
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By:
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/s/ Ronald G. Ford
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Ronald G. Ford, President and
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Chief Executive Officer
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Return to:
Donald L. Johnson
Varnum, Riddering, Schmidt & Howlett
llp
P.O. Box 352
Grand Rapids, MI 49501-0352
C&S 615 (11/97)
[ILLEGIBLE]
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RECEIVED
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MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
CORPORATION, SECURITIES, AND LAND DEVELOPMENT BUREAU
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[ILLEGIBLE]
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AUG 18 1998
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ADJUSTED PURSUANT TO
TELEPHONE AUTHORIZATION
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(FOR BUREAU USE ONLY)
FILED
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[ILLEGIBLE]
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AUG 18 1998
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Name VARNUM, RIDDERING, SCHMIDT & HOWLETT LLP
DONALD L. JOHNSON
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Address
P.O. BOX 352
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Administrator
MI DEPARTMENT OF CONSUMER & INDUSTRY SERVICES
CORPORATION, SECURITIES & LAND DEVELOPMENT BUREAU
EFFECTIVE DATE:
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City
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State
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Zip Code
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GRAND RAPIDS, MI 49501-0352
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Document will be returned to the name and address you enter above
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
For use by Domestic Profit and Nonprofit Corporations
(Please read information and instructions on the last page)
Pursuant to the provisions of Act 284, Public Acts of 1972 (profit corporations), or Act 162, Public Acts of
1982 (nonprofit corporations), the undersigned corporation executes the following Certificate:
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1.
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The present name of the corporation is: NORTH COUNTRY FINANCIAL CORPORATION
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2.
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The identification number assigned by the Bureau is: 063-316
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3.
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The location of the registered office is:
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130 SOUTH CEDAR P.O. BOX 369
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MANISTIQUE
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,
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Michigan
49854
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(Street Address)
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(City)
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(ZIP Code)
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4.
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The first paragraph of Article
III
of the Articles of Incorporation is hereby amended to read as follows:
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The total number of shares of all classes of stock which the corporation shall
have authority to issue is 18,500,000 shares of which 18,000,000 shares shall be a
single class of common stock and 500,000 shares shall be series preferred stock.
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5.
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(For amendments adopted by unanimous consent of incorporators before the first meeting of the board of directors or trustees.)
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The foregoing amendment to the Articles of Incorporation were duly adopted on the
day of
, 19______, in accordance with the provisions of the Act by the unanimous consent of the incorporator(s) before
the first meeting of the Board of Directors or Trustees.
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Signed this
day of
, 19
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(Signature)
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(Signature)
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(Type or Print Name)
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(Type or Print Name)
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(Signature)
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(Signature)
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(Type or Print Name)
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6.
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(For profit corporations, and for nonprofit corporations whose articles state
the corporation is organized on a stock or on a membership basis.)
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The foregoing amendment to the Articles of Incorporation was duly adopted on
the 11th day of August, 1998 by the shareholders if a profit corporation,
or by the shareholders or members is a nonprofit corporation (check one of the
following)
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þ
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at a meeting. The necessary votes were cast in favor of the amendment.
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by written consent of the shareholders or members having not less than
the minimum number of votes required by statute in accordance with Section
407(1) and (2) of the Act if a nonprofit corporation, or Section 407(1) of
the Act if a profit corporation. Written notice to shareholders or members
who have not consented in writing has been given. (Note: Written consent by
less than all of the shareholders or members is permitted only if such
provision appears in the Articles of Incorporation.)
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by written consent of all the shareholders or members entitled to vote in
accordance with section 407(3) of the Act if a nonprofit corporation, or
section 407(2) of the Act if a profit corporation.
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by the board of a profit corporation pursuant to section 611 (2)
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Profit Corporation
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Nonprofit Corporations
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Signed this
11th day of August , 1998
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Signed this
day of
, 19
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By
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/s/ Ronald G. Ford
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By
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(Signature of an authorized officer or agent)
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(Signature of President, Vice-President, Chairperson or
Vice-Chairperson)
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Ronald G. Ford President and CEO
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(Type or Print Name) (Type or Print Title)
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(Type or print Name) (Type or Print Title)
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C&S 515(Rev. 3/00)
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MICHIGAN DEPARTMENT OF CONSUMER & INDUSTRY SERVICES
CORPORATION AND LAND DEVELOPMENT BUREAU
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Tran Info: 1 3142412-1
07/18/2000
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Date Received
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(FOR BUREAU USE ONLY)
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[ILLEGIBLE] 125345
ID: Amt $15.00
063316
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This document is effective on the date filed, unless a subsequent
effective date within 90 days after received date
is stated in the document.
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Name
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Larry D. Lieberman
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Address:
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Godfrey & Kahn, S.C.
780 North Water Street
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FILED
JUL 25 2000
Administrator
MI DEPARTMENT OF CONSUMER & INDUSTRY SERVICES
CORPORATION SECURITIES & LAND DEVELOPMENT BUREAU
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City
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State
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Zip Code
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Milwaukee
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WI
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53202
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EFFECTIVE DATE:
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Document will be returned to the name and address you enter above.
if left blank document will be mailed to the registered office.
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
For use by Domestic Profit and Nonprofit Corporations
(Please read information and instructions on the last page)
Pursuant to the provisions of Act 284, Public Acts of 1972 (profit corporations), or Act
162, Public Acts of 1982 (nonprofit corporations), the undersigned corporation executes the
following Certificate:
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1.
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The present name of the corporation is: North Country Financial Corporation
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2.
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The identification number assigned by the Bureau is:
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063316
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3.
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Article III of the Articles of Incorporation is hereby
amended
to read as follows:-
by adding at the end of Article III the provisions set forth on Exhibit A attached
hereto creating a series of Preferred Stock designated as “Series B Junior
Participating Preferred Stock.”
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Exhibit A
ATTACHMENT TO THE
CERTIFICATE OF AMENDMENT
OF
NORTH COUNTY FINANCIAL CORPORATION
NOW, THEREFORE, BE IT RESOLVED, That pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its Articles of Incorporation, a
series of Preferred Stock of the Corporation be and it hereby is created, and that the designation
and number of shares and relative rights, preferences and limitations thereof are as follows:
1.
Designation and Amount.
The shares of such series shall be designated as “Series B Junior Participating Preferred
Stock” (the “Series B Preferred Stock”); the number of shares constituting such series shall be one
hundred thousand (100,000). Such number of shares may be increased or decreased by resolution of
the Board of Directors;
provided,
that no decrease shall reduce the number of shares of
Series B Preferred Stock to a number less than the number of shares then outstanding plus the
number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants
or upon the conversion of any outstanding securities issued by the Corporation into Series B
Preferred Stock.
2.
Dividends and Distributions.
(a) Subject to the rights of the holders of any shares of any series of Preferred Stock (or
any similar stock) ranking prior and superior to the Series B Preferred Stock with respect to
dividends, the holders of shares of Series B Preferred Stock, in preference to the holders of
Common Stock, without par value (the “Common Stock”), of the Corporation and of any other junior
stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in cash on the first day of
March, June, September and December in each year (each such date being referred to herein as a
“Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series B Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (i) $10 or (ii) subject to the
provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all
cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions, other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series B Preferred Stock. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common Stock, or
A-1
effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the amount to which
holders of shares of Series B Preferred Stock were entitled immediately prior to such event under
clause (ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the Series B Preferred
Stock as provided in paragraph (a) of this Section immediately after it declares a dividend or
distribution on the Common Stock (other than a dividend payable in shares of Common Stock);
provided that, in the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $10 per share on the Series B Preferred Stock
shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series B
Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of
such shares, unless the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders of shares of Series B
Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series B Preferred Stock in an amount less than the
total amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of Series B
Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof.
3.
Voting Rights.
The holders of shares of Series B Preferred Stock shall have the
following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth, each share of Series B
Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote
of the shareholders of the Corporation. In the event the Corporation shall at any time declare or
pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the number of votes per share to which holders of
shares of Series B Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which
A-2
is the number of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(b) Except as otherwise provided herein, in any certificate of amendment or such other
similar document creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series B Preferred Stock and the holders of shares of Common Stock and any other
capital stock of the Corporation having general voting rights shall vote together as one class
on all makers submitted to a vote of shareholders of the Corporation.
(c) Except as set forth herein, or as otherwise provided by law, holders of Series B
Preferred Stock shall have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for
taking any corporate action.
4.
Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or distributions payable on the Series B
Preferred Stock as provided in Section 1, above, are in arrears, thereafter and until all accrued
and unpaid dividends and distributions, whether or not declared, on shares of Series B Preferred
Stock outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on any shares of stock ranking
junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking
on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series
B Preferred Stock, except dividends paid ratably on the Series B Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking
junior (either as to dividends or upon liquidation, dissolution or winding up), to the Series B
Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of any stock of the Corporation
ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the
Series B Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any shares of Series B
Preferred Stock, or any shares of stock ranking on a parity with the Series B Preferred Stock,
except in accordance with a purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights and
A-3
preferences of the respective series and classes, shall determine in good faith will result in fair
and equitable treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation to purchase or
otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation
could, under paragraph (a) of this Section 3, purchase or otherwise acquire such shares at such
time and in such manner.
5.
Reacquired Shares.
Any shares of Series B Preferred Stock purchased or otherwise
acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof. All such shares shall upon their cancellation become authorized
but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred
Stock subject to the conditions and restrictions on issuance set forth herein, in the Articles of
Incorporation, or in any certificate of amendment or such other similar document creating a
series of Preferred Stock or any similar stock or as otherwise required by law.
6.
Liquidation, Dissolution or Winding Up.
Upon any liquidation, dissolution or
winding up of the Corporation, no distribution shall be made (a) to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the
Series B Preferred Stock unless, prior thereto, the holders of shares of Series B Preferred Stock
shall have received $1,000 per share, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment, provided that the
holders of shares of Series B Preferred Stock shall be entitled to receive an aggregate amount
per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the
aggregate amount to be distributed per share to holders of shares of Common Stock, or (b) to
the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series B Preferred Stock, except distributions made
ratably on the Series B Preferred Stock and all such parity stock in proportion to the total amounts
to which the holders of all such shares are entitled upon such liquidation, dissolution or
winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the aggregate amount to which holders of shares of Series B
Preferred Stock were entitled immediately prior to such event under the proviso in clause (b)
of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
7.
Consolidation, Merger, etc.
In case the Corporation shall enter into any consolidation,
merger, combination or other transaction in which the shares of Common Stock are exchanged
for or changed into other stock or securities, cash and/or any other property, then in any
such case each share of Series B Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment hereinafter set
forth,
A-4
equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each share of Common Stock is
changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of
Common Stock, then in each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series B Preferred Stock shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
8.
No Redemption.
The shares of Series B Preferred Stock shall not be redeemable.
9.
Rank.
The Series B Preferred Stock shall rank, with respect to the payment of
dividends and the distribution of assets, junior to all series of any other class of the
Corporation’s Preferred Stock.
A-5
COMPLETE ONLY ONE OF THE FOLLOWING:
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4.
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(For amendments adopted by unanimous consent of incorporators before the first meeting of the
board of directors or trustees.)
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The foregoing amendment to the Articles of Incorporation was duly adopted on the
day of
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,
, in accordance with the provisions of the Act by the unanimous consent of
the incorporator(s) before the first meeting of the Board of Directors or Trustees.
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Signed this
day of
,
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(Signature)
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(Signature)
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(Type or Print Name)
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(Type or Print Name)
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(Signature)
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(Signature)
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(Type or Print Name)
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(Type or Print Name)
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5.
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(For profit and nonprofit corporations whose Articles state the corporation is organized on a
stock or on a membership basis.)
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The foregoing amendment to the Articles of Incorporation was duly adopted on the 21st day of
June, 2000 by
the shareholders if a profit corporation, or by the
shareholders or members if a nonprofit corporation
(check one of the
following)
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o
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at a meeting the necessary votes were cast in favor of the amendment.
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by written consent of the shareholders or members having not less than the minimum
number of votes required by statute in accordance with Section 407(1) and (2) of the
Act if a nonprofit corporation, or Section 407(1) of the Act if a profit corporation.
Written notice to shareholders or members who have not consented in writing has been given.
(Note: Written consent by less than all of the shareholders or members is permitted only if
such provision appears in the Articles of Incorporation.)
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by written consent of all the shareholders or members entitled to vote in accordance
with section 407(3) of the Act if a nonprofit corporation, or Section 407(2) of the Act if
a profit corporation.
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þ
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by the board of a profit corporation pursuant to section 450.1302
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Profit Corporations
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Nonprofit Corporations
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Signed this 14th day of
July, 2000
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Signed this ________ day of ________, ________
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By
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/s/ Ronald G. Ford
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By
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(Signature of an authorized officer or agent)
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(Signature of President, Vice-President, Chairperson or Vice-Chairperson)
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Ronald G. Ford, Chairman and Chief
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Executive Officer
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(Type or Print Name)
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(Type or Print Name) (Type or Print Title)
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BCS/CD-615 (Rev. 12/03)
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MICHIGAN DEPARTMENT OF LABOR & ECONOMIC GROWTH
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BUREAU OF COMMERCIAL SERVICES
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Date Received
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(FOR BUREAU USE ONLY)
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DEC
[ILLEGIBLE] 2004
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This document is effective on the date filed, unless a
subsequent effective date within 90 days after received date
is stated in the document.
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FILED
DEC 14 2004
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Name
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David D. Joswick
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Administrator
BUREAU OF COMMERCIAL SERVICES
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Address
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840 West Long Lake Road, Suite 200
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City
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State Zip Code
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Troy
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Michigan 48098
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EFFECTIVE DATE: 12/15/04
5 pm
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Document will be returned to the name and address you enter above.
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If left blank document will be mailed to the registered office.
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CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
For use by Domestic Profit and Nonprofit Corporations
(Please read information and instructions on the last page)
Pursuant to the provisions of Act 284, Public Acts of
1972
(profit corporations), or Act 162,
Public Acts of 1982
(nonprofit corporations), the undersigned corporation executes the following
Certificate:
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1.
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The present name of the corporation is:
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NORTH COUNTRY FINANCIAL CORPORATION
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2.
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The identification number assigned by the Bureau is:
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063316
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3.
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Articles I and III of the Restated Articles of Incorporation are hereby amended as follows:
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Article I is amended to read in its entirety as set forth on Exhibit A attached hereto.
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Article III is amended by adding the provisions set forth on Exhibit B attached hereto.
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4.
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The effective date of this Certificate of Amendment is. 5:00, p.m., on December 15, 2004.
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5. (For profit and nonprofit corporations whose Articles state the corporation is
organized on a stock or on a membership basis.)
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The foregoing amendment to the Articles of Incorporation was duly adopted on the
18 day of November 2004, by the shareholders if a profit corporation, or by the
shareholders or members if a nonprofit corporation (check one of the following):
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þ
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at a meeting the necessary votes were cast in favor of the amendment.
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o
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by written consent of the shareholders or members having not less
than the minimum number of votes required by statute in
accordance
with Section 407(1) and (2) of the Act if a nonprofit corporation,
or Section 407(1) of the Act if a profit corporation. Written notice
to shareholders or members who have not consented in writing has
been given. (Note:
Written consent by less than all of the
shareholders or members is permitted only if such provision appears
in the Articles of Incorporation.)
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o
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by written consent of all the shareholders or members entitled to vote in accordance with
section 407(3) of the Act if a nonprofit corporation, or Section 407(2) of the Act if a profit corporation.
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o
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by consents given by electronic transmission in accordance with Section 407(3) if a profit corporation.
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by the board of a profit corporation pursuant to section 611(2).
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Profit Corporations and Professional Service Corporations.
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Nonprofit Corporations
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Signed this 13th day of December 2004.
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Signed this
day of
.
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By
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/s/ C. James [ILLEGIBLE]
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By:
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(Signature of an authorized officer or agent)
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(Signature of President, Vice-President, Chairperson or Vice-Chairperson)
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C. James [ILLEGIBLE], President and Chief Executive Officer
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(Type or Print Name)
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(Type or Print
Name) (Type
or Print Title)
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RECEIVED
DEC 14 2004
MI DEPT. OF
LABOR AND ECONOMIC GROWTH
BUREAU OF COMMERCIAL SERVICES
EXHIBIT A
Article I
The name of the corporation is Mackinac Financial Corporation.
EXHIBIT B
Effective at the time this Certificate of Amendment to the Restated Articles of Incorporation
shall become effective as provided in Section 4 of this Certificate of Amendment (the “Effective
Time”), the filing of this Certificate of Amendment to the Restated Articles of Incorporation
shall effect a reverse stock split on the basis of one (1) new common share for each twenty (20)
issued and outstanding common shares, while maintaining the number of authorized common shares and
preferred shares, as set forth in this Article III (the “Reverse Split”).
Immediately as of the Effective Time, and without any action by the holders of outstanding
common shares, but subject to the rounding of fractional shares described below, outstanding
certificates representing the corporation’s common shares shall represent for all purposes, and
each common share issued and outstanding immediately before the Effective Time shall automatically
be converted into, new common shares in the ratio of twenty (20) old common shares for one (1) new
common share, all by virtue of the Reverse Split and without any action on the part of the holder
of such common shares.
Notwithstanding any of the foregoing to the contrary, no fractional common shares shall be
issued in connection with the Reverse Split. In lieu thereof, each holder of common shares as of the
Effective Time who would otherwise have been entitled to receive a fractional new common share
shall, upon surrender of such shareholder’s certificate representing pre-split common shares, have
the post-split common shares to which they are entitled rounded up to the nearest whole share. As
of the Effective Time such fractional shares shall no longer represent equity interests in the
corporation, and shall not be entitled to any voting, dividend or other shareholder rights; rather,
they shall represent only the right to receive the common shares, if any, described in this
paragraph.
Table of Contents
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To Our Shareholders
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1
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Selected Financial Highlights
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6
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Five-Year Comparisons
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7
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Quarterly Financial Summary
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9
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Report of Independent Registered Public Accounting Firm
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10
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Consolidated Balance Sheets
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11
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Consolidated Statements of Operations
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12
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Consolidated Statements of Changes in Shareholders’ Equity
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13
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Consolidated Statements of Cash Flows
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14
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Notes to Consolidated Financial Statements
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15
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Selected Financial Data
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39
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Summary Quarterly Financial Information
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40
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Market Information
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42
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Shareholder Return Performance Graph
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43
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Forward-Looking Statements
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44
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Management’s Discussion and Analysis of Financial
Condition and Results of Operations
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45
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Directors and Officers
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65
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Branch Locations
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66
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Corporate Information
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67
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BUSINESS OF THE CORPORATION
Mackinac Financial Corporation is a registered bank holding company formed under the Bank Holding
Company Act of 1956 with assets in excess of $450 million and whose common stock is traded on the
NASDAQ stock market as “MFNC.” The principal subsidiary of the Corporation is mBank.
Headquartered in Manistique, Michigan, mBank has 13 branch locations; nine in the Upper Peninsula,
three in the Northern Lower Peninsula and one in Oakland County, Michigan. The newest branch,
located in Escanaba, opened on March 24, 2009. The Company’s banking services include commercial
lending and treasury management products and services geared toward small to mid-sized businesses,
as well as a full array of personal and business deposit products and consumer loans.
FORM 10-K
A copy of the Annual Report to the Securities and Exchange Commission on
Form 10-K
is available
without charge by writing the Shareholders’ Relations Department, Mackinac Financial Corporation,
130 South Cedar Street, Manistique, Michigan, 49854
.
MARKET SUMMARY
The Corporation’s common stock is traded on the Nasdaq Small Cap Market under the symbol MFNC. The
Corporation had 1,345 shareholders of record as of March 30, 2008.
March 31, 2008
Dear Shareholders:
This letter will provide you with a review of the performance of Mackinac Financial Corporation
through the end of 2008 and our thoughts about business strategy as we move through 2009. We
continue to focus on areas impacting our business which we can control. We are concentrating on
managing credit risk, growing our book value per share and on increasing our core deposits. As you
will see from the information below, we are having success in those efforts.
The chart below is a recap of various balances and book value per share as of the end of the last
three years (dollars in thousands, except per share data):
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2008/2007
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2007/2006
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As of December 31,
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Increase (Decrease)
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Increase (Decrease)
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2008
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2007
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2006
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Dollars
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Percentage
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Dollars
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Percentage
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Loans
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$
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370,280
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$
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355,079
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$
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322,581
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$
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15,201
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4.28
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%
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$
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32,498
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10.07
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%
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Assets
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451,431
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408,880
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382,791
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42,551
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10.41
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26,089
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6.82
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Deposits
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371,097
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320,827
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312,421
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50,270
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15.67
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8,406
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2.69
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Borrowings
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36,210
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45,949
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38,307
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(9,739
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(21.20
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7,642
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19.95
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Shareholders’ equity
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41,552
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39,321
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28,790
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2,231
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5.67
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10,531
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36.58
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Book vaue per share
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12.15
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11.47
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8.40
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.68
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5.93
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3.07
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36.55
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2008 Year-in-Review
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§
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Loan growth of
$15.201 million
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§
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Credit quality still relatively strong with nonperforming assets to total assets of
1.57%
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§
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Gain on sale of loans of
$.120 million
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§
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Net interest margin at
3.23%
for the year
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§
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Net income of
$1.872
million, or
$.55
per common share
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§
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Book value at 2008 year-end of
$12.15
per share
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2008 Earnings Recap
Mackinac Financial Corporation reported net income of $1.872 million, or $.55 per share, for the
year ended December 31, 2008, compared to a net income of $10.163 million, or $2.96 per share, for
2007.
The 2008 results include the positive effect, $3.475 of a lawsuit settlement and the negative
effect, $.425 million, of a severance agreement.
The results for 2007 include the recognition of a $7.500 million deferred tax benefit for NOL and
tax credit carry-forwards and $.470 million of proceeds from the settlement of a lawsuit against
the Corporation’s former
accountants. Excluding these items in both years would have resulted in a
net loss of $.141 million, or less than $.01 loss per share, in 2008 versus $2.353 million or $.69
per share in 2007.
1
Our operations have been impacted in the past two years by the significant and rapid decline in
general interest rates which impacted interest earned on loans well ahead of interest paid on
deposits and borrowings. This margin
compression affected most banks and we acted to minimize the effects as quickly as possible.
Additionally, in late summer 2008, we implemented a program of interest rate floors for new and
renewing loans.
Credit Quality
Nonperforming assets at the end of 2008 totaled $7.076 million, or 1.57%, of assets compared to
$5.234 million, or 1.28% of assets at 2007 year-end. Increases in 2008 were due to several large
credits in Southeast Michigan. The increase in nonperforming assets, $2.269 million, in 2007 was
due primarily to commercial credits that were originated prior to the recapitalization and existing
management. An important aspect in the management of our loan portfolio is a program of continual
credit monitoring which results in early detection of problem credits. We follow this detection
process with a program that aggressively seeks an early resolution of problem loans to minimize
principal loss and the expenses of problem credits.
Loan Growth/Production
Loan growth in 2008 occurred despite a challenging and tough Michigan economic climate. Each year
we continue to evaluate and adjust underwriting standards to keep pace with the moving risk profile
of the bank and corresponding Michigan economic climate. This focus has enabled the organization
to maintain a low and manageable level of problem assets in relation to many peer and competing
banks. These processes for managing our loan portfolio’s growth and overall risk have provided the
foundation for loans growing $15.201 million in 2008, despite high levels of loan pay-downs and
runoff totaling $51.224 million. A good portion of loan runoff in 2008 was due to our discipline
in qualifying renewal loans relative to pricing and risk. New loans originated for the year were
$61.597 million. The majority of the loan growth was centered in the real estate secured
commercial, high net worth, and 1-4 family loan portfolios. We have purposely avoided the subprime
lending opportunities in these sectors.
Loan production in our three geographical regions is shown below.
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For the Year Ending December 31,
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(dollars in thousands)
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2008
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2007
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2006
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REGION
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Upper Peninsula
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37,040
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$
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40,876
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$
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37,115
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Northern Lower Peninsula
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14,183
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22,448
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25,929
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Southeast Michigan
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10,374
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50,404
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72,139
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TOTAL
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$
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61,597
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$
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113,728
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$
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135,183
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We have generated loan growth in all regions and we will continue to evaluate growth potential in
markets where we can grow loans with good credit quality and acceptable loan pricing enhanced by
fee income.
In 2008, mBank was awarded “Michigan Business Development Lender of the Year” by the United States
Small Business Administration. SBA programs not only significantly augment noninterest income, but
also positively impact the bank balance sheet by freeing up liquidity and capital requirements to
be allocated to continue earning asset generation, in addition to transferring all or part of the
risk off the bank’s balance sheet.
2
Deposit Growth
Core deposits, which we define as demand deposits, interest bearing checking accounts, money market
savings accounts and certificates of deposit under $100,000 started to grow in mid 2005. We
renamed the bank, changed all of our signs, altered every deposit product to bring about market
place competitiveness and developed new collateral material and newspaper ads for our local
markets.
Shown below is the mix of our deposits for the three most recent years.
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|
|
|
|
|
|
|
|
|
|
|
|
|
DEPOSIT MIX
|
|
|
|
|
As of December 31,
|
|
|
Percent Change
|
|
|
|
|
2008
|
|
|
Mix
|
|
|
2007
|
|
|
Mix
|
|
|
2006
|
|
|
Mix
|
|
|
2008/2007
|
|
|
2007/2006
|
|
|
CORE DEPOSITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactional accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
30,099
|
|
|
|
8.11
|
%
|
|
$
|
25,557
|
|
|
|
7.97
|
%
|
|
$
|
23,471
|
|
|
|
7.51
|
%
|
|
|
17.77
|
%
|
|
|
8.89
|
%
|
|
NOW, money market, checking
|
|
|
70,584
|
|
|
|
19.02
|
|
|
|
81,160
|
|
|
|
25.30
|
|
|
|
73,188
|
|
|
|
23.43
|
|
|
|
(13.03
|
)
|
|
|
10.89
|
|
|
Savings
|
|
|
20,730
|
|
|
|
5.59
|
|
|
|
12,485
|
|
|
|
3.89
|
|
|
|
13,365
|
|
|
|
4.28
|
|
|
|
66.04
|
|
|
|
(6.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total transactional accounts
|
|
|
121,413
|
|
|
|
32.72
|
|
|
|
119,202
|
|
|
|
37.15
|
|
|
|
110,024
|
|
|
|
35.22
|
|
|
|
1.85
|
|
|
|
8.34
|
|
|
Certificates of deposit <$100,000
|
|
|
73,752
|
|
|
|
19.87
|
|
|
|
80,607
|
|
|
|
25.12
|
|
|
|
89,585
|
|
|
|
28.67
|
|
|
|
(8.50
|
)
|
|
|
(10.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits
|
|
|
195,165
|
|
|
|
52.59
|
|
|
|
199,809
|
|
|
|
62.28
|
|
|
|
199,609
|
|
|
|
63.89
|
|
|
|
(2.32
|
)
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCORE DEPOSITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit >$100,000
|
|
|
25,044
|
|
|
|
6.75
|
|
|
|
22,355
|
|
|
|
6.97
|
|
|
|
23,645
|
|
|
|
7.57
|
|
|
|
12.03
|
|
|
|
(5.46
|
)
|
|
Brokered CDs
|
|
|
150,888
|
|
|
|
40.66
|
|
|
|
98,663
|
|
|
|
30.75
|
|
|
|
89,167
|
|
|
|
28.54
|
|
|
|
52.93
|
|
|
|
10.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncore deposits
|
|
|
175,932
|
|
|
|
47.41
|
|
|
|
121,018
|
|
|
|
37.72
|
|
|
|
112,812
|
|
|
|
36.11
|
|
|
|
45.38
|
|
|
|
7.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL DEPOSITS
|
|
$
|
371,097
|
|
|
|
100.00
|
%
|
|
$
|
320,827
|
|
|
|
100.00
|
%
|
|
$
|
312,421
|
|
|
|
100.00
|
%
|
|
|
15.67
|
|
|
|
2.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the past several years, the Bank has introduced several initiatives to provide customers with
simple, flexible, and convenient banking services to assist them in meeting all their financial
needs. We updated our electronic banking products for both consumers and businesses, rolled out
and implemented a comprehensive treasury management program, and provided remote deposit capture
machines or courier services to business customers in order to help garner transactional account
deposits. Additionally, we began an extensive officer calling effort to focus our relationship
officers on generating core deposit relationships with existing and new customers. While total
deposits did not grow in 2008, due primarily to our unwillingness to match high rates on CDs in our
local markets, we increased the proportion of transactional account balances, which are our lowest
cost sources of funds.
Noninterest Expense
Controlling noninterest expense is a distinct challenge for a strategy based upon growth. We
accept this challenge and recognize that certain operational costs will increase in future periods.
During 2008, our operating costs were negatively impacted by costs associated with nonperforming
assets and a $.425 million severance agreement. We have been successful in controlling most areas
of noninterest expense and will continue to focus on becoming more efficient.
3
The chart below illustrates the breakdown of noninterest expense as a percent of average assets.
Noninterest
Expense as Percent of Average Assets
The chart below illustrates the impact of controlling expenses and the net interest margin has on
our efficiency ratio.
Efficiency
Ratio*
4
Capital/Shareholders’ Equity
The Bank and Corporation were both well capitalized as of the end of 2008. On a consolidated
basis, equity totaled $41.552 million at 2008 year end compared to $39.321 million at the end of
2007. Book value per share amounted to $12.15 compared to $11.47 a year earlier.
Looking Forward
In 2009, we are faced with the challenges of an economy in turmoil and low expectations for the
economy to improve in the near term. We recognize the problems that arise during economic
downturns and have taken the steps within our company in order to weather the storm. We will
continue to price our loans at profitable levels, decrease costs where we can without compromising
services, and are working diligently to limit losses from our problem assets. In times like these,
a strong capital base is essential. We are currently well capitalized with Tier 1 capital at 8.01%
and total risk based capital of 10.38%. This level of capital, however, does not allow for any
significant asset growth, given another lean year for earnings growth with continued margin
pressure and the possibility of additional loan issues as the economy continues to falter.
With the uncertainties noted above, the Corporation made the decision to apply for capital under
the Capital Purchase Program, as part of the Troubled Asset Relief Program, commonly referred to as
TARP. We have received preliminary approval from the United States Treasury Department.
The Corporation is, and will remain, dedicated to the primary strategic objective of enhancing
franchise and shareholder value by building a strong banking franchise in our local markets. We
invite you to contact one of our knowledgeable relationship officers to discuss how mBank’s broad
array of products and services can fit your corporate and personal needs.
We thank you for your support during this difficult economic period and we welcome your comments
and questions.
Sincerely,
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul D. Tobias
|
|
Kelly W. George
|
|
Chairman and CEO
|
|
President and CEO
|
|
Mackinac Financial Corporation
|
|
mBank
|
5
Selected Financial Highlights
(Dollars in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Selected Financial Condition Data
(at end of period)
:
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
451,431
|
|
|
$
|
408,880
|
|
|
Loans
|
|
|
370,280
|
|
|
|
355,079
|
|
|
Investment securities
|
|
|
47,490
|
|
|
|
21,597
|
|
|
Deposits
|
|
|
371,097
|
|
|
|
320,827
|
|
|
Borrowings
|
|
|
36,210
|
|
|
|
45,949
|
|
|
Shareholders’ equity
|
|
|
41,552
|
|
|
|
39,321
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
12,864
|
|
|
$
|
13,417
|
|
|
Income before taxes
|
|
|
2,659
|
|
|
|
2,923
|
|
|
Net income
|
|
|
1,872
|
|
|
|
10,163
|
|
|
Income per common share — Basic
|
|
|
.55
|
|
|
|
2.96
|
|
|
Income per common share — Diluted
|
|
|
.55
|
|
|
|
2.96
|
|
|
Weighted average shares outstanding
|
|
|
3,422,012
|
|
|
|
3,428,695
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Ratios and Other Data:
|
|
|
|
|
|
|
|
|
|
Performance Ratios:
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
3.23
|
%
|
|
|
3.60
|
%
|
|
Efficiency ratio
|
|
|
85.51
|
|
|
|
79.46
|
|
|
Return on average assets
|
|
|
.44
|
|
|
|
2.59
|
|
|
Return on average equity
|
|
|
4.61
|
|
|
|
31.05
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$
|
425,343
|
|
|
$
|
392,313
|
|
|
Average total shareholders’ equity
|
|
|
40,630
|
|
|
|
32,731
|
|
|
Average loans to average deposits ratio
|
|
|
105.61
|
%
|
|
|
104.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Common Share Data at end of period:
|
|
|
|
|
|
|
|
|
|
Market price per common share
|
|
$
|
4.40
|
|
|
$
|
8.98
|
|
|
Book value per common share
|
|
$
|
12.15
|
|
|
$
|
11.47
|
|
|
Common shares outstanding
|
|
|
3,419,736
|
|
|
|
3,428,695
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data at end of period:
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
4,277
|
|
|
$
|
4,146
|
|
|
Non-performing assets
|
|
$
|
7,076
|
|
|
$
|
5,234
|
|
|
Allowance for loan losses to total loans
|
|
|
1.16
|
%
|
|
|
1.17
|
%
|
|
Non-performing assets to total assets
|
|
|
1.57
|
%
|
|
|
1.28
|
%
|
|
Number of:
|
|
|
|
|
|
|
|
|
|
Branch locations
|
|
|
12
|
|
|
|
12
|
|
|
FTE Employees
|
|
|
100
|
|
|
|
100
|
|
The above summary should be read in connection with the related consolidated financial statements
and notes included elsewhere in this report.
6
Five-Year Comparisons
ASSETS
(Dollars in Millions)
ASSETS
Total assets on a consolidated basis
increased by 10.4% during 2008 to
$451.4 million.
EARNING
ASSETS
(Dollars in Millions)
EARNING ASSETS
Earning assets increased 10.4% during 2008 to $422.1 million.
LOANS
(Dollars in Millions)
LOANS
Total loans increased 4.3% during 2008 to $370.3 million
7
Five-Year Comparisons (Continued)
SOURCE
OF FUNDS
(Dollars in Millions)
SOURCE OF FUNDS
Source of funds increased by 11.0% to $407.3 million.
SHAREHOLDERS’
EQUITY
(Dollars in Millions)
SHAREHOLDERS’ EQUITY
During 2008, shareholders’ equity
increased by $2.2 million, or 5.7% to $41.6 million.
NET
INCOME (LOSS)
(Dollars in Millions)
NET INCOME (LOSS)
Net income for 2008 was $1.9 million, as compared to net income of $10.2 million in 2007.
8
MACKINAC FINANCIAL CORPORATION
QUARTERLY FINANCIAL SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
Average
|
|
Shareholders’
|
|
Return on Average
|
|
Net Interest
|
|
Efficiency
|
|
Net Income
|
|
Book Value
|
|
Quarter Ended
|
|
Assets
|
|
Loans
|
|
Deposits
|
|
Equity
|
|
Assets
|
|
Equity
|
|
Margin
|
|
Ratio
|
|
Per Share
|
|
Per Share
|
|
December 31, 2008
|
|
$
|
441,583
|
|
|
$
|
366,077
|
|
|
$
|
358,213
|
|
|
$
|
41,516
|
|
|
|
(.23)
|
%
|
|
|
(2.42)
|
%
|
|
|
3.20
|
%
|
|
|
80.30
|
%
|
|
$
|
(.07
|
)
|
|
$
|
12.15
|
|
|
September 30, 2008
|
|
|
423,702
|
|
|
|
358,844
|
|
|
|
341,377
|
|
|
|
41,097
|
|
|
|
.20
|
|
|
|
2.08
|
|
|
|
3.39
|
|
|
|
79.12
|
|
|
|
.06
|
|
|
|
12.11
|
|
|
June 30, 2008
|
|
|
418,246
|
|
|
|
362,574
|
|
|
|
332,725
|
|
|
|
40,399
|
|
|
|
1.70
|
|
|
|
17.62
|
|
|
|
3.19
|
|
|
|
88.45
|
|
|
|
.52
|
|
|
|
11.98
|
|
|
March 31, 2008
|
|
|
417,682
|
|
|
|
357,778
|
|
|
|
336,016
|
|
|
|
39,491
|
|
|
|
.13
|
|
|
|
1.42
|
|
|
|
3.13
|
|
|
|
95.34
|
|
|
|
.04
|
|
|
|
11.56
|
|
|
December 31, 2007
|
|
|
406,308
|
|
|
|
350,050
|
|
|
|
324,194
|
|
|
|
38,973
|
|
|
|
.51
|
|
|
|
5.36
|
|
|
|
3.55
|
|
|
|
78.02
|
|
|
|
.15
|
|
|
|
11.47
|
|
|
September 30, 2007
|
|
|
400,105
|
|
|
|
340,391
|
|
|
|
327,293
|
|
|
|
32,184
|
|
|
|
7.99
|
|
|
|
99.30
|
|
|
|
3.71
|
|
|
|
74.71
|
|
|
|
2.35
|
|
|
|
11.29
|
|
|
June 30, 2007
|
|
|
382,065
|
|
|
|
324,721
|
|
|
|
309,469
|
|
|
|
30,412
|
|
|
|
.57
|
|
|
|
7.20
|
|
|
|
3.60
|
|
|
|
83.18
|
|
|
|
.16
|
|
|
|
8.89
|
|
|
March 31, 2007
|
|
|
380,403
|
|
|
|
318,072
|
|
|
|
309,619
|
|
|
|
29,254
|
|
|
|
1.10
|
|
|
|
14.35
|
|
|
|
3.55
|
|
|
|
82.39
|
|
|
|
.30
|
|
|
|
8.73
|
|
|
December 31, 2006
|
|
|
366,566
|
|
|
|
301,508
|
|
|
|
294,755
|
|
|
|
28,646
|
|
|
|
.37
|
|
|
|
4.68
|
|
|
|
3.44
|
|
|
|
94.60
|
|
|
|
.10
|
|
|
|
8.40
|
|
|
|
|
|
LOAN
PORTFOLIO BALANCES
|
|
TRANSACTIONAL ACCOUNT DEPOSITS
|
NET
INTEREST MARGIN
Quarter Ended
9
|
|
|
|
|
|
Plante & Moran, PLLC
Suite 500
2601 Cambridge Court
Aubum Hills, MI 48326
Tel: 248.375.7100
Fax: 248.375.7101
plantemoran.com
|
Report of Independent Registered Public Accounting Firm
Board of Directors
Mackinac Financial Corporation, Inc.
We have audited the consolidated statement of financial condition of Mackinac Financial
Corporation, Inc. as of December 31, 2008 and 2007 and the related consolidated statements of
income, changes in stockholders’ equity, and cash flows for each year in the three-year period
ended December 31, 2008. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated 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
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, 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 consolidated financial position of Mackinac Financial Corporation, Inc. as
of December 31, 2008 and 2007 and the consolidated results of their operations and their cash flows
for each year in the three-year period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.
|
|
|
|
|
|
|
|
Auburn Hills, Michigan
March 20, 2009
|
|
|
10
Consolidated Balance Sheets
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 2008 and 2007
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
10,112
|
|
|
$
|
6,196
|
|
|
Federal funds sold
|
|
|
—
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
10,112
|
|
|
|
6,362
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits in other financial institutions
|
|
|
582
|
|
|
|
1,810
|
|
|
Securities available for sale
|
|
|
47,490
|
|
|
|
21,597
|
|
|
Federal Home Loan Bank stock
|
|
|
3,794
|
|
|
|
3,794
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
296,088
|
|
|
|
288,839
|
|
|
Mortgage
|
|
|
70,447
|
|
|
|
62,703
|
|
|
Installment
|
|
|
3,745
|
|
|
|
3,537
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
370,280
|
|
|
|
355,079
|
|
|
Allowance for loan losses
|
|
|
(4,277
|
)
|
|
|
(4,146
|
)
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
|
366,003
|
|
|
|
350,933
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
11,189
|
|
|
|
11,609
|
|
|
Other real estate held for sale
|
|
|
2,189
|
|
|
|
1,226
|
|
|
Other assets
|
|
|
10,072
|
|
|
|
11,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
451,431
|
|
|
$
|
408,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits
|
|
$
|
30,099
|
|
|
$
|
25,557
|
|
|
NOW, money market, checking
|
|
|
70,584
|
|
|
|
81,160
|
|
|
Savings
|
|
|
20,730
|
|
|
|
12,485
|
|
|
CDs<$100,000
|
|
|
73,752
|
|
|
|
80,607
|
|
|
CDs>$100,000
|
|
|
25,044
|
|
|
|
22,355
|
|
|
Brokered
|
|
|
150,888
|
|
|
|
98,663
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
371,097
|
|
|
|
320,827
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
|
—
|
|
|
|
7,710
|
|
|
Short-term
|
|
|
—
|
|
|
|
1,959
|
|
|
Long-term
|
|
|
36,210
|
|
|
|
36,280
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
36,210
|
|
|
|
45,949
|
|
|
Other liabilities
|
|
|
2,572
|
|
|
|
2,783
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
409,879
|
|
|
|
369,559
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Preferred stock — no par value:
|
|
|
|
|
|
|
|
|
|
Authorized 500,000 shares, no shares outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Common stock and additional paid in capital — no par value
|
|
|
|
|
|
|
|
|
|
Authorized - 18,000,000 shares
|
|
|
|
|
|
|
|
|
|
Issued and outstanding —
3,419,736
and 3,428,695,
respectively
|
|
|
42,815
|
|
|
|
42,843
|
|
|
Accumulated deficit
|
|
|
(1,708
|
)
|
|
|
(3,582
|
)
|
|
Accumulated other comprehensive income
|
|
|
445
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
41,552
|
|
|
|
39,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
451,431
|
|
|
$
|
408,880
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
11
Consolidated Statements of Operations
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2008, 2007, and 2006
(Dollars in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
22,555
|
|
|
$
|
26,340
|
|
|
$
|
21,239
|
|
|
Tax-exempt
|
|
|
404
|
|
|
|
533
|
|
|
|
753
|
|
|
Interest on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,293
|
|
|
|
1,100
|
|
|
|
1,186
|
|
|
Tax-exempt
|
|
|
5
|
|
|
|
—
|
|
|
|
87
|
|
|
Other interest income
|
|
|
305
|
|
|
|
722
|
|
|
|
787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
24,562
|
|
|
|
28,695
|
|
|
|
24,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
10,115
|
|
|
|
13,224
|
|
|
|
10,575
|
|
|
Borrowings
|
|
|
1,583
|
|
|
|
2,054
|
|
|
|
1,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
11,698
|
|
|
|
15,278
|
|
|
|
12,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
12,864
|
|
|
|
13,417
|
|
|
|
11,593
|
|
|
Provision for loan losses
|
|
|
2,300
|
|
|
|
400
|
|
|
|
(861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
10,564
|
|
|
|
13,017
|
|
|
|
12,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees
|
|
|
838
|
|
|
|
688
|
|
|
|
547
|
|
|
Net security gains
|
|
|
64
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
Net gains on sale of secondary market loans
|
|
|
120
|
|
|
|
498
|
|
|
|
197
|
|
|
Proceeds from settlement of lawsuit
|
|
|
3,475
|
|
|
|
470
|
|
|
|
—
|
|
|
Other
|
|
|
156
|
|
|
|
351
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
4,653
|
|
|
|
2,006
|
|
|
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
6,886
|
|
|
|
6,757
|
|
|
|
6,132
|
|
|
Occupancy
|
|
|
1,374
|
|
|
|
1,272
|
|
|
|
1,264
|
|
|
Furniture and equipment
|
|
|
771
|
|
|
|
678
|
|
|
|
631
|
|
|
Data processing
|
|
|
844
|
|
|
|
785
|
|
|
|
691
|
|
|
Professional service fees
|
|
|
508
|
|
|
|
532
|
|
|
|
1,425
|
|
|
Loan and deposit
|
|
|
569
|
|
|
|
285
|
|
|
|
392
|
|
|
Telephone
|
|
|
170
|
|
|
|
228
|
|
|
|
210
|
|
|
Advertising
|
|
|
305
|
|
|
|
370
|
|
|
|
346
|
|
|
Other
|
|
|
1,131
|
|
|
|
1,193
|
|
|
|
1,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
12,558
|
|
|
|
12,100
|
|
|
|
12,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
2,659
|
|
|
|
2,923
|
|
|
|
1,216
|
|
|
Provision for (benefit of) income taxes
|
|
|
787
|
|
|
|
(7,240
|
)
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
1,872
|
|
|
$
|
10,163
|
|
|
$
|
1,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.55
|
|
|
$
|
2.96
|
|
|
$
|
.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
.55
|
|
|
$
|
2.96
|
|
|
$
|
.50
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
12
Consolidated Statements of Changes in Shareholders’ Equity
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2008, 2007, and 2006
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares of
|
|
|
Common Stock
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
Common
|
|
|
and Additional
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
Stock
|
|
|
Paid in Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance, January 1, 2006
|
|
|
3,428,695
|
|
|
$
|
42,412
|
|
|
$
|
(15,461
|
)
|
|
$
|
(363
|
)
|
|
$
|
26,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
1,716
|
|
|
|
—
|
|
|
|
1,716
|
|
|
Other comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on
securities available
for sale
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
176
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option compensation
|
|
|
—
|
|
|
|
310
|
|
|
|
—
|
|
|
|
—
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
3,428,695
|
|
|
|
42,722
|
|
|
|
(13,745
|
)
|
|
|
(187
|
)
|
|
|
28,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
10,163
|
|
|
|
—
|
|
|
|
10,163
|
|
|
Other comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized income on
securities available
for sale
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
247
|
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option compensation
|
|
|
—
|
|
|
|
121
|
|
|
|
—
|
|
|
|
—
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
3,428,695
|
|
|
|
42,843
|
|
|
|
(3,582
|
)
|
|
|
60
|
|
|
|
39,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of oddlot shares
|
|
|
(8,959
|
)
|
|
|
(110
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(110
|
)
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
1,872
|
|
|
|
—
|
|
|
|
1,872
|
|
|
Other comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized income on
securities available
for sale
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
385
|
|
|
|
385
|
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option compensation
|
|
|
—
|
|
|
|
82
|
|
|
|
—
|
|
|
|
—
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
3,419,736
|
|
|
$
|
42,815
|
|
|
$
|
(1,708
|
)
|
|
$
|
445
|
|
|
$
|
41,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
13
Consolidated Statements of Cash Flows
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2008, 2007, and 2006
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,872
|
|
|
$
|
10,163
|
|
|
$
|
1,716
|
|
|
Adjustments to reconcile net income to net net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,355
|
|
|
|
942
|
|
|
|
1,052
|
|
|
Provision for loan losses
|
|
|
2,300
|
|
|
|
400
|
|
|
|
(861
|
)
|
|
Provision for (benefit of) deferred income taxes
|
|
|
787
|
|
|
|
(7,240
|
)
|
|
|
(500
|
)
|
|
(Gain) loss on sales/calls of securities available for
sale
|
|
|
(64
|
)
|
|
|
1
|
|
|
|
1
|
|
|
(Gain) on sale of premises, equipment, branch and other
real estate
|
|
|
(77
|
)
|
|
|
(17
|
)
|
|
|
(60
|
)
|
|
Writedown of other real estate
|
|
|
964
|
|
|
|
40
|
|
|
|
—
|
|
|
Stock option compensation
|
|
|
82
|
|
|
|
121
|
|
|
|
310
|
|
|
Change in other assets
|
|
|
367
|
|
|
|
12
|
|
|
|
(143
|
)
|
|
Change in other liabilities
|
|
|
(210
|
)
|
|
|
(491
|
)
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
7,376
|
|
|
|
3,931
|
|
|
|
1,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (increase) in loans
|
|
|
(21,173
|
)
|
|
|
(35,043
|
)
|
|
|
(83,074
|
)
|
|
Net (increase) decrease in interest-bearing deposits in other
financial institutions
|
|
|
1,228
|
|
|
|
(954
|
)
|
|
|
169
|
|
|
Purchase of securities available for sale
|
|
|
(50,813
|
)
|
|
|
(25,556
|
)
|
|
|
(5,000
|
)
|
|
Proceeds from maturities, sales, calls or paydowns of securities
available for sale
|
|
|
25,373
|
|
|
|
37,215
|
|
|
|
6,579
|
|
|
FHLB repurchase of stock
|
|
|
—
|
|
|
|
—
|
|
|
|
1,061
|
|
|
Capital expenditures
|
|
|
(618
|
)
|
|
|
(1,516
|
)
|
|
|
(1,367
|
)
|
|
Proceeds from sale of premises, equipment, and other real estate
|
|
|
1,956
|
|
|
|
323
|
|
|
|
1,013
|
|
|
Net cash paid in connection with branch sales
|
|
|
—
|
|
|
|
(8,042
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(44,047
|
)
|
|
|
(33,573
|
)
|
|
|
(80,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
|
50,270
|
|
|
|
17,656
|
|
|
|
79,789
|
|
|
Net increase (decrease) in federal funds purchased
|
|
|
(7,710
|
)
|
|
|
7,710
|
|
|
|
—
|
|
|
Net increase (decrease) in lines of credit
|
|
|
(1,959
|
)
|
|
|
—
|
|
|
|
1,959
|
|
|
Repurchase of common stock-oddlot shares
|
|
|
(110
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Principal payments on borrowings
|
|
|
(70
|
)
|
|
|
(68
|
)
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
40,421
|
|
|
|
25,298
|
|
|
|
81,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
3,750
|
|
|
|
(4,344
|
)
|
|
|
2,763
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
6,362
|
|
|
|
10,706
|
|
|
|
7,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
10,112
|
|
|
$
|
6,362
|
|
|
$
|
10,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
11,961
|
|
|
$
|
13,609
|
|
|
$
|
12,270
|
|
|
Income taxes
|
|
|
70
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers of Foreclosures from Loans to Other Real Estate Held for Sale
|
|
|
2,849
|
|
|
|
1,218
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities Divested in Branch Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
—
|
|
|
|
27
|
|
|
|
—
|
|
|
Premises and equipment
|
|
|
—
|
|
|
|
1,181
|
|
|
|
—
|
|
|
Deposits
|
|
|
—
|
|
|
|
9,250
|
|
|
|
—
|
|
See accompanying notes to consolidated financial statements
14
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Mackinac Financial Corporation (the “Corporation”) and Subsidiaries
conform to accounting principles generally accepted in the United States and prevailing practices
within the banking industry. Significant accounting policies are summarized below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation and its wholly owned
subsidiaries, mBank (the “Bank”) and other minor subsidiaries, after elimination of intercompany
transactions and accounts.
Nature of Operations
The Corporation’s and the Bank’s revenues and assets are derived primarily from banking activities.
The Bank’s primary market area is the Upper Peninsula, the northern portion of the Lower Peninsula
of Michigan, and Oakland County in Lower Michigan. The Bank provides to its customers commercial,
real estate, agricultural, and consumer loans, as well as a variety of traditional deposit
products. A portion, approximately 3.0%, of the Bank’s commercial loan portfolio consists of leases
to commercial and governmental entities, which are secured by various types of equipment. These
leases are dispersed geographically throughout the country. Approximately 1.0% of the Corporation’s
business activity is with Canadian customers and denominated in Canadian dollars.
While the Corporation’s chief decision makers monitor the revenue streams of the various
Corporation products and services, operations are managed and financial performance is evaluated on
a Corporation-wide basis. Accordingly, all of the Corporation’s banking operations are considered
by management to be aggregated in one reportable operating segment.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term relate
to the determination of the allowance for loan losses, the valuation of investment securities, the
valuation of foreclosed real estate, deferred tax assets, and impairment of intangible assets.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand,
noninterest-bearing deposits in correspondent banks, and federal funds sold. Generally, federal
funds are purchased and sold for one-day periods.
Securities
The Corporation’s securities are classified and accounted for as securities available for sale.
These securities are stated at fair value. Premiums and discounts are recognized in interest income
using the interest method over the period to maturity. Unrealized holding gains and losses on
securities available for sale are reported as accumulated other comprehensive income within
shareholders’ equity until realized. When it is determined that securities or other investments
are impaired and the impairment is other than temporary, an impairment loss is recognized in
earnings and a new basis in the affected security is established. Gains and losses on the sale of
securities are recorded on the trade date and determined using the specific-identification method.
15
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required to hold stock in the
FHLB based on the anticipated level of borrowings to be advanced. This stock is recorded at cost,
which approximates fair value. Transfer of the stock is substantially restricted.
Interest Income and Fees on Loans
Interest on loans is accrued and credited to income based on the principal amount outstanding.
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. 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. Loan-origination fees and allocated costs of originating loans are deferred and recognized
over the term of the loan as an adjustment to yield in accordance with FASB Statement No. 91.
Allowance for Loan Losses
The allowance for loan losses includes specific allowances related to commercial 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 continues to maintain a general allowance for loan losses for loans not considered
impaired. The allowance for loan losses is maintained at a level which management believes is
adequate to provide for possible 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.
Other Real Estate Held for Sale
Other real estate held for sale consists of assets acquired through, or in lieu of, foreclosure
and other long-lived assets to be disposed of by sale, whether previously held and used or newly
acquired. Other real estate held for sale is initially recorded at the lower of cost or fair
value, less costs to sell, establishing a new cost basis. Valuations are periodically performed
by management, and the assets’ carrying values are adjusted to the lower of cost basis or fair
value less costs to sell. Impairment losses are recognized for any initial or subsequent
write-downs. Net revenue and expenses from operations of other real estate held for sale are
included in other expense.
16
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
Intangible Assets
Intangible assets attributable to the value of core deposits are stated at cost less accumulated
amortization. The core deposit premium is amortized on a straight-line basis over a period of ten
years and is subject to an annual impairment test based on the change in deposit base.
The Corporation reviews intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. The
evaluation includes assessing the estimated fair value of the intangible asset based on market
prices for similar assets, where available, and the present value of the estimated future cash
flows associated with the intangible asset. Adjustments are recorded if it is determined that the
benefit of the intangible asset has decreased.
Stock Option Plans
The Corporation sponsors three stock option plans. One plan was approved during 2000 and applies
to officers, employees, and nonemployee directors. This plan was amended as a part of the December
2004 stock offering and recapitalization. The amendment, approved by shareholders, increased the
shares available under this plan by 428,587 shares from the original 25,000 (adjusted for the 1:20
reverse stock split), to a total authorized share balance of 453,587. The other two plans, one for
officers and employees and the other for nonemployee directors, were approved in 1997. A total of
30,000 (adjusted for the 1:20 split), were made available for grant under these plans. These two
1997 plans expired early in 2007. Options under all of the plans are granted at the discretion of
a committee of the Corporation’s Board of Directors. Options to purchase shares of the
Corporation’s stock are granted at a price equal to the market price of the stock at the date of
grant. The committee determines the vesting of the options when they are granted as established
under the plan.
The Corporation adopted SFAS No. 123 (Revised) “Share Based Payments” in the first quarter of 2006.
This statement supersedes APB Opinion No. 25, “Accounting for Stock Issue to Employees” and its
related implementation guidance. Under Opinion No. 25, issuing stock options to employees
generally resulted in recognition of no compensation cost. This adoption resulted in the
recognition of before tax compensation expense in the amount of $82,000 for 2008, $121,000 for
2007, and $310,000 in 2006. The expense recorded recognizes the current period vesting of options
outstanding. The per share impact of this accounting change was $.02 for 2008. In 2007 and 2006,
the per share impact was $.04 and $.08, respectively.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss).
Other comprehensive income (loss) includes unrealized gains and losses on securities available for
sale, which are recognized as a separate component of equity and accumulated other comprehensive
income (loss).
Earnings per Common Share
Basic earnings per common share is net income divided by the weighted average number of common
shares outstanding during the period. Diluted earnings per common share includes the dilutive
effect of additional potential common shares issuable under stock option agreements
17
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Earnings per share are based upon the weighted average number of shares outstanding. The following
shows the
computation of basic and diluted income per share for the years ended December 31 (dollars in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Income
|
|
|
|
|
Net Income
|
|
|
Number of Shares
|
|
|
per Share
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share — basic and diluted
|
|
$
|
1,872
|
|
|
|
3,422,012
|
|
|
$
|
.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share — basic and diluted
|
|
$
|
10,163
|
|
|
|
3,428,695
|
|
|
$
|
2.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share — basic and diluted
|
|
$
|
1,716
|
|
|
|
3,428,695
|
|
|
$
|
.50
|
|
|
|
|
|
|
|
|
|
|
|
|
In the above disclosure the dilutive effect of additional shares outstanding, as a result of stock
options exercisable, was not taken into account since the additional shares issued as a result of
vested options under the Company’s option plans would not have a dilutive effect on the earnings
calculated per share.
Income Taxes
Deferred income taxes have been provided under the liability method. Deferred tax assets and
liabilities are determined based upon the difference between the financial statement and tax bases
of assets and liabilities as measured by the enacted tax rates which will be in effect when these
differences are expected to reverse. Deferred tax expense (credit) 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. In
2008, the Corporation recorded a current tax provision of $.787 million. The Corporation recorded a
$.260 million current tax provision in the fourth quarter of 2007. In the third quarter of 2007,
the Corporation reversed a portion of the valuation allowance that pertained to the deferred tax
benefit of NOL and tax credit carryforwards. This valuation adjustment, $7.500 million, was
recorded as a current period income tax benefit. In 2006, the Corporation recorded a $.500 million
tax benefit and utilized additional NOL carryforward benefits to offset current taxable income.
The recognition of the deferred tax benefit in 2007 and 2006 was in accordance with generally
accepted accounting principles, and considered, among other things, the probability of utilizing
the NOL and credit carryforwards. Further discussion on the NOL carryforward and future benefits
is presented in the “Management’s Discussion and Analysis” section of this report.
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.
Reclassifications
Certain amounts in the 2007 and 2006 consolidated financial statements have been reclassified to
conform to the 2008 presentation.
18
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 2 — RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $1.400 million were restricted on December 31, 2008 to
meet the reserve requirements of the Federal Reserve System.
In the normal course of business, the Corporation maintains cash and due from bank balances with
correspondent banks. Balances in these accounts may exceed the Federal Deposit Insurance
Corporation’s insured limit of $250,000, which was increased from $100,000 under certain provisions
of the Troubled Asset Relief Program (“TARP”) and will revert back to $100,000 at 2009 year end.
Management believes that these financial institutions have strong credit ratings and the credit
risk related to these deposits is minimal.
NOTE 3 — SECURITIES AVAILABLE FOR SALE
The carrying value and estimated fair value of securities available for sale are as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Agencies — MBS
|
|
$
|
46,316
|
|
|
$
|
632
|
|
|
$
|
(7
|
)
|
|
$
|
46,941
|
|
|
Obligations of states and political subdivisions
|
|
|
498
|
|
|
|
51
|
|
|
|
—
|
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
46,814
|
|
|
$
|
683
|
|
|
$
|
(7
|
)
|
|
$
|
47,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Agencies
|
|
$
|
20,982
|
|
|
$
|
25
|
|
|
$
|
(38
|
)
|
|
$
|
20,969
|
|
|
Obligations of states and political subdivisions
|
|
|
556
|
|
|
|
72
|
|
|
|
—
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
21,538
|
|
|
$
|
97
|
|
|
$
|
(38
|
)
|
|
$
|
21,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is information pertaining to securities with gross unrealized losses at December 31,
2008 and 2007 aggregated by investment category and length of time these individual securities
have been in a loss position (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than Twelve Months
|
|
|
Over Twelve Months
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Agencies — MBS
|
|
$
|
(7
|
)
|
|
$
|
5,106
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
(7
|
)
|
|
$
|
5,106
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Agencies
|
|
$
|
(7
|
)
|
|
$
|
6,978
|
|
|
$
|
(31
|
)
|
|
$
|
8,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
|
$
|
(7
|
)
|
|
$
|
6,978
|
|
|
$
|
(31
|
)
|
|
$
|
8,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 3 — SECURITIES AVAILABLE FOR SALE
(CONTINUED)
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Proceeds from sales and calls
|
|
$
|
12,047
|
|
|
$
|
6,579
|
|
|
$
|
3,010
|
|
|
Gross gains on sales
|
|
|
65
|
|
|
|
—
|
|
|
|
—
|
|
|
Gross (losses) on sales and calls
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
The carrying value and estimated fair value of securities available for sale at December 31, 2008,
by contractual maturity, are shown below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Due in one year or less
|
|
$
|
5
|
|
|
$
|
5
|
|
|
Due after one year through five years
|
|
|
26
|
|
|
|
26
|
|
|
Due after five years through ten years
|
|
|
467
|
|
|
|
517
|
|
|
Due after ten years
|
|
|
46,316
|
|
|
|
46,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,814
|
|
|
$
|
47,490
|
|
|
|
|
|
|
|
|
|
Contractual maturities may differ from expected maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties. See Note 10 for
information on securities pledged to secure borrowings from the Federal Home Loan Bank.
20
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 — LOANS
The composition of loans at December 31 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Commercial real estate
|
|
$
|
185,241
|
|
|
$
|
171,695
|
|
|
Commercial, financial, and agricultural
|
|
|
79,734
|
|
|
|
78,192
|
|
|
One to four family residential real estate
|
|
|
65,595
|
|
|
|
57,613
|
|
|
Construction:
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
4,852
|
|
|
|
5,090
|
|
|
Commerical
|
|
|
31,113
|
|
|
|
38,952
|
|
|
Consumer
|
|
|
3,745
|
|
|
|
3,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
370,280
|
|
|
$
|
355,079
|
|
|
|
|
|
|
|
|
|
An analysis of the allowance for loan losses for the years ended December 31 is as follows (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balance, January 1
|
|
$
|
4,146
|
|
|
$
|
5,006
|
|
|
$
|
6,108
|
|
|
Recoveries on loans previously charged
off
|
|
|
121
|
|
|
|
50
|
|
|
|
91
|
|
|
Loans charged off
|
|
|
(2,290
|
)
|
|
|
(1,310
|
)
|
|
|
(332
|
)
|
|
Provision
|
|
|
2,300
|
|
|
|
400
|
|
|
|
(861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
4,277
|
|
|
$
|
4,146
|
|
|
$
|
5,006
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2008, net charge off activity was $2.169 million, or .60% of average loans outstanding compared
to net charge-offs of $1.260 million, or .38% of average loans, in the same period in 2007 and
$.241 million, or .08% of average loans, in 2006. During 2008, a provision of $2.300 million was
made to increase the reserve. This provision was made in accordance with the Corporation’s
allowance for loan loss reserve policy, which calls for a measurement of the adequacy of the
reserve at each quarter end. This process includes an analysis of the loan portfolio to take into
account increases in loans outstanding and portfolio composition, historical loss rates, and
specific reserve requirements of nonperforming loans. During the third quarter of 2007, a
provision of $.400 million was made to increase the reserve. In the first quarter of 2006, the
Corporation reduced the allowance for loan losses by recording a negative provision amounting to
$.600 million In the fourth quarter of 2006, a reduction of $.261 million was made to the reserve
due to the resolution of a problem loan with an excess specific reserve. These reductions in the
reserve were made in recognition of the improved credit quality existent in the loan portfolio and
are discussed in more detail under “Management’s Discussion and Analysis.”
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. The interest income recorded, and that
which would have been recorded had nonaccrual and renegotiated loans
been current or not troubled, was not material to the consolidated financial statements for the
years ended December 31, 2008 and 2007.
A loan is considered impaired, based on current information and events, if it is probable that the
Bank will be unable to collect the scheduled payments of principal or interest when due, according
to the contractual terms of the loan agreement.
21
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 — LOANS
(CONTINUED)
The following is a summary of impaired loans and their effect on interest income (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
|
Valuation Reserve
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balances, at period end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with valuation reserve
|
|
$
|
3,730
|
|
|
$
|
3,639
|
|
|
$
|
1,804
|
|
|
$
|
994
|
|
|
$
|
1,320
|
|
|
$
|
493
|
|
|
Impaired loans with no valuation reserve
|
|
|
1,157
|
|
|
|
369
|
|
|
|
1,136
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
4,887
|
|
|
$
|
4,008
|
|
|
$
|
2,940
|
|
|
$
|
994
|
|
|
$
|
1,320
|
|
|
$
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans on nonaccrual basis
(1)
|
|
$
|
4,887
|
|
|
$
|
3,298
|
|
|
$
|
2,900
|
|
|
$
|
994
|
|
|
$
|
1,219
|
|
|
$
|
493
|
|
|
Impaired loans on accrual basis
|
|
|
—
|
|
|
|
710
|
|
|
|
40
|
|
|
|
—
|
|
|
|
101
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
4,887
|
|
|
$
|
4,008
|
|
|
$
|
2,940
|
|
|
$
|
994
|
|
|
$
|
1,320
|
|
|
$
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average investment in impaired loans
|
|
$
|
4,834
|
|
|
$
|
4,135
|
|
|
$
|
1,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized during impairment
|
|
|
60
|
|
|
|
129
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income that would have been
recognized on an accrual basis
|
|
|
377
|
|
|
|
391
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-basis interest income recognized
|
|
|
60
|
|
|
|
84
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In addition to the valuation reserves on impaired loans as of December 31, 2007,
the Bank had an SBA loan guarantee of $.435 million, which relates to a hotel/motel loan included
with nonaccrual loans.
|
Insider Loans
The Bank, in the ordinary course of business, grants loans to the Corporation’s executive officers
and directors, including their families and firms in which they are principal owners. Activity in
such loans is summarized below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Loans outstanding, January 1
|
|
$
|
1,720
|
|
|
$
|
1,621
|
|
|
New loans
|
|
|
372
|
|
|
|
—
|
|
|
Net activity on revolving lines of credit
|
|
|
2,378
|
|
|
|
556
|
|
|
Change in related party interest
|
|
|
2,733
|
|
|
|
—
|
|
|
Repayment
|
|
|
(687
|
)
|
|
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding, December 31
|
|
$
|
6,516
|
|
|
$
|
1,720
|
|
|
|
|
|
|
|
|
|
There were no loans to related-parties classified substandard as of December 31, 2008 and 2007. In
addition to the outstanding balances above, there were unused commitments of $.924 million to
related parties at December 31, 2008.
22
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 5 — PREMISES AND EQUIPMENT
Details of premises and equipment at December 31 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
$
|
2,042
|
|
|
$
|
2,042
|
|
|
Buildings and improvements
|
|
|
12,545
|
|
|
|
12,258
|
|
|
Furniture, fixtures, and equipment
|
|
|
4,261
|
|
|
|
3,783
|
|
|
Construction in progress
|
|
|
70
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
Total cost basis
|
|
|
18,918
|
|
|
|
18,307
|
|
|
Less — accumulated depreciation
|
|
|
7,729
|
|
|
|
6,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
11,189
|
|
|
$
|
11,609
|
|
|
|
|
|
|
|
|
|
The construction in progress at the end of 2008 pertains to ATM installation at a branch location,
improvements to an existing branch location, and costs associated with the establishment of a new
branch location.
In October 2007, the Bank sold its Ripley branch office, with deposits of approximately $9.3
million, premises and equipment with a net book value of $1.2 million, and loans totaling $27,000.
Depreciation of premises and equipment charged to operating expenses amounted to $1.035 million in
2008, $.891 million in 2007, and $.890 million in 2006.
NOTE 6 — OTHER REAL ESTATE HELD FOR SALE
An analysis of other real estate held for sale for the years ended December 31 is as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance, January 1
|
|
$
|
1,226
|
|
|
$
|
26
|
|
|
Other real estate transferred from loans due to
foreclosure
|
|
|
2,849
|
|
|
|
1,218
|
|
|
Other real estate sold / written down
|
|
|
(1,886
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
2,189
|
|
|
$
|
1,226
|
|
|
|
|
|
|
|
|
|
NOTE 7 — INTANGIBLE ASSET
Included in other assets are core deposit premiums acquired through acquisitions. These core
deposit premiums are considered an intangible asset. As of December 31, 2008, the remaining
balance of core deposit intangibles was $45,000. Core deposit premium expense amounted to $78,000
in 2008, $82,000 in 2007, $125,000 in 2006. The remaining balance of $45,000 will be amortized in
2009.
23
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 8 — DEPOSITS
The distribution of deposits at December 31 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Noninterest bearing
|
|
$
|
30,099
|
|
|
$
|
25,557
|
|
|
NOW, money market, checking
|
|
|
70,584
|
|
|
|
81,160
|
|
|
Savings
|
|
|
20,730
|
|
|
|
12,485
|
|
|
CDs <$100,000
|
|
|
73,752
|
|
|
|
80,607
|
|
|
CDs >$100,000
|
|
|
25,044
|
|
|
|
22,355
|
|
|
Brokered
|
|
|
150,888
|
|
|
|
98,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
371,097
|
|
|
$
|
320,827
|
|
|
|
|
|
|
|
|
|
Maturities of non-brokered time deposits outstanding at December 31, 2008, are as follows (dollars
in thousands):
|
|
|
|
|
|
|
2009
|
|
$
|
85,296
|
|
|
2010
|
|
|
8,239
|
|
|
2011
|
|
|
2,976
|
|
|
2012
|
|
|
1,223
|
|
|
2013
|
|
|
291
|
|
|
Thereafter
|
|
|
771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
98,796
|
|
|
|
|
|
|
Brokered deposits of $150.888 million mature in 2009.
NOTE 9 — SHORT-TERM BORROWINGS
Short-term borrowings consist of the following at December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Fed funds purchased with a weighted average rate of 4.18%
|
|
$
|
—
|
|
|
$
|
7,710
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance outstanding on line of credit with a correspondent bank, interest payable
at the prime rate, 7.25% as of December 31, 2007, matured November 30, 2008
|
|
|
—
|
|
|
|
1,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
9,669
|
|
|
|
|
|
|
|
|
|
In the second quarter of 2006, the Corporation established a $6 million line of credit with a
correspondent bank. This line of credit, which is priced at the prime rate, was utilized by the
Corporation to infuse capital into the Bank in order to support the regulatory required 8% Tier 1
Capital and provide cash for holding company operations. This line of credit was secured by all of
the shares of the Bank, matured November 30, 2008 and was subsequently closed.
24
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 10 — LONG-TERM BORROWINGS
Long-term borrowings consist of the following at December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Federal Home Loan Bank fixed rate advances at rates ranging from 4.98% to 5.16%
maturing in 2010
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank variable rate advances at rates ranging from 2.88% to
4.54% maturing in 2011
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmers Home Administration, fixed-rate note payable, maturing August 24, 2024
interest payable at 1%
|
|
|
1,210
|
|
|
|
1,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,210
|
|
|
$
|
36,280
|
|
|
|
|
|
|
|
|
|
The Federal Home Loan Bank borrowings are collateralized at December 31, 2008 by the following: a
collateral agreement on the Corporation’s one to four family residential real estate loans with a
book value of approximately $26.972 million; mortgage related and municipal securities with an
amortized cost and estimated fair value of $19.107 million and $18.870 million, respectively; and
Federal Home Loan Bank stock owned by the Bank totaling $3.794 million. Prepayment of the
remaining advances is subject to the provisions and conditions of the credit policy of the Federal
Home Loan Bank of Indianapolis in effect as of December 31, 2008.
The $35.000 million FHLB borrowings are comprised of both fixed and variable rate borrowings as
shown in the above table. The FHLB has the option to convert the $15.000 million of fixed rate
advances to adjustable rate advances, repricing quarterly at three month LIBOR flat, on the
original call date and thereafter.
The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $.334 million
originated and held by the Corporation’s wholly owned subsidiary, First Rural Relending and an
assignment of a demand deposit account in the amount of $.981 million, and guaranteed by the
Corporation.
Maturities of long-term borrowings outstanding at December 31, 2008 are as follows (dollars in
thousands):
|
|
|
|
|
|
|
2009
|
|
$
|
70
|
|
|
2010
|
|
|
15,071
|
|
|
2011
|
|
|
20,072
|
|
|
2012
|
|
|
72
|
|
|
2013
|
|
|
73
|
|
|
Thereafter
|
|
|
852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,210
|
|
|
|
|
|
|
25
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 11 — INCOME TAXES
The components of the federal income tax provision (credit) for the years ended December 31 are as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current tax expense (credit)
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
Change in valuation allowance
|
|
|
—
|
|
|
|
(7,255
|
)
|
|
|
(500
|
)
|
|
Deferred tax expense
|
|
|
787
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (credit) for income taxes
|
|
$
|
787
|
|
|
$
|
(7,240
|
)
|
|
$
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Tax expense (benefit) at statutory rate
|
|
$
|
904
|
|
|
$
|
993
|
|
|
$
|
413
|
|
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest
|
|
|
(137
|
)
|
|
|
(181
|
)
|
|
|
(252
|
)
|
|
Change in valuation allowance
|
|
|
—
|
|
|
|
(8,136
|
)
|
|
|
(288
|
)
|
|
Other
|
|
|
20
|
|
|
|
84
|
|
|
|
(373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit of) income taxes
|
|
$
|
787
|
|
|
$
|
(7,240
|
)
|
|
$
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
26
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 11 — INCOME TAXES
(CONTINUED)
Deferred income taxes are provided for the temporary differences between the financial reporting
and tax bases of the Corporation’s assets and liabilities. The major components of net deferred tax
assets at December 31 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
1,454
|
|
|
$
|
1,410
|
|
|
Deferred compensation
|
|
|
310
|
|
|
|
350
|
|
|
Intangible assets
|
|
|
129
|
|
|
|
289
|
|
|
Alternative Minimum Tax Credit
|
|
|
1,463
|
|
|
|
1,463
|
|
|
NOL carryforward
|
|
|
10,924
|
|
|
|
11,623
|
|
|
Depreciation
|
|
|
131
|
|
|
|
65
|
|
|
Tax credit carryovers
|
|
|
672
|
|
|
|
672
|
|
|
Other
|
|
|
215
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
15,298
|
|
|
|
16,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
$
|
(8,146
|
)
|
|
$
|
(8,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(418
|
)
|
|
|
(376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liabilty)
|
|
$
|
6,734
|
|
|
$
|
7,755
|
|
|
|
|
|
|
|
|
|
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. At December 31, 2008 and 2007, the
Corporation evaluated the valuation allowance against the net deferred tax asset which would
require future taxable income in order to be utilized. The Corporation, as of December 31, 2008
had a net operating loss and tax credit carryforwards for tax purposes of approximately $32.128
million, and $2.136 million, respectively.
The Corporation utilized NOL carryforwards to offset taxable income for the first nine months of
2007. In the third quarter of 2007, the Corporation reversed a portion of the valuation allowance,
$7.500 million that pertained to the deferred tax benefit of NOL and tax credit carryforwards.
This valuation adjustment was recorded as a current period income tax benefit. In 2006, the
Corporation recorded a $.500 million tax benefit and utilized additional NOL carryforwards to
offset current taxable income. The recognition of the deferred tax benefit in 2007 and 2006 was in
accordance with generally accepted accounting principles, and considered among other things, the
probability of utilizing the NOL and credit carryforwards.
The Corporation recorded the future benefits from these carryforwards at such time as it became
“more likely than not” that they would be utilized prior to expiration. Please refer to further
discussion on income taxes contained in “Management’s
Discussion and Analysis.” The net operating loss carryforwards expire twenty years from the date
they originated. These carryforwards, if not utilized, will begin to expire in the year 2023. A
portion of the NOL, approximately $22 million, and all of the credit carryforwards are subject to
the limitations for utilization as set forth in Section 382 of the Internal Revenue Code. The
annual limitation is $1.400 million for the NOL and the equivalent value of tax credits, which is
approximately $.477 million. These limitations for use were established in conjunction with the
recapitalization of the Corporation in December 2004.
27
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 12 — OPERATING LEASES
The Corporation currently maintains two operating leases for branch office locations. The first
operating lease, for our location in Birmingham, was originated in September 2005 and had an
original term of 66 months with an option to renew for an additional five year period.
The second operating lease, for our new location in Escanaba, was executed in December 2008, the
terms of which are scheduled to begin in April 2009. The original term of this lease is three
years and will automatically renew and extend for four additional consecutive terms of two years
each.
Future minimum payments, by year and in the aggregate, under the initial terms of the operating
lease agreements, consist of the following (dollars in thousands):
|
|
|
|
|
|
|
2009
|
|
$
|
199
|
|
|
2010
|
|
|
206
|
|
|
2011
|
|
|
91
|
|
|
2012
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
506
|
|
|
|
|
|
|
Rent expense for all operating leases amounted to $195,000 in 2008, $141,000 in 2007, and $182,000
in 2006.
NOTE 13 — RETIREMENT PLAN
The Corporation has established a 401(k) profit sharing plan. Employees who have completed three
months of service and attained the age of 18 are eligible to participate in the plan. Eligible
employees can elect to have a portion, not to exceed 80%, of their annual compensation paid into
the plan. In addition, the Corporation may make discretionary contributions into the plan.
Retirement plan contributions charged to operations totaled $90,000, $112,000, and $70,000 in 2008,
2007, and 2006, respectively.
NOTE 14 — DEFERRED COMPENSATION PLAN
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, 2008 and 2007,
for vested benefits under this plan, was $.912 million and $1.028 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 $1.384 million and $1.332 million at December 31, 2008 and
2007, respectively. Deferred compensation expense for the plan was $84,000, $90,000, and $85,000
for 2008, 2007, and 2006 respectively.
NOTE 15 — REGULATORY MATTERS
The Corporation is subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and
possibly additional discretionary—actions by regulators that, if undertaken, could have a direct
material effect on the Corporation’s consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Corporation must meet
specific capital guidelines that involve quantitative measures of the Corporation’s assets,
liabilities, and certain off-balance-
28
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 15 — REGULATORY MATTERS
(CONTINUED)
sheet items as calculated under regulatory accounting practices. The Corporation’s capital amounts
and classification are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation
to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital
to risk-weighted assets and of Tier 1 capital to average assets. Management has determined that,
as of December 31, 2008, the Corporation is well capitalized.
To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. In addition, federal banking
regulators have established capital classifications beyond the minimum requirements in order to
risk-rate deposit insurance premiums and to provide trigger points for prompt corrective action.
The Corporation’s and the Bank’s actual and required capital amounts and ratios as of December 31
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under
|
|
|
|
|
|
|
|
|
|
|
|
For Capital
|
|
Prompt Corrective
|
|
|
|
Actual
|
|
Adequacy Purposes
|
|
Action Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-
weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
39,138
|
|
|
|
10.4
|
%
|
|
|
>
$30,158
|
|
|
|
>
8.0
|
%
|
|
|
N/A
|
|
|
|
|
|
|
mBank
|
|
$
|
39,428
|
|
|
|
10.4
|
%
|
|
|
>
$30,202
|
|
|
|
>
8.0
|
%
|
|
|
>
|
|
|
|
>
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to risk-
weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
34,861
|
|
|
|
9.3
|
%
|
|
|
>
$15,079
|
|
|
|
>
4.0
|
%
|
|
|
N/A
|
|
|
|
|
|
|
mBank
|
|
$
|
35,192
|
|
|
|
9.3
|
%
|
|
|
>
$15,101
|
|
|
|
>
4.0
|
%
|
|
|
>
|
|
|
|
>
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
34,861
|
|
|
|
8.0
|
%
|
|
|
>
$17,407
|
|
|
|
>
4.0
|
%
|
|
|
N/A
|
|
|
|
|
|
|
mBank
|
|
$
|
35,192
|
|
|
|
8.1
|
%
|
|
|
>
$17,393
|
|
|
|
>
4.0
|
%
|
|
|
>
|
|
|
|
>
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-
weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
36,293
|
|
|
|
10.1
|
%
|
|
|
>
$28,673
|
|
|
|
>
8.0
|
%
|
|
|
N/A
|
|
|
|
|
|
|
mBank
|
|
$
|
38,048
|
|
|
|
10.6
|
%
|
|
|
>
$28,629
|
|
|
|
>
8.0
|
%
|
|
|
>
$35,786
|
|
|
|
>
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to risk-
weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
32,147
|
|
|
|
9.0
|
%
|
|
|
>
$14,336
|
|
|
|
>
4.0
|
%
|
|
|
N/A
|
|
|
|
|
|
|
mBank
|
|
$
|
33,950
|
|
|
|
9.5
|
%
|
|
|
>
$14,315
|
|
|
|
>
4.0
|
%
|
|
|
>
$21,472
|
|
|
|
>
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
32,147
|
|
|
|
8.1
|
%
|
|
|
>
$15,967
|
|
|
|
>
4.0
|
%
|
|
|
N/A
|
|
|
|
|
|
|
mBank
|
|
$
|
33,950
|
|
|
|
8.5
|
%
|
|
|
>
$15,951
|
|
|
|
>
4.0
|
%
|
|
|
>
$19,938
|
|
|
|
>
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, the Bank was not authorized to pay dividends to the Corporation without prior
regulatory approval because of a negative retained earnings balance due to cumulative losses.
29
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 16 — STOCK OPTION PLANS
The Corporation sponsors three stock option plans. All historical information presented below has
been adjusted to reflect the 1 for 20 reverse stock split which occurred on December 16, 2004. One
plan was approved during 2000 and applies to officers, employees, and non-employee directors. A
total of 25,000 shares were made available for grant under this plan.
This plan was amended as a part of the recapitalization to provide for additional authorized shares
equal to 12.50% of all outstanding shares subsequent to the recapitalization, which amounted to
428,587 shares. The other two plans, one for officers and employees and the other for non-employee
directors, were approved in 1997. A total of 30,000 shares were made available for grant under
these plans. Options under all of the plans are granted at the discretion of a committee of the
Corporation’s Board of Directors. Options to purchase shares of the Corporation’s stock are
granted at a price equal to the market price of the stock at the date of grant. The committee
determines the vesting of the options when they are granted as established under the plan.
A summary of stock option transactions for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Outstanding shares at beginning of year
|
|
|
446,417
|
|
|
|
446,417
|
|
|
Granted during the year
|
|
|
—
|
|
|
|
—
|
|
|
Expired / forfeited during the year
|
|
|
(180
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding shares at end of year
|
|
|
446,237
|
|
|
|
446,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable shares at end of year
|
|
|
164,446
|
|
|
|
164,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price per share
at end of year
|
|
$
|
12.14
|
|
|
$
|
12.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available for grant at end of year
|
|
|
18,488
|
|
|
|
18,488
|
|
|
|
|
|
|
|
|
|
There were no options granted in 2008 and in 2007.
Following is a summary of the options outstanding and exercisable at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Exercise
|
|
Number of Shares
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Price Range
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Life-Years
|
|
|
Price
|
|
|
$9.16
|
|
|
12,500
|
|
|
|
5,000
|
|
|
|
7.0
|
|
|
$
|
9.16
|
|
|
$9.75
|
|
|
257,152
|
|
|
|
120,861
|
|
|
|
6.0
|
|
|
|
9.75
|
|
|
$10.65
|
|
|
72,500
|
|
|
|
14,500
|
|
|
|
8.0
|
|
|
|
10.65
|
|
|
$11.50
|
|
|
40,000
|
|
|
|
8,000
|
|
|
|
6.8
|
|
|
|
11.50
|
|
|
$12.00
|
|
|
60,000
|
|
|
|
12,000
|
|
|
|
6.5
|
|
|
|
12.00
|
|
|
$156.00 - $240.00
|
|
|
3,545
|
|
|
|
3,545
|
|
|
|
2.3
|
|
|
|
186.75
|
|
|
$300.00 - $400.00
|
|
|
540
|
|
|
|
540
|
|
|
|
1.0
|
|
|
|
180.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
446,237
|
|
|
|
164,446
|
|
|
|
6.4
|
|
|
$
|
12.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 16 — STOCK OPTION PLANS
(CONTINUED)
Options issued since the Corporation’s recapitalization in December of 2004 call for 20% immediate
vesting upon issue and subsequent vesting to occur over a two to five year period, based upon the
market value appreciation of the underlying Corporation’s stock. Compensation related to these
options is expensed based upon the vesting period without consideration given to market value
appreciation. Future compensation for all outstanding options is projected to total $61,000 in
2009, $29,000 in 2010, and none thereafter.
NOTE 17 — OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes for the years ended December 31 are
as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Unrealized holding gains on
available for sale securities
|
|
$
|
551
|
|
|
$
|
248
|
|
|
$
|
177
|
|
|
Less reclassification adjustments for gains (losses)
later recognized in income
|
|
|
64
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains
|
|
|
615
|
|
|
|
247
|
|
|
|
176
|
|
|
Tax effect
|
|
|
230
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
385
|
|
|
$
|
247
|
|
|
$
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 18 — COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in the consolidated
balance sheets.
The Corporation’s exposure to credit loss, in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of credit, is represented
by the contractual amount of those instruments. The Corporation uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet instruments. These
commitments at December 31 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Commitments to extend credit:
|
|
|
|
|
|
|
|
|
|
Variable rate
|
|
$
|
40,036
|
|
|
$
|
43,903
|
|
|
Fixed rate
|
|
|
4,487
|
|
|
|
8,055
|
|
|
Standby letters of credit — Variable rate
|
|
|
1,838
|
|
|
|
5,930
|
|
|
Credit card commitments — Fixed rate
|
|
|
2,438
|
|
|
|
2,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,799
|
|
|
$
|
60,302
|
|
|
|
|
|
|
|
|
|
31
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 18 — COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
(CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Corporation
evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management’s credit evaluation of the party. Collateral held
varies, but may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Corporation to guarantee the
performance of a customer
to a third party. Those guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The commitments are structured to allow
for 100% collateralization on all standby letters of credit.
Credit card commitments are commitments on credit cards issued by the Corporation’s subsidiary and
serviced by other companies. These commitments are unsecured.
Contingencies
In the normal course of business the Corporation is involved in various legal proceedings.
Concentration of Credit Risk
The Bank grants commercial, residential, agricultural, and consumer loans throughout Michigan. The
Bank’s most prominent concentration in the loan portfolio relates to commercial real estate loans
to operators of nonresidential buildings. This concentration at December 31, 2008 represents
$41.299 million, or 13.95%, compared to $41.597 million, or 14.40%, of the commercial loan
portfolio on December 31, 2007. The remainder of the commercial loan portfolio is diversified in
such categories as hospitality and tourism, real estate agents and managers, new car dealers,
gaming, petroleum, forestry, agriculture, and construction. Due to the diversity of the Bank’s
locations, the ability of debtors of residential and consumer loans to honor their obligations is
not tied to any particular economic sector.
NOTE 19 — FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions are set forth below for the Corporation’s financial
instruments:
Cash, cash equivalents, and interest-bearing deposits
— The carrying values approximate the fair
values for these assets.
Securities
— Fair values are based on quoted market prices where available. If a quoted market
price is not available, fair value is estimated using quoted market prices for similar securities.
Federal Home Loan Bank stock
— Federal Home Loan Bank stock is carried at cost, which is its
redeemable value and approximates its fair value, since the market for this stock is limited.
Loans
— Fair values are estimated for portfolios of loans with similar financial characteristics.
Loans are segregated by type such as commercial, residential mortgage, and other consumer. The
fair value of loans is calculated by discounting scheduled cash flows using discount rates
reflecting the credit and interest rate risk inherent in the loan.
The methodology in determining fair value of nonaccrual loans is to average them into the blended
interest rate at 0% interest. This has the effect of decreasing the carrying amount below the
risk-free rate amount and, therefore, discounts the estimated fair value.
32
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 — FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED)
Impaired loans are measured at the estimated fair value of the expected future cash flows at the
loan’s effective interest rate or the fair value of the collateral for loans which are collateral
dependent. Therefore, the carrying values of impaired loans approximate the estimated fair values
for these assets.
Deposits
— The fair value of deposits with no stated maturity, such as noninterest-bearing demand
deposits and savings, is equal to the amount payable on demand at the reporting date. The fair
value of time deposits is based on the discounted value of contractual cash flows applying interest
rates currently being offered on similar time deposits.
Borrowings
— Rates currently available for debt with similar terms and remaining maturities are
used to estimate the fair value of existing debt. The fair value of borrowed funds due on demand
is the amount payable at the reporting date.
Accrued interest
— The carrying amount of accrued interest approximates fair value.
Off-balance-sheet instruments
— The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining terms of the
agreements, the current interest rates, and the present creditworthiness of the counterparties.
Since the differences in the current fees and those reflected to the off-balance-sheet instruments
at year-end are immaterial, no amounts for fair value are presented.
The following table presents information for financial instruments at December 31 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,112
|
|
|
$
|
10,112
|
|
|
$
|
6,362
|
|
|
$
|
6,362
|
|
|
Interest-bearing deposits
|
|
|
582
|
|
|
|
582
|
|
|
|
1,810
|
|
|
|
1,810
|
|
|
Securities available for sale
|
|
|
47,490
|
|
|
|
47,490
|
|
|
|
21,597
|
|
|
|
21,597
|
|
|
Federal Home Loan Bank stock
|
|
|
3,794
|
|
|
|
3,794
|
|
|
|
3,794
|
|
|
|
3,794
|
|
|
Net loans
|
|
|
366,003
|
|
|
|
372,080
|
|
|
|
350,933
|
|
|
|
350,512
|
|
|
Cash surrender value — life insurance
|
|
|
1,397
|
|
|
|
1,397
|
|
|
|
1,332
|
|
|
|
1,332
|
|
|
Accrued interest receivable
|
|
|
1,457
|
|
|
|
1,457
|
|
|
|
1,806
|
|
|
|
1,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
430,835
|
|
|
$
|
436,912
|
|
|
$
|
387,634
|
|
|
$
|
387,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
371,097
|
|
|
$
|
371,434
|
|
|
$
|
320,827
|
|
|
$
|
319,213
|
|
|
Borrowings
|
|
|
36,210
|
|
|
|
36,846
|
|
|
|
45,949
|
|
|
|
46,111
|
|
|
Directors deferred compensation
|
|
|
912
|
|
|
|
912
|
|
|
|
1,028
|
|
|
|
1,028
|
|
|
Accrued interest payable
|
|
|
488
|
|
|
|
488
|
|
|
|
751
|
|
|
|
751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
408,707
|
|
|
$
|
409,680
|
|
|
$
|
368,555
|
|
|
$
|
367,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limitations
—
Fair value estimates are made at a specific point in time based on relevant market
information and information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the Corporation’s entire
holdings of a particular financial instrument. Because no market exists for a significant portion
of the Corporation’s financial instruments, fair value estimates are based on judgments regarding
33
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 — FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED)
future expected loss experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. Fair value estimates
are based on existing on-and off-balance-sheet financial instruments without attempting to estimate
the value of
anticipated future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not considered financial assets
or liabilities include premises and equipment, other assets, and
other liabilities. In addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have not been considered
in the estimates.
The following tables present information about the Corporation’s assets and liabilities measured at
fair value on a recurring basis at December 31, 2008, and the valuation techniques used by the
Corporation to determine those fair values.
Level 1:
In general, fair values determined by Level 1 inputs use quoted prices in active markets
for identical assets or liabilities that the Corporation has the ability
to access.
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.
In instances where inputs used to measure fair value fall into different levels in the above fair
value hierarchy, fair value measurements in their entirety are categorized based on the lowest
level input that is significant to the valuation. The Corporation’s assessment of the significance
of particular inputs to these fair value measurements requires judgment and considers factors
specific to each asset or liability.
Disclosures concerning assets and liabilities measured at fair value are as follows (dollars in
thousands):
Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active
|
|
Significant Other
|
|
Significant
|
|
|
|
|
|
Markets for Identical
|
|
Observable Inputs
|
|
Unobservable Inputs
|
|
Balance at
|
|
|
|
Assets (Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
December 31, 2008
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities —
available for sale
|
|
$
|
47,422
|
|
|
$
|
68
|
|
|
$
|
—
|
|
|
$
|
47,490
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31, 2008.
The Corporation also has assets that under certain conditions are subject to measurement at fair
value on a non-recurring basis. These assets include held to maturity investments and loans. The Corporation has estimated
the fair values of these assets using Level 3 inputs, specifically discounted cash flow
projections.
34
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 — FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED)
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
|
in Active Markets
|
|
|
Other Observable
|
|
|
Unobservable
|
|
|
Total Losses for
|
|
|
|
|
for Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Year Ended
|
|
|
(dollars in thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
December 31, 2008
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans accounted
for under FAS 114
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,030
|
|
|
$
|
862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation had no investments subject to fair value measurement on a nonrecurring basis.
Impaired loans accounted for under FAS 114 categorized as Level 3 assets consist of non-homogeneous
loans that are considered impaired. The Corporation estimates the fair value of the loans based on
the present value of expected future cash flows using management’s best estimate of key
assumptions. These assumptions include future payment ability, timing of payment streams, and
estimated realizable values of available collateral (typically based on outside appraisals).
Other assets, including bank owned life insurance, goodwill, intangible assets and other assets
acquired in business combinations, are also subject to periodic impairment assessments under other
accounting principles generally accepted in the United States of America. These assets are not
considered financial instruments. Effective February 12, 2008, the FASB issued a staff position,
FSP FAS 157-2, which delayed the applicability of FAS 157 to nonfinancial instruments.
Accordingly, these assets have been omitted from the above disclosures.
In October 2008, the FASB issued FSP 157-3,
Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active.
FSP 157-3 provides clarification of the application of
FASB 157 in an inactive market. FSP 157-3 is effective for the Corporation’s interim financial
statements as of December 31, 2008. This change had no impact on the Corporation’s disclosure on
fair value measurements.
35
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 20 — PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 2008 and 2007
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
413
|
|
|
$
|
119
|
|
|
Investment in subsidiaries
|
|
|
41,990
|
|
|
|
41,198
|
|
|
Other assets
|
|
|
29
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
42,432
|
|
|
$
|
41,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
$
|
—
|
|
|
$
|
1,959
|
|
|
Other liabilities
|
|
|
880
|
|
|
|
115
|
|
|
Shareholders’ equity
|
|
|
41,552
|
|
|
|
39,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
42,432
|
|
|
$
|
41,395
|
|
|
|
|
|
|
|
|
|
36
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE
20 — PARENT COMPANY ONLY FINANCIAL STATEMENTS
(CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2008, 2007, and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,872
|
|
|
$
|
10,163
|
|
|
$
|
1,716
|
|
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net (income) loss of subsidiaries
|
|
|
95
|
|
|
|
(10,314
|
)
|
|
|
(3,099
|
)
|
|
Increase in capital from stock option compensation
|
|
|
82
|
|
|
|
121
|
|
|
|
310
|
|
|
Change in other assets
|
|
|
49
|
|
|
|
(15
|
)
|
|
|
(11
|
)
|
|
Change in other liabilities
|
|
|
765
|
|
|
|
(59
|
)
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) operating activities
|
|
|
2,863
|
|
|
|
(104
|
)
|
|
|
(959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in lines of credit
|
|
|
(1,959
|
)
|
|
|
—
|
|
|
|
1,959
|
|
|
Purchase of common stock — oddlot shares
|
|
|
(110
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Investments in subsidiaries
|
|
|
(500
|
)
|
|
|
—
|
|
|
|
(1,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by financing activities
|
|
|
(2,569
|
)
|
|
|
—
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
294
|
|
|
|
(104
|
)
|
|
|
(950
|
)
|
|
Cash and cash equivalents at beginning of period
|
|
|
119
|
|
|
|
223
|
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
413
|
|
|
$
|
119
|
|
|
$
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 21 — SUBSEQUENT EVENTS
Mackinac Financial Corporation filed an application with the Federal Deposit Insurance Corporation
(“FDIC”) on November 4, 2008, for participation in the Capital Purchase Program (“CPP”) under the
Troubled Asset Relief Program (“TARP”). The FDIC responded and recommended approval for our
participation and forwarded our application to the Department of the Treasury (“Treasury”). We
received preliminary approval from the Treasury on January 30, 2009 for our maximum requested
participation amount of $11.000 million.
Under the CPP, the Corporation will issue previously authorized preferred stock with a 5.00% annual
dividend rate to the Treasury. The Corporation will also, as a required part of this transaction,
issue 379,093 common stock warrants with an exercise price of $4.35 per share. The preferred stock
and common stock warrants will be issued on the expected closing date in May 2009.
The Corporation intends to utilize the proceeds, $11.000 million, to support future growth of the
Corporation by generating new loan growth through its principal subsidiary, mBank.
37
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 20 — PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2008, 2007, and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,872
|
|
|
$
|
10,163
|
|
|
$
|
1,716
|
|
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net (income) loss of subsidiaries
|
|
|
95
|
|
|
|
(10,314
|
)
|
|
|
(3,099
|
)
|
|
Increase in capital from stock option compensation
|
|
|
82
|
|
|
|
121
|
|
|
|
310
|
|
|
Change in other assets
|
|
|
49
|
|
|
|
(15
|
)
|
|
|
(11
|
)
|
|
Change in other liabilities
|
|
|
765
|
|
|
|
(59
|
)
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) operating activities
|
|
|
2,863
|
|
|
|
(104
|
)
|
|
|
(959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in lines of credit
|
|
|
(1,959
|
)
|
|
|
—
|
|
|
|
1,959
|
|
|
Purchase of common stock — oddlot shares
|
|
|
(110
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Investments in subsidiaries
|
|
|
(500
|
)
|
|
|
—
|
|
|
|
(1,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by financing activities
|
|
|
(2,569
|
)
|
|
|
—
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
294
|
|
|
|
(104
|
)
|
|
|
(950
|
)
|
|
Cash and cash equivalents at beginning of period
|
|
|
119
|
|
|
|
223
|
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
413
|
|
|
$
|
119
|
|
|
$
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 21 – SUBSEQUENT EVENTS
Mackinac Financial Corporation filed an application with the Federal Deposit Insurance Corporation
(“FDIC”) on November 4, 2008, for participation in the Capital Purchase Program (“CPP”) under the
Troubled Asset Relief Program (“TARP”). The FDIC responded and recommended approval for our
participation and forwarded our application to the Department of the Treasury (“Treasury”). We
received preliminary approval from the Treasury on January 30, 2009 for our maximum requested
participation amount of $11.000 million.
Under the CPP, the Corporation will issue previously authorized preferred stock with a 5.00% annual
dividend rate to the Treasury. The Corporation will also, as a required part of this transaction,
issue 379,093 common stock warrants with an exercise price of $4.35 per share. The preferred stock
and common stock warrants will be issued on the expected closing date in May 2009.
The Corporation intends to utilize the proceeds, $11.000 million, to support future growth of the
Corporation by generating new loan growth through its principal subsidiary, mBank.
38
Notes to Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
SELECTED FINANCIAL CONDITION DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
451,431
|
|
|
$
|
408,880
|
|
|
$
|
382,791
|
|
|
$
|
298,722
|
|
|
$
|
339,497
|
|
|
Loans
|
|
|
370,280
|
|
|
|
355,079
|
|
|
|
322,581
|
|
|
|
239,771
|
|
|
|
203,832
|
|
|
Securities
|
|
|
47,490
|
|
|
|
21,597
|
|
|
|
32,769
|
|
|
|
34,210
|
|
|
|
57,075
|
|
|
Deposits
|
|
|
371,097
|
|
|
|
320,827
|
|
|
|
312,421
|
|
|
|
232,632
|
|
|
|
215,650
|
|
|
Borrowings
|
|
|
36,210
|
|
|
|
45,949
|
|
|
|
38,307
|
|
|
|
36,417
|
|
|
|
85,039
|
|
|
Total equity
|
|
|
41,552
|
|
|
|
39,321
|
|
|
|
28,790
|
|
|
|
26,588
|
|
|
|
34,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELECTED OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
24,562
|
|
|
$
|
28,695
|
|
|
$
|
24,052
|
|
|
$
|
16,976
|
|
|
$
|
18,853
|
|
|
Interest expense
|
|
|
11,698
|
|
|
|
(15,278
|
)
|
|
|
(12,459
|
)
|
|
|
(7,196
|
)
|
|
|
(10,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
12,864
|
|
|
|
13,417
|
|
|
|
11,593
|
|
|
|
9,780
|
|
|
|
8,238
|
|
|
Provision for loan losses
|
|
|
2,300
|
|
|
|
400
|
|
|
|
(861
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Net security gains (losses)
|
|
|
64
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
95
|
|
|
|
—
|
|
|
Other income
|
|
|
4,589
|
|
|
|
2,007
|
|
|
|
984
|
|
|
|
1,016
|
|
|
|
8,542
|
|
|
Other expenses
|
|
|
(12,558
|
)
|
|
|
(12,100
|
)
|
|
|
(12,221
|
)
|
|
|
(18,255
|
)
|
|
|
(18,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
2,659
|
|
|
|
2,923
|
|
|
|
1,216
|
|
|
|
(7,364
|
)
|
|
|
(1,448
|
)
|
|
Provision (credit) for income taxes
|
|
|
787
|
|
|
|
(7,240
|
)
|
|
|
(500
|
)
|
|
|
—
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,872
|
|
|
$
|
10,163
|
|
|
$
|
1,716
|
|
|
$
|
(7,364
|
)
|
|
$
|
(1,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) — Basic
|
|
$
|
.55
|
|
|
$
|
2.96
|
|
|
$
|
.50
|
|
|
$
|
(2.15
|
)
|
|
$
|
(3.23
|
)
|
|
Earnings (loss) — Diluted
|
|
|
.55
|
|
|
|
2.96
|
|
|
|
.50
|
|
|
|
(2.15
|
)
|
|
|
(3.23
|
)
|
|
Cash dividends declared
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Book value
|
|
|
12.15
|
|
|
|
11.47
|
|
|
|
8.40
|
|
|
|
7.75
|
|
|
|
10.13
|
|
|
Market value — closing price at year end
|
|
|
4.40
|
|
|
|
8.98
|
|
|
|
11.50
|
|
|
|
9.10
|
|
|
|
17.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity
|
|
|
4.61
|
%
|
|
|
31.05
|
%
|
|
|
6.19
|
%
|
|
|
(25.63)
|
%
|
|
|
(18.64)
|
%
|
|
Return on average assets
|
|
|
.44
|
|
|
|
2.59
|
|
|
|
.49
|
|
|
|
(2.58
|
)
|
|
|
(.44
|
)
|
|
Dividend payout ratio
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Average equity to average assets
|
|
|
9.55
|
|
|
|
8.34
|
|
|
|
7.97
|
|
|
|
10.05
|
|
|
|
2.34
|
|
|
Efficiency ratio
|
|
|
85.51
|
|
|
|
79.46
|
|
|
|
93.95
|
|
|
|
160.43
|
|
|
|
103.05
|
|
|
Net interest margin
|
|
|
3.23
|
|
|
|
3.60
|
|
|
|
3.51
|
|
|
|
3.64
|
|
|
|
2.57
|
|
39
Summary Quarterly Financial Information
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in Thousands, Except per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE QUARTER ENDED
|
|
FOR THE QUARTER ENDED
|
|
|
|
2008
|
|
2007
|
|
|
|
12/31
|
|
9/30
|
|
6/30
|
|
3/31
|
|
12/31
|
|
9/30
|
|
6/30
|
|
3/31
|
|
BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
370,280
|
|
|
$
|
361,521
|
|
|
$
|
362,122
|
|
|
$
|
360,056
|
|
|
$
|
355,079
|
|
|
$
|
344,149
|
|
|
$
|
338,896
|
|
|
$
|
318,421
|
|
|
Allowance for loan losses
|
|
|
(4,277
|
)
|
|
|
(3,385
|
)
|
|
|
(3,585
|
)
|
|
|
(3,924
|
)
|
|
|
(4,146
|
)
|
|
|
(5,022
|
)
|
|
|
(4,920
|
)
|
|
|
(4,975
|
)
|
|
Total loans, net
|
|
|
366,003
|
|
|
|
358,136
|
|
|
|
358,537
|
|
|
|
356,132
|
|
|
|
350,933
|
|
|
|
339,127
|
|
|
|
333,976
|
|
|
|
313,446
|
|
|
Intangible assets
|
|
|
46
|
|
|
|
65
|
|
|
|
85
|
|
|
|
104
|
|
|
|
124
|
|
|
|
143
|
|
|
|
163
|
|
|
|
182
|
|
|
Total assets
|
|
|
451,431
|
|
|
|
440,953
|
|
|
|
437,327
|
|
|
|
417,175
|
|
|
|
408,880
|
|
|
|
401,213
|
|
|
|
393,319
|
|
|
|
375,644
|
|
|
Core deposits
|
|
|
195,165
|
|
|
|
208,940
|
|
|
|
200,293
|
|
|
|
203,445
|
|
|
|
199,809
|
|
|
|
218,638
|
|
|
|
211,773
|
|
|
|
201,529
|
|
|
Noncore deposits
(1)
|
|
|
175,932
|
|
|
|
151,754
|
|
|
|
156,683
|
|
|
|
122,602
|
|
|
|
121,018
|
|
|
|
102,733
|
|
|
|
109,473
|
|
|
|
102,883
|
|
|
Total deposits
|
|
|
371,097
|
|
|
|
360,694
|
|
|
|
356,976
|
|
|
|
326,047
|
|
|
|
320,827
|
|
|
|
321,371
|
|
|
|
321,246
|
|
|
|
304,412
|
|
|
Total borrowings
|
|
|
36,210
|
|
|
|
36,210
|
|
|
|
36,280
|
|
|
|
48,849
|
|
|
|
45,949
|
|
|
|
38,239
|
|
|
|
38,307
|
|
|
|
38,307
|
|
|
Total shareholders’ equity
|
|
|
41,552
|
|
|
|
41,427
|
|
|
|
40,975
|
|
|
|
39,633
|
|
|
|
39,321
|
|
|
|
38,697
|
|
|
|
30,485
|
|
|
|
29,932
|
|
|
Total shares outstanding
|
|
|
3,419,736
|
|
|
|
3,419,736
|
|
|
|
3,419,736
|
|
|
|
3,428,695
|
|
|
|
3,428,695
|
|
|
|
3,428,695
|
|
|
|
3,428,695
|
|
|
|
3,428,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
366,077
|
|
|
$
|
358,844
|
|
|
$
|
362,574
|
|
|
$
|
357,778
|
|
|
$
|
350,050
|
|
|
$
|
340,391
|
|
|
$
|
324,721
|
|
|
$
|
318,072
|
|
|
Allowance for loan losses
|
|
|
(3,530
|
)
|
|
|
(3,500
|
)
|
|
|
(3,886
|
)
|
|
|
(4,079
|
)
|
|
|
(4,719
|
)
|
|
|
(4,839
|
)
|
|
|
(4,972
|
)
|
|
|
(4,999
|
)
|
|
Total loans, net
|
|
|
362,547
|
|
|
|
355,344
|
|
|
|
358,688
|
|
|
|
353,699
|
|
|
|
345,331
|
|
|
|
335,552
|
|
|
|
319,749
|
|
|
|
313,073
|
|
|
Intangible assets
|
|
|
55
|
|
|
|
75
|
|
|
|
94
|
|
|
|
113
|
|
|
|
133
|
|
|
|
152
|
|
|
|
172
|
|
|
|
194
|
|
|
Total assets
|
|
|
441,583
|
|
|
|
423,702
|
|
|
|
418,246
|
|
|
|
417,682
|
|
|
|
406,308
|
|
|
|
400,105
|
|
|
|
382,065
|
|
|
|
380,403
|
|
|
Core deposits
|
|
|
201,159
|
|
|
|
208,460
|
|
|
|
201,765
|
|
|
|
202,841
|
|
|
|
208,043
|
|
|
|
217,500
|
|
|
|
205,818
|
|
|
|
200,965
|
|
|
Noncore deposits
(1)
|
|
|
157,054
|
|
|
|
132,917
|
|
|
|
130,960
|
|
|
|
133,175
|
|
|
|
116,151
|
|
|
|
109,793
|
|
|
|
103,651
|
|
|
|
108,654
|
|
|
Total deposits
|
|
|
358,213
|
|
|
|
341,377
|
|
|
|
332,725
|
|
|
|
336,016
|
|
|
|
324,194
|
|
|
|
327,293
|
|
|
|
309,469
|
|
|
|
309,619
|
|
|
Total borrowings
|
|
|
37,969
|
|
|
|
37,245
|
|
|
|
42,430
|
|
|
|
39,382
|
|
|
|
39,876
|
|
|
|
38,325
|
|
|
|
39,209
|
|
|
|
38,376
|
|
|
Total shareholders’ equity
|
|
|
41,516
|
|
|
|
41,097
|
|
|
|
40,399
|
|
|
|
39,491
|
|
|
|
38,973
|
|
|
|
32,184
|
|
|
|
30,412
|
|
|
|
29,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSET QUALITY RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans/total loans
|
|
|
1.32
|
%
|
|
|
1.29
|
%
|
|
|
1.27
|
%
|
|
|
.94
|
%
|
|
|
1.13
|
%
|
|
|
.92
|
%
|
|
|
1.49
|
%
|
|
|
1.53
|
%
|
|
Nonperforming assets/total assets
|
|
|
1.57
|
|
|
|
1.45
|
|
|
|
1.83
|
|
|
|
1.08
|
|
|
|
1.28
|
|
|
|
.90
|
|
|
|
1.30
|
|
|
|
1.33
|
|
|
Allowance for loan losses/total loans
|
|
|
1.16
|
|
|
|
.94
|
|
|
|
.99
|
|
|
|
1.09
|
|
|
|
1.17
|
|
|
|
1.46
|
|
|
|
1.45
|
|
|
|
1.56
|
|
|
Allowance for loan losses/nonperforming loans
|
|
|
87.52
|
|
|
|
72.81
|
|
|
|
77.22
|
|
|
|
116.06
|
|
|
|
103.42
|
|
|
|
158.32
|
|
|
|
97.45
|
|
|
|
102.32
|
|
|
Net charge-offs/average loans
|
|
|
.01
|
|
|
|
.18
|
|
|
|
.30
|
|
|
|
.06
|
|
|
|
.25
|
|
|
|
.09
|
|
|
|
.02
|
|
|
|
.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL ADEQUACY RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio
|
|
|
8.01
|
%
|
|
|
8.31
|
%
|
|
|
8.56
|
%
|
|
|
7.85
|
%
|
|
|
8.05
|
%
|
|
|
8.03
|
%
|
|
|
7.97
|
%
|
|
|
7.85
|
%
|
|
Tier 1 capital to risk weighted assets
|
|
|
9.25
|
|
|
|
9.40
|
|
|
|
9.48
|
|
|
|
8.84
|
|
|
|
8.97
|
|
|
|
9.03
|
|
|
|
8.85
|
|
|
|
9.16
|
|
|
Total capital to risk weighted assets
|
|
|
10.38
|
|
|
|
10.31
|
|
|
|
10.45
|
|
|
|
9.92
|
|
|
|
10.13
|
|
|
|
10.28
|
|
|
|
10.10
|
|
|
|
10.41
|
|
|
Average equity/average assets
|
|
|
9.40
|
|
|
|
9.70
|
|
|
|
9.66
|
|
|
|
9.45
|
|
|
|
9.59
|
|
|
|
8.04
|
|
|
|
7.96
|
|
|
|
7.69
|
|
|
Tangible equity/tangible assets
|
|
|
9.20
|
|
|
|
9.38
|
|
|
|
9.35
|
|
|
|
9.48
|
|
|
|
9.59
|
|
|
|
9.61
|
|
|
|
7.71
|
|
|
|
7.92
|
|
|
|
|
|
|
(1)
|
|
Noncore deposits include brokered deposits and CDs greater than $100,000
|
40
Summary Quarterly Financial Information
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in Thousands, Except per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR THE QUARTER ENDED 2008
|
|
|
FOR THE QUARTER ENDED 2007
|
|
|
|
|
12/31
|
|
|
9/30
|
|
|
6/30
|
|
|
3/31
|
|
|
12/31
|
|
|
9/30
|
|
|
6/30
|
|
|
3/31
|
|
|
INCOME STATEMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
3,330
|
|
|
$
|
3,371
|
|
|
$
|
3,118
|
|
|
$
|
3,045
|
|
|
$
|
3,410
|
|
|
$
|
3,560
|
|
|
$
|
3,269
|
|
|
$
|
3,178
|
|
|
Provision for loan losses
|
|
|
1,100
|
|
|
|
450
|
|
|
|
750
|
|
|
|
—
|
|
|
|
—
|
|
|
|
400
|
|
|
|
—
|
|
|
|
—
|
|
|
Net interest income after provision
|
|
|
2,230
|
|
|
|
2,921
|
|
|
|
2,368
|
|
|
|
3,045
|
|
|
|
3,410
|
|
|
|
3,160
|
|
|
|
3,269
|
|
|
|
3,178
|
|
|
Total noninterest income
|
|
|
308
|
|
|
|
288
|
|
|
|
3,747
|
|
|
|
310
|
|
|
|
355
|
|
|
|
396
|
|
|
|
342
|
|
|
|
913
|
|
|
Total noninterest expense
|
|
|
2,961
|
|
|
|
2,935
|
|
|
|
3,471
|
|
|
|
3,191
|
|
|
|
2,978
|
|
|
|
3,001
|
|
|
|
3,065
|
|
|
|
3,056
|
|
|
Income before taxes
|
|
|
(423
|
)
|
|
|
274
|
|
|
|
2,644
|
|
|
|
164
|
|
|
|
787
|
|
|
|
555
|
|
|
|
546
|
|
|
|
1,035
|
|
|
Provision for income taxes
|
|
|
(171
|
)
|
|
|
58
|
|
|
|
875
|
|
|
|
25
|
|
|
|
260
|
|
|
|
(7,500
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(252
|
)
|
|
$
|
216
|
|
|
$
|
1,769
|
|
|
$
|
139
|
|
|
$
|
527
|
|
|
$
|
8,055
|
|
|
$
|
546
|
|
|
$
|
1,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — basic
|
|
$
|
(.07
|
)
|
|
$
|
.06
|
|
|
$
|
.52
|
|
|
$
|
.04
|
|
|
$
|
.15
|
|
|
$
|
2.35
|
|
|
$
|
.16
|
|
|
$
|
.30
|
|
|
Earnings per share — diluted
|
|
|
(.07
|
)
|
|
|
.06
|
|
|
|
.52
|
|
|
|
.04
|
|
|
|
.15
|
|
|
|
2.35
|
|
|
|
.16
|
|
|
|
.30
|
|
|
Book value per share
|
|
|
12.15
|
|
|
|
12.11
|
|
|
|
11.98
|
|
|
|
11.56
|
|
|
|
11.47
|
|
|
|
11.29
|
|
|
|
8.89
|
|
|
|
8.73
|
|
|
Market value per share
|
|
|
4.40
|
|
|
|
5.26
|
|
|
|
7.00
|
|
|
|
8.50
|
|
|
|
8.98
|
|
|
|
8.75
|
|
|
|
9.45
|
|
|
|
9.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROFITABILITY RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
(.23)
|
%
|
|
|
.20
|
%
|
|
|
1.70
|
%
|
|
|
.13
|
%
|
|
|
.51
|
%
|
|
|
7.99
|
%
|
|
|
.57
|
%
|
|
|
1.10
|
%
|
|
Return on average equity
|
|
|
(2.42
|
)
|
|
|
2.08
|
|
|
|
17.62
|
|
|
|
1.42
|
|
|
|
5.36
|
|
|
|
99.30
|
|
|
|
7.20
|
|
|
|
14.35
|
|
|
Net interest margin
|
|
|
3.20
|
|
|
|
3.39
|
|
|
|
3.19
|
|
|
|
3.13
|
|
|
|
3.55
|
|
|
|
3.71
|
|
|
|
3.60
|
|
|
|
3.55
|
|
|
Efficiency ratio
|
|
|
80.30
|
|
|
|
79.12
|
|
|
|
88.45
|
|
|
|
95.34
|
|
|
|
78.02
|
|
|
|
74.71
|
|
|
|
83.18
|
|
|
|
82.39
|
|
|
Average loans/average deposits
|
|
|
102.20
|
|
|
|
105.12
|
|
|
|
108.97
|
|
|
|
106.48
|
|
|
|
107.98
|
|
|
|
104.00
|
|
|
|
104.93
|
|
|
|
102.73
|
|
41
Market Information
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
MARKET INFORMATION
(Unaudited)
During 2001, the Corporation’s stock began trading on the NASDAQ Small Cap Market; effective on
August 31, 2001, the Corporation changed its trading symbol from “NCUF” to “NCFC.” As part of the
recapitalization, the Corporation changed its name from North Country Financial Corporation to
Mackinac Financial Corporation and changed its trading symbol from “NCFC” to “MFNC”.
The following table sets forth the range of high and low bid prices of the Corporation’s common
stock from January 1, 2007 through December 31, 2008, as reported by NASDAQ. Quotations for the
NASDAQ Small Cap Market reflect inter-dealer prices, without retail mark-up, markdown, or
commission, and may not reflect actual transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
9.24
|
|
|
$
|
8.50
|
|
|
$
|
8.00
|
|
|
$
|
5.95
|
|
|
Low
|
|
|
7.55
|
|
|
|
7.00
|
|
|
|
3.00
|
|
|
|
3.75
|
|
|
Close
|
|
|
8.50
|
|
|
|
7.00
|
|
|
|
5.26
|
|
|
|
4.40
|
|
|
Book value, at quarter end
|
|
|
11.56
|
|
|
|
11.98
|
|
|
|
12.11
|
|
|
|
12.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
11.50
|
|
|
$
|
10.02
|
|
|
$
|
9.70
|
|
|
$
|
9.70
|
|
|
Low
|
|
|
9.25
|
|
|
|
9.00
|
|
|
|
7.75
|
|
|
|
7.65
|
|
|
Close
|
|
|
9.26
|
|
|
|
9.45
|
|
|
|
8.75
|
|
|
|
8.98
|
|
|
Book value, at quarter end
|
|
|
8.73
|
|
|
|
8.89
|
|
|
|
11.29
|
|
|
|
11.47
|
|
The Corporation had 1,345 shareholders of record as of March 30, 2009.
42
Shareholder Return Performance Graph
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in the cumulative total
shareholder return on the Corporation’s common stock with that of the cumulative total return on
the NASDAQ Bank Stocks Index and the NASDAQ Market Index for the five-year period ended December
31, 2008. The following information is based on an investment of $100, on December 31, 2003 in the
Corporation’s common stock, the NASDAQ Bank Stocks Index, and the NASDAQ Market Index, with
dividends reinvested. From August 31, 2001 to December 15, 2004, the Corporation’s common stock
traded on the NASDAQ Small Cap Market under the symbol “NCFC.” Effective with the recapitalization
and the 20:1 reverse stock split on December 16, 2004, the Corporation’s stock began trading on the
NASDAQ Small Cap Market under the symbol “MFNC”.
This graph and other information furnished in the section titled “Performance Graph” under this
Part II, Item 5 of this Form 10-K shall not be deemed to be “soliciting” materials or to be “filed”
with the Securities and Exchange Commission or subject to Regulation 14A or 14C, or to the
liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG MACKINAC FINANCIAL CORP.,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
ASSUMES
$100 INVESTED ON DEC. 31, 2003
ASSUMES DIVIDEND PAYMENTS REINVESTED
FISCAL YEARS ENDING DEC. 31, 2008
43
Forword-Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The Corporation intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities Litigation Reform Act
of 1995 and is including this statement for purposes of these safe harbor provisions.
Forward-looking statements which are based on certain assumptions and describe future plans,
strategies, or expectations of the Corporation, are generally identifiable by use of the words
“believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, or similar expressions. The
Corporation’s ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors that could cause actual results to differ from the results in
forward-looking statements include, but are not limited to:
|
|
•
|
|
The highly regulated environment in which the Corporation operates could adversely
affect its ability to carry out its strategic plan due to restrictions on new products,
funding opportunities or new market entrances;
|
|
|
|
|
•
|
|
General economic conditions, either nationally or in the state(s) in which the
Corporation does business;
|
|
|
|
|
•
|
|
Legislation or regulatory changes which affect the business in which the Corporation is
engaged;
|
|
|
|
|
•
|
|
Changes in the interest rate environment which increase or decrease interest rate
margins;
|
|
|
|
|
•
|
|
Changes in securities markets with respect to the market value of financial assets and
the level of volatility in certain markets such as foreign exchange;
|
|
|
|
|
•
|
|
Significant increases in competition in the banking and financial services industry
resulting from industry consolidation, regulatory changes and other factors, as well as
action taken by particular competitors;
|
|
|
|
|
•
|
|
The ability of borrowers to repay loans;
|
|
|
|
|
•
|
|
The effects on liquidity of unusual decreases in deposits;
|
|
|
|
|
•
|
|
Changes in consumer spending, borrowing, and saving habits;
|
|
|
|
|
•
|
|
Technological changes;
|
|
|
|
|
•
|
|
Acquisitions and unanticipated occurrences which delay or reduce the expected benefits
of acquisitions;
|
|
|
|
|
•
|
|
Difficulties in hiring and retaining qualified management and banking personnel;
|
|
|
|
|
•
|
|
The Corporation’s ability to increase market share and control expenses;
|
|
|
|
|
•
|
|
The effect of compliance with legislation or regulatory changes;
|
|
|
|
|
•
|
|
The effect of changes in accounting policies and practices;
|
|
|
|
|
•
|
|
The costs and effects of existing and future litigation and of adverse outcomes in such
litigation.
|
These risks and uncertainties should be considered in evaluating forward-looking statements.
Further information concerning the Corporation and its business, including additional factors that
could materially affect the Corporation’s financial results, is included in the Corporation’s
filings with the Securities and Exchange Commission. All forward-looking statements contained in
this report are based upon information presently available and the Corporation assumes no
obligation to update any forward-looking statements.
44
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion will cover results of operations for 2006 through 2008 and asset quality,
financial position, liquidity, interest rate sensitivity, and capital resources for the years 2007
and 2008. The information included in this discussion is intended to assist readers in their
analysis of, and should be read in conjunction with, the consolidated financial statements and
related notes and other supplemental information presented elsewhere in this report. Throughout
this discussion, the term “Bank” refers to mBank, the principal banking subsidiary of the
Corporation.
EXECUTIVE OVERVIEW
The purpose of this section is to provide a brief overview of the 2008 results of operations.
Additional detail of the balance sheet and Statement of Operations follows this summary.
The Corporation reported net income of $1.872 million, or $.55 per share for the year ended
December 31, 2008, compared to net income of $10.163 million, or $2.96 per share for 2007.
Weighted average shares outstanding amounted to 3,422,012 in 2008 and 3,428,695 in 2007.
The 2008 results include the positive effect, $3.475 million of a lawsuit settlement and the
negative effect from a $.425 million severance agreement. The results for 2007 include the
recognition of a $7.500 million deferred tax benefit for NOL and tax credit carryforwards and $.470
million of proceeds from the settlement of a lawsuit against the Corporation’s former accountants.
Excluding these items in both years would have resulted in net loss of $.141 million, or less than
$.01 per share, in 2008 versus $2.353 million, or $.69 per share, in 2007.
Total assets of the Corporation at December 31, 2008, were $451.431 million, an increase of $42.551
million, or 10.41% from total assets of $408.880 million reported at December 31, 2007.
At December 31, 2008, the Corporation’s loans stood at $370.280 million, an increase of $15.201
million, or 4.28%, from 2007 year-end balances of $355.079 million. Total loan originations in
2008 amounted to $61.597 million, while we experienced significant reductions from loan
amortization and principal payoffs of $51.224 million. A good portion of these payoffs pertained
to loan relationships that no longer met our pricing or credit standards.
Asset quality remains relatively strong. Nonperforming loans totaled $4.887 million, or 1.32% of
total loans at December 31, 2008. Nonperforming assets at December 31, 2008, were $7.076 million,
1.57% of total assets, compared to $5.234 million or 1.28% of total assets at December 31, 2007.
Total deposits grew from $320.827 million at December 31, 2007, to $371.097 million at December 31,
2008, an increase of 15.67%.
Shareholders’ equity totaled $41.552 million at December 31, 2008, compared to $39.321 million at
the end of 2007, an increase of $2.231 million. This increase reflects consolidated net income of
$1.872 million, the capital contribution impact of stock options and also the increase in equity
due to the increase in the market value of available-for-sale investments, which amounted to $.385
million. The book value per share at December 31, 2008, amounted to $12.15 compared to $11.47 at
the end of 2007.
45
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL POSITION
Loan
s
In 2008, the Corporation increased loan balances by $15.201 million, or 4.28%, from 2007 year-end
loan balances of $355.079 million. The loan growth in 2008 compares to loan growth in 2007 of
$32.498 million, or 10.07% from 2006 year-end loan balances of $322.581 million. The loan growth
in 2008 and 2007 was accomplished despite high loan payoffs of existing portfolio loans of $51.2
million in 2008 and $37.8 million in 2007.
Management continues to actively manage the loan portfolio, seeking to identify and resolve problem
assets at an early stage. Management believes a properly positioned loan portfolio provides the
most attractive earning asset yield available to the Corporation and, with changes to the loan
approval process and exception reporting, management can effectively manage the risk in the loan
portfolio. Management intends to continue loan growth within its markets for mortgage, consumer,
and commercial loan products while concentrating on loan quality, industry concentration issues,
and competitive pricing.
Loans represented 82.0% of total assets at the end of 2008 compared to 86.8% at the end of 2007.
The loan to deposit ratio, at 99.8%, is higher than a peer average of approximately 89.4% due in
part to the Bank’s utilization of Federal Home Loan Bank long-term borrowings as a funding source.
Following is a summary of the Corporation’s loan balances at December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008-2007
|
|
|
2007-2006
|
|
|
Commercial real estate
|
|
$
|
185,241
|
|
|
$
|
171,695
|
|
|
$
|
154,332
|
|
|
|
7.89
|
%
|
|
|
11.25
|
%
|
|
Commercial,
financial, and
agricultural
|
|
|
79,734
|
|
|
|
78,192
|
|
|
|
71,385
|
|
|
|
1.97
|
|
|
|
9.54
|
|
|
One-to-four family
residential real
estate
|
|
|
65,595
|
|
|
|
57,613
|
|
|
|
58,014
|
|
|
|
13.85
|
|
|
|
(.69
|
)
|
|
Construction
|
|
|
35,965
|
|
|
|
44,042
|
|
|
|
36,009
|
|
|
|
(18.34
|
)
|
|
|
22.31
|
|
|
Consumer
|
|
|
3,745
|
|
|
|
3,537
|
|
|
|
2,841
|
|
|
|
5.88
|
|
|
|
24.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
370,280
|
|
|
$
|
355,079
|
|
|
$
|
322,581
|
|
|
|
4.28
|
%
|
|
|
10.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table more clearly illustrates the growth of the loan portfolio from 2006 through 2008
year end. The Corporation continues to feel that a properly positioned loan portfolio is the most
attractive earning asset available. The Corporation is highly competitive in structuring loans to
meet borrowing needs and meet strong underwriting requirements.
Looking forward, based upon the current economic outlook for the Michigan economy, management
believes there will be limited opportunity for loan growth in the near term. The Corporation will
continue to use a demanding pricing model for all new credit opportunities and existing loan
renewals.
Following is a table showing the significant industry types in the commercial loan portfolio as of
December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
% of
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
% of
|
|
|
|
|
Balance
|
|
|
Loans
|
|
|
Capital
|
|
|
Balance
|
|
|
Loans
|
|
|
Capital
|
|
|
Balance
|
|
|
Loans
|
|
|
Capital
|
|
|
Real estate — operators of nonres bldgs
|
|
$
|
41,299
|
|
|
|
13.95
|
%
|
|
|
99.39
|
%
|
|
$
|
41,597
|
|
|
|
14.40
|
%
|
|
|
105.79
|
%
|
|
$
|
44,308
|
|
|
|
19.63
|
%
|
|
|
153.90
|
%
|
|
Hospitality and tourism
|
|
|
35,086
|
|
|
|
11.85
|
|
|
|
84.44
|
|
|
|
37,604
|
|
|
|
13.02
|
|
|
|
95.63
|
|
|
|
30,826
|
|
|
|
13.66
|
|
|
|
107.07
|
|
|
Real estate agents and managers
|
|
|
29,292
|
|
|
|
9.89
|
|
|
|
70.50
|
|
|
|
29,571
|
|
|
|
10.24
|
|
|
|
75.20
|
|
|
|
25,071
|
|
|
|
11.11
|
|
|
|
87.08
|
|
|
Other
|
|
|
190,411
|
|
|
|
64.31
|
|
|
|
458.25
|
|
|
|
180,067
|
|
|
|
62.34
|
|
|
|
457.94
|
|
|
|
125,512
|
|
|
|
55.60
|
|
|
|
435.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
296,088
|
|
|
|
100.00
|
%
|
|
|
|
|
|
$
|
288,839
|
|
|
|
100.00
|
%
|
|
|
|
|
|
$
|
225,717
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management recognizes the additional risk presented by the concentration in certain segments of the
portfolio. On a historical basis, the Corporation’s highest concentration of credit risk was the
hospitality and tourism industry. Management does not consider the current loan concentrations in
hospitality and tourism to be problematic, and has no intention of further reducing loans to this
industry segment. Management does not believe that its current portfolio
46
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
composition has increased exposure related to any specific industry concentration as of 2008 year-end. The current
concentration of real estate related loans represents a broad customer base composed of a high
percentage of owner-occupied developments.
The Corporation has also extended credit to governmental units, including Native American
organizations. Tax-exempt loans and leases decreased from $6.622 million at the end of 2007 to
$5.589 million at 2008 year-end. The Corporation has elected to reduce its tax-exempt portfolio,
since it provides no current tax benefit, due to tax net operating loss carryforwards.
Due to the seasonal nature of many of the Corporation’s commercial loan customers, loan payment
terms provide flexibility by structuring payments to coincide with the customer’s business cycle.
The lending staff evaluates the collectability of the past due loans based on documented collateral
values and payment history. The Corporation discontinues the accrual of interest on loans when, in
the opinion of management, there is an indication that the borrower may be unable to meet the
payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed.
Loans are returned to accrual status when all principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
Credit Quality
The table below shows balances of nonperforming assets for the three years ended December 31
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Nonperforming Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
4,887
|
|
|
$
|
3,298
|
|
|
$
|
2,899
|
|
|
Accruing loans past due 90 days or more
|
|
|
—
|
|
|
|
710
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
4,887
|
|
|
|
4,008
|
|
|
|
2,939
|
|
|
Other real estate owned
|
|
|
2,189
|
|
|
|
1,226
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
7,076
|
|
|
$
|
5,234
|
|
|
$
|
2,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans as a % of loans
|
|
|
1.32
|
%
|
|
|
1.13
|
%
|
|
|
.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets as a % of assets
|
|
|
1.57
|
%
|
|
|
1.28
|
%
|
|
|
.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At period end
|
|
$
|
4,277
|
|
|
$
|
4,146
|
|
|
$
|
5,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of loans
|
|
|
1.16
|
%
|
|
|
1.17
|
%
|
|
|
1.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of nonperforming loans
|
|
|
87.52
|
%
|
|
|
103.44
|
%
|
|
|
170.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of nonaccrual loans
|
|
|
87.52
|
%
|
|
|
125.71
|
%
|
|
|
172.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Management continues to address market issues impacting its loan customer base. In conjunction
with the Corporation’s senior lending staff and the bank regulatory examinations, management
reviews the Corporation’s loans, related collateral evaluations, and the overall lending process.
The Corporation also utilizes a loan review consultant to perform a review of the loan portfolio.
The opinion of this consultant upon completion of the 2008 independent review provided findings
similar to management on the overall adequacy of the reserve. The Corporation will utilize this
same consultant for loan review in 2009.
The following table details the impact of nonperforming loans on interest income for the three
years ended December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Interest income that would have
been recorded at original rate
|
|
$
|
377
|
|
|
$
|
391
|
|
|
$
|
114
|
|
|
Interest income that was
actually recorded
|
|
|
60
|
|
|
|
129
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest lost
|
|
$
|
317
|
|
|
$
|
262
|
|
|
$
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table will provide additional information with respect to our nonperforming assets as
of December 31, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Liquidation
|
|
|
(Deficiency)/
|
|
|
Reserve
|
|
|
Net Surplus/
|
|
|
Collateral Type
|
|
Balance
|
|
|
Value
|
|
|
Surplus
|
|
|
Allocation
|
|
|
(Exposure)
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
( c) = (b) - (a)
|
|
|
(d)
|
|
|
(e) = ( c) + (d)
|
|
|
Nonaccrual Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land development
|
|
$
|
2,755
|
|
|
$
|
2,134
|
|
|
$
|
(621
|
)
|
|
$
|
620
|
|
|
$
|
(1
|
)
|
|
Non-farm / non-residential
|
|
|
1,210
|
|
|
|
1,094
|
|
|
|
(116
|
)
|
|
|
150
|
|
|
|
34
|
|
|
Cabins / land
|
|
|
422
|
|
|
|
422
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Conv 5+ residential
properties
|
|
|
296
|
|
|
|
72
|
|
|
|
(224
|
)
|
|
|
220
|
|
|
|
(4
|
)
|
|
Land
|
|
|
105
|
|
|
|
182
|
|
|
|
77
|
|
|
|
—
|
|
|
|
77
|
|
|
1-4 family
|
|
|
85
|
|
|
|
81
|
|
|
|
(4
|
)
|
|
|
4
|
|
|
|
—
|
|
|
Business equipment
|
|
|
14
|
|
|
|
—
|
|
|
|
(14
|
)
|
|
|
—
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
4,887
|
|
|
|
3,985
|
|
|
|
(902
|
)
|
|
|
994
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land development / condo
|
|
|
1,061
|
|
|
|
750
|
|
|
|
(311
|
)
|
|
|
350
|
|
|
|
39
|
|
|
Land development
|
|
|
510
|
|
|
|
511
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
1-4 family
|
|
|
378
|
|
|
|
370
|
|
|
|
(8
|
)
|
|
|
20
|
|
|
|
12
|
|
|
Non-farm / non-residential
|
|
|
163
|
|
|
|
121
|
|
|
|
(42
|
)
|
|
|
40
|
|
|
|
(2
|
)
|
|
Downtown store frontage /
2 / 1-4 family
|
|
|
77
|
|
|
|
77
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other real estate
owned
|
|
|
2,189
|
|
|
|
1,829
|
|
|
|
(360
|
)
|
|
|
410
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL NONPERFORMING ASSETS
|
|
$
|
7,076
|
|
|
$
|
5,814
|
|
|
$
|
(1,262
|
)
|
|
$
|
1,404
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The schedule above shows the detail of nonperforming assets categorized by type of loan/collateral.
In determining estimated liquidation value, management considered existing appraisals, the date of
the appraisals, and current market conditions, along with related selling costs. Personal
guarantees are also in place for various nonperforming assets, which will also help mitigate
losses.
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 2008 amounted to
$2.169 million, or .60% of average loans outstanding, compared to $1.260 million, or .38% of loans
outstanding in 2007. The 2008 charge-offs reflect the writedown of four commercial loans, totaling
$.994 million, which were reserved for in prior periods. The current reserve balance is
representative of the relevant risk inherent within the Corporation’s loan portfolio. Additions or
reductions to the reserve in future periods will be dependent upon a combination of future loan
growth, nonperforming loan balances and charge-off activity.
48
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
A three year history of the Corporation’s credit quality is demonstrated in the following table
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
4,146
|
|
|
$
|
5,006
|
|
|
$
|
6,108
|
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial &
agricultural
|
|
|
2,062
|
|
|
|
1,148
|
|
|
|
199
|
|
|
One-to-four family residential real estate
|
|
|
157
|
|
|
|
89
|
|
|
|
88
|
|
|
Consumer
|
|
|
71
|
|
|
|
73
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans charged off
|
|
|
2,290
|
|
|
|
1,310
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries of loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial & agicultural
|
|
|
114
|
|
|
|
15
|
|
|
|
53
|
|
|
One-to-four family residential real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
13
|
|
|
Consumer
|
|
|
7
|
|
|
|
35
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries of loans previously charged off
|
|
|
121
|
|
|
|
50
|
|
|
|
91
|
|
|
Net loans charged off
|
|
|
2,169
|
|
|
|
1,260
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
2,300
|
|
|
|
400
|
|
|
|
(861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
4,277
|
|
|
$
|
4,146
|
|
|
$
|
5,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, period end
|
|
|
370,280
|
|
|
$
|
355,079
|
|
|
$
|
322,581
|
|
|
Average loans for the year
|
|
|
361,324
|
|
|
|
333,415
|
|
|
|
278,953
|
|
|
Allowance to total loans at end of year
|
|
|
1.16
|
%
|
|
|
1.17
|
%
|
|
|
1.55
|
%
|
|
Net charge-offs to average loans
|
|
|
.60
|
|
|
|
.38
|
|
|
|
.08
|
|
|
Net charge-offs to beginning allowance balance
|
|
|
52.32
|
|
|
|
25.17
|
|
|
|
3.95
|
|
The computation of the required allowance for loan losses as of any point in time is one of the
critical accounting estimates made by management in the financial statements. As such, factors
used to establish the allowance could change significantly from the assumptions made and impact future earnings positively or negatively. The
future of the national and local economies and the resulting impact on borrowers’ ability to repay
their loans and the value of collateral are examples of areas where assumptions must be made for
individual loans, as well as the overall portfolio.
The Corporation’s computation of the allowance for loan losses follows the Interagency Policy
Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and
Savings Associations issued by the Federal Financial Institutions Examination Council (FFIEC) in
July 2001. The computation of the allowance for loan losses considers prevailing local and
national economic conditions as well as past and present underwriting practices.
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. Using a historical average loss by loan type as a base, each loan graded as
higher risk is assigned a specific percentage. Within the commercial loan portfolio, the
historical loss rates are used for specific industries such as hospitality, gaming, petroleum, and
forestry. The residential real estate and consumer loan portfolios are assigned a loss percentage
as a homogenous group. If, however, on an individual loan the projected loss based on collateral
value and payment histories are in excess of the computed allowance, the allocation is increased
for the higher anticipated loss. These computations provide the basis for the allowance for loan
losses as recorded by the Corporation.
49
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Following is a table showing the specific loan allocation of the allowance for loan losses at
December 31, 2008 (dollars in thousands):
|
|
|
|
|
|
|
Commercial, financial and agricultural loans
|
|
$
|
3,819
|
|
|
One-to-four family residential real estate loans
|
|
|
27
|
|
|
Consumer loans
|
|
|
40
|
|
|
Unallocated and general reserves
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,277
|
|
|
|
|
|
|
At the end of 2008, the allowance for loan losses represented 1.16% of total loans. In
management’s opinion, the allowance for loan losses is adequate to cover probable losses related to
specifically identified loans, as well as probable losses inherent in the balance of the loan
portfolio.
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 on the balance sheet.
The following table represents the activity in other real estate (dollars in thousands):
|
|
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
26
|
|
|
Other real estate transferred from loans due to foreclosure
|
|
|
1,218
|
|
|
Other real estate transferred to premises and equipment
|
|
|
—
|
|
|
Other real estate sold / written down
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
1,226
|
|
|
Other real estate transferred from loans due to foreclosure
|
|
|
2,849
|
|
|
Other real estate transferred to premises and equipment
|
|
|
—
|
|
|
Other real estate sold / written down
|
|
|
(1,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
2,189
|
|
|
|
|
|
|
During 2008, the Corporation received real estate in lieu of loan payments of $2.849 million.
Other real estate is initially valued at the lower of cost or the fair value less selling costs.
After the initial receipt, management periodically re-evaluates the recorded balance and any
additional reductions in the fair value result in a write-down of other real estate.
Securities
The securities portfolio is an important component of the Corporation’s asset composition to
provide diversity in its asset base and provide liquidity. Securities increased $25.893 million in
2008, from $21.597 million at December 31, 2007 to $47.490 million at December 31, 2008.
The carrying value of the Corporation’s securities is as follows at December 31 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
US Agencies - MBS
|
|
$
|
46,941
|
|
|
$
|
—
|
|
|
US Agencies
|
|
|
—
|
|
|
|
20,969
|
|
|
Obligations of states and political subdivisions
|
|
|
549
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
47,490
|
|
|
$
|
21,597
|
|
|
|
|
|
|
|
|
|
50
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The Corporation’s policy is to purchase securities of high credit quality, consistent with its
asset/liability management strategies. A net gain of $64,000 on the sale of securities was
recognized in 2008. The Corporation recorded $1,000 of net losses related to securities
transactions in 2007 and 2006.
In the second half of 2008, investment securities were increased in order to address overall market
liquidity concerns. This increase provided the Bank with significant short-term liquidity. All of
the bank’s current investments are highly marketable investments guaranteed by the U.S. government.
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,
2008, investment securities with an estimated fair market value of $20.182 million were pledged.
Deposits
Total deposits at December 31, 2008 were $370.197 million, an increase of $50.270 million, or
15.67% from December 31, 2007 deposits of $320.827 million. The table below shows the deposit mix
for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
Mix
|
|
|
2007
|
|
|
Mix
|
|
|
2006
|
|
|
Mix
|
|
|
Non-interest-bearing
|
|
$
|
30,099
|
|
|
|
8.11
|
%
|
|
$
|
25,557
|
|
|
|
7.97
|
%
|
|
$
|
23,471
|
|
|
|
7.51
|
%
|
|
NOW, money market, checking
|
|
|
70,584
|
|
|
|
19.02
|
|
|
|
81,160
|
|
|
|
25.30
|
|
|
|
73,188
|
|
|
|
23.43
|
|
|
Savings
|
|
|
20,730
|
|
|
|
5.59
|
|
|
|
12,485
|
|
|
|
3.89
|
|
|
|
13,365
|
|
|
|
4.28
|
|
|
Certificates of Deposit <$100,000
|
|
|
73,752
|
|
|
|
19.87
|
|
|
|
80,607
|
|
|
|
25.12
|
|
|
|
89,585
|
|
|
|
28.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits
|
|
|
195,165
|
|
|
|
52.59
|
|
|
|
199,809
|
|
|
|
62.28
|
|
|
|
199,609
|
|
|
|
63.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit >$100,000
|
|
|
25,044
|
|
|
|
6.75
|
|
|
|
22,355
|
|
|
|
6.97
|
|
|
|
23,645
|
|
|
|
7.57
|
|
|
Brokered CDs
|
|
|
150,888
|
|
|
|
40.66
|
|
|
|
98,663
|
|
|
|
30.75
|
|
|
|
89,167
|
|
|
|
28.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-core deposits
|
|
|
175,932
|
|
|
|
47.41
|
|
|
|
121,018
|
|
|
|
37.72
|
|
|
|
112,812
|
|
|
|
36.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
371,097
|
|
|
|
100.00
|
%
|
|
$
|
320,827
|
|
|
|
100.00
|
%
|
|
$
|
312,421
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in deposits, as illustrated above, is composed of an increase in wholesale brokered
deposits of $52.225 million and a decrease in bank deposits of $1.955 million. The additional
wholesale brokered deposits were in part utilized to enhance balance sheet liquidity, as rates on
these deposits were priced lower than in-market deposits.
Although the Corporation has been successful in growing core deposits, the high level of funding
required by loan growth has resulted in increased reliance upon brokered deposits. As of December
31, 2008, non-core deposits amounted to 47.41% of total deposits, an increase from 37.72% at 2007
year-end. A portion, approximately $25.000 million, of the increase in brokered deposits was used to augment liquidity through the purchase of investment
securities. The Bank had $150.888 million in brokered deposits at December 31, 2008, 40.66% of
total deposits. Non-core funding has a negative effect on the Corporation’s net interest margin,
as non-core out-of-market deposits carry higher interest costs.
In 2007, the Corporation increased its reliance on non-core funding due in part to the sale of a
branch office in the northwest part of the Upper Peninsula of Michigan with $9.3 million of
deposits. The sale of this branch office was in accordance with the overall strategy of the
Corporation to focus on markets with higher growth potential.
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 historically used alternative funding sources to provide long-term, stable sources
of funds. Current borrowings total $35.000 million with stated maturities ranging through 2011.
Borrowings at year end include $20.000 million with adjustable rates that reprice quarterly based
upon the three month LIBOR. The FHLB has the option to convert the remaining $15.000 million
fixed-rate advances to adjustable rate advances on the original call date and quarterly thereafter.
51
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Shareholders’ Equity
Changes in shareholders’ equity are discussed in detail in the “Capital and Regulatory” section of
this report.
RESULTS OF OPERATIONS
Summary
The Corporation reported income of $1.872 million in 2008, compared to net income of $10.163
million in 2007 and a net income of $1.716 million in 2006. As previously mentioned, the 2008
operating results include the positive effect, $3.475 million of a lawsuit settlement, and the
negative effect, $.425 million of a severance agreement. The 2007 results of operations include
the $7.500 million recognition of a deferred tax benefit pertaining to NOL and tax credit
carryforwards. Also included in the 2007 results is $.470 million from the settlement of the
lawsuit against the Corporation’s former accountants. The 2006 operations include a $.600 million
negative provision recorded in the first quarter, in recognition of improved credit quality, a
$.261 million negative provision recorded in the fourth quarter to recognize a specific reserve
reduction on a loan payoff, and a $.500 million deferred tax benefit recorded in the third quarter.
The deferred tax benefit was recorded in accordance with generally accepted accounting principles
for recognition of a portion of the benefits to be derived from NOL carry-forwards. The 2006
results also include $.310 million of stock option expense required under accounting rules for
stock compensation plans, which were effective beginning in 2006, as well as $.550 million of
expenses incurred to pursue legal action against the Corporation’s former accountants.
The following table details changes in earnings and earnings per share for the three years ended
December 31 (dollars in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/Expense
|
|
|
Change
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008-2007
|
|
|
2007-2006
|
|
|
|
|
Dollars
|
|
|
Dollars
|
|
|
Dollars
|
|
|
Dollars
|
|
|
Per Share
|
|
|
Dollars
|
|
|
Per Share
|
|
|
Interest Income
|
|
$
|
24,562
|
|
|
$
|
28,695
|
|
|
$
|
24,052
|
|
|
$
|
(4,133
|
)
|
|
|
(1.21
|
)
|
|
$
|
4,643
|
|
|
$
|
1.35
|
|
|
Interest Expense
|
|
|
11,698
|
|
|
|
15,278
|
|
|
|
12,459
|
|
|
|
(3,580
|
)
|
|
|
(1.05
|
)
|
|
|
2,819
|
|
|
|
.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
12,864
|
|
|
|
13,417
|
|
|
|
11,593
|
|
|
|
(553
|
)
|
|
|
(.16
|
)
|
|
|
1,824
|
|
|
|
.53
|
|
|
Provision for loan losses
|
|
|
2,300
|
|
|
|
400
|
|
|
|
(861
|
)
|
|
|
1,900
|
|
|
|
.56
|
|
|
|
1,261
|
|
|
|
.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
|
|
|
10,564
|
|
|
|
13,017
|
|
|
|
12,454
|
|
|
|
(2,453
|
)
|
|
|
(.72
|
)
|
|
|
563
|
|
|
|
.16
|
|
|
Noninterest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees
|
|
|
838
|
|
|
|
688
|
|
|
|
547
|
|
|
|
150
|
|
|
|
.04
|
|
|
|
141
|
|
|
|
.04
|
|
|
Net gains on sale of secondary market loans
|
|
|
120
|
|
|
|
498
|
|
|
|
197
|
|
|
|
(378
|
)
|
|
|
(.11
|
)
|
|
|
301
|
|
|
|
.09
|
|
|
Proceeds from settlement of lawsuit
|
|
|
3,475
|
|
|
|
470
|
|
|
|
—
|
|
|
|
3,005
|
|
|
|
.88
|
|
|
|
470
|
|
|
|
.14
|
|
|
Other
|
|
|
220
|
|
|
|
350
|
|
|
|
239
|
|
|
|
(130
|
)
|
|
|
(.04
|
)
|
|
|
111
|
|
|
|
.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
4,653
|
|
|
|
2,006
|
|
|
|
983
|
|
|
|
2,647
|
|
|
|
.77
|
|
|
|
1,023
|
|
|
|
.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
6,886
|
|
|
|
6,757
|
|
|
|
6,132
|
|
|
|
129
|
|
|
|
.04
|
|
|
|
625
|
|
|
|
.18
|
|
|
Occupancy
|
|
|
1,374
|
|
|
|
1,272
|
|
|
|
1,264
|
|
|
|
102
|
|
|
|
.03
|
|
|
|
8
|
|
|
|
—
|
|
|
Furniture and equipment
|
|
|
771
|
|
|
|
678
|
|
|
|
631
|
|
|
|
93
|
|
|
|
.03
|
|
|
|
47
|
|
|
|
.01
|
|
|
Data processing
|
|
|
844
|
|
|
|
785
|
|
|
|
691
|
|
|
|
59
|
|
|
|
.02
|
|
|
|
94
|
|
|
|
.03
|
|
|
Professional services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
|
|
|
254
|
|
|
|
308
|
|
|
|
273
|
|
|
|
(54
|
)
|
|
|
(.02
|
)
|
|
|
35
|
|
|
|
.01
|
|
|
Legal
|
|
|
41
|
|
|
|
42
|
|
|
|
927
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(885
|
)
|
|
|
(.26
|
)
|
|
Consulting and other
|
|
|
213
|
|
|
|
182
|
|
|
|
225
|
|
|
|
31
|
|
|
|
.01
|
|
|
|
(43
|
)
|
|
|
(.01
|
)
|
|
Loan and deposit
|
|
|
569
|
|
|
|
285
|
|
|
|
392
|
|
|
|
284
|
|
|
|
.08
|
|
|
|
(107
|
)
|
|
|
(.03
|
)
|
|
Telephone
|
|
|
170
|
|
|
|
228
|
|
|
|
210
|
|
|
|
(58
|
)
|
|
|
(.02
|
)
|
|
|
18
|
|
|
|
.01
|
|
|
Advertising
|
|
|
305
|
|
|
|
370
|
|
|
|
346
|
|
|
|
(65
|
)
|
|
|
(.02
|
)
|
|
|
24
|
|
|
|
.01
|
|
|
Other
|
|
|
1,131
|
|
|
|
1,193
|
|
|
|
1,130
|
|
|
|
(62
|
)
|
|
|
(.02
|
)
|
|
|
63
|
|
|
|
.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
12,558
|
|
|
|
12,100
|
|
|
|
12,221
|
|
|
|
458
|
|
|
|
.13
|
|
|
|
(121
|
)
|
|
|
(.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
2,659
|
|
|
|
2,923
|
|
|
|
1,216
|
|
|
|
(264
|
)
|
|
|
(.08
|
)
|
|
|
1,707
|
|
|
|
.49
|
|
|
Provision (credit) for income taxes
|
|
|
787
|
|
|
|
(7,240
|
)
|
|
|
(500
|
)
|
|
|
8,027
|
|
|
|
2.34
|
|
|
|
(6,740
|
)
|
|
|
(1.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change
|
|
|
1,872
|
|
|
|
10,163
|
|
|
|
1,716
|
|
|
|
(8,291
|
)
|
|
|
(2.42
|
)
|
|
|
8,447
|
|
|
|
2.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss), current period
|
|
$
|
1,872
|
|
|
$
|
10,163
|
|
|
$
|
1,716
|
|
|
$
|
(8,291
|
)
|
|
$
|
(2.42
|
)
|
|
$
|
8,447
|
|
|
$
|
2.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Net Interest Income
Net interest income is the Corporation’s primary source of core earnings. Net interest income
represents the difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing obligations. The net interest income is impacted by economic
and competitive factors that influence rates, loan demand, and the availability of funding.
Net interest income decreased $.553 million to $12.864 million, in 2008. The decrease in net
interest income for 2008 was primarily the result of prime rate reductions that have translated
into lower yields on the Corporation’s earning assets, specifically variable rate commercial loans
and short-term investments which reprice immediately. Offering rates on brokered certificates of
deposit are influenced by other factors, such as overall market liquidity. During most of 2008,
rates on brokered deposits were high due to overall liquidity issues prevalent in the financial
markets. In recent months, rates on brokered deposits have decreased significantly. Throughout
2008, as interest rates continued to decline and economic conditions deteriorated, management
evaluated new and existing credit relationships to ensure proper pricing. Floors were established
on the majority of new loans and renewals to mitigate interest rate risk going forward.
In 2007, net interest income increased $1.824 million, from $11.593 million in 2006. The increase
in net interest income for 2007 was primarily the result of the successful expansion of the
Corporation’s loan portfolio. The Corporation also benefited from increasing interest rates during
this same period since a large portion of the Bank’s loan portfolio repriced immediately with each
increase in the prime rate while the liability repricing lagged.
The Corporation’s net interest margin, on a fully taxable equivalent basis, was 3.28% in 2008
compared to 3.68% in 2007. During 2008, the prime rate decreased from 7.25% to 3.25%, which created significant margin
pressure since a majority of the commercial loan portfolio repriced downward with each prime rate
change, and the majority of the bank’s funding sources had significant lag time in repricing. We
experienced additional margin pressure due to our brokered deposits, which did not reprice in line
with prime rate reduction, due to the overall market liquidity crisis. Management remains diligent
in its efforts to reduce margin pressure in this decreasing rate environment.
The following table details sources of net interest income for the three years ended December 31,
2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
Mix
|
|
|
2007
|
|
|
Mix
|
|
|
2006
|
|
|
Mix
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
22,959
|
|
|
|
93.47
|
%
|
|
$
|
26,873
|
|
|
|
93.65
|
%
|
|
$
|
21,992
|
|
|
|
91.44
|
%
|
|
Funds sold
|
|
|
96
|
|
|
|
.39
|
|
|
|
391
|
|
|
|
1.36
|
|
|
|
554
|
|
|
|
2.30
|
|
|
Taxable securities
|
|
|
1,293
|
|
|
|
5.27
|
|
|
|
1,100
|
|
|
|
3.83
|
|
|
|
1,186
|
|
|
|
4.93
|
|
|
Nontaxable securities
|
|
|
5
|
|
|
|
.02
|
|
|
|
—
|
|
|
|
—
|
|
|
|
87
|
|
|
|
.36
|
|
|
Other interest-earning assets
|
|
|
209
|
|
|
|
.85
|
|
|
|
331
|
|
|
|
1.16
|
|
|
|
233
|
|
|
|
.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
24,562
|
|
|
|
100.00
|
%
|
|
|
28,695
|
|
|
|
100.00
|
%
|
|
|
24,052
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, money markets, checking
|
|
|
1,284
|
|
|
|
10.98
|
%
|
|
|
2,668
|
|
|
|
17.46
|
%
|
|
|
2,263
|
|
|
|
18.16
|
%
|
|
Savings
|
|
|
193
|
|
|
|
1.66
|
|
|
|
199
|
|
|
|
1.30
|
|
|
|
210
|
|
|
|
1.69
|
|
|
CDs <$100,000
|
|
|
3,181
|
|
|
|
27.19
|
|
|
|
4,490
|
|
|
|
29.39
|
|
|
|
3,595
|
|
|
|
28.85
|
|
|
CDs >$100,000
|
|
|
1,037
|
|
|
|
8.86
|
|
|
|
1,183
|
|
|
|
7.74
|
|
|
|
846
|
|
|
|
6.79
|
|
|
Brokered deposits
|
|
|
4,420
|
|
|
|
37.78
|
|
|
|
4,684
|
|
|
|
30.66
|
|
|
|
3,661
|
|
|
|
29.39
|
|
|
Borrowings
|
|
|
1,583
|
|
|
|
13.53
|
|
|
|
2,054
|
|
|
|
13.45
|
|
|
|
1,884
|
|
|
|
15.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing funds
|
|
|
11,698
|
|
|
|
100.00
|
%
|
|
|
15,278
|
|
|
|
100.00
|
%
|
|
|
12,459
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
12,864
|
|
|
|
|
|
|
$
|
13,417
|
|
|
|
|
|
|
$
|
11,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets
|
|
|
6.16
|
%
|
|
|
|
|
|
|
7.71
|
%
|
|
|
|
|
|
|
7.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing funds
|
|
|
3.32
|
|
|
|
|
|
|
|
4.62
|
|
|
|
|
|
|
|
4.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
2.84
|
|
|
|
|
|
|
|
3.09
|
|
|
|
|
|
|
|
3.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
While a majority of the Corporation’s loan portfolio, approximately 65%, is repriced with each
prime rate change due to floating rate loans, interest paid on similar rate changes does not impact
the pricing of interest-bearing liabilities to nearly the same degree. The mix of time deposits
reflects the Corporation’s need to utilize the brokered certificate of deposit markets for loan
funding when core deposits did not provide adequate sources. The Corporation’s historical reliance
on out-of-market non-core funding from brokered deposits along with the FHLB borrowings, have had a
negative effect on net interest margin due to the relative high costs of this funding. The
Corporation has placed a high priority on gathering in-market core deposits in order to reduce
funding costs and reduce the risk associated with non-core funding.
Recent prime rate reductions have translated into lower yields on the Corporation’s earning assets,
specifically variable rate commercial loans and short-term investments which reprice immediately.
Offering rates on brokered certificates of deposit are influenced by other factors, such as overall
market liquidity. Reliance upon wholesale funding and further rate reductions in the near term
will unfavorably impact the net interest margin of the Corporation.
The following table presents the amount of 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
(dollars in thousands)
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1,2,3)
|
|
$
|
361,324
|
|
|
$
|
23,166
|
|
|
|
6.41
|
%
|
|
$
|
333,415
|
|
|
$
|
27,146
|
|
|
|
8.14
|
%
|
|
$
|
278,953
|
|
|
$
|
22,380
|
|
|
|
8.02
|
%
|
|
Taxable securities
|
|
|
28,766
|
|
|
|
1,293
|
|
|
|
4.49
|
|
|
|
25,061
|
|
|
|
1,100
|
|
|
|
4.39
|
|
|
|
32,795
|
|
|
|
1,186
|
|
|
|
3.62
|
|
|
Nontaxable securities (2)
|
|
|
69
|
|
|
|
8
|
|
|
|
11.59
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,658
|
|
|
|
132
|
|
|
|
7.96
|
|
|
Federal Funds sold
|
|
|
4,101
|
|
|
|
96
|
|
|
|
2.34
|
|
|
|
7,515
|
|
|
|
391
|
|
|
|
5.20
|
|
|
|
11,123
|
|
|
|
554
|
|
|
|
4.98
|
|
|
Other interest-earning assets
|
|
|
4,318
|
|
|
|
209
|
|
|
|
4.84
|
|
|
|
6,358
|
|
|
|
332
|
|
|
|
5.22
|
|
|
|
5,885
|
|
|
|
233
|
|
|
|
3.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
398,578
|
|
|
|
24,772
|
|
|
|
6.22
|
|
|
|
372,354
|
|
|
|
28,969
|
|
|
|
7.78
|
|
|
|
330,414
|
|
|
|
24,485
|
|
|
|
7.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for loan losses
|
|
|
(3,747
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,881
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,495
|
)
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
6,901
|
|
|
|
|
|
|
|
|
|
|
|
6,266
|
|
|
|
|
|
|
|
|
|
|
|
5,775
|
|
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
11,453
|
|
|
|
|
|
|
|
|
|
|
|
12,276
|
|
|
|
|
|
|
|
|
|
|
|
12,375
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
12,158
|
|
|
|
|
|
|
|
|
|
|
|
6,298
|
|
|
|
|
|
|
|
|
|
|
|
4,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,765
|
|
|
|
|
|
|
|
|
|
|
|
19,959
|
|
|
|
|
|
|
|
|
|
|
|
17,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
425,343
|
|
|
|
|
|
|
|
|
|
|
$
|
392,313
|
|
|
|
|
|
|
|
|
|
|
$
|
347,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and Money Markets
|
|
$
|
77,997
|
|
|
$
|
1,245
|
|
|
|
1.60
|
%
|
|
$
|
77,942
|
|
|
$
|
2,669
|
|
|
|
3.42
|
%
|
|
$
|
70,417
|
|
|
$
|
2,263
|
|
|
|
3.21
|
%
|
|
Interest checking
|
|
|
1,501
|
|
|
|
39
|
|
|
|
2.60
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Savings deposits
|
|
|
15,963
|
|
|
|
193
|
|
|
|
1.21
|
|
|
|
13,013
|
|
|
|
199
|
|
|
|
1.53
|
|
|
|
14,412
|
|
|
|
210
|
|
|
|
1.46
|
|
|
CDs <$100,000
|
|
|
78,755
|
|
|
|
3,181
|
|
|
|
4.04
|
|
|
|
91,313
|
|
|
|
4,490
|
|
|
|
4.92
|
|
|
|
82,445
|
|
|
|
3,595
|
|
|
|
4.36
|
|
|
CDs >$100,000
|
|
|
27,079
|
|
|
|
1,037
|
|
|
|
3.83
|
|
|
|
23,879
|
|
|
|
1,183
|
|
|
|
4.96
|
|
|
|
18,128
|
|
|
|
846
|
|
|
|
4.67
|
|
|
Brokered deposits
|
|
|
111,482
|
|
|
|
4,420
|
|
|
|
3.90
|
|
|
|
85,703
|
|
|
|
4,683
|
|
|
|
5.46
|
|
|
|
72,768
|
|
|
|
3,661
|
|
|
|
5.03
|
|
|
Borrowings
|
|
|
39,248
|
|
|
|
1,583
|
|
|
|
4.03
|
|
|
|
38,949
|
|
|
|
2,054
|
|
|
|
5.27
|
|
|
|
37,422
|
|
|
|
1,884
|
|
|
|
5.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
352,025
|
|
|
|
11,698
|
|
|
|
3.32
|
%
|
|
|
330,799
|
|
|
|
15,278
|
|
|
|
4.62
|
|
|
|
295,592
|
|
|
|
12,459
|
|
|
|
4.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
29,348
|
|
|
|
|
|
|
|
|
|
|
|
25,860
|
|
|
|
|
|
|
|
|
|
|
|
21,414
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
3,340
|
|
|
|
|
|
|
|
|
|
|
|
2,923
|
|
|
|
|
|
|
|
|
|
|
|
3,177
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
40,630
|
|
|
|
|
|
|
|
|
|
|
|
32,731
|
|
|
|
|
|
|
|
|
|
|
|
27,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,318
|
|
|
|
|
|
|
|
|
|
|
|
61,514
|
|
|
|
|
|
|
|
|
|
|
|
52,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
$
|
425,343
|
|
|
|
|
|
|
|
|
|
|
$
|
392,313
|
|
|
|
|
|
|
|
|
|
|
$
|
347,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate spread
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.16
|
%
|
|
|
|
|
|
|
|
|
|
|
3.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin/revenue, tax
equivalent basis
|
|
|
|
|
|
$
|
13,074
|
|
|
|
3.28
|
%
|
|
|
|
|
|
$
|
13,691
|
|
|
|
3.68
|
%
|
|
|
|
|
|
$
|
12,026
|
|
|
|
3.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
54
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table presents the dollar amount, in thousands, of changes in 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 old rate) and (ii) changes in rate (i.e., changes in
rate multiplied by old volume). For purposes of this table, changes attributable to both rate and
volume are shown as a separate variance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
2008
|
|
vs.
|
|
2007
|
|
|
|
|
2007
|
|
vs.
|
|
2006
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
|
Due to
|
|
Total
|
|
|
Due to
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
Volume
|
|
|
Increase
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
and Rate
|
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
and Rate
|
|
|
(Decrease)
|
|
|
Interest
earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
2,271
|
|
|
$
|
(5,768
|
)
|
|
$
|
(483
|
)
|
|
$
|
(3,980
|
)
|
|
$
|
4,369
|
|
|
$
|
332
|
|
|
$
|
65
|
|
|
$
|
4,766
|
|
|
Taxable securities
|
|
|
163
|
|
|
|
26
|
|
|
|
4
|
|
|
|
193
|
|
|
|
(279
|
)
|
|
|
253
|
|
|
|
(60
|
)
|
|
|
(86
|
)
|
|
Nontaxable securities
|
|
|
—
|
|
|
|
1
|
|
|
|
7
|
|
|
|
8
|
|
|
|
(132
|
)
|
|
|
(132
|
)
|
|
|
132
|
|
|
|
(132
|
)
|
|
Federal funds sold
|
|
|
(178
|
)
|
|
|
(215
|
)
|
|
|
98
|
|
|
|
(295
|
)
|
|
|
(180
|
)
|
|
|
25
|
|
|
|
(8
|
)
|
|
|
(163
|
)
|
|
Other interest earning assets
|
|
|
(107
|
)
|
|
|
(24
|
)
|
|
|
8
|
|
|
|
(123
|
)
|
|
|
19
|
|
|
|
74
|
|
|
|
6
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
$
|
2,149
|
|
|
$
|
(5,980
|
)
|
|
$
|
(366
|
)
|
|
$
|
(4,197
|
)
|
|
$
|
3,797
|
|
|
$
|
552
|
|
|
$
|
135
|
|
|
$
|
4,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposits
|
|
$
|
2
|
|
|
$
|
(1,425
|
)
|
|
$
|
(1
|
)
|
|
$
|
(1,424
|
)
|
|
$
|
242
|
|
|
$
|
148
|
|
|
$
|
16
|
|
|
$
|
406
|
|
|
Interest checking
|
|
|
—
|
|
|
|
—
|
|
|
|
39
|
|
|
|
39
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Savings deposits
|
|
|
45
|
|
|
|
(42
|
)
|
|
|
(9
|
)
|
|
|
(6
|
)
|
|
|
(20
|
)
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
(11
|
)
|
|
CDs <$100,000
|
|
|
(617
|
)
|
|
|
(802
|
)
|
|
|
110
|
|
|
|
(1,309
|
)
|
|
|
387
|
|
|
|
459
|
|
|
|
49
|
|
|
|
895
|
|
|
CDs >$100,000
|
|
|
159
|
|
|
|
(269
|
)
|
|
|
(36
|
)
|
|
|
(146
|
)
|
|
|
268
|
|
|
|
52
|
|
|
|
17
|
|
|
|
337
|
|
|
Brokered deposits
|
|
|
1,409
|
|
|
|
(1,285
|
)
|
|
|
(387
|
)
|
|
|
(263
|
)
|
|
|
650
|
|
|
|
316
|
|
|
|
56
|
|
|
|
1,022
|
|
|
Borrowings
|
|
|
16
|
|
|
|
(483
|
)
|
|
|
(4
|
)
|
|
|
(471
|
)
|
|
|
77
|
|
|
|
89
|
|
|
|
4
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing
obligations
|
|
$
|
1,014
|
|
|
$
|
(4,306
|
)
|
|
$
|
(288
|
)
|
|
$
|
(3,580
|
)
|
|
$
|
1,604
|
|
|
$
|
1,074
|
|
|
$
|
141
|
|
|
$
|
2,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2008, the
Corporation recorded a provision for loan loss of $2.300 million. In the third quarter of 2007,
the Corporation recorded a $.400 million provision in order to provide for the potential loss
related to a commercial loan. In 2006, a negative loan loss provision of $.860 million was
recorded. This negative provision was recorded due in part to recognize the overall reduction in
loan portfolio risk and also as a direct result of a specific reserve reduction from a payoff of a
problem loan.
Noninterest Income
Noninterest income was $4.653 million, $2.006 million, and $.983 million in 2008, 2007, and 2006,
respectively. The principal recurring sources of noninterest income are fees for services related
to deposit and loan accounts. In 2008, the Corporation recorded the benefit of proceeds received,
$3.475 million, from the settlement of a lawsuit. In 2007, the Corporation recognized $.470
million of income from the settlement of a lawsuit against its former accountants. Service fees
were $.838 million in 2008, while other noninterest income was $.156 million.
Revenue due to loans produced and sold in the secondary market amounted to $.120 million compared
to $.498 million a year ago. Poor overall market conditions, caused by a declining economy and a
housing slump, limited any ability to expand our revenues from secondary mortgage loan activity
during 2008. We do anticipate increased fee income in future periods as the housing market
improves and home buyers look to more traditional lenders for their borrowing needs. We did
realize increased income from service fees related to our deposit products. Management initiated
several changes in fees associated with various deposit products, to better align services and
costs.
55
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table details noninterest income for the three years ended December 31 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase (Decrease)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008-2007
|
|
|
2007-2006
|
|
|
Service fees
|
|
$
|
838
|
|
|
$
|
688
|
|
|
$
|
547
|
|
|
|
21.80
|
%
|
|
|
25.78
|
%
|
|
Net gains on loan sales
|
|
|
120
|
|
|
|
498
|
|
|
|
197
|
|
|
|
(75.90
|
)
|
|
|
152.79
|
|
|
Proceeds from settlement of lawsuit
|
|
|
3,475
|
|
|
|
470
|
|
|
|
—
|
|
|
|
639.36
|
|
|
|
N/A
|
|
|
Other
|
|
|
156
|
|
|
|
351
|
|
|
|
240
|
|
|
|
(55.56
|
)
|
|
|
46.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
4,589
|
|
|
|
2,007
|
|
|
|
984
|
|
|
|
128.65
|
|
|
|
103.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net security gains
|
|
|
64
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
N/A
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
4,653
|
|
|
$
|
2,006
|
|
|
$
|
983
|
|
|
|
131.95
|
%
|
|
|
104.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense
Noninterest expense was $12.558 million in 2008, compared to $12.100 million and $12.221 million in
2007 and 2006, respectively. Salaries and employee benefits increased in 2008 by $.129 million to
$6.886 million, compared to 2007 expense of $6.757 million. During 2008, the Corporation recorded
a $.425 million expense related to a severance payment. Excluding this item, the Corporation had a
reduction in salaries and employee benefits of $.296 million from 2007.
Data processing expense increased from $.785 million in 2007 to $.844 million in 2008, largely as a
result of increased services and volume. Professional fees decreased from $.532 million in 2007 to
$.508 million in 2008. This decrease is a result of the settlement of a longstanding derivative
shareholder lawsuit which resulted in $3.475 million in settlement fees
recorded to income, as well as the dismissal of unpaid legal fees totaling $95,000 related to the
defense of prior directors of the Corporation. This dismissal resulted in the reversal of the
accrual for these fees.
Telephone expenses of $.170 million are lower than the 2007 level of $.228 million, as a result of
the installation of a new phone system which reduced long distance service costs. Advertising
costs also decreased in 2008, as the Corporation initiated cost controls in this area.
The Corporation saw an increase in loan and deposit expense of $.284 million to $.569 million in
2008 from $.285 million in 2007. This increase is a result of legal and carrying costs incurred in
connection with increased levels of nonperforming assets. Looking forward, management expects to
experience increased loan and deposit costs due to increased FDIC insurance premiums, as assessment
rates are increased, in order to replenish the deposit insurance fund.
Management continuously reviews all areas of noninterest expense in order to evaluate where
opportunities may exist which could reduce expenses without compromising service to customers.
56
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The
following table details noninterest expense for the three years ended
December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase (Decrease)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008-2007
|
|
|
2007-2006
|
|
|
Salaries and employee benefits
|
|
$
|
6,886
|
|
|
$
|
6,757
|
|
|
$
|
6,132
|
|
|
|
1.91
|
%
|
|
|
10.19
|
%
|
|
Occupancy
|
|
|
1,374
|
|
|
|
1,272
|
|
|
|
1,264
|
|
|
|
8.02
|
|
|
|
.63
|
|
|
Furniture and equipment
|
|
|
771
|
|
|
|
678
|
|
|
|
631
|
|
|
|
13.72
|
|
|
|
7.45
|
|
|
Data processing
|
|
|
844
|
|
|
|
785
|
|
|
|
691
|
|
|
|
7.52
|
|
|
|
13.60
|
|
|
Professional service fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
|
|
|
254
|
|
|
|
308
|
|
|
|
273
|
|
|
|
(17.53
|
)
|
|
|
12.82
|
|
|
Legal
|
|
|
41
|
|
|
|
42
|
|
|
|
927
|
|
|
|
(2.38
|
)
|
|
|
(95.47
|
)
|
|
Consulting and other
|
|
|
213
|
|
|
|
182
|
|
|
|
225
|
|
|
|
17.03
|
|
|
|
(19.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total professional service fees
|
|
|
508
|
|
|
|
532
|
|
|
|
1,425
|
|
|
|
(4.51
|
)
|
|
|
(62.67
|
)
|
|
Loan and deposit
|
|
|
569
|
|
|
|
285
|
|
|
|
392
|
|
|
|
99.65
|
|
|
|
(27.30
|
)
|
|
Telephone
|
|
|
170
|
|
|
|
228
|
|
|
|
210
|
|
|
|
(25.44
|
)
|
|
|
8.57
|
|
|
ORE writedowns/impairment
|
|
|
—
|
|
|
|
40
|
|
|
|
—
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
(Gain) loss on sale of premises,
equipment
branch and other real estate
|
|
|
77
|
|
|
|
(17
|
)
|
|
|
(60
|
)
|
|
|
(552.94
|
)
|
|
|
(71.67
|
)
|
|
Advertising
|
|
|
305
|
|
|
|
370
|
|
|
|
281
|
|
|
|
(17.57
|
)
|
|
|
31.67
|
|
|
Amortization of intangibles
|
|
|
78
|
|
|
|
82
|
|
|
|
125
|
|
|
|
(4.88
|
)
|
|
|
(34.40
|
)
|
|
Other operating expenses
|
|
|
976
|
|
|
|
1,088
|
|
|
|
1,130
|
|
|
|
(10.29
|
)
|
|
|
(3.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
12,558
|
|
|
$
|
12,100
|
|
|
$
|
12,221
|
|
|
|
3.79
|
%
|
|
|
(.99)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Income Taxes
Current Federal Tax Provision
The Corporation recorded a current period federal tax provision of $.787 million in 2008, compared
to a $7.240 million negative provision in the same period a year earlier, in recognition of a
federal deferred tax benefit, which is discussed further below.
Deferred Tax Benefit
The Corporation recognized a federal deferred tax benefit of $7.500 million in the third quarter of
2007. The recognition of this deferred tax benefit relates to the generally accepted accounting
principles applicable to the probability of utilizing the NOL and tax credit carryforwards of the
Corporation. The Corporation, based upon current profitability trends largely supported by
expansion of the net interest margin and controlled expenses, determined that the utilization of
the NOL carryforward was probable. This tax benefit was recorded by reducing the valuation
allowance that was recorded against the deferred tax assets of the Corporation. In 2006, The
Corporation recognized a portion of this benefit, $.500 million, based upon the then current
probabilities. The $7.500 million recognition is based upon assumptions of a sustained level of
taxable income within the NOL carryforward period and takes into account Section 382, establishing
annual limitations. A valuation allowance is provided against deferred tax assets when it is more
likely than not that some or all of the deferred tax assets will not be realized. As of December
31, 2008, the Corporation had an NOL carryforward of approximately $32.128 million along with
various credit carryforwards of $2.136 million. This NOL and credit carryforward benefit is
dependent upon the future profitability of the Corporation. A portion of the NOL, approximately
$22.000 million, and all of the tax credit carryforwards are also subject to the limitations of
Section 382 of the Internal Revenue Code since they originated prior to the December 2004
recapitalization of the Corporation. The Corporation intends to further evaluate the
57
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
utilization of the NOL and credit carryforwards in subsequent periods to determine if any further adjustment to
the valuation allowance is necessary. The determination criteria for recognition of deferred tax
benefits will include the assumption of future period taxable income based upon the projected
profitability of the Corporation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
In general, the Corporation attempts to manage interest rate risk by investing in a variety of
assets which afford it an opportunity to reprice assets and increase interest income at a rate
equal to or greater than the interest expense associated with repricing liabilities.
Interest rate risk is the exposure of the Corporation to adverse movements in interest rates. The
Corporation derives its income primarily from the excess of interest collected on its
interest-earning assets over the interest paid on its interest-bearing obligations. The rates of
interest the Corporation earns on its assets and owes on its obligations generally are established
contractually for a period of time. Since market interest rates change over time, the Corporation
is exposed to lower profitability if it cannot adapt to interest rate changes. Accepting interest
rate risk can be an important source of profitability and shareholder value; however, excess levels
of interest rate risk could pose a significant threat to the Corporation’s earnings and capital
base. Accordingly, effective risk management that maintains interest rate risk at prudent levels
is essential to the Corporation’s safety and soundness.
Loans are the most significant earning asset. Management offers commercial and real estate loans
priced at interest rates which fluctuate with various indices, such as the prime rate or rates paid
on various government issued securities. When loans are made with longer-term fixed rates, the
Corporation attempts to match these balances with sources of funding with similar maturities in
order to mitigate interest rate risk. In addition, the Corporation prices loans so it has an
opportunity to reprice the loan within 12 to 36 months.
The Bank has $47.490 million of securities, with a weighted average maturity of 16 months. The
investment portfolio is intended to provide a source of liquidity to the Corporation with limited
interest rate risk. The Corporation may also elect to sell monies as investments in federal funds
sold to correspondent banks, and has other interest bearing deposits with correspondent banks.
These funds are generally repriced on a daily basis.
The Corporation offers deposit products with a variety of terms ranging from deposits whose
interest rates can change on a weekly basis to certificates of deposit with repricing terms of up
to five years. Longer-term deposits generally include penalty provisions for early withdrawal.
Beyond general efforts to shorten the loan pricing periods and extend deposit maturities,
management can manage interest rate risk by the maturity periods of securities purchased, selling
securities available for sale, and borrowing funds with targeted maturity periods, among other
strategies. Also, the rate of interest rate changes can impact the actions taken, since the speed
of change affects borrowers and depositors differently.
Exposure to interest rate risk is reviewed on a regular basis. Interest rate risk is the potential
of economic losses due to future interest rate changes. These economic losses can be reflected as
a loss of future net interest income and/or a loss of current fair market values. The objective is
to measure the effect of interest rate changes on net interest income and to structure the
composition of the balance sheet to minimize interest rate risk and, at the same time, maximize
income.
Management realizes certain risks are inherent and that the goal is to identify and minimize the
risks. Tools used by management include maturity and repricing analysis and interest rate
sensitivity analysis. The Bank has monthly asset/ liability meetings with an outside consultant to
review its current 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.
58
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Assets and liabilities scheduled to reprice are reported in the following timeframes. Those
instruments with a variable interest rate tied to an index and considered immediately repricable
are reported in the 1 to 90 day timeframe. The estimates of principal amortization and prepayments
are assigned to the following time frames.
The following is the Corporation’s repricing opportunities at December 31, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-90
|
|
|
91-365
|
|
|
>1-5
|
|
|
Over 5
|
|
|
|
|
|
|
|
Days
|
|
|
Days
|
|
|
Years
|
|
|
Years
|
|
|
Total
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
257,789
|
|
|
$
|
11,061
|
|
|
$
|
26,943
|
|
|
$
|
74,487
|
|
|
$
|
370,280
|
|
|
Securities
|
|
|
—
|
|
|
|
30,358
|
|
|
|
16,615
|
|
|
|
517
|
|
|
|
47,490
|
|
|
Other
(1)
|
|
|
582
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,794
|
|
|
|
4,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
258,371
|
|
|
|
41,419
|
|
|
|
43,558
|
|
|
|
78,798
|
|
|
|
422,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, money market, savings and interest checking
|
|
|
91,314
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
91,314
|
|
|
Time deposits
|
|
|
35,759
|
|
|
|
49,537
|
|
|
|
12,729
|
|
|
|
771
|
|
|
|
98,796
|
|
|
Brokered CDs
|
|
|
102,745
|
|
|
|
48,143
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150,888
|
|
|
Borrowings
|
|
|
20,000
|
|
|
|
—
|
|
|
|
15,000
|
|
|
|
1,210
|
|
|
|
36,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing obligations
|
|
|
249,818
|
|
|
|
97,680
|
|
|
|
27,729
|
|
|
|
1,981
|
|
|
|
377,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gap
|
|
$
|
8,553
|
|
|
$
|
(56,261
|
)
|
|
$
|
15,829
|
|
|
$
|
76,817
|
|
|
$
|
44,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap
|
|
$
|
8,553
|
|
|
$
|
(47,708
|
)
|
|
$
|
(31,879
|
)
|
|
$
|
44,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
includes Federal Home Loan Bank stock
|
The above analysis indicates that at December 31, 2008, the Corporation had a cumulative liability
sensitivity GAP position of $47.708 million within the one-year timeframe. The Corporation’s
cumulative liability sensitive GAP 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.
Conversely, if market interest rates decrease in the next twelve months, the above GAP position
suggests the Corporation’s net interest income would 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, 2007, the Corporation had a cumulative liability sensitivity gap position of
$43.774 million within the one-year time frame.
The borrowings in the gap analysis include $15 million of FHLB advances as fixed-rate advances.
These advances actually give the FHLB the option to convert from a fixed-rate advance to an
adjustable rate advance with quarterly repricing at three month LIBOR Flat. The exercise of this
conversion feature by the FHLB would impact the repricing dates currently assumed in the analysis.
The Corporation’s primary market risk exposure is interest rate risk and, to a lesser extent,
liquidity risk and foreign exchange risk. The Corporation has no market risk sensitive instruments
held for trading purposes. The Corporation has limited agricultural-related loan assets, and
therefore, has minimal significant exposure to changes in commodity prices. Any impact that
changes in foreign exchange rates and commodity prices would have on interest rates are assumed to
be insignificant.
59
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the
process used to control interest rate risk and the quantitative level of exposure. The
Corporation’s interest rate risk management process seeks to ensure that appropriate policies,
procedures, management information systems, and internal controls are in place to maintain interest
rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level
of interest rate risk, the Corporation assesses the existing and potential future effects of
changes in interest rates on its financial condition, including capital adequacy, earnings,
liquidity, and asset quality. In addition to changes in interest rates, the level of future net
interest income is also dependent on a number of variables, including: the growth, composition and
levels of loans, deposits, and other earning assets and interest-bearing obligations, and economic
and competitive conditions; potential changes in lending, investing, and deposit strategies;
customer preferences; and other factors.
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, 2008
(dollars in thousands). Nonaccrual loans of $4.887 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Total
|
|
|
12/31/2008
|
|
|
Rate Sensitive Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate
securities
|
|
$
|
30,357
|
|
|
$
|
5,112
|
|
|
$
|
3,779
|
|
|
$
|
7,717
|
|
|
|
7
|
|
|
$
|
518
|
|
|
$
|
47,490
|
|
|
$
|
47,490
|
|
|
Average interest rate
|
|
|
3.08
|
%
|
|
|
3.94
|
%
|
|
|
5.09
|
%
|
|
|
5.24
|
%
|
|
|
7.00
|
%
|
|
|
8.02
|
%
|
|
|
3.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate loans
|
|
|
39,647
|
|
|
|
22,912
|
|
|
|
22,315
|
|
|
|
16,641
|
|
|
|
6,501
|
|
|
|
13,067
|
|
|
|
121,083
|
|
|
|
119,095
|
|
|
Average interest rate
|
|
|
6.88
|
|
|
|
7.70
|
|
|
|
7.65
|
|
|
|
7.53
|
|
|
|
6.88
|
|
|
|
6.52
|
|
|
|
7.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest rate loans
|
|
|
245,193
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,004
|
|
|
|
249,197
|
|
|
|
257,262
|
|
|
Average interest rate
|
|
|
4.68
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
582
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,794
|
|
|
|
4,376
|
|
|
|
4,376
|
|
|
Average interest rate
|
|
|
1.25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4.75
|
|
|
|
4.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rate sensitive assets
|
|
$
|
315,779
|
|
|
$
|
28,024
|
|
|
$
|
26,094
|
|
|
$
|
24,358
|
|
|
$
|
6,508
|
|
|
$
|
21,383
|
|
|
$
|
422,146
|
|
|
$
|
428,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate
|
|
|
4.80
|
%
|
|
|
7.01
|
%
|
|
|
7.28
|
%
|
|
|
6.80
|
%
|
|
|
6.88
|
%
|
|
|
5.02
|
%
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Sensitive Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing savings,
NOW, MMAs, interest
checking
|
|
|
91,314
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
91,314
|
|
|
|
91,314
|
|
|
Average interest rate
|
|
|
1.07
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
1.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
236,184
|
|
|
|
8,239
|
|
|
|
2,976
|
|
|
|
1,223
|
|
|
|
291
|
|
|
|
771
|
|
|
|
249,684
|
|
|
|
250,021
|
|
|
Average interest rate
|
|
|
2.91
|
|
|
|
3.82
|
|
|
|
4.05
|
|
|
|
3.99
|
|
|
|
10.72
|
|
|
|
5.97
|
|
|
|
2.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate
borrowings
|
|
|
—
|
|
|
|
15,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,210
|
|
|
|
16,210
|
|
|
|
16,808
|
|
|
Average interest rate
|
|
|
—
|
|
|
|
5.10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.00
|
|
|
|
4.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest rate
borrowings
|
|
|
20,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
20,038
|
|
|
Average interest rate
|
|
|
3.71
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rate sensitive
liabilities
|
|
$
|
347,498
|
|
|
$
|
23,239
|
|
|
$
|
2,976
|
|
|
$
|
1,223
|
|
|
$
|
291
|
|
|
$
|
1,981
|
|
|
$
|
377,208
|
|
|
$
|
378,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate
|
|
|
2.47
|
%
|
|
|
4.65
|
%
|
|
|
4.05
|
%
|
|
|
3.99
|
%
|
|
|
10.72
|
%
|
|
|
2.94
|
%
|
|
|
2.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Risk
In addition to managing interest rate risk, management also actively manages risk associated with
foreign exchange. The Corporation provides foreign exchange services, makes loans to, and accepts
deposits from, Canadian customers primarily at its banking office in Sault Ste. Marie. To protect
against foreign exchange risk, the Corporation monitors the volume of Canadian deposits it takes in
and then invests these Canadian funds in Canadian commercial loans and securities. As of December
31, 2008, the Corporation had excess Canadian liabilities of $22,000 (or $26,000 in U.S. dollars).
Management believes the exposure to short-term foreign exchange risk is minimal and at an
acceptable level for the Corporation.
60
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Management intends to limit the Corporation’s foreign
exchange risk by acquiring deposit liabilities approximately equal to its Canadian assets.
Off-Balance-Sheet Risk
Derivative financial instruments include futures, forwards, interest rate swaps, option contracts
and other financial instruments with similar characteristics. The Corporation currently does not
enter into futures, forwards, swaps or options. However, the Corporation is party to financial
instruments with off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit and involve to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated balance sheets.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates
and may require collateral from the borrower if deemed necessary by the Corporation. Standby
letters of credit are conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party up to a stipulated amount and with specified terms and
conditions.
Commitments to extend credit and standby letters of credit are not recorded as an asset or
liability by the Corporation until the instrument is exercised. See Note 18 to the consolidated
financial statements for additional information.
LIQUIDITY
Liquidity is defined as the ability to generate cash at a reasonable cost to fulfill lending
commitments and support asset growth, while satisfying the withdrawal demands of customers and make
payments on existing borrowing commitments. The Bank’s principal sources of liquidity are core
deposits and loan and investment payments and prepayments. Providing a secondary source of
liquidity is the available for sale investment portfolio. As a final source of liquidity, the Bank
can exercise existing credit arrangements.
During 2008, the Corporation increased cash and cash equivalents by $3.750 million. As shown on
the Corporation’s consolidated statement of cash flows, liquidity was primarily impacted
by cash provided by investing activities, a net increase in loans of $21.173 million and a “net”
increase in securities available for sale of $25.440 million. The net increases in assets were
offset by a similar increase in deposit liabilities of $50.270 million. This increase in deposits
was composed of an increase in non-core deposits of $54.914 million combined with a decrease in
bank deposits of $4.644 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.
During 2008, management increased the Bank’s investment portfolio by approximately $25.000 million.
The Bank’s investment portfolio, most of which are guaranteed by the U.S. government, provide
added liquidity during periods of market turmoil and overall liquidity concerns in the financial
markets. As of December 31, 2008, $27.308 million of the Bank’s investment portfolio was
unpledged, which makes them readily available for sale to address any
short term liquidity needs.
It is anticipated that during 2009, the Corporation will fund anticipated loan production with a
combination of core-deposit growth and noncore funding, primarily brokered CDs.
The Corporation’s primary source of liquidity on a stand-alone basis is dividends from the Bank.
The Bank is currently prohibited from paying dividends because of a deficit in retained earnings.
The Bank, in order to pay dividends in future periods, will need to restate its capital accounts,
which requires the approval of the Office of Financial and Insurance Services of the State of
Michigan. The Corporation is currently exploring alternative opportunities for longer term
sources of liquidity and permanent equity to support projected asset growth.
Liquidity is managed by the Corporation through its Asset and Liability Committee (“ALCO”). The
ALCO Committee meets monthly to discuss asset and liability management in order to address
liquidity and funding needs to provide a process to seek the best alternatives for investments of
assets, funding costs, and risk management. The liquidity position of the Bank is managed daily,
thus enabling the Bank to adapt its position according to market fluctuations. Core deposits are
important in maintaining a strong liquidity position as they represent a stable and relatively low
cost source of funds. The Bank’s liquidity is best illustrated by the mix in the Bank’s core and
non-core funding dependence ratio, which explains the degree of reliance on non-core liabilities to
fund long-term assets. Core deposits are herein defined as demand deposits, NOW (negotiable order
withdrawals), money markets, savings and certificates of deposit under $100,000. Non-core funding
consists of certificates of deposit greater than $100,000, brokered deposits, and FHLB and other
borrowings. At December 31, 2008, the Bank’s core deposits in relation to total funding was 47.92%
compared to 55.95% in 2007. These ratios indicated at December 31, 2008, that the Bank has
decreased its reliance on non-core deposits and borrowings
61
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
to fund the Bank’s long-term assets,
namely loans and investments. The Bank believes that by maintaining adequate volumes of short-term
investments and implementing competitive pricing strategies on deposits, it can ensure adequate
liquidity to support future growth. The Bank also has correspondent lines of credit available to
meet unanticipated short-term liquidity needs. As of December 31, 2008, the Bank had $13.375
million of unsecured lines available and another $10.185 million available if secured. Management
believes that its liquidity position remains strong to meet both present and future financial
obligations and commitments, events or uncertainties that have resulted or are reasonably likely to
result in material changes with respect to the Bank’s liquidity.
From a long-term perspective, the Corporation’s liquidity plan for 2009 includes strategies to
increase core deposits in the Corporation’s local markets and will continue to augment local
deposit growth efforts with wholesale CD funding, to the extent necessary.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As disclosed in the Notes to the Consolidated Financial Statements, the Corporation has certain
obligations and commitments to make future payments under contracts. At December 31, 2008, the
aggregate contractual obligations and commitments are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
Less than 1
|
|
|
1 to 3
|
|
|
4 to 5
|
|
|
After 5
|
|
|
|
|
|
Contractual Obligations
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Total
|
|
|
Total deposits
|
|
$
|
357,597
|
|
|
$
|
11,215
|
|
|
$
|
1,514
|
|
|
$
|
771
|
|
|
$
|
371,097
|
|
|
Short-term borrowings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Long-term borrowings
|
|
|
—
|
|
|
|
35,000
|
|
|
|
—
|
|
|
|
1,210
|
|
|
|
36,210
|
|
|
Directors’ deferred compensation
|
|
|
170
|
|
|
|
254
|
|
|
|
246
|
|
|
|
549
|
|
|
|
1,219
|
|
|
Annual rental / purchase commitments
under noncancelable leases / contracts
|
|
|
199
|
|
|
|
297
|
|
|
|
10
|
|
|
|
—
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
357,966
|
|
|
$
|
46,766
|
|
|
$
|
1,770
|
|
|
$
|
2,530
|
|
|
$
|
409,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit
|
|
$
|
1,838
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,838
|
|
|
Commitments to extend credit
|
|
|
44,523
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,523
|
|
|
Credit card commitments
|
|
|
2,438
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
48,799
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL AND REGULATORY
As a bank holding company, the Corporation is required to maintain certain levels of capital under
government regulation. There are several measurements of regulatory capital, and the Corporation
is required to meet minimum requirements under each measurement. The federal banking regulators
have also established capital classifications beyond the minimum requirements in order to risk-rate
deposit insurance premiums and to provide trigger points for prompt corrective action in the event
an institution becomes financially troubled. As of December 31, 2008, the Corporation and the Bank
were well capitalized. The Corporation is currently exploring its alternatives for the possible
issuance of equity or debt in order to provide a broader base to support future asset growth.
During 2008, total capitalization increased by $2.231 million primarily from an increase in
retained earnings from net income earned in the period. During 2008, risk based capital increased
by $2.845 million, while Tier 1 Capital increased by $2.714 million.
On October 3, 2008, congress passed the Emergency Economic Stabilization Act of 2008 (“EESA”),
which provides the U.S. Secretary of the Treasury with broad authority to implement certain actions
to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the
EESA is the Treasury Capital Purchase Program (“CPP”), which provides direct equity investment of
perpetual preferred stock by the Treasury in qualified financial institutions. The program is
voluntary and requires an institution to comply with a number of restrictions and provisions
including limits on executive compensation, stock redemptions and declaration of dividends.
Applications must be submitted by November 14, 2008, and are subject to approval by the Treasury.
The CPP provides for a minimum of 1% of risk weighted assets,
62
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
with a maximum investment equal to
the lesser of 3% of total risk weighted assets or $25 billion. The perpetual preferred stock
investment will have a dividend rate of 5% per year, until the fifth anniversary of the Treasury
investments, and a dividend of 9% thereafter. The CPP also requires the Treasury to receive
warrants for common stock equal to 15% of the capital invested by the Treasury.
The Corporation has applied for $11.000 million in capital under this program, and has received
preliminary approval by the U.S. Department of Treasury.
The following table details sources of capital for the three years ended December 31 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Capital Structure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
$
|
41,552
|
|
|
$
|
39,321
|
|
|
$
|
28,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
41,552
|
|
|
$
|
39,321
|
|
|
$
|
28,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible capital
|
|
$
|
41,507
|
|
|
$
|
39,197
|
|
|
$
|
28,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit premium
|
|
$
|
46
|
|
|
$
|
124
|
|
|
$
|
205
|
|
|
Other identifiable intangibles
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles
|
|
$
|
46
|
|
|
$
|
124
|
|
|
$
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-Based Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
$
|
41,552
|
|
|
$
|
39,321
|
|
|
$
|
28,790
|
|
|
Net unrealized (gains) losses on
available for sale securities
|
|
|
(445
|
)
|
|
|
(60
|
)
|
|
|
187
|
|
|
Less: disallowed deferred tax asset
|
|
|
(6,200
|
)
|
|
|
(6,990
|
)
|
|
|
—
|
|
|
Less: intangibles
|
|
|
(46
|
)
|
|
|
(124
|
)
|
|
|
(205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 capital
|
|
$
|
34,861
|
|
|
$
|
32,147
|
|
|
$
|
28,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 2 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowable reserve for loan losses
|
|
$
|
4,277
|
|
|
$
|
4,146
|
|
|
$
|
4,113
|
|
|
Qualifying long-term debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 2 capital
|
|
|
4,277
|
|
|
|
4,146
|
|
|
|
4,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
$
|
39,138
|
|
|
$
|
36,293
|
|
|
$
|
32,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets
|
|
$
|
376,986
|
|
|
$
|
358,410
|
|
|
$
|
328,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital to average assets
|
|
|
8.01
|
%
|
|
|
8.05
|
%
|
|
|
7.85
|
%
|
|
Tier 1 Capital to risk-weighted assets
|
|
|
9.25
|
%
|
|
|
8.97
|
%
|
|
|
8.77
|
%
|
|
Total Capital to risk-weighted assets
|
|
|
10.38
|
%
|
|
|
10.13
|
%
|
|
|
10.02
|
%
|
Regulatory capital is not the same as shareholders’ equity reported in the accompanying condensed
consolidated financial statements. Certain assets cannot be considered assets for regulatory
purposes. The Corporation’s acquisition intangibles and a portion of the deferred tax asset are
examples of such assets.
63
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Presented below is a summary of the Corporation’s and Bank’s capital position in comparison to
generally applicable regulatory requirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
|
|
Tier 1
|
|
Tier 1
|
|
Total
|
|
|
|
Equity to
|
|
Equity to
|
|
Capital to
|
|
Capital to
|
|
Capital to
|
|
|
|
Year-end
|
|
Year-end
|
|
Average
|
|
Risk Weighted
|
|
Risk Weighted
|
|
|
|
Assets
|
|
Assets
|
|
Assets
|
|
Assets
|
|
Assets
|
|
Regulatory minimum for capital adequacy
purposes
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
8.00
|
%
|
|
Regulatory defined well capitalized guideline
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
5.00
|
%
|
|
|
6.00
|
%
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
9.21
|
%
|
|
|
9.20
|
%
|
|
|
8.01
|
%
|
|
|
9.25
|
%
|
|
|
10.38
|
%
|
|
December 31, 2007
|
|
|
9.62
|
%
|
|
|
9.59
|
%
|
|
|
8.05
|
%
|
|
|
8.97
|
%
|
|
|
10.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
9.25
|
%
|
|
|
9.24
|
%
|
|
|
8.09
|
%
|
|
|
9.32
|
%
|
|
|
10.44
|
%
|
|
December 31, 2007
|
|
|
10.04
|
%
|
|
|
10.01
|
%
|
|
|
8.51
|
%
|
|
|
9.49
|
%
|
|
|
10.63
|
%
|
The Corporation intends to maintain the Bank’s total capital to risk-weighted assets at a minimum
of 10.00% in order to qualify for reduced FDIC deposit based insurance.
TROUBLED ASSET RELIEF PROGRAM
The Corporation will be participating in the Capital Purchase Program (“CPP”) under the Troubled
Asset Relief Program (“TARP”). The Corporation will issue $11.000 million in perpetual preferred
stock and 379,092 common stock warrants, effective with the anticipated close date in May, 2009.
Mackinac Financial Corporation believes that participation in the CPP will provide a stronger base
of capital for future growth. Shown below are “Proforma” capital ratios for the Corporation which
shows the effect of the issuance of the $11.000 million preferred stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Proforma
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2008
|
|
|
Total capital to risk weighted assets
|
|
|
10.38
|
%
|
|
|
13.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage
|
|
|
8.01
|
%
|
|
|
10.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to risk weighted assets
|
|
|
9.25
|
%
|
|
|
11.99
|
%
|
|
|
|
|
|
|
|
|
IMPACT OF INFLATION AND CHANGING PRICES
The accompanying financial statements have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and results of
operations in historical dollars without considering the change in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the increased cost of
the Corporation’s operations. Nearly all the assets and liabilities of the Corporation are
financial, unlike industrial or commercial companies. As a result, the Corporation’s performance
is directly impacted by changes in interest rates, which are indirectly influenced by inflationary
expectations. The Corporation’s ability to match the interest sensitivity of its financial assets
to the interest sensitivity of its financial liabilities tends to minimize the effect of changes in
interest rates on the Corporation’s performance. Changes in interest rates do not necessarily move
to the same extent as changes in the prices of goods and services.
64
Directors and Officers
DIRECTORS
Mackinac Financial Corporation and mBank
|
|
|
|
|
Walter J. Aspatore
Investment Banker
Amherst Partners
Director Since: 2004
|
|
Robert H. Orley
Vice President and Secretary
Real Estate Interests Group, Inc.
Director Since: 2004
|
|
|
|
|
|
Dennis B. Bittner
Owner and President
Bittner Engineering, Inc.
Director Since: 2001
|
|
L. Brooks Patterson
County Executive
Oakland County
Director Since: 2006
|
|
|
|
|
|
Joseph D. Garea
Managing Partner
Hancock Securities
Director Since: 2007
|
|
Randolph C. Paschke
Chairman, Department of Accounting
Wayne State University, School of Business
Administration
Director Since: 2004
|
|
|
|
|
|
Kelly W. George
President, Mackinac Financial Corporation
President and CEO, mBank
Director Since: 2006
|
|
Paul D. Tobias
Chairman and CEO, Mackinac Financial Corporation
Chairman, mBank
Director Since: 2004
|
|
|
|
|
|
Robert E. Mahaney
Sole Proprietor
Veridea Group, LLC
Director Since: 2008
|
|
|
OFFICERS
|
|
|
|
|
Mackinac Financial Corporation
|
|
mBank
|
|
|
|
|
|
Paul D. Tobias
|
|
Paul D. Tobias
|
|
Chairman and Chief Executive Officer
|
|
Chairman
|
|
|
|
|
|
Kelly W. George
|
|
Kelly W. George
|
|
President
|
|
President and Chief Executive Officer
|
|
|
|
|
|
Ernie R. Krueger
|
|
Jack C. Frost
|
|
Executive Vice President/Chief Financial Officer
|
|
Regional President, Upper Peninsula
|
|
|
|
|
|
|
|
Andrew P. Sabatine
|
|
|
|
Regional President, Northern Lower Peninsula
|
|
|
|
|
|
|
|
Ernie R. Krueger
|
|
|
|
Executive Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
Kevin D. Evans
|
|
|
|
Senior Vice President/Branch Management/Retail
Banking/Deposits
|
|
|
|
|
|
|
|
Jake D. Martin
|
|
|
|
Senior Vice President — Information Technology
|
|
|
|
|
|
|
|
Tamara R. McDowell
|
|
|
|
Senior Vice President/Senior Credit/Operations Officer
|
|
|
|
|
|
|
|
Ann M. Stepp
|
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Senior Vice President/Branch Administration Officer
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Branch Locations
UPPER PENINSULA
Regional President — Jack C. Frost
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ESCANABA (opened March 2009)
3300 Ludington Street
Escanaba, MI 49829
(906) 233-9443
Manager: Scott A. Ravet
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MARQUETTE PRESQUE ISLE
1400 Presque Isle
Marquette, MI 49855
(906) 228-3640
Bus. Dev. Officer: Shelby J.
Bischoff
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SAULT STE. MARIE
138 Ridge Street
Sault Ste. Marie, MI 49783
(906) 635-3992
Manager: David R. Thomas
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MANISTIQUE
130 South Cedar Street
Manistique, MI 49854
(906) 341-8401
Manager: Gregory D. Schuetter
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NEWBERRY
414 Newberry Avenue
Newberry, MI 49868
(906) 293-5165
Manager: Michael A. Slaght
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SOUTH RANGE
47 Trimountain Avenue
South Range, MI 49963
(906) 482-1170
Manager: Sandra L. Pesola
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MARQUETTE MAIN
300 North McClellan
Marquette, MI 49855
(906) 226-5000
Manager: Teresa M. Same
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ONTONAGON
601 River Street
Ontonagon, MI 49953
(906) 884-4115
Manager: Sue A. Preiss
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STEPHENSON
S216 Menominee Street
Stephenson, MI 49887
(906) 753-2225
Manager: Barbara A. Parrett
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NORTHERN LOWER PENINSULA
Regional President — Andrew P. Sabatine
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GAYLORD
1955 South Otsego Avenue
Gaylord, MI 49735
(989) 732-3750
Manager: Rosalba Boone
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KALEVA
14429 Wuoksi Avenue
Kaleva, MI 49645
(231) 362-3223
Manager: Barb J. Miller
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TRAVERSE CITY
3530 North Country Drive
Traverse City, MI 49684
(231) 929-5600
Manager: Andrea M. Pease
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SOUTHEAST MICHIGAN
First Vice President — Jesse A. Deering
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BIRMINGHAM
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260 East Brown Street, Suite 300
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Birmingham, MI 48009
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(248) 290-5900
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Manager: Elena C. Dritsas
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66
Corporate Information
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CORPORATE HEADQUARTERS
Mackinac Financial Corporation
130 South Cedar Street
Manistique, Michigan 49854
(888) 343-8147
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TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(800) 368-5948
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INVESTOR RELATIONS
(888) 343-8147
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WEBSITE
www.bankmbank.com
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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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STOCK LISTING AND SYMBOL
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Plante and Moran, PLLC
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NASDAQ Small Cap Market
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Auburn Hills, Michigan
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Symbol: MFNC
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SHAREHOLDER INFORMATION
Copies of the Corporation’s 10-K and 10-Q reports as filed with the Securities and Exchange
Commission are available upon request from the Corporation.
ANNUAL SHAREHOLDERS’ MEETING
The 2009 Annual Meeting of the Shareholders of Mackinac Financial Corporation will be held on
Wednesday May 27, 2009.
Visit our website, www.bankmbank.com, for updated news releases, financial reports, SEC filings,
corporate governance and other investor information.
67
