þ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
MICHIGAN (State or other jurisdiction of incorporation or organization) |
38-2062816 (I.R.S. Employer Identification No.) |
|
130 SOUTH CEDAR STREET, MANISTIQUE, MI (Address of principal executive offices) |
49854 (Zip Code) |
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Page No. | ||||||||
PART I. FINANCIAL INFORMATION | ||||||||
Item 1. | ||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
Item 2. | 15 | |||||||
Item 3. | 28 | |||||||
Item 4. | 31 | |||||||
PART II. OTHER INFORMATION | ||||||||
Item 1. | 32 | |||||||
Item 4. | 32 | |||||||
Item 6. | 33 | |||||||
SIGNATURES | 34 | |||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
June 30, | December 31, | June 30, | ||||||||||
2008 | 2007 | 2007 | ||||||||||
(unaudited) | (unaudited) | |||||||||||
ASSETS |
||||||||||||
Cash and due from banks |
$ | 7,115 | $ | 6,196 | $ | 7,518 | ||||||
Federal funds sold |
19,274 | 166 | 3,489 | |||||||||
Cash and cash equivalents |
26,389 | 6,362 | 11,007 | |||||||||
Interest-bearing deposits in other financial institutions |
387 | 1,810 | 3,687 | |||||||||
Securities available for sale |
23,230 | 21,597 | 24,086 | |||||||||
Federal Home Loan Bank stock |
3,794 | 3,794 | 3,794 | |||||||||
Loans: |
||||||||||||
Commercial |
292,645 | 288,839 | 274,783 | |||||||||
Mortgage |
65,869 | 62,703 | 60,575 | |||||||||
Installment |
3,608 | 3,537 | 3,538 | |||||||||
Total Loans |
362,122 | 355,079 | 338,896 | |||||||||
Allowance for loan losses |
(3,585 | ) | (4,146 | ) | (4,920 | ) | ||||||
Net loans |
358,537 | 350,933 | 333,976 | |||||||||
Premises and equipment |
11,377 | 11,609 | 12,471 | |||||||||
Other real estate held for sale |
3,395 | 1,226 | 77 | |||||||||
Other assets |
10,218 | 11,549 | 4,221 | |||||||||
TOTAL ASSETS |
$ | 437,327 | 408,880 | $ | 393,319 | |||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||
Liabilities: |
||||||||||||
Non-interest-bearing deposits |
$ | 27,741 | $ | 25,557 | $ | 28,811 | ||||||
Interest-bearing deposits: |
||||||||||||
NOW, money market, checking |
78,703 | 81,160 | 73,994 | |||||||||
Savings |
15,171 | 12,485 | 12,422 | |||||||||
CDs<$100,000 |
78,678 | 80,607 | 96,546 | |||||||||
CDs>$100,000 |
28,252 | 22,355 | 24,879 | |||||||||
Brokered |
128,431 | 98,663 | 84,594 | |||||||||
Total deposits |
356,976 | 320,827 | 321,246 | |||||||||
Borrowings |
||||||||||||
Federal funds purchased |
| 7,710 | | |||||||||
Short-term |
| 1,959 | | |||||||||
Long-term |
36,280 | 36,280 | 38,307 | |||||||||
Total borrowings |
36,280 | 45,949 | 38,307 | |||||||||
Other liabilities |
3,096 | 2,783 | 3,281 | |||||||||
Total liabilities |
396,352 | 369,559 | 362,834 | |||||||||
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; 3,428,695; and
and 3,428,695 shares, respectively |
42,773 | 42,843 | 42,780 | |||||||||
Accumulated deficit |
(1,672 | ) | (3,582 | ) | (12,162 | ) | ||||||
Accumulated other comprehensive income (loss) |
(126 | ) | 60 | (133 | ) | |||||||
Total shareholders equity |
40,975 | 39,321 | 30,485 | |||||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 437,327 | $ | 408,880 | $ | 393,319 | ||||||
1.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
INTEREST INCOME: |
||||||||||||||||
Interest and fees on loans: |
||||||||||||||||
Taxable |
$ | 5,604 | $ | 6,448 | $ | 11,704 | $ | 12,681 | ||||||||
Tax-exempt |
102 | 143 | 210 | 314 | ||||||||||||
Interest on securities: |
||||||||||||||||
Taxable |
271 | 293 | 537 | 594 | ||||||||||||
Tax-exempt |
2 | | 3 | | ||||||||||||
Other interest |
81 | 166 | 170 | 366 | ||||||||||||
Total interest income |
6,060 | 7,050 | 12,624 | 13,955 | ||||||||||||
INTEREST EXPENSE: |
||||||||||||||||
Deposits |
2,551 | 3,267 | 5,616 | 6,489 | ||||||||||||
Borrowings |
391 | 514 | 845 | 1,019 | ||||||||||||
Total interest expense |
2,942 | 3,781 | 6,461 | 7,508 | ||||||||||||
Net interest income |
3,118 | 3,269 | 6,163 | 6,447 | ||||||||||||
Provision for loan losses |
750 | | 750 | | ||||||||||||
Net interest income after provision for loan
losses |
2,368 | 3,269 | 5,413 | 6,447 | ||||||||||||
OTHER INCOME: |
||||||||||||||||
Service fees |
194 | 185 | 368 | 346 | ||||||||||||
Net security gains |
| | 65 | | ||||||||||||
Net gains on sale of secondary market loans |
49 | 91 | 97 | 199 | ||||||||||||
Proceeds from lawsuit settlements |
3,475 | | 3,475 | 470 | ||||||||||||
Other |
29 | 66 | 52 | 240 | ||||||||||||
Total other income |
3,747 | 342 | 4,057 | 1,255 | ||||||||||||
OTHER EXPENSE: |
||||||||||||||||
Salaries and employee benefits |
2,075 | 1,672 | 3,882 | 3,410 | ||||||||||||
Occupancy |
348 | 327 | 703 | 661 | ||||||||||||
Furniture and equipment |
190 | 166 | 368 | 323 | ||||||||||||
Data processing |
216 | 210 | 437 | 381 | ||||||||||||
Professional service fees |
79 | 174 | 232 | 325 | ||||||||||||
Loan and deposit |
144 | 79 | 254 | 151 | ||||||||||||
Telephone |
39 | 59 | 84 | 117 | ||||||||||||
Advertising |
60 | 91 | 120 | 183 | ||||||||||||
Other |
320 | 287 | 582 | 570 | ||||||||||||
Total other expense |
3,471 | 3,065 | 6,662 | 6,121 | ||||||||||||
Income before income taxes |
2,644 | 546 | 2,808 | 1,581 | ||||||||||||
Provision for (benefit of) income taxes |
875 | | 900 | | ||||||||||||
NET INCOME |
$ | 1,769 | $ | 546 | $ | 1,908 | $ | 1,581 | ||||||||
INCOME PER COMMON SHARE: |
||||||||||||||||
Basic |
$ | .52 | $ | .16 | $ | .56 | $ | .46 | ||||||||
Diluted |
$ | .52 | $ | .16 | $ | .56 | $ | .46 | ||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Balance, beginning of period |
$ | 39,633 | $ | 29,932 | $ | 39,321 | $ | 28,790 | ||||||||
Net income for period |
1,769 | 546 | 1,908 | 1,581 | ||||||||||||
Stock option compensation |
21 | 30 | 42 | 60 | ||||||||||||
Net unrealized gain (loss) on securities available for sale |
(338 | ) | (23 | ) | (186 | ) | 54 | |||||||||
Total comprehensive income |
1,452 | 553 | 1,764 | 1,695 | ||||||||||||
Repurchase of common stock oddlot shares |
(110 | ) | | (110 | ) | | ||||||||||
Balance, end of period |
$ | 40,975 | $ | 30,485 | $ | 40,975 | $ | 30,485 | ||||||||
Six Months Ended | ||||||||
June 30, | ||||||||
2008 | 2007 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net income |
$ | 1,908 | $ | 1,581 | ||||
Adjustments to reconcile net income to
net cash provided by operating activities: |
||||||||
Depreciation and amortization |
607 | 344 | ||||||
Provision for (benefit of) deferred taxes |
900 | | ||||||
Provision for loan losses |
750 | | ||||||
(Gain) on sales/calls of securities available for sale |
(65 | ) | | |||||
(Gain) on sale of premises, equipment and other real estate |
(5 | ) | (13 | ) | ||||
Writedown of other real estate |
201 | | ||||||
Stock option compensation |
42 | 60 | ||||||
Change in other assets |
283 | 348 | ||||||
Change in other liabilities |
313 | 8 | ||||||
Net cash (used in) provided by operating activities |
4,934 | 2,328 | ||||||
Cash Flows from Investing Activities: |
||||||||
Net (increase) decrease in loans |
(10,792 | ) | (16,470 | ) | ||||
Net
(increase) decrease in interest-bearing deposits in other financial institutions |
1,423 | (2,831 | ) | |||||
Purchase of securities available for sale |
(24,481 | ) | (13,564 | ) | ||||
Proceeds from sales, maturities or calls of securities available for sale |
22,766 | 22,440 | ||||||
Capital expenditures |
(266 | ) | (744 | ) | ||||
Proceeds from sale of premises, equipment, and other real estate |
73 | 317 | ||||||
Net cash (used in) provided by investing activities |
(11,277 | ) | (10,852 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Net increase in deposits |
36,149 | 8,825 | ||||||
Net increase (decrease) in federal funds purchased |
(7,710 | ) | | |||||
Net increase (decrease) in line of credit |
(1,959 | ) | | |||||
Net (decrease) repurchase of common stock oddlot shares |
(110 | ) | | |||||
Net cash (used in) provided by financing activities |
26,370 | 8,825 | ||||||
Net increase in cash and cash equivalents |
20,027 | 301 | ||||||
Cash and cash equivalents at beginning of period |
6,362 | 10,706 | ||||||
Cash and cash equivalents at end of period |
$ | 26,389 | $ | 11,007 | ||||
Supplemental Cash Flow Information: |
||||||||
Cash paid during the year for: |
||||||||
Interest |
$ | 5,086 | $ | 5,771 | ||||
Income taxes |
| | ||||||
Noncash Investing and Financing Activities: |
||||||||
Transfers of foreclosures from loans to other real estate held for sale
(net of adjustments made through the allowance for loan losses) |
$ | 2,237 | $ | 69 |
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Basis of Presentation | ||
The unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the Corporation) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. The unaudited consolidated financial statements and footnotes thereto should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Corporations Annual Report on Form 10-K for the year ended December 31, 2007. | ||
The preparation of financial statements in conformity with generally accepted accounting principles 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. | ||
In order to properly reflect some categories of other income and other expenses, reclassifications of expense and income items have been made to prior period numbers. The net other income and other expenses were not changed due to these classifications. | ||
Allowance for Loan Losses | ||
The allowance for loan losses includes specific allowances related to commercial loans, which have been judged to be impaired. A loan is impaired when, based on current information, it is probable that the Corporation will not collect all amounts due in accordance with the contractual terms of the loan agreement. These specific allowances are based on discounted cash flows of expected future payments using the loans 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 Corporations 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 collectibility 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 collectibility. | ||
In managements opinion, the allowance for loan losses is adequate to cover probable losses relating to specifically identified loans, as well as probable losses inherent in the balance of the loan portfolio as of the balance sheet date. | ||
Stock Option Plans | ||
The Corporation sponsors three stock option plans. One plan was approved in 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 |
5.
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) | |
directors, were approved in 1997. A total of 30,000 shares (adjusted for the 1:20 reverse stock split), were made available for grant under these plans. Options under all of the plans are granted at the discretion of a committee of the Corporations Board of Directors. Options to purchase shares of the Corporations 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 Issued 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 after tax compensation expense in the amount of $42,000 for the six months ended June 30, 2008, and $60,000 for the same period in 2007. The expense recorded recognizes the current period vesting of options outstanding. The per share impact of this accounting change was $.01 and $.02 in the first half of 2008 and 2007, respectively. | ||
2. | RECENT ACCOUNTING PRONOUNCEMENTS | |
FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes | ||
In July 2006, the Financial Accounting Standards Board (FASB) issued this interpretation to clarify the accounting for uncertainty in tax positions. FIN 48 requires, among other matters, that the Corporation recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained on an audit, based on the technical merits of the position. The provisions of FIN 48 were effective as of the beginning of the Corporations 2007 fiscal year and required any cumulative effect of the change in accounting principle to be recorded as an adjustment to opening retained earnings. The Corporation did not record an adjustment to retained earnings upon adoption of FIN 48. In future periods, The Corporation will, in accordance with FIN 48, evaluate its tax positions to determine whether or not an adjustment to deferred tax balances and related valuation accounts is warranted. | ||
SFAS No. 157, Fair Value Measurements | ||
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement is to be applied in concert with other accounting pronouncements which require or allow fair value measurements. This statement does not require any new fair value adjustments. | ||
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159) | ||
SFAS No. 159 permits an entity to measure certain financial assets and financial liabilities at fair value. The Statements objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. Under SFAS No. 159, entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions, as long as it is applied to the instrument in its entirety. The fair value option election is irrevocable, unless a new election date occurs. The new Statement establishes presentation and disclosure requirements to help financial statement users understand the effect of the entitys election on its earnings but does not eliminate disclosure requirements of other accounting standards. Assets and liabilities that are measured at fair value must be displayed on the face of the balance sheet. | ||
SFAS No. 157 and No. 159 were effective January 1, 2008. The adoption of SFAS No. 157 and No. 159 by the Corporation did not have any material impact on the consolidated financial statements. |
6.
2. | RECENT ACCOUNTING PRONOUNCEMENTS (Continued) | |
The Corporation has reviewed other recent accounting pronouncements by the Financial Accounting Standards Board (FASB), in addition to those noted above and determined that there is no current impact of these accounting pronouncements in the consolidated financial statements of the Corporation. | ||
3. | EARNINGS PER SHARE | |
Earnings per share are based upon the weighted average number of shares outstanding. | ||
Additional shares issued as a result of option exercises would not be dilutive in either period. | ||
The following shows the computation of basic and diluted earnings per share for the three and six months ended June 30, 2008 and 2007 (dollars in thousands, except per share data): |
Three Months Ended | Weighted Average | Income | ||||||||||
June 30, | Net Income | Number of Shares | Per Share | |||||||||
2008 |
||||||||||||
Income per share Basic and diluted |
$ | 1,769 | 3,419,933 | $ | .52 | |||||||
2007 |
||||||||||||
Income per share Basic and diluted |
$ | 546 | 3,428,695 | $ | .16 | |||||||
Six Months Ended | ||||||||||||
June 30, | ||||||||||||
2008 |
||||||||||||
Income per share Basic and diluted |
$ | 1,908 | 3,424,314 | $ | .56 | |||||||
2007 |
||||||||||||
Income per share Basic and diluted |
$ | 1,581 | 3,428,695 | $ | .46 | |||||||
4. | INVESTMENT SECURITIES | |
The amortized cost and estimated fair value of investment securities available for sale as of June 30, 2008, December 31, 2007 and June 30, 2007 are as follows (dollars in thousands): |
June 30, 2008 | December 31, 2007 | June 30, 2007 | ||||||||||||||||||||||
Amortized | Estimated | Amortized | Estimated | Amortized | Estimated | |||||||||||||||||||
Cost | Fair Value | Cost | Fair Value | Cost | Fair Value | |||||||||||||||||||
US Agencies MBS |
$ | 22,696 | $ | 22,623 | $ | | $ | | $ | | $ | | ||||||||||||
US Agencies |
| | 20,982 | 20,969 | 23,708 | 23,517 | ||||||||||||||||||
Obligations of states and political
subdivisions |
550 | 607 | 556 | 628 | 511 | 569 | ||||||||||||||||||
Total securities available for sale |
$ | 23,246 | $ | 23,230 | $ | 21,538 | $ | 21,597 | $ | 24,219 | $ | 24,086 | ||||||||||||
The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $21.321 million and $21.260 million, respectively, at June 30, 2008. |
7.
5. | LOANS | |
The composition of loans at June 30, 2008, December 31, 2007 and June 30, 2007 is as follows (dollars in thousands): |
June 30, | December 31, | June 30, | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Commercial real estate |
$ | 186,108 | $ | 171,695 | $ | 161,823 | ||||||
Commercial, financial, and agricultural |
77,473 | 78,192 | 76,390 | |||||||||
One to four family residential real
estate |
60,882 | 57,613 | 55,090 | |||||||||
Construction: |
||||||||||||
Commercial |
29,064 | 38,952 | 36,570 | |||||||||
Consumer |
4,987 | 5,090 | 5,485 | |||||||||
Consumer |
3,608 | 3,537 | 3,538 | |||||||||
Total loans |
$ | 362,122 | $ | 355,079 | $ | 338,896 | ||||||
LOANS Allowance for loan losses | ||
An analysis of the allowance for loan losses for the six months ended June 30, 2008, the year ended December 31, 2007, and the six months ended June 30, 2007 is as follows: (dollars in thousands): |
June 30, | December 31, | June 30, | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Balance at beginning of period |
$ | 4,146 | $ | 5,006 | $ | 5,006 | ||||||
Recoveries on loans |
9 | 50 | 25 | |||||||||
Loans charged off |
(1,320 | ) | (1,310 | ) | (111 | ) | ||||||
Provision for loan losses |
750 | 400 | | |||||||||
Balance at end of period |
$ | 3,585 | $ | 4,146 | $ | 4,920 | ||||||
In the first half of 2008, net charge off activity was $1.311 million, or .36% of average loans outstanding compared to net charge-offs of $86,000, or .03% of average loans, in the first half of 2007. In the first half of 2008, the Corporation recorded a provision for loan loss in the amount of $750,000, which is discussed in more detail under Managements Discussion and Analysis. | ||
LOANS 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 six months ended June 30, 2008 and 2007. |
8.
5. | LOANS (Continued) | |
Information regarding impaired loans as of June 30, 2008, December 31, 2007 and June 30, 2007 is as follows (dollars in thousands): |
Valuation Reserve | ||||||||||||||||||||||||
June 30, | December 31, | June 30, | June 30, | December 31, | June 30, | |||||||||||||||||||
2008 | 2007 | 2007 | 2008 | 2007 | 2007 | |||||||||||||||||||
Balances, at period end |
||||||||||||||||||||||||
Impaired loans with specific valuation reserve |
$ | 4,052 | $ | 3,639 | $ | 3,559 | $ | 946 | $ | 1,320 | $ | 968 | ||||||||||||
Impaired loans with no specific valuation
reserve |
561 | 369 | 1,490 | | | | ||||||||||||||||||
Total impaired loans |
$ | 4,613 | $ | 4,008 | $ | 5,049 | $ | 946 | $ | 1,320 | $ | 968 | ||||||||||||
Impaired loans on nonaccrual basis |
$ | 4,613 | $ | 3,298 | $ | 4,758 | $ | 946 | $ | 1,219 | $ | 968 | ||||||||||||
Impaired loans on accrual basis |
| 710 | 291 | | 101 | | ||||||||||||||||||
Total impaired loans |
$ | 4,613 | $ | 4,008 | $ | 5,049 | $ | 946 | $ | 1,320 | $ | 968 | ||||||||||||
Average investment in impaired loans |
$ | 4,779 | $ | 4,135 | $ | 4,113 | ||||||||||||||||||
Interest income recognized during impairment |
46 | 129 | 15 | |||||||||||||||||||||
Interest income that would have been recognized
on an accrual basis |
225 | 391 | 198 | |||||||||||||||||||||
Cash-basis interest income recognized |
46 | 84 | 10 |
The average investment in impaired loans was approximately $4.779 million for the six-months ended June 30, 2008, $4.135 million for the year ended December 31, 2007, and $4.113 million for the six months ended June 30, 2007, respectively. Nonperforming assets are discussed in more detail under Managements Discussion and Analysis. | ||
LOANS Related parties | ||
The Bank, in the ordinary course of business, grants loans to the Corporations 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): |
June 30, | December 31, | June 30, | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Loans outstanding beginning of period |
$ | 1,720 | $ | 1,621 | $ | 1,621 | ||||||
New loans |
| | | |||||||||
Net activity on revolving lines of
credit |
479 | 556 | | |||||||||
Repayment |
(41 | ) | (457 | ) | (16 | ) | ||||||
Change in related party interest |
2,733 | | | |||||||||
Loans outstanding end of period |
$ | 4,891 | $ | 1,720 | $ | 1,605 | ||||||
There were no loans to related-parties classified substandard at June 30, 2008, December 31, 2007 or June 30, 2007, respectively. |
9.
6. | SHORT-TERM BORROWINGS | |
Short-term borrowings consist of the following at June 30, 2008, December 31, 2007, and June 30, 2007 (dollars in thousands): |
June 30, | December 31, | June 30, | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Fed funds purchased |
$ | | $ | 7,710 | $ | | ||||||
Advance outstanding on line of credit with a correspondent bank, interest payable
at the prime rate, 5.00% as of June 30, 2008, maturing November 30, 2008 |
| 1,959 | 1,959 | |||||||||
$ | | $ | 9,669 | $ | 1,959 | |||||||
7. | LONG-TERM BORROWINGS | |
Long-term borrowings consist of the following at June 30, 2008, December 31, 2007 and June 30, 2007 (dollars in thousands): |
June 30, | December 31, | June 30, | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Federal Home Loan Bank fixed rate advances at rates ranging from 4.98% to 5.16%
maturing in 2010 |
$ | 15,000 | $ | 15,000 | $ | 15,000 | ||||||
Federal Home Loan Bank variable rate advances at rates ranging from 2.73% to 2.80%
maturing in 2011 |
20,000 | 20,000 | 20,000 | |||||||||
Farmers Home Administration, fixed-rate note payable, maturing August 24, 2024
interest payable at 1% |
1,280 | 1,280 | 1,348 | |||||||||
$ | 36,280 | $ | 36,280 | $ | 36,348 | |||||||
The Federal Home Loan Bank borrowings are collateralized at June 30, 2008, by the following: a collateral agreement on the Corporations one to four family residential real estate loans with a book value of approximately $22.862 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $20.071 million and $20.010 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 June 30, 2008. | ||
The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $367,000 originated and held by the Corporations wholly owned subsidiary, First Rural Relending, and an assignment of a demand deposit account in the amount of $1.031 million, and guaranteed by the Corporation. |
10.
8. | STOCK OPTION PLANS | |
A summary of stock option transactions for the six months ended June 30, 2008 and 2007, and the year ended December 31, 2007, is as follows: |
June
30, 2008 |
December
31, 2007 |
June
30, 2007 |
||||||||||
Outstanding shares at beginning of year |
446,417 | 446,417 | 446,417 | |||||||||
Granted during the period |
| | | |||||||||
Expired during the period |
180 | | | |||||||||
Outstanding shares at end of period |
446,237 | 446,417 | 446,417 | |||||||||
Weighted average exercise price per share at end of period |
$ | 12.14 | $ | 12.29 | $ | 12.29 | ||||||
Shares available for grant at end of period |
18,488 | 18,488 | 18,488 | |||||||||
There were no options granted in the first six months of 2008 and 2007. | ||
Following is a summary of the options outstanding and exercisable at June 30, 2008: |
Exercise | Number | Remaining | Weighted Average | |||||||||||||
Price Range | Outstanding | Exercisable | Contractual Life-Years | Exercise Price | ||||||||||||
$9.16 |
12,500 | 5,000 | 7.5 | $ | 9.16 | |||||||||||
$9.75 |
257,152 | 120,861 | 6.5 | 9.75 | ||||||||||||
$10.65 |
72,500 | 14,500 | 8.5 | 10.65 | ||||||||||||
$11.50 |
40,000 | 8,000 | 7.3 | 11.50 | ||||||||||||
$12.00 |
60,000 | 12,000 | 7.0 | 12.00 | ||||||||||||
$156.00
$240.00 |
3,545 | 3,545 | 2.7 | 186.75 | ||||||||||||
$300.00
$406.60 |
540 | 540 | 1.6 | 333.33 | ||||||||||||
446,237 | 164,446 | 6.9 | $ | 12.14 | ||||||||||||
9. | INCOME TAXES | |
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 June 30, 2008, 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 June 30, 2008 had a net operating loss and tax credit carryforwards for tax purposes of approximately $34.2 million, and $2.1 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 $500,000 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. |
11.
9. | INCOME TAXES (Continued) | |
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 Managements 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 $1.4 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. | ||
10. | FAS 157 FAIR VALUE MEASUREMENTS | |
The following tables present information about the Corporations assets and liabilities measured at fair value on a recurring basis at June 30, 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 Corporations 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): |
Quoted Prices in Active | Significant Other | Significant | ||||||||||||||
Markets for Identical | Observable Inputs | Unobservable Inputs | Balance at | |||||||||||||
Assets (Level 1) | (Level 2) | (Level 3) | June 30, 2008 | |||||||||||||
Assets |
||||||||||||||||
Investment securities available for sale |
$ | 23,162 | $ | 68 | $ | | $ | 23,230 | ||||||||
Liabilities |
||||||||||||||||
None |
The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31, 2007 or June 30, 2008. |
12.
10. | FAS 157 FAIR VALUE MEASUREMENTS (Continued) | |
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. |
Quoted Prices | Significant | Significant | ||||||||||||||||||||||
in Active Markets | Other Observable | Unobservable | Total Losses for | |||||||||||||||||||||
Balance at | for Identical Assets | Inputs | Inputs | Three Months Ended | Six Months Ended | |||||||||||||||||||
(dollars in thousands) | June 30, 2008 | (Level 1) | (Level 2) | (Level 3) | June 30, 2008 | June 30, 2008 | ||||||||||||||||||
Assets |
||||||||||||||||||||||||
Impaired loans accounted
for under FAS 114 |
$ | | $ | | $ | | $ | 1,161 | $ | 862 | $ | 862 | ||||||||||||
$ | 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 managements 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. | ||
11. | 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. |
13.
11. | COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued) | |
The Corporations 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 are as follows (dollars in thousands): |
June 30, | December 31, | June 30, | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Commitments to extend credit: |
||||||||||||
Variable rate |
$ | 40,215 | $ | 43,903 | $ | 51,214 | ||||||
Fixed rate |
8,601 | 8,055 | 8,881 | |||||||||
Standby letters of credit Variable rate |
6,693 | 5,930 | 5,914 | |||||||||
Credit card commitments Fixed rate |
2,521 | 2,414 | 2,432 | |||||||||
$ | 58,030 | $ | 60,302 | $ | 68,441 | |||||||
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 customers 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 managements 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 Corporations 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. For expanded discussion on the Corporations legal proceedings, see Part II, Item 1, Legal Proceedings in this report. | ||
Concentration of Credit Risk | ||
The Bank grants commercial, residential, agricultural, and consumer loans throughout Michigan. The Banks most prominent concentration in the loan portfolio relates to commercial real estate loans to operators of nonresidential buildings. This concentration at June 30, 2008 represents $41.8 million, or 15.9%, compared to $41.7 million, or 17.5%, of the commercial loan portfolio on June 30, 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 Banks locations, the ability of debtors of residential and consumer loans to honor their obligations is not tied to any particular economic sector. |
14.
| 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 Corporations 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. |
15.
16.
June 30, | Percent of | December 31, | Percent of | June 30, | Percent of | |||||||||||||||||||
2008 | Total | 2007 | Total | 2007 | Total | |||||||||||||||||||
Commercial real estate |
$ | 186,108 | 51.39 | % | $ | 171,695 | 48.35 | % | $ | 161,823 | 47.75 | % | ||||||||||||
Commercial, financial, and agricultural |
77,473 | 21.39 | 78,192 | 22.02 | 76,390 | 22.54 | ||||||||||||||||||
One to four family residential real estate |
60,882 | 16.81 | 57,613 | 16.23 | 55,090 | 16.26 | ||||||||||||||||||
Consumer |
3,608 | 1.00 | 3,537 | 1.00 | 3,538 | 1.04 | ||||||||||||||||||
Construction |
||||||||||||||||||||||||
Commercial |
29,064 | 8.03 | 38,952 | 10.97 | 36,570 | 10.79 | ||||||||||||||||||
Consumer |
4,987 | 1.38 | 5,090 | 1.43 | 5,485 | 1.62 | ||||||||||||||||||
Total loans |
$ | 362,122 | 100.00 | % | $ | 355,079 | 100.00 | % | $ | 338,896 | 100.00 | % | ||||||||||||
June 30, 2008 | December 31, 2007 | June 30, 2007 | ||||||||||||||||||||||||||||||||||
Percent of | Percent of | Percent of | Percent of | Percent of | Percent of | |||||||||||||||||||||||||||||||
Outstanding | Commerical | Shareholders | Outstanding | Commercial | Shareholders | Outstanding | Commerical | Shareholders | ||||||||||||||||||||||||||||
Balance | Loans | Equity | Balance | Loans | Equity | Balance | Loans | Equity | ||||||||||||||||||||||||||||
R/E oper. of nonresidential bldgs. |
$ | 41,778 | 15.85 | % | 101.96 | % | $ | 41,597 | 14.40 | % | 105.79 | % | $ | 41,662 | 17.49 | % | 136.66 | % | ||||||||||||||||||
Hospitality and tourism |
35,053 | 13.30 | 85.55 | 37,604 | 13.02 | 95.63 | 37,286 | 15.65 | 122.31 | |||||||||||||||||||||||||||
Real estate agents and managers |
27,495 | 10.43 | 67.10 | 29,571 | 10.24 | 75.20 | 31,937 | 13.41 | 104.76 | |||||||||||||||||||||||||||
Commercial construction |
10,716 | 4.07 | 26.15 | 38,952 | 13.49 | 99.06 | 10,270 | 4.31 | 33.69 | |||||||||||||||||||||||||||
Other |
148,539 | 56.35 | 362.51 | 141,115 | 48.85 | 358.88 | 117,058 | 49.14 | 383.99 | |||||||||||||||||||||||||||
Total Commercial Loans |
$ | 263,581 | 100.00 | % | $ | 288,839 | 100.00 | % | $ | 238,213 | 100.00 | % | ||||||||||||||||||||||||
17.
June 30, | December 31, | June 30, | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Nonperforming Assets: |
||||||||||||
Nonaccrual Loans |
$ | 4,613 | $ | 3,298 | $ | 4,758 | ||||||
Loans past due 90 days or more |
| 710 | 291 | |||||||||
Total nonperforming loans |
4,613 | 4,008 | 5,049 | |||||||||
Other real estate owned |
3,395 | 1,226 | 77 | |||||||||
Total nonperforming assets |
$ | 8,008 | $ | 5,234 | $ | 5,126 | ||||||
Nonperforming loans as a % of loans |
1.27 | % | 1.13 | % | 1.49 | % | ||||||
Nonperforming assets as a % of assets |
1.83 | % | 1.28 | % | 1.30 | % | ||||||
Reserve for Loan Losses: |
||||||||||||
At period end |
$ | 3,585 | $ | 4,146 | $ | 4,920 | ||||||
As a % of loans |
.99 | % | 1.17 | % | 1.45 | % | ||||||
As a % of nonperforming loans |
77.72 | % | 103.44 | % | 97.45 | % | ||||||
As a % of nonaccrual loans |
77.72 | % | 125.71 | % | 103.41 | % | ||||||
June 30, | December 31, | June 30, | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Total loans, at period end |
$ | 362,122 | $ | 355,079 | $ | 338,896 | ||||||
Average loans for the year |
360,176 | 333,415 | 321,414 | |||||||||
Allowance for loan losses |
3,585 | 4,146 | 4,920 | |||||||||
Allowance to total loans at period end |
.99 | % | 1.17 | % | 1.45 | % | ||||||
Net charge-offs during the period |
$ | 1,311 | $ | 1,260 | $ | 86 | ||||||
Net charge-offs to average loans |
.36 | % | .38 | % | .03 | % | ||||||
Net charge-offs to beginning allowance balance |
31.62 | % | 25.17 | % | 1.72 | % | ||||||
18.
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 |
$ | 2,754 | $ | 2,134 | $ | (620 | ) | $ | 620 | $ | | |||||||||
Land Development / Condo |
1,042 | 1,080 | 38 | 300 | 338 | |||||||||||||||
Cabins / Land |
414 | 414 | | | | |||||||||||||||
1-4 Family |
203 | 197 | (6 | ) | 6 | | ||||||||||||||
Non-Farm/Non-Residential |
117 | 97 | (20 | ) | 20 | | ||||||||||||||
Business Equipment |
50 | 50 | | | | |||||||||||||||
Land |
34 | 88 | 54 | | 54 | |||||||||||||||
Total nonaccrual loans |
4,614 | 4,060 | (554 | ) | 946 | 392 | ||||||||||||||
Other Real Estate |
||||||||||||||||||||
Conv 5+ Resdential |
1,746 | 1,225 | (521 | ) | 521 | | ||||||||||||||
Land Development |
511 | 511 | | | | |||||||||||||||
Motel / Hotel |
387 | 387 | | | | |||||||||||||||
Cabins / Land |
260 | 260 | | | | |||||||||||||||
1-4 Family |
217 | 198 | (19 | ) | 19 | | ||||||||||||||
Equipment Storage Building |
150 | 150 | | | | |||||||||||||||
Downtown Store Frontage / 2 / 1-4 Family |
77 | 77 | | | | |||||||||||||||
Non-Farm/Non-Residential |
46 | 46 | | | | |||||||||||||||
Total other real estate owned |
3,394 | 2,854 | (540 | ) | 540 | | ||||||||||||||
Total Nonperforming Assets |
$ | 8,008 | $ | 6,914 | $ | (1,094 | ) | $ | 1,486 | $ | 392 | |||||||||
June 30, | December 31, | June 30, | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Commercial, financial and agricultural loans |
$ | 3,276 | $ | 3,808 | $ | 4,261 | ||||||
One to four family residential real estate loans |
27 | 22 | 60 | |||||||||
Consumer loans |
15 | 20 | | |||||||||
Unallocated and general reserves |
267 | 296 | 599 | |||||||||
Totals |
$ | 3,585 | $ | 4,146 | $ | 4,920 | ||||||
19.
Three Months Ended | Year Ended | Three Months Ended | ||||||||||
June 30, 2008 | December 31, 2007 | June 30, 2007 | ||||||||||
Balance at beginning of period |
$ | 1,226 | $ | 26 | $ | 26 | ||||||
Other real estate transferred from loans due to foreclosure |
2,439 | 1,218 | 69 | |||||||||
Other real estate sold/written down |
(270 | ) | (18 | ) | (18 | ) | ||||||
Balance at end of period |
$ | 3,395 | $ | 1,226 | $ | 77 | ||||||
June 30, | December 31, | June 30, | ||||||||||||||||||||||
2008 | % of Total | 2007 | % of Total | 2007 | % of Total | |||||||||||||||||||
Non-interest-bearing |
$ | 27,741 | 7.77 | % | $ | 25,557 | 7.97 | % | $ | 28,811 | 8.97 | % | ||||||||||||
NOW, money market, checking |
78,703 | 22.05 | 81,160 | 25.30 | 73,994 | 23.03 | ||||||||||||||||||
Savings |
15,171 | 4.25 | 12,485 | 3.89 | 12,422 | 3.87 | ||||||||||||||||||
Certificates of Deposit <$100,000 |
78,678 | 22.04 | 80,607 | 25.12 | 96,546 | 30.05 | ||||||||||||||||||
Total core deposits |
200,293 | 56.11 | 199,809 | 62.28 | 211,773 | 65.92 | ||||||||||||||||||
Certificates of Deposit >$100,000 |
28,252 | 7.91 | 22,355 | 6.97 | 24,879 | 7.75 | ||||||||||||||||||
Brokered CDs |
128,431 | 35.98 | 98,663 | 30.75 | 84,594 | 26.33 | ||||||||||||||||||
Total non-core deposits |
156,683 | 43.89 | 121,018 | 37.72 | 109,473 | 34.08 | ||||||||||||||||||
Total deposits |
$ | 356,976 | 100.00 | % | $ | 320,827 | 100.00 | % | $ | 321,246 | 100.00 | % | ||||||||||||
20.
21.
Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
2008-2007 | ||||||||||||||||||||||||||||||||||||||||||||
Average Balances | Average Rates | Interest | Income/ | Rate/ | ||||||||||||||||||||||||||||||||||||||||
June 30, | Increase/ | June 30, | June 30, | Expense | Volume | Rate | Volume | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2008 | 2007 | (Decrease) | 2008 | 2007 | 2008 | 2007 | Variance | Variance | Variance | Variance | |||||||||||||||||||||||||||||||||
Loans (1,2,3) |
$ | 362,574 | $ | 324,721 | $ | 37,853 | 6.39 | % | 8.23 | % | $ | 5,759 | $ | 6,664 | $ | (905 | ) | $ | 775 | $ | (1,489 | ) | (191 | ) | ||||||||||||||||||||
Taxable securities |
23,960 | 25,971 | (2,011 | ) | 4.58 | 4.53 | 273 | 293 | (20 | ) | (23 | ) | 4 | (1 | ) | |||||||||||||||||||||||||||||
Nontaxable securities (2) |
69 | | 69 | 5.83 | | 1 | | 1 | | | 1 | |||||||||||||||||||||||||||||||||
Federal funds sold |
1,923 | 7,756 | (5,833 | ) | 2.09 | 5.27 | 10 | 102 | (92 | ) | (77 | ) | (61 | ) | 46 | |||||||||||||||||||||||||||||
Other interest-earning assets |
4,183 | 5,934 | (1,751 | ) | 6.73 | 4.33 | 70 | 64 | 6 | (19 | ) | 36 | (11 | ) | ||||||||||||||||||||||||||||||
Total earning assets |
392,709 | 364,382 | 28,327 | 6.26 | 7.84 | 6,113 | 7,123 | (1,010 | ) | 656 | (1,510 | ) | (156 | ) | ||||||||||||||||||||||||||||||
Reserve for loan losses |
(3,886 | ) | (4,972 | ) | 1,086 | |||||||||||||||||||||||||||||||||||||||
Cash and due from banks |
6,053 | 5,976 | 77 | |||||||||||||||||||||||||||||||||||||||||
Intangible assets |
94 | 172 | (78 | ) | ||||||||||||||||||||||||||||||||||||||||
Other assets |
23,276 | 16,507 | 6,769 | |||||||||||||||||||||||||||||||||||||||||
Total assets |
$ | 418,246 | $ | 382,065 | $ | 36,181 | ||||||||||||||||||||||||||||||||||||||
NOW and money market deposits |
$ | 80,379 | $ | 72,371 | $ | 8,008 | 1.53 | 3.49 | 306 | 629 | (323 | ) | 69 | (352 | ) | (40) | ||||||||||||||||||||||||||||
Savings deposits |
13,310 | 13,288 | 22 | .94 | 1.63 | 31 | 54 | (23 | ) | | (23 | ) | | |||||||||||||||||||||||||||||||
CDs <$100,000 |
81,746 | 96,442 | (14,696 | ) | 4.25 | 5.00 | 863 | 1,202 | (339 | ) | (183 | ) | (181 | ) | 25 | |||||||||||||||||||||||||||||
CDs >$100,000 |
26,773 | 24,350 | 2,423 | 3.97 | 5.02 | 264 | 305 | (41 | ) | 30 | (64 | ) | (7 | ) | ||||||||||||||||||||||||||||||
Brokered deposits |
104,187 | 79,301 | 24,886 | 4.20 | 5.45 | 1,087 | 1,077 | 10 | 337 | (247 | ) | (80) | ||||||||||||||||||||||||||||||||
Borrowings |
42,430 | 39,209 | 3,221 | 3.71 | 5.25 | 391 | 513 | (122 | ) | 41 | (150 | ) | (13) | |||||||||||||||||||||||||||||||
Total interest-bearing liabilities |
348,825 | 324,961 | 23,864 | 3.39 | 4.67 | 2,942 | 3,780 | (838 | ) | 294 | (1,017 | ) | (115) | |||||||||||||||||||||||||||||||
Demand deposits |
26,331 | 23,717 | 2,614 | |||||||||||||||||||||||||||||||||||||||||
Other liabilities |
2,691 | 2,975 | (284 | ) | ||||||||||||||||||||||||||||||||||||||||
Shareholders equity |
40,399 | 30,412 | 9,987 | |||||||||||||||||||||||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 418,246 | $ | 382,065 | $ | 36,181 | ||||||||||||||||||||||||||||||||||||||
Rate spread |
2.87 | % | 3.17 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin/revenue |
3.25 | % | 3.68 | % | $ | 3,171 | $ | 3,343 | $ | (172 | ) | $ | 362 | $ | (493 | ) | $ | (41 | ) | |||||||||||||||||||||||||
(1) | For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. | |
(2) | Interest income on loans includes loan fees. | |
(3) | Interest income on loans includes fees |
Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
2008-2007 | ||||||||||||||||||||||||||||||||||||||||||||
Average Balances | Average Rates | Interest | Income/ | Rate/ | ||||||||||||||||||||||||||||||||||||||||
June 30, | Increase/ | June 30, | June 30, | Expense | Volume | Rate | Volume | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2008 | 2007 | (Decrease) | 2008 | 2007 | 2008 | 2007 | Variance | Variance | Variance | Variance | |||||||||||||||||||||||||||||||||
Loans (1,23) |
$ | 360,176 | $ | 321,415 | $ | 38,761 | 6.71 | % | 8.15 | % | $ | 12,022 | $ | 13,157 | $ | (1,135 | ) | $ | 1,591 | $ | (2,465 | ) | (261 | ) | ||||||||||||||||||||
Taxable securities |
23,930 | 27,703 | (3,773 | ) | 4.51 | 4.32 | 537 | 594 | (57 | ) | (81 | ) | 26 | (2 | ) | |||||||||||||||||||||||||||||
Nontaxable securities |
70 | | 70 | 11.49 | | 4 | | 4 | | | 4 | |||||||||||||||||||||||||||||||||
Federal funds sold |
3,641 | 9,103 | (5,462 | ) | 2.93 | 5.32 | 53 | 240 | (187 | ) | (144 | ) | (108 | ) | 65 | |||||||||||||||||||||||||||||
Other interest-earning assets |
4,436 | 5,450 | (1,014 | ) | 5.30 | 4.66 | 117 | 126 | (9 | ) | (24 | ) | 17 | (2 | ) | |||||||||||||||||||||||||||||
Total earning assets |
392,253 | 363,671 | 28,582 | 6.53 | 7.74 | 12,733 | 14,117 | (1,384 | ) | 1,342 | (2,530 | ) | (196 | ) | ||||||||||||||||||||||||||||||
Reserve for loan losses |
(3,982 | ) | (4,985 | ) | 1,003 | |||||||||||||||||||||||||||||||||||||||
Cash and due from banks |
6,127 | 5,911 | 216 | |||||||||||||||||||||||||||||||||||||||||
Intangible assets |
104 | 183 | (79 | ) | ||||||||||||||||||||||||||||||||||||||||
Other assets |
23,462 | 16,459 | 7,003 | |||||||||||||||||||||||||||||||||||||||||
Total assets |
$ | 417,964 | $ | 381,239 | $ | 36,725 | ||||||||||||||||||||||||||||||||||||||
NOW and money market deposits |
$ | 81,107 | $ | 72,282 | $ | 8,825 | 1.85 | 3.48 | 748 | 1,249 | (501 | ) | 153 | (586 | ) | (68 | ) | |||||||||||||||||||||||||||
Savings deposits |
12,668 | 13,284 | (616 | ) | 0.89 | 1.64 | 56 | 108 | (52 | ) | (5 | ) | (50 | ) | 3 | |||||||||||||||||||||||||||||
CDs <$100,000 |
82,146 | 94,243 | (12,097 | ) | 4.44 | 4.95 | 1,813 | 2,312 | (499 | ) | (254 | ) | (283 | ) | 38 | |||||||||||||||||||||||||||||
CDs >$100,000 |
24,962 | 24,117 | 845 | 4.25 | 4.98 | 527 | 596 | (69 | ) | 21 | (88 | ) | (2 | ) | ||||||||||||||||||||||||||||||
Brokered deposits |
107,105 | 82,022 | 25,083 | 4.64 | 5.47 | 2,471 | 2,225 | 246 | 682 | (339 | ) | (97 | ) | |||||||||||||||||||||||||||||||
Borrowings |
40,906 | 38,795 | 2,111 | 4.15 | 5.29 | 845 | 1,018 | (173 | ) | 56 | (219 | ) | (10 | ) | ||||||||||||||||||||||||||||||
Total interest-bearing liabilities |
348,894 | 324,743 | 24,151 | 3.72 | 4.66 | 6,460 | 7,508 | (1,048 | ) | 653 | (1,565 | ) | (136 | ) | ||||||||||||||||||||||||||||||
Demand deposits |
26,383 | 23,596 | 2,787 | |||||||||||||||||||||||||||||||||||||||||
Other liabilities |
2,742 | 3,064 | (322 | ) | ||||||||||||||||||||||||||||||||||||||||
Shareholders equity |
39,945 | 29,836 | 10,109 | |||||||||||||||||||||||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 417,964 | $ | 381,239 | $ | 36,725 | ||||||||||||||||||||||||||||||||||||||
Rate spread |
2.81 | % | 3.08 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin/revenue |
3.22 | % | 3.57 | % | $ | 6,273 | $ | 6,609 | $ | (336 | ) | $ | 689 | $ | (965 | ) | $ | (60 | ) | |||||||||||||||||||||||||
(1) | For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. | |
(2) | Interest income on loans includes loan fees. | |
(3) | Interest income includes fees on loans |
22.
Three Months Ended | % Increase | Six Months Ended | % Increase | |||||||||||||||||||||
June 30, | (Decrease) | June 30, | (Decrease) | |||||||||||||||||||||
2008 | 2007 | 2008-2007 | 2008 | 2007 | 2008-2007 | |||||||||||||||||||
Service fees |
$ | 194 | $ | 185 | 4.86 | $ | 368 | $ | 346 | 6.36 | ||||||||||||||
Net gains on sale of secondary
market loans |
49 | 91 | (46.15 | ) | 97 | 199 | (51.26 | ) | ||||||||||||||||
Proceeds from lawsuit settlements |
3,475 | | 100.00 | 3,475 | 470 | 639.36 | ||||||||||||||||||
Other noninterest income |
29 | 66 | (56.06 | ) | 52 | 240 | (78.33 | ) | ||||||||||||||||
Subtotal |
3,747 | 342 | 995.61 | 3,992 | 1,255 | 218.09 | ||||||||||||||||||
Net security gain (loss) |
| | 0.00 | 65 | | 100.00 | ||||||||||||||||||
Total other income |
$ | 3,747 | $ | 342 | 995.61 | $ | 4,057 | $ | 1,255 | 223.27 | ||||||||||||||
23.
Three Months Ended | % Increase | Six Months Ended | % Increase | |||||||||||||||||||||
June 30, | (Decrease) | June 30, | (Decrease) | |||||||||||||||||||||
2008 | 2007 | 2008-2007 | 2008 | 2007 | 2008-2007 | |||||||||||||||||||
Salaries and employee benefits |
$ | 2,075 | $ | 1,672 | 24.10 | $ | 3,882 | $ | 3,410 | 13.84 | ||||||||||||||
Occupancy |
348 | 327 | 6.42 | 703 | 661 | 6.35 | ||||||||||||||||||
Furniture and equipment |
190 | 166 | 14.46 | 368 | 323 | 13.93 | ||||||||||||||||||
Data processing |
216 | 210 | 2.86 | 437 | 381 | 14.70 | ||||||||||||||||||
Professional service fees |
79 | 174 | (54.60 | ) | 232 | 325 | (28.62 | ) | ||||||||||||||||
Loan and deposit |
144 | 79 | 82.28 | 254 | 151 | 68.21 | ||||||||||||||||||
Telephone |
39 | 59 | (33.90 | ) | 84 | 117 | (28.21 | ) | ||||||||||||||||
Advertising |
60 | 91 | (34.07 | ) | 120 | 183 | (34.43 | ) | ||||||||||||||||
Other |
320 | 287 | 11.50 | 582 | 570 | 2.11 | ||||||||||||||||||
Total noninterest expense |
$ | 3,471 | $ | 3,065 | 13.25 | $ | 6,662 | $ | 6,121 | 8.84 | ||||||||||||||
24.
25.
June 30, | December 31, | June 30, | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Capital Structure |
||||||||||||
Shareholders equity |
$ | 40,975 | $ | 39,321 | $ | 30,485 | ||||||
Total capitalization |
$ | 40,975 | $ | 39,321 | $ | 30,485 | ||||||
Tangible capital |
$ | 40,890 | $ | 39,197 | $ | 30,323 | ||||||
Intangible Assets |
||||||||||||
Core deposit premium |
$ | 85 | $ | 124 | $ | 162 | ||||||
Other identifiable intangibles |
| | | |||||||||
Total intangibles |
$ | 85 | $ | 124 | $ | 162 | ||||||
Regulatory capital |
||||||||||||
Tier 1 capital: |
||||||||||||
Shareholders equity |
$ | 40,975 | $ | 39,321 | $ | 30,485 | ||||||
Net unrealized (gains) losses on
available for sale securities |
126 | (60 | ) | 133 | ||||||||
Less: disallowed deferred tax asset |
(5,731 | ) | (6,990 | ) | | |||||||
Less: intangibles |
(85 | ) | (124 | ) | (162 | ) | ||||||
Total Tier 1 capital |
$ | 35,285 | $ | 32,147 | $ | 30,456 | ||||||
Tier 2 Capital: |
||||||||||||
Allowable reserve for loan losses |
$ | 3,585 | $ | 4,146 | $ | 4,309 | ||||||
Qualifying long-term debt |
| | | |||||||||
Total Tier 2 capital |
3,585 | 4,146 | 4,309 | |||||||||
Total capital |
$ | 38,870 | $ | 36,293 | $ | 34,765 | ||||||
Risk-adjusted assets |
$ | 372,139 | $ | 358,410 | $ | 344,120 | ||||||
Capital ratios: |
||||||||||||
Tier 1 Capital to average assets |
8.56 | % | 8.05 | % | 7.97 | % | ||||||
Tier 1 Capital to risk weighted assets |
9.48 | % | 8.97 | % | 8.85 | % | ||||||
Total Capital to risk weighted assets |
10.45 | % | 10.13 | % | 10.10 | % |
26.
Shareholders | Tangible | Tier 1 | Tier 1 | Total | ||||||||||||||||
Equity to | Equity to | Capital to | Capital to | Capital to | ||||||||||||||||
Quarter-end | Quarter-end | Average | Risk-Weighted | Risk-Weighted | ||||||||||||||||
Assets | Assets | Assets | Assets | Assets | ||||||||||||||||
Regulatory minumum 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: |
||||||||||||||||||||
June 30, 2008 |
9.37 | % | 9.35 | % | 8.56 | % | 9.48 | % | 10.45 | % | ||||||||||
June 30, 2007 |
7.75 | % | 7.71 | % | 7.97 | % | 8.85 | % | 10.10 | % | ||||||||||
The Bank: |
||||||||||||||||||||
June 30, 2008 |
9.27 | % | 9.26 | % | 8.26 | % | 9.13 | % | 10.08 | % | ||||||||||
June 30, 2007 |
8.13 | % | 8.09 | % | 8.37 | % | 9.30 | % | 10.56 | % |
27.
28.
1-90 | 91 - 365 | >1-5 | Over 5 | |||||||||||||||||
Days | Days | Years | Years | Total | ||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||
Loans |
$ | 249,817 | $ | 9,441 | $ | 28,927 | $ | 73,937 | $ | 362,122 | ||||||||||
Securities |
| 5 | 22,650 | 575 | 23,230 | |||||||||||||||
Other (1) |
19,661 | | | 3,794 | 23,455 | |||||||||||||||
Total interest-earning assets |
269,478 | 9,446 | 51,577 | 78,306 | 408,807 | |||||||||||||||
Interest-bearing obligations: |
||||||||||||||||||||
NOW, money market, savings, interest checking |
93,874 | | | | 93,874 | |||||||||||||||
Time deposits |
35,749 | 57,653 | 12,624 | 904 | 106,930 | |||||||||||||||
Brokered deposits |
71,905 | 56,526 | | | 128,431 | |||||||||||||||
Borrowings |
20,000 | | 15,000 | 1,280 | 36,280 | |||||||||||||||
Total interest-bearing obligations |
221,528 | 114,179 | 27,624 | 2,184 | 365,515 | |||||||||||||||
Gap |
$ | 47,950 | $ | (104,733 | ) | $ | 23,953 | $ | 76,122 | $ | 43,292 | |||||||||
Cumulative gap |
$ | 47,950 | $ | (56,783 | ) | $ | (32,830 | ) | $ | 43,292 | ||||||||||
(1) | Includes Federal Home Loan Bank Stock |
29.
30.
31.
5
Director | For | Withheld | ||||||
Dennis B. Bittner |
2,455,097 | 38,071 | ||||||
Joseph D. Garea |
2,480,127 | 13,041 | ||||||
Kelly W. George |
2,480,076 | 13,092 | ||||||
L. Brooks Patterson |
2,453,692 | 39,476 |
32.
Exhibit 3.1
|
Articles of Incorporation, as amended, incorporated herein by reference to exhibit 3.1 of the Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. | |
Exhibit 3.2
|
Amended and Restated Bylaws, incorporated herein by reference to exhibit 3.1 of the Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. | |
Exhibit 31.1
|
Rule 13a-14(a) Certification of Chief Executive Officer. | |
Exhibit 31.2
|
Rule 13a-14(a) Certification of Chief Financial Officer. | |
Exhibit 32.1
|
Section 1350 Certification of Chief Executive Officer. | |
Exhibit 32.2
|
Section 1350 Certification of Chief Financial Officer. |
33.
MACKINAC FINANCIAL CORPORATION (Registrant) |
||||
Date: August 14, 2008 | By: | /s/ Paul D. Tobias | ||
PAUL D. TOBIAS, | ||||
CHAIRMAN AND CHIEF EXECUTIVE OFFICER (principal executive officer) |
||||
By: | /s/ Ernie R. Krueger | |||
ERNIE R. KRUEGER, | ||||
EVP / CHIEF FINANCIAL OFFICER (principal accounting officer) |
||||
34.