As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 3/31/15  Mackinac Financial Corp/MI        10-K       12/31/14  102:29M                                    Toppan Merrill/FA

Document/Exhibit                   Description                      Pages   Size 

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68: R1          Document and Entity Information                     HTML     55K 
55: R2          Consolidated Balance Sheets                         HTML    145K 
66: R3          Consolidated Balance Sheets (Parenthetical)         HTML     50K 
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92: R5          Consolidated Statement Of Comprehensive Income      HTML     72K 
57: R6          Consolidated Statements of Changes in               HTML    136K 
                Shareholders' Equity                                             
65: R7          Consolidated Statements of Cash Flows               HTML    166K 
49: R8          Summary of Significant Accounting Policies          HTML     87K 
39: R9          Restrictions on Cash and Cash Equivalents           HTML     32K 
93: R10         Securities Available for Sale                       HTML    162K 
73: R11         Loans                                               HTML   1.21M 
72: R12         Premises and Equipment                              HTML     44K 
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67: R17         Borrowings                                          HTML     54K 
69: R18         Income Taxes                                        HTML    105K 
75: R19         Operating Leases                                    HTML     41K 
102: R20         Retirement Plan                                     HTML     30K  
88: R21         Defined Benefit Pension Plan                        HTML     68K 
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                (Policies)                                                       
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                (Tables)                                                         
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                (Tables)                                                         
56: R45         Fair Value (Tables)                                 HTML    142K 
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38: R47         Parent Company Only Financial Statements (Tables)   HTML    178K 
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                (Details                                                         
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                (Details)                                                        
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18: R55         Loans (Details 4)                                   HTML    160K 
45: R56         Loans (Details 5)                                   HTML     75K 
24: R57         Loans (Details 6)                                   HTML    101K 
94: R58         Loans (Details 7)                                   HTML     34K 
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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2014

 

OR

 

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

 

For the transition period from          to

 

Commission File Number 0-20167

 

Mackinac Financial Corporation

(Exact name of registrant as specified in its charter)

 

 

130 South Cedar Street

Manistique, Michigan 49854

(888) 343-8147
(Address, including ZIP Code, and telephone number,
including area code, of registrant’s principal executive offices)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

 

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 o  No x

 

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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 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 amendment to this Form 10-K. x

 

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.

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x

 

The aggregate market value of the common stock held by non-affiliates of the Registrant, based on a per share price of $12.90 as of June 30, 2014, was $29.127 million.  As of March 27, 2015, there were outstanding 6,257,450 shares of the Corporation’s Common Stock (no par value).

 

Documents incorporated by reference:

 

Certain portions, as expressly described in this report, of the registrant’s Proxy Statement for the 2015 Annual Meeting of Shareholders to be filed subsequently are incorporated by reference into this report.

 

 

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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.  These regulatory ratios are subject to further review and adjustment as described under “Basel III” below.

 

Information pertaining to the Corporation’s capital is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 below.

 

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 “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 is not currently required to qualify as a financial holding company.

 

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:

 

·                  The creation of a five-member oversight board that will set standards for accountants and have investigative and disciplinary powers;

·                  The prohibition of accounting firms from providing various types of consulting services to public clients and requiring accounting firms to rotate partners among public client assignments every five years;

 

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·                  Increased penalties for financial crimes;

·                  Expanded disclosure of corporate operations and internal controls and certification of financial statements;

·                  Enhanced controls on, and reporting of, insider training; and

·                  Prohibition on lending to officers and directors of public companies, although the Bank may continue to make these loans within the constraints of existing banking regulations.

 

Among other provisions, Section 302(a) of the Sarbanes-Oxley Act requires that our Chief Executive Officer and Chief Financial Officer certify that our quarterly and annual reports do not contain any untrue statement or omission of a 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.

 

Under the CPP, the Corporation issued previously authorized preferred stock with a 5% annual dividend rate to the Department of Treasury (“Treasury”).  The Corporation also, as a required part of this transaction, issued 379,093 common stock warrants with an exercise price of $4.35 per share.  The preferred stock and common stock warrants were issued on the closing date, April 24, 2009.  In 2012, the Treasury auctioned the Corporation’s preferred stock and the stock was sold to several individual and private investors.  The Corporation repurchased its common stock warrants from the Treasury in December 2012 at a cost of $1.3 million.  In 2013, the Corporation redeemed the entire $11.0 million in Series A Preferred Stock.

 

Additional information pertaining to Supervision and Regulation is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 below.

 

Dodd-Frank Wall Street Reform and Consumer Protection Act

 

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) into law.  The Dodd-Frank Act resulted in sweeping changes in the regulation of financial institutions aimed at strengthening safety and soundness for the financial services sector.  A summary of certain provisions of the Dodd-Frank Act is set forth below:

 

·                  Increased Capital Standards and Enhanced Supervision.

 

The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies.  These new standards will be no lower than current regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, be higher when established by the agencies.  The Dodd-Frank Act also increased regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency.

 

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·                  Federal Deposit Insurance.

 

The Dodd-Frank Act made permanent the $250,000 deposit insurance limit for insured deposits and provided unlimited federal deposit insurance on noninterest bearing transaction accounts at all insured depository institutions through December 31, 2012.  Subsequent to 2012, these amounts reverted from unlimited insurance to $250,000 coverage per separately insured depositor.  The Dodd-Frank Act also changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible equity, eliminated the ceiling on the size of the Deposit Insurance Fund (the “DIF”) and increased the floor on the size of the DIF.

 

·                  The Consumer Financial Protection Bureau (“CFPB”).

 

The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the CFPB, responsible for implementing, examining and, for large financial institutions of $10 billion or more in total assets, enforcing compliance with federal consumer financial laws.  Because we have under $10 billion in total assets, however, the Federal Reserve Bank of Chicago (“Reserve Bank”) will still continue to examine us at the federal level for compliance with such laws.

 

·                  Interest on Demand Deposit Accounts.

 

The Dodd-Frank Act repealed the prohibition on the payment of interest on demand deposit accounts effective July 21, 2011, thereby permitting depository institutions to now pay interest on business checking and other accounts.

 

·                  Mortgage Reform.

 

The Dodd-Frank Act provided for mortgage reform addressing a customer’s ability to repay, restricted variable-rate lending by requiring the ability to repay to be determined for variable rate loans by using the maximum rate that will apply during the first five years of a variable-rate loan term, and made more loans subject to requirement for higher-cost loans, new disclosures and certain other restrictions.

 

·                  Interstate Branching.

 

The Dodd-Frank Act allows banks to engage in de novo interstate branching, a practice that was previously significantly limited.

 

·                  Interchange Fee Limitations.

 

The Dodd-Frank Act gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.  The Federal Reserve Board has rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs.  While we are not directly subject to such regulations since our total assets do not exceed $10 billion, these regulations may impact our ability to compete with larger institutions who are subject to the restrictions.

 

We expect that many of the requirements called for in the Dodd-Frank Act will be implemented over time, and most will be subject to implementing regulations over the course of several years.  Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions’ operations is unclear.  The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business.  These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

 

Basel III

 

On July 2, 2013, the Federal Reserve and OCC approved a final rule to establish a new comprehensive regulatory capital framework for all US banking organizations, with an effective date of January 1, 2015.  The Regulatory Capital Framework (“Basel III”) implements several changes to the US regulatory capital framework required by the Dodd-Frank Act.  The new US capital framework imposes higher minimum capital requirements, additional capital buffers above those minimum requirements, a more restrictive definition of capital, and higher risk weights for

 

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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” under Item 7 below.

 

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” under Item 7 below.

 

II.    Investment Portfolio

 

A.            Investment Portfolio Composition

 

The following table presents the carrying value of investment securities available for sale as of December 31 of the years set forth below (dollars in thousands):

 

		2014			2013			2012
US Treasuries		$	5,280		$	—		$	—
Corporate		12,674			16,079			18,977
US Agencies		22,717			14,855			10,404
US Agencies - MBS		13,688			7,359			8,374
State and political subdivisions		11,473			6,095			6,044
Total		$	65,832		$	44,388		$	43,799

 

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, 2014 (fully taxable equivalent, dollars in thousands):

 

					After one,			After five,									Weighted
		In one year			but within			but within			Over						Average
		or less			five years			ten years			ten years			Total			Yield (1)
US Treasuries		$	—		$	5,280		$	—		$	—		$	5,280		1.47	%
US Agencies		—			16,782			5,137			798			22,717			1.69	%
US Agencies - MBS		—			2,463			3,694			7,531			13,688			2.49	%
Corporate		8,176			4,498			—			—			12,674			1.72	%
State and politicial subdivisions		704			2,264			5,224			3,281			11,473			4.17	%
Total		$	8,880		$	31,287		$	14,055		$	11,610		$	65,832
Weighted average yield (1)		1.59		%	1.88		%	3.14		%	2.84		%	2.27		%

 

(1)  Weighted average yield includes the effect of tax-equivalent adjustments using a 34% tax rate.

 

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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):

 

		2014			2013			2012			2011			2010
Commercial real estate		$	315,387		$	268,809		$	244,966		$	199,201		$	194,859
Commercial, financial and agricultural		101,895			79,655			80,646			92,269			68,858
One to four family residential real estate		139,553			103,768			87,948			77,332			75,074
Construction		25,715			17,799			24,694			25,519			39,012
Consumer		18,385			13,801			10,923			6,925			5,283
Total		$	600,935		$	483,832		$	449,177		$	401,246		$	383,086

 

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, 2014, 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		$	143,942		$	69,587		$	106,871		$	558		$	12,051		$	333,009
Fixed interest rates		2,820			1,563			2,603			1,434			9,387			17,807
After one year but within five years:
Variable interest rates		—			—			—			—			—			—
Fixed interest rates		165,792			27,253			14,419			15,913			4,089			227,466
After five years:
Variable interest rates		—			—			—			—			—			—
Fixed interest rates		2,833			3,492			15,660			480			188			22,653
Total		$	315,387		$	101,895		$	139,553		$	18,385		$	25,715		$	600,935

 

C.            Risk Elements

 

The following table presents a summary of nonperforming assets and problem loans as of December 31 (dollars in thousands):

 

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		2014			2013			2012			2011			2010
Nonaccrual loans		$	3,939		$	1,406		$	4,687		$	5,490		$	5,921
Interest income that would have been recorded for nonaccrual loans under original terms		130			228			313			363			583
Interest income recorded during period for nonaccrual loans		—			—			54			118			141
Accruing loans past due 90 days or more		—			—			—			—			—
Restructured loans not included above		3,105			618			—			2,503			4,642

 

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.

 

The following table presents information relative to the allowance for loan losses for the years ended December 31 (dollars in thousands):

 

		2014			2013			2012			2011			2010
Balance of allowance for loan losses at beginning of period		$	4,661		$	5,218		$	5,251		$	6,613		$	5,225
Loans charged off:
Commercial		682			2,171			775			3,258			5,027
One to four family residential real estate		290			141			399			490			410
Consumer		74			120			82			52			48
Total loans charged off		1,046			2,432			1,256			3,800			5,485
Recoveries of loans previously charged off:
Commercial		259			150			253			128			346
One to four family residential real estate		22			26			7			1			11
Consumer		44			24			18			9			16
Total recoveries		325			200			278			138			373
Net loans charged off		721			2,232			978			3,662			5,112
Provisions charged to expense		1,200			1,675			945			2,300			6,500
Balance at end of period		$	5,140		$	4,661		$	5,218		$	5,251		$	6,613
Average loans outstanding		509,749			462,500			422,440			388,115			384,347
Ratio of net charge-offs		.14		%	.48		%	.23		%	.94		%	1.33		%

 

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):

 

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Table of Contents

 

		2014					2013					2012					2011					2010
		Amount			%		Amount			%		Amount			%		Amount			%		Amount			%
Commercial real estate		$	2,813		54.73	%	$	1,849		39.67	%	$	3,267		62.61	%	$	2,973		56.62	%	$	3,460		52.32	%
Commercial, financial, and agricultural		1,539			29.94	%	1,378			29.56	%	692			13.26	%	1,079			20.55	%	1,018			15.39	%
Commercial construction		142			2.76	%	80			1.72	%	125			2.40	%	207			3.94	%	389			5.88	%
1-4 family residential real estate		285			5.54	%	516			11.07	%	980			18.78	%	1,114			21.22	%	1,622			24.53	%
Consumer construction		6			.12	%	25			.54	%	—			.00	%	—			.00	%	—			.00	%
Consumer		13			.25	%	148			3.18	%	—			.00	%	—			.00	%	—			.00	%
Unallocated general reserves		342			6.66	%	665			14.26	%	154			2.95	%	(122		)	-2.33	%	124			1.88	%
Total		$	5,140		100.00	%	$	4,661		100.00	%	$	5,218		100.00	%	$	5,251		100.00	%	$	6,613		100.00	%

 

V.            Deposits

 

Deposit information is contained in Note 7 to the Corporation’s Consolidated Financial Statements in Item 8 of this Form 10-K below.

 

VI.       Return on Equity and Assets

 

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 19 to the Corporation’s Consolidated Financial Statements contained in Item 8 of this Form 10-K.

 

Item 1B.  Unresolved Staff Comments

 

None.

 

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