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MFNC > SEC Filings for MFNC > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for MACKINAC FINANCIAL CORP /MI/

Form 10-Q for MACKINAC FINANCIAL CORP /MI/


15-May-2014

Quarterly Report


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL OVERVIEW

The Corporation recorded a first quarter 2014 net income available to common shareholders of $.660 million or $.12 per share compared to net income of $.676 million, or $.12 per share for the first quarter of 2013. Operating results for the first quarter of 2014 included a provision for loan losses of $.183 million compared to $.375 million for the same period of 2013.

Weighted average shares outstanding totaled 5,530,908 for the first quarter of 2014 and 5,559,570 for the same period in 2013.

The net interest margin for the first quarter of 2014 increased to $5.593 million, or 4.25%, compared to $5.156 million, of 4.18% in the first quarter of 2013.

Total assets of the Corporation at March 31, 2014 were $583.592 million, up by $41.696 million, or 7.69% from the $541.896 million in total assets reported at March 31, 2013 and up by $10.792 million, or 1.88%, from total assets of $572.800 million at year-end 2013. The loan portfolio increased $2.030 million in the first quarter of 2014, from December 31, 2013 balances of $483.832 million. Deposits totaled $475.710 million at March 31, 2014, an increase of $9.411 million from the $466.299 million at December 31, 2013.

FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents increased $6.532 million during the first quarter of 2014. See further discussion of the change in cash and cash equivalents in the Liquidity section.

Investment Securities

Securities available for sale increased $3.023 million, or 6.81%, from December 31, 2013 to March 31, 2014, with the balance on March 31, 2014, totaling $47.411 million. Investment securities are utilized in an effort to manage interest rate risk and liquidity. As of March 31, 2014, investment securities with an estimated fair value of $4.758 million were pledged.

Loans

Through the first quarter of 2014, loan balances increased by $2.030 million, or .42%, from December 31, 2013 balances of $483.832 million. During the first three months of 2014, the Bank had total loan production of $31.166 million, which included $4.987 million of secondary market loan production. This loan production, however, was offset by loan principal runoff, paydowns and amortization, totaling $30.535 million, and nonperforming loans transferred to other real estate owned ("OREO") amounting to $.282 million.

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 a diligent 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.


Table of Contents

Following is a summary of the loan portfolio at March 31, 2014, December 31, 2013 and March 31, 2013 (dollars in thousands):

                        March 31,    Percent of    December 31,    Percent of   March 31,    Percent of
                           2014        Total           2013          Total         2013        Total

Commercial real
estate                  $  267,153        54.99 % $      268,809        55.56 % $  246,207        54.22 %
Commercial,
financial, and
agricultural                83,461        17.18           79,655        16.46       82,530        18.18
One to four family
residential real
estate                     104,376        21.48          103,768        21.45       89,629        19.74
Construction:
Consumer                     6,383         1.31            6,895         1.43        7,587         1.67
Commercial                  10,685         2.20           10,904         2.25       16,295         3.59
Consumer                    13,804         2.84           13,801         2.85       11,803         2.60
Total loans             $  485,862       100.00 % $      483,832       100.00 % $  454,051       100.00 %

Following is a table showing the significant industry types in the commercial loan portfolio as of March 31, 2014, December 31, 2013 and March 31, 2013 (dollars in thousands):

                                March 31, 2014                           December 31, 2013                          March 31, 2013
                     Outstanding    Percent of   Percent of    Outstanding    Percent of   Percent of    Outstanding    Percent of   Percent of
                       Balance        Loans       Capital        Balance        Loans       Capital        Balance        Loans       Capital

Real estate -
operators of
nonres bldgs        $      97,153        26.89 %     147.81 % $     100,333        27.92 %     153.77 % $      94,828        27.48 %     129.83 %
Hospitality and
tourism                    44,243        12.24        67.31          45,360        12.62        69.01          42,733        12.39        58.51
Lessors of
nonresidential
buildings                  13,649         3.78        20.77          14,191         3.95        21.75          13,162         3.81        18.02
Gasoline stations
and convenience
stores                     11,980         3.32        18.23          11,534         3.21        17.68          11,201         3.25        15.33
Commercial
construction               10,685         2.96        16.26          10,904         3.03        16.71          16,295         4.72        22.31
Insurance
agencies and
brokerages                 10,331         2.86        15.72          10,097         2.81        15.47          11,854         3.44        16.23
Other                     173,258        47.95       263.59         166,949        46.46       255.86         154,959        44.91       212.16

Total Commercial
Loans               $     361,299       100.00 %              $     359,368       100.00 %              $     345,032       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 composition has increased exposure related to any specific industry concentration as of March 31, 2014. The current concentration of real estate related loans represents a broad customer base composed of a high percentage of owner occupied developments.

Our residential real estate portfolio predominantly includes one to four family adjustable rate mortgages that have repricing terms generally from one to three years, construction loans to individuals and bridge financing loans for qualifying customers. As of March 31, 2014, our residential loan portfolio totaled $110.759 million, or 22.80% of our total outstanding loans.

The Corporation has also extended credit to governmental units, including Native American organizations. Tax-exempt loans and leases decreased from $1.526 million at the end of December 31, 2013 to $1.514 million at March 31, 2014. 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.


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Credit Quality

Management analyzes the allowance for loan losses in detail on a monthly basis to determine whether the losses inherent in the portfolio are properly reserved for. Net recoveries for the three months ended March 31, 2014 amounted to $39,000, compared to $.566 million, or .50% of average loans outstanding, for the same period in 2013. 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.

The table below shows period end balances of nonperforming assets (dollars in thousands):

                                         March 31,    December 31,     March 31,
                                           2014           2013           2013
Nonperforming Assets:
Nonaccrual Loans                        $       983   $       1,410   $     3,833
Loans past due 90 days or more                    -               -             -
Restructured loans                              508             614             -
Total nonperforming loans                     1,491           2,024         3,833
Other real estate owned                       2,166           1,884         3,825
Total nonperforming assets              $     3,657   $       3,908   $     7,658
Nonperforming loans as a % of loans             .31 %           .42 %         .84 %
Nonperforming assets as a % of assets           .63 %           .68 %        1.41 %
Reserve for Loan Losses:
At period end                           $     4,883   $       4,661   $     5,037
As a % of loans                                1.01 %           .96 %        1.11 %
As a % of nonperforming loans                327.50 %        230.29 %      131.41 %
As a % of nonaccrual loans                   497.74 %        330.27 %      131.41 %
Texas ratio*                                   5.18 %          5.59 %        9.90 %


*calculated by taking total nonperforming assets divided by total tangible equity plus reserve for loan losses

Nonperforming assets at $3.657 million have been reduced in 2014 by $.251 million from the $3.908 million at 2013 year end. This reduction in nonperforming assets reflects management's continued efforts in the remediation of problem credits and disposition of OREO properties. The current low level of nonperforming assets is also representative of the overall quality of the Corporation's loan portfolio.

The following provides additional information relative to the Corporation's credit quality:

                                                             At Period End
                                       March 31, 2014      December 31, 2013      March 31, 2013

Total loans, at period end            $        485,862    $           483,832    $        454,051
Average loans for the period          $        486,354    $           462,500    $        449,065




                                                                For the Period Ended
                                        Three Months Ended      Twelve Months Ended      Three Months Ended
                                          March 31, 2014         December 31, 2013         March 31, 2013

Net charge-offs during the period       $               (39 )  $               2,232    $                556
Net charge-offs to average loans                        N/M %                    .48 %                   .50 %
Net charge-offs to beginning
allowance balance                                       N/M %                  42.78 %                 10.66 %

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 an outside loan review consultant to perform a review of the loan portfolio. Historically, this independent review has provided findings similar to management as to the overall adequacy of the loan loss reserve and has substantiated the Corporation's loan rating system. In 2014, the Corporation will again utilize a consultant for loan review.


Table of Contents

As of March 31, 2014, the allowance for loan losses represented 1.01% of total loans. At March 31, 2014, the allowance included specific reserves in the amount of $1.406 million, as compared to $1.111 million at December 31, 2013 and $1.922 million at March 31, 2013. 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 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 for the periods indicated (dollars in thousands):

                                   Three Months Ended         Year Ended         Three Months Ended
                                     March 31, 2014        December 31, 2013       March 31, 2013

Balance at beginning of period     $             1,884    $             3,212    $             3,212
Other real estate transferred
from loans due to foreclosure                      282                    932                    649
Other real estate sold                               -                 (1,996 )                  (34 )
Writedowns on other real estate
held for sale                                        -                   (231 )                    -
Loss on sale of other real
estate held for sale                                 -                    (33 )                   (2 )

Balance at end of period           $             2,166    $             1,884    $             3,825

During the first quarter of 2014, the Corporation received real estate in lieu of loan payments of $.282 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 balances and any additional reductions in the fair value result in a write-down of other real estate.

Deposits

The Corporation had an increase in deposits in the first quarter of 2014. Total deposits increased by $9.411 million, or 2.02%, in the first quarter of 2014. The increase in deposits for the first quarter of 2014 is composed of an increase in noncore deposits of $.158 million and an increase in core deposits of $9.253 million. In recent years, the Corporation strategically emphasized the growth of core deposits. This strategic initiative is supported with an individual incentive plan, along with the introduction of several new deposit products and competitive deposit pricing. The core deposit balances increased primarily in transactional account deposits, our lowest cost of funds. Most recently, we have experienced some declines in core deposits. A portion of these decreases can be attributed to individual customer deposit reductions due to various business related needs. In an effort to stem some runoff from core deposit CDs, management recently increased some offering rates on CD products.

Management continues to monitor existing deposit products in order to stay competitive as to both 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 deposits.

The following table represents detail of deposits at the end of the periods indicated (dollars in thousands):

                       March 31,                  December 31,                 March 31,
                          2014      % of Total        2013        % of Total      2013      % of Total

Noninterest bearing    $   68,027        14.30 % $       72,936        15.64 % $   57,547        13.53 %
NOW, money market,
checking                  148,023        31.12          149,123        31.98      161,445        37.97
Savings                    14,425         3.03           13,039         2.80       13,273         3.12
Certificates of
Deposit <$100,000         154,371        32.45          140,495        30.13      130,646        30.72
Total core deposits       384,846        80.90          375,593        80.55      362,911        85.34

Certificates of
Deposit >$100,000          23,317         4.90           23,159         4.97       24,619         5.79
Brokered CDs               67,547        14.20           67,547        14.48       37,706         8.87
Total non-core
deposits                   90,864        19.10           90,706        19.45       62,325        14.66

Total deposits         $  475,710       100.00 % $      466,299       100.00 % $  425,236       100.00 %


Table of Contents

Borrowings

The Corporation also utilizes FHLB borrowings as a source of funding. At March 31, 2014, this source of funding totaled $35 million and the Corporation secured this funding by pledging loans and investments. The $35 million of FHLB borrowings has a weighted average maturity of 2.21 years and a weighted average rate of 1.79% at March 31, 2014. The Corporation also has a USDA Rural Development loan held by its wholly owned subsidiary, First Rural Relending that has a fixed interest rate of 1% and matures in August 2024.

In addition to the above, the Corporation maintains a relationship with a correspondent bank, which consists of a line of credit and a term note. The line of credit bears interest at 90-day LIBOR plus 2.75% with a floor rate of 4.00% and has an initial term that expires on March 22, 2015. The term note bears the same interest and matures on March 22, 2017.

Shareholders' Equity

Total shareholders' equity increased $.481 million from December 31, 2013 to March 31, 2014. Contributing to the increase in shareholders' equity was net income available to common shareholders of $.660 million, a reduction for dividends on common stock of $.276 million, increases due to stock compensation of $.112 million, an increase in the market value of securities of $.128 million and a decrease due to the repurchase of common stock of $.143 million.

RESULTS OF OPERATIONS

Summary

The Corporation reported net income available to common shareholders of $.660 million, or $.12 per share, in the first quarter of 2014, compared to $.676 million or $.12 per share for the first quarter of 2013. The first quarter results include a provision for loan losses of $.183 million. Operating results for the same period in 2013 include a provision for loan losses of $.375 million.

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 margin on a fully taxable equivalent basis amounted to $5.608 million, 4.26% of average earning assets, in the first quarter of 2014, compared to $5.174 million, and 4.20% of average earning assets, in the first quarter of 2013. Margin improvement in 2014 was primarily due to a reduction in funding costs between periods.


Table of Contents

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.

                                                                                Three Months Ended
                                                                                                                            2014-2013
                                   Average Balances               Average Rates          Interest         Income/                               Rate/
                                March 31,          Increase/        March 31,            March 31,        Expense     Volume        Rate        Volume
(dollars in thousands)      2014        2013      (Decrease)     2014       2013      2014      2013     Variance    Variance     Variance     Variance

Loans (1,2,3)             $ 486,354   $ 448,925   $    37,429      5.27 %     5.36 % $ 6,315   $ 5,930   $     385   $     495   $     (101 ) $       (9 )
Taxable securities           43,257      46,704        (3,447 )    2.22       2.08       237       240          (3 )       (18 )         16           (1 )
Nontaxable securities
(2)                           1,505         843           662      4.85       4.81        18        10           8           8            -            -
Federal funds sold                3           3             -         -          -         -         -           -           -            -            -
Other interest-earning
assets                        3,070       3,070             -      6.21       4.10        47        31          16           -           16            -
Total earning assets        534,189     499,545        34,644      5.02       5.04     6,617     6,211         406         485          (69 )        (10 )
Reserve for loan losses      (4,852 )    (5,086 )         234
Cash and due from banks      23,847      18,562         5,285
Fixed Assets                 10,288      10,633          (345 )
Other Real Estate             2,058       3,294        (1,236 )
Other assets                 15,186      14,212           974
Total assets              $ 580,716   $ 541,160   $    39,556

NOW and money market
deposits                  $ 116,847   $ 126,149   $    (9,302 )     .21 %      .25 % $    61   $    79   $     (18 ) $      (6 ) $      (13 ) $        1
Interest checking            33,090      36,071        (2,981 )     .18        .31        15        28         (13 )        (2 )        (12 )          1
Savings deposits             13,569      14,997        (1,428 )     .09        .11         3         4          (1 )         -           (1 )          -
CDs <$100,000               151,317     131,641        19,676      1.23       1.64       460       533         (73 )        80         (133 )        (20 )
CDs >$100,000                23,205      24,630        (1,425 )    1.40       1.66        80       101         (21 )        (6 )        (16 )          1
Brokered deposits            67,557      37,706        29,851      1.22       1.43       203       133          70         104          (19 )        (15 )
Borrowings                   38,808      35,755         3,053      1.95       1.80       187       159          28          14           13            1
Total interest-bearing
liabilities                 444,393     406,949        37,444       .92       1.03     1,009     1,037         (28 )       184         (181 )        (31 )
Demand deposits              68,366      71,376        (3,010 )
Other liabilities             2,495       2,545           (50 )
Shareholders' equity         65,462      60,290         5,172
Total liabilities and
shareholders' equity      $ 580,716   $ 541,160   $    39,556
Rate spread                                                        4.10 %     4.01 %
Net interest
margin/revenue                                                     4.26 %     4.20 % $ 5,608   $ 5,174   $     434   $     301   $      112   $       21



(1) For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.

(2) The amount of interest income on loans and nontaxable securities has been adjusted to a tax euivalent basis, using a 34% tax rate

In the past several years of a low interest rate environment, the Corporation, repriced all of its brokered deposits along with the majority of its bank time deposits. This repricing of liabilities is the primary reason for the increased interest margin, on a fully taxable equivalent basis in recent reported periods.

During this relatively low interest environment, the Corporation has also repriced a significant portion of its loan portfolio. Management has been diligent when repricing maturing or new loans in establishing interest rate floors in order to maintain our improved interest rate spread. The Corporation is anticipating some margin pressure in future periods as we continue to see extremely competitive pricing on new and renewable loans.

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 the first quarter of 2014, the Corporation determined through this analysis that a $.183 million provision for loan loss was required, compared to $.375 required in the first quarter of 2013. There were net recoveries of $39,000 in the first quarter of 2014 and net charge-offs of $.556 million in the same period of 2013.

Other Income

Other income decreased by $.067 million for the three months ended March 31, 2014, compared to the three months ended March 31, 2013. Included in first quarter of 2014 is income from loans sold on the secondary market of $.103 million and income from SBA/USDA loan sales of $.382 million, compared to $.299 million for secondary market loans and $.109 million from SBA/USDA loans sales in the first quarter of 2013.

Management continues to evaluate deposit products and services for ways to better serve its customer base and also enhance service fee income through a broad array of products that price services based on income contribution and cost attributes.


Table of Contents

The following table details other income for the three months ended March 31, 2014 and 2013 (dollars in thousands):

                                                     Three Months Ended
                                                         March 31,
. . .
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