EDGAR 10-K Filing

Company CIK: 36506
Filing Year: 2021
Filename: 36506_10-K_2021_0001558370-21-002868.json

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ITEM 1. BUSINESS
Item 1.
Business
Mackinac Financial Corporation (the “Corporation”, or “Mackinac”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, (the “BHCA”) that was incorporated under the laws of the state of Michigan on December 16, 1974. The Corporation changed its name from “First Manistique Corporation” to “North Country Financial Corporation” on April 14, 1998. On December 16, 2004, the Corporation changed its name from North Country Financial Corporation to Mackinac Financial Corporation. The Corporation is headquartered and located in Manistique, Michigan. The mailing address of the Corporation is P.O. Box 369, 130 South Cedar Street, Manistique, Michigan 49854.
In December of 2004, the Corporation was recapitalized with the net proceeds, approximately $26.2 million, from the issuance of $30 million of common stock in a private placement. Commensurate with this recapitalization, the Corporation changed its name from North Country Financial Corporation to Mackinac Financial Corporation, and its subsidiary bank adopted the “mBank” identity early in 2005.
On December 5, 2014, the Corporation completed its acquisition of Peninsula Financial Corporation (“PFC”) and its wholly owned subsidiary, The Peninsula Bank. PFC had six branch offices and $126 million in assets as of the acquisition date. The results of operations due to the merger have been included in the Corporation’s results since the acquisition date. The merger was effected by a combination of cash payments and the issuance of shares of the Corporation’s common stock to PFC shareholders. Each share of PFC’s 288,000 shares of common stock was converted into the right to receive, at the shareholder’s election and subject to certain limitations (i) approximately 3.64 shares of the Corporation’s common stock, with cash paid in lieu of fractional shares, or (ii) cash at $46.13 per share of common stock. The conversion of PFC’s shares resulted in the issuance of 695,361 shares of the Corporation’s common stock and payment of $4.484 million in cash to the former PFC shareholders.
On April 29, 2016, the Corporation completed its acquisition of The First National Bank of Eagle River (“Eagle River.”) Eagle River had three branch offices and approximately $125 million in assets as of the acquisition date. The results of operations due to the merger have been included in the Corporation’s results since the acquisition date. The merger was effected by a cash payment of $12.5 million.
On August 31, 2016, the Corporation completed its acquisition of Niagara Bancorporation (“Niagara”) and its wholly owned subsidiary, First National Bank of Niagara. Niagara had four branch offices and approximately $67 million in assets. The results of operations due to the merger have been included in the Corporation’s results since the acquisition date. The merger was effected by a cash payment of $7.325 million.
On May 18, 2018, the Corporation completed its acquisition of First Federal of Northern Michigan Bancorp, Inc. (“FFNM”). FFNM had seven branch offices, one of which was consolidated into an existing mBank branch office shortly after consummation of the transaction. FFNM had approximately $318 million in assets. The results of operations due to the merger have been included in the Corporation’s results since the acquisition date. The merger was effected by the issuance of 2,146,378 new shares, approximating $34.1 million.
On October 1, 2018, the Corporation completed its acquisition of Lincoln Community Bank (“Lincoln”). Lincoln had two branch offices, one of which was subsequently closed at the end of 2018. Lincoln had approximately $60 million in assets. The results of operations due to the merger have been included in the Corporation’s results since the acquisition date. The merger was effected by a cash payment of $8.5 million.
The Corporation owns all of the outstanding stock of its banking subsidiary, mBank (the “Bank”). The Bank currently has 10 branch offices located in the Upper Peninsula of Michigan, 10 branch offices located in Michigan’s Lower Peninsula, one branch in Southeast Michigan, and 7 branches in Wisconsin. The Bank maintains offices in the Michigan counties of: Alpena, Cheboygan, Chippewa, Emmet, Grand Traverse, Luce, Manistee, Marquette, Menominee, Montmorency, Oakland, Oscoda, Otsego, and Schoolcraft. The Bank maintains offices in the Wisconsin counties of: Florence, Lincoln, Marinette, Oneida and Vilas. The Bank provides drive-in convenience at 28 branch locations and has 34 automated teller machines. The Bank has no foreign offices.
The Corporation also owns three non-bank subsidiaries: First Manistique Agency, presently inactive; First Rural Relending Company, a relending company for nonprofit organizations; and North Country Capital Trust, a statutory business trust which was formed solely for the issuance of trust preferred securities (none of which remain outstanding). The Bank represents the principal asset of the Corporation. The Bank has one wholly owned subsidiary, mBank Title Insurance Agency, LLC, which provided title insurance services until 2014 and is currently inactive. The Corporation and the Bank are engaged in a single industry segment, commercial banking, broadly defined to include commercial and retail banking activities, along with other permitted activities closely related to banking.
Operations
The principal business of the Corporation is the general commercial banking business, conducted through the Bank’s provision of a full range of loan and deposit products. These banking services include customary retail and commercial banking services, including checking and savings accounts, time deposits, interest bearing transaction accounts, safe deposit facilities, real estate mortgage lending, commercial lending, commercial and governmental lease financing, and direct and indirect consumer financing. Funds for the Bank’s operations are also provided by brokered deposits and through borrowings from the Federal Home Loan Bank (“FHLB”) system, proceeds from the sale of loans and mortgage-backed and other securities, funds from repayment of outstanding loans and earnings from operations. Earnings depend primarily upon the difference between (i) revenues from loans, investments, and other interest-bearing assets and (ii) expenses incurred in payment of interest on deposit accounts and borrowings, an adequate allowance for loan losses, and general operating expenses.
Competition
Banking is a highly competitive business. The Bank competes for loans and deposits with other banks, savings and loan associations, credit unions, mortgage bankers, and investment firms in the scope and type of services offered, pricing of loans, interest rates paid on deposits, and number and location of branches, among other things. The Bank also faces competition for investors’ funds from mutual funds, marketable equity securities, and corporate and government securities.
The Bank competes for loans principally through interest rates and loan fees, the range and quality of the services it provides and the locations of its branches. In addition, the Bank actively solicits deposit-related clients and competes for deposits by offering depositors a variety of savings accounts, checking accounts, and other services.
Human Capital Management
As of December 31, 2020, the Corporation and its subsidiaries employed, in the aggregate, 315 full time equivalent employees, none of whom are covered by a collective bargaining agreement. All employees are encouraged to carry out the mission of the Corporation, which includes, among other beliefs, operating under high ethical standards, focusing on the needs of our customers and providing products, services and time to advance the well-being of the communities in which we live and work.
The Corporation provides a competitive compensation and benefits program to help meet the needs of our employees and encourage a positive work atmosphere. Employees are offered appropriate training to obtain the skills and knowledge they require to be successful and opportunities for growth and advancement are offered for those demonstrating the desire and dedication to further contribute to the Corporation’s success.
Because the health and well-being of our employees and our customers is paramount to our success in carrying out our mission, we have developed a comprehensive COVID-19 response plan that includes safety protocols across our branch network, remote work where possible and overall awareness of the pandemic.
Information about our Executive Officers
The executive officers of the Corporation are listed below. The executive officers serve at the pleasure of the Board of Directors and are appointed by the Board annually. There are no arrangements or understandings between any officer and any other person pursuant to which the officer was selected.
Name
Age
Position
Paul D. Tobias
Chairman and Chief Executive Officer
Kelly W. George
President
Jesse A. Deering
Executive Vice President/Chief Financial Officer
Additional information for the executive officers of the registrant is included in the Corporation’s Proxy Statement for its 2021 Annual Meeting of Shareholders, under the caption “Executive Officers.”
Business
The Bank makes mortgage, commercial, and installment loans to customers throughout Michigan and Northeastern Wisconsin. Fees may be charged for these services. The Bank’s most prominent concentration in the loan portfolio relates to commercial loans to entities within real estate - operators of nonresidential buildings industry. This concentration represented $138.992 million, or 16.95%, of the commercial loan portfolio at December 31, 2020. The Bank also supports the service industry, with its hospitality and related businesses, as well as gas stations and convenience stores, forestry, restaurants, farming, fishing, and many other activities important to growth in the regions we service. The economy of the Bank’s market areas is affected by summer and winter tourism activities.
The Bank has become a premier SBA/USDA lender in our regions. Many of these SBA/USDA guaranteed loans are sold at a premium on the secondary market, with the Bank retaining the servicing. The Bank does not sell the loan guarantees on every credit, rather only those where acceptable market rates are above par. During 2020, the Bank also participated in the Small Business Administration Paycheck Protection Program (“PPP”). Loan originations under this program totaled $152.506 million and net income at the Bank was positively impacted by $4.030 million as a result of participation.
The Bank also offers various consumer loan products including installment, mortgages and home equity loans. In addition to making consumer portfolio loans, the Bank engages in the business of making residential mortgage loans for sale to the secondary market.
The Bank’s primary source for lending, investments, and other general business purposes is deposits. The Bank offers a wide range of interest bearing and non-interest bearing accounts, including commercial and retail checking accounts, negotiable order of withdrawal (“NOW”) accounts, money market accounts with limited transactions, individual retirement accounts, regular interest-bearing statement savings accounts, certificates of deposit with a range of maturity date options, and accessibility to a customer’s deposit relationship through online banking. The sources of deposits are residents, businesses and employees of businesses within the Bank’s market areas, obtained through the personal solicitation of the Bank’s officers and directors, direct mail solicitation and limited advertisements published in the local media. The Bank also utilizes the wholesale deposit market for any shortfalls in loan funding. No material portions of the Bank’s deposits have been received from a single person, industry, group, or geographical location.
The Bank is a member of the FHLB of Indianapolis (“FHLB”). The FHLB provides an additional source of liquidity and long-term funds. Membership in the FHLB has provided access to attractive rate funding advances, as well as advantageous lending programs. The Community Investment Program makes advances to be used for funding community-oriented mortgage lending, and the Affordable Housing Program grants advances to fund lending for long-term low and moderate income owner occupied and affordable rental housing at subsidized interest rates.
The Bank has secondary borrowing lines of credit available to respond to deposit fluctuations and temporary loan demands. The unsecured line availability totaled $106 million with no outstanding balance at December 31, 2020, with additional amounts available if collateralized.
As of December 31, 2020, the Bank had no material risks relative to foreign sources. See the “Interest Rate Risk” and “Foreign Exchange Risk” sections in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7A below, for details on the Corporation’s foreign account activity.
Compliance with federal, state, and local statutes and/or ordinances relating to the protection of the environment is not expected to have a material effect upon the Bank’s capital expenditures, earnings, or competitive position.
Supervision and Regulation
As a registered bank holding company, the Corporation is subject to regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) under the BHCA. The Bank is subject to regulation and examination by the Michigan Department of Insurance and Financial Services (the “DIFS”) and the Federal Deposit Insurance Corporation (the “FDIC”).
Under the BHCA, the Corporation is subject to periodic examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board periodic reports of its operations and such additional information as the Federal Reserve Board may require. In accordance with Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Corporation might not do so absent such policy. In addition, there are numerous federal and state laws and regulations which regulate the activities of the Corporation, the Bank and the non-bank subsidiaries, including requirements and limitations relating to capital and reserve requirements, permissible investments and lines of business, transactions with affiliates, loan limits, mergers and acquisitions, issuances of securities, dividend payments, inter-affiliate liabilities, extensions of credit and branch banking.
Federal banking regulatory agencies have established risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies. The resulting capital ratios represent qualifying capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating expansion programs should not allow expansion to diminish their capital ratios and, “should maintain all ratios well in excess” of the minimums. The current ratios are discussed under Regulatory Capital Requirements below.
The Federal Deposit Insurance Corporation Improvement Act contains “prompt corrective action” provisions pursuant to which banks are to be classified into one of five categories based upon capital adequacy, ranging from “well capitalized” to “critically undercapitalized” and which require (subject to certain exceptions) the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes “significantly undercapitalized” or “critically undercapitalized”. The FDIC also, after an opportunity for a hearing, has authority to downgrade an institution from “well capitalized” to “adequately capitalized” or to subject an “adequately capitalized” or “undercapitalized” institution to the supervisory actions applicable to the next lower category, for supervisory concerns. Information pertaining to the Corporation’s and the Bank’s capital is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 below, as well as in Note 16 to the Corporation’s Consolidated Financial Statements in Item 8 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 previously 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;
● 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 control 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.
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 are described below. 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.
● 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 Deposit Insurance Corporation 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 requirements 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.
The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States and requires the CFPB and other federal agencies to implement many new and significant rules and regulations in addition to those discussed above. The CFPB has issued significant new regulations that impact consumer mortgage lending and servicing. Those regulations became effective in January 2014. In addition, the CFPB issued new regulations that changed the disclosure requirements and forms used under the Truth in Lending Act and Real Estate Settlement and Procedures Act effective October 3, 2015. Compliance with these new laws and regulations and other regulations under consideration by the CFPB will likely result in additional costs, which could be significant and could adversely impact our results of operations, financial condition or liquidity.
The Economic Growth, Regulator Relief and Consumer Protection Act of 2018
On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA) was enacted, which repeals or modifies certain provisions of the Dodd-Frank Act and eases regulations on all but the largest banks. The EGRRCPA’s provisions include, among other things: (i) creating a new category of “qualified mortgages” presumed to satisfy ability-to-repay requirements for loans that meet certain criteria and are held in portfolio by banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) not requiring appraisals for certain transactions valued at less than $400,000 in rural areas; (iii) exempting banks that originate fewer than 500 open-end and 500 closed-end mortgages from the Home Mortgage Disclosure Act’s expanded data disclosures; (iv) clarify that, subject to various conditions, reciprocal deposits of another depository institution obtained using a deposit broker through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations; and (v) simplify capital calculations by requiring regulators to establish for institutions under $10 billion in assets a community bank leverage ratio (Tier 1 capital to average consolidated assets) at a percentage not less than 8% and not greater than 10% that such institutions may elect to replace the general applicable risk-based capital requirements for determining well-capitalized status.
On September 17, 2019 the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR”) framework), as required by the EGRRCPA. The CBLR framework is designated to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have (i) a Tier 1 leverage ratio of greater than 9.0%, (ii) less than $10 billion in total consolidated assets, and (iii) limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under “prompt corrective action” reulations and will not be required to report or calculate risk-based capital.
The new rule became effective on January 1 , 2020. Call Report or holding company FR Y-9C, as applicable. The Corporation did not opt into the CBLR framework.
On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encourages financial institutions to work prudently with borrowers that are or that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to explain that in consultation with the FASB staff the federal banking agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a modification are not Troubled Debt Restructurings (“TDRs”). The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were not more than 30 days past due as of December 31, 2019 are not TDRs. On December 27, 2020, the President signed another COVID-19 relief bill that extended this guidance until the earlier of January 1, 2022 or 60 days after the date on which the national emergency declared as a result of COVID-19 is terminated. Through December 31, 2020, the Bank had applied this guidance and modified loans with aggregate
principal balances totaling $219.6 million. The majority of these modifications involved three-month extensions. By December 31, 2020, most of these modifications had expired, other than those receiving a second short-term modification as allowed under the guidance. At December 31, 2020, there were $2.4 million of loans under COVID-19 modification.
The CARES Act, as amended, included an allocation of $659 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. Through December 31, 2020, the Bank had originated 1,243 PPP loans totaling $152.506 million in principal. Fees totaling $5.18 million were generated from the SBA for these loans in the year ended December 31, 2020. These fees are deferred and amortized into interest income over the contractual period of 24 months or 60 months, as applicable. Upon SBA forgiveness, unamortized fees are then recognized into interest income. Participation in the PPP had a significant impact on the Bank’s asset mix and net interest income in 2020 and will continue to impact both asset mix and net interest income until these loans are forgiven or paid off.
On December 27, 2020, the President signed another COVID-19 relief bill that extended and modified several provisions of the PPP. This included an additional allocation of $284 billion. The SBA reactivated the PPP on January 11, 2021. The Bank is originating additional loans through the most recent PPP, which origination period will currently extend through March 31, 2021.
Regulatory Capital Framework
As the Corporation did not opt in to the CBLR, it will remain subject to the Regulatory Capital Framework (“Basel III”) established by the Federal Reserve and the OCC, which included a common equity Tier 1 capital (“CET1”) requirement of 4.50%, a Tier 1 capital requirement of 6.0% and an 8.0% total capital requirement. In addition to these minimum risk-based capital ratios, the Basel III requires that all banking organizations maintain a “capital conservation buffer.” The capial conservation buffer requires increased capital ratios as referenced in the table below in order ti avoid any restrictions on their ability to make capital distributions and to pay certain discretionary bonus payments to executive officers. In order to avoid those restrictions, the capital conservation buffer effectively increased the minimum CET1 capital, Tier 1 capital and total capital ratios for US banking organizations to 7.0%, 8.5% and 10.5%, respectively. Banking organizations with capital levels that fall within the buffer will be required to limit dividends, shares repurchases or redemptions (unless replaced within the same calendar quarter by capital instruments of equal or higher quality), and discretionary bonus payments. The capital conservation buffer phased in, in full, January 1, 2019.
Adequately
Well-Capitalized
Capitalized
Well-Capitalized
with Buffer, fully
Requirement
Requirement
phased in 2019
Leverage
4.0%
5.0%
5.0%
CET1
4.5%
6.5%
7.0%
Tier 1
6.0%
8.0%
8.5%
Total Capital
8.0%
10.0%
10.5%
As required by Dodd-Frank, the Basel III final rule requires that capital instruments such as trust preferred securities and cumulative preferred shares be phased out of Tier 1 capital by January 1, 2016, for banking organizations that had $15 billion or more in total consolidated assets as of December 31, 2009 and permanently grandfathers as Tier 1 capital such instruments issued by these smaller entities prior to May 19, 2010 (provided they do not exceed 25% of Tier 1 capital).
The Basel III final rule provides banking organizations under $250 billion in total consolidated assets or under $10 billion in foreign exposures with a one-time “opt-out” right to continue excluding Accumulated Other Comprehensive income from CET1 capital. The Corporation elected to opt-out and continues to exclude Accumulated Other Comprehensive Income from its regulatory capital.
The Basel III final rule requires that goodwill and other intangible assets (other than mortgage servicing assets), net of associated deferred tax liabilities, be deducted from CET1 capital. Additionally, deferred tax assets that arise from net operating loss and tax credit carryforwards, net of associated deferred tax liabilities and valuation allowances, are fully deducted from CET1 capital. However, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, along with mortgage servicing assets and “significant” (defined as greater than 10% of the issued and outstanding common stock of the unconsolidated financial institution) investments in the common stock of unconsolidated “financial institutions” are partially includible in CET1 capital, subject to deductions defined in the final rule.
Information regarding the Corporation and the Bank’s regulatory capital can be found in Note 16 - Regulatory Matters in the financial statements included herein.
Monetary Policy
The earnings and business of the Corporation and the Bank depends on interest rate differentials. In general, the difference between the interest rates paid by the Bank to obtain its deposits and other borrowings, and the interest rates received by the Bank on loans extended to its customers and on securities held in the Bank’s portfolio, comprises the major portion of the Bank’s earnings. These rates are highly sensitive to many factors that are beyond the control of the Bank, and accordingly, its earnings and growth will be subject to the influence of economic conditions, generally, both domestic and foreign, including inflation, recession, unemployment, and the monetary policies of the Federal Reserve Board. The Federal Reserve Board implements national monetary policies designed to curb inflation, combat recession, and promote growth through, among other means, its open-market dealings in US government securities, by adjusting the required level of reserves for financial institutions subject to reserve requirements, through adjustments to the discount rate applicable to borrowings by banks that are members of the Federal Reserve System, and by adjusting the Federal Funds Rate, the rate charged in the interbank market for purchase of excess reserve balances. In addition, legislative and economic factors can be expected to have an ongoing impact on the competitive environment within the financial services industry. The nature and timing of any future changes in such policies and their impact on the Bank cannot be predicted with certainty.
Selected Statistical Information
I.
Distribution of Assets, Obligations, and Shareholders’ Equity; Interest Rates and Interest Differential
The key components of net interest income, the daily average balance sheet for each year - including the components of earning assets and supporting obligations - the related interest income on a fully tax equivalent basis and interest expense, as well as the average rates earned and paid on these assets and obligations is contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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):
Corporate
28,043
20,938
20,064
US Agencies
6,589
14,496
15,970
US Agencies - MBS
34,280
34,526
32,840
State and political subdivisions
42,924
38,012
47,874
Total
$
111,836
$
107,972
$
116,748
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, 2020 (fully taxable equivalent, dollars in thousands):
In one
After one,
After five,
Weighted
year
but within
but within
Over
Average
or less
five years
ten years
ten years
Total
Yield (1)
US Agencies
6,589
-
-
-
6,589
2.05%
US Agencies - MBS
2,615
21,645
10,020
-
34,280
1.10%
Corporate
2,010
6,891
16,593
2,549
28,043
2.89%
State and political subdivisions
7,221
16,310
8,668
10,725
42,924
1.55%
Total
$
18,435
$
44,846
$
35,281
$
13,274
$
111,836
Weighted average yield (1)
1.40%
1.11%
2.71%
2.09%
1.78%
(1) Weighted average yield includes the effect of tax-equivalent adjustments using a 21% tax rate.
III.
Loan Portfolio
A.Type of Loans
The following table sets forth the major categories of loans outstanding for each category at December 31 (dollars in thousands):
Commercial real estate
$
498,450
$
514,394
$
496,207
$
406,742
$
389,420
Commercial, financial and agricultural
273,759
211,023
191,060
156,951
142,648
One to four family residential real estate
227,044
253,918
286,908
209,890
205,945
Construction
59,359
58,203
44,318
20,061
23,731
Consumer
18,980
21,238
20,371
17,434
20,113
Total
$
1,077,592
$
1,058,776
$
1,038,864
$
811,078
$
781,857
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, 2020, based on scheduled principal repayments (dollars in thousands):
Commercial,
Financial,
1-4 Family
Commercial
and
Residential
Real Estate
Agricultural
Real Estate
Consumer
Construction
Total
In one year or less:
Variable interest rates
$
23,061
$
42,066
$
2,336
$
4,940
$
$
72,479
Fixed interest rates
53,344
32,099
2,509
14,359
102,978
After one year but within five years:
Variable interest rates
40,003
15,338
7,386
16,572
79,346
Fixed interest rates
306,272
162,433
23,783
20,697
13,916
527,101
After five years:
Variable interest rates
52,842
10,146
136,150
1,334
201,179
Fixed interest rates
22,928
11,677
54,880
2,084
2,940
94,509
Total
$
498,450
$
273,759
$
227,044
$
59,359
$
18,980
$
1,077,592
C.
Risk Elements
The following table presents a summary of nonperforming assets and problem loans as of December 31 (dollars in thousands):
Nonaccrual loans
$
5,458
$
5,172
$
5,054
$
2,388
$
3,959
Interest income recorded during period for nonaccrual loans
-
-
-
-
Accruing loans past due 90 days or more
-
-
-
Restructured loans on nonaccrual not included above
-
-
-
IV.
Summary of Loan Loss Experience
A.Analysis of the Allowance for Loan Losses
Changes in the allowance for loan losses arise from loans charged off, recoveries on loans previously charged off by loan category, and additions to the allowance for loan losses through provisions charged to expense. Factors which influence management’s judgment in determining the provision for loan losses include establishing specified loss allowances for selected loans (including large loans, nonaccrual loans, and problem and delinquent loans) and consideration of historical loss information and local economic conditions.
The following table presents information relative to the allowance for loan losses for the years ended December 31, (dollars in thousands):
Balance of allowance for loan losses at beginning of period
$
5,308
$
5,183
$
5,079
$
5,020
$
5,004
Loans charged off:
Commercial
One to four family residential real estate
Consumer
Total loans charged off
Recoveries of loans previously charged off:
Commercial
One to four family residential real estate
Consumer
Total recoveries
Net loans charged off
Provisions charged to expense
1,000
Balance at end of period
$
5,816
$
5,308
$
5,183
$
5,079
$
5,020
Average loans outstanding
1,117,132
1,047,439
941,221
795,532
703,047
Ratio of net charge-offs to average loans
0.04
0.02
0.04
0.07
0.08
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):
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
Commercial real estate
$
2,983
46.26%
$
1,189
48.58%
$
1,682
47.76%
$
1,650
50.15%
$
1,345
49.81%
Commercial, financial, and agricultural
1,734
25.40
1,197
19.93
18.39
19.35
18.25
Commercial construction
4.43
3.79
2.87
1.14
1.47
1-4 family residential real estate
21.07
23.98
27.62
25.88
26.34
Consumer construction
1.08
2.01
1.40
1.33
1.56
Consumer
1.76
1.71
1.96
2.15
2.57
Unallocated general reserves
-
2,679
-
2,539
-
2,623
-
2,612
-
Total
$
5,816
100.00%
$
5,308
100.00%
$
5,183
100.00%
$
5,079
100.00%
$
5,020
100.00%
The unallocated balance of the allowance for loan losses represents general reserves not attributed directly to one
segment or class of loans, rather, represents additional reserves management believes is warranted based on local and
broader economic trends. These reserves are subjective in nature and based on qualitative factors impacting the overall
loan portfolio.
V.
Deposits
Three months
Three to
Six to twelve
Over twelve
or less
six months
months
months
Total
CDs <$100,000
21,414
18,771
39,977
49,385
129,547
CDs >$100,000
23,194
14,795
19,346
30,608
87,943
Total time deposits
$
44,608
$
33,566
$
59,323
$
79,993
$
217,490
Additional 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.
Available Information
Our Internet address is www.bankmbank.com. We will make available free of charge in the investor relations section of our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with (or furnished to) the SEC. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K. In addition, the SEC maintains an Internet site, www.sec.gov, that includes filings of and information about issuers that file electronically with the SEC.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Our business, prospects, financial condition, or operating results could be materially adversely affected by any of the risks and uncertainties set forth below, as well as in any amendments or updates reflected in subsequent filings with the SEC. In assessing these risks, you should also refer to the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.
RISK FACTORS
Investing in our securities involves risk. You should carefully consider the specific risks set forth in “Risk Factors” in this Annual Report on Form 10-K. These risks are not the only risks we face. Additional risks not presently known to us, or that we currently view as immaterial, may also impair our business, if any of the risks described herein or any additional risks actually occur, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Risks Related to Our Business
The Corporation’s net interest income could be negatively affected by interest rate adjustments by the Federal Reserve, as well as by competition in its primary market area.
As a financial institution, the Corporation’s earnings are significantly dependent upon its net interest income, which is the difference between the interest income that is earned on interest-earning assets, such as investment securities and loans, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates, including changes resulting from changes in the Federal Reserve’s fiscal and monetary policies, affects it more than non-financial institutions and can have a significant effect on net interest income and total income. The Corporation’s assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of the assets and liabilities. The Federal Reserve recently lowered market interest rates after previously raising such rates. Such rate moves may be difficult for us to predict or manage. As a result, an increase or decrease in market interest rates could have material adverse effects on net interest margin and results of operations.
If the allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
Our success depends to a significant extent upon the quality of our assets, particularly loans. In originating loans, there is a substantial likelihood that credit losses will be experienced. The risk of loss will vary with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the quality of the collateral for the loan.
Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. As a result, we may experience significant loan losses, which could have a material adverse effect on operating results. Management makes various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. An allowance for loan losses is maintained in an attempt to cover any loan losses that may occur. In determining the size of the allowance, management relies on an analysis of the loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information. The determination of the size of the allowance could be understated due to deviations in one or more of these factors.
If our assumptions are wrong, the current allowance may not be sufficient to cover future loan losses, and adjustments may be necessary to allow for different economic conditions or adverse developments in the Corporation’s loan portfolio. Material additions to the allowance would materially decrease net income.
In addition, federal and state regulators periodically review the allowance for loan losses and may require the Corporation to increase its provision for loan losses or recognize further loan charge-offs, based on judgments different than those of management. Any increase in the allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a negative effect on our operating results.
The outbreak of the COVID-19 pandemic, including the severity, magnitude, duration and businesses’ and governments’ responses thereto, may have a negative impact on the Corporation’s operations and personnel, as well as on activity and demand across the customers it serves.
The Corporation had experienced no material adverse systemic issues or material deterioration in its loan portfolio prior to the COVID-19 pandemic. At the onset of COVID-19, the Corporation began to actively work to identify potential heightened industry and consumer exposure within the portfolio based on its footprint. The Corporation does expect that COVID-19 will unavoidably impact many of its customer’s businesses and will be prepared to assist these customers with appropriate relief using the regulatory guidance provided, particularly for industries experiencing negative environmental factors and risk trends. The Corporation will continue to refine these measures and continually assess its financial reporting and loan loss reserves as the Corporation and its customers work through the pandemic crisis in the upcoming quarters.
If the Corporation is unable to increase its share of deposits in the markets that its bank operates within, it may accept out-of-market and brokered deposits, the costs of which may be higher than expected.
Our management can offer no assurance that it will be able to maintain or increase the Corporation’s market share of deposits in its highly competitive service areas. If unable to do so, it may be forced to accept increased amounts of out-of-market or brokered deposits. As of December 31, 2020, the Corporation had approximately $45.171 million in out of
market brokered deposits, which represented approximately 3.59% of total deposits. Most times, the cost of out-of-market and brokered deposits exceeds the cost of deposits in the local market. In addition, the cost of out-of-market and brokered deposits can be volatile, and if we are unable to access these markets, or if its costs related to out of market and brokered deposits increase, our liquidity and ability to support demand for loans could be adversely affected.
Volatility and disruptions in global capital and credit markets may adversely impact our business, financial condition and results of operations.
Even though the Corporation operates in a distinct geographic region in the U.S., it is impacted by global capital and credit markets, which are sometimes subject to periods of extreme volatility and disruption. Disruptions, uncertainty or volatility in the capital and credit markets may limit our ability to access capital and manage liquidity, which may adversely affect the Corporation’s business, financial condition and results of operations. Further, our customers may be adversely impacted by such conditions, which could have a negative impact on our business, financial condition and results of operations.
We may make or be required to make further increases in our provision for loan losses and to charge off additional loans in the future, which could adversely affect our results of operations.
As a result of changes in balances and composition of our loan portfolio, changes in economic and market conditions that occur from time to time and other factors specific to a borrower’s circumstances, the level of non-performing assets will fluctuate. Increased non-performing assets, credit losses or the provision for loan losses would materially adversely affect our financial condition and results of operations.
Our adjustable-rate loans may expose us to increased default risks.
While adjustable-rate loans better offset the adverse effects of an increase in interest rates as compared to fixed-rate loans, the increased payments required of adjustable-rate loan borrowers upon an interest rate adjustment in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property may also be adversely affected in a rising interest rate environment. In addition, although adjustable-rate loans help make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.
Changing interest rates may decrease the Corporation’s earnings and asset values.
Management is unable to accurately predict future market interest rates, which are affected by many factors, including, but not limited to, inflation, recession, changes in employment levels, changes in the money supply and domestic and international disorder and instability in domestic and foreign financial markets. Changes in the interest rate environment may reduce the Corporation’s profits. Net interest income is a significant component of its net income and consists of the difference, or spread, between interest income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. Although certain interest-earning assets and interest-bearing liabilities may have similar maturities or periods in which they reprice, they may react in different degrees to changes in market interest rates. In addition, residential mortgage loan origination volumes are affected by market interest rates on loans; rising interest rates generally are associated with a lower volume of loan originations, while falling interest rates are usually associated with higher loan originations. The Corporation’s ability to generate gains on sales of mortgage loans is significantly dependent on the level of originations. Cash flows are affected by changes in market interest rates. Generally, in rising interest rate environments, loan prepayment rates are likely to decline, and in falling interest rate environments, such as experienced in the past period, loan prepayment rates are likely to increase. A majority of our commercial, commercial real estate and multi-family residential real estate loans are adjustable rate loans and an increase in the general level of interest rates may adversely affect the ability of some borrowers to pay the interest on and principal of their obligations, especially borrowers with loans that have adjustable rates of interest. Changes in interest rates, prepayment speeds and other factors may also cause the value of loans held for sale to change. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, loan volume, asset quality, value of loans held for sale and cash flows, as well as the market value of our securities portfolio and overall profitability.
Mackinac faces strong competition from other financial institutions, financial services companies and other organizations offering services similar to those offered by it, which could result in Mackinac not being able to sustain or grow its loan and deposit businesses.
Mackinac conducts its business operations primarily in the State of Michigan and Northeastern Wisconsin. Increased competition within these markets may result in reduced loan originations and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer the types of loans and banking services that the Corporation offers. These competitors include other savings associations, community banks, regional banks and money center banks. We also face competition from many other types of financial institutions, including finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. Our competitors with greater resources may have a marketplace advantage enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns.
Additionally, financial intermediaries not subject to bank regulatory restrictions and banks and other financial institutions with larger capitalization have larger lending limits and are thereby able to serve the credit needs of larger clients. These institutions, particularly to the extent they are more diversified than the Corporation is, may be able to offer the same loan products and services that we offer at more competitive rates and prices. If we are unable to attract and retain banking clients, we may be unable to sustain current loan and deposit levels or increase our loan and deposit levels, and our business, financial condition and future prospects may be negatively affected.
Our business could be adversely affected due to risks related to our recent acquisitions and the subsequent integration of the acquired businesses.
In recent years, we have closed several acquisitions of varying significance, and expect to consider future acquisitions from time to time. We cannot be certain that we will be able to identify, consummate and successfully integrate acquisitions, and no assurance can be given with respect to the timing, likelihood or business effect of any possible transaction. Transactions that we consummate would involve risks and uncertainties to us, including mispricing the inherent value of the acquired entity, as well as potential difficulties integrating people, systems and customers and realizing synergies.
The risks associated with our recent acquisitions any future acquisitions include, but are not limited to:
● We may experience inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees;
● We could be subject to liabilities that could be material or become subject to litigation or regulatory risks as a result of the acquisition;
● Management’s attention may be diverted from other business initiatives; and
● Unanticipated restructuring and other integration costs may be incurred.
Any future acquisitions could involve these and additional risks. Our ability to pursue additional strategic transactions may also be limited by any significant decrease in our stock price, which would adversely affect the attractiveness of our currency to potential targets, or by our ability to raise additional equity or debt capital to fund future acquisitions. Any of these risks, whether with respect to the recent or any future acquisitions, could have a material adverse effect on our business and results of operations.
We may be required to transition from the use of the LIBOR interest rate index in the future.
A portion of the loans in our portfolio are indexed to LIBOR to calculate the loan interest rate. The continued availability of the LIBOR index is not guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR. The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers may incur significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with customers over the
appropriateness or comparability to LIBOR of the substitute index or indices, each of which could have an adverse effect on our results of operations. The corporation has minimal exposure to LIBOR.
Our ability to use net operating loss carryovers to reduce future tax payments may be limited or restricted.
As of December 31, 2020, the Corporation had net operating loss (“NOL”) carryforwards of approximately $8.0 million. The Corporation is generally able to carry NOLs forward to reduce taxable income in future years. However, its ability to utilize its NOL carryforwards is subject to the rules of Section 382 of the Code. Section 382 of the Code generally restricts the use of NOL carryforwards after an “ownership change.” An ownership change occurs if, among other things, the shareholders (or specified groups of shareholders) who own or have owned, directly or indirectly, 5% or more of a corporation’s common shares, or are otherwise treated as 5% shareholders under Section 382 of the Code and the Treasury regulations promulgated thereunder, increase their aggregate percentage ownership of that corporation’s shares by more than fifty (50) percentage points over the lowest percentage of the shares owned by these shareholders over a three (3)-year rolling period. In the event of an ownership change, Section 382 of the Code imposes an annual limitation on the amount of taxable income a corporation may offset with its pre-ownership change NOL carry forwards. This annual limitation is generally equal to the value of the corporation’s shares immediately before the ownership change multiplied by the long-term tax-exempt rate in effect for the month in which the ownership change occurs. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOL carryforwards.
Management cannot ensure that the Corporation’s ability to use its NOL carryforwards to offset taxable income or its tax credit carryforwards to offset tax will not become limited in the future. As a result, the Corporation could pay taxes earlier and in larger amounts than would be the case if its NOL and tax credit carryforwards were available to reduce its federal income taxes without restriction.
We may not be able to utilize technology to efficiently and effectively develop, market, and deliver new products and services to our customers.
The financial services industry experiences rapid technological change with regular introductions of new technology-driven products and services. The efficient and effective utilization of technology enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to market and deliver products and services that will satisfy customer demands, meet regulatory requirements, and create additional efficiencies in its operations. We may not be able to effectively develop new technology-driven products and services or be successful in marketing or supporting these products and services to our customers, which could have a material adverse impact on our financial condition and results of operations.
Operational difficulties, failure of technology infrastructure or information security incidents could adversely affect our business and operations.
We are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, failure of our controls and procedures and unauthorized transactions by employees or operational errors, including clerical or recordkeeping errors or those resulting from computer or telecommunications systems malfunctions. Given the high volume of transactions we process, certain errors may be repeated or compounded before they are identified and resolved. In particular, our operations rely on the secure processing, storage and transmission of confidential and other information on our technology systems and networks. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems.
We also face the risk of operational disruption, failure or capacity constraints due to our dependency on third party vendors for components of our business infrastructure, including our core data processing systems which are largely outsourced. While we have selected these third party vendors carefully, we do not control their operations. As such, any failure on the part of these business partners to perform their various responsibilities could also adversely affect our business and operations.
We may also be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses, cyberattacks, spikes in transaction volume and/or customer activity, electrical or telecommunications outages, or natural disasters. Although we have has programs in
place related to business continuity, disaster recovery and information security to maintain the confidentiality, integrity, and availability of its systems, business applications and customer information, such disruptions may give rise to interruptions in service to customers and loss or liability to the Corporation.
The occurrence of any failure or interruption in our operations or information systems, or any security breach, could cause reputational damage, jeopardize the confidentiality of customer information, result in a loss of customer business, subject us to regulatory intervention or expose us to civil litigation and financial loss or liability, any of which could have a material adverse effect on our business and results of operations.
Changes in customer behavior may adversely impact our business, financial condition and results of operations.
We use a variety of methods to anticipate customer behavior as a part of its strategic planning and to meet certain regulatory requirements. Individual, economic, political, industry-specific conditions and other factors outside of our control, such as fuel prices, energy costs, real estate values or other factors that affect customer income levels, could alter predicted customer borrowing, repayment, investment and deposit practices. Such a change in these practices could materially adversely affect our ability to anticipate business needs and meet regulatory requirements.
Further, difficult economic conditions may negatively affect consumer confidence levels. A decrease in consumer confidence levels would likely aggravate the adverse effects of these difficult market conditions on the Corporation, its customers and others in the financial institutions industry.
Our ability to maintain and expand customer relationships may differ from expectations.
The financial services industry is very competitive. The Corporation not only vies for business opportunities with new customers, but also competes to maintain and expand the relationships it has with its existing customers. While we believe that we can continue to grow many of these relationships, we will continue to experience pressures to maintain these relationships as its competitors attempt to capture our customers. Failure to create new customer relationships and to maintain and expand existing customer relationships to the extent anticipated may adversely impact our earnings.
Risks Related to Regulation and Supervision
The Corporation is subject to extensive regulation that could limit or restrict its activities.
The Corporation operates in a highly regulated industry and is subject to examination, supervision and comprehensive regulation by various federal and state agencies. Compliance with these regulations is costly and restricts certain activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. The Corporation is also subject to capitalization guidelines established by its regulators, which require it to maintain adequate capital to support its growth.
In particular, Congress and other regulators have increased their focus on the regulation of the financial services industry in recent years. Future political trends and the effects on the Corporation of recent and potential legislation and regulatory actions cannot reliably be fully determined at this time. Moreover, as some of the legislation and regulatory actions previously implemented in response to the recent financial crisis expire, the impact of the conclusion of these programs on the financial sector and on the economic recovery is unknown. Any worsening of current financial market conditions could adversely affect the Corporation. The Corporation can neither predict when or whether future regulatory or legislative reforms will be enacted nor what their contents will be. The impact of any future legislation or regulatory actions on our businesses or operations cannot be determined at this time, and such impact may adversely affect the Corporation.
The laws and regulations applicable to the banking industry could change at any time, and management cannot predict the effects of these changes on our business and profitability. Additionally, we cannot predict the effect of any legislation that may be passed at the state or federal level in response to the recent deterioration of the subprime, mortgage, credit and liquidity markets. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance could adversely affect our ability to operate profitably.
We are subject to regulation regarding non-public information.
The Corporation’s business also is subject to laws, rules and regulations regarding the disclosure of non-public information about its customers to non-affiliated third parties. Internet operations are not currently subject to direct regulation by any government agency in the United States beyond regulations applicable to businesses generally. A number of legislative and regulatory proposals currently under consideration by federal, state and local governmental organizations may lead to laws or regulations concerning various aspects of our business on the Internet, including: user privacy, taxation, content, access charges, liability for third-party activities and jurisdiction. The adoption of new laws or a change in the application of existing laws may decrease the use of the Internet, increase costs or otherwise adversely affect our business.
Future changes in accounting standards could adversely affect our results of operations.
The Corporation’s financial condition and results of operations are reported in accordance with accounting principles generally accepted in the United States (“GAAP”). While not impacting economic results, future changes in accounting principles issued by the Financial Accounting Standards Board could impact the Corporation’s earnings as reported under GAAP. As a public company, the Corporation is also subject to the corporate governance standards set forth in the Sarbanes-Oxley Act of 2002, as well as applicable rules and regulations promulgated by the SEC. Complying with these standards, rules and regulations has and continues to impose administrative costs and burdens on the Corporation.
Risks Related to our Common Stock
The trading price of our common stock may be subject to significant fluctuations and volatility.
The market price of our common stock could be subject to significant fluctuations due to, among other things:
● variations in quarterly or annual results of operations;
● changes in dividends per share;
● deterioration in asset quality, including declining real estate values;
● changes in interest rates;
● significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving the Corporation or its competitors;
● regulatory actions, including changes to regulatory capital levels, the components of regulatory capital and how regulatory capital is calculated;
● new regulations that limit or significantly change our ability to continue to offer products or services;
● volatility of stock market prices and volumes;
● issuance of additional shares of common stock or other debt or equity securities;
● changes in market valuations of similar companies;
● changes in securities analysts’ estimates of financial performance or recommendations;
● perceptions in the marketplace regarding the financial services industry, the Corporation and/or its competitors; and/or
●the occurrence of any one or more of the risk factors described herein.
We may need to raise additional capital in the future, but that capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Management may at some point in the future need to raise additional capital to support its business as a result of losses or acquisition activity. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside the control of management, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed on terms acceptable to management. If additional capital cannot be raised when needed, our ability to further expand our operations through internal growth or acquisition activity and to operate our business could be materially impaired.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B.
Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2.
Properties
The Corporation’s headquarters are located at 130 South Cedar Street, Manistique, Michigan 49854. The headquarters location is owned by the Corporation and not subject to any mortgage.
All of the branch locations are designed for use and operation as a bank, are well maintained, and are suitable for current operations. Of the 28 branch locations, 24 are owned and 4 are leased. The Corporation has additional office space to house administrative operational support. Below is a comprehensive listing of our branch locations:
Alanson
6232 River Street
Alanson, MI
Owned
Alpena
100 S. Second Avenue
Alpena, MI
Owned
Alpena - Ripley
468 N. Ripley Blvd
Alpena, MI
Owned
Aurora
W563 County Road N
Aurora, WI
Owned
Birmingham
260 E. Brown Street, Suite 300
Birmingham, MI
Leased
Cheboygan
350 Main Street
Cheboygan, MI
Owned
Eagle River
400 E. Wall Street
Eagle River, WI
Owned
Escanaba
2224 N. Lincoln Road
Escanaba, MI
Owned
Florence
845 Central Ave
Florence, WI
Owned
Gaylord
1955 S. Otsego Avenue
Gaylord, MI
Owned
Ishpeming - Downtown
100 S. Main Street
Ishpeming, MI
Owned
Ishpeming - West
US West & 170 N. Daisy Street
Ishpeming, MI
Owned
Kaleva
14429 Wuoksi Avenue
Kaleva, MI
Owned
Lewiston
2885 S. County Road 489
Lewiston, MI
Owned
Manistique
130 South Cedar Street
Manistique, MI
Owned
Marquette
857 W. Washington Street
Marquette, MI
Leased
Marquette - McClellan
175 S. McClellan Avenue
Marquette, MI
Owned
Merrill
1400 East Main Street
Merrill, WI
Owned
Mio
308 N. Morenci Street
Mio, MI
Owned
Negaunee
440 US 41 East
Negaunee, MI
Leased
Newberry
414 Newberry Avenue
Newberry, MI
Owned
Niagara
900 Roosevelt Road
Niagara, WI
Owned
Sault Ste. Marie
138 Ridge Street
Sault Ste. Marie, MI
Owned
Stephenson
S216 Menominee Street
Stephenson, MI
Owned
St. Germain
240 HWY 70 East
St. Germain, WI
Owned
Three Lakes
1811 Superior Street
Three Lakes, WI
Owned
Traverse City- Cass St
309 Cass Street
Traverse City, MI
Leased
Traverse City
3530 North Country Drive
Traverse City, MI
Owned

---

ITEM 3. LEGAL PROCEEDINGS
Item 3.
Legal Proceedings
There are no pending material legal proceedings to which the Corporation is a party or to which any of its property was subject, except for proceedings which arise in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material effect on the consolidated financial position or results of operations of the Corporation.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4.
Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
MARKET INFORMATION
(Unaudited)
The Corporation’s common stock is traded on the NASDAQ Capital Market under the symbol MFNC. The following table sets forth the range of high and low trading prices of the Corporation’s common stock from January 1, 2019 through December 31, 2020, as reported by NASDAQ.
For the Quarter Ended
March 31
June 30
September 30
December 31
High
$
17.32
$
11.14
$
10.39
$
13.20
Low
7.37
8.49
8.61
9.46
Close
10.45
10.37
9.65
12.99
Dividends declared per share
0.14
0.14
0.14
0.14
Book value
15.20
15.58
15.78
15.99
High
$
16.01
$
16.34
$
16.25
$
17.75
Low
13.18
14.58
12.97
15.03
Close
15.74
15.80
15.46
17.23
Dividends declared per share
0.12
0.12
0.14
0.14
Book value
14.41
14.70
14.91
15.06
The Corporation had approximately 1600 shareholders of record as of March 10, 2021. A substantially greater number of holders are beneficial owners whose shares are held of record by banks, brokers and other nominees.
Dividends
The holders of the Corporation’s common stock are entitled to dividends when, and if declared by the Board of Directors of the Corporation, out of funds legally available for that purpose. In determining dividends, the Board of Directors considers the earnings, capital requirements and financial condition of the Corporation and its subsidiary bank, along with other relevant factors. The Corporation’s principal source of funds for cash dividends is the dividends paid by the Bank. The ability of the Corporation and the Bank to pay dividends is subject to regulatory restrictions and requirements. In 2020, the Bank paid dividends to the Corporation totaling $11.5 million.
Issuer Purchases of Equity Securities
The Corporation currently has one active share repurchase program and one repurchase plan that was fully utilized in the first quarter of 2020. All share repurchase programs are conducted under authorizations by the Board of Directors. The shares repurchased to date are covered by Board authorizations made and publically announced for $600,000 on February 27, 2013, an additional $600,000 on December 17, 2013, and an additional $750,000 on April 28, 2015. None of these authorizations has an expiration date. Under the now expired plan, the Corporation purchased 1,661 shares for $.025 million in 2020, 14,000 shares for $.150 million in 2016, 102,455 shares for $1.122 million in 2015, 13,700 shares of its common stock for $.143 million in 2014, and $.509 million in 2013.
On August 28, 2019, the Corporation, under the authorization of the Board of Directors announced a new common stock repurchase program. Under the Repurchase Program, the Company is authorized to repurchase up to approximately 5% of the Company’s outstanding common stock, and has no expiration date. During 2020, the Corporation repurchased 282,118 shares under this plan.
The following table provides certain information with respect to the repurchase of shares of the Company’s common stock as of the settlement date, year ended December 31, 2020
Total number of
shares purchased
Maximum
as part of a
number of
publically
shares that
Total number of
Average price
announced
may yet be
Period of purchases
shares purchased
paid per share
plan or program
purchased
January 1, 2020 to January 31, 2020
-
$
-
-
537,036
February 1, 2020 to February 29, 2020
3,626
$
14.89
3,626
533,410
March 1, 2020 to March 31, 2020
237,018
$
11.28
237,018
296,392
April 1, 2020 to April 30, 2020
-
$
-
-
296,392
May 1, 2020 to May 31, 2020
-
$
-
-
296,392
June 1, 2020 to June 30, 2020
-
$
-
-
296,392
July 1, 2020 to July 31, 2020
-
$
-
-
296,392
August 1, 2020 to August 31, 2020
-
$
-
-
296,392
September 1, 2020 to September 30, 2020
-
$
-
-
296,392
October 1, 2020 to October 31, 2020
-
$
-
-
296,392
November 1, 2020 to November 30, 2020
-
$
-
-
296,392
December 1, 2020 to December 31, 2020
43,135
$
12.76
43,135
291,971
Total year eneded 2020
283,779
$
11.55
283,779
For information regarding securities authorized for issuance under equity compensation plans, see Item 12 of this Form 10-K.
Performance Graph
Shown below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the Corporation’s common stock with that of the cumulative total return on the NASDAQ Bank Index and the NASDAQ Composite Index for the five-year period ended December 31, 2020. The following information is based on an investment of $100, on December 31, 2015 in the Corporation’s common stock, the NASDAQ Bank Index, and the NASDAQ Composite Index, with dividends reinvested.
This graph and other information contained in this section shall not be deemed to be “soliciting” material or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6.
Selected Financial Data
SELECTED FINANCIAL DATA
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
Year Ended December 31,
SELECTED FINANCIAL CONDITION DATA:
Total assets
$
1,501,730
$
1,320,069
$
1,318,040
$
985,367
$
983,520
Loans
1,077,592
1,058,776
1,038,864
811,078
781,857
Securities
111,836
107,972
116,748
75,897
86,273
Deposits
1,258,776
1,075,677
1,097,537
817,998
823,512
Borrowings
63,479
70,776
60,441
79,552
67,579
Common shareholders’ equity
167,864
161,919
152,069
81,400
78,609
Total shareholders’ equity
167,864
161,919
152,069
81,400
78,609
SELECTED OPERATIONS DATA:
Interest income
$
62,029
$
64,384
$
55,377
$
44,376
$
37,983
Interest expense
7,223
10,477
8,247
6,438
4,885
Net interest income
54,806
53,907
47,130
37,938
33,098
Provision for loan losses
1,000
Net security gains
-
Other income
10,197
5,745
4,263
3,810
4,003
Other expenses
46,949
41,765
40,300
30,336
29,885
Income before income taxes
17,056
17,710
10,593
11,018
6,766
Provision for income taxes
3,583
3,860
2,226
5,539
2,283
Net income
13,473
13,850
8,367
5,479
4,483
Net income available to common shareholders
$
13,473
$
13,850
$
8,367
$
5,479
$
4,483
PER SHARE DATA:
Earnings - Basic
$
1.27
$
1.29
$
0.94
$
0.87
$
0.72
Earnings - Diluted
1.27
1.29
0.94
0.87
0.72
Cash dividends declared
0.56
0.52
0.48
0.48
0.40
Book value
15.99
15.06
14.20
12.93
12.55
Tangible book value
13.71
12.77
11.61
11.72
11.29
Market value - closing price at year end
12.99
17.56
13.65
15.90
13.47
FINANCIAL RATIOS:
Return on average common equity
8.19%
8.78%
6.94%
6.74%
5.73%
Return on average total equity
8.19
8.78
6.94
6.74
5.73
Return on average assets
0.92
1.04
0.71
0.55
0.52
Dividend payout ratio
44.09
40.31
51.06
55.17
55.56
Average equity to average assets
11.23
11.84
10.23
8.17
9.05
Net interest margin
4.37
4.57
4.44
4.20
4.19
ASSET QUALITY RATIOS:
Nonperforming loans to total loans
.51%
.49%
.49%
.32%
.53%
Nonperforming assets to total assets
0.48
0.56
0.62
0.62
0.91
Allowance for loan losses to total loans
0.54
0.51
0.50
0.64
0.64
Allowance for loan losses to nonperforming loans
106.56
102.41
102.09
197.78
121.73
Net charge-offs to average loans
0.04
0.02
0.04
0.07
0.08
Texas ratio
4.82
4.41
6.33
7.77
11.76

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of these safe harbor provisions. Forward-looking statements which are based on certain assumptions and describe future plans, strategies, or expectations of the Corporation, are generally identifiable by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, or similar expressions. The Corporation’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could cause actual results to differ from the results in forward-looking statements include, but are not limited to:
● changes in business, economic or political conditions;
● changes in interest rates or interest rate volatility;
● the effects global pandemics and local and national governmental responses thereto;
● our ability to manage our balance sheet size and capital levels;
● disruptions or failures of our information technology systems or those of our third party service providers;
● cyber security threats, system disruptions and other potential security breaches or incidents;
● customer demand for financial products and services;
● our ability to continue to compete effectively and respond to aggressive competition within our industry;
● our ability to participate in consolidation opportunities in our industry, to complete consolidation transactions and to realize synergies or implement integration plans;
● our ability to manage our significant risk exposures effectively;
● our ability to manage credit risk with customers and counterparties;
● changes in government regulation, including interpretations, or actions by our regulators, including those that may result from the implementation and enforcement of regulatory reform legislation;
● adverse developments in any investigations, disciplinary actions or litigation; and
● other factors detailed from time to time in our filings with the SEC.
Overview
The following discussion and analysis presents the more significant factors affecting the Corporation’s financial condition as of December 31, 2020 and 2019 and the results of operations for 2019 and 2020. This discussion also covers asset quality, liquidity, interest rate sensitivity, and capital resources for the years 2019 and 2020. The information included in this discussion is intended to assist readers in their analysis of, and should be read in conjunction with, the consolidated financial statements and related notes and other supplemental information presented elsewhere in this report. Throughout this discussion, the term “Bank” refers to mBank, the principal banking subsidiary of the Corporation.
Dollar amounts in tables are stated in thousands, except for per share data.
EXECUTIVE SUMMARY
The purpose of this section is to provide a brief summary of the 2020 results of operations and financial condition. A more detailed analysis of the results of operations and financial condition follows this summary.
The Corporation reported net income of $13.473 million, or $1.27 per share, for the year ended December 31, 2020, compared to $13.850 million, or $1.29 per share, in 2019. Net income was positively impacted by the recognition of $4.030 million as a result of participation in the Payment Protection Program (“PPP”)
Total assets of the Corporation at December 31, 2020, were $1.502 billion, an increase of $181.661 million, or 13.76%, from total assets of $1.320 billion reported at December 31, 2019.
At December 31, 2020, the Corporation’s total loans stood at $1.078 billion, an increase of $18.816 million, or 1.78%, from 2019 year-end balances of $1.059 billion. Total loan production in 2020 exluding PPP loans amounted to $393.059 million, which included $208.398 million of secondary market mortgage loans sold. When including the PPP loans, total production was $545.565 million, which includes $152.506 million of PPP loans. The Corporation also sold $14.057 million of SBA/USDA guaranteed loans. Loan balances were also impacted by normal amortization and paydowns, some of which related to payoffs on participation loans.
As of December 31, 2020, the Corporation had experienced no material adverse systemic issues or material deterioration in its loan portfolio prior to the COVID-19 pandemic. At the onset of COVID-19, the Corporation began to actively work to identify potential heightened industry and consumer exposure within the portfolio based on its footprint. The Corporation does expect that COVID-19 will inavoidably impact many of its customer’s businesses and will be prepared to assist these customers with appropriate relief using the regulatory guidance provided, particularly for the industries experiencing negative environmental factors and risk trends. The Corporation will continue to refine these measures and continually assess its financial reporting and loan loss reserves as the Corporation and its customers work through the pandemic crisis in the upcoming quarters. COVID-19 loan modifications resided at a nominal $2.4 million, or .25% of total loans with no commervial loans remaining in total payment deferral at December 31, 2020. This is compared to peak levels of $201 million in the second quarter of 2020.
Nonperforming loans totaled $5.458 million, or .51%, of total loans at December 31, 2020 compared to $5.183 million, or .49% of total loans at December 31, 2019. Nonperforming assets at December 31, 2020, were $7.210 million, .48% of total assets, compared to $7.377 million, or .56% of total assets, at December 31, 2019.
Total deposits increased from $1.076 billion at December 31, 2019 to $1.259 billion at December 31, 2020, an increase of 17.02%. The increase in deposits in 2020 was comprised of a decrease in noncore deposits of $11.002 million and an increase in core deposits of $194.101 million.
Shareholders’ equity totaled $167.864 million at December 31, 2020, compared to $161.919 million at the end of 2019, an increase of $5.945 million. This change reflects the net income available to common shareholders of $13.473 million, other comprehensive income of $.767 million, an increase related to stock compensation expense of $.878 million, dividends declared on common stock of $5.895 million, and a decrease due to share repurchases of $3.278 million. The book value per common share at December 31, 2020, amounted to $15.99 compared to $15.06 at the end of 2019.
For a description of our significant accounting policies, see Note 1 to the financial statements included herein.
RESULTS OF OPERATIONS
(dollars in thousands, except per share data)
Taxable-equivalent net interest income
$
55,185
$
54,179
Taxable-equivalent adjustment
(379)
(272)
Net interest income, per income statement
54,806
53,907
Provision for loan losses
1,000
Other income
10,199
5,953
Other expense
46,949
41,765
Income before provision for income taxes
17,056
17,710
Provision for income taxes
3,583
3,860
Net income
$
13,473
$
13,850
Earnings per common share
Basic
$
1.27
$
1.29
Diluted
$
1.27
$
1.29
Return on average assets
.92%
1.04%
Return on average equity
8.19
8.78
Summary
The Corporation reported net income available to common shareholders of $13.473 million in 2020, compared to $13.850 million in 2019.
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 funding sources. Net interest revenue is the Corporation’s principal source of revenue, representing 84.31% of total revenue in 2020. The Corporation’s net interest income is impacted by economic and competitive factors that influence rates, loan demand, and the availability of funding.
Net interest income on a taxable equivalent basis increased $1.006 million from $54.179 million in 2019 to $55.185 million in 2020. In 2020, there was one 100 basis point rate decrease and one 50 basis point rate decrease to the federal funds rate. There were three 25 basis point rate increases to the federal funds rate in 2019. The Corporation experienced a decrease of 51 basis points in the overall rates on earning assets from 5.49% in 2019 to 4.98% in 2020. Interest bearing funding sources decreased by 38 basis points, from 1.17% in 2019 to 0.79% in 2020. The combination of these effective rate changes resulted in a decrease in the taxable equivalent net interest margin from 4.60% in 2019 to 4.40% in 2020.
The following table details sources of net interest income for the two years ended December 31 (dollars in thousands):
Mix
Mix
Interest Income
Loans, taxable
$
58,412
94.17%
$
59,673
92.68%
Loans, tax-exempt
0.32
0.29
Taxable securities
2,255
3.64
2,708
4.21
Nontaxable securities
0.86
0.53
Other interest-earning assets
1.01
1,473
2.29
Total earning assets
62,029
100.00%
64,384
100.00%
Interest Expense
NOW, money markets, checking
10.81
1,473
14.06%
Savings
6.88
5.72
Certificates of deposit
3,669
50.80
4,869
46.47
Brokered deposits
1,105
15.30
2,495
23.81
Borrowings
1,171
16.21
1,041
9.94
Total interest-bearing funds
7,223
100.00%
10,477
100.00%
Net interest income
$
54,806
$
53,907
Average Rates
Earning assets
4.95%
5.46%
Interest-bearing funds
0.79
1.17
Interest rate spread
4.16
4.29
For purposes of this presentation, non-taxable interest income has not been restated on a tax-equivalent basis.
As shown in the table above, income on loans provides more than 94% of the Corporation’s interest revenue. The Corporation’s loan portfolio has approximately $386.198 million of variable rate loans that predominantly reprice with changes in the prime rate and $691.394 million of fixed rate loans. A portion of the variable rate loans, 22%, or $86.255 million, have interest rate floors.
The majority of interest bearing liabilities do not reprice automatically with changes in interest rates, which provides flexibility to manage interest income. Management monitors the interest rate sensitivity of earning assets and interest bearing liabilities to minimize the risk of movements in interest rates.
The following table presents the amount of taxable equivalent 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.
Taxable equivalent adjustments are the result of increasing income from tax-free loans and investments by an amount equal to the taxes that would be paid if the income were fully taxable based on a 21% federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.
Year Ended December 31,
Average
Average
Average
Average
(dollars in thousands)
Balance
Interest
Rate
Balance
Interest
Rate
ASSETS:
Loans (1,2,3)
$
1,117,132
$
58,850
5.27%
$
1,047,439
$
60,055
5.73%
Taxable securities
86,767
2,255
2.60
94,768
2,709
2.86
Nontaxable securities (2)
21,503
3.15
14,988
2.80
Other interest-earning assets
28,909
2.17
21,544
1,473
6.84
Total earning assets
1,254,311
62,408
4.98
1,178,739
64,656
5.49
Reserve for loan losses
(5,436)
(5,254)
Cash and due from banks
126,731
72,711
Fixed assets
25,233
23,364
Other real estate owned
2,067
2,448
Other assets
61,768
60,874
210,363
154,143
TOTAL AVERAGE ASSETS
$
1,464,674
$
1,332,882
LIABILITIES AND SHAREHOLDERS’ EQUITY:
NOW and Money Markets
$
298,508
$
0.25%
$
256,974
$
1,315
0.51%
Interest checking
99,788
0.04
106,978
0.15
Savings deposits
121,485
0.41
110,559
0.54
Certificates of deposit
236,606
3,669
1.55
259,381
4,869
1.88
Brokered deposits
77,861
1,105
1.42
102,317
2,494
2.44
Borrowings
85,651
1,171
1.37
58,300
1,041
1.79
Total interest-bearing liabilities
919,899
7,223
0.79
894,509
10,477
1.17
Demand deposits
369,056
266,007
Other liabilities
11,214
14,535
Shareholders’ equity
164,505
157,831
544,775
438,373
TOTAL AVERAGE LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,464,674
$
1,332,882
Rate spread
4.19
4.32
Net interest margin/revenue, tax equivalent basis
$
55,185
4.40%
$
54,179
4.60%
(1) For purposes of these computations, non-accruing loans are included in the daily average loan amounts outstanding.
(2) The amount of interest income on nontaxable securities and loans has been adjusted to a tax equivalent basis, using a 21% tax rate for 2020 and 2019.
(3) Interest income on loans includes loan fees.
The following table presents the dollar amount, in thousands, of changes in taxable equivalent interest income and interest expense for major components of interest-earning assets and interest-bearing obligations. It distinguishes between changes related to higher or lower outstanding balances and changes due to the levels and fluctuations in interest rates. For each category of interest-earning assets and interest-bearing obligations, information is provided for changes attributable to (i) changes in volume (i.e. changes in volume multiplied by prior period rate) and (ii) changes in rate (i.e. changes in rate multiplied by prior period volume). For purposes of this table, changes attributable to both rate and volume are shown as a separate variance.
Year ended December 31,
2020 vs. 2019
Increase (Decrease)
Due to
Total
Volume
Increase
Volume
Rate
and Rate
(Decrease)
Interest earning assets:
Loans
$
3,996
$
(4,877)
$
(324)
$
(1,205)
Taxable securities
(229)
(246)
(454)
Nontaxable securities
Other interest earning assets
(130)
(631)
(86)
(847)
Total interest earning assets
$
3,819
$
(5,701)
$
(366)
$
(2,248)
Interest bearing obligations:
NOW and money market deposits
$
$
(676)
$
(110)
$
(573)
Interest checking
(11)
(117)
(120)
Savings deposits
(147)
(14)
(102)
Certificates of deposit
(427)
(847)
(1,200)
Brokered deposits
(596)
(1,042)
(1,389)
Borrowings
(244)
(114)
Total interest bearing obligations
$
(274)
$
(3,073)
$
$
(3,254)
Net interest income, tax equivalent basis
$
1,006
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 2020, the Corporation recorded a provision for loan loss of $1.00 million, compared to a provision of $.385 million in 2019. There was no provision for loan losses for acquired loans as there was no further deterioration of acquired loans since acquisition.
Noninterest Income
Noninterest income was $10.199 million and $5.953 million in 2020 and 2019, respectively. The principal recurring sources of noninterest income are the gains and fees on the sale of SBA/USDA guaranteed loans and secondary market mortgage loans. In 2020, revenues from these two business lines totaled $7.664 million compared to $2.797 million in 2019.
Deposit related income totaled $1.133 million in 2020 compared to $1.586 million in 2019. 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.
The following table details noninterest income for the two years ended December 31 (dollars in thousands):
2020-2019%
Deposit service charges
$
$
1.28%
NSF Fees
1,038
(44.32)
Gain on sale of secondary market loans
5,205
1,544
237.11
Secondary market fees generated
111.59
SBA Fees
1,729
90.42
Mortgage servicing rights (amortization) income
20.92
Other
(15.99)
Subtotal
10,197
5,745
77.49
Net security gains
-
Total noninterest income
$
10,199
$
5,953
71.33%
Noninterest Expense
Noninterest expense was $46.949 million in 2020 compared to $41.765 million in 2019. Salaries and benefits, at $26.081 million, increased by $3.338 million, or 14.68%, from the 2019 expenses of $22.743 million. The increased salaries and benefits expense was a result of customary annual increases to legacy employees and COVID related expenses.
Management will continue to review all areas of noninterest expense in order to evaluate where opportunities may exist which could reduce expenses without compromising service to customers.
The following table details noninterest expense for the two years ended December 31 (dollars in thousands):
% Increase
(Decrease)
2020-2019
Salaries and benefits
$
26,081
$
22,743
14.68%
Occupancy
4,370
4,069
7.40
Furniture and equipment
3,347
3,000
11.57
Data processing
3,093
2,717
13.84
Professional service fees:
Accounting
(16.30)
Legal
10.36
Consulting and other
(13.69)
Total professional service fees
1,842
2,100
(12.29)
Loan origination expenses and deposit and card related fees
1,965
1,546
27.10
Writedowns and (gains) losses on OREO held for sale
(22)
(110.38)
FDIC insurance assessment
725.71
Communications
5.65
Advertising
2.59
Other operating expenses
3,848
3,534
8.89
Total noninterest expense
$
46,949
$
41,765
12.41%
Federal Income Taxes
Current Federal Tax Provision
The Corporation recognized a federal income tax expense of approximately $3.583 million for the year ended December 31, 2020 and $3.860 million for the year ended December 31, 2019. The 2019 tax expense included the effect of a $.140 million one-time non-cash amortization related to an acquired tax credit.
The Corporation has reported deferred tax assets of $3.303 million at December 31, 2020. 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. The Corporation, as of December 31, 2020, had a net operating loss carryforwards for tax purposes of
approximately $8.0 million. 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 and credit carryforwards are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue Code. The annual limitation is $2.0 million for the NOL and the equivalent value of tax credits, which is approximately $.420 million. These limitations for use were established in conjunction with the recapitalization of the Corporation in December 2004. The Corporation will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted.
The table below details the major components of the Corporation’s net deferred tax assets (dollars in thousands):
Deferred tax assets:
NOL carryforward
$
1,671
$
2,147
Allowance for loan losses
1,277
1,144
OREO
Deferred compensation
Pension liability
Stock compensation
Purchase accounting adjustments
1,507
Lease liability
Other
Total deferred tax assets
6,146
6,872
Deferred tax liabilities:
Core deposit premium
(959)
(1,108)
FHLB stock dividend
(73)
(73)
Right of use asset
(928)
(980)
Unrealized gain on securities
(522)
(273)
Other
(361)
(706)
Total deferred tax liabilities
(2,843)
(3,140)
Net deferred tax asset
$
3,303
$
3,732
FINANCIAL POSITION
The table below illustrates the relative composition of various liability funding sources and asset make-up.
December 31,
(dollars in thousands)
Balance
Mix
Balance
Mix
Sources of funds:
Deposits:
Non-interest bearing transactional deposits
$
414,804
27.62%
$
287,611
21.79%
Interest-bearing transactional deposits
581,311
38.71
482,713
36.57
CD’s <$250,000
202,266
13.47
233,956
17.72
Total core deposit funding
1,198,381
79.80
1,004,280
76.08
CD’s >$250,000
15,224
1.01
12,775
0.97
Brokered deposits
45,171
3.01
58,622
4.44
Total noncore deposit funding
60,395
4.02
71,397
5.41
FHLB and other borrowings
63,479
4.23
70,776
5.36
Other liabilities
11,611
0.77
11,697
0.89
Shareholders’ equity
167,864
11.18
161,919
12.26
Total
$
1,501,730
100.00%
$
1,320,069
100.00%
Uses of Funds:
Net Loans
$
1,071,776
71.37%
$
1,053,468
79.82%
Securities available for sale
111,836
7.45
107,972
8.18
Federal funds sold
0.01
-
Federal Home Loan Bank Stock
4,924
0.33
4,924
0.37
Interest-bearing deposits
2,917
0.19
10,295
0.78
Cash and due from banks
218,901
14.58
49,794
3.77
Other assets
91,300
6.07
93,584
7.08
Total
$
1,501,730
100.00%
$
1,320,069
100.00%
Securities
The securities portfolio is an important component of the Corporation’s asset composition to provide diversity in its asset base and provide liquidity. Securities increased $3.864 million in 2020, from $107.972 million at December 31, 2019 to $111.836 million at December 31, 2020.
The carrying value of the Corporation’s securities at December 31 (dollars in thousands) is as follows:
US Agencies
$
6,589
$
14,496
US Agencies - MBS
34,280
34,526
Corporate
28,043
20,938
Obligations of states and political subdivisions
42,924
38,012
Total securities
$
111,836
$
107,972
The Corporation’s policy is to purchase securities of high credit quality, consistent with its asset/liability management strategies. The Corporation classifies all securities as available for sale, in order to maintain adequate liquidity and to maximize its ability to react to changing market conditions. At December 31, 2020, investment securities with an estimated fair market value of $26.190 million were pledged as collateral for FHLB borrowings and certain customer relationships.
Loans
The Bank is a full service lender and offers a variety of loan products in all of its markets. The majority of its loans are commercial, which represents approximately 76% of total loans outstanding at December 31, 2020.
The Corporation continued to experience strong loan demand in 2020, total loan production excluding PPP loans was $393.059 million of new organic loan production, which included $208.398 million of mortgage loans sold in the secondary market. When including the PPP loans, total production was $545.565 million, which includes $152.506 million of PPP loans. At 2020 year-end, the Corporation’s loans stood at $1.078 billion, an increase from the 2019 year-end balances of $1.059 billion. The production of loans, exclusive of PPP loans, was distributed among our regions, with the Upper Peninsula at $171.251 million, $143.559 million in the Northern Lower Peninsula, $21.839 million in Southeast Michigan and $56.410 million in Wisconsin.
Management believes a properly positioned loan portfolio provides the most attractive earning asset yield available to the Corporation and, with the current 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. The Corporation is highly competitive in structuring loans to meet borrowing needs and satisfy strong underwriting requirements.
The following table details the loan activity for 2020 and 2019 (dollars in thousands):
Loan balances as of December 31, 2018
$
1,038,864
Total production
385,548
Secondary market sales
(89,546)
SBA loan sales
(12,334)
Loans transferred to OREO
(1,629)
Normal amortization/paydowns and payoffs
(262,127)
Loan balances as of December 31, 2019
$
1,058,776
Total production
545,565
Secondary market sales
(208,398)
SBA loan sales
14,057
Loans transferred to OREO
(874)
Normal amortization/paydowns and payoffs
(331,534)
Loan balances as of December 31, 2020
$
1,077,592
Following is a table that illustrates the balance changes in the loan portfolio for 2020 and 2019 year-end (dollars in thousands):
Percent Change
2020-2019
Commercial real estate
$
498,450
$
514,394
(3.15)%
Commercial, financial, and agricultural
273,759
211,023
29.73
One-to-four family residential real estate
227,044
253,918
(10.58)
Construction:
Consumer
11,661
18,096
(35.56)
Commercial
47,698
40,107
18.93
Consumer
18,980
21,238
(10.63)
Total
$
1,077,592
$
1,058,776
1.75%
Our commercial real estate loan portfolio predominantly relates to owner occupied real estate, and our loans are generally secured by a first mortgage lien. We make commercial loans for many purposes, including working capital
lines, which are generally renewable annually and supported by business assets, personal guarantees and additional collateral. Commercial business lending is generally considered to involve a higher degree of risk than traditional consumer bank lending.
Following is a table showing the composition of loans by significant industry types in the commercial loan portfolio as of December 31 (dollars in thousands):
% of
% of
% of
% of
Balance
Loans
Capital
Balance
Loans
Capital
Real estate - operators of nonresidential buildings
$
138,992
16.95%
82.80
$
141,965
18.54%
87.68
Hospitality and tourism
100,237
12.23
59.71
97,721
12.77
60.35
Lessors of residential buildings
52,035
6.35
31.00
51,085
6.67
31.55
Gasoline stations and convenience stores
29,046
3.54
17.30
27,176
3.55
16.78
Logging
18,651
2.27
11.11
22,136
2.89
13.67
Commercial construction
47,698
5.82
28.41
40,107
5.24
24.77
Other
433,248
52.84
258.09
385,334
50.34
237.98
Total commercial loans
$
819,907
100.00%
$
765,524
100.00%
Management recognizes the additional risk presented by the concentration in certain segments of the portfolio. Management does not believe that its current portfolio composition has increased exposure related to any specific industry concentration as of 2020 year-end.
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 December 31, 2020, our residential loan portfolio totaled $238.705 million, or 22.15%, of our total outstanding loans.
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.
Troubled debt restructurings (“TDR”) are determined on a loan-by-loan basis. Generally restructurings are related to interest rate reductions, loan term extensions and short term payment forbearance as means to maximize collectability of troubled credits. If a portion of the TDR loan is uncollectible (including forgiveness of principal), the uncollectible amount will be charged off against the allowance at the time of the restructuring. In general, a borrower must make at least six consecutive timely payments before the Corporation would consider a return of a restructured loan to accruing status in accordance with FDIC guidelines regarding restoration of credits to accrual status. More recent regulatory guidelines and accounting standards indicate that loan modifications or forbearances elated to the COVID-19 pandemic will generally not be considered TDRs. COVID-19 loan modifications resided at a nominal $2.4 million, or .25% of total loans with no commervial loans remaining in total payment deferral at December 31, 2020. This is compared to peak levels of $201 million in the second quarter of 2020.
The Corporation has, in accordance with generally accepted accounting principles standard updates, evaluated all loan modifications to determine the fair value impact of the underlying asset. The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral.
The Corporation, at December 31, 2020, had performing loans of $5.910 million and $.900 million of nonperforming loans for which repayment terms were modified to the extent that they were deemed to be “restructured” loans. The total performing restructured loans of $5.910 million is comprised of 23 performing loans, the largest of which had a December 31, 2020 balance of $1.502 million. The nonperforming restructured portfolio consists of six loan relationships, the largest balance of which is $.784 million. These TDRs are not COVID-19 related.
Credit Quality
The table below shows balances of nonperforming assets for the years ended December 31 (dollars in thousands):
December 31,
December 31,
Nonperforming Assets:
Nonaccrual loans
$
5,458
$
5,172
Loans past due 90 days or more
-
Restructured loans on nonaccrual
-
-
Total nonperforming loans
5,458
5,183
Other real estate owned
1,752
2,194
Total nonperforming assets
$
7,210
$
7,377
Nonperforming loans as a % of loans
0.51%
0.49%
Nonperforming assets as a % of assets
0.48%
0.56%
Reserve for Loan Losses:
At period end
$
5,816
$
5,308
As a % of outstanding loans
.54%
.51%
As a % of nonperforming loans
106.56%
102.41%
As a % of nonaccrual loans
106.56%
102.63%
Texas Ratio
4.82%
4.41%
Management continues to address market issues impacting its loan customer base. In conjunction with the Corporation’s senior lending staff and the bank regulatory examinations, management reviews the Corporation’s loans, related collateral evaluations, and the overall lending process. The Corporation also utilizes a loan review consultant to perform a review of the loan portfolio. The opinion of this consultant upon completion of the 2020 independent review provided findings similar to management with respect to credit quality. The Corporation will again utilize a consultant for loan review in 2021.
The following table details the impact of nonperforming loans on interest income for the two years ended December 31 (dollars in thousands):
Interest income that would have been recorded at original rate
$
$
Interest income that was actually recorded
-
-
Net interest lost
$
$
Allowance for Loan Losses
Management analyzes the allowance for loan losses on a quarterly basis to determine whether the losses inherent in the portfolio are properly reserved for. Net charge-offs in 2020 amounted to $.492 million, or .04% of average loans outstanding, compared to $.260 million, or .02% of loans outstanding in 2019. The current reserve balance is representative of the relevant risk inherent within the Corporation’s loan portfolio. The balance of the allowance for loan losses does not contemplate acquisition fair value adjustments, as detailed in Note 4 - “Loans”. 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. Management continues to actively refine the provision and allowance for loan losses as client impact and broader economic data from the pandemic becomes more clear. As of December 31, 2020, there have been no indications of systemic adverse trends and COVID-19 related modifications are at modest levels.
A two year history of relevant information on the Corporation’s credit quality is displayed in the following table (dollars in thousands):
Allowance for Loan Losses
Balance at beginning of period
$
5,308
$
5,183
Loans charged off:
Commercial
One-to-four family residential real estate
Consumer
Total loans charged off
Recoveries of loans previously charged off:
Commercial
One-to-four family residential real estate
Consumer
Total recoveries of loans previously charged off
Net loans charged off
Provision for loan losses
1,000
Balance at end of period
$
5,816
$
5,308
Total loans, period end
$
1,077,592
$
1,058,776
Average loans for the year
1,117,132
1,047,439
Allowance to total loans at end of year
0.54%
0.50%
Net charge-offs to average loans
0.04
0.02
Net charge-offs to beginning allowance balance
9.27
5.02
The computation of the required allowance for loan losses as of any point in time is one of the critical accounting estimates made by management in the financial statements. As such, factors used to establish the allowance could change significantly from the assumptions made and impact future earnings positively or negatively. The future of the national and local economies and the resulting impact on borrowers’ ability to repay their loans and the value of collateral are examples of areas where assumptions must be made for individual loans, as well as the overall portfolio.
The allowance for loan losses consists of specific and general components. Our internal risk system is used to identify loans that meet the criteria for being “impaired” as defined in the accounting guidance. The specific component relates to loans that are individually classified as impaired and where expected cash flows are less than carrying value. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. These qualitative factors include: (1) changes in the nature, volume and terms of loans, (2) changes in lending personnel, (3) changes in the quality of the loan review function, (4) changes in nature and volume of past-due, nonaccrual and/or classified loans, (5) changes in concentration of credit risk, (6) changes in economic and industry conditions, (7) changes in legal and regulatory requirements, (8) unemployment and inflation statistics, and (9) underlying collateral values.
As of December 31, 2020, the allowance for loan losses represented .54% of total loans. The total coverage ratio (equivalent to ALLL plus remaining purchase accounting credit marks to total loans less PPP balances) is .95%. 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. This position is further illustrated by the ratio of the allowance as a percent of nonperforming loans, which stood at 106.56% at December 31, 2020.
The Corporation maintains balances in nonperforming loans garnered in various acquisitions. In 2020, the Corporation had positive resolution of a portion of this portfolio, which resulted in accretable interest of approximately $1.006 million compared to $.404 million in 2019.
As part of the process of resolving problem credits, the Corporation may acquire ownership of real estate collateral which secured such credits. The Corporation carries this collateral in other real estate held for sale on the balance sheet.
The following table represents the activity in other real estate held for sale (dollars in thousands):
Balance at December 31, 2018
$
3,119
Other real estate transferred from loans due to foreclosure
1,629
Proceeds from sale of other real estate
(1,329)
Transfer to premise and equipment
(1,013)
Writedowns on other real estate held for sale
(347)
Loss on other real estate held for sale
Balance at December 31, 2019
$
2,194
Other real estate transferred from loans due to foreclosure
Proceeds from sale of other real estate
(1,338)
Transfer to premise and equipment
-
Writedowns on other real estate held for sale
(65)
Gain on other real estate held for sale
Balance at December 31, 2020
$
1,752
During 2020, the Corporation received real estate in lieu of loan payments of $.874 million. In determining the carrying value of other real estate held for sale, the Corporation generally starts with a third party appraisal of the underlying collateral and then deducts estimated selling costs to arrive at a net asset value. After the initial receipt, management periodically re-evaluates the recorded balance and records any additional reductions in the fair value as a write-down of other real estate held for sale.
Deposits
Total deposits at December 31, 2020 were $1.259 billion, an increase of $183.099 million, or 17.02%, from December 31, 2019 deposits of $1.076 billion. The table below shows the deposit mix for the periods indicated (dollars in thousands):
Mix
Mix
CORE:
Noninterest bearing
$
414,804
32.95%
$
287,611
26.74%
NOW, money market, checking
450,556
35.79
373,165
34.69
Savings
130,755
10.39
109,548
10.18
Certificates of Deposit <$250,000
202,266
16.07
233,956
21.75
Total core deposits
1,198,381
95.20
1,004,280
93.36
NONCORE:
Certificates of Deposit >$250,000
15,224
1.21
12,775
1.19
Brokered CDs
45,171
3.59
58,622
5.45
Total non-core deposits
60,395
4.80
71,397
6.64
Total deposits
$
1,258,776
100.00%
$
1,075,677
100.00%
The increase in deposits is composed of a decrease in noncore deposits of $11.002 million and an increase in core deposits of $194.101 million. As shown in the table above, core deposits represent approximately 95% of total deposits. The majority of the growth in core deposits has centered on transactional deposits through our branch network outreach and treasury management line of business.
Management continues to monitor existing deposit products in order to stay competitive, both as to terms and pricing. This focus on deposits has become especially important with changing client banking habits and demographics, as well as customer desire for more electronic and mobile based banking products and services. It is the intent of management to be aggressive in its markets to grow core deposits with an emphasis placed on transactional accounts.
Borrowings
The Corporation also utilizes FHLB borrowings as a source of funding. At 2020 year end, this source of funding totaled $63.1 million and the Corporation secured this funding by pledging loans and investments. The $63.1 million of FHLB borrowings had a weighted average maturity of 1.89 years, with a weighted average rate of 1.67% at December 31, 2020.
The Corporation currently has one correspondent banking borrowing relationship. The relationship consists of a $15.0 million revolving line of credit, which had no outstanding balance at December 31, 2020. The line of credit bears interest at a rate of LIBOR plus 2.00%, with a floor rate of 3.00% and a ceiling of 22%. The line of credit expires on April 30, 2022. LIBOR was 0.24% at December 31, 2020. The relationship is secured by all of the outstanding mBank stock.
Shareholders’ Equity
Changes in shareholders’ equity are discussed in detail in the “Capital and Regulatory” section of this report.
LIQUIDITY
Liquidity is defined as the ability to generate cash at a reasonable cost to fulfill lending commitments and support asset growth, while satisfying the withdrawal demands of customers and making payments on existing borrowing commitments. The Bank’s principal sources of liquidity are core deposits and loan and investment payments and prepayments. Providing a secondary source of liquidity is the available for sale investment portfolio. As a final source of liquidity, the Bank can exercise existing credit arrangements.
During 2020, the Corporation increased cash and cash equivalents by $169.151 million. As shown on the Corporation’s consolidated statement of cash flows, liquidity was primarily impacted by cash provided by investing activities and cash used in financing activities. The net change in investing activities included a net increase in loans of $16.508 million and a net increase in securities available for sale of $2.789 million. The Corporation also had a net increase in cash through financing activities partially due to a increase in deposit liabilities of $183.099 million. The management of bank liquidity for funding of loans and deposit maturities and withdrawals includes monitoring projected loan fundings and scheduled prepayments and deposit maturities within a 30-day period, a 30 to 90-day period and from 90 days until the end of the year. This funding forecast model is completed weekly.
The Bank’s investment portfolio provides added liquidity during periods of market turmoil and overall liquidity concerns in the financial markets. As of December 31, 2020, $85.646 million of the Bank’s investment portfolio was unpledged, which makes them readily available for sale to address any short term liquidity needs.
It is anticipated that during 2021, the Corporation will fund anticipated loan production with a combination of core-deposit growth and noncore funding, primarily brokered CDs to the extent the level of brokered CDs remains within our conservative policy limitations.
The Corporation’s primary source of liquidity on a stand-alone basis is dividends from the Bank. In 2020, the Bank paid $11.5 million in dividends to the Corporation. Bank capital, after payment of this dividend, remained strong and above the “well capitalized” level for regulatory purposes. The Corporation has a $15.0 million line of credit with a correspondent bank, which also serves as a source of liquidity. As of December 31, 2020, $15.0 million was available to the Corporation under this line. The Corporation’s current plan for dividends from the Bank are dependent upon the profitability of the Bank, growth of assets at the Bank and the level of capital needed to stay “adequately capitalized”. The Corporation will continue to explore alternative opportunities for longer term sources of liquidity and permanent equity to support projected asset growth.
Liquidity is managed by the Corporation through its Asset and Liability Committee (the “ALCO” Committee). The ALCO Committee meets regularly to discuss asset and liability management in order to address liquidity and funding needs to provide a process to seek the best alternatives for investments of assets, funding costs, and risk management. The liquidity position of the Bank is managed daily, thus enabling the Bank to adapt its position according to market fluctuations. Core deposits are important in maintaining a strong liquidity position as they represent a stable and relatively low cost source of funds. The Bank’s liquidity is best illustrated by the mix in the Bank’s core and non-core funding dependency ratio, which explains the degree of reliance on non-core liabilities to fund long-term assets.
Core deposits are herein defined as demand deposits, NOW (negotiable order withdrawals), money markets, savings and certificates of deposit under $250,000. Non-core funding consists of certificates of deposit greater than $250,000, brokered deposits, and FHLB and other borrowings. At December 31, 2020, the Bank’s core deposits in relation to total funding were 90.63% compared to 87.60% in 2019. These ratios indicated at December 31, 2020, that the Bank had decreased its reliance on non-core deposits and borrowings to fund the Bank’s long-term assets, namely loans and investments. The Bank believes that by maintaining adequate volumes of short-term investments and implementing competitive pricing strategies on deposits, it can ensure adequate liquidity to support future growth. The Bank also has correspondent lines of credit available to meet unanticipated short-term liquidity needs. As of December 31, 2020, the Bank had $106 million of unsecured overnight borrowing lines available and additional amounts available if secured. Management believes that its liquidity position remains strong to meet both present and future financial obligations and commitments, events or uncertainties that have resulted or are reasonably likely to result in material changes with respect to the Bank’s liquidity.
From a long-term perspective, the Corporation’s strategy is to increase core deposits in the Corporation’s local markets. The Corporation also has the ability to augment local deposit growth with wholesale CD funding.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As disclosed in the Notes to the Consolidated Financial Statements, the Corporation has certain obligations and commitments to make future payments under contracts. At December 31, 2020, the aggregate contractual obligations and commitments are (dollars in thousands):
Payments Due by Period
After 5
Less than 1 Year
1 to 3 Years
4 to 5 Years
Years
Total
Contractual Obligations
Total deposits
$
1,169,402
$
83,423
$
5,251
$
$
1,258,776
Federal Home Loan Bank borrowings
35,003
25,152
-
3,000
63,155
Other borrowings
-
-
Directors’ deferred compensation
1,562
Annual rental / purchase commitments under noncancelable leases / contracts
1,690
1,042
1,038
4,606
TOTAL
$
1,205,625
$
111,180
$
6,563
$
5,055
$
1,328,423
Other Commitments
Letters of credit
$
8,781
$
-
$
-
$
-
$
8,781
Commitments to extend credit
172,633
-
-
-
172,633
Credit card commitments
7,136
-
-
-
7,136
TOTAL
$
188,550
$
-
$
-
$
-
$
188,550
CAPITAL AND REGULATORY
As a bank holding company, the Corporation is required to maintain certain levels of capital under government regulation. There are several measurements of regulatory capital, and the Corporation is required to meet minimum requirements under each measurement. The federal banking regulators have also established capital classifications beyond the minimum requirements in order to risk-rate deposit insurance premiums and to provide trigger points for prompt corrective action in the event an institution becomes financially troubled.
The Corporation and Bank capital is also impacted by the disallowed portion of the Corporation’s deferred tax asset. The portion of the deferred tax asset which is allowed to be included in regulatory capital is based on the amount of the asset, net of any valuation allowance and deferred tax liabilities. The amount included is phased in through 2018. See “Business - Supervision and Regulation” and “Regulatory Capital Requirements” for additional information regarding regulatory capital, as well as Note 16 to the Corporation’s Consolidated Financial Statements in Item 8 of this Form 10-K below.
Impact of Inflation and Changing Prices
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and results of operations in historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Corporation’s operations. Nearly all the assets and liabilities of the Corporation are financial, unlike industrial or commercial companies. As a result, the Corporation’s performance is directly impacted by changes in interest rates, which are indirectly influenced by inflationary expectations. The Corporation’s ability to match the interest sensitivity of its financial assets to the interest sensitivity of its financial liabilities tends to minimize the effect of changes in interest rates on the Corporation’s performance. Changes in interest rates do not necessarily move to the same extent as changes in the prices of goods and services.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
In general, the Corporation attempts to manage interest rate risk by investing in a variety of assets which afford it an opportunity to reprice assets and increase interest income at a rate equal to or greater than the interest expense associated with repricing liabilities.
Interest rate risk is the exposure of the Corporation to adverse movements in interest rates. The Corporation derives its income primarily from the excess of interest collected on its interest-earning assets over the interest paid on its interest-bearing obligations. The rates of interest the Corporation earns on its assets and owes on its obligations generally are established contractually for a period of time. Since market interest rates change over time, the Corporation is exposed to lower profitability if it cannot adapt to interest rate changes. Accepting interest rate risk can be an important source of profitability and shareholder value; however, excess levels of interest rate risk could pose a significant threat to the Corporation’s earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to the Corporation’s safety and soundness.
Loans are the Corporation’s most significant earning asset. Management offers commercial and real estate loans priced at interest rates which fluctuate with various indices, such as the prime rate or rates paid on various government issued securities. When loans are made with longer-term fixed rates, the Corporation attempts to match these balances with sources of funding with similar maturities in order to mitigate interest rate risk. In addition, the Corporation prices loans so it has an opportunity to reprice the loan within 12 to 36 months.
At December 31, 2020 the Bank had $111.836 million of securities, with a weighted average maturity of 117 months. The investment portfolio is intended to provide a source of liquidity to the Corporation with limited interest rate risk. The Corporation may also elect to sell cash to correspondent banks as investments in federal funds. The Corporation also has other interest bearing deposits with correspondent banks. These funds are generally repriced on a daily basis.
The Corporation offers deposit products with a variety of terms ranging from deposits whose interest rates can change on a weekly basis to certificates of deposit with repricing terms of up to five years. Longer-term deposits generally include penalty provisions for early withdrawal.
Beyond general efforts to shorten the loan pricing periods and extend deposit maturities, management can manage interest rate risk by the maturity periods of securities purchased, selling securities available for sale, and borrowing funds with targeted maturity periods, among other strategies. Also, the rate of interest rate changes can impact the actions taken, since the speed of change affects borrowers and depositors differently.
Exposure to interest rate risk is reviewed on a regular basis. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect of interest rate changes on net interest income and to structure the composition of the balance sheet to minimize interest rate risk and, at the same time, maximize income.
Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. Tools used by management include maturity and repricing analysis and interest rate sensitivity analysis. The Bank has monthly asset/ liability (“ALCO”) meetings, whose membership includes senior management, board representation and third party
investment consultants. During these monthly meetings, we review the current ALCO position and strategize about future opportunities on risks relative to pricing and positioning of assets and liabilities.
The difference between repricing assets and liabilities for a specific period is referred to as the gap. An excess of repricable assets over liabilities is referred to as a positive gap. An excess of repricable liabilities over assets is referred to as a negative gap. The cumulative gap is the summation of the gap for all periods to the end of the period for which the cumulative gap is being measured.
Assets and liabilities scheduled to reprice are reported in the following timeframes. Those instruments with a variable interest rate tied to an index and considered immediately repricable are reported in the 1 to 90 day timeframe. The estimates of principal amortization and prepayments are assigned to the following time frames.
The following are the Corporation’s repricing opportunities at December 31, 2020 (dollars in thousands):
1-90
91-365
>1-5
Over 5
Days
Days
Years
Years
Total
Interest-earning assets:
Loans
$
291,763
351,964
422,271
11,594
$
1,077,592
Securities
20,311
16,448
33,576
41,501
111,836
Other (1)
5,414
2,227
-
7,841
Total interest-earning assets
317,488
368,612
458,074
53,095
1,197,269
Interest-bearing obligations:
NOW, money market, savings and interest checking
581,311
-
-
-
581,311
Time deposits
46,071
91,426
79,293
217,490
Brokered CDs
35,790
-
9,381
-
45,171
Borrowings
10,003
25,082
25,394
3,000
63,479
Total interest-bearing obligations
673,175
116,508
114,068
3,700
907,451
Gap
$
(355,687)
$
252,104
$
344,006
$
49,395
$
289,818
Cumulative gap
$
(355,687)
$
(103,583)
$
240,423
$
289,818
(1) includes Federal Home Loan Bank stock
The above analysis indicates that at December 31, 2020, the Corporation had a cumulative liability sensitivity gap position of $103.583 million within the one-year timeframe. The Corporation’s cumulative liability sensitive gap suggests that if market interest rates were to increase in the next twelve months, the Corporation has the potential to earn less net interest income since more liabilities would reprice at higher rates than assets. Conversely, if market interest rates decrease in the next twelve months, the above gap position suggests the Corporation’s net interest income would increase. A limitation of the traditional gap analysis is that it does not consider the timing or magnitude of non-contractual repricing or unexpected prepayments. In addition, the gap analysis treats savings, NOW and money market accounts as repricing within 90 days, while experience suggests that these categories of deposits are actually comparatively resistant to rate sensitivity.
At December 31, 2020, the Corporation had $386.198 million of variable rate loans that reprice primarily with the prime rate index. Approximately $86.255 million of these variable rate loans have interest rate floors. This means that the prime rate will have to increase above the floor rate before these loans will reprice. The majority of these loans have surpassed their interest rate floors and now reprice with each increase in the prime rate.
At December 31, 2019, the Corporation had a cumulative liability sensitive gap position of $46.031 million within the one-year time frame.
The Corporation’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk and foreign exchange risk. The Corporation has no market risk sensitive instruments held for trading purposes. The Corporation has limited agricultural-related loan assets, and therefore, has minimal significant exposure to changes in commodity prices. Any impact that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be insignificant.
Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure. The Corporation’s interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems, and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk, the Corporation assesses the existing and potential future effects of changes in interest rates on its financial condition, including capital adequacy, earnings, liquidity, and asset quality. In addition to changes in interest rates, the level of future net interest income is also dependent on a number of variables, including: the growth, composition and levels of loans, deposits, other earning assets and interest-bearing obligations, and economic and competitive conditions; potential changes in lending, investing, and deposit strategies; customer preferences; and other factors.
The table below measures current maturity levels of interest-earning assets and interest-bearing obligations, along with average stated rates and estimated fair values at December 31, 2020 (dollars in thousands). Nonaccrual loans of $5.458 million are included in the table at an average interest rate of 0.00% and a maturity greater than 5 years.
Principal/Notional Amount Maturing/Repricing In:
Fair Value
Thereafter
Total
12/31/2020
Rate Sensitive Assets
Fixed interest rate securities
$
18,435
$
19,140
$
14,697
$
6,074
$
4,937
$
48,553
$
111,836
$
111,836
Average interest rate
1.40
0.58
1.51
1.10
1.96
2.54
Fixed interest rate loans
301,739
214,240
122,034
35,280
6,506
11,595
691,394
692,016
Average interest rate
4.28
4.45
4.68
4.50
4.24
4.09
Variable interest rate loans
386,198
-
-
-
-
-
386,198
386,546
Average interest rate
4.45
-
-
-
-
-
Other assets
5,690
1,732
-
-
7,917
7,917
Average interest rate
3.09
2.38
2.45
-
1.07
-
Total rate sensitive assets
$
712,062
$
235,112
$
136,981
$
41,354
$
11,688
$
60,148
$
1,197,345
$
1,198,315
Average interest rate
4.29%
4.12%
4.34%
4.00%
3.21%
2.84%
4.17%
Rate Sensitive Liabilities
Interest-bearing savings, NOW, MMAs, checking
$
581,311
$
-
$
-
$
-
$
-
$
-
$
581,311
$
581,311
Average interest rate
0.25
-
-
-
-
-
Time deposits
169,316
56,659
19,474
11,260
5,252
262,661
263,528
Average interest rate
1.11
1.05
1.51
1.79
0.96
1.60
Variable interest rate borrowings
-
-
-
-
-
-
-
-
Average interest rate
-
-
-
-
-
-
Fixed interest rate borrowings
35,085
25,080
-
3,000
63,479
61,975
Average interest rate
1.83
1.00
1.42
1.50
-
1.18
Total rate sensitive liabilities
$
785,712
$
56,740
$
19,707
$
36,340
$
5,252
$
3,700
$
907,451
$
906,814
Average interest rate
0.51%
1.05%
1.51%
1.59%
0.96%
1.26%
0.61%
Foreign Exchange Risk
In addition to managing interest rate risk, management also actively manages risk associated with foreign exchange. The Corporation provides foreign exchange services to its Canadian customers primarily at its banking office in Sault Ste. Marie, Michigan. Management believes the exposure to short-term foreign exchange risk is minimal and at an acceptable level for the Corporation.
Off-Balance-Sheet Risk
Derivative financial instruments include futures, forwards, interest rate swaps, option contracts and other financial instruments with similar characteristics. In 2020, the Corporation did not enter into futures, forwards, swaps or options. However, the Corporation is party to financial instruments with off-balance-sheet risk in the normal course of business
to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Corporation. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions.
Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Corporation until the instrument is exercised. See Note 19 to the consolidated financial statements for additional information.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Mackinac Financial Corporation
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Mackinac Financial Corporation (the “Company”) as of December 31, 2020, and 2019, the related statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, and 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses - Qualitative Factors - Refer to Notes 1 and 4 to the consolidated financial statements
Critical Audit Matter Description
Management’s estimate of the general portion of the allowance relates to non-impaired loans and is based on historical loss experience adjusted for qualitative factors. These qualitative factors include: (1) changes in the nature, volume and
terms of loans, (2) changes in lending personnel, (3) changes in the quality of the loan review function, (4) changes in nature and volume of past-due, nonaccrual and/or classified loans, (5) changes in concentration of credit risk, (6) changes in economic and industry conditions, (7) changes in legal and regulatory requirements, (8) unemployment and inflation statistics, (9) underlying collateral values, and (10) estimated impact of the COVID-19 pandemic not already reflected in other factors. Management periodically evaluates the qualitative factors based on known and inherent risks in the portfolio, composition of the portfolio, current economic conditions, and other factors.
Given the significant estimates and assumptions management makes in establishing qualitative factor adjustments within the allowance for loan losses and the sensitivity of the Corporation’s operations to changes in certain market conditions, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the inherent risks in the portfolio, current economic conditions, and the selection of weighting of these qualitative factors required a high degree of auditor judgement and an increased extent of effort.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the qualitative factors used in the estimate of the allowance for loan losses included the following, among others:
● We assessed management’s determination of qualitative factor adjustments to the allowance for loan losses, which included a comparison of factors considered by management to other sources to evaluate reasonableness and completeness of factors considered.
● We gained an understanding of management’s basis for the application and weighting of the qualitative factors.
● We reviewed the overall trends in credit quality to understand the known and inherent risks in the portfolio and the portfolio composition. This included reviewing changes year-over-year in the qualitative factors and management’s commentary on the rationale for the weighting applied to each factor for reasonableness.
Goodwill - Impairment Assessment - Refer to Notes 1 and 8 to the consolidated financial statements
Critical Audit Matter Description
The Corporation, in accordance with GAAP, evaluates goodwill annually for impairment. As a result of the economic uncertainty and volatility surrounding COVID-19 during the year, the Corporation assessed whether there were triggering events during the interim periods between the annual goodwill assessment during 2020. The Corporation determined that there is currently no impairment of its goodwill. In the assessment of goodwill for impairment, management considers fair value inputs such as discounted future earnings and observations from recent bank mergers and acquisitions.
Given the significant estimates and assumptions management makes to assess goodwill for impairment, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgement and an increased extent of effort.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to management’s assessment of goodwill for impairment included the following, among others:
● We reviewed management’s evaluation on whether a triggering event occurred during the interim periods between the annual goodwill impairment assessment.
● We tested the effectiveness of controls over management’s goodwill impairment assessment.
● We evaluated the reasonableness of management’s assumptions regarding future earnings by comparing the assumptions to (1) historical results (2) internal communications to management and the Board of Directors, and (3) external information.
● We evaluated the reasonableness of management’s selection of a discount rate by comparing inputs to external sources.
● We independently obtained statistics from bank mergers and acquisitions to test the completeness and accuracy of the population obtained by management, and we assessed the reasonableness of the comparable transactions
by comparing statistical information of the targets selected by management to statistical information of the Corporation.
/s/Plante & Moran, PLLC
We have served as the Company’s auditor since 2002.
Grand Rapids, MI
March 11, 2021
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2020 and 2019
(Dollars in Thousands)
December 31,
December 31,
ASSETS
Cash and due from banks
$
218,901
$
49,794
Federal funds sold
Cash and cash equivalents
218,977
49,826
Interest-bearing deposits in other financial institutions
2,917
10,295
Securities available for sale
111,836
107,972
Federal Home Loan Bank stock
4,924
4,924
Loans:
Commercial
819,907
765,524
Mortgage
238,705
272,014
Consumer
18,980
21,238
Total Loans
1,077,592
1,058,776
Allowance for loan losses
(5,816)
(5,308)
Net loans
1,071,776
1,053,468
Premises and equipment
25,518
23,608
Other real estate held for sale
1,752
2,194
Deferred tax asset
3,303
3,732
Deposit based intangibles
4,368
5,043
Goodwill
19,574
19,574
Other assets
36,785
39,433
TOTAL ASSETS
$
1,501,730
$
1,320,069
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest bearing deposits
$
414,804
$
287,611
NOW, money market, interest checking
450,556
373,165
Savings
130,755
109,548
CDs<$250,000
202,266
233,956
CDs>$250,000
15,224
12,775
Brokered
45,171
58,622
Total deposits
1,258,776
1,075,677
Federal funds purchased
-
6,225
Borrowings
63,479
64,551
Other liabilities
11,611
11,697
Total liabilities
1,333,866
1,158,150
SHAREHOLDERS’ EQUITY:
Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares Issued and outstanding - 10,500,758 and 10,748,712 respectively
127,164
129,564
Retained earnings
39,318
31,740
Accumulated other comprehensive income
Unrealized gains on available for sale securities
1,965
1,025
Minimum pension liability
(583)
(410)
Total shareholders’ equity
167,864
161,919
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,501,730
$
1,320,069
See accompanying notes to consolidated financial statements.
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2020 and 2019
(Dollars in Thousands, Except Per Share Data)
Year Ended
December 31,
INTEREST INCOME:
Interest and fees on loans:
Taxable
$
58,412
$
59,673
Tax-exempt
Interest on securities:
Taxable
2,255
2,708
Tax-exempt
Other interest income
1,473
Total interest income
62,029
64,384
INTEREST EXPENSE:
Deposits
6,052
9,436
Borrowings
1,171
1,041
Total interest expense
7,223
10,477
Net interest income
54,806
53,907
Provision for loan losses
1,000
Net interest income after provision for loan losses
53,806
53,522
OTHER INCOME:
Deposit service fees
1,133
1,586
Income from mortgage loans sold on the secondary market
5,935
1,889
SBA/USDA loan sale gains
1,729
Net mortgage servicing fees
Realized security gains
Other
Total other income
10,199
5,953
OTHER EXPENSE:
Salaries and employee benefits
26,081
22,743
Occupancy
4,370
4,069
Furniture and equipment
3,347
3,000
Data processing
3,093
2,717
Advertising
Professional service fees
1,842
2,100
Loan origination expenses and deposit and card related fees
1,965
1,546
Writedowns and (gains) losses on other real estate held for sale
(22)
FDIC insurance assessment
Communications
Other
3,848
3,534
Total other expenses
46,949
41,765
Income before provision for income taxes
17,056
17,710
Provision for income taxes
3,583
3,860
NET INCOME
$
13,473
$
13,850
INCOME PER COMMON SHARE:
Basic
$
1.27
$
1.29
Diluted
$
1.27
$
1.29
See accompanying notes to consolidated financial statements.
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2020 and 2019
(Dollars in Thousands)
Year Ended
December 31,
Net income
$
13,473
$
13,850
Other comprehensive income
Change in securities available for sale:
Unrealized gains arising during the period
1,192
1,816
Reclassification adjustment for securities gains included in net income
(2)
(208)
Tax effect
(250)
(338)
Net change in unrealized gains on available for sale securities
1,270
Defined benefit pension plan:
Net unrealized actuarial gain (loss) on defined benefit pension obligation
(219)
(243)
Tax effect
Changes from defined benefit pension plan
(173)
(192)
Other comprehensive loss, net of tax
1,078
Total comprehensive income
$
14,240
$
14,928
See accompanying notes to consolidated financial statements.
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2020 and 2019
(Dollars in Thousands)
Accumulated
Shares of
Common Stock
Other
Common
and Additional
Retained
Comprehensive
Stock
Paid in Capital
Earnings
Income (Loss)
Total
Balance, December 31, 2018
10,712,745
$
129,066
$
23,466
$
(463)
$
152,069
Net income
-
-
13,850
-
13,850
Other comprehensive income (loss):
Net change in unrealized gain on securities available for sale
-
-
-
1,270
1,270
Actuarial loss on defined benefit pension obligation
-
-
-
(192)
(192)
Total comprehensive income
1,078
14,928
Stock compensation
-
-
-
Restricted stock award vesting
35,967
-
-
-
-
Dividend on common stock
-
-
(5,576)
-
(5,576)
Balance, December 31, 2019
10,748,712
$
129,564
$
31,740
$
$
161,919
Net income
-
-
13,473
-
13,473
Other comprehensive income (loss):
Net change in unrealized gain on securities available for sale
-
-
-
Actuarial loss on defined benefit pension obligation
-
-
-
(173)
(173)
Total comprehensive income
14,240
Stock compensation
-
-
-
Restricted stock award vesting
35,825
-
-
-
-
Repurchase of common stock
(283,779)
(3,278)
(3,278)
Dividend on common stock
-
-
(5,895)
-
(5,895)
Balance, December 31, 2020
10,500,758
$
127,164
$
39,318
$
1,382
$
167,864
See accompanying notes to consolidated financial statements.
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS CASH FLOWS
Years Ended December 31, 2020 and 2019
(Dollars in Thousands)
For the year ended December 31,
Cash Flows from Operating Activities:
Net income
$
13,473
$
13,850
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
2,897
2,880
Provision for loan losses
1,000
Deferred tax expense
1,347
Net realized security gains
(2)
(208)
Gain on sale of loans sold in the secondary market
(5,205)
(1,544)
Origination of loans held for sale in secondary market
(205,398)
(89,546)
Proceeds from sale of loans in the secondary market
208,677
86,926
(Gain) loss on sale other real estate held for sale and fixed assets
(161)
Writedown of other real estate held for sale
Stock compensation
Change in other assets
1,575
(10,907)
Change in other liabilities
(86)
3,704
Net cash provided by operating activities
18,342
7,597
Cash Flows from Investing Activities:
Net increase in loans
(16,508)
(17,649)
Net decrease in interest-bearing deposits in other financial institutions
7,378
3,157
Purchase of securities available for sale
(40,180)
(18,839)
Proceeds from maturities, sales, calls or paydowns of securities available for sale
37,391
29,374
Capital expenditures
(5,063)
(2,737)
Proceeds from sale of premises, equipment, and other real estate
1,162
1,867
Net cash used in investing activities
(15,820)
(4,827)
Cash Flows from Financing Activities:
Net increase (decrease) increase in deposits
183,099
(21,860)
(Decrease) increase in fed funds purchased
(6,225)
3,320
Repurchase of common stock
(3,278)
-
Dividend on common stock
(5,895)
(5,576)
Proceeds from FHLB borrowing
-
25,000
Proceeds from term borrowing
100,281
-
Principal payments on borrowings
(101,353)
(17,985)
Net cash provided by (used in) financing activities
166,629
(17,101)
Net (decrease) increase in cash and cash equivalents
169,151
(14,331)
Cash and cash equivalents at beginning of period
49,826
64,157
Cash and cash equivalents at end of period
$
218,977
$
49,826
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest
$
7,329
$
10,320
Income taxes
1,700
1,500
Noncash Investing and Financing Activities:
Transfers of Foreclosures from Loans to Other Real Estate Held for Sale
$
$
1,629
Transfers of Other Real Estate Held for Sale to Fixed Assets
$
-
$
1,013
See accompanying notes to consolidated financial statements.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Mackinac Financial Corporation (the “Corporation”) and Subsidiaries conform to accounting principles generally accepted in the United States and prevailing practices within the banking industry. Significant accounting policies are summarized below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries, mBank (the “Bank”) and other minor subsidiaries, after elimination of intercompany transactions and accounts.
Nature of Operations
The Corporation’s and the Bank’s revenues and assets are derived primarily from banking activities. The Bank’s primary market area is the Upper Peninsula, the northern portion of the Lower Peninsula of Michigan, Northeastern Wisconsin and Oakland County in Lower Michigan. The Bank provides to its customers commercial, real estate, agricultural, and consumer loans, as well as a variety of traditional deposit products. Less than 1.0% of the Corporation’s business activity is with Canadian customers and denominated in Canadian dollars.
While the Corporation’s chief decision makers monitor the revenue streams of the various Corporation products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis. Accordingly, all of the Corporation’s banking operations are considered by management to be aggregated in one reportable operating segment.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of investment securities, and the assessment of goodwill for impairment.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, noninterest-bearing deposits in correspondent banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.
Securities
The Corporation’s debt securities are classified and accounted for as securities available for sale. These securities are stated at fair value. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Unrealized holding gains and losses on securities available for sale are reported as accumulated other comprehensive income within shareholders’ equity until realized. When it is determined that securities or other investments are impaired and the impairment is other than temporary, an impairment loss is recognized in earnings and a new basis in the affected security is established. Gains and losses on the sale of securities are recorded on the trade date and determined using the specific-identification method.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required to hold stock in the FHLB based on the anticipated level of borrowings to be advanced. This stock is recorded at cost, which approximates fair value. Transfer of the stock is substantially restricted.
Interest Income and Fees on Loans
Interest income on loans is reported on the level-yield method and includes amortization of deferred loan fees and costs over the loan term. Net loan commitment fees or costs for commitment periods greater than one year are deferred and amortized into fee income or other expense on a straight-line basis over the commitment period. The accrual of interest on loans is discontinued when, in the opinion of management, it is probable that the borrower may be unable to meet payments as they become due as well as when required by regulatory provisions. Upon such discontinuance, all unpaid accrued interest is reversed. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. Interest income on impaired and nonaccrual loans is recorded on a cash basis.
During 2020, the Corporation funded loans under the Small Business Administration's (SBA) Paycheck Protection Program (PPP) to provide liquidity to small businesses during the COVID-19 pandemic. The loans are guaranteed by the SBA and loan proceeds to borrowers are forgivable by the SBA if certain criteria are met. The Corporation originated PPP loans totaling $152.506 during the year. PPP processing fees received from the SBA totaling $5.18 were deferred along with loan origination costs and recognized as interest income using the effective yield method. Upon forgiveness of a loan and resulting repayment by the SBA, any unrecognized net fee for a given loan is recognized as interest income. Fees of $4.030 were recognized in 2020.
Acquired Loans
Loans acquired with evidence of credit deterioration since inception and for which it is probable that all contractual payments will not be received are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). These loans are recorded at fair value at the time of acquisition, with no carryover of the related allowance for loan losses. Fair value of acquired loans is determined based on the present value of amounts expected to be received, which incorporates assumptions about the amount and timing of principal and interest payments, principal prepayments and principal defaults and losses, collateral values, and current market rates. In recording the fair values of acquired impaired loans at acquisition date, management calculates a non-accretable difference (the credit component of the purchased loans) and an accretable difference (the yield component of the purchased loans).
Over the life of the acquired loans, management continues to estimate cash flows expected to be collected. We evaluate at each balance sheet date whether it is probable that we will be unable to collect all cash flows expected at acquisition and if so, recognize a provision for loan loss in our consolidated statement of operations. For any significant increases in cash flows expected to be collected, we adjust the amount of the accretable yield recognized on a prospective basis over the pool’s remaining life.
Performing acquired loans are accounted for under ASC Topic 310-20, Receivables - Nonrefundable Fees and Other Costs. Performance of certain loans may be monitored and based on management’s assessment of the cash flows and other facts available, portions of the accretable difference may be delayed or suspended if management deems appropriate. The Corporation’s policy for determining when to discontinue accruing interest on performing acquired loans and the subsequent accounting for such loans is essentially the same as the policy for originated loans.
Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based on the fair value of the rights compared to amortized cost. Impairment is determined by using prices for similar assets with similar characteristics, such as interest rates and terms. Fair value is determined by using prices for similar assets with similar characteristics, when available, or based on discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.
Allowance for Loan Losses
The allowance for loan losses includes specific allowances related to 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 loan’s initial effective interest rate or the fair value of the collateral if the loan is collateral dependent.
The Corporation also has 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 probable loan losses. Management periodically evaluates the adequacy of the allowance using the Corporation’s past loan loss experience, known and inherent risks in the portfolio, composition of the portfolio, current economic conditions, and other factors. The allowance does not include the effects of expected losses related to future events or future changes in economic conditions. This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change. Loans are charged against the allowance for loan losses when management believes the collectability of the principal is unlikely. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require additions to the allowance for loan losses based on their judgments of collectability.
In management’s opinion, the allowance for loan losses is adequate to cover probable losses relating to specifically identified loans, as well as probable losses inherent in the balance of the loan portfolio as of the balance sheet date.
Troubled Debt Restructuring
Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as a Troubled Debt Restructure (TDR). A loan is a TDR when the Corporation, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying or renewing a loan that the Corporation would not otherwise consider. To make this determination, the Corporation must determine whether (a) the borrower is experiencing financial difficulties and (b) the Corporation granted the borrower a concession. This determination requires consideration of all of the facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties.
Other Real Estate Held for Sale
Other real estate held for sale consists of assets acquired through, or in lieu of, foreclosure and other long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. Other real estate held for sale is initially recorded at fair value, less costs to sell, establishing a new cost basis. Valuations are periodically performed by management or a third party, and the assets’ carrying values are adjusted to the lower of cost basis or fair value less costs to sell. Impairment losses are recognized for any initial or subsequent write-downs. Net revenue and expenses from operations of other real estate held for sale are included in other expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of premises and equipment are reflected in income. Depreciation is computed on the straight-line method over the estimated useful lives of the assets.
Goodwill and Other Intangible Assets
The excess of the cost of acquired entities over the fair value of identifiable assets acquired less liabilities assumed is recorded as goodwill. In accordance with ASC 350, amortization of goodwill and indefinite-lived assets is not recorded. However, the recoverability of goodwill is annually tested for impairment and between annual tests in certain circumstances. The Corporation’s core deposit intangible is currently being amortized over its estimated useful life of ten years.
Stock Compensation Plans
On May 22, 2012, the Corporation’s shareholders approved the Mackinac Financial Corporation 2012 Incentive Compensation Plan, under which current and prospective employees, non-employee directors and consultants may be awarded incentive stock options, non-statutory stock options, shares of restricted stock awards (“RSAs”), or stock appreciation rights. The aggregate number of shares of the Corporation’s common stock issuable under the plan is 575,000. Awards are made to certain other senior officers at the discretion of the Corporation's management. Compensation cost equal to the fair value of the award is recognized over the vesting period.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) is composed of unrealized gains and losses on securities available for sale, and unrecognized actuarial gains and losses in the defined benefit pension plan, arising during the period. These gains and losses for the period are shown as a component of other comprehensive income. The accumulated gains and losses are reported as a component of equity, net of any tax effect. At December 31, 2020, the balance in accumulated other comprehensive income consisted of unrealized gains on available for sales securities of $1.965 million (net of income tax of $.522 million) and actuarial losses on the defined benefit pension obligation of $.583 million (net of income tax of $.139 million). At December 31, 2019, the balance in accumulated other comprehensive income consisted of unrealized losses on available for sale securities of $1.025 million (net of income tax of $.273 million) and actuarial losses on the defined benefit pension obligation of $.410 million (net of income tax of $.147 million).
Earnings per Common Share
Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options and warrants were exercised and stock awards were fully vested and resulted in the issuance of common stock that then shared in our earnings, is computed by dividing net income by the weighted average number of common shares outstanding and common stock equivalents, after giving effect for dilutive shares issued.
The following shows the computation of basic and diluted earnings per share for the years ended December 31, 2020 and 2019 (dollars in thousands, except per share data):
Year Ended December 31,
(Numerator):
Net income
$
13,473
$
13,850
(Denominator):
Weighted average shares outstanding
10,580,044
10,737,653
Effect of restricted stock awards
-
19,854
Diluted weighted average shares outstanding
10,580,044
10,757,507
Income per common share:
Basic
$
1.27
$
1.29
Diluted
$
1.27
$
1.29
Income Taxes
Deferred income taxes have been provided under the balance sheet method. Deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences are expected to reverse. Deferred tax expense (benefit) is the result of changes in the deferred tax asset and liability. A valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred asset will not be realized.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Corporation has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit, and standby
letters of credit. For letters of credit, the Corporation recognizes a liability for the fair market value of the obligations it assumes under that guarantee.
Recent Developments
In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.
ASU 2016-13 requires an entity to measure expected credit losses for financial assets over the estimated lifetime of expected credit loss and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The standard includes the following core concepts in determining the expected credit loss. The estimate must: (a) be based on an asset’s amortized cost (including premiums or discounts, net deferred fees and costs, foreign exchange and fair value hedge accounting adjustments), (b) reflect losses expected over the remaining contractual life of an asset (considering the effect of voluntary prepayments), (c) consider available relevant information about the estimated collectability of cash flows (including information about past events, current conditions, and reasonable and supportable forecasts), and (d) reflect the risk of loss, even when that risk is remote.
ASU 2016-13 also amends the recording of purchased credit-deteriorated assets. Under the new guidance, an allowance will be recognized at acquisition through a gross-up approach whereby an entity will record as the initial amortized cost the sum of (a) the purchase price and (b) an estimate of credit losses as of the date of acquisition. In addition, the guidance also requires immediate recognition in earnings of any subsequent changes, both favorable and unfavorable, in expected cash flows by adjusting this allowance.
ASU 2016-13 also amends the impairment model for available-for-sale debt securities and requires entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. Management may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists, as is currently permitted. In addition, an entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. As a result, entities will recognize improvements to credit losses on available-for-sale debt securities immediately in earnings rather than as interest income over time under current practice.
New disclosures required by ASU 2016-13 include: (a) for financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes, (b) for financial receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year or the asset’s origination or vintage for as many as five annual periods, and (c) for available-for-sale debt securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due.
Upon adoption of ASU 2016-13, a cumulative-effect adjustment to retained earnings will be recorded as of the beginning of the first reporting period in which the guidance is effective. The Corporation is currently evaluating the provisions of ASU 2016-13 to determine the potential impact on the Coporation’s consolidated financial condition and result of operations. The Corporation has formed a cross-functional implementation team consisting of individuals from finance, credit and information systems. A project plan and timeline has been developed and the implementation team meets regularly to assess the project status to ensure adherence to the timeline. The implementation team has also been working with a software vendor to assist in implementing required changes to credit loss estimation models and processes, and is finalizing the historical data collected to be utilized in the credit loss models. The Corporation expects to recognize a cumulative effect adjustment to the opening balance of retained earnings as of the beginning of the first reporting period in which ASU 2016-13 is effective. The Corporation has not yet determined the magnitude of any such one-time adjustment or the potential impact of ASU 2016-13 on its condensed consolidated financial statements. In October 2019 the Financial Accounting Standards Board (FASB) voted to defer the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for smaller reporting companies (as defined by the Securities Exchange Commission). As the Corporation qualifies as a smaller reporting company, management plans to delay the implementation of CECL beyond 2021 and adjust the timetable of the various
CECL implementation tasks. Management believes that the Corporation will benefit from additional time to parallel testing and refine credit loss estimation models.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard provides optional guidance for a limited period of time to ease the potential burden in accounting for and recognizing the effects of reference rate reform on financial reporting by offering expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform under certain criteria. The updated guidance is effective as of March 12, 2020 through December 31, 2022. The Corporation is currently assessing the impact this new standard will have on its financial statements.
Reclassifications
Certain amounts in the 2019 consolidated financial statements have been reclassified to conform to the 2020 presentation.
NOTE 2 - RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Effective March 24, 2020, the Federal Reserve announced the reduction of reserve requirement ratios to zero percent in an effort to free up liquidity in the banking system to support lending to households and businesses. As such, as of December 31, 2020, the Corporation had no restrictions on cash and cash equivalents. In the normal course of business, the Corporation maintains cash and due from bank balances with correspondent banks. Balances in these accounts may exceed the Federal Deposit Insurance Corporation’s insured limit of $250,000. Management believes that these financial institutions have strong credit ratings and the credit risk related to these deposits is minimal.
NOTE 3 - SECURITIES AVAILABLE FOR SALE
The carrying value and estimated fair value of securities available for sale are as follows (dollars in thousands):
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
December 31, 2020
Corporate
$
27,815
$
$
(19)
$
28,043
US Agencies
6,480
-
6,589
US Agencies - MBS
33,372
(6)
34,280
Obligations of states and political subdivisions
41,682
1,242
-
42,924
Total securities available for sale
$
109,349
$
2,512
$
(25)
$
111,836
December 31, 2019
Corporate
$
20,779
$
$
(1)
$
20,938
US Agencies
14,450
(1)
14,496
US Agencies - MBS
34,063
(29)
34,526
Obligations of states and political subdivisions
37,382
-
38,012
Total securities available for sale
$
106,674
$
1,329
$
(31)
$
107,972
Following is information pertaining to securities with gross unrealized losses at December 31, 2020 and 2019 aggregated by investment category and length of time these individual securities have been in a loss position (dollars in thousands):
Less Than Twelve Months
Over Twelve Months
Gross
Gross
Unrealized
Fair
Unrealized
Fair
Losses
Value
Losses
Value
December 31, 2020
Corporate
$
(19)
$
9,293
$
-
$
-
US Agencies
-
-
-
-
US Agencies - MBS
(2)
(4)
Obligations of states and political subdivisions
-
-
-
-
Total securities available for sale
$
(21)
$
9,376
$
(4)
$
December 31, 2019
Corporate
(1)
2,502
-
-
US Agencies
-
-
(1)
US Agencies - MBS
(9)
6,966
(20)
1,233
Obligations of states and political subdivisions
-
-
-
-
Total securities available for sale
$
(10)
$
9,468
$
(21)
$
1,733
There were 10 securities in an unrealized loss position in 2020 and 26 in 2019. The gross unrealized losses in the current portfolio are considered temporary in nature and related to interest rate fluctuations. The Corporation has both the ability and intent to hold the investment securities until their respective maturities and therefore does not anticipate the realization of the temporary losses.
Following is a summary of the proceeds from sales and calls of securities available for sale, as well as gross gains and losses for the years ended December 31 (dollars in thousands):
Proceeds from sales and calls
$
9,560
$
5,805
Gross gains on sales and calls
The carrying value and estimated fair value of securities available for sale at December 31, 2020, by contractual maturity, are shown below (dollars in thousands):
Amortized
Estimated
Cost
Fair Value
Due in one year or less
$
15,645
$
15,820
Due after one year through five years
22,554
23,201
Due after five years through ten years
24,965
25,261
Due after ten years
12,813
13,274
Subtotal
75,977
77,556
US Agencies - MBS
33,372
34,280
Total
$
109,349
$
111,836
Contractual maturities may differ from expected maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities with a market value of $22.438 million are pledged as collateral to the Federal Home Loan Bank and $3.752 million are pledged to certain customer relationships. See Note 10 for information on securities pledged to secure borrowings from the Federal Home Loan Bank.
The following is information pertaining to securities with gross unrealized losses at December 31, 2020 and 2019 (dollars in thousands):
Less Than Twelve Months
Over Twelve Months
Total
Number
Gross
Number
Gross
Number
Gross
of
Fair
Unrealized
of
Fair
Unrealized
of
Fair
Unrealized
December 31, 2020
Securities
Value
Loss
Securities
Value
Loss
Securities
Value
Loss
Corporate
$
9,293
$
(19)
-
$
-
$
-
$
9,293
$
(19)
US Agencies
-
-
-
-
-
-
-
-
-
US Agencies - MBS
(2)
(4)
(6)
Obligations of states and political subdivisions
-
-
-
-
-
-
-
-
-
Total
$
9,376
$
(21)
$
$
(4)
$
9,499
$
(25)
Less Than Twelve Months
Over Twelve Months
Total
Number
Gross
Number
Gross
Number
Gross
of
Fair
Unrealized
of
Fair
Unrealized
of
Fair
Unrealized
December 31, 2019
Securities
Value
Loss
Securities
Value
Loss
Securities
Value
Loss
Corporate
$
2,502
$
(1)
-
$
-
$
-
$
2,502
$
(1)
US Agencies
-
-
-
(1)
(1)
US Agencies - MBS
6,966
(9)
1,233
(20)
8,199
(29)
Obligations of states and political subdivisions
-
-
-
-
-
Total
$
9,468
$
(10)
$
1,848
$
(21)
$
11,316
$
(31)
NOTE 4 - LOANS
The composition of loans at December 31 is as follows (dollars in thousands):
December 31,
December 31,
Commercial real estate
$
498,450
$
514,394
Commercial, financial, and agricultural
273,759
211,023
Commercial construction
47,698
40,107
One to four family residential real estate
227,044
253,918
Consumer
18,980
21,238
Consumer construction
11,661
18,096
Total loans
$
1,077,592
$
1,058,776
The Corporation completed the acquisition of Peninsula Financial Corporation, (“PFC”), on December 5, 2014, The First National Bank of Eagle River (“Eagle River”) on April 29, 2016, Niagara Bancorporation (“Niagara”) on August 31, 2016, First Federal of Northern Michigan Bancorp, Inc. (“FFNM”) on May 18, 2018, and Lincoln Community Bank (“Lincoln”) on October 1, 2018. The PFC acquired impaired loans totaled $13.290 million, the Eagle River acquired impaired loans totaled $3.401 million, and the Niagara acquired impaired loans totaled $2.105 million. The FFNM impaired loans totaled $5.440 million and the Lincoln impaired loans totaled $1.901 million. In 2020, the Corporation had positive resolution of acquired nonperforming loans, which resulted in the recognition of accretable interest of approximately $1.006 million. In 2019, The Corporation had positive resolution of acquired nonperforming loans, which resulted in the recognition of approximately $.404 million of accretable interest.
The table below details the outstanding balances of the PFC acquired portfolio and the acquisition fair value adjustments at acquisition date (dollars in thousands):
Acquired
Acquired
Acquired
Impaired
Non-impaired
Total
Loans acquired - contractual payments
$
13,290
$
53,849
$
67,139
Nonaccretable difference
(2,234)
-
(2,234)
Expected cash flows
11,056
53,849
64,905
Accretable yield
(744)
(2,100)
(2,844)
Carrying balance at acquisition date
$
10,312
$
51,749
$
62,061
Loans acquired with deteriorated credit quality in the PFC transaction carried a balance of $.793 million at December 31, 2020 and $1.718 million at December 31, 2019.
The table below details the outstanding balances of the Eagle River acquired portfolio and the acquisition fair value adjustments at acquisition date (dollars in thousands):
Acquired
Acquired
Acquired
Impaired
Non-impaired
Total
Loans acquired - contractual payments
$
3,401
$
80,737
$
84,138
Nonaccretable difference
(1,172)
-
(1,172)
Expected cash flows
2,229
80,737
82,966
Accretable yield
(391)
(1,700)
(2,091)
Carrying balance at acquisition date
$
1,838
$
79,037
$
80,875
Loans acquired with deteriorated credit quality in the Eagle River transaction carried a balance of $1.273 million at December 31, 2020 and $1.716 million at December 31, 2019.
The table below details the outstanding balances of the Niagara acquired portfolio and the acquisition fair value adjustments at acquisition date (dollars in thousands):
Acquired
Acquired
Acquired
Impaired
Non-impaired
Total
Loans acquired - contractual payments
$
2,105
$
30,555
$
32,660
Nonaccretable difference
(265)
-
(265)
Expected cash flows
1,840
30,555
32,395
Accretable yield
(88)
(600)
(688)
Carrying balance at acquisition date
$
1,752
$
29,955
$
31,707
Loans acquired with deteriorated credit quality in the Niagara transaction carried a balance of $.048 million at December 31, 2020 and $.075 million at December 31, 2019.
The table below details the outstanding balances of the FFNM acquired portfolio and the acquisition fair value adjustments at acquisition date (dollars in thousands):
Acquired
Acquired
Acquired
Impaired
Non-impaired
Total
Loans acquired - contractual payments
$
5,440
$
187,302
$
192,742
Nonaccretable difference
(2,100)
-
(2,100)
Expected cash flows
3,340
187,302
190,642
Accretable yield
(700)
(4,498)
(5,198)
Carrying balance at acquisition date
$
2,640
$
182,804
$
185,444
Loans acquired with deteriorated credit quality in the FFNM transaction carried a balance of $3.369 million at December 31, 2020 and $5.119 million at December 31, 2019.
The table below details the outstanding balances of the Lincoln acquired portfolio and the acquisition fair value adjustments at acquisition date (dollars in thousands):
Acquired
Acquired
Acquired
Impaired
Non-impaired
Total
Loans acquired - contractual payments
$
1,901
$
37,700
$
39,601
Nonaccretable difference
(421)
-
(421)
Expected cash flows
1,480
37,700
39,180
Accretable yield
(140)
(493)
(633)
Carrying balance at acquisition date
$
1,340
$
37,207
$
38,547
Loans acquired with deteriorated credit quality in the Lincoln transaction carried a balance of $.548 million at December 31, 2020 and $.897 million at December 31, 2019.
The table below presents a rollforward of the accretable yield on acquired loans for year ended December 31, 2020 (dollars in thousands):
PFC
Eagle River
Acquired
Acquired
Acquired
Acquired
Acquired
Acquired
Impaired
Non-impaired
Total
Impaired
Non-impaired
Total
Balance, December 31, 2019
$
$
-
$
$
$
-
$
Accretion
(207)
-
(207)
(104)
-
(104)
Reclassification from nonaccretable difference
-
-
Balance, December 31, 2020
$
$
-
$
$
$
-
$
Niagara
First Federal Northern Michigan
Acquired
Acquired
Acquired
Acquired
Acquired
Acquired
Impaired
Non-impaired
Total
Impaired
Non-impaired
Total
Balance, December 31, 2019
$
$
-
$
$
$
1,953
$
2,471
Accretion
(27)
-
(27)
(903)
(1,085)
(1,988)
Reclassification from nonaccretable difference
-
Balance, December 31, 2020
$
$
-
$
$
$
$
1,161
Lincoln Community Bank
Total
Acquired
Acquired
Acquired
Acquired
Acquired
Acquired
Impaired
Non-impaired
Total
Impaired
Non-impaired
Total
Balance, December 31, 2019
$
$
$
$
$
2,217
$
3,176
Accretion
(95)
(134)
(229)
(1,336)
(1,219)
(2,555)
Reclassification from nonaccretable difference
-
1,002
1,003
Balance, December 31, 2020
$
$
$
$
$
$
1,624
The table below presents a rollforward of the accretable yield on acquired loans for year ended December 31, 2019 (dollars in thousands):
PFC
Eagle River
Acquired
Acquired
Acquired
Acquired
Acquired
Acquired
Impaired
Non-impaired
Total
Impaired
Non-impaired
Total
Balance, December 31, 2018
$
$
-
$
$
$
$
Accretion
(90)
-
(90)
(17)
(16)
(33)
Reclassification from nonaccretable difference
-
-
Balance, December 31, 2019
$
$
-
$
$
$
-
$
Niagara
First Federal Northern Michigan
Acquired
Acquired
Acquired
Acquired
Acquired
Acquired
Impaired
Non-impaired
Total
Impaired
Non-impaired
Total
Balance, December 31, 2018
$
$
$
$
$
3,446
$
4,017
Accretion
(30)
(69)
(99)
(214)
(1,493)
(1,707)
Reclassification from nonaccretable difference
-
-
Balance, December 31, 2019
$
$
-
$
$
$
1,953
$
2,471
Lincoln Community Bank
Total
Acquired
Acquired
Acquired
Acquired
Acquired
Acquired
Impaired
Non-impaired
Total
Impaired
Non-impaired
Total
Balance, December 31, 2018
$
$
$
$
1,078
$
3,973
$
5,051
Accretion
(128)
(178)
(306)
(479)
(1,756)
(2,235)
Reclassification from nonaccretable difference
-
-
Balance, December 31, 2019
$
$
$
$
$
2,217
$
3,176
A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2020 is as follows (dollars in thousands):
Commercial,
One to four
Commercial
financial and
Commercial
family residential
Consumer
real estate
agricultural
construction
real estate
construction
Consumer
Unallocated
Total
Allowance for loan loss reserve:
Beginning balance ALLR
$
1,189
$
1,197
$
$
$
$
$
2,679
$
5,308
Charge-offs
(17)
(500)
(8)
(117)
-
(117)
-
(759)
Recoveries
-
-
Provision
1,706
1,036
(6)
(2,407)
1,000
Ending balance ALLR
$
2,983
$
1,734
$
$
$
$
$
$
5,816
Loans:
Ending balance
$
498,450
$
273,759
$
47,698
$
227,044
$
11,661
$
18,980
$
-
$
1,077,592
Ending balance ALLR
(2,983)
(1,734)
(209)
(605)
(5)
(8)
(272)
(5,816)
Net loans
$
495,467
$
272,025
$
47,489
$
226,439
$
11,656
$
18,972
$
(272)
$
1,071,776
Ending balance ALLR:
Individually evaluated
$
$
$
-
$
-
$
-
$
-
$
-
$
1,179
Collectively evaluated
2,507
1,031
4,637
Total
$
2,983
$
1,734
$
$
$
$
$
$
5,816
Ending balance Loans:
Individually evaluated
$
2,396
$
3,633
$
$
-
$
-
$
-
$
-
$
6,391
Collectively evaluated
494,890
269,891
47,161
226,175
11,661
18,964
-
1,068,742
Acquired with deteriorated credit quality
1,164
-
-
2,459
Total
$
498,450
$
273,759
$
47,698
$
227,044
$
11,661
$
18,980
$
-
$
1,077,592
Impaired loans, by definition, are individually evaluated.
A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2019 is as follows (dollars in thousands):
Commercial,
One to four
Commercial
financial and
Commercial
family residential
Consumer
real estate
agricultural
construction
real estate
construction
Consumer
Unallocated
Total
Allowance for loan loss reserve:
Beginning balance ALLR
$
1,682
$
$
$
$
$
$
2,539
$
5,183
Charge-offs
(27)
(103)
-
(152)
-
(228)
-
(510)
Recoveries
-
-
Provision
(625)
(32)
Ending balance ALLR
$
1,189
$
1,197
$
$
$
$
$
2,679
$
5,308
Loans:
Ending balance
$
514,394
$
211,023
$
40,107
$
253,918
$
18,096
$
21,238
$
-
$
1,058,776
Ending balance ALLR
(1,189)
(1,197)
(71)
(148)
(11)
(13)
(2,679)
(5,308)
Net loans
$
513,205
$
209,826
$
40,036
$
253,770
$
18,085
$
21,225
$
(2,679)
$
1,053,468
Ending balance ALLR:
Individually evaluated
$
$
$
-
$
-
$
-
$
-
$
-
$
1,267
Collectively evaluated
2,679
4,041
Total
$
1,189
$
1,197
$
$
$
$
$
2,679
$
5,308
Ending balance Loans:
Individually evaluated
$
2,374
$
1,475
$
-
$
-
$
-
$
-
$
-
$
3,849
Collectively evaluated
507,702
207,194
39,734
251,998
18,096
21,229
-
1,045,953
Acquired with deteriorated credit quality
4,318
2,354
1,920
-
-
8,974
Total
$
514,394
$
211,023
$
40,107
$
253,918
$
18,096
$
21,238
$
-
$
1,058,776
Impaired loans, by definition, are individually evaluated.
As part of the management of the loan portfolio, risk ratings are assigned to all commercial loans. Through the loan review process, ratings are modified as believed to be appropriate to reflect changes in the credit. Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans.
To do so, we operate a credit risk rating system under which our credit management personnel assign a credit risk rating to each loan at the time of origination and review loans on a regular basis to determine each loan’s credit risk rating on a scale of 1 through 8, with higher scores indicating higher risk. The credit risk rating structure used is shown below.
In the context of the credit risk rating structure, the term Classified is defined as a problem loan which may or may not be in a nonaccrual status, dependent upon current payment status and collectability.
Strong (1)
Borrower is not vulnerable to sudden economic or technological changes. They have “strong” balance sheets and are within an industry that is very typical for our markets or type of lending culture. Borrowers also have “strong” financial and cash flow performance and excellent collateral (low loan to value or readily available to liquidate collateral) in conjunction with an impeccable repayment history.
Good (2)
Borrower shows limited vulnerability to sudden economic change. These borrowers have “above average” financial and cash flow performance and a very good repayment history. The balance sheet of the company is also very good as compared to peer and the company is in an industry that is familiar to our markets or our type of lending. The collateral securing the deal is also very good in terms of its type, loan to value, etc.
Average (3)
Borrower is typically a well-seasoned business, however may be susceptible to unfavorable changes in the economy, and could be somewhat affected by seasonal factors. The borrowers within this category exhibit financial and cash flow performance that appear “average” to “slightly above average” when compared to peer standards and they show an adequate payment history. Collateral securing this type of credit is good, exhibiting above average loan to values, etc.
Acceptable (4)
A borrower within this category exhibits financial and cash flow performance that appear adequate and satisfactory when compared to peer standards and they show a satisfactory payment history. The collateral securing the request is within supervisory limits and overall is acceptable. Borrowers rated acceptable could also be newer businesses that are typically susceptible to unfavorable changes in the economy, and more than likely could be affected by seasonal factors.
Acceptable Watch (44)
The borrower may have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Acceptable watch assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Examples of this type of credit include a start-up company fully based on projections, a documentation issue that needs to be corrected or a general market condition that the borrower is working through to get corrected.
Substandard (6)
Substandard loans are classified assets exhibiting a number of well-defined weaknesses that jeopardize normal repayment. The assets are no longer adequately protected due to declining net worth, lack of earning capacity, or insufficient collateral offering the distinct possibility of the loss of a portion of the loan principal. Loans classified as substandard clearly represent troubled and deteriorating credit situations requiring constant supervision.
Doubtful (7)
Loans in this category exhibit the same, if not more pronounced weaknesses used to describe the substandard credit. Loans are frozen with collection improbable. Such loans are not yet rated as Charge-off because certain actions may yet occur which would salvage the loan.
Charge-off/Loss (8)
Loans in this category are largely uncollectible and should be charged against the loan loss reserve immediately.
General Reserves:
For loans with a credit risk rating of 44 or better and any loans with a risk rating of 6 or 7 not considered impaired, reserves are established based on the type of loan collateral, if any, and the assigned credit risk rating. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, and consideration of current environmental factors and economic trends, all of which may be susceptible to significant change.
Using a historical average loss by loan type as a base, each loan graded as higher risk is assigned a specific percentage. The residential real estate and consumer loan portfolios are assigned a loss percentage as a homogenous group. If, however, on an individual loan the projected loss based on collateral value and payment histories are in excess of the computed allowance, the allocation is increased for the higher anticipated loss. These computations provide the basis for the allowance for loan losses as recorded by the Corporation.
Commercial construction loans in the amount of $10.939 million and $3.525 million at December 31, 2020, and 2019, respectively did not receive a specific risk rating. These amounts represent loans made for land development and unimproved land purchases.
Below is a breakdown of loans by risk category as of December 31, 2020 (dollars in thousands):
(1)
(2)
(3)
(4)
(44)
(6)
(7)
Rating
Strong
Good
Average
Acceptable
Acceptable Watch
Substandard
Doubtful
Unassigned
Total
Commercial real estate
$
7,425
$
10,521
$
223,875
$
249,159
$
3,352
$
4,118
$
-
$
-
$
498,450
Commercial, financial and agricultural
116,107
6,760
51,150
94,743
4,343
-
-
273,759
Commercial construction
-
19,063
16,671
-
10,939
47,698
One-to-four family residential real estate
-
3,139
5,614
18,864
1,814
-
197,244
227,044
Consumer construction
-
-
-
-
-
-
-
11,661
11,661
Consumer
-
1,141
-
-
17,565
18,980
Total loans
$
123,532
$
20,539
$
299,830
$
380,578
$
4,977
$
10,727
$
-
$
237,409
$
1,077,592
At December 31, 2020, $105.492 million of Paycheck Protection Program (“PPP”) loans are included with a risk rating of “1” in the Commercial, financial and agricultural category.
Below is a breakdown of loans by risk category as of December 31, 2019 (dollars in thousands)
(1)
(2)
(3)
(4)
(44)
(6)
(7)
Rating
Strong
Good
Average
Acceptable
Acceptable Watch
Substandard
Doubtful
Unassigned
Total
Commercial real estate
$
9,979
$
17,516
$
228,962
$
248,177
$
4,468
$
5,292
$
-
$
-
$
514,394
Commercial, financial and agricultural
15,126
4,510
70,748
115,229
4,480
-
-
211,023
Commercial construction
-
6,390
28,893
-
3,525
40,107
One-to-four family residential real estate
2,145
4,937
15,168
2,632
-
228,362
253,918
Consumer construction
-
-
-
-
-
-
-
18,096
18,096
Consumer
-
-
-
20,149
21,238
Total loans
$
25,145
$
24,621
$
311,287
$
408,107
$
6,432
$
13,052
$
-
$
270,132
$
1,058,776
Impaired Loans
Impaired 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.
Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loans basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The following is a summary of impaired loans and their effect on interest income (dollars in thousands):
Impaired Loans
Impaired Loans
Total
Unpaid
Related
with No Related
with Related
Impaired
Principal
Allowance for
Allowance
Allowance
Loans
Balance
Loan Losses
December 31, 2020
Commercial real estate
$
1,251
$
2,309
$
3,560
$
5,786
$
Commercial, financial and agricultural
2,423
1,445
3,868
3,946
Commercial construction
-
-
One to four family residential real estate
-
1,993
-
Consumer construction
-
-
-
-
-
Consumer
-
-
Total
$
5,096
$
3,754
$
8,850
$
12,422
$
1,155
December 31, 2019
Commercial real estate
$
4,318
$
2,374
$
6,692
$
7,937
$
Commercial, financial and agricultural
2,354
1,475
3,829
4,892
Commercial construction
-
-
One to four family residential real estate
1,920
-
1,920
2,881
-
Consumer construction
-
-
-
-
-
Consumer
-
-
Total
$
8,974
$
3,849
$
12,823
$
16,129
$
1,267
Individually Evaluated Impaired Loans
December 31, 2020
December 31, 2019
Average
Interest Income
Average
Interest Income
Balance for
Recognized for
Balance for
Recognized for
the Period
the Period
the Period
the Period
Commercial real estate
$
6,860
$
$
8,374
$
Commercial, financial and agricultural
1,204
1,144
Commercial construction
-
One to four family residential real estate
3,064
3,508
Consumer construction
-
-
-
-
Consumer
Total
$
11,706
$
$
13,466
$
A summary of past due loans at December 31, is as follows (dollars in thousands):
December 31,
December 31,
30-89 days
90+ days
30-89 days
90+ days
Past Due
Past Due
Past Due
Past Due
(accruing)
(accruing)
Nonaccrual
Total
(accruing)
(accruing)
Nonaccrual
Total
Commercial real estate
$
$
-
$
1,481
$
1,505
$
1,055
$
-
$
$
1,726
Commercial, financial and agricultural
-
-
1,356
Commercial construction
-
-
-
One to four family residential real estate
1,925
-
3,371
5,296
4,357
3,850
8,218
Consumer construction
-
-
-
-
-
-
-
-
Consumer
-
-
Total past due loans
$
2,069
$
-
$
5,458
$
7,527
$
6,383
$
$
5,172
$
11,566
Troubled Debt Restructuring
Troubled debt restructurings (“TDR”) are determined on a loan-by-loan basis. Generally, restructurings are related to interest rate reductions, loan term extensions and short term payment forbearance as means to maximize collectability of troubled credits. If a portion of the TDR loan is uncollectible (including forgiveness of principal), the uncollectible amount will be charged off against the allowance at the time of the restructuring. In general, a borrower must make at least six consecutive timely payments before the Corporation would consider a return of a restructured loan to accruing status in accordance with FDIC guidelines regarding restoration of credits to accrual status. More recent regulatory guidelines and accounting standards indicate that loan modifications or forbearances related to the COVID-19 pandemic will generally not be considered TDRs. COVID-19 loan modifications resided at a nominal $2.4 million, or .25% of total loans with no commercial loans remaining in total payment deferral at December 31, 2020. This is compared to peak levels of $201 million in the second quarter of 2020. Subsequent to the end of 2020, the bank has modified an additional $16 million of commercial loans under the COVID framework. All modifications still require interest
payments and there were no changes to interest rate. The modification period of the loans is expected to be completed before the end of the first quarter of 2021.
The Corporation has, in accordance with generally accepted accounting principles and per recently enacted accounting standard updates, evaluated all loan modifications to determine the fair value impact of the underlying asset. The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral.
There were four new troubled debt restructuring that occurred during the year ended December 31, 2020 with a balance of $.535 million, and four new troubled debt restructurings for the year ended December 31, 2019 with a balance of $1.952 million. There are no existing troubled debt restructurings that have defaulted as of December 31, 2020 and 2019. The four TDRs are not COVID-19 related.
Insider Loans
The Bank, in the ordinary course of business, grants loans to the Corporation’s executive officers and directors, including their families and firms in which they are principal owners. Activity in such loans is summarized below (dollars in thousands):
Year Ended
Year Ended
December 31,
December 31,
Loans outstanding, January 1
$
12,196
$
9,817
New loans
1,872
Net activity on revolving lines of credit
(764)
1,200
Change in status of insiders
-
(289)
Repayment
(154)
(404)
Loans outstanding at end of period
$
11,778
$
12,196
There were no loans to related-parties classified substandard as of December 31, 2020 and 2019. In addition to the outstanding balances above, there were unfunded commitments of $.500 million to related parties at December 31, 2020.
NOTE 5 - PREMISES AND EQUIPMENT
Details of premises and equipment at December 31 are as follows (dollars in thousands):
Land
$
4,286
$
4,349
Buildings and improvements
30,637
26,711
Furniture, fixtures, and equipment
17,230
15,483
Construction in progress
1,555
Total cost basis
52,339
48,098
Less - accumulated depreciation
26,821
24,490
Net book value
$
25,518
$
23,608
Depreciation of premises and equipment charged to operating expenses amounted to $2.798 million in 2020 and $2.684 million in 2019.
NOTE 6 - OTHER REAL ESTATE HELD FOR SALE
An analysis of other real estate held for sale for the years ended December 31 is as follows (dollars in thousands):
Balance, January 1
$
2,194
$
3,119
Other real estate transferred from loans due to foreclosure
1,629
Proceeds from other real estate sold
(1,338)
(1,329)
Transfer to premise and equipment
-
(1,013)
Writedowns of other real estate held for sale
(65)
(347)
Gain on sale of other real estate held for sale
Total other real estate held for sale
$
1,752
$
2,194
Foreclosed residential real estate property of $.453 million is included in other real estate as of December 31, 2020. The recorded investment in consumer mortgage loans secured by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdictions was $.151 million as of December 31, 2020.
NOTE 7 - DEPOSITS
The distribution of deposits at December 31 is as follows (dollars in thousands):
Noninterest bearing deposits
$
414,804
$
287,611
NOW, money market, interest checking
450,556
373,165
Savings
130,755
109,548
CDs <$250,000
202,266
233,956
CDs >$250,000
15,224
12,775
Brokered
45,171
58,622
Total deposits
$
1,258,776
$
1,075,677
Maturities of non-brokered time deposits outstanding at December 31, 2020 are as follows (dollars in thousands):
$
137,497
48,023
14,759
11,260
5,251
Thereafter
Total
$
217,490
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS
The Corporation through the acquisition of Peninsula in 2014, Eagle River and Niagara in 2016, and FFNM and Lincoln in 2018, has recorded goodwill and core deposit intangibles as presented below (dollars in thousands). During 2019, the Corporation recorded period adjustments to both FFNM and Lincoln goodwill as it concluded its business combination and purchase accounting. Adjustments for the FFNM transaction resulted in an increase in the deferred tax asset of $1.950 million, an increase to MSRs of $.500 million and a decrease in goodwill of $2.450 million. Adjustments for the Lincoln transaction resulted in a decrease in the deferred tax liability of $.163 million, and a corresponding decrease in goodwill.
Deposit Based
Amortization Expense
Intangible
for the
Future Annual
December 31, 2020
year ended
Amortization
Balance
December 31, 2020
Expense
Peninsula
$
$
$
Eagle River
Niagara
FFNM
2,147
Lincoln
1,049
Total
$
4,368
$
$
Deposit Based
Intangible
December 31, 2019
Amortization
Balance
Expense
Peninsula
$
$
Eagle River
Niagara
FFNM
2,436
Lincoln
1,184
Total
$
5,043
$
The deposit based intangible is reported net of accumulated amortization at $4.368 million at December 31, 2020, compared to $5.043 million at December 31, 2019. Amortization expense in 2020 is $.675 million compared to $.677 million in 2019. Amortization expense for the next five years is expected to be at $.675 million per year. The Corporation, in accordance with GAAP, evaluates goodwill annually for impairment. The Corporation has determined no impairment to goodwill exists.
NOTE 9 - SERVICING RIGHTS
Mortgage Loans
Mortgage servicing rights (“MSRs”) are recorded when loans are sold in the secondary market with servicing retained. As of December 31, 2020, the Corporation had rights to service $204.548 million of residential first mortgage loans. The valuation of MSRs is based upon the net present value of the projected revenues over the expected life of the loans being serviced, as reduced by estimated internal costs to service these loans. The key economic assumptions used in determining the fair value of the mortgage servicing rights include an annual constant prepayment speed of 19.01% and a discount rate of 7.75% for December 31, 2020, which resulted in a fair value of $1.436 million. In 2019, the fair value was $2.159 million.
The following summarizes the fair value and net present value of the mortgage servicing rights capitalized and amortized. There was no valuation allowance required (dollars in thousands):
December 31,
December 31,
Balance at beginning of period
$
1,499
$
1,144
Final purchase accounting entry for FFNM
-
Additions from loans sold with servicing retained
-
Amortization
(140)
(240)
Balance at end of period
$
1,359
$
1,499
Balance of loan servicing portfolio
$
204,548
$
255,757
Mortgage servicing rights as % of portfolio
.66%
.59%
Fair value of servicing rights
1,436
2,159
Commercial Loans
The Corporation also retains the servicing on commercial loans that have been sold that were originated and underwritten under the SBA and USDA government guarantee programs, in which the guaranteed portion of the loan was sold to a third party with servicing retained. The balance of these sold loans with servicing retained at December 31, 2020 and December 31, 2019 was approximately $53 million and $41 million, respectively. The Corporation valued these servicing rights at $311,000 as of December 31, 2020 and $218,000 at December 31, 2019. This valuation was established in consideration of the discounted cash flow of expected servicing income over the life of the loans.
NOTE 10 - BORROWINGS
Borrowings consist of the following at December 31 (dollars in thousands):
December 31,
December 31,
Federal Home Loan Bank fixed rate advances
$
63,155
$
64,148
USDA Rural Development note
$
63,479
$
64,551
The Federal Home Loan Bank borrowings bear a weighted average rate of 1.67% and mature in 2021, 2023, 2024, and 2026. They are collateralized at December 31, 2020 by the following: a collateral agreement on the Corporation’s one to four family residential real estate loans with a book value of approximately $73.005 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $21.840 million and $22.438 million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $4.924 million. Prepayment of the advances is subject to the provisions and conditions of the credit policies of the Federal Home Loan Bank of Indianapolis in effect as of December 31, 2020.
The Corporation currently has one correspondent banking borrowing relationship. The relationship consists of a $15.0 million revolving line of credit, which had no outstanding balance at December 31, 2020 and December 31, 2019. The line of credit bears interest at a rate of LIBOR plus 2.00%, with a floor rate of 3.00% and a ceiling of 22%. The line of credit expires on April 30, 2022. LIBOR was 0.24% at December 31, 2020. The relationship is secured by all of the outstanding common stock of mBank.
The USDA Rural Development borrowing bears an interest rate of 1.00% and matures in August, 2024. It is collateralized by loans totaling $.324 million originated and held by the Corporation’s wholly owned subsidiary, First Rural Relending, and an assignment of a demand deposit account in the amount of $.374 million, and guaranteed by the Corporation.
Maturities and principal payments of borrowings outstanding at December 31, 2020 are as follows (dollars in thousands):
$
35,082
25,081
-
Thereafter
3,000
Total
$
63,479
NOTE 11 - INCOME TAXES
The components of the federal income tax provision (credit) for the years ended December 31 are as follows (dollars in thousands):
Current tax expense
$
2,954
$
2,513
Deferred tax expense
1,347
Provision for income taxes
$
3,583
$
3,860
A summary of the source of differences between income taxes at the federal statutory rate and the provision (credit) for income taxes for the years ended December 31 is as follows (dollars in thousands):
Tax expense at statutory rate
$
3,357
$
3,719
Increase (decrease) in taxes resulting from:
Tax-exempt interest
(154)
(110)
Nondeductible expenses
Wisconsin income tax expense, net of federal impact
-
Provision for income taxes, as reported
$
3,583
$
3,860
Deferred income taxes are provided for the temporary differences between the financial reporting and tax bases of the Corporation’s assets and liabilities. The major components of net deferred tax assets at December 31 are as follows (dollars in thousands):
Deferred tax assets:
NOL carryforward
$
1,671
$
2,147
Allowance for loan losses
1,277
1,144
OREO
Deferred compensation
Pension liability
Stock compensation
Purchase accounting adjustments
1,507
Lease liability
Other
Total deferred tax assets
6,146
6,872
Deferred tax liabilities:
Core deposit premium
(959)
(1,108)
FHLB stock dividend
(73)
(73)
Right of use asset
(928)
(980)
Unrealized gain on securities
(522)
(273)
Other
(361)
(706)
Total deferred tax liabilities
(2,843)
(3,140)
Net deferred tax asset
$
3,303
$
3,732
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. The Corporation, as of December 31, 2020 had a net operating loss carryforwards for tax purposes of approximately $8.0 million. 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 and credit carryforwards are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue Code. The annual limitation is $2.0 million for the NOL and the equivalent value of tax credits, which is approximately $.420 million. These limitations for use were established in conjunction with the recapitalization of the Corporation in December 2004. The Corporation will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted.
NOTE 12 - LEASES
The Corporation currently maintains four operating leases for branch locations in Birmingham, Marquette, Negaunee and Traverse City.
Future minimum payments for base rent, by year and in the aggregate, under the initial terms of the operating lease agreements, consist of the following (dollars in thousands):
Years Ending
Related Party
Unrelated Party
December 31
Amount
Amount
$
$
-
-
-
Thereafter
1,564
-
Subtotal
$
4,045
$
Less: imputed interest
(374)
(7)
Net lease liabilities
$
3,671
$
Rent expense for all operating leases amounted to $1.062 million in amortization of the right-of-use asset and $.102 million of interest on the lease liability in 2020. In 2019, the amortization of the right-of-use asset was $1.021 million and the interest on the lease liability was $.111 million.
NOTE 13 - RETIREMENT PLAN
The Corporation has established a 401(k) profit sharing plan. Employees who have completed three months of service and attained the age of 18 are eligible to participate in the plan. Eligible employees can elect to have a portion, not to exceed 80%, of their annual compensation paid into the plan. In addition, the Corporation may make discretionary contributions into the plan. Retirement plan contributions charged to operations totaled $.469 million and $.370 million in 2020 and 2019 respectively.
NOTE 14 - DEFINED BENEFIT PENSION PLAN
The Corporation acquired the Peninsula Financial Corporation noncontributory defined benefit pension plan. Effective December 31, 2005, the plan was amended to freeze participation in the plan; therefore, no additional employees are eligible to become participants in the plan. The benefits are based on years of service and the employee’s compensation at the time of retirement. The Plan was amended effective December 31, 2010, to freeze benefit accrual for all participants. Expected contributions to the Plan in 2021 are $57,000.
The anticipated distributions over the next five years and through December 31, 2030 are detailed in the table below (dollars in thousands):
$
2026-2030
Total
$
1,617
The following table sets forth the plan’s funded status and amounts recognized in the Corporation’s balance sheets and the activity from date of acquisition (dollars in thousands):
Change in benefit obligation:
Benefit obligation, beginning of year
$
3,447
$
2,991
Interest cost
Actuarial (gain) loss
Benefits paid
(132)
(130)
Benefit obligation at end of year
3,634
3,447
Change in plan assets:
Fair value of plan assets, beginning of year
2,259
1,987
Actual return on plan assets
Employer contributions
Benefits paid
(132)
(131)
Fair value of plan assets at end of year
2,264
2,259
Funded status, included with other liabilities
$
(1,370)
$
(1,188)
Net pension costs included in the Corporation’s results of operations was immaterial.
Assumptions in the actuarial valuation were:
Weighted average discount rate
2.45%
2.92%
Rate of increase in future compensation levels
N/A
N/A
Expected long-term rate of return on plan assets
2.00%
8.00%
The expected long-term rate of return on plan assets reflects management’s expectations of long-term average rates of return on funds invested to provide for benefits included in the projected benefit obligation. The expected return is based on the outlook for inflation, fixed income returns and equity returns, while also considering historical returns, asset allocation and investment strategy. The discount rate assumption is based on investment yields available on AA rated long-term corporate bonds.
The primary investment objective is to maximize growth of the pension plan assets to meet the projected obligations to the beneficiaries over a long period of time, and to do so in a manner that is consistent with the Corporation’s risk tolerance. The intention of the plan sponsor is to invest the plan assets in mutual funds with the following asset allocation, which was in place at both December 31, 2020 and December 31, 2019:
Target
Actual
Allocation
Allocation
Equity securities
50% to 70%
0%
Fixed income securities
30% to 50%
100%
NOTE 15 - DEFERRED COMPENSATION PLAN
Prior to the recapitalization in 2004, as an incentive to retain key members of management and directors, the Corporation established a deferred compensation plan, with benefits based on the number of years the individuals have served the Corporation. This plan was discontinued and no longer applies to current officers and directors. A liability was recorded on a present value basis and discounted using the rates in effect at the time the deferred compensation agreement was entered into. The liability may change depending upon changes in long-term interest rates. The liability at December 31, 2020 and 2019, for vested benefits under this plan, was $27,000 and $51,000, respectively. These benefits were originally contracted to be paid over a ten to fifteen-year period. The final payment is scheduled to occur in 2023. The deferred compensation plan is unfunded; however, the Bank maintains life insurance policies on the majority of the plan participants. The cash surrender value of the policies was $1.554 million and $1.498 million at December 31, 2020 and 2019, respectively.
Peninsula Financial Corporation, acquired by the Corporation in December 2014, also had a deferred compensation plan, which was similar in nature to the Corporation’s discontinued plan. The liability for this plan at December 31, 2020 and 2019, for vested benefits under this plan was $.605 million and $.757 million, respectively. The bank owned life insurance policy as of December 31, 2020 and 2019 had cash surrender values of $1.781 million and $1.773 million, respectively. This Plan was also discontinued by the Corporation and will not apply to future employees or directors of the Corporation.
First Federal of Northern Michigan, acquired in May 2018 had a deferred compensation plan, which was similar in nature to the Corporation’s discontinued plan. The liability for this plan at December 31, 2020 and December 31, 2019, for vested benefits under this plan was $.272 million and $.343 million respectively. The bank owned life insurance policy as of December 31, 2020 and December 31, 2019 had a cash surrender value of $5.441 million and $5.320 million respectively. This Plan was also discontinued by the Corporation and will not apply to future employees or directors of the Corporation.
Deferred compensation expense for the three plans was $84,000 and $99,000 for 2020 and 2019 respectively.
NOTE 16 - REGULATORY MATTERS
The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management has determined that, as of December 31, 2020, the Corporation is well capitalized.
The tables below do not include the 2.5% capital conservation buffer requirement. A bank with a capital conservation buffer greater than 2.5% of risk-weighted assets would not be restricted by payout limitations. However, if the 2.5% threshold is not met, the Bank would be subject to increasing limitations on capital distributions and discretionary bonus payments to executive officers as the capital conservation buffer approaches zero. The Corporation’s and the Bank’s actual capital and ratios compared to generally applicable regulatory requirements as of December 31, 2020 are as follows (dollars in thousands):
Actual
Adequacy Purposes
Well-Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total capital to risk weighted assets:
Consolidated
$
145,054
14.8%
>
$
78,577
>
8.0%
>
N/A
N/A
mBank
$
139,844
14.2%
>
$
78,530
>
8.0%
>
$
98,163
10.0%
Tier 1 capital to risk weighted assets:
Consolidated
$
139,238
14.2%
>
$
58,933
>
6.0%
>
N/A
N/A
mBank
$
134,069
13.7%
>
$
58,898
>
6.0%
>
$
78,530
8.0%
Common equity Tier 1 capital to risk weighted assets
Consolidated
$
139,238
14.2%
>
$
44,199
>
4.5%
>
N/A
N/A
mBank
$
134,069
13.7%
>
$
44,173
>
4.5%
>
$
63,806
6.5%
Tier 1 capital to average assets:
Consolidated
$
139,238
9.4%
>
$
59,048
>
4.0%
>
N/A
N/A
mBank
$
134,069
9.1%
>
$
58,787
>
4.0%
>
$
73,483
5.0%
The Corporation’s and the Bank’s actual capital and ratios compared to generally applicable regulatory requirements as of December 31, 2019 are as follows (dollars in thousands):
Actual
Adequacy Purposes
Well-Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total capital to risk weighted assets:
Consolidated
$
138,263
13.2%
>
$
83,696
>
8.0%
>
N/A
N/A
mBank
$
136,578
13.1%
>
$
83,681
>
8.0%
>
$
104,601
10.0%
Tier 1 capital to risk weighted assets:
Consolidated
$
132,955
12.7%
>
$
62,772
>
6.0%
>
N/A
N/A
mBank
$
131,311
12.6%
>
$
62,761
>
6.0%
>
$
83,681
8.0%
Common equity Tier 1 capital to risk weighted assets
Consolidated
$
132,955
12.7%
>
$
47,079
>
4.5%
>
N/A
N/A
mBank
$
131,311
12.6%
>
$
47,071
>
4.5%
>
$
67,991
6.5%
Tier 1 capital to average assets:
Consolidated
$
132,955
10.1%
>
$
52,724
>
4.0%
>
N/A
N/A
mBank
$
131,311
10.0%
>
$
52,728
>
4.0%
>
$
65,910
5.0%
NOTE 17 - STOCK COMPENSATION PLANS
Restricted Stock Awards
The Corporation’s restricted stock awards (“RSAs”) require certain service-based or performance requirements and have a vesting period of four years. Compensation expense is recognized on a straight-line basis over the vesting period. Shares are subject to certain restrictions and risk of forfeiture by the participants.
The Corporation has historically granted RSAs to members of the Board of Directors and management. Awards granted are set to vest equally over their award terms and are issued at no cost to the recipient. The table below summarizes each of the grant awards.
Market Value at
Date of Award
Units Granted
grant date
Vesting Term
February, 2017
28,427
13.39
4 years
February, 2018
18,643
16.30
4 years
April, 2018
8,000
16.00
Immediate
February, 2019
27,790
15.70
4 years
October, 2019
8,000
15.40
Immediate
February, 2020
132,000
15.46
4 years
October, 2020
8,000
9.46
Immediate
In 2019, the Corporation issued 35,967 shares for vested RSAs. In 2020, the Corporation issued 35,825 shares for vested RSAs.
The Corporation recognized annual compensation expense of $.878 million in 2020 and $.498 million in 2019. Unrecognized compensation expense at the end of 2020 was $1.914 million.
A summary of changes in our nonvested awards for the year follows:
Weighted Average
Number
Grant Date
Outstanding
Fair Value
Nonvested balance at January 1, 2020
69,145
$
14.52
Granted during the period
140,000
15.12
Forfeited during the period
(3,167)
15.46
Vested during the period
(35,825)
14.99
Nonvested balance at December 31, 2020
170,153
$
14.90
NOTE 18 - SHAREHOLDERS’ EQUITY
The Corporation currently has one active share repurchase program and one repurchase plan that has since expired. All share repurchase programs are conducted under authorizations by the Board of Directors. Under the now expired program, the Corporation repurchased 1,661 shares in 2020, 14,000 shares in 2016, 102,455 shares in 2015, 13,700 shares in 2014 and 55,594 shares in 2013. The share repurchases were conducted under Board authorizations made and publicly announced of $.600 million on February 27, 2013, $.600 million on December 17, 2013 and an additional $750,000 on April 28, 2015.
On August 28, 2019, the Corporation, under the authorization of the Board of Directors announced a new common stock repurchase program. Under the Repurchase Program, the Company is authorized to repurchase up to approximately 5% of the Company’s outstanding common stock, and has no expiration date. During 2020, the Corporation repurchased 283,779 shares under this plan.
NOTE 19 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Corporation’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. These commitments at December 31 are as follows (dollars in thousands):
December 31,
December 31,
Commitments to extend credit:
Variable rate
$
114,458
$
106,278
Fixed rate
58,175
50,796
Standby letters of credit - Variable rate
8,781
5,441
Credit card commitments - Fixed rate
7,136
5,841
$
188,550
$
168,356
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The commitments are structured to allow for 100% collateralization on all standby letters of credit.
Credit card commitments are commitments on credit cards issued by the Corporation’s subsidiary and serviced by other companies. These commitments are unsecured.
Legal Proceedings and Contingencies
At December 31, 2020, there were no pending material legal proceedings to which the Corporation is a party or to which any of its property was subject, except for proceedings which arise in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material effect on the consolidated financial position or results of operations of the Corporation.
Concentration of Credit Risk
The Bank grants commercial, residential, agricultural, and consumer loans throughout Michigan and Northeastern Wisconsin. The Bank’s most prominent concentration in the loan portfolio relates to commercial real estate loans to operators of nonresidential buildings. This concentration at December 31, 2020 represents $138.992 million, or 16.95%, compared to $141.965 million, or 18.54%, of the commercial loan portfolio on December 31, 2019. The remainder of the commercial loan portfolio is diversified in such categories as hospitality and tourism, real estate agents and managers, new car dealers, gas stations and convenience stores, petroleum, forestry, agriculture, and construction. Due to the diversity of the Bank’s locations, the ability of debtors of residential and consumer loans to honor their obligations is not tied to any particular economic sector.
NOTE 20 - FAIR VALUE
Fair value estimates, methods, and assumptions are set forth below for the Corporation’s financial instruments:
Cash, cash equivalents, and interest-bearing deposits - The carrying values approximate the fair values for these assets.
Securities - Fair values are based on quoted market prices where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Federal Home Loan Bank stock - Federal Home Loan Bank stock is carried at cost, which is its redeemable value and approximates its fair value, since the market for this stock is limited.
Loans - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, residential mortgage, and other consumer. The fair value of loans is calculated by discounting scheduled cash flows using discount rates reflecting the credit and interest rate risk inherent in the loan using an exit notion.
The methodology in determining fair value of nonaccrual loans is to average them into the blended interest rate at 0% interest. This has the effect of decreasing the carrying amount below the risk-free rate amount and, therefore, discounts the estimated fair value.
Impaired loans are measured at the estimated fair value of the expected future cash flows at the loan’s effective interest rate or the fair value of the collateral for loans which are collateral dependent. Therefore, the carrying values of impaired loans approximate the estimated fair values for these assets.
Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits and savings, is equal to the amount payable on demand at the reporting date. The fair value of time deposits is based on the discounted value of contractual cash flows applying interest rates currently being offered on similar time deposits.
Borrowings - Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. The fair value of borrowed funds due on demand is the amount payable at the reporting date.
Accrued interest - The carrying amount of accrued interest approximates fair value.
Off-balance-sheet instruments - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the counterparties. Since the differences in the current fees and those reflected to the off-balance-sheet instruments at year-end are immaterial, no amounts for fair value are presented.
The following table presents information for financial instruments at December 31 (dollars in thousands):
December 31, 2020
December 31, 2019
Level in Fair
Carrying
Estimated
Carrying
Estimated
Value Hierarchy
Amount
Fair Value
Amount
Fair Value
Financial assets:
Cash and cash equivalents
Level 1
$
218,977
$
218,977
$
49,826
$
49,826
Interest-bearing deposits
Level 2
2,917
2,917
10,295
10,295
Securities available for sale
Level 2
110,505
110,505
106,569
106,569
Securities available for sale
Level 3
1,331
1,331
1,403
1,403
Federal Home Loan Bank stock
Level 2
4,924
4,924
4,924
4,924
Net loans
Level 3
1,071,776
1,072,770
1,053,468
1,055,985
Accrued interest receivable
Level 3
4,310
4,310
3,751
3,751
Total financial assets
$
1,414,740
$
1,415,734
$
1,230,236
$
1,232,753
Financial liabilities:
Deposits
Level 2
$
1,258,776
$
1,262,930
$
1,075,677
$
1,044,267
Borrowings
Level 2
63,479
61,975
64,551
64,403
Accrued interest payable
Level 3
Total financial liabilities
$
1,322,708
$
1,325,358
$
1,140,797
$
1,109,239
Limitations - Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, other assets, and other liabilities. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
The following is information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at December 31, 2020 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.
The fair value of all investment securities at December 31, 2020 and 2019 were based on level 2 and level 3 inputs. There are no other assets or liabilities measured on a recurring basis at fair value. For additional information regarding investment securities, please refer to “Note 3 - Investment Securities.” The table below shows investment securities measured at fair value on a recurring basis (dollars in thousands):
Quoted Prices
Significant
Significant
in Active Markets
Other Observable
Unobservable
Total (Gains) Losses for
Balance at
for Identical Assets
Inputs
Inputs
Year Ended
(dollars in thousands)
December 31, 2020
(Level 1)
(Level 2)
(Level 3)
December 31, 2020
Assets
Corporate
$
28,043
$
-
$
27,543
$
$
-
US Agencies
6,589
-
6,589
-
-
US Agencies - MBS
34,280
-
34,280
-
-
Obligations of state and political subdivisions
42,924
-
42,093
$
111,836
$
Quoted Prices
Significant
Significant
in Active Markets
Other Observable
Unobservable
Total Losses for
Balance at
for Identical Assets
Inputs
Inputs
Year Ended
(dollars in thousands)
December 31, 2019
(Level 1)
(Level 2)
(Level 3)
December 31, 2019
Assets
Corporate
$
20,938
$
-
$
20,438
$
$
US Agencies
14,496
-
14,496
-
US Agencies - MBS
34,526
-
34,526
-
-
Obligations of state and political subdivisions
38,012
-
37,109
$
107,972
$
The Corporation had no other Level 3 assets or liabilities on a recurring basis as of December 31, 2020.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
The Corporation also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include loans and other real estate held for sale. The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.
The table below shows the activity in level three assets for the years ended, December 31, 2020 and 2019 (dollars in thousands):
Balance at
Transfers
Balance
Beginning
Net Gains (losses)
in (out) of
at end
of Period
Realized
Unrealized
Level 3
Purchases
Sales
of Period
Year Ended December 31, 2020
Corporate
$
$
-
$
-
$
-
$
-
$
-
$
Obligations of state and political subdivisions
-
-
(72)
-
-
Balance at
Transfers
Balance
Beginning
Net Gains (losses)
in (out) of
at end
of Period
Realized
Unrealized
Level 3
Purchases
Sales
of Period
Year Ended December 31, 2019
Corporate
$
$
-
$
-
$
-
$
-
$
-
$
Obligations of state and political subdivisions
-
-
(85)
-
-
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2020
Quoted Prices
Significant
Significant
in Active Markets
Other Observable
Unobservable
Total (Gains) Losses for
Balance at
for Identical Assets
Inputs
Inputs
Year Ended
(dollars in thousands)
December 31, 2020
(Level 1)
(Level 2)
(Level 3)
December 31, 2020
Assets
Impaired loans
$
8,850
$
-
$
-
$
8,850
$
Other real estate held for sale
1,752
-
-
1,752
(22)
$
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2019
Quoted Prices
Significant
Significant
in Active Markets
Other Observable
Unobservable
Total Losses for
Balance at
for Identical Assets
Inputs
Inputs
Year Ended
(dollars in thousands)
December 31, 2019
(Level 1)
(Level 2)
(Level 3)
December 31, 2019
Assets
Impaired loans
$
12,823
$
-
$
-
$
12,823
$
Other real estate held for sale
2,194
-
-
2,194
$
The Corporation had no investments subject to fair value measurement on a nonrecurring basis.
Impaired loans 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 or collateral values using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals).
NOTE 21 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 2020 and 2019
(Dollars in Thousands)
ASSETS
Cash and cash equivalents
$
4,226
$
Investment in subsidiaries
161,438
157,156
Other assets
3,727
5,764
TOTAL ASSETS
$
169,391
$
163,410
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities
1,527
1,491
Total liabilities
1,527
1,491
Shareholders’ equity:
Common stock and additional paid in capital - no par value
Authorized 18,000,000 shares
Issued and outstanding - 10,500,758 and 10,748,712 shares respectively
127,164
129,564
Retained earnings
39,318
31,740
Accumulated other comprehensive income
1,382
Total shareholders’ equity
167,864
161,919
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
169,391
$
163,410
STATEMENTS OF OPERATIONS
Years Ended December 31, 2020 and 2019
(Dollars in Thousands)
INCOME:
Interest income
$
-
$
-
Miscellaneous income
Total income
$
$
EXPENSES:
Interest expense on borrowings
-
Salaries and benefits
1,298
Professional service fees
Other
Total expenses
1,949
1,535
Loss before income taxes and equity in net income of subsidiaries
(1,948)
(1,534)
Provision for (benefit of) income taxes
(409)
(322)
Loss before equity in net income of subsidiaries
(1,539)
(1,212)
Equity in net income of subsidiaries
15,012
15,062
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
$
13,473
$
13,850
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2020 and 2019
(Dollars in Thousands)
Cash Flows from Operating Activities:
Net income
$
13,473
$
13,850
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in net (income) of subsidiaries
(15,012)
(15,062)
Increase in capital from stock based compensation
Change in other assets
2,035
(1,458)
Change in other liabilities
Net cash provided by (used in) operating activities
1,410
(1,904)
Cash Flows from Investing Activities:
Investments in subsidiaries
11,500
5,500
Net cash provided by used in investing activities
11,500
5,500
Cash Flows from Financing Activities:
Repurchase of common stock
(3,279)
-
Dividend on common stock
(5,895)
(5,576)
Net cash (used in) financing activities
(9,174)
(5,576)
Net increase (decrease) in cash and cash equivalents
3,736
(1,980)
Cash and cash equivalents at beginning of period
2,470
Cash and cash equivalents at end of period
$
4,226
$

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, management of the company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective in ensuring the information relating to the Corporation (and its consolidated subsidiaries) required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act was recorded, processed, summarized and reported to the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the Corporation’s internal control over financial reporting that occurred during the year ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Report on Management’s Assessment of Internal Control over Financial Reporting
Mackinac Financial Corporation is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this Form 10-K. The consolidated financial statements and notes included in this Form 10-K have been prepared in conformity with generally accepted accounting principles in the United States and necessarily include some amounts that are based on management’s best estimates and judgments.
We, as management of Mackinac Financial Corporation, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with generally accepted accounting principles in the United States. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
Management assessed the Corporation’s system of internal control over financial reporting as of December 31, 2020, in relation to criteria for the effective internal control over financial reporting as described in “Internal Control - Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2020, its system of internal control over financial reporting is effective and meets the criteria of the “Internal Control - Integrated Framework.”

---

ITEM 9B. OTHER INFORMATION
Item 9B.
Other Information
None.
PART III

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.
Directors, Executive Officers, and Corporate Governance
The information set forth under the captions “Information About Directors and Nominees,” “Director Independence,” “Board of Directors and Committees,” and “Indebtedness and Transactions with Management,” in the Corporation’s definitive Proxy Statement for its 2021 Annual Meeting of Shareholders (the “Proxy Statement”), a copy of which will be filed with the SEC prior to the meeting date, is incorporated herein by reference.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11.
Executive Compensation
Information relating to compensation of the Corporation’s executive officers and directors is contained under the caption “Compensation of Executive Officers and Directors” in the Corporation’s Proxy Statement and is incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information relating to security ownership of certain beneficial owners and management is contained under the caption “Beneficial Ownership of Common Stock” in the Corporation’s Proxy Statement is incorporated herein by reference.
The following table provides information as of December 31, 2020 with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Corporation are authorized for issuance. All such compensation plans were previously approved by security holders.
Number of securities
remaining available
Weighted average
for future issuance
Number of securities to
exercise issue price
under equity
be issued upon exercise
of outstanding
compensation plans
of outstanding options,
options, warrants
(excluding securities
Plan Category
warrants and rights
and rights
reflected in column (a))
(a)
(b)
(c)
Equity stock based compensation plans approved by security holders:
Issued and outstanding:
Restricted stock awards - February 2017
6,575
-
-
Restricted stock awards - February 2018
8,230
-
-
Restricted stock awards - February 2019
20,842
-
-
Restricted stock awards - February 2020
132,000
-
-
Shares available for future issuance
-
-
70,560
Total
167,647
$
-
70,560

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.
Certain Relationships, Related Transactions and Director Independence
Information relating to certain relationships and related transactions is contained under the caption “Indebtedness of and Transactions with Management” in the Corporation’s Proxy Statement and is incorporated herein by reference.
Additional information is contained under the captions “Information about Directors and Nominees and “Board of Directors Meetings and Committees” within the Corporation’s Proxy Statement and is incorporated herein by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.
Principal Accountant Fees and Services
Information relating to principal accountant fees and services is contained under the caption “Principal Accountant Fees and Services” in the Corporation’s Proxy Statement and is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.
Exhibits and Financial Statement Schedules
(commission file number for all incorporated documents: 000-20167)
(a)The following documents are filed as a part of this report.
1.Consolidated Financial Statements
(i)
The financial statements of the Corporation included in this Form 10-K are listed in Part II, Item 8.
2.
All of the schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are either not required under the related instruction, the required information is contained elsewhere in the Form 10-K, or the schedules are inapplicable, and therefore have been omitted.
3.
Exhibits
The exhibits required to be filed as part of this Form 10-K are listed in the attached Exhibit Index.
INDEX TO EXHIBITS
Exhibit
Incorporated by Reference
Number
Exhibit Description
Form
File No.
Exhibit
Filing Date
Filed Herewith
2.1
Agreement and Plan of Merger, dated as of January 16, 2018, by and among Mackinac Financial Corporation and First Federal of Northern Michigan Bancorp, Inc.
8-K
000-20167
2.1
1/19/2018
2.2
First Amendment to Agreement and Plan of Merger Dated as of February 8, 2018, by and among Mackinac Financial Corporation and First Federal of Northern Michigan Bancorp, Inc.
8-K
000-20167
2.1
2/13/2018
2.3
Merger Agreement, dated as of May 18, 2018, by and among Mackinac Financial Corporation and First Federal of Northern Michigan Bancorp, Inc.
8-K
000-20167
99.1
5/18/2018
2.4
Merger Agreement, dated as of October 1, 2018, by and among Mackinac Financial Corporation and Lincoln Community Bank.
8-K
000-20167
99.1
10/01/2018
3.1
Articles of Incorporation and all amendments (most recent amendment filed December 14, 2004)
10-K
000-20167
3.1
3/31/2009
3.3
Third Amended and Restated Bylaws adopted March 18, 2014
8-K
000-20167
3.1
3/24/2014
4.1
Description of Securities
*
10.1
Form of Director and Officer Indemnification Agreement**
8-K
000-20167
10.1
3/24/2014
10.2
Mackinac Financial Corporation 2012 Incentive Compensation Plan**
DEF14A
000-20167
Annex I
4/25/2012
10.3
Amended and Restated Employment Agreement, dated as of March 1, 2018, by and between Mackinac Financial Corporation and Paul D. Tobias**
10-K
000-20167
10.3
3/15/2018
10.4
Amended and Restated Employment Agreement, dated as of March 1, 2018, by and between Mackinac Financial Corporation and Kelly W. George**
10-K
000-20167
10.4
3/15/2018
10.5
Amended and Restated Employment Agreement, dated as of March 1, 2018, by and between Mackinac Financial Corporation and Jesse A. Deering **
10-K
000-20167
10.5
3/15/2018
10.6
Form of Restricted Stock Award Agreement under the Mackinac Financial Corporation 2012 Incentive Compensation Plan**
*
Subsidiaries of the Corporation
*
23.1
Consent of Plante & Moran, PLLC
*
Rule 13(a) - 14(a) Certifications
*
32.1
Section 1350 Chief Executive Officer Certification
*
32.2
Section 1350 Chief Financial Officer Certification
*
101.INS
XBRL Instance Document
*
101.SCH
XBRL Taxonomy Extension Schema Document***
*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document***
*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document***
*
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document***
*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document***
*
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
* Filed herewith.
** Management compensatory plan, contract, or arrangement.
*** As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for the purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those Sections.