UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2006
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________ to __________
Commission file number: 0-20167
MACKINAC FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2062816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 SOUTH CEDAR STREET, MANISTIQUE, MI 49854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (888) 343-8147
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer ___ Accelerated Filer ___ Non-accelerated Filer _X_
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes ___ No _X_
As of July 31, 2006, there were outstanding 3,428,695 shares of the registrant's
common stock, no par value.
MACKINAC FINANCIAL CORPORATION
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2006 (Unaudited), December 31, 2005 and
June 30, 2005 (Unaudited)....................................... 1
Condensed Consolidated Statements of Operations - Three and Six
Months Ended June 30, 2006 (Unaudited) and
June 30, 2005 (Unaudited)....................................... 2
Condensed Consolidated Statements of Changes in Shareholders'
Equity - Three and Six Months Ended June 30, 2006
(Unaudited) and June 30, 2005 (Unaudited)....................... 3
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2006 (Unaudited) and
June 30, 2005 (Unaudited)....................................... 4
Notes to Condensed Consolidated Financial
Statements (Unaudited).......................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 24
Item 4. Controls and Procedures............................................ 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 28
Item 4. Submission of Matters to a Vote of Security Holders.............. 32
Item 6. Exhibits and Reports on Form 8-K................................... 33
SIGNATURES................................................................... 34
MACKINAC FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31, June 30,
2006 2005 2005
----------- ------------ -----------
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 5,529 $ 4,833 $ 11,477
Federal funds sold 12,535 3,110 8,767
-------- -------- --------
Cash and cash equivalents 18,064 7,943 20,244
Interest-bearing deposits in other financial institutions 893 1,025 --
Securities available for sale 33,870 34,210 36,166
Federal Home Loan Bank stock 4,855 4,855 4,855
Total loans 283,110 239,771 204,503
Allowance for loan losses (5,415) (6,108) (6,636)
-------- -------- --------
Net loans 277,695 233,663 197,867
Premises and equipment 12,748 11,987 10,496
Other real estate held for sale 52 945 2,312
Other assets 4,320 4,094 4,171
-------- -------- --------
Total assets $352,497 $298,722 $276,111
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Non-interest-bearing deposits $ 21,773 $ 19,684 $ 21,033
Interest-bearing deposits 262,391 212,948 186,781
-------- -------- --------
Total deposits 284,164 232,632 207,814
Borrowings 37,617 36,417 36,484
Other liabilities 3,537 3,085 3,296
-------- -------- --------
Total liabilities 325,318 272,134 247,594
Shareholders' equity:
Preferred stock - no par value:
Authorized - 500,000 shares, no shares outstanding -- -- --
Common stock and additional paid in capital - no par value
Authorized - 18,000,000 shares
Issued and outstanding - 3,428,695 shares 42,567 42,412 42,412
Accumulated deficit (14,772) (15,461) (13,915)
Accumulated other comprehensive income (loss) (616) (363) 20
-------- -------- --------
Total shareholders' equity 27,179 26,588 28,517
-------- -------- --------
Total liabilities and shareholders' equity $352,497 $298,722 $276,111
======== ======== ========
See accompanying notes to condensed consolidated financial statements.
1.
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------- -------
INTEREST INCOME:
Interest and fees on loans:
Taxable $5,182 $3,201 $ 9,681 $ 6,260
Tax-exempt 192 230 385 472
Interest on securities
Taxable 274 434 547 896
Tax-exempt 41 42 82 84
Other interest 194 110 363 293
------ ------ ------- -------
Total interest income 5,883 4,017 11,058 8,005
------ ------ ------- -------
INTEREST EXPENSE:
Deposits 2,509 1,198 4,589 2,328
Borrowings 439 431 855 1,084
------ ------ ------- -------
Total interest expense 2,948 1,629 5,444 3,412
------ ------ ------- -------
Net interest income before provision for loan losses 2,935 2,388 5,614 4,593
Provision for loan losses -- -- (600) --
------ ------ ------- -------
Net interest income after provision for loan losses 2,935 2,388 6,214 4,593
------ ------ ------- -------
OTHER INCOME:
Service fees 122 172 232 333
Loan and lease fees 19 4 36 6
Net security gains -- 98 -- 97
Net gains on sale of loans 42 13 83 20
Other 68 83 116 98
------ ------ ------- -------
Total other income 251 370 467 554
------ ------ ------- -------
OTHER EXPENSE:
Salaries and employee benefits 1,496 1,606 3,090 3,110
Occupancy 293 247 610 473
Furniture and equipment 155 138 311 297
Data processing 182 246 336 492
Accounting, legal, and consulting fees 414 228 614 546
Loan and deposit 98 250 228 543
Telephone 51 77 100 137
Advertising 107 243 177 382
Penalty on prepayment of FHLB borrowings -- -- -- 4,320
Other 225 300 552 665
------ ------ ------- -------
Total other expense 3,021 3,335 6,018 10,965
------ ------ ------- -------
Income (loss) before income taxes 165 (577) 663 (5,818)
Provision for (benefit of) income taxes (25) -- (25) --
------ ------ ------- -------
NET INCOME (LOSS) $ 190 $ (577) $ 688 $(5,818)
====== ====== ======= =======
INCOME (LOSS) PER COMMON SHARE:
Basic $ .05 $ (.17) $ .20 $ (1.70)
====== ====== ======= =======
Diluted $ .05 $ (.17) $ .20 $ (1.70)
====== ====== ======= =======
See accompanying notes to condensed consolidated financial statements.
2.
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2006 2005 2006 2005
------- ------- ------- -------
Balance, beginning of period $27,173 $28,854 $26,588 $34,730
Stock option compensation 78 -- 156 --
Net income (loss) for period 190 (577) 688 (5,818)
Change in minority interest of consolidated subsidiary -- 77 -- 77
Net unrealized gain (loss) on securities
available for sale (262) 163 (253) (472)
------- ------- ------- -------
Total comprehensive income (loss) 6 (337) 591 (6,213)
Balance, end of period $27,179 $28,517 $27,179 $28,517
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
3.
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
-------------------
2006 2005
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 688 $ (5,818)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 489 489
(Gain) on sales of securities -- (97)
(Gain) on sales of premises, equipment, and other real estate (57) (4)
FHLB sock dividend -- (101)
Stock option tax compensation 156 --
Change in other assets (288) 1,550
Change in other liabilities 452 (768)
-------- --------
Net cash provided by (used in) operating activities 1,440 (4,749)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits in other
financial institutions 132 18,535
Purchase of securities available for sale -- (16,009)
Proceeds from sales of securities available for sale -- 30,813
Proceeds from maturities, calls or paydowns of securities
available for sale 70 5,666
Net (increase) in loans (44,039) (1,828)
Capital expenditures (1,171) (120)
Proceeds from sale of premises, equipment, and other real estate 957 249
-------- --------
Net cash provided by (used in) investing activities (44,051) 37,306
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 51,532 (7,836)
Proceeds from issuance of debt 1,200 1,651
Principal payments on borrowings -- (50,206)
-------- --------
Net cash provided by (used in) Financing activities 52,732 (56,391)
-------- --------
Net increase (decrease) in cash and cash equivalents 10,121 (23,834)
Cash and cash equivalents at beginning of period 7,943 44,078
-------- --------
Cash and cash equivalents at end of period $ 18,064 $ 20,244
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for: $ 5,177 $ 3,522
Interest
Income taxes -- --
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfers of Foreclosures from Loans to Other Real Estate Held for Sale 7 827
See accompanying notes to condensed consolidated financial statements.
4.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Mackinac
Financial Corporation (the "Corporation") have been prepared in accordance
with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six month period ended June
30, 2006 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2006. The unaudited consolidated financial
statements and footnotes thereto should be read in conjunction with the
audited consolidated financial statements and footnotes thereto included in
the Corporation's Annual Report on Form 10-K for the year ended December
31, 2005.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses
during the period. Actual results could differ from those estimates.
In order to properly reflect some categories of other income and other
expenses, reclassifications of expense and income items have been made to
prior period numbers. The "net" other income and other expenses were not
changed due to these classifications.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses includes specific allowances related to
commercial loans, which have been judged to be impaired. A loan is impaired
when, based on current information, it is probable that the Corporation
will not collect all amounts due in accordance with the contractual terms
of the loan agreement. These specific allowances are based on discounted
cash flows of expected future payments using the loan's initial effective
interest rate or the fair value of the collateral if the loan is collateral
dependent.
The Corporation continues to maintain a general allowance for loan losses
for loans not considered impaired. The allowance for loan losses is
maintained at a level which management believes is adequate to provide for
possible loan losses. Management periodically evaluates the adequacy of the
allowance using the Corporation's past loan loss experience, known and
inherent risks in the portfolio, composition of the portfolio, current
economic conditions, and other factors. The allowance does not include the
effects of expected losses related to future events or future changes in
economic conditions. This evaluation is inherently subjective since it
requires material estimates that may be susceptible to significant change.
Loans are charged against the allowance for loan losses when management
believes the collectibility of the principal is unlikely. In addition,
various regulatory agencies periodically review the allowance for loan
losses. These agencies may require additions to the allowance for loan
losses based on their judgments of collectibility.
In 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.
STOCK OPTION PLANS
The Corporation sponsors three stock option plans. One plan was approved in
2000 and applies to officers, employees, and nonemployee directors. This
plan was amended as a part of the December 2004 stock offering and
recapitalization. The amendment, approved by shareholders, increased the
shares available under this plan by 428,587 shares from the original 25,000
(adjusted for the 1:20 reverse stock split), to a total authorized share
balance of 453,587. The other two plans, one for officers and employees and
the other for nonemployee
5.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
directors, were approved in 1997. A total of 30,000 shares (adjusted for
the 1:20 reverse stock split), were made available for grant under these
plans. Options under all of the plans are granted at the discretion of a
committee of the Corporation's Board of Directors. Options to purchase
shares of the Corporation's stock are granted at a price equal to the
market price of the stock at the date of grant. The committee determines
the vesting of the options when they are granted as established under the
plan.
The Corporation adopted SFAS No. 123 (Revised) "Share Based Payments" in
the first quarter of 2006. This statement supersedes APB Opinion No. 25
"Accounting for Stock Issued to Employees" and its related implementation
guidance. Under Opinion No. 25, issuing stock options to employees
generally resulted in recognition of no compensation cost. This adoption
resulted in the recognition of after tax compensation expense in the amount
of $156,000 for the six months ended June 30, 2006. The expense recorded
recognizes the current period vesting of options outstanding. The after tax
compensation expense, using this same accounting treatment would have
amounted to $38,000 in the first six months of 2005. The per share impact
of this accounting change was negligible for 2006.
2. RECENT ACCOUNTING PRONOUNCEMENT
The Corporation adopted SFAS No. 123 (revised) "Share Based Payments" in
the first quarter of 2006. The Corporation does not expect a material
impact on the results of operations for 2006 as a result of this change,
with $78,000 reported as expense in the second quarter.
3. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are based upon the weighted average number of
shares outstanding.
The following shows the computation of basic and diluted earnings (loss)
per share for the three and six months ended June 30, 2005 and 2004
(dollars in thousands, except per share data):
Additional shares issued as a result of option exercises would not be
dilutive in either period.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
INCOME (LOSS) PER COMMON SHARE - BASIC:
Net income (loss) $ 190 $ (577) $ 688 $ (5,818)
========== ========== ========== ==========
Weighted average common shares outstanding 3,428,695 3,428,695 3,428,695 3,428,695
========== ========== ========== ==========
Income (loss) per common share - Basic $ 0.05 $ (0.17) $ 0.20 ($1.70)
========== ========== ========== ==========
INCOME (LOSS) PER COMMON SHARE - DILUTED:
Net income (loss) $ 190 $ (577) $ 688 $ (5,818)
========== ========== ========== ==========
Weighted average common shares outstanding for
basic loss per common share 3,428,695 3,428,695 3,428,695 3,428,695
Add: Dilutive effect of assumed exercise of stock options -- -- -- --
---------- ---------- ---------- ----------
Average shares and dilutive potential common shares 3,428,695 3,428,695 3,428,695 3,428,695
========== ========== ========== ==========
Income (loss) per common share - Diluted $ .05 $ (.17) $ .20 $ (1.70)
========== ========== ========== ==========
6.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities
available for sale as of June 30, 2006, December 31, 2005 and June 30, 2005
are as follows (dollars in thousands):
June 30, 2006 December 31, 2005 June 30, 2005
---------------------- ---------------------- ----------------------
Amortized Estimated Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value Cost Fair Value
--------- ---------- --------- ---------- ---------- ----------
US Agencies $30,963 $30,279 $30,980 $30,354 $32,001 $31,659
Obligations of states and political subdivisions 3,523 3,591 3,593 3,856 3,645 4,005
Corporate securities -- -- -- -- 500 502
------- ------- ------- ------- ------- -------
Total securities available for sale $34,486 $33,870 $34,573 $34,210 $36,146 $36,166
======= ======= ======= ======= ======= =======
The amortized cost and estimated fair value of investment securities
pledged to secure FHLB borrowings and customer relationships were $28.079
million and $27.497 million, respectively, at June 30, 2006.
5. LOANS
The composition of loans at June 30, 2006, December 31, 2005 and June 30,
2005 is as follows (dollars in thousands):
June 30, December 31, June 30,
2006 2005 2005
-------- ------------ --------
Commercial real estate $140,918 $118,637 $104,785
Commercial, financial, and agricultural 59,581 56,686 47,534
One to four family residential real estate 48,931 44,660 43,012
Consumer 2,632 2,285 2,153
Construction 31,048 17,503 7,019
-------- -------- --------
Total loans $283,110 $239,771 $204,503
======== ======== ========
LOANS - ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses for the six months ended June
30, 2006, the year ended December 31, 2005, and the six months ended June
30, 2005 is as follows: (dollars in thousands):
June 30, December 31, June 30,
2006 2005 2005
-------- ------------ --------
Balance at beginning of period $6,108 $6,966 $6,966
Recoveries on loans 40 134 101
Loans charged off (133) (992) (431)
Provision (600) -- --
------ ------ ------
Balance at end of period $5,415 $6,108 $6,636
====== ====== ======
7.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. LOANS (Continued)
In the first half of 2006, net charge off activity was minimal at $93,000,
or .04% of average loans outstanding compared to net charge-offs of
$330,000, or 17% of average loans, in the first half of 2005. In the first
half of 2006, the Corporation reduced the allowance for loan losses by
recording a negative provision amounting to $600,000. This reduction in the
reserve was made in recognition of the improved credit quality existent in
the loan portfolio and is discussed in more detail under "Management's
Discussion and Analysis."
LOANS - IMPAIRED LOANS
Nonperforming loans are those which are contractually past due 90 days or
more as to interest or principal payments, on nonaccrual status, or loans,
the terms of which have been renegotiated to provide a reduction or
deferral on interest or principal. The interest income recorded and that
which would have been recorded had nonaccrual and renegotiated loans been
current, or not troubled was not material to the consolidated financial
statements for the six months ended June 30, 2006 and 2005.
Information regarding impaired loans as of June 30, 2006, December 31, 2005
and June 30, 2005 is as follows (dollars in thousands):
Valuation Reserve
----------------------------------
June 30, December 31, June 30, June 30, December 31, June 30,
2006 2005 2005 2006 2005 2005
----------- ------------ ----------- -------- ------------ --------
(Unaudited) (Unaudited)
Balances, at period end
Impaired loans with specific valuation reserve $301 $ -- $ 6 $75 $-- $ 6
Impaired loans with no specific valuation reserve 145 114 1,527 -- -- --
---- ------ ------ --- --- ---
Total impaired loans $446 $ 114 $1,533 $75 $-- $ 6
==== ====== ====== === === ===
Impaired loans on nonaccrual basis $446 $ 15 $1,533 $75 $-- $ 6
Impaired loans on accrual basis -- 99 -- -- -- --
---- ------ ------ --- --- ---
Total impaired loans $446 $ 114 $1,533 $75 $-- $ 6
==== ====== ====== === === ===
Average investment in impaired loans $163 $1,922 $3,022
Interest income recognized during impairment 1 78 51
Interest income that would have been recognized
on an accrual basis 2 134 89
Cash-basis interest income recognized 1 76 51
The average investment in impaired loans was approximately $.163 million
for the six-months ended June 30, 2006, $1.922 million for the year ended
December 31, 2005, and $3.022 million for the six months ended June 30,
2005, respectively. Impacting the impaired loan balances in 2005 was a sale
of nonperforming assets in late December which included $1.0 millio n of
nonaccrual loans.
8.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. LOANS (Continued)
LOANS - RELATED PARTIES
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):
June 30, December 31, June 30,
2006 2005 2005
-------- ------------ --------
Loans outstanding beginning of period $ 578 $ 63 $ 63
New loans 1,222 56 52
Net activity on revolving lines of credit 271 578 416
Repayment (857) (119) (115)
Decrease related to retired executive officers and directors -- -- --
------ ----- -----
Loans outstanding end of period $1,214 $ 578 $ 416
====== ===== =====
There were no loans to related-parties classified substandard at June 30,
2006, December 31, 2005 or June 30, 2005, respectively. In addition to the
outstanding balances above, there were no unused commitments to related
parties at June 30, 2006.
6. BORROWINGS
Borrowings consist of the following at June 30, 2006, December 31, 2005 and
June 30, 2005 (dollars in thousands):
June 30, December 31, June 30,
2006 2005 2005
-------- ------------ --------
Federal Home Loan Bank advances at rates ranging from 4.98%
to 5.17% maturing in 2010 and 2011 $35,000 $35,000 $35,000
Farmers Home Administration, fixed-rate note payable,
maturing August 24, 2004, interest payable at 1% 1,417 1,417 1,484
Advance outstanding on line of credit with a correspondent
bank 1,200 -- --
------- ------- -------
$37,617 $36,417 $36,484
======= ======= =======
In the first quarter of 2005, the Corporation prepaid $48.555 million of
the Federal Home Loan Bank ("FHLB") borrowings and incurred a prepayment
penalty of $4.320 million. This early payoff of FHLB borrowings reduced
interest rate risk and better positions the Corporation for future match
funding of loan growth.
The Federal Home Loan Bank borrowings are collateralized at June 30, 2006,
by the following: a collateral agreement on the Corporation's one to four
family residential real estate loans with a book value of approximately
$17.952 million; U.S. government agency securities with an amortized cost
and estimated fair value of $27.468 million and $26.886 million,
respectively; and Federal Home Loan Bank stock owned by the Bank totaling
$4.855 million. Prepayment of the remaining advances is subject to the
provisions and conditions of the credit policy of the Federal Home Loan
Bank of Indianapolis in effect as of June 30, 2006.
In the second quarter of 2006, the Corporation established a $6 million
line of credit with a correspondent bank. This line of credit will be
utilized by the Corporation to infuse capital into the Bank in order to
support the regulatory required 8% Tier 1 capital.
9.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. BORROWINGS (Continued)
The U.S.D.A. Rural Development borrowing is collateralized by loans
totaling $959,000 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 $611,000, and guaranteed by the Corporation.
7. STOCK OPTION PLANS
A summary of stock option transactions for the six months ended June 30,
2006 and 2005, and the year ended December 31, 2005, is as follows:
(Historical stock option information has been adjusted for the 1:20 reverse
stock split which occurred in December 2004).
June 30, December 31, June 30,
2006 2005 2005
-------- ------------ --------
Outstanding shares at beginning of year 375,417 282,999 282,999
Granted during the period -- 112,500 60,000
Expired during the period 1,500 20,082 19,042
-------- -------- --------
Outstanding shares at end of period 373,917 375,417 323,957
======== ======== ========
Weighted average exercise price per share at end of period $ 12.60 $ 14.15 $ 15.39
======== ======== ========
Shares available for grant at end of period 90,988 89,488 140,948
======== ======== ========
There were no options granted in the first six months of 2006. In the
second quarter of 2005, the Corporation issued 60,000 option shares at a
price of $12.00 per share.
Following is a summary of the options outstanding and exercisable at June
30, 2006:
Number
Exercise ------------------------- Remaining Weighted Average
Price Range Outstanding Exercisable Contractual Life-Years Exercise Price
----------------- ----------- ----------- ---------------------- ----------------
$9.16 12,500 2,500 9.5 $ 9.16
$9.75 257,152 120,861 8.5 9.75
$11.50 40,000 8,000 9.3 11.50
$12.00 60,000 12,000 9.0 12.00
$156.00 - $240.00 3,545 3,545 4.8 186.75
$300.00 - $406.60 720 720 3.0 345.00
------- ------- --- -------
373,917 147,626 8.6 $ 12.60
======= ======= === =======
8. CAPITAL
On December 16, 2004, the Corporation consummated a recapitalization
through the issuance of $30 million of common stock in a private placement.
The net proceeds of this offering amounted to $26.2 million. This
recapitalization provided the funding to enable the Corporation to
recapitalize the Bank with a $15.5 million capital infusion. This capital
infusion provided the Bank with enough capital to be deemed a "well
capitalized" institution by regulatory standards.
10.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. 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 are as follows (dollars in
thousands):
June 30, December 31, June 30,
2006 2005 2005
-------- ------------ --------
Commitments to extend credit:
Fixed rate $ 3,345 $ 2,118 $ 1,341
Variable rate 42,787 31,557 22,982
Standby letters of credit - Variable rate 8,939 10,493 11,299
Credit card commitments - Fixed rate 2,981 3,135 2,798
------- ------- -------
$58,052 $47,303 $38,420
======= ======= =======
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Corporation
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the
party. Collateral held varies but may include accounts receivable;
inventory; property, plant, and equipment; and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers. The commitments are structured to allow for 100%
collateralization on all standby letters of credit.
Credit card commitments are commitments on credit cards issued by the
Corporation's subsidiary and serviced by other companies. These commitments
are unsecured.
CONTINGENCIES
In the normal course of business, the Corporation is involved in various
legal proceedings. For expanded discussion on the Corporation's legal
proceedings, see Part II, Item 1, "Legal Proceedings" in this report.
CONCENTRATION OF CREDIT RISK
The Bank grants commercial, residential, agricultural, and consumer loans
throughout Michigan. The Bank's most prominent concentration in the loan
portfolio relates to commercial loans to entities within the hospitality
11.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued)
and tourism industry. This concentration represents $37.754 million, or
18.83%, of the commercial loan portfolio at June 30, 2006. The remainder of
the commercial loan portfolio is diversified in such categories as gaming,
petroleum, forestry, and agriculture. 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 locality.
12.
MACKINAC FINANCIAL CORPORATION
ITEM 2 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:
- The highly regulated environment in which the Corporation operates
could adversely affect its ability to carry out its strategic plan due
to restrictions on new products, funding opportunities or new market
entrances;
- General economic conditions, either nationally or in the state(s) in
which the Corporation does business;
- Legislation or regulatory changes which affect the business in which
the Corporation is engaged;
- Changes in the interest rate environment which increase or decrease
interest rate margins;
- Changes in securities markets with respect to the market value of
financial assets and the level of volatility in certain markets such
as foreign exchange;
- Significant increases in competition in the banking and financial
services industry resulting from industry consolidation, regulatory
changes and other factors, as well as action taken by particular
competitors;
- The ability of borrowers to repay loans;
- The effects on liquidity of unusual decreases in deposits;
- Changes in consumer spending, borrowing, and saving habits;
- Technological changes;
- Acquisitions and unanticipated occurrences which delay or reduce the
expected benefits of acquisitions;
- Difficulties in hiring and retaining qualified management and banking
personnel;
- The Corporation's ability to increase market share and control
expenses;
- The effect of compliance with legislation or regulatory changes;
- The effect of changes in accounting policies and practices;
- The costs and effects of existing and future litigation and of adverse
outcomes in such litigation.
These risks and uncertainties should be considered in evaluating forward-looking
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filings with the Securities
and Exchange Commission. All forward-looking statements contained in this report
are based upon information presently available and the Corporation assumes no
obligation to update any forward-looking statements.
13.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The following discussion will cover results of operations, asset quality,
financial position, liquidity, interest rate sensitivity, and capital resources
for the periods indicated. 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. This
discussion should be read in conjunction with the consolidated financial
statements and footnotes contained in the Corporation's Annual Report and Form
10-K for the year-ended December 31, 2005. Throughout this discussion, the term
"Bank" refers to mBank, formerly known as North Country Bank and Trust, the
principal banking subsidiary of the Corporation.
FINANCIAL OVERVIEW
Year-to-date consolidated net income was $.688 million through June 30, 2006,
compared to a net loss of $5.818 million for the same period in 2005. Basic
income per share was $.20 for the six months ended June 30, 2006, compared to a
loss per share of $1.70 for the same period in 2005. The income for the three
months ended June 30, 2006 amounted to $.190 million, or $.05 per share,
compared to a loss of $.577 million, or $.17 per share for the same period in
2005. The 2006 six months operations include a $600,000 negative provision,
recorded in the first quarter, in recognition of improved credit quality. The
2005 results include a penalty of $4.320 million on the prepayment of $48.555
million of the FHLB borrowings. Excluding the provision adjustment and the
prepayment penalty, the net income in the first half of 2006 amounted to
$88,000, compared to an adjusted loss of $1.498 million for the same period in
2005. The six month 2006 results also include $158,000 of stock option expense,
required under the new accounting rules for stock compensation plans, as well as
$240,000 of expenses incurred to pursue legal action against the Corporation's
former accountants. Total assets increased $53.775 million from December 31,
2005 to June 30, 2006. The loan portfolio increased $43.339 million in the first
six months of 2006, from December 31, 2005 balances of $239.771 million.
Deposits totaled $284.164 million at June 30, 2006, an increase of $51.532
million from the $236.632 million at December 31, 2005.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased $10.121 million in 2006. See further
discussion of the change in cash and cash equivalents in the Liquidity section.
INVESTMENT SECURITIES
Available-for-sale securities decreased $.340 million, or 1.00%, from December
31, 2005 to June 30, 2006, with the balance on June 30, 2006, totaling $33.870
million. The decrease during the first six months of 2006 was largely due to a
decrease of $.253 million in the market value during the six month period.
Investment securities are utilized in an effort to manage interest rate risk and
liquidity. As of June 30, 2006, investment securities with an estimated fair
value of $27.497 million were pledged.
LOANS
Through the second quarter of 2006, loan balances increased by $43.339, or
18.1%, from December 31, 2005 balances of $239.771 million. During the first six
months of 2006, the Bank experienced loan production of $62.154 million. This
loan production, combined with normal principal reductions of approximately $10
million and early payouts of existing loans accounted for the increases in
outstanding loan balances. The Corporation has been successful in maintaining
loan growth without compromising credit quality. Enhancements to the loan
approval process and exception reporting further provide for a more effective
management of risk in the loan portfolio. Management continues to actively
manage the loan portfolio, seeking to identify and resolve problem assets at an
early stage. Management believes a properly positioned loan portfolio provides
the most attractive earning asset yield available to the Corporation and, with
changes to the loan approval process and exception reporting, management can
effectively manage the risk in the loan portfolio. As shown in the table below,
all segments of the loan portfolio increased in the first six months of 2006.
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.
14.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Following is a summary of the loan portfolio at June 30, 2006, December 31, 2005
and June 30, 2005 (dollars in thousands):
June 30, Percent December Percent June 30, Percent
2006 of Total 31, 2005 of Total 2005 of Total
-------- -------- -------- -------- -------- --------
Commercial real estate $140,918 49.77% $118,637 49.48% $104,785 51.25%
Commercial, financial, and agricultural 59,581 21.05 56,686 23.64 47,534 23.24
One to four family residential real
estate 48,931 17.28 44,660 18.63 43,012 21.03
Consumer 2,632 0.93 2,285 0.95 2,153 1.05
Construction 31,048 10.97 17,503 7.30 7,019 3.43
-------- ------ -------- ------ -------- ------
Total loans $283,110 100.00% $239,771 100.00% $204,503 100.00%
======== ====== ======== ====== ======== ======
LOAN CONCENTRATION
Management recognizes that loan concentration within specific industries does
increase the risk associated within the Corporation's loan portfolio.
Historically, the Corporation had significant concentrations of its loan
portfolio composed of hospitality and tourism loans. Management's intent is to
monitor loan concentrations and to limit exposure to any one segment of the
economy.
Following is a table showing the significant industry types in the commercial
loan portfolio as of June 30, 2006, December 31, 2005 and June 30, 2005 (dollars
in thousands):
June 30, 2006 December 31, 2005 June 30, 2005
------------------------------------ ------------------------------------ ------------------------------------
Percent of Percent of Percent of Percent of Percent of Percent of
Outstanding Commercial Shareholders' Outstanding Commercial Shareholders' Outstanding Commercial Shareholders'
Balance Loans Equity Balance Loans Equity Balance Loans Equity
----------- ---------- ------------- ----------- ---------- ------------- ----------- ---------- -------------
Hospitality
and tourism $$ 37,754 18.83% 138.91% $ 37,681 21.49% 141.72% $ 43,208 28.35% 151.52%
Real estate operators
- nonresidential
bldg 35,478 17.69 130.53 28,217 16.10 106.13 16,479 10.83 57.79
Real estate agents &
managers 15,628 7.79 57.50 10,588 6.04 39.82 6,328 4.15 22.19
New car dealers 10,002 4.99 36.80 9,995 5.70 37.59 5,005 3.29 17.55
Petroleum 7,481 3.73 27.52 6,508 3.71 24.48 8,115 5.33 28.46
Operators of
nonresidential
bldgs 7,306 3.64 26.88 6,218 3.55 23.39 4,568 3.00 16.02
Gaming 6,813 3.40 25.07 7,553 4.31 28.41 9,717 6.38 34.07
Investors 6,659 3.32 24.50 -- 0.00 -- -- 0.00 --
Skilled nursing care
facilities 6,186 3.09 22.76 6,159 3.51 23.16 -- 0.00 --
Family housing
construction 5,467 2.73 20.11 -- 0.00 -- -- 0.00 --
Other 61,725 30.79 227.11 62,404 35.59 234.71 58,899 38.67 206.54
--------- ------ -------- ------ -------- ------
Total Commercial
Loans $$200,499 100.00 $175,323 100.00% $152,319 100.00%
========= ====== ======== ====== ======== ======
Management has made considerable progress in reducing concentrations of
hospitality and tourism loans, which reduced exposure to this economic segment
and lowered overall loan portfolio risk. Management expects further reductions
in concentrations of hospitality and tourism loans through a combination of new
loans in other industries and paydowns and maturities of current portfolio loans
in this sector.
CREDIT QUALITY
The allowance for loan losses is maintained by management at a level considered
to be adequate to cover probable losses related to specifically identified
loans, as well as losses inherent in the balance of the loan portfolio. At June
30, 2006, the allowance for loan losses was 1.91% of total loans outstanding
compared to 2.55% at December 31, 2005 and 3.24% at June 30, 2005.
Management analyzes the allowance for loan losses in detail on a monthly basis
to determine whether the losses inherent in the portfolio are properly reserved
for. Net charge-offs for the six months ended June 30, 2006 amounted to $.093
million, or 0.04% of average loans outstanding, compared to $.330 million, .17%
of average loans outstanding, for the same period in 2005. The Corporation, in
recognition of the continued improvement in credit quality which has occurred
since 2004, reduced the reserve for loan loss by $600,000 in the first quarter
of 2006. The reduction of the reserve results in a current reserve balance that
is more representative of the relevant risk
15.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
inherent within the Corporation's loan portfolio. The current level of
charge-offs is below historical levels and projected charge-off activity, based
upon current levels of nonperforming loans, is not expected to attain historical
levels. 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. There were no new significant problem loans or loan
downgrades identified during the first or second quarter of 2006.
The table below shows period end balances of non-performing assets (dollars in
thousands):
June 30, December 31, June 30,
2006 2005 2005
--------- ------------ ---------
NONPERFORMING ASSETS:
Nonaccrual Loans $ 446 $ 15 $ 959
Loans past due 90 days or more -- 99 2
Restructured Loans -- -- 0
--------- --------- -------
Total nonperforming loans 446 114 961
Other real estate owned 52 945 2,312
--------- --------- -------
Total nonperforming assets $ 498 $ 1,059 $ 3,273
========= ========= =======
Nonperforming loans as a % of loans .16% .05% .47%
--------- --------- -------
Nonperforming assets as a % of assets .14% .35% 1.19%
--------- --------- -------
RESERVE FOR LOAN LOSSES:
At period end $ 5,415 $ 6,108 $ 6,636
--------- --------- -------
As a % of loans 1.91% 2.55% 3.24%
--------- --------- -------
As a % of nonperforming loans 1,214.13% 5,357.89% 690.53%
--------- --------- -------
As a % of nonaccrual loans 1,214.13% N/M% 691.97%
========= ========= =======
Following is the allocation of the allowance for loan losses as of June 30,
2006, December 31, 2005 and June 30, 2005 (dollars in thousands):
June 30, December 31, June 30,
2006 2005 2005
-------- ------------ --------
Commercial, financial and agricultural loans $1,387 $1,492 $1,206
One to four family residential real estate loans -- 17 91
Consumer loans -- -- 0
Unallocated and general reserves 4,028 4,599 5,339
------ ------ ------
Totals $5,415 $6,108 $6,636
====== ====== ======
The following ratios assist management in the determination of the Corporation's
credit quality:
Six Months Twelve Months Six Months
Ended June 30, Ended December 31, Ended June 30,
2006 2005 2005
-------------- ------------------ --------------
Allowance to total loans, at period end 1.91% 2.55% 3.24%
Average loans outstanding for the periods indicated $262,274 $207,928 $198,618
Net charge-offs to average outstanding loans .04% .41% .17%
Nonperforming loans to gross loans, at period end .16% .05% .47%
Total nonperforming loans increased $332,000 since December 31, 2005. The 2006
increase resulted primarily from the nonaccrual status of one commercial credit
with a current principal balance of $.301 million. Late in 2005, the Bank sold
$2.1 million of nonperforming assets, which included $1.000 million of
nonperforming loans.
16.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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 independent review provided
findings similar to management on the overall adequacy of the reserve. The
Corporation has engaged this same consultant for loan review during 2006.
As part of the process of resolving problem credits, the Corporation may acquire
ownership of collateral which secured such credits. The Corporation carries this
collateral in other real estate which is grouped with other assets on the
condensed consolidated balance sheet.
The following table represents the activity in other real estate for the periods
indicated (dollars in thousands):
Six Months Ended Year Ended Six Months Ended
June 30, 2006 December 31, 2005 June 30, 2005
---------------- ----------------- ----------------
Balance at beginning of period $ 945 $ 1,730 $1,730
Other real estate transferred from loans 7 274 827
Other real estate sold/written down (900) (1,059) (245)
----- ------- ------
Balance at end of period $ 52 $ 945 $2,312
===== ======= ======
During the first six months of 2006, the Corporation received real estate in
lieu of loan payments of $7,000. Other real estate is initially valued at the
lower of cost or the fair value less selling costs. After the initial receipt,
management periodically re-evaluates the recorded balance. Any additional
reduction in the fair value results in a write-down of other real estate.
Write-downs on other real estate may be recorded based on subsequent evaluations
of current realizable fair values.
DEPOSITS
The Corporation had an increase in deposits in the first six months of 2006.
Total deposits increased by $51.532 million, or 21.2%, in the first six months
of 2006. This growth in deposits included $40.278 million of non-core deposits,
mostly brokered certificates of deposit. The Corporation continues to evaluate
its deposit products and pricing alternatives in an effort to fund loan growth
as economically as possible.
The following table represents detail of deposits at the end of the periods
indicated (dollars in thousands):
June30, December 31, June 30,
2006 2005 2005
-------- ------------ --------
Demand deposit accounts $ 21,773 $ 19,684 $ 21,033
NOW and money market 68,107 64,566 53,387
Savings and IRAs 22,104 22,555 24,843
Certificates of Deposit <$100,000 73,800 67,725 56,932
-------- -------- --------
Total core deposits 185,784 174,530 156,195
Certificates of Deposit >$100,000 19,025 12,335 11,665
Internet CDs <$100,000 16,628 28,113 34,550
Internet CDs >$100,000 4,998 7,698 5,404
Brokered Deposits 57,729 9,956 --
-------- -------- --------
Total non-core deposits 98,380 58,102 51,619
Total deposits $284,164 $232,632 $207,814
======== ======== ========
17.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
BORROWINGS
In the second quarter of 2006 the Corporation established a $6 million line of
credit with a correspondent bank. This line of credit will be utilized by the
Corporation to provide infusions of capital to the Bank. As of June 30, 2006,
the outstanding balance on this line was $1.2 million.
In the first quarter of 2005 the Corporation prepaid $48.555 million of the FHLB
borrowings in order to reduce interest rate risk and to better match earning
assets and funding sources. The remaining FHLB borrowings carry both fixed and
variable interest rates and mature in 2010 and 2011. The $15 million of fixed
rate FHLB borrowings are callable quarterly at the option of the FHLB and can
also be converted to variable rates, at the option of the FHLB, should rates
rise above certain index levels. These borrowings are secured by a blanket
collateral agreement on the Bank's residential mortgage loans and specific
assignment of other assets. Management may increase FHLB borrowings in the
future as a source for funding future loan production. In the first quarter of
2005, the Bank borrowed $2 million in Canadian dollars from a correspondent bank
in order to reduce the risk of an asset sensitive foreign exchange position.
This term loan was repaid in 2005.
SHAREHOLDERS' EQUITY
Total shareholders' equity increased $.591 million from December 31, 2005 to
June 30, 2006. The increase is comprised of net income of $.688 million,
contributed capital of $.156 million in recognition of stock option expense and
a $.253 million decrease in the market value of securities. The Board of
Directors does not anticipate declaring any dividends in the near future. The
declaration of dividends is contingent on a variety of factors including
regulatory and state statutes, and the Corporation's return to profitability.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income before provision for loan losses for the quarter ended June
30, 2006, increased by $.547 million, or 22.9%, compared to the same period one
year ago. This increase in net interest income was a result of the combination
of increased average balances and increased rates. The Corporation continues to
benefit from prime rate increases due to the amount of assets repricing with
each increase. This benefit related to a net asset sensitive position has been
declining in recent periods as the Corporation initiated steps as a part of its
ALCO Committee to reduce interest rate risk in the event of a future decline in
interest rates. More discussion is included relative to repricing and asset
sensitivity under the caption "Interest Rate Risk" elsewhere in this report.
18.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The following tables present the amount of interest income from average
interest-earning assets and the yields earned on those assets, as well as the
interest expense on average interest-bearing obligations and the rates paid on
those obligations. All average balances are daily average balances.
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES 2006-2005
-------------------------------- AVERAGE RATES INTEREST -----------------------------------------
June 30, June 30, June 30, Income/ Rate/
(dollars in ------------------- Increase/ ------------- --------------- Expense Volume Rate Volume
thousands) 2006 2005 (Decrease) 2006 2005 2006 2005 Variance Variance Variance Variance
-------- -------- ---------- ----- ----- ------ ------ -------- -------- -------- --------
Loans (1,2) $273,686 $197,545 $ 76,141 7.88% 6.97% $5,374 $3,431 $1,943 $1,322 $ 448 173
Taxable securities 30,328 47,944 (17,616) 3.61 3.62 273 434 (161) (159) (1) --
Nontaxable
securities 3,757 3,700 57 4.38 4.55 41 42 (1) 1 (2) --
Federal funds sold 9,738 7,182 2,556 5.11 2.90 124 52 72 19 39 14
Other interest-
earning assets 5,736 4,845 891 4.96 4.88 71 58 13 11 1 --
-------- -------- -------- ---- ---- ------ ------ ------ ------ ---- ----
Total earning
assets 323,245 261,216 62,029 7.30 6.17 5,883 4,017 $1,866 1,194 485 187
-------- -------- --------
Reserve for loan
losses (5,427) (5,427)
Cash and due from
banks 5,957 5,957
Intangible assets 284 284
Other assets 18,761 18,761
-------- -------- --------
Total assets $342,820 $261,216 $ 81,604
======== ======== ========
NOW and money
market deposits $ 69,994 $ 52,994 $ 17,000 3.13 1.65 546 218 328 70 195 63
Savings deposits 14,641 18,312 (3,671) 1.37 1.20 50 55 (5) (11) 8 (2)
Time deposits 169,902 116,070 53,832 4.52 3.20 1,913 926 987 428 382 177
Borrowings 37,610 37,837 (227) 4.68 4.57 439 431 8 (3) 11 --
-------- -------- -------- ---- ---- ------ ------ ------ ------ ---- ----
Total interest-
bearing
liabilities 292,147 225,213 66,934 4.05 2.90 2,948 1,630 1,318 484 596 238
Demand deposits 20,054 20,054
Other liabilities 3,406 3,406
Shareholders'
equity 27,213 27,213
-------- -------- --------
Total
liabilities
and
shareholders'
equity $342,820 $225,213 $117,607
======== ======== ========
Rate spread 3.25% 3.27%
---- ---- ------ ------ ------ ------ ---- ----
Net interest
margin/revenue 3.62% 3.67% $2,935 $2,387 $ 548 $ 710 $(111) $ (51)
==== ==== ====== ====== ====== ====== ==== ====
(1) For purposes of these computations, nonaccruing loans are included in the
daily average loan amounts outstanding.
(2) Interest income on loans includes loan fees.
SIX MONTHS ENDED
-----------------------------------------------------------------------------------------------------
AVERAGE BALANCES AVERAGE 2006-2005
------------------------------ RATES INTEREST --------------------------------------
June 30, June 30, June 30, Income/ Rate/
(dollars in ------------------ Increase/ ------------ --------------- Expense Volume Rate Volume
thousands) 2006 2005 (Decrease) 2006 2005 2006 2005 Variance Variance Variance Variance
-------- -------- ---------- ----- ----- ------- ------ -------- -------- -------- --------
Loans (1,2) $262,274 $198,618 $ 63,656 7.74% 6.83% $10,066 $6,732 $3,334 $2,156 $ 892 286
Taxable securities 30,347 49,006 (18,659) 3.63 3.69 547 896 (349) (341) (13) 5
Nontaxable
securities 3,816 3,705 111 4.33 4.57 82 84 (2) 3 (4) (1)
Federal funds sold 9,582 11,826 (2,244) 4.78 2.57 227 151 76 (29) 129 (24)
Other interest-
earning assets 5,756 7,772 (2,016) 4.76 3.68 136 142 (6) (37) 42 (11)
-------- -------- -------- ---- ---- ------- ------ ------ ------ ------ -----
Total earning
assets 311,775 270,927 40,848 7.15 5.96 11,058 8,005 3,053 1,752 1,046 255
-------- -------- --------
Reserve for loan
losses (5,737) (6,844) 1,107
Cash and due from
banks 6,147 5,104 1,043
Intangible assets 301 424 (123)
Other assets 18,494 17,641 853
-------- -------- --------
Total assets $330,980 $287,252 $ 43,728
======== ======== ========
NOW and money
market deposits $ 68,949 $ 53,014 $ 15,935 2.99 1.61 1,024 422 602 127 365 110
Savings deposits 14,987 18,342 (3,355) 1.29 1.11 96 101 (5) (18) 16 (3)
Time deposits 159,562 116,316 43,246 4.38 3.13 3,469 1,805 1,664 671 724 269
Borrowings 37,017 44,885 (7,868) 4.66 4.87 855 1,084 (229) (190) (47) 8
-------- -------- -------- ---- ---- ------- ------ ------ ------ ------ -----
Total interest-
bearing
liabilities 280,515 232,557 47,958 3.91 2.96 5,444 3,412 2,032 590 1,058 384
Demand deposits 19,721 20,277 (556)
Other liabilities 3,609 4,637 (1,028)
Shareholders'
equity 27,135 29,781 (2,646)
-------- -------- --------
Total
liabilities
and
shareholders'
equity $330,980 $287,252 $ 43,728
======== ======== ========
Rate spread 3.24% 3.00%
---- ---- ------- ------ ------ ------ ------ -----
Net interest
margin/revenue 3.63% 3.42% $ 5,614 $4,593 $1,021 $1,162 $ (12) $(129)
==== ==== ======= ====== ====== ====== ====== =====
(1) For purposes of these computations, nonaccruing loans are included in the
daily average loan amounts outstanding.
(2) Interest income on loans includes loan fees.
PROVISION FOR LOAN LOSSES
The Corporation records a provision for loan losses at a level it believes is
necessary to maintain the allowance at an adequate level after considering
factors such as loan charge-offs and recoveries, changes in the mix of loans in
the portfolio, loan growth, and other economic factors. In recognition of the
improved credit quality, the Corporation reduced its loan loss reserve by
$600,000 in the first quarter of 2006. There was no provision for loan losses in
the second quarter of 2006. Management continues to monitor the loan portfolio
for changes which may impact the required allowance for loan losses. A provision
for loan losses may be required for future periods if credit quality should
deteriorate or loan growth is such that the general reserve is no longer deemed
adequate.
19
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
OTHER INCOME
Other income decreased by $.087 million for the six months ended June 30, 2006,
compared to the six months ended June 30, 2005. The Corporation recorded a $.098
million net security gain in the second quarter of 2005. Service fees decreased
$.101 million in the first six months of 2006, while loan and lease fees
increased $.030 million, gains on sales of loans increased $.063 million, and
other noninterest income increased $.018 million. The decline in service fees is
primarily due to the introduction of new "no fee" deposit products in an attempt
to stimulate growth in transactional account deposits. In the second quarter of
2006, the Corporation recognized $.029 million of revenue due to mortgage loans
produced and sold in the secondary market. Other noninterest income was
positively impacted in the first half of 2006 from a gain due to foreign
currency transactions which amounted to $.031 million.
Management does not expect noninterest income to grow significantly in the near
future, but is currently exploring several noninterest income expansion
opportunities.
The following table details noninterest income for the three and six months
ended June 30, 2006 and 2005 (dollars in thousands):
Three Months Ended Six Months Ended
June 30, % Increase June 30, % Increase
------------------ (Decrease) ---------------- (Decrease)
2006 2005 2006-2005 2006 2005 2006-2005
---- ---- ---------- ---- ---- ----------
Service fees $122 $172 (29.1) $232 $333 (30.3)
Loan and lease fees 19 4 375.0 36 6 500.0
Net gains on sale of loans 42 13 223.1 83 20 315.0
Other 68 83 (18.1) 116 98 18.4
---- ---- ----- ---- ---- -----
Subtotal 251 272 (7.7) 467 457 2.2
---- ---- ----- ---- ---- -----
Net securities gains -- 98 100.0 -- 97 100.0
---- ---- ----- ---- ---- -----
Total other income $251 $370 (32.2) $467 $554 (15.7)
==== ==== ===== ==== ==== =====
OTHER EXPENSES
Other expenses decreased $4.947 million for the six months ended June 30, 2006,
compared to the same period in 2005. The prepayment penalty on FHLB borrowings
incurred by the Corporation in the first quarter of 2005 amounted to $4.320
million and was the primary reason for the decrease. Salaries, commissions, and
related benefits decreased modestly, during the first six months of 2006,
compared to the first six months of 2005. The Corporation adopted SFAS No. 123
("Share Based Payments") in 2006 which requires certain compensation related to
the issuance of stock options. The 2006 expense amounted to $156,000 which is
included in salaries and benefits. The $.156 million decrease in data processing
costs is the result of a full systems conversion which occurred in the fourth
quarter of 2005. The increase of $.137 million in occupancy was due primarily
from the opening of a new full service branch office in January of 2006. The
$.315 million decrease in loan and deposit expense is due in large part to the
reduction in FDIC insurance premiums, which amounted to $.275 million in the
first six months of 2005, compared to $.047 million in 2006, a reduction of
$.228 million. This reduction in premium was due to the improved capital
position of the Bank which resulted in the removal of the Cease and Desist Order
in the first quarter of 2005. In 2006 the Corporation incurred approximately
$240,000 in legal costs to pursue legal action against the Corporation's former
accountants. Management continually reviews all areas of noninterest expense for
cost reduction opportunities that will not negatively impact service quality and
employee morale.
20.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The following table details noninterest expense for the three and six months
ended June 30, 2006 and June 30, 2005 (dollars in thousands):
Three Months Ended Six Months Ended
June 30, % Increase June 30, % Increase
------------------ (Decrease) ---------------- (Decrease)
2006 2005 2006-2005 2006 2005 2006-2005
------ ------ ---------- ------ ------- ----------
Salaries and employee benefits $1,496 $1,606 (6.8) $3,090 $ 3,110 (0.6)
Occupancy 293 247 18.6 610 473 29.0
Furniture and equipment 155 138 12.3 311 297 4.7
Data processing 182 246 (26.0) 336 492 (31.7)
Accounting, legal and consulting fees 414 228 81.6 614 546 12.5
Loan and deposit 98 250 (60.8) 228 543 (58.0)
Telephone 51 77 (33.8) 100 137 (27.0)
Advertising 107 243 (56.0) 177 382 (53.7)
Penalty on prepayment of FHLB borrowings -- -- -- -- 4,320 NM
Other 225 300 (25.0) 552 665 (17.0)
------ ------ ----- ------ ------- -----
Total other expense $3,021 $3,335 (9.4) $6,018 $10,965 (45.1)
====== ====== ===== ====== ======= =====
FEDERAL INCOME TAXES
There was no tax provision for the first and second quarter of 2006 and 2005.
The Corporation recorded a $25,000 federal tax benefit in the second quarter of
2006 due to a refund from a prior year tax return. The Corporation's results of
operations for 2006 and 2005 do not reflect the impact of federal income taxes
due to large NOL carryforwards. The Corporation has approximately $36.5 million
of NOL carryforward along with various tax credit carryforwards of $2.1 million.
The NOL and tax credit carryforward benefit is dependent upon the future
profitability of the Corporation; therefore, no future benefit of these deferred
items has been recorded. The Corporation will reevaluate these deferred items in
future periods to determine whether or not recognition of all or a portion of
the benefit is appropriate in accordance with FASB Statement No. 109,
"Accounting for Income Taxes."
LIQUIDITY
As a result of the Corporation's renewed capital strength, from the
recapitalization in December 2004, the Corporation is now able to pursue sources
of liquidity, such as lines of credit from correspondent banks, borrowings from
the Federal Home Loan Bank and possible brokered deposits acquisition. The
liquidity issues faced, the Corporation's actions taken to address them, and the
liquidity plan for 2005 are discussed below.
During the first half of 2006, the Corporation increased cash and cash
equivalents by $10.121 million. As shown on the Corporation's condensed
consolidated statement of cash flows, liquidity was primarily impacted from
growth in loans funded by deposits. The Corporation prepaid $48.555 million in
FHLB borrowings in the first quarter of 2005. The Corporation utilized short
term liquidity sources such as federal funds sold and time deposits in other
financial institutions to fund the prepayment. In the first six months of 2006,
the Corporation funded loan growth of $43.339 million with deposit growth, which
amounted to $51.532 million. The excess deposit growth resulted in an increase
in federal funds balances.
It is anticipated that during the remainder of 2006, the Corporation will fund
anticipated loan production with a combination of core deposit growth and
noncore funding, primarily brokered CD's.
The Corporation's parent company is dependent upon its primary operating
subsidiary, the Bank, for sources of cash to fund its operating needs. At June
30, 2006, the Corporation's parent had a balance of $.828 million in cash and
cash equivalents. The corporation established a $6 million line of credit with a
correspondent bank in the second quarter of 2006. Late in June 2006, the
Corporation borrowed $1.2 million on this line which it infused into the Bank
for capital. This line of credit will provide additional resources necessary to
provide additional capital infusions to the Bank if needed.
21.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Corporation's liquidity plan for 2006 includes strategies to increase core
deposits in the Corporation's local markets. The introduction of new products
through an extensive advertising campaign commenced in the first quarter of
2005, with a goal of increasing core deposits to reduce the dependency on
noncore, out of market, deposits. The Corporation's liquidity plan for 2006
calls for augmenting local deposit growth efforts with brokered CD funding, to
the extent necessary. The Corporation has also reestablished Bank borrowing
lines at correspondent banks to provide additional sources of liquidity.
CAPITAL AND REGULATORY
During the first six months of 2006, capital increased by $.653 million, largely
due to net income of $.688 million. This compares to a decrease in tangible
capital during the same period in the previous year of $6.151 million, resulting
primarily from a net loss of $5.818 million. The increase in 2006 is comprised
of net income, contributed capital of $.156 million in recognition of stock
option expense, a decrease in intangible assets and reduced by a $.472 million
change in the market value of securities.
The Corporation and the Bank are 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. Although the Corporation
and the Bank are well capitalized, the Bank is operating under an informal
agreement which requires a minimum Tier 1 Capital ratio of 8%.
The following table details sources of capital for the periods indicated
(dollars in thousands):
June 30, December 31, June 30,
2006 2005 2005
-------- ------------ --------
CAPITAL STRUCTURE
Long-term debt (1) $ -- $ -- $ --
Shareholders' equity 27,179 26,588 28,517
-------- -------- --------
Total capitalization $ 27,179 $ 26,588 $ 28,517
-------- -------- --------
Tangible capital $ 26,911 $ 26,258 $ 28,124
-------- -------- --------
INTANGIBLE ASSETS
Core deposit premium $ 268 $ 330 $ 393
Other identifiable intangibles -- -- --
-------- -------- --------
Total intangibles $ 268 $ 330 $ 393
-------- -------- --------
REGULATORY CAPITAL
Tier 1 capital:
Shareholders' equity $ 27,179 $ 26,588 $ 28,517
Net unrealized (gains) losses on
available for sale securities 616 363 (20)
Minority interest -- --
Less: intangibles (268) (330) (393)
-------- -------- --------
Total Tier 1 capital $ 27,527 $ 26,621 $ 28,104
-------- -------- --------
Tier 2 Capital:
Allowable reserve for loan losses $ 3,728 $ 3,184 $ 2,718
Qualifying long-term debt -- --
-------- -------- --------
Total Tier 2 capital 3,728 3,184 2,718
-------- -------- --------
Total capital $ 31,255 $ 29,805 $ 30,822
======== ======== ========
Risk-adjusted assets $296,555 $251,796 $213,505
======== ======== ========
Capital ratios:
Tier 1 Capital to risk weighted assets 8.04% 9.23% 13.17%
Total Capital to risk weighted assets 9.28% 10.57% 14.45%
Tier 1 Capital to average assets 10.54% 11.84% 10.14%
(1) Long term debt consists of the Corporation's subordinated debentures.
22.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Regulatory capital is not the same as shareholders' equity reported in the
accompanying condensed consolidated financial statements. Certain assets cannot
be considered assets for regulatory purposes, such as acquisition intangibles.
Presented below is a summary of the capital position in comparison to generally
applicable regulatory requirements:
Tier 1 Tier 1 Total
Capital to Capital to Capital to
Average Risk-Weighted Risk-Weighted
Assets Assets Assets
---------- ------------- -------------
Regulatory minumum for capital adequacy purposes 4.0% 4.0% 8.0%
The Corporation:
June 30, 2006 8.04% 9.28% 10.54%
December 31, 2005 9.23% 10.57% 11.84%
The Bank:
June 30, 2006 8.16% 9.44% 10.69%
December 31, 2005 8.80% 10.09% 11.35%
23.
MACKINAC FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
In general, the Corporation attempts to manage interest rate risk by investing
in a variety of assets which afford it an opportunity to reprice assets and
increase interest income at a rate equal to or greater than the interest expense
associated with repricing liabilities.
Interest rate risk is the exposure of the Corporation to adverse movements in
interest rates. The Corporation derives its income primarily from the excess of
interest collected on its interest-earning assets over the interest paid on its
interest-bearing obligations. The rates of interest the Corporation earns on its
assets and owes on its obligations generally are established contractually for a
period of time. Since market interest rates change over time, the Corporation is
exposed to lower profitability if it cannot adapt to interest rate changes.
Accepting interest rate risk can be an important source of profitability and
shareholder value; however, excess levels of interest rate risk could pose a
significant threat to the Corporation's earnings and capital base. Accordingly,
effective risk management that maintains interest rate risk at prudent levels is
essential to the Corporation's safety and soundness.
Loans are the most significant earning asset. Management offers commercial and
real estate loans priced at interest rates which fluctuate with various indices
such as the prime rate or rates paid on various government issued securities. In
addition, the Corporation prices the majority of fixed rate loans so it has an
opportunity to reprice the loan within 12 to 36 months.
The Corporation also has $30.285 million of federal agency securities with an
average life of 1.1 years. The maturity of these investments in the near term
will provide opportunities for enhancing portfolio yields.
The Corporation also has federal funds sold to correspondent banks as well as
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.
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 rate environment
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 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 time
frames. Those instruments with a variable interest rate tied to an index and
considered immediately repricable are reported in the 1- to 90-day time frame.
The estimates of principal amortization and prepayments are assigned to the
following time frames.
24.
MACKINAC FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
The following is the Corporation's opportunities at June 30, 2006 (dollars in
thousands):
1-90 91 - 365 >1-5 Over 5
Days Days Years Years Total
-------- -------- -------- ------- --------
Interest-earning assets:
Loans $191,144 $ 7,041 $ 26,483 $58,442 $283,110
Securities 2,960 20,665 9,614 631 33,870
Other (1) 13,428 -- -- 4,855 18,283
-------- -------- -------- ------- --------
Total interest-earning assets 207,532 27,706 36,097 63,928 335,263
-------- -------- -------- ------- --------
Interest-bearing obligations:
NOW, Money Market, and Savings deposits 82,244 -- -- -- 82,244
Time deposits 28,613 74,815 18,231 759 122,418
Brokered CD's 11,939 45,790 -- -- 57,729
Borrowings 12,617 -- 25,000 -- 37,617
-------- -------- -------- ------- --------
Total interest-bearing obligations 135,413 120,605 43,231 759 300,008
-------- -------- -------- ------- --------
Gap $ 72,119 $(92,899) $ (7,134) $63,169 $ 35,255
======== ======== ======== ======= ========
Cumulative gap $ 72,119 $(20,780) $(27,914) $35,255
======== ======== ======== =======
(1) Includes Federal Home Loan Bank Stock
The above analysis indicates that at June 30, 2006, the Corporation had a
cumulative liability sensitivity gap position of $20.780 million within the
one-year time frame. The Corporation's cumulative liability sensitive gap
suggests that if market interest rates increase in the next twelve months, the
Corporation has the potential to earn less net interest income. Conversely, if
market interest rates decreased in the next twelve months, the above GAP
position suggests the Corporation's net interest income would increase.
At December 31, 2005, the Corporation had a cumulative liability sensitivity gap
position of $1.311 million within the one-year time frame. The Corporation's
cumulative liability sensitive gap suggested that if market interest rates
increased in the next twelve months, the Corporation had the potential to earn
less net interest income. Conversely, if market interest rates decreased over a
twelve-month period, the December 31, 2005, gap position suggested the
Corporation's net interest income would increase.
The increase in the gap liability position from December 31, 2005 to June 30,
2006 resulted from the use of short term liabilities to fund loan growth. This
was done in order to reduce interest rate risk and better match assets and
liabilities. A limitation of the traditional gap analysis is that it does not
consider the timing or magnitude of noncontractual repricing or expected
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.
The borrowings in the gap analysis include FHLB advances some of which are
fixed-rate advances. These fixed rate advances give the FHLB the option to
convert from a fixed-rate advance to an adjustable rate advance with quarterly
repricing at three-month LIBOR Flat. In the second quarter of 2006 the FHLB
"put" $10 million of the borrowings to the Corporation which were then converted
to variable pricing. Early in July and additional $10 million of FHLB borrowings
was converted. The exercise of this conversion feature on the remaining
borrowings by the FHLB would impact the repricing dates currently assumed in the
analysis.
The Corporation's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk and foreign exchange risk. The Corporation has no
market risk sensitive instruments held for trading purposes. The Corporation has
limited agricultural-related loan assets and therefore has minimal significant
exposure to changes in commodity prices. Any impact that changes in foreign
exchange rates and commodity prices would have on interest rates are assumed to
be insignificant.
25.
MACKINAC FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
Evaluating the exposure to changes in interest rates includes assessing both the
adequacy of the process used to control interest rate risk and the quantitative
level of exposure. The Corporation's interest rate risk management process seeks
to ensure that appropriate policies, procedures, management information systems,
and internal controls are in place to maintain interest rate risk at prudent
levels with consistency and continuity. In evaluating the quantitative level of
interest rate risk, the Corporation assesses the existing and potential future
effects of changes in interest rates on its financial condition, including
capital adequacy, earnings, liquidity, and asset quality.
In addition to changes in interest rates, the level of future net interest
income is also dependent on a number of variables, including: the growth,
composition and levels of loans, deposits, and other earning assets and
interest-bearing obligations, and economic and competitive conditions; potential
changes in lending, investing, and deposit strategies; customer preferences; and
other factors.
FOREIGN EXCHANGE RISK
In addition to managing interest rate risk, management also actively manages
risk associated with foreign exchange. The Corporation provides foreign exchange
services, makes loans to, and accepts deposits from, Canadian customers
primarily at its banking offices in Sault Ste. Marie, Michigan. To protect
against foreign exchange risk, the Corporation monitors the volume of Canadian
deposits it takes in and then invests these Canadian funds in Canadian
commercial loans and securities. The Corporation entered into a term loan
payable in Canadian dollars during the first quarter of 2005 in order to offset
the foreign exchange exposure due to an asset sensitive position. As of June 30,
2006, the Corporation had excess Canadian liabilities of $.236 million (or $.210
million in U.S. dollars). 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.
The Corporation currently does not enter into futures, forwards, swaps or
options. However, the Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit and involve to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the condensed 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.
IMPACT OF INFLATION AND CHANGING PRICES
The accompanying condensed consolidated 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 price of goods and services.
26.
MACKINAC FINANCIAL CORPORATION
ITEM 4 CONTROLS AND PROCEDURES
An evaluation was performed under the supervision of and with the participation
of the Corporation's management, including the President and Chief Executive
Officer, and the Chief Financial Officer, of the effectiveness of the design and
operation of the Corporation's disclosure controls and procedures (as such term
is defined in Rules 13-a 15(e) and 15d-15(e) under the Securities Exchange act
of 1934, as amended (the "Exchange Act")) as of the end of the period covered by
this report. Based on that evaluation, the Corporation's management, including
the President and Chief Executive Officer, have concluded that, as of the end of
such period, the Corporation's disclosure controls and procedures were effective
in timely alerting them to material information relating to the Corporation
(including its consolidated subsidiaries) required to be disclosed by the
Corporation in the reports that it files or submits under the Exchange Act.
There was no change in the Corporation's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred during the Corporation's fiscal quarter ended June
30, 2006 that has materially affected, or is reasonably likely to materially
affect, the Corporation's internal control over financial reporting.
27.
MACKINAC FINANCIAL CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are subject to routine litigation
incidental to the business of banking. In addition, the Corporation or the Bank
is subject to an informal agreement with regulatory authorities and the
litigation described below. Information regarding the informal agreement is
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the caption "Capital and Regulatory" in this
report, and is incorporated here by reference. The litigation that is not
routine and incidental to the business of banking is described below.
Shareholder's Derivative Litigation
Damon Trust v. Bittner, et al.
In an action styled Virginia M. Damon Trust v. North Country Financial
Corporation, Nominal Defendant, and Dennis Bittner, Bernard A. Bouschor, Ronald
G. Ford, Sherry L. Littlejohn, Stanley J. Gerou II, John D. Lindroth, Stephen
Madigan, Spencer Shunk, Michael Hendrickson, Glen Tolksdorf, and Wesley Hoffman,
filed in the U.S. District Court for the Western District of Michigan on July 1,
2003, a shareholder of the Corporation has brought a shareholder's derivative
action under Section 27 of the Exchange Act against the Corporation and certain
of its current and former directors and senior executive officers. The
Complaint, which demands a jury trial, is brought on behalf of the Corporation
against the individual defendants. It alleges that the individual defendants
have caused loss and damage to the Corporation through breaches of their
fiduciary duties of oversight and supervision by failing i) adequately to
safeguard the assets of the Corporation, (ii) to ensure that adequate
administrative, operating, and internal controls were in place and implemented,
(iii) to ensure that the Corporation was operated in accordance with
legally-prescribed procedures, and (iv) to oversee the audit process to ensure
that the Corporation's assets were properly accounted for and preserved. The
Complaint further alleges that the individual defendants violated Section 14(a)
of the Exchange Act by making materially false and misleading statements in the
proxy statement mailed to shareholders in connection with the annual meeting of
the Corporation held May 29, 2000, and the adoption by the shareholders at that
meeting of the Corporation's 2000 Stock Incentive Plan. The Complaint also
alleges that Mr. Ford and Ms. Littlejohn, through a series of compensation
arrangements, stock options, and employment agreements obtained by them through
improper means resulting from the offices they held with the Corporation,
received excessive compensation, to the injury of the Corporation. Among other
things, the Complaint is based upon allegations of material misstatements or
omissions in filings made by the Corporation with the SEC, and deficiencies in
the Corporation's policies and procedures for safe and sound operation,
including its directorate and management personnel and practices, credit
underwriting, credit administration, and policies regarding asset/liability
management, liquidity, funds management, and investments, and its compliance
with all applicable laws and regulations, including Regulations O and U of the
Board, FDIC Rules and Regulations, and the Michigan Banking Code of 1999. The
Complaint seeks (i) rescission of the approval of the 2000 Stock Incentive Plan
and return of all stock and options granted under the Plan, (ii) a declaration
that the individual defendants breached their fiduciary duty to the Corporation,
(iii) an order to the individual defendants to account to the Corporation for
all losses and/or damages by reason of the acts and omissions alleged, (iv) an
order to each of the individual defendants to remit to the Corporation all
salaries and other compensation received for periods during which they breached
their fiduciary duties, (v) compensatory damages in favor of the Corporation,
(vi) injunctive relief, and (vii) interest, costs, and attorney's and expert's
fees.
By letter dated September 17, 2003, and expressly without prejudice to the
argument that any such written demand is not required, plaintiff's counsel
purported to make a written demand that the Corporation pursue a number of
indicated putative claims against: (1) present and former officers and directors
of the Corporation who also are the individual defendants in the Damon action,
and (2) the certified public accounting firm of Wipfli, Ullrich, Bertelson, LLP.
On September 18, 2003, the Corporation filed a motion to dismiss the Damon
action because plaintiff did not satisfy the mandatory precondition, under
Section 493a of the Michigan Business Corporation Act ("MBCA"), M.C.L. Section
450.1493a, for filing a shareholder derivative action that the shareholder must
first have submitted a written demand that the Corporation pursue in its own
right the claims asserted by the shareholder (the plaintiff here). Certain of
the individual defendants in the Damon action filed their own motion to dismiss
on November 25, 2003,
28.
MACKINAC FINANCIAL CORPORATION
PART II. OTHER INFORMATION (Continued)
in which motion the other individual defendants later joined. The plaintiff
filed an Opposition to both motions to dismiss on January 9, 2004, and on
January 30, 2004, the defendants filed reply briefs in support of their motions
to dismiss.
On March 22, 2004, the Court issued an Opinion and Order granting in part and
denying in part the motions to dismiss in the Damon case. The Court dismissed
the Section 14(a) claim against all of the defendants as barred by the statute
of limitations and, as further grounds, dismissed that claim as to those who
were not directors at the time of the mailing of the proxy statement. The Court
has permitted the plaintiff to proceed with its breach of fiduciary duty claims
against the Directors on the grounds that the plaintiff cured its procedural
failings by subsequently transmitting a demand letter as required by Section 493
of the MBCA.
On April 19, 2004, the Court entered an Order Granting Stipulation to Grant
Plaintiff Leave to File Amended Complaint and to Grant Related Relief to All
Parties. On May 14, 2004, the plaintiff filed an Amended Complaint and,
thereafter, all Defendants timely filed Answers to the Amended Complaint. In its
Answer, the Corporation averred that the plaintiff's claims are asserted for and
on behalf of the Corporation, that the plaintiff does not assert any claims
against the Corporation and, therefore, the Corporation properly should be
realigned as a plaintiff in the action.
During the above described proceedings, on November 11, 2003, the Corporation
filed a motion, as permitted by section 495 of the MBCA, M.C.L. Section
450.1495, requesting the Court to appoint a disinterested person to conduct a
reasonable investigation of the claims made by the plaintiff and to make a good
faith determination whether the maintenance of the derivative action is in the
best interests of the Corporation. After additional written submissions to the
Court by the defendants and the plaintiff concerning the issues presented by
this motion, and after several conferences with the Court, on May 20, 2004, the
Court entered an Order adopting the parties' written stipulations concerning the
appointment of a disinterested person and the manner of conducting the
investigation of the claims made by the plaintiff and making recommendations as
to whether the maintenance of the derivative action is in the best interests of
the Corporation.
On July 14, 2004, the Court convened a settlement conference among counsel for
all parties and counsel for the individual defendants' insurer. Although a
settlement was not achieved, at the direction of the Court, the parties'
respective counsel agreed to continue settlement discussions.
By Order of the Court dated November 2, 2004, the report of the disinterested
person was timely filed with the Corporation on October 23, 2004, and the action
was stayed until November 22, 2004. On December 22, 2004, the plaintiff filed a
motion with the Court seeking a scheduling conference among the Court and the
parties. The Court granted the plaintiff's motion on January 10, 2005. On
January 13, 2005, the parties to the action and the individual defendants'
insurer entered into an agreement regarding limited disclosure of the report of
the disinterested person to the insurer and counsel for the parties on the terms
and conditions set forth in the agreement. Also on January 13, 2005, a
scheduling conference was held with the Court, and was adjourned to February 14,
2005.
On February 9, 2005, the parties filed a joint status report with the Court. A
further status conference was held on February 14, 2005. At that time, the Court
entered a Stipulated Protective Order regarding limited dissemination of the
report of the disinterested person. Also on February 14, in a separate Order,
the Court required the parties to complete their respective review of the report
and communicate among themselves regarding their positions. Absent a negotiated
resolution, the Corporation was given the opportunity until March 21, 2005, to
file an appropriate motion to dismiss. On March 21, 2005, consistent with the
determinations of the disinterested person in his report, the Corporation filed
with the Court a motion to dismiss (i) all the breach of fiduciary duty claims
against defendants Bittner, Bouschor, Gerou, Lindroth, Madigan, Shunk,
Hendrickson, and Tolksdorf, (ii) the breach of fiduciary duty claims against
defendant Hoffman, except for one claim identified by the disinterested person
in his report, and (iii) the excess compensation claims against defendants Ford
and Littlejohn. The plaintiff opposed the motion to dismiss.
In an Order dated September 6, 2005, the Court stayed the proceedings in this
case against defendant Littlejohn, in light of her filing for personal
bankruptcy under Chapter 7 of the Bankruptcy Code in the U.S. Bankruptcy Court
for the Western District of Michigan on August 9, 2005.
29.
MACKINAC FINANCIAL CORPORATION
PART II. OTHER INFORMATION (Continued)
In an Opinion and Order, each dated September 7, 2005, the Court granted the
Corporation's motion and dismissed with prejudice (i) all the breach of
fiduciary duty claims against defendants Bittner, Bouschor, Gerou, Lindroth,
Madigan, Shunk, Hendrickson, and Tolksdorf, (ii) the breach of fiduciary duty
claims against defendant Hoffman, except for one claim identified by the
disinterested person in his report, and (iii) the excess compensation claims
against defendants Ford and Littlejohn. The Court directed that the case proceed
with the claim against defendant Hoffman with respect to his involvement in
defendant Ford's December 21, 2001 employment agreement, and with respect to the
breach of fiduciary duty claims against defendants Ford and Littlejohn, subject
to the stay regarding proceedings against defendant Littlejohn.
A Case Management Order was entered by the Court on September 16, 2005. The
Court also scheduled a mediation among the parties, the Corporation, and its
insurer for November 15, 2005.
On October 21, 2005, without the required permission of the Court, the plaintiff
filed a Third Amended Complaint which (A) deleted (i) substantive allegations
previously asserted against defendants Bittner, Bouschor, Gerou, Lindroth,
Madigan, Shunk, Hendrickson, and Tolksdorf, (ii) the claim brought under Section
14 of the Exchange Act, (iii) allegations that the defendants engaged in acts to
"artificially inflate the price" of the Corporation's stock, and (iv) the
previous allegations quantifying damages to the Corporation at $40 million
(instead alleging "million of dollars" in damages), and (B) otherwise appears to
have been drafted to comport with the Court's Opinion and Order dated September
7, 2005. The Third Amended Complaint continues to include allegations against
defendant Littlejohn, notwithstanding the Court's September 6, 2005 Order
staying the case against her because of her personal bankruptcy filing. Before
the defendants responded to the Third Amended Complaint, the Court entered an
Order on October 31, 2005, striking the Third Amended Complaint because the
required permission of the Court was not obtained for its filing. The Court's
Order affords plaintiff seven days in which to submit a stipulated order for
filing of the Third Amended Complaint, or the filing of a motion to permit its
filing. Plaintiff subsequently filed a motion for leave to file a Third Amended
Complaint, and the Court has taken the motion under advisement after conducting
a hearing on the motion on December 6, 2005.
The mediation scheduled by the Court among the parties, the Corporation, and its
insurer was held on November 15, 2005. No settlement was reached. A continuation
of the mediation has been scheduled for April 26, 2006 by the parties, which are
conducting discovery in preparation for the mediation.
On November 22, 2005, the U.S. Bankruptcy Court for the Western District of
Michigan entered an Order granting the plaintiff's motion to lift the automatic
stay under 11 U.S.C. Section 362 and to permit plaintiff to continue the Damon
action against defendant Littlejohn, to the extent that plaintiff limits its
recovery to insurance proceeds. On December 14, 2005, the Bankruptcy Court
entered an order discharging defendant Littlejohn as a debtor in bankruptcy.
On March 3, 2006, the Court amended the Case Management Order to extend the
discovery and motion cutoff deadlines in the Damon case.
Prosecution of this case is the responsibility of the plaintiff and its counsel.
The Corporation's role will be to monitor the case and to respond to discovery
requests from the parties. Any settlement or judgment ultimately obtained by
plaintiff in this action, net of fees and expenses of counsel for plaintiff,
will inure to the benefit of the Corporation.
If a settlement is not reached as a result of the mediation, the Corporation
will incur additional legal fees and expenses in monitoring the plaintiff's
prosecution of the case on behalf of the Corporation and in responding to the
parties' requests for discovery directed to it. At this time the Corporation
cannot accurately estimate the amount of any such future legal fees and
expenses.
Damon Trust v. Wipfli
On August 27, 2004, a second shareholder's derivative action, styled Virginia M.
Damon Trust v. Wipfli Ullrich Bertelson, LLP, and North Country Financial
Corporation, Nominal Defendant, was filed in the Michigan Circuit Court for
Grand Traverse County by the same shareholder which brought the derivative
action discussed above. The complaint, which demands a jury trial, is brought on
behalf of the Corporation against Wipfli Ullrich Bertelson, LLP ("Wipfli") under
the Michigan Accountant Liability statute, M.C.L. 600.2962. It alleges that
Wipfli damaged
30.
MACKINAC FINANCIAL CORPORATION
PART II. OTHER INFORMATION (Continued)
the Corporation by (i) failing to conduct and oversee, with the due care and
competence required of professional accountants, the annual audit of the
Corporation's financial statements for its fiscal years ending December 31, 2000
and December 31, 2001, (ii) failing to provide, with requisite due care and
competence, the internal audit, regulatory compliance, and financial reporting
services Wipfli had agreed to provide the Corporation after August 28, 2002,
when Wipfli resigned as its auditors to undertake such consulting services,
(iii) failing to exercise due care and competence required to ensure that the
Corporation's financial statements conformed to applicable regulatory accounting
principles ("RAP") and generally accepted accounting principles ("GAAP"), (iv)
failing to make full disclosure that the Corporation's administrative,
operating, and internal controls were inadequate to prevent loss and damage to
its assets, and (v) failing to conduct a diligent and careful "review" of the
Corporation's quarterly financial statements during its fiscal years 2000 and
2001 and the first and second quarters of 2002.
The complaint further alleges that Wipfli undertook in writing (i) to provide
professional services, including auditing services, accounting services for
preparation of audited financial statements, advice regarding financial
statement disclosure, and preparation of annual reports for regulators,
including the annual report required by section 36 of the Federal Deposit
Insurance Act, and (ii) to ensure that the Corporation had sufficient systems in
place to determine whether it was in compliance with RAP and other regulations
of the FDIC and the OFIS. The complaint alleges that Wipfli (i) failed to
conduct its audits of the Corporation's financial statements in accordance with
generally accepted auditing standards ("GAAS"), (ii) negligently represented
that the Corporation's audited annual financial statements for the year ended
December 31, 2000 were fairly presented in all material respects, (iii)
negligently conducted reviews of the Corporation's quarterly financial
statements for the interim quarters of 2000, 2001 and 2002, and (iv) negligently
audited the Corporation's financial statements for the fiscal years 2000 and
2001 by failing to obtain or review sufficient documentation failing to limit
the scope of the audit in light of such failure to obtain or review sufficient
documentation, failing to verify the accuracy of information obtained from the
Corporation for the audit, failing to limit the scope of the audit in light of
such failure to verify the accuracy of the information obtained from the
Corporation, and substantially underestimating the Corporation's liabilities and
misrepresenting its solvency.
The complaint also alleges that Wipfli is a party responsible for the
Corporation's liability in any securities fraud action arising out of a material
overstatement of its financial results. The complaint claims contribution and
indemnification from Wipfli on behalf of the Corporation under the Private
Securities Litigation Reform Act of 1995 for any liability it may incur in any
such securities fraud action.
On October 12, 2004, Wipfli removed the second shareholder's derivative action
to the U.S. District Court for the Western District of Michigan. By stipulation
between the respective counsel for the Corporation and the plaintiff, the
Corporation was initially granted until December 10, 2004, to file its first
response to the Complaint, which period was extended by a Stipulated Order until
January, 2005.
On January 10, 2005, the Corporation filed its Answer to the Complaint in the
second shareholder's derivative action. Also on that date, a joint status report
was filed with the Court by all parties. A scheduling conference was held with
the Court on January 13, 2005. On that date, the Court entered a Preliminary
Case Management Order, affording the Corporation the opportunity until February
3, 2005, to make a motion to realign the Corporation in, or to dismiss, the
litigation.
On February 3, 2005, the Corporation filed a Motion to realign the Corporation
as the plaintiff, and to dismiss the Virginia M. Damon Trust as a party, in the
second shareholder's derivative action. The plaintiff, Virginia M. Damon Trust,
filed a brief opposing the Corporation's motion. Oral argument on the
Corporation's motion was held before the Court on March 7, 2005. The Court took
the matter under advisement.
In an Order dated September 29, 2005, the Court realigned the Corporation as the
plaintiff and made the Corporation exclusively responsible for prosecuting all
further aspects of the case, including any settlement. In the same Order, the
Court stated that the Virginia M. Damon Trust would remain as a nominal
plaintiff in the case, entitled to notice.
A Case Management Order was entered by the Court on January 27, 2006. A
mediation hearing was scheduled by the court for June 2006 and later rescheduled
for early August 2006. The Corporation does not expect a resolution of this case
as a result of the mediation hearing.
31.
MACKINAC FINANCIAL CORPORATION
PART II. OTHER INFORMATION (Continued)
Litigation of the types involved in the actions described above can be complex,
time-consuming, and often protracted. The Corporation has incurred substantial
expense for legal and other professional fees as a result of these actions. The
Corporation anticipates that it will incur additional such expenses in
connection with the two actions described above. The Corporation does not
believe that legal costs associated with the Damon action noted above will be
material for 2006. The Corporation incurred and expensed $240,000 of legal costs
related to this case in the first half of 2006. The future costs related to this
case are unknown; however, the Corporation believes additional costs in 2006
will not exceed $200,000. The expenses incurred in 2007 will be dependent upon
further development and the probability of a pretrial settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the Registrant's shareholders was held on May 31, 2006.
The purpose of the meeting was to elect directors, as shown below, each for a
three-year term expiring in 2009. The number of shares voted is presented in the
table below.
DIRECTOR FOR WITHHELD
-------- --------- --------
Walter J. Aspatore 1,916,062 307,026
Robert H. Orley 1,915,234 307,854
Randolph C. Paschke 1,916,079 307,009
32.
MACKINAC FINANCIAL CORPORATION
PART II. OTHER INFORMATION (Continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 3.1 Articles of Incorporation, as amended, incorporated herein by
reference to exhibit 3.1 of the Corporation's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999.
Exhibit 3.2 Amended and Restated Bylaws, incorporated herein by reference
to exhibit 3.1 of the Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001.
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer.
Exhibit 32.1 Section 1350 Certification of Chief Executive Officer.
Exhibit 32.2 Section 1350 Certification of Chief Financial Officer.
33.
MACKINAC FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MACKINAC FINANCIAL CORPORATION
(Registrant)
Date: August 11, 2006 By: /s/ Paul D. Tobias
------------------------------------
PAUL D. TOBIAS,
CHAIRMAN
(principal executive officer)
By: /s/ Ernie R. Krueger
------------------------------------
ERNIE R. KRUEGER,
SENIOR VICE PRESIDENT / CONTROLLER
(principal accounting officer)
34.
Exhibit Index
NO. DESCRIPTION
--- -----------
Exhibit 3.1 Articles of Incorporation, as amended, incorporated herein by
reference to exhibit 3.1 of the Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999.
Exhibit 3.2 Amended and Restated Bylaws, incorporated herein by reference to
exhibit 3.1 of the Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001.
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer.
Exhibit 32.1 Section 1350 Certification of Chief Executive Officer.
Exhibit 32.2 Section 1350 Certification of Chief Financial Officer.