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 September 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 Identification No.)
incorporation or organization)
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 October 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 - September 30, 2006
(Unaudited), December 31, 2005 and September 30, 2005
(Unaudited) ............................................... 1
Condensed Consolidated Statements of Operations - Three and
Nine Months Ended September 30, 2006 (Unaudited) and
September 30, 2005 (Unaudited) ............................ 2
Condensed Consolidated Statements of Changes in Shareholders'
Equity - Three and Nine Months Ended September 30, 2006
(Unaudited) and September 30, 2005 (Unaudited) ............ 3
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2006 (Unaudited) and September 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 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)
September 30, December 31, September 30,
2006 2005 2005
------------- ------------ -------------
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 5,537 $ 4,833 $ 5,333
Federal funds sold 11,949 3,110 4,849
-------- -------- --------
Cash and cash equivalents 17,486 7,943 10,182
Interest-bearing deposits in other financial institutions 889 1,025 1,282
Securities available for sale 36,129 34,210 35,506
Federal Home Loan Bank stock 4,152 4,855 4,855
Total loans 292,614 239,771 218,462
Allowance for loan losses (5,316) (6,108) (6,589)
-------- -------- --------
Net loans 287,298 233,663 211,873
Premises and equipment 12,643 11,987 11,268
Other real estate held for sale 26 945 1,948
Other assets 4,568 4,094 3,676
-------- -------- --------
Total assets $363,191 $298,722 $280,590
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Non-interest-bearing deposits $ 22,826 $ 19,684 $ 19,690
Interest-bearing deposits 270,668 212,948 193,578
-------- -------- --------
Total deposits 293,494 232,632 213,268
Borrowings 38,307 36,417 36,417
Other liabilities 3,164 3,085 3,005
-------- -------- --------
Total liabilities 334,965 272,134 252,690
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 42,646 42,412 42,412
Accumulated deficit (14,083) (15,461) (14,434)
Accumulated other comprehensive income (loss) (337) (363) (78)
-------- -------- --------
Total shareholders' equity 28,226 26,588 27,900
-------- -------- --------
Total liabilities and shareholders' equity $363,191 $298,722 $280,590
======== ======== ========
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 Nine Months
Ended Ended
September 30, September 30,
--------------- -----------------
2006 2005 2006 2005
------ ------ ------- -------
INTEREST INCOME:
Interest and fees on loans:
Taxable $5,635 $3,547 $15,316 $ 9,807
Tax-exempt 189 222 575 694
Interest on securities
Taxable 306 282 852 1,178
Tax-exempt 5 42 87 126
Other interest 268 177 631 470
------ ------ ------- -------
Total interest income 6,403 4,270 17,461 12,275
------ ------ ------- -------
INTEREST EXPENSE:
Deposits 2,951 1,338 7,540 3,666
Borrowings 500 425 1,355 1,509
------ ------ ------- -------
Total interest expense 3,451 1,763 8,895 5,175
------ ------ ------- -------
Net interest income before provision for loan losses 2,952 2,507 8,566 7,100
Provision for loan losses -- -- (600) --
------ ------ ------- -------
Net interest income after provision for loan losses 2,952 2,507 9,166 7,100
------ ------ ------- -------
OTHER INCOME:
Service fees 133 137 365 470
Loan and lease fees 23 5 59 11
Net security gains (1) (1) (1) 96
Net gains on sale of loans 66 17 149 37
Other 19 96 135 194
------ ------ ------- -------
Total other income 240 254 707 808
------ ------ ------- -------
OTHER EXPENSE:
Salaries and employee benefits 1,487 1,555 4,577 4,665
Occupancy 333 275 943 748
Furniture and equipment 159 133 470 430
Data processing 176 234 512 726
Accounting, legal, and consulting fees 341 204 955 750
Loan and deposit 78 153 305 696
Telephone 55 66 155 203
Advertising 70 314 247 696
Penalty on prepayment of FHLB borrowings -- -- -- 4,320
Other 303 345 856 1,010
------ ------ ------- -------
Total other expense 3,002 3,279 9,020 14,244
------ ------ ------- -------
Income (loss) before income taxes 190 (518) 853 (6,336)
Provision for (benefit of) income taxes (500) -- (525) --
------ ------ ------- -------
NET INCOME (LOSS) $ 690 $ (518) $ 1,378 $(6,336)
====== ====== ======= =======
INCOME (LOSS) PER COMMON SHARE:
Basic $ .20 $ (.15) $ .40 $ (1.85)
====== ====== ======= =======
Diluted $ .20 $ (.15) $ .40 $ (1.85)
====== ====== ======= =======
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 Nine Months
Ended Ended
September 30, September 30,
----------------- -----------------
2006 2005 2006 2005
------- ------- ------- -------
Balance, beginning of period $27,179 $28,517 $26,588 $34,730
Stock option compensation 78 -- 234 --
Net income (loss) for period 690 (518) 1,378 (6,336)
Change in minority interest of consolidated subsidiary -- -- -- 76
Net unrealized gain (loss) on securities available for sale 279 (99) 26 (570)
------- ------- ------- -------
Total comprehensive income (loss) 1,047 (617) 1,638 (6,830)
------- ------- ------- -------
Balance, end of period $28,226 $27,900 $28,226 $27,900
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
3.
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------------
2006 2005
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,378 $ (6,336)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 762 707
(Gain) on sales of securities -- (96)
(Gain) on sales of premises, equipment, and other real estate (60) (64)
FHLB stock dividend -- (101)
Stock option compensation 234 --
Change in other assets (568) 1,950
Change in other liabilities 79 (1,073)
-------- --------
Net cash provided by (used in) operating activities 1,825 (5,013)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits in other
financial institutions 136 17,253
Purchase of securities available for sale (5,000) (16,009)
Proceeds from sales of securities available for sale -- 30,811
Proceeds from maturities, calls or paydowns of securities available for sale 3,079 6,218
FHLB repurchase of stock 703 --
Net (increase) in loans (53,658) (15,563)
Capital expenditures (1,307) (1,088)
Proceeds from sale of premises, equipment, and other real estate 1,013 423
Purchase of minority interest in subsidiary of bank -- 76
-------- --------
Net cash provided by (used in) investing activities (55,034) 22,121
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 60,862 (2,382)
Proceeds from issuance of debt 1,959 1,651
Principal payments on borrowings (69) (50,273)
-------- --------
Net cash provided by (used in) financing activities 62,752 (51,004)
-------- --------
Net increase (decrease) in cash and cash equivalents 9,543 (33,896)
Cash and cash equivalents at beginning of period 7,943 44,078
-------- --------
Cash and cash equivalents at end of period $ 17,486 $ 10,182
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 8,764 $ 5,338
Income taxes -- --
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfers of Foreclosures from Loans to Other Real Estate Held for Sale 23 556
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 nine month period ended
September 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 $234,000 for the nine months ended September 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 $81,000 in the first nine months of 2005. The per share
impact of this accounting change was approximately $.02 per share in each
quarter and $.07 per share for the nine months ended September 30, 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 third 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 nine months ended September 30, 2006 and 2005
(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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Income (loss) per common share-Basic:
Net income (loss) $ 690 $ (518) $ 1,378 $ (6336)
========== ========== ========== ==========
Weighted average common shares outstanding 3,428,695 3,428,695 3,428,695 3,428,695
========== ========== ========== ==========
Income (loss) per common share-Basic $ .20 $ (.15) $ .40 $ (1.85)
========== ========== ========== ==========
Income (loss) per common share-Diluted:
Net income (loss) $ 690 $ (518) $ 1,378 $ (6336)
========== ========== ========== ==========
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 $ .20 $ (.15) $ .40 $ (1.85)
========== ========== ========== ==========
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 September 30, 2006, December 31, 2005 and
September 30, 2005 are as follows (dollars in thousands):
September 30, 2006 December 31, 2005 September 30, 2005
---------------------- ---------------------- ----------------------
Amortized Estimated Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value Cost Fair Value
--------- ---------- --------- ---------- --------- ----------
US Agencies $35,954 $35,536 $30,980 $30,354 $31,990 $31,568
Obligations of states and
political subdivisions 512 593 3,593 3,856 3,594 3,938
------- ------- ------- ------- ------- -------
Total securities
available for sale $36,466 $36,129 $34,573 $34,210 $35,584 $35,506
======= ======= ======= ======= ======= =======
The amortized cost and estimated fair value of investment securities
pledged to secure FHLB borrowings and customer relationships were $26.939
million and $26.577 million, respectively, at September 30, 2006.
5. LOANS
The composition of loans at September 30, 2006, December 31, 2005 and
September 30, 2005 is as follows (dollars in thousands):
September 30, December 31, September 30,
2006 2005 2005
------------- ------------ -------------
Commercial real estate $146,838 $118,637 $123,429
Commercial, financial, and agricultural 58,548 56,686 36,297
One to four family residential real estate 51,341 44,660 42,490
Consumer 2,792 2,285 2,108
Construction 33,095 17,503 14,138
-------- -------- --------
Total loans $292,614 $239,771 $218,462
======== ======== ========
LOANS - ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses for the nine months ended
September 30, 2006, the year ended December 31, 2005, and the nine months
ended September 30, 2005 is as follows: (dollars in thousands):
September 30, December 31, September 30,
2006 2005 2005
------------- ------------ -------------
Balance at beginning of period $6,108 $6,966 $6,966
Recoveries on loans 59 134 107
Loans charged off (251) (992) (484)
Provision (600) -- --
------ ------ ------
Balance at end of period $5,316 $6,108 $6,589
====== ====== ======
In the first nine months of 2006, net charge off activity was minimal at
$192,000, or .07% of average loans outstanding compared to net charge-offs
of $377,000, or .19% of average loans, in the same period in 2005. In the
first quarter 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."
7.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. LOANS (Continued)
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 nine months ended September 30, 2006 and 2005.
Information regarding impaired loans as of September 30, 2006, December 31,
2005 and September 30, 2005 is as follows (dollars in thousands):
Valuation Reserve
--------------------------------
September December September September December September
30, 2006 31, 2005 30, 2005 30, 2006 31, 2005 30, 2005
----------- -------- ----------- --------- -------- ---------
(Unaudited) (Unaudited)
Balances, at period end
Impaired loans with specific valuation reserve $1,803 $ -- $1,071 $164 $-- $321
Impaired loans with no specific valuation reserve 262 114 886 -- -- --
------ ------ ------ ---- --- ----
Total impaired loans $2,065 $ 114 $1,957 $164 $-- $321
====== ====== ====== ==== === ====
Impaired loans on nonaccrual basis $2,065 $ 15 $1,957 $164 $-- $321
Impaired loans on accrual basis -- 99 -- -- -- --
------ ------ ------ ---- --- ----
Total impaired loans $2,065 $ 114 $1,957 $164 $-- $321
====== ====== ====== ==== === ====
Average investment in impaired loans $ 713 $1,922 $2,374
Interest income recognized during impairment 4 78 76
Interest income that would have been recognized
on an accrual basis 56 134 132
Cash-basis interest income recognized 3 76 76
The average investment in impaired loans was approximately $.713 million
for the nine months ended September 30, 2006, $1.922 million for the year
ended December 31, 2005, and $2.374 million for the nine months ended
September 30, 2005, respectively. Impacting the impaired loan balances in
2005 was a sale of nonperforming assets in late December which included
$1.0 million of nonaccrual loans.
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):
September 30, December 31, September 30,
2006 2005 2005
------------- ------------ -------------
Loans outstanding beginning of period $ 578 $ 63 $ 63
New loans 1,647 56 52
Net activity on revolving lines of credit 271 578 514
Repayment (865) (119) (115)
------ ----- -----
Loans outstanding end of period $1,631 $ 578 $ 514
====== ===== =====
8.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. LOANS (Continued)
There were no loans to related-parties classified substandard at September
30, 2006, December 31, 2005 or September 30, 2005, respectively. In
addition to the outstanding balances above, there were no unused
commitments to related parties at September 30, 2006.
6. BORROWINGS
Borrowings consist of the following at September 30, 2006, December 31,
2005 and September 30, 2005 (dollars in thousands):
September 30, December 31, September 30,
2006 2005 2005
------------- ------------ -------------
Federal Home Loan Bank advances at rates ranging from 4.98%
to 5.53% 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% 1,348 1,417 1,417
Advance outstanding on line of credit with a correspondent bank,
interest payable at the prime rate, 8.25% as of September 30, 2006 1,959 -- --
------- ------- -------
$38,307 $36,417 $36,417
======= ======= =======
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 September 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 $19.361 million; U.S. government agency securities with an
amortized cost and estimated fair value of $26.328 million and $25.966
million, respectively; and Federal Home Loan Bank stock owned by the Bank
totaling $4.152 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 September 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, which is
priced at the prime rate, will be utilized by the Corporation to infuse
capital into the Bank in order to support the regulatory required 8% Tier 1
capital.
The U.S.D.A. Rural Development borrowing is collateralized by loans
totaling $1.036 million originated and held by the Corporation's wholly
owned subsidiary, First Rural Relending, and an assignment of a demand
deposit account in the amount of $.460 million, and guaranteed by the
Corporation.
9.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. STOCK OPTION PLANS
A summary of stock option transactions for the nine months ended September
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).
September 30, December 31, September 30,
2006 2005 2005
------------- ------------ -------------
Outstanding shares at beginning of year 375,417 282,999 282,999
Granted during the period -- 112,500 100,000
Expired during the period 1,500 20,082 19,442
-------- -------- --------
Outstanding shares at end of period 373,917 375,417 363,557
======== ======== ========
Weighted average exercise price per share at end of period $ 12.60 $ 14.15 $ 14.73
======== ======== ========
Shares available for grant at end of period 90,988 89,488 108,974
======== ======== ========
There were no options granted in the first nine months of 2006. In the
first nine months of 2005, the Corporation issued 60,000 option shares at a
price of $12.00 per share and 40,000 option shares priced at $11.50 per
share.
Following is a summary of the options outstanding and exercisable at
September 30, 2006:
Weighted Average
Number Remaining
Exercise ------------------------- Contractual Weighted Average
Price Range Outstanding Exercisable Life-Years Exercise Price
----------- ----------- ----------- ---------------- ----------------
$9.16 12,500 2,500 9.25 $ 9.16
$9.75 257,152 120,861 8.21 9.75
$11.50 40,000 8,000 9.00 11.50
$12.00 60,000 12,000 8.71 12.00
$156.00 - $240.00 3,545 3,545 4.51 186.75
$300.00 - $406.60 720 720 2.79 345.00
------- ------- ---- -------
373,917 147,626 8.36 $ 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):
September 30, December 31, September 30,
2006 2005 2005
------------- ------------ -------------
Commitments to extend credit:
Fixed rate $ 4,628 $ 2,118 $ 1,709
Variable rate 44,142 31,557 27,827
Standby letters of credit - Variable rate 6,422 10,493 10,933
Credit card commitments - Fixed rate 2,488 3,135 3,145
------- ------- -------
$57,680 $47,303 $43,614
======= ======= =======
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.
11.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
and tourism industry. This concentration represents $37.287 million, or
15.17%, of the commercial loan portfolio at September 30, 2006. The
remainder of the commercial loan portfolio is diversified in such
categories as real estate related, car dealers, gaming, and petroleum. 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.
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.
13.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL OVERVIEW
Year-to-date consolidated net income was $1.378 million through September 30,
2006, or $.40 per share, compared to a loss of $6.336 million, $1.85 per share,
for the same period in 2005. The income for the three months ended September 30,
2006 amounted to $.690 million, or $.20 per share, compared to a loss of $.518
million, or $.15 per share for the same period in 2005. The 2006 nine months
operations include a $600,000 negative provision, recorded in the first quarter,
in recognition of improved credit quality and a $500,000 deferred tax benefit
recorded in the third quarter. The deferred tax benefit was recorded in
accordance with generally accepted accounting principles for recognition of a
portion of the benefits to be derived from NOL carry-forwards. The 2005 results
include a penalty of $4.320 million on the prepayment of $48.555 million of the
FHLB borrowings. Excluding the provision and deferred tax adjustment in 2006 and
the prepayment penalty recorded in 2005, the net income in the first nine months
of 2006 amounted to $278,000, compared to an adjusted loss of $2.016 million for
the same period in 2005. The nine month 2006 results also include $234,000 of
stock option expense, required under the new accounting rules for stock
compensation plans, as well as $400,000 of expenses incurred to pursue legal
action against the Corporation's former accountants. The costs associated with
the pursuit of this legal action have surpassed our earlier estimates but
management and the Corporation's Board of Directors believe the case has merit
and is in the best interests of shareholders. Legal expenses for this action are
projected to be $250,000 in the fourth quarter which will carry the case through
trial. Total assets increased $64.469 million from December 31, 2005 to
September 30, 2006. The loan portfolio increased $52.843 million in the first
nine months of 2006, from December 31, 2005 balances of $239.771 million.
Deposits totaled $293.494 million at September 30, 2006, an increase of $60.862
million from the $232.632 million at December 31, 2005.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased $9.543 million in 2006. See further
discussion of the change in cash and cash equivalents in the Liquidity section.
INVESTMENT SECURITIES
Available-for-sale securities increased $1.919 million, or 5.61%, from December
31, 2005 to September 30, 2006, with the balance on September 30, 2006, totaling
$36.129 million. The increase in securities was primarily due to the combination
of an early prepayment of $2.960 million of municipal obligations and the
purchase of a $5.0 million US Agency security. Investment securities are
utilized in an effort to manage interest rate risk and liquidity. As of
September 30, 2006, investment securities with an estimated fair value of $27
million were pledged.
LOANS
Through the third quarter of 2006, loan balances increased by $52.843, or
22.04%, from December 31, 2005 balances of $239.771 million. During the first
nine months of 2006, the Bank experienced loan production of $84 million. This
loan production, combined with normal principal reductions of approximately $16
million and $15 million of 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 nine 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 September 30, 2006, December 31,
2005 and September 30, 2005 (dollars in thousands):
September 30, Percent December 31, Percent September 30, Percent
2006 of Total 2005 of Total 2005 of Total
------------- -------- ------------ -------- ------------- --------
Commercial real estate $146,838 50.18% $118,637 49.48% $123,429 56.50%
Commercial, financial, and agricultural 58,548 20.01 56,686 23.64 36,297 16.61
One to four family residential real estate 51,341 17.55 44,660 18.63 42,490 19.45
Consumer 2,792 .95 2,285 .95 2,108 .97
Construction 33,095 11.31 17,503 7.30 14,138 6.47
-------- ------ -------- ------ -------- ------
Total loans $292,614 100.00% $239,771 100.00% $218,462 100.00%
======== ====== ======== ====== ======== ======
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 September 30, 2006, December 31, 2005 and September 30,
2005 (dollars in thousands):
September 30, 2006 December 31, 2005 September 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 $ 37,287 18.15% 132.10% $ 37,681 21.49% 141.72% $ 40,424 25.31% 144.89%
Real estate operators
- nonresidential
bldg 35,965 17.51 127.42 28,217 16.10 106.13 24,387 15.27 87.41
Real estate agents &
managers 19,744 9.61 69.95 10,588 6.04 39.82 7,837 4.91 28.09
New car dealers 10,049 4.89 35.60 9,995 5.70 37.59 5,005 3.13 17.94
Family housing
construction 7,215 3.51 25.56 2,184 1.25 8.21 1,680 1.05 6.02
Operators of
nonresidential
bldgs 7,035 3.43 24.92 6,218 3.55 23.39 6,638 4.16 23.79
Investors 6,658 3.24 23.59 191 .10 .72 335 .21 1.20
Gaming 6,459 3.15 22.88 7,553 4.31 28.41 9,331 5.84 33.44
Petroleum 6,258 3.05 22.17 6,508 3.71 24.48 6,971 4.36 24.99
Skilled nursing care
facilities 5,932 2.89 21.02 5,370 3.06 20.20 5,564 3.48 19.94
Other 62,784 30.57 222.43 60,818 34.69 228.74 51,554 32.28 184.78
-------- ------ -------- ------ -------- ------
Total Commercial
Loans $205,386 100.00% $175,323 100.00% $159,726 100.00%
======== ====== ======== ====== ======== ======
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
September 30, 2006, the allowance for loan losses was 1.82% of total loans
outstanding compared to 2.55% at December 31, 2005 and 3.02% at September 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 nine months ended September 30, 2006 amounted to
$.192 million, or .07% of average loans outstanding, compared to $.377 million,
..19% 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 inherent within the Corporation's
loan portfolio. The current level of charge-offs is below historical levels and
15.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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. In the third quarter of 2006, one large commercial
credit was put into nonaccrual which accounted for the majority of the increase
in nonperforming loans. This commercial credit is secured primarily by real
estate and no material loss is anticipated.
The table below shows period end balances of non-performing assets (dollars in
thousands):
September 30, December 31, September 30,
2006 2005 2005
------------- ------------ -------------
NONPERFORMING ASSETS:
Nonaccrual Loans $ 2,065 $ 15 $1,957
Loans past due 90 days or more -- 99 --
Restructured Loans -- -- 0
------- --------- ------
Total nonperforming loans 2,065 114 1,957
Other real estate owned 26 945 1,948
------- --------- ------
Total nonperforming assets $ 2,091 $ 1,059 $3,905
======= ========= ======
Nonperforming loans as a % of loans .71% .05% .09%
------- --------- ------
Nonperforming assets as a % of assets .58% .35% 1.39%
------- --------- ------
RESERVE FOR LOAN LOSSES:
At period end $ 5,316 $ 6,108 $6,589
------- --------- ------
As a % of loans 1.82% 2.55% 3.02%
------- --------- ------
As a % of nonperforming loans 257.43% 5,357.89% 336.69%
------- --------- ------
As a % of nonaccrual loans 257.43% N/M% N/M%
======= ========= ======
Following is the allocation of the allowance for loan losses as of September 30,
2006, December 31, 2005 and September 30, 2005 (dollars in thousands):
September 30, December 31, September 30,
2006 2005 2005
------------- ------------ -------------
Commercial, financial and agricultural loans $1,431 $1,492 $1,716
One to four family residential real estate loans 29 17 80
Consumer loans -- -- --
Unallocated and general reserves 3,856 4,599 4,793
------ ------ ------
Totals $5,316 $6,108 $6,589
====== ====== ======
The following ratios assist management in the determination of the Corporation's
credit quality (dollars in thousands):
Nine Months Twelve Months Nine Months
Ended Ended Ended
September 30, December 31, September 30,
2006 2005 2005
------------- ------------- -------------
Allowance to total loans, at period end 1.82% 2.55% 3.02%
Average loans outstanding for the periods indicated $271,351 $207,928 $202,381
Net charge-offs to average outstanding loans .07% .41% .19%
Nonperforming loans to gross loans, at period end .71% .05% 1.79%
16.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Total nonperforming loans increased $1.951 million since December 31, 2005. The
2006 increase resulted primarily from the nonaccrual status of one commercial
credit with a current principal balance of $1.693 million. Late in 2005, the
Bank sold $2.1 million of nonperforming assets, which included $1.000 million of
nonperforming loans.
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):
Nine Months Nine Months
Ended Year Ended Ended
September 30, December 31, September 30,
2006 2005 2005
------------- ------------- -------------
Balance at beginning of period $ 945 $ 1,730 $1,730
Other real estate transferred from loans 23 274 556
Other real estate sold/written down (942) (1,059) (338)
----- ------- ------
Balance at end of period $ 26 $ 945 $1,948
===== ======= ======
During the first nine months of 2006, the Corporation received real estate in
lieu of loan payments of $23,000. 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 nine months of 2006.
Total deposits increased by $60.862 million, or 26.2%, in the first nine months
of 2006. This growth in deposits included $41.508 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.
17.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The following table represents detail of deposits at the end of the periods
indicated (dollars in thousands):
September 30, December 31, September 30,
2006 2005 2005
------------- ------------ -------------
Demand deposit accounts $ 22,826 $ 19,684 $ 19,690
NOW and money market 73,797 64,566 61,093
Savings and IRAs 22,576 22,555 23,670
Certificates of Deposit <$100,000 76,575 67,725 57,850
-------- -------- --------
Total core deposits 195,774 174,530 162,303
-------- -------- --------
Certificates of Deposit >$100,000 20,305 12,335 12,300
Internet CDs <$100,000 16,727 28,113 33,461
Internet CDs >$100,000 4,898 7,698 5,204
Brokered Deposits 55,790 9,956 --
-------- -------- --------
Total non-core deposits 97,720 58,102 50,965
-------- -------- --------
Total deposits $293,494 $232,632 $213,268
======== ======== ========
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 September 30,
2006, the outstanding balance on this line was $1.959 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 $1.638 million from December 31, 2005 to
September 30, 2006. The increase is comprised of net income of $1.378 million,
contributed capital of $.234 million in recognition of stock option expense and
a $.026 million increase 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
September 30, 2006, increased by $1.466 million, or 20.65%, 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
benefited from prime rate increases in the first nine months of 2006 due to the
amount of assets that repriced 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 -----------------------------------
September 30, September 30, September 30, Income/ Rate/
------------------ Increase/ ------------- ------------- Expense Volume Rate Volume
(dollars in thousands) 2006 2005 (Decrease) 2006 2005 2006 2005 Variance Variance Variance Variance
-------- -------- ---------- ---- ---- ------ ------ -------- -------- -------- --------
Loans (1,2) $289,210 $209,785 $79,425 7.99% 7.13% $5,824 $3,769 $2,055 $1,427 $ 456 172
Taxable securities 33,482 32,087 1,395 3.61 3.49 305 282 23 12 10 1
Nontaxable securities 354 3,613 (3,259) 5.60 4.61 5 42 (37) (38) 9 (8)
Federal funds sold 18,142 12,062 6,080 5.07 3.39 232 103 129 52 51 26
Other interest-earning assets 7,099 4,855 2,244 2.01 5.97 36 74 (38) 34 (49) (23)
-------- -------- ------- ---- ---- ------ ------ ------ ------ ----- ----
Total earning assets 348,287 262,402 85,885 7.29 6.46 6,402 4,270 $2,132 1,487 477 168
-------- -------- -------
Reserve for loan losses (5,384) (6,632) 1,248
Cash and due from banks 5,354 5,958 (604)
Intangible assets 252 -- 252
Other assets 14,123 18,778 (4,655)
-------- -------- -------
Total assets $362,632 $280,506 $82,126
======== ======== =======
NOW and money market deposits $ 71,232 $ 57,534 $13,698 3.40 2.09 610 302 308 72 191 45
Savings deposits 14,198 17,489 (3,291) 1.59 1.36 57 60 (3) (11) 10 (2)
Time deposits 187,504 114,945 72,559 4.83 3.37 2,284 976 1,308 616 424 268
Borrowings 36,454 36,436 18 5.44 4.62 500 425 75 0 75 0
-------- -------- ------- ---- ---- ------ ------ ------ ------ ----- ----
Total interest-bearing
liabilities 309,388 226,404 82,984 4.43 3.09 3,451 1,763 1,688 677 700 311
-------- -------- -------
Demand deposits 23,674 21,229 2,445
Other liabilities 1,529 4,761 (3,232)
Shareholders' equity 28,041 28,112 (71)
-------- -------- -------
Total liabilities and
shareholders' equity $362,632 $280,506 $82,126
======== ======== =======
Rate spread 2.87% 3.37%
---- ---- ------ ------ ------ ------ ----- ----
Net interest margin/revenue 3.36 3.79% $2,951 $2,507 $ 444 $ 810 $(223) $(143)
==== ==== ====== ====== ====== ====== ===== ====
(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.
NINE MONTHS ENDED
------------------------------------------------------------------------------------------------
AVERAGE BALANCES 2006-2005
------------------------------ AVERAGE RATES INTEREST -----------------------------------
September 30, September 30, September 30, Income/ Rate/
------------------ Increase/ ------------- --------------- Expense Volume Rate Volume
(dollars in thousands) 2006 2005 (Decrease) 2006 2005 2006 2005 Variance Variance Variance Variance
-------- -------- ---------- ---- ---- ------- ------- -------- -------- -------- --------
Loans (1,2) $271,351 $202,381 $68,970 7.83% 6.94% $15,891 $10,501 $5,390 $3,579 $1,351 $ 460
Taxable securities 31,949 43,304 ( 11,355) 3.57 3.64 852 1,178 (326) (309) (23) 6
Nontaxable securities 2,104 3,674 (1,570) 5.53 4.59 87 126 (39) (54) 26 (11)
Federal funds sold 12,467 11,905 562 4.92 2.86 459 254 205 12 184 9
Other interest-earning assets 6,208 6,789 (581) 3.73 4.24 173 216 (43) (18) (27) 2
-------- -------- ------- ---- ---- ------- ------- ------ ------ ------ -----
Total earning assets 324,079 268,053 56,026 7.20 6.12 17,462 12,275 5,187 3,210 1,511 466
-------- -------- -------
Reserve for loan losses (5,618) (6,773) 1,155
Cash and due from banks 5,880 5,392 488
Intangible assets 285 362 (77)
Other assets 17,020 17,944 (924)
-------- -------- -------
Total assets $341,646 $284,978 $56,668
======== ======== =======
NOW and money market deposits $ 69,718 $ 54,537 $15,181 3.13 1.78 1,633 725 908 202 552 154
Savings deposits 14,721 18,054 (3,333) 1.39 1.19 153 161 (8) (30) 27 (5)
Time deposits 168,979 115,854 53,125 4.55 3.21 5,754 2,780 2,974 1,275 1,165 534
Borrowings 36,827 42,038 (5,211) 4.92 4.80 1,355 1,509 (154) (187) 38 (5)
-------- -------- ------- ---- ---- ------- ------- ------ ------ ------ -----
Total interest-bearing
liabilities 290,245 230,483 59,762 4.10 3.00 8,895 5,175 3,720 1,260 1,782 678
-------- -------- -------
Demand deposits 21,053 20,598 455
Other liabilities 2,908 4,679 (1,771)
Shareholders' equity 27,440 29,218 (1,778)
-------- -------- -------
Total liabilities and
shareholders' equity $341,646 $284,978 $56,668
======== ======== =======
Rate spread 3.11% 3.12%
---- ---- ------- ------- ------ ------ ------ -----
Net interest margin/revenue 3.53% 3.54% $ 8,567 $ 7,100 $1,467 $1,950 $ (271) $(212)
==== ==== ======= ======= ====== ====== ====== =====
(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 or third 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 $.102 million for the nine months ended September 30,
2006, compared to the nine months ended September 30, 2005. The Corporation
recorded a $.098 million net security gain in the second quarter of 2005.
Service fees decreased $.105 million in the first nine months of 2006, while
loan and lease fees increased $.047 million, gains on sales of loans increased
$.112 million, and other noninterest income decreased $.059 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 third quarter of 2006, the Corporation recognized $.066 million of revenue
due to mortgage loans produced and sold in the secondary market. Other
noninterest income was positively impacted in the first nine months of 2006 from
a gain due to foreign currency transactions which amounted to $.035 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 nine months
ended September 30, 2006 and 2005 (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, % Increase September 30, % Increase
------------------ (Decrease) ----------------- (Decrease)
2006 2005 2006-2005 2006 2005 2006-2005
---- ---- ---------- ---- ---- ----------
Service fees $133 $137 (2.9) $365 $470 (22.3)
Loan and lease fees 23 5 360.0 58 11 427.3
Net gains on sale of loans 66 17 288.2 149 37 302.7
Other 19 96 (80.2) 135 194 (30.4)
---- ---- ----- ---- ---- -----
Subtotal 241 255 (5.5) 707 712 (0.7)
---- ---- ----- ---- ---- -----
Net securities gains (1) (1) 100.0 (1) 96 100.0
---- ---- ----- ---- ---- -----
Total other income $240 $254 (5.5) $706 $808 (12.6)
==== ==== ===== ==== ==== =====
OTHER EXPENSES
Other expenses decreased $5.225 million for the nine months ended September 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 nine
months of 2006, compared to the first nine 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 $234,000 which is included in salaries and benefits. The $.214 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 $.195 million in
occupancy was due primarily to the opening of a new full service branch office
in January of 2006. The $.390 million decrease in loan and deposit expense is
due in large part to the reduction in FDIC insurance premiums, which amounted to
$.299 million in the first nine months of 2005, compared to $.076 million in
2006, a reduction of $.223 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 the first nine months of 2006,
the Corporation incurred approximately $400,000 in legal costs to pursue legal
action against the Corporation's former accountants. The remaining expected cost
on pursuit of this lawsuit is estimated at $250,000. 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 nine months
ended September 30, 2006 and September 30, 2005 (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, % Increase September 30, % Increase
------------------ (Decrease) ----------------- (Decrease)
2006 2005 2006-2005% 2006 2005 2006-2005%
------ ------ ---------- ------ ------- ----------
Salaries and employee benefits $1,487 $1,555 (4.4) $4,577 $ 4,665 (1.9)
Occupancy 333 275 21.1 943 430 119.3
Furniture and equipment 159 133 19.5 469 748 (37.3)
Data processing 176 234 (24.8) 512 726 (29.5)
Accounting, legal and consulting fees 341 204 67.2 955 750 27.3
Loan and deposit 78 153 (49.0) 306 696 (56.0)
Telephone 55 66 (16.7) 156 203 (23.2)
Advertising 70 314 (77.7) 247 696 (64.5)
Penalty on prepayment of FHLB borrowings -- -- -- -- 4,320 NM
Other 303 345 (12.2) 854 1,010 (15.4)
------ ------ ----- ------ ------- -----
Total other expense $3,002 $3,279 (8.4) $9,019 $14,244 (36.7)
====== ====== ===== ====== ======= =====
FEDERAL INCOME TAXES
There was no current 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. In the third
quarter of 2006, the Corporation recorded a $500,000 deferred tax benefit. This
deferred benefit recognized a portion of the NOL carryforward. The Corporation
has approximately $35.3 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. 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
During the first nine months of 2006, the Corporation increased cash and cash
equivalents by $9.543 million. As shown on the Corporation's condensed
consolidated statement of cash flows, liquidity was primarily impacted from
growth in loans funded by deposits. In the first nine months of 2006, the
Corporation funded loan growth of $52.843 million with deposit growth, the total
of which amounted to $60.862 million. The excess deposit growth resulted in an
increase in federal funds balances in addition to providing funds for general
purposes.
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
September 30, 2006, the Corporation's parent had a balance of $.559 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. The Corporation
has borrowed $1.9 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.
The Corporation's liquidity plan for 2006 includes strategies to increase core
deposits in the Corporation's local markets. The Corporation continually reviews
its existing deposit products and pricing of these products, 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 also has Bank borrowing lines at correspondent banks to provide
additional sources of liquidity.
21.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
CAPITAL AND REGULATORY
During the first nine months of 2006, capital increased by $1.638 million,
largely due to net income of $1.378 million. This compares to a decrease in
tangible capital during the same period in the previous year of $1.280 million,
resulting primarily from a net loss of $6.336 million. The increase in 2006 is
comprised of net income, contributed capital of $.078 million in recognition of
stock option expense, a decrease in intangible assets and increased by a $.258
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):
September 30, December 31, September 30,
2006 2005 2005
------------- ------------ -------------
CAPITAL STRUCTURE
Long-term debt $ -- $ -- $ --
Shareholders' equity 28,226 26,588 27,900
-------- -------- --------
Total capitalization $ 28,226 $ 26,588 $ 27,900
-------- -------- --------
Tangible capital $ 27,989 $ 26,258 $ 27,538
-------- -------- --------
INTANGIBLE ASSETS
Core deposit premium $ 237 $ 330 $ 362
Other identifiable intangibles -- --
-------- -------- --------
Total intangibles $ 237 $ 330 $ 362
-------- -------- --------
REGULATORY CAPITAL
Tier 1 capital:
Shareholders' equity $ 28,226 $ 26,588 $ 27,900
Net unrealized (gains) losses on
available for sale securities 337 363 78
Less: intangibles (237) (330) (362)
-------- -------- --------
Total Tier 1 capital $ 28,326 $ 26,621 $ 27,616
-------- -------- --------
Tier 2 Capital:
Allowable reserve for loan losses $ 3,800 $ 3,184 $ 2,912
Qualifying long-term debt -- -- --
-------- -------- --------
Total Tier 2 capital 3,800 3,184 2,912
-------- -------- --------
Total capital $ 32,126 $ 29,805 $ 30,528
======== ======== ========
Risk-adjusted assets $302,523 $251,796 $229,245
======== ======== ========
Capital ratios:
Tier 1 Capital to average assets 7.81% 9.23% 9.86%
Tier 1 Capital to risk weighted assets 9.36% 10.57% 12.05%
Total Capital to risk weighted assets 10.62% 11.84% 13.32%
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.
22.
MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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:
September 30, 2006 7.81% 9.36% 10.62%
December 31, 2005 9.23% 10.57% 11.84%
The Bank:
September 30, 2006 8.15% 9.86% 11.11%
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 $35.954 million of federal agency securities with an
average life of less than one year. 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 September 30, 2006 (dollars
in thousands):
1-90 91 - 365 >1-5 Over 5
Days Days Years Years Total
-------- -------- ------- ------- --------
Interest-earning assets:
Loans $151,162 $18,217 $43,875 $79,360 292,614
Securities 3,495 22,459 10,000 175 36,129
Other (1) 12,838 -- -- 4,152 16,990
-------- -------- ------- ------- --------
Total interest-earning assets 167,495 40,676 53,875 83,687 345,733
-------- -------- ------- ------- --------
Interest-bearing obligations:
NOW, Money Market, and Savings deposits 87,712 -- -- -- 87,712
Time deposits 50,719 60,639 14,953 771 127,082
Brokered CD's 11,742 44,048 -- -- 55,790
Borrowings 21,348 -- -- 16,959 38,307
-------- -------- ------- ------- --------
Total interest-bearing obligations 171,521 104,687 14,953 17,730 308,891
-------- -------- ------- ------- --------
Gap $ (4,026) $(64,011) $38,922 $65,957 $ 36,842
======== ======== ======= ======= ========
Cumulative gap $ (4,026) $(68,037) $29,115 $36,842
======== ======== ======= =======
(1) Includes Federal Home Loan Bank Stock
The above analysis indicates that at September 30, 2006, the Corporation had a
cumulative liability sensitivity gap position of $68.037 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 September
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 an 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 office 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
September 30, 2006, the Corporation had excess Canadian assets of $.218 million
(or $.195 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
September 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 $400,000 of legal costs
related to this case in the first nine months of 2006. The Corporation's future
costs of this lawsuit are not expected to exceed $250,000, most of which will be
expensed in the 2006 fourth quarter. These fourth quarter costs will carry the
lawsuit through the trial, if necessary.
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: November 14, 2006 By: /s/ Paul D. Tobias
------------------------------------
PAUL D. TOBIAS,
CHAIRMAN
(principal executive officer)
By: /s/ Ernie R. Krueger
------------------------------------
ERNIE R. KRUEGER,
SVP/CHIEF FINANCIAL OFFICER
(principal accounting officer)
34.
Exhibit Index
Exhibit No. Exhibit 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