Table of Contents

 

 

 

FORM 10-K

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

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

 

For the fiscal year ended December 31, 2013

 

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

 

For the transition period from                to              

 

Commission file number 0-20167

 

MACKINAC FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

MICHIGAN

 

38-2062816

(State of other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

130 South Cedar Street, Manistique, Michigan  49854

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (888) 343-8147

 

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

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, no par value

 

The NASDAQ Stock Market, LLC

 

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

None

 

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

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No o

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.  Yes  x   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

 

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

 

The aggregate market value of the common stock held by non-affiliates of the Registrant, based on a per share price of $8.88 as of June 30, 2013, was $19.930 million.  As of March 28, 2014, there were outstanding, 5,527,690 shares of the Corporation’s Common Stock (no par value).

 

Documents Incorporated by Reference:

 

Portions of the Corporation’s Annual Report to Shareholders for the year ended December 31, 2013, are incorporated by reference into Parts I and II of this Report.

 

Portions of the Corporation’s Proxy Statement for the 2014 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.

 

 

 


 


Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

PART I

 

 

 

Item 1

Business

3

Item 2

Properties

15

Item 3

Legal Proceedings

15

 

Executive Officers of the Registrant

15

 

 

 

PART II

 

 

 

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

15

Item 6

Selected Financial Data

16

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

16

Item 8

Financial Statements and Supplementary Data

17

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

17

Item 9A

Controls and Procedures

17

 

 

 

PART III

 

 

 

Item 10

Directors, Executive Officers and Corporate Governance

19

Item 11

Executive Compensation

19

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

19

Item 13

Certain Relationships and Related Transactions, and Director Independence

19

Item 14

Principal Accountant Fees and Services

20

 

 

 

PART IV

 

 

 

Item 15

Exhibits and Financial Statement Schedules

20

 

Signatures

24

 

 

 

EX – 13

 

 

EX – 21

 

 

EX – 23.1

 

 

EX – 31

 

 

EX – 32.1

 

 

EX – 32.2

 

 

 

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PART I

 

ITEM 1.  BUSINESS

 

Mackinac Financial Corporation (the “Corporation”) was incorporated under the laws of the state of Michigan on December 16, 1974.  The Corporation changed its name from “First Manistique Corporation” to “North Country Financial Corporation” on April 14, 1998.  On December 16, 2004, the Corporation changed its name from North Country Financial Corporation to Mackinac Financial Corporation.  The Corporation is headquartered and located in Manistique, Michigan.  The mailing address of the Corporation is 130 South Cedar Street, Manistique, Michigan 49854.

 

In December of 2004, the Corporation was recapitalized with the net proceeds, approximately $26.2 million, from the issuance of $30 million of common stock in a private placement.  Commensurate with this recapitalization, the Corporation changed its name from North Country Financial Corporation to Mackinac Financial Corporation with the Bank adopting the “mBank” identity early in 2005.

 

The Corporation owns all of the outstanding stock of its banking subsidiary, mBank (the “Bank”).  The Bank currently has 7 branch offices located in the Upper Peninsula of Michigan and 4 branch offices located in Michigan’s Lower Peninsula.  The Bank maintains offices in Chippewa, Grand Traverse, Luce, Manistee, Marquette, Menominee, Oakland, Otsego, and Schoolcraft Counties.  The Bank provides drive-in convenience at 7 branch locations and has 13 automated teller machines. The Bank has no foreign offices.

 

The Corporation also owns four non-bank subsidiaries: First Manistique Agency, presently inactive; First Rural Relending Company, a relending company for nonprofit organizations; and North Country Capital Trust, a statutory business trust which was formed solely for the issuance of trust preferred securities and Mackinac Commercial Credit, LLC, an asset based lending subsidiary located in Southeast Michigan.  The Bank represents the principal asset of the Corporation.  The Bank has one wholly owned subsidiary, mBank Title Insurance Agency, LLC, which provides title insurance services throughout Michigan.  The Corporation and its subsidiary Bank are engaged in a single industry segment, commercial banking, broadly defined to include commercial and retail banking activities, along with other permitted activities closely related to banking.

 

Operations

 

The principal business the Corporation is engaged in, through the Bank, is the general commercial banking business, providing a full range of loan and deposit products.  These banking services include customary retail and commercial banking services, including checking and savings accounts, time deposits, interest bearing transaction accounts, safe deposit facilities, real estate mortgage lending, commercial lending, commercial and governmental lease financing, and direct and indirect consumer financing.  Funds for the Bank’s operation are also provided by brokered deposits and through borrowings from the Federal Home Loan Bank (“FHLB”) system, proceeds from the sale of loans and mortgage-backed and other securities, funds from repayment of outstanding loans and earnings from operations.  Earnings depend primarily upon the difference between (i) revenues from loans, investments, and other interest-bearing assets and (ii) expenses incurred in payment of interest on deposit accounts and borrowings, maintaining an adequate allowance for loan losses, and general operating expenses.

 

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Competition

 

Banking is a highly competitive business.  The Bank competes for loans and deposits with other banks, savings and loan associations, credit unions, mortgage bankers, and investment firms in the scope and type of services offered, pricing of loans, interest rates paid on deposits, and number and location of branches, among other things.  The Bank also faces competition for investors’ funds from mutual funds and corporate and government securities.

 

The Bank competes for loans principally through interest rates and loan fees, the range and quality of the services it provides and the locations of its branches.  In addition, the Bank actively solicits deposit-related clients and competes for deposits by offering depositors a variety of savings accounts, checking accounts, and other services.

 

Employees

 

As of December 31, 2013, the Corporation and its subsidiaries employed, in the aggregate, 127 employees equating to 133 full-time equivalents.  The Corporation provides its employees with comprehensive medical and dental benefit plans, a life insurance plan, and a 401(k) plan. None of the Corporation’s employees are covered by a collective bargaining agreement with the Corporation.  Management believes its relationship with its employees to be good.

 

Business

 

The Bank makes mortgage, commercial, and installment loans to customers throughout Michigan.  Fees may be charged for these services.  The Bank’s most prominent concentration in the loan portfolio relates to commercial loans to entities within the real estate — operators of nonresidential buildings industry.  This concentration represented $100.333 million or 27.92% of the commercial loan portfolio at December 31, 2013.  The Bank also supports the service industry, with its hospitality and related businesses, as well as gaming, forestry, restaurants, farming, fishing, and many other activities important to growth in Michigan.  The economy of the Bank’s market areas is affected by summer and winter tourism activities.

 

The Bank has become a premier SBA/USDA lender in the State of Michigan.  Many of these SBA/USDA guaranteed loans are sold at a premium on the secondary market, with the Bank retaining the servicing.  The Bank does not sell the loan guarantees on every credit, rather only those where acceptable market rates are above par.

 

The Bank also offers various consumer loan products including installment, mortgages and home equity loans.  In addition to making consumer portfolio loans, the Bank engages in the business of making residential mortgage loans for sale to the secondary market.

 

The Bank also provides title insurance services throughout the State of Michigan through its wholly owned subsidiary, mBank Title Insurance Agency, LLC.

 

In late 2013, the Corporation launched Mackinac Commercial Credit, LLC (“MCC”), a wholly owned subsidiary of the Corporation.  MCC is a specialty finance company engaged in asset based lending and factoring of accounts receivable.

 

The Corporation may pursue new lease opportunities through unrelated entities, where the credit quality and rate of return on the transactions for its current business strategies.  The Bank accounts for lease transactions as loans.

 

The Bank’s primary source for lending, investments, and other general business purposes is deposits.  The Bank offers a wide range of interest bearing and non-interest bearing accounts, including commercial and retail checking accounts, negotiable order of withdrawal (“NOW”) accounts, money

 

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market accounts with limited transactions, individual retirement accounts, regular interest-bearing statement savings accounts, certificates of deposit with a range of maturity date options, and accessibility to a customer’s deposit relationship through online banking.  The sources of deposits are residents, businesses and employees of businesses within the Bank’s market areas, obtained through the personal solicitation of the Bank’s officers and directors, direct mail solicitation and limited advertisements published in the local media.  The Bank also utilizes the wholesale deposit market for any shortfalls in loan funding.  No material portions of the Bank’s deposits have been received from a single person, industry, group, or geographical location.

 

The Bank is a member of the FHLB.  The FHLB provides an additional source of liquidity and long-term funds.  Membership in the FHLB has provided access to attractive rate advances, as well as advantageous lending programs.  The Community Investment Program makes advances to be used for funding community-oriented mortgage lending, and the Affordable Housing Program grants advances to fund lending for long-term low and moderate income owner occupied and affordable rental housing at subsidized interest rates.

 

The Bank has secondary borrowing lines of credit available to respond to deposit fluctuations and temporary loan demands.  The unsecured lines totaled $28.375 million at December 31, 2013, with additional amounts available if collateralized.

 

As of December 31, 2013, the Bank had no material risks relative to foreign sources.  See the “Interest Rate Risk” and “Foreign Exchange Risk” sections in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Corporation’s 2013 Annual Report to Shareholders, which sections are incorporated herein by reference, for details on the Corporation’s foreign account activity.

 

Compliance with federal, state, and local statutes and/or ordinances relating to the protection of the environment is not expected to have a material effect upon the Bank’s capital expenditures, earnings, or competitive position.

 

Supervision and Regulation

 

As a registered bank holding company, the Corporation is subject to regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) under the Bank Holding Company Act, as amended (the “BHCA”).  The Bank is subject to regulation and examination by the Michigan Department of Financial and Insurance Services (the “DFIS”) and the Federal Deposit Insurance Corporation (the “FDIC”).

 

Under the BHCA, the Corporation is subject to periodic examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board periodic reports of its operations and such additional information as the Federal Reserve Board may require.  In accordance with Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Corporation might not do so absent such policy.  In addition, there are numerous federal and state laws and regulations which regulate the activities of the Corporation, the Bank and the non-bank subsidiaries, including requirements and limitations relating to capital and reserve requirements, permissible investments and lines of business, transactions with affiliates, loan limits, mergers and acquisitions, issuances of securities, dividend payments, inter-affiliate liabilities, extensions of credit and branch banking.

 

Federal banking regulatory agencies have established risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to

 

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differences in risk profiles among banks and bank holding companies.  The resulting capital ratios represent qualifying capital as a percentage of total risk-weighted assets and off-balance sheet items.  The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating expansion programs should not allow expansion to diminish their capital ratios and should maintain all ratios well in excess of the minimums.  The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital.  Tier 1 capital includes common shareholders’ equity, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangibles and excludes the allowance for loan and lease losses.  Tier 2 includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock, and general reserves for loan and lease losses up to 1.25% of risk-weighted assets.

 

The Federal Deposit Insurance Corporation Improvement Act contains “prompt corrective action” provisions pursuant to which banks are to be classified into one of five categories based upon capital adequacy, ranging from “well capitalized” to “critically undercapitalized” and which require (subject to certain exceptions) the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes “significantly undercapitalized” or “critically undercapitalized”.

 

In general, the regulations define the five capital categories as follows: (i) an institution is “well capitalized” if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not subject to any written capital order or directive to meet and maintain a specific capital level for any capital measures; (ii) an institution is “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, has Tier 1 risk-based capital ratio of 4% or greater, and has a leverage ratio of 4% or greater; (iii) an institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less than 4% or has a leverage ratio that is less than 4%; (iv) an institution is “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier I risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; (v) an institution is “critically undercapitalized” if its “tangible equity” is equal to or less than 2% of its total assets.  The FDIC also, after an opportunity for a hearing, has authority to downgrade an institution from “well capitalized to “adequately capitalized” or to subject an “adequately capitalized” or “undercapitalized” institution to the supervisory actions applicable to the next lower category, for supervisory concerns.  These regulatory ratios are subject to further review and adjustment as described under “Basel III Proposal” below.

 

Information pertaining to the Corporation’s capital is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Capital and Regulatory” in the Corporation’s 2013 Annual Report to Shareholders, and is incorporated herein by reference.

 

Current federal law provides that adequately capitalized and managed bank holding companies from any state may acquire banks and bank holding companies located in any other state, subject to certain conditions.

 

In 1999, Congress enacted the Gramm-Leach-Bliley Act (“GLBA”), which eliminated certain barriers to and restrictions on affiliations between banks and securities firms, insurance companies and other financial service organizations.  Among other things, GLBA repealed certain Glass-Steagall Act restrictions on affiliations between banks and securities firms, and amended the BHCA to permit bank

 

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holding companies that qualify as “financial holding companies” to engage in a broad list of “financial activities,” and any non-financial activity that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines is “complementary” to a financial activity and poses no substantial risk to the safety and soundness of depository institutions or the financial system.  GLBA treats lending, insurance underwriting, insurance company portfolio investment, financial advisory, securities underwriting, dealing and market-making, and merchant banking activities as financial in nature for this purpose.

 

Under GLBA, a bank holding company may become certified as a financial holding company by filing a notice with the Federal Reserve Board, together with a certification that the bank holding company meets certain criteria, including capital, management, and Community Reinvestment Act requirements.  The Corporation does not qualify as a financial holding company at this time.

 

Privacy Restrictions

 

GLBA, in addition to the previous described changes in permissible non-banking activities permitted to banks, bank holding companies and financial holding companies, also requires financial institutions in the U.S. to provide certain privacy disclosures to customers and consumers, to comply with certain restrictions on sharing and usage of personally identifiable information, and to implement and maintain commercially reasonable customer information safeguarding standards.  The Corporation believes that it complies with all provisions of GLBA and all implementing regulations, and the Bank has developed appropriate policies and procedures to meet its responsibilities in connection with the privacy provisions of GLBA.

 

The USA PATRIOT Act

 

In 2001, Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”).  The USA PATRIOT Act is designed to deny terrorists and criminals the ability to obtain access to the United States financial system, and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money.  The USA PATRIOT Act mandates financial services companies to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, and currency crimes.

 

Sarbanes-Oxley Act

 

On July 30, 2002, President Bush signed into law The Sarbanes-Oxley Act of 2002.  This legislation addresses accounting oversight and corporate governance matters, including:

 

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

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

·                  Increased penalties for financial crimes;

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

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

 

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

 

Among other provisions, Section 302(a) of the Sarbanes-Oxley Act requires that our Chief Executive Officer and Chief Financial Officer certify that our quarterly and annual reports do not contain any untrue statement or omission of a material fact.  Specific requirements of the certifications include having these officers confirm that they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our disclosure controls and procedures; they have made certain disclosures to our auditors and Audit Committee about our internal controls; and they have included information in our quarterly and annual reports about their evaluation and whether there have been significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation.

 

In addition, Section 404 of the Sarbanes-Oxley Act and the SEC’s rules and regulations thereunder require our management to evaluate, with the participation of our principal executive and principal financial officers, the effectiveness, as of the end of each fiscal year, of our internal control over financial reporting.  Our management must then provide a report of management on our internal over financial reporting that contains, among other things, a statement of their responsibility for establishing and maintaining adequate internal control over financial reporting, and a statement identifying the framework they used to evaluate the effectiveness of our internal control over financial reporting.

 

Extraordinary Government Programs

 

Troubled Asset Relief Program.  On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted, which, among other things, provided the United States Department of the Treasury (“Treasury”) access to up to $700 billion to stabilize the U.S. banking system.  On October 14, 2008, Treasury announced its intention to inject capital into nine large U.S. financial institutions under the Capital Purchase Program (the “CPP”) as part of the Troubled Asset Relief Program (“TARP”) implementing the EESA, and since has injected capital into many other financial institutions.

 

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

 

Additional information pertaining to Supervision and Regulation is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Capital and Regulatory” in the Corporation’s 2013 Annual Report to Shareholders, and is incorporated herein by reference.

 

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Dodd-Frank Wall Street Reform and Consumer Protection Act

 

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

 

·                  Increased Capital Standards and Enhanced Supervision

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

 

·                  Federal Deposit Insurance.

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

 

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

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

 

·                  Interest on Demand Deposit Accounts.

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

 

·                  Mortgage Reform.

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

 

·                  Interstate Branching.

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

 

·                  Interchange Fee Limitations.

The Dodd-Frank Act gave the Board of Governors of the Federal Reserve (the “FRB”) the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.  The FRB has rules under this provision that limit the swipe fees that a debit card issuer can charge a

 

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merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs.  While we are not directly subject to such regulations since our total assets do not exceed $10 billion, these regulations may impact our ability to compete with larger institutions who are subject to the restrictions.

 

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

 

Basel III

 

Internationally, both the Basel Committee on Banking Supervision and the Financial Stability Board (established in April 2009 by the Group of Twenty Finance Ministers and Central Bank Governors to take action to strengthen regulation and supervision of the financial system with greater international consistency, cooperation and transparency) have committed to raise capital standards and liquidity buffers within the banking system (“Basel III”). On September 12, 2010, the Group of Governors and Heads of Supervision agreed to the calibration and phase-in of the Basel III minimum capital requirements (raising the minimum Tier 1 common equity ratio to 4.5% and minimum Tier 1 equity ratio to 6.0%, with full implementation by January 2015) and introducing a capital conservation buffer of common equity of an additional 2.5% with implementation by January 2019. In July 2013, the Federal Reserve Board released interim final rules regarding implementation of the Basel III regulatory capital rules for U.S. banking organizations. The interim final rules address a significant number of outstanding issues and questions regarding how certain provisions of Basel III are proposed to be adopted in the United States. Key provisions of the proposed rules include the total phase-out from Tier 1 capital of trust preferred securities with grandfathering for bank holding companies with less than $15 billion in assets, a capital conservation buffer of 2.5% above minimum capital ratios, inclusion of accumulated other comprehensive income in Tier 1 common equity, inclusion in Tier 1 capital of perpetual preferred stock, and an effective minimum Tier 1 common equity ratio of 7.0%.

 

Monetary Policy

 

The earnings and business of the Corporation and the Bank depends on interest rate differentials.  In general, the difference between the interest rates paid by the Bank to obtain its deposits and other borrowings, and the interest rates received by the Bank on loans extended to its customers and on securities held in the Bank’s portfolio, comprises the major portion of the Bank’s earnings.  These rates are highly sensitive to many factors that are beyond the control of the Bank, and accordingly, its earnings and growth will be subject to the influence of economic conditions, generally, both domestic and foreign, including inflation, recession, unemployment, and the monetary policies of the Federal Reserve Board.  The Federal Reserve Board implements national monetary policies designed to curb inflation, combat recession, and promote growth through, among other means, its open-market dealings in US government securities, by adjusting the required level of reserves for financial institutions subject to reserve requirements, through adjustments to the discount rate applicable to borrowings by banks that are members of the Federal Reserve System, and by adjusting the Federal Funds Rate, the rate charged in the interbank market for purchase of excess reserve balances.  In addition, legislative and economic factors can be expected to have an ongoing impact on the competitive environment within the financial services industry.  The nature and timing of any future changes in such policies and their impact on the Bank cannot be predicted with certainty.

 

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Selected Statistical Information

 

I.                Distribution of Assets, Obligations, and Shareholders’ Equity; Interest Rates and Interest Differential

 

The key components of net interest income, the daily average balance sheet for each year — including the components of earning assets and supporting obligations — the related interest income on a fully tax equivalent basis and interest expense, as well as the average rates earned and paid on these assets and obligations is contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Corporation’s 2012 Annual Report to Shareholders, and is incorporated herein by reference.

 

An analysis of the changes in net interest income from period-to-period and the relative effect of the changes in interest income and expense due to changes in the average balances of earning assets and interest-bearing obligations and changes in interest rates is contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Corporation’s 2012 Annual Report to Shareholders, and is incorporated herein by reference.

 

II.    Investment Portfolio

 

A.            Investment Portfolio Composition

 

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

 

 

 

2013

 

2012

 

2011

 

Corporate

 

$

16,079

 

$

18,977

 

$

8,178

 

U.S. Agencies

 

14,855

 

10,404

 

10,575

 

U.S. Agencies - MBS

 

7,359

 

8,374

 

14,418

 

State and political subdivisions

 

6,095

 

6,044

 

5,556

 

 

 

 

 

 

 

 

 

TOTAL

 

$

44,388

 

$

43,799

 

$

38,727

 

 

B.            Relative Maturities and Weighted Average Interest Rates

 

The following table presents the maturity schedule of securities held and the weighted average yield of those securities, as of December 31, 2013 (fully taxable equivalent, dollars in thousands):

 

 

 

 

 

After one,

 

After five,

 

 

 

 

 

Weighted

 

 

 

In one year

 

but within

 

but within

 

Over

 

 

 

Average

 

 

 

or less

 

five years

 

ten years

 

10 years

 

TOTAL

 

Yield (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agencies

 

$

 

$

7,723

 

$

7,132

 

$

 

$

14,855

 

1.53

%

U.S. Agencies - MBS

 

 

 

7,313

 

46

 

7,359

 

2.76

%

Corporate

 

3,083

 

12,996

 

 

 

16,079

 

1.76

%

State and political subdivisions

 

83

 

816

 

2,639

 

2,557

 

6,095

 

3.73

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

3,166

 

$

21,535

 

$

17,084

 

$

2,603

 

$

44,388

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average yield (1)

 

2.10

%

1.60

%

2.90

%

4.50

%

2.23

%

 

 

 


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

 

11



Table of Contents

 

III.      Loan Portfolio

 

A.            Type of Loans

 

The following table sets forth the major categories of loans outstanding for each category at December 31 (dollars in thousands):

 

 

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

268,809

 

$

244,966

 

$

199,201

 

$

194,859

 

$

208,895

 

Commercial, financial and agricultural

 

79,655

 

80,646

 

92,269

 

68,858

 

72,184

 

One-to-four family residential real estate

 

103,768

 

87,948

 

77,332

 

75,074

 

67,232

 

Construction

 

17,799

 

24,694

 

25,519

 

39,012

 

31,709

 

Consumer

 

13,801

 

10,923

 

6,925

 

5,283

 

4,290

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

483,832

 

$

449,177

 

$

401,246

 

$

383,086

 

$

384,310

 

 

B.            Maturities and Sensitivities of Loans to Changes in Interest Rates

 

The following table presents the remaining maturity of total loans outstanding for the categories shown at December 31, 2013, based on scheduled principal repayments (dollars in thousands):

 

 

 

 

 

Commercial,

 

1-4 Family

 

 

 

 

 

 

 

 

 

Commercial

 

Financial, and

 

Residential

 

 

 

 

 

 

 

 

 

Real Estate

 

Agricultural

 

Real Estate

 

Consumer

 

Construction

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In one year or less:

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable interest rates

 

$

19,336

 

$

21,258

 

$

1,270

 

$

1,154

 

$

1,669

 

$

44,687

 

Fixed interest rates

 

2,089

 

1,836

 

1,336

 

441

 

7,001

 

12,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After one year but within five years:

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable interest rates

 

85,666

 

18,291

 

1,767

 

6

 

4,629

 

110,359

 

Fixed interest rates

 

130,889

 

18,186

 

6,278

 

8,010

 

1,348

 

164,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After five years:

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable interest rates

 

23,875

 

7,718

 

88,038

 

393

 

3,010

 

123,034

 

Fixed interest rates

 

6,954

 

12,366

 

5,079

 

3,797

 

142

 

28,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

268,809

 

$

79,655

 

$

103,768

 

$

13,801

 

$

17,799

 

$

483,832

 

 

C.            Risk Elements

 

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

 

 

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans

 

$

1,406

 

$

4,687

 

$

5,490

 

$

5,921

 

$

14,368

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income that would have been recorded for nonaccrual loans under original terms

 

228

 

313

 

363

 

583

 

700

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income recorded during period for nonaccrual loans

 

 

54

 

118

 

141

 

40

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing loans past due 90 days or more

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructured loans not included above

 

618

 

 

2,503

 

4,642

 

869

 

 

12



Table of Contents

 

IV.       Summary of Loan Loss Experience

 

A.            Analysis of the Allowance for Loan Losses

 

Changes in the allowance for loan losses arise from loans charged off, recoveries on loans previously charged off by loan category, and additions to the allowance for loan losses through provisions charged to expense.  Factors which influence management’s judgment in determining the provision for loan losses include establishing specified loss allowances for selected loans (including large loans, nonaccrual loans, and problem and delinquent loans) and consideration of historical loss information and local economic conditions.

 

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

 

 

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance of allowance for loan losses at beginning of period

 

$

5,218

 

$

5,251

 

$

6,613

 

$

5,225

 

$

4,277

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans charged off:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

2,171

 

775

 

3,258

 

5,027

 

2,465

 

One to four famly residential real estate

 

141

 

399

 

490

 

410

 

282

 

Consumer

 

120

 

82

 

52

 

48

 

71

 

Total loans charged off

 

2,432

 

1,256

 

3,800

 

5,485

 

2,818

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries of loans previously charged off:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

150

 

253

 

128

 

346

 

38

 

One to four famly residential real estate

 

26

 

7

 

1

 

11

 

16

 

Consumer

 

24

 

18

 

9

 

16

 

12

 

Total recoveries

 

200

 

278

 

138

 

373

 

66

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans charged off

 

2,232

 

978

 

3,662

 

5,112

 

2,752

 

Provisions charged to expense

 

1,675

 

945

 

2,300

 

6,500

 

3,700

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

4,661

 

$

5,218

 

$

5,251

 

$

6,613

 

$

5,225

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans outstanding

 

462,500

 

422,440

 

388,115

 

384,347

 

374,796

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of net charge-offs during period to average loans outstanding

 

.48

%

.23

%

.94

%

1.33

%

.73

%

 

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Table of Contents

 

B.            Allocation of Allowance for Loan Losses

 

The allocation of the allowance for loan losses for the years ended December 31, is shown on the following table.  The percentages shown represent the percent of each loan category to total loans (dollars in thousands):

 

 

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

1,849

 

39.67

%

$

3,267

 

70.09

%

$

2,973

 

63.78

%

$

3,460

 

74.23

%

$

3,284

 

62.94

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial agricultural

 

1,378

 

29.56

%

692

 

14.85

%

1,079

 

23.15

%

1,018

 

21.84

%

1,135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial construction

 

80

 

1.72

%

125

 

2.68

%

207

 

4.44

%

389

 

8.35

%

386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential real estate

 

516

 

11.07

%

980

 

21.03

%

1,114

 

23.90

%

1,622

 

34.80

%

23

 

.44

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer construction

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

148

 

 

 

 

 

 

 

.00

%

13

 

.25

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated and general reserves

 

665

 

14.27

%

154

 

3.30

%

(122

)

-2.62

%

124

 

2.66

%

384

 

7.36

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

$

4,661

 

100.00

%

$

5,218

 

100.00

%

$

5,251

 

100.00

%

$

6,613

 

100.00

%

$

5,225

 

100.00

%

 

V.            Deposits

 

Deposit information is contained in Note 7 to the Corporation’s Consolidated Financial Statements contained in the Corporation’s 2013 Annual Report to Shareholders, and is incorporated herein by reference.

 

VI.       Return on Equity and Assets

 

Selected financial data of the Corporation is contained in the Corporation’s 2013 Annual Report to Shareholders under the caption “Selected Financial Data,” and is incorporated herein by reference.

 

See Item 6 of this Form 10-K, “Selected Financial Data”

 

VII.  Financial Instruments with Off-Balance Sheet Risk

 

Information relative to commitments, contingencies, and credit risk are discussed in Note 17 to the Corporation’s Consolidated Financial Statements contained in the Corporation’s 2013 Annual Report to Shareholders and is incorporated herein by reference.

 

14



Table of Contents

 

ITEM 2.  PROPERTIES

 

The Corporation’s headquarters are located at 130 South Cedar Street, Manistique, Michigan 49854.  The headquarters location is owned by the Corporation and not subject to any mortgage.

 

Information regarding specific branch locations is contained in the Corporation’s 2013 Annual Report to Shareholders, and is incorporated herein by reference.

 

All of the branch locations are designed for use and operation as a bank, are well maintained, and are suitable for current operations.  Of the 11 branch locations, 8 are owned and 3 are leased.  The Corporation has additional office space to house and administrative operational support.  The Corporation also leases one office that supports our commercial lending.

 

ITEM 3.  LEGAL PROCEEDINGS

 

Information regarding legal proceedings is contained in Note 17 of the Corporation’s 2013 Annual Report to Shareholders, and is incorporated herein by reference.

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

The executive officers of the Corporation are listed below.  The executive officers serve at the pleasure of the Board of Directors and are appointed by the Board annually.  There are no arrangements or understandings between any officer and any other person pursuant to which the officer was selected.

 

Name

 

Age

 

Position

 

 

 

 

 

Paul D. Tobias

 

63

 

Chairman and Chief Executive Officer

 

 

 

 

 

Kelly W. George

 

46

 

President

 

 

 

 

 

Ernie R. Krueger

 

64

 

Executive Vice President/Chief Financial Officer

 

Additional information for the executive officers of the registrant is included in the Corporation’s Proxy Statement for its 2014 Annual Meeting of Shareholders under the caption “Directors and Officers.”

 

PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCK HOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market information pertaining to the Corporation’s common stock is contained under the caption “Market Information” in the Corporation’s 2013 Annual Report to Shareholders, and is incorporated herein by reference.

 

The holders of the Corporation’s common stock are entitled to dividends when, and if declared by the Board of Directors of the Corporation out of funds legally available for that purpose.  In determining dividends, the Board of Directors considers the earnings, capital requirements and financial condition of the Corporation and its subsidiary bank, along with other relevant factors.  The Corporation’s

 

15



Table of Contents

 

principal source of funds for cash dividends is the dividends paid by the Bank.  The ability of the Corporation and the Bank to pay dividends is subject to regulatory restrictions and requirements.  There were no dividends declared or paid by the Bank in 2010 or 2011.  The Corporation declared a $.04 quarterly dividend on its common stock in December 2012, which was paid in early 2013.  There were no sales of unregistered securities in 2012 or 2013, nor were there any repurchases of the Corporation’s common stock in 2012.  Additional information regarding the Corporation’s common equity is contained in Note 16 — Shareholders’ Equity in the Corporation’s 2013 Annual Report to Shareholders and is incorporated herein by reference.

 

The Corporation currently has a share repurchase program.  The program is conducted under authorizations from time to time by the Board of Directors.  The shares reported in the table below are covered by Board authorizations made and publically announced for $600,000 on February 27, 2013 and an additional $600,000 on December 17, 2013.  Neither of these authorizations has an expiration date.

 

Issuer purchase of Equity Securities

 

 

 

 

 

 

 

Total number of

 

 

 

 

 

 

 

 

 

shares purchased

 

Maximum

 

 

 

 

 

 

 

as part of a

 

dollars

 

 

 

 

 

 

 

publically

 

yet to

 

 

 

Total number of

 

Average price

 

announced

 

be used for

 

Period of purchases (1)

 

shares purchased

 

paid per share

 

plan or program

 

stock purchases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,059,976

 

October 1, 2013 to October 31, 2013

 

26,435

 

$

9.04

 

26,435

 

819,978

 

November 1, 2013 to November 30, 2013

 

4,416

 

$

9.24

 

4,416

 

779,168

 

December 1, 2013 to December 31, 2013

 

9,098

 

$

9.84

 

9,098

 

689,666

 

 

 

 

 

 

 

 

 

 

 

Total

 

39,949

 

$

9.24

 

39,949

 

 

 

 


(1) Monthly information is provided for the Corporation's fiscal months during the fourth quarter of 2013.

 

Additional information regarding the Corporation’s common stock is contained in the Corporation’s 2013 Annual Report to Shareholders under the caption “Market Information,” and is incorporated herein by reference.

 

Information regarding securities authorized for issuance under equity compensation plans may be found under Item 12 of this report.

 

ITEM 6.  SELECTED FINANCIAL DATA

 

Selected financial data of the Corporation is contained in the Corporation’s 2013Annual Report to Shareholders, under the caption “Selected Financial Data,” and is incorporated herein by reference.

 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Incorporated by reference to the Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Corporation’s 2013 Annual Report to Shareholders

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Incorporated by reference to the Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Corporation’s 2013 Annual Report to Shareholders

 

16



Table of Contents

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Incorporated by reference to the Corporation’s Consolidated Financial Statements for the years ended December 31, 2013, 2012, and 2011, in the Corporation’s 2013 Annual Report to Shareholders.

 

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

There has been no change in the Corporation’s independent public accountants since 2002.  The change was reported on Form 8-Ks filed during 2002.

 

ITEM 9A.  CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

As of the end of the period covered by this report, management of the company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”).  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective, in ensuring the information relating to the Corporation (and its consolidated subsidiaries) required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act was recorded, processed, summarized and reported to the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Corporation’s internal control over financial reporting that occurred during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

17



Table of Contents

 

Report on Management’s Assessment of Internal Control Over Financial Reporting

 

Mackinac Financial Corporation is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report.  The consolidated financial statements and notes included in this annual report have been prepared in conformity with generally accepted accounting principles in the United States and necessarily include some amounts that are based on management’s best estimates and judgments.

 

We, as management of Mackinac Financial Corporation, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with generally accepted accounting principles in the United States.  The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits.  Actions are taken to correct potential deficiencies as they are identified.  Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected.  Also, because of changes in conditions, internal control effectiveness may vary over time.  Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

 

Management assessed the Corporation’s system of internal control over financial reporting as of December 31, 2013, in relation to criteria for the effective internal control over financial reporting as described in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this assessment, management concludes that, as of December 31, 2013, its system of internal control over financial reporting is effective and meets the criteria of the “Internal Control — Integrated Framework.”

 

This annual report does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation  by the Corporation’s registered public accounting firm pursuant to rules of the SEC that permit the Corporation to provide only management’s report in this annual report.

 

 

/s/ Paul D. Tobias

 

/s/ Ernie R. Krueger

Paul D. Tobias

 

Ernie R. Krueger

Chairman and Chief Executive Officer

 

Executive Vice President and

 

 

Chief Financial Officer

 

 

Manistique, Michigan

March 28, 2014

 

18



Table of Contents

 

PART III

 

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

The information set forth under the captions “Information About Directors and Nominees” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Corporation’s definitive Proxy Statement for its May 28, 2014, Annual Meeting of Shareholders (the “Proxy Statement”), a copy of which will be filed with the SEC prior to the meeting date, is incorporated herein by reference.

 

ITEM 11.  EXECUTIVE COMPENSATION

 

Information relating to compensation of the Corporation’s executive officers and directors is contained under the captions “Remuneration of Directors” and “Executive Compensation,” in the Corporation’s Proxy Statement and is incorporated herein by reference.

 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Information relating to security ownership of certain beneficial owners and management is contained under the caption “Beneficial Ownership of Common Stock” in the Corporation’s Proxy Statement is incorporated herein by reference.

 

The following table provides information as of December 31, 2013 with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Corporation are authorized for issuance.  All such compensation plans were previously approved by security holders.

 

 

 

 

 

 

 

Number of securities

 

 

 

 

 

 

 

remaining available

 

 

 

 

 

Weighted average

 

for future issuance

 

 

 

Number of securities to

 

exercise issue price of

 

under equity

 

 

 

be issued upon exercise

 

outstanding

 

compensation plans

 

 

 

of outstanding options,

 

options, warrants

 

(excluding securities

 

Plan Category

 

warrants and rights

 

and rights

 

reflected in column (a))

 

 

 

(a)

 

(b)

 

(c)

 

 

 

 

 

 

 

 

 

Equity stock option compensation plans approved by security holders

 

237,152

 

$

9.88

 

 

 

 

 

 

 

 

 

 

Equity compensation plan approved by security holders in 2012

 

148,500

 

7.91

 

189,348

 

 

 

 

 

 

 

 

 

Total

 

385,652

 

$

9.13

 

189,348

 

 

ITEM 13.  CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

Information relating to certain relationships and related transactions is contained under the caption “Indebtedness of and Transactions with Management” in the Corporation’s Proxy Statement and is incorporated herein by reference.

 

Additional information is contained under the caption “Information about Directors and Executive Officers” within the Corporation’s Proxy Statement and is incorporated herein by reference.

 

19



Table of Contents

 

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Information relating to principal accountant fees and services is contained under the caption “Principal Accountant Fees and Services” in the Corporation’s Proxy Statement and is incorporated herein by reference.

 

PART IV

 

ITEM 15.          EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(commission file number for all incorporated documents:  0-20167)

 

 

(a)

 

The following documents are filed as a part of this report.

 

 

 

 

 

 

 

1.

 

Consolidated Financial Statements (contained in the Annual Report attached hereto as Exhibit 13 and incorporated herein by reference

 

 

 

 

 

 

 

 

 

 

(i)

Report on Independent Registered Public Accounting Firm

 

 

 

 

 

 

 

 

 

 

(ii)

Consolidated Balance Sheets as of December 31, 2013, and 2012

 

 

 

 

 

 

 

 

 

 

(iii)

Consolidated Statements of Operations for the years ended December 31, 2013, 2012, and 2011

 

 

 

 

 

 

 

 

 

 

(iv)

Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011

 

 

 

 

 

 

 

 

 

 

(v)

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2013, 2012, and 2011

 

 

 

 

 

 

 

 

 

 

(vi)

Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011

 

 

 

 

 

 

 

 

 

 

(vi)

Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

2.

 

All of the schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are either not required under the related instruction, the required information is contained elsewhere in the Form 10-K, or the schedules are inapplicable, and therefore have been omitted.

 

 

 

 

 

 

 

 

3.

 

Exhibits

 

Exhibit
Number

 

Document

 

 

 

3.1

 

Articles of Incorporation and all amendments (most recent amendment filed December 14, 2004) (incorporated by reference to Exhibit 3.1 to the Corporation’s Form 10-K filed March 31, 2009)

 

 

 

3.2

 

Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series A of Mackinac Financial Corporation dated April 21, 2009 (incorporated by reference to Exhibit 3.1 to the

 

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Corporation’s Form 8-K filed April 24, 2009)

 

 

 

3.3

 

Third Amended and Restated Bylaws adopted March 18, 2014 (incorporated by reference to Exhibit 3.1 to the Corporation’s Form 8-K filed March 24, 2014)

 

 

 

10.1

 

Deferred Compensation, Deferred Stock, and Current Stock Purchase Plan for the Corporation’s nonemployee directors (incorporated by reference to Exhibit 10.2 of the Corporation’s Annual Report on Form 10-K filed March 28, 2000)**

 

 

 

10.2

 

North Country Financial Corporation Stock Compensation Plan (incorporated by reference to Exhibit 10.3 of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and filed March 28, 2000)**

 

 

 

10.3

 

North Country Financial Corporation 1997 Directors’ Stock Option Plan (incorporated by reference to Exhibit 10.4 of the Corporation’s Annual Report on Form 10-K filed March 28, 2000)**

 

 

 

10.4

 

North Country Financial Corporation 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Corporation’s Form 10-Q filed May 12, 2000)**

 

 

 

10.5

 

North Country Financial Corporation Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.6 of the Corporation’s Form 10-Q filed November 5, 1999 for the quarter ended September 30, 1999)**

 

 

 

10.6

 

Form of Indemnity Agreement for the Corporation’s Directors (incorporated by reference to Exhibit 10.1 to the Corporation’s Form 8-K filed March  24, 2014)**

 

 

 

10.7

 

Mackinac Financial Corporation 2012 Incentive Compensation Plan (incorporated by reference to the Corporation’s Proxy Statement for its annual meeting of shareholders held May 22,

 

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2012**

 

 

 

10.8

 

First Amended and Restated Securities Purchase Agreement dated May 23, 2012, between the Corporation and Steinhardt Capital Investors, LLLP (incorporated by reference to Exhibit 10.1 to the Corporation’s Form 8-K filed May 23, 2012**

 

 

 

10.9

 

First Amendment to the First Amended and Restated Securities Purchase Agreement dated May 30, 2012, between the Corporation and Steinhardt Capital Investors, LLLP (incorporated by reference to Exhibit 10.1 to the Corporation’s Form 8-K filed May 31, 2012**

 

 

 

10.10

 

Employment Agreement, dated as of August 10, 2012, by and between Mackinac Financial Corporation and Paul D. Tobias (incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed August 15, 2012)**

 

 

 

10.11

 

Employment Agreement, dated as of August 10, 2012, by and between Mackinac Financial Corporation and Kelly W. George (incorporated by reference to Exhibit 10.2 of the Corporation’s Form 8-K filed August 15, 2012)**

 

 

 

10.12

 

Employment Agreement, dated as of August 10, 2012, by and between Mackinac Financial Corporation and Ernie R. Krueger (incorporated by reference to Exhibit 10.3 of the Corporation’s Form 8-K filed August 15, 2012)**

 

 

 

10.13

 

Employment Agreement, dated as of August 10, 2012, by and between Mackinac Financial Corporation and Tamara McDowell (incorporated by reference to Exhibit 10.4 of the Corporation’s Form 8-K filed August 15, 2012)**

 

 

 

10.14

 

Form of Stock Appreciation Right Award Agreement under the Mackinac Financial Corporation 2012 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed August 13, 2012)**

 

 

 

10.15

 

Form of Restricted Stock Award Agreement under the Mackinac Financial Corporation 2012 Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 of the Corporation’s Form 8-K filed August 13, 2012)**

 

 

 

10.16

 

Form of Restricted Stock Unit Award Agreement under the Mackinac Financial Corporation 2012 Incentive Compensation Plan (incorporated by reference to Exhibit 10.3 of the Corporation’s Form 8-K filed August 13, 2012)**

 

 

 

10.17

 

Warrant Repurchase Letter Agreement dated December 19, 2012

 

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(incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed December 20, 2012)

 

 

 

13*

 

2013 Annual Report to Shareholders. This exhibit, except for those portions expressly incorporated by reference in this filing, is furnished for the information of the Securities and Exchange Commission and is not deemed “filed” as part of this filing

 

 

 

21*

 

Subsidiaries of the Corporation

 

 

 

23.1*

 

Consent of Independent Public Accountants — Plante Moran, PLLC

 

 

 

31*

 

Rule 13(a) — 14(a) Certifications

 

 

 

32.1*

 

Section 1350 Chief Executive Officer Certification

 

 

 

32.2*

 

Section 1350 Chief Financial Officer Certification

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document***

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document***

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document***

 

 

 

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document***

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document***

 


*  filed herewith

**  management compensatory plan, contract, or arrangement

*** As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for the purposes of Sections 11  and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those Sections.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, dated March 28, 2014.

 

MACKINAC FINANCIAL CORPORATION

 

 

 

/s/ Paul D. Tobias

 

Paul D. Tobias

 

Chairman and Chief Executive Officer

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 29, 2013, by the following persons on behalf of the Corporation and in the capacities indicated.  Each director of the Corporation, whose signature appears below, hereby appoints Paul D. Tobias and Ernie R. Krueger, and each of them severally, as his attorney-in-fact, to sign in his name and on his behalf, as a director of the Corporation, and to file with the Commission any and all Amendments to this Report on Form 10-K.

 

 

Signature

 

/s/ Paul D. Tobias

 

/s/ Ernie R. Krueger

Paul D. Tobias — Chairman,

 

Executive Vice President/Chief Financial

Chief Executive Officer & Director

 

Officer

(principal executive officer)

 

(principal financial and accounting officer)

 

 

 

/s/Walter J. Aspatore

 

/s/ Joseph D. Garea

Walter J. Aspatore - Director

 

Joseph D. Garea — Director

 

 

 

/s/ Robert E. Mahaney

 

/s/Robert H. Orley

Robert E. Mahaney — Director

 

Robert H. Orley - Director

 

 

 

/s/ Dennis B. Bittner

 

/s/ L. Brooks Patterson

Dennis B. Bittner — Director

 

L. Brooks Patterson — Director

 

 

 

/s/ Kelly W. George

 

/s/ Randolph C. Paschke

Kelly W. George — President & Director

 

Randolph C. Paschke — Director

 

 

 

/s/ David R. Steinhardt

 

 

David R. Steinhardt — Director

 

 

 

24