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 March 31, 2005
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: (800) 200-7032
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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes[ ] No [ X ]
As of April 30, 2005, 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 -
March 31, 2005 (Unaudited), December 31, 2004 and
March 31, 2004 (Unaudited)........................................ 1
Condensed Consolidated Statements of Operations - Three
Months Ended March 31, 2005 (Unaudited) and
March 31, 2004 (Unaudited)....................................... 2
Condensed Consolidated Statements of Changes in Shareholders'
Equity - Three Months Ended March 31, 2005
(Unaudited) and March 31, 2004 (Unaudited)....................... 3
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2005 (Unaudited) and
March 31, 2004 (Unaudited)....................................... 4
Notes to Condensed Consolidated Financial
Statements (Unaudited)........................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 26
Item 4. Controls and Procedures........................................... 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 30
Item 6. Exhibits and Reports on Form 8-K.................................. 35
SIGNATURES................................................................ 36
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31, March 31,
2005 2004 2004
-------------- -------------- --------------
(Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 3,656 $ 4,230 $ 5,421
Federal funds sold 10,207 39,848 40,698
-------------- -------------- --------------
Cash and cash equivalents 13,863 44,078 46,119
Interest-bearing deposits in other financial institutions 14 18,535 12,695
Securities available for sale 52,298 57,075 65,305
Federal Home Loan Bank stock 4,805 4,754 4,601
Total loans 194,831 203,832 255,021
Allowance for loan losses (6,836) (6,966) (12,730)
-------------- -------------- --------------
Net loans 187,995 196,866 242,291
Premises and equipment 10,588 10,739 13,222
Other real estate held for sale 1,515 1,730 3,861
Other assets 4,138 5,720 12,335
-------------- -------------- --------------
Total assets $ 275,216 $ 339,497 $ 400,429
============== ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Non-interest-bearing deposits $ 19,722 $ 20,956 $ 24,378
Interest-bearing deposits 185,517 194,694 262,694
-------------- -------------- --------------
Total deposits 205,239 215,650 287,072
Borrowings 38,135 85,039 87,026
Subordinated debentures -0- -0- 12,450
Other liabilities 2,988 4,078 4,510
--------------- -------------- --------------
Total liabilities 246,362 304,767 391,058
Shareholders' equity:
Preferred stock - No par value:
Authorized -500,000 shares, no shares outstanding -0- -0- -0-
Common stock - No par value:
Authorized - 18,000,000 shares
Issued and outstanding - 3,428,695
3,428,695 and 350,958, respectively 42,335 42,335 16,175
Accumulated deficit (13,338) (8,097) (8,169)
Accumulated other comprehensive income (loss) (143) 492 1,365
-------------- -------------- --------------
Total shareholders' equity 28,854 34,730 9,371
-------------- -------------- --------------
Total liabilities and shareholders' equity $ 275,216 $ 339,497 $ 400,429
============== ============== ==============
See accompanying notes to condensed consolidated financial statements.
1.
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except per Share Data)
(Unaudited)
Three Months Ended
---------March 31,---------
2005 2004
----------- -------------
Interest income:
Interest and fees on loans:
Taxable $ 3,059 $ 3,796
Tax-exempt 242 319
Interest on securities:
Taxable 462 698
Tax-exempt 42 43
Other interest income 183 120
----------- -------------
Total interest income 3,988 4,976
----------- -------------
Interest expense:
Deposits 1,130 1,665
Borrowings 653 1,181
Subordinated debentures -0- 119
----------- -------------
Total interest expense 1,783 2,965
----------- -------------
Net interest income 2,205 2,011
Provision for loan losses -0- -0-
----------- -------------
Net interest income after provision for loan losses 2,205 2,011
----------- -------------
Other income:
Service fees 161 293
Loan and lease fees 7 5
Net security losses (1) -0-
Net gains on sales of loans -0- 12
Gain on sale of property and equipment 2 -0-
Other 15 353
----------- -------------
Total other income 184 663
----------- -------------
Other expenses:
Salaries and employee benefits 1,504 1,499
Furniture and equipment 159 258
Occupancy 226 347
Data processing 246 355
Accounting, legal, and consulting fees 318 406
Loan and deposit 293 493
Telephone 60 213
Advertising 139 17
Penalty on prepayment of FHLB borrowings 4,320 -0-
Other 365 753
----------- -------------
Total other expenses 7,630 4,341
----------- -------------
Loss before provision for income taxes (5,241) (1,667)
Provision for income taxes -0- -0-
----------- -------------
Net loss $ (5,241) $ (1,667)
=========== =============
Loss per common share:
Basic $ (1.53) $ (4.75)
=========== =============
Diluted $ (1.53) $ (4.75)
=========== =============
See accompanying notes to condensed consolidated financial statements.
2.
MACKINAC FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
(Unaudited)
Three Months Ended
---------March 31,--------
2005 2004
----------- ------------
Balance, beginning of period $ 34,730 $ 10,700
Net loss for period (5,241) (1,667)
Net unrealized gain (loss) on securities
available for sale (635) 338
----------- ------------
Total comprehensive loss (5,876) (1,329)
----------- ------------
Balance, end of period $ 28,854 $ 9,371
=========== ============
See accompanying notes to condensed consolidated financial statements.
3.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
---------March 31,--------
2005 2004
----------- ------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net loss $ (5,241) $ (1,667)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 248 456
Provision for impairment of other real estate held for sale -0- 15
Provision for impairment of bank premises and equipment -0- 193
Loss on sales of securities -0- -0-
FHLB stock dividend (51) (57)
(Gain) loss on sale of premises, equipment, and other real estate (4) 24
Change in other assets 1,551 (2,199)
Change in other liabilities (1,090) (2,059)
----------- ------------
Net cash (used in) operating activities (4,587) (5,294)
----------- ------------
Cash flows from investing activities:
Net increase in interest-bearing deposits in other financial institutions 18,521 (6,647)
Purchase of securities available for sale (16,009) (5,000)
Proceeds from sales of securities available for sale 18,674 -0-
Proceeds from maturities, calls, or paydowns of securities available for sale 1,447 24,713
Net decrease in loans 8,840 33,236
Purchase of premises and equipment (36) (19)
Proceeds from sale of premises, equipment, and other real estate 250 819
----------- ------------
Net cash provided by investing activities 31,687 47,102
----------- ------------
Cash flows from financing activities:
Net decrease in deposits (10,411) (18,722)
Proceeds from borrowings 1,651 -0-
Principal payments on borrowings (48,555) -0-
----------- ------------
Net cash used in financing activities (57,315) (18,722)
----------- ------------
Net change in cash and cash equivalents (30,215) 23,086
Cash and cash equivalents at beginning of period 44,078 23,033
----------- ------------
Cash and cash equivalents at end of period $ 13,863 $ 46,119
=========== ============
Supplemental cash flow information:
Cash paid for:
Interest $ 1,896 $ 2,973
Income taxes -0- -0-
Transfers of foreclosures from loans to other real estate held for sale 31 314
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 three-month
period ended March 31, 2005, are not necessarily indicative of the results
that may be expected for the year ending December 31, 2005. 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, 2004.
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 was not
changed due to these reclassifications.
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
during 2000 and applies to officers, employees, and nonemployee directors.
This plan was amended as a part of the recently completed 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 split), to a total authorized share balance
of 453,587. The other two plans, one for officers and employees and the
other for nonemployee directors, were approved in 1997. A total of 30,000
shares (adjusted for the 1:20 split), were made available for
See accompanying notes to condensed consolidated financial statements.
5.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 fair value of each option granted is estimated on the grant date using
the Black-Scholes methodology. The following assumptions were made in
estimating fair value for options granted for the year ended December 31,
2004. The weighted average fair value of options granted in 2004 as of
their grant date, using the assumptions shown below, was calculated at
$2.80 per share. There were no options granted in the first quarter of
2005.
2004
------
Dividend yield 0.00%
Risk-free interest rate 3.25%
Weighted average expected life (years) 4.0
Expected volatility 30.00%
The Corporation accounts for stock options using the intrinsic value
method. For all options granted, the intrinsic value was zero; therefore,
no compensation cost has been recognized for the plans. Had compensation
cost been determined on the basis of fair value, net income and earnings
per share would have been reduced for the three months ended March 31,
2005 and 2004 as follows (dollars in thousands, except per share data):
March 31, March 31,
2005 2004
------------ -----------
Net loss:
As reported $ (5,241) $ (1,667)
Total stock-based compensation expense
determined under fair value-based method (49) -0-
------------ -----------
Pro forma $ (5,290) $ (1,667)
============ ===========
Loss per share - Basic:
As reported $ (1.53) $ (4.75)
============ ===========
Pro forma $ (1.54) $ (4.75)
============ ===========
Loss per share - Diluted:
As reported $ (1.53) $ (4.75)
============ ===========
Pro forma $ (1.54) $ (4.75)
============ ===========
Weighted average shares outstanding 3,428,695 350,958
============ ===========
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 was not
changed due to these reclassifications.
See accompanying notes to condensed consolidated financial statements.
6.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. RECENT ACCOUNTING PRONOUNCEMENT
In December 2004, the FASB re-issued SFAS No. 123 "Accounting for
Stock-Based Compensation" which becomes effective for interim periods
beginning after June 15, 2005. (Note: This date has now been extended to
December 31, 2005). 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 Statement
requires entities to recognize the cost of employee services received in
exchange for these stock options. This Statement applies to all unvested
awards outstanding as of the effective date. The Corporation plans to
adopt SFAS No. 123 for the period beginning after December 31, 2005 and
does not expect a material impact on the Corporation's Consolidated
Financial Statements.
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 months ended March 31, 2005 and 2004 (dollars in
thousands, except per share data):
Three Months
Ended March 31,
2005 2004
----------- ---------
Basic loss per common share:
Net loss $ (5,241) $ (1,667)
=========== =========
Weighted average common shares outstanding 3,428,695 350,958
=========== =========
Basic loss per common share $ (1.53) $ (4.75)
=========== =========
Diluted loss per common share:
Net loss $ (5,241) $ (1,667)
=========== =========
Weighted average common shares outstanding
for basic loss per common share 3,428,695 350,958
Add: Dilutive effect of assumed exercise
of stock options -0- -0-
----------- ---------
Average shares and dilutive potential common shares 3,428,695 350,958
=========== =========
Diluted loss per common share $ (1.53) $ (4.75)
=========== =========
Additional shares issued as a result of option excercises would be
antidilutive in both periods due to the consolidated loss and are
therefore not shown in the diluted loss per share calculation.
See accompanying notes to condensed consolidated financial statements.
7.
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 March 31, 2005, December 31, 2004, and March 31,
2004 are as follows (dollars in thousands):
March 31, 2005 December 31, 2004 March 31, 2004
------------------------- --------------------------- --------------------------
Amortized Estimated Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value Cost Fair Value
---------- ------------- ------------ ------------- ------------ ------------
US Agencies $ 34,998 $ 34,466 $ 21,980 $ 21,843 $ 21,021 $ 21,241
Obligations of states and political
subdivisions 3,710 4,004 3,711 4,029 3,772 4,212
Corporate securties 668 675 667 681 666 708
Mortgage-related securities 13,065 13,153 30,225 30,522 38,481 39,144
---------- ------------- ------------ ------------- ------------ ------------
Total securities available for sale $ 52,441 $ 52,298 $ 56,583 $ 57,075 $ 63,940 $ 65,305
========== ============= ============ ============= ============ ============
The amortized cost and estimated fair value of investment securities
pledged to treasury deposits and borrowings were $1.008 million and $1.001
million, respectively, at March 31, 2005.
5. LOANS
The composition of loans at March 31, 2005, December 31, 2004, and March
31, 2004 is as follows (dollars in thousands):
March 31, December 31, March 31,
2005 2004 2004
----------- ------------- ---------
Commercial real estate $ 100,911 $ 105,619 $ 142,960
Commercial, financial, and agricultural 43,632 47,446 62,337
One to four family residential real estate 45,425 45,292 46,221
Consumer 2,277 2,379 2,867
Construction 2,586 3,096 636
----------- ------------- ---------
Total loans $ 194,831 $ 203,832 $ 255,021
=========== ============= =========
LOANS - ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses for the three months ended
March 31, 2005, the year ended December 31, 2004, and the three months
ended March 31, 2004 is as follows: (dollars in thousands):
March 31, December 31, March 31,
2005 2004 2004
---------- ------------- ---------
Balance at beginning of period $ 6,966 $ 22,005 $ 22,005
Provision for loan losses -0- -0- -0-
Recoveries on loans 97 719 113
Loans charged off (227) (15,758) (9,388)
---------- ------------- ---------
Balance at end of period $ 6,836 $ 6,966 $ 12,730
========== ============= =========
See accompanying notes to condensed consolidated financial statements.
8.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In the first quarter of 2005, net charge off activity was minimal at
$130,000, or .07% of average loans outstanding. The allowance for loan
losses was significantly impacted by loan charge offs in the first quarter
of 2004. The Corporation completed the sale of $25.2 million of loans,
primarily nonperforming, during the first quarter of 2004 which resulted
in a previously allocated specific reserve on these loans being recognized
as a charge off. This specific reserve charge off amounted to $7.4
million.
The aggregate amount of nonperforming residential and consumer loans was
approximately $981,000, $888,000 and $523,000 at March 31, 2005, December
31, 2004, and March 31, 2004, respectively. 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 of interest or
principal. The interest income recorded and that which would have been
recorded had residential and consumer nonaccrual and renegotiated loans
been current, or not troubled, are not material to the consolidated
financial statements for the three months ended March 31, 2005 and 2004.
The nonperforming commercial loans are reflected in the information
regarding impaired loans.
LOANS - IMPAIRED LOANS
Information regarding impaired loans as of March 31, 2005, December 31,
2004, and March 31, 2004 is as follows (dollars in thousands):
Valuation Reserve
--------------------------
March December March March December March
31,2005 31,2004 31,2004 31,2005 31,2004 31,2004
------- -------- ------- ------- -------- -------
Balances, at period end
Impaired loans with specific valuation reserve $ 85 $ 608 $14,478 $ 83 $ 136 $ 3,069
Impaired loans with no specific valuation reserve 2,187 3,699 7,768 -0- -0- -0-
------- -------- ------- ------- -------- -------
Total impaired loans $ 2,272 $ 4,307 $22,246 $ 83 $ 136 $ 3,069
======= ======== ======= ======= ======== =======
Impaired loans on nonaccrual basis $ 2,272 $ 4,307 $17,774 $ 83 $ 136 $ 2,861
Impaired loans on accrual basis -0- -0- 4,472 -0- -0- 208
------- -------- ------- ------- -------- -------
Total impaired loans $ 2,272 $ 4,307 $22,246 $ 83 $ 136 $ 3,069
======= ======== ======= ======= ======== =======
Average investment in impaired loans $ 3,290 $ 17,036 $33,037
Interest income recognized during impairment 21 1,053 123
Interest income that would have been recognized
on an accrual basis 55 803 348
Cash-basis interest income recognized 21 863 15
The average investment in impaired loans was approximately $3.290 million
for the three-months ended March 31, 2005, $17.036 million for the year
ended December 31, 2004, and $33.037 million for the three months ended
March 31, 2004, respectively. Impacting the impaired loan balances in 2004
were $40.0 million of loan sales, primarily nonperforming loans, which
included $22.9 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.
See accompanying notes to condensed consolidated financial statements.
9.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Activity in such loans is summarized below (dollars in thousands):
March 31, December 31, March 31,
2005 2004 2004
------------ ------------ ---------
Loans outstanding, beginning of period $ 63 $ 6,514 $ 6,514
New loans -0- 365 -0-
Net activity on revolving lines of credit -0- -0- -0-
Repayment (11) (765) (166)
Decrease related to retired executive officers and directors -0- (6,051) -0-
------------ ------------ ---------
Loans outstanding, end of period $ 52 $ 63 $ 6,348
============ ============ =========
There were no loans to related parties classified substandard at March 31,
2005, December 31, 2004, and March 31, 2004 respectively.
6. BORROWINGS
Borrowings consist of the following at March 31, 2005, December 31, 2004,
and March 31, 2004 (dollars in thousands):
March 31, December 31, March 31,
2005 2004 2004
--------- --------------- -----------
Federal Home Loan Bank advances at rates ranging from 4.35%
to 5.16% maturing in 2010 and 2011 $ 35,000 $ 83,555 $ 85,475
Term loan credit, with a correspondent bank, Canadian prime
less 1/2%, maturing February 2006 1,651 -0- -0-
Farmers Home Administration, fixed-rate note payable, maturing
August 24, 2024, interest payable at 1% 1,484 1,484 1,551
--------- --------------- -----------
$ 38,135 $ 85,039 $ 87,026
========= =============== ===========
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 March 31,
2005, by the following: a collateral agreement on the Corporation's one to
four family residential real estate loans with a book value of
approximately $31,839,000; U.S. government agency and mortgage-backed
securities with an amortized cost and estimated fair value of $18,065,000
and $18,040,000, respectively; and Federal Home Loan Bank stock owned by
the Bank totaling $4,804,700. 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 March 31, 2005.
The U.S.D.A. Rural Development borrowing is collateralized by loans
totaling $547,000 originated and held by the Corporation's wholly owned
subsidiary, First Rural Relending, an assignment of a demand deposit
account in the amount of $1,075,000, and guaranteed by the Corporation.
The term loan credit is collateralized by an investment security with an
amortized cost of $2.000 million and an estimated fair value of $1.965
million.
See accompanying notes to condensed consolidated financial statements.
10.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. STOCK OPTION PLANS
A summary of stock option transactions for the three months ended March
31, 2005 and 2004 and the year ended December 31, 2004, is as follows:
(Historical stock option information has been adjusted for the 1:20
reverse stock split which occurred in December, 2004).
2005 2004 2004
--------- --------- --------
Outstanding shares at beginning of period 282,999 27,483 27,483
Granted during the period -0- 257,152 -0-
Expired during the period -0- (1,636) (270)
-------- --------- --------
Outstanding shares at end of period 282,999 282,999 27,213
======== ========= ========
Weighted average exercise price per share
at end of period $ 34.55 $ 34.55 $ 280.60
======== ========= ========
Shares available for grant at end of period 138,899 138,899 18,182
======== ========= ========
Options granted in 2004 were granted at a price of $9.75 per share, the
approximate fair market value at date of grant. Under these plans, options
expire ten years after the date of grant.
Following is a summary of the options outstanding and exercisable at March
31, 2005:
Weighted
Average Weighted
Remaining Average
Exercise Number Contractual Exercise
Price Range Outstanding Exercisable Life-Years Price
- ------------------ ------------ ----------- ----------- ---------
$ 9.75 257,152 120,861 9.7 $ 9.75
$156.00 - $240.00 11,850 11,850 4.1 182.07
$300.00 - $406.60 13,997 13,997 2.9 365.34
------- --------- -------- ---------
282,999 146,708 9.1 $ 34.55
======= ========= ======== =========
8. SUBORDINATED DEBENTURES
As part of the recapitalization through the issuance of $30 million in
common stock in a private placement, the subordinated debentures were paid
off. This payoff settlement was negotiated with all of the holders of the
subordinated debentures. The payment for the debentures was in settlement
of $12,450,000 in principal and accrued interest. The total settlement
price was $6,500,000 and resulted in the Corporation recording a gain on
the settlement of $6,617,000. The settlement of this liability also
included the accrued interest of approximately $1.2 million.
9. 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
See accompanying notes to condensed consolidated financial statements.
11.
MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
capital infusion. This capital infusion provided the Bank with enough
capital to be deemed a "well capitalized" institution by regulatory
standards.
10. 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):
March 31, December 31, March 31,
2005 2004 2004
------------ ------------ ---------
Commitments to extend credit:
Fixed rate $ 1,054 $ 638 $ 887
Variable rate 12,578 10,889 6,014
Standby letters of credit - Variable rate 11,338 17,970 14,557
Credit card commitments - Fixed rate 2,810 2,995 3,355
------------ ------------ ---------
$ 27,780 $ 32,492 $ 24,813
============ ============ =========
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.
See accompanying notes to condensed consolidated financial statements.
12.
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 $45.4 million, or
31.4%, of the commercial loan portfolio at March 31, 2005. The remainder
of the commercial loan portfolio is diversified in such categories as
gaming, petroleum, forestry, and agriculture. Due to the diversity of the
Bank's locations, the ability of debtors of residential and consumer loans
to honor their obligations is not tied to any particular economic
locality.
See accompanying notes to condensed consolidated financial statements.
13.
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:
- Impact of continued operating losses;
- 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,
2004. Throughout this discussion, the term "Bank" refers to mBank,
formerly known as North Country Bank and Trust, the principal banking
subsidiary of the Corporation.
See accompanying notes to condensed consolidated financial statements.
14.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL OVERVIEW
Year-to-date consolidated net loss was $5.241 million through March 31, 2005,
compared to net loss of $1.667 million for the same period in 2004. Basic loss
per share was $1.53 for the three months ended March 31, 2005, compared to a
loss of $4.75 for the same period in 2004. There was no provision for loan
losses for the three months ended March 31, 2005 and March 31, 2004. Total
assets declined $64.281 million from December 31, 2004 to March 31, 2005. The
loan portfolio declined $9.001 million in the first quarter of 2005, from
December 31, 2004 balances of $203.832 million. Deposits totaled $205.239
million at March 31, 2005, a decline of $10.411 million from the $215.650
million at December 31, 2004.
FINANCIAL CONDITION
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased $30.215 million in 2005. This was due to the
utilization of the excess liquidity, which existed at December 31, 2004, to
prepay FHLB borrowings in the first quarter of 2005. See further discussion of
the change in cash and cash equivalents in the Liquidity section.
INVESTMENT SECURITIES
Available-for-sale securities decreased $4.777 million, or 8.4%, from December
31, 2004 to March 31, 2005, with the balance on March 31, 2005, totaling $52.298
million. The decrease during the first quarter was due to a combination of
maturities, calls, and paydowns of agencies and mortgage related securities. In
the first quarter of 2005, the Corporation sold $18.7 million of callable
mortgage backed securities and reinvested the proceeds in shorter term US
agencies. This repositioning was done with lower interest rate and principal
risk in anticipation of future rate increases. Investment securities are
utilized in an effort to manage interest rate risk and liquidity. As of March
31, 2005, investment securities with an estimated fair value of $19.041 million
were pledged.
LOANS
Through the first quarter of 2005, loan balances decreased by $9.001 million, or
4.4% from December 31, 2004 balances of $203.832 million. During the first
quarter, the Bank experienced a high level, $16.8 million, of loan payoffs along
with normal principal reduction of $2.3 million. These loan payoffs, which
included approximately $2.3 million of nonaccrual loans, were higher than
anticipated and are not expected to continue at this level. New loan production
in the first quarter totaled $10.1 million. The Bank recently added additional
commercial lending staff and will be adding mortgage lenders later in the year.
It is anticipated that with the addition of lending staff, along with the
extensive marketing campaign and introduction of new and more competitive loan
products, future periods will benefit from increased loan production. The Bank
sold $25.2 million of loans in the first quarter of 2004. This sale was composed
of primarily non-performing loans and resulted in a reduction in non-accrual
loans of $17.5 million and a total reduction in non-performing loans of $18.5
million. This loan sale also reduced concentration exposure in the hotel and
tourism industry. 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, most segments of the loan
portfolio declined in the first quarter of 2005. Management intends to increase
lending activities in its market for mortgage, consumer, and commercial loan
products while concentrating on loan quality, industry concentration issues, and
competitive pricing.
See accompanying notes to condensed consolidated financial statements.
15.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Following is a summary of the loan portfolio at March 31, 2005, December 31,
2004, and March 31, 2004 (dollars in thousands):
March 31, Percent of December 31, Percent of March 31, Percent of
2005 Total 2004 Total 2004 Total
--------- ---------- ------------ ---------- --------- ----------
Commercial real estate $ 100,911 51.79% $ 105,619 51.82% $ 35,117 13.77%
Commercial, financial, and agricultural 43,632 22.39 47,446 23.28 170,180 66.74
1-4 family residential real estate 45,425 23.32 45,292 22.22 46,221 18.12
Consumer 2,277 1.17 2,379 1.16 2,867 1.12
Construction 2,586 1.33 3,096 1.52 636 .25
--------- ---------- ------------ ---------- --------- ----------
Total loans $ 194,831 100.00% $ 203,832 100.00% $ 255,021 100.00%
========= ========== ============ ========== ========= ==========
Following is a table showing the significant industry types in the commercial
loan portfolio as of March 31, 2005, December 31, 2004, and March 31, 2004
(dollars in thousands):
March 31, 2005 December 31, 2004
----------------------------------------- --------------------------------------
Percent of Percent of Percent of Percent of
Outstanding Commerical Shareholders' Outstanding Commercial Shareholders'
Balance Loans Equity Balance Loans Equity
----------- ---------- ------------- ----------- ---------- -------------
Hospitality and tourism $ 45,390 31.40% 157.31% $ 52,659 34.40% 151.62%
Gaming 12,618 8.73 43.73% 14,310 9.35 41.20%
Petroleum 7,939 5.49 27.51% 7,718 5.04 22.22%
Forestry 5,486 3.80 19.01% 2,245 1.47 6.46%
Other 73,110 50.58 253.38% 76,133 49.74 219.21%
----------- ------ ------ ----------- ------ ------
Total Commercial Loans $ 144,543 100.00% $ 153,065 100.00%
=========== ====== =========== ======
March 31, 2004
---------------------------------------
Percent of Percent of
Outstanding Commercial Shareholders'
Balance Loans Equity
----------- ----------- -------------
Hospitality and tourism $ 54,418 26.50% 580.70%
Gaming 20,746 10.11 221.39%
Petroleum 5,331 2.60 56.89%
Forestry 1,300 .63 13.87%
Other 123,502 60.16 1,317.92%
-------- ------ --------
Total Commercial Loans $205,297 100.00%
======== ======
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 March
31, 2005, the allowance for loan losses was 3.51% of total loans outstanding
compared to 3.42% at December 31, 2004 and 4.99% at March 31, 2004.
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 to average loans outstanding amounted to .07% and 3.21% for
the three months ended March 31, 2005 and 2004, respectively. Net charge-offs
for the three-month period ended March 31, 2005, were $.130 million compared to
$9.275 million for the same period in 2004. Charge-offs during the first quarter
of 2004 include $7.4 million of charge-offs incurred as a result of the sale of
$25.2 million of primarily non-performing loans. The sale of these
non-performing loans did not result in any gain or loss since the total reduced
carrying value was previously recognized as a specific reserve allocation. The
Corporation did not recognize a provision for loan losses for the three months
ended March 31, 2005, and March 31, 2004 since the reserve was considered
adequate at the end of both periods. There were no new significant problem loans
or loan downgrades identified during the first quarter of 2005.
See accompanying notes to condensed consolidated financial statements.
16.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The table below shows period end balances of non-performing assets (dollars in
thousands):
March 31, December 31, March 31,
2005 2004 2004
--------- ------------ ---------
NONPERFORMING ASSETS:
Nonaccrual loans $ 2,272 $ 4,307 $ 18,297
Loans past due 90 days or more -0- -0- 736
Restructured loans -0- -0- 48
--------- ------------ ---------
Total nonperforming loans 2,272 4,307 19,081
Other real estate owned 1,515 1,730 3,861
--------- ------------ ---------
Total nonperforming assets $ 3,787 $ 6,037 $ 22,942
========= ============ =========
Nonperforming loans as a % of loans 1.17%% 2.11% 7.48%
--------- ------------ ---------
Nonperforming assets as a % of assets 1.38%% 1.78% 5.73%
--------- ------------ ---------
RESERVE FOR LOAN LOSSES:
At period end $ 6,836 $ 6,966 $ 12,730
--------- ------------ ---------
As a % of loans 3.51%% 3.42% 4.99%
--------- ------------ ---------
As a % of nonperforming loans 300.88%% 161.74% 66.72%
--------- ------------ ---------
As a % of nonaccrual loans 300.88%% 161.74% 69.57%
========= ============ =========
Following is the allocation of the allowance for loan losses as of March 31,
2005, December 31, 2004, and March 31, 2004 (dollars in thousands):
March 31, December 31, March 31,
2005 2004 2004
--------- ------------ ---------
Commercial, financial, and agricultural loans $ 1,423 $ 1,419 $ 6,120
One-to-four family residential real estate loans 97 97 143
Consumer loans -0- -0- -0-
Unallocated and general reserves 5,316 5,450 6,467
--------- ------------ ---------
Totals $ 6,836 $ 6,966 $ 12,730
========= ============ =========
The following ratios assist management in the determination of the Corporation's
credit quality:
March 31, December 31, March 31,
2005 2004 2004
--------- ------------ ---------
Allowance to total loans 3.51% 3.42% 4.99%
Average loans outstanding, for the quarters and
year, respectively 199,703 $ 244,730 $ 288,548
Net charge-offs to average outstanding loans .07% 6.15% 3.21%
Nonperforming loans to gross loans 1.17% 2.11% 7.48%
Total nonperforming loans decreased $2.035 million since December 31, 2004. The
reduction in nonperforming loans during the first quarter of 2005 is primarily
due to the payoff of one major commercial loan that was in
See accompanying notes to condensed consolidated financial statements.
17.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
nonaccrual status. During 2004, nonperforming loans were reduced through a
combination of loan sales, charge-offs, and external refinancing. In 2004, the
Bank sold $40 million of primarily nonperforming loans of which $22.9 million
were in a nonaccrual status.
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 intensified the review of the Corporation's
loans, related collateral evaluations, and the overall lending process during
2004. The Corporation also utilized a loan review consultant in 2004, 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 2005.
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):
Three Months Ended Year Ended Three Months Ended
March 31, 2005 December 31, 2004 March 31, 2004
------------------ ----------------- ------------------
Balance at beginning of period $ 1,730 $ 4,356 $ 4,356
Other real estate transferred from loans 31 4,762 314
Other real estate sold/written down (246) (7,388) (809)
------- ------- --------
Balance at end of period $ 1,515 $ 1,730 $ 3,861
======= ======= ========
During the first three months of 2005, the Corporation received real estate in
lieu of loan payments of $31,000. Other real estate is initially valued at the
lower of cost or the fair value less selling costs. After the initial receipt,
management periodically reevaluates 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 a reduction in deposits in the first quarter of 2005. Total
deposits decreased by $10.411 million, or 4.83%, in the first quarter of 2005.
This reduction in deposits was primarily due to the non-renewal of Internet
deposit maturities during the quarter. Internet deposits decreased by $8.228
million during the first quarter of 2005 to $43.602 million at March 31, 2005;
while certificates of deposit over $100,000 showed a slight increase of $.344
million during the first quarter of 2005 to $11.070 million at March 31, 2005.
The Corporation has initiated an aggressive marketing campaign to introduce new
products and offer more competitive deposit pricing in an attempt to gather in
market deposits.
See accompanying notes to condensed consolidated financial statements.
18.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table represents detail of deposits at the end of the periods
indicated (dollars in thousands):
March 31, December 31, March 31,
2005 2004 2004
--------- ------------ ---------
NOW and money market $ 51,701 $ 53,468 $ 65,780
Savings and IRAs 25,687 25,570 29,471
Certificates of Deposit <$100,000 53,458 53,100 62,767
Certificates of Deposit >$100,000 11,070 10,726 20,860
Internet CDs <$100,000 39,099 46,227 75,813
Internet CDs >$100,000 4,503 5,603 8,003
Demand deposit accounts 19,721 20,956 24,378
--------- ------------ ---------
Total deposits $ 205,239 $ 215,650 $ 287,072
========= ============ =========
BORROWINGS
The Corporation has used alternative funding sources to provide long-term,
stable sources of funds. Total borrowings of the Corporation decreased by $46.9
million from 2004 year-end. 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 fixed interest rates and mature in 2010 and 2011. The remaining
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
agreement bears interest at Canadian prime, less 1/2 percent, and is secured by
an investment security with an amortized cost of $2.000 million and an estimated
fair value of $1.965 million.
SUBORDINATED DEBENTURES
As part of the recapitalization, which occurred in December 2004, the
subordinated debentures were paid off. This payoff settlement was negotiated
with all of the holders of the subordinated debentures. The payment for the
debentures was in settlement of $12,450,000 in principal and accrued interest.
The total settlement price was $6,500,000 and resulted in the Corporation
recording a gain on the settlement of $6,617,000. The settlement of this
liability also included the accrued interest of approximately $1.2 million.
SHAREHOLDERS' EQUITY
Total shareholders' equity decreased $5.876 million from December 31, 2004 to
March 31, 2005. The decrease is comprised of a net loss of $5.241 million and a
decrease in the net unrealized gain on securities of $.635 million. 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 March
31, 2005, increased by $.194 million, or 9.6% compared to the same period one
year ago. This increase in net interest income resulted despite
See accompanying notes to condensed consolidated financial statements.
19.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
significant declines in average earning assets. The prepayment of $48.555
million of the FHLB borrowings at a weighted average rate of 6.04% contributed
to the reduction in cost of funds and benefited the interest margin in the first
quarter of 2005. The Corporation also benefited from significant declines in
nonperforming loans, $16.8 million, and also from the increases in the prime
rate of 2%, in the last twelve months.
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. There was no provision
for loan losses for the quarter ended March 31, 2005, and March 31, 2004.
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 deteriorates or loan growth
is such that the general reserve is no longer deemed adequate.
OTHER INCOME
Other income decreased by $479,000 for the quarter ended March 31, 2005,
compared to the quarter ended March 31, 2004. Service fees decreased $132,000,
while loan and lease income increased $2,000 and loan gains declined $12,000.
The decline in service fees is primarily due to the significant decline in
deposits from March 31, 2004 to March 31, 2005. Other non-interest income was
positively impacted in the first quarter of 2004 from a gain of $258,000 on the
sale of a limited partnership interest.
The following table details noninterest income for the three months ended March
31, 2005 and March 31, 2004 (dollars in thousands):
Three Months Ended % Increase
March 31, (Decrease)
2005 2004 2005-2004
--------- --------- ----------
Service fees $ 161 $ 293 (45.05)%
Loan and lease fee income 7 5 40.00
Gain on sale of loans -0- 12 (100.00)
Gain (loss) on sale of property and equipment 2 -0- (95.83)
Other non interest income 15 353 (95.75)
--------- --------- ----------
Subtotal 185 663 (73.98)
--------- --------- ----------
Net Securities gains (losses) (1) -0- 100.00
--------- --------- ----------
Total noninterest income $ 184 $ 663 74.12%
========= ========= ==========
OTHER EXPENSES
Other expenses increased $3.289 million for the quarter ended March 31, 2005,
compared to the same period in 2004. 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 increase. Salaries, commissions, and
related benefits increased modestly, by $5,000, during the first quarter of 2005
compared to the first quarter of 2004. During the first quarter of 2004, the
Corporation recognized the cost of closing five branch offices. The total cost
associated with those branch office closings in 2004 amounted to $452,000 of
which $266,000 was recognized in the first quarter of 2004 and is included in
other operating expenses. Areas of noninterest expense such as furniture and
equipment, occupancy, data processing, and telephone expense declined between
periods due to these branch closures and branch sales that occurred later in
2004. Advertising expense at $139,000 in the first quarter of 2005 increased due
to the Corporation's efforts to regain market share by advertising new products
and services. The Corporation has engaged a marketing agency to develop an
extensive marketing program to launch the Bank's new name, from North Country
Bank and Trust to mBank, and create an advertising program to announce new
products
See accompanying notes to condensed consolidated financial statements.
20.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
and services. It is anticipated that the increased level of advertising expenses
will continue through the remainder of 2005.
The following table details noninterest expense for the three months ended March
31, 2005 and March 31, 2004 (dollars in thousands):
Three Months Ended % Increase
March 31, (Decrease)
2005 2004 2005-2004
--------- ------- ----------
Salaries, commissions, and related benefits $ 1,504 $ 1,499 .33%
Furniture and Equipment Expense 159 258 (38.37)
Occupancy Expense 226 347 (34.87)
Data Processing Expense 246 355 (30.70)
Accounting, legal and consulting fees 318 406 (21.67)
Loan and Deposit Expense 293 493 (40.57)
Telephone 60 213 (71.83)
Advertising Expense 139 17 717.65
Penalty - prepayment of FHLB borrowings 4,320 -0- 100.00
Other 365 753 (51.53)
--------- ------- ---------
Total noninterest expense $ 7,630 $ 4,341 75.77%
========= ======= =========
FEDERAL INCOME TAXES
There was no tax provision for the first quarter of 2005 and 2004. The
Corporation's current year net losses are not currently being benefited due to
the uncertainty of utilization. The Corporation has approximately $24.4 million
of NOL carryforward along with tax benefit carryforwards of $1.5 million. The
NOL and tax credit carryforward benefit is dependent upon the future
profitability and generation of taxable income; therefore no future benefit of
these deferred items has been recorded.
LIQUIDITY
As a result of the Corporation's renewed capital strength, from the
recapitalization in December, 2004, the Corporation is now able to pursue
sources of liquidity, such as lines of credit from correspondent banks,
borrowings from the Federal Home Loan Bank and possible brokered deposits
acquisition. The liquidity issues faced, the Corporation's actions taken to
address them, and the liquidity plan for 2005 are discussed below.
During the first quarter of 2005, the Corporation decreased cash and cash
equivalents by $30.215 million. As shown on the Corporation's condensed
consolidated statement of cash flows, liquidity was primarily impacted from cash
used in financing activities. The Corporation prepaid $48.555 million in FHLB
borrowings in the first quarter of 2005. The Corporation utilized short term
liquidity sources such as federal funds sold and time deposits in other
financial institutions to fund the prepayment. In the first quarter of 2005, the
Corporation funded the reduction of deposits of $10.411 million primarily
through the balance sheet reductions of loans, $8.840 million, and investments,
$4.112 million. These asset reductions allowed the Corporation to maintain
adequate liquidity of $13.863 million.
It is anticipated that during the remainder of 2005, the Corporation will fund
anticipated loan production with a combination of core deposit growth and from
the use of Internet deposits and FHLB borrowings.
The Corporation's parent company is dependent upon its primary operating
subsidiary, the Bank, for sources of cash to fund its operating needs. At March
31, 2005, the Corporation's parent had a balance of $1.671 million in cash and
cash equivalents and does not anticipate the need for additional sources of
funds in the near term.
See accompanying notes to condensed consolidated financial statements.
21.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Corporation's liquidity plan for 2005 includes strategies to increase core
deposits in the Corporation's local markets. The introduction of new products
through an extensive advertising campaign commenced in the first quarter of
2005, with a goal of increasing core deposits to reduce the dependency on
noncore, out of market, deposits. The Corporation's liquidity plan for 2005
calls for augmenting local deposit growth efforts with Internet CD funding, to
the extent necessary. The Corporation has also reestablished borrowing lines at
correspondent banks to provide additional sources of liquidity.
CAPITAL AND REGULATORY
During the first quarter of 2005, capital decreased by $5.876 million, as a
result of the net loss of $5.241 million and the decrease in the unrealized gain
on securities available for sale of $.635 million. This compares to a decrease
in capital during the same period in the previous year of $1.329 million,
resulting primarily from a net loss of $1.667 million and a positive change in
the unrealized gain on securities available for sale of $.338 million.
As a bank holding company, the Corporation is required to maintain certain
levels of capital under government regulation. There are several measurements of
regulatory capital and the Corporation is required to meet minimum requirements
under each measurement. The federal banking regulators have also established
capital classifications beyond the minimum requirements in order to risk-rate
deposit insurance premiums and to provide trigger points for prompt corrective
action in the event an institution becomes financially troubled. As of March 31,
2005 and December 31, 2004, the Corporation and the Bank, were well capitalized.
See accompanying notes to condensed consolidated financial statements.
22.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table details sources of capital for the periods indicated.
March 31, December 31, March 31,
2005 2004 2004
--------- ------------ ---------
CAPITAL STRUCTURE
Long-term debt (1) $ -0- -0- $ 12,450
Shareholders' equity 28,854 34,730 9,371
--------- ------------ ---------
Total capitalization $ 28,854 $ 34,730 $ 21,821
--------- ------------ ---------
Tangible capital $ 28,430 $ 34,275 $ 20,324
--------- ------------ ---------
INTANGIBLE ASSETS
Core deposit premium $ 424 $ 455 $ 978
Other identifiable intangibles -0- -0- 519
--------- ------------ ---------
Total intangibles $ 424 $ 455 $ 1,497
--------- ------------ ---------
RISK-BASED CAPITAL
Tier I capital:
Shareholders' equity $ 28,854 $ 34,730 $ 9,371
Net unrealized (gains) losses on
available for sale securities 143 (492) (1,365)
Minority interest 80 78 2,263
Less: intangibles (424) (455) (1,497)
--------- ------------ ---------
Total Tier I capital $ 28,653 $ 33,861 $ 8,772
--------- ------------ ---------
Tier II Capital:
Allowable reserve for loan losses $ 2,585 $ 2,918 $ 3,495
Qualifying long-term debt -0- -0- 5,277
--------- ------------ ---------
Total Tier II capital 2,585 2,918 8,772
--------- ------------ ---------
Total capital $ 31,238 $ 36,779 17,544
========= ============ =========
Risk-adjusted assets $ 202,584 $ 229,355 $ 270,403
========= ============ =========
Capital ratios:
Tier I Capital to risk weighted assets 14.14% 14.76% 3.24%
Total Capital to risk weighted assets 15.42% 16.04% 6.49%
Tier I Capital to average assets 9.67% 10.68% 2.13%
(1) Long term debt in the Corporation's subordinated debentures.
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.
See accompanying notes to condensed consolidated financial statements.
23.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Presented below is a summary of the capital position in comparison to generally
applicable regulatory requirements:
Tier I Tier I Total
Capital to Capital to Capital to
Average Risk-Weighted Risk-Weighted
Assets Assets Assets
---------- ------------- -------------
Regulatory minimum for capital adequacy purposes 4.00% 4.00% 8.00%
The Corporation:
March 31, 2005 9.67% 14.14% 15.42%
December 31, 2004 10.68% 14.76% 16.04%
The Bank:
March 31, 2005 9.10% 13.33% 14.61%
December 31, 2004 9.89% 13.96% 15.23%
HISTORY
In October 2001, the Bank was notified by the FDIC that it was a "troubled
institution" within the meaning of FDIC regulations. As a troubled institution,
the Bank is required to notify the FDIC 30 days prior to the addition or
replacement of a Board member and the employment or changes in responsibilities
of a senior executive officer.
In September 2002, a regularly-scheduled safety and soundness examination of the
Bank was conducted by its principal regulators, the Michigan Office of Financial
and Insurance Services ("OFIS"), and the FDIC. During the course of that
examination, the FDIC, the OFIS, and the Federal Reserve Bank of Chicago ("FRB")
requested that the Corporation and the Bank take certain actions, including
suspending the payment of dividends and conserving the liquidity of the
Corporation.
In response to the concerns expressed by the regulators, the Board of Directors
of the Corporation and the Bank adopted resolutions providing for prior
regulatory approval of the declaration or payment of any dividend by the
Corporation or the Bank, and suspension of interest payments by the Corporation
in connection with its trust preferred securities. The agreements relating to
the trust preferred securities allow for the suspension of payments for up to 20
quarters. Therefore, the suspension of the interest payments did not violate the
agreement.
Following the completion of the regularly-scheduled safety and soundness
examination of the Bank by the FDIC and the OFIS in November 2002, and the
Bank's receipt of the related Report of Examination ("Report"), the FDIC and the
OFIS, with the consent of the Bank, on March 26, 2003, entered a formal order
(the "Order") under Federal and State banking laws. The Order became effective
on April 5, 2003, and was to remain in effect until modified or terminated by
action of the FDIC and the OFIS. The Order identified deficiencies in the Bank'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 of Governors of the
Federal Reserve System (the "Board"), the FDIC Rules and Regulations, and the
Michigan Banking Code of 1999. The Order also required the Bank to maintain
specified capital ratios during the life of the Order.
The Order required the Bank and its directors to take specific steps, within
time periods specified in the Order, to address the operational deficiencies,
including certain violations of law and regulations, identified by the FDIC and
the OFIS in the Order and the Report.
Significant progress was made by the Corporation in addressing all of the
deficiencies of the Order. The most significant event, which occurred in
mid-December 2004, was the consummation of a $30 million stock offering through
a private placement that resulted in net proceeds of $26.2 million. This
recapitalization allowed the Corporation to inject $15.5 million of capital into
the Bank which satisfied all of the capital requirements of the Order.
See accompanying notes to condensed consolidated financial statements.
24.
MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On February 8, 2005, the Order was formally removed; however, the Bank entered
into an informal agreement which requires the Bank to maintain a Tier 1 Capital
ratio of at least 8%. The Bank is also required to have regulatory approval
before paying dividends.
See accompanying notes to condensed consolidated financial statements.
25.
NORTH COUNTRY 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 loans so it has an opportunity to reprice the
loan within 12 to 36 months.
The Corporation also has $52.3 million of securities; of which $13.2 million are
mortgage-backed securities providing for scheduled monthly principal and
interest payments as well as unanticipated prepayments of principal. These cash
flows are then reinvested into other earning assets at current market rates.
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 speed of change
affects borrowers and depositors differently.
Exposure to interest rate risk is reviewed on a regular basis. Interest rate
risk is the potential of economic losses due to future interest rate changes.
These economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect of interest rate changes on net interest income and to structure the
composition of the balance sheet to minimize interest rate risk and at the same
time maximize income. Management realizes certain risks are inherent and that
the goal is to identify and minimize the risks. Tools used by management include
maturity and repricing analysis and interest rate sensitivity analysis.
The 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.
See accompanying notes to condensed consolidated financial statements.
26.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following is the Corporation's opportunities at March 31, 2005 (dollars in
thousand):
1-90 91 - 365 >1-5 Over 5
Days Days Years Years Total
--------- --------- -------- -------- ---------
Interest-earning assets:
Loans $ 142,242 1,415 31,517 19,657 $ 194,831
Securities 5,814 4,105 36,018 6,361 52,298
Other (1) 15,026 -0- -0- -0- 15,026
--------- --------- -------- -------- ---------
Total interest-earning assets 163,082 5,520 67,535 26,018 262,155
--------- --------- -------- -------- ---------
Interest-bearing obligations:
Savings deposits 70,856 -0- -0- -0- 70,856
Time deposits 27,125 50,373 36,411 752 114,661
Borrowings -0- 1,718 1,417 35,000 38,135
--------- --------- -------- -------- ---------
Total interest-bearing obligations 97,981 52,091 37,828 35,752 223,652
--------- --------- -------- -------- ---------
Gap $ 65,101 $ (46,571) $ 29,707 $ (9,734) $ 38,503
========= ========= ======== ======== =========
Cumulative gap $ 65,101 $ 18,530 $ 48,237 $ 38,503
========= ========= ======== ========
(1) Includes Federal Home Loan Bank Stock
The above analysis indicates that at March 31, 2005, the Corporation had a
cumulative asset sensitivity gap position of $18.530 million within the one-year
time frame. The Corporation's cumulative asset sensitive gap suggests that if
market interest rates increase in the next twelve months, the Corporation's net
interest income could increase. Conversely, if market interest rates decrease
over the next twelve months, the above GAP position suggests the Corporation's
net interest income would increase.
At December 31, 2004, the Corporation had a cumulative asset sensitivity gap
position of $63.804 million within the one-year time frame. The Corporation's
cumulative asset sensitive gap suggested that if market interest rates increased
in the next twelve months, the Corporation had the potential to earn more net
interest income. Conversely, if market interest rates continued to decrease over
a twelve-month period, the December 31, 2004, gap position suggested the
Corporation's net interest income would decrease.
The decrease in the gap position from December 31, 2004 to March 31, 2005
resulted from the use of short term investments to fund the prepayment of long
term liabilities. 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 as fixed-rate advances.
A significant portion of these 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. The exercise of this conversion feature 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.
See accompanying notes to condensed consolidated financial statements.
27.
NORTH COUNTRY FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Evaluating the exposure to changes in interest rates includes assessing both the
adequacy of the process used to control interest rate risk and the quantitative
level of exposure. The Corporation's interest rate risk management process seeks
to ensure that appropriate policies, procedures, management information systems,
and internal controls are in place to maintain interest rate risk at prudent
levels with consistency and continuity. In evaluating the quantitative level of
interest rate risk, the Corporation assesses the existing and potential future
effects of changes in interest rates on its financial condition, including
capital adequacy, earnings, liquidity, and asset quality.
In addition to changes in interest rates, the level of future net interest
income is also dependent on a number of variables, including: the growth,
composition and levels of loans, deposits, and other earning assets and
interest-bearing obligations, and economic and competitive conditions; potential
changes in lending, investing, and deposit strategies; customer preferences; and
other factors.
FOREIGN EXCHANGE RISK
In addition to managing interest rate risk, management also actively manages
risk associated with foreign exchange. The Corporation provides foreign exchange
services, makes loans to, and accepts deposits from, Canadian customers
primarily at its banking offices in Sault Ste. Marie, Michigan. To protect
against foreign exchange risk, the Corporation monitors the volume of Canadian
deposits it takes in and then invests these Canadian funds in Canadian
commercial loans and securities. The Corporation entered into a term loan
payable in Canadian dollars during the first quarter of 2005 in order to offset
the foreign exchange exposure due to an asset sensitive position. As of March
31, 2005, the Corporation had excess Canadian liabilities of $.227 million (or
$.207 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.
See accompanying notes to condensed consolidated financial statements.
28.
MACKINAC FINANCIAL CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
As of March 31 2005, 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. Based on that evaluation, the Corporation's management,
including the President and Chief Executive Officer, concluded that 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 included in the Corporation's periodic
SEC filings as of March 31, 2004.
There was no change in the Corporation's internal control over financial
reporting that occurred during the Corporation's fiscal quarter ended March 31,
2005 that has materially affected, or is reasonably likely to materially affect,
the Corporation's internal control over financial reporting.
See accompanying notes to condensed consolidated financial statements.
29.
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 the litigation and arbitration described below. The litigation and
arbitration that is not routine and incidental to the business of banking is
described below. The same litigation and arbitration was previously described in
the Corporation's Annual Report on Form 10-K for the year ended December 31.
2004,
SECURITIES LITIGATION
In an action styled Lanctot v. Littlejohn, et al., filed in the U.S. District
Court for the Western District of Michigan on June 13, 2003, a shareholder of
the Corporation brought a class action against the Corporation, its former
chairman, chief executive officer and director, Ronald G. Ford, and its former
chief executive officer and director, Sherry L. Littlejohn, for alleged
violations of Federal securities laws.
In another action styled Rosen v. North Country Financial Corporation, et al.,
filed in the U.S. District Court for the Western District of Michigan on June
23, 2003, a former shareholder of the Corporation brought a class action against
the Corporation, its former chairman, chief executive officer and director,
Ronald G. Ford, and its former chief executive officer and director, Sherry L.
Littlejohn, for alleged violations of Federal securities laws.
On September 2, 2003, pursuant to 15 U.S.C. Section 78-u-4(a)(3)(B), plaintiff
Charles Lanctot filed a motion requesting the Court to consolidate the two
securities class action cases (Lanctot and Rosen) under the caption In re North
Country Financial Corporation Securities Litigation, to appoint him as "Lead
Plaintiff" in the consolidated cases, and to approve the selection of his
counsel as "Lead Plaintiff's Counsel." In an Order dated September 29, 2003, the
Court among other things consolidated the Lanctot and Rosen actions, designated
Charles D. Lanctot and John F. Stevens as "Lead Plaintiffs," and designated
"Co-Lead Counsel" and "Liaison Counsel" for the class.
On December 1, 2003, the plaintiffs filed their Corrected Consolidated Amended
Class Action Complaint ("Amended Complaint"), which added John F. Stevens as a
plaintiff. The Amended Complaint, which demanded a jury trial, was brought on
behalf of all persons, subject to certain exceptions, who purchased the
Corporation's common stock during the period from November 13, 2000, through
April 15, 2003. It alleged that the Corporation and the individual defendants
violated section 10(b) of the Securities Exchange Act of 1934 (the "Exchange
Act") and Rule 10b-5 of the Securities and Exchange Commission (the "SEC")
issued under the Exchange Act, by disseminating materially false and misleading
statements and/or concealing material adverse facts concerning the financial
condition and operations of the Corporation, with knowledge, or in reckless
disregard, of the materially false and misleading character thereof. The Amended
Complaint also alleged violations of Section 20 of the Exchange Act by the
individual defendants, by reason of their control, at relevant times, of the
Corporation. Among other things, the Amended Complaint was based upon
allegations of 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 of Governors of the Federal Reserve System (the "Board"), the
Federal Deposit Insurance Corporation ("FDIC") Rules and Regulations, and the
Michigan Banking Code of 1999. The Amended Complaint further alleged that the
Corporation's acquisition of American Financial Mortgage, which had an
"unusually large number of defaulted loans . . . which triggered the attention
of banking regulators"; that a Cease and Desist Order, dated March 26, 2002,
which was attached as Exhibit 1 to the Amended Complaint, demonstrated how
defendants made "false statements" in public filings and other communications,
and were required to take "corrective actions;" that various public filings were
"false because the Company's operations resulted in an excessive level of
adversely classified assets, delinquent loans, and nonaccrual loans as well as
an inadequate level of capital protection for the kind and quality of assets
held;" that, "according to former employees, loans for Company insiders and
their related entities were often approved regardless of the quality of the
loan;" and, that the Corporation incorrectly attributed its performance to the
World Trade Center disaster and other factors impacting tourism and hospitality
businesses, instead of disclosing "insider loans," a "disproportionately high
loan concentration" in the hospitality industry, and
30.
MACKINAC FINANCIAL CORPORATION
information about the Corporation's banking practices and loan loss reserves.
The Amended Complaint sought certification of a class consisting of all persons
who purchased the common stock of the Corporation on the open market between the
dates noted above, compensatory damages on a joint and several basis against all
defendants, including the Corporation, plus interest and costs, including
attorney's fees and expert's fees.
On January 23, 2004, the Corporation and the other defendants filed their Joint
Motion to Dismiss the Corrected Consolidated Amended Class Action Complaint,
principally based on the ground that plaintiffs had not adequately plead that
the Corporation, through its officers and directors, acted with the intent to
defraud the investing public under the standard articulated in Helwig v. Vencor,
Inc., 251 F.3d 540 (6th Cir. 2001), cert. dismissed, 536 U.S. 935, 122 S.Ct.
2616 (2002). During the pendency of the motion to dismiss, a stay of "all
discovery and other proceedings" automatically was imposed under 15 U.S.C.
Section 78u-4(b)(3)(B). Plaintiffs filed their Brief in Opposition to
Defendants' Motion to Dismiss on March 8, 2004. Defendants filed a reply brief
in support of their Motion to Dismiss on March 23, 2004. The Court scheduled an
oral argument on the Motion to Dismiss for May 17, 2004.
Shortly before the hearing on the Motion to Dismiss, Plaintiffs, the Corporation
and the individual Defendants and their insurer reached a settlement in
principle of all claims asserted in the consolidated actions. On June 18, 2004,
the parties submitted to the Court their Stipulation of Settlement, which
described in detail the terms and conditions of the settlement. The parties
subsequently modified the Stipulation, which was reflected in the Revised and
Amended Stipulations of Settlement submitted to the Court.
On August 23, 2004, the Court granted conditional approval of the settlement as
set forth in the Second Revised and Amended Stipulation of Settlement. On
October 15, 2004, the Court preliminarily certified a class for purposes of
settlement only, approved a form of notice of hearing to be distributed to class
members, and scheduled a hearing concerning final approval of the settlement. As
modified by a Stipulated Order entered on October 29, 2004, the plaintiffs were
allowed to mail notice of the proposed settlement to members of the class.
Members of the class were permitted to opt out of the class by written request
postmarked no later than November 29, 2004. Members of the class who did not opt
out and who filed written notice no later than November 24, 2004, were permitted
to object to approval of the settlement at the hearing concerning final approval
before the Court.
On December 1, 2004, the Court held the hearing concerning final approval of the
settlement. At the conclusion of the hearing, the Court entered its Order and
Final Judgment, in which the Court (i) certified the action as a class action,
(ii) certified the plaintiff class, (iii) determined the settlement (as modified
by the Order and Final Judgment) to be fair, reasonable, adequate, and in the
best interests of the plaintiff class, (iv) approved the settlement, (v)
specified the claims procedure for members of the plaintiff class, (vi) awarded
fees to counsel for the plaintiff class, and (vii) dismissed the action as to
the plaintiff class and all defendants with prejudice. Under the terms of the
settlement approved by the Court, the settlement fund for the plaintiff class
and its counsel aggregated $750,000, of which the Corporation contributed
$250,000, and the individual defendants contributed $500,000. The amount
contributed by the individual defendants was covered by insurance.
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 Henrickson, 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
31.
MACKINAC FINANCIAL CORPORATION
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, 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.
32.
MACKINAC FINANCIAL 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, consistently 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 has advised the Corporation that it intends to
oppose the motion to dismiss.
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 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.
33.
MACKINAC FINANCIAL CORPORATION
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.
Employment Agreement Arbitration
On September 16, 2003, Ronald G. Ford, the former chairman and chief executive
officer and a former director of the Corporation, initiated an arbitration
proceeding with the American Arbitration Association ("AAA") against the
Corporation seeking monetary damages for alleged breach by the Corporation of
his Amended and Restated Employment Agreement, Chairman Agreement, and Amended
and Restated Consulting Agreement, each with the Corporation. The Corporation
denied the alleged breach and asserted a counterclaim to recover all amounts
paid to Mr. Ford under the Chairman Agreement, as required by the Cease and
Desist Order entered by the FDIC and the OFIS, in addition to other amounts.
On March 19, 2004, at the request of Mr. Ford, AAA reactivated the arbitration
proceeding. Pursuant to its procedures, on June 17, 2004, AAA appointed an
arbitrator to preside over the adjudication of these claims and counterclaims.
On July 13, 2004, the arbitrator convened a scheduling conference at which the
arbitrator adopted the parties' stipulation to stay the arbitration until the
conclusion in the Damon action of the court-appointed disinterested person's
investigation and recommendations concerning the claims of the Virginia M. Damon
Trust, asserted in the name and on behalf of the Corporation, against the
Corporation's former and present officers and directors, including Mr. Ford. At
a further conference held on October 27, 2004, the arbitrator adopted the
parties' stipulation to stay the arbitration until another conference, scheduled
for November 18, 2004.
Following a further stipulated stay of the arbitration proceeding, the
Corporation and Mr. Ford entered into a Release and Settlement Agreement as of
December 7, 2004. The Corporation and Mr. Ford each released certain claims
against the other specified in the Release and Settlement Agreement, and the
Bank paid Mr. Ford $20,000 for his minority ownership interest in two
subsidiaries of the Bank. The Release and Settlement Agreement, the terms of
which were consented to by the FDIC and the Michigan Office of Financial and
Insurance Services, resulted in the termination with prejudice of the AAA
arbitration proceeding.
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 shareholder's derivative actions described above.
34.
MACKINAC FINANCIAL CORPORATION
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.
35.
MACKINAC FINANCIAL CORPORATION
SIGNATURE
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)
5/13/05 By: /s/ Paul D. Tobias
- --------- ------------------------------------
Date PAUL D. TOBIAS,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(principal executive officer)
By: /s/ Ernie R. Krueger
------------------------------------
ERNIE R. KRUEGER
SENIOR VICE PRESIDENT /CONTROLLER
(principal accounting officer)
36.
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.