SOURCE: Mackinac Financial Corporation

Mackinac Financial Corporation

February 09, 2012 14:34 ET

Mackinac Financial Corporation Announces 2011 Results of Operations With Improved Profitability and Asset Quality

MANISTIQUE, MI--(Marketwire - Feb 9, 2012) - Mackinac Financial Corporation (NASDAQ: MFNC), the holding Corporation for mBank, reported a net income of $1.452 million or $.42 per share, for the year ended December 31, 2011, compared to a net loss of $1.160 million, or $(.34) per share, for 2010. Weighted average shares outstanding for both years amounted to 3,419,736. Book value per share increased from 2010 year-end of $12.63 to $12.97 for the end of 2011. The Corporation's primary asset, mBank, recorded net income of $2.7 million for the fiscal year 2011 compared to $83,000 for 2010.

2011 operations of the Corporation benefited primarily from three key drivers. (1) The Corporation recorded significantly lower credit related expenses with the loan loss provision and ORE write-downs totaling $3.437 million in 2011 compared to $9.253 million in 2010. (2) Growth in the Corporation's average net interest margin improved substantially from 3.66% in 2010 to 4.06% in 2011, with a December 2011 margin of 4.54%. (3) Non-interest income recognition of $1.500 million in gains on the sale of SBA and USDA guaranteed loans compared to $.868 million in 2010.

Listed below are some key points relative to our 2011 results:

Improved Credit Quality

  • We had an overall reduction in nonperforming assets from $16.125 million at the end of 2010 to $11.155 million at the end of 2011 as we continued with our timely and aggressive problem asset remediation plans to strengthen our balance sheet. Our Texas Ratio at 2011 year-end was reduced to 18.43% and is one of the lowest amongst the 15 largest public banks headquartered in Michigan. As noted above, the resolution of problem assets during 2011 positively impacted our earnings which should result in reduced credit related expenses for 2012.

Core Deposit Growth

  • We grew core bank deposits by $58.111 million while decreasing wholesale deposits by $40.631 million, therefore reducing overall balance sheet risk. We experienced core deposit growth in all of our markets, with $27 million in Northern Lower Michigan, $8 million in Southeast Michigan and $23 million in the Upper Peninsula. A good portion of our 2011 deposit growth occurred in low cost transactional accounts which grew by $24.402 million and positively impacted our margin.

Margin Improvement

  • The margin improvement was largely attributed to the growth in core deposits of $58 million which allowed for the repayment of higher priced wholesale deposits. The cost of funds declined in 2011 to 1.33% from 1.60% in 2010. Rates on earning assets increased from 5.10% in 2010 to 5.22% in 2011, due in large part to our disciplined loan pricing, which we expect to continue for 2012 to increase the overall margin.

Strong Loan Production

  • We continued to experience good new loan demand with approximately $173 million of new loan production split between commercial related credits accounting for $104 million, and consumer/mortgage loans totaling $69 million. At 2011 year-end, the Corporation's loans stood at $401.246 million, an increase from the 2010 year-end balances of $383.086 million. Our total outstanding loans increased by $18.160 million after reductions for loan sales, (SBA/USDA and secondary market) amortization and payoffs which accounted for the difference in production and balance sheet growth. Some of the payoffs were associated with the elimination of problem assets and unexpected payoffs of several larger participation loans. As loan demand has been anemic for some banks, we have witnessed the trend of large banks buying back participations. Most importantly, we continue to be highly successful in producing well priced high quality loans in the Upper Peninsula with 2011 loan production of $95 million. In 2011, we began to see resurgence in loan opportunities in Northern Lower Michigan with production of $48 million and also Southeast Michigan with production of $30 million.

Growth in Noninterest Income

  • In 2011 we continued to be a state leader in the origination of sound SBA and USDA guaranteed loans with total fee income of $1.500 million in 2011 compared to $.868 million in fee income during 2010. Sold guaranteed loans totaled $19 million in 2011 compared to $12.6 million in 2010. The Corporation is still seeing average premiums in the 107% range and higher.

  • Increased consumer loan production from $59 million in 2010 to $69 million in 2011 which helped augment higher levels secondary market fee income of $700,000 in 2011 compared to $539,000 in 2010. At 2011 year-end, our mortgage loans servicing portfolio totaled $50 million which provides future refinancing/cross selling opportunities and also is a provider of a stable source of core deposits since many of these clients maintain various types of checking and savings accounts.

  • Late in 2011, we established mBank Title Insurance Agency, LLC, in conjunction with the Michigan Bankers' Association. This agency will offer title services for both commercial and retail based mortgage transactions in all of our markets. This initiative provides another enhancement to noninterest income and is moving ahead well.

Manistique Papers Bankruptcy and Rehabilitation

  • As mentioned in our third quarter press release, mBank has been the lead lender and facilitator in the hopeful rehabilitation and restoration of the local paper mill that has been in existence for over 90 years. The paper mill is the 2nd largest private employer with approximately 150 local well-paying jobs and has been working through a Chapter 11 bankruptcy proceeding since late last summer, with an eventual anticipated asset sale in the first quarter of 2012 to a new owner/operator. With the assistance of the Michigan Economic Development Corporation (MEDC), mBank was able to avert a full Chapter 7 liquidation of the mill after a shut down by the previous out of town lender. mBank, through the purchase of the senior secured term debt and by providing a new debtor in possession line of credit for needed working capital enabled the mill to reopen and begin making paper again last September. This reopening provided the time for mill management to seek a buyer which would provide fresh capital and operating leverage in order to return the mill to profitable operations and keep it a vital member of the local business community.

Loans and Nonperforming Assets

Nonperforming assets decreased by $4.970 million, from $16.125 million at 2010 year end to $11.155 million at year end 2011. Nonperforming loans totaled $7.993 million, or 1.99% of total loans at December 31, 2011, compared to 2.76% of loans at 2010 year end, with 2011 year-end nonaccrual loans at $5.490 million, 1.37% of total loans, a reduction from 1.55% at year-end 2010. Nonperforming assets at December 31, 2011 represented 2.24% of total assets, compared to 3.37% of total assets at December 31, 2010. Kelly W. George, President and CEO of mBank, commented, "We are pleased with our execution in reducing problem loans and ORE from the Corporation's balance sheet this year and believe that current carrying values of problem assets fairly represent exit valuations. We continue to reassess collateral valuations and estimates of the future value of the remaining cash flows to ensure timely resolution of problem assets in the most cost effective manner."

As noted above, new loan production was strong this year. Within the markets the Corporation serves, we are seeing and reviewing more bankable lending opportunities than in previous years. Overall loan production increased from $114 million in 2010 to $173 million in 2011 and our pipeline remains steady moving into 2012. Commenting on overall loan production, George stated, "The continued use of the various government lending programs such as the SBA, USDA, and also the MEDC, have enabled the Corporation to be a catalyst for the on-going rehabilitation of a state that was significantly damaged by the recession and real estate downturn in the late 2000's, by providing the needed capital and lending resources to help clients grow and purchase stable Michigan businesses. We have also allocated additional resources and lending focus on growing and providing increased funding for consumers to acquire, or refinance their primary residence, and other retail related assets."

Assets and Deposits

Total assets of the Corporation at December 31, 2011 were $498.311 million, an increase of $19.615 million from 2010 year end assets of $478.696 million. Total deposits increased from $386.779 million at the end of 2010 to $404.789 million at 2011 year end. Mr. George, commenting on the deposit growth, stated, "In 2011, our primary initiative was to continue with the growth in the Bank's core deposit base building on the momentum and 2010 growth of $80 million. We are pleased with our results this year with $58 million of new core deposits. This translates into real franchise value and reduces our overall balance sheet risk from a regulatory perspective by providing a more stable and low cost funding base."

Noninterest Income/Expense

We have been successful in enhancing noninterest revenue beyond traditional deposit product fees over the past several years. This has been challenging given the changes in traditional overdraft charges and checking account fees. Noninterest income, excluding extraordinary items, increased in 2011 to $3.656 million from $2.580 million in 2010 and $2.072 million in 2009. We also understand the importance of cost control, especially in times of economic slowdown. In 2011, we reduced our efficiency ratio to 68.43% from 72.57%, which is a product of our cost control efforts and growth in noninterest income. The Bank's overall non-interest expense base remains slightly below peer at 2.89% of total average assets but should decline further with the improvements in asset quality noted above. Personnel expense for the Bank, at 1.45% of total average assets, compares favorably to peer levels of 1.50%.

Shareholders' Equity

Shareholders' equity totaled $55.263 million at December 31, 2011, compared to $53.882 million at the end of 2010, an increase of $1.381 million. This increase includes the consolidated net income of $1.452 million, the accretion on preferred stock of $.215 million and the $.287 million decrease in equity due to the decline in the market value of held-for-sale investments. Capital remains strong at the Corporation with a Tier 1 ratio of 10.08% and Total Risk Based Capital of 12.87%. The Bank is also well capitalized with a Tier 1 ratio of 9.24% and Total Risk Based Capital of 11.90%.

Chairman and CEO of Mackinac Financial Corporation Mr. Paul Tobias concluded, "We look forward to 2012 as a year of transition. We have weathered the financial storm and are well positioned to accelerate core earnings and explore growth opportunities. Our ongoing initiatives are to continue to grow core deposits and control expenses. We welcome the future challenges of franchise expansion in order to transform the growth in common shareholders' equity into market value realization."

Mackinac Financial Corporation is a registered bank holding Corporation formed under the Bank Holding Corporation Act of 1956 with assets in excess of $495 million and whose common stock is traded on the NASDAQ stock market as "MFNC." The principal subsidiary of the Corporation is mBank. Headquartered in Manistique, Michigan, mBank has 11 branch locations; seven in the Upper Peninsula, three in the Northern Lower Peninsula and one in Oakland County, Michigan. The Corporation's banking services include commercial lending and treasury management products and services geared toward small to mid-sized businesses, as well as a full array of personal and business deposit products and consumer loans.

Forward-Looking Statements

This release contains certain forward-looking statements. Words such as "anticipates," "believes," "estimates," "expects," "intends," "should," "will," and variations of such words and similar expressions are intended to identify forward-looking statements: as defined by the Private Securities Litigation Reform Act of 1995. These statements reflect management's current beliefs as to expected outcomes of future events and are not guarantees of future performance. These statements involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Factors that could cause a difference include among others: changes in the national and local economies or market conditions; changes in interest rates and banking regulations; the impact of competition from traditional or new sources; and the possibility that anticipated cost savings and revenue enhancements from mergers and acquisitions, bank consolidations, branch closings and other sources may not be fully realized at all or within specified time frames as well as other risks and uncertainties including but not limited to those detailed from time to time in filings of the Corporation with the Securities and Exchange Commission. These and other factors may cause decisions and actual results to differ materially from current expectations. Mackinac Financial Corporation undertakes no obligation to revise, update, or clarify forward-looking statements to reflect events or conditions after the date of this release.

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL HIGHLIGHTS
For The Years Ended December 31,
(Dollars in thousands, except per share data) 2011 2010
(Unaudited) (Unaudited)
Selected Financial Condition Data (at end of period):
Assets $ 498,311 $ 478,696
Loans 401,246 383,086
Investment securities 38,727 33,860
Deposits 404,789 386,779
Borrowings 35,997 36,069
Common Shareholders' Equity 44,342 43,176
Shareholders' equity 55,263 53,882
Selected Statements of Income Data:
Net interest income $ 17,929 $ 16,385
Income(loss) before taxes and preferred dividend 3,316 (3,918 )
Net income (loss) 1,452 (1,160 )
Income(loss) per common share - Basic .42 (.34 )
Income(loss) per common share - Diluted .41 (.34 )
Weighted average shares outstanding 3,419,736 3,419,736
Weighted average shares outstanding- Diluted 3,500,204 3,479,897
Selected Financial Ratios and Other Data:
Performance Ratios:
Net interest margin 4.06 % 3.66 %
Efficiency ratio 68.43 72.57
Return on average assets .30 (.23 )
Return on average common equity 3.30 (2.64 )
Return on average equity 2.66 (2.06 )
Average total assets $ 489,539 $ 502,993
Average common shareholders' equity $ 43,940 $ 43,981
Average total shareholders' equity $ 54,561 $ 56,171
Average loans to average deposits ratio 98.05 % 94.36 %
Common Share Data at end of period:
Market price per common share $ 5.42 $ 4.58
Book value per common share $ 12.97 $ 12.63
Common shares outstanding 3,419,736 3,419,736
Other Data at end of period:
Allowance for loan losses $ 5,251 $ 6,613
Non-performing assets $ 11,155 $ 16,125
Allowance for loan losses to total loans 1.31 % 1.73 %
Non-performing assets to total assets 2.24 % 3.37 %
Texas ratio 18.43 % 26.66 %
Number of:
Branch locations 11 11
FTE Employees 116 110

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
(Dollars in thousands) 2011 2010
(Unaudited) (Audited)
ASSETS
Cash and due from banks $ 20,071 $ 22,719
Federal funds sold 13,999 12,000
Cash and cash equivalents 34,070 34,719
Interest-bearing deposits in other financial institutions 10 713
Securities available for sale 38,727 33,860
Federal Home Loan Bank stock 3,060 3,423
Loans:
Commercial 311,215 297,047
Mortgage 83,106 80,756
Installment 6,925 5,283
Total Loans 401,246 383,086
Allowance for loan losses (5,251 ) (6,613 )
Net loans 395,995 376,473
Premises and equipment 9,627 9,660
Other real estate held for sale 3,162 5,562
Deferred tax asset 8,427 9,028
Other assets 5,233 5,258
TOTAL ASSETS $ 498,311 $ 478,696
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Non-interest-bearing deposits $ 51,273 $ 41,264
Interest-bearing deposits:
NOW, Money Market, Checking 152,563 134,703
Savings 14,203 17,670
CDs < $100,000 130,685 96,977
CDs > $100,000 23,229 22,698
Brokered 32,836 73,467
Total deposits 404,789 386,779
Borrowings:
Federal funds purchased - -
Short-term - 20,000
Long-term 35,997 16,069
Total borrowings 35,997 36,069
Other liabilities 2,262 1,966
Total liabilities 443,048 424,814
Shareholders' equity:
Preferred stock - No par value:
Authorized 500,000 shares, no shares outstanding 10,921 10,706
Common stock and additional paid in capital - No par value
Authorized - 18,000,000 shares
Issued and outstanding - 3,419,736 shares

43,525

43,525
Accumulated earnings (deficit) 492 (961 )
Accumulated other comprehensive income (loss) 325 612
Total shareholders' equity 55,263 53,882
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 498,311 $ 478,696

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data) For The Years Ended December 31,
2011 2010 2009
INTEREST INCOME: (Unaudited) (Audited) (Audited)
Interest and fees on loans:
Taxable $ 21,627 $ 21,091 $ 20,521
Tax-exempt 147 188 292
Interest on securities:
Taxable 1,162 1,406 2,783
Tax-exempt 28 28 19
Other interest income 108 127 93
Total interest income 23,072 22,840 23,708
INTEREST EXPENSE:
Deposits 4,530 5,607 6,431
Borrowings 613 848 990
Total interest expense 5,143 6,455 7,421
Net interest income 17,929 16,385 16,287
Provision for loan losses 2,300 6,500 3,700
Net interest income after provision for loan losses 15,629 9,885 12,587
OTHER INCOME:
Service fees 832 990 1,023
Net security gains (1 ) 215 1,471
Income from loans sold 2,200 1,407 830
Mortgage servicing rights 400 - -
Other 225 183 1,427
Total other income 3,656 2,795 4,751
OTHER EXPENSES:
Salaries and employee benefits 7,275 6,918 6,583
Occupancy 1,376 1,313 1,385
Furniture and equipment 827 806 805
Data processing 761 740 862
Professional service fees 756 627 603
Loan and deposit 1,137 910 792
ORE writedowns and losses on sale 1,137 2,753 208
FDIC Insurance Assessment 849 957 839
Telephone 215 193 187
Advertising 351 297 322
Other 1,285 1,084 1,216
Total other expenses 15,969 16,598 13,802
Income before provision for income taxes 3,316 (3,918 ) 3,536
Provision for (benefit of) income taxes 1,098 (3,500 ) 1,120
NET INCOME(LOSS) $ 2,218 $ (418 ) $ 2,416
Preferred dividend expense 766 742 509
NET INCOME(LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 1,452 $ (1,160 ) $ 1,907
INCOME(LOSS) PER COMMON SHARE
Basic $ .42 $ (.34 ) $ .56
Diluted $ .41 $ (.34 ) $ .56

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
LOAN PORTFOLIO AND CREDIT QUALITY
(Dollars in thousands)
Loan Portfolio Balances (at end of period):
December 31, December 31,
2011 2010
(Unaudited) (Audited)
Commercial Loans:
Real estate - operators of nonresidential buildings $ 75,391 $ 58,114
Hospitality and tourism 33,306 37,737
Operators of nonresidential buildings 16,499 16,598
Real estate agents and managers 10,617 15,857
Other 155,657 135,411
Total Commercial Loans 291,470 263,717
1-4 family residential real estate 77,332 75,074
Consumer 6,925 5,283
Construction:
Commercial 19,745 33,330
Consumer 5,774 5,682
Total Loans $ 401,246 $ 383,086

Credit Quality (at end of period):
December 31, December 31,
2011 2010
(Unaudited) (Audited)
Nonperforming Assets :
Nonaccrual loans $ 5,490 $ 5,921
Loans past due 90 days or more - -
Restructured loans 2,503 4,642
Total nonperforming loans 7,993 10,563
Other real estate owned 3,162 5,562
Total nonperforming assets $ 11,155 $ 16,125
Nonperforming loans as a % of loans 1.99 % 2.76 %
Nonperforming assets as a % of assets 2.24 % 3.37 %
Reserve for Loan Losses:
At period end $ 5,251 $ 6,613
As a % of average loans 1.35 % 1.72 %
As a % of nonperforming loans 65.69 % 62.61 %
As a % of nonaccrual loans 95.65 % 111.69 %
Texas Ratio 18.43 % 26.66 %
Charge-off Information (year to date):
Average loans $ 388,115 $ 384,347
Net charge-offs $ 3,662 $ 5,112
Charge-offs as a % of average loans .94 % 1.33 %

MACKINAC FINANCIAL CORPORATION
QUARTERLY FINANCIAL HIGHLIGHTS
QUARTER ENDED
(Unaudited)
December 31, September 30, June 30, March 31, December 31,
2011 2011 2011 2011 2010
BALANCE SHEET (Dollars in thousands)
Total loans $ 401,246 $ 391,903 $ 394,812 $ 374,609 $ 383,086
Allowance for loan losses (5,251 ) (5,838 ) (6,155 ) (6,184 ) (6,613 )
Total loans, net 395,995 386,065 388,657 368,425 376,473
Intangible assets - - - - -
Total assets 498,311 498,598 492,373 492,790 478,696
Core deposits 348,724 346,843 329,958 315,638 290,614
Noncore deposits (1) 56,065 58,215 69,709 85,145 96,165
Total deposits 404,789 405,058 399,667 400,783 386,779
Total borrowings 35,997 35,997 36,069 36,069 36,069
Common shareholders' equity 44,342 44,613 43,973 43,340 43,176
Total shareholders' equity 55,263 55,479 54,784 54,097 53,882
Total shares outstanding 3,419,736 3,419,736 3,419,736 3,419,736 3,419,736
AVERAGE BALANCES (Dollars in thousands)
Assets $ 487,304 $ 497,333 $ 494,481 $ 478,861 $ 488,320
Loans 396,197 397,665 378,250 380,066 385,296
Deposits 390,940 403,957 401,549 386,743 393,266
Common Equity 44,325 44,176 43,363 43,147 44,333
Equity 55,219 54,998 54,138 53,870 55,015
INCOME STATEMENT (Dollars in thousands)
Net interest
income
$ 4,901 $ 4,709 $ 4,178 $ 4,141 $ 4,276
Provision for loan losses 1,300 400 600 - 1,800
Net interest income after provision 3,601 4,309 3,578 4,141 2,476
Total noninterest income 725 1,006 1,348 577 747
Total noninterest expense 4,221 3,960 3,729 4,059 4,037
Income before taxes 105 1,355 1,197 659 (814 )
Provision for income taxes 27 455 402 214 1,093
Net income 78 900 795 445 (1,907 )
Preferred dividend expense 192 193 192 189 185
Net income available to common shareholders $ (114 ) $ 707 $ 603 $ 256 $ (2,092 )
PER SHARE DATA
Earnings $ (.03 ) $ .21 $ .18 $ .07 $ (.61 )
Book value per common share 12.97 13.05 12.86 12.67 12.63
Market value, closing price 5.42 5.46 6.00 6.02 4.58
ASSET QUALITY RATIOS
Nonperforming loans/total loans 1.99 % 2.47 % 2.39 % 2.66 % 2.76 %
Nonperforming assets/total assets 2.24 2.99 2.89 3.05 3.37
Allowance for loan losses/total loans 1.31 1.49 1.56 1.65 1.73
Allowance for loan losses/
nonperforming loans
65.69 60.35 65.19 62.06 62.61
Texas ratio (2) 18.43 24.28 23.38 24.96 26.66
PROFITABILITY RATIOS
Return on average assets (.09 )% .56 % .49 % .22 % (1.70 )%
Return on average common equity (1.02 ) 6.35 5.58 2.40 (18.72 )
Return on average equity (.82 ) 5.10 4.47 1.92 (15.09 )
Net interest margin 4.38 4.14 3.79 3.92 3.88
Efficiency ratio 67.51 67.39 67.84 75.73 65.05
Average loans/average deposits 101.34 98.44 94.20 98.27 97.97
CAPITAL ADEQUACY RATIOS
Tier 1 leverage ratio 10.08 % 9.73 % 9.50 % 9.70 % 9.25 %
Tier 1 capital to risk weighted assets 11.62 11.65 11.40 11.61 11.36
Total capital to risk weighted assets 12.87 12.97 12.66 12.86 12.62
Average equity/average assets 11.33 11.06 10.95 11.25 11.27
Tangible equity/tangible assets 11.33 11.06 10.95 11.25 11.27
(1) Noncore deposits includes Internet CDs, brokered deposits and CDs greater than $100,000
(2) Texas ratio equals nonperforming assets divided by shareholders' equity plus allowance for loan losses

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