Mackinac Financial Corporation Reports Six Month and Second Quarter 2014 Results

MANISTIQUE, MI--(Marketwired - Jul 30, 2014) - Mackinac Financial Corporation (NASDAQ: MFNC), the bank holding company for mBank (the "Bank"), today announced second quarter 2014 income of $.806 million or $.15 per share compared to net income available to common shareholders of $1.197 million, or $.22 per share for the second quarter of 2013. Operating results for the first six months of 2014 totaled $1.466 million or $.27 per share compared to $1.873 million or $.34 per share for the same period in 2013. The consolidated operating results for 2014 were impacted by costs associated with strategic initiatives. The Corporation incurred $.272 million of expenses related to acquisition initiatives and also recorded an after tax loss from the asset based lending subsidiary of $.297 million. The combination of these two initiatives had a negative after tax impact of $.477 million, or $.09 per share.

Weighted average shares totaled 5,529,290 shares for the six month period in 2014 and 5,527,690 shares in the 2014 second quarter compared to 5,557,842 shares for the six month period and 5,556,133 shares in the second quarter of 2013.

The Corporation's subsidiary, mBank, recorded net income of $2.404 million for the first six months of this year compared to $2.538 million for the same period in 2013. The largest adverse variance was noninterest income as it decreased primarily as a result of a reduced level of fees and gains on the sale of loans from secondary market mortgage lending of $.365 million from prior year period given the national mortgage refinance slowdown.

Total assets of the Corporation at June 30, 2014 were $595.869 million, up 7.65% from the $553.501 million reported at June 30, 2013 and up 4.03% from the $572.800 million of total assets at year-end 2013. The Corporation and the Bank are both "well-capitalized" with Tier 1 Capital at both the Corporation and the Bank of 10.50%.

Key highlights for the first six months of 2014 results include:

• Continued strong credit quality with a Texas Ratio of 6.43% compared to 9.02% one year ago, with nonperforming assets of $4.599 million, a $1.865 million reduction from a year earlier.
  
  

• Healthy new loan growth, with six-month production of $86 million and balance sheet growth of $19 million.
  
  

• Net interest income in the first half of 2014 increased to $11.252 million, 4.21%, compared to $10.425 million, or 4.17%, in the first half of 2013.
  
  

• Continued success in SBA/USDA lending with gains on the sale of these loans of $.549 million, compared to $.663 million a year earlier.
  
  

• The recent announcement of the pending acquisition of Peninsula Bank, a 127-year old, $132 million asset bank headquartered in the Upper Peninsula with six banking locations in Marquette County.
  

Loans and Nonperforming Assets

Total loans at June 30, 2014 were $502.940 million, a 10.40% increase from the $455.555 million at June 30, 2013 and up $19.108 million from year-end 2013 total loans of $483.832 million. In addition to the aforementioned balance sheet totals, the company services $138 million of sold mortgage loans and $60 million of sold SBA and USDA loans. Total loans under management now reside at $701 million.

New loan production totaled $85.8 million with the Upper Peninsula contributing $52.3 million, the Northern Lower Peninsula $14.8 million and Southeast Michigan $18.7 million. Commercial loan production accounted for $55.9 million of the six month total, with consumer, primarily 1-4 family mortgages of $29.9 million. Commenting on new loan production and overall lending activities, Kelly W. George, President and CEO of mBank stated, "We were pleased with our overall continued success in new loan production for the first half of 2014 in light of the very harsh and elongated winter in Northern Michigan where the majority of our lending activities reside. The weather stymied business development especially within the retail loan segments. Loan balance growth did accelerate in the second quarter with good activity in all of our markets and lending segments, and our pipeline remains good moving into the remainder of the year."

Nonperforming loans totaled $2.652 million, .53% of total loans at June 30, 2014 compared to $3.983 million, or .87% of total loans at June 30, 2013 and up $.628 million from December 31, 2013. Nonperforming assets were reduced by $1.865 million from a year ago and stood at .77% of total assets and equated to $4.599 million. Total loan delinquencies greater than 30 days resided at a nominal .63% or $3.145 million. George, commenting on credit quality, stated, "Our micro credit risk metrics and overall loan portfolio payment performance remains strong. We are diligent within our loan origination structures and will not stretch our prudent lending parameters for new loans. From a macro perspective, our loan origination mix and concentrations remain well manageable and will improve with the mix and types of loans that will be acquired in the Peninsula Bank acquisition."

Margin Analysis

Net interest income in the first half of 2014 increased to $11.252 million, 4.21%, compared to $10.425 million, or 4.17%, in the first half of 2014. George stated, "The growth of our net interest income and stability of our net interest margin is a direct reflection of our continued pricing discipline for loans and deposits within our various markets. We will continue our efforts to maintain our strong net interest margin within this historically low interest rate cycle though the use of continued targeted funding strategies and disciplined loan pricing and terms in efforts to mitigate longer term interest rate risk. We will remain committed to our core banking philosophy which emphasizes loan growth as the best asset to invest in to benefit and help grow the economic bases in our local communities, which in turn also provides for the best overall returns to our shareholders."

Deposits

Total deposits of $484.016 million at June 30, 2014 increased by 8.06% from deposits of $447.907 million on June 30, 2013 and were up $17.717 million from year-end deposits $466.299 million. The overall increase in deposits for the first six months of 2014 from year-end is comprised of an increase in core deposits, mostly in certificates of deposits. George, commenting on core deposits and overall liquidity needs, stated, "The Corporation maintains a strong liquidity position to fund operations and loan growth, especially as we move through the seasonal quarters where many of our lodging and tourism clients are the busiest. We will also utilize alternative funding sources such as internet CDs and small levels of wholesale deposits when deemed necessary to structure different liabilities to match asset durations, and cover any potential short term funding gaps that could arise."

Noninterest Income/Expense

Noninterest income, at $1.341 million in the first half of 2014, decreased $.668 million from the first half 2013 level of $2.009 million. Noninterest income decreased primarily as a result of a reduced level of fees and gains on the sale of loans from secondary market mortgage lending of $.336 million from prior year period. Noninterest expense, at $10.005 million in the first half of 2014, increased $1.171 million, or 13.26% from the same period in 2013. The largest increase from the first half of 2013 was in salaries and benefits, largely reflective of the compensation packages for the staff up of our asset based lending subsidiary formed in the third quarter of 2013. We also had increased occupancy costs between periods due primarily to our new Marquette branch office, which we moved into late in 2013. We incurred some additional legal costs as well in the first half of 2014 for the exploration of an acquisition and additional SEC filing work needed this year.

Assets and Capital

Total assets of the Corporation at June 30, 2014 were $595.869 million, up 7.65% from the $553.501 million reported at June 30, 2013 and up $23.069 million from the $572.800 million of total assets at year-end 2013. The increase in assets during the first half of 2014 was primarily loan growth.

Total common shareholders' equity at June 30, 2014 was $66.477 million, or $12.03 per share, compared to $62.520 million, or $11.26 per share on June 30, 2013, an increase of $3.950 million, or 6.31 %.

Paul D. Tobias, Chairman and Chief Executive Officer, concluded, "We are very excited about our recently announced acquisition of Peninsula State Bank. This marks a milestone for your Corporation as we seek to merge with the second oldest community bank in Michigan. This fine bank is within our largest and growing commerce hub in the Upper Peninsula. We expect this acquisition to be accretive in 2014 and beyond. In addition, our organic growth will be enhanced when our asset based lending subsidiary grows to a level that sustains profitability later this year. This new business is complementary to our commercial lending and to our SBA/USDA efforts. We expect our returns from both of these initiatives to produce positive returns on our investment and add to shareholder value in the near future."

Mackinac Financial Corporation is a registered bank holding company formed under the Bank Holding Company Act of 1956 with assets in excess of $590 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 Company'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 Company 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
(Dollars in thousands, except per share data)		June 30, 2014				December 31, 2013				June 30, 2013
		(Unaudited)								(Unaudited)
Selected Financial Condition Data (at end of period):
Assets		$	595,869			$	572,800			$	553,501
Loans			502,940				483,832				455,555
Investment securities			47,374				44,388				47,307
Deposits			484,016				466,299				447,907
Borrowings			42,087				37,852				35,925
Common Shareholders' Equity			66,477				65,249				62,520
Shareholders' equity			66,477				65,249				66,520
Selected Statements of Income Data (six months and year ended):
Net interest income		$	11,252			$	21,399			$	10,425
Income before taxes and preferred dividend			2,214				5,534				3,125
Net income			1,466				5,629				1,873
Income per common share - Basic*			.27				1.01				.34
Income per common share - Diluted*			.26				1.00				.34
Weighted average shares outstanding			5,529,290				5,558,313				5,557,842
Weighted average shares outstanding- Diluted			5,623,192				5,650,058				5,557,842
Three Months Ended:
Net interest income		$	5,659			$	5,626			$	5,269
Income before taxes and preferred dividend			1,220				1,057				1,897
Net income			806				2,910				1,197
Income per common share - Basic			.15				.52				.22
Income per common share - Diluted*			.15				.51				.22
Weighted average shares outstanding*			5,527,690				5,555,952				5,556,133
Weighted average shares outstanding- Diluted			5,557,563				5,555,952				5,556,133
Selected Financial Ratios and Other Data:
Performance Ratios:
Net interest margin			4.21	%			4.17	%			4.17	%
Efficiency ratio			78.95				67.46				70.22
Return on average assets			.51				1.01				.69
Return on average common equity			4.51				9.07				6.13
Return on average equity			4.51				8.26				5.41
Average total assets		$	580,934			$	555,152			$	544,887
Average common shareholders' equity			65,508				62,082				61,590
Average total shareholders' equity			65,508				68,172				69,847
Average loans to average deposits ratio			103.78	%			103.46	%			104.26	%
Common Share Data at end of period:
Market price per common share		$	12.90			$	9.90			$	8.88
Book value per common share		$	12.03			$	11.77			$	11.26
Common shares outstanding			5,527,690				5,541,390				5,554,459
Other Data at end of period:
Allowance for loan losses		$	5,097			$	4,661			$	5,177
Non-performing assets		$	4,599			$	3,908			$	6,464
Allowance for loan losses to total loans			1.01	%			.96	%			1.14	%
Non-performing assets to total assets			.77	%			.68	%			1.17	%
Texas ratio			6.43	%			5.59	%			9.02	%
Number of:
Branch locations			11				11				11
FTE Employees			134				133				128
*Earnings per share data for 2012 restated for common stock issuance

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
					June 30,				December 31,				June 30,
					2014				2013				2013
					(Unaudited)								(Unaudited)
ASSETS
Cash and due from banks					$	20,744			$	18,216			$	26,216
Federal funds sold						2				3				3
Cash and cash equivalents						20,746				18,219				26,219
Interest-bearing deposits in other financial institutions						235				10				10
Securities available for sale						47,374				44,388				47,307
Federal Home Loan Bank stock						3,060				3,060				3,060
Loans:
	Commercial					374,565				359,368				343,561
	Mortgage					113,332				110,663				98,559
	Consumer					15,043				13,801				13,435
		Total Loans				502,940				483,832				455,555
			Allowance for loan losses			(5,097	)			(4,661	)			(5,177	)
	Net loans					497,843				479,171				450,378
Premises and equipment						9,790				10,210				10,536
Other real estate held for sale						1,947				1,884				2,481
Deferred tax asset						9,097				9,933				8,367
Other assets						5,777				5,925				5,143
TOTAL ASSETS					$	595,869			$	572,800			$	553,501
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
	Noninterest bearing deposits				$	73,732			$	72,936			$	64,736
	NOW, money market, interest checking					148,242				149,123				146,203
	Savings					15,658				13,039				12,229
	CDs < $100,000					143,140				140,495				134,767
	CDs > $100,000					23,151				23,159				25,091
	Brokered					80,093				67,547				64,881
		Total deposits				484,016				466,299				447,907
	Borrowings					42,087				37,852				35,925
	Other liabilities					3,289				3,400				3,149
		Total liabilities				529,392				507,551				486,981
SHAREHOLDERS' EQUITY:
	Preferred stock - No par value:
		Authorized - 500,000 shares, none issued and outstanding				-				-				4,000
	Common stock and additional paid in capital - No par value
		Authorized - 18,000,000 shares
		Issued and outstanding - 5,527,690; 5,541,390 and 5,557,859 respectively				53,703				53,621				53,934
		Retained earnings				12,325				11,412				8,156
		Accumulated other comprehensive income				449				216				430
			Total shareholders' equity			66,477				65,249				66,520
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY					$	595,869			$	572,800			$	553,501

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
				Three Months Ended						Six Months Ended
				June 30,						June 30,
				2014			2013			2014			2013
				(Unaudited)						(Unaudited)
INTEREST INCOME:
	Interest and fees on loans:
		Taxable		$	6,373		$	6,014		$	12,654		$	11,903
		Tax-exempt			-			28			23			55
	Interest on securities:
		Taxable			244			241			481			481
		Tax-exempt			14			6			27			13
	Other interest income				32			32			80			63
		Total interest income			6,663			6,321			13,265			12,515
INTEREST EXPENSE:
	Deposits				800			886			1,622			1,763
	Borrowings				204			166			391			327
		Total interest expense			1,004			1,052			2,013			2,090
Net interest income					5,659			5,269			11,252			10,425
Provision for loan losses					191			100			374			475
Net interest income after provision for loan losses					5,468			5,169			10,878			9,950
OTHER INCOME:
	Deposit service fees				192			175			349			337
	Income from loans sold on the secondary market				139			279			242			578
	SBA/USDA loan sale gains				166			554			548			663
	Mortgage servicing income				89			182			102			285
	Other				64			61			100			146
		Total other income			650			1,251			1,341			2,009
OTHER EXPENSE:
	Salaries and employee benefits				2,523			2,375			5,064			4,681
	Occupancy				546			363			1,084			745
	Furniture and equipment				303			255			622			525
	Data processing				288			268			574			533
	Advertising				123			111			230			215
	Professional service fees				276			320			607			545
	Loan and deposit				83			45			162			118
	Writedowns and losses on other real estate held for sale				14			87			14			89
	FDIC insurance assessment				90			95			175			200
	Telephone				82			63			164			145
	Other				570			541			1,309			1,038
		Total other expenses			4,898			4,523			10,005			8,834
Income before provision for income taxes					1,220			1,897			2,214			3,125
Provision for income taxes					414			637			748			1,052
NET INCOME					806			1,260			1,466			2,073
Preferred dividend and accretion of discount					-			63			-			200
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS				$	806		$	1,197		$	1,466		$	1,873
INCOME PER COMMON SHARE:
	Basic			$	.15		$	.22		$	.27		$	.34
	Diluted			$	.15		$	.22		$	.26		$	.34

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
LOAN PORTFOLIO AND CREDIT QUALITY
(Dollars in thousands)
Loan Portfolio Balances (at end of period):
				June 30,			December 31,			June 30,
				2014			2013			2013
				(Unaudited)			(Unaudited)			(Unaudited)
	Commercial Loans:
	Real estate - operators of nonresidential buildings			$	103,598		$	100,333		$	95,510
	Hospitality and tourism				42,111			45,360			42,833
	Lessors of residential buildings				14,912			14,191			13,377
	Gasoline stations and convenience stores				11,881			11,534			11,038
	Real estate agents and managers				11,388			10,922			9,472
	Commercial construction				10,550			10,904			16,053
	Other				180,125			166,124			155,278
		Total Commercial Loans			374,565			359,368			343,561
	1-4 family residential real estate				105,868			103,768			94,254
	Consumer				15,043			13,801			13,435
	Consumer construction				7,464			6,895			4,305
		Total Loans		$	502,940		$	483,832		$	455,555

Credit Quality (at end of period):
				June 30,				December 31,				June 30,
				2014				2013				2013
				(Unaudited)				(Unaudited)				(Unaudited)
	Nonperforming Assets :
	Nonaccrual loans			$	2,055			$	1,410			$	3,983
	Loans past due 90 days or more				-				-				-
	Restructured loans				597				614				-
		Total nonperforming loans			2,652				2,024				3,983
	Other real estate owned				1,947				1,884				2,481
		Total nonperforming assets		$	4,599			$	3,908			$	6,464
	Nonperforming loans as a % of loans				.53	%			.42	%			.87	%
	Nonperforming assets as a % of assets				.77	%			.68	%			1.17	%
	Reserve for Loan Losses:
	At period end			$	5,097			$	4,661			$	5,177
	As a % of average loans				1.04	%			1.01	%			1.14	%
	As a % of nonperforming loans				192.19	%			230.29	%			129.98	%
	As a % of nonaccrual loans				248.03	%			330.57	%			129.98	%
	Texas Ratio				6.43	%			5.59	%			9.02	%
	Charge-off Information (year to date):
		Average loans		$	489,656			$	462,500			$	453,023
		Net charge-offs (recoveries)		$	(62	)		$	2,232			$	516
		Charge-offs as a % of average loans			N/M	%			.48	%			.23	%

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL HIGHLIGHTS
			QUARTER ENDED
			(Unaudited)
			June 30,				March 31,				December 31,				September 30,				June 30,
			2014				2014				2013				2013				2013
BALANCE SHEET (Dollars in thousands)
Total loans			$	502,940			$	485,862			$	483,832			$	472,495			$	455,555
Allowance for loan losses				(5,097	)			(4,883	)			(4,661	)			(4,959	)			(5,177	)
	Total loans, net			497,843				480,979				479,171				467,536				450,378
Total assets				595,869				583,592				572,800				567,917				553,501
Core deposits				380,772				384,846				375,593				375,166				357,935
Noncore deposits				103,244				90,864				90,706				86,522				89,972
	Total deposits			484,016				475,710				466,299				461,688				447,907
Total borrowings				42,087				38,852				37,852				35,852				35,925
Common shareholders' equity				66,477				65,730				65,249				63,045				62,520
Total shareholders' equity				66,477				65,730				65,249				67,045				66,520
Total shares outstanding				5,527,690				5,527,690				5,541,390				5,581,339				5,554,459
Weighted average shares outstanding				5,527,690				5,530,908				5,555,952				5,562,835				5,556,133
AVERAGE BALANCES (Dollars in thousands)
Assets			$	581,150			$	580,717			$	569,443			$	560,089			$	548,455
Loans				492,923				486,354				479,321				464,324				456,937
Deposits				469,720				473,951				461,630				456,191				439,780
Common Equity				65,553				65,462				62,950				62,134				62,483
Equity				65,553				65,462				66,906				66,134				67,483
INCOME STATEMENT (Dollars in thousands)
Net interest income			$	5,659			$	5,593			$	5,626			$	5,348			$	5,269
Provision for loan losses				191				183				825				375				100
	Net interest income after provision			5,468				5,410				4,801				4,973				5,169
Total noninterest income				650				691				1,191				738				1,251
Total noninterest expense				4,898				5,107				4,935				4,359				4,523
Income before taxes				1,220				994				1,057				1,352				1,897
Provision for income taxes				414				334				(1,911	)			456				637
	Net income			806				660				2,968				896				1,260
Preferred dividend expense				-				-				58				50				63
Net income available to common shareholders			$	806			$	660			$	2,910			$	846			$	1,197
PER SHARE DATA
Earnings			$	.15			$	.12			$	.52			$	.15			$	.22
Book value per common share				12.03				11.89				11.77				11.30				11.26
Market value, closing price				12.90				12.54				9.90				9.10				8.88
ASSET QUALITY RATIOS
Nonperforming loans/total loans				.53	%			.31	%			.42	%			.91	%			.87	%
Nonperforming assets/total assets				.77				.63				.68				1.21				1.17
Allowance for loan losses/total loans				1.01				1.01				.96				1.09				1.14
Allowance for loan losses/nonperforming loans				192.19				327.50				230.29				114.98				129.98
Texas ratio (1)				6.43				5.18				5.59				9.56				9.02
PROFITABILITY RATIOS
Return on average assets				.56	%			.46	%			2.03	%			.60	%			.88	%
Return on average common equity				4.93				4.09				18.34				5.40				7.69
Return on average equity				4.93				4.09				17.26				5.08				7.12
Net interest margin				4.18				4.25				4.24				4.12				4.16
Efficiency ratio				77.55				80.57				66.94				70.64				68.02
Average loans/average deposits				104.94				102.62				103.83				101.78				103.90
CAPITAL ADEQUACY RATIOS
Tier 1 leverage ratio				10.50	%			10.25	%			10.31	%			10.90	%			11.01	%
Tier 1 capital to risk weighted assets				11.86				11.79				11.83				12.45				12.74
Total capital to risk weighted assets				12.87				12.79				12.79				13.47				13.85
Average equity/average assets (for the quarter)				11.28				11.27				11.75				11.81				12.30
Tangible equity/tangible assets (at quarter end)				11.16				11.26				11.75				11.81				12.30
(1)Texas ratio equals nonperforming assets divided by shareholders' equity plus allowance for loan losses