MFNC Mackinac Financial Corporation

Mackinac Financial Corporation (Nasdaq:MFNC) (the “Corporation”), the bank holding company for mBank, today announced second quarter 2017 income of $1.680 million, or $.27 per share, compared to a loss of $.125 million or ($.02) per share for the second quarter of 2016.  Net income for the first six months of 2017 totaled $3.406 million, or $.54 per share, compared to $1.007 million, or $.16 per share, for the same period in 2016.  Total assets of the Corporation at June 30, 2017 totaled $1.027 billion, compared to $892.328 million at June 30, 2016.  Weighted average shares for 2017 totaled 6,282,551, compared to 6,220,906 shares in the same period of 2016.

The period-to-period comparison above includes the effect of the Corporation’s April 2016 acquisition of First National Bank of Eagle River (“Eagle River”).  In connection with this acquisition, the Corporation had GAAP pre-tax transaction related expenses totaling $2.516 million recorded in the second quarter of 2016. These costs, largely associated with the early termination of the Eagle River data processing system, reduced the reported net income for the 2016 second quarter by $1.712 million, or $.27 per share, on an after-tax basis.  The adjusted net income for the second quarter of 2016 (exclusive of the transaction related expenses) would equate to $1.588 million, or $.25 per share.  Adjusted net income for the first six months of 2016 for the Corporation was $2.770 million, or $.45 per share. 

Highlights for the first six months of 2017 include:

• mBank, the Corporation’s subsidiary bank, recorded six-month net income of $4.113 million compared to $1.807 million in 2016.  Excluding $2.216 million of transaction related expenses at the bank ($1.462 million after tax), net income was $3.270 million for the first six months of 2016, equating to a 26% increase, as adjusted, compared to the same period in 2017.     
• The Corporation and mBank surpassed the billion-dollar asset threshold during the quarter and ended the period at $1.027 billion and $1.023 billion of total assets, respectively. 
• Total interest income of $21.462 million through June 2017 compared to $17.403 million for the same period in 2016. 
• Net interest margin remains solid, at 4.21%. Net interest income increased from $15.284 million in 2016 to $18.485 million in 2017, a 21% increase. 
• Credit quality remains strong with a Texas Ratio of 9.91% 
• Continued momentum in the asset based lending division, Mackinac Commercial Credit (“MCC”), with loan production of $16.1 million, an increase of 200% from the same period of 2016.

Loans and Nonperforming Assets

Total loans at June 30, 2017 were $790.753 million an increase from $725.635 million at June 30, 2016, of which approximately $28.0 million is attributable to the August 2016 Niagara Bancorporation (“Niagara”) acquisition. In addition to the balance sheet totals, the Corporation services $210.160 million of sold mortgage loans and $40.097 million of sold SBA and USDA loans. Total loans under management as of second quarter end were $1.041 billion. 

New loan production totaled $131.0 million, with the Upper Peninsula contributing $59.8 million, the Northern Lower Peninsula $26.2 million, Southeast Michigan $17.5 million, Wisconsin $11.4 million and MCC, $16.1 million.  Commercial loan production accounted for $63.7 million of the total, with consumer loans, primarily 1-4 family mortgages, totaling $51.2 million, inclusive of $30.0 million of secondary market origination. Commenting on new loan production and overall lending activities, Kelly W. George, President and CEO of mBank stated, “We are pleased to have had consistent loan production thus far in 2017 compared to 2016 in a changing origination environment from years past.  We have accomplished good loan activity in light of increased interest rates that challenge both sides of our balance sheet in terms of garnering acceptable margins for fixed rate loans to support growth. The seasonality of our business and markets has kicked in with significant new loan fundings in July and we anticipate the remaining third quarter and early fourth quarter will remain an active period for lending originations throughout all lines of business.  Proactive officer calling efforts and business development initiatives continue to be a primary focus within all our markets and business segments given the changing lending landscape and the outlook for potential future upward rate moves from the Fed.”       Nonperforming assets totaled $7.798 million, or .76% of total assets at June 30, 2017 compared to $6.813 million, or .76% of total assets at June 30, 2016.  Total loan delinquencies greater than 30 days resided at a nominal .59%, or $4.693 million. George, commenting on credit quality stated, “Our loan portfolio remains sound with no material weaknesses showing in any of the different loan segments during the first half of this year and continued strong payment performance with very nominal levels of problem assets and delinquent obligations. We remain diligent in both the micro aspects of underwriting credits, as well as identifying and avoiding the macro risks associated with concentrations of different types of commercial loans we are cautious to put on our balance sheet. Certain types of commercial real-estate loans we may have looked to adjudicate in prior years have been passed on this year given acceptable returns could not be garnered for the structure or industry type risk of such credits. Maintaining a diverse client base and prudently mixed loan portfolio of business and retail loans remains highly important as we continue to grow, should another economic or real estate downturn occur as we seek to avoid overreliance on any one type of loan or segment.”        

Margin/Deposit Analysis

Net interest income for the first six months of 2017 increased to $18.485 million, a 4.21% net interest margin compared to $15.284 million, or 4.25%, in 2016.  Total deposits of $848.245 million June 30, 2017 included approximately $54 million in deposits acquired with the Niagara acquisition. The growth of total deposits was approximately $110 million year-over-year.  George, commenting on core deposits and overall liquidity, stated “The Corporation maintains a strong short-term liquidity position made up of various components of core and wholesale funding sources, as well as unpledged investments to support loan growth and operations. We review the mix of funding sources through various internal committees to ensure it is appropriate as we seek to maximize margin dollars while remaining competitive in terms of pricing to procure in-market core deposits and grow our client base. Focus on deposits has become especially important with changing client banking habits and demographics, as well as customer desire for more electronic and mobile based banking products and services. In June, we secured some longer-term bulk funding with a 4-year $25 million FHLB borrowing to help support new fixed rate commercial lending originations and lock in margin given the outlook for continued rising interest rates. It is becoming more and more difficult to sell variable rate loans in the upward rate environment and maintaining the longer term structural integrity of our balance sheet is critically important to ensure consistent earnings growth year over year, rather than stretch for short term gains in the current year.”

Noninterest Income/Expense

Noninterest income, at $1.571 million, was a $.048 million increase over the June 30, 2016 level of $1.523 million. Noninterest expense was $14.694 million for the first half of 2017 compared to $15.091 million for the same period of 2016.  The 2016 total included $2.516 million of transaction-related expenses. Excluding these charges, noninterest expense totaled $12.575 million.  The largest increase from 2016 was in salaries and benefits and other areas directly impacted by increased operating scale primarily related to the acquisitions of Eagle River and Niagara. The Corporation was able to achieve the expected level of cost efficiencies contemplated with the 2016 acquisitions.

Assets and Capital

Total assets of the Corporation at June 30, 2017 were $1.027 billion, up $135.122 million from the $892.328 million of total assets at June 30, 2016.  Total common shareholders’ equity at June 30, 2017 was $81.313 million, or $12.92 per share, compared to $77.081 million, or $12.38 per share at June 30, 2016.  Capital levels remain consistent with past periods as Tier 1 Common Equity resided at 6.93% of average assets at the Corporation and 9.14% at mBank. 

In closure, Chairman and CEO of the Corporation Paul D. Tobias stated, “We are very pleased with the consistency of our earnings for the first half of 2017 as well as their improvement over the same period of 2016.  The scale that we have achieved through both organic growth and acquisitions is beginning to materialize since direct costs of the transactions were all recognized last year.  We believe reaching $1 billion in assets is an important milestone for the Corporation.  With our growth, we will certainly be subject to change in various areas of our company, however, what will not change is our focus on serving our valued clients and investing in the communities, both legacy and acquired, where we conduct business.  We are very excited about the direction of the Corporation and increased opportunities to increase shareholder value through acquisitions and organic growth.” 

Mackinac Financial Corporation is a registered bank holding company formed under the Bank Holding Company Act of 1956 with assets in excess of $1 billion 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 24 branch locations; twelve in the Upper Peninsula, four in the Northern Lower Peninsula, one in Oakland County, Michigan and seven in Northern Wisconsin.  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,” “view,” 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
						As of and For the			As of and For the			As of and For the
						Period Ending			Year Ending			Period Ending
						June 30,			December 31,			June 30,
(Dollars in thousands, except per share data)							2017			2016			2016
						(Unaudited)						(Unaudited)
Selected Financial Condition Data (at end of period):
Assets						$	1,027,450		$	983,520		$	892,328
Loans							790,753			781,857			725,635
Investment securities							82,212			86,273			71,114
Deposits							848,245			823,512			738,363
Borrowings							92,024			67,579			70,604
Shareholders' equity							81,313			78,609			77,081
Selected Statements of Income Data (six months and year ended):
Net interest income						$	18,485		$	33,098		$	15,284
Income before taxes							5,162			6,766			1,566
Net income							3,406			4,483			1,007
Income per common share - Basic						.54			.72				.16
Income per common share - Diluted						.54			.72				.16
Weighted average shares outstanding							6,282,551			6,236,067			6,220,906
Weighted average shares outstanding- Diluted							6,298,515			6,268,703			6,241,367
Three Months Ended:
Net interest income						$	9,319		$	9,118		$	7,996
Income before taxes							2,547			2,500			(151	)
Net income							1,680			1,698			(125	)
Income per common share - Basic						.27			.27				(.02	)
Income per common share - Diluted						.27			.27				(.02	)
Weighted average shares outstanding							6,294,930			6,263,371			6,227,730
Weighted average shares outstanding- Diluted							6,307,883			6,316,452			6,256,386
Selected Financial Ratios and Other Data:
Performance Ratios:
Net interest margin							4.21	%		4.19	%		4.25	%
Efficiency ratio							71.61			79.69			89.10
Return on average assets						.70			.52				.26
Return on average equity							8.57			5.73			2.58
Average total assets						$	982,374		$	865,573		$	785,881
Average total shareholders' equity							80,158			78,300			78,383
Average loans to average deposits ratio							95.38	%		98.14	%		101.68	%
Common Share Data at end of period:
Market price per common share						$	13.99		$	13.47		$	11.01
Book value per common share							12.92			12.55			12.38
Tangible book value per share							11.69			11.29			11.23
Dividends paid per share, annualized						.480			.400				.400
Common shares outstanding							6,294,930			6,263,371			6,226,246
Other Data at end of period:
Allowance for loan losses						$	5,133		$	5,020		$	4,733
Non-performing assets						$	7,798		$	8,906		$	6,813
Allowance for loan losses to total loans						.65		%	.64		%		.65	%
Non-performing assets to total assets						.76		%	.91		%		.76	%
Texas ratio							9.91	%		11.76	%		9.13	%
Number of:
Branch locations							24			23			20
FTE Employees							235			222			209

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
	June 30,				December 31,				June 30,
		2017				2016				2016
	(Unaudited)								(Unaudited)
ASSETS
Cash and due from banks	$	78,972			$	44,620			$	40,226
Federal funds sold		10,006				2,135				9
Cash and cash equivalents		88,978				46,755				40,235
Interest-bearing deposits in other financial institutions		14,312				14,047				7,184
Securities available for sale		82,212				86,273				71,114
Federal Home Loan Bank stock		3,250				2,911				2,639
Loans:
Commercial		559,388				543,573				503,508
Mortgage		212,306				218,171				206,007
Consumer		19,059				20,113				16,120
Total Loans		790,753				781,857				725,635
Allowance for loan losses		(5,133	)			(5,020	)			(4,733	)
Net loans		785,620				776,837				720,902
Premises and equipment		16,654				15,891				14,699
Other real estate held for sale		4,050				4,782				3,492
Deferred tax asset		6,639				8,760				10,147
Deposit based intangibles		2,047				2,172				1,992
Goodwill		5,694				5,694				5,173
Other assets		17,994				19,398				14,751
TOTAL ASSETS	$	1,027,450			$	983,520			$	892,328
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest bearing deposits	$	156,970			$	164,179			$	149,435
NOW, money market, interest checking		259,423				286,622				251,140
Savings		61,741				58,315				48,978
CDs<$250,000		143,169				141,629				130,053
CDs>$250,000		10,077				8,489				5,417
Brokered		216,865				164,278				153,340
Total deposits		848,245				823,512				738,363
Federal funds purchased		-				6,000				-
Borrowings		92,024				67,579				70,604
Other liabilities		5,868				7,820				6,280
Total liabilities		946,137				904,911				815,247
SHAREHOLDERS' EQUITY:
Common stock and additional paid in capital - No par value
Authorized - 18,000,000 shares
Issued and outstanding - 6,294,930; 6,263,371; and 6,231,246 shares respectively		61,782				61,583				61,283
Retained earnings		19,101				17,206				14,982
Accumulated other comprehensive income
Unrealized gains (losses) on available for sale securities		508				(102	)			865
Minimum pension liability		(78	)			(78	)			(49	)
Total shareholders' equity		81,313				78,609				77,081
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,027,450			$	983,520			$	892,328

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
		Three Months Ended								Six Months Ended
		June 30,								June 30,
			2017				2016				2017				2016
		(Unaudited)								(Unaudited)
INTEREST INCOME:
Interest and fees on loans:
Taxable		$	10,260			$	8,684			$	20,217			$	16,644
Tax-exempt			19				13				52				15
Interest on securities:
Taxable			396				304				795				566
Tax-exempt			75				26				154				57
Other interest income			116				66				244				121
Total interest income			10,866				9,093				21,462				17,403
INTEREST EXPENSE:
Deposits			1,054				771				2,013				1,540
Borrowings			493				326				964				579
Total interest expense			1,547				1,097				2,977				2,119
Net interest income			9,319				7,996				18,485				15,284
Provision for loan losses			50				150				200				150
Net interest income after provision for loan losses			9,269				7,846				18,285				15,134
OTHER INCOME:
Deposit service fees			268				248				540				464
Income from loans sold on the secondary market			316				339				614				606
SBA/USDA loan sale gains			89				166				149				166
Mortgage servicing income			(9	)			(8	)			(17	)			(62	)
Net security gains			-				12				-				109
Other			131				139				285				240
Total other income			795				896				1,571				1,523
OTHER EXPENSE:
Salaries and employee benefits			3,658				3,519				7,455				6,906
Occupancy			776				640				1,561				1,280
Furniture and equipment			544				425				1,025				808
Data processing			489				333				950				678
Advertising			174				181				297				337
Professional service fees			405				257				726				498
Loan and deposit			155				155				334				282
Writedowns and losses on other real estate held for sale			243				(14	)			255				2
FDIC insurance assessment			189				117				346				225
Telephone			134				122				291				234
Transaction related expenses			-				2,449				-				2,516
Other			750				709				1,454				1,325
Total other expenses			7,517				8,893				14,694				15,091
Income before provision for income taxes			2,547				(151	)			5,162				1,566
Provision for income taxes			867				(26	)			1,756				559
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS			1,680				(125	)			3,406				1,007
INCOME PER COMMON SHARE:
Basic		$	.27			$	(.02	)		$	.54			$	.16
Diluted		$	.27			$	(.02	)		$	.54			$	.16

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,
		2017			2016			2016
	(Unaudited)			(Unaudited)			(Unaudited)
Commercial Loans:
Real estate - operators of nonresidential buildings	$	114,129		$	121,861		$	111,523
Hospitality and tourism		73,109			68,025			48,295
Lessors of residential buildings		30,719			27,590			26,662
Gasoline stations and convenience stores		19,903			20,509			20,582
Logging		18,143			19,903			19,203
Commercial construction		10,145			11,505			18,576
Other		293,240			274,180			258,667
Total Commercial Loans		559,388			543,573			503,508
1-4 family residential real estate		200,771			205,945			194,167
Consumer		19,059			20,113			16,120
Consumer construction		11,535			12,226			11,840
Total Loans	$	790,753		$	781,857		$	725,635

Credit Quality (at end of period):
	June 30,			December 31,			June 30,
		2017			2016			2016
	(Unaudited)			(Unaudited)			(Unaudited)
Nonperforming Assets :
Nonaccrual loans	$	3,644		$	3,959		$	3,177
Loans past due 90 days or more		-			-			-
Restructured loans		104			165			144
Total nonperforming loans		3,748			4,124			3,321
Other real estate owned		4,050			4,782			3,492
Total nonperforming assets	$	7,798		$	8,906		$	6,813
Nonperforming loans as a % of loans	.47		%	.53		%	.46		%
Nonperforming assets as a % of assets	.76		%	.91		%	.76		%
Reserve for Loan Losses:
At period end	$	5,133		$	5,020		$	4,733
As a % of average loans	.65		%	.64		%	.73		%
As a % of nonperforming loans		136.95	%		121.73	%		142.52	%
As a % of nonaccrual loans		140.86	%		126.80	%		148.98	%
Texas Ratio		9.91	%		11.76	%		9.13	%
Charge-off Information (year to date):
Average loans	$	784,823		$	703,047		$	652,573
Net charge-offs (recoveries)	$	88		$	584		$	421
Charge-offs as a % of average
loans, annualized	.02		%	.08		%	.13		%

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL HIGHLIGHTS
	QUARTER ENDED
	(Unaudited)
	June 30				March 31				December 31				September 30				June 30,
		2017				2017				2016				2016				2016
BALANCE SHEET (Dollars in thousands)
Total loans	$	790,753			$	786,546			$	781,857			$	756,804			$	725,635
Allowance for loan losses		(5,133	)			(5,146	)			(5,020	)			(4,862	)			(4,733	)
Total loans, net		785,620				781,400				776,837				751,942				720,902
Total assets		1,027,450				976,635				983,520				959,121				892,328
Core deposits		621,303				633,160				650,745				660,867				579,606
Noncore deposits		226,942				188,660				172,767				146,313				158,757
Total deposits		848,245				821,820				823,512				807,180				738,363
Total borrowings		92,024				66,279				67,579				67,730				70,604
Total shareholders' equity		81,313				80,009				78,609				78,285				77,081
Total tangible equity		73,572				72,205				70,743				70,356				69,916
Total shares outstanding		6,294,930				6,294,930				6,263,371				6,263,371				6,226,246
Weighted average shares outstanding		6,294,930				6,270,034				6,263,371				6,238,756				6,227,730
AVERAGE BALANCES (Dollars in thousands)
Assets	$	984,236			$	980,491			$	958,781			$	930,353			$	834,674
Loans		787,143				782,477				771,279				734,702				689,462
Deposits		820,375				825,309				800,508				780,265				679,183
Equity		81,013				79,293				78,406				78,027				79,481
INCOME STATEMENT (Dollars in thousands)
Net interest income	$	9,319			$	9,166			$	9,118			$	8,696			$	7,996
Provision for loan losses		50				150				250				200				150
Net interest income after provision		9,269				9,016				8,868				8,496				7,846
Total noninterest income		795				776				1,141				1,489				896
Total noninterest expense		7,517				7,177				7,509				7,285				8,893
Income before taxes		2,547				2,615				2,500				2,700				(151	)
Provision for income taxes		867				889				802				922				(26	)
Net income available to common shareholders	$	1,680			$	1,726			$	1,698			$	1,778			$	(125	)
Income pre-tax, pre-provision	$	2,597			$	2,765			$	2,750			$	2,900			$	(1	)
PER SHARE DATA
Earnings	$	.27			$	.28			$	.27			$	.29			$	(.02	)
Book value  per common share		12.92				12.71				12.55				12.50				12.38
Tangible book value per share		11.69				11.47				11.29				11.23				11.23
Market value, closing price		13.99				13.72				13.47				11.49				11.01
Dividends per share		.120				.120				.100				.100				.100
ASSET QUALITY RATIOS
Nonperforming loans/total loans		.47		%		.47		%		.53		%		.62		%		.46		%
Nonperforming assets/total assets		.76				.84				.91				.83				.76
Allowance for loan losses/total loans		.65				.65				.64				.64				.65
Allowance for loan losses/nonperforming loans		136.95				137.96				121.73				104.13				142.52
Texas ratio		9.91				10.60				11.76				10.55				9.13
PROFITABILITY RATIOS
Return on average assets		.68		%		.71		%		.70		%		.76		%		(.06	)	%
Return on average equity		8.32				8.83				8.62				9.06				(.63	)
Net interest margin		4.24				4.19				4.14				4.18				4.19
Average loans/average deposits		95.95				94.81				96.35				94.16				101.51
CAPITAL ADEQUACY RATIOS
Tier 1 leverage ratio		7.02		%		6.77		%		7.18		%		7.29		%		7.68		%
Tier 1 capital to risk weighted assets		8.57				8.49				8.80				8.22				8.76
Total capital to risk weighted assets		9.21				9.15				9.45				8.81				9.39
Average equity/average assets (for the quarter)		8.23				8.09				8.18				8.39				9.52
Tangible equity/tangible assets (at quarter end)		7.22				7.45				7.25				7.40				7.90

Contact:
Paul D. Tobias, (248) 290-5901 / ptobias@bankmbank.com
Jesse A. Deering, (248) 290-5906 /jdeering@bankmbank.com
Website: www.bankmbank.com