MFNC - Mackinac Financial Corporation Reports 2019 Third Quarter Results

MANISTIQUE, Mich., Oct. 31, 2019 (GLOBE NEWSWIRE) -- Mackinac Financial Corporation (Nasdaq: MFNC) (the “Corporation”), the bank holding company for mBank, today announced 2019 third quarter net income of $3.72 million, or $.35 per share, compared to 2018 third quarter net income of $3.07 million, or $.29 per share.  The 2018 third quarter results included expenses related to the acquisitions of First Federal of Northern Michigan (“FFNM”) and Lincoln Community Bank (“Lincoln”), which had an after-tax impact of $276 thousand on earnings.  Adjusted net income (net of transaction related expenses) for the third quarter of 2018 was $3.35 million or $.31 per share.  Third quarter 2019 net income, compared to 2018 third quarter adjusted net income, increased by $373 thousand, or 11%.

Net income for the first three quarters of 2019 was $10.56 million, or $.98 per share, compared to $5.00 million, or $.60 per share for the same period of 2018.  When giving effect to after-tax transaction related expenses of $2.08 million for the first three quarters, adjusted nine-month net income for 2018 was $7.08 million, or $.85 per share.  The year-over-year increase in net income for the first three quarters was $3.47 million, or 49% when giving effect to the transaction expenses in 2018.  

Total assets of the Corporation at September 30, 2019 were $1.36 billion, compared to $1.25 billion at September 30, 2018.  Weighted average shares outstanding for the third quarter of 2019 were 10,740,712, compared to 10,712,745 for the same period of 2018. Shareholders’ equity at September 30, 2019 totaled $160.17 million, compared to $149.37 million at September 30, 2018.  Book value per share equated to $14.91 at the end of the third quarter 2019, compared to $13.94 per share a year ago.  Tangible book value at quarter-end was $135.38 million, or $12.60 per share, compared to $124.61 million, or $11.63 per share, at the end of the third quarter 2018. 

Additional notes:

• mBank, the Corporation’s primary asset, recorded year-to-date net income of $11.33 million for the first nine months of 2019, compared to $6.73 million for the same period of 2018. The 2018 nine-month results included expenses related to the acquisition of FFNM and Lincoln, which had an after-tax impact of $1.47 million on earnings.  Adjusted bank net income (net of transaction related expenses) for the first three quarters of 2018 was $8.20 million, equating to a year-over-year increase of $3.13 million, or 38%.  The increase in net income equated to an improvement in Return on Average Assets at the bank from .80% (.97% as adjusted) for the first nine months of 2018 to 1.14% for the same period of 2019.
   
• On August 28, 2019, the Corporation announced a common stock repurchase program authorizing the buyback of up to 5% of outstanding MFNC shares.  There is no guarantee as to the exact number of shares, if any, that will be repurchased by the Corporation, and the Corporation may discontinue purchases at any time that management determines additional purchases are not warranted. The Board’s approval of this program reflects its confidence in the Corporation’s intrinsic value. Repurchasing stock is one means of underscoring the Corporation’s commitment to enhancing shareholder value and it is a tool for proactive capital management.
   
• On September 17, 2019, the Corporation’s board of directors declared a cash dividend of $.14 per common share for the third quarter of 2019. The dividend was an increase of $.02 per share from the prior quarter’s dividend and represents a 17% increase in the annualized dividend from $.48 per share to $.56 per share.
   
• Total core bank deposits have increased $74.30 million (or 7.7%) in the first nine months of 2019 through more proactive sales activity in the treasury management line of business and increased marketing efforts in key retail markets where the Corporation has achieved some success in obtaining high value clients.
   
• Reliance on higher-cost brokered deposits continues to decrease significantly from $136.76 million, or 12.46% of total deposits at year-end 2018, to a second quarter 2019 balance of $114.10 million, or 10.23% of total deposits, to $78.50 million, or 6.57% of total deposits, as of the end of the third quarter of 2019.
   
• Third quarter 2019 net interest margin remained solid at 4.39%.  Core operating margin for the third quarter, which is net of accretive yield from purchase accounting treatment on acquired loans (“accretion”), was 4.26%.  

Revenue

Total revenue of the Corporation for third quarter 2019 was $17.91 million, compared to $16.63 million for the third quarter of 2018.  Total interest income for the quarter ended September 30, 2019 was $16.03 million, compared to $15.29 million for the same period in 2018. The 2019 third quarter interest income included $404 thousand from accretion associated with acquisitions.  Accretion was $1.01 million for the same period of 2018.  The year-over-year change in accretive yield was mainly associated with the normal level-yield accounting treatment for acquired loan portfolios. 

Loan Production and Portfolio Mix

Total balance sheet loans at September 30, 2019 were $1.06 billion, compared to September 30, 2018 balances of $993.81 million.  Total loans under management reside at $1.36 billion, which includes $303.78 million of service retained loans.  Loan production for the third quarter of 2019 was $104.58 million, compared to $99.99 million for the third quarter of 2018.  Overall loan production for the first nine months of 2019 was $289.15 million, compared to $203.97 million for the same period of 2018, an increase of $85.18 million, or 42%.  Increased production was evident in all lines of business and across the entire market footprint, but driven primarily through commercial lending activities, which were up $74 million year-over-year. New production efforts have resulted in year-to-date 2019 organic balance sheet loan growth of $21.08 million, or annualized growth of approximately 3%. 

Overall Quarterly Loan Production:? https://www.globenewswire.com/NewsRoom/AttachmentNg/cfea46ae-1ce2-47a0-acec-b57ac41d0612

2019 New Loan Production: https://www.globenewswire.com/NewsRoom/AttachmentNg/25910576-ab7e-4c19-b204-f9549a60dfa6

Payoff activity, outside of normal amortization, continued to constrain portfolio growth with approximately $99 million of total principal reduction ahead of original terms through the third quarter of 2019. Of this amount, $65.7 million came from the commercial portfolio with $21.8 million of the total being related to borrowers divesting of the collateral and $23.3 million being refinanced out at pricing or terms that the Corporation was not able or willing to compete with.  As noted in the charts below, the loan portfolio remains well balanced and diversified in terms of geography and loan type.  

Total Loans by Region September, 2019: https://www.globenewswire.com/NewsRoom/AttachmentNg/642e7d36-fbbe-4a66-8fa7-aec431de51ea

MFNC Composition of Loans September, 2019: https://www.globenewswire.com/NewsRoom/AttachmentNg/9828c2fa-2428-460a-8ee5-5fda73903ec5

Commenting on new loan production and overall lending activities, President of the Corporation and President and CEO of mBank Kelly W. George stated, “We are pleased with our nine-month 2019 lending trends in the wake of some continued payoff activity and the rate cuts that occurred in the third quarter, which applied increased pricing pressure for fixed rate commercial loans, a trend we expect to continue going forward.  We continue to see good loan opportunities in all our markets, both on the commercial and retail side, with a solid pipeline moving through the end of the year and into 2020. Given the downward rate environment shift, management has pivoted to ensure that our margin is well maintained and that growth is in the form of ongoing profitable loans that will ensure the long-term integrity of the company’s well-matched balance sheet. We will continue to proactively monitor and try to reduce payoff activity on the commercial side, given the continued competitive pressure for good loans from all types of lending conduits.  However, we will not stretch to retain credits within the portfolio that could apply undue stress and negatively impact our balance sheet in the long-term from either a macro composition or a micro individual credit level perspective if adverse changes in overall economic conditions in our regions were to occur.”

Credit Quality

Nonperforming loans totaled $4.86 million, or .46% of total loans at September 30, 2019, compared to $4.53 million, or .46% of total loans at September 30, 2018. Total loan delinquencies greater than 30 days resided at a nominal .84%, compared to .97% at September 30, 2018.  The nonperforming assets to total assets ratio resided at .55% for third quarter of 2019, compared to .53% for the third quarter of 2018.

Commenting on overall credit risk, Mr. George stated, “We have seen no material signs of any credit issues on a systematic or individual credit basis within our loan book.  There has been no indication of softening credit quality through increased payment period times for legacy clients or material deterioration in commercial client financial statements in any of our core industries in which we lend.  Purchase accounting marks from the previously acquired banks have continued to prove accurate, attaining expected accretion levels, which should continue into future periods on the normal accretion schedule.”

Margin Analysis and Funding

Net interest income for the third quarter of 2019 was $13.32 million, with $404 thousand of accretion, resulting in a Net Interest Margin (“NIM”) of 4.39%, compared to $13.21 million in the third quarter of 2018, with $1.01 million of accretion and a NIM of 4.60%.  Core operating margin, which is net of accretion from acquired loans, was 4.26% for the third quarter 2019 and 4.24% for the same period of 2018.  Comparatively, net interest income for the second quarter of 2019 resided at $14.00 million ($741 thousand of accretion), a NIM of 4.76% and core NIM of 4.43%.  As illustrated in the chart below, core NIM remains comparatively strong but was impacted, as were the margins of most banks, by the Federal Reserve Bank (the “Fed”) rate moves in the third quarter and the effect of these moves on the Corporation’s variable based loan portfolio. 

Margin Analysis Per Quarter: https://www.globenewswire.com/NewsRoom/AttachmentNg/b495cd15-03ef-4d94-9c71-385836cc936f

Total bank deposits (excluding brokered deposits) have increased by $132.33 million year-over-year from $902.74 million at September 30, 2018 to $1.04 billion at third quarter-end 2019 as a result of the Lincoln acquisition (approximately $53.00 million) and organic efforts (approximately $79.33 million).  Total brokered deposits have decreased significantly and were $78.50 million at September 30, 2019, compared to $125.32 million at September 30, 2018, a decrease of 43%.  FHLB (Federal Home Loan Bank) and other borrowings were slightly increased from $70.08 million at the end of the third quarter 2019 from $58.22 million at the end of the third quarter 2018.  This slight increase was due to the Corporation opportunistically extending duration of roughly $25 million of liability funding taking advantage of the inverted yield curve, given the overall duration of wholesale funding remains very short.

Funding Sources September, 2019: https://www.globenewswire.com/NewsRoom/AttachmentNg/18b6cc95-2117-4d93-afc4-a704337a3acd

Funding Sources September, 2019: https://www.globenewswire.com/NewsRoom/AttachmentNg/4934b6de-3e78-4095-8fc0-f2c9df007341

Mr. George stated, “The Corporation’s margin remains strong despite the two recent Fed rate cuts with continued focus on pricing of both the loan and deposit portfolio.  We expect some core margin compression from the Fed activity as we continue to proactively review traditional bank product offerings to maintain a competitive position with local peers, as well as regional and national banks.  We were able to adjust some liability pricing in concert with the rate moves and some term liabilities, i.e. brokered deposits, are being paid off or rolled over at lesser rates as they mature.   With our bank deposits up roughly $74 million since year-end 2018, our strong liquidity position has allowed for continued reduction in higher cost brokered deposits over the course of the first three quarters of 2019.  We have significantly lessened our reliance on wholesale funding while maintaining a shorter duration to allow for continued repricing of most brokered CD’s in a timely manner given the rate forecast. Our focus on new core deposit procurement remains a key initiative for 2019 and into 2020, which has provided some nice procurement of new high value clients.  We will look to continue to wind down our wholesale funding exposure through aggressive marketing and business development initiatives in our commerce hubs and within our Treasury Management line of business throughout our entire footprint.”

Noninterest Income / Expense

Third quarter 2019 noninterest income was $1.88 million, compared to $1.34 million for the same period of 2018.  The year-over-year improvement is a combination of the scale provided by the two 2018 acquisitions, as well as continued focus on drivers of noninterest income, including secondary market mortgage and SBA sales. Noninterest expense for the third quarter of 2019 was $10.44 million, compared to $10.62 million for the same period of 2018.  The expense variance from 2018 was impacted by the transaction related expenses from FFNM, which equated to $350 thousand on a pre-tax basis.  For comparison purposes, noninterest expense remains consistent quarter-over-quarter with the second quarter of 2019 equating to $10.26 million.

Assets and Capital

Total assets of the Corporation at September 30, 2019 were $1.36 billion, compared to $1.25 billion at September 30, 2018.  Shareholders’ equity at September 30, 2019 totaled $160.17 million, compared to $149.37 million at September 30, 2018.  Book value per share equated to $14.91 at the end of the third quarter 2019, compared to $13.94 per share a year ago.  Tangible book value at quarter-end was $135.38 million, or $12.60 per share, compared to $124.61 million, or $11.63 per share at the end of the third quarter of 2018.  Both the 2018 common stock offering and the 2018 acquisitions had positive impacts on the Corporation’s overall capitalization and regulatory capital ratios. Both the Corporation and the Bank are “well-capitalized” with total risk-based capital to risk-weighted assets of 12.90% and 12.81%, and tier 1 capital to total tier 1 average assets at the Corporation of 9.81% and at the bank of 9.74%.

Paul D. Tobias, Chairman and Chief Executive Officer of the Corporation and Chairman of mBank, concluded, “We believe that the first three quarters of 2019 reflect the positive trends in operating metrics and earnings quality as we fully absorbed the two 2018 acquisitions. We continue to improve efficiency and our core funding with our larger operating platform while we work to protect our margin in this changing rate environment.  We will continue to be receptive to acquisitions with sound economics as we focus on operating efficiencies, credit trends and growth within the constructs of our credit and pricing philosophies.”

Mackinac Financial Corporation is a registered bank holding company formed under the Bank Holding Company Act of 1956 with assets in excess of $1.3 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 29 branch locations; eleven in the Upper Peninsula, ten in the Northern Lower Peninsula, one in Oakland County, Michigan, and seven in Northern Wisconsin.  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, 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
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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
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Contact:                                Jesse A. Deering, EVP & Chief Financial Officer (248) 290-5906 /jdeering@bankmbank.com
Website:                                www.bankmbank.com