Exhibit 99
(MACKINAC FINANCIAL LOGO)
November 20, 2006
Dear Shareholders:
This letter will comment on our performance through the 2006 third quarter and
discuss expected future opportunities and challenges for your Corporation. We
have made a steady advance toward achieving our goals for growth and profit
through the first nine months of 2006. Our expectations are high and challenging
for the fourth quarter of 2006 and future periods. We are closing out 2006 with
a slowing Michigan economy and a market bias for declining interest rates, both
of which could lead to shrinking interest margins. This environment will result
in a need for an even greater focus on quality loan growth, core deposit growth
and expense management.
THIRD QUARTER 2006 IN-REVIEW
The third quarter marked the following successes:
- Continued, yet slower loan growth with production of $21.4
million,
- Core deposit growth of $10 million in balances,
- On going Credit Quality:
- Nonaccrual loans at .71% of total loans
- Nonperforming assets at .58% of total assets.
In the third quarter our results included some unplanned items:
- Legal expenses related to lawsuit against former accountants;
$160,000 for the quarter and $400,000 year to date,
- On the positive side the increased profitability of your
Corporation allowed us to recognize a small portion, $500,000, of
the deferred tax benefit related to the NOL carry-forward.
LOAN PRODUCTION
The third quarter provided continued, yet slower loan growth in all markets. We
are beginning to experience the effects of a slowdown of the Michigan economy;
however, our pipeline of $21.1 million of approved but unclosed loans ($15.0
million in Oakland County) at the end of the third quarter was encouraging and
our expectations are that the fourth quarter will be a good one. The loan growth
that we have achieved marks one of our successes for 2006. Production of $83.548
million in loans through September 30 is slightly behind our aggressive growth
Plan for 2006 but is $11.651 million ahead of 2005 production for the same
period. In the third quarter we continued our recent success in consumer loan
growth throughout our northern branch network. So far in 2006, the Bank has
grown consumer loan outstandings by $7.2 million, or 15.3%. Commercial loan
growth is still the primary focus but we expect continued success in consumer
loan growth due from increased mBank brand recognition in our banking markets
coupled
LOAN GROWTH BY QUARTER
(dollars in thousands)
(PERFORMANCE GRAPH)
with the increased efforts and service of branch managers and support staff. The
table and chart below illustrate the success we have experienced in generating
loans for the seven quarters following recapitalization.
NEW LOAN PRODUCTION
2005
------------------------------------------------
First Second Third YTD Fourth 2005
(dollars in thousands) Quarter Quarter Quarter 09/30/05 Quarter TOTAL
------- ------- ------- -------- ------- --------
REGION
Upper Peninsula $6,861 $ 9,099 $ 9,090 $25,050 $19,263 $ 44,313
Northern Lower Peninsula 686 12,449 9,698 22,833 13,786 36,619
Oakland County 1,100 12,480 10,434 24,014 12,813 36,827
------ ------- ------- ------- ------- --------
TOTAL $8,647 $34,028 $29,222 $71,897 $45,862 $117,759
====== ======= ======= ======= ======= ========
2006
--------------------------------------
First Second Third YTD
Quarter Quarter Quarter 09/30/06
------- ------- ------- --------
REGION
Upper Peninsula $ 7,592 $14,082 $10,356 $32,030
Northern Lower Peninsula 7,621 7,655 5,537 20,813
Oakland County 14,884 10,320 5,501 30,705
------- ------- ------- -------
TOTAL $30,097 $32,057 $21,394 $83,548
======= ======= ======= =======
The chart below illustrates the portfolio mix of loans for each period end:
TOTAL LOANS
(dollars in thousands)
(PERFORMANCE GRAPH)
CREDIT QUALITY
We are pleased that the significant loan growth for 2005 and the first nine
months of 2006 was accomplished without compromising credit quality. As of
September 30, 2006, the Corporation's nonaccrual loans and total nonperforming
assets remained at levels considered below peer. The reserve for loan losses was
reduced by $600,000 in the first quarter in recognition of our excellent credit
quality. The reserve at September 30, 2006 stood at $5.316 million 1.82% of
loans outstanding.
CORE DEPOSIT GROWTH
The growth of core deposits, which we define as demand deposits, interest
bearing checking accounts, money market and savings accounts, and certificates
of deposits that are generated by our branch system, continued during the third
quarter of 2006. Growth of core deposits is a vital element of increased
profitability and the notable increase in demand account
balances in the third quarter provides an early indication of success in low
cost deposit growth. We are pleased with the growth overall and continue to
experience new account openings which we believe will lead to greater core
balances in future periods.
The table and chart below show changes in dollars and number of accounts lost
and added by quarter.
DEPOSIT ACCOUNT ACTIVITY
(dollars in thousands)
2005
----------------------------------------------------
First Second Third YTD Fourth
Quarter Quarter Quarter 09/30/05 Quarter
-------- -------- -------- -------- --------
Core deposit balances $150,567 $156,195 $162,303 $174,530
-------- -------- -------- -------- --------
Deposit balance, change $ (2,282) $ 5,628 $(33,472) $(30,126) $ 12,227
-------- -------- -------- -------- --------
Accounts opened 272 880 956 2,108 1,428
Accounts closed 461 748 603 1,812 867
-------- -------- -------- -------- --------
Net change (189) 132 353 296 561
-------- -------- -------- -------- --------
Total accounts 15,837 15,922 18,415 18,415
-------- -------- -------- --------
Average balance, per account
(in whole dollars) $ 9,507 $ 9,810 $ 8,814 $ 9,477
======== ======== ======== ========
2006
-----------------------------------------
First Second Third YTD
Quarter Quarter Quarter 09/30/06
-------- -------- -------- --------
Core deposit balances $183,438 $185,784 $195,775
-------- -------- -------- -------
Deposit balance, change $ 8,908 $ 2,346 $ 9,991 $21,245
-------- -------- -------- -------
Accounts opened 1,236 1,605 1,327 4,168
Accounts closed 655 1,052 983 2,690
-------- -------- -------- -------
Net change 581 553 344 1,478
-------- -------- -------- -------
Total accounts 19,063 19,616 19,960
-------- -------- --------
Average balance, per account
(in whole dollars) $ 9,622 $ 9,471 $ 9,808
======== ======== ========
CORE DEPOSIT ACTIVITY BY QUARTER
(dollars in thousands)
(PERFORMANCE GRAPH)
Growth in core deposits is important since this less expensive loan funding
source will provide the benefits of higher levels of profitability. Core deposit
growth is the primary reason for maintaining a branch banking system. We are
pleased with our progress in growing core deposits but recognize that
maintaining future growth at our recent pace will be challenging. The initial
benefits of the "mBank' brand image and reintroduction into our historical
branch markets provided core growth momentum late in 2005 and early in 2006. Our
challenge for future core growth will be dependent upon competitive products and
pricing promoted by an active sales culture and supported by service.
CORE DEPOSIT TOTALS
(dollars in thousands)
(PERFORMANCE GRAPH)
NONINTEREST INCOME
Noninterest income amounted to $251,000 during the second quarter, well below
our planned level of $356,000. The 2006 Plan included aggressive noninterest
income contribution from secondary mortgage market activity. We fell
significantly short of our Plan goals due primarily to the downturn in
Michigan's economy, primarily Southeast Michigan, where we had high expectations
for mortgage originations.
Generating significant increases in noninterest income for future periods will
be difficult since we have a limited platform for growth. Our expectations for
future period increases are modest and include increased fee income from our
newly introduced overdraft protection program. We are also in the process of
reviewing other financial services that we intend to introduce in the near
future which will contribute to noninterest income.
NONINTEREST EXPENSE
In the third quarter of 2006 noninterest expense was modestly lower than second
quarter expenses. We continued to incur higher than normal legal fees due to the
ongoing costs of our legal action against the former accountants of the
Corporation. Controlling noninterest expense is a distinct challenge when our
primary Corporate objective for increased profitability hinges on growth. We
accept this challenge yet recognize that certain operational costs will increase
in future periods; however, we have in fact continued our plan for reduction of
noninterest expense in most other categories as illustrated in the table below.
NONINTEREST EXPENSE
2005
------------------------------------------------
First Second Third YTD Fourth 2005
(dollars in thousands) Quarter Quarter Quarter 09/30/05 Quarter TOTAL
------- ------- ------- -------- ------- -------
Salaries and employee benefits $1,504 $1,606 $1,555 $ 4,665 $1,425 $ 6,090
Occupancy 226 247 275 748 305 1,053
Furniture and equipment 159 138 133 430 130 560
Data processing 246 246 234 726 994 1,720
Accounting, legal and consulting fees 318 228 204 750 136 886
Loan and deposit 293 250 153 696 156 852
Telephone 60 77 66 203 68 271
Advertising 139 243 314 696 118 814
Other 4,685 300 345 5,330 679 6,009
------ ------ ------ ------- ------ -------
Total noninterest expense 7,630 3,335 3,279 14,244 4,011 18,255
------ ------ ------ ------- ------ -------
Less:
Penalty - prepayment of FHLB borrowings 4,320 -- -- 4,320 -- 4,320
Data processing conversion costs -- -- -- -- 815 815
------ ------ ------ ------- ------ -------
Noninterest expense, as adjusted $3,310 $3,335 $3,279 $ 9,924 $3,196 $13,120
====== ====== ====== ======= ====== =======
2006
--------------------------------------
First Second Third YTD
Quarter Quarter Quarter 09/30/06
------- ------- ------- --------
Salaries and employee benefits $1,594 $1,496 $1,487 $4,577
Occupancy 317 293 333 943
Furniture and equipment 156 155 158 469
Data processing 154 182 176 512
Accounting, legal and consulting fees 200 414 341 955
Loan and deposit 129 98 79 306
Telephone 49 51 56 156
Advertising 70 107 70 247
Other 328 225 302 855
------ ------ ------ ------
Total noninterest expense $2,997 $3,021 $3,002 $9,020
====== ====== ====== ======
NONINTEREST EXPENSE BY QUARTER
(dollars in thousands)
(PERFORMANCE GRAPH)
The table above illustrates the progress we have made in controlling noninterest
expense. Excluding the one-time extraordinary costs referred to above,
noninterest expenses have declined in each successive quarter. We have reduced
total noninterest expense more than 10% in the last year. The increases for 2006
include the one time costs associated with the legal action against our former
accountants which totaled $400,000 through the end of the third quarter. We
expect additional costs in this matter of $250,000 which will bring the case to
resolution and/or trial. The increase in occupancy costs over the last few
quarters is due to the opening of the full service branch location in Birmingham
in January and the relocation of our Gaylord branch office in June of this year.
We do not expect any other significant changes to occupancy expense in
COMPOSITION OF NONINTEREST EXPENSE
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
(BAR CHART)
future periods and are exploring opportunities for rental of excess office space
at our branch locations.
The chart below illustrates the impact of controlling expenses and expanding our
net interest margin has on our efficiency ratio.
EFFICIENCY RATIO*
(PERFORMANCE GRAPH)
COMPONENTS OF THE EFFICIENCY RATIO*
QUARTER ENDED,
---------------------------------------------------------------
(dollars in thousands) 06/30/05 09/30/05 12/31/05 03/31/06 06/30/06 09/30/06
-------- -------- -------- -------- -------- --------
Net interest income (FTE basis) $ 2,528 $ 2,643 $ 2,822 $2,800 $3,055 $3,052
Noninterest income, excluding securities gain/loss 272 254 303 216 250 241
------- ------- ------- ------ ------ ------
Total operating income (FTE basis) 2,800 2,897 3,125 3,016 3,305 3,293
------- ------- ------- ------ ------ ------
Noninterest expense $ 3,335 $ 3,279 $ 3,246 $2,997 $3,021 $3,002
======= ======= ======= ====== ====== ======
Efficiency ratio 119.10% 113.19% 103.85% 99.37% 91.41% 91.16%
======= ======= ======= ====== ====== ======
* THE EFFICIENCY RATIO CALCULATION EXCLUDES THE FHLB PREPAYMENT PENALTY AND
THE DATA PROCESSING CONVERSION COSTS.
CAPITAL
As of September 30, 2006, your Corporation was well capitalized. The strong
growth of the Corporation has presented us with challenges to maintain the
regulatory capital ratios of the bank. In the second quarter the Corporation
established a $6 million line of credit at a correspondent bank to provide the
necessary funding for additional capital infusions into the Bank. As of
September 30, we have drawn $1.950 million for capital infusion to the bank.
High growth requires capital and the Corporation will be exploring different
short-term and long-term capital solutions to sustain our growth and
profitability objectives.
LOOKING FORWARD
We are looking forward to a strong closing quarter in 2006. In the fourth
quarter we will be finalizing our 2007 goals and objectives. We will develop
this 2007 Plan conscious of our responsibility to you, our shareholders, to
increase franchise value by expanding our customer base, growing loans, and
controlling costs, all leading to increased profitability.
Sincerely,
/s/ PAUL D. TOBIAS
- -------------------------------------
PAUL D. TOBIAS
Chairman and CEO
MACKINAC FINANCIAL CORPORATION SELECTED FINANCIAL HIGHLIGHTS
For The Period Ended
-------------------------------------
September December September
30, 2006 31, 2005 30, 2005
----------- ---------- ----------
(Dollars in thousands, except per share data) * (Unaudited) (Unaudited)
SELECTED FINANCIAL CONDITION DATA (AT END OF PERIOD):
Total assets $ 363,191 $ 298,722 $ 280,590
Total loans 292,614 239,771 218,462
Total deposits 293,494 232,632 213,268
Borrowings and subordinated debentures 38,307 36,417 36,417
Total shareholders' equity 28,226 26,588 27,900
SELECTED STATEMENTS OF INCOME DATA NINE MONTHS AND YEAR ENDED):
Net interest income $ 8,566 $ 9,780 $ 7,100
Income (loss) before taxes 853 (7,364) (6,336)
Net income (loss) 1,378 (7,364) (6,336)
Income (loss) per common share - Basic .40 (2.15) (1.85)
Income (loss) per common share - Diluted .40 (2.15) (1.85)
THREE MONTHS ENDED
Net interest income $ 2,952 $ 2,680 $ 2,507
Income (loss) before taxes 190 (1,028) (518)
Net income (loss) 690 (1,028) (518)
Income (loss) per common share - Basic .20 (.30) (.15)
Income (loss) per common share - Diluted .20 (.30) (.15)
SELECTED FINANCIAL RATIOS AND OTHER DATA (NINE MONTHS AND YEAR ENDED):
PERFORMANCE RATIOS:
Net interest margin 3.53% 3.64% 3.79%
Efficiency ratio 93.12 160.43 112.11
Return on average assets .54 (2.58) (2.97)
Return on average equity 6.71 (25.63) (28.99)
Average total assets $ 341,646 $ 285,896 $ 284,978
Average total shareholders' equity $ 27,440 $ 28,732 $ 29,218
Average loans to average deposits ratio 98.86% 98.17% 99.33%
COMMON SHARE DATA (AT END OF PERIOD):
Market price per common share $ 10.56 $ 9.10 $ 10.99
Book value per common share $ 8.23 $ 7.76 $ 8.14
Common shares outstanding 3,428,695 3,428,695 3,428,695
OTHER DATA (AT END OF PERIOD):
Allowance for loan losses $ 5,316 $ 6,108 $ 6,589
Non-performing assets $ 2,091 $ 1,059 $ 3,905
Allowance for loan losses to total loans 1.82% 2.55% 3.02%
Non-performing assets to total assets .58% .35% 1.39%
Number of:
Employees (FTE basis) 96 102 98
Branch locations 13 12 12
QUARTERLY FINANCIAL SUMMARY
*(Dollars in thousands, except per share data)
Net Book
Average Return on Average Net Income Value
Average Average Average Shareholders' ----------------- Interest Efficiency Per Per
Quarter Ended Assets Loans Deposits Equity Assets Equity Margin Ratio Share Share
- ------------- -------- -------- -------- ------------- ------ ------ -------- ---------- ------ ------
SEPTEMBER 30, 2006 $362,632 $289,210 $296,608 $28,041 .75% 9.76% 3.36% 91.17% $ .20 $ 8.23
June 30, 2006 342,820 273,686 274,591 27,213 .22 2.82 3.62 91.41 .05 7.93
March 31, 2006 319,007 250,735 254,720 27,055 .63 7.47 3.62 99.37 .15 7.93
December 31, 2005 288,619 224,386 219,967 27,288 (1.41) (14.95) 3.96 128.37 (.30) 7.76
September 30, 2005 280,506 209,785 211,197 28,112 (.73) (7.39) 3.79 112.11 (.15) 8.14
June 30, 2005 277,754 197,545 206,875 28,879 (.83) (8.01) 3.67 119.07 (.17) 8.32
March 31, 2005 296,856 199,703 209,035 30,692 (7.16) (69.25) 3.21 300.96 (1.53) 8.42
December 31, 2004 327,543 218,962 211,685 8,455 2.95 114.17 2.48 71.83 8.25 10.13
September 30, 2004 346,078 226,951 236,418 6,096 (.87) (49.53) 2.25 120.66 (2.17) 18.44
* Historical per share data has been adjusted for the 20:1 reverse stock
split distributed in December 2004.
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