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Mackinac Financial Corporation Announces 2012 Results of Operations With Improved Profitability and Asset Quality

MANISTIQUE, MI -- (Marketwire) -- 02/05/13 -- Mackinac Financial Corporation (NASDAQ: MFNC), the holding Corporation for mBank, today announced net income of $6.459 million or $1.51 per share, for the year ended December 31, 2012, compared to net income of $1.452 million, or $.42 per share, for 2011. The Corporation's primary asset, mBank, recorded net income of $7.884 million for the fiscal year 2012 compared to $2.656 million for 2011. The 2012 consolidated and bank results include a $3.0 million deferred tax valuation adjustment.

Total assets of the Corporation at 2012 year-end were $545.980 million, up 9.57% from the $498.311 million at 2011 year-end. The Corporation and the Bank are both "well-capitalized" with Tier 1 Capital at the Corporation of 11.98% and 9.63% at the Bank.

Some highlights for 2012 include:

  • Consummation of a common stock rights offering and the investment by Steinhardt Capital Investors, LLLP with the issuance of 2.140 million shares for net proceeds of $11.500 million.

  • In December, the Corporation announced its first quarterly dividend since the recapitalization at $.04 per share.

  • New loan production of $214.1 million. Balance sheet growth equated to $47.9 million for 2012, an 11.9% increase in loans outstanding from 2011 year end.

  • 2012 secondary mortgage loan income of $1.390 million, compared to $.700 million in 2011.

  • Continued success with the sale of SBA and USDA loan guarantees with sales generating $1.126 million in 2012.

  • 2012 core deposit growth of $24 million from 2011 year end, an increase of 6.8%.

  • Improved net interest margin at 4.17% compared to 4.06% in 2011.

  • Improved credit quality with a Texas Ratio of 10.30% compared to 18.43% one year ago, with nonperforming assets of $8.001 million at 2012 year end compared to $11.155 million a year ago.

  • Opening of our new standalone Escanaba branch banking center relocated from an in-store Menards location in August, and the opening of our new loan production office in Traverse City. Both locations are considered core commerce center hubs in their respective markets.

Loan Production

Total loans at 2012 year-end were $449.177 million, an 11.95% increase from the $401.246 million at 2011 year-end. The Corporation had total loan production for all loan types of $214 million in 2012. Comprising the total production were $103 million in commercial loans, and $111 million in consumer loans, $101 million of which were mortgages. The Upper Peninsula continues to drive a large majority of the new originations, totaling $134 million, with Southeast Michigan production of $42 million, and the Northern Lower Peninsula with $38 million. Commenting on new loan opportunities, Kelly W. George, President and Chief Executive Officer of mBank, stated, "We were extremely pleased with our success in loan production in 2012. Our loan production was all encompassing, including new home purchases and refinances, small business expansion and working capital advances, and also included loan relationships we procured from our competition. We continue to see good loan opportunities, both commercial and retail in all our markets. Our focus on SBA/USDA lending programs has allowed small businesses in our markets to take advantage of these loan programs to garner the additional capital they have needed to grow their operations and provide more jobs and commerce to these areas. We continue to remain very diligent within our credit underwriting parameters to ensure the new growth is coming onto our balance sheet in a prudent and sound manner with discipline in both loan structuring and pricing. In addition to the $449 million in balance sheet loans, we also have $50 million of SBA/USDA loans and $97 million of secondary market mortgage loans that we sold but retained servicing on. This increases our loans under management to $596 million."

Secondary Market Mortgage Lending

The Corporation made a concentrated effort several years ago to augment this line of business through some key personnel additions and technology enhancements. These efforts were well rewarded, with production of $74.1 million in secondary market mortgage loans compared to $39.0 million in 2011. Gains and fees from secondary mortgage activity totaled $1.390 million in 2012 compared to $.700 million in 2011. In addition, the Corporation also received $.179 million in fees on its secondary market servicing portfolio.

SBA/USDA Program Lending

The Corporation continues to have success in this line of business as in years past with 2012 gains from sales of SBA/USDA guaranteed loan balances amounting to $1.176 million compared to $1.500 million in 2011. The guaranteed SBA/USDA loan balances sold totaled $11.962 million for 2012, compared to $23.806 million in 2011. The Bank also services approximately $50 million of SBA/USDA loans which generated an additional $.374 million in fees during 2012. The Corporation remains a state leader in the origination of these government lending programs.

Nonperforming Loans / Assets

Nonperforming loans totaled $4.789 million, 1.07% of total loans at December 31, 2012 compared to $7.993 million, or 1.99% of total loans at December 31, 2011. Nonperforming assets were reduced by $3.154 million from a year ago and stood at $8.001 million, or 1.47% of total assets. George, commenting on credit quality, stated, "We have continued to aggressively remedy or exit our remaining problem assets throughout the year and are pleased with our continued reduction in the level of nonperforming assets and our overall loan portfolio payment performance with delinquent loans greater than 30 days residing at a nominal .73% of total loans. Our current level of nonperforming assets and associated costs are now more in line with a normal business climate and we continue to validate the underlying collateral to ensure the security has not deteriorated and carrying values are accurate."

Margin Analysis

Net interest income and the net interest margin in 2012 increased to $19.824 million, and 4.17%, compared to $17.929 million, and 4.06%, in 2011. The interest margin increase was largely due to decreased funding costs. George, commenting on the margin, stated, "We expect some margin pressure in future periods from a national economic policy that fosters a low interest rate environment and remain proactive in managing both the asset and the liability side of the balance sheet to mitigate the downward pressure. This interest rate environment has also limited investment options and puts pressure on our loan portfolio yields in this prolonged economic cycle. Our challenge is to continue growing our loan portfolio with a good balance of fixed and variable rate loans, structured to mitigate long-term interest rate risk when an upward interest rate movement begins to occur."

Deposits

Total deposits of $434.557 million at 2012 year-end increased 11.64% from deposits of $404.789 million at 2011 year-end. The overall increase in deposits for 2012 is comprised of an increase in core deposits of $23.772 million and increased noncore deposits of $5.996 million. George, commenting on core deposits, stated, "In 2012 we experienced continued good core deposit growth, though lower than in previous years, partially due to proactive rate reductions on deposit products that led to some balance reductions from strictly price driven non-relationship deposit customers. Our balance sheet liquidity was strong throughout 2012, and we were able to fund the majority of our balance sheet growth with core deposits."

Noninterest Income/Expense

Noninterest income, at $4.043 million in 2012, increased $.387 million from 2011's total of $3.656 million. The largest driver of noninterest income in 2012 was secondary market mortgage activities and gains from SBA/USDA loan sales. Income from secondary mortgage activities totaled $1.390 million in 2012 compared to $.700 million in 2011. SBA/USDA loan sale gains were $1.176 million compared to 2011 gains of $1.500 million.

Noninterest expense, at $16.757 million in 2012, increased $.788 million, or 4.93% from 2011. Increased expenses were noted in data processing, professional services associated with the divesture auction of our TARP securities and nominal employment costs. The FDIC premiums were reduced by $.390 million, or 45.94% in 2012 from $.849 million in 2011. George, commenting on areas of increased expenses, stated, "We remain diligent in our efforts to manage our operating expenses in the ongoing evaluation of our operating platform to improve efficiencies. This has become ever more challenging for all banks in our current regulatory banking climate, where the need is critical to ensure that comprehensive risk management systems and personnel infrastructure keep pace with a constantly changing banking profile, both internally and externally."

Capital

In August, the Corporation consummated the common stock rights offering and the capital investment by Steinhardt Capital Investors, LLLP with the issuance of 2.140 million shares of common stock for $11.500 million in net proceeds. Total shareholders' equity at December 31, 2012 totaled $72.448 million, compared to $55.263 million at 2011 year-end, an increase of $17.185 million, or 31.10%. Book value of common shareholders' equity was $11.05 per share at December 31, 2012 compared to $12.97 per share at December 31, 2011.

Paul D. Tobias, Chairman and Chief Executive Officer, concluded, "We are proud of our operating results for 2012. Looking forward, we are well positioned for expansion with strong credit quality and capital above the 'well capitalized' regulatory guidelines. The capital raised this year and our new relationship with the Steinhardt family are significant achievements and give us flexibility in an uncertain banking world. Regulatory costs and increasing capital requirements are creating an environment where capital is once again 'King.' To provide further flexibility, we are also in the process of setting up an $8.0 million line of credit with one of our correspondent banks.

"Our capital strength and our earnings momentum has led to the establishment of a dividend on our common stock, initially at $.04 per quarter. We are pleased to be able to reward our shareholders for their loyalty and faith. We will continue to focus on our organic growth but will also keep an eye out for external expansion opportunities that we can execute and where returns will exceed our cost of capital.

"On the list of value creation options will be the partial or full redemption of our preferred stock securities, now held by friends and investors. The current dividend at 5% without tax shelter moves to 9% without tax shelter in early 2014. We will evaluate our redemption strategy and base our timing and level of redemption on these cost factors and the quality of probable returns of alternate uses. We believe prudent growth, strong earnings, proper use of capital and returning excess capital to shareholders will help create fair market valuation for the benefit of all shareholders."

Mackinac Financial Corporation is a registered bank holding company formed under the Bank Holding Company Act of 1956 with assets of $546 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 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
===========================================================================


                                                December 31,   December 31,
(Dollars in thousands, except per share data)       2012           2011
                                               -------------  -------------
                                                (Unaudited)
Selected Financial Condition Data (at end of
 period):
Assets                                         $     545,980  $     498,311
Loans                                                449,177        401,246
Investment securities                                 43,799         38,727
Deposits                                             434,557        404,789
Borrowings                                            35,925         35,997
Common Shareholders' Equity                           61,448         44,342
Shareholders' equity                                  72,448         55,263


Selected Statements of Income Data
Net interest income                            $      19,824  $      17,929
Income before taxes and preferred dividend             6,165          3,316
Net income                                             6,459          1,452
Income per common share - Basic                         1.51            .42
Income per common share - Diluted                       1.46            .41
Weighted average shares outstanding                4,285,043      3,419,736
Weighted average shares outstanding - Diluted      4,412,625      3,500,204

Selected Financial Ratios and Other Data:
Performance Ratios:
Net interest margin                                     4.17%          4.06%
Efficiency ratio                                       67.95          68.43
Return on average assets                                1.23            .30
Return on average common equity                        12.43           3.30
Return on average equity                               10.26           2.66

Average total assets                           $     526,740  $     489,539
Average common shareholders' equity                   51,978         43,940
Average total shareholders' equity                    62,939         54,561
Average loans to average deposits ratio                99.45%         98.05%


Common Share Data at end of period:
Market price per common share                  $        7.09  $        5.42
Book value per common share                    $       11.05  $       12.97
Common shares outstanding                          5,559,859      3,419,736

Other Data at end of period:
Allowance for loan losses                      $       5,218  $       5,251
Non-performing assets                          $       8,001  $      11,155
Allowance for loan losses to total loans                1.16%          1.31%
Non-performing assets to total assets                   1.47%          2.24%
Texas ratio                                            10.30%         18.43%

Number of:
  Branch locations                                        11             11
  FTE Employees                                          121            116


              MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED BALANCE SHEETS
===========================================================================


                                                 December 31,  December 31,
                                                     2012          2011
                                                 ------------  ------------
                                                  (Unaudited)
ASSETS

Cash and due from banks                          $     26,958  $     20,071
Federal funds sold                                          3        13,999
                                                 ------------  ------------
  Cash and cash equivalents                            26,961        34,070

Interest-bearing deposits in other financial
 institutions                                              10            10
Securities available for sale                          43,799        38,727
Federal Home Loan Bank stock                            3,060         3,060

Loans:
  Commercial                                          342,841       311,215
  Mortgage                                             95,413        83,106
  Consumer                                             10,923         6,925
                                                 ------------  ------------
    Total Loans                                       449,177       401,246
      Allowance for loan losses                        (5,218)       (5,251)
                                                 ------------  ------------
  Net loans                                           443,959       395,995

Premises and equipment                                 10,633         9,627
Other real estate held for sale                         3,212         3,162
Deferred Tax Asset                                      9,131         8,427
Other assets                                            5,215         5,233
                                                 ------------  ------------

TOTAL ASSETS                                     $    545,980  $    498,311
                                                 ============  ============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
Deposits:
  Noninterest bearing deposits                   $     67,652  $     51,273
  NOW, money market, interest checking                155,465       152,563
  Savings                                              13,829        14,203
  CDs < $100,000                                      135,550       130,685
  CDs > $100,000                                       24,355        23,229
  Brokered                                             37,706        32,836
                                                 ------------  ------------
      Total deposits                                  434,557       404,789

  Borrowings                                           35,925        35,997
  Other liabilities                                     3,050         2,262
                                                 ------------  ------------
    Total liabilities                                 473,532       443,048

SHAREHOLDERS' EQUITY:
  Preferred stock - No par value:
    Authorized 500,000 shares, Issued and
     outstanding - 11,000 shares                       11,000        10,921
  Common stock and additional paid in capital -
   No par value
    Authorized - 18,000,000 shares
    Issued and outstanding - 5,559,914,
     3,419,736 and 3,419,736 shares respectively       53,797        43,525
    Retained earnings                                   6,727           492
    Accumulated other comprehensive income                924           325
                                                 ------------  ------------

      Total shareholders' equity                       72,448        55,263
                                                 ------------  ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY       $    545,980  $    498,311
                                                 ============  ============


              MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF OPERATIONS
===========================================================================


                                         For the Years Ended December 31,
                                      -------------------------------------
                                          2012         2011         2010
                                      -----------  -----------  -----------
                                      (Unaudited)
INTEREST INCOME:
  Interest and fees on loans:
    Taxable                           $    23,197  $    21,627  $    21,091
    Tax-exempt                                116          147          188
  Interest on securities:
    Taxable                                   948        1,162        1,406
    Tax-exempt                                 27           28           28
  Other interest income                       139          108          127
                                      -----------  -----------  -----------
    Total interest income                  24,427       23,072       22,840
                                      -----------  -----------  -----------

INTEREST EXPENSE:
  Deposits                                  3,946        4,530        5,607
  Borrowings                                  657          613          848
                                      -----------  -----------  -----------
    Total interest expense                  4,603        5,143        6,455
                                      -----------  -----------  -----------

Net interest income                        19,824       17,929       16,385
Provision for loan losses                     945        2,300        6,500
                                      -----------  -----------  -----------
Net interest income after provision
 for loan losses                           18,879       15,629        9,885
                                      -----------  -----------  -----------

OTHER INCOME:
  Deposit service fees                        699          832          990
  Net security gains                            -           (1)         215
  Income from secondary market loans
   sold                                     1,390          700          539
  SBA/USDA loan sale gains                  1,176        1,500          868
  Mortgage servicing income                   417          400            -
  Other                                       361          225          183
                                      -----------  -----------  -----------
    Total other income                      4,043        3,656        2,795
                                      -----------  -----------  -----------

OTHER EXPENSE:
  Salaries and employee benefits            8,288        7,275        6,918
  Occupancy                                 1,372        1,376        1,313
  Furniture and equipment                     885          827          806
  Data processing                             991          761          740
  Professional service fees                 1,196          756          627
  Loan and deposit                            877        1,137          910
  Writedowns and losses on other real
   estate held for sale                       489        1,137        2,753
  FDIC insurance assessment                   459          849          957
  Telephone                                   233          215          193
  Advertising                                 376          351          297
  Other                                     1,591        1,285        1,084
                                      -----------  -----------  -----------
    Total other expenses                   16,757       15,969       16,598
                                      -----------  -----------  -----------

Income before provision for income
 taxes                                      6,165        3,316       (3,918)
Provision for income taxes                   (922)       1,098       (3,500)
                                      -----------  -----------  -----------

NET INCOME                                  7,087        2,218         (418)
                                      -----------  -----------  -----------

Preferred dividend and accretion of
 discount                                     629          766          742

                                      -----------  -----------  -----------
NET INCOME AVAILABLE TO COMMON
 SHAREHOLDERS                         $     6,458  $     1,452  $    (1,160)
                                      ===========  ===========  ===========

INCOME PER COMMON SHARE:
  Basic                               $      1.51  $       .42  $      (.34)
                                      ===========  ===========  ===========
  Diluted                             $      1.46  $       .41  $      (.34)
                                      ===========  ===========  ===========


               MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
                      LOAN PORTFOLIO AND CREDIT QUALITY
============================================================================


(Dollars in thousands)

Loan Portfolio Balances (at end of period):

                                               December 31,    December 31,
                                                   2012            2011
                                             --------------- ---------------
                                               (Unaudited)     (Unaudited)
Commercial Loans:
Real estate - operators of nonresidential
 buildings                                   $        95,151 $        75,391
Hospitality and tourism                               40,787          33,306
Real estate agents and managers                       12,672          10,617
Lessors of nonresidential buildings                   12,128          16,499
Other                                                164,874         155,657
                                             --------------- ---------------
  Total Commercial Loans                             325,612         291,470

1-4 family residential real estate                    87,948          77,332
Consumer                                              10,923           6,925
Construction
  Commercial                                          17,229          19,745
  Consumer                                             7,465           5,774
                                             --------------- ---------------

  Total Loans                                $       449,177 $       401,246
                                             =============== ===============


Credit Quality (at end of period):

                                             December 31,     December 31,
                                                 2012             2011
                                           ---------------  ---------------
                                             (Unaudited)      (Unaudited)
Nonperforming Assets :
Nonaccrual loans                           $         4,687  $         5,490
Loans past due 90 days or more                           -                -
Restructured loans                                     102            2,503
                                           ---------------  ---------------
  Total nonperforming loans                          4,789            7,993
Other real estate owned                              3,212            3,162
                                           ---------------  ---------------
  Total nonperforming assets               $         8,001  $        11,155
                                           ===============  ===============
Nonperforming loans as a % of loans                   1.07%            1.99%
                                           ---------------  ---------------
Nonperforming assets as a % of assets                 1.47%            2.24%
                                           ---------------  ---------------
Reserve for Loan Losses:
At period end                              $         5,218  $         5,251
                                           ---------------  ---------------
As a % of average loans                               1.24%            1.35%
                                           ---------------  ---------------
As a % of nonperforming loans                       108.96%           65.69%
                                           ---------------  ---------------
As a % of nonaccrual loans                          111.33%           95.65%
                                           ---------------  ---------------
Texas Ratio                                          10.30%           18.43%
                                           ---------------  ---------------

Charge-off Information (year to date):
  Average loans                            $       422,440  $       388,115
                                           ---------------  ---------------
  Net charge-offs                          $           977  $         3,662
                                           ---------------  ---------------
  Charge-offs as a % of average loans,
   annualized                                          .23%             .94%
                                           ---------------  ---------------


     MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES QUARTERLY FINANCIAL
                                 HIGHLIGHTS
============================================================================


                               ---------------------------------------------
                                                QUARTER ENDED
                               ---------------------------------------------
                                                 (Unaudited)
                               ---------------------------------------------
                                 December 31,  September 30,     June 30,
                                     2012           2012           2012
                               ---------------------------------------------
BALANCE SHEET (Dollars in
 thousands)

Total loans                     $     449,177  $     433,958  $     419,453
Allowance for loan losses              (5,218)        (5,186)        (5,083)
                                -------------  -------------  -------------
  Total loans, net                    443,959        428,772        414,370
Total assets                          545,980        551,117        524,366
Core deposits                         372,496        372,500        357,933
Noncore deposits (1)                   62,061         66,863         67,448
                                -------------  -------------  -------------
  Total deposits                      434,557        439,363        425,381
Total borrowings                       35,925         35,925         35,997
Common shareholders' equity            61,448         61,945         49,352
Total shareholders' equity             72,448         72,945         60,352
Total shares outstanding            5,559,859      5,559,859      3,419,736
Weighted average shares
 outstanding                        5,559,859      4,722,029      3,419,736

AVERAGE BALANCES (Dollars in
 thousands)

Assets                          $     545,661  $     545,788  $     511,681
Loans                                 438,168        424,461        422,887
Deposits                              433,573        439,327        452,655
Common Equity                          61,936         56,327         44,927
Equity                                 72,936         67,327         55,915

INCOME STATEMENT (Dollars in
 thousands)

Net interest income             $       5,112  $       4,930  $       5,019
Provision for loan losses                 150            150            150
                                -------------  -------------  -------------
  Net interest income after
   provision                            4,962          4,780          4,869
Total noninterest income                  983          1,149          1,305
Total noninterest expense               4,349          4,367          4,207
                                -------------  -------------  -------------
Income before taxes                     1,596          1,562          1,967
Provision for income taxes                536            528         (2,335)
                                -------------  -------------  -------------
  Net income                            1,060          1,034          4,302
                                -------------  -------------  -------------
Preferred dividend expense                138            137            161
                                -------------  -------------  -------------
Net income (loss) available to
 common shareholders            $         922  $         897  $       4,141
                                =============  =============  =============

PER SHARE DATA

Earnings                        $         .17  $         .19  $        1.21
Book value per common share             11.05          11.14          14.43
Market value, closing price              7.09           7.60           5.99

ASSET QUALITY RATIOS

Nonperforming loans/total loans          1.07%          1.22%          1.28%
Nonperforming assets/total
 assets                                  1.47           1.60           1.70
Allowance for loan losses/total
 loans                                   1.16           1.20           1.21
Allowance for loan
 losses/nonperforming loans            108.96          98.03          94.57
Texas ratio (2)                         10.30          11.26          13.59

PROFITABILITY RATIOS

Return on average assets                  .67%           .65%          3.21%
Return on average common equity          5.93           6.33          36.57
Return on average equity                 5.03           5.29          29.39
Net interest margin                      4.11           4.10           4.30
Efficiency ratio                        70.52          67.29          63.61
Average loans/average deposits          99.45          96.62         101.50

CAPITAL ADEQUACY RATIOS

Tier 1 leverage ratio                   11.98%         11.93%         10.16%
Tier 1 capital to risk weighted
 assets                                 13.81          14.02          12.87
Total capital to risk weighted
 assets                                 14.93          15.15          14.12
Average equity/average assets           13.37          12.34          10.93
Tangible equity/tangible assets         13.26          13.36          11.51



                               ------------------------------
                                       QUARTER ENDED
                               ------------------------------
                                        (Unaudited)
                               ------------------------------
                                  March 31,     December 31,
                                     2012           2011
                               ------------------------------
BALANCE SHEET (Dollars in
 thousands)

Total loans                     $     414,402  $     401,246
Allowance for loan losses              (5,382)        (5,251)
                                -------------  -------------
  Total loans, net                    409,020        395,995
Total assets                          506,496        498,311
Core deposits                         355,186        348,724
Noncore deposits (1)                   56,902         56,065
                                -------------  -------------
  Total deposits                      412,088        404,789
Total borrowings                       35,997         35,997
Common shareholders' equity            45,119         44,342
Total shareholders' equity             56,095         55,263
Total shares outstanding            3,419,736      3,419,736
Weighted average shares
 outstanding                        3,419,736      3,419,736

AVERAGE BALANCES (Dollars in
 thousands)

Assets                          $     503,412  $     487,304
Loans                                 404,048        396,197
Deposits                              409,250        390,940
Common Equity                          44,469         44,325
Equity                                 55,418         55,219

INCOME STATEMENT (Dollars in
 thousands)

Net interest income             $       4,763  $       4,901
Provision for loan losses                 495          1,300
                                -------------  -------------
  Net interest income after
   provision                            4,268          3,601
Total noninterest income                  606            725
Total noninterest expense               3,834          4,221
                                -------------  -------------
Income before taxes                     1,040            105
Provision for income taxes                349             27
                                -------------  -------------
  Net income                              691             78
                                -------------  -------------
Preferred dividend expense                193            192
                                -------------  -------------
Net income (loss) available to
 common shareholders            $         498  $        (114)
                                =============  =============

PER SHARE DATA

Earnings                        $         .15  $        (.03)
Book value per common share             13.19          12.97
Market value, closing price              7.00           5.42

ASSET QUALITY RATIOS

Nonperforming loans/total loans          1.65%          1.99%
Nonperforming assets/total
 assets                                  2.04           2.24
Allowance for loan losses/total
 loans                                   1.30           1.31
Allowance for loan
 losses/nonperforming loans             78.49          65.69
Texas ratio (2)                         16.84          18.43

PROFITABILITY RATIOS

Return on average assets                  .40%         (.09)%
Return on average common equity          4.53          (1.02)
Return on average equity                 3.62           (.82)
Net interest margin                      4.17           4.38
Efficiency ratio                        71.01          69.04
Average loans/average deposits          98.73         101.34

CAPITAL ADEQUACY RATIOS

Tier 1 leverage ratio                    9.95%         10.08%
Tier 1 capital to risk weighted
 assets                                 11.55          11.62
Total capital to risk weighted
 assets                                 12.80          12.87
Average equity/average assets           11.01          11.33
Tangible equity/tangible assets         11.01          11.33

(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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Contact:
Ernie Krueger
EVP/CFO
(906) 341-7158
Website: www.bankmbank.com

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