"Mackinac Financial Corporation is a great financial institution that has rapidly grown mbank through acquisitions however should you buy this bank stock”
Key Takeaways:
Stable dividend with a incredible 5.54% Yield.
Undervalued with potential appreciate
This is a steady income earner that has grown significantly since 2014
By: Allan R Kirby
Sector: Financial
Name: Mackinac Financial Corporation
Total Assets: $1.52 billion
Summary of Mackinac Financial Corporation (MFNC)
Market Cap: 105.06 million
Yield: 5.54%
Dividend quarterly (.14)
Dividend Yearly (.56)
Value Investing
Historically, buying value stocks has helped Retail Investors improve performance over the long term. In fact one of the best investors of our time Warren Buffett has followed someone by the name of Benjamin Graham. Graham taught us the long term value investing strategy of purchasing stocks at a price below their intrinsic value; then holding them until their price reflects the real value of the company. We believe this is the case with Mackinac Financial Corporation.
Mackinac Financial Corporation (MFNC)
Mackinac Financial Corporation is a registered bank holding company with assets in excess of $1.3 billion. The principal subsidiary of the Corporation is mBank. Headquartered in Manistique, Michigan, mBank has 29 branch locations; 11 in the Upper Peninsula, 10 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 personal and business deposit products and consumer loans.
Why is the MFNC share price so low?
There are a number of reasons why Mackinac's stock price is down substantially over the past year. Let's take a look at what has affected MFNC stock:
COVID-19: The pandemic had completely shut down the areas Mackinac operates in, plus no one knows how badly damaged the economy will be long term.
Rates: Banks of all sizes are vulnerable to lower interest rates which we have gotten. Simply put lower rates means banks do not make as much money on their loans.
Economy: Unemployment has risen significantly, this puts doubts into investors that the current loans the bank has on their book will be paid back and if not Mackinac will need to write those loans off. Additionally when there is higher unemployment, banks tend to be more careful in providing loans to businesses and consumers so loan growth will likely slow considerably. The exception of course is the approximately $150 million of PPP loans the bank provided the second quarter.
Loan Loss Reserves: Because of the possibility of loan losses banks are raising the amount of money they need to cover the loan losses they need to write down.
Fintech: The rise of financially savvy challenger banks and fintech companies, which can provide many of a bank’s functions but with a much lower cost basis. Although this has not been front and center of late, it is in the back of the minds of many investors when looking at banks.
Let's see if now is a good time to buy Mackinac Financial Corporation shares?
Mackinac Financial, like many other banks, is in a much better place to weather a downturn than during the start of the 2008 financial crisis. Additionally they have performed reasonably well during the current economic downturn, plus are not heavily exposed to particular weak industries. In fact their loans issues in the rental and Hotel industry are negligible, which shows they were very conservative with their lending pre COVID-19. With excellent reserves and growing like a weed through acquisitions, we like what we see with this bank.
Recent Acquisitions
Mackinac Financial has been on a mission to grow through acquisitions and they have done alot for such a small bank. In fact they have acquired a total of 21 branches and over 700 million in assets since 2014, or basically a 350% increase in size.
December 2014: Peninsula Financial Corporation (Ishpeming, MI) included 6 branch locations and roughly $126 million in assets
April 2016: First National Bank of Eagle River (Eagle River, WI) included 3 branch locations and roughly $125 million in assets
August 2016: Niagara Bancorporation Inc. (Niagara, WI) included 4 branch locations and roughly $70 million in assets
May 2018: First Federal of Northern Michigan Bancorp, Inc. (Alpena, MI) included 7 branch locations and roughly $320 million in assets
October 2018: Lincoln Community Bank (Merrill, WI) included 1 branch location and roughly $60 million in assets
"High growth, conservative lending and no loan exposure to high risk industries such as oil and gas."
Revenue
Total revenue of the Corporation for second quarter 2020 was $18.81 million, compared to $17.87 million for the second quarter of 2019. Total interest income for the second quarter was $16.44 million, compared to $16.76 million for the same period in 2019. The 2020 second quarter interest income included accretive yield of $320 thousand from combined credit mark accretion associated with acquisitions, compared to $741 thousand in the same period of 2019.
Net Income
Net income of $3.45 million, or $.33 per share, compared to 2019 second quarter net income of $3.67 million, or $.34 per share. Net income for the first two quarters of 2020 was $6.50 million, or $.61 per share, compared to $6.84 million, or $.64 per share for the same period of 2019.
Loans and Credit Quality
Total balance sheet loans at June 30, 2020 were $1.15 billion, which is inclusive of $149.82 million of PPP loans, compared to June 30, 2019 balances of $1.06 billion. Total loans under management reside at $1.44 billion, which includes $281.27 million of service retained loans.
Traditional loan production (non-PPP) for the first six months of 2020 was $174.81 million, compared to $184.6 million for the same period of 2019. When including PPP loans, total production was $324.63 million. Of the total production, traditional commercial loans equated to $64 million, consumer $111 million and the aforementioned $150 million of PPP. Within the consumer totals was $86 million of secondary market mortgage production. In total, 77% of PPP funds went to existing mBank clients. There were also 295 new customers that received PPP loans and 44 included a new deposit relationship
Nonperforming loans totaled $6.124 million, or .53% (.61% excluding PPP balances) of total loans at June 30, 2020, compared to $6.416 million, or .61% of total loans at March 31, 2020 and $4.673 million, or .44% of total loans at June 30, 2019. Total loan delinquencies greater than 30 days resided at .54% (.61% excluding PPP balances), compared to 1.23% a quarter ago, and 1.05% in 2019.
The nonperforming assets to total assets ratio resided at .55% (.61% excluding PPP balances) for the second quarter of 2020, compared to .51% for the second quarter of 2019. COVID-19 related loan deferral activity has slowed significantly in the second quarter reducing by 90% from peak levels and equating to a nominal 2.3% of total loans.
Of the original $219.60 million of payment deferred loans, $196.70 have already returned to contractual obligations of either principal and interest or interest only, for a short period, as they come off of full payment deferral to build up cash flow.
Of the $15.3 million of commercial loans still in payment deferral, there are no significant concentrations, with the largest single borrower categories being rental properties ($4.60 million) and Hotels ($4.00 million). Hotel specific loan deferrals have reduced significantly from $65.60 million, or a 94% reduction.
Book Value
Shareholders’ equity at June 30, 2020 totaled $164.16 million, compared to $157.84 million at June 30, 2019.
Book value per share outstanding equated to $15.58 at the end of the second quarter 2020, compared to $14.70 per share outstanding a year ago.
Tangible book value at quarter-end was $139.88 million, or $13.28 per share outstanding, compared to $133.24 million, or $12.40 per share outstanding at the end of the second
Is this a stock to buy?
Overall this is a great income generating bank that has grown significantly over the last few years through acquisitions and some organic growth. We see the bank has lent conservatively with no high exposure to many of the industries hit hard by the pandemic. We also feel the dividend is solid and do not expect the bank to cut the dividend unless the current economic situation deteriorates significantly. Without PPP, loan growth would have been relatively flat, which is to be expected in this environment so it comes as no surprise the bank is being caustios.
Finally, even though we are cautious due to COVID-19, the 150-basis-point drop in the federal funds rate and recession, we still believe this is a great community bank to invest in. Book value per share outstanding was $15.58 at the end of the second quarter 2020 and Tangible book value was $13.28 per share outstanding shares. With a current share price of $9.92, this stock is definitely undervalued and potential investors should take a serious look at this small bank.
Other Bank Stocks?
NBT (NBT) a smaller regional bank, headquartered in Norwich, New York and Elmira Savings Bank (ESBK), are other financial stocks we see value in as well. Value investors should take the time and review these stocks.
Stocks to buy is a segment of the MySmallBank.com blog written by Allan R Kirby, who writes and produces Personal Finance articles and videos along with My Success Magazine.
Disclosure: mysmallbank.com nor the author received any compensation from the mentioned security for this article. The article is our opinion only and is written to help readers learn more about community bank stocks. Consider this as basic information only and utilize professional services and additional sources before making an investment decision.