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2019-10-16 20:41:29

In today's dividend stock analysis, we are going to review a very solid community bank located in northern Michigan. Mackinac Financial Corporation (NYSE:MFNC) is a $1.3 billion bank with 29 branches. If you are from the area, you may know this bank as mBank. The bank has quite the growth story, as they have acquired five banks since 2014. The purpose of this analysis is to review the company's financials, valuation metrics, and of course, their dividend, to determine if the company fits our investment metrics.

Financial Statement Review

I mentioned earlier that the bank has $1.3b in assets. A nice sized publicly traded community bank if you ask me. The largest financial statement asset financial statement line item is loans, of course. As of 6/30/19, the company had $1.06b of loans. The story of the company continues to be loan growth, though. The company's loan production growth was mentioned several times as a driving factor for the company's balance sheet and revenue growth during the year.

Loan production growth differs from loan growth on the balance sheet due to the fact that it considers loans that were sold. For these sold loans, the bank sold the loans and retained the servicing rights, earning the company a servicing fee over the life of the loan. However, the loan itself is not considered an asset on the balance sheet as it was sold (most likely to Fannie or Freddie). This is a common practice, especially for community banks.

Otherwise, outside of loan and loan production growth, the balance sheet has remained pretty stable from 12/31/18 to 6/30/19. We will see if the balance sheet changes drastically here when the third quarter 10-Q is released in the coming month.

The June 30, 2019 income statement in the 10-Q compares itself to the previous year, or June 30, 2018. This is where the bank's true growth story becomes evident. Six-month loan interest revenue has increased from $22.5m to $30.2m over the last 12 months. This is due to the two acquisitions that were closed in 2018! Loan growth on the balance sheet may not have grown organically since 12/31/18. But the company sure has grown their loan portfolio via acquisition. Not surprisingly either, the company has seen their interest expense, provision, and on-interest expenses increase in a similar manner due to the acquisition. Again, not surprising based on the transaction.

The company's strong earnings post-acquisition paint a positive picture for the company and help future potential investors, like myself, see the future earnings potential for the larger bank. This is especially true in such a competitive time for the industry (especially if rates continue to fall and create pressure on bank's bottom line).

The last thing I like to review from a financial standpoint is the company's capital position. Capital Ratios at banks are monitored closely by management, regulators, and all other stakeholders. Bank's must report their Capital Ratios quarterly to disclose how well the bank is capitalized. Mackinac's Tier 1 Capital to Risk Weighted Assets ratio was 12.2% as of June 30, 2019, well above the well-capitalized thresholds for those metrics. No further concerns from this dividend investor about the bank's capitalization!

Returning Value to Shareholders Via Dividends and Share Buybacks

The company recently announced a dividend increase. On September 17th, the company announced a 15% increase in their dividend. MFNC's quarterly dividend increased from $.12 per share to $.14 share. Annually, shareholders will receive $.56 per share. For a community bank with a dividend yield over 3%, that is a significant dividend increase. I'll touch on the company's dividend history later, which is difficult to evaluate based on stock splits and dilution from acquisitions.

But the shareholder returns don't stop there. In the third quarter, the company also announced a share repurchase program. I found this very interesting. Rather than define a dollar amount for share repurchases, like most companies, management may repurchase up to 5% of the company's common stock. As of the filing of their last 10-Q, the company had 10,740,712 shares outstanding. Thus, the company could repurchase approximately 537,000 shares under the new program. At the company's current close price of $15.40 per share, it would cost the bank nearly $8.3m. Luckily, the company has over $60m of cash and cash due from as of 6/30/19. So maximizing the share repurchase barely make a dent in the company's current cash balance.

Dividend Diplomats Dividend Stock Screener

Let's run Mackinac through the Dividend Diplomats' Dividend Stock Screener. The Dividend Diplomats Dividend Stock Screener examines the following metrics and is what we use to determine whether a company is considered an undervalued dividend growth stock.

P/E Ratio (Valuation)

Dividend Payout Ratio (Safety)

Dividend Growth Rate and History (Longevity)

For this analysis, I will use the company's 10/15/19 close price of $15.40 per share, annualized EPS of $1.28 per share, and an annual dividend of $.56 per share. Further, I would want to see a payout ratio below 60%, a price-to-earnings (P/E) ratio below 13 (lower due to historically lower P/E ratios in the industry), and a dividend yield above 4.00% (i.e., higher than the market and most community-based bank yields).

1.) Price-to-Earnings (P/E) - This metric is used to see if the company is undervalued. According to my source, the S&P 500 P/E ratio is 22.3. MFNC's 12.03X ratio is much lower than the broader market. Further, we performed an analysis over another Michigan community bank, Independent Bank (NYSE:IBCP). In our screener, IBCP's P/E ratio was 12.3X. So MFNC's P/E ratio is below the market, the 13X parameter I sent earlier, and is below an in-state peer.

2.) Payout Ratio - We use a 60% target payout ratio in our analysis, as we believe 60% provides a strong blend of yield and ability to continue growing their dividend going forward. MFNC's dividend payout ratio is 43%; well below our mark. Looks like there is plenty of room to continue growing their dividend.

3.) Dividend Yield - The current dividend of $.56 per share equates to a yield of 3.6%. This is a very nice dividend yield, but below the 4% yield defined earlier. For community banks, I want to see that dividend yield.

4.) Dividend Growth Rate - Earlier I discussed the company's strong 15% dividend increase announced in September. I love seeing a strong growth rate for a community bank. The company has increased their dividend this decade, although some sources may appear to say otherwise due to the impact the five acquisitions this decade had on the company's shares outstanding and corresponding dividend. To me, the important thing is that the company has managed to grow their dividend while closing five acquisitions. In their first year without an acquisition, the company announced a 15% dividend increase and a share buyback program. The company's low dividend payout ratio, along with cash on hand, should allow management to continue strong returns if the cash is not deployed elsewhere (acquisitions for example). Thus, the company's short-term history indicates that management is committed to paying, and growing their dividend.


Mackinac Financial Corporation is a strong, $1.3b community bank that is exhibiting strong earnings growth due to recent acquisitions and slight loan growth. The company continues to reward shareholders through dividend increases and share repurchase programs as well. From a valuation standpoint, I like that the company is trading below the market and an in state peer, no doubt. And the company's low payout ratio leaves plenty of room to continue to grow their dividend. However, the one knock against the company is that their dividend yield did not exceed the 4% mark outlined in our dividend stock screener. Despite the positives, when investing in smaller community banks, I like to have a high dividend yield and dividend growth. So for now, I am adding the company to my watch list, as the dividend yield only needs to increase 40 basis points to reach my target.

What are your thoughts about Mackinac Financial Corporation? Am I too focused on yield in this case? Does it concern you that the bank's growth is predominantly due to acquisitions and not organic growth?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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