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Mackinac Financial Corporation Reports Third Quarter and Nine Months 2011 Results

MANISTIQUE, MI -- (Marketwire) -- 10/28/11 -- Mackinac Financial Corporation (NASDAQ: MFNC), the bank holding company for mBank (the "Bank") today announced third quarter 2011 income of $.707 million or $.21 per share compared to a net loss of $.104 million, or $.03 per share for the third quarter of 2010. Net income for the first nine months of 2011 totaled $1.566 million, or $.46 per share, compared to net income of $.934 million, or $.27 per share, for the same period in 2010.

The Corporation's primary asset, mBank, recorded net income of $.999 million for the third quarter of 2011 and $2.439 million for the nine month period in 2011. The third quarter results include the initial recording value of mortgage servicing rights at $.300 million, a provision for loan losses of $.400 million and $.296 million of losses on OREO properties. Operating results for the same period in 2010 include a $1.000 million provision and negligible OREO losses.

Total shareholders' equity at September 30, 2011 totaled $55.479 million, compared to $55.987 million on September 30, 2010, a decrease of $.508 million and a $1.597 million, or 7.96% increase from 2010 year end equity of $53.882 million. Book value of common shareholders' equity was $13.05 per share at September 30, 2011 compared to $13.26 per share at September 30, 2010 and $12.63 on December 31, 2010. Weighted average shares outstanding totaled 3,419,736 for all periods. The common stock warrants outstanding of 379,310 shares were slightly dilutive, at approximately $.01 per share, for the 2011 third quarter and the nine month period, as the market value of our stock moved above the $4.35 strike price.

Some highlights for the third quarter and nine month period included:

  • SBA/USDA loan sale premium income of $1.469 million year to date, exceeded all of 2010 totals. We continue to see good premiums in the 7% to 8% range on these transactions. This line of business has become a core competency and revenue driver to the company as evidenced by our continued strong results statewide in terms of these programs. SBA fiscal year-end September 30th, 2011 totals reflect mBank ranking 9th in terms of the number of 7A program loans (39), and 8th in total dollars of 7A program loans ($23.4M). We continue to strive to be a steady catalyst for small business lending within the markets we serve throughout the State of Michigan by providing the necessary capital for business expansion and infrastructure growth.
  • Improved net interest margin at 4.14% for the third quarter and 3.95% for the nine month period of 2011 through the increased growth in low cost transactional deposit accounts and disciplined loan pricing ensuring appropriate asset returns on a loan by loan basis.
  • Core deposit growth for the first nine months of 2011 totaled $56.229 million, with transactional accounts accounting for $33.313 million of this growth, improving our funding mix.
  • Recorded initial valuation of mortgage servicing rights at $.300 million.
  • In the third quarter and nine month period of 2011, the Corporation recorded a provision for loan losses of $.400 million and $1.000 million, as compared to the $1.000 million and $4.700 million provision recorded in the third quarter and nine month period of 2010. ORE losses of $.296 million for the third quarter and losses of $.728 million for the nine month period of 2011 compared to negligible losses in the 2010 third quarter and YTD 2010 losses of $2.000 million. Both are showing trends of an improved and overall well performing asset base.
  • Nonperforming assets at September 30, 2011 totaled $14.885 million or a manageable 2.99% of total assets, a reduction of $1.240 million from 2010 year end balances. Non-accrual loans comprise 1.51% of total loans. Total loan delinquencies greater than 30 days past due were a nominal 1.65%, and the company's Texas Ratio resides at 24.28% for the quarter end, which is among the lowest of the 15 largest public banks headquartered in Michigan.
  • The company formed and opened its solely owned title company in conjunction with the Michigan Bankers Association. The title company began operations in September of this year and is expected to provide another business line to augment non-interest income growth through offering title services for both commercial and retail based mortgage transactions.
  • The company began the process of relocating its in-store Escanaba Menards Office location to a free standing traditional office given the growth and market share penetration we have been able to procure with our in-store branch the last two and half years and expect a full service branch to increase overall loan and deposit growth to increase shareholder value in this large commerce hub in the UP. We hope to have the new branch open during the end of the second quarter of 2012 or early summer.
  • mBank recently played an instrumental and lead role in staving off the permanent closure of Manistique Papers, Inc., a 90-year old paper mill located in Manistique, the bank's headquarters, that was being forced into Chapter 7 bankruptcy liquidation. The mill employs approximately 150 local workers and is the county's second largest private employer where the bank is based. A closure would have devastated the local economy and hundreds of direct manufacturing and indirect ancillary business jobs would have been lost. mBank's management worked quickly and diligently with the mill's prior non-local bank to purchase the senior secured debt at a discount to avert the Chapter 7 liquidation and keep the company functional in its current Chapter 11 process by also providing additional working capital through a new "debtor in possession" loan arrangement.

With mBank as the lead, the bank was supported in these transactions through participation by the Michigan Economic Development Corporation ("MEDC") and the Governor's office, whose support enabled these transactions to be consummated. Through these joint actions, the Manistique mill reopened less than six weeks after its closure in mid-August and days away from a complete liquidation in bankruptcy. Kelly W. George, President and CEO, commenting on mBank's role, stated, "We at mBank are very proud that we were able to boldly provide the financial support and expertise to a vital member of our local community to save hundreds of jobs and to help rehabilitate the paper mill, a long standing member of our business community. I believe that this is the essence of real community banking; providing local banking services and financial expertise to foster economic development in order to preserve and create employment opportunities, keeping our communities vibrant and strong with a good quality of life for all."

Loans and Non-performing Assets

Total loans at September 30, 2011 were $391.903 million, a 2.40% increase from the $382.727 million at September 30, 2010 and up $8.817 million from year-end 2010 total loans of $383.086 million. Commenting on loan growth, Kelly W. George, President and CEO, of mBank stated, "New loan production in the third quarter continued to gain momentum with overall new production of $40.6 million. On a year to date basis, the company has generated over $113 million of new loans, with $70 million of those being commercial in nature, and $43 million retail based. The Upper Peninsula continues to lead all regions with $64 million of this new production, the Northern Lower Peninsula with $34 million, and Southeast Michigan with $15 million. In addition, through the use of the various governmental loan guarantee programs offered through the SBA, USDA, and the Michigan Economic Development Corporation (MEDC), we have been able to prudently structure and extend credit throughout various commercial industries to help spur economic growth and help repair a state and job market that was significantly hurt by the financial and real-estate collapse several years ago."

Nonperforming loans of $9.673 million have declined from 2010 year end balances of $10.563 million with nominal new additions throughout the year and balances representing several older loans that still remain in some stage of legal proceedings. George commented, "Subsequent to the close of the third quarter, we did also accept an offer for the sale of a nonperforming piece of ORE of approximately $1.5 million, at very close to its carrying value that should exit the bank in the near future. We continue our aggressive remediation actions on all of our problem assets in order to mitigate our losses and ongoing carrying costs. We believe that the current carrying values of our OREO properties, which are reassessed annually to ensure timely identification for any deterioration in values, properly reflect as best they can current market value for these assets. We remain highly focused on overall asset quality metrics and are staying vigilant in extending new credit, given the still challenging overall Michigan economy, but we do believe that the market is stabilizing."

Margin Analysis

Net interest margin in the third quarter of 2011 increased to $4.709 million, 4.14%, compared to $4.064 million, or 3.69%, in the third quarter of 2010 and the net interest margin in the first nine months of 2011 increased to $13.028 million, 3.95%, compared to $12.109 million, or 3.59%, in the first nine months of 2010. The interest margin increase was largely due to decreased funding costs. George stated, "We are disciplined in our deposit and loan pricing structures in order to minimize long term interest rate risk with the primary objective of growing our current margins. We expect our margin to improve as we progress through the end of the year and into 2012 with increased funding of new loans with lower cost transactional accounts and further repayment of longer-term maturing brokered deposits. On hand liquidity remains strong with over $30 million of fed funds/cash and $28 million of unpledged investments available to service depositor needs and fund new asset growth."

Deposits

Total deposits of $405.058 million at September 30, 2011 increased slightly from deposits of $404.524 million on September 30, 2010; however, the deposit mix changed dramatically with brokered deposits declining from $94.660 million on September 30, 2010 to $34.077 million on September 30, 2011. Total deposits on September 30, 2011 were up $18.279 million from year-end 2010 deposits of $386.779 million. The overall increase in deposits for the first nine months of 2011 is comprised of a decrease in noncore deposits of $37.950 million which was offset with increased core deposits of $56.229 million. George, commenting on the increased core deposits, stated, "In the first nine months of 2011, we continued to grow core deposits at a steady rate. Our dependency on brokered deposits, which stood at 42% of total deposits at 2009 year-end, has decreased to 8% of deposits on September 30, 2011. We are pleased with our current deposit mix and we will continue to monitor all of our products and pricing to remain competitive in order to maintain interest margins and preserve franchise value associated with core deposits."

Noninterest Income/Expense

Noninterest income, at $1.006 million in the third quarter of 2011, increased $.358 million from the third quarter 2010 level of $.648 million with the largest drivers of this income being the increased gains from the sale of SBA/USDA loans, which totaled $.283 million in the third quarter and $1.469 million for the nine month period, and the initial recognition of the value of mortgage servicing rights in the amount of $.300 million. Noninterest income, at $2.931 million in the first nine months of 2011, increased $.883 million from the first nine months of 2010 level of $2.048 million. Noninterest income in the first nine months of 2010 also includes $.215 million of security gains which the Corporation does not consider recurring earnings provider on a year to year basis.

Noninterest expense, at $3.960 million in the third quarter of 2011, increased $.359 million, or 9.97% from the third quarter of 2010. Noninterest expense, at $11.749 million in the first nine months of 2011, decreased $.811 million, or 6.46% from the first nine months of 2010 due primarily to lower losses and write-downs of ORE properties, which declined from $2.000 million of write-downs in 2010 to $.728 million in 2011. Our other operating expenses in 2011 remain marginally elevated due to the added cost of aggressive nonperforming asset remediation to cleanse the credit book and are expected to decrease as these remaining problem assets eventually exit the bank. The Corporation continues to look for ways to control costs and for the quarter end continues to remain below peer levels in terms of salary and benefits as a percentage of total assets residing at 1.48%, and total overhead as a percentage of total assets which equated to 3.01%. The company's year-to-date efficiency ratio equated to 70.06%, down slightly from year end 2010 levels of 72.57%.

Assets and Capital

Total assets of the Corporation at September 30, 2011 were $498.598 million, down slightly from the $499.006 million reported at September 30, 2010 and up 4.16% from the $478.696 million of total assets at year-end 2010. Common Shareholders' equity at September 30, 2011 totaled $44.613 million, or $13.05 per share, compared to $45.329 million, or $13.26 per share on September 30, 2010 and $43.173 million, or $12.63 per share at 2010 year end. The Corporation and the Bank are both "well-capitalized" with Tier 1 Capital at the Corporation of 9.73% and 8.79% at the Bank.

Paul D. Tobias, Chairman and Chief Executive Officer, concluded, "We are pleased with our progress thus far in 2011. We continue to build franchise value through core deposit growth and other strategic initiatives, such as the organization of mBank Title Insurance Agency, LLC and look forward to prudently expanding our franchise in the near term. An additional near-term objective is to begin exploration of a TARP exit strategy sometime in 2012 given our outlook for increased core earnings which creates opportunities for other sources of capital."

Mackinac Financial Corporation is a registered bank holding company formed under the Bank Holding Company Act of 1956 with assets in excess of $490 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 Company'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

(Dollars in thousands, except
 per share data)                            For The Period Ended
                                 ------------------------------------------
                                 September 30,  December 31,  September 30,
                                      2011          2010           2010
                                 -------------  ------------  -------------
                                  (Unaudited)                  (Unaudited)
Selected Financial Condition
 Data (at end of period):
Assets                           $     498,598  $    478,696  $     499,006
Loans                                  391,903       383,086        382,727
Investment securities                   37,022        33,860         37,450
Deposits                               405,058       386,779        404,524
Borrowings                              35,997        36,069         36,069
Common shareholders' equity             44,613        43,176         45,329
Shareholders' Equity                    55,479        53,882         55,987

Selected Statements of Income
 Data (nine months and year
 ended):
Net interest income              $      13,028  $     16,385  $      12,109
Income (Loss) before taxes and
 preferred dividend                      3,210        (3,918)        (3,103)
Net income                               1,566        (1,160)           934
Income (loss) per common share -
 Basic                                     .46          (.34)           .27
Income (loss) per common share -
 Diluted                                   .45          (.34)           .27
Weighted average shares
 outstanding                         3,419,736     3,419,736      3,419,736
Weighted average shares
 outstanding - diluted               3,503,347     3,419,736      3,419,736

Three Months Ended:
Net interest income              $       4,709  $      4,276  $       4,064
Income (Loss) before taxes and
 preferred dividend                      1,355          (814)           111
Net income (Loss)                          707        (1,907)          (104)
Income (Loss) per common share -
 Basic                                     .21          (.61)          (.03)
Income (Loss) per common share -
 Diluted                                   .20          (.61)          (.03)
Weighted average shares
 outstanding                         3,419,736     3,419,736      3,419,736
Weighted average shares
 outstanding - diluted               3,509,581     3,419,736      3,419,736

Selected Financial Ratios and
 Other Data (nine months and
 year ended):
Performance Ratios:
Net interest margin                       3.95%         3.66%          3.59%
Efficiency ratio                         70.06         72.57          74.12
Return on average assets                   .43          (.23)           .25
Return on average common equity           4.81         (2.64)          2.71
Return on average equity                  3.85         (2.06)          2.21

Average total assets             $     490,293  $    502,993  $     507,938
Average common shareholders'
 equity                          $      43,563  $     43,981  $      45,975
Average total shareholders'
 equity                          $      54,340  $     56,171  $      56,561
Average loans to average
 deposits ratio                          96.96%        94.36%         93.19%

Common Share Data (at end of
 period):
Market price per common share    $        5.46  $       4.58  $        5.10
Book value per common share      $       13.05  $      12.63  $       13.26
Common shares outstanding            3,419,736     3,419,736      3,419,736

Other Data (at end of period):
Allowance for loan losses        $       5,838  $      6,613  $       5,437
Non-performing assets            $      14,885  $     16,125  $      17,005
Allowance for loan losses to
 total loans                              1.49%         1.73%          1.42%
Non-performing assets to total
 assets                                   2.99%         3.37%          3.41%
Texas Ratio                              24.28%        26.66%         27.68%
Number of:
  Branch locations                          11            11             11
  FTE Employees                            114           110             98



               MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED BALANCE SHEETS

                                 September 30,  December 31,  September 30,
(Dollars in thousands)                2011          2010           2010
                                 -------------  ------------  -------------
                                  (Unaudited)                  (Unaudited)
ASSETS

Cash and due from banks          $      30,122  $     22,719  $      36,561
Federal funds sold                      12,000        12,000         12,000
                                 -------------  ------------  -------------
  Cash and cash equivalents             42,122        34,719         48,561

Interest-bearing deposits in
 other financial institutions               10           713            692
Securities available for sale           37,022        33,860         37,450
Federal Home Loan Bank stock             3,060         3,423          3,794

Loans:
  Commercial                           299,135       297,047        295,262
  Mortgage                              86,500        80,756         82,312
  Installment                            6,268         5,283          5,153
                                 -------------  ------------  -------------
    Total Loans                        391,903       383,086        382,727
      Allowance for loan losses         (5,838)       (6,613)        (5,437)
                                 -------------  ------------  -------------
  Net loans                            386,065       376,473        377,290

Premises and equipment                   9,507         9,660          9,843
Other real estate held for sale          5,212         5,562          5,758
Other assets                            15,600        14,286         15,618
                                 -------------  ------------  -------------

TOTAL ASSETS                     $     498,598  $    478,696  $     499,006
                                 =============  ============  =============

LIABILITIES AND SHAREHOLDERS'
 EQUITY
LIABILITIES:
  Deposits:
    Noninterest bearing deposits $      53,736  $     41,264  $      44,402
    NOW, money market, checking        157,596       134,703        127,828
    Savings                             15,618        17,670         20,265
    CDs < $100,000                     119,893        96,977         94,560
    CDs > $100,000                      24,138        22,698         22,809
    Brokered                            34,077        73,467         94,660
                                 -------------  ------------  -------------
      Total deposits                   405,058       386,779        404,524

  Borrowings:
    Federal Home Loan Bank              35,000        35,000         35,000
    Other                                  997         1,069          1,069
                                 -------------  ------------  -------------
      Total borrowings                  35,997        36,069         36,069
  Other liabilities                      2,064         1,966          2,426
                                 -------------  ------------  -------------
      Total liabilities                443,119       424,814        443,019

SHAREHOLDERS' EQUITY
  Preferred stock - No par
   value: Authorized 500,000
   shares 11,000 issued and
   outstanding                          10,866        10,706         10,658
  Common stock and additional
   paid in capital - No par
   value
    Authorized - 18,000,000
     shares
    Issued and outstanding -
     3,419,736 shares                   43,525        43,525         43,517
  Accumulated earnings (deficit)           607          (961)         1,131
  Accumulated other
   comprehensive income                    481           612            681
                                 -------------  ------------  -------------

    Total shareholders' equity          55,479        53,882         55,987
                                 -------------  ------------  -------------

TOTAL LIABILITIES AND
 SHAREHOLDERS' EQUITY            $     498,598  $    478,696  $     499,006
                                 =============  ============  =============





              MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per
 share data)                        Three Months Ended   Nine Months Ended
                                      September 30,        September 30,
                                   -------------------  -------------------
                                      2011      2010       2011      2010
                                   --------- ---------  --------- ---------
                                       (Unaudited)          (Unaudited)
INTEREST INCOME:
  Interest and fees on loans:
    Taxable                        $   5,584 $   5,300  $  15,918 $  15,718
    Tax-exempt                            35        46        114       145
  Interest on securities:
    Taxable                              304       324        878     1,077
    Tax-exempt                             7         7         21        21
  Other interest income                   26        23         89       100
                                   --------- ---------  --------- ---------
    Total interest income              5,956     5,700     17,020    17,061
                                   --------- ---------  --------- ---------

INTEREST EXPENSE:
  Deposits                             1,091     1,414      3,541     4,309
  Borrowings                             156       222        452       643
                                   --------- ---------  --------- ---------
    Total interest expense             1,247     1,636      3,993     4,952
                                   --------- ---------  --------- ---------

Net interest income                    4,709     4,064     13,028    12,109
Provision for loan losses                400     1,000      1,000     4,700
                                   --------- ---------  --------- ---------
Net interest income after
 provision for loan losses             4,309     3,064     12,028     7,409
                                   --------- ---------  --------- ---------

OTHER INCOME:
  Service fees                           180       264        616       737
  Net security gains                       -        (1)         -       215
  Income from loans sold                 478       334      1,863       958
  Mortgage servicing rights              300         -        300         -
  Other                                   48        51        152       138
                                   --------- ---------  --------- ---------
    Total other income                 1,006       648      2,931     2,048
                                   --------- ---------  --------- ---------

OTHER EXPENSES:
  Salaries and employee benefits       1,811     1,779      5,441     5,281
  Occupancy                              334       358      1,048     1,048
  Furniture and equipment                197       202        612       593
  Data processing                        177       193        532       587
  Professional service fees              165       168        550       502
  Loan and deposit                       288       212        719       665
  ORE Writedowns and
   (gains)/losses on sale                296         7        728     2,000
  FDIC Insurance Assessment              215       222        755       665
  Telephone                               51        53        160       145
  Advertising                             93        77        292       220
  Other                                  333       330        912       854
                                   --------- ---------  --------- ---------
    Total other expenses               3,960     3,601     11,749    12,560
                                   --------- ---------  --------- ---------

Income (Loss) before provision for
 income taxes                          1,355       111      3,210    (3,103)
Provision for (benefit of) income
 taxes                                   455        30      1,071    (4,593)
                                   --------- ---------  --------- ---------

NET INCOME                               900        81      2,139     1,490
                                   --------- ---------  --------- ---------

Preferred dividend expense               193       185        573       556

                                   --------- ---------  --------- ---------
NET INCOME (LOSS) AVAILABLE TO
 COMMON SHAREHOLDERS               $     707 $    (104) $   1,566 $     934
                                   ========= =========  ========= =========

INCOME (LOSS) PER COMMON SHARE:
  Basic                            $     .21 $    (.03) $     .46 $     .27
                                   ========= =========  ========= =========
  Diluted                          $     .20 $    (.03) $     .45 $     .27
                                   ========= =========  ========= =========


               MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
                      LOAN PORTFOLIO AND CREDIT QUALITY

(Dollars in thousands)

Loan Portfolio Balances (at end of period):

                                   September 30,  December 31, September 30,
                                        2011          2010          2010
                                   ------------- ------------- -------------
Commercial Loans
Real estate - operators of
 nonresidential buildings          $      62,567 $      58,114 $      52,192
Hospitality and tourism                   33,867        37,737        39,998
Commercial construction                   19,771        33,330        25,718
Lessors of residential buildings          16,433        16,598        15,854
Other                                    166,497       151,268       161,500
                                   ------------- ------------- -------------
  Total Commercial Loans                 299,135       297,047       295,262

Consumer Loans
1-4 family residential real estate        78,759        75,074        74,829
Consumer construction                      7,741         5,682         7,483
Consumer                                   6,268         5,283         5,153
                                   ------------- ------------- -------------

  Total Loans                      $     391,903 $     383,086 $     382,727
                                   ============= ============= =============


              MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
                       QUARTERLY FINANCIAL HIGHLIGHTS

                 -----------------------------------------------------------
                                        QUARTER ENDED
                 -----------------------------------------------------------
                                         (Unaudited)
                 -----------------------------------------------------------
                  September                           December    September
                     30,      June 30,    March 31,      31,         30,
                    2011        2011        2011        2010        2010
                 ----------- ----------- ----------- ----------- -----------
BALANCE SHEET
 (Dollars in
 thousands)

Total loans      $  391,903  $  394,812  $  374,609  $  383,086  $  382,727
Allowance for
 loan losses         (5,838)     (6,155)     (6,184)     (6,613)     (5,437)
                 ----------  ----------  ----------  ----------  ----------
  Total loans,
   net              386,065     388,657     368,425     376,473     377,290
Total assets        492,373     492,373     492,790     478,696     499,006
Core deposits       346,843     329,958     315,638     290,614     287,055
Noncore deposits
 (1)                 58,215      69,709      85,145      96,165     117,469
                 ----------  ----------  ----------  ----------  ----------
  Total deposits    405,058     399,667     400,783     386,779     404,524
Total borrowings     35,997      36,069      36,069      36,069      36,069
Common
 shareholders'
 equity              44,613      43,973      43,340      43,176      45,329
Total
 shareholders'
 equity              55,479      54,784      54,097      53,882      55,987
Total shares
 outstanding      3,419,736   3,419,736   3,419,736   3,419,736   3,419,736

AVERAGE BALANCES
 (Dollars in
 thousands)

Assets           $  497,333  $  494,481  $  478,861  $  488,320  $  512,335
Loans               397,665     378,250     380,066     385,296     385,268
Deposits            403,957     401,549     386,743     393,266     416,847
Common equity        44,176      43,363      43,147      44,339      46,041
Equity               54,998      54,138      53,870      55,015      56,668

INCOME STATEMENT
 (Dollars in
 thousands)

Net interest
 income          $    4,709  $    4,178  $    4,141  $    4,276  $    4,064
Provision for
 loan losses            400         600           -       1,800       1,000
                 ----------  ----------  ----------  ----------  ----------
  Net interest
   income after
   provision          4,309       3,578       4,141       2,476       3,064
Total other
 income               1,006       1,348         577         747         648
Total other
 expense              3,960       3,729       4,059       4,037       3,601
                 ----------  ----------  ----------  ----------  ----------
Income before
 taxes                1,355       1,197         659        (814)        111
Provision for
 (benefit of)
 income taxes           455         402         214       1,093          30
                 ----------  ----------  ----------  ----------  ----------
  Net income            900         795         445      (1,907)         81
                 ----------  ----------  ----------  ----------  ----------
Preferred
 dividend
 expense                193         192         189         185         185
                 ----------  ----------  ----------  ----------  ----------
Net income
 (loss)
 available to
 common
 shareholders    $      707  $      603  $      256  $   (2,092) $     (104)
                 ==========  ==========  ==========  ==========  ==========

PER SHARE DATA

Earnings         $      .21  $      .18  $      .07  $     (.61) $     (.03)
Book value per
 common share         13.05       12.86       12.67       12.63       13.26
Market value,
 closing price         5.46        6.00        6.02        4.58        5.10

ASSET QUALITY
 RATIOS

Nonperforming
 loans/total
 loans                 2.47%       2.39%       2.66%       2.76%       2.94%
Nonperforming
 assets/total
 assets                2.99        2.89        3.05        3.37        3.41
Allowance for
 loan
 losses/total
 loans                 1.49        1.56        1.65        1.73        1.42
Allowance for
 loan
 losses /
 nonperforming
 loans                60.35       65.19       62.06       62.61       48.34
Texas ratio (2)       24.28       23.38       24.96       26.66       27.68

PROFITABILITY
 RATIOS

Return on
 average assets         .56%        .49%        .22%     (1.70)%      (.08)%
Return on
 average common
 equity                6.35        5.58        2.40      (18.72)       (.90)
Return on
 average equity        5.10        4.47        1.92      (15.09)       (.73)
Net interest
 margin                4.14        3.79        3.92        3.88        3.69
Efficiency ratio      67.39       67.84       75.73       65.05       75.98
Average
 loans/average
 deposits             98.44       94.20       98.27       97.97       92.42

CAPITAL ADEQUACY
 RATIOS

Tier 1 leverage
 ratio                 9.73%       9.50%       9.70%       9.25%       9.22%
Tier 1 capital
 to risk
 weighted assets      11.65       11.40       11.61       11.36       11.73
Total capital to
 risk weighted
 assets               12.97       12.66       12.86       12.62       12.98
Average
 equity/average
 assets               11.06       10.95       11.25       11.27       11.06
Tangible
 equity/tangible
 assets               11.06       10.95       11.25       11.27       11.06

(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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