##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-20167
 MACKINAC FINANCIAL CORPORATION
  MICHIGAN
    
    38-2062816(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)130 SOUTH CEDAR STREET, MANISTIQUE, MI
    
    49854(Address of principal executive offices)
    
    (Zip Code)
   þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated
filer o
    
    Smaller reporting
company þ(Do not check if a smaller reporting company)
  o þ




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##### 



Page No.PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets  March 31, 2008 (Unaudited), December 31, 2007 and March 31, 2007 (Unaudited)
    
    
    1Condensed Consolidated Statements of Operations  Three Months Ended March 31, 2008 (Unaudited) and March 31, 2007 (Unaudited)
    
    
    2Condensed
Consolidated Statements of Changes in Shareholders Equity - Three Months Ended March 31, 2008 (Unaudited) and March 31, 2007 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows  Three Months Ended March 31, 2008 (Unaudited) and March 31, 2007 (Unaudited)
    
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    30PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    31Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    32SIGNATURES
    
    
    33Certification of Chief Executive OfficerCertification of Chief Financial OfficerSection 1350 Certification of Chief Executive OfficerSection 1350 Certification of Chief Financial Officer




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FINANCIAL INFORMATION
 
 FINANCIAL STATEMENTS
 
 
 March 31,
    
    
    December 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2007(unaudited)
    
    
    
    
    
    
    (unaudited)ASSETSCash and due from banks
    
    $
    6,849
    
    
    $
    6,196
    
    
    $
    5,647Federal funds sold
    
    
    1,568
    
    
    
    166
    
    
    
    6,330Cash and cash equivalents
    
    
    8,417
    
    
    
    6,362
    
    
    
    11,977Interest-bearing deposits in other financial institutions
    
    
    382
    
    
    
    1,810
    
    
    
    856Securities available for sale
    
    
    24,581
    
    
    
    21,597
    
    
    
    28,511Federal Home Loan Bank stock
    
    
    3,794
    
    
    
    3,794
    
    
    
    3,794Loans:Commercial
    
    
    291,980
    
    
    
    288,839
    
    
    
    256,133Mortgage
    
    
    64,624
    
    
    
    62,703
    
    
    
    59,317Installment
    
    
    3,452
    
    
    
    3,537
    
    
    
    2,971Total loans
    
    
    360,056
    
    
    
    355,079
    
    
    
    318,421Allowance for loan losses
    
    
    (3,924
    )
    
    
    (4,146
    )
    
    
    (4,975
    )Net loans
    
    
    356,132
    
    
    
    350,933
    
    
    
    313,446Premises and equipment
    
    
    11,511
    
    
    
    11,609
    
    
    
    12,252Other real estate held for sale
    
    
    1,137
    
    
    
    1,226
    
    
    
    127Other assets
    
    
    11,221
    
    
    
    11,549
    
    
    
    4,681TOTAL ASSETS
    
    $
    417,175
    
    
    $
    408,880
    
    
    $
    375,644LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Non-interest-bearing deposits
    
    $
    26,876
    
    
    $
    25,557
    
    
    $
    23,416Interest-bearing deposits:NOW and Money Market
    
    
    81,952
    
    
    
    81,160
    
    
    
    70,558Savings
    
    
    11,530
    
    
    
    12,485
    
    
    
    13,488CDs<$100,000
    
    
    83,087
    
    
    
    80,607
    
    
    
    94,067CDs>$100,000
    
    
    22,010
    
    
    
    22,355
    
    
    
    24,475Brokered
    
    
    100,592
    
    
    
    98,663
    
    
    
    78,408Total deposits
    
    
    326,047
    
    
    
    320,827
    
    
    
    304,412Borrowings:Federal funds purchased
    
    
    10,410
    
    
    
    7,710
    
    
    
    Short-term
    
    
    2,159
    
    
    
    1,959
    
    
    
    Long-term
    
    
    36,280
    
    
    
    36,280
    
    
    
    38,307Total borrowings
    
    
    48,849
    
    
    
    45,949
    
    
    
    38,307Other liabilities
    
    
    2,646
    
    
    
    2,783
    
    
    
    2,993Total liabilities
    
    
    377,542
    
    
    
    369,559
    
    
    
    345,712Shareholders equity:Preferred stock  No par value:Authorized 500,000 shares, no shares outstanding
Common stock and additional paid in capital  No par
value
Authorized  18,000,000 shares 
Issued and outstanding  3,428,695 shares
    
    
    42,862
    
    
    
    42,843
    
    
    
    42,750Accumulated deficit
    
    
    (3,441
    )
    
    
    (3,582
    )
    
    
    (12,709
    )Accumulated other comprehensive (loss)
    
    
    212
    
    
    
    60
    
    
    
    (109
    )Total shareholders equity
    
    
    39,633
    
    
    
    39,321
    
    
    
    29,932TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    417,175
    
    
    $
    408,880
    
    
    $
    375,644
  1.




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Three Months EndedMarch 31,2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)INTEREST INCOME:Interest and fees on loans:Taxable
    
    $
    6,100
    
    
    $
    6,233Tax-exempt
    
    
    108
    
    
    
    171Interest on securities:Taxable
    
    
    266
    
    
    
    301Tax-exempt
    
    
    1
    
    
    
    Other interest income
    
    
    89
    
    
    
    200Total interest income
    
    
    6,564
    
    
    
    6,905INTEREST EXPENSE:Deposits
    
    
    3,065
    
    
    
    3,222Borrowings
    
    
    454
    
    
    
    505Total interest expense
    
    
    3,519
    
    
    
    3,727Net interest income
    
    
    3,045
    
    
    
    3,178Provision for loan losses
    
    
    
    
    
    
    Net interest income after provision for loan losses
    
    
    3,045
    
    
    
    3,178OTHER INCOME:Service fees
    
    
    174
    
    
    
    161Net security gains
    
    
    65
    
    
    
    Net gains on loan sales
    
    
    48
    
    
    
    108Proceeds from settlement of lawsuit
    
    
    
    
    
    
    470Other
    
    
    23
    
    
    
    174Total other income
    
    
    310
    
    
    
    913OTHER EXPENSES:Salaries and employee benefits
    
    
    1,807
    
    
    
    1,738Occupancy
    
    
    355
    
    
    
    334Furniture and equipment
    
    
    178
    
    
    
    157Data processing
    
    
    221
    
    
    
    171Professional service fees
    
    
    153
    
    
    
    151Loan and deposit
    
    
    110
    
    
    
    72Telephone
    
    
    45
    
    
    
    58Advertising
    
    
    60
    
    
    
    92Other
    
    
    262
    
    
    
    283Total other expenses
    
    
    3,191
    
    
    
    3,056Income before provision for income taxes
    
    
    164
    
    
    
    1,035Provision for (benefit of) income taxes
    
    
    25
    
    
    
    NET INCOME
    
    $
    139
    
    
    $
    1,035INCOME PER COMMON SHARE:Basic
    
    $
    .04
    
    
    $
    .30Diluted
    
    $
    .04
    
    
    $
    .30
  2.




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Three Months EndedMarch 31,2008
    
    
    2007Balance, beginning of period
    
    $
    39,321
    
    
    $
    28,790Net income for period
    
    
    139
    
    
    
    1,035Stock option compensation
    
    
    21
    
    
    
    30Net unrealized gain on securities available for sale
    
    
    152
    
    
    
    77Total comprehensive income
    
    
    312
    
    
    
    1,142Balance, end of period
    
    $
    39,633
    
    
    $
    29,932
  3.




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Three Months EndedMarch 31,2008
    
    
    2007Cash Flows from Operating Activities:Net income
    
    $
    139
    
    
    $
    1,035Adjustments to reconcile net income to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    273
    
    
    
    199Provision for (benefit of) deferred taxes
    
    
    25
    
    
    
    (Gain) on sales/calls of securities available for sale
    
    
    (65
    )
    
    
    (Gain) on sale of premises, equipment other real estate
    
    
    (6
    )
    
    
    (5
    )Writedown of other real estate
    
    
    72
    
    
    
    Stock option compensation
    
    
    21
    
    
    
    30Change in other assets
    
    
    173
    
    
    
    (92
    )Change in other liabilities
    
    
    (136
    )
    
    
    (280
    )Net cash (used in) provided by operating activities
    
    
    496
    
    
    
    887Cash Flows from Investing Activities:Net (increase) decrease in loans
    
    
    (5,214
    )
    
    
    4,028Net decrease in interest-bearing deposits in other financial institutions
    
    
    1,428
    
    
    
    Purchase of securities available for sale
    
    
    (25,429
    )
    
    
    (13,564
    )Proceeds from sales, maturities or calls of securities available for sale
    
    
    22,761
    
    
    
    17,940Capital expenditures
    
    
    (145
    )
    
    
    (302
    )Proceeds from sale of premises, equipment, and other real estate
    
    
    38
    
    
    
    291Net cash (used in) provided by investing activities
    
    
    (6,561
    )
    
    
    8,393Cash Flows from Financing Activities:Net increase (decrease) in deposits
    
    
    5,220
    
    
    
    (8,009
    )Net increase in federal funds purchased
    
    
    2,700
    
    
    
    Net increase in line of credit
    
    
    200
    
    
    
    Net cash (used in) provided by financing activities
    
    
    8,120
    
    
    
    (8,009
    )Net increase in cash and cash equivalents
    
    
    2,055
    
    
    
    1,271Cash and cash equivalents at beginning of period
    
    
    6,362
    
    
    
    10,706Cash and cash equivalents at end of period
    
    $
    8,417
    
    
    $
    11,977Supplemental Cash Flow Information:Cash paid during the year for:Interest
    
    $
    2,073
    
    
    $
    2,017Income taxes
    
    
    15
    
    
    
    Noncash Investing and Financing Activities:Transfers of Foreclosures from Loans to Other Real Estate Held for Sale
(net of adjustments made through the allowance for loan losses)
    
    
    57
    
    
    
    109
  4.




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1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of PresentationThe unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the
Corporation) have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month period ended March
31, 2008 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2008. The unaudited consolidated financial statements and footnotes thereto should
be read in conjunction with the audited consolidated financial statements and footnotes thereto
included in the Corporations Annual Report on Form 10-K for the year ended December 31, 2007.The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and expenses during the
period. Actual results could differ from those estimates.In order to properly reflect some categories of other income and other expenses,
reclassifications of expense and income items have been made to prior period numbers. The
net other income and other expenses was not changed due to these reclassifications.Allowance for Loan LossesThe allowance for loan losses includes specific allowances related to commercial loans, which
have been judged to be impaired. A loan is impaired when, based on current information, it is
probable that the Corporation will not collect all amounts due in accordance with the
contractual terms of the loan agreement. These specific allowances are based on discounted
cash flows of expected future payments using the loans initial effective interest rate or the
fair value of the collateral if the loan is collateral dependent.The Corporation continues to maintain a general allowance for loan losses for loans not
considered impaired. The allowance for loan losses is maintained at a level which management
believes is adequate to provide for possible loan losses. Management periodically evaluates
the adequacy of the allowance using the Corporations past loan loss experience, known and
inherent risks in the portfolio, composition of the portfolio, current economic conditions, and
other factors. The allowance does not include the effects of expected losses related to future
events or future changes in economic conditions. This evaluation is inherently subjective
since it requires material estimates that may be susceptible to significant change. Loans are
charged against the allowance for loan losses when management believes the collectibility of
the principal is unlikely. In addition, various regulatory agencies periodically review the
allowance for loan losses. These agencies may require additions to the allowance for loan
losses based on their judgments of collectibility.In managements opinion, the allowance for loan losses is adequate to cover probable losses
relating to specifically identified loans, as well as probable losses inherent in the balance
of the loan portfolio as of the balance sheet date.Stock Option PlansThe Corporation sponsors three stock option plans. One plan was approved during 2000 and
applies to officers, employees, and nonemployee directors. This plan was amended as a part of
the December 2004 stock offering and recapitalization. The amendment, approved by shareholders,
increased the shares available under this plan
by 428,587 shares from the original 25,000 (adjusted for the 1:20 reverse stock split), to a
total authorized share balance of 453,587. The other two plans, one for officers and employees
and the other for nonemployee directors, were approved in 1997. A total of 30,000 shares
(adjusted for the 1:20 reverse stock split), were
 5.




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1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)made available for grant under these plans. These two 1997 plans expired early in 2007.
Options under all of the plans are granted at the discretion of a committee of the Corporations
Board of Directors. Options to purchase shares of the Corporations stock are granted at a
price equal to the market price of the stock at the date of grant. The committee determines the
vesting of the options when they are granted as established under the plan.The Corporation adopted SFAS No. 123 (Revised) Share Based Payments in the first quarter of
2006. This Statement supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees
and its related implementation guidance. Under Opinion No. 25, issuing stock options to
employees generally resulted in recognition of no compensation cost. This adoption resulted in
the recognition of after tax compensation expense in the amount of $21,000 for the three months
ended March 31, 2008 and $30,000 for the same period in 2007. The expense recorded recognizes
the current period vesting of options outstanding. The per share impact of this accounting
change was $.01 in both the first quarter of 2008 and 2007.2.
    
    RECENT ACCOUNTING PRONOUNCEMENTSFASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income TaxesIn July 2006, the Financial Accounting Standards Board (FASB) issued this interpretation to
clarify the accounting for uncertainty in tax positions. FIN 48 requires, among other matters,
that the Corporation recognize in its financial statements the impact of a tax position, if that
position is more likely than not of being sustained on an audit, based on the technical merits
of the position. The provisions of FIN 48 were effective as of the beginning of the
Corporations 2007 fiscal year and required any cumulative effect of the change in accounting
principle to be recorded as an adjustment to opening retained earnings. The Corporation did not
record an adjustment to retained earnings upon adoption of FIN 48. In future periods, The
Corporation will, in accordance with FIN 48, evaluate its tax positions to determine whether or
not an adjustment to deferred tax balances and related valuation accounts is warranted.SFAS No. 157, Fair Value MeasurementsSFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value measurements.
This statement is to be applied in concert with other accounting pronouncements which require or
allow fair value measurements. This statement does not require any new fair value adjustments.SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS
No. 159)SFAS No. 159 permits an entity to measure certain financial assets and financial
liabilities at fair value. The Statements objective is to improve financial reporting by
allowing entities to mitigate volatility in reported earnings caused by the measurement of
related assets and liabilities using different attributes, without having to apply complex hedge
accounting provisions. Under SFAS No. 159, entities that elect the fair value option will
report unrealized gains and losses in earnings at each subsequent reporting date. The fair
value option may be elected on an instrument-by-instrument basis, with a few exceptions, as long
as it is applied to the instrument in its entirety. The fair value option election is
irrevocable, unless a new election date occurs. The new Statement establishes presentation and
disclosure requirements to help financial statement users understand the effect of the entitys
election on its earnings but does not eliminate disclosure requirements of other accounting
standards. Assets and liabilities that are measured at fair value must be displayed on the face
of the balance sheet.SFAS No. 157 and No. 159 were effective January 1, 2008. The adoption of SFAS No. 157 and No.
159 by the Corporation did not have any material impact on the consolidated financial
statements.
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3.
    
    EARNINGS PER SHAREEarnings per share are based upon the weighted average number of shares outstanding.Additional shares issued as a result of option exercises would not be dilutive in either three
month period.The following shows the computation of basic and diluted earnings per share for the three months
ended March 31, 2008 and 2007 (dollars in thousands, except per share data):
 Three Months Ended
    
    
    
    
    
    Weighted Average
    
    
    IncomeMarch 31,
    
    Net Income
    
    
    Number of Shares
    
    
    Per Share2008Income per share  Basic and diluted
    
    $
    139
    
    
    
    3,428,695
    
    
    $
    .042007Income per share  Basic and diluted
    
    $
    1,035
    
    
    
    3,428,695
    
    
    $
    .30
 4.
    
    INVESTMENT SECURITIESThe amortized cost and estimated fair value of investment securities available for sale as of
March 31, 2008, December 31, 2007, and March 31, 2007 are as follows (dollars in thousands):
 March 31, 2008
    
    
    December 31, 2007
    
    
    March 31, 2007Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    EstimatedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueUS Agencies  MBS
    
    $
    23,704
    
    
    $
    23,933
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    US Agencies
    
    
    
    
    
    
    
    
    
    
    20,982
    
    
    
    20,969
    
    
    
    28,110
    
    
    
    27,920Obligations of states and political
subdivisions
    
    
    555
    
    
    
    648
    
    
    
    556
    
    
    
    628
    
    
    
    511
    
    
    
    591Total securities available for sale
    
    $
    24,259
    
    
    $
    24,581
    
    
    $
    21,538
    
    
    $
    21,597
    
    
    $
    28,621
    
    
    $
    28,511
 The amortized cost and estimated fair value of investment securities pledged to secure FHLB
borrowings and customer relationships were $22.074 million and $22.267 million respectively at
March 31, 2008.
 7.




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5.
    
    LOANSThe composition of loans at March 31, 2008, December 31, 2007, and March 31, 2007 is as follows
(dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2007Commercial real estate
    
    $
    185,514
    
    
    $
    171,695
    
    
    $
    153,587Commercial, financial and agricultural
    
    
    78,913
    
    
    
    78,192
    
    
    
    67,683One to four family residential real estate
    
    
    59,532
    
    
    
    57,613
    
    
    
    54,204Construction:Commercial
    
    
    27,553
    
    
    
    38,952
    
    
    
    34,863Consumer
    
    
    5,092
    
    
    
    5,090
    
    
    
    5,113Consumer
    
    
    3,452
    
    
    
    3,537
    
    
    
    2,971Total loans
    
    $
    360,056
    
    
    $
    355,079
    
    
    $
    318,421
 LOANS  Allowance for loan lossesAn analysis of the allowance for loan losses for the three months ended March 31, 2008, the year
ended December 31, 2007, and the three months ended March 31, 2007 is as follows (dollars in
thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2007Balance at beginning of period
    
    $
    4,146
    
    
    $
    5,006
    
    
    $
    5,006Recoveries on loans
    
    
    4
    
    
    
    50
    
    
    
    6Loans charged off
    
    
    (226
    )
    
    
    (1,310
    )
    
    
    (37
    )Provision for loan losses
    
    
    
    
    
    
    400
    
    
    
    Balance at end of period
    
    $
    3,924
    
    
    $
    4,146
    
    
    $
    4,975
 In the first quarter of 2008, net charge-off activity was $222,000, or .06% of average loans
outstanding compared to net charge-offs of $31,000, or .01% of average loans, in the first
quarter of 2007.LOANS  Impaired loansNonperforming loans are those which are contractually past due 90 days or more as to interest or
principal payments, on nonaccrual status, or loans, the terms of which have been renegotiated to
provide a reduction or deferral on interest or principal. The interest income recorded and that
which would have been recorded had nonaccrual and renegotiated loans been current or not
troubled was not material to the consolidated financial statements for the three months ended
March 31, 2008 and 2007.
 8.




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5.
    
    LOANS (Continued)Information regarding impaired loans as of March 31, 2008, December 31, 2007, and March 31, 2007
is as follows (dollars in thousands):
 Valuation ReserveMarch 31,
    
    
    December 31,
    
    
    March 31,
    
    
    March 31,
    
    
    December 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2007Balances, at period endImpaired loans with specific valuation reserve
    
    $
    3,277
    
    
    $
    3,639
    
    
    $
    1,804
    
    
    $
    1,139
    
    
    $
    1,320
    
    
    $
    493Impaired loans with no specific valuation reserve
    
    
    104
    
    
    
    369
    
    
    
    3,058
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    3,381
    
    
    $
    4,008
    
    
    $
    4,862
    
    
    $
    1,139
    
    
    $
    1,320
    
    
    $
    493Impaired loans on nonaccrual basis
    
    $
    3,381
    
    
    $
    3,298
    
    
    $
    4,142
    
    
    $
    1,139
    
    
    $
    1,219
    
    
    $
    493Impaired loans on accrual basis
    
    
    
    
    
    
    710
    
    
    
    720
    
    
    
    
    
    
    
    101
    
    
    
    Total impaired loans
    
    $
    3,381
    
    
    $
    4,008
    
    
    $
    4,862
    
    
    $
    1,139
    
    
    $
    1,320
    
    
    $
    493Average investment in impaired loans
    
    $
    3,915
    
    
    $
    4,135
    
    
    $
    3,416Interest income recognized during impairment
    
    
    22
    
    
    
    129
    
    
    
    13Interest income that would have been recognized
on an accrual basis
    
    
    94
    
    
    
    391
    
    
    
    82Cash-basis interest income recognized
    
    
    22
    
    
    
    84
    
    
    
    7
 The average investment in impaired loans was approximately $3.915 million for the three-months
ended March 31, 2008, $4.135 million for the year ended December 31, 2007, and $3.416 million
for the three months ended March 31, 2007, respectively. The increase in impaired loans in the
first quarter of 2007 relates to the deterioration of several large commercial credits which are
well collateralized. Nonperforming assets are discussed in more detail under Managements
Discussion and Analysis.LOANS  Related partiesThe Bank, in the ordinary course of business, grants loans to the Corporations executive
officers and directors, including their families and firms in which they are principal owners.Activity in such loans is summarized below (dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2007Loans outstanding, beginning of period
    
    $
    1,720
    
    
    $
    1,621
    
    
    $
    1,621New loans
    
    
    
    
    
    
    
    
    
    
    Net activity on revolving lines of credit
    
    
    
    
    
    
    556
    
    
    
    Repayment
    
    
    (14
    )
    
    
    (457
    )
    
    
    (8
    )Change in related party interest
    
    
    2,733
    
    
    
    
    
    
    
    Loans outstanding, end of period
    
    $
    4,439
    
    
    $
    1,720
    
    
    $
    1,613
 There were no loans to related parties classified substandard at March 31, 2008, December 31,
2007, and March 31, 2007 respectively. In addition to the outstanding balances above, there
were unused commitments of $48,000 to related parties at March 31, 2008.
 9.




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6.SHORT-TERM BORROWINGSShort-term borrowings consist of the following at March 31, 2008, December 31, 2007, and March
31, 2007 (dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2007Fed funds purchased with an average weighted rate of 2.59% at March 31, 2008
    
    $
    10,410
    
    
    $
    7,710
    
    
    $
    Advance outstanding on line of credit with a correspondent bank, interest payable
at the prime rate, 5.25% as of March 31, 2008, maturing May 31, 2008
    
    
    2,159
    
    
    
    1,959
    
    
    
    1,959$
    12,569
    
    
    $
    9,669
    
    
    $
    1,959
 In the second quarter of 2006, the Corporation established a $6 million line of credit with a
correspondent bank. This line of credit, which is priced at the prime rate, will be utilized by
the Corporation to infuse capital into the Bank in order to support the regulatory required 8%
Tier 1 Capital and provide cash for holding company operations. This line of credit is secured
by all of the shares of the Bank and matures May 31, 2008, with a provision for an automatic
six-month extension to November 30, 2008.7.
    
    LONG-TERM BORROWINGSLong-term borrowings consist of the following at March 31, 2008, December 31, 2007 and March 31,
2007 (dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2007Federal Home Loan Bank fixed rate advances at rates ranging from 4.98% to 5.16%
maturing in 2010
    
    $
    15,000
    
    
    $
    15,000
    
    
    $
    15,000Federal Home
Loan Bank variable rate advances at rates ranging from 3.12% to 4.53% maturing in 2011
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,000Farmers Home Administration, fixed-rate note payable, maturing August 24, 2024
interest payable at 1%
    
    
    1,280
    
    
    
    1,280
    
    
    
    1,348$
    36,280
    
    
    $
    36,280
    
    
    $
    36,348
 The Federal Home Loan Bank borrowings are collateralized at March 31, 2008, by the following: a
collateral agreement on the Corporations one to four family residential real estate loans with
a book value of approximately $24.169 million; mortgage related and municipal securities with an
amortized cost and estimated fair value of $22.074 million and $22.267 million, respectively;
and Federal Home Loan Bank stock owned by the Bank totaling $3.794 million. Prepayment of the
remaining advances is subject to the provisions and conditions of the credit policy of the
Federal Home Loan Bank of Indianapolis in effect as of March 31, 2008.The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $486,000 originated
and held by the Corporations wholly owned subsidiary, First Rural Relending, an assignment of a
demand deposit account in the amount of $968,000, and guaranteed by the Corporation.
 10.




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##### Table of Contents



8.
    
    STOCK OPTION PLANSA summary of stock option transactions for the three months ended March 31, 2008 and 2007 and
the year ended December 31, 2007, is as follows:
 March 31,
    
    
    December 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2007Outstanding shares, at beginning of period
    
    
    446,417
    
    
    
    446,417
    
    
    
    446,417Granted during the period
    
    
    
    
    
    
    
    
    
    
    Expired/forfeited during the period
    
    
    
    
    
    
    
    
    
    
    Outstanding shares at end of period
    
    
    446,417
    
    
    
    446,417
    
    
    
    446,417Weighted average exercise price per share
at end of period
    
    $
    12.29
    
    
    $
    12.29
    
    
    $
    12.29Shares available for grant, at end of period
    
    
    18,488
    
    
    
    18,488
    
    
    
    18,488
 There were no options granted or exercised in the first quarter of 2008 or 2007.Following is a summary of the options outstanding and exercisable at March 31, 2008:
 WeightedAverage
    
    
    WeightedRemaining
    
    
    AverageExercise
    

Number of Shares
    
    
    Contractual
    
    
    ExercisePrice Range
    
    Outstanding
    
    
    Exercisable
    
    
    Life-Years
    
    
    Price$9.16
    
    
    12,500
    
    
    
    5,000
    
    
    
    7.8
    
    
    $
    9.16$9.75
    
    
    257,152
    
    
    
    120,861
    
    
    
    6.7
    
    
    
    9.75$10.65
    
    
    72,500
    
    
    
    14,500
    
    
    
    8.8
    
    
    
    10.65$11.50
    
    
    40,000
    
    
    
    8,000
    
    
    
    7.5
    
    
    
    11.50$12.00
    
    
    60,000
    
    
    
    12,000
    
    
    
    7.2
    
    
    
    12.00$156.00
 $240.00
    
    
    3,545
    
    
    
    3,545
    
    
    
    3.0
    
    
    
    186.75$300.00
 $400.00
    
    
    720
    
    
    
    720
    
    
    
    1.3
    
    
    
    345.00446,417
    
    
    
    164,626
    
    
    
    7.2
    
    
    $
    12.29
 9.
    
    INCOME TAXESA valuation allowance is provided against deferred tax assets when it is more likely than not
that some or all of the deferred tax asset will not be realized. At March 31, 2008, the
Corporation evaluated the valuation allowance against the net deferred tax asset which would
require future taxable income in order to be utilized. The Corporation, as of March 31, 2008
had a net operating loss and tax credit carryforwards for tax purposes of approximately $34.2
million, and $2.1 million, respectively.The Corporation utilized NOL carryforwards to offset taxable income for the first nine months of
2007. In the third quarter of 2007, the Corporation reversed a portion of the valuation
allowance, $7.500 million that pertained to the deferred tax benefit of NOL and tax credit
carryforwards. This valuation adjustment was recorded as a current period income tax benefit.
In 2006, the Corporation recorded a $500,000 tax benefit and utilized additional NOL
carryforwards to offset current taxable income. The recognition of the deferred tax benefit in
2007 and 2006 was in accordance with generally accepted accounting principles, and considered
among other things, the probability of utilizing the NOL and credit carryforwards.
 11.




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##### Table of Contents



9.
    
    INCOME TAXES (Continued)The Corporation recorded the future benefits from these carryforwards at such time as it became
more likely than not that they would be utilized prior to expiration. Please refer to further
discussion on income taxes contained in Managements Discussion and Analysis. The net
operating loss carryforwards expire twenty years from the date they originated. These
carryforwards, if not utilized, will begin to expire in the year 2023. A portion of the NOL,
approximately $22 million, and all of the credit carryforwards are subject to the limitations
for utilization as set forth in Section 382 of the Internal Revenue Code. The annual limitation
is $1.4 million for the NOL and the equivalent value of tax credits, which is approximately
$.477 million. These limitations for use were established in conjunction with the
recapitalization of the Corporation in December, 2004.10.
    
    FAS 157  FAIR VALUE MEASUREMENTSThe following tables present information about the Corporations assets and liabilities measured
at fair value on a recurring basis at March 31, 2008, and the valuation techniques used by the
Corporation to determine those fair values.
 Level 1:
    
    In general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical assets or liabilities that the Corporation has the ability to access.Level 2:
    
    Fair values determined by Level 2 inputs use other inputs that are observable,
either directly or indirectly. These Level 2 inputs include quoted prices for similar
assets and liabilities in active markets, and other inputs such as interest rates and yield
curves that are observable at commonly quoted intervals.Level 3:
    
    Level 3 inputs are unobservable inputs, including inputs available in situations
where there is little, if any, market activity for the related asset or liability.
   Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2008
 Quoted Prices in Active
    
    Significant Other
    
    SignificantMarkets for Identical
    
    Observable Inputs
    
    Unobservable Inputs
    
    Balance atAssets (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    March 31, 2008AssetsInvestment securities  available for sale
    
    $
    24,508
    
    
    $
    73
    
    
    $
    
    
    
    $
    24,581LiabilitiesNone
 12.




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##### Table of Contents



10.
    
    FAS 157  FAIR VALUE MEASUREMENTS (Continued)The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31,
2007 or March 31, 2008.The Corporation also has assets that under certain conditions are subject to measurement at fair
value on a non-recurring basis. These assets include held to maturity investments and loans.
The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically
discounted cash flow projections.
 Assets Measured at Fair Value on a Nonrecurring Basis
 Quoted Prices
    
    
    Significant
    
    
    Significantin Active Markets
    
    
    Other Observable
    
    
    Unobservable
    
    
    Total Losses forBalance at
    
    
    for Identical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    the Period EndedMarch 31, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    March 31, 2008AssetsImpaired loans accounted for under FAS 114
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,158
    
    
    $
    $
    
 The Corporation had no investments subject to fair value measurement on a nonrecurring basis.Impaired loans accounted for under FAS 114 categorized as Level 3 assets consist of
non-homogeneous loans that are considered impaired. The Corporation estimates the fair value of
the loans based on the present value of expected future cash flows using managements best
estimate of key assumptions. These assumptions include future payment ability, timing of
payment streams, and estimated realizable values of available collateral (typically based on
outside appraisals).Other assets, including bank owned life insurance, goodwill, intangible assets and other assets
acquired in business combinations, are also subject to periodic impairment assessments under
other accounting principles generally accepted in the United States of America. These assets
are not considered financial instruments. Effective February 12, 2008, the FASB issued a staff
position, FSP FAS 157-2, which delayed the applicability of FAS 157 to nonfinancial instruments.
Accordingly, these assets have been omitted from the above disclosures.11.
    
    COMMITMENTS, CONTINGENCIES, AND CREDIT RISKFinancial Instruments with Off-Balance-Sheet RiskThe Corporation is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit risk in excess of the amount recognized in the
consolidated balance sheets.
 13.




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##### Table of Contents



11.
    
    COMMITMENTS, CONTINGENCIES, AND CREDIT RISK(Continued)

The Corporations exposure to credit loss, in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit and standby letters of credit, is
represented by the contractual amount of those instruments. The Corporation uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. These commitments are as follows (dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2007Commitments to extend credit:Variable rate
    
    $
    40,993
    
    
    $
    43,903
    
    
    $
    55,517Fixed rate
    
    
    10,773
    
    
    
    8,055
    
    
    
    9,975Standby letters of credit  Variable rate
    
    
    6,089
    
    
    
    5,930
    
    
    
    6,094Credit card commitments  Fixed rate
    
    
    2,463
    
    
    
    2,414
    
    
    
    2,451$
    60,318
    
    
    $
    60,302
    
    
    $
    74,037
    Contingencies
  Concentration of Credit Risk
  14.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD LOOKING STATEMENTS
  
    
    The highly regulated environment in which the Corporation operates could adversely
affect its ability to carry out its strategic plan due to restrictions on new products,
funding opportunities or new market entrances;
    
    General economic conditions, either nationally or in the state(s) in which the
Corporation does business;
    
    Legislation or regulatory changes which affect the business in which the Corporation is
engaged;
    
    Changes in the interest rate environment which increase or decrease interest rate
margins;
    
    Changes in securities markets with respect to the market value of financial assets and
the level of volatility in certain markets such as foreign exchange;
    
    Significant increases in competition in the banking and financial services industry
resulting from industry consolidation, regulatory changes and other factors, as well as
action taken by particular competitors;
    
    The ability of borrowers to repay loans;
    
    The effects on liquidity of unusual decreases in deposits;
    
    Changes in consumer spending, borrowing, and saving habits;
    
    Technological changes;
    
    Acquisitions and unanticipated occurrences which delay or reduce the expected benefits
of acquisitions;
    
    Difficulties in hiring and retaining qualified management and banking personnel;
    
    The Corporations ability to increase market share and control expenses;
    
    The effect of compliance with legislation or regulatory changes;
    
    The effect of changes in accounting policies and practices;
    
    The costs and effects of existing and future litigation and of adverse outcomes in such
litigation.
  15.
    Table of Contents   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  FINANCIAL OVERVIEW
   FINANCIAL CONDITION
 Cash and Cash Equivalents
  Investment Securities
  Loans
  16.




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  March 31,
    
    
    Percent of
    
    
    December 31,
    
    
    Percent of
    
    
    March 31,
    
    
    Percent of2008
    
    
    Total
    
    
    2007
    
    
    Total
    
    
    2007
    
    
    TotalCommercial real estate
    
    $
    185,514
    
    
    
    51.52
    %
    
    $
    171,695
    
    
    
    48.35
    %
    
    $
    153,587
    
    
    
    48.24
    %Commercial, financial, and agricultural
    
    
    78,913
    
    
    
    21.92
    
    
    
    78,192
    
    
    
    22.02
    
    
    
    67,683
    
    
    
    21.261-4 family residential real estate
    
    
    59,532
    
    
    
    16.53
    
    
    
    57,613
    
    
    
    16.23
    
    
    
    54,204
    
    
    
    17.02Consumer
    
    
    3,452
    
    
    
    .96
    
    
    
    3,537
    
    
    
    1.00
    
    
    
    2,971
    
    
    
    .93ConstructionCommercial
    
    
    27,553
    
    
    
    7.66
    
    
    
    38,952
    
    
    
    10.97
    
    
    
    34,863
    
    
    
    10.94Consumer
    
    
    5,092
    
    
    
    1.41
    
    
    
    5,090
    
    
    
    1.43
    
    
    
    5,113
    
    
    
    1.61Total loans
    
    $
    360,056
    
    
    
    100.00
    %
    
    $
    355,079
    
    
    
    100.00
    %
    
    $
    318,421
    
    
    
    100.00
    %
  March 31, 2008
    
    
    December 31, 2007
    
    
    March 31, 2007Percent of
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    Percent ofOutstanding
    
    
    Commerical
    
    
    Shareholders
    
    
    Outstanding
    
    
    Commercial
    
    
    Shareholders
    
    
    Outstanding
    
    
    Commerical
    
    
    Shareholders'Balance
    
    
    Loans
    
    
    Equity
    
    
    Balance
    
    
    Loans
    
    
    Equity
    
    
    Balance
    
    
    Loans
    
    
    EquityReal estate  operators
of nonres bldgs
    
    $
    43,167
    
    
    
    14.78
    %
    
    
    108.92
    %
    
    $
    41,597
    
    
    
    14.40
    %
    
    
    105.79
    %
    
    $
    44,155
    
    
    
    17.24
    %
    
    
    147.52Hospitality and tourism
    
    
    35,760
    
    
    
    12.25
    
    
    
    90.23
    
    
    
    37,604
    
    
    
    13.02
    
    
    
    95.63
    
    
    
    33,726
    
    
    
    13.17
    
    
    
    112.68Real estate agents and
managers
    
    
    30,235
    
    
    
    10.36
    
    
    
    76.29
    
    
    
    29,571
    
    
    
    10.24
    
    
    
    75.20
    
    
    
    27,313
    
    
    
    10.66
    
    
    
    91.25Commercial construction
    
    
    27,553
    
    
    
    9.44
    
    
    
    69.52
    
    
    
    38,952
    
    
    
    13.49
    
    
    
    99.06
    
    
    
    34,863
    
    
    
    13.61
    
    
    
    116.47Other
    
    
    155,265
    
    
    
    53.17
    
    
    
    391.76
    %
    
    
    141,115
    
    
    
    48.85
    
    
    
    358.88
    %
    
    
    116,076
    
    
    
    45.32
    
    
    
    387.80Total Commercial Loans
    
    $
    291,980
    
    
    
    100.00
    %
    
    
    
    
    
    $
    288,839
    
    
    
    100.00
    %
    
    
    
    
    
    $
    256,133
    
    
    
    100.00
    %
  Credit Quality
  17.




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  March 31,
    
    
    December 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2007Nonperforming Assets:Nonaccrual loans
    
    $
    3,381
    
    
    $
    3,298
    
    
    $
    4,142Loans past due 90 days or more
    
    
    
    
    
    
    710
    
    
    
    720Total nonperforming loans
    
    
    3,381
    
    
    
    4,008
    
    
    
    4,862Other real estate owned
    
    
    1,137
    
    
    
    1,226
    
    
    
    127Total nonperforming assets
    
    $
    4,518
    
    
    $
    5,234
    
    
    $
    4,989Nonperforming loans as a % of loans
    
    
    .94
    %
    
    
    1.13
    %
    
    
    1.53
    %Nonperforming assets as a % of assets
    
    
    1.08
    %
    
    
    1.28
    %
    
    
    1.33
    %Reserve for Loan Losses:At period end
    
    $
    3,924
    
    
    $
    4,146
    
    
    $
    4,975As a % of loans
    
    
    1.09
    %
    
    
    1.17
    %
    
    
    1.56
    %As a % of nonperforming loans
    
    
    116.06
    %
    
    
    103.44
    %
    
    
    102.32
    %As a % of nonaccrual loans
    
    
    116.06
    %
    
    
    125.71
    %
    
    
    120.11
    %
  March 31,
    
    
    December 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2007Total loans, at period end
    
    $
    360,056
    
    
    $
    355,079
    
    
    $
    318,421Average loans for the year
    
    
    357,778
    
    
    
    333,415
    
    
    
    318,072Allowance for loan losses
    
    
    3,924
    
    
    
    4,146
    
    
    
    4,975Allowance to total loans at period end
    
    
    1.09
    %
    
    
    1.17
    %
    
    
    1.56
    %Net charge-offs during the period
    
    $
    222
    
    
    $
    1,260
    
    
    $
    31Net charge-offs to average loans
    
    
    .06
    %
    
    
    .38
    %
    
    
    .01
    %Net charge-offs to beginning allowance balance
    
    
    5.35
    %
    
    
    25.17
    %
    
    
    .62
    %
  18.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Estimated
    
    
    
    
    
    
    
    
    
    
    EsitmatedLiquidation
    
    
    (Deficiency)
    
    
    Reserve
    
    
    Net Surplus/Collateral Type
    
    Balance
    
    
    Originated
    
    
    Value
    
    
    Surplus
    
    
    Allocation
    
    
    (Exposure)(a)
    
    
    (b)
    
    
    ( c )
    
    
    (d) = ( c)-(a)
    
    
    (e)
    
    
    (f) = (d)+(e)Nonaccrual LoansCabins / Land (NLP)
    
    $
    545
    
    
    Pre-recap
    
    $
    432
    
    
    $
    (113
    )
    
    $
    120
    
    
    $
    71-4 Family (UP)
    
    
    147
    
    
    Pre-recap
    
    
    147
    
    
    
    
    
    
    
    8
    
    
    
    8Open End 1-4 Family Rev (UP)
    
    
    6
    
    
    Pre-recap
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    Land (NLP)
    
    
    36
    
    
    Pre-recap
    
    
    104
    
    
    
    68
    
    
    
    
    
    
    
    68Motel / Hotel (NLP)
    
    
    1,002
    
    
    Pre-recap
    
    
    449
    
    
    
    (553
    )
    
    
    607
    
    
    
    541-4 Family (NLP)
    
    
    64
    
    
    Pre-recap
    
    
    56
    
    
    
    (8
    )
    
    
    8
    
    
    
    Business  Liquor License (NLP)
    
    
    2
    
    
    Pre-recap
    
    
    6
    
    
    
    4
    
    
    
    
    
    
    
    41-4 Family (UP)
    
    
    425
    
    
    Post  recap
    
    
    339
    
    
    
    (86
    )
    
    
    95
    
    
    
    9Non-Farm/Non-Residential (UP)
    
    
    112
    
    
    Post  recap
    
    
    127
    
    
    
    15
    
    
    
    1
    
    
    
    16Land Development / Condo (NLP)
    
    
    1,042
    
    
    Post  recap
    
    
    1,080
    
    
    
    38
    
    
    
    300
    
    
    
    338Total nonaccrual loans
    
    
    3,381
    
    
    
    
    
    
    
    2,746
    
    
    
    (635
    )
    
    
    1,139
    
    
    
    504Other Real Estate1-4 Family (UP)
    
    
    20
    
    
    Pre-recap
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    Cabins / Land (NLP)
    
    
    260
    
    
    Pre-recap
    
    
    260
    
    
    
    
    
    
    
    
    
    
    
    Equipment Storage Building (UP)
    
    
    270
    
    
    Post  recap
    
    
    209
    
    
    
    (61
    )
    
    
    90
    
    
    
    29Land Development (NLP)
    
    
    510
    
    
    Post  recap
    
    
    546
    
    
    
    36
    
    
    
    
    
    
    
    36Downtown Store Frontage / 2 / 1-4 Family (UP)
    
    
    77
    
    
    Post  recap
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    Total other real estate owned
    
    
    1,137
    
    
    
    
    
    
    
    1,112
    
    
    
    (25
    )
    
    
    90
    
    
    
    65Total Pre-Recap Nonperforming Assets
    
    
    2,082
    
    
    
    
    
    
    
    1,480
    
    
    
    (602
    )
    
    
    743
    
    
    
    141Total Post-Recap Nonperforming Assets
    
    
    2,436
    
    
    
    
    
    
    
    2,378
    
    
    
    (58
    )
    
    
    486
    
    
    
    428Total Nonperforming assets
    
    $
    4,518
    
    
    
    
    
    
    $
    3,858
    
    
    $
    (660
    )
    
    $
    1,229
    
    
    $
    569
 
 UP
    
    = Upper PeninsulaNLP
    
    = Northern Lower PeninsulaSEM
    
    = Southeast Michigan    Estimated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EsitmatedLiquidation
    
    
    (Deficiency)
    
    
    SBA
    
    
    Reserve
    
    
    Net Surplus/Collateral Type
    
    Balance
    
    
    Value
    
    
    Surplus
    
    
    Guarantee
    
    
    Allocation
    
    
    (Exposure)Pre-RecapNorthern Lower Peninsula (NLP)
    
    $
    1,909
    
    
    $
    1,307
    
    
    $
    (602
    )
    
    $
    
    
    
    $
    735
    
    
    $
    133Upper Peninsula (UP)
    
    
    173
    
    
    
    173
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    8Southeast Michigan (SEM)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Pre-Recap Nonperforming Assets
    
    
    2,082
    
    
    
    1,480
    
    
    
    (602
    )
    
    
    
    
    
    
    743
    
    
    
    141Post-RecapNorthern Lower Peninsula (NLP)
    
    
    1,552
    
    
    
    1,626
    
    
    
    74
    
    
    
    
    
    
    
    300
    
    
    
    374Upper Peninsula (UP)
    
    
    884
    
    
    
    752
    
    
    
    (132
    )
    
    
    
    
    
    
    186
    
    
    
    54Southeast Michigan (SEM)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Post-Recap Nonperforming Assets
    
    
    2,436
    
    
    
    2,378
    
    
    
    (58
    )
    
    
    
    
    
    
    486
    
    
    
    428Total Nonperforming Assets
    
    $
    4,518
    
    
    $
    3,858
    
    
    $
    (660
    )
    
    $
    
    
    
    $
    1,229
    
    
    $
    569
 19.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  March 31,
    
    
    December 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2007Commercial, financial, and agricultural loans
    
    $
    3,615
    
    
    $
    3,808
    
    
    $
    3,906One to four family residential real estate loans
    
    
    25
    
    
    
    22
    
    
    
    29Consumer loans
    
    
    9
    
    
    
    20
    
    
    
    Unallocated and general reserves
    
    
    275
    
    
    
    296
    
    
    
    1,040Totals
    
    $
    3,924
    
    
    $
    4,146
    
    
    $
    4,975
    Three Months Ended
    
    
    Year Ended
    
    
    Three Months EndedMarch 31, 2008
    
    
    December 31, 2007
    
    
    March 31, 2007Balance at beginning of period
    
    $
    1,226
    
    
    $
    26
    
    
    $
    26Other real estate transferred from
loans due to foreclosure
    
    
    16
    
    
    
    1,218
    
    
    
    109Other real estate sold/written down
    
    
    (105
    )
    
    
    (18
    )
    
    
    (8
    )Balance at end of period
    
    $
    1,137
    
    
    $
    1,226
    
    
    $
    127
  Deposits
   20.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  March 31,
    
    
    
    
    
    
    December 31,
    
    
    
    
    
    
    March 31,2008
    
    
    % of Total
    
    
    2007
    
    
    % of Total
    
    
    2007
    
    
    % of TotalNon-interest-bearing
    
    $
    26,876
    
    
    
    8.24
    %
    
    $
    25,557
    
    
    
    7.97
    %
    
    $
    23,416
    
    
    
    7.69
    %NOW and money market
    
    
    81,952
    
    
    
    25.14
    
    
    
    81,160
    
    
    
    25.30
    
    
    
    70,558
    
    
    
    23.18Savings
    
    
    11,530
    
    
    
    3.54
    
    
    
    12,485
    
    
    
    3.89
    
    
    
    13,488
    
    
    
    4.43Certificates of Deposit <$100,000
    
    
    83,087
    
    
    
    25.48
    
    
    
    80,607
    
    
    
    25.12
    
    
    
    94,067
    
    
    
    30.90Total core deposits
    
    
    203,445
    
    
    
    62.40
    
    
    
    199,809
    
    
    
    62.28
    
    
    
    201,529
    
    
    
    66.20Certificates of Deposit >$100,000
    
    
    22,010
    
    
    
    6.75
    
    
    
    22,355
    
    
    
    6.97
    
    
    
    24,475
    
    
    
    8.04Brokered CDs
    
    
    100,592
    
    
    
    30.85
    
    
    
    98,663
    
    
    
    30.75
    
    
    
    78,408
    
    
    
    25.76Total non-core deposits
    
    
    122,602
    
    
    
    37.60
    
    
    
    121,018
    
    
    
    37.72
    
    
    
    102,883
    
    
    
    33.80Total deposits
    
    $
    326,047
    
    
    
    100.00
    %
    
    $
    320,827
    
    
    
    100.00
    %
    
    $
    304,412
    
    
    
    100.00
    %
 Borrowings
  Shareholders Equity
  RESULTS OF OPERATIONS
 Summary
   Net Interest Income
   21.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   2008-2007Average Balances
    
    
    Average Rates
    
    
    Interest
    
    
    Income/
    
    
    
    
    
    
    
    
    
    
    Rate/March 31,
    
    
    Increase/
    
    
    March 31,
    
    
    March 31,
    
    
    Expense
    
    
    Volume
    
    
    Rate
    
    
    Volume(dollars in thousands)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    Variance
    
    
    Variance
    
    
    Variance
    
    
    VarianceLoans (1,2,3)
    
    $
    357,778
    
    
    $
    318,072
    
    
    $
    39,706
    
    
    
    7.04
    %
    
    
    8.28
    %
    
    $
    6,264
    
    
    $
    6,491
    
    
    $
    (227
    )
    
    $
    817
    
    
    $
    (976
    )
    
    
    (68
    )Taxable securities
    
    
    23,899
    
    
    
    29,454
    
    
    
    (5,555
    )
    
    
    4.48
    
    
    
    4.14
    
    
    
    266
    
    
    
    301
    
    
    
    (35
    )
    
    
    (57
    )
    
    
    24
    
    
    
    (2
    )Nontaxable securities (2)
    
    
    73
    
    
    
    
    
    
    
    73
    
    
    
    5.51
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Federal funds sold
    
    
    5,360
    
    
    
    10,465
    
    
    
    (5,105
    )
    
    
    3.15
    
    
    
    5.34
    
    
    
    42
    
    
    
    138
    
    
    
    (96
    )
    
    
    (68
    )
    
    
    (57
    )
    
    
    29Other interest-earning assets
    
    
    4,688
    
    
    
    4,961
    
    
    
    (273
    )
    
    
    4.03
    
    
    
    5.05
    
    
    
    47
    
    
    
    62
    
    
    
    (15
    )
    
    
    (3
    )
    
    
    (13
    )
    
    
    1Total earning assets
    
    
    391,798
    
    
    
    362,952
    
    
    
    28,846
    
    
    
    6.80
    
    
    
    7.81
    
    
    
    6,621
    
    
    
    6,992
    
    
    
    (371
    )
    
    
    689
    
    
    
    (1,022
    )
    
    
    (38
    )Reserve for loan losses
    
    
    (4,079
    )
    
    
    (4,999
    )
    
    
    920Cash and due from banks
    
    
    6,201
    
    
    
    5,846
    
    
    
    355Intangible assets
    
    
    113
    
    
    
    194
    
    
    
    (81
    )Other assets
    
    
    23,649
    
    
    
    16,410
    
    
    
    7,239Total assets
    
    $
    417,682
    
    
    $
    380,403
    
    
    $
    37,279NOW and money market deposits
    
    $
    81,834
    
    
    $
    72,192
    
    
    $
    9,642
    
    
    
    2.17
    
    
    
    3.48
    
    
    
    442
    
    
    
    620
    
    
    
    (178
    )
    
    
    83
    
    
    
    (235
    )
    
    
    (26
    )Savings deposits
    
    
    12,026
    
    
    
    13,280
    
    
    
    (1,254
    )
    
    
    .84
    
    
    
    1.65
    
    
    
    25
    
    
    
    54
    
    
    
    (29
    )
    
    
    (5
    )
    
    
    (27
    )
    
    
    3CDs <$100,000
    
    
    82,546
    
    
    
    92,020
    
    
    
    (9,474
    )
    
    
    4.30
    
    
    
    4.89
    
    
    
    951
    
    
    
    1,110
    
    
    
    (159
    )
    
    
    (115
    )
    
    
    (59
    )
    
    
    15CDs >$100,000
    
    
    23,151
    
    
    
    23,882
    
    
    
    (731
    )
    
    
    4.57
    
    
    
    4.94
    
    
    
    263
    
    
    
    291
    
    
    
    (28
    )
    
    
    (9
    )
    
    
    (22
    )
    
    
    3Brokered deposits
    
    
    110,024
    
    
    
    84,773
    
    
    
    25,251
    
    
    
    5.05
    
    
    
    5.49
    
    
    
    1,384
    
    
    
    1,147
    
    
    
    237
    
    
    
    345
    
    
    
    (93
    )
    
    
    (15
    )Borrowings
    
    
    39,382
    
    
    
    38,376
    
    
    
    1,006
    
    
    
    4.64
    
    
    
    5.34
    
    
    
    454
    
    
    
    505
    
    
    
    (51
    )
    
    
    13
    
    
    
    (67
    )
    
    
    3Total interest-bearing liabilities
    
    
    348,963
    
    
    
    324,523
    
    
    
    24,440
    
    
    
    4.06
    
    
    
    4.66
    
    
    
    3,519
    
    
    
    3,727
    
    
    
    (208
    )
    
    
    312
    
    
    
    (503
    )
    
    
    (17
    )Demand deposits
    
    
    26,435
    
    
    
    23,473
    
    
    
    2,962Other liabilities
    
    
    2,793
    
    
    
    3,153
    
    
    
    (360
    )Shareholders equity
    
    
    39,491
    
    
    
    29,254
    
    
    
    10,237Total liabilities and
shareholders equity
    
    $
    417,682
    
    
    $
    380,403
    
    
    $
    37,279Rate spread
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.74
    %
    
    
    3.15
    %Net interest margin/revenue, tax
equivalent basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.18
    %
    
    
    3.65
    %
    
    $
    3,102
    
    
    $
    3,265
    
    
    $
    (163
    )
    
    $
    377
    
    
    $
    (519
    )
    
    $
    (21
    )
 
 (1)
    
    For purposes of these computations, nonaccruing loans are included in the daily
average loan amounts outstanding.(2)
    
    The amount of interest income on nontaxable securities and loans has been adjusted
to a tax equivalent basis, using 34% tax rate.(3)
    
    Interest income on loans
includes loan fees.  Provision for Loan Losses
  Other Income
  22.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Three Months EndedMarch 31,Increase/(Decrease)2008
    
    
    2007
    
    
    Dollars
    
    
    PercentService fees
    
    $
    174
    
    
    $
    161
    
    
    $
    13
    
    
    
    8.07
    %Net gains on loan sales
    
    
    48
    
    
    
    108
    
    
    
    (60
    )
    
    
    (55.56
    )Proceeds from settlement of lawsuit
    
    
    
    
    
    
    470
    
    
    
    (470
    )
    
    
    (100.00
    )Other
    
    
    23
    
    
    
    174
    
    
    
    (151
    )
    
    
    (86.78
    )Subtotal
    
    
    245
    
    
    
    913
    
    
    
    (668
    )
    
    
    (73.17
    )Net security gain (loss)
    
    
    65
    
    
    
    
    
    
    
    65
    
    
    
    100.00Total noninterest income
    
    $
    310
    
    
    $
    913
    
    
    $
    (603
    )
    
    
    (66.05
    )%
 Other Expenses
   Three Months EndedMarch 31,Increase/(Decrease)2008
    
    
    2007
    
    
    Dollars
    
    
    PercentSalaries and employee benefits
    
    $
    1,807
    
    
    $
    1,738
    
    
    $
    69
    
    
    
    3.97
    %Occupancy
    
    
    355
    
    
    
    334
    
    
    
    21
    
    
    
    6.29Furniture and equipment
    
    
    178
    
    
    
    157
    
    
    
    21
    
    
    
    13.38Data processing
    
    
    221
    
    
    
    171
    
    
    
    50
    
    
    
    29.24Professional service feesAccounting
    
    
    60
    
    
    
    82
    
    
    
    (22
    )
    
    
    (26.83
    )Legal
    
    
    38
    
    
    
    15
    
    
    
    23
    
    
    
    153.33Consulting and other
    
    
    55
    
    
    
    54
    
    
    
    1
    
    
    
    1.85Total professional service fees
    
    
    153
    
    
    
    151
    
    
    
    2
    
    
    
    1.32Loan and deposit
    
    
    110
    
    
    
    72
    
    
    
    38
    
    
    
    52.78Telephone
    
    
    45
    
    
    
    58
    
    
    
    (13
    )
    
    
    (22.41
    )Advertising
    
    
    60
    
    
    
    92
    
    
    
    (32
    )
    
    
    (34.78
    )Other
    
    
    262
    
    
    
    283
    
    
    
    (21
    )
    
    
    (7.42
    )Total other expense
    
    $
    3,191
    
    
    $
    3,056
    
    
    $
    135
    
    
    
    4.42
    %
 23.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS
 Federal Income Taxes
 Current Federal Tax Provision
  Deferred Tax Benefit
  LIQUIDITY
     24.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS
   CAPITAL AND REGULATORY
  25.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS
  March 31,
    
    
    December 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2007Capital StructureShareholders equity
    
    $
    39,633
    
    
    $
    39,321
    
    
    $
    29,932Total capitalization
    
    $
    39,633
    
    
    $
    39,321
    
    
    $
    29,932Tangible capital
    
    $
    39,529
    
    
    $
    39,197
    
    
    $
    29,756Intangible AssetsCore deposit premium
    
    $
    104
    
    
    $
    124
    
    
    $
    182Other identifiable intangibles
    
    
    
    
    
    
    
    
    
    
    Total intangibles
    
    $
    104
    
    
    $
    124
    
    
    $
    182Regulatory capitalTier 1 capital:Shareholders equity
    
    $
    39,633
    
    
    $
    39,321
    
    
    $
    29,932Net unrealized (gains) losses on
available for sale securities
    
    
    (212
    )
    
    
    (60
    )
    
    
    109Less: disallowed deferred tax asset
    
    
    (7,106
    )
    
    
    (6,990
    )
    
    
    Less: intangibles
    
    
    (104
    )
    
    
    (124
    )
    
    
    (182
    )Total Tier 1 capital
    
    $
    32,211
    
    
    $
    32,147
    
    
    $
    29,859Tier 2 Capital:Allowable reserve for loan losses
    
    $
    3,924
    
    
    $
    4,146
    
    
    $
    4,087Qualifying long-term debt
    
    
    
    
    
    
    
    
    
    
    Total Tier 2 capital
    
    
    3,924
    
    
    
    4,146
    
    
    
    4,087Total capital
    
    $
    36,135
    
    
    $
    36,293
    
    
    $
    33,946Risk-adjusted assets
    
    $
    364,243
    
    
    $
    358,410
    
    
    $
    326,101Capital ratios:Tier 1 Capital to average assets
    
    
    7.85
    %
    
    
    8.05
    %
    
    
    7.85
    %Tier 1 Capital to risk weighted assets
    
    
    8.84
    %
    
    
    8.97
    %
    
    
    9.16
    %Total Capital to risk weighted assets
    
    
    9.92
    %
    
    
    10.13
    %
    
    
    10.41
    %
   Tangible
    
    Tier 1
    
    Tier 1
    
    TotalEquity to
    
    Equity to
    
    Capital to
    
    Capital to
    
    Capital toPeriod-end
    
    Period-end
    
    Average
    
    Risk Weighted
    
    Risk WeightedAssets
    
    Assets
    
    Assets
    
    Assets
    
    AssetsRegulatory minimum for capital adequacy purposes
    
    
    N/A
    
    
    
    N/A
    
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    8.00
    %Regulatory defined well capitalized guideline
    
    
    N/A
    
    
    
    N/A
    
    
    
    5.00
    %
    
    
    6.00
    %
    
    
    10.00
    %The Corporation:March 31, 2008
    
    
    9.50
    %
    
    
    9.48
    %
    
    
    7.85
    %
    
    
    8.84
    %
    
    
    9.92
    %March 31, 2007
    
    
    7.97
    %
    
    
    7.92
    %
    
    
    7.85
    %
    
    
    9.16
    %
    
    
    10.41
    %The Bank:March 31, 2008
    
    
    9.94
    %
    
    
    9.92
    %
    
    
    8.34
    %
    
    
    9.40
    %
    
    
    10.46
    %March 31, 2007
    
    
    8.34
    %
    
    
    8.30
    %
    
    
    8.22
    %
    
    
    9.61
    %
    
    
    10.86
    %
 26.




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##### Table of Contents



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 INTEREST RATE RISK
          27.




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##### Table of Contents



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
  1-90
    
    
    91 - 365
    
    
    >1-5
    
    
    Over 5Days
    
    
    Days
    
    
    Years
    
    
    Years
    
    
    TotalInterest-earning assets:Loans
    
    $
    247,011
    
    
    $
    8,685
    
    
    $
    30,701
    
    
    $
    73,659
    
    
    $
    360,056Securities
    
    
    5
    
    
    
    
    
    
    
    23,957
    
    
    
    619
    
    
    
    24,581Other
    
    
    1,950
    
    
    
    
    
    
    
    
    
    
    
    3,794
    
    
    
    5,744Total interest-earning assets
    
    
    248,966
    
    
    
    8,685
    
    
    
    54,658
    
    
    
    78,072
    
    
    
    390,381Interest-bearing obligations:NOW, Money Market and Savings
    
    
    93,482
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,482Time deposits
    
    
    32,319
    
    
    
    60,001
    
    
    
    12,014
    
    
    
    763
    
    
    
    105,097Brokered deposits
    
    
    30,297
    
    
    
    70,295
    
    
    
    
    
    
    
    
    
    
    
    100,592Borrowings
    
    
    32,569
    
    
    
    
    
    
    
    15,000
    
    
    
    1,280
    
    
    
    48,849Total interest-bearing obligations
    
    
    188,667
    
    
    
    130,296
    
    
    
    27,014
    
    
    
    2,043
    
    
    
    348,020Gap
    
    $
    60,299
    
    
    $
    (121,611
    )
    
    $
    27,644
    
    
    $
    76,029
    
    
    $
    42,361Cumulative gap
    
    $
    60,299
    
    
    $
    (61,312
    )
    
    $
    (33,668
    )
    
    $
    42,361
 
 (1)
    
    Includes Federal Home Loan Bank Stock      28.




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##### Table of Contents



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
   FOREIGN EXCHANGE RISK
  OFF-BALANCE-SHEET RISK
   IMPACT OF INFLATION AND CHANGING PRICES
  29.




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##### Table of Contents



CONTROLS AND PROCEDURES
   30.




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##### Table of Contents



OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Shareholders Derivative Litigation
 Damon Trust v. Bittner, et al.
 Virginia M. Damon Trust v. North Country Financial Corporation, Nominal
Defendant, and Dennis Bittner, Bernard A. Bouschor, Ronald G. Ford, Sherry L. Littlejohn, Stanley
J. Gerou II, John D. Lindroth, Stephen Madigan, Spencer Shunk, Michael Hendrickson, Glen Tolksdorf,
and Wesley Hoffman
   Damon Trust v. Wipfli
 Virginia M. Damon Trust v.
Wipfli Ullrich Bertelson, LLP, and North Country Financial Corporation, Nominal Defendant
   31.




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##### Table of Contents



OTHER INFORMATION (Continued)
 
 Item 6. Exhibits and Reports on Form 8-K
  Exhibit 3.1
    
    Articles of Incorporation, as amended, incorporated herein by
reference to exhibit 3.1 of the Corporations Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.Exhibit 3.2
    
    Amended and Restated Bylaws, incorporated herein by reference
to exhibit 3.1 of the Corporations Quarterly Report on Form
10-Q for the quarter ended September 30, 2001.Exhibit 31.1
    
    Rule 13a-14(a) Certification of Chief Executive Officer.Exhibit 31.2
    
    Rule 13a-14(a) Certification of Chief Financial Officer.Exhibit 32.1
    
    Section 1350 Certification of Chief Executive Officer.Exhibit 32.2
    
    Section 1350 Certification of Chief Financial Officer.
 32.




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##### Table of Contents



MACKINAC FINANCIAL CORPORATION(Registrant)Date:  May 15, 2008
    By:
    /s/ Paul D. TobiasPAUL D. TOBIAS,CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(principal executive officer) By:
    /s/ Ernie R. KruegerERNIE R. KRUEGEREVP/CHIEF FINANCIAL OFFICER
(principal accounting officer) 33.