##### 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 September 30, 2007
 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
  o o þ
  o þ




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##### 



Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  September 30, 2007 (Unaudited), December 31, 2006 and
September 30, 2006 (Unaudited)
    
    
    1Condensed Consolidated Statements of Operations  Three and Nine
Months Ended September 30, 2007 (Unaudited) and
September 30, 2006 (Unaudited)
    
    
    2Condensed Consolidated Statements of Changes in Shareholders
Equity  Three and Nine Months Ended September 30, 2007
(Unaudited) and September 30, 2006 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2007 (Unaudited) and
September 30, 2006 (Unaudited)
    
    
    4Notes to Condensed Consolidated Financial
Statements (Unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 6. Exhibits and Reports on Form 8-K
    
    
    29SIGNATURES
    
    
    30Certification of Chief Executive OfficerCertification of Chief Financial OfficerSection 1350 Certification of Chief Executive OfficerSection 1350 Certification of Chief Financial Officer




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##### Table of Contents



FINANCIAL INFORMATION
 
 FINANCIAL STATEMENTS
 
 
 September 30,
    
    
    December 31,
    
    
    September 30,2007
    
    
    2006
    
    
    2006(unaudited)
    
    
    
    
    
    
    (unaudited)ASSETSCash and due from banks
    
    $
    7,364
    
    
    $
    4,865
    
    
    $
    5,537Federal funds sold
    
    
    947
    
    
    
    5,841
    
    
    
    11,949Cash and cash equivalents
    
    
    8,311
    
    
    
    10,706
    
    
    
    17,486Interest-bearing deposits in other financial institutions
    
    
    6,995
    
    
    
    856
    
    
    
    889Securities available for sale
    
    
    17,973
    
    
    
    32,769
    
    
    
    36,129Federal Home Loan Bank stock
    
    
    3,794
    
    
    
    3,794
    
    
    
    4,152Loans:Commercial
    
    
    285,680
    
    
    
    261,726
    
    
    
    238,481Mortgage
    
    
    54,962
    
    
    
    58,014
    
    
    
    51,341Installment
    
    
    3,507
    
    
    
    2,841
    
    
    
    2,792Total Loans
    
    
    344,149
    
    
    
    322,581
    
    
    
    292,614Allowance for loan losses
    
    
    (5,022
    )
    
    
    (5,006
    )
    
    
    (5,316
    )Net loans
    
    
    339,127
    
    
    
    317,575
    
    
    
    287,298Premises and equipment
    
    
    12,733
    
    
    
    12,453
    
    
    
    12,643Other real estate held for sale
    
    
    451
    
    
    
    26
    
    
    
    26Other assets
    
    
    11,829
    
    
    
    4,612
    
    
    
    4,568TOTAL ASSETS
    
    $
    401,213
    
    
    
    382,791
    
    
    $
    363,191LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Non-interest-bearing deposits
    
    $
    28,325
    
    
    $
    23,471
    
    
    $
    22,826Interest-bearing deposits:NOW and Money Market
    
    
    87,262
    
    
    
    73,188
    
    
    
    73,797Savings
    
    
    12,831
    
    
    
    13,365
    
    
    
    13,915CDs<$100,000
    
    
    90,220
    
    
    
    89,585
    
    
    
    85,236CDs>$100,000
    
    
    24,432
    
    
    
    23,645
    
    
    
    20,305Brokered
    
    
    78,301
    
    
    
    89,167
    
    
    
    77,415Total deposits
    
    
    321,371
    
    
    
    312,421
    
    
    
    293,494Borrowings
    
    
    38,239
    
    
    
    38,307
    
    
    
    38,307Other liabilities
    
    
    2,906
    
    
    
    3,273
    
    
    
    3,164Total liabilities
    
    
    362,516
    
    
    
    354,001
    
    
    
    334,965Shareholders equity:Preferred stock  No par value:Authorized 500,000 shares, no shares outstandingCommon stock and additional paid in capital  No par
valueAuthorized - 18,000,000 sharesIssued and outstanding - 3,428,695 shares
    
    
    42,810
    
    
    
    42,722
    
    
    
    42,646Accumulated deficit
    
    
    (4,107
    )
    
    
    (13,745
    )
    
    
    (14,083
    )Accumulated other comprehensive (loss)
    
    
    (6
    )
    
    
    (187
    )
    
    
    (337
    )Total shareholders equity
    
    
    38,697
    
    
    
    28,790
    
    
    
    28,226TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    401,213
    
    
    $
    382,791
    
    
    $
    363,191
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006INTEREST INCOME:Interest and fees on loans:Taxable
    
    $
    6,929
    
    
    $
    5,635
    
    
    $
    19,610
    
    
    $
    15,316Tax-exempt
    
    
    118
    
    
    
    189
    
    
    
    432
    
    
    
    575Interest on securitiesTaxable
    
    
    263
    
    
    
    306
    
    
    
    857
    
    
    
    852Tax-exempt
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    87Other interest
    
    
    209
    
    
    
    268
    
    
    
    575
    
    
    
    631Total interest income
    
    
    7,519
    
    
    
    6,403
    
    
    
    21,474
    
    
    
    17,461INTEREST EXPENSE:Deposits
    
    
    3,443
    
    
    
    2,951
    
    
    
    9,932
    
    
    
    7,540Borrowings
    
    
    516
    
    
    
    500
    
    
    
    1,535
    
    
    
    1,355Total interest expense
    
    
    3,959
    
    
    
    3,451
    
    
    
    11,467
    
    
    
    8,895Net interest income
    
    
    3,560
    
    
    
    2,952
    
    
    
    10,007
    
    
    
    8,566Provision for loan losses
    
    
    400
    
    
    
    
    
    
    
    400
    
    
    
    (600
    )Net interest income after provision for loan losses
    
    
    3,160
    
    
    
    2,952
    
    
    
    9,607
    
    
    
    9,166OTHER INCOME:Service fees
    
    
    169
    
    
    
    133
    
    
    
    515
    
    
    
    365Net gains on sale of secondary market loans
    
    
    165
    
    
    
    66
    
    
    
    364
    
    
    
    149Proceeds from settlement of lawsuit
    
    
    
    
    
    
    
    
    
    
    470
    
    
    
    Other
    
    
    62
    
    
    
    41
    
    
    
    302
    
    
    
    193Total other income
    
    
    396
    
    
    
    240
    
    
    
    1,651
    
    
    
    707OTHER EXPENSE:Salaries and employee benefits
    
    
    1,695
    
    
    
    1,487
    
    
    
    5,106
    
    
    
    4,577Occupancy
    
    
    322
    
    
    
    333
    
    
    
    983
    
    
    
    943Furniture and equipment
    
    
    178
    
    
    
    159
    
    
    
    501
    
    
    
    470Data processing
    
    
    196
    
    
    
    176
    
    
    
    577
    
    
    
    512Professional service fees
    
    
    78
    
    
    
    341
    
    
    
    403
    
    
    
    955Loan and deposit
    
    
    63
    
    
    
    78
    
    
    
    214
    
    
    
    305Telephone
    
    
    68
    
    
    
    55
    
    
    
    185
    
    
    
    155Advertising
    
    
    97
    
    
    
    70
    
    
    
    280
    
    
    
    247Other
    
    
    304
    
    
    
    303
    
    
    
    873
    
    
    
    831Total other expense
    
    
    3,001
    
    
    
    3,002
    
    
    
    9,122
    
    
    
    8,995Income before income taxes
    
    
    555
    
    
    
    190
    
    
    
    2,136
    
    
    
    878Provision for (benefit of) income taxes
    
    
    (7,500
    )
    
    
    (500
    )
    
    
    (7,500
    )
    
    
    (500
    )NET INCOME
    
    $
    8,055
    
    
    $
    690
    
    
    $
    9,636
    
    
    $
    1,378INCOME PER COMMON SHARE:Basic
    
    $
    2.35
    
    
    $
    .20
    
    
    $
    2.81
    
    
    $
    .40Diluted
    
    $
    2.35
    
    
    $
    .20
    
    
    $
    2.81
    
    
    $
    .40
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Balance, beginning of period
    
    $
    30,485
    
    
    $
    27,179
    
    
    $
    28,790
    
    
    $
    26,588Net income for period
    
    
    8,055
    
    
    
    690
    
    
    
    9,636
    
    
    
    1,378Stock option compensation
    
    
    30
    
    
    
    78
    
    
    
    90
    
    
    
    234Net unrealized gain on securities available for sale
    
    
    127
    
    
    
    279
    
    
    
    181
    
    
    
    26Total comprehensive income
    
    
    8,212
    
    
    
    1,047
    
    
    
    9,907
    
    
    
    1,638Balance, end of period
    
    $
    38,697
    
    
    $
    28,226
    
    
    $
    38,697
    
    
    $
    28,226
  3.




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Nine Months EndedSeptember 30,2007
    
    
    2006Cash Flows From Operating Activities:Net income
    
    $
    9,636
    
    
    $
    1,378Adjustments to reconcile net income to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    547
    
    
    
    762Provision for loan losses
    
    
    400
    
    
    
    (600
    )Provision for benefit of income taxes
    
    
    (7,500
    )
    
    
    (500
    )(Gain) on sales of premises, equipment, and other real estate
    
    
    (12
    )
    
    
    (60
    )Writedown of other real estate
    
    
    40
    
    
    
    Stock option compensation
    
    
    90
    
    
    
    234Change in other assets
    
    
    221
    
    
    
    (68
    )Change in other liabilities
    
    
    (368
    )
    
    
    79Net cash provided by (used in) operating activities
    
    
    3,054
    
    
    
    1,225Cash Flows From Investing Activities:Net (increase) in loans
    
    
    (22,435
    )
    
    
    (53,058
    )Net (increase) decrease in interest-bearing deposits in other financial institutions
    
    
    (6,139
    )
    
    
    136Purchase of securities available for sale
    
    
    (18,558
    )
    
    
    (5,000
    )Proceeds from maturities, calls or paydowns of securities available for sale
    
    
    33,715
    
    
    
    3,079FHLB repurchase of stock
    
    
    
    
    
    
    703Capital expenditures
    
    
    (1,231
    )
    
    
    (1,307
    )Proceeds from sale of premises, equipment, and other real estate
    
    
    317
    
    
    
    1,013Net cash (used in) investing activities
    
    
    (14,331
    )
    
    
    (54,434
    )Cash Flows From Financing Activities:Net increase in deposits
    
    
    8,950
    
    
    
    60,862Proceeds from issuance of debt
    
    
    
    
    
    
    1,959Principal payments on borrowings
    
    
    (68
    )
    
    
    (69
    )Net cash provided by financing activities
    
    
    8,882
    
    
    
    62,752Net increase (decrease) in cash and cash equivalents
    
    
    (2,395
    )
    
    
    9,543Cash and cash equivalents at beginning of period
    
    
    10,706
    
    
    
    7,943Cash and cash equivalents at end of period
    
    $
    8,311
    
    
    $
    17,486Supplemental Cash Flow Information:Cash paid during the year for:Interest
    
    $
    9,735
    
    
    $
    8,764Income taxes
    
    
    
    
    
    
    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)
    
    
    443
    
    
    
    23
  
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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 nine month period ended
September 30, 2007 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2007. 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, 2006.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 were not changed due to these classifications.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 in 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 before tax compensation expense in the amount of $90,000 for the nine months
ended September 30, 2007, and $234,000 for the same period in 2006. The expense recorded
recognizes the current period vesting of options outstanding. The per share impact of this
accounting change was $.03 and $.07 in the first nine months of 2007 and 2006, respectively.2.
    
    RECENT ACCOUNTING PRONOUNCEMENTFASB 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. 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. 159 is effective as of the beginning of an entitys first fiscal year
beginning after November 15, 2007. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity (a) makes that choice in the first 120 days of
that fiscal year, (2) has not yet issued financial statements, and (3) elects to apply the
provisions of SFAS No. 157. The Corporation did not adopt SFAS No. 159 during this early
adoption period, and has not determined the impact, if any; the implementation of SFAS No. 159
will have 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 period.The following shows the computation of basic and diluted earnings per share for the three and
nine months ended September 30, 2007 and 2006 (dollars in thousands, except per share data):
 Weighted Average
    
    
    IncomeNet Income
    
    
    Number of Shares
    
    
    Per ShareThree Months Ended
September 30,2007Income per share  Basic and diluted
    
    $
    8,055
    
    
    
    3,428,695
    
    
    $
    2.352006Income per share  Basic and diluted
    
    $
    690
    
    
    
    3,428,695
    
    
    $
    .20Nine Months Ended
September 30,2007Income per share  Basic and diluted
    
    $
    9,636
    
    
    
    3,428,695
    
    
    $
    2.812006Income per share  Basic and diluted
    
    $
    1,378
    
    
    
    3,428,695
    
    
    $
    .40
 4.
    
    INVESTMENT SECURITIESThe amortized cost and estimated fair value of investment securities available for sale as of
September 30, 2007, December 31, 2006 and September 30, 2006 are as follows (dollars in
thousands):
 September 30, 2007
    
    
    December 31, 2006
    
    
    September 30, 2006Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    EstimatedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueUS Agencies
    
    $
    17,494
    
    
    $
    17,428
    
    
    $
    32,445
    
    
    $
    32,176
    
    
    $
    35,954
    
    
    $
    35,536Obligations of states and political subdivisions
    
    
    485
    
    
    
    545
    
    
    
    511
    
    
    
    593
    
    
    
    512
    
    
    
    593Total securities available for sale
    
    $
    17,979
    
    
    $
    17,973
    
    
    $
    32,956
    
    
    $
    32,769
    
    
    $
    36,466
    
    
    $
    36,129
 The amortized cost and estimated fair value of investment securities pledged to secure FHLB
borrowings and customer relationships were $17.794 million and $17.729 million, respectively,
at September 30, 2007.
 7.




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##### Table of Contents



5.
    
    LOANSThe composition of loans at September 30, 2007, December 31, 2006 and September 30, 2006 is as
follows (dollars in thousands):
 September 30,
    
    
    December 31,
    
    
    September 30,2007
    
    
    2006
    
    
    2006Commercial real estate
    
    $
    161,032
    
    
    $
    154,332
    
    
    $
    146,838Commercial, financial, and agricultural
    
    
    78,822
    
    
    
    71,385
    
    
    
    58,548One to four family residential real estate
    
    
    54,962
    
    
    
    58,014
    
    
    
    51,341Construction
    
    
    45,826
    
    
    
    36,009
    
    
    
    33,095Consumer
    
    
    3,507
    
    
    
    2,841
    
    
    
    2,792Total loans
    
    $
    344,149
    
    
    $
    322,581
    
    
    $
    292,614
 LOANS  Allowance for loan lossesAn analysis of the allowance for loan losses for the nine months ended September 30, 2007, the year
ended December
31, 2006, and the nine months ended September 30, 2006 is as follows: (dollars in thousands):
 September 30,
    
    
    December 31,
    
    
    September 30,2007
    
    
    2006
    
    
    2006Balance at beginning of period
    
    $
    5,006
    
    
    $
    6,108
    
    
    $
    6,108Recoveries on loans
    
    
    39
    
    
    
    91
    
    
    
    59Loans charged off
    
    
    (423
    )
    
    
    (332
    )
    
    
    (251
    )Provision
    
    
    400
    
    
    
    (861
    )
    
    
    (600
    )Balance at end of period
    
    $
    5,022
    
    
    $
    5,006
    
    
    $
    5,316
 In the first nine months of 2007, net charge off activity was $384,000, or .12% of average loans
outstanding compared to net charge-offs of $192,000, or .07% of average loans, in the same
period in 2006. During the third quarter of 2007, a provision of $400,000 was made to increase
the reserve. This provision was made in accordance with the Corporations allowance for loan
loss reserve policy, which calls for a measurement of the adequacy of the reserve at each
quarter end. This process includes an analysis of the loan portfolio to take into account
increases in loans outstanding and portfolio composition, historical loss rates, and specific
reserve requirements of nonperforming loans. In the first quarter of 2006, the Corporation
reduced the allowance for loan losses by recording a negative provision amounting to $600,000.
In the fourth quarter of 2006, a reduction of $261,000 was made to the reserve due to the
resolution of a problem loan with an excess specific reserve. These reductions in the reserve
were made in recognition of the improved credit quality existent in the loan portfolio and are
discussed in more detail under Managements Discussion and Analysis.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 nine months ended
September 30, 2007 and 2006.
 8.




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##### Table of Contents



5.
    
    LOANS (Continued)Information regarding impaired loans as of September 30, 2007, December 31, 2006 and September
30, 2006 is as follows (dollars in thousands):
 Valuation ReserveSeptember 30,
    
    
    December 31,
    
    
    September 30,
    
    
    September 30,
    
    
    December 31,
    
    
    September 30,2007
    
    
    2006
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2006(Unaudited)
    
    
    
    
    
    
    (Unaudited)Balances, at period endImpaired loans with specific valuation reserve
    
    $
    2,889
    
    
    $
    1,804
    
    
    $
    1,803
    
    
    $
    835
    
    
    $
    493
    
    
    $
    164Impaired loans with no specific valuation reserve
    
    
    283
    
    
    
    1,136
    
    
    
    262
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    3,172
    
    
    $
    2,940
    
    
    $
    2,065
    
    
    $
    835
    
    
    $
    493
    
    
    $
    164Impaired loans on nonaccrual basis
    
    $
    3,136
    
    
    $
    2,900
    
    
    $
    2,065
    
    
    $
    835
    
    
    $
    493
    
    
    $
    164Impaired loans on accrual basis
    
    
    36
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    3,172
    
    
    $
    2,940
    
    
    $
    2,065
    
    
    $
    835
    
    
    $
    493
    
    
    $
    164Average investment in impaired loans
    
    $
    4,018
    
    
    $
    1,192
    
    
    $
    713Interest income recognized during impairment
    
    
    71
    
    
    
    7
    
    
    
    4Interest income that would have been recognized
on an accrual basis
    
    
    288
    
    
    
    114
    
    
    
    56Cash-basis interest income recognized
    
    
    65
    
    
    
    5
    
    
    
    3
 The average investment in impaired loans was approximately $4.018 million for the nine months
ended September 30, 2007, $1.192 million for the year ended December 31, 2006, and $.713 million
for the nine months ended September 30, 2006, respectively. Additional discussion on impaired
loans is presented in the Managements Discussion and Analysis section of this report.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):
 September 30,
    
    
    December 31,
    
    
    September 30,2007
    
    
    2006
    
    
    2006Loans outstanding beginning of period
    
    $
    1,621
    
    
    $
    578
    
    
    $
    578New loans
    
    
    
    
    
    
    1,647
    
    
    
    1,647Net activity on revolving lines of credit
    
    
    
    
    
    
    271
    
    
    
    271Repayment
    
    
    (449
    )
    
    
    (875
    )
    
    
    (865
    )Loans outstanding end of period
    
    $
    1,172
    
    
    $
    1,621
    
    
    $
    1,631
 There were no loans to related-parties classified substandard at September 30, 2007, December
31, 2006 or September 30, 2006, respectively. In addition to the outstanding balances above,
there were unused commitments of $600,000 to related parties at September 30, 2007.
 9.




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##### Table of Contents



6.
    
    BORROWINGSBorrowings consist of the following at September 30, 2007, December 31, 2006 and September 30,
2006 (dollars in thousands):
 September 30,
    
    
    December 31,
    
    
    September 30,2007
    
    
    2006
    
    
    2006Federal Home Loan Bank advances at rates ranging from 4.98%
to 5.26% maturing in 2010 and 2011
    
    $
    35,000
    
    
    $
    35,000
    
    
    $
    35,000Farmers Home Administration, fixed-rate note payable, maturing
August 24, 2024, interest payable at 1%
    
    
    1,280
    
    
    
    1,348
    
    
    
    1,348Advance outstanding on line of credit with a correspondent bank,
interest payable at the prime rate, 7.75% as of September 30,
2007,
maturing May 21, 2008
    
    
    1,959
    
    
    
    1,959
    
    
    
    1,959$
    38,239
    
    
    $
    38,307
    
    
    $
    38,307
 The Federal Home Loan Bank borrowings are collateralized at September 30, 2007, by the
following: a collateral agreement on the Corporations one to four family residential real
estate loans with a book value of approximately $21.362 million; U.S. government agency
securities with an amortized cost and estimated fair value of $16.644 million and $16.579
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 September 30,
2007.The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $615,000 originated
and held by the Corporations wholly owned subsidiary, First Rural Relending, and an assignment
of a demand deposit account in the amount of $794,000, and guaranteed by the Corporation.7.
    
    STOCK OPTION PLANSA summary of stock option transactions for the nine months ended September 30, 2007 and 2006,
and the year ended December 31, 2006, is as follows: (Historical stock option information has
been adjusted for the 1:20 reverse stock split which occurred in December 2004).
 September 30,
    
    
    December 31,
    
    
    September 30,2007
    
    
    2006
    
    
    2006Outstanding shares at beginning of year
    
    
    446,417
    
    
    
    375,417
    
    
    
    375,417Granted during the period
    
    
    
    
    
    
    72,500
    
    
    
    Expired during the period
    
    
    
    
    
    
    (1,500
    )
    
    
    (1,500
    )Outstanding shares at end of period
    
    
    446,417
    
    
    
    446,417
    
    
    
    373,917Weighted average exercise price per share at end of period
    
    $
    12.29
    
    
    $
    12.29
    
    
    $
    12.60Shares available for grant at end of period
    
    
    18,488
    
    
    
    18,488
    
    
    
    90,988
 There were no options granted in the first nine months of 2007 and 2006.
 10.




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##### Table of Contents



7.
    
    STOCK OPTION PLANS (Continued)Following is a summary of the options outstanding and exercisable at September 30, 2007:
 Weighted AverageExercise
    
    Number
    
    
    Remaining
    
    
    Weighted AveragePrice Range
    
    Outstanding
    
    
    Exercisable
    
    
    Contractual Life-Years
    
    
    Exercise Price$9.16
    
    
    12,500
    
    
    
    5,000
    
    
    
    8.25
    
    
    $
    9.16$9.75
    
    
    257,152
    
    
    
    120,861
    
    
    
    7.21
    
    
    
    9.75$10.65
    
    
    72,500
    
    
    
    14,500
    
    
    
    9.25
    
    
    
    10.65$11.50
    
    
    40,000
    
    
    
    8,000
    
    
    
    8.00
    
    
    
    11.50$12.00
    
    
    60,000
    
    
    
    12,000
    
    
    
    7.71
    
    
    
    12.00$156.00 - $240.00
    
    
    3,545
    
    
    
    3,545
    
    
    
    3.51
    
    
    
    186.75$300.00 - $406.60
    
    
    720
    
    
    
    720
    
    
    
    1.79
    
    
    
    345.00446,417
    
    
    
    164,626
    
    
    
    7.67
    
    
    $
    12.29
 8.
    
    INCOME TAXESIn the third quarter of 2007, the Corporation reversed a portion of the valuation allowance that
pertained to the deferred tax benefit of NOL and tax credit carryforwards. This valuation
adjustment, $7.500 million, was recorded as a current period income tax benefit. The
recognition of this benefit was in accordance with generally accepted accounting principles, and
considered, among other things, the probability of utilizing the NOL and credit carryforwards.
Additional discussion on the recognition of this deferred tax benefit is presented in the
Managements Discussion and Analysis section of this report.9.
    
    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.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):
 September 30,
    
    
    December 31,
    
    
    September 30,2007
    
    
    2006
    
    
    2006Commitments to extend credit:Fixed rate
    
    $
    10,075
    
    
    $
    9,288
    
    
    $
    4,628Variable rate
    
    
    50,728
    
    
    
    44,141
    
    
    
    44,142Standby letters of credit  Variable rate
    
    
    5,957
    
    
    
    6,233
    
    
    
    6,422Credit card commitments  Fixed rate
    
    
    2,388
    
    
    
    2,391
    
    
    
    2,488$
    69,148
    
    
    $
    62,053
    
    
    $
    57,680
 11.




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##### Table of Contents



9.
    
    COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued)Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Corporation evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Corporation upon extension of credit, is based on managements credit
evaluation of the party. Collateral held varies but may include accounts receivable; inventory;
property, plant, and equipment; and income-producing commercial properties.Standby letters of credit are conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers. The
commitments are structured to allow for 100% collateralization on all standby letters of credit.Credit card commitments are commitments on credit cards issued by the Corporations subsidiary
and serviced by other companies. These commitments are unsecured.ContingenciesIn the normal course of business, the Corporation is involved in various legal proceedings. For
expanded discussion on the Corporations legal proceedings, see Part II, Item 1, Legal
Proceedings in this report.Concentration of Credit RiskThe Bank grants commercial, residential, agricultural, and consumer loans throughout Michigan.
The Banks most prominent concentration in the loan portfolio relates to commercial real estate
loans to operators of nonresidential buildings. This concentration at September 30, 2007
represents $43.422 million, or 18.10%, compared to $35.965 million, or 17.51%, of the commercial
loan portfolio on September 30, 2006. The
remainder of the commercial loan portfolio is diversified in such categories as hospitality and
tourism, real estate agents and managers, new car dealers, gaming, petroleum, forestry,
agriculture and construction. Due to the diversity of the Banks locations, the ability of
debtors of residential and consumer loans to honor their obligations is not tied to any
particular economic sector.
 12.




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##### Table of Contents



AGEMENT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.
  13.




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##### Table of Contents



AGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
 OF OPERATIONS (Continued)
  FINANCIAL OVERVIEW
   FINANCIAL CONDITION
 Cash and Cash Equivalents
  Investment Securities
  Loans
  14.




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
   September 30,
    
    
    Percent of
    
    
    December 31,
    
    
    Percent of
    
    
    September 30,
    
    
    Percent of2007
    
    
    Total
    
    
    2006
    
    
    Total
    
    
    2006
    
    
    TotalCommercial real estate
    
    $
    161,032
    
    
    
    46.79
    %
    
    $
    154,332
    
    
    
    47.84
    %
    
    $
    146,838
    
    
    
    50.18
    %Commercial,
financial, and
agricultural
    
    
    78,822
    
    
    
    22.90
    
    
    
    71,385
    
    
    
    22.13
    
    
    
    58,548
    
    
    
    20.01One to four family
residential real
estate
    
    
    54,962
    
    
    
    15.97
    
    
    
    58,014
    
    
    
    17.99
    
    
    
    51,341
    
    
    
    17.55Construction
    
    
    45,826
    
    
    
    13.32
    
    
    
    36,009
    
    
    
    11.16
    
    
    
    33,095
    
    
    
    11.31Consumer
    
    
    3,507
    
    
    
    1.02
    
    
    
    2,841
    
    
    
    .88
    
    
    
    2,792
    
    
    
    .95Total loans
    
    $
    344,149
    
    
    
    100.00
    %
    
    $
    322,581
    
    
    
    100.00
    %
    
    $
    292,614
    
    
    
    100.00
    %
  September 30, 2007
    
    
    December 31, 2006
    
    
    September 30, 2006Percent of
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    Percent ofOutstanding
    
    
    Commercial
    
    
    Shareholders
    
    
    Outstanding
    
    
    Commercial
    
    
    Shareholders
    
    
    Outstanding
    
    
    Commercial
    
    
    ShareholdersBalance
    
    
    Loans
    
    
    Equity
    
    
    Balance
    
    
    Loans
    
    
    Equity
    
    
    Balance
    
    
    Loans
    
    
    EquityR/E  oper of nonresidential bldgs
    
    $
    43,422
    
    
    
    18.10
    %
    
    
    112.21
    %
    
    $
    44,308
    
    
    
    19.63
    %
    
    
    153.90
    %
    
    $
    35,965
    
    
    
    17.51
    %
    
    
    127.42
    %Hospitality and tourism
    
    
    37,479
    
    
    
    15.63
    
    
    
    96.85
    
    
    
    30,826
    
    
    
    13.66
    
    
    
    107.07
    
    
    
    37,287
    
    
    
    18.15
    
    
    
    132.10Real estate agents & managers
    
    
    25,662
    
    
    
    10.70
    
    
    
    66.32
    
    
    
    25,071
    
    
    
    11.11
    
    
    
    87.08
    
    
    
    19,744
    
    
    
    9.61
    
    
    
    69.95Offices of holding companies
    
    
    10,831
    
    
    
    4.52
    
    
    
    27.99
    
    
    
    4,989
    
    
    
    2.21
    
    
    
    17.33
    
    
    
    1,496
    
    
    
    .73
    
    
    
    5.30Other
    
    
    122,460
    
    
    
    51.05
    
    
    
    316.46
    
    
    
    120,523
    
    
    
    53.39
    
    
    
    418.63
    
    
    
    110,894
    
    
    
    54.00
    
    
    
    392.88Total Commercial Loans
    
    $
    239,854
    
    
    
    100.00
    %
    
    
    
    
    
    $
    225,717
    
    
    
    100.00
    %
    
    
    
    
    
    $
    205,386
    
    
    
    100.00
    %
  Credit Quality
  15.




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
  September 30,
    
    
    December 31,
    
    
    September 30,2007
    
    
    2006
    
    
    2006Nonperforming Assets :Nonaccrual loans
    
    $
    3,136
    
    
    $
    2,899
    
    
    $
    2,065Loans past due 90 days or more
    
    
    36
    
    
    
    40
    
    
    
    Restructured loans
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    3,172
    
    
    
    2,939
    
    
    
    2,065Other real estate owned
    
    
    451
    
    
    
    26
    
    
    
    26Total nonperforming assets
    
    $
    3,623
    
    
    $
    2,965
    
    
    $
    2,091Nonperforming loans as a % of
loans
    
    
    .92
    %
    
    
    .91
    %
    
    
    .71
    %Nonperforming assets as a %
of assets
    
    
    .90
    %
    
    
    .77
    %
    
    
    .58
    %Reserve for Loan Losses:At period end
    
    $
    5,022
    
    
    $
    5,006
    
    
    $
    5,316As a % of loans
    
    
    1.46
    %
    
    
    1.55
    %
    
    
    1.82
    %As a % of nonperforming loans
    
    
    158.32
    %
    
    
    170.33
    %
    
    
    257.43
    %As a % of nonaccrual loans
    
    
    160.14
    %
    
    
    172.68
    %
    
    
    257.43
    %
  September 30,
    
    
    December 31,
    
    
    September 30,2007
    
    
    2006
    
    
    2006Commercial, financial and agricultural loans
    
    $
    4,803
    
    
    $
    3,600
    
    
    $
    1,431One to four family residential real estate loans
    
    
    31
    
    
    
    23
    
    
    
    29Consumer loans
    
    
    
    
    
    
    
    
    
    
    Unallocated and general reserves
    
    
    188
    
    
    
    1,383
    
    
    
    3,856Totals
    
    $
    5,022
    
    
    $
    5,006
    
    
    $
    5,316
  16.




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
  September 30,
    
    
    December 31,
    
    
    September 30,2007
    
    
    2006
    
    
    2006Total loans, at period end
    
    $
    344,149
    
    
    $
    322,581
    
    
    $
    292,614Average loans for the year
    
    $
    327,810
    
    
    $
    278,953
    
    
    $
    271,351Allowance for loan losses
    
    $
    5,022
    
    
    $
    5,006
    
    
    $
    5,316Allowance to total loans at period end
    
    
    1.46
    %
    
    
    1.55
    %
    
    
    1.82
    %Net charge-offs during the period
    
    $
    384
    
    
    $
    241
    
    
    $
    192Net charge-offs to average loans
    
    
    .12
    %
    
    
    .08
    %
    
    
    .07
    %Net charge-offs to beginning
allowance balance
    
    
    7.67
    %
    
    
    3.95
    %
    
    
    1.52
    %Nonaccrual loans at end of period
    
    $
    3,136
    
    
    $
    2,899
    
    
    $
    2,065Loans past due 90 days or more
    
    
    36
    
    
    
    40
    
    
    
    Restructured loans
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    $
    3,172
    
    
    $
    2,939
    
    
    $
    2,065Nonperforming loans to total loans at
end of period
    
    
    .92
    %
    
    
    .91
    %
    
    
    .71
    %
     September 30, 2007
    
    
    December 31, 2006
    
    
    September 30, 2006Balance at beginning of period
    
    $
    26
    
    
    $
    945
    
    
    $
    945Other real estate transferred from loans due to foreclosure
(net of adjustments made through the allowance for loan
losses)
    
    
    443
    
    
    
    23
    
    
    
    23Other real estate sold/written down
    
    
    (18
    )
    
    
    (942
    )
    
    
    (942
    )Balance at end of period
    
    $
    451
    
    
    $
    26
    
    
    $
    26
  17.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
 Deposits
   September 30,
    
    
    
    
    
    
    December 31,
    
    
    
    
    
    
    September 30,2007
    
    
    % of Total
    
    
    2006
    
    
    % of Total
    
    
    2006
    
    
    % of TotalNon-interest-bearing
    
    $
    28,325
    
    
    
    8.81
    %
    
    $
    23,471
    
    
    
    7.51
    %
    
    $
    22,826
    
    
    
    7.78
    %NOW and money market
    
    
    87,262
    
    
    
    27.15
    
    
    
    73,188
    
    
    
    23.43
    
    
    
    73,797
    
    
    
    25.14Savings
    
    
    12,831
    
    
    
    3.99
    
    
    
    13,365
    
    
    
    4.28
    
    
    
    13,915
    
    
    
    4.74Certificates of Deposit
<$100,000
    
    
    90,220
    
    
    
    28.07
    
    
    
    89,585
    
    
    
    28.67
    
    
    
    85,236
    
    
    
    29.04Total core deposits
    
    
    218,638
    
    
    
    68.02
    
    
    
    199,609
    
    
    
    63.89
    
    
    
    195,774
    
    
    
    66.70Certificates of Deposit
>$100,000
    
    
    24,432
    
    
    
    7.61
    
    
    
    23,645
    
    
    
    7.57
    
    
    
    20,305
    
    
    
    6.92Brokered CDs
    
    
    78,301
    
    
    
    24.37
    
    
    
    89,167
    
    
    
    28.54
    
    
    
    77,415
    
    
    
    26.38Total non-core deposits
    
    
    102,733
    
    
    
    31.98
    
    
    
    112,812
    
    
    
    36.11
    
    
    
    97,720
    
    
    
    33.30Total deposits
    
    $
    321,371
    
    
    
    100.00
    %
    
    $
    312,421
    
    
    
    100.00
    %
    
    $
    293,494
    
    
    
    100.00
    %
 Borrowings
  Shareholders Equity
  RESULTS OF OPERATIONS
 Net Interest Income
  18.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
   Three Months Ended2007-2006Average Balances
    
    
    Average Rates
    
    
    Interest
    
    
    Income/
    
    
    
    
    
    
    
    
    
    
    Rate/September 30,
    
    
    Increase/
    
    
    September 30,
    
    
    September 30,
    
    
    Expense
    
    
    Volume
    
    
    Rate
    
    
    Volume(dollars in thousands)
    
    2007
    
    
    2006
    
    
    (Decrease)
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    Variance
    
    
    Variance
    
    
    Variance
    
    
    VarianceLoans (1,2)
    
    $
    340,391
    
    
    $
    289,210
    
    
    $
    51,181
    
    
    
    8.21
    
    
    
    7.99
    %
    
    $
    7,047
    
    
    $
    5,824
    
    
    $
    1,223
    
    
    $
    1,031
    
    
    $
    163
    
    
    
    29Taxable securities
    
    
    22,979
    
    
    
    33,482
    
    
    
    (10,503
    )
    
    
    4.54
    
    
    
    3.63
    
    
    
    263
    
    
    
    306
    
    
    
    (43
    )
    
    
    (96
    )
    
    
    77
    
    
    
    (24
    )Nontaxable securities
    
    
    
    
    
    
    354
    
    
    
    (354
    )
    
    
    
    
    
    
    5.60
    
    
    
    
    
    
    
    5
    
    
    
    (5
    )
    
    
    (5
    )
    
    
    (5
    )
    
    
    5Federal funds sold
    
    
    9,339
    
    
    
    18,142
    
    
    
    (8,803
    )
    
    
    5.14
    
    
    
    5.07
    
    
    
    121
    
    
    
    232
    
    
    
    (111
    )
    
    
    (113
    )
    
    
    3
    
    
    
    (1
    )Other interest-earning assets
    
    
    7,838
    
    
    
    7,099
    
    
    
    739
    
    
    
    4.45
    
    
    
    2.01
    
    
    
    88
    
    
    
    36
    
    
    
    52
    
    
    
    4
    
    
    
    44
    
    
    
    4Total earning assets
    
    
    380,547
    
    
    
    348,287
    
    
    
    32,260
    
    
    
    7.84
    
    
    
    7.29
    
    
    
    7,519
    
    
    
    6,403
    
    
    
    1,116
    
    
    
    821
    
    
    
    282
    
    
    
    13Reserve for loan losses
    
    
    (4,839
    )
    
    
    (5,384
    )
    
    
    545Cash and due from banks
    
    
    7,110
    
    
    
    5,354
    
    
    
    1,756Intangible assets
    
    
    152
    
    
    
    252
    
    
    
    (100
    )Other assets
    
    
    17,135
    
    
    
    14,123
    
    
    
    3,012Total assets
    
    $
    400,105
    
    
    $
    362,632
    
    
    $
    37,473NOW and money market deposits
    
    $
    83,186
    
    
    $
    71,232
    
    
    $
    11,954
    
    
    
    3.60
    
    
    
    3.40
    
    
    
    755
    
    
    
    610
    
    
    
    145
    
    
    
    102
    
    
    
    37
    
    
    
    6Savings deposits
    
    
    12,900
    
    
    
    14,198
    
    
    
    (1,298
    )
    
    
    1.54
    
    
    
    1.59
    
    
    
    50
    
    
    
    57
    
    
    
    (7
    )
    
    
    (5
    )
    
    
    (2
    )
    
    
    CDs <$100,000
    
    
    93,223
    
    
    
    83,777
    
    
    
    9,446
    
    
    
    4.92
    
    
    
    4.49
    
    
    
    1,155
    
    
    
    949
    
    
    
    206
    
    
    
    107
    
    
    
    89
    
    
    
    10CDs >$100,000
    
    
    24,590
    
    
    
    19,832
    
    
    
    4,758
    
    
    
    5.15
    
    
    
    4.72
    
    
    
    319
    
    
    
    236
    
    
    
    83
    
    
    
    57
    
    
    
    21
    
    
    
    5Brokered deposits
    
    
    85,203
    
    
    
    83,895
    
    
    
    1,308
    
    
    
    5.42
    
    
    
    5.20
    
    
    
    1,164
    
    
    
    1,099
    
    
    
    65
    
    
    
    17
    
    
    
    47
    
    
    
    1Borrowings
    
    
    38,325
    
    
    
    36,454
    
    
    
    1,871
    
    
    
    5.34
    
    
    
    5.44
    
    
    
    516
    
    
    
    500
    
    
    
    16
    
    
    
    26
    
    
    
    (9
    )
    
    
    (1
    )Total interest-bearing liabilities
    
    
    337,427
    
    
    
    309,388
    
    
    
    28,039
    
    
    
    4.65
    
    
    
    4.43
    
    
    
    3,959
    
    
    
    3,451
    
    
    
    508
    
    
    
    304
    
    
    
    183
    
    
    
    21Demand deposits
    
    
    28,191
    
    
    
    23,674
    
    
    
    4,517Other liabilities
    
    
    2,303
    
    
    
    1,529
    
    
    
    774Shareholders equity
    
    
    32,184
    
    
    
    28,041
    
    
    
    4,143Total liabilities and
shareholders equity
    
    $
    400,105
    
    
    $
    362,632
    
    
    $
    37,473Rate spread
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.19
    
    
    
    2.86
    %Net interest margin/revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.71
    
    
    
    3.36
    %
    
    $
    3,560
    
    
    $
    2,952
    
    
    $
    608
    
    
    $
    517
    
    
    $
    99
    
    
    $
    (8
    )
 
 (1)
    
    For purposes of these computations, nonaccruing loans are included in the daily average loan
amounts outstanding.(2)
    
    Interest income on loans includes loan fees. Nine Months Ended2007-2006Average Balances
    
    
    Average Rates
    
    
    Interest
    
    
    Income/
    
    
    
    
    
    
    
    
    
    
    Rate/September 30,
    
    
    Increase/
    
    
    September 30,
    
    
    September 30,
    
    
    Expense
    
    
    Volume
    
    
    Rate
    
    
    Volume(dollars in thousands)
    
    2007
    
    
    2006
    
    
    (Decrease)
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    Variance
    
    
    Variance
    
    
    Variance
    
    
    VarianceLoans (1,2)
    
    $
    327,810
    
    
    $
    271,351
    
    
    $
    56,459
    
    
    
    8.17
    
    
    
    7.83
    %
    
    $
    20,042
    
    
    $
    15,891
    
    
    $
    4,151
    
    
    $
    3,306
    
    
    $
    699
    
    
    
    146Taxable securities
    
    
    26,111
    
    
    
    31,949
    
    
    
    (5,838
    )
    
    
    4.39
    
    
    
    3.57
    
    
    
    857
    
    
    
    852
    
    
    
    5
    
    
    
    (156
    )
    
    
    197
    
    
    
    (36
    )Nontaxable securities
    
    
    
    
    
    
    2,104
    
    
    
    (2,104
    )
    
    
    
    
    
    
    5.53
    
    
    
    
    
    
    
    87
    
    
    
    (87
    )
    
    
    (87
    )
    
    
    (87
    )
    
    
    87Federal funds sold
    
    
    9,183
    
    
    
    12,467
    
    
    
    (3,284
    )
    
    
    5.26
    
    
    
    4.91
    
    
    
    361
    
    
    
    458
    
    
    
    (97
    )
    
    
    (121
    )
    
    
    32
    
    
    
    (8
    )Other interest-earning assets
    
    
    6,254
    
    
    
    6,208
    
    
    
    46
    
    
    
    4.57
    
    
    
    3.73
    
    
    
    214
    
    
    
    173
    
    
    
    41
    
    
    
    1
    
    
    
    39
    
    
    
    1Total earning assets
    
    
    369,358
    
    
    
    324,079
    
    
    
    45,279
    
    
    
    7.77
    
    
    
    7.20
    
    
    
    21,474
    
    
    
    17,461
    
    
    
    4,013
    
    
    
    2,943
    
    
    
    880
    
    
    
    190Reserve for loan losses
    
    
    (4,936
    )
    
    
    (5,618
    )
    
    
    682Cash and due from banks
    
    
    6,315
    
    
    
    5,880
    
    
    
    435Intangible assets
    
    
    173
    
    
    
    285
    
    
    
    (112
    )Other assets
    
    
    16,687
    
    
    
    17,020
    
    
    
    (333
    )Total assets
    
    $
    387,597
    
    
    $
    341,646
    
    
    $
    45,951NOW and money market deposits
    
    $
    75,957
    
    
    $
    69,718
    
    
    $
    6,239
    
    
    
    3.53
    
    
    
    3.13
    
    
    
    2,005
    
    
    
    1,633
    
    
    
    372
    
    
    
    146
    
    
    
    207
    
    
    
    19Savings deposits
    
    
    13,155
    
    
    
    14,721
    
    
    
    (1,566
    )
    
    
    1.61
    
    
    
    1.39
    
    
    
    158
    
    
    
    153
    
    
    
    5
    
    
    
    (16
    )
    
    
    24
    
    
    
    (3
    )CDs <$100,000
    
    
    93,898
    
    
    
    80,803
    
    
    
    13,095
    
    
    
    4.94
    
    
    
    4.22
    
    
    
    3,467
    
    
    
    2,549
    
    
    
    918
    
    
    
    413
    
    
    
    434
    
    
    
    70CDs >$100,000
    
    
    24,276
    
    
    
    16,919
    
    
    
    7,357
    
    
    
    5.04
    
    
    
    4.55
    
    
    
    915
    
    
    
    576
    
    
    
    339
    
    
    
    250
    
    
    
    62
    
    
    
    27Brokered deposits
    
    
    83,094
    
    
    
    71,257
    
    
    
    11,837
    
    
    
    5.45
    
    
    
    4.93
    
    
    
    3,387
    
    
    
    2,629
    
    
    
    758
    
    
    
    437
    
    
    
    276
    
    
    
    46Borrowings
    
    
    38,637
    
    
    
    36,827
    
    
    
    1,810
    
    
    
    5.31
    
    
    
    4.92
    
    
    
    1,535
    
    
    
    1,355
    
    
    
    180
    
    
    
    67
    
    
    
    108
    
    
    
    5Total interest-bearing liabilities
    
    
    329,017
    
    
    
    290,245
    
    
    
    38,772
    
    
    
    4.66
    
    
    
    4.10
    
    
    
    11,467
    
    
    
    8,895
    
    
    
    2,572
    
    
    
    1,297
    
    
    
    1,111
    
    
    
    164Demand deposits
    
    
    25,144
    
    
    
    21,053
    
    
    
    4,091Other liabilities
    
    
    2,809
    
    
    
    2,908
    
    
    
    (99
    )Shareholders equity
    
    
    30,627
    
    
    
    27,440
    
    
    
    3,187Total liabilities and
shareholders equity
    
    $
    387,597
    
    
    $
    341,646
    
    
    $
    45,951Rate spread
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.11
    
    
    
    3.10
    %Net interest margin/revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.62
    
    
    
    3.53
    %
    
    $
    10,007
    
    
    $
    8,566
    
    
    $
    1,441
    
    
    $
    1,646
    
    
    $
    (231
    )
    
    $
    26
 
 (1)
    
    For purposes of these computations, nonaccruing loans are included in the daily average loan
amounts outstanding.(2)
    
    Interest income on loans includes loan fees. 19.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
 Provision for Loan Losses
 th
 Other Income
    Three Months Ended
    
    
    % Increase
    
    
    Nine Months Ended
    
    
    % IncreaseSeptember 30,
    
    
    (Decrease)
    
    
    September 30,
    
    
    (Decrease)2007
    
    
    2006
    
    
    2007-2006
    
    
    2007
    
    
    2006
    
    
    2007-2006Service fees
    
    $
    169
    
    
    $
    133
    
    
    
    27.1
    
    
    $
    515
    
    
    $
    365
    
    
    
    41.1Net gains on sale of loans
    
    
    165
    
    
    
    66
    
    
    
    150.0
    
    
    
    364
    
    
    
    149
    
    
    
    144.3Proceeds from settlement of lawsuit
    
    
    
    
    
    
    
    
    
    
    0.0
    
    
    
    470
    
    
    
    
    
    
    
    100.0Other
    
    
    62
    
    
    
    42
    
    
    
    47.6
    
    
    
    302
    
    
    
    194
    
    
    
    55.7Subtotal
    
    
    396
    
    
    
    241
    
    
    
    64.3
    
    
    
    1,651
    
    
    
    708
    
    
    
    133.2Net securities gains
    
    
    
    
    
    
    (1
    )
    
    
    100.0
    
    
    
    
    
    
    
    (1
    )
    
    
    100.0Total other income
    
    $
    396
    
    
    $
    240
    
    
    
    65.0
    
    
    $
    1,651
    
    
    $
    707
    
    
    
    133.5
 Other Expenses
  20.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
    Three Months Ended
    
    
    % Increase
    
    
    Nine Months Ended
    
    
    % IncreaseSeptember 30,
    
    
    (Decrease)
    
    
    September 30,
    
    
    (Decrease)2007
    
    
    2006
    
    
    2007-2006%
    
    
    2007
    
    
    2006
    
    
    2007-2006%Salaries and employee benefits
    
    $
    1,695
    
    
    $
    1,487
    
    
    
    14.0
    
    
    $
    5,106
    
    
    $
    4,577
    
    
    
    11.6Occupancy
    
    
    322
    
    
    
    333
    
    
    
    (3.3
    )
    
    
    983
    
    
    
    943
    
    
    
    4.2Furniture and equipment
    
    
    178
    
    
    
    159
    
    
    
    11.9
    
    
    
    501
    
    
    
    470
    
    
    
    6.6Data processing
    
    
    196
    
    
    
    176
    
    
    
    11.4
    
    
    
    577
    
    
    
    512
    
    
    
    12.7Professional service fees
    
    
    78
    
    
    
    341
    
    
    
    (77.1
    )
    
    
    403
    
    
    
    955
    
    
    
    (57.8
    )Loan and deposit
    
    
    63
    
    
    
    78
    
    
    
    (19.2
    )
    
    
    214
    
    
    
    305
    
    
    
    (29.8
    )Telephone
    
    
    68
    
    
    
    55
    
    
    
    23.6
    
    
    
    185
    
    
    
    155
    
    
    
    19.4Advertising
    
    
    97
    
    
    
    70
    
    
    
    38.6
    
    
    
    280
    
    
    
    247
    
    
    
    13.4Other
    
    
    304
    
    
    
    303
    
    
    
    0.3
    
    
    
    873
    
    
    
    831
    
    
    
    5.1Total other expense
    
    $
    3,001
    
    
    $
    3,002
    
    
    
    (0.0
    )
    
    $
    9,122
    
    
    $
    8,995
    
    
    
    1.4
 Federal Income Taxes
  21.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
  LIQUIDITY
       22.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
 CAPITAL AND REGULATORY
   September 30,
    
    
    December 31,
    
    
    September 30,2007
    
    
    2006
    
    
    2006Capital StructureShareholders equity
    
    $
    38,697
    
    
    $
    28,790
    
    
    $
    28,226Total capitalization
    
    $
    38,697
    
    
    $
    28,790
    
    
    $
    28,226Tangible capital
    
    $
    38,554
    
    
    $
    28,585
    
    
    $
    27,989Intangible AssetsCore deposit premium
    
    $
    143
    
    
    $
    205
    
    
    $
    237Other identifiable intangibles
    
    
    
    
    
    
    
    
    
    
    Total intangibles
    
    $
    143
    
    
    $
    205
    
    
    $
    237Regulatory capitalTier 1 capital:Shareholders equity
    
    $
    38,697
    
    
    $
    28,790
    
    
    $
    28,226Net unrealized (gains) losses on
available for sale securities
    
    
    6
    
    
    
    187
    
    
    
    337Minority interest
    
    
    
    
    
    
    
    
    
    
    Less: intangibles
    
    
    (143
    )
    
    
    (205
    )
    
    
    (237
    )Less: disallowed deferred tax
asset
    
    
    (7,000
    )
    
    
    
    
    
    
    Total Tier 1 capital
    
    $
    31,560
    
    
    $
    28,772
    
    
    $
    28,326Tier 2 Capital:Allowable reserve for loan losses
    
    $
    4,379
    
    
    $
    4,113
    
    
    $
    3,800Qualifying long-term debt
    
    
    
    
    
    
    
    
    
    
    Total Tier 2 capital
    
    
    4,379
    
    
    
    4,113
    
    
    
    3,800Total capital
    
    $
    35,939
    
    
    $
    32,885
    
    
    $
    32,126Risk-adjusted assets
    
    $
    349,678
    
    
    $
    328,133
    
    
    $
    302,523Capital ratios:Tier 1 Capital to average assets
    
    
    8.03
    %
    
    
    7.85
    %
    
    
    7.81
    %Tier 1 Capital to risk weighted
assets
    
    
    9.03
    %
    
    
    8.77
    %
    
    
    9.36
    %Total Capital to risk weighted
assets
    
    
    10.28
    %
    
    
    10.02
    %
    
    
    10.62
    %
   Shareholders
    
    Tangible
    
    Tier 1
    
    Tier 1
    
    TotalEquity to
    
    Equity to
    
    Capital to
    
    Capital to
    
    Capital toQuarter-end
    
    Quarter-end
    
    Average
    
    Risk-Weighted
    
    Risk-WeightedAssets
    
    Assets
    
    Assets
    
    Assets
    
    AssetsRegulatory minumum 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:September 30, 2007
    
    
    9.65
    %
    
    
    9.61
    %
    
    
    8.03
    %
    
    
    9.03
    %
    
    
    10.28
    %December 31, 2006
    
    
    7.52
    %
    
    
    7.47
    %
    
    
    7.85
    %
    
    
    8.77
    %
    
    
    10.02
    %The Bank:September 30, 2007
    
    
    10.05
    %
    
    
    10.02
    %
    
    
    8.46
    %
    
    
    9.51
    %
    
    
    10.76
    %December 31, 2006
    
    
    7.97
    %
    
    
    7.92
    %
    
    
    8.33
    %
    
    
    9.31
    %
    
    
    10.57
    %
 23.




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##### Table of Contents



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 INTEREST RATE RISK
          24.




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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
    
    $
    236,843
    
    
    $
    8,049
    
    
    $
    28,915
    
    
    $
    70,342
    
    
    
    344,149Securities
    
    
    3,499
    
    
    
    11,996
    
    
    
    2,000
    
    
    
    478
    
    
    
    17,973Other (1)
    
    
    7,942
    
    
    
    
    
    
    
    
    
    
    
    3,794
    
    
    
    11,736Total interest-earning assets
    
    
    248,284
    
    
    
    20,045
    
    
    
    30,915
    
    
    
    74,614
    
    
    
    373,858Interest-bearing obligations:NOW, Money Market, and Savings
    
    
    100,093
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,093Time deposits
    
    
    45,668
    
    
    
    57,753
    
    
    
    10,442
    
    
    
    789
    
    
    
    114,652Brokered deposits
    
    
    52,753
    
    
    
    25,548
    
    
    
    
    
    
    
    
    
    
    
    78,301Borrowings
    
    
    21,959
    
    
    
    
    
    
    
    
    
    
    
    16,280
    
    
    
    38,239Total interest-bearing obligations
    
    
    220,473
    
    
    
    83,301
    
    
    
    10,442
    
    
    
    17,069
    
    
    
    331,285Gap
    
    $
    27,811
    
    
    $
    (63,256
    )
    
    $
    20,473
    
    
    $
    57,545
    
    
    $
    42,573Cumulative gap
    
    $
    27,811
    
    
    $
    (35,445
    )
    
    $
    (14,972
    )
    
    $
    42,573
 
 (1)
    
    Includes Federal Home Loan Bank Stock      25.




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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
  26.




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##### Table of Contents



CONTROLS AND PROCEDURES
   27.




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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
  28.




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##### Table of Contents



OTHER INFORMATION
 
 Item 6. Exhibits and Reports on Form 8-K
 (a)

Exhibits: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.
 29.




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##### Table of Contents



MACKINAC FINANCIAL CORPORATION(Registrant)Date: November 14, 2007
    By:
    /s/ Paul D. TobiasPAUL D. TOBIAS,CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(principal executive officer)By:
    /s/ Ernie R. KruegerERNIE R. KRUEGER,EVP/CHIEF FINANCIAL OFFICER
(principal accounting officer) 30.