##### 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, 2009
 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
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Small 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  September 30, 2009 (Unaudited), December 31, 2008 and September 30, 2008 (Unaudited)
    
    
    1Condensed Consolidated Statements of Operations  Three and Nine Months Ended September 30, 2009 (Unaudited) and September 30, 2008 (Unaudited)
    
    
    2Condensed Consolidated Statements of Changes in Shareholders Equity  Three and Nine Months Ended September 30, 2009 (Unaudited) and September 30, 2008 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2009 (Unaudited) and September 30, 2008 (Unaudited)
    
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    34PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 6. Exhibits and Reports on Form 8-K
    
    
    36SIGNATURES
    
    
    37EX-31.1EX-31.2EX-32.1EX-32.2




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FINANCIAL INFORMATION
 
 FINANCIAL STATEMENTS
 
 
 September 30,
    
    
    December 31,
    
    
    September 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2008(unaudited)
    
    
    
    
    
    
    (unaudited)ASSETSCash and due from banks
    
    $
    23,249
    
    
    $
    10,112
    
    
    $
    8,217Federal funds sold
    
    
    
    
    
    
    
    
    
    
    4,422Cash and cash equivalents
    
    
    23,249
    
    
    
    10,112
    
    
    
    12,639Interest-bearing deposits in other financial institutions
    
    
    662
    
    
    
    582
    
    
    
    382Securities available for sale
    
    
    80,203
    
    
    
    47,490
    
    
    
    42,781Federal Home Loan Bank stock
    
    
    3,794
    
    
    
    3,794
    
    
    
    3,794Loans:Commercial
    
    
    306,590
    
    
    
    296,088
    
    
    
    290,406Mortgage
    
    
    73,116
    
    
    
    70,447
    
    
    
    67,576Installment
    
    
    4,394
    
    
    
    3,745
    
    
    
    3,539Total Loans
    
    
    384,100
    
    
    
    370,280
    
    
    
    361,521Allowance for loan losses
    
    
    (4,081
    )
    
    
    (4,277
    )
    
    
    (3,385
    )Net loans
    
    
    380,019
    
    
    
    366,003
    
    
    
    358,136Premises and equipment
    
    
    10,281
    
    
    
    11,189
    
    
    
    11,360Other real estate held for sale
    
    
    5,821
    
    
    
    2,189
    
    
    
    1,751Other assets
    
    
    9,151
    
    
    
    10,072
    
    
    
    10,110TOTAL ASSETS
    
    $
    513,180
    
    
    $
    451,431
    
    
    $
    440,953LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIES:Noninterest bearing deposits
    
    $
    33,254
    
    
    $
    30,099
    
    
    $
    34,858NOW, money market, checking
    
    
    88,843
    
    
    
    70,584
    
    
    
    80,185Savings
    
    
    18,807
    
    
    
    20,730
    
    
    
    18,957CDs<$100,000
    
    
    59,637
    
    
    
    73,752
    
    
    
    74,940CDs>$100,000
    
    
    25,409
    
    
    
    25,044
    
    
    
    30,220Brokered
    
    
    192,631
    
    
    
    150,888
    
    
    
    121,534Total deposits
    
    
    418,581
    
    
    
    371,097
    
    
    
    360,694Borrowings:Federal funds purchased
    
    
    
    
    
    
    
    
    
    
    Short-term
    
    
    
    
    
    
    
    
    
    
    Long-term
    
    
    36,140
    
    
    
    36,210
    
    
    
    36,210Total borrowings
    
    
    36,140
    
    
    
    36,210
    
    
    
    36,210Other liabilities
    
    
    2,693
    
    
    
    2,572
    
    
    
    2,622Total liabilities
    
    
    457,414
    
    
    
    409,879
    
    
    
    399,526SHAREHOLDERS EQUITY:Preferred stock outstanding
    
    
    10,466
    
    
    
    
    
    
    
    Common stock and additional paid in capital  No par value
Authorized - 18,000,000 sharesIssued and outstanding - 3,419,736 shares
    
    
    43,485
    
    
    
    42,815
    
    
    
    42,794Retained earnings (accumulated deficit)
    
    
    378
    
    
    
    (1,708
    )
    
    
    (1,456
    )Accumulated other comprehensive income
    
    
    1,437
    
    
    
    445
    
    
    
    89Total shareholders equity
    
    
    55,766
    
    
    
    41,552
    
    
    
    41,427TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    513,180
    
    
    $
    451,431
    
    
    $
    440,953
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(Dollars in thousands except per share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008INTEREST INCOME:Interest and fees on loans:Taxable
    
    $
    5,106
    
    
    $
    5,537
    
    
    $
    15,212
    
    
    $
    17,241Tax-exempt
    
    
    63
    
    
    
    100
    
    
    
    237
    
    
    
    310Interest on securities:Taxable
    
    
    888
    
    
    
    303
    
    
    
    2,020
    
    
    
    840Tax-exempt
    
    
    7
    
    
    
    1
    
    
    
    11
    
    
    
    4Other interest income
    
    
    28
    
    
    
    87
    
    
    
    44
    
    
    
    257Total interest income
    
    
    6,092
    
    
    
    6,028
    
    
    
    17,524
    
    
    
    18,652INTEREST EXPENSE:Deposits
    
    
    1,550
    
    
    
    2,308
    
    
    
    4,894
    
    
    
    7,924Borrowings
    
    
    232
    
    
    
    349
    
    
    
    774
    
    
    
    1,194Total interest expense
    
    
    1,782
    
    
    
    2,657
    
    
    
    5,668
    
    
    
    9,118Net interest income
    
    
    4,310
    
    
    
    3,371
    
    
    
    11,856
    
    
    
    9,534Provision for loan losses
    
    
    700
    
    
    
    450
    
    
    
    1,400
    
    
    
    1,200Net interest income after provision for loan losses
    
    
    3,610
    
    
    
    2,921
    
    
    
    10,456
    
    
    
    8,334OTHER INCOME:Service fees
    
    
    236
    
    
    
    229
    
    
    
    750
    
    
    
    597Net security gains
    
    
    644
    
    
    
    (1
    )
    
    
    644
    
    
    
    64Net gains on sale of secondary market loans
    
    
    247
    
    
    
    16
    
    
    
    472
    
    
    
    113Proceeds from lawsuit settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,475Other
    
    
    1,291
    
    
    
    44
    
    
    
    1,382
    
    
    
    96Total other income
    
    
    2,418
    
    
    
    288
    
    
    
    3,248
    
    
    
    4,345OTHER EXPENSES:Salaries and employee benefits
    
    
    1,603
    
    
    
    1,534
    
    
    
    4,761
    
    
    
    5,416Occupancy
    
    
    336
    
    
    
    336
    
    
    
    1,069
    
    
    
    1,039Furniture and equipment
    
    
    193
    
    
    
    202
    
    
    
    604
    
    
    
    570Data processing
    
    
    221
    
    
    
    212
    
    
    
    665
    
    
    
    649Professional service fees
    
    
    161
    
    
    
    120
    
    
    
    458
    
    
    
    352Loan and deposit
    
    
    402
    
    
    
    176
    
    
    
    1,175
    
    
    
    430Telephone
    
    
    50
    
    
    
    41
    
    
    
    139
    
    
    
    125Advertising
    
    
    80
    
    
    
    93
    
    
    
    238
    
    
    
    213Other
    
    
    397
    
    
    
    221
    
    
    
    1,043
    
    
    
    803Total other expenses
    
    
    3,443
    
    
    
    2,935
    
    
    
    10,152
    
    
    
    9,597Income before provision for income taxes
    
    
    2,585
    
    
    
    274
    
    
    
    3,552
    
    
    
    3,082Provision for income taxes
    
    
    864
    
    
    
    58
    
    
    
    1,142
    
    
    
    958NET INCOME
    
    
    1,721
    
    
    
    216
    
    
    
    2,410
    
    
    
    2,124Preferred dividend expense
    
    
    185
    
    
    
    
    
    
    
    323
    
    
    
    NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    1,536
    
    
    $
    216
    
    
    $
    2,087
    
    
    $
    2,124INCOME PER COMMON SHARE:Basic
    
    $
    .45
    
    
    $
    .06
    
    
    $
    .61
    
    
    $
    .62Diluted
    
    $
    .45
    
    
    $
    .06
    
    
    $
    .61
    
    
    $
    .62
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Balance, beginning of period
    
    $
    53,939
    
    
    $
    40,975
    
    
    $
    41,551
    
    
    $
    39,321Net income for period
    
    
    1,721
    
    
    
    216
    
    
    
    2,410
    
    
    
    2,124Net unrealized gain on securities available for sale
    
    
    226
    
    
    
    215
    
    
    
    992
    
    
    
    29Total comprehensive income
    
    
    1,947
    
    
    
    431
    
    
    
    3,402
    
    
    
    2,153Dividend on preferred stock
    
    
    (185
    )
    
    
    
    
    
    
    (323
    )
    
    
    Stock option compensation
    
    
    17
    
    
    
    21
    
    
    
    52
    
    
    
    63Repurchase of common stock  oddlot shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (110
    )Issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    10,382
    
    
    
    Issuance of common stock warrants
    
    
    
    
    
    
    
    
    
    
    618
    
    
    
    Accretion of preferred stock discount
    
    
    48
    
    
    
    
    
    
    
    84
    
    
    
    Balance, end of period
    
    $
    55,766
    
    
    $
    41,427
    
    
    $
    55,766
    
    
    $
    41,427
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Nine Months EndedSeptember 30,2009
    
    
    2008Cash Flows From Operating Activities:Net income
    
    $
    2,410
    
    
    $
    2,124Adjustments to reconcile net income to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    1,494
    
    
    
    917Provision for deferred taxes
    
    
    1,052
    
    
    
    914Provision for loan losses
    
    
    1,400
    
    
    
    1,200(Gain) on sales/calls of securities available for sale
    
    
    (644
    )
    
    
    (64
    )(Gain) on sales of premises, equipment, and other real estate
    
    
    17
    
    
    
    (35
    )Writedown of other real estate
    
    
    36
    
    
    
    936Stock option compensation
    
    
    52
    
    
    
    63Change in other assets
    
    
    (686
    )
    
    
    (518
    )Change in other liabilities
    
    
    121
    
    
    
    797Net cash provided by operating activities
    
    
    5,252
    
    
    
    6,334Cash Flows From Investing Activities:Net (increase) in loans
    
    
    (19,212
    )
    
    
    (11,144
    )Net (increase) decrease in interest-bearing deposits in other financial institutions
    
    
    (80
    )
    
    
    1,428Purchase of securities available for sale
    
    
    (50,113
    )
    
    
    (45,699
    )Proceeds from sales, maturities or calls of securities available for sale
    
    
    18,976
    
    
    
    24,542Capital expenditures
    
    
    (540
    )
    
    
    (519
    )Proceeds from sale of premises, equipment, and other real estate
    
    
    81
    
    
    
    1,317Net cash paid in connection with branch sales
    
    
    (28,578
    )
    
    
    Net cash (used in) investing activities
    
    
    (79,466
    )
    
    
    (30,075
    )Cash Flows From Financing Activities:Net increase in deposits
    
    
    76,744
    
    
    
    39,867Issuance of Preferred Stock Series A Capital
    
    
    11,000
    
    
    
    Dividend on preferred stock
    
    
    (323
    )
    
    
    Net increase (decrease) in federal funds purchased
    
    
    
    
    
    
    (7,710
    )Net increase (decrease) in line of credit
    
    
    
    
    
    
    (1,959
    )Principal payments on borrowings
    
    
    (70
    )
    
    
    (70
    )Net (decrease)  repurchase of common stock  oddlot shares
    
    
    
    
    
    
    (110
    )Net cash provided by financing activities
    
    
    87,351
    
    
    
    30,018Net increase (decrease) in cash and cash equivalents
    
    
    13,137
    
    
    
    6,277Cash and cash equivalents at beginning of period
    
    
    10,112
    
    
    
    6,362Cash and cash equivalents at end of period
    
    $
    23,249
    
    
    $
    12,639Supplemental Cash Flow Information:Cash paid during the year for:Interest
    
    $
    5,836
    
    
    $
    7,872Income taxes
    
    
    90
    
    
    
    44Noncash 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)
    
    
    4,169
    
    
    
    1,804
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1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
 The 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, 2009 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2009. 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, 2008.
 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 Losses
 The 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 also has 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 collectability 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 collectability.
 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 Plans
 The 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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##### Table of Contents



1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 made available for grant under these plans. 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.
 2.
    
    RECENT ACCOUNTING DEVELOPMENTS
 Accounting Standards Codification
 In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles  a replacement of FASB Statement No. 162 (The
Codification). The Codification reorganized existing U.S. accounting and reporting standards
issued by the FASB and other related private sector standard setters into a single source of
authoritative accounting principles arranged by topic. The Codification supersedes all existing
U.S. accounting standards; all other accounting literature not included in the Codification
(other than Securities and Exchange Commission guidance for publicly-traded companies) is
considered non-authoritative. The Codification was effective on a prospective basis for interim
and annual reporting periods ending after September 15, 2009. The adoption of the Codification
changed the Companys references to U.S. GAAP accounting standards but did not impact the
Companys financial statements.
 6.




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2.
    
    RECENT ACCOUNTING DEVELOPMENTS(continued)
 Subsequent EventsIn May 2009, the FASB issued new guidance for the recognition and disclosure of subsequent
events not addressed in other applicable generally accepted accounting principles. The new
guidance, which is now part of Accounting Standards Codification (ASC) 855, Subsequent
Events, requires entities to disclose the date through which subsequent events have been
evaluated and the nature and estimated financial effects of certain subsequent events. This new
guidance is effective for interim or annual financial periods ending after June 15, 2009, and
will be applied prospectively. The adoption of this new guidance did not have a material impact
on the Companys financial statements.Disclosures about Fair Value of Financial Instruments
 In April 2009, the FASB issued new guidance for the accounting for other-than temporary
impairments. The new guidance, which is now part of ASC 320
Investments  Debt and Equity
Securities (ASC 320), amends the other-than temporary impairment (OTTI) guidance in GAAP
for debt securities and the presentation and disclosure requirements of OTTI on debt and equity
securities in the financial statements. This new guidance does not amend existing recognition
and measurement guidance related to OTTI of equity securities. The new guidance requires
separate display of losses related to credit deterioration and losses related to other market
factors. When an entity does not intend to sell the security and it is more likely than not
that an entity will not have to sell the security before recovery of its cost basis, it must
recognize the credit component of OTTI in earnings and the remaining portion in other
comprehensive income. The new guidance was effective for interim reporting periods ending after
June 15, 2009. See Note 4  Investment Securities.Other-Than-Temporary Impairments
 In April 2009, the FASB issued new guidance for the accounting for other-than temporary
impairments. The new guidance, which is now part of ASC 320
Investments  Debt and Equity
Securities (ASC 320), amends the other-than temporary impairment (OTTI) guidance in GAAP
for debt securities and the presentation and disclosure requirements of OTTI on debt and equity
securities in the financial statements. This new guidance does not amend existing recognition
and measurement guidance related to OTTI of equity securities. The new guidance requires
separate display of losses related to credit deterioration and losses related to other market
factors. When an entity does not intend to sell the security and it is more likely than not
that an entity will not have to sell the security before recovery of its cost basis, it must
recognize the credit component of OTTI in earnings and the remaining portion in adoption
permitted. The Company adopted the new guidance in the second quarter of 2009, which did not have a
material impact on the Company financial statements.Additional Fair Value Measurement Guidance
 In April 2009, the FASB issued new guidance for determining when a transaction is not orderly
and for estimating fair value when there has been a significant decrease in the volume and level
of activity for an asset or liability. The new guidance, which is now part of ASC 820, Fair
Value Measurements and Disclosures (ASC 820), requires disclosure of the inputs and valuation
techniques used, as well as any changes in valuation techniques and inputs used during the
period, to measure fair value in interim and annual periods. In addition, the presentation of
the fair value hierarchy is required to be presented by major security type as described in ASC
320. The provisions of the new guidance were effective for interim periods ending after June
15, 2009. The adoption of the new guidance in the second quarter of 2009 did not have a
material impact on the Companys financial statements.
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3.
    
    EARNINGS PER SHARE
 Earnings 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
six months ended September 30, 2009 and 2008 (dollars in thousands, except per share data):
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    1,721
    
    
    $
    216
    
    
    $
    2,410
    
    
    $
    2,124Preferred stock dividends
    
    
    185
    
    
    
    
    
    
    
    323
    
    
    
    Net income available to common shareholders
    
    $
    1,536
    
    
    $
    216
    
    
    $
    2,087
    
    
    $
    2,124Weighted average shares outstanding
    
    
    3,419,736
    
    
    
    3,419,736
    
    
    
    3,419,736
    
    
    
    3,422,777Effect of dilutive stock options outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted average shares outstanding
    
    
    3,419,736
    
    
    
    3,419,736
    
    
    
    3,419,736
    
    
    
    3,422,777Earnings per common share:Basic
    
    $
    .45
    
    
    $
    .06
    
    
    $
    .61
    
    
    $
    .62Diluted
    
    $
    .45
    
    
    $
    .06
    
    
    $
    .61
    
    
    $
    .62
 4.
    
    INVESTMENT SECURITIES
 The amortized cost and estimated fair value of investment securities available for sale as of
September 30, 2009, December 31, 2008 and September 30, 2008 are as follows (dollars in
thousands):
 September 30, 2009
    
    
    December 31, 2008
    
    
    September 30, 2008Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    EstimatedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueUS Agencies  MBS
    
    $
    72,623
    
    
    $
    74,563
    
    
    $
    46,316
    
    
    $
    46,941
    
    
    $
    42,147
    
    
    $
    42,234Obligations of states and political subdivisions
    
    
    1,207
    
    
    
    1,281
    
    
    
    498
    
    
    
    549
    
    
    
    499
    
    
    
    547Corporate Bonds
    
    
    4,198
    
    
    
    4,359
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total securities available for sale
    
    $
    78,028
    
    
    $
    80,203
    
    
    $
    46,814
    
    
    $
    47,490
    
    
    $
    42,646
    
    
    $
    42,781
 The amortized cost and estimated fair value of investment securities pledged to secure FHLB
borrowings and customer relationships were $17.050 million and $17.081 million, respectively, at
September 30, 2009.
 5.
    
    LOANS
 The composition of loans at September 30, 2009, December 31, 2008 and September 30, 2008 is as
follows (dollars in thousands):
 September 30,
    
    
    December 31,
    
    
    September 30,2009
    
    
    2008
    
    
    2008Commercial real estate
    
    $
    211,994
    
    
    $
    185,241
    
    
    $
    184,423Commercial, financial, and agricultural
    
    
    70,520
    
    
    
    79,734
    
    
    
    75,610One to four family residential real estate
    
    
    66,700
    
    
    
    65,595
    
    
    
    62,895Construction:Commercial
    
    
    24,076
    
    
    
    31,113
    
    
    
    30,373Consumer
    
    
    6,416
    
    
    
    4,852
    
    
    
    4,681Consumer
    
    
    4,394
    
    
    
    3,745
    
    
    
    3,539Total loans
    
    $
    384,100
    
    
    $
    370,280
    
    
    $
    361,521
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5.
    
    LOANS (Continued)LOANS  Allowance for loan lossesAn analysis of the allowance for loan losses for the nine months ended September 30, 2009, the
year ended December
31, 2008, and the nine months ended September 30, 2008 is as follows: (dollars in thousands):
 September 30,
    
    
    December 31,
    
    
    September 30,2009
    
    
    2008
    
    
    2008Balance at beginning of period
    
    $
    4,277
    
    
    $
    4,146
    
    
    $
    4,146Recoveries on loans
    
    
    50
    
    
    
    121
    
    
    
    117Loans charged off
    
    
    (1,646
    )
    
    
    (2,290
    )
    
    
    (2,078
    )Provision for loan losses
    
    
    1,400
    
    
    
    2,300
    
    
    
    1,200Balance at end of period
    
    $
    4,081
    
    
    $
    4,277
    
    
    $
    3,385
 In the first nine months of 2009, net charge off activity of $1.596 million equated to .43%
of average loans outstanding compared to net charge-offs of $1.961 million, or .55% of average
loans, in the first nine months of 2008. The allowance for loan losses and current year
provision is discussed in more detail under Managements Discussion and Analysis.
 LOANS  Impaired loans
 Nonperforming 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.
 Information regarding impaired loans as of September 30, 2009, December 31, 2008 and September
30, 2008 is as follows (dollars in thousands):
 Valuation ReserveSeptember 30,
    
    
    December 31,
    
    
    September 30,
    
    
    September 30,
    
    
    December 31,
    
    
    September 30,2009
    
    
    2008
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2008(Unaudited)
    
    
    
    
    
    
    (Unaudited)Balances, at period endImpaired loans with specific valuation reserve
    
    $
    6,561
    
    
    $
    3,730
    
    
    $
    3,913
    
    
    $
    1,341
    
    
    $
    994
    
    
    $
    951Impaired loans with no specific valuation
reserve
    
    
    4,967
    
    
    
    1,157
    
    
    
    736
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    11,528
    
    
    $
    4,887
    
    
    $
    4,649
    
    
    $
    1,341
    
    
    $
    994
    
    
    $
    951Impaired loans on nonaccrual basis
    
    $
    10,655
    
    
    $
    4,887
    
    
    $
    4,649
    
    
    $
    1,341
    
    
    $
    994
    
    
    $
    951Impaired loans on accrual basis
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    10,658
    
    
    $
    4,887
    
    
    $
    4,649
    
    
    $
    1,341
    
    
    $
    994
    
    
    $
    951Average investment in impaired loans
    
    $
    9,809
    
    
    $
    4,834
    
    
    $
    4,732Interest income recognized during impairment
    
    
    32
    
    
    
    60
    
    
    
    50Interest
income that would have been recognized on an
accrual basis
    
    
    508
    
    
    
    377
    
    
    
    263Cash-basis interest income recognized
    
    
    
    
    
    
    60
    
    
    
    50
 The average investment in impaired loans was approximately $9.809 million for the nine
months ended September 30, 2009, $4.834 million for the year ended December 31, 2008, and $4.732
million for the nine months ended September 30, 2008, respectively. Additional discussion on
impaired loans is presented in the Managements Discussion and Analysis section of this
report.
 9.




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5.
    
    LOANS (Continued)LOANS  Related parties
 The 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 30,2009
    
    
    2008
    
    
    2008Loans outstanding beginning of period
    
    $
    6,516
    
    
    $
    1,720
    
    
    $
    1,720New loans
    
    
    2,160
    
    
    
    372
    
    
    
    115Net activity on revolving lines of credit
    
    
    812
    
    
    
    2,378
    
    
    
    2,109Repayment
    
    
    (1,205
    )
    
    
    (687
    )
    
    
    (647
    )Change in related party interest
    
    
    297
    
    
    
    2,733
    
    
    
    3,758Loans outstanding end of period
    
    $
    8,580
    
    
    $
    6,516
    
    
    $
    7,055
 There were no loans to related-parties classified substandard at September 30, 2009,
December 31, 2008 or September 30, 2008, respectively. In addition to the outstanding balances
above, there were unused commitments of $.114 million to related parties at September 30, 2009.
 6.
    
    LONG-TERM BORROWINGS
 Long-term borrowings consist of the following at September 30, 2009, December 31, 2008 and
September 30, 2008 (dollars in thousands):
 September 30,
    
    
    December 31,
    
    
    September 30,2009
    
    
    2008
    
    
    2008Federal Home Loan Bank fixed rate advances at rates ranging from 4.98% to 5.16%
maturing in December 2010
    
    $
    15,000
    
    
    $
    15,000
    
    
    $
    15,000Federal Home Loan Bank variable rate advances at rates ranging from .492% to
..545%
maturing in January and February 2011
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,000Farmers Home Administration, fixed-rate note payable, maturing August 24, 2024
interest payable at 1%
    
    
    1,140
    
    
    
    1,210
    
    
    
    1,210$
    36,140
    
    
    $
    36,210
    
    
    $
    36,210
 The Federal Home Loan Bank borrowings are collateralized at September 30, 2009 by the
following: a collateral agreement on the Corporations one to four family residential real
estate loans with a book value of approximately $27.752 million; mortgage related and municipal
securities with an amortized cost and estimated fair value of $16.263 million and $17.021
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,
2009.
 The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $.280 million
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 $.947 million, and guaranteed by the
Corporation.
 10.




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7.
    
    STOCK OPTION PLANS
 A summary of stock option transactions for the nine months ended September 30, 2009 and 2008,
and the year ended December 31, 2008, is as follows:
 September 30,
    
    
    December 31,
    
    
    September 30,2009
    
    
    2008
    
    
    2008Outstanding shares at beginning of year
    
    
    446,237
    
    
    
    446,417
    
    
    
    446,417Granted during the period
    
    
    
    
    
    
    
    
    
    
    Expired during the period
    
    
    35,180
    
    
    
    180
    
    
    
    180Outstanding shares at end of period
    
    
    411,057
    
    
    
    446,237
    
    
    
    446,237Weighted average exercise price per share at end of period
    
    $
    12.03
    
    
    $
    12.14
    
    
    $
    12.14Shares available for grant at end of period
    
    
    24,780
    
    
    
    18,488
    
    
    
    18,488
 There were no options granted in the first nine months of 2009 and 2008.Following is a summary of the options outstanding and exercisable at September 30, 2009:
 Weighted AverageExercise
    
    Number
    
    
    Remaining
    
    
    Weighted AveragePrice Range
    
    Outstanding
    
    
    Exercisable
    
    
    Contractual Life-Years
    
    
    Exercise Price$9.16
    
    
    12,500
    
    
    
    5,000
    
    
    
    9.20
    
    
    $
    9.16$9.75
    
    
    257,152
    
    
    
    120,861
    
    
    
    5.20
    
    
    
    9.75$10.65
    
    
    57,500
    
    
    
    11,500
    
    
    
    7.20
    
    
    
    10.65$11.50
    
    
    40,000
    
    
    
    8,000
    
    
    
    6.00
    
    
    
    11.50$12.00
    
    
    40,000
    
    
    
    8,000
    
    
    
    5.70
    
    
    
    12.00$156.00 - $240.00
    
    
    3,545
    
    
    
    3,545
    
    
    
    1.50
    
    
    
    186.75$300.00
    
    
    360
    
    
    
    360
    
    
    
    .50
    
    
    
    300.00411,057
    
    
    
    157,266
    
    
    
    5.60
    
    
    $
    12.03
 8.
    
    INCOME TAXES
 A 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 September 30, 2009, 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 September 30,
2009 had a net operating loss and tax credit carryforwards for tax purposes of approximately
$32.1 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 million 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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8.
    
    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 $32.1 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.
 9.
    
    FAIR VALUE MEASUREMENTS
 Fair value estimates, methods, and assumptions are set forth below for the Corporations
financial instruments:
 Cash, cash equivalents, and interest-bearing deposits- The carrying values approximate the fair
values for these assets.
 Securities Fair values are based on quoted market prices where available. If a quoted market
price is not available, fair value is estimated using quoted market prices for similar
securities.
 Federal Home Loan Bank stock Federal Home Loan Bank stock is carried at cost, which is
its redeemable value and approximates its fair value, since the market for this stock is limited.
 Loans Fair values are estimated for portfolios of loans with similar financial characteristics.
Loans are segregated by type such as commercial, residential mortgage, and other consumer. The
fair value of loans is calculated by discounting scheduled cash flows using discount rates
reflecting the credit and interest rate risk inherent in the loan.
 The methodology in determining fair value of nonaccrual loans is to average them into the blended
interest rate at 0% interest. This has the effect of decreasing the carrying amount below the
risk-free rate amount and, therefore, discounts the estimated fair value.
 Impaired loans are measured at the estimated fair value of the expected future cash flows at the
loans effective interest rate or the fair value of the collateral for loans which are collateral
dependent. Therefore, the carrying values of impaired loans approximate the estimated fair
values for these assets.
 Deposits The fair value of deposits with no stated maturity, such as noninterest-bearing demand
deposits and savings, is equal to the amount payable on demand at the reporting date. The fair
value of time deposits is based on the discounted value of contractual cash flows applying
interest rates currently being offered on similar time deposits.
 Borrowings Rates currently available for debt with similar terms and remaining maturities are
used to estimate the fair value of existing debt. The fair value of borrowed funds due on demand
is the amount payable at the reporting date.Accrued interest The carrying amount of accrued interest approximates fair value.
 Off-balance-sheet instruments The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into account the remaining terms of
the agreements, the current interest rates, and the present creditworthiness of the
counterparties. Since the differences in the current fees and those reflected to the
off-balance-sheet instruments at year-end are immaterial, no amounts for fair value are
presented.
 12.




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9.
    
    FAIR VALUE MEASUREMENTS (Continued)
 The following table presents information for financial instruments at September 30, 2009 and
December 31, 2008 (dollars in thousands):
 September 30, 2009
    
    
    December 31, 2008Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueFinancial assets:Cash and cash equivalents
    
    $
    23,249
    
    
    $
    23,249
    
    
    $
    10,112
    
    
    $
    10,112Interest bearing deposits
    
    
    662
    
    
    
    662
    
    
    
    582
    
    
    
    582Securities available for sale
    
    
    80,203
    
    
    
    80,203
    
    
    
    47,490
    
    
    
    47,490Federal Home Loan Bank stock
    
    
    3,794
    
    
    
    3,794
    
    
    
    3,794
    
    
    
    3,794Net loans
    
    
    380,019
    
    
    
    383,241
    
    
    
    366,003
    
    
    
    372,080Cash surrender value  life insurance
    
    
    1,444
    
    
    
    1,444
    
    
    
    1,397
    
    
    
    1,397Other Real Estate
    
    
    5,821
    
    
    
    5,821
    
    
    
    2,189
    
    
    
    2,189Accrued interest receivable
    
    
    1,504
    
    
    
    1,504
    
    
    
    1,457
    
    
    
    1,457Total financial assets
    
    $
    496,696
    
    
    $
    499,918
    
    
    $
    433,024
    
    
    $
    439,101Financial liabilities:Deposits
    
    $
    418,581
    
    
    $
    418,313
    
    
    $
    371,097
    
    
    $
    371,434Borrowings
    
    
    36,140
    
    
    
    36,523
    
    
    
    36,210
    
    
    
    36,846Directors deferred compensation
    
    
    840
    
    
    
    840
    
    
    
    912
    
    
    
    912Accrued interest payable
    
    
    320
    
    
    
    320
    
    
    
    488
    
    
    
    488Total financial liabilties
    
    $
    455,881
    
    
    $
    455,996
    
    
    $
    408,707
    
    
    $
    409,680
 LimitationsFair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at one time the
Corporations entire holdings of a particular financial instrument. Because no market exists
for a significant portion of the Corporations financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These estimates are
subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly affect the estimates. Fair value
estimates are based on existing on-and off-balance-sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. Significant assets and liabilities
that are not considered financial assets or liabilities include premises and equipment, other
assets, and other liabilities. In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
 The following tables present information about the Corporations assets and liabilities measured
at fair value on a recurring basis at September 30, 2009, 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.
 13.




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9.
    
    FAIR VALUE MEASUREMENTS (Continued)
 In instances where inputs used to measure fair value fall into different levels in the above
fair value hierarchy, fair value measurements in their entirety are categorized based on the
lowest level input that is significant to the valuation. The Corporations assessment of the
significance of particular inputs to these fair value measurements requires judgment and
considers factors specific to each asset or liability.
 Disclosures concerning assets and liabilities measured at fair value are as follows (dollars in
thousands):
 Assets and Liabilities Measured at Fair Value on a Recurring Basis at September 30, 2009
 Quoted Prices in Active
    
    Significant Other
    
    SignificantMarkets for Identical
    
    Observable Inputs
    
    Unobservable Inputs
    
    Balance atAssets (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    September 30, 2009AssetsInvestment securities  available for sale
    
    $
    
    $
    80,203
    
    
    $
    
    $
    80,203LiabilitiesNone
 The Corporation had no Level 3 assets or liabilities on a recurring basis as of December
31, 2008 or September 30, 2009.
 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
    
    
    Three Months Ended
    
    
    Nine Months Ended(dollars in thousands)
    
    September 30, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    September 30, 2009
    
    
    September 30, 2009AssetsImpaired loans
accounted
for under FAS 114
    
    $
    1,240
    
    
    $
    
    
    
    $
    
    
    
    $
    1,240
    
    
    $
    510
    
    
    $
    590Other real estate owned
    
    
    5,821
    
    
    
    
    
    
    
    
    
    
    
    5,821
    
    
    
    90
    
    
    
    248$
    600
    
    
    $
    838
 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).
 10.
    
    SHAREHOLDERS EQUITY
 Participation in the TARP Capital Purchase Program
 On April 24, 2009, the Corporation entered into and closed a Letter Agreement, including the
Securities Purchase Agreement-Standard Terms (collectively, the Securities Purchase
Agreement), related to the CPP. Pursuant to the Securities Purchase Agreement, the Corporation
issued and sold to the Treasury (i) 11,000 shares of the Corporations Series A Preferred
Shares, and (ii) the Warrant to purchase 379,310 shares of the
 14.




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10.
    
    SHAREHOLDERS EQUITY (Continued)
 Corporations Common Shares, at an exercise price of $4.35 per share (subject to certain
anti-dilution and other adjustments), for an aggregate purchase price of $11.000 million in
cash. The Warrant has a ten-year term.
 As a result of the CPP transaction, the Corporation is required to take certain actions, for so
long as the Treasury holds any securities acquired from the Corporation pursuant to the CPP
(excluding any period in which the Treasury holds only the Warrant to purchase Common Shares of
the Corporation) (the CPP Period), to ensure that its executive compensation and benefit plans
with respect to Senior Executive Officers (as defined in the relevant agreements) comply with
Section 111(b) of Emergency Economic Stabilization Act of 2008 (EESA), as implemented by any
guidance or regulations issued under Section 111(b) of EESA, and not adopt any benefit
plans with respect to, or which cover, the Corporations Senior Executive Officers that do not
comply with EESA, as amended by the American Recovery and Reinvestment Act of 2009 (the ARRA),
which was passed by Congress and signed by the President on February 17, 2009. The applicable
executive compensation standards generally remain in effect during the CPP Period and apply to
the Corporations Senior Executive Officers (which for purposes of the ARRA and the CPP
agreements, includes the Corporations Chief Executive Officer, its Chief Financial Officer, and
the next three most highly-compensated executive officers, even though the Corporations senior
executive officers consist of a smaller group of executives for purposes of the other
compensation disclosures in this proxy statement).
 Amounts recorded for Preferred Stock and Warrant Common Stock were estimated based on an
allocation of the total proceeds from the issuance on the relative fair values of both
instruments. Fair value of the Preferred Stock was determined based on assumptions regarding
the discount rate (market rate) on the Preferred Stock (estimated 12%). Fair value of the
Warrant Common Stock is based on the value of the underlying Preferred Stock based on an
estimate for a three year term. The allocation of the proceeds received resulted in the
recording of a discount on the Preferred Stock and a premium on the Warrant Common Stock. The
discount on the preferred will be accreted on an effective yield basis over a three-year term.
The allocated carrying value of the Preferred Stock and Warrant Common Stock on the date of
issuance (based on their relative fair values) was $10.382 million and $.618 million,
respectively. Cumulative dividends on the Preferred Stock are payable at 5% annum for the first
five years and at a rate of 9% per annum thereafter on the liquidation preference of $1,000 per
share. The Company is prohibited from paying any dividend with respect to shares of common
stock unless all accrued and unpaid dividends are paid in full on the Preferred Stock for all
past dividend periods. The Preferred Stock is non-voting, other than class voting rights on
matters that could adversely affect the Preferred Stock. The Preferred Stock may be redeemed at
any time with regulatory approval. The Treasury may also transfer the Preferred Stock to a
third party at any time. The preferred stock qualifies as Tier 1 Capital for regulatory
purposes at the holding company.
 The Corporation has the right to redeem the Series A Preferred Shares at any time after
consulting with its primary regulator, in which case the executive compensation standards would
no longer apply to the Corporation.
 This capital will be used to increase the strong capital position of the Bank. The Bank will
use the capital to grow loans. In addition, the capital will allow the Corporation to consider
acquisitions of deposit franchisees that would enhance our funding mix.
 11.
    
    COMMITMENTS, CONTINGENCIES AND CREDIT RISK
 Financial Instruments With Off-Balance-Sheet Risk
 The 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.
 15.




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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):
 September 30,
    
    
    December 31,
    
    
    September 30,2009
    
    
    2008
    
    
    2008Commitments to extend credit:Variable rate
    
    $
    37,533
    
    
    $
    40,036
    
    
    $
    40,133Fixed rate
    
    
    8,653
    
    
    
    4,487
    
    
    
    2,752Standby letters of credit  Variable rate
    
    
    1,231
    
    
    
    1,838
    
    
    
    6,308Credit card commitments  Fixed rate
    
    
    2,638
    
    
    
    2,438
    
    
    
    2,457$
    50,055
    
    
    $
    48,799
    
    
    $
    51,650
 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.Contingencies
 In 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 Risk
 The 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, 2009
represents $47.0 million, or 15.33%, compared to $41.5 million, or 14.29%, of the commercial
loan portfolio on September 30, 2008. 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.
 16.




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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.
  17.




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  FINANCIAL OVERVIEW
    FINANCIAL CONDITION
 Cash and Cash Equivalents
  Investment Securities
  Loans
  18.




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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 of2009
    
    
    Total
    
    
    2008
    
    
    Total
    
    
    2008
    
    
    TotalCommercial real estate
    
    $
    211,994
    
    
    
    55.19
    %
    
    $
    185,241
    
    
    
    50.03
    %
    
    $
    184,423
    
    
    
    51.01
    %Commercial,
financial, and
agricultural
    
    
    70,520
    
    
    
    18.36
    
    
    
    79,734
    
    
    
    21.53
    
    
    
    75,610
    
    
    
    20.91One to four family
residential real
estate
    
    
    66,700
    
    
    
    17.37
    
    
    
    65,595
    
    
    
    17.72
    
    
    
    62,895
    
    
    
    17.40Consumer
    
    
    4,394
    
    
    
    1.14
    
    
    
    3,745
    
    
    
    1.01
    
    
    
    3,539
    
    
    
    0.98Construction:Commercial
    
    
    24,076
    
    
    
    6.27
    
    
    
    31,113
    
    
    
    8.40
    
    
    
    30,373
    
    
    
    8.40Consumer
    
    
    6,416
    
    
    
    1.67
    
    
    
    4,852
    
    
    
    1.31
    
    
    
    4,681
    
    
    
    1.30Total loans
    
    $
    384,100
    
    
    
    100.00
    %
    
    $
    370,280
    
    
    
    100.01
    %
    
    $
    361,521
    
    
    
    100.00
    %
  September 30, 2009
    
    
    December 31, 2008
    
    
    September 30, 2008Percent 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.
    
    $
    47,007
    
    
    
    15.33
    %
    
    
    84.29
    %
    
    $
    41,299
    
    
    
    13.95
    %
    
    
    99.39
    %
    
    $
    41,486
    
    
    
    14.29
    %
    
    
    100.14
    %Hospitality and tourism
    
    
    45,867
    
    
    
    14.96
    
    
    
    82.25
    
    
    
    35,086
    
    
    
    11.85
    
    
    
    84.44
    
    
    
    35,287
    
    
    
    12.15
    
    
    
    85.18Real estate agents & managers
    
    
    23,996
    
    
    
    7.83
    
    
    
    43.03
    
    
    
    29,292
    
    
    
    9.89
    
    
    
    70.49
    
    
    
    29,277
    
    
    
    10.08
    
    
    
    70.67Commercial construction
    
    
    24,076
    
    
    
    7.85
    
    
    
    43.17
    
    
    
    31,113
    
    
    
    10.51
    
    
    
    74.88
    
    
    
    30,373
    
    
    
    10.46
    
    
    
    73.32Other
    
    
    165,644
    
    
    
    54.03
    
    
    
    297.03
    
    
    
    159,298
    
    
    
    53.80
    
    
    
    383.37
    
    
    
    153,983
    
    
    
    53.02
    
    
    
    371.70Total Commercial Loans
    
    $
    306,590
    
    
    
    100.00
    %
    
    
    
    
    
    $
    296,088
    
    
    
    100.00
    %
    
    
    
    
    
    $
    290,406
    
    
    
    100.00
    %
  Credit Quality
  19.




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  September 30,
    
    
    December 31,
    
    
    September 30,2009
    
    
    2008
    
    
    2008Nonperforming Assets :Nonaccrual loans
    
    $
    10,655
    
    
    $
    4,887
    
    
    $
    4,649Loans past due 90 days or more
    
    
    
    
    
    
    
    
    
    
    Restructured loans
    
    
    873
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    11,528
    
    
    
    4,887
    
    
    
    4,649Other real estate owned
    
    
    5,821
    
    
    
    2,189
    
    
    
    1,751Total nonperforming assets
    
    $
    17,349
    
    
    $
    7,076
    
    
    $
    6,400Nonperforming loans as a % of
loans
    
    
    3.00
    %
    
    
    1.32
    %
    
    
    1.29
    %Nonperforming assets as a %
of assets
    
    
    3.38
    %
    
    
    1.57
    %
    
    
    1.45
    %Reserve for Loan Losses:At period end
    
    $
    4,081
    
    
    $
    4,277
    
    
    $
    3,385As a % of loans
    
    
    1.06
    %
    
    
    1.16
    %
    
    
    .94
    %As a % of nonperforming loans
    
    
    35.40
    %
    
    
    87.52
    %
    
    
    72.81
    %As a % of nonaccrual loans
    
    
    38.30
    %
    
    
    87.52
    %
    
    
    72.81
    %
  September 30,
    
    
    December 31,
    
    
    September 30,2009
    
    
    2008
    
    
    2008Total loans, at period end
    
    $
    384,100
    
    
    $
    370,280
    
    
    $
    361,521Average loans for the year
    
    
    370,952
    
    
    
    361,324
    
    
    
    359,729Allowance for loan losses
    
    
    4,081
    
    
    
    4,277
    
    
    
    3,385Allowance to total loans at period end
    
    
    1.06
    %
    
    
    1.16
    %
    
    
    .94
    %Net charge-offs during the period
    
    $
    1,596
    
    
    $
    2,169
    
    
    $
    1,961Net charge-offs to average loans
    
    
    .43
    %
    
    
    .60
    %
    
    
    .55
    %Net charge-offs to beginning
allowance balance
    
    
    37.32
    %
    
    
    52.32
    %
    
    
    47.30
    %
  20.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  MostRecent
    
    
    ReserveCollateral Type
    
    Balance
    
    
    Appraisal
    
    
    AllocationNonaccrual LoansNon-farm/non-residential (SEM)
    
    $
    4,677
    
    
    $
    5,200
    
    
    $
    520Non-farm/non-residential (NLP)
    
    
    1,937
    
    
    
    2,688
    
    
    
    47Construction/development (SEM)
    
    
    1,000
    
    
    
    460
    
    
    
    400Commercial general (SEM)
    
    
    606
    
    
    
    25
    
    
    
    99Non-farm/non-residential (UP)
    
    
    585
    
    
    
    901
    
    
    
    Cabins/land (NLP)
    
    
    449
    
    
    
    449
    
    
    
    Non-farm/non-residential and commercial unsecured (SEM)
    
    
    371
    
    
    
    450
    
    
    
    151-4 family (UP)
    
    
    222
    
    
    
    284
    
    
    
    131-4 family (NLP)
    
    
    214
    
    
    
    221
    
    
    
    Commercial general & automobile (SEM)
    
    
    201
    
    
    
    
    
    
    
    201Conv 5+ residential properties (UP)
    
    
    151
    
    
    
    100
    
    
    
    Land development (NLP)
    
    
    93
    
    
    
    100
    
    
    
    Commercial general (UP)
    
    
    88
    
    
    
    
    
    
    
    50Land (NLP)
    
    
    38
    
    
    
    130
    
    
    
    Commercial general (NLP)
    
    
    20
    
    
    
    
    
    
    
    Recreational (UP)
    
    
    3
    
    
    
    
    
    
    
    Total nonaccrual loans
    
    
    10,655
    
    
    
    11,008
    
    
    
    1,345Restructured loansNon-farm/non-residential (UP)
    
    
    873
    
    
    
    1,279
    
    
    
    Other Real EstateLand development (SEM)
    
    
    2,133
    
    
    
    2,370
    
    
    
    Non-farm/non-residential (NLP)
    
    
    1,018
    
    
    
    1,285
    
    
    
    Land development/condo (NLP)
    
    
    630
    
    
    
    700
    
    
    
    Land development (NLP)
    
    
    511
    
    
    
    645
    
    
    
    Non-farm/non-residential (SEM)
    
    
    508
    
    
    
    620
    
    
    
    Construction/development (NLP)
    
    
    424
    
    
    
    485
    
    
    
    71-4 family (UP)
    
    
    276
    
    
    
    330
    
    
    
    Non-farm/non-residential (UP)
    
    
    216
    
    
    
    240
    
    
    
    Downtown store frontage/2/1-4 family (UP)
    
    
    77
    
    
    
    85
    
    
    
    1-4 family (NLP)
    
    
    28
    
    
    
    35
    
    
    
    Total other real estate
    
    
    5,821
    
    
    
    6,795
    
    
    
    7Total nonperforming assets
    
    $
    17,349
    
    
    $
    19,082
    
    
    $
    1,352REGIONAL BREAKOUT OF NONPERFORMING ASSETSNLP  NORTHERN LOWER PENINSULA
    
    $
    5,362
    
    
    $
    6,738
    
    
    $
    54UP  UPPER PENINSULA
    
    
    2,491
    
    
    
    3,219
    
    
    
    63SEM  SOUTHEAST MICHIGAN
    
    
    9,496
    
    
    
    9,125
    
    
    
    1,235TOTAL
    
    $
    17,349
    
    
    $
    19,082
    
    
    $
    1,352
  21.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  September 30,
    
    
    December 31,
    
    
    September 30,2009
    
    
    2008
    
    
    2008Commercial, financial and agricultural loans
    
    $
    3,564
    
    
    $
    3,819
    
    
    $
    2,974One to four family residential real estate loans
    
    
    47
    
    
    
    27
    
    
    
    53Consumer loans
    
    
    9
    
    
    
    40
    
    
    
    9Unallocated and general reserves
    
    
    461
    
    
    
    391
    
    
    
    349Totals
    
    $
    4,081
    
    
    $
    4,277
    
    
    $
    3,385
    Nine Months Ended
    
    
    Year Ended
    
    
    Nine Months EndedSeptember 30, 2009
    
    
    December 31, 2008
    
    
    September 30, 2008Balance at beginning of period
    
    $
    2,189
    
    
    $
    1,226
    
    
    $
    1,226Other real estate transferred from loans due to foreclosure
    
    
    4,205
    
    
    
    2,849
    
    
    
    2,745Reclassification of redemption OREO
    
    
    (475
    )
    
    
    
    
    
    
    Other real estate sold/written down
    
    
    (82
    )
    
    
    (1,886
    )
    
    
    (2,220
    )Loss on sale of other real estate
    
    
    (16
    )
    
    
    
    
    
    
    Balance at end of period
    
    $
    5,821
    
    
    $
    2,189
    
    
    $
    1,751
  Deposits
  22.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  September 30,
    
    
    
    
    
    
    December 31,
    
    
    
    
    
    
    September 30,2009
    
    
    % of Total
    
    
    2008
    
    
    % of Total
    
    
    2008
    
    
    % of TotalNon-interest-bearing
    
    $
    33,254
    
    
    
    7.94
    %
    
    $
    30,099
    
    
    
    8.11
    %
    
    $
    34,858
    
    
    
    9.66
    %NOW, money market, checking
    
    
    88,843
    
    
    
    21.23
    
    
    
    70,584
    
    
    
    19.02
    
    
    
    80,185
    
    
    
    22.23Savings
    
    
    18,807
    
    
    
    4.49
    
    
    
    20,730
    
    
    
    5.59
    
    
    
    18,957
    
    
    
    5.26Certificates of Deposit
<$100,000
    
    
    59,637
    
    
    
    14.25
    
    
    
    73,752
    
    
    
    19.87
    
    
    
    74,940
    
    
    
    20.78Total core deposits
    
    
    200,541
    
    
    
    47.91
    
    
    
    195,165
    
    
    
    52.59
    
    
    
    208,940
    
    
    
    57.93Certificates of Deposit
>$100,000
    
    
    25,409
    
    
    
    6.07
    
    
    
    25,044
    
    
    
    6.75
    
    
    
    30,220
    
    
    
    8.38Brokered CDs
    
    
    192,631
    
    
    
    46.02
    
    
    
    150,888
    
    
    
    40.66
    
    
    
    121,534
    
    
    
    33.69Total non-core deposits
    
    
    218,040
    
    
    
    52.09
    
    
    
    175,932
    
    
    
    47.41
    
    
    
    151,754
    
    
    
    42.07Total deposits
    
    $
    418,581
    
    
    
    100.00
    %
    
    $
    371,097
    
    
    
    100.00
    %
    
    $
    360,694
    
    
    
    100.00
    %
 Borrowings
  Shareholders Equity
  23.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
 RESULTS OF OPERATIONS
 Summary
  Net Interest Income
    24.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  Three Months Ended2009-2008Average Balances
    
    
    Average Rates
    
    
    Interest
    
    
    Income/
    
    
    
    
    
    
    
    
    
    
    Rate/September 30,
    
    
    Increase/
    
    
    September 30,
    
    
    September 30,
    
    
    Expense
    
    
    Volume
    
    
    Rate
    
    
    Volume(dollars in thousands)
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Variance
    
    
    Variance
    
    
    Variance
    
    
    VarianceLoans (1,2,3)
    
    $
    370,310
    
    
    $
    358,844
    
    
    $
    11,466
    
    
    
    5.57
    %
    
    
    6.31
    %
    
    $
    5,201
    
    
    $
    5,689
    
    
    $
    (488
    )
    
    $
    180
    
    
    $
    (657
    )
    
    
    (11
    )Taxable securities
    
    
    91,837
    
    
    
    24,647
    
    
    
    67,190
    
    
    
    3.84
    
    
    
    4.89
    
    
    
    888
    
    
    
    303
    
    
    
    585
    
    
    
    819
    
    
    
    (65
    )
    
    
    (169
    )Nontaxable securities
    
    
    1,226
    
    
    
    68
    
    
    
    1,158
    
    
    
    3.56
    
    
    
    11.70
    
    
    
    11
    
    
    
    2
    
    
    
    9
    
    
    
    34
    
    
    
    (1
    )
    
    
    (24
    )Federal funds sold
    
    
    
    
    
    
    7,944
    
    
    
    (7,944
    )
    
    
    
    
    
    
    2.00
    
    
    
    
    
    
    
    40
    
    
    
    (40
    )
    
    
    (40
    )
    
    
    (40
    )
    
    
    40Other interest-earning assets
    
    
    4,434
    
    
    
    4,178
    
    
    
    256
    
    
    
    2.51
    
    
    
    4.48
    
    
    
    28
    
    
    
    47
    
    
    
    (19
    )
    
    
    3
    
    
    
    (21
    )
    
    
    (1
    )Total earning assets
    
    
    467,807
    
    
    
    395,681
    
    
    
    72,126
    
    
    
    5.20
    
    
    
    6.11
    
    
    
    6,128
    
    
    
    6,081
    
    
    
    47
    
    
    
    996
    
    
    
    (784
    )
    
    
    (165
    )Reserve for loan losses
    
    
    (4,231
    )
    
    
    (3,500
    )
    
    
    (731
    )Cash and due from banks
    
    
    24,233
    
    
    
    7,443
    
    
    
    16,790Intangible assets
    
    
    1
    
    
    
    74
    
    
    
    (73
    )Other assets
    
    
    25,877
    
    
    
    24,004
    
    
    
    1,873Total assets
    
    $
    513,687
    
    
    $
    423,702
    
    
    $
    89,985NOW and money market deposits
    
    $
    73,236
    
    
    $
    78,645
    
    
    $
    (5,409
    )
    
    
    0.96
    
    
    
    1.55
    
    
    
    177
    
    
    
    307
    
    
    
    (130
    )
    
    
    (21
    )
    
    
    (116
    )
    
    
    7Interest checking
    
    
    8,853
    
    
    
    2,087
    
    
    
    6,766
    
    
    
    1.88
    
    
    
    3.05
    
    
    
    42
    
    
    
    16
    
    
    
    26
    
    
    
    51
    
    
    
    (6
    )
    
    
    (19
    )Savings deposits
    
    
    21,273
    
    
    
    17,453
    
    
    
    3,820
    
    
    
    0.73
    
    
    
    1.41
    
    
    
    39
    
    
    
    62
    
    
    
    (23
    )
    
    
    13
    
    
    
    (30
    )
    
    
    (6
    )CDs <$100,000
    
    
    66,291
    
    
    
    76,621
    
    
    
    (10,330
    )
    
    
    2.61
    
    
    
    3.75
    
    
    
    436
    
    
    
    723
    
    
    
    (287
    )
    
    
    (97
    )
    
    
    (219
    )
    
    
    29CDs >$100,000
    
    
    25,777
    
    
    
    29,905
    
    
    
    (4,128
    )
    
    
    2.31
    
    
    
    3.61
    
    
    
    150
    
    
    
    271
    
    
    
    (121
    )
    
    
    (37
    )
    
    
    (97
    )
    
    
    13Brokered deposits
    
    
    191,471
    
    
    
    103,012
    
    
    
    88,459
    
    
    
    1.46
    
    
    
    3.59
    
    
    
    706
    
    
    
    930
    
    
    
    (224
    )
    
    
    792
    
    
    
    (547
    )
    
    
    (469
    )Borrowings
    
    
    36,194
    
    
    
    37,245
    
    
    
    (1,051
    )
    
    
    2.54
    
    
    
    3.73
    
    
    
    232
    
    
    
    349
    
    
    
    (117
    )
    
    
    (10
    )
    
    
    (110
    )
    
    
    3Total interest-bearing liabilities
    
    
    423,095
    
    
    
    344,968
    
    
    
    78,127
    
    
    
    1.67
    
    
    
    3.07
    
    
    
    1,782
    
    
    
    2,658
    
    
    
    (876
    )
    
    
    691
    
    
    
    (1,125
    )
    
    
    (442
    )Demand deposits
    
    
    32,201
    
    
    
    33,654
    
    
    
    (1,453
    )Other liabilities
    
    
    3,797
    
    
    
    3,983
    
    
    
    (186
    )Shareholders equity
    
    
    54,594
    
    
    
    41,097
    
    
    
    13,497Total liabilities and
shareholders equity
    
    $
    513,687
    
    
    $
    423,702
    
    
    $
    89,985Rate spread
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.53
    %
    
    
    3.04
    %Net interest margin/revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.69
    %
    
    
    3.44
    %
    
    $
    4,346
    
    
    $
    3,423
    
    
    $
    923
    
    
    $
    305
    
    
    $
    341
    
    
    $
    277
 
 (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 a 34% tax rate.(3)
    
    Interest income on loans includes loan fees. Nine Months Ended2009-2008Average Balances
    
    
    Average Rates
    
    
    Interest
    
    
    Income/
    
    
    
    
    
    
    
    
    
    
    Rate/September 30,
    
    
    Increase/
    
    
    September 30,
    
    
    September 30,
    
    
    Expense
    
    
    Volume
    
    
    Rate
    
    
    Volume(dollars in thousands)
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Variance
    
    
    Variance
    
    
    Variance
    
    
    VarianceLoans (1,2)
    
    $
    370,952
    
    
    $
    359,729
    
    
    $
    11,223
    
    
    
    5.61
    
    
    
    6.58
    %
    
    $
    15,570
    
    
    $
    17,712
    
    
    $
    (2,142
    )
    
    $
    552
    
    
    $
    (2,597
    )
    
    
    (97
    )Taxable securities
    
    
    72,214
    
    
    
    24,171
    
    
    
    48,043
    
    
    
    3.74
    
    
    
    4.63
    
    
    
    2,020
    
    
    
    838
    
    
    
    1,182
    
    
    
    1,664
    
    
    
    (161
    )
    
    
    (321
    )Nontaxable securities
    
    
    838
    
    
    
    69
    
    
    
    769
    
    
    
    2.70
    
    
    
    11.62
    
    
    
    17
    
    
    
    6
    
    
    
    11
    
    
    
    67
    
    
    
    (5
    )
    
    
    (51
    )Federal funds sold
    
    
    
    
    
    
    5,086
    
    
    
    (5,086
    )
    
    
    
    
    
    
    2.44
    
    
    
    
    
    
    
    93
    
    
    
    (93
    )
    
    
    (93
    )
    
    
    (93
    )
    
    
    93Other interest-earning assets
    
    
    4,400
    
    
    
    4,349
    
    
    
    51
    
    
    
    1.34
    
    
    
    5.07
    
    
    
    44
    
    
    
    165
    
    
    
    (121
    )
    
    
    2
    
    
    
    (121
    )
    
    
    (2
    )Total earning assets
    
    
    448,404
    
    
    
    393,404
    
    
    
    55,000
    
    
    
    5.26
    
    
    
    6.39
    
    
    
    17,651
    
    
    
    18,814
    
    
    
    (1,163
    )
    
    
    2,192
    
    
    
    (2,977
    )
    
    
    (378
    )Reserve for loan losses
    
    
    (4,494
    )
    
    
    (3,820
    )
    
    
    (674
    )Cash and due from banks
    
    
    18,469
    
    
    
    6,569
    
    
    
    11,900Intangible assets
    
    
    17
    
    
    
    94
    
    
    
    (77
    )Other assets
    
    
    24,364
    
    
    
    23,644
    
    
    
    720Total assets
    
    $
    486,760
    
    
    $
    419,891
    
    
    $
    66,869NOW and money market deposits
    
    $
    70,214
    
    
    $
    80,274
    
    
    $
    (10,060
    )
    
    
    0.85
    
    
    
    1.75
    
    
    
    448
    
    
    
    1,054
    
    
    
    (606
    )
    
    
    (132
    )
    
    
    (541
    )
    
    
    67Interest checking
    
    
    6,380
    
    
    
    707
    
    
    
    5,673
    
    
    
    1.93
    
    
    
    3.02
    
    
    
    92
    
    
    
    16
    
    
    
    76
    
    
    
    128
    
    
    
    (6
    )
    
    
    (46
    )Savings deposits
    
    
    20,791
    
    
    
    14,275
    
    
    
    6,516
    
    
    
    0.73
    
    
    
    1.10
    
    
    
    113
    
    
    
    118
    
    
    
    (5
    )
    
    
    54
    
    
    
    (40
    )
    
    
    (19
    )CDs <$100,000
    
    
    69,838
    
    
    
    80,291
    
    
    
    (10,453
    )
    
    
    2.87
    
    
    
    4.22
    
    
    
    1,497
    
    
    
    2,537
    
    
    
    (1,040
    )
    
    
    (330
    )
    
    
    (814
    )
    
    
    104CDs >$100,000
    
    
    25,823
    
    
    
    26,622
    
    
    
    (799
    )
    
    
    2.48
    
    
    
    4.00
    
    
    
    479
    
    
    
    798
    
    
    
    (319
    )
    
    
    (24
    )
    
    
    (303
    )
    
    
    8Brokered deposits
    
    
    173,600
    
    
    
    105,730
    
    
    
    67,870
    
    
    
    1.74
    
    
    
    4.30
    
    
    
    2,265
    
    
    
    3,401
    
    
    
    (1,136
    )
    
    
    2,181
    
    
    
    (2,018
    )
    
    
    (1,299
    )Borrowings
    
    
    36,404
    
    
    
    39,677
    
    
    
    (3,273
    )
    
    
    2.84
    
    
    
    4.02
    
    
    
    774
    
    
    
    1,194
    
    
    
    (420
    )
    
    
    (98
    )
    
    
    (349
    )
    
    
    27Total interest-bearing liabilities
    
    
    403,050
    
    
    
    347,576
    
    
    
    55,474
    
    
    
    1.88
    
    
    
    3.50
    
    
    
    5,668
    
    
    
    9,118
    
    
    
    (3,450
    )
    
    
    1,779
    
    
    
    (4,071
    )
    
    
    (1,158
    )Demand deposits
    
    
    31,285
    
    
    
    28,824
    
    
    
    2,461Other liabilities
    
    
    3,624
    
    
    
    3,159
    
    
    
    465Shareholders equity
    
    
    48,801
    
    
    
    40,332
    
    
    
    8,469Total liabilities and
shareholders equity
    
    $
    486,760
    
    
    $
    419,891
    
    
    $
    66,869Rate spread
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.38
    %
    
    
    2.89
    %Net interest margin/revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.57
    %
    
    
    3.30
    %
    
    $
    11,983
    
    
    $
    9,696
    
    
    $
    2,287
    
    
    $
    413
    
    
    $
    1,094
    
    
    $
    780
 
 (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 a 34% tax rate.

(3) Interest income on loans includes loan fees.(3)
    
    Interest income on loans includes loan fees. 
 25.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
   Provision for Loan Losses
  Noninterest Income
    Three Months Ended
    
    
    % Increase
    
    
    Nine Months Ended
    
    
    % IncreaseSeptember 30,
    
    
    (Decrease)
    
    
    September 30,
    
    
    (Decrease)2009
    
    
    2008
    
    
    2009-2008
    
    
    2009
    
    
    2008
    
    
    2009-2008Service fees
    
    $
    236
    
    
    $
    229
    
    
    
    3.1
    
    
    $
    750
    
    
    $
    597
    
    
    
    25.6Net gains on sale of secondary
market loans
    
    
    247
    
    
    
    16
    
    
    
    1,443.8
    
    
    
    472
    
    
    
    113
    
    
    
    317.7Net gain on sale of branches
    
    
    1,208
    
    
    
    
    
    
    
    N/A
    
    
    
    1,208
    
    
    
    
    
    
    
    N/AProceeds from lawsuit settlements
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    
    
    
    
    3,475
    
    
    
    639.4Other noninterest income
    
    
    83
    
    
    
    44
    
    
    
    88.6
    
    
    
    174
    
    
    
    96
    
    
    
    81.3Subtotal
    
    
    1,774
    
    
    
    289
    
    
    
    513.8
    
    
    
    2,604
    
    
    
    4,281
    
    
    
    (39.2
    )Net security gain (loss)
    
    
    644
    
    
    
    (1
    )
    
    
    N/A
    
    
    
    644
    
    
    
    64
    
    
    
    N/ATotal noninterest income
    
    $
    2,418
    
    
    $
    288
    
    
    
    739.6
    
    
    $
    3,248
    
    
    $
    4,345
    
    
    
    (25.2
    )
 26.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
 Other Expenses
   Three Months Ended
    
    
    % Increase
    
    
    Nine Months Ended
    
    
    % IncreaseSeptember 30,
    
    
    (Decrease)
    
    
    September 30,
    
    
    (Decrease)2009
    
    
    2008
    
    
    2009-2008%
    
    
    2009
    
    
    2008
    
    
    2009-2008%Salaries and employee benefits
    
    $
    1,603
    
    
    $
    1,534
    
    
    
    4.5
    
    
    $
    4,761
    
    
    $
    5,416
    
    
    
    (12.1
    )Occupancy
    
    
    336
    
    
    
    336
    
    
    
    0.0
    
    
    
    1,069
    
    
    
    1,039
    
    
    
    2.9Furniture and equipment
    
    
    193
    
    
    
    202
    
    
    
    (4.5
    )
    
    
    604
    
    
    
    570
    
    
    
    6.0Data processing
    
    
    221
    
    
    
    212
    
    
    
    4.2
    
    
    
    665
    
    
    
    649
    
    
    
    2.5Professional service fees
    
    
    161
    
    
    
    120
    
    
    
    34.2
    
    
    
    458
    
    
    
    352
    
    
    
    30.1Loan and deposit :FDIC insurance premiums
    
    
    203
    
    
    
    30
    
    
    
    N/M
    
    
    
    668
    
    
    
    48
    
    
    
    N/MOther loan and deposit
    
    
    199
    
    
    
    146
    
    
    
    N/M
    
    
    
    507
    
    
    
    382
    
    
    
    N/MTelephone
    
    
    50
    
    
    
    41
    
    
    
    22.0
    
    
    
    139
    
    
    
    125
    
    
    
    11.2Advertising
    
    
    80
    
    
    
    93
    
    
    
    (14.0
    )
    
    
    238
    
    
    
    213
    
    
    
    11.7Other
    
    
    397
    
    
    
    221
    
    
    
    79.6
    
    
    
    1,043
    
    
    
    803
    
    
    
    29.9Total noninterest expense
    
    $
    3,443
    
    
    $
    2,935
    
    
    
    17.3
    
    
    $
    10,152
    
    
    $
    9,597
    
    
    
    5.8
 Federal Income Taxes
 Current Federal Tax Provision
  27.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
 Deferred Tax Benefit
  LIQUIDITY
      28.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
   CAPITAL AND REGULATORY
  29.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  September 30,
    
    
    December 31,
    
    
    September 30,2009
    
    
    2008
    
    
    2008Capital StructureShareholders equity
    
    $
    55,766
    
    
    $
    41,552
    
    
    $
    41,427Total capitalization
    
    $
    55,766
    
    
    $
    41,552
    
    
    $
    41,427Tangible capital
    
    $
    55,766
    
    
    $
    41,506
    
    
    $
    41,362Intangible AssetsCore deposit premium
    
    $
    
    
    
    $
    46
    
    
    $
    65Other identifiable intangibles
    
    
    
    
    
    
    
    
    
    
    Total intangibles
    
    $
    
    
    
    $
    46
    
    
    $
    65Regulatory capitalTier 1 capital:Shareholders equity
    
    $
    55,766
    
    
    $
    41,552
    
    
    $
    41,427Net unrealized (gains) losses on
available for sale securities
    
    
    (1,437
    )
    
    
    (445
    )
    
    
    (89
    )Less: intangibles
    
    
    
    
    
    
    (46
    )
    
    
    (65
    )Less: disallowed deferred tax
asset
    
    
    (5,000
    )
    
    
    (6,200
    )
    
    
    (6,600
    )Total Tier 1 capital
    
    $
    49,329
    
    
    $
    34,861
    
    
    $
    34,673Tier 2 Capital:Allowable reserve for loan losses
    
    $
    4,081
    
    
    $
    4,277
    
    
    $
    3,385Qualifying long-term debt
    
    
    
    
    
    
    
    
    
    
    Total Tier 2 capital
    
    
    4,081
    
    
    
    4,277
    
    
    
    3,385Total capital
    
    $
    53,410
    
    
    $
    39,138
    
    
    $
    38,058Risk-adjusted assets
    
    $
    404,883
    
    
    $
    376,986
    
    
    $
    369,011Capital ratios:Tier 1 Capital to average assets
    
    
    9.74
    %
    
    
    8.01
    %
    
    
    8.31Tier 1 Capital to risk weighted
assets
    
    
    12.18
    %
    
    
    9.25
    %
    
    
    9.40Total Capital to risk weighted
assets
    
    
    13.19
    %
    
    
    10.38
    %
    
    
    10.31
   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, 2009
    
    
    10.87
    %
    
    
    10.87
    %
    
    
    9.74
    %
    
    
    12.18
    %
    
    
    13.19
    %September 30, 2008
    
    
    9.40
    %
    
    
    9.38
    %
    
    
    8.31
    %
    
    
    9.40
    %
    
    
    10.31
    %The Bank:September 30, 2009
    
    
    9.46
    %
    
    
    9.46
    %
    
    
    8.32
    %
    
    
    10.40
    %
    
    
    11.40
    %September 30, 2008
    
    
    9.31
    %
    
    
    9.30
    %
    
    
    8.26
    %
    
    
    9.32
    %
    
    
    10.22
    %
 30.




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##### Table of Contents



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 INTEREST RATE RISK
          31.




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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
    
    $
    252,042
    
    
    $
    19,109
    
    
    $
    28,515
    
    
    $
    84,434
    
    
    
    384,100Securities
    
    
    15,037
    
    
    
    64,360
    
    
    
    806
    
    
    
    
    
    
    
    80,203Other (1)
    
    
    662
    
    
    
    
    
    
    
    
    
    
    
    3,794
    
    
    
    4,456Total interest-earning assets
    
    
    267,741
    
    
    
    83,469
    
    
    
    29,321
    
    
    
    88,228
    
    
    
    468,759Interest-bearing obligations:NOW, money market, savings and
interest checking
    
    
    107,650
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107,650Time deposits
    
    
    26,410
    
    
    
    43,077
    
    
    
    14,887
    
    
    
    672
    
    
    
    85,046Brokered deposits
    
    
    82,614
    
    
    
    55,777
    
    
    
    50,712
    
    
    
    3,528
    
    
    
    192,631Borrowings
    
    
    20,000
    
    
    
    
    
    
    
    15,000
    
    
    
    1,140
    
    
    
    36,140Total interest-bearing obligations
    
    
    236,674
    
    
    
    98,854
    
    
    
    80,599
    
    
    
    5,340
    
    
    
    421,467Gap
    
    $
    31,067
    
    
    $
    (15,385
    )
    
    $
    (51,278
    )
    
    $
    82,888
    
    
    $
    47,292Cumulative gap
    
    $
    31,067
    
    
    $
    15,682
    
    
    $
    (35,596
    )
    
    $
    47,292
 
 (1)
    
    Includes Federal Home Loan Bank Stock       32.




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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
  33.




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##### Table of Contents



CONTROLS AND PROCEDURES
   34.




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##### Table of Contents



OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Shareholders Derivative Litigation
 Damon Trust v. Bittner, et al.
  Damon Trust v. Wipfli
  35.




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##### Table of Contents



OTHER INFORMATION
 
 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.
 36.




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##### Table of Contents



MACKINAC FINANCIAL CORPORATION
                                     (Registrant)Date:      November 16, 2009
    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) 37.