##### 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 endedJune 30, 2007
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from <> to <>
 Commission file number: 0-20167
 MACKINAC FINANCIAL CORPORATION
  MICHIGAN
    
    38-2062816(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 130 SOUTH CEDAR STREET, MANISTIQUE, MI
    
    49854(Address of principal executive offices)
    
    (Zip Code)
   þ o
  o o þ
  o þ




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##### Table of Contents



Page No.PART I.
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets 
June 30, 2007 (Unaudited), December 31, 2006 and
June 30, 2006 (Unaudited)
    
    
    1Condensed Consolidated Statements of Operations  Three and Six
Months Ended June 30, 2007 (Unaudited) and
June 30, 2006 (Unaudited)
    
    
    2Condensed Consolidated Statements of Changes in Shareholders
Equity  Three and Six Months Ended June 30, 2007
(Unaudited) and June 30, 2006 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows 
Six Months Ended June 30, 2007 (Unaudited) and
June 30, 2006 (Unaudited)
    
    
    4Notes to Condensed Consolidated Financial
Statements (Unaudited)
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    28PART II.
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    29Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    30SIGNATURES
    
    
    31Rule 13a-14(a) Certification of Chief Executive OfficerRule 13a-14(a) Certification of Chief Financial OfficerSection 1350 Certification of Chief Executive OfficerSection 1350 Certification of Chief Financial Officer




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##### Table of Contents



FINANCIAL INFORMATION
 
 FINANCIAL STATEMENTS
 
 
 June 30,
    
    
    December 31,
    
    
    June 30,2007
    
    
    2006
    
    
    2006(unaudited)
    
    
    
    
    
    
    (unaudited)ASSETSCash and due from banks
    
    $
    7,518
    
    
    $
    4,865
    
    
    $
    5,529Federal funds sold
    
    
    3,489
    
    
    
    5,841
    
    
    
    12,535Cash and cash equivalents
    
    
    11,007
    
    
    
    10,706
    
    
    
    18,064Interest-bearing deposits in other financial institutions
    
    
    3,687
    
    
    
    856
    
    
    
    893Securities available for sale
    
    
    24,086
    
    
    
    32,769
    
    
    
    33,870Federal Home Loan Bank stock
    
    
    3,794
    
    
    
    3,794
    
    
    
    4,855Loans:Commercial
    
    
    280,268
    
    
    
    261,726
    
    
    
    231,547Mortgage
    
    
    55,090
    
    
    
    58,014
    
    
    
    48,931Installment
    
    
    3,538
    
    
    
    2,841
    
    
    
    2,632Total Loans
    
    
    338,896
    
    
    
    322,581
    
    
    
    283,110Allowance for loan losses
    
    
    (4,920
    )
    
    
    (5,006
    )
    
    
    (5,415
    )Net loans
    
    
    333,976
    
    
    
    317,575
    
    
    
    277,695Premises and equipment
    
    
    12,471
    
    
    
    12,453
    
    
    
    12,748Other real estate held for sale
    
    
    77
    
    
    
    26
    
    
    
    52Other assets
    
    
    4,221
    
    
    
    4,612
    
    
    
    4,320TOTAL ASSETS
    
    $
    393,319
    
    
    $
    382,791
    
    
    $
    352,497LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Non-interest-bearing deposits
    
    $
    28,811
    
    
    $
    23,471
    
    
    $
    21,773Interest-bearing deposits:NOW and Money Market
    
    
    73,994
    
    
    
    73,188
    
    
    
    68,107Savings
    
    
    12,422
    
    
    
    13,365
    
    
    
    14,136CDs<$100,000
    
    
    96,546
    
    
    
    89,585
    
    
    
    81,768CDs>$100,000
    
    
    24,879
    
    
    
    23,645
    
    
    
    19,025Brokered
    
    
    84,594
    
    
    
    89,167
    
    
    
    79,355Total deposits
    
    
    321,246
    
    
    
    312,421
    
    
    
    284,164Borrowings
    
    
    38,307
    
    
    
    38,307
    
    
    
    37,617Other liabilities
    
    
    3,281
    
    
    
    3,273
    
    
    
    3,537Total liabilities
    
    
    362,834
    
    
    
    354,001
    
    
    
    325,318Shareholders equity:Preferred stock  No par value:Authorized 500,000 shares, no shares outstandingCommon stock and additional paid in capital  No par valueAuthorized
 18,000,000 sharesIssued and
outstanding  3,428,695 shares
    
    
    42,780
    
    
    
    42,722
    
    
    
    42,567Accumulated deficit
    
    
    (12,162
    )
    
    
    (13,745
    )
    
    
    (14,772
    )Accumulated other comprehensive (loss)
    
    
    (133
    )
    
    
    (187
    )
    
    
    (616
    )Total shareholders equity
    
    
    30,485
    
    
    
    28,790
    
    
    
    27,179TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    393,319
    
    
    $
    382,791
    
    
    $
    352,497
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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006INTEREST INCOME:Interest and fees on loans:Taxable
    
    $
    6,448
    
    
    $
    5,182
    
    
    $
    12,681
    
    
    $
    9,681Tax-exempt
    
    
    143
    
    
    
    192
    
    
    
    314
    
    
    
    385Interest on securitiesTaxable
    
    
    293
    
    
    
    274
    
    
    
    594
    
    
    
    547Tax-exempt
    
    
    
    
    
    
    41
    
    
    
    
    
    
    
    82Other interest
    
    
    166
    
    
    
    194
    
    
    
    366
    
    
    
    363Total interest income
    
    
    7,050
    
    
    
    5,883
    
    
    
    13,955
    
    
    
    11,058INTEREST EXPENSE:Deposits
    
    
    3,267
    
    
    
    2,509
    
    
    
    6,489
    
    
    
    4,589Borrowings
    
    
    514
    
    
    
    439
    
    
    
    1,019
    
    
    
    855Total interest expense
    
    
    3,781
    
    
    
    2,948
    
    
    
    7,508
    
    
    
    5,444Net interest income
    
    
    3,269
    
    
    
    2,935
    
    
    
    6,447
    
    
    
    5,614Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600
    )Net interest income after provision
for loan losses
    
    
    3,269
    
    
    
    2,935
    
    
    
    6,447
    
    
    
    6,214OTHER INCOME:Service fees
    
    
    185
    
    
    
    122
    
    
    
    346
    
    
    
    232Net gains on sale of secondary
market loans
    
    
    91
    
    
    
    42
    
    
    
    199
    
    
    
    83Proceeds from settlement of lawsuit
    
    
    
    
    
    
    
    
    
    
    470
    
    
    
    Other
    
    
    66
    
    
    
    87
    
    
    
    240
    
    
    
    152Total other income
    
    
    342
    
    
    
    251
    
    
    
    1,255
    
    
    
    467OTHER EXPENSE:Salaries and employee benefits
    
    
    1,672
    
    
    
    1,496
    
    
    
    3,410
    
    
    
    3,090Occupancy
    
    
    327
    
    
    
    293
    
    
    
    661
    
    
    
    610Furniture and equipment
    
    
    166
    
    
    
    155
    
    
    
    323
    
    
    
    311Data processing
    
    
    210
    
    
    
    182
    
    
    
    381
    
    
    
    336Professional service fees
    
    
    174
    
    
    
    414
    
    
    
    325
    
    
    
    614Loan and deposit
    
    
    79
    
    
    
    98
    
    
    
    151
    
    
    
    228Telephone
    
    
    59
    
    
    
    51
    
    
    
    117
    
    
    
    100Advertising
    
    
    91
    
    
    
    107
    
    
    
    183
    
    
    
    177Other
    
    
    287
    
    
    
    200
    
    
    
    570
    
    
    
    527Total other expense
    
    
    3,065
    
    
    
    2,996
    
    
    
    6,121
    
    
    
    5,993Income before income taxes
    
    
    546
    
    
    
    190
    
    
    
    1,581
    
    
    
    688Provision for (benefit of) income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET INCOME
    
    $
    546
    
    
    $
    190
    
    
    $
    1,581
    
    
    $
    688INCOME PER COMMON SHARE:Basic
    
    $
    .16
    
    
    $
    .05
    
    
    $
    .46
    
    
    $
    .20Diluted
    
    $
    .16
    
    
    $
    .05
    
    
    $
    .46
    
    
    $
    .20
  2.




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Balance, beginning of period
    
    $
    29,932
    
    
    $
    27,173
    
    
    $
    28,790
    
    
    $
    26,588Net income for period
    
    
    546
    
    
    
    190
    
    
    
    1,581
    
    
    
    688Stock option compensation
    
    
    30
    
    
    
    78
    
    
    
    60
    
    
    
    156Net unrealized gain (loss) on securities available for sale
    
    
    (23
    )
    
    
    (262
    )
    
    
    54
    
    
    
    (253
    )Total comprehensive income
    
    
    553
    
    
    
    6
    
    
    
    1,695
    
    
    
    591Balance, end of period
    
    $
    30,485
    
    
    $
    27,179
    
    
    $
    30,485
    
    
    $
    27,179
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Six Months EndedJune 30,2007
    
    
    2006Cash Flows from Operating Activities:Net income
    
    $
    1,581
    
    
    $
    688Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation and amortization
    
    
    344
    
    
    
    489(Gain) on sale of premises, equipment and other real estate
    
    
    (13
    )
    
    
    (57
    )Stock option compensation
    
    
    60
    
    
    
    156Change in other assets
    
    
    348
    
    
    
    (288
    )Change in other liabilities
    
    
    8
    
    
    
    452Net cash provided by operating activities
    
    
    2,328
    
    
    
    1,440Cash Flows from Investing Activities:Net (increase) in loans
    
    
    (16,470
    )
    
    
    (44,039
    )Net (increase) decrease in interest-bearing deposits in other financial institutions
    
    
    (2,831
    )
    
    
    132Purchase of securities available for sale
    
    
    (13,564
    )
    
    
    Proceeds from sales, maturities or calls of securities available for sale
    
    
    22,440
    
    
    
    70Capital expenditures
    
    
    (744
    )
    
    
    (1,171
    )Proceeds from sale of premises, equipment, and other real estate
    
    
    317
    
    
    
    957Net cash (used in) provided by investing activities
    
    
    (10,852
    )
    
    
    (44,051
    )Cash Flows from financing activities:Net increase in deposits
    
    
    8,825
    
    
    
    51,532Proceeds from issuance of debt
    
    
    
    
    
    
    1,200Net cash provided by financing activities
    
    
    8,825
    
    
    
    52,732Net increase in cash and cash equivalents
    
    
    301
    
    
    
    10,121Cash and cash equivalents at beginning of period
    
    
    10,706
    
    
    
    7,943Cash and cash equivalents at end of period
    
    $
    11,007
    
    
    $
    18,064Supplemental Cash Flow Information:Cash paid during the year for:Interest
    
    $
    5,771
    
    
    $
    5,177Income taxes
    
    
    
    
    
    
    Noncash Investing and Financing Activities:Transfers of foreclosures from loans to other real estate held for sale
(net of adjustments made through the allowance for loan losses)
    
    
    69
    
    
    
    7
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1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of PresentationThe unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the
Corporation) have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six month period ended June 30,
2007 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2007. The unaudited consolidated financial statements and footnotes thereto should
be read in conjunction with the audited consolidated financial statements and footnotes thereto
included in the Corporations Annual Report on Form 10-K for the year ended December 31, 2006.The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and expenses during the
period. Actual results could differ from those estimates.In order to properly reflect some categories of other income and other expenses,
reclassifications of expense and income items have been made to prior period numbers. The
net other income and other expenses were not changed due to these classifications.Allowance for Loan LossesThe allowance for loan losses includes specific allowances related to commercial loans, which
have been judged to be impaired. A loan is impaired when, based on current information, it is
probable that the Corporation will not collect all amounts due in accordance with the
contractual terms of the loan agreement. These specific allowances are based on discounted
cash flows of expected future payments using the loans initial effective interest rate or the
fair value of the collateral if the loan is collateral dependent.The Corporation continues to maintain a general allowance for loan losses for loans not
considered impaired. The allowance for loan losses is maintained at a level which management
believes is adequate to provide for possible loan losses. Management periodically evaluates
the adequacy of the allowance using the Corporations past loan loss experience, known and
inherent risks in the portfolio, composition of the portfolio, current economic conditions, and
other factors. The allowance does not include the effects of expected losses related to future
events or future changes in economic conditions. This evaluation is inherently subjective
since it requires material estimates that may be susceptible to significant change. Loans are
charged against the allowance for loan losses when management believes the collectibility of
the principal is unlikely. In addition, various regulatory agencies periodically review the
allowance for loan losses. These agencies may require additions to the allowance for loan
losses based on their judgments of collectibility.In managements opinion, the allowance for loan losses is adequate to cover probable losses
relating to specifically identified loans, as well as probable losses inherent in the balance
of the loan portfolio as of the balance sheet date.Stock Option PlansThe Corporation sponsors three stock option plans. One plan was approved in 2000 and applies to
officers, employees, and nonemployee directors. This plan was amended as a part of the December
2004 stock offering and recapitalization. The amendment, approved by shareholders, increased
the shares available under this plan by 428,587 shares from the original 25,000 (adjusted for
the 1:20 reverse stock split), to a total authorized share balance of 453,587. The other two
plans, one for officers and employees and the other for nonemployee
 5.




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1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)directors, were approved in 1997. A total of 30,000 shares (adjusted for the 1:20 reverse stock
split), were 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.The Corporation adopted SFAS No. 123 (Revised) Share Based Payments in the first quarter of
2006. This statement supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees
and its related implementation guidance. Under Opinion No. 25, issuing stock options to
employees generally resulted in recognition of no compensation cost. This adoption resulted in
the recognition of before tax compensation expense in the amount of $60,000 for the six months
ended June 30, 2007, and $156,000 for the same period in 2006. The expense recorded recognizes
the current period vesting of options outstanding. The per share impact of this accounting
change was $.01 and $.05 in the first half of 2007 and 2006, respectively.2.
    
    RECENT ACCOUNTING PRONOUNCEMENTSFASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income TaxesIn July 2006, the Financial Accounting Standards Board (FASB) issued this interpretation to
clarify the accounting for uncertainty in tax positions. FIN 48 requires, among other matters,
that the Corporation recognize in its financial statements the impact of a tax position, if that
position is more likely than not of being sustained on an audit, based on the technical merits
of the position. The provisions of FIN 48 were effective as of the beginning of the
Corporations 2007 fiscal year and required any cumulative effect of the change in accounting
principle to be recorded as an adjustment to opening retained earnings. The Corporation did not
record an adjustment to retained earnings upon adoption of FIN 48. In future periods, The
Corporation will, in accordance with FIN 48, evaluate its tax positions to determine whether or
not an adjustment to deferred tax balances and related valuation accounts is warranted.SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS
No. 159)SFAS No. 159 permits an entity to measure certain financial assets and financial liabilities at
fair value. The Statements objective is to improve financial reporting by allowing entities to
mitigate volatility in reported earnings caused by the measurement of related assets and
liabilities using different attributes, without having to apply complex hedge accounting
provisions. Under SFAS No. 159, entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting date. The fair value
option may be elected on an instrument-by-instrument basis, with a few exceptions, as long as it
is applied to the instrument in its entirety. The fair value option election is irrevocable,
unless a new election date occurs. The new Statement establishes presentation and disclosure
requirements to help financial statement users understand the effect of the entitys election on
its earnings but does not eliminate disclosure requirements of other accounting standards.
Assets and liabilities that are measured at fair value must be displayed on the face of the
balance sheet. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year
beginning after November 15, 2007. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity (a) makes that choice in the first 120 days of
that fiscal year, (2) has not yet issued financial statements, and (3) elects to apply the
provisions of SFAS No. 157. The Corporation did not adopt SFAS No. 159 during this early
adoption period, and has not determined the impact, if any; the implementation of SFAS No. 159
will have on the consolidated financial statements.
 6.




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3.
    
    EARNINGS PER SHAREEarnings per share are based upon the weighted average number of shares outstanding.Additional shares issued as a result of option exercises would not be dilutive in either period.The following shows the computation of basic and diluted earnings per share for the three and
six months ended June 30, 2007 and 2006 (dollars in thousands, except per share data):
 Three Months Ended
    
    
    
    

    Weighted Average


    
    
    IncomeJune 30,
    
    Net Income
    
    

   Number of Shares

    
    

    Per Share2007Income per share  Basic and diluted
    
    $
    546
    
    
    
    3,428,695
    
    
    $
    .162006Income per share  Basic and diluted
    
    $
    190
    
    
    
    3,428,695
    
    
    $
    .05
 Six Months EndedJune 30,2007Income per share  Basic and diluted
    
    $
    1,581
    
    
    
    3,428,695
    
    
    $
    .462006Income per share  Basic and diluted
    
    $
    688
    
    
    
    3,428,695
    
    
    $
    .20
 4.
    
    INVESTMENT SECURITIESThe amortized cost and estimated fair value of investment securities available for sale as of
June 30, 2007, December 31, 2006 and June 30, 2006 are as follows (dollars in thousands):
 June 30, 2007
    
    
    December 31, 2006
    
    
    June 30, 2006Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    EstimatedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueUS Agencies
    
    $
    23,708
    
    
    $
    23,517
    
    
    $
    32,445
    
    
    $
    32,176
    
    
    $
    30,963
    
    
    $
    30,279Obligations of
states and
political
subdivisions
    
    
    511
    
    
    
    569
    
    
    
    511
    
    
    
    593
    
    
    
    3,523
    
    
    
    3,591Total securities
available for
sale
    
    $
    24,219
    
    
    $
    24,086
    
    
    $
    32,956
    
    
    $
    32,769
    
    
    $
    34,486
    
    
    $
    33,870
 The amortized cost and estimated fair value of investment securities pledged to secure FHLB
borrowings and customer relationships were $23.708 million and $23.517 million, respectively, at
June 30, 2007.
 7.




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##### Table of Contents



5.
    
    LOANSThe composition of loans at June 30, 2007, December 31, 2006 and June 30, 2006 is as follows
(dollars in thousands):
 June 30,
    
    
    December 31,
    
    
    June 30,2007
    
    
    2006
    
    
    2006Commercial real estate
    
    $
    161,823
    
    
    $
    154,332
    
    
    $
    140,918Commercial, financial, and agricultural
    
    
    76,390
    
    
    
    71,385
    
    
    
    59,581One to four family residential real estate
    
    
    55,090
    
    
    
    58,014
    
    
    
    48,931Construction
    
    
    42,055
    
    
    
    36,009
    
    
    
    31,048Consumer
    
    
    3,538
    
    
    
    2,841
    
    
    
    2,632Total loans
    
    $
    338,896
    
    
    $
    322,581
    
    
    $
    283,110
 LOANS  Allowance for loan lossesAn analysis of the allowance for loan losses for the six months ended June 30, 2007, the year
ended December 31, 2006, and the six months ended June 30, 2006 is as follows: (dollars in thousands):
 June 30,
    
    
    December 31,
    
    
    June 30,2007
    
    
    2006
    
    
    2006Balance at beginning of period
    
    $
    5,006
    
    
    $
    6,108
    
    
    $
    6,108Recoveries on loans
    
    
    25
    
    
    
    91
    
    
    
    40Loans charged off
    
    
    (111
    )
    
    
    (332
    )
    
    
    (133
    )Provision
    
    
    
    
    
    
    (861
    )
    
    
    (600
    )Balance at end of period
    
    $
    4,920
    
    
    $
    5,006
    
    
    $
    5,415
 In the first half of 2007, net charge off activity was minimal at $86,000, or .03% of
average loans outstanding compared to net charge-offs of $93,000, or .04% of average loans, in
the first half of 2006. In the first half of 2006, the Corporation reduced the allowance for
loan losses by recording a negative provision amounting to $600,000. This reduction in the
reserve was made in recognition of the improved credit quality existent in the loan portfolio
and is discussed in more detail under Managements Discussion and Analysis.LOANS  Impaired loansNonperforming loans are those which are contractually past due 90 days or more as to interest or
principal payments, on nonaccrual status, or loans, the terms of which have been renegotiated to
provide a reduction or deferral on interest or principal. The interest income recorded and that
which would have been recorded had nonaccrual and renegotiated loans been current or not
troubled was not material to the consolidated financial statements for the six months ended June
30, 2007 and 2006.
 8.




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##### Table of Contents



5.
    
    LOANS (Continued)Information regarding impaired loans as of June 30, 2007, December 31, 2006 and June 30, 2006 is
as follows (dollars in thousands):
 Valuation ReserveJune 30,
    
    
    December 31,
    
    
    June 30,
    
    
    June 30,
    
    
    December 31,
    
    
    June 30,2007
    
    
    2006
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2006(Unaudited)
    
    
    
    
    
    
    (Unaudited)Balances, at period endImpaired loans with specific valuation reserve
    
    $
    3,559
    
    
    $
    1,804
    
    
    $
    301
    
    
    $
    968
    
    
    $
    493
    
    
    $
    75Impaired loans with no specific valuation reserve
    
    
    1,490
    
    
    
    1,136
    
    
    
    145
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    5,049
    
    
    $
    2,940
    
    
    $
    446
    
    
    $
    968
    
    
    $
    493
    
    
    $
    75Impaired loans on nonaccrual basis
    
    $
    4,758
    
    
    $
    2,900
    
    
    $
    446
    
    
    $
    968
    
    
    $
    493
    
    
    $
    75Impaired loans on accrual basis
    
    
    291
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    5,049
    
    
    $
    2,940
    
    
    $
    446
    
    
    $
    968
    
    
    $
    493
    
    
    $
    75Average investment in impaired loans
    
    $
    4,113
    
    
    $
    1,192
    
    
    $
    163Interest income recognized during impairment
    
    
    15
    
    
    
    7
    
    
    
    1Interest income that would have been recognized
on an accrual basis
    
    
    198
    
    
    
    114
    
    
    
    2Cash-basis interest income recognized
    
    
    10
    
    
    
    5
    
    
    
    1
 The average investment in impaired loans was approximately $4.113 million for the
six-months ended June 30, 2007, $1.192 million for the year ended December 31, 2006, and $.163
million for the six months ended June 30, 2006, respectively.LOANS  Related partiesThe Bank, in the ordinary course of business, grants loans to the Corporations executive
officers and directors, including their families and firms in which they are principal owners.Activity in such loans is summarized below (dollars in thousands):
 June 30,
    
    
    December 31,
    
    
    June 30,2007
    
    
    2006
    
    
    2006Loans outstanding beginning of period
    
    $
    1,621
    
    
    $
    578
    
    
    $
    578New loans
    
    
    
    
    
    
    1,647
    
    
    
    1,222Net activity on revolving lines of credit
    
    
    
    
    
    
    271
    
    
    
    271Repayment
    
    
    (16
    )
    
    
    (875
    )
    
    
    (857
    )Loans outstanding end of period
    
    $
    1,605
    
    
    $
    1,621
    
    
    $
    1,214
 There were no loans to related-parties classified substandard at June 30, 2007, December 31,
2006 or June 30, 2006, respectively.
 9.




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##### Table of Contents



6.
    
    BORROWINGSBorrowings consist of the following at June 30, 2007, December 31, 2006 and June 30, 2006
(dollars in thousands):
 June 30,
    
    
    December 31,
    
    
    June 30,2007
    
    
    2006
    
    
    2006Federal Home Loan Bank advances at rates ranging from 4.98%
to 5.17% maturing in 2010 and 2011
    
    $
    35,000
    
    
    $
    35,000
    
    
    $
    35,000Farmers Home Administration, fixed-rate note payable, maturing
August 24, 2004, interest payable at 1%
    
    
    1,348
    
    
    
    1,348
    
    
    
    1,417Advance outstanding on line of credit with a correspondent bank,
Interest payable at the prime rate, 8.25% as of June 30, 2007,
maturing May 21, 2008
    
    
    1,959
    
    
    
    1,959
    
    
    
    1,200$
    38,307
    
    
    $
    38,307
    
    
    $
    37,617
 The Federal Home Loan Bank borrowings are collateralized at June 30, 2007, by the
following: a collateral agreement on the Corporations one to four family residential real
estate loans with a book value of approximately $20.418 million; U.S. government agency
securities with an amortized cost and estimated fair value of $23.708 million and $23.517
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 June 30, 2007.The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $713,000 originated
and held by the Corporations wholly owned subsidiary, First Rural Relending, and an assignment
of a demand deposit account in the amount of $770,000, and guaranteed by the Corporation.7.
    
    STOCK OPTION PLANSA summary of stock option transactions for the six months ended June 30, 2007 and 2006, and the
year ended December 31, 2006, is as follows:
 June 30,
    
    
    December 31,
    
    
    June 30,2007
    
    
    2006
    
    
    2006Outstanding shares at beginning of year
    
    
    446,417
    
    
    
    375,417
    
    
    
    375,417Granted during the period
    
    
    
    
    
    
    72,500
    
    
    
    Expired during the period
    
    
    
    
    
    
    (1,500
    )
    
    
    (1,500
    )Outstanding shares at end of period
    
    
    446,417
    
    
    
    446,417
    
    
    
    373,917Weighted average exercise price per share at end of period
    
    $
    12.29
    
    
    $
    12.29
    
    
    $
    12.60Shares available for grant at end of period
    
    
    18,488
    
    
    
    18,488
    
    
    
    90,988
 There were no options granted in the first six months of 2007 and 2006.
 10.




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##### Table of Contents



7.
    
    STOCK OPTION PLANS (Continued)Following is a summary of the options outstanding and exercisable at June 30, 2007:
 Exercise
    



    Number



    
    
    Remaining
    
    
    Weighted AveragePrice Range
    
    Outstanding
    
    
    Exercisable
    
    
    Contractual Life-Years
    
    
    Exercise Price$9.16
    
    
    12,500
    
    
    
    5,000
    
    
    
    8.5
    
    
    $
    9.16$9.75
    
    
    257,152
    
    
    
    120,861
    
    
    
    7.5
    
    
    
    9.75$10.65
    
    
    72,500
    
    
    
    14,500
    
    
    
    9.5
    
    
    
    10.65$11.50
    
    
    40,000
    
    
    
    8,000
    
    
    
    8.3
    
    
    
    11.50$12.00
    
    
    60,000
    
    
    
    12,000
    
    
    
    8.0
    
    
    
    12.00$156.00 - $240.00
    
    
    3,545
    
    
    
    3,545
    
    
    
    3.8
    
    
    
    186.75$300.00 - $406.60
    
    
    720
    
    
    
    720
    
    
    
    2.0
    
    
    
    345.00446,417
    
    
    
    164,626
    
    
    
    7.9
    
    
    $
    14.15
 8.
    
    INCOME TAXESA valuation allowance is provided against deferred tax assets when it is more likely than not
that some or all of the deferred tax asset will not be realized. As of June 30, the Corporation
had a net operating loss and tax credit carryforwards for tax purposes of approximately $36.9
million, and $2.1 million, respectively. The deferred tax benefits related to the net operating
loss and tax credit carryforwards will, at a minimum, be utilized to offset future taxable
expense. In the first half of 2007 and 2006, the Corporation reversed a portion of the
valuation allowance pertaining to the NOL carryforward to offset current federal tax, $.450
million and $.075 million, respectively. The Corporation will record future benefits from these
carryforwards at such time as it becomes more likely than not that they will be utilized prior
to expiration. Please refer to further discussion on income taxes contained in Managements
Discussion and Analysis. This net operating loss carryforward expires twenty years from the
date that it originated. A portion of the NOL, approximately $22 million, and all of the credit
carryforwards are subject to the limitations for utilization as set forth in Section 382 of the
Internal Revenue Code. The annual limitation is $1.4 million for the NOL and the equivalent
value of tax credits, which is approximately $.477 million. These limitations for use were
established in conjunction with the recapitalization of the Corporation in December, 2004.9.
    
    COMMITMENTS, CONTINGENCIES AND CREDIT RISKFinancial Instruments With Off-Balance-Sheet RiskThe Corporation is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit risk in excess of the amount recognized in the
consolidated balance sheets.
 11.




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##### Table of Contents



9.
    
    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):
 June 30,
    
    
    December 31,
    
    
    June 30,2007
    
    
    2006
    
    
    2006Commitments to extend credit:Variable rate
    
    $
    51,214
    
    
    $
    44,141
    
    
    $
    42,787Fixed rate
    
    
    8,881
    
    
    
    9,288
    
    
    
    3,345Standby letters of credit  Variable rate
    
    
    5,914
    
    
    
    6,233
    
    
    
    8,939Credit card commitments  Fixed rate
    
    
    2,432
    
    
    
    2,391
    
    
    
    2,981$
    68,441
    
    
    $
    62,053
    
    
    $
    58,052
 Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Corporation evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Corporation upon extension of credit, is based on managements credit
evaluation of the party. Collateral held varies but may include accounts receivable; inventory;
property, plant, and equipment; and income-producing commercial properties.Standby letters of credit are conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers. The
commitments are structured to allow for 100% collateralization on all standby letters of credit.Credit card commitments are commitments on credit cards issued by the Corporations subsidiary
and serviced by other companies. These commitments are unsecured.ContingenciesIn the normal course of business, the Corporation is involved in various legal proceedings. For
expanded discussion on the Corporations legal proceedings, see Part II, Item 1, Legal
Proceedings in this report.Concentration of Credit RiskThe Bank grants commercial, residential, agricultural, and consumer loans throughout Michigan.
The Banks most prominent concentration in the loan portfolio relates to commercial real estate
loans. This concentration at June 30, 2007 represents $41.7 million, or 17.5%, compared to
$35.5 million, or 17.7%, of the commercial loan portfolio on June 30, 2006. The remainder of
the commercial loan portfolio is diversified in such categories as hospitality and tourism, real
estate agents and managers, new car dealers, gaming, petroleum, forestry, agriculture and
construction. Due to the diversity of the Banks locations, the ability of debtors of
residential and consumer loans to honor their obligations is not tied to any particular economic
sector.
 12.




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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.
  13.




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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
  14.




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  June 30,
    
    
    Percent of
    
    
    December 31,
    
    
    Percent of
    
    
    June 30,
    
    
    Percent of2007
    
    
    Total
    
    
    2006
    
    
    Total
    
    
    2006
    
    
    TotalCommercial real estate
    
    $
    161,823
    
    
    
    47.75
    %
    
    $
    154,332
    
    
    
    47.84
    %
    
    $
    140,918
    
    
    
    49.77
    %Commercial, financial, and agricultural
    
    
    76,390
    
    
    
    22.54
    
    
    
    71,385
    
    
    
    22.13
    
    
    
    59,581
    
    
    
    21.05One to four family residential real
estate
    
    
    55,090
    
    
    
    16.26
    
    
    
    58,014
    
    
    
    17.99
    
    
    
    48,931
    
    
    
    17.28Construction
    
    
    42,055
    
    
    
    12.41
    
    
    
    36,009
    
    
    
    11.16
    
    
    
    31,048
    
    
    
    10.97Consumer
    
    
    3,538
    
    
    
    1.04
    
    
    
    2,841
    
    
    
    .88
    
    
    
    2,632
    
    
    
    .93Total loans
    
    $
    338,896
    
    
    
    100.00
    %
    
    $
    322,581
    
    
    
    100.00
    %
    
    $
    283,110
    
    
    
    100.00
    %
  June 30, 2007
    
    
    December 31, 2006
    
    
    June 30, 2006Percent of
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    Percent ofOutstanding
    
    
    Commerical
    
    
    Shareholders
    
    
    Outstanding
    
    
    Commercial
    
    
    Shareholders
    
    
    Outstanding
    
    
    Commercial
    
    
    ShareholdersBalance
    
    
    Loans
    
    
    Equity
    
    
    Balance
    
    
    Loans
    
    
    Equity
    
    
    Balance
    
    
    Loans
    
    
    EquityR/E  oper. of nonresidential bldgs.
    
    $
    41,662
    
    
    
    17.49
    %
    
    
    136.66
    %
    
    $
    44,308
    
    
    
    19.63
    %
    
    
    153.90
    %
    
    $
    35,478
    
    
    
    17.69
    %
    
    
    130.53
    %Hospitality and tourism
    
    
    37,286
    
    
    
    15.65
    
    
    
    122.31
    
    
    
    30,826
    
    
    
    13.66
    
    
    
    107.07
    
    
    
    37,754
    
    
    
    18.83
    
    
    
    138.91Real estate agents and managers
    
    
    31,937
    
    
    
    13.41
    
    
    
    104.76
    
    
    
    25,071
    
    
    
    11.11
    
    
    
    87.08
    
    
    
    15,628
    
    
    
    7.79
    
    
    
    57.5New car dealers
    
    
    10,270
    
    
    
    4.31
    
    
    
    33.69
    
    
    
    10,086
    
    
    
    4.47
    
    
    
    35.03
    
    
    
    10,002
    
    
    
    4.99
    
    
    
    36.8Other
    
    
    117,058
    
    
    
    49.14
    
    
    
    383.99
    
    
    
    115,426
    
    
    
    51.13
    
    
    
    400.93
    
    
    
    101,637
    
    
    
    50.69
    
    
    
    373.95Total Commercial Loans
    
    $
    238,213
    
    
    
    100.00
    %
    
    
    
    
    
    $
    225,717
    
    
    
    100.00
    %
    
    
    
    
    
    $
    200,499
    
    
    
    100.00
    %
  Credit Quality
  15.




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  June 30,
    
    
    December 31,
    
    
    June 30,2007
    
    
    2006
    
    
    2006Nonperforming Assets:Nonaccrual Loans
    
    $
    4,758
    
    
    $
    2,899
    
    
    $
    446Loans past due 90 days or more
    
    
    291
    
    
    
    40
    
    
    
    Restructured Loans
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    5,049
    
    
    
    2,939
    
    
    
    446Other real estate owned
    
    
    77
    
    
    
    26
    
    
    
    52Total nonperforming assets
    
    $
    5,126
    
    
    $
    2,965
    
    
    $
    498Nonperforming loans as a % of loans
    
    
    1.49
    %
    
    
    .91
    %
    
    
    .16
    %Nonperforming assets as a % of assets
    
    
    1.30
    %
    
    
    .77
    %
    
    
    .14
    %Reserve for Loan Losses:At period end
    
    $
    4,920
    
    
    $
    5,006
    
    
    $
    5,415As a % of loans
    
    
    1.45
    %
    
    
    1.55
    %
    
    
    1.91
    %As a % of nonperforming loans
    
    
    97.45
    %
    
    
    170.33
    %
    
    
    1,214.13
    %As a % of nonaccrual loans
    
    
    103.41
    %
    
    
    172.68
    %
    
    
    1,214.13
    %
  June 30,
    
    
    December 31,
    
    
    June 30,2007
    
    
    2006
    
    
    2006Commercial, financial and agricultural loans
    
    $
    4,261
    
    
    $
    3,600
    
    
    $
    3,030One to four family residential real estate loans
    
    
    60
    
    
    
    23
    
    
    
    41Consumer loans
    
    
    
    
    
    
    
    
    
    
    Unallocated and general reserves
    
    
    599
    
    
    
    1,383
    
    
    
    2,344Totals
    
    $
    4,920
    
    
    $
    5,006
    
    
    $
    5,415
  16.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  June 30,
    
    
    December 31,
    
    
    June 30,2007
    
    
    2006
    
    
    2006Total loans, at period end
    
    $
    338,896
    
    
    $
    322,581
    
    
    $
    283,110Average loans for the year
    
    $
    321,414
    
    
    $
    301,508
    
    
    $
    262,274Allowance for loan losses
    
    $
    4,920
    
    
    $
    5,006
    
    
    $
    5,415Allowance to total loans at period end
    
    
    1.45
    %
    
    
    1.55
    %
    
    
    1.91
    %Net charge-offs during the period
    
    $
    86
    
    
    $
    241
    
    
    $
    93Net charge-offs to average loans
    
    
    .03
    %
    
    
    .08
    %
    
    
    .04
    %Net charge-offs to beginning allowance balance
    
    
    1.72
    %
    
    
    3.95
    %
    
    
    1.52
    %Nonaccrual loans at end of period
    
    $
    4,758
    
    
    $
    2,899
    
    
    $
    446Loans past due 90 days or more
    
    
    291
    
    
    
    40
    
    
    
    Restructured loans
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    $
    5,049
    
    
    $
    2,939
    
    
    $
    446Nonperforming loans to total loans at end of period
    
    
    1.49
    %
    
    
    .91
    %
    
    
    .16
    %
     Three Months Ended
    
    
    Year Ended
    
    
    Three Months EndedJune 30, 2007
    
    
    December 31, 2006
    
    
    June 30, 2006Balance at beginning of period
    
    $
    26
    
    
    $
    945
    
    
    $
    945Other real estate transferred from loans due to foreclosure
(net of adjustments made through the allowance for loan losses)
    
    
    69
    
    
    
    23
    
    
    
    7Other real estate sold/written down
    
    
    (18
    )
    
    
    (942
    )
    
    
    (900
    )Balance at end of period
    
    $
    77
    
    
    $
    26
    
    
    $
    52
  17.




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(Continued)
 Deposits
   June 30,
    
    
    
    
    
    
    December 31,
    
    
    
    
    
    
    June 30,2007
    
    
    % of Total
    
    
    2006
    
    
    % of Total
    
    
    2006
    
    
    % of TotalNon-interest-bearing
    
    $
    28,811
    
    
    
    8.97
    %
    
    $
    23,471
    
    
    
    7.51
    %
    
    $
    21,773
    
    
    
    7.66
    %NOW and money market
    
    
    73,994
    
    
    
    23.03
    
    
    
    73,188
    
    
    
    23.43
    
    
    
    68,107
    
    
    
    23.97Savings
    
    
    12,422
    
    
    
    3.87
    
    
    
    13,365
    
    
    
    4.28
    
    
    
    22,104
    
    
    
    7.78Certificates of Deposit <$100,000
    
    
    96,546
    
    
    
    30.05
    
    
    
    89,585
    
    
    
    28.67
    
    
    
    73,800
    
    
    
    25.97Total core deposits
    
    
    211,773
    
    
    
    65.92
    
    
    
    199,609
    
    
    
    63.89
    
    
    
    185,784
    
    
    
    65.38Certificates of Deposit >$100,000
    
    
    24,879
    
    
    
    7.75
    
    
    
    23,645
    
    
    
    7.57
    
    
    
    19,025
    
    
    
    6.69Brokered CDs
    
    
    84,594
    
    
    
    26.33
    
    
    
    89,167
    
    
    
    28.54
    
    
    
    79,355
    
    
    
    27.93Total non-core deposits
    
    
    109,473
    
    
    
    34.09
    
    
    
    112,812
    
    
    
    36.11
    
    
    
    98,380
    
    
    
    34.61Total deposits
    
    $
    321,246
    
    
    
    100.00
    %
    
    $
    312,421
    
    
    
    100.00
    %
    
    $
    284,164
    
    
    
    100.00
    %
 Borrowings
  Shareholders Equity
  RESULTS OF OPERATIONS
 Net Interest Income
 
 18.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
   Three Months Ended2007-2006Average Balances
    
    
    Average Rates
    
    
    Interest
    
    
    Income/
    
    
    
    
    
    
    
    
    
    
    Rate/June 30,
    
    
    Increase/
    
    
    June 30,
    
    
    June 30,
    
    
    Expense
    
    
    Volume
    
    
    Rate
    
    
    Volume(dollars in thousands)
    
    2007
    
    
    2006
    
    
    (Decrease)
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    Variance
    
    
    Variance
    
    
    Variance
    
    
    VarianceLoans (1,2)
    
    $
    324,721
    
    
    $
    273,686
    
    
    $
    51,035
    
    
    
    8.14
    %
    
    
    7.88
    %
    
    $
    6,591
    
    
    $
    5,374
    
    
    $
    1,217
    
    
    $
    1,002
    
    
    $
    181
    
    
    
    34Taxable securities
    
    
    25,971
    
    
    
    30,328
    
    
    
    (4,357
    )
    
    
    4.53
    
    
    
    3.61
    
    
    
    293
    
    
    
    273
    
    
    
    20
    
    
    
    (39
    )
    
    
    69
    
    
    
    (10
    )Nontaxable securities
    
    
    
    
    
    
    3,757
    
    
    
    (3,757
    )
    
    
    
    
    
    
    4.38
    
    
    
    
    
    
    
    41
    
    
    
    (41
    )
    
    
    (41
    )
    
    
    (41
    )
    
    
    41Federal funds sold
    
    
    7,756
    
    
    
    9,738
    
    
    
    (1,982
    )
    
    
    5.27
    
    
    
    5.11
    
    
    
    102
    
    
    
    124
    
    
    
    (22
    )
    
    
    (25
    )
    
    
    4
    
    
    
    (1
    )Other interest-earning assets
    
    
    5,934
    
    
    
    5,736
    
    
    
    198
    
    
    
    4.33
    
    
    
    4.96
    
    
    
    64
    
    
    
    71
    
    
    
    (7
    )
    
    
    2
    
    
    
    (9
    )
    
    
    Total earning assets
    
    
    364,382
    
    
    
    323,245
    
    
    
    41,137
    
    
    
    7.76
    
    
    
    7.30
    
    
    
    7,050
    
    
    
    5,883
    
    
    
    1,167
    
    
    
    899
    
    
    
    204
    
    
    
    64Reserve for loan losses
    
    
    (4,972
    )
    
    
    (5,427
    )
    
    
    455Cash and due from banks
    
    
    5,976
    
    
    
    5,957
    
    
    
    19Intangible assets
    
    
    172
    
    
    
    284
    
    
    
    (112
    )Other assets
    
    
    16,507
    
    
    
    17,469
    
    
    
    (962
    )Total assets
    
    $
    382,065
    
    
    $
    341,528
    
    
    $
    40,537NOW and money market deposits
    
    $
    72,371
    
    
    $
    69,994
    
    
    $
    2,377
    
    
    
    3.49
    
    
    
    3.13
    
    
    
    629
    
    
    
    546
    
    
    
    83
    
    
    
    19
    
    
    
    62
    
    
    
    2Savings deposits
    
    
    13,288
    
    
    
    14,641
    
    
    
    (1,353
    )
    
    
    1.63
    
    
    
    1.37
    
    
    
    54
    
    
    
    50
    
    
    
    4
    
    
    
    (5
    )
    
    
    9
    
    
    
    CDs <$100,000
    
    
    96,442
    
    
    
    80,895
    
    
    
    15,547
    
    
    
    5.00
    
    
    
    4.21
    
    
    
    1,202
    
    
    
    850
    
    
    
    352
    
    
    
    163
    
    
    
    158
    
    
    
    31CDs >$100,000
    
    
    24,350
    
    
    
    17,050
    
    
    
    7,300
    
    
    
    5.02
    
    
    
    4.49
    
    
    
    305
    
    
    
    191
    
    
    
    114
    
    
    
    82
    
    
    
    23
    
    
    
    9Brokered deposits
    
    
    79,301
    
    
    
    71,957
    
    
    
    7,344
    
    
    
    5.45
    
    
    
    4.86
    
    
    
    1,077
    
    
    
    872
    
    
    
    205
    
    
    
    89
    
    
    
    105
    
    
    
    11Borrowings
    
    
    39,209
    
    
    
    37,610
    
    
    
    1,599
    
    
    
    5.25
    
    
    
    4.68
    
    
    
    514
    
    
    
    439
    
    
    
    75
    
    
    
    19
    
    
    
    53
    
    
    
    3Total interest-bearing liabilities
    
    
    324,961
    
    
    
    292,147
    
    
    
    32,814
    
    
    
    4.67
    
    
    
    4.05
    
    
    
    3,781
    
    
    
    2,948
    
    
    
    833
    
    
    
    367
    
    
    
    410
    
    
    
    56Demand deposits
    
    
    23,717
    
    
    
    20,054
    
    
    
    3,663Other liabilities
    
    
    2,975
    
    
    
    3,406
    
    
    
    (431
    )Shareholders equity
    
    
    30,412
    
    
    
    25,921
    
    
    
    4,491Total liabilities and shareholders equity
    
    $
    382,065
    
    
    $
    341,528
    
    
    $
    40,537Rate spread
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.09
    %
    
    
    3.25
    %Net interest margin/revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.60
    %
    
    
    3.64
    %
    
    $
    3,269
    
    
    $
    2,935
    
    
    $
    334
    
    
    $
    532
    
    
    $
    (206
    )
    
    $
    8
 
 (1)
    
    For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.(2)
    
    Interest income on loans includes loan fees. Six Months Ended2007-2006Average Balances
    
    
    Average Rates
    
    
    Interest
    
    
    Income/
    
    
    
    
    
    
    
    
    
    
    Rate/June 30,
    
    
    Increase/
    
    
    June 30,
    
    
    June 30,
    
    
    Expense
    
    
    Volume
    
    
    Rate
    
    
    Volume(dollars in thousands)
    
    2007
    
    
    2006
    
    
    (Decrease)
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    Variance
    
    
    Variance
    
    
    Variance
    
    
    VarianceLoans (1,2)
    
    $
    321,415
    
    
    $
    262,274
    
    
    $
    59,141
    
    
    
    8.15
    %
    
    
    7.74
    %
    
    $
    12,995
    
    
    $
    10,066
    
    
    $
    2,929
    
    
    $
    2,270
    
    
    $
    538
    
    
    
    121Taxable securities
    
    
    27,703
    
    
    
    30,347
    
    
    
    (2,644
    )
    
    
    4.32
    
    
    
    3.63
    
    
    
    594
    
    
    
    547
    
    
    
    47
    
    
    
    (48
    )
    
    
    104
    
    
    
    (9
    )Nontaxable securities
    
    
    
    
    
    
    3,816
    
    
    
    (3,816
    )
    
    
    
    
    
    
    4.33
    
    
    
    
    
    
    
    82
    
    
    
    (82
    )
    
    
    (82
    )
    
    
    
    
    
    
    Federal funds sold
    
    
    9,103
    
    
    
    9,582
    
    
    
    (479
    )
    
    
    5.32
    
    
    
    4.78
    
    
    
    240
    
    
    
    227
    
    
    
    13
    
    
    
    (11
    )
    
    
    26
    
    
    
    (2
    )Other interest-earning assets
    
    
    5,450
    
    
    
    5,756
    
    
    
    (306
    )
    
    
    4.66
    
    
    
    4.76
    
    
    
    126
    
    
    
    136
    
    
    
    (10
    )
    
    
    (7
    )
    
    
    (3
    )
    
    
    Total earning assets
    
    
    363,671
    
    
    
    311,775
    
    
    
    51,896
    
    
    
    7.74
    
    
    
    7.15
    
    
    
    13,955
    
    
    
    11,058
    
    
    
    2,897
    
    
    
    2,122
    
    
    
    665
    
    
    
    110Reserve for loan losses
    
    
    (4,985
    )
    
    
    (5,737
    )
    
    
    752Cash and due from banks
    
    
    5,911
    
    
    
    6,147
    
    
    
    (236
    )Intangible assets
    
    
    183
    
    
    
    301
    
    
    
    (118
    )Other assets
    
    
    16,459
    
    
    
    17,187
    
    
    
    (728
    )Total assets
    
    $
    381,239
    
    
    $
    329,673
    
    
    $
    51,566NOW and money market deposits
    
    $
    72,282
    
    
    $
    68,949
    
    
    $
    3,333
    
    
    
    3.48
    
    
    
    2.99
    
    
    
    1,249
    
    
    
    1,024
    
    
    
    225
    
    
    
    50
    
    
    
    167
    
    
    
    8Savings deposits
    
    
    13,284
    
    
    
    14,987
    
    
    
    (1,703
    )
    
    
    1.64
    
    
    
    1.29
    
    
    
    108
    
    
    
    96
    
    
    
    12
    
    
    
    (11
    )
    
    
    26
    
    
    
    (3
    )CDs <$100,000
    
    
    94,243
    
    
    
    79,291
    
    
    
    14,952
    
    
    
    4.95
    
    
    
    4.07
    
    
    
    2,312
    
    
    
    1,600
    
    
    
    712
    
    
    
    302
    
    
    
    345
    
    
    
    65CDs >$100,000
    
    
    24,117
    
    
    
    15,438
    
    
    
    8,679
    
    
    
    4.98
    
    
    
    4.44
    
    
    
    596
    
    
    
    340
    
    
    
    256
    
    
    
    191
    
    
    
    42
    
    
    
    23Brokered deposits
    
    
    82,022
    
    
    
    64,833
    
    
    
    17,189
    
    
    
    5.47
    
    
    
    4.76
    
    
    
    2,225
    
    
    
    1,529
    
    
    
    696
    
    
    
    405
    
    
    
    230
    
    
    
    61Borrowings
    
    
    38,795
    
    
    
    37,017
    
    
    
    1,778
    
    
    
    5.29
    
    
    
    4.66
    
    
    
    1,018
    
    
    
    855
    
    
    
    163
    
    
    
    41
    
    
    
    116
    
    
    
    6Total interest-bearing liabilities
    
    
    324,743
    
    
    
    280,515
    
    
    
    44,228
    
    
    
    4.66
    
    
    
    3.91
    
    
    
    7,508
    
    
    
    5,444
    
    
    
    2,064
    
    
    
    978
    
    
    
    926
    
    
    
    160Demand deposits
    
    
    23,596
    
    
    
    19,721
    
    
    
    3,875Other liabilities
    
    
    3,064
    
    
    
    3,609
    
    
    
    (545
    )Shareholders equity
    
    
    29,836
    
    
    
    25,828
    
    
    
    4,008Total
liabilities and shareholders equity
    
    $
    381,239
    
    
    $
    329,673
    
    
    $
    51,566Rate spread
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.08
    %
    
    
    3.24
    %Net interest margin/revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.57
    %
    
    
    3.63
    %
    
    $
    6,447
    
    
    $
    5,614
    
    
    $
    833
    
    
    $
    1,144
    
    
    $
    (261
    )
    
    $
    (50
    )
 
 (1)
    
    For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.(2)
    
    Interest income on loans includes loan fees. 19.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 Provision for Loan Losses
  Other Income
    Three Months Ended
    
    
    % Increase
    
    
    Six Months Ended
    
    
    % IncreaseJune 30,
    
    
    (Decrease)
    
    
    June 30,
    
    
    (Decrease)2007
    
    
    2006
    
    
    2007-2006
    
    

2007
    
    
    2006
    
    
    2007-2006Service fees
    
    $
    185
    
    
    $
    122
    
    
    
    51.64
    
    
    $
    346
    
    
    $
    232
    
    
    
    49.14Net gains on sale of secondary
market loans
    
    
    91
    
    
    
    42
    
    
    
    116.67
    
    
    
    199
    
    
    
    83
    
    
    
    139.76Proceeds from settlement of lawsuit
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    470
    
    
    
    
    
    
    
    N/AOther noninterest income
    
    
    66
    
    
    
    87
    
    
    
    (24.14
    )
    
    
    240
    
    
    
    152
    
    
    
    57.89Total other income
    
    $
    342
    
    
    $
    251
    
    
    
    36.26
    
    
    $
    1,255
    
    
    $
    467
    
    
    
    168.74
 Other Expenses
  20.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
    Three Months Ended
    
    
    % Increase
    
    
    Six Months Ended
    
    
    % IncreaseJune 30,
    
    
    (Decrease)
    
    
    June 30,
    
    
    (Decrease)2007
    
    
    2006
    
    
    2007-2006%
    
    
    2007
    
    
    2006
    
    
    2007-2006%Salaries and employee benefits
    
    $
    1,672
    
    
    $
    1,496
    
    
    
    11.77
    
    
    $
    3,410
    
    
    $
    3,090
    
    
    
    10.36Occupancy
    
    
    327
    
    
    
    293
    
    
    
    11.60
    
    
    
    661
    
    
    
    610
    
    
    
    8.36Furniture and equipment
    
    
    166
    
    
    
    155
    
    
    
    7.10
    
    
    
    323
    
    
    
    311
    
    
    
    3.86Data processing
    
    
    210
    
    
    
    182
    
    
    
    15.39
    
    
    
    381
    
    
    
    336
    
    
    
    13.39Professional service fees
    
    
    174
    
    
    
    414
    
    
    
    (57.97
    )
    
    
    325
    
    
    
    614
    
    
    
    (47.07
    )Loan and deposit
    
    
    79
    
    
    
    98
    
    
    
    (19.39
    )
    
    
    151
    
    
    
    228
    
    
    
    (33.77
    )Telephone
    
    
    59
    
    
    
    51
    
    
    
    15.69
    
    
    
    117
    
    
    
    100
    
    
    
    17.00Advertising
    
    
    91
    
    
    
    107
    
    
    
    (14.95
    )
    
    
    183
    
    
    
    177
    
    
    
    3.39Other
    
    
    287
    
    
    
    200
    
    
    
    43.50
    
    
    
    570
    
    
    
    527
    
    
    
    8.16Total noninterest expense
    
    $
    3,065
    
    
    $
    2,996
    
    
    
    2.30
    
    
    $
    6,121
    
    
    $
    5,993
    
    
    
    2.14
 Federal Income Taxes
  21.




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##### Table of Contents



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




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 CAPITAL AND REGULATORY
   June 30,
    
    
    December 31,
    
    
    June 30,2007
    
    
    2006
    
    
    2006Capital StructureShareholders equity
    
    $
    30,485
    
    
    $
    28,790
    
    
    $
    27,179Total capitalization
    
    $
    30,485
    
    
    $
    28,790
    
    
    $
    27,179Tangible capital
    
    $
    30,323
    
    
    $
    28,585
    
    
    $
    26,911Intangible AssetsCore deposit premium
    
    $
    162
    
    
    $
    205
    
    
    $
    268Other identifiable intangibles
    
    
    
    
    
    
    
    
    
    
    Total intangibles
    
    $
    162
    
    
    $
    205
    
    
    $
    268Regulatory capitalTier 1 capital:Shareholders equity
    
    $
    30,485
    
    
    $
    28,790
    
    
    $
    27,179Net unrealized (gains) losses on
available for sale securities
    
    
    133
    
    
    
    187
    
    
    
    616Minority interest
    
    
    
    
    
    
    
    
    
    
    Less: intangibles
    
    
    (162
    )
    
    
    (205
    )
    
    
    (268
    )Total Tier 1 capital
    
    $
    30,456
    
    
    $
    28,772
    
    
    $
    27,527Tier 2 Capital:Allowable reserve for loan losses
    
    $
    4,309
    
    
    $
    4,113
    
    
    $
    3,728Qualifying long-term debt
    
    
    
    
    
    
    
    
    
    
    Total Tier 2 capital
    
    
    4,309
    
    
    
    4,113
    
    
    
    3,728Total capital
    
    $
    34,765
    
    
    $
    32,885
    
    
    $
    31,255Risk-adjusted assets
    
    $
    344,120
    
    
    $
    328,133
    
    
    $
    296,555Capital ratios:Tier 1 Capital to average assets
    
    
    7.97
    %
    
    
    7.85
    %
    
    
    10.54
    %Tier 1 Capital to risk weighted assets
    
    
    8.85
    %
    
    
    8.77
    %
    
    
    8.04
    %Total Capital to risk weighted assets
    
    
    10.10
    %
    
    
    10.02
    %
    
    
    9.28
    %
  23.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTSOF OPERATIONS (Continued)
  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:June 30, 2007
    
    
    7.75
    %
    
    
    7.71
    %
    
    
    7.97
    %
    
    
    8.85
    %
    
    
    10.10
    %December 31, 2006
    
    
    7.52
    %
    
    
    7.47
    %
    
    
    7.85
    %
    
    
    8.77
    %
    
    
    10.02
    %The Bank:June 30, 2007
    
    
    8.13
    %
    
    
    8.09
    %
    
    
    8.37
    %
    
    
    9.30
    %
    
    
    10.56
    %December 31, 2006
    
    
    7.97
    %
    
    
    7.92
    %
    
    
    8.33
    %
    
    
    9.31
    %
    
    
    10.57
    %
 24.




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##### Table of Contents



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 INTEREST RATE RISK
          25.




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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
    
    $
    235,849
    
    
    $
    8,429
    
    
    $
    28,608
    
    
    $
    66,010
    
    
    
    338,896Securities
    
    
    11,210
    
    
    
    5,499
    
    
    
    7,000
    
    
    
    377
    
    
    
    24,086Other (1)
    
    
    7,176
    
    
    
    
    
    
    
    
    
    
    
    3,794
    
    
    
    10,970Total interest-earning assets
    
    
    254,235
    
    
    
    13,928
    
    
    
    35,608
    
    
    
    70,181
    
    
    
    373,952Interest-bearing obligations:NOW, Money Market, and Savings
    
    
    86,416
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86,416Time deposits
    
    
    49,377
    
    
    
    61,384
    
    
    
    9,872
    
    
    
    792
    
    
    
    121,425Brokered deposits
    
    
    35,021
    
    
    
    49,573
    
    
    
    
    
    
    
    
    
    
    
    84,594Borrowings
    
    
    21,348
    
    
    
    
    
    
    
    
    
    
    
    16,959
    
    
    
    38,307Total interest-bearing obligations
    
    
    192,162
    
    
    
    110,957
    
    
    
    9,872
    
    
    
    17,751
    
    
    
    330,742Gap
    
    $
    62,073
    
    
    $
    (97,029
    )
    
    $
    25,736
    
    
    $
    52,430
    
    
    $
    43,210Cumulative gap
    
    $
    62,073
    
    
    $
    (34,956
    )
    
    $
    (9,220
    )
    
    $
    43,210
 
 (1)
    
    Includes Federal Home Loan Bank Stock      26.




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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
  27.




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##### Table of Contents



CONTROLS AND PROCEDURES
   28.




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##### Table of Contents



OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Shareholders Derivative Litigation
 Damon Trust v. Bittner, et al.
 Virginia M. Damon Trust v. North Country Financial Corporation, Nominal
Defendant, and Dennis Bittner, Bernard A. Bouschor, Ronald G. Ford, Sherry L. Littlejohn, Stanley
J. Gerou II, John D. Lindroth, Stephen Madigan, Spencer Shunk, Michael Hendrickson, Glen Tolksdorf,
and Wesley Hoffman
  Damon Trust v. Wipfli
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Director
    
    For
    
    
    WithheldPaul D. Tobias
    
    
    2,247,825
    
    
    
    365,403Eliot R. Stark
    
    
    1,827,235
    
    
    
    785,993
 29.




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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.
 30.




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##### Table of Contents



MACKINAC
FINANCIAL CORPORATION(Registrant)Date: August 10, 2007
    By:
    /s/ Paul D. TobiasPAUL D. TOBIAS,CHAIRMAN AND CHIEF EXECUTIVE OFFICER

(principal executive officer) By:
    /s/ Ernie R. KruegerERNIE R. KRUEGER,EXECUTIVE VICE PRESIDENT / CHIEF FINANCIAL
OFFICER
(principal accounting officer)  31.