##### 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 June 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(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




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##### 



Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets 
June 30, 2009 (Unaudited), December 31, 2008 and
June 30, 2008 (Unaudited)
    
    
    1Condensed Consolidated Statements of Operations  Three and Six
Months Ended June 30, 2009 (Unaudited) and
June 30, 2008 (Unaudited)
    
    
    2Condensed Consolidated Statements of Changes in Shareholders
Equity  Three and Six Months Ended June 30, 2009
(Unaudited) and June 30, 2008 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2009 (Unaudited) and
June 30, 2008 (Unaudited)
    
    
    4Notes to Condensed Consolidated Financial
Statements (Unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    34PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 6. Exhibits and Reports on Form 8-K
    
    
    36SIGNATURES
    
    
    37EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



FINANCIAL INFORMATION
 
 FINANCIAL STATEMENTS
 
 
 June 30,
    
    
    December 31,
    
    
    June 30,2009
    
    
    2008
    
    
    2008(unaudited)
    
    
    
    
    
    
    (unaudited)ASSETSCash and due from banks
    
    $
    12,189
    
    
    $
    10,112
    
    
    $
    7,115Federal funds sold
    
    
    
    
    
    
    
    
    
    
    19,274Cash and cash equivalents
    
    
    12,189
    
    
    
    10,112
    
    
    
    26,389Interest-bearing deposits in other financial institutions
    
    
    618
    
    
    
    582
    
    
    
    387Securities available for sale
    
    
    95,620
    
    
    
    47,490
    
    
    
    23,230Federal Home Loan Bank stock
    
    
    3,794
    
    
    
    3,794
    
    
    
    3,794Loans:Commercial
    
    
    296,392
    
    
    
    296,088
    
    
    
    292,645Mortgage
    
    
    71,777
    
    
    
    70,447
    
    
    
    65,869Installment
    
    
    3,835
    
    
    
    3,745
    
    
    
    3,608Total Loans
    
    
    372,004
    
    
    
    370,280
    
    
    
    362,122Allowance for loan losses
    
    
    (4,119
    )
    
    
    (4,277
    )
    
    
    (3,585
    )Net loans
    
    
    367,885
    
    
    
    366,003
    
    
    
    358,537Premises and equipment
    
    
    11,064
    
    
    
    11,189
    
    
    
    11,377Other real estate held for sale
    
    
    4,950
    
    
    
    2,189
    
    
    
    3,395Other assets
    
    
    10,184
    
    
    
    10,072
    
    
    
    10,218TOTAL ASSETS
    
    $
    506,304
    
    
    
    451,431
    
    
    $
    437,327LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Non-interest-bearing deposits
    
    $
    33,368
    
    
    $
    30,099
    
    
    $
    27,741Interest-bearing deposits:NOW, money market, checking
    
    
    75,974
    
    
    
    70,584
    
    
    
    78,703Savings
    
    
    21,411
    
    
    
    20,730
    
    
    
    15,171CDs<$100,000
    
    
    72,139
    
    
    
    73,752
    
    
    
    78,678CDs>$100,000
    
    
    25,455
    
    
    
    25,044
    
    
    
    28,252Brokered
    
    
    184,805
    
    
    
    150,888
    
    
    
    128,431Total deposits
    
    
    413,152
    
    
    
    371,097
    
    
    
    356,976Long-term borrowings
    
    
    36,210
    
    
    
    36,210
    
    
    
    36,280Other liabilities
    
    
    3,003
    
    
    
    2,572
    
    
    
    3,096Total liabilities
    
    
    452,365
    
    
    
    409,879
    
    
    
    396,352Shareholders equity:Preferred stock outstanding
    
    
    10,418
    
    
    
    
    
    
    
    Common stock and additional paid in capital  No par
valueAuthorized  18,000,000 sharesIssued and outstanding  3,419,736 shares
    
    
    43,468
    
    
    
    42,815
    
    
    
    42,773Accumulated deficit
    
    
    (1,158
    )
    
    
    (1,708
    )
    
    
    (1,672
    )Accumulated other comprehensive income (loss)
    
    
    1,211
    
    
    
    445
    
    
    
    (126
    )Total shareholders equity
    
    
    53,939
    
    
    
    41,552
    
    
    
    40,975TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    506,304
    
    
    $
    451,431
    
    
    $
    437,327
  1.




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Dollars in thousands except per share data)
    
    (Unaudited)
    
    
    (Unaudited)INTEREST INCOME:Interest and fees on loans:Taxable
    
    $
    5,104
    
    
    $
    5,604
    
    
    $
    10,106
    
    
    $
    11,704Tax-exempt
    
    
    84
    
    
    
    102
    
    
    
    174
    
    
    
    210Interest on securities:Taxable
    
    
    673
    
    
    
    271
    
    
    
    1,132
    
    
    
    537Tax-exempt
    
    
    3
    
    
    
    2
    
    
    
    4
    
    
    
    3Other interest income
    
    
    14
    
    
    
    81
    
    
    
    16
    
    
    
    170Total interest income
    
    
    5,878
    
    
    
    6,060
    
    
    
    11,432
    
    
    
    12,624INTEREST EXPENSE:Deposits
    
    
    1,566
    
    
    
    2,551
    
    
    
    3,344
    
    
    
    5,616Borrowings
    
    
    261
    
    
    
    391
    
    
    
    542
    
    
    
    845Total interest expense
    
    
    1,827
    
    
    
    2,942
    
    
    
    3,886
    
    
    
    6,461Net interest income
    
    
    4,051
    
    
    
    3,118
    
    
    
    7,546
    
    
    
    6,163Provision for loan losses
    
    
    150
    
    
    
    750
    
    
    
    700
    
    
    
    750Net interest income after provision for loan losses
    
    
    3,901
    
    
    
    2,368
    
    
    
    6,846
    
    
    
    5,413NONINTEREST INCOME:Service fees
    
    
    271
    
    
    
    194
    
    
    
    514
    
    
    
    368Net security gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65Net gains on sale of secondary market loans
    
    
    84
    
    
    
    49
    
    
    
    142
    
    
    
    97Proceeds from lawsuit settlement
    
    
    
    
    
    
    3,475
    
    
    
    
    
    
    
    3,475Other
    
    
    84
    
    
    
    29
    
    
    
    174
    
    
    
    52Total noninterest income
    
    
    439
    
    
    
    3,747
    
    
    
    830
    
    
    
    4,057NONINTEREST EXPENSESalaries and employee benefits
    
    
    1,561
    
    
    
    2,075
    
    
    
    3,158
    
    
    
    3,882Occupancy
    
    
    355
    
    
    
    348
    
    
    
    733
    
    
    
    703Furniture and equipment
    
    
    222
    
    
    
    190
    
    
    
    411
    
    
    
    368Data processing
    
    
    224
    
    
    
    216
    
    
    
    444
    
    
    
    437Professional service fees
    
    
    144
    
    
    
    79
    
    
    
    297
    
    
    
    232Loan and deposit
    
    
    512
    
    
    
    144
    
    
    
    773
    
    
    
    254Telephone
    
    
    46
    
    
    
    39
    
    
    
    89
    
    
    
    84Advertising
    
    
    80
    
    
    
    60
    
    
    
    158
    
    
    
    120Other
    
    
    326
    
    
    
    320
    
    
    
    646
    
    
    
    582Total noninterest expense
    
    
    3,470
    
    
    
    3,471
    
    
    
    6,709
    
    
    
    6,662Income before provision for income taxes
    
    
    870
    
    
    
    2,644
    
    
    
    967
    
    
    
    2,808Provision for income taxes
    
    
    271
    
    
    
    875
    
    
    
    278
    
    
    
    900NET INCOME
    
    
    599
    
    
    
    1,769
    
    
    
    689
    
    
    
    1,908Preferred dividend expense
    
    
    138
    
    
    
    
    
    
    
    138
    
    
    
    NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    461
    
    
    $
    1,769
    
    
    $
    551
    
    
    $
    1,908INCOME PER COMMON SHARE:Basic
    
    $
    .13
    
    
    $
    .52
    
    
    $
    .16
    
    
    $
    .56Diluted
    
    $
    .13
    
    
    $
    .52
    
    
    $
    .16
    
    
    $
    .56
  2.




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Balance, beginning of period
    
    $
    41,864
    
    
    $
    39,633
    
    
    $
    41,551
    
    
    $
    39,321Net income for period
    
    
    461
    
    
    
    1,769
    
    
    
    551
    
    
    
    1,908Net unrealized gain (loss) on securities available for sale
    
    
    561
    
    
    
    (338
    )
    
    
    766
    
    
    
    (186
    )Total comprehensive income
    
    
    1,022
    
    
    
    1,431
    
    
    
    1,317
    
    
    
    1,722Stock option compensation
    
    
    17
    
    
    
    21
    
    
    
    35
    
    
    
    42Repurchase of common stock  oddlot shares
    
    
    
    
    
    
    (110
    )
    
    
    
    
    
    
    (110
    )Issuance of preferred stock
    
    
    10,382
    
    
    
    
    
    
    
    10,382
    
    
    
    Issuance of common stock warrants
    
    
    618
    
    
    
    
    
    
    
    618
    
    
    
    Accretion of preferred stock discount
    
    
    36
    
    
    
    
    
    
    
    36
    
    
    
    Balance, end of period
    
    $
    53,939
    
    
    $
    40,975
    
    
    $
    53,939
    
    
    $
    40,975
  3.




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##### Table of Contents



Six Months EndedJune 30,2009
    
    
    2008Cash Flows from Operating Activities:Net income
    
    $
    551
    
    
    $
    1,908Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation and amortization
    
    
    1,000
    
    
    
    607Provision for deferred taxes
    
    
    218
    
    
    
    900Provision for loan losses
    
    
    700
    
    
    
    750(Gain) on sales/calls of securities available for sale
    
    
    
    
    
    
    (65
    )(Gain) loss on sale of premises, equipment and other real estate
    
    
    4
    
    
    
    (5
    )Writedown of other real estate
    
    
    
    
    
    
    201Stock option compensation
    
    
    35
    
    
    
    42Change in other assets
    
    
    (762
    )
    
    
    283Change in other liabilities
    
    
    430
    
    
    
    313Net cash provided by operating activities
    
    
    2,176
    
    
    
    4,934Cash Flows from Investing Activities:Net (increase) in loans
    
    
    (5,383
    )
    
    
    (10,792
    )Net (increase) decrease in interest-bearing deposits in other financial institutions
    
    
    (36
    )
    
    
    1,423Purchase of securities available for sale
    
    
    (50,216
    )
    
    
    (24,481
    )Proceeds from sales, maturities or calls of securities available for sale
    
    
    2,856
    
    
    
    22,766Capital expenditures
    
    
    (463
    )
    
    
    (266
    )Proceeds from sale of premises, equipment, and other real estate
    
    
    88
    
    
    
    73Net cash (used in) investing activities
    
    
    (53,154
    )
    
    
    (11,277
    )Cash Flows from Financing Activities:Net increase in deposits
    
    
    42,055
    
    
    
    36,149Issuance of Preferred Stock Series A Capital
    
    
    11,000
    
    
    
    Net (decrease) in federal funds purchased
    
    
    
    
    
    
    (7,710
    )Net (decrease) in line of credit
    
    
    
    
    
    
    (1,959
    )Net (decrease) repurchase of common stock  oddlot shares
    
    
    
    
    
    
    (110
    )Net cash provided by financing activities
    
    
    53,055
    
    
    
    26,370Net increase in cash and cash equivalents
    
    
    2,077
    
    
    
    20,027Cash and cash equivalents at beginning of period
    
    
    10,112
    
    
    
    6,362Cash and cash equivalents at end of period
    
    $
    12,189
    
    
    $
    26,389Supplemental Cash Flow Information:Cash paid during the year for:Interest
    
    $
    3,989
    
    
    $
    5,086Income taxes
    
    
    60
    
    
    
    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)
    
    $
    3,276
    
    
    $
    2,237
  4.




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##### Table of Contents



1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
    Allowance for Loan Losses
    Stock Option Plans
  5.




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##### Table of Contents



1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  2.
    
    RECENT ACCOUNTING PRONOUNCEMENTS
 Subsequent Events
 Amendments to FASB Interpretation No. (FIN) 46(R). Consolidation of Variable Interest Entities, Accounting for Transfers of
Financial Assets  an amendment of FASB Statement No. 140
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles  a replacement of FASB Statement No.
162. FASB Accounting Standards Codification
  Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,
 6.




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##### Table of Contents



2.
    
    RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
 Interim Disclosures about Fair Value of Financial Instruments,
 Recognition and Presentation of Other-Than-Temporary Impairments,
 Subsequent
Events
 3.
    
    EARNINGS PER SHARE
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    599
    
    
    $
    1,769
    
    
    $
    689
    
    
    $
    1,908Preferred stock dividends
    
    
    138
    
    
    
    
    
    
    
    138
    
    
    
    Net income available to common shareholders
    
    $
    461
    
    
    $
    1,769
    
    
    $
    551
    
    
    $
    1,908Weighted average shares outstanding
    
    
    3,419,736
    
    
    
    3,419,933
    
    
    
    3,419,736
    
    
    
    3,424,314Effect of dilutive stock options outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted weighted average shares outstanding
    
    
    3,419,736
    
    
    
    3,419,933
    
    
    
    3,419,736
    
    
    
    3,424,314Earnings per common share:Basic
    
    $
    .13
    
    
    $
    .52
    
    
    $
    .16
    
    
    $
    .56Diluted
    
    $
    .13
    
    
    $
    .52
    
    
    $
    .16
    
    
    $
    .56
 7.




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##### Table of Contents



4.
    
    INVESTMENT SECURITIES
  June 30, 2009
    
    
    December 31, 2008
    
    
    June 30, 2008Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    EstimatedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueUS Agencies  MBS
    
    $
    74,390
    
    
    $
    75,788
    
    
    $
    46,316
    
    
    $
    46,941
    
    
    $
    22,696
    
    
    $
    22,623Asset backed  government guaranteed
    
    
    13,936
    
    
    
    14,285
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Obligations of states and political subdivisions
    
    
    1,259
    
    
    
    1,287
    
    
    
    498
    
    
    
    549
    
    
    
    550
    
    
    
    607Corporate bonds
    
    
    4,201
    
    
    
    4,260
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total securities available for sale
    
    $
    93,786
    
    
    $
    95,620
    
    
    $
    46,814
    
    
    $
    47,490
    
    
    $
    23,246
    
    
    $
    23,230
  5.
    
    LOANS
  June 30,
    
    
    December 31,
    
    
    June 30,2009
    
    
    2008
    
    
    2008Commercial real estate
    
    $
    196,895
    
    
    $
    185,241
    
    
    $
    186,108Commercial, financial, and agricultural
    
    
    73,372
    
    
    
    79,734
    
    
    
    77,473One to four family residential real estate
    
    
    65,564
    
    
    
    65,595
    
    
    
    60,882Construction:Commercial
    
    
    26,125
    
    
    
    31,113
    
    
    
    29,064Consumer
    
    
    6,213
    
    
    
    4,852
    
    
    
    4,987Consumer
    
    
    3,835
    
    
    
    3,745
    
    
    
    3,608Total loans
    
    $
    372,004
    
    
    $
    370,280
    
    
    $
    362,122
 LOANS  Allowance for loan losses
  June 30,
    
    
    December 31,
    
    
    June 30,2009
    
    
    2008
    
    
    2008Balance at beginning of period
    
    $
    4,277
    
    
    $
    4,146
    
    
    $
    4,146Recoveries on loans
    
    
    45
    
    
    
    121
    
    
    
    9Loans charged off
    
    
    (903
    )
    
    
    (2,290
    )
    
    
    (1,320
    )Provision for loan losses
    
    
    700
    
    
    
    2,300
    
    
    
    750Balance at end of period
    
    $
    4,119
    
    
    $
    4,277
    
    
    $
    3,585
 8.




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##### Table of Contents



5.
    
    LOANS (Continued)
  LOANS  Impaired loans
   Valuation ReserveJune 30,
    
    
    December 31,
    
    
    June 30,
    
    
    June 30,
    
    
    December 31,
    
    
    June 30,2009
    
    
    2008
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2008Balances, at period endImpaired loans with specific valuation reserve
    
    $
    7,708
    
    
    $
    3,730
    
    
    $
    4,052
    
    
    $
    1,556
    
    
    $
    994
    
    
    $
    946Impaired loans with no specific valuation reserve
    
    
    2,167
    
    
    
    1,157
    
    
    
    561
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    9,875
    
    
    $
    4,887
    
    
    $
    4,613
    
    
    $
    1,556
    
    
    $
    994
    
    
    $
    946Impaired loans on nonaccrual basis
    
    $
    9,277
    
    
    $
    4,887
    
    
    $
    4,613
    
    
    $
    1,556
    
    
    $
    994
    
    
    $
    946Impaired loans on accrual basis
    
    
    598
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    9,875
    
    
    $
    4,887
    
    
    $
    4,613
    
    
    $
    1,556
    
    
    $
    994
    
    
    $
    946Average investment in impaired loans
    
    $
    9,452
    
    
    $
    4,834
    
    
    $
    4,779Interest income recognized during impairment
    
    
    11
    
    
    
    60
    
    
    
    46Interest income that would have been recognized
on an accrual basis
    
    
    338
    
    
    
    377
    
    
    
    225Cash-basis interest income recognized
    
    
    11
    
    
    
    60
    
    
    
    46
  9.




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##### Table of Contents



5.
    
    LOANS (Continued)
 LOANS  Related parties
   June 30,
    
    
    December 31,
    
    
    June 30,2009
    
    
    2008
    
    
    2008Loans outstanding beginning of period
    
    $
    6,516
    
    
    $
    1,720
    
    
    $
    1,720New loans
    
    
    900
    
    
    
    372
    
    
    
    Net activity on revolving lines of credit
    
    
    398
    
    
    
    2,378
    
    
    
    479Repayment
    
    
    (205
    )
    
    
    (687
    )
    
    
    (41
    )Change in related party interest
    
    
    
    
    
    
    2,733
    
    
    
    2,733Loans outstanding end of period
    
    $
    7,609
    
    
    $
    6,516
    
    
    $
    4,891
  6.
    
    LONG-TERM BORROWINGS
  June 30,
    
    
    December 31,
    
    
    June 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 1.04% to 1.16% 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%
    
    
    1,210
    
    
    
    1,210
    
    
    
    1,280$
    36,210
    
    
    $
    36,210
    
    
    $
    36,280
   10.




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##### Table of Contents



7.
    
    STOCK OPTION PLANS
  June 30,
    
    
    December 31,
    
    
    June 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
   Exercise
    
    Number
    
    
    Remaining
    
    
    Weighted AveragePrice Range
    
    Outstanding
    
    
    Exercisable
    
    
    Contractual Life-Years
    
    
    Exercise Price$9.16
    
    
    12,500
    
    
    
    5,000
    
    
    
    6.5
    
    
    $
    9.16$9.75
    
    
    257,152
    
    
    
    120,861
    
    
    
    5.5
    
    
    
    9.75$10.65
    
    
    57,500
    
    
    
    11,500
    
    
    
    7.5
    
    
    
    10.65$11.50
    
    
    40,000
    
    
    
    8,000
    
    
    
    6.3
    
    
    
    11.50$12.00
    
    
    40,000
    
    
    
    8,000
    
    
    
    6.0
    
    
    
    12.00$156.00 - $240.00
    
    
    3,545
    
    
    
    3,545
    
    
    
    1.7
    
    
    
    186.75$300.00
    
    
    360
    
    
    
    360
    
    
    
    .8
    
    
    
    300.00411,057
    
    
    
    157,266
    
    
    
    5.9
    
    
    $
    12.03
 8.
    
    INCOME TAXES
   11.




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##### Table of Contents



8.
    
    INCOME TAXES (Continued)
  9.
    
    FAIR VALUE MEASUREMENTS
  Cash, cash equivalents, and interest-bearing deposits
 Securities
 Federal Home Loan Bank stock
 Loans
   Deposits
 Borrowings
 Accrued interest
 Off-balance-sheet instruments
 12.




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##### Table of Contents



9.
    
    FAIR VALUE MEASUREMENTS (Continued)
  June 30, 2009
    
    
    December 31, 2008Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueFinancial assets:Cash and cash equivalents
    
    $
    12,189
    
    
    $
    12,189
    
    
    $
    10,112
    
    
    $
    10,112Interest bearing deposits
    
    
    618
    
    
    
    618
    
    
    
    582
    
    
    
    582Securities available for sale
    
    
    95,620
    
    
    
    95,620
    
    
    
    47,490
    
    
    
    47,490Federal Home Loan Bank stock
    
    
    3,794
    
    
    
    3,794
    
    
    
    3,794
    
    
    
    3,794Net loans
    
    
    367,885
    
    
    
    371,578
    
    
    
    366,003
    
    
    
    372,080Cash surrender value  life insurance
    
    
    1,421
    
    
    
    1,421
    
    
    
    1,397
    
    
    
    1,397Other Real Estate
    
    
    4,950
    
    
    
    4,950
    
    
    
    2,189
    
    
    
    2,189Accrued interest receivable
    
    
    1,595
    
    
    
    1,595
    
    
    
    1,457
    
    
    
    1,457Total financial assets
    
    $
    488,072
    
    
    $
    491,765
    
    
    $
    433,024
    
    
    $
    439,101Financial liabilities:Deposits
    
    $
    413,152
    
    
    $
    412,674
    
    
    $
    371,097
    
    
    $
    371,434Borrowings
    
    
    36,210
    
    
    
    36,669
    
    
    
    36,210
    
    
    
    36,846Directors deferred compensation
    
    
    869
    
    
    
    869
    
    
    
    912
    
    
    
    912Accrued interest payable
    
    
    385
    
    
    
    385
    
    
    
    488
    
    
    
    488Total
financial liabilities
    
    $
    450,616
    
    
    $
    450,597
    
    
    $
    408,707
    
    
    $
    409,680
 Limitations 
  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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##### Table of Contents



9.
    
    FAIR VALUE MEASUREMENTS (Continued)
   Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2009
 Quoted Prices in Active
    
    Significant Other
    
    SignificantMarkets for Identical
    
    Observable Inputs
    
    Unobservable Inputs
    
    Balance atAssets (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    June 30, 2009AssetsInvestment securities  available for sale
    
    $
    
    
    
    $
    95,620
    
    
    $
    
    
    
    $
    95,620LiabilitiesNone
   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
    
    
    Six Months Ended(dollars in thousands)
    
    June 30, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    June 30, 2009
    
    
    June 30, 2009AssetsImpaired
loans accounted for under FAS 114
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,142
    
    
    $
    43
    
    
    $
    80$
    43
    
    
    $
    80
   10.
    
    SHAREHOLDERS EQUITY
 Participation in the TARP Capital Purchase Program
  14.




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##### Table of Contents



10.
    
    SHAREHOLDERS EQUITY (Continued)
      11.
    
    COMMITMENTS, CONTINGENCIES AND CREDIT RISK
 Financial Instruments With Off-Balance-Sheet Risk
  15.




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##### Table of Contents



11.
    
    COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued)
  June 30,
    
    
    December 31,
    
    
    June 30,2009
    
    
    2008
    
    
    2008Commitments to extend credit:Variable rate
    
    $
    31,337
    
    
    $
    40,036
    
    
    $
    40,215Fixed rate
    
    
    7,005
    
    
    
    4,487
    
    
    
    8,601Standby letters of credit  Variable rate
    
    
    1,742
    
    
    
    1,838
    
    
    
    6,693Credit card commitments  Fixed rate
    
    
    2,528
    
    
    
    2,438
    
    
    
    2,521$
    42,612
    
    
    $
    48,799
    
    
    $
    58,030
    Contingencies
  Concentration of Credit Risk
  16.




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##### Table of Contents



12.
    
    SUBSEQUENT EVENTS
   17.




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 FORWARD LOOKING STATEMENTS
  
    
    The highly regulated environment in which the Corporation operates could adversely
affect its ability to carry out its strategic plan due to restrictions on new products,
funding opportunities or new market entrances;
    
    General economic conditions, either nationally or in the state(s) in which the
Corporation does business;
    
    Legislation or regulatory changes which affect the business in which the Corporation is
engaged;
    
    Changes in the interest rate environment which increase or decrease interest rate
margins;
    
    Changes in securities markets with respect to the market value of financial assets and
the level of volatility in certain markets such as foreign exchange;
    
    Significant increases in competition in the banking and financial services industry
resulting from industry consolidation, regulatory changes and other factors, as well as
action taken by particular competitors;
    
    The ability of borrowers to repay loans;
    
    The effects on liquidity of unusual decreases in deposits;
    
    Changes in consumer spending, borrowing, and saving habits;
    
    Technological changes;
    
    Acquisitions and unanticipated occurrences which delay or reduce the expected benefits
of acquisitions;
    
    Difficulties in hiring and retaining qualified management and banking personnel;
    
    The Corporations ability to increase market share and control expenses;
    
    The effect of compliance with legislation or regulatory changes;
    
    The effect of changes in accounting policies and practices;
    
    The costs and effects of existing and future litigation and of adverse outcomes in such
litigation.
  18.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  FINANCIAL OVERVIEW
     FINANCIAL CONDITION
 Cash and Cash Equivalents
  Investment Securities
  Loans
  19.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
   June 30,
    
    
    Percent of
    
    
    December 31,
    
    
    Percent of
    
    
    June 30,
    
    
    Percent of2009
    
    
    Total
    
    
    2008
    
    
    Total
    
    
    2008
    
    
    TotalCommercial real estate
    
    $
    196,895
    
    
    
    52.93
    %
    
    $
    185,241
    
    
    
    50.03
    %
    
    $
    186,108
    
    
    
    51.39
    %Commercial,
financial, and
agricultural
    
    
    73,372
    
    
    
    19.72
    
    
    
    79,734
    
    
    
    21.53
    
    
    
    77,473
    
    
    
    21.39One to four family
residential real
estate
    
    
    65,564
    
    
    
    17.63
    
    
    
    65,595
    
    
    
    17.71
    
    
    
    60,882
    
    
    
    16.81Consumer
    
    
    3,835
    
    
    
    1.03
    
    
    
    3,745
    
    
    
    1.01
    
    
    
    3,608
    
    
    
    1.00Construction:Commercial
    
    
    26,125
    
    
    
    7.02
    
    
    
    31,113
    
    
    
    8.40
    
    
    
    29,064
    
    
    
    8.03Consumer
    
    
    6,213
    
    
    
    1.67
    
    
    
    4,852
    
    
    
    1.31
    
    
    
    4,987
    
    
    
    1.38Total loans
    
    $
    372,004
    
    
    
    100.00
    %
    
    $
    370,280
    
    
    
    100.00
    %
    
    $
    362,122
    
    
    
    100.00
    %
  Percent of
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    Percent ofOutstanding
    
    
    Commerical
    
    
    Shareholders
    
    
    Outstanding
    
    
    Commercial
    
    
    Shareholders
    
    
    Outstanding
    
    
    Commerical
    
    
    ShareholdersBalance
    
    
    Loans
    
    
    Equity
    
    
    Balance
    
    
    Loans
    
    
    Equity
    
    
    Balance
    
    
    Loans
    
    
    EquityR/E  oper. of
nonresidential
bldgs.
    
    $
    44,087
    
    
    
    14.87
    %
    
    
    81.74
    %
    
    $
    41,299
    
    
    
    13.95
    %
    
    
    105.79
    %
    
    $
    41,778
    
    
    
    15.85
    %
    
    
    101.96
    %Hospitality and
tourism
    
    
    35,033
    
    
    
    11.82
    
    
    
    64.95
    
    
    
    35,086
    
    
    
    11.85
    
    
    
    95.63
    
    
    
    35,053
    
    
    
    13.30
    
    
    
    85.55Real estate agents
and managers
    
    
    24,614
    
    
    
    8.30
    
    
    
    45.63
    
    
    
    29,292
    
    
    
    9.89
    
    
    
    75.20
    
    
    
    27,495
    
    
    
    10.43
    
    
    
    67.10Commercial
construction
    
    
    26,125
    
    
    
    8.81
    
    
    
    48.43
    
    
    
    31,113
    
    
    
    10.51
    
    
    
    99.06
    
    
    
    10,716
    
    
    
    4.07
    
    
    
    26.15Other
    
    
    166,533
    
    
    
    56.20
    
    
    
    308.74
    
    
    
    159,298
    
    
    
    53.80
    
    
    
    358.88
    
    
    
    148,539
    
    
    
    56.35
    
    
    
    362.51Total Commercial
Loans
    
    $
    296,392
    
    
    
    100.00
    %
    
    
    
    
    
    $
    296,088
    
    
    
    100.00
    %
    
    
    
    
    
    $
    263,581
    
    
    
    100.00
    %
  Credit Quality
  20.




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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 30,2009
    
    
    2008
    
    
    2008Nonperforming Assets:Nonaccrual Loans
    
    $
    9,283
    
    
    $
    4,887
    
    
    $
    4,613Loans past due 90 days or more
    
    
    
    
    
    
    
    
    
    
    Restructured loans
    
    
    592
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    9,875
    
    
    
    4,887
    
    
    
    4,613Other real estate owned
    
    
    4,950
    
    
    
    2,189
    
    
    
    3,395Total nonperforming assets
    
    $
    14,825
    
    
    $
    7,076
    
    
    $
    8,008Nonperforming loans as a % of loans
    
    
    2.66
    %
    
    
    1.32
    %
    
    
    1.27
    %Nonperforming assets as a % of assets
    
    
    2.93
    %
    
    
    1.57
    %
    
    
    1.83
    %Reserve for Loan Losses:At period end
    
    $
    4,119
    
    
    $
    4,227
    
    
    $
    3,585As a % of loans
    
    
    1.11
    %
    
    
    1.16
    %
    
    
    0.99
    %As a % of nonperforming loans
    
    
    41.71
    %
    
    
    87.52
    %
    
    
    77.72
    %As a % of nonaccrual loans
    
    
    44.37
    %
    
    
    87.52
    %
    
    
    77.72
    %
  June 30,
    
    
    December 31,
    
    
    June 30,2009
    
    
    2008
    
    
    2008Total loans, at period end
    
    $
    372,004
    
    
    $
    370,280
    
    
    $
    362,122Average loans for the year
    
    
    371,278
    
    
    
    361,324
    
    
    
    360,176Allowance for loan losses
    
    
    4,119
    
    
    
    4,277
    
    
    
    3,585Allowance to total loans at period end
    
    
    1.11
    %
    
    
    1.16
    %
    
    
    0.99
    %Net charge-offs during the period
    
    $
    858
    
    
    $
    2,169
    
    
    $
    1,311Net charge-offs to average loans
    
    
    .23
    %
    
    
    .60
    %
    
    
    .36
    %Net charge-offs to beginning allowance balance
    
    
    20.06
    %
    
    
    52.32
    %
    
    
    31.62
    %
  21.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  MostRecent
    
    
    ReserveCollateral Type
    
    Balance
    
    
    Apprasial
    
    
    AllocationNonaccrual LoansNon-farm / non-residential (SEM)
    
    $
    4,742
    
    
    $
    5,200
    
    
    $
    520Non-farm / non-residential (NLP)
    
    
    1,405
    
    
    
    1,675
    
    
    
    25Construction / development (SEM)
    
    
    1,000
    
    
    
    460
    
    
    
    400Cabins / land (NLP)
    
    
    451
    
    
    
    425
    
    
    
    Land development (NLP)
    
    
    443
    
    
    
    N/A
    
    
    
    350Non-farm / non-residential & commercial unsecured (SEM)
    
    
    371
    
    
    
    450
    
    
    
    15Conv 5+ residential properties (UP)
    
    
    311
    
    
    
    100
    
    
    
    160Non-farm / non-residential (UP)
    
    
    172
    
    
    
    314
    
    
    
    Commercial general (UP)
    
    
    129
    
    
    
    50
    
    
    
    71Commercial general (SEM)
    
    
    114
    
    
    
    N/A
    
    
    
    1-4 family (NLP)
    
    
    68
    
    
    
    163
    
    
    
    Land (NLP)
    
    
    40
    
    
    
    130
    
    
    
    Business equipment (UP)
    
    
    32
    
    
    
    25
    
    
    
    15Recreational (UP)
    
    
    5
    
    
    
    N/A
    
    
    
    Total nonaccrual loans
    
    
    9,283
    
    
    
    8,992
    
    
    
    1,556Restructured LoansNon-farm / non-residential (UP)
    
    
    592
    
    
    
    920
    
    
    
    5Other Real EstateLand development (SEM)
    
    
    2,133
    
    
    
    2,370
    
    
    
    Land development / condo (NLP)
    
    
    630
    
    
    
    700
    
    
    
    Land development (NLP)
    
    
    511
    
    
    
    645
    
    
    
    Non-farm / non-residential (SEM)
    
    
    508
    
    
    
    620
    
    
    
    Construction/development (NLP)
    
    
    448
    
    
    
    485
    
    
    
    71-4 family (UP)
    
    
    400
    
    
    
    490
    
    
    
    Non-farm / non-residential (UP)
    
    
    215
    
    
    
    248
    
    
    
    Downtown store frontage / 2 / 1-4 family (UP)
    
    
    77
    
    
    
    85
    
    
    
    1-4 family (NLP)
    
    
    28
    
    
    
    35
    
    
    
    Total other real estate owned
    
    
    4,950
    
    
    
    5,678
    
    
    
    7Total nonperforming assets
    
    $
    14,825
    
    
    $
    15,590
    
    
    $
    1,568REGIONAL BREAKOUT OF NONPERFORMING ASSETSNLP  NORTHERN LOWER PENINSULA
    
    $
    4,024
    
    
    $
    4,258
    
    
    $
    382UP  UPPER PENINSULA
    
    
    1,933
    
    
    
    2,232
    
    
    
    251SEM  SOUTHEAST MICHIGAN
    
    
    8,868
    
    
    
    9,100
    
    
    
    935TOTAL
    
    $
    14,825
    
    
    $
    15,590
    
    
    $
    1,568
   June 30,
    
    
    December 31,
    
    
    June 30,2009
    
    
    2008
    
    
    2008Commercial, financial and agricultural loans
    
    $
    3,769
    
    
    $
    3,819
    
    
    $
    3,276One to four family residential real estate loans
    
    
    5
    
    
    
    27
    
    
    
    27Consumer loans
    
    
    5
    
    
    
    40
    
    
    
    15Unallocated and general reserves
    
    
    340
    
    
    
    391
    
    
    
    267Totals
    
    $
    4,119
    
    
    $
    4,277
    
    
    $
    3,585
 22.




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
    Six Months Ended
    
    
    Year Ended
    
    
    Six Months EndedJune 30, 2009
    
    
    December 31, 2008
    
    
    June 30, 2008Balance at beginning of period
    
    $
    2,189
    
    
    $
    1,226
    
    
    $
    1,226Other real estate transferred from
loans due to foreclosure
    
    
    3,276
    
    
    
    2,849
    
    
    
    2,439Reclassification of redemption OREO
    
    
    (475
    )
    
    
    
    
    
    
    Other real estate sold/written down
    
    
    (37
    )
    
    
    (1,886
    )
    
    
    (270
    )Loss on sale of other real estate
    
    
    (3
    )Balance at end of period
    
    $
    4,950
    
    
    $
    2,189
    
    
    $
    3,395
  Deposits
   June 30,
    
    
    
    
    
    
    December 31,
    
    
    
    
    
    
    June 30,2009
    
    
    % of Total
    
    
    2008
    
    
    % of Total
    
    
    2008
    
    
    % of TotalNon-interest-bearing
    
    $
    33,368
    
    
    
    8.08
    %
    
    $
    30,099
    
    
    
    8.11
    %
    
    $
    27,741
    
    
    
    7.77
    %NOW, money market,
checking
    
    
    75,974
    
    
    
    18.39
    
    
    
    70,584
    
    
    
    19.02
    
    
    
    78,703
    
    
    
    22.05Savings
    
    
    21,411
    
    
    
    5.18
    
    
    
    20,730
    
    
    
    5.59
    
    
    
    15,171
    
    
    
    4.25Certificates of Deposit
<$100,000
    
    
    72,139
    
    
    
    17.46
    
    
    
    73,752
    
    
    
    19.87
    
    
    
    78,678
    
    
    
    22.04Total core deposits
    
    
    202,892
    
    
    
    49.11
    
    
    
    195,165
    
    
    
    52.59
    
    
    
    200,293
    
    
    
    56.11Certificates of Deposit
>$100,000
    
    
    25,455
    
    
    
    6.16
    
    
    
    25,044
    
    
    
    6.75
    
    
    
    28,252
    
    
    
    7.92Brokered CDs
    
    
    184,805
    
    
    
    44.73
    
    
    
    150,888
    
    
    
    40.66
    
    
    
    128,431
    
    
    
    35.98Total non-core deposits
    
    
    210,260
    
    
    
    50.89
    
    
    
    175,932
    
    
    
    47.41
    
    
    
    156,683
    
    
    
    43.89Total deposits
    
    $
    413,152
    
    
    
    100.00
    %
    
    $
    371,097
    
    
    
    100.00
    %
    
    $
    356,976
    
    
    
    100.00
    %
 23.




---



##### Table of Contents



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




---



##### 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/June 30,
    
    
    Increase/
    
    
    June 30,
    
    
    June 30,
    
    
    Expense
    
    
    Volume
    
    
    Rate
    
    
    Volume(dollars in thousands)
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Variance
    
    
    Variance
    
    
    Variance
    
    
    VarianceLoans (1,2,3)
    
    $
    371,609
    
    
    $
    362,574
    
    
    $
    9,035
    
    
    
    5.65
    %
    
    
    6.39
    %
    
    $
    5,231
    
    
    $
    5,759
    
    
    $
    (528
    )
    
    $
    144
    
    
    $
    (671
    )
    
    
    (1
    )Taxable securities
    
    
    76,092
    
    
    
    23,960
    
    
    
    52,132
    
    
    
    3.56
    
    
    
    4.58
    
    
    
    675
    
    
    
    273
    
    
    
    402
    
    
    
    596
    
    
    
    (61
    )
    
    
    (133
    )Nontaxable securities (2)
    
    
    1,939
    
    
    
    69
    
    
    
    1,870
    
    
    
    0.41
    
    
    
    5.83
    
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    27
    
    
    
    (1
    )
    
    
    (25
    )Federal funds sold
    
    
    
    
    
    
    1,923
    
    
    
    (1,923
    )
    
    
    
    
    
    
    2.09
    
    
    
    
    
    
    
    10
    
    
    
    (10
    )
    
    
    (10
    )
    
    
    (10
    )
    
    
    10Other interest-earning assets
    
    
    4,399
    
    
    
    4,183
    
    
    
    216
    
    
    
    1.28
    
    
    
    6.73
    
    
    
    14
    
    
    
    70
    
    
    
    (56
    )
    
    
    4
    
    
    
    (57
    )
    
    
    (3
    )Total earning assets
    
    
    454,039
    
    
    
    392,709
    
    
    
    61,330
    
    
    
    5.23
    
    
    
    6.26
    
    
    
    5,922
    
    
    
    6,113
    
    
    
    (191
    )
    
    
    761
    
    
    
    (800
    )
    
    
    (152
    )Reserve for loan losses
    
    
    (4,847
    )
    
    
    (3,886
    )
    
    
    (961
    )Cash and due from banks
    
    
    17,708
    
    
    
    6,053
    
    
    
    11,655Intangible assets
    
    
    16
    
    
    
    94
    
    
    
    (78
    )Other assets
    
    
    24,289
    
    
    
    23,276
    
    
    
    1,013Total assets
    
    $
    491,205
    
    
    $
    418,246
    
    
    $
    72,959NOW and money market deposits
    
    $
    69,098
    
    
    $
    80,379
    
    
    $
    (11,281
    )
    
    
    .81
    
    
    
    1.53
    
    
    
    140
    
    
    
    306
    
    
    
    (166
    )
    
    
    (43
    )
    
    
    (144
    )
    
    
    21Interest checking
    
    
    5,884
    
    
    
    
    
    
    
    5,884
    
    
    
    1.91
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    28Savings deposits
    
    
    21,363
    
    
    
    13,310
    
    
    
    8,053
    
    
    
    .66
    
    
    
    .94
    
    
    
    35
    
    
    
    31
    
    
    
    4
    
    
    
    19
    
    
    
    (9
    )
    
    
    (6
    )CDs <$100,000
    
    
    71,608
    
    
    
    81,746
    
    
    
    (10,138
    )
    
    
    2.85
    
    
    
    4.25
    
    
    
    508
    
    
    
    863
    
    
    
    (355
    )
    
    
    (107
    )
    
    
    (285
    )
    
    
    37CDs >$100,000
    
    
    25,939
    
    
    
    26,773
    
    
    
    (834
    )
    
    
    2.35
    
    
    
    3.97
    
    
    
    152
    
    
    
    264
    
    
    
    (112
    )
    
    
    (8
    )
    
    
    (108
    )
    
    
    4Brokered deposits
    
    
    176,940
    
    
    
    104,187
    
    
    
    72,753
    
    
    
    1.59
    
    
    
    4.20
    
    
    
    703
    
    
    
    1,087
    
    
    
    (384
    )
    
    
    761
    
    
    
    (676
    )
    
    
    (469
    )Borrowings
    
    
    36,376
    
    
    
    42,430
    
    
    
    (6,054
    )
    
    
    2.88
    
    
    
    3.71
    
    
    
    261
    
    
    
    391
    
    
    
    (130
    )
    
    
    (56
    )
    
    
    (88
    )
    
    
    14Total interest-bearing liabilities
    
    
    407,208
    
    
    
    348,825
    
    
    
    58,383
    
    
    
    1.80
    
    
    
    3.39
    
    
    
    1,827
    
    
    
    2,942
    
    
    
    (1,115
    )
    
    
    566
    
    
    
    (1,310
    )
    
    
    (371
    )Demand deposits
    
    
    30,678
    
    
    
    26,331
    
    
    
    4,347Other liabilities
    
    
    3,464
    
    
    
    2,691
    
    
    
    773Shareholders equity
    
    
    49,855
    
    
    
    40,399
    
    
    
    9,456Total liabilities and
shareholders equity
    
    $
    491,205
    
    
    $
    418,246
    
    
    $
    72,959Rate spread
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.43
    %
    
    
    2.87
    %Net interest margin/revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.62
    %
    
    
    3.25
    %
    
    $
    4,095
    
    
    $
    3,171
    
    
    $
    924
    
    
    $
    195
    
    
    $
    510
    
    
    $
    219
 
 (1)
    
    For purposes of these computations, nonaccruing loans are included in the daily average loan
amounts outstanding.(2)
    
    The amount of interest income on loans and nontaxable securities has been adjusted to a tax
equivalent basis, using a 34% tax rate(3)
    
    Interest income on loans includes fees Six Months Ended2009-2008Average Balances
    
    
    Average Rates
    
    
    Interest
    
    
    Income/
    
    
    
    
    
    
    
    
    
    
    Rate/June 30,
    
    
    Increase/
    
    
    June 30,
    
    
    June 30,
    
    
    Expense
    
    
    Volume
    
    
    Rate
    
    
    Volume(dollars in thousands)
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Variance
    
    
    Variance
    
    
    Variance
    
    
    VarianceLoans (1,2,3)
    
    $
    371,278
    
    
    $
    360,176
    
    
    $
    11,102
    
    
    
    5.63
    %
    
    
    6.71
    %
    
    $
    10,370
    
    
    $
    12,022
    
    
    $
    (1,652
    )
    
    $
    370
    
    
    $
    (1,929
    )
    
    
    (93
    )Taxable securities
    
    
    61,906
    
    
    
    23,930
    
    
    
    37,976
    
    
    
    3.69
    
    
    
    4.51
    
    
    
    1,132
    
    
    
    537
    
    
    
    595
    
    
    
    850
    
    
    
    (98
    )
    
    
    (157
    )Nontaxable securities (2)
    
    
    975
    
    
    
    70
    
    
    
    905
    
    
    
    1.24
    
    
    
    11.49
    
    
    
    6
    
    
    
    4
    
    
    
    2
    
    
    
    52
    
    
    
    (4
    )
    
    
    (46
    )Federal funds sold
    
    
    
    
    
    
    3,641
    
    
    
    (3,641
    )
    
    
    
    
    
    
    2.93
    
    
    
    
    
    
    
    53
    
    
    
    (53
    )
    
    
    (53
    )
    
    
    (53
    )
    
    
    53Other interest-earning assets
    
    
    4,383
    
    
    
    4,436
    
    
    
    (53
    )
    
    
    .74
    
    
    
    5.30
    
    
    
    16
    
    
    
    117
    
    
    
    (101
    )
    
    
    (1
    )
    
    
    (100
    )
    
    
    Total earning assets
    
    
    438,542
    
    
    
    392,253
    
    
    
    46,289
    
    
    
    5.30
    
    
    
    6.53
    
    
    
    11,524
    
    
    
    12,733
    
    
    
    (1,209
    )
    
    
    1,218
    
    
    
    (2,184
    )
    
    
    (243
    )Reserve for loan losses
    
    
    (4,627
    )
    
    
    (3,982
    )
    
    
    (645
    )Cash and due from banks
    
    
    15,539
    
    
    
    6,127
    
    
    
    9,412Intangible assets
    
    
    26
    
    
    
    104
    
    
    
    (78
    )Other assets
    
    
    23,594
    
    
    
    23,462
    
    
    
    132Total assets
    
    $
    473,074
    
    
    $
    417,964
    
    
    $
    55,110NOW and money market deposits
    
    $
    68,677
    
    
    $
    81,107
    
    
    $
    (12,430
    )
    
    
    .79
    
    
    
    1.85
    
    
    $
    270
    
    
    $
    748
    
    
    $
    (478
    )
    
    $
    (114
    )
    
    $
    (427
    )
    
    $
    63Interest checking
    
    
    5,124
    
    
    
    
    
    
    
    5,124
    
    
    
    1.97
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    50Savings deposits
    
    
    20,545
    
    
    
    12,668
    
    
    
    7,877
    
    
    
    .74
    
    
    
    .89
    
    
    
    75
    
    
    
    56
    
    
    
    19
    
    
    
    35
    
    
    
    (10
    )
    
    
    (6
    )CDs <$100,000
    
    
    71,642
    
    
    
    82,146
    
    
    
    (10,504
    )
    
    
    2.99
    
    
    
    4.44
    
    
    
    1,061
    
    
    
    1,813
    
    
    
    (752
    )
    
    
    (231
    )
    
    
    (591
    )
    
    
    70CDs >$100,000
    
    
    25,846
    
    
    
    24,962
    
    
    
    884
    
    
    
    2.57
    
    
    
    4.25
    
    
    
    329
    
    
    
    527
    
    
    
    (198
    )
    
    
    19
    
    
    
    (208
    )
    
    
    (9
    )Brokered deposits
    
    
    164,517
    
    
    
    107,105
    
    
    
    57,412
    
    
    
    1.91
    
    
    
    4.64
    
    
    
    1,559
    
    
    
    2,471
    
    
    
    (912
    )
    
    
    1,321
    
    
    
    (1,449
    )
    
    
    (784
    )Borrowings
    
    
    36,511
    
    
    
    40,906
    
    
    
    (4,395
    )
    
    
    2.99
    
    
    
    4.15
    
    
    
    542
    
    
    
    845
    
    
    
    (303
    )
    
    
    (91
    )
    
    
    (235
    )
    
    
    23Total interest-bearing
liabilities
    
    
    392,862
    
    
    
    348,894
    
    
    
    43,968
    
    
    
    1.99
    
    
    
    3.72
    
    
    
    3,886
    
    
    
    6,460
    
    
    
    (2,574
    )
    
    
    939
    
    
    
    (2,920
    )
    
    
    (593
    )Demand deposits
    
    
    30,819
    
    
    
    26,383
    
    
    
    4,436Other liabilities
    
    
    3,537
    
    
    
    2,742
    
    
    
    795Shareholders equity
    
    
    45,856
    
    
    
    39,945
    
    
    
    5,911Total liabilities and
shareholders equity
    
    $
    473,074
    
    
    $
    417,964
    
    
    $
    55,110Rate spread
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.31
    %
    
    
    2.81
    %Net interest margin/revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.51
    %
    
    
    3.22
    %
    
    $
    7,638
    
    
    $
    6,273
    
    
    $
    1,365
    
    
    $
    279
    
    
    $
    736
    
    
    $
    350
 
 (1)
    
    For purposes of these computations, nonaccruing loans are included in the daily average loan
amounts outstanding.(2)
    
    The amount of interest income on loans and nontaxable
securities has been adjusted to a tax
equivalent basis, using a 34% tax rate(3)
    
    Interest income on loans includes fees  25.




---



##### 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
    
    
    Six Months Ended
    
    
    % IncreaseJune 30,
    
    
    (Decrease)
    
    
    June 30,
    
    
    (Decrease)2009
    
    
    2008
    
    
    2009-2008
    
    
    2009
    
    
    2008
    
    
    2009-2008Service fees
    
    $
    271
    
    
    $
    194
    
    
    
    39.69
    
    
    $
    514
    
    
    $
    368
    
    
    
    39.67Net gains on sale of secondary
market loans
    
    
    84
    
    
    
    49
    
    
    
    71.43
    
    
    
    142
    
    
    
    97
    
    
    
    46.39Proceeds from lawsuit settlements
    
    
    
    
    
    
    3,475
    
    
    
    (100.00
    )
    
    
    
    
    
    
    3,475
    
    
    
    (100.00
    )Other noninterest income
    
    
    84
    
    
    
    29
    
    
    
    189.66
    
    
    
    174
    
    
    
    52
    
    
    
    234.62Subtotal
    
    
    439
    
    
    
    3,747
    
    
    
    (88.28
    )
    
    
    830
    
    
    
    3,992
    
    
    
    (79.22
    )Net security gain (loss)
    
    
    
    
    
    
    
    
    
    
    0.00
    
    
    
    
    
    
    
    65
    
    
    
    (100.00
    )Total noninterest income
    
    $
    439
    
    
    $
    3,747
    
    
    
    (88.28
    )
    
    $
    830
    
    
    $
    4,057
    
    
    
    (79.54
    )
 Noninterest Expense
  26.




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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)2009
    
    
    2008
    
    
    2009-2008%
    
    
    2009
    
    
    2008
    
    
    2009-2008%Salaries and employee benefits
    
    $
    1,561
    
    
    $
    2,075
    
    
    
    (24.77
    )
    
    $
    3,158
    
    
    $
    3,882
    
    
    
    (18.65
    )Occupancy
    
    
    355
    
    
    
    348
    
    
    
    2.01
    
    
    
    733
    
    
    
    703
    
    
    
    4.27Furniture and equipment
    
    
    222
    
    
    
    190
    
    
    
    16.84
    
    
    
    411
    
    
    
    368
    
    
    
    11.68Data processing
    
    
    224
    
    
    
    216
    
    
    
    3.70
    
    
    
    444
    
    
    
    437
    
    
    
    1.60Professional service fees
    
    
    144
    
    
    
    79
    
    
    
    82.28
    
    
    
    297
    
    
    
    232
    
    
    
    28.02Loan and deposit:FDIC insurance premiums
    
    
    340
    
    
    
    9
    
    
    
    N/M
    
    
    
    465
    
    
    
    18
    
    
    
    N/MOther loan and deposit
    
    
    172
    
    
    
    135
    
    
    
    27.41
    
    
    
    308
    
    
    
    254
    
    
    
    21.26Telephone
    
    
    46
    
    
    
    39
    
    
    
    17.95
    
    
    
    89
    
    
    
    84
    
    
    
    5.95Advertising
    
    
    80
    
    
    
    60
    
    
    
    33.33
    
    
    
    158
    
    
    
    120
    
    
    
    31.67Other
    
    
    326
    
    
    
    320
    
    
    
    1.88
    
    
    
    646
    
    
    
    564
    
    
    
    14.54Total noninterest expense
    
    $
    3,470
    
    
    $
    3,471
    
    
    
    (.03
    )
    
    $
    6,709
    
    
    $
    6,662
    
    
    
    .71
 Federal Income Taxes
 Current Federal Tax Provision
  Deferred Tax Benefit
  27.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
 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
    June 30,
    
    
    December 31,
    
    
    June 30,2009
    
    
    2008
    
    
    2008Capital StructureShareholders equity
    
    $
    53,939
    
    
    $
    41,552
    
    
    $
    40,975Total capitalization
    
    $
    53,939
    
    
    $
    41,552
    
    
    $
    40,975Tangible capital
    
    $
    53,932
    
    
    $
    41,507
    
    
    $
    40,890Intangible AssetsCore deposit premium
    
    $
    7
    
    
    $
    46
    
    
    $
    85Other identifiable intangibles
    
    
    
    
    
    
    
    
    
    
    Total intangibles
    
    $
    7
    
    
    $
    46
    
    
    $
    85Regulatory capitalTier 1 capital:Shareholders equity
    
    $
    53,939
    
    
    $
    41,552
    
    
    $
    40,975Net
unrealized (gains) losses on available for sale securities
    
    
    (1,211
    )
    
    
    (445
    )
    
    
    126Less: disallowed deferred tax asset
    
    
    (6,000
    )
    
    
    (6,200
    )
    
    
    (5,731
    )Less: intangibles
    
    
    (7
    )
    
    
    (46
    )
    
    
    (85
    )Total Tier 1 capital
    
    $
    46,721
    
    
    $
    34,861
    
    
    $
    35,285Tier 2 Capital:Allowable reserve for loan losses
    
    $
    4,119
    
    
    $
    4,277
    
    
    $
    3,585Qualifying long-term debt
    
    
    
    
    
    
    
    
    
    
    Total Tier 2 capital
    
    
    4,119
    
    
    
    4,277
    
    
    
    3,585Total capital
    
    $
    50,840
    
    
    $
    39,138
    
    
    $
    38,870Risk-adjusted assets
    
    $
    391,160
    
    
    $
    376,986
    
    
    $
    372,139Capital ratios:Tier 1 Capital to average assets
    
    
    9.65
    %
    
    
    8.01
    %
    
    
    8.56
    %Tier 1 Capital to risk weighted assets
    
    
    11.94
    %
    
    
    9.25
    %
    
    
    9.48
    %Total Capital to risk weighted assets
    
    
    13.00
    %
    
    
    10.38
    %
    
    
    10.45
    %
  29.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF 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, 2009
    
    
    10.65
    %
    
    
    10.65
    %
    
    
    9.65
    %
    
    
    11.94
    %
    
    
    13.00
    %June 30, 2008
    
    
    9.37
    %
    
    
    9.35
    %
    
    
    8.56
    %
    
    
    9.48
    %
    
    
    10.45
    %The Bank:June 30, 2009
    
    
    9.17
    %
    
    
    9.17
    %
    
    
    8.12
    %
    
    
    10.03
    %
    
    
    11.07
    %June 30, 2008
    
    
    9.27
    %
    
    
    9.26
    %
    
    
    8.26
    %
    
    
    9.13
    %
    
    
    10.08
    %
 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
    
    $
    252,966
    
    
    $
    13,084
    
    
    $
    26,858
    
    
    $
    79,096
    
    
    $
    372,004Securities
    
    
    3,323
    
    
    
    
    
    
    
    76,759
    
    
    
    15,538
    
    
    
    95,620Other (1)
    
    
    618
    
    
    
    
    
    
    
    
    
    
    
    3,794
    
    
    
    4,412Total interest-earning assets
    
    
    256,907
    
    
    
    13,084
    
    
    
    103,617
    
    
    
    98,428
    
    
    
    472,036Interest-bearing obligations:NOW, money market, savings, interest checking
    
    
    97,385
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,385Time deposits
    
    
    36,337
    
    
    
    44,253
    
    
    
    16,268
    
    
    
    736
    
    
    
    97,594Brokered CDs
    
    
    77,391
    
    
    
    84,719
    
    
    
    22,695
    
    
    
    
    
    
    
    184,805Borrowings
    
    
    20,000
    
    
    
    
    
    
    
    15,000
    
    
    
    1,210
    
    
    
    36,210Total interest-bearing obligations
    
    
    231,113
    
    
    
    128,972
    
    
    
    53,963
    
    
    
    1,946
    
    
    
    415,994Gap
    
    $
    25,794
    
    
    $
    (115,888
    )
    
    $
    49,654
    
    
    $
    96,482
    
    
    $
    56,042Cumulative gap
    
    $
    25,794
    
    
    $
    (90,094
    )
    
    $
    (40,440
    )
    
    $
    56,042
 
 (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
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Proposal
    
    For
    
    WithheldWalter J. Aspatore
    
    
    2,122,734
    
    
    
    15,937Robert H. Orley
    
    
    2,122,619
    
    
    
    16,052Randolph C. Paschke
    
    
    2,122,819
    
    
    
    15,852Executive Compensation Plan
    
    
    1,774,184
    
    
    
    341,313
 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 and all amendments (most recent amendment filed December 14,
2004) incorporated herein by reference to exhibit 3.1 of the Corporations Annual Report on
Form 10-K for the year ended December 31, 2008Exhibit 3.2(a)
    
    Amended and Restated Bylaws as
revised June 27, 2001 incorporated herein by
reference to exhibit 3.2(a) of the Corporations Annual Report on Form 10-K for the year
ended December 31, 2008Exhibit 3.2(b)
    
    Amendment to the Amended and Restated Bylaws adopted August 9, 2004 incorporated
herein by reference to exhibit 3.2(b) of the Corporations Annual Report on Form 10-K for
the year ended December 31, 2008Exhibit 3.2(c)
    
    Second Amendment to the Amended and Restated Bylaws adopted December 2007
incorporated herein by reference to exhibit 3.2(c) of the Corporations Annual Report on
Form 10-K for the year ended December 31, 2008Exhibit 31.1
    
    Rule 13a-14(a) Certification of Chief Executive OfficerExhibit 31.2
    
    Rule 13a-14(a) Certification of Chief Financial OfficerExhibit 32.1
    
    Section 1350 Certification of Chief Executive OfficerExhibit 32.2
    
    Section 1350 Certification of Chief Financial Officer
 36.




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##### Table of Contents



MACKINAC FINANCIAL CORPORATION
                              (Registrant)Date: August 13, 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.