##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011
 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
(State or other jurisdiction of 
incorporation or organization)
    
    38-2062816
(I.R.S. Employer Identification No.)
 130 SOUTH CEDAR STREET, MANISTIQUE, MI
(Address of principal executive offices)
    
    49854
(Zip Code)
   þ o
 o o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-accelerated Filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
  o þ




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Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets -
March 31, 2011 (Unaudited), December 31, 2010 and
March 31, 2010 (Unaudited)
    
    
    1Condensed Consolidated Statements of Operations  Three
Months Ended March 31, 2011 (Unaudited) and
March 31, 2010 (Unaudited)
    
    
    2Condensed Consolidated Statements of Changes in Shareholders
Equity  Three Months Ended March 31, 2011
(Unaudited) and March 31, 2010 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2011 (Unaudited) and
March 31, 2010 (Unaudited)
    
    
    4Notes to Condensed Consolidated Financial
Statements (Unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    36PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    37Item 6. Exhibits and Reports on Form 8-K
    
    
    37SIGNATURES
    
    
    38EX-31.1EX-31.2EX-32.1EX-32.2




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FINANCIAL INFORMATION
 
 FINANCIAL STATEMENTS
 
 
 March 31,
    
    
    December 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2010(Unaudited)
    
    
    
    
    
    
    (Unaudited)ASSETSCash and due from banks
    
    $
    41,715
    
    
    $
    22,719
    
    
    $
    19,359Federal funds sold
    
    
    12,000
    
    
    
    12,000
    
    
    
    36,000Cash and cash equivalents
    
    
    53,715
    
    
    
    34,719
    
    
    
    55,359Interest-bearing deposits in other financial institutions
    
    
    734
    
    
    
    713
    
    
    
    700Securities available for sale
    
    
    37,543
    
    
    
    33,860
    
    
    
    36,841Federal Home Loan Bank stock
    
    
    3,423
    
    
    
    3,423
    
    
    
    3,794Loans:Commercial
    
    
    287,760
    
    
    
    297,047
    
    
    
    296,271Mortgage
    
    
    81,404
    
    
    
    80,756
    
    
    
    76,996Consumer
    
    
    5,445
    
    
    
    5,283
    
    
    
    4,044Total Loans
    
    
    374,609
    
    
    
    383,086
    
    
    
    377,311Allowance for loan losses
    
    
    (6,184
    )
    
    
    (6,613
    )
    
    
    (4,737
    )Net loans
    
    
    368,425
    
    
    
    376,473
    
    
    
    372,574Premises and equipment
    
    
    9,715
    
    
    
    9,660
    
    
    
    10,060Other real estate held for sale
    
    
    5,081
    
    
    
    5,562
    
    
    
    7,723Other assets
    
    
    14,154
    
    
    
    14,286
    
    
    
    15,376TOTAL ASSETS
    
    $
    492,790
    
    
    $
    478,696
    
    
    $
    502,427LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIES:Deposits:Noninterest bearing deposits
    
    $
    39,269
    
    
    $
    41,264
    
    
    $
    30,356NOW, money market, interest checking
    
    
    154,420
    
    
    
    134,703
    
    
    
    109,374Savings
    
    
    17,691
    
    
    
    17,670
    
    
    
    20,675CDs<$100,000
    
    
    104,258
    
    
    
    96,977
    
    
    
    75,822CDs>$100,000
    
    
    21,803
    
    
    
    22,698
    
    
    
    30,173Brokered
    
    
    63,342
    
    
    
    73,467
    
    
    
    138,812Total deposits
    
    
    400,783
    
    
    
    386,779
    
    
    
    405,212Borrowings:Federal Home Loan Bank
    
    
    35,000
    
    
    
    35,000
    
    
    
    35,000Other
    
    
    1,069
    
    
    
    1,069
    
    
    
    1,140Total borrowings
    
    
    36,069
    
    
    
    36,069
    
    
    
    36,140Other liabilities
    
    
    1,841
    
    
    
    1,966
    
    
    
    2,353Total liabilities
    
    
    438,693
    
    
    
    424,814
    
    
    
    443,705SHAREHOLDERS EQUITY:Preferred stock  No par value:Authorized 500,000 shares, 11,000 shares issued and
outstanding
    
    
    10,757
    
    
    
    10,706
    
    
    
    10,562Common stock and additional paid in capital  No par value
Authorized  18,000,000 sharesIssued and outstanding  3,419,736 shares
    
    
    43,525
    
    
    
    43,525
    
    
    
    43,502Retained earnings
    
    
    (705
    )
    
    
    (961
    )
    
    
    3,724Accumulated other comprehensive income
    
    
    520
    
    
    
    612
    
    
    
    934Total shareholders equity
    
    
    54,097
    
    
    
    53,882
    
    
    
    58,722TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    492,790
    
    
    $
    478,696
    
    
    $
    502,427
  1.




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Three Months EndedMarch 31,2011
    
    
    2010(Unaudited)INTEREST INCOME:Interest and fees on loans:Taxable
    
    $
    5,136
    
    
    $
    5,191Tax-exempt
    
    
    42
    
    
    
    52Interest on securities:Taxable
    
    
    282
    
    
    
    397Tax-exempt
    
    
    7
    
    
    
    7Other interest income
    
    
    33
    
    
    
    40Total interest income
    
    
    5,500
    
    
    
    5,687INTEREST EXPENSE:Deposits
    
    
    1,219
    
    
    
    1,457Borrowings
    
    
    140
    
    
    
    208Total interest expense
    
    
    1,359
    
    
    
    1,665Net interest income
    
    
    4,141
    
    
    
    4,022Provision for loan losses
    
    
    
    
    
    
    900Net interest income after provision for loan losses
    
    
    4,141
    
    
    
    3,122OTHER INCOME:Service fees
    
    
    217
    
    
    
    223Net security gains
    
    
    
    
    
    
    215Income from loans sold
    
    
    314
    
    
    
    316Other
    
    
    46
    
    
    
    53Total other income
    
    
    577
    
    
    
    807OTHER EXPENSE:Salaries and employee benefits
    
    
    1,824
    
    
    
    1,720Occupancy
    
    
    365
    
    
    
    345Furniture and equipment
    
    
    194
    
    
    
    194Data processing
    
    
    176
    
    
    
    189Professional service fees
    
    
    153
    
    
    
    173Loan and deposit
    
    
    179
    
    
    
    268ORE writedowns and (gains) losses on sale
    
    
    467
    
    
    
    147FDIC insurance assessment
    
    
    285
    
    
    
    222Telephone
    
    
    51
    
    
    
    47Advertising
    
    
    88
    
    
    
    72Other
    
    
    277
    
    
    
    252Total other expense
    
    
    4,059
    
    
    
    3,629Income before provision for (benefit of) income taxes
    
    
    659
    
    
    
    300Provision for (benefit of) income taxes
    
    
    214
    
    
    
    (3,411
    )NET INCOME
    
    
    445
    
    
    
    3,711Preferred dividend and accretion of discount
    
    
    189
    
    
    
    185NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    256
    
    
    $
    3,526INCOME PER COMMON SHARE:Basic
    
    $
    .07
    
    
    $
    1.03Diluted
    
    $
    .07
    
    
    $
    1.03
  2.




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Three Months EndedMarch 31,2011
    
    
    2010Balance, beginning of period
    
    $
    53,882
    
    
    $
    55,299Net income for period
    
    
    445
    
    
    
    3,711Net unrealized gain (loss) on securities available for sale
    
    
    (92
    )
    
    
    (159
    )Total comprehensive income
    
    
    353
    
    
    
    3,552Dividend on preferred stock
    
    
    (189
    )
    
    
    (185
    )Stock option compensation
    
    
    
    
    
    
    8Accretion of preferred stock discount
    
    
    51
    
    
    
    48Balance, end of period
    
    $
    54,097
    
    
    $
    58,722
  3.




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Three Months EndedMarch 31,2011
    
    
    2010Cash Flows from Operating Activities:Net income
    
    $
    445
    
    
    $
    3,711Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    347
    
    
    
    348Provision for loan losses
    
    
    
    
    
    
    900Provision for (benefit of) income taxes
    
    
    214
    
    
    
    (3,411
    )(Gain) loss on sales/calls of securities available for sale
    
    
    
    
    
    
    (215
    )(Gain) loss on sale of secondary market loans
    
    
    (42
    )
    
    
    (46
    )Origination of secondary market loans held for sale
    
    
    (4,926
    )
    
    
    (2,810
    )Proceeds from secondary market loans held for sale
    
    
    5,005
    
    
    
    2,873(Gain) loss on sale of premises, equipment, and other real estate
    
    
    15
    
    
    
    20Writedown of other real estate
    
    
    452
    
    
    
    128Stock option compensation
    
    
    
    
    
    
    8Change in other assets
    
    
    (35
    )
    
    
    12,021Change in other liabilities
    
    
    (125
    )
    
    
    (196
    )Net cash provided by operating activities
    
    
    1,350
    
    
    
    13,331Cash Flows from Investing Activities:Net decrease in loans
    
    
    7,213
    
    
    
    2,687Net increase in interest-bearing deposits in other financial institutions
    
    
    (21
    )
    
    
    (22
    )Purchase of securities available for sale
    
    
    (8,088
    )
    
    
    Proceeds from maturities, sales, calls or paydowns of securities
available for sale
    
    
    4,194
    
    
    
    9,560Capital expenditures
    
    
    (330
    )
    
    
    (156
    )Proceeds from sale of premises, equipment, and other real estate
    
    
    812
    
    
    
    840Net cash provided by investing activities
    
    
    3,780
    
    
    
    12,909Cash Flows from Financing Activities:Net increase (decrease) in deposits
    
    
    14,004
    
    
    
    (16,177
    )Dividend on preferred stock
    
    
    (138
    )
    
    
    (137
    )Net cash provided by (used in) financing activities
    
    
    13,866
    
    
    
    (16,314
    )Net increase in cash and cash equivalents
    
    
    18,996
    
    
    
    9,926Cash and cash equivalents at beginning of period
    
    
    34,719
    
    
    
    45,433Cash and cash equivalents at end of period
    
    $
    53,715
    
    
    $
    55,359Supplemental Cash Flow Information:Cash paid during the year for:Interest
    
    $
    1,315
    
    
    $
    1,658Income taxes
    
    
    25
    
    
    
    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)
    
    
    798
    
    
    
    2,907
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of PresentationThe unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the
Corporation) have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month period ended March
31, 2011 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2011. 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, 2010.The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and expenses during the
period. Actual results could differ from those estimates.In order to properly reflect some categories of other income and other expenses,
reclassifications of expense and income items have been made to prior period numbers. The
net other income and other expenses was not changed due to these reclassifications.The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America 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 reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in the near term
relate to the determination of the allowance for loan losses, and the valuation of deferred tax
assets and mortgage servicing rights.Allowance for Loan LossesThe allowance for loan losses includes specific allowances related to commercial loans, when
they 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 collectability of
the principal is unlikely. In addition, various regulatory agencies periodically review the
allowance for loan losses. These agencies may require additions to the allowance for loan
losses based on their judgments of collectability.In managements opinion, the allowance for loan losses is adequate to cover probable losses
relating to specifically identified loans, as well as probable losses inherent in the balance
of the loan portfolio as of the balance sheet date.
 5.




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1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Stock Option PlansThe Corporation sponsors three stock option plans. One plan was approved during 2000 and
applies to officers, employees, and nonemployee directors. This plan was amended as a part of
the December 2004 stock offering and recapitalization. The amendment, approved by shareholders,
increased the shares available under this plan by 428,587 shares from the original 25,000
(adjusted for the 1:20 reverse stock split), to a total authorized share balance of 453,587.
The other two plans, one for officers and employees and the other for nonemployee directors,
were approved in 1997. A total of 30,000 shares (adjusted for the 1:20 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 were granted at a price equal to the market price of the stock at the
date of grant. The committee determined the vesting of the options when they were granted as
established under the plan. All of the option plans have expired.
 2.
    
    RECENT ACCOUNTING PRONOUNCEMENTSIn April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Updated (ASU) No. 2001-02, Receivables (Topic 310): A Creditors Determination of Whether a
Restructuring is a Troubled Debt Restructuring.The ASU will improve financial reporting by
creating greater consistency in the way GAAP is applied for various types of debt
restructurings. The ASU clarifies which loan modifications constitute troubled debt
restructurings. The new guidance is effective for interim and annual periods beginning on or
after June 15, 2011, and applies retrospectively to restructurings occurring on or after the
beginning of the fiscal year of adoption. The provisions of this guidance are not expected to
have a significant impact on our consolidated financial condition, results of operation or
liquidity.In May 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860):
Reconsideration of Effective Control for Repurchase Agreements.The ASU is intended to improve
financial reporting of repurchase agreements (repos) and other agreements that both entitle
and obligate a transferor to repurchase or redeem financial assets before their maturity. The
amendments to the Codification in this ASU are intended to improve the accounting for these
transactions by removing them from the assessment of effective control the criterion requiring
the transferor to have the ability to repurchase or redeem the financial assets. The guidance
in the ASU is effective for the first interim or annual period beginning on or after December
15, 2011. The provisions of this guidance are not expected to have a significant impact on the
Corporations consolidated financial condition, results of operation or liquidity.
 3.
    
    EARNINGS PER SHAREDiluted earnings per share, which reflects the potential dilution that could occur if
outstanding stock options were exercised and stock awards were fully vested and resulted in the
issuance of common stock that then shared in our earnings, is computed by dividing net income by
the weighted average number of common shares outstanding and common stock equivalents, after
giving effect for dilutive shares shown issued.
 6.




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3.
    
    EARNINGS PER SHARE (Continued)The following shows the computation of basic and diluted earnings per share for the three months
ended March 31, 2011 and 2010 (dollars in thousands, except per share data):
 Three Months Ended March 31,2011
    
    
    2010(Numerator):Net income
    
    $
    445
    
    
    $
    3,711Preferred stock dividends
    
    
    189
    
    
    
    185Net income available to common shareholders
    
    $
    256
    
    
    $
    3,526(Denominator):Weighted average shares outstanding  basic
    
    
    3,419,736
    
    
    
    3,419,736Dilutive effect of stock options (1)
    
    
    
    
    
    
    Dilutive effect of common stock warrants (2)
    
    
    90,074
    
    
    
    Weighted average shares outstanding  diluted
    
    
    3,509,810
    
    
    
    3,419,736Income per common share:Basic
    
    $
    .07
    
    
    $
    1.03Diluted
    
    $
    .07
    
    
    $
    1.03
 
 (1)
    
    At March 31, 2011 and 2010, there were 394,072 and 411,057 outstanding stock potions, respectively, which are not included
in the computation of diluted earnings per share because they are considered anti-dilutive.(2)
    
    At March 31, 2011 and March 31, 2010, there were 379,310 common stock warrants outstanding at an exercise price of $4.35.
The dilutive impact for these shares was negligible for the three month period ended March 31, 2011 and not at all
dilutive to
the three month period ended March 31, 2010. 4.
    
    INVESTMENT SECURITIESThe amortized cost and estimated fair value of investment securities available for sale as of
March 31, 2011, December 31, 2010 and March 31, 2010 are as follows (dollars in thousands):
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMarch 31, 2011US Agencies
    
    $
    7,742
    
    
    $
    11
    
    
    $
    
    
    
    $
    7,753US Agencies  MBS
    
    
    22,528
    
    
    
    739
    
    
    
    
    
    
    
    23,267Obligations of states and political subdivisions
    
    
    1,146
    
    
    
    41
    
    
    
    (4
    )
    
    
    1,183Corporate bonds
    
    
    5,338
    
    
    
    2
    
    
    
    
    
    
    
    5,340Total securities available for sale
    
    $
    36,754
    
    
    $
    793
    
    
    $
    (4
    )
    
    $
    37,543December 31, 2010US Agencies
    
    $
    5,000
    
    
    $
    
    
    
    $
    (27
    )
    
    $
    4,973US Agencies  MBS
    
    
    26,787
    
    
    
    923
    
    
    
    
    
    
    
    27,710Obligations of states and political subdivisions
    
    
    1,146
    
    
    
    35
    
    
    
    (4
    )
    
    
    1,177Total securities available for sale
    
    $
    32,933
    
    
    $
    958
    
    
    $
    (31
    )
    
    $
    33,860March 31, 2010US Agencies  MBS
    
    $
    34,220
    
    
    $
    1,326
    
    
    $
    
    
    
    $
    35,546Obligations of states and political subdivisions
    
    
    1,206
    
    
    
    89
    
    
    
    
    
    
    
    1,295Total securities available for sale
    
    $
    35,426
    
    
    $
    1,415
    
    
    $
    
    
    
    $
    36,841
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5. LOANS
  March 31,
    
    
    December 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2010Commercial real estate
    
    $
    200,649
    
    
    $
    194,859
    
    
    $
    198,439Commercial, financial, and agricultural
    
    
    63,673
    
    
    
    68,858
    
    
    
    69,797One to four family residential real estate
    
    
    75,663
    
    
    
    75,074
    
    
    
    70,087Construction :Consumer
    
    
    5,741
    
    
    
    5,682
    
    
    
    6,909Commercial
    
    
    23,438
    
    
    
    33,330
    
    
    
    28,035Consumer
    
    
    5,445
    
    
    
    5,283
    
    
    
    4,044Total loans
    
    $
    374,609
    
    
    $
    383,086
    
    
    $
    377,311
  March 31,
    
    
    December 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2010Balance at beginning of period
    
    $
    6,613
    
    
    $
    5,225
    
    
    $
    5,225Recoveries on loans previously charged off
    
    
    9
    
    
    
    374
    
    
    
    19Loans charged off
    
    
    (438
    )
    
    
    (5,486
    )
    
    
    (1,407
    )Provision
    
    
    
    
    
    
    6,500
    
    
    
    900Balance at end of period
    
    $
    6,184
    
    
    $
    6,613
    
    
    $
    4,737
   Commercial,
    
    
    
    
    
    
    One to fourCommercial
    
    
    financial and
    
    
    Commercial
    
    
    family residential
    
    
    Consumerreal estate
    
    
    agricultural
    
    
    construction
    
    
    real estate
    
    
    construction
    
    
    Consumer
    
    
    Unallocated
    
    
    TotalAllowance for loan loss reserve:Beginning balance ALLR
    
    $
    3,460
    
    
    $
    1,018
    
    
    $
    389
    
    
    $
    1,622
    
    
    $
    
    
    
    $
    
    
    
    $
    124
    
    
    $
    6,613Charge-offs
    
    
    (215
    )
    
    
    (25
    )
    
    
    
    
    
    
    (190
    )
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (438
    )Recoveries
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    9Provision
    
    
    (242
    )
    
    
    (13
    )
    
    
    (128
    )
    
    
    356
    
    
    
    
    
    
    
    3
    
    
    
    24
    
    
    
    Unallocated assignment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending balance ALLR
    
    $
    3,006
    
    
    $
    981
    
    
    $
    261
    
    
    $
    1,788
    
    
    $
    
    
    
    $
    
    
    
    $
    148
    
    
    $
    6,184Loans:Ending balance
    
    $
    200,649
    
    
    $
    63,673
    
    
    $
    23,438
    
    
    $
    75,663
    
    
    $
    5,741
    
    
    $
    5,445
    
    
    $
    
    
    
    $
    374,609Ending balance ALLR
    
    
    (3,006
    )
    
    
    (981
    )
    
    
    (261
    )
    
    
    (1,788
    )
    
    
    
    
    
    
    
    
    
    
    (148
    )
    
    
    (6,184
    )Net loans
    
    $
    197,643
    
    
    $
    62,692
    
    
    $
    23,177
    
    
    $
    73,875
    
    
    $
    5,741
    
    
    $
    5,445
    
    
    $
    (148
    )
    
    $
    368,425Ending balance ALLRIndividually evaluated
    
    
    1,144
    
    
    
    361
    
    
    
    39
    
    
    
    845
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,389Collectively evaluated
    
    
    1,862
    
    
    
    620
    
    
    
    222
    
    
    
    943
    
    
    
    
    
    
    
    
    
    
    
    148
    
    
    
    3,795Total
    
    $
    3,006
    
    
    $
    981
    
    
    $
    261
    
    
    $
    1,788
    
    
    $
    
    
    
    $
    
    
    
    $
    148
    
    
    $
    6,184
 8.




---



##### Table of Contents



5.
    
    LOANS (Continued)
   Excellent (1)
  Good (2)
  Average (3)
  Acceptable (4)
  Special Mention (5)
  Substandard (6)
  Doubtful (7)
  Charge-off/Loss (8)
  9.




---



##### Table of Contents



5.
    
    LOANS (Continued)
 General Reserves:
    (1)
    
    
    (2)
    
    
    (3)
    
    
    (4)
    
    
    (5)
    
    
    (6)
    
    
    (7)
    
    
    (8)
    
    
    RatingExcellent
    
    
    Good
    
    
    Average
    
    
    Acceptable
    
    
    Sp. Mention
    
    
    Substandard
    
    
    Doubtful
    
    
    Loss
    
    
    Unassigned
    
    
    TotalCommercial real estate
    
    $
    6,418
    
    
    $
    16,899
    
    
    $
    42,970
    
    
    $
    116,110
    
    
    $
    6,490
    
    
    $
    9,049
    
    
    $
    2,582
    
    
    $
    
    
    
    $
    131
    
    
    $
    200,649Commercial, financial
and agricultural
    
    
    3,373
    
    
    
    3,722
    
    
    
    15,524
    
    
    
    37,455
    
    
    
    230
    
    
    
    2,534
    
    
    
    
    
    
    
    
    
    
    
    835
    
    
    
    63,673Commercial construction
    
    
    186
    
    
    
    563
    
    
    
    5,000
    
    
    
    11,400
    
    
    
    2,237
    
    
    
    516
    
    
    
    
    
    
    
    
    
    
    
    3,536
    
    
    
    23,438One to four family
residential real estate
    
    
    33
    
    
    
    3,584
    
    
    
    3,118
    
    
    
    4,256
    
    
    
    1,454
    
    
    
    3,786
    
    
    
    
    
    
    
    
    
    
    
    59,432
    
    
    
    75,663Consumer construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,741
    
    
    
    5,741Consumer
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    475
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,878
    
    
    
    5,445Total loans
    
    $
    10,010
    
    
    $
    24,768
    
    
    $
    66,704
    
    
    $
    169,696
    
    
    $
    10,411
    
    
    $
    15,885
    
    
    $
    2,582
    
    
    $
    
    
    
    $
    74,553
    
    
    $
    374,609
  (1)
    
    
    (2)
    
    
    (3)
    
    
    (4)
    
    
    (5)
    
    
    (6)
    
    
    (7)
    
    
    RatingExcellent
    
    
    Good
    
    
    Average
    
    
    Acceptable
    
    
    Sp. Mention
    
    
    Substandard
    
    
    Doubtful
    
    
    Unassigned
    
    
    TotalCommercial real estate
    
    $
    4,745
    
    
    $
    16,975
    
    
    $
    44,408
    
    
    $
    109,911
    
    
    $
    3,789
    
    
    $
    10,997
    
    
    $
    3,956
    
    
    $
    78
    
    
    $
    194,859Commercial, financial
and agricultural
    
    
    3,726
    
    
    
    5,275
    
    
    
    16,466
    
    
    
    39,844
    
    
    
    259
    
    
    
    2,636
    
    
    
    
    
    
    
    652
    
    
    
    68,858Commercial construction
    
    
    
    
    
    
    579
    
    
    
    4,416
    
    
    
    22,280
    
    
    
    1,921
    
    
    
    568
    
    
    
    
    
    
    
    3,566
    
    
    
    33,330One-to-four family
residential real estate
    
    
    33
    
    
    
    3,589
    
    
    
    3,146
    
    
    
    4,271
    
    
    
    1,464
    
    
    
    3,941
    
    
    
    
    
    
    
    58,630
    
    
    
    75,074Consumer construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,682
    
    
    
    5,682Consumer
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    368
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,881
    
    
    
    5,283Total loans
    
    $
    8,504
    
    
    $
    26,418
    
    
    $
    68,470
    
    
    $
    176,674
    
    
    $
    7,433
    
    
    $
    18,142
    
    
    $
    3,956
    
    
    $
    73,489
    
    
    $
    383,086
  10.




---



##### Table of Contents



5.
    
    LOANS (Continued)
 Impaired Loans
    11.




---



##### Table of Contents



5.
    
    LOANS (Continued)
  Interest Income
    
    
    Interest IncomeNonaccrual
    
    
    Accrual
    
    
    Average
    
    
    Related
    
    
    Recognized
    
    
    onBasis
    
    
    Basis
    
    
    Investment
    
    
    Valuation Reserve
    
    
    During Impairment
    
    
    Accrual BasisMarch 31, 2011With no valuation reserve:Commercial real estate
    
    $
    876
    
    
    $
    
    
    
    $
    5,602
    
    
    $
    
    
    
    $
    24
    
    
    $
    30Commercial, financial and agricultural
    
    
    52
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    1Commercial construction
    
    
    458
    
    
    
    
    
    
    
    458
    
    
    
    
    
    
    
    
    
    
    
    8One to four family residential real estate
    
    
    942
    
    
    
    105
    
    
    
    785
    
    
    
    
    
    
    
    
    
    
    
    11Consumer construction
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    With a valuation reserve:Commercial real estate
    
    $
    3,181
    
    
    $
    
    
    
    $
    1,156
    
    
    $
    770
    
    
    $
    33
    
    
    $
    22Commercial, financial and agricultural
    
    
    1,069
    
    
    
    
    
    
    
    971
    
    
    
    332
    
    
    
    
    
    
    
    20Commercial construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    One to four family residential real estate
    
    
    3,281
    
    
    
    
    
    
    
    1,633
    
    
    
    753
    
    
    
    
    
    
    
    35Consumer construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total:Commercial real estate
    
    $
    4,057
    
    
    $
    
    
    
    $
    6,758
    
    
    $
    770
    
    
    $
    57
    
    
    $
    52Commercial, financial and agricultural
    
    
    1,121
    
    
    
    
    
    
    
    1,034
    
    
    
    332
    
    
    
    
    
    
    
    21Commercial construction
    
    
    458
    
    
    
    
    
    
    
    458
    
    
    
    
    
    
    
    
    
    
    
    8One to four family residential real estate
    
    
    4,223
    
    
    
    105
    
    
    
    2,418
    
    
    
    753
    
    
    
    
    
    
    
    46Consumer construction
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    9,859
    
    
    $
    105
    
    
    $
    10,681
    
    
    $
    1,855
    
    
    $
    57
    
    
    $
    127December 31, 2010With no valuation reserve:Commercial real estate
    
    $
    960
    
    
    $
    
    
    
    $
    987
    
    
    $
    
    
    
    $
    
    
    
    $
    71Commercial, financial and agricultural
    
    
    51
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    1Commercial construction
    
    
    458
    
    
    
    
    
    
    
    1,186
    
    
    
    
    
    
    
    11
    
    
    
    33One to four family residential real estate
    
    
    362
    
    
    
    105
    
    
    
    237
    
    
    
    
    
    
    
    1
    
    
    
    13Consumer construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    With a valuation reserve:Commercial real estate
    
    $
    2,562
    
    
    $
    4,537
    
    
    $
    6,531
    
    
    $
    1,258
    
    
    $
    117
    
    
    $
    306Commercial, financial and agricultural
    
    
    709
    
    
    
    
    
    
    
    1,660
    
    
    
    279
    
    
    
    
    
    
    
    95Commercial construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21One to four family residential real estate
    
    
    767
    
    
    
    
    
    
    
    730
    
    
    
    230
    
    
    
    12
    
    
    
    39Consumer construction
    
    
    52
    
    
    
    
    
    
    
    52
    
    
    
    1
    
    
    
    
    
    
    
    4Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total:Commercial real estate
    
    $
    3,522
    
    
    $
    4,537
    
    
    $
    7,518
    
    
    $
    1,258
    
    
    $
    117
    
    
    $
    377Commercial, financial and agricultural
    
    
    760
    
    
    
    
    
    
    
    1,673
    
    
    
    279
    
    
    
    
    
    
    
    96Commercial construction
    
    
    458
    
    
    
    
    
    
    
    1,186
    
    
    
    
    
    
    
    11
    
    
    
    54One to four family residential real estate
    
    
    1,129
    
    
    
    105
    
    
    
    967
    
    
    
    230
    
    
    
    13
    
    
    
    52Consumer construction
    
    
    52
    
    
    
    
    
    
    
    52
    
    
    
    1
    
    
    
    
    
    
    
    4Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    5,921
    
    
    $
    4,642
    
    
    $
    11,396
    
    
    $
    1,768
    
    
    $
    141
    
    
    $
    583
 12.




---



##### Table of Contents



5.
    
    LOANS (Continued)
 Interest Income
    
    
    Interest IncomeNonaccrual
    
    
    Accrual
    
    
    Average
    
    
    Related
    
    
    Recognized
    
    
    onBasis
    
    
    Basis
    
    
    Investment
    
    
    Valuation Reserve
    
    
    During Impairment
    
    
    Accrual BasisMarch 31, 2010With no valuation reserve:Commercial real estate
    
    $
    4,337
    
    
    $
    869
    
    
    $
    5,809
    
    
    $
    
    
    
    $
    6
    
    
    $
    67Commercial, financial and agricultural
    
    
    526
    
    
    
    
    
    
    
    804
    
    
    
    
    
    
    
    
    
    
    
    9Commercial construction
    
    
    818
    
    
    
    
    
    
    
    1,622
    
    
    
    
    
    
    
    
    
    
    
    18One to four family residential real estate
    
    
    238
    
    
    
    
    
    
    
    1,156
    
    
    
    
    
    
    
    
    
    
    
    10Consumer construction
    
    
    52
    
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    1Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    With a valuation reserve:Commercial real estate
    
    $
    1,535
    
    
    $
    
    
    
    $
    1,532
    
    
    $
    107
    
    
    $
    
    
    
    $
    35Commercial, financial and agricultural
    
    
    1,521
    
    
    
    
    
    
    
    1,522
    
    
    
    1,512
    
    
    
    
    
    
    
    22Commercial construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    One to four family residential real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total:Commercial real estate
    
    $
    5,872
    
    
    $
    869
    
    
    $
    7,341
    
    
    $
    107
    
    
    $
    6
    
    
    $
    102Commercial, financial and agricultural
    
    
    2,047
    
    
    
    
    
    
    
    2,326
    
    
    
    1,512
    
    
    
    
    
    
    
    31Commercial construction
    
    
    818
    
    
    
    
    
    
    
    1,622
    
    
    
    
    
    
    
    
    
    
    
    18One to four family residential real estate
    
    
    238
    
    
    
    
    
    
    
    1,156
    
    
    
    
    
    
    
    
    
    
    
    10Consumer construction
    
    
    52
    
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    1Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    9,027
    
    
    $
    869
    
    
    $
    12,497
    
    
    $
    1,619
    
    
    $
    6
    
    
    $
    162
  March 31,
    
    
    December 31,
    
    
    March 31,2011
    
    
    2010
    
    
    201030-89 days
    
    
    90+ days
    
    
    
    
    
    
    30-89 days
    
    
    90+ days
    
    
    
    
    
    
    30-89 days
    
    
    90+ daysPast Due
    
    
    Past Due/
    
    
    
    
    
    
    Past Due
    
    
    Past Due/
    
    
    
    
    
    
    Past Due
    
    
    Past Due/(accruing)
    
    
    Nonaccrual
    
    
    Total
    
    
    (accruing)
    
    
    Nonaccrual
    
    
    Total
    
    
    (accruing)
    
    
    Nonaccrual
    
    
    TotalCommercial real estate
    
    $
    649
    
    
    $
    4,057
    
    
    $
    4,706
    
    
    $
    19
    
    
    $
    3,522
    
    
    $
    3,541
    
    
    $
    675
    
    
    $
    5,872
    
    
    $
    6,547Commercial, financial and agricultural
    
    
    1,137
    
    
    
    1,121
    
    
    
    2,258
    
    
    
    382
    
    
    
    760
    
    
    
    1,142
    
    
    
    283
    
    
    
    2,046
    
    
    
    2,329Commercial construction
    
    
    58
    
    
    
    458
    
    
    
    516
    
    
    
    
    
    
    
    458
    
    
    
    458
    
    
    
    26
    
    
    
    818
    
    
    
    844One to four family residential real estate
    
    
    600
    
    
    
    4,223
    
    
    
    4,823
    
    
    
    923
    
    
    
    1,129
    
    
    
    2,052
    
    
    
    280
    
    
    
    238
    
    
    
    518Consumer construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    52
    
    
    
    
    
    
    
    52
    
    
    
    52Consumer
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    20
    
    
    
    
    
    
    
    20
    
    
    
    5
    
    
    
    1
    
    
    
    6Total past due loans
    
    $
    2,446
    
    
    $
    9,859
    
    
    $
    12,305
    
    
    $
    1,344
    
    
    $
    5,921
    
    
    $
    7,265
    
    
    $
    1,269
    
    
    $
    9,027
    
    
    $
    10,296
  For the Three Months Ended March 31, 2011Commercial,
    
    
    
    
    
    
    One to fourCommercial
    
    
    Financial and
    
    
    Commercial
    
    
    family residential
    
    
    ConsumerReal Estate
    
    
    Agricultural
    
    
    Construction
    
    
    real estate
    
    
    Construction
    
    
    Consumer
    
    
    TotalNONACCRUALBeginning balance
    
    $
    3,522
    
    
    $
    760
    
    
    $
    458
    
    
    $
    1,129
    
    
    $
    52
    
    
    $
    
    
    
    $
    5,921Principal payments
    
    
    (458
    )
    
    
    (5
    )
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    (478
    )Charge-offs
    
    
    (203
    )
    
    
    (25
    )
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    (256
    )Advances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Class transfers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Transfers to OREO
    
    
    (644
    )
    
    
    
    
    
    
    
    
    
    
    (101
    )
    
    
    (52
    )
    
    
    
    
    
    
    (797
    )Transfers
to accruing
    
    
    (892
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (892
    )Transfers
from accruing
    
    
    2,724
    
    
    
    389
    
    
    
    
    
    
    
    3,237
    
    
    
    
    
    
    
    
    
    
    
    6,350Other
    
    
    8
    
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    11Ending balance
    
    $
    4,057
    
    
    $
    1,121
    
    
    $
    458
    
    
    $
    4,223
    
    
    $
    
    
    
    $
    
    
    
    $
    9,859
 13.




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##### Table of Contents



5.
    
    LOANS (Continued)
  For the Three Months Ended March 31, 2010Commercial,
    
    
    
    
    
    
    One to fourCommercial
    
    
    Financial and
    
    
    Commercial
    
    
    family residential
    
    
    ConsumerReal Estate
    
    
    Agricultural
    
    
    Construction
    
    
    real estate
    
    
    Construction
    
    
    Consumer
    
    
    TotalNONACCRUALBeginning balance
    
    $
    8,290
    
    
    $
    2,644
    
    
    $
    1,919
    
    
    $
    1,461
    
    
    $
    52
    
    
    $
    2
    
    
    $
    14,368Principal payments
    
    
    (4,438
    )
    
    
    (665
    )
    
    
    (83
    )
    
    
    (22
    )
    
    
    
    
    
    
    (1
    )
    
    
    (5,209
    )Charge-offs
    
    
    (1,119
    )
    
    
    (2
    )
    
    
    (19
    )
    
    
    (1,112
    )
    
    
    
    
    
    
    
    
    
    
    (2,252
    )Advances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Class transfers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Transfers to OREO
    
    
    (466
    )
    
    
    (102
    )
    
    
    (1,003
    )
    
    
    (129
    )
    
    
    
    
    
    
    
    
    
    
    (1,700
    )Transfers to accruing
    
    
    (55
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (55
    )Transfers
from accruing
    
    
    3,638
    
    
    
    171
    
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    3,844Other
    
    
    22
    
    
    
    
    
    
    
    4
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    31Ending balance
    
    $
    5,872
    
    
    $
    2,046
    
    
    $
    818
    
    
    $
    238
    
    
    $
    52
    
    
    $
    1
    
    
    $
    9,027
 Insider Loans
  March 31,
    
    
    December 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2010Loans outstanding, beginning of period
    
    $
    9,532
    
    
    $
    8,552
    
    
    $
    8,552New loans
    
    
    705
    
    
    
    5,243
    
    
    
    1,087Net activity on revolving lines of credit
    
    
    124
    
    
    
    2,065
    
    
    
    1,938Repayment
    
    
    (1,216
    )
    
    
    (6,328
    )
    
    
    (2,104
    )Loans outstanding, end of period
    
    $
    9,145
    
    
    $
    9,532
    
    
    $
    9,473
  6.
    
    BORROWINGS
 Borrowings consist of the following at March 31, 2011, December 31,
2010 and March 31, 2010 (dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2010Federal Home Loan Bank fixed rate advances at a weighted average
rate of 1.73% maturing from December 2011 to January 2016
    
    $
    35,000
    
    
    $
    35,000
    
    
    $
    35,000USDA Rural Development, fixed-rate note payable, maturing
August 24, 2024, interest payable at 1%
    
    
    1,069
    
    
    
    1,069
    
    
    
    1,140$
    36,069
    
    
    $
    36,069
    
    
    $
    36,140
 14.




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##### Table of Contents



6.
    
    BORROWINGS (Continued)
 The Federal Home Loan Bank borrowings are collateralized at March 31, 2011 by the following: a
collateral agreement on the Corporations one to four family residential real estate loans with
a book value of approximately $35.892 million; mortgage related and municipal securities with an
amortized cost and estimated fair value of $12.303 million and $12.476 million, respectively;
and Federal Home Loan Bank stock owned by the Bank totaling $3.423 million. Prepayment of the
remaining advances is subject to the provisions and conditions of the credit policy of the
Federal Home Loan Bank of Indianapolis in effect as of March 31, 2011.The USDA Rural Development borrowing is collateralized by loans totaling $.253 million
originated and held by the Corporations wholly owned subsidiary, First Rural Relending, and an
assignment of a demand deposit account in the amount of $.925 million, and guaranteed by the
Corporation.
 7.
    
    STOCK OPTION PLANSA summary of stock option transactions for the three months ended March 31, 2011 and 2010, and
the year ended December 31, 2010, is as follows:
 March 31,
    
    
    December 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2010Outstanding shares at beginning of year
    
    
    394,072
    
    
    
    411,057
    
    
    
    411,057Granted during the period
    
    
    
    
    
    
    
    
    
    
    Exercised during the period
    
    
    
    
    
    
    
    
    
    
    Expired / forfeited during the period
    
    
    
    
    
    
    (16,985
    )
    
    
    Outstanding shares at end of period
    
    
    394,072
    
    
    
    394,072
    
    
    
    411,057Exercisable shares at end of period
    
    
    150,781
    
    
    
    150,781
    
    
    
    157,266Weighted average exercise price per share at end of period
    
    $
    10.98
    
    
    $
    10.98
    
    
    $
    12.03Shares available for grant at end of period
    
    
    
    
    
    
    
    
    
    
    
 There were no options granted in the first three months of 2011 and 2010.Following is a summary of the options outstanding and exercisable at March 31, 2011:
 Weighted AverageExercise
    
    
    Number
    
    
    Unvested
    
    
    RemainingPrice
    
    
    Outstanding
    
    Exercisable
    
    
    Options
    
    
    Contractual Life-Years$
    9.16
    
    
    5,000
    
    
    2,000
    
    
    
    3,000
    
    
    
    4.71$
    9.75
    
    
    257,152
    
    
    120,861
    
    
    
    136,291
    
    
    
    3.71$
    10.65
    
    
    50,000
    
    
    10,000
    
    
    
    40,000
    
    
    
    5.71$
    11.50
    
    
    40,000
    
    
    8,000
    
    
    
    32,000
    
    
    
    4.50$
    12.00
    
    
    40,000
    
    
    8,000
    
    
    
    32,000
    
    
    
    4.32$
    156.00
    
    
    1,920
    
    
    1,920
    
    
    
    
    
    
    
    .58394,072
    
    
    150,781
    
    
    
    243,291
    
    
    
    4.09
 15.




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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. At March 31, 2010 Management
evaluated the valuation allowance. An analysis of the deferred tax asset was made to determine
the utilization of those tax benefits based upon projected future taxable income. At that time,
based upon managements determination and in accordance with the generally accepted accounting
principles, that it was more likely than not that a portion of these benefits would be
utilized, a $3.500 million valuation adjustment was made as a credit to income tax expense.
Among the criteria that management considered in evaluating the deferred tax asset was taxable
income for the three most recent taxable years ending December 31, 2009 which totaled $8.2
million. This taxable income allowed the Corporation to utilize NOL carryforwards.Management assessed the valuation allowance for the second and third quarters of 2010 and
determined that no additional adjustment was deemed appropriate. At December 31, 2010, based
upon further analysis, and in recognition of the current period operating loss before taxes,
management determined that an adjustment to the valuation was appropriate and increased the
valuation allowance by $1.364 million with an increase to current tax expense.Management evaluated the deferred tax valuation allowance as of March 31, 2011 and determined
that no adjustment to the valuation was warranted. The Corporation, as of March 31, 2011 had a
net operating loss and tax credit carryforwards for tax purposes of approximately $27.0 million,
and $2.1 million, respectively.The Corporation will continue to evaluate the future benefits from these carryforwards and at
such time as it became more likely than not that they would be utilized prior to expiration
will recognize the additional benefits as an adjustment to the valuation allowance. The net
operating loss carryforwards expire twenty years from the date they originated. These
carryforwards, if not utilized, will begin to expire in the year 2023. A portion of the NOL,
approximately $17.0 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 $1.400 million for the NOL and the equivalent value of tax credits, which is approximately
$.477 million. These limitations for use were established in conjunction with the
recapitalization of the Corporation in December 2004.
 9.
    
    FAIR VALUE MEASUREMENTSFair value estimates, methods, and assumptions are set forth below for the Corporations
financial instruments:Cash, cash equivalents, and interest-bearing deposits- The carrying values approximate the fair
values for these assets.Securities- Fair values are based on quoted market prices where available. If a quoted market
price is not available, fair value is estimated using quoted market prices for similar
securities.Federal Home Loan Bank stock Federal Home Loan Bank stock is carried at cost, which
is its redeemable value and approximates its fair value, since the market for this stock is
limited.Loans- Fair values are estimated for portfolios of loans with similar financial characteristics.
Loans are segregated by type such as commercial, residential mortgage, and other consumer. The
fair value of loans is calculated by discounting scheduled cash flows using discount rates
reflecting the credit and interest rate risk inherent in the loan.The methodology in determining fair value of nonaccrual loans is to average them into the blended
interest rate at 0% interest. This has the effect of decreasing the carrying amount below the
risk-free rate amount and, therefore, discounts the estimated fair value.Impaired loans are measured at the estimated fair value of the expected future cash flows at the
loans effective interest rate or the fair value of the collateral for loans which are collateral
dependent. Therefore, the carrying values of impaired loans approximate the estimated fair
values for these assets.
 16.




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##### Table of Contents



9.
    
    FAIR VALUE MEASUREMENTS (Continued)Deposits- The fair value of deposits with no stated maturity, such as noninterest-bearing demand
deposits and savings, is equal to the amount payable on demand at the reporting date. The fair
value of time deposits is based on the discounted value of contractual cash flows applying
interest rates currently being offered on similar time deposits.Borrowings- Rates currently available for debt with similar terms and remaining maturities are
used to estimate the fair value of existing debt. The fair value of borrowed funds due on demand
is the amount payable at the reporting date.Accrued interest- The carrying amount of accrued interest approximates fair value.Off-balance-sheet instruments- The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into account the remaining terms of
the agreements, the current interest rates, and the present creditworthiness of the
counterparties. Since the differences in the current fees and those reflected to the
off-balance-sheet instruments at year-end are immaterial, no amounts for fair value are
presented.The following table presents information for financial instruments at March 31, 2011 and December
31, 2010 (dollars in thousands):
 March 31, 2011
    
    
    December 31, 2010Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueFinancial assets:Cash and cash equivalents
    
    $
    53,715
    
    
    $
    53,715
    
    
    $
    34,719
    
    
    $
    34,719Interest-bearing deposits
    
    
    734
    
    
    
    734
    
    
    
    713
    
    
    
    713Securities available for sale
    
    
    37,543
    
    
    
    37,543
    
    
    
    33,860
    
    
    
    33,860Federal Home Loan Bank stock
    
    
    3,423
    
    
    
    3,423
    
    
    
    3,423
    
    
    
    3,423Net loans
    
    
    368,425
    
    
    
    368,436
    
    
    
    376,473
    
    
    
    376,713Accrued interest receivable
    
    
    1,401
    
    
    
    1,401
    
    
    
    1,155
    
    
    
    1,155Total financial assets
    
    $
    465,241
    
    
    $
    465,252
    
    
    $
    450,343
    
    
    $
    450,583Financial liabilities:Deposits
    
    $
    400,783
    
    
    $
    402,311
    
    
    $
    386,779
    
    
    $
    387,885Borrowings
    
    
    36,069
    
    
    
    35,658
    
    
    
    36,069
    
    
    
    36,234Accrued interest payable
    
    
    276
    
    
    
    276
    
    
    
    232
    
    
    
    232Total financial liabilities
    
    $
    437,128
    
    
    $
    438,245
    
    
    $
    423,080
    
    
    $
    424,351
 Limitations-Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at one time the
Corporations entire holdings of a particular financial instrument. Because no market exists for
a significant portion of the Corporations financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly affect the
estimates. Fair value estimates are based on existing on-and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities include premises and
equipment, other assets, and other liabilities. In addition, the tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
 17.




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##### Table of Contents



9.
    
    FAIR VALUE MEASUREMENTS (Continued)The following is information about the Corporations assets and liabilities measured at fair
value on a recurring basis at December 31, 2010, and the valuation techniques used by the
Corporation to determine those fair values.
 Level 1:
    
    In general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical assets or liabilities that the Corporation has the ability to access.Level 2:
    
    Fair values determined by Level 2 inputs use other inputs that are observable, either
directly or indirectly. These Level 2 inputs include quoted prices for similar assets and
liabilities in active markets, and other inputs such as interest rates and yield curves that
are observable at commonly quoted intervals.Level 3:
    
    Level 3 inputs are unobservable inputs, including inputs available in situations
where there is little, if any, market activity for the related asset or liability.
 The fair value of all investment securities at March 31, 2011 and March 31, 2010 were based on
level 2 inputs. There are no other assets or liabilities measured on a recurring basis at fair
value. For additional information regarding investment securities, please refer to Note 4 
Investment Securities.The Corporation had no Level 3 assets or liabilities on a recurring basis as of March 31, 2011,
December 31, 2010 or March 31, 2010.In instances where inputs used to measure fair value fall into different levels in the above fair
value hierarchy, fair value measurements in their entirety are categorized based on the lowest
level input that is significant to the valuation. The Corporations assessment of the
significance of particular inputs to these fair value measurements requires judgment and
considers factors specific to each asset or liability.The Corporation also has assets that under certain conditions are subject to measurement at fair
value on a non-recurring basis. These assets include loans and other real estate owned. The
Corporation has estimated the fair values of these assets using Level 3 inputs, specifically
discounted cash flow projections.
 Assets Measured at Fair Value on a Nonrecurring BasisQuoted Prices
    
    
    Significant
    
    
    Significantin Active Markets
    
    
    Other Observable
    
    
    Unobservable
    
    
    Total Losses forBalance at
    
    
    for Identical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    Three Months Ended(dollars in thousands)
    
    March 31, 2011
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    March 31, 2011AssetsImpaired loans
    
    $
    9,964
    
    
    $
    
    
    
    $
    
    
    
    $
    9,964
    
    
    $
    426Other real estate owned
    
    
    5,081
    
    
    
    
    
    
    
    
    
    
    
    5,081
    
    
    
    467$
    893
 Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2010Quoted Prices
    
    
    Significant
    
    
    Significantin Active Markets
    
    
    Other Observable
    
    
    Unobservable
    
    
    Total Losses forBalance at
    
    
    for Identical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    Year Ended(dollars in thousands)
    
    December 31, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    December 31, 2010AssetsImpaired loans
    
    $
    10,563
    
    
    $
    
    
    
    $
    
    
    
    $
    10,563
    
    
    $
    1,666Other real estate owned
    
    
    5,562
    
    
    
    
    
    
    
    
    
    
    
    5,562
    
    
    
    2,753$
    4,419
 The Corporation had no investments subject to fair value measurement on a nonrecurring basis.
 18.




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9. FAIR VALUE MEASUREMENTS
  10. SHAREHOLDERS EQUITY
 Participation in the TARP Capital Purchase Program
     19.




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##### Table of Contents



10. SHAREHOLDERS EQUITY
   11. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
 Financial Instruments With Off-Balance-Sheet Risk
   March 31,
    
    
    December 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2010Commitments to extend credit:Variable rate
    
    $
    27,814
    
    
    $
    18,092
    
    
    $
    26,629Fixed rate
    
    
    11,325
    
    
    
    13,034
    
    
    
    9,853Standby letters of credit  Variable rate
    
    
    2,137
    
    
    
    2,192
    
    
    
    1,170Credit card commitments  Fixed rate
    
    
    2,991
    
    
    
    2,737
    
    
    
    2,761$
    44,267
    
    
    $
    36,055
    
    
    $
    40,413
    20.




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##### Table of Contents



11. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
 Contingencies
  Concentration of Credit Risk
  21.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 FORWARD LOOKING STATEMENTS
  
    
    The highly regulated environment in which the Corporation operates could adversely
affect its ability to carry out its strategic plan due to restrictions on new products,
funding opportunities or new market entrances;
    
    General economic conditions, either nationally or in the state(s) in which the
Corporation does business;
    
    Legislation or regulatory changes which affect the business in which the Corporation is
engaged;
    
    Changes in the level and volatility of interest rates which may negatively affect the
Corporations interest margin;
    
    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; and
    
    An increase in the Corporations FDIC insurance premiums, or the collection of special
assessments by the FDIC.
  22.




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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
  23.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  March 31,
    
    
    Percent of
    
    
    December 31,
    
    
    Percent of
    
    
    March 31,
    
    
    Percent of2011
    
    
    Total
    
    
    2010
    
    
    Total
    
    
    2010
    
    
    TotalCommercial real estate
    
    $
    200,649
    
    
    
    53.56
    %
    
    $
    194,859
    
    
    
    50.87
    %
    
    $
    198,439
    
    
    
    52.59
    %Commercial, financial, and agricultural
    
    
    63,673
    
    
    
    17.00
    
    
    
    68,858
    
    
    
    17.97
    
    
    
    69,797
    
    
    
    18.50One to four family residential real
estate
    
    
    75,663
    
    
    
    20.20
    
    
    
    75,074
    
    
    
    19.60
    
    
    
    70,087
    
    
    
    18.58Construction:Consumer
    
    
    5,741
    
    
    
    1.53
    
    
    
    5,682
    
    
    
    1.48
    
    
    
    6,909
    
    
    
    1.83Commercial
    
    
    23,438
    
    
    
    6.26
    
    
    
    33,330
    
    
    
    8.70
    
    
    
    28,035
    
    
    
    7.43Consumer
    
    
    5,445
    
    
    
    1.45
    
    
    
    5,283
    
    
    
    1.38
    
    
    
    4,044
    
    
    
    1.07Total loans
    
    $
    374,609
    
    
    
    100.00
    %
    
    $
    383,086
    
    
    
    100.00
    %
    
    $
    377,311
    
    
    
    100.00
    %
  March 31, 2011
    
    
    December 31, 2010
    
    
    March 31, 2010Percent of
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    Percent ofOutstanding
    
    
    Commercial
    
    
    Shareholders
    
    
    Outstanding
    
    
    Commercial
    
    
    Shareholders
    
    
    Outstanding
    
    
    Commercial
    
    
    ShareholdersBalance
    
    
    Loans
    
    
    Equity
    
    
    Balance
    
    
    Loans
    
    
    Equity
    
    
    Balance
    
    
    Loans
    
    
    EquityReal estate  operators
of nonres bldgs
    
    $
    58,132
    
    
    
    20.20
    %
    
    
    107.46
    %
    
    $
    58,114
    
    
    
    19.56
    %
    
    
    107.85
    %
    
    $
    49,753
    
    
    
    16.79
    %
    
    
    84.73
    %Hospitality and tourism
    
    
    35,016
    
    
    
    12.17
    
    
    
    64.73
    
    
    
    37,737
    
    
    
    12.70
    
    
    
    70.04
    
    
    
    44,820
    
    
    
    15.13
    
    
    
    76.33Commercial construction
    
    
    23,438
    
    
    
    8.15
    
    
    
    43.33
    
    
    
    33,330
    
    
    
    11.22
    
    
    
    61.86
    
    
    
    28,035
    
    
    
    9.46
    
    
    
    47.74Operators of
nonresidential
buildings
    
    
    17,091
    
    
    
    5.94
    
    
    
    31.59
    
    
    
    16,598
    
    
    
    5.59
    
    
    
    30.80
    
    
    
    13,170
    
    
    
    4.45
    
    
    
    22.43Real estate agents and
managers
    
    
    15,518
    
    
    
    5.39
    
    
    
    28.69
    
    
    
    15,857
    
    
    
    5.34
    
    
    
    29.43
    
    
    
    21,529
    
    
    
    7.27
    
    
    
    36.66Other
    
    
    138,565
    
    
    
    48.15
    
    
    
    256.14
    
    
    
    135,411
    
    
    
    45.59
    
    
    
    251.31
    
    
    
    138,964
    
    
    
    46.90
    
    
    
    236.65Total Commercial Loans
    
    $
    287,760
    
    
    
    100.00
    %
    
    
    
    
    
    $
    297,047
    
    
    
    100.00
    %
    
    
    
    
    
    $
    296,271
    
    
    
    100.00
    %
     24.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
 Credit Quality
   March 31,
    
    
    December 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2010Nonperforming Assets:Nonaccrual Loans
    
    $
    9,859
    
    
    $
    5,921
    
    
    $
    9,027Loans past due 90 days or more
    
    
    
    
    
    
    
    
    
    
    Restructured loans
    
    
    105
    
    
    
    4,642
    
    
    
    869Total nonperforming loans
    
    
    9,964
    
    
    
    10,563
    
    
    
    9,896Other real estate owned
    
    
    5,081
    
    
    
    5,562
    
    
    
    7,723Total nonperforming assets
    
    $
    15,045
    
    
    $
    16,125
    
    
    $
    17,619Nonperforming loans as a % of loans
    
    
    2.66
    %
    
    
    2.76
    %
    
    
    2.62
    %Nonperforming assets as a % of assets
    
    
    3.05
    %
    
    
    3.37
    %
    
    
    3.51
    %Reserve for Loan Losses:At period end
    
    $
    6,184
    
    
    $
    6,613
    
    
    $
    4,737As a % of loans
    
    
    1.65
    %
    
    
    1.73
    %
    
    
    1.26
    %As a % of nonperforming loans
    
    
    62.06
    %
    
    
    62.61
    %
    
    
    47.87
    %As a % of nonaccrual loans
    
    
    62.72
    %
    
    
    111.69
    %
    
    
    52.48
    %Texas ratio*
    
    
    24.96
    %
    
    
    26.66
    %
    
    
    27.75
    %
 
 *
    
    calculated by taking total nonperforming assets divided by total equity plus reserve for loan losses   At Period EndMarch 31, 2011
    
    
    December 31, 2010
    
    
    March 31, 2010Total loans, at period end
    
    $
    374,609
    
    
    $
    386,086
    
    
    $
    377,311Average loans for the year
    
    $
    380,066
    
    
    $
    384,347
    
    
    $
    384,640
 For the Period EndedThree Months Ended
    
    
    Twelve Months Ended
    
    
    Three Months EndedMarch 31, 2011
    
    
    December 31, 2010
    
    
    March 31, 2010Net charge-offs during the period
    
    $
    429
    
    
    $
    5,112
    
    
    $
    1,388Net charge-offs to average loans
    
    
    .11
    %
    
    
    1.33
    %
    
    
    .36
    %Net charge-offs to beginning allowance balance
    
    
    6.49
    %
    
    
    97.84
    %
    
    
    26.56
    %
  25.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
    Three Months Ended
    
    
    Year Ended
    
    
    Three Months EndedMarch 31, 2011
    
    
    December 31, 2010
    
    
    March 31, 2010Balance at beginning of period
    
    $
    5,562
    
    
    $
    5,804
    
    
    $
    5,804Other real estate transferred
from loans due to foreclosure
    
    
    798
    
    
    
    5,373
    
    
    
    2,907Other real estate sold
    
    
    (812
    )
    
    
    (2,862
    )
    
    
    (839
    )OREO write downs
    
    
    (452
    )
    
    
    (2,703
    )
    
    
    (128
    )Loss on sale of other real estate
    
    
    (15
    )
    
    
    (50
    )
    
    
    (21
    )Balance at end of period
    
    $
    5,081
    
    
    $
    5,562
    
    
    $
    7,723
  Deposits
    March 31,
    
    
    
    
    
    
    December 31,
    
    
    
    
    
    
    March 31,2011
    
    
    % of Total
    
    
    2010
    
    
    % of Total
    
    
    2010
    
    
    % of TotalNon-interest-bearing
    
    $
    39,269
    
    
    
    9.80
    %
    
    $
    41,264
    
    
    
    10.67
    %
    
    $
    30,356
    
    
    
    7.49
    %NOW, money market, checking
    
    
    154,420
    
    
    
    38.54
    
    
    
    134,703
    
    
    
    34.83
    
    
    
    109,374
    
    
    
    26.99Savings
    
    
    17,691
    
    
    
    4.41
    
    
    
    17,670
    
    
    
    4.57
    
    
    
    20,675
    
    
    
    5.10Certificates of Deposit <$100,000
    
    
    104,258
    
    
    
    26.01
    
    
    
    96,977
    
    
    
    25.07
    
    
    
    75,822
    
    
    
    18.71Total core deposits
    
    
    315,638
    
    
    
    78.76
    
    
    
    290,614
    
    
    
    75.14
    
    
    
    236,227
    
    
    
    58.29Certificates of Deposit >$100,000
    
    
    21,803
    
    
    
    5.44
    
    
    
    22,698
    
    
    
    5.87
    
    
    
    30,173
    
    
    
    7.45Brokered CDs
    
    
    63,342
    
    
    
    15.80
    
    
    
    73,467
    
    
    
    18.99
    
    
    
    138,812
    
    
    
    34.26Total non-core deposits
    
    
    85,145
    
    
    
    21.24
    
    
    
    96,165
    
    
    
    24.86
    
    
    
    168,985
    
    
    
    41.71Total deposits
    
    $
    400,783
    
    
    
    100.00
    %
    
    $
    386,779
    
    
    
    100.00
    %
    
    $
    405,212
    
    
    
    100.00
    %
 26.




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##### 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
   27.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  Three Months Ended2011-2010Average Balances
    
    
    Average Rates
    
    
    Interest
    
    
    Income/
    
    
    
    
    
    
    
    
    
    
    Rate/March 31,
    
    
    Increase/
    
    
    March 31,
    
    
    March 31,
    
    
    Expense
    
    
    Volume
    
    
    Rate
    
    
    Volume(dollars in thousands)
    
    2011

    2010
    
    
    (Decrease)
    
    
    2011
    
    
    2010
    
    
    2011
    
    
    2010
    
    
    Variance
    
    
    Variance
    
    
    Variance
    
    
    VarianceLoans (1,2,3)
    
    $
    380,066
    
    
    $
    384,640
    
    
    $
    (4,574
    )
    
    
    5.55
    %
    
    
    5.56
    %
    
    $
    5,199
    
    
    $
    5,270
    
    
    $
    (71
    )
    
    $
    (63
    )
    
    $
    (8
    )
    
    $
    Taxable securities
    
    
    32,271
    
    
    
    37,393
    
    
    
    (5,122
    )
    
    
    3.54
    
    
    
    4.31
    
    
    
    282
    
    
    
    397
    
    
    
    (115
    )
    
    
    (54
    )
    
    
    (71
    )
    
    
    10Nontaxable securities (2)
    
    
    855
    
    
    
    844
    
    
    
    11
    
    
    
    5.22
    
    
    
    4.81
    
    
    
    11
    
    
    
    10
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Federal funds sold
    
    
    11,611
    
    
    
    37,833
    
    
    
    (26,222
    )
    
    
    .24
    
    
    
    0.25
    
    
    
    7
    
    
    
    23
    
    
    
    (16
    )
    
    
    (16
    )
    
    
    
    
    
    
    Other interest-earning assets
    
    
    4,140
    
    
    
    4,470
    
    
    
    (330
    )
    
    
    2.55
    
    
    
    1.54
    
    
    
    26
    
    
    
    17
    
    
    
    9
    
    
    
    (1
    )
    
    
    11
    
    
    
    (1
    )Total earning assets
    
    
    428,943
    
    
    
    465,180
    
    
    
    (36,237
    )
    
    
    5.22
    
    
    
    4.98
    
    
    
    5,525
    
    
    
    5,717
    
    
    
    (192
    )
    
    
    (134
    )
    
    
    (67
    )
    
    
    9Reserve for loan losses
    
    
    (6,687
    )
    
    
    (5,073
    )
    
    
    (1,614
    )Cash and due from banks
    
    
    27,254
    
    
    
    19,772
    
    
    
    7,482Fixed Assets
    
    
    9,684
    
    
    
    10,131
    
    
    
    (447
    )Other Real Estate
    
    
    4,921
    
    
    
    5,768
    
    
    
    (847
    )Other assets
    
    
    14,746
    
    
    
    12,717
    
    
    
    2,029Total assets
    
    $
    478,861
    
    
    $
    508,495
    
    
    $
    (29,634
    )NOW and money market deposits
    
    $
    120,034
    
    
    $
    87,700
    
    
    $
    32,334
    
    
    
    .79
    %
    
    
    1.04
    %
    
    $
    234
    
    
    $
    225
    
    
    $
    9
    
    
    $
    83
    
    
    $
    (54
    )
    
    $
    (20
    )Interest checking
    
    
    23,829
    
    
    
    15,475
    
    
    
    8,354
    
    
    
    1.17
    
    
    
    1.73
    
    
    
    69
    
    
    
    66
    
    
    
    3
    
    
    
    35
    
    
    
    (21
    )
    
    
    (11
    )Savings deposits
    
    
    17,741
    
    
    
    18,378
    
    
    
    (637
    )
    
    
    .27
    
    
    
    .66
    
    
    
    12
    
    
    
    30
    
    
    
    (18
    )
    
    
    (1
    )
    
    
    (18
    )
    
    
    1CDs <$100,000
    
    
    96,735
    
    
    
    66,187
    
    
    
    30,548
    
    
    
    1.90
    
    
    
    2.21
    
    
    
    453
    
    
    
    361
    
    
    
    92
    
    
    
    167
    
    
    
    (51
    )
    
    
    (24
    )CDs >$100,000
    
    
    22,122
    
    
    
    33,112
    
    
    
    (10,990
    )
    
    
    1.74
    
    
    
    1.71
    
    
    
    95
    
    
    
    140
    
    
    
    (45
    )
    
    
    (46
    )
    
    
    2
    
    
    
    (1
    )Brokered deposits
    
    
    66,380
    
    
    
    159,501
    
    
    
    (93,121
    )
    
    
    2.18
    
    
    
    1.61
    
    
    
    356
    
    
    
    635
    
    
    
    (279
    )
    
    
    (370
    )
    
    
    220
    
    
    
    (129
    )Borrowings
    
    
    36,069
    
    
    
    36,140
    
    
    
    (71
    )
    
    
    1.57
    
    
    
    2.33
    
    
    
    140
    
    
    
    208
    
    
    
    (68
    )
    
    
    
    
    
    
    (68
    )
    
    
    Total interest-bearing liabilities
    
    
    382,910
    
    
    
    416,493
    
    
    
    (33,583
    )
    
    
    1.44
    
    
    
    1.62
    
    
    
    1,359
    
    
    
    1,665
    
    
    
    (306
    )
    
    
    (132
    )
    
    
    10
    
    
    
    (184
    )Demand deposits
    
    
    39,902
    
    
    
    33,544
    
    
    
    6,358Other liabilities
    
    
    2,179
    
    
    
    3,349
    
    
    
    (1,170
    )Shareholders equity
    
    
    53,870
    
    
    
    55,109
    
    
    
    (1,239
    )Total liabilities and
shareholders equity
    
    $
    478,861
    
    
    $
    508,495
    
    
    $
    (29,634
    )Rate spread
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.78
    %
    
    
    3.36
    %Net interest margin/revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.94
    %
    
    
    3.53
    %
    
    $
    4,166
    
    
    $
    4,052
    
    
    $
    114
    
    
    $
    (2
    )
    
    $
    (77
    )
    
    $
    193
 
 (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   Provision for Loan Losses
  Other Income
  28.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
   Three Months EndedMarch 31,Increase/(Decrease)2011
    
    
    2010
    
    
    Dollars
    
    
    PercentService fees
    
    $
    217
    
    
    $
    223
    
    
    $
    (6
    )
    
    
    (2.69
    )%Income from loans sold
    
    
    314
    
    
    
    316
    
    
    
    (2
    )
    
    
    (0.63
    )Other noninterest income
    
    
    46
    
    
    
    53
    
    
    
    (7
    )
    
    
    (13.21
    )Subtotal
    
    
    577
    
    
    
    592
    
    
    
    (15
    )
    
    
    (2.53
    )Net security gain (loss)
    
    
    
    
    
    
    215
    
    
    
    (215
    )
    
    
    Total noninterest income
    
    $
    577
    
    
    $
    807
    
    
    $
    (230
    )
    
    
    (28.50
    )%
 Other Expense
   Three Months EndedMarch 31,Increase/(Decrease)2011
    
    
    2010
    
    
    Dollars
    
    
    PercentageSalaries and employee benefits
    
    $
    1,824
    
    
    $
    1,720
    
    
    $
    104
    
    
    
    6.05
    %Occupancy
    
    
    365
    
    
    
    345
    
    
    
    20
    
    
    
    5.80Furniture and equipment
    
    
    194
    
    
    
    194
    
    
    
    
    
    
    
    Data processing
    
    
    176
    
    
    
    189
    
    
    
    (13
    )
    
    
    (6.88
    )Professional service fees
    
    
    153
    
    
    
    173
    
    
    
    (20
    )
    
    
    (11.56
    )Loan and deposit
    
    
    179
    
    
    
    268
    
    
    
    (89
    )
    
    
    (33.21
    )OREO writedowns and (gains)
losses on sale
    
    
    467
    
    
    
    147
    
    
    
    320
    
    
    
    217.69FDIC insurance premiums
    
    
    285
    
    
    
    222
    
    
    
    63
    
    
    
    28.38Telephone
    
    
    51
    
    
    
    47
    
    
    
    4
    
    
    
    8.51Advertising
    
    
    88
    
    
    
    72
    
    
    
    16
    
    
    
    22.22Other operating expenses
    
    
    277
    
    
    
    252
    
    
    
    25
    
    
    
    9.92Total noninterest expense
    
    $
    4,059
    
    
    $
    3,629
    
    
    $
    430
    
    
    
    11.85
    %
 Federal Income Taxes
 Current Federal Tax Provision
  29.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 Deferred Tax Benefit
   LIQUIDITY
      30.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
     CAPITAL AND REGULATORY
  31.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  March 31,
    
    
    December 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2010Capital StructureShareholders equity
    
    $
    54,097
    
    
    $
    53,882
    
    
    $
    58,722Total capitalization
    
    $
    54,097
    
    
    $
    53,882
    
    
    $
    58,722Tangible capital
    
    $
    54,097
    
    
    $
    53,882
    
    
    $
    58,722Intangible AssetsCore deposit premium
    
    $
    
    
    
    $
    
    
    
    $
    Other identifiable intangibles
    
    
    
    
    
    
    
    
    
    
    Total intangibles
    
    $
    
    
    
    $
    
    
    
    $
    Regulatory capitalTier 1 capital:Shareholders equity
    
    $
    54,097
    
    
    $
    53,882
    
    
    $
    58,722Net unrealized (gains) losses on
available for sale securities
    
    
    (520
    )
    
    
    (612
    )
    
    
    (934
    )Less: disallowed deferred tax asset
    
    
    (8,000
    )
    
    
    (9,028
    )
    
    
    (8,700
    )Less: intangibles
    
    
    
    
    
    
    
    
    
    
    Total Tier 1 capital
    
    $
    45,577
    
    
    $
    44,242
    
    
    $
    49,088Tier 2 Capital:Allowable reserve for loan losses
    
    $
    4,891
    
    
    $
    4,890
    
    
    $
    4,737Qualifying long-term debt
    
    
    
    
    
    
    
    
    
    
    Total Tier 2 capital
    
    
    4,891
    
    
    
    4,890
    
    
    
    4,737Total capital
    
    $
    50,468
    
    
    $
    49,132
    
    
    $
    53,825Risk-adjusted assets
    
    $
    389,967
    
    
    $
    389,468
    
    
    $
    393,226Capital ratios:Tier 1 Capital to average assets
    
    
    9.70
    %
    
    
    9.25
    %
    
    
    9.85Tier 1 Capital to risk weighted assets
    
    
    11.69
    %
    
    
    11.36
    %
    
    
    12.48Total Capital to risk weighted assets
    
    
    12.94
    %
    
    
    12.62
    %
    
    
    13.69
   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:March 31, 2011
    
    
    10.98
    %
    
    
    10.98
    %
    
    
    9.70
    %
    
    
    11.69
    %
    
    
    12.94
    %March 31, 2010
    
    
    11.69
    %
    
    
    11.69
    %
    
    
    9.85
    %
    
    
    12.48
    %
    
    
    13.69
    %The Bank:March 31, 2011
    
    
    10.02
    %
    
    
    10.02
    %
    
    
    8.54
    %
    
    
    10.29
    %
    
    
    11.54
    %March 31, 2010
    
    
    10.34
    %
    
    
    10.34
    %
    
    
    8.43
    %
    
    
    10.67
    %
    
    
    11.86
    %
 32.




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##### Table of Contents



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 INTEREST RATE RISK
          33.




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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
    
    $
    266,025
    
    
    $
    6,195
    
    
    $
    23,491
    
    
    $
    78,898
    
    
    $
    374,609Securities
    
    
    134
    
    
    
    17,187
    
    
    
    19,690
    
    
    
    532
    
    
    
    37,543Other (1)
    
    
    12,734
    
    
    
    
    
    
    
    
    
    
    
    3,423
    
    
    
    16,157Total interest-earning assets
    
    
    278,893
    
    
    
    23,382
    
    
    
    43,181
    
    
    
    82,853
    
    
    
    428,309Interest-bearing obligations:NOW, money market, savings,
interest checking
    
    
    172,111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172,111Time deposits
    
    
    18,653
    
    
    
    41,363
    
    
    
    65,740
    
    
    
    305
    
    
    
    126,061Brokered CDs
    
    
    20,398
    
    
    
    40,216
    
    
    
    
    
    
    
    2,728
    
    
    
    63,342Borrowings
    
    
    
    
    
    
    5,000
    
    
    
    30,000
    
    
    
    1,069
    
    
    
    36,069Total interest-bearing obligations
    
    
    211,162
    
    
    
    86,579
    
    
    
    95,740
    
    
    
    4,102
    
    
    
    397,583Gap
    
    $
    67,731
    
    
    $
    (63,197
    )
    
    $
    (52,559
    )
    
    $
    78,751
    
    
    $
    30,726Cumulative gap
    
    $
    67,731
    
    
    $
    4,534
    
    
    $
    (48,025
    )
    
    $
    30,726
 
 (1)
    
    Includes Federal Home Loan Bank Stock     34.




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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
  35.




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##### Table of Contents



CONTROLS AND PROCEDURES
   Changes in Internal Control Over Financial Reporting
  36.




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##### Table of Contents



OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 6. Exhibits and Reports on Form 8-K
 (a)
    
    Exhibits:
 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.
 37.




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##### Table of Contents



MACKINAC FINANCIAL CORPORATION
(Registrant)Date:      May 16, 2011
    By:
    /s/ Paul D. TobiasPAUL D. TOBIAS,CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(principal executive officer)By:
    /s/ Ernie R. KruegerERNIE R. KRUEGEREVP/CHIEF FINANCIAL OFFICER
(principal financial and accounting officer) 38.