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




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Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed
Consolidated Balance Sheets 
March 31, 2007 (Unaudited), December 31, 2006 and
March 31, 2006 (Unaudited)
    
    1Condensed Consolidated Statements of Operations  Three
Months Ended March 31, 2007 (Unaudited) and
March 31, 2006 (Unaudited)
    
    2Condensed Consolidated Statements of Changes in Shareholders
Equity  Three Months Ended March 31, 2007
(Unaudited) and March 31, 2006 (Unaudited)
    
    3Condensed
Consolidated Statements of Cash Flows 
Three Months Ended March 31, 2007 (Unaudited) and
March 31, 2006 (Unaudited)
    
    4Notes to Condensed Consolidated Financial
Statements (Unaudited)
    
    5Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    23Item 4. Controls and Procedures
    
    27PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    28Item 6. Exhibits and Reports on Form 8-K
    
    29SIGNATURES
    
    30Section 302 Certification of Chief Executive OfficerSection 302 Certification of Chief Financial OfficerSection 906 Certification of Chief Executive OfficerSection 906 Certification of Chief Financial Officer




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FINANCIAL INFORMATION
 
 FINANCIAL STATEMENTS
 
 
 March 31,
    
    
    December 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2006(unaudited)
    
    
    
    
    
    
    (unaudited)ASSETSCash and due from banks
    
    $
    5,647
    
    
    $
    4,865
    
    
    $
    6,220Federal funds sold
    
    
    6,330
    
    
    
    5,841
    
    
    
    12,000Cash and cash equivalents
    
    
    11,977
    
    
    
    10,706
    
    
    
    18,220Interest-bearing deposits in other financial institutions
    
    
    856
    
    
    
    856
    
    
    
    853Securities available for sale
    
    
    28,511
    
    
    
    32,769
    
    
    
    34,140Federal Home Loan Bank stock
    
    
    3,794
    
    
    
    3,794
    
    
    
    4,855Loans:Commercial
    
    
    261,246
    
    
    
    261,726
    
    
    
    212,052Mortgage
    
    
    54,204
    
    
    
    58,014
    
    
    
    50,119Installment
    
    
    2,971
    
    
    
    2,841
    
    
    
    2,300Total Loans
    
    
    318,421
    
    
    
    322,581
    
    
    
    264,471Allowance for loan losses
    
    
    (4,975
    )
    
    
    (5,006
    )
    
    
    (5,415
    )Net loans
    
    
    313,446
    
    
    
    317,575
    
    
    
    259,056Premises and equipment
    
    
    12,252
    
    
    
    12,453
    
    
    
    12,318Other real estate held for sale
    
    
    127
    
    
    
    26
    
    
    
    952Other assets
    
    
    4,681
    
    
    
    4,612
    
    
    
    4,197TOTAL ASSETS
    
    $
    375,644
    
    
    
    382,791
    
    
    $
    334,591LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Non-interest-bearing deposits
    
    $
    23,416
    
    
    $
    23,471
    
    
    $
    20,463Interest-bearing deposits:NOW and Money Market
    
    
    70,558
    
    
    
    73,188
    
    
    
    67,467Savings
    
    
    13,488
    
    
    
    13,365
    
    
    
    15,304CDs<$100,000
    
    
    94,067
    
    
    
    89,585
    
    
    
    80,204CDs>$100,000
    
    
    24,475
    
    
    
    23,645
    
    
    
    15,246Brokered
    
    
    78,408
    
    
    
    89,167
    
    
    
    69,270Total deposits
    
    
    304,412
    
    
    
    312,421
    
    
    
    267,954Borrowings
    
    
    38,307
    
    
    
    38,307
    
    
    
    36,417Other liabilities
    
    
    2,993
    
    
    
    3,273
    
    
    
    3,047Total liabilities
    
    
    345,712
    
    
    
    354,001
    
    
    
    307,418Shareholders equity:Preferred stock  No par value:Authorized 500,000 shares, no shares outstandingCommon stock and additional paid in capital  No par
valueAuthorized
 18,000,000 sharesIssued and outstanding  3,428,695 shares
    
    
    42,750
    
    
    
    42,722
    
    
    
    42,489Accumulated deficit
    
    
    (12,709
    )
    
    
    (13,745
    )
    
    
    (14,961
    )Accumulated other comprehensive (loss)
    
    
    (109
    )
    
    
    (187
    )
    
    
    (355
    )Total shareholders equity
    
    
    29,932
    
    
    
    28,790
    
    
    
    27,173TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    375,644
    
    
    $
    382,791
    
    
    $
    334,591
  1.




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Three Months EndedMarch 31,2007
    
    
    2006INTEREST INCOME:Interest and fees on loans:Taxable
    
    $
    6,233
    
    
    $
    4,499Tax-exempt
    
    
    171
    
    
    
    194Interest on securities:Taxable
    
    
    301
    
    
    
    273Tax-exempt
    
    
    
    
    
    
    41Other interest income
    
    
    200
    
    
    
    168Total interest income
    
    
    6,905
    
    
    
    5,175INTEREST EXPENSE:Deposits
    
    
    3,222
    
    
    
    2,080Borrowings
    
    
    505
    
    
    
    416Total interest expense
    
    
    3,727
    
    
    
    2,496Net interest income
    
    
    3,178
    
    
    
    2,679Provision for loan losses
    
    
    
    
    
    
    (600
    )Net interest income after provision for loan losses
    
    
    3,178
    
    
    
    3,279OTHER INCOME:Service fees
    
    
    161
    
    
    
    111Net gains on sale of secondary market loans
    
    
    108
    
    
    
    40Proceeds from settlement of lawsuit
    
    
    470
    
    
    
    Other
    
    
    174
    
    
    
    65Total other income
    
    
    913
    
    
    
    216OTHER EXPENSE:Salaries and employee benefits
    
    
    1,738
    
    
    
    1,594Occupancy
    
    
    334
    
    
    
    317Furniture and equipment
    
    
    157
    
    
    
    156Data processing
    
    
    171
    
    
    
    154Professional service fees
    
    
    151
    
    
    
    200Loan and deposit
    
    
    72
    
    
    
    129Telephone
    
    
    58
    
    
    
    49Advertising
    
    
    92
    
    
    
    70Other
    
    
    283
    
    
    
    328Total other expenses
    
    
    3,056
    
    
    
    2,997Income before provision for income taxes
    
    
    1,035
    
    
    
    498Provision for (benefit of) income taxes
    
    
    
    
    
    
    NET INCOME
    
    $
    1,035
    
    
    $
    498INCOME PER COMMON SHARE:Basic
    
    $
    .30
    
    
    $
    .15Diluted
    
    $
    .30
    
    
    $
    .15
  2.




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Three Months EndedMarch 31,2007
    
    
    2006Balance, beginning of period
    
    $
    28,790
    
    
    $
    26,588Net income for period
    
    
    1,035
    
    
    
    498Stock option compensation
    
    
    30
    
    
    
    79Net unrealized gain on securities available for sale
    
    
    77
    
    
    
    8Total comprehensive income
    
    
    1,142
    
    
    
    585Balance, end of period
    
    $
    29,932
    
    
    $
    27,173
  3.




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Three Months EndedMarch 31,2007
    
    
    2006Cash Flows from Operating Activities:Net income
    
    $
    1,035
    
    
    $
    498Adjustments to reconcile net income to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    199
    
    
    
    243(Gain) loss on sale of premises, equipment and other real estate
    
    
    (5
    )
    
    
    Stock option compensation
    
    
    30
    
    
    
    Provision for loan losses
    
    
    
    
    
    
    (600
    )Change in other assets
    
    
    (92
    )
    
    
    (134
    )Change in other liabilities
    
    
    (280
    )
    
    
    (38
    )Net cash (used in) provided by operating activities
    
    
    887
    
    
    
    (31
    )Cash Flows from Investing Activities:Net (increase) decrease in loans
    
    
    4,028
    
    
    
    (24,800
    )Net (increase) decrease in interest-bearing deposits in other financial
institutions
    
    
    
    
    
    
    172Purchase of securities available for sale
    
    
    (13,564
    )
    
    
    Proceeds from sales, maturities or calls of securities available for sale
    
    
    17,940
    
    
    
    70Capital expenditures
    
    
    (302
    )
    
    
    (535
    )Proceeds from sale of premises, equipment, and other real estate
    
    
    291
    
    
    
    Purchase of minority interest in subsidiary of bank
    
    
    
    
    
    
    79Net cash (used in) provided by investing activities
    
    
    8,393
    
    
    
    (25,014
    )Cash Flows from financing activities:Net increase (decrease) in deposits
    
    $
    (8,009
    )
    
    $
    35,322Net cash (used in) provided by financing activities
    
    
    (8,009
    )
    
    
    35,322Net increase in cash and cash equivalents
    
    
    1,271
    
    
    
    10,277Cash and cash equivalents at beginning of period
    
    
    10,706
    
    
    
    7,943Cash and cash equivalents at end of period
    
    $
    11,977
    
    
    $
    18,220Supplemental Cash Flow Information:Cash paid during the year for:Interest
    
    $
    2,017
    
    
    $
    2,382Income taxes
    
    
    
    
    
    
    Noncash Investing and Financing Activities:Transfers of Foreclosures from Loans to Other Real Estate Held for Sale
    
    
    109
    
    
    
    7
  4.




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1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of PresentationThe unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the
Corporation) have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month period ended March
31, 2007 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2007. The unaudited consolidated financial statements and footnotes thereto should
be read in conjunction with the audited consolidated financial statements and footnotes thereto
included in the Corporations Annual Report on Form 10-K for the year ended December 31, 2006.The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and expenses during the
period. Actual results could differ from those estimates.In order to properly reflect some categories of other income and other expenses,
reclassifications of expense and income items have been made to prior period numbers. The
net other income and other expenses was not changed due to these reclassifications.Allowance for Loan LossesThe allowance for loan losses includes specific allowances related to commercial loans, which
have been judged to be impaired. A loan is impaired when, based on current information, it is
probable that the Corporation will not collect all amounts due in accordance with the
contractual terms of the loan agreement. These specific allowances are based on discounted
cash flows of expected future payments using the loans initial effective interest rate or the
fair value of the collateral if the loan is collateral dependent.The Corporation continues to maintain a general allowance for loan losses for loans not
considered impaired. The allowance for loan losses is maintained at a level which management
believes is adequate to provide for possible loan losses. Management periodically evaluates
the adequacy of the allowance using the Corporations past loan loss experience, known and
inherent risks in the portfolio, composition of the portfolio, current economic conditions, and
other factors. The allowance does not include the effects of expected losses related to future
events or future changes in economic conditions. This evaluation is inherently subjective
since it requires material estimates that may be susceptible to significant change. Loans are
charged against the allowance for loan losses when management believes the collectibility of
the principal is unlikely. In addition, various regulatory agencies periodically review the
allowance for loan losses. These agencies may require additions to the allowance for loan
losses based on their judgments of collectibility.In managements opinion, the allowance for loan losses is adequate to cover probable losses
relating to specifically identified loans, as well as probable losses inherent in the balance
of the loan portfolio as of the balance sheet date.Stock Option PlansThe Corporation sponsors three stock option plans. One plan was approved 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 reverse stock split), were
 5.




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##### Table of Contents



1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)made available for grant under these plans. Options under all of the plans are granted at the
discretion of a committee of the Corporations Board of Directors. Options to purchase shares
of the Corporations stock are granted at a price equal to the market price of the stock at the
date of grant. The committee determines the vesting of the options when they are granted as
established under the plan.The Corporation adopted SFAS No. 123 (Revised) Share Based Payments in the first quarter of
2006. This Statement supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees
and its related implementation guidance. Under Opinion No. 25, issuing stock options to
employees generally resulted in recognition of no compensation cost. This adoption resulted in
the recognition of before tax compensation expense in the amount of $30,000 for the three months
ended March 31, 2007 and $79,000 for the same period in 2006. The expense recorded recognizes
the current period vesting of options outstanding. The per share impact of this accounting
change was $.01 and $.02 in the first quarter of 2007 and 2006, respectively.2.
    
    RECENT ACCOUNTING PRONOUNCEMENTSFASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income TaxesIn July 2006, the Financial Accounting Standards Board (FASB) issued this interpretation to
clarify the accounting for uncertainty in tax positions. FIN 48 requires, among other matters,
that the Corporation recognize in its financial statements the impact of a tax position, if that
position is more likely than not of being sustained on an audit, based on the technical merits
of the position. The provisions of FIN 48 were effective as of the beginning of the
Corporations 2007 fiscal year and required any cumulative effect of the change in accounting
principle to be recorded as an adjustment to opening retained earnings. The Corporation did not
record an adjustment to retained earnings upon adoption of FIN 48. In future periods, The
Corporation will, in accordance with FIN 48, evaluate its tax positions to determine whether or
not an adjustment to deferred tax balances and related valuation accounts is warranted.SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS
No. 159)SFAS No. 159 permits an entity to measure certain financial assets and financial liabilities at
fair value. The Statements objective is to improve financial reporting by allowing entities to
mitigate volatility in reported earnings caused by the measurement of related assets and
liabilities using different attributes, without having to apply complex hedge accounting
provisions. Under SFAS No. 159, entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting date. The fair value
option may be elected on an instrument-by-instrument basis, with a few exceptions, as long as it
is applied to the instrument in its entirety. The fair value option election is irrevocable,
unless a new election date occurs. The new Statement establishes presentation and disclosure
requirements to help financial statement users understand the effect of the entitys election on
its earnings but does not eliminate disclosure requirements of other accounting standards.
Assets and liabilities that are measured at fair value must be displayed on the face of the
balance sheet. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year
beginning after November 15, 2007. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity (a) makes that choice in the first 120 days of
that fiscal year, (2) has not yet issued financial statements, and (3) elects to apply the
provisions of SFAS No. 157. The Corporation did not adopt SFAS No. 159 during this early
adoption period, and has not determined the impact, if any; the implementation of SFAS No. 159
will have on the consolidated financial statements.3.
    
    EARNINGS PER SHAREEarnings per share are based upon the weighted average number of shares outstanding.Additional shares issued as a result of option exercises would not be dilutive in either three
month period.
 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, 2007 and 2006 (dollars in thousands, except per share data):
 Weighted Average
    
    
    IncomeNet Income
    
    
    Number of Shares
    
    
    Per ShareThree Months EndedMarch 31,2007Income per share  Basic and diluted
    
    $
    1,035
    
    
    
    3,428,695
    
    
    $
    .302006Income per share  Basic and diluted
    
    $
    498
    
    
    
    3,428,695
    
    
    $
    .15
 4.
    
    INVESTMENT SECURITIESThe amortized cost and estimated fair value of investment securities available for sale as of
March 31, 2007, December 31, 2006, and March 31, 2006 are as follows (dollars in thousands):
 March 31, 2007
    
    
    December 31, 2006
    
    
    March 31, 2006Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    EstimatedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueUS Agencies
    
    $
    28,110
    
    
    $
    27,920
    
    
    $
    32,445
    
    
    $
    32,176
    
    
    $
    30,971
    
    
    $
    30,338Obligations of states and political
subdivisions
    
    
    511
    
    
    
    591
    
    
    
    511
    
    
    
    593
    
    
    
    3,524
    
    
    
    3,802Total securities available for sale
    
    $
    28,621
    
    
    $
    28,511
    
    
    $
    32,956
    
    
    $
    32,769
    
    
    $
    34,495
    
    
    $
    34,140
 The amortized cost and estimated fair value of investment securities pledged to secure FHLB
borrowings and customer relationships were $24.413 million and $.900 million respectively at
March 31, 2007.5.
    
    LOANSThe composition of loans at March 31, 2007, December 31, 2006, and March 31, 2006 is as follows
(dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2006Commercial real estate
    
    $
    153,587
    
    
    $
    154,332
    
    
    $
    134,089Commercial, financial and agricultural
    
    
    67,683
    
    
    
    71,385
    
    
    
    56,958One to four family residential real estate
    
    
    54,204
    
    
    
    58,014
    
    
    
    50,119Construction
    
    
    39,976
    
    
    
    36,009
    
    
    
    21,005Consumer
    
    
    2,971
    
    
    
    2,841
    
    
    
    2,300Total loans
    
    $
    318,421
    
    
    $
    322,581
    
    
    $
    264,471
 7.




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5.
    
    LOANS (Continued)LOANS  Allowance for loan lossesAn analysis of the allowance for loan losses for the three months ended March 31, 2007, the year
ended December 31, 2006, and the three months ended March 31, 2006 is as follows (dollars in
thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2006Balance at beginning of period
    
    $
    5,006
    
    
    $
    6,108
    
    
    $
    6,108Recoveries on loans
    
    
    6
    
    
    
    91
    
    
    
    12Loans charged off
    
    
    (37
    )
    
    
    (332
    )
    
    
    (105
    )Provision for loan losses
    
    
    
    
    
    
    (861
    )
    
    
    (600
    )Balance at end of period
    
    $
    4,975
    
    
    $
    5,006
    
    
    $
    5,415
  LOANS
 Impaired loans
   Valuation ReserveMarch 31,
    
    
    December 31,
    
    
    March 31,
    
    
    March 31,
    
    
    December 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2006Balances, at period endImpaired loans with specific valuation reserve
    
    $
    1,804
    
    
    $
    1,804
    
    
    $
    
    
    
    $
    493
    
    
    $
    493
    
    
    $
    Impaired loans with no specific valuation
reserve
    
    
    3,058
    
    
    
    1,136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    4,862
    
    
    $
    2,940
    
    
    $
    
    
    
    $
    493
    
    
    $
    493
    
    
    $
    Impaired loans on nonaccrual basis
    
    $
    4,142
    
    
    $
    2,900
    
    
    $
    
    
    
    $
    493
    
    
    $
    493
    
    
    $
    Impaired loans on accrual basis
    
    
    720
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    4,862
    
    
    $
    2,940
    
    
    $
    
    
    
    $
    493
    
    
    $
    493
    
    
    $
    Average investment in impaired loans
    
    $
    3,416
    
    
    $
    1,192
    
    
    $
    71Interest income recognized during impairment
    
    
    13
    
    
    
    7
    
    
    
    1Interest income that would have been recognized
on an accrual basis
    
    
    82
    
    
    
    114
    
    
    
    Cash-basis interest income recognized
    
    
    7
    
    
    
    5
    
    
    
    
 8.




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5.
    
    LOANS (Continued)The average investment in impaired loans was approximately $3.416 million for the three-months
ended March 31, 2007, $1.2 million for the year ended December 31, 2006, and $.071 million for
the three months ended March 31, 2006, respectively. The increase in impaired loans in the
first quarter of 2007 relates to the deterioration of several large commercial credits which are
well collateralized. Nonperforming assets are discussed in more detail under Managements
Discussion and Analysis.LOANS  Related partiesThe Bank, in the ordinary course of business, grants loans to the Corporations executive
officers and directors, including their families and firms in which they are principal owners.Activity in such loans is summarized below (dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2006Loans outstanding, beginning of period
    
    $
    1,621
    
    
    $
    578
    
    
    $
    578New loans
    
    
    
    
    
    
    1,647
    
    
    
    Net activity on revolving lines of
credit
    
    
    
    
    
    
    271
    
    
    
    805Repayment
    
    
    (8
    )
    
    
    (875
    )
    
    
    Change in related party interest
    
    
    
    
    
    
    
    
    
    
    (491
    )Loans outstanding, end of period
    
    $
    1,613
    
    
    $
    1,621
    
    
    $
    892
 There were no loans to related parties classified substandard at March 31, 2007, December
31, 2006, and March 31, 2006 respectively.6.
    
    BORROWINGSBorrowings consist of the following at March 31, 2007, December 31, 2006, and March 31, 2006
(dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2006Federal Home Loan Bank advances at rates ranging from 4.98%
to 5.38% maturing in 2010 and 2011
    
    $
    35,000
    
    
    $
    35,000
    
    
    $
    35,000Farmers Home Administration, fixed-rate note payable, maturing
August 24, 2024, interest payable at 1%
    
    
    1,348
    
    
    
    1,348
    
    
    
    1,417Advance outstanding on line of credit with a correspondent bank,
interest payable
at the prime rate, 8.25% as of March 31, 2007, maturing May 21, 2008
    
    
    1,959
    
    
    
    1,959
    
    
    
    $
    38,307
    
    
    $
    38,307
    
    
    $
    36,417
   9.




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##### Table of Contents



7.
    
    STOCK OPTION PLANSA summary of stock option transactions for the three months ended March 31, 2007 and 2006 and
the year ended December 31, 2006, is as follows:
 March 31,
    
    
    December 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2006Outstanding shares, at beginning of period
    
    
    446,417
    
    
    
    375,417
    
    
    
    375,417Granted during the period
    
    
    
    
    
    
    72,500
    
    
    
    Expired/forefited during the period
    
    
    
    
    
    
    1,500
    
    
    
    1,500Outstanding shares at end of period
    
    
    446,417
    
    
    
    446,417
    
    
    
    373,917Weighted average exercise price per share
at end of period
    
    $
    12.29
    
    
    $
    12.29
    
    
    $
    12.60Shares available for grant, at end of period
    
    
    18,488
    
    
    
    18,488
    
    
    
    90,988
   WeightedAverage
    
    WeightedRemaining
    
    AverageExercise
    
    Number of Shares
    
    Contractual
    
    ExercisePrice Range
    
    Outstanding
    
    Exercisable
    
    Life-Years
    
    Price$9.16
    
    
    12,500
    
    
    
    5,000
    
    
    
    9.0
    
    
    $
    9.16$9.75
    
    
    257,152
    
    
    
    120,861
    
    
    
    8.0
    
    
    
    9.75$10.65
    
    
    72,500
    
    
    
    14,500
    
    
    
    10.0
    
    
    
    10.65$11.50
    
    
    40,000
    
    
    
    8,000
    
    
    
    8.8
    
    
    
    11.50$12.00
    
    
    60,000
    
    
    
    12,000
    
    
    
    8.5
    
    
    
    12.00$156.00  $240.00
    
    
    3,545
    
    
    
    3,545
    
    
    
    4.3
    
    
    
    186.75$300.00  $400.00
    
    
    720
    
    
    
    720
    
    
    
    2.5
    
    
    
    345.00446,417
    
    
    
    164,626
    
    
    
    8.2
    
    
    $
    12.29
 8.
    
    INCOME TAXESA valuation allowance is provided against deferred tax assets when it is more likely than not that
some or all of the deferred tax asset will not be realized. As of March 31, the Corporation had a
net operating loss and tax credit carryforwards for tax purposes of approximately $32.6 million,
and $2.1 million, respectively. The deferred tax benefits related to the net operating loss and
tax credit carryforwards will, at a minimum, be utilized to offset future taxable expense. In the
first quarter of 2007 and 2006, the Corporation reversed a portion of the valuation
allowance pertaining to the NOL carryforward to offset current federal tax, $.305 million and
$.102 million, respectively. The Corporation will record future benefits from these carryforwards
at such time as it becomes more likely than not that they will be utilized prior to expiration.
Please refer to further discussion on income taxes contained in Managements Discussion and
Analysis. This net operating loss carryforward expires twenty years from the date that it
originated. A portion of the NOL, approximately $22 million, and all of the credit carryforwards
are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue
Code. The annual limitation is $1.4 million for the NOL and the equivalent value of tax credits,
which is approximately $.477 million. These limitations for use were established in conjunction
with the recapitalization of the Corporation in December, 2004.
 10.




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##### Table of Contents



9.
    
    COMMITMENTS, CONTINGENCIES, AND CREDIT RISKFinancial Instruments With Off-Balance-Sheet RiskThe Corporation is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in the consolidated
balance sheets.The Corporations exposure to credit loss, in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit and standby letters of credit, is
represented by the contractual amount of those instruments. The Corporation uses the same credit
policies in making commitments and conditional obligations as it does for on-balance-sheet
instruments. These commitments are as follows (dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2006Commitments to extend credit:Variable rate
    
    $
    55,517
    
    
    $
    44,141
    
    
    $
    37,889Fixed rate
    
    
    9,975
    
    
    
    9,288
    
    
    
    1,815Standby letters of credit  Variable rate
    
    
    6,094
    
    
    
    6,233
    
    
    
    9,290Credit card commitments  Fixed rate
    
    
    2,451
    
    
    
    2,391
    
    
    
    3,068$
    74,037
    
    
    $
    62,053
    
    
    $
    52,062
    Contingencies
  11.




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##### Table of Contents



9.
    
    COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (Continued)Concentration of Credit RiskThe Bank grants commercial, residential, agricultural, and consumer loans throughout Michigan.
The Banks most prominent concentration in the loan portfolio relates to commercial real estate
loans. This concentration at March 31, 2007 represents $44.2 million, or 13.9%, compared to
$32.4 million, or 12.3%, of the commercial loan portfolio on March 31, 2006. The remainder of
the commercial loan portfolio is diversified in such categories as hospitality and tourism, real
estate agents and managers, new car dealers, gaming, petroleum, forestry, agriculture and
construction. Due to the diversity of the Banks locations, the ability of debtors of
residential and consumer loans to honor their obligations is not tied to any particular economic
sector.
 12.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 FORWARD LOOKING STATEMENTS
  
    
    The highly regulated environment in which the Corporation operates could adversely
affect its ability to carry out its strategic plan due to restrictions on new products,
funding opportunities or new market entrances;
    
    General economic conditions, either nationally or in the state(s) in which the Corporation does business;
    
    Legislation or regulatory changes which affect the business in which the Corporation is engaged;
    
    Changes in the interest rate environment which increase or decrease interest rate margins;
    
    Changes in securities markets with respect to the market value of financial assets and
the level of volatility in certain markets such as foreign exchange;
    
    Significant increases in competition in the banking and financial services industry
resulting from industry consolidation, regulatory changes and other factors, as well as
action taken by particular competitors;
    
    The ability of borrowers to repay loans;
    
    The effects on liquidity of unusual decreases in deposits;
    
    Changes in consumer spending, borrowing, and saving habits;
    
    Technological changes;
    
    Acquisitions and unanticipated occurrences which delay or reduce the expected benefits of acquisitions;
    
    Difficulties in hiring and retaining qualified management and banking personnel;
    
    The Corporations ability to increase market share and control expenses;
    
    The effect of compliance with legislation or regulatory changes;
    
    The effect of changes in accounting policies and practices;
    
    The costs and effects of existing and future litigation and of adverse outcomes in such litigation.
  13.




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##### 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
  14.




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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 of2007
    
    
    Total
    
    
    2006
    
    
    Total
    
    
    2006
    
    
    TotalCommercial real estate
    
    $
    153,587
    
    
    
    48.24
    %
    
    $
    154,332
    
    
    
    47.84
    %
    
    $
    134,089
    
    
    
    50.70
    %Commercial, financial, and agricultural
    
    
    67,683
    
    
    
    21.26
    
    
    
    71,385
    
    
    
    22.13
    
    
    
    56,958
    
    
    
    21.541-4 family residential real estate
    
    
    54,204
    
    
    
    17.02
    
    
    
    58,014
    
    
    
    17.98
    
    
    
    50,119
    
    
    
    18.95Construction
    
    
    39,976
    
    
    
    12.55
    
    
    
    36,009
    
    
    
    11.16
    
    
    
    21,005
    
    
    
    7.94Consumer
    
    
    2,971
    
    
    
    .93
    
    
    
    2,841
    
    
    
    .88
    
    
    
    2,300
    
    
    
    .87Total loans
    
    $
    318,421
    
    
    
    100.00
    %
    
    $
    322,581
    
    
    
    100.00
    %
    
    $
    264,471
    
    
    
    100.00
    %
  March 31, 2007
    
    
    December 31, 2006
    
    
    March 31, 2006Percent of
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    Percent ofOutstanding
    
    
    Commerical
    
    
    Shareholders
    
    
    Outstanding
    
    
    Commercial
    
    
    Shareholders
    
    
    Outstanding
    
    
    Commercial
    
    
    ShareholdersBalance
    
    
    Loans
    
    
    Equity
    
    
    Balance
    
    
    Loans
    
    
    Equity
    
    
    Balance
    
    
    Loans
    
    
    EquityReal estate  operators of nonres bldgs
    
    $
    44,155
    
    
    
    16.90
    %
    
    
    147.52
    %
    
    $
    44,308
    
    
    
    16.93
    %
    
    
    153.90
    %
    
    $
    32,440
    
    
    
    15.30
    %
    
    
    119.38
    %Hospitality and tourism
    
    
    33,726
    
    
    
    12.91
    
    
    
    112.68
    
    
    
    30,826
    
    
    
    11.78
    
    
    
    107.07
    
    
    
    38,045
    
    
    
    17.94
    
    
    
    140.01Real estate agents and managers
    
    
    27,313
    
    
    
    10.45
    
    
    
    91.25
    
    
    
    25,071
    
    
    
    9.58
    
    
    
    87.08
    
    
    
    12,350
    
    
    
    5.82
    
    
    
    45.45New car dealers
    
    
    10,139
    
    
    
    3.88
    
    
    
    33.87
    
    
    
    10,086
    
    
    
    3.85
    
    
    
    35.03
    
    
    
    9,988
    
    
    
    4.71
    
    
    
    36.76Other
    
    
    145,913
    
    
    
    55.86
    
    
    
    487.48
    %
    
    
    151,435
    
    
    
    57.86
    
    
    
    526.00
    %
    
    
    119,229
    
    
    
    56.23
    
    
    
    438.78
    %Total Commercial Loans
    
    $
    261,246
    
    
    
    100.00
    %
    
    
    
    
    
    $
    261,726
    
    
    
    100.00
    %
    
    
    
    
    
    $
    212,052
    
    
    
    100.00
    %
  Credit Quality
   15.




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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 31,2007
    
    
    2006
    
    
    2006Nonperforming Assets:Nonaccrual loans
    
    $
    4,142
    
    
    $
    2,899
    
    
    $
    Loans past due 90 days or more
    
    
    720
    
    
    
    40
    
    
    
    Restructured loans
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    4,862
    
    
    
    2,939
    
    
    
    Other real estate owned
    
    
    127
    
    
    
    26
    
    
    
    952Total nonperforming assets
    
    $
    4,989
    
    
    $
    2,965
    
    
    $
    952Nonperforming loans as a % of loans
    
    
    1.53
    %
    
    
    .91
    %
    
    
    
    %Nonperforming assets as a % of assets
    
    
    1.33
    %
    
    
    .77
    %
    
    
    .28
    %Reserve for Loan Losses:At period end
    
    $
    4,975
    
    
    $
    5,006
    
    
    $
    5,415As a % of loans
    
    
    1.56
    %
    
    
    1.55
    %
    
    
    2.05
    %As a % of nonperforming loans
    
    
    102.32
    %
    
    
    170.30
    %
    
    
    N/M
    %As a % of nonaccrual loans
    
    
    120.11
    %
    
    
    172.68
    %
    
    
    N/M
    %
  March 31,
    
    
    December 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2006Commercial, financial, and agricultural loans
    
    $
    3,906
    
    
    $
    3,600
    
    
    $
    1,279One to four family residential real estate loans
    
    
    29
    
    
    
    23
    
    
    
    43Consumer loans
    
    
    
    
    
    
    
    
    
    
    Unallocated and general reserves
    
    
    1,040
    
    
    
    1,383
    
    
    
    4,093Totals
    
    $
    4,975
    
    
    $
    5,006
    
    
    $
    5,415
   March 31,
    
    
    December 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2006Total loans, at period end
    
    $
    318,421
    
    
    $
    322,581
    
    
    $
    264,471Average loans for the year
    
    $
    318,072
    
    
    $
    301,508
    
    
    $
    250,735Allowance for loan losses
    
    $
    4,975
    
    
    $
    5,006
    
    
    $
    5,415Allowance to total loans at period end
    
    
    1.56
    %
    
    
    1.55
    %
    
    
    2.05
    %Net charge-offs during the period
    
    $
    31
    
    
    $
    241
    
    
    $
    93Net charge-offs to average loans
    
    
    .01
    %
    
    
    .08
    %
    
    
    .04
    %Net charge-offs to beginning allowance balance
    
    
    .62
    %
    
    
    3.95
    %
    
    
    1.52
    %Nonaccrual loans at end of period
    
    $
    4,142
    
    
    $
    2,899
    
    
    $
    Loans past due 90 days or more
    
    
    720
    
    
    
    40
    
    
    
    Restructured loans
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    $
    4,862
    
    
    $
    2,939
    
    
    $
    Nonperforming loans to total loans at end of period
    
    
    1.53
    %
    
    
    .91
    %
    
    
    
    %
 16.




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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, 2007
    
    
    December 31, 2006
    
    
    March 31, 2006Balance at beginning of period
    
    $
    26
    
    
    $
    945
    
    
    $
    945Other real estate transferred from loans due to foreclosure
    
    
    109
    
    
    
    23
    
    
    
    7Other real estate transferred to premises and equipment
    
    
    
    
    
    
    
    
    
    
    Other real estate sold/written down
    
    
    (8
    )
    
    
    (942
    )
    
    
    Balance at end of period
    
    $
    127
    
    
    $
    26
    
    
    $
    952
  Deposits
   17.




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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 31,2007
    
    
    % of Total
    
    
    2006
    
    
    % of Total
    
    
    2006
    
    
    % of TotalNon-interest-bearing
    
    $
    23,416
    
    
    
    7.69
    %
    
    $
    23,471
    
    
    
    7.51
    %
    
    $
    20,463
    
    
    
    7.64
    %NOW and money market
    
    
    70,558
    
    
    
    23.18
    
    
    
    73,188
    
    
    
    23.43
    
    
    
    67,467
    
    
    
    25.18Savings
    
    
    13,488
    
    
    
    4.43
    
    
    
    13,365
    
    
    
    4.28
    
    
    
    15,304
    
    
    
    5.71Certificates of Deposit <$100,000
    
    
    94,067
    
    
    
    30.90
    
    
    
    89,585
    
    
    
    28.67
    
    
    
    80,204
    
    
    
    29.93Total core deposits
    
    
    201,529
    
    
    
    66.20
    
    
    
    199,609
    
    
    
    63.89
    
    
    
    183,438
    
    
    
    68.46Certificates of Deposit >$100,000
    
    
    24,475
    
    
    
    8.04
    
    
    
    23,645
    
    
    
    7.57
    
    
    
    15,246
    
    
    
    5.69Brokered CDs
    
    
    78,408
    
    
    
    25.76
    
    
    
    89,167
    
    
    
    28.54
    
    
    
    69,270
    
    
    
    25.85Total non-core deposits
    
    
    102,883
    
    
    
    33.80
    
    
    
    112,812
    
    
    
    36.11
    
    
    
    84,516
    
    
    
    31.54Total deposits
    
    $
    304,412
    
    
    
    100.00
    %
    
    $
    312,421
    
    
    
    100.00
    %
    
    $
    267,954
    
    
    
    100.00
    %
 Borrowings
  Shareholders Equity
  RESULTS OF OPERATIONS
 Net Interest Income
  18.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  2007-2006Average Balances
    
    
    Average Rates
    
    
    Interest
    
    
    Income/
    
    
    
    
    
    
    
    
    
    
    Rate/March 31,
    
    
    Increase/
    
    
    March 31,
    
    
    March 31,
    
    
    Expense
    
    
    Volume
    
    
    Rate
    
    
    Volume(dollars in thousands)
    
    2007
    
    
    2006
    
    

    (Decrease)
    
    
    
    2007
    
    
    2006
    
    
    2007
    
    2006
    
    
    Variance
    
    
    Variance
    
    
    Variance
    
    
    VarianceLoans (1,2)
    
    $
    318,072
    
    
    $
    250,735
    
    
    $
    67,337
    
    
    
    8.17
    %
    
    
    7.59
    %
    
    $
    6,404
    
    
    $
    4,693
    
    
    $
    1,711
    
    
    $
    1,260
    
    
    $
    355
    
    
    
    95Taxable securities
    
    
    29,454
    
    
    
    31,029
    
    
    
    (1,575
    )
    
    
    4.14
    
    
    
    3.57
    
    
    
    301
    
    
    
    273
    
    
    
    28
    
    
    
    (14
    )
    
    
    44
    
    
    
    (2
    )Nontaxable securities
    
    
    
    
    
    
    3,214
    
    
    
    (3,214
    )
    
    
    
    
    
    
    5.17
    
    
    
    
    
    
    
    41
    
    
    
    (41
    )
    
    
    (41
    )
    
    
    (40
    )
    
    
    41Federal funds sold
    
    
    10,465
    
    
    
    9,424
    
    
    
    1,041
    
    
    
    5.34
    
    
    
    4.43
    
    
    
    138
    
    
    
    103
    
    
    
    35
    
    
    
    11
    
    
    
    21
    
    
    
    2Other interest-earning assets
    
    
    4,961
    
    
    
    5,776
    
    
    
    (815
    )
    
    
    5.05
    
    
    
    4.63
    
    
    
    62
    
    
    
    65
    
    
    
    (3
    )
    
    
    (8
    )
    
    
    7
    
    
    
    (1
    )Total earning assets
    
    
    362,952
    
    
    
    300,178
    
    
    
    62,774
    
    
    
    7.72
    
    
    
    6.99
    
    
    
    6,905
    
    
    
    5,175
    
    
    
    1,730
    
    
    
    1,208
    
    
    
    387
    
    
    
    135Reserve for loan losses
    
    
    (4,999
    )
    
    
    (6,049
    )
    
    
    1,050Cash and due from banks
    
    
    5,846
    
    
    
    6,339
    
    
    
    (493
    )Intangible assets
    
    
    194
    
    
    
    319
    
    
    
    (125
    )Other assets
    
    
    16,410
    
    
    
    18,222
    
    
    
    (1,812
    )Total assets
    
    $
    380,403
    
    
    $
    319,009
    
    
    $
    61,394NOW and money market deposits
    
    $
    72,192
    
    
    $
    67,892
    
    
    $
    4,300
    
    
    
    3.48
    
    
    
    2.86
    
    
    
    620
    
    
    
    478
    
    
    
    142
    
    
    
    30
    
    
    
    105
    
    
    
    7Savings deposits
    
    
    13,280
    
    
    
    15,336
    
    
    
    (2,056
    )
    
    
    1.65
    
    
    
    1.22
    
    
    
    54
    
    
    
    46
    
    
    
    8
    
    
    
    (6
    )
    
    
    16
    
    
    
    (2
    )CDs <$100,000
    
    
    92,020
    
    
    
    77,668
    
    
    
    14,352
    
    
    
    4.89
    
    
    
    3.92
    
    
    
    1,110
    
    
    
    750
    
    
    
    360
    
    
    
    139
    
    
    
    187
    
    
    
    35CDs >$100,000
    
    
    23,882
    
    
    
    13,808
    
    
    
    10,074
    
    
    
    4.94
    
    
    
    4.38
    
    
    
    291
    
    
    
    149
    
    
    
    142
    
    
    
    109
    
    
    
    19
    
    
    
    14Brokered deposits
    
    
    84,773
    
    
    
    57,632
    
    
    
    27,141
    
    
    
    5.49
    
    
    
    4.62
    
    
    
    1,147
    
    
    
    657
    
    
    
    490
    
    
    
    309
    
    
    
    123
    
    
    
    58Borrowings
    
    
    38,376
    
    
    
    36,417
    
    
    
    1,959
    
    
    
    5.34
    
    
    
    4.63
    
    
    
    505
    
    
    
    416
    
    
    
    89
    
    
    
    22
    
    
    
    63
    
    
    
    3Total interest-bearing liabilities
    
    
    324,523
    
    
    
    268,753
    
    
    
    55,770
    
    
    
    4.66
    
    
    
    3.77
    
    
    
    3,727
    
    
    
    2,496
    
    
    
    1,231
    
    
    
    603
    
    
    
    513
    
    
    
    115Demand deposits
    
    
    23,473
    
    
    
    19,384
    
    
    
    4,089Other liabilities
    
    
    3,153
    
    
    
    3,817
    
    
    
    (664
    )Shareholders equity
    
    
    29,254
    
    
    
    27,055
    
    
    
    2,199Total liabilities and shareholders equity
    
    $
    380,403
    
    
    $
    319,009
    
    
    $
    61,394Rate spread
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.06
    %
    
    
    3.22
    %Net interest margin/revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.55
    %
    
    
    3.62
    %
    
    $
    3,178
    
    
    $
    2,679
    
    
    $
    499
    
    
    $
    605
    
    
    $
    (126
    )
    
    $
    20
 
 (1)
    
    For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.(2)
    
    Interest income on loans includes loan fees. Provision for Loan Losses
  Other Income
  19.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  Noninterest Income
 Three Months Ended
    
    
    % IncreaseMarch 31,
    
    
    (Decrease)2007
    
    
    2006
    
    
    2007-2006Service fees
    
    $
    161
    
    
    $
    111
    
    
    
    45.05
    %Net gains on sale of secondary market loans
    
    
    108
    
    
    
    40
    
    
    
    170.00Proceeds from settlement of lawsuit
    
    
    470
    
    
    
    
    
    
    
    100.00Other noninterest income
    
    
    174
    
    
    
    65
    
    
    
    890.77Total noninterest income
    
    $
    913
    
    
    $
    216
    
    
    
    322.69
    %
 Other Expenses
   Noninterest Expenses
 Three Months Ended
    
    
    % IncreaseMarch 31,
    
    
    (Decrease)2007
    
    
    2006
    
    
    2007-2006Salaries and employee benefits
    
    $
    1,738
    
    
    $
    1,594
    
    
    
    9.03
    %Occupancy
    
    
    334
    
    
    
    317
    
    
    
    5.36Furniture and equipment
    
    
    157
    
    
    
    156
    
    
    
    .64Data processing
    
    
    171
    
    
    
    154
    
    
    
    11.04Professional service fees
    
    
    151
    
    
    
    200
    
    
    
    (24.50
    )Loan and deposit
    
    
    72
    
    
    
    129
    
    
    
    (44.19
    )Telephone
    
    
    58
    
    
    
    49
    
    
    
    18.37Advertising
    
    
    92
    
    
    
    70
    
    
    
    31.43Other
    
    
    283
    
    
    
    328
    
    
    
    (13.72
    )Total noninterest expense
    
    $
    3,056
    
    
    $
    2,997
    
    
    
    1.97
    %
 20.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
 Federal Income Taxes
  LIQUIDITY
      21.




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##### Table of Contents



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




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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 31,2007
    
    
    2006
    
    
    2006Capital StructureShareholders equity
    
    $
    29,932
    
    
    $
    28,790
    
    
    $
    27,173Total capitalization
    
    $
    29,932
    
    
    $
    28,790
    
    
    $
    27,173Tangible capital
    
    $
    29,756
    
    
    $
    28,585
    
    
    $
    26,874Intangible AssetsCore deposit premium
    
    $
    182
    
    
    $
    205
    
    
    $
    299Other identifiable intangibles
    
    
    
    
    
    
    
    
    
    
    Total intangibles
    
    $
    182
    
    
    $
    205
    
    
    $
    299Regulatory capitalTier 1 capital:Shareholders equity
    
    $
    29,932
    
    
    $
    28,790
    
    
    $
    27,173Net unrealized (gains) losses on
available for sale securities
    
    
    109
    
    
    
    187
    
    
    
    355Minority interest
    
    
    
    
    
    
    
    
    
    
    60Less: intangibles
    
    
    (182
    )
    
    
    (205
    )
    
    
    (299
    )Total Tier 1 capital
    
    $
    29,859
    
    
    $
    28,772
    
    
    $
    27,289Tier 2 Capital:Allowable reserve for loan losses
    
    $
    4,087
    
    
    $
    4,113
    
    
    $
    3,517Qualifying long-term debt
    
    
    
    
    
    
    Total Tier 2 capital
    
    
    4,087
    
    
    
    4,113
    
    
    
    3,517Total capital
    
    $
    33,946
    
    
    $
    32,885
    
    
    $
    30,806Risk-adjusted assets
    
    $
    326,101
    
    
    $
    328,133
    
    
    $
    279,442Capital ratios:Tier 1 Capital to average assets
    
    
    7.85
    %
    
    
    7.85
    %
    
    
    8.54
    %Tier 1 Capital to risk weighted assets
    
    
    9.16
    %
    
    
    8.77
    %
    
    
    9.74
    %Total Capital to risk weighted assets
    
    
    10.41
    %
    
    
    10.02
    %
    
    
    11.00
    %
   Tier 1
    
    Tier 1
    
    TotalCapital to
    
    Capital to
    
    Capital toAverage
    
    Risk-Weighted
    
    Risk-WeightedAssets
    
    Assets
    
    AssetsRegulatory minimum for capital adequacy purposes
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    8.00
    %Regulatory defined well capitalized guideline
    
    
    5.00
    %
    
    
    6.00
    %
    
    
    10.00
    %The Corporation:March 31, 2007
    
    
    7.85
    %
    
    
    9.16
    %
    
    
    10.41
    %December 31, 2006
    
    
    7.85
    %
    
    
    8.77
    %
    
    
    10.02
    %The Bank:March 31, 2007
    
    
    8.22
    %
    
    
    9.61
    %
    
    
    10.86
    %December 31, 2006
    
    
    8.33
    %
    
    
    9.31
    %
    
    
    10.57
    %
 23.




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##### Table of Contents



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




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##### Table of Contents



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
  1-90
    
    
    91 - 365
    
    
    >1-5
    
    
    Over 5Days
    
    
    Days
    
    
    Years
    
    
    Years
    
    
    TotalInterest-earning assets:Loans
    
    $
    218,003
    
    
    $
    8,154
    
    
    $
    28,785
    
    
    $
    63,479
    
    
    $
    318,421Securities
    
    
    4,498
    
    
    
    16,612
    
    
    
    7,000
    
    
    
    401
    
    
    
    28,511Other (1)
    
    
    7,186
    
    
    
    
    
    
    
    
    
    
    
    3,794
    
    
    
    10,980Total interest-earning assets
    
    
    229,687
    
    
    
    24,766
    
    
    
    35,785
    
    
    
    67,674
    
    
    
    357,912Interest-bearing obligations:NOW, Money Market and Savings
    
    
    84,046
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,046Time deposits
    
    
    46,211
    
    
    
    60,969
    
    
    
    10,573
    
    
    
    789
    
    
    
    118,542Brokered deposits
    
    
    44,676
    
    
    
    33,732
    
    
    
    
    
    
    
    
    
    
    
    78,408Borrowings
    
    
    21,348
    
    
    
    
    
    
    
    
    
    
    
    16,959
    
    
    
    38,307Total interest-bearing obligations
    
    
    196,281
    
    
    
    94,701
    
    
    
    10,573
    
    
    
    17,748
    
    
    
    319,303Gap
    
    $
    33,406
    
    
    $
    (69,935
    )
    
    $
    25,212
    
    
    $
    49,926
    
    
    $
    38,609Cumulative gap
    
    $
    33,406
    
    
    $
    (36,529
    )
    
    $
    (11,317
    )
    
    $
    38,609
 
 (1)
    
    Includes Federal Home Loan Bank Stock      25.




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##### Table of Contents



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
  FOREIGN EXCHANGE RISK
  OFF-BALANCE-SHEET RISK
   IMPACT OF INFLATION AND CHANGING PRICES
  26.




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##### Table of Contents



27.




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##### Table of Contents



OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Shareholders Derivative Litigation
 Damon Trust v. Bittner, et al.
 Virginia M. Damon Trust v. North Country Financial Corporation, Nominal
Defendant, and Dennis Bittner, Bernard A. Bouschor, Ronald G. Ford, Sherry L. Littlejohn, Stanley
J. Gerou II, John D. Lindroth, Stephen Madigan, Spencer Shunk, Michael Hendrickson, Glen Tolksdorf,
and Wesley Hoffman
  Damon Trust v. Wipfli
  28.




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##### Table of Contents



OTHER INFORMATION (Continued)
 
 Item 6. Exhibits and Reports on Form 8-K
  Exhibit 3.1 Articles of Incorporation, as amended, incorporated herein by
reference to exhibit 3.1 of the Corporations Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999.Exhibit 3.2 Amended and Restated Bylaws, incorporated herein by reference
to exhibit 3.1 of the Corporations Quarterly Report on Form
10-Q for the quarter ended September 30, 2001.Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer.Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer.Exhibit 32.1 Section 1350 Certification of Chief Executive Officer.Exhibit 32.2 Section 1350 Certification of Chief Financial Officer.
 29.




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##### Table of Contents



MACKINAC FINANCIAL CORPORATION(Registrant)Date: May 15, 2007
    By:
    /s/ Paul D. TobiasPAUL D. TOBIAS,CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(principal executive officer)By:
    /s/ Ernie R. KruegerERNIE R. KRUEGEREXECUTIVE VICE PRESIDENT /CONTROLLER
(principal accounting officer) 30.