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, 2010
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-20167
 MACKINAC FINANCIAL CORPORATION
  MICHIGAN
    
    38-2062816(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)130 SOUTH CEDAR STREET, MANISTIQUE, MI
(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)
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Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets -
March 31, 2010 (Unaudited), December 31, 2009 and
March 31, 2009 (Unaudited)
    
    
    1Condensed Consolidated Statements of Operations  Three
Months Ended March 31, 2010 (Unaudited) and
March 31, 2009 (Unaudited)
    
    
    2Condensed Consolidated Statements of Changes in Shareholders
Equity  Three Months Ended March 31, 2010
(Unaudited) and March 31, 2009 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2010 (Unaudited) and
March 31, 2009 (Unaudited)
    
    
    4Notes to Condensed Consolidated Financial
Statements (Unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    33PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 6. Exhibits and Reports on Form 8-K
    
    
    34SIGNATURES
    
    
    35




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##### 



FINANCIAL INFORMATION
 
 FINANCIAL STATEMENTS
 
 
 March 31,
    
    
    December 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2009(unaudited)
    
    
    
    
    
    
    (unaudited)ASSETSCash and due from banks
    
    $
    19,359
    
    
    $
    18,433
    
    
    $
    21,394Federal funds sold
    
    
    36,000
    
    
    
    27,000
    
    
    
    Cash and cash equivalents
    
    
    55,359
    
    
    
    45,433
    
    
    
    21,394Interest-bearing deposits in other financial institutions
    
    
    700
    
    
    
    678
    
    
    
    569Securities available for sale
    
    
    36,841
    
    
    
    46,513
    
    
    
    51,071Federal Home Loan Bank stock
    
    
    3,794
    
    
    
    3,794
    
    
    
    3,794Loans:Commercial
    
    
    296,271
    
    
    
    305,670
    
    
    
    295,595Mortgage
    
    
    76,996
    
    
    
    74,350
    
    
    
    71,554Consumer
    
    
    4,044
    
    
    
    4,290
    
    
    
    3,627Total Loans
    
    
    377,311
    
    
    
    384,310
    
    
    
    370,776Allowance for loan losses
    
    
    (4,737
    )
    
    
    (5,225
    )
    
    
    (4,793
    )Net loans
    
    
    372,574
    
    
    
    379,085
    
    
    
    365,983Premises and equipment
    
    
    10,060
    
    
    
    10,165
    
    
    
    11,134Other real estate held for sale
    
    
    7,723
    
    
    
    5,804
    
    
    
    2,199Other assets
    
    
    15,376
    
    
    
    23,905
    
    
    
    10,231TOTAL ASSETS
    
    $
    502,427
    
    
    $
    515,377
    
    
    $
    466,375LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIES:Deposits:Noninterest bearing deposits
    
    $
    30,356
    
    
    $
    35,878
    
    
    $
    31,541NOW, money market, checking
    
    
    109,374
    
    
    
    95,790
    
    
    
    75,026Savings
    
    
    20,675
    
    
    
    18,207
    
    
    
    19,585CDs<$100,000
    
    
    75,822
    
    
    
    59,953
    
    
    
    70,708CDs>$100,000
    
    
    30,173
    
    
    
    36,385
    
    
    
    26,886Brokered
    
    
    138,812
    
    
    
    175,176
    
    
    
    162,011Total deposits
    
    
    405,212
    
    
    
    421,389
    
    
    
    385,757Borrowings:Federal Home Loan Bank
    
    
    35,000
    
    
    
    35,000
    
    
    
    35,000Other
    
    
    1,140
    
    
    
    1,140
    
    
    
    1,210Total borrowings
    
    
    36,140
    
    
    
    36,140
    
    
    
    36,210Other liabilities
    
    
    2,353
    
    
    
    2,549
    
    
    
    2,544Total liabilities
    
    
    443,705
    
    
    
    460,078
    
    
    
    424,511Shareholders equity:Preferred stock  No par value:Authorized 500,000 shares, 11,000 shares issued and outstanding
    
    
    10,562
    
    
    
    10,514
    
    
    
    Common stock and additional paid in capital  No par valueAuthorized - 18,000,000 sharesIssued and outstanding  3,419,736 shares
    
    
    43,502
    
    
    
    43,493
    
    
    
    42,833Retained earnings (accumulated deficit)
    
    
    3,724
    
    
    
    199
    
    
    
    (1,618
    )Accumulated other comprehensive income
    
    
    934
    
    
    
    1,093
    
    
    
    649Total shareholders equity
    
    
    58,722
    
    
    
    55,299
    
    
    
    41,864TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    502,427
    
    
    $
    515,377
    
    
    $
    466,375
  1.




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##### 



Three Months EndedMarch 31,2010
    
    
    2009(Unaudited)
    
    
    (Unaudited)INTEREST INCOME:Interest and fees on loans:Taxable
    
    $
    5,191
    
    
    $
    5,002Tax-exempt
    
    
    52
    
    
    
    90Interest on securities:Taxable
    
    
    397
    
    
    
    459Tax-exempt
    
    
    7
    
    
    
    1Other interest income
    
    
    40
    
    
    
    2Total interest income
    
    
    5,687
    
    
    
    5,554INTEREST EXPENSE:Deposits
    
    
    1,457
    
    
    
    1,778Borrowings
    
    
    208
    
    
    
    281Total interest expense
    
    
    1,665
    
    
    
    2,059Net interest income
    
    
    4,022
    
    
    
    3,495Provision for loan losses
    
    
    900
    
    
    
    550Net interest income after provision for loan losses
    
    
    3,122
    
    
    
    2,945OTHER INCOME:Service fees
    
    
    223
    
    
    
    243Net security gains
    
    
    215
    
    
    
    Net gains on sale of secondary market loans
    
    
    316
    
    
    
    58Other
    
    
    53
    
    
    
    90Total other income
    
    
    807
    
    
    
    391OTHER EXPENSE:Salaries and employee benefits
    
    
    1,720
    
    
    
    1,597Occupancy
    
    
    345
    
    
    
    378Furniture and equipment
    
    
    194
    
    
    
    189Data processing
    
    
    189
    
    
    
    220Professional service fees
    
    
    173
    
    
    
    153Loan and deposit
    
    
    395
    
    
    
    136FDIC insurance assessment
    
    
    222
    
    
    
    125Telephone
    
    
    47
    
    
    
    43Advertising
    
    
    72
    
    
    
    78Other
    
    
    272
    
    
    
    320Total other expense
    
    
    3,629
    
    
    
    3,239Income before provision for income taxes
    
    
    300
    
    
    
    97Provision for (benefit of) income taxes
    
    
    (3,411
    )
    
    
    7NET INCOME
    
    
    3,711
    
    
    
    90Preferred dividend and accretion of discount
    
    
    185
    
    
    
    NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    3,526
    
    
    $
    90INCOME PER COMMON SHARE:Basic
    
    $
    1.03
    
    
    $
    .03Diluted
    
    $
    1.03
    
    
    $
    .03
  2.




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##### 



Three Months EndedMarch 31,2010
    
    
    2009Balance, beginning of period
    
    $
    55,299
    
    
    $
    41,552Net income for period
    
    
    3,711
    
    
    
    90Net unrealized gain (loss) on securities available for sale
    
    
    (159
    )
    
    
    204Total comprehensive income
    
    
    3,552
    
    
    
    294Dividend on preferred stock and accretion of discount
    
    
    (185
    )
    
    
    Stock option compensation
    
    
    8
    
    
    
    18Accretion of preferred stock discount
    
    
    48
    
    
    
    Balance, end of period
    
    $
    58,722
    
    
    $
    41,864
  3.




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##### 



Three Months EndedMarch 31,2010
    
    
    2009Cash Flows From Operating Activities:Net income
    
    $
    3,711
    
    
    $
    90Adjustments to reconcile net income to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    396
    
    
    
    448Provision for (benefit of) deferred taxes
    
    
    (3,411
    )
    
    
    7Provision for loan losses
    
    
    900
    
    
    
    550(Gain) on sales/calls of securities available for sale
    
    
    (215
    )
    
    
    Loss on sales of premises, equipment, and other real estate
    
    
    20
    
    
    
    1Writedown of other real estate
    
    
    128
    
    
    
    Stock option compensation
    
    
    8
    
    
    
    18Change in other assets
    
    
    12,021
    
    
    
    (292
    )Change in other liabilities
    
    
    (196
    )
    
    
    (28
    )Net cash provided by operating activities
    
    
    13,362
    
    
    
    794Cash Flows From Investing Activities:Net (increase) decrease in loans
    
    
    2,704
    
    
    
    (541
    )Net (increase) decrease in interest-bearing deposits in other financial institutions
    
    
    (22
    )
    
    
    13Purchase of securities available for sale
    
    
    
    
    
    
    (4,683
    )Proceeds from sales, maturities or calls of securities available for sale
    
    
    9,560
    
    
    
    1,253Capital expenditures
    
    
    (156
    )
    
    
    (251
    )Proceeds from sale of premises, equipment, and other real estate
    
    
    840
    
    
    
    37Net cash provided by (used in) investing activities
    
    
    12,926
    
    
    
    (4,172
    )Cash Flows From Financing Activities:Net increase (decrease) in deposits
    
    
    (16,177
    )
    
    
    14,660Dividend on preferred stock and accretion of discount
    
    
    (185
    )
    
    
    Net increase (decrease) in federal funds purchased
    
    
    
    
    
    
    Net increase (decrease) in line of credit
    
    
    
    
    
    
    Principal payments on borrowings
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (16,362
    )
    
    
    14,660Net increase in cash and cash equivalents
    
    
    9,926
    
    
    
    11,282Cash and cash equivalents at beginning of period
    
    
    45,433
    
    
    
    10,112Cash and cash equivalents at end of period
    
    $
    55,359
    
    
    $
    21,394Supplemental Cash Flow Information:Cash paid during the year for:Interest
    
    $
    1,658
    
    
    $
    2,143Income taxes
    
    
    
    
    
    
    30Noncash 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)
    
    
    2,907
    
    
    
    485
  4.




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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, 2010 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2010. 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, 2009.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 also has a general allowance for loan losses for loans not considered impaired.
The allowance for loan losses is maintained at a level which management believes is adequate
to provide for probable loan losses. Management periodically evaluates the adequacy of the
allowance using the Corporations past loan loss experience, known and inherent risks in the
portfolio, composition of the portfolio, current economic conditions, and other factors. The
allowance does not include the effects of expected losses related to future events or future
changes in economic conditions. This evaluation is inherently subjective since it requires
material estimates that may be susceptible to significant change. Loans are charged against
the allowance for loan losses when management believes the collectability of the principal is
unlikely. In addition, various regulatory agencies periodically review the allowance for loan
losses. These agencies may require additions to the allowance for loan losses based on their
judgments of collectability.In managements opinion, the allowance for loan losses is adequate to cover probable losses
relating to specifically identified loans, as well as probable losses inherent in the balance
of the loan portfolio as of the balance sheet date.Stock Option 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
 5.




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##### 



1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)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 made available for grant under these plans.
All three option plans have expired, and therefore no new shares may be granted. Options to
purchase shares of the Corporations stock are granted at a price equal to the market price of
the stock at the date of grant. The committee determines the vesting of the options when they
are granted as established under the plan.
 2.
    
    RECENT ACCOUNTING DEVELOPMENTS
 In June 2009, the FASB issued Statements No. 166, Accounting for Transfers of Financial Assets,
(ASC 860-10) and No. 167, Amendments to FASB Interpretation No. 46(R),(ASC 810-10). ASC 860-10
will require more information about transfers of financial assets, including securitization
transactions, and where entities have continuing exposure to the risks related to transferred
financial assets. It eliminates the concept of a qualifying special-purpose entity, changes
the requirements for derecognizing financial assets, and requires additional disclosures.ASC 810-10 replaces the quantitative-based risks and rewards calculation for determining which
enterprise, if any, has a controlling financial interest in a variable interest entity with a
qualitative approach focused on identifying which enterprise has the power to direct the
activities of a variable interest entity (VIE) that most significantly impact the entitys
economic performance and (1) the obligation to absorb losses of the entity or (2) the right to
receive benefits from the entity. ASC 860-10 and ASC 810-10 will be effective at the start of a
reporting entitys first fiscal year beginning after November 15, 2009, or January 1, 2010, for
a calendar year entity. The adoption of this ASC did not have an impact at the date of
adoption.
 3.
    
    EARNINGS PER SHARE
 Earnings per share are based upon the weighted average number
of shares outstanding. Additional shares issued as a result of option exercises would not be dilutive in either three month
period. The issuance of shares as a result of the common stock warrants issued under the TARP
Capital Purchase Program would not have a dilutive effect on earnings for the three month period
in 2010.The following shows the computation of basic and diluted earnings per share for the three months
ended March 31, 2010 and 2009 (dollars in thousands, except per share data):
 Three Months Ended March 31,2010
    
    
    2009Net income
    
    $
    3,711
    
    
    $
    90Preferred stock dividends and accretion of discount
    
    
    185
    
    
    
    Net income available to common shareholders
    
    $
    3,526
    
    
    $
    90Weighted average shares outstanding
    
    
    3,419,736
    
    
    
    3,419,736Effect of dilutive stock options outstanding
    
    
    
    
    
    
    Effect of dilutive common stock warrants
    
    
    
    
    
    
    Diluted weighted average shares outstanding
    
    
    3,419,736
    
    
    
    3,419,736Earnings per common share:Basic
    
    $
    1.03
    
    
    $
    .03Diluted
    
    $
    1.03
    
    
    $
    .03
 6.




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##### 



4.
    
    INVESTMENT SECURITIES
 The amortized cost and estimated fair value of investment securities available for sale as of
March 31, 2010, December 31, 2009, and March 31, 2009 are as follows (dollars in thousands):
 March 31, 2010
    
    
    December 31, 2009
    
    
    March 31, 2009Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    EstimatedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueUS Agencies  MBS
    
    $
    34,220
    
    
    $
    35,546
    
    
    $
    43,651
    
    
    $
    45,238
    
    
    $
    44,904
    
    
    $
    45,915Asset backed  government guaranteed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,684
    
    
    
    4,610Obligations of states and political subdivisions
    
    
    1,206
    
    
    
    1,295
    
    
    
    1,207
    
    
    
    1,275
    
    
    
    498
    
    
    
    546Total securities available for sale
    
    $
    35,426
    
    
    $
    36,841
    
    
    $
    44,858
    
    
    $
    46,513
    
    
    $
    50,086
    
    
    $
    51,071
 The amortized cost and estimated fair value of investment securities pledged to secure FHLB
borrowings and customer relationships were $17.087 million and $17.989 million respectively at
March 31, 2010.
 5.
    
    LOANS
 The composition of loans at March 31, 2010, December 31, 2009, and March 31, 2009 is as follows
(dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2009Commercial real estate
    
    $
    198,439
    
    
    $
    208,895
    
    
    $
    191,721Commercial, financial and agricultural
    
    
    69,797
    
    
    
    72,184
    
    
    
    77,216One to four family residential real estate
    
    
    70,087
    
    
    
    67,232
    
    
    
    65,792Construction:Commercial
    
    
    28,035
    
    
    
    24,591
    
    
    
    26,658Consumer
    
    
    6,909
    
    
    
    7,118
    
    
    
    5,762Consumer
    
    
    4,044
    
    
    
    4,290
    
    
    
    3,627Total loans
    
    $
    377,311
    
    
    $
    384,310
    
    
    $
    370,776
 LOANS  Allowance for loan lossesAn analysis of the allowance for loan losses for the three months ended March 31, 2010, the year
ended December 31, 2009, and the three months ended March 31, 2009 is as follows (dollars in
thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2009Balance at beginning of period
    
    $
    5,225
    
    
    $
    4,277
    
    
    $
    4,277Recoveries on loans
    
    
    19
    
    
    
    66
    
    
    
    39Loans charged off
    
    
    (1,407
    )
    
    
    (2,818
    )
    
    
    (73
    )Provision for loan losses
    
    
    900
    
    
    
    3,700
    
    
    
    550Balance at end of period
    
    $
    4,737
    
    
    $
    5,225
    
    
    $
    4,793
 7.




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##### 



5.
    
    LOANS (Continued)In the first quarter of 2010, net charge-off activity of $1.388 million equated to .36% of
average loans outstanding compared to net charge-offs of $34,000, or .01% of average loans, in
the first quarter of 2009. In
the first quarter of 2010, the Corporation recorded a provision for loan loss in the amount of
$.900 million, which is discussed in more detail under Managements Discussion and Analysis.LOANS  Impaired loansNonperforming loans are those which are contractually past due 90 days or more as to interest or
principal payments, on nonaccrual status, or loans, the terms of which have been renegotiated to
provide a reduction or deferral on interest or principal.Information regarding impaired loans as of March 31, 2010, December 31, 2009, and March 31, 2009
is as follows (dollars in thousands):
 Valuation ReserveMarch 31,
    
    
    December 31,
    
    
    March 31,
    
    
    March 31,
    
    
    December 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2009Balances, at period endImpaired loans with specific valuation reserve
    
    $
    3,215
    
    
    $
    11,348
    
    
    $
    11,065
    
    
    $
    1,619
    
    
    $
    2,705
    
    
    $
    2,162Impaired loans with no specific valuation reserve
    
    
    6,681
    
    
    
    3,889
    
    
    
    1,396
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    9,896
    
    
    $
    15,237
    
    
    $
    12,461
    
    
    $
    1,619
    
    
    $
    2,705
    
    
    $
    2,162Impaired loans on nonaccrual basis
    
    $
    9,027
    
    
    $
    14,368
    
    
    $
    12,461
    
    
    $
    1,619
    
    
    $
    2,705
    
    
    $
    2,162Impaired loans on accrual basis
    
    
    869
    
    
    
    869
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    9,896
    
    
    $
    15,237
    
    
    $
    12,461
    
    
    $
    1,619
    
    
    $
    2,705
    
    
    $
    2,162Average investment in impaired loans
    
    $
    12,497
    
    
    $
    10,449
    
    
    $
    8,323Interest income recognized during impairment
    
    
    6
    
    
    
    40
    
    
    
    6Interest income that would have been recognized
on an accrual basis
    
    
    150
    
    
    
    700
    
    
    
    153Cash-basis interest income recognized
    
    
    
    
    
    
    
    
    
    
    6
 Additional discussion on impaired loans is presented in the Managements Discussion and
Analysis section of this report.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.
 8.




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##### 



5.
    
    LOANS (Continued)Activity in such loans is summarized below (dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2009Loans outstanding, beginning of period
    
    $
    8,552
    
    
    $
    6,516
    
    
    $
    6,516New loans
    
    
    1,087
    
    
    
    2,160
    
    
    
    Net activity on revolving lines of credit
    
    
    1,938
    
    
    
    1,189
    
    
    
    356Repayment
    
    
    (2,104
    )
    
    
    (1,610
    )
    
    
    (104
    )Change in related party interest
    
    
    
    
    
    
    297
    
    
    
    Loans outstanding, end of period
    
    $
    9,473
    
    
    $
    8,552
    
    
    $
    6,768
 There were no loans to related parties classified substandard at March 31, 2010, December
31, 2009, and March 31, 2009 respectively. In addition to the outstanding balances above, there
were unused commitments of $.543 million to related parties at March 31, 2010.
 6.
    
    BORROWINGS
 Borrowings consist of the following at March 31, 2010, December 31,
2009 and March 31, 2009 (dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2009Federal Home Loan Bank fixed rate advances at rates ranging from 4.98% to 5.16%
maturing in December 2010
    
    $
    15,000
    
    
    $
    15,000
    
    
    $
    15,000Federal Home Loan Bank variable rate advances at rates ranging of .27%
maturing in January and February 2011
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,000Farmers Home Administration, fixed-rate note payable, maturing August 24, 2024
interest payable at 1%
    
    
    1,140
    
    
    
    1,140
    
    
    
    1,210$
    36,140
    
    
    $
    36,140
    
    
    $
    36,210
 The Federal Home Loan Bank borrowings are collateralized at March 31, 2010 by the
following: a collateral agreement on the Corporations one to four family residential real
estate loans with a book value of approximately $30.255 million; mortgage related and municipal
securities with an amortized cost and estimated fair value of $16.387 million and $17.231
million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $3.794
million. Prepayment of the remaining advances is subject to the provisions and conditions of
the credit policy of the Federal Home Loan Bank of Indianapolis in effect as of March 31, 2010.The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $.266 million
originated and held by the Corporations wholly owned subsidiary, First Rural Relending; an
assignment of a demand deposit account in the amount of $.960 million and guaranteed by the
Corporation.
 9.




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##### 



7.
    
    STOCK OPTION PLANS
 A summary of stock option transactions for the three months ended March 31, 2010 and 2009 and
the year ended December 31, 2009, is as follows:
 March 31,
    
    
    December 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2009Outstanding shares, at beginning of period
    
    
    411,057
    
    
    
    446,237
    
    
    
    446,237Granted during the period
    
    
    
    
    
    
    
    
    
    
    Expired/forfeited during the period
    
    
    
    
    
    
    (35,180
    )
    
    
    (35,000
    )Outstanding shares at end of period
    
    
    411,057
    
    
    
    411,057
    
    
    
    411,237Weighted average exercise price per share
at end of period
    
    $
    12.03
    
    
    $
    12.03
    
    
    $
    12.20Shares available for grant, at end of period
    
    
    
    
    
    
    24,780
    
    
    
    24,780
 There were no options granted or exercised in the first quarter of 2010 or 2009. All
option plans under which the above outstanding shares were granted have expired; therefore, no
further shares can be granted.Following is a summary of the options outstanding and exercisable at March 31, 2010:
 WeightedAverage
    
    
    WeightedRemaining
    
    
    AverageExercise
    
    Number of Shares
    
    
    Contractual
    
    
    ExercisePrice Range
    
    Outstanding
    
    
    Exercisable
    
    
    Life-Years
    
    
    Price$9.16
    
    
    12,500
    
    
    
    5,000
    
    
    
    5.71
    
    
    $
    9.16$9.75
    
    
    257,152
    
    
    
    120,861
    
    
    
    4.71
    
    
    
    9.75$10.65
    
    
    57,500
    
    
    
    11,500
    
    
    
    6.71
    
    
    
    10.65$11.50
    
    
    40,000
    
    
    
    8,000
    
    
    
    5.50
    
    
    
    11.50$12.00
    
    
    40,000
    
    
    
    8,000
    
    
    
    5.21
    
    
    
    12.00$156.00-$240.00
    
    
    3,545
    
    
    
    3,545
    
    
    
    .98
    
    
    
    186.75$300.00-$400.00
    
    
    360
    
    
    
    360
    
    
    
    .04
    
    
    
    300.00411,057
    
    
    
    157,266
    
    
    
    5.11
    
    
    $
    12.03
 8.
    
    INCOME TAXES
 A valuation allowance is provided against deferred tax assets when it is more likely than not
that some or all of the deferred tax asset will not be realized. At March 31, 2010, the
Corporation evaluated the valuation allowance against the net deferred tax asset which would
require future taxable income in order to be utilized and record a $3.500 million deferred tax
benefit related to the utilization of the NOL carryforward. The Corporation, as of March 31,
2010 had a net operating loss and tax credit carryforwards for tax purposes of approximately
$28.0 million, and $2.1 million, respectively.The Corporation utilized NOL carryforwards to offset taxable income for the first nine months of
2007. In the third quarter of 2007, the Corporation reversed a portion of the valuation
allowance, $7.500 million that pertained to the deferred tax benefit of NOL and tax credit
carryforwards. This valuation adjustment was recorded as a current period income tax benefit.
In 2006, the Corporation recorded a $.500 million tax benefit and utilized additional NOL
carryforwards to offset current taxable income. The recognition of the deferred tax benefit in
2007 and 2006 was in accordance with generally accepted accounting principles, and considered
among other things, the probability of utilizing the NOL and credit carryforwards.
 10.




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##### 



8.
    
    INCOME TAXES (Continued)The Corporation recorded the future benefits from these carryforwards at such time as it became
more likely than not that they would be utilized prior to expiration. Please refer to further
discussion on income taxes contained in Managements Discussion and Analysis. The net
operating loss carryforwards expire twenty years from the date they originated. These
carryforwards, if not utilized, will begin to expire in the year 2023. A portion of the NOL,
approximately $18.0 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 $1.4 million for the NOL and the equivalent value of tax credits, which is approximately
$.477 million. These limitations for use were established in conjunction with the
recapitalization of the Corporation in December, 2004.
 9.
    
    FAIR VALUE MEASUREMENTS
 In June 2009, the FASB issued authoritative guidance to improve the information a reporting
entity provides in its financial statements about transfers of financial assets, including the
effect of a transfer on an entitys financial position, financial performance and cash flows and
the transferors continuing involvement in the transferred assets. The guidance eliminates the
concept of a qualifying special-purpose entity and changes the guidance for evaluation for
consolidation. This guidance became effective January 1, 2010 and did not have significant
impact on the Corporations financial position, results of operations or cash flows.In 2010, the FASB issued authoritative guidance expanding disclosures related to fair value
measurements including (i) the amounts of significant transfers of assets or liabilities between
Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons
for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with
significant transfers disclosed separately, (iii) the policy for determining when transfers
between levels of the fair value hierarchy are recognized and (iv) for recurring fair value
measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross
presentation of information about purchases, sales, issuances and settlements. The new guidance
further clarifies that (i) fair value measurement disclosures should be provided for each class
of assets and liabilities (rather than major category), which would generally be a subset of
assets or liabilities within a line item in the statement of financial position and (ii)
disclosures should be provided about the valuation techniques and inputs used to measure fair
value for both recurring and nonrecurring fair value measurements for each class of assets and
liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to
the gross presentation of purchases, sales issuances and settlements of assets and liabilities
included in Level 3 of the fair value hierarchy will be required beginning January 1, 2011. The
remaining disclosure requirements and clarifications made by the new guidance became effective on
January 1, 2010.
 11.




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##### 



9.
    
    FAIR VALUE MEASUREMENTS(Continued)The following table presents information for financial instruments at March 31, 2010 and December
31, 2009 (dollars in thousands):
 March 31, 2010
    
    December 31, 2009Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueFinancial assets:Cash and cash equivalents
    
    $
    55,359
    
    
    $
    55,359
    
    
    $
    45,433
    
    
    $
    45,433Interest bearing deposits
    
    
    700
    
    
    
    700
    
    
    
    678
    
    
    
    678Securities available for sale
    
    
    36,841
    
    
    
    36,841
    
    
    
    46,513
    
    
    
    46,513Federal Home Loan Bank stock
    
    
    3,794
    
    
    
    3,794
    
    
    
    3,794
    
    
    
    3,794Net loans
    
    
    372,574
    
    
    
    374,854
    
    
    
    379,085
    
    
    
    382,352Accrued interest receivable
    
    
    1,434
    
    
    
    1,434
    
    
    
    1,413
    
    
    
    1,413Total financial assets
    
    $
    470,702
    
    
    $
    472,982
    
    
    $
    476,916
    
    
    $
    480,183Financial liabilities:Deposits
    
    $
    405,212
    
    
    $
    405,236
    
    
    $
    421,389
    
    
    $
    421,124Borrowings
    
    
    36,140
    
    
    
    36,372
    
    
    
    36,140
    
    
    
    36,447Accrued interest payable
    
    
    332
    
    
    
    332
    
    
    
    325
    
    
    
    325Total financial liabilties
    
    $
    441,684
    
    
    $
    441,940
    
    
    $
    457,854
    
    
    $
    457,896
 Fair value estimates, methods, and assumptions are set forth below for the Corporations
financial instruments:Cash, cash equivalents, and interest-bearing deposits The carrying values approximate the fair
values for these assets.Securities Fair values are based on quoted market prices where available. If a quoted market
price is not available, fair value is estimated using quoted market prices for similar
securities.Federal Home Loan Bank stock Federal Home Loan Bank stock is carried at cost, which
is its redeemable value and approximates its fair value, since the market for this stock is
limited.Loans Fair values are estimated for portfolios of loans with similar financial characteristics.
Loans are segregated by type such as commercial, residential mortgage, and other consumer. The
fair value of loans is calculated by discounting scheduled cash flows using discount rates
reflecting the credit and interest rate risk inherent in the loan.The methodology in determining fair value of nonaccrual loans is to average them into the blended
interest rate at 0% interest. This has the effect of decreasing the carrying amount below the
risk-free rate amount and, therefore, discounts the estimated fair value.Impaired loans are measured at the estimated fair value of the expected future cash flows at the
loans effective interest rate or the fair value of the collateral for loans which are collateral
dependent. Therefore, the carrying values of impaired loans approximate the estimated fair
values for these assets.Deposits The fair value of deposits with no stated maturity, such as noninterest-bearing demand
deposits and savings, is equal to the amount payable on demand at the reporting date. The fair
value of time deposits is based on the discounted value of contractual cash flows applying
interest rates currently being offered on similar time deposits.
 12.




---



##### 



9.
    
    FAIR VALUE MEASUREMENTS (Continued)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.LimitationsThe authoritative accounting guidance for fair value measurements defines fair
value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. A fair value measurement assumes that the
transaction to sell the asset or transfer the liability occurs in the principal market for the
asset or liability or, in the absence of a principal market, the most advantageous market for the
asset or liability. The price in the principal (or most advantageous) market used to measure the
fair value of the asset or liability shall not be adjusted for transaction costs. An orderly
transaction is a transaction that assumes exposure to the market for a period prior to the
measurement date to allow for marketing activities that are usual and customary for transactions
involving such assets and liabilities; it is not a forced transaction. Market participants are
buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii)
able to transact and (iv) willing to transact.The authoritative accounting guidance requires the use of valuation techniques that are
consistent with the market approach, the income approach and/or the cost approach. The market
approach uses prices and other relevant information generated by market transactions involving
identical or comparable assets and liabilities. The income approach uses valuation techniques to
convert future amounts, such as cash flows or earnings, to a single present amount on a
discounted basis. The cost approach is based on the amount that currently would be required to
replace the service capacity of an asset (replacement costs). Valuation techniques should be
consistently applied. Inputs to valuation techniques refer to the assumptions that market
participants would use in pricing the asset or liability. Inputs may be observable, meaning
those that reflect the assumptions market participants would use in pricing the asset or
liability developed based on market data obtained from independent sources, or unobservable,
meaning those that reflect the reporting entitys own assumptions about the assumptions market
participants would use in pricing the asset or liability developed based on the best information
available in the circumstances. In that regard, the authoritative guidance establishes a fair
value hierarchy for valuation inputs that gives the highest priority to quoted prices in active
markets for identical assets or liabilities and the lowest priority to unobservable outputs. The
fair value hierarchy is as follows:
 
 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
at the measurement date.
 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 2 investments consist primarily of
obligations of U.S. government sponsored enterprises and agencies, obligations of state and
municipal subdivisions, corporate bonds and mortgage backed securities.
 Level 3:
    
    Level 3 inputs are unobservable inputs, including inputs available in situations
where there is little, if any, market activity for the related asset or liability.
 13.




---



##### 



9.
    
    FAIR VALUE MEASUREMENTS (Continued)In instances where inputs used to measure fair value fall into different levels in the above fair
value hierarchy, fair value measurements in their entirety are categorized based on the lowest
level input that is significant to the valuation. The Corporations assessment of the
significance of particular inputs to these fair value measurements requires judgment and
considers factors specific to each asset or liability.The following tables present information about the Corporations assets and liabilities measured
at fair value on a recurring basis at March 31, 2010, and the valuation techniques used by the
Corporation to determine those fair values (dollars in thousands).The fair value of all investment securities at December 31, 2009 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.The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31, 2009
or March 31, 2010.The Corporation also has assets that under certain conditions are subject to measurement at fair
value on a non-recurring basis. These assets include held to maturity investments and loans.
The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically
discounted cash flow projections.
 Assets Measured at Fair Value on a Nonrecurring Basis at March 31, 2010Quoted 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, 2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    March 31, 2010AssetsImpaired loans
    
    $
    4,658
    
    
    $
    
    
    
    $
    
    
    
    $
    4,658
    
    
    $
    86Other real estate owned
    
    
    7,723
    
    
    
    
    
    
    
    
    
    
    
    7,723
    
    
    
    149$
    235
 Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2009Quoted Prices
    
    
    Significant
    
    
    Significantin Active Markets
    
    
    Other Observable
    
    
    Unobservable
    
    
    Total Losses forBalance at
    
    
    for Identical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    Year Ended(dollars in thousands)
    
    December 31, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    December 31, 2009AssetsImpaired loans
    
    $
    13,621
    
    
    $
    
    
    
    $
    
    
    
    $
    13,621
    
    
    $
    1,300Other real estate owned
    
    
    5,804
    
    
    
    
    
    
    
    
    
    
    
    5,804
    
    
    
    399$
    1,699
 The Corporation had no investments subject to fair value measurement on a nonrecurring
basis.Certain financial assets and financial liabilities are measured at fair value on a nonrecurring
basis, that is, the instruments are not measured at fair value on an ongoing basis but are
subject to fair value adjustments in certain circumstances (for example, when there is evidence
of impairment).Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are
considered impaired. Impaired loans are reported at the fair value of the underlying collateral
if repayment is expected solely from the collateral. The Corporation estimates the fair value
of the loans based on the present value of expected future cash flows using managements best
estimate of key assumptions. These assumptions include future payment ability, timing of
payment streams, and estimated realizable values of available collateral (typically based on
outside appraisals).
 14.




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##### 



10.
    
    SHAREHOLDERS EQUITY
 Participation in the TARP Capital Purchase ProgramOn April 24, 2009, the Corporation entered into and closed a Letter Agreement, including the
Securities Purchase Agreement-Standard Terms (collectively, the Securities Purchase
Agreement), related to the CPP. Pursuant to the Securities Purchase Agreement, the Corporation
issued and sold to the Treasury (i) 11,000 shares of the Corporations Series A Preferred
Shares, and (ii) the Warrant to purchase 379,310 shares of the Corporations Common Shares, at
an exercise price of $4.35 per share (subject to certain anti-dilution and other adjustments),
for an aggregate purchase price of $11.000 million in cash. The Warrant has a ten-year term.As a result of the CPP transaction, the Corporation is required to take certain actions, for so
long as the Treasury holds any securities acquired from the Corporation pursuant to the CPP
(excluding any period in which the Treasury holds only the Warrant to purchase Common Shares of
the Corporation) (the CPP Period), to ensure that its executive compensation and benefit plans
with respect to Senior Executive Officers (as defined in the relevant agreements) comply with
Section 111(b) of Emergency Economic Stabilization Act of 2008 (EESA), as implemented by any
guidance or regulations issued under Section 111(b) of EESA, and not
adopt any benefit plans with respect to, or which cover, the Corporations Senior Executive Officers that do not
comply with EESA, as amended by the American Recovery and Reinvestment Act of 2009 (the ARRA),
which was passed by Congress and signed by the President on February 17, 2009. The applicable
executive compensation standards generally remain in effect during the CPP Period and apply to
the Corporations Senior Executive Officers (which for purposes of the ARRA and the CPP
agreements, includes the Corporations Chief Executive Officer, its Chief Financial Officer, and
the next three most highly-compensated executive officers, even though the Corporations senior
executive officers consist of a smaller group of executives for purposes of the other
compensation disclosures in this proxy statement).Amounts recorded for Preferred Stock and Warrant Common Stock were estimated based on an
allocation of the total proceeds from the issuance on the relative fair values of both
instruments. Fair value of the Preferred Stock was determined based on assumptions regarding
the discount rate (market rate) on the Preferred Stock (estimated 12%). Fair value of the
Warrant Common Stock is based on the value of the underlying Preferred Stock based on an
estimate for a three year term. The allocation of the proceeds received resulted in the
recording of a discount on the Preferred Stock and a premium on the Warrant Common Stock. The
discount on the preferred will be accreted on an effective yield basis over a three-year term.
The allocated carrying value of the Preferred Stock and Warrant Common Stock on the date of
issuance (based on their relative fair values) was $10.382 million and $.618 million,
respectively. Cumulative dividends on the Preferred Stock are payable at 5% annum for the first
five years and at a rate of 9% per annum thereafter on the liquidation preference of $1,000 per
share. The Company is prohibited from paying any dividend with respect to shares of common
stock unless all accrued and unpaid dividends are paid in full on the Preferred Stock for all
past dividend periods. The Preferred Stock is non-voting, other than class voting rights on
matters that could adversely affect the Preferred Stock. The Preferred Stock may be redeemed at
any time with regulatory approval. The Treasury may also transfer the Preferred Stock to a
third party at any time. The preferred stock qualifies as Tier 1 Capital for regulatory
purposes at the holding company.The Corporation has the right to redeem the Series A Preferred Shares at any time after
consulting with its primary regulator, in which case the executive compensation standards would
no longer apply to the Corporation.This capital may be used to increase the strong capital position of the Bank. The Bank would
then use the capital to grow loans. In addition, the capital will allow the Corporation to
consider acquisitions of deposit franchisees that would enhance funding mix.
 15.




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##### 



11.
    
    COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
 Financial 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 31,2010
    
    
    2009
    
    
    2009Commitments to extend credit:Variable rate
    
    $
    26,629
    
    
    $
    24,839
    
    
    $
    34,801Fixed rate
    
    
    9,853
    
    
    
    6,039
    
    
    
    9,059Standby letters of credit  Variable rate
    
    
    1,170
    
    
    
    1,279
    
    
    
    1,589Credit card commitments  Fixed rate
    
    
    2,761
    
    
    
    2,714
    
    
    
    2,477$
    40,413
    
    
    $
    34,871
    
    
    $
    47,926
 Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Corporation evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Corporation upon extension of credit, is based on managements credit
evaluation of the party. Collateral held varies, but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial properties.Standby letters of credit are conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers. The
commitments are structured to allow for 100% collateralization on all standby letters of credit.Credit card commitments are commitments on credit cards issued by the Corporations subsidiary
and serviced by other companies. These commitments are unsecured.ContingenciesIn the normal course of business, the Corporation is involved in various legal proceedings. See
Part II, Item 1, Legal Proceedings in this report.
 16.




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##### 



11.
    
    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 to operators of nonresidential buildings. This concentration at March 31, 2010 represents
$49.753 million, or 16.79%, compared to $40.457 million, or 13.69%, of the commercial loan
portfolio on March 31, 2009. 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. Additional discussion regarding the
concentration of credit risk is presented in the Managements Discussion and Analysis section
of this report.
 17.




---



##### 



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;
    
    An increase in the Corporations FDIC insurance premiums, or the collection of special
assessments by the FDIC.
  18.




---



##### 



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




---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
 Loans
   March 31,
    
    
    Percent of
    
    
    December 31,
        
    Percent of
        
    March 31,
        
    Percent of2010
        
    Total
        
    2009
        
    Total
        
    2009
        
    TotalCommercial real estate
    
    $
    198,439
    
    
    
    52.59
    %
    
    $
    208,895
    
    
    
    54.36
    %
    
    $
    191,721
    
    
    
    51.71
    %Commercial, financial, and agricultural
    
    
    69,797
    
    
    
    18.50
    
    
    
    72,184
    
    
    
    18.78
    
    
    
    77,216
    
    
    
    20.83One to four family residential real estate
    
    
    70,087
    
    
    
    18.58
    
    
    
    67,232
    
    
    
    17.49
    
    
    
    65,792
    
    
    
    17.74Consumer
    
    
    4,044
    
    
    
    1.07
    
    
    
    4,290
    
    
    
    1.12
    
    
    
    3,627
    
    
    
    .98ConstructionCommercial
    
    
    28,035
    
    
    
    7.43
    
    
    
    24,591
    
    
    
    6.40
    
    
    
    26,658
    
    
    
    7.19Consumer
    
    
    6,909
    
    
    
    1.83
    
    
    
    7,118
    
    
    
    1.85
    
    
    
    5,762
    
    
    
    1.55Total loans
    
    $
    377,311
    
    
    
    100.00
    %
    
    $
    384,310
    
    
    
    100.00
    %
    
    $
    370,776
    
    
    
    100.00
    %
  March 31, 2010
        
    December 31, 2009
    
    
    March 31, 2009Percent of
        
    Percent of
    
    
    
    
    
    
    Percent of
        
    Percent of
        
    
    
    
    
    Percent of
    
    
    Percent ofOutstanding
        
    Commerical
        
    Shareholders
        
    Outstanding
        
    Commercial
        
    Shareholders
        
    Outstanding
        
    Commerical
        
    ShareholdersBalance
    
    
    Loans
    
    
    Equity
    
    
    Balance
    
    
    Loans
    
    
    Equity
    
    
    Balance
    
    
    Loans
    
    
    EquityReal estate  operators of nonres bldgs
    
    $
    49,753
    
    
    
    16.79
    %
    
    
    84.73
    %
    
    $
    48,689
    
    
    
    15.93
    %
    
    
    88.05
    %
    
    $
    40,457
    
    
    
    13.69
    %
    
    
    96.64
    %Hospitality and tourism
    
    
    44,820
    
    
    
    15.13
    
    
    
    76.33
    
    
    
    45,315
    
    
    
    14.82
    
    
    
    81.95
    
    
    
    35,224
    
    
    
    11.91
    
    
    
    84.14Commercial construction
    
    
    28,035
    
    
    
    9.46
    
    
    
    47.74
    
    
    
    24,591
    
    
    
    8.04
    
    
    
    44.47
    
    
    
    26,658
    
    
    
    9.02
    
    
    
    63.68Real estate agents and managers
    
    
    21,529
    
    
    
    7.27
    
    
    
    36.66
    
    
    
    24,242
    
    
    
    7.93
    
    
    
    43.84
    
    
    
    28,012
    
    
    
    9.48
    
    
    
    66.91Other
    
    
    152,134
    
    
    
    51.35
    
    
    
    259.07
    
    
    
    162,833
    
    
    
    53.27
    
    
    
    294.46
    
    
    
    165,244
    
    
    
    55.90
    
    
    
    394.72Total Commercial Loans
    
    $
    296,271
    
    
    
    100.00
    %
    
    
    
    
    
    $
    305,670
    
    
    
    100.00
    %
    
    
    
    
    
    $
    295,595
    
    
    
    100.00
    %
   20.




---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
 Credit Quality
   March 31,
    
    
    December 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2009Nonperforming Assets:Nonaccrual loans
    
    $
    9,027
    
    
    $
    14,368
    
    
    $
    12,461Loans past due 90 days or more
    
    
    
    
    
    
    
    
    
    
    Restructured loans
    
    
    869
    
    
    
    869
    
    
    
    592Total nonperforming loans
    
    
    9,896
    
    
    
    15,237
    
    
    
    13,053Other real estate owned
    
    
    7,723
    
    
    
    5,804
    
    
    
    2,199Total nonperforming assets
    
    $
    17,619
    
    
    $
    21,041
    
    
    $
    15,252Nonperforming loans as a % of loans
    
    
    2.62
    %
    
    
    3.96
    %
    
    
    3.52
    %Nonperforming assets as a % of assets
    
    
    3.51
    %
    
    
    4.08
    %
    
    
    3.27
    %Reserve for Loan Losses:At period end
    
    $
    4,737
    
    
    $
    5,225
    
    
    $
    4,793As a % of loans
    
    
    1.26
    %
    
    
    1.36
    %
    
    
    1.29
    %As a % of nonperforming loans
    
    
    47.87
    %
    
    
    34.29
    %
    
    
    36.72
    %As a % of nonaccrual loans
    
    
    52.48
    %
    
    
    36.37
    %
    
    
    38.46
    %
  At Period EndMarch 31, 2010
    
    
    December 31, 2009
    
    
    March 31, 2009Total loans, at period end
    
    $
    377,311
    
    
    $
    384,310
    
    
    $
    370,776Average loans for the year
    
    
    384,640
    
    
    
    374,796
    
    
    
    370,943Allowance for loan losses
    
    
    4,737
    
    
    
    5,225
    
    
    
    4,793Allowance to total loans at period end
    
    
    1.26
    %
    
    
    1.36
    %
    
    
    1.29
    %
 For the Period EndedThree Months Ended
    
    
    Twelve Months Ended
    
    
    Three Months EndedMarch 31, 2010
    
    
    December 31, 2009
    
    
    March 31, 2009Net charge-offs during the period
    
    $
    1,388
    
    
    $
    2,752
    
    
    $
    34Net charge-offs to average loans
    
    
    .36
    %
    
    
    .73
    %
    
    
    .01
    %Net charge-offs to beginning allowance balance
    
    
    26.56
    %
    
    
    64.34
    %
    
    
    .79
    %
  21.




---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  March 31,
    
    
    December 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2009Commercial, financial, and agricultural loans
    
    $
    4,168
    
    
    $
    4,805
    
    
    $
    4,315One to four family residential real estate loans
    
    
    27
    
    
    
    23
    
    
    
    35Consumer loans
    
    
    4
    
    
    
    13
    
    
    
    13Unallocated and general reserves
    
    
    538
    
    
    
    384
    
    
    
    430Totals
    
    $
    4,737
    
    
    $
    5,225
    
    
    $
    4,793
    Three Months Ended
    
    
    Year Ended
    
    
    Three Months EndedMarch 31, 2010
    
    
    December 31, 2009
    
    
    March 31, 2009Balance at beginning of period
    
    $
    5,804
    
    
    $
    2,189
    
    
    $
    2,189Other real estate transferred from loans due to foreclosure
    
    
    2,907
    
    
    
    4,879
    
    
    
    485Reclassification of redemption OREO
    
    
    
    
    
    
    (475
    )
    
    
    (475
    )Other real estate sold/written down
    
    
    (988
    )
    
    
    (789
    )
    
    
    Balance at end of period
    
    $
    7,723
    
    
    $
    5,804
    
    
    $
    2,199
  Deposits
    22.




---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
  March 31,
    
    
    
    
    
    
    December 31,
    
    
    
    
    
    
    March 31,2010
    
    
    % of Total
    
    
    2009
    
    
    % of Total
    
    
    2009
    
    
    % of TotalNoninterest bearing
    
    $
    30,356
    
    
    
    7.49
    %
    
    $
    35,878
    
    
    
    8.51
    %
    
    $
    31,541
    
    
    
    8.17
    %NOW, money market, checking
    
    
    109,374
    
    
    
    26.99
    
    
    
    95,790
    
    
    
    22.73
    
    
    
    75,026
    
    
    
    19.45Savings
    
    
    20,675
    
    
    
    5.10
    
    
    
    18,207
    
    
    
    4.32
    
    
    
    19,585
    
    
    
    5.08Certificates of Deposit <$100,000
    
    
    75,822
    
    
    
    18.71
    
    
    
    59,953
    
    
    
    14.23
    
    
    
    70,708
    
    
    
    18.33Total core deposits
    
    
    236,227
    
    
    
    58.30
    
    
    
    209,828
    
    
    
    49.79
    
    
    
    196,860
    
    
    
    51.03Certificates of Deposit >$100,000
    
    
    30,173
    
    
    
    7.45
    
    
    
    36,385
    
    
    
    8.63
    
    
    
    26,886
    
    
    
    6.97Brokered CDs
    
    
    138,812
    
    
    
    34.26
    
    
    
    175,176
    
    
    
    41.57
    
    
    
    162,011
    
    
    
    42.00Total non-core deposits
    
    
    168,985
    
    
    
    41.70
    
    
    
    211,561
    
    
    
    50.21
    
    
    
    188,897
    
    
    
    48.97Total deposits
    
    $
    405,212
    
    
    
    100.00
    %
    
    $
    421,389
    
    
    
    100.00
    %
    
    $
    385,757
    
    
    
    100.00
    %
 Borrowings
  Shareholders Equity
  RESULTS OF OPERATIONS
 Summary
   Net Interest Income
  23.




---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
    Three Months Ended2010-2009Average Balances
    
    
    Average Rates
    
    
    Interest
    
    
    Income/
    
    
    
    
    
    
    
    
    
    
    Rate/March 31,
    
    
    Increase/
    
    
    March 31,
    
    
    March 31,
    
    
    Expense
    
    
    Volume
    
    
    Rate
    
    
    Volume(dollars in thousands)
    
    2010
    
    
    2009
    
    
    (Decrease)
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    Variance
    
    
    Variance
    
    
    Variance
    
    
    VarianceLoans (1,2,3)
    
    $
    384,640
    
    
    $
    370,943
    
    
    $
    13,697
    
    
    
    5.56
    %
    
    
    5.62
    %
    
    $
    5,270
    
    
    $
    5,138
    
    
    $
    132
    
    
    $
    190
    
    
    $
    (56
    )
    
    $
    (2
    )Taxable securities
    
    
    37,393
    
    
    
    47,495
    
    
    
    (10,102
    )
    
    
    4.31
    
    
    
    3.92
    
    
    
    397
    
    
    
    459
    
    
    
    (62
    )
    
    
    (98
    )
    
    
    45
    
    
    
    (9
    )Nontaxable securities (2)
    
    
    844
    
    
    
    68
    
    
    
    776
    
    
    
    4.81
    
    
    
    11.93
    
    
    
    10
    
    
    
    2
    
    
    
    8
    
    
    
    23
    
    
    
    (1
    )
    
    
    (14
    )Federal funds sold
    
    
    37,833
    
    
    
    
    
    
    
    37,833
    
    
    
    0.25
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    23Other interest-earning assets
    
    
    4,470
    
    
    
    4,367
    
    
    
    103
    
    
    
    1.54
    
    
    
    0.19
    
    
    
    17
    
    
    
    2
    
    
    
    15
    
    
    
    
    
    
    
    15
    
    
    
    Total earning assets
    
    
    465,180
    
    
    
    422,873
    
    
    
    42,307
    
    
    
    4.98
    
    
    
    5.37
    
    
    
    5,717
    
    
    
    5,601
    
    
    
    116
    
    
    
    115
    
    
    
    3
    
    
    
    (2
    )Reserve for loan losses
    
    
    (5,073
    )
    
    
    (4,405
    )
    
    
    (668
    )Cash and due from banks
    
    
    19,772
    
    
    
    13,345
    
    
    
    6,427Intangible assets
    
    
    
    
    
    
    35
    
    
    
    (35
    )Other assets
    
    
    28,616
    
    
    
    22,892
    
    
    
    5,724Total assets
    
    $
    508,495
    
    
    $
    454,740
    
    
    $
    53,755NOW and money market deposits
    
    $
    87,700
    
    
    $
    68,252
    
    
    $
    19,448
    
    
    
    1.04
    
    
    
    0.78
    
    
    
    225
    
    
    
    131
    
    
    
    94
    
    
    
    37
    
    
    
    44
    
    
    
    13Interest checking
    
    
    15,475
    
    
    
    4,354
    
    
    
    11,121
    
    
    
    1.73
    
    
    
    1.96
    
    
    
    66
    
    
    
    21
    
    
    
    45
    
    
    
    54
    
    
    
    (2
    )
    
    
    (7
    )Savings deposits
    
    
    18,378
    
    
    
    19,718
    
    
    
    (1,340
    )
    
    
    .66
    
    
    
    .82
    
    
    
    30
    
    
    
    40
    
    
    
    (10
    )
    
    
    (3
    )
    
    
    (8
    )
    
    
    1CDs <$100,000
    
    
    66,187
    
    
    
    71,677
    
    
    
    (5,490
    )
    
    
    2.21
    
    
    
    3.13
    
    
    
    361
    
    
    
    553
    
    
    
    (192
    )
    
    
    (42
    )
    
    
    (162
    )
    
    
    12CDs >$100,000
    
    
    33,112
    
    
    
    25,752
    
    
    
    7,360
    
    
    
    1.71
    
    
    
    2.77
    
    
    
    140
    
    
    
    176
    
    
    
    (36
    )
    
    
    50
    
    
    
    (67
    )
    
    
    (19
    )Brokered deposits
    
    
    159,501
    
    
    
    151,955
    
    
    
    7,546
    
    
    
    1.61
    
    
    
    2.29
    
    
    
    635
    
    
    
    857
    
    
    
    (222
    )
    
    
    43
    
    
    
    (252
    )
    
    
    (13
    )Borrowings
    
    
    36,140
    
    
    
    36,648
    
    
    
    (508
    )
    
    
    2.33
    
    
    
    3.11
    
    
    
    208
    
    
    
    281
    
    
    
    (73
    )
    
    
    (4
    )
    
    
    (70
    )
    
    
    1Total interest-bearing liabilities
    
    
    416,493
    
    
    
    378,356
    
    
    
    38,137
    
    
    
    1.62
    
    
    
    2.21
    
    
    
    1,665
    
    
    
    2,059
    
    
    
    (394
    )
    
    
    135
    
    
    
    (517
    )
    
    
    (12
    )Demand deposits
    
    
    33,544
    
    
    
    30,961
    
    
    
    2,583Other liabilities
    
    
    3,349
    
    
    
    3,610
    
    
    
    (261
    )Shareholders equity
    
    
    55,109
    
    
    
    41,813
    
    
    
    13,296Total liabilities and shareholders equity
    
    $
    508,495
    
    
    $
    454,740
    
    
    $
    53,755Rate spread
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.36
    %
    
    
    3.16
    %Net interest margin/revenue, tax equivalent
basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.53
    %
    
    
    3.40
    %
    
    $
    4,052
    
    
    $
    3,542
    
    
    $
    510
    
    
    $
    (20
    )
    
    $
    520
    
    
    $
    10
 
 (1)
    
    For purposes of these computations, nonaccruing loans are included in the daily average loan
amounts outstanding.(2)
    
    The amount of interest income on nontaxable securities and loans has been adjusted to a
tax equivalent basis, using 34% tax rate.(3)
    
    Interest income on loans includes loan fees.   Provision for Loan Losses
  24.




---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
  Other Income
   Three Months EndedMarch 31,Increase/(Decrease)2010
    
    
    2009
    
    
    Dollars
    
    
    PercentService fees
    
    $
    223
    
    
    $
    243
    
    
    $
    (20
    )
    
    
    (8.23
    )%Net gains on sale of secondary market loans
    
    
    316
    
    
    
    58
    
    
    
    258
    
    
    
    444.83Other noninterest income
    
    
    53
    
    
    
    90
    
    
    
    (37
    )
    
    
    (41.11
    )Subtotal
    
    
    592
    
    
    
    391
    
    
    
    201
    
    
    
    51.41Net security gain (loss)
    
    
    215
    
    
    
    
    
    
    
    215
    
    
    
    Total noninterest income
    
    $
    807
    
    
    $
    391
    
    
    $
    416
    
    
    
    106.39
    %
 Other Expense
  25.




---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
  Three Months EndedMarch 31,Increase/(Decrease)2010
    
    
    2009
    
    
    Dollars
    
    
    PercentSalaries and employee benefits
    
    $
    1,720
    
    
    $
    1,597
    
    
    $
    123
    
    
    
    7.70
    %Occupancy
    
    
    345
    
    
    
    378
    
    
    
    (33
    )
    
    
    (8.73
    )Furniture and equipment
    
    
    194
    
    
    
    189
    
    
    
    5
    
    
    
    2.65Data processing
    
    
    189
    
    
    
    220
    
    
    
    (31
    )
    
    
    (14.09
    )Professional service fees
    
    
    173
    
    
    
    153
    
    
    
    20
    
    
    
    13.07Loan and deposit :FDIC insurance premiums
    
    
    222
    
    
    
    125
    
    
    
    97
    
    
    
    77.60Other loan and deposit
    
    
    395
    
    
    
    136
    
    
    
    259
    
    
    
    190.44Telephone
    
    
    47
    
    
    
    43
    
    
    
    4
    
    
    
    9.30Advertising
    
    
    72
    
    
    
    78
    
    
    
    (6
    )
    
    
    (7.69
    )Other
    
    
    272
    
    
    
    320
    
    
    
    (48
    )
    
    
    (15.00
    )Total noninterest expense
    
    $
    3,629
    
    
    $
    3,239
    
    
    $
    390
    
    
    
    12.04
    %
 Federal Income Taxes
 Current Federal Tax Provision
  Deferred Tax Benefit  Historical Commentary
  26.




---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
 LIQUIDITY
        27.




---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
 CAPITAL AND REGULATORY
   March 31,
    
    
    December 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2009Capital StructureShareholders equity
    
    $
    58,722
    
    
    $
    55,299
    
    
    $
    41,864Total capitalization
    
    $
    58,722
    
    
    $
    55,299
    
    
    $
    41,864Tangible capital
    
    $
    58,722
    
    
    $
    55,299
    
    
    $
    41,838Intangible AssetsCore deposit premium
    
    $
    
    
    
    $
    
    
    
    $
    26Other identifiable intangibles
    
    
    
    
    
    
    
    
    
    
    Total intangibles
    
    $
    
    
    
    $
    
    
    
    $
    26Regulatory capitalTier 1 capital:Shareholders equity
    
    $
    58,722
    
    
    $
    55,299
    
    
    $
    41,864Net unrealized (gains) losses onavailable for sale securities
    
    
    (934
    )
    
    
    (1,093
    )
    
    
    (650
    )Less: disallowed deferred tax asset
    
    
    (8,700
    )
    
    
    (4,800
    )
    
    
    (6,000
    )Less: intangibles
    
    
    
    
    
    
    
    
    
    
    (26
    )Total Tier 1 capital
    
    $
    49,088
    
    
    $
    49,406
    
    
    $
    35,188Tier 2 Capital:Allowable reserve for loan losses
    
    $
    4,737
    
    
    $
    5,181
    
    
    $
    4,724Qualifying long-term debt
    
    
    
    
    
    
    
    
    
    
    Total Tier 2 capital
    
    
    4,737
    
    
    
    5,181
    
    
    
    4,724Total capital
    
    $
    53,825
    
    
    $
    54,587
    
    
    $
    39,912Risk-adjusted assets
    
    $
    393,226
    
    
    $
    414,440
    
    
    $
    377,861Capital ratios:Tier 1 Capital to average assets
    
    
    9.85
    %
    
    
    9.75
    %
    
    
    7.86
    %Tier 1 Capital to risk weighted assets
    
    
    12.48
    %
    
    
    11.92
    %
    
    
    9.31
    %Total Capital to risk weighted assets
    
    
    13.69
    %
    
    
    13.17
    %
    
    
    10.56
    %
  28.




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##### 



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS (Continued)
  Tangible
    
    
    Tier 1
    
    
    Tier 1
    
    
    TotalEquity to
    
    
    Equity to
    
    
    Capital to
    
    
    Capital to
    
    
    Capital toPeriod-end
    
    
    Period-end
    
    
    Average
    
    
    Risk Weighted
    
    
    Risk WeightedAssets
    
    
    Assets
    
    
    Assets
    
    
    Assets
    
    
    AssetsRegulatory minimum 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, 2010
    
    
    11.69
    %
    
    
    11.69
    %
    
    
    9.85
    %
    
    
    12.48
    %
    
    
    13.69
    %March 31, 2009
    
    
    8.98
    %
    
    
    8.97
    %
    
    
    7.86
    %
    
    
    9.31
    %
    
    
    10.56
    %The Bank:March 31, 2010
    
    
    10.34
    %
    
    
    10.34
    %
    
    
    8.43
    %
    
    
    10.67
    %
    
    
    11.86
    %March 31, 2009
    
    
    9.04
    %
    
    
    9.03
    %
    
    
    7.96
    %
    
    
    9.41
    %
    
    
    10.66
    %
 29.




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##### 



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 INTEREST RATE RISK
          30.




---



##### 



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
    1-90
    
    
    91 - 365
    
    
    >1-5
    
    
    Over 5Days
    
    
    Days
    
    
    Years
    
    
    Years
    
    
    TotalInterest-earning assets:Loans
    
    $
    256,055
    
    
    $
    12,478
    
    
    $
    28,305
    
    
    $
    80,473
    
    
    $
    377,311Securities
    
    
    6
    
    
    
    10,642
    
    
    
    25,375
    
    
    
    818
    
    
    
    36,841Other(1)
    
    
    36,700
    
    
    
    
    
    
    
    
    
    
    
    3,794
    
    
    
    40,494Total interest-earning assets
    
    
    292,761
    
    
    
    23,120
    
    
    
    53,680
    
    
    
    85,085
    
    
    
    454,646Interest-bearing obligations:NOW, money market, savings, and interest checking
    
    
    130,049
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,049Time deposits
    
    
    27,261
    
    
    
    51,174
    
    
    
    26,932
    
    
    
    628
    
    
    
    105,995Brokered CDs
    
    
    27,706
    
    
    
    47,764
    
    
    
    60,614
    
    
    
    2,728
    
    
    
    138,812Borrowings
    
    
    20,000
    
    
    
    15,000
    
    
    
    
    
    
    
    1,140
    
    
    
    36,140Total interest-bearing obligations
    
    
    205,016
    
    
    
    113,938
    
    
    
    87,546
    
    
    
    4,496
    
    
    
    410,996Gap
    
    $
    87,745
    
    
    $
    (90,818
    )
    
    $
    (33,866
    )
    
    $
    80,589
    
    
    $
    43,650Cumulative gap
    
    $
    87,745
    
    
    $
    (3,073
    )
    
    $
    (36,939
    )
    
    $
    43,650
 
 (1)
    
    Includes Federal Home Loan Bank Stock     31.




---



##### 



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
  FOREIGN EXCHANGE RISK
  OFF-BALANCE-SHEET RISK
   IMPACT OF INFLATION AND CHANGING PRICES
  32.




---



##### 



CONTROLS AND PROCEDURES
   Changes in Internal Control Over Financial Reporting
  33.




---



##### 



OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 6.
    
    Exhibits and Reports on Form 8-K
  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.
 34.




---



##### 



MACKINAC FINANCIAL CORPORATION
(Registrant)Date:      May 14, 2010
    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) 35.