##### 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, 2009
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from <> to <>
 Commission file number: 0-20167
 MACKINAC FINANCIAL CORPORATION
  MICHIGAN
    
    38-2062816(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)130 SOUTH CEDAR STREET, MANISTIQUE, MI
    
    49854(Address of principal executive offices)
    
    (Zip Code)
   þ o
  o o
  Large accelerated filer
o
    
    Accelerated filer
o
    
    Non-accelerated filer o
    
    Smaller reporting company
þ(Do not check if a smaller reporting company)
  o þ




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##### 



Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets -
March 31, 2009 (Unaudited), December 31, 2008 and
March 31, 2008 (Unaudited)
    
    
    1Condensed Consolidated Statements of Operations  Three
Months Ended March 31, 2009 (Unaudited) and
March 31, 2008 (Unaudited)
    
    
    2Condensed Consolidated Statements of Changes in Shareholders
Equity  Three Months Ended March 31, 2009
(Unaudited) and March 31, 2008 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2009 (Unaudited) and
March 31, 2008 (Unaudited)
    
    
    4Notes to Condensed Consolidated Financial
Statements (Unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    16Item 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
    
    
    35SIGNATURES
    
    
    36EX-31.1EX-31.2EX-32.1EX-32.2




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FINANCIAL INFORMATION
 
 FINANCIAL STATEMENTS
 
   March 31,
    
    
    December 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2008(unaudited)
    
    
    
    
    
    
    (unaudited)ASSETSCash and due from banks
    
    $
    21,394
    
    
    $
    10,112
    
    
    $
    6,849Federal funds sold
    
    
    
    
    
    
    
    
    
    
    1,568Cash and cash equivalents
    
    
    21,394
    
    
    
    10,112
    
    
    
    8,417Interest-bearing deposits in other financial institutions
    
    
    569
    
    
    
    582
    
    
    
    382Securities available for sale
    
    
    51,071
    
    
    
    47,490
    
    
    
    24,581Federal Home Loan Bank stock
    
    
    3,794
    
    
    
    3,794
    
    
    
    3,794Loans:Commercial
    
    
    295,595
    
    
    
    296,088
    
    
    
    291,980Mortgage
    
    
    71,554
    
    
    
    70,447
    
    
    
    64,624Installment
    
    
    3,627
    
    
    
    3,745
    
    
    
    3,452Total Loans
    
    
    370,776
    
    
    
    370,280
    
    
    
    360,056Allowance for loan losses
    
    
    (4,793
    )
    
    
    (4,277
    )
    
    
    (3,924
    )Net loans
    
    
    365,983
    
    
    
    366,003
    
    
    
    356,132Premises and equipment
    
    
    11,134
    
    
    
    11,189
    
    
    
    11,511Other real estate held for sale
    
    
    2,199
    
    
    
    2,189
    
    
    
    1,137Other assets
    
    
    10,231
    
    
    
    10,072
    
    
    
    11,221TOTAL ASSETS
    
    $
    466,375
    
    
    $
    451,431
    
    
    $
    417,175LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIES:Deposits:Noninterest bearing deposits
    
    $
    31,541
    
    
    $
    30,099
    
    
    $
    26,876NOW, money market, checking
    
    
    75,026
    
    
    
    70,584
    
    
    
    81,952Savings
    
    
    19,585
    
    
    
    20,730
    
    
    
    11,530CDs<$100,000
    
    
    70,708
    
    
    
    73,752
    
    
    
    83,087CDs>$100,000
    
    
    26,886
    
    
    
    25,044
    
    
    
    22,010Brokered
    
    
    162,011
    
    
    
    150,888
    
    
    
    100,592Total deposits
    
    
    385,757
    
    
    
    371,097
    
    
    
    326,047Borrowings:Federal funds purchased
    
    
    
    
    
    
    
    
    
    
    10,410Short-term
    
    
    
    
    
    
    
    
    
    
    2,159Long-term
    
    
    36,210
    
    
    
    36,210
    
    
    
    36,280Total borrowings
    
    
    36,210
    
    
    
    36,210
    
    
    
    48,849Other liabilities
    
    
    2,544
    
    
    
    2,572
    
    
    
    2,646Total liabilities
    
    
    424,511
    
    
    
    409,879
    
    
    
    377,542SHAREHOLDERS EQUITY:Preferred stock  No par value:Authorized 500,000 shares, no shares outstandingCommon stock and additional paid in capital  No par value
Authorized - 18,000,000 shares
Issued and outstanding  3,419,736; 3,419,736, and 3,428,695 respectively
    
    
    42,833
    
    
    
    42,815
    
    
    
    42,862Accumulated deficit
    
    
    (1,618
    )
    
    
    (1,708
    )
    
    
    (3,441
    )Accumulated other comprehensive income
    
    
    649
    
    
    
    445
    
    
    
    212Total shareholders equity
    
    
    41,864
    
    
    
    41,552
    
    
    
    39,633TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    466,375
    
    
    $
    451,431
    
    
    $
    417,175
  1.




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Three Months EndedMarch 31,2009
    
    
    2008(Unaudited)
    
    
    (Unaudited)INTEREST INCOME:Interest and fees on loans:Taxable
    
    $
    5,002
    
    
    $
    6,100Tax-exempt
    
    
    90
    
    
    
    108Interest on securities:Taxable
    
    
    459
    
    
    
    266Tax-exempt
    
    
    1
    
    
    
    1Other interest income
    
    
    2
    
    
    
    89Total interest income
    
    
    5,554
    
    
    
    6,564INTEREST EXPENSE:Deposits
    
    
    1,778
    
    
    
    3,065Borrowings
    
    
    281
    
    
    
    454Total interest expense
    
    
    2,059
    
    
    
    3,519Net interest income
    
    
    3,495
    
    
    
    3,045Provision for loan losses
    
    
    550
    
    
    
    Net interest income after provision for loan losses
    
    
    2,945
    
    
    
    3,045NONINTEREST INCOME:Service fees
    
    
    243
    
    
    
    174Net security gains
    
    
    
    
    
    
    65Net gains on sale of secondary market loans
    
    
    58
    
    
    
    48Other
    
    
    90
    
    
    
    23Total noninterest income
    
    
    391
    
    
    
    310NONINTEREST EXPENSE:Salaries and employee benefits
    
    
    1,597
    
    
    
    1,807Occupancy
    
    
    378
    
    
    
    355Furniture and equipment
    
    
    189
    
    
    
    178Data processing
    
    
    220
    
    
    
    221Professional service fees
    
    
    153
    
    
    
    153Loan and deposit
    
    
    136
    
    
    
    101FDIC insurance assessment
    
    
    125
    
    
    
    9Telephone
    
    
    43
    
    
    
    45Advertising
    
    
    78
    
    
    
    60Other
    
    
    320
    
    
    
    262Total noninterest expense
    
    
    3,239
    
    
    
    3,191Income before provision for income taxes
    
    
    97
    
    
    
    164Provision for income taxes
    
    
    7
    
    
    
    25NET INCOME
    
    $
    90
    
    
    $
    139INCOME PER COMMON SHARE:Basic
    
    $
    .03
    
    
    $
    .04Diluted
    
    $
    .03
    
    
    $
    .04
  2.




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Three Months EndedMarch 31,2009
    
    
    2008Balance, beginning of period
    
    $
    41,552
    
    
    $
    39,321Net income for period
    
    
    90
    
    
    
    139Stock option compensation
    
    
    18
    
    
    
    21Net unrealized gain on securities available for sale
    
    
    204
    
    
    
    152Total comprehensive income
    
    
    312
    
    
    
    312Balance, end of period
    
    $
    41,864
    
    
    $
    39,633
  3.




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Three Months EndedMarch 31,2009
    
    
    2008Cash Flows from Operating Activities:Net income
    
    $
    90
    
    
    $
    139Adjustments to reconcile net income to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    448
    
    
    
    273Provision for loan losses
    
    
    550
    
    
    
    Provision for (benefit of) deferred taxes
    
    
    7
    
    
    
    25(Gain) on sales/calls of securities available for sale
    
    
    
    
    
    
    (65
    )(Gain) loss on sale of premises, equipment other real estate
    
    
    1
    
    
    
    (6
    )Writedown of other real estate
    
    
    
    
    
    
    72Stock option compensation
    
    
    18
    
    
    
    21Change in other assets
    
    
    (292
    )
    
    
    173Change in other liabilities
    
    
    (28
    )
    
    
    (136
    )Net cash provided by operating activities
    
    
    794
    
    
    
    496Cash Flows from Investing Activities:Net (increase) in loans
    
    
    (541
    )
    
    
    (5,214
    )Net decrease in interest-bearing deposits in other financial institutions
    
    
    13
    
    
    
    1,428Purchase of securities available for sale
    
    
    (4,683
    )
    
    
    (25,429
    )Proceeds from sales, maturities or calls of securities available for sale
    
    
    1,253
    
    
    
    22,761Capital expenditures
    
    
    (251
    )
    
    
    (145
    )Proceeds from sale of premises, equipment, and other real estate
    
    
    37
    
    
    
    38Net cash (used in) investing activities
    
    
    (4,172
    )
    
    
    (6,561
    )Cash Flows from Financing Activities:Net increase in deposits
    
    
    14,660
    
    
    
    5,220Net increase in federal funds purchased
    
    
    
    
    
    
    2,700Net increase in line of credit
    
    
    
    
    
    
    200Net cash provided by financing activities
    
    
    14,660
    
    
    
    8,120Net increase in cash and cash equivalents
    
    
    11,282
    
    
    
    2,055Cash and cash equivalents at beginning of period
    
    
    10,112
    
    
    
    6,362Cash and cash equivalents at end of period
    
    $
    21,394
    
    
    $
    8,417Supplemental Cash Flow Information:Cash paid during the year for:Interest
    
    $
    2,143
    
    
    $
    2,073Income taxes
    
    
    30
    
    
    
    15Noncash 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)
    
    
    485
    
    
    
    57
  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, 2009 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2009. 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, 2008.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 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
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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.
These two 1997 plans expired early in 2007. 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 $18,000 for the three months
ended March 31, 2009 and $21,000 for the same period in 2008. The expense recorded recognizes
the current period vesting of options outstanding. The per share impact of this accounting
change was $.01 in the first quarter of 2009 and 2008.2.
    
    RECENT ACCOUNTING PRONOUNCEMENTSIn April 2009, the FASB issued the following three FSPs intended to provide additional
application guidance and enhance disclosures regarding fair value measurements and impairments
of securities:FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,
provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the
volume and level of activity for the asset or liability have decreased significantly. FSP FAS
157-4 also provides guidance on identifying circumstances that indicate a transaction is not
orderly. The provisions of FSP FAS 157-4 are effective for the Corporations interim period
ending on June 30, 2009. Management is currently evaluating the effect that the provisions of
FSP FAS 157-4 may have on the Corporations statements of income and condition.FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments,
requires disclosures about fair value of financial instruments in interim reporting periods of
publicly traded companies that were previously only required to be disclosed in annual financial
statements. The provisions of FSP FAS 107-1 and APB 28-1 are effective for the Corporations
interim period ending on June 30, 2009. As FSP FAS 107-1 and APB 28-1 amends only the
disclosure requirements about fair value of financial instruments in interim periods, the
adoption of FSP FAS 107-1 and APB 28-1 is not expected to affect the Corporations statements of
income and condition.FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments,
amends current other-than-temporary impairment guidance in GAAP for debt securities to make the
guidance more operational and to improve the presentations and disclosure of
other-than-temporary impairments on debt and equity securities in the financial statements.
This FSP does not amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities. The provisions of FSP FAS 115-2 and FAS
124-2 are effective for the Corporations interim period ending on June 30, 2009. Management is
currently evaluating the effect that the provisions FSP FAS 115-2 and FAS 124-2 may have on the
Corporations statements of income and condition.
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3.
    
    EARNINGS PER SHAREEarnings per share are based upon the weighted average number of shares outstanding. Additional
 shares issued as a result of option exercises would not be dilutive in either three month
period.The following shows the computation of basic and diluted earnings per share for the three months
ended March 31, 2009 and 2008 (dollars in thousands, except per share data):
 Three Months Ended
    
    
    
    
    
    Weighted Average
    
    
    IncomeMarch 31,
    
    Net Income
    
    
    Number of Shares
    
    
    Per Share2009Income per share  Basic and diluted
    
    $
    90
    
    
    
    3,419,736
    
    
    $
    .032008Income per share  Basic and diluted
    
    $
    139
    
    
    
    3,428,695
    
    
    $
    .04
 4.
    
    INVESTMENT SECURITIESThe amortized cost and estimated fair value of investment securities available for sale as of
March 31, 2009, December 31, 2008, and March 31, 2008 are as follows (dollars in thousands):
 March 31, 2009
    
    
    December 31, 2008
    
    
    March 31, 2008Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    EstimatedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueUS Agencies  MBS
    
    $
    44,904
    
    
    $
    45,915
    
    
    $
    46,316
    
    
    $
    46,941
    
    
    $
    23,704
    
    
    $
    23,933Asset backed-government guaranteed
    
    
    4,684
    
    
    
    4,610
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Obligations of states and political
subdivisions
    
    
    498
    
    
    
    546
    
    
    
    498
    
    
    
    549
    
    
    
    555
    
    
    
    648Total securities available for sale
    
    $
    50,086
    
    
    $
    51,071
    
    
    $
    46,814
    
    
    $
    47,490
    
    
    $
    24,259
    
    
    $
    24,581
 The amortized cost and estimated fair value of investment securities pledged to secure FHLB
borrowings and customer relationships were $19.057 million and $19.533 million respectively at
March 31, 2009.
 7.




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5.
    
    LOANSThe composition of loans at March 31, 2009, December 31, 2008, and March 31, 2008 is as follows
(dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2008Commercial real estate
    
    $
    191,721
    
    
    $
    185,241
    
    
    $
    185,514Commercial, financial and agricultural
    
    
    77,216
    
    
    
    79,734
    
    
    
    78,913One to four family residential real estate
    
    
    65,792
    
    
    
    65,595
    
    
    
    59,532Construction:Commercial
    
    
    26,658
    
    
    
    31,113
    
    
    
    27,553Consumer
    
    
    5,762
    
    
    
    4,852
    
    
    
    5,092Consumer
    
    
    3,627
    
    
    
    3,745
    
    
    
    3,452Total loans
    
    $
    370,776
    
    
    $
    370,280
    
    
    $
    360,056
 LOANS  Allowance for loan lossesAn analysis of the allowance for loan losses for the three months ended March 31, 2009, the year
ended December 31, 2008, and the three months ended March 31, 2008 is as follows (dollars in
thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2008Balance at beginning of period
    
    $
    4,277
    
    
    $
    4,146
    
    
    $
    4,146Recoveries on loans
    
    
    39
    
    
    
    121
    
    
    
    4Loans charged off
    
    
    (73
    )
    
    
    (2,290
    )
    
    
    (226
    )Provision for loan losses
    
    
    550
    
    
    
    2,300
    
    
    
    Balance at end of period
    
    $
    4,793
    
    
    $
    4,277
    
    
    $
    3,924
 In the first quarter of 2009, net charge-off activity was $34,000, or .01% of average loans
outstanding compared to net charge-offs of $222,000, or .06% of average loans, in the first
quarter of 2008. In the first quarter of 2009, the Corporation recorded a provision for loan
loss in the amount of $.550 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. The interest income recorded and that
which would have been recorded had nonaccrual and renegotiated loans been current or not
troubled was not material to the consolidated financial statements for the three months ended
March 31, 2009 and 2008.
 8.




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5.
    
    LOANS (Continued)Information regarding impaired loans as of March 31, 2009, December 31, 2008, and March 31, 2008
is as follows (dollars in thousands):
 Valuation ReserveMarch 31,
    
    
    December 31,
    
    
    March 31,
    
    
    March 31,
    
    
    December 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2008Balances, at period endImpaired loans with specific valuation reserve
    
    $
    11,065
    
    
    $
    3,730
    
    
    $
    3,277
    
    
    $
    2,162
    
    
    $
    994
    
    
    $
    1,139Impaired loans with no specific valuation reserve
    
    
    1,396
    
    
    
    1,157
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    12,461
    
    
    $
    4,887
    
    
    $
    3,381
    
    
    $
    2,162
    
    
    $
    994
    
    
    $
    1,139Impaired loans on nonaccrual basis
    
    $
    12,461
    
    
    $
    4,887
    
    
    $
    3,381
    
    
    $
    2,162
    
    
    $
    994
    
    
    $
    1,139Impaired loans on accrual basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total impaired loans
    
    $
    12,461
    
    
    $
    4,887
    
    
    $
    3,381
    
    
    $
    2,162
    
    
    $
    994
    
    
    $
    1,139Average investment in impaired loans
    
    $
    8,323
    
    
    $
    4,834
    
    
    $
    3,915Interest income recognized during impairment
    
    
    6
    
    
    
    60
    
    
    
    22Interest income that would have been recognized
on an accrual basis
    
    
    153
    
    
    
    377
    
    
    
    94Cash-basis interest income recognized
    
    
    6
    
    
    
    60
    
    
    
    22
 The average investment in impaired loans was approximately $8.323 million for the three-months
ended March 31, 2009, $4.834 million for the year ended December 31, 2008, and $3.915 million
for the three months ended March 31, 2008, respectively. 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.Activity in such loans is summarized below (dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2008Loans outstanding, beginning of period
    
    $
    6,516
    
    
    $
    1,720
    
    
    $
    1,720New loans
    
    
    
    
    
    
    372
    
    
    
    Net activity on revolving lines of credit
    
    
    356
    
    
    
    2,378
    
    
    
    Repayment
    
    
    (104
    )
    
    
    (687
    )
    
    
    (14
    )Change in related party interest
    
    
    
    
    
    
    2,733
    
    
    
    2,733Loans outstanding, end of period
    
    $
    6,768
    
    
    $
    6,516
    
    
    $
    4,439
 There were no loans to related parties classified substandard at March 31, 2009, December 31,
2008, and March 31, 2008 respectively. In addition to the outstanding balances above, there
were unused commitments of $.197 million to related parties at March 31, 2009.
 9.




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6.
    
    SHORT-TERM BORROWINGSShort-term borrowings consist of the following at March 31, 2009, December 31, 2008, and March
31, 2008 (dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2008Fed funds purchased
    
    $
    
    
    
    $
    
    
    
    $
    10,410Advance outstanding on line of
credit with a correspondent
bank, interest payable
at the prime rate 3.25% as of
March 31, 2009, matured
November 30, 2008.
    
    
    
    
    
    
    
    
    
    
    2,159$
    
    
    
    $
    
    
    
    $
    12,569
 7.
    
    LONG-TERM BORROWINGSLong-term borrowings consist of the following at March 31, 2009,
December 31, 2008 and March 31, 2008 (dollars in thousands):
 March 31,
    
    
    December 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2008Federal Home Loan Bank fixed
rate advances at rates ranging
from 4.98% to 5.16%
maturing in 2010
    
    $
    15,000
    
    
    $
    15,000
    
    
    $
    15,000Federal Home Loan Bank variable
rate advances at rates ranging
from 1.25% to 1.37%
maturing in 2011
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,000Farmers Home Administration,
fixed-rate note payable,
maturing August 24, 2024
interest payable at 1%
    
    
    1,210
    
    
    
    1,210
    
    
    
    1,280$
    36,210
    
    
    $
    36,210
    
    
    $
    36,280
 The Federal Home Loan Bank borrowings are collateralized at March 31, 2009 by the following: a
collateral agreement on the Corporations one to four family residential real estate loans with
a book value of approximately $25.782 million; mortgage related and municipal securities with an
amortized cost and estimated fair value of $18.870 million and $19.107 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, 2009.The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $.317 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 $.996 million and guaranteed by the
Corporation.
 10.




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8.
    
    STOCK OPTION PLANSA summary of stock option transactions for the three months ended March 31, 2009 and 2008 and
the year ended December 31, 2008, is as follows:
 March 31,
    
    
    December 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2008Outstanding shares, at beginning of period
    
    
    446,237
    
    
    
    446,417
    
    
    
    446,417Granted during the period
    
    
    
    
    
    
    
    
    
    
    Expired/forfeited during the period
    
    
    (35,000
    )
    
    
    (180
    )
    
    
    Outstanding shares at end of period
    
    
    411,237
    
    
    
    446,237
    
    
    
    446,417Weighted average exercise price per share
at end of period
    
    $
    12.20
    
    
    $
    12.14
    
    
    $
    12.29Shares available for grant, at end of period
    
    
    24,780
    
    
    
    18,488
    
    
    
    18,488
 There were no options granted or exercised in the first quarter of 2009 or 2008.Following is a summary of the options outstanding and exercisable at March 31, 2009:
 WeightedAverage
    
    
    WeightedRemaining
    
    
    AverageExercise
    
    Number of Shares
    
    
    Contractual
    
    
    ExercisePrice Range
    
    Outstanding
    
    
    Exercisable
    
    
    Life-Years
    
    
    Price$9.16
    
    
    12,500
    
    
    
    5,000
    
    
    
    6.7
    
    
    $
    9.16$9.75
    
    
    257,152
    
    
    
    120,861
    
    
    
    5.7
    
    
    
    9.75$10.65
    
    
    57,500
    
    
    
    11,500
    
    
    
    7.7
    
    
    
    10.65$11.50
    
    
    40,000
    
    
    
    8,000
    
    
    
    6.5
    
    
    
    11.50$12.00
    
    
    40,000
    
    
    
    8,000
    
    
    
    6.2
    
    
    
    12.00$156.00 - $240.00
    
    
    3,545
    
    
    
    3,545
    
    
    
    2.0
    
    
    
    186.75$300.00 - $400.00
    
    
    540
    
    
    
    540
    
    
    
    .7
    
    
    
    333.33411,237
    
    
    
    157,446
    
    
    
    6.1
    
    
    $
    12.20
 9.
    
    INCOME TAXESA valuation allowance is provided against deferred tax assets when it is more likely than not
that some or all of the deferred tax asset will not be realized. At March 31, 2009, the
Corporation evaluated the valuation allowance against the net deferred tax asset which would
require future taxable income in order to be utilized. The Corporation, as of March 31, 2009
had a net operating loss and tax credit carryforwards for tax purposes of approximately $32.1
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 $500,000 tax benefit and utilized additional NOL
carryforwards to offset current taxable income. The recognition of the deferred tax
 11.




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9.
    
    INCOME TAXES (Continued)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.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 $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.
    
    FAS 157  FAIR VALUE MEASUREMENTSThe following tables present information about the Corporations assets and liabilities measured
at fair value on a recurring basis at March 31, 2009, and the valuation techniques used by the
Corporation to determine those fair values.
 Level 1:
    
    In general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical assets or liabilities that the Corporation has the ability to access.Level 2:
    
    Fair values determined by Level 2 inputs use other inputs that are observable,
either directly or indirectly. These Level 2 inputs include quoted prices for similar
assets and liabilities in active markets, and other inputs such as interest rates and yield
curves that are observable at commonly quoted intervals.Level 3:
    
    Level 3 inputs are unobservable inputs, including inputs available in situations
where there is little, if any, market activity for the related asset or liability.
 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.Disclosures concerning assets and liabilities measured at fair value are as follows (dollars in
thousands):
 Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2009
 Quoted Prices in Active
    
    Significant Other
    
    SignificantMarkets for Identical
    
    Observable Inputs
    
    Unobservable Inputs
    
    Balance atAssets (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    March 31, 2009AssetsInvestment securities  available for sale
    
    $
    51,003
    
    
    $
    68
    
    
    $
    
    
    
    $
    51,071LiabilitiesNone
 The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31,
2008 or March 31, 2009.
 12.




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10.
    
    FAS 157  FAIR VALUE MEASUREMENTS (Continued)The Corporation also has assets that under certain conditions are subject to measurement at fair
value on a non-recurring basis. 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
 Quoted Prices
    
    
    Significant
    
    
    Significantin Active Markets
    
    
    Other Observable
    
    
    Unobservable
    
    
    Total Losses forBalance at
    
    
    for Identical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    the Period EndedMarch 31, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    March 31, 2009AssetsImpaired loans
accounted for under
FAS 114
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,789
    
    
    $
    37$
    37
 The Corporation had no investments subject to fair value measurement on a nonrecurring basis.Impaired loans accounted for under FAS 114 categorized as Level 3 assets consist of
non-homogeneous loans that are considered impaired. 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).11.
    
    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 31,2009
    
    
    2008
    
    
    2008Commitments to extend credit:Variable rate
    
    $
    34,801
    
    
    $
    40,036
    
    
    $
    40,993Fixed rate
    
    
    9,059
    
    
    
    4,487
    
    
    
    10,773Standby letters of credit  Variable rate
    
    
    1,589
    
    
    
    1,838
    
    
    
    6,089Credit card commitments  Fixed rate
    
    
    2,477
    
    
    
    2,438
    
    
    
    2,463$
    47,926
    
    
    $
    48,799
    
    
    $
    60,318
 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
 13.




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11.
    
    COMMITMENTS, CONTINGENCIES, AND CREDIT RISK(Continued)being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customers creditworthiness on a case-by-case
basis. The amount of collateral
obtained, if deemed necessary by the Corporation upon extension of credit, is based on
managements credit evaluation of the party. Collateral held varies, but may include accounts
receivable, inventory, property, plant and equipment, and income-producing commercial
properties.Standby letters of credit are conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers. The
commitments are structured to allow for 100% collateralization on all standby letters of credit.Credit card commitments are commitments on credit cards issued by the Corporations subsidiary
and serviced by other companies. These commitments are unsecured.ContingenciesIn the normal course of business, the Corporation is involved in various legal proceedings. For
expanded discussion on the Corporations legal proceedings, see Part II, Item 1, Legal
Proceedings in this report.Concentration of Credit RiskThe Bank grants commercial, residential, agricultural, and consumer loans throughout Michigan.
The Banks most prominent concentration in the loan portfolio relates to commercial real estate
loans to operators of nonresidential buildings. This concentration at March 31, 2009 represents
$40.457 million, or 13.69%, compared to $43.167 million, or 14.78%, of the commercial loan
portfolio on March 31, 2008. 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.
    
    SUBSEQUENT EVENTS  TARPParticipation in the TARP Capital Purchase ProgramAs previously announced, on 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 $11,000,000 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
 14.




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##### Table of Contents



12.
    
    SUBSEQUENT EVENTS  TARP (Continued)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).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 will be used to increase the strong capital position of the Bank. The Bank will
use the capital to grow loans. In addition, the capital will allow the Corporation to consider
acquisitions of deposit franchisees that would enhance our funding mix.
 15.




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##### Table of Contents



ITEM 2 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.
  16.




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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
  17.




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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 of2009
    
    
    Total
    
    
    2008
    
    
    Total
    
    
    2008
    
    
    TotalCommercial real estate
    
    $
    191,721
    
    
    
    51.71
    %
    
    $
    185,241
    
    
    
    50.03
    %
    
    $
    185,514
    
    
    
    51.52
    %Commercial, financial, and agricultural
    
    
    77,216
    
    
    
    20.83
    
    
    
    79,734
    
    
    
    21.53
    
    
    
    78,913
    
    
    
    21.921-4 family residential real estate
    
    
    65,792
    
    
    
    17.74
    
    
    
    65,595
    
    
    
    17.71
    
    
    
    59,532
    
    
    
    16.53Consumer
    
    
    3,627
    
    
    
    .98
    
    
    
    4,852
    
    
    
    1.31
    
    
    
    3,452
    
    
    
    .96ConstructionCommercial
    
    
    26,658
    
    
    
    7.19
    
    
    
    31,113
    
    
    
    8.40
    
    
    
    27,553
    
    
    
    7.66Consumer
    
    
    5,762
    
    
    
    1.55
    
    
    
    3,745
    
    
    
    1.01
    
    
    
    5,092
    
    
    
    1.41Total loans
    
    $
    370,776
    
    
    
    100.00
    %
    
    $
    370,280
    
    
    
    100.00
    %
    
    $
    360,056
    
    
    
    100.00
    %
  March 31, 2009
    
    
    December 31, 2008
    
    
    March 31, 2008Percent 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
    
    $
    40,457
    
    
    
    13.69
    %
    
    
    96.64
    %
    
    $
    41,299
    
    
    
    13.95
    %
    
    
    99.39
    %
    
    $
    43,167
    
    
    
    14.78
    %
    
    
    108.92
    %Hospitality and tourism
    
    
    35,224
    
    
    
    11.91
    
    
    
    84.14
    
    
    
    35,086
    
    
    
    11.85
    
    
    
    84.44
    
    
    
    35,760
    
    
    
    12.25
    
    
    
    90.23Real estate agents and managers
    
    
    28,012
    
    
    
    9.48
    
    
    
    66.91
    
    
    
    29,292
    
    
    
    9.89
    
    
    
    70.50
    
    
    
    30,235
    
    
    
    10.36
    
    
    
    76.29Commercial construction
    
    
    26,658
    
    
    
    9.02
    
    
    
    63.68
    
    
    
    31,113
    
    
    
    10.51
    
    
    
    74.88
    
    
    
    27,553
    
    
    
    9.44
    
    
    
    69.52Other
    
    
    165,244
    
    
    
    55.90
    
    
    
    394.72
    
    
    
    159,298
    
    
    
    53.80
    
    
    
    383.37
    
    
    
    155,265
    
    
    
    53.17
    
    
    
    391.76Total Commercial Loans
    
    $
    295,595
    
    
    
    100.00
    %
    
    
    
    
    
    $
    296,088
    
    
    
    100.00
    %
    
    
    
    
    
    $
    291,980
    
    
    
    100.00
    %
  Credit Quality
  18.




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
  March 31,
    
    
    December 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2008Nonperforming Assets:Nonaccrual loans
    
    $
    12,461
    
    
    $
    4,887
    
    
    $
    3,381Loans past due 90 days or more
    
    
    
    
    
    
    
    
    
    
    Restructured loans
    
    
    592
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    13,053
    
    
    
    4,887
    
    
    
    3,381Other real estate owned
    
    
    2,199
    
    
    
    2,189
    
    
    
    1,137Total nonperforming assets
    
    $
    15,252
    
    
    $
    7,076
    
    
    $
    4,518Nonperforming loans as a % of loans
    
    
    3.52
    %
    
    
    1.32
    %
    
    
    .94
    %Nonperforming assets as a % of assets
    
    
    3.27
    %
    
    
    1.57
    %
    
    
    1.08
    %Reserve for Loan Losses:At period end
    
    $
    4,793
    
    
    $
    4,277
    
    
    $
    3,924As a % average of loans
    
    
    1.29
    %
    
    
    1.16
    %
    
    
    1.09
    %As a % of nonperforming loans
    
    
    36.72
    %
    
    
    87.52
    %
    
    
    116.06
    %As a % of nonaccrual loans
    
    
    38.46
    %
    
    
    87.52
    %
    
    
    116.06
    %
  March 31,
    
    
    December 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2008Total loans, at period end
    
    $
    370,776
    
    
    $
    370,280
    
    
    $
    360,056Average loans for the year
    
    
    370,943
    
    
    
    361,324
    
    
    
    357,778Allowance for loan losses
    
    
    4,793
    
    
    
    4,277
    
    
    
    3,924Allowance to total loans at period end
    
    
    1.29
    %
    
    
    1.16
    %
    
    
    1.09
    %Net charge-offs during the period
    
    $
    34
    
    
    $
    2,169
    
    
    $
    222Net charge-offs to average loans
    
    
    .01
    %
    
    
    .60
    %
    
    
    .06
    %Net charge-offs to beginning allowance balance
    
    
    .79
    %
    
    
    52.32
    %
    
    
    5.35
    %
  19.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
  MostRecent
    
    
    ReserveCollateral Type
    
    Balance
    
    
    Apprasial
    
    
    AllocationNonaccrual LoansNon-farm / non-residential (SEM)
    
    $
    5,180
    
    
    $
    5,705
    
    
    $
    535Land development (SEM)
    
    
    2,754
    
    
    
    2,850
    
    
    
    620Non-farm / non-residential (NLP)
    
    
    1,072
    
    
    
    1,888
    
    
    
    25Construction / development (SEM)
    
    
    1,000
    
    
    
    460
    
    
    
    400Construction / development (NLP)
    
    
    490
    
    
    
    485
    
    
    
    50Cabins / land (NLP)
    
    
    454
    
    
    
    425
    
    
    
    Land development (NLP)
    
    
    443
    
    
    
    N/A
    
    
    
    350Non-farm/non-residential (UP)
    
    
    344
    
    
    
    575
    
    
    
    31Conv 5+ residential properties (UP)
    
    
    296
    
    
    
    413
    
    
    
    1001-4 family (UP)
    
    
    159
    
    
    
    217
    
    
    
    Commercial general / unsecured (SEM)
    
    
    120
    
    
    
    N/A
    
    
    
    1-4 family (NLP)
    
    
    69
    
    
    
    163
    
    
    
    Business equipment (UP)
    
    
    46
    
    
    
    25
    
    
    
    29Land (NLP)
    
    
    34
    
    
    
    130
    
    
    
    Total nonaccrual loans
    
    
    12,461
    
    
    
    13,336
    
    
    
    2,140Restructured LoansNon-farm / non-residential (UP)
    
    
    592
    
    
    
    920
    
    
    
    5Other Real EstateLand development / condo (NLP)
    
    
    630
    
    
    
    700
    
    
    
    Land development (NLP)
    
    
    510
    
    
    
    682
    
    
    
    Non-farm / non-residential (SEM)
    
    
    508
    
    
    
    620
    
    
    
    1-4 family (UP)
    
    
    380
    
    
    
    460
    
    
    
    31Non-farm / non-residential (UP)
    
    
    94
    
    
    
    118
    
    
    
    Downtown store frontage / 2 / 1-4 family (UP)
    
    
    77
    
    
    
    85
    
    
    
    Total other real estate owned
    
    
    2,199
    
    
    
    2,665
    
    
    
    31Total nonperforming assets
    
    $
    15,252
    
    
    $
    16,921
    
    
    $
    2,176REGIONAL
BREAKOUT OF NONPERFORMING ASSETSNLP  NORTHERN LOWER PENINSULA
    
    $
    3,702
    
    
    $
    4,473
    
    
    $
    425UP  UPPER PENINSULA
    
    
    1,988
    
    
    
    2,813
    
    
    
    196SEM  SOUTHEAST MICHIGAN
    
    
    9,562
    
    
    
    9,635
    
    
    
    1,555TOTAL
    
    $
    15,252
    
    
    $
    16,921
    
    
    $
    2,176
  20.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
  March 31,
    
    
    December 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2008Commercial, financial, and agricultural loans
    
    $
    4,315
    
    
    $
    3,819
    
    
    $
    3,615One to four family residential real estate loans
    
    
    35
    
    
    
    27
    
    
    
    25Consumer loans
    
    
    13
    
    
    
    40
    
    
    
    9Unallocated and general reserves
    
    
    430
    
    
    
    391
    
    
    
    275Totals
    
    $
    4,793
    
    
    $
    4,277
    
    
    $
    3,924
    Three Months Ended
    
    
    Year Ended
    
    
    Three Months EndedMarch 31, 2009
    
    
    December 31, 2008
    
    
    March 31, 2008Balance at beginning of period
    
    $
    2,189
    
    
    $
    1,226
    
    
    $
    1,226Other real estate transferred from loans due to foreclosure
    
    
    485
    
    
    
    2,849
    
    
    
    16Reclassification of redemption OREO
    
    
    (475
    )
    
    
    
    
    
    
    Other real estate sold/written down
    
    
    
    
    
    
    (1,886
    )
    
    
    (105
    )Balance at end of period
    
    $
    2,199
    
    
    $
    2,189
    
    
    $
    1,137
  Deposits
   21.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
  March 31,
    
    
    
    
    
    
    December 31,
    
    
    
    
    
    
    March 31,2009
    
    
    % of Total
    
    
    2008
    
    
    % of Total
    
    
    2008
    
    
    % of TotalNoninterest bearing
    
    $
    31,541
    
    
    
    8.17
    %
    
    $
    30,099
    
    
    
    8.11
    %
    
    $
    26,876
    
    
    
    8.24
    %NOW, money market, checking
    
    
    75,026
    
    
    
    19.45
    
    
    
    70,584
    
    
    
    19.02
    
    
    
    81,952
    
    
    
    25.14Savings
    
    
    19,585
    
    
    
    5.08
    
    
    
    20,730
    
    
    
    5.59
    
    
    
    11,530
    
    
    
    3.54Certificates of Deposit <$100,000
    
    
    70,708
    
    
    
    18.33
    
    
    
    73,752
    
    
    
    19.87
    
    
    
    83,087
    
    
    
    25.48Total core deposits
    
    
    196,860
    
    
    
    51.03
    
    
    
    195,165
    
    
    
    52.59
    
    
    
    203,445
    
    
    
    62.40Certificates of Deposit >$100,000
    
    
    26,886
    
    
    
    6.97
    
    
    
    25,044
    
    
    
    6.75
    
    
    
    22,010
    
    
    
    6.75Brokered CDs
    
    
    162,011
    
    
    
    42.00
    
    
    
    150,888
    
    
    
    40.66
    
    
    
    100,592
    
    
    
    30.85Total non-core deposits
    
    
    188,897
    
    
    
    48.97
    
    
    
    175,932
    
    
    
    47.41
    
    
    
    122,602
    
    
    
    37.60Total deposits
    
    $
    385,757
    
    
    
    100.00
    %
    
    $
    371,097
    
    
    
    100.00
    %
    
    $
    326,047
    
    
    
    100.00
    %
 Borrowings
  Shareholders Equity
  RESULTS OF OPERATIONS
 Summary
  Net Interest Income
   22.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
   Three Months Ended2009-2008Average Balances
    
    
    Average Rates
    
    
    Interest
    
    
    Income/
    
    
    
    
    
    
    
    
    
    
    Rate/March 31,
    
    
    Increase/
    
    
    March 31,
    
    
    March 31,
    
    
    Expense
    
    
    Volume
    
    
    Rate
    
    
    Volume(dollars in thousands)
    
    2009
    
    
    2008
    
    
    (Decrease)
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    Variance
    
    
    Variance
    
    
    Variance
    
    
    VarianceLoans (1,2,3)
    
    $
    370,943
    
    
    $
    357,778
    
    
    $
    13,165
    
    
    
    5.62
    %
    
    
    7.04
    %
    
    $
    5,138
    
    
    $
    6,264
    
    
    $
    (1,126
    )
    
    $
    231
    
    
    $
    (1,270
    )
    
    $
    (87
    )Taxable securities
    
    
    47,495
    
    
    
    23,899
    
    
    
    23,596
    
    
    
    3.92
    
    
    
    4.48
    
    
    
    459
    
    
    
    266
    
    
    
    193
    
    
    
    263
    
    
    
    (33
    )
    
    
    (37
    )Nontaxable securities (2)
    
    
    68
    
    
    
    73
    
    
    
    (5
    )
    
    
    11.93
    
    
    
    11.02
    
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Federal funds sold
    
    
    
    
    
    
    5,360
    
    
    
    (5,360
    )
    
    
    
    
    
    
    3.15
    
    
    
    
    
    
    
    42
    
    
    
    (42
    )
    
    
    (42
    )
    
    
    (42
    )
    
    
    42Other interest-earning assets
    
    
    4,367
    
    
    
    4,688
    
    
    
    (321
    )
    
    
    .19
    
    
    
    4.03
    
    
    
    2
    
    
    
    47
    
    
    
    (45
    )
    
    
    (3
    )
    
    
    (45
    )
    
    
    3Total earning assets
    
    
    422,873
    
    
    
    391,798
    
    
    
    31,075
    
    
    
    5.37
    
    
    
    6.80
    
    
    
    5,601
    
    
    
    6,621
    
    
    
    (1,020
    )
    
    
    449
    
    
    
    (1,390
    )
    
    
    (79
    )Reserve for loan losses
    
    
    (4,405
    )
    
    
    (4,079
    )
    
    
    (326
    )Cash and due from banks
    
    
    13,345
    
    
    
    6,201
    
    
    
    7,144Intangible assets
    
    
    35
    
    
    
    113
    
    
    
    (78
    )Other assets
    
    
    22,892
    
    
    
    23,649
    
    
    
    (757
    )Total assets
    
    $
    454,740
    
    
    $
    417,682
    
    
    $
    37,058NOW and money market deposits
    
    $
    68,252
    
    
    $
    81,834
    
    
    $
    (13,582
    )
    
    
    .78
    
    
    
    2.17
    
    
    
    131
    
    
    
    442
    
    
    
    (311
    )
    
    
    (74
    )
    
    
    (284
    )
    
    
    47Interest checking
    
    
    4,354
    
    
    
    
    
    
    
    4,354
    
    
    
    1.96
    
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    21Savings deposits
    
    
    19,718
    
    
    
    12,026
    
    
    
    7,692
    
    
    
    .82
    
    
    
    .84
    
    
    
    40
    
    
    
    25
    
    
    
    15
    
    
    
    16
    
    
    
    
    
    
    
    (1
    )CDs <$100,000
    
    
    71,677
    
    
    
    82,546
    
    
    
    (10,869
    )
    
    
    3.13
    
    
    
    4.30
    
    
    
    553
    
    
    
    951
    
    
    
    (398
    )
    
    
    (126
    )
    
    
    (310
    )
    
    
    38CDs >$100,000
    
    
    25,752
    
    
    
    23,151
    
    
    
    2,601
    
    
    
    2.77
    
    
    
    4.57
    
    
    
    176
    
    
    
    263
    
    
    
    (87
    )
    
    
    30
    
    
    
    (104
    )
    
    
    (13
    )Brokered deposits
    
    
    151,955
    
    
    
    110,024
    
    
    
    41,931
    
    
    
    2.29
    
    
    
    5.05
    
    
    
    857
    
    
    
    1,384
    
    
    
    (527
    )
    
    
    529
    
    
    
    (760
    )
    
    
    (296
    )Borrowings
    
    
    36,648
    
    
    
    39,382
    
    
    
    (2,734
    )
    
    
    3.11
    
    
    
    4.64
    
    
    
    281
    
    
    
    454
    
    
    
    (173
    )
    
    
    (32
    )
    
    
    (150
    )
    
    
    9Total interest-bearing liabilities
    
    
    378,356
    
    
    
    348,963
    
    
    
    29,393
    
    
    
    2.21
    
    
    
    4.06
    
    
    
    2,059
    
    
    
    3,519
    
    
    
    (1,460
    )
    
    
    343
    
    
    
    (1,608
    )
    
    
    (195
    )Demand deposits
    
    
    30,961
    
    
    
    26,435
    
    
    
    4,526Other liabilities
    
    
    3,610
    
    
    
    2,793
    
    
    
    817Shareholders equity
    
    
    41,813
    
    
    
    39,491
    
    
    
    2,322Total liabilities and
shareholders equity
    
    $
    454,740
    
    
    $
    417,682
    
    
    $
    37,058Rate spread
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.16
    %
    
    
    2.74
    %Net interest margin/revenue, tax equivalent basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.40
    %
    
    
    3.18
    %
    
    $
    3,542
    
    
    $
    3,102
    
    
    $
    440
    
    
    $
    106
    
    
    $
    218
    
    
    $
    116
 
 (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
  23.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 Other Income
   Three Months EndedMarch 31,Increase/(Decrease)2009
    
    
    2008
    
    
    Dollars
    
    
    PercentService fees
    
    $
    243
    
    
    $
    174
    
    
    $
    69
    
    
    
    39.66
    %Net gains on loan sales
    
    
    58
    
    
    
    48
    
    
    
    10
    
    
    
    20.83Other
    
    
    90
    
    
    
    23
    
    
    
    67
    
    
    
    291.30Subtotal
    
    
    391
    
    
    
    245
    
    
    
    146
    
    
    
    59.59Net security gain (loss)
    
    
    
    
    
    
    65
    
    
    
    (65
    )
    
    
    100.00Total noninterest income
    
    $
    391
    
    
    $
    310
    
    
    $
    81
    
    
    
    26.13
    %
 Other Expenses
  24.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
  Three Months EndedMarch 31,Increase/(Decrease)2009
    
    
    2008
    
    
    Dollars
    
    
    PercentSalaries and employee benefits
    
    $
    1,597
    
    
    $
    1,807
    
    
    $
    (210
    )
    
    
    (11.62
    )%Occupancy
    
    
    378
    
    
    
    355
    
    
    
    23
    
    
    
    6.48Furniture and equipment
    
    
    189
    
    
    
    178
    
    
    
    11
    
    
    
    6.18Data processing
    
    
    220
    
    
    
    221
    
    
    
    (1
    )
    
    
    (0.45
    )Professional service feesAccounting
    
    
    65
    
    
    
    60
    
    
    
    5
    
    
    
    8.33Legal
    
    
    26
    
    
    
    38
    
    
    
    (12
    )
    
    
    (31.58
    )Consulting and other
    
    
    62
    
    
    
    55
    
    
    
    7
    
    
    
    12.73Total professional service fees
    
    
    153
    
    
    
    153
    
    
    
    
    
    
    
    Loan and deposit
    
    
    261
    
    
    
    110
    
    
    
    151
    
    
    
    137.27Telephone
    
    
    43
    
    
    
    45
    
    
    
    (2
    )
    
    
    (4.44
    )Advertising
    
    
    78
    
    
    
    60
    
    
    
    18
    
    
    
    30.00Other
    
    
    320
    
    
    
    262
    
    
    
    58
    
    
    
    22.14Total other expense
    
    $
    3,239
    
    
    $
    3,191
    
    
    $
    48
    
    
    
    1.50
    %
 Federal Income Taxes
 Current Federal Tax Provision
  Deferred Tax Benefit
  25.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 LIQUIDITY
      26.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 CAPITAL AND REGULATORY
  TROUBLED ASSET RELIEF PROGRAM
  As Reported
    
    
    ProformaMarch 31, 2009
    
    
    March 31, 2009Total capital to risk weighted assets
    
    
    10.56
    %
    
    
    13.11
    %Tier 1 leverage
    
    
    7.86
    %
    
    
    10.28
    %Tier 1 capital to risk weighted assets
    
    
    9.31
    %
    
    
    11.99
    %
 27.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
  March 31,
    
    
    December 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2008Capital StructureShareholders equity
    
    $
    41,864
    
    
    $
    41,552
    
    
    $
    39,633Total capitalization
    
    $
    41,864
    
    
    $
    41,552
    
    
    $
    39,633Tangible capital
    
    $
    41,838
    
    
    $
    41,507
    
    
    $
    39,529Intangible AssetsCore deposit premium
    
    $
    26
    
    
    $
    46
    
    
    $
    104Other identifiable intangibles
    
    
    
    
    
    
    
    
    
    
    Total intangibles
    
    $
    26
    
    
    $
    46
    
    
    $
    104Regulatory capitalTier 1 capital:Shareholders equity
    
    $
    41,864
    
    
    $
    41,552
    
    
    $
    39,633Net unrealized (gains) losses on
available for sale securities
    
    
    (650
    )
    
    
    (445
    )
    
    
    (212
    )Less: disallowed deferred tax asset
    
    
    (6,000
    )
    
    
    (6,200
    )
    
    
    (7,106
    )Less: intangibles
    
    
    (26
    )
    
    
    (46
    )
    
    
    (104
    )Total Tier 1 capital
    
    $
    35,188
    
    
    $
    34,861
    
    
    $
    32,211Tier 2 Capital:Allowable reserve for loan losses
    
    $
    4,724
    
    
    $
    4,277
    
    
    $
    3,924Qualifying long-term debt
    
    
    
    
    
    
    
    
    
    
    Total Tier 2 capital
    
    
    4,724
    
    
    
    4,277
    
    
    
    3,924Total capital
    
    $
    39,912
    
    
    $
    39,138
    
    
    $
    36,135Risk-adjusted assets
    
    $
    377,861
    
    
    $
    376,986
    
    
    $
    364,243Capital ratios:Tier 1 Capital to average assets
    
    
    7.86
    %
    
    
    8.01
    %
    
    
    7.85
    %Tier 1 Capital to risk weighted assets
    
    
    9.31
    %
    
    
    9.25
    %
    
    
    8.84
    %Total Capital to risk weighted assets
    
    
    10.56
    %
    
    
    10.38
    %
    
    
    9.92
    %
  28.




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
  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, 2009
    
    
    8.98
    %
    
    
    8.97
    %
    
    
    7.86
    %
    
    
    9.31
    %
    
    
    10.56
    %March 31, 2008
    
    
    9.50
    %
    
    
    9.48
    %
    
    
    7.85
    %
    
    
    8.84
    %
    
    
    9.92
    %The Bank:March 31, 2009
    
    
    9.04
    %
    
    
    9.03
    %
    
    
    7.96
    %
    
    
    9.41
    %
    
    
    10.66
    %March 31, 2008
    
    
    9.94
    %
    
    
    9.92
    %
    
    
    8.34
    %
    
    
    9.40
    %
    
    
    10.46
    %
 29.




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##### Table of Contents



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




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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
    
    $
    250,590
    
    
    $
    11,227
    
    
    $
    28,508
    
    
    $
    80,451
    
    
    $
    370,776Securities
    
    
    5
    
    
    
    29,936
    
    
    
    16,006
    
    
    
    5,124
    
    
    
    51,071Other(1)
    
    
    569
    
    
    
    
    
    
    
    
    
    
    
    3,794
    
    
    
    4,363Total interest-earning assets
    
    
    251,164
    
    
    
    41,163
    
    
    
    44,514
    
    
    
    89,369
    
    
    
    426,210Interest-bearing obligations:NOW, money market, savings, and interest checking
    
    
    94,611
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,611Time deposits
    
    
    30,401
    
    
    
    52,976
    
    
    
    13,462
    
    
    
    755
    
    
    
    97,594Brokered CDs
    
    
    60,143
    
    
    
    94,730
    
    
    
    7,138
    
    
    
    
    
    
    
    162,011Borrowings
    
    
    20,000
    
    
    
    
    
    
    
    15,000
    
    
    
    1,210
    
    
    
    36,210Total interest-bearing obligations
    
    
    205,155
    
    
    
    147,706
    
    
    
    35,600
    
    
    
    1,965
    
    
    
    390,426Gap
    
    $
    46,009
    
    
    $
    (106,543
    )
    
    $
    8,914
    
    
    $
    87,404
    
    
    $
    35,784Cumulative gap
    
    $
    46,009
    
    
    $
    (60,534
    )
    
    $
    (51,620
    )
    
    $
    35,784
 
 (1)
    
    Includes Federal Home Loan Bank Stock     31.




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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
  32.




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##### Table of Contents



CONTROLS AND PROCEDURES
   33.




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##### Table of Contents



OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Shareholders Derivative Litigation
  34.




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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 and all amendments (most recent amendment filed December
14, 2004) incorporated herein by reference to exhibit 3.1 of the Corporations Annual
Report on Form 10-K for the year ended December 31, 2008Exhibit 3.2(a)
    
    Amended and Restated Bylaws as revised June 27, 2001incorporated herein by
reference to exhibit 3.2(a) of the Corporations Annual Report on Form 10-K for the year
ended December 31, 2008Exhibit 3.2(b)
    
    Amendment to the Amended and Restated Bylaws adopted August 9, 2004 incorporated
herein by reference to exhibit 3.2(b) of the Corporations Annual Report on Form 10-K for
the year ended December 31, 2008Exhibit 3.2(c)
    
    Second Amendment to the Amended and Restated Bylaws adopted December 2007
incorporated herein by reference to exhibit 3.2(c) of the Corporations Annual Report on
Form 10-K for the year ended December 31, 2008Exhibit 31.1
    
    Rule 13a-14(a) Certification of Chief Executive OfficerExhibit 31.2
    
    Rule 13a-14(a) Certification of Chief Financial OfficerExhibit 32.1
    
    Section 1350 Certification of Chief Executive OfficerExhibit 32.2
    
    Section 1350 Certification of Chief Financial Officer
 35.




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##### Table of Contents



MACKINAC FINANCIAL CORPORATION
(Registrant)Date: May 14, 2009
    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 accounting officer) 36.