2009 ANNUAL REPORT
Table of Contents
To Our Shareholders ..............................................................................................................................1
Five-Year Overview...............................................................................................................................5
Regional Review ....................................................................................................................................7
Selected Financial Highlights ..............................................................................................................13
Quarterly Financial Summary ..............................................................................................................14
Report of Independent Registered Public Accounting Firm ................................................................15
Consolidated Balance Sheets ...............................................................................................................16
Consolidated Statements of Operations ...............................................................................................17
Consolidated Statements of Changes in Shareholders’ Equity ............................................................18
Consolidated Statements of Cash Flows ..............................................................................................19
Notes to Consolidated Financial Statements........................................................................................20
Selected Financial Data........................................................................................................................45
Summary Quarterly Financial Information ..........................................................................................46
Market Information ..............................................................................................................................48
Shareholder Return Performance Graph ..............................................................................................49
Forward-Looking Statements...............................................................................................................50
Management’s Discussion and Analysis of Financial
Condition and Results of Operations ................................................................................................51
Directors and Officers ..........................................................................................................................72
______________________________________________________________________________________
BUSINESS OF THE CORPORATION
Mackinac Financial Corporation is a registered bank holding company formed under the Bank Holding Company
Act of 1956 with assets in excess of $500 million and whose common stock is traded on the NASDAQ stock market
as ―MFNC.‖ The principal subsidiary of the Corporation is mBank. Headquartered in Manistique, Michigan,
mBank has 10 branch locations; six in the Upper Peninsula, three in the Northern Lower Peninsula and one in
Oakland County, Michigan. The newest branch, located in Escanaba, opened on March 24, 2009. The Company’s
banking services include commercial lending and treasury management products and services geared toward small
to mid-sized businesses, as well as a full array of personal and business deposit products and consumer loans.
FORM 10-K
A copy of the Annual Report to the Securities and Exchange Commission on Form 10-K is available without
charge by writing the Shareholders’ Relations Department, Mackinac Financial Corporation, 130 South
Cedar Street, Manistique, Michigan, 49854.
MARKET SUMMARY
The Corporation’s common stock is traded on the Nasdaq Capital Market under the symbol MFNC. The
Corporation had 1,228 shareholders of record as of March 30, 2010.
To Our Shareholders
March 30, 2010
Dear Fellow Shareholders:
This letter will provide you with a review of the performance of Mackinac Financial Corporation through the end of 2009
and our thoughts about business strategy as we move through 2010. In addition, we have included an overview of our five
year performance since the recapitalization of the company in December of 2004, and a regional market performance
review to better detail the progress of the company during this period of economic turmoil in the State of Michigan and
national markets.
The company reported net income of $1.907 million, or $.56 per share, for the year ended December 31, 2009, compared to
a net income of $1.872 million, or $.55 per share, for 2008. The 2009 results include $1.208 million of gains related to the
sale of two branch offices and $1.471 million of security gains. The 2008 results include the positive effect, $3.475 million,
of a lawsuit settlement and the negative effect, $.425 million, of a severance agreement. Shareholders’ equity totaled
$55.299 million at December 31, 2009, compared to $41.552 million at the end of 2008, an increase of $13.747 million.
This increase includes $10.5 million of preferred stock that was issued by MFNC as a TARP recipient, consolidated net
income of $1.907 million noted above, the capital contribution impact of stock options and also the increase in equity due
to the increase in the market value of held-for-sale investments, which amounted to $.648 million.
In 2009, we continued to focus our efforts to improve the overall operation and value of the company. These included core
deposit generation through our branch network to offset reliance on wholesale funding sources, originating new loans
through various government guaranteed loan programs with good risk / return pricing, and noninterest expense
management and proper allocation of personnel and capital resources to make the company more efficient.
Noted below are some highlighted 2009 achievements as they relate to these initiatives;
The increase in new core deposits of approximately $55 million net of the sale of the two noted branches above
with approximately $29 million in deposits. We experienced deposit growth in all of our markets, with $26 million
in Northern Lower Michigan, $20 million in Southeast Michigan and $10 million in the Upper Peninsula. Most of
our 2009 deposit growth occurred in low cost transactional accounts which grew by $41 million.
In April of 2009, the Corporation, in an abundance of caution, decided to participate in the TARP program and
issued $11 million of preferred stock. In order to offset the cost of the preferred, we infused a portion of the
TARP proceeds, $3 million, into the Bank and leveraged this excess capital by purchasing approximately $40
million of investment securities. We funded the purchase of these investments by issuing brokered deposits. In
December, we began the process of deleveraging this position in anticipation of narrowing spreads and recognized
a fourth quarter security gain of $.827 million. This strategy has resulted in overall security gains in excess of $1
million.
Steady loan demand with approximately $88 million of new loan production with a $14 million increase in loans
outstanding, after reductions for amortization and payoffs. After the receipt of the TARP funds in April of 2009,
we originated over $74 million of new loans and through February of 2010 that number is approximately $85
million. We were successful in producing loans in all of our markets in 2009, but were less aggressive in Southeast
Michigan where the recession remains severe. Loan production for 2009 totaled $44 million in the Upper
Peninsula, $35 million in Northern Lower Michigan and $9 million in Southeast Michigan.
Continued development of our government SBA/USDA lending programs to become a leader state wide in these
initiatives to mitigate credit risk substantially when new loans are originated, along with positively augmenting
non-interest income though the sale of the guaranteed portion of the loan for a premium gain.
1
To Our Shareholders
Divesting of two outlier branches with a pretax gain to the company of approximately $1.2 million which also
decreases operating expenses and results in a more manageable footprint for the company.
Enhancing our core earnings by controlling noninterest expense, increasing noninterest income and net interest
margin improvement. The combination of these three factors resulted in an improved efficiency ratio from 86% in
2008 to 73% in 2009. In addition for future margin improvement in this low interest rate environment, we
continued to use interest rate floors for the majority of all new and renewed variable rate loans.
Prudent and proactive credit administration practices to quickly identify any potential problem assets to better
monitor our portfolio given the recession which continues to put substantial pressure on many businesses’ cash
flow and overall operations.
The book value per share of the company increased by $.95 to $13.10 (excluding TARP proceeds). This marks the fourth
consecutive year of increased shareholder value and a cumulative book value increase of $3.35 per share since the
December 2004 recapitalization at $9.75 per share. The chart below is a recap of various balances and book value per share
as of the end of the last three years (dollars in thousands, except per share data):
Credit Quality
Nonperforming assets increased in 2009 as the economy continued to weaken, especially in Southeast Michigan.
Nonperforming loans totaled $15.237 million, or 3.96% of total loans at December 31, 2009. Nonperforming assets at
December 31, 2009 were $21.041 million, 4.08% of total assets, compared to $7.076 million or 1.57% of total assets at
December 31, 2008. The elevated level of nonperforming assets, while still below peers and manageable, does concern us
given the challenges throughout the state. However; we do not have a systematic problem with our overall loan portfolio as
approximately 75% of these totals are centered around 5-6 customer relationships. The increase in these problem assets did
hamper overall earnings with higher than anticipated provision charges, carrying costs and legal expense. The
nonperforming assets by region are as follows; $13 million in Southeast Michigan, $6 million in Northern Lower Michigan
and $2 million in the Upper Peninsula. We continue to devote significant management attention to the administration of
these problem assets and hope to have resolution in the first half of 2010 on several of these. The increased stress in our
loan portfolio resulting from the ongoing troubles in the state has led us to a very cautious approach in all markets, but
particularly in Southeast Michigan. This approach includes an emphasis on smaller more granular loans. We will continue
to focus on early identification and resolution of all our problem credits to minimize carrying costs, collateral deterioration,
and overall risk exposure of capital loss to the company.
Loan Growth/Production
Loan growth in 2009 occurred in a challenging and tough Michigan economic climate with loans increasing by $14.030
million in 2009, despite accelerated levels of loan pay-downs and runoff totaling $60.415 million. Total bank wide new
loan production equated to $88.122 million. Through an annual credit process review, we continue to evaluate and adjust
underwriting standards to keep pace with the changing risk issues presented by the market. A good portion of loan runoff in
2009 was due to our discipline in re-qualifying renewal loans and repricing to garner acceptable returns adjusted for risk.
The majority of the loan growth was centered in the commercial real estate, construction, and 1-4 family residential loan
2
200920082007DollarsPercentageDollarsPercentageLoans384,310$ 370,280$ 355,079$ 14,030$ 3.79 %15,201$ 4.28 %Assets515,452 451,431 408,880 64,021 14.18 42,551 10.41 Deposits421,389 371,097 320,827 50,292 13.55 50,270 15.67 Borrowings36,140 36,210 45,949 (70) (0.19) (9,739) (21.20) Shareholders' equity55,299 41,552 39,321 13,747 33.08 2,231 5.67 Book vaue per share13.10 12.15 11.47 .95 7.82 .68 5.93 As of December 31,Increase (Decrease)Increase (Decrease)2009/20082008/2007
To Our Shareholders
portfolios. We have purposely avoided the subprime lending opportunities in these sectors, and do not offer any subprime
lending products within any of our product lines of business.
Loan production in our three geographical regions is shown below.
Government Guaranteed Lending Programs
In 2007, the company made a concerted effort to become a premier SBA/USDA lender throughout the State of Michigan
and separate ourselves from our local competition in terms of the adjudication of these types of loans to minimize credit
risk and increase noninterest income through the sale of the guaranteed portion of the loans for a premium. As you will note
from the chart shown below, we have had success due to the strong competencies of our lenders and credit personnel. For
the SBA fiscal year ended September 30, 2009, we ranked 3rd in the entire State of Michigan in dollar volume of SBA loans
processed at $13.214 million and 7th in number of loans processed at 36. In addition to the level of SBA production
generated, the Corporation recorded $.498 million in fees for 2009, for a total of $.813 million over the last three years. T he
company does not sell all the loan guarantees from every credit, only those where acceptable market rates are paid above
par that warrant recognizing the income now, and where the company feels that the reinvestment of the monies paid can be
lent out again in sufficient time to exceed the lost interest income from the loan sold.
mBank is being presented with two awards for SBA fiscal year 2009, ―Business Development Lender of the Year‖, (2nd
year in a row we have won that award), as mBank had the largest percentage increase in of approvals from 2008 to 2009. In
addition, we have been awarded the ―Community Lender of the Year‖ as mBank had the best overall performance among
MI based, non ―Preferred Lender Program‖ lenders, with criteria including total new volume, new market activity, and
comparison with historical performance. We are pleased with the progress we have made here; first in terms to the benefit
of the company, but also for the many local businesses in these markets that through these programs are provided the
capital to grow their organizations to help rebuild the economic base of the State.
Deposit Growth
We continue to have success in growing core bank deposits, which we define as demand deposits, interest bearing checking
accounts, money market savings accounts and certificates of deposit less than $100,000. In 2009, we increased core
deposits by $14 million, net of the $30 million in deposits sold.
3
(dollars in thousands)200920082007REGIONUpper Peninsula43,777 37,040 40,876$ Northern Lower Peninsula35,027 14,183 22,448 Southeast Michigan9,318 10,374 50,404 TOTAL88,122$ 61,597$ 113,728$ For the Year Ending December 31,SBA Loans OriginatedFor the Year Ended December 31,200920082007# LoansSBA AmountPremium# LoansSBA AmountPremium# LoansSBA AmountPremiumUP32 6,797$ 373$ 2 386$ 18$ 4 1,879$ 141$ NLP10 5,829 125 6 1,009 5 5 2,837 116 SEM- - - 3 572 3 3 952 32 Total42 12,626$ 498$ 11 1,967$ 26$ 12 5,668$ 289$
To Our Shareholders
Shown below is the mix of our deposits for the three most recent years.
We have been successful in improving our mix of core deposits to wholesale funding sources with the introduction of new
and innovative products to meet the needs of our markets. Contributing to this success is a proactive top down sales and
service incentive program, along with a culture that rewards sales personnel throughout the company for the procurement of
new core deposits into the bank based on targeted goals achieved. The combination of products, service and culture, will
continue to be the driver of this initiative given it is the most competitive business line that most banks are trying to retain,
and hardest to get customers to want to move over from another financial institution, given the uncertainty of the financial
markets in the short-term.
Building Franchise Value since the Recapitalization
As mentioned earlier, with this letter are various charts and graphs which track the performance of the company through the
challenging economic times of the last five years in terms of key shareholder metrics and operating performance levels.
Over this period the Corporation has increased its common stock book value of stock by $3.35 or 34.5%. During this five
year period, we significantly increased total assets, loans, and core deposits which provides the foundation that will lead to
future increases in common shareholders’ equity. Following this letter is a descriptive overview which provides a snapshot
of how the three distinctively different regions of our franchise, (Upper Peninsula ―UP‖, Northern Lower Peninsula, and
Southeast Michigan) have performed in relation to the market specific challenges, lines of business, and opportunities that
each region provides the company.
Looking Forward
In 2010, we remain faced with the challenges of a State economy still in turmoil and we have modest expectations for the
improvement of the overall economy and real estate values in the near term. We believe that in economic times such as
these, it becomes especially important to focus on principal business objectives that preserve and increase bank franchise
value; the ―blocking and tackling‖ of banking. In 2010 we intend to originate well priced, well structured loans, funded
with low cost in market deposits, while we control our expense base. The Corporation is, and will remain dedicated to the
primary strategic objective of enhancing franchise and shareholder value by building a strong banking franchise in our local
markets and serving the communities that provide the business opportunities for the company to prosper.
We sincerely thank you for your continued support during these difficult times and we will work diligently and prudently to
provide improved shareholder results in the years to come.
Paul D. Tobias
Chairman and CEO
Mackinac Financial Corporation mBank
Kelly W. George
President and CEO
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As of December 31, Percent Change2009Mix2008Mix2007Mix2009/20082008/2007CORE DEPOSITSTransactional accounts: Noninterest bearing35,878$ 8.51 %30,099$ 8.11 %25,557$ 7.97 %19.20 %17.77 % NOW, money market, checking95,790 22.73 70,584 19.02 81,160 25.30 35.71 (13.03) Savings18,207 4.32 20,730 5.59 12,485 3.89 (12.17) 66.04 Total transactional accounts149,875 35.57 121,413 32.72 119,202 37.15 23.44 1.85 Certficates of deposit <$100,00059,953 14.23 73,752 19.87 80,607 25.12 (18.71) (8.50) Total core deposits209,828 49.79 195,165 52.59 199,809 62.28 7.51 (2.32) NONCORE DEPOSITSCertificates of deposit >$100,00036,385 8.63 25,044 6.75 22,355 6.97 45.28 12.03 Brokered CDs175,176 41.57 150,888 40.66 98,663 30.75 16.10 52.93 Total noncore deposits211,561 50.21 175,932 47.41 121,018 37.72 20.25 45.38 TOTAL DEPOSITS421,389$ 100.00 %371,097$ 100.00 %320,827$ 100.00 %13.55 15.67 %DEPOSIT MIX
Five Year Overview
Since the recapitalization, which occurred in December 2004, the
book value of MFNC stock has increased by $3.35, or 34.5%.
Since the recapitalization, common shareholders’ equity
has increased by a total of $11 million.
In April 2009, MFNC participated in the
TARP program, receiving $11 million.
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$-$2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 12/14/0412/31/0512/31/0612/31/0712/31/0812/31/09$9.75 $7.75 $8.40 $11.47 $12.15 $13.10 MACKINAC FINANCIAL CORPORATIONBOOK VALUEBVEPSDTB-3.00%-2.00%-1.00%.00%1.00%2.00%3.00%20052006200720082009-2.58%.49%2.59%.44%.39%MACKINAC FINANCIAL CORPORATIONRETURN ON AVERAGE ASSETS$(8,000)$(6,000)$(4,000)$(2,000)$-$2,000 $4,000 $6,000 $8,000 $10,000 $12,000 12/14/0412/31/0512/31/0612/31/0712/31/0812/31/09$(6,842)$2,202 $10,531 $2,231 $3,233 Dollars in thousandsMACKINAC FINANCIAL CORPORATIONHISTORICAL CHANGES IN COMMON SHAREHOLDERS' EQUITY-30.00%-20.00%-10.00%0.00%10.00%20.00%30.00%40.00%20052006200720082009-25.63%6.19%31.05%4.61%3.77%MACKINAC FINANCIAL CORPORATIONRETURN ON AVERAGE EQUITY
Five Year Overview
Through 2009, MFNC has achieved total loan
production of $516 million, which
contributed to overall net growth of $180
million, or 88% since the recapitalization in
2004.
Total assets have increased $176 million or 52% since the
recapitalization. Since the Corporation’s lowest level of
assets, $299 million in 2005, we have grown assets by
$216 million through 2009 year end.
Since the recapitalization, core deposits
have grown a total of $79 million.
Adjusting for the branch sales in 2007 and
2009, core deposit growth amounted to
$118 million through 2009 year end.
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$(3.00)$(2.00)$(1.00)$-$1.00 $2.00 $3.00 20052006200720082009$(2.15)$.50 $2.96 $.55 $.56 MACKINAC FINANCIAL CORPORATIONEARNINGS PER SHARE$-$50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 200420052006200720082009$117,759 $135,183 $113,728 $61,597 $88,122 $203,832 $239,771 $322,581 $355,079 $370,280 $384,310 Dollars in thousandsMACKINAC FINANCIAL CORPORATIONLOAN PRODUCTION AND GROWTHProductionOutstandings$-$100,000 $200,000 $300,000 $400,000 $500,000 $600,000 200420052006200720082009$339,497 $298,722 $382,791 $408,880 $451,431 $515,452 Dollars in thousandsAt Year EndMACKINAC FINANCIAL CORPORATIONTOTAL ASSETS$(5,000)$-$5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 200420052006200720082009$21,636 $34,804 $(614)$(1,653)$25,140 Dollars in thousandsMACKINAC FINANCIAL CORPORATIONGROWTH IN CORE DEPOSITS
Regional Review – Upper Peninsula
Jack C. Frost – Regional President, UP
BRANCH LOCATIONS
ESCANABA
Located at Menards
3300 Ludington Street
Escanaba, MI 49829
(906) 233-9443
Manager: Scott A. Ravet
MANISTIQUE
130 South Cedar Street
Manistique, MI 49854
(906) 341-2413
Manager: Gregory D. Schuetter
MARQUETTE
300 North McClellan
Marquette, MI 49855
(906) 226-5000
Manager: Teresa M. Same
NEWBERRY
414 Newberry Avenue
Newberry, MI 49868
(906) 293-5165
Manager: Michael A. Slaght
SAULT STE. MARIE
138 Ridge Street
Sault Ste. Marie, MI 49783
(906) 635-3992
Manager: Herbert C. Maloney
STEPHENSON
S216 Menominee Street
Stephenson, MI 49887
(906) 753-2225
Manager: Barbara A. Parrett
Excluding the branch sales, which were predominantly transactional accounts, total deposits grew $30.6 million
in the five year period, with transactional deposits comprising roughly $21.1 million of that growth.
Core deposits are defined as demand deposits, interest bearing checking accounts, money markets, savings and CDs less
than $100,000.
Total loan production over the five year period amounted to $203.1 million.
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(20,000)-20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 20052006200720082009$140,430 $158,590 $151,379 $145,013 $132,416 Dollars in thousandsYear EndUpper PeninsulaCore DepositsBalance at Year EndGrowth/(Loss)Deposits Sold-20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 20052006200720082009$78,629 $87,152 $87,295 $83,990 $88,070 $61,801 $71,438 $64,084 $61,023 $44,346 Dollars in thousandsAt Year EndUpper PeninsulaCore Deposit CompositionTransactionalCDs-50,000 100,000 150,000 200,000 20052006200720082009$142,782 $158,603 $161,229 $181,476 $189,090 Dollars in thousandsYear EndUpper PeninsulaLoansBalance at Year EndProduction-50,000 100,000 150,000 200,000 20052006200720082009$106,064 $122,649 $124,690 $140,198 $143,535 $33,658 $33,504 $33,797 $38,597 $42,356 $2,285 $2,450 $2,742 $2,681 $3,199 Dollars in thousandsAt Year EndUpper PeninsulaLoan CompositionCommercialMortgageInstallment
Regional Review – Upper Peninsula
MARKET COMMENTARY
In the five years since the recapitalization of mBank in December of 2004, the Bank’s Upper Peninsula (UP) has made
steady progress, both in terms of growing its loan and deposit base and maneuvering through very difficult previous
reputational issues as a result of the former company’s troubles. This negative publicity made it difficult to both attract
new business as well as talent to the bank. However, the tarnished past is now just that, and the UP region continues to be
the largest market footprint of the institution in terms of geography, branches, and loan and deposit footings. Similar to the
other regions, we have implemented various new deposit and treasury management products which continue to set us ahead
of our competition in terms of delivery of cutting edge technology and convenience to our customers. We have also been
able to procure some talented local bankers that are deep rooted into their communities that have spurred the consistent
growth of core loans and deposit accounts.
In recent years, we formulated a plan to strategically realign our branch footprint to better match our business model in the
region. This has been accomplished by reallocating our personnel and capital resources into targeted ―commerce center
hub‖ markets of the UP and divesting of outlier branches located in small markets with declining populations. Specifically
in 2007, we sold our Ripley location which allowed the bank to divest of a longer term fixed asset issue and in 2009 we
sold two additional locations in South Range and Ontonagon. The sale of the latter two locations provided a gain of
approximately $1.2M to the bank. These divestitures also provided significant cost savings throughout the company and
enabled management to focus on the growth and development of our remaining network. mBank also strategically
reentered the Delta County Market by opening a small full service branch in the new Menards store located in Escanaba in
2009 which is the second largest business center in the UP footprint. Lastly, in 2009 we converted our banking center in
Marquette Presque Isle from a full service branch operation to a Mortgage and Consumer Lending Division to provide a
more centralized approach to operating this portion of the company. In doing this we were able to procure a highly talented
veteran banker who had been the top residential mortgage producer in the UP for many years to oversee and grow this line
of business.
Our commercial loan portfolio includes a diverse mix of industries that represents an inclusive sampling of the economic
platform of the UP. These business sectors include various retail and office space in addition to professional, medical and
hospitality entities which are similar to those found in the other regions of mBank. However, it is the industries that are
more indigenous to the UP that add even further variety and stability to the overall risk matrix of the portfolio. Bank
clients in the timber, light non-auto manufacturing and service industries have both alleviated some of the general
downward fiscal pressure of the state and lessened the indirect impact of the auto industry on the overall loan portfolio. We
also continue to add value to our clients with our knowledge and understanding of government guaranteed loans from the
Small Business Administration (SBA) and United States Department of Agriculture. This core competency was very
evident in 2009 when mBank not only led all UP institutions in number of SBA loans closed – 27 – but also in total dollar
amount of SBA loans originated – $7.4 million. We are very proud of this achievement not only for the success of the
organization, but also for being a catalyst for promoting economic stimulus through helping small businesses get the capital
that is essential to their success, as well as the communities they operate in, within these under developed areas of the state.
Given some of the aforementioned industrial diversity, the UP economy continues to perform better than the state as a
whole. Although unemployment is somewhat elevated on a normalized scale and pockets of comparatively high jobless
claims remain, many of our markets are trending near historical levels. Given that it is not atypical for the unemployment
rate in the UP to be higher than the remainder of the state, the experience of operating in this environment provides for a
more stable economic base which seldom experiences the severe highs or lows in times of changing economic conditions.
Furthermore, real estate values have experienced a very modest decrease on average in the UP markets compared to much
larger decreases in the Southern part of the state. Our markets continue to see growth opportunities with the development
of several successful large projects throughout the UP over the past several years including new construction as well as
expansions of existing hospitals, hotels, schools, and retail centers. This steady and methodical economic progress and the
ability to successfully function in a difficult national financial environment has allowed the UP region of mBank continued
growth through prudent banking activities and our proactive sales and serviced based culture. We thank you for your
business and for supporting mBank endeavors and look forward to continuing to serve our clients and communities in 2010.
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Regional Review – Northern Lower Peninsula
Andrew P. Sabatine, Regional President – NLP
BRANCH LOCATIONS
GAYLORD
1955 South Otsego Avenue
Gaylord, MI 49735
(989) 732-3750
Manager: Nicole Shelters
TRAVERSE CITY
3530 North Country Drive
Traverse City, MI 49684
(231) 929-5600
Manager: Andrea Pease
KALEVA
14429 Wuoksi Avenue
Kaleva, MI
(231)362-3223
Manager: Barb J. Miller
Total deposit growth amounted to $24.8 million over the five year period, largely in transactional accounts.
Core deposits are defined as demand deposits, interest bearing checking accounts, money markets, savings and CDs less
than $100,000.
Total loan production over the five year period amounted to $134.2 million.
9
(10,000)-10,000 20,000 30,000 40,000 50,000 60,000 70,000 20052006200720082009$37,182 $34,191 $35,160 $39,265 $62,008 Dollars in thousandsYear EndNorthern Lower PeninsulaCore DepositsBalance at Year EndGrowth/(Loss)-10,000 20,000 30,000 40,000 50,000 60,000 70,000 20052006200720082009$18,144 $17,737 $21,606 $27,919 $48,003 $19,038 $16,454 $13,554 $11,346 $14,005 Dollars in thousandsNorthern Lower PeninsulaCore Deposit CompositionTransactionalCDs-20,000 40,000 60,000 80,000 100,000 20052006200720082009$69,276 $78,371 $76,881 $78,482 $93,280 Dollars in thousandsYear EndNorthern Lower PeninsulaLoansBalance at Year EndProduction-10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 20052006200720082009$66,568 $72,869 $71,143 $70,415 $82,508 $2,609 $5,266 $5,289 $7,497 $10,041 $99 $236 $449 $570 $731 Dollars in thousandsAt Year EndNorthern Lower PeninsulaLoan CompositionCommercialMortgageInstallment
Regional Review – Northern Lower Peninsula
MARKET COMMENTARY
Since the late 2004 recapitalization and subsequent conversion to mBank, the Northern Lower Peninsula region has
experienced positive trends in both core depository and loan portfolio growth. The positive growth in both loans and
deposits is a direct result of mBank refining and augmenting its products, services and staff within this region to better
position itself to grow market share.
As demonstrated by our historical totals, core deposit generation in the Northern Lower Peninsula region initially proved
challenging due to having single, non-prime locations in the two largest and most competitive markets (Traverse City &
Gaylord). However, the poorly positioned Gaylord branch was relocated in the summer of 2006 to a more visible and
convenient placed bank branch through the redesign of a piece of bank owned property (REO), which has proved to be a
more effective location to drive market growth. Additionally, courier service and remote deposit capabilities were added to
the Traverse City & Gaylord locations in mid 2007 providing customers with convenient and electronic access to their
accounts. Total deposit growth during this period for the Gaylord branch was approximately $22.7 million ($10.3 to $33
million) and approximately $19.4 million ($12.1 to $31.5 million) for the Traverse City branch, with the majority of the
growth for both branches in transactional core deposit accounts. As a result of offering clients this option, it negated the
need for the additional and expensive capital outlay of adding more branches while neutralizing many logistical obstacles
caused by location.
With regard to the aforementioned depository growth, the Smart Money Market Account was also introduced to the
Northern Lower Peninsula markets in early 2009 and was a main driver of the core deposit success over the past 12 months.
This account was designed as a market specific deposit alternative to enhance mBank’s existing deposit product line and
better service the needs of the high balance consumer and business depositor. The resulting increase in core deposit base
has been very beneficial in providing a cost effective funding source to support loan portfolio growth.
The overall increase in the loan portfolio for the Northern Lower Peninsula region is represented by steady new commercial
and residential loan origination over the last five years. The industry mix in the commercial area is well diversified among
business sectors ranging from tourism & hospitality to small business and various types of real estate. While the
composition of the portfolio mitigates some risk, the current economic downturn and the related decline in the housing
market has prompted a focus on lower risk loan structures. As a result of the challenging business environment, new
commercial loan production is centered on origination of loans guaranteed under United States Small Business
Administration (SBA) and United States Department of Agricultural (USDA) loan programs. These guarantees, allow us
to meet our client’s needs and also provide the market with capital for economic stimulus while still significantly reducing
portfolio risk.
Overall, we are satisfied with the performance of the Northern Lower Peninsula region given the general condition of the
Michigan economy over the past eighteen months, and we see signs of gradual economic improvement and development
throughout the region. Fortunately, the waterfront housing market and tourism related businesses in the region have not
experienced as severe of a decline as other areas of the state. This is undoubtedly due to the popularity and relative
affordability of the region compared to other coastal markets in the U.S. This makes the region a very competitive growth
market and as a result it is anticipated that it will recover faster than others as population and industry continue to migrate
from other parts of Michigan and other contiguous states. We are looking forward to another successful year with the
general focus going into 2010 being on continued core deposit growth, controlled opportunistic loan growth and proactive
portfolio management. If you are in the region, please stop by one of our locations and experience the mBank difference!
10
Regional Review – Southeast Michigan
Jesse A. Deering, First VP/Southeast Michigan Executive
BRANCH LOCATION
BIRMINGHAM
260 East Brown Street, Suite 300
Birmingham, MI 48009
(248) 290-5900
Manager: Elena Dritsas
Total deposit growth amounted to $22.0 million over the five year period, almost solely in transactional accounts.
Core deposits are defined as demand deposits, interest bearing checking accounts, money markets, savings and CDs less
than $100,000.
Total loan production over the five year period amounted to $179.1 million.
11
(5,000)-5,000 10,000 15,000 20,000 25,000 20052006200720082009$26 $6,236 $11,904 $11,424 $22,004 Dollars in thousandsYear EndSoutheast MichiganCore DepositsBalance at Year EndGrowth/(Loss)-20,000 40,000 60,000 80,000 100,000 120,000 20052006200720082009$27,713 $85,607 $116,969 $110,322 $101,940 Dollars in thousandsYear EndSoutheast MichiganLoansBalance at Year EndProduction-20,000 40,000 60,000 80,000 100,000 120,000 20052006200720082009$26,083 $79,363 $110,668 $100,683 $94,072 $1,630 $6,214 $6,255 $9,587 $7,862 $30 $46 $52 $6 Dollars in thousandsAt Year EndSoutheast MichiganLoan CompositionCommercialMortgageInstallment-5,000 10,000 15,000 20,000 25,000 20052006200720082009$26 $5,806 $11,665 $11,091 $21,472 $430 $239 $333 $532 Dollars in thousandsAt Year EndSoutheast MichiganCore Deposit CompositionTransactionalCDs
Regional Review – Southeast Michigan
MARKET COMMENTARY
The Southeast Michigan region of mBank opened in early 2005 and has grown to its current size through two distinctly
different phases of business initiatives. With the main initial focus being asset growth through the origination of new credit
facilities, the loan portfolio successfully grew to roughly $117 million over the first three years of operation. Soon after the
inaugural year of existence, Oakland County added full service branch capabilities and a complete depository product line
to offer our clientele. This not only allowed Southeast Michigan to provide a full banking experience, including treasury
management options, to our growing portfolio of loan customers, but also allowed us to focus on providing similar
personalized products and services to deposit only customers. This resulted in steady core deposit growth over the past
three years with totals nearly doubling from $11 million at year end 2008 to just over $22 million at year end 2009.
However, The Southeast Michigan region of mBank also experienced challenges resulting from the inherent effects of the
global economic downturn of late 2008. As a result of issues within the automotive industry and the prolonged fiscal
impact of the recent recession, the financial condition of this region has negatively affected nearly all business sectors. In
addition to manufacturing and other operating entities, the market for commercial real estate is seeing drastic downward
pressure on lease rates caused by an increase in available space within the market. Further, with the population of this
region trending downward as residents relocate in search of employment, the housing and residential development markets
continue to be fundamentally weak. As a result, mBank has taken a careful credit posture in Southeast Michigan over the
past eighteen months. This has allowed us to increase our level of monitoring and administration of the current loan
portfolio. Given the aforementioned market trends, this is deemed as a necessary and prudent governance move at this
time.
While the overall economic condition of Southeast Michigan poses challenges for us, it presents opportunities as well.
Specifically, the general change in lending posture by some regional banks and their lack of desire to grow business in this
particular region has allowed mBank to offer competitive loan and deposit options to strong potential customers. These
customers may no longer fit their current bank’s ideal profile from an industry, geographic or relationship size standpoint.
Additionally, by utilizing the programs offered through the Small Business Administration and the State of Michigan, the
Southeast Michigan region has the opportunity and desire to promote loans for qualified small businesses. The
involvement of the SBA and other government resources will increase the granularity of our loan portfolio. These small to
midsized loans will both mitigate risk and allow controlled and systematic loan production in this Region.
While evidence of economic recovery may begin to show throughout the next twelve months, it is anticipated that 2010 will
continue to be another challenging year for Metropolitan Detroit. As a result, the direction of mBank’s business activities
in this region will remain focused on continued growth of core depository relationships and also the prudent underwriting
and administration of new and existing loan relationships. While the internal focus will center on these initiatives, it
remains the utmost importance to us to continue to provide the highest level of customer service to our clientele and do
everything within our ability to meet their banking needs and expectations.
12
Selected Financial Highlights
(Dollars in Thousands, Except Per Share Data)
The above summary should be read in connection with the related consolidated financial statements and notes included
elsewhere in this report.
13
20092008(Unaudited)(Unaudited)Selected Financial Condition Data (at end of period):Assets515,377$ 451,431$ Loans384,310 370,280 Investment securities46,513 47,490 Deposits421,389 371,097 Borrowings36,140 36,210 Shareholders' equity55,299 41,552 Selected Statements of Income Data:Net interest income16,287$ 12,864$ Income before taxes3,536 2,659 Net income available to common shareholders1,907 1,872 Income per common share - Basic.56 .55 Income per common share - Diluted.56 .55 Weighted average shares outstanding3,419,736 3,422,012 Selected Financial Ratios and Other Data:Performance Ratios: Net interest margin3.59 %3.23 %Efficiency ratio73.37 85.51 Return on average assets.39 .44 Return on average equity3.77 4.61 Average total assets493,652$ 425,343$ Average total shareholders' equity50,531 40,630 Average loans to average deposits ratio92.99 %105.61 %Common Share Data at end of period:Market price per common share4.64$ 4.40$ Book value per common share13.10$ 12.15$ Common shares outstanding3,419,736 3,419,736 Other Data at end of period:Allowance for loan losses5,225$ 4,277$ Non-performing assets21,041$ 7,076$ Allowance for loan losses to total loans1.36 %1.16 %Non-performing assets to total assets4.08 %1.57 %Number of: Branch locations10 12 FTE Employees100 100 For The Years Ended December 31,
Quarterly Financial Summary
___________________________________________________________________________________________________
14
AverageAverageAverageAverage Shareholders'Net InterestEfficiencyNet IncomeBook ValueQuarter EndedAssetsLoansDepositsEquityAssetsEquityMarginRatioPer SharePer ShareDecember 31, 2009514,102$ 386,203$ 418,280$ 55,665$ (.14)%(1.28) %3.74 %71.03 %(.05)$ 13.10$ September 30, 2009513,687 370,310 419,102 54,594 1.1911.16 3.66 70.09 .45 13.25 June 30, 2009491,205 371,609 401,510 49,855 .38 3.71 3.58 76.55 .13 12.73 March 31, 2009454,740 370,943 372,669 41,813 .080.87 3.35 82.36 .03 12.24 December 31, 2008441,583 366,077 358,213 41,516 (.23)(2.42) 3.20 80.30 (.07) 12.15 September 30, 2008423,702 358,844 341,377 41,097 .202.08 3.39 79.12 .06 12.11 June 30, 2008418,246 362,574 332,725 40,399 1.70 17.62 3.19 88.45 .52 11.98 March 31, 2008417,682 357,778 336,016 39,491 .131.42 3.13 95.34 .04 11.56 December 31, 2007406,308 350,050 324,194 38,973 .51 5.36 3.55 78.02 .15 11.47 Return on AverageMACKINAC FINANCIAL CORPORATIONQUARTERLY FINANCIAL SUMMARY-50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 December-08March-09June-09September-09December-09Dollars (in thousands)At Month EndLOAN PORTFOLIO BALANCESCommercialMortgageLeasesInstallment-20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 December-08March-09June-09September-09December-09Dollars (in thousands)At Month EndTRANSACTIONAL ACCOUNT DEPOSITSMoney MarketsNOWDemandSavings$3,330 $3,495 $4,051 $4,310 $4,431 3.20%3.35%3.58%3.66%3.74%2.90%3.00%3.10%3.20%3.30%3.40%3.50%3.60%3.70%3.80%2,400 2,900 3,400 3,900 4,400 4,900 December-08March-09June-09September-09December-09PercentageDollars (in thousands)Quarter EndedNET INTEREST MARGIN
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Board of Directors
Mackinac Financial Corporation, Inc.
We have audited the consolidated statement of financial condition of Mackinac Financial Corporation,
Inc. as of December 31, 2009 and 2008 and the related consolidated statements of income, changes
in stockholders’ equity, and cash flows for each year in the three-year period ended December 31,
2009. These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Mackinac Financial Corporation, Inc. as of December
31, 2009 and 2008 and the consolidated results of their operations and their cash flows for each year
in the three-year period ended December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America.
Auburn Hills, Michigan
March 30, 2010
15
Consolidated Balance Sheets
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 2009 and 2008
(Dollars in Thousands)
_____________________________________________________________________________________________
See accompanying notes to consolidated financial statements.
16
December 31,December 31,20092008ASSETSCash and due from banks18,433$ 10,112$ Federal funds sold27,000 - Cash and cash equivalents45,433 10,112 Interest-bearing deposits in other financial institutions678 582 Securities available for sale46,513 47,490 Federal Home Loan Bank stock3,794 3,794 Loans: Commercial305,670 296,088 Mortgage74,350 70,447 Installment4,290 3,745 Total Loans384,310 370,280 Allowance for loan losses(5,225) (4,277) Net loans379,085 366,003 Premises and equipment10,165 11,189 Other real estate held for sale5,804 2,189 Other assets23,905 10,072 TOTAL ASSETS515,377$ 451,431$ LIABILITIES AND SHAREHOLDERS' EQUITYLiabilities: Non-interest-bearing deposits35,878$ 30,099$ Interest-bearing deposits: NOW, Money Market, Checking95,790 70,584 Savings18,207 20,730 CDs<$100,00059,953 73,752 CDs>$100,00036,385 25,044 Brokered175,176 150,888 Total deposits421,389 371,097 Borrowings: Federal Home Loan Bank35,000 35,000 Other1,140 1,210 Total borrowings36,140 36,210 Other liabilities2,549 2,572 Total liabilities460,078 409,879 Shareholders' equity: Preferred stock - No par value: Authorized 500,000 shares, 11,000 shares issued and outstanding10,514 - Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares Issued and outstanding - 3,419,736 shares43,493 42,815 Accumulated earnings (deficit)199 (1,708) Accumulated other comprehensive income 1,093 445 Total shareholders' equity55,299 41,552 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY515,377$ 451,431$
Consolidated Statements of Operations
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
___________________________________________________________________________________________________
See accompanying notes to consolidated financial statements.
17
200920082007INTEREST INCOME: Interest and fees on loans: Taxable20,521$ 22,555$ 26,340$ Tax-exempt292 404 533 Interest on securities: Taxable2,783 1,293 1,100 Tax-exempt19 5 - Other interest income93 305 722 Total interest income23,708 24,562 28,695 INTEREST EXPENSE: Deposits6,431 10,115 13,224 Borrowings990 1,583 2,054 Total interest expense7,421 11,698 15,278 Net interest income16,287 12,864 13,417 Provision for loan losses3,700 2,300 400 Net interest income after provision for loan losses12,587 10,564 13,017 OTHER INCOME: Service fees1,023 838 688 Net security gains1,471 64 (1) Net gains on sale of secondary market loans830 120 498 Proceeds from settlement of lawsuits- 3,475 470 Gain on sales of branch offices1,208 - 5 Other219 156 346 Total other income4,751 4,653 2,006 OTHER EXPENSES: Salaries and employee benefits6,583 6,886 6,757 Occupancy1,385 1,374 1,272 Furniture and equipment805 771 678 Data processing862 844 785 Professional service fees603 508 532 Loan and deposit933 488 250 FDIC insurance premiums839 81 35 Other1,792 1,606 1,791 Total other expenses13,802 12,558 12,100 Income before provision for income taxes3,536 2,659 2,923 Provision for (benefit of) income taxes1,120 787 (7,240) NET INCOME2,416 1,872 10,163 Preferred dividend and accretion of discount509 - - NET INCOME AVAILABLE TO COMMON SHAREHOLDERS1,907$ 1,872$ 10,163$ INCOME PER COMMON SHARE Basic.56$ .55$ 2.96$ Diluted.56$ .55$ 2.96$ For The Years Ended December 31,
Consolidated Statements of Changes in Shareholders’ Equity
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2009, 2008, and 2007
(Dollars in Thousands)
_____________________________________________________________________________________________
See accompanying notes to consolidated financial statements.
18
AccumulatedShares ofPreferred Common StockOtherCommonStockand AdditionalAccumulatedComprehensiveStockSeries APaid in CapitalDeficitIncome (Loss)TotalBalance, January 1, 20073,428,695 -$ 42,722$ (13,745)$ (187)$ 28,790$ Net income- - - 10,163 - 10,163 Other comprehensive income: Net unrealized loss on securities available for sale- - - - 247 247 Total comprehensive income10,410 Stock option compensation- - 121 - - 121 Balance, December 31, 20073,428,695 - 42,843 (3,582) 60 39,321 Purchase of oddlot shares(8,959) - (110) - - (110) Net income- - 1,872 - 1,872 Other comprehensive income: Net unrealized income on securities available for sale- - - - 385 385 Other- - - 2 - 2 Total comprehensive income2,259 Stock option compensation- - 82 - - 82 Balance, December 31, 20083,419,736 - 42,815 (1,708) 445 41,552 Net income- - - 2,416 - 2,416 Other comprehensive income: Net unrealized income on securities available for sale- - - - 648 648 Total comprehensive income3,064 Stock option compensation- - 60 - 60 Dividend on preferred stock- - - (377) - (377) Issuance of preferred stock, 11,000 shares- 10,382 - - - 10,382 Issuance of common stock warrants- - 618 - - 618 Accretion of preferred stock discount- 132 - (132) - - Balance, December 31, 20093,419,736 10,514$ 43,493$ 199$ 1,093$ 55,299$
Consolidated Statements of Cash Flows
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2009, 2008, and 2007
(Dollars in Thousands)
_____________________________________________________________________________________________
See accompanying notes to consolidated financial statements.
19
200920082007Cash Flows from Operating Activities: Net income 2,416$ 1,872$ 10,163$ Adjustments to reconcile net income to net net cash provided by (used in) operating activities: Depreciation and amortization2,027 1,355 942 Provision for loan losses3,700 2,300 400 Provision for (benefit of) income taxes1,120 787 (7,240) (Gain) loss on sales/calls of securities available for sale(1,471) (64) 1 (Gain) on sales of branch offices(1,208) - (5) (Gain) loss on sale of premises, equipment, and other real estate23 (77) (12) Writedown of other real estate187 964 40 Stock option compensation60 82 121 Change in other assets(15,331) 367 12 Change in other liabilities (22) (210) (491) Net cash (used in) provided by operating activities(8,499) 7,376 3,931 Cash Flows from Investing Activities: Net (increase) in loans(21,218) (21,173) (35,043) Net (increase) decrease in interest-bearing deposits in other financial institutions(96) 1,228 (954) Purchase of securities available for sale(50,113) (50,813) (25,556) Proceeds from maturities, sales, calls or paydowns of securities available for sale52,742 25,373 37,215 Capital expenditures(679) (618) (1,516) Proceeds from sale of premises, equipment, and other real estate581 1,956 323 Net cash paid in connection with branch sales(28,578) - (8,042) Net cash (used in) investing activities(47,361) (44,047) (33,573) Cash Flows from Financing Activities: Net increase in deposits80,760 50,270 17,656 Issuance of Series A Preferred Stock and common stock warrants11,000 - - Dividend on preferred stock and discount accretion(509) - - Net increase (decrease) in federal funds purchased- (7,710) 7,710 Net increase (decrease) in lines of credit- (1,959) - Repurchase of common stock-oddlot shares- (110) - Principal payments on borrowings(70) (70) (68) Net cash provided by financing activities91,181 40,421 25,298 Net increase (decrease) in cash and cash equivalents35,321 3,750 (4,344) Cash and cash equivalents at beginning of period10,112 6,362 10,706 Cash and cash equivalents at end of period45,433$ 10,112$ 6,362$ Supplemental Cash Flow Information:Cash paid during the year for: Interest7,584$ 11,961$ 13,609$ Income taxes90 70 - Noncash Investing and Financing Activities:Transfers of Foreclosures from Loans to Other Real Estate Held for Sale (net of adjustments made through the allowance for loan losses)4,879 2,849 1,218 Assets and Liabilities Divested in Branch Sales: Loans31 - 27 Premises and equipment651 - 1,181 Deposits29,260 - 9,250
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Mackinac Financial Corporation (the ―Corporation‖) and Subsidiaries conform to accounting
principles generally accepted in the United States and prevailing practices within the banking industry. Significant
accounting policies are summarized below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries, mBank
(the ―Bank‖) and other minor subsidiaries, after elimination of intercompany transactions and accounts.
Nature of Operations
The Corporation’s and the Bank’s revenues and assets are derived primarily from banking activities. The Bank’s primary
market area is the Upper Peninsula, the northern portion of the Lower Peninsula of Michigan, and Oakland County in
Lower Michigan. The Bank provides to its customers commercial, real estate, agricultural, and consumer loans, as well as
a variety of traditional deposit products. A portion, approximately 2.0%, of the Bank’s commercial loan portfolio consists
of leases to commercial and governmental entities, which are secured by various types of equipment. These leases are
dispersed geographically throughout the country. Less than 1.0% of the Corporation’s business activity is with Canadian
customers and denominated in Canadian dollars.
While the Corporation’s chief decision makers monitor the revenue streams of the various Corporation products and
services, operations are managed and financial performance is evaluated on a Corporation-wide basis. Accordingly, all of
the Corporation’s banking operations are considered by management to be aggregated in one reportable operating segment.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
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.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the
allowance for loan losses, the valuation of investment securities, the valuation of foreclosed real estate, deferred tax assets,
and impairment of intangible assets.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, noninterest-bearing deposits in
correspondent banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.
Securities
The Corporation’s securities are classified and accounted for as securities available for sale. These securities are stated at
fair value. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.
Unrealized holding gains and losses on securities available for sale are reported as accumulated other comprehensive
income within shareholders’ equity until realized. When it is determined that securities or other investments are impaired
and the impairment is other than temporary, an impairment loss is recognized in earnings and a new basis in the affected
security is established. Gains and losses on the sale of securities are recorded on the trade date and determined using the
specific-identification method.
20
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required to hold stock in the FHLB based on
the anticipated level of borrowings to be advanced. This stock is recorded at cost, which approximates fair value. Transfer
of the stock is substantially restricted.
Interest Income and Fees on Loans
Interest on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest on
loans is discontinued when, in the opinion of management, it is probable that the borrower may be unable to meet
payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed. Loans are returned to
accrual status when all principal and interest amounts contractually due are brought current and future payments are
reasonably assured. Interest income on impaired and nonaccrual loans is recorded on a cash basis. Loan-origination fees
and allocated costs of originating loans are deferred and recognized over the term of the loan as an adjustment to yield.
Allowance for Loan Losses
The allowance for loan losses includes specific allowances related to commercial loans, when they have been judged to be
impaired. A loan is impaired when, based on current information, it is probable that the Corporation will not collect all
amounts due in accordance with the contractual terms of the loan agreement. These specific allowances are based on
discounted cash flows of expected future payments using the loan’s initial effective interest rate or the fair value of the
collateral if the loan is collateral dependent.
The Corporation continues to maintain a general allowance for loan losses for loans not considered impaired. The
allowance for loan losses is maintained at a level which management believes is adequate to provide for possible loan
losses. Management periodically evaluates the adequacy of the allowance using the Corporation’s past loan loss
experience, known and inherent risks in the portfolio, composition of the portfolio, current economic conditions, and other
factors. The allowance does not include the effects of expected losses related to future events or future changes in
economic conditions. This evaluation is inherently subjective since it requires material estimates that may be susceptible
to significant change. Loans are charged against the allowance for loan losses when management believes the
collectability of the principal is unlikely. In addition, various regulatory agencies periodically review the allowance for
loan losses. These agencies may require additions to the allowance for loan losses based on their judgments of
collectability.
In management’s opinion, the allowance for loan losses is adequate to cover probable losses relating to specifically
identified loans, as well as probable losses inherent in the balance of the loan portfolio as of the balance sheet date.
Other Real Estate Held for Sale
Other real estate held for sale consists of assets acquired through, or in lieu of, foreclosure and other long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired. Other real estate held for sale is initially
recorded at the lower of cost or fair value, less costs to sell, establishing a new cost basis. Valuations are periodically
performed by management, and the assets’ carrying values are adjusted to the lower of cost basis or fair value less costs to
sell. Impairment losses are recognized for any initial or subsequent write-downs. Net revenue and expenses from
operations of other real estate held for sale are included in other expense.
21
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Maintenance and repair costs are charged to
expense as incurred. Gains or losses on disposition of premises and equipment are reflected in income. Depreciation is
computed on the straight-line method over the estimated useful lives of the assets.
Stock Option Plans
The Corporation sponsors three stock option plans. One plan was approved during 2000 and applies to officers, employees,
and nonemployee directors. This plan was amended as a part of the December 2004 stock offering and recapitalization.
The amendment, approved by shareholders, increased the shares available under this plan by 428,587 shares from the
original 25,000 (adjusted for the 1:20 reverse stock split), to a total authorized share balance of 453,587. This plan expires
on February 15, 2010. The other two plans, one for officers and employees and the other for nonemployee directors, were
approved in 1997. A total of 30,000 shares (adjusted for the 1:20 split), were made available for grant under these plans.
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.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive
income (loss) includes unrealized gains and losses on securities available for sale, which are recognized as a separate
component of equity and accumulated other comprehensive income (loss).
Earnings per Common Share
Basic earnings per common share is net income divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares
issuable under stock option agreements and the common stock warrants issued as a part of the Corporation’s participation
in the TARP Capital Purchase Program.
Earnings per share are based upon the weighted average number of shares outstanding. The following shows the
computation of basic and diluted income per share for the years ended December 31 (dollars in thousands, except per share
data):
22
Net Income WeightedAvailable to CommonAverageIncome ShareholdersNumber of Sharesper Share2009Income per share - basic and diluted1,907$ 3,419,736 .56$ 2008Income per share - basic and diluted1,872$ 3,422,012 .55$ 2007Income per share - basic and diluted10,163$ 3,428,695 2.96$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In the above disclosure the dilutive effect of additional shares outstanding, as a result of stock options and warrants
exercisable, was not taken into account since the additional shares issued as a result of vested options under the Company’s
option plans and common stock warrants issued under the TARP Capital Purchase Program would not have a dilutive effect
on the earnings calculated per share.
Income Taxes
Deferred income taxes have been provided under the liability method. Deferred tax assets and liabilities are determined
based upon the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted
tax rates which will be in effect when these differences are expected to reverse. Deferred tax expense (credit) is the result of
changes in the deferred tax asset and liability. A valuation allowance is provided against deferred tax assets when it is more
likely than not that some or all of the deferred asset will not be realized. In 2009, the Corporation recorded a current tax
provision of $1.120 million and a current tax provision of $.787 million in 2008. The Corporation recorded a $.260 million
current tax provision in the fourth quarter of 2007. In the third quarter of 2007, the Corporation reversed a portion of the
valuation allowance that pertained to the deferred tax benefit of NOL and tax credit carryforwards. This valuation
adjustment, $7.500 million, was recorded as a current period income tax benefit. The recognition of the deferred tax benefit
in 2007 and was in accordance with generally accepted accounting principles, and considered, among other things, the
probability of utilizing the NOL and credit carryforwards. Further discussion on the NOL carryforward and future benefits
is presented in the ―Management’s Discussion and Analysis‖ section of this report.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Corporation has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements, commercial letters of credit, and standby
letters of credit. For letters of credit, the Corporation recognizes a liability for the fair market value of the obligations it
assumes under that guarantee.
Reclassifications
Certain amounts in the 2008 and 2007 consolidated financial statements have been reclassified to conform to the 2009
presentation.
NOTE 2 – RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $1.372 million were restricted on December 31, 2009 to meet the reserve
requirements of the Federal Reserve System.
In the normal course of business, the Corporation maintains cash and due from bank balances with correspondent banks.
Balances in these accounts may exceed the Federal Deposit Insurance Corporation’s insured limit of $250,000, which was
increased from $100,000 under certain provisions of the Troubled Asset Relief Program (―TARP‖).
Management believes that these financial institutions have strong credit ratings and the credit risk related to these deposits
is minimal.
23
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 3 – SECURITIES AVAILABLE FOR SALE
The carrying value and estimated fair value of securities available for sale are as follows (dollars in thousands):
Following is information pertaining to securities with gross unrealized losses at December 31, 2009 and 2008 aggregated
by investment category and length of time these individual securities have been in a loss position (dollars in thousands):
The gross unrealized losses in the current portfolio are considered temporary in nature and related to interest rate
fluctuations. The Corporation has both the ability and intent to hold the investment securities until their respective
maturities and therefore does not anticipate the realization of the temporary losses.
24
GrossGrossAmortizedUnrealizedUnrealizedEstimatedCostGainsLossesFair ValueDecember 31, 2009US Agencies - MBS43,651$ 1,642$ (55)$ 45,238$ Obligations of states and political subdivisions1,207 68 - 1,275 Total securities available for sale44,858$ 1,710$ (55)$ 46,513$ December 31, 2008US Agencies - MBS46,316$ 632$ (7)$ 46,941$ Obligations of states and political subdivisions498 51 - 549 Total securities available for sale46,814$ 683$ (7)$ 47,490$ GrossGrossUnrealizedFairUnrealizedFairLossesValueLossesValueDecember 31, 2009US Agencies - MBS(55)$ 3,309$ -$ -$ Total securities available for sale(55)$ 3,309$ -$ -$ December 31, 2008US Agencies - MBS(7)$ 5,106$ -$ -$ Total securities available for sale(7)$ 5,106$ -$ -$ Less Than Twelve MonthsOver Twelve Months
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 3 – SECURITIES AVAILABLE FOR SALE (CONTINUED)
Following is a summary of the proceeds from sales and calls of securities available for sale, as well as gross gains and
losses for the years ended December 31 (dollars in thousands):
The carrying value and estimated fair value of securities available for sale at December 31, 2009, by contractual maturity,
are shown below (dollars in thousands):
Contractual maturities may differ from expected maturities because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties. See Note 8 for information on securities pledged to secure borrowings from
the Federal Home Loan Bank.
NOTE 4 - LOANS
The composition of loans at December 31 is as follows (dollars in thousands):
25
200920082007Proceeds from sales and calls44,611$ 12,047$ 6,579$ Gross gains on sales1,472 65 - Gross (losses) on sales and calls(1) (1) (1) AmortizedEstimatedCostFair ValueDue in one year or less6$ 6$ Due after one year through five years409 469 Due after five years through ten years2,330 2,298 Due after ten years42,113 43,740 Total44,858$ 46,513$ 20092008Commercial real estate208,895$ 185,241$ Commercial, financial, and agricultural72,184 79,734 One to four family residential real estate67,232 65,595 Construction : Consumer7,118 4,852 Commerical24,591 31,113 Consumer4,290 3,745 Total loans384,310$ 370,280$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
An analysis of the allowance for loan losses for the years ended December 31 is as follows (dollars in thousands):
In 2009, net charge off activity was $2.752 million, or .73% of average loans outstanding compared to net charge-offs of
$2.169 million, or .60% of average loans, in the same period in 2008 and $1.260 million, or .38% of average loans, in 2007.
During 2009, a provision of $3.700 million was made to increase the reserve. This provision was made in accordance with
the Corporation’s allowance for loan loss reserve policy, which calls for a measurement of the adequacy of the reserve at
each quarter end. This process includes an analysis of the loan portfolio to take into account increases in loans outstanding
and portfolio composition, historical loss rates, and specific reserve requirements of nonperforming loans. The allowance
for loan losses and current provisions are discussed in more detail under ―Management’s Discussion and Analysis.‖
Impaired Loans
Nonperforming loans are those which are contractually past due 90 days or more as to interest or principal payments, on
nonaccrual status, or loans, the terms of which have been renegotiated to provide a reduction or deferral on interest or
principal. The interest income recorded, and that which would have been recorded had nonaccrual and renegotiated loans
been current or not troubled, was not material to the consolidated financial statements for the years ended December 31,
2009 and 2008.
A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to
collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement.
26
200920082007Balance, January 14,277$ 4,146$ 5,006$ Recoveries on loans previously charged off66 121 50 Loans charged off(2,818) (2,290) (1,310) Provision3,700 2,300 400 Balance, December 315,225$ 4,277$ 4,146$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
The following is a summary of impaired loans and their effect on interest income (dollars in thousands):
Insider Loans
The 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):
There were no loans to related-parties classified substandard as of December 31, 2009 and 2008. In addition to the
outstanding balances above, there were unfunded commitments of $1.222 million to related parties at December 31, 2009.
27
200920082007200920082007 Impaired loans with valuation reserve11,348$ 3,730$ 3,639$ 2,705$ 994$ 1,320$ Impaired loans with no valuation reserve3,889 1,157 369 - - - Total impaired loans15,237$ 4,887$ 4,008$ 2,705$ 994$ 1,320$ Impaired loans on nonaccrual basis 14,368$ 4,887$ 3,298$ 2,705$ 994$ 1,219$ Impaired loans on accrual basis869 - 710 - - 101 Total impaired loans15,237$ 4,887$ 4,008$ 2,705$ 994$ 1,320$ 10,449$ 4,834$ 4,135$ 40 60 129 recognized on an accrual basis700 377 391 - 60 84 Impaired LoansValuation ReserveInterest income recognized during impairmentInterest income that would have been Balances, at period endCash-basis interest income recognizedAverage investment in impaired loansDecember 31,December 31,20092008Loans outstanding, January 16,516$ 1,720$ New loans2,160 372 Net activity on revolving lines of credit1,189 2,378 Change in related party interest297 2,733 Repayment(1,610) (687) Loans outstanding, December 318,552$ 6,516$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 5 – PREMISES AND EQUIPMENT
Details of premises and equipment at December 31 are as follows (dollars in thousands):
The construction in progress at the end of 2009 pertains to ATM installation at a branch location, improvements to an
existing branch location, and costs associated with the establishment of a new branch location.
In August 2009, the Bank sold its Ontonagon and South Range branch offices, with deposits of approximately $29.300
million, premises and equipment with a net book value of $.600 million, and loans totaling approximately $31,000.
Depreciation of premises and equipment charged to operating expenses amounted to $1.050 million in 2009, $1.035 million
in 2008, and $.891 million in 2007.
NOTE 6 – OTHER REAL ESTATE HELD FOR SALE
An analysis of other real estate held for sale for the years ended December 31 is as follows (dollars in thousands):
28
20092008Land1,811$ 2,042$ Buildings and improvements11,816 12,545 Furniture, fixtures, and equipment4,346 4,261 Construction in progress84 70 Total cost basis18,057 18,918 Less - accumulated depreciation 7,892 7,729 Net book value10,165$ 11,189$ 20092008Balance, January 12,189$ 1,226$ Other real estate transferred from loans due to foreclosure4,879 2,849 Reclassification of redemption ORE(475) - Other real estate sold / written down(768) (1,886) Loss on ORE(21) - Balance, December 315,804$ 2,189$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 7 – DEPOSITS
The distribution of deposits at December 31 is as follows (dollars in thousands):
Maturities of non-brokered time deposits outstanding at December 31, 2009, are as follows (dollars in thousands):
Brokered deposits of $101.708 million mature in 2010, $70.739 million mature in 2011, and $2.729 million matures
thereafter.
NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS
Federal Home Loan Bank borrowings consist of the following at December 31 (dollars in thousands):
The Federal Home Loan Bank borrowings are collateralized at December 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 $29.275 million;
mortgage related and municipal securities with an amortized cost and estimated fair value of $16.224 million and $17.077
million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $3.794 million. Prepayment of the
remaining advances is subject to the provisions and conditions of the credit policy of the Federal Home Loan Bank of
Indianapolis in effect as of December 31, 2009.
29
20092008Noninterest bearing35,878$ 30,099$ NOW, money market, checking95,790 70,584 Savings18,207 20,730 CDs <$100,00059,953 73,752 CDs >$100,00036,385 25,044 Brokered175,176 150,888 Total deposits421,389$ 371,097$ 201076,257$ 201111,551 20125,457 20132,133 2014374 Thereafter566 Total96,338$ 20092008Federal Home Loan Bank fixed rate advances at rates ranging from 4.98% to 5.16%15,000$ 15,000$ maturing in 2010Federal Home Loan Bank variable rate advances at rates ranging from .298% to .304% maturing in 201120,000 20,000 35,000$ 35,000$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS (CONTINUED)
The $35.000 million FHLB borrowings are comprised of both fixed and variable rate borrowings as shown in the above
table. The FHLB has the option to convert the $15.000 million of fixed rate advances to adjustable rate advances, repricing
quarterly at three month LIBOR flat, on the original call date and thereafter.
NOTE 9– OTHER BORROWINGS
Other borrowings consist of the following at December 31 (dollars in thousands):
The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $.269 million originated and held by the
Corporation’s wholly owned subsidiary, First Rural Relending and an assignment of a demand deposit account in the
amount of $.954 million, and guaranteed by the Corporation.
Maturities of long-term borrowings outstanding at December 31, 2009 are as follows (dollars in thousands):
NOTE 10 – INCOME TAXES
The components of the federal income tax provision (credit) for the years ended December 31 are as follows (dollars in
thousands):
30
20092008Farmers Home Administration, fixed-rate note payable, maturing August 24, 2024 interest payable at 1%1,140$ 1,210$ 201015,071$ 201120,072 201272 201373 201474 Thereafter778 Total36,140$ 200920082007Current tax expense (credit)-$ -$ 15$ Change in valuation allowance- - (8,136) Deferred tax expense1,120 787 881 Total provision (credit) for income taxes1,120$ 787$ (7,240)$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 10 – INCOME TAXES (CONTINUED)
A summary of the source of differences between income taxes at the federal statutory rate and the provision (credit) for
income taxes for the years ended December 31 is as follows (dollars in thousands):
Deferred income taxes are provided for the temporary differences between the financial reporting and tax bases of the
Corporation’s assets and liabilities. The major components of net deferred tax assets at December 31 are as follows (dollars
in thousands):
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 December 31, 2009 and 2008, 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
December 31, 2009 had a net operating loss and tax credit carryforwards for tax purposes of approximately $28.0 million,
and $2.1 million, respectively.
31
200920082007Tax expense at statutory rate1,202$ 904$ 993$ Increase (decrease) in taxes resulting from: Tax-exempt interest(106) (137) (181) Change in valuation allowance- - (8,136) Other24 20 84 Provision for (benefit of) income taxes1,120$ 787$ (7,240)$ 20092008Deferred tax assets: Allowance for loan losses1,776$ 1,454$ Deferred compensation273 310 Intangible assets112 129 Alternative Minimum Tax Credit1,463 1,463 NOL carryforward9,520 10,924 Depreciation72 131 Tax credit carryovers672 672 Stock option compensation196 175 Other129 40 Total deferred tax assets14,213 15,298 Valuation allowance(8,146)$ (8,146)$ Deferred tax liabilities: FHLB stock dividend(128) (128) Unrealized gain (loss) on securities(563) (229) Other(95) (61) Total deferred tax liabilities(786) (418) Net deferred tax asset5,281$ 6,734$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 10 – INCOME TAXES (CONTINUED)
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. The recognition of the deferred tax benefit in 2007 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 $18 million, and
all of the credit carryforwards are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue
Code. The annual limitation is $1.400 million for the NOL and the equivalent value of tax credits, which is approximately
$.477 million. These limitations for use were established in conjunction with the recapitalization of the Corporation in
December 2004.
NOTE 11 – OPERATING LEASES
The Corporation currently maintains two operating leases for branch office locations. The first operating lease, for our
location in Birmingham, was originated in September 2005 and had an original term of 66 months with an option to renew
for an additional five year period.
The second operating lease, for our new location in Escanaba, was executed in December 2008, the terms of which began in
April 2009. The original term of this lease is three years and will automatically renew and extend for four additional
consecutive terms of two years each. The additional terms call for a lease adjustment based on the Consumer Price Index at
time of renewal.
Future minimum payments, by year and in the aggregate, under the initial terms of the operating lease agreements, consist
of the following (dollars in thousands):
Rent expense for all operating leases amounted to $207,000 in 2009, $195,000 in 2008, and $141,000 in 2007.
NOTE 12 – RETIREMENT PLAN
The Corporation has established a 401(k) profit sharing plan. Employees who have completed three months of service and
attained the age of 18 are eligible to participate in the plan. Eligible employees can elect to have a portion, not to exceed
80%, of their annual compensation paid into the plan. In addition, the Corporation may make discretionary contributions
into the plan. Retirement plan contributions charged to operations totaled $120,000, $90,000, and $112,000 in 2009, 2008,
and 2007, respectively.
32
2010209$ 201182 201210 Total301$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 13 – DEFERRED COMPENSATION PLAN
As an incentive to retain key members of management and directors, the Corporation established a deferred compensation
plan, with benefits based on the number of years the individuals have served the Corporation. This plan was discontinued
and no longer applies to current officers and directors. A liability was recorded on a present value basis and discounted
using the rates in effect at the time the deferred compensation agreement was entered into. The liability may change
depending upon changes in long-term interest rates. The liability at December 31, 2009 and 2008, for vested benefits under
this plan, was $.815 million and $.912 million respectively. These benefits were originally contracted to be paid over a ten
to fifteen-year period. The final payment is scheduled to occur in 2023. The deferred compensation plan is unfunded;
however, the Bank maintains life insurance policies on the majority of the plan participants. The cash surrender value of
the policies was $1.464 million and $1.384 million at December 31, 2009 and 2008, respectively. Deferred compensation
expense for the plan was $72,000, $84,000, and $90,000 for 2009, 2008, and 2007 respectively.
NOTE 14 – REGULATORY MATTERS
The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by
regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet
specific capital guidelines that involve quantitative measures of the Corporation’s assets, liabilities, and certain off-balance-
sheet items as calculated under regulatory accounting practices. The Corporation’s capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to
average assets. Management has determined that, as of December 31, 2009, the Corporation is well capitalized.
To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. In addition, federal banking regulators have established capital classifications
beyond the minimum requirements in order to risk-rate deposit insurance premiums and to provide trigger points for
prompt corrective action.
33
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 14 – REGULATORY MATTERS (CONTINUED)
The Corporation’s and the Bank’s actual and required capital amounts and ratios as of December 31 are as follows (dollars
in thousands):
At December 31, 2009, the Bank was not authorized to pay dividends to the Corporation without prior regulatory approval
because of a negative retained earnings balance due to cumulative losses.
NOTE 15 – STOCK OPTION PLANS
The Corporation sponsors three stock option plans. All historical information presented below has been adjusted to reflect
the 1 for 20 reverse stock split which occurred on December 16, 2004. One plan was approved during 2000 and applies to
officers, employees, and non-employee directors. A total of 25,000 shares were made available for grant under this plan.
This plan was amended as a part of the recapitalization to provide for additional authorized shares equal to 12.50% of all
outstanding shares subsequent to the recapitalization, which amounted to 428,587 shares. This plan expires on February
15, 2010. The other two plans, one for officers and employees and the other for non-employee directors, were approved in
1997 and expired in 2007. A total of 30,000 shares were made available for grant under these plans. Options under all of
the plans are granted at the discretion of a committee of the Corporation’s Board of Directors. Options to purchase shares
of the Corporation’s stock 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.
34
To Be WellCapitalized UnderFor CapitalPrompt CorrectiveActualAdequacy PurposesAction ProvisionsAmountRatioAmountRatioAmountRatio2009Total capital to risk weighted assets: Consolidated54,587$ 13.2%>33,155$ > 8.0%N/A mBank47,630$ 11.5%>33,166$ > 8.0%>41,458$ 10.0%Tier 1 capital to risk weighted assets: Consolidated49,406$ 11.9%>16,578$ > 4.0%N/A mBank42,446$ 10.2%>16,583$ > 4.0%>24,875$ 6.0%Tier 1 capital to average assets: Consolidated49,406$ 9.8%>20,272$ > 4.0%N/A mBank42,446$ 8.4%>20,261$ > 4.0%>25,326$ 5.0%2008Total capital to risk weighted assets: Consolidated39,138$ 10.4%>30,158$ > 8.0%N/A mBank39,428$ 10.4%>30,202$ > 8.0%>37,752$ 10.0%Tier 1 capital to risk weighted assets: Consolidated34,861$ 9.3%>15,079$ > 4.0%N/A mBank35,192$ 9.3%>15,101$ > 4.0%>22,651$ 6.0%Tier 1 capital to average assets: Consolidated34,861$ 8.0%>17,407$ > 4.0%N/A mBank35,192$ 8.1%>17,393$ > 4.0%>21,741$ 5.0%
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 15 – STOCK OPTION PLANS (CONTINUED)
A summary of stock option transactions for the years ended December 31 is as follows:
There were no options granted in 2009 and in 2008.
Following is a summary of the options outstanding and exercisable at December 31, 2009:
Options issued since the Corporation’s recapitalization in December of 2004 call for 20% immediate vesting upon issue and
subsequent vesting to occur over a two to five year period, based upon the market value appreciation of the underlying
Corporation’s stock. Compensation related to these options is expensed based upon the vesting period without
consideration given to market value appreciation. Future compensation for all outstanding options is projected to total
$29,000 in 2010 and none thereafter.
35
20092008Outstanding shares at beginning of year446,237 446,417 Granted during the year- - Expired / forfeited during the year(35,180) (180) Outstanding shares at end of year411,057 446,237 Exercisable shares at end of year157,266 164,446 Weighted average exercise price per share at end of year12.03$ 12.14$ Shares available for grant at end of year24,780 18,488 WeightedAverageWeightedRemainingAverageExercise ContractualExercisePrice RangeOutstandingExercisableLife-YearsPrice$9.1612,500 5,000 5.96 9.16$ $9.75257,152 120,861 4.96 9.75 $10.6557,500 11,500 6.96 10.65 $11.5040,000 8,000 5.75 11.50 $12.0040,000 8,000 5.46 12.00 $156.00 - $240.003,545 3,545 1.23 186.75 $300.00 - $400.00360 360 .29 300.00 411,057 157,266 5.36 12.03$ Number of Shares
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 16 – OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss) components and related taxes for the years ended December 31 are as follows (dollars
in thousands):
NOTE 17 – SHAREHOLDERS’ EQUITY
Participation in the TARP Capital Purchase Program
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 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 $.618 million, respectively. Cumulative dividends on the Preferred Stock are
payable at 5% annum for the first five years and at a rate of 9% per annum thereafter on the liquidation preference of
36
200920082007Unrealized holding gains on available for sale securities2,451$ 681$ 246$ Less reclassification adjustments for gains (losses) later recognized in income1,471 64 (1) Net unrealized gains 980 617 247 Tax effect331 232 - Other comprehensive income 649$ 385$ 247$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 17 – SHAREHOLDERS’ EQUITY (CONTINUED)
$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 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.
NOTE 18 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
Financial Instruments with Off-Balance-Sheet Risk
The 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 at December 31 are as follows (dollars in thousands):
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.
37
20092008Commitments to extend credit: Variable rate24,839$ 40,036$ Fixed rate6,039 4,487 Standby letters of credit - Variable rate1,279 1,838 Credit card commitments - Fixed rate2,714 2,438 34,871$ 48,799$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 18 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
Contingencies
In the normal course of business the Corporation is involved in various legal proceedings.
Concentration of Credit Risk
The 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 December 31, 2009 represents $48.689 million, or 15.93%, compared to $41.299 million,
or 13.95%, of the commercial loan portfolio on December 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.
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
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.
38
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents information for financial instruments at December 31 (dollars in thousands):
Limitations - Fair value estimates are made at a specific point in time based on relevant market information and
information about the financial instrument. These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Because no market exists
for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value
estimates are based on existing on-and off-balance-sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant
assets and liabilities that are not considered financial assets or liabilities include premises and equipment, other assets, and
other liabilities. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the estimates.
39
CarryingEstimatedCarryingEstimatedAmountFair ValueAmountFair ValueFinancial assets: Cash and cash equivalents45,433$ 45,433$ 10,112$ 10,112$ Interest-bearing deposits678 678 582 582 Securities available for sale46,513 46,513 47,490 47,490 Federal Home Loan Bank stock3,794 3,794 3,794 3,794 Net loans379,085 382,352 366,003 372,080 Other real estate owned5,804 5,804 2,189 2,189 Cash surrender value - life insurance1,485 1,485 1,397 1,397 Accrued interest receivable1,413 1,413 1,457 1,457 Total financial assets484,205$ 487,472$ 433,024$ 439,101$ Financial liabilities: Deposits421,389$ 421,124$ 371,097$ 371,434$ Borrowings36,140 36,447 36,210 36,846 Directors deferred compensation815 815 912 912 Accrued interest payable325 325 488 488 Total financial liabilities458,669$ 458,711$ 408,707$ 409,680$ 20082009
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following tables present information about the Corporation’s assets and liabilities measured at fair value on a recurring
basis at December 31, 2009, and the valuation techniques used by the Corporation to determine those fair values.
Level 1:
liabilities that the Corporation has the ability to access.
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or
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):
The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31, 2009 or 2008.
The Corporation also has assets that under certain conditions are subject to measurement at fair value on a non-recurring
basis. These assets include loans and other real estate owned. The Corporation has estimated the fair values of these assets
using Level 3 inputs, specifically discounted cash flow projections.
40
Quoted Prices in ActiveSignificant OtherSignificantMarkets for IdenticalObservable InputsUnobservable InputsBalance atAssets (Level 1)(Level 2)(Level 3)December 31, 2009AssetsInvestment securities - available for sale-$ 46,513$ -$ 46,513$ LiabilitiesNoneAssets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2009Quoted Prices in ActiveSignificant OtherSignificantMarkets for IdenticalObservable InputsUnobservable InputsBalance atAssets (Level 1)(Level 2)(Level 3)December 31, 2008AssetsInvestment securities - available for sale47,422$ 68$ -$ 47,490$ LiabilitiesNoneAssets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2008
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The Corporation had no investments subject to fair value measurement on a nonrecurring basis.
Impaired loans 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).
41
(dollars in thousands)Quoted PricesSignificantSignificantin Active MarketsOther ObservableUnobservableTotal Losses forBalance atfor Identical AssetsInputsInputsYear EndedDecember 31, 2009(Level 1)(Level 2)(Level 3)December 31, 2009AssetsImpaired loans13,621$ -$ -$ 13,621$ 1,300$ Other real estate owned5,804 - - 5,804 399 1,699$ Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2009(dollars in thousands)Quoted PricesSignificantSignificantin Active MarketsOther ObservableUnobservableTotal Losses forBalance atfor Identical AssetsInputsInputsYear EndedDecember 31, 2009(Level 1)(Level 2)(Level 3)December 31, 2008AssetsImpaired Loans1,030$ -$ -$ 1,030$ 862$ 862$ Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2008
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 20 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 2009 and 2008
(Dollars in Thousands)
42
ASSETS20092008Cash and cash equivalents7,480$ 413$ Investment in subsidiaries48,575 41,990 Other assets156 29 TOTAL ASSETS56,211$ 42,432$ LIABILITIES AND SHAREHOLDERS' EQUITYOther liabilities912$ 880$ Shareholders' equity55,299 41,552 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY56,211$ 42,432$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 20 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
Years Ended December 31, 2009, 2008, and 2007
(Dollars in Thousands)
43
200920082007INCOME: Proceeds from settlement of lawsuits-$ 3,475$ 470$ Other8 9 12 Total income8 3,484 482 EXPENSES: Salaries and benefits250 265 300 Interest- 51 160 Professional service fees196 55 96 Other227 141 127 Total expenses673 512 683 Income (loss) before income taxes and equity in undistributed net income (loss) of subsidiaries(665) 2,972 (201) Provision for (benefit of) income taxes(226) 1,005 (50) Income (loss) before equity in undistributed net income (loss) of subsidiaries(439) 1,967 (151) Equity in undistributed net income (loss) of subsidiaries2,855 (95) 10,314 Net income2,416 1,872 10,163 Preferred dividend and accretion of discount509 - - NET INCOME AVAILABLE TO COMMON SHAREHOLDERS1,907$ 1,872$ 10,163$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 20 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009, 2008, and 2007
(Dollars in Thousands)
44
200920082007Cash Flows from Operating Activities: Net income 2,416$ 1,872$ 10,163$ Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net (income) loss of subsidiaries(2,855) 95 (10,314) Increase in capital from stock option compensation60 82 121 Change in other assets(127) 49 (15) Change in other liabilities32 765 (59) Other(19) - - Net cash (used in) operating activities(493) 2,863 (104) Cash Flows from Financing Activities: Proceeds from issuance of Series A Preferred Stock and common stock warrants11,000 - - Dividend on preferred stock and discount accretion(509) - - Net increase in lines of credit- (1,959) - Purchase of common stock - oddlot shares- (110) - Payments from subsidiaries69 - - Investments in subsidiaries(3,000) (500) - Net cash (used) provided by financing activities7,560 (2,569) - Net increase (decrease) in cash and cash equivalents7,067 294 (104) Cash and cash equivalents at beginning of period413 119 223 Cash and cash equivalents at end of period7,480$ 413$ 119$
Selected Financial Data
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
45
20092008200720062005SELECTED FINANCIAL CONDITION DATA: Total assets515,377$ 451,431$ 408,880$ 382,791$ 298,722$ Loans384,310 370,280 355,079 322,581 239,771 Securities46,513 47,490 21,597 32,769 34,210 Deposits421,389 371,097 320,827 312,421 232,632 Borrowings36,140 36,210 45,949 38,307 36,417 Total equity55,299 41,552 39,321 28,790 26,588 SELECTED OPERATIONS DATA: Interest income23,708$ 24,562$ 28,695$ 24,052$ 16,976$ Interest expense(7,421) (11,698) (15,278) (12,459) (7,196) Net interest income16,287 12,864 13,417 11,593 9,780 Provision for loan losses3,700 2,300 400 (861) - Net security gains (losses)1,471 64 (1) (1) 95 Other income3,280 4,589 2,007 984 1,016 Other expenses(13,802) (12,558) (12,100) (12,221) (18,255) Income (loss) before income taxes3,536 2,659 2,923 1,216 (7,364) Provision (credit) for income taxes1,120 787 (7,240) (500) - Net income (loss)2,416 1,872 10,163 1,716 (7,364) Preferred dividend and accretion of discount509 - - - - Net income available to common shareholders1,907$ 1,872$ 10,163$ 1,716$ (7,364)$ PER SHARE DATA: Earnings (loss) - Basic.56$ .55$ 2.96$ .50$ (2.15)$ Earnings (loss) - Diluted.56 .55 2.96 .50 (2.15) Cash dividends declared- - - - - Book value13.10 12.15 11.47 8.40 7.75 Market value - closing price at year end4.64 4.40 8.98 11.50 9.10 FINANCIAL RATIOS: Return on average equity3.77 %4.61 %31.05 %6.19 %(25.63) % Return on average assets.39 .442.59 .49(2.58) Dividend payout ratioN/AN/AN/AN/AN/A Average equity to average assets 10.24 9.55 8.34 7.97 10.05 Efficiency ratio73.37 85.51 79.46 93.95 160.43 Net interest margin3.59 3.23 3.60 3.51 3.64 Years Ended December 31
Summary Quarterly Financial Information
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in Thousands, Except per Share Data)
46
12/319/306/303/3112/319/306/303/31BALANCE SHEETTotal loans384,310$ 384,100$ 372,004$ 370,776$ 370,280$ 361,521$ 362,122$ 360,056$ Allowance for loan losses(5,225) (4,081) (4,119) (4,793) (4,277) (3,385) (3,585) (3,924) Total loans, net379,085 380,019 367,885 365,983 366,003 358,136 358,537 356,132 Intangible assets- - 6 26 46 65 85 104 Total assets515,377 513,180 506,304 466,375 451,431 440,953 437,327 417,175 Core deposits209,828 200,541 202,892 196,860 195,165 208,940 200,293 203,445 Noncore deposits (1)211,561 218,040 210,260 188,897 175,932 151,754 156,683 122,602 Total deposits421,389 418,581 413,152 385,757 371,097 360,694 356,976 326,047 Total borrowings36,140 36,140 36,210 36,210 36,210 36,210 36,280 48,849 Total shareholders' equity55,299 55,766 53,939 41,864 41,552 41,427 40,975 39,633 Total shares outstanding3,419,736 3,419,736 3,419,736 3,419,736 3,419,736 3,419,736 3,419,736 3,428,695 AVERAGE BALANCE SHEETTotal loans386,203$ 370,310$ 371,609$ 370,943$ 366,077$ 358,844$ 362,574$ 357,778$ Allowance for loan losses(3,872) (4,231) (4,847) (4,405) (3,530) (3,500) (3,886) (4,079) Total loans, net382,331 366,079 366,762 366,538 362,547 355,344 358,688 353,699 Intangible assets- 1 16 35 55 75 94 113 Total assets514,102 513,687 491,205 454,740 441,583 423,702 418,246 417,682 Core deposits204,972 201,854 198,631 194,962 201,159 208,460 201,765 202,841 Noncore deposits (1)213,308 217,248 202,879 177,707 157,054 132,917 130,960 133,175 Total deposits418,280 419,102 401,510 372,669 358,213 341,377 332,725 336,016 Total borrowings36,140 36,194 36,376 36,648 37,969 37,245 42,430 39,382 Total shareholders' equity55,665 54,594 49,855 41,813 41,516 41,097 40,399 39,491 ASSET QUALITY RATIOSNonperforming loans/total loans3.96 %3.00 %2.66 %3.52 %1.32%1.29%1.27%.94%Nonperforming assets/total assets4.08 3.38 2.93 3.27 1.571.451.831.08Allowance for loan losses/total loans1.36 1.06 1.11 1.29 1.16.94.991.09Allowance for loan losses/nonperforming loans34.29 35.40 41.71 36.72 87.5272.8177.22116.06Net charge-offs/average loans.30 .20 .22 .01 .06 .18 .30 .06 CAPITAL ADEQUACY RATIOSTier 1 leverage ratio9.75 %9.74 %9.65 %7.86 %8.01 %8.31 %8.56%7.85%Tier 1 capital to risk weighted assets11.92 12.18 11.94 9.31 9.25 9.40 9.488.84Total capital to risk weighted assets13.17 13.19 13.00 10.56 10.38 10.31 10.459.92Average equity/average assets10.83 10.63 10.15 9.19 9.40 9.70 9.669.45Tangible equity/tangible assets10.83 10.87 10.65 8.97 9.20 9.38 9.359.48(1) Noncore deposits include brokered deposits and CDs greater than $100,0002009FOR THE QUARTER ENDEDFOR THE QUARTER ENDED2008
Summary Quarterly Financial Information
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in Thousands, Except per Share Data)
47
12/319/306/303/3112/319/306/303/31INCOME STATEMENTNet interest income4,431$ 4,310$ 4,051$ 3,495$ 3,330$ 3,371$ 3,118$ 3,045$ Provision for loan losses2,300 700 150 550 1,100 450 750 - Net interest income after provision2,131 3,610 3,901 2,945 2,230 2,921 2,368 3,045 Total noninterest income1,503 2,418 439 391 308 288 3,747 310 Total noninterest expense3,650 3,443 3,470 3,239 2,961 2,935 3,471 3,191 Income before taxes(16) 2,585 870 97 (423) 274 2,644 164 Provision for income taxes(22) 864 271 7 (171) 58 875 25 Net income6 1,721 599 90 (252) 216 1,769 139 Preferred dividend and accretion of discount186 185 138 - - - - - Net income available to common shareholders(180)$ 1,536$ 461$ 90$ (252)$ 216$ 1,769$ 139$ PER SHARE DATAEarnings per share - basic(.05)$ .45$ .13$ .03$ (.07)$ .06$ .52$ .04$ Earnings per share - diluted(.05) .45 .13 .03 (.07) .06 .52 .04 Book value per share13.10 13.25 12.73 12.24 12.15 12.11 11.98 11.56 Market value per share4.64 4.10 4.50 4.00 4.40 5.26 7.008.50 PROFITABILITY RATIOSReturn on average assets(.14) %1.19 %.38 %.08 %(.23) %.20 %1.70 %.13 %Return on average equity(1.28) 11.16 3.71 .87 (2.42) 2.08 17.62 1.42 Net interest margin3.74 3.66 3.58 3.35 3.20 3.39 3.19 3.13 Efficiency ratio71.03 70.09 76.55 82.36 80.30 79.12 88.45 95.34 Average loans/average deposits92.33 88.36 92.55 99.54 102.20 105.12 108.97 106.48 FOR THE QUARTER ENDED 2009FOR THE QUARTER ENDED 2008
Market Information
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
MARKET INFORMATION
(Unaudited)
The Corporation’s common stock is traded on the NASDAQ Capital Market under the symbol MFNC. The following table
sets forth the range of high and low trading prices of the Corporation’s common stock from January 1, 2008 through
December 31, 2009, as reported by NASDAQ.
The Corporation had 1,228 shareholders of record as of March 30, 2010.
The holders of the Corporation’s common stock are entitled to dividends when, and if declared by the Board of Directors of
the Corporation out of funds legally available for that purpose. In determining dividends, the Board of Directors considers
the earnings, capital requirements and financial condition of the Corporation and its subsidiary bank, along with other
relevant factors. The Corporation’s principal source of funds for cash dividends is the dividends paid by the Bank. The
ability of the Corporation and the Bank to pay dividends is subject to regulatory restrictions and requirements. The Bank
currently has a negative retained earnings position which precludes payment of dividends. The Bank, in order to pay
dividends, would need to seek regulatory approval for the restatement of its equity to eliminate the negative retained
earnings position. There were no dividends declared or paid in 2007, 2008 and 2009. There were no sales of unregistered
securities in 2009, nor were there any repurchases of the Corporation’s common stock in 2009.
48
2009March 31June 30September 30December 31High4.72$ 4.50$ 6.37$ 5.85$ Low2.45 3.76 4.00 4.00 Close4.00 4.50 4.10 4.64 Book value, at quarter end12.24 12.73 13.25 13.10 2008High9.24$ 8.50$ 8.00$ 5.95$ Low7.55 7.00 3.00 3.75 Close8.50 7.00 5.26 4.40 Book value, at quarter end11.56 11.98 12.11 12.15 For the Quarter Ended
Shareholder Return Performance Graph
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the
Corporation’s common stock with that of the cumulative total return on the NASDAQ Bank Stocks Index and the
NASDAQ Market Index for the five-year period ended December 31, 2009. The following information is based on an
investment of $100, on December 31, 2004 in the Corporation’s common stock, the NASDAQ Bank Stocks Index, and the
NASDAQ Market Index, with dividends reinvested. From August 31, 2001 to December 15, 2004, the Corporation’s
common stock traded on the NASDAQ Small Cap Market under the symbol ―NCFC.‖ Effective with the recapitalization
and the 20:1 reverse stock split on December 16, 2004, the Corporation’s stock began trading on the NASDAQ Small Cap
Market, and later the NASDAQ Capital Market under the symbol ―MFNC‖.
This graph and other information contained in this section shall not be deemed to be ―soliciting‖ material or to be ―filed‖
with the Securities and Exchange Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the
Securities Exchange Act of 1934, as amended.
49
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Mackinac Financial Corporation, The NASDAQ Composite IndexAnd The NASDAQ Bank Index$0$20$40$60$80$100$120$14012/0412/0512/0612/0712/0812/09Mackinac Financial CorporationNASDAQ CompositeNASDAQ Bank*$100 invested on 12/31/04 in stock or index, including reinvestment of dividends.Fiscal year ending December 31.
Forward Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation intends such forward-
looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995 and is including this statement for purposes of these safe harbor provisions.
Forward-looking statements which are based on certain assumptions and describe future plans, strategies, or expectations of
the Corporation, are generally identifiable by use of the words ―believe‖, ―expect‖, ―intend‖, ―anticipate‖, ―estimate‖,
―project‖, or similar expressions. The Corporation’s ability to predict results or the actual effect of future plans or strategies
is inherently uncertain. Factors that could cause actual results to differ from the results in forward-looking statements
include, but are not limited to:
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.
These risks and uncertainties should be considered in evaluating forward-looking statements. Further information
concerning the Corporation and its business, including additional factors that could materially affect the Corporation’s
financial results, is included in the Corporation’s filings with the Securities and Exchange Commission. All forward-
looking statements contained in this report are based upon information presently available and the Corporation assumes no
obligation to update any forward-looking statements.
50
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion will cover results of operations for 2007 through 2009 and asset quality, financial position,
liquidity, interest rate sensitivity, and capital resources for the years 2008 and 2009. The information included in this
discussion is intended to assist readers in their analysis of, and should be read in conjunction with, the consolidated
financial statements and related notes and other supplemental information presented elsewhere in this report. Throughout
this discussion, the term ―Bank‖ refers to mBank, the principal banking subsidiary of the Corporation.
EXECUTIVE OVERVIEW
The purpose of this section is to provide a brief overview of the 2009 results of operations. Additional detail of the balance
sheet and Statement of Operations follows this summary.
The Corporation reported net income available to common shareholders of $1.907 million, or $.56 per share for the year
ended December 31, 2009, compared to net income available to common shareholders of $1.872 million, or $.55 per share
for 2008. Weighted average shares outstanding amounted to 3,419,736 in 2009 and 3,422,012 in 2008.
The 2009 results include $1.208 million of gains related to branch office sales and $1.471 million of security gains. The
2008 results included the positive effect, $3.475 million, of a lawsuit settlement, and the negative effect, $.425 million, of a
severance agreement.
Total assets of the Corporation at December 31, 2009, were $515.377 million, an increase of $63.946 million, or 14.17%
from total assets of $451.431 million reported at December 31, 2008.
At December 31, 2009, the Corporation’s loans stood at $384.310 million, an increase of $14.030 million, or 3.79%, from
2008 year-end balances of $370.280 million. Total loan originations in 2009 amounted to $88.122 million, while we
experienced significant reductions from loan amortization and principal payoffs of $60.415 million. A good portion of
these payoffs pertained to loan relationships that no longer met our pricing or credit standards.
Nonperforming assets increased in 2009, as the economy continued to weaken, especially in Southeast Michigan.
Nonperforming loans totaled $15.237 million, or 3.96% of total loans at December 31, 2009. Nonperforming assets at
December 31, 2009, were $21.041 million, 4.08% of total assets, compared to $7.076 million or 1.57% of total assets at
December 31, 2008.
Total deposits grew from $371.097 million at December 31, 2008, to $421.389 million at December 31, 2009, an increase
of 13.55%. Core deposits increased by $14.663 million after the sale of $29.260 million of deposits in connection with
branch office sales.
Shareholders’ equity totaled $55.299 million at December 31, 2009, compared to $41.552 million at the end of 2008, an
increase of $13.747 million. This increase reflects consolidated net income of $1.907 million, the capital contribution
impact of stock options of $.060 million and the increase in equity due to the increase in the market value of available-for-
sale investments, which amounted to $.648 million. The increase also includes the issuance of Series A Preferred Stock
and common stock warrants and subsequent discount accretion totaling $11.132 million through the Corporation’s
participation in TARP. The book value per share at December 31, 2009, amounted to $13.10 compared to $12.15 at the end
of 2008.
51
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL POSITION
Loans
In 2009, the Corporation increased loan balances by $14.030 million, or 3.79%, from 2008 year-end loan balances of
$370.280 million. The loan growth in 2009 compares to loan growth in 2008 of $15.201 million, or 4.28% from 2007 year-
end loan balances of $355.079 million. The loan growth in 2009 and 2008 was accomplished despite high loan
amortization and principal payoffs on existing portfolio loans of $60.4 million in 2009 and $51.2 million in 2008.
Management continues to actively manage the loan portfolio, seeking to identify and resolve problem assets at an early
stage. Management believes a properly positioned loan portfolio provides the most attractive earning asset yield available
to the Corporation and, with changes to the loan approval process and exception reporting, management can effectively
manage the risk in the loan portfolio. Management intends to continue loan growth within its markets for mortgage,
consumer, and commercial loan products while concentrating on loan quality, industry concentration issues, and
competitive pricing.
Loans represented 74.57% of total assets at the end of 2009 compared to 82.02% at the end of 2008. The loan to deposit
ratio, at 91.2%, is higher than a peer average of approximately 82.7% due in part to the Bank’s utilization of Federal Home
Loan Bank long-term borrowings as a funding source.
Following is a summary of the Corporation’s loan balances at December 31 (dollars in thousands):
The above table more clearly illustrates the growth of the loan portfolio from 2007 through 2009 year end. The
Corporation continues to feel that a properly positioned loan portfolio is the most attractive earning asset available. The
Corporation is highly competitive in structuring loans to meet borrowing needs and satisfy strong underwriting
requirements.
Our commercial real estate loan portfolio predominantly relates to owner occupied real estate, and our loans are generally
secured by a first mortgage lien. Commercial real estate market conditions continued to be under stress in 2009, and we
expect this trend to continue. These conditions may negatively affect our commercial real estate loan portfolio in future
periods. We make commercial loans for many purposes, including: working capital lines, which are generally renewable
annually and supported by business assets, personal guarantees and additional collateral. Commercial business lending is
generally considered to involve a higher degree of risk than traditional consumer bank lending.
Looking forward, based upon the current economic outlook for the Michigan economy, management believes there will be
limited opportunity for loan growth in the near term. The Corporation will continue to use a demanding pricing model for
all new credit opportunities and existing loan renewals.
52
2009200820072009-20082008-2007Commercial real estate208,895$ 185,241$ 171,695$ 12.77 % 7.89 %Commercial, financial, and agricultural72,184 79,734 78,192 (9.47) 1.97 One-to-four family residential real estate67,232 65,595 57,613 2.50 13.85 Construction: Consumer7,118 4,852 5,090 46.70 (4.68) Commercial24,591 31,113 38,952 (20.96) (20.12)Consumer4,290 3,745 3,537 14.55 5.88 Total384,310$ 370,280$ 355,079$ 3.79 % 4.28 %Percent Change
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Following is a table showing the significant industry types in the commercial loan portfolio as of December 31 (dollars in
thousands):
Management recognizes the additional risk presented by the concentration in certain segments of the portfolio. On a
historical basis, the Corporation’s highest concentration of credit risk was the hospitality and tourism industry.
Management does not consider the current loan concentrations in hospitality and tourism to be problematic, and has no
intention of further reducing loans to this industry segment. Management does not believe that its current portfolio
composition has increased exposure related to any specific industry concentration as of 2009 year-end. The current
concentration of real estate related loans represents a broad customer base composed of a high percentage of owner-
occupied developments.
Our residential real estate portfolio predominantly includes one-to-four family adjustable rate mortgages that have repricing
terms generally from one to three years, construction loans to individuals and bridge financing loans for qualifying
customers. As of December 31, 2009, our residential loan portfolio totaled $74.350 million, or 19.35% of our total
outstanding loans.
The Corporation has also extended credit to governmental units, including Native American organizations. Tax-exempt
loans and leases decreased from $5.589 million at the end of 2008 to $3.184 million at 2009 year-end. The Corporation has
elected to reduce its tax-exempt portfolio, since it provides no current tax benefit, due to tax net operating loss
carryforwards.
Due to the seasonal nature of many of the Corporation’s commercial loan customers, loan payment terms provide flexibility
by structuring payments to coincide with the customer’s business cycle. The lending staff evaluates the collectability of the
past due loans based on documented collateral values and payment history. The Corporation discontinues the accrual of
interest on loans when, in the opinion of management, there is an indication that the borrower may be unable to meet the
payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed. Loans are returned to
accrual status when all principal and interest amounts contractually due are brought current and future payments are
reasonably assured.
Credit Quality
The table below shows balances of nonperforming assets for the three years ended December 31 (dollars in thousands):
53
% of% of% of% of% of% ofBalanceLoansCapitalBalanceLoansCapitalBalanceLoansCapitalReal estate - operators of nonres bldgs48,689$ 15.93 %88.05 %41,299$ 13.95 %99.39 %41,597$ 14.40 %105.79 %Hospitality and tourism45,315 14.82 81.95 35,086 11.85 84.44 37,604 13.02 95.63 Real estate agents and managers24,242 7.93 43.84 29,292 9.89 70.50 29,571 10.24 75.20 Other187,424 61.32 338.93 190,411 64.31 458.25 180,067 62.34 457.94 Total305,670$ 100.00 %296,088$ 100.00 %288,839$ 100.00 %200820072009Nonperforming Assets:20092008200714,368$ 4,887$ 3,298$ Accruing loans past due 90 days or more- - 710 Restructured Loans869 - - Total nonperforming loans15,237 4,887 4,008 Other real estate owned5,804 2,189 1,226 Total nonperforming assets21,041$ 7,076$ 5,234$ Nonperforming loans as a % of loans3.96 %1.32 %1.13 %Nonperforming assets as a % of assets4.08 %1.57 %1.28 %Reserve for Loan Losses:At period end5,225$ 4,277$ 4,146$ As a % of loans1.36 %1.16 %1.17 %As a % of nonperforming loans34.29 %87.52 %103.44 %As a % of nonaccrual loans36.37 %87.52 %125.71 %Nonaccrual loans
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Management continues to address market issues impacting its loan customer base. In conjunction with the Corporation’s
senior lending staff and the bank regulatory examinations, management reviews the Corporation’s loans, related collateral
evaluations, and the overall lending process. The Corporation also utilizes a loan review consultant to perform a review of
the loan portfolio. The opinion of this consultant upon completion of the 2009 independent review provided findings
similar to management on the overall adequacy of the reserve. The Corporation will utilize this same consultant for loan
review in 2010.
The following table details the impact of nonperforming loans on interest income for the three years ended December 31
(dollars in thousands):
Allowance for Loan Losses
Management analyzes the allowance for loan losses on a quarterly basis to determine whether the losses inherent in the
portfolio are properly reserved for. Net charge-offs in 2009 amounted to $ 2.752 million, or .73% of average loans
outstanding, compared to $2.169 million, or .60% of loans outstanding in 2008. In 2009, $1.400 million of these charge-
offs resulted from three credit relationships in Southeast Michigan. The current reserve balance is representative of the
relevant risk inherent within the Corporation’s loan portfolio. Additions or reductions to the reserve in future periods will
be dependent upon a combination of future loan growth, nonperforming loan balances and charge-off activity.
A three year history of the Corporation’s credit quality is displayed in the following table (dollars in thousands):
54
200920082007Interest income that would have been recorded at original rate700$ 377$ 391$ Interest income that was actually recorded40 60 129 Net interest lost660$ 317$ 262$ Allowance for Loan Losses200920082007Balance at beginning of period4,277$ 4,146$ 5,006$ Loans charged off: Commercial, financial & agricultural2,4652,0621,148 One-to-four family residential real estate28215789 Consumer717173 Total loans charged off2,818 2,290 1,310 Recoveries of loans previously charged off: Commercial, financial & agicultural3811415 One-to-four family residential real estate16 - - Consumer12 7 35 Total recoveries of loans previously charged off66 121 50 Net loans charged off2,752 2,169 1,260 Provision for loan losses3,700 2,300 400 Balance at end of period5,225$ 4,277$ 4,146$ Total loans, period end384,310$ 370,280$ 355,079$ Average loans for the year374,796 361,324 333,415 Allowance to total loans at end of year1.36 %1.16 %1.17 %Net charge-offs to average loans.73 .60 .38 Net charge-offs to beginning allowance balance64.34 52.32 25.17
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The computation of the required allowance for loan losses as of any point in time is one of the critical accounting estimates
made by management in the financial statements. As such, factors used to establish the allowance could change
significantly from the assumptions made and impact future earnings positively or negatively. The future of the national and
local economies and the resulting impact on borrowers’ ability to repay their loans and the value of collateral are examples
of areas where assumptions must be made for individual loans, as well as the overall portfolio.
The Corporation’s computation of the allowance for loan losses follows the Interagency Policy Statement on Allowance for
Loan and Lease Losses Methodologies and Documentation for Banks and Savings Associations issued by the Federal
Financial Institutions Examination Council (FFIEC) in July 2001. The computation of the allowance for loan losses
considers prevailing local and national economic conditions as well as past and present underwriting practices.
As part of the management of the loan portfolio, risk ratings are assigned to all commercial loans. Through the loan review
process, ratings are modified as believed to be appropriate to reflect changes in the credit. Our ability to manage credit risk
depends in large part on our ability to properly identify and manage problem loans. To do so, we operate a credit risk rating
system under which our credit management personnel assign a credit risk rating to each loan at the time of origination and
review loans on a regular basis to determine each loan’s credit risk rating on a scale of 1 through 8, with higher scores
indicating higher risk. The credit risk rating structure used is shown below. In the context of the credit risk rating
structure, the term Classified is defined as a problem loan which may or may not be in a nonaccrual status, dependent upon
current payment status and collectability.
Excellent (1)
Borrower is not vulnerable to sudden economic or technological changes and is in a non-seasonal business or industry.
These loans generally would be characterized by having good experienced management and a strong liquidity position with
minimal leverage.
Good (2)
Borrower shows limited vulnerability to sudden economic change with modest seasonal effect. Borrower has ―above
average‖ financial statements and an acceptable repayment history with minimal leverage and a profitability that exceeds
peers.
Average (3)
Generally, a borrower rated as average may be susceptible to unfavorable changes in the economy and somewhat effected
by seasonal factors. Some product lines may be affected by technological change. Borrowers in this category exhibit stable
earnings, with a satisfactory payment history.
Acceptable (4)
The loan is an otherwise acceptable credit that warrants a higher level of administration due to various underlying
weaknesses. These weaknesses, however, have not and may never deteriorate to the point of a Special Mention rating or
Classified status. This rating category may include new businesses not yet having established a firm performance record.
Special Mention (5)
The loan is not considered as a Classified status, however may exhibit material weaknesses that, if not corrected, may cause
future problems. Borrowers in this category warrant special attention but have not yet reached the point of concern for loss.
The borrower may have deteriorated to the point that they would have difficulty refinancing elsewhere. Similarly,
purchasers of these businesses would not be eligible for bank financing unless they represent a significantly stronger credit
risk.
Substandard (6)
The loan is Classified and exhibits a number of well-defined weaknesses that jeopardize normal repayment. The assets are
no longer adequately protected due to declining net worth, lack of earning capacity or insufficient collateral offering the
distinct possibility of the loss of a portion of the loan principal. Loans within this category clearly represent troubled and
deteriorating credit situations requiring constant supervision and an action plan must be developed and approved by the
appropriate officers to mitigate the risk.
55
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Doubtful (7)
Loans in this category exhibit the same weaknesses used to describe the substandard credit; however, the traits are more
pronounced. Loans are frozen with collection improbable. Such loans are not yet rated as Charge-off because certain
actions may yet occur which would salvage the loan.
Charge-off/Loss (8)
Loans in this category are largely uncollectible and should be charged against the loan loss reserve immediately.
General Reserves:
For loans with a credit risk rating of 5 or better and any loans with a risk rating of 6 or 7 with no specific reserve, reserves
are established based on the type of loan collateral, if any, and the assigned credit risk rating. Determination of the
allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future
cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, and
consideration of current environmental factors and economic trends, all of which may be susceptible to significant change.
Using a historical average loss by loan type as a base, each loan graded as higher risk is assigned a specific percentage.
Within the commercial loan portfolio, the historical loss rates are used for specific industries such as hospitality, gaming,
petroleum, and forestry. The residential real estate and consumer loan portfolios are assigned a loss percentage as a
homogenous group. If, however, on an individual loan the projected loss based on collateral value and payment histories
are in excess of the computed allowance, the allocation is increased for the higher anticipated loss. These computations
provide the basis for the allowance for loan losses as recorded by the Corporation.
Following is a table showing the specific loan allocation of the allowance for loan losses at December 31, 2009 (dollars in
thousands):
At the end of 2009, the allowance for loan losses represented 1.36% of total loans. In management’s opinion, the
allowance for loan losses is adequate to cover probable losses related to specifically identified loans, as well as probable
losses inherent in the balance of the loan portfolio.
As part of the process of resolving problem credits, the Corporation may acquire ownership of real estate collateral which
secured such credits. The Corporation carries this collateral in other real estate on the balance sheet.
The following table represents the activity in other real estate (dollars in thousands):
56
Commercial, financial and agricultural loans4,805$ One-to-four family residential real estate loans23 Consumer loans13 Unallocated and general reserves384 Total5,225$ Balance at January 1, 20081,226$ Other real estate transferred from loans due to foreclosure2,849 Other real estate transferred to premises and equipment- Other real estate sold / written down(1,886) Balance at December 31, 20082,189 Other real estate transferred from loans due to foreclosure4,879 Reclassification of redemption ORE(475) Other real estate transferred to premises and equipment- Other real estate sold / written down(789) Balance at December 31, 20095,804$
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
During 2009, the Corporation received real estate in lieu of loan payments of $4.879 million. In determining the carrying
value of other real estate, the Corporation generally starts with a third party appraisal of the underlying collateral and then
deducts estimated selling costs to arrive at a net asset value. After the initial receipt, management periodically re-evaluates
the recorded balance and any additional reductions in the fair value result in a write-down of other real estate.
Securities
The securities portfolio is an important component of the Corporation’s asset composition to provide diversity in its asset
base and provide liquidity. Securities decreased $.977 million in 2009, from $47.490 million at December 31, 2008 to
$46.513 million at December 31, 2009.
The carrying value of the Corporation’s securities is as follows at December 31 (dollars in thousands):
The Corporation’s policy is to purchase securities of high credit quality, consistent with its asset/liability management
strategies. In 2009, a net gain of $1.471 million was recorded in connection with the sale of approximately $45 million of
investments. These investments were purchased early in 2009 as a short-term ―leveraging‖ program in the deployment of a
portion of the proceeds from the issuance of preferred stock in conjunction with the Corporation’s participation in TARP.
This ―leveraging‖ program to increase investment securities was intended to offset the relatively high cost of the preferred
stock. Management, along with the concurrence of the Board of Directors, deleveraged this position late in 2009.
All of the bank’s current investments are highly marketable investments guaranteed by the U.S. government. The
Corporation classifies all securities as available for sale, in order to maintain adequate liquidity and to maximize its ability
to react to changing market conditions. At December 31, 2009, investment securities with an estimated fair market value of
$17.077 million were pledged.
Deposits
Total deposits at December 31, 2009 were $421.389 million, an increase of $50.292 million, or 13.55% from December 31,
2008 deposits of $371.097 million. The table below shows the deposit mix for the periods indicated (dollars in thousands):
The increase in deposits, as illustrated above, is composed of an increase in noncore deposits of $35.629 million, with
wholesale brokered deposits increasing by $24.288 million. Core deposits increased by $14.663 million in 2009. In
August 2009, the Bank sold two branch offices with core deposits of approximately $29 million. This strategic decision
was in conjunction the bank’s overall strategy to tighten its existing geographical footprint and concentrate its resources in
the commercial hubs of the Upper Peninsula. The additional wholesale brokered deposits were in part utilized to enhance
57
20092008US Agencies - MBS45,238$ 46,941$ Obligations of states and political subdivisions1,275 549 Total securities46,513$ 47,490$ 2009Mix2008Mix2007MixNon-interest-bearing35,878$ 8.51 %30,099$ 8.11 %25,557$ 7.97 %NOW, money market, checking95,790 22.73 70,584 19.02 81,160 25.30 Savings18,207 4.32 20,730 5.59 12,4853.89 Certificates of Deposit <$100,00059,953 14.23 73,752 19.87 80,607 25.12 Total core deposits209,828 49.79 195,165 52.59 199,809 62.28 Certificates of Deposit >$100,00036,385 8.63 25,044 6.75 22,355 6.97 Brokered CDs175,176 41.57 150,888 40.66 98,663 30.75 Total non-core deposits211,561 50.21 175,932 47.41 121,018 37.72 Total deposits421,389$ 100.00 %371,097$ 100.00 %320,827$ 100.00 %
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
balance sheet liquidity and to fund the acquisition of investments purchased in the TARP leveraging program discussed
earlier in this management discussion, the Corporation expects near term reduction of wholesale deposits to a level of
approximately $100 million as current issues mature.
Although the Corporation has been successful in growing core deposits, the high level of funding required by loan growth
has resulted in increased reliance upon brokered deposits. As of December 31, 2009, non-core deposits amounted to
50.21% of total deposits, an increase from 47.41% at 2008 year-end. A portion, approximately $40.000 million, of the
increase in brokered deposits was used to augment liquidity through the purchase of investment securities. The Bank had
$175.176 million in brokered deposits at December 31, 2009, 41.57% of total deposits.
Management continues to monitor existing deposit products in order to stay competitive, both as to terms and pricing. It is
the intent of management to be aggressive in its markets to grow core deposits with an emphasis placed on transactional
accounts.
Borrowings
The Corporation historically used alternative funding sources to provide long-term, stable sources of funds. Current
borrowings total $35.000 million with stated maturities ranging through 2011. Borrowings at year end include $20.000
million with adjustable rates that reprice quarterly based upon the three month LIBOR. The FHLB has the option to
convert the remaining $15.000 million fixed-rate advances to adjustable rate advances on the original call date and
quarterly thereafter.
Shareholders’ Equity
Changes in shareholders’ equity are discussed in detail in the ―Capital and Regulatory‖ section of this report.
RESULTS OF OPERATIONS
Summary
The Corporation reported net income available to common shareholders of $1.907 million in 2009, compared to net income
of $1.872 million in 2008 and a net income of $10.163 million in 2007. As previously mentioned, the 2009 results include
$1.208 million of gains related to branch office sales and $1.471 million of security gains. The 2008 operating results
include the positive effect, $3.475 million of a lawsuit settlement, and the negative effect, $.425 million of a severance
agreement. The 2007 results of operations include the $7.500 million recognition of a deferred tax benefit pertaining to
NOL and tax credit carryforwards. Also included in the 2007 results is $.470 million from the settlement of the lawsuit
against the Corporation’s former accountants.
58
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table details changes in earnings and earnings per share for the three years ended December 31 (dollars in
thousands, except for per share data):
Net Interest Income
Net interest income is the Corporation’s primary source of core earnings. Net interest income represents the difference
between the average yield earned on interest-earning assets and the average rate paid on interest-bearing obligations. The
net interest income is impacted by economic and competitive factors that influence rates, loan demand, and the availability
of funding.
Net interest income increased $3.423 million to $16.287 million, in 2009. In 2009, the Corporation benefited from low
interest rates prevalent on wholesale deposit instruments. The interest rates in the wholesale environment were
significantly more attractive than offering rates by competitors in local markets. In addition to the benefits derived from
lower rates or wholesale deposit instruments a number of new or rewritten loans were structured with interest rate floors
that locked in a near term favorable interest rate spread.
Net interest income decreased $.553 million to $12.864 million, in 2008. The decrease in net interest income for 2008 was
primarily the result of prime rate reductions that translated into lower yields on the Corporation’s earning assets,
specifically variable rate commercial loans and short-term investments which reprice immediately. Offering rates on
brokered certificates of deposit are influenced by other factors, such as overall market liquidity. During most of 2008, rates
on brokered deposits were high due to overall liquidity issues prevalent in the financial markets. Throughout 2008, as
interest rates continued to decline and economic conditions deteriorated, management evaluated new and existing credit
59
200920082007DollarsDollarsDollarsDollarsPer ShareDollarsPer ShareInterest Income23,708$ 24,562$ 28,695$ (854)$ (.25)$ (4,133)$ (1.21)$ Interest Expense7,421 11,698 15,278 (4,277) (1.25) (3,580) (1.05) Net Interest Income16,287 12,864 13,417 3,423 1.00 (553) (.16) Provision for loan losses3,700 2,300 400 1,400 .41 1,900 .56 Net interest income after provision12,587 10,564 13,017 2,023 .59 (2,453) (.72) Noninterest Income: Service fees1,023 838 688 185 .05 150 .04 Net gains on sale of secondary market loans737 120 498 617 .18 (378) (.11) Proceeds from settlement of lawsuits- 3,475 470 (3,475) (1.01) 3,005 .88 Other 2,991 220 350 2,771 .81 (130) (.04) Total noninterest income4,751 4,653 2,006 98 .04 2,647 .77 Noninterest Expense: Salaries and employee benefits6,583 6,886 6,757 (303) (.09) 129 .04 Occupancy1,385 1,374 1,272 11 .00 102 .03 Furniture and equipment805 771 678 34 .01 93 .03 Data processing862 844 785 18 .01 59 .02 Professional services: Accounting261 254 308 7 .00 (54) (.02) Legal95 41 42 54 .02 (1) .00 Consulting and other247 213 182 34 .01 31 .01 Loan and deposit933 488 250 445 .13 238 .07 FDIC insurance premiums839 81 35 758 .22 46 .01 Telephone187 170 228 17 .00 (58) (.02) Advertising322 305 370 17 .00 (65) (.02) Other 1,283 1,131 1,193 152 .05 (62) (.02) Total noninterest expense13,802 12,558 12,100 1,244 .36 458 .13 Income (loss) before provision for income taxes3,536 2,659 2,923 877 .26 (264) (.08) Provision (credit) for income taxes1,120 787 (7,240) 333 .10 8,027 2.34 Net Income2,416 1,872 10,163 544 .16 (8,291) (2.42) Preferred dividend and accretion of discount509 - - 509 .15 - - Net income available to common shareholders, current period1,907$ 1,872$ 10,163$ 35$ .16$ (8,291)$ (2.42)$ Change2008-2007Income/Expense2009-2008
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
relationships to ensure proper pricing. Floors were established on the majority of new loans and renewals to mitigate
interest rate risk going forward.
The Corporation’s net interest margin, on a fully taxable equivalent basis, was 3.62% in 2009 compared to 3.28% in 2008.
During 2008, the prime rate decreased from 7.25% to 3.25%, which created significant margin pressure since a majority of
the commercial loan portfolio repriced downward with each prime rate change, and the majority of the bank’s funding
sources had significant lag time in repricing. We experienced additional margin pressure due to our brokered deposits,
which did not reprice in line with prime rate reduction, due to the overall market liquidity crisis. Management remains
diligent in its efforts to reduce margin pressure in this decreasing rate environment.
The following table details sources of net interest income for the three years ended December 31, 2009 (dollars in
thousands):
While a majority of the Corporation’s loan portfolio, approximately 65%, is repriced with each prime rate change due to
floating rate loans, interest paid on similar rate changes does not impact the pricing of interest-bearing liabilities to nearly
the same degree. The mix of time deposits reflects the Corporation’s need to utilize the brokered certificate of deposit
markets for loan funding when core deposits did not provide adequate sources. The Corporation has placed a high priority
on gathering in-market core deposits in order to reduce funding costs and reduce the risk associated with non-core funding.
The current low interest rate environment has translated into lower yields on the Corporation’s earning assets, specifically
variable rate commercial loans and short-term investments which reprice immediately. Offering rates on brokered
certificates of deposit are influenced by other factors, such as overall market liquidity. Reliance upon wholesale funding
and further rate reductions in the near term will unfavorably impact the net interest margin of the Corporation.
60
2009Mix2008Mix2007MixInterest Income Loans20,813$ 87.79 %22,959$ 93.48 %26,873$ 93.65 % Funds sold- - 96 .39 391 1.36 Taxable securities2,783 11.74 1,293 5.26 1,100 3.83 Nontaxable securities19 .08 5 .02 - - Other interest-earning assets93 .39 209 .85 331 1.15 Total earning assets23,708 100.00 %24,562 100.00 %28,695 100.00 %Interest Expense NOW, money markets, checking809 10.90 %1,284 10.98 %2,668 17.46 % Savings142 1.92 193 1.65 199 1.30 CDs <$100,0001,857 25.02 3,181 27.19 4,490 29.39 CDs >$100,000633 8.53 1,037 8.86 1,183 7.74 Brokered deposits2,990 40.29 4,420 37.79 4,684 30.66 Borrowings990 13.34 1,583 13.53 2,054 13.44 Total interest-bearing funds7,421 100.00 %11,698 100.00 %15,278 100.00 %Net interest income16,287$ 12,864$ 13,417$ Average Rates Earning assets5.22 %6.16 %7.71 % Interest-bearing funds1.82 3.32 4.62 Interest rate spread3.40 2.84 3.09
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table presents the amount of taxable equivalent interest income from average interest-earning assets and the
yields earned on those assets, as well as the interest expense on average interest-bearing obligations and the rates paid on
those obligations. All average balances are daily average balances.
(1)
(2)
(3)
For purposes of these computations, non-accruing loans are included in the daily average loan amounts outstanding.
The amount of interest income on nontaxable securities and loans has been adjusted to a tax equivalent basis, using a 34% tax rate.
Interest income on loans includes loan fees.
61
(dollars in thousands)AverageAverage AverageAverage AverageAverage BalanceInterestRateBalanceInterestRateBalanceInterestRateASSETS:Loans (1,2,3)374,796$ 20,964$ 5.59 %361,324$ 23,166$ 6.41 %333,415$ 27,146$ 8.14 %Taxable securities74,005 2,782 3.76 28,766 1,293 4.49 25,061 1,100 4.39 Nontaxable securities (2)571 28 4.90 69 8 11.59 5 - - Federal Funds sold74 - - 4,101 96 2.34 7,515 391 5.20 Other interest-earning assets4,415 93 2.11 4,318 209 4.84 6,358 332 5.22 Total earning assets453,861 23,867 5.26 398,578 24,772 6.22 372,354 28,969 7.78 Reserve for loan losses(4,337) (3,747) (4,881) Cash and due from banks19,397 6,901 6,266 Fixed assets10,839 11,453 12,276 Other assets13,892 12,158 6,298 39,791 26,765 19,959 TOTAL ASSETS493,652$ 425,343$ 392,313$ LIABILITIES AND SHAREHOLDERS' EQUITY:NOW and Money Markets73,003$ 665$ .91 %77,997$ 1,245$ 1.60 %77,942$ 2,669$ 3.42 %Interest checking7,735 143 1.85 1,501 39 2.60 - - - Savings deposits20,179 142 .70 15,963 193 1.21 13,013 199 1.53 CDs <$100,00067,356 1,858 2.76 78,755 3,181 4.04 91,313 4,490 4.92 CDs >$100,00026,906 633 2.35 27,079 1,037 3.83 23,879 1,183 4.95 Brokered deposits176,017 2,990 1.70 111,482 4,420 3.96 85,703 4,683 5.46 Borrowings36,338 990 2.72 39,248 1,583 4.03 38,949 2,054 5.27 Total interest-bearing liabilities407,534 7,421 1.82 %352,025 11,698 3.32 330,799 15,278 4.62 Demand deposits31,864 29,348 25,860 Other liabilities3,723 3,340 2,923 Shareholders' equity50,531 40,630 32,731 86,118 73,318 61,514 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY493,652$ 425,343$ 392,313$ Rate spread3.44 2.90 %3.16 %Net interest margin/revenue, tax equivalent basis16,446$ 3.62 %13,074$ 3.28 %13,691$ 3.68 %200720082009Years ended December 31,
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table presents the dollar amount, in thousands, of changes in taxable equivalent interest income and interest
expense for major components of interest-earning assets and interest-bearing obligations. It distinguishes between changes
related to higher or lower outstanding balances and changes due to the levels and fluctuations in interest rates. For each category
of interest-earning assets and interest-bearing obligations, information is provided for changes attributable to (i) changes in
volume (i.e. changes in volume multiplied by prior period rate) and (ii) changes in rate (i.e., changes in rate multiplied by prior
period volume). For purposes of this table, changes attributable to both rate and volume are shown as a separate variance.
Provision for Loan Losses
The Corporation records a provision for loan losses when it believes it is necessary to adjust the allowance for loan losses
to maintain an adequate level after considering factors such as loan charge-offs and recoveries, changes in identified levels
of risk in the loan portfolio, changes in the mix of loans in the portfolio, loan growth, and other economic factors. During
2009, the Corporation recorded a provision for loan loss of $3.700 million, compared to a provision of $2.300 million in
2008. In the third quarter of 2007, the Corporation recorded a $.400 million provision in order to provide for the potential
loss related to a commercial loan.
Noninterest Income
Noninterest income was $4.751 million, $4.653 million, and $2.006 million in 2009, 2008, and 2007, respectively. The
principal recurring sources of noninterest income are the gains on the sale of secondary market loans and fees for services
related to deposit and loan accounts. In 2009, the Corporation recorded a gain on the sale of two branch offices, $1.208
million, and a gain on security sales of $1.471 million. In 2008, the Corporation recorded the benefit of proceeds received,
$3.475 million, from the settlement of a lawsuit. In 2007, the Corporation recognized $.470 million of income from the
settlement of a lawsuit against its former accountants. Service fees were $1.023 million in 2009, while other noninterest
income was $.219 million.
62
TotalTotalVolumeIncreaseVolumeIncreaseVolumeRateand Rate(Decrease)VolumeRateand Rate(Decrease)Interest earning assets:Loans863$ (2,955)$ (110)$ (2,202)$ 2,271$ (5,768)$ (483)$ (3,980)$ Taxable securities2,033 (212) (332) 1,489 163 26 4 193 Nontaxable securities58 (5) (33) 20 - 1 7 8 Federal funds sold(94) (96) 94 (96) (178) (215) 98 (295) Other interest earning assets5 (118) (3) (116) (107) (24) 8 (123) Total interest earning assets2,865$ (3,386)$ (384)$ (905)$ 2,149$ (5,980)$ (366)$ (4,197)$ Interest bearing obligationsNOW and money market deposits(80)$ (535)$ 35$ (580)$ 2$ (1,425)$ (1)$ (1,424)$ Interest checking162 (11) (47) 104 - - 39 39 Savings deposits51 (81) (21) (51) 45 (42) (9) (6) CDs <$100,000(460) (1,010) 147 (1,323) (617) (802) 110 (1,309) CDs >$100,000(7) (400) 3 (404) 159 (269) (36) (146) Brokered deposits2,559 (2,526) (1,463) (1,430) 1,409 (1,285) (387) (263) Borrowings(117) (514) 38 (593) 16 (483) (4) (471) Total interest bearing obligations2,108$ (5,077)$ (1,308)$ (4,277)$ 1,014$ (4,306)$ (288)$ (3,580)$ Net interest income, tax equivalent basis3,372$ (617)$ Increase (Decrease)Years ended December 31,2008 vs. 2007Increase (Decrease)Due to2009 vs. 2008Due to
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table details noninterest income for the three years ended December 31 (dollars in thousands):
Net gains on loan sales increased from $.119 million in 2008 to $.737 million. Net gains on loan sales is comprised of the
gains recognized on the sale of secondary market mortgage loans, which totaled $.224 million in 2009 and the sale of SBA
loans, which totaled $.513 million in 2009. The Corporation anticipates increased revenues from these activities in future
periods. Late in 2009, we increased our capacity for secondary market activities. We hired a primary producer of
secondary market mortgage loans in the Upper Peninsula as well as additional staff in order to support increased volume.
We are also considering additions of other mortgage loan producers to enhance our revenue stream from this activity. We
are also increasing our SBA and USDA lending activities as these types of government sponsored programs become more
advantageous to borrowers. We do anticipate increased fee income in future periods as the housing market improves and
home buyers look to more traditional lenders for their borrowing needs. We did realize increased income from service fees
related to our deposit products. Management initiated several changes in fees associated with various deposit products, to
better align services and costs.
Noninterest Expense
Noninterest expense was $13.802 million in 2009, compared to $12.558 million and $12.100 million in 2008 and 2007,
respectively. In 2009, the increase in noninterest expense totaled $1.244 million, or 9.91%. Salaries and employee benefits
decreased in 2009 by $.303 million to $6.583 million, compared to 2008 expense of $6.886 million. During 2008, the
Corporation recorded a $.425 million expense related to a severance payment. Excluding this item, the Corporation had an
increase in salaries and employee benefits of $.122 million from 2008.
The largest increase in noninterest expense for 2009 occurred in loan and deposit expense, which increased from $.488
million in 2008 to $.933 million in 2009. This increase was due in part to increased costs associated with a higher level of
nonperforming assets. Management expects that costs associated with carrying nonperforming loans will continue to be
above historical norms. The most significant noninterest expense increase was in FDIC insurance assessment premiums
which totaled $.081 million in 2008 and increased to $.839 million in 2009. FDIC insurance costs are also expected to
increase in future periods based upon the need to replenish the deposit insurance fund for charges due to increased bank
failures.
Management will continue to review all areas of noninterest expense in order to evaluate where opportunities may exist
which could reduce expenses without compromising service to customers.
63
2009200820072009-20082008-2007Deposit service charges116$ 101$ 92$ 14.85 %9.78 %NSF Fees907 737 597 23.07 23.45 Gain on sale of secondary market loans224 107 261 109.35 (59.00) Secondary market fees generated93 34 41 173.53 (17.07) SBA Fees513 12 237 4,175.00 (94.94) Proceeds from settlement of lawsuits- 3,475 470 (100.00) 639.36 Other 1,427 123 309 1,060.16 (60.19) Subtotal3,280 4,589 2,007 (28.52) 128.65 Net security gains 1,471 64 (1) 2,198.44 N/A Total noninterest income4,751$ 4,653$ 2,006$ 2.11 %131.95 %% Increase (Decrease)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table details noninterest expense for the three years ended December 31 (dollars in thousands):
Federal Income Taxes
Current Federal Tax Provision
The Corporation recorded a current period federal tax provision of $1.120 million in 2009, compared to a $.787 million
provision in the same period a year earlier due to increased income.
Deferred Tax Benefit
The Corporation recognized a federal deferred tax benefit of $7.500 million in the third quarter of 2007. The recognition of
this deferred tax benefit relates to the generally accepted accounting principles applicable to the probability of utilizing the
NOL and tax credit carryforwards of the Corporation. The Corporation, based upon current profitability trends largely
supported by expansion of the net interest margin and controlled expenses, determined that the utilization of the NOL
carryforward was probable. This tax benefit was recorded by reducing the valuation allowance that was recorded against
the deferred tax assets of the Corporation. The $7.500 million recognition is based upon assumptions of a sustained level of
taxable income within the NOL carryforward period and takes into account Section 382, establishing annual limitations. A
valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred
tax assets will not be realized. As of December 31, 2009, the Corporation had an NOL carryforward of approximately
$28.0 million along with various credit carryforwards of $2.136 million. This NOL and credit carryforward benefit is
dependent upon the future profitability of the Corporation. A portion of the NOL, approximately $18.0 million, and all of
the tax credit carryforwards are also subject to the limitations of Section 382 of the Internal Revenue Code since they
originated prior to the December 2004 recapitalization of the Corporation. The Corporation intends to further evaluate the
utilization of the NOL and credit carryforwards in subsequent periods to determine if any further adjustment to the
valuation allowance is necessary. The determination criteria for recognition of deferred tax benefits will include the
assumption of future period taxable income based upon the projected profitability of the Corporation.
64
% Increase (Decrease)2009200820072009 - 20082008 - 2007Salaries and benefits6,583$ 6,886$ 6,757$ (4.40) %1.91 %Occupancy1,385 1,374 1,272 .80 8.02 Furniture and equipment805 771 678 4.41 13.72 Data processing862 844 785 2.13 7.52 Professional service fees: Accounting261 254 308 2.76 (17.53) Legal95 41 42 131.71 (2.38) Consulting and other247 213 182 15.96 17.03 Total professional service fees603 508 532 18.70 (4.51) Loan and deposit933 488 250 91.19 95.20 FDIC insurance premiums839 81 35 935.80 131.43 Telephone187 170 228 10.00 (25.44) ORE writedowns/impairment187 - 40 N/AN/A(Gain) loss on sale of premises, equipment branch and other real estate23 77 (17) (70.13) (552.94) Advertising322 305 370 5.57 (17.57) Amortization of intangibles46 78 82 (41.03) (4.88) Other operating expenses1,027 976 1,088 5.23 (10.29) Total noninterest expense13,802$ 12,558$ 12,100$ 9.91 %3.79 %
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
In general, the Corporation attempts to manage interest rate risk by investing in a variety of assets which afford it an
opportunity to reprice assets and increase interest income at a rate equal to or greater than the interest expense associated
with repricing liabilities.
Interest rate risk is the exposure of the Corporation to adverse movements in interest rates. The Corporation derives its
income primarily from the excess of interest collected on its interest-earning assets over the interest paid on its interest-
bearing obligations. The rates of interest the Corporation earns on its assets and owes on its obligations generally are
established contractually for a period of time. Since market interest rates change over time, the Corporation is exposed to
lower profitability if it cannot adapt to interest rate changes. Accepting interest rate risk can be an important source of
profitability and shareholder value; however, excess levels of interest rate risk could pose a significant threat to the
Corporation’s earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent
levels is essential to the Corporation’s safety and soundness.
Loans are the most significant earning asset. Management offers commercial and real estate loans priced at interest rates
which fluctuate with various indices, such as the prime rate or rates paid on various government issued securities. When
loans are made with longer-term fixed rates, the Corporation attempts to match these balances with sources of funding with
similar maturities in order to mitigate interest rate risk. In addition, the Corporation prices loans so it has an opportunity to
reprice the loan within 12 to 36 months.
The Bank has $46.513 million of securities, with a weighted average maturity of 22 months. The investment portfolio is
intended to provide a source of liquidity to the Corporation with limited interest rate risk. The Corporation may also elect to
sell monies as investments in federal funds sold to correspondent banks, and has other interest bearing deposits with
correspondent banks. These funds are generally repriced on a daily basis.
The Corporation offers deposit products with a variety of terms ranging from deposits whose interest rates can change on a
weekly basis to certificates of deposit with repricing terms of up to five years. Longer-term deposits generally include
penalty provisions for early withdrawal.
Beyond general efforts to shorten the loan pricing periods and extend deposit maturities, management can manage interest
rate risk by the maturity periods of securities purchased, selling securities available for sale, and borrowing funds with
targeted maturity periods, among other strategies. Also, the rate of interest rate changes can impact the actions taken, since
the speed of change affects borrowers and depositors differently.
Exposure to interest rate risk is reviewed on a regular basis. Interest rate risk is the potential of economic losses due to
future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of
current fair market values. The objective is to measure the effect of interest rate changes on net interest income and to
structure the composition of the balance sheet to minimize interest rate risk and, at the same time, maximize income.
Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. Tools used by
management include maturity and repricing analysis and interest rate sensitivity analysis. The Bank has monthly asset/
liability (―ALCO‖) meetings, whose membership includes senior management, board representation and third party
investment consultants. During these monthly meetings, we review the current ALCO position and strategize about future
opportunities on risks relative to pricing and positioning of assets and liabilities.
The difference between repricing assets and liabilities for a specific period is referred to as the gap. An excess of repricable
assets over liabilities is referred to as a positive gap. An excess of repricable liabilities over assets is referred to as a
negative gap. The cumulative gap is the summation of the gap for all periods to the end of the period for which the
cumulative gap is being measured.
Assets and liabilities scheduled to reprice are reported in the following timeframes. Those instruments with a variable
interest rate tied to an index and considered immediately repricable are reported in the 1 to 90 day timeframe. The
65
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
estimates of principal amortization and prepayments are assigned to the following time frames.
The following is the Corporation’s repricing opportunities at December 31, 2009 (dollars in thousands):
The above analysis indicates that at December 31, 2009, the Corporation had a cumulative liability sensitivity GAP position
of $17.977 million within the one-year timeframe. The Corporation’s cumulative liability sensitive GAP suggests that if
market interest rates were to increase in the next twelve months, the Corporation has the potential to earn less net interest
income since more liabilities would reprice at higher rates than assets. Conversely, if market interest rates decrease in the
next twelve months, the above GAP position suggests the Corporation’s net interest income would increase. A limitation of
the traditional GAP analysis is that it does not consider the timing or magnitude of non-contractual repricing or unexpected
prepayments. In addition, the GAP analysis treats savings, NOW and money market accounts as repricing within 90 days,
while experience suggests that these categories of deposits are actually comparatively resistant to rate sensitivity
At December 31, 2008, the Corporation had a cumulative liability sensitivity gap position of $47.708 million within the
one-year time frame.
The borrowings in the gap analysis include $15 million of FHLB advances as fixed-rate advances. These advances actually
give the FHLB the option to convert from a fixed-rate advance to an adjustable rate advance with quarterly repricing at
three month LIBOR Flat. The exercise of this conversion feature by the FHLB would impact the repricing dates currently
assumed in the analysis.
The Corporation’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk and foreign
exchange risk. The Corporation has no market risk sensitive instruments held for trading purposes. The Corporation has
limited agricultural-related loan assets, and therefore, has minimal significant exposure to changes in commodity prices.
Any impact that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be
insignificant.
Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control
interest rate risk and the quantitative level of exposure. The Corporation’s interest rate risk management process seeks to
ensure that appropriate policies, procedures, management information systems, and internal controls are in place to
maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest
rate risk, the Corporation assesses the existing and potential future effects of changes in interest rates on its financial
66
1-9091-365>1-5Over 5DaysDaysYearsYearsTotalInterest-earning assets: Loans251,756$ 18,278$ 27,326$ 86,950$ 384,310$ Securities- 11,272 34,441 800 46,513 Other (1)27,678 - - 3,794 31,472 Total interest-earning assets279,434 29,550 61,767 91,544 462,295 Interest-bearing obligations: NOW, money market, savings and interest checking113,997 - - - 113,997 Time deposits33,701 42,554 19,514 569 96,338 Brokered CDs43,593 58,116 70,739 2,728 175,176 Borrowings20,000 15,000 - 1,140 36,140 Total interest-bearing obligations211,291 115,670 90,253 4,437 421,651 Gap68,143$ (86,120)$ (28,486)$ 87,107$ 40,644$ Cumulative gap68,143$ (17,977)$ (46,463)$ 40,644$ (1) includes Federal Home Loan Bank stock
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
condition, including capital adequacy, earnings, liquidity, and asset quality. In addition to changes in interest rates, the
level of future net interest income is also dependent on a number of variables, including: the growth, composition and
levels of loans, deposits, and other earning assets and interest-bearing obligations, and economic and competitive
conditions; potential changes in lending, investing, and deposit strategies; customer preferences; and other factors.
The table below measures current maturity levels of interest-earning assets and interest-bearing obligations, along with
average stated rates and estimated fair values at December 31, 2009 (dollars in thousands). Nonaccrual loans of $14.368
million are included in the table at an average interest rate of 0.00% and a maturity greater than five years.
Foreign Exchange Risk
In addition to managing interest rate risk, management also actively manages risk associated with foreign exchange. The
Corporation provides foreign exchange services, makes loans to, and accepts deposits from, Canadian customers primarily
at its banking office in Sault Ste. Marie. To protect against foreign exchange risk, the Corporation monitors the volume of
Canadian deposits it takes in and then invests these Canadian funds in Canadian commercial loans and securities. As of
December 31, 2009, the Corporation had excess Canadian liabilities of $51,000 (or $53,000 in U.S. dollars). Management
believes the exposure to short-term foreign exchange risk is minimal and at an acceptable level for the Corporation.
Management intends to limit the Corporation’s foreign exchange risk by acquiring deposit liabilities approximately equal to
its Canadian assets.
67
Fair Value20102011201220132014ThereafterTotal12/31/2009 $ 11,272 $ 23,267 $ 7 10,327$ 840 $ 800 $ 46,513 $ 46,513 3.85 % 4.22 % 5.48 %5.48 %6.42 % 3.26 % 4.44 %41,68621,97423,9106,445 17,455 17,180 128,650 129,165 6.68 7.42 6.99 6.89 6.16 5.58 6.66 255,660 255,660 258,412 5.00 - - - - - 5.00 27,678 - - - - 3,794 31,472 31,472 .24 - - - - 2.00 .45 $ 336,296 $ 45,241 $ 23,917 $ 16,772 $18,295 $ 21,774 $ 462,295 $ 465,562 4.78 %5.78%6.99% 6.02 %6.17% 5.35 % 4.87 % 113,997 - - - - - 113,997 113,997 1.24 % - % - % - %- % - % 1.24 %177,96382,290 5,457 2,132 374 3,298 271,514 271,249 1.45 2.15 3.00 3.53 6.04 3.57 1.74 15,000 - - - - 1,140 16,140 16,437 5.10 - - - - 1.00 4.81 - 20,000 - - - - 20,000 20,010 - .30 .30 $ 306,960 $ 102,290 $ 5,457 $ 2,132 $ 374 $ 4,438 $ 421,651 $ 421,693 1.55 % 1.79 % 3.00 % 3.53 %6.04% 2.91 % 1.62 %Average interest rate Total rate sensitive liabilities Average interest rateFixed interest rate borrowings Average interest rateVariable interest rate borrowings Average interest rate NOW, MMAs, interest checkingRate Sensitive LiabilitiesAverage interest rateInterest-bearing savings, Average interest rateTime deposits Average interest rate Variable interest rate loans Average interest rate Total rate sensitive assets Average interest rateOther assetsPrincipal/Notional Amount Maturing/Repricing In:Rate Sensitive AssetsFixed interest rate loans Average interest rateFixed interest rate securities
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Off-Balance-Sheet Risk
Derivative financial instruments include futures, forwards, interest rate swaps, option contracts and other financial
instruments with similar characteristics. The Corporation currently does not enter into futures, forwards, swaps or options.
However, the Corporation is 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 and involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized
in the consolidated balance sheets. 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 and may
require collateral from the borrower if deemed necessary by the Corporation. Standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance of a customer to a third party up to a stipulated
amount and with specified terms and conditions.
Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Corporation until
the instrument is exercised. See Note 18 to the consolidated financial statements for additional information.
LIQUIDITY
Liquidity is defined as the ability to generate cash at a reasonable cost to fulfill lending commitments and support asset
growth, while satisfying the withdrawal demands of customers and make payments on existing borrowing commitments.
The Bank’s principal sources of liquidity are core deposits and loan and investment payments and prepayments. Providing
a secondary source of liquidity is the available for sale investment portfolio. As a final source of liquidity, the Bank can
exercise existing credit arrangements.
During 2009, the Corporation increased cash and cash equivalents by $35.321 million. As shown on the Corporation’s
consolidated statement of cash flows, liquidity was primarily impacted by cash provided by investing activities, a net
increase in loans of $21.218 million and a ―net‖ decrease in securities available for sale of $2.629 million. The net
increases in assets were offset by a similar increase in deposit liabilities of $79.552 million. This increase in deposits was
composed of an increase in non-core deposits of $35.629 million combined with an increase in bank deposits of $14.663
million. The management of bank liquidity for funding of loans and deposit maturities and withdrawals includes
monitoring projected loan fundings and scheduled prepayments and deposit maturities within a 30 day period, a 30 to 90
day period and from 90 days until the end of the year. This funding forecast model is completed weekly.
The Bank’s investment portfolio, most of which are guaranteed by the U.S. government, provide added liquidity during
periods of market turmoil and overall liquidity concerns in the financial markets. As of December 31, 2009, $29.436
million of the Bank’s investment portfolio was unpledged, which makes them readily available for sale to address any short
term liquidity needs.
It is anticipated that during 2010, the Corporation will fund anticipated loan production with a combination of core-deposit
growth and noncore funding, primarily brokered CDs.
The Corporation’s primary source of liquidity on a stand-alone basis is dividends from the Bank. The Bank is currently
prohibited from paying dividends because of a deficit in retained earnings. The Bank, in order to pay dividends in future
periods, will need to restate its capital accounts, which requires the approval of the Office of Financial and Insurance
Services of the State of Michigan. The Corporation is currently exploring alternative opportunities for longer term sources
of liquidity and permanent equity to support projected asset growth.
Liquidity is managed by the Corporation through its Asset and Liability Committee (―ALCO‖). The ALCO Committee
meets monthly to discuss asset and liability management in order to address liquidity and funding needs to provide a
process to seek the best alternatives for investments of assets, funding costs, and risk management. The liquidity position
of the Bank is managed daily, thus enabling the Bank to adapt its position according to market fluctuations. Core deposits
are important in maintaining a strong liquidity position as they represent a stable and relatively low cost source of funds.
The Bank’s liquidity is best illustrated by the mix in the Bank’s core and non-core funding dependency ratio, which
explains the degree of reliance on non-core liabilities to fund long-term assets. Core deposits are herein defined as demand
deposits, NOW (negotiable order withdrawals), money markets, savings and certificates of deposit under $100,000. Non-
core funding consists of certificates of deposit greater than $100,000, brokered deposits, and FHLB and other borrowings.
At December 31, 2009, the Bank’s core deposits in relation to total funding was 45.86% compared to 47.92% in 2008.
These ratios indicated at December 31, 2009, that the Bank has decreased its reliance on non-core deposits and borrowings
to fund the Bank’s long-term assets, namely loans and investments. The Bank believes that by maintaining adequate
volumes of short-term investments and implementing competitive pricing strategies on deposits, it can ensure adequate
liquidity to support future growth. The Bank also has correspondent lines of credit available to meet unanticipated short-
68
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
term liquidity needs. As of December 31, 2009, the Bank had $15.875 million of unsecured lines available and another
$7.085 million available if secured. Management believes that its liquidity position remains strong to meet both present
and future financial obligations and commitments, events or uncertainties that have resulted or are reasonably likely to
result in material changes with respect to the Bank’s liquidity.
From a long-term perspective, the Corporation’s liquidity plan for 2010 includes strategies to increase core deposits in the
Corporation’s local markets and will continue to augment local deposit growth efforts with wholesale CD funding, to the
extent necessary.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As disclosed in the Notes to the Consolidated Financial Statements, the Corporation has certain obligations and
commitments to make future payments under contracts. At December 31, 2009, the aggregate contractual obligations and
commitments are:
(1)The Corporation issued preferred stock in April of 2009 as part of its participation in TARP. The initial term of this preferred stock is five
years with an interest rate of 5%, which increases to 9% after the initial term. Although there is no contractual obligation to do so, the
Corporation intends to repay this obligation within the initial term.
CAPITAL AND REGULATORY
As a bank holding company, the Corporation is required to maintain certain levels of capital under government regulation.
There are several measurements of regulatory capital, and the Corporation is required to meet minimum requirements under
each measurement. The federal banking regulators have also established capital classifications beyond the minimum
requirements in order to risk-rate deposit insurance premiums and to provide trigger points for prompt corrective action in
the event an institution becomes financially troubled. As of December 31, 2009, the Corporation and the Bank were well
capitalized. The Corporation is currently exploring its alternatives for the possible issuance of equity or debt in order to
provide a broader base to support future asset growth. During 2009, total capitalization increased by $13.747 million from
the issuance of preferred stock and common stock warrants in conjunction with the Corporation’s participation in TARP.
Other increases in total capital occurred from recognition of net income and market value increase of the Corporation’s
investment securities. During 2009, risk based capital increased by $15.449 million, while Tier 1 Capital increased by
$14.545 million.
69
Contractual ObligationsLess than 1 Year1 to 3 Years4 to 5 YearsAfter 5 YearsTotalTotal deposits327,838$ 87,747$ 2,506$ 3,298$ 421,389$ Federal Home Loan Bank borrowings15,000 20,000 - - 35,000 Preferred stock (1)- - 11,000 - 11,000 Other borrowings- - - 1,140 1,140 Directors' deferred compensation132 246 237 424 1,039 Annual rental / purchase commitments under noncancelable leases / contracts209 92 - - 301 TOTAL343,179$ 108,085$ 13,743$ 4,862$ 469,869$ Other CommitmentsLetters of credit1,279$ -$ -$ -$ 1,279$ Commitments to extend credit30,878 - - - 30,878 Credit card commitments2,714 - - - 2,714 TOTAL34,871$ -$ -$ -$ 34,871$ Payments Due by Period
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table details sources of capital for the three years ended December 31 (dollars in thousands):
Regulatory capital is not the same as shareholders’ equity reported in the accompanying condensed consolidated financial
statements. Certain assets cannot be considered assets for regulatory purposes. The Corporation’s acquisition intangibles
and a portion of the deferred tax asset are examples of such assets.
70
200920082007Capital StructureShareholders' equity55,299$ 41,552$ 39,321$ Total capitalization55,299$ 41,552$ 39,321$ Tangible capital55,299$ 41,507$ 39,197$ Intangible AssetsSubsidiaries: Core deposit premium-$ 46$ 124$ Other identifiable intangibles- - - Total intangibles-$ 46$ 124$ Risk-Based CapitalTier 1 capital: Shareholders' equity55,299$ 41,552$ 39,321$ Net unrealized (gains) losses on available for sale securities(1,093)(445)(60) Less: disallowed deferred tax asset(4,800)(6,200)(6,990) Less: intangibles- (46)(124) Total Tier 1 capital49,406$ 34,861$ 32,147$ Tier 2 Capital: Allowable reserve for loan losses5,181$ 4,277$ 4,146$ Qualifying long-term debt- - - Total Tier 2 capital5,181 4,277 4,146 Total risk-based capital54,587$ 39,138$ 36,293$ Risk-weighted assets414,440$ 376,986$ 358,410$ Capital Ratios: Tier 1 Capital to average assets9.75%8.01%8.05% Tier 1 Capital to risk-weighted assets11.92%9.25%8.97% Total Capital to risk-weighted assets13.17%10.38%10.13%
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Presented below is a summary of the Corporation’s and Bank’s capital position in comparison to generally applicable
regulatory requirements:
The Corporation intends to maintain the Bank’s Tier I Capital at 8% and total capital to risk-weighted assets at a minimum
of 10.00% in order to qualify for reduced FDIC deposit based insurance.
IMPACT OF INFLATION AND CHANGING PRICES
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and results of operations in historical dollars without considering the
change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Corporation’s operations. Nearly all the assets and liabilities of the Corporation are financial, unlike
industrial or commercial companies. As a result, the Corporation’s performance is directly impacted by changes in interest
rates, which are indirectly influenced by inflationary expectations. The Corporation’s ability to match the interest
sensitivity of its financial assets to the interest sensitivity of its financial liabilities tends to minimize the effect of changes
in interest rates on the Corporation’s performance. Changes in interest rates do not necessarily move to the same extent as
changes in the prices of goods and services.
71
TangibleTier 1Tier 1TotalEquity toEquity to Capital toCapital toCapital to Year-endYear-endAverageRisk WeightedRisk WeightedAssetsAssetsAssetsAssetsAssetsRegulatory minimum for capital adequacy purposesN/AN/A4.00%4.00%8.00%Regulatory defined well capitalized guidelineN/AN/A5.00%6.00%10.00%The Corporation: December 31, 200910.73%10.73%9.75%11.92%13.17% December 31, 20089.21%9.20%8.01%9.25%10.38%The Bank: December 31, 20099.38%9.38%8.38%10.24%11.49% December 31, 20089.25%9.24%8.09%9.32%10.44%
Directors and Officers
72
OFFICERSMackinac Financial CorporationNameTitleLocationPaul D. TobiasChairman and Chief Executive OfficerBirminghamKelly W. GeorgePresidentManistiqueErnie R. KruegerEVP - Chief Financial OfficerManistiquemBankNameTitleLocationBernadette C. BeaudreAVP - Deposit Compliance OfficerManistiqueShelby J. BischoffAVP - Business Development OfficerMarquetteLinda K. BoldaVP - Human Resources ManagerManistiqueJesse A. DeeringFirst VP - SEM ExecutiveBirminghamKevin D. EvansSVP - Retail Sales ManagementNewberryJeremy W. FlodinAVP - Sr. Credit Admin/Credit Risk AnalystManistiqueJack C. FrostRegional President - UPMarquetteLaura L. GarvinVP - Commercial Banking OfficerBirminghamKelly W. GeorgePresident and CEOManistiqueClarice A. GhiardiVP - Mortgage/Consumer Banking OfficerMarquetteRobert C. HenryVP - Commercial Banking OfficerTraverse CityErnie R. KruegerEVP - Chief Financial OfficerManistiqueJake D. MartinSVP - IT ManagerManistiqueBoris MartyszVP - Commercial Banking OfficerMarquetteTamara R. McDowellSVP - Sernior Credit/Operations OfficerManistiqueJacquelyn R. MenhennickSVP - Mortgage and Consumer Lending ManagerMarquetteBarbara A. ParrettAVP - Branch Sales Manager/Retail Banking OfficerStephensonScott A. RavetVP - Commercial Banking OfficerManistique/EscanabaKimberly R. RobinsonVP - New Business DevelopmentBirminghamJason J. RollingAVP - Commercial Banking OfficerMarquetteAndrew P. SabatineRegional President - NLPTraverse CityGregory D. SchuetterVP - Commercial Banking OfficerManistiqueJoanna B. SlaghtSVP - Compliance/Risk Manager/BSA OfficerManistiqueMichael A. SlaghtVP - Branch Sales Manager/Retail Banking OfficerNewberryJennifer A. StempkiVP - Assistant ControllerManistiqueAnn M. SteppSVP - Branch AdministrationGaylordDavid R. ThomasVP - Commercial Banking OfficerSault Ste. MarieTimothy J. TimmerVP - Commercial Banking OfficerGaylordPaul D. TobiasChairmanBirminghamJanet M. WillbeeAVP - Mortgage Loan OfficerGaylordWalter J. Aspatore - Lead DirectorRobert H. OrleyChairmanVice President and SecretaryAmherst PartnersReal Estate Interests Group, Inc.Director Since: 2004Director Since: 2004Dennis B. BittnerL. Brooks PattersonOwner and PresidentCounty ExecutiveBittner Engineering, Inc.Oakland CountyDirector Since: 2001Director Since: 2006Joseph D. GareaRandolph C. PaschkeManaging PartnerChairman, Department of AccountingHancock SecuritiesWayne State University, School of Business AdministrationDirector Since: 2007Director Since: 2004Kelly W. GeorgePaul D. TobiasPresident, Mackinac Financial CorporationChairman and CEO, Mackinac Financial CorporationPresident and CEO, mBankChairman, mBankDirector Since: 2006Director Since: 2004Robert E. MahaneySole ProprietorVeridea Group, LLCDirector Since: 2008DIRECTORSMackinac Financial Corporation and mBank
Corporate Information
CORPORATE HEADQUARTERS
Mackinac Financial Corporation
130 South Cedar Street
Manistique, Michigan 49854
(888) 343-8147
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(800) 368-5948
INVESTOR RELATIONS
(888) 343-8147
WEBSITE
www.bankmbank.com
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Plante and Moran, PLLC
Auburn Hills, Michigan
STOCK LISTING AND SYMBOL
NASDAQ Capital Market
Symbol: MFNC
SHAREHOLDER INFORMATION
Copies of the Corporation’s 10-K and 10-Q reports as filed with the Securities and Exchange Commission are available
upon request from the Corporation.
ANNUAL SHAREHOLDERS’ MEETING
The 2010 Annual Meeting of the Shareholders of Mackinac Financial Corporation will be held on Wednesday May 26,
2010.
Visit our website, www.bankmbank.com, for updated news releases, financial reports, SEC filings, corporate governance
and other investor information.