2010 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........................................................................................................................48
Summary Quarterly Financial Information ..........................................................................................50
Market Information ..............................................................................................................................51
Shareholder Return Performance Graph ..............................................................................................52
Forward-Looking Statements...............................................................................................................53
Management’s Discussion and Analysis of Financial
Condition and Results of Operations ................................................................................................54
Directors and Officers ..........................................................................................................................77
______________________________________________________________________________________
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 $475 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 11 branch locations; seven in the Upper Peninsula, three in the Northern Lower Peninsula and one in
Oakland County, Michigan. 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 1,216 shareholders of record as of March 30, 2011.
To Our Shareholders
March 31, 2011
Dear Shareholders:
This letter will provide you with an update of the 2010 results of operations for Mackinac Financial Corporation
(―MFNC‖), the progress we are making in reducing nonperforming assets and the relative success we’ve had in other areas
of the Corporation to build franchise value in this trying and difficult economic environment.
Following are several areas that we believe improved franchise value during 2010 and are indicative of increased
earnings potential for future periods:
We grew core bank deposits by $80 million. This reduced our reliance on wholesale deposits by $115.4 million,
reducing balance sheet risk. We experienced core deposit growth in all of our markets, with $40 million in
Northern Lower Michigan, $11 million in Southeast Michigan and $29 million in the Upper Peninsula. Most of
our 2010 deposit growth occurred in low cost transactional accounts which grew by $44 million.
We continued to experience good loan demand with approximately $114 million of new loan production, which
included $37 million of mortgage loans sold in the secondary market. At 2010 year-end, the Corporation’s loans
stood at $383.086 million, a slight decrease from the 2009 year-end balances of $384.310 million. Our total
outstanding loans declined by $1.2 million after reductions for loan sales, (both SBA/USDA and secondary
market) amortization and payoffs, some associated with the elimination of problem assets. We continue to be
highly successful in producing well priced high quality loans in the Upper Peninsula with 2010 loan production of
$81 million. Loan production totaled $22 million in Northern Lower Michigan and $11 million in Southeast
Michigan where the market have been hit the hardest by the recession.
In 2010 we had continued success in the origination and sales of SBA/USDA loans with total fee income of $.9
million in 2010 compared to $.5 million in fee income during 2009. We continue to be a state leader in these
programs.
One of our initiatives for 2010 was the expansion of our consumer lending program by hiring several key
mortgage loan producers and the centralization of our consumer lending processing. This was successful, with
secondary market fee income of $.5 million in 2010 compared to $.3 million in 2009 and an increase in total
consumer loan production from $39 million in 2009 to $60 million in 2010. We also have retained the servicing of
approximately $27 million of mortgage loans which provides future refinancing opportunities and is a source of
core deposits.
We improved our net interest margin from 3.74% in the fourth quarter of 2009 to 3.88% in 2010’s fourth quarter.
Given our current funding structure, we expect to see this improve throughout 2011 as well.
We had an overall reduction in nonperforming assets from $21.0 million at the end of 2009 to $16.1 million at the
end of 2010. As noted above, the resolution of problem assets during 2010 impacted our earnings but we divested
these problem loans and OREO properties so that we could eliminate holding costs and forego the opportunity cost
that impacts longer-term shareholder value creation.
1
To Our Shareholders
2010 Earnings Recap
In 2010, our operating results were disappointing, as we reported an after tax loss of $1.160 million, or $.34 per share. This
loss occurred as a result of credit related charges that included a $6.500 million loan loss provision, $2.753 million in
OREO charges and other related costs associated with problem assets such as legal services and OREO carrying costs.
As you will note from the chart above, which is not a GAAP measure, the company’s ―core earnings‖ run rate outside of
credit related charges and other one-time items has improved as the result of lowered funding costs from the significant
growth in our core deposit base, control of non-interest expenses, and increases in non-interest income from our
SBA/USDA lending programs
Loan Growth/Production
As stated previously we continue to experience good loan demand as demonstrated with approximately $114 million in new
loan production during 2010, including $37 million of mortgage loans sold in the secondary market. Our loan balances
actually declined slightly from year-end 2009 balances. The table below details the 2010 activity.
Loan production, excluding secondary market mortgage loans of $37 million, in our three geographical regions is shown
below.
We have generated loan growth in all regions and we will continue to evaluate growth potential in markets where we can
grow loans with good credit quality and acceptable loan pricing enhanced by fee income.
2
Earnings Analysis201020092008Income before tax and preferred dividends, as reported:(3,917)$ 3,536$ 2,659$ Credit related costs: Loan loss provision6,500 3,700 2,300 OREO write-downs/gains and losses2,753 208 (80) Noncore income: Security gains215 1,471 64 Gain on sale of branch offices- 1,208 - "Adjusted" income before taxes and preferred dividends5,121$ 4,765$ 4,815$ (Excluding items, noted above)Loan balances as of December 31, 2009384,310$ Production, excluding secondary market mortgage loans77,093 SBA loan sales(12,571) Loans transferred to OREO(5,373) Loans charged off, net of recoveries(5,112) Normal amortization/paydowns and payoffs(55,261) Loan balances as of December 31, 2010383,086$ (dollars in thousands)201020092008REGIONUpper Peninsula55,475$ 43,777$ 37,040$ Northern Lower Peninsula10,972 35,027 14,183 Southeast Michigan10,646 9,318 10,374 TOTAL77,093$ 88,122$ 61,597$ For the Year Ending December 31,
To Our Shareholders
Government Guaranteed Lending Programs
The Corporation has made a concentrated 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.
In addition to the level of SBA production generated, the Corporation recorded $.868 million in fees for 2010, for a total of
$1.680 million over the last four years. The Corporation 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 Corporation 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.
We are pleased with the progress we have made here; first in terms to the benefit of the Corporation, but also for the many
local businesses in these markets that through these programs are provided the capital to grow their organization to help
rebuild the economic base of the State.
Core Deposit Growth
One of our primary objectives during 2010 was to decrease our reliance on wholesale funding.
Shown below is the mix of our deposits for the three most recent years.
As shown in the table above, core deposits grew by more than $80 million in 2010, 38.5%.
Noninterest Expense
Controlling noninterest expense is a distinct challenge for a strategy based upon growth. We accept this challenge and
recognize that certain operational costs will increase in future periods; however, we will continue to use a cost benefit
analysis to evaluate any major initiatives. In 2010, our operating costs were negatively impacted by costs associated with
nonperforming assets, which we expect to reduce in 2011. We have been successful in controlling most other areas of
noninterest expense and will continue to focus on becoming more efficient.
3
SBA Loans OriginatedFor the Year Ended December 31,201020092008# LoansSBA AmountPremium# LoansSBA AmountPremium# LoansSBA AmountPremiumUP13 8,733$ 609$ 32 6,797$ 373$ 2 386$ 18$ NLP8 3,838 258 10 5,829 125 6 1,009 5 SEM- - - - - - 3 572 3 Total21 12,571$ 867$ 42 12,626$ 498$ 11 1,967$ 26$ As of December 31, Percent Change2010Mix2009Mix2008Mix2010/20092009/2008CORE DEPOSITSTransactional accounts: Noninterest bearing41,264$ 10.67 %35,878$ 8.51 %30,099$ 8.11 %15.01 %19.20 % NOW, money market, checking134,703 34.83 95,790 22.73 70,584 19.02 40.62 35.71 Savings17,670 4.57 18,207 4.32 20,730 5.59 (2.95) (12.17) Total transactional accounts193,637 50.07 149,875 35.56 121,413 32.72 29.20 23.44 Certificates of deposit <$100,00096,977 25.07 59,953 14.23 73,752 19.87 61.76 (18.71) Total core deposits290,614 75.14 209,828 49.79 195,165 52.59 38.50 7.51 NONCORE DEPOSITSCertificates of deposit >$100,00022,698 5.87 36,385 8.63 25,044 6.75 (37.62) 45.28 Brokered CDs73,467 18.99 175,176 41.58 150,888 40.66 (58.06) 16.10 Total noncore deposits96,165 24.86 211,561 50.21 175,932 47.41 (54.55) 20.25 TOTAL DEPOSITS386,779$ 100.00 %421,389$ 100.00 %371,097$ 100.00 %(8.21) %13.55 %DEPOSIT MIX
To Our Shareholders
Capital/Shareholders’ Equity
At the end of 2010, the Corporation and the Bank had strong capital positions. The Corporation had a Tier 1 ratio of 9.25%
and total risk based capital of 12.62%. The Bank’s Tier 1 capital ratio stood at 8.09% with a total risk based capital ratio of
11.18%. Common equity of MFNC totaled $43.176 million with book value per share at $12.63. We believe that our
franchise is undervalued with a year-end market value of $4.58 per share, which is 36% of book value.
Building Franchise Value
As mentioned earlier, with this letter are various charts and graphs which track the performance of the company through 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 from $7.75 per share at December 31, 2005 to $12.63 at 2010 year end, an
increase of $4.88 per share, or 63%. 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 an overview which provides a snapshot of the three distinctively different regions of our franchise, (Upper
Peninsula ―UP‖, Northern Lower Peninsula, and Southeast Michigan).
Looking Forward
In 2011, we will again focus on increased franchise value with one of our key initiatives being the reduction in
nonperforming assets. Another objective is to continue our core deposit growth momentum within all of our markets. We
expect to have continued success in new loan production with increased fee contribution from both secondary market
mortgage loans and SBA/USDA loan sales.
While nonperforming assets are currently below peer levels, we still face challenges in accomplishing our goal for further
reduction given the current Michigan economy. Our 2011 Operating Plan calls for aggressive disposition of these
nonearning assets in order to minimize carrying costs.
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.
Sincerely,
Paul D. Tobias
Chairman and CEO
Mackinac Financial Corporation
Kelly W. George
President and CEO
mBank
4
Five Year Overview
5
Five Year Overview
6
Regional Review – Upper Peninsula
BRANCH LOCATIONS
ESCANABA
Located in Menards
3300 Ludington Street
Escanaba, MI 49829
(906) 233-9443
Manager: Debbie L. Peterson
MANISTIQUE
130 South Cedar Street
Manistique, MI 49854
(906) 341-2413
Manager: Magan L. MacArthur
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: David R. Thomas
STEPHENSON
S216 Menominee Street
Stephenson, MI 49887
(906) 753-2225
Manager: Barbara A. Parrett
MANISTIQUE - LAKESHORE
Located in Jack’s Supervalu
Manistique, MI 49854
(906) 341-7190
Manager: Magan L. MacArthur
* Includes production of mortgage loans sold on the secondary market.
7
BALANCE SHEET HIGHLIGHTSAt December 31, 20102010 Activity(dollars in thousands)LoansDepositsLoan ProductionCore Deposit GrowthEscanaba5,772$ 4,747$ 9,087$ 3,192$ Manistique64,131 34,024 19,222 2,334 Marquette72,251 40,423 35,773 11,967 Newberry15,441 35,368 3,929 123 Sault Ste. Marie42,249 22,104 10,665 6,337 Stephenson7,383 30,809 2,112 4,584 TOTAL UPPER PENINSULA207,227$ 167,475$ 80,788$ 28,537$ CONTRIBUTION TO OTHER INCOMESecondary MarketSBA/USDA(dollars in thousands)Production/SoldGains/Fee IncomeProduction/SoldGains/Fee IncomeEscanaba4,852$ 62$ 197$ 18$ Manistique1,717 30 5,278 310 Marquette15,317 207 2,547 221 Newberry1,323 26 582 47 Sault Ste. Marie1,589 25 129 13 Stephenson516 9 - - TOTAL UPPER PENINSULA25,314$ 359$ 8,733$ 609$
Regional Review – Upper Peninsula
Excluding the branch sales, which were predominantly transactional accounts, total deposits grew $44.8 million
in the five year period, with transactional deposits comprising roughly $39.4 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 $214.3 million.
Nonperforming assets in the Upper Peninsula totaled $3.504 million at the end of 2010, which included $.682 million of
OREO and $2.822 million of nonperforming loans. Nonperforming loans as a percent of total loans was 1.36%.
8
Regional Review – Northern Lower Peninsula
Andrew P. Sabatine, Regional President – NLP
BRANCH LOCATIONS
GAYLORD
1955 South Otsego Avenue
Gaylord, MI 49735
(989) 732-3750
Manager: Joni L. Freel
TRAVERSE CITY
3530 North Country Drive
Traverse City, MI 49684
(231) 929-5600
Manager: Andrea Pease
KALEVA
14429 Wuoksi Avenue
Kaleva, MI
(231)362-3223
Manager: Barb J. Miller
* Includes production of mortgage loans sold on the secondary market.
9
BALANCE SHEET HIGHLIGHTSAt December 31, 20102010 Activity(dollars in thousands)LoansDepositsLoan Production*Core Deposit GrowthGaylord38,428$ 43,391$ 12,770$ 13,387$ Kaleva498 14,137 466 3,180 Traverse City49,280 51,545 9,100 23,875 TOTAL NORTHERN LOWER PENINSULA88,206$ 109,073$ 22,336$ 40,442$ CONTRIBUTION TO OTHER INCOMESecondary MarketSBA/USDA(dollars in thousands)Production/SoldGains/Fee IncomeProduction/SoldGains/Fee IncomeGaylord8,777$ 135$ 1,886$ 158$ Kaleva72 2 - - Traverse City2,515 43 1,952 100 TOTAL NORTHERN LOWER PENINSULA11,364$ 180$ 3,838$ 258$
Regional Review – Northern Lower Peninsula
Total deposit growth amounted to $71.5 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 $108.6 million.
Nonperforming assets in the Northern Lower Peninsula totaled $7.964 million at the end of 2010, which included $1.668
million of OREO and $6.296 million of nonperforming loans. Nonperforming loans as a percent of total loans was 7.14%
10
Regional Review – Southeast Michigan
Jesse A. Deering, First VP/Southeast Michigan Executive
BRANCH LOCATION
BIRMINGHAM
260 East Brown Street, Suite 300
Birmingham, MI 48009
(248) 290-5900
Manager: Elena Dritsas
Southeast Michigan had no contribution to other income for the year ended 2010 due in part to a lack of a secondary
market mortgage loan producer and management’s focus on overall credit issues in order to reduce levels of nonperforming
assets.
11
BALANCE SHEET HIGHLIGHTSAt December 31, 20102010 Activity(dollars in thousands)LoansDepositsLoan ProductionCore Deposit GrowthBirmingham87,653$ 36,763$ 10,646$ 11,807$
Regional Review – Southeast Michigan
Total deposit growth amounted to $33.8 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 $152.9 million.
Nonperforming assets in Southeast Michigan totaled $4.657 million at the end of 2010, which included $3.212 million of
OREO and $1.445 million of nonperforming loans. Nonperforming loans as a percent of total loans was 1.65%.
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Selected Financial Highlights
(Dollars in Thousands, Except Per Share Data)
The above summary should be read in connection with the related consolidated financial statements and notes included
elsewhere in this report.
13
(Dollars in thousands, except per share data)20102009(Unaudited)(Unaudited)Selected Financial Condition Data (at end of period):Assets478,696$ 515,377$ Loans383,086 384,310 Investment securities33,860 46,513 Deposits386,779 421,389 Borrowings36,069 36,140 Common shareholders' equity43,176 44,785 Total shareholders' equity53,882 55,299 Selected Statements of Income Data:Net interest income16,385$ 16,287$ Income before taxes and preferred dividend(3,918) 3,536 Net income(1,160) 1,907 Income per common share - Basic(.34) .56 Income per common share - Diluted(.34) .56 Weighted average shares outstanding3,419,736 3,419,736 Selected Financial Ratios and Other Data:Performance Ratios: Net interest margin3.66 %3.59 %Efficiency ratio72.57 72.24 Return on average assets(.23) .39 Return on average common equity(2.64) 4.42 Return on average total equity(2.06) 3.77 Average total assets502,993$ 493,652$ Average common shareholders' equity43,981 43,169 Average total shareholders' equity56,171 50,531 Average loans to average deposits ratio94.36 %92.99 %Common Share Data at end of period:Market price per common share4.58$ 4.64$ Book value per common share12.63$ 13.10$ Common shares outstanding3,419,736 3,419,736 Other Data at end of period:Allowance for loan losses6,613$ 5,225$ Non-performing assets16,125$ 21,041$ Allowance for loan losses to total loans1.73 %1.36 %Non-performing assets to total assets3.37 %4.08 %Texas ratio26.66 %34.77 %Number of: Branch locations11 10 FTE Employees110 100 For The Years Ended December 31,
Quarterly Financial Summary
___________________________________________________________________________________________________
14
AverageAverageAverageAverage Shareholders'Net InterestEfficiencyNet IncomeBook ValueQuarter EndedAssetsLoansDepositsEquityAssetsEquityMarginRatioPer SharePer ShareDecember 31, 2010488,320$ 385,296$ 393,266$ 55,015$ (1.70)%(15.09) %3.88 %65.05 %(.61)$ 12.63$ September 30, 2010512,335 385,268 416,847 56,668 (.08) (.73) 3.69 75.98 (.03) 13.26 June 30, 2010502,942 382,169 405,449 57,889 (1.98) (17.24) 3.56 76.04 (.73) 13.34 March 31, 2010508,495 384,640 413,897 55,109 2.8125.95 3.51 78.12 1.03 14.08 December 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 0.38 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 Return on AverageMACKINAC FINANCIAL CORPORATION(Unaudited) - 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000December-09March-10June-10September-10December-10Dollars (in thousands)At Month EndLOAN PORTFOLIO BALANCESCommercialMortgageLeasesInstallment$4,431 $4,022 $4,023 $4,064 $4,276 3.74%3.51%3.56%3.69%3.88%3.30%3.40%3.50%3.60%3.70%3.80%3.90%4.00% 2,400 2,900 3,400 3,900 4,400 4,900December-09March-10June-10September-10December-10PercentageDollars (in thousands)Quarter EndedNET INTEREST MARGIN - 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000December-09March-10June-10September-10December-10Dollars (in thousands)At Month EndTRANSACTIONAL ACCOUNT DEPOSITSMoney MarketsNOWDemandSavings
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, 2010 and 2009 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, 2010. 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, 2010 and 2009 and the
consolidated results of their operations and their cash flows for each year in the three-year period ended December 31,
2010, in conformity with accounting principles generally accepted in the United States of America.
Grand Rapids, Michigan
March 30, 2011
15
Consolidated Balance Sheets
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 2010 and 2009
(Dollars in Thousands)
_____________________________________________________________________________________________
See accompanying notes to consolidated financial statements.
16
December 31,December 31,20102009ASSETSCash and due from banks22,719$ 18,433$ Federal funds sold12,000 27,000 Cash and cash equivalents34,719 45,433 Interest-bearing deposits in other financial institutions713 678 Securities available for sale33,860 46,513 Federal Home Loan Bank stock3,423 3,794 Loans: Commercial297,047 305,670 Mortgage80,756 74,350 Installment5,283 4,290 Total Loans383,086 384,310 Allowance for loan losses(6,613) (5,225) Net loans376,473 379,085 Premises and equipment9,660 10,165 Other real estate held for sale5,562 5,804 Other assets14,286 23,905 TOTAL ASSETS478,696$ 515,377$ LIABILITIES AND SHAREHOLDERS' EQUITYLiabilities: Non-interest-bearing deposits41,264$ 35,878$ Interest-bearing deposits: NOW, Money Market, Checking134,703 95,790 Savings17,670 18,207 CDs<$100,00096,977 59,953 CDs>$100,00022,698 36,385 Brokered73,467 175,176 Total deposits386,779 421,389 Borrowings: Federal Home Loan Bank35,000 35,000 Other1,069 1,140 Total borrowings36,069 36,140 Other liabilities1,966 2,549 Total liabilities424,814 460,078 Shareholders' equity: Preferred stock - No par value: Authorized 500,000 shares, 11,000 shares issued and outstanding10,706 10,514 Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares Issued and outstanding - 3,419,736 shares43,525 43,493 Retained earnings (accumulated deficit)(961) 199 Accumulated other comprehensive income612 1,093 Total shareholders' equity53,882 55,299 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY478,696$ 515,377$
Consolidated Statements of Operations
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2010, 2009, and 2008
(Dollars in Thousands, Except Per Share Data)
___________________________________________________________________________________________________
See accompanying notes to consolidated financial statements.
17
201020092008INTEREST INCOME: Interest and fees on loans: Taxable21,091$ 20,521$ 22,555$ Tax-exempt188 292 404 Interest on securities: Taxable1,406 2,783 1,293 Tax-exempt28 19 5 Other interest income127 93 305 Total interest income22,840 23,708 24,562 INTEREST EXPENSE: Deposits5,607 6,431 10,115 Borrowings848 990 1,583 Total interest expense6,455 7,421 11,698 Net interest income16,385 16,287 12,864 Provision for loan losses6,500 3,700 2,300 Net interest income after provision for loan losses9,885 12,587 10,564 OTHER INCOME: Service fees990 1,023 838 Net security gains215 1,471 64 Income from loans sold1,407 830 120 Proceeds from settlement of lawsuits- - 3,475 Gain on sales of branch offices- 1,208 - Other183 219 156 Total other income2,795 4,751 4,653 OTHER EXPENSES: Salaries and employee benefits6,918 6,583 6,886 Occupancy1,313 1,385 1,374 Furniture and equipment806 805 771 Data processing740 862 844 Professional service fees627 603 508 Loan and deposit910 725 488 ORE writedowns and (gains) losses on sale 2,753 208 (80) FDIC insurance premiums957 839 81 Other1,574 1,792 1,686 Total other expenses16,598 13,802 12,558 Income before provision for (benefit of) income taxes(3,918) 3,536 2,659 Provision for (benefit of) income taxes(3,500) 1,120 787 NET INCOME (LOSS)(418)$ 2,416$ 1,872$ Preferred dividend and accretion of discount742 509 - NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS(1,160)$ 1,907$ 1,872$ INCOME (LOSS) PER COMMON SHARE Basic(.34)$ .56$ .55$ Diluted(.34)$ .56$ .55$ For The Years Ended December 31,
Consolidated Statements of Changes in Shareholders’ Equity
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2010, 2009, and 2008
(Dollars in Thousands)
_____________________________________________________________________________________________
See accompanying notes to consolidated financial statements.
18
AccumulatedShares ofPreferred Common StockRetainedOtherCommonStockand AdditionalEarningsComprehensiveStockSeries APaid in Capital(Accumulated Deficit)IncomeTotalBalance, January 1, 20083,428,695 -$ 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 loss 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 Net income (loss)- - - (418) - (418) Other comprehensive income: Net unrealized income on securities available for sale- - - - (481) (481) Total comprehensive income (loss)(899) Stock option compensation- - 32 - 32 Dividend on preferred stock- - - (550) - (550) Accretion of preferred stock discount- 192 - (192) - - Balance, December 31, 20103,419,736 10,706$ 43,525$ (961)$ 612$ 53,882$
Consolidated Statements of Cash Flows
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2010, 2009, and 2008
(Dollars in Thousands)
_____________________________________________________________________________________________
See accompanying notes to consolidated financial statements.
19
201020092008Cash Flows from Operating Activities: Net income (loss)(418)$ 2,416$ 1,872$ Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization1,643 2,027 1,355 Provision for loan losses6,500 3,700 2,300 Provision for (benefit of) income taxes(3,500) 1,120 787 (Gain) loss on sales/calls of securities available for sale(215) (1,471) (64) (Gain) loss on sale of secondary market loans(445) (224) (107) Origination of secondary market loans held for sale(36,678) (21,722) (9,985) Proceeds from secondary market loans held for sale37,217 22,039 10,126 (Gain) on sales of branch offices- (1,208) - (Gain) loss on sale of premises, equipment, and other real estate48 23 (77) Writedown of other real estate2,703 187 964 Stock option compensation32 60 82 Change in other assets13,174 (15,626) 333 Change in other liabilities (583) (22) (210) Net cash (used in) provided by operating activities19,478 (8,701) 7,376 Cash Flows from Investing Activities: Net (increase) in loans(9,355) (21,218) (21,173) Net (increase) decrease in interest-bearing deposits in other financial institutions(35) (96) 1,228 Purchase of securities available for sale(5,000) (50,113) (50,813) Proceeds from maturities, sales, calls or paydowns of securities available for sale16,788 52,742 25,373 Capital expenditures(606) (679) (618) Proceeds from sale of premises, equipment, and other real estate2,876 581 1,956 Redemption of FHLB stock371 - - Net cash paid in connection with branch sales- (28,578) - Net cash provided by (used in) investing activities5,039 (47,361) (44,047) Cash Flows from Financing Activities: Net increase (decrease) in deposits(34,610) 80,760 50,270 Issuance of Series A Preferred Stock and common stock warrants- 11,000 - Dividend on preferred stock(550) (307) - Net (decrease) in federal funds purchased- - (7,710) Net (decrease) in lines of credit- - (1,959) Repurchase of common stock-oddlot shares- - (110) Principal payments on borrowings(71) (70) (70) Net cash provided by (used in) financing activities(35,231) 91,383 40,421 Net increase (decrease) in cash and cash equivalents(10,714) 35,321 3,750 Cash and cash equivalents at beginning of period45,433 10,112 6,362 Cash and cash equivalents at end of period34,719$ 45,433$ 10,112$ Supplemental Cash Flow Information:Cash paid during the year for: Interest6,548$ 7,584$ 11,961$ Income taxes75 90 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)5,373 4,879 2,849 Assets and Liabilities Divested in Branch Sales: Loans- 31 - Premises and equipment- 651 - Deposits- 29,260 -
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 2.1%, 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 income on loans is reported on the level-yield method and includes amortization of deferred loan fees and costs
over the loan term. Net loan commitment fees or costs for commitment periods greater than one year are deferred and
amortized into fee income or other expense on a straight-line basis over the commitment period. 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.
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. The other two
plans, one for officers and employees and the other for nonemployee directors, were approved in 1997. A total of 30,000
shares (adjusted for the 1:20 split), were made available for grant under these plans. Options under all of the plans are
granted at the discretion of a committee of the Corporation’s Board of Directors. Options to purchase shares of the
Corporation’s stock were granted at a price equal to the market price of the stock at the date of grant. The committee
determined the vesting of the options when they were granted as established under the plan. All of the option plans have
expired.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive
income (loss) is composed of unrealized gains and losses on securities available for sale, net of tax.
Earnings per Common Share
Earnings per share are based upon the weighted average number of shares outstanding. The issuance of shares as a result of
stock options and common stock warrants issued under the TARP Capital Purchase Program did not have a dilutive effect
on earnings for the year ended December 31, 2010 and 2009.
The following shows the computation of basic and diluted earnings per share for the year ended December 31, 2010 and
2009 (dollars in thousands, except per share data):
The effect of dilutive common stock warrants is not taken into account when calculating the loss per share in 2010, since it
would be anti-dilutive.
22
20102009Net income (loss)(418)$ 2,416$ Preferred stock dividends742 509 Net income (loss) available to common shareholders(1,160)$ 1,907$ Weighted average shares outstanding3,419,736 3,419,736 Effect of dilutive stock options and common stock warrants outstanding60,161 - Diluted weighted average shares outstanding3,479,897 3,419,736 Income (loss) per common share: Basic(.34)$ .56$ Diluted(.34)$ .56$ Year Ended December 31,
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
Recent Developments
In January 2010, the FASB issued ASU No. 2010-06 ―Fair Value Measurements and Disclosures (Topic 820) — Improving
Disclosures about Fair Value Measurements.‖ ASU 2010-06 amends the fair value disclosure guidance. The amendments
include new disclosures and changes to clarify existing disclosure requirements. ASU 2010-06 was effective for interim
and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements of Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years. The impact of ASU 2010-06 on the Company’s
disclosures is reflected in Note 18 of the consolidated financial statements.
In July 2010, FASB issued ASU No. 2010-20 ―Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses‖. The standard requires the Company to expand disclosures about the credit quality of our
loans and the related reserves against them. The additional disclosures will include details on our past due loans and credit
quality indicators. For public entities, ASU 2010-20 disclosures of period-end balances are effective for interim and annual
reporting periods ending on or after December 15, 2010 and are included in Note 4 of the financial statements. Disclosures
related to activity that occurs during the reporting period are required for interim and annual reporting periods beginning on
or after December 15, 2010. The Company will adopt the disclosures related to the activity that occurs during the reporting
period beginning with our March 31, 2011 consolidated financial statements.
Reclassifications
Certain amounts in the 2009 and 2008 consolidated financial statements have been reclassified to conform to the 2010
presentation.
NOTE 2 – RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $2.275 million were restricted on December 31, 2010 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 $250,000.
Management believes that these financial institutions have strong credit ratings and the credit risk related to these deposits
is minimal.
23
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 3 – SECURITIES AVAILABLE FOR SALE
The carrying value and estimated fair value of securities available for sale are as follows (dollars in thousands):
Following is information pertaining to securities with gross unrealized losses at December 31, 2010 and 2009 aggregated
by investment category and length of time these individual securities have been in a loss position (dollars in thousands):
There were two securities in an unrealized loss position in 2010 and two in 2009. The gross unrealized losses in the
current portfolio are considered temporary in nature and related to interest rate fluctuations. The Corporation has both the
ability and intent to hold the investment securities until their respective maturities and therefore does not anticipate the
realization of the temporary losses.
Following is a summary of the proceeds from sales and calls of securities available for sale, as well as gross gains and
losses for the years ended December 31 (dollars in thousands):
24
GrossGrossAmortizedUnrealizedUnrealizedEstimatedCostGainsLossesFair ValueDecember 31, 2010US Agencies - MBS26,787$ 923$ -$ 27,710$ US Agencies5,000 - (27) 4,973 Obligations of states and political subdivisions1,146 35 (4) 1,177 Total securities available for sale32,933$ 958$ (31)$ 33,860$ December 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$ GrossGrossUnrealizedFairUnrealizedFairLossesValueLossesValueDecember 31, 2010US Agencies - MBS(27)$ 4,973$ -$ -$ Obligations of states and political subdivisions(4) 325 - - Total securities available for sale(31)$ 5,298$ -$ -$ December 31, 2009US Agencies - MBS(55)$ 3,309$ -$ -$ Total securities available for sale(55)$ 3,309$ -$ -$ Less Than Twelve MonthsOver Twelve Months201020092008Proceeds from sales and calls8,302$ 44,611$ 12,047$ Gross gains on sales216 1,472 65 Gross (losses) on sales and calls(1) (1) (1)
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 3 – SECURITIES AVAILABLE FOR SALE (CONTINUED)
The carrying value and estimated fair value of securities available for sale at December 31, 2010, 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):
An analysis of the allowance for loan losses for the years ended December 31 is as follows (dollars in thousands):
In 2010, net charge off activity was $5.112 million, or 1.33% of average loans outstanding compared to net charge-offs of
$2.752 million, or .73% of average loans, in the same period in 2009 and $2.169 million, or .60% of average loans, in 2008.
During 2010, a provision of $6.500 million was made to increase the reserve. This provision was made in accordance with
the Corporation’s allowance for loan loss reserve policy, which calls for a measurement of the adequacy of the reserve at
each quarter end. This process includes an analysis of the loan portfolio to take into account increases in loans outstanding
and portfolio composition, historical loss rates, and specific reserve requirements of nonperforming loans.
25
AmortizedEstimatedCostFair ValueDue in one year or less6$ 6$ Due after one year through five years5,634 5,617 Due after five years through ten years506 527 Due after ten years- - Subtotal6,146 6,150 US Agencies - MBS26,787 27,710 Total32,933$ 33,860$ 20102009Commercial real estate194,859$ 208,895$ Commercial, financial, and agricultural68,858 72,184 One to four family residential real estate75,074 67,232 Construction : Consumer5,682 7,118 Commerical33,330 24,591 Consumer5,283 4,290 Total loans383,086$ 384,310$ 201020092008Balance, January 15,225$ 4,277$ 4,146$ Recoveries on loans previously charged off374 66 121 Loans charged off(5,486) (2,818) (2,290) Provision6,500 3,700 2,300 Balance, December 316,613$ 5,225$ 4,277$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2010 is as follows (dollars in
thousands):
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 affected
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.
26
Commercial,One to fourCommercialfinancial andCommercialfamily residentialConsumerreal estateagriculturalconstructionreal estateconstructionConsumerUnallocatedTotalAllowance for loan loss reserve:Beginning balance ALLR3,284$ 1,135$ 386$ 23$ -$ 13$ 384$ 5,225$ Charge-offs(2,426) (1,804) (720) (416) - (9) (111) (5,486) Recoveries18 260 67 - - 15 14 374 Provision2,584 1,427 656 2,015 - (19) (163) 6,500 Unallocated assignment- - - - - - - - Ending balance ALLR3,460$ 1,018$ 389$ 1,622$ -$ -$ 124$ 6,613$ Loans:Ending balance194,859$ 68,858$ 33,330$ 75,074$ 5,682$ 5,283$ -$ 383,086$ Ending balance ALLR(3,460) (1,018) (389) (1,622) - - (124) (6,613) Net loans191,399$ 67,840$ 32,941$ 73,452$ 5,682$ 5,283$ (124)$ 376,473$ Ending balance ALLR3,460$ 1,018$ 389$ 1,622$ -$ -$ 124$ 6,613$ Individually evaluated1,601 330 39 696 - - - 2,666 Collectively evaluated1,859 688 350 926 - - 124 3,947 Total3,460$ 1,018$ 389$ 1,622$ -$ -$ 124$ 6,613$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
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 lessened 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.
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.
Below is a breakdown of loans by risk category as of December 31, 2010 (dollars in thousands):
27
(1)(2)(3)(4)(5)(6)(7)RatingExcellentGoodAverageAcceptableSp. MentionSubstandardDoubtfulUnassignedTotalCommercial real estate4,745$ 16,975$ 44,408$ 109,911$ 3,789$ 10,997$ 3,956$ 78$ 194,859$ Commercial, financial and agricultural3,726 5,275 16,466 39,844 259 2,636 - 652 68,858 Commercial construction- 579 4,416 22,280 1,921 568 - 3,566 33,330 One-to-four family residential real estate33 3,589 3,146 4,271 1,464 3,941 - 58,630 75,074 Consumer construction- - - - - - - 5,682 5,682 Consumer- - 34 368 - - - 4,881 5,283 Total loans8,504$ 26,418$ 68,470$ 176,674$ 7,433$ 18,142$ 3,956$ 73,489$ 383,086$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
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 during impairment and that which would have been recognized were $.141 million
and $.583 million for the year ended December 31, 2010. For the year ended December 31, 2009, the amounts were $.040
million and $.700 million.
The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet
payment obligations as they become due, as well as when required by regulatory provisions. When interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash
payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably assured.
Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable
to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled
principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an
individual loans basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that
the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value
of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied
to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a
cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
28
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
The following is a summary of impaired loans and their effect on interest income (dollars in thousands):
29
Interest IncomeInterest IncomeNonaccrualAccrualAverageRelatedRecognizedonBasisBasisInvestmentValuation ReserveDuring ImpairmentAccrual BasisDecember 31, 2010With no valuation reserve: Commercial real estate960$ -$ 987$ -$ -$ 71$ Commercial, financial and agricultural51 - 13 - - 1 Commercial construction458 - 1,186 - 11 33 One to four family residential real estate362 105 237 - 1 13 Consumer construction- - - - - - Consumer- - - - - - With a valuation reserve: Commercial real estate2,562$ 4,537$ 6,531$ 1,258$ 117$ 306$ Commercial, financial and agricultural709 - 1,660 279 - 95 Commercial construction- - - - - 21 One to four family residential real estate767 - 730 230 12 39 Consumer construction52 - 52 1 - 4 Consumer- - - - Total: Commercial real estate3,522$ 4,537$ 7,518$ 1,258$ 117$ 377$ Commercial, financial and agricultural760 - 1,673 279 - 96 Commercial construction458 - 1,186 - 11 54 One to four family residential real estate1,129 105 967 230 13 52 Consumer construction52 - 52 1 - 4 Consumer- - - - - - Total5,921$ 4,642$ 11,396$ 1,768$ 141$ 583$ December 31, 2009With no valuation reserve: Commercial real estate1,293$ 869$ 1,954$ -$ 40$ 133$ Commercial, financial and agricultural397 - 349 - - 21 Commercial construction986 - 2,399 - - 163 One to four family residential real estate292 - 212 - - 18 Consumer construction52 - 10 - - - Consumer- - 3 - - - With a valuation reserve: Commercial real estate6,997$ -$ 5,187$ 961$ -$ 349$ Commercial, financial and agricultural2,249 - 173 1,497 - 11 Commercial construction933 - 72 1 - 2 One to four family residential real estate1,169 - 90 246 - 3 Consumer construction- - - - - - Consumer- - - - - - Total: Commercial real estate8,290$ 869$ 7,141$ 961$ 40$ 482$ Commercial, financial and agricultural2,646 - 522 1,497 - 32 Commercial construction1,919 - 2,471 1 - 165 One to four family residential real estate1,461 - 302 246 - 21 Consumer construction52 - 10 - - - Consumer- - 3 - - - Total14,368$ 869$ 10,449$ 2,705$ 40$ 700$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
A summary of past due loans at December 31, 2010 is as follows (dollars in thousands):
A summary of troubled debt restructurings at December 31 is as follows (dollars in thousands):
A roll-forward of troubled debt restructuring during the year ended December 31, 2010 (dollars in thousands):
30
2010200930-89 days90+ days30-89 days90+ daysPast DuePast Due/Past DuePast Due/(accruing)NonaccrualTotal(accruing)NonaccrualTotalCommercial real estate19$ 3,522$ 3,541$ 4,607$ 8,290$ 12,897$ Commercial, financial and agricultural382 760 1,142 492 2,646 3,138 Commercial construction- 458 458 25 1,971 1,996 One to four family residential real estate923 1,129 2,052 226 1,461 1,687 Consumer construction- 52 52 - - - Consumer20 - 20 68 - 68 Total past due loans1,344$ 5,921$ 7,265$ 5,418$ 14,368$ 19,786$ 20102009Number ofRecordedNumber ofRecordedModificationsInvestmentModificationsInvestmentCommercial real estate7 4,537$ 2 869$ Commercial, financial and agricultural- - - - Commercial construction- - - - One to four family residential real estate1 105 - - Consumer construction- - - - Consumer- - - - Total troubled debt restructurings8 4,642$ 2 869$ Commercial,One to fourConsumer andCommercialFinancial andCommercialfamily residentialConsumerReal EstateAgriculturalConstructionreal estateConstructionTotalACCRUINGBeginning balance869$ -$ -$ -$ -$ 869$ Principal payments(48) - (2) - - (50) Charge-offs- - (632) - - (632) Advances- - - - - - New restructured4,692 - 634 609 - 5,935 Class transfers- - - - - - Transfers to nonaccrual(976) - - (504) - (1,480) Ending balance4,537$ -$ -$ 105$ -$ 4,642$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 4 – LOANS (CONTINUED)
A roll-forward of nonaccrual activity during the year ended December 31, 2010 (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, 2010 and 2009. In addition to the
outstanding balances above, there were unfunded commitments of $.351 million to related parties at December 31, 2010.
31
Commercial,One to fourCommercialFinancial andCommercialfamily residentialConsumerReal EstateAgriculturalConstructionreal estateConstructionConsumerTotalNONACCRUALBeginning balance8,290$ 2,646$ 1,919$ 1,461$ 52$ -$ 14,368$ Principal payments(5,323) (1,095) (86) (35) - - (6,539) Charge-offs(2,274) (1,539) (48) (1,311) - - (5,172) Advances245 - - - - - 245 Class transfers- - - - - - - Transfers to OREO(4,501) (150) (1,361) (368) - - (6,380) Transfers to accruing(54) (36) - - - - (90) Transfers from accruing6,987 933 24 1,368 - - 9,312 Other152 1 10 14 - - 177 Ending balance3,522$ 760$ 458$ 1,129$ 52$ -$ 5,921$ 20102009Loans outstanding, January 18,552$ 6,516$ New loans5,243 2,160 Net activity on revolving lines of credit2,065 1,189 Change in related party interest- 297 Repayment(6,328) (1,610) Loans outstanding, December 319,532$ 8,552$
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):
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 $1.098 million in 2010, $1.050 million
in 2009, and $1.035 million in 2008.
NOTE 6 – OTHER REAL ESTATE HELD FOR SALE
An analysis of other real estate held for sale for the years ended December 31 is as follows (dollars in thousands):
NOTE 7 – DEPOSITS
The distribution of deposits at December 31 is as follows (dollars in thousands):
32
20102009Land1,811$ 1,811$ Buildings and improvements11,925 11,816 Furniture, fixtures, and equipment4,770 4,346 Construction in progress12 84 Total cost basis18,518 18,057 Less - accumulated depreciation 8,858 7,892 Net book value9,660$ 10,165$ 20102009Balance, January 15,804$ 2,189$ Other real estate transferred from loans due to foreclosure5,373 4,879 Reclassification of redemption ORE- (475) Other real estate sold(2,862) (581) OREO writedowns(2,703) (187) Loss on ORE(50) (21) Balance, December 315,562$ 5,804$ 20102009Noninterest bearing41,264$ 35,878$ NOW, money market, checking134,703 95,790 Savings17,670 18,207 CDs <$100,00096,977 59,953 CDs >$100,00022,698 36,385 Brokered73,467 175,176 Total deposits386,779$ 421,389$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 7 – DEPOSITS (CONTINUED)
Maturities of non-brokered time deposits outstanding at December 31, 2010, are as follows (dollars in thousands):
Brokered deposits of $70.739 million mature in 2011 and $2.728 million matures thereafter.
NOTE 8 – 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, 2010 by the following: a collateral agreement
on the Corporation’s one to four family residential real estate loans with a book value of approximately $34.577 million;
mortgage related and municipal securities with an amortized cost and estimated fair value of $13.286 million and $13.919
million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $3.423 million. Prepayment of the
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, 2010. The $20.0 million FHLB advances which matured early in 2011 were refinanced into
longer term fixed rate maturities.
The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $.256 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 $.920 million, and guaranteed by the Corporation.
33
201167,851$ 201234,256 20139,248 20146,163 20151,840 Thereafter317 Total119,675$ 20102009Federal Home Loan Bank fixed rate advances at rates ranging from .61% to 2.10%15,000$ 15,000$ maturing in 2011 and 2014Federal Home Loan Bank variable rate advances at rates ranging from .306% to .309% maturing in 201120,000 20,000 Farmers Home Administration, fixed-rate note payable, maturing August 24, 2024 interest payable at 1%1,069 1,140 36,069$ 36,140$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 8 – BORROWINGS (CONTINUED)
Maturities of borrowings outstanding at December 31, 2010 are as follows (dollars in thousands):
NOTE 9 – INCOME TAXES
The components of the federal income tax provision (credit) for the years ended December 31 are as follows (dollars in
thousands):
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):
34
201125,072$ 201272 201373 201410,074 201574 Thereafter704 Total36,069$ 201020092008Current tax expense (benefit)-$ -$ -$ Change in valuation allowance(2,136) - - Deferred tax expense (benefit)(1,364) 1,120 787 Total provision (credit) for income taxes(3,500)$ 1,120$ 787$ 201020092008Tax expense at statutory rate(1,332)$ 1,202$ 904$ Increase (decrease) in taxes resulting from: Tax-exempt interest(73) (106) (137) Change in valuation allowance(2,136) - - Other41 24 20 Provision for (benefit of) income taxes, as reported(3,500)$ 1,120$ 787$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 9 – INCOME TAXES (CONTINUED)
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 March 31, 2010 Management evaluated the valuation allowance. An analysis of the
deferred tax asset was made to determine the utilization of those tax benefits based upon projected future taxable income.
At that time, based upon management’s determination and in accordance with the generally accepted accounting principles,
that it was ―more likely than not‖ that a portion of these benefits would be utilized, a $3.500 million valuation adjustment
was made as a credit to income tax expense. Among the criteria that management considered in evaluating the deferred tax
asset was taxable income for the three most recent taxable years ending December 31, 2009 which totaled $8.2 million.
This taxable income allowed the Corporation to utilize NOL carryforwards.
Management assessed the valuation allowance for the second and third quarters of 2010 and determined that no additional
adjustment was deemed appropriate. At December 31, 2010, based upon further analysis, and in recognition of the current
period operating loss before taxes, management determined that an adjustment to the valuation was appropriate and
increased the valuation allowance by $1.364 million with an increase to current tax expense. The Corporation, as of
December 31, 2010 had a net operating loss and tax credit carryforwards for tax purposes of approximately $27.5 million,
and $2.1 million, respectively.
The Corporation will continue to evaluate the future benefits from these carryforwards and at such time as it became ―more
likely than not‖ that they would be utilized prior to expiration will recognize the additional benefits as an adjustment to the
valuation allowance. The net operating loss carryforwards expire twenty years from the date they originated. These
carryforwards, if not utilized, will begin to expire in the year 2023. A portion of the NOL, approximately $17.0 million,
and all of the credit carryforwards are subject to the limitations for utilization as set forth in Section 382 of the Internal
Revenue Code. The annual limitation is $1.400 million for the NOL and the equivalent value of tax credits, which is
approximately $.477 million. These limitations for use were established in conjunction with the recapitalization of the
Corporation in December 2004.
35
20102009Deferred tax assets: NOL carryforward9,342$ 9,520$ Allowance for loan losses2,248 1,776 Alternative Minimum Tax Credit1,463 1,463 OREO Tax basis > book basis1,081 80 Tax credit carryovers672 672 Deferred compensation247 273 Stock option compensation204 196 Depreciation118 72 Intangible assets95 112 Other11 49 Total deferred tax assets15,481 14,213 Valuation allowance(6,010)$ (8,146)$ Deferred tax liabilities: FHLB stock dividend(128) (128) Unrealized gain (loss) on securities(315) (563) Other- (95) Total deferred tax liabilities(443) (786) Net deferred tax asset 9,028$ 5,281$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 10 – OPERATING LEASES
The Corporation currently maintains three 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. It is anticipated that the original term of this will be extended for an additional three year
term.
The second operating lease, for our 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, but either party may elect to terminate by providing notice of such election to the
other party at least 120 days prior to the end of the then-current term. The additional terms call for a lease adjustment based
on the Consumer Price Index at time of renewal.
The third operating lease, for our new location in Manistique, was executed in April 2010, the terms of which began at that
time. The original term of this lease is three years and will automatically renew and extend for four additional consecutive
terms of two years each.
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 $270,000 in 2010, $207,000 in 2009, and $195,000 in 2008.
NOTE 11 – 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 $110,000, $120,000, and $90,000 in 2010, 2009,
and 2008, respectively.
NOTE 12 – 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, 2010 and 2009, for vested benefits under
this plan, was $.725 million and $.815 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 $1.559 million and $1.464 million at December 31, 2010 and 2009, respectively. Deferred compensation
expense for the plan was $43,000, $72,000, and $84,000 for 2010, 2009, and 2008, respectively.
36
201190$ 201225 20134 Total119$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 13 – 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, 2010, 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.
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, 2010, 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.
37
To Be WellCapitalized UnderFor CapitalPrompt CorrectiveActualAdequacy PurposesAction ProvisionsAmountRatioAmountRatioAmountRatio2010Total capital to risk weighted assets: Consolidated49,132$ 12.6%>31,157$ > 8.0%N/A mBank43,477$ 11.2%>31,118$ > 8.0%>38,897$ 10.0%Tier 1 capital to risk weighted assets: Consolidated44,242$ 11.4%>15,579$ > 4.0%N/A mBank38,594$ 9.9%>15,559$ > 4.0%>23,338$ 6.0%Tier 1 capital to average assets: Consolidated44,242$ 9.3%>19,130$ > 4.0%N/A mBank38,594$ 8.1%>19,092$ > 4.0%>23,865$ 5.0%2009Total 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%
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 14 – 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 expired 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.
A summary of stock option transactions for the years ended December 31 is as follows:
There were no options granted in 2010 and in 2009.
Following is a summary of the options outstanding and exercisable at December 31, 2010:
38
20102009Outstanding shares at beginning of year411,057 446,237 Granted during the year- - Exercised during the year- - Expired / forfeited during the year(16,985) (35,180) Outstanding shares at end of year394,072 411,057 Exercisable shares at end of year150,781157,266 Weighted average exercise price per share at end of year10.98$ 12.03$ Shares available for grant at end of year024,780 WeightedAverageRemainingExercise ContractualPriceOutstandingExercisableUnvested OptionsLife-Years9.16$ 5,000 2,000 3,000 4.96 9.75$ 257,152 120,861 136,291 3.96 10.65$ 50,000 10,000 40,000 5.96 11.50$ 40,000 8,000 32,000 4.75 12.00$ 40,000 8,000 32,000 4.46 156.00$ 1,920 1,920 - .83 394,072 150,781 243,291 4.34 Number of Shares
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 14 – STOCK OPTION PLANS (CONTINUED)
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. There are no future compensation expenses related to existing option
programs.
NOTE 15 – OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes for the years ended December 31 are as follows (dollars
in thousands):
NOTE 16 – 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) a 10-year 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 aggregate proceeds of
$11.000 million in cash.
As a result of the CPP transaction, the Corporation is required to take certain actions, for so long as the Treasury holds any
securities acquired from the Corporation pursuant to the CPP (excluding any period in which the Treasury holds only the
Warrant to purchase Common Shares of the Corporation) (the ―CPP Period‖), to ensure that its executive compensation and
benefit plans with respect to Senior Executive Officers (as defined in the relevant agreements) comply with Section 111(b)
of Emergency Economic Stabilization Act of 2008 (―EESA‖), as implemented by any guidance or regulations issued under
Section 111(b) of EESA, and not adopt any benefit plans with respect to, or which cover, the Corporation’s Senior
Executive Officers that do not comply with EESA, as amended by the American Recovery and Reinvestment Act of 2009
(the ―ARRA‖), which was passed by Congress and signed by the President on February 17, 2009. The applicable executive
compensation standards generally remain in effect during the CPP Period and apply to the Corporation’s Senior Executive
Officers (which for purposes of the ARRA and the CPP agreements, includes the Corporation’s Chief Executive Officer, its
Chief Financial Officer, and the next three most highly-compensated executive officers, even though the Corporation’s
senior executive officers consist of a smaller group of executives for purposes of the other compensation disclosures in this
proxy statement).
39
201020092008Unrealized holding gains (losses) on available for sale securities(513)$ 2,451$ 681$ Less reclassification adjustments for gains (losses) later recognized in income215 1,471 64 Net unrealized gains (losses)(728) 980 617 Tax effect(247) 331 232 Other comprehensive income (loss)(481)$ 649$ 385$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 16 – SHAREHOLDERS’ EQUITY (CONTINUED)
Amounts recorded for Preferred Stock and Warrant Common Stock were estimated based on an allocation of the total
proceeds from the issuance on the relative fair values of both instruments. Fair value of the Preferred Stock was determined
based on assumptions regarding the discount rate (market rate) on the Preferred Stock (estimated 12%). Fair value of the
Warrant Common Stock is based on the value of the underlying Preferred Stock based on an estimate for a three year term.
The allocation of the proceeds received resulted in the recording of a discount on the Preferred Stock and a premium on the
Warrant Common Stock. The discount on the preferred will be accreted on an effective yield basis over a three-year term.
The allocated carrying value of the Preferred Stock and Warrant Common Stock on the date of issuance (based on their
relative fair values) was $10.382 million and $.618 million, respectively. Cumulative dividends on the Preferred Stock are
payable at 5% annum for the first five years and at a rate of 9% per annum thereafter on the liquidation preference of
$1,000 per share. The Company is prohibited from paying any dividend with respect to shares of common stock unless all
accrued and unpaid dividends are paid in full on the Preferred Stock for all past dividend periods. The Preferred Stock is
non-voting, other than class voting rights on matters that could adversely affect the Preferred Stock. The Preferred Stock
may be redeemed at any time with regulatory approval. The Treasury may also transfer the Preferred Stock to a third party
at any time. The preferred stock qualifies as Tier 1 Capital for regulatory purposes at the holding company.
The Corporation has the right to redeem the Series A Preferred Shares at any time after consulting with its primary
regulator, in which case the executive compensation standards would no longer apply to the Corporation.
The Corporation is considering whether or not to participate in the U.S. Treasury’s Small Business Lending Fund program
(―SBLF‖). The Corporation has applied for funding under the SBLF, but has not yet received approval, nor has the
Corporation determined if it will participate if approved. This SBLF program would allow the Corporation to pay off the
TARP preferred and also requires an injection of capital into the Bank which is dependent upon the amount of the total
SBLF funding less the $11 million of TARP preferred.
NOTE 17 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of
credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the
consolidated balance sheets.
The Corporation’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments.
The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-
balance-sheet instruments. These commitments at December 31 are as follows (dollars in thousands):
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s
40
20102009Commitments to extend credit: Variable rate18,092$ 24,839$ Fixed rate13,034 6,039 Standby letters of credit - Variable rate2,192 1,279 Credit card commitments - Fixed rate2,737 2,714 36,055$ 34,871$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 17 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
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.
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, 2010 represents $58.114 million, or 19.56%, compared to $48.689 million,
or 15.93%, of the commercial loan portfolio on December 31, 2009. The remainder of the commercial loan portfolio is
diversified in such categories as hospitality and tourism, real estate agents and managers, new car dealers, gaming,
petroleum, forestry, agriculture, and construction. Due to the diversity of the Bank’s locations, the ability of debtors of
residential and consumer loans to honor their obligations is not tied to any particular economic sector.
NOTE 18 - FAIR VALUE
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.
41
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 18 - FAIR VALUE (CONTINUED)
Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits and savings, is
equal to the amount payable on demand at the reporting date. The fair value of time deposits is based on the discounted
value of contractual cash flows applying interest rates currently being offered on similar time deposits.
Borrowings - Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair
value of existing debt. The fair value of borrowed funds due on demand is the amount payable at the reporting date.
Accrued interest - The carrying amount of accrued interest approximates fair value.
Off-balance-sheet instruments - The fair value of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present
creditworthiness of the counterparties. Since the differences in the current fees and those reflected to the off-balance-sheet
instruments at year-end are immaterial, no amounts for fair value are presented.
The following table presents information for financial instruments at 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.
42
Fair Value MeasurementsCarryingEstimatedCarryingEstimatedAmountFair ValueAmountFair ValueFinancial assets: Cash and cash equivalents34,719$ 34,719$ 45,433$ 45,433$ Interest-bearing deposits713 713 678 678 Securities available for sale33,860 33,860 46,513 46,513 Federal Home Loan Bank stock3,423 3,423 3,794 3,794 Net loans376,473 376,713 379,085 382,352 Accrued interest receivable1,155 1,155 1,413 1,413 Total financial assets450,343$ 450,583$ 476,916$ 480,183$ Financial liabilities: Deposits386,779$ 387,885$ 421,389$ 421,124$ Borrowings36,069 36,234 36,140 36,447 Accrued interest payable232 232 325 325 Total financial liabilities423,080$ 424,351$ 457,854$ 457,896$ 20092010
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 18 - FAIR VALUE (CONTINUED)
The following is information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at
December 31, 2010, and the valuation techniques used by the Corporation to determine those fair values.
Level 1:
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.
The fair value of all investment securities at December 31, 2010 and December 31, 2009 were based on level 2 inputs.
There are no other assets or liabilities measured on a recurring basis at fair value. For additional information regarding
investment securities, please refer to ―Note 3 – Investment Securities.‖
The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31, 2010 or December 31, 2009.
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.
43
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 18 - FAIR VALUE (CONTINUED)
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.
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).
44
(dollars in thousands)Quoted PricesSignificantSignificantin Active MarketsOther ObservableUnobservableTotal Losses forBalance atfor Identical AssetsInputsInputsYear EndedDecember 31, 2010(Level 1)(Level 2)(Level 3)December 31, 2010AssetsImpaired loans10,563$ -$ -$ 10,563$ 1,666$ Other real estate owned5,562 - - 5,562 2,753 4,419$ Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2010(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 Loans15,237$ -$ -$ 15,237$ 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
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 2010 and 2009
(Dollars in Thousands)
45
ASSETS20102009Cash and cash equivalents5,353$ 7,480$ Investment in subsidiaries49,016 48,575 Other assets275 156 TOTAL ASSETS54,644$ 56,211$ LIABILITIES AND SHAREHOLDERS' EQUITYOther liabilities762$ 912$ Shareholders' equity: Preferred stock - no par value: Authorized 500,000 shares, 11,000 shares issued and outstanding10,706 10,514 Common stock and additional paid in capital - no par value Authorized 18,000,000 shares Issued and outstanding - 3,419,73643,525 43,493 Accumulated earnings (deficit)(961) 199 Accumulated other comprehensive income612 1,093 Total shareholders' equity53,882 55,299 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY54,644$ 56,211$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
Years Ended December 31, 2010, 2009, and 2008
(Dollars in Thousands)
46
201020092008INCOME: Proceeds from settlement of lawsuits-$ -$ 3,475$ Other11 8 9 Total income11 8 3,484 EXPENSES: Salaries and benefits218 250 265 Interest- - 51 Professional service fees136 196 55 Other147 227 141 Total expenses501 673 512 Income (loss) before income taxes and equity in undistributed net income (loss) of subsidiaries(490) (665) 2,972 Provision for (benefit of) income taxes- (226) 1,005 Income (loss) before equity in undistributed net income (loss) of subsidiaries(490) (439) 1,967 Equity in undistributed net income (loss) of subsidiaries72 2,855 (95) Net income (loss)(418) 2,416 1,872 Preferred dividend and accretion of discount742 509 - NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS(1,160)$ 1,907$ 1,872$
Notes to the Consolidated Financial Statements
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2010, 2009, and 2008
(Dollars in Thousands)
47
201020092008Cash Flows from Operating Activities: Net income (418)$ 2,416$ 1,872$ Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net (income) loss of subsidiaries(72) (2,855) 95 Increase in capital from stock option compensation32 60 82 Change in other assets31 (348) 49 Change in other liabilities(149) 32 765 Net cash (used in) provided by operating activities(576) (695) 2,863 Cash Flows from Financing Activities: Proceeds from issuance of Series A Preferred Stock and common stock warrants- 11,000 - Dividend on preferred stock(550) (307) - Net increase (decrease) in lines of credit- - (1,959) Purchase of common stock - oddlot shares- - (110) Payments from subsidiaries- 69 - Investments in subsidiaries(1,000) (3,000) (500) Net cash (used) provided by financing activities(1,550) 7,762 (2,569) Net increase (decrease) in cash and cash equivalents(2,126) 7,067 294 Cash and cash equivalents at beginning of period7,480 413 119 Cash and cash equivalents at end of period5,354$ 7,480$ 413$
Selected Financial Data
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
48
20102009200820072006SELECTED FINANCIAL CONDITION DATA: Total assets478,696$ 515,377$ 451,431$ 408,880$ 382,791$ Loans383,086 384,310 370,280 355,079 322,581 Securities33,860 46,513 47,490 21,597 32,769 Deposits386,779 421,389 371,097 320,827 312,421 Borrowings36,069 36,140 36,210 45,949 38,307 Common shareholders' equity43,176 44,785 41,552 39,321 28,790 Total shareholders' equity53,882 55,299 41,552 39,321 28,790 SELECTED OPERATIONS DATA: Interest income22,840$ 23,708$ 24,562$ 28,695$ 24,052$ Interest expense6,455 7,421 11,698 (15,278) (12,459) Net interest income16,385 16,287 12,864 13,417 11,593 Provision for loan losses6,500 3,700 2,300 400 (861) Net security gains (losses)215 1,471 64 (1) (1) Other income2,580 3,280 4,589 2,007 984 Other expenses(16,598) (13,802) (12,558) (12,100) (12,221) Income (loss) before income taxes(3,918) 3,536 2,659 2,923 1,216 Provision (credit) for income taxes(3,500) 1,120 787 (7,240) (500) Net income (loss)(418) 2,416 1,872 10,163 1,716 Preferred dividend and accretion of discount742 509 - - - Net income available to common shareholders(1,160)$ 1,907$ 1,872$ 10,163$ 1,716$ PER SHARE DATA: Earnings (loss) - Basic(.34)$ .56$ .55$ 2.96$ .50$ Earnings (loss) - Diluted(.34) .56 .55 2.96 .50 Cash dividends declared- - - - - Book value12.63 13.10 12.15 11.47 8.40 Market value - closing price at year end4.58 4.64 4.40 8.98 11.50 FINANCIAL RATIOS: Return on average common equity(2.64) %4.42 %4.61 %31.05 %6.19 % Return on average total equity(2.06) 3.77 4.61 31.05 6.19 Return on average assets(.23) .39 .442.59 .49 Dividend payout ratioN/AN/AN/AN/AN/A Average equity to average assets 11.17 10.24 9.55 8.34 7.97 Efficiency ratio72.57 72.24 85.51 79.46 93.95 Net interest margin3.66 3.59 3.23 3.60 3.51 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)
49
12/319/306/303/3112/319/306/303/31BALANCE SHEETTotal loans383,086$ 382,727$ 384,839$ 377,311$ 384,310$ 384,100$ 372,004$ 370,776$ Allowance for loan losses(6,613) (5,437) (6,371) (4,737) (5,225) (4,081) (4,119) (4,793) Total loans, net376,473 377,290 378,468 372,574 379,085 380,019 367,885 365,983 Intangible assets- - - - - - 6 26 Total assets478,696 499,006 500,774 502,427 515,377 513,180 506,304 466,375 Core deposits290,614 287,055 271,026 236,227 209,828 200,541 202,892 196,860 Noncore deposits (1)96,165 117,469 134,758 168,985 211,561 218,040 210,260 188,897 Total deposits386,779 404,524 405,784 405,212 421,389 418,581 413,152 385,757 Total borrowings36,069 36,069 36,140 36,140 36,140 36,140 36,210 36,210 Total shareholders' equity53,882 55,987 56,231 58,722 55,299 55,766 53,939 41,864 Total shares outstanding3,419,736 3,419,736 3,419,736 3,419,736 3,419,736 3,419,736 3,419,736 3,419,736 AVERAGE BALANCE SHEETTotal loans385,296$ 385,268$ 382,169$ 384,640$ 386,203$ 370,310$ 371,609$ 370,943$ Allowance for loan losses(5,816) (6,094) (5,159) (5,073) (3,872) (4,231) (4,847) (4,405) Total loans, net379,480 379,174 377,010 379,567 382,331 366,079 366,762 366,538 Intangible assets- - - - - 1 16 35 Total assets488,320 512,335 502,942 508,495 514,102 513,687 491,205 454,740 Core deposits286,807 285,697 255,023 221,284 204,972 201,854 198,631 194,962 Noncore deposits (1)106,459 131,150 150,426 192,613 213,308 217,248 202,879 177,707 Total deposits393,266 416,847 405,449 413,897 418,280 419,102 401,510 372,669 Total borrowings36,069 36,115 36,140 36,140 36,140 36,194 36,376 36,648 Total shareholders' equity55,015 56,668 57,889 55,109 55,665 54,594 49,855 41,813 ASSET QUALITY RATIOSNonperforming loans/total loans2.76 %2.94 %2.87 %2.62 %3.96 %3.00 %2.66 %3.52 %Nonperforming assets/total assets3.37 3.41 3.34 3.51 4.08 3.38 2.93 3.27 Allowance for loan losses/total loans1.73 1.42 1.66 1.26 1.36 1.06 1.11 1.29 Allowance for loan losses/nonperforming loans62.61 48.34 57.69 47.87 34.29 35.40 41.71 36.72 Net charge-offs/average loans.16 .50 .31 .36 .30 .20 .22 .01 Texas Ratio (2)26.6627.6826.7127.7634.7628.9925.5332.69CAPITAL ADEQUACY RATIOSTier 1 leverage ratio9.25 %9.22 %9.38 %9.85 %9.75 %9.74 %9.65 %7.86 %Tier 1 capital to risk weighted assets11.36 11.73 11.65 12.48 11.92 12.18 11.94 9.31 Total capital to risk weighted assets12.62 12.98 12.91 13.69 13.17 13.19 13.00 10.56 Average equity/average assets11.27 11.06 11.51 10.84 10.83 10.63 10.15 9.19 Tangible equity/tangible assets11.27 11.06 11.51 10.84 10.83 10.87 10.65 8.97 (1) Noncore deposits include brokered deposits and CDs greater than $100,000(2) Texas Ratio: Nonperforming Assets Divided by Total Equity plus Allowance for Loan Losses2010FOR THE QUARTER ENDEDFOR THE QUARTER ENDED2009
Summary Quarterly Financial Information
MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY QUARTERLY FINANCIAL INFORMATION
(Unaudited)
(Dollars in Thousands, Except per Share Data)
50
12/319/306/303/3112/319/306/303/31INCOME STATEMENTNet interest income4,276$ 4,064$ 4,023$ 4,022$ 4,431$ 4,310$ 4,051$ 3,495$ Provision for loan losses1,800 1,000 2,800 900 2,300 700 150 550 Net interest income after provision2,476 3,064 1,223 3,122 2,131 3,610 3,901 2,945 Total noninterest income747 648 593 807 1,503 2,418 439 391 Total noninterest expense4,037 3,601 5,330 3,629 3,650 3,443 3,470 3,239 Income before taxes(814) 111 (3,514) 300 (16) 2,585 870 97 Provision for income taxes1,093 30 (1,212) (3,411) (22) 864 271 7 Net income(1,907) 81 (2,302) 3,711 6 1,721 599 90 Preferred dividend and accretion of discount185 185 186 185 186 185 138 - Net income available to common shareholders(2,092)$ (104)$ (2,488)$ 3,526$ (180)$ 1,536$ 461$ 90$ PER SHARE DATAEarnings per share - basic(.61)$ (.03)$ (.73)$ 1.03$ (.05)$ .45$ .13$ .03$ Earnings per share - diluted(.61) (.03) (.73) 1.03 (.05) .45 .13 .03 Book value per share12.63 13.26 13.34 14.08 13.10 13.25 12.73 12.24 Market value per share4.58 5.10 6.50 4.72 4.64 4.10 4.50 4.00 PROFITABILITY RATIOSReturn on average assets(1.70) %(.08) %(1.98) %2.81 %(.14) %1.19 %.38 %.08 %Return on average common equity(18.76) (.91) (21.28) (30.77) (1.59) 13.72 4.33 .87 Return on average total equity(15.09) (0.73) (17.24) 25.95 (1.28) 11.16 3.71 .87 Net interest margin3.88 3.69 3.56 3.51 3.74 3.66 3.58 3.35 Efficiency ratio65.05 75.98 76.04 78.12 71.03 70.09 76.55 82.36 Average loans/average deposits97.97 92.42 94.26 92.93 92.33 88.36 92.55 99.54 FOR THE QUARTER ENDED 2010FOR THE QUARTER ENDED 2009
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, 2009 through
December 31, 2010, as reported by NASDAQ.
The Corporation had 1,216 shareholders of record as of March 30, 2011.
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 eliminate the negative retained earnings position and have regulatory approval. There were no
dividends declared or paid in 2008, 2009 and 2010. There were no sales of unregistered securities in 2010, nor were there
any repurchases of the Corporation’s common stock in 2010.
51
2010March 31June 30September 30December 31High5.20$ 7.39$ 6.95$ 5.28$ Low4.09 4.51 4.74 3.95 Close4.72 6.50 5.10 4.58 Book value, at quarter end14.08 13.34 13.26 12.63 2009High4.72$ 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 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 Index and the NASDAQ
Composite Index for the five-year period ended December 31, 2010. The following information is based on an investment
of $100, on December 31, 2005 in the Corporation’s common stock, the NASDAQ Bank Index, and the NASDAQ
Composite Index, with dividends reinvested.
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.
52
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$14012/0512/0612/0712/0812/0912/10Mackinac Financial CorporationNASDAQ CompositeNASDAQ Bank*$100 invested on 12/31/05 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; and
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.
53
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
The following discussion and analysis presents the more significant factors affecting the Corporation’s financial condition
as of December 31, 2010 and 2009 and the results of operations for 2008 through 2010. This discussion also covers asset
quality, liquidity, interest rate sensitivity, and capital resources for the years 2009 and 2010. 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.
Taxable equivalent adjustments are the result of increasing income from tax-free loans and investments by an amount equal
to the taxes that would be paid if the income were fully taxable based on a 34% federal tax rate, thus making tax-exempt
yields comparable to taxable asset yields.
Dollar amounts in tables are stated in thousands, except for per share data.
EXECUTIVE SUMMARY
The purpose of this section is to provide a brief summary of the 2010 results of operations and financial condition. A more
detailed analysis of the results of operations and financial condition follows this summary.
The Corporation reported a loss available to common shareholders in 2010 of $1.160 million, or $.34 per share, compared
to net income of $1.907 million, $.56 per share, in 2009 and net income in 2008 of $1.872 million, $.55 per share.
Total assets of the Corporation at December 31, 2010, were $478.696 million, a decrease of $36.681 million, or 7.12%
from total assets of $515.377 million reported at December 31, 2009. In 2010, the Corporation reduced excess liquidity
and reliance on wholesale funding.
At December 31, 2010, the Corporation’s loans stood at $383.086 million, a decrease of $1.224 million, or .32%, from
2009 year-end balances of $384.310 million. Loan balances were impacted by normal amortization and paydowns. A good
portion of these payoffs pertained to loan relationships that no longer met our pricing or credit standards. Total loan
production in 2010 amounted to $113.8 million, which included $36.7 million of secondary market mortgage loans. The
Corporation also sold $12.6 million of SBA/USDA guaranteed loans.
Nonperforming loans totaled $10.563 million, or 2.76% of total loans at December 31, 2010. Nonperforming assets at
December 31, 2010, were $16.125 million, 3.37% of total assets, compared to $21.041 million or 4.08% of total assets at
December 31, 2009.
Total deposits decreased from $421.389 million at December 31, 2009, to $386.779 million at December 31, 2010, a
decrease of 8.21%. The decrease in deposits in 2010 was comprised of a decrease in wholesale deposits of $115.396
million and an increase in core deposits of $80.786 million.
Shareholders’ equity totaled $53.882 million at December 31, 2010, compared to $55.299 million at the end of 2009, a
decrease of $1.417 million. This decrease reflects the consolidated net loss of $1.160 million, the $32,000 capital
contribution impact of stock options, the decrease in the market value of available-for-sale investments, which amounted to
$.481 million and the decrease from the accretion of the discount on preferred stock of $.192 million. The book value per
common share at December 31, 2010, amounted to $12.63 compared to $13.10 at the end of 2009.
54
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Summary
The Corporation reported a net loss available to common shareholders of $1.160 million in 2010, compared to net income
of $1.907 million in 2009 and a net income of $1.872 million in 2008. The 2010 results include elevated costs associated
with nonperforming assets, including loan loss provisions of $6.500 million and OREO write-downs and gains/losses of
$2.753 million. Also included in the 2010 results are security gains of $.215 million. 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.
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 funding sources.
Net interest revenue is the Corporation’s principal source of revenue, representing 89% of total revenue in 2010. The net
interest income is impacted by economic and competitive factors that influence rates, loan demand, and the availability of
funding.
Net interest income on a taxable equivalent basis increased $.098 million from $16.287 in 2009 to $16.385 million, in 2010.
Attributing to the overall decrease in net interest income was a reduction in investment securities which were sold late in
2009 in order to reduce excess liquidity and lower market interest rate risk. The proceeds from these sales were used to
repay maturing wholesale deposits. In 2010, interest rates were somewhat stable with the prime rate at 3.25% for the entire
year. The Corporation experienced a modest reduction, 14 basis points, in the overall rates on earnings assets from 5.26%
in 2009 to 5.12% in 2010. Interest bearing funding sources also declined, by 22 basis points, from 1.82% in 2009 to 1.60%
in 2010. The combination of these rate reductions resulted in an improved net interest margin from 3.62% in 2009 to
3.68% in 2010.
In 2009, the Corporation realized an increase of $3.423 million in net interest income. A portion of this increase was
attributed to higher levels of investment securities which were funded by lower cost wholesale funding sources. In 2009,
the Corporation benefited from low interest rates prevalent on wholesale deposit instruments. The interest rates in the
55
For the Years Ended December 31,(dollars in thousands, except per share data)201020092008Taxable-equivalent net interest income16,496$ 16,446$ 13,074$ Taxable-equivalent adjustment111 159 210 Net interest income16,385 16,287 12,864 Provision for loan losses6,500 3,700 2,300 Other income2,795 4,751 4,653 Other expense16,598 13,802 12,558 Income before provision for income taxes(3,918) 3,536 2,659 Provision for (benefit of) income taxes(3,500) 1,120 787 Net income (loss)(418)$ 2,416$ 1,872$ Preferred dividend expense742 509 - Net income (loss) available to common shareholders(1,160)$ 1,907$ 1,872$ Earnings (loss) per common share Basic(.34)$ .56$ .55$ Diluted(.34)$ .56$ .55$ Return on average assets(.23) %.39 %.44 %
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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.
The following table details sources of net interest income for the three years ended December 31 (dollars in thousands):
As shown in the table above, income on loans provides more than 90% of the Corporation’s interest revenue. The
Corporation’s loan portfolio has approximately 71% of variable rate loans that predominantly reprice with changes in the
prime rate and 29% of fixed rate loans. A majority of the variable rate loans, 60%, or $160 million, have interest rate
floors. These loans will not reprice until the prime rate increases to the extent necessary to surpass the interest rate floor. A
prime rate increase of 100 basis points or more will reprice $66 million of these loans with floors, while the remainder will
reprice with a 200 basis point increase in the prime rate.
The majority of interest bearing liabilities do not reprice automatically with changes in interest rates, which provides
flexibility to manage interest income. Management monitors the interest sensitivity of earning assets and interest bearing
liabilities to minimize the risk of movements in interest rates.
56
2010Mix2009Mix2008MixInterest Income Loans21,279$ 93.17 %20,813$ 87.79 %22,959$ 93.48 % Funds sold58 .25 - - 96 .39 Taxable securities1,406 6.16 2,783 11.74 1,293 5.26 Nontaxable securities28 .12 19 .08 5 .02 Other interest-earning assets69 .30 93 .39 209 .85 Total earning assets22,840 100.00 %23,708 100.00 %24,562 100.00 %Interest Expense NOW, money markets, checking1,218 18.87 %809 10.90 %1,284 10.98 % Savings97 1.50 142 1.91 193 1.65 CDs <$100,0001,756 27.20 1,857 25.02 3,181 27.19 CDs >$100,000449 6.96 633 8.53 1,037 8.86 Brokered deposits2,087 32.33 2,990 40.30 4,420 37.79 Borrowings848 13.14 990 13.34 1,583 13.53 Total interest-bearing funds6,455 100.00 %7,421 100.00 %11,698 100.00 %Net interest income16,385$ 16,287$ 12,864$ Average Rates Earning assets5.10 %5.22 %6.16 % Interest-bearing funds1.60 1.82 3.32 Interest rate spread3.50 3.40 2.84
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.
57
(dollars in thousands)AverageAverage AverageAverage AverageAverage BalanceInterestRateBalanceInterestRateBalanceInterestRateASSETS:Loans (1,2,3)384,347$ 21,376$ 5.56 %374,796$ 20,964$ 5.59 %361,324$ 23,166$ 6.41 %Taxable securities35,475 1,406 3.96 74,005 2,782 3.76 28,766 1,293 4.49 Nontaxable securities (2)853 42 4.92 571 28 4.90 69 8 11.59 Federal Funds sold22,934 58 .25 74 - - 4,101 96 2.34 Other interest-earning assets4,448 69 1.55 4,415 93 2.11 4,318 209 4.84 Total earning assets448,057 22,951 5.12 453,861 23,867 5.26 398,578 24,772 6.22 Reserve for loan losses(5,539) (4,337) (3,747) Cash and due from banks29,291 19,397 6,901 Fixed assets10,002 10,839 11,453 Other real estate owned6,196 3,374 1,048 Other assets14,986 10,518 11,110 54,936 39,791 26,765 TOTAL ASSETS502,993$ 493,652$ 425,343$ LIABILITIES AND SHAREHOLDERS' EQUITY:NOW and Money Markets99,411$ 943$ .95 %73,003$ 665$ 0.91 %77,997$ 1,245$ 1.60 %Interest checking18,987 275 1.45 7,735 143 1.85 1,501 39 2.60 Savings deposits19,503 97 .50 20,179 142 0.70 15,963 193 1.21 CDs <$100,00084,841 1,756 2.07 67,356 1,858 2.76 78,755 3,181 4.04 CDs >$100,00026,273 449 1.71 26,906 633 2.35 27,079 1,037 3.83 Brokered deposits118,615 2,087 1.76 176,017 2,990 1.70 111,482 4,420 3.96 Borrowings36,116 848 2.35 36,338 990 2.72 39,248 1,583 4.03 Total interest-bearing liabilities403,746 6,455 1.60 %407,534 7,421 1.82 352,025 11,698 3.32 Demand deposits39,704 31,864 29,348 Other liabilities3,372 3,723 3,340 Shareholders' equity56,171 50,531 40,630 99,247 86,118 73,318 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY502,993$ 493,652$ 425,343$ Rate spread3.52 3.44 %2.90 %Net interest margin/revenue, tax equivalent basis16,496$ 3.68 %16,446$ 3.62 %13,074$ 3.28 %200820092010Years 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
2010, the Corporation recorded a provision for loan loss of $6.500 million, compared to a provision of $3.700 million in
2009. The higher provision for 2010 was due in large part to an elevated level of charge-offs which totaled $5.112 million,
or 1.33% of average loans compared to $2.752 million or .73% on average loans in 2009.
Noninterest Income
Noninterest income was $2.795 million, $4.751 million, and $4.653 million in 2010, 2009, and 2008, 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 2010, the Corporation expanded its efforts to generate increased income from
secondary market loans by adding additional staff and centralizing processing activities. In 2009, the Corporation recorded
a gain on the sale of two branch offices, $1.208 million, and a gain on security sales of $1.471 million.
58
TotalTotalVolumeIncreaseVolumeIncreaseVolumeRateand Rate(Decrease)VolumeRateand Rate(Decrease)Interest earning assets:Loans534$ (119)$ (3)$ 412$ 863$ (2,955)$ (110)$ (2,202)$ Taxable securities(1,448) 151 (79) (1,376) 2,033 (212) (332) 1,489 Nontaxable securities13 - 1 14 58 (5) (33) 20 Federal funds sold58 - - 58 (94) (96) 94 (96) Other interest earning assets1 (25) - (24) 5 (118) (3) (116) Total interest earning assets(842)$ 7$ (81)$ (916)$ 2,865$ (3,386)$ (384)$ (905)$ Interest bearing obligationsNOW and money market deposits241$ 27$ 10$ 278$ (80)$ (535)$ 35$ (580)$ Interest checking208 (31) (45) 132 162 (11) (47) 104 Savings deposits(5) (41) 1 (45) 51 (81) (21) (51) CDs <$100,000482 (464) (120) (102) (460) (1,010) 147 (1,323) CDs >$100,000(15) (173) 4 (184) (7) (400) 3 (404) Brokered deposits(975) 107 (35) (903) 2,559 (2,526) (1,463) (1,430) Borrowings(6) (137) 1 (142) (117) (514) 38 (593) Total interest bearing obligations(70)$ (712)$ (184)$ (966)$ 2,108$ (5,077)$ (1,308)$ (4,277)$ Net interest income, tax equivalent basis50$ 3,372$ Increase (Decrease)Years ended December 31,2009 vs. 2008Increase (Decrease)Due to2010 vs. 2009Due 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):
Total revenues from the loan sale activities amounted to $1.407 million in 2010, $.830 million in 2009 and $.153 million in
2008. The Corporation anticipates increased revenues from these activities in future periods. As stated, we increased our
capacity for secondary market activities with several key staff additions. We are also increasing our SBA and USDA
lending activities as these types of government sponsored programs become more advantageous to borrowers. Deposit
related income totaled $.990 million in 2010 compared to $1.023 million in 2009 and $.838 million in 2008. The current
regulatory environment may limit the Corporation’s ability to grow these revenue sources.
Noninterest Expense
Noninterest expense was $16.598 million in 2010, compared to $13.802 million and $12.558 million in 2009 and 2008,
respectively. In 2010, the increase in noninterest expense totaled $2.796 million, or 20.26%. The largest increase in
noninterest expense for 2010 occurred in OREO write-downs and gains/losses on the sale of OREO, which increased from
$.208 million in 2009 to $2.753 million in 2010. In 2008 the Corporation had net gains of $80,000 on the sale of OREO.
Management expects that costs associated with carrying nonperforming loans will continue to be above historical norms.
Salaries and benefits, at $6.918 million, increased by $.335 million, 5.09%, from the 2009 expenses of $6.583 million and
compared to $6.886 million in 2008. The other most significant loan and deposit expense increase was in FDIC insurance
assessment premiums which totaled $.839 million in 2009 and increased to $.957 million in 2010. FDIC insurance costs
are also expected to increase in future periods based upon the need to replenish the deposit insurance fund for charges due
to increased bank failures.
Management will continue to review all areas of noninterest expense in order to evaluate where opportunities may exist
which could reduce expenses without compromising service to customers.
The following table details noninterest expense for the three years ended December 31 (dollars in thousands):
59
% Increase (Decrease)2010200920082010 - 20092009 - 2008Salaries and benefits6,918$ 6,583$ 6,886$ 5.09 %(4.40) %Occupancy1,313 1,385 1,374 (5.20) .80 Furniture and equipment806 805 771 0.12 4.41 Data processing740 862 844 (14.15) 2.13 Professional service fees: Accounting269 261 254 3.07 2.76 Legal98 95 41 3.16 131.71 Consulting and other260 247 213 5.26 15.96 Total professional service fees627 603 508 3.98 18.70 Loan and deposit910 746 488 21.98 52.87 OREO writedowns and (gains) losses on sale2,753 208 (80) 1,223.56 (360.00) FDIC insurance premiums957 839 81 14.06 935.80 Telephone193 187 170 3.21 10.00 Advertising297 322 305 (7.76) 5.57 Amortization of intangibles- 46 78 (100.00) (41.03) Other operating expenses1,084 1,216 1,133 (10.86) 7.33 Total noninterest expense16,598$ 13,802$ 12,558$ 20.26 %9.91 %2010200920082010-20092009-2008Deposit service charges128$ 116$ 101$ 10.34 %14.85 %NSF Fees862 907 737 (4.96) 23.07 Gain on sale of secondary market loans445 224 107 98.66 109.35 Secondary market fees generated94 93 34 1.08 173.53 SBA Fees868 513 12 69.20 4,175.00 Proceeds from settlement of lawsuits- - 3,475 - (100.00) Gain on sale of branch offices- 1,208 - (100.00) 100.00 Other 183 219 123 (16.44) 78.05 Subtotal2,580 3,280 4,589 (21.34) (28.52) Net security gains 215 1,471 64 (85.38) 2,198.44 Total noninterest income2,795$ 4,751$ 4,653$ (41.17) %2.11 %% Increase (Decrease)
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Federal Income Taxes
A deferred tax asset is recognized for temporary differences that will result in deductible amounts in future years and
contain tax carryforwards including past net operating losses and tax credits. For example, a temporary difference is
created between the reported amount and the tax basis of a liability for estimated expenses if, for tax purposes, those
estimated expenses are not deductible until a future year. Settlement of that liability will result in tax deductions in future
years, and a deferred tax asset is recognized based on the weight of available evidence. All available evidence, both
positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is
needed for some portion or all of a deferred tax asset. Judgment must be used in considering the relative impact of negative
and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate
with the extent to which it can be objectively verified. The more negative evidence that exists, (a) the more positive
evidence is necessary and (b) the more difficult it is to support a conclusion that a valuation allowance is not needed. 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.
Current Federal Tax Provision
The Corporation recorded a current period federal tax benefit of $3.500 million in 2010, compared to a $1.120 million
provision in the same period a year earlier. In the first quarter of 2010, management evaluated the deferred tax assets
associated with the net operating loss and tax credit carryforwards based upon the Corporation’s foreseen ability to utilize
the benefits of these carryforwards prior to their expiration. At that time, the Corporation had net deferred tax assets of
approximately $13.4 million and a valuation allowance of $8.1 million against these assets. As a part of this analysis,
management considered, among other things, current asset levels and projected loan and deposit growth, current interest
rate spreads and projected net interest income levels, and noninterest income and expense, along with management’s ability
to control expenses and the potential for increasing contributions of noninterest income. Management also considered the
impact of nonperforming assets and future period charge-off activity relative to projected provisions. Based upon the
analysis of projected taxable income and the probability of achieving these projected taxable income levels, the Corporation
reduced the valuation allowance on its deferred tax assets by $3.500 million. Among the criteria that management
considered in evaluating the deferred tax asset was taxable income for the three most recent taxable years ending December
31, 2009 which totaled $8.2 million. This taxable income allowed the Corporation to utilize NOL carryforwards. At 2010
year end, management, in recognition of the net operating loss before taxes of $3.918 million and based upon additional
analysis of deferred tax balances and future taxable income projections, made the determination to increase the valuation
allowance by approximately $1.364 million, resulting in a net decrease in the valuation allowance of $2.136 million for the
year.
Deferred Tax Benefit – Historical Commentary
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 a portion, $7.500 million, of the
NOL carryforward was probable. The $7.500 million recognition was based upon assumptions of a sustained level of
taxable income within the NOL carryforward period and took into account Section 382, annual limitations. This tax benefit
was recorded by reducing the valuation allowance that was recorded against the deferred tax assets of the Corporation. In
2006, the Corporation recognized a portion of this benefit, $.500 million, based upon the then current probabilities.
60
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The table below details the Corporation’s deferred tax assets and liabilities (dollars in thousands):
As shown in the table above, the NOL and tax credit carryforwards comprise the majority of the deferred tax asset, which is
reduced by the $6.010 million valuation adjustment.
As of December 31, 2010, the Corporation had an NOL carryforward of approximately $27.5 million along with various
credit carryforwards of $2.1 million. This NOL and credit carryforward benefit is dependent upon the future profitability of
the Corporation. A portion of the NOL, approximately $17.0 million, and all of the tax credit carryforwards are also
subject to the use limitations of Section 382 of the Internal Revenue Code since they originated prior to the December 2004
recapitalization of the Corporation. These carryforwards, if not utilized, will begin to expire in the year 2023. The annual
limitation is $1.4 million for the NOL carryforwards and the equivalent value of tax credits, which is approximately $.477
million.
The Corporation will continue to 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.
Management believes that the Corporation will ultimately utilize all of the NOL carryforwards and a portion of the tax
credit carryforwards. The valuation allowance, which stands at $6.0 million as of December 31, 2010 is a conservative
measurement of the uncertainty related to the current economy and level of profitability the Corporation will attain in the
near term.
61
20102009Deferred tax assets: NOL carryforward9,342$ 9,520$ Allowance for loan losses2,248 1,776 Alternative Minimum Tax Credit1,463 1,463 OREO Tax basis > book basis1,081 80 Tax credit carryovers672 672 Deferred compensation247 273 Stock option compensation204 196 Depreciation118 72 Intangible assets95 112 Other11 49 Total deferred tax assets15,481 14,213 Valuation allowance(6,010)$ (8,146)$ Deferred tax liabilities: FHLB stock dividend(128) (128) Unrealized gain (loss) on securities(315) (563) Other- (95) Total deferred tax liabilities(443) (786) Net deferred tax asset9,028$ 5,281$
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL POSITION
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 $12.653 million in 2010, from $46.513 million at December 31, 2009 to
$33.860 million at December 31, 2010. This decrease in 2010 was largely attributable to paydowns on mortgage backed
securities. The Corporation also sold $5 million of investments early in 2010 to reduce excess liquidity. 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.
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. The majority of the bank’s current investments, $32.683 million or 97%, 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, 2010, investment
securities with an estimated fair market value of $14.462 million were pledged.
62
December 31,(dollars in thousands)201020092008Sources of funds:BalanceMixBalanceMixBalanceMixDeposits: Non-interest bearing transactional deposits41,264$ 8.62 %35,878$ 6.96 %30,099$ 6.67 % Interest-bearing transactional depopsits152,373 31.83 113,997 22.12 91,314 20.23 CD's <$100,00096,977 20.26 59,953 11.63 73,752 16.34 Total core deposit funding290,614 60.71 209,828 40.71 195,165 43.23 CD's >$100,00022,698 4.74 36,385 7.06 25,044 5.55 Brokered deposits73,467 15.35 175,176 33.99 150,888 33.42 Total noncore deposit funding96,165 20.09 211,561 41.05 175,932 38.97 FHLB and other borrowings36,069 7.53 36,140 7.01 36,210 8.02 Other liabilities1,966 .41 2,549 .49 2,572 .57 Shareholders' equity53,882 11.26 55,299 10.74 41,552 9.21 Total478,696$ 100.00 %515,377$ 100.00 %451,431$ 99.57 %Uses of Funds:Net Loans376,473$ 78.64 %379,085$ 73.54 %366,003$ 81.08 %Securities available for sale33,860 7.07 46,513 9.03 47,490 10.52 Federal funds sold12,000 2.51 27,000 5.24 - - Federal Home Loan Bank Stock3,423 .72 3,794 .74 3,794 .84 Interest-bearing deposits713 .15 678 .13 582 .13 Cash and due from banks22,719 4.75 18,433 3.58 10,112 2.24 Other assets29,508 6.16 39,874 7.74 23,450 5.19 Total478,696$ 100.00 %515,377$ 100.00 %451,431$ 100.00 %20102009US Agencies - MBS27,710$ 45,238$ US Agencies4,973 - Obligations of states and political subdivisions1,177 1,275 Total securities33,860$ 46,513$
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Loans
The Bank is a full service lender and offers a variety of loan products in all of its markets. The majority of its loans are
commercial, which represents approximately 78% of total loans outstanding at December 31, 2010.
The Corporation continued to experience strong loan demand in 2010 with approximately $114 million of new loan
production, including $37 million of mortgage loans sold in the secondary market. At 2010 year-end, the Corporation’s
loans stood at $383.086 million, a slight decrease from the 2009 year-end balances of $384.310 million. The total
outstanding loans declined by $1.2 million after reductions for loans sales, (both SBA/USDA and secondary market)
amortization and payoffs, some associated with the elimination of problem assets. In 2010, the secondary mortgage loans
that were produced and sold totaled $36.7 million while the SBA/USDA loan sales amounted to $12.6 million. The
production of loans was distributed among the regions, with the Upper Peninsula at $81 million, $22 million in the
Northern Lower Peninsula and $11 million in Southeast Michigan where the market has been hit the hardest by the
recession.
Management believes a properly positioned loan portfolio provides the most attractive earning asset yield available to the
Corporation and, with changes to the loan approval process and exception reporting, management can effectively manage
the risk in the loan portfolio. Management intends to continue loan growth within its markets for mortgage, consumer, and
commercial loan products while concentrating on loan quality, industry concentration issues, and competitive pricing. The
Corporation is highly competitive in structuring loans to meet borrowing needs and satisfy strong underwriting
requirements.
Following is a table that illustrates the balance changes in the loan portfolio from 2008 through 2010 year end (dollars in
thousands):
Our commercial real estate loan portfolio predominantly relates to owner occupied real estate, and our loans are generally
secured by a first mortgage lien. Commercial real estate market conditions continued to be under stress in 2010, and we
expect this trend to continue. These conditions may negatively affect our commercial real estate loan portfolio in future
periods. We make commercial loans for many purposes, including: working capital lines, which are generally renewable
annually and supported by business assets, personal guarantees and additional collateral. Commercial business lending is
generally considered to involve a higher degree of risk than traditional consumer bank lending.
63
2010200920082010-20092009-2008Commercial real estate194,859$ 208,895$ 185,241$ (6.72)% 12.77 %Commercial, financial, and agricultural68,858 72,184 79,734 (4.61) (9.47)One-to-four family residential real estate75,074 67,232 65,595 11.66 2.50 Construction Consumer5,682 7,118 4,852 (20.17) 46.70 Commercial33,330 24,591 31,113 35.54 (20.96)Consumer5,283 4,290 3,745 23.15 14.55 Total383,086$ 384,310$ 370,280$ (0.32)% 3.79 %Percent Change
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Following is a table showing the composition of loans by 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 2010 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, 2010, our residential loan portfolio totaled $80.756 million, or 21.08% 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 $3.184 million at the end of 2009 to $2.471 million at 2010 year-end. The Corporation has
elected to reduce its tax-exempt portfolio, since it provides no current tax benefit, due to tax net operating loss
carryforwards.
Due to the seasonal nature of many of the Corporation’s commercial loan customers, loan payment terms provide flexibility
by structuring payments to coincide with the customer’s business cycle. The lending staff evaluates the collectability of the
past due loans based on documented collateral values and payment history. The Corporation discontinues the accrual of
interest on loans when, in the opinion of management, there is an indication that the borrower may be unable to meet the
payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed. Loans are returned to
accrual status when all principal and interest amounts contractually due are brought current and future payments are
reasonably assured.
64
% of% of% of% of% of% ofBalanceLoansCapitalBalanceLoansCapitalBalanceLoansCapitalReal estate - operators of nonres bldgs58,114$ 19.56 %107.85 %48,689$ 15.93 %88.05 %41,299$ 13.95 %99.39 %Hospitality and tourism37,737 12.70 70.04 45,315 14.82 81.95 35,086 11.85 84.44 Commercial construction33,330 11.22 61.86 24,591 8.04 44.47 31,113 10.51 74.88 Operators of nonresidential buildings16,598 5.59 30.80 12,619 4.13 22.82 13,352 4.51 32.13 Real estate agents and managers15,857 5.34 29.43 24,242 7.93 43.84 29,292 9.89 70.50 Other135,411 45.59 251.31 150,214 49.15 271.64 145,946 49.29 351.24 Total commercial loans297,047$ 100.00 %305,670$ 100.00 %296,088$ 100.00 %200920082010
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Credit Quality
The table below shows balances of nonperforming assets for the three years ended December 31 (dollars in thousands):
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 2010 independent review provided findings
similar to management on the overall adequacy of the reserve. The Corporation will again utilize a consultant for loan
review in 2011.
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 2010 amounted to $5.112 million, or 1.33% of average loans
outstanding, compared to $2.752 million, or .73% of loans outstanding in 2009. In 2010, $2.342 million of the charge-offs
resulted from three credit relationships in Southeast Michigan. The current reserve balance is representative of the relevant
risk inherent within the Corporation’s loan portfolio. Additions or reductions to the reserve in future periods will be
dependent upon a combination of future loan growth, nonperforming loan balances and charge-off activity.
65
Nonperforming Assets:2010200920085,921$ 14,368$ 4,887$ Accruing loans past due 90 days or more- - - Restructured Loans4,642 869 - Total nonperforming loans10,563 15,237 4,887 Other real estate owned5,562 5,804 2,189 Total nonperforming assets16,125$ 21,041$ 7,076$ Nonperforming loans as a % of loans2.76 %3.96 %1.32 %Nonperforming assets as a % of assets3.37 %4.08 %1.57 %Reserve for Loan Losses:At period end6,613$ 5,225$ 4,277$ As a % of loans1.73 %1.36 %1.16 %As a % of nonperforming loans62.61 %34.29 %87.52 %As a % of nonaccrual loans111.69 %36.37 %87.52 %Nonaccrual loans201020092008Interest income that would have been recorded at original rate583$ 700$ 377$ Interest income that was actually recorded141 40 60 Net interest lost442$ 660$ 317$
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
A three year history of the Corporation’s credit quality is displayed in the following table (dollars in thousands):
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.
At the end of 2010, the allowance for loan losses represented 1.73% 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.
66
Allowance for Loan Losses201020092008Balance at beginning of period5,225$ 4,277$ 4,146$ Loans charged off: Commercial, financial & agricultural5,0272,4652,062 One-to-four family residential real estate410282157 Consumer487171 Total loans charged off5,485 2,818 2,290 Recoveries of loans previously charged off: Commercial, financial & agricultural34638114 One-to-four family residential real estate11 16 - Consumer16 12 7 Total recoveries of loans previously charged off373 66 121 Net loans charged off5,112 2,752 2,169 Provision for loan losses6,500 3,700 2,300 Balance at end of period6,613$ 5,225$ 4,277$ Total loans, period end383,086$ 384,310$ 370,280$ Average loans for the year384,347 374,796 361,324 Allowance to total loans at end of year1.73 %1.36 %1.16 %Net charge-offs to average loans1.33 .73 .60 Net charge-offs to beginning allowance balance97.84 64.34 52.32
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following table represents the activity in other real estate (dollars in thousands):
During 2010, the Corporation received real estate in lieu of loan payments of $5.373 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 records any additional reductions in the fair value as a write-down of other real estate.
Deposits
Total deposits at December 31, 2010 were $386.779 million, a decrease of $34.610 million, or 8.21% from December 31,
2009 deposits of $421.389 million. The table below shows the deposit mix for the periods indicated (dollars in thousands):
The decrease in deposits, as illustrated above, is composed of a decrease in noncore deposits of $115.396 million, while
core deposits increased by $80.786 million.
Historically the Corporation’s loan growth outpaced core deposit growth, which resulted in more reliance on brokered
deposits as a source of funding. Management has increased its efforts to grow core deposits in recent years by introducing
several new deposit products and implementing a bank-wide deposit incentive program. In 2010, the Corporation grew
core deposits by $81 million with most of this growth occurring in lower cost transactional deposits.
During 2009, the increase in wholesale brokered deposits were in part utilized to enhance balance sheet liquidity and to
fund the acquisition of investments purchased in the TARP leveraging program discussed earlier in this management
discussion. At the end of 2009, the Corporation initiated the sale of approximately $39 million of its investment portfolio
67
Balance at January 1, 20092,189$ 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(581) OREO writedowns(187) Loss on OREO(21) Balance at December 31, 20095,804 Other real estate transferred from loans due to foreclosure5,373 Reclassification of redemption ORE- Other real estate transferred to premises and equipment- Other real estate sold(2,862) OREO writedowns(2,703) Loss on OREO(50) Balance at December 31, 20105,562$ 2010Mix2009Mix2008MixNon-interest-bearing41,264$ 10.67 %35,878$ 8.51 %30,099$ 8.11 %NOW, money market, checking134,703 34.83 95,790 22.73 70,584 19.02 Savings17,670 4.57 18,207 4.32 20,730 5.59 Certificates of Deposit <$100,00096,977 25.07 59,953 14.23 73,752 19.87 Total core deposits290,614 75.14 209,828 49.79 195,165 52.59 Certificates of Deposit >$100,00022,698 5.87 36,385 8.64 25,044 6.75 Brokered CDs73,467 18.99 175,176 41.57 150,888 40.66 Total non-core deposits96,165 24.86 211,561 50.21 175,932 47.41 Total deposits386,779$ 100.00 %421,389$ 100.00 %371,097$ 100.00 %
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
to deleverage the balance sheet. Proceeds from the sale of these investments were used to pay off matured brokered
deposits. 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.
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 also utilizes FHLB borrowings as a source of funding. At 2010 year end, this source of funding totaled
$35 million, of which $20 million matured early in 2011 and was refinanced into longer term FHLB borrowings.
Subsequent to the refinancing, the $25 million of FHLB borrowings had a weighted average maturity of 3.5 years.
Shareholders’ Equity
Changes in shareholders’ equity are discussed in detail in the ―Capital and Regulatory‖ section of this report.
68
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.
At December 31, 2010 the Bank had $33.860 million of securities, with a weighted average maturity of 15.8 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
estimates of principal amortization and prepayments are assigned to the following time frames.
69
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following is the Corporation’s repricing opportunities at December 31, 2010 (dollars in thousands):
The above analysis indicates that at December 31, 2010, the Corporation had a cumulative liability sensitivity gap position
of $1.258 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, 2010, the Corporation had $276.547 million of variable rate loans that reprice primarily with the prime
rate index. Approximately $160 million of these variable rate loans have interest rate floors. This means that the prime rate
will have to increase above the floor rate before these loans will reprice. At year end, $66 million of these floor-rate loans
would reprice with a 100 basis point prime rate increase, with $94 million repricing with an additional 100 basis point
prime rate increase.
At December 31, 2009, the Corporation had a cumulative liability sensitivity gap position of $17.977 million within the
one-year time frame.
The borrowings in the gap analysis include $20 million of FHLB advances that were refinanced early in 2011 into fixed
rate advances. Subsequent to this refinancing, the $35 million total of FHLB borrowings then carried a weighted average
maturity of 3.5 years.
The Corporation’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk and foreign
exchange risk. The Corporation has no market risk sensitive instruments held for trading purposes. The Corporation has
limited agricultural-related loan assets, and therefore, has minimal significant exposure to changes in commodity prices.
Any impact that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be
insignificant.
Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control
interest rate risk and the quantitative level of exposure. The Corporation’s interest rate risk management process seeks to
ensure that appropriate policies, procedures, management information systems, and internal controls are in place to
70
1-9091-365>1-5Over 5DaysDaysYearsYearsTotalInterest-earning assets: Loans276,547$ 7,157$ 25,210$ 74,172$ 383,086$ Securities970 17,318 14,706 866 33,860 Other (1)12,713 - - 3,423 16,136 Total interest-earning assets290,230 24,475 39,916 78,461 433,082 Interest-bearing obligations: NOW, money market, savings and interest checking152,373 - - - 152,373 Time deposits26,845 41,006 51,507 317 119,675 Brokered CDs10,125 60,614 - 2,728 73,467 Borrowings20,000 5,000 10,000 1,069 36,069 Total interest-bearing obligations209,343 106,620 61,507 4,114 381,584 Gap80,887$ (82,145)$ (21,591)$ 74,347$ 51,498$ Cumulative gap80,887$ (1,258)$ (22,849)$ 51,498$ (1) includes Federal Home Loan Bank stock
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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
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, 2010 (dollars in thousands). Nonaccrual loans of $5.921
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, 2010, the Corporation had excess Canadian liabilities of .106 million, which equated to approximately the
same valuation 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.
71
Fair Value20112012201320142015ThereafterTotal12/31/2010 $ 23,261 $ 2,906 $ 6,198 334$ 295$ $ 866 $ 33,860 $ 33,860 3.85 % 4.49 % 5.55 %8.07 %3.13 % 3.98 % 4.25 %36,55223,56615,76914,752 4,736 15,565 110,940 108,441 6.00 6.68 6.57 5.62 6.33 6.14 6.16 272,146 - - - - - 272,146 274,885 5.08 - - - - - 5.08 12,713 - - - - 3,423 16,136 16,136 .25 - - - - 2.50 .73 $ 344,672 $ 26,472 $ 21,967 $ 15,086 $ 5,031 $ 19,854 $ 433,082 $ 433,322 4.90 %6.44%6.28% 5.67 %6.14% 5.42 % 4.88 % $ 152,373 $ - $ - $ - -$ $ - $ 152,373 $ 152,373 .88 % - % - % - %- % - % - %138,59634,256 9,248 6,163 1,840 3,039 193,142 194,248 1.86 2.06 2.76 3.01 3.14 3.45 2.01 5,000 - - 10,000 - 1,069 16,069 16,230 .61 - - 2.10 - 1.00 1.56 20,000 - - - - - 20,000 20,004 .31 - - - - - .31 $ 315,969 $ 34,256 $ 9,248 $ 16,163 $ 1,840 $ 4,108 $ 381,584 $ 382,855 1.27 % 2.06 % 2.76 % 2.45 %3.14% 2.81 % 1.42 %Principal/Notional Amount Maturing/Repricing In:Rate Sensitive AssetsFixed interest rate loans Average interest rateFixed interest rate securities Average interest rate Variable interest rate loans Average interest rate Total rate sensitive assets Average interest rateOther assetsRate Sensitive LiabilitiesAverage interest rateInterest-bearing savings, Average interest rateTime deposits Average interest rateVariable interest rate borrowings Average interest rate NOW, MMAs, interest checkingAverage interest rate Total rate sensitive liabilities Average interest rateFixed interest rate borrowings
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 17 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 2010, the Corporation decreased cash and cash equivalents by $10.714 million. As shown on the Corporation’s
consolidated statement of cash flows, liquidity was primarily impacted by cash provided by operating activities, resulting
primarily from a reduction in other assets due to a settlement from the prior year sale of investment securities recorded as a
receivable at 2009 year end. The net change in investing activities included a net increase in loans of $9.355 million and a
―net‖ decrease in securities available for sale of $11.788 million. The net increases in assets were offset by a similar
decrease in deposit liabilities of $34.610 million. This decrease in deposits was composed of a decrease in non-core
deposits of $115.386 million combined with an increase in bank deposits of $80.776 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, 2010, $19.398
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 2011, 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 regulatory approval. 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, 2010, the Bank’s core deposits in relation to total funding were 68.73% compared to 45.86% in 2009.
These ratios indicated at December 31, 2010, 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
72
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
liquidity to support future growth. The Bank also has correspondent lines of credit available to meet unanticipated short-
term liquidity needs. As of December 31, 2010, the Bank had $15.875 million of unsecured lines available and another
$2.500 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 2011 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.
The Corporation is considering whether or not to participate in the U.S. Treasury’s Small Business Lending Fund program
(―SBLF‖). The Corporation has applied for funding under the SBLF, but has not yet received approval, nor has the
Corporation determined if it will participate if approved. This SBLF program would allow the Corporation to pay off the
TARP preferred and also requires an injection of capital into the Bank which is dependent upon the amount of the total
SBLF funding less the $11 million of TARP preferred.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As disclosed in the Notes to the Consolidated Financial Statements, the Corporation has certain obligations and
commitments to make future payments under contracts. At December 31, 2010, the aggregate contractual obligations and
commitments are (dollars in thousands):
(1)The Corporation issued preferred stock in April of 2009 as part of its participation in TARP. The initial term of this preferred stock is five
years with an interest rate of 5%, which increases to 9% after the initial term. Although there is no contractual obligation to do so, the
Corporation intends to repay this obligation within the initial term.
73
Contractual ObligationsLess than 1 Year1 to 3 Years4 to 5 YearsAfter 5 YearsTotalTotal deposits332,233$ 43,504$ 8,003$ 3,039$ 386,779$ Federal Home Loan Bank borrowings25,000 - 10,000 - 35,000 Preferred stock (1)- - 11,000 - 11,000 Other borrowings- - - 1,069 1,069 Directors' deferred compensation123 246 216 323 908 Annual rental / purchase commitments under noncancelable leases / contracts90 29 - - 119 TOTAL357,446$ 43,779$ 29,219$ 4,431$ 434,875$ Other CommitmentsLetters of credit2,192$ -$ -$ -$ 2,192$ Commitments to extend credit31,126 - - - 31,126 Credit card commitments2,737 - - - 2,737 TOTAL36,055$ -$ -$ -$ 36,055$ Payments Due by Period
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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, 2010, 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 2010, total capitalization decreased by $1.417 million. Other
changes in total capital occurred from recognition of net income and market value decrease of the Corporation’s investment
securities. During 2010, risk based capital decreased by $5.455 million, while Tier 1 Capital decreased by $5.164 million.
The decrease in capital was also impacted by the disallowed portion of the Corporation’s deferred tax asset. The portion of
the deferred tax asset which is allowed to be included in regulatory capital is only that portion that can be utilized within the
next 12-month period. At December 31, 2010, the Corporation did not include any of the deferred tax asset in its Tier 1 or
Total Risk Based Capital.
The following table details sources of capital for the three years ended December 31 (dollars in thousands):
74
201020092008Capital StructureCommon shareholders' equity43,176$ 44,785$ 41,552$ Preferred stock10,706 10,514 - Total shareholders' equity53,882 55,299 41,552 Total capitalization53,882$ 55,299$ 41,552$ Tangible capital53,882$ 55,299$ 41,506$ Intangible AssetsSubsidiaries: Core deposit premium-$ -$ 46$ Other identifiable intangibles- - - Total intangibles-$ -$ 46$ Risk-Based CapitalTier 1 capital: Total shareholders' equity53,882$ 55,299$ 41,552$ Net unrealized (gains) losses on available for sale securities(612)(1,093)(445) Less: disallowed deferred tax asset(9,028)(4,800)(6,200) Less: intangibles- - (46) Total Tier 1 capital44,242$ 49,406$ 34,861$ Tier 2 Capital: Allowable reserve for loan losses4,890$ 5,181$ 4,277$ Qualifying long-term debt- - - Total Tier 2 capital4,890 5,181 4,277 Total risk-based capital49,132$ 54,587$ 39,138$ Risk-weighted assets389,468$ 414,440$ 376,986$ Capital Ratios: Tier 1 Capital to average assets9.25%9.75%8.01% Tier 1 Capital to risk-weighted assets11.36%11.92%9.25% Total Capital to risk-weighted assets12.62%13.17%10.38%
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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, which was discussed earlier.
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.
75
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, 201011.26%11.26%9.25%11.36%12.62% December 31, 200910.73%10.73%9.75%11.92%13.17%The Bank: December 31, 201010.22%10.22%8.09%9.92%11.18% December 31, 20099.38%9.38%8.38%10.24%11.49%
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76
Directors and Officers
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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 ResourcesManistiqueJesse A. DeeringFirst VP - SEM ExecutiveBirminghamKevin D. EvansSVP - Retail Sales ManagementNewberryJeremy W. FlodinVP - Sr. Credit Admin/Credit Risk AnalystManistiqueLaura 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 OfficerManistiqueDavid W. LeslieVP - Commercial Banking OfficerBirminghamBoris MartyszSVP - Marquette Market ExecutiveMarquetteTamara R. McDowellEVP - Chief Credit and Operations OfficerManistiqueJacquelyn R. MenhennickSVP - Mortgage and Consumer Lending ManagerMarquetteKevin J. NegriVP - Commercial Banking OfficerMarquetteBarbara A. ParrettAVP - Branch Sales Manager/Retail Banking OfficerStephensonDebra L. PetersonVP - Branch Sales Manager/Mortgage-Consumer Banking OfficerEscanabaScott A. RavetVP - Commercial Banking OfficerManistique/EscanabaAndrew P. SabatineRegional President - NLPTraverse CityGregory D. SchuetterFirst VP - Commercial Lending MangerManistiqueJoanna B. SlaghtSVP - Compliance/Risk ManagerManistiqueMichael A. SlaghtVP - Branch Sales Manager/Commercial Banking OfficerNewberryJennifer A. StempkiVP - Assistant ControllerManistiqueAnn M. SteppSVP - Branch Administration/Inc Program OfficerGaylordDaniel L. StoudtAVP - Mortgage Loan OfficerTraverse CityDavid 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
Grand Rapids, 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 2011 Annual Meeting of the Shareholders of Mackinac Financial Corporation will be held on May 25, 2011.
Visit our website, www.bankmbank.com, for updated news releases, financial reports, SEC filings, corporate governance
and other investor information.
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130 South Cedar Street
Manistique, MI 49854