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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY December 31, 2013
TABLE OF CONTENTS

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As filed with the Securities and Exchange Commission on September 3, 2014.April 4, 2018.

Registration No. 333-          333-223720

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Amendment No. 2
to
Form S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

MACKINAC FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)

130 South Cedar Street
Manistique, Michigan 49854
(888) 343-8147
(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant's Principal Executive Offices)

Ernie R. KruegerJesse Deering
Executive Vice President/Chief Financial Officer
Mackinac Financial Corporation
130 South Cedar Street
Manistique, Michigan 49854
(906) 341-7158(248) 290-5900
(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

Approximate date of commencement of the proposed sale of the securities to the public:
As soon as practicable on or after the effective date of this Registration Statement becomes effective and
upon completion of the merger described in the enclosed document.Statement.

            If the securities being registered on this Formform are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.    o

            If this Formform is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, of 1933, as amended,please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

            If this Formform is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

            Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer"filer," "smaller reporting company," and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

            If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act    o

            If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

            Exchange Act Rule 13e-4(i) (Cross-Border Issue Tender Offer) o

            Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) o

CALCULATION OF REGISTRATION FEE

(1)

TheBased on the maximum number of shares of Mackinac Financial Corporation ("Mackinac") common stock, no par value per share, estimated to be issuable upon the completion of the merger of Mackinac and Peninsula Financial CorporationFirst Federal of Northern Michigan Bancorp, Inc. ("Peninsula"First Federal"), as described herein. Thisherein, calculated as the product of (a) 3,726,925, the aggregate number is basedof shares of First Federal common stock outstanding on 3.4296March 14, 2018 to be exchanged for shares of Mackinac common stock issuable in the merger, and (b) the exchange for allratio of 0.576 shares of PeninsulaMackinac common stock issuedto be exchanged for each share of First Federal common stock.

(2)

The proposed maximum aggregate offering price of Mackinac common stock was calculated based upon the market value of the shares of First Federal common stock (the securities to be cancelled in the merger) in accordance with Rules 457(c) and outstanding immediately457(f) under the Securities Act of 1933, as follows: the product of (i) $11.15, which is the closing price reported for First Federal common stock on the OTCQX Best Market on March 18, 2018, which is within five business days prior to the completiondate of filing this Registration Statement multiplied by (ii) 3,726,925, the estimated maximum number of the merger, pursuant to the terms of the Agreement and Plan of Merger, dated as of July 18, 2014, by and between Mackinac and Peninsula and attached to the proxy statement/prospectus as Annex A, assuming that all outstanding shares of PeninsulaFirst Federal common stock elect to accept shares of Mackinac in lieu of cash.that may be exchanged for the merger consideration.

(3)

Previously paid.

            The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until the Registration Statement shall become effective on such dates as the Commission, acting pursuant to said Section 8(a), may determine.

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Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This document shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

PRELIMINARY—SUBJECT TO COMPLETION—DATED SEPTEMBER 3, 2014APRIL 4, 2018

JOINT PROXY STATEMENT AND PROSPECTUS

MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT

Dear Shareholder:

           On July 18, 2014, Peninsula Financial CorporationJanuary 16, 2018, First Federal of Northern Michigan Bancorp, Inc. ("Peninsula"First Federal"), PFCMFNC Acquisition, LLC ("PFC"MFNC") and Mackinac Financial Corporation ("Mackinac") agreed to a strategic business combination in which PeninsulaFirst Federal will merge with and into PFC,MFNC, a wholly owned subsidiary of Mackinac, pursuant to the terms of an Agreement and Plan of Merger, as amended (the"Merger Agreement"). The Merger Agreement additionally provides that, effective upon consummation of the merger, Peninsula'sFirst Federal's wholly owned subsidiary bank, Peninsula Bank,First Federal of Northern Michigan, will consolidate with and into mBank, Mackinac's wholly owned subsidiary bank, with mBank as the surviving entity. If Peninsula'sFirst Federal's shareholders approve the Merger Agreement and the shareholders of each entity approve the transactions contemplated thereby, and the merger is completed, PeninsulaFirst Federal shareholders will have the right to receive an aggregate of cash or shares of Mackinac common stock, with the mix of cash and stock consideration at such Peninsula shareholder's election (subject to a limit of 35% cash elections in the aggregate), in each case subject to adjustment as set forth in the Merger Agreement.

           Subject to the terms and conditions set forth in the Merger Agreement, which has been unanimously approved by the board of directors of each of Mackinac and Peninsula,First Federal, at the effective timeEffective Time of the Merger (as defined below), each outstanding share of PeninsulaFirst Federal common stock will be converted into the right to receive either (i) for each share of Peninsula common stock with respect to which an election to receive cash has been made and not revoked, $46.12847 (or approximately $46.13) in cash (such shares collectively, the"Cash Election Shares"); or (ii) for each share of Peninsula common stock with respect to which an election to receive Mackinac common stock has been made and not revoked, 3.42960.576 shares of Mackinac common stock, ("Stock Election Shares"); provided that the numberno par value per share, plus cash in lieu of Cash Election Shares may not exceed 35% of total merger consideration as set forth in the Merger Agreement.fractional shares. The Merger Agreement requires Peninsulaallows the First Federal board of directors to have a minimum adjusted shareholders' equity of $10.5 million and further contemplates that Peninsula will distribute any equity above such amount to its shareholders asdeclare a special dividend equal to $8 million immediately prior to the Closing. AsClosing, subject to maintenance of June 30, 2014, such dividend would have amounted to $24.96 per share.a specified minimum equity requirement. Pursuant to the Merger Agreement, $1.45 millionat the Effective Time, First Federal, or, under certain circumstances described herein, Mackinac, shall transfer to an exchange agent the amount of cash necessary to pay the special dividend (or about $5.03 per share) will be held in reserve pending the resolution of certain litigation. The reserve amount will be held in a trust required to be established and funded in such amount by the Merger Agreement for the benefit of the Peninsula shareholders. To the extent Peninsula (or Mackinac as its successor-in-interest) has any liability in the litigation, such amounts will be deducted from the reserve and all remaining funds will be distributed to the Peninsula shareholders.dividend.

           We are sending you this joint proxy statement/prospectus to notify you of and invite you to the special meetingmeetings of Peninsulaeach of Mackinac and First Federal shareholders being held with respect to consider the Agreement and Plan of Merger, dated as of July 18, 2014,January 16, 2018, as it may be further amended from time to time, that PeninsulaFirst Federal has entered into with Mackinac, and to ask you to vote at the special meeting in favor of the approval of the merger agreement.Mackinac.

           The special meeting of PeninsulaFirst Federal shareholders will be held on May 10, 2018 at 109 N. Second Ave., 2014Suite 300, Alpena, MI 49707 at the company's principal executive offices, 100 South Main Street, Ishpeming, Michigan 498498:00 a.m. local time.

           The special meeting of Mackinac shareholders will be held on May 10, 2018 at 130 S. Cedar St., Manistique, MI 49854 at 9:00 a.m. local time.

           At the special meeting, youFirst Federal shareholders will be asked to approve the Merger Agreement. Mackinac shareholders will be asked to approve the issuance of Mackinac common stock pursuant to the Merger Agreement. In the merger, PeninsulaFirst Federal will merge with and into PFC,MFNC, a wholly owned subsidiary of Mackinac. YouImmediately thereafter, First Federal of Northern Michigan will consolidate with and into mBank. Shareholders will also be asked to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies in favor of the approval of the Merger Agreement.

           The market value of the merger consideration will fluctuate with the market price of Mackinac common stock. The following table shows the closing sale prices of Mackinac common stock as reported on the NASDAQ Stock Market ("NASDAQ"), on July 11, 2014,January 12, 2018, the trading day on which the per share merger consideration was calculated, and on , 2014,March 29, 2018, the last practicable trading day before the distribution of this joint proxy statement/prospectus. This table also shows the book value per shareclosing sale prices of PeninsulaFirst Federal common stock as reported on the OTCQX Best Market ("OTCQX") as of such dates and the implied value of the per share merger consideration proposed for each share of PeninsulaFirst Federal common stock, which we calculated by multiplying the closing price of Mackinac common stock on those dates by the per share stock consideration of 3.42960.576 shares of Mackinac common stock, (in the event of a stock election), assuming no adjustment to such consideration pursuant to the merger agreement.

(1)

June 30, 2014 Book Value Per Share.

(2)

$46.139.16 and $9.31 excludes expected per share special dividend of approximately $7.2$8 million, (of which $1.45 million will be placedsubject to adjustment as set forth in the shareholders' trust described below (the"Shareholders' Trust"))Merger Agreement, which would bring implied value to $71.13.$11.30, and $11.41, respectively.

           The market price of Mackinac common stock and the book value of PeninsulaFirst Federal common stock may fluctuate between now and the closing of the merger. We urge you to obtain current market quotations. Mackinac common stock trades on NASDAQ under the symbol "MFNC."MFNC" and First Federal common stock trades on the OTC under the symbol "FFNM."

           Your vote is important. We cannot complete the merger unless Peninsula'sFirst Federal's shareholders approve the Merger Agreement. In order for the merger to be approved, the holders of at least seventy-fivefifty percent (75%(50%) of the shares of PeninsulaFirst Federal common stock outstanding and entitled to vote must vote in favor of approval of the Merger Agreement.Agreement, and a majority of Mackinac shareholders actually voting on such approval must approve the issuance of Mackinac common stock. Regardless of whether or not you plan to attend the special meeting, please take the time to vote your shares in accordance with the instructions contained in this joint proxy statement/prospectus. FailingIn the case of FFNM shareholders, failure to vote will have the same effect as voting against the merger.

           Peninsula'sFirst Federal's board of directors unanimously recommends that PeninsulaFirst Federal shareholders vote "FOR" approval of the Merger Agreement and "FOR" the approval of the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies in favor of the approval of the Merger Agreement.

           Mackinac's board of directors unanimously recommends that Mackinac shareholders vote "FOR" the issuance of Mackinac common stock and "FOR" the approval of the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies in favor of the approval of the transactions contemplated by the Merger Agreement.

This joint proxy statement/prospectus describes the special meeting, the merger, the documents related to the merger and other related matters.Please carefully read this entire joint proxy statement/prospectus, including "Risk Factors" on page ,10, for a discussion of the risks relating to the proposed merger.merger and any documents incorporated by reference. You also can obtain information about Mackinac from documents that it has filed with the Securities and Exchange Commission.

           If you have any questions concerning the merger, please contact Peninsula's chairman, John Jilbert,First Federal's Chief Executive Officer, Michael W. Mahler, at (906) 360-8666.(989) 354-7319 or Mackinac's Chairman and Chief Executive Officer, Paul Tobias, at (248) 290-5900. We look forward to seeing you at the special shareholders' meeting in Ishpeming, Michigan.

John Jilbert
Chairmansuccessful combination of the Board
Peninsula Financial CorporationFirst Federal and Mackinac.

           Neither the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Michigan Department of Insurance and Financial Services, nor any state securities commission or any other bank regulatory agency has approved or disapproved the securities to be issued in the merger or determined if this joint proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.

           The securities to be issued in the merger are not savings or deposit accounts or other obligations of any bank or non-bank subsidiary of either Mackinac or Peninsula,First Federal, and they are not insured by the Federal Deposit Insurance Corporation or any other governmental agency. The date of this joint proxy statement/prospectus is , 2014,April 4, 2018, and it is first being mailed or otherwise delivered to PeninsulaFirst Federal and Mackinac shareholders on or about April 9, 2018.

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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

To the Shareholders of First Federal of Northern Michigan Bancorp, Inc.:

        First Federal of Northern Michigan Bancorp, Inc. will hold a special meeting of shareholders at 8:00 a.m. local time, on May 10, 2018 at 109 N. Second Ave., 2014.Suite 300, Alpena, MI 49707 to consider and vote upon the following matters:

•

a proposal to approve the Agreement and Plan of Merger, dated as of January 16, 2018, as amended, by and among Mackinac Financial Corporation ("Mackinac"), MFNC Acquisition, LLC ("MFNC") and First Federal of Northern Michigan Bancorp, Inc. ("First Federal"), pursuant to which First Federal will merge with and into MFNC, a wholly owned subsidiary of Mackinac (the"Merger Agreement"), as more fully described in the attached joint proxy statement/prospectus; and



•

a proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies in favor of the approval of the merger agreement.

        We have fixed the close of business on April 2, 2018 as the record date for the special meeting. Only First Federal shareholders of record at that time are entitled to notice of, and to vote at, the special meeting, or any adjournment or postponement of the special meeting. In order for the merger to be approved, the holders of at least fifty percent (50%) of the shares of First Federal common stock outstanding and entitled to vote must vote in favor of approval of the Merger Agreement.

Your vote is very important. We cannot complete the merger unless First Federal's shareholders approve the Merger Agreement. Failure to vote will have the same effect as voting against the merger.

Regardless of whether you plan to attend the special meeting, please vote as soon as possible. If you hold stock in your name as a shareholder of record, you may vote your shares electronically via the Internet, by using telephone or, if you prefer the paper copy please complete, sign, date and return the accompanying proxy card in the enclosed postage-paid return envelope. If you hold your stock in "street name" through a bank or broker, please follow the instructions on the voting instruction card furnished by the record holder.

        The enclosed joint proxy statement/prospectus provides a detailed description of the special meeting, the merger, the documents related to the merger and other related matters. We urge you to read the joint proxy statement/prospectus and its appendices carefully and in their entirety. If you have any questions concerning the merger or the joint proxy statement/prospectus, would like additional copies of the joint proxy statement/prospectus or need help voting your shares of First Federal common stock, please contact Michael Mahler at (989) 354-7319.

First Federal's board of directors has unanimously approved the merger and the Merger Agreement and unanimously recommends that First Federal shareholders vote "FOR" the approval of the Merger Agreement and "FOR" the approval of the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies in favor of such approval.

BY ORDER OF THE BOARD OF DIRECTORS,

Michael Mahler
Chief Executive Officer
First Federal of Northern Michigan Bancorp, Inc.
Alpena, Michigan
April 9, 2018

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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

To the Shareholders of PeninsulaMackinac Financial Corporation:

        PeninsulaMackinac Financial Corporation will hold a special meeting of shareholders at 9:00 am local time, on , 2014May 10, 2018 at the company's principal executive offices, 100130 South MainCedar Street, Ishpeming,Manistique, Michigan 49849,49854, to consider and vote upon the following matters:

•

a proposal to approve the Agreement and Planissuance of Merger, dated as of July 18, 2014, by and among Mackinac Financial Corporation ("Mackinac"), PFC Acquisition, LLC ("PFC") and Peninsula Financial Corporation ("Peninsula"),common stock pursuant to which Peninsula will merge with and into PFC, a wholly owned subsidiary of Mackinac (the"the Merger Agreement"), as more fully described in the attached proxy statement/prospectus;Agreement; and



•

a proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies in favor of the approval of the merger agreement.issuance.

        We have fixed the close of business on , 2014April 2, 2018 as the record date for the special meeting. Only PeninsulaFirst Federal shareholders of record at that time are entitled to notice of, and to vote at, the special meeting, or any adjournment or postponement of the special meeting. In order for the mergerissuance of Mackinac common stock to be approved, Mackinac needs the holdersapproval of at least seventy-five percent (75%)a majority of the shares of Peninsula common stock outstanding and entitled to vote must vote in favor of approval ofvotes cast on this proposal at the Merger Agreement.Mackinac special meeting, assuming a quorum.

Your vote is very important. We cannot complete the merger unless Peninsula'sa majority of Mackinac's shareholders casting a vote approve the issuance of shares pursuant to the Merger Agreement. Failure to vote will have the same effect as voting against the merger.

        Regardless of whether you plan to attend the special meeting, please vote as soon as possible. If you hold stock in your name as a shareholder of record, you may vote your shares electronically via the Internet, by using telephone, or if you prefer the paper copy please complete, sign, date and return the accompanying proxy card in the enclosed postage-paid return envelope. If you hold your stock in "street name" through a bank or broker, please follow the instructions on the voting instruction card furnished by the record holder.

        The enclosed joint proxy statement/prospectus provides a detailed description of the special meeting, the issuance of shares pursuant to the merger, the documents related to the merger and other related matters. We urge you to read the joint proxy statement/prospectus, and its appendices, and any documents incorporated by reference carefully and in their entirety. If you have any questions concerning the merger or the joint proxy statement/prospectus, would like additional copies of the joint proxy statement/prospectus or need help voting your shares of PeninsulaFirst Federal common stock, please contact John Jilbertour chairman and chief executive officer, Paul D. Tobias at (906) 360-8666.(248) 290-5900.

        Peninsula'sMackinac's board of directors has unanimously approved the merger and the Merger Agreement and unanimously recommends that PeninsulaMackinac shareholders vote "FOR" the approvalissuance of Mackinac common stock to First Federal shareholders pursuant to the Merger Agreement and "FOR" the approval of the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies in favor of such approval.

BY ORDER OF THE BOARD OF DIRECTORS,

Terry GarceauPaul D. Tobias
Interim PresidentChairman of the Board and SecretaryChief Executive Officer
PeninsulaMackinac Financial Corporation
Ishpeming,Manistique, Michigan
      , 2014April 9, 2018

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REFERENCES TO ADDITIONAL INFORMATION

        Mackinac is currently subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended. Mackinac has filed a Registration Statement with the Securities and Exchange Commission (the"SEC") relating to the Mackinac common stock offered in connection with the proposed merger described in this Prospectus and Joint Proxy Statement. This Prospectus and Joint Proxy Statement does not contain all of the information set forth in the Registration Statement, certain portions of which are omitted in accordance with the rules and regulations of the SEC. Reference is hereby made to the Registration Statement and exhibits thereto for further information about Mackinac and its securities. The Registration Statement is available at http://www.sec.gov. Mackinac shareholders can also obtain copies of all or part of the Registration Statement upon written or oral request by contacting Mackinac at the following address:

Mackinac Financial Corporation
130 South Cedar Street
Manistique, Michigan 49854
Attention: Secretary
Telephone: (888) 343-8147

        You will not be charged for any of these documents that you request. To obtain timely delivery of these documents, you must request them no later than five business days before the date of the special meeting. This means that Peninsulaeach of Mackinac and First Federal shareholders requesting documents must do so by , 2014,May 4, 2018, in order to receive them before the special meeting.

        In addition, if you have questions about the merger or the PeninsulaFirst Federal special meeting, need additional copies of this joint proxy statement/prospectus or need to obtain proxy cards or other information related to the proxy solicitation, you may contact John Jilbert or Terry Garceau,Michael Mahler at the following address and telephone numbers:number:

100 South MainSecond Ave.
Alpena, Michigan 49707
(989) 354-7319

        In addition, if you have questions about the merger or the Mackinac special meeting, need additional copies of this joint proxy statement/prospectus or need to obtain proxy cards or other information related to the proxy solicitation, you may contact Paul D. Tobias at the following address and telephone number:

130 South Cedar Street
Ishpeming,Manistique, Michigan 4984949854
Mr. John JilbertPaul Tobias
(906) 360-8666
or
Mr. Terry Garceau
(906) 485-6333(248) 290-5900

        PeninsulaFirst Federal does not have a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, is not subject to the reporting requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and accordingly does not file documents or reports with the SEC.

        See "Where You Can Find More Information" for more details.

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE PENINSULAFIRST FEDERAL AND MACKINAC SPECIAL MEETINGMEETINGS

        The following are some questions that you may have regarding the merger and special meetingmeetings of Peninsulathe shareholders First Federal of Northern Michigan Bancorp, Inc. and Mackinac Financial Corporation shareholders (the(each, a"Special Meeting" and collectively, the"Special Meetings"), and brief answers to those questions. We urge you to read carefully the remainder of this joint proxy statement/prospectus because the information in this section does not provide all of the information that might be important to you with respect to the merger and the special meeting. See also "Where You Can Find More Information.Information" and "Certain Documents Incorporated by Reference."

        References in this joint proxy statement/prospectus to "Peninsula""First Federal" refer to Peninsula Financial Corporation,First Federal of Northern Michigan Bancorp, Inc., a MichiganMaryland corporation, and, unless the context otherwise requires, to its affiliates. References in this joint proxy statement/prospectus to "Mackinac" refer to Mackinac Financial Corporation, a Michigan corporation, and, unless the context otherwise requires, to its affiliates. References in this joint proxy statement/prospectus to "PFC""MFNCA" refer to PFCMFNC Acquisition, LLC, a Michigan limited liability company and a wholly owned subsidiary of Mackinac.

Q:

What am I being asked to vote on at the PeninsulaFirst Federal and Mackinac Special Meeting?Meetings?

A:

Mackinac and PeninsulaFirst Federal have entered into an Agreement and Plan of Merger, dated as of July 18, 2014January 16, 2018, as amended (the "Merger Agreement"), pursuant to which Mackinac has agreed to acquire Peninsula.First Federal. Under the terms of the merger agreement, PeninsulaFirst Federal will merge with and into PFC,MFNCA, a wholly owned subsidiary of Mackinac, with PFCMFNC continuing as the surviving entity (the"Merger"). The merger agreement additionally provides that, effective upon consummation of the merger, Peninsula'sFirst Federal's wholly owned subsidiary bank, Peninsula Bank,First Federal of Northern Michigan, will consolidate with and into mBank, Mackinac's wholly owned subsidiary bank, with mBank as the surviving entity.

PeninsulaFirst Federal:    First Federal shareholders are also being asked to approve the Merger as well as the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies in favor of the approval of the Merger Agreement (the"Adjournment Proposal").

Mackinac:    Mackinac shareholders are being asked to approve the issuance of shares of Mackinac common stock to First Federal shareholders in connection with the Merger (the"Issuance Proposal"), which requires the approval of a majority of the votes actually cast on this proposal at the Mackinac special meeting, assuming a quorum. Failures to vote, broker non-votes and abstentions will have no effect on the vote for the Issuance Proposal.

Q:

What will I receive in the merger?

A:

Subject to the terms and conditions set forth in the Merger Agreement, which has been unanimously approved by the board of directors of each of Mackinac and Peninsula,First Federal, at the effective time of the Merger,Effective Time, each outstanding share of PeninsulaFirst Federal common stock will be converted into the right to receive either (i) for each share0.576 shares of PeninsulaMackinac common stock, with respect to which an election to receiveno par value per share, plus cash has been made and not revoked, $46.12847 (or approximately $46.13) in cash (such shares collectively, the"Cash Election Shares"); or (ii) for each sharelieu of Peninsula common stock with respect to which an election to receive Company common stock has been made and not revoked, 3.4296 shares of Company common stock ("Stock Election Shares"); provided that the number of Cash Election Shares may not exceed 35% of total merger consideration, subject to adjustment as set forth in the Merger Agreement. Accordingly, the cash and stock elections of Peninsula's shareholders are subject to adjustment under certain circumstances.fractional shares.

The Merger Agreement further contemplates that Peninsula willthe First Federal board of directors may distribute any equity above$8 million in the required minimum adjusted shareholders' equity of $10.5 millionaggregate to its shareholders as a special dividend immediately prior to the closing. AsClosing, subject to maintenance of June 30, 2014, such dividend would have amounted to $24.96 per share.a specific minimum equity requirement. Pursuant to the Merger Agreement, $1.45 millionat the Effective Time, First Federal, or Mackinac under certain circumstances, will transfer to an exchange agent the amount of cash necessary to pay the special dividend (or about $5.03 per share) will be held in reserve pending the resolution of certain litigation. The reserve amount will be held in a trust required to be established and funded in such amount by the Merger Agreement for the benefit of the Peninsula shareholders. To the extent Peninsula (or Mackinac as its successor-in-interest) has any liability in the litigation, such amounts will be deducted from the reserve and all remaining funds will be distributed to the Peninsula shareholders. The resolution of the litigation in question could take a significant period of time

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and Peninsula shareholders may not receive distributions from the trust, if any are forthcoming, for months or years.dividend.

If the number of shares of common stock outstanding of PeninsulaFirst Federal or Mackinac changes before the Merger is completed as a result of any reclassification, recapitalization, stock split (including a

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reverse stock split) or subdivision or combination or readjustment of shares, or any stock dividend or stock distribution with a record date during such period, then the merger consideration will be equitably and proportionately adjusted.

Mackinac will not issue any fractional shares of Mackinac common stock in the Merger. PeninsulaFirst Federal shareholders who would otherwise be entitled to a fractional share of Mackinac common stock upon the completion of the Merger will instead receive ana check representing the amount of cash in lieu of fractional shares that the holder is entitled to receive.an amount in cash (rounded to the nearest cent) determined by multiplying (i) the average, rounded to the nearest one tenth of a cent, of the closing sales pricesale prices of Mackinac common stockCommon Stock as reported by the NASDAQ Stock Market ("NASDAQ") in The Wall Street Journal (or any other authoritative source reasonably selected by Mackinac) for the five (5) trading days immediately preceding the date upon which the Certificate of Merger is accepted for filing by the Corporations Division of the Michigan Department of Licensing and Regulatory Affairs ("LARA") accepts for filing the Certificate of Merger (the"Effective Time") by (ii) the fraction of a share (after taking into account all shares of PeninsulaFirst Federal common stock held by such holder at the Effective Time and rounded to the nearest thousandth)thousandth when expressed in decimal form) of Mackinac common stock to which such holder would otherwise be entitled to receive.

Q:

Will the value of the merger consideration change between the Special Meeting and the time the Merger is completed?

A:

The value of the merger consideration may fluctuate between the Special Meeting and the completion of the Merger based upon the market value of Mackinac common stock. If an election to receive shares of Mackinac common stock is made, as a result of the Merger you will receive a number of shares of Mackinac common stock for each share of Peninsula common stock you hold. Any fluctuation in the market price of Mackinac common stock after the Special Meeting will change the value of the shares of Mackinac common stock that you will receive. In addition, the value you receive may be further affected in the event the mix of cash and Mackinac common stock you elect is adjusted by Mackinac in the event that cash elections exceed 35% of the total merger consideration.

Q:

How does Peninsula's boarddo Mackinac and First Federal's boards of directors recommend that I vote at the Special Meeting?

A:

Peninsula's boardEach of First Federal and Mackinac's boards of directors unanimously recommends that you vote "FOR" the proposal to approve the Merger Agreement and "FOR" the Adjournment Proposal. Mackinac's board of directors unanimously recommends that you vote "FOR" the Issuance Proposal.

Q:

When and where is the PeninsulaFirst Federal Special Meeting?

A:

First Federal:The PeninsulaFirst Federal Special Meeting will be held at the company's principal executive offices, 100 South Main Street, Ishpeming, Michigan 49849109 N. Second Ave., Suite 300, Alpena, MI 49707 on , 2014,May 10, 2018, at 8:00 am local time.

Mackinac:    The Mackinac Meeting will be held at 130 S. Cedar St., Manistique, MI 49854 on May 10, 2018, at 9:00 a.m. local time.

Q:

What do I need to do now?

A:

After you have carefully read this joint proxy statement/prospectus and have decided how you wish to vote your shares, please vote your shares promptly so that your shares are represented and voted at the Special Meeting. If you hold your shares in your name as a shareholder of record, you may vote your shares electronically via the Internet, by using telephone, or if you prefer the paper copy you must complete, sign, date and mail your proxy card in the enclosed postage-paid return envelope as soon as possible. If you hold your shares in "street name" through a bank or broker, you must direct your bank or broker to vote in accordance with the instructions you have received from your bank or broker. "Street name" shareholders who wish to vote at the Special Meeting will need to obtain a proxy form from the institution that holds their shares.

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Q:

What constitutes a quorum for the Special Meeting?

A:

First Federal:The presence at the Special Meeting, in person or by proxy, of holders of a majority of the outstanding shares of PeninsulaFirst Federal common stock entitled to vote at the Special Meeting will constitute a quorum for the transaction of business. Abstentions and broker non-votes will be included in determining the number of shares present

Mackinac:    The presence at the meetingSpecial Meeting, in person or by proxy, of holders of a majority of the outstanding shares of Mackinac common stock entitled to vote at the Special Meeting will constitute a quorum for the purposetransaction of determining the presence of a quorum. A broker non-vote occurs under stock exchange rules when a broker is not permitted to vote on a matter without instructions from the beneficial owner of the shares and no instruction is given.

business.

Q:

What is the vote required to approve each proposal at the PeninsulaFirst Federal Special Meeting?

A:

First Federal:Approval of the Merger Agreement requires the affirmative vote of the holders of at least seventy-fivefifty percent (75%(50%) of the outstandingthen-outstanding shares of PeninsulaFirst Federal common stock entitled to vote as of the close of business on 2014,April 2, 2018, the record date for the Special Meeting.

Approval of the Adjournment Proposal requires the affirmative vote of a majority of the shares of PeninsulaFirst Federal common stock represented in person or by proxy at the Special Meeting, even if less thanMeeting.

Mackinac:    Approval of the Issuance Proposal requires the affirmative vote of a quorum.majority of the shares of Mackinac common stock actually cast on such proposal represented in person or by proxy at the Special Meeting.

Approval of the Adjournment Proposal requires of a majority of the shares of Mackinac common stock represented in person or by proxy at the Special Meeting.

Q:

Why is my vote important?

If you do not vote, it will be more difficult for PeninsulaFirst Federal and Mackinac to obtain the necessary quorum to hold its Special Meeting. In addition, in the case of First Federal shareholders, your failure to vote or failure to instruct your bank or broker as to how to vote will have the same effect as a vote against approval of the Merger Agreement. The Merger Agreement must be approved by the holders of at least seventy-fivefifty percent (75%(50%) of the outstanding shares of PeninsulaFirst Federal common stock entitled to vote at the Special Meeting. Peninsula'sMeeting, and the issuance of Mackinac common stock pursuant to the Merger Agreement must be approved by a majority of votes actually cast on such proposal. First Federal's board of directors unanimously recommends that you vote to approve the Merger Agreement.Agreement, and Mackinac's board of directors unanimously recommends that you vote to approve the Issuance Proposal.

Q:

If my shares of common stock are held in "street name" by my bank or broker, will my bank or broker automatically vote my shares for me?

A:

No. Your bank or broker cannot vote your shares without instructions from you. You should instruct your bank or broker as to how to vote your shares in accordance with the instructions provided to you. Please check the voting form used by your bank or broker.

Q:

What if I abstain from voting or fail to instruct my bank or broker?

A:

First Federal Shareholders:If you fail to vote, mark "ABSTAIN" on your proxy or fail to instruct your bank or broker with respect to the proposal to approve the Merger Agreement, it will have the same effect as a vote "AGAINST" the proposal.

If you mark "ABSTAIN" on your proxy with respect to the Adjournment Proposal, it will have the same effect as a vote "AGAINST" the proposal. The failure to vote or failure to instruct your bank or broker with respect to the Adjournment Proposal, however, will have no effect on the Adjournment Proposal.

Mackinac Shareholders:    If you fail to vote, mark "ABSTAIN" on your proxy or fail to instruct your bank or broker with respect to the Issuance proposal, it will have the same effect as a vote

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"AGAINST" the proposal. The failure to vote or failure to instruct your bank or broker how to vote with respect to the Issuance Proposal or the Adjournment Proposal, however, will have no effect on such proposal.

Q:

Can I attend the Special Meeting and vote my shares in person?



A:

Yes. All shareholders, including shareholders of record and shareholders who hold their shares through banks, brokers, nominees or any other holder of record, are invited to attend the Special Meeting. Holders of record of PeninsulaFirst Federal or Mackinac common stock can vote in person at thetheir respective Special Meeting.Meetings. If you are not a shareholder of record, you must obtain a proxy, executed in your favor, from the record holder of your shares, such as a broker, bank or other nominee, to be able to vote in person at the Special Meeting. If you plan to attend the Special Meeting, you must hold your

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shares in your own name or have a letter from the record holder of your shares confirming your ownership. In addition, you must bring a form of personal photo identification with you in order to be admitted. Peninsula reservesFirst Federal and Mackinac reserve the right to refuse admittance to anyone without proper proof of share ownership or without proper photo identification. The use of cameras, sound recording equipment, communications devices or any similar equipment during the Special Meeting is prohibited without Peninsula'sthe express written consent.

consent of First Federal or Mackinac, respectively.



Q:

Can I change my vote?



A:

Yes. You may revoke any proxy at any time before it is voted by (1) signing and returningfiling with the Corporate Secretary a written revocation or a duly executed proxy card withbearing a later date (2) delivering a written revocation letter to Peninsula's corporate secretary, or (3) attending the Special Meeting in person, notifying the corporate secretary and voting by ballot at the Special Meeting. Attendance at the Special Meeting will not automatically revoke your proxy. A revocation or later-dated proxy received by PeninsulaFirst Federal or Mackinac after the vote will not affect the vote. Peninsula's corporate secretary's mailing address is: Secretary, Peninsula Financial Corporation, 100 S. Main St., Ishpeming, Michigan 49849. If you hold your shares in "street name" through a bank or broker, you should contact your bank or broker to revoke your proxy.



First Federal's corporate secretary's mailing address is: Corporate Secretary, First Federal of Northern Michigan Bancorp, Inc., 100 South Second Ave., Alpena, Michigan 49707.

Mackinac's corporate secretary's mailing address is: Corporate Secretary, Mackinac Financial Corporation, 130 S. Cedar St., Manistique, MI 49854.

Q:

Will PeninsulaFirst Federal be required to submit the proposal to approve the Merger Agreement to its shareholders even if Peninsula'sFirst Federal's board of directors has withdrawn, modified or qualified its recommendation?



A:

Yes. Unless the Merger Agreement is terminated before the Peninsula Special Meeting, PeninsulaMeetings, First Federal is required to submit the proposal to approve the Merger Agreement to its shareholders even if Peninsula'sFirst Federal's board of directors has withdrawn or modified its recommendation.



Q:

What are the U.S. federal income tax consequences of the Merger to PeninsulaFirst Federal shareholders?



A:

The Merger is intended to qualify, and the obligation of the parties to complete the Merger is conditioned upon the receipt of a legal opinion from their counsel to the effect that the Merger will qualify, as a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended, which is referred to herein as the Code. In addition, in connection with the filing of the registration statement of which this document is a part, Honigman Miller Schwartz and Cohn LLP has delivered an opinion to Mackinac to the same effect. Assuming the Merger qualifies as such a reorganization, a shareholder of PeninsulaFirst Federal generally will not recognize any gain or loss upon receipt of Mackinac common stock in exchange for PeninsulaFirst Federal common stock

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in the Merger but may recognize gain with respect to the cash consideration and cash received in lieu of a fractional share of PeninsulaFirst Federal common stock.

For further information, see "Material U.S. Federal Income Tax Consequences of the Merger."

The U.S. federal income tax consequences described above may not apply to all holders of PeninsulaFirst Federal common stock. A holder's tax consequences will depend on its individual situation. Accordingly, we strongly urge you to consult your tax advisor for a full understanding of the particular tax consequences of the Merger to you.

Q:

Will IFirst Federal shareholders be entitled to exercise dissenters' rights in connection with the Merger?



A:

First Federal Shareholders:Under MichiganMaryland law, which is the law under which PeninsulaFirst Federal is incorporated, the holders of PeninsulaFirst Federal common stock willare not be entitled to dissenters' rights in connection with the Merger. The Michigan BusinessMaryland General Corporation ActLaw (the"MBCA"MGCL") provides that a shareholder may not demand the fair value of the shareholder's stock and is bound by the terms of the transaction if any shares of the consideration to be received in a merger is in cashclass or sharesseries of stock are listed on a national securities exchange or if the holdersstock is that of the stock are not entitled to dissenters' rights. As Peninsula shareholders may elect to receive either

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cashsuccessor in the Merger, or Mackinac'smerger. As First Federal shareholders will receive Mackinac common stock, which is listed on NASDAQ, there are no dissenters' rights.

Q:

If I am a Peninsula shareholder, should I send in my Peninsula stock certificates now?



A:

Included with this proxy statement/prospectus is a Form of Election, which may be used to exercise your right to make an election with regard to the form of consideration that you wish to receive in the Merger. If you choose to make an election at this time, please follow the instructions for completing the Form of Election, and return it, along with certificates representing your shares of Peninsula common stock, or an appropriate Notice of Guaranteed Delivery, prior to 5:00 p.m. Eastern Time on the date prior to the Special Meeting, which is the election deadline.

If you choose not to complete the Form of Election, do not send your certificates at this time. Following the Effective Time of the Merger, an exchange agent designated by Mackinac will send you instructions for exchanging Peninsula stock certificates for the merger consideration. See "The Merger Agreement—Conversion of Shares; Exchange of Certificates."

Q:

What will each Peninsula shareholder receive in the merger?



A:

A Peninsula shareholder may elect to receive:



•

all cash;



•

all Mackinac common stock; or



•

A mix of cash and Mackinac common stock.

All elections are subject to the election, proration and allocation procedures described in this proxy statement/prospectus if too many shareholders elect cash consideration over stock consideration, due to the limitation that the relative cash consideration can amount to no more than 35% of the number of shares of Peninsula common stock outstanding prior to the effective date of the Merger, subject to certain adjustments described in the merger agreement. Due to these limitations, Peninsula shareholders may not receive the form of merger consideration that they elected. See "The Merger—Conversion of Shares; Exchange of Certificates—Allocation Procedures" beginning on page    for a more detailed discussion of allocation procedures under the merger agreement.

Q:

How and when does a Peninsula shareholder elect the form of consideration he or she prefers to receive?



A:

An election statement with instructions for making the election as to the form of consideration preferred is being mailed to Peninsula shareholders simultaneously with this proxy statement/prospectus. To make an election, a Peninsula shareholder must submit an election statement, to Mackinac's exchange agent before 5:00 p.m., Eastern Time, on the day prior to the date of the shareholders' meeting. This date is referred to as the "election deadline." Election choices and election procedures are described under "The Merger."

NOTE: The actual election deadline is not currently known. Mackinac and Peninsula will issue a press release announcing the date of the election deadline not more than 15 and at least five business days before that deadline.

Q:

May a Peninsula shareholder change his or her election once it has been submitted?



A:

Yes. An election may be changed so long as the new election is received by the exchange agent prior to the election deadline. To change an election, a Peninsula shareholder must send the exchange agent a written notice revoking any election previously submitted.

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Q:

What happens if an election is not made prior to the election deadline?



A:

If a Peninsula shareholder fails to submit an election statement to the exchange agent prior to the election deadline, then that holder will be deemed to have made no election and will be issued shares of Mackinac common stock, cash, or a mixture of stock and cash, depending on the aggregate cash and stock elections made and the need for any adjustments to ensure that no more than 35% of the number of shares of Peninsula common stock outstanding prior to the effective date of the Merger elect to receive cash consideration.



Q:

What should I do if I hold my shares of PeninsulaFirst Federal common stock in book-entry form?



A:

You are not required to take any specific actions if your shares of PeninsulaFirst Federal common stock are held in book-entry form, and you may vote your shares in the same manner as certificated shares may be voted. After the completion of the Merger, shares of PeninsulaFirst Federal common stock held in book-entry form automatically will be exchanged for the merger consideration, including shares of Mackinac common stock in book-entry form, and any cash to be received in the Merger.



Q:

Whom may I contact if I cannot locate my PeninsulaFirst Federal stock certificate(s)?



A:

If you are unable to locate your original PeninsulaFirst Federal stock certificate(s), you should contact Terry GarceauMichael Mahler at (906) 485-6333.(989) 354-7319.



Q:

When do you expect to complete the Merger?



A:

Peninsula, PFCFirst Federal, MFNC and Mackinac expect to complete the Merger late in the third quarter or early in the fourthsecond quarter of 2014.2018. However, neither PeninsulaFirst Federal nor Mackinac can assure you when or if the Merger will occur. Mackinac must first obtain the approval of its state and federal regulators, and PeninsulaFirst Federal must obtain the approval of its shareholders at the Special Meeting.



Q:

Whom should I call with questions?



A:

If you have any questions concerning the Merger or this joint proxy statement/prospectus, would like additional copies of this joint proxy statement/prospectus or need help voting your shares of PeninsulaFirst Federal common stock, please contact: John JilbertMichael Mahler at (906) 360-8666.(989) 354-7319.

viiiIf you have any questions concerning the Merger or this joint proxy statement/prospectus, would like additional copies of this joint proxy statement/prospectus or need help voting your shares of Mackinac common stock, please contact: Paul D. Tobias at (248) 290-5900.

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SUMMARY


        This summary highlights selected information from this joint proxy statement/prospectus. It may not contain all of the information that is important to you. We urge you to carefully read the entire joint proxy statement/prospectus, including the appendices, and the other documents to which we refer in order to fully understand the merger. See "Where You Can Find More Information.Information" and "Certain Documents Incorporated by Reference." Each item in this summary refers to the page of this joint proxy statement/prospectus on which that subject is discussed in more detail.


The Merger Transaction (page )59)


        Mackinac and PeninsulaFirst Federal have entered into an Agreement and Plan of Merger, dated as of July 18, 2014January 16, 2018, as amended (theMerger Agreement"), pursuant to which Mackinac has agreed to acquire Peninsula.First Federal. Under the terms of the Merger Agreement, PeninsulaFirst Federal will merge with and into PFC,MFNC, a wholly-owned subsidiary of Mackinac, with PFCMFNC continuing as the surviving entity (the"Merger"). The Merger Agreement governs the Merger. The Merger Agreement is included in this joint proxy statement/prospectus as Annex A. Please read the Merger Agreement carefully. All descriptions in this summary and elsewhere in this joint proxy statement/prospectus of the terms and conditions of the Merger are qualified by reference to the Merger Agreement and the exhibits thereto, all as attached as Annex A.Agreement.


The Merger Consideration (page )59)


        Subject to the terms and conditions set forth in the Merger Agreement, which has been unanimously approved by the board of directors of each of Mackinac and Peninsula,First Federal, at the Effective Time, of the Merger (as defined below), each outstanding share of PeninsulaFirst Federal common stock will be converted into the right to receive either (i) for each share0.576 shares of PeninsulaMackinac common stock, with respect to which an election to receiveno par value per share, plus cash has been made and not revoked, approximately $46.13 in cash (such shares collectively, the"Cash Election Shares"); or (ii) for each sharelieu of Peninsula common stock with respect to which an election to receive Company common stock has been made and not revoked, 3.4296 shares of Company common stock ("Stock Election Shares"); provided that the number of Cash Election Shares may not exceed 35% of total merger consideration, subject to adjustment as set forth in the Merger Agreement.fractional shares. The Merger Agreement requires Peninsulaallows the First Federal board of directors to havedeclare a minimum adjusted shareholders' equity of $10.5special cash dividend equal to $8 million and further contemplates that Peninsula will distribute any equity above such amountin the aggregate, to its shareholders as a special dividend immediately prior to the closing.Closing, subject to maintenance of a specified minimum equity requirement. As of February 28, 2018, First Federal's equity, as calculated in accordance with the terms of the Merger Agreement, exceeded the specified amount by approximately $200,000. To the extent First Federal's equity is less than the minimum requirement as of closing, the dividend would be reduced to the extent of such shortfall. Pursuant to the Merger Agreement, $1.45 millionat the Effective Time, First Federal or, under certain circumstances, including for regulatory or practical reasons, Mackinac, shall transfer to an exchange agent the amount of cash necessary to pay the special dividend (or about $5.03 per share) will be held in reserve pending the resolution of certain litigation. The reserve amount will be held in a trust required to be established and funded in such amount by the Merger Agreement for the benefit of the Peninsula shareholders. To the extent Peninsula (or Mackinac as its successor-in-interest) has any liability in the litigation, such amounts will be deducted from the reserve and all remaining funds will be distributed to the Peninsula shareholders. The resolution of the litigation in question could take a significant period of time and Peninsula shareholders may not receive distributions from the trust, if any are forthcoming, for months or years.dividend.


Equivalent PeninsulaFirst Federal Per Share Value (page )31)


        Mackinac common stock trades on the NASDAQ Stock Market ("NASDAQ") under the symbol "MFNC." PeninsulaFirst Federal common stock trades on the OTCQX Best Market (the"OTCQX") under the symbol "FFNM" is not listed or traded on any established securities exchange or quotation system. Accordingly, there is no established public trading market for PeninsulaFirst Federal common stock. The following table presents the closing price of Mackinac common stock on July 11, 2014,January 12, 2018, the trading day on which the per share merger consideration was calculated, and , 2014,March 29, 2018, the last practicable trading day prior to the printing of this joint proxy statement/prospectus. The table also presents the equivalent value of the merger consideration per share of PeninsulaFirst Federal common stock on




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those dates, calculated by multiplying the closing sales price of Mackinac common stock on those dates by 3.4296.0.576.

Date		Mackinac closing sale price			Equivalent Peninsula per share value(1)(2)
July 17, 2014		$	13.45		$	46.13
, 2014		$			$

Date		Mackinac closing sale price			Equivalent First Federal per share value(1)(2)
January 12, 2018		$	15.90		$	9.16
March 29, 2018		$	16.16		$	9.31

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(1)

Excludes cash in lieu of fractional shares.



(2)

46.13$9.16 and $9.31 excludes expected per share special dividend of approximately $7.2$8 million ($1.45 million of which will be held in the Shareholders' Trust) which would bring implied value to $71.13.$11.30 and $11.45 respectively.

        The value of the shares of Mackinac common stock to be issued in the Merger will fluctuate between now and the closing date of the Merger. You should obtain current sale prices for the Mackinac common stock.


Adjustments (page )59)


        If the number of shares of common stock outstanding of PeninsulaFirst Federal or Mackinac changes before the Merger is completed as a result of any reclassification, recapitalization, stock split (including a reverse stock split) or subdivision or combination or readjustment of shares, or any stock dividend or stock distribution with a record date during such period, then the merger consideration will be equitably and proportionately adjusted.


Fractional Shares (page )59)


        Mackinac will not issue any fractional shares of Mackinac common stock in the Merger. PeninsulaFirst Federal shareholders who would otherwise be entitled to a fractional share of Mackinac common stock upon the completion of the Merger will instead receive ana check representing the amount of cash in lieu of fractional shares that the holder is entitled to receive.an amount in cash (rounded to the nearest cent) determined by multiplying (i) the average, rounded to the nearest one tenth of a cent, of the closing sales price of Mackinac common stockCommon Stock as reported by NASDAQ for the five (5) trading days immediately preceding the date upon which the Certificate of Merger is accepted for filing by the Corporations Division of the Michigan Department of Licensing and Regulatory Affairs (the"Effective Time")LARA by (ii) the fraction of a share (after taking into account all shares of PeninsulaFirst Federal common stock held by such holder at the Effective Time and rounded to the nearest thousandth) of Mackinac common stock to which such holder would otherwise be entitled to receive.

        For example, if you hold 10 shares of PeninsulaFirst Federal common stock, and elect to receive Mackinac common stock in the merger, you will receive 345 shares of Mackinac common stock and $$12.09 (calculated based on the closing sales price of Mackinac common stock as of , 2014,January 12, 2018, which represents a cash payment instead of the 0.30.76 fractional shares of Mackinac common stock that you otherwise would have received. If you instead elect to receive cash in the Merger, you will receive approximately $46.13 multiplied by the number of shares of Peninsula common stock you hold).


Dividends (page )61)


        The Merger Agreement requires Peninsulaallows the First Federal board of directors to havedistribute $8 million in the aggregate to its shareholders as a minimum adjusted shareholders' equity of $10.5 million.special dividend immediately prior to the closing. Pursuant to the Merger Agreement, immediately priorat the Effective Time, First Federal (or, under certain circumstances, such as prevention of payment by First Federal for regulatory reasons or for practical reasons, Mackinac) shall transfer to an exchange agent the Merger, Peninsula willamount of cash necessary to pay a special cash dividend of any excess equity (expected to be approximately $7.2 million in the aggregate) to holders of Peninsula common stock. As described above, $1.45 million of the special dividend (or about $5.03 per share) will be held in reserve pending the resolution of certain litigation.




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The reserve amount will be held in a trust required to be established and funded in such amount by the Merger Agreement for the benefit of the Peninsula shareholders. To the extent Peninsula (or Mackinac as its successor-in-interest) has any liability in the litigation, such amounts will be deducted from the reserve and all remaining funds will be distributed to the Peninsula shareholders. The resolution of the litigation in question could take a significant period of time and Peninsula shareholders may not receive distributions from the trust, if any are forthcoming, for months or years. Peninsula and its subsidiaries may not declare or pay any dividend prior to the completion of the Merger other than the special dividend. Mackinac has recently paid a dividend each quarter, the most recent of which was $0.05$0.12 per share, paid April 11, 2014.January 9, 2018. The payment, timing and amount of dividends by Mackinac or PeninsulaFirst Federal on their common stock in the future, either before or after the Merger is completed, are subject to the determination of




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the respective Mackinac and PeninsulaFirst Federal boards of directors and depend, with respect to Mackinac, on cash requirements, the financial condition and earnings of Mackinac and Peninsula,First Federal, legal and regulatory considerations and other factors.


Peninsula's First Federal's Board of Directors Unanimously Recommends that PeninsulaFirst Federal Shareholders Vote "FOR" Approval of the Merger Agreement (page 34)


        Peninsula'sFirst Federal's board of directors determined that the Merger, the Merger Agreement and the transactions contemplated by the Merger Agreement are advisable and in the best interests of PeninsulaFirst Federal and its shareholders and has unanimously approved the Merger and the Merger Agreement. Peninsula'sFirst Federal's board of directors unanimously recommends that PeninsulaFirst Federal shareholders vote "FOR" approval of the Merger Agreement. For the factors considered by Peninsula'sFirst Federal's board of directors in reaching its decision to approve the Merger Agreement, see "The Merger—Peninsula'sFirst Federal's Reasons for the Merger; Recommendation of Peninsula'sFirst Federal's Board of Directors."


Wipfli LLP Mackinac's Board of Directors Unanimously Recommends that Mackinac Shareholders Vote "FOR" Approval of the Issuance Proposal (page 34)


        Mackinac's board of directors determined that the Merger, the Merger Agreement and the transactions contemplated by the Merger Agreement are advisable and in the best interests of Mackinac and its shareholders and has unanimously approved the Merger and the Merger Agreement. Mackinac's board of directors unanimously recommends that Mackinac's shareholders vote "FOR" approval of the issuance of Mackinac common stock. For the factors considered by Mackinac's board of directors in reaching its decision to approve the Merger Agreement, see "The Merger—Mackinac's Reasons for the Merger; Recommendation of Mackinac's Board of Directors."

ProBank Austin Has Provided an Opinion to Peninsula'sFirst Federal's Board of Directors Regarding the Merger Consideration (page 45 and Annex B)


        On JulyJanuary 16, 2014, Wipfli LLP2018, ProBank Austin ("Wipfli"ProBank Austin"), Peninsula'sFirst Federal's financial advisor in connection with the Merger, rendered its oral opinion to Peninsula'sFirst Federal's board of directors subsequently confirmed in writing, that, as of such date and based upon and subject to the assumptions, procedures, considerations, qualifications and limitations set forth in the written opinion, the merger consideration was fair, from a financial point of view, to the holders of shares of PeninsulaFirst Federal common stock.

        The full text of Wipfli'sProBank Austin's opinion, dated August 12, 2014,January 16, 2018, is attached as Annex BA to this joint proxy statement/prospectus. You should read the opinion in its entirety for a discussion of the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by WipfliProBank Austin in rendering its opinion.

        Wipfli'sProBank Austin's opinion is directed to Peninsula'sFirst Federal's board of directors, addresses only the fairness of the merger consideration from a financial point of view to the holders of shares of PeninsulaFirst Federal common stock on the date the opinion was rendered, and does not address any other aspect of the Merger or constitute a recommendation as to how any shareholders of PeninsulaFirst Federal should vote at any shareholder meeting held in connection with the Merger.

        For further information, see "The Merger—Opinion of Wipfli."ProBank Austin"


Peninsula First Federal and Mackinac Will Hold itsTheir Special MeetingMeetings on , 2014May 10, 2018 (page )34)


        The Special MeetingFirst Federal's board of Peninsula shareholders will be held on                        , 2014, at                    local time, atdirectors determined that the Corporate main office, 100 S. Main St., Ishpeming, Michigan 49849. At the Special Meeting, Peninsula shareholders will be asked to:

•

approveMerger, the Merger Agreement and the transactions it contemplates;contemplated by the Merger Agreement are advisable and

in the best interests of First Federal and its shareholders and has unanimously approved the Merger and the Merger Agreement. First Federal's board of directors unanimously recommends that First Federal shareholders vote




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"FOR" approval of the Merger Agreement. For the factors considered by First Federal's board of directors in reaching its decision to approve the Merger Agreement, see "The Merger—First Federal's Reasons for the Merger; Recommendation of First Federal's Board of Directors.")

First Federal:    The Special Meeting of First Federal shareholders will be held on May 10, 2018, at 8:00 am local time, at 109 N. Second Ave., Suite 300, Alpena, MI 49707.

        At the Special Meeting, First Federal shareholders will be asked to:

•

approve the Merger Agreement and the transactions it contemplates; and



•

approve the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies in favor of the approval of the Merger Agreement.

Mackinac:    The Special Meeting of Mackinac shareholders will be held on May 10, 2018, at 9:00 a.m. local time, at the Corporate main office, 130 South Cedar St., Manistique, Michigan 49854.

        At the Special Meeting, Mackinac shareholders will be asked to:

•

approve the issuance of shares of Mackinac common stock to First Federal shareholders in connection with the Merger; and



•

approve the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies in favor of the approval of the Merger Agreement.

        Only holders of record at the close of business on , 2014April 2, 2018 will be entitled to vote at the Special Meeting.Meetings. Each share of PeninsulaFirst Federal or Mackinac common stock is entitled to one vote on each proposal to be considered at the PeninsulaFirst Federal or Mackinac Special Meeting. As of the record date, there were 288,0003,726,925 shares of PeninsulaFirst Federal common stock entitled to vote at the Special Meeting and 6,512,910 shares of Mackinac common stock entitled to vote at the Special Meeting. Each of theThe directors of Peninsula and certain other shareholders of PeninsulaFirst Federal have entered into voting agreements with Mackinac, pursuant to which they have agreed, solely in their capacity as PeninsulaFirst Federal shareholders, to vote all of their shares of PeninsulaFirst Federal common stock in favor of the proposals to be presented at the Special Meeting. As of the record date, PeninsulaFirst Federal directors and other shareholders who are parties to the voting agreements were entitled to vote an aggregate of approximately 349,674 shares of PeninsulaFirst Federal common stock, representing approximately %9.38% of the PeninsulaFirst Federal common stock outstanding on that date. As of the record date, the directors and executive officers of PeninsulaFirst Federal were entitled to vote approximately 398,946 shares of PeninsulaFirst Federal common stock representing approximately %10.7% of the shares of PeninsulaFirst Federal common stock outstanding on that date. As of the record date, Mackinac and its subsidiaries held no shares of PeninsulaFirst Federal common stock (other than shares held as fiduciary, custodian or agent), and its directors and executive officers or their affiliates held 398,946 shares of PeninsulaFirst Federal common stock.

First Federal:    To approve the Merger Agreement, holders of at least seventy-fivefifty percent (75%(50%) of the outstanding shares of PeninsulaFirst Federal common stock entitled to vote at the Special Meeting must vote in favor of approving the Merger Agreement. Because approval is based on the affirmative vote of at least seventy-fivefifty percent (75%(50%) of the shares outstanding, your failure to vote, failure to instruct your bank or broker how to vote with respect to the proposal to approve the Merger Agreement or abstention will have the same effect as a vote against approval of the Merger Agreement.

        Approval of the Adjournment Proposal and the Issuance Proposal requires the affirmative vote of a majority of shares of PeninsulaFirst Federal common stock entitled to vote, represented in person or by proxy at the Special Meeting. Because approval of the Adjournment Proposal is based on the affirmative vote of a majority of shares voting or expressly abstaining at the Special Meeting, abstentions will have the same effect as a vote against such proposal. The failure to vote or failure




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to instruct your bank or broker how to vote with respect to the Adjournment Proposal, however, will have no effect on such proposal.

Mackinac:    To approve the Issuance Proposal requires the affirmative vote of a majority of shares of Mackinac common stock entitled to vote on, and represented in person or by proxy at the Special Meeting, even if less thanassuming a quorum. Because approval of the Issuance Proposal is based on the affirmative vote of a majority of shares voting or expressly abstaining at the Special Meeting, abstentions will have the same effect as a vote against such proposal. The failure to vote or failure to instruct your bank or broker how to vote with respect to the Issuance Proposal, however, will have no effect on such proposal.

        Approval of the Adjournment Proposal requires the affirmative vote of a majority of shares of Mackinac common stock entitled to vote, represented in person or by proxy at the Special Meeting. Because approval of the Adjournment Proposal is based on the affirmative vote of a majority of shares voting or expressly abstaining at the Special Meeting, abstentions will have the same effect as a vote against such proposal. The failure to vote or failure to instruct your bank or broker how to vote with respect to the Adjournment Proposal, however, will have no effect on such proposal.


Peninsula Shareholders Will Not Be Entitled First Federal's Officers and Directors Have Financial Interests in the Merger that Differ from Your Interests (page 55)


        You should be aware that some of directors and executive officers of First Federal may have interests in the Merger that are different from, or in addition to, their interests as shareholders. Both First Federal's Board of Directors and Mackinac's Board of Directors were aware of these interests and took them into consideration in approving the Merger Agreement and the Merger. These interests include an aggregate payment of $566,000 upon completion of the Merger to two First Federal executive officers pursuant to change in control agreements, continuation of coverage under director and executive officer insurance policies of First Federal management; and the appointment of a director from First Federal's board of directors to the Mackinac board of directors following the Merger.

        For a more complete description of these interests, see "The Merger—Interests of First Federal's Directors and Executive Officers in the Merger."

Dissenters' Rights of First Federal Shareholders in the Merger (page )38)


        Under MichiganMaryland law, which is the law under which PeninsulaFirst Federal is incorporated, the holders of PeninsulaFirst Federal common stock willare not be entitled to dissenters' appraisal rights in connection with the Merger. The MBCAMaryland General Corporation Law (the"MGCL") provides that a shareholder may not demand the fair value of the shareholder's stock and is bound by the terms of the transaction if any shares of the consideration to be received in a merger is in cashclass or sharesseries of stock are listed on a national securities exchange or if the holdersstock is that of the stock are not entitled to dissenters' rights. As Peninsula shareholders may elect to receive either cashsuccessor in the Merger, or Mackinac'smerger. As First Federal shareholders will receive Mackinac common stock, which is listed on the NASDAQ, there are no dissenters' rights.


Conditions That Must Be Satisfied or Waived for the Merger to Occur (page )71)


        Currently, PeninsulaFirst Federal and Mackinac expect to complete the Merger late in the third quarter or early in the fourthsecond quarter of 2014.2018. As more fully described in this joint proxy statement/prospectus and in the Merger Agreement, the completion of the Merger depends on a number of conditions being satisfied or, where legally permissible, waived. These conditions include, among others, approval of the Merger Agreement by Peninsula'sFirst Federal's shareholders and the receipt of certain required regulatory approvals.




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        Neither PeninsulaFirst Federal nor Mackinac can be certain when, or if, the conditions to the Merger will be satisfied or waived, or that the Merger will be completed.




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Termination of the Merger Agreement (page )72)


        The Merger Agreement can be terminated at any time prior to completion of the Merger by mutual consent, or by either party in the following circumstances:

•

By mutual written consent of PeninsulaFirst Federal and Mackinac;



•

the Merger has not been completed by March 18, 2015August 16, 2018 (the"End Date"), (if the failure to complete the Merger by that date is not caused by the terminating party's breach of the Merger Agreement);



•

any required regulatory approval has been denied by the relevant governmental entity and this denial has become final and nonappealable, or a governmental entity has issued a final, nonappealable injunction permanently enjoining or otherwise prohibiting the consummation of the Merger or the other transactions contemplated by the Merger Agreement;



•

there is a breach of the Merger Agreement by the other party that would cause the conditions for completion of the Merger not to be satisfied, and the breach is not cured prior to the earlier of March 18, 2015August 16, 2018 and 30 business days following written notice of the breach; or



•

PeninsulaFirst Federal shareholders fail to approve the Merger Agreement at the PeninsulaFirst Federal Special Meeting, and a No-Match Event shall have occurred, or the Merger Agreement is resubmitted to PeninsulaFirst Federal shareholders at a second shareholder meeting and the PeninsulaFirst Federal shareholders fail to approve the Merger Agreement at such shareholder meeting.

        PeninsulaFirst Federal may terminate the Merger Agreement inif both of the following circumstances:conditions have been satisfied:

•

the number obtained by dividing the average closing price by $13.45$15.9472 is less than 0.85;0.80; and



•

the number obtained by dividing the average closing price by $13.45$15.9472 is less than the number obtained by (x) dividing the final index price by the initial index price (the"Index Ratio") and then multiplying the index ratio by 0.85.0.20.

        However, in the event Peninsula notifies Mackinac of its intent to terminate for failure to meet the average closing price condition, Mackinac may, within one business day, elect to increase the per share cash consideration in an amount equal to the amount by which the value of Mackinac's common shares failed to meet the average closing price condition, in which case Peninsula may not terminate pursuant to this condition.

        In addition, Mackinac may terminate the Merger Agreement in the following circumstances:

•

Peninsula shareholders fail to approve the Merger Agreement atissuance of the Special Meeting (regardlessshares of whether or not Peninsula is obligatedMackinac common stock to resubmit the Merger Agreement to its shareholders for approval at a second shareholder meeting as described below in "The Merger Agreement—Peninsula Shareholder Meeting and Recommendation of Peninsula's Board of Directors");First Federal Shareholders;



•

Peninsula'sFirst Federal's board of directors fails to recommend to the PeninsulaFirst Federal shareholders that they approve the Merger Agreement or withdraws, modifies or qualifies such recommendation in a manner adverse to Mackinac;



•

Peninsula'sFirst Federal's board of directors fails to reaffirm its recommendation of the Merger within 10 business days after the public announcement of an acquisition proposal (or material modification thereto);



•

Peninsula'sFirst Federal or Mackinac's board of directors breaches its non-solicitation obligations described below in "The Merger Agreement—Agreement Not to Solicit Other Offers" or its obligations with respect to calling shareholder meetings and alternate acquisition proposals described below in "The Merger




Table Agreement—First Federal and Mackinac Shareholder Meetings and Recommendations of Contents

Agreement—Peninsula Shareholder MeetingFirst Federal and Recommendation of Peninsula's BoardMackinac's Boards of Directors"; or





•

Peninsula'sFirst Federal's board of directors approves, recommends or endorses, or proposes or resolves to recommend or endorse, an alternative transaction (as described below in "The Merger




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Agreement—PeninsulaFirst Federal and Mackinac's Shareholder MeetingMeetings and RecommendationRecommendations of Peninsula's BoardFirst Federal and Mackinac's Boards of Directors") or acquisition proposal.


Termination Fee (page )74)


        If the Merger Agreement is terminated under certain circumstances, including circumstances involving a change in recommendation by Peninsula'sFirst Federal's board of directors, PeninsulaFirst Federal may be required to pay Mackinac a termination fee of $0.5$1.5 million. The termination fee could discourage other companies from seeking to acquire or merge with Peninsula.First Federal.


Regulatory Approvals Required for the Merger (page )56)


        Both PeninsulaFirst Federal and Mackinac have agreed to use their reasonable best efforts to obtain all regulatory approvals required to complete the transactions contemplated by the Merger Agreement. Mackinac filed applications seeking regulatory approval to complete the transactions contemplated by the Merger Agreement with the Board of Governors of the Federal Reserve (the"FRB"), the Federal Deposit Insurance Corporation (the"FDIC"), and the Michigan Department of Insurance and Financial Services (the"DIFS"). Mackinac received approval of the transaction from the FRB on March 30, 2018.


Material U.S. Federal Income Tax Consequences of the Merger (page )77)


        The Merger is intended to qualify as a reorganization within the meaning of Section 368 of the Code. Assuming the Merger qualifies as such a reorganization, a shareholder of PeninsulaFirst Federal generally will not recognize any gain or loss upon receipt of Mackinac common stock in exchange for PeninsulaFirst Federal common stock in the Merger, but may recognize gain with respect to the cash consideration and cash received in lieu of a fractional share of Mackinac common stock. It is a condition to the completion of the Merger that the parties receive a written opinion from their counsel to the effect that the Merger will qualify as a reorganization within the meaning of Section 368 of the Code.


Board of Directors and Executive Officers of Mackinac Following Completion of the Merger (page )55)


        The size and composition of        Mackinac's board of directors will be expanded by one board seat, to be filled by a current FFNM director (reasonably acceptable to Mackinac) and PFC'sMFNC's board of managers will not be affected by the Merger.

        See "The Merger—Interests of First Federal's Directors and Executive Officers in the Merger." Information about Mackinac's current directors and executive officers can be found in the section entitled "Directors and Executive Officers of Mackinac."


The Rights of PeninsulaFirst Federal Shareholders Will Change as a Result of the Merger (page )82)


        The rights of PeninsulaFirst Federal shareholders will change as a result of the Merger due to differences in Mackinac's and Peninsula'sFirst Federal's governing documents. Both Peninsula and Mackinac areis incorporated in the state of Michigan, so both areand is governed by Michigan law. PeninsulaFirst Federal is incorporated in the state of Maryland, and is governed by Maryland law. First Federal shareholders are further governed by its restated articles of incorporation and amended and restated bylaws, each as amended to date (which we refer to as Peninsula'sFirst Federal's articles of incorporation and bylaws, respectively). Upon the completion of the Merger, PeninsulaFirst Federal shareholders will become Mackinac shareholders, and the rights of such shareholders will be governed by Michigan law and Mackinac's restated articles of incorporation, as amended to date, and its third amended and restated bylaws (which we refer to as Mackinac's articles of incorporation and bylaws, respectively).

        




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See "Comparison of Shareholders' Rights" for a description of the material differences in shareholder rights under each of the Mackinac and PeninsulaFirst Federal governing documents.




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Information About the Companies (page )91)


Mackinac Financial Corporation

        Mackinac is a bank holding company, or BHC, incorporated under Michigan law, primarily engaged in the business of planning, directing and coordinating the business activities of its wholly owned banking subsidiary, mBank, a Michigan state-chartered bank. As a BHC, Mackinac's activities are limited to banking and activities that are closely related to banking. At June 30, 2014,December 31, 2017 Mackinac had consolidated total assets of approximately $596$985.3 million, loans and leases receivable, net of allowances, of $503$811.1 million and total deposits of $484$818.0 million.

        The principal executive offices of Mackinac are located at 130 South Cedar Street, Manistique, Michigan 49854, and its telephone number is (888) 343-8147. Mackinac's website can be accessed at http://www.bankmbank.com. Information contained in Mackinac's website does not constitute part of, and is not incorporated into, this joint proxy statement/prospectus. Mackinac's common stock is traded on the NASDAQ under the symbol "MFNC."

        For more information about Mackinac and its subsidiaries, see "Where You Can Find More Information."

Peninsula Financial CorporationFirst Federal of Northern Michigan Bancorp, Inc.

        PeninsulaFirst Federal is a banksavings and loan holding company, or BHC, incorporated under MichiganMaryland law, primarily engaged in the business of planning, directing and coordinating the business activities of its wholly owned subsidiary, Peninsula Bank,First Federal of Northern Michigan, a Michigan state-chartered bank. As a BHC, Peninsula's activities are limited to banking and activities that are closely related to banking.federal stock savings association. At June 30, 2014, PeninsulaDecember 31, 2017, First Federal had consolidated total assets of approximately $124$321.2 million, loans and leases receivable, net of allowances, of $72$191.5 million and total deposits of $104$270.1 million.

        Peninsula'sFirst Federal's principal executive offices are located at 100 South Main Street, Ishpeming,Second Ave., Alpena, Michigan 49849,49707, and its telephone number is (906) 485-6333. Peninsula's(989) 356-9041. First Federal's website can be accessed at http:https://www.penbank.com.www.first-federal.com/. Information contained in Peninsula'sFirst Federal's website does not constitute part of, and is not incorporated into, this joint proxy statement/prospectus.


Comparative Historical and Unaudited Pro Forma Per Share Data


        Presented below for PeninsulaFirst Federal and Mackinac are comparative historical and unaudited pro forma equivalent per share financial data as of and for the year ended December 31, 2013, and as of and for the six months ended June 30, 2014.2017. The information presented below should be read together with the historical consolidated financial statements of PeninsulaFirst Federal and Mackinac, including the related notes, which are included and incorporated by reference, respectively, in this proxy statement/prospectus.

        The unaudited pro forma information gives effect to the Merger as if the Merger had been effective on June 30, 2014 in the case of the book value data, and as if the Merger had been effective as of January 1, 2014 in the case of the earnings per share and the cash dividends data.December 31, 2017. The unaudited pro forma data combines the historical results of PeninsulaFirst Federal into Mackinac's consolidated statement of net income. While certain adjustments were made for the estimated impact of fair value adjustments and other acquisition-related activity, they are not indicative of what could have occurred had the acquisition taken place on January 1, 2013 or January 1, 2014.2017.

        The unaudited pro forma adjustments are based upon available information and certain assumptions that PeninsulaFirst Federal and Mackinac management believe are reasonable. The unaudited pro




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forma data, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the impact of factors that may result as a consequence of the Merger, excluding estimated Merger integration costs, or consider any potential impacts of current market conditions or the Merger on revenues, expense efficiencies or asset dispositions, among other factors, nor the impact of possible business model changes. As a result, unaudited pro forma data are presented for illustrative purposes only and do not represent an attempt to predict or suggest future results. Upon completion of the Merger, the operating results of PeninsulaFirst Federal will be reflected in the consolidated financial statements of Mackinac on a prospective basis.




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COMPARATIVE PER SHARE DATA
(Unaudited)


Comparative Historical and Unaudited Pro Forma Per Share Data


        Presented below for First Federal and Mackinac are comparative historical and unaudited pro forma equivalent per share financial data as of and for the year ended December 31, 2017. The information presented below should be read together with the historical consolidated financial statements of First Federal and Mackinac, including the related notes. The financial statements for First Federal are included and incorporated by reference, respectively, in this joint proxy statement/prospectus.

        The unaudited pro forma information gives effect to the Merger as if the Merger had been effective on December 31, 2017 in the case of the book value data, and as if the Merger had been effective as of January 1, 2017 in the case of the earnings per share and the cash dividends data. The unaudited pro forma data combines the historical results of First Federal into Mackinac's consolidated statement of net income. While certain adjustments were made for the estimated impact of fair value adjustments and other acquisition-related activity, they are not indicative of what could have occurred had the acquisition taken place on January 1, 2017.

        The unaudited pro forma adjustments are based upon available information and certain assumptions that First Federal and Mackinac management believe are reasonable. The unaudited pro forma data, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the impact of factors that may result as a consequence of the Merger, excluding estimated merger integration costs, or consider any potential impacts of current market conditions or the Merger on revenues, expense efficiencies or asset dispositions, among other factors, nor the impact of possible business model changes. As a result, unaudited pro forma data are presented for illustrative purposes only and do not represent an attempt to predict or suggest future results. Upon completion of the merger, the operating results of First Federal will be reflected in the consolidated financial statements of Mackinac on a prospective basis.

		Peninsula Historical
As of or for The Period Ended		Book Value Per Share			Tangible Book Value			Cash Dividends Declared Per Share			Basic Earnings Per Common Share			Diluted Earnings Per Common Share
Six months ended June 30, 2014		$	61.58		$	61.58		$	.00		$	1.88		$	1.88
Year ended December 31, 2013		$	59.45		$	59.45		$	.75		$	.87		$	.87

First Federal Historical
As of or for The Period Ended		Book Value Per Share			Tangible Book Value			Cash Dividends Declared Per Share			Basic Earnings Per Common Share			Diluted Earnings Per Common Share
Year ended December 31, 2017		$	8.84		$	8.67		$	0.19		$	0.17		$	0.17

 


		Mackinac Historical
As of or for The Period Ended		Book Value Per Share			Tangible Book Value			Cash Dividends Declared Per Share			Basic Earnings Per Common Share			Diluted Earnings Per Common Share
Six months ended June 30, 2014		$	12.03		$	12.03		$	.10		$	.27		$	.26
Year ended December 31, 2013		$	11.77		$	11.77		$	.17		$	1.01		$	1.00

Mackinac Historical
As of or for The Period Ended		Book Value Per Share			Tangible Book Value			Cash Dividends Declared Per Share			Basic Earnings Per Common Share			Diluted Earnings Per Common Share
Year ended December 31, 2017		$	12.93		$	11.72		$	0.48		$	0.87		$	0.87

 


Pro Forma First Federal and Mackinac
As of or for The Period Ended		Book Value Per Share			Tangible Book Value			Cash Dividends Declared Per Share			Basic Earnings Per Common Share			Diluted Earnings Per Common Share
Year ended December 31, 2017		$	13.63		$	11.12		$	0.48		$	0.62		$	0.62

		Pro Forma Peninsula and Mackinac
As of or for The Period Ended		Book Value Per Share			Tangible Book Value			Cash Dividends Declared Per Share			Basic Earnings Per Common Share			Diluted Earnings Per Common Share
Six months ended June 30, 2014		$	12.18		$	11.18		$	.10		$	.45		$	.45




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RISK FACTORS


        In addition to general investment risks and the other information contained in this joint proxy statement/prospectus, including the matters addressed under the section "Cautionary Statement Regarding Forward-Looking Statements," you should carefully consider the following risk factors in deciding how to vote for the proposals presented in this joint proxy statement/prospectus. In addition, you should read and consider the risks associated with each of the businesses of PeninsulaFirst Federal and Mackinac because these risks will relate to the combined company. Descriptions of some of these risks can be found in the Annual Report on Form 10-K filed by Mackinac for the year ended December 31, 2013,2017, as updated by other reports filed with the SEC, which is filed with the SEC. You should also consider the other information in this joint proxy statement/prospectus. See "Where You Can Find More Information.Information" and "Certain Documents Incorporated by Reference."


Risk Factors Related to Proposed Merger


Because the market price of Mackinac common stock will fluctuate, PeninsulaFirst Federal shareholders cannot be certain of the market value of the merger consideration they will receive.

        If the Merger is completed, each holder of PeninsulaFirst Federal common stock outstanding immediately prior to the completion of the Merger will receive either (i) for each share of Peninsula common stock with respect to which an election to receive cash has been made and not revoked, approximately $46.13 in cash; or (ii) for each share of Peninsula common stock with respect to which an election to receive Mackinac common stock has been made and not revoked, 3.42960.576 shares of Mackinac common stock; provided that the numberstock, no par value per share, plus cash in lieu of Cash Election Shares may not exceed 35% of total merger consideration, subject to adjustment as set forth in the Merger Agreement.fractional shares. The Merger Agreement requires Peninsulaallows the First Federal board of directors to have a minimum adjusted shareholders' equity of $10.5 million and further contemplates that Peninsula will distribute any equity above such amount to its shareholders asdeclare a special cash dividend equal to $8 million in the aggregate immediately prior to the closing.Closing. Pursuant to the Merger Agreement, $1.45 million ofat the special dividend will be held in reserve pending final resolution ofEffective Time, First Federal or Mackinac under certain litigation. The exact number of Mackinac shares andcircumstances, shall transfer to an exchange agent the amount of cash you may be entitlednecessary to receive inpay the Merger will depend on the number of Peninsula common shares outstanding on the date the Merger is actually completed. Additionally, thespecial dividend. The market value of the merger consideration on the date the Merger is completed may differ from the market value of the merger consideration on the date Mackinac announced the Merger, on the date that this joint proxy statement/prospectus was mailed to PeninsulaFirst Federal shareholders, and on the date of the Special Meeting of the PeninsulaFirst Federal shareholders. Any change in the market price of Mackinac common stock prior to the completion of the Merger will affect the market value of the Mackinac common stock that PeninsulaFirst Federal shareholders will receive upon completion of the Merger. Stock price changes may result from a variety of factors that are beyond the control of Mackinac and Peninsula,First Federal, including but not limited to general market and economic conditions, changes in our respective businesses, operations and prospects and regulatory considerations. Therefore, at the time of the PeninsulaFirst Federal Special Meeting you will not know the precise market value of the consideration you will receive at the Effective Time of the Merger. You should obtain current market quotations for shares of Mackinac common stock.

Regulatory approvals may not be received, may take longer to receive than expected, or may impose conditions that are not presently anticipated.

        Before the transactions contemplated in the merger agreement may be completed, regulatory approvals must be obtained from the Federal Reserve Board, the Federal Deposit Insurance Corporation and the State of Michigan. These governmental entities will consider, among other factors, the competitive impact of the merger, Mackinac's financial and managerial resources, the convenience and needs of the communities to be served, capital position, safety and soundness, legal and regulatory compliance matters, and Community Reinvestment Act matters, and they may impose conditions on the completion of the merger or require changes to the terms of the merger agreement. On March 30, 2018, the Federal Reserve Board approved the transaction. However, there can be no assurance as to whether regulatory approvals will be received from the other agencies, the timing of those approvals, or whether any conditions will be imposed.




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The market price of Mackinac common stock after the Merger may be affected by factors different from those affecting the shares of First Federal or Mackinac currently.

        Upon completion of the Merger, holders of First Federal common stock may become holders of Mackinac common stock. Mackinac's business differs from that of First Federal, and, accordingly, the results of operations of the combined company and the market price of Mackinac common stock after the completion of the Merger may be affected by factors different from those currently affecting the independent results of operations of each of Mackinac and First Federal. Mackinac's banking subsidiary, mBank, offers a variety of financial services to meet the banking and financial needs of a broad-range of customers in the communities they serve. Similarly, First Federal's banking subsidiary, First Federal of Northern Michigan, is also a community bank that offers a range of financial services to its customers, through First Federal has a much larger concentration of residential loans. However, difficulties in integrating these services may result in the failure to achieve the expected synergies.

Combining the two companies may be more difficult, costly or time consuming than expected.

        Mackinac and PeninsulaFirst Federal have operated and, until the completion of the Merger, will continue to operate, independently. The success of the Merger, including anticipated cost savings, will depend, in part, on our ability to successfully combine the businesses of Mackinac and Peninsula.First Federal. To realize these anticipated benefits, after the completion of the Merger, Mackinac expects to integrate Peninsula'sFirst Federal's business into its own. It is possible that the integration process could result in the loss of key employees, the disruption of each company's ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company's ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of




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the merger. The loss of key employees could adversely affect Mackinac's ability to successfully conduct its business in the markets in which PeninsulaFirst Federal now operates, which could have an adverse effect on Mackinac's financial results and the value of its common stock. If Mackinac experiences difficulties with the integration process, the anticipated benefits of the Merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause PeninsulaFirst Federal to lose customers or cause customers to remove their accounts from PeninsulaFirst Federal and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of PeninsulaFirst Federal and Mackinac during this transition period and for an undetermined period after completion of the Merger. In addition, the actual cost savings of the Merger could be less than anticipated.

The fairness opinion obtained by PeninsulaFirst Federal from its financial advisor will not reflect changes in circumstances between signing the Merger Agreement and the completion of the Merger.

        PeninsulaFirst Federal has not obtained an updated fairness opinion as of the date of this joint proxy statement/prospectus from Wipfli LLP,ProBank Austin, its financial advisor. The original opinion attached hereto is dated as of August 12, 2014. Changes in the operations and prospects of PeninsulaFirst Federal or Mackinac, general market and economic conditions and other factors that may be beyond the control of PeninsulaFirst Federal and Mackinac, and on which the fairness opinion was based, may alter the value of PeninsulaFirst Federal or Mackinac or the prices of shares of PeninsulaFirst Federal common stock or Mackinac common stock by the time the Merger is completed. The opinion does not speak as of the time the Merger will be completed or as of any date other than the date of such opinion. Because PeninsulaFirst Federal does not anticipate asking its financial advisor to update its opinion, the opinion does not address the fairness of the merger consideration, from a financial point of view, at the time the Merger is completed. The opinion is attached as Annex B to this joint proxy statement/prospectus. For a description of the opinion that PeninsulaFirst Federal received from its financial advisor, see "The Merger—Opinion of Wipfli LLP.ProBank Austin." For a description of the other factors considered by Peninsula'sFirst




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Federal's board of directors in determining to approve the Merger, see "The Merger—Peninsula'sFirst Federal's Reasons for the Merger; Recommendation of Peninsula'sFirst Federal's Board of Directors."

Some of the directors and executive officers of First Federal may have interests and arrangements that may have influenced their decisions to support or recommend that you approve the Merger Agreement.

        The interests of some of the directors and executive officers of First Federal may be different from those of First Federal common shareholders, and directors and officers of First Federal may be participants in arrangements that are different from, or in addition to, those of First Federal common shareholders. These interests are described in more detail in the section entitled "The Merger—Interests of First Federal's Directors and Executive Officers in the Merger."

The unaudited pro forma financial data for Mackinac and PeninsulaFirst Federal included in this joint proxy statement/prospectus are preliminary, and Mackinac's actual financial position and operations after the completion of the Merger may differ materially from the unaudited pro forma financial data included in this joint proxy statement/prospectus.

        The unaudited pro forma financial data for both Mackinac and PeninsulaFirst Federal in this joint proxy statement/prospectus are presented for illustrative purposes only and are not necessarily indicative of what Mackinac's actual financial position or operations would have been had the Merger been completed on the dates indicated. For more information, see "Unaudited Pro Forma Combined Condensed Consolidated Financial Information."

First Federal shareholders' percentage ownership of Mackinac will be much smaller than their percentage ownership of First Federal.

        First Federal shareholders currently have the right to vote in the election of the First Federal board of directors and on other matters affecting First Federal. When the merger occurs, each First Federal shareholder will become a shareholder of Mackinac with a percentage ownership of the combined organization that is much smaller than the shareholder's percentage ownership of First Federal. Because of this, the First Federal shareholders will have less influence on the management and policies of Mackinac than they now have on the management and policies of First Federal.

The Merger may fail to qualify as a reorganization for federal income tax purposes, resulting in your recognition of taxable gain or loss in respect of all of your First Federal common stock.

        Mackinac and First Federal intend for the merger to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the"Code"). The Internal Revenue Service ("IRS") will not provide a ruling on the matter. Mackinac and First Federal each will, as a condition to closing, obtain an opinion from counsel that the merger will constitute a reorganization for federal income tax purposes. However, these opinions do not bind the IRS or prevent the IRS from adopting a contrary position. If the merger fails to qualify as a reorganization, First Federal shareholders generally would recognize gain or loss on each share of First Federal common stock surrendered in an amount equal to the difference between the shareholder's adjusted tax basis in that share and the fair market value of the Mackinac common stock received in exchange for that share upon completion of the merger. See "Material U.S. Federal Income Tax Consequences of the Merger" on page 77.


Risk Factors Related to the Business of PeninsulaFirst Federal


If the Merger is not completed, PeninsulaFirst Federal may have to revise its business strategy.

        During the past several months, management of PeninsulaFirst Federal has been focused on, and has devoted significant resources to, the Merger. This focus is continuing, and PeninsulaFirst Federal has not been




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able to pursue certain business opportunities which may have been beneficial to PeninsulaFirst Federal on a stand-alone basis. Under the Merger Agreement, PeninsulaFirst Federal is subject to restrictions on the conduct of its business before completing the Merger, which may adversely affect its ability to execute certain of its business strategies if the Merger is terminated. If the Merger is not completed, PeninsulaFirst Federal will have to revisit its business strategy in an effort to determine what changes may be required in order for PeninsulaFirst Federal to operate on an independent, stand-alone basis.




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Termination of the Merger Agreement could negatively impact Peninsula.First Federal.

        If the Merger Agreement is terminated, there may be various consequences. For example, Peninsula'sFirst Federal's businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger. If the Merger Agreement is terminated and Peninsula'sFirst Federal's board of directors seeks another merger or business combination, PeninsulaFirst Federal shareholders cannot be certain that PeninsulaFirst Federal will be able to find a party willing to pay the equivalent or greater consideration than that which Mackinac has agreed to pay in the Merger. In addition, if the Merger Agreement is terminated under certain circumstances, including circumstances involving a change in recommendation by Peninsula'sFirst Federal's board of directors, PeninsulaFirst Federal may be required to pay Mackinac a termination fee of $0.5$1.5 million.

If the Merger is not completed, PeninsulaFirst Federal will have incurred substantial expenses without realizing the expected benefits of the Merger.

        PeninsulaFirst Federal has incurred substantial expenses in connection with the Merger. The completion of the Merger depends on the satisfaction of specified conditions and the receipt of regulatory approvals and the approval of Peninsula'sFirst Federal's shareholders. PeninsulaFirst Federal cannot guarantee that these conditions will be met. If the Merger is not completed, these expenses could have a material adverse impact on Peninsula'sFirst Federal's financial condition and results of operations on a stand-alone basis.

PeninsulaFirst Federal will be subject to business uncertainties and contractual restrictions while the Merger is pending.

        Uncertainty about the effect of the Merger on employees and customers may have an adverse effect on Peninsula.First Federal. These uncertainties may impair Peninsula'sFirst Federal's ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with PeninsulaFirst Federal to seek to change existing business relationships with Peninsula.First Federal. Retention of certain employees by PeninsulaFirst Federal may be challenging while the Merger is pending, as certain employees may experience uncertainty about their future roles with Peninsula.First Federal. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Peninsula, Peninsula'sFirst Federal, First Federal's business following the Merger could be harmed. In addition, subject to certain exceptions, PeninsulaFirst Federal has agreed to operate its business in the ordinary course prior to closing. See "The Merger Agreement—Covenants and Agreements" for a description of the restrictive covenants applicable to Peninsula.First Federal.


Risk Factors Related to the Business of Mackinac


Mackinac makes and holds in its portfolio a significant number of loans to the hospitality and tourism industry; a downturn in these industries would disproportionately affect Mackinac versus its competitors.

        On a historical basis, the highest concentration of credit risk for Mackinac was the hospitality and tourism industry. Although management does not consider the current loan concentrations in hospitality and tourism to be problematic and have no intention of further reducing loans to this industry segment, a downturn in this segment may disproportionately affect Mackinac's results as compared to other financial institutions.




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Mackinac's net interest income could be negatively affected by interest rate adjustments by the Federal Reserve, as well as by competition in its primary market area.

        As a financial institution, Mackinac's earnings are significantly dependent upon its net interest income, which is the difference between the interest income that is earned on interest-earning assets, such as investment securities and loans, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates,




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including changes resulting from changes in the Federal Reserve's fiscal and monetary policies, affects it more than non-financial institutions and can have a significant effect on net interest income and total income. Mackinac's assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of the assets and liabilities. As a result, an increase or decrease in market interest rates could have material adverse effects on net interest margin and results of operations.

If the allowance for loan losses is not sufficient to cover actual loan losses, Mackinac's earnings could decrease.

        Mackinac's success depends to a significant extent upon the quality of its assets, particularly loans. In originating loans, there is a substantial likelihood that credit losses will be experienced. The risk of loss will vary with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the quality of the collateral for the loan.

        Mackinac's loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. As a result, Mackinac may experience significant loan losses, which could have a material adverse effect on operating results. Management makes various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of Mackinac's loans. An allowance for loan losses is maintained in an attempt to cover any loan losses that may occur. In determining the size of the allowance, management relies on an analysis of the loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information. The determination of the size of the allowance could be understated due to deviations in one or more of these factors.

        If assumptions are wrong, the current allowance may not be sufficient to cover future loan losses, and adjustments may be necessary to allow for different economic conditions or adverse developments in Mackinac's loan portfolio. Material additions to the allowance would materially decrease net income.

        In addition, federal and state regulators periodically review the allowance for loan losses and may require Mackinac to increase its provision for loan losses or recognize further loan charge-offs, based on judgments different than those of management. Any increase in the allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a negative effect on Mackinac's operating results.

Mackinac may need to raise additional capital in the future, but that capital may not be available when it is needed.

        Mackinac is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. Management may at some point in the future need to raise additional capital to support its business as a result of losses. Its ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside the control of management, and on Mackinac's financial performance. Accordingly, Mackinac cannot assure you of its ability to




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raise additional capital if needed on terms acceptable to management. If additional capital cannot be raised when needed, Mackinac's ability to further expand its operations through internal growth and to operate its business could be materially impaired.




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If Mackinac is unable to increase its share of deposits in the markets that its banks operate within, it may accept out-of-market and brokered deposits, the costs of which may be higher than expected.

        Mackinac's management can offer no assurance that it will be able to maintain or increase Mackinac's market share of deposits in its highly competitive service areas. If unable to do so, it may be forced to accept increased amounts of out-of-market or brokered deposits. As of June 30, 2014,December 31, 2017, Mackinac had approximately $80.0$175.3 million in out of market brokered deposits, which represented approximately 16.5%17.8% of total deposits. At times, the cost of out-of-market and brokered deposits exceeds the cost of deposits in the local market. In addition, the cost of out-of-market and brokered deposits can be volatile, and if Mackinac is unable to access these markets, or if its costs related to out of market and brokered deposits increase, its liquidity and ability to support demand for loans could be adversely affected.

Volatility and disruptions in global capital and credit markets may adversely impact Mackinac's business, financial condition and results of operations.

        Even though Mackinac operates in a distinct geographic region in the U.S., it is impacted by global capital and credit markets, which are sometimes subject to periods of extreme volatility and disruption. Disruptions, uncertainty or volatility in the capital and credit markets may limit Mackinac's ability to access capital and manage liquidity, which may adversely affect Mackinac's business, financial condition and results of operations. Further, Mackinac's customers may be adversely impacted by such conditions, which could have a negative impact on Mackinac's business, financial condition and results of operations.

Mackinac is subject to extensive regulation that could limit or restrict its activities.

        Mackinac operates in a highly regulated industry and is subject to examination, supervision and comprehensive regulation by various federal and state agencies. Compliance with these regulations is costly and restricts certain activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. Mackinac is also subject to capitalization guidelines established by its regulators, which require it to maintain adequate capital to support its growth.

        Mackinac's business also is subject to laws, rules and regulations regarding the disclosure of non-public information about its customers to non-affiliated third parties. Internet operations are not currently subject to direct regulation by any government agency in the United States beyond regulations applicable to businesses generally. A number of legislative and regulatory proposals currently under consideration by federal, state and local governmental organizations may lead to laws or regulations concerning various aspects of Mackinac's business on the Internet, including: user privacy, taxation, content, access charges, liability for third-party activities and jurisdiction. The adoption of new laws or a change in the application of existing laws may decrease the use of the Internet, increase costs or otherwise adversely affect Mackinac's business.

        In particular, Congress and other regulators have increased their focus on the regulation of the financial services industry in recent years. While recent changes in the executive branch may mitigate this impact, the effects on Mackinac of recent legislation and regulatory actions cannot reliably be fully determined at this time. Moreover, as some of the legislation and regulatory actions previously implemented in response to the recent financial crisis expire, the impact of the conclusion of these programs on the financial sector and on the economic recovery is unknown. Any delay in the economic




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recovery or a worsening of current financial market conditions could adversely affect Mackinac. Mackinac can neither predict when or whether future regulatory or legislative reforms will be enacted nor what their contents will be. The impact of any future legislation or regulatory actions on Mackinac's businesses or operations cannot be determined at this time, and such impact may adversely affect Mackinac.

        The laws and regulations applicable to the banking industry could change at any time, and management cannot predict the effects of these changes on Mackinac's business and profitability. Additionally, Mackinac cannot predict the effect of any legislation that may be passed at the state or federal level in response to the recent deterioration of the subprime, mortgage, credit and liquidity markets. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance could adversely affect Mackinac's ability to operate profitably.

        Mackinac's financial condition and results of operations are reported in accordance with accounting principles generally accepted in the United States ("GAAP"). While not impacting economic results, future changes in accounting principles issued by the Financial Accounting Standards Board could impact Mackinac's earnings as reported under GAAP. As a public company, Mackinac is also subject to the corporate governance standards set forth in the Sarbanes-Oxley Act of 2002, as well as applicable rules and regulations promulgated by the SEC. Complying with these standards, rules and regulations has and continues to impose administrative costs and burdens on the company.

        Additionally, political conditions could impact Mackinac's earnings. Acts or threats of war or terrorism, as well as actions taken by the United States or other governments in response to such acts or threats, could impact the business and economic conditions in which it operates.




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Mackinac may make or be required to make further increases in its provision for loan losses and to charge off additional loans in the future, which could adversely affect the results of operations.

        As a result of changes in balances and composition of Mackinac's loan portfolio, changes in economic and market conditions that occur from time to time and other factors specific to a borrower's circumstances, the level of non-performing assets will fluctuate. Increased non-performing assets, credit losses or the provision for loan losses would materially adversely affect Mackinac's financial condition and results of operations.

Mackinac's adjustable-rate loans may expose it to increased default risks.

        While adjustable-rate loans better offset the adverse effects of an increase in interest rates as compared to fixed-rate loans, the increased payments required of adjustable-rate loan borrowers upon an interest rate adjustment in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property may also be adversely affected in a rising interest rate environment. In addition, although adjustable-rate loans help make Mackinac's asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.

Changing interest rates may decrease Mackinac's earnings and asset values.

        Management is unable to accurately predict future market interest rates, which are affected by many factors, including, but not limited to, inflation, recession, changes in employment levels, changes in the money supply and domestic and international disorder and instability in domestic and foreign financial markets. Changes in the interest rate environment may reduce Mackinac's profits. Net interest income is a significant component of its net income and consists of the difference, or spread, between interest income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing




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characteristics of interest-earning assets and interest-bearing liabilities. Although certain interest-earning assets and interest-bearing liabilities may have similar maturities or periods in which they reprice, they may react in different degrees to changes in market interest rates. In addition, residential mortgage loan origination volumes are affected by market interest rates on loans; rising interest rates generally are associated with a lower volume of loan originations, while falling interest rates are usually associated with higher loan originations. Mackinac's ability to generate gains on sales of mortgage loans is significantly dependent on the level of originations. Cash flows are affected by changes in market interest rates. Generally, in rising interest rate environments, loan prepayment rates are likely to decline, and in falling interest rate environments, loan prepayment rates are likely to increase. A majority of Mackinac's commercial, commercial real estate and multi-family residential real estate loans are adjustable rate loans and an increase in the general level of interest rates may adversely affect the ability of some borrowers to pay the interest on and principal of their obligations, especially borrowers with loans that have adjustable rates of interest. Changes in interest rates, prepayment speeds and other factors may also cause the value of loans held for sale to change. Accordingly, changes in levels of market interest rates could materially and adversely affect Mackinac's net interest spread, loan volume, asset quality, value of loans held for sale and cash flows, as well as the market value of its securities portfolio and overall profitability.

Regulatory reform may have a material impact on Mackinac's operations.

        On July 21, 2010, President Obama signed into law the Dodd-Frank Act which could impact the performance of Mackinac and mBank in future periods. The Dodd-Frank Act included numerous provisions intended to strengthen the financial industry, enhance consumer protection, expand disclosures and provide for transparency. Some of these provisions included changes to FDIC insurance coverage, which included a permanent increase in coverage to $250,000 per depositor. Additional




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provisions created a Bureau of Consumer Financial Protection, which is authorized to write rules on all consumer financial products. Still other provisions created a Financial Stability Oversight Council, which is not only empowered to determine the entities that are systemically significant and therefore require more stringent regulations, but is also charged with reviewing, and when appropriate, submitting, comments to the SEC and Financial Accounting Standards Board with respect to existing or proposed accounting principles, standards or procedures. Further, the Dodd-Frank Act retained the thrift charter and merged the Office of Thrift Supervision into the Comptroller of the Currency. The aforementioned are only a few of the numerous provisions included in the Dodd-Frank Act. The overall impact of the entire Dodd-Frank Act will not be known until full implementation is completed, but the possibility of significant additional compliance costs exists, and the Dodd-Frank Act consequently may have a material adverse impact on Mackinac's operations.

Mackinac faces strong competition from other financial institutions, financial services companies and other organizations offering services similar to those offered by it, which could result in Mackinac not being able to sustain or grow its loan and deposit businesses.

        Mackinac conducts its business operations primarily in the State of Michigan. Increased competition within this market may result in reduced loan originations and deposits. Ultimately, Mackinac may not be able to compete successfully against current and future competitors. Many competitors offer the types of loans and banking services that it offers. These competitors include other savings associations, community banks, regional banks and money center banks. Mackinac also faces competition from many other types of financial institutions, including finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. Mackinac's competitors with greater resources may have a marketplace advantage enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns.

        Additionally, financial intermediaries not subject to bank regulatory restrictions and banks and other financial institutions with larger capitalization have larger lending limits and are thereby able to serve the credit needs of larger clients. These institutions, particularly to the extent they are more diversified than Mackinac is, may be able to offer the same loan products and services that Mackinac offers at more competitive rates and prices. If Mackinac is unable to attract and retain banking clients, it may be unable to sustain current loan and deposit levels or increase its loan and deposit levels, and its business, financial condition and future prospects may be negatively affected.

Basel III capital rules may have a material impact on Mackinac's operations.

        In December 2010, the Basel Committee on Banking Supervision, an international forum for cooperation on banking supervisory matters, announced the "Basel III" capital rules, which set new capital requirements for banking organizations. On June 7, 2012, the Federal Reserve Board requested comment on three proposed rules that, taken together, would establish an integrated regulatoryThe capital framework implementing therequirements applicable to Mackinac as a bank holding company as well as to its subsidiary bank have been substantially revised in connection with Basel III regulatory capital reforms inand the United States. As proposed,requirements of the U.S. implementation of Basel III would lead to significantly higherFinancial Reform Act. These more stringent capital requirements, and more restrictive leverage and liquidity ratios than those currently in place. Once adopted, theseany other new capital requirements would be phased in over time. Additionally, the U.S. implementation of Basel III contemplates that, for banking organizations with less than $15 billion in assets, theregulations, could adversely affect Mackinac's ability to treat trust preferred securities as tier 1pay dividends in the future, or could require it to reduce business levels or to raise capital, would be phased out over a ten-year period.including in ways that may adversely affect its results of operations or financial condition and/or existing shareholders. The ultimate impact of the U.S. implementation of the new capital requirements cannot be determined at this time and liquidity standardswill depend on Mackinaca number of factors, including treatment and mBank is currently being reviewed.implementation by the U.S. bank regulators. However,




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maintaining higher levels of capital may reduce Mackinac's profitability and otherwise adversely affect its business, financial condition, or results of operations.

Mackinac's ability to use net operating loss carryovers to reduce future tax payments may be limited or restricted.

        As of June 30, 2014,December 31, 2017, Mackinac had net operating loss ("NOL") carryforwards of approximately $17.2$7.5 million. Mackinac is generally able to carry NOLs forward to reduce taxable income in future years. However, its ability to utilize its NOL carryforwards is subject to the rules of Section 382 of the Internal Revenue Code of 1986, as amended (the"Code").Code. Section 382 of the Code generally restricts the use of NOL carryforwards after an "ownership change." An ownership change occurs if, among other things, the shareholders (or specified groups of shareholders) who own or have owned, directly or indirectly, 5% or more of a corporation's common shares, or are otherwise treated as 5% shareholders under Section 382 of the Code and the Treasury regulations promulgated thereunder, increase their aggregate percentage ownership of that corporation's shares by more than fifty (50) percentage points over the lowest percentage of the shares owned by these shareholders over a three (3)-year rolling period. In the event of an ownership change, Section 382 of the Code imposes an annual limitation on the amount of taxable income a corporation may offset with its pre-ownership change NOL carry forwards. This annual limitation is generally equal to the value of the corporation's shares immediately before the ownership change multiplied by the long-term tax-exempt rate in effect for the month in which the ownership change occurs. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOL carryforwards.

        As of June 30, 2014,December 31, 2017, Mackinac had tax credit carryforwards of approximately $2.4$1.7 million. Mackinac is generally able to carry tax credits forward to reduce taxes in future years. However, Mackinac's ability to utilize the tax credit carryforwards is subject to the rules of Section 383 of the Code. Section 383 of the Code imposes a comparable and related set of rules for limiting the use of capital loss and tax credit carry-forwards in the event of an ownership change.

        Mackinac does not anticipate that the proposed merger will cause an "ownership change" for purposes of Section 382 and Section 383 of the Code. However, management cannot ensure that Mackinac's ability to use its NOL carryforwards to offset taxable income or its tax credit carryforwards to offset tax will not become limited in the future. As a result, Mackinac could pay taxes earlier and in larger amounts than would be the case if its NOL and tax credit carryforwards were available to reduce its federal income taxes without restriction.

Mackinac may not be able to utilize technology to efficiently and effectively develop, market, and deliver new products and services to its customers.

        The financial services industry experiences rapid technological change with regular introductions of new technology-driven products and services. The efficient and effective utilization of technology enables financial institutions to better serve customers and to reduce costs. Mackinac's future success depends, in part, upon its ability to address the needs of its customers by using technology to market and deliver products and services that will satisfy customer demands, meet regulatory requirements, and create additional efficiencies in its operations. Mackinac may not be able to effectively develop new technology-driven products and services or be successful in marketing or supporting these products and services to its customers, which could have a material adverse impact on its financial condition and results of operations.




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Operational difficulties, failure of technology infrastructure or information security incidents could adversely affect Mackinac's business and operations.

        Mackinac is exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, failure of its controls and procedures and unauthorized transactions by employees or operational errors, including clerical or recordkeeping errors or those resulting from computer or telecommunications systems malfunctions. Given the high volume of transactions Mackinac processes, certain errors may be repeated or compounded before they are identified and resolved. In particular, Mackinac's operations rely on the secure processing, storage and transmission of confidential and other information on its technology systems and networks. Any failure, interruption or breach in security of these systems could result in failures or disruptions in its customer relationship management, general ledger, deposit, loan and other systems.

        Mackinac also faces the risk of operational disruption, failure or capacity constraints due to its dependency on third party vendors for components of its business infrastructure, including its core data processing systems which are largely outsourced. While Mackinac has selected these third party vendors carefully, it does not control their operations. As such, any failure on the part of these business partners to perform their various responsibilities could also adversely affect Mackinac's business and operations.

        Mackinac may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control, which may include, for example, computer viruses, cyberattacks, spikes in transaction volume and/or customer activity, electrical or telecommunications outages, or natural disasters. Although Mackinac has programs in place related to business continuity, disaster recovery and information security to maintain the confidentiality, integrity, and availability of its systems, business applications and customer information, such disruptions may give rise to interruptions in service to customers and loss or liability to Mackinac.

        The occurrence of any failure or interruption in Mackinac's operations or information systems, or any security breach, could cause reputational damage, jeopardize the confidentiality of customer information, result in a loss of customer business, subject Mackinac to regulatory intervention or expose it to civil litigation and financial loss or liability, any of which could have a material adverse effect on Mackinac.

Changes in customer behavior may adversely impact Mackinac's business, financial condition and results of operations.

        Mackinac uses a variety of methods to anticipate customer behavior as a part of its strategic planning and to meet certain regulatory requirements. Individual, economic, political, industry-specific conditions and other factors outside of its control, such as fuel prices, energy costs, real estate values or other factors that affect customer income levels, could alter predicted customer borrowing, repayment, investment and deposit practices. Such a change in these practices could materially adversely affect Mackinac's ability to anticipate business needs and meet regulatory requirements.

        Further, difficult economic conditions may negatively affect consumer confidence levels. A decrease in consumer confidence levels would likely aggravate the adverse effects of these difficult market conditions on Mackinac, its customers and others in the financial institutions industry.

Mackinac's ability to maintain and expand customer relationships may differ from expectations

        The financial services industry is very competitive. Mackinac not only vies for business opportunities with new customers, but also competes to maintain and expand the relationships it has with its existing customers. While Mackinac believes that it can continue to grow many of these




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relationships, Mackinac will continue to experience pressures to maintain these relationships as its competitors attempt to capture its customers. Failure to create new customer relationships and to maintain and expand existing customer relationships to the extent anticipated may adversely impact Mackinac's earnings.

The trading price of Mackinac's common stock may be subject to significant fluctuations and volatility.

        The market price of Mackinac's common stock could be subject to significant fluctuations due to, among other things:

•

variations in quarterly or annual results of operations;



•

changes in dividends per share;



•

deterioration in asset quality, including declining real estate values;



•

changes in interest rates;



•

significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving Mackinac or its competitors;



•

regulatory actions, including changes to regulatory capital levels, the components of regulatory capital and how regulatory capital is calculated;



•

new regulations that limit or significantly change Mackinac's ability to continue to offer products or services;



•

volatility of stock market prices and volumes;



•

issuance of additional shares of common stock or other debt or equity securities;



•

changes in market valuations of similar companies;



•

changes in securities analysts' estimates of financial performance or recommendations;



•

perceptions in the marketplace regarding the financial services industry, Mackinac and/or its competitors; and/or



•

the occurrence of any one or more of the risk factors described above.




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SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF MACKINAC


        The following table sets forth certain consolidated financial and other data of Mackinac at the dates and for the periods indicated. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations of Mackinac" in Mackinac's Annual Report on Form 10-K filed with the SEC on March 15, 2018 and the consolidatedaudited financial statements and notescontained in Item 8 therein, each of Mackinac for the fiscal year ended




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December 31, 2013, which are also included inincorporated by reference into this joint proxy statement/prospectus. See "Index to Consolidated Financial Statements."Certain Documents Incorporated by Reference."


(Unaudited)
(Dollars in Thousands, Except Per Share Data)


		Years Ended December 31
		2013			2012			2011			2010			2009
		(Unaudited)																Year Ended December 31
		(Dollars in Thousands, Except Per Share Data)																2017			2016			2015			2014			2013
SELECTED FINANCIAL CONDITION DATA:
Total assets		$	572,800		$	545,980		$	498,311		$	478,696		$	515,377			$	985,367		$	983,520		$	739,269		$	743,785		$	572,800
Loans			483,832			449,177			401,246			383,086			384,310				811,078			781,857			618,394			600,935			483,832
Securities			44,388			43,799			38,727			33,860			46,513				75,897			86,273			53,728			65,832			44,388
Deposits			466,299			434,557			404,789			386,779			421,389				817,998			823,512			610,323			606,973			466,299
Borrowings			37,852			35,925			35,997			36,069			36,140				79,552			67,579			45,754			49,846			37,852
Common shareholders' equity			65,249			61,448			44,342			43,176			44,785				81,400			78,609			76,602			73,996			65,249
Total shareholders' equity			65,249			72,448			55,263			53,882			55,299				81,400			78,609			76,602			73,996			65,249
SELECTED OPERATIONS DATA:
Interest income		$	25,523		$	24,427		$	23,072		$	22,840		$	23,708			$	44,376		$	37,983		$	33,513		$	27,669		$	25,523
Interest expense			4,124			4,603			5,143			6,455			7,421				6,438			4,885			4,393			4,142			4,124
​	​		​	​		​	​		​	​		​	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income			21,399			19,824			17,929			16,385			16,287				37,938			33,098			29,120			23,527			21,399
Provision for loan losses			1,675			945			2,300			6,500			3,700				625			600			1,204			1,200			1,675
Net security gains (losses)			73			—			(1	)		215			1,471				231			150			455			54			73
Other income			3,865			4,043			3,657			2,580			3,280				3,810			4,003			3,434			3,058			3,865
Other expenses			(18,128	)		(16,757	)		(15,969	)		(16,598	)		(13,802	)			(30,336	)		(29,885	)		(23,876	)		(22,610	)		(18,128	)
​	​		​	​		​	​		​	​		​	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Income (loss) before income taxes			5,534			6,165			3,316			(3,918	)		3,536
Income before income taxes																			11,018			6,766			7,929			2,829			5,534
Provision (credit) for income taxes			(403	)		(922	)		1,098			(3,500	)		1,120				5,539			2,283			2,333			1,129			(403	)
​	​		​	​		​	​		​	​		​	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net income (loss)			5,937			7,087			2,218			(418	)		2,416
Net income																			5,479			4,483			5,596			1,700			5,937
Preferred dividend and accretion of discount			308			629			766			742			509				—			—			—			—			308
​	​		​	​		​	​		​	​		​	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net income available to common shareholders		$	5,629		$	6,458		$	1,452		$	(1,160	)	$	1,907				5,479		$	4,483		$	5,596		$	1,700		$	5,629
​	​		​	​		​	​		​	​		​	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​
​																	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
PER SHARE DATA:
Earnings (loss)—Basic		$	1.01		$	1.51		$	.42		$	(.34	)	$	.56
Earnings (loss)—Diluted			1.00			1.46			.41			(.34	)		.56
Earnings—Basic																		$	0.87		$	0.72		$	0.90		$	0.30		$	1.01
Earnings—Diluted																			0.87			0.72			0.89			0.30			1.00
Cash dividends declared			.17			.04			—			—			—				0.48			0.40			0.35			0.225			0.17
Book value			11.77			11.05			12.97			12.63			13.10				12.93			12.55			12.32			11.81			11.77
Market value—closing price at year end			9.90			7.09			5.42			4.58			4.64
Tangible book value																			11.72			11.29			11.54			11.01			11.77
Market value - closing price at year end																			15.90			13.47			11.49			11.85			9.90
FINANCIAL RATIOS:
Return on average common equity			9.07	%		12.43	%		3.30	%		(2.64	)%		4.42	%			6.74			5.73	%		7.41	%		2.57	%		9.07	%
Return on average total equity			8.26			10.26			2.66			(2.06	)		3.77				6.74			5.73			7.41			2.57			8.26
Return on average assets			1.01			1.23			.30			(.23	)		.39				.55			0.52			0.76			0.28			1.01
Dividend payout ratio			16.83			2.65			N/A			N/A			N/A				55.17			55.56			41.67			75.00			16.83
Average equity to average assets			12.28			11.95			11.15			11.17			10.24				8.17			9.05			10.23			10.94			12.28
Efficiency ratio			67.46			67.95			68.43			72.57			72.24
Net interest margin			4.17			4.17			4.06			3.66			3.59				4.20			4.19			4.30			4.19			4.17
Texas ratio			6.59			10.25			18.56			26.66			34.76
ASSET QUALITY RATIOS:
Nonperforming loans to total loans			.42	%		1.04	%		1.99	%		2.76	%		3.96	%			.32	%		.53	%		.41	%		.66	%		.42	%
Nonperforming assets to total assets			.58			1.45			2.24			3.37			4.08				0.62			0.91			0.66			0.93			0.58
Allowance for loan losses to total loans			.96			1.16			1.18			1.73			1.36				0.64			0.64			0.81			0.86			0.96
Allowance for loan losses to nonperforming loans			230.29			111.33			65.69			62.61			34.29				197.78			121.73			197.09			130.49			230.29
Net charge-offs to average loans			.48			.23			.94			1.33			.73				0.07			0.08			0.22			0.14			0.48
Texas ratio			5.59			10.25			18.56			26.66			34.76				7.77			11.76			6.34			9.37			5.59




Table of Contents


SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF PENINSULAFIRST FEDERAL


        The following table sets forth certain consolidated financial and other data of PeninsulaFirst Federal at the dates and for the periods indicated. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes of PeninsulaFirst Federal for the fiscal yearyears ended December 31, 2013,2017 and 2016, which are also included in this joint proxy statement/prospectus. The information at and for the years ended December 31, 2015, 2014, and 2013 is derived in part from Audited Consolidated Financial Statements that do not appear in this joint proxy statement/prospectus.

Selected Consolidated Financial and Other Data of the Company


        Set forth below are selected financial and other data of First Federal of Northern Michigan Bancorp, Inc. ("Company"). This information is derived in part from and should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto presented elsewhere in this Annual Report. The information at and for the years ended December 31, 2017 and December 31, 2016 is derived in part from the Audited Consolidated Financial Statements of the Company that appear in this Annual Report. The information at and for the years ended December 31, 2015, 2014, and 2013 is derived in part from Audited Consolidated Financial Statements that do not appear in this Annual Report.

		Years Ended December 31
		2013			2012			2011			2010			2009
		(Unaudited)
		(Dollars in Thousands, Except Per Share Data)
SELECTED FINANCIAL CONDITION DATA:
Total assets		$	124,058		$	131,516		$	136,917		$	135,512		$	135,865
Loans			73,507			81,781			92,901			100,477			105,498
Securities			24,275			15,084			14,361			10,981			12,813
Deposits			104,825			110,059			115,352			112,590			110,861
Borrowings			—			1,000			2,000			4,000			6,000
Common shareholders' equity			17,121			17,241			16,456			16,365			15,921
Total shareholders' equity			17,121			17,241			16,456			16,365			15,921
SELECTED OPERATIONS DATA:
Interest income		$	4,722		$	5,646		$	6,273		$	6,997		$	7,621
Interest expense			502			776			1,143			1,473			1,945
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income			4,220			4,870			5,130			5,524			5,675
Provision for loan losses			580			560			1,100			400			750
Net security gains			35			—			—			—			—
Other income			760			861			1,059			839			823
Other expenses			(4,445	)		(4,330	)		(4,328	)		(4,582	)		(4,288	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Income (loss) before income taxes			(10	)		841			761			1,381			1,460
Provision (credit) for income taxes			(260	)		212			247			439			406
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net income			250			629			514			942			1,054
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net income available to common shareholders		$	250		$	629		$	514		$	942		$	1,054
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
PER SHARE DATA:
Earnings—Basic		$	0.87		$	2.18		$	1.78		$	3.27		$	3.66
Earnings—Diluted			0.87			2.18			1.78			3.27			3.66
Cash dividends declared			.75			1.00			1.00			1.93			1.93
Book value			59.45			59.86			57.14			56.82			55.28
FINANCIAL RATIOS:
Return on average common equity			1.57	%		3.82	%		3.15	%		5.87	%		6.77	%
Return on average total equity			1.57			3.82			3.15			5.87			6.77
Return on average assets			.20			.47			.38			.69			.79
Dividend payout ratio			86.45			45.80			56.04			58.98			52.74
Average equity to average assets			13.76			12.82			12.18			12.03			11.60
Efficiency ratio			87.90			74.10			67.45			69.97			64.12
Net interest margin			3.95			4.34			4.33			4.46			4.63
ASSET QUALITY RATIOS:
Nonperforming loans to total loans			5.91	%		7.77	%		2.72	%		.42	%		.45	%
Nonperforming assets to total assets			4.93			5.28			2.24			1.30			1.64
Allowance for loan losses to total loans			1.99			2.40			2.11			1.54			1.28
Allowance for loan losses to nonperforming loans			33.71			29.01			65.18			88.79			61.67
Net charge-offs to average loans			1.39			.23			.94			1.33			.73

		At December 31,
Financial Condition Data:		2017			2016			2015			2014			2013
		(In thousands)
Total assets		$	321,247		$	344,940		$	336,009		$	325,867		$	209,657
Loans receivable, net			191,503			181,439			167,984			163,647			136,315
Loans held for sale			430			—			563			88			175
Investment securities			99,489			128,834			129,163			120,758			52,613
Cash and cash equivalents			8,389			8,807			7,603			11,472			2,766
Deposits			270,307			293,428			268,527			270,734			160,029
FHLB advances			16,648			17,517			32,928			22,885			24,813
Stockholders' equity			32,942			32,889			33,341			30,536			23,525




		For the Years Ended December 31,
Operating Data:		2017			2016			2015			2014			2013
		(In thousands)
Interest income		$	11,524		$	10,588		$	10,611		$	9,100		$	8,319
Interest expense			1,227			1,284			1,245			1,082			1,150
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income			10,297			9,304			9,366			8,018			7,169
Provision for loan losses			155			95			(535	)		284			637
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income after provision for loan losses			10,142			9,209			9,901			7,734			6,532
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Other income (loss):
Service charges and other fees			959			967			947			807			857
Mortgage banking activities			565			500			532			472			585
Net gain (loss) on sale of investments			36			134			4			(4	)		—
Net gain (loss) on sale of premises and equipment, real estate owned and other repossessed assets			73			55			80			(76	)		3
Bargain purchase gain			—			—			—			1,982			—
Other			213			295			433			297			320
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total other income			1,846			1,951			1,996			3,478			1,765
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Other expenses			9,824			9,846			10,119			8,963			8,242
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Income before income tax expense			2,164			1,314			1,778			2,249			55
Income tax expense			1,548			—			(1,650	)		—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net income		$	616		$	1,314		$	3,428		$	2,249		$	55
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION

        The following condensed consolidated financial information has been prepared using the acquisition method of accounting, giving effect to Mackinac's proposed acquisition of Peninsula. The condensed consolidated balance sheets and income statement show the historical financial information of Mackinac and Peninsula as of June 30, 2014, and assumes that the proposed Peninsula acquisition was completed on December 31, 2013.

        The condensed consolidated financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined on the dates described above, nor is it necessarily indicative of the results of operations in future periods or the future financial position of the combined entities. The condensed consolidated financial information also does not consider any potential impacts of current market conditions on revenues, expense efficiencies, asset dispositions and share repurchases, among other factors.

        The value of shares of Mackinac common stock issued in connection with the Peninsula acquisition will be $13.45. For purposes of the condensed consolidated financial information, the fair value of Mackinac's common stock was assumed to be $13.45 per share. The actual value of the Mackinac common stock at the completion of the Merger could be different.

        The condensed consolidated financial information includes estimated pro forma adjustments to record assets and liabilities of Peninsula at their respective fair values and represents Mackinac's pro forma estimates based on available information. The pro forma adjustments included herein are subject to change depending on changes in interest rates and the fair value of the components of assets and liabilities and as additional information becomes available and additional analyses are performed. The final allocation of the purchase price will be determined after the Peninsula acquisition is completed and after completion of thorough analyses to determine the fair value of Peninsula's tangible and identifiable intangible assets and liabilities as of the date the Peninsula acquisition is completed. Increases or decreases in the estimated fair values of the net assets as compared with the information shown in the condensed consolidated financial information may change the amount of the purchase price allocated to goodwill and other assets and liabilities and may impact Mackinac's consolidated statement of operations due to adjustments in yields and interest rates and/or amortization or accretion of the adjusted assets or liabilities. Any changes to Peninsula's shareholders' equity, including results of operations from June 30, 2014 through the date the Peninsula acquisition is completed, will also change the purchase price allocation, which may include the recording of a lower or higher amount of goodwill. The final adjustments may be materially different from the adjustments presented herein.

        Mackinac anticipates that the proposed acquisition of Peninsula will provide the combined company with financial benefits that include reduced operating expenses. The condensed consolidated financial information, although helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not necessarily reflect the exact benefits of expected cost savings or opportunities to earn additional revenue and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had the companies been combined during these periods.

        The condensed consolidated financial information has been derived from and should be read in conjunction with the applicable historical consolidated financial statements and the related notes of Mackinac and Peninsula, which are included in this proxy statement/prospectus.

        The consolidated shareholders' equity and net income are qualified by the statements set forth under this caption and should not be considered indicative of the market value of Mackinac common stock or the actual or future results of operations of Mackinac for any period. Actual results may be materially different than the pro forma information presented.

		For the Years Ended December 31,
Performance Ratios:		2017			2016			2015			2014			2013
Return on average assets			0.18	%		0.39	%		1.02	%		0.87	%		0.03	%
Return on average equity			1.80	%		3.83	%		10.78	%		8.42	%		0.22	%
Average interest rate spread			3.06	%		2.81	%		2.84	%		3.18	%		3.54	%
Dividend payout ratio			114.97	%		45.37	%		7.22	%		11.01	%		105.35	%
Dividends per share		$	0.19		$	0.16		$	0.10		$	0.08		$	0.02
Net interest margin			3.19	%		2.95	%		2.97	%		3.31	%		3.64	%
Efficiency ratio (Bank only)			81.14	%		86.93	%		78.33	%		78.24	%		98.00	%
Texas ratio (Bank only)			8.07	%		7.90	%		7.83	%		17.10	%		17.02	%
Non-interest expense to average total assets			2.87	%		2.90	%		2.91	%		3.36	%		3.78	%
Average interest-earning assets to average interest-bearing liabilities			133.02	%		133.99	%		133.52	%		128.81	%		118.10	%




Table of Contents


UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2014DECEMBER 31, 2017
(all amounts are in thousands, except per share data, unless otherwise indicated)


								Purchase Accounting and Pro Forma Adjustments
		Mackinac 6/30/2014 (as reported)			Peninsula 6/30/2014 (as reported)																					Pro-Forma 6/30/2014 Combined
								Debit					Credit					Debit			Credit
ASSETS
Cash and due from banks		$	20,744		$	12,618		$	—												$	7,189		(i)		$	21,523
																						4,650		(j)
Federal funds sold			2			100			—					—								—					102
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Cash and cash equivalents			20,746			12,718			—					—					—			11,839					21,625
Interest bearing deposits			235			—								—								—					235
Securities available for sale			47,374			29,279			—					—								—					76,653
Federal Home Loan Bank stock			3,060			576								—								—					3,636
Loans
Commercial			374,565			41,477								3,529		(b)						—					412,513
Mortgage			113,332			29,407								—								—					142,739
Consumer			15,043			3,360								—								—					18,403
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total loans			502,940			74,244			—					3,529					—			—					573,655
Allowance for loan losses			(5,097	)		(1,764	)		1,764		(c)			—								—					(5,097	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net loans			497,843			72,480			1,764					3,529					—			—					568,558
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Premises and equipment			9,790			3,113								—								—					12,903
Other real estate held for sale			1,947			1,829								489		(d)						—					3,287
Other assets			14,874			4,292			1,026					—		(e)						—					20,192
Deposit Base Intangible			—			—			1,150							(f)											1,150
Goodwill			—			—			5,013							(g)											5,013
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL ASSETS		$	595,869		$	124,287		$	8,953				$	4,018				$	—		$	11,839				$	713,252
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Noninterest bearing deposits		$	73,732		$	10,165		$	—				$	—							$	—				$	83,897
Interest-bearing deposits
Interest checking			45,333																								45,333
NOW			38,011			21,034								—								—					59,045
Money market			64,898			30,351								—								—					95,249
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total transactional deposits			221,974			61,550			—					—					—			—					283,524
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Savings			15,658			12,172								—								—					27,830
IRA			17,815			3,384								—								—					21,199
CDs<$100,000			125,325			27,091								—								—					152,416
CDs>$100,000			23,151			—								—								—					23,151
Brokered/internet			80,093			—								—								—					80,093
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total deposits			484,016			104,197			—					—					—			—					588,213
Borrowings			42,087			—								—								—					42,087
Other liabilities			3,289			2,354								2,150		(a)						—					7,793
Shareholders' equity
Common stock and additional paid in capital			53,703			6,000								5,013		(g)			13,720			8,635		(k)			59,631
Retained earnings			12,325			12,171			2,228							(h)			7,189			—		(i)			15,079
Accumulated other comprehensive income			449			(435	)							—								435		(l)			449
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	���	​	​	​	​	​	​	​
Total shareholders' equity			66,477			17,736			2,228					5,013					20,909			9,070					75,159
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	595,869		$	124,287		$	2,228				$	7,163				$	20,909		$	9,070				$	713,252
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Basic common shares outstanding			5,527,690			288,000																642,026		(m)			6,169,716
Book value per basic common shares outstanding		$	12.03		$	61.58																				$	12.18
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2014
(all amounts are in thousands, except per share data, unless otherwise indicated)


		Mackinac 6/30/2014 (as reported)			Peninsula 6/30/2014 (as reported)			Pro Forma Adjustments					Pro-Forma 6/30/2014 Combined
Interest income		$	13,265		$	2,226		$	—				$	15,491
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Accretion of performing loan credit mark			—			—			219		(b)			219
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest income			13,265			2,226			219					15,710
Interest expense			2,013			191			50		(n)			2,254
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income			11,252			2,035			169					13,456
Provision for loan losses			374			325			—					699
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income after provision			10,878			1,710			169					12,757
Noninterest income			1,341			1,147			—					2,488
Noninterest expense			10,005			2,210			(1,074	)	(o)			11,141
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Amortization of deposit based intangible			—			—			58		(f)			58
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total noninterest expense			10,005			2,210			(1,016	)				11,199
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Income before taxes			2,214			647			1,185					4,046
Federal income taxes			748			106			403		(e)			1,257
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net income available to common shareholders		$	1,466		$	541		$	782				$	2,789
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Shares outstanding at end of period			5,527,690			288,000			642,026		(m)			6,169,716
Weighted average common shares outstanding			5,529,290			288,000			642,026		(m)			6,171,316
Weighted average fully diluted common shares outstanding			5,584,932			288,000			642,026		(m)			6,226,958
Basic earnings per share		$	0.27		$	1.88							$	0.45
Diluted earnings per share		$	0.26		$	1.88							$	0.45

								Purchase Accounting and Pro Forma Adjustments
		MFNC 12/31/2017 (as reported)			FFNM 12/31/2017 (as reported)																							Pro-Forma 12/31/2017 Combined
								Debit					Credit					Debit					Credit
ASSETS
Cash and due from banks		$	37,420		$	8,389		$	—				$	17,073		a		$	—				$	489		j		$	28,247
																								—					—
Federal funds sold			6			—			—					—										—					6
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Cash and cash equivalents			37,426			8,389			—					17,073					—					489					28,253
Interest bearing deposits			13,374			3,714								—										—					17,088
Securities available for sale			75,897			99,489			—					—										—					175,386
Federal Home Loan Bank stock			3,112			1,636								—										—					4,748
Loans
Commercial			572,936			101,507								—										3,443		k			671,000
Tax exempt loans & leases			—			—																							—
Mortgage			220,708			83,167								1,500		b								2,844		k			299,531
Consumer			17,434			8,662								—										—					26,096
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total loans			811,078			193,336			—					1,500					—					6,287					996,627
Allowance for loan losses			(5,079	)		(1,833	)		—					—					1,833		f			—					(5,079	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net loans			805,999			191,503			—					1,500					1,833					6,287					991,548
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Premises and equipment			16,290			5,552								—										170		l			21,672
Other real estate held for sale			3,558			652								—										341		m			3,869
Deferred tax benefit			4,970			1,690			—					—					531		i			—					7,191
Deposit Based Intangible			1,922			635			—					—					2,081		g			635		g			4,003
Goodwill			5,694			—			—										11,500		h								17,194
Other assets			17,125			7,987			—					—					143		q								25,255
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL ASSETS		$	985,367		$	321,247		$	—				$	18,573				$	16,088				$	7,922				$	1,296,207
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Noninterest bearing deposits		$	148,079		$	58,423		$	2,405		c		$	—									$	—				$	204,097
Interest-bearing deposits
NOW			80,953			45,361			325		c																		125,989
Interest checking			67,985			8,116			1,819		c								—					—					74,282
Money market			131,371			54,607			2,189		c			—										—					183,789
Savings			61,097			42,838			1,677		c			—										—					102,258
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total transactional deposits			489,485			209,345			8,415					—					—					—					690,415
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
CDs<$250,000			142,159			55,457			2,243		c			—					376		n								194,997
CDs>$250,000			11,055			5,505			242		c			—										—					16,318
Brokered/internet			175,299			—								—										—					175,299
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	���	​	​	​	​	​	​	​
Total deposits			817,998			270,307			10,900					—					376					—					1,077,029
Borrowings:
Associated Line of Credit			—			—													—										—
Associated Term Loan			18,999			—																		—					18,999
FHLB & Other			60,553			16,648																							77,201
Other liabilities			6,417			1,350								—										—					7,767
Shareholders' equity
Common stock and additional paid in capital			61,981			25,340																		8,144		o			95,465
Retained earnings			19,711			8,612			8,000		d			327		e			612		o								20,038
Accumulated other comp. inc.—Inv			(71	)		(1,010	)																	1,010		p			(71	)
Accumulated other comp. inc.—Pension			(221	)		—								—										—					(221	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total shareholders' equity			81,400			32,942			8,000					327					612					9,154					115,211
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	985,367		$	321,247		$	18,900				$	327				$	988				$	9,154				$	1,296,207
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Basic common shares outstanding
Book value per basic common shares outstanding




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 20132017
(all amounts are in thousands, except per share data, unless otherwise indicated)


		Mackinac 12/31/2013 (as reported)			Peninsula 12/31/2013 (as reported)			Pro Forma Adjustments					Pro-Forma 12/31/2013 Combined				Mackinac 12/31/2017 (as reported)			First Federal 12/31/2017 (as reported)			Pro Forma Adjustments					Pro Forma 12/31/2017 Combined
Interest income		$	25,523		$	4,721		$	—				$	30,244			$	44,376		$	11,524							$	55,900
​	​		​	​		​	​		​	​	​	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Accretion of performing loan credit mark			—						437		(b)			437				—			—			560		(1)			560
​	​		​	​		​	​		​	​	​	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest income			25,523			4,721			437					30,681				44,376			11,524			560					56,460
Interest expense			4,124			502			100		(n)			4,726				6,438			1,227			(200	)	(2)			7,465
​	​		​	​		​	​		​	​	​	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income			21,399			4,219			337					25,955				37,938			10,297			760					48,995
Provision for loan losses			1,675			580			—					2,255				625			155								780
​	​		​	​		​	​		​	​	​	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income after provision			19,724			3,639			337					23,700				37,313			10,142			760					48,215
Noninterest income			3,938			795			—					4,733				4,041			1,846			—					5,887
Noninterest expense			18,128			4,445			(2,148	)	(o)			20,425				30,336			9,824			1,620		(3)			41,780
​	​		​	​		​	​		​	​	​	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Amortization of deposit based intangible			—						115		(f)			115				—			—			208		(4)			208
​	​		​	​		​	​		​	​	​	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total noninterest expense			18,128			4,445			(2,033	)				20,540				30,336			9,824			1,828					41,988
​	​		​	​		​	​		​	​	​	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Income before taxes			5,534			(11	)		2,370					7,893				11,018			2,164			(1,068	)				12,114
Federal income taxes			(403	)		(260	)		806		(e)			143				5,539			1,548			(247	)	(5)			6,840
​	​		​	​		​	​		​	​	​	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net Income		$	5,937		$	249		$	1,564				$	7,750			$	5,479		$	616		$	(821	)			$	5,274
Preferred dividends			308			—			—					308
​			​	​		​	​		​	​	​	​		​	​
Net income available to common shareholders		$	5,629		$	249		$	1,564				$	7,442
​	​		​	​		​	​		​	​	​	​		​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​
​																​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Shares outstanding at end of period			5,541,390			288,000			642,026		(m)			6,183,416				6,294,930			3,726,925			2,146,709		(6)			8,441,639
Weighted average common shares outstanding			5,558,313			288,000			642,026		(m)			6,200,339				6,288,791			3,726,925			2,146,709		(6)			8,435,500
Weighted average fully diluted common shares outstanding			5,650,058			288,000			642,026		(m)			6,292,084				6,322,413			3,726,925			2,146,709		(6)			8,469,122
Basic earnings per share		$	1.01		$	0.86							$	1.20			$	0.87		$	0.17							$	0.62
Diluted earnings per share		$	1.00		$	0.86							$	1.18			$	0.87		$	0.17							$	0.62




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NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION


Note A—Basis of Presentation


        The condensed consolidated financial information and explanatory notes show the impact on the historical financial condition and results of operations of Mackinac resulting from the pending PeninsulaFirst Federal acquisition under the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of PeninsulaFirst Federal will be recorded by Mackinac at fair value as of the date the transaction is completed. The condensed consolidated statement of financial conditionbalance sheet combines the historical financial information of Mackinac and PeninsulaFirst Federal as of June 30, 2014,December 31, 2017, and assumes that the Merger was completed on that date. The condensed consolidated statements of operations for the twelve month period ended December 31, 20132017 gives effect to the pending Merger as if the transaction had been completed on January 1, 2013.2017.

        Since the transaction is recorded using the acquisition method of accounting, all loans are recorded at fair value, including adjustments for credit quality, and no allowance for credit losses is carried over to Mackinac's balance sheet. In addition, certain nonrecurring costs of Mackinac associated with the pending Merger such as potential severance, professional fees, legal fees and conversion-related expenditures are expensed as incurred and not reflected in the unaudited pro forma combined condensed consolidated statements of operations.

        While the recording of the acquired loans at their fair value will impact the prospective determination of the provision for loan and lease losses and the allowance for loan and lease losses, for purposes of the unaudited pro forma combined condensed consolidated statement of operations for the year ended December 31, 2013,2017, Mackinac assumed no adjustments to the historical amount of Peninsula'sFirst Federal's provision for loan losses. If such adjustments were estimated, there could be a reduction, which could be significant, to the historical amounts of Peninsula'sFirst Federal's provision for loan losses presented.


Note B—Accounting Policies and Financial Statement Classifications


        The accounting policies of PeninsulaFirst Federal are in the process of being reviewed in detail by Mackinac. Upon completion of such review, conforming adjustments or financial statement reclassifications may be determined.


Note C—Merger and Acquisition Integration Costs


        In connection with the pending Merger, the plan to integrate the operations of PeninsulaFirst Federal is still being developed. The specific details of the plan to integrate the operations of PeninsulaFirst Federal will continue to be refined over the next several months, and will include assessing personnel, benefit plans, premises, equipment and service contracts to determine where Mackinac may take advantage of redundancies. Certain decisions arising from these assessments may involve involuntary termination of employees, vacating leased premises, changing information systems, canceling contracts with certain service providers, selling or otherwise disposing of certain premises, furniture and equipment, and re-assessing a possible deferred tax asset valuation allowance from a potential change in control for tax purposes. Mackinac also expects to incur merger-related costs including professional fees, legal fees, system conversion costs and costs related to communications with customers and others. To the extent there are costs associated with these actions, the costs will be recorded based on the nature of the cost and the timing of these integration actions. NoOther than as indicated above, no such costs were considered in the accompanying unaudited pro forma combined condensed consolidated statements of operations.




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Note D—Estimated Annual Cost Savings


        Mackinac expects to realize cost savings from the pending Merger. These cost savings are not reflected in the unaudited pro forma condensed consolidated financial information. While any costs savings achieved would have a positive effect on the condensed consolidated financial information, but there can be no assurance they will be achieved in the amount, manner or timing currently contemplated.achieved.


Note E—Pro Forma Adjustments


        The following pro forma adjustments have been reflected in the unaudited pro forma combined condensed consolidated financial information. All adjustments are based on current assumptions and valuations, which are subject to change.

Adjustments to Balance Sheet


(a)

Cash was adjustedThe cash balances on a proforma basis are decreased to reflect expensingthe cash required to fund the transfer of approximately $2.150deposits as part of the previously announced sale of the Oscoda branch by FFNM ($9.073 million, of anticipated non-recurring expenses to be incurred by Mackinac and Peninsulascheduled for completion prior to closing. The related tax effectthe merger) and the cash payment of approximately $.640 million is reflected as an increasea special dividend by FFNM to other assets. Anticipated non-recurring expenses consist of employment related expenses such as stay bonuses and severance payments. Also included are costs associated with termination fees for data processing services and conversion expenses. These expenses are not included inits shareholders, also prior to the Pro Forma Condensed Consolidated Income Statements because they are not expected to have a continuing impact on the combined entity. Payment of these expenses is not expected to have a significant impact on the liquidity of the combined entity.merger (approximately $8 million).



(b)

Based on Mackinac's initial evaluationThe loan balances of FFNM are reduced to reflect the closing of the acquired portfoliosale of loans,the Oscoda branch (for proforma purposes, all loan balances are assumed to be consumer balances.)



(c)

The deposit balances of FFNM are reduced to reflect the closing of the sale of the Oscoda branch (for proforma purposes, the deposit reduction is assumed on a fair value adjustmentpro rata basis, utilizing year end 2017 balances.)



(d)

The retained earnings of $3.529 million was recorded, which includes bothFFNM are reduced to reflect the aforementioned special dividend by FFNM to its shareholders at an interest rate componentestimated total amount of $8 million.



(e)

The common stock and a credit component. Theadditional paid in capital of FFNM is adjusted to reflect the impact of the adjustment was an increase to interest income by approximately $.437sale of the Oscoda branch (assuming a 3% deposit premium), resulting in a $.327 million and $.219 million for the year ended December 31, 2013 and six months ended June 30, 2014, respectively.reduction.



(c)(f)

The allowance for loan losses wasis adjusted to reflect the reversal of Peninsula'sFFNM's recorded allowance.allowance for loan losses. Purchased loans acquired in a business combination are required to be recorded at fair value, and the recorded allowance for loan losses may not be carried over.



(d)(g)

Based on Mackinac's initial evaluation of core deposits, the identified estimated core deposit intangible of $2.081 will be amortized on a straight-line basis over an estimated useful life of ten years. The amortization expense associated with the core deposit intangible will result in an increase to noninterest expense of $.208 million on an annual basis. The current core deposit intangible of $.635 million on the balance sheet of FFNM will be eliminated in purchase accounting.



(h)

Goodwill of $11.50 million is generated as a result of the total purchase price and net assets acquired. (See "Pro Forma Allocation of Purchase Price" below for the allocation of the purchase price to net assets acquired". The adjustment has no impact on the Pro Forma Condensed Consolidated Income Statements.



(i)

The adjustment of $.531 million reflects deferred taxes associated with the adjustments to record the assets and liabilities of FFNM at fair value using Mackinac's statutory rate of 21%.



(j)

Represents FFNM payment of transaction related expenses, net of the current tax rate.




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(k)

Based on Mackinac's initial evaluation of the acquired portfolio of loans, a fair value adjustment of $6.287 million was recorded, which includes both an interest rate component and a credit component. The fair value adjustment, on a preliminary basis, is pro-rated between commercial and consumer mortgage loans balances of FFNM at 2017 year end.



(l)

Based on Mackinac's initial evaluation of premises and equipment, a fair value adjustment is made to the carrying value of said assets in the amount of $.170 million.



(m)

Fair value adjustment to the net book value of other real estate owned by PeninsulaFFNM is $.489$.341 million based on Mackinac's initial evaluation of the portfolio.



(e)

The adjustment of approximately $1.026 million reflects deferred taxes associated with the adjustments to record the assets and liabilities of Peninsula at fair value using Mackinac's statutory rate of 34%.



(f)(n)

Based on the Mackinac's initial evaluation of core deposits, the identified core deposit intangibleportfolio of $1.150FFNM, a fair value adjustment in the amount of $.376 million will be amortized on a straight line basis over an estimated useful life of 10 years. The amortization expense associated with the core deposit intangible was an increase to non-interest expense of $.115 million and $.058 million for the year ended December 31, 2013 and six months ended June 30, 2014, respectively.is recorded.



(g)

Goodwill of $5.013 million was generated as a result of the total purchase price and net assets acquired. See "Pro Forma Allocation of Purchase Price" under Note (o) below for the allocation of the purchase price to net assets acquired. The adjustment has no impact on the Pro Forma Condensed Consolidated Income Statements.



(h)

Net impact to equity of transaction costs and purchase accounting adjustments.



(i)

Reflection of pre-close special dividend paid with excess capital by Peninsula to its shareholders.



(j)

Reflection of payment to those of Peninsula's shareholders who elected for cash consideration. This is estimated at 35% of shares outstanding at a per share price of $46.13.




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(k)

Common stock and additional paid in capital and retained earnings and accumulated other comprehensive income werewas adjusted to reverse Peninsula'sFFNM's historical stockholders'shareholders' equity balances to reflect the stock consideration to be issued,paid, estimated at $8.635$33.811 million. See also "Pro Forma Allocation of Purchase Price," under Note (o)Price" below for the allocation of the purchase price to net assets acquired. The adjustment has no impact on the Pro Forma Combined Condensed Consolidated Income Statements.Statements of Income.



(l)(p)

Accumulated other comprehensive income was adjustedof FFNM is eliminated to reverse Peninsula's historical accumulated other comprehensive income (deficit) balance.reflect the consideration to be paid.



(m)(q)

Represents other asset value adjustments.

Adjustments to Condensed Consolidated Statement of Operations


(1)

The impact of the accretion of the performing purchase accounting mark is an increase to income by approximately $.560 million.



(2)

Reflects the reduction in interest expense resulting from the decrease in brokered deposits that will occur in the short-term after the closing of the transaction.



(3)

Reflects the transaction expenses to be recognized in the merger.



(4)

The amortization expense associated with the core deposit intangible will result in an increase to noninterest expense of $.208 million on an annual basis.



(5)

Reflects the tax effect of the adjustments noted in items (1)-(4) above.



(6)

Basic and weighted average common shares outstanding were adjusted to reverse Peninsula'sFFNM's basic shares outstanding and to record shares of Mackinac's common stock issued to effect the transaction.



(n)

Represents interest expense related to cash consideration in the transaction.



(o)

Represents operational efficiencies and cost reductions created with the transaction that reduce salaries and benefits, data processing costs, and other overhead expenses.




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        Pro Forma Allocation of Purchase Price.    Below is a reconciliation between the purchase price net assets acquired and the resultant goodwill.

(dollars in thousands, except per share data)
Purchase Price:
Peninsula shares outstanding at June 30, 2014			288,000
Price per share		$	46.13
Aggregate pro forma value of Mackinac stock to be issued, assuming 65% stock consideration election		$	8,635
Aggregate cash consideration at $46.13 per share, assuming 35% cash election			4,650
FFNM shares outstanding at December 31, 2017										3,726,925
Price per share of FFNM									$	9.07
Aggregate pro forma value of Mackinac stock to be issued, Stock consideration value $9.07 for 3,726,925 shares										33,811
​	​		​	​		​	​	​	​	​	​		​	​
Total pro forma purchase price					$	13,285						$	33,811
​	​		​	​		​	​	​		​	​	​	​	​
​
​								​		​	​	​	​	​
Net assets acquired:
Cash and cash equivalents		$	5,529
Cash and cash equivalents ($8,389—$8000 for Special Dividend)									$	389
Securities available for sale			29,279							103,203
Federal Home Loan Bank stock			576							1,636
Loans			70,715							191,503
Premises and equipment			3,113							5,552
Other real estate owned			1,340							652
Deposit based intangible			1,150
Deposit based intangibles										—
Other assets			5,271							9,677
​	​		​	​		​	​	​	​	​	​		​	​
Total assets			116,973							312,612
​			​	​		​	​
Non-interest bearing deposits			10,165
Interest bearing deposits			94,032
​	​		​	​		​	​	​	​	​	​		​	​
Total deposits			104,197							270,307
Borrowings										16,648
​								​	​	​	​		​	​
Total Funding										286,955
Other liabilities			4,504							1,350
​	​		​	​		​	​	​	​	​	​		​	​
Total liabilities			108,701							288,305
​	​		​	​		​	​	​	​	​	​		​	​
Subtotal assets acquired													24,307
​								​		​	​	​	​	​
​								​		​	​		​	​
​								​		​	​	​	​	​
Purchase Accounting Marks													(2,527	)
Deferred tax asset (from purchase accounting marks)													531
Net assets acquired						8,272							22,311
​	​		​	​		​	​	​		​	​	​	​	​
Goodwill					$	5,013						$	11,500
​	​		​	​		​	​	​		​	​	​	​	​
​
​								​		​	​	​	​	​




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        The following information reflects the unaudited pro forma balances used for calculating pro forma regulatory and tangible capital ratios as of June 30, 2014.December 31, 2017.

		6/30/2014 (as reported)(1)			Adjustments			6/30/2014 Pro Forma
Total equity			66,477			8,135	(2)		74,612
Less:
Net unrealized gain on available for sale securities			(449	)		(47	)		(496	)
Disallowed deferred tax asset			(5,500	)		1,000	(3)		(4,500	)
Disallowed goodwill and intangibles			(106	)		(6,166)	(4)		(6,272	)
​	​	​	​	​	​	​	​	​	​	​
Tier 1 Capital			60,422			2,922			63,344
Allowance for loan losses			5,097			—			5,097
​	​	​	​	​	​	​	​	​	​	​
Total risk based capital			65,519			2,922			68,441
​	​	​	​	​	​	​	​	​	​	​
Risk weighted assets			508,874			74,937	(5)		583,811
​	​	​	​	​	​	​	​	​	​	​
Total average assets			581,150			119,086	(6)		700,236
Less:
Disallowed deferred tax asset			(5,500	)		1,000	(3)		(4,500	)
Disallowed goodwill and intangibles			(106	)		—			(106	)
​	​	​	​	​	​	​	​	​	​	​
Average assets for regulatory leverage capital			575,544			120,086			695,630
Total assets			595,869			114,287	(7)		710,156
​	​	​	​	​	​	​	​	​	​	​
Total tangible assets			595,869			114,287			710,156
​	​	​	​	​	​	​	​	​	​	​
Tier 1 leverage ratio			10.50	%					9.11	%
Tier 1 risk based ratio			11.87	%					10.85	%
Total risk based ratio			12.88	%					11.72	%
Total tangible equity to total tangible assets			11.16	%					10.51	%

---

		12/31/2017 (as reported)			Adjustments					12/31/2017 Pro Forma
Total Equity			81,400			33,811		(A)			115,211
Less:
Net unrealized gain on available for sale securities			256			—					256
Disallowed deferred tax asset			(3,976	)		(1,563	)	(B)			(5,539	)
Disallowed goodwill and intangibles			(7,232	)		(13,163	)	(C)			(20,395	)
Additional tier 1 capital deductions applied to common equity tier 1			(994	)		(391	)	(B)			(1,385	)
​	​	​	​	​	​	​	​	​	​	​	​	​
Tier 1 Capital			69,454			18,694					88,148
Allowance for loan losses			5,079			—					5,079
​	​	​	​	​	​	​	​	​	​	​	​	​
Total risk based capital			74,533			18,694					93,227
​	​	​	​	​	​	​	​	​	​	​	​	​
Risk weighted assets			802,370			139,462		(D)			941,832
​	​	​	​	​	​	​	​	​	​	​	​	​
Total average assets			996,588			259,188		(E)			1,255,776
Less:
Disallowed deferred tax asset			(3,976	)		(1,563	)				(5,539	)
Disallowed goodwill and intangibles			(7,232	)		(13,163	)				(20,395	)
Additional tier 1 capital deductions applied to common equity tier 1			(994	)		(391	)				(1,385	)
​	​	​	​	​	​	​	​	​	​	​	​	​
Average assets for regulatory leverage capital			984,386			244,071					1,228,457
Total assets			985,367			270,409		(F)			1,255,776
​	​	​	​	​	​	​	​	​	​	​	​	​
Total tangible assets			978,135			257,246		(G)			1,235,381
​	​	​	​	​	​	​	​	​	​	​	​	​
Tier 1 leverage ratio			7.06	%							7.16	%
Tier 1 risk based ratio			8.66	%							9.34	%
Total risk based ratio			9.29	%							9.88	%
Total tangible equity to total tangible assets			7.55	%							7.36	%

Adjustments to Equity


(1)

Balances as of June 30, 2014 as reported on Mackinac's FRY-9C filed with the Federal Reserve.



(2)(A)

Adjustment to reflect stock and cash consideration to effect the transaction. See also "Pro Forma Allocation of Purchase Price" under Note (o) above.



(3)(B)

Adjustment to reflect additional deferred tax asset recognition for regulatory capital created as a result of the transaction.



(4)(C)

Adjustment to reflect preliminary estimate of goodwill and intangibles net of the deferred tax liability. See also "Pro Forma Allocation of Purchase Price" under Note (o) above.Price."



(5)(D)

Adjustment to reflect the risk weighted assets as reported by PeninsulaFFNM on the June 30, 2014December 31, 2017 Consolidated ReportsReport of Condition and Income for a Bank with Domestic Offices Only—FFIEC 041 ("Call Report") filed with the Federal Financial Institutions Examination Council.



(6)(E)

Adjustments to total average assets resulting from the transaction. See also "Pro Forma Allocation of Purchase Price" under Note (o) above..



(7)(F)

Adjustments to total assets resulting from the transaction. See also "Pro Forma Allocation of Purchase Price" under Note (o) above.Price."



(G)

Adjustments to tangible assets to reflect the additional intangible assets resulting from the transaction.




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COMPARATIVE PER SHARE DATA
(Unaudited)


Comparative Historical and Unaudited Pro Forma Per Share Data


        Presented below for PeninsulaFirst Federal and Mackinac are comparative historical and unaudited pro forma equivalent per share financial data as of and for the year ended December 31, 2013, and as of and for the six months ended June 30, 2014.2017. The information presented below should be read together with the historical consolidated financial statements of PeninsulaFirst Federal and Mackinac, including the related notes. The financial statements for Peninsula and MackinacFirst Federal are included and incorporated by reference, respectively, in this joint proxy statement/prospectus.

        The unaudited pro forma information gives effect to the Merger as if the Merger had been effective on December 31, 2013 or June 30, 20142017 in the case of the book value data, and as if the Merger had been effective as of January 1, 2013 or January 1, 20142017 in the case of the earnings per share and the cash dividends data. The unaudited pro forma data combines the historical results of PeninsulaFirst Federal into Mackinac's consolidated statement of net income. While certain adjustments were made for the estimated impact of fair value adjustments and other acquisition-related activity, they are not indicative of what could have occurred had the acquisition taken place on January 1, 2013 or January 1, 2014.2017.

        The unaudited pro forma adjustments are based upon available information and certain assumptions that PeninsulaFirst Federal and Mackinac management believe are reasonable. The unaudited pro forma data, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the impact of factors that may result as a consequence of the Merger, excluding estimated merger integration costs, or consider any potential impacts of current market conditions or the Merger on revenues, expense efficiencies or asset dispositions, among other factors, nor the impact of possible business model changes. As a result, unaudited pro forma data are presented for illustrative purposes only and do not represent an attempt to predict or suggest future results. Upon completion of the merger, the operating results of PeninsulaFirst Federal will be reflected in the consolidated financial statements of Mackinac on a prospective basis.

		Peninsula Historical
As of or for The Period Ended		Book Value Per Share			Tangible Book Value			Cash Dividends Declared Per Share			Basic Earnings Per Common Share			Diluted Earnings Per Common Share
Six months ended June 30, 2014		$	61.58		$	61.58		$	.00		$	1.88		$	1.88
Year ended December 31, 2013		$	59.45		$	59.45		$	.75		$	.87		$	.87

First Federal Historical
As of or for The Period Ended		Book Value Per Share			Tangible Book Value			Cash Dividends Declared Per Share			Basic Earnings Per Common Share			Diluted Earnings Per Common Share
Year ended December 31, 2017		$	8.84		$	8.67		$	0.19		$	0.17		$	0.17

 


		Mackinac Historical
As of or for The Period Ended		Book Value Per Share			Tangible Book Value			Cash Dividends Declared Per Share			Basic Earnings Per Common Share			Diluted Earnings Per Common Share
Six months ended June 30, 2014		$	12.03		$	12.03		$	.10		$	.27		$	.26
Year ended December 31, 2013		$	11.77		$	11.77		$	.17		$	1.01		$	1.00

Mackinac Historical
As of or for The Period Ended		Book Value Per Share			Tangible Book Value			Cash Dividends Declared Per Share			Basic Earnings Per Common Share			Diluted Earnings Per Common Share
Year ended December 31, 2017		$	12.93		$	11.72		$	0.48		$	0.87		$	0.87

 


		Pro Forma Peninsula and Mackinac
Pro Forma First Federal and Mackinac																	Pro Forma First Federal and Mackinac
As of or for The Period Ended		Book Value Per Share			Tangible Book Value			Cash Dividends Declared Per Share			Basic Earnings Per Common Share			Diluted Earnings Per Common Share				Book Value Per Share			Tangible Book Value			Cash Dividends Declared Per Share			Basic Earnings Per Common Share			Diluted Earnings Per Common Share
Six months ended June 30, 2014		$	12.18		$	11.18		$	.10		$	.45		$	.45
Year ended December 31, 2017																		$	13.63		$	11.12		$	0.48		$	0.62		$	0.62




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Equivalent Peninsula Per Share Value


        Mackinac common stock trades on the NASDAQ under the symbol "MFNC." Peninsula common stock is not listed or traded on any established securities exchange or quotation system. Accordingly, there is no established public trading market for Peninsula common stock. The following table presents the closing price of Mackinac common stock on July 11, 2014, the trading day on which the per share merger consideration was calculated, and                  , 2014, the last practicable trading day prior to the printing of this proxy statement/prospectus. The table also presents the equivalent value of the merger consideration per share of Peninsula common stock on those dates, calculated by multiplying the closing sales price of Mackinac common stock on those dates by 3.4296.

Date		Mackinac closing sale price			Equivalent Peninsula per share value(1)
July 17, 2014		$	13.45		$	46.13
, 2014		$			$

---

(1)

Excludes cash in lieu of fractional shares.

        The value of the shares of Mackinac common stock to be issued in the Merger will fluctuate between now and the closing date of the Merger. You should obtain current sale prices for the Mackinac common stock. In the event the value of the shares of Mackinac common stock falls outside of certain parameters described under "Merger Agreement—Termination," Peninsula may terminate the Merger Agreement, subject to Mackinac's right to increase the per share consideration in cash in the amount by which Mackinac's common share value fell below such parameters.




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS


        Some of the statements contained in, or incorporated by reference to, this joint proxy statement/prospectus contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements about the financial condition, results of operations, earnings outlook and prospects of Mackinac, PeninsulaFirst Federal and the combined company following the proposed transaction and statements for the period following the completion of the Merger. Words such as "anticipates," "believes," "feels," "expects," "estimates," "seeks," "strives," "plans," "intends," "outlook," "forecast," "position," "target," "mission," "assume," "achievable," "potential," "strategy," "goal," "aspiration," "outcome," "continue," "remain," "maintain," "trend," "objective" and variations of such words and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "might," "can," "may" or similar expressions, as they relate to Mackinac, Peninsula,First Federal, the proposed transaction or the combined company following the transaction often identify forward-looking statements.

        These forward-looking statements are predicated on the beliefs and assumptions of Mackinac's and Peninsula'sFirst Federal's management based on information known to them as of the date of this joint proxy statement/prospectus and do not purport to speak as of any other date. Forward-looking statements may include descriptions of the expected benefits and costs of the transaction; forecasts of revenue, earnings or other measures of economic performance, including statements of profitability, business segments and subsidiaries; management plans relating to the transaction; the expected timing of the completion of the transaction; the ability to complete the transaction; the ability to obtain any required regulatory, shareholder or other approvals; any statements of the plans and objectives of management for future or past operations, products or services, including the execution of integration plans; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing.

        The forward-looking statements contained in this joint proxy statement/prospectus reflect the views of Mackinac's and Peninsula'sFirst Federal's management as of the date of this joint proxy statement/prospectus with respect to future events and are subject to risks and uncertainties. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, actual results could differ materially from those anticipated by the forward-looking statements or historical results. Factors that could cause or contribute to such differences include, but are not limited to: (1) matters set forth under the section entitled "Risk Factors"; (2) expected benefitsoccurrence of any event, change or other circumstances that could give rise to the termination of the Merger may not materialize inAgreement; (2) the timeframe expected or at all, oroutcome of any legal proceedings that may be more costlyinstituted against Mackinac or First Federal; (3) the inability to achieve; (3)complete the transactions contemplated by the Merger Agreement due to the failure to satisfy conditions to completion, including the receipt of regulatory approval; (4) risks that the Merger may not be timely completed, if at all; (4) priordisrupt current plans and operations, and the potential difficulties in employee retention as a result of the transaction; (5) the amount of the costs, fees, expenses and charges related to the completionMerger; (6) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; (7) continuation of the Mergerhistorically low short-term interest rate environment; (8) changes in loan underwriting, credit review or thereafter, Mackinac'sloss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (9) increased levels of non-performing and Peninsula's respective businessesrepossessed assets that may not perform as expected dueresult in future losses; (10) greater than anticipated deterioration or lack of sustained growth in the national or local economies; (11) changes in state and federal legislation, regulations or policies applicable to transaction-related uncertaintybanks or other factors; (5)financial service providers, including regulatory or legislative developments, like the parties may be unable to successfully implement integration strategies; (6) requiredDodd-Frank Wall Street Reform and Consumer Protection Act, arising out of current unsettled conditions in the economy; (12) the results of regulatory shareholder orexaminations; and (13) increased competition with other approvals might not be obtained or other closing conditions might not be satisfied in a timely manner or at all; (7) Mackinac and Peninsula may experience reputational risks and the companies' customers may react negatively to the transaction; (8) management may have their time diverted from ordinary activities due to Merger-related issues; and (9) those factors referenced in Mackinac's filings with the SEC.financial institutions.

        For any forward-looking statements made in this joint proxy statement/prospectus, Mackinac and PeninsulaFirst Federal claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this joint proxy statement/prospectus. Mackinac




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and PeninsulaFirst Federal do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made. All subsequent written and oral forward-looking statements concerning the merger or other matters addressed in this joint proxy statement/prospectus and attributable to Mackinac, PeninsulaFirst Federal or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this joint proxy statement/prospectus.




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THE PENINSULAFIRST FEDERAL AND MACKINAC SPECIAL MEETINGMEETINGS


        This section contains information for PeninsulaFirst Federal and Mackinac shareholders about the Special MeetingMeetings that Peninsula hasthe companies have called to allow itstheir shareholders to consider and approve the Merger Agreement. PeninsulaAgreement, or approve the issuance of Mackinac common stock, as applicable. First Federal or Mackinac, as applicable, is mailing this joint proxy statement/prospectus to you, as a Peninsula shareholder, on or about , 2014.April 9, 2018. Together with this joint proxy statement/prospectus, PeninsulaFirst Federal or Mackinac, as applicable, is also sending to you a notice of the Special Meeting of Peninsula shareholders and a form of proxy card that Peninsula's boardFirst Federal and Mackinac's boards of directors isare soliciting for use at thetheir respective Special MeetingMeetings and at any adjournments or postponements of thesuch Special Meeting.Meetings.

        This joint proxy statement/prospectus is also being furnished by Mackinac to PeninsulaFirst Federal shareholders as a prospectus in connection with the issuance of shares of Mackinac common stock upon completion of the Merger.


Date, Time and Place of Meeting


        First Federal:    The Special Meeting will be held at Peninsula's principal executive offices, 100 S Main Street, Ishpeming, Michigan 49849109 N. Second Ave., Suite 300, Alpena, MI 49707 on , 2014,May 10, 2018, at 8:00 a.m. local time.

        Mackinac:    The Special Meeting will be held at 130 S. Cedar St., Manistique, MI 49854 on May 10, 2018, at 9:00 a.m. local time.


Matters to Be Considered


        At the First Federal Special Meeting, of shareholders you will be asked to consider and vote upon the following matters:

•

a proposal to approve the Merger Agreement and the transactions it contemplates; and



•

a proposal to approve the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies in favor of the approval of the Merger Agreement.

        At the Mackinac Special Meeting, shareholders will be asked to consider and vote upon the following matters:

•

a proposal to approve the issuance of Mackinac common stock to First Federal shareholders; and



•

a proposal to approve the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies in favor of the approval of the Merger Agreement.


Recommendation Recommendations of Peninsula's Boardthe Boards of Directors


        Peninsula's        First Federal:    First Federal's board of directors determined that the Merger, the Merger Agreement and the transactions contemplated by the Merger Agreement are advisable and in the best interests of PeninsulaFirst Federal and its shareholders and has unanimously approved the Merger and the Merger Agreement. Peninsula'sFirst Federal's board of directors unanimously recommends that PeninsulaFirst Federal shareholders vote "FOR" approval of the Merger Agreement and "FOR" the Adjournment Proposal. See "The Merger—Peninsula'sFirst Federal's Reasons for the Merger; Recommendation of Peninsula'sFirst Federal's Board of Directors" for a more detailed discussion of Peninsula'sFirst Federal's board of directors' recommendation.

        Mackinac:    Mackinac's board of directors determined that the Merger, the Merger Agreement and the transactions contemplated by the Merger Agreement are advisable and in the best interests of Mackinac and its shareholders and has unanimously approved the Merger and the Merger Agreement. Mackinac's board of directors unanimously recommends that Mackinac shareholders vote "FOR" approval of the Issuance Proposal and "FOR" the Adjournment Proposal. See "The Merger—




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Mackinac's Reasons for the Merger; Recommendation of Mackinac's Board of Directors" for a more detailed discussion of Mackinac's board of directors' recommendation.


Record Date and Quorum


        Peninsula's        First Federal:    First Federal's board of directors has fixed the close of business on , 2014April 2, 2018 as the record date for determining the holders of PeninsulaFirst Federal common stock entitled to receive notice of and to vote at the PeninsulaFirst Federal Special Meeting.

        As of the record date, there were 288,0003,726,925 shares of PeninsulaFirst Federal common stock outstanding and entitled to vote at the PeninsulaFirst Federal Special Meeting held by approximately 600 holders of record. Each share of PeninsulaFirst Federal common stock entitles the holder to one vote at the PeninsulaFirst Federal Special Meeting on each proposal to be considered at the PeninsulaFirst Federal Special Meeting.

        The presence at the Special Meeting, in person or by proxy, of holders of a majority of the outstanding shares of PeninsulaFirst Federal common stock entitled to vote at the Special Meeting will constitute a quorum for the transaction of business. All shares of PeninsulaFirst Federal common stock, whether present in person or represented by proxy, including abstentions and broker non-votes, will be treated as present for purposes of determining the presence or absence of a quorum for all matters voted on at the PeninsulaFirst Federal Special Meeting. A broker non-vote occurs under

        Mackinac:    Mackinac's board of directors has fixed the close of business on April 2, 2018 as the record date for determining the holders of First Federal common stock exchange rules when a broker is not




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permittedand to vote on a matter without instructions fromat the beneficial ownerFirst Federal Special Meeting.

        As of the record date, there were 6,512,910 shares of Mackinac common stock outstanding and no instruction is given.entitled to vote at the Mackinac Special Meeting held by approximately 1,200 holders of record. Each share of Mackinac common stock entitles the holder to one vote at the Mackinac Special Meeting on each proposal to be considered at the Mackinac Special Meeting.

        The presence at the Special Meeting, in person or by proxy, of holders of a majority of the outstanding shares of Mackinac common stock entitled to vote at the Special Meeting will constitute a quorum for the transaction of business. All shares of Mackinac common stock, whether present in person or represented by proxy, will be treated as present for purposes of determining the presence or absence of a quorum for all matters voted on at the Mackinac Special Meeting.


Vote Required; Treatment of Abstentions and Failure to Vote


        First Federal:    Approval of the Merger Agreement requires the affirmative vote of the holders of at least seventy-fivefifty percent (75%(50%) of the outstanding shares of PeninsulaFirst Federal common stock entitled to vote at the Special Meeting. You are entitled to one vote for each share of PeninsulaFirst Federal common stock you held as of the record date. Because approval is based on the affirmative vote of at least seventy-fivefifty percent (75%(50%) of the shares outstanding, your failure to vote, failure to instruct your bank or broker with respect to the proposal to approve the Merger Agreement or an abstention will have the same effect as a vote against approval of the Merger Agreement.

        Approval of the Adjournment Proposal requires the affirmative vote of a majority of shares of PeninsulaFirst Federal common stock entitled to vote on, and represented in person or by proxy at the Special Meeting, even if less than a quorum. Because approval of the Adjournment Proposal is based on the affirmative vote of a majority of shares voting or expressly abstaining at the Special Meeting, abstentions will have the same effect as a vote against such proposal. The failure to vote or failure to instruct your bank or broker how to vote with respect to the Adjournment Proposal, however, will have no effect on such proposal.

        Mackinac:    Approval of the Issuance Proposal requires the affirmative vote of a majority of shares of Mackinac common stock entitled to vote on, and represented in person or by proxy at the Special




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Meeting, assuming a quorum. Because approval of the Issuance Proposal is based on the affirmative vote of a majority of shares voting or expressly abstaining at the Special Meeting, abstentions will have the same effect as a vote against such proposal. The failure to vote or failure to instruct your bank or broker how to vote with respect to the Issuance Proposal, however, will have no effect on such proposal.

        Approval of the Adjournment Proposal requires the affirmative vote of a majority of shares of Mackinac common stock entitled to vote on, and represented in person or by proxy at the Special Meeting, even if less than a quorum. Because approval of the Adjournment Proposal is based on the affirmative vote of a majority of shares voting or expressly abstaining at the Special Meeting, abstentions will have the same effect as a vote against such proposal. The failure to vote or failure to instruct your bank or broker how to vote with respect to the Adjournment Proposal, however, will have no effect on such proposal.


Shares Held by Officers and Directors


        First Federal:    As of the record date, directors and executive officers of PeninsulaFirst Federal and their affiliates beneficially owned and were entitled to vote approximately 398,946 shares of PeninsulaFirst Federal common stock, representing approximately %10.7% of the shares of PeninsulaFirst Federal common stock outstanding on that date. Each of the directors of PeninsulaFirst Federal have entered into voting agreements with Mackinac, pursuant to which they have agreed, solely in their capacity as PeninsulaFirst Federal shareholders, to vote all of their shares of PeninsulaFirst Federal common stock in favor of the proposals to be presented at the Special Meeting. As of the record date, the directors and certain shareholders that are party to the voting agreements were entitled to vote an aggregate of approximately 349,674 shares of PeninsulaFirst Federal common stock, representing approximately %9.38% of the shares of PeninsulaFirst Federal common stock outstanding on that date. As of the record date, Mackinac and its subsidiaries held no shares of PeninsulaFirst Federal common stock (other than shares held as fiduciary, custodian or agent), and its directors and executive officers or their affiliates held 398,946 shares of PeninsulaFirst Federal common stock. See "The Merger—Interests of First Federal's Directors and Executive Officers in the Merger."

        Mackinac:    As of the record date, directors and executive officers of Mackinac and their affiliates beneficially owned and were entitled to vote approximately 1,562,693 shares of Mackinac common stock, representing approximately 24.0% of the shares of Mackinac common stock outstanding on that date. As of the record date, First Federal and its subsidiaries held no shares of Mackinac common stock (other than shares held as fiduciary, custodian or agent), and its directors and executive officers or their affiliates held no shares of Mackinac common stock.


Voting of Proxies; Incomplete Proxies


        Each copy of this joint proxy statement/prospectus mailed to holders of PeninsulaFirst Federal and Mackinac common stock is accompanied by a form of proxy with instructions for voting. If you hold stock in your name as a shareholder of record, you should complete and return the proxy card accompanying this joint proxy statement/prospectus, regardless of whether you plan to attend the Special Meeting.Meeting or you may vote your shares electronically via the Internet or by using telephone.

        If you hold your stock in "street name" through a bank or broker, you must direct your bank or broker to vote in accordance with the instructions you have received from your bank or broker.

        All shares represented by valid proxies that Peninsula receivesFirst Federal and Mackinac receive through this solicitation, and that are not revoked, will be voted in accordance with your instructions on the proxy card.card or your electronic or telephone vote. If you make no specification on your proxy card as to how you want your shares voted before signing and returning it, your proxy will be voted "FOR" approval of the Merger Agreement and "FOR" approval of the Adjournment Proposal. No matters other than




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the matters described in this joint proxy statement/prospectus are anticipated to be presented for action at the Special MeetingMeetings or at any adjournment or postponement of the Special Meeting.




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Shares Held in "Street Name"; Broker Non-Votes


        Under stock exchange rules, banks, brokers and other nominees who hold shares of PeninsulaFirst Federal or Mackinac common stock in "street name" for a beneficial owner of those shares typically have the authority to vote in their discretion on "routine" proposals when they have not received instructions from beneficial owners. However, banks, brokers and other nominees are not allowed to exercise their voting discretion with respect to the approval of matters determined to be "non-routine," such as approval of the Merger Agreement proposal, without specific instructions from the beneficial owner. Broker non-votes are shares held by a broker, bank or other nominee that are represented at the PeninsulaFirst Federal and Mackinac Special Meeting,Meetings, but with respect to which the broker or nominee is not instructed by the beneficial owner of such shares to vote on the particular proposal and for which the broker does not have discretionary voting power with respect to such proposal. It is expected that brokers, banks and other nominees will not have discretionary authority to vote on either proposal and, as a result, Peninsula anticipatesFirst Federal and Mackinac anticipate that there will not be any broker non-votes cast in connection with either proposal. Therefore, if your broker, bank or other nominee holds your shares of Peninsula common stock in "street name," your broker, bank or other nominee will vote your shares of Peninsula common stock only if you provide instructions on how to vote by filling out the voter instruction form sent to you by your broker, bank or other nominee with this joint proxy statement/prospectus.


Revocability of Proxies and Changes to a Peninsula Shareholder's Vote


        First Federal:    If you hold stock in your name as a shareholder of record, you may revoke any proxy at any time before it is voted by (1) signing and returning a proxy card with a later date, (2) delivering a written revocation letter to Peninsula's corporate secretary,First Federal's chief executive officer, or (3) attending the Special Meeting in person, notifying the corporate secretary and voting by ballot at the Special Meeting.

        Any shareholder entitled to vote in person at the Special Meeting may vote in person regardless of whether a proxy has been previously given, but the mere presence (without notifying Peninsula's corporate secretary)First Federal) of a PeninsulaFirst Federal shareholder at the Special Meeting will not constitute revocation of a previously given proxy.

        Written notices of revocation and other communications about revoking your proxy should be addressed to:

PeninsulaFirst Federal of Northern Michigan Bancorp, Inc.
100 South Second Ave.
Alpena, Michigan 49707
Attention: Michael Mahler

        If your shares are held in "street name" by a bank or broker, you should follow the instructions of your bank or broker regarding the revocation of proxies.

        Mackinac:    If you hold stock in your name as a shareholder of record, you may revoke any proxy at any time before it is voted by (1) signing and returning a proxy card with a later date, (2) delivering a written revocation letter to Mackinac's chief financial officer, or (3) attending the Special Meeting in person, notifying the corporate secretary and voting by ballot at the Special Meeting.

        Any shareholder entitled to vote in person at the Special Meeting may vote in person regardless of whether a proxy has been previously given, but the mere presence (without notifying Mackinac) of a Mackinac shareholder at the Special Meeting will not constitute revocation of a previously given proxy.




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        Written notices of revocation and other communications about revoking your proxy should be addressed to:

Mackinac Financial Corporation
100130 S. Main St.Cedar Street
Ishpeming,Manistique, Michigan 4984949854
Attention: SecretaryPaul Tobias

        If your shares are held in "street name" by a bank or broker, you should follow the instructions of your bank or broker regarding the revocation of proxies.


Dissenters' Rights of First Federal Shareholders


        Under MichiganMaryland law, the holders of PeninsulaFirst Federal common stock will not be entitled to dissenters' rights in connection with the Merger. The MBCAMGCL provides that if the consideration to be received in a merger is in cash or shares listed on a national securities exchange, the holders of the stock are not entitled to dissenters' rights. As PeninsulaFirst Federal shareholders may elect towill receive either cash in the Merger, or Mackinac'sMackinac common stock, which is listed on the NASDAQ, there are no dissenters' rights.


Solicitation of Proxies


        Peninsula'sEach of First Federal and Mackinac's Board of Directors is soliciting your proxy in conjunction with the Merger. PeninsulaFirst Federal will bear the entire cost of soliciting proxies from you. PeninsulaFirst Federal may use several of its regular employees, who will not be specially compensated, to solicit proxies from the PeninsulaFirst Federal shareholders,




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either personally or by telephone, facsimile, letter or other electronic means. In addition to solicitation of proxies by mail, PeninsulaFirst Federal will request that banks, brokers and other record holders send proxies and proxy material to the beneficial owners of PeninsulaFirst Federal common stock and secure their voting instructions. PeninsulaFirst Federal will reimburse the record holders for their reasonable expenses in taking those actions.


Attending the Meeting


        All holders of PeninsulaFirst Federal and Mackinac common stock, including shareholders of record and shareholders who hold their shares through banks, brokers, nominees or any other holder of record, are invited to attend the Special Meeting.Meetings. Shareholders of record can vote in person at the Special Meeting. If you are not a shareholder of record, you must obtain a proxy executed in your favor, from the record holder of your shares, such as a broker, bank or other nominee, to be able to vote in person at the Special Meeting. If you plan to attend the Special Meeting, you must hold your shares in your own name or have a letter from the record holder of your shares confirming your ownership. In addition, you must bring a form of personal photo identification with you in order to be admitted. Peninsula reservesFirst Federal and Mackinac reserve the right to refuse admittance to anyone without proper proof of share ownership and without proper photo identification. The use of cameras, sound recording equipment, communications devices or any similar equipment during the Special Meeting is prohibited without Peninsula'sthe express written consent.consent of First Federal or Mackinac, as the case may be.


Assistance


        First Federal:    If you have any questions concerning the Merger or this joint proxy statement/prospectus, would like additional copies of this joint proxy statement/prospectus or need help voting your shares of PeninsulaFirst Federal common stock, please contact John JilbertMichael Mahler at (906) 360-8666(989) 354-7319.

        Mackinac:    If you have any questions concerning the Merger or Terry Garceauthis joint proxy statement/prospectus, would like additional copies of this joint proxy statement/prospectus or need help voting your shares of Mackinac common stock, please contact Paul D. Tobias at (906) 485-6333.(248) 290-5900.




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THE MERGER


        The following discussion contains material information about the Merger. We urge you to read carefully this entire joint proxy statement/prospectus, including the Merger Agreement attached as Annex A to this joint proxy statement/prospectus, for a more complete understanding of the Merger.


Terms of the Merger


        Mackinac's and Peninsula'sFirst Federal's boards of directors have approved the Merger Agreement. The Merger Agreement provides for the acquisition of PeninsulaFirst Federal by Mackinac through the merger of PeninsulaFirst Federal with and into PFC,MFNC, a wholly-owned subsidiary of Mackinac, with PFCMFNC continuing as the surviving entity in the Merger. The Merger Agreement additionally provides that, effective upon consummation of the Merger, Peninsula'sFirst Federal's wholly owned subsidiary bank, Peninsula Bank,First Federal of Northern Michigan, will consolidate with and into mBank, Mackinac's wholly owned subsidiary bank, with mBank as the surviving entity. Subject to the terms and conditions set forth in the Merger Agreement, which has been unanimously approved by the board of directors of each of Mackinac and Peninsula,First Federal, at the Effective Time of the Merger, each outstanding share of PeninsulaFirst Federal common stock will be converted into the right to receive either (i) for each share of Peninsula common stock with respect to which an election to receive cash has been made and not revoked, approximately $46.13 in cash; or (ii) for each share of Peninsula common stock with respect to which an election to receive Mackinac common stock has been made and not revoked, 3.42960.576 shares of Mackinac common stock; provided that the numberstock, no par value per share, plus cash in lieu of Cash Election Shares may not exceed 35% of total merger consideration, subject to adjustment as set forth in the Merger Agreement.fractional shares. The Merger Agreement requires Peninsulaallows the First Federal board of directors to havedeclare a minimum adjusted shareholders' equity of $10.5special cash dividend equal to $8 million in the aggregate and further contemplates that PeninsulaFirst Federal will distribute any equity above such amount to its shareholders as a special dividend immediately prior to the closing of the Merger.Closing. Pursuant to the Merger Agreement, $1.45 millionat the Effective Time, First Federal shall transfer to an exchange agent the amount of cash necessary to pay the special dividend (or about $5.03 per share) will be held in reserve pending the resolution of certain litigation. The reserve amount will be held in a trust required to be established and funded in such amount by the Merger Agreement for the benefit of the Peninsula shareholders. To the extent Peninsula (or Mackinac as its successor-in-interest) has any liability in the litigation, such amounts will be deducted from the reserve and all remaining funds will be distributed to the Peninsula shareholders. The resolution of the litigation in question could take a significant period of time and Peninsula shareholders may not receive distributions from the trust, if any are forthcoming, for months or years.dividend.

        If the number of shares of common stock outstanding of PeninsulaFirst Federal or Mackinac changes before the Merger is completed as a result of any reclassification, recapitalization, stock split (including a reverse stock split) or subdivision or combination or readjustment of shares, or any stock dividend or stock distribution with a record date during such period, then the merger consideration will be equitably and proportionately adjusted.

        Mackinac will not issue any fractional shares of Mackinac common stock in the Merger. PeninsulaFirst Federal shareholders who would otherwise be entitled to a fractional share of Mackinac common stock upon the completion of the Merger will instead receive an amount in cash calculated using the five day average closing price of Mackinac common stock on the five days immediately preceding the Effective Time as the value of one share of Mackinac common stock.

        PeninsulaFirst Federal shareholders are being asked to approve the Merger Agreement. See "The Merger Agreement" for additional and more detailed information regarding the legal documents that govern the Merger, including information about the conditions to the completion of the Merger and the provisions for terminating or amending the Merger Agreement.




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Background of the Merger


        Over the past fewseveral years, the board of directors and executive officers of PeninsulaFirst Federal have periodically discussed and reviewed Peninsula'sFirst Federal's business, performance and prospects, including its strategic alternatives. In the context of such reviews, the strategic alternatives considered by the Peninsula board have included, among other things, continuing its ongoing operations as an independent institution, acquiring other depository institutions, opening new branch offices or buying other financial services firms engaged in complementary lines of business and entering into a merger or acquisition transaction with a similarly sized or larger institution. The Peninsula board also periodically reviewed the competitive environment, which it sees as very difficult, in its market area as well as merger and acquisition activity in the financial services industry in general and in the Upper Peninsula of Michigan in particular.

        The Peninsula board of directors and management have also been aware in recent years of changes in the financial services industry and the regulatory environment as well as the competitive challenges facing a financial institution such as Peninsula. These challenges have included increasing government regulations, increasing expense burdens and commitments for technology and training, an interest rate environment which has resulted in a significant compression in the interest rate spread and margin, a deep and long recession followed by a slow economic recovery, and increasing competition in the delivery of financial products and services combined with increased customer expectations for the availability of sophisticated financial products and services from financial institutions. The most concerning of these factors has been the significant regulatory burden for smaller community banks and the probability of an extended period of low interest rates.

        The members of management and directors of PeninsulaFirst Federal and Mackinac have long-standing business relationships. Dating back to 2006, First Federal and Mackinac had occasional discussions regarding a potential combination, however these discussions never proceeded to meaningful progress. Periodically since, members of management or directors of PeninsulaFirst Federal and Mackinac would meet socially or otherwise to discuss the state of the financial services industry, the regulatory environment and business prospects. During the second quarter of 2012, Robert Mahaney (a member of the board of directors2017, Kelly George (President and Chief Executive Officer of Mackinac) and John Jilbert (ChairmanMichael Mahler (Chief Executive Officer of the boardFirst Federal)




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discussed the state of the financial services market in the Upper Peninsula ofNorthern Michigan. During the meeting, amongAmong other topics, they discussed a possible business combination between PeninsulaFirst Federal and Mackinac. The discussion during the meeting was general in nature and touched on topics such as the potential operating synergies that might be achieved, expense reductions from the combined operations and Peninsula'sFirst Federal's operations, including its management and its lending platform. The discussion concluded with agreement that the Chairman of First Federal and Mackinac should meet to discuss any further interest.

        As a resultDuring early August of the second quarter2017, Mr. Paul Tobias (Chairman of 2012 meeting, a meeting was later in 2012 by Mr. Jilbert, accompanied by Kim Van Osdol, the then-President of Peninsula Bank,Mackinac) met with Mr. Mahaney and mBank's President, Kelly George,Martin Thomson (Chairman of First Federal) to further discuss Mackinac's potential interest in engaging in a transaction with Peninsula. The group discussed the potential benefitscombination of the transaction from a market perspective, the credit cultureMackinac and Peninsula's operations, including the benefits of the combined entity having the ability to pursue larger loans.

        During 2013, Mr. Mahaney and Mr. Jilbert continued to engage in periodic high level conversations concerning a possible business combination between Peninsula and Mackinac.

        Conversations between Mr. Mahaney and Mr. Jilbert continued into early 2014. In February of 2014, the conversations between Mr. Mahaney and Mr. Jilbert accelerated. Mackinac expressed an interest in having further discussions and requested certain financial information regarding Peninsula. An invitation was extended by Mr. Jilbert to Mr. Mahaney to present a proposal to the Peninsula board of directors at a special meeting of Peninsula's board of directors to be heldFirst Federal. Subsequently, on May 6, 2014.

        At the regular meeting ofAugust 15, 2017, the board of directors of Peninsula held on May 6, 2014, Mr. Mahaney, Mr. George, and Mr. Paul D. Tobias,First Federal met to review the Chairman and Chief Executive Officerstatus of Mackinac metdiscussions with the Peninsula board of directors and presented a formal letter of intent to Peninsula's board of




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directors that contemplated an acquisition of Peninsula by Mackinac. The letter of intent proposed to Peninsula's board of directors contemplated a merger transaction pursuant to which Peninsula's shareholders would receive $18,700,000 in the aggregate, in a mix of cash and Mackinac common stock (in a ratio ranging between 50%-75% stock) in exchange for their shares of Peninsula common stock. The letter of intent proposed a merger consideration value of $42.80 per share of Peninsula common stock and contemplated a $6,400,000 special dividend equivalent to $22.21 per share for each share of Peninsula common stock immediately prior to the effectiveness of the merger, for a total per share value of $65.01, subject to a due diligence investigation of Peninsula by Mackinac and other customary conditions.

        On May 23, 2014, Mr. Jilbert contacted John Reichert of Godfreywas joined by its special counsel, Shumaker, Loop & Kahn SC, which we refer to as Godfrey & Kahn, legal counsel to Peninsula, to discuss having Godfrey & Kahn represent Peninsula with respect to a possible transaction with Mackinac. Following this discussion, Mr. Jilbert retained Godfrey & Kahn and invited Mr. Reichert to attend a special meeting of the Peninsula board of directors to be held on May 28, 2014.

        On May 28, 2014, the Peninsula board of directors held a meeting to discuss the draft letter of intent that was presented at the May 6, 2014 meeting of the Peninsula board of directors. Mr. Reichert participated in the meeting to discuss and consider the Mackinac letter of intent. Following extensive discussion, in view of the possibility that a transaction might ensue, Peninsula's board of directors authorized Mr. Jilbert to negotiate the retention of a financial advisor to assist the Peninsula board of directors in fulfilling its duties to its shareholders. Peninsula subsequently retained WipfliKendrick, LLP, which we refer to as Wipfli,Shumaker. During the meeting the board reviewed the discussions to serve as Peninsula'sdate and considered its strategic options, including remaining an independent financial advisor.institution, combining with another larger financial institution and its organic and acquisition prospects for growth. The board also reviewed with counsel its fiduciary obligations to shareholders. At the May 28, 2014 boardconclusion of directors'the meeting the Peninsula board determined to retain ProBank Austin ("ProBank") as its financial advisor to assist with negotiations.

        Following execution of directors approved proceedingthe confidentiality agreement, on August 18, 2017, Mackinac was granted access to a data room containing initial due diligence documents with the negotiationrespect to First Federal. Mackinac subsequently submitted a further due diligence request and commenced its review of First Federal's operations.

        On September 7, 2017, Mr. George spoke with Mr. Mahler and representatives of ProBank Austin regarding a combined entity and possibility of a confidentiality agreement with Mackinacmerger. As part of their discussions, the parties first began discussing the framework of the financial and structural terms of the negotiationproposed combination, including consideration of a definitiveproposed term sheet. The next day, Mr. George had a follow-up call with each of Mr. Mahler and Mr. Kus regarding certain due diligence items and details regarding Mackinac's anticipated merger agreement rather than entering intoproposal. Also on September 8, 2017, ProBank Austin sent Piper Jaffray a memorandum outlining the proposed letter of intent.

        As a result, on May 29, 2014, Phillip Torrence ofissues First Federal would like to be addressed in any written acquisition proposal. At this time, Mackinac instructed its counsel, Honigman Miller Schwartz and Cohn LLP, which we refer to as Honigman, legal counsel to prepare a more formal proposal. On September 14, 2017, Mackinac sent Mr. Reichert an email withsubmitted a proposed draftnon-binding indication of a confidentiality and exclusivity agreement. On May 29, 2014, Mr. Reichert telephoned Mr. Torrence to discussinterest addressing the terms and conditions of the draft confidentiality and exclusivity agreement.

        On May 30, 2014, Mr. Torrence sent Mr. Reichert an email with a revised version of the confidentiality and exclusivity agreement. On June 3, 2014, Mackinac and Peninsula executed the confidentiality and exclusivity agreement.

        On June 6, 2014, Mr. Torrence sent Mr. Reichert a due diligence request list relating to the due diligence investigation to be conductedtransaction issues raised by Mackinac.First Federal.

        The board of directors of PeninsulaFirst Federal met on June 9, 2014,October 4, 2017, to discussreview the timelinestatus of negotiations with Mackinac and its non-binding indication of interest. The board reviewed both the financial and non-financial terms presented by Mackinac and reviewed those terms with its financial and legal advisors from ProBank Austin and Shumaker, who participated in the meeting. At the conclusion of the proposed transaction with Mr. Reichert. During the board meeting held on June 9, 2014, a conference callit was initiated amongdetermined by the board of directors of Peninsula, Mr. Reichert, Mr. Tobias and Mr. TorrenceFirst Federal to discuss priority itemsauthorize ProBank Austin to communicate with respectPiper Jaffray, financial advisor to due diligence activities and the timeline leading upMackinac, that First Federal found its proposal substantially acceptable, but prior to the execution of a merger agreement. At the June 9, 2014 Peninsula board meeting, the Peninsula board of directors authorized Mr. Jilbert to haveany further discussions with Mackinac concerning the financial termsFirst Federal was going to conduct a market check of the proposed merger. The Peninsula boardprice and other terms offered by contacting other potential parties that may have an interest in acquiring First Federal. Also at that meeting, ProBank Austin reviewed with the directors a list of directorssix other financial institutions it had determined to proceed with discussions with Mackinacbe most likely to have an interest in acquiring First Federal. The board authorized ProBank Austin to contact all six institutions and authorized Peninsula's Chairman, Mr. Jilbert,invite competing proposals to notify Mackinac that it was invited to conduct in-depth due diligence of Peninsula. From early June 2014 through early July 2014, Mackinac conducted extensive due diligence of Peninsula, and continued to refine and conduct additional due diligence thereafter.acquire First Federal. During the later part of Juneperiod beginning immediately following the board meeting on October 4, 2017, through October 17, 2017, ProBank Austin contracted all six other financial institutions. Of the six institutions contacted, five executed customary nondisclosure agreements and continuing through the first week of July 2014, Peninsula conducted due diligence of Mackinac.

        Aswere provided summary select nonpublic information regarding First Federal. All five parties indicated they did not have an interest in pursuing a result, during the month of June 2014, Mr. Jilbert and Mr. George met and further discussed the possible economic terms under which Peninsula might consider engaging in a business combinationtransaction with First Federal.




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with Mackinac. Peninsula        As a result of ongoing conversations between First Federal and Mackinac, each agreed that they would exchange financial information for presentationon October 12, 2017, Mackinac spoke with Honigman to discuss terms and discussion by Peninsula and Mackinac. Extensive discussionsto draft a letter of intent, which was provided to First Federal shortly thereafter.

        At a meeting of the parties'board of directors of First Federal held on October 17, 2017, First Federal directors reviewed the formal letter of intent from Mackinac that contemplated an acquisition of First Federal. The board discussed the terms of the letter of intent including its financial information ensued.and nonfinancial terms and was joined in the meeting by its financial and legal advisors from ProBank Austin and Shumaker. At the conclusion of the meeting Mr. Thomson indicated that the board would meet again on October 23, 2017 to further discuss and consider the proposed combination as presented by Mackinac in its letter of intent.

        On JuneOctober 23, 2017, the board of directors of First Federal met again to consider the proposed combination with Mackinac. The board was joined by its financial and legal advisors from ProBank Austin and Shumaker. The board reviewed and considered the financial terms of the offer together with the nonfinancial terms and the interests of the shareholders. The board also took into consideration the prospects for future growth as an independent financial institution as well as the burdensome costs of doing business as a relatively smaller community financial institution. Finally, the board of directors considered the impact of the proposed transaction on First Federal's customers, employees and the community. After a review of the terms of the letter of intent by counsel, the board approved the letter of intent and authorized Mr. Mahler to execute it on behalf of First Federal. The letter of intent was executed on October 23, 2017 with a 60-day exclusivity period (later extended pursuant to an extension letter, dated December 21, 2017 to January 21, 2018).

        From late October through early January, the parties conducted due diligence on the respective organizations, including extensive document review and in person meetings.

        On December 11, 2014, Mr. Torrence2017, Honigman (on Mackinac's behalf) presented Peninsula with acirculated the first draft of the proposed merger agreement.Agreement and Plan of Merger to Shumaker. Over the next several weeks, Peninsula,days, First Federal, Mackinac and their respective financial and legal advisors negotiated the terms of the merger and the merger agreement. During the negotiations, Mackinac proposed to establish the composition of the merger consideration and the special dividend to be provided to shareholders of First Federal, including the addition of a First Federal board member to Mackinac's board following the consummation of the transaction.

        On December 12, 2017, Mackinac's CEO Paul Tobias, and its President, Kelly George traveled to Alpena to meet with the full board of directors of First Federal. At this meetings, Messrs. Tobias and Kelly addressed a number of issues relating to the proposed consolidation, including with respect to cultural issues, the effect on the community, market information and overall reasons why Mackinac believed the proposed combination would have positive results. First Federal's board of directors asked questions and received answers from Messrs. Tobias and George regarding the proposed combination.

        On December 15, 2017, representatives from Piper Jaffray and ProBank Austin held further discussions regarding modifications to the stock consideration and the proposed special dividend as 65% stocka result of continued negotiations and 35% cash.results of the parties' due diligence findings. The principals from each party continued negotiating such changes over the next several days.

        On December 19, 2017, at a regular meeting of Mackinac's board of directors, the board of directors was updated on the proposed merger with First Federal and was provided a draft of the purchase agreement. Piper Jaffray attended the meeting. Mr. Tobias led a discussion regarding the key deal metrics, including recent negotiations regarding the proposed exchange ratio and special dividend contemplated by the definitive agreement, including the factors leading to proposed changes from the last discussion held by the board of directors. Honigman, who was also in attendance, highlighted the key provisions in the draft definitive agreement. The board of directors then engaged in detailed




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discussion with management and their advisors, including with respect to key risks, cost saves, and assumptions underlying the merger model. Following such discussions, the board of directors unanimously supported the continuation of negotiations of a definitive agreement along the lines of the draft previously provided in contemplation of final approval by written consent following communication of the final terms.

        On December 19, 2017, the board of directors of First Federal met to discuss the status of negotiations with Mackinac. Representatives of ProBank Austin reviewed with the board its discussions and negotiations regarding the financial terms of the transaction and counsel from Shumaker discussed with the board its initial review of the draft definitive agreement prepared by Mackinac's attorneys at Honigman. Also reviewed was the status of mutual due diligence between the parties and the process that had occurred to date. As a result of the discussion at the meeting, the board approved continuation of negotiations of a definitive agreement with Mackinac.

        The terms of the proposed merger were set forth in a revised draft of the merger agreement provided by MackinacFirst Federal on June 27, 2014.December 22, 2017. During the following days, PeninsulaFirst Federal and Mackinac and their respective advisors continued to negotiate the terms of the merger and the merger agreement but were not able to fully resolve all open issues. On June 30, 2014, PeninsulaJanuary 6, 2018, Mackinac proposed to MackinacFirst Federal further revisions to the proposed merger agreement.agreement, followed by additional revisions from the parties' respective counsel on January 9, 2018 and January 11, 2018.

        On July 8, 2014, Mackinac presented PeninsulaDecember 28, 2017, ProBank Austin held discussions with an updated draftmanagement of the proposed merger agreement. Over the next week, Peninsula, Mackinac and First Federal for purposes of performing certain reverse due diligence to support the issuance of their respective financial and legal advisors continued to negotiate the termsfairness opinion. Representatives of the merger and the merger agreement. During the negotiations, Mackinac proposed to maintain the composition of the merger consideration as 65% stock and 35% cash, but agreed to provide for a cash election feature in the merger agreement.

        Negotiations continued during July 8-July 14, 2014 as Peninsula and Mackinac worked to resolve the various open issues. On July 10, 2014, Mackinac agreed that as part of the proposed merger, Peninsula would be permitted to pay a special cash dividend to its shareholders immediately prior to consummation of the merger equal to an amount that would allow Peninsula to maintain a minimum adjusted peninsula shareholders' equity of not less than $10,500,000 as determined in accordance with GAAP as of the close of businessPiper were also present on the last business day prior to the closing date of the merger.

        On July 10, 2014, Mr. Torrence sent Mr. Reichert an updated draft of the merger agreement which included updated provisions relating to: (i) a cash-election feature; (ii) the formulation of the computation for the special dividend; and (iii) the formation of a Peninsula shareholders' trust and form of indemnification agreement pursuant to which the Shareholders' Trust would agree to indemnify and hold Mackinac and its affiliates harmless from any and all claims or losses related to the litigation filed in Marquette, County Michigan under Marquette County Circuit Court Case No. 13-51651-CZ.

call. From July 14, 2014January 11, 2018 through July 17, 2014,January 12, 2018, representatives of Mackinac and Honigman reviewed disclosure schedules to the merger agreement delivered by Peninsula.

        In addition, during the week of July 14 through July 17, 2014, Peninsula and Mackinac and their respective legal advisors resolved all other remaining matters, including the agreed upon Mackinac share value of $13.45 per share, and negotiated the final terms of the merger agreement and the related documents.First Federal.

        On July 14, 2014, Peninsula's board of directors held a special meeting to review the merger proposal as set forth in the definitive merger agreement and related documents negotiated by Peninsula and Mackinac and their respective advisors. The Peninsula board received presentations regarding the merger from its financial advisor, Wipfli, and the merger agreement from its legal counsel, Godfrey & Kahn. Management of Peninsula also summarized its earlier presentation to the board on the results of the due diligence conducted on Mackinac. Representatives of Godfrey & Kahn and Wipfli responded to questions from Peninsula's board. At the meeting, Wipfli provided its oral opinion that, based upon and subject to the assumptions, limitations, qualifications and conditions set forth in its written opinion, as of the date of the meeting, the merger consideration to be paid to the holders of Peninsula common stock, including as a part thereof, the special cash dividend, was fair to the holders of Peninsula common stock from a financial point of view. The merger consideration and the amount of the special dividend was determined through negotiation between Peninsula and Mackinac and the decision to




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enter into the merger agreement was solely that of the Peninsula board. After careful and deliberate consideration of this information as well as the interests of Peninsula's shareholders, customers, employees and communities served by Peninsula, Peninsula's board of directors unanimously but subject to the request that Mackinac increase the merger consideration to a range that equated to approximately $72 per share for each share of Peninsula common stock (i) determined that the merger agreement and the transactions contemplated thereby were advisable and fair to and in the best interests of Peninsula, (ii) approved and adopted the merger agreement and approved the merger and the other transactions contemplated thereby and (iii) subject to the board's fiduciary duties, recommended the approval and adoption of the merger agreement and the transactions contemplated thereby by Peninsula's shareholders.January 11, 2018, Mr. Reichert called Mr. Torrence after the completion of the Peninsula board meeting to convey the request of the Peninsula board of directors that Mackinac agree to increase the amount of the total merger consideration value.

        On July 15, 2014, Mr. Torrence sent Mr. ReichertTobias circulated an updated draft of the merger agreement which included updated provisions relating to: (i) an increase in the total merger consideration value from $12,900,000 to $13,285,000; and (ii) a revision to the cash-election provision which permitted the stock component of the merger consideration to not be limited to 65% of the total merger consideration if the shareholders of Peninsula elected to receive in the aggregate more than 65% of the merger consideration in the form of shares of Mackinac common stock as opposed to cash. Later during the evening of July 15, 2014, Mr. Jilbert, Mr. Reichert, Mr. George and Mr. Torrence participated in a conference call and discussed Mackinac's willingness to increase the total merger consideration value to $13,285,000. Mr. George requested Mr. Jilbert to reconvene a special meeting of the Peninsula board of directors to promptly seek final approval of the terms and conditions of the final version of the merger agreement.

        On the morning of July 16, 2014, Mr. Jilbert contacted Mr. George to confirm that the Peninsula board of directors would approve the terms and conditions of the final version of the merger agreement and the $13,285,000 value for the total merger consideration value.

        On July 16, 2014, Peninsula's board of directors held a special meeting to review the final version of the merger proposal as set forth in the revised merger agreement and related documents negotiated by Peninsula and Mackinac and their respective advisors. Representatives of Godfrey & Kahn and Wipfli responded to questions from Peninsula's board. At the meeting, Wipfli provided its oral opinion that, based upon and subject to the assumptions, limitations, qualifications and conditions set forth in its written opinion, as of the date of the meeting, the merger consideration to be paid to the holders of Peninsula common stock, including as a part thereof, the special cash dividend, was fair to the holders of Peninsula common stock from a financial point of view. A copy of Wipfli's written opinion, dated August 12, 2014, is attached as Annex B, andBoard, along with a summary of principal terms provided by Honigman and a unanimous consent approving the opinion is included below in "Opinion of Peninsula's Financial Advisor." After careful and deliberate consideration of this information as well as the interests of Peninsula's shareholders, customers, employees and communities served by Peninsula, Peninsula's board of directors unanimously (i) determined that the merger agreement and the transactions contemplated thereby were advisable and fair to and in the best interests of Peninsula, (ii) approved and adopted the merger agreement and approved the merger and the other transactions contemplated thereby and (iii) subject to the board's fiduciary duties, recommended the approval and adoption of the merger agreement and the transactions contemplated thereby by Peninsula's shareholders.

        At each of the Mackinac board of directors' meetings held in March, April and May of 2014, the transaction was discussed and management was authorized to continue the negotiation process with respect to the merger and the merger agreement.transaction. On July 16, 2014,January 12, 2018, Mackinac's board of directors held a special meeting to review the merger proposal as set forth in the definitive merger agreement and related documents negotiated by Peninsula and Mackinac and their respective financial and legal advisors. The Mackinac board received management presentations regarding assessments on cost




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savings, Peninsula's loan portfolio, enterprise risk management and key risks, operational impact of the transaction, qualitative integration matters and the impact of the transaction on Mackinac's other projects and initiatives. Also at this meeting, River Branch Capital, LLC, which we refer to as River Branch, Mackinac's financial advisor, reviewed with the Mackinac board of directors the financial aspects of the proposed merger. Representatives of Honigman and River Branch responded to questions from Mackinac's board. River Branch provided its oral opinion that the merger consideration in the proposed merger was fair to Mackinac from a financial point of view. After careful and deliberate consideration of the presentations received as well as the interests of Mackinac and of its constituencies, Mackinac's board of directorsunanimously determined that the merger agreement and the transactions contemplated thereby were in the best interests of Mackinac and its shareholders, approved and adopted the merger agreement, subject to the final negotiation by management of certain terms of the merger agreement and finalization of the disclosure schedules, and approved the merger and the other transactions contemplated thereby.

        The board of directors of First Federal met on January 12, 2018, to review and consider approval of the merger agreement. The board was joined by its financial and legal advisors from ProBank Austin and Shumaker. ProBank Austin reviewed the financial terms of the merger agreement and provided its oral fairness opinion that the transaction was fair, from a financial point of view, to the shareholders of First Federal. The merger agreement, which had been provided to all board members prior to the meeting for review, was reviewed with the board by First Federal's counsel from Shumaker. At the conclusion of the meeting First Federal's board of directors unanimously determined that the merger agreement and the transactions contemplated thereby were in the best interests of First Federal and its shareholders and approved and adopted the merger agreement, subject to the final negotiation by management of certain terms of the merger agreement and finalization of the disclosure schedules, and approved the merger and the other transactions contemplated thereby.

        On July 18, 2014, PeninsulaJanuary 15, 2018, First Federal and Mackinac and their respective legal advisors resolved all other remaining matters and negotiated the final terms of the merger agreement and the related documents.

        On January 16, 2018, First Federal and Mackinac executed the merger agreement, and the related voting agreements, and the transaction was publicly announced after the close of the market.




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Peninsula's First Federal's Reasons for the Merger; Recommendation of Peninsula'sFirst Federal's Board of Directors


After careful consideration, at its meetings on July 14, 2014 and July 16, 2014, Peninsula's board of directors determined that First Federal's Reasons for the plan of merger contained in the Merger Agreement is in the best interests of Peninsula and its shareholders and that the consideration to be received in the Merger is fair to the common shareholders of Peninsula. Accordingly, Peninsula's board of directors, by a unanimous vote, adopted and approved the Merger Agreement and unanimously recommends that Peninsula shareholders vote "FOR" approval of the Merger Agreement.


        In reaching its decision to adopt and approve the Merger Agreementmerger agreement, the merger and the other transactions contemplated by the merger agreement, and to recommend the Merger tothat its shareholders Peninsula's boardapprove the merger agreement, First Federal's Board of directorsDirectors consulted with Peninsula'sFirst Federal management, as well as its legalfinancial and financiallegal advisors, and considered a number of positive factors, including the following material factors:

•

Its knowledge of Peninsula's business, operations, financial condition, earnings and prospects and of Mackinac's business, operations, financial condition, earnings and prospects, taking into account the results of Peninsula's due diligence review of Mackinac.



•

Its knowledge of the current environment in the financial services industry, including national and regional economic conditions, continued consolidation, increased regulatory burdens, evolving trends in technology and increasing nationwide and global competition, the current financial market conditions and the likely effects of these factors on the companies' potential growth, development, productivity, profitability and strategic options, and the historical value of Peninsula common stock.



•

The careful review undertaken by Peninsula's boardthe First Federal Board of directorsDirectors and management with the assistance of Peninsula's legal and financial advisors, with respect to the strategic alternatives available to Peninsula if it remained an independent bank.First Federal;



•

The complementary aspectsthe business strategy and strategic plan of First Federal and its prospects for the Peninsulafuture as an independent institution, including the risks inherent in successful execution of its strategic plan, its projected financial results, and Mackinac businesses, including customer focus, geographic coverage, business orientation and compatibility ofexpectations relating to the companies' management and operating styles.proposed merger with Mackinac;



•

The value to Peninsula shareholders from diversifying Peninsula's community banking platform by combining ita review of the challenges facing First Federal in the current competitive, economic, financial and regulatory climate, and the potential benefits of aligning First Federal with Mackinac's general commercial banking model.a larger organization;



•

the consistency of the merger with First Federal's long-term strategic plan to seek profitable future expansion, leading to continued growth in overall shareholder value and enhanced liquidity for First Federal shareholders;



•

a review of the historical financial statements and condition of First Federal and certain other internal information, primarily financial in nature, relating to the business, earnings and balance sheet of First Federal;



•

a review of the limited liquidity for the stock of First Federal and the market prices at which First Federal traded relative to its financial performance and to peers;



•

a review of the investments that would be required in First Federal's physical properties;



•

a review of the historical financial statements and condition of Mackinac and certain other information, primarily financial in nature, relating to the business, earnings and financial condition of Mackinac;



•

its review and discussions with First Federal management and its advisors concerning the due diligence examination of Mackinac;



•

the fact that the merger would combine two established banking franchises to create a bank with over $1.3 billion in assets;



•

the complementary nature of the businesses of First Federal and Mackinac and the anticipated improved stability of the combined company's business and earnings in varying economic and market climates;



•

the belief of First Federal senior management that the management teams and employees of First Federal and Mackinac possess complementary skills and expertise and the potential advantages of a larger institution when pursuing, or seeking to retain, talent;



•

the financial strength of Mackinac based on Mackinac's commitment to enhancing its strategic position inhistorical earnings and profitability expectations over the Statenear and long term;



•

the strength, recent performance and liquidity of Michigan.Mackinac's common stock;




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•

The potential expense-savingthe financial and revenue-enhancing opportunities in connection with the Merger, the related potential impact on the combined company's earnings and the fact that the natureother terms of the merger consideration would allow former Peninsula shareholders to participate as Mackinac shareholders inagreement, including the benefits of such savings opportunitiesfixed exchange ratio, the special dividend payment permitted by the merger agreement, tax treatment and the future performance of the combined company generally.deal protection and termination fee provisions, which it reviewed with its outside financial and legal advisors;



•

The respective presentations by Peninsula management and its financial advisors concerning the operations, financial condition and prospects of Peninsula and the expected financial impact of the Mergerfact that, based on the combined company, including pro forma assets, earnings and deposits.closing price of Mackinac's common stock on January 12, 2018, of $15.90 plus the permitted special dividend to be paid in connection with the merger closing to First Federal shareholders, the implied price per share value of First Federal common stock would be $11.30;



•

The termsthe ability of First Federal's shareholders to benefit from Mackinac's potential growth and stock appreciation over time since it is more likely that the Merger Agreement,combined entity will have superior future earnings and prospects compared to First Federal's earnings and prospects on an independent basis as the presentation by Peninsula's outside legal advisors regarding the Mergerresult of greater operating efficiencies and the Merger Agreement.better penetration of commercial and consumer banking markets;



•

Thethe ability of Mackinac to complete a merger transaction from a financial and regulatory perspective;



•

the regulatory and other approvals required in connection with the merger and the expectation that such regulatory approvals will be received in a timely manner and without the imposition of unacceptable conditions;



•

the complementary geographic fit and customer convenience of the branch networks of the combined banks;



•

the potential continued representation of certain of First Federal's management on the management team of the combined entity and the participation of a First Federal director on the board of directors of the combined banks;



•

the anticipated effect of the acquisition on First Federal's employees;



•

the anticipated effect on First Federal's customers and the communities served by First Federal;



•

the belief that, while no assurances could be given, the business and financial advantages contemplated in connection with the merger were likely to be achieved within a reasonable time frame, particularly in light of the fact that Mackinac has transition experience due to successfully completed acquisitions in the past; and



•

the opinion of ProBank Austin orally delivered to Peninsula by Wipflithe First Federal Board of Directors on AugustJanuary 12, 2014, to the effect2018, and subsequently confirmed in writing on January 16, 2018, that, as of August 12, 2014,that date, and based upon and subject to the assumptions, procedures, considerations,conditions, limitations, qualifications and limitationsassumptions set forth in the opinion, the exchange ratio under the Merger AgreementConsideration was fair, from a financial point of view, to the holders of shares of Peninsula common stock.



•

The financial terms of the Merger, including the fact that, based on the $46.13 per share priceFirst Federal and including the expected per share special dividend of approximately $7.2 million (of which $1.45 million will be placed in the Shareholders' Trust), the implied value of $71.13 represented an approximate 15% premium to the $61.58 book value of Peninsula common stock as of June 30, 2014.



•

Peninsula's board of directors' belief that a Merger with Mackinac would allow Peninsula shareholders to participate in the future performance of a combined company that would have better future prospects than Peninsula was likely to achieve on a stand-alone basis or through other strategic alternatives, including a combination with other potential merger partners.



•

Peninsula's board of directors' belief that Peninsula and Mackinac shared a similar strategic vision, as compared to other potential merger partners.



•

The regulatory and other approvals required in connection with the Merger and the likelihood that the approvals needed to complete the Merger would be obtained without unacceptable conditions.

        Peninsula's board of directors also considered potential risks and potentially negative factors concerning the Merger in connection with its deliberations on the proposed transaction, including the following material factors:

•

The potential risk that a further downturn in the Michigan housing market could negatively impact Mackinac's loan portfolio, and thereby affect the value of the Mackinac common stock.



•

The potential risk of diverting management focus and resources from other strategic opportunities and from operational matters while working to implement the Merger.



•

The provisions of the Merger Agreement restricting Peninsula's solicitation of third-party acquisition proposals, requiring Peninsula to hold a Special Meeting of its shareholders to vote on approval of the Merger Agreement and providing for the payment of a termination fee in certain circumstances, which Peninsula's board of directors understood, while potentially limiting the willingness of a third party to propose a competing business combination transaction with Peninsula, were a condition to Mackinac's willingness to enter into the Merger Agreement.shareholders.

        The foregoing discussion of factors considered by Peninsula'sFirst Federal's board of directors is not intended to be exhaustive, but is believed to include all material factors considered by Peninsula'sFirst Federal's board of directors. In view of the wide variety of the factors considered in connection with its evaluation of the




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Merger merger and the complexity of these matters, Peninsula'sFirst Federal's board of directors did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, the individual members of Peninsula'sFirst Federal's board of directors may have given different weight to different factors. Peninsula'sFirst Federal's board of directors conducted an overall analysis of the factors described above including thorough discussions with, and questioning of, PeninsulaFirst Federal management and Peninsula'sFirst Federal's legal and financial advisors, and considered the factors overall to be favorable to, and to support, its determination.

        The Board of Directors of First Federal approved the merger agreement and recommends that First Federal's shareholders vote"FOR" the approval of the merger Proposal and"FOR" the




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Adjournment Proposal. First Federal shareholders should be aware that First Federal's directors and executive officers have interests in the merger that are different from, or in addition to, those of other First Federal shareholders. The Board of Directors of First Federal was aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement, and in recommending that the merger Proposal be approved by the shareholders of First Federal. See "THE MERGER—Interests of First Federal Directors and Executive Officers in the Merger."

        The foregoing explanation of Peninsula'sFirst Federal's board of directors' reasoning and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed in the section entitled "Cautionary Statement Concerning Forward-Looking Statements."


Opinion of Wipfli LLPProBank Austin (First Federal's Financial Advisor)


        By letter dated July 18, 2014,        On September 11, 2017, First Federal retained ProBank Austin to serve as exclusive financial advisor in connection with evaluating and implementing a potential transaction involving the boardsale or merger of directorsFirst Federal. ProBank Austin is an investment banking and consulting firm specializing in community bank mergers and acquisitions. First Federal selected ProBank Austin as its financial advisor on the basis of Peninsula retained Wipfli LLP ("Wipfli"), to provideits experience and expertise in representing financial institutions in similar transactions and its familiarity with First Federal.

        In its capacity as financial advisor, ProBank Austin provided a fairness opinion (the "ProBank Austin Opinion") to the Board of Directors of First Federal (the "First Federal Board") in connection with a possible business combination transaction. Wipfli is a nationally recognized accounting firm with a specializationthe Merger. At the meeting of the First Federal Board on January 12, 2018, ProBank Austin rendered its oral opinion (which was subsequently confirmed in financial institutions. Through Wipfli's wholly owned subsidiary, Wipfli Corporate Finance Advisors, LLC ("WCF"), Wipfli provideswriting by delivery of ProBank Austin's written opinion dated January 16, 2018) that, based upon and subject to the various factors, assumptions and limitations set forth in such opinion, ProBank Austin representatives' experience as investment banking services. Inbankers, ProBank Austin's work as described in such opinion and other factors ProBank Austin deemed relevant, as of such date, the ordinary course of its accounting and investment banking services, Wipfli and/or WCF are regularly engagedMerger Consideration set forth in the valuationAgreement was fair, from a financial point of financial institutionsview, to the shareholders of First Federal common stock. The ProBank Austin written opinion, dated January 16, 2018, is sometimes referred to herein as the ProBank Austin Opinion.

        The full text of the ProBank Austin Opinion, which sets forth, among other things, the assumptions made, procedures followed, matters considered and their securitieslimitations on the review undertaken in rendering its opinion, is attached asAnnex B to this joint proxy statement/prospectus and is incorporated herein by reference. The summary of the ProBank Austin Opinion set forth herein is qualified in its entirety by reference to the full text of the opinion.

ProBank Austin's opinion speaks only as of the date of the opinion. The ProBank Austin Opinion was for the information of, and was directed to, the First Federal Board (in its capacity as such) in connection with mergers and acquisitions and other corporate transactions.its consideration of the financial terms of the Merger. The Boardopinion addressed only the fairness, from a financial point of Directors selected Wipfliview, of the Merger Consideration to providebe received by First Federal. It did not address the underlying business decision of First Federal to engage in the Merger or enter into the Agreement or constitute a fairness opinionrecommendation to the First Federal Board in connection with the Merger, and it does not constitute a possible business combination based on its qualifications, expertise, reputation, and experiencerecommendation to any holder of First Federal common stock or any shareholder of any other entity as to how to vote in mergers and acquisitions involving financial institutions.connection with the Merger proposal or any other matter.

        ThroughoutThe ProBank Austin Opinion was reviewed and approved by the remainderfairness opinion committee of this letter, Wipfli may referProBank Austin. ProBank Austin expressed no view or opinion as to any of the legal, accounting and tax matters relating to the possible business combination pursuant to which 100%Merger and any other transactions contemplated by the Agreement or any terms or other aspects of the Company's issued and outstanding common stock would be acquiredAgreement or the Merger. ProBank Austin expressed no opinion as to the "Transaction," and Mackinac Financial Corporation and PFC Acquisition, LLC, separately orfairness of any consideration paid in combination, as the "Acquirer."

        In connection with rendering its opinion on July 17, 2014, Wipfli reviewed and considered, amongthe Merger to the holders of any other things:class

•

Acquirer's offer to purchase the Company.



•

Financial statements for The Peninsula Bank of Ishpeming (the"Bank") filed with the FDIC for the years ended December 31, 2010 through 2013, and for the six months ended June 30, 2013 and 2014.



•

Company-only financial statements filed with the Federal Reserve System for the years ended December 31, 2010 through 2013, and for the six months ended June 30, 2013.



•

Internal financial statements for the Company for the six months ended June 30, 2014.



•

Financial projections for the calendar years 2014 through 2018 for the Company.



•

Financial ratios and information on the guideline private transactions obtained fromSNL Financial.



•

Financial ratios and information on the guideline public companies obtained fromS&P Capital IQ.



•

Information used to build-up discount rate obtained fromDuff & Phelps 2014 Valuation Handbook—Guide to Cost of Capital andS&P Capital IQ.



•

Information on Acquirer and its publicly traded equity obtained fromS&P Capital IQ.




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        Wipfli also discussed with certain membersof securities, creditors or other constituencies of First Federal or as to the underlying decision by First Federal to engage in the Merger or enter into the Agreement. ProBank Austin did not express any opinion as to the fairness of the Company's senior management and Board of Directors the business, financial condition, results of operations, and prospectsamount or nature of the Company.

        Information regardingcompensation to be received in the Company andMerger by First Federal officers, directors or employees, or class of such persons, relative to the proposed Transaction usedcompensation to be received in developing Wipfli's opinion was providedthe Merger by the Company orholders of First Federal common stock.

        The description of the opinion set forth below is qualified in its representatives. Wipfli takes no responsibility forentirety by reference to the underlying data usedProBank Austin Opinion. You should consider the following when reading the discussion of ProBank Austin's Opinion in arriving atthis document:

•

The opinion letter details the procedures followed, assumptions made, matters considered, and qualifications and limitations of the review undertaken by ProBank Austin in connection with its opinion, and Wipfli has undertakenshould be read in its entirety;



•

ProBank Austin expressed no dutyopinion as to the price at which First Federal's or responsibilityMackinac's common stock would actually trade at any given time;



•

ProBank Austin's opinion does not address the relative merits of the Merger and the other business strategies considered by First Federal's board, nor does it address the board's decision to verify independentlyproceed with the Merger; and



•

ProBank Austin's opinion rendered in connection with the Merger does not constitute a recommendation to any of such information.

First Federal shareholder as to how he or she should vote their shares.

        The preparation of a financial fairness opinion involves various determinations as to the most appropriate methods of financial analysis and the application of those methods to the particular circumstances. It is, therefore, not readily susceptible to partial analysis or summary description. In connection with rendering its opinion, Wipfli performed a variety of financial analyses. Wipfli believes that the analyses must be considered together as a whole and that selecting portions of the analyses and the facts considered in its analyses, without considering all other factors and analyses, would create an incomplete or inaccurate view of the analyses and the process underlying the rendering of its opinion.

        In performing its analyses, WipfliProBank Austin made numerous assumptions with respect to industry performance, business and economic conditions, and other matters, many of which are beyond the control of the CompanyFirst Federal and Mackinac and may not be realized. Any estimates contained in Wipfli'sProBank Austin's analyses are not necessarily predictive of future results or values, whichand may be significantly more or less favorable than the estimates. In arrivingEstimates of values of companies do not purport to be appraisals or necessarily reflect the prices at this opinion, Wipfli didwhich the companies or their securities may actually be sold. Unless specifically noted, none of the analyses performed by ProBank Austin was assigned a greater significance by ProBank Austin than any other. The relative importance or weight given to these analyses is not attribute any particular weight to any analysisaffected by the order of the analyses or factor considered, but rather made qualitative judgments asthe corresponding results. The summaries of financial analyses include information presented in tabular format. The tables should be read together with the text of those summaries.

        With respect to the significanceexpected transaction costs, accounting adjustments and relevance of each analysiscost savings, First Federal's and factor.

        Wipfli considered the natureMackinac's management and terms of recent merger and acquisition transactions,advisors confirmed to the extent publicly available, involving banks and bank holding companiesus that were considered relevant and such other factors as Wipfli deemed appropriate. Wipfli also took into account its knowledge of the banking industry and its general experience in performing bank valuations.

        In arriving at its opinion, Wipfli relied on, without independent verification, the accuracy and completeness of the publicly and nonpublicly available financial and other information furnished to it. Wipfli also assumed that the financial projections were reasonably prepared and reflectthey reflected the best currently available estimates and judgments. Wipfli has not made any independent evaluation or appraisaljudgments of any properties, assets, or liabilitiesmanagement of the Company.

        In rendering its July 17, 2014 opinion, Wipfli performed a varietyfuture financial performance of First Federal and Mackinac, respectively, and ProBank Austin assumed that such performance would be achieved. ProBank Austin also assumed that there has been no material change in First Federal's or Mackinac's assets, financial analyses. The following is a summarycondition, results of operations, business or prospects since the date of the most recent financial statements made available to us. ProBank Austin assumed in all respects material to our analysis that First Federal and Mackinac will remain as going concerns for all periods relevant to the analyses, that all of the representations and warranties contained in the Agreement are true and correct, that each party to the Agreement will perform all of the covenants required to be performed by Wipfli, but it is not a complete description of allsuch party under the analyses underlying Wipfli's opinion. The summary includes information presented in tabular format. In order to fully understandAgreement, and that the financial analyses, these tables must be read together with the accompanying text. The tables alone do not constitute a complete description of the financial analyses. Also, no company includedclosing conditions in the comparative analyses described below is identicalAgreement are not waived. Finally, ProBank Austin has relied upon the advice First Federal has received from its legal, accounting and tax advisors as to all legal, accounting and tax matters relating to the Company and no guideline transaction is identical to the subject Transaction. Accordingly, an analysis of comparable companies or transactions involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading values or merger transaction values, as the case may be, of the CompanyMerger and the companies to which it is being compared.


Transaction Summary


        Pursuant toother transactions contemplated by the terms of the merger agreement, the Company will merge with and into Acquirer. The Merger Agreement further provides that, effective upon consummation of the merger, the Company's wholly-owned subsidiary Bank will consolidate with and into mBank, the Acquirer'sAgreement.




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wholly-owned subsidiary bank, with mBank as        ProBank Austin has relied, without independent verification, upon the surviving entity. Particularsaccuracy and completeness of the subject transactioninformation it reviewed for the purpose of rendering its opinion. ProBank Austin did not undertake any independent evaluation or appraisal of the assets and liabilities of First Federal or Mackinac, nor was it furnished with any appraisals. ProBank Austin has not reviewed any individual credit files of First Federal or Mackinac, and has assumed that First Federal's and Mackinac's allowances are, as follows:in the aggregate, adequate to cover inherent credit losses. ProBank Austin's opinion is based on economic, market and other conditions existing on the date of its opinion. No limitations were imposed by First Federal's board or its management on ProBank Austin with respect to the investigations made or the procedures followed by ProBank Austin in rendering its opinion.

        In rendering its opinion, ProBank Austin made the following assumptions:

•

Acquirer will purchaseall material governmental, regulatory and other consents and approvals necessary for the consummation of the Merger would be obtained without any adverse effect on First Federal, Mackinac or on the anticipated benefits of the Merger; and



•

First Federal and Mackinac have provided all of the Company's common stock, through a mix of cash and stock consideration, for a Total Gross Purchase Price of $13,285,000.information that might be material to ProBank Austin in its review.

        In connection with its opinion, ProBank Austin reviewed:

•

the Agreement dated January 16, 2018;



•

Each outstanding sharecertain publicly available financial statements and other historical financial information of the Company's common stock will be converted into the right to receive either (i) approximately $46.13 in cash; or (ii) 3.4296 shares of Acquirer's common stock.First Federal and Mackinac deemed relevant;



•

Total cash paid to the Company's common stock shareholders, pursuant tohistorical financial performance, current financial position, budgets and management forecasts, and general prospects of each of First Federal and Mackinac and reviewed certain financial records of First Federal and Mackinac, as well had discussions with the Agreement, may not exceed 35%respective management teams of the Total Purchase Price.First Federal and Mackinac regarding such information;



•

The Agreement requires the Companypro forma financial impact of the Merger on Mackinac, based on assumptions (including without limitation the cost savings and related expenses expected to have a minimum shareholders' equityresult or be derived from the Merger) prepared by ProBank Austin and reviewed with management of $10.5 million after a special dividend paid by the Company toFirst Federal and Mackinac and its shareholders' immediately prior to closing.advisors;



•

The Company had shareholders' equitypublicly reported historical stock price and trading activity for First Federal's and Mackinac's common stock, including an analysis of approximately $17,700,000 ascertain financial and stock information of June 30, 2014, after consideration of its mortgage servicing rights.certain other publicly traded companies deemed comparable to First Federal and Mackinac;



•

Deal value calculated based on a mixthe financial terms of 35% cash consideration and 65% stock consideration based oncertain recent business combinations in the Acquirer's July 17, 2014 closing stock price of $13.21 per share. This implies a deal value of approximately $13,131,000. This is calculated as (288,000 shares × 35% × $46.13 cash per share) + (288,000 × 65% × 3.4296 exchange ratio × $13.21 per share).



•

$1.45 million ofcommercial banking industry, to the deal value will be held in escrow related to pending litigation.


Guideline Public Company Analysis


        Wipfli usedextent publicly available, informationdeemed comparable to compare selected financial information for the Company and a group of financial institutions selected by Wipfli based on Wipfli's professional judgment and experience. Wipfli obtained the list of guideline public companies from a database compiled by the consulting firm of S&P Capital IQ. S&P Capital IQ is recognized as an industry leader in collecting, standardizing, and disseminating public company data.

        The table below summarizes certain financial measures and pricing multiples for:

•

All U.S. publicly traded banks and bank holding companies with up to $250 million in assets.Merger;



•

All U.S. publicly traded banksthe current market environment generally and bank holding companies with NPA/asset ratios between 3%the banking environment in particular; and, 6%.



•

Allsuch other information, financial studies, analyses and investigations, financial, economic, and market criteria as we considered relevant.

        ProBank Austin also discussed with certain members of senior management of First Federal the business, financial condition, results of operations and prospects of First Federal, including certain operating, regulatory and other financial matters. ProBank Austin held similar discussions with certain members of senior management of Mackinac and their financial advisor regarding the business, financial condition, results of operations and prospects of Mackinac.

        The following is a summary of the material factors considered and analyses performed by ProBank Austin in connection with its opinion dated January 16, 2018. The summary does not purport to be a complete description of the analyses performed by ProBank Austin. Capitalized terms used herein without definition shall have the meanings given to such terms in the Agreement.




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Summary of Financial Terms of Agreement

        The financial terms of the Agreement provide for each share of First Federal common stock to be exchanged for 0.576 shares of Mackinac Common Stock("Exchange Ratio"). The Exchange Ratio remains fixed so long as Mackinac's Initial Price (defined in the Agreement) does not increase or decrease by more than 20 percent. In both cases, the change in Mackinac's Initial Price is also compared against the NASDAQ Bank Index("the Index"). If Mackinac's Average Closing Price increases by more than 20 percent on an absolute basis compared to the Initial Price and by more than 20 percent vs. the Index, the Exchange Ratio will be reduced. If Mackinac's Average Closing Price decreases by more than 20 percent on an absolute basis to the Initial Price and by more than 20 percent compared to the Index, First Federal may terminate the Merger; provided, however, Mackinac is permitted to increase the Exchange Ratio to a level such that First Federal would not have termination rights under this provision.

        In addition, First Federal shareholders will be entitled to a Special Dividend or cash consideration from Mackinac in an aggregate amount of $8.0 million. The amount of the Special Dividend may be reduced if the Adjusted First Federal Shareholders' Equity at closing is less than the First Federal Shareholders' Equity as of December 31, 2017, as specified in the Agreement. The Exchange Ratio along with the Special Dividend and cash payment represents the Merger Consideration.

        The implied value of the Merger Consideration was $42.15 million in the aggregate or $11.31 per share, based on 3,726,925 shares of First Federal outstanding common stock, the exchange ratio of 0.576 and Mackinac's closing price of $15.90 on January 12, 2018. The Merger Consideration also includes the $8.0 million Special Dividend. The Merger Consideration represents:

•

130 percent of First Federal's December 31, 2017 tangible equity of $32.3 million;



•

141 percent of First Federal's December 31, 2017 adjusted tangible equity (implied aggregate deal value and First Federal's tangible equity adjusted for payment of Special Dividend); and



•

30.3 times First Federal's full year ending December 31, 2017 normalized net income of $1.39 million (normalized net income excludes security gains, other asset gains and deferred tax asset valuation adjustment from the 2017 tax reform law).

First Federal of Northern Michigan Peer Analysis

        ProBank Austin compared selected results of First Federal of Northern Michigan's (bank-level) operating performance to that of 25 selected financial institutions headquartered in Michigan with total assets between $250 million and $500 million. In addition, the selected peer banks were not part of a larger multi-bank holding company organization. ProBank Austin considered this group of financial institutions comparable to First Federal of Northern Michigan on the basis of asset size and geographic location.




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        This peer group consisted of the following banks:

Bank Name		City		Bank Name		City
1st State Bank		Saginaw		First National Bank of Michigan		Kalamazoo
Ann Arbor State Bank		Ann Arbor		First National Bank of St. Ignace		Saint Ignace
Central Savings Bank		Sault St. Marie		Hastings City Bank		Hastings
Century Bank and Trust		Coldwater		Oxford Bank		Oxford
Chelsea State Bank		Chelsea		Range Bank, N.A.		Marquette
Citizens NB of Cheboygan		Cheboygan		Shelby State Bank		Shelby
Dart Bank		Mason		Sturgis Bank & Trust Company		Sturgis
Dearborn Federal Savings Bank		Dearborn		Traverse City State Bank		Traverse City
Eastern Michigan Bank		Croswell		Tri-County Bank		Brown City
Eaton Federal Savings Bank		Charlotte		University Bank		Ann Arbor
First Community Bank		Harbor Springs		West Michigan Community Bank		Hudsonville
First National B&T Co.		Iron Mountain		West Shore Bank		Ludington
First National Bank in Howell		Howell

        ProBank Austin noted the following selected financial measures for the peer group as compared to First Federal of Northern Michigan:

		Peer Financial Performance(1)
											First Fed of Northern Michigan(1)
		25th Pct			Median			75th Pct
Total Assets ($millions)		$	283		$	305		$	375		$	335
LTM PTPP (FTE) / Average Assets			0.98	%		1.21	%		1.51	%		0.66	%
LTM Return on Average Assets(2)			0.69	%		0.82	%		0.97	%		0.41	%
LTM Return on Average Equity(2)			7.23	%		7.96	%		10.21	%		4.55	%
NPAs / Total Assets			0.57	%		0.37	%		0.22	%		0.83	%
Tangible Equity/Tangible Assets			8.77	%		9.52	%		11.05	%		9.23	%

---

LTM = Last 12 Months

PTPP = Pre-Tax Pre-Provision = Net Interest Income (FTE) + Noninterest Income – Noninterest Expense

FTE = fully-tax equivalent


Return on Average Assets = ROAA


Return on Average Equity = ROAE

NPAs = Nonperforming assets, defined as loans 90 or more days past due, nonaccrual loans, and Other Real Estate Owned. Restructured loans are not included.

(1)

Peer financial performance and First Federal of Northern Michigan's performance for the 12 month period ending September 30, 2017.



(2)

Based on tax-adjusted performance for S-Corporations.

        This comparison indicated that First Federal of Northern Michigan was below the 25^th percentile of the peer group in terms of ROAA, ROAE, and PTPP earnings to average assets. First Federal of Northern Michigan's nonperforming asset levels were higher compared to the 25^th percentile of the peer group. First Federal of Northern Michigan's tangible equity to asset ratio was between the 25^th percentile and median of the peer group.

Comparable Transaction Analysis

        ProBank Austin compared the financial performance of certain selling institutions and the prices paid in selected transactions to First Federal's financial performance and the implied transaction




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multiples being paid by Mackinac for First Federal. Specifically, ProBank Austin reviewed certain information relating to select bank and thrift transactions in Michigan between January 1, 2016 and January 10, 2018 (with seller's assets between $100 million - $750 million). Four (4) transactions were included in this group based on the selected criterion. The following lists the Michigan transactions reviewed by ProBank Austin:

Michigan Guideline M&A Transactions

Buyer Name		Seller Name		Seller City		Announcement Date
Independent Bank Corp.		TCSB Bancorp Inc.		Traverse City			12/4/17
Horizon Bancorp		Wolverine Bancorp Inc.		Midland			6/14/17
Arbor Bancorp Inc.		Birmingham Bloomfield		Birmingham			7/20/16
Fentura Financial Inc.		Community Bancorp		St. Charles			3/24/16

        In addition, ProBank Austin reviewed certain information relating to select bank and thrift transactions in the Midwest between January 1, 2016 and January 10, 2018 (with seller's assets between $200 million -$500 million, ROAA between zero and 1.0 percent and ROAE between zero and 10.0 percent). Eighteen (18) transactions were included in this group based on the selected criterion. The following lists the Midwest transactions reviewed by ProBank Austin:

Midwest Guideline M&A Transactions

Buyer Name		Seller Name		Seller City		Seller State		Announcement Date
Old Second Bancorp Inc.		Greater Chicago Finl Corp		Chicago		IL		12/26/17
LCNB Corp.		Columbus First Bancorp		Worthington		OH		12/21/17
First Mid-Illinois Bancshares		First BancTrust Corp.		Champaign		IL		12/11/17
Investor group		St. Louis Bank		Town & Country		MO		12/07/17
Independent Bank Corp.		TCSB Bancorp Inc.		Traverse City		MI		12/04/17
Investor group		Bancorp of Lexington Inc.		Lexington		KY		11/14/17
Peoples Bancorp Inc.		ASB Financial Corp.		Portsmouth		OH		10/24/17
MutualFirst Financial Inc.		Universal Bancorp		Bloomfield		IN		10/04/17
QCR Holdings Inc.		Guaranty B&TC & assets		Cedar Rapids		IA		06/08/17
Citizens Community Bancorp		Wells Financial Corp.		Wells		MN		03/17/17
Topeka Bancorp Inc.		Kaw Valley Bancorp Inc.		Topeka		KS		03/15/17
Nicolet Bankshares Inc.		First Menasha Bancshares		Neenah		WI		11/04/16
United Community Bancorp		Liberty Bancshares Inc.		Alton		IL		09/30/16
United Community Finl Corp.		Ohio Legacy Corp		North Canton		OH		09/08/16
Middlefield Banc Corp.		Liberty Bank NA		Beachwood		OH		07/28/16
Arbor Bancorp Inc.		Birmingham Bloomfield		Birmingham		MI		07/20/16
United Community Bancorp		Illini Corp.		Springfield		IL		06/08/16
RCB Holding Co.		Cornerstone Alliance Ltd.		Winfield		KS		05/24/16




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        The following table highlights the median results of the guideline M&A transactions in comparison to the Merger:

		Michigan									Midwest
																				First Federal(1)
Seller's Financial Performance		25th Pct.			Median			75th Pct.			25th Pct.			Median			75th Pct.
Total Assets ($millions)		$	254.9		$	310.8		$	355.0		$	271.7		$	330.8		$	385.8		$	321.0
Tangible Equity / Tangible Assets			8.75	%		9.59	%		11.40	%		9.50	%		9.84	%		11.11	%		10.09	%
Return on Average Asset			0.68	%		0.76	%		0.92	%		0.56	%		0.69	%		0.82	%		0.41	%
Return on Average Equity			7.25	%		7.77	%		8.12	%		5.17	%		6.84	%		7.85	%		4.08	%
Efficiency Ratio			71.2	%		67.5	%		64.7	%		74.2	%		68.8	%		66.1	%		79.2	%
Nonperforming Assets(2) / Assets			2.44	%		1.60	%		1.52	%		1.64	%		1.04	%		0.41	%		1.37	%
Deal Transaction Multiples
Price/Tangible Book Value Ratio			135	%		157	%		182	%		121	%		146	%		159	%		130	%
Price/LTM Earnings			17.7			18.5			20.6			19.2			22.9			27.2			30.3

---

LTM = Last twelve months

Note: M&A Guideline transactions financial performance based on most recent 12-month data as of the deal announcement date.

(1)

First Federal's financial performance and deal transaction multiples based on normalized 2017 data ending December 31, 2017.



(2)

Nonperforming assets include nonaccrual loans and leases, restructured loans and leases, and other real estate owned.

        The 25^th percentile ROAA ratios of the selling banks in the Michigan and Midwest guideline transactions were 0.68 percent and 0.56 percent, respectively compared to 0.41 percent for First Federal (normalized to exclude security gains, other asset gains and DTA valuation adjustment). First Federal's normalized ROAE of 4.08 percent was below both the Michigan and Midwest's 25^th percentile of 7.25 percent and 5.17 percent, respectively. The nonperforming assets ("NPA") to assets ratio of First Federal measured 1.37 percent and more favorable than 75^th percentile of the Michigan guideline peer of 1.52 percent and between the 25^th percentile and median of the Midwest guideline peer of 1.64 percent and 1.04 percent, respectively. The indicated price to tangible book ratio being paid by Mackinac for First Federal of 130 percent is lower than the 25^th percentile of the Michigan guideline peer of 135 percent and between the 25^th percentile and median of the Midwest guideline peer of 121 percent and 146 percent, respectively. The implied price-to-normalized earnings multiple for the First Federal transaction with Mackinac of 30.3 times was higher than both the Michigan 75^th percentile of 20.6 times and the Midwest 75^th percentile of 27.2 times.

Mackinac Financial Performance and Market Trading Data versus Peer

        ProBank Austin compared selected results of Mackinac's operating and stock performance to that of 19 publicly traded banks that are headquartered in Michigan, Ohio, Indiana and bank holding companies headquartered within Michigan or Wisconsin.Wisconsin with assets between $750 million and $2.0 billion.




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        This peer group consisted of the following companies:

Name		State		Symbol		Name		State		Symbol
Bank First National Corp.		WI		BFNC		LCNB Corp.		OH		LCNB
Civista Bancshares Inc.		OH		CIVB		Macatawa Bank Corp.		MI		MCBC
County Bancorp Inc.		WI		ICBK		MBT Financial Corp.		MI		MBTF
Croghan Bancshares Inc.		OH		CHBH		Middlefield Banc Corp.		OH		MBCN
Farmers & Merchants		OH		FMAO		MutualFirst Financial Inc.		IN		MFSF
Fentura Financial Inc.		MI		FETM		Ohio Valley Banc Corp.		OH		OVBC
First Business Finl. Svcs.		WI		FBIZ		PSB Holdings Inc.		WI		PSBQ
First Savings Fncl Grp		IN		FSFG		SB Financial Group Inc.		OH		SBFG
Heartland BancCorp		OH		HLAN		Tri City Bankshares Corp.		WI		TRCY
Isabella Bank Corporation		MI		ISBA

        ProBank Austin noted the following selected financial measures:

		Peer Financial Performance(1)
		25th Pct			Median			75th Pct			Mackinac(1)
Total Assets ($millions)		$	888.1		$	1,314.3		$	1,438.0		$	1,015.1
Tangible Equity / Tangible Assets			8.82	%		9.57	%		10.09	%		7.44	%
LTM PTPP / Average Assets			1.38	%		1.53	%		1.64	%		1.20	%
LTM Core Return on Average Assets			0.90	%		1.05	%		1.10	%		0.77	%
LTM Core Return on Average Equity			8.98	%		9.88	%		10.86	%		9.29	%
LTM Efficiency Ratio			67.3	%		64.8	%		61.5	%		70.1	%
NPAs / Total Assets			0.70	%		0.35	%		0.25	%		0.74	%

---

LTM = Last twelve months

Core = As reported by each company in SEC filings and excludes nonrecurring revenue and expense, gains/losses on sale of securities along with certain noncash expenses such as intangible amortization expense.

PTPP = Pre-Tax Pre-Provision = Net Interest Income + Noninterest Income – Noninterest Expense

(1)

Peer group financial performance as of most recent available as of January 10, 2018. Mackinac's financial performance as of September 30, 2017 (Peer group financial performance excludes Mackinac).

        This comparison indicated that Mackinac was below the 25^th percent of the peer group for PTPP to average assets and core ROAA. Mackinac's core ROAE was between the 25^th percentile and median of the peer group. Mackinac's tangible equity to assets ratio was below 25^th percentile of the peer. Mackinac's efficiency ratio was below the 25^th percentile of peer along with its NPAs to total assets. The analysis compared publicly available financial information forfollowing presents a summary of the Bank and certain financial and market trading data of Mackinac compared to this same peer group as of January 10, 2018:

		Peer Market Trading Data
As of 1/10/2018		25th Pct			Median			75th Pct			Mackinac
Price / Tangible Book Value per Share			125	%		139	%		178	%		119	%
Price / LTM Core EPS			14.7			15.7			17.9			13.1
Dividend Yield			1.3	%		1.7	%		2.3	%		2.9	%
Average Monthly Volume			27,878			127,113			344,568			86,751
Avg. Monthly Volume as % of Shares			0.6	%		2.7	%		3.4	%		1.4	%




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        Mackinac traded below the 25^th percentile of the peer group as measured by the price to tangible book and the price to LTM Core EPS. Mackinac's dividend yield exceeded the 75^th percentile of the peer. Mackinac was between the 25^th percentile and median of the peer in average monthly trading volume to shares outstanding.

Contribution Analysis

        ProBank Austin compared the relative contribution of both First Federal and Mackinac in the pro forma company based on September 30, 2017 financial data.

		Mackinac						First Federal
		Contribution Value ($mils.)			Percent Contribution			Contribution Value ($mils.)			Percent Contribution			Pro Forma Combined Value ($mils.)
Total Assets		$	1,015			75.1	%	$	336			24.9	%	$	1,351
Tangible Equity		$	75.0			68.9	%	$	33.9			31.1	%	$	108.8
YTD PTPP		$	8.54			84.6	%	$	1.55			15.4	%	$	10.09
YTD Normalized Net Income		$	5.60			85.5	%	$	0.95			14.5	%	$	6.54
Implied Market Capitalization(1)		$	100.1			70.4	%	$	42.1			29.6	%	$	142.2

---

(1)

First Federal implied market capitalization based on 3,726,925 shares multiplied by the Exchange Ratio (0.576) multiplied by Mackinac's closing stock price of $15.90 plus $8.0 million special dividend. Mackinac's implied market capitalization is based on 6,294,930 shares outstanding multiplied by the closing price of $15.90 as of 1/12/2018.

        First Federal's contribution of total assets and tangible equity equaled 24.9 percent and 31.1 percent, respectively. For the year-to-date period ending September 30, 2017, First Federal's contribution of PTPP and core/normalized net income equaled 15.4 percent and 14.5 percent, respectively.

        The pro forma ownership provided to First Federal along with the Special Dividend value, results in an implied market capitalization of 29.6 percent to First Federal.

Pro Forma Merger Analysis

        ProBank Austin performed a pro forma analysis that considered the projected income statement, balance sheet impact and performance metrics of the Merger on Mackinac. ProBank Austin's analysis was reasonably prepared on a basis reflecting the best currently available information and judgement of the management of First Federal and Mackinac as to the future operating and financial performance of First Federal and Mackinac, respectively. Assumptions were made regarding the fair value accounting adjustments, cost savings, restructuring charges and other acquisition adjustments based on discussions with management of First Federal and Mackinac and their representatives. The pro forma merger analysis indicated that the Merger is expected to be dilutive to Mackinac's tangible book value per share at closing and recovered within approximately 3.1 years. The Merger is expected to be accretive to Mackinac's earnings per share (excluding nonrecurring transaction expenses) for the three selected peer groups as12-month period following completion of or for the period ended June 30, 2014, with pricing data as of June 30, 2014.Merger and this accretion is expected to increase going forward into the second year following closing based on cost savings becoming fully implemented. The analysis did include the corporate tax rate change from legislation that was enacted on December 22, 2017. Furthermore, the analysis indicated that Mackinac would continue to be well-capitalized based on consolidated regulatory capital ratios including Tier 1 leverage ratio, CET1 ratio, Tier 1 capital ratio and total capital ratio at closing. For all the above analysis, the actual results of these analyses are summarized inachieved by Mackinac following the following table.Merger may vary from the projected results, and the variance may be material.




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Publicly Traded Company Analysis—June 30, 2014
ComparisonPro Forma Dividends Per Share to The Peninsula Bank of Ishpeming


																							Multiples
					Median Total Tangible Assets ($000)						Median Total Tangible Equity ($000)
		Number of Companies						Median Market Capitalization ($000)						Median NPAs/ Assets(2) (%)			Median LTM ROAA(2) (%)			Median LTM ROAE(2) (%)			Price/ LTM Earnings (x)			Price/ Tangible Book Value (x)			Price/ Tangible Assets (%)
All U.S. publicly traded banks and bank holding companies with up to $250 million in assets(1)			53		$	164,536		$	14,437		$	17,587			0.25			0.67			6.76			7.97			0.89			8.25
All U.S. publicly traded banks and bank holding companies with NPA's between 3% and 6%(1)			20		$	740,844		$	64,903		$	68,251			3.35			0.60			5.94			12.15			0.77			6.74
All publicly traded banks and bank holding companies headquartered within Michigan or Wisconsin(1)			31		$	531,947		$	45,004		$	49,301			1.11			0.83			8.10			9.76			1.05			7.45
The Peninsula Bank of Ishpeming					$	123,970		$	17,364			14.01			4.34			0.28			2.09			40.23	(3)		1.25	(3)		11.21	%(3)
																								35.79	(4)		1.11	(4)		9.97	%(4)

---

(1)

Multiples shown are the First Quartile Value (25th percentile) of each data set



(2)

Multiples include 25% control premium



(3)

Multiple based on deal value of $13,131,000



(4)

Multiple based on deal value of $11,681,000 (calculated as $13,131,000 less $1,450,000 held in escrow)

Source: S&P Capital IQ


Analysis of Selected Merger Transactions
Federal

        Wipfli obtainedBased on the 0.576 exchange ratio and Mackinac's current annual cash dividend rate of $0.48 per share, First Federal's common shareholders would have received $0.28 in equivalent cash dividends per share. First Federal's annual cash dividend for 2017 was $0.19 per share. Also, assuming the Special Dividend was converted to stock consideration and Mackinac's stock price of $15.90 on January 12, 2018, the adjusted exchange ratio would equal 0.711 resulting in a listingpro forma equivalent cash dividends per share of bank mergers and acquisitions from$0.34 to First Federal. On a database compiled by the consulting firm of SNL Financial. SNL Financial collects, standardizes, and disseminates market and merger and acquisition data for the banking industry. As part of our analysis, Wipfli reviewed comparable merger and acquisition transactions which occurred between July 1, 2013 and June 30, 2014, for which full transaction information was available.

        The table below summarizes certain financial measures and pricing multiples for:

•

All U.S. bank deals (targets with up to $250 millionpro forma combined basis, First Federal shareholders would have received a 47 percent increase in assets).



•

All U.S. bank deals (targets with NPA/asset ratios between 3% and 6%).



•

All bank deals where the targets' operations were located within Michigan or Wisconsin.




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M&A Transaction Analysis—June 30, 2014
Comparison to The Peninsula Bank of Ishpeming


																										Multiples
		Number of Transactions(1)			Median Total Tangible Assets ($000)			Median Total Tangible Equity ($000)			Median Equity/ Assets (%)			Median NPAs/ Assets (%)			Median YTD ROAA (%)			Median YTD ROAE (%)			Median Deal Price ($000,000)			Price/ Adjusted LTM Earnings (x)			Price/ Normalized Tangible BV (x)			Price/ Tangible Assets (%)
Transactions 07/01/2013 - 06/30/2014
All Announced U.S. Bank Deals (Up to $250 million in assets)(2)			47		$	125,089		$	12,130			10.62			1.08			0.63			5.94		$	14.25			13.61			0.83			8.40
All Announced U.S. Bank Deals (NPA's between 3% and 6%)(3)			14		$	235,520		$	27,123			10.26			4.40			0.83			8.00		$	26.10			15.89			1.18			11.95
All Announced Michigan and Wisconsin Bank Deals(2)			4		$	539,928		$	53,585			9.55			2.72			0.83			8.04		$	86.60			13.07			1.02			9.60
The Peninsula Bank of Ishpeming					$	123,970		$	17,364			14.01			4.34			0.28			2.09						40.23	(4)		1.25	(4)		11.21	%(4)
																											35.79	(5)		1.11	(5)		9.97	%(5)

---

(1)

Includes only transactions for which full information was available



(2)

Multiples shown are the First Quartile Value (25th percentile) of each data set



(3)

Multiples shown are the Median Value (50th percentile) of each data set



(4)

Multiple based on deal value of $13,131,000



(5)

Multiple based on deal value of $11,681,000 (calculated as $13,131,000 less $1,450,000 held in escrow)

Source: SNL Financial


Discounted Cash Flow Analysis


        Wipfli also considered the net present value of all shares of the Company's common stockannual cash dividends based on the Company's internal projections alongstated exchange ratio and 79 percent assuming Special Dividend converted to stock consideration.

ProBank Austin's Compensation and Other Relationships with Wipfli's projectionsFirst Federal and Mackinac

        First Federal has agreed to pay ProBank Austin customary fees for its services as exclusive financial advisor in connection with the Merger. ProBank Austin has acted exclusively for the Company betweenboard of directors of First Federal in rendering this opinion and will receive a fee from First Federal for our services. A portion of the years 2014fee is payable upon rendering this opinion, and 2018.

        The DCF approach recognizes that the present value of an investmenta significant portion is basedcontingent upon the expected receipt of future net cash flows discounted at a rate that reflects both the current return requirementssuccessful completion of the market in generaltransaction.

        First Federal agreed to reimburse ProBank Austin for its reasonable out-of-pocket expenses, and the risks inherentto indemnify ProBank Austin against certain liabilities, including liabilities under securities laws. ProBank Austin has provided various consulting services to First Federal in the specific entity that is being valued. The projected financial information was presented by management as being a base level forpast, including investment banking services. ProBank Austin has not provided services within the future of the Company.

        The DCF approach consists of estimating annual future cash flows and individually discounting them back to present value. If the cash flow stream will continue beyond the foreseeable future, an estimate of the stabilized future cash flow attributable to the business enterprise is also capitalized and discounted back to the present value. For the Company, the stabilized earnings stream was concluded to be after fivelast two years and grown into perpetuity at a normal long-run growth rate.

        In this method, the discount rate is built-up and is reasonably considered equal to the sum of the risk-free investment rate plus a risk premium for equity and size.

        Summation of the discounted annual cash flows plus the terminal year cash flow after discounting results in the estimated value of the business enterprise.

        Wipfli also considered and discussed with the members of the Board of Directors and senior management how this analysis would be affected by changes in assumptions, including variations with respect to net income. Wipfli noted that the net present value analysis is a widely used valuation methodology, but the results of such methodology are highly dependent upon the numerous




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assumptions that must be made, and the results thereof are not necessarily indicative of actual values or future results.


Other Information Reviewed By Wipfli


        Wipfli also reviewed for informational purposes the characteristics of the Acquirer's shareholder group as well as the relationship between the current and historical publicly reported trading prices of the Acquirer's common stock and its earnings, tangible book value, and tangible assets.


Conclusion


        Wipfli's opinion is based upon market, economic, financial, and other circumstances and conditions existing and disclosed to us as of July 17, 2014, and any material change in such circumstances and conditions would require a reevaluation of this opinion, which Wipfli is under no obligation to undertake.

        Wipfli expresses no opinion as to the underlying business decision to effect the Transaction, the structure or tax consequences of the Agreement or the availability or advisability of any alternatives to the Transaction. Wipfli did not structure the Transaction or negotiate the final terms of the Transaction. This letter does not express any opinion as to the likely trading range of the Acquirer's stock following the Transaction, which may vary depending on numerous factors that generally impact the price of securities or financial condition of Acquirer at that time. Wipfli's opinion is limited to the fairness, from a financial point of view, of the Transaction to the shareholders of the Company as of July 17, 2014. Wipfli expresses no opinion with respect to any other reasons, legal, business, or otherwise, that may support the decision of the Board of Directors to approve or consummate the Transaction.

        It is understood that this letter is for the information of the Board of Directors of the Company in evaluating the proposed Transaction and does not constitute a recommendation tohave any shareholder of the Company regarding how said shareholder should voteexisting or pending engagements with Mackinac.

Summary

        Based on the proposed Transaction. Furthermore, this letter should not be construed as creating any fiduciary duty on the part of Wipfli to any such party. This opinion is not to be quoted or referred to, in whole or in part, without Wipfli's prior written consent, which will not be unreasonably withheld.

        Based uponpreceding summary discussion and analysis, and subject to the foregoing, it is Wipfli's opinion that, as of July 17, 2014,qualifications described herein, ProBank Austin determined the considerationMerger Consideration to be received by the shareholders of the Company pursuant to the merger agreement is fair, from a financial point of view, to the holders of the Company's outstandingFirst Federal common stock.

        The opinion expressed by ProBank Austin was based on market, economic and other relevant considerations as they existed and could be evaluated as of the date of the opinion. Events occurring after the date of issuance of the opinion, including, but not limited to, changes affecting the securities markets, the results of operations or material changes in the financial condition of either First Federal or Mackinac could materially affect the assumptions used in preparing this opinion.


Mackinac's Reasons for the MergerMerger; Recommendation of Mackinac's Board of Directors


        Mackinac believes that the acquisition of Peninsula will complement Mackinac's footprint and its growth strategy, including by enabling it to deepen its footprint in the central Upper Peninsula of Michigan, particularly since Peninsula has a strong reputation in the Ishpeming and Marquette markets. Peninsula's management team has long-term expertise providing independent community banking services to the community in Marquette County, Michigan.        Mackinac's board of directors has unanimously determined that the merger is in the best interests of Mackinac and PFC'sMackinac's shareholders and has adopted the merger agreement and authorized the merger and the other transactions contemplated by the merger agreement, including the issuance of Mackinac shares as merger consideration subject to shareholder approval as set forth herein. In negotiating the terms of the merger agreement and in considering its adoption, the board of managers approveddirectors of Mackinac reviewed the Merger Agreement in a joint meetingfinancial results and conditions of the two boards of directors, after Mackinac's senior management discussed with the Mackinac and PFC boards a number of factors, including those described aboveFirst Federal, the perceived prospects for each in the future, and the business, assets, liabilities, resultsbanking philosophies of operations, financial performance, strategic directionMackinac and prospects of Peninsula. NeitherFirst Federal.

        Mackinac's board of directors nor PFC's boardrecognized the increased scale First Federal will add to Mackinac's franchise, expected to result in a more efficient operating platform, particularly given First Federal's geographic location adjacent to Mackinac's existing footprint. The complementary geographic location also includes industries similar to current Mackinac markets and therefore provides lesser execution risk in terms of managers considered it practicable to, and did not attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its determination.serving markets consistent with Mackinac's historical operations. Mackinac's board of directors also recognized the diversified and PFC's boardgranular deposit portfolio of managers viewed their respective positions as being based on all of the informationFirst Federal, which management believes will increase Mackinac's core deposit base and the factors presentedimprove its loan to and considered by them. In addition, individual directors may have given different weights to different information and factors.deposit ratio.




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The board of directors and management further believe that First Federal's customer centric culture will be a good fit with Mackinac's similar community bank oriented customer service philosophy.

        The board of directors of Mackinac believes the merger provides the shareholders of Mackinac an opportunity to have an interest in a larger and more diversified financial organization. Shareholders of Mackinac may enjoy certain benefits associated with the combined organization's larger and more diversified asset base and access to the attractive Northeastern Lower Peninsula market. The shareholders of Mackinac will, however, be subject to the risks associated with First Federal, in which they have not previously held a material interest.

        The board of directors of Mackinac believes that the merger will enhance each organization's ability to compete with larger institutions in their combined market. The board of directors of Mackinac also believes that the merger will permit the achievement of certain economies of scale, particularly as regulatory costs continue to increase commensurate with the increased size of Mackinac's asset base.

        The board of directors of Mackinac did not assign any particular weight to any one of the foregoing factors.

        The foregoing explanation of Mackinac's board of directors' reasoning and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed in the section entitled "Cautionary Statement Concerning Forward-Looking Statements."


Board of Directors and Management of Mackinac After the Merger


        The size and compositionAs soon as reasonably practicable after the Closing, Mackinac will cause one director of Mackinac'sFirst Federal, to be determined by First Federal but subject to reasonable approval by Mackinac, to be added to the board of directors of Mackinac and PFC's boardmBank.

        See "—Interests of managers will not be affected byFirst Federal's Directors and Executive Officers in the Merger.

" Information about Mackinac's current directors and executive officers can be found in the section entitled "Directors and Executive Officers of Mackinac."

Interests of First Federal's Directors and Executive Officers in the Merger


        You should be aware that some of directors and executive officers of First Federal may have interests in the Merger that are different from, or in addition to, their interests as shareholders. Both First Federal's Board of Directors and Mackinac's Board of Directors were aware of these interests and took them into consideration in approving the Merger Agreement and the Merger. These interests are as follows:

•

Two executive officers of First Federal currently are covered by change in control agreements that provide for them to receive payments following a change in control of First Federal. Under these agreements, Mr. Mahler, First Federal's Chief Executive Officer and Ms. Budnick, First Federal's Chief Financial Officer, will be entitled to receive payments of $422,760 and $141,119, respectively, upon the closing of the Merger. These payments will be made without regard to whether such executives remain in the employment of Mackinac following the Merger and are therefore so called "single trigger" change in control agreement payments.



•

Mackinac has agreed that for a period of six (6) years after the effective time of the Merger, it will maintain directors' and officers' liability insurance in force covering directors and officers of First Federal, subject to certain conditions set forth in the Merger Agreement.



•

The Merger Agreement obligates Mackinac to appoint one person who is currently a member of the First Federal Board of Directors (subject to the reasonable approval of Mackinac) to the




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First Federal Board of Directors. Such person will be entitled to receive compensation from Mackinac for service to the Board.

Stock Ownership

        The directors and executive officers of PeninsulaFirst Federal beneficially owned as of , 2014,April 2, 2018, a total of 398,946 shares of PeninsulaFirst Federal common stock, representing approximately %10.7% of the outstanding shares of PeninsulaFirst Federal common stock as of such date. They will receive the same merger consideration as other PeninsulaFirst Federal shareholders in respect of these shares of PeninsulaFirst Federal common stock.


Public Trading Markets


        Mackinac common stock is listed for trading on the NASDAQ under the symbol "MFNC." PeninsulaFirst Federal common stock is not currently listed or traded on any securities exchange or quotation system.

        Under the Merger Agreement, Mackinac will use reasonable best efforts to cause the shares of Mackinac common stock to be issued in connection with the Merger to be listed on the NASDAQ, and the Merger Agreement provides that neither Mackinac nor PeninsulaFirst Federal will be required to complete the Merger if such shares are not approved for listing, subject to notice of issuance, on the NASDAQ.


Mackinac's Dividend Policy


        No assurances can be given that Mackinac will pay any dividends on its common stock or that, if paid, such dividends will not be reduced or eliminated in future periods. Special cash dividends, stock dividends or returns of capital may, to the extent permitted by Michigan Department of Insurance and Financial Services and other applicable regulations, be paid in addition to, or in lieu of, regular cash dividends. Dividends from Mackinac will depend, in large part, upon receipt of dividends from mBank, and any other banks which Mackinac acquires, because Mackinac will have limited sources of income other than dividends from mBank, and other banks it acquires, earnings from the investment of proceeds from the sale of shares of common stock retained by Mackinac. Mackinac's board of directors may change its dividend policy at any time, and the payment of dividends by financial holding companies is generally subject to legal and regulatory limitations. For further information, see "Comparative Market Prices and Dividends."


Dissenters' Rights in the Merger


        Under MichiganMaryland law, which is the law under which PeninsulaFirst Federal is incorporated, the holders of PeninsulaFrst Federal common stock willare not be entitled to dissenters' appraisal rights in connection with the Merger. The MBCAMaryland General Corporation Law (the "MGCL") provides that a shareholder may not demand the fair value of the shareholder's stock and is bound by the terms of the transaction if any shares of the consideration to be received in a merger is in cashclass or sharesseries of stock are listed on a national securities exchange or if the holdersstock is that of the stock are not entitled to dissenters' rights. As Peninsula shareholders may elect to receive either cashsuccessor in the Merger, or Mackinac'smerger. As First Federal shareholders will receive Mackinac common stock, which is listed on the NASDAQ, there are no dissenters' rights.


Regulatory Approvals Required for the Merger


        Both Mackinac and PeninsulaFirst Federal have agreed to use their reasonable best efforts to obtain all regulatory approvals required to complete the transactions contemplated by the Merger Agreement. Mackinac filed applications seeking regulatory approval to complete the transactions contemplated by the Merger Agreement with the FRB, FDIC and the DIFS.




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        Mackinac is a bank holding company under the Bank Holding Company Act of 1956, as amended, which we refer to as the BHCA. The primary regulator of Mackinac is the FRB. At the discretion of the FRB, the Merger is subject to the approval by the FRB under Section 34 of the BHCA. In




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evaluating an application filed under Section 34 of the BHCA, the FRB considers, with respect to the bank holding companies and the depository institutions concerned: (1) the competitive impact of the transaction, (2) the financial condition and future prospects, including capital positions and managerial resources, (3) the convenience and needs of the communities to be served and the record of the insured depository institution subsidiaries of the bank holding companies under the Community Reinvestment Act of 1977, which we refer to as the CRA, (4) the effectiveness of the companies and the depository institutions concerned in combating money laundering activities and (5) the extent to which the proposal would result in greater or more concentrated risks to the stability of the United States banking or financial system. The FRB would providehas provided an opportunity for public comment on the application and is authorized to hold a public meeting or other proceeding if they determine such meeting or other proceeding would be appropriate.

        Under the CRA, the FRB must take into account the record of performance of the companies and the depository institutions concerned in meeting the credit needs of the entire community, including low and moderate-income neighborhoods, served by such companies and depository institutions. Depository institutions are periodically examined for compliance with the CRA by their primary federal supervisor and are assigned ratings. In evaluating the record of the performance of an institution in meeting the credit needs of the entire community served by the institution, the FRB considers the institution's record of compliance with the CRA, including the most recent rating assigned by its primary federal supervisor. As of their last respective CRA examinations, each of Peninsula, mBankFirst Federal was rated "Outstanding", and PFCMFNC was rated "Satisfactory" with respect to CRA compliance.

        Mackinac received approval for the transaction on March 30, 2018.

        The primary regulators of mBank are the DIFS and the FDIC. The prior approval of the FDIC under the Federal Bank Merger Act would be required to consolidate Peninsula BankFirst Federal of Northern Michigan with and into mBank. In evaluating an application filed under the Bank Merger Act, the FDIC generally considers: (1) the competitive impact of the transaction, (2) the financial and managerial resources of the depository institutions party to the merger, (3) the convenience and needs of the community to be served and the record of the depository institutions under the Community Reinvestment Act, including their CRA ratings, (4) the depository institutions' effectiveness in combating money-laundering activities and (5) the extent to which the depository institution merger or mergers would result in greater or more concentrated risks to the stability of the U.S. banking or financial system. In connection with its review, the FDIC will providehas provided an opportunity for public comment on the application for the bank consolidation, and is authorized to hold a public meeting or other proceeding if they determine that would be appropriate.

        Filings wouldhave also bebeen made with the DIFS which would include giving the agency prior notice of the proposed consolidation of Peninsula BankFirst Federal of Northern Michigan into mBank and a copy of the bank merger application submitted to the FDIC.

Additional Regulatory Approvals and Notices

        Notifications and/or applications requesting approval may be submitted to various other federal and state regulatory authorities and self-regulatory organizations.

        Neither PeninsulaFirst Federal nor Mackinac can assure you that all of the regulatory approvals described above will be obtained and, if obtained, we cannot assure you as to the timing of any such approvals, our ability to obtain the approvals on satisfactory terms or the absence of any litigation challenging such approvals.

        Mackinac and PeninsulaFirst Federal believe that the Merger does not raise significant regulatory concerns and that we will be able to obtain all requisite regulatory approvals on a timely basis. However, neither




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Mackinac nor PeninsulaFirst Federal can assure you that all of the required regulatory approvals described above




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will be obtained and, if obtained, we cannot assure you as to the timing of such approvals, our ability to obtain the approvals on satisfactory terms or the absence of any litigation challenging such approvals. In addition, there can be no assurance that such approvals will not impose conditions or requirements that, individually or in the aggregate, would or could reasonably be expected to have a materially adverse effect on the financial conditions, results of operations, assets or business of Mackinac following completion of the Merger.

        Neither PeninsulaFirst Federal nor Mackinac is aware of any material governmental approvals or actions that are required for completion of the Merger other than those described above. It is presently contemplated that if any such additional governmental approvals or actions are required, those approvals or actions will be sought. There can be no assurance, however, that any additional approvals or actions will be obtained.




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THE MERGER AGREEMENT


        The following describes certain aspects of the Merger, including certain material provisions of the Merger Agreement. The following description of the Merger Agreement is subject to, and qualified in its entirety by reference to, the Merger Agreement, which is attached to this joint proxy statement/prospectus as Annex A and is incorporated by reference into this joint proxy statement/prospectus. We urge you to read the Merger Agreement carefully and in its entirety, as it is the legal document governing the Merger.


Structure of the Merger


        Each of Peninsula'sFirst Federal's board of directors, Mackinac's board of directors and PFC'sMFNC's board of managers has approved the Merger Agreement, by and among Mackinac, PFCMFNC and Peninsula.First Federal. The Merger Agreement provides for the merger of PeninsulaFirst Federal with and into PFC,MFNC, with PFCMFNC continuing as the surviving entity in the merger. The Merger Agreement additionally provides effective upon consummation of the Merger, Peninsula'sFirst Federal's wholly owned subsidiary bank, Peninsula BankFirst Federal of Northern Michigan will consolidate with and into mBank, Mackinac's wholly owned subsidiary, with mBank as the surviving entity in the merger.

Merger Consideration

        Subject to the terms and conditions set forth in the Merger Agreement, which has been unanimously approved by the board of directors of each of Mackinac and Peninsula,First Federal, at the Effective Time of the Merger, each outstanding share of PeninsulaFirst Federal common stock will be converted into the right to receive either (i) for each share0.576 shares of PeninsulaMackinac common stock, with respect to which an election to receiveno par value per share, plus cash has been made and not revoked, approximately $46.13 in cash; or (ii) for each sharelieu of Peninsula common stock with respect to which an election to receive Company common stock has been made and not revoked, 3.4296 shares of Company common stock; provided that the number of Cash Election Shares may not exceed 35% of total merger consideration, subject to adjustment as set forth in the Merger Agreement.fractional shares. The Merger Agreement requires Peninsulaallows the First Federal board of directors to havedeclare a minimum adjusted shareholders' equity of $10.5special cash dividend equal to $8 million in the aggregate and further contemplates that PeninsulaFirst Federal will distribute anysuch amount, subject to maintenance of a specified minimum equity above such amountrequirement, to its shareholders as a special dividend immediately prior to the closing.Closing. As of February 28, 2018, First Federal's equity, as calculated in accordance with the terms of the Merger Agreement, exceeded the specified amount by approximately $200,000. To the extent First Federal's equity is less than the minimum requirement as of closing, the dividend would be reduced to the extent of such shortfall. Pursuant to the Merger Agreement, $1.45 millionat the Effective Time, First Federal or, under certain circumstances, including for regulatory or practical reasons, Mackinac, shall transfer to an exchange agent the amount of cash necessary to pay the special dividend (or about $5.03 per share) will be held in reserve pending the resolution of certain litigation. The reserve amount will be held in a trust required to be established and funded in such amount by the Merger Agreement for the benefit of the Peninsula shareholders. To the extent Peninsula (or Mackinac as its successor-in-interest) has any liability in the litigation, such amounts will be deducted from the reserve and all remaining funds will be distributed to the Peninsula shareholders. The resolution of the litigation in question could take a significant period of time and Peninsula shareholders may not receive distributions from the trust, if any are forthcoming, for months or years.

        If the number of shares of common stock outstanding of PeninsulaFirst Federal or Mackinac changes before the Merger is completed as a result of any reclassification, recapitalization, stock split (including a reverse stock split) or subdivision or combination or readjustment of shares, or any stock dividend or stock distribution with a record date during such period, then the merger consideration will be equitably and proportionately adjusted.

Fractional Shares

        Mackinac will not issue any fractional shares of Mackinac common stock in the Merger. PeninsulaFirst Federal shareholders who would otherwise be entitled to a fractional share of Mackinac common stock upon the completion of the Merger will instead receive ana check representing the amount of cash in lieu of fractional shares that the holder is entitled to receive.an amount in cash (rounded to the nearest cent) determined by multiplying (i) the average, rounded to the nearest one tenth of a cent, of the closing sale prices of Mackinac common stockCommon Stock as reported by NASDAQ in The Wall Street Journal (or any other authoritative source reasonably selected by Mackinac) for the five (5) trading days




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immediately preceding the Effective Time by (ii) the fraction of a share (after taking into account all shares of Peninsula common stockFirst Federal Common Stock held by such holder at the Effective Time and rounded to the




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nearest thousandth)thousandth when expressed in decimal form) of Mackinac common stockCommon Stock to which such holder would otherwise be entitled to receive.

Surviving Entity; Governing Documents; Directors and Officers

        At the Effective Time of the Merger, the articles of organization and operating agreement of PFCMFNC in effect immediately prior to the Effective Time (subject to any amendment to the articles of organization set forth in the Certificate of Merger) will be the articles of organization and operating agreement of the surviving entity until thereafter amended in accordance with applicable law.

        The size and compositionAs soon as reasonably practicable after the Closing, Mackinac will cause one director of Mackinac'sFirst Federal, to be determined by First Federal but subject to reasonable approval by Mackinac, to be added to the board of directors of Mackinac and PFC's board of managers will not be affected by the Merger.mBank.


Closing and Effective Time of the Merger


        The Merger will be completed only if all conditions to the Merger discussed in this joint proxy statement/prospectus and set forth in the Merger Agreement are either satisfied or waived. See "—Conditions to Complete the Merger."

        The Merger will become effective when the Merger Agreement is accepted for filing by LARA. The completion of the Merger will occur at a time determined by Mackinac that follows the close of trading on the date that is the later of (1) three business days after the satisfaction or waiver (subject to applicable law) of the last of the conditions specified in the Merger Agreement, (2) ten business days after the parties receive all regulatory approvals required to complete the Merger or (3) another mutually agreed upon date. It currently is anticipated that the completion of the Merger will occur late in the third quarter or early in the fourthsecond quarter of 2014,2018, subject to the receipt of required approvals and other customary closing conditions, but neither PeninsulaFirst Federal nor Mackinac can guarantee when or if the Merger will be completed.


Conversion of Shares; Exchange of Certificates


        The conversion of PeninsulaFirst Federal common stock into the right to receive the merger consideration will occur automatically at the Effective Time of the Merger. Promptly after completion of the Merger, the exchange agent will exchange certificates or book-entry shares representing shares of PeninsulaFirst Federal common stock for the merger consideration to be received pursuant to the terms of the Merger Agreement.

Form of Election

        At the time that the proxy statement is made available to shareholders, a Form of Election will be mailed to Peninsula shareholders entitled to vote at the Special Meeting that will allow shareholders to exercise their right to make an election prior to the election deadline, which is 5:00 p.m. Eastern Time on the day prior to the date of the shareholders' meeting. The materials will contain instructions on how to properly submit the Form of Election and surrender shares of Peninsula common stock in order to receive the merger consideration the holder is entitled to receive under the Merger Agreement.

        This date is referred to as the election deadline. Shares of Peninsula common stock as to which the holder has not made a valid election prior to the election deadline will be treated as though they had not made an election.

        NOTE:    The actual election deadline is not currently known. Mackinac and Peninsula will issue a press release announcing the date of the election deadline no more than 15 and at least five business days before that deadline.




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        To make an election, a holder of Peninsula common stock must submit a properly completed election statement so that it is actually received by the exchange agent at or prior to the election deadline in accordance with the instructions on the election statement. Neither Peninsula nor Mackinac is under any obligation to notify any holder of defects in such holder's election statement.

        Generally, an election may be revoked or changed, but only by written notice received by the exchange agent prior to the election deadline. If an election is revoked and unless a subsequent properly executed election statement is actually received by the exchange agent at or prior to the election deadline, the holder having revoked the election will be deemed to have made no election with respect to his or her shares of Peninsula common stock.

        Holders will not be entitled to revoke or change their elections following the election deadline. As a result, holders who have made elections will be unable to revoke their elections.

        Shares of Peninsula common stock as to which the holder has not made a valid election prior to the election deadline, including as a result of revocation, will be deemed to have made no election. If it is determined that any purported cash election or stock election was not properly made, the purported election will be deemed to be of no force or effect and the holder making the purported election will be deemed not to have made an election for these purposes, unless a proper election is subsequently made on a timely basis.

Allocation Procedures

        All elections are subject to the election, proration and allocation procedures described in this proxy statement/prospectus if too many shareholders elect cash consideration over stock consideration, due to the limitation that the relative cash consideration can amount to no more than 35% of the number of shares of Peninsula common stock outstanding prior to the effective date of the Merger, subject to certain adjustments described in the merger agreement. Due to these limitations, Peninsula shareholders may not receive the form of merger consideration that they elected.

        If the aggregate number of shares of Peninsula common stock with respect to which cash elections are made (the"Cash Election Number") exceed the 35% limitation on cash elections (or such lesser number as may be reasonably agreed to by tax counsel to Mackinac and Peninsula in order to preserve tax-free reorganization treatment under the Internal Revenue Code)(the"Cash Conversion Number"), then all stock election shares and all non-election shares shall be converted into the right to receive stock consideration, and the cash election shares of each holder of Peninsula common stock will be converted into the right to receive the per share cash consideration in respect of that number of cash election shares equal to the product obtained by multiplying (x) the number of cash election shares held by such holder by (y) a fraction, the numerator of which is the Cash Conversion Number and the denominator of which is the Cash Election Number, with the remaining number of such holder's cash election shares being converted into the right to receive the stock consideration.

        For example, assuming no further issuances of Peninsula common stock and no adjustments to the 35% limitation made by tax counsel, the Cash Conversion Number would be 100,800 (35% of the 288,000 shares of Common Stock currently outstanding) at the effective time. If cash elections are made with respect to 120,000 shares of Peninsula common stock, 16% of each holder's cash election shares would be converted into stock elections.

Letter of Transmittal

        As soon as reasonably practicable after the completion of the Merger, the exchange agent will mail appropriate transmittal materials and instructions to each holder who has not previously submitted a Form of Election and their shares of PeninsulaFirst Federal common stock. Similar to the Form of Election, these




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These materials will also contain instructions on how to surrender shares of PeninsulaFirst Federal common stock in exchange for the merger consideration the holder is entitled to receive under the Merger Agreement.

        If a certificate for PeninsulaFirst Federal common stock has been lost, stolen or destroyed, the exchange agent will issue the merger consideration properly upon receipt of (1) an affidavit of that fact by the claimant and (2) such bond as Mackinac may determine is reasonably necessary asan indemnity against any claim that may be made against Mackinac with respectagreement in a form acceptable to both the certificate.exchange agent and Mackinac.

        After completion of the Merger, there will be no further transfers on the stock transfer books of PeninsulaFirst Federal other than to settle transfers of PeninsulaFirst Federal common stock that occurred prior to the Effective Time of the Merger.




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Withholding

        Mackinac and the exchange agent will be entitled to deduct and withhold from the consideration otherwise payable to any PeninsulaFirst Federal shareholder the amounts either of them are required to deduct and withhold under any applicable federal, state, local or foreign tax law. If any such amounts are withheld, these amounts will be treated for all purposes of the Merger Agreement as having been paid to the shareholders from whom they were withheld.

Dividends and Distributions

        Whenever a dividend or other distribution is declared by Mackinac on Mackinac common stock, the record date for which is at or after the Effective Time of the Merger, the declaration will include dividends or other distributions on all shares of Mackinac common stock issuable under the Merger Agreement, but such dividends or other distributions will not be paid to the holder thereof until such holder has duly surrendered its PeninsulaFirst Federal stock certificates.


Representations and Warranties


        The representations, warranties and covenants described below and included in the Merger Agreement were made only for purposes of the Merger Agreement and as of specific dates, are solely for the benefit of Mackinac and Peninsula,First Federal, may be subject to limitations, qualifications or exceptions agreed upon by the parties, including those included in confidential disclosures made for the purposes of, among other things, allocating contractual risk between Mackinac and PeninsulaFirst Federal rather than establishing matters as facts, and may be subject to standards of materiality that differ from those standards relevant to investors. You should not rely on the representations, warranties, covenants or any description thereof as characterizations of the actual state of facts or condition of Mackinac, PeninsulaFirst Federal or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in public disclosures by Mackinac or Peninsula.First Federal. The representations and warranties and other provisions of the Merger Agreement should not be read alone, but instead should be read only in conjunction with the information provided elsewhere in this joint proxy statement/prospectus. See "Where You Can Find More Information."

        The Merger Agreement contains customary representations and warranties of Mackinac and PeninsulaFirst Federal relating to their respective businesses. The representations and warranties in the merger agreement do not survive the Effective Time of the Merger.

        The Merger Agreement contains representations and warranties made by PeninsulaFirst Federal to Mackinac relating to a number of matters, including the following:

•

corporate matters, including due organization and qualification and subsidiaries;






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•

capitalization;



•

authority relative to execution and delivery of the merger agreement and the absence of conflicts with, or violations of, organizational documents or other obligations as a result of the Merger;



•

required governmental and other regulatory filings and consents in connection with the Merger;



•

reports to regulatory authorities;



•

financial statements, internal controls and absence of undisclosed liabilities;



•

the absence of certain changes or events;



•

legal proceedings;




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•

tax matters;



•

employee benefit matters;



•

labor matters;



•

compliance with applicable laws;



•

certain material contracts;



•

agreements with regulatory agencies;



•

investment securities;



•

derivative instruments and transactions;



•

environmental matters;



•

insurance matters;



•

real and personal property;



•

intellectual property matters;



•

broker's fees payable in connection with the Merger;



•

inapplicability of the Investment Company Act of 1940, as amended;



•

loan matters;



•

related party transactions;



•

inapplicability of takeover statutes;



•

good faith belief that necessary regulatory approvals are obtainable;



•

books and records;



•

validity and enforceability of loan guarantees;



•

compliance with data security laws and customer privacy policies; and



•

the accuracy of information supplied for inclusion in this joint proxy statement/prospectus and other similar documents.

        The Merger Agreement contains representations and warranties made by Mackinac to PeninsulaFirst Federal relating to a number of matters, including the following:

•

corporate matters, including due organization and qualification and subsidiaries;



•

capitalization;






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•

authority relative to execution and delivery of the Merger Agreement and the absence of conflicts with, or violations of, organizational documents or other obligations as a result of the Merger;



•

required governmental and other regulatory filings and consents in connection with the Merger;



•

legal proceedings;



•

the absence of certain changes or events;



•

reports to regulatory authorities;



•

financial statements;




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•

undisclosed liabilities;



•

compliance with applicable laws;



•

tax matters;



•

broker's fees payable in connection with the Merger;



•

the accuracy of information supplied for inclusion in this joint proxy statement/prospectus and other similar documents;



•

absence of regulatory agreements or enforcement actions; and



•

good faith belief that necessary regulatory approvals are obtainable; and



•

ability to pay the cash portion of the merger consideration.obtainable.

        Certain representations and warranties of Mackinac and PeninsulaFirst Federal are qualified as to "materiality" or "material adverse effect." For purposes of the Merger Agreement, a "material adverse effect," when used in reference to Mackinac or Peninsula,First Federal, means any event, circumstance, development, change or effect that, individually or in the aggregate, (1) prevents or materially impairs, or would be reasonably likely to prevent or materially impair, the ability of the applicable party to timely consummate the Merger or any of the other transactions contemplated by the Merger Agreement or to perform its covenants under the Merger Agreement or (2) is, or is reasonably likely to be, material and adverse to the business, operations, prospects, condition (financial or otherwise) or results of operations of the applicable party and its subsidiaries, taken as a whole, other than to the extent resulting from:

•

changes in GAAP, except to the extent that the effects of such changes disproportionately affect the applicable party and its subsidiaries, taken as a whole, as compared to other companies in the industry in which the applicable party operates;



•

changes in laws generally applicable to companies in the financial services industry, except to the extent that the effects of such changes disproportionately affect the applicable party and its subsidiaries, taken as a whole, as compared to other companies in the industry in which the applicable party operates;



•

changes in political or regulatory conditions or general economic or market conditions in the United States or any state or territory thereof, in each case generally affecting other companies in the financial services industry, except to the extent that the effects of such changes disproportionately affect the applicable party and its subsidiaries, taken as a whole, as compared to other companies in the industry in which the applicable party operates;



•

any outbreak or escalation of hostilities, declared or undeclared acts of war or terrorism, except to the extent that the effects of such changes disproportionately affect the applicable party and its subsidiaries, taken as a whole, as compared to other companies in the industry in which the applicable party operates;




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•

failure, in and of itself, to meet earnings projections or internal financial forecasts, but not including any underlying causes thereof, or changes in the trading price of Mackinac's common stock, in and of itself, but not including any underlying causes thereof;



•

public disclosure of the Merger Agreement;



•

any outbreak or escalation of hostilities, declared or undeclared acts of war or terrorism, except to the extent that the effects of such changes disproportionately affect the applicable party and its subsidiaries, taken as a whole, as compared to other companies in the industry in which the applicable party operates; or



•

actions or omissions taken with the express prior written consent of the other party.




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Covenants and Agreements


Conduct of Businesses Prior to the Completion of the Merger

        PeninsulaFirst Federal has agreed that, prior to the Effective Time of the Merger, it will, and will cause each of its subsidiaries to, conduct its business in the usual, regular and ordinary course consistent with past practice, use reasonable best efforts to maintain and preserve intact its business organization, rights, franchises, authorizations issued by government entities and current relationships and take no action that is intended to or would reasonably be expected to adversely affect or materially delay the ability of PeninsulaFirst Federal or Mackinac to obtain any required regulatory approvals or to perform their respective obligations under the Merger Agreement.

        Additionally, PeninsulaFirst Federal has agreed that prior to the Effective Time of the Merger, except as expressly required by the Merger Agreement or with the prior written consent of Mackinac, PeninsulaFirst Federal will not, and will not permit any of its subsidiaries to, subject to certain exceptions, undertake the following actions:

•

create or incur indebtedness or guarantee indebtedness of another person, except in the ordinary course of business consistent with past practice;



•

(1) adjust, split, combine or reclassify any capital stock or other equity interest; (2) set any record or payment dates for any dividends or distributions on its capital stock or other equity interest, or make, declare or pay any dividend or distribution or make any other distribution on any shares of its capital stock or other equity interest or redeem, purchase or otherwise acquire any securities or obligations convertible into or exchangeable for any shares of its capital stock or other equity interest other than the payment of the special dividend; (3) grant any stock appreciation rights, restricted stock units or other equity-based compensation or grant any right to acquire any shares of its capital stock; (4) issue or commit to issue any additional shares of capital stock or sell, lease, transfer, mortgage, encumber or otherwise dispose of any capital stock in any PeninsulaFirst Federal subsidiary; or (5) enter into any agreement, understanding or arrangement with respect to the sale or voting of its capital stock;



•

sell, lease, transfer, mortgage, encumber or otherwise dispose of any of its properties or assets (other than to a subsidiary), except for the sale of loans and sales of investment securities in the ordinary course of business consistent with past practice to third parties who are not affiliates of Peninsula,First Federal, or as expressly required by contracts or agreements in force at the date of the Merger Agreement;



•

acquire direct or indirect control over any business or corporate entity, whether by stock purchase, merger, consolidation or otherwise, or make any other investment either by purchase of stock or securities, contributions to capital, property transfers or purchase of any property or assets of any other person, except in connection with a foreclosure of collateral or conveyance of such collateral in lieu of foreclosure taken in connection with collection of a loan in the ordinary course of business consistent with past practice and with respect to loans made to third parties who are not affiliates of Peninsula;First Federal;



•

except as required under applicable law or the terms of any PeninsulaFirst Federal benefit plan, (1) enter into, adopt or terminate any employee benefit plan, program or policy for the benefit or welfare




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of any current or former employee, officer, director or consultant, (2) amend any employee benefit plan, program or policy for the benefit or welfare of any current or former employee, officer, director or consultant in a manner that would result in any increase in cost, (3) increase the compensation or benefits payable to any employee, officer, director or consultant (other than any annual base compensation raises in the ordinary course of business consistent with past practice to employees other than senior executive officers of not more than 5% per year), (4) grant or accelerate the vesting of any equity-based awards for the benefit of any such




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individual, (5) enter into any new, or amend any existing, collective bargaining agreement or similar agreement, (6) provide any funding for any rabbi trust or similar arrangement or (7) hire, transfer, promote or terminate the employment of any employee who has a target annual compensation of $75,000 or more;

•

settle any claim, action or proceeding other than in the ordinary course of business consistent with past practice involving solely money damages where the settlement payments not covered by insurance do not exceed $100,000 individually or $200,000 in the aggregate; waive, compromise, assign, cancel or release any material rights or claims; or agree or consent to the issuance of any injunction, decree, order or judgment restricting or otherwise affecting its business or operations;



•

pay, discharge or satisfy any claims, liabilities or obligations, other than in the ordinary course of business and consistent with past practice;



•

make any change in accounting methods or systems of internal accounting controls (or the manner in which it accrues for liabilities), except as required by GAAP as concurred in by Peninsula'sFirst Federal's independent auditors, or revalue in any material respect any of its assets, including writing-off notes or accounts receivable, except as required by GAAP and in the ordinary course of business consistent with past practice;



•

make, change or revoke any tax election, change an annual tax accounting period, adopt or change any tax accounting method, file any amended tax return, enter into any closing agreement with respect to taxes, or settle any tax claim, audit, assessment or dispute or surrender any right to claim a refund of taxes;



•

adopt or implement any amendment to its articles of incorporation or any changes to its bylaws or comparable organizational documents;



•

materially restructure or materially change its investment securities portfolio or its gap position, through purchases, sales or otherwise, or the manner in which the portfolio is classified or reported, or invest in any mortgage-backed or mortgage related securities that would be considered "high-risk" securities under applicable regulatory pronouncements;



•

enter into, modify, amend or terminate any material contract, other than in the ordinary course of business consistent with past practice, provided that in no event will PeninsulaFirst Federal enter into, modify, amend or terminate certain types of contracts or any contract that calls for aggregate annual payments of $100,000 or more;



•

change in any material respect its credit policies and collateral eligibility requirements and standards;



•

fail to use reasonable best efforts to take any action that is required under an agreement with a regulatory authority or take any action that violates such an agreement;



•

except as required by applicable law, regulation or policies imposed by any governmental entity, enter into any new line of business or change in any material respect its lending, investment, underwriting, risk and asset liability management, interest rate or fee pricing with respect to depository accounts, hedging and other material banking and operating policies or practices,




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including policies and practices with respect to underwriting, pricing, originating, acquiring, selling, servicing, or buying or selling rights to service loans;





•

permit the construction of new structures or facilities upon, or purchase or lease any real property in respect of, any branch or other facility, or file any application or take any other action to establish, relocate or terminate the operation of any banking office;




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•

make, or commit to make, any capital expenditures in excess of $50,000 individually or $100,000 in the aggregate other than as set forth in Peninsula'sFirst Federal's capital expenditure budget as of the date of the Merger Agreement;



•

without previously notifying and consulting with Mackinac, and except to the extent approved by PeninsulaFirst Federal and committed to prior to the date of the Merger Agreement and disclosed to Mackinac, make or acquire any loan or issue a commitment (or renew or extend an existing commitment) for any loan relationship aggregating in excess of $1,000,000, or amend or modify in any material respect any existing loan relationship, that would result in total credit exposure to the applicable borrower, as calculated for applicable loan-to-one borrower regulatory limitations, in excess of $1,000,000;



•

take any action that is intended to, would or would be reasonably likely to result in any of the conditions to the completion of the Merger not being satisfied or prevent or materially delay the consummation of the transactions contemplated by the Merger Agreement, except as may be required by applicable laws;



•

take any action, or knowingly fail to take any action, that prevents or impedes, or could reasonably be expected to prevent or impede, the Merger from qualifying as a "reorganization" within the meaning of Section 368(a) of the Code; or



•

agree to, or make any commitment to, take or adopt any resolutions of Peninsula'sFirst Federal's board of directors in support of, any of the above prohibited actions; or



•

take any action that would or would be reasonably likely to result in Peninsula Merger-related closing expenses in excess of $300,000.actions.

        With respect to the actions above, Mackinac subsequently agreed not to enforce the above covenants to the extent such actions are ordinary course for the First Federal business. Mackinac has agreed to a more limited set of restrictions on its business prior to the completion of the Merger. Specifically, Mackinac has agreed that prior to the Effective Time of the Merger, except as expressly contemplated or permitted by the Merger Agreement or with the prior written consent of Peninsula,First Federal, Mackinac will not, and will not permit any of its subsidiaries to, subject to certain exceptions, undertake the following actions:

•

amend its articles of incorporation or bylaws or similar governing documents of any of its subsidiaries in a manner that would materially and adversely affect the economic benefits of the Merger to the holders of PeninsulaFirst Federal common stock or that would materially impede Mackinac's ability to consummate the Merger and the other transactions contemplated by the Merger Agreement;



•

take any action that is intended to, would or would be reasonably likely to result in any of the conditions to the completion of the Merger not being satisfied or prevent or materially delay the completion of the Merger and the other transactions contemplated by the Merger Agreement, except as may be required by applicable laws;



•

take any action, or knowingly fail to take any action, that prevents or impedes, or could reasonably be expected to prevent or impede, the Merger from qualifying as a "reorganization" within the meaning of Section 368(a) of the Code; or



•

agree to, make any commitment to, take or adopt any resolutions of Mackinac's board of directors in support of, any of the above prohibited actions.




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Regulatory Matters

        Mackinac and PeninsulaFirst Federal have agreed to use their respective reasonable best efforts to take, or cause to be taken, and assist and cooperate with the other party in taking, all actions that are necessary, proper or advisable to comply promptly with all legal requirements with respect to the Merger and the other transactions contemplated by the Merger Agreement, including obtaining any




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third-party consent or waiver that may be required, and to obtain, and assist and cooperate with the other party in obtaining, all actions, nonactions, permits, consents, authorizations, orders, clearances, waivers or approvals of any exemption by governmental entity required or advisable in connection with the Merger and the other transactions contemplated by the Merger Agreement. Mackinac and PeninsulaFirst Federal will use their respective reasonable best efforts to resolve any objections that may be asserted by any governmental entity with respect to the Merger Agreement or the Merger or the other transactions contemplated by the Merger Agreement. However, in no event will Mackinac or PFCMFNC be required, and will PeninsulaFirst Federal and its subsidiaries be permitted (without Mackinac's written consent), to take, or commit to take, any action or agree to any condition or restriction if such action, condition or restriction would have, or would be reasonably likely to have, individually or in the aggregate, a material adverse effect in respect of Mackinac or PeninsulaFirst Federal and its subsidiaries, taken as a whole (measured on a scale relative to PeninsulaFirst Federal and its subsidiaries, taken as a whole), provided that PeninsulaFirst Federal and its subsidiaries will take such action if requested by Mackinac and if such condition or restriction is binding on PeninsulaFirst Federal and its subsidiaries only in the event the Merger is completed. Mackinac filed applications seeking regulatory approval to complete the transactions contemplated by the Merger Agreement with the FRB, the FDIC and the DIFS.

Tax Matters

        Mackinac and PeninsulaFirst Federal have agreed to use their respective reasonable best efforts to cause the Merger to qualify as a "reorganization" within the meaning of Section 368(a) of the Code, and to not knowingly take any action that could reasonably be expected to prevent the Merger from so qualifying.

Employee Matters

        The Merger Agreement provides that, for the 12-month period immediately after the completion of the Merger, Mackinac will provide to employees of PeninsulaFirst Federal and its subsidiaries (as a group) who are actively employed as of the completion of the Merger employee benefits and compensation opportunities that, in the aggregate, are substantially comparable to the employee benefits and compensation opportunities generally made available to similarly situated employees of Mackinac (provided that, in no event will any such employee be eligible to participate in any closed or frozen plan of Mackinac or its subsidiaries, and until such time as Mackinac shall cause such employees to participate in the employee benefit plans and receive compensation opportunities that are made available to similarly situated employees of Mackinac). The service of PeninsulaFirst Federal employees prior to the completion of the Merger will, to the same extent such service is recognized immediately prior to the completion of the Merger under a corresponding PeninsulaFirst Federal benefit plan in which the applicable employee is eligible to participate immediately prior to the completion of the Merger, be treated as service with Mackinac for purposes of eligibility, participation, vesting and benefit accrual under Mackinac's employee benefit plans, subject to customary exclusions.

D&O Indemnification and Insurance

        The Merger Agreement provides that after the completion of the Merger, Mackinac and the surviving entity in the Merger will indemnify and hold harmless all present and former directors and officers of PeninsulaFirst Federal against all losses, claims, damages, costs, expenses (including attorneys' fees), liabilities or judgments or amounts that are paid in settlement of or in connection with any claim, action, suit, proceeding, investigation or other legal proceeding, whether civil, criminal, administrative




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or investigative or investigation, arising out of the fact that such person is or was a director or officer of PeninsulaFirst Federal if the claim pertains to any matter of fact arising, existing or occurring at or before the Effective Time of the Merger, to the fullest extent permitted by applicable law and Peninsula'sFirst Federal's governing documents.




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        The Merger Agreement requires Mackinac, or the surviving entity in the Merger, to use its reasonable best efforts to maintain for a period of six years after completion of the Merger Peninsula'sFirst Federal's existing directors' and officers' liability insurance policy, or policies of at least the same coverage and amounts and containing terms and conditions that are substantially no less advantageous than the current policy (or, with the consent of PeninsulaFirst Federal prior to the completion of the Merger, any other policy), with respect to claims arising from facts or events that occurred prior to the completion of the Merger, and covering such individuals who are currently covered by such insurance. However, neither Mackinac nor the surviving entity in the Merger is required to incur annual premium payments greater than 250% of Peninsula'sFirst Federal's current annual directors' and officers' liability insurance premium. In lieu of the insurance described in the preceding sentence, prior to the completion of the Merger, Mackinac or Peninsula,First Federal, with Mackinac's consent, may obtain a six-year "tail" prepaid policy providing coverage equivalent to such insurance.

Existing Business Relationships

        PeninsulaFirst Federal has agreed to use its good faith efforts to ensure that its officers and directors continue their banking relationships with PeninsulaFirst Federal and, following the completion of the Merger, with Mackinac and its affiliates, to the same extent as existed on the date of the Merger Agreement.

Loan Documentation

        The Merger Agreement requires PeninsulaFirst Federal to use all commercially reasonable efforts to fully correct, remedy and otherwise resolve any fact or circumstance known to PeninsulaFirst Federal that has resulted, or could reasonably be expected to result, in any loan payable to PeninsulaFirst Federal that (i) is not evidenced by proper loan documentation, (ii) does not represent the valid and legally binding obligation of the loan obligor or (iii) is not enforceable against the loan obligor in accordance with its terms, such that the applicable loan or loan documentation fully complies with the representations and warranties made by PeninsulaFirst Federal with respect to loans payable to it or its subsidiaries.

Certain Additional Covenants

        The Merger Agreement also contains additional covenants, including covenants relating to the filing of this joint proxy statement/prospectus, obtaining required consents, the listing of the shares of Mackinac common stock to be issued in the Merger on the NASDAQ, the provision of a PeninsulaFirst Federal closing date balance sheet and schedule reporting charge-offs by Peninsula,First Federal three (3) days prior to Closing, access to information of the other company, public announcements with respect to the transactions contemplated by the Merger Agreement, provisions for the integration of Peninsula'sFirst Federal's electronic data into Mackinac's systems, the coordination and implementation of the post-merger operating and integration plans, the execution and delivery of claims letters by Peninsula,First Federal, actions causing the transactions contemplated by the Merger Agreement to be subject to takeover provisions, attendance by Mackinac at all committee meetingsweekly discussions between a senior officer of Peninsula Bank,First Federal of Northern Michigan and officers of mBank regarding the establishmentdevelopment, coordination and implementation of a trust for the benefitpost-Merger operating and integration plans of Peninsula shareholders,mBank, and the provision of notice to each party on the occurrence of certain events related to the Merger, such as any incidence of Merger-related litigation against either partythose that are reasonably likely to have a material adverse effect, or the breach, by either party, of the representations and warranties contained in the Merger Agreement.




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Peninsula First Federal Shareholder Meeting and Recommendation of Peninsula'sFirst Federal's Board of Directors


        PeninsulaFirst Federal has agreed to hold a meeting of its shareholders for the purpose of voting upon approval of the Merger Agreement as promptly as practicable. PeninsulaFirst Federal will use its reasonable best efforts to obtain from its shareholders the requisite shareholder approval of the Merger Agreement, including by recommending that its shareholders approve and adopt the Merger Agreement and the




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transactions contemplated thereby (subject to the provisions governing making a change in Peninsula'sFirst Federal's recommendation as described below).

        The board of directors of PeninsulaFirst Federal has agreed to recommend that Peninsula'sFirst Federal's shareholders vote in favor of approval of the Merger Agreement and to not withdraw or modify such recommendation in any manner adverse to Mackinac (which we refer to as a change in Peninsula'sFirst Federal's recommendation), except that Peninsula'sFirst Federal's board of directors may effect a change in Peninsula'sFirst Federal's recommendation if and only to the extent that:

•

PeninsulaFirst Federal has received an unsolicited bona fide "acquisition proposal" (as described below) that constitutes a "superior proposal" (as described below), and Peninsula'sFirst Federal's board of directors determines in good faith, after receiving the advice of outside legal counsel, that Peninsula'sFirst Federal's board of directors would be in violation of its fiduciary duties under applicable laws if it failed to effect a change in Peninsula'sFirst Federal's recommendation;



•

has given at least five business days' written notice to Mackinac of its intention to effect a change in or withdraw Peninsula'sFirst Federal's recommendation absent modification of the terms and conditions of the Merger Agreement;



•

if applicable, after giving effect to any amendments to the Merger Agreement proposed by Mackinac, such acquisition proposal continues to constitute a superior proposal; and



•

PeninsulaFirst Federal complies with its non-solicitation obligations described below in "—Agreement Not to Solicit Other Offers" and its obligations with respect to calling shareholder meetings and acquisition proposals described in this section.

        In the event of any material revisions to the superior proposal, PeninsulaFirst Federal will be required to deliver a new written notice to Mackinac five business days in advance of its intention to effect a change in Peninsula'sFirst Federal's recommendation and to comply with the other requirements described above.

        The Merger Agreement requires PeninsulaFirst Federal to submit the Merger Agreement to a shareholder vote even if Peninsula'sFirst Federal's board of directors effects a change in Peninsula'sFirst Federal's recommendation.

        If an acquisition proposal has been made known to the PeninsulaFirst Federal shareholders and thereafter the PeninsulaFirst Federal shareholders do not approve the Merger at the PeninsulaFirst Federal shareholder meeting, if during the 10 business-day period following the failed shareholder vote Mackinac proposes revised terms and conditions of the Merger Agreement that are no less favorable from a financial point of view to PeninsulaFirst Federal shareholders than the acquisition proposal, PeninsulaFirst Federal is obligated to resubmit the revised Merger Agreement to its shareholders at a second shareholder meeting (and to comply with the other requirements described above as if such second shareholder meeting was treated as the first shareholder meeting), except that PeninsulaFirst Federal will not be obligated to submit the revised Merger Agreement to its shareholders at a second shareholder meeting if:

•

Peninsula'sFirst Federal's board of directors effected a change in Peninsula'sFirst Federal's recommendation prior to the first shareholder meeting;



•

assuming the Merger Agreement was amended to reflect all adjustments to the terms and conditions proposed by Mackinac during the 10 business-day period following the failed shareholder vote at the first shareholder meeting, the acquisition proposal would continue to constitute a superior proposal; and






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•

PeninsulaFirst Federal complies with its non-solicitation obligations described below in "—Agreement Not to Solicit Other Offers" and its obligations with respect to calling shareholder meetings and acquisition proposals described in this section.




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        For purposes of the Merger Agreement:

•

an "acquisition proposal" means any inquiries or proposals regarding any merger, share exchange, consolidation, sale of assets, sale of shares of capital stock (including, by way of a tender offer) or similar transactions involving PeninsulaFirst Federal or any of its subsidiaries that, if consummated, would constitute an "alternative transaction" (as described below);



•

an "alternative transaction" means (1) anya transaction pursuant to which any person (or group of persons) other than Mackinac or its affiliates, directly or indirectly, acquires or would acquire more than 20% of the outstanding shares of PeninsulaFirst Federal common stock or outstanding voting power of Peninsula,First Federal, or more than 20% of the outstanding shares or voting power of any other series or class of capital stock of PeninsulaFirst Federal that would be entitled to a class or series vote with respect to the merger, whether from Peninsula,First Federal, or pursuant to a tender offer or exchange offer or otherwise, (2) a merger, share exchange, consolidation or other business combination involving PeninsulaFirst Federal (other than the Merger), (3) any transaction pursuant to which any person (or group of persons) other than Mackinac or its affiliates acquires or would acquire control of assets (including for this purpose the outstanding equity securities of any PeninsulaFirst Federal subsidiaries and securities of the entity surviving any merger or business combination involving any PeninsulaFirst Federal subsidiary) of PeninsulaFirst Federal or any of its subsidiaries representing more than 20% of the fair market value of all the assets, deposits, net revenues or net income of PeninsulaFirst Federal and its subsidiaries, taken as a whole, immediately prior to such transaction or (4) any other consolidation, business combination, recapitalization or similar transaction involving PeninsulaFirst Federal or any of its subsidiaries, other than the transactions contemplated by the Merger Agreement, as a result of which the holders of shares of PeninsulaFirst Federal common stock immediately prior to such transaction do not, in the aggregate, own at least 80% of each of the outstanding shares of PeninsulaFirst Federal common stock and the outstanding voting power of the surviving or resulting entity in such transaction immediately following the completion of the transaction, in substantially the same proportion as such holders held the shares of PeninsulaFirst Federal common stock immediately prior to the completion of such transaction; and



•

"superior proposal" means a bona fide, unsolicited written acquisition proposal that (1) is obtained not in breach of the Mergerthis Agreement for all of the outstanding shares of Peninsula common stock,First Federal Common Stock, on terms that Peninsula'sthe board of directors of First Federal determines in its good faith judgment (after consultation with outside counsel and a financial advisor and after taking into account all the terms and conditions of the acquisition proposalAcquisition Proposal and the Mergerthis Agreement (including any proposal by Mackinac to adjust the terms and conditions of the Mergerthis Agreement), including any break-up fees, expense reimbursement provisions, conditions to and expected timing and risks of completion,consummation, the form of consideration offered and the ability of the party making such proposal to obtain financing for such acquisition proposal,Acquisition Proposal, and after taking into account all other legal, financial, strategic, regulatory and other aspects of such proposal, including the identity of the party making such proposal, and the Mergerthis Agreement) are more favorable from a financial point of view to Peninsulaits shareholders than the Merger, (2) is reasonably likely to receive all necessary regulatory approvals and be completedconsummated and (3) does not contain any condition to closing or similar contingency related to the ability of the party making such proposal to obtain financing.




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Agreement Not to Solicit Other Offers


        PeninsulaFirst Federal also has agreed that it will not, and will cause each of its subsidiaries and its and their respective officers, directors, employees, agents and representatives not to, directly or indirectly:

•

solicit, initiate, encourage or facilitate (including by furnishing information), or take any other action designed to facilitate, any inquiries or proposals regarding any merger, share exchange,




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consolidation, sale of assets, sale of shares of capital stock (including, by way of a tender offer) or similar transactions involving PeninsulaFirst Federal or any of its subsidiaries that, if consummated, would constitute an alternative transaction;



•

participate in any discussions or negotiations regarding an alternative transaction or acquisition proposal; or



•

enter into any agreement regarding any alternative transaction or acquisition proposal.

        However, if prior to the approval of the Merger Agreement by PeninsulaFirst Federal shareholders, (1) PeninsulaFirst Federal receives a superior proposal that was not solicited by PeninsulaFirst Federal and that did not otherwise result from a breach of the Merger Agreement, (2) Peninsula'sFirst Federal's board of directors determines in its good faith judgment (after receiving the advice of outside counsel) that a failure to participate in discussions or negotiations with, or provide information to, the person making the superior proposal would violate Peninsula'sFirst Federal's board of directors' fiduciary duties under applicable laws and (3) PeninsulaFirst Federal gives at least five business days' notice to Mackinac, Peninsula'sFirst Federal's board of directors may:

•

furnish information with respect to it and its subsidiaries to the party making the superior proposal pursuant to a customary confidentiality agreement containing terms no less restrictive to the party making the superior proposal than the terms contained in Peninsula'sFirst Federal's confidentiality agreement with Mackinac; provided that a copy of all such written information is simultaneously provided to Mackinac, and



•

participate in discussions regarding the superior proposal.

        PeninsulaFirst Federal has also agreed to provide Mackinac written notice within one business day following the receipt of any acquisition proposal, material modification to any acquisition proposal or request for nonpublic information or access to Peninsula'sFirst Federal's or its subsidiaries' properties, books or records by any person that has made or, to Peninsula'sFirst Federal's knowledge, may be considering making, an acquisition proposal. The notice will be made orally and in writing and will indicate the identity of the person making the acquisition proposal or requesting nonpublic information or access and the material terms of the acquisition proposal or modification to an acquisition proposal.

        PeninsulaFirst Federal and its subsidiaries have agreed to (1) immediately cease and cause to be terminated any existing discussions or negotiations conducted with any third party with respect to any alternative transaction or acquisition proposal, (2) enforce and not release any third party from the confidentiality and standstill provisions of any agreement to which PeninsulaFirst Federal or its subsidiaries is a party and (3) immediately terminate any approval previously given under any such provisions authorizing any person to make an acquisition proposal.


Conditions to Complete the Merger


        Mackinac's and Peninsula'sFirst Federal's respective obligations to complete the Merger are subject to the fulfillment or waiver of the following conditions:

•

the approval of the Merger Agreement by Peninsula'sFirst Federal's common shareholders;



•

the approval of the issuance of Mackinac common stock by Mackinac's common shareholders;



•

the receipt of required regulatory approvals without a condition or restriction that would have, or would be reasonably likely to have, individually or in the aggregate, a material adverse effect in respect of Mackinac, and the expiration or termination of all related statutory waiting periods;






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•

the absence of any order, injunction, decree or judgment by any court or governmental body or agency of competent jurisdiction or other legal restraint or prohibition preventing the completion of the Merger or the other transactions contemplated by the Merger Agreement, and no statute, rule, regulation, order, injunction or decree shall have been enacted, entered,




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promulgated or enforced by any governmental entity prohibiting or making illegal the completion of the Merger;



•

the listing of the Mackinac common stock to be issued in the Merger on the NASDAQ, subject to official notice of issuance;



•

the effectiveness of the registration statement of which this joint proxy statement/prospectus is a part with respect to the Mackinac common stock to be issued in the Merger under the Exchange Act, and the absence of any stop order or proceedings threatened by the SEC for that purpose;



•

the accuracy of the representations and warranties of each other party in the Merger Agreement as of the closing date of the Merger, subject to the materiality standards provided in the Merger Agreement and the performance of the other party in all material respects of all obligations required to be performed by it at or prior to the Effective Time of the Merger under the Merger Agreement (and the receipt by each party of certificates from the other party to such effects);



•

receipt by PeninsulaFirst Federal of an opinion of its financial adviser confirmingconfirm the fairness of the merger consideration (which condition has been satisfied);



•

receipt by each of Mackinac and PeninsulaFirst Federal of an opinion of legal counsel as to certain tax matters; and



•

adjusted Peninsula shareholders' equitythe termination of not less than $10,500,000, as determinedcertain change in accordance with GAAP, measured as of the last business day priorcontrol agreements to the closing date.which First Federal is a party.

        Mackinac's obligations to complete the Merger are further subject to the receipt of a closing date balance sheet from PeninsulaFirst Federal setting forth the assets, liabilities and tangible common equity of PeninsulaFirst Federal and its subsidiaries as of the close of business on the last business day of the month preceding the month in which the Merger is completed, as well as an executed copy of an indemnification agreement signed on behalf of the shareholders' trust.completed.

        Neither PeninsulaFirst Federal nor Mackinac can provide assurance as to when or if all of the conditions to the Merger can or will be satisfied or waived by the appropriate party. As of the date of this joint proxy statement/prospectus, neither PeninsulaFirst Federal nor Mackinac has reason to believe that any of these conditions will not be satisfied.


Termination of the Merger Agreement


        The Merger Agreement can be terminated at any time prior to completion of the Merger by mutual consent, or by either party in the following circumstances:

•

By mutual written consent of First Federal and Mackinac;



•

the Merger has not been completed by the August 16, 2018 (the"End DateDate"), (if the failure to complete the Merger by that date is not caused by the terminating party's breach of the Merger Agreement);



•

any required regulatory approval has been denied by the relevant governmental entity and this denial has become final and nonappealable, or a governmental entity has issued a final, nonappealable injunction permanently enjoining or otherwise prohibiting the completionconsummation of the Merger or the other transactions contemplated by the Merger Agreement;



•

there is a breach of the Merger Agreement by the other party that would cause the failure of the closing conditions described above, and the breach is not cured prior to the earlier of March 18, 2015August 16, 2018 and 30 business days following written notice of the breach; or



•

First Federal shareholders fail to approve the Merger Agreement at the First Federal Special Meeting, and a No-Match Event shall have occurred, or the Merger Agreement is resubmitted




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•

Peninsula shareholders fail

to approve the Merger Agreement at the Special Meeting, and Peninsula is not obligated to resubmit the Merger Agreement to its shareholders for approval at a second shareholder meeting as described above in "—Peninsula Shareholder Meeting and Recommendation of Peninsula's Board of Directors," or the Merger Agreement is resubmitted to PeninsulaFirst Federal shareholders at a second shareholder meeting and the PeninsulaFirst Federal shareholders fail to approve the Merger Agreement at such shareholder meeting.

        First Federal may terminate the Merger Agreement if both of the following conditions are satisfied:

•

the number obtained by dividing the average closing price by $15.9472 is less than 0.80; and



•

the number obtained by dividing the average closing price by $15.9472 is less than the number obtained by (x) dividing the final index price by the initial index price (the"Index Ratio") and then multiplying the index ratio by 0.20.

        In addition, Mackinac may terminate the Merger Agreement in the following circumstances:

•

PeninsulaFirst Federal shareholders fail to approve the Merger Agreement at the shareholder meetingSpecial Meeting (regardless of whether or not PeninsulaFirst Federal is obligated to resubmit the Merger Agreement to its shareholders for approval at a second shareholder meeting as described abovebelow in "—Peninsula"The Merger Agreement—First Federal Shareholder Meeting and Recommendation of Peninsula'sFirst Federal's Board of Directors");



•

Peninsula'sFirst Federal's board of directors fails to recommend to the PeninsulaFirst Federal shareholders that they approve the Merger Agreement or withdraws, modifies or qualifies such recommendation in a manner adverse to Mackinac;



•

Peninsula'sFirst Federal's board of directors fails to reaffirm its recommendation of the Merger within 10 business days after the public announcement of an acquisition proposal (or material modification thereto);



•

Peninsula'sFirst Federal's board of directors breaches its non-solicitation obligations described abovebelow in "—"The Merger Agreement—Agreement Not to Solicit Other Offers" or its obligations with respect to calling shareholder meetings and alternate acquisition proposals described abovebelow in "—Peninsula"The Merger Agreement—First Federal Shareholder Meeting and Recommendation of Peninsula'sFirst Federal's Board of Directors"; or



•

Peninsula'sFirst Federal's board of directors approves, recommends or endorses, or proposes or resolves to recommend or endorse, an alternative transaction (as described below in "The Merger Agreement—First Federal Shareholder Meeting and Recommendation of First Federal's Board of Directors") or acquisition proposal.

Peninsula may terminate the Merger Agreement if both of the following conditions are satisfied:

•

the number obtained by dividing the average closing price by $13.45 is less than 0.85; and



•

the number obtained by dividing the average closing price by $13.45 is less than the number obtained by (x) dividing the final index price by the initial index price (the"Index Ratio") and then multiplying the index ratio by 0.85.

In such event, PeninsulaHowever, First Federal must provide written notice to Mackinac of such election to terminate, and the election must be made within two business days after the determination date, which is the fourth business day immediately prior to the closing date. Mackinac may, within one business day, elect to increase the per share cash consideration in an amount equal to the amount by which the value of Mackinac's common shares failed to meet the condition set forth above, in which case Peninsula may not terminate pursuant to this condition.


Effect of Termination


        If the Merger Agreement is terminated, it will become void, except that (1) both Mackinac and PeninsulaFirst Federal will remain liable for any willful and material breach of the Merger Agreement and (2) designated provisions of the Merger Agreement will survive the termination, including those relating to payment of fees and the confidential treatment of information.




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Termination Fee


        PeninsulaFirst Federal will pay Mackinac a $0.5$1.5 million termination fee in the following circumstances:

•

if the Merger Agreement is terminated by Mackinac in the following circumstances:



•

Peninsula'sFirst Federal's board of directors fails to recommend to the PeninsulaFirst Federal shareholders that they approve the Merger Agreement or withdraws, modifies or qualifies such recommendation in a manner adverse to Mackinac;






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•

Peninsula'sFirst Federal's board of directors fails to reaffirm its recommendation of the Merger within 10 business days after the public announcement of an acquisition proposal (or material modification thereto);



•

Peninsula'sFirst Federal's board of directors breaches its non-solicitation obligations described above in "—Agreement Not to Solicit Other Offers" or its obligations with respect to calling shareholder meetings and acquisition proposals described above in "—PeninsulaFirst Federal Shareholder Meeting and Recommendation of Peninsula'sFirst Federal's Board of Directors";



•

Peninsula'sFirst Federal's board of directors approves, recommends or endorses, or proposes or resolves to recommend or endorse, an alternative transaction or acquisition proposal;



•

PeninsulaFirst Federal shareholders fail to approve the Merger Agreement at the shareholder meeting and Peninsula completes or agrees to an alternative transaction within 12 months of the date of such shareholder meeting; ormeeting.



•

an acquisition proposal or intent to make an acquisition proposal is made known to PeninsulaFirst Federal or its shareholders after the date of the Merger Agreement, there is an uncured breach by PeninsulaFirst Federal that would cause the failure of the closing conditions described in the penultimate bullet of "—Conditions to Complete the Merger"; and PeninsulaFirst Federal completes or agrees to an alternative transaction (for purposes of determining whether a termination fee is payable, substituting 40% in place of reference to 20% and 60% in place of reference to 80% in the definition of an "alternative transaction") within 12 months of the date the Merger Agreement is terminated.



•

if the Merger Agreement is terminated by Mackinac or PeninsulaFirst Federal in the following circumstances:



•

an acquisition proposal or intent to make an acquisition proposal is made known to PeninsulaFirst Federal or its shareholders after the date of the Merger Agreement; thereafter the Merger Agreement is terminated by Mackinac or PeninsulaFirst Federal because the Merger has not been completed by the end date and Peninsula'sFirst Federal's shareholders have not approved the Merger Agreement and PeninsulaFirst Federal completes or agrees to an alternative transaction (for purposes of determining whether a termination fee is payable, substituting 40% in place of reference to 20% and 60% in place of reference to 80% in the definition of an "alternative transaction") or enters into any agreement related to an alternative transaction within 12 months of the date the Merger Agreement is terminated;



•

PeninsulaFirst Federal shareholders fail to approve the Merger Agreement at the shareholder meeting, and PeninsulaFirst Federal is not obligated to resubmit the Merger Agreement to its shareholders for approval at a second shareholder meeting as described above in "—PeninsulaFirst Federal Shareholder Meeting and Recommendation of Peninsula'sFirst Federal's Board of Directors"; or



•

the Merger Agreement is resubmitted to PeninsulaFirst Federal shareholders at a second shareholder meeting and the PeninsulaFirst Federal shareholders fail to approve the Merger Agreement at such shareholder meeting and PeninsulaFirst Federal completes or agrees to an alternative transaction within 12 months of the date of such shareholder meeting.




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Expenses and Fees


        Except as set forth above, each of Mackinac and PeninsulaFirst Federal will be responsible for all costs and expenses incurred by it in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement.


Amendment, Waiver and Extension of the Merger Agreement


        Subject to applicable law, Mackinac and PeninsulaFirst Federal may amend the Merger Agreement by written agreement. However, after any approval of the Merger Agreement by Peninsula'sFirst Federal's shareholders, there




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may not be, without further approval of Peninsula'sFirst Federal's shareholders, any amendment of the Merger Agreement that requires further approval under applicable law.

        At any time prior to the Effective Time of the Merger, each party may, to the extent legally allowed, and by written notice, extend the time for the performance of any of the obligations or other acts of the other party; waive any inaccuracies in the representations and warranties of the other party contained in the Merger Agreement or in any document delivered pursuant to the Merger Agreement; and waive compliance by the other party with any of the agreements and conditions contained in the Merger Agreement.


Voting Agreements


        In connection with entering into the Merger Agreement, Mackinac entered into a voting agreement with each of the directors and certain shareholders of Peninsula,First Federal, which we refer to collectively as the voting agreements. The following summary of the voting agreements is subject to, and qualified in its entirety by reference to, the form of voting agreement attached to this joint proxy statement/prospectus as Exhibit A to Annex A.

        Pursuant to the voting agreements, each shareholder party to a voting agreement agreed to vote its shares of PeninsulaFirst Federal common stock:

•

in favor of adoption and approval of the Merger Agreement;



•

in favor of each of the other actions contemplated by the Merger Agreement;



•

in favor of any action in furtherance of any of the foregoing;



•

against any action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of PeninsulaFirst Federal in the Merger Agreement or of a shareholder contained in the voting agreement; and



•

against any acquisition proposal or any other action, agreement or transaction that is intended, or could reasonably be expected, to impede, interfere or be inconsistent with, delay, postpone, discourage or materially and adversely affect consummation of the transactions contemplated by the Merger Agreement or the voting agreement.

        The voting agreements provide that each shareholder party to a voting agreement will not, other than pursuant to the Merger, directly or indirectly sell, transfer, pledge, assign or otherwise dispose of, or enter into any contract option, commitment or other arrangement or understanding with respect to the sale, transfer, pledge, assignment or other disposition of, any of the shares. However, the following transfers may be permitted: transfers by will or operation of law, transfers pursuant to any pledge agreement, transfers in connection with estate and tax planning purposes, and such transfers as Mackinac may otherwise permit in its sole discretion.

        The voting agreements may be terminated at any time prior to completion of the Merger by the written consent of the parties to the voting agreement, and will automatically terminate upon the




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earlier of the Effective Time of the Merger and the termination of the Merger Agreement in accordance with its terms.

        As of , 2014,April 2, 2018, the record date for the Special Meeting, the shareholders that are party to the voting agreements beneficially own an aggregate of approximately 349,674 outstanding shares of PeninsulaFirst Federal common stock, which represent approximately %9.38% of the shares of PeninsulaFirst Federal common stock entitled to vote at the Special Meeting.




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ACCOUNTING TREATMENT


        The Merger will be accounted for as an acquisition by Mackinac using the acquisition method of accounting. Accordingly, the assets (including identifiable intangible assets) and liabilities (including executory contracts and other commitments) of PeninsulaFirst Federal as of the Effective Time of the Merger will be recorded at their respective fair values and added to those of Mackinac. Any excess of purchase price over the fair values is recorded as goodwill. Consolidated financial statements of Mackinac issued after the Merger would reflect these fair values and would not be restated retroactively to reflect the historical financial position or results of operations of Peninsula.First Federal.




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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER


        The following is a general discussion of the anticipated material U.S. federal income tax consequences of the Merger to "U.S. holders" (as defined below) of PeninsulaFirst Federal common stock who exchange shares of PeninsulaFirst Federal common stock for shares of Mackinac common stock, cash, or a combination of shares of Mackinac common stock and cash pursuant to the Merger.

        For purposes of this discussion, the term "U.S. holder" means a beneficial owner of PeninsulaFirst Federal common stock that is for U.S. federal income tax purposes (1) an individual citizen or resident of the United States, (2) a corporation, or entity treated as a corporation, created or organized in or under the laws of the United States or any state or political subdivision thereof, (3) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) such trust has made a valid election to be treated as a U.S. person for U.S. federal income tax purposes or (4) an estate, the income of which is includible in gross income for U.S. federal income tax purposes, regardless of its source.

        The following discussion is limited to U.S. holders of shares of PeninsulaFirst Federal common stock who hold such shares as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). Further, this discussion does not purport to consider all aspects of U.S. federal income taxation that might be relevant to U.S. holders in light of their particular circumstances and does not apply to U.S. holders subject to special treatment under the U.S. federal income tax laws (such as, for example, dealers or brokers in securities, commodities or foreign currencies, traders in securities that elect to apply a mark-to-market method of accounting, banks and certain other financial institutions, insurance companies, mutual funds, tax-exempt organizations, holders liable for the alternative minimum tax, partnerships or other pass-through entities or investors in partnerships or such other pass-through entities, regulated investment companies, real estate investment trusts, controlled foreign corporations, passive foreign investment companies, former citizens or residents of the United States, U.S. expatriates, holders whose functional currency is not the U.S. dollar, holders who hold shares of PeninsulaFirst Federal common stock as part of a hedge, straddle, constructive sale or conversion transaction or other integrated investment, persons who are not U.S. holders, holders who acquired PeninsulaFirst Federal common stock pursuant to the exercise of employee stock options, through a tax qualified retirement plan or otherwise as compensation, or holders who exercise appraisal rights).

        The U.S. federal income tax consequences to a partner in an entity or arrangement treated as a partnership for U.S. federal income tax purposes that holds PeninsulaFirst Federal common stock generally will depend on the status of the partner and the activities of the partnership. Partnerships and partners in a partnership holding PeninsulaFirst Federal common stock should consult their own tax advisors.

        This discussion is based upon the Code, its legislative history, the U.S. Treasury regulations promulgated thereunder and judicial and administrative authorities, rulings and decisions, all as in effect as of the date of this joint proxy statement/prospectus. These authorities may change, possibly with retroactive effect, and any such change could affect the accuracy of the statements and conclusions set forth in this discussion. This discussion does not address any tax consequences arising under the




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unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010, any U.S. federal estate or gift tax consequences, or any state, local or foreign tax consequences, nor does it address any U.S. federal tax considerations other than those pertaining to the U.S. federal income tax.

        The parties intend for the Merger to qualify as a reorganization within the meaning of Section 368(a) of the Code for U.S. federal income tax purposes. It is a condition to the obligation of Mackinac to complete the Merger that Mackinac receive an opinion from Honigman Miller Schwartz and Cohn LLP, dated the date the Merger is completed, substantially to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code. It is a condition to the




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obligation of PeninsulaFirst Federal to complete the Merger that PeninsulaFirst Federal receive an opinion from GodfreyShumaker, Loop & Kahn, S.C.,Kendrick, LLP, dated the date the Merger is completed, substantially to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code. In addition, in connection with the filing of the registration statement of which this document is a part, Honigman Miller Schwartz and Cohn LLP has delivered an opinion to Mackinac to the same effect as the opinions described above. These opinions will be based on assumptions, representations, warranties and covenants, including those contained in the merger agreement and in tax representation letters provided by Mackinac and Peninsula.First Federal. The accuracy of such assumptions, representations and warranties, and compliance with such covenants, could affect the conclusions set forth in such opinions. The opinions described above will not be binding on the Internal Revenue Service, which we refer to as the IRS. Mackinac and PeninsulaFirst Federal have not sought and will not seek any ruling from the IRS regarding any matters relating to the Merger and, as a result, there can be no assurance that the IRS will not assert, or that a court would not sustain, a position contrary to any of the conclusions set forth below. Accordingly, each PeninsulaFirst Federal shareholder should consult its tax advisor with respect to the particular tax consequences of the merger to such holder. In addition, because a Peninsula shareholder may receive a mix of cash and stock despite having made a cash election or stock election, it will not be possible for holders of Peninsula common stock to determine the specific tax consequences of the merger to them at the time of making the election.

        Holders of PeninsulaFirst Federal common stock will also receive a special dividend under the Merger Agreement. The tax treatment of the special dividend is unclear. Mackinac and PeninsulaFirst Federal intend to report the special dividend as additional merger considerationa distribution with respect to First Federal common stock for U.S. federal income tax purposes. It is possible, however, that the IRS may take a contrary position, and treatto the extent the IRS were to prevail, the amount paid as the special dividend would be treated as additional cash received in connection with the merger, and not treated as a distribution with respect to Peninsula common stock for U.S. federal income tax purposes. U.S. holders should consult their tax advisors for the potential U.S. federal income tax consequences to them if the special dividend were instead treated as a distribution with respect to Peninsula common stock and not as additional merger consideration.

Tax Consequences of the Merger Generally to U.S. Holders of PeninsulaFirst Federal Common Stock

        If the Merger is treated as a "reorganization" within the meaning of Section 368(a) of the Code, the tax consequences are as follows:

•

Gain or loss will be recognized by those U.S. holders receiving solely cash in exchange for shares of Peninsula common stock pursuant to the Merger, in an amount equal to the difference between the amount of cash received by such holder and such holder's cost basis in such holder's shares of Peninsula common stock.



•

No gain or loss will be recognized by thosea U.S. holdersholder receiving solely shares of Mackinac common stock in exchange for shares of PeninsulaFirst Federal common stock (except with respect to any cash received instead of fractional shares of Mackinac common stock, as discussed below in the section entitled "Cash Received Instead of a Fractional Share of Mackinac Common Stock").






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•

Gain (but not loss) by U.S. holders who receive shares of Mackinac common stock (including fractional shares of Mackinac common stock, if any, deemed to be received and exchanged as discussed below in the section entitled "Cash Received Instead of a Fractional Share of Mackinac Common Stock") and cash in exchange for shares of PeninsulaFirst Federal common stock pursuant to the Merger (other than any cash received instead of fractional shares of Mackinac common stock, as discussed below in the section entitled "Cash Received Instead of a Fractional Share of Mackinac Common Stock"), in an amount equal to the lesser of (1) the sum of the amount of cash (other than any cash received instead of a fractional share of Mackinac common stock) and the fair market value of the Mackinac common stock received, minus the adjusted tax basis of the PeninsulaFirst Federal common stock surrendered in exchange therefor and (2) the amount of cash received by the holder (other than any cash received instead of a fractional share of Mackinac common stock).



•

The aggregate tax basis of the Mackinac common stock received by a U.S. holder in the Merger (including any fractional shares of Mackinac common stock, if any deemed received and exchanged for cash as discussed below in the section entitled "Cash Received Instead of a Fractional Share of Mackinac Common Stock") will be equal to the aggregate adjusted tax basis of the shares of PeninsulaFirst Federal common stock surrendered, reduced by the amount of cash received by the holder in the Merger (excluding any cash received in lieu of a fractional share of




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Mackinac common stock) and increased by the amount of gain, if any, recognized by the holder (excluding any gain or loss resulting from the deemed receipt and exchange of fractional shares of Mackinac common stock).



•

The holding period of the Mackinac common stock received by a U.S. holder in the Merger (including any fractional share of Mackinac common stock, if any, deemed received and exchanged for cash as discussed below in the section entitled "Cash Received Instead of a Fractional Share of Mackinac Common Stock") will include the holding period of the PeninsulaFirst Federal common stock surrendered.

        If a U.S. holder of PeninsulaFirst Federal common stock acquired different blocks of PeninsulaFirst Federal common stock at different times or different prices, any gain or loss will be determined separately with respect to each block of PeninsulaFirst Federal common stock and such U.S. holder's bases and holding periods in their shares of Mackinac common stock may be determined with reference to each block of PeninsulaFirst Federal common stock. Any such holders should consult their tax advisors regarding the manner in which cash and Mackinac common stock received in the Merger should be allocated among different blocks of PeninsulaFirst Federal common stock and regarding their bases and holding periods in the particular shares of Mackinac common stock received in the Merger.

        Gain or loss that U.S. holders of PeninsulaFirst Federal common stock recognize in connection with the Merger generally will constitute capital gain or loss and will be long-term capital gain or loss if, as of the date the Merger is completed, the U.S. holder's holding period with respect to the PeninsulaFirst Federal common stock surrendered exceeds one year. Long-term capital gains of certain non-corporate U.S. holders, including individuals, are generally subject to U.S. federal income tax at preferential rates. The deductibility of capital losses is subject to limitations. In some cases, such as if the U.S. holder of PeninsulaFirst Federal common stock actually or constructively owns Mackinac common stock, such gain could be treated as having the effect of a distribution of a dividend, under the tests set forth in Section 302 of the Code, in which case such gain would be treated as ordinary dividend income. These rules are complex and dependent upon the specific factual circumstances particular to each. U.S. holder. Consequently, each U.S. holder that may be subject to these rules should consult its tax advisor as to the application of these rules to the particular facts relevant to such U.S. holder.




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Cash Received Instead of a Fractional Share of Mackinac Common Stock

        A U.S. holder who receives cash instead of a fractional share of Mackinac common stock generally will be treated as having received such fractional share pursuant to the Merger and then as having received cash in exchange for such fractional shares. Gain or loss generally will be recognized based on the difference between the amount of cash received instead of the fractional share and the tax basis allocated to such fractional share of Mackinac common stock. Except as described above, such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if, as of the date the Merger is completed, the holding period for the fractional share exceeds one year. Long-term capital gains of certain non-corporate U.S. holders, including individuals, are generally subject to U.S. federal income tax at preferential rates. The deductibility of capital losses is subject to limitations.

Treatment of Receipt of Special Dividend by U.S. Holders of First Federal Common Stock

        If the special dividend is treated as a distribution with respect to First Federal common stock, the gross amount paid to holders of First Federal common stock will be characterized as dividend income to the extent that the First Federal special dividend does not exceed First Federal's current and accumulated earnings and profits (as determined for U.S. federal income tax purposes). In the event that the amount of the special dividend exceeds First Federal's current and accumulated earnings and profits, the excess should be treated as non-taxable return of capital to the extent of the holder's adjusted tax basis in its common stock, calculated on a share-by-share basis, and thereafter as gain from




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the sale or exchange of First Federal common stock. This gain would be capital gain provided that such shareholder holds the First Federal common stock as a capital asset as of the time of the First Federal special dividend. The determination of First Federal's earnings and profits entails complex factual and legal analysis which will not be completed until after the Effective Time of the Merger.

        Dividend income will be includible in the gross income of a holder of First Federal common stock on the day received. Under current law this income will generally be taxed to non-corporate stockholders at the rates applicable to long-term capital gains, provided that a minimum holding period (generally, ownership of the stock for more than 60 days during the 121-day period surrounding the ex-dividend date) and other requirements are satisfied. Corporate U.S. holders may be entitled to a dividends-received deduction with respect to distributions treated as dividend income for U.S. federal income tax purposes, subject to limitations and conditions. U.S. holders should consult their tax advisors regarding their ability to satisfy the minimum holding period and other requirements for favorable tax treatment of dividend income and the potential application of the "extraordinary dividend" provisions of the Code.

        U.S. holders should consult their tax advisors for the potential U.S. federal income tax consequences to them if the special dividend were instead treated as additional cash received in connection with the Merger and not as a distribution.


Information Reporting and Backup Withholding


        Cash payments received in the Merger and dividends may, under certain circumstances, be subject to information reporting and backup withholding (currently at a rate of 28%24%), unless the holder provides proof of an applicable exemption or furnishes its taxpayer identification number, and otherwise complies with all applicable requirements of the backup withholding rules. Any amounts withheld from payments to a holder under the backup withholding rules are not an additional tax and will be allowed as a refund or credit against the holder's U.S. federal income tax liability, provided that the required information is timely furnished to the IRS.

        The preceding discussion is intended only as a summary of material U.S. federal income tax consequences of the merger. It is not a complete analysis or discussion of all potential tax effects that may be important to you. Thus, holders of PeninsulaFirst Federal common stock should consult their tax advisors as to the specific tax consequences to them of the Merger, including the applicability and effect of the alternative minimum tax and any state, local, foreign and other tax laws.




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DESCRIPTION OF CAPITAL STOCK OF MACKINAC


        As a result of the merger, PeninsulaFirst Federal shareholders who receive shares of Mackinac common stock in the Merger will become shareholders of Mackinac. Your rights as shareholders of Mackinac will continue to be governed by Michigan law, as well as the restated articles of incorporation, as amended and the third amended and restated bylaws of Mackinac (Mackinac's"articles of incorporation" and"bylaws", respectively). The following briefly summarizes the material terms of Mackinac common stock and preferred stock. We urge you to read the applicable provisions of the Michigan Business Corporation Act (the"MBCA"), Mackinac's articles of incorporation and bylaws and federal law governing bank holding companies carefully and in their entirety. Copies of Mackinac's governing documents have been filed with the SEC. To find out where copies of these documents can be obtained, see "Where You Can Find More Information."


Authorized Capital Stock


        Mackinac's authorized capital stock consists of 18,000,000 shares of common stock, no par value per share, and 500,000 shares of preferred stock, no par value per share. As of the record date, there were 5,527,6906,512,910 shares of Mackinac common stock issued and outstanding, 69,294185,749 shares held in




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treasury, no shares of Mackinac preferred stock outstanding, and no options to purchase 237,152 shares of Mackinac common stock outstanding.


Common Stock


Dividend Rights

        Mackinac can pay dividends if, as and when declared by Mackinac's board of directors, subject to compliance with limitations imposed by law. The holders of Mackinac common stock will be entitled to receive and share equally in these dividends as they may be declared by Mackinac's board of directors out of funds legally available for such purpose. If Mackinac issues any shares of its authorized preferred stock, the holders of such preferred stock may have a priority over the holders of the common stock with respect to dividends.

Voting Rights

        Each holder of Mackinac common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. Directors will be elected by a plurality of the shares actually voting on the matter. When an action other than the election of directors is to be taken by a vote of the shareholders, it shall be authorized by a majority of the votes cast by the holders of shares entitled to vote, unless a greater plurality is required by the articles or the MBCA. If Mackinac issues preferred stock, holders of such preferred stock may also possess voting rights.

Liquidation Rights

        In the event of liquidation, dissolution or winding up of Mackinac, whether voluntary or involuntary, the holders of Mackinac common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, and payment or provision for payment of all required distributions with respect to outstanding shares of preferred stock, all of the assets of Mackinac available for distribution. If preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution.

Preemptive Rights

        Holders of the common stock of Mackinac will not be entitled to preemptive rights with respect to any shares which may be issued. Preemptive rights are the priority right to buy additional shares if




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Mackinac issues more shares in the future. Therefore, if additional shares are issued by Mackinac without the opportunity for existing shareholders to purchase more shares, a shareholder's ownership interest in Mackinac may be subject to dilution. The common stock is not subject to redemption.

        For more information regarding the rights of holders of Mackinac common stock, see "Comparison of Shareholders' Rights."


Preferred Stock


        Mackinac's articles of incorporation permit Mackinac's board of directors to issue up to 500,000 shares of preferred stock in one or more series, with such designations, titles, voting powers, preferences and rights as may be fixed by Mackinac's board of directors without any further action by Mackinac shareholders. The issuance of preferred stock could adversely affect the rights of holders of common stock.




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COMPARISON OF SHAREHOLDERS' RIGHTS


        Mackinac and PeninsulaFirst Federal are each incorporated under the laws of the State of Michigan, and accordingly, the rights of their shareholders are governed by Michigan law and their respective articles of incorporation and bylaws. After the Merger, the rights of PeninsulaFirst Federal shareholders who elect to receive shares of Mackinac common stock in the Merger will be determined by reference to Mackinac's articles of incorporation and bylaws and Michigan law. The following is a summary of the material differences between the current rights of PeninsulaFirst Federal shareholders and the current rights of Mackinac shareholders.

        Mackinac and PeninsulaFirst Federal believe that this summary describes the material differences between the rights of holders of Mackinac common stock as of the date of this joint proxy statement/prospectus and the rights of holders of PeninsulaFirst Federal common stock as of the date of this joint proxy statement/prospectus; however, it does not purport to be a complete description of those differences. Copies of Mackinac's governing documents have been filed with the SEC. To find out where copies of these documents can be obtained, see "Where You Can Find More Information."

		MACKINAC		PENINSULAFIRST FEDERAL
Authorized Capital Stock		Mackinac's articles of incorporation authorize it to issue up to 18,500,000 shares, of which 18,000,000 shares shall be a single class of common stock, no par value, and 500,000 shares of series preferred stock, no par value. As of the record date, there were 5,527,6906,512,910 shares of Mackinac common stock outstanding, 69,294185,749 shares of Mackinac common stock held in treasury, and no shares of Mackinac preferred stock outstanding.		Peninsula'sFirst Federal's articles of incorporation authorize PeninsulaFirst Federal to issue up to 400,00030,000,000 shares of commoncapital stock, all of one class,which 10,000,000, par value $1.00$0.01 per share.share, shall be a single class of preferred stock and 20,000,000 shares, par value $0.01 per share, shall be a single class of common stock. As of the record date, there were 288,0003,726,925 shares of PeninsulaFirst Federal common stock outstanding.outstanding and 307,750 shares held in treasury.
Board of Directors
Number		Mackinac's articles of incorporation and bylaws provide that its board of directors shall consist of a number of directors to be determined from time to time by resolution adopted by the affirmative vote of (i) at least 80% of the board of directors, and (ii) a majority of the continuing directors. A "continuing director," as defined in Mackinac's articles of incorporation, means any member of the board of directors of the corporation who is unaffiliated with an interested shareholder and was a member of the board prior to the time that the interested shareholder became an interested shareholder, and any successor of a continuing director who is unaffiliated with the interested shareholder and is recommended to succeed a continuing director by a majority of continuing directors then on the board.		Peninsula'sFirst Federal's articles of incorporation and bylaws provide that its initial board of directors shall consist of not less than five nor more than twenty-five members, withwhich may be decreased or increased pursuant to the exact number of directors to be determined by resolutionbylaws of the board of directors. Peninsula'scorporation. First Federal's board of directors currently is fixed at seven9 directors.
		Mackinac's board of directors currently has ten directors. Effective upon consummation of the Merger, Mackinac will have eleven directors.




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		MACKINAC		PENINSULAFIRST FEDERAL
Classification and Term; Qualification		Mackinac's board of directors is divided into three classes, as nearly equal in number as reasonably possible, with each class of directors serving for successive three-year terms so that each year the term of only one class of directors expires.		Peninsula'sFirst Federal's board of directors is divided into three classes, as nearly equal in number as possible and each class must have a minimum of two members.possible. Each class serves three-year terms so that each year, the term of only one class of directors expires.
				Each director must own a minimum of ten shares of Peninsula stock, and a majority of the board must be residents of the service area of Peninsula Bank, as described by the bank's Community Reinvestment Act Statement.
Election		Under the MBCA and Mackinac's bylaws, unless otherwise provided in the articles of incorporation, directors are elected by a plurality of the votes cast by the holders of the shares entitled to vote in an election of directors at a meeting at which a quorum is present. Mackinac's articles of incorporation do not otherwise provide for the vote required to elect directors.		Peninsula is also subject to the election provisions of the MBCA. Peninsula'sFirst Federal's articles of incorporation do not otherwise provide for the vote required to elect directors.
Vacancies		Mackinac's articles of incorporation and bylaws provide that vacancies on Mackinac's board of directors for any reason and newly created directorships resulting from an increase in the number of directors may only be filled by an affirmative vote of a majority of the continuing directors, and an 80% majority of all of the directors then in office, although less than a quorum. Each director filling a vacancy will remain in office for the remainder of the unexpired term.		Under Peninsula'sFirst Federal's bylaws, a vacancy on the board of directors, including a vacancy created by an increase in the number of directors may be filled for the balance of the yearterm of the vacancy by the affirmative vote of a majority of the remaining directors, although less than a quorum. However, a vacancy created by a removalan increase in the number of a directordirectors may be filled by election by the shareholders may be filledboard of directors for a term of office continuing only until the next election of directors by the shareholders.
Removal		Under Mackinac's articles of incorporation, any one or more directors may be removed at any time, with or without cause, but only by either (i) the affirmative vote of a majority of the continuing directors and at least 80% of the board of directors, or (ii) the affirmative vote, at a meeting of the shareholders called for that purpose, of the holders of at least 80% of the voting power of the then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors voting together as a single class.		Peninsula's articles of incorporationFirst Federal's bylaws provide that directors may only be removed for cause by the affirmative vote of the holders of a majority of the outstanding shares then entitled to vote for the election of such director.




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		MACKINAC		PENINSULA
Shareholder Meetings
Special Meetings		Under Mackinac's bylaws, a special meeting of shareholders may be called by resolution of a majority of the board of directors, by the Chairman of the board of directors, or by the President, and shall be held on a date fixed by the board of directors, the Chairman or the President.		Peninsula'sFirst Federal's bylaws provide that special meetings may be called by the chairman of the board, the chief executive officer or a majority of the board of directors, or the President, and may alsomust be called by the Secretary atsecretary, chairman of the board, chief executive officer or the president upon the written request of the holders of not less than one-tenth of all the outstanding shares entitled to vote at any such meeting.
Voting Rights		Holders of shares of Mackinac common stock are entitled to one vote per share in the election of directors and on all other matters submitted to a vote at a meeting of shareholders.		Holders of shares of PeninsulaFirst Federal common stock are entitled to one vote per share in the election of directors and on all other matters submitted to a vote at a meeting of shareholders.




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		MACKINAC		FIRST FEDERAL
Cumulative Voting		Mackinac shareholders do not have the right to cumulate their votes with respect to the election of directors.		PeninsulaFirst Federal shareholders do not have the right under the bylaws to cumulate their votes with respect to the election of directors.
Actions by Written Consent		Under the MBCA, any action required or permitted to be taken at an annual or special meeting of shareholders may be taken without a meeting, without prior notice, and without a vote, if before or after the action all the shareholders entitled to vote consent in writing.		Peninsula's articles of incorporationFirst Federal's bylaws provide that any action required or permitted by the MBCA to be taken at an annual or special meeting of shareholders may be taken without a meeting without prior notice and without a vote, if a consent in writing, setting forth the action so taken, is signed by all of the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take the action at a meeting at which all sharesshareholders entitled to vote thereon were present and voted. The articles further provide that prompt notice ofwith respect to the taking of the corporate action without a meeting by less than unanimous written consent shall be given to shareholders who have not consented in writing.subject matter.
Quorum		Under Mackinac's bylaws, the presence in person or by proxy of holders of a majority of the shares entitled to vote at a meeting of Mackinac shareholders constitutes a quorum for such meeting of shareholders. If a quorum is not present or represented at a meeting of shareholders, the chairman of the meeting or the holders of a majority of the shares entitled to vote at the meeting who are present or represented at the meeting may adjourn the meeting until a quorum is obtained.		Peninsula'sFirst Federal's bylaws provide that a majority of the outstanding shares entitled to vote, represented in person or by proxy, constitutes a quorum at any meeting of PeninsulaFirst Federal shareholders.




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		MACKINAC		PENINSULA
Advance Notice Requirements for Shareholder Nominations and Other Proposals		Mackinac's articles of incorporation provide that, for a proposal relating to the nomination of a director to be elected to the board of directors, the shareholder must deliver written notice to Mackinac's secretary before the meeting. With respect to an election to be held at an annual meeting of shareholders, the notice must be received by the secretary not less than 60 days or more than 90 days before the anniversary date of the previous year's annual meeting, unless the annual meeting is changed by more than 20 days from such anniversary date, in which case the notice must be delivered within ten days after the date the corporation mails or otherwise gives notice of the date of such meeting, and with respect to an election to be held at a special meeting of shareholders, not later than the close of business on the tenth day following the date on which notice of the special meeting was first mailed to the shareholders.		First Federal's bylaws provide that any new business to be taken up at annual meetings must be stated in writing and filed with the secretary at least five (5) days prior to the date of the annual meeting. Only those proposals that have been stated, proposed and filed will be considered at the annual meeting. Shareholders may make other proposals at the annual meeting, and the same may be discussed and considered, but no action shall be taken with respect to such proposals for at least 30 days.




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		MACKINAC		FIRST FEDERAL
		Mackinac's articles provide further that a shareholder who desires to bring other business before an annual meeting of shareholders and who is eligible to make such nomination or bring such other business must provide a Notice of Proposal by personal delivery or by U.S. mail not less than 30 days prior to the date of the originally scheduled meeting, regardless of any adjournments to a later date; provided that, if less than 40 days' notice of the meeting of shareholders is given by Mackinac, the Notice of Proposal must be received by Mackinac not later than the close of business on the tenth day following the date on which the notice of the scheduled meeting was first mailed to the shareholders. The Secretary of Mackinac shall notify the shareholder in writing whether the Notice of Proposal was made in accordance with the articles of incorporation.		Peninsula's bylaws provide that nominations for directors, other than by the Board of Directors, may be made by any shareholder entitled to vote for the election of directors. Notice of a shareholders' intention to make a nomination must be given in writing to the President not less than 14 calendar days prior to any meeting of shareholders called for the election of directors; provided however, that if less than 21 days' notice of the meeting is given to shareholders, such nomination shall be mailed or delivered to the President not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. A notice of nomination should include the name, address and principal occupation of the proposed nominee; the total number of shares of common stock of the bank that will be voted for each proposed nominee; the name and address of the notifying shareholder; and the number of shares of common stock owned by the notifying shareholder. Nominations for director not made in accordance with the bylaw requirements will be disregarded. A shareholder that wishes to bring other business before the annual meeting must provide written notice to the Secretary of Peninsula not less than 14 days nor more than 60 days prior to the meeting date corresponding to the previous year's annual meeting. Such notice must set forth a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, the name and address of the shareholder proposing the business, the number of shares owned by such shareholder, and any material interest of the shareholder in such business.




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		MACKINAC		PENINSULA
		To be in proper written form, each Notice of Proposal must set forth (1) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected, and a description of any arrangements or understandings between the shareholder and the nominee and any other person pursuant to which the nomination is being made); (2) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of the shareholder, on whose behalf the proposal is made; and (3) as to the shareholder giving the notice (A) the name and address of the shareholder; (B) a representation that the shareholder is a holder of record of the common stock of Mackinac and entitled to vote at such meeting and will continue to hold such stock through the date on which the meeting is held; and (C) a representation that the shareholder intends to appear in person or by proxy at the meeting to bring such business before the meeting.




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		MACKINAC		PENINSULAFIRST FEDERAL
Notice of Shareholder Meeting		Mackinac's bylaws provide that Mackinac must give written notice between 10 and 60 days before any shareholder meeting to each shareholder entitled to vote at such meeting. The notice must state the time and place of the meeting and the purposes of the meeting. Notice may be given personally, by mail, or if authorized by the board of directors, by a form of electronic transmission to which the shareholder has consented.		Peninsula'sFirst Federal's bylaws provide that PeninsulaFirst Federal must give written notice between 10 and 6050 days before any shareholder meeting to each shareholder entitled to vote at such meeting, provided that notice of a meeting in which there is to be considered either (i) an agreement of merger or consolidation or (ii) a proposal to dispose of all or substantially all of the property and assets of the corporation not in the usual course of business, shall be delivered at least 20 days prior to the date of the meeting. The notice shall state the place, date and hour, and, in the case of a special meeting, the purpose(s) for which the meeting has been called; every notice for a meeting called to consider an amendment to the articles of incorporation must include a statement of the nature of the proposed amendment; and every notice for a meeting to consider an agreement of merger, consolidation, or disposition of all or substantially all of the property and assets of the corporation shall include a statement of the rights of dissenting shareholders.called.
Stock Transfer Restrictions		None.		None.
Dissenters' Rights		Under the MBCA, dissenters' rights are generally not available to holders of shares of any class of shares which is listed on a national securities exchange. Accordingly, holders of Mackinac common stock, which is listed on the NASDAQ, are not entitled to exercise dissenters' rights under the MBCA.		The appraisalUnder the MGCL, dissenters' rights of Peninsula shareholders are governed in accordance with the MBCA. Under Michigan law, a dissenting or objecting shareholder has the rightnot available to demand and receive paymentholders of the fair value of the shareholder's stock if (1) the corporation consolidates or merges with another corporation; (2) the corporation's stock is to be acquired in a share exchange; (3) the corporation sells or exchanges all, or substantially all of its assets in a transaction requiring approval of the corporation's shareholders; (4) the corporation enters into a plan of conversion; (5) the corporation amends its charter in a way which alters the contract rights, as expressly set forth in the charter, of any outstanding stock and substantially adversely affects the shareholder's rights, unless the right to do so is reserved in the charter of the corporation; or (5) the transaction is subject to certain provisions of the MBCA.




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		MACKINAC		PENINSULA
				However, in a merger that requires shareholder approval, unless otherwise provided in the articles of incorporation, bylaws, or a resolution of the board, a shareholder may not dissent from a transaction in which shareholders receive (i) cash, (ii) shares that are listed on a national securities exchange or designated as a national market system securityexchange. As First Federal shareholders will receive Mackinac common stock, which is listed on an interdealer quotation system by the national association of securities dealers on the effective date of the merger, or (iii) any combination of cash and those shares.
				See "The Merger—Dissenters' Rights in the Merger."NASDAQ, there are no dissenters' rights.
Dividends		Mackinac's bylaws provide that Mackinac's board of directors may declare a dividend and direct payment of dividends or other distributions upon the outstanding shares out of funds legally available for such purposes which may be payable in cash or other property as permitted by law. The board of directors may also declare and direct payment of a dividend in shares of Mackinac's common stock, in accordance with and subject to the provisions of the MBCA. Under Michigan law, which is the law of the state where Mackinac is incorporated, Mackinac may not declare a dividend if, after giving effect to such dividend, it would not be able to pay its debts as the debts become due in its usual course of business or if its total assets would be less than the sum of its total liabilities, plus, unless the articles of incorporation permit otherwise, the amount that would be needed, if Mackinac were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.		Peninsula is also subject to the provisions of the MBCA. Peninsula'sFirst Federal's bylaws provide that subject to the provisions of applicable law, the board of directors may declare dividends from surplus, at such time and in such amounts as the board shall deem advisable.on its outstanding shares of capital stock.




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		MACKINAC		PENINSULAFIRST FEDERAL
Amendments to Organizational Documents
Charter		Unless otherwise provided in the articles of incorporation, the MBCA provides that with the limited exception of certain non-substantive amendments that can be adopted by the board of directors without shareholder action, a corporation's board of directors may propose one or more amendments to the articles of incorporation for submission to the shareholders. The proposed amendment is adopted if it receives the affirmative vote of a majority of the outstanding shares entitled to vote on the proposed amendment. The amendment of certain provisions of the articles of incorporation, however, require the affirmative vote of the holders of at least 80% of the outstanding shares of stock entitled to vote, voting as a single class, unless such amendment or repeal or inconsistent provision has been recommended for approval by at least 80% of all directors then holding office and by a majority of the continuing directors. These provisions include the number, classification, election and removal of directors; notification of shareholder proposals; and amendments to the articles of incorporation.		Peninsula is subjectPursuant to First Federal's articles of incorporation, the same provisions regarding amendmentscorporation reserves the right to amend or repeal any provision of the articles of incorporation under the MBCA. However, pursuant to Peninsula's articles of incorporation, theas prescribed by Maryland General Corporate Law; however, amendment of certain provisions of the articles requires the affirmative vote of the holders of at least 75%80% of the outstanding shares of stock entitled to vote, provided however, that if there is a control person such action must be approved by not less than 75% of the total votes entitled to be cast in an election of directors attributable to shares owned by persons other than the control person.vote. These provisions include action by written consent; increasing the number of authorized shares of preferred stock; the number, classification, election and removal of directors; amendment of bylaws; the approval of business combinations;combinations involving interested persons; indemnification of directors; personal liability of directors; and amendments to the articles of incorporation.
Bylaws		Mackinac's bylaws may be amended or repealed or new bylaws adopted either by a majority of the board of directors or by a vote of the holders of a majority of the outstanding shares of stock entitled to vote at any annual or special meeting if notice of the proposed amendment, repeal, or adoption is contained in the notice of the meeting, provided however, that the affirmative vote of at least 80% of the outstanding shares, voting as single class, shall be required to amend or repeal Article IV, Article VIII, or Article IX or to adopt any provision inconsistent therewith, unless such amendment or repeal or inconsistent provision has been recommended by at least 80% of all directors then in office and by a majority of the continuing directors.		Peninsula'sFirst Federal's bylaws may be amended by a vote of the majority of the whole board of directors at any meeting, however, the board of directors shall not amend or repeal any bylaw adopted by the shareholders if such authority has been withheld from the directors by the bylaws.meeting. The shareholders may amend or repeal any bylaw by a majoritythe affirmative vote of the shareholders represented at any annual or special meeting called for such purpose.80% of shares entitled to vote.




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		MACKINAC		PENINSULAFIRST FEDERAL
Liability and Indemnification of Directors and Officers
Personal Liability		Mackinac's articles of incorporation provide that directors of Mackinac will not be personally liable to Mackinac or its shareholders for money damages, except for liability (1) for any breach of the director's duty of loyalty to Mackinac or its shareholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) resulting from a violation of the MBCA, or (4) for any transaction from which the director derived an improper benefit.		Peninsula'sFirst Federal's articles of incorporation provide that its directors will not be personally liable to PeninsulaFirst Federal or its shareholders for money damages, except for liabilityto the extent that the person (1) based on a breach of the duty of loyalty to Peninsula or its shareholders, (2) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (3)  liability based on the payment of an improper dividend or an improper repurchase of Peninsula's stock under the MBCA or on violations of federal or state securities laws, (4) for any transaction from which the director derived an improper benefit, (2) was found to have acted with deliberate dishonesty in a formal judgment or (5) for any actadjudication, or omission occurring prior(3) to the date the articles of incorporation were effective.extent otherwise permitted by Maryland General Corporate Law.
Indemnification		Mackinac's bylaws provide for the indemnification of directors and officers to the fullest extent authorized by law and of employees and agents to such extent as authorized by the board of directors and permitted by law. Mackinac's bylaws provide that Mackinac may purchase and maintain insurance on behalf of its directors, officers, employees and agents against any liability, whether or not Mackinac would have the power to indemnify such person against such liability under its articles of incorporation. Mackinac maintains such insurance.		Peninsula's bylawsFirst Federal's articles of incorporation provide that any person who at any time shall serve or has served as a director, officer, employee or agent of the corporation, or any other entity at the request of the corporation, and the heirs, executors and administrators of such person shall be indemnified by the corporation in accordance with, and to the fullest extent permitted by, the provisions of Michigan law.Maryland General Corporate Law.
Preemptive Rights		Under the MBCA, shareholders do not have preemptive rights unless the corporation's articles of incorporation provide otherwise. Mackinac's articles of incorporation do not provide for preemptive rights.		Under the MBCA,First Federal shareholders do not have preemptive rights unless the corporation's articlesboard of incorporation providedirectors established otherwise. Peninsula's articles of incorporation do not provide for preemptive rights.
Shareholder Rights Plan/Shareholders' Agreement		Mackinac does not have a rights plan in effect. Neither Mackinac nor holders of Mackinac common stock are parties to a shareholders' agreement with respect to Mackinac's capital stock.		PeninsulaFirst Federal does not have a rights plan. Other than with respect to the Voting Agreements described under "The Merger Agreement—Voting Agreements", neither PeninsulaFirst Federal nor holders of PeninsulaFirst Federal common stock are parties to a shareholders' agreement with respect to Mackinac's common stock.




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		MACKINAC		PENINSULAFIRST FEDERAL
Certain Business Combination Restrictions		The MBCA contains a business combination statute that places restrictions on business combinations between a corporation and an interested shareholder (one who beneficially owns 10% or more of the voting power), which requires the issuance by the board of directors of an advisory statement with regard to the transaction and receipt of the approval by the affirmative vote of: (i) not less than 90% of the vote of common stock entitled to be cast by the shareholders, and (ii) not less than2/ 2/3 of the votes of each class of stock entitled to be cast by the shareholders other than voting shares beneficially owned by the interested shareholder who is, or whose affiliate is, a party to the business combination or an affiliate or associate of the interested shareholder, in addition to the satisfaction of certain fair price and terms criteria.		Peninsula is subject to the same provisions of the MBCA. Under Peninsula'sFirst Federal's articles of incorporation, certain business combinations (for example, mergers or consolidations, reclassification of common stock or recapitalizations, significant asset sales and significant stock issuances or securities acquisitions) involving a "control person"an "interested" person or stockholder (including such person or stockholder's affiliates) of PeninsulaFirst Federal require, in addition to any vote required by law, the affirmative vote of not less than 75%80% of the total votes entitled to be cast in an election of directors attributable to shares owned by persons other than a control person, provided however, that such additional voting requirements shall not be applicable if the business combination has been approved by the affirmative vote of a majority of the continuingboard directors, including a majority of disinterested directors. A "controlAn "interested person" means an individual, corporation, partnership or other person or entity which, together with their affiliates and associates (i) beneficially owns in the aggregate 10%5% or more of the outstanding shares of common stock of the corporation, and any affiliate or associate of any such individual, corporation, partnership or other person or entity; and (ii) acquired any portion of such shares within one year of the vote required.entity.




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COMPARATIVE MARKET PRICES AND DIVIDENDS


        Mackinac common stock is listed on the NASDAQ under the symbol "MFNC." PeninsulaFirst Federal common stock is not publicly traded. The following table sets forth the high and low reported intra-day sales prices per share of Mackinac common stock, and the cash dividends declared per share for the periods indicated.

		Mackinac Common Stock										Mackinac Common Stock
		High			Low			Dividend				High			Low			Dividend
2012
2016
First Quarter		$	7.74		$	5.00			n/a			$	11.69		$	9.90		$	0.10
Second Quarter		$	7.28		$	5.61			n/a			$	11.97		$	10.00		$	0.10
Third Quarter		$	8.00		$	5.71			n/a			$	11.98		$	10.64		$	0.10
Fourth Quarter		$	7.90		$	6.46			n/a			$	14.97		$	11.00		$	0.10
2013
2017
First Quarter		$	9.25		$	7.09			.04			$	13.88		$	13.63		$	0.12
Second Quarter		$	9.25		$	8.25			.04			$	13.99		$	13.92		$	0.12
Third Quarter		$	10.09		$	8.61			.04			$	15.52		$	15.01		$	0.12
Fourth Quarter		$	10.14		$	8.38			.05			$	16.10		$	15.89		$	0.12
2014
2018
First Quarter		$	15.06		$	9.86			.05			$	16.68		$	15.43		$	0.12
Second Quarter		$	14.19		$	11.35			.05
Third Quarter (through , 2014)		$			$




		First Federal Common Stock
		High			Low			Dividend
2016
First Quarter		$	7.25		$	5.86		$	0.04
Second Quarter		$	7.28		$	6.65		$	0.04
Third Quarter		$	7.00		$	6.60		$	0.04
Fourth Quarter		$	8.25		$	6.70		$	0.04
2017
First Quarter		$	8.55		$	7.50		$	0.05
Second Quarter		$	8.05		$	7.60		$	0.05
Third Quarter		$	8.30		$	7.60		$	0.05
Fourth Quarter		$	8.25		$	7.90		$	0.05
2018
First Quarter		$	11.25		$	7.90		$	0.05

        On July 17, 2014,January 12, 2018, the last full trading day before the public announcement of the Merger Agreement, the high and low sales prices of shares of Mackinac common stock as reported on the NASDAQ were $13.50$15.90 and $13.21,$15.80, respectively. On , 2014,March 29, 2018, the last practicable trading day before the date of this joint proxy statement/prospectus, the high and low sales prices of shares of Mackinac common stock as reported on the NASDAQ were $$16.25 and $            ,$16.15, respectively.

        As of , 2014,March 29, 2018, the last date prior to printing this joint proxy statement/prospectus for which it was practicable to obtain this information, there were approximately 1,200 registered holders of Mackinac common stock and approximately 600 registered holders of PeninsulaFirst Federal common stock. Each of the directors of PeninsulaFirst Federal and certain other shareholders of PeninsulaFirst Federal have entered into voting agreements with Mackinac, pursuant to which they have agreed, solely in their capacity as PeninsulaFirst Federal shareholders, to vote all of their shares of PeninsulaFirst Federal common stock in favor of the proposals to be presented at the Special Meeting. As of the record date, PeninsulaFirst Federal directors and other shareholders who are parties to the voting agreements were entitled to vote an aggregate of




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approximately 349,674 shares of PeninsulaFirst Federal common stock, representing approximately %9.38% of the PeninsulaFirst Federal common stock outstanding on that date. As of the record date, the directors and executive officers of PeninsulaFirst Federal were entitled to vote approximately 398,946 shares of PeninsulaFirst Federal common stock representing approximately %10.7% of the shares of PeninsulaFirst Federal common stock outstanding on that date. As of the record date, Mackinac and its subsidiaries held no shares of PeninsulaFirst Federal common stock (other than shares held as fiduciary, custodian or agent), and its directors and executive officers or their affiliates held no shares of PeninsulaFirst Federal common stock.

        PeninsulaFirst Federal shareholders are advised to obtain current market quotations for Mackinac common stock. The market price of Mackinac common stock will fluctuate between the date of this joint proxy statement/prospectus and the completion of the Merger. No assurance can be given concerning the market price of Mackinac common stock or the value of PeninsulaFirst Federal common stock before or after the effective date of the Merger. Changes in the market price of Mackinac common stock prior to the completion of the Merger will affect the market value of the merger consideration that Peninsula'sFirst Federal's shareholders will receive upon completion of the Merger.




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        Mackinac's ability to pay dividendsMackinac is subject to various factors including, among other things, sufficient earnings, available capital, board discretion and regulatory compliance. Dividends from Mackinac will depend, in large part, upon receipt of dividends from mBank, and any other banks which Mackinac acquires, because Mackinac will have limited sources of income other than dividends from mBank and other banks it acquires. No assurances can be given that Mackinac will pay any dividends on its common stocka bank holding company, or that, if paid, such dividends will not be reduced or eliminated in future periods. Special cash dividends, stock dividends or returns of capital may, to the extent permitted byBHC, incorporated under Michigan Department of Insurance and Financial Services and other applicable regulations, be paid in addition to, or in lieu of, regular cash dividends. Mackinac's board of directors may change its dividend policy at any time, and the payment of dividends by financial holding companies is generally subject to legal and regulatory limitations.

        Peninsula is subject to the same restrictions and limitations on the payment of dividends as Mackinac. Peninsula's primary sources of funds are dividends from Peninsula Bank and net proceeds from borrowings. Restrictions, which govern all state chartered banks, preclude the payment of dividends by Peninsula Bank without the prior written consent of the Michigan Department of Insurance and Financial Services if dividends declared and paid by Peninsula Bank in either of the two immediately preceding years exceeded Peninsula Bank's net income for those years, which was not the case. Peninsula paid dividends of $1.00 per share in each of 2013 and 2012, and $0.75law, primarily engaged in the six months ended June 30, 2014.




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INFORMATION ABOUT MACKINAC


        Mackinac was incorporated underplanning, directing and coordinating the lawsbusiness activities of the state of Michigan on December 16, 1974, and changed its name from "First Manistique Corporation" to "North Country Financial Corporation" on April 14, 1998. On December 16, 2004, Mackinac changed its name from North Country Financial Corporation to Mackinac Financial Corporation. Its headquarters are located in Manistique, Michigan, and its mailing address is 130 South Cedar Street, Manistique, Michigan 49854.

        In December of 2004, Mackinac was recapitalized with the net proceeds, approximately $26.2 million, from the issuance of $30 million of common stock in a private placement. Commensurate with this recapitalization, it changed its name from North Country Financial Corporation to Mackinac Financial Corporation with itswholly owned banking subsidiary, adopting the "mBank" identity early in 2005.

        Mackinac owns all of the outstanding stock of mBank. mBank, currently has 7 branch offices located in the Upper Peninsula ofa Michigan state-chartered bank. As a BHC, Mackinac's activities are limited to banking and 4 branch offices located in Michigan's Lower Peninsula. mBank maintains offices in Chippewa, Grand Traverse, Luce, Manistee, Marquette, Menominee, Oakland, Otsego, and Schoolcraft Counties. mBank provides drive-in convenience at 7 branch locations and has 13 automated teller machines. mBank has no foreign offices.

        Mackinac also owns four non-bank subsidiaries: First Manistique Agency, presently inactive; First Rural Relending Company, a relending company for nonprofit organizations; North Country Capital Trust, a statutory business trust which was formed solely for the issuance of trust preferred securities; and Mackinac Commercial Credit, LLC, an asset based lending subsidiary located in Southeast Michigan. mBank represents the principal asset of Mackinac. mBank has one wholly-owned subsidiary, mBank Title Insurance Agency, LLC, which provides title insurance services throughout Michigan. Mackinac and its subsidiary bankactivities that are engaged in a single industry segment, commercial banking, which is broadly defined to include commercial and retail banking activities, along with other permitted activities closely related to banking.

The principal executive offices of Mackinac are located at 130 South Cedar Street, Manistique, Michigan 49854, and its telephone number is (888) 343-8147. Mackinac's website can be accessed at http://www.bankmBank.com.www.bankmbank.com. Information contained in Mackinac's website does not constitute part of, and is not incorporated into, this joint proxy statement/prospectus. Mackinac's common stock is traded on the NASDAQ under the symbol "MFNC."

        For additionala complete description of Mackinac's business, financial condition, results of operations and other important information, about Mackinac andplease refer to Mackinac's filings with the SEC that are incorporated by reference into this joint proxy statement/prospectus, including its subsidiaries, see "Where You Can Find More Information.Annual Report on Form 10-K for the year ended December 31, 2017. See "Certain Documents Incorporated By Reference."


OperationsINFORMATION ABOUT FIRST FEDERAL


General


First Federal of Northern Michigan Bancorp, Inc.

        First Federal of Northern Michigan Bancorp, Inc. is a Maryland corporation that owns all of the outstanding shares of common stock of First Federal of Northern Michigan. At December 31, 2017, we had consolidated assets of $321,247,279, deposits of $270,267,949 and stockholders' equity of $32,942,489. As of December 31, 2017, First Federal of Northern Michigan Bancorp, Inc. had 3,726,925 shares of common stock issued and outstanding and 307,750 held in treasury. Our executive offices are located at 100 South Second Avenue, Alpena, Michigan 49707. Our phone number at that address is (800) 498-0013.

        The Company maintains a website at www.first-federal.com that includes important information on our Company, including a list of our products and services, branch locations and current financial information. In addition, we make available, without charge, through our website, a link to our annual reports and other financial information. Information on our website should not be considered a part of this joint proxy statement/prospectus.

First Federal of Northern Michigan

        First Federal of Northern Michigan is a full-service, community-oriented savings bank that provides financial services to individuals, families and businesses from eight full-service facilities located in




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Alpena, Cheboygan, Emmet, Iosco, Otsego, Montmorency and Oscoda Counties, Michigan. First Federal of Northern Michigan was chartered in 1957, and reorganized into the mutual holding company structure in 1994. In 2000, First Federal of Northern Michigan became the wholly owned subsidiary of Alpena Bancshares, Inc., First Federal of Northern Michigan's predecessor company, and in April 2005 it completed its "second step" mutual-to-stock conversion and formed our current ownership structure.

        In August 2014, First Federal of Northern Michigan completed its merger with Alpena Banking Corporation and its subsidiary Bank of Alpena, a Michigan chartered bank located in Alpena, Michigan.

        First Federal of Northern Michigan's business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in one- to four-family residential mortgage loans, commercial real estate loans, commercial business loans, consumer loans and in investment securities and mortgage-backed securities.

        First Federal of Northern Michigan's executive offices are located at 100 South Second Avenue, Alpena, Michigan 49707. Its phone number at that address is (800) 498-0013.

Business


        First Federal of Northern Michigan Bancorp, Inc.'s only direct subsidiary is First Federal of Northern Michigan.

        First Federal of Northern Michigan has two wholly owned subsidiaries namely, Financial Services & Mortgage Corporation ("FSMC") and FFNM Financial Services, Inc., each of which has been consolidated in the financial statements with all inter-company balances and transactions being eliminated in consolidation. FSMC's primary business is to lease, sell, develop and maintains real estate properties. FFNM Financial Service, Inc.'s principal business is to collect commissions associated with a wealth management program that Mackinac is engaged in, through its subsidiary bank, is the general commercial banking business, providing a full range of loan and deposit products. These banking services include customary retail and commercial banking services, including checking and savings accounts, time deposits, interest bearing transaction accounts, safe deposit facilities, real estate mortgage lending, commercial lending, commercial and governmental lease financing, and direct and indirect consumer financing. Funds for mBank's operation are also providedoffered by brokered deposits and through borrowings from the Federal Home Loan Bank (an independent investment consultant.

"FHLB" Employees
) system, proceeds from the sale

        As of loansDecember 31, 2017, First Federal of Northern Michigan had 78 full-time and mortgage-backed22 part-time employees. None of First Federal's employees are represented by a collective bargaining group. The Bank believes its relationship with its employees to be good. First Federal of Northern Michigan Bancorp, Inc., FFNM Agency, Inc. and other securities, funds from repayment of outstanding loans and earnings from operations. Earnings depend primarily upon the difference between (i) revenues from loans, investments, and other interest-bearing assets and (ii) expenses incurred in payment of interest on deposit accounts and borrowings, maintaining an adequate allowance for loan losses, and general operating expenses.FSMC have no separate employees.




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Competition


        Banking is a highly competitive business. mBank competes for loans and deposits with other banks, savings and loan associations, credit unions, mortgage bankers, and investment firms in the scope and type of services offered, pricing of loans, interest rates paid on deposits, and number and location of branches, among other things. mBank also faces competition for investors' funds from mutual funds and corporate and government securities.

        mBank competes for loans principally through interest rates and loan fees, the range and quality of the services it provides and the locations of its branches. In addition, mBank actively solicits deposit-related clients and competes for deposits by offering depositors a variety of savings accounts, checking accounts, and other services.


Employees Properties


        As of December 31, 2013, Mackinac2017, First Federal of Northern Michigan owned its main office and all of its subsidiaries employed,branch offices. The following is a list of our locations:

Main Office
100 South Second Avenue
Alpena, Michigan 49707
Branch Offices
468 North Ripley Boulevard		2885 South County Road #489
Alpena, Michigan 49707		Lewiston, Michigan 49756
6232 River Street		308 North Morenci
Alanson, Michigan 49706		Mio, Michigan 48647
101 South Main Street		201 North State Street
Cheboygan, Michigan 49721		Oscoda, Michigan 48750(1)
1000 South Wisconsin
Gaylord, Michigan 49735

---

(1)

On February 8, 2018, First Federal sold its branch located in the aggregate, 127 employees equating to 133 full-time equivalents. Mackinac provides its employees with comprehensive medical and dental benefit plans, a life insurance plan, and a 401(k) plan. None of Mackinac's employees are covered by a collective bargaining agreement with Mackinac. Management believes its relationship with its employees to be good.

Oscoda, Michigan.


Business


        mBank makes mortgage, commercial, and installment loans to customers throughout Michigan. Fees may be charged for these services. mBank's most prominent concentration in the loan portfolio relates to commercial loans to entities within the real estate—operators of nonresidential buildings industry. This concentration represented $100.333 million or 27.92% of the commercial loan portfolio at December 31, 2013. mBank also supports the service industry, with its hospitality and related businesses, as well as gaming, forestry, restaurants, farming, fishing, and many other activities important to growth in Michigan. The economy of mBank's market areas is affected by summer and winter tourism activities.

        mBank has become a premier SBA/USDA lender in the State of Michigan. Many of these SBA/USDA guaranteed loans are sold at a premium on the secondary market, with mBank retaining the servicing. mBank does not sell the loan guarantees on every credit, rather only those where acceptable market rates are above par.

        mBank also offers various consumer loan products including installment, mortgages and home equity loans. In addition to making consumer portfolio loans, mBank engages in the business of making residential mortgage loans for sale to the secondary market.

        mBank also provides title insurance services throughout the State of Michigan through its wholly-owned subsidiary, mBank Title Insurance Agency, LLC. In late 2013, Mackinac launched Mackinac Commercial Credit, LLC ("MCC"), a wholly-owned subsidiary of Mackinac. MCC is a specialty finance company engaged in asset based lending and factoring of accounts receivable.

        Mackinac may pursue new lease opportunities through unrelated entities, where the credit quality and rate of return on the transactions for its current business strategies. mBank accounts for lease transactions as loans.

        mBank's primary source for lending, investments, and other general business purposes is deposits. mBank offers a wide range of interest bearing and non-interest bearing accounts, including commercial and retail checking accounts, negotiable order of withdrawal ("NOW") accounts, money market accounts with limited transactions, individual retirement accounts, regular interest-bearing statement savings accounts, certificates of deposit with a range of maturity date options, and accessibility to a




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customer's deposit relationship through online banking. The sources of deposits are residents, businesses and employees of businesses within mBank's market areas, obtained through the personal solicitation of mBank's officers and directors, direct mail solicitation and limited advertisements published in the local media. mBank also utilizes the wholesale deposit market for any shortfalls in loan funding. No material portions of mBank's deposits have been received from a single person, industry, group, or geographical location.

        mBank is a member of the FHLB. The FHLB provides an additional source of liquidity and long-term funds. Membership in the FHLB has provided access to attractive rate advances, as well as advantageous lending programs. The Community Investment Program makes advances to be used for funding community-oriented mortgage lending, and the Affordable Housing Program grants advances to fund lending for long-term low and moderate income owner occupied and affordable rental housing at subsidized interest rates.

        mBank has secondary borrowing lines of credit available to respond to deposit fluctuations and temporary loan demands. The unsecured lines totaled $28.375 million at December 31, 2013, with additional amounts available if collateralized.

        As of December 31, 2013, mBank had no material risks relative to foreign sources. See the "Interest Rate Risk" and "Foreign Exchange Risk" sections in "Management's Discussion and Analysis of Financial Condition and Results of Operations of Mackinac," for details on Mackinac's foreign account activity.

        Compliance with federal, state, and local statutes and/or ordinances relating to the protection of the environment is not expected to have a material effect upon mBank's capital expenditures, earnings, or competitive position.


Supervision and Regulation


        As a registered bank holding company, Mackinac is subject to regulation and examination by the Board of Governors of the Federal Reserve System (the"FRB") under the Bank Holding Company Act, as amended (the"BHCA"). mBank is subject to regulation and examination by the Michigan Department of Insurance and Financial Services (the"DIFS") and the Federal Deposit Insurance Corporation (the"FDIC").

        Under the BHCA, Mackinac is subject to periodic examination by the FRB, and is required to file with the FRB periodic reports of its operations and such additional information as the FRB may require. In accordance with FRB policy, Mackinac is expected to act as a source of financial strength to mBank and to commit resources to support mBank in circumstances where it might not do so absent such policy. In addition, there are numerous federal and state laws and regulations which regulate the activities of Mackinac, mBank and the non-bank subsidiaries, including requirements and limitations relating to capital and reserve requirements, permissible investments and lines of business, transactions with affiliates, loan limits, mergers and acquisitions, issuances of securities, dividend payments, inter-affiliate liabilities, extensions of credit and branch banking.

        Federal banking regulatory agencies have established risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies. The resulting capital ratios represent qualifying capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating expansion programs should not allow expansion to diminish their capital ratios and should maintain all ratios well in excess of the minimums. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital includes common




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shareholders' equity, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangibles and excludes the allowance for loan and lease losses. Tier 2 includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock, and general reserves for loan and lease losses up to 1.25% of risk-weighted assets.

        The Federal Deposit Insurance Corporation Improvement Act contains "prompt corrective action" provisions pursuant to which banks are to be classified into one of five categories based upon capital adequacy, ranging from "well capitalized" to "critically undercapitalized" and which require (subject to certain exceptions) the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes "significantly undercapitalized" or "critically undercapitalized."

        In general, the regulations define the five capital categories as follows: (i) an institution is "well capitalized" if it has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not subject to any written capital order or directive to meet and maintain a specific capital level for any capital measures; (ii) an institution is "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, has Tier 1 risk-based capital ratio of 4% or greater, and has a leverage ratio of 4% or greater; (iii) an institution is "undercapitalized" if it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less than 4% or has a leverage ratio that is less than 4%; (iv) an institution is "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6%, a Tier I risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; (v) an institution is "critically undercapitalized" if its "tangible equity" is equal to or less than 2% of its total assets. The FDIC also, after an opportunity for a hearing, has authority to downgrade an institution from "well capitalized to "adequately capitalized" or to subject an "adequately capitalized" or "undercapitalized" institution to the supervisory actions applicable to the next lower category, for supervisory concerns. These regulatory ratios are subject to further review and adjustment as described under "Basel III Proposal" below.

        Information pertaining to Mackinac's capital is contained in in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations of Mackinac" in this proxy statement/prospectus under the caption "Capital and Regulatory."

        Current federal law provides that adequately capitalized and managed bank holding companies from any state may acquire banks and bank holding companies located in any other state, subject to certain conditions.

        In 1999, Congress enacted the Gramm-Leach-Bliley Act ("GLBA"), which eliminated certain barriers to and restrictions on affiliations between banks and securities firms, insurance companies and other financial service organizations. Among other things, GLBA repealed certain Glass-Steagall Act restrictions on affiliations between banks and securities firms, and amended the BHCA to permit bank holding companies that qualify as "financial holding companies" to engage in a broad list of "financial activities," and any non-financial activity that the FRB, in consultation with the Secretary of the Treasury, determines is "complementary" to a financial activity and poses no substantial risk to the safety and soundness of depository institutions or the financial system. GLBA treats lending, insurance underwriting, insurance company portfolio investment, financial advisory, securities underwriting, dealing and market-making, and merchant banking activities as financial in nature for this purpose.

        Under GLBA, a bank holding company may become certified as a financial holding company by filing a notice with the FRB, together with a certification that the bank holding company meets certain criteria, including capital, management, and Community Reinvestment Act requirements. Mackinac does not qualify as a financial holding company at this time.




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Privacy Restrictions

        GLBA, in addition to the previous described changes in permissible non-banking activities permitted to banks, bank holding companies and financial holding companies, also requires financial institutions in the U.S. to provide certain privacy disclosures to customers and consumers, to comply with certain restrictions on sharing and usage of personally identifiable information, and to implement and maintain commercially reasonable customer information safeguarding standards. Mackinac believes that it complies with all provisions of GLBA and all implementing regulations, and mBank has developed appropriate policies and procedures to meet its responsibilities in connection with the privacy provisions of GLBA.

The USA PATRIOT Act

        In 2001, Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the"USA PATRIOT Act"). The USA PATRIOT Act is designed to deny terrorists and criminals the ability to obtain access to the United States financial system, and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The USA PATRIOT Act mandates financial services companies to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, and currency crimes.

Sarbanes-Oxley Act

        On July 30, 2002, President Bush signed into law The Sarbanes-Oxley Act of 2002. This legislation addresses accounting oversight and corporate governance matters, including:

•

The creation of a five-member oversight board that will set standards for accountants and have investigative and disciplinary powers;



•

The prohibition of accounting firms from providing various types of consulting services to public clients and requiring accounting firms to rotate partners among public client assignments every five years;



•

Increased penalties for financial crimes;



•

Expanded disclosure of corporate operations and internal controls and certification of financial statements;



•

Enhanced controls on, and reporting of, insider training; and



•

Prohibition on lending to officers and directors of public companies, although mBank may continue to make these loans within the constraints of existing banking regulations.

        Among other provisions, Section 302(a) of the Sarbanes-Oxley Act requires that Mackinac's Chief Executive Officer and Chief Financial Officer certify that its quarterly and annual reports do not contain any untrue statement or omission of a material fact. Specific requirements of the certifications include having these officers confirm that they are responsible for establishing, maintaining and regularly evaluating the effectiveness of Mackinac's disclosure controls and procedures; management has made certain disclosures to Mackinac's auditors and Audit Committee about its internal controls; and they have included information in Mackinac's quarterly and annual reports about their evaluation and whether there have been significant changes in its internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation.

        In addition, Section 404 of the Sarbanes-Oxley Act and the SEC's rules and regulations thereunder require Mackinac's management to evaluate, with the participation of its principal executive and




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principal financial officers, the effectiveness, as of the end of each fiscal year, of Mackinac's internal control over financial reporting. Mackinac's management must then provide a report of management on its internal control over financial reporting that contains, among other things, a statement of their responsibility for establishing and maintaining adequate internal control over financial reporting, and a statement identifying the framework used to evaluate the effectiveness of Mackinac's internal control over financial reporting.

Extraordinary Government Programs

        Troubled Asset Relief Program.    On October 3, 2008, the Emergency Economic Stabilization Act of 2008 ("EESA") was enacted, which, among other things, provided the United States Department of the Treasury ("Treasury") access to up to $700 billion to stabilize the U.S. banking system. On October 14, 2008, Treasury announced its intention to inject capital into nine large U.S. financial institutions under the Capital Purchase Program (the"CPP") as part of the Troubled Asset Relief Program ("TARP") implementing the EESA, and since has injected capital into many other financial institutions.

        Under the CPP, Mackinac issued previously authorized preferred stock with a 5% annual dividend rate to the Treasury. Mackinac also, as a required part of this transaction, issued 379,093 common stock warrants with an exercise price of $4.35 per share. The preferred stock and common stock warrants were issued on the closing date, April 24, 2009. In 2012, the Treasury auctioned Mackinac's preferred stock and the stock was sold to several individual and private investors. Mackinac repurchased its common stock warrants from the Treasury in December 2012 at a cost of $1.3 million. In 2013, Mackinac redeemed the entire $11.0 million in Series A Preferred Stock.

        Additional information pertaining to Supervision and Regulation is contained in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations of Mackinac" in this proxy statement/prospectus under the caption "Capital and Regulatory."

Dodd-Frank Wall Street Reform and Consumer Protection Act

        On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the"Dodd-Frank Act") into law. The Dodd-Frank Act resulted in sweeping changes in the regulation of financial institutions aimed at strengthening safety and soundness for the financial services sector. A summary of certain provisions of the Dodd-Frank Act is set forth below:

•

Increased Capital Standards and Enhanced Supervision

The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies. These new standards will be no lower than current regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, be higher when established by the agencies. The Dodd-Frank Act also increased regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency.

•

Federal Deposit Insurance.

The Dodd-Frank Act made permanent the $250,000 deposit insurance limit for insured deposits and provided unlimited federal deposit insurance on noninterest bearing transaction accounts at all insured depository institutions through December 31, 2012. Subsequent to 2012, these amounts reverted from unlimited insurance to $250,000 coverage per separately insured depositor. The Dodd-Frank Act also changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible equity, eliminated the ceiling on the size of the Deposit Insurance Fund (the"DIF") and increased the floor on the size of the DIF.




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•

The Consumer FinancialProtection Bureau ("CFPB").

The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the CFPB, responsible for implementing, examining and, for large financial institutions of $10 billion or more in total assets, enforcing compliance with federal consumer financial laws. Because Mackinac has under $10 billion in total assets, however, the Federal Reserve Bank of Chicago ("Reserve Bank") will still continue to examine it at the federal level for compliance with such laws.

•

Interest on Demand Deposit Accounts.

The Dodd-Frank Act repealed the prohibition on the payment of interest on demand deposit accounts effective July 21, 2011, thereby permitting depository institutions to now pay interest on business checking and other accounts.

•

Mortgage Reform.

The Dodd-Frank Act provided for mortgage reform addressing a customer's ability to repay, restricted variable-rate lending by requiring the ability to repay to be determined for variable rate loans by using the maximum rate that will apply during the first five years of a variable-rate loan term, and made more loans subject to requirement for higher-cost loans, new disclosures and certain other restrictions.

•

Interstate Branching.

The Dodd-Frank Act allows banks to engage in de novo interstate branching, a practice that was previously significantly limited.

•

Interchange Fee Limitations.

The Dodd-Frank Act gave the FRB the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The FRB has rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs. While Mackinac is not directly subject to such regulations since its total assets do not exceed $10 billion, these regulations may impact its ability to compete with larger institutions who are subject to the restrictions.

        Mackinac's management expects that many of the requirements called for in the Dodd-Frank Act will be implemented over time, and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions' operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of Mackinac's business activities, require changes to certain of its business practices, impose upon Mackinac more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect its business. These changes may also require Mackinac to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

Basel III

        Internationally, both the Basel Committee on Banking Supervision and the Financial Stability Board (established in April 2009 by the Group of Twenty Finance Ministers and Central Banker




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Governors to take action to strengthen regulation and supervision of the financial system with greater international consistency, cooperation and transparency) have committed to raise capital standards and liquidity buffers within the banking system ("Basel III"). On September 12, 2010, the Group of Governors and Heads of Supervision agreed to the calibration and phase-in of the Basel III minimum capital requirements (raising the minimum Tier I common equity ratio to 4.5% and minimum Tier 1 equity ratio to 6.0%, with full implementation by January 2015) and introducing a capital conservation buffer of common equity of an additional 2.5% with implementation by January 2019. In July 2013, the Federal Reserve Board released interim final rules regarding implementation of the Basel III regulatory capital rules for U.S. banking organizations. The interim final rules address a significant number of outstanding issues and questions regarding how certain provisions of Basel III are proposed to be adopted in the United States. Key provisions of the proposed rules include the total phase-out from Tier 1 capital of trust preferred securities with grandfathering for bank holding companies with less than $15 billion in assets, a capital conservation buffer of 2.5% above minimum capital ratios, inclusion of other comprehensive income in Tier 1 common equity, inclusion in Tier 1 capital of perpetual preferred stock, and an effective minimum Tier 1 common equity ratio of 7.0%


Monetary Policy


        The earnings and business of Mackinac and mBank depends on interest rate differentials. In general, the difference between the interest rates paid by mBank to obtain its deposits and other borrowings, and the interest rates received by mBank on loans extended to its customers and on securities held in mBank's portfolio, comprises the major portion of mBank's earnings. These rates are highly sensitive to many factors that are beyond the control of mBank, and accordingly, its earnings and growth will be subject to the influence of economic conditions, generally, both domestic and foreign, including inflation, recession, unemployment, and the monetary policies of the FRB. The FRB implements national monetary policies designed to curb inflation, combat recession, and promote growth through, among other means, its open-market dealings in US government securities, by adjusting the required level of reserves for financial institutions subject to reserve requirements, through adjustments to the discount rate applicable to borrowings by banks that are members of the Federal Reserve System, and by adjusting the Federal Funds Rate, the rate charged in the interbank market for purchase of excess reserve balances. In addition, legislative and economic factors can be expected to have an ongoing impact on the competitive environment within the financial services industry. The nature and timing of any future changes in such policies and their impact on mBank cannot be predicted with certainty.


Properties


        Mackinac's headquarters are located at 130 South Cedar Street, Manistique, Michigan 49854. The headquarters location is owned by Mackinac and not subject to any mortgage.

        Mackinac has seven branches located in Michigan's Upper Peninsula, 3 in the Northern Lower Peninsula, and one branch in Southeast Michigan. All of the branch locations are designed for use and operation as a bank, are well maintained, and are suitable for current operations. Of the 11 branch locations, 8 are owned and 3 are leased. Mackinac has additional office space to house administrative operational support. Mackinac also leases one office that supports its commercial lending.


Legal Proceedings


        At August 28, 2014, there were no pending material legal proceedingsWe are periodically involved in claims and lawsuits that are incident to which Mackinac is a party or to which any of its property was subject, except for proceedings which arise in the ordinary course oftheir business. In the opinion of management, pending legal proceedings will not have a material effect on the consolidated financial position or results of operations of Mackinac.




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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MACKINAC


        The following discussion will cover results of operations, asset quality, financial position, liquidity, interest rate sensitivity, and capital resources for the periods indicated. 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 proxy statement/prospectus. This discussion should be read in conjunction with the consolidated financial statements and footnotes contained in this proxy statement/prospectus.


SIX MONTHS ENDED JUNE 30, 2014


FINANCIAL OVERVIEW

        Mackinac recorded a second quarter 2014 income of $.806 million or $.15 per share compared to net income available to common shareholders of $1.197 million, or $.22 per share for the second quarter of 2013. Operating results for the first six months of 2014 totaled $1.466 million or $.27 per share, compared to $1.873 million, or $.34 per share, for the same period in 2013.

        Weighted average shares totaled 5,529,290 shares for the six month period in 2014 and 5,527,690 shares in the 2014 second quarter compared to 5,557,842 shares for the six month period in 2013 and 5,556,133 shares in the 2013 second quarter of 2013.

        The net interest margin for the second quarter of 2014 increased to $5.659 million, or 4.18%, compared to $5.269 million, or 4.16% in the second quarter of 2013. The six month margin in 2014 was $11.252 million, or 4.21% compared to $10.425 million, or 4.17%.

        Total assets of Mackinac at June 30, 2014 were $595.869 million, up by $42.368 million, or 7.65% from the $553.501 million in total assets reported at June 30, 2013 and up by $23.069 million, or 4.03%, from total assets of $572.800 million at year-end 2013. The loan portfolio increased $19.108 million, or 3.95%, fromAt December 31, 2013 balances of $483.832 million. Deposits totaled $484.016 million at June 30, 2014, an increase of $17.717 million from the $466.299 million at December 31, 2013.

FINANCIAL CONDITION2017, we are not involved in any claims or lawsuits material to their respective businesses.

Cash and Cash EquivalentsCompetition


        Cash and cash equivalents increased $2.527 million during the first halfFirst Federal of 2014. See further discussion of the changeNorthern Michigan conducts operations through its main office in cash and cash equivalentsAlpena, Michigan, which is located in the Liquidity section.


Investment Securities
northeastern lower peninsula of Michigan, and through its six other branch offices in Michigan. According to the United States Census Bureau, the population of Alpena County, from which the majority of our deposits are drawn, has decreased approximately 3.6% since 2010, and is currently estimated at 28,526. The population of our primary market area, which includes Alpena County and five additional counties, was estimated to be approximately 128,900 in 2018, a decrease of 1.6% from approximately 131,000 according to the 2010 census conducted by United States Census Bureau. Median household income for the counties which comprised our market area in 2018 ranged from approximately $38,502 to $56,005, and is projected to moderately increase over the next five years in our market area. Median household income for our entire market area was below the national level of $61,045 and below the Michigan level of $56,204, reflecting the largely rural nature of our market area and the absence of more densely populated urban and suburban areas. Household income levels are not expected to increase substantially in our market area in the near future. The unemployment rate in our primary market, Alpena County, was 5.9% for December 2017, and ranged from 6.5% to 15.6% across the rest of our primary market area, as compared to 3.9% nationally and 4.4% for Michigan (all numbers not seasonally adjusted).

        Securities available for sale increased $2.986 million from December 31, 2013Alpena is the largest city located in the northeastern lower peninsula of Michigan. This area has long been associated with agricultural, wood and concrete industries. Tourism has also been a major industry in our primary market area. All of these industries tend to June 30, 2014, with the balance on June 30, 2014, totaling $47.374 million. Investment securitiesbe seasonal and are utilized in an effort to manage interest rate riskstrongly affected by state and liquidity. As of June 30, 2014, investment securities with an estimated fair value of $4.605 million were pledged.


Loans


        Through the first half of 2014, loan balances increased by $19.108 million, or 3.95%, from December 31, 2013 balances of $483.832 million. During the first half of 2014, mBank had total loan production of $86 million, which included $11 million of secondary market loan production. This loan production, however, was offset by loan principal runoff, paydowns and amortization, and also SBA/USDA loan sales of $4.724 million, and nonperforming loans transferred to other real estate owned ("OREO") amounting to $.282 million.national economic conditions.




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        Management continues to actively manage the loan portfolio, seeking to identifyMajor employers in our primary market area include various public schools and resolve problem assets at an early stage. Management believes a properly positioned loan portfolio provides the most attractive earning asset yield available to Mackinacgovernmental agencies, MidMichigan Medical Center, Besser Company (a manufacturer of concrete products equipment), Lafarge Corporation (an international limestone mining and with a diligent loan approval processcement producer), Panel Processing (a peg board manufacturer), Treetops Sylvan Resort (an operator of resort properties), Garland Resort (an operator of resort properties 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,golf courses), Otsego Memorial Hospital, Decorative Panels International (a hardboard manufacturer), OMNI Metalcraft Corp. (a diversified manufacturer), and commercial loan products while concentrating on loan quality, industry concentration issues, and competitive pricing.various other small companies.

        Following is a summary of the loan portfolio at June 30, 2014, December 31, 2013 and June 30, 2013 (dollars in thousands):

		June 30, 2014			Percent of Total			December 31, 2013			Percent of Total			June 30, 2013			Percent of Total
Commercial real estate		$	274,500			54.58	%	$	268,809			55.56	%	$	243,363			53.42	%
Commercial, financial, and agricultural			89,515			17.80			79,655			16.46			84,145			18.47
One to four family residential real estate			105,868			21.05			103,768			21.45			94,254			20.69
Construction:
Consumer			7,464			1.48			6,895			1.43			4,305			.95
Commercial			10,550			2.10			10,904			2.25			16,053			3.52
Consumer			15,043			2.99			13,801			2.85			13,435			2.95
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Total loans		$	502,940			100.00	%	$	483,832			100.00	%	$	455,555			100.00	%
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        Following is a table showing the significant industry types in the commercial loan portfolio as of June 30, 2014, December 31, 2013 and June 30, 2013 (dollars in thousands):

		June 30, 2014									December 31, 2013									June 30, 2013
		Outstanding Balance			Percent of Loans			Percent of Capital			Outstanding Balance			Percent of Loans			Percent of Capital			Outstanding Balance			Percent of Loans			Percent of Capital
Real estate—operators of nonres bldgs		$	103,598			27.66	%		155.84	%	$	100,333			27.92	%		153.77	%	$	95,510			27.80	%		143.58	%
Hospitality and tourism			42,111			11.24			63.35			45,360			12.62			106.90			42,833			12.47			64.39
Lessors of residential buildings			14,912			3.98			22.43			14,191			3.95			21.75			13,377			3.89			20.11
Gasoline and convenience stores			11,881			3.17			17.87			11,534			3.21			17.68			11,038			3.21			16.59
Real estate agents and managers			11,388			3.04			17.13			10,922			3.04			16.74			9,472			2.76			14.24
Commercial construction			10,550			2.82			15.87			10,904			3.03			16.46			16,053			4.67			24.13
Other			180,125			48.09			270.96			166,124			46.23			41.90			155,278			45.20			233.43
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Total Commercial Loans		$	374,565			100.00	%				$	359,368			100.00	%				$	343,561			100.00	%
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        Management recognizes the additional risk presented by the concentration in certain segments of the portfolio. On a historical basis, Mackinac'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 June 30, 2014. The current concentration of real estate related loans represents a broad customer base composed of a high percentage of owner occupied developments.

        Mackinac's 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 June 30, 2014, the residential loan portfolio totaled $105.868 million, or 21.05% of Mackinac's total outstanding loans.




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        Mackinac has also extended credit to governmental units, including Native American organizations. Tax-exempt loans and leases increased from $1.526 million at the end of December 31, 2013 to $2.113 million at June 30, 2014.

        Due to2017, First Federal of Northern Michigan was the seasonal nature ofonly thrift institution headquartered in our market area. We encounter strong competition both in attracting deposits and in originating residential and commercial real estate and other loans. Our most direct competition for deposits has historically come from commercial banks, other savings institutions, and credit unions in our market area. Competition for loans comes from such financial institutions. We expect continued strong competition in the foreseeable future, including the "super-regional" banks currently in our markets, from internet banks, and from credit unions in many of Mackinac's commercial loan customers, loan payment terms provide flexibilityour markets. We compete for savings deposits by structuring payments to coincide withoffering depositors a high level of personal service and a wide range of competitively priced financial products. We compete for real estate loans primarily on the customer's business cycle. The lending staff evaluates the collectabilitybasis of the past dueinterest rates and fees we charge and through advertising. Strong competition for deposits and loans based on documented collateral valuesmay limit our ability to grow and payment history. Mackinac discontinues the accrual of interest on loans when,may adversely affect our profitability 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.future.


Credit Quality


        Management analyzes the allowance for loan losses in detail on a monthly basis to determine whether the losses inherent in the portfolio are properly reserved for. Net recoveries for the six months ended June 30, 2014 amounted to $62,000, compared to net charge-offs of $.516 million, or .23% of average loans outstanding, for the same period in 2013. The current reserve balance is representative of the relevant risk inherent within Mackinac'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.

        The table below shows period end balances of nonperforming assets (dollars in thousands):

		June 30, 2014			December 31, 2013			June 30, 2013
Nonperforming Assets:
Nonaccrual Loans		$	2,055		$	1,410		$	3,983
Loans past due 90 days or more			—			—			—
Restructured loans			597			614			—
​	​	​	​	​	​	​	​	​	​	​
Total nonperforming loans			2,652			2,024			3,983
Other real estate owned			1,947			1,884			2,481
​	​	​	​	​	​	​	​	​	​	​
Total nonperforming assets		$	4,599		$	3,908		$	6,464
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Nonperforming loans as a % of loans			.53	%		.42	%		.87	%
​	​	​	​	​	​	​	​	​	​	​
Nonperforming assets as a % of assets			.77	%		.68	%		1.17	%
​	​	​	​	​	​	​	​	​	​	​
Reserve for Loan Losses:
At period end		$	5,097		$	4,661		$	5,177
​	​	​	​	​	​	​	​	​	​	​
As a % of loans			1.01	%		.96	%		1.14	%
​	​	​	​	​	​	​	​	​	​	​
As a % of nonperforming loans			192.19	%		230.29	%		129.98	%
​	​	​	​	​	​	​	​	​	​	​
As a % of nonaccrual loans			248.03	%		330.57	%		129.98	%
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Texas ratio*			6.43	%		5.59	%		9.02	%
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

---

*

calculated by taking total nonperforming assets divided by total equity plus reserve for loan losses

        Nonperforming assets at $4.599 million were reduced by $1.865 million from one year ago and increased $.691 million from the $3.908 million at 2013 year end. The current low level of nonperforming assets is also representative of the overall quality of Mackinac's loan portfolio.




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        The following ratios provide additional information relative to Mackinac's credit quality:

		At Period End						At Period End
		June 30, 2014			December 31, 2013			June 30, 2013
Total loans, at period end		$	502,940		$	483,832		$	455,555
​	​	​	​	​	​	​	​	​	​	​
Average loans for the year		$	489,656		$	462,500		$	453,023
​	​	​	​	​	​	​	​	​	​	​




		For the Period Ended						For the Period Ended
		Six Months Ended June 30, 2014			Twelve Months Ended December 31, 2013			Six Months Ended June 30, 2013
Net charge-offs (recoveries) during the period		$	(62	)	$	2,232		$	516
​	​	​	​	​	​	​	​	​	​	​
Net charge-offs to average loans			N/M	%		.48	%		.23	%
​	​	​	​	​	​	​	​	​	​	​
Net charge-offs to beginning allowance balance			N/M	%		42.78	%		9.89	%
​	​	​	​	​	​	​	​	​	​	​

        Management continues to address market issues impacting its loan customer base. In conjunction with Mackinac's senior lending staff and the bank regulatory examinations, management reviews its loans, related collateral evaluations, and the overall lending process. Mackinac also utilizes an outside loan review consultant to perform a review of the loan portfolio. Historically, this independent review has provided findings similar to management as to the overall adequacy of the loan loss reserve and has substantiated Mackinac's loan rating system. In 2014, Mackinac will again utilize a consultant for loan review.

        As of June 30, 2014, the allowance for loan losses represented 1.01% of total loans. At June 30, 2014, the allowance included specific reserves in the amount of $1.438 million, as compared to $1.111 million at December 31, 2013 and $2.208 million at June 30, 2013. 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, Mackinac may acquire ownership of collateral which secured such credits. Mackinac carries this collateral in other real estate on the balance sheet.

        The following table represents the activity in other real estate for the periods indicated (dollars in thousands):

		Six Months Ended June 30 2014			Year Ended December 31, 2013			Six Months Ended June 30 2013
Balance at beginning of period		$	1,884		$	3,212		$	3,212
Other real estate transferred from loans due to foreclosure			282			932			687
Other real estate sold			(205	)		(1,996	)		(1,329	)
Writedowns on other real estate held for sale			(2	)		(231	)		(114	)
Gain (loss) on sale of other real estate held for sale			(12	)		(33	)		25
​	​	​	​	​	​	​	​	​	​	​
Balance at end of period		$	1,947		$	1,884		$	2,481
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​




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        During the first half of 2014, Mackinac received real estate in lieu of loan payments of $.282 million. Other real estate is initially valued at the lower of cost or the fair value less selling costs. After the initial receipt, management periodically re-evaluates the recorded balances and any additional reductions in the fair value result in a write-down of other real estate.


Deposits


        Mackinac had an increase in deposits in the first six months of 2014. Total deposits increased by $17.717 million, or 3.80%, in the first half of 2014. The increase in deposits for the first half of 2014 is composed of an increase in noncore deposits of $12.538 million and an increase in core deposits of $5.179 million. In recent years, Mackinac has strategically emphasized the growth of core deposits. This strategic initiative is supported with an individual incentive plan, along with the introduction of several new deposit products and competitive deposit pricing. The core deposit balances increased primarily in transactional account deposits, Mackinac's lowest cost of funds. Most recently, Mackinac has experienced some declines in core deposits. A portion of these decreases can be attributed to individual customer deposit reductions due to various business related needs. In an effort to stem some runoff from core deposit CDs, management recently increased some offering rates on CD products.

        Management continues to monitor existing deposit products in order to stay competitive as to both 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 deposits.

        The following table represents detail of deposits at the end of the periods indicated (dollars in thousands):

		June 30, 2014			% of Total			December 31, 2013			% of Total			June 30, 2013			% of Total
Noninterest bearing		$	73,732			15.23	%	$	72,936			15.64	%	$	64,736			14.45	%
NOW, money market, checking			148,242			30.63			149,123			31.98			146,203			32.64
Savings			15,658			3.24			13,039			2.80			12,229			2.73
Certificates of Deposit <$100,000			143,140			29.57			140,495			30.13			134,767			30.09
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total core deposits			380,772			78.67			375,593			80.55			357,935			79.91
Certificates of Deposit >$100,000			23,151			4.78			23,159			4.96			25,091			5.60
Brokered CDs			80,093			16.55			67,547			14.49			64,881			14.49
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total non-core deposits			103,244			21.33			90,706			19.45			89,972			20.09
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total deposits		$	484,016			100.00	%	$	466,299			100.00	%	$	447,907			100.00	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​


Borrowings


        Mackinac also utilizes FHLB borrowings as a source of funding. At June 30, 2014, this source of funding totaled $35 million and Mackinac secured this funding by pledging loans and investments. The $35 million of FHLB borrowings has a weighted average maturity of 1.96 years and a weighted average rate of 1.79% at June 30, 2014. Mackinac also has a USDA Rural Development loan held by its wholly owned subsidiary, First Rural Relending that has an outstanding balance of $.852 million, with a fixed interest rate of 1% that matures in August 2024.

        In addition to the above, Mackinac currently has two banking borrowing relationships. The first relationship consists of a line of credit and a term note. The line of credit bears interest at 90-day LIBOR plus 2.75%, with a floor rate of 4.00% and has an initial term that expires on March 22, 2015. The term note bears the same interest and matures on March 22, 2017. The second borrowing relationship consists of a $10 million revolving line of credit, which can be increased to $25 million




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upon request, used to support asset based lending activities at a wholly owned subsidiary that currently bears interest at 90-day LIBOR plus 2.75% and has an initial term that expires on September 10, 2016.


Shareholders' Equity


        Total shareholders' equity increased $1.228 million from December 31, 2013 to June 30, 2014. Contributing to the increase in shareholders' equity was net income available to common shareholders of $1.466 million, a reduction for dividends on common stock of $.553 million, increases due to stock compensation of $.225 million, an increase in the market value of securities of $.233 million and a decrease due to the repurchase of common stock of $.143 million.

RESULTS OF OPERATIONS

Summary


        Mackinac reported net income available to common shareholders of $1.466 million, or $.27 per share, in the first half of 2014, compared to $1.873 million or $.34 per share for the first half of 2013. The first half results include a provision for loan losses of $.374 million. Operating results for the same period in 2013 include a provision for loan losses of $.475 million.


Net Interest Income


        Net interest income is Mackinac's primary source of core earnings. Net interest income represents the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing obligations. The net interest income is impacted by economic and competitive factors that influence rates, loan demand, and the availability of funding.

        Net interest margin on a fully taxable equivalent basis amounted to $5.661 million, 4.18% of average earning assets, in the second quarter of 2014, compared to $5.287 million, and 4.17% of average earning assets, in the second quarter of 2013. In the first six months of 2014, net interest margin increased to $11.277 million, 4.22% of average earning assets, compared to $10.460 million, 4.19% of average earning assets, for the same period in 2013.

        The following table presents the amount of 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.




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		Three Months Ended
											Average Rates
		Average Balances															Interest
																							2014 - 2013
		June 30,									June 30,						June 30,
								Increase/ (Decrease)															Income/ Expense Variance			Volume Variance			Rate Variance			Rate/ Volume Variance
(dollars in thousands)		2014			2013						2014			2013			2014			2013
Loans(1)(2)(3)		$	492,922		$	456,937		$	35,985			5.18	%		5.32	%	$	6,370		$	6,056		$	314		$	477		$	(151	)	$	(12	)
Taxable securities			45,515			47,456			(1,941	)		2.15			2.04			244			241			3			(10	)		13			—
Nontaxable securities(2)			1,828			835			993			3.73			4.80			17			10			7			12			(2	)		(3	)
Federal funds sold			3			3			—			—			—			—			—			—			—			—			—
Other interest-earning assets			3,160			3,070			90			4.32			4.18			34			32			2			1			1			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total earning assets			543,428			508,301			35,127			4.92			5.00			6,665			6,339			326			480			(139	)		(15	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Reserve for loan losses			(4,960	)		(5,180	)		220
Cash and due from banks			16,272			17,927			(1,655	)
Fixed Assets			9,883			10,635			(752	)
Other Real Estate			2,112			3,175			(1,063	)
Other assets			14,415			13,597			818
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total assets		$	581,150		$	548,455		$	32,695
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
NOW and money market deposits		$	96,397		$	116,362		$	(19,965	)		.22	%		.25	%	$	54		$	72		$	(18	)	$	(12	)	$	(7	)	$	1
Interest checking			47,288			36,761			10,527			.24			.32			28			29			(1	)		8			(7	)		(2	)
Savings deposits			15,151			13,085			2,066			.11			.09			4			3			1			—			—			1
CDs <$100,000			145,494			130,957			14,537			1.19			1.60			433			524			(91	)		58			(134	)		(15	)
CDs >$100,000			23,229			24,610			(1,381	)		1.26			1.66			73			102			(29	)		(6	)		(25	)		2
Brokered deposits			72,781			53,449			19,332			1.15			1.17			208			156			52			56			(3	)		(1	)
Borrowings			43,043			40,656			2,387			1.90			1.64			204			166			38			10			27			1
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest-bearing liabilities			443,383			415,880			27,503			.91			1.01			1,004			1,052			(48	)		114			(149	)		(13	)
Demand deposits			69,380			64,556			4,824
Other liabilities			2,834			536			2,298
Shareholders' equity			65,553			67,483			(1,930	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total liabilities and shareholders' equity		$	581,150		$	548,455		$	32,695
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Rate spread												4.01	%		3.99	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest margin/revenue												4.18	%		4.17	%	$	5,661		$	5,287		$	374		$	366		$	10		$	(2	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
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		Six Months Ended
											Average Rates
		Average Balances															Interest
																							2014 - 2013
		June 30,									June 30,						June 30,
								Increase/ (Decrease)															Income/ Expense Variance			Volume Variance			Rate Variance			Rate/ Volume Variance
(dollars in thousands)		2014			2013						2014			2013			2014			2013
Loans(1)(2)(3)		$	489,656		$	453,023		$	36,633			5.22	%		5.41	%	$	12,687		$	11,986		$	701		$	969		$	(248	)	$	(20	)
Taxable securities			44,392			47,082			(2,690	)		2.19			2.06			481			481			—			(27	)		29			(2	)
Nontaxable securities(2)			1,668			839			829			4.96			4.81			41			20			21			20			1			—
Federal funds sold			3			3			—			—			—			—			—			—			—			—			—
Other interest-earning assets			3,115			3,070			45			5.24			4.14			81			63			18			1			17			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total earning assets			538,834			504,017			34,817			4.97			5.02			13,290			12,550			740			963			(201	)		(22	)
Reserve for loan losses			(4,907	)		(5,153	)		246
Cash and due from banks			20,038			18,243			1,795
Fixed Assets			10,085			10,634			(549	)
Other Real Estate			2,085			3,234			(1,149	)
Other assets			14,799			13,912			887
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total assets		$	580,934		$	544,887		$	36,047
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
NOW and money market deposits		$	106,565		$	120,797		$	(14,232	)		.22	%		.25	%	$	114		$	150		$	(36	)	$	(18	)	$	(21	)	$	3
Interest checking			40,228			36,418			3,810			.22			.32			44			57			(13	)		6			(17	)		(2	)
Savings deposits			14,365			13,279			1,086			.10			.11			7			7			—			1			(1	)		—
CDs <$100,000			148,390			131,297			17,093			1.21			1.62			892			1,057			(165	)		138			(268	)		(35	)
CDs >$100,000			23,217			24,620			(1,403	)		1.33			1.66			153			203			(50	)		(12	)		(41	)		3
Brokered deposits			70,183			45,621			24,562			1.18			1.28			412			289			123			156			(21	)		(12	)
Borrowings			40,937			38,679			2,258			1.93			1.70			391			327			64			19			42			3
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest-bearing liabilities			443,885			410,711			33,174			0.91			1.03			2,013			2,090			(77	)		290			(327	)		(40	)
Demand deposits			68,875			62,475			6,400
Other liabilities			2,666			1,854			812
Shareholders' equity			65,508			69,847			(4,339	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total liabilities and shareholders' equity		$	580,934		$	544,887		$	36,047
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
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Rate spread												4.06	%		3.99	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest margin/revenue												4.22	%		4.19	%	$	11,277		$	10,460		$	817		$	673		$	126		$	18
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

---

(1)

For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.



(2)

The amount of interest income on loans and nontaxable securities has been adjusted to a tax euivalent basis, using a 34% tax rate



(3)

Interest income on loans includes fees

        In the past several years of a low interest rate environment, Mackinac repriced all of its brokered deposits along with the majority of its bank time deposits. This repricing of liabilities is the primary reason for the increased interest margin, on a fully taxable equivalent basis in recent reported periods.

        During this relatively low interest environment, Mackinac has also repriced a significant portion of its loan portfolio. Management has been diligent when repricing maturing or new loans in establishing interest rate floors in order to maintain the improved interest rate spread. Mackinac is anticipating some margin pressure in future periods as it continues to see extremely competitive pricing on new and renewable loans.


Provision for Loan Losses


        Mackinac 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 the first half of 2014, Mackinac determined through this analysis that a $.374 million provision for loan loss was required, compared to




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$.475 million in the first half of 2013. There were net recoveries of $62,000 in the first half of 2014, compared to net charge-offs of $.516 million for the same period in 2013.


Other Income


        Other income, at $1.341 million in the first half of 2014, decreased $.668 million from the first half of 2013 level of $2.009 million. Other income decreased primarily as a result of a reduced level of fees and gains on the sale of loans from secondary market mortgage lending of $.336 million from prior year period.

        Management continues to evaluate deposit products and services for ways to better serve its customer base and also enhance service fee income through a broad array of products that price services based on income contribution and cost attributes.

        The following table details other income for the three and six months ended June 30, 2014 and 2013 (dollars in thousands):

		Three Months Ended June 30,												Six Months Ended June 30,
								Increase/ (Decrease)												Increase/ (Decrease)
		2014			2013			Dollars			Percent			2014			2013			Dollars			Percent
Deposit service fees		$	192		$	175		$	17			9.71	%	$	349		$	337		$	12			3.56	%
Income from secondary market loans sold			139			279			(140	)		(50.18	)		242			578			(336	)		(58.13	)
SBA/USDA loan sale gains			166			554			(388	)		(70.04	)		548			663			(115	)		(17.35	)
Mortgage servicing income			89			182			(93	)		(51.10	)		102			285			(183	)		(64.21	)
Other noninterest income			64			61			3			4.92			100			146			(46	)		(31.51	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total other income		$	650		$	1,251		$	(601	)		(48.04	)%	$	1,341		$	2,009		$	(668	)		(33.25	)%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​


Other Expense


        For the first half of 2014, Mackinac recorded other expense of $10.005 million compared to $8.834 million in 2013, an increase of $1.171 million. The largest increase from the first half of 2013 was in salaries and benefits, largely reflective of the compensation packages for the staff up of Mackinac's asset based lending subsidiary formed in the third quarter of 2013. Mackinac also had increased occupancy costs between periods due primarily to its new Marquette branch office, which it moved into late in 2013. Mackinac incurred some additional legal costs as well in the first half of 2014 for the exploration of acquisitions.




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        The following table details other expense for the three and six months ended June 30, 2014 and 2013 (dollars in thousands):

		Three Months Ended June 30,												Six Months Ended June 30,
								Increase/(Decrease)												Increase/(Decrease)
		2014			2013			Dollars			Percentage			2014			2013			Dollars			Percentage
Salaries and employee benefits		$	2,523		$	2,375		$	148			6.23	%	$	5,064		$	4,681		$	383			8.18	%
Occupancy			546			363			183			50.41			1,084			745			339			45.50
Furniture and equipment			303			255			48			18.82			622			525			97			18.48
Data processing			288			268			20			7.46			574			533			41			7.69
Advertising			123			111			12			10.81			230			215			15			6.98
Professional service fees			276			320			(44	)		(13.75	)		607			545			62			11.38
Loan and deposit			83			45			38			84.44			162			118			44			37.29
Writedowns and losses on other real estate held for sale			14			87			(73	)		(83.91	)		14			89			(75	)		(84.27	)
FDIC insurance premiums			90			95			(5	)		(5.26	)		175			200			(25	)		(12.50	)
Telephone			82			63			19			30.16			164			145			19			13.10
Other			570			541			29			5.36			1,309			1,038			271			26.11
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total other expense		$	4,898		$	4,523		$	375			8.29	%	$	10,005		$	8,834		$	1,171			13.26	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
											��


Federal Income Taxes


        A valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred tax asset will not be realized. Mackinac, as of June 30, 2014 had a net operating loss and tax credit carryforwards for tax purposes of approximately $17.2 million, and $2.4 million, respectively. 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 $10.3 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 $.476 million. These limitations for use were established in conjunction with the recapitalization of Mackinac in December 2004.

        Mackinac has reported deferred tax assets of $9.097 million at June 30, 2014, which is net of a valuation allowance of $.760 million. Management evaluated the deferred tax valuation allowance as of June 30, 2014 and determined that no adjustment to the valuation was warranted. The remaining valuation allowance pertains to the existing tax credit carryovers, which will only be utilized after all net operating loss carryforwards. Since a portion of these tax credits may expire before that occurs, a valuation allowance for these has been established. Mackinac will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted.

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. mBank'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, mBank can exercise existing credit arrangements.




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        Current balance sheet liquidity consists of $20.746 million in cash and due from balances, negligible fed funds sold, $42.769 million of unpledged investment securities. Although current liquidity is deemed adequate, management will increase on hand liquidity in the near term by issuing brokered CDs in order to fund anticipated loan growth.

        During the first six months of 2014, Mackinac increased cash and cash equivalents by $2.527 million. As shown on Mackinac's condensed consolidated statement of cash flows, liquidity was impacted by cash used in investing activities, with a net increase in loans of $19.354 million. Offsetting the net decrease used by investing activities was cash provided by financing activities, primarily a net increase in deposits of $17.717 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.

        Mackinac's primary source of liquidity on a stand-alone basis is dividends from mBank. Mackinac also has a line of credit with a correspondent bank with current availability of $2.500 million. Mackinac's current plan for dividends from mBank are dependent upon the profitability of mBank, growth of assets at mBank and the level of capital needed to stay "well capitalized."

        Liquidity is managed by Mackinac 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 mBank is managed daily, thus enabling mBank 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. mBank's liquidity is best illustrated by the mix in mBank's core and noncore funding dependence ratio, which explains the degree of reliance on noncore 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. Noncore funding consists of certificates of deposit greater than $100,000, brokered deposits, and FHLB and Farmers' Home Administration borrowings. At June 30, 2014, mBank's core deposits in relation to total funding were 72.38% compared to 73.98% at June 30, 2013. These ratios indicated at June 30, 2014, that mBank has increased its reliance on noncore deposits and borrowings to fund mBank's long-term assets, namely loans and investments. mBank believes that by maintaining adequate volumes of short-term investments and implementing competitive pricing strategies on deposits, it can ensure adequate liquidity to support future growth. mBank also has correspondent lines of credit available to meet unanticipated short-term liquidity needs. As of June 30, 2014, mBank had $28.375 million of unsecured lines available and additional funding sources available if secured. mBank 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 mBank's liquidity.

        From a long-term perspective, Mackinac's strategy is to increase core deposits in its local markets. Management continually evaluates deposit products offered in order to remain competitive in its goal of increasing core deposits. Mackinac will and has the ability to augment local deposit growth efforts with wholesale CD funding.

CAPITAL AND REGULATORY

        As a bank holding company, Mackinac is required to maintain certain levels of capital under government regulation. There are several measurements of regulatory capital and Mackinac 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




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institution becomes financially troubled. As of June 30, 2014, Mackinac and mBank were well capitalized. During the first six months of 2014, total capitalization increased by $1.228 million.

        The following table details sources of capital for the periods indicated (dollars in thousands):

		June 30, 2014			December 31, 2013			June 30, 2013
Capital Structure
Shareholders' equity		$	66,477		$	65,249		$	62,520
Preferred stock			—			—			4,000
​	​	​	​	​	​	​	​	​	​	​
Total shareholders' equity		$	66,477		$	65,249		$	66,520
​	​	​	​	​	​	​	​	​	​	​
Total capitalization		$	66,477		$	65,249		$	66,520
​	​	​	​	​	​	​	​	​	​	​
Tangible capital		$	66,477		$	65,249		$	66,520
​	​	​	​	​	​	​	​	​	​	​
Intangible Assets
Core deposit premium		$	—		$	—		$	—
Other identifiable intangibles			1,061			1,129			830
​	​	​	​	​	​	​	​	​	​	​
Total intangibles		$	1,061		$	1,129		$	830
​	​	​	​	​	​	​	​	​	​	​
Regulatory capital
Tier 1 capital:
Shareholders' equity		$	66,477		$	65,249		$	66,520
Net unrealized (gains) losses on available for sale securities			(449	)		(216	)		(430	)
Less: disallowed deferred tax asset			(5,500	)		(7,000	)		(6,500	)
Less: intangibles			(106	)		(113	)		(83	)
​	​	​	​	​	​	​	​	​	​	​
Total Tier 1 capital		$	60,422		$	57,920		$	59,507
​	​	​	​	​	​	​	​	​	​	​
Tier 2 Capital:
Allowable reserve for loan losses		$	5,097		$	4,661		$	5,177
Qualifying long-term debt			—			—			—
​	​	​	​	​	​	​	​	​	​	​
Total Tier 2 capital			5,097			4,661			5,177
​	​	​	​	​	​	​	​	​	​	​
Total capital		$	65,519		$	62,581		$	64,684
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Risk-adjusted assets		$	508,874		$	489,407		$	467,090
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Capital ratios:
Tier 1 Capital to average assets			10.50	%		10.31	%		11.01	%
Tier 1 Capital to risk weighted assets			11.87	%		11.83	%		12.74	%
Total Capital to risk weighted assets			12.88	%		12.79	%		13.85	%

        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, such as acquisition intangibles and noncurrent deferred tax benefits.




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        Presented below is a summary of the capital position in comparison to generally applicable regulatory requirements:

		Shareholders' Equity to Quarter-end Assets			Tangible Equity to Quarter-end Assets			Tier 1 Capital to Average Assets			Tier 1 Capital to Risk-Weighted Assets			Total Capital to Risk-Weighted Assets
Regulatory minumum for capital adequacy purposes			N/A			N/A			4.00	%		4.00	%		8.00	%
Regulatory defined well capitalized guideline			N/A			N/A			5.00	%		6.00	%		10.00	%
The Corporation:
June 30, 2014			11.16	%		11.16	%		10.50	%		11.87	%		12.88	%
June 30, 2013			12.02	%		12.02	%		11.01	%		12.74	%		13.85	%
The Bank:
June 30, 2014			11.20	%		11.20	%		10.50	%		11.90	%		12.88	%
June 30, 2013			11.18	%		11.18	%		10.15	%		11.74	%		12.84	%

INTEREST RATE RISK

        In general, Mackinac 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 Mackinac to adverse movements in interest rates. Mackinac 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 Mackinac 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, Mackinac 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 Mackinac's earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to Mackinac'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. In addition, Mackinac prices the majority of fixed rate loans so it has an opportunity to reprice the loan within 12 to 36 months.

        Mackinac has established interest rate floors on approximately $143.787 million of its variable rate commercial loans. These interest rate floors will result in a "lag" on the repricing of these variable rate loans when and if interest rates increase in future periods. Approximately $98.781 million of the "floor rate" loan balances will reprice with a 100 basis point increase on the prime rate, with another $40.915 million repricing in the next 100 basis point prime rate increase.

        Mackinac also has $47.374 million of securities providing for scheduled monthly principal and interest payments as well as unanticipated prepayments of principal. These cash flows are then reinvested into other earning assets at current market rates. Mackinac also has federal funds sold to correspondent banks as well as other interest-bearing deposits with correspondent banks. These funds are generally repriced on a daily basis.




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        Mackinac has $237.632 million of transactional accounts, of which $73.732 million consists of noninterest bearing demand deposit balances. Transaction account balances have increased significantly in the last year due in part to Mackinac's focus on these low costs accounts by developing new attractive products and increased sales efforts to municipalities, schools and businesses. These transactional account balances provide additional repricing flexibility in changing interest rate environments since they have no scheduled maturities and interest rates can be reset at any time.

        Other deposit products have 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 rate environment 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. mBank has monthly asset/liability meetings with an outside consultant to review its current 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 time frames. Those instruments with a variable interest rate tied to an index and considered immediately repricable are reported in the 1- to 90-day time frame. The estimates of principal amortization and prepayments are assigned to the following time frames.




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        The following are Mackinac's repricing opportunities at June 30, 2014 (dollars in thousands):

		1 - 90 Days			91 - 365 Days			>1 - 5 Years			Over 5 Years			Total
Interest-earning assets:
Loans		$	221,607		$	101,993		$	178,085		$	1,255		$	502,940
Securities			3,306			3,080			28,131			12,857			47,374
Other(1)			237			—			—			3,060			3,297
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest-earning assets			225,150			105,073			206,216			17,172			553,611
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Interest-bearing obligations:
NOW, money market, savings, interest checking			163,900			—			—			—			163,900
Time deposits			31,246			62,427			72,468			150			166,291
Brokered CDs			17,728			10,877			51,488			—			80,093
Borrowings			500			10,000			30,735			852			42,087
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest-bearing obligations			213,374			83,304			154,691			1,002			452,371
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Gap		$	11,776		$	21,769		$	51,525		$	16,170		$	101,240
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Cumulative gap		$	11,776		$	33,545		$	85,070		$	101,240
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

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(1)

Includes Federal Home Loan Bank Stock

        The above analysis indicates that at June 30, 2014, Mackinac had a cumulative asset sensitivity gap position of $33.545 million within the one-year time frame. Mackinac's cumulative asset sensitive gap suggests that if market interest rates were to increase in the next twelve months, Mackinac has the potential to earn more net interest income. Since more assets would reprice at higher rates than liabilities. Conversely, if market interest rates decrease in the next twelve months, the above gap position suggests Mackinac's net interest income would decrease. A limitation of the traditional gap analysis is that it does not consider the timing or magnitude of non-contractual repricing or expected 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, 2013, Mackinac had a cumulative liability sensitivity gap position of $24.272 million within the one-year time frame.

        The borrowings in the gap analysis include $35.000 million of FHLB advances that have a weighted average maturity of 1.96 years and a weighted average rate of 1.79%.

        Mackinac's primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk and foreign exchange risk. Mackinac has no market risk sensitive instruments held for trading purposes. Mackinac 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. Mackinac's interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems, and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk, Mackinac assesses the existing and potential future effects of changes in interest rates on its financial condition, including capital adequacy, earnings, liquidity, and asset quality.




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        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.

FOREIGN EXCHANGE RISK

        In addition to managing interest rate risk, management also actively manages risk associated with foreign exchange. Mackinac provides foreign exchange services, makes loans to, and accepts deposits from, Canadian customers primarily at its banking offices in Sault Ste. Marie, Michigan. To protect against foreign exchange risk, Mackinac monitors the volume of Canadian deposits it takes in and then invests these Canadian funds in Canadian commercial loans and securities. Management believes the exposure to short-term foreign exchange risk is minimal and at an acceptable level for Mackinac.

OFF-BALANCE-SHEET RISK

        Derivative financial instruments include futures, forwards, interest rate swaps, option contracts and other financial instruments with similar characteristics. Mackinac currently does not enter into futures, forwards, swaps, or options. However, Mackinac 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 condensed 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 Mackinac. Standby letters of credit are conditional commitments issued by Mackinac 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 Mackinac until the instrument is exercised.

IMPACT OF INFLATION AND CHANGING PRICES

        The accompanying condensed consolidated 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 Mackinac's operations. Nearly all the assets and liabilities of Mackinac are financial, unlike industrial or commercial companies. As a result, Mackinac's performance is directly impacted by changes in interest rates, which are indirectly influenced by inflationary expectations. Mackinac'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 Mackinac's performance. Changes in interest rates do not necessarily move to the same extent as changes in the price of goods and services.


YEAR ENDED DECEMBER 31, 2013


OVERVIEW

        The following discussion and analysis presents the more significant factors affecting Mackinac's financial condition as of December 31, 2013 and 2012 and the results of operations for 2011 through 2013. This discussion also covers asset quality, liquidity, interest rate sensitivity, and capital resources for the years 2012 and 2013. 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




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related notes and other supplemental information presented elsewhere in this proxy statement/prospectus.

        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 2013 results of operations and financial condition. A more detailed analysis of the results of operations and financial condition follows this summary.

        Mackinac reported net income of $5.629 million or $1.01 per share, for the year ended December 31, 2013, compared to net income of $6.458 million, or $1.51 per share, for 2012 and $1.452 million, or $.42 per share, in 2011. The 2013 and 2012 consolidated and bank results include a deferred tax valuation adjustment of $2.250 million, or $.40 per share and $3.000 million, $.70 per share, respectively.

        Total assets of Mackinac at December 31, 2013, were $572.800 million, an increase of $26.820 million, or 4.91% from total assets of $545.980 million reported at December 31, 2012.

        At December 31, 2013, Mackinac's loans stood at $483.832 million, an increase of $34.655 million, or 7.72%, from 2012 year-end balances of $449.177 million. Total loan production in 2013 amounted to $190.918 million, which included $55.973 million of secondary market mortgage loans sold. Mackinac also sold $8.393 million of SBA/USDA guaranteed loans. Loan balances were also impacted by normal amortization and paydowns, some of which related to payoffs on participation loans.

        Nonperforming loans totaled $2.024 million, or .42% of total loans at December 31, 2013. Nonperforming assets at December 31, 2013, were $3.908 million, .68% of total assets, compared to $7.899 million or 1.45% of total assets at December 31, 2012.

        Total deposits increased from $434.557 million at December 31, 2012, to $466.299 million at December 31, 2013, an increase of 7.30%. The increase in deposits in 2013 was comprised of an increase in wholesale deposits of $28.645 million and an increase in core deposits of $3.097 million. In 2013, Mackinac utilized wholesale deposits in order to better manage interest rate risk in funding fixed rate loans.

        Shareholders' equity totaled $65.249 million at December 31, 2013, compared to $72.448 million at the end of 2012, a decrease of $7.199 million. This change reflects the net income available to common shareholders of $5.629 million, the redemption of the $11.000 million of outstanding Preferred Series A stock, the after tax decrease in the market value of available-for-sale investments, which amounted to $.708 million, the cost associated with the repurchase of common stock of $.509 million, dividends on common stock of $.944 million, and recognition of compensation expense associated with restricted stock awards if $.333 million. The book value per common share at December 31, 2013, amounted to $11.87 compared to $11.05 at the end of 2012.




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RESULTS OF OPERATIONS

(dollars in thousands, except per share data)		2013			2012			2011
Taxable-equivalent net interest income		$	21,471		$	19,898		$	18,019
Taxable-equivalent adjustment			(72	)		(74	)		(90	)
​	​	​	​	​	​	​	​	​	​	​
Net interest income, per income statement			21,399			19,824			17,929
Provision for loan losses			1,675			945			2,300
Other income			3,938			4,043			3,656
Other expense			18,128			16,757			15,969
​	​	​	​	​	​	​	​	​	​	​
Income before provision for income taxes			5,534			6,165			3,316
Provision for (benefit of) income taxes			(403	)		(922	)		1,098
​	​	​	​	​	​	​	​	​	​	​
Net income		$	5,937		$	7,087		$	2,218
Preferred dividend expense			308			629			766
​	​	​	​	​	​	​	​	​	​	​
Net income available to common shareholders		$	5,629		$	6,458		$	1,452
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Earnings per common share
Basic		$	1.01		$	1.51		$	.42
Diluted		$	1.00		$	1.51		$	.41
Return on average assets			1.01	%		1.23	%		..30	%
Return on average common equity			9.07			12.43			3.30
Return on average equity			8.26			10.26			2.66


Summary


        Mackinac reported net income available to common shareholders of $5.629 million in 2013, compared to $6.458 million in 2012 and $1.452 million in 2011. The 2013 results include a deferred tax valuation adjustment of $2.250 million, and reduced nonperforming costs. The 2012 results include significantly reduced credit related expenses and a decreased loan loss provision. In 2012, the loan loss provision was $.945 million, with write-downs and losses on other real estate of $.489 million. In 2012, Mackinac also recognized income from SBA/USDA loan sales of $1.176 million and fees and gains on the sale of secondary market loans of $1.390 million. In 2011, the loan loss provision was $2.300 million, with write-downs and losses on other real estate held for sale of $1.137 million. Also included in 2011 results are income of $1.500 million from SBA/USDA loan sales and the initial valuation of mortgage servicing rights of $.400 million.


Net Interest Income


        Net interest income is Mackinac'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 Mackinac's principal source of revenue, representing 84% of total revenue in 2013. 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 $1.573 million from $19.898 million in 2012 to $21.471 million in 2013. In 2013, interest rates were stable with the prime rate at 3.25% for the entire year. Mackinac experienced a decrease, 16 basis points, in the overall rates on earnings assets from 5.15% in 2012 to 4.99% in 2013. Interest bearing funding sources also declined by 16 basis points, from 1.15% in 2012 to .99% in 2013. The combination of these effective rate changes resulted in a slight increase in net interest margin from 4.18% in 2012 to 4.19% in 2013. In 2012, Mackinac realized an increase of $1.879 million in net interest income. This increase was largely attributed to lower rates on funding liabilities with an increased level of earning assets.




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        In 2013, Mackinac benefited from higher levels of low interest transactional deposit instruments and repricing of term deposits. In addition to the benefits derived from repriced deposit liabilities and a higher level of transactional deposits, Mackinac experienced solid loan growth.

        The following table details sources of net interest income for the three years ended December 31 (dollars in thousands):

		2013			Mix			2012			Mix			2011			Mix
Interest Income
Loans		$	24,400			95.60	%	$	23,313			95.44	%	$	21,774			94.37	%
Funds sold			—			—			18			.07			21			.09
Taxable securities			961			3.77			948			3.88			1,162			5.04
Nontaxable securities			34			.13			27			.11			28			.12
Other interest-earning assets			128			.50			121			.50			87			.38
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total earning assets			25,523			100.00	%		24,427			100.00	%		23,072			100.00	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Interest Expense
NOW, money markets, checking			388			9.41	%		548			11.90	%		1,002			19.48	%
Savings			13			.31			16			.35			36			.70
CDs <$100,000			2,033			49.30			2,429			52.77			2,064			40.13
CDs >$100,000			380			9.21			433			9.41			383			7.45
Brokered deposits			654			15.86			520			11.30			1,045			20.32
Borrowings			656			15.91			657			14.27			613			11.92
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest-bearing funds			4,124			100.00	%		4,603			100.00	%		5,143			100.00	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income		$	21,399					$	19,824					$	17,929
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Average Rates
Earning assets			4.98	%					5.14	%					5.22	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Interest-bearing funds			.99						1.15						1.33
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Interest rate spread			3.99						3.99						3.89
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        As shown in the table above, income on loans provides more than 95% of Mackinac's interest revenue. Mackinac's loan portfolio has approximately $278.080 million of variable rate loans that predominantly reprice with changes in the prime rate and $205.752 million of fixed rate loans. A majority of the variable rate loans, 54%, or $150.087 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 $93.170 million of these loans with floors, while the remainder will reprice with an additional 100 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 rate sensitivity of earning assets and interest bearing liabilities to minimize the risk of movements in interest rates.




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        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.

		Years ended December 31,
		2013									2012									2011
(dollars in thousands)		Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
ASSETS:
Loans(1)(2)(3)		$	462,500		$	24,454			5.29	%	$	422,440		$	23,373			5.53	%	$	388,115		$	21,850			5.63	%
Taxable securities			46,294			961			2.08			38,094			948			2.49			36,155			1,162			3.21
Nontaxable securities(2)			1,002			51			5.09			850			41			4.82			850			42			4.94
Federal Funds sold			3			—			—			11,127			18			.16			13,102			21			.16
Other interest-earning assets			3,070			128			4.17			3,070			121			3.94			3,504			87			2.48
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total earning assets			512,869			25,594			4.99			475,581			24,501			5.15			441,726			23,162			5.24
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Reserve for loan losses			(5,045	)								(5,232	)								(6,027	)
Cash and due from banks			20,535									28,561									25,622
Fixed assets			10,632									10,254									9,630
Other real estate owned			2,800									3,392									4,581
Other assets			13,361									14,184									14,007
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
			42,283									51,159									47,813
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL ASSETS		$	555,152								$	526,740								$	489,539
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
LIABILITIES AND SHAREHOLDERS' EQUITY:
NOW and Money Markets		$	120,401		$	289			.24	%	$	119,053		$	406			.34	%	$	124,575		$	762			.61	%
Interest checking			35,242			99			.28			31,837			142			.45			26,962			240			.89
Savings deposits			13,052			13			.10			13,682			16			.12			16,242			36			.22
CDs <$100,000			133,082			2,032			1.53			138,767			2,429			1.75			112,464			2,064			1.84
CDs >$100,000			24,243			380			1.57			25,128			433			1.72			22,909			383			1.67
Brokered deposits			53,435			654			1.22			36,569			520			1.42			45,906			1,045			2.28
Borrowings			37,838			656			1.73			35,973			657			1.83			36,579			613			1.68
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest-bearing liabilities			417,293			4,123			.99	%		401,009			4,603			1.15			385,637			5,143			1.33
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Demand deposits			67,596									59,730									46,773
Other liabilities			2,091									3,062									2,568
Shareholders' equity			68,172									62,939									54,561
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
			137,859									125,731									103,902
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	555,152								$	526,740								$	489,539
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Rate spread									4.00									4.00	%								3.91	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest margin/revenue, tax equivalent basis					$	21,471			4.19	%				$	19,898			4.18	%				$	18,019			4.08	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

---

(1)

For purposes of these computations, non-accruing loans are included in the daily average loan amounts outstanding.



(2)

The amount of interest income on nontaxable securities and loans has been adjusted to a tax equivalent basis, using a 34% tax rate.



(3)

Interest income on loans includes loan fees.

        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




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rate multiplied by prior period volume). For purposes of this table, changes attributable to both rate and volume are shown as a separate variance.

		Years ended December 31,
		2013 vs. 2012												2012 vs. 2011
		Increase (Decrease) Due to												Increase (Decrease) Due to
		Volume			Rate			Volume and Rate			Total Increase (Decrease)			Volume			Rate			Volume and Rate			Total Increase (Decrease)
Interest earning assets:
Loans		$	2,216		$	(1,037	)	$	(98	)	$	1,081		$	1,932		$	(376	)	$	(33	)	$	1,523
Taxable securities			204			(157	)		(34	)		13			62			(262	)		(14	)		(214	)
Nontaxable securities			7			2			1			10			—			(1	)		—			(1	)
Federal funds sold			(18	)		(18	)		18			(18	)		(3	)		—			—			(3	)
Other interest earning assets			—			7			—			7			(11	)		51			(6	)		34
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest earning assets		$	2,409		$	(1,203	)	$	(113	)	$	1,093		$	1,980		$	(588	)	$	(53	)	$	1,339
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Interest bearing obligations:
NOW and money market deposits		$	5		$	(120	)	$	(2	)	$	(117	)	$	(34	)	$	(337	)	$	15		$	(356	)
Interest checking			15			(53	)		(5	)		(43	)		43			(120	)		(22	)		(99	)
Savings deposits			(1	)		(2	)		—			(3	)		(6	)		(17	)		3			(20	)
CDs <$100,000			(100	)		(310	)		13			(397	)		483			(95	)		(22	)		366
CDs >$100,000			(15	)		(39	)		1			(53	)		37			12			1			50
Brokered deposits			240			(72	)		(34	)		134			(213	)		(392	)		80			(525	)
Borrowings			34			(33	)		(2	)		(1	)		(10	)		55			(1	)		44
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest bearing obligations		$	178		$	(629	)	$	(29	)	$	(480	)	$	300		$	(894	)	$	54		$	(540	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income, tax equivalent basis											$	1,573											$	1,879
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​


Provision for Loan Losses


        Mackinac 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 2013, Mackinac recorded a provision for loan loss of $1.675 million, compared to a provision of $.945 million in 2012 and $2.300 million in 2011.


Noninterest Income


        Noninterest income was $3.938 million, $4.043 million, and $3.656 million in 2013, 2012, and 2011, respectively. The principal recurring sources of noninterest income are the gains on the sale of SBA/USDA guaranteed loans and secondary market loans. In 2013, revenues from these two business lines totaled $1.979 million compared to $2.566 million in 2012 and $2.200 million in 2011. Mackinac, in recent years, expanded its efforts to generate increased income from secondary market loans by adding additional staff and centralizing processing activities. Mackinac also retains the servicing for the majority of mortgage loans sold to the secondary market. In 2013, income from servicing mortgages amounted to $.790 million, compared to $.417 million in 2012 and $.400 million in 2011.

        Deposit related income totaled $.667 million in 2013 compared to $.699 million in 2012 and $.832 million in 2011. Mackinac has experienced continued decline in deposit related income as a result




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of changes in the assessments mandated by new consumer regulations. The current regulatory environment may limit Mackinac's ability to grow these revenue sources.

        The following table details noninterest income for the three years ended December 31 (dollars in thousands):

											% Increase (Decrease)
		2013			2012			2011			2013 - 2012			2012 - 2011
Deposit service charges		$	109		$	110		$	123			(.91	)%		(10.57	)%
NSF Fees			558			589			709			(5.26	)		(16.93	)
Gain on sale of secondary market loans			794			1,077			477			(26.28	)		125.79
Secondary market fees generated			234			313			223			(25.24	)		40.36
SBA Fees			951			1,176			1,500			(19.13	)		(21.60	)
Mortgage servicing rights			790			417			400			89.45			4.25
Other			429			361			225			18.84			60.44
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Subtotal			3,865			4,043			3,657			(4,40	)		10.56
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net security gains			73			—			(1	)		100.00			(100.00	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total noninterest income		$	3,938		$	4,043		$	3,656			(2.60	)%		10.59	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​


Noninterest Expense


        Noninterest expense was $18.128 million in 2013, compared to $16.757 million and $15.969 million in 2012 and 2011, respectively. In 2013, the increase in noninterest expense totaled $1.371 million, or 8.18%. This increase was higher than normal due to several initiatives undertaken during the year including start-up costs for Mackinac's asset based lending subsidiary of approximately $.671 million, the write down of the old mortgage loan office, of $.270 million, in the Marquette market as Mackinac moved to the new leased facility, and other costs incurred in the exploration of a possible acquisition which totaled approximately $.162 million. Salaries and benefits, at $9.351 million, increased by $1.063 million, 12.83%, from the 2012 expenses of $8.288 million and compared to $7.275 million in 2011. Expense increases on salaries and benefits in 2013 were largely due to increased staffing (due to the additions at Mackinac's asset based lending subsidiary), combined with increased employee benefits costs relative to health insurance premium increases and stock compensation expenses related to the issuance of restricted stock. The largest decrease in noninterest expense for 2013 occurred in write-downs and losses on the sale of other real estate, which decreased from $.489 million in 2012 to $.265 million in 2013. Mackinac also experienced a decline in its FDIC insurance premiums due to its improved asset quality and operating performance.

        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.




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        The following table details noninterest expense for the three years ended December 31 (dollars in thousands):

											% Increase (Decrease)
		2013			2012			2011			2013 - 2012			2012 - 2011
Salaries and benefits		$	9,351		$	8,288		$	7,275			12.83	%		13.92	%
Occupancy			1,481			1,372			1,376			7.94			(.29	)
Furniture and equipment			1,102			885			827			24.52			7.01
Data processing			1,071			991			761			8.07			30.22
Professional service fees:
Accounting			362			368			260			(1.63	)		41.54
Legal			264			396			207			(33.33	)		91.30
Consulting and other			443			432			289			2.55			49.48
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total professional service fees			1,069			1,196			756			(10.62	)		58.20
Loan and deposit			617			877			1,137			(29.65	)		(22.87	)
Writedowns and losses on OREO held for sale			265			489			1,137			(45.81	)		(56.99	)
FDIC insurance assessment			385			459			849			(16.12	)		(45.94	)
Telephone			303			233			215			30.04			8.37
Advertising			436			376			351			15.96			7.12
Other operating expenses			2,048			1,591			1,285			28.72			23.81
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total noninterest expense		$	18,128		$	16,757		$	15,969			8.18	%		4.93	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​


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 asset will not be realized. Mackinac, as of December 31, 2013 had a net operating loss and tax credit carryforwards for tax purposes of approximately $19.815 million, and $2.135 million, respectively. Mackinac will evaluate the future benefits from these carryforwards and at such time as it becomes "more likely than not" that they would be utilized prior to expiration and 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 $12.8 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 $1.404 million for the NOL and the equivalent value of tax credits, which is approximately $.476 million. These limitations for use were established in conjunction with the recapitalization of Mackinac in December 2004.




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Current Federal Tax Provision

        Mackinac recognized a deferred tax benefit of approximately $.403 million for the year ended December 31, 2013 and a deferred tax benefit of $.922 million for the year ended December 31, 2012. The valuation allowance at December 31, 2013 was approximately $.760 million. Mackinac has reduced the valuation allowance as it was determined that it was "more likely than not" that these benefits would be realized. In December 2013, Mackinac reduced the valuation by $2.250 million and in June 2012 a reduction of $3.0 million was recorded. Mackinac made these determinations after a thorough review of projected earnings and the composition and sustainability of those earnings over the projected tax carryover period. This analysis substantiated the ability to utilize these deferred tax assets.

        The table below details Mackinac's deferred tax assets and liabilities (dollars in thousands):

		2013			2012
Deferred tax assets:
NOL carryforward		$	6,737		$	7,149
Allowance for loan losses			1,585			1,774
Alternative Minimum Tax Credit			1,463			1,463
OREO Tax basis > book basis			138			1,025
Tax credit carryovers			672			672
Deferred compensation			152			185
Stock compensation			267			265
Depreciation			157			174
Intangible assets			33			60
Other			155			170
​	​	​	​	​	​	​	​
Total deferred tax assets			11,359			12,937
​	​	​	​	​	​	​	​
Valuation allowance		$	(760	)	$	(3,010	)
​	​	​	​	​	​	​	​
Deferred tax liabilities:
FHLB stock dividend			(103	)		(103	)
Unrealized gain on securities			(111	)		(476	)
Mortgage servicing rights			(452	)		(217	)
​	​	​	​	​	​	​	​
Total deferred tax liabilities			(666	)		(796	)
​	​	​	​	​	​	​	​
Net deferred tax asset		$	9,933		$	9,131
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        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 $.760 million valuation adjustment as of December 31, 2013. The remaining valuation allowance pertains to the existing tax credit carryovers, which will only be utilized after all net operating loss carryforwards. Since a portion of these tax credits may expire before that occurs, a valuation allowance for those credits that may expire has been established. Mackinac will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted.




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FINANCIAL POSITION

        The table below illustrates the relative composition of various liability funding sources and asset make-up.

		December 31,
		2013						2012						2011
(dollars in thousands)		Balance			Mix			Balance			Mix			Balance			Mix
Sources of funds:
Deposits:
Non-interest bearing transactional deposits		$	72,936			12.73	%	$	67,652			12.39	%	$	51,273			10.29	%
Interest-bearing transactional depopsits			162,162			28.31			169,294			31.01			166,766			33.47
CD's <$100,000			140,495			24.53			135,550			24.83			130,685			26.23
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total core deposit funding			375,593			65.57			372,496			68.23			348,724			69.99
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
CD's >$100,000			23,159			4.04			24,355			4.46			23,229			4.66
Brokered deposits			67,547			11.79			37,706			6.91			32,836			6.59
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total noncore deposit funding			90,706			15.84			62,061			11.37			56,065			11.25
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
FHLB and other borrowings			37,852			6.61			35,925			6.58			35,997			7.22
Other liabilities			3,400			.59			3,050			.56			2,262			.45
Shareholders' equity			65,249			11.39			72,448			13.27			55,263			11.09
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	572,800			100.00	%	$	545,980			100.00	%	$	498,311			100.00	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Uses of Funds:
Net Loans		$	479,171			83.66	%	$	443,959			81.32	%	$	395,995			79.47	%
Securities available for sale			44,388			7.75			43,799			8.02			38,727			7.77
Federal funds sold			3			.00			3			.00			13,999			2.81
Federal Home Loan Bank Stock			3,060			.53			3,060			.56			3,060			.61
Interest-bearing deposits			10			.00			10			.00			10			.00
Cash and due from banks			18,216			3.18			26,958			4.94			20,071			4.03
Other assets			27,952			4.88			28,191			5.16			26,449			5.31
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	572,800			100.00	%	$	545,980			100.00	%	$	498,311			100.00	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​


Securities


        The securities portfolio is an important component of Mackinac's asset composition to provide diversity in its asset base and provide liquidity. Securities increased $.589 million in 2013, from $43.799 million at December 31, 2012 to $44.388 million at December 31, 2013.

        The carrying value of Mackinac's securities is as follows at December 31 (dollars in thousands):

		2013			2012
Corporate		$	16,079		$	18,977
US Agencies			14,855			10,404
US Agencies—MBS			7,359			8,374
Obligations of states and political subdivisions			6,095			6,044
​	​	​	​	​	​	​	​
Total securities		$	44,388		$	43,799
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​




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        Mackinac's policy is to purchase securities of high credit quality, consistent with its asset/liability management strategies. Mackinac classifies all securities as available for sale, in order to maintain adequate liquidity and to maximize its ability to react to changing market conditions. The current portfolio has a weighted average maturity of 50.5 months. At December 31, 2013, investment securities with an estimated fair market value of $4.830 million were pledged.

Loans

        mBank 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 74% of total loans outstanding at December 31, 2013.

        Mackinac continued to experience strong loan demand in 2013 with approximately $190.918 million of new loan production, including $55.973 million of mortgage loans sold in the secondary market. At 2013 year-end, Mackinac's loans stood at $483.832 million, an increase from the 2012 year-end balances of $449.177 million. In 2013, the secondary mortgage loans that were produced and sold totaled $55.973 million while the SBA/USDA loan sales amounted to $8.393 million. The production of loans was distributed among the regions, with the Upper Peninsula at $124.836 million, $48.004 million in the Northern Lower Peninsula and $18.078 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 Mackinac 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. Mackinac is highly competitive in structuring loans to meet borrowing needs and satisfy strong underwriting requirements.

        The following table details the loan activity for 2012 and 2013 (dollars in thousands):

Loan balances as of December 31, 2011		$	401,246
Total production			214,102
Secondary market sales			(74,142	)
SBA loan sales			(11,962	)
Loans transferred to OREO			(1,352	)
Loans charged off, net of recoveries			(978	)
Normal amortization/paydowns and payoffs			(77,737	)
​	​	​	​	​
Loan balances as of December 31, 2012			449,177
​	​	​	​	​
Total production			190,918
Secondary market sales			(54,736	)
SBA loan sales			(8,393	)
Loans transferred to OREO			(932	)
Loans charged off, net of recoveries			(2,232	)
Normal amortization/paydowns and payoffs			(89,970	)
​	​	​	​	​
Loan balances as of December 31, 2013		$	483,832
​	​	​	​	​
​	​	​	​	​




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        Following is a table that illustrates the balance changes in the loan portfolio from 2011 through 2013 year end (dollars in thousands):

											Percent Change
		2013			2012			2011			2013 - 2012			2012 - 2011
Commercial real estate		$	268,809		$	244,966		$	199,201			9.73	%		22.97	%
Commercial, financial, and agricultural			79,655			80,646			92,269			(1.23	)		(12.60	)
One-to-four family residential real estate			103,768			87,948			77,332			17.99			13.73
Construction:
Consumer			6,895			7,465			5,774			(7.64	)		29.29
Commercial			10,904			17,229			19,745			(36.71	)		(12.74	)
Consumer			13,801			10,923			6,925			26.35			57.73
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	483,832		$	449,177		$	401,246			7.72	%		11.95	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        Mackinac's commercial real estate loan portfolio predominantly relates to owner occupied real estate, and its loans are generally secured by a first mortgage lien. Commercial real estate market conditions improved in 2013, and Mackinac expects this trend to continue. Mackinac makes 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.

        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):

		2013									2012
		Balance			% of Loans			% of Capital			Balance			% of Loans			% of Capital
Real estate—operators of nonres bldgs		$	100,333			27.92	%		153.77	%	$	95,151			27.75	%		131.34
Hospitality and tourism			45,360			12.62			69.52			40,787			11.90			56.30
Lessors of residential buildings			14,191			3.95			21.75			12,128			3.54			16.74
Gasoline stations and convenience stores			11,534			3.21			17.68			11,393			3.32			15.73
Real estate agents and managers			10,922			3.04			16.74			10,597			3.09			14.63
Commercial construction			10,904			3.03			16.71			17,229			5.03			23.78
Other			166,124			46.23			254.60			155,556			45.37			214.71
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total commercial loans		$	359,368			100.00	%				$	342,841			100.00	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        Management recognizes the additional risk presented by the concentration in certain segments of the portfolio. On a historical basis, Mackinac'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. Mackinac does not believe that its current portfolio composition has increased exposure related to any specific industry concentration as of 2013 year-end. The current concentration of real estate related loans represents a broad customer base composed of a high percentage of owner-occupied developments.

        As of December 31, 2013, the 20 largest commercial loan relationships of Mackinac represented approximately $122.0 million of the $359.4 million commercial loans, or 34.0%. There is good diversification of these top 20 loan relationships from both a geographical perspective and industrial classification.




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        Mackinac's 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, 2013, Mackinac's residential loan portfolio totaled $110.663 million, or 23% of its total outstanding loans.

        Mackinac has also extended credit to governmental units, including Native American organizations. Tax-exempt loans and leases decreased from $1.542 million at the end of 2012 to $1.526 million at 2013 year-end. Mackinac has elected to refrain from making tax-exempt loans, since they provide no current tax benefit, due to tax net operating loss carryforwards.

        Due to the seasonal nature of many of Mackinac'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. Mackinac 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.

        Troubled debt restructurings ("TDR") are determined on a loan-by-loan basis. Generally restructurings are related to interest rate reductions, loan term extensions and short term payment forbearance as means to maximize collectability of troubled credits. If a portion of the TDR loan is uncollectible (including forgiveness of principal), the uncollectible amount will be charged off against the allowance at the time of the restructuring. In general, a borrower must make at least six consecutive timely payments before Mackinac would consider a return of a restructured loan to accruing status in accordance with FDIC guidelines regarding restoration of credits to accrual status.

        Mackinac has, in accordance with generally accepted accounting principles and per recently enacted accounting standard updates, evaluated all loan modifications to determine the fair value impact of the underlying asset. The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan's original rate, or for collateral dependent loans, to the fair value of the collateral.

        Mackinac, at December 31, 2013, had performing loans of $5.663 million and nonperforming loans totaling $.614 million for which repayment terms were modified to the extent that they were deemed to be "restructured" loans. The total restructured loans of $6.277 million is comprised of 11 loans, the largest of which had a December 31, 2013 balance of $2.511 million.




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Credit Quality


        The table below shows balances of nonperforming assets for the three years ended December 31 (dollars in thousands):

		December 31, 2013			December 31, 2012			December 31, 2011
Nonperforming Assets :
Nonaccrual loans		$	1,410		$	4,687		$	5,490
Loans past due 90 days or more			—			—			—
Restructured loans			614			—			2,503
​	​	​	​	​	​	​	​	​	​	​
Total nonperforming loans			2,024			4,687			7,993
Other real estate owned			1,884			3,212			3,162
​	​	​	​	​	​	​	​	​	​	​
Total nonperforming assets		$	3,908		$	7,899		$	11,155
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Nonperforming loans as a % of loans			.42	%		1.04	%		1.99	%
​	​	​	​	​	​	​	​	​	​	​
Nonperforming assets as a % of assets			.68	%		1.45	%		2.24	%
​	​	​	​	​	​	​	​	​	​	​
Reserve for Loan Losses:
At period end		$	4,661		$	5,218		$	5,251
​	​	​	​	​	​	​	​	​	​	​
As a % of average loans			.96	%		1.24	%		1.35	%
​	​	​	​	​	​	​	​	​	​	​
As a % of nonperforming loans			230.29	%		111.33	%		65.69	%
​	​	​	​	​	​	​	​	​	​	​
As a % of nonaccrual loans			330.57	%		111.33	%		95.65	%
​	​	​	​	​	​	​	​	​	​	​
Texas Ratio			5.59	%		10.17	%		18.43	%
​	​	​	​	​	​	​	​	​	​	​
Charge-off Information (year to date):
Average loans		$	462,500		$	422,440		$	388,115
​	​	​	​	​	​	​	​	​	​	​
Net charge-offs		$	2,232		$	978		$	3,662
​	​	​	​	​	​	​	​	​	​	​
Charge-offs as a % of average loans			.48	%		.23	%		.94	%
​	​	​	​	​	​	​	​	​	​	​

        Management continues to address market issues impacting its loan customer base. In conjunction with Mackinac's senior lending staff and the bank regulatory examinations, management reviews Mackinac's loans, related collateral evaluations, and the overall lending process. Mackinac also utilizes a loan review consultant to perform a review of the loan portfolio. The opinion of this consultant upon completion of the 2013 independent review provided findings similar to management on the overall adequacy of the reserve. Mackinac will again utilize a consultant for loan review in 2014.

        The following table details the impact of nonperforming loans on interest income for the three years ended December 31 (dollars in thousands):

		2013			2012			2011
Interest income that would have been recorded at original rate		$	228		$	313		$	363
Interest income that was actually recorded			—			54			118
​	​	​	​	​	​	​	​	​	​	​
Net interest lost		$	228		$	259		$	245
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​


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 2013 amounted to $2.232 million, or .48% of average loans outstanding, compared to $.978 million, or .23% of loans outstanding in 2012. Attributing to the increase in net charge-offs to average loans was the divestiture




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of a distressed legacy hotel loan, with no personal recourse, in the Northern Lower Peninsula. This loan was originated in 2002 prior to the recapitalization and has been long identified as a problem asset. The company elected to divest of this loan after all other attempts to minimize exposure and loss related to this property were exhausted. The current reserve balance is representative of the relevant risk inherent within Mackinac's loan portfolio. Additions or reductions to the reserve in future periods will be dependent upon a combination of future loan growth, nonperforming loan balances and charge-off activity.

        A three year history of relevant information on Mackinac's credit quality is displayed in the following table (dollars in thousands):

Allowance for Loan Losses		2013			2012			2011
Balance at beginning of period		$	5,218		$	5,251		$	6,613
Loans charged off:
Commercial			2,171			775			3,258
One-to-four family residential real estate			141			399			490
Consumer			120			82			52
​	​	​	​	​	​	​	​	​	​	​
Total loans charged off			2,432			1,256			3,800
​	​	​	​	​	​	​	​	​	​	​
Recoveries of loans previously charged off:
Commercial			150			253			128
One-to-four family residential real estate			26			7			1
Consumer			24			18			9
​	​	​	​	​	​	​	​	​	​	​
Total recoveries of loans previously charged off			200			278			138
Net loans charged off			2,232			978			3,662
​	​	​	​	​	​	​	​	​	​	​
Provision for loan losses			1,675			945			2,300
​	​	​	​	​	​	​	​	​	​	​
Balance at end of period		$	4,661		$	5,218		$	5,251
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Total loans, period end		$	483,832		$	449,177		$	401,246
Average loans for the year			462,500			422,440			388,115
Allowance to total loans at end of year			.96	%		1.16	%		1.31	%
Net charge-offs to average loans			.48			.23			.94
Net charge-offs to beginning allowance balance			42.78			18.63			55.38

        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 allowance for loan losses consists of specific and general components. Mackinac's internal risk system is used to identify loans that meet the criteria for being "impaired" as defined in the accounting guidance. The specific component relates to loans that are individually classified as impaired and where expected cash flows are less than carrying value. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. These qualitative factors include: 1) changes in the nature, volume and terms of loans, 2) changes in lending personnel, 3) changes in the quality of the loan review function, 4) changes in nature and volume of past-due, nonaccrual and/or classified loans, 5) changes in concentration of credit risk, 6) changes in economic and industry conditions, 7) changes in legal and regulatory requirements, 8) unemployment and inflation statistics, and 9) underlying collateral values.




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        At the end of 2013, the allowance for loan losses represented .96% of total loans. The allowance for loan losses at the end of 2013 as a percentage of nonperforming assets was 119.27% compared to 66.06% at 2012 year end. 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. This position is further illustrated with the ratio of the allowance as a percent of nonperforming loans, which stood at 230.29% at December 31, 2013, compared to 111.33% at 2012 year end.

        As part of the process of resolving problem credits, Mackinac may acquire ownership of real estate collateral which secured such credits. Mackinac carries this collateral in other real estate held for sale on the balance sheet.

        The following table represents the activity in other real estate held for sale (dollars in thousands):

Balance at December 31, 2011		$	3,162
Other real estate transferred from loans due to foreclosure			1,352
Other real estate sold			(775	)
Writedowns on other real estate held for sales			(496	)
Loss on other real estate held for sale			(31	)
​	​	​	​	​
Balance at December 31, 2012			3,212
Other real estate transferred from loans due to foreclosure			932
Other real estate sold			(1,996	)
Writedowns on other real estate held for sales			(231	)
Loss on other real estate held for sale			(33	)
​	​	​	​	​
Balance at December 31, 2013		$	1,884
​	​	​	​	​
​	​	​	​	​

        During 2013, Mackinac received real estate in lieu of loan payments of $.932 million. In determining the carrying value of other real estate held for sale, Mackinac 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 held for sale.


Deposits


        Total deposits at December 31, 2013 were $466.299 million, an increase of $31.742 million, or 7.30% from December 31, 2012 deposits of $434.557 million. The table below shows the deposit mix for the periods indicated (dollars in thousands):

		2013			Mix			2012			Mix			2011			Mix
CORE:
Non-interest-bearing		$	72,936			15.64	%	$	67,652			15.57	%	$	51,273			12.67	%
NOW, money market, checking			149,123			31.98			155,465			35.78			152,563			37.69
Savings			13,039			2.80			13,829			3.18			14,203			3.51
Certificates of Deposit <$100,000			140,495			30.13			135,550			31.19			130,685			32.28
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total core deposits			375,593			80.55			372,496			85.72			348,724			86.15
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
NONCORE:
Certificates of Deposit >$100,000			23,159			4.97			24,355			5.60			23,229			5.74
Brokered CDs			67,547			14.49			37,706			8.68			32,836			8.11
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total non-core deposits			90,706			19.45			62,061			14.28			56,065			13.85
​	​	​	​	​	��	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total deposits		$	466,299			100.00	%	$	434,557			100.00	%	$	404,789			100.00	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




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        The increase in deposits, as illustrated above, is composed of an increase in noncore deposits of $28.645 million, while core deposits increased by $3.097 million.

        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. As shown in the table above, core deposits now represent approximately 81% of total deposits. Mackinac will continue to emphasize core deposit growth in its funding sources, but will also supplement this funding with strategic utilization of wholesale brokered deposits to help manage interest rate risk.

        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


        Mackinac also utilizes FHLB borrowings as a source of funding. At 2013 year end, this source of funding totaled $35.000 million and Mackinac secured this funding by pledging loans and investments. The $35.000 million of FHLB borrowings had a weighted average maturity of 2.5 years, with a weighted average rate of 1.79% at December 31, 2013.


Shareholders' Equity


        Changes in shareholders' equity are discussed in detail in the "Capital and Regulatory" section of this proxy statement/prospectus.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk


        In general, Mackinac 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 Mackinac to adverse movements in interest rates. Mackinac 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 Mackinac 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, Mackinac 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 Mackinac's earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to Mackinac's safety and soundness.

        Loans are the most significant earning asset. Mackinac 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, Mackinac attempts to match these balances with sources of funding with similar maturities in order to mitigate interest rate risk. In addition, Mackinac prices loans so it has an opportunity to reprice the loan within 12 to 36 months.

        At December 31, 2013 mBank had $44.388 million of securities, with a weighted average maturity of 50.5 months. The investment portfolio is intended to provide a source of liquidity to Mackinac with limited interest rate risk. Mackinac 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.




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        Mackinac 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. mBank has monthly asset/ liability ("ALCO") meetings, whose membership includes senior management, board representation and third party investment consultants. During these monthly meetings, mBank reviews 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.

        The following is Mackinac's repricing opportunities at December 31, 2013 (dollars in thousands):

		1 - 90 Days			91 - 365 Days			>1 - 5 Years			Over 5 Years			Total
Interest-earning assets:
Loans		$	278,981		$	13,678		$	63,531		$	127,642		$	483,832
Securities			—			6,182			23,860			14,346			44,388
Other(1)			13			—			—			3,060			3,073
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest-earning assets			278,994			19,860			87,391			145,048			531,293
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Interest-bearing obligations:
NOW, money market, savings and interest checking			162,162			—			—			—			162,162
Time deposits			18,000			69,576			75,918			160			163,654
Brokered CDs			—			12,844			54,703			—			67,547
Borrowings			2,000			10,000			25,000			852			37,852
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest-bearing obligations			182,162			92,420			155,621			1,012			431,215
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Gap		$	96,832		$	(72,560	)	$	(68,230	)	$	144,036		$	100,078
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Cumulative gap		$	96,832		$	24,272		$	(43,958	)	$	100,078
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

---

(1)

includes Federal Home Loan Bank stock




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        The above analysis indicates that at December 31, 2013, Mackinac had a cumulative asset sensitivity gap position of $24.272 million within the one-year timeframe. Mackinac's cumulative asset sensitive gap suggests that if market interest rates were to increase in the next twelve months, Mackinac has the potential to earn more net interest income since more assets would reprice at higher rates than liabilities. Conversely, if market interest rates decrease in the next twelve months, the above gap position suggests Mackinac's net interest income would decrease. 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, 2013, Mackinac had $278.080 million of variable rate loans that reprice primarily with the prime rate index. Approximately $150.087 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, $93.170 million of these floor-rate loans would reprice with a 100 basis point prime rate increase, with $148.197 million repricing with an additional 100 basis point prime rate increase.

        At December 31, 2012, Mackinac had a cumulative liability asset gap position of $44.838 million within the one-year time frame.

        Mackinac's primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk and foreign exchange risk. Mackinac has no market risk sensitive instruments held for trading purposes. Mackinac 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. Mackinac's interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems, and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk, Mackinac 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, 2013 (dollars in




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thousands). Nonaccrual loans of $2.024 million are included in the table at an average interest rate of 0.00% and a maturity greater than five years.

		Principal/Notional Amount Maturing/Repricing In:
		2014			2015			2016			2017			2018			Thereafter			Total			Fair Value 12/31/2013
Rate Sensitive Assets
Fixed interest rate securities		$	3,166		$	8,704		$	5,097		$	10		$	7,723		$	19,688		$	44,388		$	44,388
Average interest rate			2.10	%		1.54	%		2.25	%		7.00	%		1.23	%		2.95	%		2.23	%
Fixed interest rate loans			12,703			6,692			24,267			55,539			78,213			28,338			205,752			206,069
Average interest rate			5.39			5.43			5.32			2.87			4.60			5.05			4.35
Variable interest rate loans			278,080			—			—			—			—			—			278,080			278,130
Average interest rate			4.78			—			—			—			—			—			4.78
Other assets			13			—			—			—			—			3,060			3,073			3,073
Average interest rate			.25			—			—			—			—			3.53			3.52
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total rate sensitive assets		$	293,962		$	15,396		$	29,364		$	55,549		$	85,936		$	51,086		$	531,293		$	531,660
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Average interest rate			4.78	%		3.23	%		4.79	%		2.87	%		4.30	% %		4.15	%		4.00	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Rate Sensitive Liabilities Interest-bearing savings, NOW, MMAs, checking		$	162,162		$	—		$	—		$	—		$	—		$	—			162,162		$	162,162
Average interest rate			.24	%		—	%		—	%			%		—	%		—	%		.24	%
Time deposits			100,420			56,790			49,906			18,529			5,396			160			231,201			230,333
Average interest rate			1.64			1.29			1.64			1.38			0.96			4.49			1.52
Variable interest rate borrowings			2,000			—			—			—			—			—			2,000			2,000
Average interest rate			4.00			—			—			—			—			—			4.00
Fixed interest rate borrowings			10,000			—			15,000			—			10,000			852			35,852			35,487
Average interest rate			2.10			—			2.07			—			1.11			1.00			1.78
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total rate sensitive liabilities		$	272,582		$	56,790		$	64,906		$	18,529		$	15,396		$	1,012		$	429,215		$	427,982
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Average interest rate			.85	%		1.29	%		1.74	%		1.38	%		1.06	%		1.55	%		1.07	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​


Foreign Exchange Risk


        In addition to managing interest rate risk, management also actively manages risk associated with foreign exchange. Mackinac 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, Mackinac 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, 2013, Mackinac had excess Canadian assets of $.074 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 Mackinac. Management intends to limit Mackinac's foreign exchange risk by acquiring deposit liabilities approximately equal to its Canadian assets.


Off-Balance-Sheet Risk


        Derivative financial instruments include futures, forwards, interest rate swaps, option contracts and other financial instruments with similar characteristics. Mackinac currently does not enter into futures, forwards, swaps or options. However, Mackinac 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 Mackinac. Standby letters




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of credit are conditional commitments issued by Mackinac 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 Mackinac 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. mBank'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, mBank can exercise existing credit arrangements.

        During 2013, Mackinac decreased cash and cash equivalents by $8.742 million. As shown on Mackinac's consolidated statement of cash flows, liquidity was primarily impacted by cash used in investing activities. The net change in investing activities included a net increase in loans of $37.853 million and a net increase in securities available for sale of $2.011 million. The net increases in assets were offset by a similar increase in deposit liabilities of $31.742 million. This increase in deposits was composed of an increase in non-core deposits of $28.645 million combined with an increase in core deposits of $3.097 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.

        mBank's investment portfolio provides added liquidity during periods of market turmoil and overall liquidity concerns in the financial markets. As of December 31, 2013, $39.558 million of mBank's investment portfolio was unpledged, which makes them readily available for sale to address any short term liquidity needs.

        It is anticipated that during 2013, Mackinac will fund anticipated loan production with a combination of core-deposit growth and noncore funding, primarily brokered CDs.

        Mackinac's primary source of liquidity on a stand-alone basis is dividends from mBank. In December 2013, mBank paid a $3.0 million dividend. Bank capital, after payment of this dividend, was strong and above the "well capitalized" regulatory level. Mackinac, in 2013, established and $8.0 million line of credit with a correspondent bank, which also serves as a source of liquidity. As of December 31, 2013, $6.0 million was available under this line. Mackinac will continue to explore alternative opportunities for longer term sources of liquidity and permanent equity to support projected asset growth.

        Liquidity is managed by Mackinac through its Asset and Liability Committee. The Asset and Liability 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 mBank is managed daily, thus enabling mBank 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. mBank's liquidity is best illustrated by the mix in mBank'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, 2013, mBank's core




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deposits in relation to total funding were 74.50% compared to 79.17% in 2012. These ratios indicated at December 31, 2013, that mBank has increased its reliance on non-core deposits and borrowings to fund mBank's long-term assets, namely loans and investments. mBank believes that by maintaining adequate volumes of short-term investments and implementing competitive pricing strategies on deposits, it can ensure adequate liquidity to support future growth. mBank also has correspondent lines of credit available to meet unanticipated short-term liquidity needs. As of December 31, 2013, mBank had $28.375 million of unsecured lines available and additional amounts 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 mBank's liquidity.

        From a long-term perspective, Mackinac's liquidity plan for 2013 includes strategies to increase core deposits in Mackinac's local markets and will continue to augment local deposit growth efforts with wholesale CD funding, to the extent necessary.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

        As disclosed in the Notes to the Consolidated Financial Statements, Mackinac has certain obligations and commitments to make future payments under contracts. At December 31, 2013, the aggregate contractual obligations and commitments are (dollars in thousands):

		Payments Due by Period
		Less than 1 Year			1 to 3 Years			4 to 5 Years			After 5 Years			Total
Contractual Obligations
Total deposits		$	335,518		$	106,696		$	23,925		$	160		$	466,299
Federal Home Loan Bank borrowings			10,000			15,000			10,000			—			35,000
Other borrowings			2,074			149			153			476			2,852
Directors' deferred compensation			115			204			99			29			447
Annual rental / purchase commitments under noncancelable leases / contracts			515			873			879			4,954			7,221
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL		$	348,222		$	122,922		$	35,056		$	5,619		$	511,819
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Other Commitments
Letters of credit		$	5,077		$	—		$	—		$	—		$	5,077
Commitments to extend credit			51,109			—			—			—			51,109
Credit card commitments			3,152			—			—			—			3,152
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL		$	59,338		$	—		$	—		$	—		$	59,338
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

CAPITAL AND REGULATORY

        As a bank holding company, Mackinac is required to maintain certain levels of capital under government regulation. There are several measurements of regulatory capital, and Mackinac 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, 2013, Mackinac and mBank were well capitalized.

        The capital of Mackinac and mBank is also impacted by the disallowed portion of Mackinac'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.




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        The following table details sources of capital for the three years ended December 31 (dollars in thousands):

		2013			2012			2011
Capital Structure
Common shareholders' equity		$	65,249		$	61,448		$	44,342
Preferred stock			—			11,000			10,921
​	​	​	​	​	​	​	​	​	​	​
Total shareholders' equity			65,249			72,448			55,263
​	​	​	​	​	​	​	​	​	​	​
Total capitalization		$	65,249		$	72,448		$	55,263
​	​	​	​	​	​	​	​	​	​	​
Tangible capital		$	65,249		$	72,448		$	55,263
​	​	​	​	​	​	​	​	​	​	​
Intangible Assets
Subsidiaries:
Core deposit premium		$	—		$	—		$	—
Other identifiable intangibles			1,129			688			400
​	​	​	​	​	​	​	​	​	​	​
Total intangibles		$	1,129		$	688		$	400
​	​	​	​	​	​	​	​	​	​	​
Risk-Based Capital
Tier 1 capital:
Total shareholders' equity		$	65,249		$	72,448		$	55,263
Net unrealized (gains) losses on available for sale securities			(216	)		(924	)		(325	)
Less: disallowed deferred tax asset			(7,000	)		(7,100	)		(6,500	)
Less: disallowed intangibles			(113	)		(69	)		(40	)
​	​	​	​	​	​	​	​	​	​	​
Total Tier 1 capital		$	57,920		$	64,355		$	48,398
​	​	​	​	​	​	​	​	​	​	​
Tier 2 Capital:
Allowable reserve for loan losses		$	4,661		$	5,218		$	5,206
Qualifying long-term debt			—			—			—
​	​	​	​	​	​	​	​	​	​	​
Total Tier 2 capital			4,661			5,218			5,206
​	​	​	​	​	​	​	​	​	​	​
Total risk-based capital		$	62,581		$	69,573		$	53,604
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Risk-weighted assets		$	489,407		$	466,039		$	416,423
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Capital Ratios:
Tier 1 Capital to average assets			10.31	%		11.98	%		10.08	%
Tier 1 Capital to risk-weighted assets			11.83	%		13.81	%		11.62	%
Total Capital to risk-weighted assets			12.79	%		14.93	%		12.87	%

        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. Mackinac's acquisition intangibles and a portion of the deferred tax asset are examples of such assets, which was discussed earlier.




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        Presented below is a summary of Mackinac's and mBank's capital position in comparison to generally applicable regulatory requirements:

		Equity to Year-end Assets			Tangible Equity to Year-end Assets			Tier 1 Capital to Average Assets			Tier 1 Capital to Risk Weighted Assets			Total Capital to Risk Weighted Assets
Regulatory minimum for capital adequacy purposes			N/A			N/A			4.00	%		4.00	%		8.00	%
Regulatory defined well capitalized guideline			N/A			N/A			5.00	%		6.00	%		10.00	%
The Corporation:
December 31, 2013			11.39	%		11.39	%		10.31	%		11.83	%		12.79	%
December 31, 2012			13.27	%		13.27	%		11.98	%		13.81	%		14.93	%
The Bank:
December 31, 2013			11.11	%		11.11	%		10.01	%		11.49	%		12.44	%
December 31, 2012			10.96	%		10.96	%		9.63	%		11.10	%		12.21	%

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 Mackinac's operations. Nearly all the assets and liabilities of Mackinac are financial, unlike industrial or commercial companies. As a result, Mackinac's performance is directly impacted by changes in interest rates, which are indirectly influenced by inflationary expectations. Mackinac'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 Mackinac's performance. Changes in interest rates do not necessarily move to the same extent as changes in the prices of goods and services.


CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


        There has been no change in Mackinac's independent public accountants since 2002. The change was reported on Form 8-Ks filed during 2002.




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INFORMATION ABOUT PENINSULA


General


        Peninsula was incorporated under the laws of the State of Michigan in 1986, is a registered bank holding company under the BHCA, and owns all of the outstanding shares of its banking subsidiary, Peninsula Bank. Peninsula operates as a one-bank holding company and its only business activity is the operation of its subsidiary bank, Peninsula Bank. Peninsula Bank is a Michigan state-chartered commercial bank that offers its commercial and retail customers a variety of community banking products and services through its six banking offices located in Marquette County, Michigan.

        As of June 30, 2014, Peninsula had total consolidated assets of $124 million, total consolidated loans of $74.2 million, total consolidated deposits of $104.1 million and total stockholders' equity of $17.7 million.

        At June 30, 2014, 40.8% of Peninsula Financial's loan portfolio was collateralized by non-farm, nonresidential real estate (73.3% of which is owner occupied), 3.5% was in Commercial and Industrial ("C&I"), 44.5% was in single family residential, 5.1% was in construction and land, and the remaining 6.1% of the loan portfolio was in consumer and other. Peninsula's deposit mix as of June 30, 2014 was 10.1% non-interest bearing deposits and 89.9% interest-bearing deposits.

        Peninsula's executive offices are located at 100 South Main Street, Ishpeming, Michigan 49849. Its telephone number is (906) 485-6333 and its website is www.penbank.com.

        The information on Peninsula's website is not part of this proxy statement/prospectus, and the reference to Peninsula's website address does not constitute incorporation by reference of any information on that website into this proxy statement/prospectus.

        Additional information about Peninsula is included below, as well as in the section "Peninsula Management's Discussion and Analysis of Financial Condition and Results of Operations."


Business


        Peninsula's primary market focus is on small business owners and operators, including professional practices, manufacturers, wholesalers and distributors, non-profit organizations and individuals associated with those businesses, including investors and executives.

        Peninsula has actively pursued its targeted market for deposits, particularly small businesses and professionals. Peninsula endeavors to offer leading edge technology to the marketplace. Such technology includes online banking, including corporate cash management, remote deposit capture and debit cards.

        Peninsula provides a full range of consumer and commercial financial services, including consumer and commercial loans, deposit accounts, safe deposit services, consumer finance, mortgage lending, SBA lending, direct deposits, notary services, money orders, night depository, travelers' checks, cashier's checks, domestic collections, savings bonds, automated teller services, drive-in tellers, and banking by mail.

        The revenues of Peninsula are primarily derived from interest on, and fees received in connection with, real estate and other loans, interest and dividends from investment securities, service charge income generated from deposit accounts, gain on the sale of residential loans, ATM fees, and fees generated through other services. The principal sources of funds for Peninsula's lending activities are its deposits (both commercial and consumer deposits), loan repayments and proceeds from amortization of maturities of investment securities. The principal expenses of Peninsula are the interest paid on deposits, and operating and general administrative expenses.




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        As is the case with banking institutions generally, Peninsula's operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve and the FDIC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. Peninsula faces strong competition in the attraction of deposits (the primary source of lendable funds) and in the origination of loans (see "Competition" below).


Supervision and Regulation


        Like Mackinac, Peninsula is a registered bank company subject to regulation and examination by the FRB. Peninsula Bank, like mBank, is subject to regulation and examination by the DIFS and the FDIC. For a discussion of the regulatory environment applicable to Peninsula and Peninsula Bank, please see "Supervision and Regulation" starting on page     above.


Banking Services


        Commercial Banking.    Peninsula focuses its commercial loan originations on small and mid-sized businesses (generally up to $3 million in annual sales) and such loans are usually accompanied by significant related deposits. Commercial underwriting is driven by cash flow analysis supported by collateral analysis and review. Commercial loan products include commercial real estate construction and term loans; working capital loans and lines of credit; demand, term and time loans; and equipment, inventory and accounts receivable financing. Peninsula also offers several short and long-term SBA loan alternatives based upon customer needs. Peninsula offers a range of cash management services and deposit products to commercial customers. Online banking is currently available to commercial customers.

        Retail Banking.    Peninsula's retail banking activities emphasize consumer deposit and checking accounts. An extensive range of these services is offered by Peninsula to meet the varied needs of its customers from young people to senior citizens. In addition to traditional products and services, Peninsula offers contemporary products and services, such as internet banking and electronic bill payment services. Consumer loan products offered by Peninsula include home mortgages, home equity lines of credit, second mortgages, new and used auto loans, new and used boat loans and unsecured personal lines of credit.

        Mortgage Banking.    Peninsula's mortgage banking business is structured to provide a source of fee income largely from the process of originating products for sale on the secondary market (primarily fixed rate loans), as well as the origination of primarily adjustable rate loans to be held in Peninsula's loan portfolio. Mortgage banking capabilities include conventional and nonconforming mortgage underwriting; and construction and permanent financing.


Employees


        As of June 30, 2014, Peninsula has 35 full-time employees and 20 part-time employees. The employees are not represented by any collective bargaining unit. Peninsula considers relations with employees to be good.


Properties


        The main office of Peninsula is located at 100 South Main Street, Ishpeming, Michigan 49849. Peninsula also operates branch banking offices in Marquette and Negaunee, Michigan. Peninsula Bank owns three of its banking facilities and leases the other three.




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Legal Proceedings


        In 2013, Peninsula Bank was named as a defendant in a suit brought in the Marquette County Circuit Court by TruNorth Federal Credit Union. The case is based on a loss sustained by the Credit Union as a result of a check kiting scheme by a mutual customer of the Credit Union and Peninsula Bank. The Credit Union seeks damages of $1.3 million, with claims for conversion which are alleged to form a basis for imposing treble damages against Peninsula Bank. Peninsula Bank has engaged legal counsel and is vigorously defending this lawsuit.

        Peninsula is periodically a party to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to its business.

        Other than as discussed above, management does not believe that there is any other pending or threatened proceeding against Peninsula which, if determined adversely, would have a material adverse effect on Peninsula's financial position, liquidity, or results of operation.


Competition


        Peninsula encounters strong competition both in making loans and in attracting deposits. The continued deregulation of the banking industry and the widespread enactment of laws that permit multi-bank holding companies as well as an increasing level of interstate banking continue to create a highly competitive environment for commercial banking. In one or more aspect of its business, Peninsula competes with other commercial banks, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Most of these competitors, some of which are affiliated with bank holding companies, have substantially greater resources and lending limits, and may offer certain services that Peninsula does not currently provide. In addition, many of Peninsula's non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. Federal and state legislation continues to heighten the competitive environment in which financial institutions must conduct their business, and the potential for competition among financial institutions of all types as increased significantly. There can be no assurance that increased competition from other financial institutions will not have a material adverse effect on Peninsula's operations.




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PENINSULAFIRST FEDERAL MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


IntroductionOverview


        Peninsula's discussion and analysisFirst Federal's principal operating subsidiary, First Federal of financial condition and results of operations is presented herein to assist investors in understanding the financial condition of Peninsula at June 30, 2014 and December 31, 2013, and the results of operations for the six month periods ended June 30, 2014 and 2013, and the years ended December 31, 2013 and 2012. This discussion should be read in conjunction with Peninsula's Consolidated Financial Statements and related footnotes, presented with this proxy statement/prospectus.


Critical Accounting Policies


        Peninsula's accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 1 of the notes to Peninsula's Consolidated Financial Statements. The critical accounting policies require management's judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. Peninsula has established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure the process for changing methodologies occurs in an appropriate manner. The followingNorthern Michigan (the "Bank"), is a brief descriptionfull-service, community-oriented savings bank whose primary lending activity is the origination of Peninsula's current accounting policies involving significant management judgments.

        Allowance for Loan Losses.    The allowance for loan losses is a valuation allowance for probably incurred credit losses. Loan losses are charged against the allowance when management believes the inabilityone- to collect a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off.

        The allowance consists of specific, general and unallocated components. The specific component relates to loans that are individually classified as impaired. The general component covers loans that are not classified and is based on historical loss experience, adjusted for environmental and qualitative factors. The unallocated component is intended to cover uncertainties that could affect management's estimate of the probable losses.

        A loan is impaired when full payment under the terms of the loan agreement is not probable or when the terms of a loan are modified as a result of a borrower experiencing financial difficulties. Land and construction, commercial and industrial andfour-family residential real estate mortgages, commercial real estate loans, commercial loans, and consumer loans. As of December 31, 2017, $83.5 million, or 43.1%, of our total loan portfolio consisted of one- to four-family residential real estate loans; $76.8 million, or 39.7%, and $24.6 million, or 12.7%, of our total loan portfolio consisted of commercial real estate loans and commercial loans respectively; and $8.6 million, or 4.5%, of our total loan portfolio consisted of consumer and other loans. In recent years, commercial real estate loans and other commercial loans have grown as a percentage of our loan portfolio for two reasons. First, we have increased our emphasis on originating these loans, which generally have higher interest rates over one- to four-family residential real estate loans. Secondly, many of these loans are individually evaluated for impairment. If aoriginated with adjustable interest rates, which assist us in managing interest rate risk. In addition, most of our one- to four-family residential mortgage loan is impaired, a portioncustomers prefer fixed-rate loans in the low interest rate environment that has prevailed over the last several years. In spite of the allowance is allocated so the loan is reported, net, at the present valuefact 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.

        Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls onselling a case-by-case basis, taking into consideration allmajority of the circumstances surrounding thefixed-rate one- to four-family residential mortgage loans that we originate, one- to four-family residential real estate loans have increased as a percentage of our total loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

        Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties are considered troubled debt restructurings and are classified as impaired. Troubled




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debt restructurings are measured for impairment based upon the present value of estimated future cash flows using the loan's existing rate at inception or at the fair value of collateral, if repayment is expected solely from the collateral. For troubled debt restructurings that subsequently default, Peninsula determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

        The general component of the allowance covers non-classified loans and is based on historical loss experience, adjusted for environmental and qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by Peninsula on a rolling average period over a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for environmental and qualitative factors, including the following: changes in lending policies and procedures; changes in international, national, regional and local economic and business conditions and developments that affect the collectability of the portfolio; changes in the nature and volume of the portfolio in terms of loans; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due loans, the volume of nonaccrual loans and the volume and severity of adversely classified loans or graded loans; changes in the quality of the loan review program; changes in the underlying collateral for collateral-dependent loans; the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

        The unallocated component is intended to reflect the imprecision inherent in the underlying assumptions used in the methodology for estimating specific and general losses in the portfolio.

        Income Taxes.    Peninsula determines income tax expense based on management's judgments and estimates regarding permanent differences in the treatment of specific items of income and expense for financial statement and income tax purposes. These permanent differences result in an effective tax rate that differs from the federal statutory rate. In addition, Peninsula recognizes deferred tax assets and liabilities, recorded in the consolidated balance sheets, based on management's judgment and estimates regarding timing differences in the recognition of income and expense for financial statement and income tax purposes.

        Peninsula must also assess the likelihood that any deferred tax assets will be realized through the reduction or refund of taxes in future periods and establish a valuation allowance for those assets for which recovery is not more likely than not. In making this assessment, management must make judgments and estimates regarding the ability to realize the asset through carryback to taxable income in prior years, the future reversal of existing taxable temporary differences, future taxable income, and the possible application of future tax planning strategies. Management believes it is more likely than not that the net deferred tax assets included in the accompanying balance sheets will be fully realized and accordingly, Peninsula has not established a valuation allowance.


Results of Operations


        The following table sets forth Peninsula'sOur results of operations and related summary information for the six months ended June 30, 2014 and 2013 and the years ended December 31, 2013 and 2012.




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SUMMARY RESULTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)


		Six months ended June 30,						Year ended December 31,
		2014			2013			2013			2012
Net income, as reported		$	541		$	108		$	250		$	629
Earnings per share-basic, as reported		$	1.88		$	0.37		$	0.87		$	2.18
Earnings per share-diluted, as reported		$	1.88		$	0.37		$	0.87		$	2.18
Cash dividends declared per share		$	0.50		$	0.50		$	0.75		$	1.00

        Net income of $0.5 million for the six months ended June 30, 2014 increased from net income of $0.1 million for the comparable period in 2013. Net interest income was $2.0 million for the six months ended June 30, 2014 and $2.1 million for the comparable period in 2013, resulting from a $0.2 million decrease in interest income offset in part by a $0.2 million reduction in interest expense. A provision for loan losses of $0.3 million was charged to operations during the first six months of both 2014 and 2013. Noninterest income increased by $0.8 million during the first six months of 2014 versus the comparable period of 2013,depend primarily related to death benefit proceeds received in the first half of 2014 and a one-time adjustment taken effective June 30, 2014 to record mortgage servicing rights. Noninterest expense was relatively unchanged at $2.2 million for the six months ended June 30, 2014 and for the comparable period in 2013.

        Net income of $0.3 million for the year ended December 31, 2013 decreased from net income of $0.6 million for the year ended December 31, 2012. Net interest income was $4.2 million for the year ended December 31, 2013 and $4.9 million for the year ended December 31, 2012, resulting from a $0.9 million decrease in interest income, offset in part by a $0.3 million reduction in interest expense. A provision for loan losses of $0.6 million was charged to operations for each of the years ending December 31, 2013 and 2012. Noninterest income decreased by $0.1 million during the year ended December 31, 2013 versus the year ended December 31, 2012. Noninterest expense for the years ended December 31, 2013 and 2012 was $4.4 million and $4.3 million, respectively.

Net Interest Income:

        Net interest income is the largest component of Peninsula's operating income and represents the difference between interest earned on loans, investments and other interest-earning assets, offset by the interest expense attributable to the deposits and borrowings that fund such assets. Interest rate fluctuations, together with changes in the volume and types of interest-earning assets and interest-bearing liabilities, combine to affect total net interest income. This analysis discussesour net interest income, on a tax-equivalent basis in order to provide comparability among the various types of earned interest income. Tax-exempt interest income is adjusted to a level that reflects such income as if it were fully taxable.

        Net interest income on a tax-equivalent basis was $2.1 million for the six months ended June 30, 2014, compared to $2.2 million for the same period in 2013. The decrease for the second quarter of 2014 resulted primarily from a $0.2 million decrease in interest income on interest-earning assets, partially offset by a $0.1 million decrease in interest expense on interest-bearing liabilities. Interest income decreased to $2.2 million for the six months ended June 30, 2014 compared to $2.4 million for the same period in 2013. Contributing to the change was a decrease in average earning assets from $110.3 million for the six months ended June 30, 2014 to $107.7 million for the six months ended June 30, 2013. The yield on average earning assets for the six months ended June 30, 2014 decreased by 26 bps to 4.23% compared to 4.49% for the same period in 2013, due primarily to the average yield on loans declining by 22 bps to 5.31% for the six months ended June 30, 2014 from 5.53% for the same




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period in 2013. Yields on both taxable and tax-exempt securities during the first six months of 2014 increased compared to the first six months of 2013.

        Average interest-bearing liabilities decreased from $101.8 million for the six months ended June 30, 2013 to $100.6 million for the same period in 2014. In addition, noninterest-bearing demand deposits decreased from $11.4 million for the six months ended June 30, 2013 to $9.9 million for the six months ended June 30, 2014.

        The cost of average interest-bearing liabilities declined 16 bps from 0.54% for the six months ended June 30, 2013 to 0.38% for the same period in 2014. The reductions in the cost of interest-bearing liabilities resulted primarily from a reduction in interest rates.

        Interest rate spreadwhich is the difference between the interest rate earnedincome we receive on averageour interest-earning assets, such as loans and securities, and the rate paidinterest expense we pay on average interest-bearing liabilities. Interest rate spread declined from 3.95% for the six months ended June 30, 2013 to 3.85% for the six months ended June 30, 2014, resulting from a 26 bp decrease in the yield on earning assets from 4.49% to 4.23%, partially offset by a 16 bp decrease in the cost of interest-bearing liabilities from 0.54% to 0.38%.

        Net interest margin represents net interest income expressed as an annualized percentage of average interest-earning assets. Net interest margin exceeds the interest rate spread because of the use of noninterest-bearing sources of funds (demandour deposits and equity capital) to fund a portion of earning assets. Net interest margin for the first six months of 2014 was 3.87% compared to 3.99% from the same period in 2013.

        For the six months ended June 30, 2014, average interest-earning asset balances decreased $2.5 million (2.3%) from the same period in 2013. Decreases of $1.7 million (12.7%) in federal funds sold and interest-bearing due from financial institutions, $0.5 million (12.7%) in tax exempt securities and $7.1 million (8.8%) in average loans were partially offset by a $6.8 million (56.2%) increase in average taxable securities.

        Net interest income on a tax-equivalent basis was $4.3 million for the year ended December 31, 2013, compared to $5.0 million for the year ended December 31, 2012. The decrease in 2013 resulted primarily from a $1.0 million decrease in interest income on interest-earning assets, offset in part by a $0.3 million decrease in interest expense on interest-bearing liabilities. Contributing to the decrease was a $5.9 million decrease in average earning assets from $114.6 million for the year ended December 31, 2012 to $108.8 million for the year ended December 31, 2013.borrowings. In addition, the yield on average earning assets decreased 61 bps from 5.02% for the year ended December 31, 2012 to 4.41% for the year ended December 31, 2013.

        Average interest-bearing liabilities declined from $105.1 million for the year ended December 31, 2012 to $100.7 million for the year ended December 31, 2013. Noninterest-bearing demand deposits decreased from $12.0 million for the year ended December 31, 2012 to $11.1 million for the year ended December 31, 2013.

        The costour results of average interest-bearing liabilities declinedoperations are significantly affected by 24 bps from 0.74% for the year ended December 31, 2012 to 0.50% for the year ended December 31, 2013. The reduction in the cost of interest-bearing liabilities during 2013 compared to 2012 resulted primarily from a reduction in interest rates.

        Interest rate spread decreased from 4.28% for the year ended December 31, 2012 to 3.91% for the year ended December 31, 2013, resulting primarily from a 61 bp decrease in the yield on earning assets from 5.02% to 4.41%, partially offset by a 24 bp decrease in the cost of interest-bearing liabilities from 0.74% to 0.50%general economic and by the 61 bp decrease in the yield on earning assets from 5.02% to 4.41%.

        Net interest margin for the year ended December 31, 2013 was 3.95% compared to 4.34% from the same period in 2012.




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        For the year ended December 31, 2013, average interest-earning assets decreased $5.9 million from the same period in 2012. A $10.7 million (12.0%) decrease in average loans, along with a $0.6 million (14.9%) decrease in tax exempt securities, was partially offset by an increase of $1.7 million (18.8%) in federal funds soldcompetitive conditions, and interest-bearing due from financial institutions balances and an increase of $3.7 million (32.1%) in average taxable securities.


NET INTEREST INCOME ANALYSIS ON A TAX-EQUIVALENT BASIS
(Dollar amounts in thousands)


		Six months ended June 30, 2014									Six months ended June 30, 2013
		Average Balance			Interest Income/ Expense			Average Yield/ Rate			Average Balance			Interest Income/ Expense			Average Yield/ Rate
ASSETS
Average Interest-Earning Assets:
Loans(1)(2)		$	73,679		$	1,942			5.31	%	$	80,782		$	2,216			5.53	%
Taxable securities			18,911			177			1.89	%		12,110			109			1.82	%
Tax exempt securities(1)			3,267			95			5.89	%		3,744			109			5.88	%
Federal funds sold and interest-bearing due from financial institutions			11,889			45			0.76	%		13,626			22			0.33	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest-earning assets			107,746			2,259			4.23	%		110,262			2,456			4.49	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Noninterest earning assets			22,181									22,865
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total assets		$	129,927								$	133,127
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
LIABILITIES AND STOCKHOLDERS' EQUITY
Average Interest-Bearing Liabilities:
Total interest-bearing deposits		$	100,649			191			0.38	%	$	101,721			273			0.54	%
Customer repurchase agreements			0			0				%		0			0				%
Federal Home Loan Bank advances			0			0				%		93			1			2.17	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest-bearing liabilities			100,649			191			0.38	%		101,814			274			0.54	%
Demand deposits			9,935									11,390
Accrued expenses and other liabilities			2,110									3,282
Stockholders' equity			17,233									16,641
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total liabilities and stockholders' equity		$	129,927								$	133,127
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income					$	2,068								$	2,182
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Interest rate spread(3)									3.85	%								3.95	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest margin(4)									3.87	%								3.99	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

---

(1)

The interest income on tax exempt securities and loans is computed on a tax-equivalent basis using a tax rate of 34% for all periods presented.



(2)

The average loan balances and rates include nonaccrual loans.



(3)

Interest rate spread is the difference between the annualized average yield earned on average interest-earning assets for the period and the annualized average rate of interest accrued on average interest-bearing liabilities for the period.



(4)

Net interest margin is the annualized effect of net interest income for a period divided by average interest-earning assets for the period.




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NET INTEREST INCOME ANALYSIS ON A TAX-EQUIVALENT BASIS
(Dollar amounts in thousands)


		Year ended December 31, 2013									Year ended December 31, 2012
		Average Balance			Interest Income/ Expense			Average Yield/ Rate			Average Balance			Interest Income/ Expense			Average Yield/ Rate
ASSETS
Average Interest-Earning Assets:
Loans(1)(2)		$	78,774		$	4,269			5.42	%	$	89,504		$	5,236			5.85	%
Taxable securities			15,352			271			1.77	%		11,621			241			2.07	%
Tax exempt securities(1)			3,613			211			5.83	%		4,244			247			5.82	%
Federal funds sold and interest-bearing due from financial institutions			11,020			48			0.44	%		9,278			30			0.32	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest-earning assets			108,759			4,799			4.41	%		114,647			5,754			5.02	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Noninterest earning assets			22,702									22,653
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total assets		$	131,461								$	137,300
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
LIABILITIES AND STOCKHOLDERS' EQUITY
Average Interest-Bearing Liabilities:
Total interest-bearing deposits		$	100,633			501			0.50	%	$	103,777			732			0.71	%
Federal funds purchased			0			0				%		0			0				%
Customer repurchase agreements			0			0				%		0			0				%
Federal Home Loan Bank advances			47			1			2.13	%		1,284			43			3.35	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest-bearing liabilities			100,680			502			0.50	%		105,061			775			0.74	%
Demand deposits			11,136									12,018
Accrued expenses and other liabilities			3,153									3,473
Stockholders' equity			16,492									16,748
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total liabilities and stockholders' equity		$	131,461								$	137,300
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income					$	4,297								$	4,979
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Interest rate spread(3)									3.91	%								4.28	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest margin(4)									3.95	%								4.34	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

---

(1)

The interest income on tax exempt securities and loans is computed on a tax-equivalent basis using a tax rate of 34% for all periods presented.



(2)

The average loan balances and rates include nonaccrual loans.



(3)

Interest rate spread is the difference between the annualized average yield earned on average interest-earning assets for the period and the annualized average rate of interest accrued on average interest-bearing liabilities for the period.



(4)

Net interest margin is the annualized effect of net interest income for a period divided by average interest-earning assets for the period.




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RATE/VOLUME ANALYSIS(1)
(Dollar amounts in thousands)


        The following table presents an analysis ofparticularly changes in netmarket interest income resulting fromrates, government policies and actions of regulatory authorities. Numerous factors that are beyond our control can cause market interest rates to increase or decline. As a result, we believe that changes in average volumesmarket interest rates, government policies and actions of regulatory authorities represent the primary uncertainties in interest-earning assets and interest-bearing liabilities, and average rates earned and paid for the six months ended June 30, 2014 compared to the six months ended June 30, 2013:

		Increase (Decrease) due to(1)
		Volume			Rate			Net
Interest income:
Loans		$	(189	)	$	(85	)	$	(274	)
Taxable securities			63			5			68
Tax exempt securities			(14	)		0			(14	)
Federal funds sold and interest-bearing due from financial institutions			(2	)		25			23
​	​	​	​	​	​	​	​	​	​	​
Total interest-earning assets		$	(142	)	$	(55	)	$	(197	)
​	​	​	​	​	​	​	​	​	​	​
Interest expense:
Total interest-bearing deposits		$	(22	)	$	(60	)	$	(82	)
FHLB advances			(1	)		0			(1	)
​	​	​	​	​	​	​	​	​	​	​
Total interest-bearing liabilities		$	(23	)	$	(60	)	$	(83	)
​	​	​	​	​	​	​	​	​	​	​
Net interest income		$	(119	)	$	5		$	(114	)
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

---

(1)

The change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each.




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RATE/VOLUME ANALYSIS(1)
(Dollar amounts in thousands)


        The following table presents an analysis of changes in net interest income resulting from changes in average volumes in interest-earning assets and interest-bearing liabilities, and average rates earned and paid for the year ended December 31, 2013 compared to the year ended December 31, 2012:

		Increase (Decrease) due to(1)
		Volume			Rate			Net
Interest income:
Loans		$	(600	)	$	(366	)	$	(966	)
Taxable securities			56			(26	)		30
Tax exempt securities			(37	)		1			(36	)
Federal funds sold and interest-bearing due from financial institutions			6			12			18
​	​	​	​	​	​	​	​	​	​	​
Total interest-earning assets		$	(575	)	$	(379	)	$	(954	)
​	​	​	​	​	​	​	​	​	​	​
Interest expense:
Total interest-bearing deposits		$	(59	)	$	(172	)	$	(231	)
FHLB advances			(30	)		(12	)		(42	)
​	​	​	​	​	​	​	​	​	​	​
Total interest-bearing liabilities		$	(89	)	$	(184	)	$	(273	)
​	​	​	​	​	​	​	​	​	​	​
Net interest income		$	(486	)	$	(195	)	$	(681	)
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

---

(1)

The change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each.

Provision for Loan Losses:

        The provision for loan losses is the periodic cost of providing an allowance for probable and inherent losses in Peninsula's loan portfolio. The allowance for loan losses consists of specific, general and unallocated components. Peninsula's provision for loan losses totaled $0.3 million for both the six months ended June 30, 2014 and June 30, 2013. Net annualized charge-offs to average loans was 0.15% for the six months ended June 30, 2014 compared to 0.52% for the same period in 2013. Nonperforming loans decreased by $0.8 million (19.8%) from $4.4 million at December 31, 2013 to $3.6 million at June 30, 2014.

        Peninsula management believes that the allowance for loan losses at June 30, 2014 is appropriate in light of the present condition of the loan portfolio and the amount and quality of the collateral supporting nonperforming loans. Peninsula continues to monitor nonperforming loan relationships and will make additional provisions for loan losses, as necessary, if the facts and circumstances change. In addition, a decline in the quality of Peninsula's loan portfolio as a result of general economic conditions, factors affecting particular borrowers or Peninsula's market area, or otherwise, could affect the adequacy of the allowance for loan losses. If there are significant charge-offs against the allowance for loan losses, or Peninsula otherwise determines that the allowance is inadequate or its estimates are different than its regulators' estimates, Peninsula will need to make additional provisions in the future.

Noninterest Income:

        The following table reflects the various components of noninterest income for the six month periods ended June 30, 2014 and 2013 and the years ended December 31, 2013 and 2012.predicting our future performance.




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NONINTEREST INCOME
(Dollar amounts in thousands) Business Strategy


        Operating as a Community Savings Bank.    We are committed to meeting the financial needs of the communities in which we operate. We provide a broad range of individualized consumer and business financial services. We believe that we can be more effective in servicing our customers than many of our non-local competitors because our employees and senior management are able to respond promptly to customer needs and inquiries. Our ability to provide these services is enhanced by the experience of our senior management, which has an average of 29 years of experience in the financial services industry.

		Six months ended June 30,									Year ended December 31,
		2014			2013			% Change			2013			2012			% Change
Fees from loan servicing		$	97			99			-2.0	%	$	202			214			-5.6	%
Service charges on deposit accounts			79			67			17.9	%		153			139			10.1	%
Other fee income			108			108			0	%		212			221			-4.1	%
Net gains on sales of loans			16			83			-80.7	%		169			190			-11.1	%
Net gains from sale of securities		$	1			35			-97.1	%	$	35			0				%
Other income			846			2			42,200.0	%		24			97			-75.3	%
Total Noninterest Income		$	1,147		$	394			191.1	%	$	795		$	861			-7.7	%

        Non-interest income increased $0.8 million (191.1%)        Increasing Our Share of Lower-Cost Deposits.    As we continue to increase our origination of shorter-term commercial real estate and commercial loans, most of which are originated with adjustable interest rates, we have decreased our need for higher-cost, long-term certificates of deposit. We intend to continue to lower our cost of funds by increasing our share of lower-cost deposit products in the six months ended June 30, 2014 versusform of savings, checking and money market deposits. We typically are not a market leader in deposit rates, although from time-to-time we do offer higher rates as liquidity needs dictate. We also intend to continue to market our non-interest-bearing checking accounts in conjunction with our focus on commercial business lending.

        Maintaining High Asset Quality and Capital Strength.    We are committed to conservative loan underwriting standards and procedures, and we primarily originate loans secured by real estate. As a result, we have historically experienced low levels of late payments and losses on loans. However, during the comparable periodeconomic recession that began in 2013 primarily2007, we saw delinquency trends increase despite our conservative underwriting practices due to death benefit proceeds receiveddeclining economic conditions and increasing unemployment in the first half of 2014 of $0.3 millionour market area. We continue to maintain a strong capital base. At December 31, 2017, our total risk-based capital ratio was 16.5%, an increase from 15.6% at December 31, 2016, and a one-time adjustment taken effective June 30, 2014 to record mortgage servicing rights of $0.5 million. Peninsula Bank determined its mortgage servicing rights portfolioour tier 1 leverage ratio was growing to a size that warranted recording9.2%, an increase from 8.4% at December 31, 2016, still in excess of the related asset.regulatory requirements to be categorized as "well capitalized."

Comparison of Financial Condition at December 31, 2017 and 2016


        Total assets decreased $23.7 million, or 6.9%, to $321.2 million at December 31, 2017 from $344.9 million at December 31, 2016. Net loans increased $10.1 million, or 5.6%, to $191.5 million at December 31, 2017 from $181.4 million at December 31, 2016. Mortgage loan originations decreased $2.9 million or 7.6%, to $35.1 million in 2017 from $38.0 million in 2016. During that time period, our mortgage loan portfolio increased $1.1 million, or 1.3%, to $83.5 million at December 31, 2017 from $82.4 million as of December 31, 2016. The calculationcommercial loan portfolio increased $9.4 million, or 10.2%, to $101.4 million at December 31, 2017 from $92.0 million at December 31, 2016. Cash and cash equivalents decreased $418,000, or 4.7%, to $8.4 million at December 31, 2017 from $8.8 million at December 31, 2016.

        Deposits decreased $23.1 million, or 7.9%, to $270.3 million at December 31, 2017 from $293.4 million at December 31, 2016. Borrowings, consisting primarily of the valueFHLB advances, decreased $869,000, or 5.0%, to $16.6 million at December 31, 2017 from $17.5 million at December 31, 2016.

        Our total stockholders' equity remained relatively unchanged at $32.9 million at December 31, 2017 and 2016. The slight increase of the servicing rights$53,000 is based on various assumptions, including estimated prepayment speeds, servicing costs, delinquency rates and foreclosure costs, ancillaryattributed to $616,000 in net income including the rights to collect late charges and earn income on float and escrow balances and utilizing various discount rates. All assumptions are consistent with those found within the financial industry.

        Included in the fees for other services to customers in noninterest income on Peninsula's consolidated statements of operations are service charges on deposit accounts, other fee income and financial services income.

        Noninterest income decreased $0.1 million (7.7%) for the year, endedwhich includes an $8.000 loss related to the dissolution of an investment in a title agency, an increase of $145,000 in net unrealized gain on investment securities. These increases are partially offset by $708,000 of dividends paid on common stock. First Federal's ratio of equity to assets increased to 10.3% as of December 31, 2013 versus the year ended2017 from 9.5% as of December 31, 2012 primarily due to2016.

        Federal bank regulatory agencies have set the following adequately capitalized standards, including a decrease in gains received onconservation buffer reflective of the salefinal transition date of loans to Freddie Mac.

Noninterest Expense:

        The following table reflects the various components2019: Common Equity Tier 1 (CET1) of noninterest expense for the six months ended June 30, 2014 and 2013 and the years ended December 31, 2013 and 2012.




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at least 7.0%, Tier 1 Risk Based Capital of at least 8.5%, Total Risk Based Capital of at least 10.5%, and Leverage Capital of at least 4.0%. The regulatory agencies consider a bank to be "well capitalized" if its CET1 ratio is at least 6.5% of Risk Weighted Assets (RWAs), Tier 1 Capital is at least 8.0% of RWAs, Total Risk Based Capital is at least 10.0% of RWAs, Leverage Capital Ratio is at least 5.0%, and the Bank is not subject to any written agreements or orders issued by the FDIC pursuant to Section 8 of the Federal Deposit Insurance Act.

        At December 31, 2017 and December 31, 2016, the Bank exceeded the minimum capital requirements to be considered "well capitalized." See Note 12 to our financial statements for further information.


NONINTEREST EXPENSE
(Dollar amounts in thousands) Comparison of Operating Results for the Years Ended December 31, 2017 and 2016


		Six months ended June 30									Years ended December 31,
		2014			2013			% Change			2013			2012			% Change
Salaries		$	864		$	882			-2.0	%	$	1,789		$	1,699			5.3	%
Pensions and employee benefits			277			264			4.9			519			461			12.6
Occupancy			198			182			8.8	%		370			316			17.1	%
Equipment			61			43			41.9	%		97			43			125.6	%
Data processing and courier			289			264			9.5	%		542			574			-5.6	%
Operation of other real estate owned			71			42			69.0	%		96			109			-11.9	%
Business development and advertising			22			24			-8.3	%		58			105			-44.8	%
Charitable contributions			7			7			0.0	%		12			13			-7.7	%
Stationery and supplies			39			47			-17.0	%		78			84			-7.1	%
Director fees			89			103			-13.6	%		201			220			-8.6	%
FDIC insurance			77			86			-10.5	%		170			192			-11.5	%
Legal and professional			80			81			-1.2	%		158			64			146.9	%
Loan and collection			19			45			-57.8	%		81			161			-49.7	%
Other outside services			18			22			-18.2	%		59			51			15.7	%
Other operating expenses			100			127			-21.3	%		215			238			-9.7	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total Noninterest Expense		$	2,211		$	2,219			-0.4	%	$	4,445		$	4,330			2.7	%
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        Total noninterest expense remained consistent at $2.2 million        General.    Net income decreased to $616,000 for the six-month periodsyear ended June 30, 2014 and June 30, 2013. The noninterest expense to average assets ratio (annualized) was 3.4% for the first six months of both 2014 and 2013.

        Total noninterest expense increasedDecember 31, 2017 from $4.3$1.3 million for the year ended December 31, 20122016. Net interest income before provision for loan losses increased $1.0 million, or 10.8%, to $4.4$10.3 million in 2017 from $9.3 million in 2016. The provision for year ended December 31, 2013. The noninterestloan losses resulted in an expense of $155,000 in 2017 compared to average assets ratio$95,000 in 2016, resulting in net interest income after provision for loan losses being $933,000 higher in 2017 than in 2016. Non-interest income declined $105,000 to $1.8 million in 2017 compared to $1.9 million in 2016, and non-interest expense was 3.4%$22,000 lower in 2017 than in 2016.

        Interest Income.    Interest income for the year ended December 31, 20132017 increased $936,000, or 8.8%, to $11.5 million when compared to 3.2% for the year ended December 31, 2012.

        Net overhead expense is total noninterest expense less total noninterest income.2016. The net overhead expenseaverage balance of our one- to average assets ratio (annualized) was at 1.7% for the six months ended June 30, 2014 comparedfour-family residential mortgage loans increased $4.7 million, or 6.1%, to 2.8% for the six months ended June 30, 2013. The efficiency ratio represents total noninterest expense as a percentage of the sum of net interest income on a fully taxable equivalent basis and total noninterest income (excluding net gains on the sale of securities, life insurance proceeds, mortgage servicing rights, premises and equipment, branch sales, and land held for sale). The efficiency ratio rose from 87.3% for the six months ended June 30, 2013 to 92.4% for the six months ended June 30, 2014, and rose from 74.1% for the year ended December 31, 2012 to 87.9% for the year ended December 31, 2013.

        Salaries and employee benefits were consistent at $1.1 million for the six months ended June 30, 2014 and June 30, 2013. Salaries and employee benefits increased to $2.3$81.9 million for the year ended December 31, 20132017 from $2.2$77.2 million for the year ended December 31, 2012, largely as2016, while the average yield on such loans increased to 4.33% from 4.31%. The average balance of our non-mortgage loans, principally commercial loans and consumer loans, increased $11.4 million, or 12.0%, to $101.6 million for the twelve months ended December 31, 2017 from $95.2 million for the twelve months ended December 31, 2016. With the competitive interest rate environment that was present in 2017, we experienced a resultdecline of the increasetwo basis points in the numberyield on our non-mortgage loan portfolio to 5.03% from 5.05% for the same period in 2016. The average balance of full-time equivalent employees from 50 at December 31, 2012our investment securities, excluding mortgage-backed securities, increased $7.2 million to 51 at December 31, 2013 and an increase in employee health insurance and pension costs.

        Loan and collection costs decreased from $0.2$69.9 million for the year ended December 31, 2012 to $0.12017 from $62.7 million for the year ended December 31, 2013 primarily as a result2016, while the average yield on these investments increased to 2.07% from 1.90%. In addition, the average balance of the reduction in the amount of secondary market repurchases during the year.




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Income Taxes:

        Peninsula recorded income tax expense of $0.1our mortgage-backed securities decreased $8.5 million, for the six months ended June 30, 2014 versus a benefit of $0.1 million for the same period in 2013. The increase in tax expense is primarily attributableor 14.4%, to an increase in pre-tax income for the six months ended June 30, 2014 versus the comparable period of 2013. The effective tax rate decreased from 137.0% for the six months ended June 30, 2013 to 16.4% for the same period in 2014. The Company recorded significant tax benefits in 2013 due to the level of municipal income, non-taxable insurance benefits, and various tax credits.

        Income tax benefit recorded for the year ended December 31, 2013 was $0.3 million compared to expense of $0.2$50.4 million for the year ended December 31, 2012. The2017 from $58.9 million for the year ended December 31, 2016, with an average yield increase of 10 basis points to 1.84% from 1.74%.

        Interest Expense.    Interest expense decreased to $1.2 million for the year ended December 31, 2017 from $1.3 million for the year ended December 31, 2016, due primarily to a $5.3 million, or 21.2%, decrease in taxthe average balance of Federal Home Loan Bank ("FHLB") advances year over year, while the average cost of those borrowings increased four basis points to 1.38% for 2017 from 1.34% for 2016. Interest expense ison deposits remained relatively unchanged at $949,000 for the year ended December 31, 2017 and $941,000 for the year ended December 31, 2016.

        Net Interest Income.    Net interest income increased to $10.3 million for the year ended December 31, 2017 from $9.3 million for the year ended December 31, 2016. The increase was primarily attributabledue to the increase in total loans for the year ended December 31, 2017 and the recovery of interest income from a nominal pre-taxlong standing non-accrual relationship that was paid off late in the year.

        Provision for Loan Losses.    We recorded an expense of $155,000 as our provision for loan loss for the year ended December 31, 2013 versus a pre-tax profit of $0.8 million posted2017 compared to $95,000 for the year ended December 31, 2012. The effective tax rate for the year ended December 31, 2013 and 2012 was (2668.0)% and 25.2%, respectively. The Company recorded significant tax benefits in 2013 due2016. During 2017, we had net charge offs of $7,000 compared to the levelnet recoveries of municipal income, non-taxable income on insurance and death benefits received on insurance policies, various tax credits, and adjustment of prior period items to actual.

        Peninsula maintains net deferred income tax assets for deductible temporary tax differences, such as allowance for loan losses, as well as net operating loss carry forwards. Peninsula's determination of the amount of its deferred income tax assets to be realized is highly subjective and is based on several factors, including projected future income, income tax planning strategies, and federal and state income tax rules and regulations. At June 30, 2014, Peninsula determined that no valuation allowance was required to be taken against its net deferred income tax assets. Peninsula assesses the amount of tax benefits it may realize in future periods in determining the necessity for any valuation allowance.

Financial Condition$31,000 during 2016. Our

Loans:

        The following table reflects the composition (mix) of the loan portfolio:

		June 30, 2014			December 31, 2013			Percent Change
Amount of Loans by Type:
Real estate-mortgage:
Commercial		$	31,410		$	31,482			(0.2	)%
1-4 family residential
First liens			27,531			27,306			0.8	%
Junior liens			2,558			2,512			1.8	%
Home equity			2,942			3,003			(2.0	)%
Commercial, financial and agricultural			2,614			2,848			(8.2	)%
Real estate-construction			3,781			3,656			3.4	%
Installment
Credit cards and related plans			115			107			7.5	%
Auto			1,248			1,280			(2.5	)
Other			2,007			2,693			(25.5	)%
Obligations of states and political subdivisions			38			113			(66.4	)%
Less: Allowance for loan losses			(1,764	)		(1,493	)		(18.2	)%
​	​	​	​	​	​	​	​	​	​	​
Total		$	72,480		$	73,507			(1.4	)%
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

        Net loans decreased $1.0 million (1.4%) from $73.5 million at December 31, 2013 to $72.5 million at June 30, 2014. In addition to originating loans, Peninsula buys and sells loan participations with




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other financial institutions locatedprovision is based on management's review of the components of the overall loan portfolio, the status of non-performing loans, and various subjective factors.

        Non-Interest Income.    Non-interest income decreased $105,000, or 5.4%, to $1.8 million for the year ended December 31, 2017 from $2.0 million as of December 31, 2016. Non-interest income is detailed in markets it serves. These loans are underwrittenthe table presented below:

		For years ended December 31,
		2017			2016			Change from 2016 to 2017
		(dollars in thousands)
Service charges and other fees		$	959		$	967			(0.83	)%
Net gain on sale of investments			36			134			(73.13	)%
Net gain on sale of loans			249			263			(5.32	)%
Net gain on sale of premises and equipment, real estate owned and other repossessed assets			73			55			32.73	%
Loan fees			316			237			33.33	%
Other			213			295			(27.80	)%
​	​	​	​	​	​	​	​	​	​	​
		$	1,846		$	1,951			(5.38	)%
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

        Non-Interest Expense.    Non-interest expense remained steady at $9.8 million for the years ended December 31, 2017 and 2016. Non-interest expense is detailed in the table presented below:

		For years ended December 31,
		2017			2016			Change from 2016 to 2017
		(dollars in thousands)
Compensation and employee benefits		$	5,886		$	5,833			0.91	%
FDIC insurance premiums			170			194			(12.37	)%
Advertising			164			184			(10.87	)%
Occupancy and equipment			1,156			1,172			(1.37	)%
Amortization of intangible assets			192			217			(11.52	)%
Data processing service bureau			517			493			4.87	%
Professional fees			486			442			9.95	%
Collection activity			39			78			(50.00	)%
Real estate and other repossessed assets			94			117			(19.66	)%
Other			1,120			1,116			0.36	%
​	​	​	​	​	​	​	​	​	​	​
		$	9,824		$	9,846			(0.22	)%
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

        Income Taxes.    For the year ended December 31, 2017, First Federal recorded $1.5 million in federal income tax expense as compared to the same lending standardsno federal income expense as the loans Peninsula originates.

of December 31, 2016. The primarymain reason for the overall decrease in net loans from December 31, 2013increase to June 30, 2014 was a decrease in installment loans, which totaled $3.4 million at June 30, 2014 versus $4.1 million at December 31, 2013. This decrease was mainly due to a reduction in overdraft protection account balances. Also contributingfederal income tax expense relates to the decrease in overall net loans was an increaselate December signing of $0.3 million (18.2%) in the allowanceTax Cut and Jobs Act. See Note 1 for loan losses.discussion on the impact to the valuation of deferred taxes.

Risk Management and the Allowance for Loan Losses:of Interest Rate Risk


        Qualitative Analysis.    Our most significant form of market risk is interest rate risk. The loan portfoliogeneral objective of our interest rate risk management is Peninsula's primary asset subject to credit risk. To address this creditdetermine the appropriate level of risk Peninsula maintains an allowance for loan losses for probablegiven our business strategy, and inherent credit losses through periodic charges to its earnings. These charges are shown in Peninsula's consolidated statements of operations as provision for loan losses. See the "Provision for Loan Losses" section discussed earlier. Peninsula attempts to control, monitor and minimize creditthen manage that risk through the use of prudent lending standards, a thorough review of potential borrowers prior to lending and ongoing and timely review of payment performance. Asset quality administration, including early identification of loans performing in a substandard manner as well as timely and active resolution of problems, further enhances management of credit risk and minimization of loan losses. Any losses that occur and that are charged off against the allowance for loan losses are periodically reviewedis consistent with specific efforts focused on achieving maximum recovery of both principal and interest.

        The allowance for loan losses at June 30, 2014 was $1.8 million, compared to $1.5 million at December 31, 2013. On a quarterly basis, management reviews the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses consists of three components: (i) specific reserves established for expected losses relating to impaired loans for which the recorded investment in the loans exceeds its fair value; (ii) general reserves based on historical loan loss experience for significant loan classes, adjusted for environmental and qualitative factors; and (iii) an unallocated reserve maintained to cover uncertainties that could affect management's estimate of the probable losses. Allocations of the allowance for loan losses may be made for specific loans but the entire allowance is available for any loan that, in management's judgment, should be charged off or for which an actual loss is realized.

Nonperforming Loans, Potential Problem Loans and Other Real Estate Owned:

        Management encourages early identification of nonaccrual and problem loans in order to minimize the risk of loss. Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past due but still accruing, and nonaccrual loans restructured in a troubled debt restructuring that have not shown a sufficient period of performance with the restructured terms. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collection of principal or interest on loans, it is the practice of management to place such loans on nonaccrual status immediately rather than waiting until the loans become 90 days past due. The accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest or earlier as deemed appropriate. When interest accruals are discontinued, interest credited to income is reversed. If collection is in doubt, cash received on nonaccrual loans is usedour policy to reduce principal rather than recorded as interest income. Restructuring a loan typically involves the granting of some concession to the borrower involving a loan modification such as payment schedule or interest rate changes. Restructured loans may involve loans that have had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to accounting guidance for troubled debt restructurings.




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the exposure of our net interest income to changes in market interest rates. First Federal of Northern Michigan's asset/liability management committee ("ALCO") evaluates the interest rate risk inherent in our assets and liabilities, our operating environment and capital and liquidity requirements, and modifies our lending, investing and deposit-taking strategies accordingly. The Board of Directors reviews the ALCO's activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios, as well as the intrinsic value of our deposits and borrowings.

        We actively evaluate interest rate risk in connection with our lending, investing and deposit-taking activities. Generally, our loans, which represent the significant majority of our assets, have longer-terms to maturity than our deposits, which represent the significant majority of our liabilities. As of December 31, 2017, $192.2 million, or 99.3% of our loan portfolio, consisted of loans that mature or reprice on or after January 1, 2018. In contrast, as of December 31, 2017, $25.8 million, or 42.4% of our time deposits as of that date, consisted of deposits that mature or reprice in less than one year.

        Historically, most borrowers have preferred long-term, fixed-rate residential real estate loans when, as now, market interest rates are at relatively low levels. These loans expose us to interest rate risk because our liabilities, consisting primarily of deposits, have relatively short maturities. In order to better match the maturities of our loan portfolio to the maturities of our deposits in the current low interest rate environment, we sell, on a servicing-retained basis, substantially all of the fixed-rate, one-to four-family residential real estate loans with maturities of 15 years or more that we have originated since 2002. In 2017, we determined to retain in portfolio $18.9 million of adjustable rate, 10- and 15-year fixed-rate residential mortgage loans. Beginning in late 2012, we began placing certain 15-year fixed residential real estate loans into our portfolio in an effort to rebuild our balance sheet and increase net interest income; however, we continue to sell most loans with terms longer than 15 years on the secondary market.

        In an effort to manage interest rate risk, we have increased our focus on the origination and retention in our portfolio of adjustable-rate residential mortgage loans. In addition, we have increased the origination and retention in our portfolio of commercial real estate and commercial loans, since most of these loans are originated with adjustable interest rates. Finally, we have primarily invested in short-and medium-term securities and have maintained high levels of liquid assets, such as cash and cash equivalents. Shortening the average maturity of our interest-earning assets through these strategies helps us to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. Maintaining high levels of liquid assets also permits us to invest in higher-yielding securities and loans when market interest rates increase. However, these strategies can be expected to adversely affect net interest income if long-term interest rates remain at low levels. As long-term interest rates rise, as we expect will happen, we will reduce our mortgage banking operations and retain in our portfolio a larger percentage of the one- to four-family loans that we originate.


        Quantitative Analysis.    First Federal uses two primary measurement techniques to identify and manage its interest rate risk, the net interest income (NII) simulation and economic value of equity (EVE).

NONPERFORMING ASSETS
(Dollar amounts in thousands)
        Net Interest Income Simulation Model.    First Federal uses a NII simulation model to analyze the sensitivity of net interest income to changing interest rates. The model is based on contractual and assumed cash flows and repricing characteristics for all of First Federal's financial instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes management's projections of the future volume and pricing of each of the product lines offered by First Federal as well as other pertinent assumptions. Actual results may differ from these simulated results due to timing, magnitude




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and frequency of interest rate changes as well as changes in market conditions and management strategies.

        First Federal's interest rate risk exposure is currently evaluated by measuring the anticipated change in net interest income over a 24-month horizon assuming a –100bp, 100bp, 200bp, 300bp and 400bp parallel ramped decrease or increase in interest rates. As of December 31, 2017, the Federal Reserve's targeted Fed Funds interest rate ranged from 1.25% to 1.50%.

        At December 31, 2017, First Federal's interest rate risk profile reflects a neutral position. The following table shows First Federal's estimated net interest income sensitivity profile and ALCO policy limits as of December 31, 2017.

		June 30, 2014			December 31, 2013
Nonperforming Assets:
Nonaccrual loans		$	1,366		$	2,785
Nonaccrual loans, restructured			2,128			1,438
Loans 90 days or more past due, still accruing			58			206
​	​	​	​	​	​	​	​
Total nonperforming loans ("NPLs")		$	3,552		$	4,429
Other real estate owned, net			1,829			1,693
​	​	​	​	​	​	​	​
Total nonperforming assets ("NPAs")		$	5,381		$	6,122
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Restructured loans, accruing(1)		$	2,911		$	2,786
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Ratios:
ALL to Net Charge-offs ("NCOs") (annualized)			6,587.48	%		136.35	%
NCOs to average loans (annualized)			0.15	%		1.39	%
ALL to total loans			2.38	%		1.99	%
NPLs to total loans			4.78	%		5.91	%
NPAs to total assets			4.35	%		4.93	%
ALL to NPLs			49.66	%		33.71	%

---

(1)

Restructured loans

Rate Changes:		0 BP			– 100 BP			+ 100 BP			+200 BP			+300 BP			+400 BP
$ Change in NII		$	20,628		$	20,062		$	20,831		$	20,984		$	20,949		$	20,835
% Change in NII						–2.74	%		0.98	%		1.72	%		1.56	%		1.00	%
Policy Limits						–5.00	%		–5.00	%		–10.00	%		–15.00	%		–20.00	%

        The 24-month net interest income at risk reported as of December 31, 2017 for all scenarios presented shows that First Federal's overall risk to changes in interest rates is low. Based on nonaccrual statusthe assumptions discussed in the following paragraph and given that the duration of our assets is longer than that of our liabilities, the scenarios shown illustrate that a rising rate environment has a neutral to slightly positive impact on our net interest income. The impact illustrated is well within Board set limits.

        Certain shortcomings are returnedinherent in the methodology used in the above interest rate risk measurements. Modeling changes in net interest income requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to accruing whenchanges in market interest rates. The net interest income table presented above assumes that the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a sufficient period remains constant over the period being measured and, accordingly, the data does not reflect any actions management may undertake in response to changes in interest rates. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of performancethe duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in accordancetime, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results. As a means of validation and testing of our assumptions, a back test is performed annually to compare actual results to the predicted results.

        Economic Value of Equity.    First Federal also uses EVE as a measurement tool in managing interest rate risk. Whereas the net interest income simulation model highlights exposure over a relatively short time horizon, the EVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The EVE of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows less the discounted value of liability cash flows. The sensitivity of EVE to changes in the level of interest rates is a measure of longer-term interest rate risk. EVE values only the current balance sheet and does not incorporate the growth assumptions used in the earnings simulation model. As with the restructured terms, generally six months, has passed.

        Duringearnings simulation model, assumptions about the six months ended June 30, 2014, other real estate owned increased by $0.1 million. Five properties totaling $0.4 million were transferred into other real estate owned duringtiming and variability of existing balance sheet cash flows are critical in the six months ended June 30, 2014, offsetEVE analysis. Particularly important are assumptions driving prepayments and the expected changes in part by $0.3 millionbalances and pricing of such real estate sold.transaction deposit portfolios.




        Restructured loans accruing at June 30, 2014 were $2.9 million. No accruing restructured loans were transferred to nonaccrual during the first six monthsTable of 2014. No restructured loans with modified terms were transferred out of the restructured loan category during the six months ended June 30, 2014 as a result of their complying with the modified terms for a sufficient period of time, generally six months, whereas three loans for $0.3 million were added to the restructured loans accruing category during the six months ended June 30, 2014.Contents

        The following table presents an analysisshows First Federal's EVE sensitivity profile as of Peninsula's past due loans, excluding nonaccrual loans:December 31, 2017.

Rate Changes:		0 BP			–100 BP			+100 BP			+200 BP			+300 BP			+400 BP
$ Change in Equity		$	49,648		$	48,905		$	49,639		$	49,423		$	48,807		$	48,292
% Change in Equity						–1.50	%		–0.02	%		–0.45	%		–1.69	%		–2.73	%
Policy Limits						–10.00	%		–10.00	%		–15.00	%		–20.00	%		–25.00	%

        The EVE at risk profile shows slight to moderate asset sensitivity from market rate increases.


PAST DUE LOANS (EXCLUDING NONACCRUALS)
30-89 DAYS PAST DUE
(Dollar amounts in thousands) Cash Flows


		June 30, 2014			December 31, 2013
Secured by real estate		$	2,029			1,951
Commercial and industrial loans			40			80
Loans to individuals			11			30
​	​	​	​	​	​	​	​
Total		$	2,080			2,061
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Percentage of total loans			2.80	%		2.75	%

        As reflected above,Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included with our Consolidated Financial Statements.

        Cash flows provided from operations were $2.9 million for 2017 compared to $3.8 million for 2016. Cash flows provided by investing activities were $21.4 million in 2017 as compared to $11.5 million used in investing activities in 2016, primarily due to activity in investment securities. Cash flows used in financing activities were $24.7 million in 2017 compared to $8.9 million provided by financing activities in 2016, due primarily to the decrease in the balance of deposits and the FHLB advance activity, year over year.

Liquidity


        The overall objective of liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.

        Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, borrowings (FHLB advances), proceeds from maturing securities and short-term investments, and proceeds from the sales of loans and securities. The scheduled amortization of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments, mortgage loan balances 30-89 days pastsales, and mortgage-backed securities sales are greatly influenced by market interest rates, economic condition and competition.

        Our most liquid assets are cash, short-term U.S. government securities and U.S. government agency or government-sponsored enterprise securities. We are required to maintain sufficient levels of liquidity as defined by the Office of the Comptroller of the Currency regulations. Current regulations require that we maintain sufficient liquidity to ensure our safe and sound operation. Our current objective is to maintain liquid assets equal to at least 20% of total deposits and FHLB borrowings due have remained stable at $2.1 millionin one year or less. Liquidity as of June 30, 2014 and December 31, 2013.2017 was $95.0 million, or 38.6% of total deposits and FHLB borrowings due in one year or less, compared to $159.0 million, or 62.6% of this amount at December 31, 2016. During 2017, First Federal made the decision to cease pledging one- to four- family residential loans as collateral for our FHLB borrowings and replace them with available-for-sale securities. This decision contributed to the decline in the liquidity ratio indicated above. The levels of liquidity are dependent on our operating, financing, lending and investing activities during any given period. Our calculation of liquidity includes additional borrowing capacity available with the FHLB. As of December 31, 2017, we had unused borrowing capacity of $43.4 million.




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        Information regarding other real estate owned is as follows:

		Six months ended June 30, 2014			Year ended December 31, 2013			Six months ended June 30, 2013
Beginning balance		$	1,693		$	408		$	408
Transfer of loans to other real estate owned			403			1,579			107
Sales proceeds, net			(266	)		(290	)		(81	)
Net gain from sale of other real estate owned			(1	)		(4	)		(27	)
Valuation allowance recovered upon disposition of other real estate owned			0			0			0
​	​	​	​	​	​	​	​	​	​	​
Total other real estate owned, net			1,829			1,693			407
Valuation allowance for losses			0			0			0
​	​	​	​	​	​	​	​	​	​	​
Total other real estate owned, net		$	1,829		$	1,693		$	407
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

Investment Portfolio:

        Peninsula's investmentWe currently retain in our portfolio is intended to provide itall adjustable-rate residential mortgage loans, short-term balloon mortgage loans and fixed-rate residential mortgage loans with adequate liquidity, flexibility in asset/liability managementmaturities of less than 15 years, and an increase in its earning potential.

        The investment portfolio comprising investment securities available for sale ("AFS") increased $4.8 million (19.6%) from 24.5 million atgenerally sell the remainder. During the year ended December 31, 20132017, we originated $35.1 million of one- to $29.3four-family residential mortgage loans, of which $18.9 million at June 30, 2014.were retained in our portfolio and the remainder were sold. This compares to $38.0 million of one- to four-family originations during the year ended December 31, 2016, of which $21.2 million were retained in our portfolio.

        Deposits are a primary source of funds for use in lending and for other general business purposes. At June 30, 2014, the AFS investment portfolio represented 23.6%December 31, 2017, deposits funded 84.1% of our total assets compared to 19.8%85.1% at December 31, 2013. For the six months ended June 30, 2014, principal payments2016. Certificates of $0.6 million were received on investments as well as $2.4 million from the maturity of securities. For the six months ended June 30, 2014, Peninsula purchased $9.2 million of AFS securities and sold $1.4 million of AFS securities. Additionally, securities decreased by $0.1 million duedeposit scheduled to net amortization of premiums and discounts originated at the time the securities were purchased, which was offset by a $0.1 million increasemature in the market value of the AFS investment portfolio during the six months ended June 30, 2014.

        Peninsula closely monitors securities it holds in its investment portfolios that remain in an unrealized loss position for twelve months or greater. Total gross unrealized losses on AFS securities in such a loss position for twelve months or greater were $0.2 million at June 30, 2014, representing 93.8% of total gross unrealized securities losses. AFS securities in such a loss position for twelve months or greater represented 28.0% of the total AFS investment portfolio. Based on an in-depth analysis of the specific instruments, which may include ratings from external rating agencies and/or brokers, as well as the creditworthiness of the related issuers, including their ability to continue payments under the terms of the security agreements, no unrealized losses were deemed to be other-than-temporary. Additionally, Peninsula does not have the intent to sell the securities and it is not more likelyless than not that it will be required to sell these securities before their anticipated recovery. If at any point in time any losses are considered other-than-temporary, Peninsula would be required to recognize other-than-temporary impairment. This would require Peninsula to assess the cash flows expected to be collected from the security. The difference between cash flows expected to be collected and the amortized cost basis would result in a credit loss for the amount of the impairment. This amount would reduce Peninsula's earnings. The remaining portion of the impairment related to factors other than credit loss would be recognized through other comprehensive income (loss). At June 30, 2014 and December 31, 2013, Peninsula did not hold securities of any one issuer, other than the Federal National Mortgage Association ("FNMA"), Government National Mortgage Association ("GNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), or United States Department of




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Veterans Affairs ("VA"), each an agency or corporation of the United States government, in an amount greater than 10% of its stockholders' equity.

Deposits:

        Total deposits at June 30, 2014 decreased $0.6 million (0.6%) from $104.8 millionyear at December 31, 20132017 totaled $25.8 million. We believe that a significant portion of such deposits will remain with us. We monitor the deposit rates offered by competitors in our market area and we set rates that take into account the prevailing market conditions along with our liquidity position.

        Borrowings may be used to $104.2 million at June 30, 2014. The decreasecompensate for the first six months of 2014 was the result of a decrease of $2.6 million (7.9%)seasonal or other reductions in Peninsula's time deposits, offset in part by a $0.6 million (0.9%) increase in savings deposits and an increase in non-interest bearing demand deposits of $1.4 million (15.3%) for the period. Total interest-bearing deposits decreased $1.6 million (1.7%) and non-interest-bearing deposits increased $1.0 million (10.1%) from December 31, 2013 to June 30, 2014. During the six months ended June 30, 2014, Peninsula did not hold any traditional brokered certificates of deposits.

        Peninsula continued to focus on expanding and retaining customer relationships and attracting core deposit accounts by emphasizing customer service while maintaining competitive pricing. If liquidity concerns arise, Peninsula has alternativenormal sources of funds such as lines of credit with correspondent banksor for deposit outflows at more-than-projected levels. Borrowings also may be used on a longer-term basis to support increased lending or investment activities. At December 31, 2017, we had $16.6 million in FHLB advances and borrowing arrangements with the FHLB and through the discount windowno outstanding advances at the Federal Reserve.

Other Funding Sources:

        Peninsula did not have any securities sold under agreements to repurchase, federal funds purchased or FHLB advancesReserve Discount Window. Total borrowings as a percentage of total assets were 5.2% at June 30, 2014 or December 31, 2013.

Contractual Obligations:2017 compared to 5.1% at December 31, 2016.

        Peninsula usesAs of December 31, 2017, management was not aware of any known trends, events or uncertainties that have or are reasonably likely to have a varietymaterial impact on our liquidity. As of financial instruments in the normal course of business to meet the financial needs of its customers. These financial instruments includeDecember 31, 2017, we had no material commitments to extend credit, commitments to originate residential mortgage loans held for sale, commercial letters of credit, standby letters of credit, and forward commitments to sell residential mortgage loans.

        The following table summarizes Peninsula's significant contractual obligations and commitments at June 30, 2014:




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CONTRACTUAL OBLIGATIONS Safe Harbor Statement


		Within 1 Year			1 - 3 Years			3 - 5 Years			After 5 Years			Total
Certificates of deposit and other time deposit obligations		$	17,639		$	11,782		$	847		$	0		$	30,268
Operating leases			73			97			21			—			191
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	17,712		$	11,879		$	868		$	0		$	30,459
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

Off- Balance Sheet Arrangements:        When used in this annual report by First Federal of Northern Michigan Bancorp, Inc. with the press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements." First Federal wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect First Federal's financial performance and could cause First Federal's actual results for future periods to differ materially from those anticipated or projected.

        PeninsulaFirst Federal does not use interest rate contracts (i.e. swaps), forward loans salesundertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or other derivatives to manage interest rate risk and does not have anyunanticipated events or circumstances after the date of these instruments outstanding. Peninsula Bank does have, through its normal operations, loan commitments and standby letters of credit outstanding as of June 30, 2014 and December 31, 2013 in the amount of $0.4 million and $0.7 million, respectively.

Liquidity:

        Liquidity management refers to Peninsula's ability to ensure that cash is available on a timely basis to meet loan demand and depositors' needs and to service other liabilities as they become due without undue cost or risk and without causing a disruption to normal operating activities. Peninsula and Peninsula Bank have different liquidity considerations.

        Peninsula's primary sources of funds are dividends from Peninsula Bank and net proceeds from borrowings. Restrictions, which govern all state chartered banks, preclude the payment of dividends by Peninsula Bank without the prior written consent of the Michigan Department of Insurance and Financial Services if dividends declared and paid by Peninsula Bank in either of the two immediately preceding years exceeded Peninsula Bank's net income for those years, which was not the case.

        Peninsula Bank meets its cash flow needs by having funding sources available to satisfy the credit needs of customers as well as having available funds to satisfy deposit withdrawal requests. Liquidity is derived from deposit growth, payments on and maturities of loans, payments on and maturities of the investment portfolio, access to other funding sources, marketability of certain assets, the ability to use loan and investment portfolios as collateral for secured borrowings and a strong capital position.

        Maturing investments have historically been a primary source of liquidity. For the six months ended June 30, 2014, principal payments totaling $0.6 million were received on investments as well as $2.4 million from maturities. Peninsula purchased $9.2 million in investments in the same period. Approximately 17.2%, or $1.4 million, of the mortgage-backed securities outstanding at June 30, 2014 were issued and guaranteed by GNMA, the VA or the FHA; agencies of the United States government. The remaining 82.8%, or $6.9 million, of the mortgage-backed securities outstanding at June 30, 2014 were issued by either FNMA or FHLMC, United States government-sponsored agencies. Peninsula did not hold any non-agency mortgage-backed securities at June 30, 2014.

        Deposit decreases resulted in $0.6 million of cash outflow during the first six months of 2014. Deposit growth is normally the most stable source of liquidity, although brokered deposits, which are inherently less stable than locally-generated core deposits, are sometimes used. Peninsula did not, however, rely on brokered certificates of deposit for liquidity at June 30, 2014 or December 31, 2013. Also affecting liquidity are core deposit growth levels, certificate of deposit maturity structure and retention, and characteristics and diversification of wholesale funding sources affecting the channels by which brokered deposits are acquired. Conversely, deposit outflow will cause a need to develop alternative sources of funds, which may not be as liquid and potentially a more costly alternative.

        The scheduled payments and maturities of loans can provide a source of additional liquidity. There are $24.1 million, or 32.5% of total loans, maturing within one year of June 30, 2014. Factors affectingsuch statements.




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liquidity relative to loans are loan origination volumes, loan prepayment rates and the maturity structure of existing loans. The liquidity position is influenced by changes in interest rates, economic conditions and competition. Conversely, loan demand creates a need for liquidity that may cause Peninsula to acquire other sources of funding, some of which could be more difficult to find and more costly to secure.

Capital Resources:

        Stockholders' equity at June 30, 2014 and December 31, 2013 was $17.7 million and $17.1 million, respectively, reflecting an increase of $0.6 million (3.5%) during the first six months of 2014. The increase in stockholders' equity primarily resulted from net income of $0.5 million and an increase in comprehensive income of $0.2 million for the six-month period, partially offset by cash dividends of $0.1 million. Dividends of $0.50 per share were declared and paid during the six months ended June 30, 2014. The ratio of stockholders' equity to assets was 14.3% and 13.8% at June 30, 2014 and December 31, 2013, respectively.

        Peninsula's ability to pay dividends is subject to various factors including, among other things, sufficient earnings, available capital, board discretion and regulatory compliance.

        Peninsula regularly reviews the adequacy of its capital to ensure that sufficient capital is available for its current and future needs and it is in compliance with regulatory guidelines. The assessment of overall capital adequacy depends upon a variety of factors, including asset quality, liquidity, stability of earnings, changing competitive forces, economic conditions in markets served and strength of management.

        The Federal Reserve has established capital adequacy rules which take into account risk attributable to balance sheet assets and off-balance sheet activities. All banks and all bank holding companies with assets in excess of $500 million must meet a minimum total risk-based capital ratio of 8% of which at least half must comprise core capital elements defined as Tier 1 capital. The federal banking agencies also have adopted leverage capital guidelines that banks and bank holding companies must meet. Under these guidelines, the most highly rated banking organizations must meet a leverage ratio of at least 3% Tier 1 capital to assets, while lower rated banking organizations must maintain a minimum ratio of 4% or 5%, depending on their rating. Failure to meet minimum capital requirements can initiate certain mandatory, as well as possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Peninsula's consolidated financial statements. At June 30, 2014, Peninsula was not subject to the Federal Reserve's capital adequacy guidelines because its assets were under $500 million and Peninsula Bank maintained capital in excess of the minimum ratios required to be categorized as "well capitalized" under the regulatory framework for the prompt corrective action categorization. There are no conditions or events since that date that Peninsula believes have changed its category. To be "well capitalized" under the regulatory framework, the Tier 1 capital ratio must meet or exceed 6%, the total capital ratio must meet or exceed 10% and the leverage ratio must meet or exceed 5%.

        On July 2, 2013, the FRB approved a final rule that implements changes to the regulatory capital framework for all banking organizations. The rule, Basel III, implements the reforms proposed by the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, and will increase minimum requirements as to the quantity and quality of capital required to be held by banking organizations. Peninsula believes it would be considered "well capitalized" under the new regulation if it were in effect as of June 30, 2014.

        The total capital ratios for the previous four quarters are as follows:

		June 30, 2014			March 31, 2014			December 31, 2013			September 30, 2013
Company			25.04	%		23.97	%		23.77	%		22.37	%
Bank			25.04	%		23.97	%		23.77	%		22.37	%




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        A strong capital position is necessary to take advantage of opportunities for profitable expansion of product and market share and to provide depositor and investor confidence. Peninsula believes its capital level is strong, but also must be maintained at an appropriate level to provide the opportunity for an adequate return on the capital employed. Peninsula actively reviews its capital strategies to ensure that capital levels are appropriate based on the perceived business risks, further growth opportunities, industry standards, and regulatory requirements.

        The following tables present Peninsula and the Peninsula Bank's capital ratios as of June 30, 2014 and December 31, 2013:


CAPITAL RATIOS
(Dollar amounts in thousands)


		Actual						Required For Capital Adequacy Purposes						Required To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount			Ratio			Amount			Ratio			Amount			Ratio
As of June 30, 2014									��
Total Capital (to Risk-Weighted Assets)
Peninsula		$	17,730			25.04	%	$	N/A			N/A	%	$	N/A			N/A
Peninsula Bank			17,730			25.04	%		5,658			8.00	%		7,073			10.00	%
Tier 1 Capital (to Risk-Weighted Assets)
Peninsula		$	17,683			23.78	%	$	N/A			N/A	%	$	N/A			N/A
Peninsula Bank			17,683			23.78	%		2,975			4.00	%		4,463			6.00	%
Tier 1 Capital (to Average Assets)
Peninsula		$	17,683			13.59	%	$	N/A			N/A	%	$	N/A			N/A
Peninsula Bank			17,683			13.59	%		5,204			4.00	%		6,505			5.00	%




		Actual						Required For Capital Adequacy Purposes						Required To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount			Ratio			Amount			Ratio			Amount			Ratio
As of December 31, 2013
Total Capital (to Risk-Weighted Assets)
Company		$	18,252			23.77	%	$	N/A			N/A	%	$	N/A			N/A
Bank			18,252			23.77	%		6,143			8.00	%		7,679			10.00	%
Tier 1 Capital (to Risk-Weighted Assets)
Company		$	17,286			22.51	%	$	N/A			N/A	%	$	N/A			N/A
Bank			17,286			22.51	%		3,073			4.00	%		4,610			6.00	%
Tier 1 Capital (to Average Assets)
Company		$	17,286			13.51	%	$	N/A			N/A	%	$	N/A			N/A
Bank			17,286			13.51	%		5,122			4.00	%		6,402			5.00	%

        Peninsula's principal executive offices are located at 100 S. Main St., Ishpeming, Michigan 49849, and its telephone number is (906) 485-6333. Peninsula's website can be accessed at http://www.penbank.com. Information contained in Peninsula's website does not constitute part of, and is not incorporated into, this proxy statement/prospectus.




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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT OF PENINSULAFIRST FEDERAL


        Peninsula'sFirst Federal's Management knows of no person who beneficially owned more than 5% of the outstanding common stock of PeninsulaFirst Federal as of August 28, 2014,April 2, 2018, except as set forth below:

Name and Address of Beneficial Owner				Amount and Nature of Beneficial Ownership		Percent of Class
Jay M. Blewett				22,200 Common Shares			7.71	%
1570 Aspen Dr.
Ishpeming, MI 49849
James R. & Patricia A. Blewett		21,520 shares
753 Juniper St.		7.47%
Ishpeming, MI 49849
David V. & Patricia A. Holli		20,345 shares
2002 Prairie Ave.		7.06%
Ishpeming, MI 49849
Elizabeth A. & William H. Manning		15,840 shares
1341 Ashton Court		5.50%
Chanhassen, MN 55317

        The followingindicated in the table sets forth certain information as of August 28, 2014,below. Also with respect to the ownership of common stock by the directors and named executive officers of Peninsula,First Federal, individually, and all directors and executive officers as a group (8(11 persons):

, such ownership is indicated below:

Name of Beneficial Owner		Number of Shares of Common Stock Beneficially Owned(1)			Percent of All Common Stock Outstanding
Five Percent Shareholders:
Tontine Financial Partners, L.P.(2)			278,551			7.47	%
55 Railroad Ave Third Floor
Greenwich, CT 06830
Mr. Joseph Stilwell(3)			264,140			7.10	%
111 Broadway, 12th Floor
New York, NY 10006
Directors and Executive Officers:
Timothy E. Fitzpatrick			100,263			2.7
Christopher B. McCoy			22,137			*
Eric G. Smith			33,378			*
Martin A. Thomson			76,582	(4)		2.1
Thomas R. Townsend			23,854			*
Gary C. VanMassenhove			18,550			*
James E. Kraenzlein			7,638			*
Michael W. Mahler			48,910	(5)		1.3
Craig A. Kus			18,362			*
Eileen M. Budnick			4,668	(6)		*
Jerome W. Tracey			44,604	(7)		1.2
​	​	​	​	​	​	​	​
All directors and executive officers as a group (11 persons)			398,946			10.7	%

---

Name of Beneficial Owner(3)		Amount and Nature of Beneficial Ownership(4)			Percent of Class(5)
Stephen Balbierz			30				%
Robert DellAngelo			2,280				%
Thomas Farley			505				%
Terry Garceau			282				%
Lloyd Hooper			2,300				%
John Jilbert			3,635			1.26	%
James Penrose			2,590				%
William Stream			2,231				%
Directors and Executive Officers as a Group (8 persons)			13,853			4.81	%

*

Less than 1%.



(1)

In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to be the beneficial owner for purposes of this table of any shares of common stock if he has sole or shared voting or investment power with respect to such security, or has a right to acquire beneficial ownership at any time within 60 days from the date as of which beneficial ownership is being determined. As used herein, "voting power" is the power to vote or direct the voting of shares and "investment power" is the power to dispose or direct the disposition of shares.



(2)

Based on a Schedule 13G/A filed jointly by Tontine Financial Partners, L.P., Tontine Management, L.L.C. and Jeffrey L. Gendell on February 5, 2016.



(3)

Based on a Schedule 13D filed by Joseph Stilwell, Stilwell Activist Fund, L.P., Stilwell Activist Investments, L.P. and Stilwell Value LLC filed on March 10, 2016.



(4)

Includes 17,180 shares held in Mr. Thomson's 401(k) account.



(5)

Includes 40,301 shares held in Mr. Mahler's 401(k) account.



(6)

Includes 4,118 shares held in Mrs. Budnick's 401(k) account.



(7)

Includes 36,656 shares held in Mr. Tracey's 401(k) account.




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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT OF MACKINAC


        As of August 28, 2014,April 2, 2018, no person was known by Mackinac's management to be the beneficial owner of more than 5% of the outstanding common stock of Mackinac, except as follows:indicated in the table below. Also with respect to the ownership of common stock by the directors and named executive officers of Mackinac, individually, and all directors and executive officers as a group, such ownership is indicated below

Name and Address of Beneficial Owner		Amount and Nature of Beneficial Ownership		Percent of Class
Steinhardt Capital Investors, LLLP 712 5th Avenue, 34th Floor New York, NY 10019		1,019,788 Common Shares			18.22	%
FBO Banc Funds Company, LLC(1) 20 North Wacker Drive, Suite 3300 Chicago, IL 60606		518,509 Common Shares			9.26	%
Raymond Garea 31 Claremont Avenue Maplewood, NJ 07040		372,225 Common Shares			6.65	%
FSI Group, LLC 441 Vine Street, Suite 507 Cincinnati, OH 45202		340,000 Common Shares			6.07	%
Wellington Management Company LLP(2) 280 Congress Street Boston, MA 02210		328,796 Common Shares			5.87	%
PRB Advisors, LLC(3) 245 Park Avenue, 24th Floor New York, NY 10167		325,000 Common Shares			5.81	%

Name of Beneficial Owner		Number of Shares of Common Stock Beneficially Owned(1)			Percent of All Common Stock Outstanding
Five Percent Shareholders:
Steinhardt Capital Investors, LLLP(1)			1,044,557			16.59	%
712 5th Avenue, 34th Floor
New York, NY 10019
Dimensional Fund Advisors (LP)(2)			349,789			5.56	%
6300 Bee Cave Road
Austin, TX 78746
Manulife Asset Management (US) LLC(3)			328,769			5.22	%
197 Clarendon Street
Boston, MA 02116
Directors and Executive Officers:
Walter J. Aspatore			28,620			*
Dennis B. Bittner			6,452			*
Jesse A. Deering(4)			14,010			*
Joseph D. Garea			88,315			1.40	%
Kelly W. George(5)			73,306			*
Robert E. Mahaney			24,420			*
Robert H. Orley			36,641			*
Randolph C. Paschke			30,317			*
L. Brooks Patterson			10,000			*
David R. Steinhardt(6)			1,044,557			16.59	%
Paul D. Tobias(7)			206,055			2.93	%
All directors and executive officers as a group (11 persons)			1,562,693			23.99	%

---

*

Less than 1%.



(1)

Shares are owned directly by Steinhardt Capital Investors, LLLP, and indirectly by Steinhardt Capital Management, LLC, as general partner of Steinhardt Capital Investors, and Mr. Steinhardt as a manager of Steinhardt Capital Management. Steinhardt Capital Management and Mr. Steinhardt disclaim beneficial ownership of the shares except to the extent of their respective pecuniary interests therein.



(2)

Based upon Amendment 2013-1 to Schedule 13G/A, as of December 31, 2013, which was filed with the SEC on February 11, 2014. Includes 384,300 shares held by Banc9, 2018. Dimensional Fund VIAdvisors LP, ("BF VI"), 29,772 shares held by Banc Fund VII LP ("BF VII"), and 104,437 shares held by Banc Fund VIII LP ("BF VIII"). MidBanc VI, LP is the general partner of BF VI. MidBanc VII LP is the general partner of BF VII, and MidBanc VIII LP is the general partner of BF VIII. The general partner of MidBanc VI LP, MidBanc VII LP and MidBanc VIII LP is The Banc Funds Company, LLC, whose principal shareholder is Charles J. Moore. Mr. Moore also serves as the manager of BF VI, BF VII and BF VIII, and as manager, Mr. Moore has voting and dispositive power over the securities reported.



(2)

Based upon Amendment No. 2 to Schedule 13G as of December 31, 2013, which was filed with the SEC on February 14, 2014. Wellington Management Company, LLP, in its capacity as investment adviser, shares voting and investment power with respect to thesethe shares and therefore, may also be deemed to beneficially own the shares, which are held of record by clients of Wellington Management.Dimensional Fund Advisors.



(3)

Based upon Amendment No. 7 toa Schedule 13G, as of December 31, 2013, which was filed with the SEC on February 14, 2014. PRB Investors, LP, its general partner PRB Advisors, LLC, Stephen J. Paluszek, principal of PRB Investors, LP and PRB Advisors, LLC, and Andrew P. Bergman, share voting and investment power with respect to these shares. PRB Advisors, LLC, and Messrs. Paluszek and Bergman disclaim beneficial ownership except to the extent of their pecuniary interest therein.13, 2018.




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        The information in the following table sets forth the

(4)

Includes 821 shares held by 401(k) plan.



(5)

Includes 4,943 shares held by 401(k) plan.



(6)

Shares are owned directly by Steinhardt Capital Investors, LLLP, and indirectly by Steinhardt Capital Management, LLC, as general partner of Steinhardt Capital Investors, and Mr. Steinhardt as a manager of Steinhardt Capital Management. Steinhardt Capital Management and Mr. Steinhardt disclaim beneficial ownership of Mackinac's common stock by eachthe shares except to the extent of its directors, each of the executive officers listed in the Summary Compensation Table below and by all current directors and executive officers of Mackinac as a group, as of June 30, 2014. Except as noted, beneficial ownership is direct and the person indicated has sole voting and investment power.

Name of Beneficial Owner		Amount and Nature of Beneficial Ownership			Percent of Class
Walter J. Aspatore			21,120			*
Dennis B. Bittner			6,567			*
Joseph D. Garea			80,815			1.44	%
Kelly W. George			23,371			*
Ernie R. Krueger			27,045			*
Robert E. Mahaney			12,922			*
Robert H. Orley			28,141			*
Randolph C. Paschke			22,817			*
L. Brooks Patterson			2,500			*
David R. Steinhardt(1)			1,019,788			18.22	%
Paul D. Tobias(2)			210,686			3.76	%
​	​	​	​	​	​	​	​
All current Directors and Executive Officers as a group (10 persons)			1,455,772			26.00	%
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

---

*

Less than 1.0%. Percentages are based on shares outstanding on June 30, 2014.their respective pecuniary interests therein.



(1)(7)

Includes 97,0003,718 shares ownedheld by a related entity401(k) plan, 54,194 shares held jointly with exclusivity by Mr. Steinhardt on voting rights.



(2)

Includes 10,256 shares owned by Tobias Capital LLC, which is 35% owned by Mr. Tobias and his wife, and 70,502 option72,970 shares which are currently vested.held by IRA.

        The above beneficial ownership information is based on data furnished by the specified persons and is determined in accordance with Rule 13d-3 under the Exchange Act, as required for purposes of this joint proxy statement/prospectus. It is not necessarily to be construed as an admission of beneficial ownership for other purposes.




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DIRECTORS AND EXECUTIVE OFFICERS OF MACKINAC


        The following information has been furnished to Mackinac by the respective members of the board of directors (the"Directors" or, collectively, the"Board"). Each of them has been engaged in the occupations stated below during the periods indicated, or if no period is indicated, for more than five years.

Directors

Whose Terms Expire in 2017		Age		Principal Occupation		Director of Corporation Since
Dennis B. Bittner		64		Owner and President, Bittner Engineering, Inc. (a professional services company providing planning, development and consultation related services on civil, environmental and architectural engineering projects). Mr. Bittner's qualifications as a Director include the management/ownership of an engineering company, his many years of business related consultation to a broad array of public and private companies along with his prior career experience as an engineer with State and Federal Agencies.		2001
Joseph D. Garea		59		Investment Advisor, Managing Director Hancock Securities and related companies (provides investment portfolio management services to banks, thrift institutions and other institutional clients). Mr. Garea's qualifications as a Director include his historical employment within the financial service industry, his current service as a member of the BOD of three banks, with a variety of committee responsibilities including the chairmanship of audit and compensation, along with his other current advisory services to numerous public and private financial service organizations.		2007
Kelly W. George		46		President and Chief Executive Officer of mBank and President of Mackinac. Mr. George's qualifications to serve as a Director include his employment within the financial services industry for over twenty years with employment as a regulator for the Federal Reserve system, along with lending experience, prior to joining Mackinac.		2006
L. Brooks Patterson		74		County Executive, Oakland County, Michigan. Mr. Patterson's qualifications to serve as a Director include his many years of service as the County Executive of Oakland County and his academic background, along with a distinguished career as a prosecuting attorney.		2006

Whose Terms Expire in 2018		Age		Principal Occupation		Director of Corporation Since
Walter J. Aspatore		75		Chairman, Methode Electronics Corp. (developer of customer-engineered and application-specific products and solutions using the latest technologies) from September 2012 to the present; from 1987 to 1989, President, Cross & Trecker Corporation; from 1985 to 1986, Vice-President of Finance, Industrial Energy Group of TRW Corporation; and from 1974 to 1978, Controller, Flight Systems Division of Bendix Corporation. Mr. Aspatore's qualifications to serve as a director encompass his broad financial background which spans across several decades and includes his service as chief executive officer and director for a wide variety of national and international publicly held companies.		2004
Robert H. Orley		62		Real Estate Developer, Founding Partner, O2 Investments, LLC (real estate and corporate development and management). Mr. Orley's qualifications to serve as a director include his background in real estate management and corporate developments, along with his academic background.		2004
Randolph C. Paschke		68		Executive-in-Residence, Mike Ilitch School of Business, Wayne State University; from August 2012 to 2015, Director of External Relations and Community Engagement, Mike Ilitch School of Business, Wayne State University; from August 2002 to 2012, Chair, Department of Accounting and Interim Chair of The Department of Finance (2009-2010), Mike Ilitch School of Business, Wayne State University. Mr. Paschke's qualifications to serve as a director include 32 years of service for an international accounting firm, 20 years as a partner with 16 years as a practice managing partner, his experience as a licensed CPA since 1972, along with his years of service as a chair of the accounting department at Wayne State University.		2004




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Whose Terms Expire in 2015		Age		Principal Occupation		Since
Walter J. Aspatore (currently designated as "Lead Director")		71		Chairman, Methode Electronics Corp. (developer of customer-engineered and application-specific products and solutions using the latest technologies). Mr. Aspatore's qualifications to serve on the Board encompass a broad financial background which spans across several decades as CEO and board member in a wide variety of national and international publicly held companies.		2004
Robert H. Orley		58		Real Estate Developer, Founding Partner, O2 Investments, LLC (real estate and corporate development and management). Mr. Orley's qualifications as Director include a background in real estate management and corporate developments, along with his academic background.		2004
Randolph C. Paschke		64		Director of External Relations and Community Engagement, School of Business Administration at Wayne State University. From August 2002 to 2012—Chair, Department of Accounting and Interim Chair of The Department of Finance (2009-2010) in the School of Business Administration at Wayne State University. Mr. Paschke's qualifications as a Director include 32 years in an international accounting firm, 20 years as a partner with 16 years as a practice managing partner, a licensed CPA since 1972, along with his service as chair of the accounting department at Wayne State University.		2004

Whose Terms Expire in 2019		Age		Principal Occupation		Since
Robert E. Mahaney II		59		Founder and President, Veridea Group, LLC (a commercial and residential real estate development and hotel management company). Mr. Mahaney is also a private equity investor in a number of lodging and other businesses. Mr. Mahaney's qualifications to serve as a director include his many business ventures and his previous financial services experience, coupled with his academic background, professional designations and community involvement.		2001
Paul D. Tobias		67		Chairman and Chief Executive Officer of Mackinac and Chairman of the Bank since December 2004. Mr. Tobias' qualifications to serve as a director include his experience as a banking and financial services executive, along with his institutional knowledge of Mackinac through his tenure as its Chief Executive Officer.		2007
David R. Steinhardt		48		Co-Founder and Board Member, Clarity Capital, Managing Partner and Portfolio Manager, Wooster Capital Management. Mr. Steinhardt has served as Managing Director and Head of Research at Centurion Investment Group and as an analyst and assistant portfolio manager at Spears, Benzak, Salomon and Farrell. Mr. Steinhardt's qualifications to serve as a director include his vast experience in capital management and his educational background.		2012







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Whose Terms Expire in 2016		Age		Principal Occupation		Since
Robert E. Mahaney		55		Founder and President, Veridea Group, LLC (a commercial and residential real estate development and hotel management company). Mr. Mahaney is also a private equity investor in a number of lodging and other businesses. Mr. Mahaney's qualifications to serve on the Board include his many business ventures and previous financial services experience, coupled with his academic background, professional designations and community involvement.		2001
Paul D. Tobias		63		Chairman and Chief Executive Officer of Mackinac and Chairman of mBank from December 2004 to present. Mr. Tobias' qualifications as a director include his experience as a banking and financial services executive, along with his knowledge of Mackinac as Chief Executive Officer.		2007
David R. Steinhardt		44		Co-Founder and Board Member, KCPS & Company Ltd; Managing Partner and Portfolio Manager, Wooster Capital Management. Mr. Steinhardt has served as Managing Director and Head of Research at Centurion Investment Group and as an analyst and assistant portfolio manager at Spears, Benzak, Salomon and Farrell. Mr. Steinhardt's qualifications to serve as a Director include his vast experience in capital management and his educational background.		2012

Whose Terms Expire in 2020		Age		Principal Occupation		Since
Dennis B. Bittner		68		Owner and President, Bittner Engineering, Inc. (professional services company providing planning, development and consultation related services on civil, environmental and architectural engineering projects.) Mr. Bittner's qualifications to serve as a director include his management and ownership of an engineering company, his many years of business related consultation to a broad array of public and private companies, along with his prior career as an engineer with State and Federal Agencies.		2001
Joseph D. Garea		63		Investment Advisor, Managing Director, Detalus Advisors and related companies (provider of investment portfolio management services to banks, thrift institutions and other institutional customers). Mr. Garea's qualifications to serve as a director include his prior employment within the financial services industry, his service as a member of the Board, with a variety of committee responsibilities including his chairmanship of the Audit and Compensation Committees, along with his other current advisory services to numerous public and private financial services organizations.		2007
Kelly W. George		50		President of Mackinac and President and Chief Executive Officer of the Bank. Mr. George's qualifications to serve as a director include his employment within the financial services industry for over 25 years, including his experience as a regulator for the Federal Reserve System, along with his lending experience, prior to joining Mackinac.		2006
L. Brooks Patterson		78		Elected County Executive, Oakland County, Michigan. Mr. Patterson's qualifications to serve as a director include his service as the County Executive of Oakland County since 1992, his service on the Board of Directors for Plastipak Holdings Inc. since August 17, 2007 and his academic background, along with his distinguished career as a prosecuting attorney.		2006

        Mackinac believes that its Board as a whole should encompass a range of talent, skill, diversity, and expertise enabling it to provide sound guidance with respect to its operations and interests. In addition to considering a candidates' background and accomplishments, candidates are reviewed to




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maintain the current majority of Directors which qualify as "independent" under the rules of the NASDAQ.

        Mackinac's Board has considered the independence of its Directors under the rules of the NASDAQ. The Board has determined that all of the Directors are independent under NASDAQ rules except Mr. Tobias, Chairman and Chief Executive Officer of Mackinac and Chairman of mBank, Mr. George, President of Mackinac and President and Chief Executive Officer of mBank, and Director Robert Mahaney. Messrs. Tobias and George are not independent because of their services as executive officers of Mackinac and mBank. Mr. Mahaney is not independent under NASDAQ rules as a result of the transaction described under "Indebtedness of and Transactions with Management" below.

        The Board has also determined that each of the members of the Audit, Compensation and Nominating Committees are considered independent as defined in applicable NASDAQ rules. In addition, the Board has affirmatively determined that the members of the Audit Committee and Compensation Committee qualify as independent in accordance with the additional independence rules established by the Securities Exchange Commission (the"SEC") and NASDAQ.

Executive Officers

        The executive officers of Mackinac serve at the pleasure of the board of directors.Board. Set forth below are the current executive officers of Mackinac and a brief explanation of their principal employment during at least the last five years. Additional information concerning the employment agreementsarrangements of Mackinac's executive officers of Mackinac is included elsewhere in this joint proxy statement/prospectusstatement under the heading "Executive Compensation."




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        Paul D. Tobias—Age 63—67—Chairman of the Board and Chief Executive Officer of Mackinac and Chairman of the Board of mBank.Directors of the Bank. Mr. Tobias was appointed to his present positions with Mackinac and mBankthe Bank in November 2006.

        Kelly W. George—Age 46—50—President of Mackinac and President and Chief Executive Officer of mBank. Mr. George was appointed as President ofto his present positions with Mackinac and as Chief Executive Officer of mBankthe Bank in November 2006.

        Ernie R. KruegerJesse A. Deering—Age 64—38—Executive Vice President and Chief Financial Officer of Mackinac and mBank. Mr. KruegerDeering was appointed to his current positions in October 2006.August 2016. Prior to such time, Mr. Deering served in various capacities for the Bank, including as a Senior Vice President and Managing Director (February 2013 to August 2016), as Senior Vice President and Southeast Michigan Executive (December 2011 to February 2013), and as First Vice President and Southeast Michigan Executive (February 2009 through December 2011).

Family Relationships

        There are no family relationships between or among any of the Directors, nominees, or executive officers of Mackinac.


Compensation of Directors and Executive Officers


TARP/CPP Exit

        On April 24, 2009, Mackinac sold $11 million of preferred stock and warrants to the U.S. Treasury under the Capital Purchase Program ("CPP") of the Troubled Asset Relief Program ("TARP"). Participants in CPP are subject to a number of limitations and restrictions on executive compensation, including certain provisions of the American Recovery and Reinvestment Act of 2009 ("ARRA").

        On August 29, 2012, Mackinac exited the TARP/CPP program through the U.S. Treasury sponsored auction. Through detailed analysis and information provided to the Board of Directors, on December 19, 2012, Mackinac entered into a letter agreement with the U.S. Treasury pursuant to which Mackinac repurchased the warrant previously issued to U.S. Treasury in connection with the CPP program for $1,300,000, in cash. As a result of the repurchase, the warrant is no longer issued or outstanding and Mackinac's participation in the TARP CPP is completed. The TARP Preferred Stock was initially purchased by private investors and was redeemed in full by Mackinac in 2013.

        With participation in the CPP ending on August 29, 2012, the Compensation Committee has reviewed the required compensation standards, and will continue to assess any changes deemed necessary to Mackinac's compensation practices.

Compensation Consultant Disclosure

        Mackinac'sThe Compensation Committee has engaged an independent consulting firm to review executive officer and Boarddirector compensation, review itsMackinac's annual proxy statement, assist with the risk reviews, and provide general consulting advice to the Compensation Committee over the course of the year.

        The Compensation Committee approved engagingengaged Meyer-Chatfield as a consultant in 2016. The 2016 engagement included an update of market compensation data requested by the Committee's consultant for 2013. The engagement for 2013 included a reviewCompensation




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Committee during their periodic evaluation of Mackinac's annual proxy statement and a review of the semi-annual risk review.compensation practices. Meyer-Chatfield is an independent third-party consulting firm that is focused on the banking marketplace.

Compensation Program Details

        The foregoing discussion provides background and context for the information that follows regarding Mackinac's existing compensation programs to those persons who served as its named executive officers during 20132017 and to assist in understanding the information in the executive compensation tables included later in this section. Named executive officers are determined using current year compensation for the year being disclosed.




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        The 2012 named executive officers, based on their 2012 compensation were subject to the CPP restrictions that have been described in previous proxy statements for the period of time that Mackinac was a CPP participant. Because we were no longer a CPP participant as of August 29, 2012, the compensation restrictions have been lifted for the period that we were not a CPP participant. Therefore, the 2012 named executive officers could receive incentive compensation for the period after we exited the CPP program for fiscal year 2012.

Executive Compensation

Summary Compensation Table


        The following table showssets forth certain information, for the years ended December 31, 2017 and December 31, 2016, regarding Mackinac's compensation earned by Mackinac's chief executive officer and president,of its chief financial officer, andcurrent Chief Executive Officer, the two other most highly compensated otherexecutive officers in 2017 who were serving as executive officers as of December 31, 2017, and one individual for whom disclosure would have been provided but for the fact that such individual was not serving as an executive officer (collectively, theas of December 31, 2017 (the"named executive officers") for the years ended December 31, 2013 and 2012..

Name and Principal Position		Year			Salary ($)			Bonus ($)(1)			Stock Awards ($)(2)			All Other Compensation ($)(3)			Total ($)
Paul D. Tobias			2013			285,000			40,000			—			21,273			346,273
Chairman and Chief Executive			2012			267,000			40,000			197,750			19,976			524,726
Officer of Mackinac
Chairman of mBank
Kelly W. George			2013			280,000			40,000			—			26,358			346,358
President of Mackinac			2012			272,000			55,000			170,068			25,705			522,773
President and Chief Executive
Officer of mBank
Ernie R. Krueger			2013			200,000			30,000			—			18,911			248,911
Executive Vice President and			2012			194,500			25,000			142,380			18,027			379,907
Chief Financial Officer of
Mackinac and mBank

Name and Principal Position		Year			Salary ($)			Bonus ($)(2)			Stock Awards ($)(3)			All Other Compensation ($)(4)(5)			Total ($)
Paul D. Tobias			2017			326,991			110,000			49,049			16,246			502,286
Chairman and Chief Executive Officer of Mackinac Chairman of the Bank			2016			315,933			55,000			63,187			16,397			450,517
Kelly W. George			2017			321,255			110,000			48,188			23,666			503,109
President of Mackinac President and Chief Executive Officer of the Bank			2016			310,391			55,000			62,076			26,403			453,870
Jesse A. Deering			2017			182,505			50,000			27,376			17,571			277,452
Executive Vice President and Chief Financial Officer of Mackinac and the Bank(1)			2016			163,448			40,000			35,269			22,996			261,713

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(1)

The amountsAmounts reported for Mr. Deering include all compensation paid to Mr. Deering during 2016. Mr. Deering was appointed Executive Vice President and Chief Financial Officer of the Corporation and the Bank, effective August 1, 2016, at which time the Corporation entered into an amended and restated employment agreement with Mr. Deering, which was subsequently amended and restated in this columnFebruary 2018 (discussed below).



(2)

Amounts reported for 20132017 and 2016 represent a discretionary bonus that was paid to each named executive officer pursuant to the terms of the Employment Agreementsemployment agreements described below.



(2)(3)

The amountsAmounts reported relate to time-based restricted stock awards granted under the Corporation's 2012 Incentive Compensation Plan. Amounts reported represent the aggregate grant date fair value of such awards (excluding the effect of estimated forfeitures), in each case calculated in accordance with FASB ASC Topic 718. Awards for 2012 in the Stock Awards column relate to time-based restricted stock awards granted on August 31, 2012 under the Mackinac Financial Corporation 2012 Incentive Compensation Plan.



(3)(4)

Amounts in this column for 20132017 include the value of the following benefits or perquisites: (i) for Mr. Tobias, health and disability insurance premiums and life insurance premiums of $21,273;$16,246; (ii) for Mr. George, 401(k) employer match contributions of $9,327$9,450 and health and disability




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insurance premiums and life insurance premiums of $14,216; and (iii) for Mr. Deering, 401(k) employer match contributions of $3,287.29 and health and disability insurance premiums and life insurance premiums of $17,031; and (iii)$14,284.

(5)

Amounts in this column for 2016 include the value of the following benefits or perquisites: (i) for Mr. Krueger,Tobias, health and disability insurance premiums and life insurance premiums of $16,397; (ii) for Mr. George, 401(k) employer match contributions of $9,080$7,590 and health and disability insurance premiums and life insurance premiums of $9,831.$18,813; and (iii) for Mr. Deering, 401(k) employer match contributions of $4,917 and health and disability insurance premiums and life insurance premiums of $18,079.


Narrative Disclosure to Summary Compensation Table


Employment Agreements

Amended and Restated Employment Agreements

        On August 10, 2012,March 1, 2018, Mackinac entered into an amended and restated employment agreementsagreement with each of the following named executive officers (i) Paul D. Tobias, Mackinac'sthe Company's Chairman of the Board and Chief Executive




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Officer and the Chairman of the Board of mBank, Mackinac's subsidiary bank,the Bank, (ii) Kelly W. George, Mackinac'sthe Company's President and mBank'sthe Bank's President and Chief Executive Officer, and (iii) Ernie R. Krueger,Jesse A. Deering, the Executive Vice President and Chief Financial Officer of mBankthe Bank and Mackinacthe Company (each, an"Employment Agreement" and collectively, the"Employment Agreements").

        Each of the Employment Agreements have an initial term (the"Initial Term") of three (3) years beginning on August 10, 2012March 1, 2018 (the ""Commencement Date"), and automatically renewrenewing for successive one (1) year terms at the end of the Initial Term provided that the applicable executive notifies the Board of Mackinacthe Company does not notify the executive of such renewalits intention not to renew the Employment Agreement on or prior to at least one hundred eighty (180) days prior (the"Renewal Date") to the expiration of the Initial Term or any renewal term and the Board does not notify the applicable executive of its intention not to renew the agreement on or prior to the Renewal Date.term. In the event of a change of control of Mackinac,the Company, the Commencement Date of each Employment Agreement automatically resets as of the date of the change of control, resulting in an initial term of three (3) years from the date of such change of control.

        Each Employment Agreement supersedes the prior employment agreement between Mackinacthe Company and the applicable executive in its entirety.

        The Employment Agreements entitle the applicable executives to, among other benefits, the following compensation:

•

(i) for Mr. Tobias, will receive(a) a base salary of at least $267,000,$370,000, which will beis reviewed annually by the Compensation Committee. Mr. Tobias shall also be eligibleCommittee of the Board (the"Compensation Committee"), (b) eligibility for an annual cash bonus, as determined by the Compensation Committee, and shall be eligibleeligibility to participate in Mackinac's long term incentive plan, (the"Plan"). In addition,and (c) in the event Mr. Tobias' employment is terminated within two (2) years of a change of control of Mackinac (or six (6) months prior to such change of control in anticipation of such change of control) for any reason other than for cause, Mr. Tobias will be entitled to a lump sum payment of 2.99 times his annual base salary as of such termination.



•

termination and the average of the full year annual cash bonus paid to Mr. Tobias during the prior three (3) fully completed years, (ii) for Mr. George, will receive(a) a base salary of at least $272,000,$365,000, which will beis reviewed annually by the Compensation Committee. Mr. George shall also be eligibleCommittee, (b) eligibility for an annual cash bonus, as determined by the Compensation Committee, and shall be eligibleeligibility to participate in the Plan. In addition,Mackinac's long term incentive plan, and (c) in the event Mr. George's employment is terminated within two (2) years of a change of control of Mackinac (or six (6) months prior to such change of control in anticipation of such change of control) for any reason other than for cause, Mr. George will be entitled to a lump sum payment of 2.99 times his annual base salary as of such termination.



•

termination and the average of the full year annual cash bonus paid to Mr. Krueger will receiveGeorge during the prior three (3) fully completed years, and (iii) for Mr. Deering, (a) a base salary of at least $194,500,$205,000, which will beis reviewed annually by the Compensation Committee. Mr. Krueger shall also be eligibleCommittee, (b) eligibility for an annual cash bonus, as determined by the Compensation Committee,




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and shall be eligibleeligibility to participate in the Plan. In addition,Mackinac's long term incentive plan, and (c) in the event Mr. Krueger'sDeering's employment is terminated within two (2) years of a change of control of Mackinac (or six (6) months prior to such change of control in anticipation of such change of control) for any reason other than for cause, Mr. Krueger will be entitled to a lump sum payment of 2.0 times his annual base salary as of such termination.

termination and the average of the full year annual cash bonus paid to Mr. Deering during the prior three (3) fully completed years.

        Each employment agreementEmployment Agreement contains provisions relating to non-solicitation of customers and personnel and non-competition during the term of employment and the two yearsfor eighteen (18) months thereafter, as well as a provision relating to the protection of confidential information.

Equity Awards Granted to Mackinac's Named Executive Officers

        On August 31, 2012,February 26, 2018, the Board granted the following restricted stock awards to Messrs. Tobias, George and KruegerDeering under the Mackinac Financial CorporationMackinac's 2012 Incentive Compensation Plan (the "2012"2018 Restricted Stock Awards"): (i) 3,066 shares of restricted stock to Mr. Tobias; (ii) 3,012 shares of restricted stock to Mr. George, and (iii) 1,711 shares of restricted stock to Mr. Deering. The 2018 Restricted Stock Awards"). The 2012 Restricted Stock Awards were granted in exchange for each executive officer agreeing to forfeit certain outstanding options previously granted to them under the




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North Country Financial Corporation 2000 Incentive Compensation Plan. The table below describes the options that each named executive officer forfeited in 2012:

Name		Grant Date			Number of Shares Underlying Option			Option Exercise Price ($)			Option Expiration Date
Paul D. Tobias			12/15/2004			40,000			9.75			12/15/2014
Kelly W. George			06/10/2005			20,000			12.00			06/10/2015
			12/15/2006			15,000			10.65			12/15/2016
Ernie R. Krueger			06/10/2005			10,000			12.00			06/10/2015
			12/15/2006			10,000			10.65			12/15/2016

        The 2012 Restricted Stock Awards will vest in four equal annual installments beginning on the each of the first 4 anniversariesanniversary of the grant date (or August 31^st)(February 22, 2019) so that such awards shallwill be fully vested on August 31, 2016,February 22, 2022, subject to each named executivesuch officer's continued employment. The

        On February 24, 2017, the Board granted the following restricted stock awards to Messrs. Tobias, George and Deering under Mackinac's 2012 Incentive Compensation Plan (the"2017 Restricted Stock Awards" and together with the 2016 Restricted Stock Awards, the"Restricted Stock Awards"): (i) 4,719 shares of restricted stock to Mr. Tobias; (ii) 4,636 shares of restricted stock to Mr. George, and (iii) 2,634 shares of restricted stock to Mr. Deering. The 2017 Restricted Stock Awards vest in four equal annual installments beginning on the first anniversary of the grant date (February 24, 2018) so that such awards will alsobe fully vested on February 24, 2021, subject to each such officer's continued employment.

        The Restricted Stock Awards fully vest upon a named executiveany such officer's termination due to death or disability or upon a change inof control of Mackinac. IfIn the named executive officer retires,event of any such officer's retirement, his award shallRestricted Stock Awards will continue to vest as if his employment with Mackinac continued, provided that if hewere continuing, but any unvested shares will be immediately forfeited in the event such officer ceases to be retired than any unvested shares shall be immediately forfeited.retired.




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20132017 Outstanding Equity Awards at Fiscal Year-End Table


        The following table provides information on the holdings of options to purchase common shares and restricted stock by the named executive officers as of December 31, 2013.2017.

					Option Awards												Stock Awards										Stock Awards
Name		Grant Date(3)			Number of Securities Underlying Unexercised Options Exercisable (#)			Equity Incentive Plan awards: Number of Securities Underlying Unexercised Unearned Options (#)			Option Exercise Price ($)			Option Expiration Date			Number of Shares or Units of Stock That Have Not Vested (#)(1)			Market Value of Shares or Units of Stock That Have Not Vested ($)(2)				Grant Date			Number of Shares or Units of Stock That Have Not Vested (#)(1)			Market Value of Shares or Units of Stock That Have Not Vested ($)(2)
Paul D. Tobias			12/15/2004			70,502			39,503			9.75			12/15/2014			—			—				3/18/14			3,652			58,067
			08/31/2012			—			—			—			—			18,750			185,625				03/24/2015			6,038			96,004
																									02/22/2016			4,352			69,197
																									02/24/2017			4,719			75,032
Kelly W. George			08/31/2012			—			—			—			—			16,125			159,637				3/18/14			3,655			58,115
Ernie R. Krueger			08/31/2012			—			—			—			—			13,500			133,650
																									03/24/2015			2,349			37,349
																									02/22/2016			4,276			67,988
																									02/24/2017			4,636			13,712
Jesse A. Deering																									3/18/14			625			9,938
																									03/24/2015			1,750			27,825
																									02/22/2016			2,065			32,834
																									02/24/2017			2,634			41,881

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(1)

Based upon the $9.90 closing priceShares of the Shares on NASDAQ on December 31, 2013.



(2)

The restricted stock shall vest in four equal annual installments on the first through fourth anniversaries of the grant date.



(3)(2)

Mr. Tobias was granted 150,005 optionsBased on December 15, 2004. The option vests as follows: 47% of the option vested upon Mackinac's common stock attaining aclosing price equal to or greater than 115% of the stock option exercise price, which it did on December 16, 2004; the remaining 53% was to vest within two years from the December 15, 2004 grant date if the market value of Mackinac's common stock increases to an amount equal to or greater than 145% of the stock option exercise price. This market value condition has not yet been met; therefore, only 47% of the original options are currently vested. In August 2012, Mr. Tobias surrendered 40,000 unvested option shares. The remaining 39,503 unvested options may still vest if, within the ten-year life of the option, certain events occur, including but not limited to the death of the executive or a change in control of Mackinac.on NASDAQ on December 29, 2017, which was $15.90.




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Retirement Plan

        Mackinac sponsors the Mackinac Financial Corporation 401(k) Plan (the"Plan"). All regular, and full-time employees are eligible to enroll in the Plan after their 90 day90-day introductory period has been met. Employees who have completed 1,000 hours of service and are 18 years of age or older during the plan year (January 1—December 31) may participate in this plan.the Plan. If an employee completes at least 1,000 hours of service during any plan year (January 1 - December 31) and is employed by Mackinac on the last day of the Plan year, Mackinac may, in its sole discretion, make a matching contribution on their behalf. The Plan permits Mackinac, through action of the Board, of Directors to specify the range, rate and level of and to make discretionary contributions to the Plan for allocation to eligible participants. For the 20132017 plan year, Mackinac made a discretionary contribution that matched 100% of the first 4%3% of eligible employee contributions.compensation and 50% on the next 1% of eligible compensation. All contributions to the Plan are subject to both individual and total participant contribution limits as established by the IRS.

Severance and Change inof Control Benefits

        Other than the Employment Agreements and the acceleration of equity vesting upon certain qualifying terminations described above,        Mackinac does not provide for any severance or change inof control benefits.benefits, other than those discussed above.




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Director Compensation

20132017 Director Compensation Table


        The table below summarizes the compensation paid by Mackinac to non-employee directors for the fiscal year ended December 31, 2013.2017.

Name		Total Fees Earned or Paid in Cash ($)			Stock Awards($)(1)			Total ($)
Walter J. Aspatore			40,750			—			40,750
Dennis B. Bittner			34,250			—			34,250
Joseph D. Garea			28,500			—			28,500
Robert E. Mahaney			28,500			—			28,500
Robert H. Orley			27,500			—			27,500
Randolph C. Paschke			28,500			—			28,500
L. Brooks Patterson			31,750			—			31,750
David R. Steinhardt			31,750			—			31,750

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(1)

As of December 31, 2013, each non-employee director, with the exception of Mr. Steinhardt had 7,500 shares of restricted stock outstanding.

Name		Fees Earned or Paid in Cash ($)
Walter J. Aspatore			41,500
Dennis B. Bittner			34,000
Joseph D. Garea			32,000
Robert E. Mahaney			35,000
Robert H. Orley			32,500
Randolph C. Paschke			35,000
L. Brooks Patterson			34,500
David R. Steinhardt			35,000

20132017 Non-Employee Director Annual Cash Retainer and Meeting Fees

        In 2013,2017, each non-employee director received an annual retainer of $25,000. In addition, Mr. Aspatore, as the Lead Director of the Board, and each committee chairman received an additional annual retainer of $3,000. Mr. Aspatore also served as chairman of the Audit Committee, Mr. Patterson served as chairman of the Nominating Committee, and Mr. Steinhardt served as chairman of the Compensation Committee. Finally, on August 31, 2012, each non-employee director was granted an award of 10,000 shares of restricted stock, to vest ratably over 4 years on each of the first 4 anniversaries of the grant date. Mackinac's employee directors (which included Messrs. Tobias and George in 2013) did not receive compensation for their service on the Board of Directors.

        For 2014, non-employee directors will be paid an annual fee of $25,000. In addition to the annual fee, the lead director and those directors who chair board committees will be paidBoard committee chairs received an additional $3,000, and boardBoard committee members will receivereceived $250 per meeting attended.




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INDEBTEDNESS OF AND TRANSACTIONS WITH MACKINAC'S MANAGEMENT


        Certain of the directors and officers of Mackinac have had and are expected to have in the future, transactions with its banking affiliate, mBank, or have been directors or officers of corporations, or members of partnerships or limited liability companies, which have had and are expected to have in the future, transactions with mBank. In the opinion of management, all such previous transactions (i) were made in the ordinary course of business, (ii) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and (iii) did not involve more than normal risk of collectability or present other unfavorable features. Mackinac's BoardThe Audit Committee has responsibility for reviewing and approving transactions with related persons. Mackinac,persons, in accordance with the rules of NASDAQ. The Audit Committee, as a general policy, approves transactions to related parties at essentially the same terms and conditions that apply to similar transactions it engages in or approves with non-related parties.

        Under SEC rules, a "related person transaction" is any transaction or series of transactions in which Mackinac or a subsidiary is a participant, the amount involved exceeds $120,000 and a related person has a direct or indirect material interest. A "related person" is a director, officer, nominee for director or a more than 5% shareholder since the beginning of Mackinac's last completed fiscal year, and their immediate family members. Mackinac reviews all related person transactions in accordance with the procedure described above.

        Mr. Mahaney owns a controlling interest in Veridea Group, LLC, a commercial and residential real estate development and hotel management company he founded in 2001. On May 24, 2013, mBankthe Bank signed a lease for a branch office in a building owned by Mr. Mahaney. The lease has a 15-year termterm. Lease payments in calendar year 2017 and requires annual lease payments2016 totaled $440,994 and $432,532, respectively.




Table of $533,130 for the first three years with scheduled two percent annual increases beginning in year four. The lease payments include rent plus a common area maintenance allocation expense.Contents


LEGAL MATTERS


        The validity of the Mackinac common stock to be issued in connection with the merger will be passed upon for Mackinac by Honigman Miller Schwartz and Cohn LLP. Certain U.S. federal income tax consequences relating to the merger may also be passed upon for Mackinac by Honigman Miller Schwartz and Cohn LLP and for PeninsulaFirst Federal by GodfreyShumaker, Loop & Kahn.Kendrick, LLP.


EXPERTS


Mackinac


        The consolidated financial statements of Mackinac included inincorporated by reference into this joint proxy statement/prospectus as of and for the two years ended December 31, 2013,2017, and management's assessment of the effectiveness of internal control over financial reporting as of December 31, 20132017 have been so included in reliance upon the report of Plante & Moran, PLLC, independent registered public accounting firm, and upon the authority of said firm as experts in accounting and auditing.


Peninsula First Federal


        The financial statements of PeninsulaFirst Federal as of and for the yeartwo years ended December 31, 20132017 included in this joint proxy statement/prospectus have been so included in reliance on the report of Makela, Toutant, Hill & Nardi, P.C.,Andrews Hooper Pavlik PLC an independent auditor, given on the authority of said firm as experts in auditing and accounting.


CERTAIN DOCUMENTS INCORPORATED BY REFERENCE


        The SEC allows Mackinac to "incorporate by reference" information into this proxy statement/prospectus, which means that Mackinac can disclose important information to you by referring you to another document filed separately by it with the SEC. The information incorporated by reference is deemed to be part of this joint proxy statement/prospectus, except for any information superseded by any information in this joint proxy statement/prospectus. This document incorporates by reference the following documents that have been filed previously with the SEC by Mackinac:

•

Annual Report on Form 10-K for the year ended December 31, 2017;



•

Current Reports on Form 8-K filed on January 16, 2018, January 19, 2018, February 13, 2018, and March 7, 2018; and



•

The description of the Mackinac common stock contained under the caption "Description of Common Shares" found Mackinac's Registration Statement on Form S-1/A (333-18724), filed with the SEC on August 21, 2012, and any amendments or reports filed for the purpose of updating such description.

        In addition, Mackinac is incorporating by reference any documents it may file under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this joint proxy statement/prospectus and prior to the date of the special meeting of Mackinac stockholders provided, however, that Mackinac is not incorporating by reference any information furnished (but not filed), except as otherwise specified herein.

        Mackinac files annual, quarterly and special reports, proxy statements and other business and financial information with the SEC. You may obtain the information incorporated by reference and any other materials Mackinac files with the SEC without charge by following the instructions in the section entitled "Where You Can Find More Information."




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OTHER MATTERS


        No matters other than the matters described in this joint proxy statement/prospectus are anticipated to be presented for action at the special meeting or at any adjournment or postponement of the special meeting.


SHAREHOLDER PROPOSALS


        If a shareholder of Mackinac intends to present a shareholder proposal at Mackinac's 20152018 annual meeting, the proposal must have been received by Mackinac's secretary no later than December 31, 201429, 2017 to be eligible for inclusion in Mackinac's proxy statement and form of proxy for that meeting. Such proposals will be subject to the requirements of the proxy rules adopted under the Exchange Act, Mackinac's articles of incorporation and bylaws and Michigan law.

        In order to be considered at any meeting, a shareholder proposal submitted outside of Rule 14a-8 under the Exchange Act, other than a nomination of directors, must (i) comply with the requirements in Mackinac's bylaws and articles of incorporation as to form and content, and (ii) be received by Mackinac (a) at least 30 days prior to the originally scheduled date of the meeting, or (b) not later than the close of business on the tenth day following the date on which notice of the scheduled meeting was first mailed to the shareholders, if less than 40 daysdays' notice of the meeting is given by Mackinac.

        The Nominating Committee will consider candidates nominated by shareholders in accordance with the procedures set forth in Mackinac's articles of incorporation and in the Nominating Committee's charter, pursuant to which the Nominating Committee would apply the same qualification criteria and consideration factors applicable to its own nominees. Under Mackinac's articles of incorporation, nominations other than those made by the Board or the Nominating Committee must be made pursuant to timely notice in proper written form to the Secretary of Mackinac. To be timely, a shareholder's request to nominate a person for election to the Board at the annual meeting of shareholders, together with the written consent of such person to serve as a Director, must be received by the Secretary of Mackinac not less than 60 nor more than 90 days prior to the first anniversary date of the annual meeting of shareholders in the immediately preceding year. To be in proper form, the notice must contain certain information concerning the nominee and the shareholder submitting the nomination.


WHERE YOU CAN FIND MORE INFORMATION


Mackinac


        Mackinac has filed with the SEC a registration statement under the Securities Act that registers the distribution to PeninsulaFirst Federal shareholders of the shares of Mackinac common stock to be issued in connection with the merger. This joint proxy statement/prospectus is a part of that registration statement and constitutes the prospectus of Mackinac in addition to being a proxy statement for PeninsulaFirst Federal shareholders. The registration statement, including the attached exhibits and schedules, contains additional relevant information about Mackinac and Mackinac common stock.

        You may read and copy this information at the Public Reference Room of the SEC at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates, or from commercial document retrieval services.

        The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like Mackinac, who file electronically with the SEC. The address of the site is http://www.sec.gov. The reports and other information filed by Mackinac with the SEC are also




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available at Mackinac's website at http://www.bankmBank.com. The web addresses of the SEC and Mackinac are included as inactive textual references only. Information on those web sites is not part of this joint proxy statement/prospectus.


Peninsula First Federal


        PeninsulaFirst Federal does not have a class of securities registered under Section 12 of the Exchange Act, is not subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act, and accordingly does not file documents and reports with the SEC. The historical consolidated financial statements of PeninsulaFirst Federal have been filed with the SEC by Mackinac and are incorporated by reference into this joint proxy statement/prospectus. See "Where You Can Find More Information."

        If you have any questions concerning the merger or this joint proxy statement/prospectus, would like additional copies of this joint proxy statement/prospectus or need help voting your shares of PeninsulaFirst Federal common stock, please contact John JilbertMichael W. Mahler, at (906) 360-8666.(989) 354-7319.

        Mackinac has not authorized anyone to give any information or make any representation about the merger or the company that is different from, or in addition to, that contained in this joint proxy statement/prospectus or in any of the materials that have been incorporated in this joint proxy statement/prospectus. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where offers to exchange or sell, or solicitations of offers to exchange or purchase, the securities offered by this joint proxy statement/prospectus or the solicitation of proxies is unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this joint proxy statement/prospectus does not extend to you. The information contained in this joint proxy statement/prospectus speaks only as of the date of this joint proxy statement/prospectus unless the information specifically indicates that another date applies.




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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


		Page
Financial Statements of Mackinac Financial CorporationFirst Federal of Northern Michigan Bancorp, Inc.—December 31, 2017 and 2016
Audited Financial Statements:
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheet as of December 31, 2013 and 2012			F-3
Consolidated Statements of Operation for the years ended December 31, 2013, 2012 and 2011			F-4
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012, and 2011			F-5
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2013, 2012 and 2011			F-6
Consolidated Statements of Cash Flow for the years ended December 31, 2013, 2012 and 2011			F-7
Notes of the Consolidated Financial Statement			F-8
Unaudited Financial Statements:
Condensed Consolidated Balance Sheets—June 30, 2014, December 31, 2013 and June 30, 2013			F-44
Condensed Consolidated Statements of Operations—Three and Six Months Ended June 30, 2014, and June 30, 2013			F-45
Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended June 30, 2014, and June 30, 2013			F-46
Condensed Consolidated Statements of Changes in Shareholders' Equity—Three and Six Months Ended June 30, 2014, and June 30, 2013			F-47
Condensed Consolidated Cash Flows—Three and Six Months Ended June 30, 2014, and June 30, 2013			F-48
Notes to Condensed Consolidated Financial Statements			F-49
Financial Statements of Peninsula Financial Corporation, Inc.
Report of Independent Auditors			F-83F-2
Consolidated Balance Sheets			F-85F-3
Consolidated Statements of Income			F-86
Consolidated Statements ofOperations and Comprehensive Income			F-87F-4
Consolidated Statements of Changes in Shareholders'Stockholders' Equity			F-88F-5
Consolidated Statements of Cash Flows			F-89F-6
Notes to Consolidated Financial Statements			F-90F-7
Unaudited Pro Forma Condensed Consolidated Financial Information of Mackinac Financial Corporation and Peninsula Financial Corporation
Unaudited Pro Forma Condensed Consolidated Balance Sheet���June 30, 2014			F-122
Unaudited Pro Forma Condensed Consolidated Statement of Operations—Six Months Ended June 30, 2014			F-123
Unaudited Pro Forma Condensed Consolidated Statement of Operations—Year Ended December 31,			F-124
Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information			F-125




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		Plante & Moran, PLLC Suite 500 2601 Cambridge Court Aubum Hills, MI 48326 Tel: 248.375.7100 Fax: 248.375.7101 plantemoran.com

Report of Independent Registered Public Accounting FirmAuditors


Board of Directors and Stockholders
Mackinac Financial Corporation, Inc.First Federal of Northern Michigan
Alpena, Michigan

        We have audited the accompanying consolidated financial statements of First Federal of Northern Michigan Bancorp, Inc., which comprise the consolidated balance sheet of Mackinac Financial Corp. (the Corporation)sheets as of December 31, 20132017 and 2012,2016 and the related consolidated statements of operations,income and comprehensive income, changes in shareholders'stockholders' equity, and cash flows for each of the years then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements


        Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the three-year period ended December 31, 2013. TheseUnited States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are the responsibility of the Corporation's management.free from material misstatement, whether due to fraud or error.

Auditors' Responsibility


        Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

audit. We conducted our auditsaudit in accordance with auditing standards generally accepted in the standardsUnited States of the Public Company Accounting Oversight Board (United States).America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

        An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement. The Corporation is not requiredmisstatement of the consolidated financial statements, whether due to have, nor were we engaged to perform, an audit of itsfraud or error. In making those risk assessments, the auditor considers internal control overrelevant to the entity's preparation and fair presentation of the consolidated financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designingstatements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation'sentity's internal control over financial reporting.control. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessingevaluating the appropriateness of accounting principlespolicies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements.

        We believe that our auditsthe audit evidence we have obtained is sufficient and appropriate to provide a reasonable basis for our audit opinion.

Opinion


        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mackinac Financial Corp.First Federal of Northern Michigan Bancorp, Inc., as of December 31, 20132017 and 2012,2016, and the results of its operations and its cash flows for each of the years then ended in the three-year period ended December 31, 2013, in conformityaccordance with accounting principles generally accepted in the United States of America.

/s/ Plante & Moran, PLLC Plante & Moran, PLLC
March 28, 2014 Auburn Hills, Michigan		/s/ Andrews Hooper Pavlik PLC

Saginaw, Michigan
March 2, 2018




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheet

December 31, 2013 and 2012

Sheets

(Dollars in Thousands)000s omitted, except per share data)


		December 31, 2013			December 31, 2012
ASSETS
Cash and due from banks		$	18,216		$	26,958
Federal funds sold			3			3
​	​	​	​	​	​	​	​
Cash and cash equivalents			18,219			26,961
Interest-bearing deposits in other financial institutions			10			10
Securities available for sale			44,388			43,799
Federal Home Loan Bank stock			3,060			3,060
Loans:
Commercial			359,368			342,841
Mortgage			110,663			95,413
Consumer			13,801			10,923
​	​	​	​	​	​	​	​
Total Loans			483,832			449,177
Allowance for loan losses			(4,661	)		(5,218	)
​	​	​	​	​	​	​	​
Net loans			479,171			443,959
Premises and equipment			10,210			10,633
Other real estate held for sale			1,884			3,212
Deferred Tax Asset			9,933			9,131
Other assets			5,925			5,215
​	​	​	​	​	​	​	​
TOTAL ASSETS		$	572,800		$	545,980
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest bearing deposits		$	72,936		$	67,652
NOW, money market, interest checking			149,123			155,465
Savings			13,039			13,829
CDs<$100,000			140,495			135,550
CDs>$100,000			23,159			24,355
Brokered			67,547			37,706
​	​	​	​	​	​	​	​
Total deposits			466,299			434,557
Borrowings			37,852			35,925
Other liabilities			3,400			3,050
​	​	​	​	​	​	​	​
Total liabilities			507,551			473,532
SHAREHOLDERS' EQUITY:
Preferred stock—No par value:
Authorized 500,000 shares, Issued and outstanding—none and 11,000 shares			—			11,000
Common stock and additional paid in capital—No par value
Authorized—18,000,000 shares
Issued and outstanding—5,541,390 and 5,559,914, shares respectively			53,621			53,797
Retained earnings			11,412			6,727
Accumulated other comprehensive income			216			924
​	​	​	​	​	​	​	​
Total shareholders' equity			65,249			72,448
​	​	​	​	​	​	​	​
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	572,800		$	545,980
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

		December 31,
		2017			2016
Assets
Cash and cash equivalents		$	7,862		$	8,752
Overnight deposits with Federal Home Loan Bank			527			55
​	​	​	​	​	​	​	​
Total cash and cash equivalents			8,389			8,807
Deposits held in other financial institutions			3,714			5,422
Securities available for sale, at fair value (Note 3)			98,839			128,134
Securities held to maturity (Note 3)			650			700
Loans—net (Note 4)			191,503			181,439
Loans held for sale			430			—
Federal Home Loan Bank stock			1,636			1,636
Property and equipment (Note 5)			5,552			5,939
Foreclosed real estate and other repossessed assets			652			1,370
Accrued interest receivable			1,033			1,026
Intangible assets (Note 7)			635			827
Deferred tax asset (Note 10)			1,690			3,314
Originated mortgage servicing right—net (Note 6)			418			473
Bank owned life insurance			5,125			4,998
Other assets			981			855
​	​	​	​	​	​	​	​
Total assets		$	321,247		$	344,940
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Liabilities and Stockholders' Equity
Liabilities
Non-interest bearing deposits		$	58,423		$	59,761
Interest-bearing deposits (Note 8)			211,884			233,667
Advances from Federal Home Loan Bank (Note 9)			16,648			17,517
Accrued expenses and other liabilities (Note 13)			1,350			1,106
​	​	​	​	​	​	​	​
Total liabilities			288,305			312,051
Stockholders' Equity (Note 12)
Common stock ($0.01 par value 20,000,000 shares authorized, 4,034,675 shares issued and outstanding—at December 31, 2017 and 2016)			40			40
Additional paid-in capital			28,264			28,264
Retained earnings			8,612			8,538
Treasury stock at cost (307,750 shares)—at December 31, 2017 and 2016			(2,964	)		(2,964	)
Accumulated other comprehensive loss			(1,010	)		(989	)
​	​	​	​	​	​	​	​
Total stockholders' equity			32,942			32,889
​	​	​	​	​	​	​	​
Total liabilities and stockholders' equity		$	321,247		$	344,940
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

   

See accompanying notes to consolidated financial statements.




Table of Contents


Consolidated Statements of Operations and Comprehensive Income

(000s omitted)


		Year Ended December 31,
		2017			2016
Interest Income
Loans, including fees		$	8,906		$	8,133
Investments
Taxable			1,586			1,339
Tax-exempt			78			93
Mortgage-backed securities			954			1,023
​	​	​	​	​	​	​	​
Total interest income			11,524			10,588
Interest Expense
Deposits			949			941
Borrowings			278			343
​	​	​	​	​	​	​	​
Total interest expense			1,227			1,284
​	​	​	​	​	​	​	​
Net Interest Income—Before provision for loan losses			10,297			9,304
Provision for Loan Losses (Note 4)			155			95
​	​	​	​	​	​	​	​
Net Interest Income—After provision for loan losses			10,142			9,209
Other Income
Service charges and other fees			959			967
Net gain on sale of investments			36			134
Net gain on sale of loans			249			263
Net gain on sale of premises and equipment, real estate owned and other repossessed assets			73			55
Loan servicing fees			316			237
Other			213			295
​	​	​	​	​	​	​	​
Total other income			1,846			1,951
Operating Expenses
Compensation and employee benefits (Note 13)			5,886			5,833
FDIC insurance premiums			170			194
Advertising			164			184
Occupancy and equipment			1,156			1,172
Amortization of intangible assets			192			217
Data processing service bureau			517			493
Professional fees			486			442
Collection activity			39			78
Real estate owned and other repossessed assets			94			117
Other			1,120			1,116
​	​	​	​	​	​	​	​
Total operating expenses			9,824			9,846
​	​	​	​	​	​	​	​
Income—before income tax expense			2,164			1,314
Income tax expense (Note 10)			1,548			—
​	​	​	​	​	​	​	​
Net income			616			1,314
Other Comprehensive Income:
Unrealized gain (loss) on securities available for sale—net of tax of $88 and ($556) in 2017 and 2016, respectively			169			(1,080	)
Reclassification adjustment for gains realized in earnings—net of tax of $12 and $46 in 2017 and 2016, respectively			(24	)		(90	)
​	​	​	​	​	​	​	​
Comprehensive Income		$	761		$	144
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

See accompanying notes




Table of Contents


Consolidated Statements of Changes in Stockholders' Equity

(000s omitted, except per share data)


		Shares			Common Stock			Treasury Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
Balance—January 1, 2016			4,035		$	40		$	(2,964	)	$	28,264		$	7,820		$	181		$	33,341
Net income			—			—			—			—			1,314			—			1,314
Other comprehensive loss			—			—			—			—			—			(1,170	)		(1,170	)
Common dividend declared, $0.16 per share			—			—			—			—			(596	)		—			(596	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balance—December 31, 2016			4,035			40			(2,964	)		28,264			8,538			(989	)		32,889
Net income			—			—			—			—			616			—			616
Other comprehensive gain			—			—			—			—			—			145			145
Reclassification adjustment for tax rate change			—			—			—			—			166			(166	)		—
Common dividend declared, $0.19 per share			—			—			—			—			(708	)		—			(708	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balance—December 31, 2017			4,035		$	40		$	(2,964	)	$	28,264		$	8,612		$	(1,010	)	$	32,942
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

See accompanying notes




Table of Contents


Consolidated Statements of Cash Flows

(000s omitted)


		Year Ended December 31
		2017			2016
Cash Flows from Operating Activities
Net income		$	616		$	1,314
Adjustments to reconcile net income to cash from operating activities:
Depreciation and amortization			596			639
Provision for loan losses			155			95
Accretion of acquired loans			(96	)		(39	)
Amortization and accretion on securities			593			776
Gain on sale of investment securities			(36	)		(134	)
Gain on sale of loans held for sale			(249	)		(263	)
Gain on sale of property and equipment and assets held for sale			(22	)		(54	)
Gain on sale of real estate owned and other repossessed assets			(51	)		(1	)
Originations of loans held for sale			(16,260	)		(16,764	)
Proceeds from sale of loans held for sale			16,079			17,590
Deferred income tax			1,548			—
Net change in:
Accrued interest receivable			(7	)		13
Bank-owned life insurance			(127	)		(141	)
Other assets and mortgage servicing rights			(71	)		921
Accrued expenses and other liabilities			266			(134	)
​	​	​	​	​	​	​	​
Net cash from operating activities			2,934			3,818
Cash Flows from Investing Activities
Net increase in loans			(10,285	)		(14,120	)
Net decrease in deposits at other institutions			1,708			3,968
Proceeds from maturity of securities			14,040			28,179
Proceeds from sale of securities available for sale			23,080			12,324
Purchase of securities available for sale			(8,111	)		(42,591	)
Proceeds from sale of property and equipment and assets held for sale			99			402
Purchase of premises and equipment			(94	)		(109	)
Proceeds from sale of of real estate owned and other repossessed assets			931			411
​	​	​	​	​	​	​	​
Net cash from investing activities			21,368			(11,536	)
Cash Flows from Financing Activities
Net (decrease) increase in deposits			(23,121	)		24,901
Dividends paid on common stock			(708	)		(596	)
Net increase (decrease) in advances from borrowers			(22	)		28
Advances from FHLB			45,876			18,400
Repayments of advances from FHLB			(46,745	)		(33,811	)
​	​	​	​	​	​	​	​
Net cash from financing activities			(24,720	)		8,922
​	​	​	​	​	​	​	​
Net Change in Cash and Cash Equivalents			(418	)		1,204
Cash and Cash Equivalents—Beginning of year			8,807			7,603
​	​	​	​	​	​	​	​
Cash and Cash Equivalents—End of year		$	8,389		$	8,807
​	​	​	​	​	​	​	​
Supplemental Cash Flow and Noncash Information
Net cash paid for income taxes		$	—		$	96
Cash paid for interest on deposits and borrowings			1,228			1,292
Transfer of loans to real estate owned & other repossessed assets			162			609

See accompanying notes




Table of Contents


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIESNote 1—Summary of Significant Accounting Policies

Consolidated Statements        Nature of OperationOperations—First Federal of Northern Michigan Bancorp, Inc. ("Company") and its subsidiary, First Federal of Northern Michigan ("Bank"), conduct operations in the northeastern Lower Peninsula of Michigan. The Company's primary services include accepting deposits, making commercial, consumer and mortgage loans, and engaging in mortgage banking activities.

Years Ended December 31, 2013, 2012, and 2011

(Dollars in Thousands, Except Per Share Data)

		For the Year Ended December 31,
		2013			2012			2011
INTEREST INCOME:
Interest and fees on loans:
Taxable		$	24,295		$	23,197		$	21,627
Tax-exempt			105			116			147
Interest on securities:
Taxable			961			948			1,162
Tax-exempt			34			27			28
Other interest income			128			139			108
​	​	​	​	​	​	​	​	​	​	​
Total interest income			25,523			24,427			23,072
​	​	​	​	​	​	​	​	​	​	​
INTEREST EXPENSE:
Deposits			3,468			3,946			4,530
Borrowings			656			657			613
​	​	​	​	​	​	​	​	​	​	​
Total interest expense			4,124			4,603			5,143
​	​	​	​	​	​	​	​	​	​	​
Net interest income			21,399			19,824			17,929
Provision for loan losses			1,675			945			2,300
​	​	​	​	​	​	​	​	​	​	​
Net interest income after provision for loan losses			19,724			18,879			15,629
​	​	​	​	​	​	​	​	​	​	​
OTHER INCOME:
Deposit service fees			667			699			832
Income from loans sold on secondary market			1,028			1,390			700
SBA/USDA loan sale gains			951			1,176			1,500
Mortgage servicing income			790			417			400
Net security gains (losses)			73			—			(1	)
Other			429			361			225
​	​	​	​	​	​	​	​	​	​	​
Total other income			3,938			4,043			3,656
​	​	​	​	​	​	​	​	​	​	​
OTHER EXPENSE:
Salaries and employee benefits			9,351			8,288			7,275
Occupancy			1,481			1,372			1,376
Furniture and equipment			1,102			885			827
Data processing			1,071			991			761
Professional service fees			1,069			1,196			756
Loan and deposit			617			877			1,137
Writedowns and losses on other real estate held for sale			265			489			1,137
FDIC insurance assessment			385			459			849
Telephone			303			233			215
Advertising			436			376			351
Other			2,048			1,591			1,285
​	​	​	​	​	​	​	​	​	​	​
Total other expenses			18,128			16,757			15,969
​	​	​	​	​	​	​	​	​	​	​
Income before income taxes			5,534			6,165			3,316
Provision for (benefit of) for income taxes			(403	)		(922	)		1,098
​	​	​	​	​	​	​	​	​	​	​
NET INCOME			5,937			7,087			2,218
​	​	​	​	​	​	​	​	​	​	​
Preferred dividend and accretion of discount			308			629			766
​	​	​	​	​	​	​	​	​	​	​
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	5,629		$	6,458		$	1,452
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
INCOME PER COMMON SHARE:
Basic		$	1.01		$	1.51		$	.42
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Diluted		$	1.00		$	1.51		$	.41
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

See accompanying notes to consolidated financial statements.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2013, 2012, and 2011

(Dollars in Thousands)

		For the year ended December 31,
		2013			2012			2011
Net income		$	5,937		$	7,087		$	2,218
Net change in net unrealized gains and losses on securities available for sale:
Unrealized gains (losses) arising during the period			(999	)		907			(433	)
Less: reclassification adjustment for gains included in net income			(73	)		—			1
​	​	​	​	​	​	​	​	​	​	​
Net securities gain (loss) during the period			(1,072	)		907			(432	)
Tax effect			364			(308	)		145
​	​	​	​	​	​	​	​	​	​	​
Other comprehensive income (loss)			(708	)		599			(287	)
​	​	​	​	​	​	​	​	​	​	​
Total comprehensive income		$	5,229		$	7,686		$	1,931
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

See accompanying notes to consolidated financial statements.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity

Years Ended December 31, 2013, 2012, and 2011

(Dollars in Thousands)

		Shares of Common Stock			Preferred Stock Series A			Common Stock and Additional Paid in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total
Balance, January 1, 2011			3,419,736		$	10,706		$	43,525		$	(961	)	$	612		$	53,882
Net income			—			—			—			2,218			—			2,218
Other comprehensive income (loss):
Net unrealized (loss) on securities available for sale			—			—			—			—			(287	)		(287	)
Total comprehensive income																		1,931
Dividend on preferred stock			—			—			—			(551	)		—			(551	)
Accretion of preferred stock discount			—			215			—			(215	)		—			—
Other			—			—			—			1			—			1
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balance, December 31, 2011			3,419,736			10,921			43,525			492			325			55,263
Net income												7,087						7,087
Other comprehensive income:
Net unrealized income on securities available for sale			—			—			—			—			599			599
Total comprehensive income																		7,686
Stock compensation			—			—			66			—			—			66
Issuance of common stock			2,140,123			—			11,506			—			—			11,506
Divided on common stock			—			—			—			(223	)		—			(223	)
Purchase of common stock warrants			—			—			(1,300	)		—			—			(1,300	)
Dividend on preferred stock			—			—			—			(550	)		—			(550	)
Accretion of preferred stock discount			—			79			—			(79	)		—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balance, December 31, 2012			5,559,859			11,000			53,797			6,727			924			72,448
Net income												5,937						5,937
Other comprehensive income (loss):
Net unrealized loss on securities available for sale			—			—			—			—			(708	)		(708	)
Total comprehensive income																		5,229
Stock compensation			—			—			333			—			—			333
Issuance of common stock			37,125			—			—			—			—			—
Repurchase of common stock			(55,594	)					(509	)		—			—			(509	)
Dividend on common stock			—			—			—			(944	)		—			(944	)
Dividend on preferred stock			—			—			—			(308	)		—			(308	)
Redemption of Preferred Series A			—			(11,000	)		—			—			—			(11,000	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balance, December 31, 2013			5,541,390		$	—		$	53,621		$	11,412		$	216		$	65,249
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

See accompanying notes to consolidated financial statements.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flow

Years Ended December 31, 2013, 2012, and 2011

(Dollars in Thousands)


		For the year ended December 31,
		2013			2012			2011
Cash Flows from Operating Activities:
Net income		$	5,937		$	7,087		$	2,218
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,657			1,547			1,419
Provision for loan losses			1,675			945			2,300
Deferred income taxes, net			(403	)		(922	)		1,098
(Gain) loss on sales/calls of securities			(73	)		—			1
(Gain) on sale of secondary market loans			(794	)		(1,077	)		(477	)
Origination of loans held for sale in secondary market			(55,973	)		(74,142	)		(38,971	)
Proceeds from sale of loans in the secondary market			56,767			75,219			39,448
Loss on sale of premises, equipment, and other real estate held for sale			304			31			282
Writedown of other real estate held for sale			231			496			855
Stock compensation			333			66			—
Change in other assets			(710	)		(61	)		(325	)
Change in other liabilities			350			788			296
​	​	​	​	​	​	​	​	​	​	​
Net cash provided by operating activities			9,301			9,977			8,144
​	​	​	​	​	​	​	​	​	​	​
Cash Flows from Investing Activities:
Net increase in loans			(37,853	)		(50,351	)		(26,015	)
Net decrease in interest-bearing deposits in other financial institutions			—			—			703
Purchase of securities available for sale			(15,709	)		(15,209	)		(21,260	)
Proceeds from maturities, sales, calls or paydowns of securities available for sale			13,698			10,668			15,607
Capital expenditures			(1,497	)		(2,098	)		(1,034	)
Proceeds from sale of premises, equipment, and other real estate			2,410			775			5,456
Redemption of FHLB stock			—			—			363
​	​	​	​	​	​	​	​	​	​	​
Net cash (used in) investing activities			(38,951	)		(56,215	)		(26,180	)
​	​	​	​	​	​	​	​	​	​	​
Cash Flows from Financing Activities:
Net increase in deposits			31,742			29,768			18,010
Net activity on line of credit			2,000			—			—
Net proceeds from stock issuance			—			11,506			—
Repurchase of common stock			(509	)		—			—
Dividend on common stock			(944	)		(223	)		—
Redemption of Series A Preferred Stock			(11,000	)		—			—
Repurchase of common stock warrants			—			(1,300	)		—
Dividend on preferred stock			(308	)		(550	)		(551	)
Principal payments on borrowings			(73	)		(72	)		(72	)
​	​	​	​	​	​	​	​	​	​	​
Net cash provided by financing activities			20,908			39,129			17,387
​	​	​	​	​	​	​	​	​	​	​
Net (decrease) in cash and cash equivalents			(8,742	)		(7,109	)		(649	)
Cash and cash equivalents at beginning of period			26,961			34,070			34,719
​	​	​	​	​	​	​	​	​	​	​
Cash and cash equivalents at end of period		$	18,219		$	26,961		$	34,070
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest		$	4,157		$	4,172		$	4,664
Income taxes			149			125			75
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)			932			1,352			4,194

See accompanying notes to consolidated financial statements.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement

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")First Federal of Northern Michigan Bancorp, Inc., Mackinac Commercial Credit, LLC ("MCC", formed in late 2013) and other minor subsidiaries, after eliminationFirst Federal of intercompany transactions and accounts.

Nature of Operations

        The Corporation'sNorthern Michigan, 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, less than 1.0% of the Bank's commercial loan portfolio consists of leases to commercial and governmental entities, which are secured by various types of equipment. These leases are dispersed geographically throughout the country. Less than 1.0% of the Corporation's business activity is with Canadian customers and denominated in Canadian dollars.

        While the Corporation's chief decision makers monitor the revenue streams of the various Corporation products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis. Accordingly, all of the Corporation's banking operations are considered by management to be aggregated in one reportable operating segment.

Use of Estimates in Preparation of Financial Statements

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates.

        Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of investment securities, the valuation of foreclosed real estate, deferred tax assets, and mortgage servicing rights.

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




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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 as well as when required by regulatory provisions. 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.

Servicing Rights

        Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based on the fair value of the rights compared to amortized cost. Impairment is determined by using prices for similar assets with similar characteristics, such as interest rates and terms. Fair value is determined by using prices for similar assets with similar characteristics, when available, or based on discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.

Allowance for Loan Losses

        The allowance for loan losses includes specific allowances related to commercial loans which have been judged to be impaired. A loan is impaired when, based on current information, it is probable that the Corporation will not collect all amounts due in accordance with the contractual terms of the loan agreement. These specific allowances are based on discounted cash flows of expected future payments using the loan's initial effective interest rate or the fair value of the collateral if the loan is collateral dependent.

        The Corporation also has a general allowance for loan losses for loans not considered impaired. The allowance for loan losses is maintained at a level which management believes is adequate to provide for probable loan losses. Management periodically evaluates the adequacy of the allowance




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Troubled Debt Restructuring

        Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as a Troubled Debt Restructure (TDR). A loan is a TDR when the Corporation, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower by modifying or renewing a loan that the Corporation would not otherwise consider. To make this determination, the Corporation must determine whether (a) the borrower is experiencing financial difficulties and (b) the Corporation granted the borrower a concession. This determination requires consideration of all of the facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower's financial condition does not automatically mean the borrower is experiencing financial difficulties.

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.

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 Compensation Plans

        On May 22, 2012, the Corporation's shareholders approved the Mackinac Financial Corporation 2012 Incentive Compensation Plan, under which current and prospective employees, non-employee




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

directors and consultants may be awarded incentive stock options, non-statutory stock options, shares of restricted stock units ("RSUs"), or stock appreciation rights. The aggregate number of shares of the Corporation's common stock issuable under the plan was set at 575,000, which included 392,152 option shares outstanding at that time. Awards are made at the discretion of the Board of Directors. Compensation cost equal to the fair value of the award is recognized over the vesting period.

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, during the period. Accumulated other comprehensive income, a component of equity, consists solely of net unrealized gains and losses on securities, net of tax.

Earnings per Common Share

        Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options and warrants were exercised and stock awards were fully vested and resulted in the issuance of common stock that then shared in our earnings, is computed by dividing net income by the weighted average number of common shares outstanding and common stock equivalents, after giving effect for dilutive shares issued.

        The following shows the computation of basic and diluted earnings per share for the year ended December 31, 2013, 2012 and 2011 (dollars in thousands, except per share data):

		Year Ended December 31,
		2013			2012			2011
Net income		$	5,937		$	7,087		$	2,218
Preferred stock dividends and accretion of discount			308			629			766
​	​	​	​	​	​	​	​	​	​	​
Net income available to common shareholders		$	5,629		$	6,458		$	1,452
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Weighted average shares outstanding			5,558,313			4,285,043			3,419,736
Effect of dilutive stock options, vesting of restricted stock units, and common stock warrants outstanding			91,745			—			80,468
​	​	​	​	​	​	​	​	​	​	​
Diluted weighted average shares outstanding			5,650,058			4,285,043			3,500,204
​	​	​	​	​	​	​	​	​	​	​
Income per common share:
Basic		$	1.01		$	1.51		$	.42
Diluted		$	1.00		$	1.51		$	.41

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 (benefit) is the result of changes in the deferred tax asset




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 2014, the FASB issued ASU No. 2014-04,Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The amendments in the ASU clarify when an in-substance repossession or foreclosure occurs—that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The new ASU requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal titled to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The ASU is effective for the Corporation beginning January 1, 2015. The provisions of this guidance are not expected to have a significant impact on the consolidated financial condition, results of operation or the liquidity of the Corporation.

        In July 2013, the FASB issued ASU 2013-11,Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the Emerging Issues Task Force). ASU 2013-11 requires that an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward except as follows: To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The provisions of this guidance are not expected to have a significant impact on the consolidated financial condition, results of operation or the liquidity of the Corporation.

        In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-02,Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"), to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 requires that an entity report the effect of significant reclassifications out of




Table of Contents


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles ("GAAP") to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about these amounts. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. The Corporation adopted ASU 2013-02 as of January 1, 2013.

Reclassifications

        Certain amounts in the 2012 and 2011 consolidated financial statements have been reclassified to conform to the 2013 presentation.

NOTE 2—RESTRICTIONS ON CASH AND CASH EQUIVALENTS

        Cash and cash equivalents in the amount of $6.345 million were restricted on December 31, 2013 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.

NOTE 3—SECURITIES AVAILABLE FOR SALE

        The carrying value and estimated fair value of securities available for sale are as follows (dollars in thousands):

		Amortized Cost			Unrealized Gains			Unrealized Losses			Estimated Fair Value
December 31, 2013
Corporate		$	15,862		$	218		$	(1	)	$	16,079
US Agencies			15,227			—			(372	)		14,855
US Agencies—MBS			7,078			281			—			7,359
Obligations of states and political subdivisions			5,893			202			—			6,095
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total securities available for sale		$	44,060		$	701		$	(373	)	$	44,388
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
December 31, 2012
Corporate		$	18,763		$	237		$	(23	)	$	18,977
US Agencies			10,267			137			—			10,404
US Agencies—MBS			7,962			412			—			8,374
Obligations of states and political subdivisions			5,407			637			—			6,044
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total securities available for sale		$	42,399		$	1,423		$	(23	)	$	43,799
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​

        At December 31, 2013 and 2012, the mortgage backed securities portfolio was $7.359 million (16.58%) and $8.374 million (19.12%), respectively, of the securities portfolio. At December 31, 2013,




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 3—SECURITIES AVAILABLE FOR SALE (Continued)

the entire mortgage backed securities portfolio consisted of securities issued and guaranteed by either the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC), United States government-sponsored agencies.

        Following is information pertaining to securities with gross unrealized losses at December 31, 2013 and 2012 aggregated by investment category and length of time these individual securities have been in a loss position (dollars in thousands):

		Less Than Twelve Months						Over Twelve Months
		Gross Unrealized Losses			Fair Value			Gross Unrealized Losses			Fair Value
December 31, 2013
Corporate		$	(1	)	$	1,390		$	—		$	—
US Agencies			(372	)		14,855			—			—
US Agencies—MBS			—			—			—			—
Obligations of states and political subdivisions			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total securities available for sale		$	(373	)	$	16,245		$	—		$	—
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
December 31, 2012
US Agencies—MBS		$	—		$	—			—			—
Corporate			(23	)		5,566			—			—
Obligations of states and political subdivisions			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total securities available for sale		$	(23	)	$	5,566		$	—		$	—
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​

        There were six securities in an unrealized loss position in 2013 and three in 2012. 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):

		2013			2012			2011
Proceeds from sales and calls		$	10,156		$	2,601		$	76
Gross gains on sales			73			—			—
Gross (losses) on sales and calls			—			—			(1	)




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 3—SECURITIES AVAILABLE FOR SALE (Continued)

        The carrying value and estimated fair value of securities available for sale at December 31, 2013, by contractual maturity, are shown below (dollars in thousands):

		Amortized Cost			Estimated Fair Value
Due in one year or less		$	3,140		$	3,166
Due after one year through five years			21,433			21,535
Due after five years through ten years			9,893			9,771
Due after ten years			2,516			2,557
​	​	​	​	​	​	​	​
Subtotal			36,982			37,029
US Agencies—MBS			7,078			7,359
​	​	​	​	​	​	​	​
Total		$	44,060		$	44,388
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        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 9 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):

		2013			2012
Commercial real estate		$	268,809		$	244,966
Commercial, financial, and agricultural			79,655			80,646
One to four family residential real estate			103,768			87,948
Commercial construction			10,904			17,229
Consumer			13,801			10,923
Consumer construction			6,895			7,465
Total loans		$	483,832		$	449,177
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        An analysis of the allowance for loan losses for the years ended December 31 is as follows (dollars in thousands):

		2013			2012			2011
Balance, January 1		$	5,218		$	5,251		$	6,613
Recoveries on loans previously charged off			200			278			138
Loans charged off			(2,432	)		(1,256	)		(3,800	)
Provision			1,675			945			2,300
​	​	​	​	​	​	​	​	​	​	​
Balance, December 31		$	4,661		$	5,218		$	5,251
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

        In 2013, net charge off activity was $2.232 million, or .48% of average loans outstanding compared to net charge-offs of $.978 million, or .23% of average loans, in the same period in 2012 and $3.662 million, or .94% of average loans, in 2011. During 2013, a provision of $1.675 million was made to increase the allowance. This provision was made in accordance with the Corporation's allowance for




Table of Contents


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 4—LOANS (Continued)

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.

        A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2013 is as follows (dollars in thousands):

		Commercial real estate			Commercial, financial and agricultural			Commercial construction			One to four family residential real estate			Consumer construction			Consumer			Unallocated			Total
Allowance for loan loss reserve:
Beginning balance ALLR		$	3,267		$	692		$	125		$	980		$	—		$	—		$	154		$	5,218
Charge-offs			(1,539	)		(632	)		—			(141	)		—			(120	)		—			(2,432	)
Recoveries			92			56			2			26			2			22			—			200
Provision			29			1,262			(47	)		(349	)		23			246			511			1,675
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance ALLR		$	1,849		$	1,378		$	80		$	516		$	25		$	148		$	665		$	4,661
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Loans:
Ending balance		$	268,809		$	79,655		$	10,904		$	103,768		$	6,895		$	13,801		$	—		$	483,832
Ending balance ALLR			(1,849	)		(1,378	)		(80	)		(516	)		(25	)		(148	)		(665	)		(4,661	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net loans		$	266,960		$	78,277		$	10,824		$	103,252		$	6,870		$	13,653		$	(665	)	$	479,171
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance ALLR:
Individually evaluated		$	99		$	891		$	—		$	103		$	—		$	18		$	—		$	1,111
Collectively evaluated			1,750			487			80			413			25			130			665			3,550
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	1,849		$	1,378		$	80		$	516		$	25		$	148		$	665		$	4,661
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance Loans:
Individually evaluated		$	649		$	1,830		$	—		$	385		$	—		$	42		$	—		$	2,906
Collectively evaluated			268,160			77,825			10,904			103,383			6,895			13,759			—			480,926
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	268,809		$	79,655		$	10,904		$	103,768		$	6,895		$	13,801		$	—		$	483,832
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

Impaired loans, by definition, are individually evaluated.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 4—LOANS (Continued)

        A breakdown of the allowance for loan losses, the activity for the period, and recorded balances in loans for the year ended December 31, 2012 is as follows (dollars in thousands):

		Commercial real estate			Commercial, financial and agricultural			Commercial construction			One to four family residential real estate			Consumer construction			Consumer			Unallocated			Total
Allowance for loan loss reserve:
Beginning balance ALLR		$	2,823		$	1,079		$	207		$	1,114		$	—		$	—		$	28		$	5,251
Charge-offs			(729	)		(40	)		(6	)		(399	)		—			(82	)		—			(1,256	)
Recoveries			52			201			—			7			—			18			—			278
Provision			1,121			(548	)		(76	)		258			—			64			126			945
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance ALLR		$	3,267		$	692		$	125		$	980		$	—		$	—		$	154		$	5,218
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Loans:
Ending balance		$	244,966		$	80,646		$	17,229		$	87,948		$	7,465		$	10,923		$	—		$	449,177
Ending balance ALLR			(3,267	)		(692	)		(125	)		(980	)		—			—			(154	)		(5,218	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net loans		$	241,699		$	79,954		$	17,104		$	86,968		$	7,465		$	10,923		$	(154	)	$	443,959
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance ALLR:
Individually evaluated		$	1,662		$	155		$	10		$	112		$	—		$	—		$	—		$	1,939
Collectively evaluated			1,605			537			115			868			—			—			154			3,279
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	3,267		$	692		$	125		$	980		$	—		$	—		$	154		$	5,218
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance Loans:
Individually evaluated		$	22,910		$	6,070		$	858		$	796		$	—		$	—		$	—		$	30,634
Collectively evaluated			222,056			74,576			16,371			87,152			7,465			10,923			—			418,543
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	244,966		$	80,646		$	17,229		$	87,948		$	7,465		$	10,923		$	—		$	449,177
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

Impaired loans, by definition, are individually evaluated.

        A breakdown of the allowance for loan losses, the activity for the period, and recorded balances in loans for the year ended December 31, 2011 is as follows (dollars in thousands):

		Commercial real estate			Commercial, financial and agricultural			Commercial construction			One to four family residential real estate			Consumer construction			Consumer			Unallocated			Total
Allowance for loan loss reserve:
Beginning balance ALLR		$	3,460		$	1,018		$	389		$	1,622		$	—		$	—		$	124		$	6,613
Charge-offs			(2,267	)		(579	)		(412	)		(490	)		—			(52	)		—			(3,800	)
Recoveries			32			21			75			1			—			9			—			138
Provision			1,598			619			155			(19	)		—			43			(96	)		2,300
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance ALLR		$	2,823		$	1,079		$	207		$	1,114		$	—		$	—		$	28		$	5,251
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Loans:
Ending balance		$	199,201		$	92,269		$	19,745		$	77,332		$	5,774		$	6,925		$	—		$	401,246
Ending balance ALLR			(2,823	)		(1,079	)		(207	)		(1,114	)		—			—			(28	)		(5,251	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net loans		$	196,378		$	91,190		$	19,538		$	76,218		$	5,774		$	6,925		$	(28	)	$	395,995
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance ALLR:
Individually evaluated		$	926		$	160		$	—		$	114		$	—		$	—		$	—		$	1,200
Collectively evaluated			1,897			919			207			1,000			—			—			28			4,051
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	2,823		$	1,079		$	207		$	1,114		$	—		$	—		$	28		$	5,251
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance Loans:
Individually evaluated		$	13,628		$	1,707		$	—		$	1,930		$	—		$	—		$	—		$	17,265
Collectively evaluated			185,573			90,562			19,745			75,402			5,774			6,925			—			383,981
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	199,201		$	92,269		$	19,745		$	77,332		$	5,774		$	6,925		$	—		$	401,246
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

Impaired loans, by definition, are individually evaluated.




Table of Contents


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 4—LOANS (Continued)

        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.

Strong (1)

        Borrower is not vulnerable to sudden economic or technological changes. They have "strong" balance sheets and are within an industry that is very typical for our markets or type of lending culture. Borrowers also have "strong" financial and cash flow performance and excellent collateral (low loan to value or readily available to liquidate collateral) in conjunction with an impeccable repayment history.

Good (2)

        Borrower shows limited vulnerability to sudden economic change. These borrowers have "above average" financial and cash flow performance and a very good repayment history. The balance sheet of the company is also very good as compared to peer and the company is in an industry that is familiar to our markets or our type of lending. The collateral securing the deal is also very good in terms of its type, loan to value, etc.

Average (3)

        Borrower is typically a well-seasoned business, however may be susceptible to unfavorable changes in the economy, and could be somewhat affected by seasonal factors. The borrowers within this category exhibit financial and cash flow performance that appear "average" to "slightly above average" when compared to peer standards and they show an adequate payment history. Collateral securing this type of credit is good, exhibiting above average loan to values, etc.

Acceptable (4)

        A borrower within this category exhibits financial and cash flow performance that appear adequate and satisfactory when compared to peer standards and they show a satisfactory payment history. The collateral securing the request is within supervisory limits and overall is acceptable. Borrowers rated acceptable could also be newer businesses that are typically susceptible to unfavorable changes in the economy, and more than likely could be affected by seasonal factors.

Special Mention (5)

        The borrower may have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 4—LOANS (Continued)

asset or in the institution's credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Examples of this type of credit include a start-up company fully based on projections, a documentation issue that needs to be corrected or a general market condition that the borrower is working through to get corrected.

Substandard (6)

        Substandard loans are classified assets exhibiting 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 classified as substandard clearly represent troubled and deteriorating credit situations requiring constant supervision.

Doubtful (7)

        Loans in this category exhibit the same, if not more pronounced weaknesses used to describe the substandard credit. 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. In 2013 and 2012, commercial construction loans of $2.951 million and $3.468 million, respectively, did not receive a specific risk rating. These amounts represent loans made for land development and unimproved land purchases.




Table of Contents


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 4—LOANS (Continued)

        Below is a breakdown of loans by risk category as of December 31, 2013 (dollars in thousands):

		(1) Strong			(2) Good			(3) Average			(4) Acceptable/ Acceptable Watch			(5) Sp. Mention			(6) Substandard			(7) Doubtful			Rating Unassigned			Total
Commercial real estate		$	1,502		$	23,310		$	116,702		$	125,010		$	—		$	2,285		$	—		$	—		$	268,809
Commercial, financial and agricultural			3,741			4,348			27,455			39,070			—			5,041			—			—			79,655
Commercial construction			30			479			2,702			4,340			—			402			—			2,951			10,904
One-to-four family residential real estate			251			3,074			1,275			4,482			—			710			—			93,976			103,768
Consumer construction			—			—			—			—			—			—			—			6,895			6,895
Consumer			10			—			37			43			—			30			—			13,681			13,801
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total loans		$	5,534		$	31,211		$	148,171		$	172,945		$	—		$	8,468		$	—		$	117,503		$	483,832
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        Below is a breakdown of loans by risk category as of December 31, 2012 (dollars in thousands)

		(1) Strong			(2) Good			(3) Average			(4) Acceptable/ Acceptable Watch			(5) Sp. Mention			(6) Substandard			(7) Doubtful			Rating Unassigned			Total
Commercial real estate		$	4,807		$	20,491		$	84,164		$	113,379		$	16,754		$	5,189		$	182		$	—		$	244,966
Commercial, financial and agricultural			5,026			3,936			23,821			41,785			4,296			1,782			—			—			80,646
Commercial construction			—			1,038			5,103			5,784			759			1,077			—			3,468			17,229
One-to-four family residential real estate			—			1,969			3,635			4,791			—			646			—			76,907			87,948
Consumer construction			—			—			—			—			—			—			—			7,465			7,465
Consumer			—			359			71			257			—			6			—			10,230			10,923
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total loans		$	9,833		$	27,793		$	116,794		$	165,996		$	21,809		$	8,700		$	182		$	98,070		$	449,177
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

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. There was no interest income recorded during impairment, and that which would have been recognized was $.228 million for the year ended December 31, 2013. For the year ended December 31, 2012, the amounts of interest recorded during impairment was $.054 million and that which would have been recognized was $.313 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




Table of Contents


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 4—LOANS (Continued)

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.

        The following is a summary of impaired loans and their effect on interest income (dollars in thousands):

		Nonaccrual Basis			Accrual Basis			Average Investment			Related Valuation Reserve			Interest Income Recognized During Impairment			Interest Income on Accrual Basis
December 31, 2013
With no valuation reserve:
Commercial real estate		$	513		$	—		$	3,045		$	—		$	—		$	153
Commercial, financial and agricultural			59			—			505			—			—			13
Commercial construction			—			—			626			—			—			3
One to four family residential real estate			361			—			625			—			—			16
Consumer construction			—			—			—			—			—			—
Consumer			—			—			2			—			—			—
With a valuation reserve:
Commercial real estate		$	59		$	—		$	71		$	14		$	—		$	5
Commercial, financial and agricultural			752			—			834			265			—			18
Commercial construction			—			—			—			—			—			—
One to four family residential real estate			250			—			261			78			—			20
Consumer construction			—			—			—			—			—			—
Consumer			30			—			30			13			—			—
Total:
Commercial real estate		$	572		$	—		$	3,116		$	14		$	—		$	158
Commercial, financial and agricultural			811			—			1,339			265			—			31
Commercial construction			—			—			626			—			—			3
One to four family residential real estate			611			—			886			78			—			36
Consumer construction			—			—			—			—			—			—
Consumer			30			—			32			13			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	2,024		$	—		$	5,999		$	370		$	—		$	228
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 4—LOANS (Continued)

		Nonaccrual Basis			Accrual Basis			Average Investment			Related Valuation Reserve			Interest Income Recognized During Impairment			Interest Income on Accrual Basis
December 31, 2012
With no valuation reserve:
Commercial real estate		$	132		$	—		$	1,550		$	—		$	—		$	37
Commercial, financial and agricultural			—			—			1,063			—			—			19
Commercial construction			675			—			675			—			—			15
One to four family residential real estate			230			—			1,074			—			—			41
Consumer construction			—			—			16			—			—			1
Consumer			—			—			3			—			—			—
With a valuation reserve:
Commercial real estate		$	2,939		$	—		$	3,173		$	1,315		$	54		$	177
Commercial, financial and agricultural			436			—			504			109			—			17
Commercial construction			—			—			—			—			—			—
One to four family residential real estate			275			—			281			95			—			6
Consumer construction			—			—			—			—			—			—
Consumer			—			—			—			—			—			—
Total:
Commercial real estate		$	3,071		$	—		$	4,723		$	1,315		$	54		$	214
Commercial, financial and agricultural			436			—			1,567			109			—			36
Commercial construction			675			—			675			—			—			15
One to four family residential real estate			505			—			1,355			95			—			47
Consumer construction			—			—			16			—			—			1
Consumer			—			—			3			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	4,687		$	—		$	8,339		$	1,519		$	54		$	313
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        A summary of past due loans at December 31, is as follows (dollars in thousands):

		2013									2012
		30 - 89 days Past Due (accruing)			90+ days Past Due/ Nonaccrual			Total			30 - 89 days Past Due (accruing)			90+ days Past Due/ Nonaccrual			Total
Commercial real estate		$	—		$	572		$	572		$	575		$	3,071		$	3,646
Commercial, financial and agricultural			4			811			815			71			436			507
Commercial construction			20			—			20			—			675			675
One to four family residential real estate			201			611			812			291			505			796
Consumer construction			—			—			—			—			—			—
Consumer			14			30			44			14			—			14
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total past due loans		$	239		$	2,024		$	2,263		$	951		$	4,687		$	5,638
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 4—LOANS (Continued)

        A roll-forward of nonaccrual activity during the year ended December 31, 2013 (dollars in thousands):

		Commercial Real Estate			Commercial, Financial and Agricultural			Commercial Construction			One to four family residential real estate			Consumer Construction			Consumer			Total
NONACCRUAL
Beginning balance		$	3,071		$	436		$	675		$	505		$	—		$	—		$	4,687
Principal payments			(1,478	)		(319	)		(100	)		(88	)		—			(2	)		(1,987	)
Charge-offs			(1,304	)		(616	)		—			(141	)		—			(4	)		(2,065	)
Advances			—			—			—			—			—			—			—
Transfers to OREO			(208	)		(37	)		(580	)		(107	)		—			—			(932	)
Transfers to accruing			—			—			—			—			—			—			—
Transfers from accruing			443			1,346			—			434			—			36			2,259
Other			48			1			5			8			—			—			62
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance		$	572		$	811		$	—		$	611		$	—		$	30		$	2,024
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        A roll-forward of nonaccrual activity during the year ended December 31, 2012 (dollars in thousands):

		Commercial Real Estate			Commercial, Financial and Agricultural			Commercial Construction			One to four family residential real estate			Consumer Construction			Consumer			Total
NONACCRUAL
Beginning balance		$	2,362		$	1,111		$	—		$	1,997		$	20		$	—		$	5,490
Principal payments			(1,569	)		(1,385	)		—			(1,068	)		—			—			(4,022	)
Charge-offs			(463	)		—			—			(387	)		(5	)		(3	)		(858	)
Advances			—			—			—			—			—			—			—
Class transfers			—			—			—			—			—			—			—
Transfers to OREO			(675	)		—			—			(662	)		(15	)		—			(1,352	)
Transfers to accruing			—			—			—			—			—			—			—
Transfers from accruing			3,377			716			675			617			—			3			5,388
Other			39			(6	)		—			8			—			—			41
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance		$	3,071		$	436		$	675		$	505		$	—		$	—		$	4,687
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

Troubled Debt Restructuring

        Troubled debt restructurings ("TDR") are determined on a loan-by-loan basis. Generally, restructurings are related to interest rate reductions, loan term extensions and short term payment forbearance as means to maximize collectability of troubled credits. If a portion of the TDR loan is uncollectible (including forgiveness of principal), the uncollectible amount will be charged off against the allowance at the time of the restructuring. In general, a borrower must make at least six consecutive timely payments before the Corporation would consider a return of a restructured loan to accruing status in accordance with FDIC guidelines regarding restoration of credits to accrual status.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 4—LOANS (Continued)

        The Corporation has, in accordance with generally accepted accounting principles and per recently enacted accounting standard updates, evaluated all loan modifications to determine the fair value impact of the underlying asset. The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan's original rate, or for collateral dependent loans, to the fair value of the collateral.

        A summary of troubled debt restructurings that occurred during the years ended December 31 is as follows (dollars in thousands):

		2013						2012
		Number of Modifications			Recorded Investment			Number of Modifications			Recorded Investment
Commercial real estate			—		$	—			3		$	4,614
Commercial, financial and agricultural			1			528			1			1,221
Commercial construction			—			—			3			860
One to four family residential real estate			—			—			1			102
Consumer construction			—			—			—			—
Consumer			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total troubled debt restructurings			1		$	528			8		$	6,797
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 4—LOANS (Continued)

        A roll-forward of troubled debt restructuring during the year ended December 31, 2013 (dollars in thousands):

		Commercial Real Estate			Commercial, Financial and Agricultural			Commercial Construction			One to four family residential real estate			Consumer and Consumer Construction			Total
ACCRUING
Beginning balance		$	3,611		$	1,221		$	858		$	102		$	—		$	5,792
Principal payments			(91	)		(460	)					(3	)		—			(554	)
Charge-offs			—			—						—			—			—
Advances			—			—						—			—			—
New restructured			—			953						—			—			953
Transferred out of TDR			—			—						—			—			—
Transfers to nonaccrual			—			(528	)					—			—			(528	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	3,520		$	1,186		$	858		$	99		$	—		$	5,663
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
NONACCRUAL
Beginning balance		$	2,162		$	—		$	—		$	102		$	—		$	2,264
Principal payments			(1,376	)		(5	)		—			(15	)		—			(1,396	)
Charge-offs			(793	)		—			—			—			—			(793	)
Advances			—			—			—			—			—			—
New restructured			7			528			—			4			—			539
Transfers to foreclosed properties			—			—			—			—			—			—
Transfers from accruing			—			—			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	—		$	523		$	—		$	91		$	—		$	614
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTALS
Beginning balance		$	5,773		$	1,221		$	858		$	204		$	—		$	8,056
Principal payments			(1,467	)		(465	)		—			(18	)		—			(1,950	)
Charge-offs			(793	)		—			—			—			—			(793	)
Advances			—			—			—			—			—			—
New restructured			7			1,481			—			4			—			1,492
Transfers out of TDRs			—			—			—			—			—			—
Tansfers to nonaccrual			—			(528	)		—			—			—			(528	)
Transfers to foreclosed properties			—			—			—			—			—			—
Transfers from accruing			—			—			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	3,520		$	1,709		$	858		$	190		$	—		$	6,277
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 4—LOANS (Continued)

        A roll-forward of troubled debt restructuring during the year ended December 31, 2012 (dollars in thousands):

		Commercial Real Estate			Commercial, Financial and Agricultural			Commercial Construction			One to four family residential real estate			Consumer and Consumer Construction			Total
ACCRUING
Beginning balance		$	2,400		$	—		$	—		$	103		$	—		$	2,503
Principal payments			(84	)		—			(2	)		(1	)		—			(87	)
Charge-offs			—			—			—			—			—			—
Advances			—			—			—			—			—			—
New restructured			3,695			1,221			860			—			—			5,776
Transferred out of TDRs			—			—			—			—			—			—
Transfers to nonaccrual			(2,400	)		—			—			—			—			(2,400	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	3,611		$	1,221		$	858		$	102		$	—		$	5,792
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
NONACCRUAL
Beginning balance		$	—		$	—		$	—		$	—		$	—		$	—
Principal payments			(432	)		—			—			—			—			(432	)
Charge-offs			(772	)		—			—			—			—			(772	)
Advances			47			—			—			—			—			47
New restructured			919			—			—			102			—			1,021
Transfers to foreclosed properties			—			—			—			—			—			—
Transfers from accruing			2,400			—			—			—			—			2,400
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	2,162		$	—		$	—		$	102		$	—		$	2,264
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTALS
Beginning balance		$	2,400		$	—		$	—		$	103		$	—		$	2,503
Principal payments			(516	)		—			(2	)		(1	)		—			(519	)
Charge-offs			(772	)		—			—			—			—			(772	)
Advances			47			—			—			—			—			47
New restructured			4,614			1,221			860			102			—			6,797
Transfers out of TDRs			—			—			—			—			—			—
Transfers to nonaccrual			(2,400	)		—			—			—			—			(2,400	)
Transfers to foreclosed properties			—			—			—			—			—			—
Transfers from accruing			2,400			—			—			—			—			2,400
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	5,773		$	1,221		$	858		$	204		$	—		$	8,056
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 4—LOANS (Continued)

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):

		2013			2012
Loans outstanding, January 1		$	11,297		$	8,827
New loans			496			3,911
Net activity on revolving lines of credit			(266	)		233
Repayment			(2,484	)		(1,674	)
​	​	​	​	​	​	​	​
Loans outstanding, December 31		$	9,043		$	11,297
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        There were no loans to related-parties classified substandard as of December 31, 2013 and 2012. In addition to the outstanding balances above, there were unfunded commitments of $5,000 to related parties at December 31, 2013.

NOTE 5—PREMISES AND EQUIPMENT

        Details of premises and equipment at December 31 are as follows (dollars in thousands):

		2013			2012
Land		$	1,781		$	2,062
Buildings and improvements			12,911			13,151
Furniture, fixtures, and equipment			6,833			5,916
Construction in progress			145			19
​	​	​	​	​	​	​	​
Total cost basis			21,670			21,148
Less—accumulated depreciation			11,460			10,515
​	​	​	​	​	​	​	​
Net book value		$	10,210		$	10,633
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        Depreciation of premises and equipment charged to operating expenses amounted to $1.231 million in 2013, $1.092 million in 2012, and $1.067 million in 2011.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

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):

		2013			2012
Balance, January 1		$	3,212		$	3,162
Other real estate transferred from loans due to foreclosure			932			1,352
Other real estate sold			(1,996	)		(775	)
Writedowns of other real estate held for sale			(231	)		(496	)
Loss on other real estate held for sale			(33	)		(31	)
​	​	​	​	​	​	​	​
Balance, December 31		$	1,884		$	3,212
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

NOTE 7—DEPOSITS

        The distribution of deposits at December 31 is as follows (dollars in thousands):

		2013			2012
Noninterest bearing		$	72,936		$	67,652
NOW, money market, checking			149,123			155,465
Savings			13,039			13,829
CDs <$100,000			140,495			135,550
CDs >$100,000			23,159			24,355
Brokered			67,547			37,706
​	​	​	​	​	​	​	​
Total deposits		$	466,299		$	434,557
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        Maturities of non-brokered time deposits outstanding at December 31, 2013 are as follows (dollars in thousands):

2014		$	87,574
2015			38,887
2016			32,558
2017			4,077
2018			397
Thereafter			161
​	​	​	​	​
Total		$	163,654
​	​	​	​	​
​	​	​	​	​

NOTE 8—SERVICING RIGHTS

Mortgage Loans

        Mortgage servicing rights ("MSRs") are recorded when loans are sold in the secondary market with servicing retained. As of December 31, 2013, the Corporation had obligations to service $133 million of residential first mortgage loans. The valuation is based upon the net present value of the projected revenues over the expected life of the loans being serviced, as reduced by estimated internal costs to service these loans. The fair value of the capitalized servicing rights approximates the




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 8—SERVICING RIGHTS (Continued)

carrying value. The key economic assumptions used in determining the fair value of the mortgage servicing rights include an annual constant prepayment speed of 10.13% and a discount rate of 8.16% for December 31, 2013.

        The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances (dollars in thousands):

		December 31, 2013			December 31, 2012
Balance at beginning of period		$	638		$	400
Additions from loans sold with servicing retained			675			344
Amortization			(184	)		(106	)
​	​	​	​	​	​	​	​
Book value of MSRs at end of period		$	1,129		$	638
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

Commercial Loans

        The Corporation also retains the servicing on commercial loans that have been sold. These loans were originated and underwritten under the SBA and USDA government guarantee programs, in which the guaranteed portion of the loan was sold to a third party with servicing retained. The balance of these sold loans with servicing retained at December 31, 2013 and December 31, 2012 was approximately $59 million and $62 million. The Corporation valued these servicing rights at $.200 million as of December 31, 2013 and $.050 million at December 31, 2012. This valuation was established in consideration of the discounted cash flow of expected servicing income over the life of the loans.

NOTE 9—BORROWINGS

        Borrowings consist of the following at December 31 (dollars in thousands):

		2013			2012
Federal Home Loan Bank fixed rate advances at December 31, 2013 with a weighted average rate of 1.82% maturing in 2014, 2016 and 2018		$	35,000		$	35,000
Line of Credit			2,000			—
USDA Rural Development, fixed-rate note payable, maturing August 24, 2024 interest payable at 1%			852			925
​	​	​	​	​	​	​	​
		$	37,852		$	35,925
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        The Federal Home Loan Bank borrowings are collateralized at December 31, 2013 by the following: a collateral agreement on the Corporation's one to four family residential real estate loans with a book value of approximately $43.454 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $4.610 million and $4.755 million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $3.060 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, 2013.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 9—BORROWINGS (Continued)

        The USDA Rural Development borrowing is collateralized by loans totaling $.128million originated and held by the Corporation's wholly owned subsidiary, First Rural Relending and an assignmentFFNM Financial Services, Inc. The 2017 activity of FFNM Financial Services, Inc. was to collect the stream of income generated by referral of customers for non-bank investment products through a demand deposit account in the amount of $.790 million, and guaranteed by the Corporation.

        The line of credit ("LOC") was establishedcontract with a correspondent bank and bears interest at 90-day LIBOR plus 2.75%Old Mission Investment Co., with a floor rate of 4.00%. The LOC has an initial term of two years, with all outstanding balances on the LOC converted to a term note on the one-year anniversary date, March 22, 2014.

        Maturities and principal payments of borrowings outstanding at December 31, 2013 are as follows (dollars in thousands):

2014		$	12,074
2015			74
2016			15,075
2017			76
2018			10,077
Thereafter			476
​	​	​	​	​
Total		$	37,852
​	​	​	​	​
​	​	​	​	​

NOTE 10—INCOME TAXES

        The components of the federal income tax provision (credit) for the years ended December 31 are as follows (dollars in thousands):

		2013			2012			2011
Current tax expense (benefit)		$	—		$	—		$	314
Change in valuation allowance			(2,250	)		(3,000	)		—
Deferred tax expense (benefit)			1,847			2,078			784
​	​	​	​	​	​	​	​	​	​	​
Provision for (benefit of) income taxes		$	(403	)	$	(922	)	$	1,098
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

        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):

		2013			2012			2011
Tax expense at statutory rate		$	1,882		$	2,096		$	1,127
Increase (decrease) in taxes resulting from:
Tax-exempt interest			(47	)		(49	)		(59	)
Change in valuation allowance			(2,250	)		(3,000	)		—
Other			12			31			30
​	​	​	​	​	​	​	​	​	​	​
Provision for (benefit of) income taxes, as reported		$	(403	)	$	(922	)	$	1,098
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​




LLC.

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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 10—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):

		2013			2012
Deferred tax assets:
NOL carryforward		$	6,737		$	7,149
Allowance for loan losses			1,585			1,774
Alternative Minimum Tax Credit			1,463			1,463
OREO Tax basis > book basis			138			1,025
Tax credit carryovers			672			672
Deferred compensation			152			185
Stock compensation			267			265
Depreciation			157			174
Intangible assets			33			60
Other			155			170
​	​	​	​	​	​	​	​
Total deferred tax assets			11,359			12,937
​	​	​	​	​	​	​	​
Valuation allowance		$	(760	)	$	(3,010	)
​	​	​	​	​	​	​	​
Deferred tax liabilities:
FHLB stock dividend			(103	)		(103	)
Unrealized gain on securities			(111	)		(476	)
Mortgage servicing rights			(452	)		(217	)
​	​	​	​	​	​	​	​
Total deferred tax liabilities			(666	)		(796	)
​	​	​	​	​	​	​	​
Net deferred tax asset		$	9,933		$	9,131
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        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. The Corporation, as of December 31, 2013 had a net operating loss and tax credit carryforwards for tax purposes of approximately $19.815 million, and $2.135 million, respectively. The Corporation will evaluate the future benefits from these carryforwards and at such time as it becomes "more likely than not" that they would be utilized prior to expiration and recognizes 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 $12.8 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 $1.404 million for the NOL and the equivalent value of tax credits, which is approximately $.476 million. These limitations for use were established in conjunction with the recapitalization of the Corporation in December 2004.

        The Corporation recognized a deferred tax benefit of approximately $.403 million for the year ended December 31, 2013 and a deferred tax benefit of $.922 million for the year ended December 31, 2012. The valuation allowance at December 31, 2013 was approximately $.760 million. The Corporation has reduced the valuation allowance as it was determined that it was "more likely than not" that these benefits would be realized. In December 2013, the Corporation reduced the valuation by $2.250 million and in June 2012 a reduction of $3.0 million was recorded. The Corporation made these determinations after a thorough review of projected earnings and the composition and sustainability of those earnings




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 10—INCOME TAXES (Continued)

over the projected tax carryover period. This analysis substantiated the ability to utilize these deferred tax assets. The remaining valuation allowance pertains to the existing tax credit carryovers, which will only be utilized after all net operating loss carryforwards. Since a portion of these tax credits may expire before that occurs, a valuation allowance for these has been established. The Corporation will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted.

NOTE 11—OPERATING LEASES

        The Corporation currently maintains four operating leases for office locations. The first operating lease, for our location in Birmingham, was originated in September 2005 and had an original term of 66 months with an option to renew for an additional five year period. The original term of this was extended during 2011 for an additional three year term.

        The second operating lease, for a second 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.

        The third operating lease, for a loan production office in Traverse City, was executed in May 2012, the terms of which began in August 2012. The original term of this lease is three years with options for two consecutive renewal terms of three years each.

        The fourth operating lease was initiated in December 2013 as the Corporation consolidated its banking offices in Marquette. The original term of this lease is 15 years with options for two consecutive renewal terms of four years each.

        Future minimum payments for base rent, by year and in the aggregate, under the initial terms of the operating lease agreements, consist of the following (dollars in thousands):

2014		$	515
2015			447
2016			426
2017			435
2018			444
Thereafter			4,954
​	​	​	​	​
Total		$	7,221
​	​	​	​	​
​	​	​	​	​

        Rent expense for all operating leases amounted to $280,000 in 2013, $269,000 in 2012, and $260,000 in 2011.

NOTE 12—RETIREMENT PLAN

        The Corporation has established a 401(k) profit sharing plan. Employees who have completed three months of service and attained the age of 18 are eligible to participate in the plan. Eligible employees can elect to have a portion, not to exceed 80%, of their annual compensation paid into the plan. In addition, the Corporation may make discretionary contributions into the plan. Retirement plan contributions charged to operations totaled $198,000, $161,000, and $125,000 in 2013, 2012, and 2011, respectively.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 13—DEFERRED COMPENSATION PLAN

        Prior to the recapitalization in 2004, 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, 2013 and 2012, for vested benefits under this plan, was $.447 million and $.545 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 $1.506 million and $1.545 million at December 31, 2013 and 2012, respectively. Deferred compensation expense for the plan was $25,000, $30,000, and $35,000 for 2013, 2012, and 2011, respectively.

NOTE 14—REGULATORY MATTERS

        The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Corporation's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

        Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management has determined that, as of December 31, 2013, 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.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 14—REGULATORY MATTERS (Continued)

        The Corporation's and the Bank's actual capital and ratios compared to generally applicable regulatory requirements as of December 31 are as follows (dollars in thousands):

		Actual						Adequacy Purposes						Action Provisions
		Amount			Ratio			Amount			Ratio			Amount			Ratio
2013
Total capital to risk weighted assets:
Consolidated		$	62,581			12.8	%	³ $	39,153			³ 8.0	%		N/A			N/A
mBank		$	60,537			12.4	%	³ $	38,944			³ 8.0	%	³ $	48,680			10.0	%
Tier 1 capital to risk weighted assets:
Consolidated		$	57,920			11.8	%	³ $	19,576			³ 4.0	%		N/A			N/A
mBank		$	55,947			11.5	%	³ $	19,472			³ 4.0	%	³ $	29,208			6.0	%
Tier 1 capital to average assets:
Consolidated		$	57,920			10.3	%	³ $	22,469			³ 4.0	%		N/A			N/A
mBank		$	55,947			10.0	%	³ $	22,352			³ 4.0	%	³ $	27,940			5.0	%
2012
Total capital to risk weighted assets:
Consolidated		$	69,573			14.9	%	³ $	37,283			³ 8.0	%		N/A			N/A
mBank		$	56,879			12.2	%	³ $	37,262			³ 8.0	%	³ $	46,577			10.0	%
Tier 1 capital to risk weighted assets:
Consolidated		$	64,355			13.8	%	³ $	18,642			³ 4.0	%		N/A			N/A
mBank		$	51,701			11.1	%	³ $	18,631			³ 4.0	%	³ $	27,946			6.0	%
Tier 1 capital to average assets:
Consolidated		$	64,355			12.0	%	³ $	21,486			³ 4.0	%		N/A			N/A
mBank		$	51,701			9.6	%	³ $	21,481			³ 4.0	%	³ $	26,851			5.0	%

NOTE 15—STOCK COMPENSATION PLANS

        On May 22, 2012, the Company's shareholders approved the Mackinac Financial Corporation 2012 Incentive Compensation Plan, under which current and prospective employees, non-employee directors and consultants may be awarded incentive stock options, non-statutory stock options, shares of restricted stock units ("RSUs"), or stock appreciation rights. The aggregate number of shares of the Company's common stock issuable under the plan is 575,000, which included 392,152 option shares outstanding at that time.

        The Corporation also has three various stock compensation plans which are now expired. One plan was approved during 2000 and applied 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 were granted at the discretion of a committee of the Corporation's Board of Directors. Options to purchase shares of the Corporation's stock were




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 15—STOCK COMPENSATION PLANS (Continued)

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.

        The Corporation, in August 2012, granted 148,500 Restricted Stock Units ("RSU's") to members of the Board of Directors and Management. These RSU's were granted at a market value of $7.91 and will vest equally over a four year term. In exchange for the grant of RSU's various previously issued stock option awards were surrendered. The RSUs were awarded at no cost to the employee and vest ratably over a four-year period. Compensation cost to be recognized over the four-year vesting period, is $.776 million. On August 31, 2013, the Corporation issued 37,125 shares of its common stock for vested RSUs. As of December 31, 2013, RSUs totaling 111,375 were unvested and unrecognized compensation expense, net of income tax, was $.512 million.

        A summary of stock option transactions for the years ended December 31 is as follows:

		2013			2012
Outstanding shares at beginning of year			242,152			392,152
Granted during the year			—			—
Exercised during the year			—			—
Expired / forfeited during the year			(5,000	)		—
Surrendered/exchanged for restricted stock			—			(150,000	)
​	​	​	​	​	​	​	​
Outstanding shares at end of year			237,152			242,152
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Exercisable shares at end of year			124,861			126,361
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Weighted average exercise price per share at end of year		$	9.88		$	9.88
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Shares available for grant at end of year			—			—
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        Following is a summary of the options outstanding and exercisable at December 31, 2013:

					Number of Shares									Weighted Average Remaining Contractual Life-Years
		Exercise Price			Outstanding			Exercisable			Unvested Options
		$	9.75			217,152			120,861			96,291			.96
		$	10.65			10,000			2,000			8,000			1.54
		$	12.00			10,000			2,000			8,000			2.96
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
						237,152			124,861			112,291			1.07
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        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 was expensed based upon the vesting period without consideration given to market value appreciation. There are no future compensation expenses related to existing option programs.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 16—SHAREHOLDERS' EQUITY

        In August 2012 the corporation consummated the previously announced $7.000 million rights offering and the investment by Steinhardt Capital Investors, LLLP ("SCI") by issuing 2,140,123 shares of common stock for net proceeds of $11.506 million. Also, in August 2012, the Corporation exited the TARP Capital Purchase Program ("CPP") when the Corporations 11,000 Series A Preferred Shares, issued in April, 2009 to the U.S. Treasury, were publically offered and sold. The Corporation repurchased the 379,310 of Common Stock Warrants issued to the U.S. Treasury under the CPP in December, 2012 for $1.3 million. During 2013, the Corporation redeemed all of the outstanding Series A Preferred Shares.

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.

        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 was 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 Corporation was 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 was non-voting, other than class voting rights on matters that could adversely affect the Preferred Stock. The Preferred Stock was auctioned by the Treasury in 2012. The Corporation redeemed all of its outstanding Preferred stock in 2013.

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.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 17—COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (Continued)

        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):

		2013			2012
Commitments to extend credit:
Variable rate		$	36,039		$	39,782
Fixed rate			15,070			18,427
Standby letters of credit—Variable rate			5,077			2,879
Credit card commitments—Fixed rate			3,152			3,060
​	​	​	​	​	​	​	​
		$	59,338		$	64,148
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

        Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The commitments are structured to allow for 100% collateralization on all standby letters of credit.

        Credit card commitments are commitments on credit cards issued by the Corporation's subsidiary and serviced by other companies. These commitments are unsecured.

Legal Proceedings and Contingencies

        At December 31, 2013, there were no pending material legal proceedings to which the Corporation is a party or to which any of its property was subject, except for proceedings which arise in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material effect on the consolidated financial position or results of operations of the Corporation.

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, 2013 represents $100.333 million, or 27.92%, compared to $95.151 million, or 27.75%, of the commercial loan portfolio on December 31, 2012. 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




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 17—COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (Continued)

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 depositsEstimates—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 and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

        Federal Home Loan Bank stock—Federal Home Loan Bank stock is carried at cost, which is its redeemable value and approximates its fair value, since the market for this stock is limited.

        Loans—Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, residential mortgage, and other consumer. The fair value of loans is calculated by discounting scheduled cash flows using discount rates reflecting the credit and interest rate risk inherent in the loan.

        The methodology in determining fair value of nonaccrual loans is to average them into the blended interest rate at 0% interest. This has the effect of decreasing the carrying amount below the risk-free rate amount and, therefore, discounts the estimated fair value.

        Impaired loans are measured at the estimated fair value of the expected future cash flows at the loan's effective interest rate or the fair value of the collateral for loans which are collateral dependent. Therefore, the carrying values of impaired loans approximate the estimated fair values for these assets.

        Deposits—The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits and savings, is equal to the amount payable on demand at the reporting date. The fair value of time deposits is based on the discounted value of contractual cash flows applying interest rates currently being offered on similar time deposits.

        Borrowings—Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. The fair value of borrowed funds due on demand is the amount payable at the reporting date.

        Accrued interest—The carrying amount of accrued interest approximates fair value.

        Off-balance-sheet instruments—The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the counterparties. Since the differences in the current fees and those reflected to the off-balance-sheet instruments at year-end are immaterial, no amounts for fair value are presented.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 18—FAIR VALUE (Continued)

        The following table presents information for financial instruments at December 31 (dollars in thousands):

				December 31, 2013						December 31, 2012
		Level in Fair Value Hierarchy		Carrying Amount			Estimated Fair Value			Carrying Amount			Estimated Fair Value
Financial assets:
Cash and cash equivalents		Level 1		$	18,219		$	18,219		$	26,961		$	26,961
Interest-bearing deposits		Level 2			10			10			10			10
Securities available for sale		Level 2			44,388			44,388			43,799			43,799
Federal Home Loan Bank stock		Level 2			3,060			3,060			3,060			3,060
Net loans		Level 3			479,171			479,538			443,959			439,239
Accrued interest receivable		Level 3			1,351			1,351			1,319			1,319
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total financial assets				$	546,199		$	546,566		$	519,108		$	514,388
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Financial liabilities:
Deposits		Level 2		$	466,299		$	465,431		$	434,557		$	434,227
Borrowings		Level 2			37,852			37,487			35,925			35,729
Accrued interest payable		Level 3			182			182			214			214
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total financial liabilties				$	504,333		$	503,100		$	470,696		$	470,170
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        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.

        The following is information about the Corporation's assets and liabilities measured at fair value on a recurring basis at December 31, 2013 and the valuation techniques used by the Corporation to determine those fair values.

Level 1:    In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or            liabilities that the Corporation has the ability to access.

Level 2:    Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 18—FAIR VALUE (Continued)

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, 2013 and December 31, 2012 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, 2013 or December 31, 2012.

        In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Corporation's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

        The 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 held for sale. The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

		Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2013
(dollars in thousands)		Balance at December 31, 2013			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Losses for Year Ended December 31, 2013
Assets
Impaired loans		$	2,024		$	—		$	—		$	2,024		$	2,075
Other real estate held for sale			1,884			—			—			1,884			265
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
														$	2,340
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

		Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2012
(dollars in thousands)		Balance at December 31, 2012			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Losses for Year Ended December 31, 2012
Assets
Impaired loans		$	4,687		$	—		$	—		$	4,687		$	1,151
Other real estate held for sale			3,212			—			—			3,212			489
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
														$	1,640
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        The Corporation had no investments subject to fair value measurement on a nonrecurring basis.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 18—FAIR VALUE (Continued)

        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).

NOTE 19—PARENT COMPANY ONLY FINANCIAL STATEMENTS


BALANCE SHEETS

December 31, 2013 and 2012

(Dollars in Thousands)


		2013			2012
ASSETS
Cash and cash equivalents		$	1,301		$	12,943
Investment in subsidiaries			65,881			59,854
Other assets			567			117
​	​	​	​	​	​	​	​
TOTAL ASSETS		$	67,749		$	72,914
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
LIABILITIES AND SHAREHOLDERS' EQUITY
Line of Credit		$	2,000		$	—
Other liabilities			500			466
​	​	​	​	​	​	​	​
Total liabilities			2,500			466
Shareholders' equity:
Preferred stock—no par value:
Authorized 500,000 shares, 11,000 shares issued and outstanding			—			11,000
Common stock and additional paid in capital—no par value
Authorized 18,000,000 shares
Issued and outstanding—5,541,390 and 5,559,859 shares respectively			53,621			53,797
Retained earnings			11,412			6,727
Accumulated other comprehensive income			216			924
​	​	​	​	​	​	​	​
Total shareholders' equity			65,249			72,448
​	​	​	​	​	​	​	​
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	67,749		$	72,914
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 19—PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)


STATEMENTS OF OPERATIONS

Years Ended December 31, 2013, 2012, and 2011

(Dollars in Thousands)


		2013			2012			2011
INCOME:
Interest income		$	1		$	3		$	3
​	​	​	​	​	​	​	​	​	​	​
Total income		$	1		$	3		$	3
​	​	​	​	​	​	​	​	​	​	​
EXPENSES:
Salaries and benefits			482			280			180
Professional service fees			208			562			245
Other			520			340			223
​	​	​	​	​	​	​	​	​	​	​
Total expenses			1,210			1,182			648
​	​	​	​	​	​	​	​	​	​	​
Loss before income taxes and equity in undistributed net income (loss) of subsidiaries			(1,209	)		(1,179	)		(645	)
​	​	​	​	​	​	​	​	​	​	​
Provision for (benefit of) income taxes			(411	)		(393	)		(211	)
​	​	​	​	​	​	​	​	​	​	​
Loss before equity in undistributed net income of subsidiaries			(798	)		(786	)		(434	)
Equity in undistributed net income of subsidiaries			6,735			7,873			2,652
​	​	​	​	​	​	​	​	​	​	​
Net income			5,937			7,087			2,218
Preferred dividend and accretion of discount			308			629			766
​	​	​	​	​	​	​	​	​	​	​
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	5,629		$	6,458		$	1,452
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

Notes of the Consolidated Financial Statement (Continued)

NOTE 19—PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)


STATEMENTS OF CASH FLOWS

Years Ended December 31, 2013, 2012, and 2011

(Dollars in Thousands)


		2013			2012			2011
Cash Flows from Operating Activities:
Net income		$	5,937		$	7,087		$	2,218
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net (income) of subsidiaries			(6,735	)		(7,873	)		(2,652	)
Increase in capital from stock compensation			333			66			—
Change in other assets			2,587			92			29
Change in other liabilities			1,997			(163	)		(97	)
​	​	​	​	​	​	​	​	​	​	​
Net cash provided by (used in) operating activities			4,119			(791	)		(502	)
​	​	​	​	​	​	​	​	​	​	​
Cash Flows from Investing Activities:
Investments in subsidiaries			(3,000	)		—			—
Cash Flows from Financing Activities:
Proceeds from issuance of common stock			—			11,506			—
Repurchase of common stock			(509	)		—			—
Purchase of common stock warrants			—			(1,300	)		—
Dividend on common stock			(944	)		(223	)		—
Dividend on preferred stock			(308	)		(550	)		(551	)
Redemption of Series A Preferred Stock			(11,000	)		—			—
​	​	​	​	​	​	​	​	​	​	​
Net cash provided by (used in) financing activities			(12,761	)		9,433			(551	)
​	​	​	​	​	​	​	​	​	​	​
Net increase (decrease) in cash and cash equivalents			(11,642	)		8,642			(1,053	)
Cash and cash equivalents at beginning of period			12,943			4,301			5,354
​	​	​	​	​	​	​	​	​	​	​
Cash and cash equivalents at end of period		$	1,301		$	12,943		$	4,301
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​




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MACKINAC FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

		June 30, 2014			December 31, 2013			June 30, 2013
		(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks		$	20,744		$	18,216		$	26,216
Federal funds sold			2			3			3
​	​	​	​	​	​	​	​	​	​	​
Cash and cash equivalents			20,746			18,219			26,219
Interest-bearing deposits in other financial institutions			235			10			10
Securities available for sale			47,374			44,388			47,307
Federal Home Loan Bank stock			3,060			3,060			3,060
Loans:
Commercial			374,565			359,368			343,561
Mortgage			113,332			110,663			98,559
Consumer			15,043			13,801			13,435
​	​	​	​	​	​	​	​	​	​	​
Total Loans			502,940			483,832			455,555
Allowance for loan losses			(5,097	)		(4,661	)		(5,177	)
​	​	​	​	​	​	​	​	​	​	​
Net loans			497,843			479,171			450,378
Premises and equipment			9,790			10,210			10,536
Other real estate held for sale			1,947			1,884			2,481
Deferred tax asset			9,097			9,933			8,367
Other assets			5,777			5,925			5,143
​	​	​	​	​	​	​	​	​	​	​
TOTAL ASSETS		$	595,869		$	572,800		$	553,501
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest bearing deposits		$	73,732		$	72,936		$	64,736
NOW, money market, interest checking			148,242			149,123			146,203
Savings			15,658			13,039			12,229
CDs<$100,000			143,140			140,495			134,767
CDs>$100,000			23,151			23,159			25,091
Brokered			80,093			67,547			64,881
​	​	​	​	​	​	​	​	​	​	​
Total deposits			484,016			466,299			447,907
Borrowings			42,087			37,852			35,925
Other liabilities			3,289			3,400			3,149
​	​	​	​	​	​	​	​	​	​	​
Total liabilities			529,392			507,551			486,981
SHAREHOLDERS' EQUITY:
Preferred stock—No par value:
Authorized—500,000 shares, none issued and outstanding			—			—			4,000
Common stock and additional paid in capital—No par value
Authorized—18,000,000 shares
Issued and outstanding—5,527,690; 5,541,390 and 5,557,859 respectively			53,703			53,621			53,934
Retained earnings			12,325			11,412			8,156
Accumulated other comprehensive income			449			216			430
​	​	​	​	​	​	​	​	​	​	​
Total shareholders' equity			66,477			65,249			66,520
​	​	​	​	​	​	​	​	​	​	​
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	595,869		$	572,800		$	553,501
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

See accompanying notes to consolidated financial statements.




Table of Contents


MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except per Share Data)

		Three Months Ended June 30,						Six Months Ended June 30,
		2014			2013			2014			2013
		(Unaudited)						(Unaudited)
INTEREST INCOME:
Interest and fees on loans:
Taxable		$	6,373		$	6,014		$	12,654		$	11,903
Tax-exempt			—			28			23			55
Interest on securities:
Taxable			244			241			481			481
Tax-exempt			14			6			27			13
Other interest income			32			32			80			63
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest income			6,663			6,321			13,265			12,515
​	​	​	​	​	​	​	​	​	​	​	​	​	​
INTEREST EXPENSE:
Deposits			800			886			1,622			1,763
Borrowings			204			166			391			327
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest expense			1,004			1,052			2,013			2,090
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income			5,659			5,269			11,252			10,425
Provision for loan losses			191			100			374			475
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income after provision for loan losses			5,468			5,169			10,878			9,950
​	​	​	​	​	​	​	​	​	​	​	​	​	​
OTHER INCOME:
Deposit service fees			192			175			349			337
Income from loans sold on the secondary market			139			279			242			578
SBA/USDA loan sale gains			166			554			548			663
Mortgage servicing income			89			182			102			285
Other			64			61			100			146
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total other income			650			1,251			1,341			2,009
​	​	​	​	​	​	​	​	​	​	​	​	​	​
OTHER EXPENSE:
Salaries and employee benefits			2,523			2,375			5,064			4,681
Occupancy			546			363			1,084			745
Furniture and equipment			303			255			622			525
Data processing			288			268			574			533
Advertising			123			111			230			215
Professional service fees			276			320			607			545
Loan and deposit			83			45			162			118
Writedowns and losses on other real estate held for sale			14			87			14			89
FDIC insurance assessment			90			95			175			200
Telephone			82			63			164			145
Other			570			541			1,309			1,038
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total other expenses			4,898			4,523			10,005			8,834
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Income before provision for income taxes			1,220			1,897			2,214			3,125
Provision for income taxes			414			637			748			1,052
​	​	​	​	​	​	​	​	​	​	​	​	​	​
NET INCOME			806			1,260			1,466			2,073
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Preferred dividend and accretion of discount			—			63			—			200
​	​	​	​	​	​	​	​	​	​	​	​	​	​
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	806		$	1,197		$	1,466		$	1,873
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
INCOME PER COMMON SHARE:
Basic		$	.15		$	.22		$	.27		$	.34
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Diluted		$	.14		$	.22		$	.26		$	.34
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​

See accompanying notes to consolidated financial statements.




Table of Contents


MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

		Three Months Ended						Six Months Ended
		June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Net income		$	806		$	1,260		$	1,466		$	2,073
Net change in net unrealized gains and losses on securities available for sale:
Unrealized gains (losses) arising during the period			150			(832	)		345			(763	)
Less: reclassification adjustment for gains included in net income			—			15			—			15
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net securities gain (loss) during the period			150			(817	)		345			(748	)
Tax effect			(45	)		277			(112	)		254
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Other comprehensive income			105			(540	)		233			(494	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total comprehensive income		$	911		$	720		$	1,699		$	1,579
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​

See accompanying notes to consolidated financial statements.




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MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Dollars in Thousands)

(Unaudited)

		Three Months Ended June 30, 2014									Three Months Ended June 30, 2013
		Preferred Stock			Common Shareholders' Equity			Total Shareholders' Equity			Preferred Stock			Common Shareholders' Equity			Total Shareholders' Equity
Balance, beginning of period		$	—		$	65,730		$	65,730		$	11,000		$	62,039		$	73,039
Net income for period			—			806			806			—			1,260			1,260
Net unrealized gain (loss) on securities available for sale			—			105			105			—			(540	)		(540	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total comprehensive income			—			911			911			—			720			720
Stock compensation			—			113			113			—			75			75
Dividend on common stock			—			(277	)		(277	)		—			(222	)		(222	)
Repurchase of common stock			—			—			—			—			(29	)		(29	)
Redemption of Preferred Series A stock			—			—			—			(7,000	)		—			(7,000	)
Dividend on preferred stock			—			—			—			—			(63	)		(63	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balance, end of period		$	—		$	66,477		$	66,477		$	4,000		$	62,520		$	66,520
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




		Six Months Ended June 30, 2014									Six Months Ended June 30, 2013
		Preferred Stock			Common Shareholders' Equity			Total Shareholders' Equity			Preferred Stock			Common Shareholders' Equity			Total Shareholders' Equity
Balance, beginning of period		$	—		$	65,249		$	65,249		$	11,000		$	61,448		$	72,448
Net income for period			—			1,466			1,466			—			2,073			2,073
Net unrealized gain (loss) on securities available for sale			—			233			233			—			(494	)		(494	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total comprehensive income			—			1,699			1,699			—			1,579			1,579
Stock compensation			—			225			225			—			183			183
Dividend on common stock			—			(553	)		(553	)		—			(444	)		(444	)
Repurchase of common stock			—			(143	)		(143	)		—			(46	)		(46	)
Redemption of Preferred Series A stock			—			—			—			(7,000	)		—			(7,000	)
Dividend on preferred stock			—			—			—			—			(200	)		(200	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balance, end of period		$	—		$	66,477		$	66,477		$	4,000		$	62,520		$	66,520
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

See accompanying notes to consolidated financial statements.




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MACKINAC FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

		Six Months Ended June 30,
		2014			2013
Cash Flows from Operating Activities:
Net income		$	1,466		$	2,073
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			751			840
Provision for loan losses			374			475
Deferred income taxes, net			748			1,052
Gain on sales/calls of securities			—			(15	)
(Gain) on sale of loans sold to secondary market			(191	)		(458	)
Origination of loans held for sale in the secondary market			(11,170	)		(32,597	)
Proceeds from sale of loans in the secondary market			11,361			33,055
Loss (gain) on sale of premises, equipment, and other real estate held for sale			41			(25	)
Writedown of other real estate held for sale			2			114
Stock compensation			225			183
Change in other assets			149			72
Change in other liabilities			(111	)		99
​	​	​	​	​	​	​	​
Net cash provided by operating activities			3,645			4,868
​	​	​	​	​	​	​	​
Cash Flows from Investing Activities:
Net increase in loans			(19,354	)		(7,600	)
Net increase in deposits held at other banks			(225	)		—
Purchase of securities available for sale			(3,243	)		(4,974	)
Proceeds from maturities, sales, calls or paydowns of securities available for sale			504			476
Capital expenditures			(798	)		(501	)
Proceeds from sale of premises, equipment, and other real estate			742			1,329
​	​	​	​	​	​	​	​
Net cash (used in) investing activities			(22,374	)		(11,270	)
​	​	​	​	​	​	​	​
Cash Flows from Financing Activities:
Net increase in deposits			17,717			13,350
Net increase in borrowings			4,235			—
Repurchase of common stock			(143	)		(46	)
Dividend on common stock			(553	)		(444	)
Redemption of Preferred Series A			—			(7,000	)
Dividend on preferred stock			—			(200	)
​	​	​	​	​	​	​	​
Net cash provided by financing activities			21,256			5,660
​	​	​	​	​	​	​	​
Net increase (decrease) in cash and cash equivalents			2,527			(742	)
Cash and cash equivalents at beginning of period			18,219			26,961
​	​	​	​	​	​	​	​
Cash and cash equivalents at end of period		$	20,746		$	26,219
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest		$	2,009		$	1,651
Income taxes			25			99
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)			282			687




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MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

        The unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the "Corporation") have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The unaudited consolidated financial statements and footnotes thereto should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2013.

        In order to properly reflect some categories of other income and other expenses, reclassifications of expense and income items have been made to prior period numbers. The "net" other income and other expenses was not changed due to these reclassifications.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 reporting 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, and lease loss ("ALLL"), the valuation of deferred tax assets, mortgage servicing rights and other real estate held for sale.

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




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

the allowance for loan losses. These agencies may require additions to the allowance for loan losses based on their judgments of collectability.

        In management's opinion, the allowance for loan losses is adequate to cover probable losses relating to specifically identified loans, as well as probable losses inherent in the balance of the loan portfolio as of the balance sheet date.

Stock Compensation Plans

        On May 22, 2012, the Company's shareholders approved the Mackinac Financial Corporation 2012 Incentive Compensation Plan, under which current and prospective employees, non-employee directors and consultants may be awarded incentive stock options, non-statutory stock options, shares of restricted stock units ("RSUs"), or stock appreciation rights. The aggregate number of shares of the Company's common stock issuable under the plan is 575,000, which included 392,152 option shares outstanding at that time. Awards are made at the discretion of management. Compensation cost equal to the fair value of the award is recognized over the vesting period.

        The Corporation, in August 2012 and March 2014, granted Restricted Stock Units ("RSUs") to members of the Board of Directors and Management. In August 2012, 148,500 RSUs were granted at a market value of $7.91 and will vest equally over a four year term. In exchange for the grant of these RSUs various previously issued stock option awards were surrendered. In March 2014, 52,774 RSUs were granted at a market value of $12.95, also vesting equally over a four year term. The RSUs were awarded at no cost to the employee. Compensation cost to be recognized over the four-year vesting periods, is $1.175 million and $.683 million, respectively. On August 31, 2013, the Corporation issued 37,125 shares of its common stock for vested RSUs. As of June 30, 2014, RSUs totaling 164,149 were unvested and unrecognized compensation expense was $1.270 million.

2. RECENT ACCOUNTING PRONOUNCEMENTS

        In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on the recognition of revenue from contracts with customers. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The guidance is effective January 1, 2017 and early adoption is not permitted. The company is currently evaluating the impact of the new guidance and the method of adoption in the consolidated financial results.

3. EARNINGS PER SHARE

        Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and stock awards were fully vested and resulted in the issuance of common stock that then shared in our earnings, is computed by dividing net income by the weighted




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. EARNINGS PER SHARE (Continued)

average number of common shares outstanding and common stock equivalents, after giving effect for dilutive shares issued.

        The following shows the computation of basic and diluted earnings per share for the three and six months ended June 30, 2014 and 2013 (dollars in thousands, except per share data):

		Three Months Ended June 30,						Six Months Ended June 30,
		2014			2013			2014			2013
(Numerator):
Net income		$	806		$	1,260		$	1,466		$	2,073
Preferred stock dividends and accretion of discount			—			63			—			200
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net income available to common shareholders		$	806		$	1,197		$	1,466		$	1,873
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
(Denominator):
Weighted average shares outstanding—basic			5,527,690			5,556,133			5,529,290			5,557,842
Effect of dilutive stock options and vesting of restricted stock units			27,973			—			93,902			—
Weighted average shares outstanding—diluted			5,555,663			5,556,133			5,623,192			5,557,842
Income per common share:
Basic		$	.15		$	.22		$	.27		$	.34
Diluted		$	.15		$	.22		$	.26		$	.34




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MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. INVESTMENT SECURITIES

        The amortized cost and estimated fair value of investment securities, available for sale as of June 30, 2014, December 31, 2013intangible and June 30, 2013 are as follows (dollars in thousands):

		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
June 30, 2014
US Agencies—MBS		$	6,598		$	253		$	—		$	6,851
US Agencies			17,755			91			(258	)		17,588
Corporate Bonds			15,691			189			—			15,880
Obligations of states and political subdivisions			6,441			400			(2	)		6,839
Other			216			—			—			216
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total securities available for sale		$	46,701		$	933		$	(260	)	$	47,374
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
December 31, 2013
US Agencies—MBS		$	7,078		$	281		$	—		$	7,359
US Agencies			15,227			—			(372	)		14,855
Corporate Bonds			15,862			218			(1	)		16,079
Obligations of states and political subdivisions			5,893			202			—			6,095
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total securities available for sale		$	44,060		$	701		$	(373	)	$	44,388
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
June 30, 2013
US Agencies—MBS		$	7,491		$	354		$	—		$	7,845
US Agencies			15,172			74			(341	)		14,905
Corporate Bonds			18,557			161			(45	)		18,673
Obligations of states and political subdivisions			5,435			450			(1	)		5,884
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total securities available for sale		$	46,655		$	1,039		$	(387	)	$	47,307
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​

        The Corporation has evaluated gross unrealized losses that exist within the portfolio and considers them temporary in nature. The Corporation has both the ability and the intent to hold the investment securities until their respective maturities and therefore does not anticipate the realization of the temporary losses.

        The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $4.378 million and $4.530 million, respectively, at June 30, 2014.




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MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS

        The composition of loans is as follows (dollars in thousands):

		June 30, 2014			December 31, 2013			June 30, 2013
Commercial real estate		$	274,500		$	268,809		$	243,363
Commercial, financial, and agricultural			89,515			79,655			84,145
One to four family residential real estate			105,868			103,768			94,254
Construction:
Consumer			7,464			6,895			4,305
Commerical			10,550			10,904			16,053
Consumer			15,043			13,801			13,435
​	​	​	​	​	​	​	​	​	​	​
Total loans		$	502,940		$	483,832		$	455,555
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

        An analysis of the allowance for loan losses for the six months ended June 30, 2014, the year ended December 31, 2013, and the six months ended June 30, 2013 is as follows (dollars in thousands):

		June 30, 2014			December 31, 2013			June 30, 2013
Balance at beginning of period		$	4,661		$	5,218		$	5,218
Loans charged off			(115	)		(2,432	)		(616	)
Recoveries on loans previously charged off			177			200			100
Provision			374			1,675			475
​	​	​	​	​	​	​	​	​	​	​
Balance at end of period		$	5,097		$	4,661		$	5,177
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

        In the first half of 2014, net recoveries were $62,000, compared to net charge-offs of $.516 million, or .11% of average loans, in the same period in 2013. In the first half of 2014, the Corporation recorded a provision for loan loss of $.374 million compared to $.475 million in the first half of 2013. The Corporation's allowance for loan loss reserve policy 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.




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

        A breakdown of the allowance for loan losses and recorded balances in loans at June 30, 2014 is as follows (dollars in thousands):

		Commercial real estate			Commercial, financial and agricultural			Commercial construction			One to four family residential real estate			Consumer construction			Consumer			Unallocated			Total
Three Months Ended June 30, 2014 Allowance for loan loss reserve:
Beginning balance ALLR		$	1,756		$	1,572		$	41		$	391		$	16		$	114		$	993		$	4,883
Charge-offs			—			(3	)		—			(13	)		—			(17	)		—			(33	)
Recoveries			20			15			3			8			—			10			—			56
Provision			(146	)		85			(4	)		(41	)		(1	)		4			294			191
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance ALLR		$	1,630		$	1,669		$	40		$	345		$	15		$	111		$	1,287		$	5,097
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Six Months Ended June 30, 2014 Allowance for loan loss reserve:
Beginning balance ALLR		$	1,849		$	1,378		$	80		$	516		$	25		$	148		$	665		$	4,661
Charge-offs			(1	)		(65	)		—			(16	)		—			(33	)		—			(115	)
Recoveries			74			59			6			14			—			24			—			177
Provision			(292	)		297			(46	)		(169	)		(10	)		(28	)		622			374
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance ALLR		$	1,630		$	1,669		$	40		$	345		$	15		$	111		$	1,287		$	5,097
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
At June 30,2014 Loans:
Ending balance		$	274,500		$	89,515		$	10,550		$	105,868		$	7,464		$	15,043		$	—		$	502,940
Ending balance ALLR			(1,630	)		(1,669	)		(40	)		(345	)		(15	)		(111	)		(1,287	)		(5,097	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net loans		$	272,870		$	87,846		$	10,510		$	105,523		$	7,449		$	14,932		$	(1,287	)	$	497,843
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance ALLR:
Individually evaluated		$	189		$	1,110		$	—		$	118		$	—		$	21		$	—		$	1,438
Collectively evaluated			1,441			559			40			227			15			90			1,287			3,659
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	1,630		$	1,669		$	40		$	345		$	15		$	111		$	1,287		$	5,097
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance Loans:
Individually evaluated		$	609		$	1,744		$	—		$	622		$	—		$	64		$	—		$	3,039
Collectively evaluated			273,891			87,771			10,550			105,246			7,464			14,979			—			499,901
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	274,500		$	89,515		$	10,550		$	105,868		$	7,464		$	15,043		$	—		$	502,940
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

Impaired loans, by definition, are individually evaluated.




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

        A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2013 is as follows (dollars in thousands):

		Commercial real estate			Commercial, financial and agricultural			Commercial construction			One to four family residential real estate			Consumer construction			Consumer			Unallocated			Total
Allowance for loan loss reserve:
Beginning balance ALLR		$	3,267		$	692		$	125		$	980		$	—		$	—		$	154			5,218
Charge-offs			(1,539	)		(632	)		—			(141	)		—			(120	)		—			(2,432	)
Recoveries			92			56			2			26			2			22			—			200
Provision			29			1,262			(47	)		(349	)		23			246			511			1,675
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance ALLR		$	1,849		$	1,378		$	80		$	516		$	25		$	148		$	665		$	4,661
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Loans:
Ending balance		$	268,809		$	79,655		$	10,904		$	103,768		$	6,895		$	13,801		$	—		$	483,832
Ending balance ALLR			(1,849	)		(1,378	)		(80	)		(516	)		(25	)		(148	)		(665	)		(4,661	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net loans		$	266,960		$	78,277		$	10,824		$	103,252		$	6,870		$	13,653		$	(665	)	$	479,171
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance ALLR:
Individually evaluated		$	99		$	891		$	—		$	103		$	—		$	18		$	—		$	1,111
Collectively evaluated			1,750			487			80			413			25			130			665			3,550
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	1,849		$	1,378		$	80		$	516		$	25		$	148		$	665		$	4,661
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance Loans:
Individually evaluated		$	649		$	1,830		$	—		$	385		$	—		$	42		$	—		$	2,906
Collectively evaluated			268,160			77,825			10,904			103,383			6,895			13,759			—			480,926
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	268,809		$	79,655		$	10,904		$	103,768		$	6,895		$	13,801		$	—		$	483,832
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




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MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

        A breakdown of the allowance for loan losses and recorded balances in loans at June 30, 2013 is as follows (dollars in thousands):

		Commercial real estate			Commercial, financial and agricultural			Commercial construction			One to four family residential real estate			Consumer construction			Consumer			Unallocated			Total
Three Months Ended June 30, 2013 Allowance for loan loss reserve:
Beginning balance ALLR		$	2,964		$	847		$	118		$	990		$	—		$	13		$	105		$	5,037
Charge-offs			(21	)		(4	)		—			(6	)		—			(5	)		—			(36	)
Recoveries			29			30			1			6			—			10			—			76
Provision			(311	)		217			(22	)		(113	)		—			(5	)		334			100
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance ALLR		$	2,661		$	1,090		$	97		$	877		$	—		$	13		$	439		$	5,177
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Six Months Ended June 30, 2013 Allowance for loan loss reserve:
Beginning balance ALLR		$	3,267		$	692		$	125		$	980		$	—		$	—		$	154		$	5,218
Charge-offs			(456	)		(76	)		—			(13	)		—			(71	)		—			(616	)
Recoveries			41			33			2			11			—			13			—			100
Provision			(191	)		441			(30	)		(101	)		—			71			285			475
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance ALLR		$	2,661		$	1,090		$	97		$	877		$	—		$	13		$	439		$	5,177
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
At June 30,2013 Loans:
Ending balance		$	243,363		$	84,145		$	16,053		$	94,254		$	4,305		$	13,435		$	—		$	455,555
Ending balance ALLR			(2,661	)		(1,090	)		(97	)		(877	)		—			(13	)		(439	)		(5,177	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net loans		$	240,702		$	83,055		$	15,956		$	93,377		$	4,305		$	13,422		$	(439	)	$	450,378
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance ALLR:
Individually evaluated		$	1,396		$	643		$	8		$	148		$	—		$	13		$	—		$	2,208
Collectively evaluated			1,265			447			89			729			—			—			439			2,969
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	2,661		$	1,090		$	97		$	877		$	—		$	13		$	439		$	5,177
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance Loans:
Individually evaluated		$	14,499		$	6,668		$	917		$	640		$	—		$	22		$	—		$	22,746
Collectively evaluated			228,864			77,477			15,136			93,614			4,305			13,413			—			432,809
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	243,363		$	84,145		$	16,053		$	94,254		$	4,305		$	13,435		$	—		$	455,555
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

Impaired loans, by definition, are individually evaluated.

        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.




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

Strong (1)

        Borrower is not vulnerable to sudden economic or technological changes. They have "strong" balance sheets and are within an industry that is very typical for our markets or type of lending culture. Borrowers also have "strong" financial and cash flow performance and excellent collateral (low loan to value or readily available to liquidate collateral) in conjunction with an impeccable repayment history.

Good (2)

        Borrower shows limited vulnerability to sudden economic change. These borrowers have "above average" financial and cash flow performance and a very good repayment history. The balance sheet of the company is also very good as compared to peer and the company is in an industry that is familiar to our markets or our type of lending. The collateral securing the deal is also very good in terms of its type, loan to value, etc.

Average (3)

        Borrower is typically a well-seasoned business, however may be susceptible to unfavorable changes in the economy, and could be somewhat affected by seasonal factors. The borrowers within this category exhibit financial and cash flow performance that appear "average" to "slightly above average" when compared to peer standards and they show an adequate payment history. Collateral securing this type of credit is good, exhibiting above average loan to values, etc.

Acceptable/Acceptable Watch (4)

        A borrower within this category exhibits financial and cash flow performance that appear adequate and satisfactory when compared to peer standards and they show a satisfactory payment history. The collateral securing the request is within supervisory limits and overall is acceptable. Borrowers rated acceptable could also be newer businesses that are typically susceptible to unfavorable changes in the economy, and more than likely could be affected by seasonal factors.

Special Mention (5)

        The borrower may have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Examples of this type of credit include a start-up company fully based on projections, a documentation issue that needs to be corrected or a general market condition that the borrower is working through to get corrected.

Substandard (6)

        Substandard loans are classified assets exhibiting 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




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

portion of the loan principal. Loans classified as substandard clearly represent troubled and deteriorating credit situations requiring constant supervision.

Doubtful (7)

        Loans in this category exhibit the same, if not more pronounced weaknesses used to describe the substandard credit. 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.

        Commercial construction loans in the amount of $3.153 million, $2.951 million and $3.394 million for the periods ended June 30, 2014, December 31, 2013 and June 30, 2013, respectively did not receive a specific risk rating. These amounts represent loans made for land development and unimproved land purchases. Below is a breakdown of loans by risk category as of June 30, 2014 (dollars in thousands):

		(1) Excellent			(2) Good			(3) Average			(4) Acceptable/ Acceptable Watch			(5) Sp. Mention			(6) Substandard			(7) Doubtful			Rating Unassigned			Total
Commercial real estate		$	15		$	25,065		$	121,108		$	126,593		$	—		$	1,719		$	—		$	—		$	274,500
Commercial, financial and agricultural			2,107			4,418			31,875			46,320			—			4,795			—			—			89,515
Commercial construction			—			460			2,919			3,616			—			402			—			3,153			10,550
One to four family residential real estate			—			2,329			1,303			4,344			—			—			—			97,892			105,868
Consumer construction			—			—			—			—			—			—			—			7,464			7,464
Consumer			—			—			20			39			—			—			—			14,984			15,043
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total loans		$	2,122		$	32,272		$	157,225		$	180,912		$	—		$	6,916		$	—		$	123,493		$	502,940
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




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MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

        Below is a breakdown of loans by risk category as of December 31, 2013 (dollars in thousands):

		(1) Excellent			(2) Good			(3) Average			(4) Acceptable/ Acceptable Watch			(5) Sp. Mention			(6) Substandard			(7) Doubtful			Rating Unassigned			Total
Commercial real estate		$	1,502		$	23,310		$	116,702		$	125,010		$	—		$	2,285		$	—		$	—		$	268,809
Commercial, financial and agricultural			3,741			4,348			27,455			39,070			—			5,041			—			—			79,655
Commercial construction			30			479			2,702			4,340			—			402			—			2,951			10,904
One-to-four family residential real estate			251			3,074			1,275			4,482			—			710			—			93,976			103,768
Consumer construction			—			—			—			—			—			—			—			6,895			6,895
Consumer			10			—			37			43			—			30			—			13,681			13,801
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total loans		$	5,534		$	31,211		$	148,171		$	172,945		$	—		$	8,468		$	—		$	117,503		$	483,832
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        Below is a breakdown of loans by risk category as of June 30, 2013 (dollars in thousands):

		(1) Excellent			(2) Good			(3) Average			(4) Acceptable/ Acceptable Watch			(5) Sp. Mention			(6) Substandard			(7) Doubtful			Rating Unassigned			Total
Commercial real estate		$	2,294		$	22,319		$	86,404		$	111,180		$	16,446		$	4,531		$	189		$	—		$	243,363
Commercial, financial and agricultural			4,997			5,253			21,780			46,214			4,176			1,725			—			—			84,145
Commercial construction			—			723			5,119			5,660			755			402			—			3,394			16,053
One to four family residential real estate			—			1,954			2,465			4,565			—			—			—			85,270			94,254
Consumer construction			—			—			—			—			—			—			—			4,305			4,305
Consumer			—			109			36			470			—			—			—			12,820			13,435
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total loans		$	7,291		$	30,358		$	115,804		$	168,089		$	21,377		$	6,658		$	189		$	105,789		$	455,555
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

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. There was no interest income recorded during impairment for the three and six months ended June 30, 2014. Interest income that would have been recognized during these periods was $.029 million and $.053 million, respectively. For the three and six months ended June 30, 2013, the amounts that would have been recognized were $.059 million and $.117 million, respectively.

        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




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

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.

        The following is a summary of impaired loans and their effect on interest income (dollars in thousands):

																	Three Months Ended						Six Months Ended
June 30, 2014		Nonaccrual Basis			Accrual Basis			QTD Average Investment			YTD Average Investment			Related Valuation Reserve			Interest Income Recognized During Impairment			Interest Income on Accrual Basis			Interest Income Recognized During Impairment			Interest Income on Accrual Basis
With no valuation reserve:
Commercial real estate		$	278		$	—		$	279		$	304		$	—		$	—		$	4		$	—		$	8
Commercial, financial and agricultural			82			—			97			140			—			—			2			—			4
Commercial construction			—			—			—			—			—			—			—			—			—
One to four family residential real estate			37			—			38			97			—			—			—			—			3
Consumer construction			—			—			—			—			—			—			—			—			—
Consumer			—			—			3			6			—			—			—			—			—
With a valuation reserve:
Commercial real estate		$	176		$	—		$	176		$	176		$	104		$	—		$	3		$	—		$	7
Commercial, financial and agricultural			1,726			—			1,157			918			1,110			—			13			—			20
Commercial construction			—			—			—			—			—			—			—			—			—
One to four family residential real estate			346			—			279			299			100			—			7			—			11
Consumer construction			—			—			—			—			—			—			—			—			—
Consumer			7			—			7			8			1			—			—			—			—
Total:
Commercial real estate		$	454		$	—		$	455		$	480		$	104		$	—		$	7		$	—		$	15
Commercial, financial and agricultural			1,808			—			1,254			1,058			1,110			—			15			—			24
Commercial construction			—			—			—			—			—			—			—			—			—
One to four family residential real estate			383			—			317			396			100			—			7			—			14
Consumer construction			—			—			—			—			—			—			—			—			—
Consumer			7			—			10			14			1			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	2,652		$	—		$	2,036		$	1,948		$	1,315		$	—		$	29		$	—		$	53
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)




For the Year Ended: December 31, 2013		Nonaccrual Basis			Accrual Basis			Average Investment			Related Valuation Reserve			Interest Income Recognized During Impairment			Interest Income on Accrual Basis
With no valuation reserve:
Commercial real estate		$	513		$	—		$	3,045		$	—		$	—		$	153
Commercial, financial and agricultural			59			—			505			—			—			13
Commercial construction			—			—			626			—			—			3
One to four family residential real estate			361			—			625			—			—			16
Consumer construction			—			—			—			—			—			—
Consumer			—			—			2			—			—			—
With a valuation reserve:
Commercial real estate		$	59		$	—		$	71		$	14		$	—		$	5
Commercial, financial and agricultural			752			—			834			265			—			18
Commercial construction			—			—			—			—			—			—
One to four family residential real estate			250			—			261			78			—			20
Consumer construction			—			—			—			—			—			—
Consumer			30			—			30			13			—			—
Total:
Commercial real estate		$	572		$	—		$	3,116		$	14		$	—		$	158
Commercial, financial and agricultural			811			—			1,339			265			—			31
Commercial construction			—			—			626			—			—			3
One to four family residential real estate			611			—			886			78			—			36
Consumer construction			—			—			—			—			—			—
Consumer			30			—			32			13			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	2,024		$	—		$	5,999		$	370		$	—		$	228
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)




																	Three Months Ended						Six Months Ended
June 30, 2013		Nonaccrual Basis			Accrual Basis			QTD Average Investment			YTD Average Investment			Related Valuation Reserve			Interest Income Recognized During Impairment			Interest Income on Accrual Basis			Interest Income Recognized During Impairment			Interest Income on Accrual Basis
With no valuation reserve:
Commercial real estate		$	728		$	—		$	733		$	797		$	—		$	—		$	14		$	—		$	26
Commercial, financial and agricultural			176			—			206			248			—			—			3			—			6
Commercial construction			—			—			—			275			—			—			—			—			3
One to four family residential real estate			94			—			133			165			—			—			3			—			5
Consumer construction			—			—			—			—			—			—			—			—			—
Consumer			9			—			2			1			—			—			—			—			—
With a valuation reserve:
Commercial real estate		$	2,329		$	—		$	2,308		$	2,298		$	1,240		$	—		$	30		$	—		$	60
Commercial, financial and agricultural			341			—			267			199			106			—			4			—			6
Commercial construction			—			—			—			—			—			—			—			—			—
One to four family residential real estate			306			—			303			289			126			—			5			—			11
Consumer construction			—			—			—			—			—			—			—			—			—
Consumer			—			—			—			—			—			—			—			—			—
Total:
Commercial real estate		$	3,057		$	—		$	3,041		$	3,095		$	1,240		$	—		$	44		$	—		$	86
Commercial, financial and agricultural			517			—			473			447			106			—			7			—			12
Commercial construction			—			—			—			275			—			—			—			—			3
One to four family residential real estate			400			—			436			454			126			—			8			—			16
Consumer construction			—			—			—			—			—			—			—			—			—
Consumer			9			—			2			1			—			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	3,983		$	—		$	3,952		$	4,272		$	1,472		$	—		$	59		$	—		$	117
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        A summary of past due loans at June 30, 2014, December 31, 2013 and June 30, 2013 is as follows (dollars in thousands):

		June 30, 2014									December 31, 2013									June 30, 2013
		30 - 89 days Past Due (accruing)			90+ days Past Due/ Nonaccrual			Total			30 - 89 days Past Due (accruing)			90+ days Past Due/ Nonaccrual			Total			30 - 89 days Past Due (accruing)			90+ days Past Due/ Nonaccrual			Total
Commercial real estate		$	602		$	454		$	1,056		$	—		$	572		$	572		$	146		$	3,057		$	3,203
Commercial, financial and agricultural			5			1,808			1,813			4			811			815			92			517			609
Commercial construction			—			—			—			20			—			20			—			—			—
One to four family residential real estate			141			383			524			201			611			812			100			400			500
Consumer construction			—			—			—			—			—			—			—			—			—
Consumer			57			7			64			14			30			44			18			9			27
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total past due loans		$	805		$	2,652		$	3,457		$	239		$	2,024		$	2,263		$	356		$	3,983		$	4,339
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

        A roll-forward of nonperforming loan activity for the three months ended June 30, 2014 (dollars in thousands):

		For the Three Months Ended June 30, 2014
		Commercial Real Estate			Commercial, Financial and Agricultural			Commercial Construction			One to four family residential real estate			Consumer Construction			Consumer			Total
NONACCRUAL
Beginning balance		$	455		$	730		$	—		$	299		$	—		$	7		$	1,491
Principal payments			(3	)		(63	)		—			(14	)		—			—			(80	)
Charge-offs			—			—			—			—			—			(6	)		(6	)
Advances			—			—			—			—			—			—			—
Class transfers			—			—			—			—			—			—			—
Transfers to OREO			—			—			—			—			—			—			—
Transfers to accruing			—			—			—			—			—			—			—
Transfers from accruing			—			1,139			—			89			—			6			1,234
Other			2			2			—			9			—			—			13
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance		$	454		$	1,808		$	—		$	383		$	—		$	7		$	2,652
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        A roll-forward of nonperforming loan activity for the three months ended June 30, 2013 (dollars in thousands):

		For the Three Months Ended June 30, 2013
		Commercial Real Estate			Commercial, Financial and Agricultural			Commercial Construction			One to four family residential real estate			Consumer Construction			Consumer			Total
NONACCRUAL
Beginning balance		$	2,963		$	424		$	—		$	446		$	—		$	—		$	3,833
Principal payments			(31	)		(66	)		—			(16	)		—			—			(113	)
Charge-offs			—			—			—			(6	)		—			(4	)		(10	)
Advances			—			—			—			—			—			—			—
Class transfers			—			—			—			—			—			—			—
Transfers to OREO			—			—			—			(38	)		—			—			(38	)
Transfers to accruing			—			—			—			—			—			—			—
Transfers from accruing			126			179			—			14			—			13			332
Other			(1	)		(20	)		—			—			—			—			(21	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance		$	3,057		$	517		$	—		$	400		$	—		$	9		$	3,983
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

        A roll-forward of nonperforming loan activity for the first six months ended June 30, 2014 (dollars in thousands):

		For the Six Months Ended June 30, 2014
		Commercial Real Estate			Commercial, Financial and Agricultural			Commercial Construction			One to four family residential real estate			Consumer Construction			Consumer			Total
NONACCRUAL
Beginning balance		$	572		$	811		$	—		$	611		$	—		$	30		$	2,024
Principal payments			(102	)		(81	)		—			(22	)		—			(4	)		(209	)
Charge-offs			—			(53	)		—			(3	)		—			(25	)		(81	)
Advances			—			—			—			—			—			—			—
Class transfers			—			—			—			—			—			—			—
Transfers to OREO			(26	)		—			—			(256	)		—			—			(282	)
Transfers to accruing			—			(10	)		—			(127	)		—			—			(137	)
Transfers from accruing			—			1,139			—			171			—			6			1,316
Other			10			2			—			9			—			—			21
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance		$	454		$	1,808		$	—		$	383		$	—		$	7		$	2,652
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        A roll-forward of nonperforming loan activity for the first six months ended June 30, 2013 (dollars in thousands):

		For the Six Months Ended June 30, 2013
		Commercial Real Estate			Commercial, Financial and Agricultural			Commercial Construction			One to four family residential real estate			Consumer Construction			Consumer			Total
NONACCRUAL
Beginning balance		$	3,071		$	436		$	675		$	505		$	—		$	—		$	4,687
Principal payments			(148	)		(68	)		(100	)		(65	)		—			—			(381	)
Charge-offs			(329	)		(72	)		—			(13	)		—			(4	)		(418	)
Advances			—			—			—			—			—			—			—
Class transfers			—			—			—			—			—			—			—
Transfers to OREO			—			—			(580	)		(107	)		—			—			(687	)
Transfers to accruing			—			—			—			—			—			—			—
Transfers from accruing			443			241			—			76			—			13			773
Other			20			(20	)		5			4			—			—			9
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance		$	3,057		$	517		$	—		$	400		$	—		$	9		$	3,983
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

        A roll-forward of nonperforming loan activity during the year ended December 31, 2013 (dollars in thousands):

		Commercial Real Estate			Commercial, Financial and Agricultural			Commercial Construction			One to four family residential real estate			Consumer Construction			Consumer			Total
NONACCRUAL
Beginning balance		$	3,071		$	436		$	675		$	505		$	—		$	—		$	4,687
Principal payments			(1,478	)		(319	)		(100	)		(88	)		—			(2	)		(1,987	)
Charge-offs			(1,304	)		(616	)		—			(141	)		—			(4	)		(2,065	)
Advances			—			—			—			—			—			—			—
Class transfers			—			—			—			—			—			—			—
Transfers to OREO			(208	)		(37	)		(580	)		(107	)		—			—			(932	)
Transfers to accruing			—			—			—			—			—			—			—
Transfers from accruing			443			1,346			—			434			—			36			2,259
Other			48			1			5			8			—			—			62
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending balance		$	572		$	811		$	—		$	611		$	—		$	30		$	2,024
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

Troubled Debt Restructuring

        Troubled debt restructurings ("TDR") are determined on a loan-by-loan basis. Generally restructurings are related to interest rate reductions, loan term extensions and short term payment forbearance as means to maximize collectability of troubled credits. If a portion of the TDR loan is uncollectible (including forgiveness of principal), the uncollectible amount will be charged off against the allowance at the time of the restructuring. In general, a borrower must make at least six consecutive timely payments before the Corporation would consider a return of a restructured loan to accruing status in accordance with FDIC guidelines regarding restoration of credits to accrual status.

        The Corporation has, in accordance with generally accepted accounting principles and per recently enacted accounting standard updates, evaluated all loan modifications to determine the fair value impact of the underlying asset. The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan's original rate, or for collateral dependent loans, to the fair value of the collateral.




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

        A summary of troubled debt restructurings for the periods indicated is as follows (dollars in thousands):

		June 30, 2014						December 31, 2013						June 30, 2013
		Number of Modifications			Recorded Investment			Number of Modifications			Recorded Investment			Number of Modifications			Recorded Investment
Commercial real estate			—		$	—			—		$	—			—		$	—
Commercial, financial and agricultural			—			—			1			528			—			—
Commercial construction			—			—			—			—			—			—
One to four family residential real estate			1			89			—			—			—			—
Consumer construction			—			—			—			—			—			—
Consumer			—			—			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total troubled debt restructurings			1		$	89			1		$	528			—		$	—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

        A roll-forward of troubled debt restructuring during the three months ended June 30, 2014 (dollars in thousands):

		Commercial Real Estate			Commercial, Financial and Agricultural			Commercial Construction			One to four family residential real estate			Consumer and Consumer Construction			Total
ACCRUING
Beginning balance		$	1,009		$	1,186		$	858		$	187		$	—		$	3,240
Principal payments			(2	)		—			—			—			—			(2	)
Charge-offs			—			—			—			—			—			—
Advances			—			—			—			—			—			—
New restructured			—			—			—			—			—			—
Transferred out of TDR			—			—			—			—			—			—
Transfers to nonaccrual			—			—			—			(89	)		—			(89	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	1,007		$	1,186		$	858		$	98		$	—		$	3,149
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
NONACCRUAL
Beginning balance		$	—		$	508		$	—		$	—		$	—		$	508
Principal payments			—			—			—			—			—			—
Charge-offs			—			—			—			—			—			—
Advances			—			—			—			—			—			—
New restructured			—			—			—			—			—			—
Transfers to foreclosed properties			—			—			—			—			—			—
Transfers from accruing			—			—			—			89			—			89
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	—		$	508		$	—		$	89		$	—		$	597
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTALS
Beginning balance		$	1,009		$	1,694		$	858		$	187		$	—		$	3,748
Principal payments			(2	)		—			—			—			—			(2	)
Charge-offs			—			—			—			—			—			—
Advances			—			—			—			—			—			—
New restructured			—			—			—			—			—			—
Transfers out of TDRs			—			—			—			—			—			—
Tansfers to nonaccrual			—			—			—			(89	)		—			(89	)
Transfers to foreclosed properties			—			—			—			—			—			—
Transfers from accruing			—			—			—			89			—			89
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	1,007		$	1,694		$	858		$	187		$	—		$	3,746
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

        A roll-forward of troubled debt restructuring during the three months ended June 30, 2013 (dollars in thousands):

		Commercial Real Estate			Commercial, Financial and Agricultural			Commercial Construction			One to four family residential real estate			Consumer and Consumer Construction			Total
ACCRUING
Beginning balance		$	3,588		$	2,174		$	858		$	100		$	—		$	6,720
Principal payments			(25	)		—			—			—			—			(25	)
Charge-offs			—			—			—			—			—			—
Advances			—			—			—			—			—			—
New restructured			—			—			—			—			—			—
Transferred out of TDRs			—			—			—			—			—			—
Transfers to nonaccrual			—			—			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	3,563		$	2,174		$	858		$	100		$	—		$	6,695
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
NONACCRUAL
Beginning balance		$	2,169		$	—		$	—		$	106		$	—		$	2,275
Principal payments			—			—			—			—			—			—
Charge-offs			—			—			—			—			—			—
Advances			—			—			—			—			—			—
New restructured			—			—			—			—			—			—
Transfers to foreclosed properties			—			—			—			—			—			—
Transfers from accruing			—			—			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	2,169		$	—		$	—		$	106		$	—		$	2,275
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTALS
Beginning balance		$	5,757		$	2,174		$	858		$	206		$	—		$	8,995
Principal payments			(25	)		—			—			—			—			(25	)
Charge-offs			—			—			—			—			—			—
Advances			—			—			—			—			—			—
New restructured			—			—			—			—			—			—
Transfers out of TDRs			—			—			—			—			—			—
Tansfers to nonaccrual			—			—			—			—			—			—
Transfers to foreclosed properties			—			—			—			—			—			—
Transfers from accruing			—			—			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	5,732		$	2,174		$	858		$	206		$	—		$	8,970
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

        A roll-forward of troubled debt restructuring during the six months ended June 30, 2014 (dollars in thousands):

		Commercial Real Estate			Commercial, Financial and Agricultural			Commercial Construction			One to four family residential real estate			Consumer and Consumer Construction			Total
ACCRUING
Beginning balance		$	3,520		$	1,186		$	858		$	99		$	—		$	5,663
Principal payments			(2,513	)		—			—			(3	)		—			(2,516	)
Charge-offs			—															—
Advances			—															—
New restructured			—															—
Transferred out of TDRs			—															—
Transfers from accruing			—			—			—			91			—			91
Transfers to nonaccruing			—			—			—			(89	)		—			(89	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	1,007		$	1,186		$	858		$	98		$	—		$	3,149
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
NONACCRUAL
Beginning balance		$	—		$	523		$	—		$	91		$	—		$	614
Principal payments			—			(15	)		—			—			—			(15	)
Charge-offs			—			—			—			—			—			—
Advances			—			—			—			—			—			—
New restructured			—			—			—			—			—			—
Transfers to accruing			—			—			—			(91	)		—			(91	)
Transfers from accruing			—			—			—			89			—			89
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	—		$	508		$	—		$	89		$	—		$	597
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTALS
Beginning balance		$	3,520		$	1,709		$	858		$	190		$	—		$	6,277
Principal payments			(2,513	)		(15	)		—			(3	)		—			(2,531	)
Charge-offs			—			—			—			—			—			—
Advances			—			—			—			—			—			—
New restructured			—			—			—			—			—			—
Transfers out of TDR			—			—			—			—			—			—
Transfers to nonaccrual			—			—			—			(89	)		—			(89	)
Transfers to accruing			—			—			—			89			—			89
Transfer from accruing			—			—			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	1,007		$	1,694		$	858		$	187		$	—		$	3,746
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

        A roll-forward of troubled debt restructuring during the six months ended June 30, 2013 (dollars in thousands):

		Commercial Real Estate			Commercial, Financial and Agricultural			Commercial Construction			One to four family residential real estate			Consumer and Consumer Construction			Total
ACCRUING
Beginning balance		$	3,611		$	1,221		$	858		$	102		$	—		$	5,792
Principal payments			(48	)		—			—			(2	)		—			(50	)
Charge-offs			—			—			—			—			—			—
Advances			—			—			—			—			—			—
New restructured			—			953			—			—			—			953
Transferred out of TDRs			—			—			—			—			—			—
Transfers to nonaccrual			—			—			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	3,563		$	2,174		$	858		$	100		$	—		$	6,695
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
NONACCRUAL
Beginning balance		$	2,162		$	—		$	—		$	102		$	—		$	2,264
Principal payments			—			—			—			—			—			—
Charge-offs			—			—			—			—			—			—
Advances			—			—			—			—			—			—
New restructured			7			—			—			4			—			11
Transfers to foreclosed properties			—			—			—			—			—			—
Transfers from accruing			—			—			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	2,169		$	—		$	—		$	106		$	—		$	2,275
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTALS
Beginning balance		$	5,773		$	1,221		$	858		$	204		$	—		$	8,056
Principal payments			(48	)		—			—			(2	)		—			(50	)
Charge-offs			—			—			—			—			—			—
Advances			—			—			—			—			—			—
New restructured			7			953			—			4			—			964
Transfers out of TDRs			—			—			—			—			—			—
Transfers to nonaccrual			—			—			—			—			—			—
Transfers to foreclosed properties			—			—			—			—			—			—
Transfers from accruing			—			—			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	5,732		$	2,174		$	858		$	206		$	—		$	8,970
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

        A roll-forward of troubled debt restructuring during the year ended December 31, 2013 (dollars in thousands):

		Commercial Real Estate			Commercial, Financial and Agricultural			Commercial Construction			One to four family residential real estate			Consumer and Consumer Construction			Total
ACCRUING
Beginning balance		$	3,611		$	1,221		$	858		$	102		$	—		$	5,792
Principal payments			(91	)		(460	)					(3	)		—			(554	)
Charge-offs			—			—						—			—			—
Advances			—			—						—			—			—
New restructured			—			953						—			—			953
Transferred out of TDR			—			—						—			—			—
Transfers to nonaccrual			—			(528	)					—			—			(528	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	3,520		$	1,186		$	858		$	99		$	—		$	5,663
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
NONACCRUAL
Beginning balance		$	2,162		$	—		$	—		$	102		$	—		$	2,264
Principal payments			(1,376	)		(5	)		—			(15	)		—			(1,396	)
Charge-offs			(793	)		—			—			—			—			(793	)
Advances			—			—			—			—			—			—
New restructured			7			528			—			4			—			539
Transfers to foreclosed properties			—			—			—			—			—			—
Transfers from accruing			—			—			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	—		$	523		$	—		$	91		$	—		$	614
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTALS
Beginning balance		$	5,773		$	1,221		$	858		$	204		$	—		$	8,056
Principal payments			(1,467	)		(465	)		—			(18	)		—			(1,950	)
Charge-offs			(793	)		—			—			—			—			(793	)
Advances			—			—			—			—			—			—
New restructured			7			1,481			—			4			—			1,492
Transfers out of TDRs			—			—			—			—			—			—
Tansfers to nonaccrual			—			(528	)		—			—			—			(528	)
Transfers to foreclosed properties			—			—			—			—			—			—
Transfers from accruing			—			—			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	3,520		$	1,709		$	858		$	190		$	—		$	6,277
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. LOANS (Continued)

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):

		June 30, 2014			December 31, 2013			June 30, 2013
Loans outstanding, beginning of period		$	9,043		$	11,297		$	11,297
New loans			—			496			496
Net activity on revolving lines of credit			1,178			(266	)		(25	)
Principal payments			(1,523	)		(2,484	)		(1,298	)
​	​	​	​	​	​	​	​	​	​	​
Loans outstanding, end of period		$	8,698		$	9,043		$	10,470
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

        There were no loans to related parties classified substandard as of June 30, 2014, December 31, 2013 or June 30, 2013. In addition to the outstanding balances above, there were unfunded commitments of $.575 million to related parties at June 30, 2014.

6. MORTGAGE SERVICING RIGHTS

        Mortgage servicing rights ("MSRs") are recorded when loans are sold in the secondary market with servicing retained. As of June 30, 2014, the Corporation had obligations to service approximately $138 million of residential first mortgage loans. The valuation is based upon the net present value of the projected revenues over the expected life of the loans being serviced, as reduced by estimated internal costs to service these loans. The fair value of the capitalized servicing rights approximates the carrying value. The key economic assumptions used in determining the fair value of the mortgage servicing rights include an annual constant prepayment speed of 10.13% and a discount rate of 8.16% for June 30, 2014.

        The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances (dollars in thousands):

		Six Months Ended June 30, 2014			Year Ended December 31, 2013			Six Months Ended June 30, 2013
Balance at beginning of period		$	1,129		$	638		$	638
Additions from loans sold with servicing retained			75			675			225
Amortization			(143	)		(184	)		(80	)
​	​	​	​	​	​	​	​	​	​	​
Balance at end of period		$	1,061		$	1,129		$	783
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. BORROWINGS

        Borrowings consist of the following at June 30, 2014, December 31, 2013 and June 30, 2013 (dollars in thousands):

		June 30, 2014			December 31, 2013			June 30, 2013
Federal Home Loan Bank fixed rate advances at June 30, 2014 with a weighted average rate of 1.82% maturing in 2014, 2016 and 2018		$	35,000		$	35,000		$	35,000
Correspondent bank line of credit—holding company			500			2,000			—
Bank line of credit—wholly-owned asset based lending subsidiary			2,835			—			—
Correspondent bank term note, current floor rate of 4%, maturing March 22, 2017			2,900			—			—
USDA Rural Development, fixed-rate note payable, maturing August 24, 2024, interest payable at 1%			852			852			925
​	​	​	​	​	​	​	​	​	​	​
		$	42,087		$	37,852		$	35,925
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

        The Federal Home Loan Bank borrowings are collateralized at June 30, 2014 by the following: a collateral agreement on the Corporation's one to four family residential real estate loans with a book value of approximately $44.140 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $4.378 million and $4.530 million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $3.060 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 June 30, 2014.

        The USDA Rural Development borrowing is collateralized by loans totaling $.125 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 $.798 million, and guaranteed by the Corporation.

        The Corporation currently has two banking borrowing relationships. The first relationship consists of a line of credit and a term note. The line of credit bears interest at 90-day LIBOR plus 2.75%, with a floor rate of 4.00% and has an initial term that expires on March 22, 2015. The term note bears the same interest and matures on March 22, 2017. The second borrowing relationship consists of a $10 million revolving line of credit, which can be increased to $25 million upon request, used to support asset based lending activities at a wholly owned subsidiary that currently bears interest at 90-day LIBOR plus 2.75% and has an initial term that expires on September 10, 2016.




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. STOCK COMPENSATION PLANS

        On May 22, 2012, the Company's shareholders approved the Mackinac Financial Corporation 2012 Incentive Compensation Plan, under which current and prospective employees, non-employee directors and consultants may be awarded incentive stock options, non-statutory stock options, shares of restricted stock units ("RSUs"), or stock appreciation rights. The aggregate number of shares of the Company's common stock issuable under the plan is 575,000, which included 392,152 option shares outstanding at that time.

        The Corporation, in August 2012 and March 2014, granted Restricted Stock Units ("RSUs") to members of the Board of Directors and Management. In August 2012, 148,500 RSUs were granted at a market value of $7.91 and will vest equally over a four year term. In exchange for the grant of the August 2012 RSUs various previously issued stock option awards were surrendered. In March 2014, 52,774 RSUs were granted at a market value of $12.95, also vesting equally over a four year term. The RSUs were awarded at no cost to the employee. Compensation cost to be recognized over the four-year vesting periods, is $1.175 million and $.683 million, respectively. On August 31, 2013, the Corporation issued 37,125 shares of its common stock for vested RSUs. As of June 30, 2014, RSUs totaling 164,149 were unvested and unrecognized compensation expense was $1.270 million.

        A summary of stock option transactions for the six months ended June 30, 2014 and 2013, and the year ended December 31, 2013, is as follows:

		June 30, 2014			December 31, 2013			June 30, 2013
Outstanding shares at beginning of year			237,152			242,152			242,152
Granted during the period			—			—			—
Exercised during the period			—			—			—
Expired / forfeited during the period			—			(5,000	)		—
​	​	​	​	​	​	​	​	​	​	​
Outstanding shares at end of period			237,152			237,152			242,152
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Exercisable shares at end of period			124,861			124,861			126,361
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Weighted average exercise price per share at end of period		$	9.80		$	9.80		$	9.88
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
Shares available for grant at end of period			—			—			—
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	��	​	​	​	​	​

        There were no options granted in the first six months of 2014 and 2013.

        Following is a summary of the options outstanding and exercisable at June 30, 2014:

					Number
		Exercise Price			Outstanding			Exercisable			Unvested Options			Weighted Average Remaining Contractual Life-Years
		$	9.75			217,152			120,861			96,291			.48
		$	10.65			10,000			2,000			8,000			1.04
		$	12.00			10,000			2,000			8,000			2.46
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
						237,152			124,861			112,291			.59
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. STOCK COMPENSATION 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 was expensed based upon the vesting period without consideration given to market value appreciation. There are no future compensation expenses related to existing option programs.

9. INCOME TAXES

        A valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred tax asset will not be realized. The Corporation, as of June 30, 2014 had a net operating loss and tax credit carryforwards for tax purposes of approximately $17.2 million, and $2.4 million, respectively. 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 $10.3 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 $.476 million. These limitations for use were established in conjunction with the recapitalization of the Corporation in December 2004.

        The Corporation has reported deferred tax assets of $9.097 million at June 30, 2014, which is net of a valuation allowance of $.760 million. Management evaluated the deferred tax valuation allowance as of June 30, 2014 and determined that no adjustment to the valuation was warranted. The remaining valuation allowance pertains to the existing tax credit carryovers, which will only be utilized after all net operating loss carryforwards. Since a portion of these tax credits may expire before that occurs, a valuation allowance for these has been established. The Corporation will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted.

10. FAIR VALUE MEASUREMENTS

        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 and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

        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.




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. FAIR VALUE MEASUREMENTS (Continued)

        The methodology in determining fair value of nonaccrual loans is to average them into the blended interest rate at 0% interest. This has the effect of decreasing the carrying amount below the risk-free rate amount and, therefore, discounts the estimated fair value.

        Impaired loans are measured at the estimated fair value of the expected future cash flows at the loan's effective interest rate or the fair value of the collateral for loans which are collateral dependent. Therefore, the carrying values of impaired loans approximate the estimated fair values for these assets.

        Deposits—The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits and savings, is equal to the amount payable on demand at the reporting date. The fair value of time deposits is based on the discounted value of contractual cash flows applying interest rates currently being offered on similar time deposits.

        Borrowings—Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. The fair value of borrowed funds due on demand is the amount payable at the reporting date.

        Accrued interest—The carrying amount of accrued interest approximates fair value.

        Off-balance-sheet instruments—The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the counterparties. Since the differences in the current fees and those reflected to the off-balance-sheet instruments at year-end are immaterial, no amounts for fair value are presented.

        The following table presents information for financial instruments at June 30, 2014, December 31, 2013 and June 30, 2013 (dollars in thousands):

				June 30, 2014						December 31, 2013						June 30, 2013
		Level in Fair Value Hierarchy		Carrying Amount			Estimated Fair Value			Carrying Amount			Estimated Fair Value			Carrying Amount			Estimated Fair Value
Financial assets:
Cash and cash equivalents		Level 1		$	20,746		$	20,746		$	18,219		$	18,219		$	26,219		$	26,219
Interest-bearing deposits		Level 2			235			235			10			10			10			10
Securities available for sale		Level 2			47,374			47,374			44,388			44,388			47,307			47,307
Federal Home Loan Bank stock		Level 2			3,060			3,060			3,060			3,060			3,060			3,060
Net loans		Level 2			497,843			499,609			479,171			479,538			450,378			444,638
Accrued interest receivable		Level 3			1,485			1,485			1,351			1,351			1,636			1,636
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total financial assets				$	570,743		$	572,509		$	546,199		$	546,566		$	528,610		$	522,870
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Financial liabilities:
Deposits		Level 2		$	484,016		$	485,230		$	466,299		$	465,431		$	447,907		$	446,438
Borrowings		Level 2			42,087			42,699			37,852			37,487			35,925			35,621
Accrued interest payable		Level 3			186			186			182			182			229			229
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total financial liabilties				$	526,289		$	528,115		$	504,333		$	503,100		$	484,061		$	482,288
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. FAIR VALUE MEASUREMENTS (Continued)

        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.

        The following is information about the Corporation's assets and liabilities measured at fair value on a recurring basis at June 30, 2014, and the valuation techniques used by the Corporation to determine those fair values.

Level 1:    In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access.

Level 2:    Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3:    Level 3 inputs are unobservable inputs, including inputs available in situations where there is little, if any, market activity for the related asset or liability.

        The fair value of all investment securities at June 30, 2014 and June 30, 2013 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 4 Investment Securities."

        The Corporation had no Level 3 assets or liabilities on a recurring basis as of June 30, 2014, December 31, 2013 or June 30, 2013.

        In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Corporation's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

        The 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




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MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. FAIR VALUE MEASUREMENTS (Continued)

Corporation has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

		Assets Measured at Fair Value on a Nonrecurring Basis at June 30, 2014
(dollars in thousands)		Balance at June 30, 2014			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Losses for Three Months Ended June 30, 2014			Total Losses for Six Months Ended June 30, 2014
Assets
Impaired loans		$	2,652		$	—		$	—		$	2,652		$	22		$	430
Other real estate owned			1,947			—			—			1,947			14			14
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
														$	36		$	444
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




		Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2013
(dollars in thousands)		Balance at December 31, 2013			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Losses for Year Ended December 31, 2013
Assets
Impaired loans		$	2,024		$	—		$	—		$	2,024		$	2,075
Other real estate owned			1,884			—			—			1,884			265
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
														$	2,340
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




		Assets Measured at Fair Value on a Nonrecurring Basis at June 30, 2013
(dollars in thousands)		Balance at June 30, 2013			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Losses for Three Months Ended June 30, 2013			Total Losses for Six Months Ended June 30, 2013
Assets
Impaired loans		$	3,983		$	—		$	—		$	3,983		$	10		$	418
Other real estate owned			2,481			—			—			2,481			87			89
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
														$	97		$	507
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        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).




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MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

11. SHAREHOLDERS' EQUITY

        In August 2012 the Corporation consummated the previously announced $7.000 million rights offering and the investment by Steinhardt Capital Investors, LLLP ("SCI") by issuing 2,140,123 shares of common stock for net proceeds of $11.506 million. Also, in August 2012, the Corporation exited the TARP Capital Purchase Program ("CPP") when the Corporation's 11,000 Series A Preferred Shares, issued in April, 2009 to the U.S. Treasury, were publically offered and sold. The Corporation repurchased the 379,310 of Common Stock Warrants issued to the U.S. Treasury under the CPP in December, 2012 for $1.3 million. During 2013, the Corporation redeemed all of the outstanding Series A Preferred Shares.

        The Corporation currently has a share repurchase program. The program is conducted under authorizations from time to time by the Board of Directors. The Corporation repurchased 55,594 shares in 2013 and 13,700 shares in the first quarter of 2014. The share repurchases were conducted under Board authorizations made and publically announced of $600,000 on February 27, 2013 and an additional $600,000 on December 17, 2013. Neither of these authorizations has an expiration date.

12. 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 are as follows (dollars in thousands):

		June 30, 2014			December 31, 2013			June 30, 2013
Commitments to extend credit:
Variable rate		$	54,048		$	36,039		$	37,462
Fixed rate			18,604			15,070			19,873
Standby letters of credit—Variable rate			5,742			5,077			3,805
Credit card commitments—Fixed rate			3,234			3,152			3,113
​	​	​	​	​	​	​	​	​	​	​
		$	81,628		$	59,338		$	64,253
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

        Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but




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MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

12. COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued)

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.

Legal Proceedings and Contingencies

        In the normal course of business, the Corporation is involved in various legal proceedings. For expanded discussion on the Corporation's legal proceedings, see Part II, Item 1, "Legal Proceedings" in this report.

Concentration of Credit 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 June 30, 2014 represents $103.598 million, or 27.66%, compared to $95.510 million, or 27.80%, of the commercial loan portfolio on June 30, 2013. 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.

13. SUBSEQUENT EVENT

        On July 18, 2014, the Corporation announced the signing of a definitive agreement to acquire Peninsula Financial Corporation ("Peninsula") for $13.285 million. The purchase price of Peninsula contemplates a special dividend to Peninsula shareholders prior to the consummation that would reduce the acquired equity to $10.5 million. Peninsula is headquartered in Marquette County, Michigan and is the parent of Peninsula Bank with June 30 assets of approximately $132 million and six banking offices. The consummation of this transaction is expected to occur late in the third or early in the fourth quarter of 2014.




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Audited Consolidated Financial Statements

PENINSULA FINANCIAL CORPORATION
AND SUBSIDIARY


December 31, 2013





Table of Contents


Audited Consolidated Financial Statements

PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

December 31, 2013


Report of Independent Auditors		F-83
Consolidated Balance Sheets		F-85
Consolidated Statements of Income		F-86
Consolidated Statements of Comprehensive Income		F-87
Consolidated Statements of Changes in Shareholders' Equity		F-88
Consolidated Statements of Cash Flows		F-89
Notes to Consolidated Financial Statements		F-90




Table of Contents



REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
Peninsula Financial Corporation and Subsidiary
Ishpeming, Michigan

        We have audited the accompanying consolidated financial statements of Peninsula Financial Corporation and Subsidiary (Company), which comprise the balance sheets as of December 31, 2013 and 2012, and the related statements of income, comprehensive income, changes in shareholders' equity, and cash flows for the years then ended, and the related notes to the financial statements.


Management's Responsibility for the Financial Statements


        Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.


Auditor's Responsibility


        Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

        An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

        We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.


Opinion


        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Peninsula Financial Corporation and Subsidiary as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.






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Board of Directors and Shareholders
Peninsula Financial Corporation and Subsidiary


Prior Period Adjustment


        As discussed in Note T to the financial statements, the Company has corrected an error, that was discovered during the current year, by changing from an accounting principle that is not generally accepted to one that is generally accepted. The error resulted in an understatement of the amounts previously reported for deferred tax assets. Accordingly, deferred tax assets, and retained earnings have been restated in the 2012 financial statements now presented. Our opinion is not modified with respect to that matter.



Marquette, Michigan

February 20, 2014




Table of Contentsmortgage servicing rights.

        Significant Concentrations of Credit Risk—Most of the Company's activities are with customers located within the northeastern lower peninsula of Michigan. Note 3 discusses the types of securities in which the Company invests. Note 4 discusses the types of lending in which the Company engages. The Company does not have any significant concentrations to any one industry or customer.


PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

		December 31
		2013			2012
ASSETS
Cash and due from banks		$	14,759,921		$	21,882,579
Investment securities—available for sale			24,275,058			15,083,594
Federal funds sold			2,200,000			6,500,000
Loans			74,999,910			83,789,591
Less allowance for loan losses			(1,492,994	)		(2,008,296	)
​	​	​	​	​	​	​	​
NET LOANS			73,506,916			81,781,295
Federal Reserve Bank and Federal Home Loan Bank stock, at cost			575,600			515,600
Bank premises and equipment, net			3,178,462			1,047,735
Accrued interest receivable and other assets			5,561,522			4,705,354
​	​	​	​	​	​	​	​
TOTAL ASSETS		$	124,057,479		$	131,516,157
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand deposits		$	8,779,293		$	10,644,525
Savings and NOW deposits			63,184,241			60,492,642
Other time deposits			32,861,264			38,921,953
​	​	​	​	​	​	​	​
TOTAL DEPOSITS			104,824,798			110,059,120
Federal Home Loan Bank advances			-0-			1,000,000
Other liabilities			2,112,029			3,216,374
​	​	​	​	​	​	​	​
TOTAL LIABILITIES			106,936,827			114,275,494
SHAREHOLDERS' EQUITY
Common stock—no par value, 400,000 shares authorized, 288,000 issued and outstanding			6,000,000			6,000,000
Retained earnings, restated			11,774,677			11,740,808
Accumulated other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale			(171,791	)		281,156
Actuarial losses on the defined benefit pension plan			(482,234	)		(781,301	)
​	​	​	​	​	​	​	​
TOTAL SHAREHOLDERS' EQUITY			17,120,652			17,240,663
​	​	​	​	​	​	​	​
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	124,057,479		$	131,516,157
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

See notes to consolidated financial statements.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

		Year Ended December 31
		2013			2012
INTEREST INCOME
Interest and fees on loans		$	4,264,174		$	5,212,054
Short-term investments			24,238			10,391
Investment securities:
Taxable			294,278			260,067
Tax-exempt			138,740			163,292
​	​	​	​	​	​	​	​
TOTAL INTEREST INCOME			4,721,430			5,645,804
INTEREST EXPENSE—Interest on deposits and borrowings			501,888			775,458
​	​	​	​	​	​	​	​
NET INTEREST INCOME			4,219,542			4,870,346
Provision for loan losses			580,000			560,000
​	​	​	​	​	​	​	​
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			3,639,542			4,310,346
OTHER INCOME
Service charges, commissions, and fees			568,501			578,948
Net gain on sale of investment securities			34,834			-0-
Other income			191,915			281,651
​	​	​	​	​	​	​	​
			795,250			860,599
​	​	​	​	​	​	​	​
			4,434,792			5,170,945
OTHER EXPENSES
Salaries			1,789,070			1,698,841
Pensions and other employee benefits			519,288			461,377
Occupancy expenses			370,279			316,464
Equipment expense			96,462			42,957
Other operating expenses			1,669,423			1,810,336
​	​	​	​	​	​	​	​
			4,444,522			4,329,975
​	​	​	​	​	​	​	​
INCOME (LOSS) BEFORE INCOME TAXES			(9,730	)		840,970
Income tax expense (benefit)			(259,599	)		212,090
​	​	​	​	​	​	​	​
NET INCOME		$	249,869		$	628,880
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Net income per share of common stock		$	0.87		$	2.18
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

See notes to consolidated financial statements.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

		Year Ended December 31
		2013			2012
NET INCOME		$	249,869		$	628,880
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities:
Unrealized holding gains (losses) on securities			(651,449	)		12,740
Less: reclassification adjustment for gains included in net income			(34,834	)		-0-
Actuarial gains (losses) on the defined benefit pension plan			453,132			(262,888	)
​	​	​	​	​	​	​	​
OTHER COMPREHENSIVE INCOME (LOSS) BEFORE INCOME TAX			(233,151	)		(250,148	)
Income tax benefit (expense) related to items of comprehensive income:
Unrealized holding gains (losses) on securities:
Unrealized holding gains (losses) on securities			221,492			(4,332	)
Less: reclassification adjustment for gains included in net income			11,844			-0-
Actuarial gains (losses) on the defined benefit pension plan			(154,065	)		89,382
​	​	​	​	​	​	​	​
OTHER COMPREHENSIVE INCOME (LOSS) NET OF INCOME TAX			(153,880	)		(165,098	)
​	​	​	​	​	​	​	​
COMPREHENSIVE INCOME		$	95,989		$	463,782
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

See notes to consolidated financial statements.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

		Common Stock									Accumulated Other Comprehensive Income (Loss)
								Retained Earnings
		Shares			Amount									Total
Balance at December 31, 2011, restated			288,000		$	4,000,000		$	13,399,928		$	(335,047	)	$	17,064,881
Net income									628,880						628,880
Dividends paid ($1.00/share)									(288,000	)					(288,000	)
Transfer						2,000,000			(2,000,000	)
Other comprehensive income, net of income tax:
Unrealized gains on securities available for sale												8,408			8,408
Actuarial losses on the defined benefit pension plan												(173,506	)		(173,506	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balance at December 31, 2012			288,000			6,000,000			11,740,808			(500,145	)		17,240,663
Net income									249,869						249,869
Dividends paid ($0.75/share)									(216,000	)					(216,000	)
Other comprehensive income, net of income tax:
Unrealized losses on securities available for sale												(452,947	)		(452,947	)
Actuarial gains on the defined benefit pension plan												299,067			299,067
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Balance at December 31, 2013			288,000		$	6,000,000		$	11,774,677		$	(654,025	)	$	17,120,652
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

See notes to consolidated financial statements.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Year Ended December 31
		2013			2012
NET CASH FLOWS PROVIDED (USED) BY
OPERATING ACTIVITIES
Net income		$	249,869		$	628,880
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			580,000			560,000
Provision for depreciation			121,396			74,333
Loss on disposal of premises and equipment			10,845			544
Amortization of investment securities, net			160,613			125,005
Gain on sale of investment securities			(34,834	)		-0-
Loss on sales or writedowns of foreclosed real estate			3,971			35,824
Gain on sale of loans			(112,384	)		(185,564	)
Gain on sale of credit card loans			(16,956	)		-0-
Originations of loans for resale			(16,643,020	)		(27,020,867	)
Proceeds from sale of loans			16,755,404			27,703,009
Net change in:
Accrued interest receivable			98,077			57,804
Accrued interest payable			(20,524	)		(30,120	)
Other assets			176,185			(143,995	)
Other liabilities			(397,353	)		(130,143	)
​	​	​	​	​	​	​	​
NET CASH PROVIDED BY OPERATING ACTIVITIES			931,289			1,674,710
INVESTING ACTIVITIES
Net decrease in loans			5,750,370			9,902,539
Net change in federal funds position			4,300,000			150,000
Proceeds from sale of foreclosed real estate			271,131			215,045
Proceeds from sale of investment securities			734,842			-0-
Proceeds from maturities of investment securities			4,197,902			7,788,313
Purchases of investment securities			(14,996,270	)		(8,622,702	)
Proceeds from sale of credit card loans			401,368			-0-
Purchases of premises and equipment			(2,262,968	)		(152,356	)
Proceeds from sale of premises and equipment			-0-			2,500
​	​	​	​	​	​	​	​
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES			(1,603,625	)		9,283,339
FINANCING ACTIVITIES
Payments on FHLB advances			(1,000,000	)		(1,000,000	)
Net increase (decrease) in:
Certificates of deposit			(6,060,689	)		(7,949,241	)
Non-interest and interest-bearing demand and savings deposits			826,367			2,656,723
Cash dividends			(216,000	)		(288,000	)
​	​	​	​	​	​	​	​
NET CASH USED BY FINANCING ACTIVITIES			(6,450,322	)		(6,580,518	)
​	​	​	​	​	​	​	​
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(7,122,658	)		4,377,531
Cash and cash equivalents at beginning of year			21,882,579			17,505,048
​	​	​	​	​	​	​	​
CASH AND CASH EQUIVALENTS AT END OF YEAR		$	14,759,921		$	21,882,579
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Loans transferred to foreclosed real estate		$	1,559,597		$	160,969
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

See notes to consolidated financial statements.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        The accounting policies followed by the Company and its subsidiary and the methods of applying these policies, which materially affect the determination of financial position, results of operations and cash flows, are summarized below.

        Nature of Operations:    The Company provides a variety of financial services to individuals and corporate customers through its main office and five branches located in Ishpeming, Negaunee, and Marquette, Michigan. The Company's primary deposit products are interest-bearing checking accounts, savings accounts, and certificates of deposit. Its primary lending products are single-family residential loans and commercial loans to small to medium sized businesses.

        Use of Estimates:    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. The significant estimates incorporated into the Company's consolidated financial statements, which are susceptible to change in the near term, include the allowance for loan losses and the fair value of financial instruments.

        Principles of Consolidation:    The consolidated financial statements include the accounts of Peninsula Financial Corporation (the Company) and Peninsula Bank (Bank), a wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

        Cash and Cash Equivalents:Equivalents—For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption, "Cashinclude cash and balances due from banks."depository institutions, federal funds sold, and interest bearing deposits in other depository institutions which mature within 90 days when purchased. The Company was required to maintain $2.4 million as of December 31, 2017 and $2.0 million as of December 31, 2016 on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements.

        Investment Securities:        Securities    Management determines the appropriate classification of—Debt securities at the time of purchase. Ifthat management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income net of applicable income taxes. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

        Management evaluates securities for other-than-temporary impairment ("OTTI") on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. When evaluating investment securities consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company has the ability atintent to sell the timedebt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer's financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of purchase to hold securities until maturity or onreviews of the issuer's financial condition. The assessment of whether an other-than-temporary decline exists involves a long-term basis, they are classified as investments held to maturityhigh degree of subjectivity and carried at amortized historical cost. Securities to be held for indefinite periods of timejudgment and not intended to be held to maturity or on a long-term basis are classified as available for sale and are carried at fair value. Securities held for indefinite periods of time include securities that management intends to use as part of its asset and liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk, and other factors related to interest rate and resultant prepayment risk changes.

        Interest income includes amortization of purchase premium or accretion of discount. Realized gains and losses on dispositions areis based on the net proceeds less the amortized cost of the security sold, using the specific identification method. Unrealized gains and losses on investment securitiesinformation available for sale are based on the difference between book value and fair value of each security. These gains and losses are credited to accumulated other comprehensive income, whereas realized gains and losses flow through the Company's yearly operations.

        Other securities such as Federal Home Loan Bank and Federal Reserve Bank stock are carriedmanagement at cost.

        Loans:    Loans are stated at the amount of unpaid principal reduced by an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of thea point in time.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARYNote 1—Summary of Significant Accounting Policies (Continued)

        When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. If a security is determined to be other-than-temporarily impaired, but the entity does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.

        Federal Home Loan Bank ("FHLB") Stock—As a requirement to conduct business, FHLB stock is held by the Company and carried at cost. Any sales and purchases of FHLB stock is at par; therefore, cost approximates fair market value.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)        Mortgage Banking Activities

—The Company routinely sells to investors its originated long-term residential fixed-rate mortgage loans. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. As of December 31, 20132017, the Company was servicing mortgage loans sold to others totaling $107.0 million. Net unrealized losses on loans held for sale, if any, are recognized through a valuation allowance by charges to income.

        Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.

        The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding, also known as rate lock commitments. Rate lock commitments on residential mortgage loans that are intended to be sold are considered to be derivatives. Fair value is based on fees currently charged to enter into similar agreements. The fair value of rate lock commitments was insignificant at December 31, 2017 and 2016.

        The Company uses forward contracts as part of its mortgage banking activities. Forward contracts provide for the delivery of financial instruments at a specified future date and at a specified price or yield. The fair value of forward contracts was insignificant at December 31, 2017 and 2016.

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)        Originated Loans—The Company grants mortgage, commercial and consumer loans to customers. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the ALLL and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield over the contractual life of the loan.

principal amount outstanding.        The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due,delinquent unless the credit is well-secured and in the process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

        All interest accrued but not collected, for loans that are placed on nonaccrual or charged off, is reversed against interest incomeincome. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to the extent income was recognized in the current year and to the allowance for loan losses for any amount remaining.accrual. Loans are returned to accrual status when all




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Note 1—Summary of Significant Accounting Policies (Continued)

the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loan fees

        Loans Acquired in a Business Combination—Loans acquired in a business combination ("acquired loans") consist of loans acquired on August 8, 2014 in the merger with Bank of Alpena. Acquired loans are recognizedrecorded at fair value as of the acquisition date without a carryover of the associated allowance for loan losses related to these loans, through a fair value discount that was, in incomepart, attributed to credit quality. The estimate of the expected credit losses was determined based on due diligence performed by executive and senior management of the Company. The fair value discount was recorded as a reduction to the acquired loans' outstanding principal balance in the consolidated financial statements on the merger date.

        The Company accounts for acquired loans, which are recorded at fair value at acquisition, in accordance with ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Under the provisions of ASC 310-30, the Company evaluated each loan individually and determined that loans with an outstanding principal balance of $5.9 million exhibited deteriorated credit quality, and therefore, met the criteria set forth in ASC 310-30. None of the loans acquired were classified as debt securities.

        In accordance with ASC 310-30, the Company elected to evaluate each loan individually for expected future cash flows. Loans will be removed from the acquired loan segment in the event of sale, foreclosure, pay off or being written off as uncollectable. The Company estimates the cash flow to be collected over the remaining life of the loan on a quarterly basis based on a set of assumptions including expectations as to default rates, prepayment rates, and expected loss rates. The Company makes numerous assumptions, interpretations and judgments using internal and third-party credit quality information when determining the probability of collecting all contractual required payments. This is a point in time assessment and inherently subjective due to the nature of the available information and judgment involved.

        The calculation of the fair value of the acquired loans entails estimating the amount and timing of cash flows attributable to both principal and interest expected to be collected on each individual loan, and then discounting those cash flows at a market interest rate. The excess of a loan's expected cash flow at the timeacquisition date over its estimated fair value is commonly referred to as "accretable yield", which is recognized into interest income over the remaining life of the loan on a level-yield basis. The difference between an individual loan's contractual required principal and interest as of the merger date and the expected cash flows as of the same date is made.commonly referred to as "nonaccretable difference", which includes an estimate of future credit losses expected to be incurred over the remaining life of the loan and interest payments that are not expected to be collected. A decrease to the expected cash flows of a loan in subsequent periods will require the Company to record a provision for loan loss. Improvements to expected cash flows of a loan in subsequent periods will result in reversing a portion of the nonaccretable difference, which is then classified as a part of the accretable yield and subsequently recognized into interest income over the estimated remaining life of the loan. A loan will be removed from the acquired loan segment through any one of the following avenues: foreclosed, paid off or written off.

        Allowance for Loan Losses:and Lease Losses—The Allowance for Loan Losses (Allowance)ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the Allowanceallowance when management believes the uncollectabilityuncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the Allowance.allowance.




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Note 1—Summary of Significant Accounting Policies (Continued)

        The AllowanceALLL is evaluated on a regular basis by management and is based on management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

        The Allowanceallowance consists of specific, general and unallocated components.

The specific component relates to loans that are considered impaired.classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, a reservean allowance is established when the discounted cash flows or(or collateral value or observable market priceprice) of the impaired loan is lower than the carrying value of thethat loan. The general component covers non-classified loans as well as classified loans that are not deemed to be impaired and is based on historical loss experience adjusted for qualitative factors.

        A loan is considered impaired when, based on current information and events, it is probable that the BankCompany will be unable to collect the scheduled payments of principal andor interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observableobtainable market price, or the fair value of the collateral if the loan is collateral-dependent.collateral dependent. Large groups of homogeneous loans are collectively evaluated for impairment. The Company does not separately identify individual consumer and residential loans for impairment disclosures until a loss is imminent.

        The Bank may agreeTroubled debt restructuring of loans is undertaken to modifyimprove the contractuallikelihood that the loan will be repaid in full under the modified terms of loans. Whenin accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as a troubled debt restructure ("TDR"). A loan is a TDR when the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower by modifying or renewing a loan that the Company would not otherwise consider. To make this determination, the Company must determine whether (a) the borrower is modified and a concession is made to a borrower experiencing financial difficulties and (b) the modificationCompany granted the borrower a concession. This determination requires consideration of all of the facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower's financial condition does not automatically mean the borrower is considered a Troubled Debt Restructuring (TDR). All TDRs are initially deemed to be impaired.




Table of Contentsexperiencing financial difficulties.


PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY        Loan Servicing

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        The general component covers non-classified loans—Servicing assets are recognized as separate assets when rights are retained through the sale of originated residential mortgage loans. Capitalized servicing rights are amortized against non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Fair value is based on historical loss experience, adjustedmarket prices for environmental and qualitative factors, in the following eight loan portfolio segments: residential real estate loans (excluding home equity lines of credit); commercial real estate loans—owner occupied; commercial real estate loans—non-owner occupied; commercial land and development; other commercial loans and overdrafts; consumer installment loans; revolving home equity lines of credit; and credit cards. Management uses a rolling average of historical losses basedcomparable mortgage servicing contracts, when available, or on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted forvaluation model that calculates the following environmental and qualitative factors: changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; changes in the nature and volume of the portfolio and in terms of loans; changes in the experience, ability, and depth of lending management and other relevant staff; changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans or graded loans; changes in the quality of the loan review program; changes in the underlying collateral for collateral-dependent loans; the existence and effect of any concentrations of credit, and changes in the level of such concentrations; the effect of other external factors such as competition and legal and regulatory requirements on the levelpresent value of estimated credit losses in the existing portfolio.

        The environmental and qualitative factors are determinedfuture net servicing income using market based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

        Residential Real Estate Loans:    Loans in this segment are collateralized by residential real estate and repaymentassumptions. Temporary impairment is dependent on the credit quality of the borrower and the value of the underlying collateral. Changes in business conditions, lending policies, the quality of the loan review program, and the local real estate market can affect the credit quality of this segment.

        Commercial Real Estate Loans—Owner Occupied:    Loans in this segment are collateralized by commercial real estaterecognized through a valuation allowance for which the primary source of repayment is the cash flow from the ongoing operations conducted by the party, or affiliate of the party, who owns the property. Repayment is dependent on the income-generating capacity of the business, the credit quality of the borrower, and the value of the underlying collateral. Changes in business conditions, lending policies, the value of the underlying collateral, and the quality of the loan review program can affect the credit quality of this segment.

        Commercial Real Estate Loans—Non-Owner Occupied:    Loans in this segment are collateralized by commercial real estate where the primary source of repayment is derived from rental income associated with the property or the proceeds of the sale, refinancing, or permanent financing of the property. Repayment is dependent on the income-generating capacity of the business, the strength of the rental market, occupancy rates, demand for commercial real estate, the credit quality of the borrower, and the value of the underlying collateral. Changes in business conditions, lending policies, the value of the underlying collateral, and the quality of the loan review program can affect the credit quality of this segment.an




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1—Summary of Significant Accounting Policies (Continued)

December 31, 2013

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        Commercial Land and Development:    Loans in this segment are secured by real estate usedindividual stratum to the extent that fair value is less than the capitalized amount for developing land in preparation of erecting new structuresthe stratum. If it is later determined that all or for on-site construction of industrial and commercial buildings. Repayment is dependent on the income-generating capacitya portion of the business andtemporary impairment no longer exists, the demand for commercial real estate. Changesvaluation allowance is reduced through a recovery of income. An other-than-temporary impairment results in business conditions, lending policies,a permanent reduction to the carrying value of the underlying collateral, and the qualityservicing asset. Servicing income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan review program can affectand are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.

        Foreclosed Assets (including Other Real Estate Owned)—Foreclosed real estate held for sale is carried at the credit qualitylower of this segment.cost or fair value minus estimated costs to sell. Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and an allowance is established by a charge to non-interest expense if the carrying value exceeds the fair value minus estimated costs to sell. Foreclosed real estate is classified as other real estate owned. The net income from operations of foreclosed real estate held for sale is reported in non-interest income. At December 31, 2017 there were $159 of one-to-four family residential mortgages in the process of foreclosure compared to $64 as of December 31, 2016.

        Other Commercial Loans        Property and Overdrafts:Equipment    Other commercial loans in this segment—These assets are generally collateralized by the assets of the business. Repayment is dependent on the income-generating capacity of the business. Changes in business conditions and lending policies can affect the credit quality of this segment.

        Overdrafts are considered unsecured loans.    Repayment is dependent on the income-generating capacity of the deposit account owner. Changes in business conditions and lending policies can affect the credit quality of this segment.

        Consumer Installment Loans:    Loans in this segment are generally collateralized by vehicles, other personal property, or are unsecured. Repayment is dependent on the credit quality of the borrower and value of the underlying collateral, if any. Changes in business conditions and lending policies can affect the credit quality of this segment.

        Revolving Home Equity Lines-of-Credit:    Loans in this segment are collateralized by residential real estate and repayment is dependent on the credit quality of the borrower and the value of the underlying collateral. Changes in business conditions, lending policies, and the quality of the loan review program can affect the credit quality of this segment.

        Credit Cards:    Loans in this segment are unsecured and repayment is dependent on the credit quality of the borrower. Changes in business conditions and lending policies can affect the credit quality of this segment.

        An unallocated component is maintained to cover uncertainties that could affect management's estimate of the probable losses. The unallocated component of the Allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodology for estimating specific and general losses in the portfolio.

Credit Quality Information

recorded at cost, less accumulated depreciation. The Bank uses the following eight risk rating numerical grades:straight-line method of recording depreciation for financial reporting. The depreciable lives used by the Company are: land improvements 7-10 years, buildings 7-40 years and equipment 3-10 years. Maintenance and repairs are charged to expense and improvements are capitalized.

        Grades        Bank-Owned Life Insurance—The Bank has purchased life insurance policies on certain key officers. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized.

        Intangible Assets—The Company has in the past purchased one or more branches from other financial institutions. The analysis of these branch acquisitions led the Company to conclude that in each case, a business was acquired and the purchase price generally includes the intangible value of the depositor relationships acquired, referred to as core deposit intangible assets. The expected life for the core deposit intangible asset is based on the type of products acquired. The amortization periods range from 10 to 15 years and are based on the expected life of the products and relationships. The expected life was determined based on an analysis of the life of similar products within the Company and local competition in the markets where the branches were acquired. The core deposit intangible assets, related to branch purchases, were amortized on a straight-line basis.

        In conjunction with the merger with Bank of Alpena, the Company established a $1.4 million core deposit intangible asset. This intangible asset is being amortized over a 10-year period on an accelerated basis. The core deposit intangible is analyzed quarterly for impairment.

        Income Taxes—Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

        On December 22, 2017, the President of the United States signed a tax bill which reduced the corporate income tax rate from 34% to 21% effective for tax years beginning on or after January 1, 2018. As a result, the Company's deferred tax assets and liabilities were remeasured for the effects of




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Note 1—Summary of Significant Accounting Policies (Continued)

the tax rate change on the date the law was enacted in accordance with Accounting Standards Codification ("ASC") 740, Income Taxes. The impact of the new tax rate increased federal income tax $1.2 million for the year ended December 31, 2017. Since the impact of the remeasurement of the deferred tax effects of items reported in accumulated other comprehensive income ("AOCI") was recorded through 4:    Loansincome tax expense there was a stranded tax effect in AOCI as the recorded deferred tax assets and tax liabilities no longer equaled the tax effect included in the AOCI for that item. In February 2018, the FASB issued and the Company early adopted the provisions of Accounting Standards Update ("ASU")—Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income for the year ended December 31, 2017. This ASU allows a one- time reclassification from AOCI to retained earnings for these categories exhibit an acceptablestranded tax effects. The amount of the reclassification from AOCI to retained earnings at December 31, 2017 was $166. This reclassification eliminates the stranded tax effect that was created as a result of the tax rate change to improve the usefulness of information reported in the financial statements.

        The Company records a valuation allowance if it believes, based on available evidence, that it is "more likely than not" that the future tax assets recognized will not be realized before their expiration. Realization of the Company's deferred tax assets is primarily dependent upon the generation of a sufficient level of future taxable income.

        At December 31, 2017 and 2016, management believes that it is more likely than not that all of the deferred tax assets would be realized. Accordingly, at December 31, 2017 and 2016, the Company recaptured $347 and $432, respectively, of the valuation allowance. As of December 31, 2017, there was no remaining valuation allowance on the balance sheet compared to $347 as of December 31, 2016.

        The net deferred tax asset recorded at December 31, 2017 and 2016 was $1.7 million and $3.3 million, respectively.

        Off-Balance-Sheet Instruments—In the ordinary course of business, the Company has entered into commitments to extend credit, risk, ranging from "exceptional" to "acceptable."including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. For letters of credit, a liability is recorded for the fair value of the obligation undertaken in issuing the guarantee.

        Grade 5:        Comprehensive Income (Loss)    "Watch"—LoansAccounting principles generally require that recognized revenue, expenses, gains and losses be included in this category have potential weaknesses that require closer monitoring. If left uncorrected, these potential weaknesses may resultnet income. Certain changes in deteriorationassets and liabilities; however, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component in the equity section of the repayment prospects orconsolidated statement of financial condition. Such items, along with net income, are components of comprehensive income (loss).

        Accumulated other comprehensive income (loss) consists solely of unrealized gains (losses) on available for sale securities and the credit qualityreclassification for the tax rate change.

        Stock-Based Compensation—The Company's stock based compensation plans are described in detail in Note 13 (Employee Benefit Plans). Compensation expense is recognized for stock options and unvested (restricted) stock awards issued to employees, based on the future. Watch loans do not exposefair value of these awards at the Bankdate of grant. A Black Scholes model is utilized to sufficient riskestimate the fair value of stock options, while the market price of the Company's common shares at the date of grant is used to warrant a substandard grade. Loans in this category are periodically past due, or reflect a potentialestimate the fair value of unvested (restricted) stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the unvested period for nonvested (restricted) stock awards. Certain of the Company's share-based awards contain terms that




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Note 1—Summary of Significant Accounting Policies (Continued)

provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period.

        The Company granted no options and did not record, through net income, any compensation costs related to stock options in 2017 and 2016.

Note 2—Business Combinations

        As of August 8, 2014 ("Merger Date"), the Company completed its merger with Alpena Banking Corporation and its wholly owned subsidiary Bank of Alpena ("Alpena"). Alpena had one branch office and $102.9 million in assets as of August 8, 2014. The results of operations due to the merger have been included in the Company's results since the Merger Date. The merger was effected by the issuance of shares of the Company's common stock to Alpena Banking Corporation shareholders. Each share of Alpena's common stock was converted into the right to receive 1.549 shares of the Company's common stock, with cash paid in lieu of fractional shares. The conversion of Alpena's shares resulted in the issuance of 842,965 shares of the Company's common stock.

        The business combination was recorded using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair values on the Merger Date. The following table provides the purchase price calculation as of December 31, 2014 and the identifiable assets acquired and liabilities assumed at their estimated fair values. A bargain purchase gain resulted from the business combination due to the fair value of the net assets acquired exceeding the value of the stock issued as consideration in the transaction. These fair value measurements are based on third-party valuations.

Purchase Price:
Common stock issued for Alpena Banking Corporation common shares						843
Price per share, based on the Company's closing price on August 8, 2014					$	5.59
​	​	​	​	​	​	​	​
Total purchase price					$	4,712
Preliminary Statement of Net Assets Acquired at Fair Value:
Assets
Cash and cash equivalents		$	41,650
Securities			24,008
Loans			33,051
Premises and Equipment			1,667
Core Deposit Intangible			1,392
Deferred Tax Asset			337
Other Assets			467
​	​	​	​	​	​	​	​
Total Assets		$	102,572
Liabilities
Deposits			95,787
Other Liabilities			91
​	​	​	​	​	​	​	​
Total Liabilities		$	95,878
Net Identifiable Assets Acquired					$	6,694
​	​	​	​	​	​	​	​
Bargain Purchase Gain					$	(1,982	)
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 2—Business Combinations (Continued)

        In most instances, determining the fair value of the acquired assets and assumed liabilities required the Company to estimate the cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations related to the valuation of acquired loans. For such loans, the excess cash flows expected at merger over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at merger and the cash flows expected to be collected at merger reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with the applicable accounting guidance for business combinations, there was no carry-over of Alpena's previously established allowance for loan losses.

        The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 ("acquired impaired"), and loans that do not meet the criteria, which are accounted for under ASC 310-20 ("acquired non-impaired"). In addition, the loans are further categorized into different pools based primarily on the type and purpose of the loan.

		Acquired Impaired			Acquired Non-Impaired			Acquired Total
Real estate loans:
Residential mortgages		$	397		$	6,992		$	7,389
Commercial loans:
Secured by real estate			3,070			14,830			17,900
Other			1,201			4,213			5,414
​	​	​	​	​	​	​	​	​	​	​
Total commercial loans			4,271			19,043			23,314
Consumer loans:
Secured by real estate			30			1,568			1,598
Other			—			750			750
​	​	​	​	​	​	​	​	​	​	​
Total consumer loans			30			2,318			2,348
​	​	​	​	​	​	​	​	​	​	​
Total loans at acquisition date		$	4,698		$	28,353		$	33,051
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​




		Acquired Impaired			Acquired Non-Impaired			Acquired Total
Loans acquired—contractual required payments		$	5,930		$	28,587		$	34,517
Non-accretable yield			(1,232	)		—			(1,232	)
​	​	​	​	​	​	​	​	​	​	​
Expected cash flows			4,698			28,587			33,285
Accretable yield			—			(234	)		(234	)
​	​	​	​	​	​	​	​	​	​	​
Carrying balance at acquisition date		$	4,698		$	28,353		$	33,051
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​




Table of Contents

Note 3—Securities

        Investment securities have been classified according to management's intent. The carrying value and estimated fair value of securities are as follows:

		December 31, 2017												December 31, 2016
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Market Value			Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Market Value
Securities Available for Sale
U.S. treasury securities and obligations of U.S. government corporations and agencies		$	18,901		$	—		$	(216	)	$	18,685		$	26,736		$	64		$	(190	)	$	26,610
Municipal notes			38,232			146			(782	)		37,596			45,905			167			(955	)		45,117
Corporate securities			150			—			(1	)		149			—			—			—			—
Mortgage-backed securities			42,832			54			(483	)		42,403			56,973			100			(704	)		56,369
Equity securities			2			4			—			6			19			19			—			38
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	100,117		$	204		$	(1,482	)	$	98,839		$	129,633		$	350		$	(1,849	)	$	128,134
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Securities Held to Maturity
Municipal notes		$	650		$	1		$	—		$	651		$	700		$	1		$	—		$	701
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        The amortized cost and estimated market value of securities at December 31, 2017, by contractual maturity, are shown on the following table. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

		December 31, 2017
		Amortized Cost			Market Value
Available For Sale:
Due in one year or less		$	355		$	356
Due after one year through five years			39,722			39,281
Due in five years through ten years			16,619			16,170
Due after ten years			587			623
​	​	​	​	​	​	​	​
Subtotal			57,283			56,430
Equity securities			2			6
Mortgage-backed securities			42,832			42,403
​	​	​	​	​	​	​	​
Total		$	100,117		$	98,839
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Held To Maturity
Due in one year or less		$	50		$	50
Due after one year through five years			235			235
Due in five years through ten years			365			366
Due after ten years			—			—
​	​	​	​	​	​	​	​
Total		$	650		$	651
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        At December 31, 2017 and 2016, securities with a fair value of $62.4 million and $34.5 million, respectively, were pledged to FHLB advances and borrowings from the Federal Reserve discount window.

        The following is a summary of securities that had unrealized losses at December 31, 2017 and 2016. The information is presented for securities that have been in an unrealized loss position for less than 12 months and 12 months or longer. At December 31, 2017, the Company held 125 securities with




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Note 3—Securities (Continued)

unrealized losses totaling $1.5 million. At December 31, 2016 there were 127 securities with unrealized losses totaling $1.8 million.

        There are temporary reasons why securities may be valued at less than amortized cost. Temporary reasons are that the current levels of interest rates as compared to the coupons on the securities held by the Company are higher and impairment is not due to credit deterioration. The Company has the intent and the ability to hold these securities until their value recovers, which may be until maturity.

		December 31, 2017												December 31, 2016
					Gross Unrealized Losses						Gross Unrealized Losses						Gross Unrealized Losses						Gross Unrealized Losses
		Fair Value			Less than 12 months			Fair Value			12 months or longer			Fair Value			Less than 12 months			Fair Value			12 months or longer
Available For Sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	12,082		$	(71	)	$	6,603		$	(145	)	$	10,204		$	(190	)	$	—		$	—
Corporate and other securities			149			(1	)		—			—			—			—			—			—
Municipal notes			11,395			(111	)		17,866			(671	)		32,728			(955	)		—			—
Mortgage-backed securities			26,105			(166	)		14,149			(317	)		47,811			(651	)		1,804			(53	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total securities available for sale		$	49,731		$	(349	)	$	38,618		$	(1,133	)	$	90,743		$	(1,796	)	$	1,804		$	(53	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        On a quarterly basis, the Company performs a comprehensive security-level impairment assessment on all securities in an unrealized loss position to determine if OTTI exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. For debt securities, an OTTI loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between the fair value and the amortized cost basis of the individual security. If the Company does not expect to sell the security, the Company must evaluate the expected cash flows to be received to determine if a credit loss has occurred. If a credit loss is present, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in other comprehensive income (loss).

        The security-level assessment is performed on each security, regardless of the classification of the security as available for sale or held to maturity. The assessments are based on the nature of the securities, the financial condition of the issuer, the extent and duration of the securities, the extent and duration of the loss and the intent and whether management intends to sell or it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis, which may be at maturity. For those securities for which the assessment shows the Company will recover the entire cost basis, management does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before the anticipated recovery of the amortized cost basis, the gross unrealized losses are recognized in other comprehensive income, net of tax.

        Management does not believe that the investment securities that were in an unrealized loss position as of December 31, 2017 represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely




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Note 3—Securities (Continued)

than not that the Company will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.

Note 4—Loans

        Loans at December 31, are summarized as follows:

		December 31
		2017			2016
Real estate loans—One- to four-family residential		$	83,473		$	82,405
Commercial loans:
Secured by real estate			76,813			65,131
Other			24,635			26,843
​	​	​	​	​	​	​	​
Total commercial loans			101,448			91,974
Consumer loans:
Secured by real estate			7,026			7,628
Other			1,617			1,357
​	​	​	​	​	​	​	​
Total consumer loans			8,643			8,985
​	​	​	​	​	​	​	​
Total gross loans			193,564			183,364
Less:
Net deferred loan fees			228			240
Allowance for loan losses			1,833			1,685
​	​	​	​	​	​	​	​
Total loans—net		$	191,503		$	181,439
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        As of December 31, 2017, the total outstanding balance and carrying value of acquired impaired loans was $1.5 million and $1.3 million, respectively. Changes to the non-accretable yield for acquired impaired loans and accretable yield for acquired non-impaired loans were as follows as of December 31, 2017:

		Acquired Impaired Non-Accretable			Acquired Non-Impaired Accretable			Acquired Total
Beginning of year		$	(582	)	$	(106	)	$	(688	)
Accretion of discount for credit spread			—			40			40
Loans charged-off through December 31, 2017			27			—			27
Loans paid off through December 31, 2017			29			15			44
​	​	​	​	​	​	​	​	​	​	​
Total		$	(526	)	$	(51	)	$	(577	)
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

        Certain directors and executive officers of the Company were loan customers of the Bank during December 31, 2017 and 2016. Such loans were made in the ordinary course of business and do not involve more than a normal risk of collectability. As of December 31, 2017 and 2016, the outstanding balances of loans to officers and directors was $5.5 million and $7.6 million, respectively.




Table of Contents

Note 4—Loans (Continued)

        The following tables illustrate the contractual aging of the recorded investment in past due loans by class of loans as of December 31, 2017 and 2016:

As of December 31, 2017
Originated Loans:		30 - 59 Days Past Due			60 - 89 Days Past Due			90 Days & Greater Past Due			Total Past Due			Current			Total Loans			Recorded Investment > 90 Days and Accruing
Commercial real estate:
Commercial real estate—construction		$	—		$	—		$	—		$	—		$	2,859		$	2,859		$	—
Commercial real estate			350			—			—			350			67,044			67,394			—
Commercial—other			45			114			206			365			24,071			24,436			172
Consumer:
Consumer—real estate			18			—			—			18			6,502			6,520			—
Consumer—other			7			—			—			7			1,593			1,600			—
Residential:
Residential			981			321			15			1,317			78,732			80,049			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	1,401		$	435		$	221		$	2,057		$	180,801		$	182,858		$	172
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




As of December 31, 2017
Acquired Loans:		30 - 59 Days Past Due			60 - 89 Days Past Due			90 Days & Greater Past Due			Total Past Due			Current			Total Loans			Recorded Investment > 90 Days and Accruing
Commercial real estate:
Commercial real estate—construction		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Commercial real estate			375			—			34			409			6,151			6,560			—
Commercial—other			125			—			—			125			74			199			—
Consumer:
Consumer—real estate			—			—			—			—			506			506			—
Consumer—other			—			—			—			—			17			17			—
Residential:
Residential			129			—			—			129			3,295			3,424			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	629		$	—		$	34		$	663		$	10,043		$	10,706		$	—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents

Note 4—Loans (Continued)




As of December 31, 2016
Originated Loans:		30 - 59 Days Past Due			60 - 89 Days Past Due			90 Days & Greater Past Due			Total Past Due			Current			Total Loans			Recorded Investment > 90 Days and Accruing
Commercial real estate:
Commercial real estate—construction		$	459		$	—		$	—		$	459		$	662		$	1,121		$	—
Commercial real estate			700			935			—			1,635			52,873			54,508			—
Commercial—other			267			316			261			844			25,255			26,099			—
Consumer:
Consumer—real estate			24			26			—			50			6,567			6,617			—
Consumer—other			4			—			—			4			1,296			1,300			—
Residential:
Residential			991			471			64			1,526			76,308			77,834			40
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	2,445		$	1,748		$	325		$	4,518		$	162,961		$	167,479		$	40
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




As of December 31, 2016
Acquired Loans:		30 - 59 Days Past Due			60 - 89 Days Past Due			90 Days & Greater Past Due			Total Past Due			Current			Total Loans			Recorded Investment > 90 Days and Accruing
Commercial real estate:
Commercial real estate—construction		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Commercial real estate			833			353			122			1,308			8,194			9,502			—
Commercial—other			10			—			—			10			734			744			—
Consumer:
Consumer—real estate			—			—			—			—			1,011			1,011			—
Consumer—other			—			—			—			—			57			57			—
Residential:
Residential			179			—			32			211			4,360			4,571			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	1,022		$	353		$	154		$	1,529		$	14,356		$	15,885		$	—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        The Bank uses an eight-tier risk rating system to grade its commercial loans. The grade of a loan may change during the life of the loans. The risk ratings are described as follows:

        Risk Grade 1 (Excellent)—Prime loans based on liquid collateral, with adequate margin or supported by strong financial statements. Probability of serious financial deterioration is unlikely. High liquidity, minimum risk, strong ratios, and low handling costs are common to these loans. This classification also includes all loans secured by certificates of deposit or cash equivalents.

        Risk Grade 2 (Good)—Desirable loans of somewhat less stature than Grade 1, but with strong financial statements. Probability of serious financial deterioration is unlikely. These loans possess a sound repayment source (and/or a secondary source). These loans represent less than the normal degree of risk associated with the type of financing contemplated.




Table of Contents

Note 4—Loans (Continued)

December 31, 2013        Risk Grade 3 (Satisfactory)—Satisfactory loans of average risk—may have some minor deficiency or vulnerability to changing economic conditions, but still fully collectible. There may be some minor weakness but with offsetting features or other support readily available. These loans present a normal degree of risk associated with the type of financing. Actual and projected indicators and market conditions provide satisfactory assurance that the credit shall perform in accordance with agreed terms.

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)        Risk Grade 4 (Acceptable)

problem noted by—Loans considered satisfactory, but which are of slightly "below average" credit risk due to financial weaknesses or uncertainty. The loans warrant a somewhat higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk is considered acceptable and within normal underwriting guidelines, so long as the loan officer,is given the proper level of management supervision.

        Risk Grade 4.5 (Monitored)—Loans are considered "below average" and monitored more closely due to some credit deficiency that poses additional risk but is not considered adverse to the point of being a loan review, an auditor, "classified" credit. Possible reasons for additional monitoring may include characteristics such as temporary negative debt service coverage due to weak economic conditions; borrower may have experienced recent losses from operations, declining equity and/or increasing leverage, or marginal liquidity that may affect long-term sustainability. Loans of this grade have a regulator. Indicatorshigher degree of watch loans include negative trends in collateral values or cash flow or by temporary downturns.risk and warrant close monitoring to ensure against further deterioration.

        Risk Grade 6:5 (Other Assets Especially Mentioned) ("OAEM")    "Substandard"—SubstandardLoans which possess some credit deficiency or potential weakness, which deserve management's close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future.

        Risk Grade 6 (Substandard)—Loans are inadequately"substandard" whose full, final collectability does not appear to be a matter of serious doubt, but which nevertheless portray some form of well-defined weakness that requires close supervision by Bank management. The noted weaknesses involve more than normal banking risk. One or more of the following characteristics may be exhibited in loans classified Substandard: (1) Loans are not adequately protected by the current soundnet worth andand/or paying capacity of the obligorobligor; (2) primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or of the collateral pledged, if any. Substandard loans must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by theguarantees; (3) distinct possibility that the Bank willshall sustain some loss if the deficiencies are not corrected.corrected; (4) loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to normal loan terms; or (5) the Bank is contemplating foreclosure or legal action due to the apparent deterioration in the loan.

        Grade 7:7 (Doubtful)    "Doubtful"—Doubtful loansLoans have all the weaknesses inherent in "Substandard Loans" with the added characteristic that theof those classified Substandard. Additionally, however, these weaknesses make collection or liquidation in full, based on the basis of currently known facts,existing conditions, improbable. Loans in this category are typically not performing in conformance with established terms and values, highly questionable and improbable. The possibilityconditions. Full repayment is considered "Doubtful", but extent of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its grading as an estimated loss is deferred until its exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral, or refinancing plans.not currently determinable.

        Risk Grade 8:8 (Loss)    "Loss"—Loss loansLoans are considered uncollectible and of such little value, that their continuancecontinuing to carry them as bankable assetsan asset on the Bank's financial statements is not warranted.feasible. This classification does not mean that the loanasset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affectedeffected in the future.

        Other Real Estate:    Other real estate acquired through or in lieu of loan foreclosure is initially recorded at the lower of the Company's carrying amount or fair market value less estimated selling cost at the date of foreclosure. At the date of acquisition, losses are charged to the allowance for loan losses. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property.

        Depreciation:    Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.

        Pension Plan:    The Company has a defined benefit pension plan. The funding policy is to pay at least the minimum amounts required by the Employee Retirement Income Security Act of 1974.

        Federal Income Taxes:    The provision for federal income taxes charged to earnings is based on pre-tax income as reported in the accompanying statements of income after adjustments for tax-exempt interest and non-allowable expenses. Deferred tax assets or liabilities are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. The principal sources of these timing differences relate primarily to accelerated depreciation for tax purposes versus straight-line depreciation for book purposes, and various timing differences in income and expense recognition due to the Company's elected basis of tax accounting and differences relating to the Company's deferred compensation/retirement plan for certain officers and directors. The Company and its subsidiary bank file a consolidated federal income tax return.




Table of Contents


PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 4—Loans (Continued)

December 31, 2013

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        Net Income Per Share of Common Stock:    Net income per share of common stock is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period.

        Comprehensive Income:    Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and actuarial gains and losses on the defined benefit pension plan. Comprehensive income is recognized as a separate component of equity.

        Off-Balance-Sheet Financial Instruments:    In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, and letters of credit. Such financial instruments are recorded in the financial statements when they become payable.

        Fair Values of Financial Instruments:    Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

        The Fair Value Measurementsfollowing tables present the risk category of loans by class of loans based on the most recent analysis performed as of December 31, 2017 and Disclosures Topic2016:

As of December 31, 2017
Originated Loans: Loan Grade		Commercial Real Estate Construction			Commercial Real Estate			Commercial Other
1 - 2		$	—		$	2,381		$	415
3			132			15,384			8,987
4			2,727			41,913			13,058
4.5			—			2,200			1,353
5			—			17			55
6			—			5,499			568
7			—			—			—
8			—			—			—
​	​	​	​	​	​	​	​	​	​	​
Total		$	2,859		$	67,394		$	24,436
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​




As of December 31, 2017
Acquired Loans: Loan Grade		Commercial Real Estate Construction			Commercial Real Estate			Commercial Other
1 - 2		$	—		$	—		$	—
3			—			267			168
4			—			5,274			20
4.5			—			—			—
5			—			80			—
6			—			939			11
7			—			—			—
8			—			—			—
​	​	​	​	​	​	​	​	​	​	​
Total		$	—		$	6,560		$	199
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​




As of December 31, 2016
Originated Loans: Loan Grade		Commercial Real Estate Construction			Commercial Real Estate			Commercial Other
1 - 2		$	—		$	447		$	324
3			662			12,557			9,508
4			459			32,090			14,842
4.5			—			4,319			221
5			—			1,987			517
6			—			3,108			687
7			—			—			—
8			—			—			—
​	​	​	​	​	​	​	​	​	​	​
Total		$	1,121		$	54,508		$	26,099
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​




Table of Contents

Note 4—Loans (Continued)




As of December 31, 2016
Acquired Loans: Loan Grade		Commercial Real Estate Construction			Commercial Real Estate			Commercial Other
1 - 2		$	—		$	—		$	405
3			—			5,845			201
4			—			2,344			102
4.5			—			100			—
5			—			674			10
6			—			539			—
7			—			—			26
8			—			—			—
​	​	​	​	​	​	​	​	​	​	​
Total		$	—		$	9,502		$	744
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

        For residential real estate and other consumer credit, the Company also evaluates credit quality based on the aging status of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) requires disclosureloan and by payment activity. Loans 60 or more days past due are monitored by the collection committee. The following tables present the risk category of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values areloans by class based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The Fair Value Measurements and Disclosures Topic excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

        Reclassifications:    Certain amountsmost recent analysis performed as of and for the year ended December 31, 2012 have been reclassified to conform with the current year's presentation.2017 and 2016.

		As of December 31, 2017
		Residential			Consumer— Real Estate			Consumer— Other			Residential			Consumer— Real Estate			Consumer— Other
		Originated Loans:									Acquired Loans:
Loan Grade:
Pass		$	79,397		$	6,508		$	1,600		$	3,424		$	506		$	17
Special mention			271			—			—			—			—			—
Substandard			381			12			—			—			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	80,049		$	6,520		$	1,600		$	3,424		$	506		$	17
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        Subsequent Events:    Subsequent events were evaluated through February 20, 2014, which is the date the financial statements were available to be issued.


		As of December 31, 2016
		Residential			Consumer— Real Estate			Consumer— Other			Residential			Consumer— Real Estate			Consumer— Other
		Originated Loans:									Acquired Loans:
Loan Grade:
Pass		$	77,471		$	6,597		$	1,300		$	4,512		$	1,011		$	57
Substandard			363			20			—			59			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total		$	77,834		$	6,617		$	1,300		$	4,571		$	1,011		$	57
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 4—Loans (Continued)

        The following tables present the recorded investment in non-accrual loans by class as of December 31, 2013

NOTE B—INVESTMENT SECURITIES

        At December 31, 2013, the investment securities portfolio was comprised of securities classified as available for sale. Investment securities available for sale are carried at market value. The amortized cost2017 and fair values of investment securities available for sale are:2016:

		December 31, 2013
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
U.S. Government and federal agencies		$	5,422,790		$	8,098		$	(52,388	)	$	5,378,500
State and municipal securities			5,345,063			125,275			(90,553	)		5,379,785
Mortgage-backed securities			10,940,494			62,466			(312,191	)		10,690,769
Certificates of deposit			2,827,000			-0-			(996	)		2,826,004
​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL		$	24,535,347		$	195,839		$	(456,128	)	$	24,275,058
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​




		December 31, 2012
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
U.S. Government and federal agencies		$	3,300,000		$	9,860		$	(150	)	$	3,309,710
State and municipal securities			5,969,665			278,760			(16,929	)		6,231,496
Mortgage-backed securities			5,387,935			154,455			(2	)		5,542,388
​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL		$	14,657,600		$	443,075		$	(17,081	)	$	15,083,594
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​

As of December 31
		2017			2016
Commercial:
Commercial real estate		$	1,060		$	265
Commercial—other			281			287
Consumer:
Consumer—real estate			12			20
Residential:
Residential			381			394
​	​	​	​	​	​	​	​
Total		$	1,734		$	966
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        The amortized costfollowing tables present loans individually evaluated for impairment by class of loans as of December 31, 2017 and fair values of investment securities available for sale by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.2016:

		Securities Available For Sale at December 31, 2013
		Amortized Cost			Fair Value
Due in one year or less		$	1,589,230		$	1,597,866
Due after one year but less than five years			5,824,418			5,853,639
Due after five years but less than ten years			3,311,237			3,333,863
Due after ten years			2,869,968			2,798,921
Mortgage-backed securities			10,940,494			10,690,769
​	​	​	​	​	​	​	​
TOTAL		$	24,535,347		$	24,275,058
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

Impaired Loans As of December 31, 2017											For the Twelve Months Ended December 31, 2017
		Unpaid Principal Balance			Recorded Investment			Related Allowance			Average Recorded Investment			Interest Income Recognized
With no related allowance recorded:
Commercial—other		$	843		$	761		$	—		$	776		$	33
Commercial real estate			3,243			3,065			—			3,142			163
Consumer—real estate			83			80			—			85			3
Residential			793			623			—			655			21
With a specific allowance recorded:
Commercial—other			12			12			3			19			1
Commercial real estate			1,747			1,747			22			1,789			101
Consumer—real estate			3			1			—			2			—
Residential			390			390			9			397			13
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Totals:
Commercial—other		$	855		$	773		$	3		$	795		$	34
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Commercial real estate		$	4,990		$	4,812		$	22		$	4,931		$	264
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Consumer—real estate		$	86		$	81		$	—		$	87		$	3
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Residential		$	1,183		$	1,013		$	9		$	1,052		$	34
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 4—Loans (Continued)




Impaired Loans As of December 31, 2016											For the Twelve Months Ended December 31, 2016
		Unpaid Principal Balance			Recorded Investment			Related Allowance			Average Recorded Investment			Interest Income Recognized
With no related allowance recorded:
Commercial—other		$	374		$	327		$	—		$	334		$	—
Commercial real estate			2,725			2,400			—			2,449			119
Consumer—real estate			30			27			—			32			1
Residential			1,653			1,366			—			1,564			58
With a specific allowance recorded:
Commercial—other			26			26			1			33			2
Commercial real estate			847			847			17			862			28
Consumer—real estate			9			8			1			9			—
Residential			46			45			1			46			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Totals:
Commercial—other		$	400		$	353		$	1		$	367		$	2
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Commercial real estate		$	3,572		$	3,247		$	17		$	3,311		$	147
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Consumer—real estate		$	39		$	35		$	1		$	41		$	1
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Residential		$	1,699		$	1,411		$	1		$	1,610		$	58
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        As of December 31, 2013

NOTE B—INVESTMENT SECURITIES (Continued)2017 no additional funds are committed to be advanced in connection with impaired loans.

        Securities with unrealized losses,A restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not recognizedotherwise consider. That concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. The Company adheres to ASC 310-40, Troubled Debt Restructurings by Creditors, to determine whether a TDR applies in income, aggregated by investment categorya particular instance. Prior to loans being modified and lengthclassified as a TDR, specific reserves are generally assessed, as most of time that individual securitiesthese loans have been inspecifically allocated for as part of the Company's normal loan loss provisioning methodology. The Company allocated $34 and $19 reserves for the TDR loans at December 31, 2017 and December 31, 2016, respectively. The Company classifies all TDR loans as impaired loans.

        The following tables summarize the loans that were modified as a continuous unrealized loss position are as follows:TDR during the period ended December 31, 2017 and 2016.

		December 31, 2013
		Less than 12 Months						12 Months or More						Total
Description		Fair Value			Unrealized Loss			Fair Value			Unrealized Loss			Fair Value			Unrealized Loss
U.S. Government and federal agencies		$	2,909,100		$	(52,388	)	$	-0-		$	-0-		$	2,909,100		$	(52,388	)
State and municipal securities			1,072,289			(29,127	)		518,160			(61,426	)		1,590,449			(90,553	)
Mortgage-backed securities			7,958,973			(312,191	)		-0-			-0-			7,958,973			(312,191	)
Certificates of deposit			497,004			(996	)		-0-			-0-			497,004			(996	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL		$	12,437,366		$	(394,702	)	$	518,160		$	(61,426	)	$	12,955,526		$	(456,128	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        The Company evaluates securities for other-than-temporary impairment on a regular basis. No unrealized losses have been recognized into income as a result. In performing this evaluation, consideration is given to the length of time and the extent to which fair value has been less than cost, the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and whether the securities are issued by the federal government or its agencies. At December 31, 2013, 24 debt securities had unrealized losses with aggregate depreciation of less than two percent from the Company's amortized cost basis. As management has the ability to hold these securities until maturity, no declines are deemed to be other-than-temporary.

        At December 31, 2013 and 2012, $2,492,589 and $3,375,767, respectively, of the Bank's investment securities were pledged to the Federal Reserve Bank against potential future borrowings.




Table of Contents


PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE C—LOANS AND ALLOWANCE FOR LOAN LOSSES

        Major classifications of loans are as follows:

		December 31
		2013			2012
Residential REM		$	31,776,634		$	32,049,524
Commercial REM—owner occupied			21,530,509			24,120,210
Commercial REM—non-owner occupied			9,952,177			11,875,186
Other Commercial			3,370,537			5,450,977
Installment			3,669,650			3,970,107
Commercial Land and Development			1,697,713			2,264,456
Revolving			3,002,690			3,624,381
Credit Cards			-0-			434,750
​	​	​	​	​	​	​	​
			74,999,910			83,789,591
Allowance for loan losses			(1,492,994	)		(2,008,296	)
​	​	​	​	​	​	​	​
NET LOANS		$	73,506,916		$	81,781,295
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        Changes in the allowance for loan losses are as follows:

		Year Ended December 31
		2013			2012
Balance at beginning of year		$	2,008,296		$	2,004,841
Provision charged to operations			580,000			560,000
Loans charged off			(1,100,542	)		(601,764	)
Recoveries			5,240			45,219
​	​	​	​	​	​	​	​
BALANCE AT END OF YEAR		$	1,492,994		$	2,008,296
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​




Table of Contents

PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE C—LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

        Changes in the allowance for loan losses by major loan classifications are as follows:

		Year Ended December 31, 2013
					Commercial REM
		Residential REM			Owner Occupied			Non-Owner Occupied			Other Commercial			Installment			Commercial Land			Revolving			Credit Cards			Unallocated			Total
Beginning balance		$	676,757		$	271,620		$	451,914		$	261,893		$	27,298		$	187,152		$	52,314		$	1,763		$	77,585		$	2,008,296
Charge offs			(436,167	)		(81,802	)		(97,575	)		-0-			(2,585	)		(480,392	)		-0-			(2,021	)		-0-			(1,100,542	)
Recoveries			-0-			-0-			300			2,000			2,940			-0-			-0-			-0-			-0-			5,240
Provision for loan losses			116,041			238,208			223,744			(216,456	)		(15,932	)		352,215			(40,493	)		258			(77,585	)		580,000
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
ENDING BALANCE		$	356,631		$	428,026		$	578,383		$	47,437		$	11,721		$	58,975		$	11,821		$	-0-		$	-0-		$	1,492,994
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




		Year Ended December 31, 2012
					Commercial REM
		Residential REM			Owner Occupied			Non-Owner Occupied			Other Commercial			Installment			Commercial Land			Revolving			Credit Cards			Unallocated			Total
Beginning balance		$	712,755		$	266,708		$	440,518		$	212,261		$	51,850		$	146,050		$	56,745		$	2,783		$	115,171		$	52,004,841
Charge offs			(56,329	)		(127,427	)		(357,218	)		(57,593	)		-0-			-0-			-0-			(3,197	)		-0-			(601,764	)
Recoveries			711			15,000			2,576			19,036			7,746			-0-			-0-			150			-0-			45,219
Provision for loan losses			19,620			117,339			366,038			88,189			(32,298	)		41,102			(4,431	)		2,027			(37,586	)		560,000
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
ENDING BALANCE		$	676,757		$	271,620		$	451,914		$	261,893		$	27,298		$	187,152		$	52,314		$	1,763		$	77,585		$	2,008,296
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

For the Twelve Months Ended December 31, 2017
											Troubled Debt Restructurings That Subsequently Defaulted
		Number of Contracts			Pre-Modification Outstanding Recorded Investments			Post-Modification Outstanding Recorded Investment			Number of Contracts			Recorded Investment
Commercial real estate			3		$	2,556		$	862			—		$	—
Residential			1			7			7			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total			4		$	2,563		$	869			—		$	—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents

PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 4—Loans (Continued)

December 31, 2013

NOTE C—LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

        The unpaid principal balance of loans by major classifications based on impairment method is as follows:


		December 31, 2013
					Commercial REM
		Residential REM			Owner Occupied			Non-Owner Occupied			Other Commercial			Installment			Commercial Land			Revolving			Credit Cards			Total
Allowance for Loan Loss:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	229,658		$	326,615		$	476,032		$	47,437		$	6,441		$	-0-		$	8,296		$	-0-		$	1,094,479
Collectively evaluated for impairment			126,973			101,411			102,351			-0-			5,280			58,975			3,525			-0-			398,515
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL ENDING ALLOWANCE BALANCE		$	356,631		$	428,026		$	578,383		$	47,437		$	11,721		$	58,975		$	11,821		$	-0-		$	1,492,994
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Loans:
Individually evaluated for impairment		$	4,302,980		$	5,002,050		$	3,103,016		$	539,499		$	27,416		$	877,462		$	35,425		$	-0-		$	13,887,848
Collectively evaluated for impairment			27,473,654			16,528,459			6,849,161			2,831,038			3,642,234			820,251			2,967,265			-0-			61,112,062
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL ENDING LOANS BALANCE		$	31,776,634		$	21,530,509		$	9,952,177		$	3,370,537		$	3,669,650		$	1,697,713		$	3,002,690		$	-0-		$	74,999,910
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

For the Twelve Months Ended December 31, 2016
											Troubled Debt Restructurings That Subsequently Defaulted
		Number of Contracts			Pre-Modification Outstanding Recorded Investments			Post-Modification Outstanding Recorded Investment			Number of Contracts			Recorded Investment
Commercial real estate			3		$	506		$	506			3		$	237
Commercial—other			1			261			261			—			—
Consumer—real estate			2			10			10			—			—
Residential			3			423			423			—			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total			9		$	1,200		$	1,200			3		$	237
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        


		December 31, 2012
					Commercial REM
		Residential REM			Owner Occupied			Non-Owner Occupied			Other Commercial			Installment			Commercial Land			Revolving			Credit Cards			Total
Allowance for Loan Loss:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	597,998		$	157,549		$	347,837		$	261,115		$	24,041		$	186,968		$	5,125		$	-0-		$	1,580,633
Collectively evaluated for impairment			78,759			114,071			104,077			778			3,257			184			47,189			1,763			350,078
Unallocated to specific loan segments			-0-			-0-			-0-			-0-			-0-			-0-			-0-			-0-			77,585
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL ENDING ALLOWANCE BALANCE		$	676,757		$	271,620		$	451,914		$	261,893		$	27,298		$	187,152		$	52,314		$	1,763		$	2,008,296
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Loans:
Individually evaluated for impairment		$	4,452,188		$	5,526,787		$	2,937,531		$	742,221		$	169,588		$	1,953,130		$	44,855		$	-0-		$	15,826,300
Collectively evaluated for impairment			27,597,336			18,593,423			8,937,655			4,708,756			3,800,519			311,326			3,579,526			434,750			67,963,291
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL ENDING LOANS BALANCE		$	32,049,524		$	24,120,210		$	11,875,186		$	5,450,977		$	3,970,107		$	2,264,456		$	3,624,381		$	434,750		$	83,789,591
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




TableA modification of Contents


PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE C—LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan; however, forgiveness of principal is rarely granted. Commercial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans.

        The following table presentsAdditional collateral, a co-borrower, or a guarantor may be requested. Commercial mortgage and construction loans individually evaluated for impairment by class of loans at December 31, 2013:

		Unpaid Principal Balance			Related Allowance
With no related allowance recorded:
Residential REM		$	3,424,345		$	-0-
Commercial REM—owner occupied			4,025,147			-0-
Commercial REM—non-owner occupied			1,500,324			-0-
Other Commercial			477,949			-0-
Installment			20,973			-0-
Commercial Land and Development			877,462			-0-
Revolving			24,852			-0-
Credit Cards			-0-			-0-
​	​	​	​	​	​	​	​
SUBTOTAL		$	10,351,052		$	-0-
​	​	​	​	​	​	​	​
With an allowance recorded:
Residential REM		$	878,635		$	229,658
Commercial REM—owner occupied			976,903			326,615
Commercial REM—non-owner occupied			1,602,692			476,032
Other Commercial			61,550			47,437
Installment			6,443			6,441
Commercial Land and Development			-0-			-0-
Revolving			10,573			8,296
Credit Cards			-0-			-0-
​	​	​	​	​	​	​	​
SUBTOTAL		$	3,536,796		$	1,094,479
​	​	​	​	​	​	​	​
TOTAL		$	13,887,848		$	1,094,479
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​




Table of Contents


PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE C—LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

        The following table presents loans individually evaluated for impairment by class of loans at December 31, 2012:

		Unpaid Principal Balance			Related Allowance
With no related allowance recorded:
Residential REM		$	2,749,961		$	-0-
Commercial REM—owner occupied			4,640,277			-0-
Commercial REM—non-owner occupied			742,074			-0-
Other Commercial			337,488			-0-
Installment			145,547			-0-
Commercial Land and Development			1,423,201			-0-
Revolving			24,889			-0-
Credit Cards			-0-			-0-
​	​	​	​	​	​	​	​
SUBTOTAL		$	10,063,437		$	-0-
​	​	​	​	​	​	​	​
With an allowance recorded:
Residential REM		$	1,702,227		$	597,998
Commercial REM—owner occupied			886,510			157,549
Commercial REM—non-owner occupied			2,195,457			347,837
Other Commercial			404,733			261,115
Installment			24,041			24,041
Commercial Land and Development			529,929			186,968
Revolving			19,966			5,125
Credit Cards			-0-			-0-
​	​	​	​	​	​	​	​
SUBTOTAL		$	5,762,863		$	1,580,633
​	​	​	​	​	​	​	​
TOTAL		$	15,826,300		$	1,580,633
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        The average recorded investmentmodified in impaired loans amounted to approximately $4,649,830a TDR often involve reducing the interest rate for the year ended December 31, 2013.

        Non-performing loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one classification.




Table of Contents


PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE C—LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

        Past due and non-accrual loans are as follows:

		December 31, 2013						December 31, 2012
		Past Due 90 Days or More and Still Accruing			Non-Accrual			Past Due 90 Days or More and Still Accruing			Non-Accrual
Residential REM		$	62,479		$	1,300,877		$	961,416		$	752,448
Commercial REM—owner occupied			140,894			1,038,457			9,729			722,577
Commercial REM—non-owner occupied			-0-			643,819			-0-			1,242,287
Other Commercial			-0-			326,208			45,809			212,875
Installment			2,861			949			13,575			-0-
Commercial Land and Development			-0-			877,462			43,600			1,953,131
Revolving			-0-			35,425			-0-			44,855
Credit Cards			-0-			-0-			-0-			-0-
​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL		$	206,234		$	4,223,197		$	1,074,129		$	4,928,173
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​

        The following table presents the aging of past due loans by classification at December 31, 2013:

		30 - 89 Days Past Due			Greater Than 90 Days and Non-Accrual			Total Past Due and Non- Accrual			Current			Total Loan Balance
Residential REM		$	1,621,513		$	1,363,356		$	2,984,869		$	28,791,765		$	31,776,634
Commercial REM—owner occupied			170,959			1,179,350			1,350,309			20,180,200			21,530,509
Commercial REM—non-owner occupied			92,837			643,820			736,657			9,215,520			9,952,177
Other Commercial			79,891			326,208			406,099			2,964,438			3,370,537
Installment			29,223			3,810			33,033			3,636,617			3,669,650
Commercial Land and Development			-0-			877,462			877,462			820,251			1,697,713
Revolving			65,639			35,425			101,064			2,901,626			3,002,690
Credit Cards			-0-			-0-			-0-			-0-			-0-
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL		$	2,060,062		$	4,429,431		$	6,489,493		$	68,510,417		$	74,999,910
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




Table of Contents


PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE C—LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

        The following table presents the aging of past due loans by classification at December 31, 2012:

		30 - 89 Days Past Due			Greater Than 90 Days and Non-Accrual			Total Past Due and Non- Accrual			Current			Total Loan Balance
Residential REM		$	1,415,988		$	1,713,865		$	3,129,853		$	28,919,671		$	32,049,524
Commercial REM—owner occupied			1,032,455			732,305			1,764,760			22,355,450			24,120,210
Commercial REM—non-owner occupied			617,208			1,242,287			1,859,495			10,015,691			11,875,186
Other Commercial			265,165			258,684			523,849			4,927,128			5,450,977
Installment			55,650			13,575			69,225			3,900,882			3,970,107
Commercial Land and Development			31,772			1,996,731			2,028,503			235,953			2,264,456
Revolving			82,635			44,855			127,490			3,496,891			3,624,381
Credit Cards			-0-			-0-			-0-			434,750			434,750
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL		$	3,500,873		$	6,002,302		$	9,503,175		$	74,286,416		$	83,789,591
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​


Troubled Debt Restructuring:


        During the twelve months ending December 31, 2013, the terms of certain loans were modified as TDRs. The modificationremaining term of the terms of such loans included one or a combination ofloan, extending the following: a statedmaturity date at an interest rate of interest lower than the current market rate for new debt with similar risk; interest only paymentsrisk, or substituting or adding a new borrower or guarantor.

        Loans modified in a TDR may be on an amortizing note;non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a reduced payment amount which does not fully coverresult, loans modified in a TDR for the interest; orCompany may have the financial effect of increasing the specific allowance associated with the loan. The allowance for impaired loans that have been modified in a permanent reductionTDR is measured based on the estimated fair value of the recorded investmentcollateral, less any selling costs, if the loan is collateral dependent or on the present value of expected future cash flows discounted at the loan's effective interest rate if the loan is performing in accordance with the loan.modified terms. Management exercises significant judgment in developing these estimates.

        The Bank has allocated $680,878 of specific reserves on $5,570,547 ofregulatory guidance requires loans to customersbe accounted for as collateral-dependent loans when borrowers have filed Chapter 7 bankruptcy, the debt has been discharged and the borrower has not reaffirmed the debt, regardless of the delinquency status of the loan. The filing of bankruptcy by the borrower is evidence of financial difficulty and the discharge of the obligation by the bankruptcy court is deemed to be a concession granted to the borrower.

        At December 31, 2017, there were no additional commitments to lend additional funds to the related debtors whose terms have been modified in TDR as of December 31, 2013.a TDR.

        The Bank had allocated $589,953uses the following guidelines as stated in policy to determine when to realize a charge-off, whether a partial or full loan balance. A charge down in whole or in part is realized when unsecured consumer loans, credit card credits and overdraft lines of specific reserves on $4,634,154credit reach 90 days delinquency. At 120 days delinquent, secured consumer loans are charged down to the value of loans to customers whose terms have been modifiedcollateral, if repossession of the collateral is assured and/or in TDRthe process of repossession. Consumer mortgage loan deficiencies are charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency. Commercial credits are charged down at 90 days delinquency, unless an established and approved work-out plan is in place or litigation of the credit will likely result in recovery of the loan balance. Upon notification of bankruptcy, unsecured debt is charged off. Additional charge-off may be realized as of December 31, 2012.further unsecured positions are recognized.




Table of Contents

Note 4—Loans (Continued)

        The ALLL has a direct impact on the provision expense. An increase in the ALLL is funded through recoveries and provision expense.

        Activity in the ALLL was as follows for the years ended December 31, 2017 and 2016:

For the Year Ended December 31, 2017
		Commercial Construction			Commercial Real Estate			Commercial Other			Consumer Real Estate			Consumer			Residential			Unallocated			Total
Allowance for credit losses:
Beginning Balance		$	12		$	586		$	249		$	23		$	12		$	652		$	151		$	1,685
Charge-offs			—			—			(10	)		—			(7	)		(93	)		—			(110	)
Recoveries			—			18			12			24			2			47			—			103
Provision			(11	)		26			28			(26	)		5			75			58			155
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	1		$	630		$	279		$	21		$	12		$	681		$	209		$	1,833
Ending balance: individually evaluated for impairment		$	—		$	22		$	3		$	—		$	—		$	9		$	—		$	34
Ending balance: collectively evaluated for impairment		$	1		$	608		$	276		$	21		$	12		$	672		$	209		$	1,799
Loans:
Ending Balance		$	2,859		$	73,954		$	24,635		$	7,026		$	1,617		$	83,473		$	—		$	193,564
Ending balance: individually evaluated for impairment		$	—		$	4,812		$	773		$	81		$	—		$	1,013		$	—		$	6,679
Ending balance: collectively evaluated for impairment		$	2,859		$	69,142		$	23,862		$	6,945		$	1,617		$	82,460		$	—		$	186,885


PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

For the Year Ended December 31, 2016
		Commercial Construction			Commercial Real Estate			Commercial Other			Consumer Real Estate			Consumer			Residential			Unallocated			Total
Allowance for credit losses:
Beginning Balance		$	1		$	504		$	233		$	36		$	13		$	677		$	95		$	1,559
Charge-offs			—			(115	)		—			(29	)		(16	)		(129	)		—			(289	)
Recoveries			—			255			—			20			3			42			—			320
Provision			11			(58	)		16			(4	)		12			62			56			95
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Ending Balance		$	12		$	586		$	249		$	23		$	12		$	652		$	151		$	1,685
Ending balance: individually evaluated for impairment		$	—		$	17		$	1		$	1		$	—		$	1		$	—		$	20
Ending balance: collectively evaluated for impairment		$	12		$	569		$	248		$	22		$	12		$	651		$	151		$	1,665
Loans:
Ending Balance		$	1,121		$	64,010		$	26,843		$	7,628		$	1,357		$	82,405		$	—		$	183,364
Ending balance: individually evaluated for impairment		$	—		$	3,247		$	353		$	35		$	—		$	1,411		$	—		$	5,046
Ending balance: collectively evaluated for impairment		$	1,121		$	51,261		$	25,746		$	6,582		$	1,300		$	76,423		$	—		$	162,433
Acquired loans not subject to loan loss reserve		$	—		$	9,502		$	744		$	1,011		$	57		$	4,571		$	—		$	15,885




Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Note 5—Property and Equipment

        A summary of property and equipment is as follows:

		December 31,
		2017			2016
Land		$	1,081		$	1,081
Land improvements			173			173
Buildings			6,546			6,617
Equipment			3,155			3,160
​	​	​	​	​	​	​	​
Total property and equipment			10,955			11,031
Accumulated depreciation			5,403			5,092
​	​	​	​	​	​	​	​
Net property and equipment		$	5,552		$	5,939
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        Depreciation expense was $404 and $422 for the periods ended December 31, 20132017 and 2016, respectively.

Note 6—Servicing

NOTE C—LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)        Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were approximately $107.0 million and $111.1 million at December 31, 2017 and 2016, respectively.

        The key economic assumptions used in determining the fair value of the mortgage servicing rights are as follows:

		December 31,
		2017			2016
Annual constant prepayment speed (CPR)			10.80	%		11.32	%
Weighted average life (in months)			245			243
Discount rate			10.34	%		9.96	%

        The fair value of our mortgage servicing rights was estimated to be $900 and $873 at December 31, 2017 and December 31, 2016.

        The following table presents TDRs that occurred during 2013 by class of loans:summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances:

		Number of Loans			Pre-Modification Outstanding Loan Balance			Post-Modification Outstanding Loan Balance
Troubled Debt Restructuring:
Residential REM			10		$	1,060,395		$	1,060,395
Commercial REM—owner occupied			2			368,537			368,537
Commercial REM—non-owner occupied			2			410,889			410,889
Other Commercial			4			406,630			406,630
Installment			0			-0-			-0-
Commercial Land and Development			0			-0-			-0-
Revolving			0			-0-			-0-
Credit Cards			0			-0-			-0-
​	​	​	​	​	​	​	​	​	​	​
TOTAL			18		$	2,246,451		$	2,246,451
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

		December 31,
		2017			2016
Balance—beginning of period		$	473		$	578
Originated mortgage servicing rights capitalized			124			133
Amortization of mortgage servicing rights			(179	)		(238	)
​	​	​	​	​	​	​	​
Balance—end of period		$	418		$	473
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        The following table presents TDRs that occurred during 2012 by class of loans:

		Number of Loans			Pre-Modification Outstanding Loan Balance			Post-Modification Outstanding Loan Balance
Troubled Debt Restructuring:
Residential REM			6		$	387,394		$	387,394
Commercial REM—owner occupied			0			-0-			-0-
Commercial REM—non-owner occupied			1			640,903			640,903
Other Commercial			0			-0-			-0-
Installment			0			-0-			-0-
Commercial Land & Development			2			681,567			681,567
Revolving			0			-0-			-0-
Credit Cards			0			-0-			-0-
​	​	​	​	​	​	​	​	​	​	​
TOTAL			9		$	1,709,864		$	1,709,864
​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​

        Generally, a modified loan is considered to be in payment default when the borrower is not performing according to the renegotiated terms and stops communicating and working with the Bank.

        At December 31, 2013, there were four loans classified as TDRs that totaled approximately $861,000 that experienced a payment default within twelve months of the modification.Note 7—Intangible Assets

        In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performedaccordance with the merger with Bank of Alpena in 2014, the probability that the borrower will beCompany recorded $1.4 million in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed utilizing the Company's internal underwriting policy.core deposit intangible assets.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 7—Intangible Assets (Continued)

        Intangible assets of the Company are summarized as follows:

		December 31, 2017									December 31, 2016
		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Core deposit (merger)		$	1,392		$	757		$	635		$	1,392		$	565		$	827
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

        Amortization expense was $192 and $217 for the periods ended December 31, 2013

NOTE C—LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)


Credit Quality Indicators:
2017 and 2016, respectively.

        The Bank utilizes a numeric grading system for loans to indicate the quality of the credit. At origination, grades are assigned to each commercial and commercial real estate loan by assessing information about the borrower's situation, including cash flow analysis and estimated collateral values. The loan grade is reassessed at each renewal or refinance, but any credit may receive a review based on lender identifications of changes in the situation or behavior of the borrower.

        Grades are not usually assigned to consumer residential or installment loans unless the loan meets specific criteria for placing the loanfuture amortization expense on the Bank's watch list. Once a loan is graded a "5" ("Watch") or greater number,Company's core deposit intangible asset for the loan grade will be analyzed once a quarter to assess the borrower's credit quality and to determine if the loan is impaired. In addition to these methods of assigning loan grades, changes may occur through the loan review program or regulatory examination process. The loan grades are as follows:

        Exceptional Quality:    Loans characterized as having minimal credit risk.

        High Quality:    Loans characterized as having low credit risk; the borrower has a history of strong repayment capacity.

        Satisfactory Quality:    Loans characterized as having a reasonable level of credit risk; the capacity to service debt is sufficient and stable.

        Acceptable Quality:    Loans with a moderate to above-average level of credit risk.

        Watch:    Loans with potential weaknesses that require close monitoring.

        Substandard:    Loans that are inadequately protected by the current sound worth and paying capacity of the borrower or the collateral.

        Doubtful:    Loans with weaknesses that make collection in full highly questionable and improbable.

        Loss:    Loans that are considered uncollectible.

        Atyears ending after December 31, 2013, and based on the most recent analysis performed, the risk category of loans by classification2017 is as follows:

		Commercial REM
Loan Grade		Owner Occupied			Non-Owner Occupied			Other Commercial			Commercial Land and Development			Total
Unrated		$	134,412		$	106,309		$	409,535		$	134,307		$	784,563
1 - 4			16,211,788			7,773,076			2,173,772			685,945			26,844,581
5			706,082			725,480			100,831			-0-			1,532,393
6			4,478,227			1,347,312			686,399			877,461			7,389,399
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTALS		$	21,530,509		$	9,952,177		$	3,370,537		$	1,697,713		$	36,550,936
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

		Amortization Expense
2018		$	167
2019			141
2020			116
2021			91
2022			65
Thereafter			55
​	​	​	​	​
Total		$	635
​	​	​	​	​
​	​	​	​	​
​	​	​	​	​

Note 8—Deposits

        Interest-bearing deposit accounts, by type, consist of the following:

		December 31,
		2017			2016
Account Type
NOW accounts and MMDA		$	108,084		$	128,015
Regular savings accounts			42,838			37,040
​	​	​	​	​	​	​	​
Total			150,922			165,055
Certificates of Deposit
Certificates of Deposit < $250,000			55,457			63,158
Certificates of Deposit³ $250,000			5,505			5,454
​	​	​	​	​	​	​	​
Total certificates of deposit			60,962			68,612
​	​	​	​	​	​	​	​
Total interest-bearing deposits		$	211,884		$	233,667
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE C—LOANS AND ALLOWANCE FOR LOAN LOSSESNote 8—Deposits (Continued)

        The following table sets forth the amount and maturities of certificates of deposit:

Years Ending December 31		Amount
2018		$	25,832
2019			16,233
2020			9,357
2021			6,076
2022			3,280
Thereafter			184
​	​	​	​	​
		$	60,962
​	​	​	​	​
​	​	​	​	​
​	​	​	​	​

        Deposits from related parties held by the Bank at December 31, 2017 and 2016 amounted to $12.4 million and $33.3 million, respectively.

Note 9—Federal Home Loan Bank and Federal Reserve Advances

        The Bank has advances from the FHLB of Indianapolis. Interest rates range from 0.99% to 2.21% with a weighted-average interest rate of 1.4%. These advances contain varying maturity dates through March 3, 2026 with a weighted-average maturity of approximately 27 months. The advances are collateralized by securities with a carrying value of $58.4 million and $28.1 million as of December 31, 2017 and 2016, respectively. Available borrowings with the FHLB at December 31, 2017 totaled $60.0 million, of which $16.6 million was outstanding.

        The Bank had no variable rate advances outstanding as of December 31, 2017 and 2016, respectively.

        The advances are subject to prepayment penalties subject to the provisions and conditions of the credit policy of the FHLB. Future maturities of the advances are as follows:

Years Ending December 31		Amount
2018		$	6,875
2019			2,264
2020			4,052
2021			97
2022			—
Thereafter			3,360
​	​	​	​	​
Total		$	16,648
​	​	​	​	​
​	​	​	​	​
​	​	​	​	​

        In 2009, the Bank entered into a discount window loan agreement with the Federal Reserve Bank that allows for advances up to 75% of the collateral balance. As of December 31, 2017, these advances are secured by investment securities with a fair value of approximately $4.1 million and are generally due within 28 days from the date of the advance. The interest rate on the advances is based on the quoted Federal Reserve discount window rate (effective rate of 2.00% as of December 31, 2017). At December 31, 2012,2017 and based on2016, the most recentBank had no outstanding advances.

Note 10—Federal Income Tax

        Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates




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Note 10—Federal Income Tax (Continued)

expected to apply to taxable income in the years in which those temporary differences are expected to be reversed.

        The Company and the Bank file a consolidated Federal income tax return. The analysis performed,of the risk category of loans by classificationconsolidated provision for federal income tax is as follows:

		Commercial REM
Loan Grade		Owner Occupied			Non-Owner Occupied			Other Commercial			Commercial Land and Development			Total
Unrated		$	1,034,255		$	504,491		$	883,216		$	185,945		$	2,607,907
1 - 4			17,734,014			8,734,664			3,888,500			93,614			30,450,792
5			1,351,813			665,819			-0-			-0-			2,017,632
6			4,000,128			1,970,212			679,261			1,984,897			8,634,498
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTALS		$	24,120,210		$	11,875,186		$	5,450,977		$	2,264,456		$	43,710,829
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​

		Year Ended December 31,
		2017			2016
Current provision		$	—		$	—
Deferred expense			721			432
Change in tax rate			1,174			—
Change in valuation allowance			(347	)		(432	)
​	​	​	​	​	​	​	​
Total		$	1,548		$	—
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        A reconciliation of federal income tax expense and the amount computed by applying the statutory federal income tax rate of 34% to income before federal income tax is as follows:

		Year Ended December 31,
		2017			2016
Tax expense at statutory rate		$	738		$	447
Increase (decrease) from:
Nondeductible expenses			4			4
Tax-exempt interest			(30	)		(32	)
Change in tax rate			1,174			—
Change in valuation allowance			(347	)		(432	)
Other			9			13
​	​	​	​	​	​	​	​
Total income tax expense		$	1,548		$	—
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​




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Note 10—Federal Income Tax (Continued)

        The Company considers the performancecomponents of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classifications, the Company evaluates credit quality based on the aging status of the loan, which was previously presented on page 20 of this report, and by payment activity. The following table presents the unpaid principal balance of residential and consumer loans based on payment activityour deferred tax asset as, of December 31, 2013:2017, have been computed using a 21% tax rate while the December 31, 2016 components are computed using a 34% tax rate. The net deferred tax asset was comprised of the following temporary differences:

		Residential REM			Installment			Revolving			Credit Cards				December 31,
Performing		$	28,791,765		$	3,636,617		$	2,901,626		$	-0-
Non-Performing			2,984,869			33,033			101,064			-0-
															2017			2016
Deferred tax assets:
Acquired loans															$	121		$	234
Other real estate owned																6			84
Non-accrual loan interest																25			35
Directors' benefit plan																103			230
Net operating loss carryforward																1,560			3,114
Net deferred loan origination fees																48			82
Unrealized loss on available-for-sale securities																268			510
Allowance for loan losses																172			227
Alternative minimum tax credit																59			59
Other																—			—
​	​		​	​		​	​		​	​		​	​	​	​	​	​	​	​	​
TOTAL		$	31,776,634		$	3,669,650		$	3,002,690		$	-0-
Total deferred tax assets																2,362			4,575
Less: valuation allowance																—			347
Deferred tax liabilities:
Mortgage servicing rights																88			161
Partnership losses																82			126
Depreciation																49			99
Core deposit intangible																133			281
Other																320			247
​														​	​	​	​	​	​	​
Total deferred tax liabilities																672			914
​														​	​	​	​	​	​	​
Net deferred tax asset															$	1,690		$	3,314
​	​		​	​		​	​		​	​		​	​	​	​	​	​	​	​	​
​
​														​	​	​	​	​	​	​

        The Company has net operating loss carryforwards of approximately $7.4 million generated from December 31, 2007 through December 31, 2014 that are available to reduce total taxable income through the years ending December 31, 2033.

Note 11—Off-Balance-Sheet Risk Commitments and Contingencies

        The Company is a party to credit-related 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, standby letters of credit, and commercial letters of credit. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

        The Bank's exposure to credit loss in the event of non-performance 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 these commitments. The Company follows the same credit policies in making




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Note 11—Off-Balance-Sheet Risk Commitments and Contingencies (Continued)

commitments as it does for on-balance-sheet instruments. The following table presentsfinancial instruments were outstanding whose contract amounts represent credit risk:

		December 31,
		2017			2016
Commitments to grant loans		$	10,274		$	10,741
Unfunded commitments under lines of credit			174,832			19,931
Commercial and standby letters of credit			343			310

        Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the unpaid principal balancecontract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of residential and consumer loansa fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on payment activity asmanagement's credit evaluation of the customer.

        Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. In most cases, these lines of credit are collateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

        Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily used to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. Fees earned on commercial and standby letters of credit are required to be deferred over the contractual life of the letter of credit. The Company determined that the fair value of guarantees on standby letters of credit has an immaterial effect on the financial results at December 31, 2012:2017 and 2016.

		Residential REM			Installment			Revolving			Credit Cards
Performing		$	28,919,671		$	3,900,882		$	3,496,891		$	434,750
Non-Performing			3,129,853			69,225			127,490			-0-
​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL		$	32,049,524		$	3,970,107		$	3,624,381		$	434,750
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​

        The Bank is servicing loans totaling $77,205,349 and $79,527,207 underTo reduce credit risk related to the Freddie Mac Program asuse of December 31, 2013 and 2012, respectively. During the years ended December 31, 2013 and 2012,credit-related financial instruments, the Company originatedgenerally holds collateral supporting those commitments if deemed necessary. The amount and sold secondary market loans undernature of the Freddie Mac Program totaling $16,643,020collateral obtained is based on the Company's credit evaluation of the customer. Collateral held varies, but may include cash, securities, accounts receivable, inventory, property, plant, equipment, and $25,822,485, respectively. The Bank is servicing loans totaling $1,764,474real estate.

        If the counterparty does not have the right and $2,122,464 underability to redeem the Federal Home Loan Bank Program as of December 31, 2013 and 2012, respectively. During the year ended December 31, 2013,collateral or the Company did not originateis permitted to sell or sell any secondary market loans underrepledge the Federal Home Loan Bank Program.collateral on short notice, the Company records the collateral in its balance sheet at fair value with a corresponding obligation to return it.

        Various legal claims also arise from time to time in the normal course of business, which, in the opinion of management, will have no material effect on the Company's financial statements.

Note 12—Stockholders' Equity

        Payment of dividends on the common stock is subject to determination and declaration by the Board of Directors and depends on a number of factors, including capital requirements, regulatory limitation on payment of dividends, the Bank's results of operations and financial condition, tax considerations, and general economic conditions.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 12—Stockholders' Equity (Continued)

December 31, 2013

NOTE C—LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

        During the year ended December 31, 2012, the Company originated        Banks and sold secondary market loans under the Federal Home Loan Bank totaling $1,198,382. The Company has elected not to adopt the requirements of the Transfers and Servicing Topic of FASB ASC. This election does not have a material effect on the Company's financial position or results of operations. As of December 31, 2013, the Bank had mortgage loans with a carrying value approximating $18,358,641 pledged as collateral for the Federal Home Loan Bank borrowing.

NOTE D—BANK PREMISES AND EQUIPMENT

        The major classifications of these assetsbank holding companies are summarized as follows:

		December 31
		2013			2012
Land and building		$	4,005,575		$	1,971,311
Equipment and furniture			1,424,316			1,255,564
Leasehold improvements			66,015			71,950
Construction in progress			-0-			50,091
​	​	​	​	​	​	​	​
			5,495,906			3,348,916
Accumulated depreciation			(2,317,444	)		(2,301,181	)
​	​	​	​	​	​	​	​
TOTAL		$	3,178,462		$	1,047,735
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        At December 31, 2013, the Company's subsidiary leases space for three branches expiring at various dates through May 2018. The leases allow for renewal terms of either three or five years. Rent expense was $147,850 and $166,015 for 2013 and 2012, respectively. One of the leases is located in a building owned by one of the directors of the Company and the Bank. Rent paid to the related party was $17,200 for 2013 and $15,600 for 2012.

        Future minimum payments under these operating leases are summarized below:

Year Ended December 31
2014		$	73,749
2015			72,249
2016			45,412
2017			30,500
2018			6,000
​	​	​	​	​
TOTAL		$	227,910
​	​	​	​	​
​	​	​	​	​

NOTE E—INTEREST PAYMENTS

        The Bank paid $517,215 and $757,636 in interest on deposits during 2013 and 2012, respectively. The Bank paid $5,198 and $47,900 in interest on borrowed funds during 2013 and 2012, respectively.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE F—COMMITMENTS AND CONTINGENCIES

        The Company's consolidated financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of business and that involve elements of credit risk, interest rate risk, and liquidity risk. These commitments and contingent liabilities are commitments to extend credit, credit card arrangements, and standby letters of credit. A summary of the Bank's commitments and contingent liabilities at December 31, 2013, is as follows:

Unfunded construction loan commitments		$	909,509
Standby letters of credit			673,889
Lines of credit			4,663,357
​	​	​	​	​
TOTAL		$	6,246,755
​	​	​	​	​
​	​	​	​	​

        Standby letters of credit include exposure to some credit loss in the event of nonperformance of the customer. The Bank's credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded on the consolidated statements of condition; because these instruments have fixed maturity dates, and because many of them expire without being drawn upon, they do not generally present any significant liquidity risk to the Bank.

NOTE G—CONCENTRATION OF CREDIT

        All of the Bank's loans, commitments, and standby letters of credit have been granted to customers in the Bank's market area, which is primarily Marquette County in Michigan's Upper Peninsula. Investments in state and municipal securities also involve governmental entities within the Bank's market area. The concentrations of credit by type of loan are set forth in Note C. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Letters of credit were granted primarily to commercial borrowers.

        The Bank places its cash with high credit quality institutions. At times, such investments may be in excess of the insured limits. The Bank's cash accounts at banks are insured by the FDIC for up to $250,000. At December 31, 2013, the Bank had cash deposits in excess of federally-insured limits with four correspondent banks. The uninsured portion of these deposits approximates $11,876,102 at December 31, 2013.

NOTE H—REGULATORY MATTERS

        The Bank 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 material effect on the Bank's financial statements. Under capitalCapital adequacy guidelines and, the regulatory frameworkadditionally for banks, prompt corrective action the Bank must meet specific capital guidelines thatregulations, involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheetoff-balance-sheet items as calculated under regulatory accounting practices. The Bank's capitalCapital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The prompt corrective action regulations provide four classifications; well capitalized; adequately capitalized; undercapitalized; and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.

        Beginning in 2015, banks transitioned to the regulators about components,new federal banking agencies revisions to the capital rules which incorporated certain changes to the Basel capital framework, including Basel III and other elements. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in at the rate of 0.625% per year and is fully phased in at 2.50% on January 1, 2019. The conservation buffer is 1.25% for 2017. Other than the conservation buffer, these regulations are considered in the 2017 ratios below and include several provisions such as the implementation of a common equity tier ratio, modifications to risk weightings of certain assets, and other factors.




Tablea phase in of Contents


PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE H—REGULATORY MATTERS (Continued)a capital conservation buffer and threshold deductions of certain instruments included in capital.

        Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below)following table) of total, common, and Tier I1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2013,2017 and 2016, that the Company and the Bank meetsmet all capital adequacy requirements to which it isthey are subject.

        As of December 31, 2013,2017, the most recent notification from the Federal Reserve Bank of MinneapolisBank's primary regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.

		Actual						For Capital Adequacy Purposes						To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount			Ratio			Amount			Ratio			Amount			Ratio
As of December 31, 2013:
Total Capital
(to Risk-Weighted Assets)		$	18,252,000			23.8	%	$	6,143,000			8.0	%	$	7,679,000			10.0	%
Tier 1 Capital
(to Risk-Weighted Assets)		$	17,286,000			22.5	%	$	3,073,000			4.0	%	$	4,610,000			6.0	%
Tier 1 Capital
(to Average Assets)		$	17,286,000			13.5	%	$	5,122,000			4.0	%	$	6,402,000			5.0	%
As of December 31, 2012:
Total Capital
(to Risk-Weighted Assets)		$	18,160,000			22.0	%	$	6,604,000			8.0	%	$	8,255,000			10.0	%
Tier 1 Capital
(to Risk-Weighted Assets)		$	17,125,000			20.8	%	$	3,293,000			4.0	%	$	4,940,000			6.0	%
Tier 1 Capital
(to Average Assets)		$	17,125,000			12.9	%	$	5,310,000			4.0	%	$	6,638,000			5.0	%

        The Bank is required to maintain average reserve balances by the Federal Reserve Bank. The amount of the required average reserve balance as of December 31, 2013, approximated $148,000.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARYNote 12—Stockholders' Equity (Continued)

To be categorized as well capitalized, an institution must maintain minimum total risk-based, common equity Tier 1 risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table.

		Actual						Regulatory Minimum						Minimum to be Well Capitalized			Minimum to be Well Capitalized
		Amount			Ratio			Amount			Ratio			Amount			Ratio
		Dollars in Thousands
December 31, 2017:
Tier 1 leverage ratio (core capital to average assets)		$	30,187			9.19	%	$	13,144			4.00	%	$	16,430			5.00	%
Common Equity tier 1 risk-based capital (to risk-weighted assets)			30,187			15.55	%		8,734			4.50	%		12,615			6.50	%
Tier 1 risk-based capital (to risk-weighted assets)			30,187			15.55	%		11,645			6.00	%		15,527			8.00	%
Total risk-based capital (to risk-weighted assets)			32,020			16.50	%		15,527			8.00	%		19,408			10.00	%
Tangible capital (tangible capital to tangible assets)			29,879			9.06	%		6,594			1.50	%		16,486			5.00	%
December 31, 2016:
Tier 1 leverage ratio (core capital to average assets)		$	28,352			8.44	%	$	13,439			4.00	%	$	16,799			5.00	%
Common Equity tier 1 risk-based capital (to risk-weighted assets)			28,352			14.71	%		8,672			4.50	%		12,526			6.50	%
Tier 1 risk-based capital (to risk-weighted assets)			28,352			14.71	%		11,562			6.00	%		15,416			8.00	%
Total risk-based capital (to risk-weighted assets)			30,046			15.59	%		15,416			8.00	%		19,271			10.00	%
Tangible capital (tangible capital to tangible assets)			28,352			8.39	%		6,763			1.50	%		16,906			5.00	%

Note 13—Employee Benefit Plans

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)        Defined Benefit Pension Plan—The Bank is a participant in the multiemployer Financial Institutions Retirement Fund ("FIRF" or the "Plan"), which covers a number of its officers and employees. The defined benefit plan covers all employees who have completed one year of service, attained age 21, and worked at least 1,000 hours during the year. Normal retirement age is 65, with reduced benefits available at age 55. The Bank's contributions are determined by FIRF and generally represent the normal cost of the Plan. Specific Plan assets and accumulated benefit information for the Bank's portion of the Plan are not available. Under the Employee Retirement Income Security Act of 1974 ("ERISA"), a contributor to a multiemployer pension plan may be liable in the event of complete or partial withdrawal for the benefit payments guaranteed under ERISA. Effective July 1, 2005 the Plan was frozen as to current participants and any new employees hired after July 1, 2004 were excluded from the Plan. The expense of the Plan allocated to the Bank was $132 and $144 for the years ended December 31, 2017 and 2016, respectively.

        401(k) Savings Plan—The Bank has a 401(k) savings plan covering substantially all of its employees who meet certain age and service requirements. Contributions to the plan by the Bank are discretionary in nature in such amounts determined by the Board of Directors. The expense under the plan for the years ended December 31, 2013

NOTE I—INCOME TAXES

        The reasons for the difference between income tax expense (benefit)2017 and the amount computed by applying the statutory federal income tax rate to income before income taxes are as follows:

		Year Ended December 31
		2013			2012
Federal income tax expense (benefit) computed at 34 percent		$	(3,308	)	$	285,930
Add (deduct) effect of:
Tax-exempt bond and loan interest income			(51,512	)		(71,109	)
Non-deductible interest expense			2,040			8,160
Increase in cash surrender value of life insurance			(18,323	)		(15,663	)
Benefit of low income housing credits			(65,855	)		-0-
Benefit of work opportunity tax credits			(20,000	)		-0-
Deductible bad debts versus provision			-0-			1,175
Other items—net			(102,641	)		3,597
​	​	​	​	​	​	​	​
TOTAL INCOME TAX EXPENSE (BENEFIT)		$	(259,599	)	$	212,090
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        The balance of the federal income tax expense (benefit) in the statements of income is comprised of the following components:

		Year Ended December 31
		2013			2012
Current		$	-0-		$	280,042
Deferred			(259,599	)		(67,952	)
​	​	​	​	​	​	​	​
TOTAL INCOME TAX EXPENSE (BENEFIT)		$	(259,599	)	$	212,090
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        The components of deferred tax assets (liabilities) that are included in other assets (liabilities) are as follows:

		December 31
		2013			2012
Deferred compensation plan		$	430,172		$	420,527
Allowance for loan losses			337,243			545,742
Depreciation			(145,853	)		(187,061	)
Minimum pension liability adjustment			248,423			402,488
Unrealized gains (losses) on securities available for sale			88,498			(144,838	)
​	​	​	​	​	​	​	​
NET DEFERRED TAX ASSETS		$	958,483		$	1,036,858
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        The Company made income tax payments of $5002016 was $106 and $305,000 during 2013 and 2012,$116, respectively.

        The Company has adopted FASB ASC 740-10-25, Accounting for Uncertainty in Income Taxes. The Company will record a liability for uncertain tax positions when it is more likely than not that a tax position would not be sustained if examined by the taxing authority. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 13—Employee Benefit Plans (Continued)

        Nonqualified Deferred Compensation Plan—The Bank has a nonqualified deferred compensation plan for certain directors. Through 1998, each eligible director could voluntarily defer all or part of his or her director's fees to participate in the program. The plan is currently unfunded and amounts deferred are unsecured and remain subject to claims of the Bank's general creditors.

        Directors are paid once they reach normal retirement age or sooner for reason of death, total disability, or termination. The Bank may terminate the plan at any time. The amount recorded for accrued expenses and other liabilities under the plan totaled approximately $491 and $579 at December 31, 2013

NOTE I—INCOME TAXES (Continued)

2017 and 2016, respectively. The Company's evaluation on December 31, 2013, revealed no uncertain tax positions that would have a material impact onexpense under the financial statements.

        As of December 31, 2013 and 2012, the Company does not have any unrecognized tax benefits in its financial statements. Duringplan for the years ended December 31, 20132017 and 2012,2016 was $58 and $64, respectively.

        Stock-Based Compensation Plans—The Company's 1996 Stock Option Plan (the "1996 Plan"), which was approved by shareholders, permits the grant of stock options to its directors and employees for up to 127,491 shares of common stock (retroactively adjusted for the exchange ratio applied in the Company's 2005 stock offering and related second-step conversion). The Company's 2006 Stock-Based Incentive Plan (the "2006 Plan"), which was approved by the shareholders on May 17, 2006, permits the award of up to 242,740 shares of common stock of which the maximum number to be granted as Stock Options is 173,386 and the maximum that can be granted as Restricted Stock Awards is 69,354. Option awards are granted with an exercise price equal to the market price of the Company's stock at the date of grant; those option awards generally vest based on five years of continual service and have 10-year contractual terms. Certain options provide for accelerated vesting if there is a change in control (as defined in the Plans). Shares issued, and subsequently exercised, under the Plans may be either authorized but unissued shares or reacquired shares held by the Company as treasury stock.

        Stock Options—A summary of option activity under the Plans during the years ended December 31, 2017 and 2016 is presented below:

Options		Shares			Weighted- Average Exercise Price			Weighted-Average Remaining Contractual Term (Years)			Aggregate Intrinsic Value
Outstanding at January 1, 2016			121,380		$	9.57			1.40			—
Forfeited or Expired			(121,380	)	$	9.57
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Outstanding at December 31, 2016			—		$	—			0.00			—
Forfeited or expired			—		$	—
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Oustanding at December 31, 2017			—		$	—			0.00			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Options Exercisable at December 31, 2017			—		$	—			0.00			—
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​

        There were no shares available for future granting of options due to the expiration of the Plan during 2016.

        Restricted Stock Awards—The Company did not grant any award shares during the years ended December 31, 2017 and 2016.

        There were no shares available for future grants of award shares due to the expiration of the Plan during 2016.

Note 14—Fair Value Measurements

        Accounting standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework for establishing that fair value. The framework for determining




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Note 14—Fair Value Measurements (Continued)

fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value.

        The following tables present information about the Company's assets measured at fair value on a recurring basis at December 31, 2017 and 2016 and the valuation techniques used by the Company to determine those fair values.

        In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets that the Company has not incurredthe ability to access.

        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 in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

        Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, interestmarket activity for the related asset. These Level 3 fair value measurements are based primarily on management's own estimates using pricing models, discounted cash flow methodologies, or penaltiessimilar techniques taking into account the characteristics of the asset.

        In instances whereby 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 its income tax returns.

the lowest level input that is significant to the valuation. The Company's tax returns are subjectassessment of the significance of particular inputs to possible examination by the taxing authorities. For federal income tax purposes, the tax returns essentially remain open for possible examination for a period of three years after the respective filing deadlines of those returns.

NOTE J—PENINSULA FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL STATEMENTSthese fair value measurements requires judgment and considers factors specific to each asset.

		CONDENSED BALANCE SHEETS December 31
		2013			2012
ASSETS
Cash		$	27,304		$	40,212
Investment in subsidiary			17,114,404			17,232,439
​	​	​	​	​	​	​	​
TOTAL ASSETS		$	17,141,708		$	17,272,651
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
LIABILITIES—Dividends payable		$	21,056		$	31,988
SHAREHOLDERS' EQUITY
Common stock, no par value, 400,000 shares authorized, 288,000 shares issued and outstanding			6,000,000			6,000,000
Retained earnings			11,774,677			11,740,808
Accumulated other comprehensive income (loss):
Net unrealized holding gains on available for sale securities of subsidiary			(171,791	)		281,156
Actuarial losses on the defined benefit pension plan			(482,234	)		(781,301	)
​	​	​	​	​	​	​	​
TOTAL SHAREHOLDERS' EQUITY			17,120,652			17,240,663
​	​	​	​	​	​	​	​
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	17,141,708		$	17,272,651
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2017
		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Balance at December 31, 2017
Investment securities—available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	—		$	18,685		$	—		$	18,685
Municipal notes			—			37,062			534			37,596
Corporate securities			—			149			—			149
Mortgage-backed securities			—			42,403			—			42,403
Equity securities			6			—			—			6
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total investment securities—available for sale		$	6		$	98,299		$	534		$	98,839
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​




Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2016
		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Balance at December 31, 2016
Investment securities—available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies		$	—		$	26,610		$	—		$	26,610
Municipal notes			—			44,509			608			45,117
Mortgage-backed securities			—			56,369			—			56,369
Equity securities			38			—			—			38
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total investment securities—available for sale		$	38		$	127,488		$	608		$	128,134
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 14—Fair Value Measurements (Continued)

December 31, 2013

NOTE J—PENINSULA FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL STATEMENTS (Continued)




		CONDENSED INCOME STATEMENTS Year Ended December 31
		2013			2012
INCOME—Dividends from subsidiary		$	224,640		$	299,520
EXPENSES—Miscellaneous			(10,616	)		(10,595	)
​	​	​	​	​	​	​	​
INCOME BEFORE UNDISTRIBUTED NET INCOME OF SUBSIDIARY			214,024			288,925
Equity in undistributed net income of subsidiary			35,845			339,955
​	​	​	​	​	​	​	​
NET INCOME		$	249,869		$	628,880
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​




		CONDENSED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31
		2013			2012
NET INCOME		$	249,869		$	628,880
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
COMPREHENSIVE INCOME		$	95,989		$	463,782
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​




		CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31
		2013			2012
Net cash flows provided (used) by:
Operating activities:
Net income		$	249,869		$	628,880
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed earnings of subsidiary			(35,845	)		(339,955	)
Decrease in dividends payable			(10,932	)		(1,661	)
​	​	​	​	​	​	​	​
NET CASH PROVIDED BY OPERATING ACTIVITIES			203,092			287,264
Financing activities—cash dividends			(216,000	)		(288,000	)
​	​	​	​	​	​	​	​
NET DECREASE IN CASH			(12,908	)		(736	)
Cash at beginning of year			40,212			40,948
​	​	​	​	​	​	​	​
CASH AT END OF YEAR		$	27,304		$	40,212
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​




Table        Fair value measurements of Contents


PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE K—DEFINED BENEFIT PENSION PLANU.S. Government agencies and mortgage-backed securities use pricing models that vary and may consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures.

        The Bank has a noncontributory defined benefit pension plan. Effective December 31, 2005, the plan was amended to freeze participation in the plan; therefore,There were no additional employees are eligible to become participants in the plan. The benefits are based on years of servicetransfers between Levels 1 and the employee's compensation at the time of retirement. The Plan was amended effective December 31, 2010, to freeze benefit accrual for all plan participants.

        The following table sets forth the plan's funded status and amounts recognized in the Bank's balance sheets.

		December 31
		2013			2012
Change in benefit obligation:
Benefit obligation at beginning of year		$	2,993,487		$	2,570,640
Service cost			-0-			-0-
Interest cost			120,072			121,510
Actuarial (gain) loss			(332,074	)		382,634
Benefits paid			(134,507	)		(81,297	)
​	​	​	​	​	​	​	​
Benefit (asset) obligation at end of year			2,646,978			2,993,487
Change in plan assets:
Fair value of plan assets at beginning of year			1,842,337			1,611,777
Actual return on plan assets			209,414			206,863
Employer contributions			82,720			104,994
Benefits paid			(134,507	)		(81,297	)
​	​	​	​	​	​	​	​
Fair value of plan assets at end of year			1,999,964			1,842,337
​	​	​	​	​	​	​	​
Funded status			(647,014	)		(1,151,150	)
Unrecognized net actuarial loss			730,657			1,183,789
​	​	​	​	​	​	​	​
Prepaid (accrued) pension expense, included with other assets or liabilities		$	83,643		$	32,639
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Additional pension liability, included with other liabilities		$	730,657		$	1,183,789
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

        The accumulated benefit obligation at December 31, 2013 and 2012 was $2,646,978 and $2,993,487, respectively.

        Net pension cost consists2 of the following components:

		Year Ended December 31
		2013			2012
Service cost-benefit earned during year		$	-0-		$	-0-
Interest cost on projected benefit obligation			120,072			121,510
Amortization of loss			57,410			43,321
Expected return on plan assets			(145,766	)		(130,438	)
​	​	​	​	​	​	​	​
NET PERIODIC PENSION COST		$	31,716		$	34,393
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE K—DEFINED BENEFIT PENSION PLAN (Continued)

        Assumptions used in the actuarial valuation are:

		January 1
		2013		2012
Weighted average discount rate		4.95%		4.75%
Rate of increase in future compensation levels		Not Applicable		Not Applicable
Expected long-term rate of return on plan assets		8.00%		8.00%

        The expected long-term rate of return on plan assets reflects management's expectations of long-term average rates of return on funds invested to provide for benefits included in the projected benefit obligation. The expected return is based on the outlook for inflation, fixed income returns and equity returns, while also considering historical returns, asset allocation and investment strategy. The discount rate assumption is based on investment yields available on AA rated long-term corporate bonds.

        The primary investment objective is to maximize the growth of the pension plan assets to meet the projected obligations to beneficiaries over a long period of time, and to do so in a manner that is consistent with the Bank's risk tolerance. Although all assets of the plan were in cash as of December 31, 2013, it was the intention of the plan sponsor to invest the plan assets in mutual funds with the following asset allocation:

		Target Allocation		Actual Allocation
Equity securities		50% to 70%			60	%
Debt securities		30% to 50%			40	%

        The following benefit payments, which reflect expected future service, are expected to be paid by the plan:

January 1, 2014 through December 31, 2014		$	143,413
January 1, 2015 through December 31, 2015		$	140,257
January 1, 2016 through December 31, 2016		$	136,920
January 1, 2017 through December 31, 2017		$	133,423
January 1, 2018 through December 31, 2018		$	132,440
January 1, 2019 through December 31, 2023		$	648,279

        The Company contribution for the year ending December 31, 2014, is estimated to be $132,200.

NOTE L—DEFINED CONTRIBUTION PLANS

        The Bank has a deferred compensation/retirement plan for certain directors and former directors. It is being funded by purchases of life insurance policies on these individuals. At December 31, 2013 and 2012, the cash surrenderfair value of these policies was $1,959,450 and $1,905,559, respectively. The total expense for this plan forhierarchy during the years ended December 31, 20132017 and 2012, was $135,208 and $138,101, respectively.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE L—DEFINED CONTRIBUTION PLANS (Continued)

        Employees of2016. For the Bank may participate in a 401(k) Profit Sharing Plan, whereby the employees may elect to make contributions pursuant to a salary reduction agreement upon meeting age and length-of-service requirements. The Company matches 50 percent of the employee's contribution up to six percent of the employee's wages for the year. Company contributions recognized as expense approximated $30,352 in 2013 and $33,554 in 2012.

NOTE M—STOCK RIGHTS

        The Company's Board of Directors has approved a Rights Agreement (Rights Plan). The Rights Plan declared a dividend of one common share purchase right (Right) for each outstanding share of common stock. Each Right entitles a shareholder to purchase fromavailable-for-sale securities, the Company obtains fair value measurements from an additional share at a price equal to two and one-half times the book value subject to the terms of the Rights Plan. The Rights transfer with the common stock and are presently not assigned any monetary value. Rights are only exercisable on the distribution date, which is generally triggered by the acquisition of a 20 percent interest in the Company by a control group. Until a Right is exercised, Rights do not have a diluting effect on common stock. The Rights Plan will expire December 31, 2014.

NOTE N—ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGSindependent third-party service.

        The Company had an outstanding advancealso has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These assets include impaired loans (see Note 4) and other real estate owned.

        The change in fair value of $1,000,000 fromimpaired loans is recorded through the Federal Home Loan Bank at December 31, 2012. The advance outstanding as of December 31, 2012, had interest at a fixed rate of 2.88 percent and matured in January 2013. There is no outstanding advance from the Federal Home Loan Bank at December 31, 2013.ALLL. The Company can draw upestimates the fair value of impaired loans based on Level 3 inputs which include 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).

        Other real estate owned assets are reported in the following table at initial recognition of impairment and on an ongoing basis until recovery or charge-off. At the time of foreclosure or repossession, real estate owned and repossessed assets are adjusted to a maximum $12,000,000 from the Federal Home Loan Bank. All of the advances are secured by a portion of the Company's mortgage loans.

        The Company has lines of credit with banks totaling $8,800,000. At December 31, 2013, there were no outstanding balances on the lines of credit.

        As part of the Bank's Liquidity Contingency Funding Plan, the Bank has taken the necessary stepsfair value less estimated costs to be able to borrow approximately $2,292,000 from the Federal Reserve. At December 31, 2013, no amounts had been drawn by the Bank under this program.

NOTE O—DEPOSITS

        The aggregate amount of time deposits, with a minimum denomination of $100,000, totaled $10,709,154 at December 31, 2013, and $13,639,809 at December 31, 2012.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNote 14—Fair Value Measurements (Continued)

December 31, 2013

NOTE O—DEPOSITS (Continued)

        The scheduled maturities ofsell, establishing a new cost basis. At that time, depositsthey are as follows:reported in the Company's fair value disclosures in the following nonrecurring tables:

Year Ended December 31
2014		$	19,654,235
2015			11,001,359
2016			1,635,064
2017			298,536
2018 and thereafter			272,070
​	​	​	​	​
TOTAL		$	32,861,264
​	​	​	​	​
​	​	​	​	​

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2017
		Balance at December 31, 2017			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Originated Assets:
Impaired loans accounted for under FASB ASC 310-10		$	3,352		$	—		$	—		$	3,352
Other real estate owned—residential mortgages			93			—			—			93
Other repossessed assets			559			—			—			559
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total assets at fair value on a non-recurring basis		$	4,004		$	—		$	—		$	4,004
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Acquired Assets:
Impaired loans accounted for under FASB ASC 310-10		$	249		$	—		$	—		$	249
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total assets at fair value on a non-recurring basis		$	249		$	—		$	—		$	249
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​

NOTE P—RELATED PARTIES

        The Bank has entered into transactions with its officers and directors. Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans to such related parties at December 31, 2013 and 2012, was $1,416,960 and $1,340,537, respectively. During 2013, new loans were made totaling $789,194 and repayments totaled $712,771.

        The amount of deposits of officers, directors, and their affiliated businesses as of December 31, 2013 and 2012, was $2,001,592 and $2,112,210, respectively.

NOTE Q—OTHER REAL ESTATE OWNED

        The following represents the change in the Bank's investment in Other Real Estate (ORE) for the years ending:


		Year Ended December 31
		2013			2012
Balance at January 1		$	408,079		$	497,979
Loans transferred to ORE			1,559,597			160,969
Reductions from sales of ORE			(275,102	)		(250,869	)
​	​	​	​	​	​	​	​
BALANCE AT DECEMBER 31		$	1,692,574		$	408,079
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2016
		Balance at December 31, 2016			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Originated Assets:
Impaired loans accounted for under FASB ASC 310-10		$	786		$	—		$	—		$	786
Other real estate owned—residential mortgages			396			—			—			396
Other real estate owned—commercial			283			—			—			283
Other repossessed assets			691			—			—			691
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total assets at fair value on a non-recurring basis		$	2,156		$	—		$	—		$	2,156
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Acquired Assets:
Impaired loans accounted for under FASB ASC 310-10		$	569		$	—		$	—		$	569
​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total assets at fair value on a non-recurring basis		$	569		$	—		$	—		$	569
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​

        The Bank's investment in ORE is included in other assets on the balance sheet. The Bank incurred ORE expenses approximating $52,540 and $68,940 for the years ending December 31, 2013 and 2012, respectively.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE R—FAIR VALUE

Fair Values of Financial Instruments

        The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

        Cash and Due from Banks:    Cash Equivalents—The carrying valueamounts of cash and cash equivalents approximatesshort-term instruments approximate fair value.values.




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        Federal Funds Sold or Purchased:    The carrying amount approximates fair value.Note 14—Fair Value Measurements (Continued)

        Investment Securities:            Deposits Held at Other Financial Institutions—Fair values of deposits held at other financial institutions are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for investmentsimilar deposits.

        Securities—Fair values of securities are based on quoted market prices, where available.prices. If a quoted market price is not available, fair value is estimated using quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying amount is the estimated fair value for the investments in Federal Reserve and Federal Home Loan Bank stock.similar securities.

        Loans Receivable:    Receivable—For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fairFair values for certain mortgage loans (e.g., one-to-four family residential), consumer loans and other loans (e.g., commercial real estate and rental property mortgage loans, commercial and industrial loans and agricultural) are estimated using discounted cash flow analyses,analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of nonperforming loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.

        Federal Home Loan Bank Stock—The carrying value of FHLB stock approximates fair value based on the redemption provisions of the FHLB.

        Deposit Liabilities:    Liabilities—The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).

The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

        Federal Home Loan Bank Advances—The estimated fair value of the fixed and variable rate FHLB advances are estimated by discounting the related cash flows using the rates currently available for similarly structured borrowings with similar maturities.

        Accrued interest receivable or payable:    Interest—The carrying amountamounts of accrued interest receivable or payable approximates itsapproximate fair value.

        Advances from Federal Home Loan Bank:            Other Financial Instruments—The carrying amount approximates fair value.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE R—FAIR VALUE (Continued)other financial instruments, including loan commitments and unfunded letters of credit, based on discounted cash flow analyses, is not material.

        The approximate carrying amount and estimated fair values and related carrying amounts of the Company's financial instruments are as follows:

		December 31, 2013
		Carrying Amount			Fair Value
Financial Assets:
Cash and due from banks		$	14,759,921		$	14,759,921
Federal funds sold		$	2,200,000		$	2,200,000
Investment securities available for sale		$	24,275,058		$	24,275,058
Federal Reserve and Federal Home Loan Bank stock		$	575,600		$	575,600
Loans, less allowance for loan losses		$	73,506,916		$	73,007,314
Accrued interest receivable		$	324,012		$	324,012
Financial Liabilities:
Deposits		$	104,824,798		$	102,853,122
Accrued interest payable		$	34,901		$	34,901

Fair Value Measurements

        The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, impaired loans, and foreclosed assets. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting write-downs of individual assets.

        The Fair Value Measurements and Disclosures Topic of FASB ASC establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy consists of three broad levels: Level 1 inputs consist of unadjusted quoted prices in active markets for identical assets and have the highest priority; Level 2 inputs consist of observable inputs other than quoted prices for identical assets; Level 3 inputs consist of unobservable inputs and have the lowest priority. The Bank uses appropriate valuation techniques based on the available inputs to measure the fair value of its investments.

        Following is a description of the valuation methodologies used for assets and liabilities recorded at fair value:

        Investment Securities:    Investment securities available for sale are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions, and other factors such as credit loss and liquidity assumptions and are considered Level 2. The values for Level 1 and Level 2 investment securities are generally obtained from an independent third party without making any adjustments. The




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE R—FAIR VALUE (Continued)

third party generally obtains direct market prices, such as benchmark curves, sector groupings, or matrix pricing. Because of these modeling techniques, the third party generally designates the investment securities as Level 2.

        Other Real Estate:    Commercial and residential real estate properties classified as foreclosed assets are measured at fair value less costs to sell. Fair values are generally based on recent real estate appraisals or internal evaluations. Management may add discounts to third party appraisals. The appraisals are generally obtained annually and are performed by qualified licensed appraisers. When the fair value of collateral is based on an observable market price or a current appraised value, the Company records the foreclosed assets as a nonrecurring Level 2. When a current appraised value is not available, or management determines further impairment below the appraised value, and there is no observable market price, the Company classifies the foreclosed asset as a nonrecurring Level 3.

        Loans:    The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The Company measures impairment in accordance with FASB ASC 942-310. The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value, and discounted cash flows. Impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investment in such loans.

        The Company reviews the net realizable values of the underlying collateral for collateral dependent impaired loans on a quarterly basis for all loan types. To determine the collateral value, management utilizes independent appraisals or internal evaluations. These valuations are reviewed to determine whether additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to carry and sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. These valuations are used to determine if any charge-offs or specific reserves are necessary. The Company may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.

        At December 31, 2013, substantially all of the impaired loans were evaluated based on the fair value of the collateral. Impaired loans, where an allowance is established based on the fair value of collateral, require classification in the fair value hierarchy.




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PENINSULA FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2013

NOTE R—FAIR VALUE (Continued)

        The following table presents information about the Bank's investments measured at fair value on a recurring basis:

					Fair Value Measurements at Reporting Date Using
		Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
December 31, 2013:
U.S. Government and federal agencies		$	5,378,500		$	5,378,500		$	-0-		$	-0-
State and other municipal securities			5,379,785			-0-			5,379,785			-0-
Mortgage-backed securities			10,690,769			-0-			10,690,769			-0-
Certificates of deposit			2,826,004			-0-			2,826,004			-0-
​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL INVESTMENT SECURITIES		$	24,275,058		$	5,378,500		$	18,896,558		$	0
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​
December 31, 2012:
U.S. Government and federal agencies		$	3,309,710		$	3,309,710		$	-0-		$	-0-
State and other municipal securities			6,231,496			-0-			6,231,496			-0-
Mortgage-backed securities			5,542,388			-0-			5,542,388			-0-
​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL INVESTMENT SECURITIES		$	15,083,594		$	3,309,710		$	11,773,884		$	0
​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​

        Fair values of assets measured on a nonrecurring basis at December 31 are as follows:

		Total Fair Value			Level 3
December 31, 2013:
Impaired loans		$	3,930,013		$	3,930,013
Other real estate		$	1,392,595		$	1,392,595

NOTE S—PENDING LITIGATION, CLAIMS, OR ASSESSMENTS

        Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are such matters that will have a material effect on the consolidated financial statements.

NOTE T—PRIOR PERIOD ADJUSTMENT

        During 2013, the Company restated retained earnings at December 31, 2011, to correct the application of U.S. GAAP to properly record a deferred tax asset for the allowance for loan losses. The effect of this adjustment was an increase in deferred tax assets and retained earnings at December 31, 2011, by $608,882. This restatement had no impact on net income for either 2013 or 2012.




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

JUNE 30, 2014

(all amounts are in thousands, except per share data, unless otherwise indicated)

								Purchase Accounting and Pro Forma Adjustments
		Mackinac 6/30/2014 (as reported)			Peninsula 6/30/2014 (as reported)																					Pro-Forma 6/30/2014 Combined
								Debit					Credit					Debit			Credit
ASSETS
Cash and due from banks		$	20,744		$	12,618		$	—												$	7,189		(i)		$	21,523
																						4,650		(j)
Federal funds sold			2			100			—					—								—					102
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Cash and cash equivalents			20,746			12,718			—					—					—			11,839					21,625
Interest bearing deposits			235			—								—								—					235
Securities available for sale			47,374			29,279			—					—								—					76,653
Federal Home Loan Bank stock			3,060			576								—								—					3,636
Loans
Commercial			374,565			41,477								3,529		(b)						—					412,513
Mortgage			113,332			29,407								—								—					142,739
Consumer			15,043			3,360								—								—					18,403
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total loans			502,940			74,244			—					3,529					—			—					573,655
Allowance for loan losses			(5,097	)		(1,764	)		1,764		(c)			—								—					(5,097	)
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net loans			497,843			72,480			1,764					3,529					—			—					568,558
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Premises and equipment			9,790			3,113								—								—					12,903
Other real estate held for sale			1,947			1,829								489		(d)						—					3,287
Other assets			14,874			4,292			1,026					—		(e)						—					20,192
Deposit Base Intangible			—			—			1,150							(f)											1,150
Goodwill			—			—			5,013							(g)											5,013
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL ASSETS		$	595,869		$	124,287		$	8,953				$	4,018				$	—		$	11,839				$	713,252
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Noninterest bearing deposits		$	73,732		$	10,165		$	—				$	—							$	—				$	83,897
Interest-bearing deposits
Interest checking			45,333																								45,333
NOW			38,011			21,034								—								—					59,045
Money market			64,898			30,351								—								—					95,249
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total transactional deposits			221,974			61,550			—					—					—			—					283,524
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Savings			15,658			12,172								—								—					27,830
IRA			17,815			3,384								—								—					21,199
CDs<$100,000			125,325			27,091								—								—					152,416
CDs>$100,000			23,151			—								—								—					23,151
Brokered/internet			80,093			—								—								—					80,093
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total deposits			484,016			104,197			—					—					—			—					588,213
Borrowings			42,087			—								—								—					42,087
Other liabilities			3,289			2,354								2,150		(a)						—					7,793
Shareholders' equity
Common stock and additional paid in capital			53,703			6,000								5,013		(g)			13,720			8,635		(k)			59,631
Retained earnings			12,325			12,171			2,228							(h)			7,189			—		(i)			15,079
Accumulated other comprehensive income			449			(435	)							—								435		(l)			449
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total shareholders' equity			66,477			17,736			2,228					5,013					20,909			9,070					75,159
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	595,869		$	124,287		$	2,228				$	7,163				$	20,909		$	9,070				$	713,252
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Basic common shares outstanding			5,527,690			288,000																642,026		(m)			6,169,716
Book value per basic common shares outstanding		$	12.03		$	61.58																				$	12.18
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​




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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2014

(all amounts are in thousands, except per share data, unless otherwise indicated)

		Mackinac 6/30/2014 (as reported)			Peninsula 6/30/2014 (as reported)			Pro Forma Adjustments					Pro-Forma 6/30/2014 Combined
Interest income		$	13,265		$	2,226		$	—				$	15,491
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Accretion of performing loan credit mark			—			—			219		(b)			219
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest income			13,265			2,226			219					15,710
Interest expense			2,013			191			50		(n)			2,254
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income			11,252			2,035			169					13,456
Provision for loan losses			374			325			—					699
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income after provision			10,878			1,710			169					12,757
Noninterest income			1,341			1,147			—					2,488
Noninterest expense			10,005			2,210			(1,074	)	(o)			11,141
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Amortization of deposit based intangible			—			—			58		(f)			58
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total noninterest expense			10,005			2,210			(1,016	)				11,199
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Income before taxes			2,214			647			1,185					4,046
Federal income taxes			748			106			403		(e)			1,257
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net income available to common shareholders		$	1,466		$	541		$	782				$	2,789
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Shares outstanding at end of period			5,527,690			288,000			642,026		(m)			6,169,716
Weighted average common shares outstanding			5,529,290			288,000			642,026		(m)			6,171,316
Weighted average fully diluted common shares outstanding			5,584,932			288,000			642,026		(m)			6,226,958
Basic earnings per share		$	0.27		$	1.88							$	0.45
Diluted earnings per share		$	0.26		$	1.88							$	0.45




Table of Contents


MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2013

(all amounts are in thousands, except per share data, unless otherwise indicated)

		Mackinac 12/31/2013 (as reported)			Peninsula 12/31/2013 (as reported)			Pro Forma Adjustments					Pro-Forma 12/31/2013 Combined
Interest income		$	25,523		$	4,721		$	—				$	30,244
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Accretion of performing loan credit mark			—						437		(b)			437
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total interest income			25,523			4,721			437					30,681
Interest expense			4,124			502			100		(n)			4,726
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income			21,399			4,219			337					25,955
Provision for loan losses			1,675			580			—					2,255
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net interest income after provision			19,724			3,639			337					23,700
Noninterest income			3,938			795			—					4,733
Noninterest expense			18,128			4,445			(2,148	)	(o)			20,425
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Amortization of deposit based intangible			—						115		(f)			115
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Total noninterest expense			18,128			4,445			(2,033	)				20,540
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Income before taxes			5,534			(11	)		2,370					7,893
Federal income taxes			(403	)		(260	)		806		(e)			143
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net Income		$	5,937		$	249		$	1,564				$	7,750
Preferred dividends			308			—			—					308
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Net income available to common shareholders		$	5,629		$	249		$	1,564				$	7,442
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
Shares outstanding at end of period			5,541,390			288,000			642,026		(m)			6,183,416
Weighted average common shares outstanding			5,558,313			288,000			642,026		(m)			6,200,339
Weighted average fully diluted common shares outstanding			5,650,058			288,000			642,026		(m)			6,292,084
Basic earnings per share		$	1.01		$	0.86							$	1.20
Diluted earnings per share		$	1.00		$	0.86							$	1.18




Table of Contents


NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Note A—Basis of Presentation

        The unaudited pro forma combined condensed consolidated financial information and explanatory notes show the impact on the historical financial condition and results of operations of Mackinac resulting from the pending Peninsula acquisition under the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of Peninsula will be recorded by Mackinac at fair value as of the date the transaction is completed. The unaudited pro forma combined condensed consolidated statement of financial condition combines the historical financial information of Mackinac and Peninsula as of December 31, 2013,2017 and assumes that the Merger was completed on that date. The unaudited pro forma combined condensed consolidated statements of operations for the twelve month period ended December 31, 2013 gives effect to the pending Merger2016 are as if the transaction had been completed on January 1, 2013.

        Since the transaction is recorded using the acquisition method of accounting, all loans are recorded at fair value, including adjustments for credit quality, and no allowance for credit losses is carried over to Mackinac's balance sheet. In addition, certain nonrecurring costs associated with the pending Merger such as potential severance, professional fees, legal fees and conversion-related expenditures are expensed as incurred and not reflected in the unaudited pro forma combined condensed consolidated statements of operations.

        While the recording of the acquired loans at their fair value will impact the prospective determination of the provision for loan and lease losses and the allowance for loan and lease losses, for purposes of the unaudited pro forma combined condensed consolidated statement of operations for the year ended December 31, 2013, Mackinac assumed no adjustments to the historical amount of Peninsula's provision for loan losses. If such adjustments were estimated, there could be a reduction, which could be significant, to the historical amounts of Peninsula's provision for loan losses presented.

Note B—Accounting Policies and Financial Statement Classifications

        The accounting policies of Peninsula are in the process of being reviewed in detail by Mackinac. Upon completion of such review, conforming adjustments or financial statement reclassifications may be determined.

Note C—Merger and Acquisition Integration Costs

        In connection with the pending Merger, the plan to integrate the operations of Peninsula is still being developed. The specific details of the plan to integrate the operations of Peninsula will continue to be refined over the next several months, and will include assessing personnel, benefit plans, premises, equipment and service contracts to determine where Mackinac may take advantage of redundancies. Certain decisions arising from these assessments may involve involuntary termination of employees, vacating leased premises, changing information systems, canceling contracts with certain service providers, selling or otherwise disposing of certain premises, furniture and equipment, and re-assessing a possible deferred tax asset valuation allowance from a potential change in control for tax purposes. Mackinac also expects to incur merger-related costs including professional fees, legal fees, system conversion costs and costs related to communications with customers and others. To the extent there are costs associated with these actions, the costs will be recorded based on the nature of the cost and the timing of these integration actions. No such costs were considered in the accompanying unaudited pro forma combined condensed consolidated statements of operations.follows:




Table of Contents


NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (Continued)

Note D—Estimated Annual Cost Savings

        Mackinac expects to realize cost savings from the pending Merger. These cost savings are not reflected in the unaudited pro forma condensed consolidated financial information and there can be no assurance they will be achieved in the amount, manner or timing currently contemplated.

Note E—Pro Forma Adjustments

        The following pro forma adjustments have been reflected in the unaudited pro forma combined condensed consolidated financial information. All adjustments are based on current assumptions and valuations, which are subject to change.

(a)

Cash was adjusted to reflect expensing of approximately $2.150 million of anticipated non-recurring expenses to be incurred by Mackinac and Peninsula prior to closing. The related tax effect of approximately $.640 million is reflected as an increase to other assets. Anticipated non-recurring expenses consist of employment related expenses such as stay bonuses and severance payments. Also included are costs associated with termination fees for data processing services and conversion expenses. These expenses are not included in the Pro Forma Condensed Consolidated Income Statements because they are not expected to have a continuing impact on the combined entity. Payment of these expenses is not expected to have a significant impact on the liquidity of the combined entity.



(b)

Based on Mackinac's initial evaluation of the acquired portfolio of loans, a fair value adjustment of $3.529 million was recorded, which includes both an interest rate component and a credit component. The impact of the adjustment was an increase to interest income by approximately $.437 million and $.219 million for the year ended December 31, 2013 and six months ended June 30, 2014, respectively.



(c)

The allowance for loan losses was adjusted to reflect the reversal of Peninsula's recorded allowance. Purchased loans acquired in a business combination are required to be recorded at fair value, and the recorded allowance for loan losses may not be carried over.



(d)

Fair value adjustment to the net book value of other real estate owned by Peninsula is $.489 million based on Mackinac's initial evaluation of the portfolio.



(e)

The adjustment of approximately $1.026 million reflects deferred taxes associated with the adjustments to record the assets and liabilities of Peninsula at fair value using Mackinac's statutory rate of 34%.



(f)

Based on Mackinac's initial evaluation of core deposits, the identified core deposit intangible of $1.150 million will be amortized on a straight line basis over an estimated useful life of 10 years. The amortization expense associated with the core deposit intangible was an increase to non-interest expense of $.115 million and $.058 million for the year ended December 31, 2013 and six months ended June 30, 2014, respectively.



(g)

Goodwill of $5.013 million was generated as a result of the total purchase price and net assets acquired. See "Pro Forma Allocation of Purchase Price" under Note (o) below for the allocation of the purchase price to net assets acquired. The adjustment has no impact on the Pro Forma Condensed Consolidated Income Statements.



(h)

Net impact to equity of transaction costs and purchase accounting adjustments.




Table of Contents


NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (Continued)

Note E—Pro Forma Adjustments (Continued)

(i)

Reflection of pre-close special dividend paid with excess capital by Peninsula to its shareholders.



(j)

Reflection of payment to those of Peninsula's shareholders who elected for cash consideration. This is estimated at 35% of shares outstanding at a per share price of $46.13.



(k)

Common stock and additional paid in capital, retained earnings, and accumulated other comprehensive income were adjusted to reverse Peninsula's historical stockholders' equity balances to reflect the stock consideration to be issued, estimated at $8.635 million. See also "Pro Forma Allocation of Purchase Price" under Note (o) below for the allocation of the purchase price to net assets acquired. The adjustment has no impact on the Pro Forma Combined Condensed Consolidated Income Statements.



(l)

Accumulated other comprehensive income was adjusted to reverse Peninsula's historical accumulated other comprehensive income (deficit) balance.



(m)

Basic and weighted average common shares outstanding were adjusted to reverse Peninsula's basic shares outstanding and to record shares of Mackinac's stock issued to effect the transaction.



(n)

Represents interest expense related to cash consideration in the transaction.



(o)

Represents operational efficiencies and cost reductions created with the transaction that reduce salaries and benefits, data processing costs, and other overhead expenses.



(p)

Preliminary unaudited proforma regulatory intangible capital ratios.




Table of Contents


NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (Continued)

Note E—Pro Forma Adjustments (Continued)

(dollars in thousands, except per share data)
Purchase Price:
Peninsula shares outstanding at June 30, 2014			288,000
Price per share		$	46.13
Aggregate pro forma value of Mackinac stock to be issued, assuming 65% stock consideration election		$	8,635
Aggregate cash consideration at $46.13 per share, assuming 35% cash election			4,650
​	​	​	​	​	​	​	​
Total pro forma purchase price					$	13,285
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​
Net assets acquired:
Cash and cash equivalents		$	5,529
Securities available for sale			29,279
Federal Home Loan Bank stock			576
Loans			70,715
Premises and equipment			3,113
Other real estate owned			1,340
Deposit based intangible			1,150
Other assets			5,271
​	​	​	​	​	​	​	​
Total assets			116,973
​	​	​	​	​	​	​	​
Non-interest bearing deposits			10,165
Interest bearing deposits			94,032
​	​	​	​	​	​	​	​
Total deposits			104,197
Other liabilities			4,504
​	​	​	​	​	​	​	​
Total liabilities			108,701
​	​	​	​	​	​	​	​
Net assets acquired						8,272
​	​	​	​	​	​	​	​
Goodwill					$	5,013
​	​	​	​	​	​	​	​
​	​	​	​	​	​	​	​

December 31, 2017		Carrying Value			Level 1			Level 2			Level 3			Total Estimated Fair Value
Financial assets:
Cash and cash equivalents		$	8,389		$	8,389		$	—		$	—		$	8,389
Deposits held at other financial institutions			3,714			—			3,696			—			3,696
Securities available for sale			98,839			6			98,299			534			98,839
Securities held to maturity			650			—			651			—			651
Loans held for sale			430			—			—			438			438
Loans receivable—net			191,503			—			—			188,417			188,417
Federal Home Loan Bank stock			1,636			—			1,636			—			1,636
Accrued interest receivable			1,033			—			—			1,033			1,033
Financial liabilities:
Customer deposits			270,307			—			270,907			—			270,907
Federal Home Loan Bank advances			16,648			—			16,236			—			16,236
Accrued interest payable			93			—			—			93			93




Table of Contents

Note 14—Fair Value Measurements (Continued)


NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (Continued)

December 31, 2016		Carrying Value			Level 1			Level 2			Level 3			Total Estimated Fair Value
Financial assets:
Cash and cash equivalents		$	8,807		$	8,807		$	—		$	—		$	8,807
Deposits held at other financial institutions			5,422			—			5,441			—			5,441
Securities available for sale			128,134			—			127,526			608			128,134
Securities held to maturity			700			—			701			—			701
Loans receivable—net			181,439			—			—			181,569			181,569
Federal Home Loan Bank stock			1,636			—			1,636			—			1,636
Accrued interest receivable			1,026			—			—			1,026			1,026
Financial liabilities:
Customer deposits			293,428			—			294,103			—			294,103
Federal Home Loan Bank advances			17,517			—			17,048			—			17,048
Accrued interest payable			94			—			—			94			94

Note 15—Restrictions on Dividends

        Dividends paid by the Bank are the primary source of funds available to the Company for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the Bank to the Company is subject to restrictions by the Office of the Comptroller of Currency ("OCC"). These restrictions generally limit dividends to the current and prior two years' retained earnings. In addition to these restrictions, as a practical matter, dividend payments cannot reduce regulatory capital levels below the Bank's regulatory capital requirements and minimum regulatory guidelines. Future dividend payments by the Company will be based on future earnings and the approval of the OCC.

Note E—Pro Forma Adjustments (Continued)16—Subsequent Events

(q)

The following information reflects

        On January 16, 2018, First Federal of Northern Michigan Bancorp, Inc. ("First Federal Bancorp") and Mackinac Financial Corporation ("Mackinac Financial"), jointly announced the unaudited pro forma balances usedexecution of an agreement and plan of merger that provides for calculating pro forma regulatorythe integration of the two companies and tangible capital ratios astheir subsidiary community banking institutions. First Federal Bancorp shareholders will receive 0.576 shares of June 30, 2014.

		6/30/2014 (as reported)(1)			Adjustments			6/30/2014 Pro Forma
Total equity	��		66,477			8,135	(2)		74,612
Less:
Net unrealized gain on available for sale securities			(449	)		(47	)		(496	)
Disallowed deferred tax asset			(5,500	)		1,000	(3)		(4,500	)
Disallowed goodwill and intangibles			(106	)		(6,166	)(4)		(6,272	)
​	​	​	​	​	​	​	​	​	​	​
Tier 1 Capital			60,422			2,922			63,344
Allowance for loan losses			5,097			—			5,097
​	​	​	​	​	​	​	​	​	​	​
Tier 2 capital			5,097			—			5,097
​	​	​	​	​	​	​	​	​	​	​
Total risk based capital			65,519			2,922			68,441
​	​	​	​	​	​	​	​	​	​	​
Risk weighted assets			508,874			74,937	(5)		583,811
​	​	​	​	​	​	​	​	​	​	​
Total average assets			581,150			119,086	(6)		700,236
Less:
Disallowed deferred tax asset			(5,500	)		1,000	(3)		(4,500	)
Disallowed goodwill and intangibles			(106	)		—			(106	)
​	​	​	​	​	​	​	​	​	​	​
Average assets for regulatory leverage capital			575,544			120,086			695,630
Total assets			595,869			114,287	(7)		710,156
​	​	​	​	​	​	​	​	​	​	​
Total tangible assets			595,869			114,287			710,156
​	​	​	​	​	​	​	​	​	​	​
Tier 1 leverage ratio			10.50	%					9.11	%
Tier 1 risk based ratio			11.87	%					10.85	%
Total risk based ratio			12.88	%					11.72	%
Total tangible equity to total tangible assets			11.16	%					10.51	%

---

(1)

Balances asMackinac Financial common stock for each share of June 30, 2014 as reported on Mackinac's FRY-9C filedFirst Federal Bancorp common stock. In addition, First Federal Bancorp shareholders will receive a special cash dividend, immediately prior to the closing of the merger, of $8.0 million subject to the maintenance of a minimum equity requirement. Should the equity (adjusted for merger-related expense and any change in unrealized gains or losses after December 31, 2017 or realized gains or losses associated with the Federal Reserve.



(2)

Adjustment to reflect stock and cashinvestment portfolio) at the closing date be less than the equity at December 31, 2017, there will be a dollar for dollar reduction in the special dividend. Total consideration to effectFirst Federal Bancorp shareholders in connection with the transaction. See also "Pro Forma Allocationtransaction would equate to $41.8 million, or $11.22 per share, based upon the assumed value of Purchase Price." under Note (o) above.



(3)

Adjustment$15.75 for Mackinac Financial common shares. The transaction is subject to reflect additional deferred tax asset recognition forcustomary closing conditions, including approval by the shareholders of First Federal Bancorp and the shareholders of Mackinac Financial and their applicable banking regulatory capital created asagencies. It is anticipated that the transaction will close mid to late second quarter of 2018.

        On February 8, 2018, First Federal of Northern Michigan ("First Federal"), the wholly owned subsidiary of First Federal of Northern Michigan, Bancorp, Inc., closed the assumption of deposits and sale of certain loans within the Oscoda market to Huron Community Bank. In the transaction, Huron Community Bank assumed $7.6 million in deposits and purchased $1.5 million in loans. First Federal received a resultpremium of the transaction.



(4)

Adjustment to reflect preliminary estimate of goodwill and intangibles net of the deferred tax liability. See also "Pro Forma Allocation of Purchase Price" under Note (o) above.



(5)

Adjustment to reflect the risk weighted assets as reported by Peninsula$229 on the June 30, 2014 Consolidated Reports of Condition and Income for a Bank with Domestic Offices Only—FFIEC 041 ("Call Report") filed with the Federal Financial Institutions Examination Council.



(6)

Adjustments to total average assets resulting from the transaction. See also "Pro Forma Allocation of Purchase Price" under Note (o) above.



(7)

Adjustments to total assets resulting from the transaction. See also "Pro Forma Allocation of Purchase Price" under Note (o) above.

assumed deposits.



Table of Contents


Annex A


EXECUTION VERSION
Annex A

AGREEMENT AND PLAN OF MERGER



by and among:


MACKINAC FINANCIAL CORPORATION,

a Michigan corporation;

PFCMFNC ACQUISITION, LLC,
a Michigan limited liability company,company;

and

PENINSULA FINANCIAL CORPORATION,FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.,
a Michigan corporation.

---




Dated as of July 18, 2014January 16, 2018

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Table of Contents


TABLE OF CONTENTS


ARTICLE I THE MERGER					A-8A-1
1.1		THE MERGERMERGER.			A-8A-1
1.2		EFFECTIVE TIMETIME.			A-8A-1
1.3		CLOSINGCLOSING.			A-8A-1
1.4		ARTICLES OF ORGANIZATION OF THE SURVIVING ENTITYENTITY.			A-9A-2
1.5		TAX CONSEQUENCESCONSEQUENCES.			A-9A-2
1.6		EFFECTS OF THE MERGERMERGER.			A-9A-2
1.7		CONVERSION OF STOCKSTOCK.			A-9A-2
1.8		THE BANK MERGERMERGER.			A-11A-4
ARTICLE II DELIVERY OF MERGER CONSIDERATION					A-11A-4
2.1		EXCHANGE AGENTAGENT.			A-11A-4
2.2		DELIVERY OF MERGER CONSIDERATIONCONSIDERATION.			A-11A-4
2.3		ELECTION AND EXCHANGE PROCEDURESPROCEDURES.			A-11A-5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PENINSULAFIRST FEDERAL					A-15A-7
3.1		CORPORATE ORGANIZATIONORGANIZATION.			A-15A-7
3.2		CAPITALIZATIONCAPITALIZATION.			A-16A-8
3.3		AUTHORITY; NO VIOLATIONVIOLATION.			A-16A-8
3.4		CONSENTS AND APPROVALSAPPROVALS.			A-17A-9
3.5		REPORTSREPORTS.			A-17A-9
3.6		FINANCIAL STATEMENTSSTATEMENTS.			A-18A-10
3.7		UNDISCLOSED LIABILITIESLIABILITIES.			A-19A-11
3.8		ABSENCE OF CERTAIN CHANGES OR EVENTSEVENTS.			A-19A-11
3.9		LEGAL PROCEEDINGSPROCEEDINGS.			A-19A-11
3.10		TAXES AND TAX RETURNSRETURNS.			A-19A-11
3.11		EMPLOYEE BENEFIT PLANSPLANS.			A-21A-13
3.12		LABOR MATTERSMATTERS.			A-23A-16
3.13		COMPLIANCE WITH APPLICABLE LAWLAW.			A-24A-17
3.14		MATERIAL CONTRACTSCONTRACTS.			A-25A-18
3.15		AGREEMENTS WITH REGULATORY AGENCIESAGENCIES.			A-27A-20
3.16		INVESTMENT SECURITIESSECURITIES.			A-27A-20
3.17		DERIVATIVE INSTRUMENTSINSTRUMENTS.			A-27A-20
3.18		ENVIRONMENTAL LIABILITYLIABILITY.			A-28A-21
3.19		INSURANCEINSURANCE.			A-28A-21
3.20		TITLE TO PROPERTYPROPERTY.			A-29A-22
3.21		INTELLECTUAL PROPERTYPROPERTY.			A-30A-23
3.22		BROKER'S FEESFEES.			A-31A-24
3.23		NO INVESTMENT ADVISERADVISER.			A-31A-24
3.24		LOANSLOANS.			A-31A-24
3.25		RELATED PARTY TRANSACTIONSTRANSACTIONS.			A-33A-26
3.26		TAKEOVER LAWSLAWS.			A-33A-26
3.27		APPROVALSAPPROVALS.			A-34A-27
3.28		BOOKS AND RECORDSRECORDS.			A-34A-27
3.29		LOAN GUARANTEESGUARANTEES.			A-34A-27
3.30		DATA SECURITY AND CUSTOMER PRIVACYPRIVACY.			A-35A-28
3.31		PENINSULA INFORMATIONFIRST FEDERAL INFORMATION.			A-35A-28

A-i




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Table of Contents

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MACKINAC					A-35A-28
4.1		CORPORATE ORGANIZATIONORGANIZATION.			A-35A-28
4.2		CAPITALIZATIONCAPITALIZATION.			A-36A-29
4.3		AUTHORITY; NO VIOLATIONVIOLATION.			A-36A-29
4.4		CONSENTS AND APPROVALSAPPROVALS.			A-37A-30
4.5		LEGAL PROCEEDINGSPROCEEDINGS.			A-37A-30
4.6		ABSENCE OF CERTAIN CHANGESCHANGES.			A-37A-30
4.7		REPORTSREPORTS.			A-37A-30
4.8		FINANCIAL STATEMENTSSTATEMENTS.			A-38A-31
4.9		COMPLIANCE WITH APPLICABLE LAWUNDISCLOSED LIABILITIES.			A-38A-31
4.10		TAX MATTERSCOMPLIANCE WITH APPLICABLE LAW.			A-38A-31
4.11		BROKER'S FEESTAX MATTERS.			A-39A-32
4.12		MACKINAC INFORMATIONBROKER'S FEES.			A-39A-32
4.13		AGREEMENTS WITH REGULATORY AGENCIESMACKINAC INFORMATION.			A-39A-32
4.14		APPROVALSAGREEMENTS WITH REGULATORY AGENCIES.			A-39A-32
4.15		FINANCIAL ABILITYAPPROVALS.			A-39A-33
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS					A-39A-33
5.1		CONDUCT OF BUSINESS OF PENINSULAFIRST FEDERAL PRIOR TO THE EFFECTIVE TIMETIME.			A-39A-33
5.2		FORBEARANCES OF PENINSULAFIRST FEDERAL.			A-40A-33
5.3		COVENANTS OF MACKINACMACKINAC.			A-36
A-425.4		ADDITION OF FIRST FEDERAL DIRECTOR TO MACKINAC BOARD.			A-36
ARTICLE VI ADDITIONAL AGREEMENTS					A-43A-36
6.1		REGULATORY MATTERSMATTERS.			A-43A-36
6.2		ACCESS TO INFORMATIONINFORMATION.			A-44A-38
6.3		SEC FILINGS AND SHAREHOLDER APPROVALAPPROVAL.			A-45A-38
6.4		PUBLIC DISCLOSUREDISCLOSURE.			A-47A-40
6.5		EMPLOYEE BENEFIT MATTERSMATTERS.			A-47A-41
6.6		ADDITIONAL AGREEMENTSAGREEMENTS.			A-48A-42
6.7		INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCEINSURANCE.			A-48A-42
6.8		LISTING AND QUOTATIONQUOTATION.			A-50A-44
6.9		NO SOLICITATIONSOLICITATION.			A-50A-44
6.10		CLOSING DATE BALANCE SHEETSHEET.			A-51A-45
6.11		NOTIFICATION OF CERTAIN MATTERSMATTERS.			A-51A-45
6.12		SYSTEM INTEGRATIONINTEGRATION.			A-51A-45
6.13		COORDINATION; INTEGRATIONINTEGRATION.			A-52A-46
6.14		CLAIMS LETTERSLETTERS.			A-52A-46
6.15		TAKEOVER PROVISIONSPROVISIONS.			A-52A-46
6.16		SHAREHOLDER LITIGATIONLITIGATION.			A-52A-46
6.17		EXISTING BUSINESS RELATIONSHIPSRELATIONSHIPS.			A-52A-46
6.18		LOAN DOCUMENTATIONDOCUMENTATION.			A-52A-46
6.19		CHARGE-OFFSCHARGE-OFFS.			A-52A-46
6.20		BANK COMMITTEE MEETINGSSPECIAL DIVIDEND.			A-52
6.21		SPECIAL DIVIDEND			A-53
6.22		PENINSULA SHAREHOLDERS' TRUST			A-53A-47
ARTICLE VII CONDITIONS PRECEDENT					A-53A-47
7.1		CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE CLOSINGCLOSING.			A-53A-47
7.2		CONDITIONS TO OBLIGATIONS OF MACKINACMACKINAC.			A-54A-47
7.3		CONDITIONS TO OBLIGATIONS OF PENINSULAFIRST FEDERAL.			A-55A-48

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ARTICLE VIII TERMINATION AND AMENDMENT					A-56A-49
8.1		TERMINATIONTERMINATION.			A-56A-49
8.2		EFFECT OF TERMINATIONTERMINATION.			A-58A-50
8.3		TERMINATION FEEFEE.			A-58A-51
8.4		AMENDMENTAMENDMENT.			A-58A-51
8.5		EXTENSION; WAIVERWAIVER.			A-59A-51
ARTICLE IX GENERAL PROVISIONS					A-59A-52
9.1		NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND AGREEMENTSAGREEMENTS.			A-59A-52
9.2		EXPENSESEXPENSES.			A-59A-52
9.3		NOTICESNOTICES.			A-59A-52
9.4		INTERPRETATIONINTERPRETATION.			A-60A-53
9.5		COUNTERPARTSCOUNTERPARTS.			A-60A-53
9.6		ENTIRE AGREEMENTAGREEMENT.			A-60A-53
9.7		GOVERNING LAW; VENUE; WAIVER OF JURY TRIALTRIAL.			A-60A-53
9.8		SPECIFIC PERFORMANCEPERFORMANCE.			A-61A-54
9.9		ADDITIONAL DEFINITIONSDEFINITIONS.			A-61A-54
9.10		SEVERABILITYSEVERABILITY.			A-64A-57
9.11		ALTERNATIVE STRUCTURESTRUCTURE.			A-64A-57
9.12		ASSIGNMENT; THIRD-PARTY BENEFICIARIESBENEFICIARIES.			A-64A-57

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INDEX OF DEFINED TERMS


Term		Section
Acquisition Proposal		6.9(a)
Adjusted PeninsulaFirst Federal Shareholders' Equity		7.2(f)6.20
Affiliate		3.25(a)
Aggregate Cash Consideration Agreement		Preamble
Alternative Transaction		6.9(b)
Average Closing Price		1.7(f)
Bank Merger		1.8
Bank Consolidation Agreement		1.8
Balance Sheet		3.6(a)
Balance Sheet Date		3.6(a)
Board of Directors		9.9
Aggregate Stock Consideration Business Day		9.9
Aggregate Stock Consideration Value		9.9
Agreement		Preamble
Alternative Transaction		6.9(b)
Bank Merger		1.8
Bank Consolidation Agreement		1.8
Balance Sheet		3.6(a)
Balance Sheet Date		3.6(a)
Business Day		9.9
Business Combination Exemption Resolution		3.27(b)
Cancelled Shares		1.7(e)1.7(d)
Cash Election		1.7(c)(i)
Cash Election Shares		1.7(c)(i)
Certificates		2.3(e)
Certificate of Merger		1.2
Change In Control and Retention Payments Claim		9.9
Charge-Offs		9.9
Claim		6.7(a)
Closing		1.3
Closing Date		1.3
Closing Date Balance Sheet		6.10
Code		Recitals
Confidentiality Agreement		9.9
Controlled Group Liability Corporate Entity		9.9
Corporate Entity Covered Employees		6.5(a)
CRA		3.13(c)
Derivative Transactions		3.17
Determination Date		1.7(f)
DIFS		3.4
Disclosure Schedule		9.9
Covered Employees Effective Time		6.5(a)1.2
CRA End Date		3.13(c)9.9
Derivative Transactions Environmental Laws		3.173.18(a)
DIFS ERISA Affiliate		9.9
Exchange Act		4.7(b)
Exchange Agent		2.1
Exchange Agent Agreement		2.1
Exchange Fund		2.2
Exchange Ratio		9.9
FDIC		3.1(a)
Federal Reserve		3.4
Disclosure Schedule FHLB		9.93.1
Effective Time Final Index Price		1.21.7(f)
Election First Federal		2.3(b)Preamble
Election Deadline		2.3(e)
End Date		9.9
Environmental Laws		3.18(a)
ERISA Affiliate		9.9
Exchange Act		4.7(b)
Exchange Agent		2.1
Exchange Agent Agreement		2.1
Exchange Fund		2.2
Exchange Ratio		1.7(c)(ii)
FDI ACT		9.9
FDIC First Federal Articles of Incorporation		3.1(a)
First Federal ReserveBank		3.41.8
First Federal Benefit Plans		3.11(a)
First Federal Board Recommendation		6.3(b)




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Term		Section
Form of Election First Federal Bylaws		2.3(c)3.1(a)
First Federal Certificate		2.3(a)
First Federal Closing Expenses		9.9
First Federal Common Stock		1.7(c)
First Federal Financial Statements		3.6(a)
First Federal Indemnified Party		6.7(a)
First Federal Intellectual Property		3.21(a)
First Federal Measuring Date		7.2(f)
First Federal Policies		3.19
First Federal Regulatory Agreement		3.15
First Federal Requisite Shareholder Approval		3.3(a)
First Federal Shareholders' Meeting		6.3(b)
First Federal Subsidiary/Subsidiaries		3.1(b)
Form S-4		6.3(a)
GAAP		3.6(a)
Governmental Entity		3.4
Holders		2.4(a)
Index Group		1.7(f)
Index Price		1.7(f)
Index Ratio		1.7(f)
Intellectual Property		3.21(e)
IRS		3.10(k)
Joint Proxy Statement		6.3(a)
Knowledge		9.9
LARA		1.2
Law/Laws		9.9
Leased Premises		3.20(b)
Letter of Transmittal		2.3(a)
Index Ratio		8.1(h)(ii)
Intellectual Property		3.21(e)
IRS		3.10(k)
Knowledge		9.9
LARA		1.2
Law/Laws		9.9
Leased Premises		3.20(b)
Letter of Transmittal		2.3(i)
Lien		3.1(b)
Loan Documentation		3.24(a)
Loans		3.24(a)
Mackinac		Preamble
Mackinac Awards		4.2
Mackinac Capitalization Date		4.2
Mackinac Closing Price		2.3(n)
Mackinac Common Stock		1.7(a)
Mackinac Disclosure Schedule		Article IV
Mackinac Initial Price		1.7(f)
Mackinac Material Adverse Effect		9.9
Mackinac Regulatory Agreement		4.13
Mackinac Requisite Shareholder Approval		4.4
Mackinac Shareholders' Meeting		6.3(d)
Mackinac SEC Reports		4.7(b)
Mackinac Share ValueCommon Stock		1.7(a)
Material Adverse Effect		9.9
Mackinac Common Stock		1.7(a)
Material Adverse Effect		9.9
Material Contact		3.14(a)
Materially Burdensome Regulatory Condition		6.1(a)
Maximum Adjustment Amount		1.7(f)
Maximum Amount		6.7(c)
mBank		1.8
MBC		1.8
MBCA		1.1
Merger		Recitals
Merger Consideration		1.7(c)
MergerSub		Preamble
Michigan Courts		9.7(b)
Multiple Employer Plan/Multiemployer Plan		3.11(f)
NASDAQ		2.3(n)
No-Match Event		6.3(c)
Non-Election Shares		1.7(c)(iii)
Nonqualified Deferred Compensation Plan		3.11(d)
Obligor		3.24(a)
Owned Real Property		3.20(a)
Peninsula		Preamble
Peninsula Articles of Incorporation		3.1(a)
Peninsula Bank		1.8
Peninsula Benefit Plans		3.11(a)
Peninsula Board Recommendation		6.3(b)




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Term		Section
Peninsula Bylaws MBC		3.1(a)1.8
Peninsula Closing Expenses MBCA		1.1
Merger		Recitals
Merger Consideration		1.7(c)
MergerSub		Preamble
Michigan Courts		9.7(b)
Minimum Adjustment Amount		8.1(h)
Multiple Employer Plan/Multiemployer Plan		3.11(f)
Nasdaq		3.4
No-Match Event		6.3(c)
Nonqualified Deferred Compensation Plan		3.11(d)
Obligor		3.24(a)
Owned Real Property		3.20(a)
Party/Parties		9.9
Peninsula Common Stock Permitted Encumbrances		1.7(c)3.20(b)
Peninsula Financial Statements Person		3.6(a)9.9
Peninsula Indemnified Party Personal Property		6.7(a)3.20(f)
Peninsula Intellectual Property Pool		3.21(a)3.24(k)
Peninsula Measuring Date Professional Expenses		6.219.9
Peninsula Policies Qualified Plans		3.193.11(e)
Peninsula Regulatory Agreement Real Property Leases		3.153.20(a)
Peninsula Regulatory Agency		3.5
Regulatory Approvals		6.1(a)
Reports		3.5
Representative		6.9(a)
Requisite Shareholder Approvals		4.4
SEC		4.7(b)
Second First Federal Shareholders' Meeting		6.3(c)
Securities Act		3.2
Special Dividend		6.20
Subsidiary		3.1(b)
Superior Proposal		6.3(b)
Peninsula Stock Plans Surviving Bank		1.8
Surviving Entity		Recitals
Takeover Provisions		3.26
Tax/Taxes		9.9
Peninsula Subsidiary/Subsidiaries		3.1(b)
Party/Parties Tax Return		9.9
Per Share Cash Consideration		1.7(c)(i)
Per Share Merger Consideration Value		9.9
Permitted Encumbrances		3.20(b)
Person		9.9
Personal Property		3.20(f)
Pool		3.24(k)
Professional Expenses		9.9
Proxy Statement		6.3(a)
Qualified Plans		3.11(e)
Real Property Tenant Leases		3.20(a)
Regulatory Agencies Termination Fee		3.58.3(a)
Regulatory Approvals Trading Day		6.1(a)1.7(f)
Reports		3.5
Representative		6.9(a)
Requisite Shareholder Approval		3.3(a)
SEC		4.7(b)
Second Peninsula Shareholders' Meeting		6.3(c)
Securities Act		3.2
Special Dividend		6.21
Stock Consideration		1.7(c)(ii)
Stock Election		1.7(c)(ii)
Stock Election Shares		1.7(c)(ii)
Subsidiary		3.1(b)
Superior Proposal		6.3(b)
Surviving Bank		1.8
Surviving Entity Voting and Support Agreement(s)		Recitals
Takeover Provisions		3.26
Tax/Taxes		9.9
Tax Return		9.9
Tenant Leases		3.20(a)
Termination Fee		8.3(a)
Voting and Support Agreement(s)		Recitals
Voting Debt		3.2




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AGREEMENT AND PLAN OF MERGER


        THIS AGREEMENT AND PLAN OF MERGER (this"Agreement"), dated as of July 18, 2014,January 16, 2018, by and amongMACKINAC FINANCIAL CORPORATION, a Michigan corporation ("Mackinac"),PFCMFNC ACQUISITION, LLC, a Michigan limited liability company ("MergerSub"), andPENINSULA FINANCIAL CORPORATION,andFIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC., a MichiganMaryland corporation ("Peninsula"First Federal"). Certain capitalized terms have the meanings given to such terms inARTICLE IX.inARTICLE IX.


RECITALS


        WHEREAS, the respective boards of directors of Peninsula,First Federal, Mackinac and MergerSub have determined that it is in the best interests of their respective companies and their shareholders to consummate the strategic business combination transaction provided for in this Agreement in which PeninsulaFirst Federal will, on the terms and subject to the conditions set forth in this Agreement, merge with and into MergerSub (the"Merger"), with MergerSub as the surviving entity in the Merger (sometimes referred to in such capacity as the"Surviving Entity") and continuing as a wholly owned Subsidiary of Mackinac;

        WHEREAS, the parties intend that for federal income Tax purposes the Merger shall qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the"Code"), and this Agreement shall constitute a "plan of reorganization" for purposes of Sections 354 and 361 of the Code;

        WHEREAS, as a condition to the willingnesseach of Mackinac to enter into this Agreement, all of the directors of Peninsula and certainthose shareholders of Peninsula haveFirst Federal set forth onSCHEDULE A hereto has simultaneously herewith entered into voting agreementsa Voting and Support Agreement substantially in the form attached hereto asEXHIBITasEXHIBIT A (each, a"Voting and Support Agreement" and, collectively, the"Voting and Support Agreements") in connection with the Merger; and

        WHEREAS, the parties desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe certain conditions to the Merger.

        NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements set forth herein, and for other good and valuable consideration, and intending to be legally bound, the parties hereto agree as follows:


ARTICLE I
THE MERGER


        1.1THE MERGER.    Subject to the terms and conditions of this Agreement, including Section 9.11 hereof, in accordance with the Michigan Business Corporation Act, as amended (the"MBCA"), at the Effective Time, PeninsulaFirst Federal shall merge with and into MergerSub. MergerSub shall be the Surviving Entity in the Merger and shall continue its existence as a limited liability company existence under the laws of Michigan, and as a wholly owned Subsidiary of Mackinac. As of the Effective Time, the separate corporate existence of PeninsulaFirst Federal shall cease.


        1.2EFFECTIVE TIME.    The Merger shall become effective upon the filing on the Closing Date of the Certificate of Merger (the"Certificate of Merger") with the Corporations Division of the Michigan Department of Licensing and Regulatory Affairs ("LARA") as provided in the MBCA. The term"Effective Time" shall be the date and time when the LARA accepts the Certificate of Merger for filing in accordance with the MBCA.


        1.3CLOSING.    On the terms and subject to the conditions set forth in this Agreement, the closing of the transactions contemplated by this Agreement (the"Closing") shall take place at the offices of Honigman Miller Schwartz and Cohn LLP, 350 East660 Woodward Ave, 2290 First National Building, Detroit, Michigan Avenue, Kalamazoo Michigan 4900848226 at a time determined by Mackinac that follows the close of trading on the date that is the later of (i) three




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the later of (i) three (3) Business Days after the satisfaction or waiver (subject to applicable Law) of the latest to occur of the conditions set forth in ArticleARTICLE VII (other than those conditions that by their nature are to be satisfied or waived at the Closing, but subject to the satisfaction of such conditions and the continued satisfaction or waiver of all other conditions set forth in Article VII)ARTICLE VII) and (ii) 10ten (10)  Business Days after the satisfaction of the condition set forth in Section 7.1(b) (but subject to the continued satisfaction of such condition and the satisfaction or waiver of all other conditions set forth in Article VII)ARTICLE VII), or such other date as mutually agreed to by the parties (the"Closing Date").


        1.4ARTICLES OF ORGANIZATION OF THE SURVIVING ENTITY.    At the Effective Time, the articles of organization and operating agreement of MergerSub in effect immediately prior to the Effective Time (subject to any amendment to the articles of organization set forth in the Certificate of Merger) shall be the articles of organization and operating agreement of the Surviving Entity until thereafter amended in accordance with applicable Law.


        1.5TAX CONSEQUENCES.    It is intended that the Merger shall qualify as a "reorganization" within the meaning of Section 368(a) of the Code, and that this Agreement shall constitute a "plan of reorganization" for purposes of Sections 354 and 361 of the Code. From and after the date of this Agreement and until the Closing Date, each party hereto shall use its reasonable best efforts to cause the Merger to qualify, and will not knowingly take any action, cause any action to be taken, fail to take any action or cause any action to fail to be taken, which action or failure to act could reasonably be expected to prevent the Merger from qualifying as a "reorganization" within the meaning of Section 368(a) of the Code.


        1.6EFFECTS OF THE MERGER.    Subject to the terms and conditions of this Agreement, at the Effective Time, PeninsulaFirst Federal shall be merged with and into MergerSub and the separate corporate existence of PeninsulaFirst Federal shall cease. At the Effective Time, PeninsulaFirst Federal and MergerSub shall become a single limited liability company as the Surviving Entity. The effect of the Merger upon each of PeninsulaFirst Federal and the Surviving Entity shall be as provided in Chapter Seven of the MBCA with respect to the merger of domestic corporations with a domestic business organization. Without limiting the generality of the foregoing, and subject to the MBCA, at the Effective Time: (a) all the rights, privileges, powers, franchises, licenses, and interests in and to every type of property (whether real, personal or mixed) of MergerSub and Peninsula,First Federal, shall vest in the Surviving Entity, (b) all choses in action MergerSub and PeninsulaFirst Federal shall continue unaffected and uninterrupted by the Merger and shall accrue to the Surviving Entity and (c) all debts, liabilities and duties of MergerSub and PeninsulaFirst Federal shall become the debts, liabilities and duties of the Surviving Entity.


        1.7CONVERSION OF STOCK.    At the Effective Time, by virtue of the Merger and without any action on the part of Mackinac, MergerSub, PeninsulaFirst Federal or the holder of any of the following securities:securities (each a"Mackinac Common Shareholder" or a"First Federal Common Shareholder"):

        (a)    No Effect on Mackinac Common Stock.    Each share of the common stock, no par value per share, of Mackinac (the"Mackinac Common Stock"), issued and outstanding immediately prior to the Effective Time shall remain issued and outstanding and shall not be affected by the Merger.

        (b)    No Effect on MergerSub Membership Interests.    Each of the membership interests of MergerSub shall continue unaffected and unimpaired by the Merger.

        (c)    Conversion of PeninsulaFirst Federal Common Stock.    Subject to Section 1.7(f) and (g), each share of the common stock, par value $1.00$0.01 per share, of PeninsulaFirst Federal ("PeninsulaFirst Federal Common Stock") that is issued and outstanding immediately prior to the Effective Time (other than any Cancelled Shares) shall, subject to Section 1.7, be converted at the electionEffective Time, by reason of the Merger and without any action on the part of the holder thereof, in accordance with the procedures set forth in Article II,cease to be outstanding and be automatically cancelled, and shall be converted into the right to receive, (the"Merger Consideration") the following, without interest:

(i)in exchange for each such share, that number of Peninsulashares of Mackinac Common Stock with respectequal to whichthe Exchange Ratio, plus cash, in an electionamount, if any, equal to receive cash has been effectively made and not revoked or lost pursuant to Section 2.3 (athe quotient resulting from dividing




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"Cash Election") an amount in cash without interest(i) the difference resulting from (x) where (x) is equal to $8,000,000 less the Per Share Merger Consideration Value (such amount,Special Dividend Reduction, if any, and (y) the Special Dividend actually paid, by (ii) 3,726,925 (the"Per Share CashMerger Consideration")(such shares collectively, the"Cash Election Shares"); or

(ii)  forprovided, however, that each share of PeninsulaFirst Federal Common Stock with respectissued and outstanding immediately prior to which an election to receivethe Effective Time that is held by any Subsidiary of First Federal, by Mackinac Common Stock has been effectively made and not revoked or lost pursuant to Section 2.3 (a"Stock Election"), the number (such number, the"Exchange Ratio") of validly issued, fully paid and nonassessable sharesany Subsidiary of Mackinac Common Stock (the"Stock Consideration") equal to the quotient of (A) the Per Share Merger Consideration Value divided by (B) the Mackinac Share Value (such shares collectively,"Stock Election Shares"); or

(iii)  for(in each share of Peninsula Common Stockcase other than shares held in any First Federal Benefit Plan or Mackinac Benefit Plan or related trust accounts or otherwise held in any fiduciary or agency capacity or as a result of debts previously contracted) shall no longer be outstanding and shall automatically be canceled and retired and shall cease to which a Cash Election or a Stock Election has been effectivelyexist, and no payment shall be made and not revoked or lost pursuant to Section 2.3 (collectively, the"Non-Election Shares"), the right to receive from Mackinac such Per Share Cash Consideration or Stock Consideration as is determined in accordance with Section 1.7(g).respect thereto.

        (d)[Reserved.]

(e)    Cancellation of Certain Shares of PeninsulaFirst Federal Stock.    All shares of PeninsulaFirst Federal Common Stock issued and outstanding immediately prior to the Effective Time that are owned directly by PeninsulaFirst Federal (other than (i) shares held in trust accounts, managed accounts and the like, or otherwise held in a fiduciary or agency capacity, that are beneficially owned by third parties and (ii) shares held, directly or indirectly, by PeninsulaFirst Federal in respect of a debt previously contracted) shall be cancelled and shall cease to exist and no Merger Consideration or other consideration shall be delivered in exchange therefor (such cancelled shares, the"Cancelled Shares").

        (f)(e)    Adjustments to Prevent Dilution.    If at any time during the period between the date of this Agreement and the Effective Time, any change in the outstanding shares of capital stock of Mackinac or Peninsula,First Federal, respectively, shall occur (or for which the relevant record date will occur) as a result of any reclassification, recapitalization, stock split (including a reverse stock split) or subdivision or combination or readjustment of shares, or any stock dividend or stock distribution with a record date during such period, the Merger Consideration, the Per Share Merger Consideration Value, the Exchange Ratio and any other dependent items, as applicable, shall be equitably and proportionately adjusted, if necessary and without duplication, to reflect such change.

        (g)(f)    Election Procedures.Further Adjustments.    In the event that, as of the Determination Date (as defined below):

          (i)  Notwithstanding any other provision contained in this Agreement,The number obtained by dividing the totalAverage Closing Price by the Mackinac Initial Price is greater than 1.20; and

(ii)  The number of shares of Peninsula Common Stock to be converted into Per Share Cash Consideration pursuant to Section 1.7(c)obtained by dividing the Average Closing Price by the Mackinac Initial Price is greater than the number obtained by (x) dividing the Final Index Price by the Initial Index Price (the "Cash Conversion Number""Index Ratio") and (y) then increasing the Index Ratio by 0.20,

the Exchange Ratio shall not exceedbe adjusted such that the lesser ofExchange Ratio shall equal the number derived by multiplying the Exchange Ratio by the quotient obtained by dividing (i) 35%the Maximum Adjustment Price by (ii) the Average Closing Price.

        As used herein, the following terms shall have the meanings indicated:

"Average Closing Price" shall mean the volume weighted average price per share of the number of shares of PeninsulaMackinac Common Stock outstanding(based on "regular way" trading on the NASDAQ Stock Market only) over the twenty consecutive Trading Days ending on the Trading Day immediately prior to the Effective Time and (ii)Determination Date, as calculated by Bloomberg Financial LP under the number of shares, as determined in the reasonable discretion of each of Honigman Miller Schwartz and Cohn LLP and Godfrey & Kahn, S.C., that may be exchanged for cash without preventing or impeding the delivery of the opinions set forth in Section 7.2(d) and Section 7.3(d) that the Merger will qualifying as a "reorganization" within the meaning of Section 368(a) of the Code. All of the other shares of Peninsula Common Stock (except for shares of Peninsula Common Stock owned directly by Peninsula or Mackinac) shall be converted into the Stock Consideration.function "VWAP".

        (ii)"Determination Date" Within five (5) business days aftershall mean the fourth Business Day immediately prior to the Closing Date, Mackinac shall causeor if such day is not a trading day on the Exchange Agent to effectNASDAQ Stock Market, then the allocation among holders of Peninsula Common Stock of rights to receive the Per Share Cash Consideration and the Stock Consideration in accordance with this Section 1.7(g)(ii). If the aggregate number of shares of Peninsula Common Stock with respect to which Cash Elections shall have been made (thetrading day immediately preceding such day.

"Cash Election Number"Final Index Price") exceeds shall mean the average of the Index Prices for the 20 consecutive Trading Days ending on the Trading Day immediately prior to the Determination Date.