MFNC Mackinac Financial Corporation

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 11-K

x ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

OR

o TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from <> to <>

Commission file number: 0-20167

A.           Full title of the plan and the address of the plan, if different from that of the issuer named below:

Mackinac Financial Corporation 401(k) Plan

B.           Name of the issuer of the securities held pursuant to the plan and the address of its principal executive office:

Mackinac Financial Corporation

130 South Cedar Street

Manistique, MI  49854

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Mackinac Financial Corporation 401(k) Plan

Financial Report

December 31, 2018

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Mackinac Financial Corporation 401(k) Plan

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See Notes to Financial Statements

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See Notes to Financial Statements

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Mackinac Financial Corporation 401(k) Plan

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Mackinac Financial Corporation 401(k) Plan

Notes to Financial Statements

December 31, 2018 and 2017

Note 1 - Plan Description (continued)

Investment Options — Amounts contributed through employee contributions are deducted from gross wages for each payroll and amounts contributed through employer matching contributions are calculated annually and are remitted subsequent to the Plan year-end.  All contributions are deposited with John Hancock Life Insurance Company (U.S.A.) (“John Hancock”) or with Keefe, Bruyette & Woods, Inc., the Plan’s investment custodians.  Participants may direct the investment of their contributions and the Corporation’s contributions into one or more formal investment options offered by the Plan, including various pooled separate accounts and up to 35 percent of the participant’s account balance in Corporation stock. John Hancock currently serves as trustee for Plan investments, excluding Corporation stock.  Keefe, Bruyette & Woods, Inc., serves as custodian for Corporation stock.  The Plan invests in whole shares of the Corporation’s stock generally on the last business day of each month.  The contributions used to purchase whole shares of Corporation stock are held in a cash account until the Plan’s next purchase of whole shares of Corporation stock.  Cash dividends, if any, on Corporation stock will be reinvested in accordance with the participant’s investment election.  Stock dividends, if any, on Corporation stock will be reinvested in Corporation stock unless specifically elected otherwise in writing.  If a participant does not direct the investment of contributions, they will be invested in the age-appropriate target date fund.  Participants may change their deferral percentage and investment direction at any time.

Participant Accounts - Each participant’s account is credited with the participant’s contributions, allocations of the Corporation’s contributions and plan earnings and charged with an allocation of administrative expenses.  Allocations are based on participants’ compensation or account balances, as defined.  The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.

Vesting - Participants are immediately 100 percent vested in employee salary and rollover contributions and any income or loss thereon. Vesting in the Corporation’s discretionary contribution portion of their accounts, plus actual earnings thereon, is based on years of service.  For vesting purposes, a year of service is defined as a plan year during which an employee has been credited with at least 1,000 hours of service.  Participants vest in the Corporation’s contributions 100 percent after three years of service.

Participant Notes Receivable - Participants may borrow from their accounts subject to certain maximum and minimum amounts as prescribed in the Plan and in the Internal Revenue Code (IRC).  Participant notes receivable are collateralized by the participant’s account balance and bear interest at a rate charged for similar loans by lending institutions as determined by the Plan administrator.

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Mackinac Financial Corporation 401(k) Plan

Notes to Financial Statements

December 31, 2018 and 2017

Note 1 - Plan Description (continued)

Benefit Payments - Upon termination of employment, the participant or, in the case of death, the surviving spouse can elect to receive the participant’s account balance in a single lump sum or in various installment annuities.  If the account is invested in Corporation stock, the participant may elect to receive an “in kind” distribution of whole shares. Participants may elect to receive a taxable distribution of any dividends paid on Corporation stock.

Hardship Withdrawals - Participants may request that all or a portion of their account be distributed in the case of severe financial hardship, as defined in the Plan document.  The Corporation must approve any such hardship withdrawals.

Forfeitures - If a participant is not fully vested on his or her termination date, the non-vested amount of the account is forfeited.  Forfeitures are used to reduce future employer contributions or to pay administrative expenses of the Plan.

Termination - While it has not expressed any intent to do so, the Corporation has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions set forth in the plan agreement and ERISA.  Upon termination of the Plan, participants become 100 percent vested in their account balances.

Party-in-interest Transactions - Certain Plan assets are in investment funds managed by John Hancock Life Insurance Company or its affiliates.  John Hancock is a custodian of the Plan; therefore, these transactions qualify as party-in-interest transactions as defined under ERISA guidelines.  Participants can elect to invest in Mackinac Financial Corporation stock.  As Mackinac Financial Corporation is the Plan sponsor, these transactions, as well as the Corporation’s payment of certain expenses of the Plan, qualify as party-in-interest transactions as defined under ERISA guidelines.  During the years ended December 31, 2018 and 2017, the Plan made purchases of $56,809 and $54,140, respectively, and sales of $4,859 and $12,057, respectively, of Mackinac Financial Corporation stock on behalf of its participants.

Voting Rights - Each participant is entitled to exercise voting rights attributable to the shares of Corporation stock allocated to his or her account.  The Plan trustee is required to vote shares of common stock that have been allocated to participants but for which the trustee received no voting instructions in the same manner and in the same proportion as the shares for which the Plan trustee received timely voting instructions.

Note 2 - Summary of Significant Accounting Policies

Participant Notes Receivable — Participant notes receivable are recorded at their unpaid principal balances plus any accrued interest.  Participant notes receivable are written off when deemed uncollectible.

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Mackinac Financial Corporation 401(k) Plan

Notes to Financial Statements

December 31, 2018 and 2017

Note 2 - Summary of Significant Accounting Policies (continued)

Benefit Payments — Benefit distributions are recorded when paid.

Administrative Expenses - Various administrative costs are paid by the Corporation and were negligible in 2018.

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 the reported amounts of assets and liabilities and changes therein and disclosure of contingent assets and liabilities.  Actual results could differ from those estimates.

Risks and Uncertainties - The Plan invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statement of net assets available for benefits.

Investment Valuation — Corporation stock is valued at fair value based on quoted market prices.

The pooled separate accounts are valued at net asset value per share, or its equivalent of the funds, which are based on the fair value of the funds’ underlying assets.  There are no redemption restrictions or unfunded commitments on these investments.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.  Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.  See Note 5 — Fair Value for additional information.

Note 3 - Tax Status

The Plan, as adopted, is a volume submitter plan, which does not require an application for a determination letter from the IRC.  The volume submitter plan received a favorable notification letter from the IRS dated March 31, 2008.  Although the Plan has been amended since receiving the determination letter, management believes that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC.  The Plan administrator believes the Plan is no longer subject to tax examinations for years prior to 2015.

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Mackinac Financial Corporation 401(k) Plan

Notes to Financial Statements

December 31, 2018 and 2017

Note 4 — Employer Contribution

For the 2018 plan year, Mackinac Financial Corporation made an employer matching contribution to the Plan of $388,977.  The balance was a receivable for the Plan as of December 31, 2018 and was paid by the Corporation in February of 2019.  Mackinac Financial Corporation utilizes plan forfeitures toward the total contribution to the Plan.  For 2018, the amount utilized was $1,269.

Note 5 — Fair Value

Accounting standards require certain assets be reported at fair value on the financial statements and provides a framework for establishing that fair value.  The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value.

Level 1 - In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets that the Plan 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 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 that are available in situations where there is little, if any, market 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 similar techniques taking into account the characteristics of the asset.

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 Plan’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.

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Mackinac Financial Corporation 401(k) Plan

Notes to Financial Statements

December 31, 2018 and 2017

Note 5 — Fair Value (continued)

(1) This class represents investments in actively managed pooled separate account funds that invests primarily in both equity and debt securities.  The investments may include pooled separate accounts, common stock, corporate bonds, interest rate swaps, options and futures.

(2) This class represents investments in actively managed pooled separate account funds that invests primarily in equity securities which may include pooled separate accounts, common stocks, options and futures.

(3) This class represents investments in actively managed pooled separate account funds with investments in a variety of fixed income investments which may include pooled separate accounts, corporate bonds, both U.S. and non-U.S. municipal securities, interest rate swaps, options and futures.

(4) This class represents an investment in an actively managed pooled separate account that invests in a collective investment trust that invests primarily in corporate bonds, both U.S. and non-U.S., municipal securities and wrapper contracts.

(5) At December 31, 2018, the Plan held 77,051 shares of Corporation stock with a fair value of $1.052 million and a cost basis of $.877 million.  At December 31, 2017, the Plan held 34,484 shares of Corporation stock with a fair value of $.548 million and cost basis of $.330 million.

The Plan’s policy is to recognize transfers between the levels of the fair value hierarchy as of the actual date of the event or change in circumstances that caused the transfer.  There were no significant transfers between levels of the fair value hierarchy during 2018 and 2017.

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Schedule 1

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*Cost information not required

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