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, 2019

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, 2019

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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, 2019 and 2018

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 the Plan’s current investment custodian.  Participants may direct the investment of their contributions and the Corporation’s contributions into one or more formal investment options offered by the Plan.  Fidelity Management Trust Company (“Fidelity”) currently serves as trustee for Plan investments.  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.

During 2019, Mackinac Financial Corporation changed the plan custodian and trustee for the plan investments to Fidelity.  As such, the investment options available changed, including the elimination of the ability to allocate funds to the investment in Corporation stock.  Investment options were also streamlined, with a reduction in the number of options available.

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, 2019 and 2018

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 or were in investment funds managed by Fidelity, John Hancock Life Insurance Company (“John Hancock”), or their affiliates.  Fidelity is the current custodian, and John Hancock was previously a custodian of the Plan; therefore, these transactions qualify as party-in-interest transactions as defined under ERISA guidelines.  As Mackinac Financial Corporation is the Plan sponsor, these transactions, as well as the Corporation’s payment of certain expenses of the Plan, qualified as party-in-interest transactions as defined under ERISA guidelines.  During the year ended December 31, 2019, the Plan made purchases of $35,154 and sales of $56,775, of Mackinac Financial Corporation stock on behalf of its participants.  Effective July 1, 2019, there are no further purchases of Corporation stock permitted.

Voting Rights - Each participant is entitled to exercise voting rights attributable to the shares of Corporation stock that have previously been 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.

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Mackinac Financial Corporation 401(k) Plan

Notes to Financial Statements

December 31, 2019 and 2018

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.

Benefit Payments — Benefit distributions are recorded when paid.

Administrative Expenses - Various administrative costs are paid by the Corporation and were negligible in 2019.

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.

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 Internal Revenue Service (IRS).  The volume submitter plan received a favorable notification letter from the IRS.  The Plan has not individually sought its own determination letter.    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 2016.

Note 4 — Employer Contribution

For the 2019 plan year, Mackinac Financial Corporation made an employer matching contribution to the Plan of $335,245.  The balance was a receivable for the Plan as of December 31, 2019 and was paid by the Corporation in February of 2020.  Mackinac Financial Corporation utilizes plan forfeitures toward the total contribution to the Plan.  For 2019, the amount utilized was $43,933.  The Plan had a balance of $388,977 as a receivable as of December 31, 2018 and was paid by the Corporation in February of 2019.

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Mackinac Financial Corporation 401(k) Plan

Notes to Financial Statements

December 31, 2019 and 2018

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.

The following valuation methodologies have been used to value the Plan’s investments:

Mutual Funds

Mutual funds are valued at quoted prices reported in active markets.

Money Market Fund

The money market fund is valued at the outstanding balance, which is the best estimate of fair value.

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Mackinac Financial Corporation 401(k) Plan

Notes to Financial Statements

December 31, 2019 and 2018

Common Collective Trust Fund

The common collective trust fund is valued at net asset value per share (NAV) or its equivalent of the fund, which is based on the fair value of the fund’s underlying assets.  There are no redemption restrictions or unfunded commitments on this investment.

Corporation Stock

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

Pooled Separate Accounts

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.

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Mackinac Financial Corporation 401(k) Plan

Notes to Financial Statements

December 31, 2019 and 2018

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, 2019, the Plan held 75,339 shares of Corporation stock with a fair value of $1.315 million and a cost basis of $.912 million.  At

December 31, 2018, the Plan held 77,051 shares of Corporation stock with a fair value of $1.052 million and cost basis of $.877 million.

Note 6 — Subsequent Events

On March 11, 2020, the World Health Organization declared the global outbreak of COVID-19 a pandemic.  Subsequent to that, The United States of America declared a National Emergency due to the pandemic on March 13, 2020.  No revisions were made to the financial results as of December 31, 2019.  As the situation is evolving at an extremely rapid pace, the duration and impact of COVID-19 is uncertain at this time as it relates to the financial results of the Plan in future periods.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress.  The CARES Act provides immediate and temporary relief for retirement plan sponsors and their participants with respect to employer contributions, distributions and participant loans.  The provision of the CARES Act may be effective and operationalized immediately, prior to amending the plan document.  Plan management has adopted the provision allowing an increase to the maximum loan limit for qualified participants to the lesser of 100% of the participant’s vested account balance or $100,000.

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*Cost information not required

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