Mackinac Financial (MFNC) 8-K Mackinac Financial Corporation Reports Second Quarter and Six Months 2006 Results of Operations

PRESS RELEASE

For Release:	July 28, 2006
Nasdaq:	MFNC
Contact:	Investor Relations at (888) 343-8147
Website:	www.bankmbank.com

MACKINAC FINANCIAL CORPORATION
REPORTS SECOND QUARTER AND SIX MONTHS 2006 RESULTS OF OPERATIONS

(Manistique, Michigan) — Mackinac Financial Corporation (Nasdaq: MFNC), the bank holding company for mBank (the “Bank”) today announced second quarter 2006 income of $190,000 or $.05 per share compared to a loss of $577,000 or $.17 per share for the second quarter of 2005. Net income for the first six months of 2006 totaled $688,000, or $.20 per share, compared to a loss of $5.818 million, $1.70 per share, for the same period in 2005. The 2006 six months operations include a $600,000 negative provision, recorded in the first quarter, in recognition of improved credit quality. The 2005 results include a penalty of $4.320 million on the prepayment of $48.555 million of the FHLB borrowings. Excluding the provision adjustment and the prepayment penalty, the net income in the first half of 2006 amounted to $88,000, compared to an adjusted loss of $1.498 million for the same period in 2005. The six month 2006 results also include $158,000 of stock option expense, required under the new accounting rules for stock compensation plans, as well as $240,000 of expenses incurred to pursue legal action against the Corporation’s former accountants. The costs associated with the Corporation’s legal action include approximately $185,000 for the retention of and subsequent research performed by an expert witness.

Paul Tobias, Chairman and Chief Executive Officer commented, “The first half of 2006 reflects the Corporation’s growth that has established our foundation for profitability. The balance sheet growth we have attained in the last year has resulted in profitability each month in 2006 at mBank, our principal subsidiary. This balance sheet growth reflects excellent commercial loan production without compromising the bank’s strong credit profile.

Total assets of the Corporation at June 30, 2006 were $352.497 million, up 27.67 percent from the $276.111 million in total assets reported at June 30, 2005. June 30, 2006 total assets were up 18.00 percent from the $298.722 million of total assets at year-end 2005.

Total loans at June 30, 2006 were $283.110 million, up from $204.503 million at June 30, 2005 or a 38.44 percent increase. Total loans at June 30, 2006 increased $43.339 million, or 18.08 percent from year-end 2005 total loans of $239.771 million. Tobias stated, “This loan growth resulted from the successful execution of our market strategy, which is driven by highly qualified commercial lenders, supported by a skilled and responsive credit review team. We have also experienced a resurgence of consumer loan activity in our northern branch locations, which we believe demonstrates our progress in reestablishing trust and confidence within our markets.”

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Total deposits of $284.164 million at June 30, 2006 were up 36.74 percent from deposits of $207.814 million on June 30, 2005. Deposits were up $51.532 million, or 22.15 percent from year-end 2005 deposits of $232.632 million. Deposit growth in 2006 includes increases in out of market brokerage deposits totaling $33.588 million with the remaining $17.944 million representing bank core deposit growth of 9.50%. Mr. Tobias added, “Bank deposit growth is a key element of our strategic plan to build franchise value and maintain adequate interest margins. We are continually reviewing our deposit products and offering rates in our efforts to increase core deposits.”

The Bank’s credit quality remains excellent, with total nonperforming assets at June 30, 2006 of $.498 million. Tobias commenting on credit quality stated, “Credit quality is critical. We recognize that with high levels of loan production there is a need for more diligence on the front end credit review process.”

Shareholders’ equity at June 30, 2006 totaled $27.179 million, or $7.93 per share. The Corporation is well capitalized with Tier 1 capital in excess of 8% and total risk-based capital in excess of 10%.

Tobias concluded, “The first six months of 2006 show that we continue to make progress towards our goal of robust profitability, despite the new costs associated with stock options and pursuit of legal action against former accountants of the Corporation. We are optimistic about the remainder of 2006. We remain focused on our plan elements of quality loan production, increasing core deposits, and controlling noninterest expense.

Mackinac Financial Corporation is a registered bank holding company which owns mBank. The Bank has 13 offices; nine in the Upper Peninsula and four in Lower Michigan. The Company’s banking services include commercial lending and treasury management products and services geared toward small to mid-sized businesses; as well as checking and savings accounts, time deposits, interest bearing transaction accounts, safe deposit facilities, real estate mortgage lending, and direct and indirect consumer financing.

Forward-Looking Statements

This release contains certain forward-looking statements. Words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “should,” “will,” and variations of such words and similar expressions are intended to identify forward-looking statements: as defined by the Private Securities Litigation Reform Act of 1995. These statements reflect management’s current beliefs as to expected outcomes of future events and are not guarantees of future performance. These statements involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Factors that could cause a difference include among others: changes in the national and local economies or market conditions; changes in interest rates and banking regulations; the impact of competition form traditional or new sources; and the possibility that anticipated cost savings and revenue enhancements from mergers and acquisitions, bank consolidations, branch closings and other sources may not be fully realized at all or within specified time frames as well as other risks and uncertainties including but not limited to those detailed from time to time in filings of the Company with the Securities and Exchange Commission. These and other factors may cause decisions and actual results to differ materially from current expectations. Mackinac Financial Corporation undertakes no obligation to revise, update, or clarify forward-looking statements to reflect events or conditions after the date of this release.

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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL HIGHLIGHTS

(Dollars in thousands, except per share data)*	For The Period Ended
	June 30,			December 31,			June 30,
	2006			2005			2005
	(Unaudited)						(Unaudited)
Selected Financial Condition Data (at end of period):
Total assets	$	352,497		$	298,722		$	276,111
Total loans		283,110			239,771			204,503
Total deposits		284,165			232,632			207,814
Borrowings and subordinated debentures		37,617			36,417			36,484
Total shareholders’ equity		27,179			26,588			28,517
Selected Statements of Income Data(six months and year ended):
Net interest income	$	5,614		$	9,780		$	4,593
Income (loss) before taxes		663			(7,364	)		(5,818	)
Net income (loss)		688			(7,364	)		(5,818	)
Income (loss) per common share — Basic		0.20			(2.15	)		(1.70	)
Income (loss) per common share — Diluted		0.20			(2.15	)		(1.70	)
Three Months Ended
Net interest income	$	2,935		$	2,680		$	2,388
Income (loss) before taxes		165			(1,028	)		(577	)
Net income (loss)		190			(1,028	)		(577	)
Income (loss) per common share — Basic		.05			(0.30	)		(0.17	)
Income (loss) per common share — Diluted		.05			(0.30	)		(0.17	)
Selected Financial Ratios and Other Data (six months and year ended):
Performance Ratios:
Net interest margin		3.63	%		3.64	%		3.63	%
Efficiency ratio		95.21			160.43			205.52
Return on average assets		0.42			(2.58	)		(4.06	)
Return on average equity		5.11			(25.63	)		(39.18	)
Average total assets	$	330,980		$	285,896		$	287,252
Average total shareholders’ equity	$	27,135		$	28,732		$	29,781
Average loans to average deposits ratio		99.64	%		98.17	%		95.51	%
Common Share Data (at end of period):
Market price per common share	$	10.27		$	9.10		$	15.23
Book value per common share	$	7.93		$	7.76		$	8.32
Common shares outstanding		3,428,695			3,428,695			3,428,695
Other Data (at end of period):
Allowance for loan losses	$	5,415		$	6,108		$	6,636
Non-performing assets	$	498		$	1,059		$	3,273
Allowance for loan losses to total loans		1.91	%		2.55	%		3.24	%
Non-performing assets to total assets		0.14	%		0.35	%		1.19	%
Number of:
Branch locations		13			12			12

* Historical per share data has been adjusted for the 20:1 reverse stock split distributed in December 2004.

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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share data)	June 30,			December 31,			June 30,
	2006			2005			2005
	(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks	$	5,529		$	4,833		$	11,477
Federal funds sold		12,535			3,110			8,767
Cash and cash equivalents		18,064			7,943			20,244
Interest-bearing deposits in other financial institutions		893			1,025			—
Securities available for sale		33,870			34,210			36,166
Federal Home Loan Bank stock		4,855			4,855			4,855
Total loans		283,110			239,771			204,503
Allowance for loan losses		(5,415	)		(6,108	)		(6,636	)
Net loans		277,695			233,663			197,867
Premises and equipment		12,748			11,987			10,496
Other real estate held for sale		52			945			2,312
Other assets		4,320			4,094			4,171
Total assets	$	352,497		$	298,722		$	276,111
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Non-interest-bearing deposits	$	21,773		$	19,684		$	21,033
Interest-bearing deposits		262,391			212,948			186,781
Total deposits		284,164			232,632			207,814
Borrowings		37,617			36,417			36,484
Other liabilities		3,537			3,085			3,296
Total liabilities		325,318			272,134			247,594
Shareholders’ equity:
Preferred stock — No par value:
Authorized 500,000 shares, no shares outstanding		—			—			—
Common stock — No par value:
Authorized 18,000,000 shares Issued and outstanding - 3,428,695 shares		42,567			42,412			42,412
Accumulated deficit		(14,772	)		(15,461	)		(13,915	)
Accumulated other comprehensive income		(616	)		(363	)		20
Total shareholders’ equity		27,179			26,588			28,517
Total liabilities and shareholders’ equity	$	352,497		$	298,722		$	276,111

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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2006			2005			2006			2005
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Interest income:
Interest and fees on loans:
Taxable	$	5,182		$	3,201		$	9,681		$	6,260
Tax-exempt		192			230			385			472
Interest on securities:
Taxable		274			434			547			896
Tax-exempt		41			42			82			84
Other interest income		194			110			363			293
Total interest income		5,883			4,017			11,058			8,005
Interest expense:
Deposits		2,509			1,198			4,589			2,328
Borrowings		439			431			855			1,084
Total interest expense		2,948			1,629			5,444			3,412
Net interest income		2,935			2,388			5,614			4,593
Provision for loan losses		—			—			(600	)		—
Net interest income after provision for loan losses		2,935			2,388			6,214			4,593
Other income:
Service fees		122			172			232			333
Loan and lease fees		19			4			36			6
Net security gains		—			98			—			97
Net gains on sale of loans		42			13			83			20
Other		68			83			116			98
Total other income		251			370			467			554
Other expenses:
Salaries, commissions, and related benefits		1,496			1,606			3,090			3,110
Furniture and equipment		155			138			311			297
Occupancy		293			247			610			473
Data processing		182			246			336			492
Accounting, legal, and consulting fees		414			228			614			546
Loan and deposit expense		98			250			228			543
Telephone		51			77			100			137
Advertising expense		107			243			177			382
Penalty on prepayment of FHLB borrowings		—			—			—			4,320
Other		225			300			552			665
Total other expenses		3,021			3,335			6,018			10,965
Income (loss) before income taxes		165			(577	)		663			(5,818	)
Provision for (benefit of) income taxes		(25	)		—			(25	)		—
Net income (loss)	$	190		$	(577	)	$	688		$	(5,818	)
Income (loss) per common share:
Basic	$	0.05		$	(0.17	)	$	0.20		$	(1.70	)
Diluted	$	0.05		$	(0.17	)	$	0.20		$	(1.70	)

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MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
LOAN PORTFOLIO AND CREDIT QUALITY

(Dollars in thousands)

Loan Portfolio Balances (at end of period):

	June 30,		December 31,		June 30,
	2006		2005		2005
Commercial Loans
Hospitality and tourism	$	37,754	$	37,681	$	43,208
Real estate — operators of nonresidential buildings		35,478		28,217		16,479
Real estate agents and managers		15,628		10,588		6,328
New car dealers		10,002		9,995		5,005
Other		101,637		88,842		81,299
Total Commercial Loans		200,499		175,323		152,319
1-4 family residential real estate		48,931		44,660		43,012
Consumer		2,632		2,285		2,153
Construction		31,048		17,503		7,019
Total Loans	$	283,110	$	239,771	$	204,503

Credit Quality (at end of period):

	June 30,			December 31,			June 30,
	2006			2005			2005
Nonperforming Assets
Nonaccrual loans	$	446		$	15		$	959
Loans past due 90 days or more		—			99			2
Restructured loans		—			—			—
Total nonperforming loans		446			114			961
Other real estate owned		52			945			2,312
Total nonperforming assets	$	498		$	1,059		$	3,273
Nonperforming loans as a % of loans		0.16	%		0.05	%		0.47	%
Nonperforming assets as a % of assets		0.14	%		0.35	%		1.19	%
Reserve for Loan Losses:
At period end	$	5,415		$	6,108		$	6,636
As a % of loans		1.91	%		2.55	%		3.24	%
As a % of nonperforming loans		1,214.13	%		5,357.89	%		690.53	%
As a % of nonaccrual loans		1,214.13	%		N/M	%		691.97	%
Charge-off Information:
Average loans	$	273,686		$	207,928		$	198,618
Net charge-offs	$	93		$	858		$	330
Charge-offs as a % of average loans		0.03	%		0.41	%		0.17	%

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MACKINAC FINANCIAL CORPORATION

QUARTERLY FINANCIAL SUMMARY

*(Dollars in thousands, except per share data)

							Average
	Average		Average		Average		Shareholders'		Return on Average						Net Interest			Efficiency			Net Income			Book Value
Quarter Ended	Assets		Loans		Deposits		Equity		Assets			Equity			Margin			Ratio			Per Share			Per Share
June 30, 2006	$	342,821	$	273,686	$	274,591	$	27,213		0.22	%		2.82	%		3.64	%		91.41	%	$	0.05		$	7.93
March 31, 2006		319,007		250,735		254,720		27,055		0.63			7.47			3.62			99.37			0.15			7.93
December 31, 2005		288,619		224,386		219,967		27,288		(1.41	)		(14.95	)		3.96			128.37			(0.30	)		7.76
September 30, 2005		280,506		209,795		211,197		28,112		(0.73	)		(7.39	)		3.79			112.11			(0.15	)		8.14
June 30, 2005		277,754		197,545		206,875		28,879		(0.83	)		(8.01	)		3.67			119.07			(0.17	)		8.32
March 31, 2005		296,856		199,703		209,035		30,692		(7.16	)		(69.25	)		3.21			300.96			(1.53	)		8.42
December 31, 2004		327,543		218,962		211,685		8,455		2.95			114.17			2.48			71.83			8.25			10.13
September 30, 2004		346,078		226,951		236,418		6,096		(0.87	)		(49.53	)		2.25			120.66			(2.17	)		18.44
June 30, 2004		372,246		244,515		260,031		7,628		(1.72	)		(84.13	)		2.28			146.88			(4.56	)		16.77

* Historical per share data has been adjusted for the 20:1 reverse stock split distributed in December 2004.

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