Mackinac Financial (MFNC) 10-Q 2007 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedJune 30, 2007

OR

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from <> to <>

Commission file number: 0-20167

MACKINAC FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

MICHIGAN	38-2062816
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

130 SOUTH CEDAR STREET, MANISTIQUE, MI	49854
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (888) 343-8147

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ       Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filero            Accelerated Filero            Non-accelerated Filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yeso       Noþ

As of July 31, 2007, there were outstanding 3,428,695 shares of the registrant’s common stock, no par value.

MACKINAC FINANCIAL CORPORATION

INDEX

				Page No.
PART I.		FINANCIAL INFORMATION
	Item 1.		Financial Statements
			Condensed Consolidated Balance Sheets — June 30, 2007 (Unaudited), December 31, 2006 and June 30, 2006 (Unaudited)		1
			Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2007 (Unaudited) and June 30, 2006 (Unaudited)		2
			Condensed Consolidated Statements of Changes in Shareholders’ Equity — Three and Six Months Ended June 30, 2007 (Unaudited) and June 30, 2006 (Unaudited)		3
			Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2007 (Unaudited) and June 30, 2006 (Unaudited)		4
			Notes to Condensed Consolidated Financial Statements (Unaudited)		5
	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
	Item 3.		Quantitative and Qualitative Disclosures About Market Risk		25
	Item 4.		Controls and Procedures		28
PART II.		OTHER INFORMATION
	Item 1.		Legal Proceedings		29
	Item 4.		Submission of Matters to a Vote of Security Holders		29
	Item 6.		Exhibits and Reports on Form 8-K		30
	SIGNATURES				31
Rule 13a-14(a) Certification of Chief Executive Officer
Rule 13a-14(a) Certification of Chief Financial Officer
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer

MACKINAC FINANCIAL CORPORATION

PART I.FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)

	June 30,			December 31,			June 30,
	2007			2006			2006
	(unaudited)						(unaudited)
ASSETS
Cash and due from banks	$	7,518		$	4,865		$	5,529
Federal funds sold		3,489			5,841			12,535
Cash and cash equivalents		11,007			10,706			18,064
Interest-bearing deposits in other financial institutions		3,687			856			893
Securities available for sale		24,086			32,769			33,870
Federal Home Loan Bank stock		3,794			3,794			4,855
Loans:
Commercial		280,268			261,726			231,547
Mortgage		55,090			58,014			48,931
Installment		3,538			2,841			2,632
Total Loans		338,896			322,581			283,110
Allowance for loan losses		(4,920	)		(5,006	)		(5,415	)
Net loans		333,976			317,575			277,695
Premises and equipment		12,471			12,453			12,748
Other real estate held for sale		77			26			52
Other assets		4,221			4,612			4,320
TOTAL ASSETS	$	393,319		$	382,791		$	352,497
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Non-interest-bearing deposits	$	28,811		$	23,471		$	21,773
Interest-bearing deposits:
NOW and Money Market		73,994			73,188			68,107
Savings		12,422			13,365			14,136
CDs<$100,000		96,546			89,585			81,768
CDs>$100,000		24,879			23,645			19,025
Brokered		84,594			89,167			79,355
Total deposits		321,246			312,421			284,164
Borrowings		38,307			38,307			37,617
Other liabilities		3,281			3,273			3,537
Total liabilities		362,834			354,001			325,318
Shareholders’ equity:
Preferred stock — No par value:
Authorized 500,000 shares, no shares outstanding
Common stock and additional paid in capital — No par value
Authorized — 18,000,000 shares
Issued and outstanding — 3,428,695 shares		42,780			42,722			42,567
Accumulated deficit		(12,162	)		(13,745	)		(14,772	)
Accumulated other comprehensive (loss)		(133	)		(187	)		(616	)
Total shareholders’ equity		30,485			28,790			27,179
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	393,319		$	382,791		$	352,497

See accompanying notes to condensed consolidated financial statements.

1.

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except per Share Data)
(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
INTEREST INCOME:
Interest and fees on loans:
Taxable	$	6,448	$	5,182	$	12,681	$	9,681
Tax-exempt		143		192		314		385
Interest on securities
Taxable		293		274		594		547
Tax-exempt		—		41		—		82
Other interest		166		194		366		363
Total interest income		7,050		5,883		13,955		11,058
INTEREST EXPENSE:
Deposits		3,267		2,509		6,489		4,589
Borrowings		514		439		1,019		855
Total interest expense		3,781		2,948		7,508		5,444
Net interest income		3,269		2,935		6,447		5,614
Provision for loan losses		—		—		—		(600	)
Net interest income after provision for loan losses		3,269		2,935		6,447		6,214
OTHER INCOME:
Service fees		185		122		346		232
Net gains on sale of secondary market loans		91		42		199		83
Proceeds from settlement of lawsuit		—		—		470		—
Other		66		87		240		152
Total other income		342		251		1,255		467
OTHER EXPENSE:
Salaries and employee benefits		1,672		1,496		3,410		3,090
Occupancy		327		293		661		610
Furniture and equipment		166		155		323		311
Data processing		210		182		381		336
Professional service fees		174		414		325		614
Loan and deposit		79		98		151		228
Telephone		59		51		117		100
Advertising		91		107		183		177
Other		287		200		570		527
Total other expense		3,065		2,996		6,121		5,993
Income before income taxes		546		190		1,581		688
Provision for (benefit of) income taxes		—		—		—		—
NET INCOME	$	546	$	190	$	1,581	$	688
INCOME PER COMMON SHARE:
Basic	$	.16	$	.05	$	.46	$	.20
Diluted	$	.16	$	.05	$	.46	$	.20

See accompanying notes to condensed consolidated financial statements.

2.

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in Thousands)
(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007		2006
Balance, beginning of period	$	29,932		$	27,173		$	28,790	$	26,588
Net income for period		546			190			1,581		688
Stock option compensation		30			78			60		156
Net unrealized gain (loss) on securities available for sale		(23	)		(262	)		54		(253	)
Total comprehensive income		553			6			1,695		591
Balance, end of period	$	30,485		$	27,179		$	30,485	$	27,179

See accompanying notes to condensed consolidated financial statements.

3.

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

	Six Months Ended
	June 30,
	2007			2006
Cash Flows from Operating Activities:
Net income	$	1,581		$	688
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		344			489
(Gain) on sale of premises, equipment and other real estate		(13	)		(57	)
Stock option compensation		60			156
Change in other assets		348			(288	)
Change in other liabilities		8			452
Net cash provided by operating activities		2,328			1,440
Cash Flows from Investing Activities:
Net (increase) in loans		(16,470	)		(44,039	)
Net (increase) decrease in interest-bearing deposits in other financial institutions		(2,831	)		132
Purchase of securities available for sale		(13,564	)		—
Proceeds from sales, maturities or calls of securities available for sale		22,440			70
Capital expenditures		(744	)		(1,171	)
Proceeds from sale of premises, equipment, and other real estate		317			957
Net cash (used in) provided by investing activities		(10,852	)		(44,051	)
Cash Flows from financing activities:
Net increase in deposits		8,825			51,532
Proceeds from issuance of debt		—			1,200
Net cash provided by financing activities		8,825			52,732
Net increase in cash and cash equivalents		301			10,121
Cash and cash equivalents at beginning of period		10,706			7,943
Cash and cash equivalents at end of period	$	11,007		$	18,064
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest	$	5,771		$	5,177
Income taxes		—			—
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)		69			7

See accompanying notes to condensed consolidated financial statements.

4.

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, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. 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, 2006.
	The preparation of financial statements in conformity with generally accepted accounting principles 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.
	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 were not changed due to these classifications.
	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 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 collectibility 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 collectibility.
	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 Option Plans
	The Corporation sponsors three stock option plans. One plan was approved in 2000 and applies to officers, employees, and nonemployee directors. This plan was amended as a part of the December 2004 stock offering and recapitalization. The amendment, approved by shareholders, increased the shares available under this plan by 428,587 shares from the original 25,000 (adjusted for the 1:20 reverse stock split), to a total authorized share balance of 453,587. The other two plans, one for officers and employees and the other for nonemployee

5.

MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
	directors, were approved in 1997. A total of 30,000 shares (adjusted for the 1:20 reverse stock split), were made available for grant under these plans. Options under all of the plans are granted at the discretion of a committee of the Corporation’s Board of Directors. Options to purchase shares of the Corporation’s stock are granted at a price equal to the market price of the stock at the date of grant. The committee determines the vesting of the options when they are granted as established under the plan.
	The Corporation adopted SFAS No. 123 (Revised) “Share Based Payments” in the first quarter of 2006. This statement supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees” and its related implementation guidance. Under Opinion No. 25, issuing stock options to employees generally resulted in recognition of no compensation cost. This adoption resulted in the recognition of before tax compensation expense in the amount of $60,000 for the six months ended June 30, 2007, and $156,000 for the same period in 2006. The expense recorded recognizes the current period vesting of options outstanding. The per share impact of this accounting change was $.01 and $.05 in the first half of 2007 and 2006, respectively.
2.	RECENT ACCOUNTING PRONOUNCEMENTS
	FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes
	In July 2006, the Financial Accounting Standards Board (FASB) issued this interpretation to clarify the accounting for uncertainty in tax positions. FIN 48 requires, among other matters, that the Corporation recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained on an audit, based on the technical merits of the position. The provisions of FIN 48 were effective as of the beginning of the Corporation’s 2007 fiscal year and required any cumulative effect of the change in accounting principle to be recorded as an adjustment to opening retained earnings. The Corporation did not record an adjustment to retained earnings upon adoption of FIN 48. In future periods, The Corporation will, in accordance with FIN 48, evaluate its tax positions to determine whether or not an adjustment to deferred tax balances and related valuation accounts is warranted.
	SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159)
	SFAS No. 159 permits an entity to measure certain financial assets and financial liabilities at fair value. The Statement’s objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. Under SFAS No. 159, entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions, as long as it is applied to the instrument in its entirety. The fair value option election is irrevocable, unless a new election date occurs. The new Statement establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings but does not eliminate disclosure requirements of other accounting standards. Assets and liabilities that are measured at fair value must be displayed on the face of the balance sheet. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity (a) makes that choice in the first 120 days of that fiscal year, (2) has not yet issued financial statements, and (3) elects to apply the provisions of SFAS No. 157. The Corporation did not adopt SFAS No. 159 during this early adoption period, and has not determined the impact, if any; the implementation of SFAS No. 159 will have on the consolidated financial statements.

6.

MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3.	EARNINGS PER SHARE
	Earnings per share are based upon the weighted average number of shares outstanding.
	Additional shares issued as a result of option exercises would not be dilutive in either period.
	The following shows the computation of basic and diluted earnings per share for the three and six months ended June 30, 2007 and 2006 (dollars in thousands, except per share data):

Three Months Ended			Weighted Average		Income
June 30,	Net Income		Number of Shares		Per Share
2007
Income per share — Basic and diluted	$	546		3,428,695	$	.16
2006
Income per share — Basic and diluted	$	190		3,428,695	$	.05

Six Months Ended
June 30,
2007
Income per share — Basic and diluted	$	1,581	3,428,695	$	.46
2006
Income per share — Basic and diluted	$	688	3,428,695	$	.20

4.	INVESTMENT SECURITIES
	The amortized cost and estimated fair value of investment securities available for sale as of June 30, 2007, December 31, 2006 and June 30, 2006 are as follows (dollars in thousands):

	June 30, 2007				December 31, 2006				June 30, 2006
	Amortized		Estimated		Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
US Agencies	$	23,708	$	23,517	$	32,445	$	32,176	$	30,963	$	30,279
Obligations of states and political subdivisions		511		569		511		593		3,523		3,591
Total securities available for sale	$	24,219	$	24,086	$	32,956	$	32,769	$	34,486	$	33,870

The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $23.708 million and $23.517 million, respectively, at June 30, 2007.

7.

MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5.	LOANS
	The composition of loans at June 30, 2007, December 31, 2006 and June 30, 2006 is as follows (dollars in thousands):

	June 30,		December 31,		June 30,
	2007		2006		2006
Commercial real estate	$	161,823	$	154,332	$	140,918
Commercial, financial, and agricultural		76,390		71,385		59,581
One to four family residential real estate		55,090		58,014		48,931
Construction		42,055		36,009		31,048
Consumer		3,538		2,841		2,632
Total loans	$	338,896	$	322,581	$	283,110

LOANS – Allowance for loan losses

An analysis of the allowance for loan losses for the six months ended June 30, 2007, the year ended December 31, 2006, and the six months ended June 30, 2006 is as follows: (dollars in thousands):

	June 30,			December 31,			June 30,
	2007			2006			2006
Balance at beginning of period	$	5,006		$	6,108		$	6,108
Recoveries on loans		25			91			40
Loans charged off		(111	)		(332	)		(133	)
Provision		—			(861	)		(600	)
Balance at end of period	$	4,920		$	5,006		$	5,415

In the first half of 2007, net charge off activity was minimal at $86,000, or .03% of average loans outstanding compared to net charge-offs of $93,000, or .04% of average loans, in the first half of 2006. In the first half of 2006, the Corporation reduced the allowance for loan losses by recording a negative provision amounting to $600,000. This reduction in the reserve was made in recognition of the improved credit quality existent in the loan portfolio and is discussed in more detail under “Management’s Discussion and Analysis.”

LOANS – Impaired loans

Nonperforming loans are those which are contractually past due 90 days or more as to interest or principal payments, on nonaccrual status, or loans, the terms of which have been renegotiated to provide a reduction or deferral on interest or principal. The interest income recorded and that which would have been recorded had nonaccrual and renegotiated loans been current or not troubled was not material to the consolidated financial statements for the six months ended June 30, 2007 and 2006.

8.

MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5.	LOANS (Continued)
	Information regarding impaired loans as of June 30, 2007, December 31, 2006 and June 30, 2006 is as follows (dollars in thousands):

							Valuation Reserve
	June 30,		December 31,		June 30,		June 30,		December 31,		June 30,
	2007		2006		2006		2007		2006		2006
	(Unaudited)				(Unaudited)
Balances, at period end
Impaired loans with specific valuation reserve	$	3,559	$	1,804	$	301	$	968	$	493	$	75
Impaired loans with no specific valuation reserve		1,490		1,136		145		—		—		—
Total impaired loans	$	5,049	$	2,940	$	446	$	968	$	493	$	75
Impaired loans on nonaccrual basis	$	4,758	$	2,900	$	446	$	968	$	493	$	75
Impaired loans on accrual basis		291		40		—		—		—		—
Total impaired loans	$	5,049	$	2,940	$	446	$	968	$	493	$	75
Average investment in impaired loans	$	4,113	$	1,192	$	163
Interest income recognized during impairment		15		7		1
Interest income that would have been recognized on an accrual basis		198		114		2
Cash-basis interest income recognized		10		5		1

The average investment in impaired loans was approximately $4.113 million for the six-months ended June 30, 2007, $1.192 million for the year ended December 31, 2006, and $.163 million for the six months ended June 30, 2006, respectively.

LOANS – Related parties

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,			December 31,			June 30,
	2007			2006			2006
Loans outstanding beginning of period	$	1,621		$	578		$	578
New loans		—			1,647			1,222
Net activity on revolving lines of credit		—			271			271
Repayment		(16	)		(875	)		(857	)
Loans outstanding end of period	$	1,605		$	1,621		$	1,214

There were no loans to related-parties classified substandard at June 30, 2007, December 31, 2006 or June 30, 2006, respectively.

9.

MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6.	BORROWINGS
	Borrowings consist of the following at June 30, 2007, December 31, 2006 and June 30, 2006 (dollars in thousands):

	June 30,		December 31,		June 30,
	2007		2006		2006
Federal Home Loan Bank advances at rates ranging from 4.98% to 5.17% maturing in 2010 and 2011	$	35,000	$	35,000	$	35,000
Farmers Home Administration, fixed-rate note payable, maturing August 24, 2004, interest payable at 1%		1,348		1,348		1,417
Advance outstanding on line of credit with a correspondent bank, Interest payable at the prime rate, 8.25% as of June 30, 2007, maturing May 21, 2008		1,959		1,959		1,200
	$	38,307	$	38,307	$	37,617

	The Federal Home Loan Bank borrowings are collateralized at June 30, 2007, by the following: a collateral agreement on the Corporation’s one to four family residential real estate loans with a book value of approximately $20.418 million; U.S. government agency securities with an amortized cost and estimated fair value of $23.708 million and $23.517 million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $3.794 million. Prepayment of the remaining 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, 2007.
	The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $713,000 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 $770,000, and guaranteed by the Corporation.
7.	STOCK OPTION PLANS
	A summary of stock option transactions for the six months ended June 30, 2007 and 2006, and the year ended December 31, 2006, is as follows:

	June 30,		December 31,			June 30,
	2007		2006			2006
Outstanding shares at beginning of year		446,417		375,417			375,417
Granted during the period		—		72,500			—
Expired during the period		—		(1,500	)		(1,500	)
Outstanding shares at end of period		446,417		446,417			373,917
Weighted average exercise price per share at end of period	$	12.29	$	12.29		$	12.60
Shares available for grant at end of period		18,488		18,488			90,988

There were no options granted in the first six months of 2007 and 2006.

10.

MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7.	STOCK OPTION PLANS (Continued)
	Following is a summary of the options outstanding and exercisable at June 30, 2007:

Exercise	Number				Remaining		Weighted Average
Price Range	Outstanding		Exercisable		Contractual Life-Years		Exercise Price
$9.16		12,500		5,000		8.5	$	9.16
$9.75		257,152		120,861		7.5		9.75
$10.65		72,500		14,500		9.5		10.65
$11.50		40,000		8,000		8.3		11.50
$12.00		60,000		12,000		8.0		12.00
$156.00 - $240.00		3,545		3,545		3.8		186.75
$300.00 - $406.60		720		720		2.0		345.00
		446,417		164,626		7.9	$	14.15

8.	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. As of June 30, the Corporation had a net operating loss and tax credit carryforwards for tax purposes of approximately $36.9 million, and $2.1 million, respectively. The deferred tax benefits related to the net operating loss and tax credit carryforwards will, at a minimum, be utilized to offset future taxable expense. In the first half of 2007 and 2006, the Corporation reversed a portion of the valuation allowance pertaining to the NOL carryforward to offset current federal tax, $.450 million and $.075 million, respectively. The Corporation will record future benefits from these carryforwards at such time as it becomes “more likely than not” that they will be utilized prior to expiration. Please refer to further discussion on income taxes contained in “Management’s Discussion and Analysis.” This net operating loss carryforward expires twenty years from the date that it originated. A portion of the NOL, approximately $22 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 $1.4 million for the NOL and the equivalent value of tax credits, which is approximately $.477 million. These limitations for use were established in conjunction with the recapitalization of the Corporation in December, 2004.
9.	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.

11.

MACKINAC FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9.

COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued)

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,		December 31,		June 30,
	2007		2006		2006
Commitments to extend credit:
Variable rate	$	51,214	$	44,141	$	42,787
Fixed rate		8,881		9,288		3,345
Standby letters of credit — Variable rate		5,914		6,233		8,939
Credit card commitments — Fixed rate		2,432		2,391		2,981
	$	68,441	$	62,053	$	58,052

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.

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. This concentration at June 30, 2007 represents $41.7 million, or 17.5%, compared to $35.5 million, or 17.7%, of the commercial loan portfolio on June 30, 2006. 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.

12.

MACKINAC FINANCIAL CORPORATION

ITEM 2MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of these safe harbor provisions. Forward-looking statements which are based on certain assumptions and describe future plans, strategies, or expectations of the Corporation, are generally identifiable by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, or similar expressions. The Corporation’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could cause actual results to differ from the results in forward-looking statements include, but are not limited to:

• The highly regulated environment in which the Corporation operates could adversely affect its ability to carry out its strategic plan due to restrictions on new products, funding opportunities or new market entrances;

• General economic conditions, either nationally or in the state(s) in which the Corporation does business;

• Legislation or regulatory changes which affect the business in which the Corporation is engaged;

• Changes in the interest rate environment which increase or decrease interest rate margins;

• Changes in securities markets with respect to the market value of financial assets and the level of volatility in certain markets such as foreign exchange;

• Significant increases in competition in the banking and financial services industry resulting from industry consolidation, regulatory changes and other factors, as well as action taken by particular competitors;

• The ability of borrowers to repay loans;

• The effects on liquidity of unusual decreases in deposits;

• Changes in consumer spending, borrowing, and saving habits;

• Technological changes;

• Acquisitions and unanticipated occurrences which delay or reduce the expected benefits of acquisitions;

• Difficulties in hiring and retaining qualified management and banking personnel;

• The Corporation’s ability to increase market share and control expenses;

• The effect of compliance with legislation or regulatory changes;

• The effect of changes in accounting policies and practices;

• The costs and effects of existing and future litigation and of adverse outcomes in such litigation.

These risks and uncertainties should be considered in evaluating forward-looking statements. Further information concerning the Corporation and its business, including additional factors that could materially affect the Corporation’s financial results, is included in the Corporation’s filings with the Securities and Exchange Commission. All forward-looking statements contained in this report are based upon information presently available and the Corporation assumes no obligation to update any forward-looking statements.

13.

MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

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 report. This discussion should be read in conjunction with the consolidated financial statements and footnotes contained in the Corporation’s Annual Report and Form 10-K for the year-ended December 31, 2006. Throughout this discussion, the term “Bank” refers to mBank, formerly known as North Country Bank and Trust, the principal banking subsidiary of the Corporation.

FINANCIAL OVERVIEW

Year-to-date consolidated net income was $1.581 million through June 30, 2007, compared to a net income of $.688 million for the same period in 2006. Basic income per share was $.46 for the six months ended June 30, 2007, compared to an income per share of $.20 for the same period in 2006. The income for the three months ended June 30, 2007 amounted to $.546 million, or $.16 per share, compared to an income of $.190 million, or $.05 per share for the same period in 2006. The results of operations for the first six months of 2007 include $470,000, of proceeds from the settlement of a lawsuit against the Corporation’s former accountants. During the comparable six month period in 2006, the Bank recorded a $600,000 negative provision in recognition of improved credit quality. Excluding both items provides a more revealing picture of operating results. The adjusted figures show net income in the first half of 2007 of $1.111 million, compared to an adjusted net income of $.088 million for the same period in 2006.

Total assets increased $10.528 million from December 31, 2006 to June 30, 2007. The loan portfolio increased $16.315 million in the first six months of 2007, from December 31, 2006 balances of $322.581 million. Deposits totaled $321.246 million at June 30, 2007, an increase of $8.825 million from the $312.421 million at December 31, 2006.

FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents increased $.301 million in 2007. See further discussion of the change in cash and cash equivalents in the Liquidity section.

Investment Securities

Available-for-sale securities decreased $8.683 million, or 26.5%, from December 31, 2006 to June 30, 2007, with the balance on June 30, 2007, totaling $24.086 million. The decrease during the first six months of 2007 was due to a combination of maturities, calls, and paydowns of securities. Investment securities are utilized in an effort to manage interest rate risk and liquidity. As of June 30, 2007, investment securities with an estimated fair value of $23.574 million were pledged. During the first half of 2007, the Corporation utilized a higher proportion of federal funds to maintain liquidity since yields were comparable to those offered on short-term investment securities.

Loans

Through the first half of 2007, loan balances increased by $16.315, or 5.1%, from December 31, 2006 balances of $322.581 million. During the first six months of 2007, the Bank had total loan production of $64.511 million. This loan production, some of which has not yet funded, was significantly offset by normal principal runoff and amortization, $17.3 million, and large paydowns and refinancing, which totaled $23.9 million. Enhancements to the loan approval process and exception reporting further provide for a more effective management of risk in the loan portfolio. Management continues to actively manage the loan portfolio, seeking to identify and resolve problem assets at an early stage. Management believes a properly positioned loan portfolio provides the most attractive earning asset yield available to the Corporation and, with changes to the loan approval process and exception reporting, management can effectively manage the risk in the loan portfolio. Management intends to continue loan growth within its markets for mortgage, consumer, and commercial loan products while concentrating on loan quality, industry concentration issues, and competitive pricing.

14.

MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Following is a summary of the loan portfolio at June 30, 2007, December 31, 2006 and June 30, 2006 (dollars in thousands):

	June 30,		Percent of			December 31,		Percent of			June 30,		Percent of
	2007		Total			2006		Total			2006		Total
Commercial real estate	$	161,823		47.75	%	$	154,332		47.84	%	$	140,918		49.77	%
Commercial, financial, and agricultural		76,390		22.54			71,385		22.13			59,581		21.05
One to four family residential real estate		55,090		16.26			58,014		17.99			48,931		17.28
Construction		42,055		12.41			36,009		11.16			31,048		10.97
Consumer		3,538		1.04			2,841		.88			2,632		.93
Total loans	$	338,896		100.00	%	$	322,581		100.00	%	$	283,110		100.00	%

Following is a table showing the significant industry types in the commercial loan portfolio as of June 30, 2007, December 31, 2006 and June 30, 2006 (dollars in thousands):

	June 30, 2007								December 31, 2006								June 30, 2006
			Percent of			Percent of					Percent of			Percent of					Percent of			Percent of
	Outstanding		Commerical			Shareholders’			Outstanding		Commercial			Shareholders’			Outstanding		Commercial			Shareholders’
	Balance		Loans			Equity			Balance		Loans			Equity			Balance		Loans			Equity
R/E — oper. of nonresidential bldgs.	$	41,662		17.49	%		136.66	%	$	44,308		19.63	%		153.90	%	$	35,478		17.69	%		130.53	%
Hospitality and tourism		37,286		15.65			122.31			30,826		13.66			107.07			37,754		18.83			138.91
Real estate agents and managers		31,937		13.41			104.76			25,071		11.11			87.08			15,628		7.79			57.5
New car dealers		10,270		4.31			33.69			10,086		4.47			35.03			10,002		4.99			36.8
Other		117,058		49.14			383.99			115,426		51.13			400.93			101,637		50.69			373.95
Total Commercial Loans	$	238,213		100.00	%				$	225,717		100.00	%				$	200,499		100.00	%

Management recognizes the additional risk presented by the concentration in certain segments of the portfolio. On a historical basis, the Corporation’s highest concentration of credit risk was the hospitality and tourism industry. Management does not consider the current loan concentrations in hospitality and gaming 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, 2007. The current concentration of real estate related loans represents a broad customer base composed of a high percentage of owner occupied developments.

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 charge-offs for the six months ended June 30, 2007 amounted to $.086 million, or 0.03% of average loans outstanding, compared to $.093 million, .04% of average loans outstanding, for the same period in 2006. The Corporation, in recognition of the continued improvement in credit quality which has occurred since 2004, reduced the reserve for loan loss by $600,000 in the first quarter of 2006. The reduction of the reserve results in a current reserve balance that is more representative of the relevant risk inherent within the Corporation’s loan portfolio. The current level of charge-offs is below historical levels and projected charge-off activity, based upon current levels of nonperforming loans, is not expected to attain historical levels. 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 increase in nonperforming loans in the first half of 2007 is not indicative of an overall deterioration of portfolio credit quality. Management believes these additions to problem loans are somewhat isolated and are due mainly to these individual credit situations and not to an industry, geographic, or economic decline.

15.

MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

     The table below shows period end balances of nonperforming assets (dollars in thousands):

	June 30,			December 31,			June 30,
	2007			2006			2006
Nonperforming Assets:
Nonaccrual Loans	$	4,758		$	2,899		$	446
Loans past due 90 days or more		291			40			—
Restructured Loans		—			—			—
Total nonperforming loans		5,049			2,939			446
Other real estate owned		77			26			52
Total nonperforming assets	$	5,126		$	2,965		$	498
Nonperforming loans as a % of loans		1.49	%		.91	%		.16	%
Nonperforming assets as a % of assets		1.30	%		.77	%		.14	%
Reserve for Loan Losses:
At period end	$	4,920		$	5,006		$	5,415
As a % of loans		1.45	%		1.55	%		1.91	%
As a % of nonperforming loans		97.45	%		170.33	%		1,214.13	%
As a % of nonaccrual loans		103.41	%		172.68	%		1,214.13	%

Following is the allocation of the allowance for loan losses as of June 30, 2007, December 31, 2006 and June 30, 2006 (dollars in thousands):

	June 30,		December 31,		June 30,
	2007		2006		2006
Commercial, financial and agricultural loans	$	4,261	$	3,600	$	3,030
One to four family residential real estate loans		60		23		41
Consumer loans		—		—		—
Unallocated and general reserves		599		1,383		2,344
Totals	$	4,920	$	5,006	$	5,415

The Corporation has experienced a significant decline in historical loan charge-offs in the past several years. During this same period, the commercial loan portfolio has grown by $99.125 million from 2005 year end to June 30, 2007. The increased allocation of the reserve from unallocated and general reserves to commercial, financial and agricultural is in recognition of this growth. The increase in nonperforming loans has also resulted in increases for specific reserve allocations. Specific reserve allocations on nonperforming loans totaled $.968 million as of June 30, 2007. The decline of charge-offs in recent years has helped mitigate the need for loan loss provisions, despite increased balances of impaired loans, since the requirement for general reserves has significantly decreased.

16.

MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The following ratios assist management in the determination of the Corporation’s credit quality:

	June 30,			December 31,			June 30,
	2007			2006			2006
Total loans, at period end	$	338,896		$	322,581		$	283,110
Average loans for the year	$	321,414		$	301,508		$	262,274
Allowance for loan losses	$	4,920		$	5,006		$	5,415
Allowance to total loans at period end		1.45	%		1.55	%		1.91	%
Net charge-offs during the period	$	86		$	241		$	93
Net charge-offs to average loans		.03	%		.08	%		.04	%
Net charge-offs to beginning allowance balance		1.72	%		3.95	%		1.52	%
Nonaccrual loans at end of period	$	4,758		$	2,899		$	446
Loans past due 90 days or more		291			40			—
Restructured loans		—			—			—
Total nonperforming loans	$	5,049		$	2,939		$	446
Nonperforming loans to total loans at end of period		1.49	%		.91	%		.16	%

Total nonperforming loans increased $2.110 million since December 31, 2006. The increase was due to several commercial credits that were added in the first half of 2007. Management believes that these loans are well secured and does not expect any material loss on these loans.

Management continues to address market issues impacting its loan customer base. In conjunction with the Corporation’s senior lending staff and the bank regulatory examinations, management reviews the Corporation’s loans, related collateral evaluations, and the overall lending process. The Corporation also utilizes a loan review consultant to perform a review of the loan portfolio. The opinion of this consultant upon completion of the independent review provided findings similar to management on the overall adequacy of the reserve. The Corporation has engaged this same consultant for loan review during 2007.

As part of the process of resolving problem credits, the Corporation may acquire ownership of collateral which secured such credits. The Corporation carries this collateral in other real estate which is grouped with other assets on the condensed consolidated balance sheet.

The following table represents the activity in other real estate for the periods indicated (dollars in thousands):

	Three Months Ended			Year Ended			Three Months Ended
	June 30, 2007			December 31, 2006			June 30, 2006
Balance at beginning of period	$	26		$	945		$	945
Other real estate transferred from loans due to foreclosure (net of adjustments made through the allowance for loan losses)		69			23			7
Other real estate sold/written down		(18	)		(942	)		(900	)
Balance at end of period	$	77		$	26		$	52

During the first six months of 2007, the Corporation received real estate in lieu of loan payments of $69,000. 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 balance. Any additional reduction in the fair value results in a write-down of other real estate. Write-downs on other real estate may be recorded based on subsequent evaluations of current realizable fair values.

17.

MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Deposits

The Corporation had an increase in deposits in the first six months of 2007. Total deposits increased by $8.825 million, or 2.8%, in the first six months of 2007. Core deposits increased from $199.609 million at 2006 year end to $211.773 million, an increase of $12.164 million. During the first six months of 2007, the Corporation reduced its wholesale funding, brokered deposits, by $4.567 million. The Corporation utilizes brokered deposits to fulfill the shortfall between increases in bank deposits compared to loan funding needs. During the first half of 2007, the Corporation was able to reduce its reliance on brokered deposits.

The following table represents detail of deposits at the end of the periods indicated (dollars in thousands):

	June 30,					December 31,					June 30,
	2007		% of Total			2006		% of Total			2006		% of Total
Non-interest-bearing	$	28,811		8.97	%	$	23,471		7.51	%	$	21,773		7.66	%
NOW and money market		73,994		23.03			73,188		23.43			68,107		23.97
Savings		12,422		3.87			13,365		4.28			22,104		7.78
Certificates of Deposit <$100,000		96,546		30.05			89,585		28.67			73,800		25.97
Total core deposits		211,773		65.92			199,609		63.89			185,784		65.38
Certificates of Deposit >$100,000		24,879		7.75			23,645		7.57			19,025		6.69
Brokered CDs		84,594		26.33			89,167		28.54			79,355		27.93
Total non-core deposits		109,473		34.09			112,812		36.11			98,380		34.61
Total deposits	$	321,246		100.00	%	$	312,421		100.00	%	$	284,164		100.00	%

Borrowings

The Corporation historically used alternative funding sources to provide long-term, stable sources of funds. These borrowings were initially carried with fixed interest rates and stated maturities through 2011. The advances gave the FHLB the option to convert the above listed convertible-fixed-rate advances to adjustable rate advances, repricing quarterly at three month LIBOR Flat, on the original call date and quarterly thereafter. During 2006, $20.0 million of the advances were converted from fixed to adjustable rate by the FHLB. This shift from fixed to variable rate did not have a material impact on the Corporation’s net interest margin.

Shareholders’ Equity

Total shareholders’ equity increased $1.695 million from December 31, 2006 to June 30, 2007. The increase is comprised of net income, contributed capital of $60,000 in recognition of stock option expense and an increase in the market value of securities of $54,000. The Board of Directors does not anticipate declaring any dividends in the near future. The declaration of dividends is contingent on a variety of factors including regulatory and state statutes, and the Corporation’s return to profitability.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income before provision for loan losses for the quarter ended June 30, 2007, increased by $.833 million, or 14.8%, compared to the same period one year ago. This increase in net interest income was a result of the combination of increased average balances and increased rates. The Corporation, through the first six months of 2006, benefited from prime rate increases as more assets were repricing upwards than liabilities. This asset sensitive position has been declining in recent periods as the Corporation initiated steps as a part of its ALCO Committee to reduce interest rate risk. More discussion is included relative to repricing and asset sensitivity under the caption “Interest Rate Risk” elsewhere in this report.

18.

MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

In the second quarter of 2007, net interest income totaled $3.269 million compared to $2.935 million for the same three month period in 2006. The increase of $.334 million is attributed largely to increased loan balances of $51.035 million between periods. The overall yield on earning assets increased from 7.15% in the second quarter of 2006 to 7.76% in 2007. The increase in yields was due primarily to repricing of loans and investments commensurate with increases in the prime rate during the first six months of 2006 from 7.25% to 8.25%. This increased yield on earning assets was largely offset by similar increases in the cost of interest bearing liabilities, which increased from 3.91% in the second quarter of 2006 to 4.66% in 2007.

The following tables present 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.

	Three Months Ended
																				2007-2006
	Average Balances									Average Rates						Interest				Income/									Rate/
	June 30,						Increase/			June 30,						June 30,				Expense			Volume			Rate			Volume
(dollars in thousands)	2007			2006			(Decrease)			2007			2006			2007		2006		Variance			Variance			Variance			Variance
Loans (1,2)	$	324,721		$	273,686		$	51,035			8.14	%		7.88	%	$	6,591	$	5,374	$	1,217		$	1,002		$	181			34
Taxable securities		25,971			30,328			(4,357	)		4.53			3.61			293		273		20			(39	)		69			(10	)
Nontaxable securities		—			3,757			(3,757	)		—			4.38			—		41		(41	)		(41	)		(41	)		41
Federal funds sold		7,756			9,738			(1,982	)		5.27			5.11			102		124		(22	)		(25	)		4			(1	)
Other interest-earning assets		5,934			5,736			198			4.33			4.96			64		71		(7	)		2			(9	)		—
Total earning assets		364,382			323,245			41,137			7.76			7.30			7,050		5,883		1,167			899			204			64
Reserve for loan losses		(4,972	)		(5,427	)		455
Cash and due from banks		5,976			5,957			19
Intangible assets		172			284			(112	)
Other assets		16,507			17,469			(962	)
Total assets	$	382,065		$	341,528		$	40,537
NOW and money market deposits	$	72,371		$	69,994		$	2,377			3.49			3.13			629		546		83			19			62			2
Savings deposits		13,288			14,641			(1,353	)		1.63			1.37			54		50		4			(5	)		9			—
CDs <$100,000		96,442			80,895			15,547			5.00			4.21			1,202		850		352			163			158			31
CDs >$100,000		24,350			17,050			7,300			5.02			4.49			305		191		114			82			23			9
Brokered deposits		79,301			71,957			7,344			5.45			4.86			1,077		872		205			89			105			11
Borrowings		39,209			37,610			1,599			5.25			4.68			514		439		75			19			53			3
Total interest-bearing liabilities		324,961			292,147			32,814			4.67			4.05			3,781		2,948		833			367			410			56
Demand deposits		23,717			20,054			3,663
Other liabilities		2,975			3,406			(431	)
Shareholders’ equity		30,412			25,921			4,491
Total liabilities and shareholders’ equity	$	382,065		$	341,528		$	40,537
Rate spread											3.09	%		3.25	%
Net interest margin/revenue											3.60	%		3.64	%	$	3,269	$	2,935	$	334		$	532		$	(206	)	$	8

(1)	For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.
(2)	Interest income on loans includes loan fees.

	Six Months Ended
																					2007-2006
	Average Balances										Average Rates						Interest				Income/									Rate/
	June 30,						Increase/				June 30,						June 30,				Expense			Volume			Rate			Volume
(dollars in thousands)	2007			2006			(Decrease)				2007			2006			2007		2006		Variance			Variance			Variance			Variance
Loans (1,2)	$	321,415		$	262,274		$	59,141				8.15	%		7.74	%	$	12,995	$	10,066	$	2,929		$	2,270		$	538			121
Taxable securities		27,703			30,347			(2,644	)			4.32			3.63			594		547		47			(48	)		104			(9	)
Nontaxable securities		—			3,816			(3,816	)			—			4.33			—		82		(82	)		(82	)		—			—
Federal funds sold		9,103			9,582			(479	)			5.32			4.78			240		227		13			(11	)		26			(2	)
Other interest-earning assets		5,450			5,756			(306	)			4.66			4.76			126		136		(10	)		(7	)		(3	)		—
Total earning assets		363,671			311,775			51,896				7.74			7.15			13,955		11,058		2,897			2,122			665			110
Reserve for loan losses		(4,985	)		(5,737	)		752
Cash and due from banks		5,911			6,147			(236	)
Intangible assets		183			301			(118	)
Other assets		16,459			17,187			(728	)
Total assets	$	381,239		$	329,673		$	51,566
NOW and money market deposits	$	72,282		$	68,949		$	3,333				3.48			2.99			1,249		1,024		225			50			167			8
Savings deposits		13,284			14,987			(1,703	)			1.64			1.29			108		96		12			(11	)		26			(3	)
CDs <$100,000		94,243			79,291			14,952				4.95			4.07			2,312		1,600		712			302			345			65
CDs >$100,000		24,117			15,438			8,679				4.98			4.44			596		340		256			191			42			23
Brokered deposits		82,022			64,833			17,189				5.47			4.76			2,225		1,529		696			405			230			61
Borrowings		38,795			37,017			1,778				5.29			4.66			1,018		855		163			41			116			6
Total interest-bearing liabilities		324,743			280,515			44,228				4.66			3.91			7,508		5,444		2,064			978			926			160
Demand deposits		23,596			19,721			3,875
Other liabilities		3,064			3,609			(545	)
Shareholders’ equity		29,836			25,828			4,008
Total liabilities and shareholders’ equity	$	381,239		$	329,673		$	51,566		��
Rate spread												3.08	%		3.24	%
Net interest margin/revenue												3.57	%		3.63	%	$	6,447	$	5,614	$	833		$	1,144		$	(261	)	$	(50	)

(1)	For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.
(2)	Interest income on loans includes loan fees.

19.

MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Provision for Loan Losses

The Corporation records a provision for loan losses at a level it believes is necessary to maintain the allowance at an adequate level after considering factors such as loan charge-offs and recoveries, changes in the mix of loans in the portfolio, loan growth, and other economic factors. There was no provision for loan losses in the first half of 2007. In recognition of the improved credit quality, the Corporation reduced its loan loss reserve by $600,000 in the first half of 2006. Management, on a quarterly basis, recalculates the required loan loss reserve based upon consistently applied criteria which includes, among other factors, loan type, historical charge-off information by loan type, and a loan grading system applied for evaluating credit risk. Management continues to monitor the loan portfolio for changes which may impact the required allowance for loan losses. A provision for loan losses may be required for future periods if credit quality should deteriorate or loan growth is such that the general reserve is no longer deemed adequate. Management expects, based upon current projected loan growth, that a provision for loan loss will be required later in 2007 in order to maintain required reserve levels.

Other Income

Other income increased by $.788 million for the six months ended June 30, 2007, compared to the six months ended June 30, 2006. The Corporation recognized a benefit from the settlement of a lawsuit against its former accountants in the first half of 2007, which amounted to $.470 million. Service fees increased $.114 million in the first six months of 2007, while other noninterest income increased $.558 million. Revenue due to loans produced and sold in the secondary market amounted to $.199 million compared to $.083 million a year ago. We expect to continue to benefit from secondary market activity in future periods. The Corporation is also expecting to increase other income from sources such as fees from the sale of SBA guaranteed loans.

During the second quarter of 2007, the Corporation recognized $.342 million in other income, compared to $.251 million for the second quarter of 2006. Service fees increased for the second quarter of 2007 by $.063 million to $.185 million when compared to $.122 million in the second quarter of 2006. Also contributing to the increase in total other income was revenue from the sale of loans sold on the secondary market, which increased by $.049 million from $.042 million in the second quarter of 2006 to $.091 million for the same period in 2007.

The following table details noninterest income for the three and six months ended June 30, 2007 and 2006 (dollars in thousands):

	Three Months Ended				% Increase			Six Months Ended				% Increase
	June 30,				(Decrease)			June 30,				(Decrease)
	2007		2006		2007-2006			2007		2006		2007-2006
Service fees	$	185	$	122		51.64		$	346	$	232		49.14
Net gains on sale of secondary market loans		91		42		116.67			199		83		139.76
Proceeds from settlement of lawsuit		—		—		N/A			470		—		N/A
Other noninterest income		66		87		(24.14	)		240		152		57.89
Total other income	$	342	$	251		36.26		$	1,255	$	467		168.74

Other Expenses

Other expenses increased $.128 million for the six months ended June 30, 2007, compared to the same period in 2006. Salaries, commissions, and related benefits increased $.320 million, during the first six months of 2007, compared to the first six months of 2006. This increase reflects the annual salary increases and staffing additions. The Corporation, in an attempt to increase core deposit balances, added three Treasury Management Specialists to focus on generating business related transactional deposit balances. The most significant decrease in 2007 expenses was in professional services, due primarily from reduced legal costs. In 2006, significant legal costs were incurred

20.

MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

in pursuit of legal action against the Corporation’s former accountants. The $.045 million increase in data processing costs is the result of increased deposit balances and activity, along with added data processing services. The $.077 million decrease in loan and deposit expense is due in large part to the reduction in FDIC insurance premiums, which amounted to $.047 million in the first six months of 2006, compared to $.018 million in 2007, a reduction of $.029 million. This reduction in premium was due to lower premium assessments and is expected to continue for the near term. Management continually reviews all areas of noninterest expense for cost reduction opportunities that will not negatively impact service quality and employee morale.

The Corporation recognized other expense in the second quarter of 2007 totaling $3.065 million, compared to $2.996 million in the second quarter of 2006. The increase in noninterest expense between periods was composed of increases in salary and employee benefits, due primarily to staffing increases; occupancy, due to a branch office relocation; and data processing, due to increased services and volume. These increased expenses were partially offset by reductions in professional service fees. In the second quarter of 2006, the Corporation incurred $240,000 in legal fees to pursue legal action against the Corporation’s former accountants. This lawsuit was settled early in 2007.

The following table details noninterest expense for the three and six months ended June 30, 2007 and June 30, 2006 (dollars in thousands):

	Three Months Ended				% Increase			Six Months Ended				% Increase
	June 30,				(Decrease)			June 30,				(Decrease)
	2007		2006		2007-2006%			2007		2006		2007-2006%
Salaries and employee benefits	$	1,672	$	1,496		11.77		$	3,410	$	3,090		10.36
Occupancy		327		293		11.60			661		610		8.36
Furniture and equipment		166		155		7.10			323		311		3.86
Data processing		210		182		15.39			381		336		13.39
Professional service fees		174		414		(57.97	)		325		614		(47.07	)
Loan and deposit		79		98		(19.39	)		151		228		(33.77	)
Telephone		59		51		15.69			117		100		17.00
Advertising		91		107		(14.95	)		183		177		3.39
Other		287		200		43.50			570		527		8.16
Total noninterest expense	$	3,065	$	2,996		2.30		$	6,121	$	5,993		2.14

Federal Income Taxes

There was no tax provision for the first quarter of 2007 and 2006. The Corporation’s results of operations for 2007 and 2006 do not reflect the impact of federal income taxes due to large NOL carryforwards, a portion of which was utilized in each period to offset current federal taxes. The differences in each year between the tax provision or benefit and the federal corporate income tax rate of 34% are primarily due to permanent and temporary differences between book and taxable income. A valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. As of June 30, 2007, the Corporation had an NOL carryforward of approximately $36.9 million along with various credit carryforwards of $2.1 million. This NOL and credit carryforward benefit is dependent upon the future profitability of the Corporation. A portion of the NOL, approximately $22 million, and all of the tax credit carryforwards are also subject to the use limitations of Section 382 of the Internal Revenue Code since they originated prior to the December 2004 recapitalization of the Corporation. In 2006, a $500,000 benefit was recognized and a portion of the NOL carryforward was utilized to offset current year tax expense. The deferred tax benefit was recognized in accordance with generally accepted accounting principles which allow for recognition when it is “more likely than not” that such benefit will in fact be realized in future periods. The Corporation intends to further evaluate the utilization of the NOL and credit carryforwards in subsequent periods and recognize the related tax benefits when appropriate. The determination criteria for recognition of deferred tax benefits will include the assumption of future period taxable income based upon the projected profitability of the Corporation. The utilization of the NOL and tax credit carryforwards will be evaluated based upon management’s determination of the probable outcome of attaining the projected profit levels

21.

MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

during the remaining utilization period. Based upon the Corporation’s most recent results of operations and current projections, it is anticipated that the Corporation will recognize a portion of the deferred tax benefit later in 2007.

LIQUIDITY

Liquidity is defined as the ability to generate cash at a reasonable cost to fulfill lending commitments and support asset growth, while satisfying the withdrawal demands of customers and make payments on existing borrowing commitments. The Bank’s principal sources of liquidity are core deposits and loan and investment payments and prepayments. Providing a secondary source of liquidity is the available for sale investment portfolio. As a final source of liquidity, the Bank can exercise existing credit arrangements.

During the first half of 2007, the Corporation increased cash and cash equivalents by $.301 million. As shown on the Corporation’s condensed consolidated statement of cash flows, liquidity was primarily impacted by cash provided by investing activities, a net increase in loans of $16.440 million and a “net” reduction in securities available for sale of $8.876 million. The net increases in assets were offset by a similar increase in deposit liabilities of $8.825 million. This increase in deposits was composed of a decrease in brokered deposits of $4.573 million combined with an increase in bank deposits of $13.398 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.

It is anticipated that during the remainder of 2007, the Corporation will fund anticipated loan production with a combination of core deposit growth and noncore funding, primarily brokered CDs.

The Corporation’s primary source of liquidity on a stand-alone basis is dividends from the Bank. The Bank is currently prohibited from paying dividends because of a deficit in retained earnings. The Bank, in order to pay dividends in future periods, will need to restate its capital accounts, which requires the approval of the Office of Financial and Insurance Services of the State of Michigan. The Corporation has a $6 million correspondent bank line of credit available for short-term liquidity. This line of credit has an outstanding balance of $1.959 million as of June 30, 2007. The Corporation is currently exploring alternative opportunities for longer term sources of liquidity and permanent equity to support projected asset growth.

Liquidity is managed by the Corporation through its Asset and Liability Committee (“ALCO”). The ALCO Committee meets monthly to discuss asset and liability management in order to address liquidity and funding needs to provide a process to seek the best alternatives for investments of assets, funding costs, and risk management. The liquidity position of the Bank is managed daily, thus enabling the Bank to adapt its position according to market fluctuations. Core deposits are important in maintaining a strong liquidity position as they represent a stable and relatively low cost source of funds. The Bank’s liquidity is best illustrated by the mix in the Bank’s core and non-core funding dependence ratio, which explain 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 Farmers’ Home Administration borrowings. At June 30, 2007, the Bank’s core deposits in relation to total funding were 59.6% compared to 58.3% at June 30, 2006. These ratios indicated at June 30, 2007, that the Bank has decreased its reliance on non-core deposits and borrowings to fund the Bank’s long-term assets, namely loans and investments. The Bank believes that by maintaining adequate volumes of short-term investments and implementing competitive pricing strategies on deposits, it can ensure adequate liquidity to support future growth. The Bank also has correspondent lines of credit available to meet unanticipated short-term liquidity needs. As of June 30, 2007, the Bank had $14.875 million of unsecured lines available and another $8.125 million available if secured. The Bank believes that its liquidity position remains strong to meet both present and future financial obligations and commitments, events or uncertainties that have resulted or are reasonably likely to result in material changes with respect to the Bank’s liquidity.

From a long-term perspective, the Corporation’s liquidity plan for 2007 includes strategies to increase core deposits in the Corporation’s local markets. The new deposit products and strategic advertising is expected to aid in efforts of management in growing core deposits to reduce the dependency on non-core deposits, while also reducing interest costs. The Corporation’s liquidity plan for 2007 calls for augmenting local deposit growth efforts with wholesale CD funding, to the extent necessary.

22.

MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

CAPITAL AND REGULATORY

As a bank holding company, the Corporation is required to maintain certain levels of capital under government regulation. There are several measurements of regulatory capital and the Corporation is required to meet minimum requirements under each measurement. The federal banking regulators have also established capital classifications beyond the minimum requirements in order to risk-rate deposit insurance premiums and to provide trigger points for prompt corrective action in the event an institution becomes financially troubled. As of June 30, 2007, the Corporation and Bank were well capitalized. The Corporation is currently exploring its alternatives for the possible issuance of equity or debt in order to provide a broader base to support future asset growth. During the first half of 2007, total capitalization increased by $1.695 million.

The following table details sources of capital for the periods indicated (dollars in thousands):

	June 30,			December 31,			June 30,
	2007			2006			2006
Capital Structure
Shareholders’ equity	$	30,485		$	28,790		$	27,179
Total capitalization	$	30,485		$	28,790		$	27,179
Tangible capital	$	30,323		$	28,585		$	26,911
Intangible Assets
Core deposit premium	$	162		$	205		$	268
Other identifiable intangibles		—			—			—
Total intangibles	$	162		$	205		$	268
Regulatory capital
Tier 1 capital:
Shareholders’ equity	$	30,485		$	28,790		$	27,179
Net unrealized (gains) losses on available for sale securities		133			187			616
Minority interest		—			—			—
Less: intangibles		(162	)		(205	)		(268	)
Total Tier 1 capital	$	30,456		$	28,772		$	27,527
Tier 2 Capital:
Allowable reserve for loan losses	$	4,309		$	4,113		$	3,728
Qualifying long-term debt		—			—			—
Total Tier 2 capital		4,309			4,113			3,728
Total capital	$	34,765		$	32,885		$	31,255
Risk-adjusted assets	$	344,120		$	328,133		$	296,555
Capital ratios:
Tier 1 Capital to average assets		7.97	%		7.85	%		10.54	%
Tier 1 Capital to risk weighted assets		8.85	%		8.77	%		8.04	%
Total Capital to risk weighted assets		10.10	%		10.02	%		9.28	%

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.

23.

MACKINAC FINANCIAL CORPORATION
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

Presented below is a summary of the capital position in comparison to generally applicable regulatory requirements:

	Shareholders'			Tangible			Tier 1			Tier 1			Total
	Equity to			Equity to			Capital to			Capital to			Capital to
	Quarter-end			Quarter-end			Average			Risk-Weighted			Risk-Weighted
	Assets			Assets			Assets			Assets			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, 2007		7.75	%		7.71	%		7.97	%		8.85	%		10.10	%
December 31, 2006		7.52	%		7.47	%		7.85	%		8.77	%		10.02	%
The Bank:
June 30, 2007		8.13	%		8.09	%		8.37	%		9.30	%		10.56	%
December 31, 2006		7.97	%		7.92	%		8.33	%		9.31	%		10.57	%

24.

MACKINAC FINANCIAL CORPORATION

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

In general, the Corporation attempts to manage interest rate risk by investing in a variety of assets which afford it an opportunity to reprice assets and increase interest income at a rate equal to or greater than the interest expense associated with repricing liabilities.

Interest rate risk is the exposure of the Corporation to adverse movements in interest rates. The Corporation derives its income primarily from the excess of interest collected on its interest-earning assets over the interest paid on its interest-bearing obligations. The rates of interest the Corporation earns on its assets and owes on its obligations generally are established contractually for a period of time. Since market interest rates change over time, the Corporation is exposed to lower profitability if it cannot adapt to interest rate changes. Accepting interest rate risk can be an important source of profitability and shareholder value; however, excess levels of interest rate risk could pose a significant threat to the Corporation’s earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to the Corporation’s safety and soundness.

Loans are the most significant earning asset. Management offers commercial and real estate loans priced at interest rates which fluctuate with various indices such as the prime rate or rates paid on various government issued securities. In addition, the Corporation prices the majority of fixed rate loans so it has an opportunity to reprice the loan within 12 to 36 months.

The Corporation also has $24.086 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. The Corporation 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.

The Corporation offers deposit products with a variety of terms ranging from deposits whose interest rates can change on a weekly basis to certificates of deposit with repricing terms of up to five years. Longer term deposits generally include penalty provisions for early withdrawal.

Beyond general efforts to shorten the loan pricing periods and extend deposit maturities, management can manage interest rate risk by the maturity periods of securities purchased, selling securities available for sale, and borrowing funds with targeted maturity periods, among other strategies. Also, the rate of interest rate changes can impact the actions taken since the 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. The Bank 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.

25.

MACKINAC FINANCIAL CORPORATION
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)

     The following is the Corporation’s opportunities at June 30, 2007 (dollars in thousands):

	1-90		91 - 365			>1-5			Over 5
	Days		Days			Years			Years		Total
Interest-earning assets:
Loans	$	235,849	$	8,429		$	28,608		$	66,010		338,896
Securities		11,210		5,499			7,000			377		24,086
Other (1)		7,176		—			—			3,794		10,970
Total interest-earning assets		254,235		13,928			35,608			70,181		373,952
Interest-bearing obligations:
NOW, Money Market, and Savings		86,416		—			—			—		86,416
Time deposits		49,377		61,384			9,872			792		121,425
Brokered deposits		35,021		49,573			—			—		84,594
Borrowings		21,348		—			—			16,959		38,307
Total interest-bearing obligations		192,162		110,957			9,872			17,751		330,742
Gap	$	62,073	$	(97,029	)	$	25,736		$	52,430	$	43,210
Cumulative gap	$	62,073	$	(34,956	)	$	(9,220	)	$	43,210

(1) Includes Federal Home Loan Bank Stock

The above analysis indicates that at June 30, 2007, the Corporation had a cumulative liability sensitivity gap position of $34.956 million within the one-year time frame. The Corporation’s cumulative liability sensitive gap suggests that if market interest rates increase in the next twelve months, the Corporation has the potential to earn less net interest income. Conversely, if market interest rates decrease in the next twelve months, the above GAP position suggests the Corporation’s net interest income would increase. A limitation of the traditional gap analysis is that it does not consider the timing or magnitude of non-contractual repricing or expected prepayments. In addition, the gap analysis treats savings, NOW, and savings accounts as repricing within 90 days, while experience suggests that these categories of deposits are actually comparatively resistant to rate sensitivity.

At December 31, 2006, the Corporation had a cumulative liability sensitivity gap position of $36.811 million within the one-year time frame. The decrease in the gap position from December 31, 2006, to June 30, 2007, was insignificant.

The borrowings in the gap analysis include $15 million of the FHLB advances as fixed-rate advances. These advances give the FHLB the option to convert from a fixed-rate advance to an adjustable rate advance with quarterly repricing at three-month LIBOR Flat. The exercise of this conversion feature by the FHLB would impact the repricing dates currently assumed in the analysis. In 2006, the FHLB converted $20 million of the $35 million total FHLB borrowings from fixed to variable rate.

The Corporation’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk and foreign exchange risk. The Corporation has no market risk sensitive instruments held for trading purposes. The Corporation has limited agricultural-related loan assets and therefore has minimal significant exposure to changes in commodity prices. Any impact that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be insignificant.

Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure. The Corporation’s interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems, and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk, the Corporation assesses the existing and potential future effects of changes in interest rates on its financial condition, including capital adequacy, earnings, liquidity, and asset quality.

26.

MACKINAC FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)

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. The Corporation 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, the Corporation monitors the volume of Canadian deposits it takes in and then invests these Canadian funds in Canadian commercial loans and securities. As of June 30, 2007, the Corporation had excess Canadian assets of $.385 million (or $.364 million in U.S. dollars). Management believes the exposure to short-term foreign exchange risk is minimal and at an acceptable level for the Corporation.

OFF-BALANCE-SHEET RISK

Derivative financial instruments include futures, forwards, interest rate swaps, option contracts and other financial instruments with similar characteristics. The Corporation currently does not enter into futures, forwards, swaps or options. However, the Corporation is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the 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 the Corporation. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions.

Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Corporation until the instrument is exercised.

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 the Corporation’s operations. Nearly all the assets and liabilities of the Corporation are financial, unlike industrial or commercial companies. As a result, the Corporation’s performance is directly impacted by changes in interest rates, which are indirectly influenced by inflationary expectations. The Corporation’s ability to match the interest sensitivity of its financial assets to the interest sensitivity of its financial liabilities tends to minimize the effect of changes in interest rates on the Corporation’s performance. Changes in interest rates do not necessarily move to the same extent as changes in the price of goods and services.

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MACKINAC FINANCIAL CORPORATION

ITEM 4CONTROLS AND PROCEDURES

An evaluation was performed under the supervision of and with the participation of the Corporation’s management, including the Chairman and Chief Executive Officer, and the Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13-a 15(e) and 15d-15(e) under the Securities Exchange act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Corporation’s management, including the Chairman and Chief Executive Officer, have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures were effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act.

There was no change in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Corporation’s fiscal quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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MACKINAC FINANCIAL CORPORATION

PART II.OTHER INFORMATION

Item 1. Legal Proceedings

The Corporation and its subsidiaries are subject to routine litigation incidental to the business of banking. The litigation that is not routine and incidental to the business of banking is described below.

Shareholder’s Derivative Litigation

Damon Trust v. Bittner, et al.

In an action styledVirginia M. Damon Trust v. North Country Financial Corporation, Nominal Defendant, and Dennis Bittner, Bernard A. Bouschor, Ronald G. Ford, Sherry L. Littlejohn, Stanley J. Gerou II, John D. Lindroth, Stephen Madigan, Spencer Shunk, Michael Hendrickson, Glen Tolksdorf, and Wesley Hoffman, filed in the U.S. District Court for the Western District of Michigan on July 1, 2003, a shareholder of the Corporation has brought a shareholder’s derivative action under Section 27 of the Exchange Act against the Corporation and certain of its current and former directors and senior executive officers.

On November 11, 2003, the Corporation filed a motion, as permitted by section 495 of the MBCA, M.C.L.§ 450.1495, requesting the Court to appoint a disinterested person to conduct a reasonable investigation of the claims made by the plaintiff and to make a good faith determination whether the maintenance of the derivative action is in the best interests of the Corporation. After additional written submissions to the Court by the defendants and the plaintiff concerning the issues presented by this motion, and after several conferences with the Court, on May 20, 2004, the Court entered an Order adopting the parties’ written stipulations concerning the appointment of a disinterested person and the manner of conducting the investigation of the claims made by the plaintiff and making recommendations as to whether the maintenance of the derivative action is in the best interests of the Corporation. The Corporation is a named “nominal” defendant which requires the Corporation to cooperate with the defendants’ defense of the plaintiff’s action. The Corporation is assisting the defendants in the discovery phase of this litigation and is incurring legal fees as a consequence of that cooperation. However, in total, the Corporation’s primary purpose will be to monitor the process of this legal action and the Corporation does not expect to incur substantial legal fees related to the case.

Damon Trust v. Wipfli

This matter has been resolved and concluded with the Corporation receiving $470,000 in settlement proceeds. Please refer to the Annual Report for a more detailed description and explanation of this litigation.

Item 4. Submission of Matters to a Vote of Security Holders

The annual meeting of the Registrant’s shareholders was held on May 24, 2007. The purpose of the meeting was to elect directors, as shown below, each for a three-year term expiring in 2010. The number of shares voted is presented in the table below.

Director	For		Withheld
Paul D. Tobias		2,247,825		365,403
Eliot R. Stark		1,827,235		785,993

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MACKINAC FINANCIAL CORPORATION
PART II.OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit 3.1	Articles of Incorporation, as amended, incorporated herein by reference to exhibit 3.1 of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
Exhibit 3.2	Amended and Restated Bylaws, incorporated herein by reference to exhibit 3.1 of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
Exhibit 31.1	Rule 13a-14(a) Certification of Chief Executive Officer.
Exhibit 31.2	Rule 13a-14(a) Certification of Chief Financial Officer.
Exhibit 32.1	Section 1350 Certification of Chief Executive Officer.
Exhibit 32.2	Section 1350 Certification of Chief Financial Officer.

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MACKINAC FINANCIAL CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	MACKINAC FINANCIAL CORPORATION
			(Registrant)
Date: August 10, 2007	By:	/s/ Paul D. Tobias
		PAUL D. TOBIAS,
		CHAIRMAN AND CHIEF EXECUTIVE OFFICER (principal executive officer)

By:	/s/ Ernie R. Krueger
	ERNIE R. KRUEGER,
	EXECUTIVE VICE PRESIDENT / CHIEF FINANCIAL OFFICER (principal accounting officer)

31.