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 ended March 31, 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		(I.R.S. Employer Identification No.)
incorporation or organization)
130 SOUTH CEDAR STREET, MANISTIQUE, MI		49854
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (800) 200-7032

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.

Yes þ No o

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 filer o     Accelerated filer o     Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o      No o

As of April 30, 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 — March 31, 2007 (Unaudited), December 31, 2006 and March 31, 2006 (Unaudited)		1
Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2007 (Unaudited) and March 31, 2006 (Unaudited)		2
Condensed Consolidated Statements of Changes in Shareholders’ Equity — Three Months Ended March 31, 2007 (Unaudited) and March 31, 2006 (Unaudited)		3
Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2007 (Unaudited) and March 31, 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		23
Item 4. Controls and Procedures		27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		28
Item 6. Exhibits and Reports on Form 8-K		29
SIGNATURES		30
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive Officer
Section 906 Certification of Chief Financial Officer

MACKINAC FINANCIAL CORPORATION

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)

		March 31,				December 31,				March 31,
		2007				2006				2006
		(unaudited)								(unaudited)
ASSETS
Cash and due from banks		$	5,647			$	4,865			$	6,220
Federal funds sold			6,330				5,841				12,000
Cash and cash equivalents			11,977				10,706				18,220
Interest-bearing deposits in other financial institutions			856				856				853
Securities available for sale			28,511				32,769				34,140
Federal Home Loan Bank stock			3,794				3,794				4,855
Loans:
Commercial			261,246				261,726				212,052
Mortgage			54,204				58,014				50,119
Installment			2,971				2,841				2,300
Total Loans			318,421				322,581				264,471
Allowance for loan losses			(4,975	)			(5,006	)			(5,415	)
Net loans			313,446				317,575				259,056
Premises and equipment			12,252				12,453				12,318
Other real estate held for sale			127				26				952
Other assets			4,681				4,612				4,197
TOTAL ASSETS		$	375,644				382,791			$	334,591
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Non-interest-bearing deposits		$	23,416			$	23,471			$	20,463
Interest-bearing deposits:
NOW and Money Market			70,558				73,188				67,467
Savings			13,488				13,365				15,304
CDs<$100,000			94,067				89,585				80,204
CDs>$100,000			24,475				23,645				15,246
Brokered			78,408				89,167				69,270
Total deposits			304,412				312,421				267,954
Borrowings			38,307				38,307				36,417
Other liabilities			2,993				3,273				3,047
Total liabilities			345,712				354,001				307,418
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			42,750				42,722				42,489
Accumulated deficit			(12,709	)			(13,745	)			(14,961	)
Accumulated other comprehensive (loss)			(109	)			(187	)			(355	)
Total shareholders’ equity			29,932				28,790				27,173
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	375,644			$	382,791			$	334,591

See accompanying notes to condensed consolidated financial statements.

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

		Three Months Ended
		March 31,
		2007				2006
INTEREST INCOME:
Interest and fees on loans:
Taxable		$	6,233			$	4,499
Tax-exempt			171				194
Interest on securities:
Taxable			301				273
Tax-exempt			—				41
Other interest income			200				168
Total interest income			6,905				5,175
INTEREST EXPENSE:
Deposits			3,222				2,080
Borrowings			505				416
Total interest expense			3,727				2,496
Net interest income			3,178				2,679
Provision for loan losses			—				(600	)
Net interest income after provision for loan losses			3,178				3,279
OTHER INCOME:
Service fees			161				111
Net gains on sale of secondary market loans			108				40
Proceeds from settlement of lawsuit			470				—
Other			174				65
Total other income			913				216
OTHER EXPENSE:
Salaries and employee benefits			1,738				1,594
Occupancy			334				317
Furniture and equipment			157				156
Data processing			171				154
Professional service fees			151				200
Loan and deposit			72				129
Telephone			58				49
Advertising			92				70
Other			283				328
Total other expenses			3,056				2,997
Income before provision for income taxes			1,035				498
Provision for (benefit of) income taxes			—				—
NET INCOME		$	1,035			$	498
INCOME PER COMMON SHARE:
Basic		$	.30			$	.15
Diluted		$	.30			$	.15

See accompanying notes to condensed consolidated financial statements.

MACKINAC FINANCIAL CORPORATION

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

		Three Months Ended
		March 31,
		2007				2006
Balance, beginning of period		$	28,790			$	26,588
Net income for period			1,035				498
Stock option compensation			30				79
Net unrealized gain on securities available for sale			77				8
Total comprehensive income			1,142				585
Balance, end of period		$	29,932			$	27,173

See accompanying notes to condensed consolidated financial statements.

MACKINAC FINANCIAL CORPORATION

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

		Three Months Ended
		March 31,
		2007				2006
Cash Flows from Operating Activities:
Net income		$	1,035			$	498
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			199				243
(Gain) loss on sale of premises, equipment and other real estate			(5	)			—
Stock option compensation			30				—
Provision for loan losses			—				(600	)
Change in other assets			(92	)			(134	)
Change in other liabilities			(280	)			(38	)
Net cash (used in) provided by operating activities			887				(31	)
Cash Flows from Investing Activities:
Net (increase) decrease in loans			4,028				(24,800	)
Net (increase) decrease in interest-bearing deposits in other financial institutions			—				172
Purchase of securities available for sale			(13,564	)			—
Proceeds from sales, maturities or calls of securities available for sale			17,940				70
Capital expenditures			(302	)			(535	)
Proceeds from sale of premises, equipment, and other real estate			291				—
Purchase of minority interest in subsidiary of bank			—				79
Net cash (used in) provided by investing activities			8,393				(25,014	)
Cash Flows from financing activities:
Net increase (decrease) in deposits		$	(8,009	)		$	35,322
Net cash (used in) provided by financing activities			(8,009	)			35,322
Net increase in cash and cash equivalents			1,271				10,277
Cash and cash equivalents at beginning of period			10,706				7,943
Cash and cash equivalents at end of period		$	11,977			$	18,220
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest		$	2,017			$	2,382
Income taxes			—				—
Noncash Investing and Financing Activities:
Transfers of Foreclosures from Loans to Other Real Estate Held for Sale			109				7

See accompanying notes to condensed consolidated financial statements.

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 three-month period ended March 31, 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 was not changed due to these reclassifications.
		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 during 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 directors, were approved in 1997. A total of 30,000 shares (adjusted for the 1:20 reverse stock split), were

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

1.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
		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 $30,000 for the three months ended March 31, 2007 and $79,000 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 $.02 in the first quarter 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.
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 three month period.

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

3.		EARNINGS PER SHARE (Continued)
		The following shows the computation of basic and diluted earnings per share for the three months ended March 31, 2007 and 2006 (dollars in thousands, except per share data):

						Weighted Average				Income
		Net Income				Number of Shares				Per Share
Three Months Ended
March 31,
2007
Income per share — Basic and diluted		$	1,035				3,428,695			$	.30
2006
Income per share — Basic and diluted		$	498				3,428,695			$	.15

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

		March 31, 2007								December 31, 2006								March 31, 2006
		Amortized				Estimated				Amortized				Estimated				Amortized				Estimated
		Cost				Fair Value				Cost				Fair Value				Cost				Fair Value
US Agencies		$	28,110			$	27,920			$	32,445			$	32,176			$	30,971			$	30,338
Obligations of states and political subdivisions			511				591				511				593				3,524				3,802
Total securities available for sale		$	28,621			$	28,511			$	32,956			$	32,769			$	34,495			$	34,140

		The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $24.413 million and $.900 million respectively at March 31, 2007.
5.		LOANS
		The composition of loans at March 31, 2007, December 31, 2006, and March 31, 2006 is as follows (dollars in thousands):

		March 31,				December 31,				March 31,
		2007				2006				2006
Commercial real estate		$	153,587			$	154,332			$	134,089
Commercial, financial and agricultural			67,683				71,385				56,958
One to four family residential real estate			54,204				58,014				50,119
Construction			39,976				36,009				21,005
Consumer			2,971				2,841				2,300
Total loans		$	318,421			$	322,581			$	264,471

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

5.		LOANS (Continued)
		LOANS — Allowance for loan losses
		An analysis of the allowance for loan losses for the three months ended March 31, 2007, the year ended December 31, 2006, and the three months ended March 31, 2006 is as follows (dollars in thousands):

		March 31,				December 31,				March 31,
		2007				2006				2006
Balance at beginning of period		$	5,006			$	6,108			$	6,108
Recoveries on loans			6				91				12
Loans charged off			(37	)			(332	)			(105	)
Provision for loan losses			—				(861	)			(600	)
Balance at end of period		$	4,975			$	5,006			$	5,415

In the first quarter of 2007, net charge-off activity was minimal at $31,000, or .01% of average loans outstanding compared to net charge-offs of $93,000, or .04% of average loans, in the first quarter of 2006. In the first quarter 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 three months ended March 31, 2007 and 2006.

Information regarding impaired loans as of March 31, 2007, December 31, 2006, and March 31, 2006 is as follows (dollars in thousands):

														Valuation Reserve
		March 31,				December 31,				March 31,				March 31,				December 31,				March 31,
		2007				2006				2006				2007				2006				2006
Balances, at period end
Impaired loans with specific valuation reserve		$	1,804			$	1,804			$	—			$	493			$	493			$	—
Impaired loans with no specific valuation reserve			3,058				1,136				—				—				—				—
Total impaired loans		$	4,862			$	2,940			$	—			$	493			$	493			$	—
Impaired loans on nonaccrual basis		$	4,142			$	2,900			$	—			$	493			$	493			$	—
Impaired loans on accrual basis			720				40				—				—				—				—
Total impaired loans		$	4,862			$	2,940			$	—			$	493			$	493			$	—
Average investment in impaired loans		$	3,416			$	1,192			$	71
Interest income recognized during impairment			13				7				1
Interest income that would have been recognized on an accrual basis			82				114				—
Cash-basis interest income recognized			7				5				—

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

5.		LOANS (Continued)
		The average investment in impaired loans was approximately $3.416 million for the three-months ended March 31, 2007, $1.2 million for the year ended December 31, 2006, and $.071 million for the three months ended March 31, 2006, respectively. The increase in impaired loans in the first quarter of 2007 relates to the deterioration of several large commercial credits which are well collateralized. Nonperforming assets are discussed in more detail under “Management’s Discussion and Analysis.”
		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):

		March 31,				December 31,				March 31,
		2007				2006				2006
Loans outstanding, beginning of period		$	1,621			$	578			$	578
New loans			—				1,647				—
Net activity on revolving lines of credit			—				271				805
Repayment			(8	)			(875	)			—
Change in related party interest			—				—				(491	)
Loans outstanding, end of period		$	1,613			$	1,621			$	892

		There were no loans to related parties classified substandard at March 31, 2007, December 31, 2006, and March 31, 2006 respectively.
6.		BORROWINGS
		Borrowings consist of the following at March 31, 2007, December 31, 2006, and March 31, 2006 (dollars in thousands):

		March 31,				December 31,				March 31,
		2007				2006				2006
Federal Home Loan Bank advances at rates ranging from 4.98% to 5.38% maturing in 2010 and 2011		$	35,000			$	35,000			$	35,000
Farmers Home Administration, fixed-rate note payable, maturing August 24, 2024, 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 March 31, 2007, maturing May 21, 2008			1,959				1,959				—
		$	38,307			$	38,307			$	36,417

The Federal Home Loan Bank borrowings are collateralized at March 31, 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 $21.660 million; U.S. government agencies with an amortized cost and estimated fair value of $24.598 million and $24.413 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 March 31, 2007.

The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $788,000 originated and held by the Corporation’s wholly owned subsidiary, First Rural Relending, an assignment of a demand deposit account in the amount of $686,000, and guaranteed by the Corporation.

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

7.		STOCK OPTION PLANS
		A summary of stock option transactions for the three months ended March 31, 2007 and 2006 and the year ended December 31, 2006, is as follows:

		March 31,				December 31,				March 31,
		2007				2006				2006
Outstanding shares, at beginning of period			446,417				375,417				375,417
Granted during the period			—				72,500				—
Expired/forefited 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 or exercised in the first quarter of 2007 or 2006.

Following is a summary of the options outstanding and exercisable at March 31, 2007:

										Weighted
										Average				Weighted
										Remaining				Average
Exercise		Number of Shares								Contractual				Exercise
Price Range		Outstanding				Exercisable				Life-Years				Price
$9.16			12,500				5,000				9.0			$	9.16
$9.75			257,152				120,861				8.0				9.75
$10.65			72,500				14,500				10.0				10.65
$11.50			40,000				8,000				8.8				11.50
$12.00			60,000				12,000				8.5				12.00
$156.00 — $240.00			3,545				3,545				4.3				186.75
$300.00 — $400.00			720				720				2.5				345.00
			446,417				164,626				8.2			$	12.29

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 March 31, the Corporation had a net operating loss and tax credit carryforwards for tax purposes of approximately $32.6 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 quarter of 2007 and 2006, the Corporation reversed a portion of the valuation allowance pertaining to the NOL carryforward to offset current federal tax, $.305 million and $.102 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.

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

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.
		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):

		March 31,				December 31,				March 31,
		2007				2006				2006
Commitments to extend credit:
Variable rate		$	55,517			$	44,141			$	37,889
Fixed rate			9,975				9,288				1,815
Standby letters of credit — Variable rate			6,094				6,233				9,290
Credit card commitments — Fixed rate			2,451				2,391				3,068
		$	74,037			$	62,053			$	52,062

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.

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

9.		COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (Continued)
		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 March 31, 2007 represents $44.2 million, or 13.9%, compared to $32.4 million, or 12.3%, of the commercial loan portfolio on March 31, 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.

MACKINAC FINANCIAL CORPORATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 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.

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

Consolidated net income for the first quarter of 2007 was $1.035 million or $.30 per share compared to net income of $.498 million, or $.15 per share for the first quarter of 2006. Weighted average shares outstanding amounted to 3,428,695 in both periods. The results of operations for the first quarter of 2007 include the proceeds received, $470,000, in the settlement of a lawsuit against the Corporation’s former accountants. The first quarter 2006 results include a $600,000 negative loan loss provision. Excluding the lawsuit settlement and the provision adjustment, the net income in the first quarter of 2007 amounted to $.568 million, compared to a loss of .102 million for the same period in 2006.

Total assets of the Corporation at March 31, 2007 were $375.644 million, up 12.27 percent from the $334.591 million in total assets reported at March 31, 2006. First quarter-end total assets were down 1.87 percent from the $382.791 million of total assets at year-end 2006.

FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents increased $1.271 million in the first quarter of 2007. See further discussion of the change in cash and cash equivalents in the Liquidity section.

Investment Securities

Available-for-sale securities decreased $4.258 million, or 12.99%, from December 31, 2006, to March 31, 2007, with the balance on March 31, 2007, totaling $28.511 million. The decrease during the first quarter 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. During the first quarter 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. As of March 31, 2007, investment securities with an estimated fair value of $25.563 million were pledged.

Loans

Through the first quarter of 2007, loan balances decreased by $4.160 million, or 1.29% from December 31, 2006 balances of $322.581 million. During the first quarter, the Bank had new loan production of $30.1 million, however experienced paydowns and external loan refinancings which reduced existing portfolio loan balances by approximately $26.6 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.

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 March 31, 2007, December 31, 2006, and March 31, 2006 (dollars in thousands):

		March 31,				Percent of				December 31,				Percent of				March 31,				Percent of
		2007				Total				2006				Total				2006				Total
Commercial real estate		$	153,587				48.24	%		$	154,332				47.84	%		$	134,089				50.70	%
Commercial, financial, and agricultural			67,683				21.26				71,385				22.13				56,958				21.54
1-4 family residential real estate			54,204				17.02				58,014				17.98				50,119				18.95
Construction			39,976				12.55				36,009				11.16				21,005				7.94
Consumer			2,971				.93				2,841				.88				2,300				.87
Total loans		$	318,421				100.00	%		$	322,581				100.00	%		$	264,471				100.00	%

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

		March 31, 2007												December 31, 2006												March 31, 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
Real estate — operators of nonres bldgs		$	44,155				16.90	%			147.52	%		$	44,308				16.93	%			153.90	%		$	32,440				15.30	%			119.38	%
Hospitality and tourism			33,726				12.91				112.68				30,826				11.78				107.07				38,045				17.94				140.01
Real estate agents and managers			27,313				10.45				91.25				25,071				9.58				87.08				12,350				5.82				45.45
New car dealers			10,139				3.88				33.87				10,086				3.85				35.03				9,988				4.71				36.76
Other			145,913				55.86				487.48	%			151,435				57.86				526.00	%			119,229				56.23				438.78	%
Total Commercial Loans		$	261,246				100.00	%						$	261,726				100.00	%						$	212,052				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 March 31, 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 on a monthly basis to determine whether the losses inherent in the portfolio are properly reserved for. The Corporation utilizes a loan review consultant to perform a review of the loan portfolio. The opinion of this consultant, upon completion of the independent review in 2006, provided findings similar to management on the overall adequacy of the reserve. The Corporation will utilize this same consultant for loan review during 2007.

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 amounted to $.031 million, ..01% of average loans outstanding, compared to $.093 million, .04% of average loans outstanding, for the three months ended March 31, 2007 and 2006, respectively. In the first quarter of 2006, the Corporation, in recognition of the continued improvement in credit quality, reduced the reserve for loan loss by $600,000. The current reserve balance is 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 quarter 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.

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):

		March 31,				December 31,				March 31,
		2007				2006				2006
Nonperforming Assets:
Nonaccrual loans		$	4,142			$	2,899			$	—
Loans past due 90 days or more			720				40				—
Restructured loans			—				—				—
Total nonperforming loans			4,862				2,939				—
Other real estate owned			127				26				952
Total nonperforming assets		$	4,989			$	2,965			$	952
Nonperforming loans as a % of loans			1.53	%			.91	%			—	%
Nonperforming assets as a % of assets			1.33	%			.77	%			.28	%
Reserve for Loan Losses:
At period end		$	4,975			$	5,006			$	5,415
As a % of loans			1.56	%			1.55	%			2.05	%
As a % of nonperforming loans			102.32	%			170.30	%			N/M	%
As a % of nonaccrual loans			120.11	%			172.68	%			N/M	%

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

		March 31,				December 31,				March 31,
		2007				2006				2006
Commercial, financial, and agricultural loans		$	3,906			$	3,600			$	1,279
One to four family residential real estate loans			29				23				43
Consumer loans			—				—				—
Unallocated and general reserves			1,040				1,383				4,093
Totals		$	4,975			$	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 approximately $105 million. The increased allocation of the reserve from unallocated and general reserves to commercial, financial and agricultural is in recognition of this growth.

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

		March 31,				December 31,				March 31,
		2007				2006				2006
Total loans, at period end		$	318,421			$	322,581			$	264,471
Average loans for the year		$	318,072			$	301,508			$	250,735
Allowance for loan losses		$	4,975			$	5,006			$	5,415
Allowance to total loans at period end			1.56	%			1.55	%			2.05	%
Net charge-offs during the period		$	31			$	241			$	93
Net charge-offs to average loans			.01	%			.08	%			.04	%
Net charge-offs to beginning allowance balance			.62	%			3.95	%			1.52	%
Nonaccrual loans at end of period		$	4,142			$	2,899			$	—
Loans past due 90 days or more			720				40				—
Restructured loans			—				—				—
Total nonperforming loans		$	4,862			$	2,939			$	—
Nonperforming loans to total loans at end of period			1.53	%			.91	%			—	%

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

Total nonperforming loans increased $1.923 million since December 31, 2006. The increase was due to several specific commercial credits that were added in the quarter. 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
		March 31, 2007				December 31, 2006				March 31, 2006
Balance at beginning of period		$	26			$	945			$	945
Other real estate transferred from loans due to foreclosure			109				23				7
Other real estate transferred to premises and equipment			—				—				—
Other real estate sold/written down			(8	)			(942	)			—
Balance at end of period		$	127			$	26			$	952

During the first three months of 2007, the Corporation received real estate in lieu of loan payments of $109,000. Other real estate is initially valued at the lower of cost or the fair value less selling costs. After the initial receipt, management periodically reevaluates 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.

Deposits

The Corporation had a decrease in deposits in the first quarter of 2007. Total deposits decreased by $8.009 million, or 2.56%, in the first quarter of 2007. This decrease in deposits included a reduction of $10.759 million in brokered deposits. The Corporation utilizes brokered deposits to fulfill loan funding needs. During the first quarter of 2007, actual loan balances decreased and the Corporation was able to reduce its reliance on brokered deposits. In the first quarter, core deposits, as shown in the table below, increased by $1.920 million over year end balances.

Management continues to monitor existing deposit products in order to stay competitive, as to both terms and pricing. It is the intent of management to be aggressive in its markets to grow core deposits with an emphasis placed on transactional accounts.

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

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

		March 31,								December 31,								March 31,
		2007				% of Total				2006				% of Total				2006				% of Total
Non-interest-bearing		$	23,416				7.69	%		$	23,471				7.51	%		$	20,463				7.64	%
NOW and money market			70,558				23.18				73,188				23.43				67,467				25.18
Savings			13,488				4.43				13,365				4.28				15,304				5.71
Certificates of Deposit <$100,000			94,067				30.90				89,585				28.67				80,204				29.93
Total core deposits			201,529				66.20				199,609				63.89				183,438				68.46
Certificates of Deposit >$100,000			24,475				8.04				23,645				7.57				15,246				5.69
Brokered CDs			78,408				25.76				89,167				28.54				69,270				25.85
Total non-core deposits			102,883				33.80				112,812				36.11				84,516				31.54
Total deposits		$	304,412				100.00	%		$	312,421				100.00	%		$	267,954				100.00	%