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, 2008

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

For the transition period from                      to                     

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: (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.

Yes þ No o

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
		(Do not check if a smaller reporting company)

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

Yes o No þ

As of April 30, 2008, there were outstanding 3,419,736 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, 2008 (Unaudited), December 31, 2007 and March 31, 2007 (Unaudited)			1
				Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2008 (Unaudited) and March 31, 2007 (Unaudited)			2
				Condensed Consolidated Statements of Changes in Shareholders’ Equity - Three Months Ended March 31, 2008 (Unaudited) and March 31, 2007 (Unaudited)			3
				Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2008 (Unaudited) and March 31, 2007 (Unaudited)			4
				Notes to Condensed Consolidated Financial Statements (Unaudited)			5
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk			27
		Item 4.		Controls and Procedures			30
PART II. OTHER INFORMATION
		Item 1.		Legal Proceedings			31
		Item 6.		Exhibits and Reports on Form 8-K			32
		SIGNATURES					33
Certification of Chief Executive Officer
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)

		March 31,				December 31,				March 31,
		2008				2007				2007
		(unaudited)								(unaudited)
ASSETS
Cash and due from banks		$	6,849			$	6,196			$	5,647
Federal funds sold			1,568				166				6,330
Cash and cash equivalents			8,417				6,362				11,977
Interest-bearing deposits in other financial institutions			382				1,810				856
Securities available for sale			24,581				21,597				28,511
Federal Home Loan Bank stock			3,794				3,794				3,794
Loans:
Commercial			291,980				288,839				256,133
Mortgage			64,624				62,703				59,317
Installment			3,452				3,537				2,971
Total loans			360,056				355,079				318,421
Allowance for loan losses			(3,924	)			(4,146	)			(4,975	)
Net loans			356,132				350,933				313,446
Premises and equipment			11,511				11,609				12,252
Other real estate held for sale			1,137				1,226				127
Other assets			11,221				11,549				4,681
TOTAL ASSETS		$	417,175			$	408,880			$	375,644
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Non-interest-bearing deposits		$	26,876			$	25,557			$	23,416
Interest-bearing deposits:
NOW and Money Market			81,952				81,160				70,558
Savings			11,530				12,485				13,488
CDs<$100,000			83,087				80,607				94,067
CDs>$100,000			22,010				22,355				24,475
Brokered			100,592				98,663				78,408
Total deposits			326,047				320,827				304,412
Borrowings:
Federal funds purchased			10,410				7,710				—
Short-term			2,159				1,959				—
Long-term			36,280				36,280				38,307
Total borrowings			48,849				45,949				38,307
Other liabilities			2,646				2,783				2,993
Total liabilities			377,542				369,559				345,712
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			42,862				42,843				42,750
Accumulated deficit			(3,441	)			(3,582	)			(12,709	)
Accumulated other comprehensive (loss)			212				60				(109	)
Total shareholders’ equity			39,633				39,321				29,932
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	417,175			$	408,880			$	375,644

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,
		2008				2007
		(Unaudited)				(Unaudited)
INTEREST INCOME:
Interest and fees on loans:
Taxable		$	6,100			$	6,233
Tax-exempt			108				171
Interest on securities:
Taxable			266				301
Tax-exempt			1				—
Other interest income			89				200
Total interest income			6,564				6,905
INTEREST EXPENSE:
Deposits			3,065				3,222
Borrowings			454				505
Total interest expense			3,519				3,727
Net interest income			3,045				3,178
Provision for loan losses			—				—
Net interest income after provision for loan losses			3,045				3,178
OTHER INCOME:
Service fees			174				161
Net security gains			65				—
Net gains on loan sales			48				108
Proceeds from settlement of lawsuit			—				470
Other			23				174
Total other income			310				913
OTHER EXPENSES:
Salaries and employee benefits			1,807				1,738
Occupancy			355				334
Furniture and equipment			178				157
Data processing			221				171
Professional service fees			153				151
Loan and deposit			110				72
Telephone			45				58
Advertising			60				92
Other			262				283
Total other expenses			3,191				3,056
Income before provision for income taxes			164				1,035
Provision for (benefit of) income taxes			25				—
NET INCOME		$	139			$	1,035
INCOME PER COMMON SHARE:
Basic		$	.04			$	.30
Diluted		$	.04			$	.30

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,
		2008				2007
Balance, beginning of period		$	39,321			$	28,790
Net income for period			139				1,035
Stock option compensation			21				30
Net unrealized gain on securities available for sale			152				77
Total comprehensive income			312				1,142
Balance, end of period		$	39,633			$	29,932

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,
		2008				2007
Cash Flows from Operating Activities:
Net income		$	139			$	1,035
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			273				199
Provision for (benefit of) deferred taxes			25				—
(Gain) on sales/calls of securities available for sale			(65	)			—
(Gain) on sale of premises, equipment other real estate			(6	)			(5	)
Writedown of other real estate			72				—
Stock option compensation			21				30
Change in other assets			173				(92	)
Change in other liabilities			(136	)			(280	)
Net cash (used in) provided by operating activities			496				887
Cash Flows from Investing Activities:
Net (increase) decrease in loans			(5,214	)			4,028
Net decrease in interest-bearing deposits in other financial institutions			1,428				—
Purchase of securities available for sale			(25,429	)			(13,564	)
Proceeds from sales, maturities or calls of securities available for sale			22,761				17,940
Capital expenditures			(145	)			(302	)
Proceeds from sale of premises, equipment, and other real estate			38				291
Net cash (used in) provided by investing activities			(6,561	)			8,393
Cash Flows from Financing Activities:
Net increase (decrease) in deposits			5,220				(8,009	)
Net increase in federal funds purchased			2,700				—
Net increase in line of credit			200				—
Net cash (used in) provided by financing activities			8,120				(8,009	)
Net increase in cash and cash equivalents			2,055				1,271
Cash and cash equivalents at beginning of period			6,362				10,706
Cash and cash equivalents at end of period		$	8,417			$	11,977
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest		$	2,073			$	2,017
Income taxes			15				—
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)			57				109

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, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. 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, 2007.
		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. These two 1997 plans expired early in 2007. 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 after tax compensation expense in the amount of $21,000 for the three months ended March 31, 2008 and $30,000 for the same period in 2007. The expense recorded recognizes the current period vesting of options outstanding. The per share impact of this accounting change was $.01 in both the first quarter of 2008 and 2007.
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. 157, Fair Value Measurements
		SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement is to be applied in concert with other accounting pronouncements which require or allow fair value measurements. This statement does not require any new fair value adjustments.
		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. 157 and No. 159 were effective January 1, 2008. The adoption of SFAS No. 157 and No. 159 by the Corporation did not have any material impact on the consolidated financial statements.

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 three month period.
		The following shows the computation of basic and diluted earnings per share for the three months ended March 31, 2008 and 2007 (dollars in thousands, except per share data):

Three Months Ended						Weighted Average				Income
March 31,		Net Income				Number of Shares				Per Share
2008
Income per share — Basic and diluted		$	139				3,428,695			$	.04
2007
Income per share — Basic and diluted		$	1,035				3,428,695			$	.30

4.		INVESTMENT SECURITIES
		The amortized cost and estimated fair value of investment securities available for sale as of March 31, 2008, December 31, 2007, and March 31, 2007 are as follows (dollars in thousands):

		March 31, 2008								December 31, 2007								March 31, 2007
		Amortized				Estimated				Amortized				Estimated				Amortized				Estimated
		Cost				Fair Value				Cost				Fair Value				Cost				Fair Value
US Agencies — MBS		$	23,704			$	23,933			$	—			$	—			$	—			$	—
US Agencies			—				—				20,982				20,969				28,110				27,920
Obligations of states and political subdivisions			555				648				556				628				511				591
Total securities available for sale		$	24,259			$	24,581			$	21,538			$	21,597			$	28,621			$	28,511

The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $22.074 million and $22.267 million respectively at March 31, 2008.

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

5.		LOANS
		The composition of loans at March 31, 2008, December 31, 2007, and March 31, 2007 is as follows (dollars in thousands):

		March 31,				December 31,				March 31,
		2008				2007				2007
Commercial real estate		$	185,514			$	171,695			$	153,587
Commercial, financial and agricultural			78,913				78,192				67,683
One to four family residential real estate			59,532				57,613				54,204
Construction:
Commercial			27,553				38,952				34,863
Consumer			5,092				5,090				5,113
Consumer			3,452				3,537				2,971
Total loans		$	360,056			$	355,079			$	318,421

		LOANS — Allowance for loan losses
		An analysis of the allowance for loan losses for the three months ended March 31, 2008, the year ended December 31, 2007, and the three months ended March 31, 2007 is as follows (dollars in thousands):

		March 31,				December 31,				March 31,
		2008				2007				2007
Balance at beginning of period		$	4,146			$	5,006			$	5,006
Recoveries on loans			4				50				6
Loans charged off			(226	)			(1,310	)			(37	)
Provision for loan losses			—				400				—
Balance at end of period		$	3,924			$	4,146			$	4,975

		In the first quarter of 2008, net charge-off activity was $222,000, or .06% of average loans outstanding compared to net charge-offs of $31,000, or .01% of average loans, in the first quarter of 2007.
		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, 2008 and 2007.

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

5.		LOANS (Continued)
		Information regarding impaired loans as of March 31, 2008, December 31, 2007, and March 31, 2007 is as follows (dollars in thousands):

														Valuation Reserve
		March 31,				December 31,				March 31,				March 31,				December 31,				March 31,
		2008				2007				2007				2008				2007				2007
Balances, at period end
Impaired loans with specific valuation reserve		$	3,277			$	3,639			$	1,804			$	1,139			$	1,320			$	493
Impaired loans with no specific valuation reserve			104				369				3,058				—				—				—
Total impaired loans		$	3,381			$	4,008			$	4,862			$	1,139			$	1,320			$	493
Impaired loans on nonaccrual basis		$	3,381			$	3,298			$	4,142			$	1,139			$	1,219			$	493
Impaired loans on accrual basis			—				710				720				—				101				—
Total impaired loans		$	3,381			$	4,008			$	4,862			$	1,139			$	1,320			$	493
Average investment in impaired loans		$	3,915			$	4,135			$	3,416
Interest income recognized during impairment			22				129				13
Interest income that would have been recognized on an accrual basis			94				391				82
Cash-basis interest income recognized			22				84				7

		The average investment in impaired loans was approximately $3.915 million for the three-months ended March 31, 2008, $4.135 million for the year ended December 31, 2007, and $3.416 million for the three months ended March 31, 2007, 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,
		2008				2007				2007
Loans outstanding, beginning of period		$	1,720			$	1,621			$	1,621
New loans			—				—				—
Net activity on revolving lines of credit			—				556				—
Repayment			(14	)			(457	)			(8	)
Change in related party interest			2,733				—				—
Loans outstanding, end of period		$	4,439			$	1,720			$	1,613

There were no loans to related parties classified substandard at March 31, 2008, December 31, 2007, and March 31, 2007 respectively. In addition to the outstanding balances above, there were unused commitments of $48,000 to related parties at March 31, 2008.

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

		6. SHORT-TERM BORROWINGS
		Short-term borrowings consist of the following at March 31, 2008, December 31, 2007, and March 31, 2007 (dollars in thousands):

		March 31,				December 31,				March 31,
		2008				2007				2007
Fed funds purchased with an average weighted rate of 2.59% at March 31, 2008		$	10,410			$	7,710			$	—
Advance outstanding on line of credit with a correspondent bank, interest payable at the prime rate, 5.25% as of March 31, 2008, maturing May 31, 2008			2,159				1,959				1,959
		$	12,569			$	9,669			$	1,959

		In the second quarter of 2006, the Corporation established a $6 million line of credit with a correspondent bank. This line of credit, which is priced at the prime rate, will be utilized by the Corporation to infuse capital into the Bank in order to support the regulatory required 8% Tier 1 Capital and provide cash for holding company operations. This line of credit is secured by all of the shares of the Bank and matures May 31, 2008, with a provision for an automatic six-month extension to November 30, 2008.
7.		LONG-TERM BORROWINGS
		Long-term borrowings consist of the following at March 31, 2008, December 31, 2007 and March 31, 2007 (dollars in thousands):

		March 31,				December 31,				March 31,
		2008				2007				2007
Federal Home Loan Bank fixed rate advances at rates ranging from 4.98% to 5.16% maturing in 2010		$	15,000			$	15,000			$	15,000
Federal Home Loan Bank variable rate advances at rates ranging from 3.12% to 4.53% maturing in 2011			20,000				20,000				20,000
Farmers Home Administration, fixed-rate note payable, maturing August 24, 2024 interest payable at 1%			1,280				1,280				1,348
		$	36,280			$	36,280			$	36,348

		The Federal Home Loan Bank borrowings are collateralized at March 31, 2008, by the following: a collateral agreement on the Corporation’s one to four family residential real estate loans with a book value of approximately $24.169 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $22.074 million and $22.267 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, 2008.
		The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $486,000 originated and held by the Corporation’s wholly owned subsidiary, First Rural Relending, an assignment of a demand deposit account in the amount of $968,000, and guaranteed by the Corporation.

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

8.		STOCK OPTION PLANS
		A summary of stock option transactions for the three months ended March 31, 2008 and 2007 and the year ended December 31, 2007, is as follows:

		March 31,				December 31,				March 31,
		2008				2007				2007
Outstanding shares, at beginning of period			446,417				446,417				446,417
Granted during the period			—				—				—
Expired/forfeited during the period			—				—				—
Outstanding shares at end of period			446,417				446,417				446,417
Weighted average exercise price per share at end of period		$	12.29			$	12.29			$	12.29
Shares available for grant, at end of period			18,488				18,488				18,488

		There were no options granted or exercised in the first quarter of 2008 or 2007.
		Following is a summary of the options outstanding and exercisable at March 31, 2008:

										Weighted
										Average				Weighted
										Remaining				Average
Exercise		Number of Shares								Contractual				Exercise
Price Range		Outstanding				Exercisable				Life-Years				Price
$9.16			12,500				5,000				7.8			$	9.16
$9.75			257,152				120,861				6.7				9.75
$10.65			72,500				14,500				8.8				10.65
$11.50			40,000				8,000				7.5				11.50
$12.00			60,000				12,000				7.2				12.00
$156.00 — $240.00			3,545				3,545				3.0				186.75
$300.00 — $400.00			720				720				1.3				345.00
			446,417				164,626				7.2			$	12.29

9.		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. At March 31, 2008, the Corporation evaluated the valuation allowance against the net deferred tax asset which would require future taxable income in order to be utilized. The Corporation, as of March 31, 2008 had a net operating loss and tax credit carryforwards for tax purposes of approximately $34.2 million, and $2.1 million, respectively.
		The Corporation utilized NOL carryforwards to offset taxable income for the first nine months of 2007. In the third quarter of 2007, the Corporation reversed a portion of the valuation allowance, $7.500 million that pertained to the deferred tax benefit of NOL and tax credit carryforwards. This valuation adjustment was recorded as a current period income tax benefit. In 2006, the Corporation recorded a $500,000 tax benefit and utilized additional NOL carryforwards to offset current taxable income. The recognition of the deferred tax benefit in 2007 and 2006 was in accordance with generally accepted accounting principles, and considered among other things, the probability of utilizing the NOL and credit carryforwards.

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

9.		INCOME TAXES (Continued)
		The Corporation recorded the future benefits from these carryforwards at such time as it became “more likely than not” that they would be utilized prior to expiration. Please refer to further discussion on income taxes contained in “Management’s Discussion and Analysis.” The net operating loss carryforwards expire twenty years from the date they originated. These carryforwards, if not utilized, will begin to expire in the year 2023. 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.
10.		FAS 157 — FAIR VALUE MEASUREMENTS
		The following tables present information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at March 31, 2008, and the valuation techniques used by the Corporation to determine those fair values.

	Level 1:		In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access.
	Level 2:		Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
	Level 3:		Level 3 inputs are unobservable inputs, including inputs available in situations where there is little, if any, market activity for the related asset or liability.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

Disclosures concerning assets and liabilities measured at fair value are as follows (dollars in thousands):

Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2008

Quoted Prices in Active

Significant Other

Significant

Markets for Identical

Observable Inputs

Unobservable Inputs

Balance at

Assets (Level 1)

(Level 2)

(Level 3)

March 31, 2008

Assets

Investment securities — available for sale

$

24,508

$

73

$

—

$

24,581

Liabilities

None

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

10.		FAS 157 — FAIR VALUE MEASUREMENTS (Continued)
		The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31, 2007 or March 31, 2008.
		The Corporation also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include held to maturity investments and loans. The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

Assets Measured at Fair Value on a Nonrecurring Basis

Quoted Prices

Significant

Significant

in Active Markets

Other Observable

Unobservable

Total Losses for

Balance at

for Identical Assets

Inputs

Inputs

the Period Ended

March 31, 2008

(Level 1)

(Level 2)

(Level 3)

March 31, 2008

Assets

Impaired loans accounted for under FAS 114

$

—

$

—

$

—

$

1,158

$

—

$

—

		The Corporation had no investments subject to fair value measurement on a nonrecurring basis.
		Impaired loans accounted for under FAS 114 categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Corporation estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals).
		Other assets, including bank owned life insurance, goodwill, intangible assets and other assets acquired in business combinations, are also subject to periodic impairment assessments under other accounting principles generally accepted in the United States of America. These assets are not considered financial instruments. Effective February 12, 2008, the FASB issued a staff position, FSP FAS 157-2, which delayed the applicability of FAS 157 to nonfinancial instruments. Accordingly, these assets have been omitted from the above disclosures.
11.		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.

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

11.

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):

		March 31,				December 31,				March 31,
		2008				2007				2007
Commitments to extend credit:
Variable rate		$	40,993			$	43,903			$	55,517
Fixed rate			10,773				8,055				9,975
Standby letters of credit — Variable rate			6,089				5,930				6,094
Credit card commitments — Fixed rate			2,463				2,414				2,451
		$	60,318			$	60,302			$	74,037

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 to operators of nonresidential buildings. This concentration at March 31, 2008 represents $43.167 million, or 16.3%, compared to $44.2 million, or 13.9%, of the commercial loan portfolio on March 31, 2007. 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.

15.

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

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, 2007. Throughout this discussion, the term “Bank” refers to mBank, the principal banking subsidiary of the Corporation.

FINANCIAL OVERVIEW

Consolidated net income for the first quarter of 2008 was $.139 million or $.04 per share compared to net income of $1.035 million, or $.30 per share for the first quarter of 2007. 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. Excluding the lawsuit settlement, the net income in the first quarter of 2007 amounted to $.565 million, or $.16 per share.

Total assets of the Corporation at March 31, 2008 were $417.175 million, up 11.06 percent from the $375.644 million in total assets reported at March 31, 2007. First quarter-end total assets were up 2.03 percent from the $408.880 million of total assets at year-end 2007.

FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents increased $2.055 million in the first quarter of 2008. See further discussion of the change in cash and cash equivalents in the Liquidity section.

Investment Securities

Available-for-sale securities increased $2.984 million, or 13.82%, from December 31, 2007, to March 31, 2008 with the balance on March 31, 2008, totaling $24.581 million. The increase during the first quarter was in conjunction with liquidity objectives of the Corporation’s asset liability management. Investment securities are utilized in an effort to manage interest rate risk and liquidity. As of March 31, 2008, investment securities with an estimated fair value of $22.267 million were pledged.

Loans

Through the first quarter of 2008, loan balances increased by $4.977 million, or 1.40% from December 31, 2007 balances of $355.079 million. During the first quarter, the Bank had new loan production of $17.8 million, however experienced paydowns and external loan refinancings which reduced existing portfolio loan balances by approximately $12.9 million. 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

Following is a summary of the loan portfolio at March 31, 2008, December 31, 2007, and March 31, 2007 (dollars in thousands):

		March 31,				Percent of				December 31,				Percent of				March 31,				Percent of
		2008				Total				2007				Total				2007				Total
Commercial real estate		$	185,514				51.52	%		$	171,695				48.35	%		$	153,587				48.24	%
Commercial, financial, and agricultural			78,913				21.92				78,192				22.02				67,683				21.26
1-4 family residential real estate			59,532				16.53				57,613				16.23				54,204				17.02
Consumer			3,452				.96				3,537				1.00				2,971				.93
Construction
Commercial			27,553				7.66				38,952				10.97				34,863				10.94
Consumer			5,092				1.41				5,090				1.43				5,113				1.61
Total loans		$	360,056				100.00	%		$	355,079				100.00	%		$	318,421				100.00	%

Following is a table showing the significant industry types in the commercial loan portfolio as of March 31, 2008, December 31, 2007, and March 31, 2007 (dollars in thousands):

		March 31, 2008												December 31, 2007												March 31, 2007
						Percent of				Percent of								Percent of				Percent of								Percent of				Percent of
		Outstanding				Commerical				Shareholders’				Outstanding				Commercial				Shareholders’				Outstanding				Commerical				Shareholders'
		Balance				Loans				Equity				Balance				Loans				Equity				Balance				Loans				Equity
Real estate — operators of nonres bldgs		$	43,167				14.78	%			108.92	%		$	41,597				14.40	%			105.79	%		$	44,155				17.24	%			147.52
Hospitality and tourism			35,760				12.25				90.23				37,604				13.02				95.63				33,726				13.17				112.68
Real estate agents and managers			30,235				10.36				76.29				29,571				10.24				75.20				27,313				10.66				91.25
Commercial construction			27,553				9.44				69.52				38,952				13.49				99.06				34,863				13.61				116.47
Other			155,265				53.17				391.76	%			141,115				48.85				358.88	%			116,076				45.32				387.80
Total Commercial Loans		$	291,980				100.00	%						$	288,839				100.00	%						$	256,133				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, 2008. 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 quarterly basis to determine whether the losses inherent in the portfolio are properly reserved for. Net charge-offs amounted to $.222 million, .06% of average loans outstanding, compared to $.031 million, .01% of average loans outstanding, for the three months ended March 31, 2008 and 2007, respectively. The current reserve balance is representative of the relevant risk inherent within the Corporation’s loan portfolio. 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 decrease in nonperforming loans in the first quarter of 2008 is primarily due to the collection of the SBA guarantee on a nonperforming loan.

MACKINAC FINANCIAL CORPORATION

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

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

		March 31,				December 31,				March 31,
		2008				2007				2007
Nonperforming Assets:
Nonaccrual loans		$	3,381			$	3,298			$	4,142
Loans past due 90 days or more			—				710				720
Total nonperforming loans			3,381				4,008				4,862
Other real estate owned			1,137				1,226				127
Total nonperforming assets		$	4,518			$	5,234			$	4,989
Nonperforming loans as a % of loans			.94	%			1.13	%			1.53	%
Nonperforming assets as a % of assets			1.08	%			1.28	%			1.33	%
Reserve for Loan Losses:
At period end		$	3,924			$	4,146			$	4,975
As a % of loans			1.09	%			1.17	%			1.56	%
As a % of nonperforming loans			116.06	%			103.44	%			102.32	%
As a % of nonaccrual loans			116.06	%			125.71	%			120.11	%