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 June 30, 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 (State or other jurisdiction of incorporation or organization)		38-2062816 (I.R.S. Employer Identification No.)
130 SOUTH CEDAR STREET, MANISTIQUE, MI (Address of principal executive offices)		49854 (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):

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 July 31, 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 — June 30, 2008 (Unaudited), December 31, 2007 and June 30, 2007 (Unaudited)			1
				Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2008 (Unaudited) and June 30, 2007 (Unaudited)			2
				Condensed Consolidated Statements of Changes in Shareholders’ Equity — Three and Six Months Ended June 30, 2008 (Unaudited) and June 30, 2007 (Unaudited)			3
				Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2008 (Unaudited) and June 30, 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			28
		Item 4.		Controls and Procedures			31
PART II. OTHER INFORMATION
		Item 1.		Legal Proceedings			32
		Item 4.		Submission of Matters to a Vote of Security Holders			32
		Item 6.		Exhibits and Reports on Form 8-K			33
		SIGNATURES					34
EX-31.1
EX-31.2
EX-32.1
EX-32.2

MACKINAC FINANCIAL CORPORATION

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)

		June 30,				December 31,				June 30,
		2008				2007				2007
		(unaudited)								(unaudited)
ASSETS
Cash and due from banks		$	7,115			$	6,196			$	7,518
Federal funds sold			19,274				166				3,489
Cash and cash equivalents			26,389				6,362				11,007
Interest-bearing deposits in other financial institutions			387				1,810				3,687
Securities available for sale			23,230				21,597				24,086
Federal Home Loan Bank stock			3,794				3,794				3,794
Loans:
Commercial			292,645				288,839				274,783
Mortgage			65,869				62,703				60,575
Installment			3,608				3,537				3,538
Total Loans			362,122				355,079				338,896
Allowance for loan losses			(3,585	)			(4,146	)			(4,920	)
Net loans			358,537				350,933				333,976
Premises and equipment			11,377				11,609				12,471
Other real estate held for sale			3,395				1,226				77
Other assets			10,218				11,549				4,221
TOTAL ASSETS		$	437,327				408,880			$	393,319
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Non-interest-bearing deposits		$	27,741			$	25,557			$	28,811
Interest-bearing deposits:
NOW, money market, checking			78,703				81,160				73,994
Savings			15,171				12,485				12,422
CDs<$100,000			78,678				80,607				96,546
CDs>$100,000			28,252				22,355				24,879
Brokered			128,431				98,663				84,594
Total deposits			356,976				320,827				321,246
Borrowings
Federal funds purchased			—				7,710				—
Short-term			—				1,959				—
Long-term			36,280				36,280				38,307
Total borrowings			36,280				45,949				38,307
Other liabilities			3,096				2,783				3,281
Total liabilities			396,352				369,559				362,834
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 — 3,419,736; 3,428,695; and and 3,428,695 shares, respectively			42,773				42,843				42,780
Accumulated deficit			(1,672	)			(3,582	)			(12,162	)
Accumulated other comprehensive income (loss)			(126	)			60				(133	)
Total shareholders’ equity			40,975				39,321				30,485
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	437,327			$	408,880			$	393,319

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								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
INTEREST INCOME:
Interest and fees on loans:
Taxable		$	5,604			$	6,448			$	11,704			$	12,681
Tax-exempt			102				143				210				314
Interest on securities:
Taxable			271				293				537				594
Tax-exempt			2				—				3				—
Other interest			81				166				170				366
Total interest income			6,060				7,050				12,624				13,955
INTEREST EXPENSE:
Deposits			2,551				3,267				5,616				6,489
Borrowings			391				514				845				1,019
Total interest expense			2,942				3,781				6,461				7,508
Net interest income			3,118				3,269				6,163				6,447
Provision for loan losses			750				—				750				—
Net interest income after provision for loan losses			2,368				3,269				5,413				6,447
OTHER INCOME:
Service fees			194				185				368				346
Net security gains			—				—				65				—
Net gains on sale of secondary market loans			49				91				97				199
Proceeds from lawsuit settlements			3,475				—				3,475				470
Other			29				66				52				240
Total other income			3,747				342				4,057				1,255
OTHER EXPENSE:
Salaries and employee benefits			2,075				1,672				3,882				3,410
Occupancy			348				327				703				661
Furniture and equipment			190				166				368				323
Data processing			216				210				437				381
Professional service fees			79				174				232				325
Loan and deposit			144				79				254				151
Telephone			39				59				84				117
Advertising			60				91				120				183
Other			320				287				582				570
Total other expense			3,471				3,065				6,662				6,121
Income before income taxes			2,644				546				2,808				1,581
Provision for (benefit of) income taxes			875				—				900				—
NET INCOME		$	1,769			$	546			$	1,908			$	1,581
INCOME PER COMMON SHARE:
Basic		$	.52			$	.16			$	.56			$	.46
Diluted		$	.52			$	.16			$	.56			$	.46

See accompanying notes to condensed consolidated financial statements.

 2.

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Balance, beginning of period		$	39,633			$	29,932			$	39,321			$	28,790
Net income for period			1,769				546				1,908				1,581
Stock option compensation			21				30				42				60
Net unrealized gain (loss) on securities available for sale			(338	)			(23	)			(186	)			54
Total comprehensive income			1,452				553				1,764				1,695
Repurchase of common stock — oddlot shares			(110	)			—				(110	)			—
Balance, end of period		$	40,975			$	30,485			$	40,975			$	30,485

See accompanying notes to condensed consolidated financial statements.

 3.

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

		Six Months Ended
		June 30,
		2008				2007
Cash Flows from Operating Activities:
Net income		$	1,908			$	1,581
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			607				344
Provision for (benefit of) deferred taxes			900				—
Provision for loan losses			750				—
(Gain) on sales/calls of securities available for sale			(65	)			—
(Gain) on sale of premises, equipment and other real estate			(5	)			(13	)
Writedown of other real estate			201				—
Stock option compensation			42				60
Change in other assets			283				348
Change in other liabilities			313				8
Net cash (used in) provided by operating activities			4,934				2,328
Cash Flows from Investing Activities:
Net (increase) decrease in loans			(10,792	)			(16,470	)
Net (increase) decrease in interest-bearing deposits in other financial institutions			1,423				(2,831	)
Purchase of securities available for sale			(24,481	)			(13,564	)
Proceeds from sales, maturities or calls of securities available for sale			22,766				22,440
Capital expenditures			(266	)			(744	)
Proceeds from sale of premises, equipment, and other real estate			73				317
Net cash (used in) provided by investing activities			(11,277	)			(10,852	)
Cash Flows from Financing Activities:
Net increase in deposits			36,149				8,825
Net increase (decrease) in federal funds purchased			(7,710	)			—
Net increase (decrease) in line of credit			(1,959	)			—
Net (decrease) repurchase of common stock — oddlot shares			(110	)			—
Net cash (used in) provided by financing activities			26,370				8,825
Net increase in cash and cash equivalents			20,027				301
Cash and cash equivalents at beginning of period			6,362				10,706
Cash and cash equivalents at end of period		$	26,389			$	11,007
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest		$	5,086			$	5,771
Income taxes			—				—
Noncash Investing and Financing Activities:
Transfers of foreclosures from loans to other real estate held for sale (net of adjustments made through the allowance for loan losses)		$	2,237			$	69

See accompanying notes to condensed consolidated financial statements.

 4.

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

1.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
		Basis of Presentation
		The unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the “Corporation”) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 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 were not changed due to these classifications.
		Allowance for Loan Losses
		The allowance for loan losses includes specific allowances related to commercial loans, which have been judged to be impaired. A loan is impaired when, based on current information, it is probable that the Corporation will not collect all amounts due in accordance with the contractual terms of the loan agreement. These specific allowances are based on discounted cash flows of expected future payments using the loan’s initial effective interest rate or the fair value of the collateral if the loan is collateral dependent.
		The Corporation continues to maintain a general allowance for loan losses for loans not considered impaired. The allowance for loan losses is maintained at a level which management believes is adequate to provide for possible loan losses. Management periodically evaluates the adequacy of the allowance using the Corporation’s past loan loss experience, known and inherent risks in the portfolio, composition of the portfolio, current economic conditions, and other factors. The allowance does not include the effects of expected losses related to future events or future changes in economic conditions. This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require additions to the allowance for loan losses based on their judgments of collectibility.
		In management’s opinion, the allowance for loan losses is adequate to cover probable losses relating to specifically identified loans, as well as probable losses inherent in the balance of the loan portfolio as of the balance sheet date.
		Stock Option Plans
		The Corporation sponsors three stock option plans. One plan was approved in 2000 and applies to officers, employees, and nonemployee directors. This plan was amended as a part of the December 2004 stock offering and recapitalization. The amendment, approved by shareholders, increased the shares available under this plan by 428,587 shares from the original 25,000 (adjusted for the 1:20 reverse stock split), to a total authorized share balance of 453,587. The other two plans, one for officers and employees and the other for nonemployee

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

1.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
		directors, were approved in 1997. A total of 30,000 shares (adjusted for the 1:20 reverse stock split), were made available for grant under these plans. Options under all of the plans are granted at the discretion of a committee of the Corporation’s Board of Directors. Options to purchase shares of the Corporation’s stock are granted at a price equal to the market price of the stock at the date of grant. The committee determines the vesting of the options when they are granted as established under the plan.
		The Corporation adopted SFAS No. 123 (Revised) “Share Based Payments” in the first quarter of 2006. This statement supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees” and its related implementation guidance. Under Opinion No. 25, issuing stock options to employees generally resulted in recognition of no compensation cost. This adoption resulted in the recognition of after tax compensation expense in the amount of $42,000 for the six months ended June 30, 2008, and $60,000 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 and $.02 in the first half of 2008 and 2007, 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. 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)

2.		RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
		The Corporation has reviewed other recent accounting pronouncements by the Financial Accounting Standards Board (FASB), in addition to those noted above and determined that there is no current impact of these accounting pronouncements in the consolidated financial statements of the Corporation.
3.		EARNINGS PER SHARE
		Earnings per share are based upon the weighted average number of shares outstanding.
		Additional shares issued as a result of option exercises would not be dilutive in either period.
		The following shows the computation of basic and diluted earnings per share for the three and six months ended June 30, 2008 and 2007 (dollars in thousands, except per share data):

Three Months Ended						Weighted Average				Income
June 30,		Net Income				Number of Shares				Per Share
2008
Income per share — Basic and diluted		$	1,769				3,419,933			$	.52
2007
Income per share — Basic and diluted		$	546				3,428,695			$	.16
Six Months Ended
June 30,
2008
Income per share — Basic and diluted		$	1,908				3,424,314			$	.56
2007
Income per share — Basic and diluted		$	1,581				3,428,695			$	.46

4.		INVESTMENT SECURITIES
		The amortized cost and estimated fair value of investment securities available for sale as of June 30, 2008, December 31, 2007 and June 30, 2007 are as follows (dollars in thousands):

		June 30, 2008								December 31, 2007								June 30, 2007
		Amortized				Estimated				Amortized				Estimated				Amortized				Estimated
		Cost				Fair Value				Cost				Fair Value				Cost				Fair Value
US Agencies — MBS		$	22,696			$	22,623			$	—			$	—			$	—			$	—
US Agencies			—				—				20,982				20,969				23,708				23,517
Obligations of states and political subdivisions			550				607				556				628				511				569
Total securities available for sale		$	23,246			$	23,230			$	21,538			$	21,597			$	24,219			$	24,086

The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $21.321 million and $21.260 million, respectively, at June 30, 2008.

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

5.		LOANS
		The composition of loans at June 30, 2008, December 31, 2007 and June 30, 2007 is as follows (dollars in thousands):

		June 30,				December 31,				June 30,
		2008				2007				2007
Commercial real estate		$	186,108			$	171,695			$	161,823
Commercial, financial, and agricultural			77,473				78,192				76,390
One to four family residential real estate			60,882				57,613				55,090
Construction:
Commercial			29,064				38,952				36,570
Consumer			4,987				5,090				5,485
Consumer			3,608				3,537				3,538
Total loans		$	362,122			$	355,079			$	338,896

		LOANS — Allowance for loan losses
		An analysis of the allowance for loan losses for the six months ended June 30, 2008, the year ended December 31, 2007, and the six months ended June 30, 2007 is as follows: (dollars in thousands):

		June 30,				December 31,				June 30,
		2008				2007				2007
Balance at beginning of period		$	4,146			$	5,006			$	5,006
Recoveries on loans			9				50				25
Loans charged off			(1,320	)			(1,310	)			(111	)
Provision for loan losses			750				400				—
Balance at end of period		$	3,585			$	4,146			$	4,920

		In the first half of 2008, net charge off activity was $1.311 million, or .36% of average loans outstanding compared to net charge-offs of $86,000, or .03% of average loans, in the first half of 2007. In the first half of 2008, the Corporation recorded a provision for loan loss in the amount of $750,000, which is discussed in more detail under “Management’s Discussion and Analysis.”
		LOANS — Impaired loans
		Nonperforming loans are those which are contractually past due 90 days or more as to interest or principal payments, on nonaccrual status, or loans, the terms of which have been renegotiated to provide a reduction or deferral on interest or principal. The interest income recorded and that which would have been recorded had nonaccrual and renegotiated loans been current or not troubled was not material to the consolidated financial statements for the six months ended June 30, 2008 and 2007.

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

5.		LOANS (Continued)
		Information regarding impaired loans as of June 30, 2008, December 31, 2007 and June 30, 2007 is as follows (dollars in thousands):

														Valuation Reserve
		June 30,				December 31,				June 30,				June 30,				December 31,				June 30,
		2008				2007				2007				2008				2007				2007
Balances, at period end
Impaired loans with specific valuation reserve		$	4,052			$	3,639			$	3,559			$	946			$	1,320			$	968
Impaired loans with no specific valuation reserve			561				369				1,490				—				—				—
Total impaired loans		$	4,613			$	4,008			$	5,049			$	946			$	1,320			$	968
Impaired loans on nonaccrual basis		$	4,613			$	3,298			$	4,758			$	946			$	1,219			$	968
Impaired loans on accrual basis			—				710				291				—				101				—
Total impaired loans		$	4,613			$	4,008			$	5,049			$	946			$	1,320			$	968
Average investment in impaired loans		$	4,779			$	4,135			$	4,113
Interest income recognized during impairment			46				129				15
Interest income that would have been recognized on an accrual basis			225				391				198
Cash-basis interest income recognized			46				84				10

		The average investment in impaired loans was approximately $4.779 million for the six-months ended June 30, 2008, $4.135 million for the year ended December 31, 2007, and $4.113 million for the six months ended June 30, 2007, respectively. 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):

		June 30,				December 31,				June 30,
		2008				2007				2007
Loans outstanding beginning of period		$	1,720			$	1,621			$	1,621
New loans			—				—				—
Net activity on revolving lines of credit			479				556				—
Repayment			(41	)			(457	)			(16	)
Change in related party interest			2,733				—				—
Loans outstanding end of period		$	4,891			$	1,720			$	1,605

There were no loans to related-parties classified substandard at June 30, 2008, December 31, 2007 or June 30, 2007, respectively.

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

6.		SHORT-TERM BORROWINGS
		Short-term borrowings consist of the following at June 30, 2008, December 31, 2007, and June 30, 2007 (dollars in thousands):

		June 30,				December 31,				June 30,
		2008				2007				2007
Fed funds purchased		$	—			$	7,710			$	—
Advance outstanding on line of credit with a correspondent bank, interest payable at the prime rate, 5.00% as of June 30, 2008, maturing November 30, 2008			—				1,959				1,959
		$	—			$	9,669			$	1,959

7.		LONG-TERM BORROWINGS
		Long-term borrowings consist of the following at June 30, 2008, December 31, 2007 and June 30, 2007 (dollars in thousands):

		June 30,				December 31,				June 30,
		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 2.73% to 2.80% 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 June 30, 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 $22.862 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $20.071 million and $20.010 million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $3.794 million. Prepayment of the remaining advances is subject to the provisions and conditions of the credit policy of the Federal Home Loan Bank of Indianapolis in effect as of June 30, 2008.
		The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $367,000 originated and held by the Corporation’s wholly owned subsidiary, First Rural Relending, and an assignment of a demand deposit account in the amount of $1.031 million, 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 six months ended June 30, 2008 and 2007, and the year ended December 31, 2007, is as follows:

		June 30, 2008				December 31, 2007				June 30, 2007
Outstanding shares at beginning of year			446,417				446,417				446,417
Granted during the period			—				—				—
Expired during the period			180				—				—
Outstanding shares at end of period			446,237				446,417				446,417
Weighted average exercise price per share at end of period		$	12.14			$	12.29			$	12.29
Shares available for grant at end of period			18,488				18,488				18,488

		There were no options granted in the first six months of 2008 and 2007.
		Following is a summary of the options outstanding and exercisable at June 30, 2008:

Exercise		Number								Remaining				Weighted Average
Price Range		Outstanding				Exercisable				Contractual Life-Years				Exercise Price
$9.16			12,500				5,000				7.5			$	9.16
$9.75			257,152				120,861				6.5				9.75
$10.65			72,500				14,500				8.5				10.65
$11.50			40,000				8,000				7.3				11.50
$12.00			60,000				12,000				7.0				12.00
$156.00 — $240.00			3,545				3,545				2.7				186.75
$300.00 — $406.60			540				540				1.6				333.33
			446,237				164,446				6.9			$	12.14

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 June 30, 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 June 30, 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 June 30, 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 June 30, 2008

Quoted Prices in Active

Significant Other

Significant

Markets for Identical

Observable Inputs

Unobservable Inputs

Balance at

Assets (Level 1)

(Level 2)

(Level 3)

June 30, 2008

Assets

Investment securities — available for sale

$

23,162

$

68

$

—

$

23,230

Liabilities

None

The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31, 2007 or June 30, 2008.

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

10.		FAS 157 — FAIR VALUE MEASUREMENTS (Continued)
		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				Three Months Ended				Six Months Ended
(dollars in thousands)		June 30, 2008				(Level 1)				(Level 2)				(Level 3)				June 30, 2008				June 30, 2008
Assets
Impaired loans accounted for under FAS 114		$	—			$	—			$	—			$	1,161			$	862			$	862
																		$	862			$	862

		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):

		June 30,				December 31,				June 30,
		2008				2007				2007
Commitments to extend credit:
Variable rate		$	40,215			$	43,903			$	51,214
Fixed rate			8,601				8,055				8,881
Standby letters of credit — Variable rate			6,693				5,930				5,914
Credit card commitments — Fixed rate			2,521				2,414				2,432
		$	58,030			$	60,302			$	68,441

		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 June 30, 2008 represents $41.8 million, or 15.9%, compared to $41.7 million, or 17.5%, of the commercial loan portfolio on June 30, 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.

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

FINANCIAL OVERVIEW

Year-to-date consolidated net income was $1.908 million through June 30, 2008, compared to a net income of $1.581 million for the same period in 2007. Basic income per share was $.56 for the six months ended June 30, 2008, compared to an income per share of $.46 for the same period in 2007. The income for the three months ended June 30, 2008 amounted to $1.769 million, or $.52 per share, compared to an income of $.546 million, or $.16 per share for the same period in 2007. The results of operations for the first six months of 2008 include $3.475 million of proceeds from the settlement of a shareholder lawsuit, the negative effects of a severance agreement expense of $.425 million, and a $.750 million provision for loan loss. During the comparable six month period in 2007, the Corporation recorded income from proceeds of the settlement of a lawsuit against the Corporation’s former accountants in the amount of $470,000.

Total assets increased $28.447 million from December 31, 2007 to June 30, 2008. The loan portfolio increased $7.043 million in the first six months of 2008, from December 31, 2007 balances of $355.079 million. Deposits totaled $356.976 million at June 30, 2008, an increase of $36.149 million from the $320.827 million at December 31, 2007.

FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents increased $20.027 million in 2008. See further discussion of the change in cash and cash equivalents in the Liquidity section.

Investment Securities

Available-for-sale securities increased $1.633 million, or 7.56%, from December 31, 2007 to June 30, 2008, with the balance on June 30, 2008, totaling $23.230 million. Investment securities are utilized in an effort to manage interest rate risk and liquidity. As of June 30, 2008, investment securities with an estimated fair value of $21.260 million were pledged.

Loans

Through the first half of 2008, loan balances increased by $7.043 million, or 1.98%, from December 31, 2007 balances of $355.079 million. During the first six months of 2008, the Bank had total loan production of $34.234 million. This loan production, however, was significantly offset by normal principal runoff and amortization, $15.26 million, and large paydowns and refinancing, which totaled $24.470 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 (Continued)

Following is a summary of the loan portfolio at June 30, 2008, December 31, 2007 and June 30, 2007 (dollars in thousands):

		June 30,				Percent of				December 31,				Percent of				June 30,				Percent of
		2008				Total				2007				Total				2007				Total
Commercial real estate		$	186,108				51.39	%		$	171,695				48.35	%		$	161,823				47.75	%
Commercial, financial, and agricultural			77,473				21.39				78,192				22.02				76,390				22.54
One to four family residential real estate			60,882				16.81				57,613				16.23				55,090				16.26
Consumer			3,608				1.00				3,537				1.00				3,538				1.04
Construction
Commercial			29,064				8.03				38,952				10.97				36,570				10.79
Consumer			4,987				1.38				5,090				1.43				5,485				1.62
Total loans		$	362,122				100.00	%		$	355,079				100.00	%		$	338,896				100.00	%