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, 2009

OR

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o                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 March 31, 2009, 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, 2009 (Unaudited), December 31, 2008 and March 31, 2008 (Unaudited)			1
Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2009 (Unaudited) and March 31, 2008 (Unaudited)			2
Condensed Consolidated Statements of Changes in Shareholders’ Equity — Three Months Ended March 31, 2009 (Unaudited) and March 31, 2008 (Unaudited)			3
Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2009 (Unaudited) and March 31, 2008 (Unaudited)			4
Notes to Condensed Consolidated Financial Statements (Unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures about Market Risk			30
Item 4. Controls and Procedures			33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			34
Item 6. Exhibits and Reports on Form 8-K			35
SIGNATURES			36
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)

		March 31,				December 31,				March 31,
		2009				2008				2008
		(unaudited)								(unaudited)
ASSETS
Cash and due from banks		$	21,394			$	10,112			$	6,849
Federal funds sold			—				—				1,568
Cash and cash equivalents			21,394				10,112				8,417
Interest-bearing deposits in other financial institutions			569				582				382
Securities available for sale			51,071				47,490				24,581
Federal Home Loan Bank stock			3,794				3,794				3,794
Loans:
Commercial			295,595				296,088				291,980
Mortgage			71,554				70,447				64,624
Installment			3,627				3,745				3,452
Total Loans			370,776				370,280				360,056
Allowance for loan losses			(4,793	)			(4,277	)			(3,924	)
Net loans			365,983				366,003				356,132
Premises and equipment			11,134				11,189				11,511
Other real estate held for sale			2,199				2,189				1,137
Other assets			10,231				10,072				11,221
TOTAL ASSETS		$	466,375			$	451,431			$	417,175
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest bearing deposits		$	31,541			$	30,099			$	26,876
NOW, money market, checking			75,026				70,584				81,952
Savings			19,585				20,730				11,530
CDs<$100,000			70,708				73,752				83,087
CDs>$100,000			26,886				25,044				22,010
Brokered			162,011				150,888				100,592
Total deposits			385,757				371,097				326,047
Borrowings:
Federal funds purchased			—				—				10,410
Short-term			—				—				2,159
Long-term			36,210				36,210				36,280
Total borrowings			36,210				36,210				48,849
Other liabilities			2,544				2,572				2,646
Total liabilities			424,511				409,879				377,542
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; 3,419,736, and 3,428,695 respectively			42,833				42,815				42,862
Accumulated deficit			(1,618	)			(1,708	)			(3,441	)
Accumulated other comprehensive income			649				445				212
Total shareholders’ equity			41,864				41,552				39,633
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	466,375			$	451,431			$	417,175

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,
		2009				2008
		(Unaudited)				(Unaudited)
INTEREST INCOME:
Interest and fees on loans:
Taxable		$	5,002			$	6,100
Tax-exempt			90				108
Interest on securities:
Taxable			459				266
Tax-exempt			1				1
Other interest income			2				89
Total interest income			5,554				6,564
INTEREST EXPENSE:
Deposits			1,778				3,065
Borrowings			281				454
Total interest expense			2,059				3,519
Net interest income			3,495				3,045
Provision for loan losses			550				—
Net interest income after provision for loan losses			2,945				3,045
NONINTEREST INCOME:
Service fees			243				174
Net security gains			—				65
Net gains on sale of secondary market loans			58				48
Other			90				23
Total noninterest income			391				310
NONINTEREST EXPENSE:
Salaries and employee benefits			1,597				1,807
Occupancy			378				355
Furniture and equipment			189				178
Data processing			220				221
Professional service fees			153				153
Loan and deposit			136				101
FDIC insurance assessment			125				9
Telephone			43				45
Advertising			78				60
Other			320				262
Total noninterest expense			3,239				3,191
Income before provision for income taxes			97				164
Provision for income taxes			7				25
NET INCOME		$	90			$	139
INCOME PER COMMON SHARE:
Basic		$	.03			$	.04
Diluted		$	.03			$	.04

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,
		2009				2008
Balance, beginning of period		$	41,552			$	39,321
Net income for period			90				139
Stock option compensation			18				21
Net unrealized gain on securities available for sale			204				152
Total comprehensive income			312				312
Balance, end of period		$	41,864			$	39,633

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,
		2009				2008
Cash Flows from Operating Activities:
Net income		$	90			$	139
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			448				273
Provision for loan losses			550				—
Provision for (benefit of) deferred taxes			7				25
(Gain) on sales/calls of securities available for sale			—				(65	)
(Gain) loss on sale of premises, equipment other real estate			1				(6	)
Writedown of other real estate			—				72
Stock option compensation			18				21
Change in other assets			(292	)			173
Change in other liabilities			(28	)			(136	)
Net cash provided by operating activities			794				496
Cash Flows from Investing Activities:
Net (increase) in loans			(541	)			(5,214	)
Net decrease in interest-bearing deposits in other financial institutions			13				1,428
Purchase of securities available for sale			(4,683	)			(25,429	)
Proceeds from sales, maturities or calls of securities available for sale			1,253				22,761
Capital expenditures			(251	)			(145	)
Proceeds from sale of premises, equipment, and other real estate			37				38
Net cash (used in) investing activities			(4,172	)			(6,561	)
Cash Flows from Financing Activities:
Net increase in deposits			14,660				5,220
Net increase in federal funds purchased			—				2,700
Net increase in line of credit			—				200
Net cash provided by financing activities			14,660				8,120
Net increase in cash and cash equivalents			11,282				2,055
Cash and cash equivalents at beginning of period			10,112				6,362
Cash and cash equivalents at end of period		$	21,394			$	8,417
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest		$	2,143			$	2,073
Income taxes			30				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)			485				57

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, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. 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, 2008.
		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 collectability 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 collectability.
		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

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

1.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
		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 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 before tax compensation expense in the amount of $18,000 for the three months ended March 31, 2009 and $21,000 for the same period in 2008. The expense recorded recognizes the current period vesting of options outstanding. The per share impact of this accounting change was $.01 in the first quarter of 2009 and 2008.
2.		RECENT ACCOUNTING PRONOUNCEMENTS
		In April 2009, the FASB issued the following three FSPs intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities:
		FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have decreased significantly. FSP FAS 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. The provisions of FSP FAS 157-4 are effective for the Corporation’s interim period ending on June 30, 2009. Management is currently evaluating the effect that the provisions of FSP FAS 157-4 may have on the Corporation’s statements of income and condition.
		FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of FSP FAS 107-1 and APB 28-1 are effective for the Corporation’s interim period ending on June 30, 2009. As FSP FAS 107-1 and APB 28-1 amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 is not expected to affect the Corporation’s statements of income and condition.
		FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentations and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Corporation’s interim period ending on June 30, 2009. Management is currently evaluating the effect that the provisions FSP FAS 115-2 and FAS 124-2 may have on the Corporation’s statements of income and condition.

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, 2009 and 2008 (dollars in thousands, except per share data):

Three Months Ended						Weighted Average				Income
March 31,		Net Income				Number of Shares				Per Share
2009
Income per share — Basic and diluted		$	90				3,419,736			$	.03
2008
Income per share — Basic and diluted		$	139				3,428,695			$	.04

4.		INVESTMENT SECURITIES
		The amortized cost and estimated fair value of investment securities available for sale as of March 31, 2009, December 31, 2008, and March 31, 2008 are as follows (dollars in thousands):

		March 31, 2009								December 31, 2008								March 31, 2008
		Amortized				Estimated				Amortized				Estimated				Amortized				Estimated
		Cost				Fair Value				Cost				Fair Value				Cost				Fair Value
US Agencies — MBS		$	44,904			$	45,915			$	46,316			$	46,941			$	23,704			$	23,933
Asset backed-government guaranteed			4,684				4,610				—				—				—				—
Obligations of states and political subdivisions			498				546				498				549				555				648
Total securities available for sale		$	50,086			$	51,071			$	46,814			$	47,490			$	24,259			$	24,581

The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $19.057 million and $19.533 million respectively at March 31, 2009.

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

5.		LOANS
		The composition of loans at March 31, 2009, December 31, 2008, and March 31, 2008 is as follows (dollars in thousands):

		March 31,				December 31,				March 31,
		2009				2008				2008
Commercial real estate		$	191,721			$	185,241			$	185,514
Commercial, financial and agricultural			77,216				79,734				78,913
One to four family residential real estate			65,792				65,595				59,532
Construction:
Commercial			26,658				31,113				27,553
Consumer			5,762				4,852				5,092
Consumer			3,627				3,745				3,452
Total loans		$	370,776			$	370,280			$	360,056

		LOANS — Allowance for loan losses
		An analysis of the allowance for loan losses for the three months ended March 31, 2009, the year ended December 31, 2008, and the three months ended March 31, 2008 is as follows (dollars in thousands):

		March 31,				December 31,				March 31,
		2009				2008				2008
Balance at beginning of period		$	4,277			$	4,146			$	4,146
Recoveries on loans			39				121				4
Loans charged off			(73	)			(2,290	)			(226	)
Provision for loan losses			550				2,300				—
Balance at end of period		$	4,793			$	4,277			$	3,924

		In the first quarter of 2009, net charge-off activity was $34,000, or .01% of average loans outstanding compared to net charge-offs of $222,000, or .06% of average loans, in the first quarter of 2008. In the first quarter of 2009, the Corporation recorded a provision for loan loss in the amount of $.550 million, 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 three months ended March 31, 2009 and 2008.

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

5.		LOANS (Continued)
		Information regarding impaired loans as of March 31, 2009, December 31, 2008, and March 31, 2008 is as follows (dollars in thousands):

														Valuation Reserve
		March 31,				December 31,				March 31,				March 31,				December 31,				March 31,
		2009				2008				2008				2009				2008				2008
Balances, at period end
Impaired loans with specific valuation reserve		$	11,065			$	3,730			$	3,277			$	2,162			$	994			$	1,139
Impaired loans with no specific valuation reserve			1,396				1,157				104				—				—				—
Total impaired loans		$	12,461			$	4,887			$	3,381			$	2,162			$	994			$	1,139
Impaired loans on nonaccrual basis		$	12,461			$	4,887			$	3,381			$	2,162			$	994			$	1,139
Impaired loans on accrual basis			—				—				—				—				—				—
Total impaired loans		$	12,461			$	4,887			$	3,381			$	2,162			$	994			$	1,139
Average investment in impaired loans		$	8,323			$	4,834			$	3,915
Interest income recognized during impairment			6				60				22
Interest income that would have been recognized on an accrual basis			153				377				94
Cash-basis interest income recognized			6				60				22

		The average investment in impaired loans was approximately $8.323 million for the three-months ended March 31, 2009, $4.834 million for the year ended December 31, 2008, and $3.915 million for the three months ended March 31, 2008, respectively. Additional discussion on impaired loans is presented in the “Management’s Discussion and Analysis” section of this report.
		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,
		2009				2008				2008
Loans outstanding, beginning of period		$	6,516			$	1,720			$	1,720
New loans			—				372				—
Net activity on revolving lines of credit			356				2,378				—
Repayment			(104	)			(687	)			(14	)
Change in related party interest			—				2,733				2,733
Loans outstanding, end of period		$	6,768			$	6,516			$	4,439

There were no loans to related parties classified substandard at March 31, 2009, December 31, 2008, and March 31, 2008 respectively. In addition to the outstanding balances above, there were unused commitments of $.197 million to related parties at March 31, 2009.

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

6.		SHORT-TERM BORROWINGS
		Short-term borrowings consist of the following at March 31, 2009, December 31, 2008, and March 31, 2008 (dollars in thousands):

		March 31,				December 31,				March 31,
		2009				2008				2008
Fed funds purchased		$	—			$	—			$	10,410
Advance outstanding on line of credit with a correspondent bank, interest payable at the prime rate 3.25% as of March 31, 2009, matured November 30, 2008.			—				—				2,159
		$	—			$	—			$	12,569

7.		LONG-TERM BORROWINGS
		Long-term borrowings consist of the following at March 31, 2009, December 31, 2008 and March 31, 2008 (dollars in thousands):

		March 31,				December 31,				March 31,
		2009				2008				2008
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 1.25% to 1.37% maturing in 2011			20,000				20,000				20,000
Farmers Home Administration, fixed-rate note payable, maturing August 24, 2024 interest payable at 1%			1,210				1,210				1,280
		$	36,210			$	36,210			$	36,280

		The Federal Home Loan Bank borrowings are collateralized at March 31, 2009 by the following: a collateral agreement on the Corporation’s one to four family residential real estate loans with a book value of approximately $25.782 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $18.870 million and $19.107 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, 2009.
		The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $.317 million originated and held by the Corporation’s wholly owned subsidiary, First Rural Relending; an assignment of a demand deposit account in the amount of $.996 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 three months ended March 31, 2009 and 2008 and the year ended December 31, 2008, is as follows:

		March 31,				December 31,				March 31,
		2009				2008				2008
Outstanding shares, at beginning of period			446,237				446,417				446,417
Granted during the period			—				—				—
Expired/forfeited during the period			(35,000	)			(180	)			—
Outstanding shares at end of period			411,237				446,237				446,417
Weighted average exercise price per share at end of period		$	12.20			$	12.14			$	12.29
Shares available for grant, at end of period			24,780				18,488				18,488

		There were no options granted or exercised in the first quarter of 2009 or 2008.
		Following is a summary of the options outstanding and exercisable at March 31, 2009:

										Weighted
										Average				Weighted
										Remaining				Average
Exercise		Number of Shares								Contractual				Exercise
Price Range		Outstanding				Exercisable				Life-Years				Price
$9.16			12,500				5,000				6.7			$	9.16
$9.75			257,152				120,861				5.7				9.75
$10.65			57,500				11,500				7.7				10.65
$11.50			40,000				8,000				6.5				11.50
$12.00			40,000				8,000				6.2				12.00
$156.00 - $240.00			3,545				3,545				2.0				186.75
$300.00 - $400.00			540				540				.7				333.33
			411,237				157,446				6.1			$	12.20

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, 2009, 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, 2009 had a net operating loss and tax credit carryforwards for tax purposes of approximately $32.1 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

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

9.		INCOME TAXES (Continued)
		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.
		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, 2009, 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, 2009

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, 2009

Assets

Investment securities — available for sale

$

51,003

$

68

$

—

$

51,071

Liabilities

None

The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31, 2008 or March 31, 2009.

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. 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, 2009

(Level 1)

(Level 2)

(Level 3)

March 31, 2009

Assets

Impaired loans accounted for under FAS 114

$

—

$

—

$

—

$

1,789

$

37

$

37

		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).
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.
		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,
		2009				2008				2008
Commitments to extend credit:
Variable rate		$	34,801			$	40,036			$	40,993
Fixed rate			9,059				4,487				10,773
Standby letters of credit — Variable rate			1,589				1,838				6,089
Credit card commitments — Fixed rate			2,477				2,438				2,463
		$	47,926			$	48,799			$	60,318

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

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

11.		COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (Continued)
		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, 2009 represents $40.457 million, or 13.69%, compared to $43.167 million, or 14.78%, of the commercial loan portfolio on March 31, 2008. The remainder of the commercial loan portfolio is diversified in such categories as hospitality and tourism, real estate agents and managers, new car dealers, gaming, petroleum, forestry, agriculture and construction. Due to the diversity of the Bank’s locations, the ability of debtors of residential and consumer loans to honor their obligations is not tied to any particular economic sector.
12.		SUBSEQUENT EVENTS — TARP
		Participation in the TARP Capital Purchase Program
		As previously announced, on April 24, 2009, the Corporation entered into and closed a Letter Agreement, including the Securities Purchase Agreement-Standard Terms (collectively, the “Securities Purchase Agreement”), related to the CPP. Pursuant to the Securities Purchase Agreement, the Corporation issued and sold to the Treasury (i) 11,000 shares of the Corporation’s Series A Preferred Shares, and (ii) the Warrant to purchase 379,310 shares of the Corporation’s Common Shares, at an exercise price of $4.35 per share (subject to certain anti-dilution and other adjustments), for an aggregate purchase price of $11,000,000 in cash. The Warrant has a ten-year term.
		As a result of the CPP transaction, the Corporation is required to take certain actions, for so long as the Treasury holds any securities acquired from the Corporation pursuant to the CPP (excluding any period in which the Treasury holds only the Warrant to purchase Common Shares of the Corporation) (the “CPP Period”), to ensure that its executive compensation and benefit plans with respect to Senior Executive Officers (as defined in the relevant agreements) comply with Section 111(b) of Emergency Economic Stabilization Act of 2008 (“EESA”), as implemented by any guidance or regulations issued under Section 111(b) of EESA, and not adopt any benefit plans with respect to, or which cover, the Corporation’s Senior Executive Officers that do not comply with EESA, as amended by the American Recovery and Reinvestment Act of 2009 (the “ARRA”), which was passed

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

12.		SUBSEQUENT EVENTS — TARP (Continued)
		by Congress and signed by the President on February 17, 2009. The applicable executive compensation standards generally remain in effect during the CPP Period and apply to the Corporation’s Senior Executive Officers (which for purposes of the ARRA and the CPP agreements, includes the Corporation’s Chief Executive Officer, its Chief Financial Officer, and the next three most highly-compensated executive officers, even though the Corporation’s senior executive officers consist of a smaller group of executives for purposes of the other compensation disclosures in this proxy statement).
		The Corporation has the right to redeem the Series A Preferred Shares at any time after consulting with its primary regulator, in which case the executive compensation standards would no longer apply to the Corporation.
		This capital will be used to increase the strong capital position of the Bank. The Bank will use the capital to grow loans. In addition, the capital will allow the Corporation to consider acquisitions of deposit franchisees that would enhance our funding mix.

MACKINAC FINANCIAL CORPORATION

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, 2008. 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 2009 was $.090 million or $.03 per share compared to net income of $.139 million, or $.04 per share for the first quarter of 2008. Weighted average shares outstanding amounted to 3,419,736 in the first quarter of 2009 and 3,428,695 in the first quarter of 2008.

Total assets of the Corporation at March 31, 2009 were $466.375 million, up 11.79% from the $417.175 million in total assets reported at March 31, 2008. First quarter-end total assets were up 3.31% from the $451.431 million of total assets at year-end 2008.

FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents increased $11.282 million in the first quarter of 2009. See further discussion of the change in cash and cash equivalents in the Liquidity section.

Investment Securities

Securities available for sale increased $3.581 million, or 7.54%, from December 31, 2008, to March 31, 2009 with the balance on March 31, 2009 totaling $51.071 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, 2009, investment securities with an estimated fair value of $19.533 million were pledged.

Loans

Through the first quarter of 2009, loan balances increased by $.496 million, or .13% from December 31, 2008 balances of $370.280 million. During the first quarter, the Bank had new loan production of $9.390 million, however experienced paydowns and external loan refinancings which reduced existing portfolio loan balances by approximately $14.425 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 March 31, 2009, December 31, 2008, and March 31, 2008 (dollars in thousands):

		March 31,				Percent of				December 31,				Percent of				March 31,				Percent of
		2009				Total				2008				Total				2008				Total
Commercial real estate		$	191,721				51.71	%		$	185,241				50.03	%		$	185,514				51.52	%
Commercial, financial, and agricultural			77,216				20.83				79,734				21.53				78,913				21.92
1-4 family residential real estate			65,792				17.74				65,595				17.71				59,532				16.53
Consumer			3,627				.98				4,852				1.31				3,452				.96
Construction
Commercial			26,658				7.19				31,113				8.40				27,553				7.66
Consumer			5,762				1.55				3,745				1.01				5,092				1.41
Total loans		$	370,776				100.00	%		$	370,280				100.00	%		$	360,056				100.00	%

Following is a table showing the significant industry types in the commercial loan portfolio as of March 31, 2009, December 31, 2008, and March 31, 2008 (dollars in thousands):

		March 31, 2009												December 31, 2008												March 31, 2008
						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		$	40,457				13.69	%			96.64	%		$	41,299				13.95	%			99.39	%		$	43,167				14.78	%			108.92	%
Hospitality and tourism			35,224				11.91				84.14				35,086				11.85				84.44				35,760				12.25				90.23
Real estate agents and managers			28,012				9.48				66.91				29,292				9.89				70.50				30,235				10.36				76.29
Commercial construction			26,658				9.02				63.68				31,113				10.51				74.88				27,553				9.44				69.52
Other			165,244				55.90				394.72				159,298				53.80				383.37				155,265				53.17				391.76
Total Commercial Loans		$	295,595				100.00	%						$	296,088				100.00	%						$	291,980				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, 2009. 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 $.034 million, .01% of average loans outstanding, compared to $.222 million, .06% of average loans outstanding, for the three months ended March 31, 2009 and 2008, 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 increase in nonperforming loans, $8.166 million in the first quarter of 2009, includes two large commercial credit relationships in Southeast Michigan with a total balance of $5.8 million.

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

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

		March 31,				December 31,				March 31,
		2009				2008				2008
Nonperforming Assets:
Nonaccrual loans		$	12,461			$	4,887			$	3,381
Loans past due 90 days or more			—				—				—
Restructured loans			592				—				—
Total nonperforming loans			13,053				4,887				3,381
Other real estate owned			2,199				2,189				1,137
Total nonperforming assets		$	15,252			$	7,076			$	4,518
Nonperforming loans as a % of loans			3.52	%			1.32	%			.94	%
Nonperforming assets as a % of assets			3.27	%			1.57	%			1.08	%
Reserve for Loan Losses:
At period end		$	4,793			$	4,277			$	3,924
As a % average of loans			1.29	%			1.16	%			1.09	%
As a % of nonperforming loans			36.72	%			87.52	%			116.06	%
As a % of nonaccrual loans			38.46	%			87.52	%			116.06	%