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, 2007

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 incorporation or organization)		(I.R.S. Employer Identification No.)

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

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

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

Yes þ       No o

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

Large Accelerated Filer o            Accelerated Filer o            Non-accelerated Filer þ

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

Yes o       No þ

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

 

 

MACKINAC FINANCIAL CORPORATION

INDEX

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

MACKINAC FINANCIAL CORPORATION

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)

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

See accompanying notes to condensed consolidated financial statements.

MACKINAC FINANCIAL CORPORATION

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

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

See accompanying notes to condensed consolidated financial statements.

MACKINAC FINANCIAL CORPORATION

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

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

See accompanying notes to condensed consolidated financial statements.

MACKINAC FINANCIAL CORPORATION

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

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

See accompanying notes to condensed consolidated financial statements.

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
		Basis of Presentation
		The unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the “Corporation”) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. The unaudited consolidated financial statements and footnotes thereto should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006.
		The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates.
		In order to properly reflect some categories of other income and other expenses, reclassifications of expense and income items have been made to prior period numbers. The “net” other income and other expenses were not changed due to these classifications.
		Allowance for Loan Losses
		The allowance for loan losses includes specific allowances related to commercial loans, which have been judged to be impaired. A loan is impaired when, based on current information, it is probable that the Corporation will not collect all amounts due in accordance with the contractual terms of the loan agreement. These specific allowances are based on discounted cash flows of expected future payments using the loan’s initial effective interest rate or the fair value of the collateral if the loan is collateral dependent.
		The Corporation continues to maintain a general allowance for loan losses for loans not considered impaired. The allowance for loan losses is maintained at a level which management believes is adequate to provide for possible loan losses. Management periodically evaluates the adequacy of the allowance using the Corporation’s past loan loss experience, known and inherent risks in the portfolio, composition of the portfolio, current economic conditions, and other factors. The allowance does not include the effects of expected losses related to future events or future changes in economic conditions. This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require additions to the allowance for loan losses based on their judgments of collectibility.
		In management’s opinion, the allowance for loan losses is adequate to cover probable losses relating to specifically identified loans, as well as probable losses inherent in the balance of the loan portfolio as of the balance sheet date.
		Stock Option Plans
		The Corporation sponsors three stock option plans. One plan was approved in 2000 and applies to officers, employees, and nonemployee directors. This plan was amended as a part of the December 2004 stock offering and recapitalization. The amendment, approved by shareholders, increased the shares available under this plan by 428,587 shares from the original 25,000 (adjusted for the 1:20 reverse stock split), to a total authorized share balance of 453,587. The other two plans, one for officers and employees and the other for nonemployee

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

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

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

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

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

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

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

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

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

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

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

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

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

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

		In the first half of 2007, net charge off activity was minimal at $86,000, or .03% of average loans outstanding compared to net charge-offs of $93,000, or .04% of average loans, in the first half of 2006. In the first half of 2006, the Corporation reduced the allowance for loan losses by recording a negative provision amounting to $600,000. This reduction in the reserve was made in recognition of the improved credit quality existent in the loan portfolio and is discussed in more detail under “Management’s Discussion and Analysis.”
		LOANS – Impaired loans
		Nonperforming loans are those which are contractually past due 90 days or more as to interest or principal payments, on nonaccrual status, or loans, the terms of which have been renegotiated to provide a reduction or deferral on interest or principal. The interest income recorded and that which would have been recorded had nonaccrual and renegotiated loans been current or not troubled was not material to the consolidated financial statements for the six months ended June 30, 2007 and 2006.

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

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

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

		The average investment in impaired loans was approximately $4.113 million for the six-months ended June 30, 2007, $1.192 million for the year ended December 31, 2006, and $.163 million for the six months ended June 30, 2006, respectively.
		LOANS – Related parties
		The Bank, in the ordinary course of business, grants loans to the Corporation’s executive officers and directors, including their families and firms in which they are principal owners.
		Activity in such loans is summarized below (dollars in thousands):

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

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

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

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

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

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

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

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

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

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

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

8.		INCOME TAXES
		A valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred tax asset will not be realized. As of June 30, the Corporation had a net operating loss and tax credit carryforwards for tax purposes of approximately $36.9 million, and $2.1 million, respectively. The deferred tax benefits related to the net operating loss and tax credit carryforwards will, at a minimum, be utilized to offset future taxable expense. In the first half of 2007 and 2006, the Corporation reversed a portion of the valuation allowance pertaining to the NOL carryforward to offset current federal tax, $.450 million and $.075 million, respectively. The Corporation will record future benefits from these carryforwards at such time as it becomes “more likely than not” that they will be utilized prior to expiration. Please refer to further discussion on income taxes contained in “Management’s Discussion and Analysis.” This net operating loss carryforward expires twenty years from the date that it originated. A portion of the NOL, approximately $22 million, and all of the credit carryforwards are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue Code. The annual limitation is $1.4 million for the NOL and the equivalent value of tax credits, which is approximately $.477 million. These limitations for use were established in conjunction with the recapitalization of the Corporation in December, 2004.
9.		COMMITMENTS, CONTINGENCIES AND CREDIT RISK
		Financial Instruments With Off-Balance-Sheet Risk
		The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

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

9.		COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued)
		The Corporation’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. These commitments are as follows (dollars in thousands):

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

		Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies but may include accounts receivable; inventory; property, plant, and equipment; and income-producing commercial properties.
		Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The commitments are structured to allow for 100% collateralization on all standby letters of credit.
		Credit card commitments are commitments on credit cards issued by the Corporation’s subsidiary and serviced by other companies. These commitments are unsecured.
		Contingencies
		In the normal course of business, the Corporation is involved in various legal proceedings. For expanded discussion on the Corporation’s legal proceedings, see Part II, Item 1, “Legal Proceedings” in this report.
		Concentration of Credit Risk
		The Bank grants commercial, residential, agricultural, and consumer loans throughout Michigan. The Bank’s most prominent concentration in the loan portfolio relates to commercial real estate loans. This concentration at June 30, 2007 represents $41.7 million, or 17.5%, compared to $35.5 million, or 17.7%, of the commercial loan portfolio on June 30, 2006. The remainder of the commercial loan portfolio is diversified in such categories as hospitality and tourism, real estate agents and managers, new car dealers, gaming, petroleum, forestry, agriculture and construction. Due to the diversity of the Bank’s locations, the ability of debtors of residential and consumer loans to honor their obligations is not tied to any particular economic sector.

MACKINAC FINANCIAL CORPORATION

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

FORWARD-LOOKING STATEMENTS

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

	•		The highly regulated environment in which the Corporation operates could adversely affect its ability to carry out its strategic plan due to restrictions on new products, funding opportunities or new market entrances;
	•		General economic conditions, either nationally or in the state(s) in which the Corporation does business;
	•		Legislation or regulatory changes which affect the business in which the Corporation is engaged;
	•		Changes in the interest rate environment which increase or decrease interest rate margins;
	•		Changes in securities markets with respect to the market value of financial assets and the level of volatility in certain markets such as foreign exchange;
	•		Significant increases in competition in the banking and financial services industry resulting from industry consolidation, regulatory changes and other factors, as well as action taken by particular competitors;
	•		The ability of borrowers to repay loans;
	•		The effects on liquidity of unusual decreases in deposits;
	•		Changes in consumer spending, borrowing, and saving habits;
	•		Technological changes;
	•		Acquisitions and unanticipated occurrences which delay or reduce the expected benefits of acquisitions;
	•		Difficulties in hiring and retaining qualified management and banking personnel;
	•		The Corporation’s ability to increase market share and control expenses;
	•		The effect of compliance with legislation or regulatory changes;
	•		The effect of changes in accounting policies and practices;
	•		The costs and effects of existing and future litigation and of adverse outcomes in such litigation.

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

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

The following discussion will cover results of operations, asset quality, financial position, liquidity, interest rate sensitivity, and capital resources for the periods indicated. The information included in this discussion is intended to assist readers in their analysis of, and should be read in conjunction with, the consolidated financial statements and related notes and other supplemental information presented elsewhere in this report. This discussion should be read in conjunction with the consolidated financial statements and footnotes contained in the Corporation’s Annual Report and Form 10-K for the year-ended December 31, 2006. Throughout this discussion, the term “Bank” refers to mBank, formerly known as North Country Bank and Trust, the principal banking subsidiary of the Corporation.

FINANCIAL OVERVIEW

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

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

FINANCIAL CONDITION

Cash and Cash Equivalents

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

Investment Securities

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

Loans

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

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

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

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

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

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

Management recognizes the additional risk presented by the concentration in certain segments of the portfolio. On a historical basis, the Corporation’s highest concentration of credit risk was the hospitality and tourism industry. Management does not consider the current loan concentrations in hospitality and gaming to be problematic, and has no intention of further reducing loans to this industry segment. Management does not believe that its current portfolio composition has increased exposure related to any specific industry concentration as of June 30, 2007. The current concentration of real estate related loans represents a broad customer base composed of a high percentage of owner occupied developments.

Credit Quality

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

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

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

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

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

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