Edgar Filing: MACKINAC FINANCIAL CORP /MI/

e10vq

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, 2010


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

For the transition period from <> to <>

Commission file number: 0-20167

MACKINAC FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


MICHIGAN		38-2062816
(State or other jurisdiction of 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 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 (§232.405 of this chapter) 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, 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 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 June 30, 2010, there were outstanding 3,419,736 shares of the registrant’s common stock, no par value.

MACKINAC FINANCIAL CORPORATION

INDEX


	Page No.
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets - June 30, 2010 (Unaudited), December 31, 2009 and June 30, 2009 (Unaudited)		1

Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2010 (Unaudited) and June 30, 2009 (Unaudited)		2

Condensed Consolidated Statements of Changes in Shareholders’ Equity — Three and Six Months Ended June 30, 2010 (Unaudited) and June 30, 2009 (Unaudited)		3

Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2010 (Unaudited) and June 30, 2009 (Unaudited)		4

Notes to Condensed Consolidated Financial Statements (Unaudited)		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

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		34

SIGNATURES		35
EX-31.1
EX-31.2
EX-32.1
EX-32.2

MACKINAC FINANCIAL CORPORATION

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)


	June 30,			December 31,			June 30,
	2010			2009			2009
	(Unaudited)						(Unaudited)
ASSETS

Cash and due from banks	$	39,165		$	18,433		$	12,189
Federal funds sold		12,000			27,000			—

Cash and cash equivalents		51,165			45,433			12,189

Interest-bearing deposits in other financial institutions		678			678			618
Securities available for sale		34,942			46,513			95,620
Federal Home Loan Bank stock		3,794			3,794			3,794

Loans:
Commercial		302,228			305,670			296,392
Mortgage		78,428			74,350			71,777
Consumer		4,183			4,290			3,835

Total Loans		384,839			384,310			372,004
Allowance for loan losses		(6,371	)		(5,225	)		(4,119	)

Net loans		378,468			379,085			367,885

Premises and equipment		10,085			10,165			11,064
Other real estate held for sale		5,676			5,804			4,950
Other assets		15,966			23,905			10,184


TOTAL ASSETS	$	500,774		$	515,377		$	506,304


LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest bearing deposits	$	41,434		$	35,878		$	33,368
NOW, money market, checking		118,909			95,790			75,974
Savings		20,110			18,207			21,411
CDs<$100,000		90,573			59,953			72,139
CDs>$100,000		23,652			36,385			25,455
Brokered		111,106			175,176			184,805

Total deposits		405,784			421,389			413,152

Borrowings:
Federal Home Loan Bank		35,000			35,000			35,000
Other		1,140			1,140			1,210

Total borrowings		36,140			36,140			36,210
Other liabilities		2,619			2,549			3,003

Total liabilities		444,543			460,078			452,365

Shareholders’ equity:
Preferred stock — No par value:
Authorized 500,000 shares, 11,000 shares issued and outstanding		10,610			10,514			10,418
Common stock and additional paid in capital — No par value
Authorized - 18,000,000 shares
Issued and outstanding — 3,419,736 shares		43,509			43,493			43,468
Retained earnings (accumulated deficit)		1,236			199			(1,158	)
Accumulated other comprehensive income		876			1,093			1,211


Total shareholders’ equity		56,231			55,299			53,939


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	500,774		$	515,377		$	506,304

See accompanying notes to condensed consolidated financial statements.

MACKINAC FINANCIAL CORPORATION

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


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010			2009		2010			2009
	(Unaudited)					(Unaudited)
INTEREST INCOME:
Interest and fees on loans:
Taxable	$	5,227		$	5,104	$	10,418		$	10,106
Tax-exempt		47			84		99			174
Interest on securities:
Taxable		356			673		753			1,132
Tax-exempt		7			3		14			4
Other interest income		37			14		77			16

Total interest income		5,674			5,878		11,361			11,432


INTEREST EXPENSE:
Deposits		1,439			1,566		2,896			3,344
Borrowings		212			261		420			542

Total interest expense		1,651			1,827		3,316			3,886


Net interest income		4,023			4,051		8,045			7,546
Provision for loan losses		2,800			150		3,700			700

Net interest income after provision for loan losses		1,223			3,901		4,345			6,846


OTHER INCOME:
Service fees		252			271		474			514
Net security gains		—			—		215			—
Net gains on sale of loans		309			84		625			142
Other		32			84		86			174

Total other income		593			439		1,400			830


OTHER EXPENSE:
Salaries and employee benefits		1,781			1,561		3,501			3,158
Occupancy		345			355		690			733
Furniture and equipment		197			222		391			411
Data processing		205			224		394			444
Professional service fees		161			144		334			297
Loan and deposit		218			172		466			308
Writedown of other real estate owned		1,800			—		1,947			—
FDIC insurance assessment		221			340		443			465
Telephone		45			46		92			89
Advertising		72			80		144			158
Other		285			326		557			646

Total other expense		5,330			3,470		8,959			6,709


Income (loss) before provision for income taxes		(3,514	)		870		(3,214	)		967
Provision for (benefit of) income taxes		(1,212	)		271		(4,623	)		278

NET INCOME (LOSS)		(2,302	)		599		1,409			689


Preferred dividend and accretion of discount		186			138		371			138


NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS	$	(2,488	)	$	461	$	1,038		$	551


INCOME (LOSS) PER COMMON SHARE:
Basic	$	(0.73	)	$	.13	$	.30		$	.16

Diluted	$	(0.73	)	$	.13	$	.30		$	.16

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,
	2010			2009			2010			2009
Balance, beginning of period	$	58,722		$	41,864		$	55,299		$	41,551

Net income (loss) for period		(2,302	)		599			1,409			689
Net unrealized gain (loss) on securities available for sale		(58	)		561			(217	)		766

Total comprehensive income (loss)		(2,360	)		1,160			1,192			1,455
Dividend on preferred stock and accretion of discount		(186	)		(138	)		(371	)		(138	)
Stock option compensation		7			17			15			35
Issuance of preferred stock		—			10,382			—			10,382
Issuance of common stock warrants		—			618			—			618
Accretion of preferred stock discount		48			36			96			36

Balance, end of period	$	56,231		$	53,939		$	56,231		$	53,939

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,
	2010			2009
Cash Flows From Operating Activities:
Net income	$	1,409		$	689
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		802			1,000
Provision for (benefit of) deferred taxes		(4,623	)		278
Provision for loan losses		3,700			700
(Gain) on sales/calls of securities available for sale		(215	)		—
Loss on sales of premises, equipment, and other real estate		47			4
Writedown of other real estate		1,947			—
Stock option compensation		15			35
Change in other assets		12,673			(822	)
Change in other liabilities		70			430

Net cash provided by operating activities		15,825			2,314


Cash Flows From Investing Activities:
Net (increase) decrease in loans		(6,086	)		(5,383	)
Net (increase) decrease in interest-bearing deposits in other financial institutions		—			(36	)
Purchase of securities available for sale		—			(50,216	)
Proceeds from sales, maturities or calls of securities available for sale		11,277			2,856
Capital expenditures		(445	)		(463	)
Proceeds from sale of premises, equipment, and other real estate		1,137			88

Net cash provided by (used in) investing activities		5,883			(53,154	)


Cash Flows From Financing Activities:
Net increase (decrease) in deposits		(15,605	)		42,055
Issuance of Preferred Stock Series A Capital		—			11,000
Dividend on preferred stock and accretion of discount		(371	)		(138	)

Net cash provided by (used in) financing activities		(15,976	)		52,917


Net increase in cash and cash equivalents		5,732			2,077
Cash and cash equivalents at beginning of period		45,433			10,112


Cash and cash equivalents at end of period	$	51,165		$	12,189


Supplemental Cash Flow Information:

Cash paid during the year for:
Interest	$	3,319		$	3,989
Income taxes		25			60

Noncash Investing and Financing Activities:
Transfers of foreclosures from loans to other real estate held for sale		3,003			3,276

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, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. 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, 2009.

		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.

		The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, and the valuation of intangible assets, deferred tax assets and mortgage servicing rights.

		*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 also has 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 probable 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.

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

1.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

		*Stock Option Plans*

		The Corporation sponsors three stock option plans. One plan was approved during 2000 and applies to officers, employees, and nonemployee directors. This plan was amended as a part of the December 2004 stock offering and recapitalization. The amendment, approved by shareholders, increased the shares available under this plan by 428,587 shares from the original 25,000 (adjusted for the 1:20 reverse stock split), to a total authorized share balance of 453,587. The other two plans, one for officers and employees and the other for nonemployee directors, were approved in 1997. A total of 30,000 shares (adjusted for the 1:20 reverse stock split), were made available for grant under these plans. All three option plans have expired, and therefore no new shares may be granted. 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.

2.		RECENT ACCOUNTING PRONOUNCEMENTS

		In June 2009, the FASB issued Statements No. 166, Accounting for Transfers of Financial Assets, (ASC 860-10) and No. 167, Amendments to FASB Interpretation No. 46(R), (ASC 810-10). ASC 860-10 will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. The adoption of this ASC did not have an impact.

		ASC 810-10 replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with a qualitative approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity (VIE) that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. ASC 860-10 and ASC 810-10 was effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year entity. The adoption of this ASC did not have an impact at the date of adoption.

		In July 2010, FASB issued a statement which expands disclosures about credit quality of financing receivables and allowance for credit losses. The standard will require the Corporation to expand disclosures about the credit quality of our loans and the related reserves against them. The extra disclosures will include details on our past due loans, credit quality indicators and modifications of loans. The Corporation will adopt the standard beginning with our December 31, 2010 financial statements.

3.		EARNINGS PER SHARE

		Earnings per share are based upon the weighted average number of shares outstanding. Additional shares issued as a result of option exercises would not be dilutive in both the three and six month period. The issuance of shares as a result of the common stock warrants issued under the TARP Capital Purchase Program would not have a dilutive effect on earnings for the three month period in 2010, since they would decrease the loss per share. The common stock warrants would be slightly dilutive for the six month period ended June 30, 2010. Please refer to the table below for the dilutive impact.

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

3.		EARNINGS PER SHARE (Continued)

		The following shows the computation of basic and diluted earnings per share for the three and six months ended June 30, 2010 and 2009 (dollars in thousands, except per share data):


	Three Months Ended June 30,					Six Months Ended June 30,
	2010			2009		2010		2009
Net income (loss)	$	(2,302	)	$	599	$	1,409	$	689
Preferred stock dividends		186			138		371		138

Net income (loss) available to common shareholders	$	(2,488	)	$	461	$	1,038	$	551


Weighted average shares outstanding		3,419,736			3,419,736		3,419,736		3,419,736
Effect of dilutive stock options and common stock warrants outstanding		—			—		64,425		—
Diluted weighted average shares outstanding		3,419,736			3,419,736		3,484,161		3,419,736
Earnings per common share:
Basic	$	(0.73	)	$	.13	$	.30	$	.16
Diluted	$	(0.73	)	$	.13	$	.30	$	.16

4.		INVESTMENT SECURITIES

		The amortized cost and estimated fair value of investment securities available for sale as of June 30, 2010, December 31, 2009 and June 30, 2009 are as follows (dollars in thousands):


			Gross			Gross
	Amortized		Unrealized			Unrealized			Estimated
	Cost		Gains			Losses			Fair Value
*June 30, 2010*

US Agencies — MBS	$	32,416	$	1,232		$	—		$	33,648
Obligations of states and political subdivisions		1,199		95			—			1,294


Total securities available for sale	$	33,615	$	1,327		$	—		$	34,942


*December 31, 2009*

US Agencies — MBS	$	43,651	$	1,642		$	(55	)	$	45,238
Obligations of states and political subdivisions		1,207		68			—			1,275


Total securities available for sale	$	44,858	$	1,710		$	(55	)	$	46,513


*June 30, 2009*

US Agencies — MBS	$	74,390	$	1,596		$	(198	)	$	75,788
Asset backed — government guaranteed		13,936		349			—			14,285
Obligations of states and political subdivisions		1,259		(21	)		49			1,287
Corporate bonds		4,201		59			—			4,260


Total securities available for sale	$	93,786	$	1,983		$	(149	)	$	95,620

		When gross unrealized losses exist within the portfolio, the Corporation considers them temporary in nature and related to interest rate fluctuations. The Corporation has both the ability and the intent to hold the investment securities until their respective maturities and therefore does not anticipate the realization of the temporary losses.

		The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $15.497 million and $16.459 million, respectively, at June 30, 2010.

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

5.		LOANS

		The composition of loans at June 30, 2010, December 31, 2009 and June 30, 2009 is as follows (dollars in thousands):


	June 30,		December 31,		June 30,
	2010		2009		2009
Commercial real estate	$	208,596	$	208,895	$	196,895
Commercial, financial, and agricultural		66,413		72,184		73,372
One to four family residential real estate		71,613		67,232		65,564
Construction:
Commercial		27,219		24,591		26,125
Consumer		6,815		7,118		6,213
Consumer		4,183		4,290		3,835


Total loans	$	384,839	$	384,310	$	372,004

LOANS — Allowance for loan losses

An analysis of the allowance for loan losses for the six months ended June 30, 2010, the year ended December 31, 2009, and the six months ended June 30, 2009 is as follows (dollars in thousands):


	June 30,			December 31,			June 30,
	2010			2009			2009
Balance at beginning of period	$	5,225		$	4,277		$	4,277
Recoveries on loans		33			66			45
Loans charged off		(2,587	)		(2,818	)		(903	)
Provision for loan losses		3,700			3,700			700


Balance at end of period	$	6,371		$	5,225		$	4,119

		In the first half of 2010, net charge off activity was $2.554 million, or .67% of average loans outstanding compared to net charge offs of $.858 million, or .23% of average loans, in the first half of 2009. In the first half of 2010, the Corporation recorded a provision for loan loss in the amount of $3.700 million compared to $.700 million in the first half of 2009, 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.

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

5.		LOANS (Continued)

		Information regarding impaired loans as of June 30, 2010, December 31, 2009 and June 30, 2009 is as follows (dollars in thousands):


							Valuation Reserve
	June 30,		December 31,		June 30,		June 30,		December 31,		June 30,
	2010		2009		2009		2010		2009		2009
Balances, at period end
Impaired loans with specific valuation reserve	$	4,841	$	11,348	$	7,708	$	2,023	$	2,705	$	1,556
Impaired loans with no specific valuation reserve		6,202		3,889		2,167		—		—		—


Total impaired loans	$	11,043	$	15,237	$	9,875	$	2,023	$	2,705	$	1,556


Impaired loans on nonaccrual basis	$	10,174	$	14,368	$	9,277	$	2,023	$	2,705	$	1,556
Impaired loans on accrual basis		869		869		598		—		—		—


Total impaired loans	$	11,043	$	15,237	$	9,875	$	2,023	$	2,705	$	1,556


	Six Months		Twelve Months		Six Months
	Ended		Ended		Ended
	June 30,		December 31,		June 30,
	2010		2009		2009
Average investment in impaired loans	$	11,717	$	10,449	$	9,452
Interest income recognized during period		7		40		11
Interest income that would have been recognized on an accrual basis		328		700		338
Cash-basis interest income recognized		—		—		11

		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):


	June 30,			December 31,			June 30,
	2010			2009			2009
Loans outstanding beginning of period	$	8,552		$	6,516		$	6,516
New loans		1,267			2,160			900
Net activity on revolving lines of credit		2,068			1,189			398
Repayment		(2,267	)		(1,610	)		(205	)
Change in related party interest		—			297			—


Loans outstanding end of period	$	9,620		$	8,552		$	7,609

There were no loans to related parties classified substandard at June 30, 2010, December 31, 2009 or June 30, 2009, respectively. In addition to the outstanding balances above, there were unused commitments of $.405 million to related parties at June 30, 2010.

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

6.		BORROWINGS

		Borrowings consist of the following at June 30, 2010, December 31, 2009 and June 30, 2009 (dollars in thousands):


	June 30,		December 31,		June 30,
	2010		2009		2009
Federal Home Loan Bank fixed rate advances at rates ranging from 4.98% to 5.16% maturing in December 2010	$	15,000	$	15,000	$	15,000
Federal Home Loan Bank variable rate advances at rates ranging from .314% to .367% maturing in January and February 2011		20,000		20,000		20,000
Farmers Home Administration, fixed-rate note payable, maturing August 24, 2024 interest payable at 1%		1,140		1,140		1,210


	$	36,140	$	36,140	$	36,210

		The Federal Home Loan Bank borrowings are collateralized at June 30, 2010 by the following: a collateral agreement on the Corporation’s one to four family residential real estate loans with a book value of approximately $30.551 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $14.997 million and $15.742 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, 2010.

		The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $.263 million 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 $.991 million, and guaranteed by the Corporation.

7.		STOCK OPTION PLANS

		A summary of stock option transactions for the six months ended June 30, 2010 and 2009, and the year ended December 31, 2009, is as follows:


	June 30,			December 31,			June 30,
	2010			2009			2009
Outstanding shares at beginning of year		411,057			446,237			446,237
Granted during the period		—			—			—
Expired during the period		(1,485	)		(35,180	)		(35,180	)


Outstanding shares at end of period		409,572			411,057			411,057


Weighted average exercise price per share at end of period	$	11.15		$	12.03		$	12.03


Shares available for grant at end of period		—			24,780			24,780

There were no options granted in the first six months of 2010 and 2009.

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, 2010:



Exercise	Number				Remaining		Weighted Average
Price Range	Outstanding		Exercisable		Contractual Life-Years		Exercise Price
$9.16		12,500		5,000		5.5	$	9.16
$9.75		257,152		120,861		4.5		9.75
$10.65		57,500		11,500		6.5		10.65
$11.50		40,000		8,000		5.3		11.50
$12.00		40,000		8,000		5.0		12.00
$156.00 - $185.00		2,420		2,420		1.1		161.99


		409,572		155,781		4.9	$	11.15

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. During the first quarter of 2010, the Corporation evaluated the valuation allowance against the net deferred tax asset which would require future taxable income in order to be utilized and recorded a $3.500 million deferred tax benefit related to the utilization of the NOL carryforward. The Corporation, as of June 30, 2010 had a net operating loss and tax credit carryforwards for tax purposes of approximately $28.0 million, and $2.1 million, respectively. As of June 30, 2010 the Corporation had total net deferred tax assets of $10.0 million, with a related valuation allowance of approximately $3.0 million.

		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 $18.0 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.

		Subsequent to June 30, 2010, in deference to the loss recorded in the 2010 second quarter, an analysis of the deferred tax asset was performed in order to determine if there was any impairment relative to ultimate utilization during the carryforward period. As a part of this analysis, management reviewed projected levels of taxable income and assessed the probability of attaining these projected levels. Based upon this analysis, it was determined that there was no impairment of this deferred tax asset.

9.		FAIR VALUE MEASUREMENTS

		In June 2009, the FASB issued authoritative guidance to improve the information a reporting entity provides in its financial statements about transfers of financial assets, including the effect of a transfer on an entity’s financial position, financial performance and cash flows and the transferor’s continuing involvement in the transferred assets. The guidance eliminates the concept of a qualifying special-purpose entity and changes the guidance for evaluation for consolidation. This guidance became effective January 1, 2010 and did not have significant impact on the Corporation’s financial position, results of operations or cash flows.

		In 2010, the FASB issued authoritative guidance expanding disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases,

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

9. FAIR VALUE MEASUREMENTS (Continued)

sales, issuances and settlements. The new guidance further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) disclosures should be provided about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required beginning January 1, 2011. The remaining disclosure requirements and clarifications made by the new guidance became effective on January 1, 2010.

The following table presents information for financial instruments at June 30, 2010 and December 31, 2009 (dollars in thousands):


	June 30, 2010				December 31, 2009
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	51,165	$	51,165	$	45,433	$	45,433
Interest bearing deposits		678		678		678		678
Securities available for sale		34,942		34,942		46,513		46,513
Federal Home Loan Bank stock		3,794		3,794		3,794		3,794
Net loans		378,468		378,883		379,085		382,352
Accrued interest receivable		1,343		1,343		1,413		1,413


Total financial assets	$	470,390	$	470,805	$	476,916	$	480,183


Financial liabilities:
Deposits	$	405,784	$	405,941	$	421,389	$	421,124
Borrowings		36,140		36,291		36,140		36,447
Accrued interest payable		322		322		325		325


Total financial liabilities	$	442,246	$	442,554	$	457,854	$	457,896

Fair value estimates, methods, and assumptions are set forth below for the Corporation’s financial instruments:

Cash, cash equivalents, and interest-bearing deposits - The carrying values approximate the fair values for these assets.

Securities - Fair values are based on quoted market prices where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Federal Home Loan Bank stock - Federal Home Loan Bank stock is carried at cost, which is its redeemable value and approximates its fair value, since the market for this stock is limited.

Loans - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, residential mortgage, and other consumer. The fair value of loans is calculated by discounting scheduled cash flows using discount rates reflecting the credit and interest rate risk inherent in the loan.

The methodology in determining fair value of nonaccrual loans is to average them into the blended interest rate at 0% interest. This has the effect of decreasing the carrying amount below the risk-free rate amount and, therefore, discounts the estimated fair value.

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

9. FAIR VALUE MEASUREMENTS (Continued)

Impaired loans are measured at the estimated fair value of the expected future cash flows at the loan’s effective interest rate or the fair value of the collateral for loans which are collateral dependent. Therefore, the carrying values of impaired loans approximate the estimated fair values for these assets.

Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits and savings, is equal to the amount payable on demand at the reporting date. The fair value of time deposits is based on the discounted value of contractual cash flows applying interest rates currently being offered on similar time deposits.

		*Borrowings* - Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. The fair value of borrowed funds due on demand is the amount payable at the reporting date.

		*Accrued interest* - The carrying amount of accrued interest approximates fair value.

Off-balance-sheet instruments - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the counterparties. Since the differences in the current fees and those reflected to the off-balance-sheet instruments at year-end are immaterial, no amounts for fair value are presented.

Limitations - The authoritative accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

The authoritative accounting guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable outputs. The fair value hierarchy is as follows:

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 2 investments consist primarily of obligations of U.S. government

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

9. FAIR VALUE MEASUREMENTS (Continued)

sponsored enterprises and agencies, obligations of state and municipal subdivisions, corporate bonds and mortgage backed securities.

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.

The fair value of all investment securities at December 31, 2009 and June 30, 2010 were based on level 2 inputs. There are no other assets or liabilities measured on a recurring basis at fair value. For additional information regarding investment securities, please refer to “Note 4 — Investment Securities.”

The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31, 2009 or June 30, 2010.

The Corporation also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include held to maturity investments, other real estate and loans. The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

Assets Measured at Fair Value on a Nonrecurring Basis


			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Six Months Ended
(dollars in thousands)	June 30, 2010		(Level 1)		(Level 2)		(Level 3)		June 30, 2010		June 30, 2010
Assets

Impaired loans	$	7,959	$	—	$	—	$	7,959	$	894	$	980
Other real estate owned		5,676		—		—		5,676		1,845		1,994

									$	2,739	$	2,974

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2009


			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Year Ended
(dollars in thousands)	December 31, 2009		(Level 1)		(Level 2)		(Level 3)		December 31, 2009
Assets

Impaired loans	$	13,621	$	—	$	—	$	13,621	$	1,300
Other real estate owned		5,804		—		—		5,804		399


									$	1,699

The Corporation had no investments subject to fair value measurement on a nonrecurring basis.

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

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

9. FAIR VALUE MEASUREMENTS (Continued)

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. 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). For purposes of valuing other real estate owned, the Corporation relies upon third party appraisals and reduces this appraised value by anticipated liquidation costs.

10. SHAREHOLDERS’ EQUITY

Participation in the TARP Capital Purchase Program

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 million 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 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).

Amounts recorded for Preferred Stock and Warrant Common Stock were estimated based on an allocation of the total proceeds from the issuance on the relative fair values of both instruments. Fair value of the Preferred Stock was determined based on assumptions regarding the discount rate (market rate) on the Preferred Stock (estimated 12%). Fair value of the Warrant Common Stock is based on the value of the underlying Preferred Stock based on an estimate for a three year term. The allocation of the proceeds received resulted in the recording of a discount on the Preferred Stock and a premium on the Warrant Common Stock. The discount on the preferred will be accreted on an effective yield basis over a three-year term. The allocated carrying value of the Preferred Stock and Warrant Common Stock on the date of issuance (based on their relative fair values) was $10.382 million and $.618 million, respectively. Cumulative dividends on the Preferred Stock are payable at 5% annum for the first five years and at a rate of 9% per annum thereafter on the liquidation preference of $1,000 per share. The Company is prohibited from paying any dividend with respect to shares of common stock unless all accrued and unpaid dividends are paid in full on the Preferred Stock for all past dividend periods. The Preferred Stock is non-voting, other than class voting rights on matters that could adversely affect the Preferred Stock. The Preferred Stock may be redeemed at any time with regulatory approval. The Treasury may also transfer the Preferred Stock to a third party at any time. The preferred stock qualifies as Tier 1 Capital for regulatory purposes at the holding company.

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

10. SHAREHOLDERS’ EQUITY (Continued)

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.

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):


	June 30,		December 31,		June 30,
	2010		2009		2009
Commitments to extend credit:
Variable rate	$	22,702	$	24,839	$	31,337
Fixed rate		9,423		6,039		7,005
Standby letters of credit — Variable rate		1,470		1,279		1,742
Credit card commitments — Fixed rate		2,694		2,714		2,528


	$	36,289	$	34,871	$	42,612

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.

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

11. COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued)

Contingencies

In the normal course of business, the Corporation is involved in various legal proceedings. For expanded discussion on the Corporation’s legal proceedings, see Part II, Item 1, “Legal Proceedings” in this report.

Concentration of Credit Risk

The Bank grants commercial, residential, agricultural, and consumer loans throughout Michigan. The Bank’s most prominent concentration in the loan portfolio relates to commercial real estate loans to operators of nonresidential buildings. This concentration at June 30, 2010 represents $50.000 million, or 16.54%, compared to $44.087 million, or 14.87%, of the commercial loan portfolio on June 30, 2009. 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. Additional discussion regarding the concentration of credit risk is presented in the “Management’s Discussion and Analysis” section of this report.

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 level and volatility of interest rates which may negatively affect the Corporation’s interest margin;

	•		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;

	•		An increase in the Corporation’s FDIC insurance premiums, or the collection of special assessments by the FDIC.

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, 2009. Throughout this discussion, the term “Bank” refers to mBank, the principal banking subsidiary of the Corporation.

FINANCIAL OVERVIEW

The Corporation recorded a second quarter 2010 loss available to common shareholders of $2.488 million or $.73 per share compared to net income of $.461 million, or $.13 per share for the second quarter of 2009. Net income available to common shareholders for the first six months of 2010 totaled $1.038 million, or $.30 per share, compared to $.551 million, or $.16 per share, for the same period in 2009. Weighted average shares totaled 3,419,736 year to date and for the second quarter in 2010 and 2009.

The second quarter results include a provision for loan losses of $2.800 million and $1.800 of write-downs of OREO properties. Operating results for the six month period in 2010 include a $3.700 million loan loss provision, $1.947 million OREO write-downs, and a $3.500 million deferred tax benefit. The second quarter and six month periods of 2009 include the FDIC special assessment of $.215 million.

The loan loss provisions, along with the OREO write-downs, primarily reflect the continued deterioration of several large credit relationships in Southeast Michigan, two which emerged in the second quarter, along with others that have been nonperforming assets for some time. The OREO write-down includes a $1.4 million adjustment on a vacant parcel of land in Southeast Michigan which has decreased in value by more than 80% since the inception of the credit relationship early in 2006.

Total assets of the Corporation at June 30, 2010 were $500.774 million, down by $5.530 million, or 1.10% from the $506.304 million in total assets reported at June 30, 2009 and down by $14.603 million, or 2.83%, from total assets of $515.377 million at year-end 2009. Asset totals at June 30, 2010 reflect decreased balances of investment securities of approximately $11.571 million from December 31, 2009. The loan portfolio increased $.529 million in the first six months of 2010, from December 31, 2009 balances of $384.310 million. Deposits totaled $405.784 million at June 30, 2010, a decrease from the $421.389 million at December 31, 2009.

FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents increased $5.732 million in 2010. See further discussion of the change in cash and cash equivalents in the Liquidity section.

Investment Securities

Securities available for sale decreased $11.571 million, or 24.88%, from December 31, 2009 to June 30, 2010, with the balance on June 30, 2010, totaling $34.942 million. The Corporation sold $8.6 million of investments early in 2010 and recognized a gain of $.215 million. This sale was in conjunction with the Corporation’s strategy to reduce balance sheet leverage and reduce wholesale deposits. Investment securities are utilized in an effort to manage interest rate risk and liquidity. As of June 30, 2010, investment securities with an estimated fair value of $16.459 million were pledged.

Loans

Through the first half of 2010, loan balances increased by $.529 million, or 0.14%, from December 31, 2009 balances of $384.310 million. During the first six months of 2010, the Bank had total loan production of $35.964 million. This loan production, however, was significantly offset by normal principal runoff and amortization, $24.545 million, and large paydowns and refinancing, which totaled $15.995 million. Management continues to

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

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 a diligent 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.

Following is a summary of the loan portfolio at June 30, 2010, December 31, 2009 and June 30, 2009 (dollars in thousands):


	June 30,		Percent of			December 31,		Percent of			June 30,		Percent of
	2010		Total			2009		Total			2009		Total
Commercial real estate	$	208,596		54.20	%	$	208,895		54.36	%	$	196,895		52.93	%
Commercial, financial, and agricultural		66,413		17.26			72,184		18.78			73,372		19.72
One to four family residential real estate		71,613		18.61			67,232		17.49			65,564		17.63
Consumer		4,183		1.09			4,290		1.12			3,835		1.03
Construction:
Commercial		27,219		7.07			24,591		6.40			26,125		7.02
Consumer		6,815		1.77			7,118		1.85			6,213		1.67

Total loans	$	384,839		100.00	%	$	384,310		100.00	%	$	372,004		100.00	%

Following is a table showing the significant industry types in the commercial loan portfolio as of June 30, 2010, December 31, 2009 and June 30, 2009 (dollars in thousands):


	June 30, 2010								December 31, 2009								June 30, 2009
			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	$	50,000		16.54	%		88.92	%	$	48,689		15.93	%		88.05	%	$	44,087		14.87	%		81.74	%
Hospitality and tourism		43,883		14.52			78.04			45,315		14.82			81.95			35,033		11.82			64.95
Commercial construction		27,219		9.01			48.41			24,591		8.04			44.47			26,125		8.81			48.43
Real estate agents and managers		20,727		6.86			36.86			24,242		7.93			43.84			24,614		8.30			45.63
Other		160,399		53.07			285.25			162,833		53.28			294.46			166,533		56.20			308.74


Total Commercial Loans	$	302,228		100.00	%				$	305,670		100.00	%				$	296,392		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 tourism 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, 2010. The current concentration of real estate related loans represents a broad customer base composed of a high percentage of owner occupied developments.

Our residential real estate portfolio predominantly includes one-to-four family adjustable rate mortgages that have repricing terms generally from one to three years, construction loans to individuals and bridge financing loans for qualifying customers. As of June 30, 2010, our residential loan portfolio totaled $78.428 million, or 20.38% of our total outstanding loans.

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, 2010 amounted to $2.554 million, or .67% of average loans outstanding, compared to $.858 million, .23% of average loans outstanding, for the same period in 2009. The current reserve balance is representative of the relevant risk

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

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 high level of charge-offs incurred during the 2010 second quarter primarily relate to the deterioration of several credit relationships in Southeast Michigan. These relationships, some of which were unsecured, have been on the Corporation’s watchlist of problem credits for sometime; however, the Corporation has exhausted efforts for principal recovery and therefore recorded the charge-off.

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


	June 30,			December 31,			June 30,
	2010			2009			2009
Nonperforming Assets:
Nonaccrual Loans	$	10,174		$	14,368		$	9,283
Loans past due 90 days or more		—			—			—
Restructured loans		869			869			592

Total nonperforming loans		11,043			15,237			9,875
Other real estate owned		5,676			5,804			4,950

Total nonperforming assets	$	16,719		$	21,041		$	14,825

Nonperforming loans as a % of loans		2.87	%		3.96	%		2.65	%

Nonperforming assets as a % of assets		3.34	%		4.08	%		2.93	%

Reserve for Loan Losses:
At period end	$	6,371		$	5,225		$	4,119

As a % of loans		1.66	%		1.36	%		1.11	%

As a % of nonperforming loans		57.69	%		34.29	%		41.71	%

As a % of nonaccrual loans		62.62	%		36.37	%		44.37	%

Texas ratio*		26.71	%		34.77	%		25.54	%


*		*calculated by taking total nonperforming assets divided by total equity plus reserve for loan losses*

The following ratios provide additional information relative to the Corporation’s credit quality:


	At Period End
	June 30, 2010		December 31, 2009		June 30, 2009
Total loans, at period end	$	384,839	$	384,310	$	372,004

Average loans for the year		383,398		374,796		371,278


	For the Period Ended
	Six Months Ended			Twelve Months Ended			Six Months Ended
	June 30, 2010			December 31, 2009			June 30, 2009
Net charge-offs during the period	$	2,554		$	2,752		$	858

Net charge-offs to average loans		.67	%		.73	%		.23	%

Net charge-offs to beginning allowance balance		48.88	%		64.34	%		20.06	%

Management continues to address market issues impacting its loan customer base. In conjunction with the Corporation’s senior lending staff and the bank regulatory examinations, management reviews the Corporation’s loans, related collateral evaluations, and the overall lending process. The Corporation also utilizes a loan review consultant to perform a review of the loan portfolio. The opinion of this consultant upon completion of the independent review in 2009 provided findings similar to management on the overall adequacy of the reserve. The Corporation has engaged this same consultant for loan review during 2010.

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

Following is the allocation for loan losses as of June 30, 2010, December 31, 2009, and June 30, 2009 (dollars in thousands):


	June 30,		December 31,		June 30,
	2010		2009		2009
Commercial, financial and agricultural loans	$	5,616	$	4,805	$	3,769
One to four family residential real estate loans		100		23		5
Consumer loans		16		13		5
Unallocated and general reserves		639		384		340


Totals	$	6,371	$	5,225	$	4,119

As of June 30, 2010, the allowance for loan losses represented 1.66% of total loans. At June 30, 2010, the allowance included specific reserves in the amount of $2.023 million, as compared to $2.705 million at December 31, 2009 and $1.556 million at June 30, 2009. In management’s opinion, the allowance for loan losses is adequate to cover probable losses related to specifically identified loans, as well as probable losses inherent in the balance of the loan portfolio.

As part of the process of resolving problem credits, the Corporation may acquire ownership of collateral which secured such credits. The Corporation carries this collateral in other real estate on the balance sheet.

The following table represents the activity in other real estate for the periods indicated (dollars in thousands):


	Six Months Ended			Year Ended			Six Months Ended
	June 30, 2010			December 31, 2009			June 30, 2009
Balance at beginning of period	$	5,804		$	2,189		$	2,189
Other real estate transferred from loans due to foreclosure		3,003			4,879			3,276
Reclassification of redemption OREO		—			(475	)		(475	)
Other real estate sold/written down		(3,084	)		(789	)		(37	)
Loss on sale of other real estate		(47	)		—			(3	)


Balance at end of period	$	5,676		$	5,804		$	4,950

During the first six months of 2010, the Corporation received real estate in lieu of loan payments of $3.003 million. Other real estate is initially valued at the lower of cost or the fair value less selling costs. After the initial receipt, management periodically re-evaluates the recorded balances and any additional reductions in the fair value result in a write-down of other real estate.

Deposits

The Corporation had a decrease in deposits in the first six months of 2010. Total deposits decreased by $15.605 million, or 3.70%, in the first six months of 2010. The decrease in deposits for the first six months of 2010 is composed of a decrease in noncore deposits of $76.803 million and an increase in core deposits of $61.198 million. In 2010, the Corporation continued to strategically emphasize the growth of core deposits. This strategic initiative was supported with an individual incentive plan, along with the introduction of several new deposit products and competitive deposit pricing. The core deposit balance increases are primarily in transactional account deposits, our lowest cost of funds.

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

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

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


	June 30,					December 31,					June 30,
	2010		% of Total			2009		% of Total			2009		% of Total
Non-interest-bearing	$	41,434		10.21	%	$	35,878		8.51	%	$	33,368		8.08	%
NOW, money market, checking		118,909		29.30			95,790		22.73			75,974		18.39
Savings		20,110		4.96			18,207		4.32			21,411		5.18
Certificates of Deposit <$100,000		90,573		22.32			59,953		14.23			72,139		17.46

Total core deposits		271,026		66.79			209,828		49.79			202,892		49.11

Certificates of Deposit >$100,000		23,652		5.83			36,385		8.63			25,455		6.16
Brokered CDs		111,106		27.38			175,176		41.57			184,805		44.73

Total non-core deposits		134,758		33.21			211,561		50.21			210,260		50.88


Total deposits	$	405,784		100.00	%	$	421,389		100.00	%	$	413,152		100.00	%

Borrowings

The Corporation historically used alternative funding sources to provide long-term, stable sources of funds. Current FHLB borrowings total $35.000 million with stated maturities ranging through February 2011. FHLB borrowings at quarter end include $20.000 million with adjustable rates that reprice quarterly based upon the three month LIBOR. The FHLB has the option to convert the remaining $15.000 million fixed-rate advances to adjustable rate advances on the original call date and quarterly thereafter. The Corporation also has a USDA Rural Development loan held by its wholly owned subsidiary, First Rural Relending that has a fixed interest rate of 1% and matures in August 2024.

Shareholders’ Equity

Total shareholders’ equity increased $.932 million from December 31, 2009 to June 30, 2010. Contributing to the increase in shareholders’ equity was net income of $1.038 million, contributed capital of $15,000 in recognition of stock option expense, a decrease in the market value of securities of $.217 million and the accretion of the discount on preferred stock of $96,000.

RESULTS OF OPERATIONS

Summary

The Corporation reported net income available to common shareholders of $1.038 million, or $0.30 per share, in the first half of 2010, compared to $.551 million, or $.16 per share for the first half of 2009. Operating results for the first half of 2010 included the recognition of a $3.500 million deferred tax benefit related to NOL carry-forwards. This deferred tax benefit was recognized in accordance with GAAP accounting which requires the benefit to be recognized when “it is more likely than not” that the NOL will be utilized within the carry-forward period.

In the first half of 2010 a provision for loan losses of $3.700 million was booked in comparison to a provision of $.700 million in the first half of 2009. The first six months of 2010 also includes the preferred dividend and accretion of discount of $.371 million.

Net Interest Income

Net interest income is the Corporation’s primary source of core earnings. Net interest income represents the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing obligations. The net interest income is impacted by economic and competitive factors that influence rates, loan demand, and the availability of funding.

Net interest margin amounted to $4.023 million, 3.56% of average earning assets, in the second quarter of 2010, compared to $4.051 million, 3.58% of average earning assets, in the second quarter of 2009. In the first six months of 2010, net interest margin increased to $8.045 million, 3.53% of average earning assets, compared to $7.546

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

million, 3.47% of average earning assets, for the same period in 2009. Margin improvement in 2010 was primarily due to a reduction in funding costs between periods as average interest rates on brokered deposits declined more than rates on earning assets.

The following tables present the amount of interest income from average interest-earning assets and the yields earned on those assets, as well as the interest expense on average interest-bearing obligations and the rates paid on those obligations. All average balances are daily average balances.


	Three Months Ended
																				2010-2009
	Average Balances									Average Rates						Interest				Income/									Rate/
	June 30,						Increase/			June 30,						June 30,				Expense			Volume			Rate			Volume
(dollars in thousands)	2010			2009			(Decrease)			2010			2009			2010		2009		Variance			Variance			Variance			Variance
Loans (1,2,3)	$	382,169		$	371,609		$	10,560			5.56	%		5.65	%	$	5,298	$	5,231	$	67		$	149		$	(79	)	$	(3	)
Taxable securities		35,291			76,092			(40,801	)		4.05			3.56			356		675		(319	)		(362	)		93			(50	)
Nontaxable securities (2)		845			1,939			(1,094	)		5.22			.41			11		2		9			(1	)		23			(13	)
Federal funds sold		30,308			—			30,308			.25			—			19		—		19			—			—			19
Other interest-earning assets		4,488			4,399			89			1.61			1.28			18		14		4			—			4			—

Total earning assets		453,101			454,039			(938	)		5.05			5.23			5,702		5,922		(220	)		(214	)		41			(47	)

Reserve for loan losses		(5,159	)		(4,847	)		(312	)
Cash and due from banks		22,096			17,708			4,388
Intangible assets		—			16			(16	)
Other assets		32,904			24,289			8,615

Total assets	$	502,942		$	491,205		$	11,737


NOW and money market deposits	$	97,069		$	69,098		$	27,971			1.06	%		.81	%	$	257	$	140	$	117		$	57		$	43		$	17
Interest checking		17,860			5,884			11,976			1.63			1.91			72		28		44			57			(4	)		(9	)
Savings deposits		20,070			21,363			(1,293	)		.60			.66			30		35		(5	)		(2	)		(3	)		—
CDs <$100,000		83,241			71,608			11,633			2.10			2.85			435		508		(73	)		83			(134	)		(22	)
CDs >$100,000		26,101			25,939			162			1.68			2.35			109		152		(43	)		1			(44	)		—
Brokered deposits		124,325			176,940			(52,615	)		1.73			1.59			536		703		(167	)		(209	)		60			(18	)
Borrowings		36,140			36,376			(236	)		2.35			2.88			212		261		(49	)		(2	)		(48	)		1

Total interest-bearing liabilities		404,806			407,208			(2,402	)		1.64			1.80			1,651		1,827		(176	)		(15	)		(130	)		(31	)
Demand deposits		36,784			30,678			6,106
Other liabilities		3,463			3,464			(1	)
Shareholders’ equity		57,889			49,855			8,034

Total liabilities and shareholders’ equity	$	502,942		$	491,205		$	11,737


Rate spread											3.41	%		3.43	%

Net interest margin/revenue											3.59	%		3.62	%	$	4,051	$	4,095	$	(44	)	$	(199	)	$	171		$	(16	)


(1)		For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.

(2)		The amount of interest income on loans and nontaxable securities has been adjusted to a tax euivalent basis, using a 34% tax rate

(3)		Interest income on loans includes fees


	Six Months Ended
																				2010-2009
	Average Balances									Average Rates						Interest				Income/									Rate/
	June 30,						Increase/			June 30,						June 30,				Expense			Volume			Rate			Volume
(dollars in thousands)	2010			2009			(Decrease)			2010			2009			2010		2009		Variance			Variance			Variance			Variance
Loans (1,2,3)	$	383,398		$	371,278		$	12,120			5.56	%		5.63	%	$	10,579	$	10,370	$	209		$	339		$	(125	)	$	(5	)
Taxable securities		36,336			61,906			(25,570	)		4.17			3.69			752		1,132		(380	)		(468	)		149			(61	)
Nontaxable securities (2)		844			975			(131	)		5.02			1.24			21		6		15			(1	)		18			(2	)
Federal funds sold		34,050			—			34,050			.25			—			42		—		42			—			—			42
Other interest-earning assets		4,479			4,383			96			1.58			.74			35		16		19			—			18			1

Total earning assets		459,107			438,542			20,565			5.02			5.30			11,429		11,524		(95	)		(130	)		60			(25	)

Reserve for loan losses		(5,116	)		(4,627	)		(489	)
Cash and due from banks		20,940			15,539			5,401
Intangible assets		—			26			(26	)
Other assets		30,772			23,594			7,178

Total assets	$	505,703		$	473,074		$	32,629

NOW and money market deposits	$	92,410		$	68,677		$	23,733			1.05	%		.79	%	$	481	$	270	$	211		$	93		$	87		$	31
Interest checking		16,674			5,124			11,550			1.67			1.97			138		50		88			113			(8	)		(17	)
Savings deposits		19,229			20,545			(1,316	)		.63			.74			60		75		(15	)		(5	)		(11	)		1
CDs <$100,000		74,761			71,642			3,119			2.15			2.99			797		1,061		(264	)		46			(297	)		(13	)
CDs >$100,000		29,587			25,846			3,741			1.70			2.57			249		329		(80	)		48			(111	)		(17	)
Brokered deposits		141,816			164,517			(22,701	)		1.67			1.91			1,171		1,559		(388	)		(215	)		(201	)		28
Borrowings		36,140			36,511			(371	)		2.34			2.99			420		542		(122	)		(6	)		(118	)		2

Total interest-bearing liabilities		410,617			392,862			17,755			1.63			1.99			3,316		3,886		(570	)		74			(659	)		15
Demand deposits		35,173			30,819			4,354
Other liabilities		3,407			3,537			(130	)
Shareholders’ equity		56,506			45,856			10,650

Total liabilities and shareholders’ equity	$	505,703		$	473,074		$	32,629

Rate spread											3.39	%		3.31	%

Net interest margin/revenue											3.56	%		3.51	%	$	8,113	$	7,638	$	475		$	(204	)	$	719		$	(40	)


(1)		For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.

(2)		The amount of interest income on loans and nontaxable securities has been adjsuted to a tax equivalent basis, using a 34% tax rate

(3)		Interet income on loans includes fees

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

Throughout 2010 and 2009 there have been no changes to the prime rate. The Corporation, during this period, repriced all of its brokered deposits along with the majority of its bank time deposits. This repricing of liabilities is the primary reason for the increased interest margin from 3.51% in the first six months of 2009 to 3.56% in the first six months of 2010.

During this relatively low interest environment, the Corporation has also repriced a significant portion of its loan portfolio. Management has been diligent when repricing maturing or new loans in establishing interest rate floors in order to maintain our improved interest rate spread.

Provision for Loan Losses

The Corporation records a provision for loan losses when it believes it is necessary to adjust the allowance for loan losses to maintain an adequate level after considering factors such as loan charge-offs and recoveries, changes in identified levels of risk in the loan portfolio, changes in the mix of loans in the portfolio, loan growth, and other economic factors. During the first six months of 2010, the Corporation recorded a $3.700 million provision for loan loss, compared to a $.700 million provision in the first six months of 2009. The large provision for the first six months of 2010 is composed of a number of factors including a portion to re-establish the reserve for net charge-offs incurred during the period, which totaled $2.554 million, increases attributable to specific reserves on deteriorating credit relationships, and increases due to the changing economic and experience factors used in the computation for adequacy of the overall reserve for loan losses. In future periods, loan loss provisions will be required if there is further market deterioration that impacts the credit quality on the existing portfolio.

Other Income

Other income increased by $.570 million for the six months ended June 30, 2010, compared to the six months ended June 30, 2009. Revenue due to loans produced and sold in the secondary market, along with the sale of SBA guaranteed loans, amounted to $.625 million compared to $.142 million a year ago. We expect to continue to benefit from secondary market activity in future periods as the refinancing boom continues. Service fees decreased $.040 million in the first six months of 2010, while other noninterest income decreased $.088 million.

During the second quarter of 2010, the Corporation recognized $.593 million in other income, compared to $.439 million for the second quarter of 2009. The increase between periods was attributed entirely to gains on the sale of SBA and secondary market loans. Service fees decreased for the second quarter of 2010 by $.019 million to $.252 million when compared to $.271 million in the second quarter of 2009. Management continues to evaluate deposit products and services for ways to better serve its customer base and also enhance service fee income through a broad array of products that price services based on income contribution and cost attributes.

The following table details other income for the three and six months ended June 30, 2010 and 2009 (dollars in thousands):


	Three Months Ended				% Increase			Six Months Ended				% Increase
	June 30,				(Decrease)			June 30,				(Decrease)
	2010		2009		2010-2009			2010		2009		2010-2009
Service fees	$	252	$	271		(7.01	)	$	474	$	514		(7.78	)
Net gains on sale of loans		309		84		267.86			625		142		340.14
Other noninterest income		32		84		(61.90	)		86		174		(50.57	)

Subtotal		593		439		35.08			1,185		830		42.77
Net security gain (loss)		—		—		N/A			215		—		N/A

Total noninterest income	$	593	$	439		35.08		$	1,400	$	830		68.67

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

Other Expense

Other expenses increased $2.250 million for the six months ended June 30, 2010, compared to the same period in 2009. Salaries and employee benefits also increased between periods, largely reflective of annual salary increases along with increased incentive pay related to compensation plans in place for 2010 that incent employees for core deposit growth. The most significant increase in other expense was in the loan and deposit expense category from costs associated with higher levels of nonperforming assets. During the second quarter of 2010, the Corporation recorded $1.8 million in total write-downs of OREO properties. Management continually reviews all areas of other expense for cost reduction opportunities that will not impact service quality and employee morale.

The following table details other expense for the three and six months ended June 30, 2010 and June 30, 2009 (dollars in thousands):


	Three Months Ended				% Increase			Six Months Ended				% Increase
	June 30,				(Decrease)			June 30,				(Decrease)
	2010		2009		2010-2009			2010		2009		2010-2009
Salaries and employee benefits	$	1,781	$	1,561		14.09		$	3,501	$	3,158		10.86
Occupancy		345		355		(2.82	)		690		733		(5.87	)
Furniture and equipment		197		222		(11.26	)		391		411		(4.87	)
Data processing		205		224		(8.48	)		394		444		(11.26	)
Professional service fees		161		144		11.81			334		297		12.46
Loan and deposit:
FDIC insurance premiums		221		340		(35.00	)		443		465		(4.73	)
Writedown of other real etstate owned		218		—		N/A			1,947		—		N/A
Other loan and deposit		1,800		172		946.51			466		308		51.30
Telephone		45		46		(2.17	)		92		89		3.37
Advertising		72		80		(10.00	)		144		158		(8.86	)
Other		285		326		(12.58	)		557		646		(13.78	)

Total noninterest expense	$	5,330	$	3,470		53.60		$	8,959	$	6,709		33.54

Federal Income Taxes

Current Federal Tax Provision

In the first half of 2010, management evaluated the deferred tax benefits associated with the net operating loss and tax credit carryforwards based upon the Corporation’s foreseen ability to utilize the benefits of these carryforwards prior to their expiration. As a part of this analysis, management considered, among other things, current asset levels and projected loan and deposit growth, current interest rate spreads and projected net interest income levels, and other income and expense, along with management’s ability to control expenses and the potential for increasing contributions of noninterest income. Management also considered the impact of nonperforming assets and future period charge-off activity relative to projected provisions. Based upon the analysis of projected taxable income and the probability of achieving these projected taxable income levels, a portion, $3.500 million of the remaining deferred tax benefit was recognized. This $3.500 million deferred tax benefit, along with taxes on current net operating results, income before taxes resulted in a total net benefit in the first half of $4.623 million compared to the $.278 million tax expense recorded in the first half of 2009.

Deferred Tax Benefit

The Corporation recognized a federal deferred tax benefit of $7.500 million in the third quarter of 2007. The recognition of this deferred tax benefit relates to the generally accepted accounting principles applicable to the probability of utilizing the NOL and tax credit carryforwards of the Corporation. The Corporation, based upon current profitability trends largely supported by expansion of the net interest margin and controlled expenses, determined that the utilization of the NOL carryforward was probable. This tax benefit was recorded by reducing the valuation allowance that was recorded against the deferred tax assets of the Corporation. In 2006, the Corporation recognized a portion of this benefit, $.500 million, based upon the then current probabilities. The $7.500 million recognition is based upon assumptions of a sustained level of taxable income within the NOL carryforward period and takes into account Section 382, establishing annual limitations. A valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not

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

be realized. As of June 30, 2010, the Corporation had an NOL carryforward of approximately $28.0 million along with various credit carryforwards of $2.1 million. This NOL and credit carryforward benefit is dependent upon the future profitability of the Corporation. A portion of the NOL, approximately $18.0 million, and all of the tax credit carryforwards are also subject to the use limitations of Section 382 of the Internal Revenue Code since they originated prior to the December 2004 recapitalization of the Corporation. The Corporation intends to further evaluate the utilization of the NOL and credit carryforwards in subsequent periods to determine if any further adjustment to the valuation allowance is necessary. The determination criteria for recognition of deferred tax benefits will include the assumption of future period taxable income based upon the projected profitability of the Corporation.

Subsequent to June 30, 2010, in deference to the loss recorded in the 2010 second quarter, an analysis of the deferred tax asset was performed in order to determine if there was any impairment relative to ultimate utilization during the carryforward period. As a part of this analysis, management reviewed projected levels of taxable income and assessed the probability of attaining these projected levels. Based upon this analysis, it was determined that there was no impairment of this deferred tax asset.

LIQUIDITY

Liquidity is defined as the ability to generate cash at a reasonable cost to fulfill lending commitments and support asset growth, while satisfying the withdrawal demands of customers and make payments on existing borrowing commitments. The Bank’s principal sources of liquidity are core deposits and loan and investment payments and prepayments. Providing a secondary source of liquidity is the available for sale investment portfolio. As a final source of liquidity, the Bank can exercise existing credit arrangements.

Current balance sheet liquidity consists of $39.165 million in cash and due from balances, $12 million in federal funds sold and $18.483 million of unpledged investment securities. The overall balance sheet liquidity results from the late 2009 and early 2010 sale of approximately $40 million of investment securities. The Corporation has also experienced significant deposit inflows during the first half of 2010. Management anticipates reducing liquidity levels in future periods through payments of maturing brokered deposits and funding loan growth.

Late in 2010 and early in 2011, the $35.0 million of FHLB borrowings will mature. At the time of maturity, the Corporation will review funding alternatives that may be more attractive than FHLB borrowings.

During the first half of 2010, the Corporation increased cash and cash equivalents by $5.732 million. As shown on the Corporation’s condensed consolidated statement of cash flows, liquidity was impacted by cash provided by investing activities, with a net decrease in investment securities of $11.277 million and a net increase in loans of $6.086 million. Offsetting the increases provided by investing activities were uses in financing activities, with a net decrease in deposits of $15.605 million. The decrease in deposits was composed of a decrease in brokered deposits of $64.070 million combined with an increase in bank deposits of $48.465 million. The management of bank liquidity for funding of loans and deposit maturities and withdrawals includes monitoring projected loan fundings and scheduled prepayments and deposit maturities within a 30 day period, a 30 to 90 day period and from 90 days until the end of the year. This funding forecast model is completed weekly.

It is anticipated that during the remainder of 2010, the Corporation will fund anticipated loan production by reducing current balances of liquidity.

The Corporation’s primary source of liquidity on a stand-alone basis is dividends from the Bank. The Bank is currently prohibited from paying dividends because of a deficit in retained earnings. The Bank, in order to pay dividends in future periods, will need to completely eliminate the negative balance of retained earnings through future profits.

Liquidity is managed by the Corporation through its Asset and Liability Committee (“ALCO”). The ALCO Committee meets monthly to discuss asset and liability management in order to address liquidity and funding needs to provide a process to seek the best alternatives for investments of assets, funding costs, and risk management. The liquidity position of the Bank is managed daily, thus enabling the Bank to adapt its position according to market fluctuations. Core deposits are important in maintaining a strong liquidity position as they represent a stable and relatively low cost source of funds. The Bank’s liquidity is best illustrated by the mix in the Bank’s core and noncore funding dependence ratio, which explains the degree of reliance on noncore liabilities to fund long-term assets.

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

Core deposits are herein defined as demand deposits, NOW (negotiable order withdrawals), money markets, savings and certificates of deposit under $100,000. Noncore funding consists of certificates of deposit greater than $100,000, brokered deposits, and FHLB and Farmers’ Home Administration borrowings. At June 30, 2010, the Bank’s core deposits in relation to total funding were 61.33% compared to 45.15% at June 30, 2009. These ratios indicated at June 30, 2010, that the Bank has decreased its reliance on noncore deposits and borrowings to fund the Bank’s long-term assets, namely loans and investments. The bank believes that by maintaining adequate volumes of short-term investments and implementing competitive pricing strategies on deposits, it can ensure adequate liquidity to support future growth. The Bank also has correspondent lines of credit available to meet unanticipated short-term liquidity needs. As of June 30, 2010, the Bank had $19.875 million of unsecured lines available and another $2.5 million available if secured. The bank believes that its liquidity position remains strong to meet both present and future financial obligations and commitments, events or uncertainties that have resulted or are reasonably likely to result in material changes with respect to the Bank’s liquidity.

From a long-term perspective, the Corporation’s operating plan for 2010 includes strategies to increase core deposits in the Corporation’s local markets. New deposit products and strategic advertising is expected to aid in efforts of management in growing core deposits which will then reduce the dependency on noncore deposits. The Corporation’s operating plan for 2010 calls for augmenting local deposit growth efforts with wholesale CD funding, to the extent necessary.

CAPITAL AND REGULATORY

As a bank holding company, the Corporation is required to maintain certain levels of capital under government regulation. There are several measurements of regulatory capital and the Corporation is required to meet minimum requirements under each measurement. The federal banking regulators have also established capital classifications beyond the minimum requirements in order to risk-rate deposit insurance premiums and to provide trigger points for prompt corrective action in the event an institution becomes financially troubled. As of June 30, 2010, the Corporation and Bank were well capitalized. During the first half of 2010, total capitalization increased by $.932 million.

The following table details sources of capital for the periods indicated (dollars in thousands):


	June 30,			December 31,			June 30,
	2010			2009			2009
Capital Structure
Shareholders’ equity	$	56,231		$	55,299		$	53,939

Total capitalization	$	56,231		$	55,299		$	53,939

Tangible capital	$	56,231		$	55,299		$	53,932


Intangible Assets
Core deposit premium	$	—		$	—		$	7
Other identifiable intangibles		—			—			—

Total intangibles	$	—		$	—		$	7


Regulatory capital
Tier 1 capital:
Shareholders’ equity	$	56,231		$	55,299		$	53,939
Net unrealized (gains) losses on available for sale securities		(876	)		(1,093	)		(1,211	)
Less: disallowed deferred tax asset		(9,200	)		(4,800	)		(6,000	)
Less: intangibles		—			—			(7	)

Total Tier 1 capital	$	46,155		$	49,406		$	46,721

Tier 2 Capital:
Allowable reserve for loan losses	$	4,968		$	5,181		$	4,119
Qualifying long-term debt		—			—			—

Total Tier 2 capital		4,968			5,181			4,119

Total capital	$	51,123		$	54,587		$	50,840

Risk-adjusted assets	$	396,037		$	414,440		$	391,160


Capital ratios:
Tier 1 Capital to average assets		9.38	%		9.75	%		9.65	%
Tier 1 Capital to risk weighted assets		11.65	%		11.92	%		11.94	%
Total Capital to risk weighted assets		12.91	%		13.17	%		13.00	%

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

Regulatory capital is not the same as shareholders’ equity reported in the accompanying condensed consolidated financial statements. Certain assets cannot be considered assets for regulatory purposes, such as acquisition intangibles and noncurrent deferred tax benefits.

Presented below is a summary of the capital position in comparison to generally applicable regulatory requirements:


	Shareholders’			Tangible			Tier 1			Tier 1			Total
	Equity to			Equity to			Capital to			Capital to			Capital to
	Quarter-end			Quarter-end			Average			Risk-Weighted			Risk-Weighted
	Assets			Assets			Assets			Assets			Assets
Regulatory minumum for capital adequacy purposes		N/A			N/A			4.00	%		4.00	%		8.00	%
Regulatory defined well capitalized guideline		N/A			N/A			5.00	%		6.00	%		10.00	%

The Corporation:
June 30, 2010		11.23	%		11.23	%		9.38	%		11.65	%		12.91	%
June 30, 2009		10.65	%		10.65	%		9.65	%		11.94	%		13.00	%

The Bank:
June 30, 2010		9.93	%		9.93	%		7.98	%		9.91	%		11.16	%
June 30, 2009		9.17	%		9.17	%		8.12	%		10.03	%		11.07	%

MACKINAC FINANCIAL CORPORATION

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

In general, the Corporation attempts to manage interest rate risk by investing in a variety of assets which afford it an opportunity to reprice assets and increase interest income at a rate equal to or greater than the interest expense associated with repricing liabilities.

Interest rate risk is the exposure of the Corporation to adverse movements in interest rates. The Corporation derives its income primarily from the excess of interest collected on its interest-earning assets over the interest paid on its interest-bearing obligations. The rates of interest the Corporation earns on its assets and owes on its obligations generally are established contractually for a period of time. Since market interest rates change over time, the Corporation is exposed to lower profitability if it cannot adapt to interest rate changes. Accepting interest rate risk can be an important source of profitability and shareholder value; however, excess levels of interest rate risk could pose a significant threat to the Corporation’s earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to the Corporation’s safety and soundness.

Loans are the most significant earning asset. Management offers commercial and real estate loans priced at interest rates which fluctuate with various indices such as the prime rate or rates paid on various government issued securities. In addition, the Corporation prices the majority of fixed rate loans so it has an opportunity to reprice the loan within 12 to 36 months.

The Corporation has established interest rate floors on approximately $120 million, or 38% of its variable rate commercial loans. These interest rate floors will result in a “lag” on the repricing of these variable rate loans when and if interest rates increase in future periods. Approximately $41 million of the “floor rate” loan balances will reprice with a 100 basis point increase on the prime rate, with another $60 million repricing in the next 100 basis point prime rate increase.

The Corporation also has $34.942 million of securities providing for scheduled monthly principal and interest payments as well as unanticipated prepayments of principal. These cash flows are then reinvested into other earning assets at current market rates. The Corporation also has federal funds sold to correspondent banks as well as other interest-bearing deposits with correspondent banks. These funds are generally repriced on a daily basis.

The Corporation has $180 million of transactional accounts, of which $41 million consists of non interest bearing demand deposit balances. Transaction account balances have increased significantly in the last year due in part to the Corporation’s focus on these low costs accounts by developing new attractive products and increased sales efforts to municipalities, schools and businesses. These transactional account balances provide additional repricing flexibility in changing interest rate environments since they have no scheduled maturities and interest rates can be reset at any time.

Other deposit products have a variety of terms ranging from deposits whose interest rates can change on a weekly basis to certificates of deposit with repricing terms of up to five years. Longer term deposits generally include penalty provisions for early withdrawal.

Beyond general efforts to shorten the loan pricing periods and extend deposit maturities, management can manage interest rate risk by the maturity periods of securities purchased, selling securities available for sale, and borrowing funds with targeted maturity periods, among other strategies. Also, the rate of interest rate changes can impact the actions taken since the rate environment affects borrowers and depositors differently.

Exposure to interest rate risk is reviewed on a regular basis. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect of interest rate changes on net interest income and to structure the composition of the balance sheet to minimize interest rate risk and at the same time maximize income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. Tools used by management include maturity and repricing analysis and interest rate sensitivity analysis. The Bank has monthly asset/liability meetings with an outside consultant to review its current position and strategize about future opportunities on risks relative to pricing and positioning of assets and liabilities.

MACKINAC FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)

The difference between repricing assets and liabilities for a specific period is referred to as the gap. An excess of repricable assets over liabilities is referred to as a positive gap. An excess of repricable liabilities over assets is referred to as a negative gap. The cumulative gap is the summation of the gap for all periods to the end of the period for which the cumulative gap is being measured.

Assets and liabilities scheduled to reprice are reported in the following time frames. Those instruments with a variable interest rate tied to an index and considered immediately repricable are reported in the 1- to 90-day time frame. The estimates of principal amortization and prepayments are assigned to the following time frames.

The following is the Corporation’s opportunities at June 30, 2010 (dollars in thousands):


	1-90		91 - 365			>1-5			Over 5
	Days		Days			Years			Years		Total
Interest-earning assets:
Loans	$	264,178	$	6,360		$	24,677		$	89,624	$	384,839
Securities		—		19,720			14,701			521		34,942
Other (1)		12,678		—			—			3,794		16,472


Total interest-earning assets		276,856		26,080			39,378			93,939		436,253


Interest-bearing obligations:
NOW, money market, savings, interest checking		139,019		—			—			—		139,019
Time deposits		23,369		53,068			37,398			390		114,225
Brokered CDs		16,446		51,716			40,216			2,728		111,106
Borrowings		20,000		15,000			—			1,140		36,140


Total interest-bearing obligations		198,834		119,784			77,614			4,258		400,490


Gap	$	78,022	$	(93,704	)	$	(38,236	)	$	89,681	$	35,763


Cumulative gap	$	78,022	$	(15,682	)	$	(53,918	)	$	35,763


(1)		Includes Federal Home Loan Bank Stock

The above analysis indicates that at June 30, 2010, the Corporation had a cumulative liability sensitivity gap position of $15.682 million within the one-year time frame. The Corporation’s cumulative liability sensitive gap suggests that if market interest rates continue to decline in the next twelve months, the Corporation has the potential to increase net interest income. A limitation of the traditional gap analysis is that it does not consider the timing or magnitude of non-contractual repricing or expected prepayments. In addition, the gap analysis treats savings, NOW, and money market accounts as repricing within 90 days, while experience suggests that these categories of deposits are actually comparatively resistant to rate sensitivity.

At December 31, 2009, the Corporation had a cumulative liability sensitivity gap position of $17.977 million within the one-year time frame.

The borrowings in the gap analysis include $15.000 million of the FHLB advances as fixed-rate advances. These advances give the FHLB the option to convert from a fixed-rate advance to an adjustable rate advance with quarterly repricing at three-month LIBOR Flat. The exercise of this conversion feature by the FHLB would impact the repricing dates currently assumed in the analysis.

The Corporation’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk and foreign exchange risk. The Corporation has no market risk sensitive instruments held for trading purposes. The Corporation has limited agricultural-related loan assets and therefore has minimal significant exposure to changes in commodity prices. Any impact that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be insignificant.

MACKINAC FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)

Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure. The Corporation’s interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems, and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity. In evaluating the quantitative level of interest rate risk, the Corporation assesses the existing and potential future effects of changes in interest rates on its financial condition, including capital adequacy, earnings, liquidity, and asset quality. In addition to changes in interest rates, the level of future net interest income is also dependent on a number of variables, including: the growth, composition and levels of loans, deposits, and other earning assets and interest-bearing obligations, and economic and competitive conditions; potential changes in lending, investing, and deposit strategies; customer preferences; and other factors.

FOREIGN EXCHANGE RISK

In addition to managing interest rate risk, management also actively manages risk associated with foreign exchange. The Corporation provides foreign exchange services, makes loans to, and accepts deposits from, Canadian customers primarily at its banking offices in Sault Ste. Marie, Michigan. To protect against foreign exchange risk, the Corporation monitors the volume of Canadian deposits it takes in and then invests these Canadian funds in Canadian commercial loans and securities. Management believes the exposure to short-term foreign exchange risk is minimal and at an acceptable level for the Corporation.

OFF-BALANCE-SHEET RISK

Derivative financial instruments include futures, forwards, interest rate swaps, option contracts and other financial instruments with similar characteristics. The Corporation currently does not enter into futures, forwards, swaps, or options. However, the Corporation is 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 and involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the condensed consolidated balance sheets. 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 and may require collateral from the borrower if deemed necessary by the Corporation. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions.

Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Corporation until the instrument is exercised.

IMPACT OF INFLATION AND CHANGING PRICES

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and results of operations in historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Corporation’s operations. Nearly all the assets and liabilities of the Corporation are financial, unlike industrial or commercial companies. As a result, the Corporation’s performance is directly impacted by changes in interest rates, which are indirectly influenced by inflationary expectations. The Corporation’s ability to match the interest sensitivity of its financial assets to the interest sensitivity of its financial liabilities tends to minimize the effect of changes in interest rates on the Corporation’s performance. Changes in interest rates do not necessarily move to the same extent as changes in the price of goods and services.

MACKINAC FINANCIAL CORPORATION

ITEM 4 CONTROLS AND PROCEDURES

As of June 30, 2010, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Our management, which includes our principal executive officer and our principal financial officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud.

A control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints; additionally, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, but collusion of two or more people, or by management override of the controls. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated foals under all potential future conditions. Over time, controls may become inadequate due to changes in conditions; also the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Our principal executive officer and principal accounting officer have concluded, based on our evaluation of our disclosure controls and procedures, that our disclosure controls and procedures, as defined, under Rule 13a-15 of the Securities Exchange Act of 1934 are effective at the reasonable assurance levels as of June 30, 2010.

Changes in Internal Control Over Financial Reporting

There were no changes in the Corporation’s internal control over financial reporting that occurred during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

MACKINAC FINANCIAL CORPORATION

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Corporation and its subsidiaries are subject to routine litigation incidental to the business of banking.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:


	Exhibit 31.1		Rule 13a-14(a) Certification of Chief Executive Officer.

	Exhibit 31.2		Rule 13a-14(a) Certification of Chief Financial Officer.

	Exhibit 32.1		Section 1350 Certification of Chief Executive Officer.

	Exhibit 32.2		Section 1350 Certification of Chief Financial Officer.

MACKINAC FINANCIAL CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	MACKINAC FINANCIAL CORPORATION (Registrant)
Date: August 16, 2010	By:	/s/ Paul D. Tobias
		PAUL D. TOBIAS,
		CHAIRMAN AND CHIEF EXECUTIVE OFFICER (principal executive officer)


	By:	/s/ Ernie R. Krueger
		ERNIE R. KRUEGER
		EVP/CHIEF FINANCIAL OFFICER (principal financial and accounting officer)

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