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

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

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		(I.R.S. Employer Identification No.)
incorporation or organization)
130 SOUTH CEDAR STREET, MANISTIQUE, MI		49854
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o      No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o      No þ

As of July 31, 2009, there were outstanding 3,419,736 shares of the registrant’s common stock, no par value.

 

 

MACKINAC FINANCIAL CORPORATION

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets — June 30, 2009 (Unaudited), December 31, 2008 and June 30, 2008 (Unaudited)			1
Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2009 (Unaudited) and June 30, 2008 (Unaudited)			2
Condensed Consolidated Statements of Changes in Shareholders’ Equity — Three and Six Months Ended June 30, 2009 (Unaudited) and June 30, 2008 (Unaudited)			3
Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2009 (Unaudited) and June 30, 2008 (Unaudited)			4
Notes to Condensed Consolidated Financial Statements (Unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			31
Item 4. Controls and Procedures			34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			35
Item 4. Submission of Matters to a Vote of Security Holders			35
Item 6. Exhibits and Reports on Form 8-K			36
SIGNATURES			37
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,
		2009				2008				2008
		(unaudited)								(unaudited)
ASSETS
Cash and due from banks		$	12,189			$	10,112			$	7,115
Federal funds sold			—				—				19,274
Cash and cash equivalents			12,189				10,112				26,389
Interest-bearing deposits in other financial institutions			618				582				387
Securities available for sale			95,620				47,490				23,230
Federal Home Loan Bank stock			3,794				3,794				3,794
Loans:
Commercial			296,392				296,088				292,645
Mortgage			71,777				70,447				65,869
Installment			3,835				3,745				3,608
Total Loans			372,004				370,280				362,122
Allowance for loan losses			(4,119	)			(4,277	)			(3,585	)
Net loans			367,885				366,003				358,537
Premises and equipment			11,064				11,189				11,377
Other real estate held for sale			4,950				2,189				3,395
Other assets			10,184				10,072				10,218
TOTAL ASSETS		$	506,304				451,431			$	437,327
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Non-interest-bearing deposits		$	33,368			$	30,099			$	27,741
Interest-bearing deposits:
NOW, money market, checking			75,974				70,584				78,703
Savings			21,411				20,730				15,171
CDs<$100,000			72,139				73,752				78,678
CDs>$100,000			25,455				25,044				28,252
Brokered			184,805				150,888				128,431
Total deposits			413,152				371,097				356,976
Long-term borrowings			36,210				36,210				36,280
Other liabilities			3,003				2,572				3,096
Total liabilities			452,365				409,879				396,352
Shareholders’ equity:
Preferred stock outstanding			10,418				—				—
Common stock and additional paid in capital — No par value
Authorized — 18,000,000 shares
Issued and outstanding — 3,419,736 shares			43,468				42,815				42,773
Accumulated deficit			(1,158	)			(1,708	)			(1,672	)
Accumulated other comprehensive income (loss)			1,211				445				(126	)
Total shareholders’ equity			53,939				41,552				40,975
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	506,304			$	451,431			$	437,327

See accompanying notes to condensed consolidated financial statements.

MACKINAC FINANCIAL CORPORATION

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
(Dollars in thousands except per share data)		(Unaudited)								(Unaudited)
INTEREST INCOME:
Interest and fees on loans:
Taxable		$	5,104			$	5,604			$	10,106			$	11,704
Tax-exempt			84				102				174				210
Interest on securities:
Taxable			673				271				1,132				537
Tax-exempt			3				2				4				3
Other interest income			14				81				16				170
Total interest income			5,878				6,060				11,432				12,624
INTEREST EXPENSE:
Deposits			1,566				2,551				3,344				5,616
Borrowings			261				391				542				845
Total interest expense			1,827				2,942				3,886				6,461
Net interest income			4,051				3,118				7,546				6,163
Provision for loan losses			150				750				700				750
Net interest income after provision for loan losses			3,901				2,368				6,846				5,413
NONINTEREST INCOME:
Service fees			271				194				514				368
Net security gains			—				—				—				65
Net gains on sale of secondary market loans			84				49				142				97
Proceeds from lawsuit settlement			—				3,475				—				3,475
Other			84				29				174				52
Total noninterest income			439				3,747				830				4,057
NONINTEREST EXPENSE
Salaries and employee benefits			1,561				2,075				3,158				3,882
Occupancy			355				348				733				703
Furniture and equipment			222				190				411				368
Data processing			224				216				444				437
Professional service fees			144				79				297				232
Loan and deposit			512				144				773				254
Telephone			46				39				89				84
Advertising			80				60				158				120
Other			326				320				646				582
Total noninterest expense			3,470				3,471				6,709				6,662
Income before provision for income taxes			870				2,644				967				2,808
Provision for income taxes			271				875				278				900
NET INCOME			599				1,769				689				1,908
Preferred dividend expense			138				—				138				—
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	461			$	1,769			$	551			$	1,908
INCOME PER COMMON SHARE:
Basic		$	.13			$	.52			$	.16			$	.56
Diluted		$	.13			$	.52			$	.16			$	.56

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,
		2009				2008				2009				2008
Balance, beginning of period		$	41,864			$	39,633			$	41,551			$	39,321
Net income for period			461				1,769				551				1,908
Net unrealized gain (loss) on securities available for sale			561				(338	)			766				(186	)
Total comprehensive income			1,022				1,431				1,317				1,722
Stock option compensation			17				21				35				42
Repurchase of common stock — oddlot shares			—				(110	)			—				(110	)
Issuance of preferred stock			10,382				—				10,382				—
Issuance of common stock warrants			618				—				618				—
Accretion of preferred stock discount			36				—				36				—
Balance, end of period		$	53,939			$	40,975			$	53,939			$	40,975

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,
		2009				2008
Cash Flows from Operating Activities:
Net income		$	551			$	1,908
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,000				607
Provision for deferred taxes			218				900
Provision for loan losses			700				750
(Gain) on sales/calls of securities available for sale			—				(65	)
(Gain) loss on sale of premises, equipment and other real estate			4				(5	)
Writedown of other real estate			—				201
Stock option compensation			35				42
Change in other assets			(762	)			283
Change in other liabilities			430				313
Net cash provided by operating activities			2,176				4,934
Cash Flows from Investing Activities:
Net (increase) in loans			(5,383	)			(10,792	)
Net (increase) decrease in interest-bearing deposits in other financial institutions			(36	)			1,423
Purchase of securities available for sale			(50,216	)			(24,481	)
Proceeds from sales, maturities or calls of securities available for sale			2,856				22,766
Capital expenditures			(463	)			(266	)
Proceeds from sale of premises, equipment, and other real estate			88				73
Net cash (used in) investing activities			(53,154	)			(11,277	)
Cash Flows from Financing Activities:
Net increase in deposits			42,055				36,149
Issuance of Preferred Stock Series A Capital			11,000				—
Net (decrease) in federal funds purchased			—				(7,710	)
Net (decrease) in line of credit			—				(1,959	)
Net (decrease) repurchase of common stock — oddlot shares			—				(110	)
Net cash provided by financing activities			53,055				26,370
Net increase in cash and cash equivalents			2,077				20,027
Cash and cash equivalents at beginning of period			10,112				6,362
Cash and cash equivalents at end of period		$	12,189			$	26,389
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest		$	3,989			$	5,086
Income taxes			60				—
Noncash Investing and Financing Activities:
Transfers of foreclosures from loans to other real estate held for sale (net of adjustments made through the allowance for loan losses)		$	3,276			$	2,237

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, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. The unaudited consolidated financial statements and footnotes thereto should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates.

In order to properly reflect some categories of other income and other expenses, reclassifications of expense and income items have been made to prior period numbers. The “net” other income and other expenses were not changed due to these classifications.

Allowance for Loan Losses

The allowance for loan losses includes specific allowances related to commercial loans, which have been judged to be impaired. A loan is impaired when, based on current information, it is probable that the Corporation will not collect all amounts due in accordance with the contractual terms of the loan agreement. These specific allowances are based on discounted cash flows of expected future payments using the loan’s initial effective interest rate or the fair value of the collateral if the loan is collateral dependent.

The Corporation continues to maintain a general allowance for loan losses for loans not considered impaired. The allowance for loan losses is maintained at a level which management believes is adequate to provide for possible loan losses. Management periodically evaluates the adequacy of the allowance using the Corporation’s past loan loss experience, known and inherent risks in the portfolio, composition of the portfolio, current economic conditions, and other factors. The allowance does not include the effects of expected losses related to future events or future changes in economic conditions. This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change. Loans are charged against the allowance for loan losses when management believes the collectability of the principal is unlikely. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require additions to the allowance for loan losses based on their judgments of collectability.

In management’s opinion, the allowance for loan losses is adequate to cover probable losses relating to specifically identified loans, as well as probable losses inherent in the balance of the loan portfolio as of the balance sheet date.

Stock Option Plans

The Corporation sponsors three stock option plans. One plan was approved in 2000 and applies to officers, employees, and nonemployee directors. This plan was amended as a part of the December 2004 stock offering and recapitalization. The amendment, approved by shareholders, increased the shares available under this plan by 428,587 shares from the original 25,000 (adjusted for the 1:20 reverse stock split), to a total authorized share balance of 453,587. The other two plans, one for officers and employees and the other for nonemployee

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

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

directors, were approved in 1997. A total of 30,000 shares (adjusted for the 1:20 reverse stock split), were made available for grant under these plans. Options under all of the plans are granted at the discretion of a committee of the Corporation’s Board of Directors. Options to purchase shares of the Corporation’s stock are granted at a price equal to the market price of the stock at the date of grant. The committee determines the vesting of the options when they are granted as established under the plan.

2.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Although there is new terminology, the standard is based on the same principles as those that currently exist in the auditing standards. The standard also includes a required disclosure of the date through which the entity has evaluated subsequent events and whether the evaluation date is the date of issuance or the date the financial statements were available to be issued. The standard is effective for interim or annual periods ending after June 15, 2009. The Corporation has complied with the disclosure requirements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. (“FIN”) 46(R). SFAS No. 167 was issued to improve financial reporting for enterprises with variable interest entities to address (1) the effects of certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in SFAS No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140, and (2) constituent concerns about the application of certain key provisions of FIN 46(R), including those in which the accounting and disclosures under FASB Interpretation No. 46 do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS No. 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier adoption of SFAS No. 167 is prohibited. The Corporation is currently evaluating the effect the adoption of SFAS No. 167 will have on its consolidated financial statements.

In June 2009, the FASB Issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162. The FASB Accounting Standards Codification (Codification) will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of the federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Corporation will comply with the requirements of the Statement beginning in the third quarter of 2009.

In April 2009, the FASB issued the following three FSPs intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities:

FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have decreased significantly. FSP FAS 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. The provisions of FSP FAS 157-4 were effective for the Corporation’s interim period ending on June 30, 2009. The adoption of FSP FAS 157-4 did not affect the consolidated financial statements for the Corporation as of June 30, 2009.

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

2.

RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of FSP FAS 107-1 and APB 28-1 were effective for the Corporation’s interim period ending on June 30, 2009. As FSP FAS 107-1 and APB 28-1 amended only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 did not affect the consolidated financial statements for the Corporation as of June 30, 2009.

FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentations and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The provisions of FSP FAS 115-2 and FAS 124-2 were effective for the Corporation’s interim period ending on June 30, 2009. The adoption of FSP FAS 115-2 and FAS
124-2 did not affect the consolidated financial statements for the Corporation as of June 30, 2009.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 165, Subsequent Events, we have evaluated subsequent events through the date of this filing, August 13, 2009. We do not believe there are any material subsequent events which would require further disclosure, other than the subsequent sale of two branch offices. Please refer to footnote 12 for further discussion.

3.

EARNINGS PER SHARE

Earnings per share are based upon the weighted average number of shares outstanding. Additional             shares issued as a result of option exercises would not be dilutive in either period.

The following shows the computation of basic and diluted earnings per share for the three and six months ended June 30, 2009 and 2008 (dollars in thousands, except per share data):

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
Net income		$	599			$	1,769			$	689			$	1,908
Preferred stock dividends			138				—				138				—
Net income available to common shareholders		$	461			$	1,769			$	551			$	1,908
Weighted average shares outstanding			3,419,736				3,419,933				3,419,736				3,424,314
Effect of dilutive stock options outstanding			—				—				—				—
Diluted weighted average shares outstanding			3,419,736				3,419,933				3,419,736				3,424,314
Earnings per common share:
Basic		$	.13			$	.52			$	.16			$	.56
Diluted		$	.13			$	.52			$	.16			$	.56

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

4.

INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities available for sale as of June 30, 2009, December 31, 2008 and June 30, 2008 are as follows (dollars in thousands):

		June 30, 2009								December 31, 2008								June 30, 2008
		Amortized				Estimated				Amortized				Estimated				Amortized				Estimated
		Cost				Fair Value				Cost				Fair Value				Cost				Fair Value
US Agencies — MBS		$	74,390			$	75,788			$	46,316			$	46,941			$	22,696			$	22,623
Asset backed — government guaranteed			13,936				14,285				—				—				—				—
Obligations of states and political subdivisions			1,259				1,287				498				549				550				607
Corporate bonds			4,201				4,260				—				—				—				—
Total securities available for sale		$	93,786			$	95,620			$	46,814			$	47,490			$	23,246			$	23,230

The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $18.095 million and $18.730 million, respectively, at June 30, 2009.

5.

LOANS

The composition of loans at June 30, 2009, December 31, 2008 and June 30, 2008 is as follows (dollars in thousands):

		June 30,				December 31,				June 30,
		2009				2008				2008
Commercial real estate		$	196,895			$	185,241			$	186,108
Commercial, financial, and agricultural			73,372				79,734				77,473
One to four family residential real estate			65,564				65,595				60,882
Construction:
Commercial			26,125				31,113				29,064
Consumer			6,213				4,852				4,987
Consumer			3,835				3,745				3,608
Total loans		$	372,004			$	370,280			$	362,122

LOANS — Allowance for loan losses

An analysis of the allowance for loan losses for the six months ended June 30, 2009, the year ended December 31, 2008, and the six months ended June 30, 2008 is as follows: (dollars in thousands):

		June 30,				December 31,				June 30,
		2009				2008				2008
Balance at beginning of period		$	4,277			$	4,146			$	4,146
Recoveries on loans			45				121				9
Loans charged off			(903	)			(2,290	)			(1,320	)
Provision for loan losses			700				2,300				750
Balance at end of period		$	4,119			$	4,277			$	3,585

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

5.

LOANS (Continued)

In the first half of 2009, net charge off activity was $.858 million, or .23% of average loans outstanding compared to net charge-offs of $1.311 million, or .36% of average loans, in the first half of 2008. In the first half of 2009, the Corporation recorded a provision for loan loss in the amount of $700,000 compared to $750,000 in the first half of 2008, 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.

Information regarding impaired loans as of June 30, 2009, December 31, 2008 and June 30, 2008 is as follows (dollars in thousands):

														Valuation Reserve
		June 30,				December 31,				June 30,				June 30,				December 31,				June 30,
		2009				2008				2008				2009				2008				2008
Balances, at period end
Impaired loans with specific valuation reserve		$	7,708			$	3,730			$	4,052			$	1,556			$	994			$	946
Impaired loans with no specific valuation reserve			2,167				1,157				561				—				—				—
Total impaired loans		$	9,875			$	4,887			$	4,613			$	1,556			$	994			$	946
Impaired loans on nonaccrual basis		$	9,277			$	4,887			$	4,613			$	1,556			$	994			$	946
Impaired loans on accrual basis			598				—				—				—				—				—
Total impaired loans		$	9,875			$	4,887			$	4,613			$	1,556			$	994			$	946
Average investment in impaired loans		$	9,452			$	4,834			$	4,779
Interest income recognized during impairment			11				60				46
Interest income that would have been recognized on an accrual basis			338				377				225
Cash-basis interest income recognized			11				60				46

The average investment in impaired loans was approximately $9.452 million for the six months ended June 30, 2009, $4.834 million for the year ended December 31, 2008, and $4.779 million for the six months ended June 30, 2008, respectively. Additional discussion on impaired loans is presented in the “Management’s Discussion and Analysis” section of this report.

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

5.

LOANS (Continued)

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,
		2009				2008				2008
Loans outstanding beginning of period		$	6,516			$	1,720			$	1,720
New loans			900				372				—
Net activity on revolving lines of credit			398				2,378				479
Repayment			(205	)			(687	)			(41	)
Change in related party interest			—				2,733				2,733
Loans outstanding end of period		$	7,609			$	6,516			$	4,891

There were no loans to related parties classified substandard at June 30, 2009, December 31, 2008 or June 30, 2008, respectively. In addition to the outstanding balances above, there were unused commitments of $.197 million to related parties at June 30, 2009.

6.

LONG-TERM BORROWINGS

Long-term borrowings consist of the following at June 30, 2009, December 31, 2008 and June 30, 2008 (dollars in thousands):

		June 30,				December 31,				June 30,
		2009				2008				2008
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 1.04% to 1.16% 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%			1,210				1,210				1,280
		$	36,210			$	36,210			$	36,280

The Federal Home Loan Bank borrowings are collateralized at June 30, 2009, by the following: a collateral agreement on the Corporation’s one to four family residential real estate loans with a book value of approximately $26.839 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $17.020 million and $17.655 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, 2009.

The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $.300 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 $1.012 million, and guaranteed by the Corporation.

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

7.

STOCK OPTION PLANS

A summary of stock option transactions for the six months ended June 30, 2009 and 2008, and the year ended December 31, 2008, is as follows:

		June 30,				December 31,				June 30,
		2009				2008				2008
Outstanding shares at beginning of year			446,237				446,417				446,417
Granted during the period			—				—				—
Expired during the period			35,180				180				180
Outstanding shares at end of period			411,057				446,237				446,237
Weighted average exercise price per share at end of period		$	12.03			$	12.14			$	12.14
Shares available for grant at end of period			24,780				18,488				18,488

There were no options granted in the first six months of 2009 and 2008.

Following is a summary of the options outstanding and exercisable at June 30, 2009:

Exercise		Number								Remaining				Weighted Average
Price Range		Outstanding				Exercisable				Contractual Life-Years				Exercise Price
$9.16			12,500				5,000				6.5			$	9.16
$9.75			257,152				120,861				5.5				9.75
$10.65			57,500				11,500				7.5				10.65
$11.50			40,000				8,000				6.3				11.50
$12.00			40,000				8,000				6.0				12.00
$156.00 - $240.00			3,545				3,545				1.7				186.75
$300.00			360				360				.8				300.00
			411,057				157,266				5.9			$	12.03

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. At June 30, 2009, the Corporation evaluated the valuation allowance against the net deferred tax asset which would require future taxable income in order to be utilized. The Corporation, as of June 30, 2009 had a net operating loss and tax credit carryforwards for tax purposes of approximately $32.1 million, and $2.1 million, respectively.

The Corporation utilized NOL carryforwards to offset taxable income for the first nine months of 2007. In the third quarter of 2007, the Corporation reversed a portion of the valuation allowance, $7.500 million that pertained to the deferred tax benefit of NOL and tax credit carryforwards. This valuation adjustment was recorded as a current period income tax benefit. In 2006, the Corporation recorded a $.500 million tax benefit and utilized additional NOL carryforwards to offset current taxable income. The recognition of the deferred tax benefit in 2007 and 2006 was in accordance with generally accepted accounting principles, and considered among other things, the probability of utilizing the NOL and credit carryforwards.

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

8.

INCOME TAXES (Continued)

The Corporation recorded the future benefits from these carryforwards at such time as it became “more likely than not” that they would be utilized prior to expiration. Please refer to further discussion on income taxes contained in “Management’s Discussion and Analysis.” The net operating loss carryforwards expire twenty years from the date they originated. These carryforwards, if not utilized, will begin to expire in the year 2023. A portion of the NOL, approximately $20 million, and all of the credit carryforwards are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue Code. The annual limitation is $1.4 million for the NOL and the equivalent value of tax credits, which is approximately $.477 million. These limitations for use were established in conjunction with the recapitalization of the Corporation in December, 2004.

9.

FAIR VALUE MEASUREMENTS

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.

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.

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

9.

FAIR VALUE MEASUREMENTS (Continued)

The following table presents information for financial instruments at June 30, 2009 and December 31, 2008 (dollars in thousands):

		June 30, 2009								December 31, 2008
		Carrying				Estimated				Carrying				Estimated
		Amount				Fair Value				Amount				Fair Value
Financial assets:
Cash and cash equivalents		$	12,189			$	12,189			$	10,112			$	10,112
Interest bearing deposits			618				618				582				582
Securities available for sale			95,620				95,620				47,490				47,490
Federal Home Loan Bank stock			3,794				3,794				3,794				3,794
Net loans			367,885				371,578				366,003				372,080
Cash surrender value — life insurance			1,421				1,421				1,397				1,397
Other Real Estate			4,950				4,950				2,189				2,189
Accrued interest receivable			1,595				1,595				1,457				1,457
Total financial assets		$	488,072			$	491,765			$	433,024			$	439,101
Financial liabilities:
Deposits		$	413,152			$	412,674			$	371,097			$	371,434
Borrowings			36,210				36,669				36,210				36,846
Directors deferred compensation			869				869				912				912
Accrued interest payable			385				385				488				488
Total financial liabilities		$	450,616			$	450,597			$	408,707			$	409,680

Limitations — Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, other assets, and other liabilities. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The following tables present information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at June 30, 2009, and the valuation techniques used by the Corporation to determine those fair values.

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

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

9.

FAIR VALUE MEASUREMENTS (Continued)

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2009

Quoted Prices in Active

Significant Other

Significant

Markets for Identical

Observable Inputs

Unobservable Inputs

Balance at

Assets (Level 1)

(Level 2)

(Level 3)

June 30, 2009

Assets

Investment securities — available for sale

$

—

$

95,620

$

—

$

95,620

Liabilities

None

The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31, 2008 or June 30, 2009.

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

Assets Measured at Fair Value on a Nonrecurring Basis

						Quoted Prices				Significant				Significant
						in Active Markets				Other Observable				Unobservable				Total Losses for
		Balance at				for Identical Assets				Inputs				Inputs				Three Months Ended				Six Months Ended
(dollars in thousands)		June 30, 2009				(Level 1)				(Level 2)				(Level 3)				June 30, 2009				June 30, 2009
Assets
Impaired loans accounted for under FAS 114		$	—			$	—			$	—			$	1,142			$	43			$	80
																		$	43			$	80

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

Impaired loans accounted for under FAS 114 categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Corporation estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals).

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

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

10.

SHAREHOLDERS’ EQUITY (Continued)

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.

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.

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

11.

COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued)

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

		June 30,				December 31,				June 30,
		2009				2008				2008
Commitments to extend credit:
Variable rate		$	31,337			$	40,036			$	40,215
Fixed rate			7,005				4,487				8,601
Standby letters of credit — Variable rate			1,742				1,838				6,693
Credit card commitments — Fixed rate			2,528				2,438				2,521
		$	42,612			$	48,799			$	58,030

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies but may include accounts receivable; inventory; property, plant, and equipment; and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The commitments are structured to allow for 100% collateralization on all standby letters of credit.

Credit card commitments are commitments on credit cards issued by the Corporation’s subsidiary and serviced by other companies. These commitments are unsecured.

Contingencies

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

Concentration of Credit Risk

The Bank grants commercial, residential, agricultural, and consumer loans throughout Michigan. The Bank’s most prominent concentration in the loan portfolio relates to commercial real estate loans to operators of nonresidential buildings. This concentration at June 30, 2009 represents $44.087 million, or 14.87%, compared to $41.778 million, or 15.85%, of the commercial loan portfolio on June 30, 2008. The remainder of the commercial loan portfolio is diversified in such categories as hospitality and tourism, real estate agents and managers, new car dealers, gaming, petroleum, forestry, agriculture and construction. Due to the diversity of the Bank’s locations, the ability of debtors of residential and consumer loans to honor their obligations is not tied to any particular economic sector.

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

12.

SUBSEQUENT EVENTS

On May 19, 2009, mBank, the banking subsidiary of the Corporation entered into a definitive Purchase and Assumption Agreement with The Miners State Bank of Iron River, Michigan, for the sale of two of their Northwest Upper Peninsula branch offices.

The Asset Purchase and Assumption Agreements call for The Miners State Bank of Iron River, Michigan to purchase the branch buildings and assume approximately $30 million of deposits associated with both branches. These transactions are expected to close in the third quarter of 2009 and will result in a gain for the Corporation.

MACKINAC FINANCIAL CORPORATION

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

FORWARD LOOKING STATEMENTS

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

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

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

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

The following discussion will cover results of operations, asset quality, financial position, liquidity, interest rate sensitivity, and capital resources for the periods indicated. The information included in this discussion is intended to assist readers in their analysis of, and should be read in conjunction with, the consolidated financial statements and related notes and other supplemental information presented elsewhere in this report. This discussion should be read in conjunction with the consolidated financial statements and footnotes contained in the Corporation’s Annual Report and Form 10-K for the year-ended December 31, 2008. Throughout this discussion, the term “Bank” refers to mBank, the principal banking subsidiary of the Corporation.

FINANCIAL OVERVIEW

The Corporation recorded second quarter 2009 income of $.461 million or $ .13 per share compared to net income of $1.769 million, or $.52 per share for the second quarter of 2008. Net income for the first six months of 2009 totaled $ .551 million, or $.16 per share, compared to $1.908 million, or $.56 per share, for the same period in 2008.

The quarter and six month results for 2009 includes the FDIC special assessment which was charged to all banking organizations based upon asset size, and amounted to $.215 million for mBank. The quarter and six month results for 2008 include the positive effect, $3.475 million, of a lawsuit settlement and the negative effect, $.425 million, of a severance agreement. Operating results for the six month period in 2009 includes a $.700 million provision compared to $.750 million in the same period in 2008.

Weighted average shares totaled 3,419,736 year to date and for the second quarter in 2009 compared to 3,424,314 for the six month period and 3,419,935 at the second quarter of 2008.

Total assets of the Corporation at June 30, 2009 were $506.304 million, up $68.977 million, or 15.77% from the $437.327 million in total assets reported at June 30, 2008 and up $54.873 million, or 12.16%, from total assets of $451.431 million at year-end 2008. Asset totals at June 30, 2009 reflect increased balances of investment securities of approximately $48 million. The loan portfolio increased $1.724 million in the first six months of 2009, from December 31, 2008 balances of $370.280 million. Deposits totaled $413.152 million at June 30, 2009, an increase from the $371.097 million at December 31, 2008.

FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents increased $2.077 million in 2009. See further discussion of the change in cash and cash equivalents in the Liquidity section.

Investment Securities

Securities available-for-sale increased $48.130 million, or 101.35%, from December 31, 2008 to June 30, 2009, with the balance on June 30, 2009, totaling $95.620 million. Investment securities are utilized in an effort to manage interest rate risk and liquidity. In the second quarter of 2009, the Corporation increased its investment portfolio in combination with the funding received, $11.000 million, from the issuance of preferred stock. The Corporation expects to reduce the current level of investment securities as loan funding increases later in 2009. As of June 30, 2009, investment securities with an estimated fair value of $18.730 million were pledged.

Loans

Through the first half of 2009, loan balances increased by $1.724 million, or .47%, from December 31, 2008 balances of $370.280 million. During the first six months of 2009, the Bank had total loan production of $27.436 million. This loan production, however, was significantly offset by normal principal runoff and amortization, $11.785 million, and large paydowns and refinancing, which totaled $7.520 million. Management continues to actively manage the loan portfolio, seeking to identify and resolve problem assets at an early stage. Management believes a properly positioned loan portfolio provides the most attractive earning asset yield available to the Corporation and, with changes to the loan approval process and exception reporting, management can effectively manage the risk in the loan portfolio. Management intends to continue loan growth within its markets for mortgage,

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

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, 2009, December 31, 2008 and June 30, 2008 (dollars in thousands):

		June 30,				Percent of				December 31,				Percent of				June 30,				Percent of
		2009				Total				2008				Total				2008				Total
Commercial real estate		$	196,895				52.93	%		$	185,241				50.03	%		$	186,108				51.39	%
Commercial, financial, and agricultural			73,372				19.72				79,734				21.53				77,473				21.39
One to four family residential real estate			65,564				17.63				65,595				17.71				60,882				16.81
Consumer			3,835				1.03				3,745				1.01				3,608				1.00
Construction:
Commercial			26,125				7.02				31,113				8.40				29,064				8.03
Consumer			6,213				1.67				4,852				1.31				4,987				1.38
Total loans		$	372,004				100.00	%		$	370,280				100.00	%		$	362,122				100.00	%