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

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

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

Indicate by check mark whether the registrant 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 March 31, 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 - March 31, 2010 (Unaudited), December 31, 2009 and March 31, 2009 (Unaudited)			1
Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2010 (Unaudited) and March 31, 2009 (Unaudited)			2
Condensed Consolidated Statements of Changes in Shareholders’ Equity — Three Months Ended March 31, 2010 (Unaudited) and March 31, 2009 (Unaudited)			3
Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2010 (Unaudited) and March 31, 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

MACKINAC FINANCIAL CORPORATION

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)

		March 31,				December 31,				March 31,
		2010				2009				2009
		(unaudited)								(unaudited)
ASSETS
Cash and due from banks		$	19,359			$	18,433			$	21,394
Federal funds sold			36,000				27,000				—
Cash and cash equivalents			55,359				45,433				21,394
Interest-bearing deposits in other financial institutions			700				678				569
Securities available for sale			36,841				46,513				51,071
Federal Home Loan Bank stock			3,794				3,794				3,794
Loans:
Commercial			296,271				305,670				295,595
Mortgage			76,996				74,350				71,554
Consumer			4,044				4,290				3,627
Total Loans			377,311				384,310				370,776
Allowance for loan losses			(4,737	)			(5,225	)			(4,793	)
Net loans			372,574				379,085				365,983
Premises and equipment			10,060				10,165				11,134
Other real estate held for sale			7,723				5,804				2,199
Other assets			15,376				23,905				10,231
TOTAL ASSETS		$	502,427			$	515,377			$	466,375
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest bearing deposits		$	30,356			$	35,878			$	31,541
NOW, money market, checking			109,374				95,790				75,026
Savings			20,675				18,207				19,585
CDs<$100,000			75,822				59,953				70,708
CDs>$100,000			30,173				36,385				26,886
Brokered			138,812				175,176				162,011
Total deposits			405,212				421,389				385,757
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			2,353				2,549				2,544
Total liabilities			443,705				460,078				424,511
Shareholders’ equity:
Preferred stock — No par value:
Authorized 500,000 shares, 11,000 shares issued and outstanding			10,562				10,514				—
Common stock and additional paid in capital — No par value
Authorized - 18,000,000 shares
Issued and outstanding — 3,419,736 shares			43,502				43,493				42,833
Retained earnings (accumulated deficit)			3,724				199				(1,618	)
Accumulated other comprehensive income			934				1,093				649
Total shareholders’ equity			58,722				55,299				41,864
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	502,427			$	515,377			$	466,375

See accompanying notes to condensed consolidated financial statements.

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except per Share Data)

(Unaudited)

		Three Months Ended
		March 31,
		2010				2009
		(Unaudited)				(Unaudited)
INTEREST INCOME:
Interest and fees on loans:
Taxable		$	5,191			$	5,002
Tax-exempt			52				90
Interest on securities:
Taxable			397				459
Tax-exempt			7				1
Other interest income			40				2
Total interest income			5,687				5,554
INTEREST EXPENSE:
Deposits			1,457				1,778
Borrowings			208				281
Total interest expense			1,665				2,059
Net interest income			4,022				3,495
Provision for loan losses			900				550
Net interest income after provision for loan losses			3,122				2,945
OTHER INCOME:
Service fees			223				243
Net security gains			215				—
Net gains on sale of secondary market loans			316				58
Other			53				90
Total other income			807				391
OTHER EXPENSE:
Salaries and employee benefits			1,720				1,597
Occupancy			345				378
Furniture and equipment			194				189
Data processing			189				220
Professional service fees			173				153
Loan and deposit			395				136
FDIC insurance assessment			222				125
Telephone			47				43
Advertising			72				78
Other			272				320
Total other expense			3,629				3,239
Income before provision for income taxes			300				97
Provision for (benefit of) income taxes			(3,411	)			7
NET INCOME			3,711				90
Preferred dividend and accretion of discount			185				—
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	3,526			$	90
INCOME PER COMMON SHARE:
Basic		$	1.03			$	.03
Diluted		$	1.03			$	.03

See accompanying notes to condensed consolidated financial statements.

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

		Three Months Ended
		March 31,
		2010				2009
Balance, beginning of period		$	55,299			$	41,552
Net income for period			3,711				90
Net unrealized gain (loss) on securities available for sale			(159	)			204
Total comprehensive income			3,552				294
Dividend on preferred stock and accretion of discount			(185	)			—
Stock option compensation			8				18
Accretion of preferred stock discount			48				—
Balance, end of period		$	58,722			$	41,864

See accompanying notes to condensed consolidated financial statements.

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

		Three Months Ended
		March 31,
		2010				2009
Cash Flows From Operating Activities:
Net income		$	3,711			$	90
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			396				448
Provision for (benefit of) deferred taxes			(3,411	)			7
Provision for loan losses			900				550
(Gain) on sales/calls of securities available for sale			(215	)			—
Loss on sales of premises, equipment, and other real estate			20				1
Writedown of other real estate			128				—
Stock option compensation			8				18
Change in other assets			12,021				(292	)
Change in other liabilities			(196	)			(28	)
Net cash provided by operating activities			13,362				794
Cash Flows From Investing Activities:
Net (increase) decrease in loans			2,704				(541	)
Net (increase) decrease in interest-bearing deposits in other financial institutions			(22	)			13
Purchase of securities available for sale			—				(4,683	)
Proceeds from sales, maturities or calls of securities available for sale			9,560				1,253
Capital expenditures			(156	)			(251	)
Proceeds from sale of premises, equipment, and other real estate			840				37
Net cash provided by (used in) investing activities			12,926				(4,172	)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits			(16,177	)			14,660
Dividend on preferred stock and accretion of discount			(185	)			—
Net increase (decrease) in federal funds purchased			—				—
Net increase (decrease) in line of credit			—				—
Principal payments on borrowings			—				—
Net cash provided by (used in) investing activities			(16,362	)			14,660
Net increase in cash and cash equivalents			9,926				11,282
Cash and cash equivalents at beginning of period			45,433				10,112
Cash and cash equivalents at end of period		$	55,359			$	21,394
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest		$	1,658			$	2,143
Income taxes			—				30
Noncash Investing and Financing Activities:
Transfers of foreclosures from loans to other real estate held for sale (net of adjustments made through the allowance for loan losses)			2,907				485

See accompanying notes to condensed consolidated financial statements.

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

		Basis of Presentation
		The unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the “Corporation”) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 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.
		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.
		Stock Option Plans
		The Corporation sponsors three stock option plans. One plan was approved during 2000 and applies to officers, employees, and nonemployee directors. This plan was amended as a part of the December 2004 stock offering and recapitalization. The amendment, approved by shareholders, increased the shares available under this plan

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

1.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
		by 428,587 shares from the original 25,000 (adjusted for the 1:20 reverse stock split), to a total authorized share balance of 453,587. The other two plans, one for officers and employees and the other for nonemployee directors, were approved in 1997. A total of 30,000 shares (adjusted for the 1:20 reverse stock split), were made available for grant under these plans. 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 DEVELOPMENTS

		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.
		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 will be 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.

3.

EARNINGS PER SHARE

		Earnings per share are based upon the weighted average number of shares outstanding. Additional shares issued as a result of option exercises would not be dilutive in either three month period. The 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.
		The following shows the computation of basic and diluted earnings per share for the three months ended March 31, 2010 and 2009 (dollars in thousands, except per share data):

		Three Months Ended March 31,
		2010				2009
Net income		$	3,711			$	90
Preferred stock dividends and accretion of discount			185				—
Net income available to common shareholders		$	3,526			$	90
Weighted average shares outstanding			3,419,736				3,419,736
Effect of dilutive stock options outstanding			—				—
Effect of dilutive common stock warrants			—				—
Diluted weighted average shares outstanding			3,419,736				3,419,736
Earnings per common share:
Basic		$	1.03			$	.03
Diluted		$	1.03			$	.03

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 March 31, 2010, December 31, 2009, and March 31, 2009 are as follows (dollars in thousands):

		March 31, 2010								December 31, 2009								March 31, 2009
		Amortized				Estimated				Amortized				Estimated				Amortized				Estimated
		Cost				Fair Value				Cost				Fair Value				Cost				Fair Value
US Agencies — MBS		$	34,220			$	35,546			$	43,651			$	45,238			$	44,904			$	45,915
Asset backed — government guaranteed			—				—				—				—				4,684				4,610
Obligations of states and political subdivisions			1,206				1,295				1,207				1,275				498				546
Total securities available for sale		$	35,426			$	36,841			$	44,858			$	46,513			$	50,086			$	51,071

The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $17.087 million and $17.989 million respectively at March 31, 2010.

5.

LOANS

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

		March 31,				December 31,				March 31,
		2010				2009				2009
Commercial real estate		$	198,439			$	208,895			$	191,721
Commercial, financial and agricultural			69,797				72,184				77,216
One to four family residential real estate			70,087				67,232				65,792
Construction:
Commercial			28,035				24,591				26,658
Consumer			6,909				7,118				5,762
Consumer			4,044				4,290				3,627
Total loans		$	377,311			$	384,310			$	370,776

		LOANS — Allowance for loan losses
		An analysis of the allowance for loan losses for the three months ended March 31, 2010, the year ended December 31, 2009, and the three months ended March 31, 2009 is as follows (dollars in thousands):

		March 31,				December 31,				March 31,
		2010				2009				2009
Balance at beginning of period		$	5,225			$	4,277			$	4,277
Recoveries on loans			19				66				39
Loans charged off			(1,407	)			(2,818	)			(73	)
Provision for loan losses			900				3,700				550
Balance at end of period		$	4,737			$	5,225			$	4,793

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

5.		LOANS (Continued)
		In the first quarter of 2010, net charge-off activity of $1.388 million equated to .36% of average loans outstanding compared to net charge-offs of $34,000, or .01% of average loans, in the first quarter of 2009. In the first quarter of 2010, the Corporation recorded a provision for loan loss in the amount of $.900 million, which is discussed in more detail under “Management’s Discussion and Analysis.”
		LOANS — Impaired loans
		Nonperforming loans are those which are contractually past due 90 days or more as to interest or principal payments, on nonaccrual status, or loans, the terms of which have been renegotiated to provide a reduction or deferral on interest or principal.
		Information regarding impaired loans as of March 31, 2010, December 31, 2009, and March 31, 2009 is as follows (dollars in thousands):

														Valuation Reserve
		March 31,				December 31,				March 31,				March 31,				December 31,				March 31,
		2010				2009				2009				2010				2009				2009
Balances, at period end
Impaired loans with specific valuation reserve		$	3,215			$	11,348			$	11,065			$	1,619			$	2,705			$	2,162
Impaired loans with no specific valuation reserve			6,681				3,889				1,396				—				—				—
Total impaired loans		$	9,896			$	15,237			$	12,461			$	1,619			$	2,705			$	2,162
Impaired loans on nonaccrual basis		$	9,027			$	14,368			$	12,461			$	1,619			$	2,705			$	2,162
Impaired loans on accrual basis			869				869				—				—				—				—
Total impaired loans		$	9,896			$	15,237			$	12,461			$	1,619			$	2,705			$	2,162
Average investment in impaired loans		$	12,497			$	10,449			$	8,323
Interest income recognized during impairment			6				40				6
Interest income that would have been recognized on an accrual basis			150				700				153
Cash-basis interest income recognized			—				—				6

		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.

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

5.		LOANS (Continued)
		Activity in such loans is summarized below (dollars in thousands):

		March 31,				December 31,				March 31,
		2010				2009				2009
Loans outstanding, beginning of period		$	8,552			$	6,516			$	6,516
New loans			1,087				2,160				—
Net activity on revolving lines of credit			1,938				1,189				356
Repayment			(2,104	)			(1,610	)			(104	)
Change in related party interest			—				297				—
Loans outstanding, end of period		$	9,473			$	8,552			$	6,768

There were no loans to related parties classified substandard at March 31, 2010, December 31, 2009, and March 31, 2009 respectively. In addition to the outstanding balances above, there were unused commitments of $.543 million to related parties at March 31, 2010.

6.

BORROWINGS

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

		March 31,				December 31,				March 31,
		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 of .27% 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 March 31, 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 $30.255 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $16.387 million and $17.231 million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $3.794 million. Prepayment of the remaining advances is subject to the provisions and conditions of the credit policy of the Federal Home Loan Bank of Indianapolis in effect as of March 31, 2010.
		The U.S.D.A. Rural Development borrowing is collateralized by loans totaling $.266 million originated and held by the Corporation’s wholly owned subsidiary, First Rural Relending; an assignment of a demand deposit account in the amount of $.960 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 three months ended March 31, 2010 and 2009 and the year ended December 31, 2009, is as follows:

		March 31,				December 31,				March 31,
		2010				2009				2009
Outstanding shares, at beginning of period			411,057				446,237				446,237
Granted during the period			—				—				—
Expired/forfeited during the period			—				(35,180	)			(35,000	)
Outstanding shares at end of period			411,057				411,057				411,237
Weighted average exercise price per share at end of period		$	12.03			$	12.03			$	12.20
Shares available for grant, at end of period			—				24,780				24,780

		There were no options granted or exercised in the first quarter of 2010 or 2009. All option plans under which the above outstanding shares were granted have expired; therefore, no further shares can be granted.
		Following is a summary of the options outstanding and exercisable at March 31, 2010:

										Weighted
										Average				Weighted
										Remaining				Average
Exercise		Number of Shares								Contractual				Exercise
Price Range		Outstanding				Exercisable				Life-Years				Price
$9.16			12,500				5,000				5.71			$	9.16
$9.75			257,152				120,861				4.71				9.75
$10.65			57,500				11,500				6.71				10.65
$11.50			40,000				8,000				5.50				11.50
$12.00			40,000				8,000				5.21				12.00
$156.00-$240.00			3,545				3,545				.98				186.75
$300.00-$400.00			360				360				.04				300.00
			411,057				157,266				5.11			$	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 March 31, 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 record a $3.500 million deferred tax benefit related to the utilization of the NOL carryforward. The Corporation, as of March 31, 2010 had a net operating loss and tax credit carryforwards for tax purposes of approximately $28.0 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 $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.

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, 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.

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

9.		FAIR VALUE MEASUREMENTS (Continued)
		The following table presents information for financial instruments at March 31, 2010 and December 31, 2009 (dollars in thousands):

		March 31, 2010								December 31, 2009
		Carrying				Estimated				Carrying				Estimated
		Amount				Fair Value				Amount				Fair Value
Financial assets:
Cash and cash equivalents		$	55,359			$	55,359			$	45,433			$	45,433
Interest bearing deposits			700				700				678				678
Securities available for sale			36,841				36,841				46,513				46,513
Federal Home Loan Bank stock			3,794				3,794				3,794				3,794
Net loans			372,574				374,854				379,085				382,352
Accrued interest receivable			1,434				1,434				1,413				1,413
Total financial assets		$	470,702			$	472,982			$	476,916			$	480,183
Financial liabilities:
Deposits		$	405,212			$	405,236			$	421,389			$	421,124
Borrowings			36,140				36,372				36,140				36,447
Accrued interest payable			332				332				325				325
Total financial liabilties		$	441,684			$	441,940			$	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.
		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.

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

9.		FAIR VALUE MEASUREMENTS (Continued)
		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 at the measurement date.

		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 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.

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.
		The following tables present information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at March 31, 2010, and the valuation techniques used by the Corporation to determine those fair values (dollars in thousands).
		The fair value of all investment securities at December 31, 2009 and March 31, 2010 were based on level 2 inputs. There are no other assets or liabilities measured on a recurring basis at fair value.
		The Corporation had no Level 3 assets or liabilities on a recurring basis as of December 31, 2009 or March 31, 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 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 at March 31, 2010
						Quoted Prices				Significant				Significant
						in Active Markets				Other Observable				Unobservable				Total Losses for
		Balance at				for Identical Assets				Inputs				Inputs				Three Months Ended
(dollars in thousands)		March 31, 2010				(Level 1)				(Level 2)				(Level 3)				March 31, 2010
Assets
Impaired loans		$	4,658			$	—			$	—			$	4,658			$	86
Other real estate owned			7,723				—				—				7,723				149
																		$	235

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).
		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).

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

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.
		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 may be used to increase the strong capital position of the Bank. The Bank would then use the capital to grow loans. In addition, the capital will allow the Corporation to consider acquisitions of deposit franchisees that would enhance funding mix.

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

11.

COMMITMENTS, CONTINGENCIES, AND CREDIT RISK

		Financial Instruments with Off-Balance-Sheet Risk
		The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
		The Corporation’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. These commitments are as follows (dollars in thousands):

		March 31,				December 31,				March 31,
		2010				2009				2009
Commitments to extend credit:
Variable rate		$	26,629			$	24,839			$	34,801
Fixed rate			9,853				6,039				9,059
Standby letters of credit — Variable rate			1,170				1,279				1,589
Credit card commitments — Fixed rate			2,761				2,714				2,477
		$	40,413			$	34,871			$	47,926

		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. See Part II, Item 1, “Legal Proceedings” in this report.

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

11.		COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued)
		Concentration of Credit Risk
		The Bank grants commercial, residential, agricultural, and consumer loans throughout Michigan. The Bank’s most prominent concentration in the loan portfolio relates to commercial real estate loans to operators of nonresidential buildings. This concentration at March 31, 2010 represents $49.753 million, or 16.79%, compared to $40.457 million, or 13.69%, of the commercial loan portfolio on March 31, 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

Consolidated net income available to common shareholders for the first quarter of 2010 was $3.526 million or $1.03 per share compared to $.090 million, or $.03 per share for the first quarter of 2009. Weighted average shares outstanding amounted to 3,419,736 in the first quarter of 2010.

Net interest margin in the first quarter of 2010 increased to $4.022 million, 3.51%, compared to $3.495 million, or 3.35%, in the first quarter of 2009. The interest margin declined from 3.74% in the fourth quarter of 2009 largely due to the sale of approximately $40 million of investment securities late in 2009, the proceeds of which will be used to pay off brokered deposit maturities but is currently in overnight funds yielding .25%. During 2009, the Corporation experienced margin improvement from decreased rates on wholesale funding and also benefitted from disciplined loan pricing that included establishing interest rate floors on new and renewing loans. The temporary decline in the net interest margin is due to the decision, late in the 2009 fourth quarter, to deleverage the balance sheet in anticipation of narrowing interest rate spreads. This margin improvement is expected to continue through the year reducing current excess liquidity by funding new loans and payment of maturing brokered deposits.

Noninterest income, at $.807 million in the first quarter of 2010, increased $.416 million from the first quarter 2009 level of $.391 million. The most significant reason for the increase between periods was the increased activity in the sale of loans, which totaled $.316 million in 2010 versus $.058 million in the same period in 2009. Noninterest income in the first quarter of 2010 also includes $.215 million of security gains.

Noninterest expense totaled $3.629 million in the first quarter of 2010, an increase of $.390 million, or $12.04%. Increased expenses in the first quarter reflect the added cost of aggressive nonperforming asset remediation, along with an increase in FDIC insurance premiums of $.097 million. The expenses related to nonperforming assets include increased legal costs and expenses associated with OREO, which contributed to the overall increase in this expense category from $.136 million in the first quarter of 2009 to $.395 million in the 2010 first quarter.

Total assets of the Corporation at March 31, 2010 were $502.427 million, an increase of $36.052 million, or 7.73% from the $466.375 million in total assets reported at March 31, 2009 and decreased $12.950 million, or 2.51%, from total assets of $515.377 million at year-end 2009.

FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents increased $9.926 million in the first quarter of 2010. See further discussion of the change in cash and cash equivalents in the Liquidity section.

Investment Securities

Securities available for sale decreased $9.672 million, or 20.79%, from December 31, 2009 to March 31, 2010, with the balance on March 31, 2010, totaling $36.841 million. Securities sold in the 2010 first quarter resulted in a gain of $.215 million. As of March 31, 2010, investment securities with an estimated fair value of $17.989 million were pledged.

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

Loans

Through the first quarter of 2010, loan balances decreased by $6.999 million, or 1.82% from December 31, 2009 balances of $384.310 million. During the first quarter of 2010, the Bank had total loan production of $14.953 million. This loan production, however, was significantly offset by normal principal runoff and amortization, $10.541 million, and large paydowns and refinancing, which totaled $12.239 million. The reductions included $3.2 million in SBA loan sales, and the move of $2.1 million of nonperforming loans to OREO and a reduction of $4.5 million on another nonperforming loan relationship that was sold. Management continues to actively manage the loan portfolio, seeking to identify and resolve problem assets at an early stage. Management believes a properly positioned loan portfolio provides the most attractive earning asset yield available to the Corporation and, with changes to the loan approval process and exception reporting, management can effectively manage the risk in the loan portfolio. Management intends to continue loan growth within its markets for mortgage, consumer, and commercial loan products while concentrating on loan quality, industry concentration issues, and competitive pricing.

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

		March 31,				Percent of				December 31,				Percent of				March 31,				Percent of
		2010				Total				2009				Total				2009				Total
Commercial real estate		$	198,439				52.59	%		$	208,895				54.36	%		$	191,721				51.71	%
Commercial, financial, and agricultural			69,797				18.50				72,184				18.78				77,216				20.83
One to four family residential real estate			70,087				18.58				67,232				17.49				65,792				17.74
Consumer			4,044				1.07				4,290				1.12				3,627				.98
Construction
Commercial			28,035				7.43				24,591				6.40				26,658				7.19
Consumer			6,909				1.83				7,118				1.85				5,762				1.55
Total loans		$	377,311				100.00	%		$	384,310				100.00	%		$	370,776				100.00	%