Summary of MACKINAC FINANCIAL CORP /MI/

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.

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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, 2007. Throughout this discussion, the term "Bank" refers to mBank, the principal banking subsidiary of the Corporation.
FINANCIAL OVERVIEW
Year-to-date consolidated net income was $2.124 million through September 30, 2008, or $.62 per share, compared to income of $9.636 million, $2.81 per share, for the same period in 2007. The income for the three months ended September 30, 2008 amounted to $.216 million, or $.06 per share, compared to income of $8.055 million, or $2.35 per share for the same period in 2007. The results of operations for the first nine months of 2008 include the positive effect, $3.475 million, of a lawsuit settlement, the negative effect, $.425 million, of a severance agreement and a $1.200 million loan loss provision. The results of operations for the same period in 2007 include a provision for the benefit of income taxes in the amount of $7.500 million in recognition of a deferred tax benefit, $470,000, of proceeds from the settlement of a lawsuit against the Corporation's former accountants, and a provision for loan losses of $400,000. Total assets increased $32.073 million from December 31, 2007 to September 30, 2008. The loan portfolio increased $6.442 million in the first nine months of 2008, from December 31, 2007 balances of $355.079 million. Deposits totaled $360.694 million at September 30, 2008, an increase of $39.867 million from the $320.827 million at December 31, 2007.
FINANCIAL CONDITION
Cash and Cash Equivalents
Cash and cash equivalents increased $6.277 million in 2008. See further discussion of the change in cash and cash equivalents in the Liquidity section. Investment Securities
Securities available for sale increased $21.184 million, or 98.09%, from December 31, 2007 to September 30, 2008, with the balance on September 30, 2008, totaling $42.781 million. Investment securities are utilized in an effort to manage interest rate risk and liquidity. As of September 30, 2008, investment securities with an estimated fair value of $19.276 million were pledged. In the third quarter of 2008, investment securities were increased in order to address overall market liquidity concerns. The Bank's investment portfolio increased from $23.230 million at June 30, 2008 to $42.781 million on September 30, 2008. This increase of $19.557 million provided the Bank with significant short-term liquidity, since $23.505 million of the investments are unpledged. All of the Bank's current investments are highly marketable investments guaranteed by the U.S. government. Loans
Through the third quarter of 2008, loan balances increased by $6.442 million, or 1.81%, from December 31, 2007 balances of $355.079 million. During the first nine months of 2008, the Bank had total loan production of $46.539 million. This loan production, some of which has not yet funded, was significantly offset by normal principal runoff and amortization, $24.320 million, and large paydowns and refinancing, which totaled $18.680 million. Management continues to actively manage the loan portfolio, seeking to identify and resolve problem assets at an early stage. Management believes a properly positioned loan portfolio provides the most attractive earning asset yield available to the Corporation and, with changes to the loan approval process and exception reporting, management can effectively manage the risk in the loan portfolio. Management intends to continue loan growth within its markets for mortgage, consumer, and commercial loan products while concentrating on loan quality, industry concentration issues, and competitive pricing.

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                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                           OF OPERATIONS (Continued)
Following is a summary of the loan portfolio at September 30, 2008, December 31,
2007 and September 30, 2007 (dollars in thousands):

                                  September 30,          Percent of          December 31,          Percent of          September 30,          Percent of
                                      2008                 Total                 2007                Total                 2007                 Total
Commercial real estate           $       184,423               51.01 %      $      171,695               48.35 %      $       161,032               46.79 %
Commercial, financial, and
agricultural                              75,610               20.91                78,192               22.02                 78,822               22.90
One to four family
residential real estate                   62,895               17.40                57,613               16.23                 54,962               15.97
Consumer                                   3,539                 .98                 3,537                1.00                  3,507                1.02
Construction:
Commercial                                30,373                8.40                38,952               10.97                 39,816               11.57
Consumer                                   4,681                1.30                 5,090                1.43                  6,010                1.75

Total loans                      $       361,521              100.00 %      $      355,079              100.00 %      $       344,149              100.00 %

Following is a table showing the significant industry types in the commercial loan portfolio as of September 30, 2008, December 31, 2007 and September 30, 2007 (dollars in thousands):

                                                    September 30, 2008                                              December 31, 2007                                               September 30, 2007
                                                       Percent of           Percent of                                 Percent of           Percent of                                 Percent of           Percent of
                                  Outstanding          Commercial          Shareholders'          Outstanding          Commercial          Shareholders'          Outstanding          Commercial          Shareholders'
                                    Balance              Loans                Equity                Balance              Loans                Equity                Balance              Loans                Equity
R/E - oper of
nonresidential bldgs.            $      41,486               14.29 %               100.14 %      $      41,597               14.40 %               105.79 %      $      43,422               15.53 %               112.21 %
Hospitality and tourism                 35,287               12.15                  85.18               37,604               13.02                  95.63               37,479               13.40                  96.85
Real estate agents &
managers                                29,277               10.08                  70.67               29,571               10.24                  75.20               25,662                9.18                  66.32
Commercial construction                 30,373               10.46                  73.32               38,952               13.49                  99.06               39,816               14.24                 102.89
Other                                  153,983               53.02                 371.70              141,115               48.85                 358.88              133,291               47.65                 344.45

Total Commercial Loans           $     290,406              100.00 %                             $     288,839              100.00 %                             $     279,670              100.00 %

Management recognizes the additional risk presented by the concentration in certain segments of the portfolio. On a historical basis, the Corporation's highest concentration of credit risk was the hospitality and tourism industry. Management does not consider the current loan concentrations in hospitality and gaming to be problematic, and has no intention of further reducing loans to this industry segment. Management does not believe that its current portfolio composition has increased exposure related to any specific industry concentration as of September 30, 2008. The current concentration of real estate related loans represents a broad customer base composed of a high percentage of owner occupied developments.
Credit Quality
Management analyzes the allowance for loan losses in detail on a monthly basis to determine whether the losses inherent in the portfolio are properly reserved for. Net charge-offs for the nine months ended September 30, 2008 amounted to $1.961 million, or .55% of average loans outstanding, compared to $.384 million, .12% of average loans outstanding, for the same period in 2007. The 2008 nine month charge-offs reflect the writedown of three commercial loans, totaling $.862 million, which were reserved for in prior periods. The current reserve balance is representative of the relevant risk inherent within the Corporation's loan portfolio. Additions or reductions to the reserve in future periods will be dependent upon a combination of future loan growth, nonperforming loan balances and charge-off activity.

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                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                           OF OPERATIONS (Continued)
The table below shows period end balances of non-performing assets (dollars in
thousands):

                                                         September 30,          December 31,          September 30,
                                                             2008                   2007                  2007
Nonperforming Assets :
Nonaccrual loans                                        $         4,649        $        3,298        $         3,136
Loans past due 90 days or more                                        -                   710                     36

Total nonperforming loans                                         4,649                 4,008                  3,172
Other real estate owned                                           1,751                 1,226                    451

Total nonperforming assets                              $         6,400        $        5,234        $         3,623

Nonperforming loans as a % of loans                                1.29 %                1.13 %                  .92 %

Nonperforming assets as a % of assets                              1.45 %                1.28 %                  .90 %

Reserve for Loan Losses:
At period end                                           $         3,385        $        4,146        $         5,022

As a % of loans                                                     .94 %                1.24 %                 1.46 %

As a % of nonperforming loans                                     72.81 %              103.44 %               158.32 %

As a % of nonaccrual loans                                        72.81 %              125.71 %               160.14 %

The following ratios assist management in the determination of the Corporation's credit quality (dollars in thousands):

                                                         September 30,          December 31,          September 30,
                                                             2007                   2007                  2007
Total loans, at period end                              $       361,521        $      355,079        $       344,149

Average loans for the year                                      359,729               333,415                327,810

Allowance for loan losses                                         3,385                 4,146                  5,022

Allowance to total loans at period end                              .94 %                1.17 %                 1.46 %

Net charge-offs during the period                       $         1,961        $        1,260        $           384

Net charge-offs to average loans                                    .55 %                 .38 %                  .12 %

Net charge-offs to beginning allowance balance                    47.30 %               25.17 %                 7.67 %

Management continues to address market issues impacting its loan customer base. In conjunction with the Corporation's senior lending staff and the bank regulatory examinations, management reviews the Corporation's loans, related collateral evaluations, and the overall lending process. The Corporation also utilizes a loan review consultant to perform a review of the loan portfolio. The opinion of this consultant upon completion of the independent review, early in 2008, provided findings similar to management on the overall adequacy of the reserve.

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                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                           OF OPERATIONS (Continued)
The following table will provide additional information with respect to our
nonperforming assets as of September 30, 2008 (dollars in thousands):

                                                         Estimated                                                                                      Estimated
                                                        Liquidation             (Deficiency)                SBA               Reserve                  Net Surplus/
        Collateral Type                Balance             Value                  Surplus                Guarantee           Allocation                 (Exposure)
                                         (a)                (b)               ( c) = (b) - (a)              (d)                 (e)               (f) = (c ) + (d) + (e)
Nonaccrual Loans
Land Development                       $  2,754         $      2,134         $             (620 )       $         -         $        620         $                      -
Land Development/Condo                    1,038                  700                       (338 )                 -                  350                               12
Cabins / Land                               410                  410                          -                   -                    -                                -
Non-Farm/Non-Residential                    229                  234                          5                 116                    -                              121
Land                                        107                  149                         42                   -                   13                               55
1-4 Family                                   85                   84                         (1 )                 -                    2                                1
Business Equipment                           26                   10                        (16 )                 -                   16                                -

Total nonaccrual loans                    4,649                3,721                       (928 )               116                1,001                              189


Other Real Estate
Land Development                            511                  511                          -                   -                    -                                -
1-4 Family                                  403                  377                        (26 )                 -                   25                               (1 )
Motel/Hotel                                 337                  337                          -                   -                                                     -
Cabins/Land                                 260                  240                        (20 )                 -                                                   (20 )
Non-Farm/Non-Residential                    163                  142                        (21 )                 -                   20                               (1 )
Downtown Store Frontage / 2 /
1-4 Family                                   77                   77                          -                   -                    -                                -

Total other real estate owned             1,751                1,684                        (67 )                 -                   45                              (22 )

Total nonperforming assets $ 6,400 $ 5,405 $ (995 ) $ 116 $ 1,046 $ 167

The schedule above shows the detail of nonperforming assets categorized by type of loan/collateral. In determining estimated liquidation value, management considered existing appraisals, the date of the appraisals, and current market conditions, along with related selling costs. Personal guarantees are also in place for various nonperforming assets, which will also help mitigate losses. Following is the allocation of the allowance for loan losses as of September 30, 2008, December 31, 2007 and September 30, 2007 (dollars in thousands):

                                                         September 30,         December 31,          September 30,
                                                             2008                  2007                  2007
Commercial, financial and agricultural loans            $         2,974        $       3,808        $         4,803
One to four family residential real estate loans                     53                   22                     31
Consumer loans                                                        9                   20                      -
Unallocated and general reserves                                    349                  296                    188

Totals                                                  $         3,385        $       4,146        $         5,022

As of September 30, 2008, the allowance for loan losses represented 0.94% of total loans. In management's opinion, the allowance for loan losses is adequate to cover probable losses related to specifically identified loans, as well as probable losses inherent in the balance of the loan portfolio. As part of the process of resolving problem credits, the Corporation may acquire ownership of collateral which secured such credits. The Corporation carries this collateral in other real estate on the balance sheet.

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                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                           OF OPERATIONS (Continued)
The following table represents the activity in other real estate for the periods
indicated (dollars in thousands):

                                                         Nine Months Ended             Year Ended              Nine Months Ended
                                                        September 30, 2008          December 31, 2007         September 30, 2007
Balance at beginning of period                          $             1,226        $                26        $                26
Other real estate transferred from loans due to
foreclosure                                                           2,745                      1,218                        443
Other real estate sold/written down                                  (2,220 )                      (18 )                      (18 )

Balance at end of period                                $             1,751        $             1,226        $               451

During the first nine months of 2008, the Corporation received real estate in lieu of loan payments of $2.745 million. Other real estate is initially valued at the lower of cost or the fair value less selling costs. After the initial receipt, management periodically re-evaluates the recorded balance. Any additional reduction in the fair value results in a write-down of other real estate.
Deposits
The Corporation had an increase in deposits in the first nine months of 2008. Total deposits increased by $39.867 million, or 12.43%, in the first nine months of 2008. Core deposits increased from $199.809 million at 2007 year end to $208.940 million, an increase of $9.131 million. Noncore deposits increased by $30.736 million during the first nine months of 2008, largely due to increased liquidity needs. Management continues to monitor existing deposit products in order to stay competitive, as to both terms and pricing. It is the intent of management to be aggressive in our markets to grow core deposits, with an emphasis placed on transactional accounts.
The following table represents detail of deposits at the end of the periods indicated (dollars in thousands):

                                         September 30,                                December 31,                                September 30,
                                             2008                % of Total               2007               % of Total               2007                % of Total
Non-interest-bearing                    $        34,858                 9.66 %       $       25,557                 7.97 %       $        28,325                 8.81 %
NOW, money market, checking                      80,185                22.23                 81,160                25.30                  87,262                27.15
Savings                                          18,957                 5.26                 12,485                 3.89                  12,831                 3.99
Certificates of Deposit <$100,000                74,940                20.78                 80,607                25.12                  90,220                28.07

Total core deposits                             208,940                57.93                199,809                62.28                 218,638                68.02

Certificates of Deposit >$100,000                30,220                 8.38                 22,355                 6.97                  24,432                 7.61
Brokered CDs                                    121,534                33.69                 98,663                30.75                  78,301                24.37

Total non-core deposits                         151,754                42.07                121,018                37.72                 102,733                31.98


Total deposits                          $       360,694               100.00 %       $      320,827               100.00 %       $       321,371               100.00 %

Borrowings
The Corporation historically used alternative funding sources to provide long-term, stable sources of funds. Current borrowings total $35.000 million with stated maturities ranging through 2011. Borrowings at quarter end include $20.000 million with adjustable rates that reprice quarterly based upon the three month LIBOR. The FHLB has the option to convert the remaining $15.000 million fixed-rate advances to adjustable rate advances on the original call date and quarterly thereafter.
Shareholders' Equity
Total shareholders' equity increased $2.106 million from December 31, 2007 to September 30, 2008. The increase is comprised of net income of $2.124 million, . . .