<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


                 [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 2005
                                               ------------------

                                       OR

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

                     For the transition period from <> to <>

                         Commission file number: 0-20167

                         MACKINAC FINANCIAL CORPORATION
             (Exact name of registrant as specified in its charter)

              MICHIGAN                                38-2062816
 (State or other jurisdiction of        (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:  (800) 200-7032


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   X       No
                                 ------       -----


Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

                             Yes           No   X
                                 ------       -----


As of October 31, 2005, there were outstanding 3,428,695 shares of the
registrant's common stock, no par value.




<PAGE>




<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION                                                                    Page No.
                                                                                                  --------

<S>            <C>                                                                                <C>
   Item 1.     Financial Statements

               Condensed Consolidated Balance Sheets -
                 September 30, 2005 (Unaudited), December 31, 2004 and
                 September 30, 2004 (Unaudited)..................................................      1

               Condensed Consolidated Statements of Operations - Three and Nine
                 Months Ended September 30, 2005 (Unaudited) and
                 September 30, 2004 (Unaudited)..................................................      2

               Condensed Consolidated Statements of Changes in Shareholders'
                 Equity -- Three and Nine Months Ended September 30, 2005
                 (Unaudited) and September 30, 2004 (Unaudited)..................................      3

               Condensed Consolidated Statements of Cash Flows -
                 Nine Months Ended September 30, 2005 (Unaudited) and
                 September 30, 2004 (Unaudited)..................................................      4

               Notes to Condensed Consolidated Financial
                 Statements (Unaudited)..........................................................      5


   Item 2.     Management's Discussion and Analysis of Financial
                 Condition and Results of Operations.............................................     14


   Item 3.     Quantitative and Qualitative Disclosures About Market Risk........................     27


   Item 4.     Controls and Procedures...........................................................     30


PART II.    OTHER INFORMATION

   Item 1.     Legal Proceedings.................................................................     31


   Item 6.     Exhibits and Reports on Form 8-K..................................................     35


   SIGNATURES....................................................................................     36
</TABLE>



<PAGE>
                         MACKINAC FINANCIAL CORPORATION

                          PART I FINANCIAL INFORMATION
                          ITEM 1. FINANCIAL STATEMENTS

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)





<TABLE>
<CAPTION>
                                                               September 30,    December 31,    September 30,
                                                                   2005             2004              2004
                                                               -------------    ------------    -------------
                                                                (Unaudited)                       (Unaudited)

<S>                                                            <C>              <C>             <C>
ASSETS
   Cash and due from banks                                     $       5,333    $      4,230    $       8,210
   Federal funds sold                                                  4,849          39,848           12,318
                                                               -------------    ------------    -------------
       Cash and cash equivalents                                      10,182          44,078           20,528

   Interest-bearing deposits in other financial institutions           1,282          18,535            6,126
   Securities available for sale                                      35,506          57,075           67,502
   Federal Home Loan Bank stock                                        4,855           4,754            4,704

   Total loans                                                       218,462         203,832          221,595
       Allowance for loan losses                                      (6,589)         (6,966)         (10,720)
                                                               -------------    ------------    -------------
   Net loans                                                         211,873         196,866          210,875

   Premises and equipment                                             11,268          10,739           10,927
   Other real estate held for sale                                     1,948           1,730            4,650
   Other assets                                                        3,676           5,720            6,840
                                                               -------------    ------------    -------------

  Total assets                                                 $     280,590    $    339,497    $     332,152
                                                               =============    ============    =============

LIABILITIES AND SHAREHOLDERS' EQUITY
  Liabilities:
       Non-interest-bearing deposits                           $      19,690    $     20,956    $      23,036
       Interest-bearing deposits                                     193,578         194,694          200,074
                                                               -------------    ------------    -------------
       Total deposits                                                213,268         215,650          223,110

        Borrowings                                                    36,417          85,039           85,595
        Subordinated debentures                                           --              --           12,450
        Other liabilities                                              3,005           4,078            4,526
                                                               -------------    ------------    -------------
              Total liabilities                                      252,690         304,767          325,681

   Shareholders' equity:
       Preferred stock - No par value:
          Authorized - 500,000 shares, no shares outstanding              --              --               --

   Common stock and additional paid in capital - No par value
         Authorized - 18,000 000 shares
         Issued and outstanding - 3,428,695,
         3,428,695, and 350,958, respectively                         42,412          42,335           16,175
   Accumulated deficit                                               (14,434)         (8,097)         (10,530)
   Accumulated other comprehensive income (loss)                         (78)            492              826
                                                               -------------    ------------    -------------

       Total shareholders' equity                                     27,900          34,730            6,471
                                                               -------------    ------------    -------------
  Total liabilities and shareholders' equity                   $     280,590    $    339,497    $     332,152
                                                               =============    ============    =============
</TABLE>




     See accompanying notes to condensed consolidated financial statements.    1
<PAGE>


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



<TABLE>
<CAPTION>
                                                       Three Months Ended      Nine Months Ended
                                                          September 30,          September 30,
                                                         2005       2004        2005        2004
                                                      --------    --------    --------    --------
<S>                                                   <C>         <C>         <C>         <C>
Interest income:
   Interest and fees on loans:
     Taxable                                          $  3,547    $  3,341    $  9,807    $ 11,206
     Tax-exempt                                            222         276         694         919
   Interest on securities:
     Taxable                                               282         612       1,178       1,884
     Tax-exempt                                             42          42         126         128
   Other interest                                          177         137         470         400
                                                      --------    --------    --------    --------
     Total interest income                               4,270       4,408      12,275      14,537
                                                      --------    --------    --------    --------

Interest expense:
   Deposits                                              1,338       1,246       3,666       4,289
   Borrowings                                              425       1,184       1,509       3,554
   Subordinated debentures                                  --         118          --         356
                                                      --------    --------    --------    --------
     Total interest expense                              1,763       2,548       5,175       8,199
                                                      --------    --------    --------    --------

Net interest income                                      2,507       1,860       7,100       6,338
Provision for loan losses                                   --          --          --          --
                                                      --------    --------    --------    --------
Net interest income after provision for loan losses      2,507       1,860       7,100       6,338
                                                      --------    --------    --------    --------

Other income:
   Service fees                                            137         225         470         805
   Loan and lease fees                                       5           4          11          13
   Net security gains (losses)                              (1)         --          96          --
   Net gains on sale of loans                               17          11          37          31
   Gain on sale of branches                                 --         458          --         204
   Other                                                    96         169         194         540
                                                      --------    --------    --------    --------
     Total other income                                    254         867         808       1,593
                                                      --------    --------    --------    --------

Other expense:
   Salaries and employee benefits                        1,555       1,302       4,665       4,155
   Furniture and equipment                                 133         247         430         819
   Occupancy                                               275         193         748         740
   Data processing                                         234         282         726         985
   Accounting, legal, and consulting fees                  204         419         750       1,397
   Loan and deposit                                        153         296         696       1,389
   Telephone                                                66          83         203         315
   Advertising                                             314           9         696          52
   Penalty on prepayment of FHLB borrowings                 --          --       4,320          --
   Other                                                   345         657       1,010       2,107
                                                      --------    --------    --------    --------
     Total other expense                                 3,279       3,488      14,244      11,959
                                                      --------    --------    --------    --------

Loss before provision for income taxes                    (518)       (761)     (6,336)     (4,028)
Provision for income taxes                                  --          --           0          --
                                                      --------    --------    --------    --------
Net loss                                              $   (518)   $   (761)   $ (6,336)   $ (4,028)
                                                      ========    ========    ========    ========
Loss per common share:
   Basic                                              $   (.15)   $  (2.17)   $  (1.85)   $ (11.48)
                                                      ========    ========    ========    ========
   Diluted                                            $   (.15)   $  (2.17)   $  (1.85)   $ (11.48)
                                                      ========    ========    ========    ========

</TABLE>




     See accompanying notes to condensed consolidated financial statements.    2
<PAGE>


                         MACKINAC FINANCIAL CORPORATION
      CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                             (Dollars in Thousands)
                                   (Unaudited)




<TABLE>
<CAPTION>
                                                               Three Months Ended       Nine Months Ended
                                                                 September 30,            September 30,
                                                                2005        2004        2005        2004
                                                              --------    --------    --------    --------

<S>                                                           <C>         <C>         <C>         <C>
Balance, beginning of period                                  $ 28,517    $  5,885    $ 34,730    $ 10,700

Net loss for period                                               (518)       (761)     (6,336)     (4,028)
Change in minority interest of consolidated subsidiary              --          --          76          --
Net unrealized gain (loss) on securities available for sale        (99)      1,347        (570)       (201)
                                                              --------    --------    --------    --------
     Total comprehensive income (loss)                            (617)        586      (6,830)     (4,229)
                                                              --------    --------    --------    --------

Balance, end of period                                        $ 27,900    $  6,471    $ 27,900    $  6,471
                                                              ========    ========    ========    ========
</TABLE>















     See accompanying notes to condensed consolidated financial statements.    3
<PAGE>
                         MACKINAC FINANCIAL CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                                    Nine Months Ended
                                                                                                       September 30,
                                                                                                2005                 2004
                                                                                              --------             --------
<S>                                                                                         <C>                  <C>
Increase (decrease) in cash and cash equivalents:

   Cash flows from operating activities:
     Net loss                                                                                 $ (6,336)            $ (4,028)
     Adjustments to reconcile net loss to net cash
       provided by (used in) operating activities:
         Depreciation and amortization                                                             707                1,295
         Provision for impairment of other real estate held for sale                                 -                   92
         Gain on sales of securities                                                               (96)                   -
         Gain on sales of premises, equipment, and other real estate                               (64)                  98
         FHLB stock dividend                                                                      (101)                (160)
         Change in other assets                                                                  1,950                3,109
         Change in other liabilities                                                            (1,073)              (2,043)
                                                                                              --------             --------
     Net cash used in operating activities                                                      (5,013)              (1,637)
                                                                                              --------             --------

   Cash flows from investing activities:
     Net (increase) decrease in interest-bearing deposits in other financial
      institutions                                                                              17,253                  (78)
     Purchase of securities available for sale                                                 (16,009)             (21,910)
     Proceeds from sales of securities available for sale                                       30,811               27,997
     Proceeds from maturities, calls, or paydowns of securities available for sale               6,218               10,771
     Net decrease (increase) in loans                                                          (15,563)              59,813
     Purchase of premises and equipment                                                         (1,088)                 (87)
     Proceeds from sales of premises, equipment, and other real estate                             423                6,741
     Purchase of minority interest in subsidiary of bank                                            76                    -
                                                                                              --------             --------
   Net cash provided by investing activities                                                    22,121               83,247

   Cash flows from financing activities:
     Net decrease in deposits                                                                   (2,382)             (82,684)
     Proceeds from issuance of debt                                                              1,651                  125
     Principal payments on borrowings                                                          (50,273)              (1,556)
                                                                                              --------             --------
   Net cash used in financing activities                                                       (51,004)             (84,115)
                                                                                              --------             --------

   Net change in cash and cash equivalents                                                     (33,896)              (2,505)
   Cash and cash equivalents at beginning of period                                             44,078               23,033
                                                                                              --------             --------

   Cash and cash equivalents at end of period                                                   10,182             $ 20,528
                                                                                              ========             ========

   Supplemental cash flow information:
   Cash paid for:
       Interest                                                                               $  5,338             $  8,405
       Income taxes                                                                                  -                    -

     Transfers of foreclosures from loans to other real estate held for sale                       556                5,153

</TABLE>



     See accompanying notes to condensed consolidated financial statements.   4.


<PAGE>
                         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 nine month period ended
     September 30, 2005 are not necessarily indicative of the results that may
     be expected for the year ending December 31, 2005. 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, 2004.

     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,
     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 December 2004 the Corporation effected a 1:20 reverse stock split. All
     historical per share data has been restated to reflect the decrease in
     shares outstanding as a result of this split.

     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 recently completed stock offering and
     recapitalization. The amendment, approved by shareholders, increased the
     shares available under this plan by 428,587 shares from the original 25,000
     (adjusted for the 1:20 reverse stock split), to a total authorized share
     balance of 453,587. The other two plans, one for officers and employees and
     the other for nonemployee directors, were approved in 1997. A total of
     30,000 shares (adjusted for the 1:20 reverse stock split), were made
     available for grant under these plans. Options under all of the plans are
     granted at the



                                                                              5.
<PAGE>


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


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
     ------------------------------------------

     discretion of a committee of the Corporation's Board of Directors. Options
     to purchase shares of the Corporation's stock are granted at a price equal
     to the market price of the stock at the date of grant. The committee
     determines the vesting of the options when they are granted as established
     under the plan.

     The fair value of each option granted is estimated on the grant date using
     the Black-Scholes methodology. The following assumptions were made in
     estimating fair value for options granted for the nine months ended
     September 30, 2005. The weighted average fair value of options granted in
     2005 as of their grant date, along with the assumptions used for each
     grant, is shown below.

<TABLE>
<CAPTION>
                                                                   Grant Date
                                                     -------------------------------------
                                                     June 10, 2005      September 28, 2005
                                                     -------------      ------------------
<S>                                                 <C>                <C>
Shares granted                                              60,000                  40,000
Exercise price                                       $       12.00      $            11.50
Dividend yield                                                 0.0%                    0.0%
Risk-free interest rate                                       3.80%                   4.10%
Weighted average expected life (years)                         4.0                     4.0
Expected volatility                                          30.00%                  30.00%
Fair value per share                                 $        3.55      $             3.46
</TABLE>



     The Corporation accounts for stock options using the intrinsic value
     method. For all options granted, the intrinsic value was zero; therefore,
     no compensation cost has been recognized for the plans. Had compensation
     cost been determined on the basis of fair value, net income and earnings
     per share would have been reduced for the nine months ended September 30,
     2005 and 2004 as follows (dollars in thousands, except per share data):


<TABLE>
<CAPTION>

                                                                           Nine Months Ended
                                                                     September 30,    September 30,
                                                                        2005              2004
                                                                     -------------    -------------
<S>                                                                  <C>              <C>
Net Loss:
     As reported                                                     $      (6,336)   $      (4,028)
     Total stock-based compensation expense determined
       under fair value-based method                                            70                -
                                                                     -------------    -------------
Pro forma                                                            $      (6,406)   $      (4,028)
                                                                     =============    =============

Loss per share - Basic:

     As reported                                                     $       (1.85)   $      (11.48)
                                                                     =============    =============

     Pro forma                                                       $       (1.87)   $      (11.48)
                                                                     =============    =============

Loss per share - Diluted:

     As reported                                                     $       (1.85)   $      (11.48)
                                                                     =============    =============

     Pro forma                                                       $       (1.87)   $      (11.48)
                                                                     =============    =============

     Weighted average shares outstanding                                 3,428,695          350,958
                                                                     =============    =============

</TABLE>


                                                                              6.
<PAGE>


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


RECLASSIFICATION

     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.

2.   RECENT ACCOUNTING PRONOUNCEMENT

     In December 2004, the FASB re-issued SFAS No. 123 "Accounting for
     Stock-Based Compensation" which becomes effective for interim periods
     beginning after June 15, 2005. (Note: This date has now been extended to
     December 31, 2005). This Statement supersedes APB Opinion No. 25
     "Accounting for Stock Issued to Employees" and its related implementation
     guidance. Under Opinion No. 25, issuing stock options to employees
     generally resulted in recognition of no compensation cost. This Statement
     requires entities to recognize the cost of employee services received in
     exchange for these stock options. This Statement applies to all unvested
     awards outstanding as of the effective date. The Corporation plans to adopt
     SFAS No. 123 for the period beginning after December 31, 2005 and does not
     expect a material impact on the Corporation's Consolidated Financial
     Statements.

3.   EARNINGS (LOSS) PER SHARE

     Earnings (loss) per share are based upon the weighted average number of
     shares outstanding.

     The following shows the computation of basic and diluted earnings (loss)
     per share for the three and nine months ended September 30, 2005 and 2004
     (dollars in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                     Three Months Ended                  Nine Months Ended
                                                                        September 30,                       September 30,
                                                                    2005              2004              2005              2004
                                                                -----------       -----------       -----------       -----------
<S>                                                             <C>               <C>               <C>               <C>
Basic loss per common share:
     Net loss                                                   $      (518)      $      (761)      $    (6,336)      $    (4,028)
                                                                ===========       ===========       ===========       ===========

     Weighted average common shares outstanding                       3,429               351             3,429               351

                                                                -----------       -----------       -----------       -----------
       Basic loss per common share                              $      (.15)      $     (2.17)      $     (1.85)      $    (11.48)
                                                                ===========       ===========       ===========       ===========

Diluted loss per common share:
     Net loss                                                   $      (518)      $      (761)      $    (6,336)      $    (4,028)
                                                                ===========       ===========       ===========       ===========

Weighted average common shares outstanding for
  basic loss per common share                                     3,428,695           350,958         3,428,695           350,958
Add:  Dilutive effect of assumed exercise of stock options                -                 -                 -                 -
                                                                -----------       -----------       -----------       -----------

     Average shares and dilutive potential common shares              3,429               351             3,429               351
                                                                ===========       ===========       ===========       ===========

     Diluted loss per common share                              $      (.15)      $     (2.17)      $     (1.85)      $    (11.48)
                                                                ===========       ===========       ===========       ===========

</TABLE>

      Additional shares issued as a result of option exercises would be
     antidilutive in both periods due to the consolidated loss and are therefore
     not shown in the diluted loss per share calculation.


                                                                              7.
<PAGE>


                         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 September 30, 2005, December 31, 2004 and
     September 30, 2004 are as follows (dollars in thousands):


<TABLE>
<CAPTION>
                                                       September 30, 2005          December 31, 2004          September 30, 2004
                                                     ----------------------     ------------------------    -----------------------
                                                     Amortized    Estimated     Amortized     Estimated     Amortized    Estimated
                                                       Cost      Fair Value        Cost       Fair Value      Cost       Fair Value
                                                     ---------   ----------     ---------     ----------    ---------    ----------
<S>                                                  <C>         <C>            <C>           <C>           <C>          <C>
US Agencies                                          $  31,990   $   31,568     $  21,980     $   21,843    $  29,953    $   29,942
Obligations of states and political subdivisions         3,594        3,938         3,711          4,029        3,711         4,053
Corporate securities                                         -            -           667            681          667           689
Mortgage-related securities                                  -            -        30,225         30,522       32,345        32,818
                                                     ---------   ----------     ---------     ----------    ---------    ----------

     total securities available for sale             $  35,584   $   35,506     $  56,583     $   57,075    $  66,676   $    67,502
                                                     =========   ==========     =========     ==========    =========   ===========
</TABLE>


     The amortized cost and estimated fair value of investment securities
     pledged to treasury deposits and borrowings were $21.410 million and
     $21.085 million, respectively, at September 30, 2005.

5.   LOANS

     The composition of loans at September 30, 2005, December 31, 2004 and
     September 30, 2004 is as follows (dollars in thousands):


<TABLE>
<CAPTION>

                                                     September 30,         December 31,       September 30,
                                                         2005                  2004               2004
                                                     -------------         ------------       -------------
<S>                                                  <C>                   <C>                <C>
Commercial real estate                               $     123,429         $    105,619       $     114,929
Commercial, financial, and agricultural                     36,297               47,446              59,206
One to four family residential real estate                  42,490               45,292              44,365
Consumer                                                     2,108                2,379               2,646
Construction                                                14,138                3,096                 449
                                                     -------------         ------------       -------------

     Total loans                                     $     218,462         $    203,832       $     221,595
                                                     =============         ============       =============
</TABLE>


     LOANS -- ALLOWANCE FOR LOAN LOSSES

     An analysis of the allowance for loan losses for the nine months ended
     September 30, 2005, the year ended December 31, 2004, and the nine months
     ended September 30, 2004 is as follows: (dollars in thousands):

<TABLE>
<CAPTION>
                                                        September 30,         December 31,       September 30,
                                                            2005                  2004               2004
                                                        ------------          ------------       ------------
<S>                                                     <C>                   <C>                <C>
Balance, beginning of period                            $      6,966          $     22,005       $     22,005
Recoveries on loans                                              107                   719                633
Loans charged off                                               (484)              (15,758)           (11,918)
Provision for loan losses                                          -                     -                  -
                                                        ------------          ------------       ------------

Balance, end of period                                  $      6,589          $      6,966       $     10,720
                                                        ============          ============       ============

</TABLE>



                                                                              8.

<PAGE>

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


5.   LOANS (Continued)

     In the first nine months of 2005, net charge-off activity was minimal at
     $.377 million, or .19% of average loans outstanding. The allowance for loan
     losses was significantly impacted by loan charge-offs in the first nine
     months of 2004. The Corporation completed the sale of $25.2 million of
     loans, primarily nonperforming, during the first quarter of 2004 which
     resulted in a previously allocated specific reserve on these loans being
     recognized as a charge-off. This specific reserve charge-off amounted to
     $7.4 million.

     The aggregate amount of nonperforming residential and consumer loans was
     approximately $391,000, $888,000, and $469,000 at September 30, 2005,
     December 31, 2004 and September 30, 2004, respectively. 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 of interest or
     principal. The interest income recorded and that which would have been
     recorded had residential and consumer nonaccrual and renegotiated loans
     been current, or not troubled, are not material to the consolidated
     financial statements for the nine months ended September 30, 2005 and 2004.
     The nonperforming commercial loans are reflected in the information
     regarding impaired loans.

     LOANS -- IMPAIRED LOANS

     Information regarding impaired loans as of September 30, 2005, December 31,
     2004 and September 30, 2004 is as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                                      Valuation Reserve
                                                                                         -------------------------------------------
                                            September 30,   December 31, September 30,   September 30,  December 31,   September 30,
                                                 2005           2004          2004            2005          2004           2004
                                            -------------  ------------  -------------   -------------  ------------   -------------
<S>                                         <C>            <C>           <C>             <C>            <C>            <C>
Balances, period end
   Impaired loans with specific valuation
     reserve                                   $ 1,071        $   608        $ 3,845        $   321        $   136        $ 2,230
   Impaired loans with no specific
     valuation reserve                             886          3,699          6,160              -              -              -
                                               -------        -------        -------        -------        -------        -------

     Total impaired loans                      $ 1,957        $ 4,307        $10,005        $   321        $   136        $ 2,230
                                               =======        =======        =======        =======        =======        =======

   Impaired loans on nonaccural basis          $ 1,957        $ 4,307        $ 6,862        $   321        $   136        $   377
   Impaired loans on accrual basis                   -              -          3,143              -              -          1,853
                                               -------        -------        -------        -------        -------        -------

     Total impaired loans                      $ 1,957        $ 4,307        $10,005        $   321        $   136        $ 2,230
                                               =======        =======        =======        =======        =======        =======

Average investment in impaired loans             2,374         17,036         12,907

Interest income recognized during impairment        76          1,053            961
Interest income that would have been
  recognized on an accrual basis                   132            803            646
Cash-basis interest income recognized               76            863            771
</TABLE>

     The average investment in impaired loans was approximately $2.374 million
     for the nine months ended September 30, 2005, $17.036 million for the year
     ended December 31, 2004, and $12.907 million for the nine months ended
     September 30, 2004, respectively. The $10.533 million reduction in average
     balance of impaired loan balances from September 30, 2004 to September 30,
     2005 was due to sales of $25.2 million of impaired loans in the first
     quarter of 2004 and the sale of $14.1 million of loans in December 2004.



                                                                              9.
<PAGE>



                         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):
<TABLE>
<CAPTION>
                                                                 September 30,    December 31,    September 30,
                                                                     2005            2004             2004
                                                                 -------------    ------------    -------------
<S>                                                              <C>             <C>             <C>
Loans outstanding, beginning of period                              $    63         $ 6,514         $ 6,514
New loans                                                                52             365             330
Net activity on revolving lines of credit                               514               -               -
Repayment                                                              (115)           (765)           (465)
Decrease related to retired executive officers and directors              -          (6,051)         (5,621)
                                                                    -------         -------         -------

   Loans outstanding, end of period                                 $   514         $    63         $   758
                                                                    =======         =======         =======
</TABLE>

     There were no loans to related-parties classified at September 30, 2005,
     December 31, 2004 or September 30, 2004, respectively. In addition to the
     outstanding balances as shown above, there were unused commitments to
     related parties of approximately $340,000.

6.   BORROWINGS

     Borrowings consist of the following at September 30, 2005, December 31,
     2004 and September 30, 2004 (dollars in thousands):

<TABLE>
<CAPTION>
                                                                      September 30,    December 31,     September 30,
                                                                          2005             2004             2004
                                                                      -------------    ------------     -------------
<S>                                                                   <C>              <C>              <C>
Federal Home Loan Bank advances at rates ranging from 4.35%
   to 5.16 %,  maturing in 2010 and 2011                                 $35,000          $83,555          $83,986

Farmers Home Administration, fixed-rate notes payable, maturing
   August 24, 2024, interest payable at 1%                                 1,417            1,484            1,484

Notes payable to directors                                                     -                -              125
                                                                         -------          -------          -------

Borrowings outstanding                                                   $36,417          $85,039          $85,595
                                                                         =======          =======          =======
</TABLE>

     In the first quarter of 2005, the Corporation prepaid $48.555 million of
     the Federal Home Loan Bank ("FHLB") borrowings and incurred a prepayment
     penalty of $4.320 million. This early payoff of FHLB borrowings reduced
     interest rate risk and better positions the Corporation for future match
     funding of loan growth.

     The Federal Home Loan Bank borrowings are collateralized at September 30,
     2005, by the following: a collateral agreement on the Corporation's one to
     four family residential real estate loans with a book value of
     approximately $25,920,000; U.S. government agency securities with an
     amortized cost and estimated fair value of $20,408,000 and $20,085,000,
     respectively; and Federal Home Loan Bank stock owned by the Bank totaling
     $4,855,000. 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 September 30, 2005.




                                                                             10.
<PAGE>


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


6.   BORROWINGS (Continued)

     The U.S.D.A. Rural Development borrowing is collateralized by loans
     totaling $.719 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 $.829 million, and guaranteed by the Corporation.

7.   STOCK OPTION PLANS

     A summary of stock option transactions for the nine months ended September
     30, 2005 and 2004, and the year ended December 31, 2004, is as follows:
     (Historical stock option information has been adjusted for the 1:20 reverse
     stock split which occurred in December 2004.

<TABLE>
<CAPTION>
                                                                September 30,       December 31,      September 30,
                                                                    2005               2004               2004
                                                                -------------       ------------      -------------
<S>                                                              <C>                 <C>                <C>
Outstanding shares, beginning of year                              282,999             27,483             27,483
Granted during the period                                          100,000            257,152                  -
Expired during the period                                          (19,442)            (1,636)              (700)
                                                                  --------           --------           --------

Outstanding shares, end of period                                  363,557            282,999             26,783
                                                                  ========           ========           ========

Weighted average exercise price per share, end of period          $  14.73           $  34.55           $ 280.40
                                                                  ========           ========           ========

Shares available for grant, end of period                          108,974            189,532             18,612
                                                                  --------           --------           --------
</TABLE>

     Options granted in 2005 were granted at a price of $12.00 per share in the
     second quarter, and $11.50 per share for options granted in the third
     quarter, the fair market value at date of grant. Under these plans, options
     expire ten years after the date of grant.

     Following is a summary of the options outstanding and exercisable at
September 30, 2005:

<TABLE>
<CAPTION>
                                               Number                       Remaining            Average
        Exercise                   -----------------------------            Contractual          Exercise
       Price Range                 Outstanding       Exercisable            Life-Years            Price
       -----------                 -----------       -----------            ----------            -----
<S>                              <C>                <C>                    <C>               <C>
          $9.75                      257,152            120,861                  9.2             $  9.75
         $11.50                       40,000              8,000                 10.0               11.50
         $12.00                       60,000             12,000                  9.7               12.00
    $156.00 - $240.00                  3,945              3,945                  5.0              183.63
    $300.00 - $406.60                  2,460              2,460                  3.5              382.93
                                     -------            -------                  ---             -------

                                     363,557            147,266                  9.3             $ 14.73
                                     =======            =======                  ===             =======
</TABLE>

8.   SUBORDINATED DEBENTURES

     As part of the recapitalization through the issuance of $30 million in
     common stock in a private placement, the subordinated debentures were paid
     off. This payoff settlement was negotiated with all of the holders of the
     subordinated debentures. The payment for the debentures was in settlement
     of $12,450,000 in principal and accrued interest. The total settlement
     price was $6,500,000 and resulted in the Corporation recording a gain on
     the settlement of $6,617,000. The settlement of this liability also
     included the accrued interest of approximately $1.2 million.



                                                                             11.
<PAGE>


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


9.   CAPITAL

     On December 16, 2004, the Corporation consummated a recapitalization
     through the issuance of $30 million of common stock in a private placement.
     The net proceeds of this offering amounted to $26.2 million. This
     recapitalization provided the funding to enable the Corporation to
     recapitalize the Bank with a $15.5 million capital infusion. This capital
     infusion provided the Bank with enough capital to be deemed a "well
     capitalized" institution by regulatory standards.

10.  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):


<TABLE>
<CAPTION>
                                                 September 30,     December 31,     September 30,
                                                     2005             2004             2004
                                                 -------------     ------------     -------------
<S>                                              <C>              <C>              <C>
Commitments to extend credit
     Fixed rate                                    $ 1,709          $   638          $   488
     Variable rate                                  27,827           10,889            8,685
Standby letters of credit - Variable rate           10,933           17,970           17,849
Credit card commitments - Fixed rate                 3,145            2,995            3,047
                                                   -------          -------          -------

                                                   $43,614          $32,492          $30,069
                                                   =======          =======          =======
</TABLE>

     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.




                                                                             12.
<PAGE>

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


10.  COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued)

     CONTINGENCIES

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

     CONCENTRATION OF CREDIT RISK

     The Bank grants commercial, residential, agricultural, and consumer loans
     throughout Michigan. The Bank's most prominent concentration in the loan
     portfolio relates to commercial loans to entities within the hospitality
     and tourism industry. This concentration represents $40.4 million, or
     25.3%, of the commercial loan portfolio at September 30, 2005. The
     remainder of the commercial loan portfolio is diversified in such
     categories as gaming, petroleum, forestry, and agriculture. 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 locality.






                                      13.

<PAGE>
                         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:

    -    Impact of continued operating losses;

    -    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.






                                                                             14.
<PAGE>
                         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, 2004. Throughout this discussion, the term
"Bank" refers to mBank, formerly known as North Country Bank and Trust, the
principal banking subsidiary of the Corporation.

FINANCIAL OVERVIEW

Year-to-date consolidated net loss was $6.336 million through September 30,
2005, compared to a net loss of $4.028 million for the same period in 2004.
Basic loss per share was $1.85 for the nine months ended September 30, 2005,
compared to a loss of $11.48 for the same period in 2004. The loss for the three
months ended September 30, 2005 amounted to $.518 million, or $.15 per share,
compared to $.761 million, or $2.17 per share for the same period in 2004.
Impacting the per share earnings between periods was the increase in weighted
average shares outstanding. In 2005, weighted average shares outstanding totaled
3,428,695, compared to 350,958 in 2004. There was no provision for loan losses
recorded during the three and nine month periods for 2005 and 2004. Total assets
declined $58.907 million from December 31, 2004 to September 30, 2005. The loan
portfolio increased $14.630 million in the first nine months of 2005, from
December 31, 2004 balances of $203.832 million. Deposits totaled $213.268
million at September 30, 2005, a decline of $2.382 million from the $215.650
million at December 31, 2004.


FINANCIAL CONDITION

CASH AND CASH EQUIVALENTS

Cash and cash equivalents decreased $33.896 million in 2005. This was due to the
utilization of the excess liquidity, which existed at December 31, 2004, to
prepay FHLB borrowings in the first quarter of 2005. See further discussion of
the change in cash and cash equivalents in the Liquidity section.

INVESTMENT SECURITIES

Available-for-sale securities decreased $21.569 million, or 37.79%, from
December 31, 2004 to September 30, 2005, with the balance on September 30, 2005,
totaling $35.506 million. The decrease during the first nine months of 2005 was
due to a combination of maturities, calls, and paydowns of agencies and mortgage
related securities. In the second quarter of 2005, the Corporation sold $18.7
million of callable mortgage backed securities and reinvested the proceeds in
shorter term US agencies. This repositioning was done with lower interest rate
and principal risk in anticipation of future rate increases. Investment
securities are utilized in an effort to manage interest rate risk and liquidity.
As of September 30, 2005, investment securities with an estimated fair value of
$21.085 million were pledged.

LOANS

Through the third quarter of 2005, loan balances increased by $14.630 or 7.18%
from December 31, 2004 balances of $203.832 million. During the first nine
months of 2005, the Bank experienced a high level, $36.9 million, of loan
payoffs along with normal principal reduction of $20.4 million. These loan
payoffs, which included approximately $2.3 million of nonaccrual loans, were
higher than anticipated and are not expected to continue at this level for the
remainder of 2005. New loan production in the 2005 third quarter and nine month
period totaled $24.0 and $71.9 million, respectively. The Bank added additional
commercial lending staff during the second quarter of 2005 and added three
mortgage lenders in the third quarter. It is anticipated that with the addition
of lending staff, along with the extensive marketing campaign and introduction
of new and more competitive loan products, future periods will benefit from
increased loan production. The Bank sold $39.3 million of loans in 2004. These
sales, composed of a $25.2 million sale in the first quarter and $14.1 million
in December, were composed of primarily non-performing loans and resulted in a
reduction in non-accrual loans of $22.9 million. This loan sale also reduced
concentration exposure in the hotel and tourism industry. Enhancements to the
loan approval process and exception reporting further provide for a more
effective management of risk in the loan portfolio. Management continues to
actively

                                                                             15.
<PAGE>
                         MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                           OF OPERATIONS (Continued)


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. As shown in the table below,
commercial real estate and construction loans increased significantly in the
first nine months of 2005. Management intends to increase lending activities in
its market 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 September 30, 2005, December 31,
2004 and September 30, 2004 (dollars in thousands):

<TABLE>
<CAPTION>
                                             September 30,  Percent of      December 31,   Percent of    September 30,   Percent of
                                                 2005          Total            2004          Total          2004           Total
                                             -------------  ----------      ------------   ----------    -------------   ----------

<S>                                          <C>            <C>             <C>            <C>           <C>             <C>
Commercial real estate                       $     123,429     56.51 %      $    105,619      51.81 %    $     114,929     51.87 %
Commercial, financial, and agricultural             36,297     16.61              47,446      23.28             59,206     26.72
One to four family residential real estate          42,490     19.45              45,292      22.22             44,365     20.02
Consumer                                             2,108       .96               2,379       1.17              2,646      1.19
Construction                                        14,138      6.47               3,096       1.52                449       .20
                                             -------------  ---------       ------------   ---------     -------------   --------

     Total loans                             $     218,462    100.00 %      $    203,832     100.00 %    $     221,595    100.00 %
                                             =============  =========       ============   =========     =============   ========
</TABLE>

Following is a table showing the significant industry types in the commercial
loan portfolio as of September 30 2005, December 31, 2004 and September 30, 2004
(dollars in thousands):

<TABLE>
<CAPTION>
                                           September 30, 2005                              December 31, 2004
                              -------------------------------------------     -------------------------------------------
                                             Percent of       Percent of                     Percent of       Percent of
                              Outstanding    Commercial     Shareholders'     Outstanding    Commercial     Shareholders'
                                Balance        Loans           Equity           Balance         Loans          Equity
                              -----------    ----------     -------------     -----------    ----------     -------------
<S>                           <C>            <C>            <C>               <C>            <C>            <C>
Hospitality and tourism       $    40,424         25.31 %          144.89 %   $    52,659         34.40 %          151.62 %
Gaming                              9,331          5.84             33.44          14,310          9.35             41.20
Petroleum                           6,971          4.36             24.99           7,718          5.04             22.22
Forestry                            5,564          3.48             19.94           2,245          1.47              6.46
Other                              97,436         61.00            349.23          76,133         49.74            219.21
                              -----------    ----------     -------------     -----------    ----------     -------------

     Total commercial loans   $   159,726        100.00 %                     $   153,065        100.00 %
                              ===========    ==========                       ===========    ==========

<CAPTION>
                                          September 30,  2004
                              ------------------------------------------
                                             Percent of     Percent of
                              Outstanding    Commercial    Shareholders'
                                Balance        Loans          Equity
                              -----------    ----------    -------------
<S>                           <C>            <C>           <C>
Hospitality and tourism       $    54,780         31.46 %         846.55 %
Gaming                             14,932          8.58           230.75
Petroleum                           8,308          4.77           128.39
Forestry                            2,511          1.44            38.80
Other                              93,604         53.75         1,446.52 %
                              -----------    ----------    -------------

     Total commercial loans   $   174,135        100.00 %
                              ===========    ==========
</TABLE>

The Bank has a high concentration of hospitality and tourism loans. This
economic segment of our loan portfolio represents the importance of tourism in
the markets we serve. Management expects that the concentrations of hospitality
and tourism loans will be reduced in future periods through a combination of new
loans in other industries and paydowns and maturities of current portfolio loans
in this sector.

CREDIT QUALITY

The allowance for loan losses is maintained by management at a level considered
to be adequate to cover probable losses related to specifically identified
loans, as well as losses inherent in the balance of the loan portfolio. At
September 30, 2005, the allowance for loan losses was 3.02% of total loans
outstanding compared to 3.42% at December 31, 2004 and 4.84% at September 30,
2004.

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 to average loans outstanding amounted to .19% and 4.45% for
the nine months ended September 30, 2005 and 2004, respectively. Net charge-offs
for the nine-month period ended September 30, 2005, were $.377 million compared
to $11.285 million for the same period in 2004. Charge-offs during the first
nine months of 2004 include $7.4 million of charge-offs incurred as a result of


                                                                             16.
<PAGE>
                         MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                            OF OPERATIONS (Continued)


the sale of $25.2 million of primarily non-performing loans. The sale of these
non-performing loans did not result in any gain or loss since the total reduced
carrying value was previously recognized as a specific reserve allocation. The
Corporation did not recognize a provision for loan losses for the nine months
ended September 30, 2005, and September 30, 2004 since the reserve was
considered adequate at the end of both periods. In the third quarter, the
Corporation placed two commercial loans, from the same borrower, totaling
approximately $1.071 million in nonaccrual.

The table below shows period end balances of non-performing assets (dollars in
thousands):

<TABLE>
<CAPTION>
                                             Nine Months Ended           Year Ended        Nine Months Ended
                                               September 30,            December 31,         September 30,
                                                   2005                     2004                  2004
                                             -----------------          -----------        -----------------

<S>                                          <C>                        <C>                <C>
NONPERFORMING ASSETS:
Nonaccrual loans                             $           1,957          $     4,307        $           6,862
Loans past due 90 days or more                               -                    -                      143
Restructured loans                                           -                    -                        -
                                             -----------------          -----------        -----------------
   Total nonperforming loans                             1,957                4,307                    7,005
Other real estate owned                                  1,948                1,730                    4,650
                                             -----------------          -----------        -----------------

   Total nonperforming assets                $           3,905          $     6,037        $          11,655
                                             =================          ===========        =================
Nonperforming loans as a % of loans                        .90 %               2.11 %                   3.16 %
Nonperforming assets as a % of assets                     1.39 %               1.78 %                   3.51 %
RESERVE FOR LOAN LOSSES:
At period end                                $           6,589          $     6,966        $          10,720
                                             -----------------          -----------        -----------------
As a % of loans                                           3.02 %               3.42 %                   4.84 %
                                             -----------------          -----------        -----------------
As a % of nonperforming loans                           336.69 %             161.74 %                 153.03 %
                                             -----------------          -----------        -----------------
</TABLE>


Following is the allocation of the allowance for loan losses as of September 30,
2005, December 31, 2004, and September 30, 2004 (dollars in thousands):



<TABLE>
<CAPTION>
                                                   September 30,   December 31,   September 30,
                                                       2005            2004           2004
                                                   -------------   ------------   -------------

<S>                                                <C>             <C>            <C>
Commercial, financial, and agricultural loans      $       1,716   $      1,419   $       4,228
One to four family residential real estate loans              80             97             105
Consumer loans                                                --             --              --
Unallocated and general reserves                           4,793          5,450           6,387
                                                   -------------   ------------   -------------

Totals                                             $       6,589   $      6,966   $      10,720
                                                   =============   ============   =============
</TABLE>


The following ratios assist management in the determination of the Corporation's
credit quality:

<TABLE>
<CAPTION>
                                                         Nine Months           Twelve Months          Nine Months
                                                            Ended                  Ended                 Ended
                                                      September 30, 2005     December 31, 2004     September 30, 2004
                                                      ------------------     -----------------     ------------------
<S>                                                   <C>                    <C>                   <C>

Allowance to total loans, at period end                             3.02 %                3.42 %                 4.84 %
Average loans outstanding for the periods indicated   $          202,381     $         244,730     $          253,414
Net charge-off to average outstanding loans                          .19 %                6.15 %                 4.45 %
Nonperforming loans to gross loans, at period end                   1.79 %                2.11 %                 3.16 %
</TABLE>


                                                                             17.
<PAGE>
                         MACKINAC FINANCIAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                            OF OPERATIONS (Continued)


Total nonperforming loans decreased $2.350 million since December 31, 2004. The
reduction in nonperforming loans during the nine months of 2005 is primarily due
to the payoff of one major commercial loan that was in nonaccrual status. During
2004, nonperforming loans were reduced through a combination of loan sales,
charge- offs, and external refinancing. In 2004 the Bank sold $39.3 million of
primarily nonperforming loans of which $22.9 million were in a nonaccrual
status. 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 intensified the review of the
Corporation's loans, related collateral evaluations, and the overall lending
process during 2004. The Corporation also utilized a loan review consultant in
2004, to perform a review of the loan portfolio. The opinion of this consultant
upon completion of the independent review provided findings similar to
management on the overall adequacy of the reserve. The Corporation has engaged
this same consultant for loan review during 2005.

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 which is grouped with other assets on the
condensed consolidated balance sheet.

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

<TABLE>
<CAPTION>
                                             Nine Months Ended        Year Ended        Nine Months Ended
                                             September 30, 2005    December 31, 2004    September 30, 2004
                                             ------------------    -----------------    ------------------

<S>                                          <C>                   <C>                  <C>
Balance at beginning of period               $            1,730    $           4,356    $            4,356
Other real estate transferred from loans                    556                4,762                 5,153
Other real estate sold/written down                        (338)              (7,388)               (4,859)
                                             ------------------    -----------------    ------------------

Balance at end of period                     $            1,948    $           1,730    $            4,650
                                             ==================    =================    ==================
</TABLE>

During the first nine months of 2005, the Corporation received real estate in
lieu of loan payments of $.556 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. Write-downs on other real estate may be recorded based on subsequent
evaluations of current realizable fair values.

DEPOSITS

The Corporation had a decrease in deposits in the first nine months of 2005.
Total deposits decreased by $2.382 million, or 1.10%, in the first nine months
of 2005. Non-core deposits decreased by $11.591 million during the first nine
months of 2005, while core deposits showed an increase of $9.209 million during
this same period. The Corporation initiated an aggressive marketing campaign in
the second quarter of 2005 to introduce new products and offer more competitive
deposit pricing in an attempt to gather in market deposits. This campaign, along
with continued competitive pricing and products, is expected to help generate
core deposits in future periods.



                                                                             18.
<PAGE>

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


<TABLE>
<CAPTION>
                                         September 30,     December 31,      September 30,
                                             2005              2004              2004
                                         -------------     ------------      -------------
<S>                                      <C>               <C>               <C>
Demand deposit accounts                    $ 19,690          $ 20,956          $ 23,036
NOW and money market                         61,093            53,468            52,521
Savings and IRAs                             23,670            25,570            25,866
Certificates of Deposit less than
  $100,000                                   57,850            53,100            52,355
                                           --------          --------          --------
   Total core deposits                      162,303           153,094           153,778
Certificates of Deposit less than
  $100,000                                   12,300            10,726             9,892
Internet CDs less than $100,000              33,461            46,227            53,538
Internet CDs greater than $100,000            5,204             5,603             5,902
                                           --------          --------          --------
   Total non-core deposits                   50,965            62,556            69,332

   Total deposits                          $213,268          $215,650          $223,110
                                           ========          ========          ========
</TABLE>

BORROWINGS

The Corporation has used alternative funding sources to provide long-term,
stable sources of funds. Total borrowings of the Corporation decreased by
$48.622 million from 2004 year-end. In the first quarter of 2005 the Corporation
prepaid $48.555 million of the FHLB borrowings in order to reduce interest rate
risk and to better match earning assets and funding sources. The remaining FHLB
borrowings carry fixed interest rates and mature in 2010 and 2011. The remaining
FHLB borrowings are callable quarterly at the option of the FHLB and can also be
converted to variable rates, at the option of the FHLB, should rates rise above
certain index levels. These borrowings are secured by a blanket collateral
agreement on the Bank's residential mortgage loans and specific assignment of
other assets. Management may increase FHLB borrowings in the future as a source
for funding future loan production. In the first quarter of 2005, the Bank
borrowed $2 million in Canadian dollars from a correspondent bank in order to
reduce the risk of an asset sensitive foreign exchange position. This borrowing
was repaid in the second quarter.

SUBORDINATED DEBENTURES

As part of the recapitalization, which occurred in December 2004, the
subordinated debentures were paid off. This payoff settlement was negotiated
with all of the holders of the subordinated debentures. The payment for the
debentures was in settlement of $12,450,000 in principal and accrued interest.
The total settlement price was $6,500,000 and resulted in the Corporation
recording a gain on the settlement of $6,617,000. The settlement of this
liability also included the accrued interest of approximately $1.2 million.

SHAREHOLDERS' EQUITY

Total shareholders' equity decreased $6.830 million from December 31, 2004 to
September 30, 2005. The decrease is comprised of a net loss of $6.336 million
and a decrease in the net unrealized gain on securities of $.570 million and an
adjustment to record the purchase of the minority interests of bank
subsidiaries. The Board of Directors does not anticipate declaring any dividends
in the near future. The declaration of dividends is contingent on a variety of
factors including regulatory and state statutes, and the Corporation's return to
profitability.

Results of Operations

NET INTEREST INCOME

Net interest income before provision for loan losses for the quarter ended
September 30, 2005, increased by $.647 million, or 34.785% compared to the same
period one year ago. For the nine month period ended September 30, 2005, net
interest income amounted to $7.100 million, an increase of $.762 million,
12.023% from the amount




                                                                             19.
<PAGE>

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


recorded in the same period in 2004. This increase in net interest income
resulted despite significant declines in average earning assets. The prepayment
of $48.555 million of the FHLB borrowings at a weighted average rate of 6.04%
contributed to the reduction in cost of funds and benefited the interest margin
in the first nine months of 2005. The Corporation also benefited from
significant declines in nonperforming loans, $5.048 million, from September 30,
2004 to September 30, 2005. The Corporation also benefited from the increases in
the prime rate of 2.00%, in the last twelve months, since it is asset sensitive,
with approximately 75% of the loan portfolio repricing with changes in various
indices. The Corporation expects to see continued growth in net interest income
with growth in the loan portfolio; however, expects to see pressure on the net
interest margin as a percent of average earnings assets due to increased cost of
funds.

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

<TABLE>
<CAPTION>
                                                                                    Three Months Ended
                                         -------------------------------------------------------------------------------------------
                                                        AVERAGE BALANCES                   AVERAGE RATES             INTEREST
                                         -------------------------------------------   ---------------------    --------------------
                                               September 30,                               September 30,            September 30,
                                         ---------------------------    Increase/      ---------------------    --------------------
(dollars in thousands)                       2005          2004        (Decrease)        2005        2004          2005      2004
                                         ---------------------------  --------------   ---------------------    --------------------
<S>                                      <C>            <C>            <C>             <C>          <C>         <C>        <C>

Loans                                        $ 209,785    $ 226,951       $ (17,166)       7.13 %      6.32 %      $ 3,769  $ 3,617
Taxable securities                              32,087       68,846         (36,759)       3.49        3.52            282      612
Nontaxable securities                            3,613        3,711             (98)       4.61        4.60             42       42
Federal funds sold                              12,062       12,383            (321)       3.39        1.42            103       44
Other interest-earning assets                    4,855       16,672         (11,817)       5.97        2.21             74       93
                                         ---------------------------  --------------   ---------------------    --------------------
   Total earning assets                        262,402      328,563         (66,161)       6.46        5.32          4,270    4,408
                                         ---------------------------  --------------
Reserve for loan losses                         (6,632)     (10,942)          4,310
Cash and due from banks                          5,958        5,352             606
Fixed assets                                    10,701       12,070          (1,369)
Other assets                                     8,077       11,035          (2,958)
                                         ---------------------------  --------------
   Total assets                              $ 280,506    $ 346,078       $ (65,572)
                                         ===========================  ==============

NOW and money market deposits                 $ 57,534     $ 59,723        $ (2,189)       2.09        1.44            302      217
Savings deposits                                17,489       18,903          (1,414)       1.36         .96             60       46
Time deposits                                  114,945      135,040         (20,095)       3.37        2.89            976      983
Borrowings                                      36,436       85,643         (49,207)       4.62        5.48            425    1,184
Subordinated debentures                              -       12,450         (12,450)          -        3.76              -      118
                                         ---------------------------  --------------   ---------------------    --------------------
   Total interest-bearing liabilities          226,404      311,759         (85,355)       3.09        3.24          1,763    2,548
Demand deposits                                 21,229       22,752          (1,523)
Other liabilities                                4,761        3,128           1,633
Shareholders' equity                            28,112        8,439          19,673
                                         ---------------------------  --------------
   Total liabilities and shareholders'
     equity                                  $ 280,506    $ 346,078       $ (65,572)
                                         ===========================  ==============
Rate spread                                                                                3.37 %      2.08 %
                                                                                       ---------------------    --------------------
Net interest margin/revenue                                                                3.79 %      2.25 %      $ 2,507  $ 1,860
                                                                                       =====================    ====================
<CAPTION>
                                                      Three Months Ended
                                         ----------------------------------------------
                                                           2005-2004
                                         --------------------------------------------
                                           Income/                              Rate/
                                           Expense     Volume        Rate      Volume
(dollars in thousands)                    Variance    Variance     Variance   Variance
                                         ----------------------------------------------
<S>                                      <C>          <C>           <C>          <C>

Loans                                         $ 152      $ (273)       $ 463       (37)
Taxable securities                             (330)       (326)          (5)        2
Nontaxable securities                             -          (1)           -         1
Federal funds sold                               59          (1)          61        (2)
Other interest-earning assets                   (19)        (66)         158      (112)
                                         ----------------------------------------------
   Total earning assets                        (138)       (668)         678      (148)

Reserve for loan losses
Cash and due from banks
Fixed assets
Other assets

   Total assets


NOW and money market deposits                    85          (8)          98        (5)
Savings deposits                                 14          (8)          19        (1)
Time deposits                                    (7)       (146)         163       (24)
Borrowings                                     (759)       (680)        (186)      106
Subordinated debentures                        (118)       (118)           -         -
                                         ----------------------------------------------
   Total interest-bearing liabilities          (785)       (955)         (23)      192
Demand deposits
Other liabilities
Shareholders' equity

   Total liabilities and shareholders'
     equity
Rate spread
                                         ----------------------------------------------
Net interest margin/revenue                   $ 647       $ 288        $ 701      (340)
                                         ==============================================
</TABLE>

<TABLE>
<CAPTION>
                                                                                Nine Months Ended
                                         -------------------------------------------------------------------------------------------
                                                        AVERAGE BALANCES                   AVERAGE RATES             INTEREST
                                         -------------------------------------------   ---------------------    --------------------
                                               September 30,                               September 30,            September 30,
                                         ---------------------------    Increase/      ---------------------    --------------------
(dollars in thousands)                       2005          2004        (Decrease)        2005        2004          2005      2004
                                         ---------------------------  --------------   ---------------------    --------------------
<S>                                      <C>            <C>            <C>             <C>          <C>         <C>        <C>
Loans                                        $ 202,381    $ 253,414       $ (51,033)       6.94 %      6.38 %     $ 10,501 $ 12,124
Taxable securities                              43,304       70,255         (26,951)       3.64        3.57          1,178    1,884
Nontaxable securities                            3,674        3,735             (61)       4.59        4.57            126      128
Federal funds sold                              11,905       17,617          (5,712)       2.86        1.10            254      145
Other interest-earning assets                    6,789       15,829          (9,040)       4.24        2.15            216      256
                                         ---------------------------  --------------   ---------------------    --------------------
   Total earning assets                        268,053      360,850         (92,797)       6.12        5.37         12,275   14,537
                                         ---------------------------  --------------
Reserve for loan losses                         (6,773)     (14,876)          8,103
Cash and due from banks                          5,392        5,970            (578)
Fixed assets                                    10,648       12,826          (2,178)
Other assets                                     7,658       12,885          (5,227)
                                         ---------------------------  --------------
   Total assets                              $ 284,978    $ 377,655       $ (92,677)
                                         ===========================  ==============

NOW and money market deposits                 $ 54,537     $ 64,192        $ (9,655)       1.78        1.44            725      675
Savings deposits                                18,054       19,915          (1,861)       1.19         .93            161      139
Time deposits                                  115,854      156,976         (41,122)       3.21        2.95          2,780    3,475
Borrowings                                      42,038       86,508         (44,470)       4.80        5.47          1,509    3,554
Subordinated debentures                              -       12,450         (12,450)          -        3.81              -      356
                                         ---------------------------  --------------   ---------------------    --------------------
   Total interest-bearing liabilities          230,483      340,041        (109,558)       3.00        3.21          5,175    8,199
Demand deposits                                 20,598       23,509          (2,911)
Other liabilities                                4,679        6,323          (1,644)
Shareholders' equity                            29,218        7,782          21,436
                                         ---------------------------  --------------
   Total liabilities and shareholders'
     equity                                  $ 284,978    $ 377,655       $ (92,677)
                                         ===========================  ==============
Rate spread                                                                                3.12 %      2.16 %
                                                                                       ---------------------    --------------------
Net interest margin/revenue                                                                3.54 %      2.34 %      $ 7,100  $ 6,338
                                                                                       =====================    ====================

<CAPTION>

                                                        Nine Months Ended
                                         ----------------------------------------------
                                                           2005-2004
                                         --------------------------------------------
                                           Income/                              Rate/
                                           Expense     Volume        Rate      Volume
(dollars in thousands)                    Variance    Variance     Variance   Variance
                                         ----------------------------------------------
<S>                                      <C>          <C>           <C>          <C>
Loans                                      $ (1,624)   $ (2,444)     $ 1,065      (246)
Taxable securities                             (706)       (722)          37       (20)
Nontaxable securities                            (2)         (2)           1         -
Federal funds sold                              109         (47)         233       (76)
Other interest-earning assets                   (39)       (146)         248      (142)
                                         ----------------------------------------------
   Total earning assets                      (2,262)     (3,362)       1,584      (484)

Reserve for loan losses
Cash and due from banks
Fixed assets
Other assets

   Total assets


NOW and money market deposits                    50        (101)         183       (32)
Savings deposits                                 22      (1,299)           9        (4)
Time deposits                                  (695)       (911)         306       (90)
Borrowings                                   (2,045)     (1,826)        (435)      216
Subordinated debentures                        (356)       (356)           -         -
                                         ----------------------------------------------
   Total interest-bearing liabilities        (3,024)   (264,002)     (53,605)      152
Demand deposits
Other liabilities
Shareholders' equity

   Total liabilities and shareholders'
     equity
Rate spread
                                         ----------------------------------------------
Net interest margin/revenue                   $ 762   $ 260,640     $ 55,189      (636)
                                         ==============================================
</TABLE>

                                                                             20.


<PAGE>

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


PROVISION FOR LOAN LOSSES

The Corporation records a provision for loan losses at a level it believes is
necessary to maintain the allowance at an adequate level after considering
factors such as loan charge-offs and recoveries, changes in the mix of loans in
the portfolio, loan growth, and other economic factors. There was no provision
for loan losses for the quarter or nine months ended September 30, 2005, and
2004. Management continues to monitor the loan portfolio for changes which may
impact the required allowance for loan losses. A provision for loan losses may
be required for future periods if credit quality should deteriorate or loan
growth is such that the general reserve is no longer deemed adequate.

OTHER INCOME

Other income decreased by $.785 million for the nine months ended September 30,
2005, compared to the nine months ended September 30, 2004. Service fees
decreased $.335 million while loan and lease income decreased $2,000. The
decline in service fees is primarily due to the significant decline in deposits
from September 30, 2004 to September 30, 2005. Other non-interest income was
positively impacted in the first nine months of 2004 from a gain of $258,000 on
the sale of a limited partnership interest. The Corporation realized security
gains of $98,000 in the second quarter of 2005 from the sale of approximately
$12 million of mortgage-backed securities. The sale of these securities was done
to provide funding for future loan growth. In the first nine months of 2004, the
Corporation sold five branch offices at a net gain of $204,000.

The following table details noninterest income for the three and nine months
ended September 30, 2005 and September 30, 2004 (dollars in thousands):

<TABLE>
<CAPTION>
                                     Three Months Ended       % Increase           Nine Months Ended        % Increase
                                        September 30,         (Decrease)              September 30,         (Decrease)
                                   2005            2004        2005-2004           2005          2004        2005-2004
                                 --------        --------     ----------         --------      --------     ----------
<S>                              <C>             <C>         <C>                <C>           <C>          <C>
Service fees                     $    137        $    225          (39.1)        $    470      $    805          (41.6)
Loan and lease fees                     5               4           25.0               11            13          (15.4)
Net gains on sale of loans             17              11           54.5               37            31           19.4
Gain on sale of branches                -             458              -                -           204              -
Other                                  96             169          (43.2)             194           540          (64.1)
                                 --------        --------     ----------         --------      --------     ----------
   Subtotal                           255             867          (70.6)             712         1,593          (55.3)
                                 --------        --------     ----------         --------      --------     ----------
Net securities gains                   (1)              -         (100.0)              96             -          100.0
                                 --------        --------     ----------         --------      --------     ----------

                                                              ----------                                    ----------
   Total other income            $    254        $    867          (70.6)        $    808      $  1,593          (49.3)
                                 --------        --------     ----------         --------      --------     ----------
</TABLE>

OTHER EXPENSES

Other expenses increased $2.285 million for the nine months ended September 30,
2005, compared to the same period in 2004. The prepayment penalty on FHLB
borrowings incurred by the Corporation in the first nine months of 2005 amounted
to $4.320 million and was the primary reason for the increase. Salaries and
employee benefits increased by $.510 million, during the first nine months of
2005 compared to the first nine months of 2004. During the first nine months of
2004, the Corporation recognized the $452,000 cost of closing five branch
offices which is included in other operating expenses. Areas of noninterest
expense such as furniture and equipment, occupancy, data processing, and
telephone expense declined between periods due to these branch closures and
branch sales that occurred in 2004. Advertising expense at $.696 million in the
first nine months of 2005 increased due to the Corporation's efforts to regain
market share by advertising new products and services. The Corporation engaged a
marketing agency to develop an extensive marketing program to launch the Bank's
new name, from North Country Bank and Trust to mBank, and create an advertising
program to announce new products and services. It is anticipated that the
advertising expenses for the remainder of 2005 will decrease since the
development of this marketing program is complete.


                                                                             21.

<PAGE>

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


The following table details noninterest expense for the three and nine months
ended September 30, 2005 and 2004 (dollars in thousands):

<TABLE>
<CAPTION>
                                                      Three Months Ended       % Increase        Nine Months Ended        % Increase
                                                         September 30,         (Decrease)          September 30,          (Decrease)
                                                      2005          2004        2005-2004         2005         2004        2005-2004
                                                   --------      --------        -------       --------     ---------     ---------
<S>                                                <C>           <C>          <C>             <C>           <C>          <C>
Salaries and employee benefits                     $  1,555      $  1,302           19.4       $  4,665      $  4,155          12.3
Furniture and equipment                                 133           247          (46.2)           430           819         (47.5)
Occupancy                                               275           193           42.5            748           740           1.1
Data processing                                         234           282          (17.0)           726           985         (26.3)
Accounting, legal and consulting fees                   204           419          (51.3)           750         1,397         (46.3)
Loan and deposit                                        153           296          (48.3)           696         1,389         (49.9)
Telephone                                                66            83          (20.5)           203           315         (35.6)
Advertising                                             314             9        3,388.9            696            52       1,238.5
Penalty on prepayment of FHLB borrowings                  -             -              -          4,320             -             -
Other                                                   345           657          (47.5)         1,010         2,107         (52.1)
                                                   --------      --------        -------       --------     ---------     ---------

   Total other expense                             $  3,279      $  3,488           (6.0)      $ 14,244     $  11,959          19.1
                                                   ========      ========        =======       ========     =========     =========


</TABLE>


Salaries and employee benefits amounted to $4.665 million for the nine months
ended September 30, 2005 compared to $4.155 million in the same period in 2004,
a 12.27% increase. Salaries and benefits increased $.253 million, 19.4%, when
comparing the three month periods in 2005 and 2004. Late in 2004 and during the
first nine months in 2005, the Corporation made staff additions in lending and
senior management. The Corporation added senior management as a part of the
recapitalization which occurred in December 2005, and also has made several
additions to its lending staff, primarily in Lower Michigan. These employee
additions will benefit the Corporation by providing additional management
expertise and seasoned lending personnel to provide future loan growth. The
Corporation signed an agreement with a new systems administrator in 2005 and is
expecting to complete a total loan, deposit and general ledger system conversion
prior to 2005 year-end. This system conversion is expected to significantly
enhance the Corporation's management information systems and result in an
overall reduction of data processing expenses beginning in 2006.

FEDERAL INCOME TAXES

There was no federal tax provision for the third quarter or nine months ended
2005 and 2004. The Corporation has approximately $26.2 million of NOL
carryforward along with tax benefit carryforwards of $2.2 million. The NOL and
tax credit carryforward benefit is dependent upon the future profitability and
generation of taxable income; therefore no future benefit of these deferred
items has been recorded.

Liquidity

As a result of the Corporation's renewed capital strength, from the
recapitalization in December, 2004, the Corporation is now able to pursue
sources of liquidity, such as lines of credit from correspondent banks,
borrowings from the Federal Home Loan Bank and possible brokered deposits
acquisition. The liquidity issues faced, the Corporation's actions taken to
address them, and the liquidity plan for 2005 are discussed below.

During the first nine months of 2005, the Corporation decreased cash and cash
equivalents by $33.896 million. As shown on the Corporation's condensed
consolidated statement of cash flows, liquidity was primarily impacted from cash
used in financing activities. The Corporation prepaid $48.555 million in FHLB
borrowings in the first quarter of 2005. The Corporation utilized short term
liquidity sources such as federal funds sold and time deposits in other
financial institutions to fund the prepayment. In the first nine months of 2005,
the Corporation funded the increase in loans, $15.6 million and reduction of
deposits, $2.4 million, primarily through the balance sheet reductions of
$21.569 million in securities available for sale. These asset reductions allowed
the Corporation to maintain adequate liquidity at quarter end, which included
$10.2 million of cash and cash equivalents.



                                                                             22.


<PAGE>

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


It is anticipated that during the remainder of 2005, the Corporation will fund
anticipated loan production with a combination of core deposit growth, and
Internet deposits or FHLB or alternative borrowings, if needed. The Bank's
liquidity plan for 2005 includes strategies to increase core deposits in the
Corporation's local markets. The introduction of new products, through an
extensive advertising campaign commenced in the first quarter of 2005. During
the second quarter, the Bank began to see the positive results of its marketing
campaign. The Bank's core deposits increased by $9.209 million in the first nine
months of 2005. The Corporation's liquidity plan for 2005 calls for augmenting
local deposit growth efforts with Internet CD funding, to the extent necessary.
The Corporation has also reestablished borrowing lines at correspondent banks to
provide additional sources of liquidity.

The Corporation's parent company is dependent upon its primary operating
subsidiary, the Bank, for sources of cash to fund its operating needs. At
September 30, 2005, the Corporation's parent had a balance of $1.252 million in
cash and cash equivalents and does not anticipate the need for additional
sources of funds in the near term.






                                                                             23.

<PAGE>

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


CAPITAL AND Regulatory

During the first nine months of 2005, capital decreased by $6.830 million, as a
result of the net loss of $6.336 million, the decrease in the unrealized gain on
securities available for sale of $.570 million, and a $.076 million increase
from the purchase of the minority interests of bank subsidiaries. This compares
to a decrease in capital during the same period in the previous year of $4.229
million, resulting primarily from a net loss of $4.028 million and a reduction
in the unrealized gain on securities available for sale of $.201 million.

As a bank holding company, the Corporation is required to maintain certain
levels of capital under government regulation. There are several measurements of
regulatory capital and the Corporation is required to meet minimum requirements
under each measurement. The federal banking regulators have also established
capital classifications beyond the minimum requirements in order to risk-rate
deposit insurance premiums and to provide trigger points for prompt corrective
action in the event an institution becomes financially troubled. As of September
30, 2005 and December 31, 2004, the Corporation and the Bank, were well
capitalized.

The following table details sources of capital for the periods indicated.


<TABLE>
<CAPTION>
                                                     September 30,       December 31,      September 30,
                                                          2005               2004               2004
                                                     ------------        -----------       ------------
<S>                                                  <C>                 <C>               <C>
CAPITAL STRUCTURE
Long-term debt                                       $          -        $         -       $     12,450
Shareholders' equity                                       27,900             34,730              6,471
                                                     ------------        -----------       ------------
Total capitalization                                       27,900             34,730             18,921
                                                     ------------        -----------       ------------
Tangible capital                                     $     27,538        $    34,275       $     17,900
                                                     ------------        -----------       ------------

INTANGIBLE ASSETS
Core deposit premium                                 $        362        $       455       $        517
Other identifiable intangibles                                  -                  -                504
                                                     ------------        -----------       ------------
Total intangibles                                    $        362        $       455       $      1,021
                                                     ------------        -----------       ------------

RISK-BASED CAPITAL
Tier I Capital:
  Shareholders' equity                               $     27,900        $    34,730       $      6,471
Net unrealized (gains) losses on
   available for sale securities                               78               (492)              (826)
     Minority interest                                          -                 78              1,641
     Less: intangibles                                       (362)              (455)            (1,021)
                                                     ------------        -----------       ------------
       Total Tier I Capital                          $     27,616        $    33,861       $      6,265
                                                     ------------        -----------       ------------
Tier II Capital:
   Allowable reserve for loan losses                       $2,912        $     2,918       $      3,056
   Qualifying long-term debt                                    -                  -              3,209
                                                     ------------        -----------       ------------
     Total Tier II capital                                  2,912              2,918              6,265
                                                     ------------        -----------       ------------
     Total capital                                   $     30,528        $    36,779       $     12,530
                                                     ============        ===========       ============
Risk-adjusted assets                                 $    229,245        $   229,355       $    236,803
                                                     ============        ===========       ============
Average tangible assets                              $    280,144        $   277,361       $    346,067
                                                     ============        ===========       ============

Capital ratios:
   Tier I Capital to risk-weighted assets                   12.05%             14.76%              2.65%
   Total capital to risk-weighted assets                    13.32%             16.04%              5.29%
   Tier I Capital to average assets                          9.86%             10.68%              1.82%

</TABLE>

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


                                                                             24.

<PAGE>

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


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

<TABLE>
<CAPTION>
                                                                   Tier I            Tier I                 Total
                                                                 Capital to        Capital to            Capital to
                                                                   Average        Risk-Weighted         Risk-Weighted
                                                                    Assets            Assets                Assets
                                                                ------------     ---------------       ---------------
<S>                                                            <C>               <C>                   <C>
Regulatory minimum for capital adequacy purposes                      4.00 %              4.00 %                8.00 %

The Corporation:
     September 30, 2005                                               9.86 %             12.05 %               13.32 %
     December 31, 2004                                               10.68               14.76                 16.04


The Bank:
     September 30, 2005                                               9.39 %             11.47 %               12.74 %
     December 31, 2004                                                9.89               13.96                 15.23

</TABLE>


HISTORY

In October 2001, the Bank was notified by the FDIC that it is a "troubled
institution" within the meaning of FDIC regulations. As a troubled institution,
the Bank is required to notify the FDIC 30 days prior to the addition or
replacement of a Board member and the employment or changes in responsibilities
of a senior executive officer.

In September 2002, a regularly-scheduled safety and soundness examination of the
Bank was conducted by its principal regulators, the Michigan Office of Financial
and Insurance Services ("OFIS") and the FDIC. During the course of that
examination, the FDIC, the OFIS, and the Federal Reserve Bank of Chicago ("FRB")
requested that the Corporation and the Bank take certain actions, including
suspending the payment of dividends and conserving the liquidity of the
Corporation.

In response to the concerns expressed by the regulators, the Board of Directors
of the Corporation and the Bank adopted resolutions providing for prior
regulatory approval of the declaration or payment of any dividend by the
Corporation or the Bank, and suspension of interest payments by the Corporation
in connection with its trust preferred securities. The agreements relating to
the trust preferred securities allow for the suspension of payments for up to 20
quarters. Therefore, the suspension of the interest payments does not violate
the agreement.

Following the completion of the regularly-scheduled safety and soundness
examination of the Bank by the FDIC and the OFIS in November 2002, and the
Bank's receipt of the related Report of Examination ("Report"), the FDIC and the
OFIS, with the consent of the Bank, on March 26, 2003, entered a formal order
(the "Order") under Federal and State banking laws. The Order became effective
on April 5, 2003, and was to remain in effect until modified or terminated by
action of the FDIC and the OFIS. The Order identified deficiencies in the Bank's
policies and procedures for safe and sound operation, including its directorate
and management personnel and practices, credit underwriting, credit
administration, and policies regarding asset/liability management, liquidity,
funds management and investments, and its compliance with all applicable laws
and regulations, including Regulations O and U of the Board of Governors of the
Federal Reserve System (the "Board"), the FDIC Rules and Regulations, and the
Michigan Banking Code of 1999. The Order also required the Bank to maintain
specified capital ratios during the life of the Order.

The Order required the Bank and its directors to take specific steps, within
time periods specified in the Order, to address the operational deficiencies,
including certain violations of law and regulations, identified by the FDIC and
the OFIS in the Order and the Report.



                                                                             25.
<PAGE>
                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                           OF OPERATIONS (Continued)

Significant progress was made by the Corporation in addressing all of the
deficiencies of the Order. The most significant event, which occurred in
mid-December 2004, was the consummation of a $30 million stock offering through
a private placement that resulted in net proceeds of $26.2 million. This
recapitalization allowed the Corporation to inject $15.5 million of capital into
the Bank which satisfied all of the capital requirements of the Order.

On February 8, 2005, the Order was formally removed; however, the Bank entered
into an informal agreement which requires the Bank to maintain a Tier 1 Capital
ratio of at least 8%. The Bank is also required to have regulatory approval
before paying dividends.










































                                                                             26.
<PAGE>
                         MACKINAC FINANCIAL CORPORATION
       ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

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

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

Loans are the most significant earning asset. Management offers commercial and
real estate loans priced at competitive interest rates. The loan products
offered include those which reprice with indices such as the prime rate or rates
paid on government issued securities. The Corporation's current loan portfolio
is comprised of approximately 75% which is indexed and 25% fixed rate term
loans, generally 3-5 years.

The Corporation also has $35.506 million of securities. These securities are
available for sale and provide flexibility for the Corporation in managing
interest rate risk. These cash flows are then reinvested into other earning
assets at current market rates.

The Corporation also has federal funds sold to correspondent banks as well as
other interest-bearing deposits with correspondent banks. These funds are
generally repriced on a daily basis.

The Corporation offers deposit products with a variety of terms ranging from
deposits whose interest rates can change on a weekly basis to certificates of
deposit with repricing terms of up to five years.

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

Exposure to interest rate risk is reviewed on a regular basis. Interest rate
risk is the potential of economic losses due to future interest rate changes.
These economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect of interest rate changes on net interest income and to structure the
composition of the balance sheet to minimize interest rate risk and at the same
time maximize income. Management realizes certain risks are inherent and that
the goal is to identify and minimize the risks. Tools used by management include
maturity and repricing analysis and interest rate sensitivity analysis.

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

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



                                                                             27.
<PAGE>
                         MACKINAC FINANCIAL CORPORATION
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)

The following is the Corporation's repricing opportunities at September 30, 2005
(dollars in thousands):

<TABLE>
<CAPTION>
                                            1-90      91-365       >1-5      Over 5
                                            Days       Days       Years       Years       Total
                                          --------   --------    --------   --------    --------
<S>                                       <C>        <C>         <C>        <C>         <C>
Interest-earning assets
     Loans                                $157,371   $  6,159    $ 34,957   $ 19,975    $218,462
     Securities                              1,000         71      30,898      3,537      35,506
     Other (1)                               9,704         --          --         --       9,704
                                          --------   --------    --------   --------    --------

     Total interest-earning assets         168,075      6,230      65,855     23,512     263,672
                                          --------   --------    --------   --------    --------

     Interest-bearing obligations:
     Savings deposits                       77,853         --          --         --      77,853
     Time deposits                          35,356     55,260      24,348        761     115,725
     Borrowings                                 68         --       1,349     35,000      36,417
                                          --------   --------    --------   --------    --------
     Total interest-bearing obligations    113,277     55,260      25,697     35,761     229,995
                                          --------   --------    --------   --------    --------

Gap                                       $ 54,798   $(49,030)   $ 40,158   $(12,249)   $ 33,677
                                          ========   ========    ========   ========    ========

Cumulative gap                            $ 54,798   $  5,768    $ 45,926   $ 33,677
                                          ========   ========    ========   ========
</TABLE>

(1)  Includes Federal Home Loan Bank Stock


The above analysis indicates that at September 30, 2005, the Corporation had a
cumulative asset sensitivity gap position of $5.8 million within the one-year
time frame. The Corporation's cumulative asset sensitive gap suggests that if
market interest rates increase in the next twelve months, the Corporation's net
interest income could benefit. Conversely, if market interest rates decrease
over the next twelve months, the above GAP position suggests the Corporation's
net interest income would decline.

At December 31, 2004, the Corporation had a cumulative asset sensitivity gap
position of $63.804 million within the one-year time frame. The Corporation's
cumulative asset sensitive gap suggested that if market interest rates increased
in the next twelve months, the Corporation had the potential to earn more net
interest income. Conversely, if market interest rates continued to decrease over
a twelve-month period, the December 31, 2004, gap position suggested the
Corporation's net interest income would decrease. During the first nine months
of 2005, the Corporation did benefit from its asset sensitivity gap position
because of rising interest rates.

The decrease in the gap position from December 31, 2004 to September 30, 2005
resulted from the use of short term investments to fund the prepayment of long
term liabilities. This was done in order to reduce interest rate risk and better
match assets and liabilities. A limitation of the traditional gap analysis is
that it does not consider the timing or magnitude of noncontractual repricing or
expected prepayments. In addition, the gap analysis treats savings, NOW, and
money market accounts as repricing within 90 days, while experience suggests
that these categories of deposits are actually comparatively resistant to rate
sensitivity.

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

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


                                                                             28.
<PAGE>
                         MACKINAC FINANCIAL CORPORATION
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)


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

FOREIGN EXCHANGE RISK

In addition to managing interest rate risk, management also actively manages
risk associated with foreign exchange. The Corporation provides foreign exchange
services, makes loans to, and accepts deposits from, Canadian customers
primarily at its banking offices in Sault Ste. Marie, Michigan. To protect
against foreign exchange risk, the Corporation monitors the volume of Canadian
deposits it takes in and then invests these Canadian funds in Canadian
commercial loans and securities. The Corporation entered into a term loan
payable in Canadian dollars during the first quarter of 2005 in order to offset
the foreign exchange exposure due to an asset sensitive position. This loan was
repaid in the second quarter when the asset exposure was reduced. As of
September 30, 2005, the Corporation had excess Canadian assets of $.310 million
(or $.266 million in U.S. dollars). Management believes the exposure to
short-term foreign exchange risk is minimal and at an acceptable level for the
Corporation.

OFF-BALANCE-SHEET RISK

Derivative financial instruments include futures, forwards, interest rate swaps,
option contracts and other financial instruments with similar characteristics.
The Corporation currently does not enter into futures, forwards, swaps or
options. However, the Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit and involve to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the condensed consolidated balance sheets. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates and may require collateral from the borrower if deemed
necessary by the Corporation. Standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party up to a stipulated amount and with specified terms and
conditions.

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

IMPACT OF INFLATION AND CHANGING PRICES

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


                                                                             29.
<PAGE>
                         MACKINAC FINANCIAL CORPORATION
                         ITEM 4. CONTROLS AND PROCEDURES


An evaluation was performed under the supervision of and with the participation
of the Corporation's management, including the President and Chief Executive
Officer, and the Chief Financial Officer, of the effectiveness of the design and
operation of the Corporation's disclosure controls and procedures (as such term
is defined in Rules 13-a 15(e) and 15d-15(e) under the Securities Exchange act
of 1934, as amended (the "Exchange Act")) as of the end of the period covered by
this report. Based on that evaluation, the Corporation's management, including
the President and Chief Executive Officer, have concluded that, as of the end of
such period, the Corporation's disclosure controls and procedures were effective
in timely alerting them to material information relating to the Corporation
(including its consolidated subsidiaries) required to be disclosed by the
Corporation in the reports that it files or submits under the Exchange Act.

There was no change in the Corporation's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred during the Corporation's fiscal quarter ended
September 30, 2005 that has materially affected, or is reasonably likely to
materially affect, the Corporation's internal control over financial reporting.






































                                                                             30.
<PAGE>
                         MACKINAC FINANCIAL CORPORATION
                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The Corporation and its subsidiaries are subject to routine litigation
incidental to the business of banking. In addition, the Corporation or the Bank
is subject to an informal agreement with regulatory authorities and the
litigation described below. Information regarding the informal agreement is
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the caption "History" in this report, and is
incorporated here by reference. The litigation that is not routine and
incidental to the business of banking is described below. The shareholders'
derivative cases discussed below, were previously described in the Corporation's
Annual Report on Form 10-K for the year ended December 31, 2004, and in the
Corporation's Quarterly Report for the period ended June 30, 2005.

Shareholder's Derivative Litigation

Damon Trust v. Bittner, et al.

In an action styled Virginia M. Damon Trust v. North Country Financial
Corporation, Nominal Defendant, and Dennis Bittner, Bernard A. Bouschor, Ronald
G. Ford, Sherry L. Littlejohn, Stanley J. Gerou II, John D. Lindroth, Stephen
Madigan, Spencer Shunk, Michael Henrickson, Glen Tolksdorf, and Wesley Hoffman,
filed in the U.S. District Court for the Western District of Michigan on July 1,
2003, a shareholder of the Corporation has brought a shareholder's derivative
action under Section 27 of the Exchange Act against the Corporation and certain
of its current and former directors and senior executive officers. The
Complaint, which demands a jury trial, is brought on behalf of the Corporation
against the individual defendants. It alleges that the individual defendants
have caused loss and damage to the Corporation through breaches of their
fiduciary duties of oversight and supervision by failing i) adequately to
safeguard the assets of the Corporation, (ii) to ensure that adequate
administrative, operating, and internal controls were in place and implemented,
(iii) to ensure that the Corporation was operated in accordance with
legally-prescribed procedures, and (iv) to oversee the audit process to ensure
that the Corporation's assets were properly accounted for and preserved. The
Complaint further alleges that the individual defendants violated Section 14(a)
of the Exchange Act by making materially false and misleading statements in the
proxy statement mailed to shareholders in connection with the annual meeting of
the Corporation held May 29, 2000, and the adoption by the shareholders at that
meeting of the Corporation's 2000 Stock Incentive Plan. The Complaint also
alleges that Mr. Ford and Ms. Littlejohn, through a series of compensation
arrangements, stock options, and employment agreements obtained by them through
improper means resulting from the offices they held with the Corporation,
received excessive compensation, to the injury of the Corporation. Among other
things, the Complaint is based upon allegations of material misstatements or
omissions in filings made by the Corporation with the SEC, and deficiencies in
the Corporation's policies and procedures for safe and sound operation,
including its directorate and management personnel and practices, credit
underwriting, credit administration, and policies regarding asset/liability
management, liquidity, funds management, and investments, and its compliance
with all applicable laws and regulations, including Regulations O and U of the
Board, FDIC Rules and Regulations, and the Michigan Banking Code of 1999. The
Complaint seeks (i) rescission of the approval of the 2000 Stock Incentive Plan
and return of all stock and options granted under the Plan, (ii) a declaration
that the individual defendants breached their fiduciary duty to the Corporation,
(iii) an order to the individual defendants to account to the Corporation for
all losses and/or damages by reason of the acts and omissions alleged, (iv) an
order to each of the individual defendants to remit to the Corporation all
salaries and other compensation received for periods during which they breached
their fiduciary duties, (v) compensatory damages in favor of the Corporation,
(vi) injunctive relief, and (vii) interest, costs, and attorney's and expert's
fees.

By letter dated September 17, 2003, and expressly without prejudice to the
argument that any such written demand is not required, plaintiff's counsel
purported to make a written demand that the Corporation pursue a number of
indicated putative claims against: (1) present and former officers and directors
of the Corporation who also are the individual defendants in the Damon action,
and (2) the certified public accounting firm of Wipfli, Ullrich, Bertelson, LLP.



                                                                             31.
<PAGE>
                         MACKINAC FINANCIAL CORPORATION
                     PART II. OTHER INFORMATION (Continued)


On September 18, 2003, the Corporation filed a motion to dismiss the Damon
action because plaintiff did not satisfy the mandatory precondition, under
Section 493a of the Michigan Business Corporation Act ("MBCA"), M.C.L.Section
450.1493a, for filing a shareholder derivative action that the shareholder must
first have submitted a written demand that the Corporation pursue in its own
right the claims asserted by the shareholder (the plaintiff here). Certain of
the individual defendants in the Damon action filed their own motion to dismiss
on November 25, 2003, in which motion the other individual defendants later
joined. The plaintiff filed an Opposition to both motions to dismiss on January
9, 2004, and on January 30, 2004, the defendants filed reply briefs in support
of their motions to dismiss.

On March 22, 2004, the Court issued an Opinion and Order granting in part and
denying in part the motions to dismiss in the Damon case. The Court dismissed
the Section 14(a) claim against all of the defendants as barred by the statute
of limitations and, as further grounds, dismissed that claim as to those who
were not directors at the time of the mailing of the proxy statement. The Court
has permitted the plaintiff to proceed with its breach of fiduciary duty claims
against the Directors on the grounds that the plaintiff cured its procedural
failings by subsequently transmitting a demand letter as required by Section 493
of the MBCA.

On April 19, 2004, the Court entered an Order Granting Stipulation to Grant
Plaintiff Leave to File Amended Complaint and to Grant Related Relief to All
Parties. On May 14, 2004, the plaintiff filed an Amended Complaint and,
thereafter, all Defendants timely filed Answers to the Amended Complaint. In its
Answer, the Corporation averred that the plaintiff's claims are asserted for and
on behalf of the Corporation, that the plaintiff does not assert any claims
against the Corporation and, therefore, the Corporation properly should be
realigned as a plaintiff in the action.

During the above described proceedings, on November 11, 2003, the Corporation
filed a motion, as permitted by section 495 of the MBCA, M.C.L.Section 450.1495,
requesting the Court to appoint a disinterested person to conduct a reasonable
investigation of the claims made by the plaintiff and to make a good faith
determination whether the maintenance of the derivative action is in the best
interests of the Corporation. After additional written submissions to the Court
by the defendants and the plaintiff concerning the issues presented by this
motion, and after several conferences with the Court, on May 20, 2004, the Court
entered an Order adopting the parties' written stipulations concerning the
appointment of a disinterested person and the manner of conducting the
investigation of the claims made by the plaintiff and making recommendations as
to whether the maintenance of the derivative action is in the best interests of
the Corporation.

On July 14, 2004, the Court convened a settlement conference among counsel for
all parties and counsel for the individual defendants' insurer. Although a
settlement was not achieved, at the direction of the Court, the parties'
respective counsel agreed to continue settlement discussions.

By Order of the Court dated November 2, 2004, the report of the disinterested
person was timely filed with the Corporation on October 23, 2004, and the action
was stayed until November 22, 2004. On December 22, 2004, the plaintiff filed a
motion with the Court seeking a scheduling conference among the Court and the
parties. The Court granted the plaintiff's motion on January 10, 2005. On
January 13, 2005, the parties to the action and the individual defendants'
insurer entered into an agreement regarding limited disclosure of the report of
the disinterested person to the insurer and counsel for the parties on the terms
and conditions set forth in the agreement. Also on January 13, 2005, a
scheduling conference was held with the Court, and was adjourned to February 14,
2005.

On February 9, 2005, the parties filed a joint status report with the Court. A
further status conference was held on February 14, 2005. At that time, the Court
entered a Stipulated Protective Order regarding limited dissemination of the
report of the disinterested person. Also on February 14, in a separate Order,
the Court required the parties to complete their respective review of the report
and communicate among themselves regarding their positions. Absent a negotiated
resolution, the Corporation was given the opportunity until March 21, 2005, to
file an appropriate motion to dismiss. On March 21, 2005, consistent with the
determinations of the disinterested person in his report, the Corporation filed
with the Court a motion to dismiss (i) all the breach of fiduciary duty claims
against defendants Bittner, Bouschor, Gerou, Lindroth, Madigan, Shunk,
Hendrickson, and Tolksdorf, (ii) the breach of fiduciary duty claims against
defendant Hoffman, except for one claim identified by the disinterested person
in his report, and (iii) the excess compensation claims against defendants Ford
and Littlejohn. The plaintiff opposed the motion to dismiss.



                                                                             32.
<PAGE>


                         MACKINAC FINANCIAL CORPORATION
                     PART II. OTHER INFORMATION (Continued)

In an Order dated September 6, 2005, the Court stayed the proceedings in this
case against defendant Littlejohn, in light of her filing for personal
bankruptcy under Chapter 7 of the Bankruptcy Code in the U.S. Bankruptcy Court
for the Western District of Michigan on August 9, 2005.

In an Opinion and Order, each dated September 7, 2005, the Court granted the
Corporation's motion and dismissed with prejudice (i) all the breach of
fiduciary duty claims against defendants Bittner, Bouschor, Gerou, Lindroth,
Madigan, Shunk, Hendrickson, and Tolksdorf, (ii) the breach of fiduciary duty
claims against defendant Hoffman, except for one claim identified by the
disinterested person in his report, and (iii) the excess compensation claims
against defendants Ford and Littlejohn. The Court directed that the case proceed
with the claim against defendant Hoffman with respect to his involvement in
defendant Ford's December 21, 2001 employment agreement, and with respect to the
breach of fiduciary duty claims against defendants Ford and Littlejohn, subject
to the stay regarding proceedings against defendant Littlejohn.

A Case Management Order was entered by the Court on September 16, 2005. The
Court has also scheduled a mediation among the parties, the Corporation, and its
insurer for November 15, 2005.

On October 21, 2005, without the required permission of the Court, the plaintiff
filed a Third Amended Complaint which (A) deleted (i) substantive allegations
previously asserted against defendants Bittner, Bouschor, Gerou, Lindroth,
Madigan, Shunk, Hendrickson, and Tolksdorf, (ii) the claim brought under Section
14 of the Exchange Act, (iii) allegations that the defendants engaged in acts to
"artificially inflate the price" of the Corporation's stock, and (iv) the
previous allegations quantifying damages to the Corporation at $40 million
(instead alleging "million of dollars" in damages), and (B) otherwise appears to
have been drafted to comport with the Court's Opinion and Order dated September
7, 2005. The Third Amended Complaint continues to include allegations against
defendant Littlejohn, notwithstanding the Court's September 6, 2005 Order
staying the case against her because of her personal bankruptcy filing. Before
the defendants responded to the Third Amended Complaint, the Court entered an
Order on October 31, 2005, striking the Third Amended Complaint because the
required permission of the Court was not obtained for its filing. The Court's
Order affords plaintiff seven days in which to submit a stipulated order for
filing of the Third Amended Complaint, or the filing of a motion to permit its
filing.

Prosecution of this case is the responsibility of the plaintiff and its counsel.
The Corporation's role will be to monitor the case and to respond to discovery
requests from the parties. Any settlement or judgment ultimately obtained by
plaintiff in this action, net of fees and expenses of counsel for plaintiff,
will inure to the benefit of the Corporation.

If the case proceeds beyond November 15, 2005 mediation, the Corporation will
incur legal fees and expenses in monitoring the plaintiff's prosecution of the
case on behalf of the Corporation and in responding to the parties' requests for
discovery directed to it. At this time the Corporation cannot accurately
estimate the amount of any such future legal fees and expenses.

Damon Trust v. Wipfli

On August 27, 2004, a second shareholder's derivative action, styled Virginia M.
Damon Trust v. Wipfli Ullrich Bertelson, LLP, and North Country Financial
Corporation, Nominal Defendant, was filed in the Michigan Circuit Court for
Grand Traverse County by the same shareholder which brought the derivative
action discussed above. The complaint, which demands a jury trial, is brought on
behalf of the Corporation against Wipfli Ullrich Bertelson, LLP ("Wipfli") under
the Michigan Accountant Liability statute, M.C.L. 600.2962. It alleges that
Wipfli damaged the Corporation by (i) failing to conduct and oversee, with the
due care and competence required of professional accountants, the annual audit
of the Corporation's financial statements for its fiscal years ending December
31, 2000 and December 31, 2001, (ii) failing to provide, with requisite due care
and competence, the internal audit, regulatory compliance, and financial
reporting services Wipfli had agreed to provide the Corporation after August 28,
2002, when Wipfli resigned as its auditors to undertake such consulting
services, (iii) failing to exercise due care and competence required to ensure
that the Corporation's financial statements conformed to applicable regulatory
accounting principles ("RAP") and generally accepted accounting principles
("GAAP"), (iv) failing to make full disclosure that the Corporation's
administrative, operating, and internal controls were inadequate to prevent loss
and


                                                                             33.
<PAGE>

                         MACKINAC FINANCIAL CORPORATION
                     PART II. OTHER INFORMATION (Continued)


damage to its assets, and (v) failing to conduct a diligent and careful "review"
of the Corporation's quarterly financial statements during its fiscal years 2000
and 2001 and the first and second quarters of 2002.

The complaint further alleges that Wipfli undertook in writing (i) to provide
professional services, including auditing services, accounting services for
preparation of audited financial statements, advice regarding financial
statement disclosure, and preparation of annual reports for regulators,
including the annual report required by section 36 of the Federal Deposit
Insurance Act, and (ii) to ensure that the Corporation had sufficient systems in
place to determine whether it was in compliance with RAP and other regulations
of the FDIC and the OFIS. The complaint alleges that Wipfli (i) failed to
conduct its audits of the Corporation's financial statements in accordance with
generally accepted auditing standards ("GAAS"), (ii) negligently represented
that the Corporation's audited annual financial statements for the year ended
December 31, 2000 were fairly presented in all material respects, (iii)
negligently conducted reviews of the Corporation's quarterly financial
statements for the interim quarters of 2000, 2001 and 2002, and (iv) negligently
audited the Corporation's financial statements for the fiscal years 2000 and
2001 by failing to obtain or review sufficient documentation, failing to limit
the scope of the audit in light of such failure to obtain or review sufficient
documentation, failing to verify the accuracy of information obtained from the
Corporation for the audit, failing to limit the scope of the audit in light of
such failure to verify the accuracy of the information obtained from the
Corporation, and substantially underestimating the Corporation's liabilities and
misrepresenting its solvency.

The complaint also alleges that Wipfli is a party responsible for the
Corporation's liability in any securities fraud action arising out of a material
overstatement of its financial results. The complaint claims contribution and
indemnification from Wipfli on behalf of the Corporation under the Private
Securities Litigation Reform Act of 1995 for any liability it may incur in any
such securities fraud action.

On October 12, 2004, Wipfli removed the second shareholder's derivative action
to the U.S. District Court for the Western District of Michigan. By stipulation
between the respective counsel for the Corporation and the plaintiff, the
Corporation was initially granted until December 10, 2004, to file its first
response to the Complaint, which period was extended by a Stipulated Order until
January, 2005.

On January 10, 2005, the Corporation filed its Answer to the Complaint in the
second shareholder's derivative action. Also on that date, a joint status report
was filed with the Court by all parties. A scheduling conference was held with
the Court on January 13, 2005. On that date, the Court entered a Preliminary
Case Management Order, affording the Corporation the opportunity until February
3, 2005, to make a motion to realign the Corporation in, or to dismiss, the
litigation.

On February 3, 2005, the Corporation filed a Motion to realign the Corporation
as the plaintiff, and to dismiss the Virginia M. Damon Trust as a party, in the
second shareholder's derivative action. The plaintiff, Virginia M. Damon Trust,
filed a brief opposing the Corporation's motion. Oral argument on the
Corporation's motion was held before the Court on March 7, 2005. The Court took
the matter under advisement.

In an Order dated September 29, 2005, the Court realigned the Corporation as the
plaintiff and made the Corporation exclusively responsible for prosecuting all
further aspects of the case, including any settlement.. In the same Order, the
Court stated that the Virginia M. Damon Trust would remain as a nominal
plaintiff in the case, entitled to notice. The Corporation is currently
evaluating its position with regard to the case, in advance of a scheduling
conference with the Court, which is anticipated to occur during the fourth
quarter of 2005.






                                                                             34.
<PAGE>





                         MACKINAC FINANCIAL CORPORATION


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

     Exhibit 3.1     Articles of Incorporation, as amended, incorporated
                     herein by reference to exhibit 3.1 of the Corporation's
                     Quarterly Report on Form 10-Q for the quarter ended
                     September 30, 1999.

     Exhibit 3.2     Amended and Restated Bylaws, incorporated herein by
                     reference to exhibit 3.1 of the Corporation's Quarterly
                     Report on Form 10-Q for the quarter ended September 30,
                     2001.

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

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

     Exhibit 32.1    Section 1350 Certification of Chief Executive Officer

     Exhibit 32.2    Section 1350 Certification of Chief Financial Officer



                                                                             35.
<PAGE>


                         MACKINAC FINANCIAL CORPORATION



                                   SIGNATURES

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

                                    MACKINAC FINANCIAL CORPORATION
                                    ------------------------------
                                             (Registrant)


Date: November 11, 2005             By: /s/ Paul D. Tobias
                                        -------------------------------------
                                        PAUL D. TOBIAS,
                                        CHAIRMAN
                                        (principal executive officer)





                                    By: /s/ Ernie R. Krueger
                                        -------------------------------------
                                        ERNIE R. KRUEGER,
                                        SENIOR VICE PRESIDENT / CONTROLLER
                                        (principal accounting officer)





                                                                             36.
<PAGE>



EXHIBIT INDEX

<Table>
<Caption>

EXHIBIT
NUMBER            DESCRIPTION
-------           -----------
<S>               <C>
Exhibit 3.1       Articles of Incorporation, as amended, incorporated herein
                  by reference to exhibit 3.1 of the Corporation's Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1999.

Exhibit 3.2       Amended and Restated Bylaws, incorporated herein by reference
                  to exhibit 3.1 of the Corporation's Quarterly Report on
                  Form 10-Q for the quarter ended September 30, 2001.

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

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

Exhibit 32.1      Section 1350 Certification of Chief Executive Officer

Exhibit 32.2      Section 1350 Certification of Chief Financial Officer
</Table>