<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 June 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)

<TABLE>
<S>                                          <C>
                MICHIGAN                                 38-2062816
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)
</TABLE>

<TABLE>
<S>                                                      <C>
 130 SOUTH CEDAR STREET, MANISTIQUE, MI                    49854
(Address of principal executive offices)                 (Zip Code)
</TABLE>

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

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
                                      INDEX

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

   Item 1.   Financial Statements

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

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

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

             Condensed Consolidated Statements of Cash Flows -
                Six Months Ended June 30, 2005 (Unaudited) and
                June 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..................      13

   Item 3.   Quantitative and Qualitative Disclosures About Market
                Risk.................................................      26

   Item 4.   Controls and Procedures.................................      29

PART II. OTHER INFORMATION

   Item 1.   Legal Proceedings.......................................      30

   Item 4.   Submission of  Matters to a Vote of  Security Holders...      35

   Item 6.   Exhibits and Reports on Form 8-K........................      36

   SIGNATURES .......................................................      37
</TABLE>

<PAGE>

                         MACKINAC FINANCIAL CORPORATION

                          PART I. FINANCIAL INFORMATION
                          ITEM 1. FINANCIAL STATEMENTS

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                                  June 30,    December 31,     June 30,
                                                                    2005          2004           2004
                                                                -----------   ------------   -----------
                                                                (Unaudited)                  (Unaudited)
<S>                                                             <C>           <C>            <C>
ASSETS
Cash and due from banks                                           $ 11,477      $  4,230       $  5,707
Federal funds sold                                                   8,767        39,848          9,333
                                                                  --------      --------       --------
   Cash and cash equivalents                                        20,244        44,078         15,040

Interest-bearing deposits in other financial institutions               --        18,535         15,726
Securities available for sale                                       36,166        57,075         64,552
Federal Home Loan Bank stock                                         4,855         4,754          4,652

Total loans                                                        204,503       203,832        233,032
   Allowance for loan losses                                        (6,636)       (6,966)       (10,850)
                                                                  --------      --------       --------
Net loans                                                          197,867       196,866        222,182

Premises and equipment                                              10,496        10,739         12,430
Other real estate held for sale                                      2,312         1,730          3,557
Other assets                                                         4,171         5,720          6,903
                                                                  --------      --------       --------
   Total assets                                                   $276,111      $339,497       $345,042
                                                                  ========      ========       ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
   Non-interest-bearing deposits                                  $ 21,033      $ 20,956       $ 21,477
   Interest-bearing deposits                                       186,781       194,694        214,169
                                                                  --------      --------       --------
   Total deposits                                                  207,814       215,650        235,646

Borrowings                                                          36,484        85,039         86,637
Subordinated debentures                                                 --            --         12,450
Other liabilities                                                    3,296         4,078          4,424
                                                                  --------      --------       --------
   Total liabilities                                               247,594       304,767        339,157

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                                             (13,915)       (8,097)        (9,769)
   Accumulated other comprehensive income (loss)                        20           492           (521)
                                                                  --------      --------       --------
      Total shareholders' equity                                    28,517        34,730          5,885
                                                                  --------      --------       --------
   Total liabilities and shareholders' equity                     $276,111      $339,497       $345,042
                                                                  ========      ========       ========
</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     Six Months Ended
                                                           June 30,              June 30,
                                                      ------------------   -------------------
                                                        2005       2004      2005       2004
                                                      --------   -------   --------   --------
<S>                                                   <C>        <C>       <C>        <C>
Interest income:
   Interest and fees on loans:
      Taxable                                          $3,201    $ 4,069    $ 6,260    $ 7,865
      Tax-exempt                                          230        324        472        643
   Interest on securities:
      Taxable                                             434        574        896      1,272
      Tax-exempt                                           42         43         84         86
   Other interest                                         110        143        293        263
                                                       ------    -------    -------    -------
      Total interest income                             4,017      5,153      8,005     10,129
                                                       ------    -------    -------    -------

Interest expense:
   Deposits                                             1,198      1,378      2,328      3,043
   Borrowings                                             431      1,189      1,084      2,370
   Subordinated debentures                                 --        119         --        238
                                                       ------    -------    -------    -------
      Total interest expense                            1,629      2,686      3,412      5,651
                                                       ------    -------    -------    -------

Net interest income                                     2,388      2,467      4,593      4,478
Provision for loan losses                                  --         --         --         --
                                                       ------    -------    -------    -------
Net interest income after provision for loan losses     2,388      2,467      4,593      4,478
                                                       ------    -------    -------    -------

Other income:
   Service fees                                           172        287        333        580
   Loan and lease fees                                      4          4          6          9
   Net security gains                                      98         --         97         --
   Net gains on sale of loans                              13          8         20         20
   (Loss) on sale of branches                              --       (254)        --       (254)
   Other                                                   83         18         98        371
                                                       ------    -------    -------    -------
      Total other income                                  370         63        554        726
                                                       ------    -------    -------    -------

Other expense:
   Salaries and employee benefits                       1,606      1,354      3,110      2,853
   Furniture and equipment                                138        235        297        493
   Occupancy                                              247        279        473        626
   Data processing                                        246        348        492        703
   Accounting, legal, and consulting fees                 228        572        546        978
   Loan and deposit                                       250        600        543      1,093
   Telephone                                               77         19        137        232
   Advertising                                            243         26        382         43
   Penalty on prepayment of FHLB borrowings                --         --      4,320         --
   Other                                                  300        697        665      1,450
                                                       ------    -------    -------    -------
      Total other expense                               3,335      4,130     10,965      8,471
                                                       ------    -------    -------    -------

Loss before provision for income taxes                   (577)    (1,600)    (5,818)    (3,267)
Provision for income taxes                                 --         --         --         --
                                                       ------    -------    -------    -------
Net loss                                               $ (577)   $(1,600)   $(5,818)   $(3,267)
                                                       ======    =======    =======    =======
Loss per common share:
   Basic                                               $ (.17)   $ (4.56)   $ (1.70)   $ (9.31)
                                                       ======    =======    =======    =======
   Diluted                                             $ (.17)   $ (4.56)   $ (1.70)   $ (9.31)
                                                       ======    =======    =======    =======
</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    Six Months Ended
                                                                   June 30,             June 30,
                                                              ------------------   ------------------
                                                                2005       2004      2005      2004
                                                              --------   -------   -------   --------
<S>                                                           <C>        <C>       <C>       <C>
Balance, beginning of period                                  $28,854    $ 9,371   $34,730   $10,700

Net loss for period                                              (577)    (1,600)   (5,818)   (3,267)
Change in minority interest of consolidated subsidiary             77         --        77        --
Net unrealized gain (loss) on securities available for sale       163     (1,886)     (472)   (1,548)
                                                              -------    -------   -------   -------
   Total comprehensive income (loss)                             (337)    (3,486)   (6,213)   (4,815)

Balance, end of period                                        $28,517    $ 5,885   $28,517   $ 5,885
                                                              =======    =======   =======   =======
</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                                                              3.

<PAGE>

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

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                Six Months Ended
                                                                    June 30,
                                                              -------------------
                                                                2005       2004
                                                              --------   --------
<S>                                                           <C>        <C>
Increase (decrease) in cash and cash equivalents:

   Cash flows from operating activities:
      Net loss                                                $ (5,818)  $ (3,267)
      Adjustments to reconcile net loss to net cash
         provided by (used in) operating activities:
         Depreciation and amortization                             489        914
         Provision for impairment of other real estate held
            for sale                                                --         22
         Gain on sales of securities                               (97)        --
         Gain on sales of premises, equipment, and other
            real estate                                             (4)       (33)
         FHLB stock dividend                                      (101)      (108)
         Change in other assets                                  1,550      3,120
         Change in other liabilities                              (768)    (2,145)
                                                              --------   --------
      Net cash used in operating activities                     (4,749)    (1,497)
                                                              --------   --------

   Cash flows from investing activities:
      Net (increase) decrease in interest-bearing deposits
         in other financial institutions                        18,535     (9,678)
      Purchase of securities available for sale                (16,009)   (10,000)
      Proceeds from sales of securities available for sale      30,813     20,000
      Proceeds from maturities, calls or paydowns of
         securities available for sale                           5,666      8,494
      Net decrease (increase) in loans                          (1,828)    49,997
      Purchase of premises and equipment                          (120)       (19)
      Proceeds from sales of premises, equipment, and other
         real estate                                               249      5,247
                                                              --------   --------
   Net cash provided by investing activities                    37,306     64,041
                                                              --------   --------

   Cash flows from financing activities:
      Net decrease in deposits                                  (7,836)   (70,148)
      Proceeds from issuance of debt                             1,651        100
      Principal payments on borrowings                         (50,206)      (489)
                                                              --------   --------
   Net cash used in financing activities                       (56,391)   (70,537)
                                                              --------   --------

Net change in cash and cash equivalents                        (23,834)    (7,993)
Cash and cash equivalents at beginning of period                44,078     23,033
                                                              --------   --------
Cash and cash equivalents at end of period                      20,244   $ 15,040
                                                              ========   ========

Supplemental cash flow information:

Cash paid for:
   Interest                                                   $  3,522   $  5,929
   Income taxes                                                     --         --

Transfers of foreclosures from loans to other real estate
   held for sale                                                   827      3,662
</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 six month period ended June
     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.

     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 collectibility 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 collectibility.

     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 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.


                                                                              5.

<PAGE>

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

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     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 six months ended June 30,
     2005. The weighted average fair value of options granted in 2005 as of
     their grant date, using assumptions shown below, was calculated at $3.55
     per share. There were 60,000 options granted in the second quarter of 2005
     at an exercise price of $12.00 per share.

<TABLE>
<CAPTION>
                                              June 30,
                                                2005
                                              --------
<S>                                           <C>
     Dividend yield                             0.00%
     Risk-free interest rate                    3.80%
     Weighted average expected life (years)      4.0
     Expected volatility                       30.00%
</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 six months ended June 30, 2005
     and 2004 as follows (dollars in thousands, except per share data):

<TABLE>
<CAPTION>
                                                               Six months ended
                                                            ---------------------
                                                             June 30,    June 30,
                                                               2005        2004
                                                            ----------   --------
<S>                                                         <C>          <C>
     Net Loss:
        As reported                                         $   (5,818)  $ (3,267)
        Total stock-based compensation expense determined
           under fair value-based method                    $      (43)  $     --
                                                            ----------   --------
     Pro forma                                              $   (5,861)  $ (3,267)
                                                            ==========   ========
     Loss per share - Basic:
        As reported                                         $    (1.70)  $  (9.31)
                                                            ==========   ========
        Pro forma                                           $    (1.71)  $  (9.31)
                                                            ==========   ========
     Loss per share - Diluted:
        As reported                                         $    (1.70)  $  (9.31)
                                                            ==========   ========
        Pro forma                                           $    (1.71)  $  (9.31)
                                                            ==========   ========
        Weighted average shares outstanding                  3,428,695    350,958
                                                            ==========   ========
</TABLE>

     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


                                                                              6.

<PAGE>

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

     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 six months ended June 30, 2005 and 2004
     (dollars in thousands, except per share data):

<TABLE>
<CAPTION>
                                                              Three Months Ended       Six Months Ended
                                                                   June 30,                June 30,
                                                            ---------------------   ---------------------
                                                               2005        2004        2005        2004
                                                            ----------   --------   ----------   --------
<S>                                                         <C>          <C>        <C>          <C>
Basic loss per common share:
   Net loss                                                 $     (577)  $ (1,600)  $   (5,818)  $ (3,267)
                                                            ==========   ========   ==========   ========
   Weighted average common shares outstanding                3,428,695    350,958    3,428,695    350,958
                                                            ==========   ========   ==========   ========
      Basic loss per common share                           $     (.17)  $  (4.56)  $    (1.70)  $  (9.31)
                                                            ==========   ========   ==========   ========
Diluted loss per common share:
   Net loss                                                 $     (.17)  $  (4.56)  $    (1.70)  $  (9.31)
                                                            ==========   ========   ==========   ========
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       3,428,695    350,958    3,428,695    350,958
                                                            ==========   ========   ==========   ========
   Diluted loss per common share                            $     (.17)  $  (4.56)  $    (1.70)  $  (9.31)
                                                            ==========   ========   ==========   ========
</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.

4.   INVESTMENT SECURITIES

     The amortized cost and estimated fair value of investment securities
     available for sale as of June 30, 2005, December 31, 2004 and June 30, 2004
     are as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                        June 30, 2005          December 31, 2004          June 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                                         $32,001      $31,659     $21,980      $21,843     $26,018      $25,621
Obligations of states and political subdivisions      3,645        4,005       3,711        4,029       3,711        3,855
Corporate securities                                    500          502         667          681         666          695
Mortgage-related securities                              --           --      30,225       30,522      34,678       34,381
                                                    -------      -------     -------      -------     -------      -------
   Total securities available for sale              $36,146      $36,166     $56,583      $57,075     $65,073      $64,552
                                                    =======      =======     =======      =======     =======      =======
</TABLE>


                                                                              7.


<PAGE>

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

     The amortized cost and estimated fair value of investment securities
     pledged to treasury deposits and borrowings were $19.405 million and
     $19.150 million, respectively, at June 30, 2005.

5.   LOANS

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

<TABLE>
<CAPTION>
                                                  June 30,   December 31,   June 30,
                                                    2005         2004         2004
                                                  --------   ------------   --------
<S>                                               <C>        <C>            <C>
     Commercial real estate                       $104,785     $105,619     $122,100
     Commercial, financial, and agricultural        47,534       47,446       63,052
     One to four family residential real estate     43,012       45,292       44,457
     Consumer                                        2,153        2,379        2,678
     Construction                                    7,019        3,096          745
                                                  --------     --------     --------
        Total loans                               $204,503     $203,832     $233,032
                                                  ========     ========     ========
</TABLE>


     LOANS - ALLOWANCE FOR LOAN LOSSES

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

<TABLE>
<CAPTION>
                                      June 30,   December 31,   June 30,
                                        2005         2004         2004
                                      --------   ------------   --------
<S>                                   <C>        <C>            <C>
     Balance at beginning of period    $6,966      $ 22,005     $ 22,005
     Recoveries on loans                  101           719          344
     Loans charged off                   (431)      (15,758)     (11,499)
     Provision                             --            --           --
                                       ------      --------     --------
     Balance at end of period          $6,636      $  6,966     $ 10,850
                                       ======      ========     ========
</TABLE>

     In the first six months of 2005, net charge off activity was minimal at
     $330,000, or .17% of average loans outstanding. The allowance for loan
     losses was significantly impacted by loan charge offs in the first quarter
     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 $394,000, $888,000, and $523,000 at June 30, 2005, December
     31, 2004 and June 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 six months ended June 30, 2005 and 2004. The
     nonperforming commercial loans are reflected in the information regarding
     impaired loans.


                                                                              8.

<PAGE>

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

     LOANS - IMPAIRED LOANS

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

<TABLE>
<CAPTION>
                                                                                                           Valuation Reserve
                                                                                                  ----------------------------------
                                                         June 30,    December 31,     June 30,    June 30,   December 31,   June 30,
                                                           2005          2004           2004        2005         2004         2004
                                                       -----------   ------------   -----------   --------   ------------   --------
                                                       (Unaudited)                  (Unaudited)
<S>                                                    <C>           <C>            <C>           <C>        <C>            <C>
Balances, at period end
   Impaired loans with specific valuation reserve         $    6        $   608      $ 8,265         $ 6         $136         $587
   Impaired loans with no specific valuation reserve       1,527          3,699          524          --           --           --
                                                          ------        -------      -------         ---         ----         ----
      Total impaired loans                                $1,533        $ 4,307      $ 8,789         $ 6         $136         $587
                                                          ======        =======      =======         ===         ====         ====

   Impaired loans on nonaccrual basis                     $1,533        $ 4,307      $ 8,789         $ 6         $136         $587
   Impaired loans on accrual basis                            --             --           --          --           --           --
                                                          ------        -------      -------         ---         ----         ----
      Total impaired loans                                $1,533        $ 4,307      $ 8,789         $ 6         $136         $587
                                                          ======        =======      =======         ===         ====         ====

Average investment in impaired loans                      $3,022        $17,036      $24,954
Interest income recognized during impairment                  51          1,053          712
Interest income that would have been recognized
   on an accrual basis                                        89            803          279
Cash-basis interest income recognized                         51            863          712
</TABLE>

     The average investment in impaired loans was approximately $3.022 million
     for the six-months ended June 30, 2005, $17.036 million for the year ended
     December 31, 2004, and $24.954 million for the six months ended June 30,
     2004, respectively. The reduction in impaired loan balances from June 30,
     2004 to June 30, 2005, of $21.932 million, was largely due to $40.0 million
     of loan sales, primarily nonperforming loans, which included $22.9 million
     of nonaccrual loans.

     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>
                                                 June 30,   December 31,   June 30,
                                                   2005         2004         2004
                                                 --------   ------------   --------
<S>                                              <C>        <C>            <C>
     Loans outstanding beginning of period         $  63       $ 6,514      $6,514
     New loans                                        52           365          40
     Net activity on revolving lines of credit       416            --          --
     Repayment                                      (115)         (765)       (331)
     Decrease related to retired executive
        officers and directors                        --        (6,051)         --
                                                   -----       -------      ------
        Loans outstanding end of period            $ 416       $    63      $6,223
                                                   =====       =======      ======
</TABLE>

     There were no loans to related-parties classified at June 30, 2005,
     December 31, 2004 or June 30, 2004, respectively.


                                                                              9.

<PAGE>

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

6.   BORROWINGS

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

<TABLE>
<CAPTION>
                                                             June 30,   December 31,   June 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      $84,986

     Farmers Home Administration, fixed-rate note payable,
        maturing August 24, 2004, interest payable at 1%        1,484        1,484        1,551

     Notes payable to directors                                    --           --          100
                                                              -------      -------      -------
                                                              $36,484      $85,039      $86,637
                                                              =======      =======      =======
</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 June 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
     $28,263,000; U.S. government agency securities with an amortized cost and
     estimated fair value of $18,399,000 and $18,149,000, 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 June 30, 2005.

     The U.S.D.A. Rural Development borrowing is collateralized by loans
     totaling $678,000 originated and held by the Corporation's wholly owned
     subsidiary, First Rural Relending, an assignment of a demand deposit
     account in the amount of $948,000, and guaranteed by the Corporation.

7.   STOCK OPTION PLANS

     A summary of stock option transactions for the six months ended June 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>
                                                   June 30,   December 31,   June 30,
                                                     2005         2004         2004
                                                   --------   ------------   --------
<S>                                                <C>        <C>            <C>
     Outstanding shares at beginning of year        282,999       27,483      27,483
     Granted during the period                       60,000      257,152          --
     Expired during the period                      (19,042)      (1,636)       (700)
                                                   --------     --------     -------
     Outstanding shares at end of period            323,957      282,999      26,783
                                                   ========     ========     =======

     Weighted average exercise price per share
        at end of period                           $  15.39     $  34.55     $280.40
                                                   ========     ========     =======

     Shares available for grant at end of period    140,948      189,532      18,612
                                                   ========     ========     =======
</TABLE>


                                                                             10.

<PAGE>

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

     Options granted in 2005 were granted at a price of $12.00 per share, the
     approximate 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 June
     30, 2005:

<TABLE>
<CAPTION>
                                                       Weighted
                                                       Average     Weighted
                                   Number             Remaining     Average
          Exercise       -------------------------   Contractual   Exercise
        Price Range      Outstanding   Exercisable    Life-Years     Price
     -----------------   -----------   -----------   -----------   --------
<S>                      <C>           <C>           <C>           <C>
           $9.75           257,152       120,861         9.5        $  9.75
           $12.00           60,000        12,000         9.9          12.00
     $156.00 - $240.00       4,225         4,225         4.9         181.80
     $300.00 - $406.60       2,580         2,580         3.6         383.26
                           -------       -------         ---        -------
                           323,957       139,666         9.4        $ 15.39
                           =======       =======         ===        =======
</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.

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.


                                                                             11.

<PAGE>

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

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>
                                            June 30,   December 31,   June 30,
                                              2005         2004         2004
                                            --------   ------------   --------
<S>                                         <C>        <C>            <C>
Commitments to extend credit:
   Fixed rate                                $ 1,341      $   638      $   847
   Variable rate                              22,982       10,889        5,935
Standby letters of credit - Variable rate     11,299       17,970       18,771
Credit card commitments - Fixed rate           2,798        2,995        3,184
                                             -------      -------      -------
                                             $38,420      $32,492      $28,737
                                             =======      =======      =======
</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.

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 $43.2 million, or 28.4%, of the
commercial loan portfolio at June 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.


                                                                             12.

<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.


                                                                             13.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                  OF OPERATIONS

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 $5.818 million through June 30, 2005,
compared to net loss of $3.267 million for the same period in 2004. Basic loss
per share was $1.70 for the six months ended June 30, 2005, compared to a loss
of $9.31 for the same period in 2004. The loss for the three months ended June
30, 2005 amounted to $.577 million, or $.17 per share, compared to $1.600
million, or $4.56 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 3,438,695,
compared to 350,958 in 2004. There was no provision for loan losses recorded
during the three and six month periods for 2005 and 2004. Total assets declined
$63.386 million from December 31, 2004 to June 30, 2005. The loan portfolio
declined $9.001 million in the first quarter of 2005, from December 31, 2004
balances of $203.832 million. Deposits totaled $205.239 million at March 31,
2005, a decline of $10.411 million from the $215.650 million at December 31,
2004.

FINANCIAL CONDITION

CASH AND CASH EQUIVALENTS

Cash and cash equivalents decreased $23.834 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 $20.909 million, or 36.6%, from December
31, 2004 to June 30, 2005, with the balance on June 30, 2005, totaling $36.166
million. The decrease during the first six 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 June 30,
2005, investment securities with an estimated fair value of $19.150 million were
pledged.

LOANS

Through the second quarter of 2005, loan balances increased by $671,000 or .33%
from December 31, 2004 balances of $203.832 million. During the first quarter,
the Bank experienced a high level, $16.8 million, of loan payoffs along with
normal principal reduction of $2.3 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. New loan production in the first
quarter totaled $10.1 million. The Bank recently added additional commercial
lending staff and will be adding mortgage lenders later in the year. 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 $25.2
million of loans in the first quarter of 2004. This sale was composed of
primarily non-performing loans and resulted in a reduction in non-accrual loans
of $17.5 million and a total reduction in non-performing loans of $18.5 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 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, most segments of the loan portfolio were


                                                                             14.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                  OF OPERATIONS

relatively unchanged the first half of 2005, except construction loans, which
increased by $3.923 million. 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 June 30, 2005, December 31, 2004
and June 30, 2004 (dollars in thousands):

<TABLE>
<CAPTION>
                                             June 30,   Percent of   December 31,   Percent of   June 30,   Percent of
                                               2005        Total         2004         Total        2004        Total
                                             --------   ----------   ------------   ----------   --------   ----------
<S>                                          <C>        <C>          <C>            <C>          <C>        <C>
Commercial real estate                       $104,785      51.25%      $105,619        51.82%    $122,100      52.40%
Commercial, financial, and agricultural        47,534      23.24         47,446        23.28       63,052      27.06
One to four family residential real estate     43,012      21.03         45,292        22.22       44,457      19.08
Consumer                                        2,153       1.05          2,379         1.16        2,678       1.15
Construction                                    7,019       3.43          3,096         1.52          745        .31
                                             --------      -----       --------        -----     --------      -----
Total loans                                  $204,503      100.0%      $203,832        100.0%    $233,032      100.0%
                                             ========      =====       ========        =====     ========      =====
</TABLE>

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

<TABLE>
<CAPTION>
                                          June 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       $ 43,208       28.37%        151.5%        $ 52,659       34.40%        151.6%
Gaming                           9,717        6.38          34.1           14,310        9.35          41.2
Petroleum                        8,115        5.33          28.5            7,718        5.04          22.2
Forestry                         5,180        3.40          18.2            2,245        1.47           6.5
Other                           86,099       56.52         301.9%          76,133       49.74         219.2%
                              --------      ------         -----         --------      ------         -----
   Total Commercial Loans     $152,319      100.00%                      $153,065      100.00%
                              ========      ======                       ========      ======

<CAPTION>
                                         June 30, 2004
                            ----------------------------------------
                                          Percent of     Percent of
                            Outstanding   Commercial   Shareholders'
                              Balance        Loans         Equity
                            -----------   ----------   -------------
<S>                         <C>           <C>          <C>
Hospitality and tourism       $ 45,932       24.81%         780.5%
Gaming                          19,344       10.45          328.7
Petroleum                        4,648        2.50           79.0
Forestry                         1,182         .64           20.1
Other                          114,046       61.60        1,937.9%
                              --------      ------        -------
   Total Commercial Loans     $185,152      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 June
30, 2005, the allowance for loan losses was 3.24% of total loans outstanding
compared to 3.42% at December 31, 2004 and 4.66% at June 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 .17% and 4.18% for
the six months ended June 30, 2005 and 2004, respectively. Net charge-offs for
the six-month period ended June 30, 2005, were $330,546 compared to $11,155,000
for the same period in 2004. Charge-offs during the first six months of 2004
include $7.4 million of charge-offs incurred as a result of 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 six months ended June 30,
2005, and June 30, 2004 since the reserve was considered adequate at the end of
both periods. There were no new significant problem loans or loan downgrades
identified during the second quarter of 2005.


                                                                             15.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                  OF OPERATIONS

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

<TABLE>
<CAPTION>
                                        June 30,   December 31,   June 30,
                                          2005         2004         2004
                                        --------   ------------   --------
<S>                                     <C>        <C>            <C>
NONPERFORMING ASSETS:
Nonaccrual Loans                        $   959       $ 4,307     $ 8,789
Loans past due 90 days or more                2            --          --
Restructured Loans                           --            --       4,473
                                        -------       -------     -------
   Total nonperforming loans                961         4,307      13,262
Other real estate owned                   2,312         1,730       3,557
                                        -------       -------     -------
   Total nonperforming assets           $ 3,273       $ 6,037     $16,819
                                        =======       =======     =======
Nonperforming loans as a % of loans         .47%         2.11%       5.69%
                                        -------       -------     -------
Nonperforming assets as a % of assets      1.19%         1.78%       4.87%
                                        -------       -------     -------
RESERVE FOR LOAN LOSSES:
At period end                           $ 6,636       $ 6,966     $10,850
                                        -------       -------     -------
As a % of loans                            3.24%         3.42%       4.66%
                                        -------       -------     -------
As a % of nonperforming loans            690.53%       161.74%      81.81%
                                        -------       -------     -------
As a % of nonaccrual loans               691.97%       161.74%     123.45%
                                        =======       =======     =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                   June 30,   December 31,   June 30,
                                                     2005         2004         2004
                                                   --------   ------------   --------
<S>                                                <C>        <C>            <C>
Commercial, financial and agricultural loans        $1,206       $1,419       $ 3,893
One to four family residential real estate loans        91           97           125
Consumer loans                                          --           --             0
Unallocated and general reserves                     5,339        5,450         6,832
                                                    ------       ------       -------
Totals                                              $6,636       $6,966       $10,850
                                                    ======       ======       =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                        Six Months        Twelve Months       Six Months
                                                      Ended June 30,   Ended December 31,   Ended June 30,
                                                           2005               2004               2004
                                                      --------------   ------------------   --------------
<S>                                                   <C>              <C>                  <C>
Allowance to total loans, at period end                      3.24%              3.42%              4.66%
Average loans outstanding for the periods indicated      $198,618           $244,730           $266,791
Net charge-offs to average outstanding loans                  .17%              6.15%              4.18%
Nonperforming loans to gross loans, at period end             .47%              2.11%              5.69%
</TABLE>

Total nonperforming loans decreased $3.346 million since December 31, 2004. The
reduction in nonperforming loans during the six 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 $40 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


                                                                             16.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                  OF OPERATIONS

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>
                                           Six Months Ended       Year Ended      Six Months Ended
                                             June 30, 2005    December 31, 2004     June 30, 2004
                                           ----------------   -----------------   ----------------
<S>                                        <C>                <C>                 <C>
Balance at beginning of period                  $1,730             $ 4,356             $ 4,356
Other real estate transferred from loans           827               4,762               3,662
Other real estate sold/written down               (245)             (7,388)             (4,461)
                                                ------             -------             -------
   Balance at end of period                     $2,312             $ 1,730             $ 3,557
                                                ======             =======             =======
</TABLE>

During the first six months of 2005, the Corporation received real estate in
lieu of loan payments of $.827 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 six months of 2005.
Total deposits decreased by $7.836 million, or 3.63%, in the first six months of
2005. Non-core deposits decreased by $10.937 million during the first six months
of 2005; while core deposits showed an increase of $3.101 million during the
first six months of 2005. The Corporation has initiated an aggressive marketing
campaign to introduce new products and offer more competitive deposit pricing in
an attempt to gather in market deposits.

<TABLE>
<CAPTION>
                                    June 30,   December 31,   June 30,
                                      2005         2004         2004
                                    --------   ------------   --------
<S>                                 <C>        <C>            <C>
Demand deposit accounts             $ 21,033     $ 20,956     $ 21,477
NOW and money market                  53,387       53,468       60,232
Savings and IRAs                      24,843       25,570       26,074
Certificates of Deposit <$100,000     56,932       53,100       58,212
                                    --------     --------     --------
   Total core deposits               156,195      153,094      165,995
Certificates of Deposit >$100,000     11,665       10,726       10,706
Internet CDs <$100,000                34,550       46,227       53,242
Internet CDs >$100,000                 5,404        5,603        5,703
                                    --------     --------     --------
   Total non-core deposits            51,619       62,556       69,651

   Total deposits                   $207,814     $215,650     $235,646
                                    ========     ========     ========
</TABLE>


                                                                             17.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
     ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

BORROWINGS

The Corporation has used alternative funding sources to provide long-term,
stable sources of funds. Total borrowings of the Corporation decreased by
$48.555 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 $6.213 million from December 31, 2004 to
June 30, 2005. The decrease is comprised of a net loss of $5.818 million and a
decrease in the net unrealized gain on securities of $.472 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 June
30, 2005, decreased by $.079 million, or 3.20% compared to the same period one
year ago. For the six month period ended June 30, 2005, net interest income
amounted to $4.593 million, an increase of $.115 million, 2.57% from the amount
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 six months of 2005. The Corporation also benefited from significant
declines in nonperforming loans, $13.5 million, from June 30, 2004 to June 30,
2005. The Corporation also benefited from the increases in the prime rate of
2.25%, in the last twelve months, since it is asset sensitive, with
approximately 75% of the loan portfolio repricing with changes in various
indices.


                                                                             18.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
     ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

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
                                               ---------------------------------------------------------------
                                                        June 30, 2005                    June 30, 2004
                                               ------------------------------   ------------------------------
                                                 Average     Interest             Average     Interest
                                               Outstanding    Earned/   Yield   Outstanding    Earned/   Yield
                                                 Balance       Paid      Rate     Balance       Paid      Rate
                                               -----------   --------   -----   -----------   --------   -----
<S>                                            <C>           <C>        <C>     <C>           <C>        <C>
Interest-earning assets
   Loans                                         $197,545      3,431    6.97%     $244,559     $4,393    7.13%
   Taxable securities                              47,944        434    3.62%       63,501        574    3.59%
   Nontaxable securities                            3,700         42    4.55%        3,723         43    4.58%
   Federal funds sold                               7,182         52    2.89%       23,960         59    0.98%
   Other interest-earning assets                    4,845         58    4.87%       17,643         84    1.89%
                                                 --------     ------    ----      --------     ------    ----
      Total interest-earning assets               261,216      4,017    6.17%      350,386      5,153    5.90%
                                                 --------     ------    ----      --------     ------    ----

Interest-bearing obligations
   Savings deposits                                71,306        273    1.54%       83,273        265    1.28%
   Time deposits                                  116,069        925    3.20%      154,101      1,113    2.90%
   Borrowings                                      37,838        431    4.57%       86,865      1,189    5.49%
   Subordinated debentures                             --         --    0.00%       12,450        119    3.83%
                                                 --------     ------    ----      --------     ------    ----
      Total interest-bearing obligations         $225,213      1,629    2.90%      336,689      2,686    3.19%
                                                 --------     ------    ----      --------     ------    ----
Net interest income                                           $2,388                           $2,467
                                                              ======                           ======
Net interest rate spread
Net earning assets                               $ 36,003                         $ 13,697
                                                 ========                         ========
Net yield on average interest-earning assets

Average interest-earning assets to average
   interest-bearing obligations                    115.99%                          104.07%
                                                 ========                         ========
</TABLE>

<TABLE>
<CAPTION>
                                                                       Six Months Ended
                                               ---------------------------------------------------------------
                                                        June 30, 2005                    June 30, 2004
                                               ------------------------------   ------------------------------
                                                 Average     Interest             Average     Interest
                                               Outstanding    Earned/   Yield   Outstanding    Earned/   Yield
                                                 Balance       Paid     Rate      Balance       Paid      Rate
                                               -----------   --------   -----   -----------   --------   -----
<S>                                            <C>           <C>        <C>     <C>           <C>        <C>
Interest-earning assets
   Loans                                         $198,618     $6,732    6.83%     $266,791     $ 8,508   6.40%
   Taxable securities                              49,006        896    3.69%       70,988       1,272   3.59%
   Nontaxable securities                            3,705         84    4.57%        3,747          86   4.60%
   Federal funds sold                              11,826        151    2.58%       20,264         101   1.00%
   Other interest-earning assets                    7,771        142    3.69%       15,401         162   2.11%
                                                 --------     ------    ----      --------     -------   ----
      Total interest-earning assets               270,926      8,005    5.96%      377,191      10,129   5.39%
                                                 --------     ------    ----      --------     -------   ----

Interest-bearing obligations
   Savings deposits                                71,355        523    1.48%       86,879         551   1.27%
   Time deposits                                  116,316      1,805    3.13%      188,064       2,492   2.66%
   Borrowings                                      44,885      1,084    4.87%       86,946       2,370   5.47%
   Subordinated debentures                             --         --                12,450         238   3.83%
                                                 --------     ------    ----      --------     -------   ----
      Total interest-bearing obligations          232,556      3,412    2.96%      374,339       5,651   3.03%
                                                 --------     ------    ----      --------     -------   ----

Net interest income                                           $4,593                           $ 4,478
                                                              ======                           =======
Net interest rate spread
Net earning assets                               $ 38,370                         $  2,852
                                                 ========                         ========
Net yield on average interest-earning assets

Average interest-earning assets to average
   interest-bearing obligations                    116.50%                          100.76%
                                                 ========                         ========
</TABLE>


                                                                             19.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                  OF OPERATIONS

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 six months ended June 30, 2005, and June 30,
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 $172,000 for the six months ended June 30, 2005,
compared to the six months ended June 30, 2004. Service fees decreased $247,000,
while loan and lease income decreased $3,000. The decline in service fees is
primarily due to the significant decline in deposits from June 30, 2004 to June
30, 2005. Other non-interest income was positively impacted in the first six
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 second quarter of 2004, the Corporation sold two branch
offices at a loss of $254,000.

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

<TABLE>
<CAPTION>
                             For the Three Months Ended                For the Six Months Ended
                                     June 30,             % Increase           June 30,           % Increase
                             --------------------------   (Decrease)   ------------------------   (Decrease)
                                    2005    2004           2005-2004         2005    2004          2005-2004
                                    ----   -----          ----------         ----   -----         ----------
<S>                          <C>           <C>            <C>          <C>          <C>           <C>
Service fees                        $172   $ 287             (40.1)          $333   $ 580            (42.6)
Loan and lease fees                    4       4               0.0              6       9            (33.3)
Net gains on sale of loans            13       8              62.5             20      20              0.0
(Loss) on sale of branches            --    (254)           (100.0)            --    (254)          (100.0)
Other                                 83      18             361.1             98     371            (73.6)
                                    ----   -----            ------           ----   -----           ------
   Subtotal                          272      63             331.7            457     726            (37.1)
                                    ----   -----            ------           ----   -----           ------
Net securities gains                  98      --             100.0             97      --            100.0
                                    ----   -----            ------           ----   -----           ------
   Total other income               $370   $  63             487.3           $554   $ 726            (23.7)
                                    ====   =====            ======           ====   =====           ======
</TABLE>

OTHER EXPENSES

Other expenses increased $2.494 million for the six months ended June 30, 2005,
compared to the same period in 2004. The prepayment penalty on FHLB borrowings
incurred by the Corporation in the first six months of 2005 amounted to $4.320
million and was the primary reason for the increase. Salaries and employee
benefits increased modestly, by $257,000, during the first six months of 2005
compared to the first six months of 2004. During the first six months of 2004,
the Corporation recognized the cost of closing five branch offices. The total
cost associated with those branch office closings in 2004 amounted to $452,000
of which $438,000 was recognized in the first six months of 2004 and 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 later in
2004. Advertising expense at $382,000 in the first six 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.


                                                                             20.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                  OF OPERATIONS

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

<TABLE>
<CAPTION>
                                           Three Months Ended                Six Months Ended
                                                June 30,        % Increase       June 30,       % Increase
                                           ------------------   (Decrease)   ----------------   (Decrease)
                                              2005     2004      2005-2004     2005     2004     2005-2004
                                             ------   ------    ----------   -------   ------   ----------
<S>                                        <C>        <C>       <C>          <C>       <C>      <C>
Salaries and employee benefits               $1,606   $1,354       18.6      $ 3,110   $2,853       9.0
Furniture and equipment                         138      235      (41.3)         297      493     (39.8)
Occupancy                                       247      279      (11.5)         473      626     (24.4)
Data processing                                 246      348      (29.3)         492      703     (30.0)
Accounting, legal and consulting fees           228      572      (60.1)         546      978     (44.2)
Loan and deposit                                250      600      (58.3)         543    1,093     (50.3)
Telephone                                        77       19      305.3          137      232     (40.9)
Advertising                                     243       26      834.6          382       43     788.4
Penalty on prepayment of FHLB borrowings         --       --         --        4,320       --        NM
Other                                           300      697      (57.0)         665    1,450     (54.1)
                                             ------   ------      -----      -------   ------     -----
   Total other expense                       $3,335   $4,130      (19.2)     $10,965   $8,471      29.4
                                             ======   ======      =====      =======   ======     =====
</TABLE>

Salaries and employee benefits amounted to $3.110 million for the six months
ended June 30, 2005 compared to $2.853 million in the same period in 2004, a 9%
increase. Salaries and benefits increased $.252 million, 18.6%, when comparing
the three month periods in 2005 and 2004. Late in 2004 and during the first six
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 recently signed an agreement with a new systems administrator 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 tax provision for the second quarter of 2005 and 2004. The
Corporation has approximately $24.4 million of NOL carryforward along with tax
benefit carryforwards of $1.5 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 six months of 2005, the Corporation decreased cash and cash
equivalents by $23.834 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 six months of 2005,
the Corporation funded the reduction of deposits of $7.836 million primarily
through the balance sheet reductions of securities, $20.470 million, and
investments, $1.828 million. These asset reductions allowed the Corporation to
maintain adequate liquidity of $20.244 million.


                                                                             21.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                  OF OPERATIONS

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 $3.1 million in the first six
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 June
30, 2005, the Corporation's parent had a balance of $1.371 million in cash and
cash equivalents and does not anticipate the need for additional sources of
funds in the near term.


                                                                             22.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                  OF OPERATIONS

CAPITAL AND REGULATORY

During the first six months of 2005, capital decreased by $6.213 million, as a
result of the net loss of $5.818 million, the decrease in the unrealized gain on
securities available for sale of $.472 million, and a $.077 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 $4.815
million, resulting primarily from a net loss of $3.267 million and a reduction
in the unrealized gain on securities available for sale of $1.548 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 June 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>
                                            June 30,   December 31,    June 30,
                                              2005         2004          2004
                                            --------   ------------   ---------
<S>                                         <C>        <C>            <C>
CAPITAL STRUCTURE
Long-term debt (1)                          $     --     $     --      $ 12,450
Shareholders' equity                          28,517       34,730         5,885
                                            --------     --------      --------
Total capitalization                        $ 28,517     $ 34,730      $ 18,335
                                            --------     --------      --------
Tangible capital                            $ 28,124     $ 34,275      $ 17,232
                                            --------     --------      --------

INTANGIBLE ASSETS
Core deposit premium                        $    393     $    455      $    591
Other identifiable intangibles                    --           --           512
                                            --------     --------      --------
Total intangibles                           $    393     $    455      $  1,103
                                            --------     --------      --------

RISK-BASED CAPITAL
Tier I capital:
   Shareholders' equity                     $ 28,517     $ 34,730      $  5,885
Net unrealized (gains) losses on
   available for sale securities                 (20)        (492)          521
   Minority interest                              --           78         1,865
   Less: intangibles                            (393)        (455)       (1,103)
                                            --------     --------      --------
      Total Tier I capital                  $ 28,104     $ 33,861      $  7,168
                                            --------     --------      --------
Tier II Capital:

   Allowable reserve for loan losses        $  2,718     $  2,918      $  3,173
   Qualifying long-term debt                      --           --         3,995
                                            --------     --------      --------
      Total Tier II capital                    2,718        2,918         7,168
                                            --------     --------      --------
      Total capital                         $ 30,822     $ 36,779      $ 14,336
                                            ========     ========      ========
Risk-adjusted assets                        $213,505     $229,355      $246,139
                                            ========     ========      ========

Capital ratios:
   Tier I Capital to risk weighted assets      13.17%       14.76%         2.91%
   Total Capital to risk weighted assets       14.45%       16.04%         5.82%
   Tier I Capital to average assets            10.14%       10.68%         1.93%
</TABLE>

(1)  Long term debt consists of the Corporation's subordinated debentures.

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.


                                                                             23.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                  OF OPERATIONS

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 minumum for capital adequacy purposes        4.0%          4.0%            8.0%

The Corporation:
   June 30, 2005                                      10.14%        13.17%          14.45%
   December 31, 2004                                  10.68%        14.76%          16.04%

The Bank:
   June 30, 2005                                       9.60%        12.50%          13.77%
   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.

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.


                                                                             24.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                  OF OPERATIONS

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.


                                                                             25.

<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 $36.166 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 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.


                                                                             26.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
        ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following is the Corporation's repricing opportunities at June 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                                $151,891   $  1,541   $31,206   $ 19,865   $204,503
   Securities                              1,503         71    30,991      3,601     36,166
   Other (1)                              13,622         --        --         --     13,622
                                        --------   --------   -------   --------   --------
   Total interest-earning assets         167,016      1,612    62,197     23,466    254,291
                                        --------   --------   -------   --------   --------
   Interest-bearing obligations:
   Savings deposits                       71,417         --        --         --     71,417
   Time deposits                          10,177     74,201    30,234        752    115,364
   Borrowings                                 67         --     1,417     35,000     36,484
                                        --------   --------   -------   --------   --------
   Total interest-bearing obligations     81,661     74,201    31,651     35,752    223,265
                                        --------   --------   -------   --------   --------

Gap                                     $ 85,355   $(72,589)  $30,546   $(12,286)  $ 31,026
                                        ========   ========   =======   ========   ========
Cumulative gap                          $ 85,355   $ 12,766   $43,312   $ 31,026
                                        ========   ========   =======   ========
</TABLE>

(1)  Includes Federal Home Loan Bank Stock

The above analysis indicates that at June 30, 2005, the Corporation had a
cumulative asset sensitivity gap position of $12.766 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.

The decrease in the gap position from December 31, 2004 to June 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.

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


                                                                             27.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION
        ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 June 30,
2005, the Corporation had excess Canadian assets of $1.951 million (or $1.586
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.


                                                                             28.

<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 June
30, 2005 that has materially affected, or is reasonably likely to materially
affect, the Corporation's internal control over financial reporting.


                                                                             29.

<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
are subject to the Order referred to below, and the litigation and arbitration
described below. Information regarding the Order is contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the caption "Capital and Regulatory" in this report, and is incorporated here by
reference. The litigation and arbitration that is not routine and incidental to
the business of banking is described below The securities litigation,
shareholders' derivative litigation, and the Ford arbitration discussed below,
were previously described in the Corporation's Annual Report on Form 10-K for
the year ended December 31, 2004.

SECURITIES LITIGATION

In an action styled Lanctot v. Littlejohn, et al., filed in the U.S. District
Court for the Western District of Michigan on June 13, 2003, a shareholder of
the Corporation brought a class action against the Corporation, its former
chairman, chief executive officer and director, Ronald G. Ford, and its former
chief executive officer and director, Sherry L. Littlejohn, for alleged
violations of Federal securities laws.

In another action styled Rosen v. North Country Financial Corporation, et al.,
filed in the U.S. District Court for the Western District of Michigan on June
23, 2003, a former shareholder of the Corporation has brought a class action
against the Corporation, its former chairman and chief executive officer and
current director, Ronald G. Ford, and its former chief executive officer and
director, Sherry L. Littlejohn, for alleged violations of Federal securities
laws.

On September 2, 2003, pursuant to 15 U.S.C. Section 78-u-4(a)(3)(B), plaintiff
Charles Lanctot filed a motion requesting the Court to consolidate the two
securities class action cases (Lanctot and Rosen) under the caption In re North
Country Financial Corporation Securities Litigation, to appoint him as "Lead
Plaintiff" in the consolidated cases, and to approve the selection of his
counsel as "Lead Plaintiff's Counsel." In an Order dated September 29, 2003, the
Court among other things consolidated the Lanctot and Rosen actions, designated
Charles D. Lanctot and John F. Stevens as "Lead Plaintiffs," and designated
"Co-Lead Counsel" and "Liaison Counsel" for the class.

On December 1, 2003, the plaintiffs filed their Corrected Consolidated Amended
Class Action Complaint ("Amended Complaint"), which adds John F. Stevens as a
plaintiff. The Amended Complaint, which demands a jury trial, is brought on
behalf of all persons, subject to certain exceptions, who purchased the
Corporation's common stock during the period from November 13, 2000, through
April 15, 2003. It alleges that the Corporation and the individual defendants
violated section 10(b) of the Securities Exchange Act of 1934 (the "Exchange
Act") and Rule 10b-5 of the Securities and Exchange Commission (the "SEC")
issued under the Exchange Act, by disseminating materially false and misleading
statements and/or concealing material adverse facts concerning the financial
condition and operations of the Corporation, with knowledge, or in reckless
disregard, of the materially false and misleading character thereof. The Amended
Complaint also alleges violations of Section 20 of the Exchange Act by the
individual defendants, by reason of their control, at relevant times, of the
Corporation. Among other things, the Amended Complaint is based upon allegations
of 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 of Governors of the Federal Reserve System (the "Board"), the
Federal Deposit Insurance Corporation ("FDIC") Rules and Regulations, and the
Michigan Banking Code of 1999. The Amended Complaint further alleges that the
Corporation's acquisition of American Financial Mortgage, which had an
"unusually large number of defaulted loans . . . which triggered the attention
of banking regulators"; that a Cease and Desist Order, dated March 26, 2002,
which is attached as Exhibit 1 to the Amended Complaint, demonstrates how
defendants made "false statements" in public filings and other communications,
and were required to take "corrective actions;" that various public filings were
"false because the Company's operations resulted in an excessive level of
adversely classified assets, delinquent loans, and nonaccrual loans as well as
an inadequate level of capital protection for the kind and


                                                                             30.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION

qualify of assets held;" that, "according to former employees, loans for Company
insiders and their related entities were often approved regardless of the
quality of the loan;" and, that the Corporation incorrectly attributed its

performance to the World Trade Center disaster and other factors impacting
tourism and hospitality businesses, instead of disclosing "insider loans," a
"disproportionately high loan concentration" in the hospitality industry, and
information about the Corporation's banking practices and loan loss reserves.
The Amended Complaint seeks certification of a class consisting of all persons
who purchased the common stock of the Corporation on the open market between the
dates noted above, compensatory damages on a joint and several basis against all
defendants, including the Corporation, plus interest and costs, including
attorney's fees and expert's fees.

On January 23, 2004, the Corporation and the other defendants filed their Joint
Motion to Dismiss the Corrected Consolidated Amended Class Action Complaint,
principally based on the ground that plaintiffs have not adequately plead that
the Corporation, through its officers and directors, acted with the intent to
defraud the investing public under the standard articulated in Helwig v. Vencor,
Inc., 251 F.3d 540 (6th Cir. 2001), cert. dismissed, 536 U.S. 935, 122 S.Ct.
2616 (2002). During the pendency of the motion to dismiss, a stay of "all
discovery and other proceedings" automatically is imposed under 15 U.S.C.
Section 78u-4(b)(3)(B). Plaintiffs filed their Brief in Opposition to
Defendants' Motion to Dismiss on March 8, 2004. Defendants filed a reply brief
in support of their Motion to Dismiss on March 23, 2004. The Court scheduled an
oral argument on the Motion to Dismiss for May 17, 2004.

Shortly before the hearing on the Motion to Dismiss, Plaintiffs, the Corporation
and the individual Defendants and their insurer reached a settlement in
principle of all claims asserted in the consolidated actions. On June 18, 2004,
the parties submitted to the Court their Stipulation of Settlement, which
described in detail the terms and conditions of the settlement. The parties
subsequently modified the Stipulation, which was reflected in the Revised and
Amended Stipulations of Settlement submitted to the Court.

On August 23, 2004, the Court granted conditional approval of the settlement as
set forth in the Second Revised and Amended Stipulation of Settlement. On
October 15, 2004, the Court preliminarily certified a class for purposes of
settlement only, approved a form of notice of hearing to be distributed to class
members, and scheduled a hearing concerning final approval of the settlement. As
modified by a Stipulated Order entered on October 29, 2004, the plaintiffs were
allowed to mail notice of the proposed settlement to members of the class.
Members of the class were permitted to opt out of the class by written request
postmarked no later than November 29, 2004. Members of the class who did not opt
out and who filed written notice no later than November 24, 2004, were permitted
to object to approval of the settlement at the hearing concerning final approval
before the Court.

On December 1, 2004, the Court held the hearing concerning final approval of the
settlement. At the conclusion of the hearing, the Court entered its Order and
Final Judgment, in which the Court (i) certified the action as a class action,
(ii) certified the plaintiff class, (iii) determined the settlement (as modified
by the Order and Final Judgment) to be fair, reasonable, adequate, and in the
best interests of the plaintiff class, (iv) approved the settlement, (v)
specified the claims procedure for members of the plaintiff class, (vi) awarded
fees to counsel for the plaintiff class, and (vii) dismissed the action as to
the plaintiff class and all defendants with prejudice. Under the terms of the
settlement approved by the Court, the settlement fund for the plaintiff class
and its counsel aggregated $750,000, of which the Corporation contributed
$250,000, and the individual defendants contributed $500,000. The amount
contributed by the individual defendants was covered by insurance.

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


                                                                             31.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION

(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.

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


                                                                             32.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION

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 has advised the Corporation that it intends to
oppose the motion to dismiss.

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 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,


                                                                             33.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION

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.

Employment Agreement Arbitration

On September 16, 2003, Ronald G. Ford, the former chairman and chief executive
officer and a current director of the Corporation, initiated an arbitration
proceeding with the American Arbitration Association ("AAA") against the
Corporation seeking monetary damages for alleged breach by the Corporation of
his Amended and Restated Employment Agreement, Chairman Agreement, and Amended
and Restated Consulting Agreement, each with the Corporation. The Corporation
has denied the alleged breach and asserted a counterclaim to recover all amounts
paid to Mr. Ford under the Chairman Agreement, as required by the Cease and
Desist Order entered by the FDIC and the OFIS, in addition to other amounts.

On March 19, 2004, at the request of Mr. Ford, AAA reactivated the arbitration
proceeding. Pursuant to its procedures, on June 17, 2004, AAA appointed an
arbitrator to preside over the adjudication of these claims and counterclaims.

On July 13, 2004, the arbitrator convened a scheduling conference at which the
arbitrator adopted the parties' stipulation to stay the arbitration until the
conclusion in the Damon action of the court-appointed disinterested person's
investigation and recommendations concerning the claims of the Virginia M. Damon
Trust, asserted in the name and on behalf of the Corporation, against the
Corporation's former and present officers and directors, including Mr. Ford. At
a further conference held on October 27, 2004., the arbitrator adopted the
parties' stipulation to stay the arbitration until another conference, scheduled
for November 18, 2004.

Following a further stipulated stay of the arbitration proceeding, the
Corporation and Mr. Ford entered into a Release and Settlement Agreement as of
December 7, 2004. The Corporation and Mr. Ford each released certain claims
against the other specified in the Release and Settlement Agreement, and the
Bank paid Mr. Ford $20,000 for his minority ownership interest in two
subsidiaries of the Bank. The Release and Settlement Agreement, the terms of
which were consented to by the FDIC and the Michigan Office of Financial and
Insurance Services, resulted in the termination with prejudice of the AAA
arbitration proceeding.


                                                                             34.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION

Litigation of the types involved in the actions described above can be complex,
time-consuming, and often protracted. The Corporation has incurred substantial
expense for legal and other professional fees as a result of these actions.

The Corporation has incurred legal costs in the monitoring and in response to
court inquiries concerning these derivative action suits for the three months
ended June 30, 2005, amounting to $46,000 and for the six month period ended
June 30, 2005, of $145,000. The Corporation anticipates that the additional
legal costs related to these lawsuits for the remainder of 2005 will be
immaterial in total; however, could be as high as $230,000.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of the Registrant's shareholders was held on May 25, 2005.
The purpose of the meeting was to elect directors, as shown below, each for a
three-year term expiring in 2008. The number of shares voted is presented in the
table below.

<TABLE>
<CAPTION>
     Director          For      Withheld
-----------------   ---------   --------
<S>                 <C>         <C>
C. James Bess       2,277,452     3,293
Dennis B. Bittner   2,277,744     3,100
</TABLE>


                                                                             35.

<PAGE>

                         MACKINAC FINANCIAL CORPORATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

<TABLE>
<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 10.1   First Amendment, dated January 12, 2005, to Employment Agreement,
               dated December 14, 2005, between Mackinac Financial Corporation
               and Kelly W. George.

Exhibit 10.2   First Amendment, dated January 12, 2005, to Employment Agreement,
               dated December 14, 2005, between Mackinac Financial Corporation
               and Ernie R. Krueger.

Exhibit 10.3   First Amendment, dated January 12, 2005, to Employment Agreement,
               dated December 14, 2005, between Mackinac Financial Corporation
               and David C. Crimmins.

Exhibit 10.4   Amended and Restated Employment Agreement dated July 15, 2005
               between Mackinac Financial Corporation and C. James Bess.

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>


                                                                             36.

<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: August 12, 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)


                                                                             37.

<PAGE>

                                  Exhibit Index

<TABLE>
<CAPTION>
Exhibit No.    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 10.1   First Amendment, dated January 12, 2005, to Employment Agreement,
               dated December 14, 2005, between Mackinac Financial Corporation
               and Kelly W. George.

Exhibit 10.2   First Amendment, dated January 12, 2005, to Employment Agreement,
               dated December 14, 2005, between Mackinac Financial Corporation
               and Ernie R. Krueger.

Exhibit 10.3   First Amendment, dated January 12, 2005, to Employment Agreement,
               dated December 14, 2005, between Mackinac Financial Corporation
               and David C. Crimmins.

Exhibit 10.4   Amended and Restated Employment Agreement dated July 15, 2005
               between Mackinac Financial Corporation and C. James Bess.

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>