Exhibit 13

2009

ANNUAL REPORT

Table of Contents

To Our Shareholders			1
Five-Year Overview			5
Regional Review			7
Selected Financial Highlights			13
Quarterly Financial Summary			14
Report of Independent Registered Public Accounting Firm			15
Consolidated Balance Sheets			16
Consolidated Statements of Operations			17
Consolidated Statements of Changes in Shareholders’ Equity			18
Consolidated Statements of Cash Flows			19
Notes to Consolidated Financial Statements			20
Selected Financial Data			45
Summary Quarterly Financial Information			46
Market Information			48
Shareholder Return Performance Graph			49
Forward-Looking Statements			50
Management’s Discussion and Analysis of Financial Condition and Results of Operations			51
Directors and Officers			72

BUSINESS OF THE CORPORATION

Mackinac Financial Corporation is a registered bank holding company formed under the Bank Holding Company Act of 1956 with assets in excess of $500 million and whose common stock is traded on the NASDAQ stock market as “MFNC.” The principal subsidiary of the Corporation is mBank. Headquartered in Manistique, Michigan, mBank has 10 branch locations; six in the Upper Peninsula, three in the Northern Lower Peninsula and one in Oakland County, Michigan. The newest branch, located in Escanaba, opened on March 24, 2009. The Company’s banking services include commercial lending and treasury management products and services geared toward small to mid-sized businesses, as well as a full array of personal and business deposit products and consumer loans.

FORM 10-K

A copy of the Annual Report to the Securities and Exchange Commission on Form 10-K is available without charge by writing the Shareholders’ Relations Department, Mackinac Financial Corporation, 130 South Cedar Street, Manistique, Michigan, 49854.

MARKET SUMMARY

The Corporation’s common stock is traded on the Nasdaq Capital Market under the symbol MFNC. The Corporation had 1,228 shareholders of record as of March 30, 2010.

To Our Shareholders

March 30, 2010

Dear Fellow Shareholders:

This letter will provide you with a review of the performance of Mackinac Financial Corporation through the end of 2009 and our thoughts about business strategy as we move through 2010. In addition, we have included an overview of our five year performance since the recapitalization of the company in December of 2004, and a regional market performance review to better detail the progress of the company during this period of economic turmoil in the State of Michigan and national markets.

The company reported net income of $1.907 million, or $.56 per share, for the year ended December 31, 2009, compared to a net income of $1.872 million, or $.55 per share, for 2008. The 2009 results include $1.208 million of gains related to the sale of two branch offices and $1.471 million of security gains. The 2008 results include the positive effect, $3.475 million, of a lawsuit settlement and the negative effect, $.425 million, of a severance agreement. Shareholders’ equity totaled $55.299 million at December 31, 2009, compared to $41.552 million at the end of 2008, an increase of $13.747 million. This increase includes $10.5 million of preferred stock that was issued by MFNC as a TARP recipient, consolidated net income of $1.907 million noted above, the capital contribution impact of stock options and also the increase in equity due to the increase in the market value of held-for-sale investments, which amounted to $.648 million.

In 2009, we continued to focus our efforts to improve the overall operation and value of the company. These included core deposit generation through our branch network to offset reliance on wholesale funding sources, originating new loans through various government guaranteed loan programs with good risk / return pricing, and noninterest expense management and proper allocation of personnel and capital resources to make the company more efficient.

Noted below are some highlighted 2009 achievements as they relate to these initiatives;

	•		The increase in new core deposits of approximately $55 million net of the sale of the two noted branches above with approximately $29 million in deposits. We experienced deposit growth in all of our markets, with $26 million in Northern Lower Michigan, $20 million in Southeast Michigan and $10 million in the Upper Peninsula. Most of our 2009 deposit growth occurred in low cost transactional accounts which grew by $41 million.
	•		In April of 2009, the Corporation, in an abundance of caution, decided to participate in the TARP program and issued $11 million of preferred stock. In order to offset the cost of the preferred, we infused a portion of the TARP proceeds, $3 million, into the Bank and leveraged this excess capital by purchasing approximately $40 million of investment securities. We funded the purchase of these investments by issuing brokered deposits. In December, we began the process of deleveraging this position in anticipation of narrowing spreads and recognized a fourth quarter security gain of $.827 million. This strategy has resulted in overall security gains in excess of $1 million.
	•		Steady loan demand with approximately $88 million of new loan production with a $14 million increase in loans outstanding, after reductions for amortization and payoffs. After the receipt of the TARP funds in April of 2009, we originated over $74 million of new loans and through February of 2010 that number is approximately $85 million. We were successful in producing loans in all of our markets in 2009, but were less aggressive in Southeast Michigan where the recession remains severe. Loan production for 2009 totaled $44 million in the Upper Peninsula, $35 million in Northern Lower Michigan and $9 million in Southeast Michigan.
	•		Continued development of our government SBA/USDA lending programs to become a leader state wide in these initiatives to mitigate credit risk substantially when new loans are originated, along with positively augmenting non-interest income though the sale of the guaranteed portion of the loan for a premium gain.

To Our Shareholders

	•		Divesting of two outlier branches with a pretax gain to the company of approximately $1.2 million which also decreases operating expenses and results in a more manageable footprint for the company.
	•		Enhancing our core earnings by controlling noninterest expense, increasing noninterest income and net interest margin improvement. The combination of these three factors resulted in an improved efficiency ratio from 86% in 2008 to 73% in 2009. In addition for future margin improvement in this low interest rate environment, we continued to use interest rate floors for the majority of all new and renewed variable rate loans.
	•		Prudent and proactive credit administration practices to quickly identify any potential problem assets to better monitor our portfolio given the recession which continues to put substantial pressure on many businesses’ cash flow and overall operations.

The book value per share of the company increased by $.95 to $13.10 (excluding TARP proceeds). This marks the fourth consecutive year of increased shareholder value and a cumulative book value increase of $3.35 per share since the December 2004 recapitalization at $9.75 per share. The chart below is a recap of various balances and book value per share as of the end of the last three years (dollars in thousands, except per share data):

														2009/2008								2008/2007
		As of December 31,												Increase (Decrease)								Increase (Decrease)
		2009				2008				2007				Dollars				Percentage				Dollars				Percentage
Loans		$	384,310			$	370,280			$	355,079			$	14,030				3.79	%		$	15,201				4.28	%
Assets			515,452				451,431				408,880				64,021				14.18				42,551				10.41
Deposits			421,389				371,097				320,827				50,292				13.55				50,270				15.67
Borrowings			36,140				36,210				45,949				(70	)			(0.19	)			(9,739	)			(21.20	)
Shareholders’ equity			55,299				41,552				39,321				13,747				33.08				2,231				5.67
Book vaue per share			13.10				12.15				11.47				.95				7.82				.68				5.93

Credit Quality

Nonperforming assets increased in 2009 as the economy continued to weaken, especially in Southeast Michigan. Nonperforming loans totaled $15.237 million, or 3.96% of total loans at December 31, 2009. Nonperforming assets at December 31, 2009 were $21.041 million, 4.08% of total assets, compared to $7.076 million or 1.57% of total assets at December 31, 2008. The elevated level of nonperforming assets, while still below peers and manageable, does concern us given the challenges throughout the state. However; we do not have a systematic problem with our overall loan portfolio as approximately 75% of these totals are centered around 5-6 customer relationships. The increase in these problem assets did hamper overall earnings with higher than anticipated provision charges, carrying costs and legal expense. The nonperforming assets by region are as follows; $13 million in Southeast Michigan, $6 million in Northern Lower Michigan and $2 million in the Upper Peninsula. We continue to devote significant management attention to the administration of these problem assets and hope to have resolution in the first half of 2010 on several of these. The increased stress in our loan portfolio resulting from the ongoing troubles in the state has led us to a very cautious approach in all markets, but particularly in Southeast Michigan. This approach includes an emphasis on smaller more granular loans. We will continue to focus on early identification and resolution of all our problem credits to minimize carrying costs, collateral deterioration, and overall risk exposure of capital loss to the company.

Loan Growth/Production

Loan growth in 2009 occurred in a challenging and tough Michigan economic climate with loans increasing by $14.030 million in 2009, despite accelerated levels of loan pay-downs and runoff totaling $60.415 million. Total bank wide new loan production equated to $88.122 million. Through an annual credit process review, we continue to evaluate and adjust underwriting standards to keep pace with the changing risk issues presented by the market. A good portion of loan runoff in 2009 was due to our discipline in re-qualifying renewal loans and repricing to garner acceptable returns adjusted for risk. The majority of the loan growth was centered in the commercial real estate, construction, and 1-4 family residential loan

To Our Shareholders

portfolios. We have purposely avoided the subprime lending opportunities in these sectors, and do not offer any subprime lending products within any of our product lines of business.

Loan production in our three geographical regions is shown below.

		For the Year Ending December 31,
(dollars in thousands)		2009				2008				2007
REGION
Upper Peninsula			43,777				37,040			$	40,876
Northern Lower Peninsula			35,027				14,183				22,448
Southeast Michigan			9,318				10,374				50,404
TOTAL		$	88,122			$	61,597			$	113,728

Government Guaranteed Lending Programs

In 2007, the company made a concerted effort to become a premier SBA/USDA lender throughout the State of Michigan and separate ourselves from our local competition in terms of the adjudication of these types of loans to minimize credit risk and increase noninterest income through the sale of the guaranteed portion of the loans for a premium. As you will note from the chart shown below, we have had success due to the strong competencies of our lenders and credit personnel. For the SBA fiscal year ended September 30, 2009, we ranked 3^rd in the entire State of Michigan in dollar volume of SBA loans processed at $13.214 million and 7^th in number of loans processed at 36. In addition to the level of SBA production generated, the Corporation recorded $.498 million in fees for 2009, for a total of $.813 million over the last three years. The company does not sell all the loan guarantees from every credit, only those where acceptable market rates are paid above par that warrant recognizing the income now, and where the company feels that the reinvestment of the monies paid can be lent out again in sufficient time to exceed the lost interest income from the loan sold.

																		SBA Loans Originated
		For the Year Ended December 31,
		2009												2008												2007
		# Loans				SBA Amount				Premium				# Loans				SBA Amount				Premium				# Loans				SBA Amount				Premium
UP			32			$	6,797			$	373				2			$	386			$	18				4			$	1,879			$	141
NLP			10				5,829				125				6				1,009				5				5				2,837				116
SEM			—				—				—				3				572				3				3				952				32
Total			42			$	12,626			$	498				11			$	1,967			$	26				12			$	5,668			$	289

mBank is being presented with two awards for SBA fiscal year 2009, “Business Development Lender of the Year”, (2^nd year in a row we have won that award), as mBank had the largest percentage increase in of approvals from 2008 to 2009. In addition, we have been awarded the “Community Lender of the Year” as mBank had the best overall performance among MI based, non “Preferred Lender Program” lenders, with criteria including total new volume, new market activity, and comparison with historical performance. We are pleased with the progress we have made here; first in terms to the benefit of the company, but also for the many local businesses in these markets that through these programs are provided the capital to grow their organizations to help rebuild the economic base of the State.

Deposit Growth

We continue to have success in growing core bank deposits, which we define as demand deposits, interest bearing checking accounts, money market savings accounts and certificates of deposit less than $100,000. In 2009, we increased core deposits by $14 million, net of the $30 million in deposits sold.

To Our Shareholders

Shown below is the mix of our deposits for the three most recent years.

		DEPOSIT MIX
		As of December 31,																								Percent Change
		2009				Mix				2008				Mix				2007				Mix				2009/2008				2008/2007
CORE DEPOSITS
Transactional accounts:
Noninterest bearing		$	35,878				8.51	%		$	30,099				8.11	%		$	25,557				7.97	%			19.20	%			17.77	%
NOW, money market, checking			95,790				22.73				70,584				19.02				81,160				25.30				35.71				(13.03	)
Savings			18,207				4.32				20,730				5.59				12,485				3.89				(12.17	)			66.04
Total transactional accounts			149,875				35.57				121,413				32.72				119,202				37.15				23.44				1.85
Certficates of deposit <$100,000			59,953				14.23				73,752				19.87				80,607				25.12				(18.71	)			(8.50	)
Total core deposits			209,828				49.79				195,165				52.59				199,809				62.28				7.51				(2.32	)
NONCORE DEPOSITS
Certificates of deposit >$100,000			36,385				8.63				25,044				6.75				22,355				6.97				45.28				12.03
Brokered CDs			175,176				41.57				150,888				40.66				98,663				30.75				16.10				52.93
Total noncore deposits			211,561				50.21				175,932				47.41				121,018				37.72				20.25				45.38
TOTAL DEPOSITS		$	421,389				100.00	%		$	371,097				100.00	%		$	320,827				100.00	%			13.55				15.67	%

We have been successful in improving our mix of core deposits to wholesale funding sources with the introduction of new and innovative products to meet the needs of our markets. Contributing to this success is a proactive top down sales and service incentive program, along with a culture that rewards sales personnel throughout the company for the procurement of new core deposits into the bank based on targeted goals achieved. The combination of products, service and culture, will continue to be the driver of this initiative given it is the most competitive business line that most banks are trying to retain, and hardest to get customers to want to move over from another financial institution, given the uncertainty of the financial markets in the short-term.

Building Franchise Value since the Recapitalization

As mentioned earlier, with this letter are various charts and graphs which track the performance of the company through the challenging economic times of the last five years in terms of key shareholder metrics and operating performance levels. Over this period the Corporation has increased its common stock book value of stock by $3.35 or 34.5%. During this five year period, we significantly increased total assets, loans, and core deposits which provides the foundation that will lead to future increases in common shareholders’ equity. Following this letter is a descriptive overview which provides a snapshot of how the three distinctively different regions of our franchise, (Upper Peninsula “UP”, Northern Lower Peninsula, and Southeast Michigan) have performed in relation to the market specific challenges, lines of business, and opportunities that each region provides the company.

Looking Forward

In 2010, we remain faced with the challenges of a State economy still in turmoil and we have modest expectations for the improvement of the overall economy and real estate values in the near term. We believe that in economic times such as these, it becomes especially important to focus on principal business objectives that preserve and increase bank franchise value; the “blocking and tackling” of banking. In 2010 we intend to originate well priced, well structured loans, funded with low cost in market deposits, while we control our expense base. The Corporation is, and will remain dedicated to the primary strategic objective of enhancing franchise and shareholder value by building a strong banking franchise in our local markets and serving the communities that provide the business opportunities for the company to prosper.

We sincerely thank you for your continued support during these difficult times and we will work diligently and prudently to provide improved shareholder results in the years to come.

Paul D. Tobias		Kelly W. George
Chairman and CEO		President and CEO
Mackinac Financial Corporation		mBank

Five Year Overview

Since the recapitalization, which occurred in December 2004, the book value of MFNC stock has increased by $3.35, or 34.5%.

Since the recapitalization, common shareholders’ equity has increased by a total of $11 million.		In April 2009, MFNC participated in the TARP program, receiving $11 million.

Five Year Overview

		Through 2009, MFNC has achieved total loan production of $516 million, which contributed to overall net growth of $180 million, or 88% since the recapitalization in 2004.

Total assets have increased $176 million or 52% since the recapitalization. Since the Corporation’s lowest level of assets, $299 million in 2005, we have grown assets by $216 million through 2009 year end.		Since the recapitalization, core deposits have grown a total of $79 million. Adjusting for the branch sales in 2007 and 2009, core deposit growth amounted to $118 million through 2009 year end.

Regional Review – Upper Peninsula

Jack C. Frost – Regional President, UP

BRANCH LOCATIONS

ESCANABA		NEWBERRY
Located at Menards		414 Newberry Avenue
3300 Ludington Street		Newberry, MI 49868
Escanaba, MI 49829		(906) 293-5165
(906) 233-9443		Manager: Michael A. Slaght
Manager: Scott A. Ravet
MANISTIQUE		SAULT STE. MARIE
130 South Cedar Street		138 Ridge Street
Manistique, MI 49854		Sault Ste. Marie, MI 49783
(906) 341-2413		(906) 635-3992
Manager: Gregory D. Schuetter		Manager: Herbert C. Maloney
MARQUETTE		STEPHENSON
300 North McClellan		S216 Menominee Street
Marquette, MI 49855		Stephenson, MI 49887
(906) 226-5000		(906) 753-2225
Manager: Teresa M. Same		Manager: Barbara A. Parrett

Excluding the branch sales, which were predominantly transactional accounts, total deposits grew $30.6 million in the five year period, with transactional deposits comprising roughly $21.1 million of that growth.

Core deposits are defined as demand deposits, interest bearing checking accounts, money markets, savings and CDs less than $100,000.

Total loan production over the five year period amounted to $203.1 million.

Regional Review – Upper Peninsula

MARKET COMMENTARY

In the five years since the recapitalization of mBank in December of 2004, the Bank’s Upper Peninsula (UP) has made steady progress, both in terms of growing its loan and deposit base and maneuvering through very difficult previous reputational issues as a result of the former company’s troubles. This negative publicity made it difficult to both attract new business as well as talent to the bank. However, the tarnished past is now just that, and the UP region continues to be the largest market footprint of the institution in terms of geography, branches, and loan and deposit footings. Similar to the other regions, we have implemented various new deposit and treasury management products which continue to set us ahead of our competition in terms of delivery of cutting edge technology and convenience to our customers. We have also been able to procure some talented local bankers that are deep rooted into their communities that have spurred the consistent growth of core loans and deposit accounts.

In recent years, we formulated a plan to strategically realign our branch footprint to better match our business model in the region. This has been accomplished by reallocating our personnel and capital resources into targeted “commerce center hub” markets of the UP and divesting of outlier branches located in small markets with declining populations. Specifically in 2007, we sold our Ripley location which allowed the bank to divest of a longer term fixed asset issue and in 2009 we sold two additional locations in South Range and Ontonagon. The sale of the latter two locations provided a gain of approximately $1.2M to the bank. These divestitures also provided significant cost savings throughout the company and enabled management to focus on the growth and development of our remaining network. mBank also strategically reentered the Delta County Market by opening a small full service branch in the new Menards store located in Escanaba in 2009 which is the second largest business center in the UP footprint. Lastly, in 2009 we converted our banking center in Marquette Presque Isle from a full service branch operation to a Mortgage and Consumer Lending Division to provide a more centralized approach to operating this portion of the company. In doing this we were able to procure a highly talented veteran banker who had been the top residential mortgage producer in the UP for many years to oversee and grow this line of business.

Our commercial loan portfolio includes a diverse mix of industries that represents an inclusive sampling of the economic platform of the UP. These business sectors include various retail and office space in addition to professional, medical and hospitality entities which are similar to those found in the other regions of mBank. However, it is the industries that are more indigenous to the UP that add even further variety and stability to the overall risk matrix of the portfolio. Bank clients in the timber, light non-auto manufacturing and service industries have both alleviated some of the general downward fiscal pressure of the state and lessened the indirect impact of the auto industry on the overall loan portfolio. We also continue to add value to our clients with our knowledge and understanding of government guaranteed loans from the Small Business Administration (SBA) and United States Department of Agriculture. This core competency was very evident in 2009 when mBank not only led all UP institutions in number of SBA loans closed – 27 – but also in total dollar amount of SBA loans originated – $7.4 million. We are very proud of this achievement not only for the success of the organization, but also for being a catalyst for promoting economic stimulus through helping small businesses get the capital that is essential to their success, as well as the communities they operate in, within these under developed areas of the state.

Given some of the aforementioned industrial diversity, the UP economy continues to perform better than the state as a whole. Although unemployment is somewhat elevated on a normalized scale and pockets of comparatively high jobless claims remain, many of our markets are trending near historical levels. Given that it is not atypical for the unemployment rate in the UP to be higher than the remainder of the state, the experience of operating in this environment provides for a more stable economic base which seldom experiences the severe highs or lows in times of changing economic conditions. Furthermore, real estate values have experienced a very modest decrease on average in the UP markets compared to much larger decreases in the Southern part of the state. Our markets continue to see growth opportunities with the development of several successful large projects throughout the UP over the past several years including new construction as well as expansions of existing hospitals, hotels, schools, and retail centers. This steady and methodical economic progress and the ability to successfully function in a difficult national financial environment has allowed the UP region of mBank continued growth through prudent banking activities and our proactive sales and serviced based culture. We thank you for your business and for supporting mBank endeavors and look forward to continuing to serve our clients and communities in 2010.

Regional Review – Northern Lower Peninsula

     Andrew P. Sabatine, Regional President – NLP

BRANCH LOCATIONS

GAYLORD		KALEVA
1955 South Otsego Avenue		14429 Wuoksi Avenue
Gaylord, MI 49735		Kaleva, MI
(989) 732-3750		(231)362-3223
Manager: Nicole Shelters		Manager: Barb J. Miller
TRAVERSE CITY
3530 North Country Drive
Traverse City, MI 49684
(231) 929-5600
Manager: Andrea Pease

Total deposit growth amounted to $24.8 million over the five year period, largely in transactional accounts.

Core deposits are defined as demand deposits, interest bearing checking accounts, money markets, savings and CDs less than $100,000.

Total loan production over the five year period amounted to $134.2 million.

Regional Review – Northern Lower Peninsula

MARKET COMMENTARY

Since the late 2004 recapitalization and subsequent conversion to mBank, the Northern Lower Peninsula region has experienced positive trends in both core depository and loan portfolio growth. The positive growth in both loans and deposits is a direct result of mBank refining and augmenting its products, services and staff within this region to better position itself to grow market share.

As demonstrated by our historical totals, core deposit generation in the Northern Lower Peninsula region initially proved challenging due to having single, non-prime locations in the two largest and most competitive markets (Traverse City & Gaylord). However, the poorly positioned Gaylord branch was relocated in the summer of 2006 to a more visible and convenient placed bank branch through the redesign of a piece of bank owned property (REO), which has proved to be a more effective location to drive market growth. Additionally, courier service and remote deposit capabilities were added to the Traverse City & Gaylord locations in mid 2007 providing customers with convenient and electronic access to their accounts. Total deposit growth during this period for the Gaylord branch was approximately $22.7 million ($10.3 to $33 million) and approximately $19.4 million ($12.1 to $31.5 million) for the Traverse City branch, with the majority of the growth for both branches in transactional core deposit accounts. As a result of offering clients this option, it negated the need for the additional and expensive capital outlay of adding more branches while neutralizing many logistical obstacles caused by location.

With regard to the aforementioned depository growth, the Smart Money Market Account was also introduced to the Northern Lower Peninsula markets in early 2009 and was a main driver of the core deposit success over the past 12 months. This account was designed as a market specific deposit alternative to enhance mBank’s existing deposit product line and better service the needs of the high balance consumer and business depositor. The resulting increase in core deposit base has been very beneficial in providing a cost effective funding source to support loan portfolio growth.

The overall increase in the loan portfolio for the Northern Lower Peninsula region is represented by steady new commercial and residential loan origination over the last five years. The industry mix in the commercial area is well diversified among business sectors ranging from tourism & hospitality to small business and various types of real estate. While the composition of the portfolio mitigates some risk, the current economic downturn and the related decline in the housing market has prompted a focus on lower risk loan structures. As a result of the challenging business environment, new commercial loan production is centered on origination of loans guaranteed under United States Small Business Administration (SBA) and United States Department of Agricultural (USDA) loan programs. These guarantees, allow us to meet our client’s needs and also provide the market with capital for economic stimulus while still significantly reducing portfolio risk.

Overall, we are satisfied with the performance of the Northern Lower Peninsula region given the general condition of the Michigan economy over the past eighteen months, and we see signs of gradual economic improvement and development throughout the region. Fortunately, the waterfront housing market and tourism related businesses in the region have not experienced as severe of a decline as other areas of the state. This is undoubtedly due to the popularity and relative affordability of the region compared to other coastal markets in the U.S. This makes the region a very competitive growth market and as a result it is anticipated that it will recover faster than others as population and industry continue to migrate from other parts of Michigan and other contiguous states. We are looking forward to another successful year with the general focus going into 2010 being on continued core deposit growth, controlled opportunistic loan growth and proactive portfolio management. If you are in the region, please stop by one of our locations and experience the mBank difference!

Regional Review – Southeast Michigan

Jesse A. Deering, First VP/Southeast Michigan Executive

BRANCH LOCATION

BIRMINGHAM
260 East Brown Street, Suite 300
Birmingham, MI 48009
(248) 290-5900
Manager: Elena Dritsas

Total deposit growth amounted to $22.0 million over the five year period, almost solely in transactional accounts.

Core deposits are defined as demand deposits, interest bearing checking accounts, money markets, savings and CDs less than $100,000.

Total loan production over the five year period amounted to $179.1 million.

Regional Review – Southeast Michigan

MARKET COMMENTARY

The Southeast Michigan region of mBank opened in early 2005 and has grown to its current size through two distinctly different phases of business initiatives. With the main initial focus being asset growth through the origination of new credit facilities, the loan portfolio successfully grew to roughly $117 million over the first three years of operation. Soon after the inaugural year of existence, Oakland County added full service branch capabilities and a complete depository product line to offer our clientele. This not only allowed Southeast Michigan to provide a full banking experience, including treasury management options, to our growing portfolio of loan customers, but also allowed us to focus on providing similar personalized products and services to deposit only customers. This resulted in steady core deposit growth over the past three years with totals nearly doubling from $11 million at year end 2008 to just over $22 million at year end 2009.

However, The Southeast Michigan region of mBank also experienced challenges resulting from the inherent effects of the global economic downturn of late 2008. As a result of issues within the automotive industry and the prolonged fiscal impact of the recent recession, the financial condition of this region has negatively affected nearly all business sectors. In addition to manufacturing and other operating entities, the market for commercial real estate is seeing drastic downward pressure on lease rates caused by an increase in available space within the market. Further, with the population of this region trending downward as residents relocate in search of employment, the housing and residential development markets continue to be fundamentally weak. As a result, mBank has taken a careful credit posture in Southeast Michigan over the past eighteen months. This has allowed us to increase our level of monitoring and administration of the current loan portfolio. Given the aforementioned market trends, this is deemed as a necessary and prudent governance move at this time.

While the overall economic condition of Southeast Michigan poses challenges for us, it presents opportunities as well. Specifically, the general change in lending posture by some regional banks and their lack of desire to grow business in this particular region has allowed mBank to offer competitive loan and deposit options to strong potential customers. These customers may no longer fit their current bank’s ideal profile from an industry, geographic or relationship size standpoint. Additionally, by utilizing the programs offered through the Small Business Administration and the State of Michigan, the Southeast Michigan region has the opportunity and desire to promote loans for qualified small businesses. The involvement of the SBA and other government resources will increase the granularity of our loan portfolio. These small to midsized loans will both mitigate risk and allow controlled and systematic loan production in this Region.

While evidence of economic recovery may begin to show throughout the next twelve months, it is anticipated that 2010 will continue to be another challenging year for Metropolitan Detroit. As a result, the direction of mBank’s business activities in this region will remain focused on continued growth of core depository relationships and also the prudent underwriting and administration of new and existing loan relationships. While the internal focus will center on these initiatives, it remains the utmost importance to us to continue to provide the highest level of customer service to our clientele and do everything within our ability to meet their banking needs and expectations.

Selected Financial Highlights

(Dollars in Thousands, Except Per Share Data)

		For The Years Ended December 31,
		2009				2008
		(Unaudited)				(Unaudited)
Selected Financial Condition Data (at end of period):
Assets		$	515,377			$	451,431
Loans			384,310				370,280
Investment securities			46,513				47,490
Deposits			421,389				371,097
Borrowings			36,140				36,210
Shareholders’ equity			55,299				41,552
Selected Statements of Income Data:
Net interest income		$	16,287			$	12,864
Income before taxes			3,536				2,659
Net income available to common shareholders			1,907				1,872
Income per common share — Basic			.56				.55
Income per common share — Diluted			.56				.55
Weighted average shares outstanding			3,419,736				3,422,012
Selected Financial Ratios and Other Data:
Performance Ratios:
Net interest margin			3.59	%			3.23	%
Efficiency ratio			73.37				85.51
Return on average assets			.39				.44
Return on average equity			3.77				4.61
Average total assets		$	493,652			$	425,343
Average total shareholders’ equity			50,531				40,630
Average loans to average deposits ratio			92.99	%			105.61	%
Common Share Data at end of period:
Market price per common share		$	4.64			$	4.40
Book value per common share		$	13.10			$	12.15
Common shares outstanding			3,419,736				3,419,736
Other Data at end of period:
Allowance for loan losses		$	5,225			$	4,277
Non-performing assets		$	21,041			$	7,076
Allowance for loan losses to total loans			1.36	%			1.16	%
Non-performing assets to total assets			4.08	%			1.57	%
Number of:
Branch locations			10				12
FTE Employees			100				100

The above summary should be read in connection with the related consolidated financial statements and notes included elsewhere in this report.

Quarterly Financial Summary

MACKINAC FINANCIAL CORPORATION

QUARTERLY FINANCIAL SUMMARY

														Average
		Average				Average				Average				Shareholders’				Return on Average								Net Interest				Efficiency				Net Income				Book Value
Quarter Ended		Assets				Loans				Deposits				Equity				Assets				Equity				Margin				Ratio				Per Share				Per Share
December 31, 2009		$	514,102			$	386,203			$	418,280			$	55,665				(.14)	%			(1.28	)%			3.74	%			71.03	%		$	(.05	)		$	13.10
September 30, 2009			513,687				370,310				419,102				54,594				1.19				11.16				3.66				70.09				.45				13.25
June 30, 2009			491,205				371,609				401,510				49,855				.38				3.71				3.58				76.55				.13				12.73
March 31, 2009			454,740				370,943				372,669				41,813				.08				0.87				3.35				82.36				.03				12.24
December 31, 2008			441,583				366,077				358,213				41,516				(.23	)			(2.42	)			3.20				80.30				(.07	)			12.15
September 30, 2008			423,702				358,844				341,377				41,097				.20				2.08				3.39				79.12				.06				12.11
June 30, 2008			418,246				362,574				332,725				40,399				1.70				17.62				3.19				88.45				.52				11.98
March 31, 2008			417,682				357,778				336,016				39,491				.13				1.42				3.13				95.34				.04				11.56
December 31, 2007			406,308				350,050				324,194				38,973				.51				5.36				3.55				78.02				.15				11.47

Report of Independent Registered Public Accounting Firm

Board of Directors

Mackinac Financial Corporation, Inc.

We have audited the consolidated statement of financial condition of Mackinac Financial Corporation, Inc. as of December 31, 2009 and 2008 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each year in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mackinac Financial Corporation, Inc. as of December 31, 2009 and 2008 and the consolidated results of their operations and their cash flows for each year in the three-year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

Auburn Hills, Michigan March 30, 2010

Consolidated Balance Sheets

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
December 31, 2009 and 2008
(Dollars in Thousands)

		December 31,				December 31,
		2009				2008
ASSETS
Cash and due from banks		$	18,433			$	10,112
Federal funds sold			27,000				—
Cash and cash equivalents			45,433				10,112
Interest-bearing deposits in other financial institutions			678				582
Securities available for sale			46,513				47,490
Federal Home Loan Bank stock			3,794				3,794
Loans:
Commercial			305,670				296,088
Mortgage			74,350				70,447
Installment			4,290				3,745
Total Loans			384,310				370,280
Allowance for loan losses			(5,225	)			(4,277	)
Net loans			379,085				366,003
Premises and equipment			10,165				11,189
Other real estate held for sale			5,804				2,189
Other assets			23,905				10,072
TOTAL ASSETS		$	515,377			$	451,431
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Non-interest-bearing deposits		$	35,878			$	30,099
Interest-bearing deposits:
NOW, Money Market, Checking			95,790				70,584
Savings			18,207				20,730
CDs<$100,000			59,953				73,752
CDs>$100,000			36,385				25,044
Brokered			175,176				150,888
Total deposits			421,389				371,097
Borrowings:
Federal Home Loan Bank			35,000				35,000
Other			1,140				1,210
Total borrowings			36,140				36,210
Other liabilities			2,549				2,572
Total liabilities			460,078				409,879
Shareholders’ equity:
Preferred stock — No par value:
Authorized 500,000 shares, 11,000 shares issued and outstanding			10,514				—
Common stock and additional paid in capital — No par value Authorized - 18,000,000 shares Issued and outstanding — 3,419,736 shares			43,493				42,815
Accumulated earnings (deficit)			199				(1,708	)
Accumulated other comprehensive income			1,093				445
Total shareholders’ equity			55,299				41,552
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	515,377			$	451,431

See accompanying notes to consolidated financial statements.

Consolidated Statements of Operations

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)

		For The Years Ended December 31,
		2009				2008				2007
INTEREST INCOME:
Interest and fees on loans:
Taxable		$	20,521			$	22,555			$	26,340
Tax-exempt			292				404				533
Interest on securities:
Taxable			2,783				1,293				1,100
Tax-exempt			19				5				—
Other interest income			93				305				722
Total interest income			23,708				24,562				28,695
INTEREST EXPENSE:
Deposits			6,431				10,115				13,224
Borrowings			990				1,583				2,054
Total interest expense			7,421				11,698				15,278
Net interest income			16,287				12,864				13,417
Provision for loan losses			3,700				2,300				400
Net interest income after provision for loan losses			12,587				10,564				13,017
OTHER INCOME:
Service fees			1,023				838				688
Net security gains			1,471				64				(1	)
Net gains on sale of secondary market loans			830				120				498
Proceeds from settlement of lawsuits			—				3,475				470
Gain on sales of branch offices			1,208				—				5
Other			219				156				346
Total other income			4,751				4,653				2,006
OTHER EXPENSES:
Salaries and employee benefits			6,583				6,886				6,757
Occupancy			1,385				1,374				1,272
Furniture and equipment			805				771				678
Data processing			862				844				785
Professional service fees			603				508				532
Loan and deposit			933				488				250
FDIC insurance premiums			839				81				35
Other			1,792				1,606				1,791
Total other expenses			13,802				12,558				12,100
Income before provision for income taxes			3,536				2,659				2,923
Provision for (benefit of) income taxes			1,120				787				(7,240	)
NET INCOME		$	2,416			$	1,872			$	10,163
Preferred dividend and accretion of discount			509				—				—
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	1,907			$	1,872			$	10,163
INCOME PER COMMON SHARE
Basic		$	.56			$	.55			$	2.96
Diluted		$	.56			$	.55			$	2.96

See accompanying notes to consolidated financial statements.

Consolidated Statements of Changes in Shareholders’ Equity

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2009, 2008, and 2007
(Dollars in Thousands)

																		Accumulated
		Shares of				Preferred				Common Stock								Other
		Common				Stock				and Additional				Accumulated				Comprehensive
		Stock				Series A				Paid in Capital				Deficit				Income (Loss)				Total
Balance, January 1, 2007			3,428,695			$	—			$	42,722			$	(13,745	)		$	(187	)		$	28,790
Net income			—				—				—				10,163				—				10,163
Other comprehensive income:
Net unrealized loss on securities available for sale			—				—				—				—				247				247
Total comprehensive income																							10,410
Stock option compensation			—				—				121				—				—				121
Balance, December 31, 2007			3,428,695				—				42,843				(3,582	)			60				39,321
Purchase of oddlot shares			(8,959	)			—				(110	)			—				—				(110	)
Net income			—								—				1,872				—				1,872
Other comprehensive income:
Net unrealized income on securities available for sale			—				—				—				—				385				385
Other			—				—				—				2				—				2
Total comprehensive income																							2,259
Stock option compensation			—				—				82				—				—				82
Balance, December 31, 2008			3,419,736				—				42,815				(1,708	)			445				41,552
Net income			—				—				—				2,416				—				2,416
Other comprehensive income:
Net unrealized income on securities available for sale			—				—				—				—				648				648
Total comprehensive income																							3,064
Stock option compensation			—				—				60				—								60
Dividend on preferred stock			—				—				—				(377	)			—				(377	)
Issuance of preferred stock, 11,000 shares			—				10,382				—				—				—				10,382
Issuance of common stock warrants			—				—				618				—				—				618
Accretion of preferred stock discount			—				132				—				(132	)			—				—
Balance, December 31, 2009			3,419,736			$	10,514			$	43,493			$	199			$	1,093			$	55,299

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2009, 2008, and 2007
(Dollars in Thousands)

		2009				2008				2007
Cash Flows from Operating Activities:
Net income		$	2,416			$	1,872			$	10,163
Adjustments to reconcile net income to net net cash provided by (used in) operating activities:
Depreciation and amortization			2,027				1,355				942
Provision for loan losses			3,700				2,300				400
Provision for (benefit of) income taxes			1,120				787				(7,240	)
(Gain) loss on sales/calls of securities available for sale			(1,471	)			(64	)			1
(Gain) on sales of branch offices			(1,208	)			—				(5	)
(Gain) loss on sale of premises, equipment, and other real estate			23				(77	)			(12	)
Writedown of other real estate			187				964				40
Stock option compensation			60				82				121
Change in other assets			(15,331	)			367				12
Change in other liabilities			(22	)			(210	)			(491	)
Net cash (used in) provided by operating activities			(8,499	)			7,376				3,931
Cash Flows from Investing Activities:
Net (increase) in loans			(21,218	)			(21,173	)			(35,043	)
Net (increase) decrease in interest-bearing deposits in other financial institutions			(96	)			1,228				(954	)
Purchase of securities available for sale			(50,113	)			(50,813	)			(25,556	)
Proceeds from maturities, sales, calls or paydowns of securities available for sale			52,742				25,373				37,215
Capital expenditures			(679	)			(618	)			(1,516	)
Proceeds from sale of premises, equipment, and other real estate			581				1,956				323
Net cash paid in connection with branch sales			(28,578	)			—				(8,042	)
Net cash (used in) investing activities			(47,361	)			(44,047	)			(33,573	)
Cash Flows from Financing Activities:
Net increase in deposits			80,760				50,270				17,656
Issuance of Series A Preferred Stock and common stock warrants			11,000				—				—
Dividend on preferred stock and discount accretion			(509	)			—				—
Net increase (decrease) in federal funds purchased			—				(7,710	)			7,710
Net increase (decrease) in lines of credit			—				(1,959	)			—
Repurchase of common stock-oddlot shares			—				(110	)			—
Principal payments on borrowings			(70	)			(70	)			(68	)
Net cash provided by financing activities			91,181				40,421				25,298
Net increase (decrease) in cash and cash equivalents			35,321				3,750				(4,344	)
Cash and cash equivalents at beginning of period			10,112				6,362				10,706
Cash and cash equivalents at end of period		$	45,433			$	10,112			$	6,362
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest		$	7,584			$	11,961			$	13,609
Income taxes			90				70				—
Noncash Investing and Financing Activities:
Transfers of Foreclosures from Loans to Other Real Estate Held for Sale (net of adjustments made through the allowance for loan losses)			4,879				2,849				1,218
Assets and Liabilities Divested in Branch Sales:
Loans			31				—				27
Premises and equipment			651				—				1,181
Deposits			29,260				—				9,250

See accompanying notes to consolidated financial statements.

Notes to the Consolidated Financial Statements

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of Mackinac Financial Corporation (the “Corporation”) and Subsidiaries conform to accounting principles generally accepted in the United States and prevailing practices within the banking industry. Significant accounting policies are summarized below.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries, mBank (the “Bank”) and other minor subsidiaries, after elimination of intercompany transactions and accounts.

Nature of Operations

The Corporation’s and the Bank’s revenues and assets are derived primarily from banking activities. The Bank’s primary market area is the Upper Peninsula, the northern portion of the Lower Peninsula of Michigan, and Oakland County in Lower Michigan. The Bank provides to its customers commercial, real estate, agricultural, and consumer loans, as well as a variety of traditional deposit products. A portion, approximately 2.0%, of the Bank’s commercial loan portfolio consists of leases to commercial and governmental entities, which are secured by various types of equipment. These leases are dispersed geographically throughout the country. Less than 1.0% of the Corporation’s business activity is with Canadian customers and denominated in Canadian dollars.

While the Corporation’s chief decision makers monitor the revenue streams of the various Corporation products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis. Accordingly, all of the Corporation’s banking operations are considered by management to be aggregated in one reportable operating segment.

Use of Estimates in Preparation of Financial Statements

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

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of investment securities, the valuation of foreclosed real estate, deferred tax assets, and impairment of intangible assets.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, noninterest-bearing deposits in correspondent banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.

Securities

The Corporation’s securities are classified and accounted for as securities available for sale. These securities are stated at fair value. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Unrealized holding gains and losses on securities available for sale are reported as accumulated other comprehensive income within shareholders’ equity until realized. When it is determined that securities or other investments are impaired and the impairment is other than temporary, an impairment loss is recognized in earnings and a new basis in the affected security is established. Gains and losses on the sale of securities are recorded on the trade date and determined using the specific-identification method.

Notes to the Consolidated Financial Statements

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Federal Home Loan Bank Stock

As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required to hold stock in the FHLB based on the anticipated level of borrowings to be advanced. This stock is recorded at cost, which approximates fair value. Transfer of the stock is substantially restricted.

Interest Income and Fees on Loans

Interest on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, it is probable that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. Interest income on impaired and nonaccrual loans is recorded on a cash basis. Loan-origination fees and allocated costs of originating loans are deferred and recognized over the term of the loan as an adjustment to yield.

Allowance for Loan Losses

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

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

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

Other Real Estate Held for Sale

Other real estate held for sale consists of assets acquired through, or in lieu of, foreclosure and other long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. Other real estate held for sale is initially recorded at the lower of cost or fair value, less costs to sell, establishing a new cost basis. Valuations are periodically performed by management, and the assets’ carrying values are adjusted to the lower of cost basis or fair value less costs to sell. Impairment losses are recognized for any initial or subsequent write-downs. Net revenue and expenses from operations of other real estate held for sale are included in other expense.

Notes to the Consolidated Financial Statements

MACKINAC FINANCIAL CORPORATION AND SUBSIDIARIES

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of premises and equipment are reflected in income. Depreciation is computed on the straight-line method over the estimated useful lives of the assets.

Stock Option Plans

The Corporation sponsors three stock option plans. One plan was approved during 2000 and applies to officers, employees, and nonemployee directors. This plan was amended as a part of the December 2004 stock offering and recapitalization. The amendment, approved by shareholders, increased the shares available under this plan 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. This plan expires on February 15, 2010. 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 split), were made available for grant under these plans. These two 1997 plans expired early in 2007. 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.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, which are recognized as a separate component of equity and accumulated other comprehensive income (loss).

Earnings per Common Share

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock option agreements and the common stock warrants issued as a part of the Corporation’s participation in the TARP Capital Purchase Program.

Earnings per share are based upon the weighted average number of shares outstanding. The following shows the computation of basic and diluted income per share for the years ended December 31 (dollars in thousands, except per share data):

		Net Income				Weighted
		Available to Common				Average				Income
		Shareholders				Number of Shares				per Share
2009
Income per share — basic and diluted		$	1,907				3,419,736			$	.56
2008
Income per share — basic and diluted		$	1,872				3,422,012			$	.55
2007
Income per share — basic and diluted		$	10,163				3,428,695			$	2.96