Mackinac Financial Corporation Announces Annual Results for 2006

Market Wire, January, 2007

Mackinac Financial Corporation (NASDAQ: MFNC), the holding company for mBank, has reported net income of $1.716 million, or $.50 per share, for the year ended December 31, 2006, compared to a net loss of $7.364 million, or $2.15 per share, for 2005. Weighted average shares outstanding amounted to 3,428,695 in both years.

The 2006 operations include a $600,000 negative provision recorded in the first quarter, in recognition of improved credit quality, a $261,000 negative provision recorded in the fourth quarter to recognize a specific reserve reduction on a loan payoff, and a $500,000 deferred tax benefit recorded in the third quarter. The deferred tax benefit was recorded in accordance with generally accepted accounting principles for recognition of a portion of the benefits to be derived from NOL carry-forwards. The 2006 results also include $310,000 of stock option expense required under the new accounting rules for stock compensation plans, as well as $550,000 of expenses incurred to pursue legal action against the Corporation's former accountants. The costs associated with the pursuit of this legal action have surpassed our earlier estimates but management and the Corporation's Board of Directors believe the case has merit and pursuing it is in the best interests of our shareholders.

The 2005 loss of $7.364 million includes a number of significant one-time charges. Included are $4.320 million of penalties incurred to prepay $48.555 million of FHLB borrowings, $.815 million of costs associated with conversion of the Corporation's data processing system, approximately $500,000 of marketing expense to launch the new "mBank" name along with a new line of products and services, and lastly a $200,000 write-down of other real estate property.

Paul Tobias, Chairman and Chief Executive Officer, commented, "In 2006, the Corporation was extremely successful in generating new loans and deposits which enabled us to attain core profitability. This balance sheet growth provides the foundation in which to increase profits in future periods; however, in order to bring profitability in line with our peers and meet shareholder expectations we will need to improve our funding mix and constrain noninterest expenses."

Total assets of the Corporation at December 31, 2006 were $382.791 million, an increase of 28.1% from total assets of $298.722 million reported at December 31, 2005.

During 2006 the Corporation's loans stood at $322.581 million, an increase of $82.810 million from 2005 year-end balances of $239.771 million, a 34.5% increase. Total loan originations in 2006 amounted to $135.2 million.

Tobias stated, "We are extremely pleased with our team's ability to originate high quality loan relationships. This loan growth in 2006 along with our 2005 growth of $35.939 million demonstrates the effectiveness of our strategy in staffing our organization with experienced, highly skilled commercial lenders. In 2007 and beyond our ability to fund continued loan growth with a higher portion of in-market lower cost transactional deposits is another key variable for increased profitability."

Asset quality remains strong. Nonperforming loans, as a percent of loans, was .91% at December 31, 2006. Nonperforming assets at December 31, 2006 were $2.965 million, .77% of total assets, compared to $1.059 million or .35% of total assets at December 31, 2005. Tobias added, "During our rapid loan portfolio expansion, we have been diligent in our credit administration and have continued to focus on credit quality. Our process, which is administrated under a committee system, and anchored by strong underwriting, has proved effective in maintaining our strong credit quality. The increase in nonperforming assets reflects the impact of two large credits moving into the nonaccrual category. These credits were originated before our team arrived and in both instances, we are well reserved and have a strategy for adequate recovery."

Total deposits grew from $232.632 million at December 31, 2005 to $312.421 million at December 31, 2006, an increase of 34.3%. The increase includes a growth in core deposits of the Bank in the amount of $25.079 million, a 14.37% increase from 2005 year-end balances of $174.530 million, and increases in non-core deposits of $54.710 million, which include bank CDs greater than $100,000 and brokered deposits.

Net interest income for the year ended December 31, 2006 was $11.593 million compared to $9.780 million for the year ended December 31, 2005, an increase of $1.813 million. The margin percentage for 2006 was 3.51% compared to 3.64% in 2005. This decrease in the net interest margin is attributable to a number of factors. During 2006 the prime rate increased from 7.25% to 8.25%, which was beneficial to the Corporation since a majority of the commercial loan portfolio repriced upwards with each prime rate change. A factor which negatively impacted the margin in 2006 was the increased reliance on brokered deposits to fund loan growth. The Corporation also experienced a migration of deposits from low cost transactional accounts to higher cost money market accounts. Tobias commented, "We realize the importance of obtaining lower cost transactional deposits to maintain our interest margin. We have directed our efforts towards this need by staffing our branches with sales oriented branch managers supported by the right systems and products. We will be implementing appropriate incentives in 2007 to help reward the individuals that grow low cost deposits."