Mindanao is home to a sizable Muslim population, in contrast to the overwhelmingly Catholic remainder of the country.
The militants had reportedly taken over a medical center and replaced the Philippines flag with a black, ISIS-style banner.
Armed Forces of the Philippines (AFP) spokesman Lt. Col. Jo-Ar Herrera said that Isnilon Hapilon, the leader of the Abu Sayyaf Group, which has pledged allegiance to ISIS, was among the armed men.