10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from <> to <>

Commission file number: 0-20167

MACKINAC FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

MICHIGAN	38-2062816
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
130 SOUTH CEDAR STREET, MANISTIQUE, MI	49854
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:  (888) 343-8147

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer o	Accelerated Filer o
Non-accelerated Filer o	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

As of October 31, 2014, there were outstanding 5,564,815 shares of the registrant’s common stock, no par value.

MACKINAC FINANCIAL CORPORATION

INDEX

		Page No.
PART I.         FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets - September 30, 2014 (Unaudited), December 31, 2013 and September 30, 2013 (Unaudited)	1
	Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2014 (Unaudited) and September 30, 2013 (Unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2014 (Unaudited) and September 30, 2013 (Unaudited)	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity – Three and Nine Months Ended September 30, 2014 (Unaudited) and September 30, 2013 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2014 (Unaudited) and September 30, 2013 (Unaudited)	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	44
PART II.        OTHER INFORMATION
Item 1.	Legal Proceedings	45
Item 6.	Exhibits and Reports on Form 8-K	45
SIGNATURES		46

MACKINAC FINANCIAL CORPORATION

PART I.  FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

	September 30,			December 31,			September 30,
	2014			2013			2013
	(Unaudited)						(Unaudited)
ASSETS
Cash and due from banks	$	22,399		$	18,216		$	22,791
Federal funds sold	2			3			3
Cash and cash equivalents	22,401			18,219			22,794
Interest-bearing deposits in other financial institutions	235			10			10
Securities available for sale	48,742			44,388			48,096
Federal Home Loan Bank stock	3,060			3,060			3,060
Loans:
Commercial	383,759			359,368			353,526
Mortgage	119,039			110,663			104,504
Consumer	15,575			13,801			14,465
Total Loans	518,373			483,832			472,495
Allowance for loan losses	(5,279		)	(4,661		)	(4,959		)
Net loans	513,094			479,171			467,536
Premises and equipment	9,821			10,210			10,484
Other real estate held for sale	1,843			1,884			2,568
Deferred tax asset	8,681			9,933			7,953
Other assets	6,066			5,925			5,416
TOTAL ASSETS	$	613,943		$	572,800		$	567,917
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest bearing deposits	$	84,073		$	72,936		$	70,063
NOW, money market, interest checking	173,793			149,123			158,588
Savings	15,263			13,039			12,694
CDs<$100,000	130,821			140,495			133,821
CDs>$100,000	24,891			23,159			23,816
Brokered	62,365			67,547			62,706
Total deposits	491,206			466,299			461,688
Federal funds purchased	7,500			—			—
Borrowings	44,909			37,852			35,852
Other liabilities	3,196			3,400			3,332
Total liabilities	546,811			507,551			500,872
SHAREHOLDERS’ EQUITY:
Preferred stock - No par value:
Authorized - 500,000 shares, Issued and outstanding - none and 4,000 shares	—			—			4,000
Common stock and additional paid in capital - No par value
Authorized - 18,000,000 shares
Issued and outstanding - 5,564,815; 5,541,390 and 5,581,339 respectively	53,800			53,621			53,915
Retained earnings	12,923			11,412			8,780
Accumulated other comprehensive income	409			216			350
Total shareholders’ equity	67,132			65,249			67,045
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	613,943		$	572,800		$	567,917

See accompanying notes to condensed consolidated financial statements.

1

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except per Share Data)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
	(Unaudited)				(Unaudited)
INTEREST INCOME:
Interest and fees on loans:
Taxable	$	6,651	$	6,077	$	19,305	$	17,980
Tax-exempt	4		26		27		81
Interest on securities:
Taxable	230		245		711		726
Tax-exempt	14		9		41		22
Other interest income	34		33		114		96
Total interest income	6,933		6,390		20,198		18,905
INTEREST EXPENSE:
Deposits	813		879		2,435		2,642
Borrowings	234		163		625		490
Total interest expense	1,047		1,042		3,060		3,132
Net interest income	5,886		5,348		17,138		15,773
Provision for loan losses	187		375		561		850
Net interest income after provision for loan losses	5,699		4,973		16,577		14,923
OTHER INCOME:
Deposit service fees	168		158		517		495
Income from loans sold on the secondary market	212		203		455		781
SBA/USDA loan sale gains	—		135		548		798
Mortgage servicing income	313		128		415		413
Other	75		114		174		260
Total other income	768		738		2,109		2,747
OTHER EXPENSE:
Salaries and employee benefits	2,481		2,226		7,545		6,907
Occupancy	511		362		1,595		1,107
Furniture and equipment	305		274		927		799
Data processing	288		269		862		802
Advertising	114		119		344		334
Professional service fees	276		161		883		706
Loan and deposit	144		55		306		173
Writedowns and losses on other real estate held for sale	176		57		190		146
FDIC insurance assessment	92		100		267		300
Telephone	84		84		248		229
Other	655		652		1,964		1,690
Total other expenses	5,126		4,359		15,131		13,193
Income before provision for income taxes	1,341		1,352		3,555		4,477
Provision for income taxes	455		456		1,203		1,508
NET INCOME	886		896		2,352		2,969
Preferred dividend and accretion of discount	—		50		—		250
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	886	$	846	$	2,352	$	2,719
INCOME PER COMMON SHARE:
Basic	$	.16	$	.15	$	.43	$	.49
Diluted	$	.16	$	.15	$	.42	$	.49

See accompanying notes to condensed consolidated financial statements.

2

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Net income	$	886		$	896		$	2,352		$	2,969
Net change in net unrealized gains and losses on securities available for sale:
Unrealized gains (losses) arising during the period	(53		)	(136		)	292			(899		)
Less: reclassification adjustment for gains included in net income	—			14			—			29
Net securities gain (loss) during the period	(53		)	(122		)	292			(870		)
Tax effect	13			42			(99		)	296
Other comprehensive income (loss)	(40		)	(80		)	193			(574		)
Total comprehensive income	$	846		$	816		$	2,545		$	2,395

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

	Three Months Ended
	September 30,
	2014								2013
			Common			Total					Common			Total
	Preferred		Shareholders’			Shareholders’			Preferred		Shareholders’			Shareholders’
	Stock		Equity			Equity			Stock		Equity			Equity
Balance, beginning of period	$	—	$	66,477		$	66,477		$	4,000	$	62,520		$	66,520
Net income for period	—		886			886			—		896			896
Net unrealized (loss) on securities available for sale	—		(40		)	(40		)	—		(80		)	(80		)
Total comprehensive income	—		846			846			—		816			816
Stock compensation	—		96			96			—		75			75
Dividend on common stock	—		(287		)	(287		)	—		(222		)	(222		)
Repurchase of common stock	—		—			—			—		(94		)	(94		)
Dividend on preferred stock	—		—			—			—		(50		)	(50		)
Balance, end of period	$	—	$	67,132		$	67,132		$	4,000	$	63,045		$	67,045

	Nine Months Ended
	September 30,
	2014								2013
			Common			Total						Common			Total
	Preferred		Shareholders’			Shareholders’			Preferred			Shareholders’			Shareholders’
	Stock		Equity			Equity			Stock			Equity			Equity
Balance, beginning of period	$	—	$	65,249		$	65,249		$	11,000		$	61,448		$	72,448
Net income for period	—		2,352			2,352			—			2,969			2,969
Net unrealized gain (loss) on securities available for sale	—		193			193			—			(574		)	(574		)
Total comprehensive income	—		2,545			2,545			—			2,395			2,395
Stock compensation	—		321			321			—			258			258
Dividend on common stock	—		(840		)	(840		)	—			(666		)	(666		)
Repurchase of common stock	—		(143		)	(143		)	—			(140		)	(140		)
Redemption of Preferred Series A stock	—		—			—			(7,000		)	—			(7,000		)
Dividend on preferred stock	—		—			—			—			(250		)	(250		)
Balance, end of period	$	—	$	67,132		$	67,132		$	4,000		$	63,045		$	67,045

See accompanying notes to condensed consolidated financial statements.

3

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2014			2013
Cash Flows from Operating Activities:
Net income	$	2,352		$	2,969
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,115			1,264
Provision for loan losses	561			850
Deferred income taxes, net	1,203			1,508
(Gain) on sales/calls of securities	—			(29		)
(Gain) on sale of loans sold in the secondary market	(358		)	(609		)
Origination of loans held for sale in the secondary market	(21,395		)	(44,568		)
Proceeds from sale of loans in the secondary market	21,753			45,177
Loss on sale of premises, equipment, and other real estate held for sale	77			13
Writedown of other real estate held for sale	142			134
Stock compensation	321			258
Change in other assets	(141		)	(201		)
Change in other liabilities	(204		)	283
Net cash provided by operating activities	5,426			7,049
Cash Flows from Investing Activities:
Net increase in loans	(35,022		)	(25,393		)
Net increase in deposits held at other banks	(225		)	—
Purchase of securities available for sale	(8,257		)	(7,875		)
Proceeds from maturities, sales, calls or paydowns of securities available for sale	4,059			2,378
Capital expenditures	(1,156		)	(757		)
Proceeds from sale of premises, equipment, and other real estate	876			1,429
Net cash (used in) investing activities	(39,725		)	(30,218		)
Cash Flows from Financing Activities:
Net increase in deposits	24,907			27,131
Net increase in federal funds purchased	7,500			—
Net increase in borrowings	7,330			—
Repurchase of common stock	(143		)	(140		)
Dividend on common stock	(840		)	(666		)
Redemption of Preferred Series A	—			(7,000		)
Principal payments on borrowings	(273		)	(73		)
Dividend on preferred stock	—			(250		)
Net cash provided by financing activities	38,481			19,002
Net increase (decrease) in cash and cash equivalents	4,182			(4,167		)
Cash and cash equivalents at beginning of period	18,219			26,961
Cash and cash equivalents at end of period	$	22,401		$	22,794
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest	$	3,058		$	2,721
Income taxes	75			124
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)	488			932

4

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the “Corporation”) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the nine-month period ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  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, 2013.

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.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 reporting 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, and the valuation of deferred tax assets, mortgage servicing rights and other real estate held for sale.

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.

5

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock Compensation Plans

On May 22, 2012, the Company’s shareholders approved the Mackinac Financial Corporation 2012 Incentive Compensation Plan, under which current and prospective employees, non-employee directors and consultants may be awarded incentive stock options, non-statutory stock options, shares of restricted stock units (“RSUs”), or stock appreciation rights.  The aggregate number of shares of the Company’s common stock issuable under the plan is 575,000, which included 392,152 option shares outstanding at that time.  Awards are made at the discretion of management.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

The Corporation, in August 2012 and March 2014, granted Restricted Stock Units (“RSUs”) to members of the Board of Directors and Management.  In August 2012, 148,500 RSUs were granted at a market value of $7.91 and will vest equally over a four year term.  In exchange for the grant of these RSUs various previously issued stock option awards were surrendered.  In March 2014, 52,774 RSUs were granted at a market value of $12.95, also vesting equally over a four year term.    The RSUs were awarded at no cost to the employee.  Compensation cost to be recognized over the four —year vesting periods, is $1.175 million and $.683 million, respectively.  On August 31, 2013, the Corporation issued 37,125 shares of its common stock for vested RSUs.  As of September 30, 2014, RSUs totaling 127,024 were unvested and unrecognized compensation expense was $1.154 million.

2.     RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on the recognition of revenue from contracts with customers. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The guidance is effective January 1, 2017 and early adoption is not permitted. The company is currently evaluating the impact of the new guidance and the method of adoption in the consolidated financial results.

3.     EARNINGS PER SHARE

Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and stock awards were fully vested and resulted in the issuance of common stock that then shared in our earnings, is computed by dividing net income by the weighted average number of common shares outstanding and common stock equivalents, after giving effect for dilutive shares issued.

The following shows the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
(Numerator):
Net income	$	886	$	896	$	2,352	$	2,969
Preferred stock dividends and accretion of discount	—		50		—		250
Net income available to common shareholders	$	886	$	846	$	2,352	$	2,719
(Denominator):
Weighted average shares outstanding - basic	5,540,200		5,562,835		5,532,966		5,559,108
Effect of dilutive stock options and vesting of restricted stock awards	71,722		—		70,268		—
Weighted average shares outstanding - diluted	5,611,922		5,562,835		5,603,234		5,559,108
Income per common share
Basic	$	.16	$	.15	$	.43	$	.49
Diluted	$	.16	$	.15	$	.42	$	.49

6

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.  INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities available for sale as of September 30, 2014, December 31, 2013 and September 30, 2013 are as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
September 30, 2014
US Agencies - MBS	$	6,142	$	241	$	—		$	6,383
US Agencies	22,725		41		(273		)	22,493
Corporate Bonds	12,621		172		—			12,793
Obligations of states and political subdivisions	6,383		439		—			6,822
Other	251		—		—			251
Total securities available for sale	$	48,122	$	893	$	(273	)	$	48,742
December 31, 2013
US Agencies - MBS	$	7,078	$	281	$	—		$	7,359
US Agencies	15,227		—		(372		)	14,855
Corporate Bonds	15,862		218		(1		)	16,079
Obligations of states and political subdivisions	5,893		202		—			6,095
Total securities available for sale	$	44,060	$	701	$	(373	)	$	44,388
September 30, 2013
US Agencies - MBS	$	7,236	$	315	$	—		$	7,551
US Agencies	16,003		66		(336		)	15,733
Corporate Bonds	18,451		192		(4		)	18,639
Obligations of states and political subdivisions	5,876		297		—			6,173
Total securities available for sale	$	47,566	$	870	$	(340	)	$	48,096

The Corporation has evaluated gross unrealized losses that exist within the portfolio and considers them temporary in nature.  The Corporation has both the ability and the intent to hold the investment securities until their respective maturities and therefore does not anticipate the realization of the temporary losses.

The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $4.167 million and $4.300 million, respectively, at September 30, 2014.

5.    LOANS

The composition of loans is as follows (dollars in thousands):

	September 30,		December 31,		September 30,
	2014		2013		2013
Commercial real estate	$	272,803	$	268,809	$	257,961
Commercial, financial, and agricultural	98,714		79,655		79,511
One to four family residential real estate	110,310		103,768		98,770
Construction :
Consumer	8,729		6,895		5,734
Commerical	12,242		10,904		16,054
Consumer	15,575		13,801		14,465
Total loans	$	518,373	$	483,832	$	472,495

7

 MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.    LOANS (Continued)

An analysis of the allowance for loan losses for nine months ended September 30, 2014, the year ended December 31, 2013 and the nine months ended September 30, 2013 is as follows (dollars in thousands):

	September 30,			December 31,			September 30,
	2014			2013			2013
Balance at beginning of period	$	4,661		$	5,218		$	5,218
Loans charged off	(185		)	(2,432		)	(1,263		)
Recoveries on loans previously charged off	242			200			154
Provision	561			1,675			850
Balance at end of period	$	5,279		$	4,661		$	4,959

In the first nine months of 2014, net recoveries were $.057 million compared to net charge-offs of $1.109 million, or .32% of average loans, in the same period in 2013.   In the first nine months of 2014, the Corporation recorded a provision for loan loss of $.561 million compared to $.850 million in the first nine months of 2013.  The Corporation’s allowance for loan loss reserve policy calls for a measurement of the adequacy of the reserve at each quarter end.  This process includes an analysis of the loan portfolio to take into account increases in loans outstanding and portfolio composition, historical loss rates, and specific reserve requirements of nonperforming loans.

A breakdown of the allowance for loan losses and recorded balances in loans at September 30, 2014 is as follows (dollars in thousands):

				Commercial,						One to four
	Commercial			financial and			Commercial			family residential			Consumer
	real estate			agricultural			construction			real estate			construction			Consumer			Unallocated			Total
Three Months Ended September 30, 2014
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,630		$	1,669		$	40		$	345		$	15		$	111		$	1,287		$	5,097
Charge-offs	(18		)	(9		)	—			(28		)	—			(15		)	—			(70		)
Recoveries	31			16			3			4			—			11			—			65
Provision	(1		)	(153		)	1			80			3			1			256			187
Ending balance ALLR	$	1,642		$	1,523		$	44		$	401		$	18		$	108		$	1,543		$	5,279
Nine Months Ended September 30, 2014
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,849		$	1,378		$	80		$	516		$	25		$	148		$	665		$	4,661
Charge-offs	(19		)	(74		)	—			(44		)	—			(48		)	—			(185		)
Recoveries	105			75			9			18			—			35			—			242
Provision	(293		)	144			(45		)	(89		)	(7		)	(27		)	878			561
Ending balance ALLR	$	1,642		$	1,523		$	44		$	401		$	18		$	108		$	1,543		$	5,279
At September 30,2014
Loans:
Ending balance	$	272,803		$	98,714		$	12,242		$	110,310		$	8,729		$	15,575		$	—		$	518,373
Ending balance ALLR	(1,642		)	(1,523		)	(44		)	(401		)	(18		)	(108		)	(1,543		)	(5,279		)
Net loans	$	271,161		$	97,191		$	12,198		$	109,909		$	8,711		$	15,467		$	(1,543	)	$	513,094
Ending balance ALLR:
Individually evaluated	$	312		$	1,104		$	—		$	167		$	—		$	32		$	—		$	1,615
Collectively evaluated	1,330			419			44			234			18			76			1,543			3,664
Total	$	1,642		$	1,523		$	44		$	401		$	18		$	108		$	1,543		$	5,279
Ending balance Loans:
Individually evaluated	$	378		$	1,730		$	—		$	1,202		$	—		$	61		$	—		$	3,371
Collectively evaluated	272,425			96,984			12,242			109,108			8,729			15,514			—			515,002
Total	$	272,803		$	98,714		$	12,242		$	110,310		$	8,729		$	15,575		$	—		$	518,373

Impaired loans, by definition, are individually evaluated.

8

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.    LOANS (Continued)

A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2013 is as follows (dollars in thousands):

				Commercial,						One to four
	Commercial			financial and			Commercial			family residential			Consumer
	real estate			agricultural			construction			real estate			construction			Consumer			Unallocated			Total
Allowance for loan loss reserve:
Beginning balance ALLR	$	3,267		$	692		$	125		$	980		$	—		$	—		$	154		5,218
Charge-offs	(1,539		)	(632		)	—			(141		)	—			(120		)	—			(2,432		)
Recoveries	92			56			2			26			2			22			—			200
Provision	29			1,262			(47		)	(349		)	23			246			511			1,675
Ending balance ALLR	$	1,849		$	1,378		$	80		$	516		$	25		$	148		$	665		$	4,661
Loans:
Ending balance	$	268,809		$	79,655		$	10,904		$	103,768		$	6,895		$	13,801		$	—		$	483,832
Ending balance ALLR	(1,849		)	(1,378		)	(80		)	(516		)	(25		)	(148		)	(665		)	(4,661		)
Net loans	$	266,960		$	78,277		$	10,824		$	103,252		$	6,870		$	13,653		$	(665	)	$	479,171
Ending balance ALLR:
Individually evaluated	$	99		$	891		$	—		$	103		$	—		$	18		$	—		$	1,111
Collectively evaluated	1,750			487			80			413			25			130			665			3,550
Total	$	1,849		$	1,378		$	80		$	516		$	25		$	148		$	665		$	4,661
Ending balance Loans:
Individually evaluated	$	649		$	1,830		$	—		$	385		$	—		$	42		$	—		$	2,906
Collectively evaluated	268,160			77,825			10,904			103,383			6,895			13,759			—			480,926
Total	$	268,809		$	79,655		$	10,904		$	103,768		$	6,895		$	13,801		$	—		$	483,832

Impaired loans, by definition, are individually evaluated

A breakdown of the allowance for loan losses and recorded balances in loans at September 30, 2013 is as follows (dollars in thousands):

				Commercial,						One to four
	Commercial			financial and			Commercial			family residential			Consumer
	real estate			agricultural			construction			real estate			construction			Consumer			Unallocated			Total
Three Months Ended September 30, 2013
Allowance for loan loss reserve:
Beginning balance ALLR	$	2,661		$	1,090		$	97		$	877		$	—		$	13		$	439		$	5,177
Charge-offs	(132		)	(476		)	—			(25		)	—			(14		)	—			(647		)
Recoveries	23			20			—			6			1			4			—			54
Provision	3			522			(16		)	44			(1		)	15			(192		)	375
Ending balance ALLR	$	2,555		$	1,156		$	81		$	902		$	—		$	18		$	247		$	4,959
Nine Months Ended September 30, 2013
Allowance for loan loss reserve:
Beginning balance ALLR	$	3,267		$	692		$	125		$	980		$	—		$	—		$	154		$	5,218
Charge-offs	(588		)	(552		)	—			(38		)	—			(85		)	—			(1,263		)
Recoveries	64			53			2			17			1			17			—			154
Provision	(188		)	963			(46		)	(57		)	(1		)	86			93			850
Ending balance ALLR	$	2,555		$	1,156		$	81		$	902		$	—		$	18		$	247		$	4,959
At September 30,2013
Loans:
Ending balance	$	257,961		$	79,511		$	16,054		$	98,770		$	5,734		$	14,465		$	—		$	472,495
Ending balance ALLR	(2,555		)	(1,156		)	(81		)	(902		)	—			(18		)	(247		)	(4,959		)
Net loans	$	255,406		$	78,355		$	15,973		$	97,868		$	5,734		$	14,447		$	(247	)	$	467,536
Ending balance ALLR:
Individually evaluated	$	1,407		$	802		$	6		$	246		$	—		$	18		$	—		$	2,479
Collectively evaluated	1,148			354			75			656			—			—			247			2,480
Total	$	2,555		$	1,156		$	81		$	902		$	—		$	18		$	247		$	4,959
Ending balance Loans:
Individually evaluated	$	13,475		$	7,638		$	798		$	450		$	—		$	35		$	—		$	22,396
Collectively evaluated	244,486			71,873			15,256			98,320			5,734			14,430			—			450,099
Total	$	257,961		$	79,511		$	16,054		$	98,770		$	5,734		$	14,465		$	—		$	472,495

Impaired loans, by definition, are individually evaluated.

9

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.    LOANS (Continued)

As part of the management of the loan portfolio, risk ratings are assigned to all commercial loans.  Through the loan review process, ratings are modified as believed to be appropriate to reflect changes in the credit.  Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans.

To do so, we operate a credit risk rating system under which our credit management personnel assign a credit risk rating to each loan at the time of origination and review loans on a regular basis to determine each loan’s credit risk rating on a scale of 1 through 8, with higher scores indicating higher risk.  The credit risk rating structure used is shown below.

In the context of the credit risk rating structure, the term Classified is defined as a problem loan which may or may not be in a nonaccrual status, dependent upon current payment status and collectability.

Strong (1)

Borrower is not vulnerable to sudden economic or technological changes.  They have “strong” balance sheets and are within an industry that is very typical for our markets or type of lending culture.  Borrowers also have “strong” financial and cash flow performance and excellent collateral (low loan to value or readily available to liquidate collateral) in conjunction with an impeccable repayment history.

Good (2)

Borrower shows limited vulnerability to sudden economic change.  These borrowers have “above average” financial and cash flow performance and a very good repayment history.  The balance sheet of the company is also very good as compared to peer and the company is in an industry that is familiar to our markets or our type of lending.  The collateral securing the deal is also very good in terms of its type, loan to value, etc.

Average (3)

Borrower is typically a well-seasoned business, however may be susceptible to unfavorable changes in the economy, and could be somewhat affected by seasonal factors.  The borrowers within this category exhibit financial and cash flow performance that appear “average” to “slightly above average” when compared to peer standards and they show an adequate payment history.  Collateral securing this type of credit is good, exhibiting above average loan to values, etc.

Acceptable/Acceptable Watch (4)

A borrower within this category exhibits financial and cash flow performance that appear adequate and satisfactory when compared to peer standards and they show a satisfactory payment history.  The collateral securing the request is within supervisory limits and overall is acceptable.  Borrowers rated acceptable could also be newer businesses that are typically susceptible to unfavorable changes in the economy, and more than likely could be affected by seasonal factors.

Special Mention (5)

The borrower may have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.  Examples of this type of credit include a start-up company fully based on projections, a documentation issue that needs to be corrected or a general market condition that the borrower is working through to get corrected.

Substandard (6)

Substandard loans are classified assets exhibiting a number of well-defined weaknesses that jeopardize normal repayment.  The assets are no longer adequately protected due to declining net worth, lack of earning capacity, or insufficient collateral offering the distinct possibility of the loss of a portion of the loan principal.  Loans classified as substandard clearly represent troubled and deteriorating credit situations requiring constant supervision.

10

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.    LOANS (Continued)

Doubtful (7)

Loans in this category exhibit the same, if not more pronounced weaknesses used to describe the substandard credit.  Loans are frozen with collection improbable.  Such loans are not yet rated as Charge-off because certain actions may yet occur which would salvage the loan.

Charge-off/Loss (8)

Loans in this category are largely uncollectible and should be charged against the loan loss reserve immediately.

General Reserves:

For loans with a credit risk rating of 5 or better and any loans with a risk rating of 6 or 7 with no specific reserve, reserves are established based on the type of loan collateral, if any, and the assigned credit risk rating.  Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, and consideration of current environmental factors and economic trends, all of which may be susceptible to significant change.

Using a historical average loss by loan type as a base, each loan graded as higher risk is assigned a specific percentage.  Within the commercial loan portfolio, the historical loss rates are used for specific industries such as hospitality, gaming, petroleum, and forestry.  The residential real estate and consumer loan portfolios are assigned a loss percentage as a homogenous group.  If, however, on an individual loan the projected loss based on collateral value and payment histories are in excess of the computed allowance, the allocation is increased for the higher anticipated loss.  These computations provide the basis for the allowance for loan losses as recorded by the Corporation.

Commercial construction loans in the amount of $2.883 million, $2.951 million and $2.773 million for the periods ended September 30, 2014, December 31, 2013 and September 30, 2013, respectively did not receive a specific risk rating.  These amounts represent loans made for land development and unimproved land purchases.  Below is a breakdown of loans by risk category as of September 30, 2014 (dollars in thousands):

	(1)		(2)		(3)		(4)		(5)		(6)		(7)		Rating
							Acceptable/
	Excellent		Good		Average		Acceptable Watch		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	1,741	$	24,827	$	116,621	$	128,126	$	—	$	1,488	$	—	$	—	$	272,803
Commercial, financial and agricultural	1,736		4,472		34,547		53,311		—		4,648		—		—		98,714
Commercial construction	—		444		1,578		6,935		—		402		—		2,883		12,242
One to four family residential real estate	—		295		1,046		4,119		60		—		—		104,790		110,310
Consumer construction	—		—		—		—		—		—		—		8,729		8,729
Consumer	—		—		4		21		—		—		—		15,550		15,575
Total loans	$	3,477	$	30,038	$	153,796	$	192,512	$	60	$	6,538	$	—	$	131,952	$	518,373

Below is a breakdown of loans by risk category as of December 31, 2013 (dollars in thousands):

	(1)		(2)		(3)		(4)		(5)		(6)		(7)		Rating
							Acceptable/
	Excellent		Good		Average		Acceptable Watch		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	1,502	$	23,310	$	116,702	$	125,010	$	—	$	2,285	$	—	$	—	$	268,809
Commercial, financial and agricultural	3,741		4,348		27,455		39,070		—		5,041		—		—		79,655
Commercial construction	30		479		2,702		4,340		—		402		—		2,951		10,904
One-to-four family residential real estate	251		3,074		1,275		4,482		—		710		—		93,976		103,768
Consumer construction	—		—		—		—		—		—		—		6,895		6,895
Consumer	10		—		37		43		—		30		—		13,681		13,801
Total loans	$	5,534	$	31,211	$	148,171	$	172,945	$	—	$	8,468	$	—	$	117,503	$	483,832

11

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.    LOANS (Continued)

Below is a breakdown of loans by risk category as of September 30, 2013 (dollars in thousands):

	(1)		(2)		(3)		(4)		(5)		(6)		(7)		Rating
	Excellent		Good		Average		Acceptable		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	2,240	$	23,675	$	88,105	$	123,373	$	16,117	$	4,451	$	—	$	—	$	257,961
Commercial, financial and agricultural	4,260		5,108		22,263		41,851		3,746		2,094		189		—		79,511
Commercial construction	—		676		5,283		6,167		753		402		—		2,773		16,054
One to four family residential real estate	—		1,951		2,186		4,522		—		6		—		90,105		98,770
Consumer construction	—		—		—		—		—		—		—		5,734		5,734
Consumer	—		102		34		632		—		—		—		13,697		14,465
Total loans	$	6,500	$	31,512	$	117,871	$	176,545	$	20,616	$	6,953	$	189	$	112,309	$	472,495

Impaired Loans

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 on interest or principal.  There was no interest income recorded during impairment for the three and nine months ended September 30, 2014.  There was no interest income recorded during impairment and that which would have been recognized was $.040 million for the three months ended September 30, 2014, and no interest income recorded during impairment and that which would have been recognized of $.093 million for the nine months ended September 30, 2014.

The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.  When interest accrual is discontinued, all unpaid accrued interest is reversed.  Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments.  Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loans basis for other loans.  If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.  Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis.  Impaired loans, or portions thereof, are charged off when deemed uncollectible.

12

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.    LOANS (Continued)

The following is a summary of impaired loans and their effect on interest income (dollars in thousands):

											Three Months Ended				Nine Months Ended
					QTD		YTD				Interest Income		Interest Income		Interest Income		Interest Income
	Nonaccrual		Accrual		Average		Average		Related		Recognized		on		Recognized		on
	Basis		Basis		Investment		Investment		Valuation Reserve		During Impairment		Accrual Basis		During Impairment		Accrual Basis
September 30, 2014
With no valuation reserve:
Commercial real estate	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial, financial and agricultural	—		—		—		—		—		—		—		—		—
Commercial construction	—		—		—		—		—		—		—		—		—
One to four family residential real estate	—		—		—		—		—		—		—		—		—
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—
With a valuation reserve:															$	—
Commercial real estate	$	227	$	—	$	340	$	427	$	227	$	—	$	4	—		$	20
Commercial, financial and agricultural	1,735		—		1,770		1,268		1,104		—		28		—		52
Commercial construction	—		—		—		—		—		—		—		—		—
One to four family residential real estate	733		—		489		434		147		—		7		—		20
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	—		—		11		14		—		—		1				1
Total:
Commercial real estate	$	227	$	—	$	340	$	427	$	227	$	—	$	4	$	—	$	20
Commercial, financial and agricultural	1,735		—		1,770		1,268		1,104		—		28		—		52
Commercial construction	—		—		—		—		—		—		—		—		—
One to four family residential real estate	733		—		489		434		147		—		7		—		20
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	—		—		11		14		—		—		1		—		1
Total	$	2,695	$	—	$	2,610	$	2,143	$	1,478	$	—	$	40	$	—	$	93

									Interest Income		Interest Income
For the Year Ended:	Nonaccrual		Accrual		Average		Related		Recognized		on
December 31, 2013	Basis		Basis		Investment		Valuation Reserve		During Impairment		Accrual Basis
With no valuation reserve:
Commercial real estate	$	513	$	—	$	3,045	$	—	$	—	$	153
Commercial, financial and agricultural	59		—		505		—		—		13
Commercial construction	—		—		626		—		—		3
One to four family residential real estate	361		—		625		—		—		16
Consumer construction	—		—		—		—		—		—
Consumer	—		—		2		—		—		—
With a valuation reserve:
Commercial real estate	$	59	$	—	$	71	$	14	$	—	$	5
Commercial, financial and agricultural	752		—		834		265		—		18
Commercial construction	—		—		—		—		—		—
One to four family residential real estate	250		—		261		78		—		20
Consumer construction	—		—		—		—		—		—
Consumer	30		—		30		13		—		—
Total:
Commercial real estate	$	572	$	—	$	3,116	$	14	$	—	$	158
Commercial, financial and agricultural	811		—		1,339		265		—		31
Commercial construction	—		—		626		—		—		3
One to four family residential real estate	611		—		886		78		—		36
Consumer construction	—		—		—		—		—		—
Consumer	30		—		32		13		—		—
Total	$	2,024	$	—	$	5,999	$	370	$	—	$	228

13

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.    LOANS (Continued)

											Three Months Ended				Nine Months Ended
					QTD		YTD				Interest Income		Interest Income		Interest Income		Interest Income
	Nonaccrual		Accrual		Average		Average		Related		Recognized		on		Recognized		on
	Basis		Basis		Investment		Investment		Valuation Reserve		During Impairment		Accrual Basis		During Impairment		Accrual Basis
September 30, 2013
With no valuation reserve:
Commercial real estate	$	238	$	—	$	412	$	501	$	—	$	—	$	—	$	—	$	26
Commercial, financial and agricultural	—		—		147		243		—		—		3		—		9
Commercial construction	—		—		—		193		—		—		—		—		3
One to four family residential real estate	67		—		86		140		—		—		2		—		7
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	10		—		9		4		—		—		—		—		—
With a valuation reserve:
Commercial real estate	$	2,589	$	—	$	2,581	$	2,557	$	1,272	$	—	$	42	$	—	$	102
Commercial, financial and agricultural	767		—		741		373		33		—		5		—		11
Commercial construction	—		—		—		—		—		—		—		—		—
One to four family residential real estate	642		—		560		396		250		—		8		—		19
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—
Total:
Commercial real estate	$	2,827	$	—	$	2,993	$	3,058	$	1,272	$	—	$	42	$	—	$	128
Commercial, financial and agricultural	767		—		888		616		33		—		8		—		20
Commercial construction	—		—		—		193		—		—		—		—		3
One to four family residential real estate	709		—		646		536		250		—		10		—		26
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	10		—		9		4		—		—		—		—		—
Total	$	4,313	$	—	$	4,536	$	4,407	$	1,555	$	—	$	60	$	—	$	177

A summary of past due loans at September 30, 2014, December 31, 2013 and September 30, 2013 is as follows (dollars in thousands):

	September 30,						December 31,						September 30,
	2014						2013						2013
	30-89 days		90+ days				30-89 days		90+ days				30-89 days		90+ days
	Past Due		Past Due/				Past Due		Past Due/				Past Due		Past Due/
	(accruing)		Nonaccrual		Total		(accruing)		Nonaccrual		Total		(accruing)		Nonaccrual		Total
Commercial real estate	$	540	$	227	$	767	$	—	$	572	$	572	$	—	$	2,827	$	2,827
Commercial, financial and agricultural	306		1,735		2,041		4		811		815		100		767		867
Commercial construction	55		—		55		20		—		20		—		—		—
One to four family residential real estate	414		733		1,147		201		611		812		186		709		895
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	55		—		55		14		30		44		31		10		41
Total past due loans	$	1,370	$	2,695	$	4,065	$	239	$	2,024	$	2,263	$	317	$	4,313	$	4,630

A roll-forward of nonaccrual activity for the three months ended September 30, 2014 (dollars in thousands):

	For the Three Months Ended September 30, 2014
				Commercial,					One to four
	Commercial			Financial and			Commercial		family residential			Consumer
	Real Estate			Agricultural			Construction		real estate			Construction		Consumer			Total
NONACCRUAL
Beginning balance	$	454		$	1,808		$	—	$	383		$	—	$	7		$	2,652
Principal payments	(2		)	(79		)	—		(7		)	—		—			(88		)
Charge-offs	(18		)	(3		)	—		(10		)	—		(7		)	(38		)
Advances	—			—			—		—			—		—			—
Class transfers	—			—			—		—			—		—			—
Transfers to OREO	(207		)	—			—		—			—		—			(207		)
Transfers to accruing	—			—			—		—			—		—			—
Transfers from accruing	—			3			—		368			—		—			371
Other	—			6			—		(1		)	—		—			5
Ending balance	$	227		$	1,735		$	—	$	733		$	—	$	—		$	2,695

14

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.    LOANS (Continued)

A roll-forward of nonaccrual activity for the three months ended September 30, 2013 (dollars in thousands):

	For the Three Months Ended September 30, 2013
				Commercial,					One to four
	Commercial			Financial and			Commercial		family residential			Consumer
	Real Estate			Agricultural			Construction		real estate			Construction		Consumer			Total
NONACCRUAL
Beginning balance	$	3,057		$	517		$	—	$	400		$	—	$	9		$	3,983
Principal payments	(26		)	(224		)	—		(12		)	—		(1		)	(263		)
Charge-offs	(23		)	(476		)	—		(24		)	—		—			(523		)
Advances	—			—			—		—			—		—			—
Class transfers	—			—			—		—			—		—			—
Transfers to OREO	(208		)	(37		)	—		—			—		—			(245		)
Transfers to accruing	—			—			—		—			—		—			—
Transfers from accruing	—			966			—		344			—		2			1,312
Other	27			21			—		1								49
Ending balance	$	2,827		$	767		$	—	$	709		$	—	$	10		$	4,313

A roll-forward of nonaccrual activity for the nine months ended September 30, 2014 (dollars in thousands):

	For the Nine Months Ended September 30, 2014
				Commercial,					One to four
	Commercial			Financial and			Commercial		family residential			Consumer
	Real Estate			Agricultural			Construction		real estate			Construction		Consumer			Total
NONACCRUAL
Beginning balance	$	572		$	811		$	—	$	611		$	—	$	30		$	2,024
Principal payments	(104		)	(160		)	—		(29		)	—		(4		)	(297		)
Charge-offs	(18		)	(56		)	—		(13		)	—		(32		)	(119		)
Advances	—			—			—		—			—		—			—
Class transfers	—			—			—		—			—		—			—
Transfers to OREO	(233		)	—			—		(257		)	—		—			(490		)
Transfers to accruing	—			(10		)	—		(127		)	—		—			(137		)
Transfers from accruing	—			1,142			—		539			—		6			1,687
Other	10			8			—		9			—		—			27
Ending balance	$	227		$	1,735		$	—	$	733		$	—	$	—		$	2,695

A roll-forward of nonaccrual activity for the nine months ended September 30, 2013 (dollars in thousands):

	For the Nine Months Ended September 30, 2013
				Commercial,						One to four
	Commercial			Financial and			Commercial			family residential			Consumer
	Real Estate			Agricultural			Construction			real estate			Construction		Consumer			Total
NONACCRUAL
Beginning balance	$	3,071		$	436		$	675		$	505		$	—	$	—		$	4,687
Principal payments	(174		)	(292		)	(100		)	(77		)	—		(1		)	(644		)
Charge-offs	(352		)	(548		)	—			(37		)	—		(4		)	(941		)
Advances	—			—			—			—			—		—			—
Class transfers	—			—			—			—			—		—			—
Transfers to OREO	(208		)	(37		)	(580		)	(107		)	—		—			(932		)
Transfers to accruing	—			—			—			—			—		—			—
Transfers from accruing	443			1,207			—			420			—		15			2,085
Other	47			1			5			5			—		—			58
Ending balance	$	2,827		$	767		$	—		$	709		$	—	$	10		$	4,313

15

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.    LOANS (Continued)

A roll-forward of nonaccrual activity during the year ended December 31, 2013 (dollars in thousands):

				Commercial,						One to four
	Commercial			Financial and			Commercial			family residential			Consumer
	Real Estate			Agricultural			Construction			real estate			Construction		Consumer			Total
NONACCRUAL
Beginning balance	$	3,071		$	436		$	675		$	505		$	—	$	—		$	4,687
Principal payments	(1,478		)	(319		)	(100		)	(88		)	—		(2		)	(1,987		)
Charge-offs	(1,304		)	(616		)	—			(141		)	—		(4		)	(2,065		)
Advances	—			—			—			—			—		—			—
Class transfers	—			—			—			—			—		—			—
Transfers to OREO	(208		)	(37		)	(580		)	(107		)	—		—			(932		)
Transfers to accruing	—			—			—			—			—		—			—
Transfers from accruing	443			1,346			—			434			—		36			2,259
Other	48			1			5			8			—		—			62
Ending balance	$	572		$	811		$	—		$	611		$	—	$	30		$	2,024

Troubled Debt Restructuring

Troubled debt restructurings (“TDR”) are determined on a loan-by-loan basis.  Generally restructurings are related to interest rate reductions, loan term extensions and short term payment forbearance as means to maximize collectability of troubled credits.  If a portion of the TDR loan is uncollectible (including forgiveness of principal), the uncollectible amount will be charged off against the allowance at the time of the restructuring.  In general, a borrower must make at least six consecutive timely payments before the Corporation would consider a return of a restructured loan to accruing status in accordance with FDIC guidelines regarding restoration of credits to accrual status.

The Corporation has, in accordance with generally accepted accounting principles and per recently enacted accounting standard updates, evaluated all loan modifications to determine the fair value impact of the underlying asset.  The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral.

A summary of troubled debt restructurings occurring during the periods indicated is as follows (dollars in thousands):

	September 30,			December 31,			September 30,
	2014			2013			2013
	Number of	Recorded		Number of	Recorded		Number of	Recorded
	Modifications	Investment		Modifications	Investment		Modifications	Investment
Commercial real estate	—	$	—	—	$	—	—	$	—
Commercial, financial and agricultural	—	—		1	528		1	528
Commercial construction	—	—		—	—		—	—
One to four family residential real estate	—	—		—	—		—	—
Consumer construction	—	—		—	—		—	—
Consumer	—	—		—	—		—	—
Total troubled debt restructurings	—	$	—	1	$	528	1	$	528

16

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.    LOANS (Continued)

A roll-forward of troubled debt restructuring during the three months ended September 30, 2014 (dollars in thousands):

			Commercial,					One to four			Consumer and
	Commercial		Financial and		Commercial			family residential			Consumer
	Real Estate		Agricultural		Construction			real estate			Construction		Total
ACCRUING
Beginning balance	$	1,007	$	1,186	$	858		$	98		$	—	$	3,149
Principal payments	—		—		(3		)	(1		)	—		(4		)
Charge-offs	—		—		—			—			—		—
Advances	—		—		—			—			—		—
New restructured	—		—		—			—			—		—
Transferred out of TDR	—		—		—			—			—		—
Transfers to nonaccrual	—		—		—			—			—		—
Ending Balance	$	1,007	$	1,186	$	855		$	97		$	—	$	3,145
NONACCRUAL
Beginning balance	$	—	$	508	$	—		$	89		$	—	$	597
Principal payments	—		—		—			—			—		—
Charge-offs	—		—		—			—			—		—
Advances	—		—		—			—			—		—
New restructured	—		—		—			—			—		—
Transfers to foreclosed properties	—		—		—			—			—		—
Transfers from accruing	—		—		—			—			—		—
Ending Balance	$	—	$	508	$	—		$	89		$	—	$	597
TOTALS
Beginning balance	$	1,007	$	1,694	$	858		$	187		$	—	$	3,746
Principal payments	—		—		(3		)	(1		)	—		(4		)
Charge-offs	—		—		—			—			—		—
Advances	—		—		—			—			—		—
New restructured	—		—		—			—			—		—
Transfers out of TDRs	—		—		—			—			—		—
Tansfers to nonaccrual	—		—		—			—			—		—
Transfers to foreclosed properties	—		—		—			—			—		—
Transfers from accruing	—		—		—			—			—		—
Ending Balance	$	1,007	$	1,694	$	855		$	186		$	—	$	3,742

17

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.    LOANS (Continued)

A roll-forward of troubled debt restructuring during the three months ended September 30, 2013 (dollars in thousands):

				Commercial,					One to four			Consumer and
	Commercial			Financial and			Commercial		family residential			Consumer
	Real Estate			Agricultural			Construction		real estate			Construction		Total
ACCRUING
Beginning balance	$	3,563		$	2,174		$	858	$	100		$	—	$	6,695
Principal payments	(20		)	(25		)	—		(1		)			(46		)
Charge-offs	—			(400		)	—		—			—		(400		)
Advances	—			—			—		—			—		—
New restructured	—			—			—		—			—		—
Transferred out of TDR	—			—			—		—			—		—
Transfers to nonaccrual	—			(528		)	—		—			—		(528		)
Ending Balance	$	3,543		$	1,221		$	858	$	99		$	—	$	5,721
NONACCRUAL
Beginning balance	$	2,169		$	—		$	—	$	106		$	—	$	2,275
Principal payments	(87		)	—			—		(14		)	—		(101		)
Charge-offs	—			—			—		—			—		—
Advances	—			—			—		—			—		—
New restructured	—			—			—		—			—		—
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			528			—		—			—		528
Ending Balance	$	2,082		$	528		$	—	$	92		$	—	$	2,702
TOTALS
Beginning balance	$	5,732		$	2,174		$	858	$	206		$	—	$	8,970
Principal payments	(107		)	(25		)	—		(15		)	—		(147		)
Charge-offs	—			(400		)	—		—			—		(400		)
Advances	—			—			—		—			—		—
New restructured	—			—			—		—			—		—
Transfers out of TDRs	—			—			—		—			—		—
Tansfers to nonaccrual	—			(528		)	—		—			—		(528		)
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			528			—		—			—		528
Ending Balance	$	5,625		$	1,749		$	858	$	191		$	—	$	8,423

18

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.    LOANS (Continued)

A roll-forward of troubled debt restructuring during the nine months ended September 30, 2014 (dollars in thousands):

				Commercial,						One to four			Consumer and
	Commercial			Financial and			Commercial			family residential			Consumer
	Real Estate			Agricultural			Construction			real estate			Construction		Total
ACCRUING
Beginning balance	$	3,520		$	1,186		$	858		$	99		$	—	$	5,663
Principal payments	(2,513		)	—			(3		)	(4		)	—		(2,520		)
Charge-offs	—			—			—			—			—		—
Advances	—			—			—			—			—		—
New restructured	—			—			—			—			—		—
Transferred out of TDRs	—			—			—			91			—		91
Transfers to nonaccrual	—			—			—			(89		)	—		(89		)
Ending Balance	$	1,007		$	1,186		$	855		$	97		$	—	$	3,145
NONACCRUAL
Beginning balance	$	—		$	523		$	—		$	91		$	—	$	614
Principal payments	—			(15		)	—			—			—		(15		)
Charge-offs	—			—			—			—			—		—
Advances	—			—			—			—			—		—
New restructured	—			—			—			—			—		—
Transfers to foreclosed properties	—			—			—			(91		)	—		(91		)
Transfers from accruing	—			—			—			89			—		89
Ending Balance	$	—		$	508		$	—		$	89		$	—	$	597
TOTALS
Beginning balance	$	3,520		$	1,709		$	858		$	190		$	—	$	6,277
Principal payments	(2,513		)	(15		)	(3		)	(4		)	—		(2,535		)
Charge-offs	—			—			—			—			—		—
Advances	—			—			—			—			—		—
New restructured	—			—			—			—			—		—
Transfers out of TDR	—			—			—			91			—		91
Transfers to nonaccrual	—			—			—			(89		)	—		(89		)
Transfers to foreclosed properties	—			—			—			89			—		89
Transfer from accruing	—			—			—			(91		)	—		(91		)
Ending Balance	$	1,007		$	1,694		$	855		$	186		$	—	$	3,742

19

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.    LOANS (Continued)

A roll-forward of troubled debt restructuring during the nine months ended September 30, 2013 (dollars in thousands):

				Commercial,					One to four			Consumer and
	Commercial			Financial and			Commercial		family residential			Consumer
	Real Estate			Agricultural			Construction		real estate			Construction		Total
ACCRUING
Beginning balance	$	3,611		$	1,221		$	858	$	102		$	—	$	5,792
Principal payments	(68		)	(25		)	—		(3		)	—		(96		)
Charge-offs	—			(400		)	—		—			—		(400		)
Advances	—			—			—		—			—		—
New restructured	—			953			—		—			—		953
Transferred out of TDRs	—			—			—		—			—		—
Transfers to nonaccrual	—			(528		)	—		—			—		(528		)
Ending Balance	$	3,543		$	1,221		$	858	$	99		$	—	$	5,721
NONACCRUAL
Beginning balance	$	2,162		$	—		$	—	$	102		$	—	$	2,264
Principal payments	(87		)	—			—		(14		)	—		(101		)
Charge-offs	—			—			—		—			—		—
Advances	—			—			—		—			—		—
New restructured	7			—			—		4			—		11
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			528			—		—			—		528
Ending Balance	$	2,082		$	528		$	—	$	92		$	—	$	2,702
TOTALS
Beginning balance	$	5,773		$	1,221		$	858	$	204		$	—	$	8,056
Principal payments	(155		)	(25		)	—		(17		)	—		(197		)
Charge-offs	—			(400		)	—		—			—		(400		)
Advances	—			—			—		—			—		—
New restructured	7			953			—		4			—		964
Transfers out of TDR	—			—			—		—			—		—
Transfers to nonaccrual	—			(528		)	—		—			—		(528		)
Transfers to foreclosed properties	—			528			—		—			—		528
Transfer from accruing	—			—			—		—			—		—
Ending Balance	$	5,625		$	1,749		$	858	$	191		$	—	$	8,423

20

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.    LOANS (Continued)

A roll-forward of troubled debt restructuring during the year ended December 31, 2013 (dollars in thousands):

				Commercial,					One to four			Consumer and
	Commercial			Financial and			Commercial		family residential			Consumer
	Real Estate			Agricultural			Construction		real estate			Construction		Total
ACCRUING
Beginning balance	$	3,611		$	1,221		$	858	$	102		$	—	$	5,792
Principal payments	(91		)	(460		)			(3		)	—		(554		)
Charge-offs	—			—					—			—		—
Advances	—			—					—			—		—
New restructured	—			953					—			—		953
Transferred out of TDR	—			—					—			—		—
Transfers to nonaccrual	—			(528		)			—			—		(528		)
Ending Balance	$	3,520		$	1,186		$	858	$	99		$	—	$	5,663
NONACCRUAL
Beginning balance	$	2,162		$	—		$	—	$	102		$	—	$	2,264
							—
Principal payments	(1,376		)	(5		)	—		(15		)	—		(1,396		)
Charge-offs	(793		)	—			—		—			—		(793		)
Advances	—			—			—		—			—		—
New restructured	7			528			—		4			—		539
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			—			—		—			—		—
Ending Balance	$	—		$	523		$	—	$	91		$	—	$	614
TOTALS
Beginning balance	$	5,773		$	1,221		$	858	$	204		$	—	$	8,056
Principal payments	(1,467		)	(465		)	—		(18		)	—		(1,950		)
Charge-offs	(793		)	—			—		—			—		(793		)
Advances	—			—			—		—			—		—
New restructured	7			1,481			—		4			—		1,492
Transfers out of TDRs	—			—			—		—			—		—
Tansfers to nonaccrual	—			(528		)	—		—			—		(528		)
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			—			—		—			—		—
Ending Balance	$	3,520		$	1,709		$	858	$	190		$	—	$	6,277

Insider Loans

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):

	September 30,			December 31,			September 30,
	2014			2013			2013
Loans outstanding, beginning of period	$	9,043		$	11,297		$	11,297
New loans	33			496			496
Net activity on revolving lines of credit	1,052			(266		)	(263		)
Principal payments	(1,614		)	(2,484		)	(1,442		)
Loans outstanding, end of period	$	8,514		$	9,043		$	10,088

There were no loans to related parties classified substandard as of September 30, 2014, December 31, 2013 or September 30, 2013.  In addition to the outstanding balances above, there were unfunded commitments of $.517 million to related parties at September 30, 2014.

21

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6.MORTGAGE SERVICING RIGHTS

Mortgage servicing rights (“MSRs”) are recorded when loans are sold in the secondary market with servicing retained.  As of September 30, 2014, the Corporation had obligations to service approximately $144.051 million of residential first mortgage loans.  The valuation is based upon the net present value of the projected revenues over the expected life of the loans being serviced, as reduced by estimated internal costs to service these loans.  The fair value of the capitalized servicing rights approximates the carrying value.  The key economic assumptions used in determining the fair value of the mortgage servicing rights include an annual constant prepayment speed of 9.77% and a discount rate of 8.83% for September 30, 2014.

The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances (dollars in thousands):

	Nine months ended			Year ended			Nine months ended
	September 30,			December 31,			September 30,
	2014			2013			2013
Balance at beginning of period	$	1,129		$	638		$	638
Additions from loans sold with servicing retained	375			675			325
Amortization	(218		)	(184		)	(129		)
Estimated Valuation of MSRs at end of period	$	1,286		$	1,129		$	834

7.BORROWINGS

Borrowings consist of the following at September 30, 2014, December 31, 2013 and September 30, 2013 (dollars in thousands):

	September 30,		December 31,		September 30,
	2014		2013		2013
Federal Home Loan Bank fixed rate advances at September 30, 2014 with a weighted average rate of 1.82% maturing in 2014, 2016 and 2018	$	35,000	$	35,000	$	35,000
Correspondent bank line of credit - holding company	4,500		2,000		—
Bank line of credit - wholly-owned asset based lending subsidiary	1,830		—		—
Correspondent bank term note, current floor rate of 4%, maturing December 28, 2017	2,800		—		—
USDA Rural Development, fixed-rate note payable, maturing August 24, 2024, interest payable at 1%	779		852		852
	$	44,909	$	37,852	$	35,852

The Federal Home Loan Bank borrowings are collateralized at September 30, 2014 by the following:  a collateral agreement on the Corporation’s one to four family residential real estate loans with a book value of approximately $42.041 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $4.167 million and $4.300 million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $3.060 million.  Prepayment of the advances is subject to the provisions and conditions of the credit policy of the Federal Home Loan Bank of Indianapolis in effect as of September 30, 2014.

The USDA Rural Development borrowing is collateralized by loans totaling $.779 million originated and held by the Corporation’s wholly owned subsidiary, First Rural Relending, and an assignment of a demand deposit account in the amount of $.720 million, and guaranteed by the Corporation.

The Corporation currently has two banking borrowing relationships.  The first relationship consists of a non-revolving line of credit and a term note.  The line of credit bears interest at 90-day LIBOR plus 2.75%, with a floor rate of 4.00% and has an initial term that expires on December 28, 2017.  The term note bears the same interest and matures on March 22, 2017 and requires quarterly principal payments of $100,000 beginning June 30, 2014.  The second borrowing relationship consists of a $10 million revolving line of credit, which can be increased to $25 million upon request, used to support asset based lending activities at a wholly-owned subsidiary that currently bears interest at 90-day LIBOR plus 2.75% and has an initial term that expires on September 10, 2016.

22

 MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

8.     STOCK COMPENSATION PLANS

On May 22, 2012, the Company’s shareholders approved the Mackinac Financial Corporation 2012 Incentive Compensation Plan, under which current and prospective employees, non-employee directors and consultants may be awarded incentive stock options, non-statutory stock options, shares of restricted stock units (“RSUs”), or stock appreciation rights.  The aggregate number of shares of the Company’s common stock issuable under the plan is 575,000, which included 392,152 option shares outstanding at that time.  Awards are made at the discretion of management.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

The Corporation, in August 2012 and March 2014, granted Restricted Stock Units (“RSUs”) to members of the Board of Directors and Management.  In August 2012, 148,500 RSUs were granted at a market value of $7.91 and will vest equally over a four year term.  In exchange for the grant of these RSUs various previously issued stock option awards were surrendered.  In March 2014, 52,774 RSUs were granted at a market value of $12.95, also vesting equally over a four year term.  The RSUs were awarded at no cost to the employee.  Compensation cost to be recognized over the four —year vesting periods, is $1.175 million and $.683 million, respectively.  On August 31, 2013, the Corporation issued 37,125 shares of its common stock for vested RSUs.  As of September 30, 2014, RSUs totaling 127,024 were unvested and unrecognized compensation expense was $1.154 million.

A summary of stock option transactions for the nine months ended September 30, 2014 and 2013, and the year ended December 31, 2013, is as follows:

	September 30,		December 31,			September 30,
	2014		2013			2013
Outstanding shares at beginning of year	237,152		242,152			242,152
Granted during the period	—		—			—
Exercised during the period	—		—			—
Expired / forfeited during the period	—		—			(5,000		)
Surrendered/Echanged for restricted stock	—		(5,000		)	—
Outstanding shares at end of period	237,152		237,152			237,152
Exercisable shares at end of period	124,861		124,861			125,861
Weighted average exercise price per share at end of period	$	9.80	$	9.80		$	9.88
Shares available for grant at end of period	—		—			—

There were no options granted in the first nine months of 2014 and 2013.

Following is a summary of the options outstanding and exercisable at September 30, 2014:

					Weighted Average
Exercise		Number			Remaining
Price		Outstanding	Exercisable	Unvested Options	Contractual Life-Years
$	9.75	217,152	120,861	96,291	.23
$	10.65	10,000	2,000	8,000	.79
$	12.00	10,000	2,000	8,000	2.21
		237,152	124,861	112,291	.34

23

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9.     INCOME TAXES

A valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred tax asset will not be realized.  The Corporation, as of September 30, 2014 had a net operating loss and tax credit carryforwards for tax purposes of approximately $16.3 million, and $2.4 million, respectively.  The net operating loss carryforwards expire twenty years from the date they originated.  These carryforwards, if not utilized, will begin to expire in the year 2023.  A portion of the NOL and all of the credit carryforwards are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue Code.  The annual limitation is $1.400 million for the NOL and the equivalent value of tax credits, which is approximately $.476 million.  These limitations for use were established in conjunction with the recapitalization of the Corporation in December 2004.

The Corporation has reported deferred tax assets of $8.681 million at September 30, 2014, which is net of a valuation allowance of $.760 million.  Management evaluated the deferred tax valuation allowance as of September 30, 2014 and determined that no adjustment to the valuation was warranted.  The remaining valuation allowance pertains to the existing tax credit carryovers, which will only be utilized after all net operating loss carryforwards.  Since a portion of these tax credits may expire before that occurs, a valuation allowance for these has been established.  The Corporation will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted.

10.  FAIR VALUE MEASUREMENTS

Fair value estimates, methods, and assumptions are set forth below for the Corporation’s financial instruments:

Cash, cash equivalents, and interest-bearing deposits - The carrying values approximate the fair values for these assets.

Securities - Fair values are based on quoted market prices where available.  If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Federal Home Loan Bank stock — Federal Home Loan Bank stock is carried at cost, which is its redeemable value and approximates its fair value, since the market for this stock is limited.

Loans - Fair values are estimated for portfolios of loans with similar financial characteristics.  Loans are segregated by type such as commercial, residential mortgage, and other consumer.  The fair value of loans is calculated by discounting scheduled cash flows using discount rates reflecting the credit and interest rate risk inherent in the loan.

The methodology in determining fair value of nonaccrual loans is to average them into the blended interest rate at 0% interest.  This has the effect of decreasing the carrying amount below the risk-free rate amount and, therefore, discounts the estimated fair value.

Impaired loans are measured at the estimated fair value of the expected future cash flows at the loan’s effective interest rate or the fair value of the collateral for loans which are collateral dependent.  Therefore, the carrying values of impaired loans approximate the estimated fair values for these assets.

Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits and savings, is equal to the amount payable on demand at the reporting date.  The fair value of time deposits is based on the discounted value of contractual cash flows applying interest rates currently being offered on similar time deposits.

Borrowings - Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.  The fair value of borrowed funds due on demand is the amount payable at the reporting date.

Accrued interest - The carrying amount of accrued interest approximates fair value.

24

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10.  FAIR VALUE MEASUREMENTS (Continued)

Off-balance-sheet instruments - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the counterparties.  Since the differences in the current fees and those reflected to the off-balance-sheet instruments at year-end are immaterial, no amounts for fair value are presented.

The following table presents information for financial instruments at September 30, 2014, December 31, 2013 and September 30, 2013 (dollars in thousands):

		September 30, 2014				December 31, 2013				September 30, 2013
	Level in Fair	Carrying		Estimated		Carrying		Estimated		Carrying		Estimated
	Value Hierarchy	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	22,401	$	22,401	$	18,219	$	18,219	$	22,794	$	22,794
Interest-bearing deposits	Level 2	235		235		10		10		10		10
Securities available for sale	Level 2	48,742		48,742		44,388		44,388		48,096		48,096
Federal Home Loan Bank stock	Level 2	3,060		3,060		3,060		3,060		3,060		3,060
Net loans	Level 2	513,094		513,117		479,171		479,538		467,536		460,009
Accrued interest receivable	Level 3	1,457		1,457		1,351		1,351		1,536		1,536
Total financial assets		$	588,989	$	589,012	$	546,199	$	546,566	$	543,032	$	535,505
Financial liabilities:
Deposits	Level 2	$	491,206	$	491,912	$	466,299	$	465,431	$	461,688	$	459,862
Borrowings	Level 2	44,909		45,285		37,852		37,487		35,852		35,548
Accrued interest payable	Level 3	184		184		182		182		200		200
Total financial liabilties		$	536,299	$	537,381	$	504,333	$	503,100	$	497,740	$	495,610

Limitations - Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.  Fair value estimates are based on existing on-and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, other assets, and other liabilities.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The following is information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at September 30, 2014, and the valuation techniques used by the Corporation to determine those fair values.

Level 1:In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access.

Level 2:Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly.  These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3:Level 3 inputs are unobservable inputs, including inputs available in situations where there is little, if any, market activity for the related asset or liability.

25

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10.  FAIR VALUE MEASUREMENTS (Continued)

The fair value of all investment securities at September 30, 2014 and September 30, 2013 were based on level 2 inputs.  There are no other assets or liabilities measured on a recurring basis at fair value.  For additional information regarding investment securities, please refer to “Note 4 Investment Securities.”

The Corporation had no Level 3 assets or liabilities on a recurring basis as of September 30, 2014, December 31, 2013 or September 30, 2013.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation.  The Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

The Corporation also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis.  These assets include loans and other real estate owned.  The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

Assets Measured at Fair Value on a Nonrecurring Basis at September 30, 2014

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Nine Months Ended
(dollars in thousands)	September 30, 2014		(Level 1)		(Level 2)		(Level 3)		September 30, 2014		September 30, 2014
Assets
Impaired loans	$	2,695	$	—	$	—	$	2,695	$	10	$	440
Other real estate owned	1,843		—		—		1,843		176		190
									$	186	$	630

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2013

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Year Ended
(dollars in thousands)	December 31, 2013		(Level 1)		(Level 2)		(Level 3)		December 31, 2013
Assets
Impaired loans	$	2,024	$	—	$	—	$	2,024	$	2,075
Other real estate owned	1,884		—		—		1,884		265
									$	2,340

Assets Measured at Fair Value on a Nonrecurring Basis at September 30, 2013

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Nine Months Ended
(dollars in thousands)	September 30, 2013		(Level 1)		(Level 2)		(Level 3)		September 30, 2013		September 30, 2013
Assets
Impaired loans	$	4,313	$	—	$	—	$	4,313	$	531	$	949
Other real estate owned	2,568		—		—		2,568		57		146
									$	588	$	1,095

The Corporation had no investments subject to fair value measurement on a nonrecurring basis.

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired.  The Corporation estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions.  These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals).

26

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

11. SHAREHOLDER’S EQUITY

In August 2012 the Corporation consummated the $7.000 million rights offering and the investment by Steinhardt Capital Investors, LLLP (“SCI”) by issuing 2,140,123 shares of common stock for net proceeds of $11.506 million.  Also, in August 2012, the Corporation exited the TARP Capital Purchase Program (“CPP”) when the Corporation’s 11,000 Series A Preferred Shares, issued in April, 2009 to the U.S. Treasury, were publically offered and sold.  The Corporation repurchased the 379,310 of Common Stock Warrants issued to the U.S. Treasury under the CPP in December, 2012 for $1.3 million. During 2013, the Corporation redeemed all of the outstanding Series A Preferred Shares.

The Corporation currently has a share repurchase program.  The program is conducted under authorizations from time to time by the Board of Directors.  The Corporation repurchased 55,594 shares in 2013 and 13,700 shares in the first quarter of 2014.  The share repurchases were conducted under Board authorizations made and publically announced of $600,000 on February 27, 2013 and an additional $600,000 on December 17, 2013.  Neither of these authorizations has an expiration date.

12.  COMMITMENTS, CONTINGENCIES AND CREDIT RISK

Financial Instruments With Off-Balance-Sheet Risk

The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Corporation’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments.  The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.  These commitments are as follows (dollars in thousands):

	September 30,		December 31,		September 30,
	2013		2013		2013
Commitments to extend credit:
Variable rate	$	54,962	$	36,039	$	32,061
Fixed rate	19,092		15,070		24,536
Standby letters of credit - Variable rate	5,730		5,077		4,741
Credit card commitments - Fixed rate	3,286		3,152		3,162
	$	83,070	$	59,338	$	64,500

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.

27

MACKINAC FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

12.  COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Continued)

Legal Proceedings and 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 real estate loans to operators of nonresidential buildings.  This concentration at September 30, 2014 represents $100.912 million, or 26.30%, compared to $101.406 million, or 28.68%, of the commercial loan portfolio on September 30, 2013.  The remainder of the commercial loan portfolio is diversified in such categories as hospitality and tourism, real estate agents and managers, new car dealers, gaming, petroleum, forestry, agriculture and construction.  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 sector.

13.  PENDING ACQUISITION

On July 18, 2014, the Corporation announced the signing of a definitive agreement to acquire Peninsula Financial Corporation (“Peninsula”) for $13.285 million.  The purchase price of Peninsula contemplates a special dividend to Peninsula shareholders prior to the consummation that would reduce the acquired equity to $10.5 million.  Peninsula is headquartered in Marquette County, Michigan and is the parent of Peninsula Bank with September 30 assets of approximately $132 million and six banking offices.  The consummation of this transaction is expected to occur early in the fourth quarter of 2014.  The Corporation has received all regulatory approvals for the transaction; however, the acquisition is subject to Peninsula shareholder approval, with a vote scheduled for November 24, 2014.

The Corporation, in connection with this transaction, filed a proxy statement/prospectus on Form S-4 on September 3, 2014, an amendment to the S-4 on October 20, 2014, and a final proxy statement/prospectus on October 29, 2014. These documents provide more detailed pro-forma financial information with respect to the pending acquisition.

28

Forward Looking Statements/Risk Factors

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:

RISK FACTORS

Risks Related to our Lending and Credit Activities

·Our business may be adversely affected by conditions in the financial markets and economic conditions generally, as our borrowers’ ability to repay loans and the value of the collateral securing our loans decline.

·Weakness in the markets for residential or commercial real estate, including the secondary residential mortgage loan markets, could reduce our net income and profitability.

·Our allowance for loan losses may be insufficient.

Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our control, may require an increase in our allowance for loan losses.

Risks Related to Our Operations

·We are subject to interest rate risk.

Our earnings and cash flows are largely dependent upon our net interest income, which is the difference between interest income on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds.  There are many factors which influence interest rates that are beyond our control, including but not limited to general economic conditions and governmental policy, in particular, the policies of the FRB.

·Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition.

·Our controls and procedures may fail or be circumvented.

·Impairment of deferred income tax assets could require charges to earnings, which could result in an adverse impact on our results of operations.

In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some allowance requires management to evaluate all available evidence, both negative and positive.  Positive evidence necessary to overcome the negative evidence includes whether future taxable income in sufficient amounts and character within the carry back and carry forward periods is available under the tax law, including the use of tax planning strategies.  When negative evidence (e.g. cumulative losses in recent years, history of operating loss or tax credit carry forwards expiring unused) exists, more positive evidence than negative evidence will be necessary.  At September 30, 2014, the Corporation recorded net deferred tax assets of approximately $8.681 million.  If an additional valuation allowance becomes necessary with respect to such balance, it could have a material adverse effect on our business, results of operations and financial condition.

·Our information systems may experience an interruption or breach in security.

29

Risks Related to Legal and Regulatory Compliance

·We operate in a highly regulated environment, which could increase our cost structure or have other negative impacts on our operations.

·The full impact of the recently enacted Dodd-Frank Act is currently unknown given that many of the details and substance of the new laws will be implemented through agency rulemaking.

Strategic Risks

·Maintaining or increasing our market share may depend on lowering prices and market acceptance of new products and services.

·Future growth or operating results may require us to raise additional capital but that capital may not be available.

Reputation Risks

·Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of our computer system or otherwise, could severely harm our business.

Liquidity Risks

·We could experience an unexpected inability to obtain needed liquidity.

The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds.  We seek to ensure our funding needs are met by maintaining an appropriate level of liquidity through asset/liability management.

Risks Related to an Investment in Our Common Stock

·Limited trading activity for shares of our common stock may contribute to price volatility.

·Our securities are not an insured deposit.

·You may not receive dividends on your investment in common stock.

Our ability to pay dividends is dependent upon our receipt of dividends from the Bank, which is subject to regulatory restrictions.  Such restrictions, which govern state-chartered banks, generally limit the payment of dividends on bank stock to the bank’s undivided profits after all payments of all necessary expenses, provided that the bank’s surplus equals or exceeds its capital.

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.

30

 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, 2013.  Throughout this discussion, the term “Bank” refers to mBank, the principal banking subsidiary of the Corporation.

FINANCIAL OVERVIEW

The Corporation recorded third quarter 2014 net income available to common shareholders of $.886 million or $.16 per share compared to net income of $.846 million, or $.15 per share for the third quarter of 2013.  Income for the nine months ended September 30, 2014 totaled $2.352 million, or $.43 per share, compared to $2.719 million, or $.49 per share for the same period in 2013.

Weighted average shares totaled 5,532,966 shares for the nine month period in 2014 and 5,540,200 shares in the 2013 third quarter compared to 5,559,108 shares and 5,562,835 shares in 2013.

The net interest margin for the third quarter of 2014 increased to $5.886 million, or 4.18%, compared to $5.348 million, of 4.12% in the third quarter of 2013.  The nine month margin in 2014 was $17.138 million, or 4.20% compared to $15.773 million, or 4.15%.

Total assets of the Corporation at September 30, 2014 were $613.943 million, up by $46.026 million, or 8.10% from the $567.917 million in total assets reported at September 30, 2013 and up by $41.143 million, or 7.18%, from total assets of $572.800 million at year-end 2013.  The loan portfolio increased $34.541 million, or 7.14%, from December 31, 2013 balances of $483.832 million.  Deposits totaled $491.206 million at September 30, 2014, an increase of $24.907 million from the $466.299 million at December 31, 2013.

FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents increased $4.182 million during the first nine months of 2014.  See further discussion of the change in cash and cash equivalents in the Liquidity section.

Investment Securities

Securities available for sale increased $4.354 million from December 31, 2013 to September 30, 2014, with the balance on September 30, 2014, totaling $48.742 million.  Investment securities are utilized in an effort to manage interest rate risk and liquidity.  As of September 30, 2014, investment securities with an estimated fair value of $4.300 million were pledged to secure Federal Home Loan Bank borrowings.

Loans

Through the first nine months of 2014, loan balances increased by $34.541 million, or 7.14%, from December 31, 2013 balances of $483.832 million.  During the first nine months of 2014, the Bank had total loan production of $140.781 million, which included $21.395 million of secondary market loan production.  This loan production, however, was offset by loan principal runoff, paydowns and amortization, SBA/USDA loan sales of $4.724 million, and nonperforming loans transferred to other real estate owned (“OREO”) amounting to $.488 million.

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 a diligent loan approval process and exception reporting, management can effectively manage the risk in the loan portfolio.  Management intends to continue loan growth within its markets for mortgage, consumer, and commercial loan products while concentrating on loan quality, industry concentration issues, and competitive pricing.

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Following is a summary of the loan portfolio at September 30, 2014, December 31, 2013 and September 30, 2013 (dollars in thousands):

	September 30,		Percent of		December 31,		Percent of		September 30,		Percent of
	2014		Total		2013		Total		2013		Total
Commercial real estate	$	272,803	52.63	%	$	268,809	55.56	%	$	257,961	54.60	%
Commercial, financial, and agricultural	98,714		19.04		79,655		16.46		79,511		16.83
One to four family residential real estate	110,310		21.28		103,768		21.45		98,770		20.90
Construction:
Consumer	8,729		1.68		6,895		1.43		5,734		1.21
Commercial	12,242		2.36		10,904		2.25		16,054		3.40
Consumer	15,575		3.00		13,801		2.85		14,465		3.06
Total loans	$	518,373	100.00	%	$	483,832	100.00	%	$	472,495	100.00	%

Following is a table showing the significant industry types in the commercial loan portfolio as of September 30, 2014, December 31, 2013 and September 30, 2013 (dollars in thousands):

	September 30, 2014						December 31, 2013						September 30, 2013
	Outstanding		Percent of		Percent of		Outstanding		Percent of		Percent of		Outstanding		Percent of		Percent of
	Balance		Loans		Capital		Balance		Loans		Capital		Balance		Loans		Capital
Real estate - lessors of nonresidential buildings	$	100,912	26.30	%	150.32	%	$	100,333	27.92	%	153.77	%	$	101,406	28.68	%	151.25	%
Hospitality and tourism	42,538		11.08		63.36		45,360		12.62		106.90		41,473		11.73		61.86
Lessors of residential buildings	16,262		4.24		24.22		14,191		3.95		21.75		14,573		4.12		21.74
Commercial construction	12,242		3.19		18.24		10,904		3.03		16.71		16,054		4.54		23.95
Gasoline stations and convenience stores	11,626		3.03		17.32		11,534		3.21		17.68		10,897		3.09		16.25
Real estate agents and managers	9,810		2.55		14.61		10,922		3.04		16.74		10,975		3.10		16.37
Other	190,369		49.61		283.57		166,124		46.23		254.60		158,148		44.74		235.88
Total Commercial Loans	$	383,759	100.00	%			$	359,368	100.00	%			$	353,526	100.00	%

Management recognizes the additional risk presented by the concentration in certain segments of the portfolio.  On a historical basis, the Corporation’s highest concentration of credit risk was the hospitality and tourism industry.  Management does not consider the current loan concentrations in hospitality and tourism to be problematic, and has no intention of further reducing loans to this industry segment.  Management does not believe that its current portfolio composition has increased exposure related to any specific industry concentration as of September 30, 2014.  The current concentration of real estate related loans represents a broad customer base composed of a high percentage of owner occupied developments.

Our residential real estate portfolio predominantly includes one to four family adjustable rate mortgages that have repricing terms generally from one to three years, construction loans to individuals and bridge financing loans for qualifying customers.  As of September 30, 2014, our residential loan portfolio totaled $110.310 million, or 21.28% of our total outstanding loans.

The Corporation has also extended credit to governmental units.  Tax-exempt loans and leases decreased from $1.526 million at the end of December 31, 2013 to $1.237 million at September 30, 2014.

Due to the seasonal nature of many of the Corporation’s commercial loan customers, loan payment terms provide flexibility by structuring payments to coincide with the customer’s business cycle.  The lending staff evaluates the collectability of the past due loans based on documented collateral values and payment history.  The Corporation discontinues the accrual of interest on loans when, in the opinion of management, there is an indication that the borrower may be unable to meet the 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.

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Credit Quality

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 recoveries for the nine months ended September 30, 2014 amounted to $.057 million, compared to net charge-offs of $1.109 million, or .32% annualized, of average loans outstanding, for the same period in 2013.  The current reserve balance is representative of the relevant risk inherent within the Corporation’s loan portfolio.  Additions or reductions to the reserve in future periods will be dependent upon a combination of future loan growth, nonperforming loan balances and charge-off activity.

The table below shows period end balances of nonperforming assets (dollars in thousands):

	September 30,			December 31,			September 30,
	2014			2013			2013
Nonperforming Assets:
Nonaccrual Loans	$	2,098		$	1,410		$	4,313
Loans past due 90 days or more	—			—			—
Restructured loans	597			614			—
Total nonperforming loans	2,695			2,024			4,313
Other real estate owned	1,843			1,884			2,568
Total nonperforming assets	$	4,538		$	3,908		$	6,881
Nonperforming loans as a % of loans	.52		%	.42		%	.91		%
Nonperforming assets as a % of assets	.74		%	.68		%	1.21		%
Reserve for Loan Losses:
At period end	$	5,279		$	4,661		$	4,959
As a % of loans	1.02		%	.96		%	1.05		%
As a % of nonperforming loans	195.88		%	230.29		%	114.98		%
As a % of nonaccrual loans	251.62		%	330.57		%	114.98		%
Texas ratio*	6.27		%	5.59		%	9.56		%

*calculated by taking total nonperforming assets divided by total equity plus reserve for loan losses

The following ratios provide additional information relative to the Corporation’s credit quality:

	At Period End
	September 30, 2014		December 31, 2013		September 30, 2013
Total loans, at period end	$	518,373	$	483,832	$	472,495
Average loans for the period	$	496,383	$	462,500	$	456,831

	For the Period Ended
	Nine Months Ended			Twelve Months Ended			Nine Months Ended
	September 30, 2014			December 31, 2013			September 30, 2013
Net charge-offs (recoveries) during the period	$	(57	)	$	2,232		$	1,109
Net charge-offs to average loans, annualized	N/M		%	.48		%	.32		%
Net charge-offs to beginning allowance balance	N/M		%	42.78		%	21.27		%

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 reviews the Corporation’s loans, related collateral evaluations, and the overall lending process.  The Corporation also utilizes an outside loan consultant to perform a review of the loan portfolio.  Historically, this independent review has provided findings similar to management as to the overall adequacy of the loan loss reserve and has substantiated the Corporation’s loan rating system.  In 2014, the Corporation will again utilize a consultant for loan review.

As of September 30, 2014, the allowance for loan losses represented 1.02% of total loans.  At September 30, 2014, the allowance included specific reserves in the amount of $1.615 million, as compared to specific reserves of $1.111 million at December 31, 2013 and $2.479 million at September 30, 2013.  In management’s opinion, the allowance for loan losses is adequate to cover probable losses related to specifically identified loans, as well as probable losses inherent in the balance of the loan portfolio.

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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” or in some cases, “other assets” on the balance sheet.

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

	Nine Months Ended			Year Ended			Nine Months Ended
	September 30 2014			December 31, 2012			September 30 2013
Balance at beginning of period	$	1,884		$	3,212		$	3,212
Other real estate transferred from loans due to foreclosure	488			932			932
Other real estate sold	(339		)	(1,996		)	(1,429		)
Writedowns on other real estate held for sale	(142		)	(231		)	(134		)
Loss on sale of other real estate held for sale	(48		)	(33		)	(13		)
Balance at end of period	$	1,843		$	1,884		$	2,568

During the first nine months of 2014, the Corporation received real estate in lieu of loan payments of $.488 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 balances and any additional reductions in the fair value result in a write-down of other real estate.

Deposits

The Corporation had an increase in deposits in the first nine months of 2014.  Total deposits increased by $24.907 million, or 5.34 %, in the first nine months of 2014.  The increase in deposits for the first nine months of 2014 is composed of a decrease in noncore deposits of $3.450 million and an increase in core deposits of $28.357 million.  In recent years, the Corporation has strategically emphasized the growth of core deposits.  This strategic initiative is supported with an individual incentive plan, along with the introduction of several new deposit products and competitive deposit pricing.  The core deposit balances increased primarily in transactional account deposits, our lowest cost of funds.

Management continues to monitor existing deposit products in order to stay competitive as to both terms and pricing.  It is the intent of management to be aggressive in its markets to grow core deposits with an emphasis placed on transactional deposits.

The following table represents detail of deposits at the end of the periods indicated (dollars in thousands):

	September 30,				December 31,				September 30,
	2014		% of Total		2013		% of Total		2013		% of Total
Noninterest bearing	$	84,073	17.11	%	$	72,936	15.64	%	$	70,063	15.17	%
NOW, money market, checking	173,793		35.38		149,123		31.98		158,588		34.35
Savings	15,263		3.11		13,039		2.80		12,694		2.75
Certificates of Deposit <$100,000	130,821		26.63		140,495		30.13		133,821		28.99
Total core deposits	403,950		82.23		375,593		80.55		375,166		81.26
Certificates of Deposit >$100,000	24,891		5.07		23,159		4.97		23,816		5.16
Brokered CDs	62,365		12.70		67,547		14.48		62,706		13.58
Total non-core deposits	87,256		17.77		90,706		19.45		86,522		18.74
Total deposits	$	491,206	100.00	%	$	466,299	100.00	%	$	461,688	100.00	%

Borrowings

The Corporation also utilizes FHLB borrowings as a source of funding.  At September 30, 2014, this source of funding totaled $35 million and the Corporation secured this funding by pledging loans and investments.  The $35 million of FHLB borrowings has a weighted average maturity of 1.71 years and a weighted average rate of 1.79% at September 30, 2014.  The Corporation also has a USDA Rural Development loan held by its wholly owned subsidiary, First Rural Relending that has an outstanding balance of $.779 million, with a fixed interest rate of 1% that matures in August 2024.

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In addition to the above, the Corporation currently has two banking borrowing relationships.  The first relationship consists of a non-revolving line of credit and a term note.  The line of credit bears interest at 90-day LIBOR plus 2.75%, with a floor rate of 4.00% and has an initial term that expires on December 28, 2015.  The term note bears the same interest and matures on March 22, 2017 and requires quarterly principal payments of $100,000 beginning June 30, 2014.  The second borrowing relationship consists of a $10 million revolving line of credit, which can be increased to $25 million upon request, used to support asset based lending activities at a wholly-owned subsidiary that currently bears interest at 90-day LIBOR plus 2.75% and has an initial term that expires on September 10, 2016.

Shareholders’ Equity

Total shareholders’ equity increased $1.883 million from December 31, 2013 to September 30, 2014.  Contributing to the increase in shareholders’ equity was net income available to common shareholders of $2.352 million, a reduction for dividends on common stock of $.840 million, increases due to stock compensation of $.321 million, an increase in the market value of securities of $.193 million and a decrease due to the repurchase of common stock of $.143 million.

RESULTS OF OPERATIONS

Summary

The Corporation reported net income available to common shareholders of $2.352 million, or $.43 per share, in the first nine months of 2014, compared to $2.719 million or $.49 per share for the first nine months of 2013.  The year to date results include a provision for loan losses of $.561 million. Operating results for the same period in 2013 include a provision for loan losses of $.850 million.

Net Interest Income

Net interest income is the Corporation’s primary source of core earnings.  Net interest income represents the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing obligations.  The net interest income is impacted by economic and competitive factors that influence rates, loan demand, and the availability of funding.

Net interest margin on a fully taxable equivalent basis amounted to $5.896 million, 4.19% of average earning assets, in the third quarter of 2014, compared to $5.366 million, and 4.13% of average earning assets, in the third quarter of 2013.  In the first nine months of 2014, net interest margin increased to $17.173 million, 4.21% of average earning assets, compared to $15.826 million, 4.17 % of average earning assets, for the same period in 2013.

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The following table presents 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.

	Three Months Ended
																		2014-2013
	Average Balances									Average Rates				Interest				Income/									Rate/
	September 30,						Increase/			September 30,				September 30,				Expense			Volume			Rate			Volume
(dollars in thousands)	2014			2013			(Decrease)			2014		2013		2014		2013		Variance			Variance			Variance			Variance
Loans (1,2,3)	$	509,618		$	464,324		$	45,294		5.18	%	5.23	%	$	6,657	$	6,117	$	540		$	597		$	(52	)	$	(5	)
Taxable securities	43,933			46,612			(2,679		)	2.08		2.09		230		245		(15		)	(14		)	(1		)	—
Nontaxable securities (2)	1,821			1,003			818			4.58		4.75		21		12		9			10			—			(1		)
Federal funds sold	2			3			(1		)	—		—		—		—		—			—			—			—
Other interest-earning assets	3,295			3,070			225			4.09		4.26		34		33		1			2			(1		)	—
Total earning assets	558,669			515,012			43,657			4.93		4.94		6,942		6,407		535			595			(54		)	(6		)
Reserve for loan losses	(5,254		)	(5,093		)	(161		)
Cash and due from banks	28,900			24,099			4,801
Fixed Assets	9,687			10,596			(909		)
Other Real Estate	1,839			2,434			(595		)
Other assets	13,999			13,041			958
Total assets	$	607,840		$	560,089		$	47,751
NOW and money market deposits	$	112,236		$	119,225		$	(6,989	)	.34	%	.25	%	$	95	$	74	$	21		$	(4	)	$	27		$	(2	)
Interest checking	48,292			33,771			14,521			.22		.28		27		24		3			10			(5		)	(2		)
Savings deposits	15,309			12,810			2,499			.10		.09		4		3		1			1			—			—
CDs <$100,000	139,471			134,465			5,006			1.17		1.50		413		510		(97		)	19			(112		)	(4		)
CDs >$100,000	24,177			24,257			(80		)	1.23		1.54		75		94		(19		)	—			(19		)	—
Brokered deposits	71,335			59,559			11,776			1.10		1.15		198		173		25			34			(8		)	(1		)
Borrowings	44,296			36,449			7,847			2.10		1.77		234		163		71			35			30			6
Total interest-bearing liabilities	455,116			420,536			34,580			.91		.98		1,046		1,041		5			95			(87		)	(3		)
Demand deposits	83,779			72,103			11,676
Other liabilities	2,387			1,316			1,071
Shareholders’ equity	66,558			66,134			424
Total liabilities and shareholders’ equity	$	607,840		$	560,089		$	47,751
Rate spread										4.02	%	3.96	%
Net interest margin/revenue										4.19	%	4.13	%	$	5,896	$	5,366	$	530		$	500		$	33		$	(3	)

(1) For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.

(2) The amount of interest income on loans and nontaxable securities has been adjusted to a tax equivalent basis, using a 34% tax rate

(3)  Interest income on loans includes fees

	Nine Months Ended
																		2014-2013
	Average Balances									Average Rates				Interest				Income/									Rate/
	September 30,						Increase/			September 30,				September 30,				Expense			Volume			Rate			Volume
(dollars in thousands)	2014			2013			(Decrease)			2014		2013		2014		2013		Variance			Variance			Variance			Variance
Loans (1,2,3)	$	496,383		$	456,831		$	39,552		5.21	%	5.30	%	$	19,346	$	18,104	$	1,242		$	1,567		$	(299	)	$	(26	)
Taxable securities	44,238			46,929			(2,691		)	2.15		2.07		711		726		(15		)	(42		)	28			(1		)
Nontaxable securities (2)	1,719			889			830			4.82		4.81		62		32		30			30			—			—
Federal funds sold	2			3			(1		)	—		—		—		—		—			—			—			—
Other interest-earning assets	3,176			3,070			106			4.80		4.18		114		96		18			3			14			1
Total earning assets	545,518			507,722			37,796			4.96		4.99		20,233		18,958		1,275			1,558			(257		)	(26		)
Reserve for loan losses	(5,024		)	(5,133		)	109
Cash and due from banks	23,025			20,216			2,809
Fixed Assets	9,907			10,621			(714		)
Other Real Estate	2,002			2,965			(963		)
Other assets	14,573			13,622			951
Total assets	$	590,001		$	550,013		$	39,988
NOW and money market deposits	$	108,476		$	120,267		$	(11,791	)	.26	%	.25	%	$	209	$	224	$	(15	)	$	(22	)	$	8		$	(1	)
Interest checking	42,946			35,526			7,420			.22		.31		71		82		(11		)	17			(23		)	(5		)
Savings deposits	14,683			13,121			1,562			.10		.10		11		10		1			1			—			—
CDs <$100,000	145,385			132,365			13,020			1.20		1.58		1,306		1,567		(261		)	154			(378		)	(37		)
CDs >$100,000	23,540			24,497			(957		)	1.29		1.62		228		297		(69		)	(12		)	(60		)	3
Brokered deposits	70,571			50,318			20,253			1.16		1.23		610		462		148			186			(27		)	(11		)
Borrowings	42,069			37,928			4,141			1.99		1.73		625		490		135			53			73			9
Total interest-bearing liabilities	447,670			414,022			33,648			.91		1.01		3,060		3,132		(72		)	377			(407		)	(42		)
Demand deposits	73,898			65,720			8,178
Other liabilities	2,571			1,672			899
Shareholders’ equity	65,862			68,599			(2,737		)
Total liabilities and shareholders’ equity	$	590,001		$	550,013		$	39,988
Rate spread										4.05	%	3.98	%
Net interest margin/revenue										4.21	%	4.17	%	$	17,173	$	15,826	$	1,347		$	1,181		$	150		$	16

(1) For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.

(2) The amount of interest income on loans and nontaxable securities has been adjusted to a tax equivalent basis, using a 34% tax rate

(3)  Interest income on loans includes fees

In the past several years of a low interest rate environment, the Corporation repriced all of its brokered deposits along with the majority of its bank time deposits.  This repricing of liabilities is the primary reason for the increased interest margin, on a fully taxable equivalent basis in recent reported periods.

During this relatively low interest environment, the Corporation has also repriced a significant portion of its loan portfolio.  Management has been diligent when repricing maturing or new loans in establishing interest rate floors in order to maintain our improved interest rate spread.  The Corporation is anticipating some margin pressure in future periods as we continue to see extremely competitive pricing on new and renewable loans.

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Provision for Loan Losses

The Corporation records a provision for loan losses when it believes it is necessary to adjust the allowance for loan losses to maintain an adequate level after considering factors such as loan charge-offs and recoveries, changes in identified levels of risk in the loan portfolio, changes in the mix of loans in the portfolio, loan growth, and other economic factors.  During the first nine months of 2014, the Corporation determined through this analysis that a $.561 million provision for loan loss was required, compared to $.850 million in the first nine months of 2013.

Other Income

Other income, at $2.109 million in the first nine months of 2014, decreased $.638 million from the $2.747 million in the same period in 2013.  Other income decreased primarily as a result of a reduced level of fees and gains on the sale of loans from secondary market mortgage lending of $.326 million from prior year period.

Management continues to evaluate deposit products and services for ways to better serve its customer base and also enhance service fee income through a broad array of products that price services based on income contribution and cost attributes.

The following table details other income for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):

	Three Months Ended									Nine Months Ended
	September 30,									September 30,
					Increase/(Decrease)									Increase/(Decrease)
	2014		2013		Dollars			Percent		2014		2013		Dollars			Percent
Deposit service fees	$	168	$	158	$	10		6.33	%	$	517	$	495	$	22		4.44	%
Income from loans sold in the secondary market	212		203		9			4.43		455		781		(326		)	(41.74	)
SBA/USDA loan sale gains	—		135		(135		)	(100.00	)	548		798		(250		)	(31.33	)
Mortgage servicing income	313		128		185			100.00		415		413		2			100.00
Other noninterest income	75		114		(39		)	(34.21	)	174		260		(86		)	(33.08	)
Total other income	$	768	$	738	$	30		4.07	%	$	2,109	$	2,747	$	(638	)	(23.23	)%

Other Expense

For the first nine months of 2014, the Corporation recorded other expenses of $15.131 million, compared to $13.193 million in 2013, an increase of $.1.938 million.  The largest increase from the first nine months of 2013 was in salaries and benefits, largely reflective of the compensation packages for the staff up of our asset based lending subsidiary formed in the third quarter of 2013.  We also had increased occupancy costs between periods due primarily to our new Marquette branch office, which we moved into late in 2013.  We incurred some additional legal costs as well in the first nine months of 2014 for the exploration of acquisitions.

The following table details other expense for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):

	Three Months Ended									Nine Months Ended
	September 30,									September 30,
					Increase/(Decrease)									Increase/(Decrease)
	2014		2013		Dollars			Percentage		2014		2013		Dollars			Percentage
Salaries and employee benefits	$	2,481	$	2,226	$	255		11.46	%	$	7,545	$	6,907	$	638		9.24	%
Occupancy	511		362		149			41.16		1,595		1,107		488			44.08
Furniture and equipment	305		274		31			11.31		927		799		128			16.02
Data processing	288		269		19			7.06		862		802		60			7.48
Advertising	114		119		(5		)	(4.20	)	344		334		10			2.99
Professional service fees	276		161		115			71.43		883		706		177			25.07
Loan and deposit	144		55		89			161.82		306		173		133			76.88
Writedowns and losses on other real estate held for sale	176		57		119			208.77		190		146		44			30.14
FDIC insurance premiums	92		100		(8		)	(8.00	)	267		300		(33		)	(11.00	)
Telephone	84		84		—			—		248		229		19			8.30
Other	655		652		3			0.46		1,964		1,690		274			16.21
Total other expense	$	5,126	$	4,359	$	767		17.60	%	$	15,131	$	13,193	$	1,938		14.69	%

37

Federal Income Taxes

A valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred tax asset will not be realized.  The Corporation, as of September 30, 2014 had a net operating loss and tax credit carryforwards for tax purposes of approximately $16.3 million, and $2.4 million, respectively.  The net operating loss carryforwards expire twenty years from the date they originated.  These carryforwards, if not utilized, will begin to expire in the year 2023.  A portion of the NOL and all of the credit carryforwards are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue Code.  The annual limitation is $1.400 million for the NOL and the equivalent value of tax credits, which is approximately $.476 million.  These limitations for use were established in conjunction with the recapitalization of the Corporation in December 2004.

The Corporation has reported deferred tax assets of $8.681 million at September 30, 2014, which is net of a valuation allowance of $.760 million.  Management evaluated the deferred tax valuation allowance as of September 30, 2014 and determined that no adjustment to the valuation was warranted.  The remaining valuation allowance pertains to the existing tax credit carryovers, which will only be utilized after all net operating loss carryforwards.  Since a portion of these tax credits may expire before that occurs, a valuation allowance for these has been established.  The Corporation will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted.

LIQUIDITY

Liquidity is defined as the ability to generate cash at a reasonable cost to fulfill lending commitments and support asset growth, while satisfying the withdrawal demands of customers and make payments on existing borrowing commitments.  The Bank’s principal sources of liquidity are core deposits and loan and investment payments and prepayments.  Providing a secondary source of liquidity is the available for sale investment portfolio.  As a final source of liquidity, the Bank can exercise existing credit arrangements.

Current balance sheet liquidity consists of $22.401 million in cash and due from balances, negligible fed funds sold, $41.442 million of unpledged investment securities.   Although current liquidity is deemed adequate, management will increase on hand liquidity in the near term by issuing brokered CDs in order to fund anticipated loan growth.

During the first nine months of 2014, the Corporation increased cash and cash equivalents by $4.182 million.  As shown on the Corporation’s condensed consolidated statement of cash flows, liquidity was impacted by cash used in investing activities, with a net increase in loans of $35.022 million.  Offsetting the net decrease used by investing activities was cash provided by financing activities, primarily a net increase in deposits of $24.907 million.  The management of bank liquidity for funding of loans and deposit maturities and withdrawals includes monitoring projected loan fundings and scheduled prepayments and deposit maturities within a 30 day period, a 30- to 90- day period and from 90 days until the end of the year.  This funding forecast model is completed weekly.

The Corporation’s primary source of liquidity on a stand-alone basis is dividends from the Bank.  The Corporation also has a line of credit with a correspondent bank with current availability of $7.500 million.  The Corporation’s current plan for dividends from the Bank are dependent upon the profitability of the Bank, growth of assets at the Bank and the level of capital needed to stay “well capitalized.”

Liquidity is managed by the Corporation through its Asset and Liability Committee (“ALCO”).  The ALCO Committee meets monthly to discuss asset and liability management in order to address liquidity and funding needs to provide a process to seek the best alternatives for investments of assets, funding costs, and risk management.  The liquidity position of the Bank is managed daily, thus enabling the Bank to adapt its position according to market fluctuations.  Core deposits are important in maintaining a strong liquidity position as they represent a stable and relatively low cost source of funds.  The Bank’s liquidity is best illustrated by the mix in the Bank’s core and noncore funding dependence ratio, which explains the degree of reliance on noncore liabilities to fund long-term assets.

Core deposits are herein defined as demand deposits, NOW (negotiable order withdrawals), money markets, savings and certificates of deposit under $100,000. Noncore funding consists of certificates of deposit greater than $100,000, brokered deposits, and FHLB and Farmers’ Home Administration borrowings.  At September 30, 2014, the Bank’s core deposits in relation to total funding were 74.31% compared to 75.40% at September 30, 2013.  These ratios indicated at September 30, 2013, that the Bank has slightly increased its reliance on noncore deposits and borrowings to fund the Bank’s long-term assets, namely loans and investments.  The bank believes that by maintaining adequate volumes of short-term investments and implementing competitive pricing strategies on deposits, it can ensure adequate

38

liquidity to support future growth.  The Bank also has correspondent lines of credit available to meet unanticipated short-term liquidity needs.  As of September 30, 2014, the Bank had $20.875 million of unsecured lines available and additional funding sources available if secured.  The bank believes that its liquidity position remains strong to meet both present and future financial obligations and commitments, events or uncertainties that have resulted or are reasonably likely to result in material changes with respect to the Bank’s liquidity.

From a long-term perspective, the Corporation’s strategy is to increase core deposits in the Corporation’s local markets.  Management continually evaluates deposit products offered in order to remain competitive in its goal of increasing core deposits. The Corporation also has the ability to augment local deposit growth efforts with wholesale CD funding.

CAPITAL AND REGULATORY

As a bank holding company, the Corporation is required to maintain certain levels of capital under government regulation.  There are several measurements of regulatory capital and the Corporation is required to meet minimum requirements under each measurement.  The federal banking regulators have also established capital classifications beyond the minimum requirements in order to risk-rate deposit insurance premiums and to provide trigger points for prompt corrective action in the event an institution becomes financially troubled.  As of September 30, 2014, the Corporation and Bank were well capitalized.  During the first nine months of 2014, total capitalization increased by $1.883 million.

The following table details sources of capital for the periods indicated (dollars in thousands):

	September 30,			December 31,			September 30,
	2014			2013			2013
Capital Structure
Shareholders’ equity	$	67,132		$	65,249		$	63,045
Preferred stock	—			—			4,000
Total shareholders’ equity	$	67,132		$	65,249		$	67,045
Total capitalization	$	67,132		$	65,249		$	67,045
Tangible capital	$	67,132		$	65,249		$	67,045
Intangible Assets
Core deposit premium	$	—		$	—		$	—
Mortgage servicing rights	1,285			1,129			834
Total intangibles	$	1,285		$	1,129		$	834
Regulatory capital
Tier 1 capital:
Shareholders’ equity	$	67,132		$	65,249		$	67,045
Net unrealized (gains) losses on available for sale securities	(409		)	(216		)	(350		)
Less: disallowed deferred tax asset	(5,000		)	(7,000		)	(6,200		)
Less: disallowed intangibles	(129		)	(113		)	(83		)
Total Tier 1 capital	$	61,594		$	57,920		$	60,412
Tier 2 Capital:
Allowable reserve for loan losses	$	5,279		$	4,661		$	4,959
Qualifying long-term debt	—			—
Total Tier 2 capital	5,279			4,661			4,959
Total capital	$	66,873		$	62,581		$	65,371
Risk-adjusted assets	$	522,462		$	489,407		$	483,229
Capital ratios:
Tier 1 Capital to average assets	10.23		%	10.31		%	10.90		%
Tier 1 Capital to risk weighted assets	11.79		%	11.83		%	12.50		%
Total Capital to risk weighted assets	12.80		%	12.79		%	13.53		%

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 and noncurrent deferred tax benefits.

39

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

	Shareholders’		Tangible		Tier 1		Tier 1		Total
	Equity to		Equity to		Capital to		Capital to		Capital to
	Quarter-end		Quarter-end		Average		Risk-Weighted		Risk-Weighted
	Assets		Assets		Assets		Assets		Assets
Regulatory minumum for capital adequacy purposes	N/A		N/A		4.00	%	4.00	%	8.00	%
Regulatory defined well capitalized guideline	N/A		N/A		5.00	%	6.00	%	10.00	%
The Corporation:
September 30, 2014	10.93	%	10.93	%	10.23	%	11.79	%	12.80	%
September 30, 2013	11.81	%	11.81	%	10.90	%	12.50	%	13.53	%
The Bank:
September 30, 2014	11.11	%	11.11	%	10.36	%	12.03	%	13.02	%
September 30, 2013	11.17	%	11.17	%	10.20	%	11.70	%	12.72	%

40

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.  The Corporation offers commercial and real estate loans priced at interest rates which fluctuate with various indices such as the prime rate or rates paid on various government issued securities.  In addition, the Corporation prices the majority of fixed rate loans so it has an opportunity to reprice the loan within 12 to 36 months.

The Corporation has established interest rate floors on approximately $143.954 million of its variable rate commercial loans.  These interest rate floors will result in a “lag” on the repricing of these variable rate loans when and if interest rates increase in future periods.  Approximately $102.304 million of the “floor rate” loan balances will reprice with a 100 basis point increase on the prime rate, with another $38.622 million repricing in the next 100 basis point prime rate increase.

The Corporation also has $48.742 million of securities providing for scheduled monthly principal and interest payments as well as unanticipated prepayments of principal.  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 has $273.129 million of transactional accounts, of which $84.073 million consists of noninterest bearing demand deposit balances.  Transaction account balances have increased significantly in the last year due in part to the Corporation’s focus on these low cost accounts by developing new attractive products and increased sales efforts to municipalities, schools and businesses.  These transactional account balances provide additional repricing flexibility in changing interest rate environments since they have no scheduled maturities and interest rates can be reset at any time.

Other deposit products have 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.  Longer term deposits generally include penalty provisions for early withdrawal.

Beyond general efforts to shorten the loan pricing periods and extend deposit maturities, management can manage interest rate risk by managing 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 Bank has monthly asset/liability meetings with an outside consultant to review its current position and strategize about future opportunities on risks relative to pricing and positioning of assets and liabilities.

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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.

The following is the Corporation’s repricing opportunities at September 30, 2014 (dollars in thousands):

	1-90			91 - 365		>1-5		Over 5
	Days			Days		Years		Years		Total
Interest-earning assets:
Loans	$	240,230		$	100,882	$	175,629	$	1,632	$	518,373
Securities	4,614			4,566		28,401		11,161		48,742
Other (1)	237			—		—		3,060		3,297
Total interest-earning assets	245,081			105,448		204,030		15,853		570,412
Interest-bearing obligations:
NOW, money market, savings, interest checking	189,056			—		—		—		189,056
Time deposits	33,678			45,612		76,291		131		155,712
Brokered CDs	7,877			8,000		46,488		—		62,365
Federal funds purchased	7,500			—		—		—		7,500
Borrowings	10,100			4,500		29,530		779		44,909
Total interest-bearing obligations	248,211			58,112		152,309		910		459,542
Gap	$	(3,130	)	$	47,336	$	51,721	$	14,943	$	110,870
Cumulative gap	$	(3,130	)	$	44,206	$	95,927	$	110,870

(1)Includes Federal Home Loan Bank Stock

The above analysis indicates that at September 30, 2014, the Corporation had a cumulative asset sensitivity gap position of $44.206 million within the one-year time frame.  The Corporation’s cumulative asset sensitive gap suggests that if market interest rates were to increase in the next twelve months, the Corporation has the potential to earn more net interest income.  This is because more assets would reprice at higher rates than liabilities.  Conversely, if market interest rates decrease in the next twelve months, the above gap position suggests the Corporation’s net interest income would decrease.  A limitation of the traditional gap analysis is that it does not consider the timing or magnitude of non-contractual 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.

At December 31, 2013, the Corporation had a cumulative asset sensitivity gap position of $24.272 million within the one-year time frame.

The borrowings in the gap analysis include $35.000 million of FHLB advances that have a weighted average maturity of 1.71 years and a weighted average rate of 1.79%.

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.

42

Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure.  The Corporation’s interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems, and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity.  In evaluating the quantitative level of interest rate risk, the Corporation assesses the existing and potential future effects of changes in interest rates on its financial condition, including capital adequacy, earnings, liquidity, and asset quality.

In addition to changes in interest rates, the level of future net interest income is also dependent on a number of variables, including: the growth, composition and levels of loans, deposits, and other earning assets and interest-bearing obligations, and economic and competitive conditions; potential changes in lending, investing, and deposit strategies; customer preferences; and other factors.

FOREIGN EXCHANGE RISK

In addition to managing interest rate risk, management also actively manages risk associated with foreign exchange.  The Corporation provides foreign exchange services, makes loans to, and accepts deposits from, Canadian customers primarily at its banking offices in Sault Ste. Marie, Michigan.  To protect against foreign exchange risk, the Corporation monitors the volume of Canadian deposits it takes in and then invests these Canadian funds in Canadian commercial loans and securities.  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.

43

MACKINAC FINANCIAL CORPORATION

ITEM 4  CONTROLS AND PROCEDURES

As of September 30, 2014, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.  Our management, which includes our principal executive officer and our principal financial officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud.

A control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints; additionally, the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected.  These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate due to changes in conditions; also the degree of compliance with policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.  Our principal executive officer and principal accounting officer have concluded, based on our evaluation of our disclosure controls and procedures, that our disclosure controls and procedures, as defined, under Rule 13a-15 of the Securities Exchange Act of 1934 are effective as of September 30, 2014.

Changes in Internal Control Over Financial Reporting

There were no changes in the Corporation’s internal control over financial reporting that occurred during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

44

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. The Corporation believes that the disposition or ultimate resolution of such litigation will not have a material adverse effect on the consolidated financial position or results of operations of the Corporation.

Item 6.  Exhibits and Reports on Form 8-K

(a)Exhibits:

Exhibit 2.1*	Agreement and Plan of Merger, dated as of July 18, 2014, by and among Mackinac Financial Corporation, PFC Acquisition, LLC and Peninsula Financial Corporation.
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.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

* Previously filed as Exhibit 2.1 to Mackinac Financial Corporation’s Current Report on Form 8-K filed on July 23, 2014, File Number 000-20167.

45

SIGNATURES

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

	MACKINAC FINANCIAL CORPORATION
	(Registrant)
Date:  November 13, 2014	By:	/s/ Paul D. Tobias
		PAUL D. TOBIAS,
		CHAIRMAN AND CHIEF EXECUTIVE OFFICER
		(principal executive officer)
	By:	/s/ Ernie R. Krueger
		ERNIE R. KRUEGER
		EVP/CHIEF FINANCIAL OFFICER
		(principal financial and accounting officer)

46

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Paul D. Tobias, Chairman and Chief Executive Officer of Mackinac Financial Corporation certify that:

1.I have reviewed this report on Form 10-Q of Mackinac Financial Corporation (the “registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements and other financial information included in this report fairly present, in all material respects, the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	November 13, 2014	/s/ Paul D. Tobias
		Paul D. Tobias
		Chairman and Chief Executive Officer
		(principal executive officer)

1

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Ernie R. Krueger, Executive Vice President/Chief Financial Officer of Mackinac Financial Corporation, certify that:

1.I have reviewed this report on Form 10-Q of Mackinac Financial Corporation (the “registrant”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	November 13, 2014	/s/ Ernie R. Krueger
		Ernie R. Krueger
		Executive Vice President/Chief Financial Officer
		(principal financial officer)

1

EX-32.1

Exhibit 32.1

CERTIFICATION PERSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C § 1350, and accompanies the quarterly report on Form 10-Q for the quarter ended September 30, 2014, (the “Form 10-Q”) of Mackinac Financial Corporation (the “Issuer”).

I, Paul D. Tobias, Chairman and Chief Executive Officer of the Issuer, certify that:

(1)The Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

(2)The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operation of the Issuer.

/s/ Paul D. Tobias

Paul D. Tobias

Chairman and Chief Executive Officer

(chief executive officer)

Date:      November 13, 2014

1

EX-32.2

Exhibit 32.2

CERTIFICATION PERSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C § 1350, and accompanies the quarterly report on Form 10-Q for the quarter ended September 30, 2014, (the “Form 10-Q”) of Mackinac Financial Corporation (the “Issuer”).

I, Ernie R. Krueger, Executive Vice President of the Issuer, certify that:

(1)The Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

(2)The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operation of the Issuer.

/s/ Ernie R. Krueger

Executive Vice President and Chief Financial Officer

(principal financial officer)

Date:      November 13, 2014

1

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LOANS (Details 7) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2013 item	Dec. 31, 2013 item
Troubled Debt Restructuring
Number of Modifications	1	1
Recorded Investment	$ 528	$ 528
Commercial, financial, and agricultural
Troubled Debt Restructuring
Number of Modifications	1	1
Recorded Investment	$ 528	$ 528

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PENDING ACQUISITION (Details) (USD $)				0 Months Ended
	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013	Jul. 18, 2014 Peninsula Financial Corporation Member item	Jul. 18, 2014 Peninsula Financial Corporation Member
Purchase price				$ 13,285,000,000
Purchase price on contemplation of special dividend to shareholders prior to consummation				10,500,000
Assets	$ 613,943,000	$ 572,800,000	$ 567,917,000		$ 132,000,000
Number of banking offices				6

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FAIR VALUE MEASUREMENTS (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013
FAIR VALUE MEASUREMENTS
Blended interest rate for determining fair value of nonaccrual loans (as a percent)	0.00%
Fair value of commitments	$ 0
Financial assets:
Interest-bearing deposits	235	10	10
Securities available for sale	48,742	44,388	48,096
Carrying Amount
Financial assets:
Total financial assets	588,989	546,199	543,032
Financial liabilities:
Total financial liabilities	536,299	504,333	497,740
Estimated Fair Value
Financial assets:
Total financial assets	589,012	546,566	535,505
Financial liabilities:
Total financial liabilities	537,381	503,100	495,610
Level 1 | Carrying Amount
Financial assets:
Cash and cash equivalents	22,401	18,219	22,794
Level 1 | Estimated Fair Value
Financial assets:
Cash and cash equivalents	22,401	18,219	22,794
Level 2 | Carrying Amount
Financial assets:
Interest-bearing deposits	235	10	10
Securities available for sale	48,742	44,388	48,096
Federal Home Loan Bank stock	3,060	3,060	3,060
Financial liabilities:
Deposits	491,206	466,299	461,688
Borrowings	44,909	37,852	35,852
Level 2 | Estimated Fair Value
Financial assets:
Interest-bearing deposits	235	10	10
Securities available for sale	48,742	44,388	48,096
Federal Home Loan Bank stock	3,060	3,060	3,060
Financial liabilities:
Deposits	491,912	465,431	459,862
Borrowings	45,285	37,487	35,548
Significant Unobservable Inputs (Level 3) | Carrying Amount
Financial assets:
Net loans	513,094	479,171	467,536
Accrued interest receivable	1,457	1,351	1,536
Financial liabilities:
Accrued interest payable	184	182	200
Significant Unobservable Inputs (Level 3) | Estimated Fair Value
Financial assets:
Net loans	513,117	479,538	460,009
Accrued interest receivable	1,457	1,351	1,536
Financial liabilities:
Accrued interest payable	$ 184	$ 182	$ 200

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STOCK COMPENSATION PLANS (Details 3) (USD $)	9 Months Ended
	Sep. 30, 2014
Stock option plans
Number of Shares, Outstanding	237,152
Number of Shares, Exercisable	124,861
Number of Shares, Unvested Options	112,291
Weighted Average Remaining Contractual Life-Years	4 months 2 days
$9.75
Stock option plans
Exercise Price (in dollars per share)	$ 9.75
Number of Shares, Outstanding	217,152
Number of Shares, Exercisable	120,861
Number of Shares, Unvested Options	96,291
Weighted Average Remaining Contractual Life-Years	2 months 23 days
$10.65
Stock option plans
Exercise Price (in dollars per share)	$ 10.65
Number of Shares, Outstanding	10,000
Number of Shares, Exercisable	2,000
Number of Shares, Unvested Options	8,000
Weighted Average Remaining Contractual Life-Years	9 months 15 days
$12.00
Stock option plans
Exercise Price (in dollars per share)	$ 12.00
Number of Shares, Outstanding	10,000
Number of Shares, Exercisable	2,000
Number of Shares, Unvested Options	8,000
Weighted Average Remaining Contractual Life-Years	2 years 2 months 16 days

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LOANS (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Insider Loans
Total loans	$ 518,373	$ 472,495	$ 518,373	$ 472,495	$ 483,832
Changes in the allowance for loan losses
Balance at beginning of period	5,097	5,177	4,661	5,218	5,218
Recoveries on loans previously charged off	65	54	242	154	200
Loans charged off	(70)	(647)	(185)	(1,263)	(2,432)
Provision	187	375	561	850	1,675
Balance at end of period	5,279	4,959	5,279	4,959	4,661
Net charge off activity			57	1,109
Net charge off activity as percentage of average loans outstanding				0.32%
Commercial real estate loans
Insider Loans
Total loans	272,803	257,961	272,803	257,961	268,809
Changes in the allowance for loan losses
Balance at beginning of period	1,630	2,661	1,849	3,267	3,267
Recoveries on loans previously charged off	31	23	105	64	92
Loans charged off	(18)	(132)	(19)	(588)	(1,539)
Provision	(1)	3	(293)	(188)	29
Balance at end of period	1,642	2,555	1,642	2,555	1,849
Commercial, financial, and agricultural
Insider Loans
Total loans	98,714	79,511	98,714	79,511	79,655
Changes in the allowance for loan losses
Balance at beginning of period	1,669	1,090	1,378	692	692
Recoveries on loans previously charged off	16	20	75	53	56
Loans charged off	(9)	(476)	(74)	(552)	(632)
Provision	(153)	522	144	963	1,262
Balance at end of period	1,523	1,156	1,523	1,156	1,378
One to four family residential real estate
Insider Loans
Total loans	110,310	98,770	110,310	98,770	103,768
Changes in the allowance for loan losses
Balance at beginning of period	345	877	516	980	980
Recoveries on loans previously charged off	4	6	18	17	26
Loans charged off	(28)	(25)	(44)	(38)	(141)
Provision	80	44	(89)	(57)	(349)
Balance at end of period	401	902	401	902	516
Consumer construction
Insider Loans
Total loans	8,729	5,734	8,729	5,734	6,895
Changes in the allowance for loan losses
Balance at beginning of period	15		25
Recoveries on loans previously charged off		1		1	2
Provision	3	(1)	(7)	(1)	23
Balance at end of period	18		18		25
Commercial construction
Insider Loans
Total loans	12,242	16,054	12,242	16,054	10,904
Changes in the allowance for loan losses
Balance at beginning of period	40	97	80	125	125
Recoveries on loans previously charged off	3		9	2	2
Provision	1	(16)	(45)	(46)	(47)
Balance at end of period	44	81	44	81	80
Consumer
Insider Loans
Total loans	15,575	14,465	15,575	14,465	13,801
Changes in the allowance for loan losses
Balance at beginning of period	111	13	148
Recoveries on loans previously charged off	11	4	35	17	22
Loans charged off	(15)	(14)	(48)	(85)	(120)
Provision	1	15	(27)	86	246
Balance at end of period	$ 108	$ 18	$ 108	$ 18	$ 148

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MORTGAGE SERVICING RIGHTS (Tables)

9 Months Ended

Sep. 30, 2014

MORTGAGE SERVICING RIGHTS

Summary of mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances

The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances (dollars in thousands):

	Nine months ended			Year ended			Nine months ended
	September 30,			December 31,			September 30,
	2014			2013			2013
Balance at beginning of period	$	1,129		$	638		$	638
Additions from loans sold with servicing retained	375			675			325
Amortization	(218		)	(184		)	(129		)
Estimated Valuation of MSRs at end of period	$	1,286		$	1,129		$	834

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FAIR VALUE MEASUREMENTS (Details 3) (Nonrecurring, USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Fair value
Total Losses	$ 186	$ 588	$ 630	$ 1,095	$ 2,340
Investments	0		0
Impaired loans
Fair value
Total Losses	10	531	440	949	2,075
Other real estate owned
Fair value
Total Losses	$ 176	$ 57	$ 190	$ 146	$ 265

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MORTGAGE SERVICING RIGHTS (Details) (Mortgage loans, USD $) In Thousands, unless otherwise specified	9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Mortgage loans
Mortgage Loans
Residential first mortgage loans the Corporation has obligations to service	$ 144,051
Annual constant prepayment speed (as a percent)	9.77%
Discount rate (as a percent)	8.83%
Changes in mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances
Balance at beginning of period	1,129	638	638
Additions from loans sold with servicing retained	375	325	675
Amortization	(218)	(129)	(184)
Balance at end of period	$ 1,286	$ 834	$ 1,129

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LOANS (Details 5) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Jun. 30, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Dec. 31, 2012
Past due loans
30-89 days Past Due (accruing)	$ 1,370		$ 239	$ 317
90+ days Past Due/Nonaccrual	2,695	2,652	2,024	4,313	3,983	4,687
Total	4,065		2,263	4,630
Commercial real estate loans
Past due loans
30-89 days Past Due (accruing)	540
90+ days Past Due/Nonaccrual	227	454	572	2,827	3,057	3,071
Total	767		572	2,827
Commercial, financial, and agricultural
Past due loans
30-89 days Past Due (accruing)	306		4	100
90+ days Past Due/Nonaccrual	1,735	1,808	811	767	517	436
Total	2,041		815	867
Commercial construction
Past due loans
30-89 days Past Due (accruing)	55		20
90+ days Past Due/Nonaccrual						675
Total	55		20
One to four family residential real estate
Past due loans
30-89 days Past Due (accruing)	414		201	186
90+ days Past Due/Nonaccrual	733	383	611	709	400	505
Total	1,147		812	895
Consumer
Past due loans
30-89 days Past Due (accruing)	55		14	31
90+ days Past Due/Nonaccrual		7	30	10	9
Total	$ 55		$ 44	$ 41

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COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013
Financial Instruments with Off-Balance-Sheet Risk
Commitments	$ 83,070	$ 59,338	$ 64,500
Commitments to extend credit
Financial Instruments with Off-Balance-Sheet Risk
Commitments, variable rate	54,962	36,039	32,061
Commitments, fixed rate	19,092	15,070	24,536
Standby letters of credit
Financial Instruments with Off-Balance-Sheet Risk
Commitments, variable rate	5,730	5,077	4,741
Percentage collateralization on financial instruments allowed under commitments	100.00%
Credit card commitments
Financial Instruments with Off-Balance-Sheet Risk
Commitments, fixed rate	$ 3,286	$ 3,152	$ 3,162

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INCOME TAXES (Details) (USD $)	9 Months Ended
	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013
INCOME TAXES
Net operating loss (NOL) carryforwards	$ 16,300,000
Tax credit carryforwards	2,400,000
Expiration period from date of origination for net operating loss carryforwards	20 years
Annual limitation for usage of NOL	1,400,000
Annual limitation for usage of tax credits	476,000
Deferred tax assets, net of valuation allowance	8,681,000	9,933,000	7,953,000
Valuation allowance	760,000
Adjustment warranted to the valuation	$ 0

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RECENT ACCOUNTING PRONOUNCEMENTS

9 Months Ended

Sep. 30, 2014

RECENT ACCOUNTING PRONOUNCEMENTS

RECENT ACCOUNTING PRONOUNCEMENTS

2.RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on the recognition of revenue from contracts with customers. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The guidance is effective January 1, 2017 and early adoption is not permitted. The company is currently evaluating the impact of the new guidance and the method of adoption in the consolidated financial results.

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BORROWINGS (Details) (USD $)	3 Months Ended									9 Months Ended		9 Months Ended		3 Months Ended
	Sep. 30, 2014 item	Dec. 31, 2013	Sep. 30, 2013	Sep. 30, 2014 Federal Home Loan Bank borrowings	Dec. 31, 2013 Federal Home Loan Bank borrowings	Sep. 30, 2013 Federal Home Loan Bank borrowings	Sep. 30, 2014 Federal Home Loan Bank borrowings Mortgage related and municipal securities	Sep. 30, 2014 Federal Home Loan Bank borrowings Federal Home Loan Bank stock	Sep. 30, 2014 Federal Home Loan Bank borrowings One to four family residential real estate	Sep. 30, 2014 Line of Credit	Dec. 31, 2013 Line of Credit	Sep. 30, 2014 Line of Credit 90-day LIBOR	Sep. 30, 2014 Bank Line Of Credit Wholly Owned Assets Based Lending Subsidiary Member	Sep. 30, 2014 Revolving Credit Facility 90-day LIBOR	Sep. 30, 2014 Correspondent bank term note, current floor rate of 4%, maturing December 28, 2017	Jun. 30, 2014 Correspondent bank term note, current floor rate of 4%, maturing December 28, 2017	Sep. 30, 2013 Correspondent bank term note, current floor rate of 4%, maturing December 28, 2017	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013	Sep. 30, 2014 First Rural Relending
BORROWINGS
Borrowings	$ 44,909,000	$ 37,852,000	$ 35,852,000	$ 35,000,000	$ 35,000,000	$ 35,000,000				$ 4,500,000	$ 2,000,000		$ 1,830,000		$ 2,800,000			$ 779,000	$ 852,000	$ 852,000
Interest rate on note (as a percent)				1.82%											4.00%		4.00%	1.00%
Loans pledged as collateral									42,041,000												779,000
Securities pledged as collateral, amortized cost							4,167,000
Securities pledged as collateral, fair value							4,300,000
Stock owned and pledged as collateral								3,060,000,000
Demand deposit account pledged as collateral																					720,000
Variable rate basis										90-day LIBOR				90-day LIBOR
Variable rate (as a percent)												2.75%		2.75%
Floor rate (as a percent)										4.00%
Number of banking borrowing relationship	2
Maximum borrowing														10,000,000
Maximum borrowing capacity upon request to increase														25,000,000
Frequency of period payment															quarterly	quarterly
Quarterly principal payment															$ 100,000	$ 100,000

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COMMITMENTS, CONTINGENCIES AND CREDIT RISKS (Tables)

9 Months Ended

Sep. 30, 2014

COMMITMENTS, CONTINGENCIES, AND CREDIT RISK

Schedule of commitments

These commitments are as follows (dollars in thousands):

	September 30,		December 31,		September 30,
	2013		2013		2013
Commitments to extend credit:
Variable rate	$	54,962	$	36,039	$	32,061
Fixed rate	19,092		15,070		24,536
Standby letters of credit - Variable rate	5,730		5,077		4,741
Credit card commitments - Fixed rate	3,286		3,152		3,162
	$	83,070	$	59,338	$	64,500

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FAIR VALUE MEASUREMENTS (Tables)

9 Months Ended

Sep. 30, 2014

FAIR VALUE MEASUREMENTS

Schedule presenting information for financial instruments

The following table presents information for financial instruments at September 30, 2014, December 31, 2013 and September 30, 2013 (dollars in thousands):

		September 30, 2014				December 31, 2013				September 30, 2013
	Level in Fair	Carrying		Estimated		Carrying		Estimated		Carrying		Estimated
	Value Hierarchy	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	22,401	$	22,401	$	18,219	$	18,219	$	22,794	$	22,794
Interest-bearing deposits	Level 2	235		235		10		10		10		10
Securities available for sale	Level 2	48,742		48,742		44,388		44,388		48,096		48,096
Federal Home Loan Bank stock	Level 2	3,060		3,060		3,060		3,060		3,060		3,060
Net loans	Level 2	513,094		513,117		479,171		479,538		467,536		460,009
Accrued interest receivable	Level 3	1,457		1,457		1,351		1,351		1,536		1,536
Total financial assets		$	588,989	$	589,012	$	546,199	$	546,566	$	543,032	$	535,505
Financial liabilities:
Deposits	Level 2	$	491,206	$	491,912	$	466,299	$	465,431	$	461,688	$	459,862
Borrowings	Level 2	44,909		45,285		37,852		37,487		35,852		35,548
Accrued interest payable	Level 3	184		184		182		182		200		200
Total financial liabilties		$	536,299	$	537,381	$	504,333	$	503,100	$	497,740	$	495,610

Schedule of fair values of assets using Level 3 inputs

Assets Measured at Fair Value on a Nonrecurring Basis at September 30, 2014

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Nine Months Ended
(dollars in thousands)	September 30, 2014		(Level 1)		(Level 2)		(Level 3)		September 30, 2014		September 30, 2014
Assets
Impaired loans	$	2,695	$	—	$	—	$	2,695	$	10	$	440
Other real estate owned	1,843		—		—		1,843		176		190
									$	186	$	630

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2013

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Year Ended
(dollars in thousands)	December 31, 2013		(Level 1)		(Level 2)		(Level 3)		December 31, 2013
Assets
Impaired loans	$	2,024	$	—	$	—	$	2,024	$	2,075
Other real estate owned	1,884		—		—		1,884		265
									$	2,340

Assets Measured at Fair Value on a Nonrecurring Basis at September 30, 2013

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Nine Months Ended
(dollars in thousands)	September 30, 2013		(Level 1)		(Level 2)		(Level 3)		September 30, 2013		September 30, 2013
Assets
Impaired loans	$	4,313	$	—	$	—	$	4,313	$	531	$	949
Other real estate owned	2,568		—		—		2,568		57		146
									$	588	$	1,095

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STOCK COMPENSATION PLANS (Details) (USD $)	0 Months Ended	1 Months Ended		9 Months Ended
	Aug. 31, 2013 RSUs	Mar. 31, 2014 RSUs	Aug. 31, 2012 RSUs	Sep. 30, 2014 RSUs	May 22, 2012 2012 Incentive Compensation Plan	May 22, 2012 2012 Incentive Compensation Plan Stock Options
Stock Compensation Plans
Number of RSUs granted (in shares)	37,125	52,774	148,500
Total authorized share balance					575,000	392,152
Share price (in dollars per share)		$ 12.95	$ 7.91	$ 12.95
Cost to the employee				$ 0
Vesting period		4 years	4 years	4 years
Recognition period of compensation cost to be recognized				4 years
Compensation cost to be recognized		683,000	1,175,000	683,000
Number of RSUs unvested (in shares)				127,024
Compensation cost to be recognized				$ 1,154,000

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $)	0 Months Ended	1 Months Ended		9 Months Ended
	Aug. 31, 2013 RSUs	Mar. 31, 2014 RSUs	Aug. 31, 2012 RSUs	Sep. 30, 2014 RSUs	May 22, 2012 2012 Incentive Compensation Plan	May 22, 2012 2012 Incentive Compensation Plan Stock Options
Stock Compensation Plans
Number of RSUs granted (in shares)	37,125	52,774	148,500
Purchase price (in dollars per share)		$ 12.95	$ 7.91	$ 12.95
Cost to the employee				$ 0
Vesting period		4 years	4 years	4 years
Recognition period of compensation cost to be recognized				4 years
Compensation cost to be recognized		683,000	1,175,000	683,000
Number of RSUs unvested (in shares)				127,024
Compensation cost to be recognized				$ 1,154,000
Total authorized share balance					575,000	392,152

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EARNINGS PER SHARE (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
(Numerator):
Net income	$ 886	$ 896	$ 2,352	$ 2,969
Preferred stock dividends and accretion of discount		50		250
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$ 886	$ 846	$ 2,352	$ 2,719
(Denominator):
Weighted average shares outstanding - basic	5,540,200	5,562,835	5,532,966,000	5,559,108,000
Effect of dilutive stock options, vesting of restricted stock units, and common stock warrants outstanding (in shares)	71,722		70,268,000
Diluted weighted average shares outstanding	5,611,922	5,562,835	5,603,234,000	5,559,108,000
Income per common share:
Basic (in dollars per share)	$ 0.16	$ 0.15	$ 0.43	$ 0.49
Diluted (in dollars per share)	$ 0.16	$ 0.15	$ 0.42	$ 0.49

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2014

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the “Corporation”) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the nine-month period ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  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, 2013.

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.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 reporting 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, and the valuation of deferred tax assets, mortgage servicing rights and other real estate held for sale.

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.

Stock Compensation Plans

On May 22, 2012, the Company’s shareholders approved the Mackinac Financial Corporation 2012 Incentive Compensation Plan, under which current and prospective employees, non-employee directors and consultants may be awarded incentive stock options, non-statutory stock options, shares of restricted stock units (“RSUs”), or stock appreciation rights.  The aggregate number of shares of the Company’s common stock issuable under the plan is 575,000, which included 392,152 option shares outstanding at that time.  Awards are made at the discretion of management.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

The Corporation, in August 2012 and March 2014, granted Restricted Stock Units (“RSUs”) to members of the Board of Directors and Management.  In August 2012, 148,500 RSUs were granted at a market value of $7.91 and will vest equally over a four year term.  In exchange for the grant of these RSUs various previously issued stock option awards were surrendered.  In March 2014, 52,774 RSUs were granted at a market value of $12.95, also vesting equally over a four year term.    The RSUs were awarded at no cost to the employee.  Compensation cost to be recognized over the four —year vesting periods, is $1.175 million and $.683 million, respectively.  On August 31, 2013, the Corporation issued 37,125 shares of its common stock for vested RSUs.  As of September 30, 2014, RSUs totaling 127,024 were unvested and unrecognized compensation expense was $1.154 million.

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INVESTMENT SECURITIES (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013
SECURITIES AVAILABLE FOR SALE
Amortized Cost	$ 48,122	$ 44,060	$ 47,566
Gross Unrealized Gains	893	701	870
Gross Unrealized Losses	(273)	(373)	(340)
Estimated Fair Value	48,742	44,388	48,096
US Agencies - MBS
SECURITIES AVAILABLE FOR SALE
Amortized Cost	6,142	7,078	7,236
Gross Unrealized Gains	241	281	315
Estimated Fair Value	6,383	7,359	7,551
US Agencies
SECURITIES AVAILABLE FOR SALE
Amortized Cost	22,725	15,227	16,003
Gross Unrealized Gains	41		66
Gross Unrealized Losses	(273)	(372)	(336)
Estimated Fair Value	22,493	14,855	15,733
Corporate Bonds
SECURITIES AVAILABLE FOR SALE
Amortized Cost	12,621	15,862	18,451
Gross Unrealized Gains	172	218	192
Gross Unrealized Losses		(1)	(4)
Estimated Fair Value	12,793	16,079	18,639
Obligations of states and political subdivisions
SECURITIES AVAILABLE FOR SALE
Amortized Cost	6,383	5,893	5,876
Gross Unrealized Gains	439	202	297
Estimated Fair Value	6,822	6,095	6,173
Other
SECURITIES AVAILABLE FOR SALE
Amortized Cost	251
Estimated Fair Value	251
FHLB borrowings and customer relationships
SECURITIES AVAILABLE FOR SALE
Amortized Cost	4,167
Estimated Fair Value	$ 4,300

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LOANS (Details 8) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended		12 Months Ended	3 Months Ended		9 Months Ended		12 Months Ended	3 Months Ended	9 Months Ended		12 Months Ended		3 Months Ended	9 Months Ended		12 Months Ended		3 Months Ended	9 Months Ended		12 Months Ended		3 Months Ended	9 Months Ended	12 Months Ended	3 Months Ended	9 Months Ended		12 Months Ended		3 Months Ended	9 Months Ended	12 Months Ended			3 Months Ended	9 Months Ended		12 Months Ended		3 Months Ended	9 Months Ended				3 Months Ended	9 Months Ended				3 Months Ended		9 Months Ended		12 Months Ended	3 Months Ended		9 Months Ended		12 Months Ended	3 Months Ended	9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013	Sep. 30, 2014 Accrual Basis	Sep. 30, 2013 Accrual Basis	Sep. 30, 2014 Accrual Basis	Sep. 30, 2013 Accrual Basis	Dec. 31, 2013 Accrual Basis	Sep. 30, 2013 Nonaccrual Basis	Sep. 30, 2014 Nonaccrual Basis	Sep. 30, 2013 Nonaccrual Basis	Dec. 31, 2013 Nonaccrual Basis	Jun. 30, 2014 Nonaccrual Basis	Sep. 30, 2013 Commercial real estate loans	Sep. 30, 2014 Commercial real estate loans	Sep. 30, 2013 Commercial real estate loans	Dec. 31, 2013 Commercial real estate loans	Jun. 30, 2014 Commercial real estate loans	Sep. 30, 2013 Commercial real estate loans Accrual Basis	Sep. 30, 2014 Commercial real estate loans Accrual Basis	Sep. 30, 2013 Commercial real estate loans Accrual Basis	Dec. 31, 2013 Commercial real estate loans Accrual Basis	Jun. 30, 2014 Commercial real estate loans Accrual Basis	Sep. 30, 2013 Commercial real estate loans Nonaccrual Basis	Sep. 30, 2013 Commercial real estate loans Nonaccrual Basis	Dec. 31, 2013 Commercial real estate loans Nonaccrual Basis	Sep. 30, 2013 Commercial, financial, and agricultural	Sep. 30, 2014 Commercial, financial, and agricultural	Sep. 30, 2013 Commercial, financial, and agricultural	Dec. 31, 2013 Commercial, financial, and agricultural	Jun. 30, 2014 Commercial, financial, and agricultural	Sep. 30, 2013 Commercial, financial, and agricultural Accrual Basis	Sep. 30, 2013 Commercial, financial, and agricultural Accrual Basis	Dec. 31, 2013 Commercial, financial, and agricultural Accrual Basis	Sep. 30, 2014 Commercial, financial, and agricultural Accrual Basis	Jun. 30, 2014 Commercial, financial, and agricultural Accrual Basis	Sep. 30, 2013 Commercial, financial, and agricultural Nonaccrual Basis	Sep. 30, 2014 Commercial, financial, and agricultural Nonaccrual Basis	Sep. 30, 2013 Commercial, financial, and agricultural Nonaccrual Basis	Dec. 31, 2013 Commercial, financial, and agricultural Nonaccrual Basis	Jun. 30, 2014 Commercial, financial, and agricultural Nonaccrual Basis	Sep. 30, 2014 Commercial construction	Sep. 30, 2014 Commercial construction	Sep. 30, 2013 Commercial construction	Jun. 30, 2013 Commercial construction	Dec. 31, 2012 Commercial construction	Sep. 30, 2014 Commercial construction Accrual Basis	Sep. 30, 2014 Commercial construction Accrual Basis	Sep. 30, 2013 Commercial construction Accrual Basis	Jun. 30, 2013 Commercial construction Accrual Basis	Dec. 31, 2012 Commercial construction Accrual Basis	Sep. 30, 2014 One to four family residential real estate	Sep. 30, 2013 One to four family residential real estate	Sep. 30, 2014 One to four family residential real estate	Sep. 30, 2013 One to four family residential real estate	Dec. 31, 2013 One to four family residential real estate	Sep. 30, 2014 One to four family residential real estate Accrual Basis	Sep. 30, 2013 One to four family residential real estate Accrual Basis	Sep. 30, 2014 One to four family residential real estate Accrual Basis	Sep. 30, 2013 One to four family residential real estate Accrual Basis	Dec. 31, 2013 One to four family residential real estate Accrual Basis	Sep. 30, 2013 One to four family residential real estate Nonaccrual Basis	Sep. 30, 2014 One to four family residential real estate Nonaccrual Basis	Sep. 30, 2013 One to four family residential real estate Nonaccrual Basis	Dec. 31, 2013 One to four family residential real estate Nonaccrual Basis	Jun. 30, 2014 One to four family residential real estate Nonaccrual Basis
Changes in troubled debt restructuring
Beginning balance	$ 3,746	$ 8,056	$ 6,277	$ 8,056	$ 8,056	$ 3,149	$ 6,695	$ 5,663	$ 5,792	$ 5,792	$ 2,275	$ 614	$ 2,264	$ 2,264	$ 597	$ 5,773	$ 3,520	$ 5,773	$ 5,773	$ 1,007	$ 3,563	$ 3,520	$ 3,611	$ 3,611	$ 1,007	$ 2,169	$ 2,162	$ 2,162	$ 1,221	$ 1,709	$ 1,221	$ 1,221	$ 1,694	$ 2,174	$ 1,221	$ 1,221	$ 1,186	$ 1,186		$ 523			$ 508	$ 858	$ 858	$ 858	$ 858	$ 858	$ 858	$ 858	$ 858	$ 858	$ 858	$ 187	$ 204	$ 190	$ 204	$ 204	$ 98	$ 100	$ 99	$ 102	$ 102	$ 106	$ 91	$ 102	$ 102	$ 89
Principal payments	(4)	(197)	(2,535)	(197)	(1,950)	(4)	(46)	(2,520)	(96)	(554)	(101)	(15)	(101)	(1,396)		(155)	(2,513)	(155)	(1,467)		(20)	(2,513)	(68)	(91)		(87)	(87)	(1,376)	(25)	(15)	(25)	(465)		(25)	(25)	(460)				(15)		(5)		(3)	(3)				(3)	(3)				(1)	(17)	(4)	(17)	(18)	(1)	(1)	(4)	(3)	(3)	(14)		(14)	(15)
Charge-offs		(400)		(400)	(793)		(400)		(400)					(793)					(793)									(793)	(400)		(400)			(400)	(400)
New restructured		964		964	1,492				953	953			11	539		7		7	7								7	7	953		953	1,481			953	953						528													4		4	4								4	4
Transferred out of TDRs			91					91																																																91					91
Transfers to nonaccrual		(528)	(89)	(528)	(528)		(528)	(89)	(528)	(528)																			(528)		(528)	(528)		(528)	(528)	(528)																				(89)					(89)
Transfers to foreclosed properties			89	528								(91)																			528																									89									(91)
Transfer from accruing		528	91								528	89	528																528										528		528															91									89
Ending balance	$ 3,742	$ 8,423	$ 3,742	$ 8,423	$ 6,277	$ 3,145	$ 5,721	$ 3,145	$ 5,721	$ 5,663	$ 2,702	$ 597	$ 2,702	$ 614	$ 597	$ 5,625	$ 1,007	$ 5,625	$ 3,520	$ 1,007	$ 3,543	$ 1,007	$ 3,543	$ 3,520	$ 1,007	$ 2,082	$ 2,082		$ 1,749	$ 1,694	$ 1,749	$ 1,709	$ 1,694	$ 1,221	$ 1,221	$ 1,186	$ 1,186	$ 1,186	$ 528	$ 508	$ 528	$ 523	$ 508	$ 855	$ 855	$ 858	$ 858	$ 858	$ 855	$ 855	$ 858	$ 858	$ 858	$ 186	$ 191	$ 186	$ 191	$ 190	$ 97	$ 99	$ 97	$ 99	$ 99	$ 92	$ 89	$ 92	$ 91	$ 89

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COMMITMENTS, CONTINGENCIES AND CREDIT RISK (Details 2) (USD $) In Thousands, unless otherwise specified							9 Months Ended
	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013	Sep. 30, 2014 Commercial real estate loans	Dec. 31, 2013 Commercial real estate loans	Sep. 30, 2013 Commercial real estate loans	Sep. 30, 2014 Bank Commercial real estate loans Commercial loan portfolio Credit risk concentration	Sep. 30, 2013 Bank Commercial real estate loans Commercial loan portfolio Credit risk concentration
Concentration of Credit Risk
Loan portfolio	$ 513,094	$ 479,171	$ 467,536	$ 271,161	$ 266,960	$ 255,406	$ 100,912	$ 101,406
Percentage of concentration risk under a specified benchmark							26.30%	28.68%

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013
ASSETS
Cash and due from banks	$ 22,399	$ 18,216	$ 22,791
Federal funds sold	2	3	3
Cash and cash equivalents	22,401	18,219	22,794
Interest-bearing deposits in other financial institutions	235	10	10
Securities available for sale	48,742	44,388	48,096
Federal Home Loan Bank stock	3,060	3,060	3,060
Loans:
Commercial	383,759	359,368	353,526
Mortgage	119,039	110,663	104,504
Consumer	15,575	13,801	14,465
Total Loans	518,373	483,832	472,495
Allowance for loan losses	(5,279)	(4,661)	(4,959)
Net loans	513,094	479,171	467,536
Premises and equipment	9,821	10,210	10,484
Other real estate held for sale	1,843	1,884	2,568
Deferred Tax Asset	8,681	9,933	7,953
Other assets	6,066	5,925	5,416
TOTAL ASSETS	613,943	572,800	567,917
Deposits:
Noninterest bearing deposits	84,073	72,936	70,063
NOW, money market, interest checking	173,793	149,123	158,588
Savings	15,263	13,039	12,694
CDs less than $100,000	130,821	140,495	133,821
CDs more than $100,000	24,891	23,159	23,816
Brokered	62,365	67,547	62,706
Total deposits	491,206	466,299	461,688
Borrowings	44,909	37,852	35,852
Other liabilities	3,196	3,400	3,332
Total liabilities	546,811	507,551	500,872
Borrowings:
Fed funds purchased	7,500
SHAREHOLDERS' EQUITY:
Preferred stock - No par value: Authorized 500,000 shares, Issued and outstanding - none and 4,000 shares			4,000
Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares Issued and outstanding - 5,564,815; 5,541,390; and 5,581,339 shares respectively	53,800	53,621	53,915
Retained earnings	12,923	11,412	8,780
Accumulated other comprehensive income	409	216	350
Total shareholders' equity	67,132	65,249	67,045
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 613,943	$ 572,800	$ 567,917

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STOCK COMPENSATION PLANS (Details 2) (USD $)	9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Stock option transactions
Outstanding shares at beginning of year	237,152	242,152	242,152
Granted during the year (in shares)	0	0
Expired / forfeited during the year (in shares)		(5,000)
Surrendered/exchanged for restricted stock (in shares)			(5,000)
Outstanding shares at end of year	237,152	237,152	237,152
Exercisable shares at end of year	124,861	125,861	124,861
Weighted average exercise price per share at end of year (in dollars per share)	$ 9.80	$ 9.88	$ 9.80

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Consolidated Statements of Changes in Shareholders' Equity (USD $) In Thousands, except Share data, unless otherwise specified	Common Shareholders' Equity	Preferred Stock Series A	Total
Balance, beginning of period at Dec. 31, 2012	$ 61,448	$ 11,000	$ 72,448
Increase (Decrease) in Shareholders' Equity
Net income	2,969		2,969
Other comprehensive income (loss):
Net unrealized gain on securities available for sale	(574)		(574)
Total comprehensive income	2,395		2,395
Stock compensation	258		258
Repurchase of common stock	(140)		(140)
Dividend on common stock	(666)		(666)
Dividend on preferred stock	(250)		(250)
Redemption of Preferred Series A stock		(7,000)	(7,000)
Balance, end of period at Sep. 30, 2013	63,045	4,000	67,045
Balance, beginning of period at Dec. 31, 2012	61,448
Other comprehensive income (loss):
Repurchase of common stock (in shares)	(55,594)
Balance, end of period at Dec. 31, 2013	65,249
Balance, beginning of period at Jun. 30, 2013	62,520	4,000	66,520
Increase (Decrease) in Shareholders' Equity
Net income	896		896
Other comprehensive income (loss):
Net unrealized gain on securities available for sale	(80)		(80)
Total comprehensive income	816		816
Stock compensation	75		75
Repurchase of common stock	(94)		(94)
Dividend on common stock	(222)		(222)
Dividend on preferred stock	(50)		(50)
Balance, end of period at Sep. 30, 2013	63,045		67,045
Balance, beginning of period at Dec. 31, 2013	65,249
Other comprehensive income (loss):
Repurchase of common stock (in shares)	(13,700)
Balance, end of period at Mar. 31, 2014
Balance, beginning of period at Dec. 31, 2013	65,249		65,249
Increase (Decrease) in Shareholders' Equity
Net income	2,352		2,352
Other comprehensive income (loss):
Net unrealized gain on securities available for sale	193		193
Total comprehensive income	2,545		2,545
Stock compensation	321		321
Repurchase of common stock	(143)		(143)
Dividend on common stock	(840)		(840)
Balance, end of period at Sep. 30, 2014	67,132		67,132
Balance, beginning of period at Jun. 30, 2014	66,477		66,477
Increase (Decrease) in Shareholders' Equity
Net income	886		886
Other comprehensive income (loss):
Net unrealized gain on securities available for sale	(40)		(40)
Total comprehensive income	846		846
Stock compensation	96		96
Dividend on common stock	(287)		(287)
Balance, end of period at Sep. 30, 2014	$ 67,132		$ 67,132

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LOANS (Details 3) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013
Breakdown of loans by risk category
Total loans	$ 518,373	$ 483,832	$ 472,495
Minimum
Breakdown of loans by risk category
Credit risk rating for which reserves are established if no specific reserves made	6
Maximum
Breakdown of loans by risk category
Credit risk rating for which general reserves are established	5
Credit risk rating for which reserves are established if no specific reserves made	7
Commercial real estate loans
Breakdown of loans by risk category
Total loans	272,803	268,809	257,961
Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	98,714	79,655	79,511
Commercial construction
Breakdown of loans by risk category
Total loans	12,242	10,904	16,054
One to four family residential real estate
Breakdown of loans by risk category
Total loans	110,310	103,768	98,770
Consumer construction
Breakdown of loans by risk category
Total loans	8,729	6,895	5,734
Consumer
Breakdown of loans by risk category
Total loans	15,575	13,801	14,465
Strong (1)
Breakdown of loans by risk category
Total loans	3,477	5,534	6,500
Strong (1) | Commercial real estate loans
Breakdown of loans by risk category
Total loans	1,741	1,502	2,240
Strong (1) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	1,736	3,741	4,260
Strong (1) | Commercial construction
Breakdown of loans by risk category
Total loans		30
Strong (1) | One to four family residential real estate
Breakdown of loans by risk category
Total loans		251
Strong (1) | Consumer
Breakdown of loans by risk category
Total loans		10
Good (2)
Breakdown of loans by risk category
Total loans	30,038	31,211	31,512
Good (2) | Commercial real estate loans
Breakdown of loans by risk category
Total loans	24,827	23,310	23,675
Good (2) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	4,472	4,348	5,108
Good (2) | Commercial construction
Breakdown of loans by risk category
Total loans	444	479	676
Good (2) | One to four family residential real estate
Breakdown of loans by risk category
Total loans	295	3,074	1,951
Good (2) | Consumer
Breakdown of loans by risk category
Total loans			102
Average (3)
Breakdown of loans by risk category
Total loans	153,796	148,171	117,871
Average (3) | Commercial real estate loans
Breakdown of loans by risk category
Total loans	116,621	116,702	88,105
Average (3) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	34,547	27,455	22,263
Average (3) | Commercial construction
Breakdown of loans by risk category
Total loans	1,578	2,702	5,283
Average (3) | One to four family residential real estate
Breakdown of loans by risk category
Total loans	1,046	1,275	2,186
Average (3) | Consumer
Breakdown of loans by risk category
Total loans	4	37	34
Acceptable/Acceptable Watch (4)
Breakdown of loans by risk category
Total loans	192,512	172,945	176,545
Acceptable/Acceptable Watch (4) | Commercial real estate loans
Breakdown of loans by risk category
Total loans	128,126	125,010	123,373
Acceptable/Acceptable Watch (4) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	53,311	39,070	41,851
Acceptable/Acceptable Watch (4) | Commercial construction
Breakdown of loans by risk category
Total loans	6,935	4,340	6,167
Acceptable/Acceptable Watch (4) | One to four family residential real estate
Breakdown of loans by risk category
Total loans	4,119	4,482	4,522
Acceptable/Acceptable Watch (4) | Consumer
Breakdown of loans by risk category
Total loans	21	43	632
Special Mention (5)
Breakdown of loans by risk category
Total loans	60		20,616
Special Mention (5) | Commercial real estate loans
Breakdown of loans by risk category
Total loans			16,117
Special Mention (5) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans			3,746
Special Mention (5) | Commercial construction
Breakdown of loans by risk category
Total loans			753
Special Mention (5) | One to four family residential real estate
Breakdown of loans by risk category
Total loans	60
Substandard (6)
Breakdown of loans by risk category
Total loans	6,538	8,468	6,953
Substandard (6) | Commercial real estate loans
Breakdown of loans by risk category
Total loans	1,488	2,285	4,451
Substandard (6) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	4,648	5,041	2,094
Substandard (6) | Commercial construction
Breakdown of loans by risk category
Total loans	402	402	402
Substandard (6) | One to four family residential real estate
Breakdown of loans by risk category
Total loans		710	6
Substandard (6) | Consumer
Breakdown of loans by risk category
Total loans		30
Doubtful (7)
Breakdown of loans by risk category
Total loans			189
Doubtful (7) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans			189
Rating Unassigned
Breakdown of loans by risk category
Total loans	131,952	117,503	112,309
Rating Unassigned | Commercial construction
Breakdown of loans by risk category
Total loans	2,883	2,951	2,773
Rating Unassigned | One to four family residential real estate
Breakdown of loans by risk category
Total loans	104,790	93,976	90,105
Rating Unassigned | Consumer construction
Breakdown of loans by risk category
Total loans	8,729	6,895	5,734
Rating Unassigned | Consumer
Breakdown of loans by risk category
Total loans	$ 15,550	$ 13,681	$ 13,697

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EARNINGS PER SHARE (Tables)

9 Months Ended

Sep. 30, 2014

EARNINGS PER SHARE

Schedule showing the computation of basic and diluted earnings per share

The following shows the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
(Numerator):
Net income	$	886	$	896	$	2,352	$	2,969
Preferred stock dividends and accretion of discount	—		50		—		250
Net income available to common shareholders	$	886	$	846	$	2,352	$	2,719
(Denominator):
Weighted average shares outstanding - basic	5,540,200		5,562,835		5,532,966		5,559,108
Effect of dilutive stock options and vesting of restricted stock awards	71,722		—		70,268		—
Weighted average shares outstanding - diluted	5,611,922		5,562,835		5,603,234		5,559,108
Income per common share
Basic	$	.16	$	.15	$	.43	$	.49
Diluted	$	.16	$	.15	$	.42	$	.49

XML

LOANS (Details 4) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Impaired Loans
Number of days past due to be considered as nonperforming loans			90 days
Average investment
With a valuation reserve	$ 11
Total	2,610	4,536	2,143	4,407	5,999
Related Valuation Reserve	1,478	1,555	1,478	1,555	370
Interest Income on Accrual Basis
Total	40	60	93	177	228
Nonaccrual Basis
Recorded investment
Total	2,695	4,313	2,695	4,313	2,024
Commercial real estate loans
Average investment
With no valuation reserve		412		501	3,045
With a valuation reserve	340	2,581	427	2,557	71
Total	340	2,993	427	3,058	3,116
Related Valuation Reserve	227	1,272	227	1,272	14
Interest Income on Accrual Basis
With no valuation reserve				26	153
With a valuation reserve	4	42	20	102	5
Total	4	42	20	128	158
Commercial real estate loans | Nonaccrual Basis
Recorded investment
With no valuation reserve		238		238	513
With a valuation reserve	227	2,589	227	2,589	59
Total	227	2,827	227	2,827	572
Commercial, financial, and agricultural
Average investment
With no valuation reserve		147		243	505
With a valuation reserve	1,770	741	1,268	373	834
Total	1,770	888	1,268	616	1,339
Related Valuation Reserve	1,104	33	1,104	33	265
Interest Income on Accrual Basis
With no valuation reserve		3		9	13
With a valuation reserve	28	5	52	11	18
Total	28	8	52	20	31
Commercial, financial, and agricultural | Nonaccrual Basis
Recorded investment
With no valuation reserve					59
With a valuation reserve	1,735	767	1,735	767	752
Total	1,735	767	1,735	767	811
Commercial construction
Average investment
With no valuation reserve				193	626
Total				193	626
Interest Income on Accrual Basis
With no valuation reserve				3	3
Total				3	3
One to four family residential real estate
Average investment
With no valuation reserve		86		140	625
With a valuation reserve	489	560	434	396	261
Total	489	646	434	536	886
Related Valuation Reserve	147	250	147	250	78
Interest Income on Accrual Basis
With no valuation reserve		2		7	16
With a valuation reserve	7	8	20	19	20
Total	7	10	20	26	36
One to four family residential real estate | Nonaccrual Basis
Recorded investment
With no valuation reserve		67		67	361
With a valuation reserve	733	642	733	642	250
Total	733	709	733	709	611
Consumer
Average investment
With no valuation reserve		9		4	2
With a valuation reserve			14		30
Total	11	9	14	4	32
Related Valuation Reserve					13
Interest Income on Accrual Basis
With a valuation reserve	1		1
Total	1		1
Consumer | Nonaccrual Basis
Recorded investment
With no valuation reserve		10		10
With a valuation reserve					30
Total		$ 10		$ 10	$ 30

XML

LOANS (Tables)

9 Months Ended

Sep. 30, 2014

LOANS

Schedule of composition of loans

The composition of loans is as follows (dollars in thousands):

	September 30,		December 31,		September 30,
	2014		2013		2013
Commercial real estate	$	272,803	$	268,809	$	257,961
Commercial, financial, and agricultural	98,714		79,655		79,511
One to four family residential real estate	110,310		103,768		98,770
Construction :
Consumer	8,729		6,895		5,734
Commerical	12,242		10,904		16,054
Consumer	15,575		13,801		14,465
Total loans	$	518,373	$	483,832	$	472,495

Schedule of the allowance for loan losses

An analysis of the allowance for loan losses for nine months ended September 30, 2014, the year ended December 31, 2013 and the nine months ended September 30, 2013 is as follows (dollars in thousands):

	September 30,			December 31,			September 30,
	2014			2013			2013
Balance at beginning of period	$	4,661		$	5,218		$	5,218
Loans charged off	(185		)	(2,432		)	(1,263		)
Recoveries on loans previously charged off	242			200			154
Provision	561			1,675			850
Balance at end of period	$	5,279		$	4,661		$	4,959

Schedule of breakdown of the allowance for loan losses and recorded balances in loans

A breakdown of the allowance for loan losses and recorded balances in loans at September 30, 2014 is as follows (dollars in thousands):

			Commercial,				One to four
	Commercial		financial and		Commercial		family residential		Consumer
	real estate		agricultural		construction		real estate		construction		Consumer		Unallocated		Total
Three Months Ended September 30, 2014
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,630	$	1,669	$	40	$	345	$	15	$	111	$	1,287	$	5,097
Charge-offs	(18)		(9)		—		(28)		—		(15)		—		(70)
Recoveries	31		16		3		4		—		11		—		65
Provision	(1)		(153)		1		80		3		1		256		187
Ending balance ALLR	$	1,642	$	1,523	$	44	$	401	$	18	$	108	$	1,543	$	5,279
Nine Months Ended September 30, 2014
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,849	$	1,378	$	80	$	516	$	25	$	148	$	665	$	4,661
Charge-offs	(19)		(74)		—		(44)		—		(48)		—		(185)
Recoveries	105		75		9		18		—		35		—		242
Provision	(293)		144		(45)		(89)		(7)		(27)		878		561
Ending balance ALLR	$	1,642	$	1,523	$	44	$	401	$	18	$	108	$	1,543	$	5,279
At September 30,2014
Loans:
Ending balance	$	272,803	$	98,714	$	12,242	$	110,310	$	8,729	$	15,575	$	—	$	518,373
Ending balance ALLR	(1,642)		(1,523)		(44)		(401)		(18)		(108)		(1,543)		(5,279)
Net loans	$	271,161	$	97,191	$	12,198	$	109,909	$	8,711	$	15,467	$	(1,543)	$	513,094
Ending balance ALLR:
Individually evaluated	$	312	$	1,104	$	—	$	167	$	—	$	32	$	—	$	1,615
Collectively evaluated	1,330		419		44		234		18		76		1,543		3,664
Total	$	1,642	$	1,523	$	44	$	401	$	18	$	108	$	1,543	$	5,279
Ending balance Loans:
Individually evaluated	$	378	$	1,730	$	—	$	1,202	$	—	$	61	$	—	$	3,371
Collectively evaluated	272,425		96,984		12,242		109,108		8,729		15,514		—		515,002
Total	$	272,803	$	98,714	$	12,242	$	110,310	$	8,729	$	15,575	$	—	$	518,373

A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2013 is as follows (dollars in thousands):

			Commercial,				One to four
	Commercial		financial and		Commercial		family residential		Consumer
	real estate		agricultural		construction		real estate		construction		Consumer		Unallocated		Total
Allowance for loan loss reserve:
Beginning balance ALLR	$	3,267	$	692	$	125	$	980	$	—	$	—	$	154	5,218
Charge-offs	(1,539)		(632)		—		(141)		—		(120)		—		(2,432)
Recoveries	92		56		2		26		2		22		—		200
Provision	29		1,262		(47)		(349)		23		246		511		1,675
Ending balance ALLR	$	1,849	$	1,378	$	80	$	516	$	25	$	148	$	665	$	4,661
Loans:
Ending balance	$	268,809	$	79,655	$	10,904	$	103,768	$	6,895	$	13,801	$	—	$	483,832
Ending balance ALLR	(1,849)		(1,378)		(80)		(516)		(25)		(148)		(665)		(4,661)
Net loans	$	266,960	$	78,277	$	10,824	$	103,252	$	6,870	$	13,653	$	(665)	$	479,171
Ending balance ALLR:
Individually evaluated	$	99	$	891	$	—	$	103	$	—	$	18	$	—	$	1,111
Collectively evaluated	1,750		487		80		413		25		130		665		3,550
Total	$	1,849	$	1,378	$	80	$	516	$	25	$	148	$	665	$	4,661
Ending balance Loans:
Individually evaluated	$	649	$	1,830	$	—	$	385	$	—	$	42	$	—	$	2,906
Collectively evaluated	268,160		77,825		10,904		103,383		6,895		13,759		—		480,926
Total	$	268,809	$	79,655	$	10,904	$	103,768	$	6,895	$	13,801	$	—	$	483,832

A breakdown of the allowance for loan losses and recorded balances in loans at September 30, 2013 is as follows (dollars in thousands):

			Commercial,				One to four
	Commercial		financial and		Commercial		family residential		Consumer
	real estate		agricultural		construction		real estate		construction		Consumer		Unallocated		Total
Three Months Ended September 30, 2013
Allowance for loan loss reserve:
Beginning balance ALLR	$	2,661	$	1,090	$	97	$	877	$	—	$	13	$	439	$	5,177
Charge-offs	(132)		(476)		—		(25)		—		(14)		—		(647)
Recoveries	23		20		—		6		1		4		—		54
Provision	3		522		(16)		44		(1)		15		(192)		375
Ending balance ALLR	$	2,555	$	1,156	$	81	$	902	$	—	$	18	$	247	$	4,959
Nine Months Ended September 30, 2013
Allowance for loan loss reserve:
Beginning balance ALLR	$	3,267	$	692	$	125	$	980	$	—	$	—	$	154	$	5,218
Charge-offs	(588)		(552)		—		(38)		—		(85)		—		(1,263)
Recoveries	64		53		2		17		1		17		—		154
Provision	(188)		963		(46)		(57)		(1)		86		93		850
Ending balance ALLR	$	2,555	$	1,156	$	81	$	902	$	—	$	18	$	247	$	4,959
At September 30,2013
Loans:
Ending balance	$	257,961	$	79,511	$	16,054	$	98,770	$	5,734	$	14,465	$	—	$	472,495
Ending balance ALLR	(2,555)		(1,156)		(81)		(902)		—		(18)		(247)		(4,959)
Net loans	$	255,406	$	78,355	$	15,973	$	97,868	$	5,734	$	14,447	$	(247)	$	467,536
Ending balance ALLR:
Individually evaluated	$	1,407	$	802	$	6	$	246	$	—	$	18	$	—	$	2,479
Collectively evaluated	1,148		354		75		656		—		—		247		2,480
Total	$	2,555	$	1,156	$	81	$	902	$	—	$	18	$	247	$	4,959
Ending balance Loans:
Individually evaluated	$	13,475	$	7,638	$	798	$	450	$	—	$	35	$	—	$	22,396
Collectively evaluated	244,486		71,873		15,256		98,320		5,734		14,430		—		450,099
Total	$	257,961	$	79,511	$	16,054	$	98,770	$	5,734	$	14,465	$	—	$	472,495

Schedule of breakdown of loans by risk category

Below is a breakdown of loans by risk category as of September 30, 2014 (dollars in thousands):

	(1)		(2)		(3)		(4)		(5)		(6)		(7)		Rating
							Acceptable/
	Excellent		Good		Average		Acceptable Watch		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	1,741	$	24,827	$	116,621	$	128,126	$	—	$	1,488	$	—	$	—	$	272,803
Commercial, financial and agricultural	1,736		4,472		34,547		53,311		—		4,648		—		—		98,714
Commercial construction	—		444		1,578		6,935		—		402		—		2,883		12,242
One to four family residential real estate	—		295		1,046		4,119		60		—		—		104,790		110,310
Consumer construction	—		—		—		—		—		—		—		8,729		8,729
Consumer	—		—		4		21		—		—		—		15,550		15,575
Total loans	$	3,477	$	30,038	$	153,796	$	192,512	$	60	$	6,538	$	—	$	131,952	$	518,373

Below is a breakdown of loans by risk category as of December 31, 2013 (dollars in thousands):

	(1)		(2)		(3)		(4)		(5)		(6)		(7)		Rating
							Acceptable/
	Excellent		Good		Average		Acceptable Watch		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	1,502	$	23,310	$	116,702	$	125,010	$	—	$	2,285	$	—	$	—	$	268,809
Commercial, financial and agricultural	3,741		4,348		27,455		39,070		—		5,041		—		—		79,655
Commercial construction	30		479		2,702		4,340		—		402		—		2,951		10,904
One-to-four family residential real estate	251		3,074		1,275		4,482		—		710		—		93,976		103,768
Consumer construction	—		—		—		—		—		—		—		6,895		6,895
Consumer	10		—		37		43		—		30		—		13,681		13,801
Total loans	$	5,534	$	31,211	$	148,171	$	172,945	$	—	$	8,468	$	—	$	117,503	$	483,832

Below is a breakdown of loans by risk category as of September 30, 2013 (dollars in thousands):

	(1)		(2)		(3)		(4)		(5)		(6)		(7)		Rating
	Excellent		Good		Average		Acceptable		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	2,240	$	23,675	$	88,105	$	123,373	$	16,117	$	4,451	$	—	$	—	$	257,961
Commercial, financial and agricultural	4,260		5,108		22,263		41,851		3,746		2,094		189		—		79,511
Commercial construction	—		676		5,283		6,167		753		402		—		2,773		16,054
One to four family residential real estate	—		1,951		2,186		4,522		—		6		—		90,105		98,770
Consumer construction	—		—		—		—		—		—		—		5,734		5,734
Consumer	—		102		34		632		—		—		—		13,697		14,465
Total loans	$	6,500	$	31,512	$	117,871	$	176,545	$	20,616	$	6,953	$	189	$	112,309	$	472,495

Summary of impaired loans and their effect on interest income

The following is a summary of impaired loans and their effect on interest income (dollars in thousands):

											Three Months Ended				Nine Months Ended
					QTD		YTD				Interest Income		Interest Income		Interest Income		Interest Income
	Nonaccrual		Accrual		Average		Average		Related		Recognized		on		Recognized		on
	Basis		Basis		Investment		Investment		Valuation Reserve		During Impairment		Accrual Basis		During Impairment		Accrual Basis
September 30, 2014
With no valuation reserve:
Commercial real estate	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial, financial and agricultural	—		—		—		—		—		—		—		—		—
Commercial construction	—		—		—		—		—		—		—		—		—
One to four family residential real estate	—		—		—		—		—		—		—		—		—
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—
With a valuation reserve:															$	—
Commercial real estate	$	227	$	—	$	340	$	427	$	227	$	—	$	4	—		$	20
Commercial, financial and agricultural	1,735		—		1,770		1,268		1,104		—		28		—		52
Commercial construction	—		—		—		—		—		—		—		—		—
One to four family residential real estate	733		—		489		434		147		—		7		—		20
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	—		—		11		14		—		—		1				1
Total:
Commercial real estate	$	227	$	—	$	340	$	427	$	227	$	—	$	4	$	—	$	20
Commercial, financial and agricultural	1,735		—		1,770		1,268		1,104		—		28		—		52
Commercial construction	—		—		—		—		—		—		—		—		—
One to four family residential real estate	733		—		489		434		147		—		7		—		20
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	—		—		11		14		—		—		1		—		1
Total	$	2,695	$	—	$	2,610	$	2,143	$	1,478	$	—	$	40	$	—	$	93

									Interest Income		Interest Income
For the Year Ended:	Nonaccrual		Accrual		Average		Related		Recognized		on
December 31, 2013	Basis		Basis		Investment		Valuation Reserve		During Impairment		Accrual Basis
With no valuation reserve:
Commercial real estate	$	513	$	—	$	3,045	$	—	$	—	$	153
Commercial, financial and agricultural	59		—		505		—		—		13
Commercial construction	—		—		626		—		—		3
One to four family residential real estate	361		—		625		—		—		16
Consumer construction	—		—		—		—		—		—
Consumer	—		—		2		—		—		—
With a valuation reserve:
Commercial real estate	$	59	$	—	$	71	$	14	$	—	$	5
Commercial, financial and agricultural	752		—		834		265		—		18
Commercial construction	—		—		—		—		—		—
One to four family residential real estate	250		—		261		78		—		20
Consumer construction	—		—		—		—		—		—
Consumer	30		—		30		13		—		—
Total:
Commercial real estate	$	572	$	—	$	3,116	$	14	$	—	$	158
Commercial, financial and agricultural	811		—		1,339		265		—		31
Commercial construction	—		—		626		—		—		3
One to four family residential real estate	611		—		886		78		—		36
Consumer construction	—		—		—		—		—		—
Consumer	30		—		32		13		—		—
Total	$	2,024	$	—	$	5,999	$	370	$	—	$	228

											Three Months Ended				Nine Months Ended
					QTD		YTD				Interest Income		Interest Income		Interest Income		Interest Income
	Nonaccrual		Accrual		Average		Average		Related		Recognized		on		Recognized		on
	Basis		Basis		Investment		Investment		Valuation Reserve		During Impairment		Accrual Basis		During Impairment		Accrual Basis
September 30, 2013
With no valuation reserve:
Commercial real estate	$	238	$	—	$	412	$	501	$	—	$	—	$	—	$	—	$	26
Commercial, financial and agricultural	—		—		147		243		—		—		3		—		9
Commercial construction	—		—		—		193		—		—		—		—		3
One to four family residential real estate	67		—		86		140		—		—		2		—		7
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	10		—		9		4		—		—		—		—		—
With a valuation reserve:
Commercial real estate	$	2,589	$	—	$	2,581	$	2,557	$	1,272	$	—	$	42	$	—	$	102
Commercial, financial and agricultural	767		—		741		373		33		—		5		—		11
Commercial construction	—		—		—		—		—		—		—		—		—
One to four family residential real estate	642		—		560		396		250		—		8		—		19
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—
Total:
Commercial real estate	$	2,827	$	—	$	2,993	$	3,058	$	1,272	$	—	$	42	$	—	$	128
Commercial, financial and agricultural	767		—		888		616		33		—		8		—		20
Commercial construction	—		—		—		193		—		—		—		—		3
One to four family residential real estate	709		—		646		536		250		—		10		—		26
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	10		—		9		4		—		—		—		—		—
Total	$	4,313	$	—	$	4,536	$	4,407	$	1,555	$	—	$	60	$	—	$	177

Summary of past due loans

A summary of past due loans at September 30, 2014, December 31, 2013 and September 30, 2013 is as follows (dollars in thousands):

	September 30,						December 31,						September 30,
	2014						2013						2013
	30-89 days		90+ days				30-89 days		90+ days				30-89 days		90+ days
	Past Due		Past Due/				Past Due		Past Due/				Past Due		Past Due/
	(accruing)		Nonaccrual		Total		(accruing)		Nonaccrual		Total		(accruing)		Nonaccrual		Total
Commercial real estate	$	540	$	227	$	767	$	—	$	572	$	572	$	—	$	2,827	$	2,827
Commercial, financial and agricultural	306		1,735		2,041		4		811		815		100		767		867
Commercial construction	55		—		55		20		—		20		—		—		—
One to four family residential real estate	414		733		1,147		201		611		812		186		709		895
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	55		—		55		14		30		44		31		10		41
Total past due loans	$	1,370	$	2,695	$	4,065	$	239	$	2,024	$	2,263	$	317	$	4,313	$	4,630

Schedule of roll-forward of nonaccrual activity

A roll-forward of nonaccrual activity for the three months ended September 30, 2014 (dollars in thousands):

	For the Three Months Ended September 30, 2014
			Commercial,				One to four
	Commercial		Financial and		Commercial		family residential		Consumer
	Real Estate		Agricultural		Construction		real estate		Construction		Consumer		Total
NONACCRUAL
Beginning balance	$	454	$	1,808	$	—	$	383	$	—	$	7	$	2,652
Principal payments	(2)		(79)		—		(7)		—		—		(88)
Charge-offs	(18)		(3)		—		(10)		—		(7)		(38)
Advances	—		—		—		—		—		—		—
Class transfers	—		—		—		—		—		—		—
Transfers to OREO	(207)		—		—		—		—		—		(207)
Transfers to accruing	—		—		—		—		—		—		—
Transfers from accruing	—		3		—		368		—		—		371
Other	—		6		—		(1)		—		—		5
Ending balance	$	227	$	1,735	$	—	$	733	$	—	$	—	$	2,695

A roll-forward of nonaccrual activity for the three months ended September 30, 2013 (dollars in thousands):

	For the Three Months Ended September 30, 2013
			Commercial,				One to four
	Commercial		Financial and		Commercial		family residential		Consumer
	Real Estate		Agricultural		Construction		real estate		Construction		Consumer		Total
NONACCRUAL
Beginning balance	$	3,057	$	517	$	—	$	400	$	—	$	9	$	3,983
Principal payments	(26)		(224)		—		(12)		—		(1)		(263)
Charge-offs	(23)		(476)		—		(24)		—		—		(523)
Advances	—		—		—		—		—		—		—
Class transfers	—		—		—		—		—		—		—
Transfers to OREO	(208)		(37)		—		—		—		—		(245)
Transfers to accruing	—		—		—		—		—		—		—
Transfers from accruing	—		966		—		344		—		2		1,312
Other	27		21		—		1						49
Ending balance	$	2,827	$	767	$	—	$	709	$	—	$	10	$	4,313

A roll-forward of nonaccrual activity for the nine months ended September 30, 2014 (dollars in thousands):

	For the Nine Months Ended September 30, 2014
			Commercial,				One to four
	Commercial		Financial and		Commercial		family residential		Consumer
	Real Estate		Agricultural		Construction		real estate		Construction		Consumer		Total
NONACCRUAL
Beginning balance	$	572	$	811	$	—	$	611	$	—	$	30	$	2,024
Principal payments	(104)		(160)		—		(29)		—		(4)		(297)
Charge-offs	(18)		(56)		—		(13)		—		(32)		(119)
Advances	—		—		—		—		—		—		—
Class transfers	—		—		—		—		—		—		—
Transfers to OREO	(233)		—		—		(257)		—		—		(490)
Transfers to accruing	—		(10)		—		(127)		—		—		(137)
Transfers from accruing	—		1,142		—		539		—		6		1,687
Other	10		8		—		9		—		—		27
Ending balance	$	227	$	1,735	$	—	$	733	$	—	$	—	$	2,695

A roll-forward of nonaccrual activity for the nine months ended September 30, 2013 (dollars in thousands):

	For the Nine Months Ended September 30, 2013
				Commercial,						One to four
	Commercial			Financial and			Commercial			family residential			Consumer
	Real Estate			Agricultural			Construction			real estate			Construction		Consumer			Total
NONACCRUAL
Beginning balance	$	3,071		$	436		$	675		$	505		$	—	$	—		$	4,687
Principal payments	(174		)	(292		)	(100		)	(77		)	—		(1		)	(644		)
Charge-offs	(352		)	(548		)	—			(37		)	—		(4		)	(941		)
Advances	—			—			—			—			—		—			—
Class transfers	—			—			—			—			—		—			—
Transfers to OREO	(208		)	(37		)	(580		)	(107		)	—		—			(932		)
Transfers to accruing	—			—			—			—			—		—			—
Transfers from accruing	443			1,207			—			420			—		15			2,085
Other	47			1			5			5			—		—			58
Ending balance	$	2,827		$	767		$	—		$	709		$	—	$	10		$	4,313

A roll-forward of nonaccrual activity during the year ended December 31, 2013 (dollars in thousands):

				Commercial,						One to four
	Commercial			Financial and			Commercial			family residential			Consumer
	Real Estate			Agricultural			Construction			real estate			Construction		Consumer			Total
NONACCRUAL
Beginning balance	$	3,071		$	436		$	675		$	505		$	—	$	—		$	4,687
Principal payments	(1,478		)	(319		)	(100		)	(88		)	—		(2		)	(1,987		)
Charge-offs	(1,304		)	(616		)	—			(141		)	—		(4		)	(2,065		)
Advances	—			—			—			—			—		—			—
Class transfers	—			—			—			—			—		—			—
Transfers to OREO	(208		)	(37		)	(580		)	(107		)	—		—			(932		)
Transfers to accruing	—			—			—			—			—		—			—
Transfers from accruing	443			1,346			—			434			—		36			2,259
Other	48			1			5			8			—		—			62
Ending balance	$	572		$	811		$	—		$	611		$	—	$	30		$	2,024

Summary of troubled debt restructurings

A summary of troubled debt restructurings occurring during the periods indicated is as follows (dollars in thousands):

	September 30,			December 31,			September 30,
	2014			2013			2013
	Number of	Recorded		Number of	Recorded		Number of	Recorded
	Modifications	Investment		Modifications	Investment		Modifications	Investment
Commercial real estate	—	$	—	—	$	—	—	$	—
Commercial, financial and agricultural	—	—		1	528		1	528
Commercial construction	—	—		—	—		—	—
One to four family residential real estate	—	—		—	—		—	—
Consumer construction	—	—		—	—		—	—
Consumer	—	—		—	—		—	—
Total troubled debt restructurings	—	$	—	1	$	528	1	$	528

Schedule of roll-forward of troubled debt restructurings

A roll-forward of troubled debt restructuring during the three months ended September 30, 2014 (dollars in thousands):

			Commercial,					One to four			Consumer and
	Commercial		Financial and		Commercial			family residential			Consumer
	Real Estate		Agricultural		Construction			real estate			Construction		Total
ACCRUING
Beginning balance	$	1,007	$	1,186	$	858		$	98		$	—	$	3,149
Principal payments	—		—		(3		)	(1		)	—		(4		)
Charge-offs	—		—		—			—			—		—
Advances	—		—		—			—			—		—
New restructured	—		—		—			—			—		—
Transferred out of TDR	—		—		—			—			—		—
Transfers to nonaccrual	—		—		—			—			—		—
Ending Balance	$	1,007	$	1,186	$	855		$	97		$	—	$	3,145
NONACCRUAL
Beginning balance	$	—	$	508	$	—		$	89		$	—	$	597
Principal payments	—		—		—			—			—		—
Charge-offs	—		—		—			—			—		—
Advances	—		—		—			—			—		—
New restructured	—		—		—			—			—		—
Transfers to foreclosed properties	—		—		—			—			—		—
Transfers from accruing	—		—		—			—			—		—
Ending Balance	$	—	$	508	$	—		$	89		$	—	$	597
TOTALS
Beginning balance	$	1,007	$	1,694	$	858		$	187		$	—	$	3,746
Principal payments	—		—		(3		)	(1		)	—		(4		)
Charge-offs	—		—		—			—			—		—
Advances	—		—		—			—			—		—
New restructured	—		—		—			—			—		—
Transfers out of TDRs	—		—		—			—			—		—
Tansfers to nonaccrual	—		—		—			—			—		—
Transfers to foreclosed properties	—		—		—			—			—		—
Transfers from accruing	—		—		—			—			—		—
Ending Balance	$	1,007	$	1,694	$	855		$	186		$	—	$	3,742

A roll-forward of troubled debt restructuring during the three months ended September 30, 2013 (dollars in thousands):

				Commercial,					One to four			Consumer and
	Commercial			Financial and			Commercial		family residential			Consumer
	Real Estate			Agricultural			Construction		real estate			Construction		Total
ACCRUING
Beginning balance	$	3,563		$	2,174		$	858	$	100		$	—	$	6,695
Principal payments	(20		)	(25		)	—		(1		)			(46		)
Charge-offs	—			(400		)	—		—			—		(400		)
Advances	—			—			—		—			—		—
New restructured	—			—			—		—			—		—
Transferred out of TDR	—			—			—		—			—		—
Transfers to nonaccrual	—			(528		)	—		—			—		(528		)
Ending Balance	$	3,543		$	1,221		$	858	$	99		$	—	$	5,721
NONACCRUAL
Beginning balance	$	2,169		$	—		$	—	$	106		$	—	$	2,275
Principal payments	(87		)	—			—		(14		)	—		(101		)
Charge-offs	—			—			—		—			—		—
Advances	—			—			—		—			—		—
New restructured	—			—			—		—			—		—
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			528			—		—			—		528
Ending Balance	$	2,082		$	528		$	—	$	92		$	—	$	2,702
TOTALS
Beginning balance	$	5,732		$	2,174		$	858	$	206		$	—	$	8,970
Principal payments	(107		)	(25		)	—		(15		)	—		(147		)
Charge-offs	—			(400		)	—		—			—		(400		)
Advances	—			—			—		—			—		—
New restructured	—			—			—		—			—		—
Transfers out of TDRs	—			—			—		—			—		—
Tansfers to nonaccrual	—			(528		)	—		—			—		(528		)
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			528			—		—			—		528
Ending Balance	$	5,625		$	1,749		$	858	$	191		$	—	$	8,423

A roll-forward of troubled debt restructuring during the nine months ended September 30, 2014 (dollars in thousands):

				Commercial,						One to four			Consumer and
	Commercial			Financial and			Commercial			family residential			Consumer
	Real Estate			Agricultural			Construction			real estate			Construction		Total
ACCRUING
Beginning balance	$	3,520		$	1,186		$	858		$	99		$	—	$	5,663
Principal payments	(2,513		)	—			(3		)	(4		)	—		(2,520		)
Charge-offs	—			—			—			—			—		—
Advances	—			—			—			—			—		—
New restructured	—			—			—			—			—		—
Transferred out of TDRs	—			—			—			91			—		91
Transfers to nonaccrual	—			—			—			(89		)	—		(89		)
Ending Balance	$	1,007		$	1,186		$	855		$	97		$	—	$	3,145
NONACCRUAL
Beginning balance	$	—		$	523		$	—		$	91		$	—	$	614
Principal payments	—			(15		)	—			—			—		(15		)
Charge-offs	—			—			—			—			—		—
Advances	—			—			—			—			—		—
New restructured	—			—			—			—			—		—
Transfers to foreclosed properties	—			—			—			(91		)	—		(91		)
Transfers from accruing	—			—			—			89			—		89
Ending Balance	$	—		$	508		$	—		$	89		$	—	$	597
TOTALS
Beginning balance	$	3,520		$	1,709		$	858		$	190		$	—	$	6,277
Principal payments	(2,513		)	(15		)	(3		)	(4		)	—		(2,535		)
Charge-offs	—			—			—			—			—		—
Advances	—			—			—			—			—		—
New restructured	—			—			—			—			—		—
Transfers out of TDR	—			—			—			91			—		91
Transfers to nonaccrual	—			—			—			(89		)	—		(89		)
Transfers to foreclosed properties	—			—			—			89			—		89
Transfer from accruing	—			—			—			(91		)	—		(91		)
Ending Balance	$	1,007		$	1,694		$	855		$	186		$	—	$	3,742

A roll-forward of troubled debt restructuring during the nine months ended September 30, 2013 (dollars in thousands):

				Commercial,					One to four			Consumer and
	Commercial			Financial and			Commercial		family residential			Consumer
	Real Estate			Agricultural			Construction		real estate			Construction		Total
ACCRUING
Beginning balance	$	3,611		$	1,221		$	858	$	102		$	—	$	5,792
Principal payments	(68		)	(25		)	—		(3		)	—		(96		)
Charge-offs	—			(400		)	—		—			—		(400		)
Advances	—			—			—		—			—		—
New restructured	—			953			—		—			—		953
Transferred out of TDRs	—			—			—		—			—		—
Transfers to nonaccrual	—			(528		)	—		—			—		(528		)
Ending Balance	$	3,543		$	1,221		$	858	$	99		$	—	$	5,721
NONACCRUAL
Beginning balance	$	2,162		$	—		$	—	$	102		$	—	$	2,264
Principal payments	(87		)	—			—		(14		)	—		(101		)
Charge-offs	—			—			—		—			—		—
Advances	—			—			—		—			—		—
New restructured	7			—			—		4			—		11
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			528			—		—			—		528
Ending Balance	$	2,082		$	528		$	—	$	92		$	—	$	2,702
TOTALS
Beginning balance	$	5,773		$	1,221		$	858	$	204		$	—	$	8,056
Principal payments	(155		)	(25		)	—		(17		)	—		(197		)
Charge-offs	—			(400		)	—		—			—		(400		)
Advances	—			—			—		—			—		—
New restructured	7			953			—		4			—		964
Transfers out of TDR	—			—			—		—			—		—
Transfers to nonaccrual	—			(528		)	—		—			—		(528		)
Transfers to foreclosed properties	—			528			—		—			—		528
Transfer from accruing	—			—			—		—			—		—
Ending Balance	$	5,625		$	1,749		$	858	$	191		$	—	$	8,423

A roll-forward of troubled debt restructuring during the year ended December 31, 2013 (dollars in thousands):

				Commercial,					One to four			Consumer and
	Commercial			Financial and			Commercial		family residential			Consumer
	Real Estate			Agricultural			Construction		real estate			Construction		Total
ACCRUING
Beginning balance	$	3,611		$	1,221		$	858	$	102		$	—	$	5,792
Principal payments	(91		)	(460		)			(3		)	—		(554		)
Charge-offs	—			—					—			—		—
Advances	—			—					—			—		—
New restructured	—			953					—			—		953
Transferred out of TDR	—			—					—			—		—
Transfers to nonaccrual	—			(528		)			—			—		(528		)
Ending Balance	$	3,520		$	1,186		$	858	$	99		$	—	$	5,663
NONACCRUAL
Beginning balance	$	2,162		$	—		$	—	$	102		$	—	$	2,264
							—
Principal payments	(1,376		)	(5		)	—		(15		)	—		(1,396		)
Charge-offs	(793		)	—			—		—			—		(793		)
Advances	—			—			—		—			—		—
New restructured	7			528			—		4			—		539
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			—			—		—			—		—
Ending Balance	$	—		$	523		$	—	$	91		$	—	$	614
TOTALS
Beginning balance	$	5,773		$	1,221		$	858	$	204		$	—	$	8,056
Principal payments	(1,467		)	(465		)	—		(18		)	—		(1,950		)
Charge-offs	(793		)	—			—		—			—		(793		)
Advances	—			—			—		—			—		—
New restructured	7			1,481			—		4			—		1,492
Transfers out of TDRs	—			—			—		—			—		—
Tansfers to nonaccrual	—			(528		)	—		—			—		(528		)
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			—			—		—			—		—
Ending Balance	$	3,520		$	1,709		$	858	$	190		$	—	$	6,277

Schedule of activity in insider loans granted to the entity's executive officers and directors, including their families and firms

Activity in such loans is summarized below (dollars in thousands):

	September 30,			December 31,			September 30,
	2014			2013			2013
Loans outstanding, beginning of period	$	9,043		$	11,297		$	11,297
New loans	33			496			496
Net activity on revolving lines of credit	1,052			(266		)	(263		)
Principal payments	(1,614		)	(2,484		)	(1,442		)
Loans outstanding, end of period	$	8,514		$	9,043		$	10,088

XML

Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Cash Flows from Operating Activities:
Net income	$ 2,352	$ 2,969
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,115	1,264
Provision for loan losses	561	850
Deferred income taxes, net	1,203	1,508
(Gain) loss on sales/calls of securities		(29)
(Gain) on sale of loans sold to secondary market	(358)	(609)
Origination of loans held for sale in secondary market	(21,395)	(44,568)
Proceeds from sale of loans in the secondary market	21,753	45,177
Loss on sale of premises, equipment, and other real estate held for sale	77	13
Writedown of other real estate held for sale	142	134
Stock compensation	321	258
Change in other assets	(141)	(201)
Change in other liabilities	(204)	283
Net cash provided by operating activities	5,426	7,049
Cash Flows from Investing Activities:
Net increase in loans	(35,022)	(25,393)
Net decrease in deposits held at other bank	(225)
Purchase of securities available for sale	(8,257)	(7,875)
Proceeds from maturities, sales, calls or paydowns of securities available for sale	4,059	2,378
Capital expenditures	(1,156)	(757)
Proceeds from sale of premises, equipment, and other real estate	876	1,429
Net cash (used in) investing activities	(39,725)	(30,218)
Cash Flows from Financing Activities:
Net increase in deposits	24,907	27,131
Net increase in borrowings	7,330
Repurchase of common stock	(143)	(140)
Dividend on common stock	(840)	(666)
Redemption of Series A Preferred Stock		(7,000)
Dividend on preferred stock		(250)
Principal payments on borrowings	(273)	(73)
Net cash provided by financing activities	38,481	19,002
Net increase in fed funds purchased	7,500
Net (decrease) in cash and cash equivalents	4,182	(4,167)
Cash and cash equivalents at beginning of period	18,219	26,961
Cash and cash equivalents at end of period	22,401	22,794
Cash paid during the year for:
Interest	3,058	2,721
Income taxes	75	124
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)	$ 488	$ 932

XML

Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013
Consolidated Balance Sheets
Preferred stock, par value	$ 0	$ 0	$ 0
Preferred stock, Authorized shares	500,000	500,000	500,000
Preferred stock, shares issued	0	0	4,000
Preferred stock, shares outstanding	0	0	4,000
Common stock, par value	$ 0	$ 0	$ 0
Common stock, Authorized shares	18,000,000	18,000,000	18,000,000
Common stock, Shares issued	5,564,815	5,541,390	5,581,339
Common stock, Shares outstanding	5,564,815	5,541,390	5,581,339

XML

FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2014

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

10.  FAIR VALUE MEASUREMENTS

Fair value estimates, methods, and assumptions are set forth below for the Corporation’s financial instruments:

Cash, cash equivalents, and interest-bearing deposits - The carrying values approximate the fair values for these assets.

Securities - Fair values are based on quoted market prices where available.  If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Federal Home Loan Bank stock — Federal Home Loan Bank stock is carried at cost, which is its redeemable value and approximates its fair value, since the market for this stock is limited.

Loans - Fair values are estimated for portfolios of loans with similar financial characteristics.  Loans are segregated by type such as commercial, residential mortgage, and other consumer.  The fair value of loans is calculated by discounting scheduled cash flows using discount rates reflecting the credit and interest rate risk inherent in the loan.

The methodology in determining fair value of nonaccrual loans is to average them into the blended interest rate at 0% interest.  This has the effect of decreasing the carrying amount below the risk-free rate amount and, therefore, discounts the estimated fair value.

Impaired loans are measured at the estimated fair value of the expected future cash flows at the loan’s effective interest rate or the fair value of the collateral for loans which are collateral dependent.  Therefore, the carrying values of impaired loans approximate the estimated fair values for these assets.

Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits and savings, is equal to the amount payable on demand at the reporting date.  The fair value of time deposits is based on the discounted value of contractual cash flows applying interest rates currently being offered on similar time deposits.

Borrowings - Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.  The fair value of borrowed funds due on demand is the amount payable at the reporting date.

Accrued interest - The carrying amount of accrued interest approximates fair value.

Off-balance-sheet instruments - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the counterparties.  Since the differences in the current fees and those reflected to the off-balance-sheet instruments at year-end are immaterial, no amounts for fair value are presented.

The following table presents information for financial instruments at September 30, 2014, December 31, 2013 and September 30, 2013 (dollars in thousands):

		September 30, 2014				December 31, 2013				September 30, 2013
	Level in Fair	Carrying		Estimated		Carrying		Estimated		Carrying		Estimated
	Value Hierarchy	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	22,401	$	22,401	$	18,219	$	18,219	$	22,794	$	22,794
Interest-bearing deposits	Level 2	235		235		10		10		10		10
Securities available for sale	Level 2	48,742		48,742		44,388		44,388		48,096		48,096
Federal Home Loan Bank stock	Level 2	3,060		3,060		3,060		3,060		3,060		3,060
Net loans	Level 2	513,094		513,117		479,171		479,538		467,536		460,009
Accrued interest receivable	Level 3	1,457		1,457		1,351		1,351		1,536		1,536
Total financial assets		$	588,989	$	589,012	$	546,199	$	546,566	$	543,032	$	535,505
Financial liabilities:
Deposits	Level 2	$	491,206	$	491,912	$	466,299	$	465,431	$	461,688	$	459,862
Borrowings	Level 2	44,909		45,285		37,852		37,487		35,852		35,548
Accrued interest payable	Level 3	184		184		182		182		200		200
Total financial liabilties		$	536,299	$	537,381	$	504,333	$	503,100	$	497,740	$	495,610

Limitations  - Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.  Fair value estimates are based on existing on-and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not considered financial assets or liabilities include premises and equipment, other assets, and other liabilities.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The following is information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at September 30, 2014, and the valuation techniques used by the Corporation to determine those fair values.

Level 1:In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access.

Level 2:Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly.  These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3:Level 3 inputs are unobservable inputs, including inputs available in situations where there is little, if any, market activity for the related asset or liability.

The fair value of all investment securities at September 30, 2014 and September 30, 2013 were based on level 2 inputs.  There are no other assets or liabilities measured on a recurring basis at fair value.  For additional information regarding investment securities, please refer to “Note 4 Investment Securities.”

The Corporation had no Level 3 assets or liabilities on a recurring basis as of September 30, 2014, December 31, 2013 or September 30, 2013.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation.  The Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

The Corporation also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis.  These assets include loans and other real estate owned.  The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

Assets Measured at Fair Value on a Nonrecurring Basis at September 30, 2014

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Nine Months Ended
(dollars in thousands)	September 30, 2014		(Level 1)		(Level 2)		(Level 3)		September 30, 2014		September 30, 2014
Assets
Impaired loans	$	2,695	$	—	$	—	$	2,695	$	10	$	440
Other real estate owned	1,843		—		—		1,843		176		190
									$	186	$	630

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2013

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Year Ended
(dollars in thousands)	December 31, 2013		(Level 1)		(Level 2)		(Level 3)		December 31, 2013
Assets
Impaired loans	$	2,024	$	—	$	—	$	2,024	$	2,075
Other real estate owned	1,884		—		—		1,884		265
									$	2,340

Assets Measured at Fair Value on a Nonrecurring Basis at September 30, 2013

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Nine Months Ended
(dollars in thousands)	September 30, 2013		(Level 1)		(Level 2)		(Level 3)		September 30, 2013		September 30, 2013
Assets
Impaired loans	$	4,313	$	—	$	—	$	4,313	$	531	$	949
Other real estate owned	2,568		—		—		2,568		57		146
									$	588	$	1,095

The Corporation had no investments subject to fair value measurement on a nonrecurring basis.

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired.  The Corporation estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions.  These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals).

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2014	Oct. 31, 2014
Document and Entity Information
Entity Registrant Name	MACKINAC FINANCIAL CORP /MI/
Entity Central Index Key	0000036506
Document Type	10-Q
Document Period End Date	Sep. 30, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		5,564,815
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q3

XML

SHAREHOLDER'S EQUITY

9 Months Ended

Sep. 30, 2014

SHAREHOLDER'S EQUITY

SHAREHOLDER'S EQUITY

11. SHAREHOLDER’S EQUITY

In August 2012 the Corporation consummated the $7.000 million rights offering and the investment by Steinhardt Capital Investors, LLLP (“SCI”) by issuing 2,140,123 shares of common stock for net proceeds of $11.506 million.  Also, in August 2012, the Corporation exited the TARP Capital Purchase Program (“CPP”) when the Corporation’s 11,000 Series A Preferred Shares, issued in April, 2009 to the U.S. Treasury, were publically offered and sold.  The Corporation repurchased the 379,310 of Common Stock Warrants issued to the U.S. Treasury under the CPP in December, 2012 for $1.3 million. During 2013, the Corporation redeemed all of the outstanding Series A Preferred Shares.

The Corporation currently has a share repurchase program.  The program is conducted under authorizations from time to time by the Board of Directors.  The Corporation repurchased 55,594 shares in 2013 and 13,700 shares in the first quarter of 2014.  The share repurchases were conducted under Board authorizations made and publically announced of $600,000 on February 27, 2013 and an additional $600,000 on December 17, 2013.  Neither of these authorizations has an expiration date.

XML

Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Interest and fees on loans:
Taxable	$ 6,651	$ 6,077	$ 19,305	$ 17,980
Tax-exempt	4	26	27	81
Interest on securities:
Taxable	230	245	711	726
Tax-exempt	14	9	41	22
Other interest income	34	33	114	96
Total interest income	6,933	6,390	20,198	18,905
INTEREST EXPENSE:
Deposits	813	879	2,435	2,642
Borrowings	234	163	625	490
Total interest expense	1,047	1,042	3,060	3,132
Net interest income	5,886	5,348	17,138	15,773
Provision for loan losses	187	375	561	850
Net interest income after provision for loan losses	5,699	4,973	16,577	14,923
OTHER INCOME:
Deposit service fees	168	158	517	495
Income from loans sold on secondary market	212	203	455	781
SBA/USDA loan sale gains		135	548	798
Mortgage servicing income	313	128	415	413
Net security gains (losses)				29
Other	75	114	174	260
Total other income	768	738	2,109	2,747
OTHER EXPENSE:
Salaries and employee benefits	2,481	2,226	7,545	6,907
Occupancy	511	362	1,595	1,107
Furniture and equipment	305	274	927	799
Data processing	288	269	862	802
Professional service fees	276	161	883	706
Loan and deposit	144	55	306	173
Writedowns and losses on other real estate held for sale	176	57	190	146
FDIC insurance assessment	92	100	267	300
Telephone	84	84	248	229
Advertising	114	119	344	334
Other	655	652	1,964	1,690
Total other expenses	5,126	4,359	15,131	13,193
Income before provision for income taxes	1,341	1,352	3,555	4,477
Provision for (benefit of) for income taxes	455	456	1,203	1,508
NET INCOME	886	896	2,352	2,969
Preferred dividend and accretion of discount		50		250
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$ 886	$ 846	$ 2,352	$ 2,719
INCOME PER COMMON SHARE:
Basic (in dollars per share)	$ 0.16	$ 0.15	$ 0.43	$ 0.49
Diluted (in dollars per share)	$ 0.16	$ 0.15	$ 0.42	$ 0.49

XML

LOANS

9 Months Ended

Sep. 30, 2014

LOANS

LOANS

5.    LOANS

The composition of loans is as follows (dollars in thousands):

	September 30,		December 31,		September 30,
	2014		2013		2013
Commercial real estate	$	272,803	$	268,809	$	257,961
Commercial, financial, and agricultural	98,714		79,655		79,511
One to four family residential real estate	110,310		103,768		98,770
Construction :
Consumer	8,729		6,895		5,734
Commerical	12,242		10,904		16,054
Consumer	15,575		13,801		14,465
Total loans	$	518,373	$	483,832	$	472,495

An analysis of the allowance for loan losses for nine months ended September 30, 2014, the year ended December 31, 2013 and the nine months ended September 30, 2013 is as follows (dollars in thousands):

	September 30,			December 31,			September 30,
	2014			2013			2013
Balance at beginning of period	$	4,661		$	5,218		$	5,218
Loans charged off	(185		)	(2,432		)	(1,263		)
Recoveries on loans previously charged off	242			200			154
Provision	561			1,675			850
Balance at end of period	$	5,279		$	4,661		$	4,959

In the first nine months of 2014, net recoveries were $.057 million compared to net charge-offs of $1.109 million, or .32% of average loans, in the same period in 2013.   In the first nine months of 2014, the Corporation recorded a provision for loan loss of $.561 million compared to $.850 million in the first nine months of 2013.  The Corporation’s allowance for loan loss reserve policy calls for a measurement of the adequacy of the reserve at each quarter end.  This process includes an analysis of the loan portfolio to take into account increases in loans outstanding and portfolio composition, historical loss rates, and specific reserve requirements of nonperforming loans.

A breakdown of the allowance for loan losses and recorded balances in loans at September 30, 2014 is as follows (dollars in thousands):

			Commercial,				One to four
	Commercial		financial and		Commercial		family residential		Consumer
	real estate		agricultural		construction		real estate		construction		Consumer		Unallocated		Total
Three Months Ended September 30, 2014
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,630	$	1,669	$	40	$	345	$	15	$	111	$	1,287	$	5,097
Charge-offs	(18)		(9)		—		(28)		—		(15)		—		(70)
Recoveries	31		16		3		4		—		11		—		65
Provision	(1)		(153)		1		80		3		1		256		187
Ending balance ALLR	$	1,642	$	1,523	$	44	$	401	$	18	$	108	$	1,543	$	5,279
Nine Months Ended September 30, 2014
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,849	$	1,378	$	80	$	516	$	25	$	148	$	665	$	4,661
Charge-offs	(19)		(74)		—		(44)		—		(48)		—		(185)
Recoveries	105		75		9		18		—		35		—		242
Provision	(293)		144		(45)		(89)		(7)		(27)		878		561
Ending balance ALLR	$	1,642	$	1,523	$	44	$	401	$	18	$	108	$	1,543	$	5,279
At September 30,2014
Loans:
Ending balance	$	272,803	$	98,714	$	12,242	$	110,310	$	8,729	$	15,575	$	—	$	518,373
Ending balance ALLR	(1,642)		(1,523)		(44)		(401)		(18)		(108)		(1,543)		(5,279)
Net loans	$	271,161	$	97,191	$	12,198	$	109,909	$	8,711	$	15,467	$	(1,543)	$	513,094
Ending balance ALLR:
Individually evaluated	$	312	$	1,104	$	—	$	167	$	—	$	32	$	—	$	1,615
Collectively evaluated	1,330		419		44		234		18		76		1,543		3,664
Total	$	1,642	$	1,523	$	44	$	401	$	18	$	108	$	1,543	$	5,279
Ending balance Loans:
Individually evaluated	$	378	$	1,730	$	—	$	1,202	$	—	$	61	$	—	$	3,371
Collectively evaluated	272,425		96,984		12,242		109,108		8,729		15,514		—		515,002
Total	$	272,803	$	98,714	$	12,242	$	110,310	$	8,729	$	15,575	$	—	$	518,373

Impaired loans, by definition, are individually evaluated.

A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2013 is as follows (dollars in thousands):

			Commercial,				One to four
	Commercial		financial and		Commercial		family residential		Consumer
	real estate		agricultural		construction		real estate		construction		Consumer		Unallocated		Total
Allowance for loan loss reserve:
Beginning balance ALLR	$	3,267	$	692	$	125	$	980	$	—	$	—	$	154	5,218
Charge-offs	(1,539)		(632)		—		(141)		—		(120)		—		(2,432)
Recoveries	92		56		2		26		2		22		—		200
Provision	29		1,262		(47)		(349)		23		246		511		1,675
Ending balance ALLR	$	1,849	$	1,378	$	80	$	516	$	25	$	148	$	665	$	4,661
Loans:
Ending balance	$	268,809	$	79,655	$	10,904	$	103,768	$	6,895	$	13,801	$	—	$	483,832
Ending balance ALLR	(1,849)		(1,378)		(80)		(516)		(25)		(148)		(665)		(4,661)
Net loans	$	266,960	$	78,277	$	10,824	$	103,252	$	6,870	$	13,653	$	(665)	$	479,171
Ending balance ALLR:
Individually evaluated	$	99	$	891	$	—	$	103	$	—	$	18	$	—	$	1,111
Collectively evaluated	1,750		487		80		413		25		130		665		3,550
Total	$	1,849	$	1,378	$	80	$	516	$	25	$	148	$	665	$	4,661
Ending balance Loans:
Individually evaluated	$	649	$	1,830	$	—	$	385	$	—	$	42	$	—	$	2,906
Collectively evaluated	268,160		77,825		10,904		103,383		6,895		13,759		—		480,926
Total	$	268,809	$	79,655	$	10,904	$	103,768	$	6,895	$	13,801	$	—	$	483,832

Impaired loans, by definition, are individually evaluated

A breakdown of the allowance for loan losses and recorded balances in loans at September 30, 2013 is as follows (dollars in thousands):

			Commercial,				One to four
	Commercial		financial and		Commercial		family residential		Consumer
	real estate		agricultural		construction		real estate		construction		Consumer		Unallocated		Total
Three Months Ended September 30, 2013
Allowance for loan loss reserve:
Beginning balance ALLR	$	2,661	$	1,090	$	97	$	877	$	—	$	13	$	439	$	5,177
Charge-offs	(132)		(476)		—		(25)		—		(14)		—		(647)
Recoveries	23		20		—		6		1		4		—		54
Provision	3		522		(16)		44		(1)		15		(192)		375
Ending balance ALLR	$	2,555	$	1,156	$	81	$	902	$	—	$	18	$	247	$	4,959
Nine Months Ended September 30, 2013
Allowance for loan loss reserve:
Beginning balance ALLR	$	3,267	$	692	$	125	$	980	$	—	$	—	$	154	$	5,218
Charge-offs	(588)		(552)		—		(38)		—		(85)		—		(1,263)
Recoveries	64		53		2		17		1		17		—		154
Provision	(188)		963		(46)		(57)		(1)		86		93		850
Ending balance ALLR	$	2,555	$	1,156	$	81	$	902	$	—	$	18	$	247	$	4,959
At September 30,2013
Loans:
Ending balance	$	257,961	$	79,511	$	16,054	$	98,770	$	5,734	$	14,465	$	—	$	472,495
Ending balance ALLR	(2,555)		(1,156)		(81)		(902)		—		(18)		(247)		(4,959)
Net loans	$	255,406	$	78,355	$	15,973	$	97,868	$	5,734	$	14,447	$	(247)	$	467,536
Ending balance ALLR:
Individually evaluated	$	1,407	$	802	$	6	$	246	$	—	$	18	$	—	$	2,479
Collectively evaluated	1,148		354		75		656		—		—		247		2,480
Total	$	2,555	$	1,156	$	81	$	902	$	—	$	18	$	247	$	4,959
Ending balance Loans:
Individually evaluated	$	13,475	$	7,638	$	798	$	450	$	—	$	35	$	—	$	22,396
Collectively evaluated	244,486		71,873		15,256		98,320		5,734		14,430		—		450,099
Total	$	257,961	$	79,511	$	16,054	$	98,770	$	5,734	$	14,465	$	—	$	472,495

Impaired loans, by definition, are individually evaluated.

As part of the management of the loan portfolio, risk ratings are assigned to all commercial loans.  Through the loan review process, ratings are modified as believed to be appropriate to reflect changes in the credit.  Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans.

To do so, we operate a credit risk rating system under which our credit management personnel assign a credit risk rating to each loan at the time of origination and review loans on a regular basis to determine each loan’s credit risk rating on a scale of 1 through 8, with higher scores indicating higher risk.  The credit risk rating structure used is shown below.

In the context of the credit risk rating structure, the term Classified is defined as a problem loan which may or may not be in a nonaccrual status, dependent upon current payment status and collectability.

Strong (1)

Borrower is not vulnerable to sudden economic or technological changes.  They have “strong” balance sheets and are within an industry that is very typical for our markets or type of lending culture.  Borrowers also have “strong” financial and cash flow performance and excellent collateral (low loan to value or readily available to liquidate collateral) in conjunction with an impeccable repayment history.

Good (2)

Borrower shows limited vulnerability to sudden economic change.  These borrowers have “above average” financial and cash flow performance and a very good repayment history.  The balance sheet of the company is also very good as compared to peer and the company is in an industry that is familiar to our markets or our type of lending.  The collateral securing the deal is also very good in terms of its type, loan to value, etc.

Average (3)

Borrower is typically a well-seasoned business, however may be susceptible to unfavorable changes in the economy, and could be somewhat affected by seasonal factors.  The borrowers within this category exhibit financial and cash flow performance that appear “average” to “slightly above average” when compared to peer standards and they show an adequate payment history.  Collateral securing this type of credit is good, exhibiting above average loan to values, etc.

Acceptable/Acceptable Watch (4)

A borrower within this category exhibits financial and cash flow performance that appear adequate and satisfactory when compared to peer standards and they show a satisfactory payment history.  The collateral securing the request is within supervisory limits and overall is acceptable.  Borrowers rated acceptable could also be newer businesses that are typically susceptible to unfavorable changes in the economy, and more than likely could be affected by seasonal factors.

Special Mention (5)

The borrower may have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.  Examples of this type of credit include a start-up company fully based on projections, a documentation issue that needs to be corrected or a general market condition that the borrower is working through to get corrected.

Substandard (6)

Substandard loans are classified assets exhibiting a number of well-defined weaknesses that jeopardize normal repayment.  The assets are no longer adequately protected due to declining net worth, lack of earning capacity, or insufficient collateral offering the distinct possibility of the loss of a portion of the loan principal.  Loans classified as substandard clearly represent troubled and deteriorating credit situations requiring constant supervision.

Doubtful (7)

Loans in this category exhibit the same, if not more pronounced weaknesses used to describe the substandard credit.  Loans are frozen with collection improbable.  Such loans are not yet rated as Charge-off because certain actions may yet occur which would salvage the loan.

Charge-off/Loss (8)

Loans in this category are largely uncollectible and should be charged against the loan loss reserve immediately.

General Reserves:

For loans with a credit risk rating of 5 or better and any loans with a risk rating of 6 or 7 with no specific reserve, reserves are established based on the type of loan collateral, if any, and the assigned credit risk rating.  Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, and consideration of current environmental factors and economic trends, all of which may be susceptible to significant change.

Using a historical average loss by loan type as a base, each loan graded as higher risk is assigned a specific percentage.  Within the commercial loan portfolio, the historical loss rates are used for specific industries such as hospitality, gaming, petroleum, and forestry.  The residential real estate and consumer loan portfolios are assigned a loss percentage as a homogenous group.  If, however, on an individual loan the projected loss based on collateral value and payment histories are in excess of the computed allowance, the allocation is increased for the higher anticipated loss.  These computations provide the basis for the allowance for loan losses as recorded by the Corporation.

Commercial construction loans in the amount of $2.883 million, $2.951 million and $2.773 million for the periods ended September 30, 2014, December 31, 2013 and September 30, 2013, respectively did not receive a specific risk rating.  These amounts represent loans made for land development and unimproved land purchases.  Below is a breakdown of loans by risk category as of September 30, 2014 (dollars in thousands):

	(1)		(2)		(3)		(4)		(5)		(6)		(7)		Rating
							Acceptable/
	Excellent		Good		Average		Acceptable Watch		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	1,741	$	24,827	$	116,621	$	128,126	$	—	$	1,488	$	—	$	—	$	272,803
Commercial, financial and agricultural	1,736		4,472		34,547		53,311		—		4,648		—		—		98,714
Commercial construction	—		444		1,578		6,935		—		402		—		2,883		12,242
One to four family residential real estate	—		295		1,046		4,119		60		—		—		104,790		110,310
Consumer construction	—		—		—		—		—		—		—		8,729		8,729
Consumer	—		—		4		21		—		—		—		15,550		15,575
Total loans	$	3,477	$	30,038	$	153,796	$	192,512	$	60	$	6,538	$	—	$	131,952	$	518,373

Below is a breakdown of loans by risk category as of December 31, 2013 (dollars in thousands):

	(1)		(2)		(3)		(4)		(5)		(6)		(7)		Rating
							Acceptable/
	Excellent		Good		Average		Acceptable Watch		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	1,502	$	23,310	$	116,702	$	125,010	$	—	$	2,285	$	—	$	—	$	268,809
Commercial, financial and agricultural	3,741		4,348		27,455		39,070		—		5,041		—		—		79,655
Commercial construction	30		479		2,702		4,340		—		402		—		2,951		10,904
One-to-four family residential real estate	251		3,074		1,275		4,482		—		710		—		93,976		103,768
Consumer construction	—		—		—		—		—		—		—		6,895		6,895
Consumer	10		—		37		43		—		30		—		13,681		13,801
Total loans	$	5,534	$	31,211	$	148,171	$	172,945	$	—	$	8,468	$	—	$	117,503	$	483,832

Below is a breakdown of loans by risk category as of September 30, 2013 (dollars in thousands):

	(1)		(2)		(3)		(4)		(5)		(6)		(7)		Rating
	Excellent		Good		Average		Acceptable		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	2,240	$	23,675	$	88,105	$	123,373	$	16,117	$	4,451	$	—	$	—	$	257,961
Commercial, financial and agricultural	4,260		5,108		22,263		41,851		3,746		2,094		189		—		79,511
Commercial construction	—		676		5,283		6,167		753		402		—		2,773		16,054
One to four family residential real estate	—		1,951		2,186		4,522		—		6		—		90,105		98,770
Consumer construction	—		—		—		—		—		—		—		5,734		5,734
Consumer	—		102		34		632		—		—		—		13,697		14,465
Total loans	$	6,500	$	31,512	$	117,871	$	176,545	$	20,616	$	6,953	$	189	$	112,309	$	472,495

Impaired Loans

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 on interest or principal.  There was no interest income recorded during impairment for the three and nine months ended September 30, 2014.  There was no interest income recorded during impairment and that which would have been recognized was $.040 million for the three months ended September 30, 2014, and no interest income recorded during impairment and that which would have been recognized of $.093 million for the nine months ended September 30, 2014.

The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.  When interest accrual is discontinued, all unpaid accrued interest is reversed.  Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments.  Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loans basis for other loans.  If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.  Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis.  Impaired loans, or portions thereof, are charged off when deemed uncollectible.

The following is a summary of impaired loans and their effect on interest income (dollars in thousands):

											Three Months Ended				Nine Months Ended
					QTD		YTD				Interest Income		Interest Income		Interest Income		Interest Income
	Nonaccrual		Accrual		Average		Average		Related		Recognized		on		Recognized		on
	Basis		Basis		Investment		Investment		Valuation Reserve		During Impairment		Accrual Basis		During Impairment		Accrual Basis
September 30, 2014
With no valuation reserve:
Commercial real estate	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial, financial and agricultural	—		—		—		—		—		—		—		—		—
Commercial construction	—		—		—		—		—		—		—		—		—
One to four family residential real estate	—		—		—		—		—		—		—		—		—
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—
With a valuation reserve:															$	—
Commercial real estate	$	227	$	—	$	340	$	427	$	227	$	—	$	4	—		$	20
Commercial, financial and agricultural	1,735		—		1,770		1,268		1,104		—		28		—		52
Commercial construction	—		—		—		—		—		—		—		—		—
One to four family residential real estate	733		—		489		434		147		—		7		—		20
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	—		—		11		14		—		—		1				1
Total:
Commercial real estate	$	227	$	—	$	340	$	427	$	227	$	—	$	4	$	—	$	20
Commercial, financial and agricultural	1,735		—		1,770		1,268		1,104		—		28		—		52
Commercial construction	—		—		—		—		—		—		—		—		—
One to four family residential real estate	733		—		489		434		147		—		7		—		20
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	—		—		11		14		—		—		1		—		1
Total	$	2,695	$	—	$	2,610	$	2,143	$	1,478	$	—	$	40	$	—	$	93

									Interest Income		Interest Income
For the Year Ended:	Nonaccrual		Accrual		Average		Related		Recognized		on
December 31, 2013	Basis		Basis		Investment		Valuation Reserve		During Impairment		Accrual Basis
With no valuation reserve:
Commercial real estate	$	513	$	—	$	3,045	$	—	$	—	$	153
Commercial, financial and agricultural	59		—		505		—		—		13
Commercial construction	—		—		626		—		—		3
One to four family residential real estate	361		—		625		—		—		16
Consumer construction	—		—		—		—		—		—
Consumer	—		—		2		—		—		—
With a valuation reserve:
Commercial real estate	$	59	$	—	$	71	$	14	$	—	$	5
Commercial, financial and agricultural	752		—		834		265		—		18
Commercial construction	—		—		—		—		—		—
One to four family residential real estate	250		—		261		78		—		20
Consumer construction	—		—		—		—		—		—
Consumer	30		—		30		13		—		—
Total:
Commercial real estate	$	572	$	—	$	3,116	$	14	$	—	$	158
Commercial, financial and agricultural	811		—		1,339		265		—		31
Commercial construction	—		—		626		—		—		3
One to four family residential real estate	611		—		886		78		—		36
Consumer construction	—		—		—		—		—		—
Consumer	30		—		32		13		—		—
Total	$	2,024	$	—	$	5,999	$	370	$	—	$	228

											Three Months Ended				Nine Months Ended
					QTD		YTD				Interest Income		Interest Income		Interest Income		Interest Income
	Nonaccrual		Accrual		Average		Average		Related		Recognized		on		Recognized		on
	Basis		Basis		Investment		Investment		Valuation Reserve		During Impairment		Accrual Basis		During Impairment		Accrual Basis
September 30, 2013
With no valuation reserve:
Commercial real estate	$	238	$	—	$	412	$	501	$	—	$	—	$	—	$	—	$	26
Commercial, financial and agricultural	—		—		147		243		—		—		3		—		9
Commercial construction	—		—		—		193		—		—		—		—		3
One to four family residential real estate	67		—		86		140		—		—		2		—		7
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	10		—		9		4		—		—		—		—		—
With a valuation reserve:
Commercial real estate	$	2,589	$	—	$	2,581	$	2,557	$	1,272	$	—	$	42	$	—	$	102
Commercial, financial and agricultural	767		—		741		373		33		—		5		—		11
Commercial construction	—		—		—		—		—		—		—		—		—
One to four family residential real estate	642		—		560		396		250		—		8		—		19
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	—		—		—		—		—		—		—		—		—
Total:
Commercial real estate	$	2,827	$	—	$	2,993	$	3,058	$	1,272	$	—	$	42	$	—	$	128
Commercial, financial and agricultural	767		—		888		616		33		—		8		—		20
Commercial construction	—		—		—		193		—		—		—		—		3
One to four family residential real estate	709		—		646		536		250		—		10		—		26
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	10		—		9		4		—		—		—		—		—
Total	$	4,313	$	—	$	4,536	$	4,407	$	1,555	$	—	$	60	$	—	$	177

A summary of past due loans at September 30, 2014, December 31, 2013 and September 30, 2013 is as follows (dollars in thousands):

	September 30,						December 31,						September 30,
	2014						2013						2013
	30-89 days		90+ days				30-89 days		90+ days				30-89 days		90+ days
	Past Due		Past Due/				Past Due		Past Due/				Past Due		Past Due/
	(accruing)		Nonaccrual		Total		(accruing)		Nonaccrual		Total		(accruing)		Nonaccrual		Total
Commercial real estate	$	540	$	227	$	767	$	—	$	572	$	572	$	—	$	2,827	$	2,827
Commercial, financial and agricultural	306		1,735		2,041		4		811		815		100		767		867
Commercial construction	55		—		55		20		—		20		—		—		—
One to four family residential real estate	414		733		1,147		201		611		812		186		709		895
Consumer construction	—		—		—		—		—		—		—		—		—
Consumer	55		—		55		14		30		44		31		10		41
Total past due loans	$	1,370	$	2,695	$	4,065	$	239	$	2,024	$	2,263	$	317	$	4,313	$	4,630

A roll-forward of nonaccrual activity for the three months ended September 30, 2014 (dollars in thousands):

	For the Three Months Ended September 30, 2014
			Commercial,				One to four
	Commercial		Financial and		Commercial		family residential		Consumer
	Real Estate		Agricultural		Construction		real estate		Construction		Consumer		Total
NONACCRUAL
Beginning balance	$	454	$	1,808	$	—	$	383	$	—	$	7	$	2,652
Principal payments	(2)		(79)		—		(7)		—		—		(88)
Charge-offs	(18)		(3)		—		(10)		—		(7)		(38)
Advances	—		—		—		—		—		—		—
Class transfers	—		—		—		—		—		—		—
Transfers to OREO	(207)		—		—		—		—		—		(207)
Transfers to accruing	—		—		—		—		—		—		—
Transfers from accruing	—		3		—		368		—		—		371
Other	—		6		—		(1)		—		—		5
Ending balance	$	227	$	1,735	$	—	$	733	$	—	$	—	$	2,695

A roll-forward of nonaccrual activity for the three months ended September 30, 2013 (dollars in thousands):

	For the Three Months Ended September 30, 2013
			Commercial,				One to four
	Commercial		Financial and		Commercial		family residential		Consumer
	Real Estate		Agricultural		Construction		real estate		Construction		Consumer		Total
NONACCRUAL
Beginning balance	$	3,057	$	517	$	—	$	400	$	—	$	9	$	3,983
Principal payments	(26)		(224)		—		(12)		—		(1)		(263)
Charge-offs	(23)		(476)		—		(24)		—		—		(523)
Advances	—		—		—		—		—		—		—
Class transfers	—		—		—		—		—		—		—
Transfers to OREO	(208)		(37)		—		—		—		—		(245)
Transfers to accruing	—		—		—		—		—		—		—
Transfers from accruing	—		966		—		344		—		2		1,312
Other	27		21		—		1						49
Ending balance	$	2,827	$	767	$	—	$	709	$	—	$	10	$	4,313

A roll-forward of nonaccrual activity for the nine months ended September 30, 2014 (dollars in thousands):

	For the Nine Months Ended September 30, 2014
			Commercial,				One to four
	Commercial		Financial and		Commercial		family residential		Consumer
	Real Estate		Agricultural		Construction		real estate		Construction		Consumer		Total
NONACCRUAL
Beginning balance	$	572	$	811	$	—	$	611	$	—	$	30	$	2,024
Principal payments	(104)		(160)		—		(29)		—		(4)		(297)
Charge-offs	(18)		(56)		—		(13)		—		(32)		(119)
Advances	—		—		—		—		—		—		—
Class transfers	—		—		—		—		—		—		—
Transfers to OREO	(233)		—		—		(257)		—		—		(490)
Transfers to accruing	—		(10)		—		(127)		—		—		(137)
Transfers from accruing	—		1,142		—		539		—		6		1,687
Other	10		8		—		9		—		—		27
Ending balance	$	227	$	1,735	$	—	$	733	$	—	$	—	$	2,695

A roll-forward of nonaccrual activity for the nine months ended September 30, 2013 (dollars in thousands):

	For the Nine Months Ended September 30, 2013
				Commercial,						One to four
	Commercial			Financial and			Commercial			family residential			Consumer
	Real Estate			Agricultural			Construction			real estate			Construction		Consumer			Total
NONACCRUAL
Beginning balance	$	3,071		$	436		$	675		$	505		$	—	$	—		$	4,687
Principal payments	(174		)	(292		)	(100		)	(77		)	—		(1		)	(644		)
Charge-offs	(352		)	(548		)	—			(37		)	—		(4		)	(941		)
Advances	—			—			—			—			—		—			—
Class transfers	—			—			—			—			—		—			—
Transfers to OREO	(208		)	(37		)	(580		)	(107		)	—		—			(932		)
Transfers to accruing	—			—			—			—			—		—			—
Transfers from accruing	443			1,207			—			420			—		15			2,085
Other	47			1			5			5			—		—			58
Ending balance	$	2,827		$	767		$	—		$	709		$	—	$	10		$	4,313

A roll-forward of nonaccrual activity during the year ended December 31, 2013 (dollars in thousands):

				Commercial,						One to four
	Commercial			Financial and			Commercial			family residential			Consumer
	Real Estate			Agricultural			Construction			real estate			Construction		Consumer			Total
NONACCRUAL
Beginning balance	$	3,071		$	436		$	675		$	505		$	—	$	—		$	4,687
Principal payments	(1,478		)	(319		)	(100		)	(88		)	—		(2		)	(1,987		)
Charge-offs	(1,304		)	(616		)	—			(141		)	—		(4		)	(2,065		)
Advances	—			—			—			—			—		—			—
Class transfers	—			—			—			—			—		—			—
Transfers to OREO	(208		)	(37		)	(580		)	(107		)	—		—			(932		)
Transfers to accruing	—			—			—			—			—		—			—
Transfers from accruing	443			1,346			—			434			—		36			2,259
Other	48			1			5			8			—		—			62
Ending balance	$	572		$	811		$	—		$	611		$	—	$	30		$	2,024

Troubled Debt Restructuring

Troubled debt restructurings (“TDR”) are determined on a loan-by-loan basis.  Generally restructurings are related to interest rate reductions, loan term extensions and short term payment forbearance as means to maximize collectability of troubled credits.  If a portion of the TDR loan is uncollectible (including forgiveness of principal), the uncollectible amount will be charged off against the allowance at the time of the restructuring.  In general, a borrower must make at least six consecutive timely payments before the Corporation would consider a return of a restructured loan to accruing status in accordance with FDIC guidelines regarding restoration of credits to accrual status.

The Corporation has, in accordance with generally accepted accounting principles and per recently enacted accounting standard updates, evaluated all loan modifications to determine the fair value impact of the underlying asset.  The carrying amount of the loan is compared to the expected payments to be received, discounted at the loan’s original rate, or for collateral dependent loans, to the fair value of the collateral.

A summary of troubled debt restructurings occurring during the periods indicated is as follows (dollars in thousands):

	September 30,			December 31,			September 30,
	2014			2013			2013
	Number of	Recorded		Number of	Recorded		Number of	Recorded
	Modifications	Investment		Modifications	Investment		Modifications	Investment
Commercial real estate	—	$	—	—	$	—	—	$	—
Commercial, financial and agricultural	—	—		1	528		1	528
Commercial construction	—	—		—	—		—	—
One to four family residential real estate	—	—		—	—		—	—
Consumer construction	—	—		—	—		—	—
Consumer	—	—		—	—		—	—
Total troubled debt restructurings	—	$	—	1	$	528	1	$	528

A roll-forward of troubled debt restructuring during the three months ended September 30, 2014 (dollars in thousands):

			Commercial,					One to four			Consumer and
	Commercial		Financial and		Commercial			family residential			Consumer
	Real Estate		Agricultural		Construction			real estate			Construction		Total
ACCRUING
Beginning balance	$	1,007	$	1,186	$	858		$	98		$	—	$	3,149
Principal payments	—		—		(3		)	(1		)	—		(4		)
Charge-offs	—		—		—			—			—		—
Advances	—		—		—			—			—		—
New restructured	—		—		—			—			—		—
Transferred out of TDR	—		—		—			—			—		—
Transfers to nonaccrual	—		—		—			—			—		—
Ending Balance	$	1,007	$	1,186	$	855		$	97		$	—	$	3,145
NONACCRUAL
Beginning balance	$	—	$	508	$	—		$	89		$	—	$	597
Principal payments	—		—		—			—			—		—
Charge-offs	—		—		—			—			—		—
Advances	—		—		—			—			—		—
New restructured	—		—		—			—			—		—
Transfers to foreclosed properties	—		—		—			—			—		—
Transfers from accruing	—		—		—			—			—		—
Ending Balance	$	—	$	508	$	—		$	89		$	—	$	597
TOTALS
Beginning balance	$	1,007	$	1,694	$	858		$	187		$	—	$	3,746
Principal payments	—		—		(3		)	(1		)	—		(4		)
Charge-offs	—		—		—			—			—		—
Advances	—		—		—			—			—		—
New restructured	—		—		—			—			—		—
Transfers out of TDRs	—		—		—			—			—		—
Tansfers to nonaccrual	—		—		—			—			—		—
Transfers to foreclosed properties	—		—		—			—			—		—
Transfers from accruing	—		—		—			—			—		—
Ending Balance	$	1,007	$	1,694	$	855		$	186		$	—	$	3,742

A roll-forward of troubled debt restructuring during the three months ended September 30, 2013 (dollars in thousands):

				Commercial,					One to four			Consumer and
	Commercial			Financial and			Commercial		family residential			Consumer
	Real Estate			Agricultural			Construction		real estate			Construction		Total
ACCRUING
Beginning balance	$	3,563		$	2,174		$	858	$	100		$	—	$	6,695
Principal payments	(20		)	(25		)	—		(1		)			(46		)
Charge-offs	—			(400		)	—		—			—		(400		)
Advances	—			—			—		—			—		—
New restructured	—			—			—		—			—		—
Transferred out of TDR	—			—			—		—			—		—
Transfers to nonaccrual	—			(528		)	—		—			—		(528		)
Ending Balance	$	3,543		$	1,221		$	858	$	99		$	—	$	5,721
NONACCRUAL
Beginning balance	$	2,169		$	—		$	—	$	106		$	—	$	2,275
Principal payments	(87		)	—			—		(14		)	—		(101		)
Charge-offs	—			—			—		—			—		—
Advances	—			—			—		—			—		—
New restructured	—			—			—		—			—		—
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			528			—		—			—		528
Ending Balance	$	2,082		$	528		$	—	$	92		$	—	$	2,702
TOTALS
Beginning balance	$	5,732		$	2,174		$	858	$	206		$	—	$	8,970
Principal payments	(107		)	(25		)	—		(15		)	—		(147		)
Charge-offs	—			(400		)	—		—			—		(400		)
Advances	—			—			—		—			—		—
New restructured	—			—			—		—			—		—
Transfers out of TDRs	—			—			—		—			—		—
Tansfers to nonaccrual	—			(528		)	—		—			—		(528		)
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			528			—		—			—		528
Ending Balance	$	5,625		$	1,749		$	858	$	191		$	—	$	8,423

A roll-forward of troubled debt restructuring during the nine months ended September 30, 2014 (dollars in thousands):

				Commercial,						One to four			Consumer and
	Commercial			Financial and			Commercial			family residential			Consumer
	Real Estate			Agricultural			Construction			real estate			Construction		Total
ACCRUING
Beginning balance	$	3,520		$	1,186		$	858		$	99		$	—	$	5,663
Principal payments	(2,513		)	—			(3		)	(4		)	—		(2,520		)
Charge-offs	—			—			—			—			—		—
Advances	—			—			—			—			—		—
New restructured	—			—			—			—			—		—
Transferred out of TDRs	—			—			—			91			—		91
Transfers to nonaccrual	—			—			—			(89		)	—		(89		)
Ending Balance	$	1,007		$	1,186		$	855		$	97		$	—	$	3,145
NONACCRUAL
Beginning balance	$	—		$	523		$	—		$	91		$	—	$	614
Principal payments	—			(15		)	—			—			—		(15		)
Charge-offs	—			—			—			—			—		—
Advances	—			—			—			—			—		—
New restructured	—			—			—			—			—		—
Transfers to foreclosed properties	—			—			—			(91		)	—		(91		)
Transfers from accruing	—			—			—			89			—		89
Ending Balance	$	—		$	508		$	—		$	89		$	—	$	597
TOTALS
Beginning balance	$	3,520		$	1,709		$	858		$	190		$	—	$	6,277
Principal payments	(2,513		)	(15		)	(3		)	(4		)	—		(2,535		)
Charge-offs	—			—			—			—			—		—
Advances	—			—			—			—			—		—
New restructured	—			—			—			—			—		—
Transfers out of TDR	—			—			—			91			—		91
Transfers to nonaccrual	—			—			—			(89		)	—		(89		)
Transfers to foreclosed properties	—			—			—			89			—		89
Transfer from accruing	—			—			—			(91		)	—		(91		)
Ending Balance	$	1,007		$	1,694		$	855		$	186		$	—	$	3,742

A roll-forward of troubled debt restructuring during the nine months ended September 30, 2013 (dollars in thousands):

				Commercial,					One to four			Consumer and
	Commercial			Financial and			Commercial		family residential			Consumer
	Real Estate			Agricultural			Construction		real estate			Construction		Total
ACCRUING
Beginning balance	$	3,611		$	1,221		$	858	$	102		$	—	$	5,792
Principal payments	(68		)	(25		)	—		(3		)	—		(96		)
Charge-offs	—			(400		)	—		—			—		(400		)
Advances	—			—			—		—			—		—
New restructured	—			953			—		—			—		953
Transferred out of TDRs	—			—			—		—			—		—
Transfers to nonaccrual	—			(528		)	—		—			—		(528		)
Ending Balance	$	3,543		$	1,221		$	858	$	99		$	—	$	5,721
NONACCRUAL
Beginning balance	$	2,162		$	—		$	—	$	102		$	—	$	2,264
Principal payments	(87		)	—			—		(14		)	—		(101		)
Charge-offs	—			—			—		—			—		—
Advances	—			—			—		—			—		—
New restructured	7			—			—		4			—		11
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			528			—		—			—		528
Ending Balance	$	2,082		$	528		$	—	$	92		$	—	$	2,702
TOTALS
Beginning balance	$	5,773		$	1,221		$	858	$	204		$	—	$	8,056
Principal payments	(155		)	(25		)	—		(17		)	—		(197		)
Charge-offs	—			(400		)	—		—			—		(400		)
Advances	—			—			—		—			—		—
New restructured	7			953			—		4			—		964
Transfers out of TDR	—			—			—		—			—		—
Transfers to nonaccrual	—			(528		)	—		—			—		(528		)
Transfers to foreclosed properties	—			528			—		—			—		528
Transfer from accruing	—			—			—		—			—		—
Ending Balance	$	5,625		$	1,749		$	858	$	191		$	—	$	8,423

A roll-forward of troubled debt restructuring during the year ended December 31, 2013 (dollars in thousands):

				Commercial,					One to four			Consumer and
	Commercial			Financial and			Commercial		family residential			Consumer
	Real Estate			Agricultural			Construction		real estate			Construction		Total
ACCRUING
Beginning balance	$	3,611		$	1,221		$	858	$	102		$	—	$	5,792
Principal payments	(91		)	(460		)			(3		)	—		(554		)
Charge-offs	—			—					—			—		—
Advances	—			—					—			—		—
New restructured	—			953					—			—		953
Transferred out of TDR	—			—					—			—		—
Transfers to nonaccrual	—			(528		)			—			—		(528		)
Ending Balance	$	3,520		$	1,186		$	858	$	99		$	—	$	5,663
NONACCRUAL
Beginning balance	$	2,162		$	—		$	—	$	102		$	—	$	2,264
							—
Principal payments	(1,376		)	(5		)	—		(15		)	—		(1,396		)
Charge-offs	(793		)	—			—		—			—		(793		)
Advances	—			—			—		—			—		—
New restructured	7			528			—		4			—		539
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			—			—		—			—		—
Ending Balance	$	—		$	523		$	—	$	91		$	—	$	614
TOTALS
Beginning balance	$	5,773		$	1,221		$	858	$	204		$	—	$	8,056
Principal payments	(1,467		)	(465		)	—		(18		)	—		(1,950		)
Charge-offs	(793		)	—			—		—			—		(793		)
Advances	—			—			—		—			—		—
New restructured	7			1,481			—		4			—		1,492
Transfers out of TDRs	—			—			—		—			—		—
Tansfers to nonaccrual	—			(528		)	—		—			—		(528		)
Transfers to foreclosed properties	—			—			—		—			—		—
Transfers from accruing	—			—			—		—			—		—
Ending Balance	$	3,520		$	1,709		$	858	$	190		$	—	$	6,277

Insider Loans

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):

	September 30,			December 31,			September 30,
	2014			2013			2013
Loans outstanding, beginning of period	$	9,043		$	11,297		$	11,297
New loans	33			496			496
Net activity on revolving lines of credit	1,052			(266		)	(263		)
Principal payments	(1,614		)	(2,484		)	(1,442		)
Loans outstanding, end of period	$	8,514		$	9,043		$	10,088

There were no loans to related parties classified substandard as of September 30, 2014, December 31, 2013 or September 30, 2013.  In addition to the outstanding balances above, there were unfunded commitments of $.517 million to related parties at September 30, 2014.

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INVESTMENT SECURITIES

9 Months Ended

Sep. 30, 2014

INVESTMENT SECURITIES

INVESTMENT SECURITIES

4.  INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities available for sale as of September 30, 2014, December 31, 2013 and September 30, 2013 are as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
September 30, 2014
US Agencies - MBS	$	6,142	$	241	$	—	$	6,383
US Agencies	22,725		41		(273)		22,493
Corporate Bonds	12,621		172		—		12,793
Obligations of states and political subdivisions	6,383		439		—		6,822
Other	251		—		—		251
Total securities available for sale	$	48,122	$	893	$	(273)	$	48,742
December 31, 2013
US Agencies - MBS	$	7,078	$	281	$	—	$	7,359
US Agencies	15,227		—		(372)		14,855
Corporate Bonds	15,862		218		(1)		16,079
Obligations of states and political subdivisions	5,893		202		—		6,095
Total securities available for sale	$	44,060	$	701	$	(373)	$	44,388
September 30, 2013
US Agencies - MBS	$	7,236	$	315	$	—	$	7,551
US Agencies	16,003		66		(336)		15,733
Corporate Bonds	18,451		192		(4)		18,639
Obligations of states and political subdivisions	5,876		297		—		6,173
Total securities available for sale	$	47,566	$	870	$	(340)	$	48,096

The Corporation has evaluated gross unrealized losses that exist within the portfolio and considers them temporary in nature.  The Corporation has both the ability and the intent to hold the investment securities until their respective maturities and therefore does not anticipate the realization of the temporary losses.

The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $4.167 million and $4.300 million, respectively, at September 30, 2014.

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INVESTMENT SECURITIES (Tables)

9 Months Ended

Sep. 30, 2014

INVESTMENT SECURITIES

Schedule of amortized cost and estimated fair value of investment securities available for sale

The amortized cost and estimated fair value of investment securities available for sale as of September 30, 2014, December 31, 2013 and September 30, 2013 are as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
September 30, 2014
US Agencies - MBS	$	6,142	$	241	$	—	$	6,383
US Agencies	22,725		41		(273)		22,493
Corporate Bonds	12,621		172		—		12,793
Obligations of states and political subdivisions	6,383		439		—		6,822
Other	251		—		—		251
Total securities available for sale	$	48,122	$	893	$	(273)	$	48,742
December 31, 2013
US Agencies - MBS	$	7,078	$	281	$	—	$	7,359
US Agencies	15,227		—		(372)		14,855
Corporate Bonds	15,862		218		(1)		16,079
Obligations of states and political subdivisions	5,893		202		—		6,095
Total securities available for sale	$	44,060	$	701	$	(373)	$	44,388
September 30, 2013
US Agencies - MBS	$	7,236	$	315	$	—	$	7,551
US Agencies	16,003		66		(336)		15,733
Corporate Bonds	18,451		192		(4)		18,639
Obligations of states and political subdivisions	5,876		297		—		6,173
Total securities available for sale	$	47,566	$	870	$	(340)	$	48,096

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COMMITMENTS, CONTINGENCIES AND CREDIT RISK

9 Months Ended

Sep. 30, 2014

COMMITMENTS, CONTINGENCIES, AND CREDIT RISK

COMMITMENTS, CONTINGENCIES, AND CREDIT RISK

12.  COMMITMENTS, CONTINGENCIES AND CREDIT RISK

Financial Instruments With Off-Balance-Sheet Risk

The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Corporation’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments.  The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.  These commitments are as follows (dollars in thousands):

	September 30,		December 31,		September 30,
	2013		2013		2013
Commitments to extend credit:
Variable rate	$	54,962	$	36,039	$	32,061
Fixed rate	19,092		15,070		24,536
Standby letters of credit - Variable rate	5,730		5,077		4,741
Credit card commitments - Fixed rate	3,286		3,152		3,162
	$	83,070	$	59,338	$	64,500

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.

Legal Proceedings and 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 real estate loans to operators of nonresidential buildings.  This concentration at September 30, 2014 represents $100.912 million, or 26.30%, compared to $101.406 million, or 28.68%, of the commercial loan portfolio on September 30, 2013.  The remainder of the commercial loan portfolio is diversified in such categories as hospitality and tourism, real estate agents and managers, new car dealers, gaming, petroleum, forestry, agriculture and construction.  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 sector.

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STOCK COMPENSATION PLANS

9 Months Ended

Sep. 30, 2014

STOCK COMPENSATION PLANS

STOCK COMPENSATION PLANS

8.STOCK COMPENSATION PLANS

On May 22, 2012, the Company’s shareholders approved the Mackinac Financial Corporation 2012 Incentive Compensation Plan, under which current and prospective employees, non-employee directors and consultants may be awarded incentive stock options, non-statutory stock options, shares of restricted stock units (“RSUs”), or stock appreciation rights.  The aggregate number of shares of the Company’s common stock issuable under the plan is 575,000, which included 392,152 option shares outstanding at that time.  Awards are made at the discretion of management.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

The Corporation, in August 2012 and March 2014, granted Restricted Stock Units (“RSUs”) to members of the Board of Directors and Management.  In August 2012, 148,500 RSUs were granted at a market value of $7.91 and will vest equally over a four year term.  In exchange for the grant of these RSUs various previously issued stock option awards were surrendered.  In March 2014, 52,774 RSUs were granted at a market value of $12.95, also vesting equally over a four year term.  The RSUs were awarded at no cost to the employee.  Compensation cost to be recognized over the four —year vesting periods, is $1.175 million and $.683 million, respectively.  On August 31, 2013, the Corporation issued 37,125 shares of its common stock for vested RSUs.  As of September 30, 2014, RSUs totaling 127,024 were unvested and unrecognized compensation expense was $1.154 million.

A summary of stock option transactions for the nine months ended September 30, 2014 and 2013, and the year ended December 31, 2013, is as follows:

	September 30,		December 31,			September 30,
	2014		2013			2013
Outstanding shares at beginning of year	237,152		242,152			242,152
Granted during the period	—		—			—
Exercised during the period	—		—			—
Expired / forfeited during the period	—		—			(5,000		)
Surrendered/Echanged for restricted stock	—		(5,000		)	—
Outstanding shares at end of period	237,152		237,152			237,152
Exercisable shares at end of period	124,861		124,861			125,861
Weighted average exercise price per share at end of period	$	9.80	$	9.80		$	9.88
Shares available for grant at end of period	—		—			—

There were no options granted in the first nine months of 2014 and 2013.

Following is a summary of the options outstanding and exercisable at September 30, 2014:

					Weighted Average
Exercise		Number			Remaining
Price		Outstanding	Exercisable	Unvested Options	Contractual Life-Years
$	9.75	217,152	120,861	96,291	.23
$	10.65	10,000	2,000	8,000	.79
$	12.00	10,000	2,000	8,000	2.21
		237,152	124,861	112,291	.34

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MORTGAGE SERVICING RIGHTS

9 Months Ended

Sep. 30, 2014

MORTGAGE SERVICING RIGHTS

MORTGAGE SERVICING RIGHTS

6.MORTGAGE SERVICING RIGHTS

Mortgage servicing rights (“MSRs”) are recorded when loans are sold in the secondary market with servicing retained.  As of September 30, 2014, the Corporation had obligations to service approximately $144.051 million of residential first mortgage loans.  The valuation is based upon the net present value of the projected revenues over the expected life of the loans being serviced, as reduced by estimated internal costs to service these loans.  The fair value of the capitalized servicing rights approximates the carrying value.  The key economic assumptions used in determining the fair value of the mortgage servicing rights include an annual constant prepayment speed of 9.77% and a discount rate of 8.83% for September 30, 2014.

The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances (dollars in thousands):

	Nine months ended			Year ended			Nine months ended
	September 30,			December 31,			September 30,
	2014			2013			2013
Balance at beginning of period	$	1,129		$	638		$	638
Additions from loans sold with servicing retained	375			675			325
Amortization	(218		)	(184		)	(129		)
Estimated Valuation of MSRs at end of period	$	1,286		$	1,129		$	834

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BORROWINGS

9 Months Ended

Sep. 30, 2014

BORROWINGS

BORROWINGS

7.BORROWINGS

Borrowings consist of the following at September 30, 2014, December 31, 2013 and September 30, 2013 (dollars in thousands):

	September 30,		December 31,		September 30,
	2014		2013		2013
Federal Home Loan Bank fixed rate advances at September 30, 2014 with a weighted average rate of 1.82% maturing in 2014, 2016 and 2018	$	35,000	$	35,000	$	35,000
Correspondent bank line of credit - holding company	4,500		2,000		—
Bank line of credit - wholly-owned asset based lending subsidiary	1,830		—		—
Correspondent bank term note, current floor rate of 4%, maturing December 28, 2017	2,800		—		—
USDA Rural Development, fixed-rate note payable, maturing August 24, 2024, interest payable at 1%	779		852		852
	$	44,909	$	37,852	$	35,852

The Federal Home Loan Bank borrowings are collateralized at September 30, 2014 by the following:  a collateral agreement on the Corporation’s one to four family residential real estate loans with a book value of approximately $42.041 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $4.167 million and $4.300 million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $3.060 million.  Prepayment of the advances is subject to the provisions and conditions of the credit policy of the Federal Home Loan Bank of Indianapolis in effect as of September 30, 2014.

The USDA Rural Development borrowing is collateralized by loans totaling $.779 million originated and held by the Corporation’s wholly owned subsidiary, First Rural Relending, and an assignment of a demand deposit account in the amount of $.720 million, and guaranteed by the Corporation.

The Corporation currently has two banking borrowing relationships.  The first relationship consists of a non-revolving line of credit and a term note.  The line of credit bears interest at 90-day LIBOR plus 2.75%, with a floor rate of 4.00% and has an initial term that expires on December 28, 2017.  The term note bears the same interest and matures on March 22, 2017 and requires quarterly principal payments of $100,000 beginning June 30, 2014.  The second borrowing relationship consists of a $10 million revolving line of credit, which can be increased to $25 million upon request, used to support asset based lending activities at a wholly-owned subsidiary that currently bears interest at 90-day LIBOR plus 2.75% and has an initial term that expires on September 10, 2016.

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INCOME TAXES

9 Months Ended

Sep. 30, 2014

INCOME TAXES

INCOME TAXES

9.INCOME TAXES

A valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred tax asset will not be realized.  The Corporation, as of September 30, 2014 had a net operating loss and tax credit carryforwards for tax purposes of approximately $16.3 million, and $2.4 million, respectively.  The net operating loss carryforwards expire twenty years from the date they originated.  These carryforwards, if not utilized, will begin to expire in the year 2023.  A portion of the NOL and all of the credit carryforwards are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue Code.  The annual limitation is $1.400 million for the NOL and the equivalent value of tax credits, which is approximately $.476 million.  These limitations for use were established in conjunction with the recapitalization of the Corporation in December 2004.

The Corporation has reported deferred tax assets of $8.681 million at September 30, 2014, which is net of a valuation allowance of $.760 million.  Management evaluated the deferred tax valuation allowance as of September 30, 2014 and determined that no adjustment to the valuation was warranted.  The remaining valuation allowance pertains to the existing tax credit carryovers, which will only be utilized after all net operating loss carryforwards.  Since a portion of these tax credits may expire before that occurs, a valuation allowance for these has been established.  The Corporation will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted.

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LOANS (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Allowance for loan loss reserve:
Balance at beginning of period	$ 5,097	$ 5,177	$ 4,661	$ 5,218	$ 5,218
Charge-offs	(70)	(647)	(185)	(1,263)	(2,432)
Recoveries	65	54	242	154	200
Provision	187	375	561	850	1,675
Balance at end of period	5,279	4,959	5,279	4,959	4,661
Loans:
Ending balance	518,373	472,495	518,373	472,495	483,832
Ending balance ALLR	(5,279)	(4,959)	(5,279)	(4,959)	(4,661)
Net loans	513,094	467,536	513,094	467,536	479,171
Ending balance ALLR:
Individually evaluated	1,615	2,479	1,615	2,479	1,111
Collectively evaluated	3,664	2,480	3,664	2,480	3,550
Total	5,279	4,959	5,279	4,959	4,661
Ending balance Loans:
Individually evaluated	3,371	22,396	3,371	22,396	2,906
Collectively evaluated	515,002	450,099	515,002	450,099	480,926
Total Loans	518,373	472,495	518,373	472,495	483,832
Commercial real estate loans
Allowance for loan loss reserve:
Balance at beginning of period	1,630	2,661	1,849	3,267	3,267
Charge-offs	(18)	(132)	(19)	(588)	(1,539)
Recoveries	31	23	105	64	92
Provision	(1)	3	(293)	(188)	29
Balance at end of period	1,642	2,555	1,642	2,555	1,849
Loans:
Ending balance	272,803	257,961	272,803	257,961	268,809
Ending balance ALLR	(1,642)	(2,555)	(1,642)	(2,555)	(1,849)
Net loans	271,161	255,406	271,161	255,406	266,960
Ending balance ALLR:
Individually evaluated	312	1,407	312	1,407	99
Collectively evaluated	1,330	1,148	1,330	1,148	1,750
Total	1,642	2,555	1,642	2,555	1,849
Ending balance Loans:
Individually evaluated	378	13,475	378	13,475	649
Collectively evaluated	272,425	244,486	272,425	244,486	268,160
Total Loans	272,803	257,961	272,803	257,961	268,809
Commercial, financial, and agricultural
Allowance for loan loss reserve:
Balance at beginning of period	1,669	1,090	1,378	692	692
Charge-offs	(9)	(476)	(74)	(552)	(632)
Recoveries	16	20	75	53	56
Provision	(153)	522	144	963	1,262
Balance at end of period	1,523	1,156	1,523	1,156	1,378
Loans:
Ending balance	98,714	79,511	98,714	79,511	79,655
Ending balance ALLR	(1,523)	(1,156)	(1,523)	(1,156)	(1,378)
Net loans	97,191	78,355	97,191	78,355	78,277
Ending balance ALLR:
Individually evaluated	1,104	802	1,104	802	891
Collectively evaluated	419	354	419	354	487
Total	1,523	1,156	1,523	1,156	1,378
Ending balance Loans:
Individually evaluated	1,730	7,638	1,730	7,638	1,830
Collectively evaluated	96,984	71,873	96,984	71,873	77,825
Total Loans	98,714	79,511	98,714	79,511	79,655
Commercial construction
Allowance for loan loss reserve:
Balance at beginning of period	40	97	80	125	125
Recoveries	3		9	2	2
Provision	1	(16)	(45)	(46)	(47)
Balance at end of period	44	81	44	81	80
Loans:
Ending balance	12,242	16,054	12,242	16,054	10,904
Ending balance ALLR	(44)	(81)	(44)	(81)	(80)
Net loans	12,198	15,973	12,198	15,973	10,824
Ending balance ALLR:
Individually evaluated		6		6
Collectively evaluated	44	75	44	75	80
Total	44	81	44	81	80
Ending balance Loans:
Individually evaluated		798		798
Collectively evaluated	12,242	15,256	12,242	15,256	10,904
Total Loans	12,242	16,054	12,242	16,054	10,904
One to four family residential real estate
Allowance for loan loss reserve:
Balance at beginning of period	345	877	516	980	980
Charge-offs	(28)	(25)	(44)	(38)	(141)
Recoveries	4	6	18	17	26
Provision	80	44	(89)	(57)	(349)
Balance at end of period	401	902	401	902	516
Loans:
Ending balance	110,310	98,770	110,310	98,770	103,768
Ending balance ALLR	(401)	(902)	(401)	(902)	(516)
Net loans	109,909	97,868	109,909	97,868	103,252
Ending balance ALLR:
Individually evaluated	167	246	167	246	103
Collectively evaluated	234	656	234	656	413
Total	401	902	401	902	516
Ending balance Loans:
Individually evaluated	1,202	450	1,202	450	385
Collectively evaluated	109,108	98,320	109,108	98,320	103,383
Total Loans	110,310	98,770	110,310	98,770	103,768
Consumer construction
Allowance for loan loss reserve:
Balance at beginning of period	15		25
Recoveries		1		1	2
Provision	3	(1)	(7)	(1)	23
Balance at end of period	18		18		25
Loans:
Ending balance	8,729	5,734	8,729	5,734	6,895
Ending balance ALLR	(18)		(18)		(25)
Net loans	8,711	5,734	8,711	5,734	6,870
Ending balance ALLR:
Collectively evaluated	18		18		25
Total	18		18		25
Ending balance Loans:
Collectively evaluated	8,729	5,734	8,729	5,734	6,895
Total Loans	8,729	5,734	8,729	5,734	6,895
Consumer
Allowance for loan loss reserve:
Balance at beginning of period	111	13	148
Charge-offs	(15)	(14)	(48)	(85)	(120)
Recoveries	11	4	35	17	22
Provision	1	15	(27)	86	246
Balance at end of period	108	18	108	18	148
Loans:
Ending balance	15,575	14,465	15,575	14,465	13,801
Ending balance ALLR	(108)	(18)	(108)	(18)	(148)
Net loans	15,467	14,447	15,467	14,447	13,653
Ending balance ALLR:
Individually evaluated	32	18	32	18	18
Collectively evaluated	76		76		130
Total	108	18	108	18	148
Ending balance Loans:
Individually evaluated	61	35	61	35	42
Collectively evaluated	15,514	14,430	15,514	14,430	13,759
Total Loans	15,575	14,465	15,575	14,465	13,801
Unallocated
Allowance for loan loss reserve:
Balance at beginning of period	1,287	439	665	154	154
Provision	256	(192)	878	93	511
Balance at end of period	1,543	247	1,543	247	665
Loans:
Ending balance ALLR	(1,543)	(247)	(1,543)	(247)	(665)
Net loans	(1,543)	(247)	(1,543)	(247)	(665)
Ending balance ALLR:
Collectively evaluated	1,543	247	1,543	247	665
Total	$ 1,543	$ 247	$ 1,543	$ 247	$ 665

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SHAREHOLDER'S EQUITY (Details) (USD $)	0 Months Ended		1 Months Ended	3 Months Ended	12 Months Ended	1 Months Ended	9 Months Ended	12 Months Ended
	Feb. 27, 2013	Dec. 17, 2013	Aug. 31, 2012 Steinhardt Capital Investors, LLLP	Mar. 31, 2014 Common Shareholders' Equity	Dec. 31, 2013 Common Shareholders' Equity	Apr. 30, 2009 US Treasury with TARP Capital Purchase Program Preferred Stock Series A Series A	Sep. 30, 2014 US Treasury with TARP Capital Purchase Program Warrant	Dec. 31, 2012 US Treasury with TARP Capital Purchase Program Warrant
Participation in the TARP Capital Purchase Program
Previously announced rights offering amount			$ 7,000,000
Shares issued			2,140,123			11,000
Issuance of common stock			11,506,000
Repurchase of common stock warrants issued							379,310
Purchase of common stock warrants								1,300,000
Number of shares repurchased				13,700	55,594
Number of shares authorized to be repurchased	600,000
Number of additional shares authorized to be repurchased		$ 600,000

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2014

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Basis of Presentation

The unaudited condensed consolidated financial statements of Mackinac Financial Corporation (the “Corporation”) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the nine-month period ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  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, 2013.

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.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 reporting 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, and the valuation of deferred tax assets, mortgage servicing rights and other real estate held for sale.

Allowance for Loan Losses

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.

Stock Compensation Plans

Stock Compensation Plans

On May 22, 2012, the Company’s shareholders approved the Mackinac Financial Corporation 2012 Incentive Compensation Plan, under which current and prospective employees, non-employee directors and consultants may be awarded incentive stock options, non-statutory stock options, shares of restricted stock units (“RSUs”), or stock appreciation rights.  The aggregate number of shares of the Company’s common stock issuable under the plan is 575,000, which included 392,152 option shares outstanding at that time.  Awards are made at the discretion of management.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

The Corporation, in August 2012 and March 2014, granted Restricted Stock Units (“RSUs”) to members of the Board of Directors and Management.  In August 2012, 148,500 RSUs were granted at a market value of $7.91 and will vest equally over a four year term.  In exchange for the grant of these RSUs various previously issued stock option awards were surrendered.  In March 2014, 52,774 RSUs were granted at a market value of $12.95, also vesting equally over a four year term.    The RSUs were awarded at no cost to the employee.  Compensation cost to be recognized over the four —year vesting periods, is $1.175 million and $.683 million, respectively.  On August 31, 2013, the Corporation issued 37,125 shares of its common stock for vested RSUs.  As of September 30, 2014, RSUs totaling 127,024 were unvested and unrecognized compensation expense was $1.154 million.

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BORROWINGS (Tables)

9 Months Ended

Sep. 30, 2014

BORROWINGS

Schedule of borrowings

Borrowings consist of the following at September 30, 2014, December 31, 2013 and September 30, 2013 (dollars in thousands):

	September 30,		December 31,		September 30,
	2014		2013		2013
Federal Home Loan Bank fixed rate advances at September 30, 2014 with a weighted average rate of 1.82% maturing in 2014, 2016 and 2018	$	35,000	$	35,000	$	35,000
Correspondent bank line of credit - holding company	4,500		2,000		—
Bank line of credit - wholly-owned asset based lending subsidiary	1,830		—		—
Correspondent bank term note, current floor rate of 4%, maturing December 28, 2017	2,800		—		—
USDA Rural Development, fixed-rate note payable, maturing August 24, 2024, interest payable at 1%	779		852		852
	$	44,909	$	37,852	$	35,852

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FAIR VALUE MEASUREMENTS (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013
Fair value measurements
Other real estate owned	$ 1,843	$ 1,884	$ 2,568
Nonrecurring | Estimated Fair Value
Fair value measurements
Impaired loans	2,695	2,024	4,313
Other real estate owned	1,843	1,884	2,568
Nonrecurring | Significant Unobservable Inputs (Level 3)
Fair value measurements
Impaired loans	2,695	(2,024)	4,313
Other real estate owned	1,843	(1,884)	2,568
Recurring
Fair value measurements
Other assets	0		0
Other liabilities	0		0
Recurring | Significant Unobservable Inputs (Level 3)
Fair value measurements
Assets	0	0	0
Liabilities	$ 0	$ 0	$ 0

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LOANS (Details 9) (Bank, USD $) In Thousands, unless otherwise specified	9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Activity in insider loans granted to the entity's executive officers and directors, including their families and firms
Loans outstanding, beginning of period	$ 9,043	$ 11,297	$ 11,297
New loans	33	496	496
Net activity on revolving lines of credit	1,052	(263)	(266)
Principal payments	(1,614)	(1,442)	(2,484)
Loans outstanding, end of period	8,514	10,088	9,043
Unfunded commitments	517
Substandard (6)
Activity in insider loans granted to the entity's executive officers and directors, including their families and firms
Loans outstanding, end of period	$ 0	$ 0	$ 0

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Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Consolidated Statements of Comprehensive Income
Net income	$ 886	$ 896	$ 2,352	$ 2,969
Net change in net unrealized gains and losses on securities available for sale:
Unrealized gains (losses) arising during the period	(53)	(136)	292	(899)
Less: reclassification adjustment for gains included in net income		14		29
Net securities gain (loss) during the period	(53)	(122)	292	(870)
Tax effect	13	42	(99)	296
Other comprehensive income (loss)	(40)	(80)	193	(574)
Total comprehensive income	$ 846	$ 816	$ 2,545	$ 2,395

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EARNINGS PER SHARE

9 Months Ended

Sep. 30, 2014

EARNINGS PER SHARE

EARNINGS PER SHARE

3.EARNINGS PER SHARE

Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and stock awards were fully vested and resulted in the issuance of common stock that then shared in our earnings, is computed by dividing net income by the weighted average number of common shares outstanding and common stock equivalents, after giving effect for dilutive shares issued.

The following shows the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
(Numerator):
Net income	$	886	$	896	$	2,352	$	2,969
Preferred stock dividends and accretion of discount	—		50		—		250
Net income available to common shareholders	$	886	$	846	$	2,352	$	2,719
(Denominator):
Weighted average shares outstanding - basic	5,540,200		5,562,835		5,532,966		5,559,108
Effect of dilutive stock options and vesting of restricted stock awards	71,722		—		70,268		—
Weighted average shares outstanding - diluted	5,611,922		5,562,835		5,603,234		5,559,108
Income per common share
Basic	$	.16	$	.15	$	.43	$	.49
Diluted	$	.16	$	.15	$	.42	$	.49

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STOCK COMPENSATION PLANS (Tables)

9 Months Ended

Sep. 30, 2014

STOCK COMPENSATION PLANS

Summary of stock option transactions

	September 30,		December 31,			September 30,
	2014		2013			2013
Outstanding shares at beginning of year	237,152		242,152			242,152
Granted during the period	—		—			—
Exercised during the period	—		—			—
Expired / forfeited during the period	—		—			(5,000		)
Surrendered/Echanged for restricted stock	—		(5,000		)	—
Outstanding shares at end of period	237,152		237,152			237,152
Exercisable shares at end of period	124,861		124,861			125,861
Weighted average exercise price per share at end of period	$	9.80	$	9.80		$	9.88
Shares available for grant at end of period	—		—			—

Summary of the options outstanding and exercisable

					Weighted Average
Exercise		Number			Remaining
Price		Outstanding	Exercisable	Unvested Options	Contractual Life-Years
$	9.75	217,152	120,861	96,291	.23
$	10.65	10,000	2,000	8,000	.79
$	12.00	10,000	2,000	8,000	2.21
		237,152	124,861	112,291	.34

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LOANS (Details 6) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Roll-forward of nonaccrual activity
Beginning balance	$ 2,652	$ 3,983	$ 2,024	$ 4,687	$ 4,687
Principal payments	(88)	(263)	(297)	(644)	(1,987)
Charge-offs	(38)	(523)	(119)	(941)	(2,065)
Transfers to OREO	(207)	(245)	(490)	(932)	(932)
Transfers from accruing	371	1,312	1,687	2,085	2,259
Other	5	49	27	58	62
Ending balance	2,695	4,313	2,695	4,313	2,024
Commercial real estate loans
Roll-forward of nonaccrual activity
Beginning balance	454	3,057	572	3,071	3,071
Principal payments	(2)	(26)	(104)	(174)	(1,478)
Charge-offs	(18)	(23)	(18)	(352)	(1,304)
Transfers to OREO	(207)	(208)	(233)	(208)	(208)
Transfers from accruing				443	443
Other		27	10	47	48
Ending balance	227	2,827	227	2,827	572
Commercial, financial, and agricultural
Roll-forward of nonaccrual activity
Beginning balance	1,808	517	811	436	436
Principal payments	(79)	(224)	(160)	(292)	(319)
Charge-offs	(3)	(476)	(56)	(548)	(616)
Transfers to OREO		(37)		(37)	(37)
Transfers from accruing	3	966	1,142	1,207	1,346
Other	6	21	8	1	1
Ending balance	1,735	767	1,735	767	811
Commercial construction
Roll-forward of nonaccrual activity
Beginning balance				675	675
Principal payments				(100)	(100)
Transfers to OREO				(580)	(580)
Other				5	5
One to four family residential real estate
Roll-forward of nonaccrual activity
Beginning balance	383	400	611	505	505
Principal payments	(7)	(12)	(29)	(77)	(88)
Charge-offs	(10)	(24)	(13)	(37)	(141)
Transfers to OREO			(257)	(107)	(107)
Transfers from accruing	368	344	539	420	434
Other	(1)	1	9	5	8
Ending balance	733	709	733	709	611
Consumer
Roll-forward of nonaccrual activity
Beginning balance	7	9	30
Principal payments		(1)	(4)	(1)	(2)
Charge-offs	(7)		(32)	(4)	(4)
Transfers from accruing		2	6	15	36
Ending balance		$ 10		$ 10	$ 30

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PENDING ACQUISITION

9 Months Ended

Sep. 30, 2014

Pending Acquisition Abstract

Pending Acquisition

13.  PENDING ACQUISITION

On July 18, 2014, the Corporation announced the signing of a definitive agreement to acquire Peninsula Financial Corporation (“Peninsula”) for $13.285 million.  The purchase price of Peninsula contemplates a special dividend to Peninsula shareholders prior to the consummation that would reduce the acquired equity to $10.5 million.  Peninsula is headquartered in Marquette County, Michigan and is the parent of Peninsula Bank with September 30 assets of approximately $132 million and six banking offices.  The consummation of this transaction is expected to occur early in the fourth quarter of 2014.  The Corporation has received all regulatory approvals for the transaction; however, the acquisition is subject to Peninsula shareholder approval, with a vote scheduled for November 24, 2014.

The Corporation, in connection with this transaction, filed a proxy statement/prospectus on Form S-4 on September 3, 2014, an amendment to the S-4 on October 20, 2014, and a final proxy statement/prospectus on October 29, 2014. These documents provide more detailed pro-forma financial information with respect to the pending acquisition.