10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended September 30, 2016

OR

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

For the transition period from <> to <>

Commission file number: 0-20167

MACKINAC FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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  ☒     No  ☐

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  ☒     No  ☐

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  ☐	Accelerated Filer  ☐
Non-accelerated Filer  ☐	Smaller reporting company  ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes  ☐     No  ☒

As of November 10, 2016, there were outstanding 6,263,371 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, 2016 (Unaudited), December 31, 2015	1
	Condensed Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2016 (Unaudited) and September 30, 2015 (Unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2016 (Unaudited) and September 30, 2015 (Unaudited)	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity — Nine Months Ended September 30, 2016 (Unaudited) and September 30, 2015 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2016 (Unaudited) and September 30, 2015 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	47
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 6.	Exhibits and Reports on Form 8-K	48
SIGNATURES		49

MACKINAC FINANCIAL CORPORATION

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

	September 30,		December 31,
	2016		2015
	(Unaudited)
ASSETS
Cash and due from banks	$	46,200	$	25,005
Federal funds sold		2,415		3
Cash and cash equivalents		48,615		25,008
Interest-bearing deposits in other financial institutions		14,047		5,089
Securities available for sale		88,886		53,728
Federal Home Loan Bank stock		2,926		2,169
Loans:
Commercial		513,266		450,275
Mortgage		222,840		152,272
Consumer		20,698		15,847
Total Loans		756,804		618,394
Allowance for loan losses		(4,862)		(5,004)
Net loans		751,942		613,390
Premises and equipment		16,028		12,524
Other real estate held for sale		3,269		2,324
Deferred tax asset		9,287		9,213
Deposit based intangibles		2,235		1,076
Goodwill		5,694		3,805
Other assets		16,192		10,943
TOTAL ASSETS	$	959,121	$	739,269
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest bearing deposits	$	163,278	$	122,775
NOW, money market, interest checking		287,097		202,784
Savings		60,322		30,882
CDs<$250,000		150,170		124,084
CDs>$250,000		9,015		8,532
Brokered		137,298		121,266
Total deposits		807,180		610,323
Borrowings		67,730		45,754
Other liabilities		5,926		6,590
Total liabilities		880,836		662,667
SHAREHOLDERS’ EQUITY:
Preferred stock - No par value:
Authorized - 500,000 shares, Issued and outstanding - none		—		—
Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares Issued and outstanding - 6,263,371 and 6,217,620, respectively		61,433		61,133
Retained earnings		16,115		15,221
Accumulated other comprehensive income
Unrealized gains on available for sale securities		786		297
Minimum pension liability		(49)		(49)
Total shareholders’ equity		78,285		76,602
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	959,121	$	739,269

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,
	2016		2015		2016		2015
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
INTEREST INCOME:
Interest and fees on loans:
Taxable	$	9,441	$	8,019	$	26,085	$	23,986
Tax-exempt		19		3		34		9
Interest on securities:
Taxable		387		282		953		845
Tax-exempt		57		35		114		129
Other interest income		91		46		212		148
Total interest income		9,995		8,385		27,398		25,117
INTEREST EXPENSE:
Deposits		870		843		2,410		2,467
Borrowings		429		307		1,008		895
Total interest expense		1,299		1,150		3,418		3,362
Net interest income		8,696		7,235		23,980		21,755
Provision for loan losses		200		350		350		855
Net interest income after provision for loan losses		8,496		6,885		23,630		20,900
OTHER INCOME:
Deposit service fees		259		196		723		624
Income from loans sold on the secondary market		512		301		1,118		750
SBA/USDA loan sale gains		551		40		717		440
Mortgage servicing (amortization) income		(12)		9		(74)		239
Net realized security gains		40		133		149		402
Other		139		94		379		292
Total other income		1,489		773		3,012		2,747
OTHER EXPENSE:
Salaries and employee benefits		3,687		3,139		10,592		9,102
Occupancy		680		602		1,960		1,804
Furniture and equipment		440		370		1,248		1,159
Data processing		440		327		1,118		1,041
Advertising		157		153		494		399
Professional service fees		309		348		807		928
Loan and deposit		152		136		434		399
Writedowns and (gains) losses on other real estate held for sale		60		104		62		141
FDIC insurance assessment		131		135		356		383
Telephone		140		108		374		346
Transaction related expenses		359		—		2,928		—
Other		730		692		2,003		1,868
Total other expenses		7,285		6,114		22,376		17,570
Income before provision for income taxes		2,700		1,544		4,266		6,077
Provision for  income taxes		922		526		1,481		2,074
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	1,778	$	1,018	$	2,785	$	4,003
INCOME PER COMMON SHARE:
Basic	$	0.29	$	0.16	$	.45	$	.64
Diluted	$	0.28	$	0.16	$	.45	$	.64

2

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Net income	$	1,778	$	1,018	$	2,785	$	4,003
Other comprehensive income
Change in securities available for sale:
Unrealized gains (losses) arising during the period		(79)		297		890		370
Reclassification adjustment for securities gains included in net income		(40)		(133)		(149)		(402)
Tax effect		40		(56)		(252)		61
Net change in unrealized gains on available for sale securities		(79)		108		489		29
Total comprehensive income	$	1,699	$	1,126	$	3,274	$	4,032

3

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2016
		Common				Accumulated
	Shares of	Stock and				Other
	Common	Additional		Retained		Comprehensive
	Stock	Paid in Capital		Earnings		Income		Total
Balance, beginning of period	6,217,620	$	61,133	$	15,221	$	248	$	76,602
Net income for period	—		—		2,785		—		2,785
Other comprehensive income
Net unrealized gain on securities available for sale	—		—		—		489		489
Actuarial loss on defined benefit pension obligation	—		—		—		—		—
Total comprehensive income	—		—		2,785		489		3,274
Stock compensation	—		450		—		—		450
Issuance of common stock:
Restricted stock award vesting	59,751		—		—		—		—
Repurchase of common stock	(14,000)		(150)		—		—		(150)
Dividend on common stock	—		—		(1,891)		—		(1,891)
Balance, end of period	6,263,371	$	61,433	$	16,115	$	737	$	78,285

	Nine Months Ended
	September 30,
	2015
		Common				Accumulated
	Shares of	Stock and				Other
	Common	Additional		Retained		Comprehensive
	Stock	Paid in Capital		Earnings		Income		Total
Balance, beginning of period	6,266,756	$	61,679	$	11,804	$	513	$	73,996
Net income for period	—		—		4,003		—		4,003
Other comprehensive income
Net unrealized gain on securities available for sale	—		—		—		29		29
Actuarial loss on defined benefit pension obligation	—		—		—		—		—
Total comprehensive income	—		—		4,003		29		4,032
Stock compensation	—		432		—		—		432
Issuance of common stock:
Restricted stock award vesting	53,319		—		—		—		—
Repurchase of common stock	(70,480)		(791)		—		—		(791)
Dividend on common stock	—		—		(1,578)		—		(1,578)
Balance, end of period	6,249,595	$	61,320	$	14,229	$	542	$	76,091

4

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2016		2015
Cash Flows from Operating Activities:
Net income	$	2,785	$	4,003
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,336		1,265
Provision for loan losses		350		855
Deferred income taxes, net		1,481		2,074
Gain on sales/calls of securities		(149)		(402)
Gain on sale of loans sold in the secondary market		(959)		(604)
Origination of loans held for sale in the secondary market		(56,941)		(36,827)
Proceeds from sale of loans in the secondary market		57,900		37,431
(Gain) loss on sale of premises, equipment, and other real estate held for sale		10		6
Writedown of other real estate held for sale		53		135
Stock compensation		450		432
Change in other assets		12,462		7,993
Change in other liabilities		(1,174)		(6,016)
Net cash provided by operating activities		17,604		10,345
Cash Flows from Investing Activities:
Net increase in loans		(28,118)		(19,185)
Net decrease in interest bearing deposits in other financial institutions		3,015		708
Purchase of securities available for sale		(7,225)		(16,390)
Proceeds from maturities, sales, calls or paydowns of securities available for sale		16,752		27,546
Proceeds from FHLBI repurchases of excess stock		—		804
Capital expenditures		(1,833)		(1,123)
Net cash used in Eagle acquisition and reimbursement of contract termination fee		(12,500)		—
Net cash used in Niagara acquisition		(7,325)		—
Proceeds from sale of premises, equipment, and other real estate		1,143		1,190
Net cash (used in) provided by investing activities		(36,091)		(6,450)
Cash Flows from Financing Activities:
Net increase (decrease) in deposits		33,159		15,361
Net activity on lines of credit		(8,550)		121
New term debt issuance		19,800		—
Principal payments on borrowings		(274)		(374)
Repurchase of common stock		(150)		(791)
Dividend on common stock		(1,891)		(1,578)
Net cash provided by financing activities		42,094		12,739
Net increase (decrease) in cash and cash equivalents		23,607		16,634
Cash and cash equivalents at beginning of period		25,008		21,947
Cash and cash equivalents at end of period	$	48,615	$	38,581
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest	$	3,273	$	3,345
Income taxes		100		150
Noncash Investing and Financing Activities:
Transfers of Foreclosures from Loans to Other Real Estate Held for Sale		1,091		674

5

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 three and nine-month period ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.  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, 2015.

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, the valuation of investment securities, the valuation of foreclosed real estate, deferred tax assets, mortgage servicing rights, and the assessment of goodwill for impairment.

Acquired Loans

Loans acquired with evidence of credit deterioration since inception and for which it is probable that all contractual payments will not be received are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).  These loans are recorded at fair value at the time of acquisition, with no carryover of the related allowance for loan losses.  Fair value of acquired loans is determined using a discounted cash flow methodology based on assumptions about the amount and timing of principal and interest payments, principal prepayments and principal defaults and losses, and current market rates.  In recording the fair values of acquired impaired loans at acquisition date, management calculates a non-accretable difference (the credit component of the purchased loans) and an accretable difference (the yield component of the purchased loans).

Over the life of the acquired loans, management continues to estimate cash flows expected to be collected on pools of loans sharing common risk characteristics, which are treated in the aggregate when applying various valuation techniques.  Management evaluates at each balance sheet date whether the present value of our pools of loans determined using the effective interest rates has decreased significantly and if so, recognizes a provision for loan loss in our consolidated statement of income.  For any significant increases in cash flows expected to be collected, we adjust the amount of the accretable yield recognized on a prospective basis over the pool’s remaining life.

Performing acquired loans are accounted for under Financial Accounting Standards Board (“FASB”) Topic 310-20, Receivables – Nonrefundable Fees and Other Costs.  Performance of certain loans may be monitored and based on management’s assessment of the cash flows and other facts available, portions of the accretable difference may be delayed or suspended if management deems appropriate.  The Corporation’s policy for determining when to discontinue accruing interest on performing acquired loans and the subsequent accounting for such loans is essentially the same as the policy for originated loans.

6

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 incurred 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 Corporation’s 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 Corporation’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.  Awards are made at the discretion of management and the Board of Directors.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

2.RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the 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, 2018 and early adoption is permitted only as of January 1, 2017. The Corporation is currently evaluating the impact of the new guidance and the method of adoption in the consolidated financial results; however, adoption is not expected to have a material impact on the Corporation’s consolidated financial condition and results of operations.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”).  ASU 2016-01 amends current guidance by requiring companies to recognize changes in fair value for equity investments that have a readily determinable fair value through net income rather than through other comprehensive income.  Under ASU 2016-01, equity investments that do not have a readily determinable fair value will either be accounted for the same as equity investments that have a readily determinable fair value, with changes in fair value recognized through net income or carried at cost, adjusted for changes in observable prices based on orderly transactions for identical or similar investments issued by the same issuer and further adjusted for impairment, if applicable.  ASU 2016-01 also requires a qualitative assessment of impairment indicators each reporting period.  If this assessment indicates that impairment exists, companies must adjust the investment to fair value and recognize an impairment loss in net income, even if the impairment is determined to be temporary.  ASU 2016-01 is effective for public companies for interim and annual periods beginning after December 15,

7

2017.   The Corporation’s adoption of ASU 2016-01 is not expected to have a material impact on the Corporation’s consolidated financial condition or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases, which will supersede the current lease requirements in ASC 840.  The ASU requires lessees to recognize an asset with the right of use and related lease liability for all leases, with a limited exception for short-term leases.  Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations.  Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet.  The reporting of lease related expenses in the statements of operations and cash flows will be generally consistent with the current guidance.  The new lease guidance will be effective for the Corporation’s year ending December 31, 2019 and will be applied using modified retrospective transition method to the beginning of the earliest period presented.  The effect of applying the new lease guidance on the financial statements has not yet been determined.

In September, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.

ASU 2016-13 requires an entity to measure expected credit losses for financial assets over the estimated lifetime of expected credit loss and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The standard includes the following core concepts in determining the expected credit loss.  The estimate must: (a) be based on an asset’s amortized cost (including premiums or discounts, net deferred fees and costs, foreign exchange and fair value hedge accounting adjustments), (b) reflect losses expected over the remaining contractual life of an asset (considering the effect of voluntary prepayments), (c) consider available relevant information about the estimated collectability of cash flows (including information about past events, current conditions, and reasonable and supportable forecasts), and (d) reflect the risk of loss, even when that risk is remote.

ASU 2016-13 also amends the recording of purchased credit-deteriorated assets. Under the new guidance, an allowance will be recognized at acquisition through a gross-up approach whereby an entity will record as the initial amortized cost the sum of (a) the purchase price and (b) an estimate of credit losses as of the date of acquisition. In addition, the guidance also requires immediate recognition in earnings of any subsequent changes, both favorable and unfavorable, in expected cash flows by adjusting this allowance.

ASU 2016-13 also amends the impairment model for available-for-sale debt securities and requires entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. Management may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists, as is currently permitted. In addition, an entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. As a result, entities will recognize improvements to credit losses on available-for-sale debt securities immediately in earnings rather than as interest income over time under current practice.

New disclosures required by ASU 2016-13 include: (a) for financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes, (b) for financial receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year or the asset’s origination or vintage for as many as five annual periods, and (c) for available-for-sale debt securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due.

Upon adoption of ASU 2016-13, a cumulative-effect adjustment to retained earnings will be recorded as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for public companies for interim and annual periods beginning after December 15, 2019, with early adoption permitted for annual periods beginning after December 15, 2018. The Corporation is currently evaluating the provisions of ASU 2016-13 to determine the potential impact on the Corporation's consolidated financial condition and results of operations.

8

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, 2016 and 2015 (dollars in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
(Numerator):
Net income	$	1,778	$	1,018	$	2,785	$	4,003
(Denominator):
Weighted average shares outstanding		6,238,756		6,238,963		6,226,900		6,247,416
Effect of dilutive stock options, and vesting of restricted stock units		20,999		39,046		33,525		31,400
Diluted weighted average shares outstanding		6,259,755		6,278,009		6,260,425		6,278,816
Income per common share:
Basic	$	0.29	$	0.16	$	.45	$	.64
Diluted	$	0.28	$	0.16	$	.45	$	.64

4.INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities available for sale as of September 30, 2016 and December 31, 2015 are as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
September 30, 2016
US Agencies - MBS	$	16,254	$	176	$	(73)	$	16,357
US Agencies		24,148		295		—		24,443
Corporate Bonds		18,403		239		—		18,642
Other		3,033		—		—		3,033
Obligations of states and political subdivisions		25,857		561		(7)		26,411
Total securities available for sale	$	87,695	$	1,271	$	(80)	$	88,886
December 31, 2015
US Treasury	$	12,710	$	—	$	(64)	$	12,646
US Agencies		27,358		62		(43)		27,377
US Agencies - MBS		3,738		31		(10)		3,759
Obligations of states and political subdivisions		9,472		592		(118)		9,946
Total securities available for sale	$	53,278	$	685	$	(235)	$	53,728

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.

9

The amortized cost and estimated fair value of investment securities pledged to secure FHLB borrowings and customer relationships were $24.168 million and $25.048 million, respectively, at September 30, 2016.

5.LOANS

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

	September 30,		December 31,
	2016		2015
Commercial real estate	$	362,858	$	312,805
Commercial, financial, and agricultural		136,065		122,140
One to four family residential real estate		211,072		140,502
Construction :
Consumer		11,768		11,770
Commercial		14,343		15,330
Consumer		20,698		15,847
Total loans	$	756,804	$	618,394

The Corporation completed the acquisition of Peninsula Financial Corporation (“PFC”) on December 5, 2014, The First National Bank of Eagle River (“Eagle”) on April 29, 2016 and Niagara Bancorporation (“Niagara”) on August 31, 2016.  The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (“acquired impaired”) and loans that do not meet that criteria, which are accounted for under ASC 310-20 (“acquired nonimpaired”).  The PFC acquired impaired loans totaled $13.290 million, the Eagle acquired impaired loans totaled $3.401 million, and the Niagara acquired impaired loans totaled $2.105 million.  The Corporation recorded all acquired loans at fair value taking into account a number of factors, including remaining life, estimated loss, estimated value of the underlying collateral and net present values of cash flows.  In the first nine months of 2015, the Corporation had positive resolution of one PFC acquired nonperforming loan which resulted in the recognition of approximately $.429 million of the accretable interest.

The table below details the outstanding balances of the PFC acquired portfolio and the fair value adjustments at acquisition date (dollars in thousands):

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	13,290	$	53,849	$	67,139
Nonaccretable difference		(2,234)		—		(2,234)
Expected cash flows		11,056		53,849		64,905
Accretable yield		(744)		(2,100)		(2,844)
Carrying balance at acquisition date	$	10,312	$	51,749	$	62,061

The table below details the outstanding balances of the Eagle acquired portfolio and the fair value adjustments at acquisition date (dollars in thousands):

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	3,401	$	82,639	$	86,040
Nonaccretable difference		(1,172)		—		(1,172)
Expected cash flows		2,229		82,639		84,868
Accretable yield		(391)		(1,700)		(2,091)
Carrying balance at acquisition date	$	1,838	$	80,939	$	82,777

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The table below details the outstanding balances of the Niagara acquired portfolio and the fair value adjustments at acquisition date (dollars in thousands):

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	2,105	$	29,936	$	32,041
Nonaccretable difference		(265)		—		(265)
Expected cash flows		1,840		29,936		31,776
Accretable yield		(88)		(600)		(688)
Carrying balance at acquisition date	$	1,752	$	29,336	$	31,088

The table below presents a rollforward of the accretable yield on acquired loans for the nine months ended September 30, 2016 (dollars in thousands):

	Peninsula						Eagle						Niagara
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2015	$	426	$	1,342	$	1,768	$	—	$	—	$	—	$	—	$	—	$	—
Acquisitions		—		—		—		391		1,700		2,091		88		600		688
Accretion		—		(525)		(525)		—		(299)		(299)		—		(49)		(49)
Reclassification from nonaccretable difference		(80)		—		(80)		(54)		—		(54)		—		—		—
Balance, September 30, 2016	$	346	$	817	$	1,163	$	337	$	1,401	$	1,738	$	88	$	551	$	639

The table below presents a rollforward of the accretable yield on acquired loans for the nine months ended September 30, 2015 (dollars in thousands):

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Balance, December 31, 2014	$	744	$	2,042	$	2,786
Accretion		(429)		(525)		(954)
Reclassification from nonaccretable difference		188		—		188
Balance, September 30, 2015	$	503	$	1,517	$	2,020

An analysis of the allowance for loan losses for the nine months ended September 30, 2016 and the year ended December 31, 2015 is as follows (dollars in thousands):

	September 30,		December 31,
	2016		2015
Balance, January 1	$	5,004	$	5,140
Recoveries on loans previously charged off		120		690
Loans charged off		(612)		(2,030)
Provision		350		1,204
Balance at end of period	$	4,862	$	5,004

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In the first nine months of 2016, net charge-offs were $.492 million, or .10% of average loans, annualized, compared to net charge-offs of $.216 million in the same period in 2015.   In the first nine  months of 2016, the Corporation recorded a provision for loan loss of $.350 million compared to $.855 million in the first nine months of 2015.  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.

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A breakdown of the allowance for loan losses and recorded balances in loans at September 30, 2016 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, 2016
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,824		700	$	78	$	348	$	5	$	23	$	1,755	$	4,733
Charge-offs		(20)		—		—		(76)		—		(10)		—		(106)
Recoveries		17		4		—		2		—		12		—		35
Provision		(235)		(180)		(16)		133		1		49		448		200
Ending balance ALLR	$	1,586	$	524	$	62	$	407	$	6	$	74	$	2,203	$	4,862
Nine Months Ended September 30, 2016
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,611	$	645	$	79	$	274	$	7	$	64	$	2,324	$	5,004
Charge-offs		(245)		(206)		—		(125)		—		(36)		—		(612)
Recoveries		40		40		—		4		7		29		—		120
Provision		180		45		(17)		254		(8)		17		(121)		350
Ending balance ALLR	$	1,586	$	524	$	62	$	407	$	6	$	74	$	2,203	$	4,862
At September 30, 2016
Loans:
Ending balance	$	362,858	$	136,065	$	14,343	$	211,072	$	11,768	$	20,698	$	—	$	756,804
Ending balance ALLR		(1,586)		(524)		(62)		(407)		(6)		(74)		(2,203)		(4,862)
Net loans	$	361,272	$	135,541	$	14,281	$	210,665	$	11,762	$	20,624	$	(2,203)	$	751,942
Ending balance ALLR:
Individually evaluated	$	570	$	252	$	—	$	68	$	—	$	64	$	—	$	954
Collectively evaluated		1,016		272		62		339		6		10		2,203		3,908
Acquired with deteriorated credit quality		—		—		—		—		—		—		—		—
Total	$	1,586	$	524	$	62	$	407	$	6	$	74	$	2,203	$	4,862
Ending balance Loans:
Individually evaluated	$	2,035	$	329	$	—	$	1,038	$	—	$	288	$	—	$	3,690
Collectively evaluated		357,030		135,736		14,343		206,199		11,709		20,410		—		745,427
Acquired with deteriorated credit quality		3,793		—		—		3,835		59		—		—		7,687
Total	$	362,858	$	136,065	$	14,343	$	211,072	$	11,768	$	20,698	$	—	$	756,804

Impaired loans, by definition, are individually evaluated.

A breakdown of the allowance for loan losses and recorded balances in loans as of and for the twelve months ended December 31, 2015 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	$	2,813	$	1,539	$	142	$	285	$	6	$	13	$	342	$	5,140
Charge-offs		(52)		(1,749)		—		(142)		—		(87)		—		(2,030)
Recoveries		588		22		52		2		—		26		—		690
Provision		(1,738)		833		(115)		129		1		112		1,982		1,204
Ending balance ALLR	$	1,611	$	645	$	79	$	274	$	7	$	64	$	2,324	$	5,004
Loans:
Ending balance	$	312,805	$	122,140	$	15,330	$	140,502	$	11,770	$	15,847	$	—	$	618,394
Ending balance ALLR		(1,611)		(645)		(79)		(274)		(7)		(64)		(2,324)		(5,004)
Net loans	$	311,194	$	121,495	$	15,251	$	140,228	$	11,763	$	15,783	$	(2,324)	$	613,390
Ending balance ALLR:
Individually evaluated	$	420	$	192	$	—	$	60	$	—	$	55	$	—	$	727
Collectively evaluated		1,191		453		79		214		7		9		2,324		4,277
Acquired with deteriorated credit quality		—		—		—		—		—		—		—		—
Total	$	1,611	$	645	$	79	$	274	$	7	$	64	$	2,324	$	5,004
Ending balance Loans:
Individually evaluated	$	1,086	$	617	$	—	$	325	$	83	$	—	$	—	$	2,111
Collectively evaluated		307,336		121,345		15,330		136,940		11,686		15,845		—		608,482
Acquired with deteriorated credit quality		4,383		178		—		3,237		1		2		—		7,801
Total	$	312,805	$	122,140	$	15,330	$	140,502	$	11,770	$	15,847	$	—	$	618,394

Impaired loans, by definition, are individually evaluated.

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A breakdown of the allowance for loan losses and recorded balances in loans at September 30, 2015 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, 2015
Allowance for loan loss reserve:
Beginning balance ALLR	$	2,550	$	2,571	$	128	$	282	$	5	$	27	$	37	$	5,600
Charge-offs		(52)		(57)		—		(62)		—		(36)		—		(207)
Recoveries		28		3		—		—		—		5		—		36
Provision		(221)		355		(17)		74		2		46		111		350
Ending balance ALLR	$	2,305	$	2,872	$	111	$	294	$	7	$	42	$	148	$	5,779
Nine Months Ended September 30, 2015
Allowance for loan loss reserve:
Beginning balance ALLR	$	2,813	$	1,539	$	142	$	285	$	6	$	13	$	342	$	5,140
Charge-offs		(52)		(157)		—		(92)		—		(64)		—		(365)
Recoveries		120		3		—		1		1		24		—		149
Provision		(576)		1,487		(31)		100		—		69		(194)		855
Ending balance ALLR	$	2,305	$	2,872	$	111	$	294	$	7	$	42	$	148	$	5,779
At September 30, 2015
Loans:
Ending balance	$	310,025	$	120,804	$	15,498	$	144,807	$	11,957	$	16,815	$	—	$	619,906
Ending balance ALLR		(2,305)		(2,872)		(111)		(294)		(7)		(42)		(148)		(5,779)
Net loans	$	307,720	$	117,932	$	15,387	$	144,513	$	11,950	$	16,773	$	(148)	$	614,127
Ending balance ALLR:
Individually evaluated	$	518	$	1,927	$	—	$	56	$	—	$	23	$	—	$	2,524
Collectively evaluated		1,787		945		111		238		7		19		148		3,255
Total	$	2,305	$	2,872	$	111	$	294	$	7	$	42	$	148	$	5,779
Ending balance Loans:
Individually evaluated	$	1,924	$	4,728	$	—	$	394	$	—	$	46	$	—	$	7,092
Collectively evaluated		303,390		115,897		15,496		140,789		11,957		16,767		—		604,296
Acquired with deteriorated credit quality		4,711		179		2		3,624		—		2		—		8,518
Total	$	310,025	$	120,804	$	15,498	$	144,807	$	11,957	$	16,815	$	—	$	619,906

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.

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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. 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.

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Below is a breakdown of loans by risk category as of September 30, 2016 (dollars in thousands):

							(4)
	(1)		(2)		(3)		Acceptable/		(5)		(6)		(7)		Rating
	Strong		Good		Average		Acceptable Watch		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	3,592	$	24,337	$	119,657	$	209,084	$	—	$	6,188	$	—	$	—	$	362,858
Commercial, financial and agricultural		9,835		10,946		46,722		67,037		—		1,525		—		—		136,065
Commercial construction		—		912		3,093		4,116		—		404		—		5,818		14,343
One-to-four family residential real estate		545		1,304		3,534		9,133		—		5,284		—		191,272		211,072
Consumer construction		29		—		—		707		—		18		—		11,014		11,768
Consumer		23		—		16		2		—		64		—		20,593		20,698
Total loans	$	14,024	$	37,499	$	173,022	$	290,079	$	—	$	13,483	$	—	$	228,697	$	756,804

Below is a breakdown of loans by risk category as of December 31, 2015 (dollars in thousands):

							(4)
	(1)		(2)		(3)		Acceptable/		(5)		(6)		(7)		Rating
	Strong		Good		Average		Acceptable Watch		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	2,072	$	26,197	$	113,868	$	164,954	$	—	$	5,714	$	—	$	—	$	312,805
Commercial, financial and agricultural		13,067		5,954		47,194		53,791		—		2,134		—		—		122,140
Commercial construction		—		400		3,869		8,257		—		395		—		2,409		15,330
One-to-four family residential real estate		591		1,222		3,172		4,078		—		4,093		—		127,346		140,502
Consumer construction		—		—		—		—		—		—		—		11,770		11,770
Consumer		24		—		19		—		—		61		—		15,743		15,847
Total loans	$	15,754	$	33,773	$	168,122	$	231,080	$	—	$	12,397	$	—	$	157,268	$	618,394

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 months ended September 30, 2016 and that which was recorded for the nine months ended September 30, 2016 was $.542  million. Interest income that would have been recognized during this period was $.033 million and $.611 million, respectively.  For the three months and nine months ended September 30, 2015, interest income recorded during impairment was $.076 million and $.704 million, and the amount that would have been recognized was $.140 million and $.971 million.

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

16

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.

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses.  In determining the estimated fair value of purchased loans, management considers a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, net present value of cash flows expected to be received, among others.  Purchased loans are accounted for in accordance with guidance for certain loans acquired in a transfer (ASC 310-30), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments.  The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference.   Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.  Subsequent increases in expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact 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, 2016
With no valuation reserve:
Commercial real estate	$	593	$	3,272	$	4,011	$	4,273	$	—	$	—	$	29	$	295	$	330
Commercial, financial and agricultural		—		—		109		208		—		—		—		6		10
Commercial construction		—		—		—		—		—		—		—		—		—
One to four family residential real estate		2,107		3,360		4,697		4,141		—		—		4		237		266
Consumer construction		18		59		18		19		—		—		—		4		4
Consumer		9		—		84		72		—		—		—		—		1
With a valuation reserve:
Commercial real estate	$	1,528	$	—	$	1,226	$	702	$	170	$	—	$	—		—	$	—
Commercial, financial and agricultural		328		—		—		—		231		—		—		—		—
Commercial construction		—		—		—		—		—		—		—		—		—
One to four family residential real estate		—		—		94		91		—		—		—		—		—
Consumer construction		—		—		—		—		—		—		—		—		—
Consumer		54		—		5		6		53		—		—		—		—
Total:
Commercial real estate	$	2,121	$	3,272	$	5,237	$	4,975	$	170	$	—	$	29	$	295	$	330
Commercial, financial and agricultural		328		—		109		208		231		—		—		6		10
Commercial construction		—		—		—		—		—		—		—		—		—
One to four family residential real estate		2,107		3,360		4,791		4,232		—		—		4		237		266
Consumer construction		18		59		18		19		—		—		—		4		4
Consumer		63		—		89		78		53		—		—		—		1
Total	$	4,637	$	6,691	$	10,244	$	9,512	$	454	$	—	$	33	$	542	$	611

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									Interest Income		Interest Income
	Nonaccrual		Accrual		Average		Related		Recognized		on
	Basis		Basis		Investment		Valuation Reserve		During Impairment		Accrual Basis
December 31, 2015
With no valuation reserve:
Commercial real estate	$	471	$	4,051	$	7,205	$	—	$	576	$	655
Commercial, financial and agricultural		—		1,778		4,849		—		78		214
Commercial construction		—		—		260		—		3		6
One to four family residential real estate		1,267		2,385		5,413		—		137		205
Consumer construction		20		2		99		—		—		1
Consumer		50		1		102		—		1		2
With a valuation reserve:
Commercial real estate	$	—	$	—	$	—	$	—	$	—	$	—
Commercial, financial and agricultural		460		—		699		192		—		36
Commercial construction		—		—		—		—		—		—
One to four family residential real estate		229		—		232		58		—		6
Consumer construction		—		—		—		—		—		—
Consumer		10		0		10		1		0		0
Total:
Commercial real estate	$	471	$	4,051	$	7,205	$	—	$	576	$	655
Commercial, financial and agricultural		460		1,778		5,548		192		78		250
Commercial construction		—		—		260		—		3		6
One to four family residential real estate		1,496		2,385		5,645		58		137		211
Consumer construction		20		2		99		—		—		1
Consumer		60		1		112		1		1		2
Total	$	2,507	$	8,217	$	18,869	$	251	$	795	$	1,125

											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, 2015
With no valuation reserve:
Commercial real estate	$	692	$	3,978	$	4,740	$	5,344	$	—	$	41	$	45	$	574	$	611
Commercial, financial and agricultural		—		179		219		357		—		2		2		21		23
Commercial construction		—		—		—		103		—		—		0		3		7
One to four family residential real estate		1,017		2,584		3,968		4,401		—		33		37		105		150
Consumer construction		21		2		76		117		—		—		—		—		1
Consumer		5		2		20		20		—		—		—		1		1
With a valuation reserve:
Commercial real estate	$	929	$	—	$	929	$	686	$	118	$	—	$	6	$	—	$	26
Commercial, financial and agricultural		4,706		—		4,747		3,935		1,927		—		50		—		140
Commercial construction		—		—		—		—		—		—		—		—		0
One to four family residential real estate		597		—		576		546		84		—		0		—		12
Consumer construction		—		—		—		—		—		—		—		—		—
Consumer		61		—		20		20		—		—		—		—		—
Total:
Commercial real estate	$	1,621	$	3,978	$	5,669	$	6,030	$	118	$	41	$	51	$	574	$	637
Commercial, financial and agricultural		4,706		179		4,966		4,292		1,927		2		52		21		163
Commercial construction		—		—		—		103		—		—		—		3		7
One to four family residential real estate		1,614		2,584		4,544		4,947		84		33		37		105		162
Consumer construction		21		2		76		117		—		—		—		—		1
Consumer		66		2		40		40		—		—		—		1		1
Total	$	8,028	$	6,745	$	15,295	$	15,529	$	2,129	$	76	$	140	$	704	$	971

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A summary of past due loans at September 30, 2016 and December 31, 2015 is as follows (dollars in thousands):

	September 30,						December 31,
	2016						2015
	30-89 days		90+ days				30-89 days		90+ days
	Past Due		Past Due/				Past Due		Past Due/
	(accruing)		Nonaccrual		Total		(accruing)		Nonaccrual		Total
Commercial real estate	$	1,008	$	2,122	$	3,130	$	521	$	471	$	992
Commercial, financial and agricultural		1,710		328		2,038		222		460		682
Commercial construction		678		34		712		270		—		270
One to four family residential real estate		1,381		2,106		3,487		807		1,528		2,335
Consumer construction		—		—		—		—		20		20
Consumer		198		77		275		130		60		190
Total past due loans	$	4,975	$	4,667	$	9,642	$	1,950	$	2,539	$	4,489

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.

There were no troubled debt restructurings that occurred during the nine months ended September 30, 2016 or September 30, 2015.

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):

	Nine Months Ended		Year ended
	September 30,		December 31,
	2016		2015
Loans outstanding, January 1	$	6,887	$	8,789
New loans		—		—
Net activity on revolving lines of credit		1,720		778
Repayment		(2,269)		(2,680)
Loans outstanding at end of period	$	6,338	$	6,887

There were no loans to related parties classified substandard as of September 30, 2016 or December 31, 2015.  In addition to the outstanding balances above, there were unfunded commitments of $1.694 million to related parties at September 30, 2016.

6.GOODWILL AND OTHER INTANGIBLE ASSETS

During the fourth quarter of 2014, the Corporation recorded $3.805 million of goodwill and $1.206 million of deposit based intangible assets associated with the acquisition of PFC.  During 2016, the Corporation recorded $1.839 million of goodwill and $.993 million of deposit based intangible assets associated with the acquisition of Eagle.  During the third

19

quarter of 2016, the Corporation recorded $.050 million of goodwill and $.300 million of deposit based intangible assets associated with the acquisition of Niagara.

The excess of the cost of acquired entities over the fair value of identifiable assets acquired less liabilities assumed is recorded as goodwill.  In accordance with FASB ASC 350, amortization of goodwill and indefinite-lived assets is not recorded.  However, the recoverability of goodwill and other intangible assets are annually tested for impairment.  Intangible assets, including core deposits and customer business relationships, are amortized primarily on a straight-line basis over their estimated useful lives.  The Corporation is currently amortizing the deposit based intangible over a ten-year estimated life.

The deposit based intangible is reported net of accumulated amortization at $2.235 million at September 30, 2016.  Amortization expense in the first nine months of 2016 is $.129 million.  Amortization expense for the next five years is expected to be at $.250 million per year.

7.SERVICING RIGHTS

Mortgage Loans

Mortgage servicing rights (“MSRs”) are recorded when loans are sold in the secondary market with servicing retained.  As of September 30, 2016, the Corporation had obligations to service approximately $233.356 million of residential first mortgage loans.  The valuation of MSRs 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. On a quarterly basis, management evaluates the MSRs for impairment. The key economic assumptions used in determining the fair value of the MSRs include an annual constant prepayment speed of 9.45% and a discount rate of 8.97% for September 30, 2016.

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

	Nine Months Ended		Year Ended
	September 30,		December 31,
	2016		2015
Balance at beginning of period	$	1,965	$	1,994
Additions from loans sold with servicing retained		—		585
Acquired MSRs		207		—
Amortization		(495)		(614)
Balance at end of period	$	1,677	$	1,965
Balance of loan servicing portfolio	$	233,356	$	224,612
Mortgage servicing rights as % of portfolio		.72%		.87%

Commercial Loans

The Corporation also retains the servicing on commercial loans that have been sold.  These loans were originated and underwritten under the SBA and USDA government guarantee programs, in which the guaranteed portion of the loan was sold to a third party with servicing retained.  The balance of these sold loans with servicing retained at September 30, 2016 and December 31, 2015 was approximately $43.2 million and $63.0 million, respectively. The Corporation valued these servicing rights at $.147 million as of September 30, 2016 and at $.170 million as of December 31, 2015.  This valuation was established in consideration of the discounted cash flow of expected servicing income over the life of the loans.

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8.BORROWINGS

Borrowings consist of the following at September 30, 2016 and December 31, 2015 (dollars in thousands):

	September 30,		December 31,
	2016		2015
Federal Home Loan Bank fixed rate advances at September 30, 2016 with a weighted average rate of 2.01% maturing in 2016, 2017, 2018, 2019 and 2020	$	46,000	$	35,000
Correspondent bank line of credit - holding company		—		7,750
Correspondent bank term note, current floor rate of 4%, maturing April 30, 2019		21,100		2,300
USDA Rural Development, fixed-rate note payable, maturing August 24, 2024 interest payable at 1%		630		704
	$	67,730	$	45,754

The Federal Home Loan Bank borrowings are collateralized at September 30, 2016 by the following:  a collateral agreement on the Corporation’s one to four family residential real estate loans with a book value of approximately  $47.533 million; mortgage related and municipal securities with an amortized cost and estimated fair value of  $11.000 million and  $11.094 million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $2.926 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, 2016.

The USDA Rural Development borrowing is collateralized by loans totaling $.108 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 $.583 million, and guaranteed by the Corporation.

The Corporation currently has one banking borrowing relationship.  The 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 April 30, 2018.  The term note bears the same interest and matures on April 30, 2019 and requires quarterly principal payments of $550,000 beginning March 31, 2017.  This relationship is secured by all of the outstanding mBank stock.  

9.DEFINED BENEFIT PENSION PLAN

The Corporation acquired the Peninsula Financial Corporation noncontributory defined benefit pension plan.  Effective December 31, 2005, the plan was amended to freeze participation in the plan; therefore, no additional employees are eligible to become participants in the plan.  The benefits are based on years of service and the employee’s compensation at the time of retirement.  The Plan was amended effective December 31, 2010, to freeze benefit accrual for all participants.  Expected contributions to the Plan in 2016 are $.063 million.  The anticipated distributions over the next five years and through December 31, 2025 are detailed in the table below (dollars in thousands):

2016	$	134
2017		132
2018		129
2019		126
2020		125
2021-2025		690
Total	$	1,336

At September 30, 2016, the plan’s assets had a fair value of $2.033 million and the Corporation had a net liability of $1.147 million.  The accumulated benefit obligation was $3.180 million.  At September 30, 2015, the plan’s assets had a fair value of $2.107 million and the Corporation had a net liability of $1.183 million.  The accumulated benefit obligation at September 30, 2015 was $3.290 million.

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Assumptions in the actuarial valuation are:

	2016
Weighted average discount rate	3.99	%
Rate of increase in future compensation levels	N/A
Expected long-term rate of return on plan assets	8.00	%

The expected long-term rate of return on plan assets reflects management’s expectations of long-term average rates of return on funds invested to provide for benefits included in the projected benefit obligation.  The expected return is based on the outlook for inflation, fixed income returns and equity returns, while also considering historical returns, asset allocation and investment strategy.  The discount rate assumption is based on investment yields available on AA rated long-term corporate bonds.

The primary investment objective is to maximize growth of the pension plan assets to meet the projected obligations to the beneficiaries over a long period of time, and to do so in a manner that is consistent with the Corporation’s risk tolerance.  The intention of the plan sponsor is to invest the plan assets in mutual funds with the following asset allocation:

	Target	Actual
	Allocation	Allocation
Equity securities	50% to 70%	60%
Fixed income securities	30% to 50%	40%

10.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, RSUs, or stock appreciation rights.  The aggregate number of shares of the Company’s common stock issuable under the plan is 575,000.  Awards are made at the discretion of management and the Board of Directors.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

Restricted Stock Awards

The Corporation’s restricted stock awards require certain service-based or performance requirements and have a vesting period of four years.  Compensation expense is recognized on a straight-line basis over the vesting period.  Shares are subject to certain restrictions and risk of forfeiture by the participants.

The Corporation has historically granted RSUs to members of the Board of Directors and management. Awards granted are set to vest equally over their award terms and are issued at no cost to the recipient.  The table below summarizes each of the grant awards:

Date of Award	Units Granted	Market Value at grant date	Vesting Term	Annual Compensation Cost (in thousands)
August, 2012	148,500	$ 7.91	4 years	$ 294
March, 2014	52,774	12.95	4  years	171
March, 2015	37,730	11.15	4 years	105
May, 2015	3,000	10.77	Immediate	32
February, 2016	35,733	9.91	4 years	89

On August 31, 2013, 2014, 2015 and 2016, the Corporation issued 37,125 shares of its common stock for vested RSUs, in each year. In March 2015, the Corporation issued 13,194 shares of its common stock for vested RSUs. In May 2015, the Corporation granted 3,000 shares, which were immediately vested and issued.  In March 2016, the Corporation issued 22,626 shares of its common stock for vested RSUs.

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A summary of changes in our nonvested shares for the period follows:

		Weighted Average
	Number	Grant Date
	Outstanding	Fair Value
Nonvested balance at January 1, 2016	114,435	$	10.72
Granted during the year	35,733		9.91
Vested during the year	(59,751)		9.53
Nonvested balance at September 30, 2016	90,417	$	11.19

A summary of stock option transactions for the nine months ended September 30, 2016 and 2015, and the year ended December 31, 2015, is as follows:

	September 30,		December 31,
	2016		2015
Outstanding shares at beginning of year		10,000		20,000
Granted during the year		—		—
Exercised during the year		—		—
Expired during the year		—		(10,000)
Outstanding shares at end of period		10,000		10,000
Exercisable shares at end of period		2,000		2,000
Weighted average exercise price per share at end of period	$	12.00	$	12.00
Shares available for grant at end of period		—		—

There were no options granted in the first nine months of 2016 and 2015.

Following is a summary of the options outstanding and exercisable at September 30, 2016.

					Weighted Average
Exercise		Number			Remaining
Price		Outstanding	Exercisable	Unvested Options	Contractual Life-Years
$	12.00	10,000	2,000	8,000	.25

Options issued since the Corporation’s recapitalization in December of 2004 call for 20% immediate vesting upon issue and subsequent vesting to occur over a two to five year period, based upon the market value appreciation of the Corporation’s underlying stock.  Compensation related to these options was expensed based upon the vesting period without consideration given to market value appreciation.  There are no future compensation expenses related to existing option programs.

11.INCOME TAXES

The Corporation has reported deferred tax assets of $9.287 million at September 30, 2016. 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, 2016 had a net operating loss and tax credit carryforwards for tax purposes of approximately $11.200 million, and $2.300 million, respectively.  The Corporation evaluated the future benefits from these carryforwards as of September 30, 2016 and determined that it was “more likely than not” that they would be utilized prior to expiration.  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 credit carryforwards are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue Code.  The annual limitation is $1.404 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 will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted.

The Corporation recognized a federal income tax expense of approximately $.922 million for the three months ended September 30, 2016 and an expense of $1.481 million for the nine months ended September 30, 2016 and a deferred tax expense of $.526 million and $2.074 million for the three and nine months ended September 30, 2015. 

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12.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.

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The following table presents information for financial instruments at September 30, 2016 and December 31, 2015 (dollars in thousands):

		September 30, 2016				December 31, 2015
	Level in Fair	Carrying		Estimated		Carrying		Estimated
	Value Hierarchy	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	48,615	$	48,615	$	25,008	$	25,008
Interest-bearing deposits	Level 2		14,047		14,047		5,089		5,089
Securities available for sale	Level 2		88,886		88,886		53,728		53,728
Federal Home Loan Bank stock	Level 2		2,926		2,926		2,169		2,169
Net loans	Level 3		751,942		756,548		613,390		614,187
Accrued interest receivable	Level 3		1,998		1,998		1,416		1,416
Total financial assets		$	908,414	$	913,020	$	700,800	$	701,597
Financial liabilities:
Deposits	Level 2	$	807,180	$	805,299	$	610,323	$	607,636
Borrowings	Level 2		67,730		69,085		45,754		45,989
Accrued interest payable	Level 3		319		319		174		174
Total financial liabilties		$	875,229	$	874,703	$	656,251	$	653,799

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, 2016, 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, 2016, December 31, 2015 and September 30, 2015 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 measured at fair value on a recurring basis as of September 30, 2016, or December 31, 2015.

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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 certain impaired 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, 2016

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total (Gains) Losses for		Total (Gains) Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Nine Months Ended
(dollars in thousands)	September 30, 2016		(Level 1)		(Level 2)		(Level 3)		September 30, 2016		September 30, 2016
Assets
Impaired loans	$	11,328	$	—	$	—	$	11,328	$	80	$	583
Other real estate owned		3,269		—		—		3,269		60		62
									$	140		645

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2015

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Twelve months ended
(dollars in thousands)	December 31, 2015		(Level 1)		(Level 2)		(Level 3)		December 31, 2015
Assets
Impaired loans	$	10,724	$	—	$	—	$	10,724	$	1,852
Other real estate held for sale		2,324		—		—		2,324		332
									$	2,184

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).

13.SHAREHOLDERS’ EQUITY

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 14,000 shares thus far in 2016, 102,455 shares in 2015, 13,700 shares in 2014 and 55,594 shares in 2013.  The share repurchases were conducted under Board authorizations made and publically announced of $600,000 on February 27, 2013, $600,000 on December 17, 2013 and an additional $750,000 on April 28, 2015. None of these authorizations has an expiration date.  As of September 30, 2016, $.026 million of the total authorization was available for future purchases.

14.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.

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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,
	2016		2015
Commitments to extend credit:
Variable rate	$	69,478	$	53,628
Fixed rate		36,602		26,846
Standby letters of credit - Variable rate		8,042		6,390
Credit card commitments - Fixed rate		5,458		3,747
	$	119,580	$	90,611

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, 2016 represents $110.252 million, or  21.48%, compared to  $102.897 million, or 23.11%, of the commercial loan portfolio on September 30, 2015.  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.

15.  BUSINESS COMBINATIONS

The First National Bank of Eagle River

The Corporation completed its acquisition of The First National Bank of Eagle River (“Eagle”) in April 2016.  Eagle had three branch offices and approximately $125 million in assets as of April 29, 2016. The results of operations due to the merger have been included in the Corporation’s results since the acquisition date.  The merger was effected by a cash payment of $12.500 million. 

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The table below highlights the allocation of the purchase price (dollars in thousands, except per share data):

Purchase Price:
Eagle shares outstanding		85,776
Price per share/Cash price	$	145.73
Total purchase price			$	12,500
Reimbursement of termination fees				(1,763)
Cash consideration			$	10,737
Net assets acquired:
Cash and cash equivalents	$	10,600
Securities available for sale		24,046
Valuation mark		(750)
FRB & FHLB Stock		575
Total Loans		84,138
Allowance for loan losses		(611)
Valuation mark   -  ASC 310-30, nonperforming		(1,563)
-  ASC 310-20, performing		(1,700)
Allowance for loan loss reversal		611
Premises and equipment		1,931
Other real estate owned		1,795
Valuation mark		(891)
Deposit based intangible		993
Mortgage servicing rights		120
Deferred tax benefit - book for valuation marks		948
Bank owned life insurance		4,132
Other assets		323
Total assets		124,697
Non-interest bearing deposits		22,349
Interest bearing deposits		82,165
Total deposits		104,514
FHLB Borrowings		11,000
Other liabilities		285
Total liabilities		115,799
Net assets acquired				8,898
Goodwill			$	1,839

The results of operations for the nine months ended September 30, 2016 include the operating results of the acquired assets and assumed liablities for the 153 days subsequent to the acquisition date.  Eagle’s results of operations prior to the acquisition date are not included in the Corporation’s consolidated statement of comprehensive income.

In addition to the data processing termination fees of $1.763 million, the Corporation incurred other Eagle transaction related expenses of $.890 million, for a total of $2.653 million, or $1.751 million on an after tax basis during the nine months ended September 30, 2016.  These expenses included professional services such as legal, accounting, employee severance payments and contractual arrangements for consulting services. 

Niagara Bancorporation

The Corporation completed its acquisition of Niagara Bancorporation, Inc. (“Niagara”) in August 2016.  Niagara had four branch offices and approximately $67 million in assets as of August 31, 2016. The results of operations due to the

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merger have been included in the Corporation’s results since the acquisition date.  The merger was effected by a cash payment of $7.325 million. 

The table below highlights the allocation of the purchase price (dollars in thousands, except per share data):

Purchase Price:
Eagle shares outstanding		4,354
Price per share/Cash price	$	1,682.36
Total purchase price			$	7,325
Net assets acquired:
Cash and cash equivalents	$	9,778
Securities available for sale		21,491
FRB & FHLB Stock		287
Total Loans		32,660
Allowance for loan losses		(358)
Valuation mark   -  ASC 310-30, nonperforming		(353)
-  ASC 310-20, performing		(600)
Allowance for loan loss reversal		358
Premises and equipment		926
Other real estate owned		450
Valuation mark		(149)
Deposit based intangible		300
Mortgage servicing rights		87
Deferred tax benefit - book for valuation marks		273
Deferred tax benefit		124
Bank owned life insurance		1,109
Other assets		302
Total assets		66,685
Non-interest bearing deposits		5,396
Interest bearing deposits		53,788
Total deposits		59,184
Other liabilities		226
Total liabilities		59,410
Net assets acquired				7,275
Goodwill			$	50

The results of operations for the nine months ended September 30, 2016 include the operating results of the acquired assets and assumed liablities for the 30 days subsequent to the acquisition date.  Niagara’s results of operations prior to the acquisition date are not included in the Corporation’s consolidated statement of comprehensive income.

The Corporation incurred Niagara  transaction related expenses of $.275 million, $.182 million on an after tax basis during the nine months ended September 30, 2016.  These expenses included professional services such as data processing, legal, accounting, employee severance payments, and contractual arrangements for consulting services. 

The following table provides the unaudited pro forma information for the results of operations for the nine months ended September 30, 2016, and the year ended December 31, 2015 as if both the Eagle acquisition and Niagara acquistion had occurred on January 1 of each year.  These adjustments reflect the impact of certain purchase accounting fair value measurements, primarily on the loan and deposit portfolios of Eagle.  In addition, the merger related costs noted above are excluded from the nine months ended September 30, 2016 results of operations, for comparative proforma purposes.  Further operating cost savings are expected along with additional business synergies as a result of the merger which are not presented in the pro forma amounts.  These unaudited pro forma results are presented for illustrative purposes only

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and are not intended to represent or be indicative of the actual results of operations of the combined banking organization that would have been achieved had the merger occurred at the beginning of the period presented, nor are the intended to represent or be indicative of future results of the Corporation.

Proforma Mackinac Financial Combined with Eagle River and Niagara

	Nine months ended		Year Ended
	September 30, 2016		December 31, 2015
Net interest income	$	26,833	$	35,492
Noninterest income		3,744		5,533
Noninterest expense		25,431		30,691
Net income		3,396		7,117
Net income per diluted share	$	.54		1.13

Fair Value

In most instances, determining the fair value of the acquired assets and assumed liabilities required the Corporation to estimate the cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest.  The most significant of those determinations is related to the valuation of acquired loans.  For such loans, the excess cash flows expected at merger over the estimated fair value is recognized as interest income over the remaining lives of the loans.  The difference between contractually required payments at merger and the cash flows expected to be collected at merger reflects the impact of estimated credit losses and other factors, such as prepayments.  In accordance with the applicable accounting guidance for business combinations, there was no carry-over of either Eagle’s or Niagara’s previously established allowance for loan losses.

The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (“acquired impaired”) and loans that do not meet the criteria, which are accounted for under ASC 310-20 (“acquired non-impaired”).  In addition, the loans are further categorized into different pools based primarily on the type and purpose of the loan.

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Forward Looking Statements/Risk Factors

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.

· As a community banking organization, the Corporation’s success depends upon local and regional economic conditions and has different lending risks than larger banks.

We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries and through loan approval and review procedures.  We have established an evaluation process designed to determine the adequacy of our allowance for loan losses.  While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is estimated based on experience, judgment and expectations regarding borrowers and economic conditions, as well as regulator judgments.  We can make no assurance that our loan loss reserves will be sufficient to absorb future loan losses or prevent a material adverse effect on our business, profitability or financial condition.

· 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.

· We may not realize the expected benefits of our recently completed acquisitions of The First National Bank of Eagle River and Niagara Bancorporation, Inc.

· Our controls and procedures may fail or be circumvented.

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· 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, 2016, net deferred tax assets were approximately $9.287 million.  If a 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 of breach in security.

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 implemented Dodd-Frank Act is currently unknown and subject to significant uncertainty.

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.

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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, the related notes, and other supplemental information presented elsewhere in this report.  It should be noted that there are non-GAAP disclosures presented within this discussion to further assist readers in their analysis of the financial condition of the Corporation.  These disclosures are specifically noted where present.  This discussion should also 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, 2015.  Throughout this discussion and elsewhere in this report, the term “Bank” refers to mBank, the principal banking subsidiary of the Corporation.

FINANCIAL OVERVIEW

The Corporation recorded third quarter 2016 net income of $1.778 million, or $.29 per share, compared to net income available to common shareholders of $1.018 million, or $.16 per share for the third quarter of 2015. In connection with the acquisitions of Niagara and Eagle, the Corporation had total GAAP pre-tax transaction related expenses for the third quarter of $.359 million that reduced net income by $.237 million or $.04 per share, on an after tax basis.  The adjusted net income (a non-GAAP measure) for the third quarter of 2016 (exclusive of all transaction related expenses) is $2.015 million, or $.32 per share. 

Operating results for the first nine months of 2016, including transaction related expenses from both Niagara and Eagle River, totaled $2.785 million, or $.45 per share, compared to $4.003 million, or $.64 per share, for the same period in 2015. Year-to-date transaction related expenses, largely associated with the early termination of the Eagle River data processing system, totaled $2.928 million with an after-tax impact of $1.932 million on earnings equating to $.31 per share. Adjusted net income (a non-GAAP measure) for the first nine months of 2016 for the Corporation is $4.718 million, or $.76 per share. 

Weighted average shares for the nine month period in 2016 totaled 6,226,900, compared to 6,247,416 shares in the same period of 2015.  Weighted average shares for the third quarter of 2016 were 6,238,756, compared to 6,238,963 for the same period in 2015.

The net interest margin for the third quarter of 2016 was $8.696 million, or 4.18%, compared to $7.235 million, or 4.18% in the third quarter of 2015.  The nine month net interest margin in 2016 was $23.980 million, or 4.21%, compared to $21.755 million, or 4.29%, in 2015.

Total assets of the Corporation at September 30, 2016 were $959.121 million, up by $219.852 million, or 29.74%, from the $739.269 million in total assets reported at year-end 2015.

FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents increased $23.607 million during the first nine months of 2016.  See further discussion of the change in cash and cash equivalents in the Liquidity section.

Investment Securities

Securities available for sale increased $35.158 million from December 31, 2015 to September 30, 2016, with the balance on September 30, 2016 totaling $88.886 million.  Investment securities are utilized in an effort to manage interest rate risk and liquidity.  As of September 30, 2016, investment securities with an estimated fair value of $25.048 million were pledged against borrowings at the FHLB and certain customer relationships.

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Loans

Through the first nine months of 2016, loan balances increased by $138.410 million from December 31, 2015 balances of $618.394 million.  During the first nine months of 2016, the Bank had total loan production of $206.8 million, which included $56.9 million of secondary market loan production.  This loan production, however, was offset by loan principal runoff, paydowns and amortization.

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.

Following is a summary of the loan portfolio at September 31, 2016 and December 31, 2015 (dollars in thousands):

	September 30,		Percent of	December 31,		Percent of
	2016		Total	2015		Total
Commercial real estate	$	362,858	47.95%	$	312,805	50.59%
Commercial, financial, and agricultural		136,065	17.98		122,140	19.75
One to four family residential real estate		211,072	27.89		140,502	22.72
Construction:
Consumer		11,768	1.55		11,770	1.90
Commercial		14,343	1.90		15,330	2.48
Consumer		20,698	2.73		15,847	2.56
Total loans	$	756,804	100.00%	$	618,394	100.00%

Following is a table showing the significant industry types in the commercial loan portfolio as of September 30, 2016 and December 31, 2015 (dollars in thousands):

	September 30, 2016				December 31, 2015
	Outstanding		Percent of	Percent of	Outstanding		Percent of	Percent of
	Balance		Loans	Capital	Balance		Loans	Capital
Real estate - operators of nonresidential buildings		110,252	22.15%	144.68%		102,620	22.79%	133.97%
Hospitality and tourism		53,182	9.59	62.65		41,300	9.17	53.92
Lessors of residential buildings		23,939	5.30	34.59		25,930	5.76	33.85
Gasoline stations and convenience stores		20,286	4.09	26.70		21,647	4.81	28.26
Commercial construction		14,343	3.69	24.10		15,330	3.40	20.01
Real estate agents and managers		9,962	3.31	21.61		11,225	2.49	14.65
Other		281,302	51.87	338.88		232,223	51.58	303.16
Total Commercial Loans	$	513,266	100.00%		$	450,275	100.00%

Management recognizes the additional risk presented by the concentration in certain segments of the portfolio.  Management does not believe that its current portfolio composition has increased exposure related to any specific industry concentration as of September 30, 2016.  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, 2016, our residential loan portfolio totaled $222.840 million, or 29.45% of our total outstanding loans.

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

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reversed.  Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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 charge-offs for the nine months ended September 30, 2016 amounted to $.492 million, compared to net charge-offs of $.216 million, for the same period in 2015.  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,
	2016		2015
Nonperforming Assets:
Nonaccrual loans	$	4,498	$	2,353
Loans past due 90 days or more		32		32
Restructured loans		139		154
Total nonperforming loans		4,669		2,539
Other real estate owned		3,269		2,324
Total nonperforming assets	$	7,938	$	4,863
Nonperforming loans as a % of loans		0.62%		0.41%
Nonperforming assets as a % of assets		0.83%		0.66%
Reserve for Loan Losses:
At period end	$	4,862	$	5,004
As a % of average loans		.71%		.83%
As a % of nonperforming loans		104.13%		197.09%
As a % of nonaccrual loans		108.09%		212.66%
Texas Ratio		10.55%		6.34%

Nonperforming assets at $7.938 million have increased in 2016 by $3.075 million from the $4.863 million at 2015 year end, largely a result of the nonperforming assets garnered in the Eagle and Niagara acquisitions.

The following ratios provide additional information relative to the Corporation’s credit quality (dollars in thousands):

	At Period End
	September 30, 2016		December 31, 2015
Total loans, at period end	$	756,804		618,394
Average loans for the period	$	680,027	$	602,904
	For the Period Ended
	Nine Months Ended		Twelve Months Ended
	September 30, 2016		December 31, 2015
Net charge-offs (recoveries) during the period	$	492		1,340
Net charge-offs to average loans, annualized	.10%		.22%

Management continues to address market issues impacting its loan customer base.  In conjunction with the Corporation’s senior lending staff and 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

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review of the loan portfolio.  The opinion of this consultant upon completion of the 2015 independent review provided findings similar to management with respect to credit quality.  In 2016, the Corporation continues to utilize a consultant for loan review.

As of September 30, 2016, the allowance for loan losses represented .65% of total loans.  At September 30, 2016, the allowance included specific reserves in the amount of $.954 million, as compared to specific reserves of $.727 million at December 31, 2015.  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.

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 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
	September 30, 2016		December 31, 2015
Balance at beginning of period	$	2,324	$	3,010
Other real estate acquired, net of purchase accounting adjustments		1,242		—
Other real estate transferred from loans due to foreclosure		1,091		1,376
Other real estate sold, net of purchase accounting adjustments		(1,128)		(1,702)
Transferred out of other real estate for bank use		(197)		—
Writedowns on other real estate held for sale, including purchase accounting adjustment		(53)		(295)
Loss on sale of other real estate held for sale		(10)		(65)
Balance at end of period	$	3,269	$	2,324

During the first nine months of 2016, the Corporation received real estate in lieu of loan payments of $1.091 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 2016.  Total deposits increased by $196.857 million, or 32.25%, in the first nine months of 2016.  The increase in deposits for the first nine months of 2016 is composed of an increase in core deposits of $180.342 million and an increase in noncore deposits of $16.515 million.  These increases included the acquisition of Eagle deposits amounting to $104.514 million and Niagara deposits amounting to $59.184 million.  In recent years, the Corporation has strategically emphasized the growth of core deposits with the introduction of several new deposit products and competitive deposit pricing.    Management also utilizes brokered deposits as a funding source, which provides flexibility in managing interest rate risk for fixed rate longer term loan fundings.

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.

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

	September 30,			December 31,
	2016		% of Total	2015		% of Total
Noninterest bearing	$	163,278	20.23%	$	122,775	20.12%
NOW, money market, checking		287,097	35.57		202,784	33.23
Savings		60,322	7.47		30,882	5.06
Certificates of Deposit <$250,000		150,170	18.60		124,084	20.33
Total core deposits		660,867	81.87		480,525	78.73
Certificates of Deposit >$250,000		9,015	1.12		8,532	1.40
Brokered CDs		137,298	17.01		121,266	19.87
Total non-core deposits		146,313	18.13		129,798	21.27
Total deposits	$	807,180	100.00%	$	610,323	100.00%

Borrowings

The Corporation also utilizes FHLB borrowings as a source of funding.  At September 30, 2016, this source of funding totaled $46 million and the Corporation secured this funding by pledging loans and investments.  The $46 million of FHLB borrowings has a weighted average maturity of 1.75 years and a weighted average rate of 2.01% at September 30, 2016.  The Corporation also has a USDA Rural Development loan held by its wholly owned subsidiary, First Rural Relending, that has an outstanding balance of $.630 million, with a fixed interest rate of 1% that matures in August 2024.

In addition to the above, the Corporation currently has one banking borrowing relationship.  The relationship consists of a nonrevolving line of credit and a term note.  The line of credit had no balance at September 30, 2016 and bears interest at 90-day LIBOR plus 2.75%, with a floor rate of 4.00% and has an initial term that expires on April 30, 2018.  The term note had a September 30, 2016 balance of $21.100 million, bears the same interest and matures on April 30, 2019 and requires quarterly principal payments of $550,000 beginning March 31, 2017. 

Shareholders’ Equity

Total shareholders’ equity increased $1.683 million from December 31, 2015 to September 30, 2016.  Contributing to the increase in shareholders’ equity was net income available to common shareholders of $2.785 million, a reduction for cash dividends on common stock of $1.891 million, increases due to stock compensation of $.450 million, an increase in the market value of securities of $.489 million and a decrease due to the repurchase of common stock of $.150 million.

RESULTS OF OPERATIONS

Summary

The Corporation reported net income available to common shareholders of $2.785 million, or $.45 per share, in the first nine months of 2016, compared to $4.003 million, or $.64 per share, for the first nine months of 2015.

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 $24.049 million, 4.23% of average earning assets, in the first nine months of 2016, compared to $21.827 million, and 4.31% of average earning assets, in the first half of 2015. 

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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
													2016-2015
	Average Balances						Average Rates		Interest				Income/						Rate/
	September 30,				Increase/		September 30,		September 30,				Expense		Volume		Rate		Volume
(dollars in thousands)	2016		2015		(Decrease)		2016	2015	2016		2015		Variance		Variance		Variance		Variance
Loans (1,2,3)	$	734,702	$	614,315	$	120,387	5.13%	5.18%	$	9,470	$	8,027	$	1,443	$	1,554	$	12	$	(123)
Taxable securities		59,881		49,578		10,303	2.57	2.26		387		282		105		59		38		8
Nontaxable securities (2)		16,927		9,888		7,039	2.02	1.97		86		49		37		17		26		(6)
Federal funds sold		12,358		5,219		7,139	0.23	0		7		1		6		1		2		3
Other interest-earning assets		11,043		7,423		3,620	3.03	2.46		84		46		38		18		20		—
Total earning assets		834,911		686,423		148,488	4.78	4.86		10,034		8,405		1,629		1,649		98		(118)
Reserve for loan losses		(4,855)		(5,565)		710
Cash and due from banks		52,367		31,319		21,048
Fixed Assets		15,185		12,703		2,482
Other Real Estate		3,480		2,342		1,138
Other assets		29,265		23,931		5,334
Total assets	$	930,353	$	751,153	$	179,200
NOW and money market deposits	$	215,372	$	158,155	$	57,217	.33	.32	$	180	$	127	$	53	$	46	$	4	$	3
Interest checking		59,443		52,706		6,737	.15	.18		23		24		(1)		3		(4)		—
Savings deposits		53,338		30,688		22,650	.09	.10		12		8		4		6		(1)		(1)
Certificates of deposit		144,466		161,746		(17,280)	.84	1.03		306		420		(114)		(45)		(81)		12
Brokered deposits		149,839		107,951		41,888	.93	.97		349		264		85		102		(12)		(5)
Borrowings		69,308		50,458		18,850	2.03	2.41		354		307		47		116		(52)		(17)
Total interest-bearing liabilities		691,766		561,704		130,062	.70	.81		1,224		1,150		74		228		(146)		(8)
Demand deposits		157,808		113,282		44,526
Other liabilities		2,752		(195)		2,947
Shareholders’ equity		78,027		76,362		1,665
Total liabilities and shareholders’ equity	$	930,353	$	751,153	$	179,200
Rate spread							4.08%	4.05%
Net interest margin/revenue							4.20%	4.19%	$	8,810	$	7,255	$	1,555	$	1,421	$	244	$	(110)

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	Nine Months Ended
													2016-2015
	Average Balances						Average Rates		Interest				Income/						Rate/
	September 30,				Increase/		September 30,		September 30,				Expense		Volume		Rate		Volume
(dollars in thousands)	2016		2015		(Decrease)		2016	2015	2016		2015		Variance		Variance		Variance		Variance
Loans (1,2,3)	$	680,137	$	607,284	$	72,853	5.13%	5.28%	$	26,128	$	23,999	$	2,129	$	2,879	$	(691)	$	(59)
Taxable securities		54,014		50,468		3,546	2.36	2.24		954		845		109		59		46		4
Nontaxable securities (2)		12,863		10,224		2,639	1.80	2.58		173		197		(24)		51		(60)		(15)
Federal funds sold		4,576		1761		2,815	.26	0		9		1		8		2		2		4
Other interest-earning assets		8,598		8,019		579	3.15	2.45		203		147		56		11		42		3
Total earning assets		760,188		677,756		82,432	4.83	4.97		27,467		25,189		2,278		3,002		(661)		(63)
Reserve for loan losses		(5,015)		(5419)		404
Cash and due from banks		36,529		25,675		10,854
Fixed Assets		13,935		12,684		1,251
Other Real Estate		3,371		2,505		866
Other assets		25,370		27,392		(2,022)
Total assets	$	834,378	$	740,593	$	93,785
NOW and money market deposits	$	189,765	$	158,082	$	31,683	.33	.30	$	462	$	357	$	105	$	72	$	28	$	5
Interest checking		52,063		52,208		(145)	.16	.19		62		73		(11)		—		(11)		—
Savings deposits		43,467		29,637		13,830	.10	.10		32		22		10		10		—		—
Certificates of deposit		135,162		160,674		(25,512)	.90	1.05		914		1,260		(346)		(200)		(174)		28
Brokered deposits		130,280		101,395		28,885	.96	1.00		940		755		185		215		(24)		(6)
Borrowings		65,505		53,223		12,282	2.06	2.25		1,008		895		113		207		(77)		(17)
Total interest-bearing liabilities		616,242		555,219		61,023	.74	.81		3,418		3,362		56		304		(258)		10
Demand deposits		137,395		104,815		32,580
Other liabilities		2,477		5,123		(2,646)
Shareholders’ equity		78,264		75,436		2,828
Total liabilities and shareholders’ equity	$	834,378	$	740,593	$	93,785
Rate spread							4.09%	4.16%
Net interest margin/revenue							4.23%	4.31%	$	24,049	$	21,827	$	2,222	$	2,698	$	(403)	$	(73)

(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 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.

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 2016, the Corporation recorded a loan loss provision of $.350 million, compared to $.855 million in the first nine months of 2015.  There were net charge-offs of $.492 million in the first nine months of 2016, compared to net charge-offs of $.216 million for the same period in 2015.

Other Income

Other income was $3.012 million in the first nine months of 2016, compared to $2.747 million in the same period in 2015.  The increases year over year were largely a result of increased SBA/USDA loan sale gains and increased secondary market mortgage income.  With respect to mortgage servicing income, the Corporation has slowed the retention of mortgage servicing on those loans sold to the secondary market, which has contributed to the decrease year over year in this category.

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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, 2016 and 2015 (dollars in thousands):

	Three Months Ended							Nine Months Ended
	September 30,							September 30,
					Increase/(Decrease)							Increase/(Decrease)
	2016		2015		Dollars		Percent	2016		2015		Dollars		Percent
Deposit service fees	$	259	$	196	$	63	32.14%	$	723	$	624	$	99	15.87%
Income from loans sold in the secondary market		512		301		211	70.10		1,118		750		368	49.07
SBA/USDA loan sale gains		551		40		511	1,277.50		717		440		277	62.95
Mortgage servicing (amortization) income		(12)		9		(21)	(233.33)		(74)		239		(313)	(130.96)
Net realized security gains		40		133		(93)	(69.92)		149		402		(253)	(62.94)
Other noninterest income		139		94		45	47.87		379		292		87	29.79
Total other income	$	1,489	$	773	$	716	92.63%	$	3,012	$	2,747	$	265	9.65%

Other Expense

For the first nine months of 2016, the Corporation recorded other expenses of $22.376 million, compared to $17.570 million in 2015, an increase of $4.806 million.  The 2016 increase from the first nine months of 2015 was due to transaction related expenses of $2.928 million incurred with the acquisitions of Eagle and Niagara, as well as customary employee compensation and retention related costs to ensure our personnel infrastructure keeps pace with our growing asset base and subsequent regulatory platform monitoring needs.

The following table details other expense for the three and nine months ended September 30, 2016 and 2015 (dollars in thousands):

	Three Months Ended							Nine Months Ended
	September 30,							September 30,
					Increase/(Decrease)							Increase/(Decrease)
	2016		2015		Dollars		Percentage	2016		2015		Dollars		Percentage
Salaries and employee benefits	$	3,687	$	3,139	$	548	17.46%	$	10,592	$	9,102	$	1,490	16.37%
Occupancy		680		602		78	12.96		1,960		1,804		156	8.65
Furniture and equipment		440		370		70	18.92		1,248		1,159		89	7.68
Data processing		440		327		113	34.56		1,118		1,041		77	7.40
Advertising		157		153		4	2.61		494		399		95	23.81
Professional service fees		309		348		(39)	(11.21)		807		928		(121)	(13.04)
Loan and deposit		152		136		16	11.76		434		399		35	8.77
Writedowns and losses on other real estate held for sale		60		104		(44)	(42.31)		62		141		(79)	(56.03)
FDIC insurance premiums		131		135		(4)	(2.96)		356		383		(27)	(7.05)
Telephone		140		108		32	29.63		374		346		28	8.09
Transaction related expenses		359		—		359	N/A		2,928		—		2,928	N/A
Other		730		692		38	5.49		2,003		1,868		135	7.23
Total other expense	$	7,285	$	6,114	$	1,171	19.15%	$	22,376	$	17,570	$	4,806	27.35%

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Federal Income Taxes

The Corporation recognized a federal income tax expense for the nine months ended September 30, 2016 of $1.481 million, compared to $2.074 million a year earlier.

The Corporation has reported deferred tax assets of $9.287 million at September 30, 2016.  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, 2016 had a net operating loss and tax credit carryforwards for tax purposes of approximately $11.200 million and $2.300 million, respectively.  The Corporation evaluated the future benefits from these carryforwards as of September 30, 2016 and determined it was “more likely than not” that they would be utilized prior to expiration.  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 $1.404 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 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 $48.615 million in cash and cash equivalents and $63.838 million of unpledged investment securities.   Although current liquidity is deemed adequate, management has the ability to increase on hand liquidity by acquiring brokered CDs in order to fund any anticipated loan growth.

During the first nine months of 2016, the Corporation increased cash and cash equivalents by $23.607 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 $5.000 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 “adequately capitalized.”

Liquidity is managed by the Corporation through its Asset and Liability Committee (“ALCO”).  The ALCO Committee meets regularly 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 $250,000. Noncore funding consists of certificates of deposit greater than $250,000, brokered deposits, and FHLB and Farmers’ Home Administration borrowings.  At September 30, 2016, the Bank’s core deposits in relation to total funding were 75.54% compared to 73.24% at September 30, 2015.  These ratios indicate that at September 30, 2016, that the Bank had slightly decreased 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 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, 2016, the Bank had $43.000 million of unsecured lines available and additional

41

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

The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Corporation’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets.  Management has determined that, as of September 30, 2016, the Corporation is adequately capitalized.

Effective January 1, 2015, the Corporation became subject to new capital requirements due to the Basel III regulation, including:

· A new minimum ratio of Common Equity Tier I Capital to risk-weighted assets of 4.5%;

· An increase in the minimum required amount of Additional Tier 1 Capital to 6% of risk-weighted assets;

· A continuation of the current minimum required amount of Total Capital (Tier 1 plus Tier 2) of 8% of risk-weighted assets; and

· A minimum leverage ratio of Tier I Capital to total assets equal to 4% in all circumstances.

In order to be “well-capitalized” under the current guidelines, a depository institution must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more; an Additional Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10% or more; and a leverage ratio of 5% or more.

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The Corporation’s and the Bank’s actual capital and ratios compared to generally applicable regulatory requirements as of September 30, 2016 are as follows (dollars in thousands):

	Actual				Adequacy Purposes					Well-Capitalized
	Amount		Ratio		Amount			Ratio		Amount			Ratio
Total capital to risk weighted assets:
Consolidated	$	72,376	9.3%	>	$	62,457	>	8.0%	>	$	78,071	>	10.0%
mBank	$	96,179	11.6%	>	$	62,187	>	8.0%	>	$	77,734	>	10.0%
Tier 1 capital to risk weighted assets:
Consolidated	$	67,514	8.7%	>	$	46,842	>	6.0%	>	$	62,457	>	8.0%
mBank	$	85,408	11.0%	>	$	46,640	>	6.0%	>	$	62,187	>	8.0%
Common equity Tier 1 capital to risk weighted assets
Consolidated	$	67,514	8.7%	>	$	35,132	>	4.5%	>	$	50,746	>	6.5%
mBank	$	85,408	11.0%	>	$	34,980	>	4.5%	>	$	50,527	>	6.5%
Tier 1 capital to average assets:
Consolidated	$	67,514	7.4%	>	$	36,749	>	4.0%	>	$	45,937	>	5.0%
mBank	$	85,408	9.3%	>	$	36,809	>	4.0%	>	$	46,011	>	5.0%

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.

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MACKINAC FINANCIAL CORPORATION

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

In general, the Corporation attempts to manage interest rate risk by investing in a variety of assets which afford it an opportunity to reprice assets and increase interest income at a rate equal to or greater than the interest expense associated with repricing liabilities.

Interest rate risk is the exposure of the Corporation to adverse movements in interest rates.  The Corporation derives its income primarily from the excess of interest collected on its interest-earning assets over the interest paid on its interest-bearing obligations.  The rates of interest the Corporation earns on its assets and owes on its obligations generally are established contractually for a period of time.  Since market interest rates change over time, the Corporation is exposed to lower profitability if it cannot adapt to interest rate changes. Accepting interest rate risk can be an important source of profitability and shareholder value; however, excess levels of interest rate risk could pose a significant threat to the Corporation’s earnings and capital base.  Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to the Corporation’s safety and soundness.

Loans are the most significant earning asset.  Management offers commercial and real estate loans priced at 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.

As of September 30, 2016, the Corporation had established interest rate floors on approximately $150.301 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 $130.263 million of the “floor rate” loan balances will reprice with a 100 basis point increase on the prime rate, with another $19.968 million repricing in the next 100 basis point prime rate increase.

The Corporation also has $88.886 million of securities providing for scheduled monthly principal and interest payments as well as unanticipated prepayments of principal as of September 30, 2016.  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.

As of September 30, 2016, the Corporation has $510.697 million of transactional accounts, of which $163.278 million consists of noninterest bearing demand deposit balances.  Transaction account balances have increased significantly in the last year due in part to the acquisitions of Eagle and Niagara, as well as the Corporation’s focus on these low costs 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

44

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.

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, 2016 (dollars in thousands):

	1-90		91-365		>1-5		Over 5
	Days		Days		Years		Years		Total
Interest-earning assets:
Loans	$	273,535		182,968		298,188		2,113	$	756,804
Securities		8,603		4,408		53,756		22,119		88,886
Other (1)		5,597		5,046		8,298		447		19,388
Total interest-earning assets		287,735		192,422		360,242		24,679		865,078
Interest-bearing obligations:
NOW, money market, savings and interest checking		347,419		—		—		—		347,419
Time deposits		31,925		61,525		63,198		2,537		159,185
Brokered CDs		29,592		85,591		22,115		—		137,298
Borrowings		6,000		1,724		59,450		556		67,730
Total interest-bearing obligations		414,936		148,840		144,763		3,093		711,632
Gap	$	(127,201)	$	43,582	$	215,479	$	21,586	$	153,446
Cumulative gap	$	(127,201)	$	(83,619)	$	131,860	$	153,446

(1) Includes Federal Home Loan Bank Stock.

The above analysis indicates that at September 30, 2016, the Corporation had a cumulative liability sensitivity gap position of $83.619 million within the one-year time frame.  The Corporation’s cumulative liability sensitive gap suggests that if market interest rates were to increase in the next twelve months, the Corporation has the potential to earn less net interest income.  This is because more liabilities would reprice at higher rates than assets.  Conversely, if market interest rates decrease in the next twelve months, the above gap position suggests the Corporation’s net interest income would increase.  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, 2015, the Corporation had a cumulative liability sensitivity gap position of $37.492 million within the one-year time frame.

The borrowings in the gap analysis include $46.000 million of FHLB advances that have a weighted average maturity of 1.75 years and a weighted average rate of 2.01%.

45

The Corporation’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk and foreign exchange risk.  The Corporation has no market risk sensitive instruments held for trading purposes.  The Corporation has limited agricultural-related loan assets and therefore has minimal significant exposure to changes in commodity prices.  Any impact that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be insignificant.

Evaluating the exposure to changes in interest rates includes assessing both the adequacy of the process used to control interest rate risk and the quantitative level of exposure.  The Corporation’s interest rate risk management process seeks to ensure that appropriate policies, procedures, management information systems, and internal controls are in place to maintain interest rate risk at prudent levels with consistency and continuity.  In evaluating 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.

46

MACKINAC FINANCIAL CORPORATION

ITEM 4  CONTROLS AND PROCEDURES

As of September 30, 2016, 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, 2016.

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, 2016 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

47

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.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The Corporation currently has a share repurchase program.  The program is conducted under authorizations from time to time by the Board of Directors.  The shares reported in the table below are covered by Board authorizations made and publically announced for $600,000 on February 27, 2013, an additional $600,000 on December 17, 2013 and an additional $750,000 on April 28, 2015.  None of these authorizations has an expiration date.

Issuer purchase of Equity Securities

				Total number of
				shares purchased	Maximum
				as part of a	dollars
				publically	yet to
	Total number of	Average price		announced	be used for
Period of purchases	shares purchased	paid per share		plan or program	stock purchases
July 1, 2016 to July 31, 2016	—	$	—	—	$	25,335
August 1, 2016 to August 31, 2016	—	$	—	—		25,335
September 1, 2016 to September 30, 2016	—	$	—	—		25,335
Total Third Quarter 2016	—	$	—	—

Item 6.  Exhibits and Reports on Form 8-K

(a)	Exhibits:
	Exhibit 10.1	Amended and Restated Emloyment Agreement, dated as of August 1, 2016, by and between Mackinac Financial Corporation and Jesse Deering, filed with the SEC on August 1, 2016 as Exhibit 10.1 to the Corporation’s Current Report on Form 8-K filed and incorporated herein by reference.
	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.

48

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 14, 2016	By:	/s/ Paul D. Tobias
		PAUL D. TOBIAS,
		CHAIRMAN AND CHIEF EXECUTIVE OFFICER
		(principal executive officer)
	By:	/s/ Jesse A. Deering
		JESSE A. DEERING
		EVP/CHIEF FINANCIAL OFFICER
		(principal financial and accounting officer)

49

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 14, 2016	/s/ Paul D. Tobias
	Paul D. Tobias
	Chairman and Chief Executive Officer
	(principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Jesse A. Deering, 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.

ay
Date:     November 14, 2016	/s/ Jesse A. Deering
	Jesse A. Deering
	Executive Vice President/Chief Financial Officer
	(principal financial officer)

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, 2016, (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.

aya

/s/ Paul D. Tobias

Paul D. Tobias

Chairman and Chief Executive Officer

(chief executive officer)

Date:     November 14, 2016

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, 2016, (the “Form 10-Q”) of Mackinac Financial Corporation (the “Issuer”).

I, Jesse A. Deering, 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.

Ma

/s/ Jesse A. Deering

Executive Vice President and Chief Financial Officer

(principal financial officer)

Date:     November 14, 2016

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Nov. 10, 2016
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, 2016
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		6,263,371
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q3

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
ASSETS
Cash and due from banks	$ 46,200	$ 25,005
Federal funds sold	2,415	3
Cash and cash equivalents	48,615	25,008
Interest-bearing deposits in other financial institutions	14,047	5,089
Securities available for sale	88,886	53,728
Federal Home Loan Bank stock	2,926	2,169
Loans:
Commercial	513,266	450,275
Mortgage	222,840	152,272
Consumer	20,698	15,847
Total Loans	756,804	618,394
Allowance for loan losses	(4,862)	(5,004)
Net loans	751,942	613,390
Premises and equipment	16,028	12,524
Other real estate held for sale	3,269	2,324
Deferred tax asset	9,287	9,213
Deposit based intangibles	2,235	1,076
Goodwill	5,694	3,805
Other assets	16,192	10,943
TOTAL ASSETS	959,121	739,269
Deposits:
Noninterest bearing deposits	163,278	122,775
NOW, money market, interest checking	287,097	202,784
Savings	60,322	30,882
CDs less than $250,000	150,170	124,084
CDs more than $250,000	9,015	8,532
Brokered	137,298	121,266
Total deposits	807,180	610,323
Borrowings	67,730	45,754
Other liabilities	5,926	6,590
Total liabilities	880,836	662,667
SHAREHOLDERS' EQUITY:
Preferred stock - No par value: Authorized - 500,000 shares, Issued and outstanding - none
Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares Issued and outstanding - 6,263,371 and 6,217,620, respectively	61,433	61,133
Retained earnings	16,115	15,221
Accumulated other comprehensive income
Unrealized gains on available for sale securities	786	297
Minimum pension liability	(49)	(49)
Total shareholders' equity	78,285	76,602
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 959,121	$ 739,269

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Sep. 30, 2016	Dec. 31, 2015
CONDENSED CONSOLIDATED BALANCE SHEETS
Preferred stock, par value	$ 0	$ 0
Preferred stock, Authorized shares	500,000	500,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0	$ 0
Common stock, Authorized shares	18,000,000	18,000,000
Common stock, Shares issued	6,263,371	6,217,620
Common stock, Shares outstanding	6,263,371	6,217,620

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Interest and fees on loans:
Taxable	$ 9,441	$ 8,019	$ 26,085	$ 23,986
Tax-exempt	19	3	34	9
Interest on securities:
Taxable	387	282	953	845
Tax-exempt	57	35	114	129
Other interest income	91	46	212	148
Total interest income	9,995	8,385	27,398	25,117
INTEREST EXPENSE:
Deposits	870	843	2,410	2,467
Borrowings	429	307	1,008	895
Total interest expense	1,299	1,150	3,418	3,362
Net interest income	8,696	7,235	23,980	21,755
Provision for loan losses	200	350	350	855
Net interest income after provision for loan losses	8,496	6,885	23,630	20,900
OTHER INCOME:
Deposit service fees	259	196	723	624
Income from loans sold on the secondary market	512	301	1,118	750
SBA/USDA loan sale gains	551	40	717	440
Mortgage servicing (amortization) income	(12)	9	(74)	239
Net realized security gains	40	133	149	402
Other	139	94	379	292
Total other income	1,489	773	3,012	2,747
OTHER EXPENSE:
Salaries and employee benefits	3,687	3,139	10,592	9,102
Occupancy	680	602	1,960	1,804
Furniture and equipment	440	370	1,248	1,159
Data processing	440	327	1,118	1,041
Advertising	157	153	494	399
Professional service fees	309	348	807	928
Loan and deposit	152	136	434	399
Writedowns and (gains) losses on other real estate held for sale	60	104	62	141
FDIC insurance assessment	131	135	356	383
Telephone	140	108	374	346
Transaction related expenses	359		2,928
Other	730	692	2,003	1,868
Total other expenses	7,285	6,114	22,376	17,570
Income before provision for income taxes	2,700	1,544	4,266	6,077
Provision for income taxes	922	526	1,481	2,074
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$ 1,778	$ 1,018	$ 2,785	$ 4,003
INCOME PER COMMON SHARE:
Basic (in dollars per share)	$ 0.29	$ 0.16	$ 0.45	$ 0.64
Diluted (in dollars per share)	$ 0.28	$ 0.16	$ 0.45	$ 0.64

XML

CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME
Net income	$ 1,778	$ 1,018	$ 2,785	$ 4,003
Other comprehensive income
Unrealized gains (losses) arising during the period	(79)	297	890	370
Reclassification adjustment for securities gains included in net income	(40)	(133)	(149)	(402)
Tax effect	40	(56)	(252)	61
Net change in unrealized gains on available for sale securities	(79)	108	489	29
Total comprehensive income	$ 1,699	$ 1,126	$ 3,274	$ 4,032

XML

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - USD ($) $ in Thousands	Shares of Common Stock	Common Stock and Additional Paid in Capital	Retained Earnings (Accumulated Deficit)	Accumulated Other Comprehensive Income	Total
Balance, beginning of period at Dec. 31, 2014		$ 61,679	$ 11,804	$ 513	$ 73,996
Balance (in shares) at Dec. 31, 2014	6,266,756
Increase (Decrease) in Shareholders' Equity
Net income for the period			4,003		4,003
Other comprehensive income (loss):
Net unrealized gain on securities available for sale				29	29
Total comprehensive income			4,003	29	4,032
Stock compensation		432			432
Restricted stock award vesting (in shares)	53,319
Repurchase of common stock		(791)			(791)
Repurchase of common stock (in shares)	(70,480)
Dividend on common stock			(1,578)		(1,578)
Balance, end of period at Sep. 30, 2015		61,320	14,229	542	76,091
Balance (in shares) at Sep. 30, 2015	6,249,595
Balance, beginning of period at Dec. 31, 2014		61,679	11,804	513	73,996
Balance (in shares) at Dec. 31, 2014	6,266,756
Other comprehensive income (loss):
Repurchase of common stock (in shares)	(102,455)
Balance, end of period at Dec. 31, 2015		61,133	15,221	248	76,602
Balance (in shares) at Dec. 31, 2015	6,217,620
Increase (Decrease) in Shareholders' Equity
Net income for the period			2,785		2,785
Other comprehensive income (loss):
Net unrealized gain on securities available for sale				489	489
Total comprehensive income			2,785	489	3,274
Stock compensation		450			450
Restricted stock award vesting (in shares)	59,751
Repurchase of common stock		(150)			(150)
Repurchase of common stock (in shares)	(14,000)
Dividend on common stock			(1,891)		(1,891)
Balance, end of period at Sep. 30, 2016		$ 61,433	$ 16,115	$ 737	$ 78,285
Balance (in shares) at Sep. 30, 2016	6,263,371

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Cash Flows from Operating Activities:
Net income	$ 2,785	$ 4,003
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,336	1,265
Provision for loan losses	350	855
Deferred income taxes, net	1,481	2,074
Gain on sales/calls of securities	(149)	(402)
Gain on sale of loans sold in the secondary market	(959)	(604)
Origination of loans held for sale in the secondary market	(56,941)	(36,827)
Proceeds from sale of loans in the secondary market	57,900	37,431
(Gain) loss on sale of premises, equipment, and other real estate held for sale	10	6
Writedown of other real estate held for sale	53	135
Stock compensation	450	432
Change in other assets	12,462	7,993
Change in other liabilities	(1,174)	(6,016)
Net cash provided by operating activities	17,604	10,345
Cash Flows from Investing Activities:
Net increase in loans	(28,118)	(19,185)
Net decrease in interest-bearing deposits in other financial institutions	3,015	708
Purchase of securities available for sale	(7,225)	(16,390)
Proceeds from maturities, sales, calls or paydowns of securities available for sale	16,752	27,546
Proceeds from FHLBI repurchases of excess stock		804
Capital expenditures	(1,833)	(1,123)
Net cash used in Eagle acquisition and reimbursement of contract termination fee	(12,500)
Net cash used in Niagara acquisition	(7,325)
Proceeds from sale of premises, equipment, and other real estate	1,143	1,190
Net cash (used in) provided by investing activities	(36,091)	(6,450)
Cash Flows from Financing Activities:
Net increase (decrease) in deposits	33,159	15,361
Net activity on lines of credit	(8,550)	121
New term debt issuance	19,800
Principal payments on borrowings	(274)	(374)
Repurchase of common stock	(150)	(791)
Dividend on common stock	(1,891)	(1,578)
Net cash provided by financing activities	42,094	12,739
Net increase (decrease) in cash and cash equivalents	23,607	16,634
Cash and cash equivalents at beginning of period	25,008	21,947
Cash and cash equivalents at end of period	48,615	38,581
Cash paid during the year for:
Interest	3,273	3,345
Income taxes	100	150
Noncash Investing and Financing Activities:
Transfers of Foreclosures from Loans to Other Real Estate Held for Sale	$ 1,091	$ 674

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2016

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 three and nine-month period ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.  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, 2015.

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, the valuation of investment securities, the valuation of foreclosed real estate, deferred tax assets, mortgage servicing rights, and the assessment of goodwill for impairment.

Acquired Loans

Loans acquired with evidence of credit deterioration since inception and for which it is probable that all contractual payments will not be received are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).  These loans are recorded at fair value at the time of acquisition, with no carryover of the related allowance for loan losses.  Fair value of acquired loans is determined using a discounted cash flow methodology based on assumptions about the amount and timing of principal and interest payments, principal prepayments and principal defaults and losses, and current market rates.  In recording the fair values of acquired impaired loans at acquisition date, management calculates a non-accretable difference (the credit component of the purchased loans) and an accretable difference (the yield component of the purchased loans).

Over the life of the acquired loans, management continues to estimate cash flows expected to be collected on pools of loans sharing common risk characteristics, which are treated in the aggregate when applying various valuation techniques.  Management evaluates at each balance sheet date whether the present value of our pools of loans determined using the effective interest rates has decreased significantly and if so, recognizes a provision for loan loss in our consolidated statement of income.  For any significant increases in cash flows expected to be collected, we adjust the amount of the accretable yield recognized on a prospective basis over the pool’s remaining life.

Performing acquired loans are accounted for under Financial Accounting Standards Board (“FASB”) Topic 310-20, Receivables – Nonrefundable Fees and Other Costs.  Performance of certain loans may be monitored and based on management’s assessment of the cash flows and other facts available, portions of the accretable difference may be delayed or suspended if management deems appropriate.  The Corporation’s policy for determining when to discontinue accruing interest on performing acquired loans and the subsequent accounting for such loans is essentially the same as the policy for originated loans.

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 incurred 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 Corporation’s 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 Corporation’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.  Awards are made at the discretion of management and the Board of Directors.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

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RECENT ACCOUNTING PRONOUNCEMENTS

9 Months Ended

Sep. 30, 2016

RECENT ACCOUNTING PRONOUNCEMENTS

RECENT ACCOUNTING PRONOUNCEMENTS

2.RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the 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, 2018 and early adoption is permitted only as of January 1, 2017. The Corporation is currently evaluating the impact of the new guidance and the method of adoption in the consolidated financial results; however, adoption is not expected to have a material impact on the Corporation’s consolidated financial condition and results of operations.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”).  ASU 2016-01 amends current guidance by requiring companies to recognize changes in fair value for equity investments that have a readily determinable fair value through net income rather than through other comprehensive income.  Under ASU 2016-01, equity investments that do not have a readily determinable fair value will either be accounted for the same as equity investments that have a readily determinable fair value, with changes in fair value recognized through net income or carried at cost, adjusted for changes in observable prices based on orderly transactions for identical or similar investments issued by the same issuer and further adjusted for impairment, if applicable.  ASU 2016-01 also requires a qualitative assessment of impairment indicators each reporting period.  If this assessment indicates that impairment exists, companies must adjust the investment to fair value and recognize an impairment loss in net income, even if the impairment is determined to be temporary.  ASU 2016-01 is effective for public companies for interim and annual periods beginning after December 15, 2017.   The Corporation’s adoption of ASU 2016-01 is not expected to have a material impact on the Corporation’s consolidated financial condition or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases, which will supersede the current lease requirements in ASC 840.  The ASU requires lessees to recognize an asset with the right of use and related lease liability for all leases, with a limited exception for short-term leases.  Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations.  Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet.  The reporting of lease related expenses in the statements of operations and cash flows will be generally consistent with the current guidance.  The new lease guidance will be effective for the Corporation’s year ending December 31, 2019 and will be applied using modified retrospective transition method to the beginning of the earliest period presented.  The effect of applying the new lease guidance on the financial statements has not yet been determined.

In September, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.

ASU 2016-13 requires an entity to measure expected credit losses for financial assets over the estimated lifetime of expected credit loss and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The standard includes the following core concepts in determining the expected credit loss.  The estimate must: (a) be based on an asset’s amortized cost (including premiums or discounts, net deferred fees and costs, foreign exchange and fair value hedge accounting adjustments), (b) reflect losses expected over the remaining contractual life of an asset (considering the effect of voluntary prepayments), (c) consider available relevant information about the estimated collectability of cash flows (including information about past events, current conditions, and reasonable and supportable forecasts), and (d) reflect the risk of loss, even when that risk is remote.

ASU 2016-13 also amends the recording of purchased credit-deteriorated assets. Under the new guidance, an allowance will be recognized at acquisition through a gross-up approach whereby an entity will record as the initial amortized cost the sum of (a) the purchase price and (b) an estimate of credit losses as of the date of acquisition. In addition, the guidance also requires immediate recognition in earnings of any subsequent changes, both favorable and unfavorable, in expected cash flows by adjusting this allowance.

ASU 2016-13 also amends the impairment model for available-for-sale debt securities and requires entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. Management may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists, as is currently permitted. In addition, an entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. As a result, entities will recognize improvements to credit losses on available-for-sale debt securities immediately in earnings rather than as interest income over time under current practice.

New disclosures required by ASU 2016-13 include: (a) for financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes, (b) for financial receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year or the asset’s origination or vintage for as many as five annual periods, and (c) for available-for-sale debt securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due.

Upon adoption of ASU 2016-13, a cumulative-effect adjustment to retained earnings will be recorded as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for public companies for interim and annual periods beginning after December 15, 2019, with early adoption permitted for annual periods beginning after December 15, 2018. The Corporation is currently evaluating the provisions of ASU 2016-13 to determine the potential impact on the Corporation's consolidated financial condition and results of operations.

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EARNINGS PER SHARE

9 Months Ended

Sep. 30, 2016

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, 2016 and 2015 (dollars in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
(Numerator):
Net income	$	1,778	$	1,018	$	2,785	$	4,003
(Denominator):
Weighted average shares outstanding		6,238,756		6,238,963		6,226,900		6,247,416
Effect of dilutive stock options, and vesting of restricted stock units		20,999		39,046		33,525		31,400
Diluted weighted average shares outstanding		6,259,755		6,278,009		6,260,425		6,278,816
Income per common share:
Basic	$	0.29	$	0.16	$	.45	$	.64
Diluted	$	0.28	$	0.16	$	.45	$	.64

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INVESTMENT SECURITIES

9 Months Ended

Sep. 30, 2016

INVESTMENT SECURITIES

INVESTMENT SECURITIES

4.INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities available for sale as of September 30, 2016 and December 31, 2015 are as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
September 30, 2016
US Agencies - MBS	$	16,254	$	176	$	(73)	$	16,357
US Agencies		24,148		295		—		24,443
Corporate Bonds		18,403		239		—		18,642
Other		3,033		—		—		3,033
Obligations of states and political subdivisions		25,857		561		(7)		26,411
Total securities available for sale	$	87,695	$	1,271	$	(80)	$	88,886
December 31, 2015
US Treasury	$	12,710	$	—	$	(64)	$	12,646
US Agencies		27,358		62		(43)		27,377
US Agencies - MBS		3,738		31		(10)		3,759
Obligations of states and political subdivisions		9,472		592		(118)		9,946
Total securities available for sale	$	53,278	$	685	$	(235)	$	53,728

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 $24.168 million and $25.048 million, respectively, at September 30, 2016.

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LOANS

9 Months Ended

Sep. 30, 2016

LOANS

LOANS

5.LOANS

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

	September 30,		December 31,
	2016		2015
Commercial real estate	$	362,858	$	312,805
Commercial, financial, and agricultural		136,065		122,140
One to four family residential real estate		211,072		140,502
Construction :
Consumer		11,768		11,770
Commercial		14,343		15,330
Consumer		20,698		15,847
Total loans	$	756,804	$	618,394

The Corporation completed the acquisition of Peninsula Financial Corporation (“PFC”) on December 5, 2014, The First National Bank of Eagle River (“Eagle”) on April 29, 2016 and Niagara Bancorporation (“Niagara”) on August 31, 2016.  The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (“acquired impaired”) and loans that do not meet that criteria, which are accounted for under ASC 310-20 (“acquired nonimpaired”).  The PFC acquired impaired loans totaled $13.290 million, the Eagle acquired impaired loans totaled $3.401 million, and the Niagara acquired impaired loans totaled $2.105 million.  The Corporation recorded all acquired loans at fair value taking into account a number of factors, including remaining life, estimated loss, estimated value of the underlying collateral and net present values of cash flows.  In the first nine months of 2015, the Corporation had positive resolution of one PFC acquired nonperforming loan which resulted in the recognition of approximately $.429 million of the accretable interest.

The table below details the outstanding balances of the PFC acquired portfolio and the fair value adjustments at acquisition date (dollars in thousands):

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	13,290	$	53,849	$	67,139
Nonaccretable difference		(2,234)		—		(2,234)
Expected cash flows		11,056		53,849		64,905
Accretable yield		(744)		(2,100)		(2,844)
Carrying balance at acquisition date	$	10,312	$	51,749	$	62,061

The table below details the outstanding balances of the Eagle acquired portfolio and the fair value adjustments at acquisition date (dollars in thousands):

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	3,401	$	82,639	$	86,040
Nonaccretable difference		(1,172)		—		(1,172)
Expected cash flows		2,229		82,639		84,868
Accretable yield		(391)		(1,700)		(2,091)
Carrying balance at acquisition date	$	1,838	$	80,939	$	82,777

The table below details the outstanding balances of the Niagara acquired portfolio and the fair value adjustments at acquisition date (dollars in thousands):

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	2,105	$	29,936	$	32,041
Nonaccretable difference		(265)		—		(265)
Expected cash flows		1,840		29,936		31,776
Accretable yield		(88)		(600)		(688)
Carrying balance at acquisition date	$	1,752	$	29,336	$	31,088

The table below presents a rollforward of the accretable yield on acquired loans for the nine months ended September 30, 2016 (dollars in thousands):

	Peninsula						Eagle						Niagara
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2015	$	426	$	1,342	$	1,768	$	—	$	—	$	—	$	—	$	—	$	—
Acquisitions		—		—		—		391		1,700		2,091		88		600		688
Accretion		—		(525)		(525)		—		(299)		(299)		—		(49)		(49)
Reclassification from nonaccretable difference		(80)		—		(80)		(54)		—		(54)		—		—		—
Balance, September 30, 2016	$	346	$	817	$	1,163	$	337	$	1,401	$	1,738	$	88	$	551	$	639

The table below presents a rollforward of the accretable yield on acquired loans for the nine months ended September 30, 2015 (dollars in thousands):

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Balance, December 31, 2014	$	744	$	2,042	$	2,786
Accretion		(429)		(525)		(954)
Reclassification from nonaccretable difference		188		—		188
Balance, September 30, 2015	$	503	$	1,517	$	2,020

An analysis of the allowance for loan losses for the nine months ended September 30, 2016 and the year ended December 31, 2015 is as follows (dollars in thousands):

	September 30,		December 31,
	2016		2015
Balance, January 1	$	5,004	$	5,140
Recoveries on loans previously charged off		120		690
Loans charged off		(612)		(2,030)
Provision		350		1,204
Balance at end of period	$	4,862	$	5,004

In the first nine months of 2016, net charge-offs were $.492 million, or .10% of average loans, annualized, compared to net charge-offs of $.216 million in the same period in 2015.   In the first nine  months of 2016, the Corporation recorded a provision for loan loss of $.350 million compared to $.855 million in the first nine months of 2015.  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, 2016 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, 2016
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,824		700	$	78	$	348	$	5	$	23	$	1,755	$	4,733
Charge-offs		(20)		—		—		(76)		—		(10)		—		(106)
Recoveries		17		4		—		2		—		12		—		35
Provision		(235)		(180)		(16)		133		1		49		448		200
Ending balance ALLR	$	1,586	$	524	$	62	$	407	$	6	$	74	$	2,203	$	4,862
Nine Months Ended September 30, 2016
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,611	$	645	$	79	$	274	$	7	$	64	$	2,324	$	5,004
Charge-offs		(245)		(206)		—		(125)		—		(36)		—		(612)
Recoveries		40		40		—		4		7		29		—		120
Provision		180		45		(17)		254		(8)		17		(121)		350
Ending balance ALLR	$	1,586	$	524	$	62	$	407	$	6	$	74	$	2,203	$	4,862
At September 30, 2016
Loans:
Ending balance	$	362,858	$	136,065	$	14,343	$	211,072	$	11,768	$	20,698	$	—	$	756,804
Ending balance ALLR		(1,586)		(524)		(62)		(407)		(6)		(74)		(2,203)		(4,862)
Net loans	$	361,272	$	135,541	$	14,281	$	210,665	$	11,762	$	20,624	$	(2,203)	$	751,942
Ending balance ALLR:
Individually evaluated	$	570	$	252	$	—	$	68	$	—	$	64	$	—	$	954
Collectively evaluated		1,016		272		62		339		6		10		2,203		3,908
Acquired with deteriorated credit quality		—		—		—		—		—		—		—		—
Total	$	1,586	$	524	$	62	$	407	$	6	$	74	$	2,203	$	4,862
Ending balance Loans:
Individually evaluated	$	2,035	$	329	$	—	$	1,038	$	—	$	288	$	—	$	3,690
Collectively evaluated		357,030		135,736		14,343		206,199		11,709		20,410		—		745,427
Acquired with deteriorated credit quality		3,793		—		—		3,835		59		—		—		7,687
Total	$	362,858	$	136,065	$	14,343	$	211,072	$	11,768	$	20,698	$	—	$	756,804

Impaired loans, by definition, are individually evaluated.

A breakdown of the allowance for loan losses and recorded balances in loans as of and for the twelve months ended December 31, 2015 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	$	2,813	$	1,539	$	142	$	285	$	6	$	13	$	342	$	5,140
Charge-offs		(52)		(1,749)		—		(142)		—		(87)		—		(2,030)
Recoveries		588		22		52		2		—		26		—		690
Provision		(1,738)		833		(115)		129		1		112		1,982		1,204
Ending balance ALLR	$	1,611	$	645	$	79	$	274	$	7	$	64	$	2,324	$	5,004
Loans:
Ending balance	$	312,805	$	122,140	$	15,330	$	140,502	$	11,770	$	15,847	$	—	$	618,394
Ending balance ALLR		(1,611)		(645)		(79)		(274)		(7)		(64)		(2,324)		(5,004)
Net loans	$	311,194	$	121,495	$	15,251	$	140,228	$	11,763	$	15,783	$	(2,324)	$	613,390
Ending balance ALLR:
Individually evaluated	$	420	$	192	$	—	$	60	$	—	$	55	$	—	$	727
Collectively evaluated		1,191		453		79		214		7		9		2,324		4,277
Acquired with deteriorated credit quality		—		—		—		—		—		—		—		—
Total	$	1,611	$	645	$	79	$	274	$	7	$	64	$	2,324	$	5,004
Ending balance Loans:
Individually evaluated	$	1,086	$	617	$	—	$	325	$	83	$	—	$	—	$	2,111
Collectively evaluated		307,336		121,345		15,330		136,940		11,686		15,845		—		608,482
Acquired with deteriorated credit quality		4,383		178		—		3,237		1		2		—		7,801
Total	$	312,805	$	122,140	$	15,330	$	140,502	$	11,770	$	15,847	$	—	$	618,394

Impaired loans, by definition, are individually evaluated.

A breakdown of the allowance for loan losses and recorded balances in loans at September 30, 2015 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, 2015
Allowance for loan loss reserve:
Beginning balance ALLR	$	2,550	$	2,571	$	128	$	282	$	5	$	27	$	37	$	5,600
Charge-offs		(52)		(57)		—		(62)		—		(36)		—		(207)
Recoveries		28		3		—		—		—		5		—		36
Provision		(221)		355		(17)		74		2		46		111		350
Ending balance ALLR	$	2,305	$	2,872	$	111	$	294	$	7	$	42	$	148	$	5,779
Nine Months Ended September 30, 2015
Allowance for loan loss reserve:
Beginning balance ALLR	$	2,813	$	1,539	$	142	$	285	$	6	$	13	$	342	$	5,140
Charge-offs		(52)		(157)		—		(92)		—		(64)		—		(365)
Recoveries		120		3		—		1		1		24		—		149
Provision		(576)		1,487		(31)		100		—		69		(194)		855
Ending balance ALLR	$	2,305	$	2,872	$	111	$	294	$	7	$	42	$	148	$	5,779
At September 30, 2015
Loans:
Ending balance	$	310,025	$	120,804	$	15,498	$	144,807	$	11,957	$	16,815	$	—	$	619,906
Ending balance ALLR		(2,305)		(2,872)		(111)		(294)		(7)		(42)		(148)		(5,779)
Net loans	$	307,720	$	117,932	$	15,387	$	144,513	$	11,950	$	16,773	$	(148)	$	614,127
Ending balance ALLR:
Individually evaluated	$	518	$	1,927	$	—	$	56	$	—	$	23	$	—	$	2,524
Collectively evaluated		1,787		945		111		238		7		19		148		3,255
Total	$	2,305	$	2,872	$	111	$	294	$	7	$	42	$	148	$	5,779
Ending balance Loans:
Individually evaluated	$	1,924	$	4,728	$	—	$	394	$	—	$	46	$	—	$	7,092
Collectively evaluated		303,390		115,897		15,496		140,789		11,957		16,767		—		604,296
Acquired with deteriorated credit quality		4,711		179		2		3,624		—		2		—		8,518
Total	$	310,025	$	120,804	$	15,498	$	144,807	$	11,957	$	16,815	$	—	$	619,906

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. 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.

Below is a breakdown of loans by risk category as of September 30, 2016 (dollars in thousands):

							(4)
	(1)		(2)		(3)		Acceptable/		(5)		(6)		(7)		Rating
	Strong		Good		Average		Acceptable Watch		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	3,592	$	24,337	$	119,657	$	209,084	$	—	$	6,188	$	—	$	—	$	362,858
Commercial, financial and agricultural		9,835		10,946		46,722		67,037		—		1,525		—		—		136,065
Commercial construction		—		912		3,093		4,116		—		404		—		5,818		14,343
One-to-four family residential real estate		545		1,304		3,534		9,133		—		5,284		—		191,272		211,072
Consumer construction		29		—		—		707		—		18		—		11,014		11,768
Consumer		23		—		16		2		—		64		—		20,593		20,698
Total loans	$	14,024	$	37,499	$	173,022	$	290,079	$	—	$	13,483	$	—	$	228,697	$	756,804

Below is a breakdown of loans by risk category as of December 31, 2015 (dollars in thousands):

							(4)
	(1)		(2)		(3)		Acceptable/		(5)		(6)		(7)		Rating
	Strong		Good		Average		Acceptable Watch		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	2,072	$	26,197	$	113,868	$	164,954	$	—	$	5,714	$	—	$	—	$	312,805
Commercial, financial and agricultural		13,067		5,954		47,194		53,791		—		2,134		—		—		122,140
Commercial construction		—		400		3,869		8,257		—		395		—		2,409		15,330
One-to-four family residential real estate		591		1,222		3,172		4,078		—		4,093		—		127,346		140,502
Consumer construction		—		—		—		—		—		—		—		11,770		11,770
Consumer		24		—		19		—		—		61		—		15,743		15,847
Total loans	$	15,754	$	33,773	$	168,122	$	231,080	$	—	$	12,397	$	—	$	157,268	$	618,394

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 months ended September 30, 2016 and that which was recorded for the nine months ended September 30, 2016 was $.542  million. Interest income that would have been recognized during this period was $.033 million and $.611 million, respectively.  For the three months and nine months ended September 30, 2015, interest income recorded during impairment was $.076 million and $.704 million, and the amount that would have been recognized was $.140 million and $.971 million.

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.

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses.  In determining the estimated fair value of purchased loans, management considers a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, net present value of cash flows expected to be received, among others.  Purchased loans are accounted for in accordance with guidance for certain loans acquired in a transfer (ASC 310-30), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments.  The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference.   Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.  Subsequent increases in expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact 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, 2016
With no valuation reserve:
Commercial real estate	$	593	$	3,272	$	4,011	$	4,273	$	—	$	—	$	29	$	295	$	330
Commercial, financial and agricultural		—		—		109		208		—		—		—		6		10
Commercial construction		—		—		—		—		—		—		—		—		—
One to four family residential real estate		2,107		3,360		4,697		4,141		—		—		4		237		266
Consumer construction		18		59		18		19		—		—		—		4		4
Consumer		9		—		84		72		—		—		—		—		1
With a valuation reserve:
Commercial real estate	$	1,528	$	—	$	1,226	$	702	$	170	$	—	$	—		—	$	—
Commercial, financial and agricultural		328		—		—		—		231		—		—		—		—
Commercial construction		—		—		—		—		—		—		—		—		—
One to four family residential real estate		—		—		94		91		—		—		—		—		—
Consumer construction		—		—		—		—		—		—		—		—		—
Consumer		54		—		5		6		53		—		—		—		—
Total:
Commercial real estate	$	2,121	$	3,272	$	5,237	$	4,975	$	170	$	—	$	29	$	295	$	330
Commercial, financial and agricultural		328		—		109		208		231		—		—		6		10
Commercial construction		—		—		—		—		—		—		—		—		—
One to four family residential real estate		2,107		3,360		4,791		4,232		—		—		4		237		266
Consumer construction		18		59		18		19		—		—		—		4		4
Consumer		63		—		89		78		53		—		—		—		1
Total	$	4,637	$	6,691	$	10,244	$	9,512	$	454	$	—	$	33	$	542	$	611

									Interest Income		Interest Income
	Nonaccrual		Accrual		Average		Related		Recognized		on
	Basis		Basis		Investment		Valuation Reserve		During Impairment		Accrual Basis
December 31, 2015
With no valuation reserve:
Commercial real estate	$	471	$	4,051	$	7,205	$	—	$	576	$	655
Commercial, financial and agricultural		—		1,778		4,849		—		78		214
Commercial construction		—		—		260		—		3		6
One to four family residential real estate		1,267		2,385		5,413		—		137		205
Consumer construction		20		2		99		—		—		1
Consumer		50		1		102		—		1		2
With a valuation reserve:
Commercial real estate	$	—	$	—	$	—	$	—	$	—	$	—
Commercial, financial and agricultural		460		—		699		192		—		36
Commercial construction		—		—		—		—		—		—
One to four family residential real estate		229		—		232		58		—		6
Consumer construction		—		—		—		—		—		—
Consumer		10		0		10		1		0		0
Total:
Commercial real estate	$	471	$	4,051	$	7,205	$	—	$	576	$	655
Commercial, financial and agricultural		460		1,778		5,548		192		78		250
Commercial construction		—		—		260		—		3		6
One to four family residential real estate		1,496		2,385		5,645		58		137		211
Consumer construction		20		2		99		—		—		1
Consumer		60		1		112		1		1		2
Total	$	2,507	$	8,217	$	18,869	$	251	$	795	$	1,125

											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, 2015
With no valuation reserve:
Commercial real estate	$	692	$	3,978	$	4,740	$	5,344	$	—	$	41	$	45	$	574	$	611
Commercial, financial and agricultural		—		179		219		357		—		2		2		21		23
Commercial construction		—		—		—		103		—		—		0		3		7
One to four family residential real estate		1,017		2,584		3,968		4,401		—		33		37		105		150
Consumer construction		21		2		76		117		—		—		—		—		1
Consumer		5		2		20		20		—		—		—		1		1
With a valuation reserve:
Commercial real estate	$	929	$	—	$	929	$	686	$	118	$	—	$	6	$	—	$	26
Commercial, financial and agricultural		4,706		—		4,747		3,935		1,927		—		50		—		140
Commercial construction		—		—		—		—		—		—		—		—		0
One to four family residential real estate		597		—		576		546		84		—		0		—		12
Consumer construction		—		—		—		—		—		—		—		—		—
Consumer		61		—		20		20		—		—		—		—		—
Total:
Commercial real estate	$	1,621	$	3,978	$	5,669	$	6,030	$	118	$	41	$	51	$	574	$	637
Commercial, financial and agricultural		4,706		179		4,966		4,292		1,927		2		52		21		163
Commercial construction		—		—		—		103		—		—		—		3		7
One to four family residential real estate		1,614		2,584		4,544		4,947		84		33		37		105		162
Consumer construction		21		2		76		117		—		—		—		—		1
Consumer		66		2		40		40		—		—		—		1		1
Total	$	8,028	$	6,745	$	15,295	$	15,529	$	2,129	$	76	$	140	$	704	$	971

A summary of past due loans at September 30, 2016 and December 31, 2015 is as follows (dollars in thousands):

	September 30,						December 31,
	2016						2015
	30-89 days		90+ days				30-89 days		90+ days
	Past Due		Past Due/				Past Due		Past Due/
	(accruing)		Nonaccrual		Total		(accruing)		Nonaccrual		Total
Commercial real estate	$	1,008	$	2,122	$	3,130	$	521	$	471	$	992
Commercial, financial and agricultural		1,710		328		2,038		222		460		682
Commercial construction		678		34		712		270		—		270
One to four family residential real estate		1,381		2,106		3,487		807		1,528		2,335
Consumer construction		—		—		—		—		20		20
Consumer		198		77		275		130		60		190
Total past due loans	$	4,975	$	4,667	$	9,642	$	1,950	$	2,539	$	4,489

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.

There were no troubled debt restructurings that occurred during the nine months ended September 30, 2016 or September 30, 2015.

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):

	Nine Months Ended		Year ended
	September 30,		December 31,
	2016		2015
Loans outstanding, January 1	$	6,887	$	8,789
New loans		—		—
Net activity on revolving lines of credit		1,720		778
Repayment		(2,269)		(2,680)
Loans outstanding at end of period	$	6,338	$	6,887

There were no loans to related parties classified substandard as of September 30, 2016 or December 31, 2015.  In addition to the outstanding balances above, there were unfunded commitments of $1.694 million to related parties at September 30, 2016.

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GOODWILL AND OTHER INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2016

GOODWILL AND OTHER INTANGIBLE ASSETS

GOODWILL AND OTHER INTANGIBLE ASSETS

6.GOODWILL AND OTHER INTANGIBLE ASSETS

During the fourth quarter of 2014, the Corporation recorded $3.805 million of goodwill and $1.206 million of deposit based intangible assets associated with the acquisition of PFC.  During 2016, the Corporation recorded $1.839 million of goodwill and $.993 million of deposit based intangible assets associated with the acquisition of Eagle.  During the third quarter of 2016, the Corporation recorded $.050 million of goodwill and $.300 million of deposit based intangible assets associated with the acquisition of Niagara.

The excess of the cost of acquired entities over the fair value of identifiable assets acquired less liabilities assumed is recorded as goodwill.  In accordance with FASB ASC 350, amortization of goodwill and indefinite-lived assets is not recorded.  However, the recoverability of goodwill and other intangible assets are annually tested for impairment.  Intangible assets, including core deposits and customer business relationships, are amortized primarily on a straight-line basis over their estimated useful lives.  The Corporation is currently amortizing the deposit based intangible over a ten-year estimated life.

The deposit based intangible is reported net of accumulated amortization at $2.235 million at September 30, 2016.  Amortization expense in the first nine months of 2016 is $.129 million.  Amortization expense for the next five years is expected to be at $.250 million per year.

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SERVICING RIGHTS

9 Months Ended

Sep. 30, 2016

SERVICING RIGHTS

SERVICING RIGHTS

7.SERVICING RIGHTS

Mortgage Loans

Mortgage servicing rights (“MSRs”) are recorded when loans are sold in the secondary market with servicing retained.  As of September 30, 2016, the Corporation had obligations to service approximately $233.356 million of residential first mortgage loans.  The valuation of MSRs 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. On a quarterly basis, management evaluates the MSRs for impairment. The key economic assumptions used in determining the fair value of the MSRs include an annual constant prepayment speed of 9.45% and a discount rate of 8.97% for September 30, 2016.

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

	Nine Months Ended		Year Ended
	September 30,		December 31,
	2016		2015
Balance at beginning of period	$	1,965	$	1,994
Additions from loans sold with servicing retained		—		585
Acquired MSRs		207		—
Amortization		(495)		(614)
Balance at end of period	$	1,677	$	1,965
Balance of loan servicing portfolio	$	233,356	$	224,612
Mortgage servicing rights as % of portfolio		.72%		.87%

Commercial Loans

The Corporation also retains the servicing on commercial loans that have been sold.  These loans were originated and underwritten under the SBA and USDA government guarantee programs, in which the guaranteed portion of the loan was sold to a third party with servicing retained.  The balance of these sold loans with servicing retained at September 30, 2016 and December 31, 2015 was approximately $43.2 million and $63.0 million, respectively. The Corporation valued these servicing rights at $.147 million as of September 30, 2016 and at $.170 million as of December 31, 2015.  This valuation was established in consideration of the discounted cash flow of expected servicing income over the life of the loans.

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BORROWINGS

9 Months Ended

Sep. 30, 2016

BORROWINGS

BORROWINGS

8.BORROWINGS

Borrowings consist of the following at September 30, 2016 and December 31, 2015 (dollars in thousands):

	September 30,		December 31,
	2016		2015
Federal Home Loan Bank fixed rate advances at September 30, 2016 with a weighted average rate of 2.01% maturing in 2016, 2017, 2018, 2019 and 2020	$	46,000	$	35,000
Correspondent bank line of credit - holding company		—		7,750
Correspondent bank term note, current floor rate of 4%, maturing April 30, 2019		21,100		2,300
USDA Rural Development, fixed-rate note payable, maturing August 24, 2024 interest payable at 1%		630		704
	$	67,730	$	45,754

The Federal Home Loan Bank borrowings are collateralized at September 30, 2016 by the following:  a collateral agreement on the Corporation’s one to four family residential real estate loans with a book value of approximately $47.533 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $11.000 million and $11.094 million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $2.926 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, 2016.

The USDA Rural Development borrowing is collateralized by loans totaling $.108 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 $.583 million, and guaranteed by the Corporation.

The Corporation currently has one banking borrowing relationship.  The 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 April 30, 2018.  The term note bears the same interest and matures on April 30, 2019 and requires quarterly principal payments of $550,000 beginning March 31, 2017.  This relationship is secured by all of the outstanding mBank stock.  

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DEFINED BENEFIT PENSION PLAN

9 Months Ended

Sep. 30, 2016

DEFINED BENEFIT PENSION PLAN

DEFINED BENEFIT PENSION PLAN

9.DEFINED BENEFIT PENSION PLAN

The Corporation acquired the Peninsula Financial Corporation noncontributory defined benefit pension plan.  Effective December 31, 2005, the plan was amended to freeze participation in the plan; therefore, no additional employees are eligible to become participants in the plan.  The benefits are based on years of service and the employee’s compensation at the time of retirement.  The Plan was amended effective December 31, 2010, to freeze benefit accrual for all participants.  Expected contributions to the Plan in 2016 are $.063 million.  The anticipated distributions over the next five years and through December 31, 2025 are detailed in the table below (dollars in thousands):

2016	$	134
2017		132
2018		129
2019		126
2020		125
2021-2025		690
Total	$	1,336

At September 30, 2016, the plan’s assets had a fair value of $2.033 million and the Corporation had a net liability of $1.147 million.  The accumulated benefit obligation was $3.180 million.  At September 30, 2015, the plan’s assets had a fair value of $2.107 million and the Corporation had a net liability of $1.183 million.  The accumulated benefit obligation at September 30, 2015 was $3.290 million.

Assumptions in the actuarial valuation are:

	2016
Weighted average discount rate	3.99	%
Rate of increase in future compensation levels	N/A
Expected long-term rate of return on plan assets	8.00	%

The expected long-term rate of return on plan assets reflects management’s expectations of long-term average rates of return on funds invested to provide for benefits included in the projected benefit obligation.  The expected return is based on the outlook for inflation, fixed income returns and equity returns, while also considering historical returns, asset allocation and investment strategy.  The discount rate assumption is based on investment yields available on AA rated long-term corporate bonds.

The primary investment objective is to maximize growth of the pension plan assets to meet the projected obligations to the beneficiaries over a long period of time, and to do so in a manner that is consistent with the Corporation’s risk tolerance.  The intention of the plan sponsor is to invest the plan assets in mutual funds with the following asset allocation:

	Target	Actual
	Allocation	Allocation
Equity securities	50% to 70%	60%
Fixed income securities	30% to 50%	40%

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STOCK COMPENSATION PLANS

9 Months Ended

Sep. 30, 2016

STOCK COMPENSATION PLANS

STOCK COMPENSATION PLANS

10.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, RSUs, or stock appreciation rights.  The aggregate number of shares of the Company’s common stock issuable under the plan is 575,000.  Awards are made at the discretion of management and the Board of Directors.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

Restricted Stock Awards

The Corporation’s restricted stock awards require certain service-based or performance requirements and have a vesting period of four years.  Compensation expense is recognized on a straight-line basis over the vesting period.  Shares are subject to certain restrictions and risk of forfeiture by the participants.

The Corporation has historically granted RSUs to members of the Board of Directors and management. Awards granted are set to vest equally over their award terms and are issued at no cost to the recipient.  The table below summarizes each of the grant awards:

Date of Award	Units Granted	Market Value at grant date	Vesting Term	Annual Compensation Cost (in thousands)
August, 2012	148,500	$ 7.91	4 years	$ 294
March, 2014	52,774	12.95	4 years	171
March, 2015	37,730	11.15	4 years	105
May, 2015	3,000	10.77	Immediate	32
February, 2016	35,733	9.91	4 years	89

On August 31, 2013, 2014, 2015 and 2016, the Corporation issued 37,125 shares of its common stock for vested RSUs, in each year. In March 2015, the Corporation issued 13,194 shares of its common stock for vested RSUs. In May 2015, the Corporation granted 3,000 shares, which were immediately vested and issued.  In March 2016, the Corporation issued 22,626 shares of its common stock for vested RSUs.

A summary of changes in our nonvested shares for the period follows:

		Weighted Average
	Number	Grant Date
	Outstanding	Fair Value
Nonvested balance at January 1, 2016	114,435	$	10.72
Granted during the year	35,733		9.91
Vested during the year	(59,751)		9.53
Nonvested balance at September 30, 2016	90,417	$	11.19

A summary of stock option transactions for the nine months ended September 30, 2016 and 2015, and the year ended December 31, 2015, is as follows:

	September 30,		December 31,
	2016		2015
Outstanding shares at beginning of year		10,000		20,000
Granted during the year		—		—
Exercised during the year		—		—
Expired during the year		—		(10,000)
Outstanding shares at end of period		10,000		10,000
Exercisable shares at end of period		2,000		2,000
Weighted average exercise price per share at end of period	$	12.00	$	12.00
Shares available for grant at end of period		—		—

There were no options granted in the first nine months of 2016 and 2015.

Following is a summary of the options outstanding and exercisable at September 30, 2016.

					Weighted Average
Exercise		Number			Remaining
Price		Outstanding	Exercisable	Unvested Options	Contractual Life-Years
$	12.00	10,000	2,000	8,000	.25

Options issued since the Corporation’s recapitalization in December of 2004 call for 20% immediate vesting upon issue and subsequent vesting to occur over a two to five year period, based upon the market value appreciation of the Corporation’s underlying stock.  Compensation related to these options was expensed based upon the vesting period without consideration given to market value appreciation.  There are no future compensation expenses related to existing option programs.

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INCOME TAXES

9 Months Ended

Sep. 30, 2016

INCOME TAXES

INCOME TAXES

11.INCOME TAXES

The Corporation has reported deferred tax assets of $9.287 million at September 30, 2016. 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, 2016 had a net operating loss and tax credit carryforwards for tax purposes of approximately $11.200 million, and $2.300 million, respectively.  The Corporation evaluated the future benefits from these carryforwards as of September 30, 2016 and determined that it was “more likely than not” that they would be utilized prior to expiration.  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 credit carryforwards are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue Code.  The annual limitation is $1.404 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 will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted.

The Corporation recognized a federal income tax expense of approximately $.922 million for the three months ended September 30, 2016 and an expense of $1.481 million for the nine months ended September 30, 2016 and a deferred tax expense of $.526 million and $2.074 million for the three and nine months ended September 30, 2015. 

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FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2016

FAIR VALUE MEASUREMENTS

FAIR VALUE

12.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, 2016 and December 31, 2015 (dollars in thousands):

		September 30, 2016				December 31, 2015
	Level in Fair	Carrying		Estimated		Carrying		Estimated
	Value Hierarchy	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	48,615	$	48,615	$	25,008	$	25,008
Interest-bearing deposits	Level 2		14,047		14,047		5,089		5,089
Securities available for sale	Level 2		88,886		88,886		53,728		53,728
Federal Home Loan Bank stock	Level 2		2,926		2,926		2,169		2,169
Net loans	Level 3		751,942		756,548		613,390		614,187
Accrued interest receivable	Level 3		1,998		1,998		1,416		1,416
Total financial assets		$	908,414	$	913,020	$	700,800	$	701,597
Financial liabilities:
Deposits	Level 2	$	807,180	$	805,299	$	610,323	$	607,636
Borrowings	Level 2		67,730		69,085		45,754		45,989
Accrued interest payable	Level 3		319		319		174		174
Total financial liabilties		$	875,229	$	874,703	$	656,251	$	653,799

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, 2016, 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, 2016, December 31, 2015 and September 30, 2015 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 measured at fair value on a recurring basis as of September 30, 2016, or December 31, 2015.

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 certain impaired 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, 2016

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total (Gains) Losses for		Total (Gains) Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Nine Months Ended
(dollars in thousands)	September 30, 2016		(Level 1)		(Level 2)		(Level 3)		September 30, 2016		September 30, 2016
Assets
Impaired loans	$	11,328	$	—	$	—	$	11,328	$	80	$	583
Other real estate owned		3,269		—		—		3,269		60		62
									$	140		645

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2015

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Twelve months ended
(dollars in thousands)	December 31, 2015		(Level 1)		(Level 2)		(Level 3)		December 31, 2015
Assets
Impaired loans	$	10,724	$	—	$	—	$	10,724	$	1,852
Other real estate held for sale		2,324		—		—		2,324		332
									$	2,184

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).

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SHAREHOLDERS' EQUITY

9 Months Ended

Sep. 30, 2016

SHAREHOLDER'S EQUITY

SHAREHOLDER'S EQUITY

13.SHAREHOLDERS’ EQUITY

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 14,000 shares thus far in 2016, 102,455 shares in 2015, 13,700 shares in 2014 and 55,594 shares in 2013.  The share repurchases were conducted under Board authorizations made and publically announced of $600,000 on February 27, 2013, $600,000 on December 17, 2013 and an additional $750,000 on April 28, 2015.  None of these authorizations has an expiration date.  As of September 30, 2016, $.026 million of the total authorization was available for future purchases.

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COMMITMENTS, CONTINGENCIES, AND CREDIT RISK

9 Months Ended

Sep. 30, 2016

COMMITMENTS, CONTINGENCIES, AND CREDIT RISK

COMMITMENTS, CONTINGENCIES, AND CREDIT RISK

14.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,
	2016		2015
Commitments to extend credit:
Variable rate	$	69,478	$	53,628
Fixed rate		36,602		26,846
Standby letters of credit - Variable rate		8,042		6,390
Credit card commitments - Fixed rate		5,458		3,747
	$	119,580	$	90,611

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, 2016 represents $110.252 million, or 21.48%, compared to $102.897 million, or 23.11%, of the commercial loan portfolio on September 30, 2015.  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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BUSINESS COMBINATIONS

9 Months Ended

Sep. 30, 2016

Business Combinations

BUSINESS COMBINATIONS

15.  BUSINESS COMBINATIONS

The First National Bank of Eagle River

The Corporation completed its acquisition of The First National Bank of Eagle River (“Eagle”) in April 2016.  Eagle had three branch offices and approximately $125 million in assets as of April 29, 2016.  The results of operations due to the merger have been included in the Corporation’s results since the acquisition date.  The merger was effected by a cash payment of $12.500 million. 

The table below highlights the allocation of the purchase price (dollars in thousands, except per share data):

Purchase Price:
Eagle shares outstanding		85,776
Price per share/Cash price	$	145.73
Total purchase price			$	12,500
Reimbursement of termination fees				(1,763)
Cash consideration			$	10,737
Net assets acquired:
Cash and cash equivalents	$	10,600
Securities available for sale		24,046
Valuation mark		(750)
FRB & FHLB Stock		575
Total Loans		84,138
Allowance for loan losses		(611)
Valuation mark   -  ASC 310-30, nonperforming		(1,563)
-  ASC 310-20, performing		(1,700)
Allowance for loan loss reversal		611
Premises and equipment		1,931
Other real estate owned		1,795
Valuation mark		(891)
Deposit based intangible		993
Mortgage servicing rights		120
Deferred tax benefit - book for valuation marks		948
Bank owned life insurance		4,132
Other assets		323
Total assets		124,697
Non-interest bearing deposits		22,349
Interest bearing deposits		82,165
Total deposits		104,514
FHLB Borrowings		11,000
Other liabilities		285
Total liabilities		115,799
Net assets acquired				8,898
Goodwill			$	1,839

The results of operations for the nine months ended September 30, 2016 include the operating results of the acquired assets and assumed liablities for the 153 days subsequent to the acquisition date.  Eagle’s results of operations prior to the acquisition date are not included in the Corporation’s consolidated statement of comprehensive income.

In addition to the data processing termination fees of $1.763 million, the Corporation incurred other Eagle transaction related expenses of $.890 million, for a total of $2.653 million, or $1.751 million on an after tax basis during the nine months ended September 30, 2016.  These expenses included professional services such as legal, accounting, employee severance payments and contractual arrangements for consulting services. 

Niagara Bancorporation

The Corporation completed its acquisition of Niagara Bancorporation, Inc. (“Niagara”) in August 2016.  Niagara had four branch offices and approximately $67 million in assets as of August 31, 2016. The results of operations due to the merger have been included in the Corporation’s results since the acquisition date.  The merger was effected by a cash payment of $7.325 million. 

The table below highlights the allocation of the purchase price (dollars in thousands, except per share data):

Purchase Price:
Eagle shares outstanding		4,354
Price per share/Cash price	$	1,682.36
Total purchase price			$	7,325
Net assets acquired:
Cash and cash equivalents	$	9,778
Securities available for sale		21,491
FRB & FHLB Stock		287
Total Loans		32,660
Allowance for loan losses		(358)
Valuation mark   -  ASC 310-30, nonperforming		(353)
-  ASC 310-20, performing		(600)
Allowance for loan loss reversal		358
Premises and equipment		926
Other real estate owned		450
Valuation mark		(149)
Deposit based intangible		300
Mortgage servicing rights		87
Deferred tax benefit - book for valuation marks		273
Deferred tax benefit		124
Bank owned life insurance		1,109
Other assets		302
Total assets		66,685
Non-interest bearing deposits		5,396
Interest bearing deposits		53,788
Total deposits		59,184
Other liabilities		226
Total liabilities		59,410
Net assets acquired				7,275
Goodwill			$	50

The results of operations for the nine months ended September 30, 2016 include the operating results of the acquired assets and assumed liablities for the 30 days subsequent to the acquisition date.  Niagara’s results of operations prior to the acquisition date are not included in the Corporation’s consolidated statement of comprehensive income.

The Corporation incurred Niagara  transaction related expenses of $.275 million, $.182 million on an after tax basis during the nine months ended September 30, 2016.  These expenses included professional services such as data processing, legal, accounting, employee severance payments, and contractual arrangements for consulting services. 

The following table provides the unaudited pro forma information for the results of operations for the nine months ended September 30, 2016, and the year ended December 31, 2015 as if both the Eagle acquisition and Niagara acquistion had occurred on January 1 of each year.  These adjustments reflect the impact of certain purchase accounting fair value measurements, primarily on the loan and deposit portfolios of Eagle.  In addition, the merger related costs noted above are excluded from the nine months ended September 30, 2016 results of operations, for comparative proforma purposes.  Further operating cost savings are expected along with additional business synergies as a result of the merger which are not presented in the pro forma amounts.  These unaudited pro forma results are presented for illustrative purposes only and are not intended to represent or be indicative of the actual results of operations of the combined banking organization that would have been achieved had the merger occurred at the beginning of the period presented, nor are the intended to represent or be indicative of future results of the Corporation.

Proforma Mackinac Financial Combined with Eagle River and Niagara

	Nine months ended		Year Ended
	September 30, 2016		December 31, 2015
Net interest income	$	26,833	$	35,492
Noninterest income		3,744		5,533
Noninterest expense		25,431		30,691
Net income		3,396		7,117
Net income per diluted share	$	.54		1.13

Fair Value

In most instances, determining the fair value of the acquired assets and assumed liabilities required the Corporation to estimate the cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest.  The most significant of those determinations is related to the valuation of acquired loans.  For such loans, the excess cash flows expected at merger over the estimated fair value is recognized as interest income over the remaining lives of the loans.  The difference between contractually required payments at merger and the cash flows expected to be collected at merger reflects the impact of estimated credit losses and other factors, such as prepayments.  In accordance with the applicable accounting guidance for business combinations, there was no carry-over of either Eagle’s or Niagara’s previously established allowance for loan losses.

The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (“acquired impaired”) and loans that do not meet the criteria, which are accounted for under ASC 310-20 (“acquired non-impaired”).  In addition, the loans are further categorized into different pools based primarily on the type and purpose of the loan.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2016

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 three and nine-month period ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.  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, 2015.

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, the valuation of investment securities, the valuation of foreclosed real estate, deferred tax assets, mortgage servicing rights, and the assessment of goodwill for impairment.

Acquired Loans

Acquired Loans

Loans acquired with evidence of credit deterioration since inception and for which it is probable that all contractual payments will not be received are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”).  These loans are recorded at fair value at the time of acquisition, with no carryover of the related allowance for loan losses.  Fair value of acquired loans is determined using a discounted cash flow methodology based on assumptions about the amount and timing of principal and interest payments, principal prepayments and principal defaults and losses, and current market rates.  In recording the fair values of acquired impaired loans at acquisition date, management calculates a non-accretable difference (the credit component of the purchased loans) and an accretable difference (the yield component of the purchased loans).

Over the life of the acquired loans, management continues to estimate cash flows expected to be collected on pools of loans sharing common risk characteristics, which are treated in the aggregate when applying various valuation techniques.  Management evaluates at each balance sheet date whether the present value of our pools of loans determined using the effective interest rates has decreased significantly and if so, recognizes a provision for loan loss in our consolidated statement of income.  For any significant increases in cash flows expected to be collected, we adjust the amount of the accretable yield recognized on a prospective basis over the pool’s remaining life.

Performing acquired loans are accounted for under Financial Accounting Standards Board (“FASB”) Topic 310-20, Receivables – Nonrefundable Fees and Other Costs.  Performance of certain loans may be monitored and based on management’s assessment of the cash flows and other facts available, portions of the accretable difference may be delayed or suspended if management deems appropriate.  The Corporation’s policy for determining when to discontinue accruing interest on performing acquired loans and the subsequent accounting for such loans is essentially the same as the policy for originated loans.

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 incurred 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 Corporation’s 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 Corporation’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.  Awards are made at the discretion of management and the Board of Directors.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

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EARNINGS PER SHARE (Tables)

9 Months Ended

Sep. 30, 2016

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, 2016 and 2015 (dollars in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
(Numerator):
Net income	$	1,778	$	1,018	$	2,785	$	4,003
(Denominator):
Weighted average shares outstanding		6,238,756		6,238,963		6,226,900		6,247,416
Effect of dilutive stock options, and vesting of restricted stock units		20,999		39,046		33,525		31,400
Diluted weighted average shares outstanding		6,259,755		6,278,009		6,260,425		6,278,816
Income per common share:
Basic	$	0.29	$	0.16	$	.45	$	.64
Diluted	$	0.28	$	0.16	$	.45	$	.64

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INVESTMENT SECURITIES (Tables)

9 Months Ended

Sep. 30, 2016

INVESTMENT SECURITIES

Schedule of carrying value and estimated fair value of securities available for sale

The amortized cost and estimated fair value of investment securities available for sale as of September 30, 2016 and December 31, 2015 are as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
September 30, 2016
US Agencies - MBS	$	16,254	$	176	$	(73)	$	16,357
US Agencies		24,148		295		—		24,443
Corporate Bonds		18,403		239		—		18,642
Other		3,033		—		—		3,033
Obligations of states and political subdivisions		25,857		561		(7)		26,411
Total securities available for sale	$	87,695	$	1,271	$	(80)	$	88,886
December 31, 2015
US Treasury	$	12,710	$	—	$	(64)	$	12,646
US Agencies		27,358		62		(43)		27,377
US Agencies - MBS		3,738		31		(10)		3,759
Obligations of states and political subdivisions		9,472		592		(118)		9,946
Total securities available for sale	$	53,278	$	685	$	(235)	$	53,728

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LOANS (Tables)

9 Months Ended

Sep. 30, 2016

Schedule of composition of loans

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

	September 30,		December 31,
	2016		2015
Commercial real estate	$	362,858	$	312,805
Commercial, financial, and agricultural		136,065		122,140
One to four family residential real estate		211,072		140,502
Construction :
Consumer		11,768		11,770
Commercial		14,343		15,330
Consumer		20,698		15,847
Total loans	$	756,804	$	618,394

Schedule of the accretable yield by acquisition

The table below presents a rollforward of the accretable yield on acquired loans for the nine months ended September 30, 2016 (dollars in thousands):

	Peninsula						Eagle						Niagara
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2015	$	426	$	1,342	$	1,768	$	—	$	—	$	—	$	—	$	—	$	—
Acquisitions		—		—		—		391		1,700		2,091		88		600		688
Accretion		—		(525)		(525)		—		(299)		(299)		—		(49)		(49)
Reclassification from nonaccretable difference		(80)		—		(80)		(54)		—		(54)		—		—		—
Balance, September 30, 2016	$	346	$	817	$	1,163	$	337	$	1,401	$	1,738	$	88	$	551	$	639

The table below presents a rollforward of the accretable yield on acquired loans for the nine months ended September 30, 2015 (dollars in thousands):

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Balance, December 31, 2014	$	744	$	2,042	$	2,786
Accretion		(429)		(525)		(954)
Reclassification from nonaccretable difference		188		—		188
Balance, September 30, 2015	$	503	$	1,517	$	2,020

Schedule of the allowance for loan losses

An analysis of the allowance for loan losses for the nine months ended September 30, 2016 and the year ended December 31, 2015 is as follows (dollars in thousands):

	September 30,		December 31,
	2016		2015
Balance, January 1	$	5,004	$	5,140
Recoveries on loans previously charged off		120		690
Loans charged off		(612)		(2,030)
Provision		350		1,204
Balance at end of period	$	4,862	$	5,004

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, 2016 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, 2016
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,824		700	$	78	$	348	$	5	$	23	$	1,755	$	4,733
Charge-offs		(20)		—		—		(76)		—		(10)		—		(106)
Recoveries		17		4		—		2		—		12		—		35
Provision		(235)		(180)		(16)		133		1		49		448		200
Ending balance ALLR	$	1,586	$	524	$	62	$	407	$	6	$	74	$	2,203	$	4,862
Nine Months Ended September 30, 2016
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,611	$	645	$	79	$	274	$	7	$	64	$	2,324	$	5,004
Charge-offs		(245)		(206)		—		(125)		—		(36)		—		(612)
Recoveries		40		40		—		4		7		29		—		120
Provision		180		45		(17)		254		(8)		17		(121)		350
Ending balance ALLR	$	1,586	$	524	$	62	$	407	$	6	$	74	$	2,203	$	4,862
At September 30, 2016
Loans:
Ending balance	$	362,858	$	136,065	$	14,343	$	211,072	$	11,768	$	20,698	$	—	$	756,804
Ending balance ALLR		(1,586)		(524)		(62)		(407)		(6)		(74)		(2,203)		(4,862)
Net loans	$	361,272	$	135,541	$	14,281	$	210,665	$	11,762	$	20,624	$	(2,203)	$	751,942
Ending balance ALLR:
Individually evaluated	$	570	$	252	$	—	$	68	$	—	$	64	$	—	$	954
Collectively evaluated		1,016		272		62		339		6		10		2,203		3,908
Acquired with deteriorated credit quality		—		—		—		—		—		—		—		—
Total	$	1,586	$	524	$	62	$	407	$	6	$	74	$	2,203	$	4,862
Ending balance Loans:
Individually evaluated	$	2,035	$	329	$	—	$	1,038	$	—	$	288	$	—	$	3,690
Collectively evaluated		357,030		135,736		14,343		206,199		11,709		20,410		—		745,427
Acquired with deteriorated credit quality		3,793		—		—		3,835		59		—		—		7,687
Total	$	362,858	$	136,065	$	14,343	$	211,072	$	11,768	$	20,698	$	—	$	756,804

Impaired loans, by definition, are individually evaluated.

A breakdown of the allowance for loan losses and recorded balances in loans as of and for the twelve months ended December 31, 2015 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	$	2,813	$	1,539	$	142	$	285	$	6	$	13	$	342	$	5,140
Charge-offs		(52)		(1,749)		—		(142)		—		(87)		—		(2,030)
Recoveries		588		22		52		2		—		26		—		690
Provision		(1,738)		833		(115)		129		1		112		1,982		1,204
Ending balance ALLR	$	1,611	$	645	$	79	$	274	$	7	$	64	$	2,324	$	5,004
Loans:
Ending balance	$	312,805	$	122,140	$	15,330	$	140,502	$	11,770	$	15,847	$	—	$	618,394
Ending balance ALLR		(1,611)		(645)		(79)		(274)		(7)		(64)		(2,324)		(5,004)
Net loans	$	311,194	$	121,495	$	15,251	$	140,228	$	11,763	$	15,783	$	(2,324)	$	613,390
Ending balance ALLR:
Individually evaluated	$	420	$	192	$	—	$	60	$	—	$	55	$	—	$	727
Collectively evaluated		1,191		453		79		214		7		9		2,324		4,277
Acquired with deteriorated credit quality		—		—		—		—		—		—		—		—
Total	$	1,611	$	645	$	79	$	274	$	7	$	64	$	2,324	$	5,004
Ending balance Loans:
Individually evaluated	$	1,086	$	617	$	—	$	325	$	83	$	—	$	—	$	2,111
Collectively evaluated		307,336		121,345		15,330		136,940		11,686		15,845		—		608,482
Acquired with deteriorated credit quality		4,383		178		—		3,237		1		2		—		7,801
Total	$	312,805	$	122,140	$	15,330	$	140,502	$	11,770	$	15,847	$	—	$	618,394

Impaired loans, by definition, are individually evaluated.

A breakdown of the allowance for loan losses and recorded balances in loans at September 30, 2015 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, 2015
Allowance for loan loss reserve:
Beginning balance ALLR	$	2,550	$	2,571	$	128	$	282	$	5	$	27	$	37	$	5,600
Charge-offs		(52)		(57)		—		(62)		—		(36)		—		(207)
Recoveries		28		3		—		—		—		5		—		36
Provision		(221)		355		(17)		74		2		46		111		350
Ending balance ALLR	$	2,305	$	2,872	$	111	$	294	$	7	$	42	$	148	$	5,779
Nine Months Ended September 30, 2015
Allowance for loan loss reserve:
Beginning balance ALLR	$	2,813	$	1,539	$	142	$	285	$	6	$	13	$	342	$	5,140
Charge-offs		(52)		(157)		—		(92)		—		(64)		—		(365)
Recoveries		120		3		—		1		1		24		—		149
Provision		(576)		1,487		(31)		100		—		69		(194)		855
Ending balance ALLR	$	2,305	$	2,872	$	111	$	294	$	7	$	42	$	148	$	5,779
At September 30, 2015
Loans:
Ending balance	$	310,025	$	120,804	$	15,498	$	144,807	$	11,957	$	16,815	$	—	$	619,906
Ending balance ALLR		(2,305)		(2,872)		(111)		(294)		(7)		(42)		(148)		(5,779)
Net loans	$	307,720	$	117,932	$	15,387	$	144,513	$	11,950	$	16,773	$	(148)	$	614,127
Ending balance ALLR:
Individually evaluated	$	518	$	1,927	$	—	$	56	$	—	$	23	$	—	$	2,524
Collectively evaluated		1,787		945		111		238		7		19		148		3,255
Total	$	2,305	$	2,872	$	111	$	294	$	7	$	42	$	148	$	5,779
Ending balance Loans:
Individually evaluated	$	1,924	$	4,728	$	—	$	394	$	—	$	46	$	—	$	7,092
Collectively evaluated		303,390		115,897		15,496		140,789		11,957		16,767		—		604,296
Acquired with deteriorated credit quality		4,711		179		2		3,624		—		2		—		8,518
Total	$	310,025	$	120,804	$	15,498	$	144,807	$	11,957	$	16,815	$	—	$	619,906

Schedule of breakdown of loans by risk category

Below is a breakdown of loans by risk category as of September 30, 2016 (dollars in thousands):

							(4)
	(1)		(2)		(3)		Acceptable/		(5)		(6)		(7)		Rating
	Strong		Good		Average		Acceptable Watch		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	3,592	$	24,337	$	119,657	$	209,084	$	—	$	6,188	$	—	$	—	$	362,858
Commercial, financial and agricultural		9,835		10,946		46,722		67,037		—		1,525		—		—		136,065
Commercial construction		—		912		3,093		4,116		—		404		—		5,818		14,343
One-to-four family residential real estate		545		1,304		3,534		9,133		—		5,284		—		191,272		211,072
Consumer construction		29		—		—		707		—		18		—		11,014		11,768
Consumer		23		—		16		2		—		64		—		20,593		20,698
Total loans	$	14,024	$	37,499	$	173,022	$	290,079	$	—	$	13,483	$	—	$	228,697	$	756,804

Below is a breakdown of loans by risk category as of December 31, 2015 (dollars in thousands):

							(4)
	(1)		(2)		(3)		Acceptable/		(5)		(6)		(7)		Rating
	Strong		Good		Average		Acceptable Watch		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	2,072	$	26,197	$	113,868	$	164,954	$	—	$	5,714	$	—	$	—	$	312,805
Commercial, financial and agricultural		13,067		5,954		47,194		53,791		—		2,134		—		—		122,140
Commercial construction		—		400		3,869		8,257		—		395		—		2,409		15,330
One-to-four family residential real estate		591		1,222		3,172		4,078		—		4,093		—		127,346		140,502
Consumer construction		—		—		—		—		—		—		—		11,770		11,770
Consumer		24		—		19		—		—		61		—		15,743		15,847
Total loans	$	15,754	$	33,773	$	168,122	$	231,080	$	—	$	12,397	$	—	$	157,268	$	618,394

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, 2016
With no valuation reserve:
Commercial real estate	$	593	$	3,272	$	4,011	$	4,273	$	—	$	—	$	29	$	295	$	330
Commercial, financial and agricultural		—		—		109		208		—		—		—		6		10
Commercial construction		—		—		—		—		—		—		—		—		—
One to four family residential real estate		2,107		3,360		4,697		4,141		—		—		4		237		266
Consumer construction		18		59		18		19		—		—		—		4		4
Consumer		9		—		84		72		—		—		—		—		1
With a valuation reserve:
Commercial real estate	$	1,528	$	—	$	1,226	$	702	$	170	$	—	$	—		—	$	—
Commercial, financial and agricultural		328		—		—		—		231		—		—		—		—
Commercial construction		—		—		—		—		—		—		—		—		—
One to four family residential real estate		—		—		94		91		—		—		—		—		—
Consumer construction		—		—		—		—		—		—		—		—		—
Consumer		54		—		5		6		53		—		—		—		—
Total:
Commercial real estate	$	2,121	$	3,272	$	5,237	$	4,975	$	170	$	—	$	29	$	295	$	330
Commercial, financial and agricultural		328		—		109		208		231		—		—		6		10
Commercial construction		—		—		—		—		—		—		—		—		—
One to four family residential real estate		2,107		3,360		4,791		4,232		—		—		4		237		266
Consumer construction		18		59		18		19		—		—		—		4		4
Consumer		63		—		89		78		53		—		—		—		1
Total	$	4,637	$	6,691	$	10,244	$	9,512	$	454	$	—	$	33	$	542	$	611

									Interest Income		Interest Income
	Nonaccrual		Accrual		Average		Related		Recognized		on
	Basis		Basis		Investment		Valuation Reserve		During Impairment		Accrual Basis
December 31, 2015
With no valuation reserve:
Commercial real estate	$	471	$	4,051	$	7,205	$	—	$	576	$	655
Commercial, financial and agricultural		—		1,778		4,849		—		78		214
Commercial construction		—		—		260		—		3		6
One to four family residential real estate		1,267		2,385		5,413		—		137		205
Consumer construction		20		2		99		—		—		1
Consumer		50		1		102		—		1		2
With a valuation reserve:
Commercial real estate	$	—	$	—	$	—	$	—	$	—	$	—
Commercial, financial and agricultural		460		—		699		192		—		36
Commercial construction		—		—		—		—		—		—
One to four family residential real estate		229		—		232		58		—		6
Consumer construction		—		—		—		—		—		—
Consumer		10		0		10		1		0		0
Total:
Commercial real estate	$	471	$	4,051	$	7,205	$	—	$	576	$	655
Commercial, financial and agricultural		460		1,778		5,548		192		78		250
Commercial construction		—		—		260		—		3		6
One to four family residential real estate		1,496		2,385		5,645		58		137		211
Consumer construction		20		2		99		—		—		1
Consumer		60		1		112		1		1		2
Total	$	2,507	$	8,217	$	18,869	$	251	$	795	$	1,125

											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, 2015
With no valuation reserve:
Commercial real estate	$	692	$	3,978	$	4,740	$	5,344	$	—	$	41	$	45	$	574	$	611
Commercial, financial and agricultural		—		179		219		357		—		2		2		21		23
Commercial construction		—		—		—		103		—		—		0		3		7
One to four family residential real estate		1,017		2,584		3,968		4,401		—		33		37		105		150
Consumer construction		21		2		76		117		—		—		—		—		1
Consumer		5		2		20		20		—		—		—		1		1
With a valuation reserve:
Commercial real estate	$	929	$	—	$	929	$	686	$	118	$	—	$	6	$	—	$	26
Commercial, financial and agricultural		4,706		—		4,747		3,935		1,927		—		50		—		140
Commercial construction		—		—		—		—		—		—		—		—		0
One to four family residential real estate		597		—		576		546		84		—		0		—		12
Consumer construction		—		—		—		—		—		—		—		—		—
Consumer		61		—		20		20		—		—		—		—		—
Total:
Commercial real estate	$	1,621	$	3,978	$	5,669	$	6,030	$	118	$	41	$	51	$	574	$	637
Commercial, financial and agricultural		4,706		179		4,966		4,292		1,927		2		52		21		163
Commercial construction		—		—		—		103		—		—		—		3		7
One to four family residential real estate		1,614		2,584		4,544		4,947		84		33		37		105		162
Consumer construction		21		2		76		117		—		—		—		—		1
Consumer		66		2		40		40		—		—		—		1		1
Total	$	8,028	$	6,745	$	15,295	$	15,529	$	2,129	$	76	$	140	$	704	$	971

Summary of past due loans

A summary of past due loans at September 30, 2016 and December 31, 2015 is as follows (dollars in thousands):

	September 30,						December 31,
	2016						2015
	30-89 days		90+ days				30-89 days		90+ days
	Past Due		Past Due/				Past Due		Past Due/
	(accruing)		Nonaccrual		Total		(accruing)		Nonaccrual		Total
Commercial real estate	$	1,008	$	2,122	$	3,130	$	521	$	471	$	992
Commercial, financial and agricultural		1,710		328		2,038		222		460		682
Commercial construction		678		34		712		270		—		270
One to four family residential real estate		1,381		2,106		3,487		807		1,528		2,335
Consumer construction		—		—		—		—		20		20
Consumer		198		77		275		130		60		190
Total past due loans	$	4,975	$	4,667	$	9,642	$	1,950	$	2,539	$	4,489

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

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):

	Nine Months Ended		Year ended
	September 30,		December 31,
	2016		2015
Loans outstanding, January 1	$	6,887	$	8,789
New loans		—		—
Net activity on revolving lines of credit		1,720		778
Repayment		(2,269)		(2,680)
Loans outstanding at end of period	$	6,338	$	6,887

Peninsula Financial Corporation

Schedule of acquired portfolio at acquisition date

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	13,290	$	53,849	$	67,139
Nonaccretable difference		(2,234)		—		(2,234)
Expected cash flows		11,056		53,849		64,905
Accretable yield		(744)		(2,100)		(2,844)
Carrying balance at acquisition date	$	10,312	$	51,749	$	62,061

Eagle

Schedule of acquired portfolio at acquisition date

The table below details the outstanding balances of the Eagle acquired portfolio and the fair value adjustments at acquisition date (dollars in thousands):

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	3,401	$	82,639	$	86,040
Nonaccretable difference		(1,172)		—		(1,172)
Expected cash flows		2,229		82,639		84,868
Accretable yield		(391)		(1,700)		(2,091)
Carrying balance at acquisition date	$	1,838	$	80,939	$	82,777

Niagara Bancorporation

Schedule of acquired portfolio at acquisition date

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	2,105	$	29,936	$	32,041
Nonaccretable difference		(265)		—		(265)
Expected cash flows		1,840		29,936		31,776
Accretable yield		(88)		(600)		(688)
Carrying balance at acquisition date	$	1,752	$	29,336	$	31,088

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SERVICING RIGHTS (Tables)

9 Months Ended

Sep. 30, 2016

SERVICING RIGHTS

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

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

	Nine Months Ended		Year Ended
	September 30,		December 31,
	2016		2015
Balance at beginning of period	$	1,965	$	1,994
Additions from loans sold with servicing retained		—		585
Acquired MSRs		207		—
Amortization		(495)		(614)
Balance at end of period	$	1,677	$	1,965
Balance of loan servicing portfolio	$	233,356	$	224,612
Mortgage servicing rights as % of portfolio		.72%		.87%

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BORROWINGS (Tables)

9 Months Ended

Sep. 30, 2016

BORROWINGS

Schedule of borrowings

Borrowings consist of the following at September 30, 2016 and December 31, 2015 (dollars in thousands):

	September 30,		December 31,
	2016		2015
Federal Home Loan Bank fixed rate advances at September 30, 2016 with a weighted average rate of 2.01% maturing in 2016, 2017, 2018, 2019 and 2020	$	46,000	$	35,000
Correspondent bank line of credit - holding company		—		7,750
Correspondent bank term note, current floor rate of 4%, maturing April 30, 2019		21,100		2,300
USDA Rural Development, fixed-rate note payable, maturing August 24, 2024 interest payable at 1%		630		704
	$	67,730	$	45,754

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DEFINED BENEFIT PENSION PLAN (Tables)

9 Months Ended

Sep. 30, 2016

DEFINED BENEFIT PENSION PLAN

Schedule of anticipated distributions over the next five years

2016	$	134
2017		132
2018		129
2019		126
2020		125
2021-2025		690
Total	$	1,336

Schedule of assumptions in the actuarial valuation

	2016
Weighted average discount rate	3.99	%
Rate of increase in future compensation levels	N/A
Expected long-term rate of return on plan assets	8.00	%

Schedule of asset allocation

	Target	Actual
	Allocation	Allocation
Equity securities	50% to 70%	60%
Fixed income securities	30% to 50%	40%

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STOCK COMPENSATION PLANS (Tables)

9 Months Ended

Sep. 30, 2016

STOCK COMPENSATION PLANS

Summary of restricted stock units awards granted

Date of Award	Units Granted	Market Value at grant date	Vesting Term	Annual Compensation Cost (in thousands)
August, 2012	148,500	$ 7.91	4 years	$ 294
March, 2014	52,774	12.95	4 years	171
March, 2015	37,730	11.15	4 years	105
May, 2015	3,000	10.77	Immediate	32
February, 2016	35,733	9.91	4 years	89

Summary of changes in nonvested shares

		Weighted Average
	Number	Grant Date
	Outstanding	Fair Value
Nonvested balance at January 1, 2016	114,435	$	10.72
Granted during the year	35,733		9.91
Vested during the year	(59,751)		9.53
Nonvested balance at September 30, 2016	90,417	$	11.19

Summary of stock option transactions

	September 30,		December 31,
	2016		2015
Outstanding shares at beginning of year		10,000		20,000
Granted during the year		—		—
Exercised during the year		—		—
Expired during the year		—		(10,000)
Outstanding shares at end of period		10,000		10,000
Exercisable shares at end of period		2,000		2,000
Weighted average exercise price per share at end of period	$	12.00	$	12.00
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
$	12.00	10,000	2,000	8,000	.25

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FAIR VALUE MEASUREMENTS (Tables)

9 Months Ended

Sep. 30, 2016

FAIR VALUE MEASUREMENTS

Schedule presenting information for financial instruments

The following table presents information for financial instruments at September 30, 2016 and December 31, 2015 (dollars in thousands):

		September 30, 2016				December 31, 2015
	Level in Fair	Carrying		Estimated		Carrying		Estimated
	Value Hierarchy	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	48,615	$	48,615	$	25,008	$	25,008
Interest-bearing deposits	Level 2		14,047		14,047		5,089		5,089
Securities available for sale	Level 2		88,886		88,886		53,728		53,728
Federal Home Loan Bank stock	Level 2		2,926		2,926		2,169		2,169
Net loans	Level 3		751,942		756,548		613,390		614,187
Accrued interest receivable	Level 3		1,998		1,998		1,416		1,416
Total financial assets		$	908,414	$	913,020	$	700,800	$	701,597
Financial liabilities:
Deposits	Level 2	$	807,180	$	805,299	$	610,323	$	607,636
Borrowings	Level 2		67,730		69,085		45,754		45,989
Accrued interest payable	Level 3		319		319		174		174
Total financial liabilties		$	875,229	$	874,703	$	656,251	$	653,799

Schedule of assets measured at fair value on a non-recurring basis

Assets Measured at Fair Value on a Nonrecurring Basis at September 30, 2016

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total (Gains) Losses for		Total (Gains) Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Nine Months Ended
(dollars in thousands)	September 30, 2016		(Level 1)		(Level 2)		(Level 3)		September 30, 2016		September 30, 2016
Assets
Impaired loans	$	11,328	$	—	$	—	$	11,328	$	80	$	583
Other real estate owned		3,269		—		—		3,269		60		62
									$	140		645

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2015

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Twelve months ended
(dollars in thousands)	December 31, 2015		(Level 1)		(Level 2)		(Level 3)		December 31, 2015
Assets
Impaired loans	$	10,724	$	—	$	—	$	10,724	$	1,852
Other real estate held for sale		2,324		—		—		2,324		332
									$	2,184

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COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (Tables)

9 Months Ended

Sep. 30, 2016

COMMITMENTS, CONTINGENCIES, AND CREDIT RISK

Schedule of commitments

These commitments are as follows (dollars in thousands):

	September 30,		December 31,
	2016		2015
Commitments to extend credit:
Variable rate	$	69,478	$	53,628
Fixed rate		36,602		26,846
Standby letters of credit - Variable rate		8,042		6,390
Credit card commitments - Fixed rate		5,458		3,747
	$	119,580	$	90,611

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BUSINESS COMBINATIONS (Tables)

9 Months Ended

Sep. 30, 2016

Schedule of unaudited proforma results

Proforma Mackinac Financial Combined with Eagle River and Niagara

	Nine months ended		Year Ended
	September 30, 2016		December 31, 2015
Net interest income	$	26,833	$	35,492
Noninterest income		3,744		5,533
Noninterest expense		25,431		30,691
Net income		3,396		7,117
Net income per diluted share	$	.54		1.13

Eagle

Schedule of disclosure of goodwill in a business combination

The table below highlights the allocation of the purchase price (dollars in thousands, except per share data):

Purchase Price:
Eagle shares outstanding		85,776
Price per share/Cash price	$	145.73
Total purchase price			$	12,500
Reimbursement of termination fees				(1,763)
Cash consideration			$	10,737
Net assets acquired:
Cash and cash equivalents	$	10,600
Securities available for sale		24,046
Valuation mark		(750)
FRB & FHLB Stock		575
Total Loans		84,138
Allowance for loan losses		(611)
Valuation mark   -  ASC 310-30, nonperforming		(1,563)
-  ASC 310-20, performing		(1,700)
Allowance for loan loss reversal		611
Premises and equipment		1,931
Other real estate owned		1,795
Valuation mark		(891)
Deposit based intangible		993
Mortgage servicing rights		120
Deferred tax benefit - book for valuation marks		948
Bank owned life insurance		4,132
Other assets		323
Total assets		124,697
Non-interest bearing deposits		22,349
Interest bearing deposits		82,165
Total deposits		104,514
FHLB Borrowings		11,000
Other liabilities		285
Total liabilities		115,799
Net assets acquired				8,898
Goodwill			$	1,839

Niagara Bancorporation

Schedule of disclosure of goodwill in a business combination

The table below highlights the allocation of the purchase price (dollars in thousands, except per share data):

Purchase Price:
Eagle shares outstanding		4,354
Price per share/Cash price	$	1,682.36
Total purchase price			$	7,325
Net assets acquired:
Cash and cash equivalents	$	9,778
Securities available for sale		21,491
FRB & FHLB Stock		287
Total Loans		32,660
Allowance for loan losses		(358)
Valuation mark   -  ASC 310-30, nonperforming		(353)
-  ASC 310-20, performing		(600)
Allowance for loan loss reversal		358
Premises and equipment		926
Other real estate owned		450
Valuation mark		(149)
Deposit based intangible		300
Mortgage servicing rights		87
Deferred tax benefit - book for valuation marks		273
Deferred tax benefit		124
Bank owned life insurance		1,109
Other assets		302
Total assets		66,685
Non-interest bearing deposits		5,396
Interest bearing deposits		53,788
Total deposits		59,184
Other liabilities		226
Total liabilities		59,410
Net assets acquired				7,275
Goodwill			$	50

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) - shares	Sep. 30, 2016	May 22, 2012
2012 Incentive Compensation Plan
Stock Compensation Plans
Total authorized share balance	575,000	575,000

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EARNINGS PER SHARE (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
(Numerator):
Net income	$ 1,778	$ 1,018	$ 2,785	$ 4,003
(Denominator):
Weighted average shares outstanding	6,238,756	6,238,963	6,226,900	6,247,416
Effect of dilutive stock options, and vesting of restricted stock units	20,999	39,046	33,525	31,400
Diluted weighted average shares outstanding	6,259,755	6,278,009	6,260,425	6,278,816
Income per common share:
Basic (in dollars per share)	$ 0.29	$ 0.16	$ 0.45	$ 0.64
Diluted (in dollars per share)	$ 0.28	$ 0.16	$ 0.45	$ 0.64

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INVESTMENT SECURITIES (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
SECURITIES AVAILABLE FOR SALE
Amortized Cost	$ 87,695	$ 53,278
Gross Unrealized Gains	1,271	685
Gross Unrealized Losses	(80)	(235)
Estimated Fair Value	88,886	53,728
US Agencies - MBS
SECURITIES AVAILABLE FOR SALE
Amortized Cost	16,254	3,738
Gross Unrealized Gains	176	31
Gross Unrealized Losses	(73)	(10)
Estimated Fair Value	16,357	3,759
US Treasury
SECURITIES AVAILABLE FOR SALE
Amortized Cost		12,710
Gross Unrealized Losses		(64)
Estimated Fair Value		12,646
US Agencies
SECURITIES AVAILABLE FOR SALE
Amortized Cost	24,148	27,358
Gross Unrealized Gains	295	62
Gross Unrealized Losses		(43)
Estimated Fair Value	24,443	27,377
Corporate Bonds
SECURITIES AVAILABLE FOR SALE
Amortized Cost	18,403
Gross Unrealized Gains	239
Estimated Fair Value	18,642
Other
SECURITIES AVAILABLE FOR SALE
Amortized Cost	3,033
Estimated Fair Value	3,033
Obligations of states and political subdivisions
SECURITIES AVAILABLE FOR SALE
Amortized Cost	25,857	9,472
Gross Unrealized Gains	561	592
Gross Unrealized Losses	(7)	(118)
Estimated Fair Value	26,411	$ 9,946
FHLB borrowings and customer relationships
SECURITIES AVAILABLE FOR SALE
Amortized Cost	24,168
Estimated Fair Value	$ 25,048

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LOANS (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Loans
Total loans	$ 756,804	$ 619,906	$ 756,804	$ 619,906	$ 618,394
Changes in the allowance for loan losses
Balance at beginning of period	4,733	5,600	5,004	5,140	5,140
Recoveries on loans previously charged off	35	36	120	149	690
Loans charged off	(106)	(207)	(612)	(365)	(2,030)
Provision	200	350	350	855	1,204
Balance at end of period	4,862	5,779	4,862	5,779	5,004
Net recoveries			$ 492
Net charge off activity				216
Net charge off activity as percentage of average loans outstanding			0.10%
Balance at the beginning of period				2,786	2,786
Accretion				(954)
Reclassification from nonaccretable difference				188
Balance at the end of period		2,020		2,020
Peninsula Financial Corporation
Acquired portfolio
Loans acquired - contractual payments	67,139		$ 67,139
Nonaccretable difference	(2,234)		(2,234)
Expected cash flows	64,905		64,905
Accretable yield	(2,844)		(2,844)
Carrying balance at acquisition date	62,061		62,061
Changes in the allowance for loan losses
Balance at the beginning of period			1,768
Accretion			(525)
Reclassification from nonaccretable difference			(80)
Balance at the end of period	1,163		1,163		1,768
Eagle
Acquired portfolio
Loans acquired - contractual payments	86,040		86,040
Nonaccretable difference	(1,172)		(1,172)
Expected cash flows	84,868		84,868
Accretable yield	(2,091)		(2,091)
Carrying balance at acquisition date	82,777		82,777
Changes in the allowance for loan losses
Acquisition			688
Accretion			(49)
Balance at the end of period	639		639
Niagara Bancorporation
Acquired portfolio
Loans acquired - contractual payments	32,041		32,041
Nonaccretable difference	(265)		(265)
Expected cash flows	31,776		31,776
Accretable yield	(688)		(688)
Carrying balance at acquisition date	31,088		31,088
Changes in the allowance for loan losses
Acquisition			2,091
Accretion			(299)
Reclassification from nonaccretable difference			(54)
Balance at the end of period	1,738		1,738
Commercial real estate
Loans
Total loans	362,858	310,025	362,858	310,025	312,805
Changes in the allowance for loan losses
Balance at beginning of period	1,824	2,550	1,611	2,813	2,813
Recoveries on loans previously charged off	17	28	40	120	588
Loans charged off	(20)	(52)	(245)	(52)	(52)
Provision	(235)	(221)	180	(576)	(1,738)
Balance at end of period	1,586	2,305	1,586	2,305	1,611
Commercial, financial, and agricultural
Loans
Total loans	136,065	120,804	136,065	120,804	122,140
Changes in the allowance for loan losses
Balance at beginning of period	700	2,571	645	1,539	1,539
Recoveries on loans previously charged off	4	3	40	3	22
Loans charged off		(57)	(206)	(157)	(1,749)
Provision	(180)	355	45	1,487	833
Balance at end of period	524	2,872	524	2,872	645
Commercial construction
Loans
Total loans	14,343	15,498	14,343	15,498	15,330
Changes in the allowance for loan losses
Balance at beginning of period	78	128	79	142	142
Recoveries on loans previously charged off					52
Provision	(16)	(17)	(17)	(31)	(115)
Balance at end of period	62	111	62	111	79
One to four family residential real estate
Loans
Total loans	211,072	144,807	211,072	144,807	140,502
Changes in the allowance for loan losses
Balance at beginning of period	348	282	274	285	285
Recoveries on loans previously charged off	2		4	1	2
Loans charged off	(76)	(62)	(125)	(92)	(142)
Provision	133	74	254	100	129
Balance at end of period	407	294	407	294	274
Consumer
Loans
Total loans	20,698	16,815	20,698	16,815	15,847
Changes in the allowance for loan losses
Balance at beginning of period	23	27	64	13	13
Recoveries on loans previously charged off	12	5	29	24	26
Loans charged off	(10)	(36)	(36)	(64)	(87)
Provision	49	46	17	69	112
Balance at end of period	74	42	74	42	64
Consumer construction
Loans
Total loans	11,768	11,957	11,768	11,957	11,770
Changes in the allowance for loan losses
Balance at beginning of period	5	5	7	6	6
Recoveries on loans previously charged off			7	1
Provision	1	2	(8)		1
Balance at end of period	6	7	6	7	7
Acquired impaired
Changes in the allowance for loan losses
Balance at the beginning of period				744	744
Accretion				(429)
Reclassification from nonaccretable difference				188
Balance at the end of period		503		503
Acquired impaired | Peninsula Financial Corporation
Acquired portfolio
Loans acquired - contractual payments	13,290		13,290
Nonaccretable difference	(2,234)		(2,234)
Expected cash flows	11,056		11,056
Accretable yield	(744)		(744)
Carrying balance at acquisition date	10,312		10,312
Changes in the allowance for loan losses
Balance at the beginning of period			426
Reclassification from nonaccretable difference			(80)
Balance at the end of period	346		346		426
Acquired impaired | Eagle
Acquired portfolio
Loans acquired - contractual payments	3,401		3,401
Nonaccretable difference	(1,172)		(1,172)
Expected cash flows	2,229		2,229
Accretable yield	(391)		(391)
Carrying balance at acquisition date	1,838		1,838
Changes in the allowance for loan losses
Acquisition			88
Balance at the end of period	88		88
Acquired impaired | Niagara Bancorporation
Acquired portfolio
Loans acquired - contractual payments	2,105		2,105
Nonaccretable difference	(265)		(265)
Expected cash flows	1,840		1,840
Accretable yield	(88)		(88)
Carrying balance at acquisition date	1,752		1,752
Changes in the allowance for loan losses
Acquisition			391
Reclassification from nonaccretable difference			(54)
Balance at the end of period	337		337
Acquired Non-impaired
Changes in the allowance for loan losses
Balance at the beginning of period				2,042	2,042
Accretion				(525)
Balance at the end of period		$ 1,517		$ 1,517
Acquired Non-impaired | Peninsula Financial Corporation
Acquired portfolio
Loans acquired - contractual payments	53,849		53,849
Expected cash flows	53,849		53,849
Accretable yield	(2,100)		(2,100)
Carrying balance at acquisition date	51,749		51,749
Changes in the allowance for loan losses
Balance at the beginning of period			1,342
Accretion			(525)
Balance at the end of period	817		817		$ 1,342
Acquired Non-impaired | Eagle
Acquired portfolio
Loans acquired - contractual payments	82,639		82,639
Expected cash flows	82,639		82,639
Accretable yield	(1,700)		(1,700)
Carrying balance at acquisition date	80,939		80,939
Changes in the allowance for loan losses
Acquisition			600
Accretion			(49)
Balance at the end of period	551		551
Acquired Non-impaired | Niagara Bancorporation
Acquired portfolio
Loans acquired - contractual payments	29,936		29,936
Expected cash flows	29,936		29,936
Accretable yield	(600)		(600)
Carrying balance at acquisition date	29,336		29,336
Changes in the allowance for loan losses
Acquisition			1,700
Accretion			(299)
Balance at the end of period	$ 1,401		$ 1,401

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LOANS - ALLOWANCE (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015	Sep. 30, 2016	Dec. 31, 2015	Sep. 30, 2015
Allowance for loan loss reserve:
Balance at beginning of period	$ 4,733	$ 5,600	$ 5,004	$ 5,140	$ 5,140
Charge-offs	(106)	(207)	(612)	(365)	(2,030)
Recoveries	35	36	120	149	690
Provision	200	350	350	855	1,204
Balance at end of period	4,862	5,779	4,862	5,779	5,004
Loans:
Ending balance						$ 756,804	$ 618,394	$ 619,906
Ending balance ALLR	(4,733)	(5,600)	(5,004)	(5,140)	(5,140)	(4,862)	(5,004)	(5,779)
Net loans						751,942	613,390	614,127
Ending balance ALLR:
Individually evaluated						954	727	2,524
Collectively evaluated						3,908	4,277	3,255
Total	4,733	5,600	5,004	5,140	5,140	4,862	5,004	5,779
Ending balance Loans:
Individually evaluated						3,690	2,111	7,092
Collectively evaluated						745,427	608,482	604,296
Acquired with deteriorated credit quality						7,687	7,801	8,518
Total Loans						756,804	618,394	619,906
Commercial real estate
Allowance for loan loss reserve:
Balance at beginning of period	1,824	2,550	1,611	2,813	2,813
Charge-offs	(20)	(52)	(245)	(52)	(52)
Recoveries	17	28	40	120	588
Provision	(235)	(221)	180	(576)	(1,738)
Balance at end of period	1,586	2,305	1,586	2,305	1,611
Loans:
Ending balance						362,858	312,805	310,025
Ending balance ALLR	(1,824)	(2,550)	(1,611)	(2,813)	(2,813)	(1,586)	(1,611)	(2,305)
Net loans						361,272	311,194	307,720
Ending balance ALLR:
Individually evaluated						570	420	518
Collectively evaluated						1,016	1,191	1,787
Total	1,824	2,550	1,611	2,813	2,813	1,586	1,611	2,305
Ending balance Loans:
Individually evaluated						2,035	1,086	1,924
Collectively evaluated						357,030	307,336	303,390
Acquired with deteriorated credit quality						3,793	4,383	4,711
Total Loans						362,858	312,805	310,025
Commercial, financial, and agricultural
Allowance for loan loss reserve:
Balance at beginning of period	700	2,571	645	1,539	1,539
Charge-offs		(57)	(206)	(157)	(1,749)
Recoveries	4	3	40	3	22
Provision	(180)	355	45	1,487	833
Balance at end of period	524	2,872	524	2,872	645
Loans:
Ending balance						136,065	122,140	120,804
Ending balance ALLR	(700)	(2,571)	(645)	(1,539)	(1,539)	(524)	(645)	(2,872)
Net loans						135,541	121,495	117,932
Ending balance ALLR:
Individually evaluated						252	192	1,927
Collectively evaluated						272	453	945
Total	700	2,571	645	1,539	1,539	524	645	2,872
Ending balance Loans:
Individually evaluated						329	617	4,728
Collectively evaluated						135,736	121,345	115,897
Acquired with deteriorated credit quality							178	179
Total Loans						136,065	122,140	120,804
Commercial construction
Allowance for loan loss reserve:
Balance at beginning of period	78	128	79	142	142
Recoveries					52
Provision	(16)	(17)	(17)	(31)	(115)
Balance at end of period	62	111	62	111	79
Loans:
Ending balance						14,343	15,330	15,498
Ending balance ALLR	(78)	(128)	(79)	(142)	(142)	(62)	(79)	(111)
Net loans						14,281	15,251	15,387
Ending balance ALLR:
Collectively evaluated						62	79	111
Total	78	128	79	142	142	62	79	111
Ending balance Loans:
Collectively evaluated						14,343	15,330	15,496
Acquired with deteriorated credit quality								2
Total Loans						14,343	15,330	15,498
One to four family residential real estate
Allowance for loan loss reserve:
Balance at beginning of period	348	282	274	285	285
Charge-offs	(76)	(62)	(125)	(92)	(142)
Recoveries	2		4	1	2
Provision	133	74	254	100	129
Balance at end of period	407	294	407	294	274
Loans:
Ending balance						211,072	140,502	144,807
Ending balance ALLR	(348)	(282)	(274)	(285)	(285)	(407)	(274)	(294)
Net loans						210,665	140,228	144,513
Ending balance ALLR:
Individually evaluated						68	60	56
Collectively evaluated						339	214	238
Total	348	282	274	285	285	407	274	294
Ending balance Loans:
Individually evaluated						1,038	325	394
Collectively evaluated						206,199	136,940	140,789
Acquired with deteriorated credit quality						3,835	3,237	3,624
Total Loans						211,072	140,502	144,807
Consumer construction
Allowance for loan loss reserve:
Balance at beginning of period	5	5	7	6	6
Recoveries			7	1
Provision	1	2	(8)		1
Balance at end of period	6	7	6	7	7
Loans:
Ending balance						11,768	11,770	11,957
Ending balance ALLR	(5)	(5)	(7)	(6)	(6)	(6)	(7)	(7)
Net loans						11,762	11,763	11,950
Ending balance ALLR:
Collectively evaluated						6	7	7
Total	5	5	7	6	6	6	7	7
Ending balance Loans:
Individually evaluated							83
Collectively evaluated						11,709	11,686	11,957
Acquired with deteriorated credit quality						59	1
Total Loans						11,768	11,770	11,957
Consumer
Allowance for loan loss reserve:
Balance at beginning of period	23	27	64	13	13
Charge-offs	(10)	(36)	(36)	(64)	(87)
Recoveries	12	5	29	24	26
Provision	49	46	17	69	112
Balance at end of period	74	42	74	42	64
Loans:
Ending balance						20,698	15,847	16,815
Ending balance ALLR	(23)	(27)	(64)	(13)	(13)	(74)	(64)	(42)
Net loans						20,624	15,783	16,773
Ending balance ALLR:
Individually evaluated						64	55	23
Collectively evaluated						10	9	19
Total	23	27	64	13	13	74	64	42
Ending balance Loans:
Individually evaluated						288		46
Collectively evaluated						20,410	15,845	16,767
Acquired with deteriorated credit quality							2	2
Total Loans						20,698	15,847	16,815
Unallocated
Allowance for loan loss reserve:
Balance at beginning of period	1,755	37	2,324	342	342
Provision	448	111	(121)	(194)	1,982
Balance at end of period	2,203	148	2,203	148	2,324
Loans:
Ending balance ALLR	(1,755)	(37)	(2,324)	(342)	(342)	(2,203)	(2,324)	(148)
Net loans						(2,203)	(2,324)	(148)
Ending balance ALLR:
Collectively evaluated						2,203	2,324	148
Total	$ 1,755	$ 37	$ 2,324	$ 342	$ 342	$ 2,203	$ 2,324	$ 148

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LOANS - LOANS BY RISK CATEGORY (Details) $ in Thousands	Sep. 30, 2016 USD ($) item	Dec. 31, 2015 USD ($)	Sep. 30, 2015 USD ($)
Breakdown of loans by risk category
Total loans	$ 756,804	$ 618,394	$ 619,906
Minimum
Breakdown of loans by risk category
Credit risk rating for which reserves are established if no specific reserves made | item	6
Maximum
Breakdown of loans by risk category
Credit risk rating for which general reserves are established | item	5
Credit risk rating for which reserves are established if no specific reserves made | item	7
Commercial real estate
Breakdown of loans by risk category
Total loans	$ 362,858	312,805	310,025
Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	136,065	122,140	120,804
Commercial construction
Breakdown of loans by risk category
Total loans	14,343	15,330	15,498
One to four family residential real estate
Breakdown of loans by risk category
Total loans	211,072	140,502	144,807
Consumer construction
Breakdown of loans by risk category
Total loans	11,768	11,770	11,957
Consumer
Breakdown of loans by risk category
Total loans	20,698	15,847	$ 16,815
Strong (1)
Breakdown of loans by risk category
Total loans	14,024	15,754
Strong (1) | Commercial real estate
Breakdown of loans by risk category
Total loans	3,592	2,072
Strong (1) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	9,835	13,067
Strong (1) | One to four family residential real estate
Breakdown of loans by risk category
Total loans	545	591
Strong (1) | Consumer construction
Breakdown of loans by risk category
Total loans	29
Strong (1) | Consumer
Breakdown of loans by risk category
Total loans	23	24
Good (2)
Breakdown of loans by risk category
Total loans	37,499	33,773
Good (2) | Commercial real estate
Breakdown of loans by risk category
Total loans	24,337	26,197
Good (2) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	10,946	5,954
Good (2) | Commercial construction
Breakdown of loans by risk category
Total loans	912	400
Good (2) | One to four family residential real estate
Breakdown of loans by risk category
Total loans	1,304	1,222
Average (3)
Breakdown of loans by risk category
Total loans	173,022	168,122
Average (3) | Commercial real estate
Breakdown of loans by risk category
Total loans	119,657	113,868
Average (3) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	46,722	47,194
Average (3) | Commercial construction
Breakdown of loans by risk category
Total loans	3,093	3,869
Average (3) | One to four family residential real estate
Breakdown of loans by risk category
Total loans	3,534	3,172
Average (3) | Consumer
Breakdown of loans by risk category
Total loans	16	19
Acceptable/Acceptable Watch (4)
Breakdown of loans by risk category
Total loans	290,079	231,080
Acceptable/Acceptable Watch (4) | Commercial real estate
Breakdown of loans by risk category
Total loans	209,084	164,954
Acceptable/Acceptable Watch (4) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	67,037	53,791
Acceptable/Acceptable Watch (4) | Commercial construction
Breakdown of loans by risk category
Total loans	4,116	8,257
Acceptable/Acceptable Watch (4) | One to four family residential real estate
Breakdown of loans by risk category
Total loans	9,133	4,078
Acceptable/Acceptable Watch (4) | Consumer construction
Breakdown of loans by risk category
Total loans	707
Acceptable/Acceptable Watch (4) | Consumer
Breakdown of loans by risk category
Total loans	2
Substandard (6)
Breakdown of loans by risk category
Total loans	13,483	12,397
Substandard (6) | Commercial real estate
Breakdown of loans by risk category
Total loans	6,188	5,714
Substandard (6) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	1,525	2,134
Substandard (6) | Commercial construction
Breakdown of loans by risk category
Total loans	404	395
Substandard (6) | One to four family residential real estate
Breakdown of loans by risk category
Total loans	5,284	4,093
Substandard (6) | Consumer construction
Breakdown of loans by risk category
Total loans	18
Substandard (6) | Consumer
Breakdown of loans by risk category
Total loans	64	61
Rating Unassigned
Breakdown of loans by risk category
Total loans	228,697	157,268
Rating Unassigned | Commercial construction
Breakdown of loans by risk category
Total loans	5,818	2,409
Rating Unassigned | One to four family residential real estate
Breakdown of loans by risk category
Total loans	191,272	127,346
Rating Unassigned | Consumer construction
Breakdown of loans by risk category
Total loans	11,014	11,770
Rating Unassigned | Consumer
Breakdown of loans by risk category
Total loans	$ 20,593	$ 15,743

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LOANS - IMPAIRED LOANS AND EFFECT ON INTEREST INCOME (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Impaired Loans
Number of days past due to be considered as nonperforming loans			90 days
Accretion				$ (954)
Recorded investment
Total		$ 15,295		15,295
Average investment
Total	$ 10,244		$ 9,512	15,529	$ 18,869
Related Valuation Reserve	454	2,129	454	2,129	251
Interest Income Recognized During Impairment
Total	0	76	542	704	795
Interest Income on Accrual Basis
Total	33	140	611	971	1,125
Nonaccrual Basis
Recorded investment
Total	4,637	8,028	4,637	8,028	2,507
Accrual Basis
Recorded investment
Total	6,691	6,745	6,691	6,745	8,217
Commercial real estate
Average investment
With no valuation reserve	4,011	4,740	4,273	5,344	7,205
With a valuation reserve	1,226	929	702	686
Total	5,237	5,669	4,975	6,030	7,205
Related Valuation Reserve	170	118	170	118
Interest Income Recognized During Impairment
With no valuation reserve		41	295	574	576
Total		41	295	574	576
Interest Income on Accrual Basis
With no valuation reserve	29	45	330	611	655
With a valuation reserve		6		26
Total	29	51	330	637	655
Commercial real estate | Nonaccrual Basis
Recorded investment
With no valuation reserve	593	692	593	692	471
With a valuation reserve	1,528	929	1,528	929
Total	2,121	1,621	2,121	1,621	471
Commercial real estate | Accrual Basis
Recorded investment
With no valuation reserve	3,272	3,978	3,272	3,978	4,051
Total	3,272	3,978	3,272	3,978	4,051
Commercial, financial, and agricultural
Average investment
With no valuation reserve	109	219	208	357	4,849
With a valuation reserve		4,747		3,935	699
Total	109	4,966	208	4,292	5,548
Related Valuation Reserve	231	1,927	231	1,927	192
Interest Income Recognized During Impairment
With no valuation reserve		2	6	21	78
Total		2	6	21	78
Interest Income on Accrual Basis
With no valuation reserve		2	10	23	214
With a valuation reserve		50		140	36
Total		52	10	163	250
Commercial, financial, and agricultural | Nonaccrual Basis
Recorded investment
With a valuation reserve	328	4,706	328	4,706	460
Total	328	4,706	328	4,706	460
Commercial, financial, and agricultural | Accrual Basis
Recorded investment
With no valuation reserve		179		179	1,778
Total		179		179	1,778
Commercial construction
Average investment
With no valuation reserve				103	260
Total				103	260
Interest Income Recognized During Impairment
With no valuation reserve				3	3
Total				3	3
Interest Income on Accrual Basis
With no valuation reserve		0		7	6
With a valuation reserve				0
Total				7	6
One to four family residential real estate
Average investment
With no valuation reserve	4,697	3,968	4,141	4,401	5,413
With a valuation reserve	94	576	91	546	232
Total	4,791	4,544	4,232	4,947	5,645
Related Valuation Reserve		84		84	58
Interest Income Recognized During Impairment
With no valuation reserve		33	237	105	137
Total		33	237	105	137
Interest Income on Accrual Basis
With no valuation reserve	4	37	266	150	205
With a valuation reserve		0		12	6
Total	4	37	266	162	211
One to four family residential real estate | Nonaccrual Basis
Recorded investment
With no valuation reserve	2,107	1,017	2,107	1,017	1,267
With a valuation reserve		597		597	229
Total	2,107	1,614	2,107	1,614	1,496
One to four family residential real estate | Accrual Basis
Recorded investment
With no valuation reserve	3,360	2,584	3,360	2,584	2,385
Total	3,360	2,584	3,360	2,584	2,385
Consumer construction
Average investment
With no valuation reserve	18	76	19	117	99
Total	18	76	19	117	99
Interest Income Recognized During Impairment
With no valuation reserve			4
Total			4
Interest Income on Accrual Basis
With no valuation reserve			4	1	1
Total			4	1	1
Consumer construction | Nonaccrual Basis
Recorded investment
With no valuation reserve	18	21	18	21	20
Total	18	21	18	21	20
Consumer construction | Accrual Basis
Recorded investment
With no valuation reserve	59	2	59	2	2
Total	59	2	59	2	2
Consumer
Average investment
With no valuation reserve	84	20	72	20	102
With a valuation reserve	5	20	6	20	10
Total	89	40	78	40	112
Related Valuation Reserve	53		53		1
Interest Income Recognized During Impairment
With no valuation reserve				1	1
With a valuation reserve					0
Total				1	1
Interest Income on Accrual Basis
With no valuation reserve			1	1	2
With a valuation reserve					0
Total			1	1	2
Consumer | Nonaccrual Basis
Recorded investment
With no valuation reserve	9	5	9	5	50
With a valuation reserve	54	61	54	61	10
Total	63	66	63	66	60
Consumer | Accrual Basis
Recorded investment
With no valuation reserve		2		2	1
With a valuation reserve					0
Total		$ 2		$ 2	$ 1
Peninsula Financial Corporation
Impaired Loans
Accretion			(525)
Accretable yield	(2,844)		(2,844)
Eagle
Impaired Loans
Accretion			(49)
Accretable yield	(2,091)		(2,091)
Niagara Bancorporation
Impaired Loans
Accretion			(299)
Accretable yield	$ (688)		$ (688)

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LOANS - PAST DUE (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Past due loans
30-89 days Past Due (accruing)	$ 4,975	$ 1,950
90+ days Past Due/Nonaccrual	4,667	2,539
Total	9,642	4,489
Commercial real estate
Past due loans
30-89 days Past Due (accruing)	1,008	521
90+ days Past Due/Nonaccrual	2,122	471
Total	3,130	992
Commercial, financial, and agricultural
Past due loans
30-89 days Past Due (accruing)	1,710	222
90+ days Past Due/Nonaccrual	328	460
Total	2,038	682
Commercial construction
Past due loans
30-89 days Past Due (accruing)	678	270
90+ days Past Due/Nonaccrual	34
Total	712	270
One to four family residential real estate
Past due loans
30-89 days Past Due (accruing)	1,381	807
90+ days Past Due/Nonaccrual	2,106	1,528
Total	3,487	2,335
Consumer construction
Past due loans
90+ days Past Due/Nonaccrual		20
Total		20
Consumer
Past due loans
30-89 days Past Due (accruing)	198	130
90+ days Past Due/Nonaccrual	77	60
Total	$ 275	$ 190

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LOANS - INSIDER LOANS (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2016	Dec. 31, 2015	Sep. 30, 2016	Jun. 30, 2016	Jun. 30, 2015
Activity in insider loans granted to the entity's executive officers and directors, including their families and firms
Loans outstanding, beginning of period	$ 6,887	$ 8,789
Net activity on revolving lines of credit	1,720	778
Repayment	(2,269)	(2,680)
Loans outstanding, end of period	6,338	6,887
Loans outstanding	6,887	8,789	$ 6,338
Bank
Activity in insider loans granted to the entity's executive officers and directors, including their families and firms
Unfunded commitments			$ 1,694
Bank | Substandard (6)
Activity in insider loans granted to the entity's executive officers and directors, including their families and firms
Loans outstanding, beginning of period	0
Loans outstanding, end of period		0
Loans outstanding	$ 0	$ 0		$ 0	$ 0

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GOODWILL AND OTHER INTANGIBLE ASSETS (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2016	Apr. 30, 2016	Dec. 31, 2015	Aug. 31, 2015	Dec. 31, 2014
Goodwill	$ 5,694		$ 3,805
Deposit based intangible assets	2,235		$ 1,076
Amortization of Intangible Assets	129
Amortization expense year one	250
Amortization expense year two	250
Amortization expense year three	250
Amortization expense year four	250
Amortization expense year five	$ 250
Peninsula Financial Corporation
Goodwill					$ 3,805
Deposit based intangible assets					$ 1,206
Estimated life	10 years
Eagle
Goodwill	$ 1,839	$ 1,839
Deposit based intangible assets	993
Niagara Bancorporation
Goodwill	50			$ 50
Deposit based intangible assets	$ 300

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SERVICING RIGHTS (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2016	Dec. 31, 2015
Commercial loans
Commercial Loans
Commercial Loans	$ 43,200	$ 63,000
Servicing rights	$ 147	170
Mortgage loans
Mortgage Loans
Annual constant prepayment speed (as a percent)	9.45%
Discount rate (as a percent)	8.97%
Changes in mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances
Balance at beginning of period	$ 1,965	1,994
Additions from loans sold with servicing retained		585
Acquired MSRs	207
Amortization	(495)	(614)
Balance at end of period	1,677	1,965
Balance of loan servicing portfolio	$ 233,356	$ 224,612
Mortgage servicing rights as % of portfolio	0.72%	0.87%

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BORROWINGS (Details)	9 Months Ended
	Sep. 30, 2016 USD ($) item	Dec. 31, 2015 USD ($)
BORROWINGS
Borrowings	$ 67,730,000	$ 45,754,000
Number of banking borrowing relationships | item	1
Federal Home Loan Bank borrowings
BORROWINGS
Borrowings	$ 46,000,000	35,000,000
Interest rate on note (as a percent)	2.01%
Federal Home Loan Bank borrowings | Mortgage related and municipal securities
BORROWINGS
Securities pledged as collateral, amortized cost	$ 11,000,000
Securities pledged as collateral, fair value	11,094,000
Federal Home Loan Bank borrowings | FHLB stock
BORROWINGS
Stock owned and pledged as collateral	2,926,000
Federal Home Loan Bank borrowings | One to four family residential real estate
BORROWINGS
Loans pledged as collateral	$ 47,533,000
Line of Credit
BORROWINGS
Borrowings		7,750,000
Variable rate basis	90-day LIBOR
Floor rate (as a percent)	4.00%
Line of Credit | 90-day LIBOR
BORROWINGS
Variable rate (as a percent)	2.75%
Correspondent bank term note, current floor rate of 4%, maturing April 30, 2019
BORROWINGS
Borrowings	$ 21,100,000	2,300,000
Interest rate on note (as a percent)	4.00%
Quarterly principal payment	$ 550,000
Frequency of period payment	quarterly
USDA Rural Development, fixed-rate note payable, maturing August 24, 2024, interest payable at 1%
BORROWINGS
Borrowings	$ 630,000	$ 704,000
Interest rate on note (as a percent)	1.00%
USDA Rural Development, fixed-rate note payable, maturing August 24, 2024, interest payable at 1% | First Rural Relending
BORROWINGS
Loans pledged as collateral	$ 108,000
Demand deposit account pledged as collateral	$ 583,000

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DEFINED BENEFIT PENSION PLAN (Details)	9 Months Ended
	Sep. 30, 2016 USD ($) item	Sep. 30, 2015 USD ($)
Defined Benefit Pension Plan
Expected contributions to the plan	$ 63,000
Number of years over which anticipated pension distributions disclosed | item	5
Anticipated distributions from the plan
2016	$ 134
2017	132
2018	129
2019	126
2020	125
2021-2025	690
Total	1,336
Peninsula Financial Corporation noncontributory defined benefit pension plan
Change in plan assets
Fair value of plan assets	2,033,000	$ 2,107,000
Accrued pension expense, included with other assets or liabilities	1,147,000	1,183,000
Accumulated benefit obligation	$ 3,180,000	$ 3,290,000
Assumptions in the actuarial valuation
Weighted average discount rate	3.99%
Expected long-term rate of return on plan assets	8.00%
Peninsula Financial Corporation noncontributory defined benefit pension plan | Equity securities
Plan assets
Target Allocation, minimum	50.00%
Target Allocation, maximum	70.00%
Peninsula Financial Corporation noncontributory defined benefit pension plan | Equity securities | Plan
Plan assets
Actual Allocation	60.00%
Peninsula Financial Corporation noncontributory defined benefit pension plan | Fixed income securities
Plan assets
Target Allocation, minimum	30.00%
Target Allocation, maximum	50.00%
Peninsula Financial Corporation noncontributory defined benefit pension plan | Fixed income securities | Plan
Plan assets
Actual Allocation	40.00%

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STOCK COMPENSATION PLANS (Details) - USD ($) $ / shares in Units, $ in Thousands					1 Months Ended						6 Months Ended		9 Months Ended	12 Months Ended
	Aug. 31, 2016	Aug. 31, 2015	Aug. 31, 2014	Aug. 31, 2013	Mar. 31, 2016	Feb. 29, 2016	May 31, 2015	Mar. 31, 2015	Mar. 31, 2014	Aug. 31, 2012	Jun. 30, 2016	Jun. 30, 2015	Sep. 30, 2016	Dec. 31, 2015	Sep. 30, 2016	Dec. 31, 2015	May 22, 2012
Stock Compensation Plans
Number of RSUs granted (in shares)													35,733
Number of RSUs unvested (in shares)											114,435		114,435	114,435	90,417	114,435
Market value of granted stock (in dollars per unit)													$ 9.91
Exercisable shares at end of period															2,000	2,000
Weighted average exercise price per share at end of period (in dollars per share)															$ 12.00	$ 12.00
Summary of nonvested shares
Nonvested beginning balance (in shares)											114,435		114,435
Granted during the period (in shares)													35,733
Vested during the period (in shares)													(59,751)
Nonvested ending balance (in shares)													90,417	114,435
Weighted Average Grant Date Fair Value
Nonvested beginning balance (in dollars per share)											$ 10.72		$ 10.72
Granted during the period (in dollars per share)													9.91
Vested during the period (in dollars per share)													9.53
Nonvested ending balance (in dollars per share)													$ 11.19	$ 10.72
Stock option transactions
Outstanding shares at beginning of year											10,000	20,000	10,000	20,000
Granted during the year (in shares)											0	0
Expired / forfeited during the period														(10,000)
Outstanding shares at end of period													10,000	10,000
RSUs
Stock Compensation Plans
Number of RSUs granted (in shares)						35,733	3,000	37,730	52,774	148,500
Market value at grant date (in dollars per share)						$ 9.91	$ 10.77	$ 11.15	$ 12.95	$ 7.91
Stock issued for vested restricted stocks	37,125	37,125	37,125	37,125	22,626		3,000	13,194
Vesting period						4 years		4 years	4 years	4 years			4 years
Annual Compensation cost						$ 89	$ 32	$ 105	$ 171	$ 294
Summary of nonvested shares
Granted during the period (in shares)						35,733	3,000	37,730	52,774	148,500
2012 Incentive Compensation Plan
Stock Compensation Plans
Total authorized share balance															575,000		575,000

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STOCK COMPENSATION PLANS -OUTSTANDING AND EXERCISABLE (Details) $ / shares in Units, $ in Thousands	9 Months Ended
	Sep. 30, 2016 USD ($) $ / shares shares
Stock option plans
Percentage of stock options to be vested immediately upon issue	20.00%
Future compensation expenses | $	$ 0
$10.65
Stock option plans
Exercise Price (in dollars per share) | $ / shares	$ 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	3 months
Minimum
Stock option plans
Vesting period	2 years
Maximum
Stock option plans
Vesting period	5 years

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INCOME TAXES (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
INCOME TAXES
Deferred tax assets, net of valuation allowance	$ 9,287		$ 9,287		$ 9,213
Net operating loss (NOL) carryforwards	11,200		11,200
Tax credit carryforwards	2,300		$ 2,300
Expiration period from date of origination for net operating loss carryforwards			20 years
Annual limitation for usage of NOL	1,404		$ 1,404
Annual limitation for usage of tax credits	476		476
Deferred income taxes, net	$ 922	$ 526	$ 1,481	$ 2,074
Deferred tax expense (benefit)		$ 526		$ 2,074

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FAIR VALUE (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2016	Dec. 31, 2015
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	14,047	$ 5,089
Securities available for sale	88,886	53,728
Carrying Amount
Financial assets:
Total financial assets	908,414	700,800
Financial liabilities:
Total financial liabilities	875,229	656,251
Estimated Fair Value
Financial assets:
Total financial assets	913,020	701,597
Financial liabilities:
Total financial liabilities	874,703	653,799
Level 1 | Carrying Amount
Financial assets:
Cash and cash equivalents	48,615	25,008
Level 1 | Estimated Fair Value
Financial assets:
Cash and cash equivalents	48,615	25,008
Level 2 | Carrying Amount
Financial assets:
Interest-bearing deposits	14,047	5,089
Securities available for sale	88,886	53,728
Federal Home Loan Bank stock	2,926	2,169
Financial liabilities:
Deposits	807,180	610,323
Borrowings	67,730	45,754
Level 2 | Estimated Fair Value
Financial assets:
Interest-bearing deposits	14,047	5,089
Securities available for sale	88,886	53,728
Federal Home Loan Bank stock	2,926	2,169
Financial liabilities:
Deposits	805,299	607,636
Borrowings	69,085	45,989
Significant Unobservable Inputs (Level 3) | Carrying Amount
Financial assets:
Net loans	751,942	613,390
Accrued interest receivable	1,998	1,416
Financial liabilities:
Accrued interest payable	319	174
Significant Unobservable Inputs (Level 3) | Estimated Fair Value
Financial assets:
Net loans	756,548	614,187
Accrued interest receivable	1,998	1,416
Financial liabilities:
Accrued interest payable	$ 319	$ 174

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FAIR VALUE - OTHER ASSETS AND OTHER LIABILITIES (Details) - Recurring - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015	Sep. 30, 2015
Fair value measurements
Other assets	$ 0	$ 0	$ 0
Other liabilities	0	0	0
Significant Unobservable Inputs (Level 3)
Fair value measurements
Assets	0	0	0
Liabilities	$ 0	$ 0	$ 0

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FAIR VALUE - NONRECURRING BASIS (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended	12 Months Ended
	Sep. 30, 2016	Sep. 30, 2016	Dec. 31, 2015	Sep. 30, 2015
Fair value
Impaired loans				$ 15,295
Other real estate owned	$ 3,269	$ 3,269	$ 2,324
Nonrecurring
Fair value
Total Losses	140	645	2,184
Nonrecurring | Impaired loans
Fair value
Impaired loans	11,328	11,328	10,724
Total Losses	80	583	1,852
Nonrecurring | Other real estate owned
Fair value
Other real estate owned	3,269	3,269	2,324
Total Losses	60	62	332
Nonrecurring | Significant Unobservable Inputs (Level 3) | Impaired loans
Fair value
Impaired loans	11,328	11,328	10,724
Nonrecurring | Significant Unobservable Inputs (Level 3) | Other real estate owned
Fair value
Other real estate owned	$ 3,269	$ 3,269	$ 2,324

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SHAREHOLDERS' EQUITY (Details) - USD ($)	9 Months Ended		12 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2013	Apr. 28, 2015	Dec. 17, 2013	Feb. 27, 2013
Participation in the TARP Capital Purchase Program
Number of shares authorized to be repurchased	$ 26,000						$ 600,000	$ 600,000
Number of additional shares authorized to be repurchased						$ 750,000,000
Shares of Common Stock
Participation in the TARP Capital Purchase Program
Number of shares repurchased	14,000	70,480	102,455	13,700	55,594

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COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2016	Dec. 31, 2015
Financial Instruments with Off-Balance-Sheet Risk
Commitments	$ 119,580	$ 90,611
Commitments to extend credit
Financial Instruments with Off-Balance-Sheet Risk
Commitments, variable rate	69,478	53,628
Commitments, fixed rate	36,602	26,846
Standby letters of credit
Financial Instruments with Off-Balance-Sheet Risk
Commitments, variable rate	$ 8,042	6,390
Percentage collateralization on financial instruments allowed under commitments	100.00%
Credit card commitments
Financial Instruments with Off-Balance-Sheet Risk
Commitments, fixed rate	$ 5,458	$ 3,747

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COMMITMENTS, CONTINGENCIES, AND CREDIT RISK - CREDIT RISK (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Concentration of Credit Risk
Loan portfolio	$ 751,942	$ 614,127	$ 613,390
Commercial real estate
Concentration of Credit Risk
Loan portfolio	361,272	307,720	$ 311,194
Bank | Commercial real estate | Commercial loan portfolio | Credit risk concentration
Concentration of Credit Risk
Loan portfolio	$ 110,252	$ 102,897
Percentage of concentration risk under a specified benchmark	21.48%	23.11%

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BUSINESS COMBINATIONS (Details) $ / shares in Units, $ in Thousands	1 Months Ended			9 Months Ended		12 Months Ended
	Apr. 30, 2016 USD ($) $ / shares shares	Apr. 29, 2016 USD ($) item	Aug. 31, 2015 USD ($) item $ / shares shares	Sep. 30, 2016 USD ($) $ / shares shares	Sep. 30, 2015 USD ($)	Dec. 31, 2015 USD ($) $ / shares shares
Business Acquisition [Line Items]
Assets				$ 959,121		$ 739,269
Purchase Price:
Shares outstanding (in Shares) | shares				6,263,371		6,217,620
Net assets acquired:
Goodwill				$ 5,694		$ 3,805
Eagle
Business Acquisition [Line Items]
Number of banking offices | item		3
Assets		$ 125,000
Purchase Price:
Shares outstanding (in Shares) | shares	85,776
Price per share / Cash Price | $ / shares	$ 145.73
Total purchase price	$ 12,500
Reimbursement of termination fees	(1,763)
Cash purchase price	10,737
Net assets acquired:
Cash and cash equivalents	10,600
Securities available for sale	24,046
Valuation marks	(750)
FRB & FHLB Stock	575
Total loans	84,138
Allowance for loan losses	(611)
Allowances on loan losses reversal	611
Premises and equipment	1,931
Other real estate owned	1,795
Valuation mark	(891)
Deposit based intangible	993
Mortgage service rights	120
Deferred tax benefit - book for valuation marks	948
Bank owned life insurance	4,132
Other assets	323
Total assets	124,697
Non-interest bearing deposits	22,349
Interest bearing deposits	82,165
Total deposits	104,514
FHLB Borrowings	11,000
Other liabilities	285
Total liabilities	115,799
Net assets acquired	8,898
Goodwill	1,839			$ 1,839
Number of days included into the pro-forma results				153 days
Data processing termination fees				$ 1,763
Other related expenses				890
Merger transaction related expenses before tax				2,653
Merger transaction related expenses after tax				1,751
Eagle | ASC 310-30 nonperforming
Net assets acquired:
Valuation mark	(1,563)
Eagle | ASC 310-20 performing
Net assets acquired:
Valuation mark	$ (1,700)
Niagara Bancorporation
Business Acquisition [Line Items]
Number of banking offices | item			4
Assets			$ 67,000
Purchase Price:
Shares outstanding (in Shares) | shares			4,354,000
Price per share / Cash Price | $ / shares			$ 1,682.36
Cash purchase price			$ 7,325
Net assets acquired:
Cash and cash equivalents			9,778
Securities available for sale			21,491
Valuation marks			287
Total loans			32,660
Allowance for loan losses			(358)
Allowances on loan losses reversal			358
Premises and equipment			926
Other real estate owned			450
Valuation mark			(149)
Deposit based intangible			300
Mortgage service rights			87
Deferred tax benefit - book for valuation marks			273
Deferred tax benefit			124
Bank owned life insurance			1,109
Other assets			302
Total assets			66,685
Non-interest bearing deposits			5,396
Interest bearing deposits			53,788
Total deposits			59,184
Other liabilities			226
Total liabilities			59,410
Net assets acquired			7,275
Goodwill			50	50
Number of days included into the pro-forma results					30 days
Merger transaction related expenses before tax					$ 275
Merger transaction related expenses after tax					$ 182
Niagara Bancorporation | ASC 310-30 nonperforming
Net assets acquired:
Valuation mark			(353)
Niagara Bancorporation | ASC 310-20 performing
Net assets acquired:
Valuation mark			$ (600)
Eagle River and Niagara
Unaudited proforma results
Net interest income				26,833		35,492
Noninterest income				3,744		5,533
Noninterest expense				25,431		30,691
Net income				$ 3,396		$ 7,117
Net income per diluted share | $ / shares				$ 0.54		$ 1.13