10-Q

mac

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended June 30, 2019

OR

☐TRANSITION REPORT PURSUANT TO 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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Trading Symbol	Name of each exchange on which registered:
Commmon Stock, No par value	MFNC	The NASDAQ Stock Market, LLC

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 every Interactive Data File required to be submitted 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 such files).  Yes  ☒     No  ☐

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

Large Accelerated Filer  ☐	Accelerated Filer  ☒
Non-accelerated Filer     ☐	Smaller reporting company  ☒ Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

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

Yes  ☐     No  ☒

As of August 8, 2019, there were outstanding 10,740,712 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 – June 30, 2019 (Unaudited), December 31, 2018	1
	Condensed Consolidated Statements of Operations — Three and Six Months Ended June 30, 2019 (Unaudited) and June 30, 2018 (Unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income — Three and Six Months Ended June 30, 2019 (Unaudited) and June 30, 2018 (Unaudited)	3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity — Six Months Ended June 30, 2019 (Unaudited) and June 30, 2018 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2019 (Unaudited) and June 30, 2018 (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	46
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 6.	Exhibits and Reports on Form 8-K	47
SIGNATURES		48

MACKINAC FINANCIAL CORPORATION

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

	June 30,		December 31,
	2019		2018
	(Unaudited)
ASSETS
Cash and due from banks	$	60,680	$	64,151
Federal funds sold		10		6
Cash and cash equivalents		60,690		64,157
Interest-bearing deposits in other financial institutions		12,465		13,452
Securities available for sale		110,348		116,748
Federal Home Loan Bank stock		4,924		4,924
Loans:
Commercial		755,176		717,032
Mortgage		284,864		301,461
Consumer		20,663		20,371
Total Loans		1,060,703		1,038,864
Allowance for loan losses		(5,306)		(5,183)
Net loans		1,055,397		1,033,681
Premises and equipment		23,166		22,783
Other real estate held for sale		2,125		3,119
Deferred tax asset		4,609		5,763
Deposit based intangibles		5,380		5,720
Goodwill		19,574		22,024
Other assets		32,045		25,669
TOTAL ASSETS	$	1,330,723	$	1,318,040
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest bearing deposits	$	276,776	$	241,556
NOW, money market, interest checking		344,213		368,890
Savings		111,438		111,358
CDs<$250,000		256,689		225,236
CDs>$250,000		11,640		13,737
Brokered		114,097		136,760
Total deposits		1,114,853		1,097,537
Federal funds purchased		—		2,905
Borrowings		46,232		57,536
Other liabilities		11,798		7,993
Total liabilities		1,172,883		1,165,971
SHAREHOLDERS’ EQUITY:
Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares                                            Issued and outstanding - 10,740,712 and 10,712,745 respectively		129,262		129,066
Retained earnings		27,734		23,466
Accumulated other comprehensive income (loss)
Unrealized gains (losses) on available for sale securities		1,062		(245)
Minimum pension liability		(218)		(218)
Total shareholders’ equity		157,840		152,069
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,330,723	$	1,318,040

1

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except per Share Data)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(Unaudited)				(Unaudited)
INTEREST INCOME:
Interest and fees on loans:
Taxable	$	15,586	$	12,071	$	30,181	$	22,461
Tax-exempt		42		31		89		56
Interest on securities:
Taxable		680		560		1,383		932
Tax-exempt		85		79		183		148
Other interest income		367		197		752		396
Total interest income		16,760		12,938		32,588		23,993
INTEREST EXPENSE:
Deposits		2,515		1,602		4,869		2,838
Borrowings		248		523		486		1,033
Total interest expense		2,763		2,125		5,355		3,871
Net interest income		13,997		10,813		27,233		20,122
Provision for loan losses		200		100		300		150
Net interest income after provision for loan losses		13,797		10,713		26,933		19,972
OTHER INCOME:
Deposit service fees		408		323		814		592
Income from mortgage loans sold on the secondary market		355		277		667		454
SBA/USDA loan sale gains		29		83		154		134
Net mortgage servicing fees (amortization)		128		(2)		248		(10)
Other		190		182		344		307
Total other income		1,110		863		2,227		1,477
OTHER EXPENSE:
Salaries and employee benefits		5,511		4,923		10,946		9,077
Occupancy		1,004		928		2,085		1,739
Furniture and equipment		723		644		1,441		1,175
Data processing		708		586		1,417		1,090
Advertising		214		192		523		387
Professional service fees		547		397		981		701
Loan origination expenses and deposit and card related fees		184		148		363		274
Writedowns and losses on other real estate held for sale		73		40		101		66
FDIC insurance assessment		77		187		211		343
Communications		232		152		460		307
Transaction related expenses		—		1,976		—		2,165
Other		990		904		1,979		1,681
Total other expenses		10,263		11,077		20,507		19,005
Income before provision for income taxes		4,644		499		8,653		2,444
Provision for  income taxes		975		103		1,817		511
NET INCOME	$	3,669	$	396	$	6,836	$	1,933
INCOME PER COMMON SHARE:
Basic	$	0.34	$	0.05	$	0.64	$	0.27
Diluted	$	0.34	$	0.05	$	0.64	$	0.27

2

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Net income	$	3,669	$	396	$	6,836	$	1,933
Other comprehensive income
Change in securities available for sale:
Unrealized gains arising during the period		822		1,392		1,795		857
Tax effect		(173)		(291)		(488)		(180)
Net change in unrealized gains on available for sale securities		649		1,101		1,307		677
Total comprehensive income	$	4,318	$	1,497	$	8,143	$	2,610

3

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

	Six Months Ended
	June 30,
	2019
		Common				Accumulated
	Shares of	Stock and				Other
	Common	Additional		Retained		Comprehensive
	Stock	Paid in Capital		Earnings		Income (loss)		Total
Balance, beginning of period	10,712,745	$	129,066	$	23,466	$	(463)	$	152,069
Net income for period	—		—		6,836		—		6,836
Other comprehensive income
Net unrealized gain on securities available for sale	—		—		—		1,307		1,307
Total comprehensive income	—		—		6,836		1,307		8,143
Stock compensation	—		196		—		—		196
Issuance of common stock:
Restricted stock award vesting	27,967		—		—		—		—
Dividend on common stock	—		—		(2,568)		—		(2,568)
Balance, end of period	10,740,712	$	129,262	$	27,734	$	844	$	157,840

	Six Months Ended
	June 30,
	2018
		Common				Accumulated
	Shares of	Stock and				Other
	Common	Additional		Retained		Comprehensive
	Stock	Paid in Capital		Earnings		Income (Loss)		Total
Balance, beginning of period	6,294,930	$	61,981	$	19,711	$	(292)	$	81,400
Net income for period	—		—		1,933		—		1,933
Other comprehensive income
Net unrealized gain on securities available for sale	—		—		—		677		677
Total comprehensive income	—		—		1,933		677		2,610
Stock compensation	—		274		—		—		274
Issuance of common stock:
Restricted stock award vesting	45,630		—		—		—		—
FFNM acquisition	2,146,378		34,101						34,101
Capital raise, net of offering costs	2,225,807		32,524		—		—		32,524
Dividend on common stock	—		—		(2,042)		—		(2,042)
Balance, end of period	10,712,745	$	128,880	$	19,602	$	385	$	148,867

4

	Three Months Ended
	June 30,
	2019
		Common				Accumulated
	Shares of	Stock and				Other
	Common	Additional		Retained		Comprehensive
	Stock	Paid in Capital		Earnings		Income (Loss)		Total
Balance, beginning of period	10,740,712	$	129,204	$	25,347	$	195	$	154,746
Net income for period	—		—		3,669		—		3,669
Other comprehensive income
Net unrealized loss on securities available for sale	—		—		—		649		649
Actuarial loss on defined benefit pension obligation	—		—		—		—		—
Total comprehensive income	—		—		3,669		649		4,318
Stock compensation	—		58		—		—		58
Issuance of common stock:
Restricted stock award vesting	—		—		—		—		—
Dividend on common stock	—		—		(1,282)		—		(1,282)
Balance, end of period	10,740,712	$	129,262	$	27,734	$	844	$	157,840

	Three Months Ended
	June 30,
	2018
		Common				Accumulated
	Shares of	Stock and				Other
	Common	Additional		Retained		Comprehensive
	Stock	Paid in Capital		Earnings		Income		Total
Balance, beginning of period	6,332,560	$	62,080	$	20,493	$	(716)	$	81,857
Net income for period	—		—		396		—		396
Other comprehensive income
Net unrealized gain on securities available for sale	—		—		—		1,101		1,101
Actuarial loss on defined benefit pension obligation	—		—		—		—		—
Total comprehensive income	—		—		396		1,101		1,497
Stock compensation	—		175		—		—		175
Issuance of common stock:
Restricted stock award vesting	8,000		—		—		—		—
FFNM acquisition	2,146,378		34,101						34,101
Capital raise, net of offering costs	2,225,807		32,524						32,524
Dividend on common stock	—		—		(1,287)		—		(1,287)
Balance, end of period	10,712,745	$	128,880	$	19,602	$	385	$	148,867

5

MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

	Six Months Ended
	June 30,
	2019		2018
Cash Flows from Operating Activities:
Net income	$	6,836	$	1,933
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,255		1,298
Provision for loan losses		300		150
Deferred tax expense, net		590		511
Gain on sale of loans sold in the secondary market		(547)		(454)
Origination of loans held for sale in the secondary market		(28,775)		(20,613)
Proceeds from sale of loans in the secondary market		29,322		21,067
Loss on sale of other real estate held for sale		47		19
Writedown of other real estate held for sale		—		47
Stock compensation		196		274
Change in other assets		(709)		1,191
Change in other liabilities		3,805		34
Net cash provided by operating activities		12,320		5,457
Cash Flows from Investing Activities:
Net increase in loans		(25,518)		(7,343)
Net decrease in interest bearing deposits in other financial institutions		987		2,501
Purchase of securities available for sale		(7,776)		(1,063)
Proceeds from maturities, sales, calls or paydowns of securities available for sale		16,058		58,760
Capital expenditures		(713)		(1,484)
Acquisition of FFNM		—		13,267
Proceeds from sale of other real estate, premises and fixed assets		636		1,624
Net cash (used in) provided by investing activities		(16,326)		66,262
Cash Flows from Financing Activities:
Net increase (decrease) in deposits		17,316		(56,212)
Net activity on line of credit		—		(1,000)
Net (decrease) increase in fed funds purchased		(2,905)		10,000
Principal payments on borrowings		(11,304)		(27,527)
Proceeds of common stock offering, net of offering costs		—		32,524
Dividend on common stock		(2,568)		(2,041)
Net cash provided by (used in) financing activities		539		(44,256)
Net (decrease) increase in cash and cash equivalents		(3,467)		27,463
Cash and cash equivalents at beginning of period		64,157		37,426
Cash and cash equivalents at end of period	$	60,690	$	64,889
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest	$	5,102	$	3,777
Income taxes		1,500		625
Noncash Investing and Financing Activities:
Transfers of Foreclosures from Loans to Other Real Estate Held for Sale		825		400
Transfers of Other Real Estate Held for Sale to Fixed Assets		1,013		—

6

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 six month period ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.  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, 2018.

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 were unchanged by 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, the assessment of goodwill for impairment, and the fair value of assets and liabilities acquired in business combinations.

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.  We evaluate at each balance sheet date whether it is probable that we will be unable to collect all cash flows expected at acquisition and if so, recognize a provision for loan loss in our consolidated statement of operations. 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.

7

Allowance for Loan Losses

The allowance for loan losses includes specific allowances related to 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 also has an unallocated 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 probable loan losses.  Management periodically evaluates the adequacy of the allowance using the Corporation’s past loan loss experience, known and inherent risks in the portfolio, composition of the portfolio, current economic conditions, and other factors.  The allowance does not include the effects of expected losses related to future events or future changes in economic conditions.  This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change.  Loans are charged against the allowance for loan losses when management believes the collectability of the principal is unlikely.  In addition, various regulatory agencies periodically review the allowance for loan losses.  These agencies may require additions to the allowance for loan losses based on their judgments of collectability.

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

Stock Compensation Plans

On May 22, 2012, the 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 awards (“RSAs”), stock grants, or stock appreciation rights.  The aggregate number of shares of the Corporation’s common stock issuable under the plan is 575,000. At June 30, 2019 there were 216,310 shares available for issuance under this plan. Awards are made to certain other senior officers at the discretion of the Corporation’s management.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

2.RECENT ACCOUNTING PRONOUNCEMENTS

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 was adopted January 1, 2019, and accordingly an asset and liability of $4.502 million were recognized.  The asset is included in other assets and the liability is included within other liabilities.

In September 2016, 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

8

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 SEC registrants 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.  The Corporation has formed a cross-functional implementation team consisting of individuals from finance, credit and information systems.  A project plan and timeline has been developed and the implementation team meets regularly to assess the project status to ensure adherence to the timeline.  The implementation team has also been working with a software vendor to assist in implementing required changes to credit loss estimation models and proceses, and is finalizing the historical data collected to be utilized in the credit loss models.  The Corporation expects to recognize a cumulative effect adjustment to the opening balance of retained earnings as of the beginning of the first reporting period in which ASU 2016-13 is effective.  The Corporation has not yet determined the magnitude of any such one-time adjustment or ther potential impact of ASU 2016-13 on its condensed consolidated financial statements.  On July 17, 2019 the Financial Accounting Standards Board (FASB) voted to recommend the delay CECL implementation for smaller reporting companies and private companies to annual periods beginning after December 15, 2022. 

3.EARNINGS PER SHARE

Diluted earnings per share, which reflects the potential dilution that could occur if 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 six months ended June 30, 2019 and 2018 (dollars in thousands, except per share data):

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
(Numerator):
Net income	$	3,669	$	396	$	6,836	$	1,933
(Denominator):
Weighted average shares outstanding		10,740,712		7,769,720		10,730,477		7,041,010
Effect of restricted stock awards		11,358		39,298		8,994		33,622
Diluted weighted average shares outstanding		10,752,070		7,809,018		10,739,471		7,074,632
Income per common share:
Basic	$	0.34	$	0.05	$	0.64	$	0.27
Diluted	$	0.34	$	0.05	$	0.64	$	0.27

9

4.INVESTMENT SECURITIES

At June 30, 2019 the Corporation had an investment security portfolio totaling $110.348 million, a decrease of $6.400 million from the December 31, 2018 balance of $116.748 million. The amortized cost and estimated fair value of investment securities available for sale as of June 30, 2019 and December 31, 2018 are as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
June 30, 2019
Corporate	$	15,452	$	48	$	(22)	$	15,478
US Agencies		22,067		134		(7)		22,194
US Agencies - MBS		29,114		498		(38)		29,574
Obligations of states and political subdivisions		42,371		860		(129)		43,102
Total securities available for sale	$	109,004	$	1,540	$	(196)	$	110,348
December 31, 2018
Corporate	$	20,198	$	24	$	(158)	$	20,064
US Agencies		16,198		5		(233)		15,970
US Agencies - MBS		32,974		124		(258)		32,840
Obligations of states and political subdivisions		47,828		341		(295)		47,874
Total securities available for sale	$	117,198	$	494	$	(944)	$	116,748

The following table presents the amortized cost and estimated fair value of investment securities by contractual maturity as of June 30, 2019 and December 31, 2018 (dollars in thousands):

	June 30, 2019				December 31, 2018
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Available -for-sale securities
Under 1 year	$	16,553	$	16,563	$	13,728	$	13,583
After 1 year through five years		49,310		49,954		54,563		54,382
After 5 years through 10 years		11,838		12,049		13,058		13,085
After 10 years		2,038		2,056		2,875		2,858
Subtotal		79,739		80,622		84,224		83,908
US Agencies - MBS		29,265		29,726		32,974		32,840
Total available -for-sale securities	$	109,004	$	110,348	$	117,198	$	116,748

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 $5.411 million and $5.426 million, respectively, at June 30, 2019.

10

5.LOANS

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

	June 30,		December 31,
	2019		2018
Commercial real estate	$	509,885	$	496,207
Commercial, financial, and agricultural		208,488		191,060
Commercial construction		36,803		29,765
One to four family residential real estate		273,813		286,908
Consumer		20,663		20,371
Consumer construction		11,051		14,553
Total loans	$	1,060,703	$	1,038,864

The Corporation completed the acquisition of Peninsula Financial Corporation (“PFC”) on December 5, 2014, The First National Bank of Eagle River (“Eagle River”) on April 29, 2016, Niagara Bancorporation (“Niagara”) on August 31, 2016, First Federal of Northern Michigan Bancorp (“FFNM”) on May 18, 2018 and Lincoln Community Bank (“Lincoln”) on October 1, 2018.  The PFC acquired impaired loans totaled $13.290 million, the Eagle River acquired impaired loans totaled $3.401 million, the Niagara acquired impaired loans totaled $2.105 million, the FFNM acquired impaired loans totaled $5.440 million, and the Lincoln acquired impaired loans totaled $1.901 million.

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 River 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	$	80,737	$	84,138
Nonaccretable difference		(1,172)		—		(1,172)
Expected cash flows		2,229		80,737		82,966
Accretable yield		(391)		(1,700)		(2,091)
Carrying balance at acquisition date	$	1,838	$	79,037	$	80,875

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	$	30,555	$	32,660
Nonaccretable difference		(265)		—		(265)
Expected cash flows		1,840		30,555		32,395
Accretable yield		(88)		(600)		(688)
Carrying balance at acquisition date	$	1,752	$	29,955	$	31,707

11

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

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	5,440	$	187,302	$	192,742
Nonaccretable difference		(2,100)		—		(2,100)
Expected cash flows		3,340		187,302		190,642
Accretable yield		(700)		(4,498)		(5,198)
Carrying balance at acquisition date	$	2,640	$	182,804	$	185,444

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

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	1,901	$	37,700	$	39,601
Nonaccretable difference		(546)		—		(546)
Expected cash flows		1,355		37,700		39,055
Accretable yield		(561)		(493)		(1,054)
Carrying balance at acquisition date	$	794	$	37,207	$	38,001

The table below presents a rollforward of the accretable yield on acquired loans for the six months ended June 30, 2019 (dollars in thousands):

	PFC						Eagle River
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2018	$	128	$	—	$	128	$	213	$	16	$	229
Accretion		(40)		—		(40)		(17)		(16)		(33)
Reclassification from nonaccretable difference		30		—		30		13		—		13
Balance, June 30, 2019	$	118	$	—	$	118	$	209	$	—	$	209
	Niagara						First Federal Northern Michigan
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2018	$	26	$	69	$	95	$	571	$	3,446	$	4,017
Accretion		(14)		(69)		(83)		(145)		(796)		(941)
Reclassification from nonaccretable difference		11		—		11		109		—		109
Balance, June 30, 2019	$	23	$	—	$	23	$	535	$	2,650	$	3,185
	Lincoln Community Bank						Total
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2018	$	140	$	442	$	582	$	1,078	$	3,973	$	5,051
Accretion		(109)		(95)		(204)		(325)		(976)		(1,301)
Reclassification from nonaccretable difference		82		—		82		245		—		245
Balance, June 30, 2019	$	113	$	347	$	460	$	998	$	2,997	$	3,995

12

The table below presents a rollforward of the accretable yield on acquired loans for the six months ended June 30, 2018 (dollars in thousands):

	PFC						Eagle River
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2017	$	149	$	—	$	149	$	218	$	603	$	821
Accretion		(30)		—		(30)		—		(297)		(297)
Reclassification from nonaccretable difference		23		—		23		—		—		—
Balance, June 30, 2018	$	142	$	—	$	142	$	218	$	306	$	524
	Niagara						First Federal Northern Michigan						Total
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2017	$	38	$	281	$	319	$	—	$	—	$	—	$	405	$	884	$	1,289
Acquisition		—		—		—		700		4,498		5,198		700		4,498		5,198
Accretion		—		(108)		(108)		—		(83)		(83)		(30)		(488)		(518)
Reclassification from nonaccretable difference		—		—		—		—		—		—		23		—		23
Balance, June 30, 2018	$	38	$	173	$	211	$	700	$	4,415	$	5,115	$	1,098	$	4,894	$	5,992

Allowance for Loan Losses

An analysis of the allowance for loan losses for the six months ended June 30, 2019 and June 30, 2018 is as follows (dollars in thousands):

	June 30,		June 30,
	2019		2018
Balance, January 1	$	5,183	$	5,079
Recoveries on loans previously charged off		169		264
Loans charged off		(346)		(352)
Provision		300		150
Balance at end of period	$	5,306	$	5,141

In the first six months of 2019, net charge-offs were $177,000, compared to net charge-offs of $88,000 in the same period in 2018.   In the first six months of 2019, the Corporation recorded a provision for loan loss of $300,000 compared to a $150,000 provision for loan losses in the first six months of 2018.  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.

13

A breakdown of the allowance for loan losses and recorded balances in loans at June 30, 2019 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 June 30, 2019
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,565	$	1,005	$	100	$	201	$	6	$	9	$	2,268	$	5,154
Charge-offs		—		(84)		—		(57)		—		(44)		—		(185)
Recoveries		122		—		1		6		—		8		—		137
Provision		(479)		(60)		(24)		78		(1)		37		649		200
Ending balance ALLR	$	1,208	$	861	$	77	$	228	$	5	$	10	$	2,917	$	5,306
Six Months Ended June 30, 2019
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,682	$	648	$	101	$	199	$	6	$	8	$	2,539	$	5,183
Charge-offs		(20)		(103)		—		(120)		—		(103)		—		(346)
Recoveries		134		4		1		11		—		19		—		169
Provision		(588)		312		(25)		138		(1)		86		378		300
Ending balance ALLR	$	1,208	$	861	$	77	$	228	$	5	$	10	$	2,917	$	5,306
At June 30, 2019
Loans:
Ending balance	$	509,885	$	208,488	$	36,803	$	273,813	$	11,051	$	20,663	$	—	$	1,060,703
Ending balance ALLR		(1,208)		(861)		(77)		(228)		(5)		(10)		(2,917)		(5,306)
Net loans	$	508,677	$	207,627	$	36,726	$	273,585	$	11,046	$	20,653	$	(2,917)	$	1,055,397
Ending balance ALLR:
Individually evaluated	$	457	$	559	$	—	$	—	$	—	$	—	$	—	$	1,016
Collectively evaluated		751		302		77		228		5		10		2,917		4,290
Total	$	1,208	$	861	$	77	$	228	$	5	$	10	$	2,917	$	5,306
Ending balance Loans:
Individually evaluated	$	2,077	$	1,134	$	—	$	—	$	—	$	—	$	—	$	3,211
Collectively evaluated		505,501		204,804		36,418		272,773		11,051		20,633		—		1,051,180
Acquired with deteriorated credit quality		2,307		2,550		385		1,040		—		30		—		6,312
Total	$	509,885	$	208,488	$	36,803	$	273,813	$	11,051	$	20,663	$	—	$	1,060,703

Impaired loans, by definition, are individually evaluated.

14

A breakdown of the allowance for loan losses and recorded balances in loans at June 30, 2018 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 June 30, 2018
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,127	$	547	$	54	$	173	$	6	$	9	$	3,185	$	5,101
Charge-offs		(1)		(128)		—		(100)		—		(70)		—		(299)
Recoveries		23		156		—		50		—		10		—		239
Provision		319		(80)		(1)		157		1		60		(356)		100
Ending balance ALLR	$	1,468	$	495	$	53	$	280	$	7	$	9	$	2,829	$	5,141
Six Months Ended June 30, 2018
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,650	$	576	$	54	$	160	$	6	$	10	$	2,623	$	5,079
Charge-offs		(1)		(128)		—		(147)		—		(76)		—		(352)
Recoveries		30		159		1		52		—		22		—		264
Provision		(211)		(112)		(2)		215		1		53		206		150
Ending balance ALLR	$	1,468	$	495	$	53	$	280	$	7	$	9	$	2,829	$	5,141
At June 30, 2018
Loans:
Ending balance	$	478,798	$	185,032	$	20,895	$	284,041	$	15,409	$	19,202	$	—	$	1,003,377
Ending balance ALLR		(1,468)		(495)		(53)		(280)		(7)		(9)		(2,829)		(5,141)
Net loans	$	477,330	$	184,537	$	20,842	$	283,761	$	15,402	$	19,193	$	(2,829)	$	998,236
Ending balance ALLR:
Individually evaluated	$	500	$	264	$	—	$	—	$	—	$	—	$	—	$	764
Collectively evaluated		968		231		53		280		7		9		2,829		4,377
Total	$	1,468	$	495	$	53	$	280	$	7	$	9	$	2,829	$	5,141
Ending balance Loans:
Individually evaluated	$	2,447	$	1,324	$	372	$	—	$	—	$	—	$	—	$	4,143
Collectively evaluated		467,159		183,535		20,523		281,144		15,364		19,117		—		986,842
Acquired with deteriorated credit quality		9,192		173		—		2,897		45		85		—		12,392
Total	$	478,798	$	185,032	$	20,895	$	284,041	$	15,409	$	19,202	$	—	$	1,003,377

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, and other relevant characteristics.

15

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, and other relevant characteristics.

Acceptable (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.

Acceptable Watch (44)

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.  Acceptable Watch 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 44 or better and any loans with a risk rating of 6 or 7 not considered impaired, 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 is 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.

16

Below is a breakdown of loans by risk category as of June 30, 2019 (dollars in thousands):

	(1)		(2)		(3)		(4)		(44)		(6)		(7)		Rating
	Strong		Good		Average		Acceptable		Acceptable Watch		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	15,144	$	19,727	$	203,261	$	259,748	$	5,833	$	6,172	$	—	$	—	$	509,885
Commercial, financial and agricultural		10,339		9,781		72,957		110,701		2,073		2,637		—		—		208,488
Commercial construction		—		407		8,605		17,000		405		805		—		9,581		36,803
One-to-four family residential real estate		69		2,909		5,929		16,583		1,670		4,035		—		242,618		273,813
Consumer construction		—		261		216		329		90		—		—		10,155		11,051
Consumer		1		187		359		1,340		—		73		—		18,703		20,663
Total loans	$	25,553	$	33,272	$	291,327	$	405,701	$	10,071	$	13,722	$	—	$	281,057	$	1,060,703

Below is a breakdown of loans by risk category as of December 31, 2018 (dollars in thousands):

	(1)		(2)		(3)		(4)		(44)		(6)		(7)		Rating
	Strong		Good		Average		Acceptable		Acceptable Watch		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	9,564	$	22,265	$	189,898	$	257,627	$	5,993	$	10,860	$	—	$	—	$	496,207
Commercial, financial and agricultural		8,077		8,678		72,466		97,441		2,269		2,129		—		—		191,060
Commercial construction		734		706		6,844		12,244		829		823		—		7,585		29,765
One-to-four family residential real estate		70		2,873		6,941		15,711		2,095		4,757		—		254,461		286,908
Consumer construction		—		—		—		200		50		11		—		14,292		14,553
Consumer		19		236		625		1,156		42		77		—		18,216		20,371
Total loans	$	18,464	$	34,758	$	276,774	$	384,379	$	11,278	$	18,657	$	—	$	294,554	$	1,038,864

Impaired Loans

Impaired 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. 

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 loan 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.

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

	Impaired Loans		Impaired Loans		Total		Unpaid		Related
	with No Related		with Related		Impaired		Principal		Allowance for
	Allowance		Allowance		Loans		Balance		Loan Losses
June 30, 2019
Commercial real estate	$	2,307	$	2,077	$	4,384	$	7,822	$	457
Commercial, financial and agricultural		2,550		1,134		3,684		2,709		559
Commercial construction		385		—		385		375		—
One to four family residential real estate		1,040		—		1,040		3,233		—
Consumer construction		—		—		—		—		—
Consumer		30		—		30		43		—
Total	$	6,312	$	3,211	$	9,523	$	14,182	$	1,016
December 31, 2018
Commercial real estate	$	2,777	$	2,148	$	4,925	$	10,740	$	486
Commercial, financial and agricultural		1,460		577		2,037		2,249		340
Commercial construction		366		—		366		1,132		—
One to four family residential real estate		1,231		—		1,231		4,136		—
Consumer construction		217		—		217		—		—
Consumer		42		—		42		55		—
Total	$	6,093	$	2,725	$	8,818	$	18,312	$	826

	Individually Evaluated Impaired Loans
	June 30, 2019				December 31, 2018
	Average		Interest Income		Average		Interest Income
	Balance for		Recognized for		Balance for		Recognized for
	the Period		the Period		the Period		the Period
Commercial real estate	$	7,860	$	166	$	5,024	$	410
Commercial, financial and agricultural		382		1		374		26
Commercial construction		389		—		383		13
One to four family residential real estate		3,685		231		2,879		203
Consumer construction		—		—		9		—
Consumer		49		1		38		4
Total	$	12,365	$	399	$	8,707	$	656

A summary of past due loans at June 30, 2019 and December 31, 2018 is as follows (dollars in thousands):

	June 30,								December 31,
	2019								2018
	30-89 days		90+ days						30-89 days		90+ days
	Past Due		Past Due						Past Due		Past Due
	(accruing)		(accruing)		Nonaccrual		Total		(accruing)		(accruing)		Nonaccrual		Total
Commercial real estate	$	345	$	—	$	798	$	1,143	$	298	$	—	$	1,700	$	1,998
Commercial, financial and agricultural		528		—		597		1,125		398		—		320		718
Commercial construction		677		—		245		922		112		—		266		378
One to four family residential real estate		4,559		—		2,993		7,552		5,456		18		2,725		8,199
Consumer construction		—		—		—		—		—		—		—		—
Consumer		137		—		40		177		108		5		43		156
Total past due loans	$	6,246	$	—	$	4,673	$	10,919	$	6,372	$	23	$	5,054	$	11,449

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 a 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 applicable 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.

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There were three TDR’s that occurred during the six months ended June 30, 2019 and no TDR’s during the six months ended June 30, 2018.  The three restructured loans included only modifications to the repayment schedules.  The balance of these restructured loans pre-modification was $.450 million, post-modification as of June 30, 2019, the balances of the restructured loans were $.437 million.

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):

	Six Months Ended		Six Months Ended
	June 30,		June 30,
	2019		2018
Loans outstanding, January 1	$	9,817	$	10,037
New loans		1,872		—
Net activity on revolving lines of credit		458		—
Change in status of insiders		(285)		—
Repayment		(553)		(1,143)
Loans outstanding at end of period	$	11,309	$	8,894

There were no loans to related parties classified substandard as of June 30, 2019 or June 30, 2018.  In addition to the outstanding balances above, there were unfunded commitments of $.505 million to related parties at June 30, 2019.

6.GOODWILL AND OTHER INTANGIBLE ASSETS

The Corporation through the acquisition of Peninsula in 2014, Eagle River and Niagara in 2016, and FFNM and Lincoln in 2018, has recorded goodwill and core deposit intangibles as presented below (dollars in thousands):

			Deposit Based
	Goodwill		Intangible
	Balance		Initial Balance
Peninsula	$	3,805	$	1,206
Eagle River		1,839		993
Niagara		50		300
FFNM		12,628		2,894
Lincoln		1,252		1,353
Total	$	19,574	$	6,746

	Deposit Based
	Intangible		June 30, 2019		Future Annual
	June 30, 2019		Amortization		Amortization
	Balance		Expense		Expense
Peninsula	$	654	$	60	$	121
Eagle River		678		50		99
Niagara		215		15		30
FFNM		2,581		154		290
Lincoln		1,252		61		135
Total	$	5,380	$	340	$	675

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	Deposit Based
	Intangible		2018
	December 31, 2018		Amortization
	Balance		Expense
Peninsula	$	714	$	121
Eagle River		728		99
Niagara		230		30
FFNM		2,735		159
Lincoln		1,313		41
Total	$	5,720	$	450

The deposit based intangible asset is reported net of accumulated amortization at $5.380 million at June 30, 2019.  Amortization expense in the first six months of 2019 is $.340 million.  Amortization expense for the next five years is expected to be at $.675 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 June 30, 2019, the Corporation had obligations to service approximately $279.478 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 which management estimates at $2.898 million. 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 10.57% and a discount rate of 10.17% as of June 30, 2019.  For additional details on the acquired MSRs presented in the table below, please refer to Note 15 – “Business Combinations”.

The following table summarizes MSRs capitalized and amortized (dollars in thousands):

	June 30,		June 30,
	2019		2018
Balance at beginning of period	$	1,144	$	1,033
Acquired MSRs		500		386
Amortization		(120)		(219)
Balance at end of period	$	1,524	$	1,200
Balance of loan servicing portfolio	$	279,478	$	292,739
Mortgage servicing rights as % of portfolio		.55%		.41%
Fair value of servicing rights		2,898		1,767

Commercial Loans

The Corporation periodically retains the servicing on certain 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 June 30, 2019 was approximately $41 million. The Corporation valued these servicing rights at $80,000 as of June 30, 2019 and at $80,000 as of December 31, 2018.  This valuation was established in consideration of the discounted cash flow of net expected servicing income over the life of the loans.

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8.BORROWINGS

Borrowings consist of the following at June 30, 2019 and December 31, 2018 (dollars in thousands):

	June 30,		December 31,
	2019		2018
Federal Home Loan Bank fixed rate advances	$	45,752	$	57,056
USDA Rural Development note		480		480
	$	46,232	$	57,536

The Federal Home Loan Bank borrowings bear a weighted average rate of 1.73% and mature at various dates through 2026. They are collateralized at June 30, 2019 by the following:  a collateral agreement on the Corporation’s one to four family residential real estate loans with a book value of approximately $66.662 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $5.411 million and $5.426 million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $4.924 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 June 30, 2019.

The Corporation currently has one correspondent banking borrowing relationship.  The relationship currently consists of a $15.0 million revolving line of credit, which had a zero balance at June 30, 2019.  The line of credit bears an interest rate of LIBOR plus 2.00%, with a floor rate of 3.00% and a ceiling of 22%.  The line of credit expires on April 30, 2020.  LIBOR at June 30, 2019 was 2.32%.  The Corporation previously had a term note as part of this relationship that was paid in full during the second quarter of 2018.  This relationship is secured by all of the outstanding mBank stock.  

The USDA Rural Development borrowing bears an interest rate of 1.00% and matures in August, 2024. It is collateralized by an assignment of a demand deposit account held by the Corporation’s wholly owned subsidiary, First Rural Relending, in the amount of $.538 million, and guaranteed by the Corporation.

9.DEFINED BENEFIT PENSION PLAN

The Corporation acquired the Peninsula Financial Corporation noncontributory defined benefit pension plan in 2014.  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 2019 are $22,000.

The anticipated distributions over the next five years and through December 31, 2028 are detailed in the table below (dollars in thousands):

2019	$	136
2020		132
2021		131
2022		137
2023		143
2024-2028		823
Total	$	1,502

The Corporation receives a valuation of the Plan annually.  As such, at December 31, 2018, the plan’s assets had a fair value of $1.987 million and the Corporation had a net unfunded liability of $1.004 million.  The accumulated benefit obligation at December 31, 2018 was $2.991 million. The accumulated benefit obligation at June 30, 2019 was $3.331 million.

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Assumptions in the actuarial valuation are:

	2019	2018
Weighted average discount rate	4.02%	3.33%
Rate of increase in future compensation levels	N/A	N/A
Expected long-term rate of return on plan assets	8.00%	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; which was in place at both June 30, 2019 and December 31, 2018.

	Target	Actual
	Allocation	Allocation
Equity securities	50% to 70%	59%
Fixed income securities	30% to 50%	41%

10.STOCK COMPENSATION PLANS

Restricted Stock Awards

The Corporation’s restricted stock awards are service-based and awarded based on performance.  Each award has 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 RSAs 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:

		Market Value at
Date of Award	Units Granted	grant date	Vesting Term
May, 2015	3,000	10.77	Immediate
February, 2016	35,733	9.91	4 years
February, 2017	28,427	13.39	4 years
February, 2018	18,643	16.30	4 years
April, 2018	8,000	16.00	Immediate
February, 2019	27,790	15.70	4 years

In the first six months of 2019, the Corporation issued 27,967 shares of its common stock for vested RSAs.  In the first six months of 2018, the Corporation issued 45,630 shares of its common stock for vested RSAs.

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, 2019	69,322	$	12.79
Granted during the period	27,790		15.70
Vested during the period	(27,967)		12.09
Nonvested balance at June 30, 2019	69,145	$	13.28

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11.INCOME TAXES

The Corporation has reported deferred tax assets of $4.609 million at June 30, 2019.

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 June 30, 2019 had a net operating loss and tax credit carryforwards for tax purposes of approximately $12.5 million, and $1.7 million, respectively.  The Corporation evaluated the future benefits from these carryforwards as of June 30, 2019 and determined that is 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 $2.0 million for the NOL and the equivalent value of tax credits, which is approximately $.420 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 $1.817 million for the six months ended June 30, 2019 and $.511 million for the six months ended June 30, 2018. 

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 June 30, 2019 and December 31, 2018 (dollars in thousands):

		June 30, 2019				December 31, 2018
	Level in Fair	Carrying		Estimated		Carrying		Estimated
	Value Hierarchy	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	60,690	$	60,690	$	64,157	$	64,157
Interest-bearing deposits	Level 2		12,465		12,465		13,452		13,452
Securities available for sale	Level 2		108,918		108,918		115,260		115,260
Securities available for sale	Level 3		1,430		1,430		1,488		1,488
Federal Home Loan Bank stock	Level 2		4,924		4,924		4,924		4,924
Net loans	Level 3		1,055,397		1,042,732		1,033,681		1,013,214
Accrued interest receivable	Level 3		3,791		3,791		3,005		3,005
Total financial assets		$	1,247,615	$	1,234,950	$	1,235,967	$	1,215,500
Financial liabilities:
Deposits	Level 2	$	1,114,853	$	1,082,522	$	1,097,537	$	1,047,709
Borrowings	Level 2		46,232		46,098		57,536		56,771
Accrued interest payable	Level 3		575		575		391		391
Total financial liabilities		$	1,161,660	$	1,129,195	$	1,155,464	$	1,104,871

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 June 30, 2019, 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 June 30, 2019 and December 31, 2018 were based on level 2 and level 3 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.”

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The table below shows investment securities measured at fair value on a recurring basis (dollars in thousands):

			Quoted Prices		Significant		Significant		Total (Gains)		Total (Gains)
			in Active Markets		Other Observable		Unobservable		Losses for		Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Six Months Ended
(dollars in thousands)	June 30, 2019		(Level 1)		(Level 2)		(Level 3)		June 30, 2019		June 30, 2019
Assets
Corporate	$	15,478	$	—	$	14,978	$	500	$	—	$	—
US Agencies		22,194		—		22,194		—		—		—
US Agencies - MBS		29,574		—		29,574		—		—		—
Obligations of state and political subdivisions		43,102		—		42,172		930		—		—
	$	110,348							$	—		—

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total (Gains) Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Twelve months ended
(dollars in thousands)	December 31, 2018		(Level 1)		(Level 2)		(Level 3)		December 31, 2018
Assets
Corporate	$	20,064	$	—	$	19,564	$	500	$	—
US Agencies		15,970		—		15,970		—		—
US Agencies - MBS		32,840		—		32,840		—		—
Obligations of state and political subdivisions		47,874		—		46,886		988		—
	$	116,748							$	—

The Corporation had no Level 3 assets or liabilities measured at fair value on a recurring basis as of June 30, 2019, or December 31, 2018 other than as described above.

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 June 30, 2019

			Quoted Prices		Significant		Significant		Total (Gains)		Total (Gains)
			in Active Markets		Other Observable		Unobservable		Losses for		Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Six Months Ended
(dollars in thousands)	June 30, 2019		(Level 1)		(Level 2)		(Level 3)		June 30, 2019		June 30, 2019
Assets
Impaired loans	$	6,645	$	—	$	—	$	6,645	$	—	$	219
Other real estate owned		2,125		—		—		2,125		73		101
									$	73		320

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Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2018

			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, 2018		(Level 1)		(Level 2)		(Level 3)		December 31, 2018
Assets
Impaired loans	$	8,818	$	—	$	—	$	8,818	$	198
Other real estate held for sale		3,119		—		—		3,119		182
									$	380

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 by the Board of Directors.  The Corporation repurchased 14,000 shares 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 million on February 27, 2013, $.600 million on December 17, 2013 and an additional $.750 million on April 28, 2015.  None of these authorizations has an expiration date.  As of June 30, 2019, approximately $25,000 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.

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):

	June 30,		December 31,
	2019		2018
Commitments to extend credit:
Variable rate	$	109,646	$	88,862
Fixed rate		68,830		54,434
Standby letters of credit - Variable rate		7,218		7,208
Credit card commitments - Fixed rate		5,592		5,107
	$	191,286	$	155,611

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.

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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 an 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 and Northeastern Wisconsin.  The Bank’s most prominent concentration in the loan portfolio relates to commercial real estate loans to operators of nonresidential buildings.  This concentration at June 30, 2019 represents $143.897 million, or 19.05%, compared to $150.251 million, or 20.95%, of the commercial loan portfolio on December 31, 2018.  The remainder of the commercial loan portfolio is diversified in such categories as hospitality and tourism, real estate agents and managers, new car dealers, gas stations and convenience stores, 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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15.  BUSINESS COMBINATIONS

First Federal of Northern Michigan Bancorp, Inc.

The Corporation completed its acquisition of First Federal of Northern Michigan Bancorp, Inc. in May 2018.  FFNM had seven branch offices, one of which was consolidated into an existing mBank branch shortly after consummation of the transaction.  Total assets of FFNM as of May 18, 2018 were $318 million, including total loans of $192 million. Deposits garnered in the acquisition, the majority of which were core deposits, totaled $254 million.  The results of operations due to the merger have been included in the Corporation’s results since the acquisition date.  As consideration in the acquisition, the Corporation issued 2,146,378 new shares, approximating $34.101 million.  The Corporation recorded deposit based intangibles of $2.894 million and goodwill of $12.278 million.  In the first quarter of 2019, the Corporation concluded the business combination and purchase accounting based on the final tax returns and deferred tax calculations of FFNM.  As a result, the purchase price allocation has been updated to reflect changes with an increase in the deferred tax asset of $1.950 million, an increase to the MSRs of $.500 million, and a decrease in goodwill of $2.450 million.

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

Purchase Price:
FFNM shares outstanding		3,726,925
Price per share	$	9.15
Total purchase price			$	34,101
Net assets acquired:
Cash and cash equivalents	$	13,267
Securities available for sale		96,297
FHLB Stock		1,748
Total loans		185,444
Premises and equipment		5,134
Other real estate owned		194
Deposit based intangible		2,894
Mortgage servicing rights		886
Deferred tax assets		4,794
Bank owned life insurance		5,170
Other assets		1,775
Total assets		317,603
Non-interest bearing deposits		60,616
Interest bearing deposits		193,099
Total deposits		253,715
FHLB borrowings		40,722
Deferred tax liability		133
Other liabilities		1,397
Total liabilities		295,967
Net assets acquired				21,636
Goodwill			$	12,465

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Lincoln Community Bank

On June 7, 2018 the Corporation announced the execution of a definitive agreement to acquire Lincoln Community Bank (“Lincoln”) located in Merrill, WI, for $8.50 million in cash, to further expand the Corporation’s market.  Lincoln operated two (2) banking centers, one in each of Merrill and Gleason, WI.  As of September 30, 2018, Lincoln had total assets in excess of $59 million, loans of approximately $39 million and deposits of $53 million.  The acquisition and subsequent merger of Lincoln into mBank occurred on October 1, 2018.  As part of the transaction, the Gleason location was closed at the end of 2018.  In the first quarter of 2019, the Corporation made adjustments to the business comniation and purchase accounting based on additional tax provision information.  As a result, the purchase price allocation has been updated to reflect changes with a decrease in the deferred tax liability of $.163 million and a decrease in goodwill of $.163 million.  The Corporation believes the majority of the business combination and purchase accounting activity is complete, however, there may be further minor adjustments in the normal course within the allotted GAAP adjustment period. 

Purchase Price:
Cash consideration	$	8,500
Net assets acquired:
Cash and cash equivalents	$	10,971
Securities available for sale		6,947
Total loans		38,001
Premises and equipment		1,249
Other real estate owned		69
Deposit based intangible		1,353
Bank owned life insurance		1,653
Other assets		339
Total assets		60,582
Non-interest bearing deposits		15,559
Interest bearing deposits		37,654
Total deposits		53,213
Deferred tax liability		68
Other liabilities		53
Total liabilities		53,334
Net assets acquired				7,248
Goodwill			$	1,252

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MACKINAC FINANCIAL CORPORATION

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 the Corporation 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.

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· We may not realize the expected benefits of our recent acquisitions of First Federal of Northern Michigan or Lincoln Community Bank.

· Our controls and procedures may fail or be circumvented.

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

In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some allowance requires management to evaluate all available evidence, both negative and positive.  Positive evidence necessary to overcome the negative evidence includes whether future taxable income in sufficient amounts and character within the carry back and carry forward periods is available under the tax law, including the use of tax planning strategies.  When negative evidence (e.g. cumulative losses, history of operating loss or tax credit carry forwards expiring unused) exists, more positive evidence than negative evidence will be necessary.  At June 30, 2019, net deferred tax assets were approximately $6.259 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 or 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.

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

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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.

The following discussion covers 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 may be non-GAAP disclosures presented within this discussion to further assist readers in their analysis of the financial condition of the Corporation.  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, 2018.  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 second quarter 2019 net income of $3.669 million, or $.34 per share, compared to net income of $.396 million, or $.05 per share for the second quarter of 2018. The 2018 results were impacted by expenses related to the FFNM acquisition.  Exclusion of these one-time costs resulted in adjusted net income, (a non-GAAP measure), for the second quarter of 2018 of $1.957 million, or $.25 per share.

Weighted average shares outstanding for the three month period in 2019 totaled 10,752,070, compared to 7,041,010  shares in the same period of 2018. 

The net interest income and net interest margin for the second quarter of 2019 was $13.997 million, or 4.76%, respectively, compared to $10.813 million, or 4.26%, respectively, for the second quarter of 2018.

Total assets of the Corporation at June 30, 2019 were $1.331 billion, up by $12.683 million, or 0.96%, from the $1.318 billion in total assets reported at year-end 2018.

FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents decreased $3.467 million during the first six months of 2019, compared to 2018 year end.  See further discussion of the change in cash and cash equivalents in the Liquidity section of this Quarterly Report on Form 10-Q.

Investment Securities

Securities available for sale decreased $6.400 million from December 31, 2018 to June 30, 2019, with the balance on June 30, 2019 totaling $110.348 million.  Investment securities are increased or decreased as appropriate as a result of managing interest rate risk and liquidity.  As of June 30, 2019, investment securities with an estimated fair value of $5.426 million were pledged against borrowings at the FHLB and certain customer relationships.

Loans

Through the first six months of 2019, loan balances increased by $21.839 million from December 31, 2018 balances of $1.039 billion.  This increase was partially offset by payoffs in the legacy portfolio.  During the first six months of 2019, the Bank had total loan production of $184.480 million, which included $28.775 million of secondary market loan production.  The increase in loan production, however, was partially offset by loan amortization and payoffs.

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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 to pursue loan growth within its markets for mortgage, consumer, and commercial loan products while concentrating on loan quality, industry concentration issues, and competitive pricing. The Corporation is highly competitive in structuring loans to meet borrowing needs, while maintaining strong underwriting requirements.

Following is a summary of the loan portfolio at June 30, 2019 and December 31, 2018 (dollars in thousands):

	June 30,		Percent of	December 31,		Percent of
	2019		Total	2018		Total
Commercial real estate	$	509,885	48.07%	$	496,207	47.76%
Commercial, financial, and agricultural		208,488	19.66		191,060	18.39
Commercial construction		36,803	3.47		29,765	2.87
One to four family residential real estate		273,813	25.81		286,908	27.62
Consumer		20,663	1.95		20,371	1.96
Consumer construction		11,051	1.04		14,553	1.40
Total loans	$	1,060,703	100.00%	$	1,038,864	100.00%

Following is a table showing the significant industry types in the commercial loan portfolio as of June 30, 2019 and December 31, 2018 (dollars in thousands). 

	June 30, 2019				December 31, 2018
	Outstanding		Percent of	Percent of	Outstanding		Percent of	Percent of
	Balance		Loans	Capital	Balance		Loans	Capital
Real estate - operators of nonresidential buildings		143,897	19.05%	91.17%		150,251	20.95%	98.80%
Hospitality and tourism		92,809	12.29	58.80		77,598	10.82	51.03
Lessors of residential buildings		49,489	6.55	31.35		50,204	7.00	33.01
Gasoline stations and convenience stores		26,974	3.57	17.09		24,189	3.37	15.91
Logging		21,666	2.87	13.73		20,860	2.91	13.72
Commercial construction		36,803	4.87	23.32		29,765	4.15	8.39
Other		383,538	50.80	242.99		364,165	50.80	250.66
Total Commercial Loans	$	755,176	100.00%		$	717,032	100.00%

Management recognizes that additional risks presented by concentration in certain segments of the portfolio.  Management does not believe that its current portfolio composition has increased such risk related to any specific industry concentration as of June 30, 2019.  The current concentration of commercial real estate-related loans represents a broad customer base composed of a high percentage of owner-occupied developments.  The company will, and has, slowed growth and origination of certain industry concentrations where internal limits have been reached.

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 June 30, 2019, our residential loan portfolio totaled $284.864 million, or 26.86%, of our total outstanding loans.

Due to the seasonal nature of many of the Corporation’s commercial loan customers, our loan payment terms provide flexibility by structuring payments to coincide with our customers’ business cycles.  The lending staff evaluates the collectability of past due loans based on documented collateral values and payment history.  The Corporation discontinues the accrual of interest on loans when, in the opinion of management, there is an indication that the borrower may be unable to meet the payments as they become due.  Upon such discontinuance, all unpaid accrued interest is reversed.  Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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Credit Quality

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

	June 30,		December 31,
	2019		2018
Nonperforming Assets:
Nonaccrual loans	$	4,673	$	5,054
Loans past due 90 days or more		—		23
Restructured loans on nonaccrual		—		—
Total nonperforming loans		4,673		5,077
Other real estate owned		2,125		3,119
Total nonperforming assets	$	6,798	$	8,196
Nonperforming loans as a % of loans		0.44%		0.49%
Nonperforming assets as a % of assets		0.51%		0.62%
Reserve for Loan Losses:
At period end	$	5,306	$	5,183
As a % of outstanding loans		.50%		.50%
As a % of nonperforming loans		113.55%		102.09%
As a % of nonaccrual loans		113.55%		102.55%
Texas Ratio		4.91%		6.33%

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

	At Period End
	June 30, 2019		December 31, 2018
Total loans, at period end	$	1,060,703		1,038,864
Average loans for the period	$	1,049,383	$	941,221
	For the Period Ended
	Six Months Ended		Twelve Months Ended
	June 30, 2019		December 31, 2018
Net charge-offs during the period	$	177		396
Net charge-offs to average loans, annualized	.03%		.04%

Management seeks 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 review of the loan portfolio.  The opinion of this consultant upon completion of the 2018 independent review provided findings similar to management with respect to credit quality.  In 2019, the Corporation will once again utilized a consultant for loan review.

As of June 30, 2019, the allowance for loan losses represented .50% of total loans.  At June 30, 2019, the allowance included specific reserves in the amount of $1.016 million, as compared to specific reserves of $.826 million at December 31, 2018.  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. Purchased impaired credits do not have an effect on the allowance for loan losses, in accordance with ASC 310-30.

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.

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

	Six Months Ended		Year Ended
	June 30, 2019		December 31, 2018
Balance at beginning of period	$	3,119	$	3,558
Other real estate transferred from loans due to foreclosure		825		1,878
Other real estate acquired in business combinations		—		263
Proceeds from sale of other real estate		(705)		(2,398)
Transfer to premise and equipment		(1,013)		—
Writedowns on other real estate held for sale		(54)		(125)
Loss on other real estate held for sale		(47)		(57)
Balance at end of period	$	2,125	$	3,119

During the first six months of 2019, the Corporation received real estate in lieu of loan payments of $.825 million.  In determining the carrying value of other real estate held for sale, the Corporation generally starts with a third party appraisal of the underlying collateral and then deducts estimated selling costs to arrive at a net asset value. After the initial receipt, management periodically re-evaluates the recorded balances and records any additional reductions in the fair value as a write-down of other real estate held for sale.

Deposits

The Corporation had an increase in deposits in the first six months of 2019.  Total deposits decreased by $17.316 million, or 1.58%, in the first six months of 2019.  The increase in deposits for the first six months of 2019 is composed of a increase in core deposits of $42.076 million and a decrease in noncore deposits of $24.760 million.  Management 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, both as to terms and pricing, which will remain important as we move through the current rate cycle to protect our margin.  This focus on deposits has become especially important with changing client banking habits and demographics, as well as customer desire for more electronic and mobile based banking products and services.  It is the intent of management to focus on growing core deposit levels, as the comparatively inexpensive deposits, in relation to wholesale deposit sources, will continue to prove valuable as rates continue to increase.

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

	June 30,			December 31,
	2019		% of Total	2018		% of Total
Noninterest bearing	$	276,776	24.83%	$	241,556	22.01%
NOW, money market, checking		344,213	30.88		368,890	33.61%
Savings		111,438	10.00		111,358	10.15%
Certificates of Deposit <$250,000		256,689	23.02		225,236	20.52%
Total core deposits		989,116	88.72		947,040	86.29%
Certificates of Deposit >$250,000		11,640	1.04		13,737	1.25%
Brokered CDs		114,097	10.23		136,760	12.46%
Total non-core deposits		125,737	11.28		150,497	13.71%
Total deposits	$	1,114,853	100.00%	$	1,097,537	100.00%

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Borrowings

The Corporation also utilizes FHLB borrowings as a source of funding.  At June 30, 2019, this source of funding totaled $46 million and the Corporation secured this funding by pledging loans and investments.  The $46 million of FHLB borrowings have a weighted average maturity of 2.98 years and a weighted average interest rate of 1.73% at June 30, 2019.  The Corporation also has a USDA Rural Development loan held by its wholly owned subsidiary, First Rural Relending, that has an outstanding balance of $.480 million, with a fixed interest rate of 1% that matures in August 2024.

The Corporation currently has one correspondent banking borrowing relationship.  The relationship consists of a $15.0 million revolving line of credit, which had no outstanding balance at June 30, 2019.  The line of credit bears an interest rate of 90-day LIBOR plus 2.00%, with a floor rate of 2.00% and a ceiling of 22%.  The line of credit expires on April 30, 2020.  LIBOR at June 30, 2019 was 2.32%.  The Corporation previously had a term note as part of this relationship that was paid in full during the second quarter of 2018. This relationship is secured by all of the outstanding mBank stock.  

Shareholders’ Equity

Total shareholders’ equity increased $5.771 million from December 31, 2018 to June 30, 2019.  Contributing to the increase in shareholders’ equity was net income of $6.836 million, offset by a reduction for cash dividends on common stock of $2.568 million,  an increase due to stock compensation of $.196 million, and an increase in the market value of securities of $1.307 million.

RESULTS OF OPERATIONS

Summary

The Corporation recorded net income of $6.836 million, or $.64 per share for the first six months of 2019, compared to net income of $1.933 million, or $.27 per share for the first six months of 2018.  The 2018 results were impacted by expenses related to the FFNM acquisition.  Exclusion of these costs resulted in adjusted net income, (a non-GAAP measure), for the first six months of 2018 of $3.694 million, or $.50 per share.

The Corporation recorded second quarter 2019 net income of $3.669 million, or $.34 per share, compared to net income of $.396 million or $.05 per share for the second quarter of 2018.  The 2018 results were impacted by expenses related to the FFNM acquisition.  Exclusion of these costs resulted in adjusted net income, (a non-GAAP measure), for the second quarter of 2018 of $1.957 million, or $.25 per share.

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.  Net interest income is impacted by economic and competitive factors that influence rates, loan demand, and the availability of funding.

Net interest income and net interest margin on a fully taxable equivalent basis amounted to $27.374 million, 4.68% of average earning assets, respectively in the first six months of 2019, compared to $20.226 million, 4.25% of average earning assets, respectively in the first six months of 2018. 

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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
													2019-2018
	Average Balances						Average Rates		Interest				Income/						Rate/
	June 30,				Increase/		June 30,		June 30,				Expense		Volume		Rate		Volume
(dollars in thousands)	2019		2018		(Decrease)		2019	2018	2019		2018		Variance		Variance		Variance		Variance
Loans (1,2,3)	$	1,051,998	$	905,802	$	146,196	5.98%	5.37%	$	15,678	$	12,136	$	3,542	$	1,959	$	1,363	$	220
Taxable securities		94,634		77,080		17,554	2.88	2.91		680		560		120		128		(6)		(2)
Nontaxable securities (2)		14,772		19,157		(4,385)	2.77	2.09		102		100		2		(23)		33		(8)
Federal funds sold		674		70		604	2.57	0.10		4		—		4		—		—		4
Other interest-earning assets		17,505		16,481		1,024	8.30	4.77		362		196		166		12		145		9
Total earning assets		1,179,583		1,018,590		160,993	5.72	5.12		16,826		12,992		3,834		2,076		1,535		223
Reserve for loan losses		(5,250)		(5,933)		683
Cash and due from banks		65,446		51,033		14,413
Fixed Assets		23,340		18,880		4,460
Other Real Estate		2,073		2,187		(114)
Other assets		61,335		32,431		28,904
Total assets	$	1,326,527	$	1,117,188	$	209,339
NOW and money market deposits	$	237,730	$	221,320	$	16,410	.55	.36	$	324	$	199	$	125	$	15	$	103	$	7
Interest checking		110,175		71,658		38,517	.18	.14		49		25		24		13		7		4
Savings deposits		110,979		83,858		27,121	.56	.06		155		13		142		4		104		34
Certificates of deposit		265,667		172,853		92,814	1.92	1.18		1,275		507		768		272		323		173
Brokered deposits		118,422		183,361		(64,939)	2.41	1.88		712		858		(146)		(303)		244		(87)
Borrowings		51,422		100,935		(49,513)	1.94	2.08		248		523		(275)		(257)		(36)		18
Total interest-bearing liabilities		894,395		833,985		60,410	1.24	1.02		2,763		2,125		638		(256)		745		149
Demand deposits		260,441		180,171		80,270
Other liabilities		15,200		2,514		12,686
Shareholders’ equity		156,491		100,518		55,973
Total liabilities and shareholders’ equity	$	1,326,527	$	1,117,188	$	209,339
Rate spread							4.48%	4.09%
Net interest margin/revenue							4.78%	4.28%	$	14,063	$	10,867	$	3,196	$	2,332	$	790	$	74

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	Six Months Ended
													2019-2018
	Average Balances						Average Rates		Interest				Income/						Rate/
	June 30,				Increase/		June 30,		June 30,				Expense		Volume		Rate		Volume
(dollars in thousands)	2019		2018		(Decrease)		2019	2018	2019		2018		Variance		Variance		Variance		Variance
Loans (1,2,3)	$	1,049,384	$	858,508	$	190,876	5.83%	5.30%	$	30,362	$	22,582	$	7,780	$	5,021	$	2,257	$	502
Taxable securities		96,294		70,759		25,535	2.90	2.66		1,383		932		451		336		84		31
Nontaxable securities (2)		15,891		14,915		976	2.94	2.53		232		187		45		12		31		2
Federal funds sold		891		41		850	2.55	0.17		11		—		11		1		—		10
Other interest-earning assets		17,822		16,125		1,697	8.38	4.95		741		396		345		42		274		29
Total earning assets		1,180,282		960,348		219,934	5.59	5.06		32,729		24,097		8,632		5,412		2,646		574
Reserve for loan losses		(5,216)		(5,505)		289
Cash and due from banks		62,608		44,176		18,432
Fixed Assets		23,011		17,797		5,214
Other Real Estate		2,436		2,656		(220)
Other assets		60,200		30,833		29,367
Total assets	$	1,323,321	$	1,050,305	$	273,016
NOW and money market deposits	$	250,387	$	212,953	$	37,434	.56	0.38	$	694	$	400	$	294	$	70	$	190	$	34
Interest checking		111,910		69,625		42,285	.19	0.14		105		50		55		30		16		9
Savings deposits		110,447		72,813		37,634	.41	0.06		226		23		203		12		126		65
Certificates of deposit		258,139		161,415		96,724	1.85	1.15		2,362		917		1,445		549		560		336
Brokered deposits		123,240		181,113		(57,873)	2.42	1.61		1,482		1,448		34		(463)		730		(233)
Borrowings		52,318		95,586		(43,268)	1.87	2.18		486		1,033		(547)		(468)		(145)		66
Total interest-bearing liabilities		906,441		793,505		112,936	1.19	0.98		5,355		3,871		1,484		(270)		1,477		277
Demand deposits		247,913		161,536		86,377
Other liabilities		13,869		4,006		9,863
Shareholders’ equity		155,098		91,258		63,840
Total liabilities and shareholders’ equity	$	1,323,321	$	1,050,305	$	273,016
Rate spread							4.40%	4.08%
Net interest margin/revenue							4.68%	4.25%	$	27,374	$	20,226	$	7,148	$	5,682	$	1,169	$	297

(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 21% tax rate.

(3) Interest income on loans includes fees.

The Corporation continues to reprice 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 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 six months of 2019, the Corporation recorded a loan loss provision of $300,000, compared to $150,000 in the first six months of 2018.  There were net charge-offs of $177,000 in the first six months of 2019, compared to net charge-offs of $88,000 for the same period in 2018.  There was no provision for loan losses for acquired loans as a result of acquisition fair value adjustments.

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Other Income

Other income was $2.227 million in the first six months of 2019, compared to $1.477 million in the same period in 2018.  The increase year over year was largely a result of increased income from deposit service fees, including the impact of the FFNM and LCB acquisitions.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 six months ended June 30, 2019 and 2018 (dollars in thousands):

	Three Months Ended							Six Months Ended
	June 30,							June 30,
					Increase/(Decrease)							Increase/(Decrease)
	2019		2018		Dollars		Percent	2019		2018		Dollars		Percent
Deposit service fees	$	408	$	323	$	85	26.32%	$	814	$	592	$	222	37.50%
Income from loans sold in the secondary market		355		277		78	28.16		667		454		213	46.92
SBA/USDA loan sale gains		29		83		(54)	(65.06)		154		134		20	14.93
Net mortgage servicing (amortization) income		128		(2)		130	N/A		248		(10)		258	N/A
Other noninterest income		190		182		8	4.40		344		307		37	12.05
Total other income	$	1,110	$	863	$	247	28.62%	$	2,227	$	1,477	$	750	50.78%

Other Expense

For the first six months of 2019, the Corporation recorded other expenses of $20.507 million, compared to $19.005 million in 2018, an increase of $1.502 million.  The increase in salaries and benefits and other customary operating expenses were related to our efforts to ensure our platform infrastructure keeps pace with our growing asset base and the associated regulatory and risk management needs.

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The following table details other expense for the three and six months ended June 30, 2019 and 2018 (dollars in thousands):

	Three Months Ended							Six Months Ended
	June 30,							June 30,
					Increase/(Decrease)							Increase/(Decrease)
	2019		2018		Dollars		Percentage	2019		2018		Dollars		Percentage
Salaries and employee benefits	$	5,511	$	4,923	$	588	11.94%	$	10,946	$	9,077	$	1,869	20.59%
Occupancy		1,004		928		76	8.19		2,085		1,739		346	19.90
Furniture and equipment		723		644		79	12.27		1,441		1,175		266	22.64
Data processing		708		586		122	20.82		1,417		1,090		327	30.00
Advertising		214		192		22	11.46		523		387		136	35.14
Professional service fees		547		397		150	37.78		981		701		280	39.94
Loan origination expenses and deposit and card related fees		184		148		36	24.32		363		274		89	32.48
Writedowns and losses on other real estate held for sale		73		40		33	82.50		101		66		35	53.03
FDIC insurance assessment		77		187		(110)	(58.82)		211		343		(132)	(38.48)
Communications		232		152		80	52.63		460		307		153	49.84
Transaction related expenses		—		1,976		(1,976)	N/A		—		2,165		(2,165)	N/A
Other		990		904		86	9.51		1,979		1,681		298	17.73
Total other expense	$	10,263	$	11,077	$	(814)	-7.35%	$	20,507	$	19,005	$	1,502	7.90%

Federal Income Taxes

The Corporation recognized a federal income tax expense for the six months ended June 30, 2019 of $1.817 million, compared to $.511 million a year earlier.

The Corporation has reported deferred tax assets of $4.609 million at June 30, 2019.    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 June 30, 2019 had a net operating loss and tax credit carryforwards for tax purposes of approximately $12.5 million, and $1.7 million, respectively. The Corporation evaluated the future benefits from these carryforwards as of December 31, 2018 and determined that is 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 $2.0 million for the NOL and the equivalent value of tax credits, which is approximately $.420 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

We define liquidity 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 making payments on any 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, FHLB borrowings and brokered deposits.  As a final source of liquidity, the Bank can exercise existing credit arrangements.

Current balance sheet liquidity consists of $60.690 million in cash and cash equivalents and $104.922 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 six months of 2019, the Corporation decreased cash and cash equivalents by $3.467 million.  The management of bank liquidity for funding of loans and deposit maturities and withdrawals includes monitoring projected

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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. During the first six months of 2019, the Bank paid no dividends to the Corporation. Bank capital remains strong and above the “well-capitalized” level for regulatory purposes as of June 30, 2019. The Corporation also has a line of credit with a correspondent bank that had borrowing availability at June 30, 2019 of $15 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.” The Corporation will continue to explore opportunities for longer term sources of liquidity and permanent equity to support projected asset growth.

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, Farmers’ Home Administration and other borrowings.  At June 30, 2019, the Bank’s core deposits in relation to total funding were 85.19% compared to 81.78% at December 31, 2018.  These ratios indicate that at June 30, 2019, that the Bank had decreased its reliance on noncore deposits and borrowings to fund the Bank’s long-term assets, namely loans and investments.  This was in large part due to the core deposits garnered in the FFNM transaction. 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 June 30, 2019, the Bank had $76 million of unsecured lines available and additional funding sources available if secured.  The Bank believes that its liquidity position remains strong to meet both present and future financial obligations and commitments, events or uncertainties that have resulted or are reasonably likely to result in material changes with respect to the Bank’s liquidity.

From a long-term perspective, the Corporation’s strategy is to increase core deposits in the Corporation’s local markets.  Management continually evaluates deposit products it offers 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.

REGULATORY CAPITAL

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, Tier 1 capital and Common Equity Tier 1 Capital to risk-weighted assets and of Tier 1 capital to average assets.  Management has determined that, as of June 30, 2019, the Corporation is well-capitalized.

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 June 30, 2019 are as follows (dollars in thousands):

	Actual				Adequacy Purposes					Well-Capitalized
	Amount		Ratio		Amount			Ratio		Amount			Ratio
Total capital to risk weighted assets:
Consolidated	$	131,439	12.7%	>	$	82,686	>	8.0%	>	$	N/A	>	N/A
mBank	$	131,687	12.7%	>	$	82,668	>	8.0%	>	$	103,336	>	10.0%
Tier 1 capital to risk weighted assets:
Consolidated	$	126,133	12.2%	>	$	62,015	>	6.0%	>	$	N/A	>	N/A
mBank	$	126,422	12.2%	>	$	62,001	>	6.0%	>	$	82,668	>	8.0%
Common equity Tier 1 capital to risk weighted assets
Consolidated	$	126,133	12.2%	>	$	46,511	>	4.5%	>	$	N/A	>	N/A
mBank	$	126,422	12.2%	>	$	46,501	>	4.5%	>	$	67,168	>	6.5%
Tier 1 capital to average assets:
Consolidated	$	126,133	9.7%	>	$	51,803	>	4.0%	>	$	N/A	>	N/A
mBank	$	126,422	9.8%	>	$	51,807	>	4.0%	>	$	64,759	>	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 Corporation’s 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 its fixed rate loans so it has an opportunity to reprice the loan within 12 to 60 months.

As of June 30, 2019, the Corporation had established interest rate floors on approximately $121.252 million of its variable rate commercial loans.  Historically these interest rate floors would result in a “lag” on the repricing of these variable rate loans when and if interest rates increased in future periods.  However, the majority of these loans have surpassed their floors and will now reprice with each interest rate move.

The Corporation also has $110.348 million of securities providing for scheduled monthly principal and interest payments as well as unanticipated prepayments of principal as of June 30, 2019.  These cash flows are then reinvested into other earning assets at current market rates.  The Corporation also has federal funds sold to correspondent banks as well as other interest-bearing deposits with correspondent banks.  These funds are generally repriced on a daily basis.

The Corporation offers deposit products with 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.

Management can mitigate interest rate risk by managing the maturity periods of securities purchased, selling securities available for sale, and borrowing funds with targeted maturity periods, among other strategies.  Also, the rate of interest rate changes can impact the actions taken since the rate environment affects borrowers and depositors differently.

Exposure to interest rate risk is reviewed on a regular basis.  Interest rate risk is the potential of economic losses due to future interest rate changes.  These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values.  The objective is to measure the effect of interest rate changes on net interest income and to structure the composition of the balance sheet to minimize interest rate risk and at the same time maximize income. 

Management realizes certain interest rate risks are inherent in the business of banking 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 regular 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.

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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 June 30, 2019 (dollars in thousands):

	1-90		91-365		>1-5		Over 5
	Days		Days		Years		Years		Total
Interest-earning assets:
Loans	$	278,211		348,638		408,647		25,207	$	1,060,703
Securities		3,691		19,423		68,037		19,197		110,348
Other (1)		6,114		3,444		7,339		492		17,389
Total interest-earning assets		288,016		371,505		484,023		44,896		1,188,440
Interest-bearing obligations:
NOW, money market, savings and interest checking		455,651		—		—		—		455,651
Time deposits		34,586		105,879		127,206		658		268,329
Brokered CDs		35,597		78,500		—		—		114,097
Borrowings		425		16,376		26,431		3,000		46,232
Total interest-bearing obligations		526,259		200,755		153,637		3,658		884,309
Gap	$	(238,243)	$	170,750	$	330,386	$	41,238	$	304,131
Cumulative gap	$	(238,243)	$	(67,493)	$	262,893	$	304,131

(1) Includes Federal Home Loan Bank Stock.

The above analysis indicates that at June 30, 2019, the Corporation had a cumulative liability sensitivity gap position of $67.493 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, 2018, the Corporation had a cumulative liability sensitivity gap position of $119.352 million within the one-year time frame.

The borrowings in the gap analysis include $46 million of FHLB advances that have a weighted average maturity of 2.98 years and a weighted average rate of 1.73%.

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

44

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 has decided to curtail its foreign exchange services for customers, and accordingly, management believes the exposure to short-term foreign exchange risk is minimal.

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.

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MACKINAC FINANCIAL CORPORATION

ITEM 4  CONTROLS AND PROCEDURES

As of June 30, 2019, 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 June 30, 2019.

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 June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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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. Although the results of litigation and claims cannot be predicted, management believes there are no legal proceedings, the outcome of which, if determined adversely to the Corporation, would individually or in the aggregate be reasonably expected to have a material adverse effect on the Corporation’s results of operations.

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 share repurchases previously disclosed in prior periods 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. As of June 30, 2019 there remains $25,335 to be utilized under the current authorizations. There were no purchases during the first six months of 2019.

Item 6.  Exhibits

(a)	Exhibits:
	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.

47

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:     August 9, 2019	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)

48

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:     August 9, 2019	/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:     August 9, 2019	/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 June 30, 2019, (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:     August 9, 2019

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 June 30, 2019, (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:     August 9, 2019

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2019	Aug. 08, 2019
Document and Entity Information
Document Type	10-Q
Document Period End Date	Jun. 30, 2019
Entity Registrant Name	MACKINAC FINANCIAL CORP /MI/
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		10,740,712
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q2
Entity Central Index Key	0000036506
Amendment Flag	false

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
ASSETS
Cash and due from banks	$ 60,680	$ 64,151
Federal funds sold	10	6
Cash and cash equivalents	60,690	64,157
Interest-bearing deposits in other financial institutions	12,465	13,452
Securities available for sale	110,348	116,748
Federal Home Loan Bank stock	4,924	4,924
Loans:
Commercial	755,176	717,032
Mortgage	284,864	301,461
Consumer	20,663	20,371
Total Loans	1,060,703	1,038,864
Allowance for loan losses	(5,306)	(5,183)
Net loans	1,055,397	1,033,681
Premises and equipment	23,166	22,783
Other real estate held for sale	2,125	3,119
Deferred tax asset	4,609	5,763
Deposit based intangibles	5,380	5,720
Goodwill	19,574	22,024
Other assets	32,045	25,669
TOTAL ASSETS	1,330,723	1,318,040
Deposits:
Noninterest bearing deposits	276,776	241,556
NOW, money market, interest checking	344,213	368,890
Savings	111,438	111,358
CDs less than $250,000	256,689	225,236
CDs more than $250,000	11,640	13,737
Brokered	114,097	136,760
Total deposits	1,114,853	1,097,537
Federal funds purchased		2,905
Borrowings	46,232	57,536
Other liabilities	11,798	7,993
Total liabilities	1,172,883	1,165,971
SHAREHOLDERS’ EQUITY:
Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares Issued and outstanding - 10,740,712 and 10,712,745 respectively	129,262	129,066
Retained earnings	27,734	23,466
Accumulated other comprehensive income (loss)
Unrealized gains (losses) on available for sale securities	1,062	(245)
Minimum pension liability	(218)	(218)
Total shareholders’ equity	157,840	152,069
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 1,330,723	$ 1,318,040

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Jun. 30, 2019	Dec. 31, 2018
CONDENSED CONSOLIDATED BALANCE SHEETS
Common stock, par value	$ 0	$ 0
Common stock, Authorized shares	18,000,000	18,000,000
Common stock, Shares issued	10,740,712	10,712,745
Common stock, Shares outstanding	10,740,712	10,712,745

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Interest and fees on loans:
Taxable	$ 15,586	$ 12,071	$ 30,181	$ 22,461
Tax-exempt	42	31	89	56
Interest on securities:
Taxable	680	560	1,383	932
Tax-exempt	85	79	183	148
Other interest income	367	197	752	396
Total interest income	16,760	12,938	32,588	23,993
INTEREST EXPENSE:
Deposits	2,515	1,602	4,869	2,838
Borrowings	248	523	486	1,033
Total interest expense	2,763	2,125	5,355	3,871
Net interest income	13,997	10,813	27,233	20,122
Provision for loan losses	200	100	300	150
Net interest income after provision for loan losses	13,797	10,713	26,933	19,972
OTHER INCOME:
Deposit service fees	408	323	814	592
Income from mortgage loans sold on the secondary market	355	277	667	454
SBA/USDA loan sale gains	29	83	154	134
Net mortgage servicing fees (amortization)	128	(2)	248	(10)
Other	190	182	344	307
Total other income	1,110	863	2,227	1,477
OTHER EXPENSE:
Salaries and employee benefits	5,511	4,923	10,946	9,077
Occupancy	1,004	928	2,085	1,739
Furniture and equipment	723	644	1,441	1,175
Data processing	708	586	1,417	1,090
Advertising	214	192	523	387
Professional service fees	547	397	981	701
Loan origination expenses and deposit and card related fees	184	148	363	274
Writedowns and losses on other real estate held for sale	73	40	101	66
FDIC insurance assessment	77	187	211	343
Communications	232	152	460	307
Transaction related expenses		1,976		2,165
Other	990	904	1,979	1,681
Total other expenses	10,263	11,077	20,507	19,005
Income before provision for income taxes	4,644	499	8,653	2,444
Provision for income taxes	975	103	1,817	511
NET INCOME	$ 3,669	$ 396	$ 6,836	$ 1,933
INCOME PER COMMON SHARE:
Basic (in dollars per share)	$ 0.34	$ 0.05	$ 0.64	$ 0.27
Diluted (in dollars per share)	$ 0.34	$ 0.05	$ 0.64	$ 0.27

XML

CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME
Net income	$ 3,669	$ 396	$ 6,836	$ 1,933
Other comprehensive income
Unrealized gains arising during the period	822	1,392	1,795	857
Tax effect	(173)	(291)	(488)	(180)
Net change in unrealized gains on available for sale securities	649	1,101	1,307	677
Total comprehensive income	$ 4,318	$ 1,497	$ 8,143	$ 2,610

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 Other Comprehensive Income (Loss)	Total
Balance, beginning of period at Dec. 31, 2017		$ 61,981	$ 19,711	$ (292)	$ 81,400
Balance (in shares) at Dec. 31, 2017	6,294,930
Increase (Decrease) in Shareholders' Equity
Net income for period			1,933		1,933
Other comprehensive income
Net unrealized gain on securities available for sale				677	677
Total comprehensive income			1,933	677	2,610
Stock compensation		274			274
Restricted stock award vesting (in shares)	45,630
FFNM acquisition		34,101			34,101
FFNM acquisition (in shares)	2,146,378
Capital raise, net of offering costs		32,524			32,524
Capital raise, net of offering costs (in shares)	2,225,807
Dividend on common stock			(2,042)		(2,042)
Balance, end of period at Jun. 30, 2018		128,880	19,602	385	148,867
Balance (in shares) at Jun. 30, 2018	10,712,745
Balance, beginning of period at Mar. 31, 2018		62,080	20,493	(716)	81,857
Balance (in shares) at Mar. 31, 2018	6,332,560
Increase (Decrease) in Shareholders' Equity
Net income for period			396		396
Other comprehensive income
Net unrealized gain on securities available for sale				1,101	1,101
Total comprehensive income			396	1,101	1,497
Stock compensation		175			175
Restricted stock award vesting (in shares)	8,000
FFNM acquisition		34,101			34,101
FFNM acquisition (in shares)	2,146,378
Capital raise, net of offering costs		32,524			32,524
Capital raise, net of offering costs (in shares)	2,225,807
Dividend on common stock			(1,287)		(1,287)
Balance, end of period at Jun. 30, 2018		128,880	19,602	385	148,867
Balance (in shares) at Jun. 30, 2018	10,712,745
Balance, beginning of period at Dec. 31, 2018		129,066	23,466	(463)	152,069
Balance (in shares) at Dec. 31, 2018	10,712,745
Increase (Decrease) in Shareholders' Equity
Net income for period			6,836		6,836
Other comprehensive income
Net unrealized gain on securities available for sale				1,307	1,307
Total comprehensive income			6,836	1,307	8,143
Stock compensation		196			196
Restricted stock award vesting (in shares)	27,967
Dividend on common stock			(2,568)		(2,568)
Balance, end of period at Jun. 30, 2019		129,262	27,734	844	157,840
Balance (in shares) at Jun. 30, 2019	10,740,712
Balance, beginning of period at Mar. 31, 2019		129,204	25,347	195	154,746
Balance (in shares) at Mar. 31, 2019	10,740,712
Increase (Decrease) in Shareholders' Equity
Net income for period			3,669		3,669
Other comprehensive income
Net unrealized gain on securities available for sale				649	649
Total comprehensive income			3,669	649	4,318
Stock compensation		58			58
Dividend on common stock			(1,282)		(1,282)
Balance, end of period at Jun. 30, 2019		$ 129,262	$ 27,734	$ 844	$ 157,840
Balance (in shares) at Jun. 30, 2019	10,740,712

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
Cash Flows from Operating Activities:
Net income	$ 6,836	$ 1,933
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,255	1,298
Provision for loan losses	300	150
Deferred tax expense, net	590	511
Gain on sale of loans sold in the secondary market	(547)	(454)
Origination of loans held for sale in the secondary market	(28,775)	(20,613)
Proceeds from sale of loans in the secondary market	29,322	21,067
Loss on sale of other real estate held for sale	47	19
Writedown of other real estate held for sale		47
Stock compensation	196	274
Change in other assets	(709)	1,191
Change in other liabilities	3,805	34
Net cash provided by operating activities	12,320	5,457
Cash Flows from Investing Activities:
Net increase in loans	(25,518)	(7,343)
Net decrease in interest bearing deposits in other financial institutions	987	2,501
Purchase of securities available for sale	(7,776)	(1,063)
Proceeds from maturities, sales, calls or paydowns of securities available for sale	16,058	58,760
Capital expenditures	(713)	(1,484)
Acquisition of FFNM		13,267
Proceeds from sale of other real estate, premises and fixed assets	636	1,624
Net cash (used in) provided by investing activities	(16,326)	66,262
Cash Flows from Financing Activities:
Net increase (decrease) in deposits	17,316	(56,212)
Net activity on line of credit		(1,000)
Net (decrease) increase in fed funds purchased	(2,905)	10,000
Principal payments on borrowings	(11,304)	(27,527)
Proceeds of common stock offering, net of offering costs		32,524
Dividend on common stock	(2,568)	(2,041)
Net cash provided by (used in) financing activities	539	(44,256)
Net (decrease) increase in cash and cash equivalents	(3,467)	27,463
Cash and cash equivalents at beginning of period	64,157	37,426
Cash and cash equivalents at end of period	60,690	64,889
Cash paid during the year for:
Interest	5,102	3,777
Income taxes	1,500	625
Noncash Investing and Financing Activities:
Transfers of Foreclosures from Loans to Other Real Estate Held for Sale	825	$ 400
Transfers of Other Real Estate Held for Sale to Fixed Assets	$ 1,013

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2019

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 six month period ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.  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, 2018.

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 were unchanged by 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, the assessment of goodwill for impairment, and the fair value of assets and liabilities acquired in business combinations.

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.  We evaluate at each balance sheet date whether it is probable that we will be unable to collect all cash flows expected at acquisition and if so, recognize a provision for loan loss in our consolidated statement of operations. 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 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 also has an unallocated 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 probable loan losses.  Management periodically evaluates the adequacy of the allowance using the Corporation’s past loan loss experience, known and inherent risks in the portfolio, composition of the portfolio, current economic conditions, and other factors.  The allowance does not include the effects of expected losses related to future events or future changes in economic conditions.  This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change.  Loans are charged against the allowance for loan losses when management believes the collectability of the principal is unlikely.  In addition, various regulatory agencies periodically review the allowance for loan losses.  These agencies may require additions to the allowance for loan losses based on their judgments of collectability.

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

Stock Compensation Plans

On May 22, 2012, the 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 awards (“RSAs”), stock grants, or stock appreciation rights.  The aggregate number of shares of the Corporation’s common stock issuable under the plan is 575,000. At June 30, 2019 there were 216,310 shares available for issuance under this plan. Awards are made to certain other senior officers at the discretion of the Corporation’s management.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

XML

RECENT ACCOUNTING PRONOUNCEMENTS

6 Months Ended

Jun. 30, 2019

RECENT ACCOUNTING PRONOUNCEMENTS

RECENT ACCOUNTING PRONOUNCEMENTS

2.RECENT ACCOUNTING PRONOUNCEMENTS

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 was adopted January 1, 2019, and accordingly an asset and liability of $4.502 million were recognized.  The asset is included in other assets and the liability is included within other liabilities.

In September 2016, 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 SEC registrants 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.  The Corporation has formed a cross-functional implementation team consisting of individuals from finance, credit and information systems.  A project plan and timeline has been developed and the implementation team meets regularly to assess the project status to ensure adherence to the timeline.  The implementation team has also been working with a software vendor to assist in implementing required changes to credit loss estimation models and proceses, and is finalizing the historical data collected to be utilized in the credit loss models.  The Corporation expects to recognize a cumulative effect adjustment to the opening balance of retained earnings as of the beginning of the first reporting period in which ASU 2016-13 is effective.  The Corporation has not yet determined the magnitude of any such one-time adjustment or ther potential impact of ASU 2016-13 on its condensed consolidated financial statements.  On July 17, 2019 the Financial Accounting Standards Board (FASB) voted to recommend the delay CECL implementation for smaller reporting companies and private companies to annual periods beginning after December 15, 2022. 

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EARNINGS PER SHARE

6 Months Ended

Jun. 30, 2019

EARNINGS PER SHARE

EARNINGS PER SHARE

3.EARNINGS PER SHARE

Diluted earnings per share, which reflects the potential dilution that could occur if 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 six months ended June 30, 2019 and 2018 (dollars in thousands, except per share data):

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
(Numerator):
Net income	$	3,669	$	396	$	6,836	$	1,933
(Denominator):
Weighted average shares outstanding		10,740,712		7,769,720		10,730,477		7,041,010
Effect of restricted stock awards		11,358		39,298		8,994		33,622
Diluted weighted average shares outstanding		10,752,070		7,809,018		10,739,471		7,074,632
Income per common share:
Basic	$	0.34	$	0.05	$	0.64	$	0.27
Diluted	$	0.34	$	0.05	$	0.64	$	0.27

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INVESTMENT SECURITIES

6 Months Ended

Jun. 30, 2019

INVESTMENT SECURITIES

INVESTMENT SECURITIES

4.INVESTMENT SECURITIES

At June 30, 2019 the Corporation had an investment security portfolio totaling $110.348 million, a decrease of $6.400 million from the December 31, 2018 balance of $116.748 million. The amortized cost and estimated fair value of investment securities available for sale as of June 30, 2019 and December 31, 2018 are as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
June 30, 2019
Corporate	$	15,452	$	48	$	(22)	$	15,478
US Agencies		22,067		134		(7)		22,194
US Agencies - MBS		29,114		498		(38)		29,574
Obligations of states and political subdivisions		42,371		860		(129)		43,102
Total securities available for sale	$	109,004	$	1,540	$	(196)	$	110,348
December 31, 2018
Corporate	$	20,198	$	24	$	(158)	$	20,064
US Agencies		16,198		5		(233)		15,970
US Agencies - MBS		32,974		124		(258)		32,840
Obligations of states and political subdivisions		47,828		341		(295)		47,874
Total securities available for sale	$	117,198	$	494	$	(944)	$	116,748

The following table presents the amortized cost and estimated fair value of investment securities by contractual maturity as of June 30, 2019 and December 31, 2018 (dollars in thousands):

	June 30, 2019				December 31, 2018
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Available -for-sale securities
Under 1 year	$	16,553	$	16,563	$	13,728	$	13,583
After 1 year through five years		49,310		49,954		54,563		54,382
After 5 years through 10 years		11,838		12,049		13,058		13,085
After 10 years		2,038		2,056		2,875		2,858
Subtotal		79,739		80,622		84,224		83,908
US Agencies - MBS		29,265		29,726		32,974		32,840
Total available -for-sale securities	$	109,004	$	110,348	$	117,198	$	116,748

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 $5.411 million and $5.426 million, respectively, at June 30, 2019.

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LOANS

6 Months Ended

Jun. 30, 2019

LOANS

LOANS

5.LOANS

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

	June 30,		December 31,
	2019		2018
Commercial real estate	$	509,885	$	496,207
Commercial, financial, and agricultural		208,488		191,060
Commercial construction		36,803		29,765
One to four family residential real estate		273,813		286,908
Consumer		20,663		20,371
Consumer construction		11,051		14,553
Total loans	$	1,060,703	$	1,038,864

The Corporation completed the acquisition of Peninsula Financial Corporation (“PFC”) on December 5, 2014, The First National Bank of Eagle River (“Eagle River”) on April 29, 2016, Niagara Bancorporation (“Niagara”) on August 31, 2016, First Federal of Northern Michigan Bancorp (“FFNM”) on May 18, 2018 and Lincoln Community Bank (“Lincoln”) on October 1, 2018.  The PFC acquired impaired loans totaled $13.290 million, the Eagle River acquired impaired loans totaled $3.401 million, the Niagara acquired impaired loans totaled $2.105 million, the FFNM acquired impaired loans totaled $5.440 million, and the Lincoln acquired impaired loans totaled $1.901 million.

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 River 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	$	80,737	$	84,138
Nonaccretable difference		(1,172)		—		(1,172)
Expected cash flows		2,229		80,737		82,966
Accretable yield		(391)		(1,700)		(2,091)
Carrying balance at acquisition date	$	1,838	$	79,037	$	80,875

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	$	30,555	$	32,660
Nonaccretable difference		(265)		—		(265)
Expected cash flows		1,840		30,555		32,395
Accretable yield		(88)		(600)		(688)
Carrying balance at acquisition date	$	1,752	$	29,955	$	31,707

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

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	5,440	$	187,302	$	192,742
Nonaccretable difference		(2,100)		—		(2,100)
Expected cash flows		3,340		187,302		190,642
Accretable yield		(700)		(4,498)		(5,198)
Carrying balance at acquisition date	$	2,640	$	182,804	$	185,444

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

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	1,901	$	37,700	$	39,601
Nonaccretable difference		(546)		—		(546)
Expected cash flows		1,355		37,700		39,055
Accretable yield		(561)		(493)		(1,054)
Carrying balance at acquisition date	$	794	$	37,207	$	38,001

The table below presents a rollforward of the accretable yield on acquired loans for the six months ended June 30, 2019 (dollars in thousands):

	PFC						Eagle River
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2018	$	128	$	—	$	128	$	213	$	16	$	229
Accretion		(40)		—		(40)		(17)		(16)		(33)
Reclassification from nonaccretable difference		30		—		30		13		—		13
Balance, June 30, 2019	$	118	$	—	$	118	$	209	$	—	$	209
	Niagara						First Federal Northern Michigan
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2018	$	26	$	69	$	95	$	571	$	3,446	$	4,017
Accretion		(14)		(69)		(83)		(145)		(796)		(941)
Reclassification from nonaccretable difference		11		—		11		109		—		109
Balance, June 30, 2019	$	23	$	—	$	23	$	535	$	2,650	$	3,185
	Lincoln Community Bank						Total
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2018	$	140	$	442	$	582	$	1,078	$	3,973	$	5,051
Accretion		(109)		(95)		(204)		(325)		(976)		(1,301)
Reclassification from nonaccretable difference		82		—		82		245		—		245
Balance, June 30, 2019	$	113	$	347	$	460	$	998	$	2,997	$	3,995

The table below presents a rollforward of the accretable yield on acquired loans for the six months ended June 30, 2018 (dollars in thousands):

	PFC						Eagle River
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2017	$	149	$	—	$	149	$	218	$	603	$	821
Accretion		(30)		—		(30)		—		(297)		(297)
Reclassification from nonaccretable difference		23		—		23		—		—		—
Balance, June 30, 2018	$	142	$	—	$	142	$	218	$	306	$	524
	Niagara						First Federal Northern Michigan						Total
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2017	$	38	$	281	$	319	$	—	$	—	$	—	$	405	$	884	$	1,289
Acquisition		—		—		—		700		4,498		5,198		700		4,498		5,198
Accretion		—		(108)		(108)		—		(83)		(83)		(30)		(488)		(518)
Reclassification from nonaccretable difference		—		—		—		—		—		—		23		—		23
Balance, June 30, 2018	$	38	$	173	$	211	$	700	$	4,415	$	5,115	$	1,098	$	4,894	$	5,992

Allowance for Loan Losses

An analysis of the allowance for loan losses for the six months ended June 30, 2019 and June 30, 2018 is as follows (dollars in thousands):

	June 30,		June 30,
	2019		2018
Balance, January 1	$	5,183	$	5,079
Recoveries on loans previously charged off		169		264
Loans charged off		(346)		(352)
Provision		300		150
Balance at end of period	$	5,306	$	5,141

In the first six months of 2019, net charge-offs were $177,000, compared to net charge-offs of $88,000  in the same period in 2018.   In the first six months of 2019, the Corporation recorded a provision for loan loss of $300,000 compared to a  $150,000 provision for loan losses in the first six months of 2018.  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 June 30, 2019 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 June 30, 2019
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,565	$	1,005	$	100	$	201	$	6	$	9	$	2,268	$	5,154
Charge-offs		—		(84)		—		(57)		—		(44)		—		(185)
Recoveries		122		—		1		6		—		8		—		137
Provision		(479)		(60)		(24)		78		(1)		37		649		200
Ending balance ALLR	$	1,208	$	861	$	77	$	228	$	5	$	10	$	2,917	$	5,306
Six Months Ended June 30, 2019
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,682	$	648	$	101	$	199	$	6	$	8	$	2,539	$	5,183
Charge-offs		(20)		(103)		—		(120)		—		(103)		—		(346)
Recoveries		134		4		1		11		—		19		—		169
Provision		(588)		312		(25)		138		(1)		86		378		300
Ending balance ALLR	$	1,208	$	861	$	77	$	228	$	5	$	10	$	2,917	$	5,306
At June 30, 2019
Loans:
Ending balance	$	509,885	$	208,488	$	36,803	$	273,813	$	11,051	$	20,663	$	—	$	1,060,703
Ending balance ALLR		(1,208)		(861)		(77)		(228)		(5)		(10)		(2,917)		(5,306)
Net loans	$	508,677	$	207,627	$	36,726	$	273,585	$	11,046	$	20,653	$	(2,917)	$	1,055,397
Ending balance ALLR:
Individually evaluated	$	457	$	559	$	—	$	—	$	—	$	—	$	—	$	1,016
Collectively evaluated		751		302		77		228		5		10		2,917		4,290
Total	$	1,208	$	861	$	77	$	228	$	5	$	10	$	2,917	$	5,306
Ending balance Loans:
Individually evaluated	$	2,077	$	1,134	$	—	$	—	$	—	$	—	$	—	$	3,211
Collectively evaluated		505,501		204,804		36,418		272,773		11,051		20,633		—		1,051,180
Acquired with deteriorated credit quality		2,307		2,550		385		1,040		—		30		—		6,312
Total	$	509,885	$	208,488	$	36,803	$	273,813	$	11,051	$	20,663	$	—	$	1,060,703

Impaired loans, by definition, are individually evaluated.

A breakdown of the allowance for loan losses and recorded balances in loans at June 30, 2018 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 June 30, 2018
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,127	$	547	$	54	$	173	$	6	$	9	$	3,185	$	5,101
Charge-offs		(1)		(128)		—		(100)		—		(70)		—		(299)
Recoveries		23		156		—		50		—		10		—		239
Provision		319		(80)		(1)		157		1		60		(356)		100
Ending balance ALLR	$	1,468	$	495	$	53	$	280	$	7	$	9	$	2,829	$	5,141
Six Months Ended June 30, 2018
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,650	$	576	$	54	$	160	$	6	$	10	$	2,623	$	5,079
Charge-offs		(1)		(128)		—		(147)		—		(76)		—		(352)
Recoveries		30		159		1		52		—		22		—		264
Provision		(211)		(112)		(2)		215		1		53		206		150
Ending balance ALLR	$	1,468	$	495	$	53	$	280	$	7	$	9	$	2,829	$	5,141
At June 30, 2018
Loans:
Ending balance	$	478,798	$	185,032	$	20,895	$	284,041	$	15,409	$	19,202	$	—	$	1,003,377
Ending balance ALLR		(1,468)		(495)		(53)		(280)		(7)		(9)		(2,829)		(5,141)
Net loans	$	477,330	$	184,537	$	20,842	$	283,761	$	15,402	$	19,193	$	(2,829)	$	998,236
Ending balance ALLR:
Individually evaluated	$	500	$	264	$	—	$	—	$	—	$	—	$	—	$	764
Collectively evaluated		968		231		53		280		7		9		2,829		4,377
Total	$	1,468	$	495	$	53	$	280	$	7	$	9	$	2,829	$	5,141
Ending balance Loans:
Individually evaluated	$	2,447	$	1,324	$	372	$	—	$	—	$	—	$	—	$	4,143
Collectively evaluated		467,159		183,535		20,523		281,144		15,364		19,117		—		986,842
Acquired with deteriorated credit quality		9,192		173		—		2,897		45		85		—		12,392
Total	$	478,798	$	185,032	$	20,895	$	284,041	$	15,409	$	19,202	$	—	$	1,003,377

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, and other relevant characteristics.

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, and other relevant characteristics.

Acceptable (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.

Acceptable Watch (44)

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.  Acceptable Watch 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 44 or better and any loans with a risk rating of 6 or 7 not considered impaired, 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 is 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 June 30, 2019 (dollars in thousands):

	(1)		(2)		(3)		(4)		(44)		(6)		(7)		Rating
	Strong		Good		Average		Acceptable		Acceptable Watch		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	15,144	$	19,727	$	203,261	$	259,748	$	5,833	$	6,172	$	—	$	—	$	509,885
Commercial, financial and agricultural		10,339		9,781		72,957		110,701		2,073		2,637		—		—		208,488
Commercial construction		—		407		8,605		17,000		405		805		—		9,581		36,803
One-to-four family residential real estate		69		2,909		5,929		16,583		1,670		4,035		—		242,618		273,813
Consumer construction		—		261		216		329		90		—		—		10,155		11,051
Consumer		1		187		359		1,340		—		73		—		18,703		20,663
Total loans	$	25,553	$	33,272	$	291,327	$	405,701	$	10,071	$	13,722	$	—	$	281,057	$	1,060,703

Below is a breakdown of loans by risk category as of December 31, 2018 (dollars in thousands):

	(1)		(2)		(3)		(4)		(44)		(6)		(7)		Rating
	Strong		Good		Average		Acceptable		Acceptable Watch		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	9,564	$	22,265	$	189,898	$	257,627	$	5,993	$	10,860	$	—	$	—	$	496,207
Commercial, financial and agricultural		8,077		8,678		72,466		97,441		2,269		2,129		—		—		191,060
Commercial construction		734		706		6,844		12,244		829		823		—		7,585		29,765
One-to-four family residential real estate		70		2,873		6,941		15,711		2,095		4,757		—		254,461		286,908
Consumer construction		—		—		—		200		50		11		—		14,292		14,553
Consumer		19		236		625		1,156		42		77		—		18,216		20,371
Total loans	$	18,464	$	34,758	$	276,774	$	384,379	$	11,278	$	18,657	$	—	$	294,554	$	1,038,864

Impaired Loans

Impaired 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. 

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 loan basis for other loans.  If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.  Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis.  Impaired loans, or portions thereof, are charged off when deemed uncollectible.

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

	Impaired Loans		Impaired Loans		Total		Unpaid		Related
	with No Related		with Related		Impaired		Principal		Allowance for
	Allowance		Allowance		Loans		Balance		Loan Losses
June 30, 2019
Commercial real estate	$	2,307	$	2,077	$	4,384	$	7,822	$	457
Commercial, financial and agricultural		2,550		1,134		3,684		2,709		559
Commercial construction		385		—		385		375		—
One to four family residential real estate		1,040		—		1,040		3,233		—
Consumer construction		—		—		—		—		—
Consumer		30		—		30		43		—
Total	$	6,312	$	3,211	$	9,523	$	14,182	$	1,016
December 31, 2018
Commercial real estate	$	2,777	$	2,148	$	4,925	$	10,740	$	486
Commercial, financial and agricultural		1,460		577		2,037		2,249		340
Commercial construction		366		—		366		1,132		—
One to four family residential real estate		1,231		—		1,231		4,136		—
Consumer construction		217		—		217		—		—
Consumer		42		—		42		55		—
Total	$	6,093	$	2,725	$	8,818	$	18,312	$	826

	Individually Evaluated Impaired Loans
	June 30, 2019				December 31, 2018
	Average		Interest Income		Average		Interest Income
	Balance for		Recognized for		Balance for		Recognized for
	the Period		the Period		the Period		the Period
Commercial real estate	$	7,860	$	166	$	5,024	$	410
Commercial, financial and agricultural		382		1		374		26
Commercial construction		389		—		383		13
One to four family residential real estate		3,685		231		2,879		203
Consumer construction		—		—		9		—
Consumer		49		1		38		4
Total	$	12,365	$	399	$	8,707	$	656

A summary of past due loans at June 30, 2019 and December 31, 2018 is as follows (dollars in thousands):

	June 30,								December 31,
	2019								2018
	30-89 days		90+ days						30-89 days		90+ days
	Past Due		Past Due						Past Due		Past Due
	(accruing)		(accruing)		Nonaccrual		Total		(accruing)		(accruing)		Nonaccrual		Total
Commercial real estate	$	345	$	—	$	798	$	1,143	$	298	$	—	$	1,700	$	1,998
Commercial, financial and agricultural		528		—		597		1,125		398		—		320		718
Commercial construction		677		—		245		922		112		—		266		378
One to four family residential real estate		4,559		—		2,993		7,552		5,456		18		2,725		8,199
Consumer construction		—		—		—		—		—		—		—		—
Consumer		137		—		40		177		108		5		43		156
Total past due loans	$	6,246	$	—	$	4,673	$	10,919	$	6,372	$	23	$	5,054	$	11,449

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 a 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 applicable 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 three TDR’s that occurred during the six months ended June 30, 2019 and no TDR’s during the six months ended June 30, 2018.  The three restructured loans included only modifications to the repayment schedules.  The balance of these restructured loans pre-modification was $.450 million, post-modification as of June 30, 2019, the balances of the restructured loans were $.437 million.

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):

	Six Months Ended		Six Months Ended
	June 30,		June 30,
	2019		2018
Loans outstanding, January 1	$	9,817	$	10,037
New loans		1,872		—
Net activity on revolving lines of credit		458		—
Change in status of insiders		(285)		—
Repayment		(553)		(1,143)
Loans outstanding at end of period	$	11,309	$	8,894

There were no loans to related parties classified substandard as of June 30, 2019 or June 30, 2018.  In addition to the outstanding balances above, there were unfunded commitments of $.505 million to related parties at June 30, 2019.

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GOODWILL AND OTHER INTANGIBLE ASSETS

6 Months Ended

Jun. 30, 2019

GOODWILL AND OTHER INTANGIBLE ASSETS

GOODWILL AND OTHER INTANGIBLE ASSETS

6.GOODWILL AND OTHER INTANGIBLE ASSETS

The Corporation through the acquisition of Peninsula in 2014, Eagle River and Niagara in 2016, and FFNM and Lincoln in 2018, has recorded goodwill and core deposit intangibles as presented below (dollars in thousands):

			Deposit Based
	Goodwill		Intangible
	Balance		Initial Balance
Peninsula	$	3,805	$	1,206
Eagle River		1,839		993
Niagara		50		300
FFNM		12,628		2,894
Lincoln		1,252		1,353
Total	$	19,574	$	6,746

	Deposit Based
	Intangible		June 30, 2019		Future Annual
	June 30, 2019		Amortization		Amortization
	Balance		Expense		Expense
Peninsula	$	654	$	60	$	121
Eagle River		678		50		99
Niagara		215		15		30
FFNM		2,581		154		290
Lincoln		1,252		61		135
Total	$	5,380	$	340	$	675

	Deposit Based
	Intangible		2018
	December 31, 2018		Amortization
	Balance		Expense
Peninsula	$	714	$	121
Eagle River		728		99
Niagara		230		30
FFNM		2,735		159
Lincoln		1,313		41
Total	$	5,720	$	450

The deposit based intangible asset is reported net of accumulated amortization at $5.380 million at June 30, 2019.  Amortization expense in the first six months of 2019 is $.340 million.  Amortization expense for the next five years is expected to be at $.675 million per year.

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SERVICING RIGHTS

6 Months Ended

Jun. 30, 2019

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 June 30, 2019, the Corporation had obligations to service approximately $279.478 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 which management estimates at $2.898 million. 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 10.57% and a discount rate of 10.17% as of June 30, 2019.  For additional details on the acquired MSRs presented in the table below, please refer to Note 15 – “Business Combinations”.

The following table summarizes MSRs capitalized and amortized (dollars in thousands):

	June 30,		June 30,
	2019		2018
Balance at beginning of period	$	1,144	$	1,033
Acquired MSRs		500		386
Amortization		(120)		(219)
Balance at end of period	$	1,524	$	1,200
Balance of loan servicing portfolio	$	279,478	$	292,739
Mortgage servicing rights as % of portfolio		.55%		.41%
Fair value of servicing rights		2,898		1,767

Commercial Loans

The Corporation periodically retains the servicing on certain 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 June 30, 2019 was approximately $41 million. The Corporation valued these servicing rights at $80,000 as of June 30, 2019 and at $80,000 as of December 31, 2018.  This valuation was established in consideration of the discounted cash flow of net expected servicing income over the life of the loans.

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BORROWINGS

6 Months Ended

Jun. 30, 2019

BORROWINGS

BORROWINGS

8.BORROWINGS

Borrowings consist of the following at June 30, 2019 and December 31, 2018 (dollars in thousands):

	June 30,		December 31,
	2019		2018
Federal Home Loan Bank fixed rate advances	$	45,752	$	57,056
USDA Rural Development note		480		480
	$	46,232	$	57,536

The Federal Home Loan Bank borrowings bear a weighted average rate of 1.73% and mature at various dates through 2026. They are collateralized at June 30, 2019 by the following:  a collateral agreement on the Corporation’s one to four family residential real estate loans with a book value of approximately $66.662 million; mortgage related and municipal securities with an amortized cost and estimated fair value of $5.411 million and $5.426 million, respectively; and Federal Home Loan Bank stock owned by the Bank totaling $4.924 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 June 30, 2019.

The Corporation currently has one correspondent banking borrowing relationship.  The relationship currently consists of a $15.0 million revolving line of credit, which had a zero balance at June 30, 2019.  The line of credit bears an interest rate of LIBOR plus 2.00%, with a floor rate of 3.00% and a ceiling of 22%.  The line of credit expires on April 30, 2020.  LIBOR at June 30, 2019 was 2.32%.  The Corporation previously had a term note as part of this relationship that was paid in full during the second quarter of 2018.  This relationship is secured by all of the outstanding mBank stock.  

The USDA Rural Development borrowing bears an interest rate of 1.00% and matures in August, 2024. It is collateralized by an assignment of a demand deposit account held by the Corporation’s wholly owned subsidiary, First Rural Relending, in the amount of $.538 million, and guaranteed by the Corporation.

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DEFINED BENEFIT PENSION PLAN

6 Months Ended

Jun. 30, 2019

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 in 2014.  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 2019 are $22,000.  

The anticipated distributions over the next five years and through December 31, 2028 are detailed in the table below (dollars in thousands):

2019	$	136
2020		132
2021		131
2022		137
2023		143
2024-2028		823
Total	$	1,502

The Corporation receives a valuation of the Plan annually.  As such, at December 31, 2018, the plan’s assets had a fair value of $1.987 million and the Corporation had a net unfunded liability of $1.004 million.  The accumulated benefit obligation at December 31, 2018 was $2.991 million. The accumulated benefit obligation at June 30, 2019 was $3.331 million.

Assumptions in the actuarial valuation are:

	2019	2018
Weighted average discount rate	4.02%	3.33%
Rate of increase in future compensation levels	N/A	N/A
Expected long-term rate of return on plan assets	8.00%	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; which was in place at both June 30, 2019 and December 31, 2018.

	Target	Actual
	Allocation	Allocation
Equity securities	50% to 70%	59%
Fixed income securities	30% to 50%	41%

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STOCK COMPENSATION PLANS

6 Months Ended

Jun. 30, 2019

STOCK COMPENSATION PLANS

STOCK COMPENSATION PLANS

10.STOCK COMPENSATION PLANS

Restricted Stock Awards

The Corporation’s restricted stock awards are service-based and awarded based on performance.  Each award has 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 RSAs 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:

		Market Value at
Date of Award	Units Granted	grant date	Vesting Term
May, 2015	3,000	10.77	Immediate
February, 2016	35,733	9.91	4 years
February, 2017	28,427	13.39	4 years
February, 2018	18,643	16.30	4 years
April, 2018	8,000	16.00	Immediate
February, 2019	27,790	15.70	4 years

In the first six months of 2019, the Corporation issued 27,967 shares of its common stock for vested RSAs.  In the first six months of 2018, the Corporation issued 45,630 shares of its common stock for vested RSAs.

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, 2019	69,322	$	12.79
Granted during the period	27,790		15.70
Vested during the period	(27,967)		12.09
Nonvested balance at June 30, 2019	69,145	$	13.28

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INCOME TAXES

6 Months Ended

Jun. 30, 2019

INCOME TAXES

INCOME TAXES

11.INCOME TAXES

The Corporation has reported deferred tax assets of $4.609 million at June 30, 2019.

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 June 30, 2019 had a net operating loss and tax credit carryforwards for tax purposes of approximately $12.5 million, and $1.7 million, respectively.  The Corporation evaluated the future benefits from these carryforwards as of June 30, 2019 and determined that is 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 $2.0 million for the NOL and the equivalent value of tax credits, which is approximately $.420 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 $1.817 million for the six months ended June 30, 2019 and $.511 million for the six months ended June 30, 2018. 

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FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2019

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

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 June 30, 2019 and December 31, 2018 (dollars in thousands):

		June 30, 2019				December 31, 2018
	Level in Fair	Carrying		Estimated		Carrying		Estimated
	Value Hierarchy	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	60,690	$	60,690	$	64,157	$	64,157
Interest-bearing deposits	Level 2		12,465		12,465		13,452		13,452
Securities available for sale	Level 2		108,918		108,918		115,260		115,260
Securities available for sale	Level 3		1,430		1,430		1,488		1,488
Federal Home Loan Bank stock	Level 2		4,924		4,924		4,924		4,924
Net loans	Level 3		1,055,397		1,042,732		1,033,681		1,013,214
Accrued interest receivable	Level 3		3,791		3,791		3,005		3,005
Total financial assets		$	1,247,615	$	1,234,950	$	1,235,967	$	1,215,500
Financial liabilities:
Deposits	Level 2	$	1,114,853	$	1,082,522	$	1,097,537	$	1,047,709
Borrowings	Level 2		46,232		46,098		57,536		56,771
Accrued interest payable	Level 3		575		575		391		391
Total financial liabilities		$	1,161,660	$	1,129,195	$	1,155,464	$	1,104,871

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 June 30, 2019, 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 June 30, 2019 and December 31, 2018 were based on level 2 and level 3 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 table below shows investment securities measured at fair value on a recurring basis (dollars in thousands):

			Quoted Prices		Significant		Significant		Total (Gains)		Total (Gains)
			in Active Markets		Other Observable		Unobservable		Losses for		Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Six Months Ended
(dollars in thousands)	June 30, 2019		(Level 1)		(Level 2)		(Level 3)		June 30, 2019		June 30, 2019
Assets
Corporate	$	15,478	$	—	$	14,978	$	500	$	—	$	—
US Agencies		22,194		—		22,194		—		—		—
US Agencies - MBS		29,574		—		29,574		—		—		—
Obligations of state and political subdivisions		43,102		—		42,172		930		—		—
	$	110,348							$	—		—

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total (Gains) Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Twelve months ended
(dollars in thousands)	December 31, 2018		(Level 1)		(Level 2)		(Level 3)		December 31, 2018
Assets
Corporate	$	20,064	$	—	$	19,564	$	500	$	—
US Agencies		15,970		—		15,970		—		—
US Agencies - MBS		32,840		—		32,840		—		—
Obligations of state and political subdivisions		47,874		—		46,886		988		—
	$	116,748							$	—

The Corporation had no Level 3 assets or liabilities measured at fair value on a recurring basis as of June 30, 2019, or December 31, 2018 other than as described above.

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 June 30, 2019

			Quoted Prices		Significant		Significant		Total (Gains)		Total (Gains)
			in Active Markets		Other Observable		Unobservable		Losses for		Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Six Months Ended
(dollars in thousands)	June 30, 2019		(Level 1)		(Level 2)		(Level 3)		June 30, 2019		June 30, 2019
Assets
Impaired loans	$	6,645	$	—	$	—	$	6,645	$	—	$	219
Other real estate owned		2,125		—		—		2,125		73		101
									$	73		320

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2018

			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, 2018		(Level 1)		(Level 2)		(Level 3)		December 31, 2018
Assets
Impaired loans	$	8,818	$	—	$	—	$	8,818	$	198
Other real estate held for sale		3,119		—		—		3,119		182
									$	380

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

6 Months Ended

Jun. 30, 2019

SHAREHOLDERS' EQUITY

SHAREHOLDERS' EQUITY

13.SHAREHOLDERS’ EQUITY

The Corporation currently has a share repurchase program.  The program is conducted under authorizations by the Board of Directors.  The Corporation repurchased 14,000 shares 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 million on February 27, 2013, $.600 million on December 17, 2013 and an additional $.750 million on April 28, 2015.  None of these authorizations has an expiration date.  As of June 30, 2019, approximately $25,000 of the total authorization was available for future purchases.

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COMMITMENTS, CONTINGENCIES AND CREDIT RISK

6 Months Ended

Jun. 30, 2019

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):

	June 30,		December 31,
	2019		2018
Commitments to extend credit:
Variable rate	$	109,646	$	88,862
Fixed rate		68,830		54,434
Standby letters of credit - Variable rate		7,218		7,208
Credit card commitments - Fixed rate		5,592		5,107
	$	191,286	$	155,611

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 an 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 and Northeastern Wisconsin.  The Bank’s most prominent concentration in the loan portfolio relates to commercial real estate loans to operators of nonresidential buildings.  This concentration at June 30, 2019 represents $143.897 million, or 19.05%, compared to $150.251 million, or 20.95%, of the commercial loan portfolio on December 31, 2018.  The remainder of the commercial loan portfolio is diversified in such categories as hospitality and tourism, real estate agents and managers, new car dealers, gas stations and convenience stores, 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

6 Months Ended

Jun. 30, 2019

BUSINESS COMBINATIONS

BUSINESS COMBINATIONS

15.  BUSINESS COMBINATIONS

First Federal of Northern Michigan Bancorp, Inc.

The Corporation completed its acquisition of First Federal of Northern Michigan Bancorp, Inc. in May 2018.  FFNM had seven branch offices, one of which was consolidated into an existing mBank branch shortly after consummation of the transaction.  Total assets of FFNM as of May 18, 2018 were $318 million, including total loans of $192 million. Deposits garnered in the acquisition, the majority of which were core deposits, totaled $254 million.  The results of operations due to the merger have been included in the Corporation’s results since the acquisition date.  As consideration in the acquisition, the Corporation issued 2,146,378 new shares, approximating $34.101 million.  The Corporation recorded deposit based intangibles of $2.894 million and goodwill of $12.278 million.  In the first quarter of 2019, the Corporation concluded the business combination and purchase accounting based on the final tax returns and deferred tax calculations of FFNM.  As a result, the purchase price allocation has been updated to reflect changes with an increase in the deferred tax asset of $1.950 million, an increase to the MSRs of $.500 million, and a decrease in goodwill of $2.450 million.

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

Purchase Price:
FFNM shares outstanding		3,726,925
Price per share	$	9.15
Total purchase price			$	34,101
Net assets acquired:
Cash and cash equivalents	$	13,267
Securities available for sale		96,297
FHLB Stock		1,748
Total loans		185,444
Premises and equipment		5,134
Other real estate owned		194
Deposit based intangible		2,894
Mortgage servicing rights		886
Deferred tax assets		4,794
Bank owned life insurance		5,170
Other assets		1,775
Total assets		317,603
Non-interest bearing deposits		60,616
Interest bearing deposits		193,099
Total deposits		253,715
FHLB borrowings		40,722
Deferred tax liability		133
Other liabilities		1,397
Total liabilities		295,967
Net assets acquired				21,636
Goodwill			$	12,465

Lincoln Community Bank

On June 7, 2018 the Corporation announced the execution of a definitive agreement to acquire Lincoln Community Bank (“Lincoln”) located in Merrill, WI, for $8.50 million in cash, to further expand the Corporation’s market.  Lincoln operated two (2) banking centers, one in each of Merrill and Gleason, WI.  As of September 30, 2018, Lincoln had total assets in excess of $59 million, loans of approximately $39 million and deposits of $53 million.  The acquisition and subsequent merger of Lincoln into mBank occurred on October 1, 2018.  As part of the transaction, the Gleason location was closed at the end of 2018.  In the first quarter of 2019, the Corporation made adjustments to the business comniation and purchase accounting based on additional tax provision information.  As a result, the purchase price allocation has been updated to reflect changes with a decrease in the deferred tax liability of $.163 million and a decrease in goodwill of $.163 million.  The Corporation believes the majority of the business combination and purchase accounting activity is complete, however, there may be further minor adjustments in the normal course within the allotted GAAP adjustment period. 

Purchase Price:
Cash consideration	$	8,500
Net assets acquired:
Cash and cash equivalents	$	10,971
Securities available for sale		6,947
Total loans		38,001
Premises and equipment		1,249
Other real estate owned		69
Deposit based intangible		1,353
Bank owned life insurance		1,653
Other assets		339
Total assets		60,582
Non-interest bearing deposits		15,559
Interest bearing deposits		37,654
Total deposits		53,213
Deferred tax liability		68
Other liabilities		53
Total liabilities		53,334
Net assets acquired				7,248
Goodwill			$	1,252

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 30, 2019

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 six month period ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.  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, 2018.

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 were unchanged by 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, the assessment of goodwill for impairment, and the fair value of assets and liabilities acquired in business combinations.

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.  We evaluate at each balance sheet date whether it is probable that we will be unable to collect all cash flows expected at acquisition and if so, recognize a provision for loan loss in our consolidated statement of operations. 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 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 also has an unallocated 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 probable loan losses.  Management periodically evaluates the adequacy of the allowance using the Corporation’s past loan loss experience, known and inherent risks in the portfolio, composition of the portfolio, current economic conditions, and other factors.  The allowance does not include the effects of expected losses related to future events or future changes in economic conditions.  This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change.  Loans are charged against the allowance for loan losses when management believes the collectability of the principal is unlikely.  In addition, various regulatory agencies periodically review the allowance for loan losses.  These agencies may require additions to the allowance for loan losses based on their judgments of collectability.

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

Stock Compensation Plans

Stock Compensation Plans

On May 22, 2012, the 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 awards (“RSAs”), stock grants, or stock appreciation rights.  The aggregate number of shares of the Corporation’s common stock issuable under the plan is 575,000. At June 30, 2019 there were 216,310 shares available for issuance under this plan. Awards are made to certain other senior officers at the discretion of the Corporation’s management.  Compensation cost equal to the fair value of the award is recognized over the vesting period.

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EARNINGS PER SHARE (Tables)

6 Months Ended

Jun. 30, 2019

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 six months ended June 30, 2019 and 2018 (dollars in thousands, except per share data):

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
(Numerator):
Net income	$	3,669	$	396	$	6,836	$	1,933
(Denominator):
Weighted average shares outstanding		10,740,712		7,769,720		10,730,477		7,041,010
Effect of restricted stock awards		11,358		39,298		8,994		33,622
Diluted weighted average shares outstanding		10,752,070		7,809,018		10,739,471		7,074,632
Income per common share:
Basic	$	0.34	$	0.05	$	0.64	$	0.27
Diluted	$	0.34	$	0.05	$	0.64	$	0.27

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INVESTMENT SECURITIES (Tables)

6 Months Ended

Jun. 30, 2019

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 June 30, 2019 and December 31, 2018 are as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
June 30, 2019
Corporate	$	15,452	$	48	$	(22)	$	15,478
US Agencies		22,067		134		(7)		22,194
US Agencies - MBS		29,114		498		(38)		29,574
Obligations of states and political subdivisions		42,371		860		(129)		43,102
Total securities available for sale	$	109,004	$	1,540	$	(196)	$	110,348
December 31, 2018
Corporate	$	20,198	$	24	$	(158)	$	20,064
US Agencies		16,198		5		(233)		15,970
US Agencies - MBS		32,974		124		(258)		32,840
Obligations of states and political subdivisions		47,828		341		(295)		47,874
Total securities available for sale	$	117,198	$	494	$	(944)	$	116,748

Schedule of amortized cost and estimated fair value sore investment securities by contractual maturity

	June 30, 2019				December 31, 2018
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Available -for-sale securities
Under 1 year	$	16,553	$	16,563	$	13,728	$	13,583
After 1 year through five years		49,310		49,954		54,563		54,382
After 5 years through 10 years		11,838		12,049		13,058		13,085
After 10 years		2,038		2,056		2,875		2,858
Subtotal		79,739		80,622		84,224		83,908
US Agencies - MBS		29,265		29,726		32,974		32,840
Total available -for-sale securities	$	109,004	$	110,348	$	117,198	$	116,748

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LOANS (Tables)

6 Months Ended

Jun. 30, 2019

Schedule of composition of loans

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

	June 30,		December 31,
	2019		2018
Commercial real estate	$	509,885	$	496,207
Commercial, financial, and agricultural		208,488		191,060
Commercial construction		36,803		29,765
One to four family residential real estate		273,813		286,908
Consumer		20,663		20,371
Consumer construction		11,051		14,553
Total loans	$	1,060,703	$	1,038,864

Schedule of the accretable yield by acquisition

The table below presents a rollforward of the accretable yield on acquired loans for the six months ended June 30, 2019 (dollars in thousands):

	PFC						Eagle River
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2018	$	128	$	—	$	128	$	213	$	16	$	229
Accretion		(40)		—		(40)		(17)		(16)		(33)
Reclassification from nonaccretable difference		30		—		30		13		—		13
Balance, June 30, 2019	$	118	$	—	$	118	$	209	$	—	$	209
	Niagara						First Federal Northern Michigan
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2018	$	26	$	69	$	95	$	571	$	3,446	$	4,017
Accretion		(14)		(69)		(83)		(145)		(796)		(941)
Reclassification from nonaccretable difference		11		—		11		109		—		109
Balance, June 30, 2019	$	23	$	—	$	23	$	535	$	2,650	$	3,185
	Lincoln Community Bank						Total
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2018	$	140	$	442	$	582	$	1,078	$	3,973	$	5,051
Accretion		(109)		(95)		(204)		(325)		(976)		(1,301)
Reclassification from nonaccretable difference		82		—		82		245		—		245
Balance, June 30, 2019	$	113	$	347	$	460	$	998	$	2,997	$	3,995

The table below presents a rollforward of the accretable yield on acquired loans for the six months ended June 30, 2018 (dollars in thousands):

	PFC						Eagle River
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2017	$	149	$	—	$	149	$	218	$	603	$	821
Accretion		(30)		—		(30)		—		(297)		(297)
Reclassification from nonaccretable difference		23		—		23		—		—		—
Balance, June 30, 2018	$	142	$	—	$	142	$	218	$	306	$	524
	Niagara						First Federal Northern Michigan						Total
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2017	$	38	$	281	$	319	$	—	$	—	$	—	$	405	$	884	$	1,289
Acquisition		—		—		—		700		4,498		5,198		700		4,498		5,198
Accretion		—		(108)		(108)		—		(83)		(83)		(30)		(488)		(518)
Reclassification from nonaccretable difference		—		—		—		—		—		—		23		—		23
Balance, June 30, 2018	$	38	$	173	$	211	$	700	$	4,415	$	5,115	$	1,098	$	4,894	$	5,992

Schedule of the allowance for loan losses

An analysis of the allowance for loan losses for the six months ended June 30, 2019 and June 30, 2018 is as follows (dollars in thousands):

	June 30,		June 30,
	2019		2018
Balance, January 1	$	5,183	$	5,079
Recoveries on loans previously charged off		169		264
Loans charged off		(346)		(352)
Provision		300		150
Balance at end of period	$	5,306	$	5,141

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 June 30, 2019 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 June 30, 2019
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,565	$	1,005	$	100	$	201	$	6	$	9	$	2,268	$	5,154
Charge-offs		—		(84)		—		(57)		—		(44)		—		(185)
Recoveries		122		—		1		6		—		8		—		137
Provision		(479)		(60)		(24)		78		(1)		37		649		200
Ending balance ALLR	$	1,208	$	861	$	77	$	228	$	5	$	10	$	2,917	$	5,306
Six Months Ended June 30, 2019
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,682	$	648	$	101	$	199	$	6	$	8	$	2,539	$	5,183
Charge-offs		(20)		(103)		—		(120)		—		(103)		—		(346)
Recoveries		134		4		1		11		—		19		—		169
Provision		(588)		312		(25)		138		(1)		86		378		300
Ending balance ALLR	$	1,208	$	861	$	77	$	228	$	5	$	10	$	2,917	$	5,306
At June 30, 2019
Loans:
Ending balance	$	509,885	$	208,488	$	36,803	$	273,813	$	11,051	$	20,663	$	—	$	1,060,703
Ending balance ALLR		(1,208)		(861)		(77)		(228)		(5)		(10)		(2,917)		(5,306)
Net loans	$	508,677	$	207,627	$	36,726	$	273,585	$	11,046	$	20,653	$	(2,917)	$	1,055,397
Ending balance ALLR:
Individually evaluated	$	457	$	559	$	—	$	—	$	—	$	—	$	—	$	1,016
Collectively evaluated		751		302		77		228		5		10		2,917		4,290
Total	$	1,208	$	861	$	77	$	228	$	5	$	10	$	2,917	$	5,306
Ending balance Loans:
Individually evaluated	$	2,077	$	1,134	$	—	$	—	$	—	$	—	$	—	$	3,211
Collectively evaluated		505,501		204,804		36,418		272,773		11,051		20,633		—		1,051,180
Acquired with deteriorated credit quality		2,307		2,550		385		1,040		—		30		—		6,312
Total	$	509,885	$	208,488	$	36,803	$	273,813	$	11,051	$	20,663	$	—	$	1,060,703

Impaired loans, by definition, are individually evaluated.

A breakdown of the allowance for loan losses and recorded balances in loans at June 30, 2018 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 June 30, 2018
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,127	$	547	$	54	$	173	$	6	$	9	$	3,185	$	5,101
Charge-offs		(1)		(128)		—		(100)		—		(70)		—		(299)
Recoveries		23		156		—		50		—		10		—		239
Provision		319		(80)		(1)		157		1		60		(356)		100
Ending balance ALLR	$	1,468	$	495	$	53	$	280	$	7	$	9	$	2,829	$	5,141
Six Months Ended June 30, 2018
Allowance for loan loss reserve:
Beginning balance ALLR	$	1,650	$	576	$	54	$	160	$	6	$	10	$	2,623	$	5,079
Charge-offs		(1)		(128)		—		(147)		—		(76)		—		(352)
Recoveries		30		159		1		52		—		22		—		264
Provision		(211)		(112)		(2)		215		1		53		206		150
Ending balance ALLR	$	1,468	$	495	$	53	$	280	$	7	$	9	$	2,829	$	5,141
At June 30, 2018
Loans:
Ending balance	$	478,798	$	185,032	$	20,895	$	284,041	$	15,409	$	19,202	$	—	$	1,003,377
Ending balance ALLR		(1,468)		(495)		(53)		(280)		(7)		(9)		(2,829)		(5,141)
Net loans	$	477,330	$	184,537	$	20,842	$	283,761	$	15,402	$	19,193	$	(2,829)	$	998,236
Ending balance ALLR:
Individually evaluated	$	500	$	264	$	—	$	—	$	—	$	—	$	—	$	764
Collectively evaluated		968		231		53		280		7		9		2,829		4,377
Total	$	1,468	$	495	$	53	$	280	$	7	$	9	$	2,829	$	5,141
Ending balance Loans:
Individually evaluated	$	2,447	$	1,324	$	372	$	—	$	—	$	—	$	—	$	4,143
Collectively evaluated		467,159		183,535		20,523		281,144		15,364		19,117		—		986,842
Acquired with deteriorated credit quality		9,192		173		—		2,897		45		85		—		12,392
Total	$	478,798	$	185,032	$	20,895	$	284,041	$	15,409	$	19,202	$	—	$	1,003,377

Schedule of breakdown of loans by risk category

Below is a breakdown of loans by risk category as of June 30, 2019 (dollars in thousands):

	(1)		(2)		(3)		(4)		(44)		(6)		(7)		Rating
	Strong		Good		Average		Acceptable		Acceptable Watch		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	15,144	$	19,727	$	203,261	$	259,748	$	5,833	$	6,172	$	—	$	—	$	509,885
Commercial, financial and agricultural		10,339		9,781		72,957		110,701		2,073		2,637		—		—		208,488
Commercial construction		—		407		8,605		17,000		405		805		—		9,581		36,803
One-to-four family residential real estate		69		2,909		5,929		16,583		1,670		4,035		—		242,618		273,813
Consumer construction		—		261		216		329		90		—		—		10,155		11,051
Consumer		1		187		359		1,340		—		73		—		18,703		20,663
Total loans	$	25,553	$	33,272	$	291,327	$	405,701	$	10,071	$	13,722	$	—	$	281,057	$	1,060,703

Below is a breakdown of loans by risk category as of December 31, 2018 (dollars in thousands):

	(1)		(2)		(3)		(4)		(44)		(6)		(7)		Rating
	Strong		Good		Average		Acceptable		Acceptable Watch		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	9,564	$	22,265	$	189,898	$	257,627	$	5,993	$	10,860	$	—	$	—	$	496,207
Commercial, financial and agricultural		8,077		8,678		72,466		97,441		2,269		2,129		—		—		191,060
Commercial construction		734		706		6,844		12,244		829		823		—		7,585		29,765
One-to-four family residential real estate		70		2,873		6,941		15,711		2,095		4,757		—		254,461		286,908
Consumer construction		—		—		—		200		50		11		—		14,292		14,553
Consumer		19		236		625		1,156		42		77		—		18,216		20,371
Total loans	$	18,464	$	34,758	$	276,774	$	384,379	$	11,278	$	18,657	$	—	$	294,554	$	1,038,864

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):

	Impaired Loans		Impaired Loans		Total		Unpaid		Related
	with No Related		with Related		Impaired		Principal		Allowance for
	Allowance		Allowance		Loans		Balance		Loan Losses
June 30, 2019
Commercial real estate	$	2,307	$	2,077	$	4,384	$	7,822	$	457
Commercial, financial and agricultural		2,550		1,134		3,684		2,709		559
Commercial construction		385		—		385		375		—
One to four family residential real estate		1,040		—		1,040		3,233		—
Consumer construction		—		—		—		—		—
Consumer		30		—		30		43		—
Total	$	6,312	$	3,211	$	9,523	$	14,182	$	1,016
December 31, 2018
Commercial real estate	$	2,777	$	2,148	$	4,925	$	10,740	$	486
Commercial, financial and agricultural		1,460		577		2,037		2,249		340
Commercial construction		366		—		366		1,132		—
One to four family residential real estate		1,231		—		1,231		4,136		—
Consumer construction		217		—		217		—		—
Consumer		42		—		42		55		—
Total	$	6,093	$	2,725	$	8,818	$	18,312	$	826

	Individually Evaluated Impaired Loans
	June 30, 2019				December 31, 2018
	Average		Interest Income		Average		Interest Income
	Balance for		Recognized for		Balance for		Recognized for
	the Period		the Period		the Period		the Period
Commercial real estate	$	7,860	$	166	$	5,024	$	410
Commercial, financial and agricultural		382		1		374		26
Commercial construction		389		—		383		13
One to four family residential real estate		3,685		231		2,879		203
Consumer construction		—		—		9		—
Consumer		49		1		38		4
Total	$	12,365	$	399	$	8,707	$	656

Summary of past due loans

A summary of past due loans at June 30, 2019 and December 31, 2018 is as follows (dollars in thousands):

	June 30,								December 31,
	2019								2018
	30-89 days		90+ days						30-89 days		90+ days
	Past Due		Past Due						Past Due		Past Due
	(accruing)		(accruing)		Nonaccrual		Total		(accruing)		(accruing)		Nonaccrual		Total
Commercial real estate	$	345	$	—	$	798	$	1,143	$	298	$	—	$	1,700	$	1,998
Commercial, financial and agricultural		528		—		597		1,125		398		—		320		718
Commercial construction		677		—		245		922		112		—		266		378
One to four family residential real estate		4,559		—		2,993		7,552		5,456		18		2,725		8,199
Consumer construction		—		—		—		—		—		—		—		—
Consumer		137		—		40		177		108		5		43		156
Total past due loans	$	6,246	$	—	$	4,673	$	10,919	$	6,372	$	23	$	5,054	$	11,449

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):

	Six Months Ended		Six Months Ended
	June 30,		June 30,
	2019		2018
Loans outstanding, January 1	$	9,817	$	10,037
New loans		1,872		—
Net activity on revolving lines of credit		458		—
Change in status of insiders		(285)		—
Repayment		(553)		(1,143)
Loans outstanding at end of period	$	11,309	$	8,894

PFC

Schedule of acquired portfolio at acquisition date

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

Eagle River

Schedule of acquired portfolio at acquisition date

The table below details the outstanding balances of the Eagle River 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	$	80,737	$	84,138
Nonaccretable difference		(1,172)		—		(1,172)
Expected cash flows		2,229		80,737		82,966
Accretable yield		(391)		(1,700)		(2,091)
Carrying balance at acquisition date	$	1,838	$	79,037	$	80,875

Niagara Bancorporation

Schedule of acquired portfolio at acquisition date

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	$	30,555	$	32,660
Nonaccretable difference		(265)		—		(265)
Expected cash flows		1,840		30,555		32,395
Accretable yield		(88)		(600)		(688)
Carrying balance at acquisition date	$	1,752	$	29,955	$	31,707

FFNM

Schedule of acquired portfolio at acquisition date

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

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	5,440	$	187,302	$	192,742
Nonaccretable difference		(2,100)		—		(2,100)
Expected cash flows		3,340		187,302		190,642
Accretable yield		(700)		(4,498)		(5,198)
Carrying balance at acquisition date	$	2,640	$	182,804	$	185,444

Lincoln Community Bank

Schedule of acquired portfolio at acquisition date

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

	Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total
Loans acquired - contractual payments	$	1,901	$	37,700	$	39,601
Nonaccretable difference		(546)		—		(546)
Expected cash flows		1,355		37,700		39,055
Accretable yield		(561)		(493)		(1,054)
Carrying balance at acquisition date	$	794	$	37,207	$	38,001

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GOODWILL AND OTHER INTANGIBLE ASSETS (Tables)

6 Months Ended

Jun. 30, 2019

GOODWILL AND OTHER INTANGIBLE ASSETS

Schedule of goodwill and deposit based intangible initial balance

The Corporation through the acquisition of Peninsula in 2014, Eagle River and Niagara in 2016, and FFNM and Lincoln in 2018, has recorded goodwill and core deposit intangibles as presented below (dollars in thousands):

			Deposit Based
	Goodwill		Intangible
	Balance		Initial Balance
Peninsula	$	3,805	$	1,206
Eagle River		1,839		993
Niagara		50		300
FFNM		12,628		2,894
Lincoln		1,252		1,353
Total	$	19,574	$	6,746

Schedule of deposit based intangible asset amortization

	Deposit Based
	Intangible		June 30, 2019		Future Annual
	June 30, 2019		Amortization		Amortization
	Balance		Expense		Expense
Peninsula	$	654	$	60	$	121
Eagle River		678		50		99
Niagara		215		15		30
FFNM		2,581		154		290
Lincoln		1,252		61		135
Total	$	5,380	$	340	$	675

	Deposit Based
	Intangible		2018
	December 31, 2018		Amortization
	Balance		Expense
Peninsula	$	714	$	121
Eagle River		728		99
Niagara		230		30
FFNM		2,735		159
Lincoln		1,313		41
Total	$	5,720	$	450

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SERVICING RIGHTS (Tables)

6 Months Ended

Jun. 30, 2019

SERVICING RIGHTS

Summary of mortgage servicing rights capitalized and amortized

The following table summarizes MSRs capitalized and amortized (dollars in thousands):

	June 30,		June 30,
	2019		2018
Balance at beginning of period	$	1,144	$	1,033
Acquired MSRs		500		386
Amortization		(120)		(219)
Balance at end of period	$	1,524	$	1,200
Balance of loan servicing portfolio	$	279,478	$	292,739
Mortgage servicing rights as % of portfolio		.55%		.41%
Fair value of servicing rights		2,898		1,767

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BORROWINGS (Tables)

6 Months Ended

Jun. 30, 2019

BORROWINGS

Schedule of borrowings

Borrowings consist of the following at June 30, 2019 and December 31, 2018 (dollars in thousands):

	June 30,		December 31,
	2019		2018
Federal Home Loan Bank fixed rate advances	$	45,752	$	57,056
USDA Rural Development note		480		480
	$	46,232	$	57,536

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DEFINED BENEFIT PENSION PLAN (Tables)

6 Months Ended

Jun. 30, 2019

DEFINED BENEFIT PENSION PLAN

Schedule of anticipated distributions over the next five years

The anticipated distributions over the next five years and through December 31, 2028 are detailed in the table below (dollars in thousands):

2019	$	136
2020		132
2021		131
2022		137
2023		143
2024-2028		823
Total	$	1,502

Schedule of assumptions in the actuarial valuation

	2019	2018
Weighted average discount rate	4.02%	3.33%
Rate of increase in future compensation levels	N/A	N/A
Expected long-term rate of return on plan assets	8.00%	8.00%

Schedule of asset allocation

	Target	Actual
	Allocation	Allocation
Equity securities	50% to 70%	59%
Fixed income securities	30% to 50%	41%

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STOCK COMPENSATION PLANS (Tables)

6 Months Ended

Jun. 30, 2019

STOCK COMPENSATION PLANS

Summary of restricted stock units awards granted

		Market Value at
Date of Award	Units Granted	grant date	Vesting Term
May, 2015	3,000	10.77	Immediate
February, 2016	35,733	9.91	4 years
February, 2017	28,427	13.39	4 years
February, 2018	18,643	16.30	4 years
April, 2018	8,000	16.00	Immediate
February, 2019	27,790	15.70	4 years

Summary of changes in nonvested shares

		Weighted Average
	Number	Grant Date
	Outstanding	Fair Value
Nonvested balance at January 1, 2019	69,322	$	12.79
Granted during the period	27,790		15.70
Vested during the period	(27,967)		12.09
Nonvested balance at June 30, 2019	69,145	$	13.28

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FAIR VALUE MEASUREMENTS (Tables)

6 Months Ended

Jun. 30, 2019

FAIR VALUE MEASUREMENTS

Schedule presenting information for financial instruments

The following table presents information for financial instruments at June 30, 2019 and December 31, 2018 (dollars in thousands):

		June 30, 2019				December 31, 2018
	Level in Fair	Carrying		Estimated		Carrying		Estimated
	Value Hierarchy	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	60,690	$	60,690	$	64,157	$	64,157
Interest-bearing deposits	Level 2		12,465		12,465		13,452		13,452
Securities available for sale	Level 2		108,918		108,918		115,260		115,260
Securities available for sale	Level 3		1,430		1,430		1,488		1,488
Federal Home Loan Bank stock	Level 2		4,924		4,924		4,924		4,924
Net loans	Level 3		1,055,397		1,042,732		1,033,681		1,013,214
Accrued interest receivable	Level 3		3,791		3,791		3,005		3,005
Total financial assets		$	1,247,615	$	1,234,950	$	1,235,967	$	1,215,500
Financial liabilities:
Deposits	Level 2	$	1,114,853	$	1,082,522	$	1,097,537	$	1,047,709
Borrowings	Level 2		46,232		46,098		57,536		56,771
Accrued interest payable	Level 3		575		575		391		391
Total financial liabilities		$	1,161,660	$	1,129,195	$	1,155,464	$	1,104,871

Schedule of investment securities measured at fair value on a recurring basis

The table below shows investment securities measured at fair value on a recurring basis (dollars in thousands):

			Quoted Prices		Significant		Significant		Total (Gains)		Total (Gains)
			in Active Markets		Other Observable		Unobservable		Losses for		Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Six Months Ended
(dollars in thousands)	June 30, 2019		(Level 1)		(Level 2)		(Level 3)		June 30, 2019		June 30, 2019
Assets
Corporate	$	15,478	$	—	$	14,978	$	500	$	—	$	—
US Agencies		22,194		—		22,194		—		—		—
US Agencies - MBS		29,574		—		29,574		—		—		—
Obligations of state and political subdivisions		43,102		—		42,172		930		—		—
	$	110,348							$	—		—

			Quoted Prices		Significant		Significant
			in Active Markets		Other Observable		Unobservable		Total (Gains) Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Twelve months ended
(dollars in thousands)	December 31, 2018		(Level 1)		(Level 2)		(Level 3)		December 31, 2018
Assets
Corporate	$	20,064	$	—	$	19,564	$	500	$	—
US Agencies		15,970		—		15,970		—		—
US Agencies - MBS		32,840		—		32,840		—		—
Obligations of state and political subdivisions		47,874		—		46,886		988		—
	$	116,748							$	—

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

Assets Measured at Fair Value on a Nonrecurring Basis at June 30, 2019

			Quoted Prices		Significant		Significant		Total (Gains)		Total (Gains)
			in Active Markets		Other Observable		Unobservable		Losses for		Losses for
	Balance at		for Identical Assets		Inputs		Inputs		Three Months Ended		Six Months Ended
(dollars in thousands)	June 30, 2019		(Level 1)		(Level 2)		(Level 3)		June 30, 2019		June 30, 2019
Assets
Impaired loans	$	6,645	$	—	$	—	$	6,645	$	—	$	219
Other real estate owned		2,125		—		—		2,125		73		101
									$	73		320

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2018

			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, 2018		(Level 1)		(Level 2)		(Level 3)		December 31, 2018
Assets
Impaired loans	$	8,818	$	—	$	—	$	8,818	$	198
Other real estate held for sale		3,119		—		—		3,119		182
									$	380

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COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (Tables)

6 Months Ended

Jun. 30, 2019

COMMITMENTS, CONTINGENCIES AND CREDIT RISK

Schedule of commitments

These commitments are as follows (dollars in thousands):

	June 30,		December 31,
	2019		2018
Commitments to extend credit:
Variable rate	$	109,646	$	88,862
Fixed rate		68,830		54,434
Standby letters of credit - Variable rate		7,218		7,208
Credit card commitments - Fixed rate		5,592		5,107
	$	191,286	$	155,611

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BUSINESS COMBINATIONS (Tables)

6 Months Ended

Jun. 30, 2019

FFNM

Schedule of allocation of the purchase price

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

Lincoln Community Bank

Schedule of allocation of the purchase price

Purchase Price:
Cash consideration	$	8,500
Net assets acquired:
Cash and cash equivalents	$	10,971
Securities available for sale		6,947
Total loans		38,001
Premises and equipment		1,249
Other real estate owned		69
Deposit based intangible		1,353
Bank owned life insurance		1,653
Other assets		339
Total assets		60,582
Non-interest bearing deposits		15,559
Interest bearing deposits		37,654
Total deposits		53,213
Deferred tax liability		68
Other liabilities		53
Total liabilities		53,334
Net assets acquired				7,248
Goodwill			$	1,252

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) - shares	Jun. 30, 2019	May 22, 2012
Stock Compensation Plans
Shares available for grant	216,310
2012 Incentive Compensation Plan
Stock Compensation Plans
Total authorized share balance		575,000

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RECENT ACCOUNTING PRONOUNCEMENTS (Details) - Accounting Standards Update 2016-02 - Adjustment $ in Thousands	Jun. 30, 2019 USD ($)
Right-of-use assets	$ 4,502
Lease liabilities	$ 4,502

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EARNINGS PER SHARE (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
(Numerator):
Net income	$ 3,669	$ 396	$ 6,836	$ 1,933
(Denominator):
Weighted average shares outstanding	10,740,712	7,769,720	10,730,477	7,041,010
Effect of restricted stock awards	11,358	39,298	8,994	33,622
Diluted weighted average shares outstanding	10,752,070	7,809,018	10,739,471	7,074,632
Income per common share:
Basic (in dollars per share)	$ 0.34	$ 0.05	$ 0.64	$ 0.27
Diluted (in dollars per share)	$ 0.34	$ 0.05	$ 0.64	$ 0.27

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INVESTMENT SECURITIES (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Dec. 31, 2018
SECURITIES AVAILABLE FOR SALE
Decrease in fair value of marketable securities.	$ 6,400
Total amortized cost	109,004	$ 117,198
Estimated Fair Value	110,348	116,748
Available-for-sale Securities
SECURITIES AVAILABLE FOR SALE
Total amortized cost	109,004	117,198
Gross Unrealized Gains	1,540	494
Gross Unrealized Losses	(196)	(944)
Estimated Fair Value	110,348	116,748
Corporate
SECURITIES AVAILABLE FOR SALE
Total amortized cost	15,452	20,198
Gross Unrealized Gains	48	24
Gross Unrealized Losses	(22)	(158)
Estimated Fair Value	15,478	20,064
US Agencies
SECURITIES AVAILABLE FOR SALE
Total amortized cost	22,067	16,198
Gross Unrealized Gains	134	5
Gross Unrealized Losses	(7)	(233)
Estimated Fair Value	22,194	15,970
US Agencies - MBS
SECURITIES AVAILABLE FOR SALE
Total amortized cost	29,114	32,974
Gross Unrealized Gains	498	124
Gross Unrealized Losses	(38)	(258)
Estimated Fair Value	29,574	32,840
Obligations of states and political subdivisions
SECURITIES AVAILABLE FOR SALE
Total amortized cost	42,371	47,828
Gross Unrealized Gains	860	341
Gross Unrealized Losses	(129)	(295)
Estimated Fair Value	$ 43,102	$ 47,874

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INVESTMENT SECURITIES - BY CONTRACTUAL MATURITY (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Amortized Cost
Due in one year or less	$ 16,553	$ 13,728
Due after one year through five years	49,310	54,563
Due after five years through ten years	11,838	13,058
Due after ten years	2,038	2,875
Subtotal	79,739	84,224
US Agencies - MBS	29,265	32,974
Total amortized cost	109,004	117,198
Estimated Fair Value
Due in one year or less	16,563	13,583
Due after one year through five years	49,954	54,382
Due after five years through ten years	12,049	13,085
Due after ten years	2,056	2,858
Subtotal	80,622	83,908
US Agencies - MBS	29,726	32,840
Estimated Fair Value	110,348	$ 116,748
Collateral Pledged
Estimated Fair Value
Investment securities at cost	5,411
Securities held as collateral at fair value	$ 5,426

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LOANS (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018
Loans
Total loans	$ 1,060,703	$ 1,003,377	$ 1,038,864
Acquired portfolio
Balance at the beginning of period	5,051	1,289
Acquisition activity		5,198
Accretion	(1,301)	(518)
Reclassification from nonaccretable difference	245	23
Balance at the end of period	3,995	5,992
Changes in the allowance for loan losses
Net charge off activity	177	88
PFC
Acquired portfolio
Loans acquired - contractual payments	67,139
Nonaccretable difference	(2,234)
Expected cash flows	64,905
Accretable yield	(2,844)
Carrying balance at acquisition date	62,061
Balance at the beginning of period	128	149
Accretion	(40)	(30)
Reclassification from nonaccretable difference	30	(23)
Balance at the end of period	118	142
Eagle River
Acquired portfolio
Loans acquired - contractual payments	84,138
Nonaccretable difference	(1,172)
Expected cash flows	82,966
Accretable yield	(2,091)
Carrying balance at acquisition date	80,875
Balance at the beginning of period	229	821
Accretion	(33)	(297)
Reclassification from nonaccretable difference	13
Balance at the end of period	209	524
Niagara Bancorporation
Acquired portfolio
Loans acquired - contractual payments	32,660
Nonaccretable difference	(265)
Expected cash flows	32,395
Accretable yield	(688)
Carrying balance at acquisition date	31,707
Balance at the beginning of period	95	319
Accretion	(83)	(108)
Reclassification from nonaccretable difference	11
Balance at the end of period	23	211
FFNM
Acquired portfolio
Loans acquired - contractual payments	192,742
Nonaccretable difference	(2,100)
Expected cash flows	190,642
Accretable yield	(5,198)
Carrying balance at acquisition date	185,444
Balance at the beginning of period	4,017
Acquisition activity		5,198
Accretion	(941)	(83)
Reclassification from nonaccretable difference	109
Balance at the end of period	3,185	5,115
Lincoln Community Bank
Acquired portfolio
Loans acquired - contractual payments	39,601
Nonaccretable difference	(546)
Expected cash flows	39,055
Accretable yield	(1,054)
Carrying balance at acquisition date	38,001
Balance at the beginning of period	582
Accretion	(204)
Reclassification from nonaccretable difference	82
Balance at the end of period	460
Commercial real estate
Loans
Total loans	509,885	478,798	496,207
Commercial, financial, and agricultural
Loans
Total loans	208,488	185,032	191,060
Commercial construction
Loans
Total loans	36,803	20,895	29,765
One to four family residential real estate
Loans
Total loans	273,813	284,041	286,908
Consumer
Loans
Total loans	20,663	19,202	20,371
Consumer construction
Loans
Total loans	11,051	15,409	$ 14,553
Acquired Impaired
Acquired portfolio
Balance at the beginning of period	1,078	405
Acquisition activity		700
Accretion	(325)	(30)
Reclassification from nonaccretable difference	245	23
Balance at the end of period	998	1,098
Acquired Impaired | PFC
Acquired portfolio
Loans acquired - contractual payments	13,290
Nonaccretable difference	(2,234)
Expected cash flows	11,056
Accretable yield	(744)
Carrying balance at acquisition date	10,312
Balance at the beginning of period	128	149
Accretion	(40)	(30)
Reclassification from nonaccretable difference	30	(23)
Balance at the end of period	118	142
Acquired Impaired | Eagle River
Acquired portfolio
Loans acquired - contractual payments	3,401
Nonaccretable difference	(1,172)
Expected cash flows	2,229
Accretable yield	(391)
Carrying balance at acquisition date	1,838
Balance at the beginning of period	213	218
Accretion	(17)
Reclassification from nonaccretable difference	13
Balance at the end of period	209	218
Acquired Impaired | Niagara Bancorporation
Acquired portfolio
Loans acquired - contractual payments	2,105
Nonaccretable difference	(265)
Expected cash flows	1,840
Accretable yield	(88)
Carrying balance at acquisition date	1,752
Balance at the beginning of period	26	38
Accretion	(14)
Reclassification from nonaccretable difference	11
Balance at the end of period	23	38
Acquired Impaired | FFNM
Acquired portfolio
Loans acquired - contractual payments	5,440
Nonaccretable difference	(2,100)
Expected cash flows	3,340
Accretable yield	(700)
Carrying balance at acquisition date	2,640
Balance at the beginning of period	571
Acquisition activity		700
Accretion	(145)
Reclassification from nonaccretable difference	109
Balance at the end of period	535	700
Acquired Impaired | Lincoln Community Bank
Acquired portfolio
Loans acquired - contractual payments	1,901
Nonaccretable difference	(546)
Expected cash flows	1,355
Accretable yield	(561)
Carrying balance at acquisition date	794
Balance at the beginning of period	140
Accretion	(109)
Reclassification from nonaccretable difference	82
Balance at the end of period	113
Acquired Non-impaired
Acquired portfolio
Balance at the beginning of period	3,973	884
Acquisition activity		4,498
Accretion	(976)	(488)
Balance at the end of period	2,997	4,894
Acquired Non-impaired | PFC
Acquired portfolio
Loans acquired - contractual payments	53,849
Expected cash flows	53,849
Accretable yield	(2,100)
Carrying balance at acquisition date	51,749
Acquired Non-impaired | Eagle River
Acquired portfolio
Loans acquired - contractual payments	80,737
Expected cash flows	80,737
Accretable yield	(1,700)
Carrying balance at acquisition date	79,037
Balance at the beginning of period	16	603
Accretion	(16)	(297)
Balance at the end of period		306
Acquired Non-impaired | Niagara Bancorporation
Acquired portfolio
Loans acquired - contractual payments	30,555
Expected cash flows	30,555
Accretable yield	(600)
Carrying balance at acquisition date	29,955
Balance at the beginning of period	69	281
Accretion	(69)	(108)
Balance at the end of period		173
Acquired Non-impaired | FFNM
Acquired portfolio
Loans acquired - contractual payments	187,302
Expected cash flows	187,302
Accretable yield	(4,498)
Carrying balance at acquisition date	182,804
Balance at the beginning of period	3,446
Acquisition activity		4,498
Accretion	(796)	(83)
Balance at the end of period	2,650	$ 4,415
Acquired Non-impaired | Lincoln Community Bank
Acquired portfolio
Loans acquired - contractual payments	37,700
Expected cash flows	37,700
Accretable yield	(493)
Carrying balance at acquisition date	37,207
Balance at the beginning of period	442
Accretion	(95)
Balance at the end of period	$ 347

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LOANS - ALLOWANCE (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Dec. 31, 2018	Jun. 30, 2018
Allowance for loan loss reserve:
Balance at beginning of period	$ 5,154	$ 5,101	$ 5,183	$ 5,079
Charge-offs	(185)	(299)	(346)	(352)
Recoveries	137	239	169	264
Provision	200	100	300	150
Balance at end of period	5,306	5,141	5,306	5,141
Loans:
Ending balance					$ 1,060,703	$ 1,038,864	$ 1,003,377
Ending balance ALLR	(5,154)	(5,101)	(5,183)	(5,079)	(5,306)	(5,183)	(5,141)
Net loans					1,055,397	1,033,681	998,236
Ending balance ALLR:
Individually evaluated					1,016		764
Collectively evaluated					4,290		4,377
Total	5,154	5,101	5,183	5,079	5,306	5,183	5,141
Ending balance Loans:
Individually evaluated					3,211		4,143
Collectively evaluated					1,051,180		986,842
Acquired with deteriorated credit quality					6,312		12,392
Total Loans					1,060,703	1,038,864	1,003,377
Commercial real estate
Allowance for loan loss reserve:
Balance at beginning of period	1,565	1,127	1,682	1,650
Charge-offs		(1)	(20)	(1)
Recoveries	122	23	134	30
Provision	(479)	319	(588)	(211)
Balance at end of period	1,208	1,468	1,208	1,468
Loans:
Ending balance					509,885	496,207	478,798
Ending balance ALLR	(1,565)	(1,127)	(1,682)	(1,650)	(1,208)	(1,682)	(1,468)
Net loans					508,677		477,330
Ending balance ALLR:
Individually evaluated					457		500
Collectively evaluated					751		968
Total	1,565	1,127	1,682	1,650	1,208	1,682	1,468
Ending balance Loans:
Individually evaluated					2,077		2,447
Collectively evaluated					505,501		467,159
Acquired with deteriorated credit quality					2,307		9,192
Total Loans					509,885	496,207	478,798
Commercial, financial, and agricultural
Allowance for loan loss reserve:
Balance at beginning of period	1,005	547	648	576
Charge-offs	(84)	(128)	(103)	(128)
Recoveries		156	4	159
Provision	(60)	(80)	312	(112)
Balance at end of period	861	495	861	495
Loans:
Ending balance					208,488	191,060	185,032
Ending balance ALLR	(1,005)	(547)	(648)	(576)	(861)	(648)	(495)
Net loans					207,627		184,537
Ending balance ALLR:
Individually evaluated					559		264
Collectively evaluated					302		231
Total	1,005	547	648	576	861	648	495
Ending balance Loans:
Individually evaluated					1,134		1,324
Collectively evaluated					204,804		183,535
Acquired with deteriorated credit quality					2,550		173
Total Loans					208,488	191,060	185,032
Commercial construction
Allowance for loan loss reserve:
Balance at beginning of period	100	54	101	54
Recoveries	1		1	1
Provision	(24)	(1)	(25)	(2)
Balance at end of period	77	53	77	53
Loans:
Ending balance					36,803	29,765	20,895
Ending balance ALLR	(100)	(54)	(101)	(54)	(77)	(101)	(53)
Net loans					36,726		20,842
Ending balance ALLR:
Collectively evaluated					77		53
Total	100	54	101	54	77	101	53
Ending balance Loans:
Individually evaluated							372
Collectively evaluated					36,418		20,523
Acquired with deteriorated credit quality					385
Total Loans					36,803	29,765	20,895
One to four family residential real estate
Allowance for loan loss reserve:
Balance at beginning of period	201	173	199	160
Charge-offs	(57)	(100)	(120)	(147)
Recoveries	6	50	11	52
Provision	78	157	138	215
Balance at end of period	228	280	228	280
Loans:
Ending balance					273,813	286,908	284,041
Ending balance ALLR	(201)	(173)	(199)	(160)	(228)	(199)	(280)
Net loans					273,585		283,761
Ending balance ALLR:
Collectively evaluated					228		280
Total	201	173	199	160	228	199	280
Ending balance Loans:
Collectively evaluated					272,773		281,144
Acquired with deteriorated credit quality					1,040		2,897
Total Loans					273,813	286,908	284,041
Consumer construction
Allowance for loan loss reserve:
Balance at beginning of period	6	6	6	6
Provision	(1)	1	(1)	1
Balance at end of period	5	7	5	7
Loans:
Ending balance					11,051	14,553	15,409
Ending balance ALLR	(6)	(6)	(6)	(6)	(5)	(6)	(7)
Net loans					11,046		15,402
Ending balance ALLR:
Collectively evaluated					5		7
Total	6	6	6	6	5	6	7
Ending balance Loans:
Collectively evaluated					11,051		15,364
Acquired with deteriorated credit quality							45
Total Loans					11,051	14,553	15,409
Consumer
Allowance for loan loss reserve:
Balance at beginning of period	9	9	8	10
Charge-offs	(44)	(70)	(103)	(76)
Recoveries	8	10	19	22
Provision	37	60	86	53
Balance at end of period	10	9	10	9
Loans:
Ending balance					20,663	20,371	19,202
Ending balance ALLR	(9)	(9)	(8)	(10)	(10)	(8)	(9)
Net loans					20,653		19,193
Ending balance ALLR:
Collectively evaluated					10		9
Total	9	9	8	10	10	8	9
Ending balance Loans:
Collectively evaluated					20,633		19,117
Acquired with deteriorated credit quality					30		85
Total Loans					20,663	20,371	19,202
Unallocated
Allowance for loan loss reserve:
Balance at beginning of period	2,268	3,185	2,539	2,623
Provision	649	(356)	378	206
Balance at end of period	2,917	2,829	2,917	2,829
Loans:
Ending balance ALLR	(2,268)	(3,185)	(2,539)	(2,623)	(2,917)	(2,539)	(2,829)
Net loans					(2,917)		(2,829)
Ending balance ALLR:
Collectively evaluated					2,917		2,829
Total	$ 2,268	$ 3,185	$ 2,539	$ 2,623	$ 2,917	$ 2,539	$ 2,829

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LOANS - LOANS BY RISK CATEGORY (Details) $ in Thousands	Jun. 30, 2019 USD ($) item	Dec. 31, 2018 USD ($)	Jun. 30, 2018 USD ($)
Breakdown of loans by risk category
Total loans	$ 1,060,703	$ 1,038,864	$ 1,003,377
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	44
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	$ 509,885	496,207	478,798
Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	208,488	191,060	185,032
Commercial construction
Breakdown of loans by risk category
Total loans	36,803	29,765	20,895
One to four family residential real estate
Breakdown of loans by risk category
Total loans	273,813	286,908	284,041
Consumer construction
Breakdown of loans by risk category
Total loans	11,051	14,553	15,409
Consumer
Breakdown of loans by risk category
Total loans	20,663	20,371	$ 19,202
Strong (1)
Breakdown of loans by risk category
Total loans	25,553	18,464
Strong (1) | Commercial real estate
Breakdown of loans by risk category
Total loans	15,144	9,564
Strong (1) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	10,339	8,077
Strong (1) | Commercial construction
Breakdown of loans by risk category
Total loans		734
Strong (1) | One to four family residential real estate
Breakdown of loans by risk category
Total loans	69	70
Strong (1) | Consumer
Breakdown of loans by risk category
Total loans	1	19
Good (2)
Breakdown of loans by risk category
Total loans	33,272	34,758
Good (2) | Commercial real estate
Breakdown of loans by risk category
Total loans	19,727	22,265
Good (2) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	9,781	8,678
Good (2) | Commercial construction
Breakdown of loans by risk category
Total loans	407	706
Good (2) | One to four family residential real estate
Breakdown of loans by risk category
Total loans	2,909	2,873
Good (2) | Consumer construction
Breakdown of loans by risk category
Total loans	261
Good (2) | Consumer
Breakdown of loans by risk category
Total loans	187	236
Average (3)
Breakdown of loans by risk category
Total loans	291,327	276,774
Average (3) | Commercial real estate
Breakdown of loans by risk category
Total loans	203,261	189,898
Average (3) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	72,957	72,466
Average (3) | Commercial construction
Breakdown of loans by risk category
Total loans	8,605	6,844
Average (3) | One to four family residential real estate
Breakdown of loans by risk category
Total loans	5,929	6,941
Average (3) | Consumer construction
Breakdown of loans by risk category
Total loans	216
Average (3) | Consumer
Breakdown of loans by risk category
Total loans	359	625
Acceptable
Breakdown of loans by risk category
Total loans	405,701	384,379
Acceptable | Commercial real estate
Breakdown of loans by risk category
Total loans	259,748	257,627
Acceptable | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	110,701	97,441
Acceptable | Commercial construction
Breakdown of loans by risk category
Total loans	17,000	12,244
Acceptable | One to four family residential real estate
Breakdown of loans by risk category
Total loans	16,583	15,711
Acceptable | Consumer construction
Breakdown of loans by risk category
Total loans	329	200
Acceptable | Consumer
Breakdown of loans by risk category
Total loans	1,340	1,156
Acceptable Watch
Breakdown of loans by risk category
Total loans	10,071	11,278
Acceptable Watch | Commercial real estate
Breakdown of loans by risk category
Total loans	5,833	5,993
Acceptable Watch | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	2,073	2,269
Acceptable Watch | Commercial construction
Breakdown of loans by risk category
Total loans	405	829
Acceptable Watch | One to four family residential real estate
Breakdown of loans by risk category
Total loans	1,670	2,095
Acceptable Watch | Consumer construction
Breakdown of loans by risk category
Total loans	90	50
Acceptable Watch | Consumer
Breakdown of loans by risk category
Total loans		42
Substandard (6)
Breakdown of loans by risk category
Total loans	13,722	18,657
Substandard (6) | Commercial real estate
Breakdown of loans by risk category
Total loans	6,172	10,860
Substandard (6) | Commercial, financial, and agricultural
Breakdown of loans by risk category
Total loans	2,637	2,129
Substandard (6) | Commercial construction
Breakdown of loans by risk category
Total loans	805	823
Substandard (6) | One to four family residential real estate
Breakdown of loans by risk category
Total loans	4,035	4,757
Substandard (6) | Consumer construction
Breakdown of loans by risk category
Total loans		11
Substandard (6) | Consumer
Breakdown of loans by risk category
Total loans	73	77
Rating Unassigned
Breakdown of loans by risk category
Total loans	281,057	294,554
Rating Unassigned | Commercial construction
Breakdown of loans by risk category
Total loans	9,581	7,585
Rating Unassigned | One to four family residential real estate
Breakdown of loans by risk category
Total loans	242,618	254,461
Rating Unassigned | Consumer construction
Breakdown of loans by risk category
Total loans	10,155	14,292
Rating Unassigned | Consumer
Breakdown of loans by risk category
Total loans	$ 18,703	$ 18,216

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LOANS - IMPAIRED LOANS AND EFFECT ON INTEREST INCOME (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2019	Dec. 31, 2018
Impaired Loans
Number of days past due to be considered as nonperforming loans	90 days
Recorded investment
With no valuation reserve	$ 6,312	$ 6,093
With a valuation reserve	3,211	2,725
Total	9,523	8,818
Unpaid Principal Balance	14,182	18,312
Related Allowance for Loan Losses	1,016	826
Average investment
Average Balance for the Period	12,365	8,707
Interest Income Recognized During Impairment
Interest Income Recognized for the Period	399	656
Commercial real estate
Recorded investment
With no valuation reserve	2,307	2,777
With a valuation reserve	2,077	2,148
Total	4,384	4,925
Unpaid Principal Balance	7,822	10,740
Related Allowance for Loan Losses	457	486
Average investment
Average Balance for the Period	7,860	5,024
Interest Income Recognized During Impairment
Interest Income Recognized for the Period	166	410
Commercial, financial, and agricultural
Recorded investment
With no valuation reserve	2,550	1,460
With a valuation reserve	1,134	577
Total	3,684	2,037
Unpaid Principal Balance	2,709	2,249
Related Allowance for Loan Losses	559	340
Average investment
Average Balance for the Period	382	374
Interest Income Recognized During Impairment
Interest Income Recognized for the Period	1	26
Commercial construction
Recorded investment
With no valuation reserve	385	366
Total	385	366
Unpaid Principal Balance	375	1,132
Average investment
Average Balance for the Period	389	383
Interest Income Recognized During Impairment
Interest Income Recognized for the Period		13
One to four family residential real estate
Recorded investment
With no valuation reserve	1,040	1,231
Total	1,040	1,231
Unpaid Principal Balance	3,233	4,136
Average investment
Average Balance for the Period	3,685	2,879
Interest Income Recognized During Impairment
Interest Income Recognized for the Period	231	203
Consumer construction
Recorded investment
With no valuation reserve		217
Total		217
Average investment
Average Balance for the Period		9
Consumer
Recorded investment
With no valuation reserve	30	42
Total	30	42
Unpaid Principal Balance	43	55
Average investment
Average Balance for the Period	49	38
Interest Income Recognized During Impairment
Interest Income Recognized for the Period	$ 1	$ 4

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LOANS - PAST DUE (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Past due loans
Nonaccrual	$ 4,673	$ 5,054
Total	10,919	11,449
30-89 days Past Due
Past due loans
30-89 days Past Due (accruing)	6,246	6,372
90+ days Past Due
Past due loans
90+ days Past Due (accruing)		23
Commercial real estate
Past due loans
Nonaccrual	798	1,700
Total	1,143	1,998
Commercial real estate | 30-89 days Past Due
Past due loans
30-89 days Past Due (accruing)	345	298
Commercial, financial, and agricultural
Past due loans
Nonaccrual	597	320
Total	1,125	718
Commercial, financial, and agricultural | 30-89 days Past Due
Past due loans
30-89 days Past Due (accruing)	528	398
Commercial construction
Past due loans
Nonaccrual	245	266
Total	922	378
Commercial construction | 30-89 days Past Due
Past due loans
30-89 days Past Due (accruing)	677	112
One to four family residential real estate
Past due loans
Nonaccrual	2,993	2,725
Total	7,552	8,199
One to four family residential real estate | 30-89 days Past Due
Past due loans
30-89 days Past Due (accruing)	4,559	5,456
One to four family residential real estate | 90+ days Past Due
Past due loans
90+ days Past Due (accruing)		18
Consumer
Past due loans
Nonaccrual	40	43
Total	177	156
Consumer | 30-89 days Past Due
Past due loans
30-89 days Past Due (accruing)	$ 137	108
Consumer | 90+ days Past Due
Past due loans
90+ days Past Due (accruing)		$ 5

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LOANS - TROUBLED DEBT RESTRUCTURING (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2019 USD ($) loan item	Jun. 30, 2018 loan
LOANS
Number of consecutive timely payments before being considered return to accruing status | item	6
Number of TDR’s | loan	3	0
Restructed loan pre-modification	$ 450
restructured loans post-modification	$ 437

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LOANS - INSIDER LOANS (Details) - USD ($)	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019
Activity in insider loans granted to the entity's executive officers and directors, including their families and firms
Loans outstanding, beginning of period	$ 9,817,000	$ 10,037,000
New loans	1,872,000
Net activity on revolving lines of credit	458,000
Change in status of insiders	(285,000)
Repayment	(553,000)	(1,143,000)
Loans outstanding, end of period	11,309,000	8,894,000
Loans outstanding	9,817,000	10,037,000	$ 11,309,000
Unfunded commitments			505,000
Substandard (6)
Activity in insider loans granted to the entity's executive officers and directors, including their families and firms
Loans outstanding, end of period	0	0
Loans outstanding	$ 0	$ 0	$ 0

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GOODWILL AND OTHER INTANGIBLE ASSETS (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2019	Dec. 31, 2018	Oct. 01, 2018	Jun. 07, 2018	May 31, 2018	May 18, 2018	Aug. 31, 2016	Apr. 29, 2016	Dec. 05, 2014
Goodwill	$ 19,574	$ 22,024	$ 19,574
Deposit based intangible assets	5,380	5,720	6,746
Amortization expense	340	450
Future Amortization Expense	675
Amortization expense year one	675
Amortization expense year two	675
Amortization expense year three	675
Amortization expense year four	675
Amortization expense year five	675
PFC
Goodwill									$ 3,805
Deposit based intangible assets	654	714							$ 1,206
Amortization expense	60	121
Future Amortization Expense	121
Eagle River
Goodwill								$ 1,839
Deposit based intangible assets	678	728						$ 993
Amortization expense	50	99
Future Amortization Expense	99
Niagara Bancorporation
Goodwill							$ 50
Deposit based intangible assets	215	230					$ 300
Amortization expense	15	30
Future Amortization Expense	30
FFNM
Goodwill					$ 12,465	$ 12,628
Deposit based intangible assets	2,581	2,735				$ 2,894
Amortization expense	154	159
Future Amortization Expense	290
Lincoln Community Bank
Goodwill			1,252	$ 1,252
Deposit based intangible assets	1,252	1,313	$ 1,353
Amortization expense	61	$ 41
Future Amortization Expense	$ 135

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SERVICING RIGHTS (Details) - USD ($)	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018
Changes in mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances
Capitalized servicing rights as estimated by management	$ 2,898,000
Commercial loans
Commercial Loans
Commercial Loans	41,000,000
Servicing rights	$ 80,000		$ 80,000
Mortgage loans
Mortgage Loans
Annual constant prepayment speed (as a percent)	10.57%
Discount rate (as a percent)	10.17%
Changes in mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances
Balance at beginning of period	$ 1,144,000	$ 1,033,000
Acquired MSRs	500,000	386,000
Amortization	(120,000)	(219,000)
Balance at end of period	1,524,000	1,200,000
Balance of loan servicing portfolio	$ 279,478,000	$ 292,739,000
Mortgage servicing rights as % of portfolio	0.55%	0.41%
Fair value of servicing rights	$ 2,898.00	$ 1,767.00

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BORROWINGS (Details)	6 Months Ended
	Jun. 30, 2019 USD ($) item	Dec. 31, 2018 USD ($)
BORROWINGS
Borrowings	$ 46,232,000	$ 57,536,000
Collateral Pledged
BORROWINGS
Amortized cost estimated fair value	5,426,000
Federal Home Loan Bank borrowings
BORROWINGS
Borrowings	$ 45,752,000	57,056,000
Federal Home Loan Bank Borrowing Weighted Average Interest Rate	1.73%
Federal Home Loan Bank borrowings | Mortgage related and municipal securities | Collateral Pledged
BORROWINGS
Available for sale equity securities	$ 5,411,000
Amortized cost estimated fair value	5,426,000
Federal Home Loan Bank borrowings | FHLB stock
BORROWINGS
Stock owned and pledged as collateral	4,924,000
Federal Home Loan Bank borrowings | One to four family residential real estate
BORROWINGS
Loans pledged as collateral	$ 66,662,000
Correspondent bank line of credit
BORROWINGS
Number of banking borrowing relationships | item	1
Correspondent bank line of credit | LIBOR
BORROWINGS
Variable rate basis	LIBOR
Variable rate (as a percent)	2.00%
Correspondent bank line of credit | LIBOR | Minimum
BORROWINGS
Floor rate (as a percent)	3.00%
Correspondent bank line of credit | LIBOR | Maximum
BORROWINGS
Floor rate (as a percent)	22.00%
USDA Rural Development note
BORROWINGS
Borrowings	$ 480,000	$ 480,000
Interest rate on note (as a percent)	1.00%
USDA Rural Development note | First Rural Relending
BORROWINGS
Demand deposit account pledged as collateral	$ 538,000
Revolving Credit Facility
BORROWINGS
Line of Credit	0
Maximum borrowing capacity	$ 15,000,000
Revolving Credit Facility | LIBOR
BORROWINGS
LIBOR rate at point of time	2.32%

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DEFINED BENEFIT PENSION PLAN (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2019 USD ($) item	Jun. 30, 2018 USD ($)	Dec. 31, 2018 USD ($)
Defined Benefit Pension Plan
Number of years over which anticipated pension distributions disclosed | item	5
Anticipated distributions from the plan
2019	$ 136
2020	132
2021	131
2022	137
2023	143
2024-2028	823
Total	1,502
Peninsula Financial Corporation noncontributory defined benefit pension plan
Defined Benefit Pension Plan
Expected contributions to the plan next fiscal year	$ 22
Change in plan assets
Fair value of plan assets			$ 1,987
Accrued pension expense, included with other assets or liabilities			1,004
Accumulated benefit obligation		$ 3,331	$ 2,991
Assumptions in the actuarial valuation
Weighted average discount rate	4.02%	3.33%
Expected long-term rate of return on plan assets	8.00%	8.00%
Peninsula Financial Corporation noncontributory defined benefit pension plan | Equity securities | Minimum
Plan assets
Target Allocation	50.00%		50.00%
Peninsula Financial Corporation noncontributory defined benefit pension plan | Equity securities | Maximum
Plan assets
Target Allocation	70.00%		70.00%
Peninsula Financial Corporation noncontributory defined benefit pension plan | Equity securities | Plan
Plan assets
Actual Allocation	59.00%		59.00%
Peninsula Financial Corporation noncontributory defined benefit pension plan | Fixed income securities | Minimum
Plan assets
Target Allocation	30.00%		30.00%
Peninsula Financial Corporation noncontributory defined benefit pension plan | Fixed income securities | Maximum
Plan assets
Target Allocation	50.00%		50.00%
Peninsula Financial Corporation noncontributory defined benefit pension plan | Fixed income securities | Plan
Plan assets
Actual Allocation	41.00%		41.00%

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STOCK COMPENSATION PLANS (Details) - $ / shares					1 Months Ended						6 Months Ended
	Feb. 28, 2019	Feb. 28, 2018	Feb. 28, 2017	Feb. 29, 2016	Feb. 28, 2019	Apr. 30, 2018	Feb. 28, 2018	Feb. 28, 2017	Feb. 29, 2016	May 31, 2015	Jun. 30, 2019	Jun. 30, 2018
Summary of nonvested shares
Nonvested beginning balance (in shares)											69,322
Granted during the period (in shares)											27,790
Vested during the period (in shares)											(27,967)
Nonvested ending balance (in shares)											69,145
Weighted Average Grant Date Fair Value
Nonvested beginning balance (in dollars per share)											$ 12.79
Granted during the period (in dollars per share)											15.70
Vested during the period (in dollars per share)											12.09
Nonvested ending balance (in dollars per share)											$ 13.28
RSUs
Stock Compensation Plans
Vesting period	4 years	4 years	4 years	4 years							4 years
Market value at grant date (in dollars per share)	$ 15.70	$ 16.30	$ 13.39	$ 9.91	$ 15.70	$ 16.00	$ 16.30	$ 13.39	$ 9.91	$ 10.77
Stock issued for vested restricted stocks											27,967	45,630
Summary of nonvested shares
Granted during the period (in shares)					27,790	8,000	18,643	28,427	35,733	3,000

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INCOME TAXES (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
INCOME TAXES
Deferred tax assets, net of valuation allowance	$ 4,609
Net operating loss (NOL) carryforwards	12,500
Tax credit carryforwards	1,700
Annual limitation for usage of NOL	2,000
Annual limitation for usage of tax credits	420
Deferred tax expense	$ 1,817	$ 511

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FAIR VALUE (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Dec. 31, 2018
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	12,465	$ 13,452
Securities available for sale	110,348	116,748
Marketable Securities	110,348	116,748
Carrying Amount
Financial assets:
Total financial assets	1,247,615	1,235,967
Financial liabilities:
Total financial liabilities	1,161,660	1,155,464
Estimated Fair Value
Financial assets:
Total financial assets	1,234,950	1,215,500
Financial liabilities:
Total financial liabilities	1,129,195	1,104,871
Level 1 | Carrying Amount
Financial assets:
Cash and cash equivalents	60,690	64,157
Level 1 | Estimated Fair Value
Financial assets:
Cash and cash equivalents	60,690	64,157
Level 2 | Carrying Amount
Financial assets:
Interest-bearing deposits	12,465	13,452
Federal Home Loan Bank stock	4,924	4,924
Financial liabilities:
Deposits	1,114,853	1,097,537
Borrowings	46,232	57,536
Level 2 | Estimated Fair Value
Financial assets:
Interest-bearing deposits	12,465	13,452
Federal Home Loan Bank stock	4,924	4,924
Financial liabilities:
Deposits	1,082,522	1,047,709
Borrowings	46,098	56,771
Level 3 | Carrying Amount
Financial assets:
Net loans	1,055,397	1,033,681
Accrued interest receivable	3,791	3,005
Financial liabilities:
Accrued interest payable	575	391
Level 3 | Estimated Fair Value
Financial assets:
Net loans	1,042,732	1,013,214
Accrued interest receivable	3,791	3,005
Financial liabilities:
Accrued interest payable	575	391
Available-for-sale Securities
Financial assets:
Marketable Securities	110,348	116,748
Available-for-sale Securities | Level 2 | Carrying Amount
Financial assets:
Marketable Securities	108,918	115,260
Available-for-sale Securities | Level 2 | Estimated Fair Value
Financial assets:
Marketable Securities	108,918	115,260
Available-for-sale Securities | Level 3 | Carrying Amount
Financial assets:
Marketable Securities	1,430	1,488
Available-for-sale Securities | Level 3 | Estimated Fair Value
Financial assets:
Marketable Securities	1,430	1,488
Corporate
Financial assets:
Marketable Securities	15,478	20,064
US Agencies
Financial assets:
Marketable Securities	22,194	15,970
US Agencies - MBS
Financial assets:
Marketable Securities	29,574	32,840
Obligations of states and political subdivisions
Financial assets:
Marketable Securities	$ 43,102	$ 47,874

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FAIR VALUE - OTHER ASSETS AND OTHER LIABILITIES (Details) - Recurring - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Fair value measurements
Other assets	$ 0	$ 0
Other liabilities	0	0
Level 3
Fair value measurements
Assets	0	0
Liabilities	$ 0	$ 0

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FAIR VALUE - RECURRING (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Marketable Securities	$ 110,348	$ 116,748
Recurring
Marketable Securities	110,348	116,748
Available-for-sale Securities
Marketable Securities	110,348	116,748
Corporate
Marketable Securities	15,478	20,064
Corporate | Recurring
Marketable Securities	15,478	20,064
Corporate | Level 2 | Recurring
Marketable Securities	14,978	19,564
Corporate | Level 3 | Recurring
Marketable Securities	500	500
US Agencies
Marketable Securities	22,194	15,970
US Agencies | Recurring
Marketable Securities	22,194	15,970
US Agencies | Level 2 | Recurring
Marketable Securities	22,194	15,970
US Agencies - MBS
Marketable Securities	29,574	32,840
US Agencies - MBS | Recurring
Marketable Securities	29,574	32,840
US Agencies - MBS | Level 2 | Recurring
Marketable Securities	29,574	32,840
Obligations of states and political subdivisions
Marketable Securities	43,102	47,874
Obligations of states and political subdivisions | Recurring
Marketable Securities	43,102	47,874
Obligations of states and political subdivisions | Level 2 | Recurring
Marketable Securities	42,172	46,886
Obligations of states and political subdivisions | Level 3 | Recurring
Marketable Securities	$ 930	$ 988

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FAIR VALUE - NONRECURRING BASIS (Details) - USD ($) $ in Thousands	3 Months Ended	6 Months Ended	12 Months Ended
	Jun. 30, 2019	Jun. 30, 2019	Dec. 31, 2018
Fair value
Impaired loans	$ 9,523	$ 9,523	$ 8,818
Other real estate owned	2,125	2,125	3,119
Impaired loans
Fair value
Impaired loans	6,645	6,645	8,818
Other real estate owned
Fair value
Other real estate owned	2,125	2,125	3,119
Nonrecurring
Fair value
Total (Gains) Losses	73	320	380
Nonrecurring | Impaired loans
Fair value
Impaired loans	219	219
Total (Gains) Losses			198
Nonrecurring | Other real estate owned
Fair value
Other real estate owned	101	101
Total (Gains) Losses	73		182
Nonrecurring | Level 3 | Impaired loans
Fair value
Impaired loans	6,645	6,645	8,818
Nonrecurring | Level 3 | Other real estate owned
Fair value
Other real estate owned	$ 2,125	$ 2,125	$ 3,119

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SHAREHOLDERS' EQUITY (Details) - USD ($)	3 Months Ended	6 Months Ended	12 Months Ended
	Jun. 30, 2018	Jun. 30, 2018	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014	Dec. 31, 2013	Jun. 30, 2019	Apr. 28, 2015	Dec. 17, 2013	Feb. 27, 2013
Participation in the TARP Capital Purchase Program
Number of shares authorized to be repurchased							$ 25,000		$ 600,000	$ 600,000
Number of additional shares authorized to be repurchased								$ 750,000
Proceeds of common stock offering, net of offering costs		$ 32,524,000
Shares of Common Stock
Participation in the TARP Capital Purchase Program
Number of shares repurchased			14,000	102,455	13,700	55,594
Shares issued (in shares)	2,225,807	2,225,807

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COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Dec. 31, 2018
Financial Instruments with Off-Balance-Sheet Risk
Commitments	$ 191,286	$ 155,611
Commitments to extend credit
Financial Instruments with Off-Balance-Sheet Risk
Variable rate	109,646	88,862
Fixed rate	68,830	54,434
Standby letters of credit
Financial Instruments with Off-Balance-Sheet Risk
Variable rate	$ 7,218	7,208
Percentage collateralization on financial instruments allowed under commitments	100.00%
Credit card commitments
Financial Instruments with Off-Balance-Sheet Risk
Fixed rate	$ 5,592	$ 5,107

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COMMITMENTS, CONTINGENCIES, AND CREDIT RISK - CREDIT RISK (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2019	Dec. 31, 2018	Jun. 30, 2018
Concentration of Credit Risk
Loan portfolio	$ 1,055,397	$ 1,033,681	$ 998,236
Commercial real estate
Concentration of Credit Risk
Loan portfolio	508,677		$ 477,330
Bank | Commercial real estate | Commercial loan portfolio | Credit risk concentration
Concentration of Credit Risk
Loan portfolio	$ 143,897	$ 150,251
Percentage of concentration risk under a specified benchmark	19.05%	20.95%

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BUSINESS COMBINATIONS (Details)			1 Months Ended	3 Months Ended	6 Months Ended
	Jun. 07, 2018 USD ($) item	May 18, 2018 USD ($)	May 31, 2018 USD ($) item $ / shares shares	Jun. 30, 2018 USD ($) shares	Jun. 30, 2019 USD ($) shares	Jun. 30, 2018 USD ($) shares	Dec. 31, 2018 USD ($) shares	Oct. 01, 2018 USD ($)	Sep. 30, 2018 USD ($)	Aug. 31, 2016 USD ($)	Apr. 29, 2016 USD ($)
Business Acquisition [Line Items]
Assets					$ 1,330,723,000		$ 1,318,040,000
FFNM acquisition				$ 34,101,000		$ 34,101,000
Purchase Price:
FFNM shares outstanding | shares					10,740,712		10,712,745
Net assets acquired:
Goodwill					$ 19,574,000		$ 22,024,000	$ 19,574,000
Eagle River
Net assets acquired:
Goodwill											$ 1,839,000
Niagara Bancorporation
Net assets acquired:
Goodwill										$ 50,000
FFNM
Business Acquisition [Line Items]
Number of banking offices | item			7
Increase deferred tax asset					1,950,000
Decrease Goodwill					2,450,000
FFNM acquisition (in shares) | shares			2,146,378
Purchase Price:
FFNM shares outstanding | shares			3,726,925
Price per share / Cash Price | $ / shares			$ 9.15
Total purchase price			$ 34,101,000
Net assets acquired:
Cash and cash equivalents			13,267,000
Securities available for sale			96,297,000
FHLB Stock			1,748,000
Total loans		$ 192,000,000	185,444,000
Premises and equipment			5,134,000
Other real estate owned			194,000
Deposit based intangible			2,894,000
Mortgage service rights			886,000
Deferred tax assets			4,794,000
Bank owned life insurance			5,170,000
Other assets			1,775,000
Total assets			317,603,000
Non-interest bearing deposits			60,616,000
Interest bearing deposits			193,099,000
Total deposits		254,000,000	253,715,000
FHLB Borrowings			40,722,000
Deferred tax liability			133,000
Other liabilities			1,397,000
Total liabilities			295,967,000
Net assets acquired			21,636,000
Goodwill		12,628,000	$ 12,465,000
Increase to MSRs		500,000
FFNM | Minimum
Business Acquisition [Line Items]
Assets		$ 318,000,000
Lincoln Community Bank
Business Acquisition [Line Items]
Number of banking centers | item	2
Cash consideration	$ 8,500,000
Decrease deferred tax liability					163,000
Decrease Goodwill					$ 163,000
Net assets acquired:
Cash and cash equivalents	10,971,000
Securities available for sale	6,947,000
Total loans	38,001,000								$ 39,000,000
Premises and equipment	1,249,000
Other real estate owned	69,000
Deposit based intangible	1,353,000
Bank owned life insurance	1,653,000
Other assets	339,000
Total assets	60,582,000
Non-interest bearing deposits	15,559,000
Interest bearing deposits	37,654,000
Total deposits	53,213,000								53,000,000
Deferred tax liability	68,000
Other liabilities	53,000
Total liabilities	53,334,000
Net assets acquired	7,248,000
Goodwill	$ 1,252,000							$ 1,252,000
Lincoln Community Bank | Minimum
Business Acquisition [Line Items]
Assets									$ 59,000,000
Shares of Common Stock
Business Acquisition [Line Items]
FFNM acquisition (in shares) | shares				2,146,378		2,146,378
Common Stock and Additional Paid in Capital
Business Acquisition [Line Items]
FFNM acquisition				$ 34,101,000		$ 34,101,000