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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 March 31, 2021

☐

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 May 12, 2021, there were outstanding 10,550,393 shares of the registrant’s common stock, no par value.

Table of Contents

MACKINAC FINANCIAL CORPORATION

INDEX


		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets – March 31, 2021 (Unaudited), December 31, 2020	1

	Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2021 (Unaudited) and March 31, 2020 (Unaudited)	2

	Condensed Consolidated Statements of Comprehensive Income — Three Months Ended March 31, 2021 (Unaudited) and March 30, 2020 (Unaudited)	3

	Condensed Consolidated Statements of Changes in Shareholders’ Equity — Three Months Ended March 31, 2021 (Unaudited) and March 31, 2020 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2021 (Unaudited) and March 31, 2020 (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	41

Item 4.	Controls and Procedures	45

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46



SIGNATURES		48

Table of Contents

MACKINAC FINANCIAL CORPORATION

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)


	March 31,		December 31,
	2021		2020

ASSETS

Cash and due from banks	$	239,831	$	218,901
Federal funds sold		3,661		76
Cash and cash equivalents		243,492		218,977

Interest-bearing deposits in other financial institutions		2,427		2,917
Securities available for sale		109,414		111,836
Federal Home Loan Bank stock		4,924		4,924

Loans:
Commercial		818,584		819,907
Mortgage		226,780		238,705
Consumer		18,392		18,980
Total Loans		1,063,756		1,077,592
Allowance for loan losses		(5,842)		(5,816)
Net loans		1,057,914		1,071,776

Premises and equipment		25,010		25,518
Other real estate held for sale		1,692		1,752
Deferred tax asset		2,492		3,303
Deposit based intangibles		4,200		4,368
Goodwill		19,574		19,574
Other assets		37,109		36,785

TOTAL ASSETS	$	1,508,248	$	1,501,730

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES:
Deposits:
Noninterest bearing deposits	$	443,956	$	414,804
NOW, money market, interest checking		478,181		450,556
Savings		137,134		130,755
CDs<$250,000		190,320		202,266
CDs>$250,000		10,337		15,224
Brokered		13,351		45,171
Total deposits		1,273,279		1,258,776

Federal funds purchased		—		—
Borrowings		53,459		63,479
Other liabilities		11,334		11,611
Total liabilities		1,338,072		1,333,866

SHAREHOLDERS’ EQUITY:
Common stock and additional paid in capital - No par value Authorized - 18,000,000 shares Issued and outstanding - 10,550,393 and 10,500,758 respectively		127,397		127,164
Retained earnings		41,721		39,318
Accumulated other comprehensive income
Unrealized gains on available for sale securities		1,641		1,965
Minimum pension liability		(583)		(583)
Total shareholders’ equity		170,176		167,864

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,508,248	$	1,501,730

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MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except per Share Data)


	Three Months Ended
	March 31,
	2021		2020
INTEREST INCOME:
Interest and fees on loans:
Taxable	$	14,121	$	14,613
Tax-exempt		20		74
Interest on securities:
Taxable		525		621
Tax-exempt		142		87
Other interest income		84		270
Total interest income		14,892		15,665

INTEREST EXPENSE:
Deposits		889		1,927
Borrowings		225		341
Total interest expense		1,114		2,268

Net interest income		13,778		13,397
Provision for loan losses		50		100
Net interest income after provision for loan losses		13,728		13,297

OTHER INCOME:
Deposit service fees		257		403
Income from mortgage loans sold on the secondary market		1,302		538
SBA/USDA loan sale gains		433		710
Net mortgage servicing fees		241		189
Realized security gains		36		—
Other		129		97
Total other income		2,398		1,937

OTHER EXPENSE:
Salaries and employee benefits		6,824		6,051
Occupancy		1,183		1,124
Furniture and equipment		842		802
Data processing		770		825
Advertising		113		212
Professional service fees		498		498
Loan origination expenses and deposit and card related fees		450		381
Writedowns and (gains) losses on other real estate held for sale		(52)		3
FDIC insurance assessment		140		150
Communications		241		213
Other		839		1,113
Total other expenses		11,848		11,372

Income before provision for income taxes		4,278		3,862
Provision for income taxes		398		811

NET INCOME	$	3,880	$	3,051

INCOME PER COMMON SHARE:
Basic	$	0.37	$	0.28
Diluted	$	0.37	$	0.28

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MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS COMPREHENSIVE INCOME

(Dollars in Thousands)

(Unaudited)


	Three Months Ended
	March 31,
	2021		2020
Net income	$	3,880	$	3,051
Other comprehensive income
Change in securities available for sale:
Unrealized gains arising during the period		(375)		(1,106)
Reclassification adjustment for securities gains included in net income		(36)		—
Tax effect		87		232
Net change in unrealized gains on available for sale securities		(324)		(874)

Total comprehensive income	$	3,556	$	2,177

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MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

Three Months Ended

March 31,

2021

Common

Accumulated

Shares of

Stock and

Other

Common

Additional

Retained

Comprehensive

Stock

Paid in Capital

Earnings

Income (loss)

Total

Balance, beginning of period

10,500,758

127,164

39,318

1,382

167,864

Net income for period

—

3,880

—

3,880

Other comprehensive income

Net unrealized gain on securities available for sale

—

(324)

Total comprehensive income

—

3,880

(324)

3,556

Stock compensation

—

233

—

233

Issuance of common stock:

Restricted stock award vesting

49,635

—

Repurchase of common stock

—

Dividend on common stock

—

(1,477)

—

(1,477)

Balance, end of period

10,550,393

127,397

41,721

1,058

170,176

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MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)


	Three Months Ended
	March 31,
	2020
		Common				Accumulated
	Shares of	Stock and				Other
	Common	Additional		Retained		Comprehensive
	Stock	Paid in Capital		Earnings		Income		Total

Balance, beginning of period	10,748,712	$	129,564	$	31,740	$	615	$	161,919

Net income for period	—		—		3,051		—		3,051
Other comprehensive income
Net unrealized gain on securities available for sale	—		—		—		(874)		(874)
Total comprehensive income	—		—		3,051		(874)		2,177
Stock compensation	—		168		—		—		168
Issuance of common stock:
Restricted stock award vesting	25,521		—		—		—		—
Repurchase of common stock	(240,644)		(2,729)		—		—		(2,729)
Dividend on common stock	—		—		(1,475)		—		(1,475)

Balance, end of period	10,533,589	$	127,003	$	33,316	$	(259)	$	160,060

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MACKINAC FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)


	Three Months Ended
	March 31,
	2021		2020
Cash Flows from Operating Activities:
Net income	$	3,880	$	3,051
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		812		687
Provision for loan losses		50		100
Deferred tax expense, net		179		456
Gain on sale of loans sold in the secondary market		(1,168)		(447)
Origination of loans held for sale in the secondary market		(35,131)		(18,997)
Proceeds from sale of loans in the secondary market		36,597		16,900
(Gain) on sale other real estate held for sale and fixed assets		(52)		—
Writedown of other real estate held for sale		—		3
Stock compensation		233		168
Change in other assets		(339)		2,090
Change in other liabilities		(277)		(667)
Net cash provided by operating activities		4,784		3,344

Cash Flows from Investing Activities:
Net increase in loans		13,962		17,200
Net decrease in interest bearing deposits in other financial institutions		490		1,470
Purchase of securities available for sale		(4,338)		(17,873)
Proceeds from maturities, sales, calls or paydowns of securities available for sale		6,279		9,988
Capital expenditures		(233)		(1,584)
Proceeds from sale of other real estate, premises and fixed assets		565		67
Net cash used in investing activities		16,725		9,268

Cash Flows from Financing Activities:
Net increase in deposits		14,503		19,704
Net activity on line of credit		—		3,000
Net decrease in fed funds purchased		—		16,565
New term debt issuance		—		10,000
Principal payments on borrowings		(10,020)		(10,431)
Repurchase of common stock		—		(2,729)
Dividend on common stock		(1,477)		(1,475)
Net cash provided by financing activities		3,006		34,634

Net increase in cash and cash equivalents		24,515		47,246
Cash and cash equivalents at beginning of period		218,977		49,826

Cash and cash equivalents at end of period	$	243,492	$	97,072

Supplemental Cash Flow Information:
Cash paid during the year for:
Interest	$	1,356	$	2,242
Income taxes		—		—

Noncash Investing and Financing Activities:
Transfers of Foreclosures from Loans to Other Real Estate Held for Sale		448		155
Transfers of Other Real Estate Held for Sale to Fixed Assets		—		—

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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 month period ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. 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, 2020.

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.

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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 March 31, 2021 there were 6,560 shares available for issuance under this plan. Awards are made to executive officers at the discretion of the compensation committee of the board of directors. 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 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

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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. 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 the potential impact of ASU 2016-13 on its condensed consolidated financial statements. In October 2019 the Financial Accounting Standards Board (FASB) voted to defer the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for smaller reporting companies (as defined by the Securities Exchange Commission).

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 months ended March 31, 2021 and 2020 (dollars in thousands, except per share data):


	Three Months Ended March 31,
	2021		2020

(Numerator):
Net income	$	3,880	$	3,051

(Denominator):
Weighted average shares outstanding		10,522,899		10,717,967
Effect of restricted stock awards		—		96,824
Diluted weighted average shares outstanding		10,522,899		10,814,791
Income per common share:
Basic	$	0.37	$	0.28
Diluted	$	0.37	$	0.28

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4.	INVESTMENT SECURITIES

At March 31, 2021, the Corporation had an investment security portfolio totaling $109.414 million, a decrease of $2.422 million from the December 31, 2020 balance of $111.836 million. The amortized cost and estimated fair value of investment securities available for sale as of March 31, 2021 and December 31, 2020 are as follows (dollars in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value

March 31, 2021

US Treasury	$	1,067	$	3	$	—	$	1,070
Corporate		29,042		304		(222)		29,124
US Agencies		6,486		78		—		6,564
US Agencies - MBS		30,389		906		(3)		31,292
Obligations of states and political subdivisions		40,353		1,061		(50)		41,364

Total securities available for sale	$	107,337	$	2,352	$	(275)	$	109,414

December 31, 2020

US Treasury	$	—	$	—	$	—	$	—
Corporate		27,815		247		(19)		28,043
US Agencies		6,480		109		—		6,589
US Agencies - MBS		33,372		914		(6)		34,280
Obligations of states and political subdivisions		41,682		1,242		—		42,924

Total securities available for sale	$	109,349	$	2,512	$	(25)	$	111,836

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The following table presents the amortized cost and estimated fair value of investment securities by contractual maturity as of March 31, 2021 and December 31, 2020 (dollars in thousands):

March 31,

December 31,

2021

2020

Amortized

Estimated

Amortized

Estimated

Cost

Fair Value

Cost

Fair Value

Available -for-sale securities

Under 1 year

14,366

14,518

15,645

15,820

After 1 year through 5 years

21,202

21,754

22,554

23,201

After 5 years through 10 years

27,548

27,724

24,965

25,261

After 10 years

13,832

14,126

12,813

13,274

Subtotal

76,948

78,122

75,977

77,556

US Agencies - MBS

30,389

31,292

33,372

34,280

Total available -for-sale securities

107,337

109,414

109,349

111,836

The following is information pertaining to securities with gross unrealized losses at March 31, 2021 and December 31, 2020 (dollars in thousands):


	Less Than Twelve Months						Over Twelve Months						Total
	Number				Gross		Number				Gross		Number				Gross
	of		Fair		Unrealized		of		Fair		Unrealized		of		Fair		Unrealized
March 31, 2021	Securities		Value		Loss		Securities		Value		Loss		Securities		Value		Loss
Corporate		8		14,753	$	(222)		—		—	$	—		8	$	14,753	$	(222)
US Agencies		—		—		—		—		—		—		—		—		—
US Agencies - MBS		—		—		—		4		150		(3)		4		150		(3)
Obligations of states and political subdivisions		2		1,373		(50)		—		—		—		2		1,373		(50)
Total		10	$	16,126	$	(272)		4	$	150	$	(3)		14	$	16,276	$	(275)


	Less Than Twelve Months						Over Twelve Months						Total
	Number				Gross		Number				Gross		Number				Gross
	of		Fair		Unrealized		of		Fair		Unrealized		of		Fair		Unrealized
December 31, 2020	Securities		Value		Loss		Securities		Value		Loss		Securities		Value		Loss
Corporate		4	$	9,293	$	(19)		—	$	—	$	—		4	$	9,293	$	(19)
US Agencies		—		—		—		—		—		—		—		—		—
US Agencies - MBS		4		83		(2)		2		123		(4)		6		206		(6)
Obligations of states and political subdivisions		—		—		—		—		—		—		—		—		—
Total		8	$	9,376	$	(21)		2	$	123	$	(4)		10	$	9,499	$	(25)

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 $20.887 million and $2.285 million, respectively, at March 31, 2021.

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LOANS

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


	March 31,		December 31,
	2021		2020

Commercial real estate	$	496,257	$	498,450
Commercial, financial, and agricultural		273,087		273,759
Commercial construction		49,240		47,698
One to four family residential real estate		214,034		227,044
Consumer		18,392		18,980
Consumer construction		12,746		11,661

Total loans	$	1,063,756	$	1,077,592

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

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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		(421)		—		(421)
Expected cash flows		1,480		37,700		39,180
Accretable yield		(140)		(493)		(633)
Carrying balance at acquisition date	$	1,340	$	37,207	$	38,547

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The table below presents a rollforward of the accretable yield on acquired loans for the three months ended March 31, 2021 (dollars in thousands):


	PFC						Eagle River
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2020	$	53	$	—	$	53	$	183	$	—	$	183
Accretion		(2)		—		(2)		—		—		—
Reclassification from nonaccretable difference		2		—		2		—		—		—
Balance, March 31, 2021	$	53	$	—	$	53	$	183	$	—	$	183

	Niagara						First Federal Northern Michigan
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2020	$	12	$	—	$	12	$	292	$	869	$	1,161
Accretion		—		—		—		(3)		(205)		(208)
Reclassification from nonaccretable difference		—		—		—		2		(1)		1
Balance, March 31, 2021	$	12	$	—	$	12	$	291	$	663	$	954

	Lincoln Community Bank						Total
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total
Balance, December 31, 2020	$	85	$	130	$	215	$	625	$	999	$	1,624
Accretion		(1)		(26)		(27)		(6)		(231)		(237)
Reclassification from nonaccretable difference		1		—		1		5		(1)		4
Balance, March 31, 2021	$	85	$	104	$	189	$	624	$	767	$	1,391

The table below presents a rollforward of the accretable yield on acquired loans for the three months ended March 31, 2020 (dollars in thousands):


	PFC						Eagle River
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total

Balance, December 31, 2019	$	105	$	—	$	105	$	209	$	—	$	209
Accretion		(90)		—		(90)		(77)		—		(77)
Reclassification from nonaccretable difference		52		—		52		58		—		58
Balance, March 31, 2020	$	67	$	—	$	67	$	190	$	—	$	190

	Niagara						First Federal Northern Michigan
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total

Balance, December 31, 2019	$	19	$	—	$	19	$	518	$	1,953	$	2,471
Accretion		(4)		—		(4)		(237)		(310)		(547)
Reclassification from nonaccretable difference		3		—		3		177		—		177
Balance, March 31, 2020	$	18	$	—	$	18	$	458	$	1,643	$	2,101

	Lincoln Community Bank						Total
	Acquired		Acquired		Acquired		Acquired		Acquired		Acquired
	Impaired		Non-impaired		Total		Impaired		Non-impaired		Total

Balance, December 31, 2019	$	108	$	264	$	372	$	959	$	2,217	$	3,176
Accretion		(3)		(38)		(41)		(411)		(348)		(759)
Reclassification from nonaccretable difference		3		—		3		293		—		293
Balance, March 31, 2020	$	108	$	226	$	334	$	841	$	1,869	$	2,710

Table of Contents

Allowance for Loan Losses

An analysis of the allowance for loan losses for the three months ended March 31, 2021 and March 30, 2020 is as follows (dollars in thousands):


	March 31,		March 31,
	2021		2020

Balance, January 1	$	5,816	$	5,308
Recoveries on loans previously charged off		31		29
Loans charged off		(55)		(145)
Provision		50		100

Balance at end of period	$	5,842	$	5,292

In the first three months of 2021, net charge-offs were $24,000, compared to net charge-offs of $116,000 in the same period in 2020. In the first three months of 2021, the Corporation recorded a provision for loan loss of $50,000 compared to a $100,000 provision for loan losses in the first three months of 2020. 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 March 31, 2021 is as follows (dollars in thousands):


			Commercial,				One to four
	Commercial		financial and		Commercial		family residential		Consumer
	real estate		agricultural		construction		real estate		construction		Consumer		Unallocated		Total
Allowance for loan loss reserve:
Beginning balance ALLR	$	2,983	$	1,734	$	209	$	605	$	8	$	5	$	272	$	5,816
Charge-offs		(8)		—		—		(18)		(29)		—		—		(55)
Recoveries		3		11		—		5		12		—		—		31
Provision		(240)		331		—		(32)		17		1		(27)		50
Ending balance ALLR	$	2,738	$	2,076	$	209	$	560	$	8	$	6	$	245	$	5,842

Loans:
Ending balance	$	496,257	$	273,087	$	49,240	$	214,034	$	12,746	$	18,392	$	—	$	1,063,756
Ending balance ALLR		(2,738)		(2,076)		(209)		(560)		(8)		(6)		(245)		(5,842)
Net loans	$	493,519	$	271,011

MACKINAC FINANCIAL CORP /MI/ 10-Q