Insider Transactions.  The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to Macatawa or any subsidiary of Macatawa, on investments in the stock or other securities of Macatawa or any subsidiary of Macatawa and the acceptance of the stock or other securities of Macatawa or any subsidiary of Macatawa as collateral for loans.  Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to Macatawa's directors and officers, to our principal shareholders and to "related interests" of such directors, officers and principal shareholders.  In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of our company or any subsidiary or a principal shareholder in our company may obtain credit from banks with which the Bank maintains a correspondent relationship.

Safety and Soundness Standards.  The federal banking agencies have adopted guidelines to promote the safety and soundness of federally insured depository institutions.  These guidelines establish standards for, among other things, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

Investments and Other Activities.  Under federal law and FDIC regulations, FDIC insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank.  Federal law, as implemented by FDIC regulations, also prohibits FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the Insurance Fund.  Impermissible investments and activities must be divested or discontinued within certain time frames set by the FDIC in accordance with federal law.

Consumer Protection Laws.  The Bank's business includes making a variety of types of loans to individuals. In making these loans, we are subject to state usury and regulatory laws and to various federal laws and regulations, including the privacy of consumer financial information provisions of the Gramm-Leach-Bliley Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Servicemembers Civil Relief Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act, which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of the Bank, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing.  In receiving deposits, the Bank is subject to extensive regulation under state and federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Electronic Funds Transfer Act, the Federal Deposit Insurance Act and the privacy of consumer financial information provisions of the Gramm-Leach-Bliley Act.  Violation of these laws could result in the imposition of significant damages and fines upon the Bank and its directors and officers.

Anti-Money Laundering and OFAC Regulation.  A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing.  The Bank Secrecy Act of 1970 (“BSA”) and subsequent laws and regulations require the Bank to take steps to prevent the use of the Bank or its systems from facilitating the flow of illegal or illicit money or terrorist funds.  Those requirements include ensuring effective Board and management oversight, establishing policies and procedures, performing comprehensive risk assessments, developing effective monitoring and reporting capabilities, ensuring adequate training and establishing a comprehensive independent audit of BSA compliance activities.

The USA PATRIOT Act of 2001 ("Patriot Act") significantly expanded the anti-money laundering ("AML") and financial transparency laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Regulations promulgated under the Patriot Act impose various requirements on financial institutions, such as standards for verifying client identification at account opening and maintaining expanded records (including "Know Your Customer" and "Enhanced Due Diligence" practices) and other obligations to maintain appropriate policies, procedures and controls to aid the process of preventing, detecting, and reporting money laundering and terrorist financing. An institution subject to the Patriot Act must provide AML training to employees, designate an AML compliance officer and annually audit the AML program to assess its effectiveness. The FDIC continues to issue regulations and additional guidance with respect to the application and requirements of BSA and AML.

The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. Based on their administration by the United States Department of the Treasury's Office of Foreign Assets Control ("OFAC"), these are typically known as the "OFAC" rules. The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on "United States persons" engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to United States jurisdiction (including property in the possession or control of United States persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC.

Branching Authority.   Michigan banks have the authority under Michigan law to establish branches anywhere in the State of Michigan, subject to receipt of all required regulatory approvals.  Banks may establish interstate branch networks through acquisitions of other banks.  The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law.

Michigan law permits both U.S. and non-U.S. banks to establish branch offices in Michigan.  The Michigan Banking Code permits, in appropriate circumstances and with the approval of the DIFS, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan.  A Michigan bank holding company may acquire a non-Michigan bank and a non-Michigan bank holding company may acquire a Michigan bank.

TheCurrent Expected Credit Loss accounting standard could add volatility to ourallowance for credit losses and may have a material adverse effect on our financial condition and results of operations.

Effective January 1, 2023, we adopted the Financial Accounting Standards Board ("the FASB") Account Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, commonly referred to as "CECL".  CECL changed the allowance for credit losses methodology from an incurred loss impairment methodology to an expected loss methodology, which is more dependent on future economic forecasts, assumptions and models than previous accounting standards and could result in increases in, and add volatility to, our allowance for credit losses and future provisions for credit losses.  These forecasts, assumptions and models are inherently uncertain and are based upon management's reasonable judgment in light of information currently available.

We are subject to liquidity risk in our operations, which could adversely affect our ability to fund various obligations.

Liquidity risk is the possibility of being unable to meet obligations as they come due, pay deposits when withdrawn, and fund loan and investment opportunities as they arise because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. Liquidity is required to fund various obligations, including credit obligations to borrowers, mortgage originations, withdrawals by depositors, repayment of debt, operating expenses and capital expenditures. Liquidity of the Bank is derived primarily from retail deposit growth and retention, principal and interest payments on loans and investment securities, net cash provided from operations and access to other funding sources. Liquidity is essential to our business. We must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets could have a material adverse effect on our liquidity.  An inability to retain the current level of deposits, including the loss of one or more of the Bank's larger deposit relationships, could have a material adverse effect on the Bank's liquidity.  Our access to funding sources in amounts adequate to finance activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of the business activity due to a market downturn or regulatory action that limits or eliminates access to alternate funding sources, including brokered deposits discussed above. Our ability to borrow could also be impaired by factors that are nonspecific to the Company, such as severe disruption of the financial markets or negative expectations about the prospects for the financial services industry as a whole.

Our construction and development lending exposes us to significant risks.

Construction and development loans consist of loans to commercial customers for the construction of their business facilities.  They also include construction loans to builders and developers for the construction of one- to four-family residences and the development of one- to four-family lots, residential subdivisions, condominium developments and other commercial developments.  This portfolio may be particularly adversely affected by job losses, declines in real estate values, declines in home sale volumes, and declines in new home building. Declining real estate values may result in sharp increases in losses, particularly in the land development and construction loan portfolios to residential developers.  This type of lending is generally considered to have more complex credit risks than traditional single-family residential lending because the principal is concentrated in a limited number of loans with repayment dependent on the successful completion and sales of the related real estate project.  Consequently, these loans are often more sensitive to adverse conditions in the real estate market or the general economy than other real estate loans.  These loans are generally less predictable and more difficult to evaluate and monitor and collateral may be difficult to dispose of in a market decline. Additionally, we may experience significant construction loan losses if independent appraisers or project engineers inaccurately estimate the cost and value of construction loan projects.

We have significant exposure to risks associated with commercial and residential real estate.

A substantial portion of our loan portfolio consists of commercial and residential real estate-related loans, including real estate development, construction and residential and commercial mortgage loans.  As of December 31, 2023, we had approximately $585.1 million of commercial real estate loans outstanding, which represented approximately 43.7% of our total loan portfolio.  As of that same date, we had approximately $189.8 million in residential real estate loans outstanding, or approximately 14.2% of our total loan portfolio. Consequently, real estate-related credit risks are a significant concern for us. The adverse consequences from real estate-related credit risks tend to be cyclical and are often driven by national economic developments that are not controllable or entirely foreseeable by us or our borrowers.

Commercial loans may expose us to greater financial and credit risk than other loans.

Our commercial loan portfolio, including commercial mortgages, was approximately $1.092 billion at December 31, 2023, comprising approximately 81.6% of our total loan portfolio. Commercial loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans. Any significant failure to pay on time by our customers would hurt our earnings. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. In addition, when underwriting a commercial or industrial loan, we may take a security interest in commercial real estate, and, in some instances upon a default by the borrower, we may foreclose on and take title to the property, which may lead to potential financial risks for us under applicable environmental laws. If hazardous substances were discovered on any of these properties, we may be liable to governmental agencies or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination.

Our loan portfolio has and will continue to be affected by the housing market.

Loans to residential developers involved in the development or sale of 1-4 family residential properties were approximately $19.2 million, $21.4 million and $16.1 million at December 31, 2023, 2022 and 2021, respectively. As we continue our on-going portfolio monitoring, we will make credit and reserve decisions based on the current conditions of the borrower or project combined with our expectations for the future. If the housing market deteriorates, we could experience higher charge-offs and delinquencies in this portfolio.

We are subject to significant government regulation, and any regulatory changes may adversely affect us.

The banking industry is heavily regulated under both federal and state law.  These regulations are primarily intended to protect customers and the Deposit Insurance Fund, not our creditors or shareholders.  We are subject to extensive regulation by the Federal Reserve, the FDIC and the DIFS, in addition to other regulatory and self-regulatory organizations.  Future regulatory changes or accounting pronouncements may increase our regulatory capital requirements or adversely affect our regulatory capital levels.  Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of such changes, which could have a material adverse effect on our profitability or financial condition.

The Company's ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of credit, trading, clearing, counterparty or other relationships between financial institutions. The Company has exposure to multiple counterparties, and the Company routinely executes transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by the Company or by other institutions. This is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Company interacts on a daily basis, and therefore could adversely affect the Company.

We are and will continue to be dependent upon the services of our management team and other key personnel. LosingDuring 2023, we experienced a transition in the chief executive officer and chief financial officer positions.  Challenges with these transitions could adversely affect our operations. Additionally, losing the services of one or more key members of our management team could adversely affect our operations.

Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.  If we fail to identify and remediate control deficiencies, it is possible that a material misstatement of interim or annual financial statements will not be prevented or detected on a timely basis.  In addition, any failure or circumvention of our other controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.

Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.

Cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company and/or its third party service providers. While we have experienced, and expect to continue to experience, these types of threats and incidents, none of them to date have been material to the Company. Although we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties and increased cybersecurity protection and remediation costs, which in turn could materially adversely affect our results of operations.

The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services.  In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs.  Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations.  Many of our competitors have substantially greater resources to invest in technological improvements.  There can be no assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.

At December 31, 2020,2023, our gross deferred tax asset was $5.1$10.0 million. Our ability to use our deferred tax assets to offset future taxable income will be limited if we experience an "ownership change" as defined in Section 382 of the Internal Revenue Code. In general, an ownership change will occur if there is a cumulative increase in our ownership by "5-percent shareholders" (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. A corporation that experiences an ownership change will generally be subject to an annual limitation on the use of its pre-ownership change deferred tax assets equal to the equity value of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate.

If an "ownership change" occurs, we could lose certain built-in losses that have not been recognized for tax purposes. The amount of the permanent loss would depend on the size of the annual limitation (which is in part a function of our market capitalization at the time of an "ownership change") and the remaining carry forward period (U.S. federal net operating losses generally may be carried forward for a period of 20 years).

Our customers rely on us to deliver superior, personalized financial services with the highest standards of ethics, performance, professionalism and compliance. Damage to our reputation could undermine the confidence of our current customers and our ability to attract potential customers. Such damage could also impair the confidence of our contractual counterparties and vendors and ultimately affect our ability to effect transactions. Maintenance of our reputation depends not only on our success in maintaining our service-focused culture and controlling and mitigating the various risks described herein, but also on our success in identifying and appropriately addressing issues that may arise in areas such as potential conflicts of interest, anti-money laundering, client personal information and privacy issues, employee, customer and other third party fraud, record-keeping, regulatory investigations and any litigation that may arise from the failure or perceived failure of us to comply with legal and regulatory requirements.

We are vulnerable to reputational harm because we operate in an industry in which integrity and the confidence of our customers are of critical importance. Our employees could engage in misconduct that adversely affects our customers, other employees, and/or our business. For example, if an employee were to engage in fraudulent, illegal, wrongful or suspicious activities, and/or activities resulting in consumer harm, we could be subject to litigation, regulatory sanctions or penalties, and suffer serious harm to our reputation (as a consequence of the negative perception resulting from such activities), financial position, customer relationships and ability to attract new customers. Our business often requires that we deal with confidential information. If our employees were to improperly use or disclose this information, even if inadvertently, we could suffer serious harm to our reputation, financial position and current and future business relationships. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. Misconduct or harassment by our employees, or even unsubstantiated allegations of misconduct or harassment, or improper use or disclosure of confidential information by our employees, even inadvertently, could result in a material adverse effect on our business, financial condition or results of operations.

We depend to a significant extent on relationships with third party service providers. Specifically, we utilize third party core banking services and receive credit card and debit card services, branch capture services, Internet banking services and services complementary to our banking products from various third party service providers. If these third party service providers experience difficulties or terminate their services and we are unable to replace them with other service providers, our operations could be interrupted. It may be difficult for us to replace some of our third party vendors, particularly vendors providing our core banking, credit card and debit card services, in a timely manner if they were unwilling or unable to provide us with these services in the future for any reason. If an interruption were to continue for a significant period of time, it could have a material adverse effect on our business, financial condition or results of operations. Even if we are able to replace them, it may be at higher cost to us, which could have a material adverse effect on our business, financial condition or results of operations.

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Uncertainty relating to the LIBOR calculation process and potential phasing out

Table of LIBOR may adversely affect our results of operations.Contents

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, subordinated debentures, or other securities or financial arrangements, given LIBOR's role in determining market interest rates globally. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio, and may impact the availability and cost of hedging instruments and borrowings. If LIBOR rates are no longer available, and we are required to implement alternative indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the alternative indices, which could have an adverse effect on our results of operations.

Risks Associated With the Company's Stock

The market price of our common stock can be volatile, which may make it more difficult to resell our common stock at a desired time and price.

Stock price volatility may make it more difficult for a shareholder to resell our common stock when a shareholder wants to and at prices a shareholder finds attractive or at all.  Our stock price can fluctuate significantly in response to a variety of factors, regardless of operating results.  These factors include, among other things:

Variations in our anticipated or actual operating results or the results of our competitors;

Changes in investors' or analysts' perceptions of the risks and conditions of our business;

The size of the public float of our common stock;

Regulatory developments, including changes to regulatory capital levels, components of regulatory capital and how regulatory capital is calculated;

Interest rate changes or credit loss trends;

Trading volume in our common stock;

Market conditions; and

General economic conditions.

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Variations in our anticipated or actual operating results or the results of our competitors;

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Changes in investors' or analysts' perceptions of the risks and conditions of our business;

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The size of the public float of our common stock;

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Regulatory developments, including changes to regulatory capital levels, components of regulatory capital and how regulatory capital is calculated;

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Interest rate changes or credit loss trends;

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Trading volume in our common stock;

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Market conditions; and

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General economic conditions.

The Company may issue additional shares of its common stock in the future, which could dilute a shareholder's ownership of common stock.

The Company's articles of incorporation authorize its Board of Directors, without shareholder approval, to, among other things, issue additional shares of common or preferred stock. The issuance of any additional shares of common or preferred stock could be dilutive to a shareholder's ownership of Company common stock.

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To the extent that the Company issues options or warrants to purchase common stock in the future and the options or warrants are exercised, the Company's shareholders may experience further dilution. Holders of shares of Company common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, shareholders may not be permitted to invest in future issuances of Company common or preferred stock.

Although publicly traded, our common stock has substantially less liquidity than the average liquidity of stocks listed on The Nasdaq Global Select Market.

Although our common stock is listed for trading on The Nasdaq Global Select Market, our common stock has substantially less liquidity than the average liquidity for companies listed on The Nasdaq Global Select Market.  A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This marketplace depends on the individual decisions of investors and general economic and market conditions over which we have no control. This limited market may affect a shareholder’s ability to sell their shares on short notice, and the sale of a large number of shares at one time could temporarily depress the market price of our common stock. For these reasons, our common stock should not be viewed as a short-term investment.

The Company's common stock is not insured by any governmental entity.

Our common stock is not a deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental entity.  Investment in Company common stock is subject to risk, including possible loss.

The Company may issue debt and equity securities that are senior to Company common stock as to distributions and in liquidation, which could negatively affect the value of Company common stock.

The Company has in the past and may in the future increase its capital by entering into debt or debt-like financing or issuing debt or equity securities, which could include issuances of senior notes, subordinated notes, preferred stock or common stock. In the event of the Company's liquidation, its lenders and holders of its debt securities would receive a distribution of the Company's available assets before distributions to the holders of Company common stock. The Company's decision to incur debt and issue securities in future offerings will depend on market conditions and other factors beyond its control. The Company cannot predict or estimate the amount, timing or nature of its future offerings and debt financings. Future offerings could reduce the value of shares of Company common stock and dilute a shareholder's interest in the Company.

Our articles of incorporation and bylaws and Michigan laws contain certain provisions that could make a takeover more difficult.

Our articles of incorporation and bylaws, and the laws of Michigan, include provisions which are designed to provide our Board of Directors with time to consider whether a hostile takeover offer is in our best interest and the best interests of our shareholders. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control. The provisions also could diminish the opportunities for a holder of our common stock to participate in tender offers, including tender offers at a price above the then-current price for our common stock. These provisions could also prevent transactions in which our shareholders might otherwise receive a premium for their shares over then current market prices, and may limit the ability of our shareholders to approve transactions that they may deem to be in their best interests.

The Michigan Business Corporation Act contains provisions intended to protect shareholders and prohibit or discourage certain types of hostile takeover activities. In addition to these provisions and the provisions of our articles of incorporation and bylaws, federal law requires the Federal Reserve Board's approval prior to acquisition of "control" of a bank holding company. All of these provisions may have the effect of delaying or preventing a change in control of the Company without action by our shareholders, and therefore, could adversely affect the price of our common stock.

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If an entity holds as little as a 5% interest in our outstanding securities, that entity could, under certain circumstances, be subject to regulation as a "bank holding company."

Any entity, including a "group" composed of natural persons, owning or controlling with the power to vote 25% or more of our outstanding securities, or 5% or more if the holder otherwise exercises a "controlling influence" over us, may be subject to regulation as a "bank holding company" in accordance with the Bank Holding Company Act of 1956, as amended (the "BHC Act").  In addition, any bank holding company or foreign bank with a U.S. presence may be required to obtain the approval of the Federal Reserve Board under the BHC Act to acquire or retain 5% or more of our outstanding securities.  Becoming a bank holding company imposes statutory and regulatory restrictions and obligations, such as providing managerial and financial strength for its bank subsidiaries.  Regulation as a bank holding company could require the holder to divest all or a portion of the holder's investment in our securities or those nonbanking investments that may be deemed impermissible or incompatible with bank holding company status, such as a material investment in a company unrelated to banking.

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Any person not defined as a company by the BHC Act may be required to obtain the approval of the Federal Reserve Board under the Change in Bank Control Act of 1978, as amended, to acquire or retain 10% or more of our outstanding securities.

Any person not otherwise defined as a company by the BHC Act and its implementing regulations may be required to obtain the approval of the Federal Reserve Board under the Change in Bank Control Act of 1978, as amended, to acquire or retain 10% or more of our outstanding securities.  Applying to obtain this approval could result in a person incurring substantial costs and time delays.  There can be no assurance that regulatory approval will be obtained.

ITEM 1B:

Unresolved Staff Comments.

None.

ITEM 2:1C:

Cybersecurity.

Cybersecurity Risk Management and Strategy

The Company is exposed to cybersecurity threats and incidents that can range from uncoordinated individual attempts to gain unauthorized access to information systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company or its third party service providers. While we have experienced, and expect to continue to experience, cybersecurity threats, we have not experienced a material cybersecurity incident in the three year period ended December 31, 2023.  Management considers various factors in assessing the materiality of a cybersecurity incident, including the potential for misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the business operation disruption.  The potential consequences of a material cybersecurity incident could include reputational damage, litigation with third parties, regulatory criticism or proceedings and increased cybersecurity protection and remediation costs, which in turn could materially adversely affect our results of operations.  We evaluate the risks of data theft (including theft of sensitive, proprietary and other data categories, in addition to personal data), and harm to customer or third party relationships or the possibility of litigation or regulatory investigation or actions that could materially adversely affect our results of operations and our reputation. 

The Company maintains a number of processes to identify and respond to cybersecurity threats and incidents.  The Company’s information security and third party risk management programs evaluate cybersecurity threats posed by internal and external factors and support daily operational functions that prevent unauthorized access or compromise. 

The information security and third party risk management programs report functionally to the Company’s overall risk management function, led by the Chief Risk Officer.  The information security function, led by the Information Security Officer and the Chief Technology Officer, evaluates internal and external cybersecurity threat factors according to a written policy statement approved by the Board periodically.  The Company maintains processes to evaluate third parties whose information systems support critical Company operations.

Risk management evaluates cybersecurity risks and information systems of third parties at onboarding and on an ongoing basis.  Processes include evaluating reports or performing assessments of a third party’s information systems leveraging cybersecurity frameworks such as International Organization for Standardization (ISO) ISO 27001, Cybersecurity Framework (CSF) published by the US National Institute of Standards and Technology, as well as evaluating reports issued by a third party’s auditors developed under the attestation standards issued by the American Institute of Certified Public Accountants (AICPA).  The Company integrates risk mitigation into additional onboarding requirements to address identified risk factors, such as developing service level agreements and minimum required information security performance expectations to enable cybersecurity threats and incidents to be managed within applicable industry or regulatory standards.  The Company requires contracts of third parties to incorporate industry and regulatory standard clauses requiring reporting to the Company of the occurrence and mitigation of cyber security threats and incidents as well as to maintain adequate levels of cybersecurity insurance coverage. 

The information security function performs periodic risk assessments of the Company’s information systems and cybersecurity threats using industry standard methodologies based on NIST CSF and MITRE Att&ck® methodologies, as well as regulatory guidance issued by the Federal Financial Institutions Examination Council (FFIEC) and state and federal regulators, including the Federal Deposit Insurance Corporation and the Michigan Department of Insurance and Financial Services.  Based on risk, the Company’s information security function performs internal engagements to provide assurance to senior management and the Board that the company’s information systems are able to identify, escalate and mitigate cybersecurity threats on a routine basis.  The Company also engages external independent parties to perform independent audit engagements, as well as other assessments of the Company’s information security and third party risk management program and information systems. 

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Cybersecurity Governance

On a periodic basis, typically monthly, management’s technology steering committee receives reporting summarizing cybersecurity threat and incident monitoring activity, along with details of remediation to address threats and incidents.  The summary considers both internal as well as external threat events and outlines management’s approach to enable the timely identification and notice of a material incident, should one occur, without unreasonable delay.  The results of internal and external assessments of the Company’s cybersecurity threat monitoring capabilities are provided to the committee.  Meeting minutes of the committee are maintained and made available to the Board of Directors. 

The Board of Directors receives periodic training related to cyber security and is responsible for approval and oversight of management’s policies governing information system security and cybersecurity threats and incidents, as well as oversight of management’s approach to secure the Company’s information systems.  The Board of Directors delegates the oversight of risk management to the Audit Committee of the Board.

The Audit Committee receives and reviews reports on the Company’s risk management processes, which include assessments of management’s cybersecurity threats and incident management functions.  The committee receives periodic reporting of certain cybersecurity risks from the information security officer, including reports related to social engineering, effectiveness of cyber security training, as well as vulnerability and penetration assessments performed on management’s information systems by internal and by external parties and audit reports of information systems and cybersecurity threat and incident monitoring. 

Any event that could become a cybersecurity incident is reviewed by risk management and information security and the technology steering committee.  The evaluation of reported events by the committee includes reporting of any mitigation or remediation determined necessary to address the threat posed by the reported event.  If any event rose to the level of a material incident, management maintains a response plan to mitigate the impact, maintain business continuity and provide for internal and external communication, including required communication. 

ITEM 2:

Properties.

We own or lease facilities located in Ottawa County, Allegan County and Kent County, Michigan.  Our administrative offices are located at 10753 Macatawa Drive, Holland, Michigan 49424.  Our administrative offices are approximately 49,000 square feet and contain our administration, human resources, trust, loan underwriting and processing, and deposit operations. We believe our facilities are well-maintained and adequately insured.  We own each of the facilities except those identified in the “Use” column as “(Leased facility)”.  Our facilities as of February 18, 2021,15, 2024, were as follows:

Location of Facility	Use
10753 Macatawa Drive, Holland	Main Branch, Administrative, and Loan Processing Offices
815 E. Main Street, Zeeland	Branch Office
116 Ottawa Avenue N.W., Grand Rapids	Branch Office (Leased facility, lease expires December 2025)2026)
126 Ottawa Avenue N.W., Grand Rapids	Loan Center (Leased facility, lease expires December 2021)2025)
141 E. 8th Street, Holland	Branch Office
489 Butternut Dr., Holland	Branch Office
145 Columbia Avenue, Holland	Satellite Office (Leased facility, lease expires March 2024)
701 Maple Avenue, Holland	Branch Office
699 E. 16th Street, Holland	Branch Office
41 N. State Street, Zeeland	Branch Office
2020 Baldwin Street, Jenison	Branch Office
6299 Lake Michigan Dr., Allendale	Branch Office
132 South Washington, Douglas	Branch Office
4758 – 136th Street, Hamilton	Branch Office (Leased facility, lease expires December 2021)2024)
3526 Chicago Drive, Hudsonville	Branch Office
20 E. Lakewood Blvd., Holland	Branch Office
3191 – 44th Street, S.W., Grandville	Branch Office
2261 Byron Center Avenue S.W., Byron Center	Branch Office
5271 Clyde Park Avenue, S.W., Wyoming	Branch Office
4590 Cascade Road, Grand Rapids	Branch Office
3177 Knapp Street, N.E., Grand Rapids	Branch Office
15135 Whittaker Way, Grand Haven	Branch Office
12415 Riley Street, Holland	Branch Office
2750 Walker N.W., Walker	Branch Office
1575 – 68th Street S.E., Grand Rapids	Branch Office
2820 – 10 Mile Road, Rockford	Branch Office
520 Baldwin Street, Jenison	Branch Office
2440 Burton Street, S.E., Grand Rapids	Branch Office
6330 28 th28th Street, S.E., Grand Rapids	Branch Office

ITEM 3:

Legal Proceedings.

As of the date of this report, there were no material pending legal proceedings, other than routine litigation incidental to the business of banking, to which Macatawa Bank Corporation or the Bank are a party or of which any of our properties are the subject.

ITEM 4:

Mine Safety Disclosures.

Not applicable.

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Table of Contents

PART II

 

PARTII

ITEM 5:

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is quoted on The Nasdaq Global Select Market under the symbol MCBC.  High and low closing prices (as reported on The Nasdaq Global Select Market) of our common stock for each quarter for the years ended December 31, 20202023 and 20192022 are set forth in the table below.

		2020												2019
Quarter		High				Low				Dividends Declared				High				Low				Dividends Declared
First Quarter		$	11.24			$	6.01			$	0.08			$	11.16			$	9.32			$	0.07
Second Quarter			8.48				6.15				0.08				10.95				9.71				0.07
Third Quarter			7.97				6.23				0.08				10.98				9.67				0.07
Fourth Quarter			8.75				6.45				0.08				11.42				9.92				0.07

		2023												2022
Quarter		High				Low				Dividends Declared				High				Low				Dividends Declared
First Quarter		$	11.16			$	6.96			$	0.08			$	9.56			$	8.76			$	0.08
Second Quarter			10.20				8.34				0.08				9.31				8.38				0.08
Third Quarter			10.25				8.88				0.08				10.28				8.65				0.08
Fourth Quarter			11.91				8.31				0.09				11.84				9.21				0.08

Information on restrictions on payments of dividends by us may be found in Item 1 of this report under the heading “Supervision and Regulation” and is here incorporated by reference.   Information regarding our equity compensation plans may be found in Item 12 of this report and is here incorporated by reference.

On February 18, 2021,15, 2024, there were approximately 730724 owners of record and approximately 5,3038,410 beneficial owners of our common stock.

Shareholder Return Performance Graph

The following graph shows the cumulative total shareholder return on an investment in the Company’s common stock compared to the Russell 2000 Index and the SNLKBW Bank NASDAQ Index.  The comparison assumes a $100 investment on December 31, 20152018 at the initial price of $6.05$9.62 per share (adjusted for all stock dividends and splits) and assumes that dividends are reinvested.  The comparisons in this table are set forth in response to Securities and Exchange Commission (SEC) disclosure requirements and therefore are not intended to forecast or be indicative of future performance of the common stock.

		Period Ending
Index		12/31/15				12/31/16				12/31/17				12/31/18				12/31/19				12/31/20
Macatawa Bank Corporation			100.00				174.99				171.28				168.58				200.38				156.83
Russell 2000			100.00				121.31				139.08				123.76				155.35				186.36
SNL Bank NASDAQ			100.00				138.65				145.97				123.04				154.47				132.56

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		Period Ending
Index		12/31/18				12/31/19				12/31/20				12/31/21				12/31/22				12/31/23
Macatawa Bank Corporation			100.00				118.85				93.06				101.69				131.44				139.20
Russell 2000			100.00				125.53				150.58				172.90				137.56				160.85
KBW Bank NASDAQ			100.00				136.13				122.09				168.88				132.75				131.57

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Issuer Purchases of Equity Securities

The following table provides information regarding the Company’s purchase of its own common stock during the fourth quarter of 2020.2023.  All employee transactions are under stock compensation plans.  These include shares of Macatawa Bank Corporation common stock surrendered for cancellation to satisfy tax withholding obligations that occur upon the vesting of restricted shares.  The value of the shares withheld is determined based on the closing price of Macatawa Bank Corporation common stock at the date of vesting.  The Company has no publicly announced repurchase plans or programs.

Macatawa Bank Corporation Purchases of Equity Securities
		Total Number of Shares Purchased				Average Price Paid Per Share
Period
October 1 - October 31, 2020
Employee Transactions			—				—
November 1 - November 30, 2020
Employee Transactions			7,976			$	7.87
December 1 - December 31, 2020
Employee Transactions			—				—
Total for Fourth Quarter ended December 31, 2020
Employee Transactions			7,976			$	7.87

Macatawa Bank Corporation Purchases of Equity Securities
		Total Number of Shares Purchased				Average Price Paid Per Share
Period
October 1 - October 31, 2023
Employee Transactions			—				—
November 1 - November 30, 2023
Employee Transactions			12,785			$	9.44
December 1 - December 31, 2023
Employee Transactions			—				—
Total for Fourth Quarter ended December 31, 2023
Employee Transactions			12,785			$	9.44

ITEM 6:

[Reserved]

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ITEM 7.

ITEM 6:

SelectedManagement’s Discussion and Analysis of Results of Operations and Financial Data.Condition.

Selected Historical Consolidated Financial Information.

The following unaudited table sets forth selected historical consolidated financial information as of and for the years ended December 31, 2023, 2022, 2021, 2020 2019, 2018, 2017 and 2016,2019, which is derived from our audited consolidated financial statements. You should read this information in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Results of Operations and Financial Condition" included elsewhere in this report.

		As of and for the Year Ended December 31,
(Dollars in thousands, except per share data)		2020				2019				2018				2017				2016
Financial Condition
Total assets		$	2,642,026			$	2,068,770			$	1,975,124			$	1,890,232			$	1,741,013
Securities			316,300				307,969				297,320				306,547				253,811
Loans			1,429,331				1,385,627				1,405,658				1,320,309				1,280,812
Deposits			2,298,587				1,753,294				1,676,739				1,579,010				1,448,724
Long-term debt			20,619				20,619				41,238				41,238				41,238
Other borrowed funds			70,000				60,000				60,000				92,118				84,173
Shareholders' equity			239,843				217,469				190,853				172,986				162,239
Share Information*
Basic earnings (loss) per common share		$	0.88			$	0.94			$	0.78			$	0.48			$	0.47
Diluted earnings (loss) per common share			0.88				0.94				0.78				0.48				0.47
Book value per common share			7.01				6.38				5.61				5.09				4.78
Tangible book value per common share			7.01				6.38				5.61				5.09				4.78
Dividends per common share			0.32				0.28				0.25				0.18				0.12
Dividend payout ratio			36.36	%			29.79	%			32.05	%			37.50	%			25.53	%
Average dilutive common shares outstanding			34,120,275				34,056,200				34,018,554				33,952,872				33,922,548
Common shares outstanding at period end			34,197,519				34,103,542				34,045,411				33,972,977				33,940,788
Operations
Interest income		$	67,224			$	75,942			$	69,037			$	57,676			$	52,499
Interest expense			5,687				12,455				9,411				5,732				4,959
Net interest income			61,537				63,487				59,626				51,944				47,540
Provision for loan losses			3,000				(450	)			450				(1,350	)			(1,350	)
Net interest income after provision for loan losses			58,537				63,937				59,176				53,294				48,890
Total noninterest income			23,976				19,728				17,503				17,419				19,074
Total noninterest expense			45,725				44,224				44,329				43,688				45,782
Income before income tax			36,788				39,441				32,350				27,025				22,182
Federal income tax**			6,623				7,462				5,971				10,733				6,231
Net income attributable to common shares			30,165				31,979				26,379				16,292				15,951
Performance Ratios
Return on average equity			13.19	%			15.66	%			14.69	%			9.60	%			10.06	%
Return on average assets			1.27				1.59				1.40				0.93				0.95
Yield on average interest-earning assets			3.00				4.04				3.91				3.59				3.42
Cost on average interest-bearing liabilities			0.38				0.94				0.76				0.51				0.46
Average net interest spread			2.62				3.10				3.15				3.08				2.96
Average net interest margin			2.75				3.38				3.38				3.24				3.11
Efficiency ratio			53.47				53.14				57.47				62.98				68.73
Capital Ratios
Period-end equity to total assets			9.08	%			10.51	%			9.66	%			9.15	%			9.32	%
Average equity to average assets			9.62				10.17				9.51				9.69				9.47
Total risk-based capital ratio (consolidated)			18.29				15.78				15.54				14.99				14.88
Credit Quality Ratios
Allowance for loan losses to total loans			1.22	%			1.24	%			1.20	%			1.26	%			1.32	%
Nonperforming assets to total assets			0.12				0.14				0.24				0.33				0.72
Net charge-offs / (recoveries) to average loans			0.19				(0.06	)			0.01				(0.08	)			(0.10	)

		As of and for the Year Ended December 31,
(Dollars in thousands, except per share data)		2023				2022				2021				2020				2019
Financial Condition
Total assets		$	2,748,699			$	2,906,919			$	2,928,751			$	2,642,026			$	2,068,770
Securities			840,321				848,022				553,066				316,300				307,969
Loans			1,338,386				1,177,748				1,108,993				1,429,331				1,385,627
Deposits			2,415,730				2,615,142				2,577,958				2,298,587				1,753,294
Long-term debt			—				—				—				20,619				20,619
Other borrowed funds			30,000				30,000				85,000				70,000				60,000
Shareholders' equity			287,085				247,038				254,005				239,843				217,469
Share Information*
Basic and diluted earnings (loss) per common share		$	1.26			$	1.01			$	0.85			$	0.88			$	0.94
Book value per common share			8.35				7.20				7.41				7.01				6.38
Dividends per common share			0.33				0.32				0.32				0.32				0.28
Dividend payout ratio			26.19	%			31.68	%			37.65	%			36.36	%			29.79	%
Average dilutive common shares outstanding			34,301,650				34,259,604				34,202,179				34,120,275				34,056,200
Common shares outstanding at period end			34,361,562				34,298,640				34,259,945				34,197,519				34,103,542
Operations
Interest income		$	113,811			$	74,906			$	58,634			$	67,224			$	75,942
Interest expense			26,364				4,760				2,565				5,687				12,455
Net interest income			87,447				70,146				56,069				61,537				63,487
Provision for credit losses			550				(1,125	)			(2,050	)			3,000				(450	)
Net interest income after provision for credit losses			86,897				71,271				58,119				58,537				63,937
Total noninterest income			18,441				20,019				23,695				23,976				19,728
Total noninterest expense			51,591				48,226				46,090				45,725				44,224
Income before income tax			53,747				43,064				35,724				36,788				39,441
Federal income tax			10,523				8,333				6,710				6,623				7,462
Net income attributable to common shares			43,224				34,731				29,014				30,165				31,979
Performance Ratios
Return on average equity			16.42	%			14.19	%			11.74	%			13.19	%			15.66	%
Return on average assets			1.60				1.21				1.02				1.27				1.59
Yield on average interest-earning assets			4.37				2.73				2.19				3.00				4.04
Cost on average interest-bearing liabilities			1.52				0.28				0.15				0.38				0.94
Average net interest spread			2.85				2.45				2.04				2.62				3.10
Average net interest margin			3.36				2.56				2.09				2.75				3.38
Efficiency ratio			48.72				53.49				57.78				53.47				53.14
Capital Ratios
Period-end equity to total assets			10.44	%			8.50	%			8.67	%			9.08	%			10.51	%
Average equity to average assets			9.74				8.55				8.71				9.62				10.17
Total risk-based capital ratio (consolidated)			18.69				17.87				18.32				18.29				15.78
Credit Quality Ratios
Allowance for credit losses to total loans			1.30	%			1.30	%			1.43	%			1.22	%			1.24	%
Nonperforming assets to total assets			—				0.08				0.08				0.12				0.14
Nonaccrual loans to total loans			—				0.01				0.01				0.04				0.01
Allowance for credit losses to nonaccrual loans			1,744,200.00				19,596.15				17,270.65				3,266.04				8,472.91
Net charge-offs / (recoveries) to average loans			(0.01	)			(0.05	)			(0.04	)			0.19				(0.06	)

*Retroactively adjusted to reflect the effect of all stock splits and dividends

**2017 reflects the effect of "H.R.1", also known as the "Tax Cuts and Jobs Act", on the value of the Company's net deferred tax assets which increased federal income tax expense by $2,524,000.  2020, 2019 and 2018 reflect the effect of the reduced corporate tax rate from 35% to 21% under H.R.1 effective as of January 1, 2018.

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Item 7.

Management’s Discussion and Analysis of Results of Operations and Financial Condition.

Management’s discussion and analysis of results of operations and financial condition contains forward-looking statements.  Please refer to the discussion of forward-looking statements at the beginning of this report.

The following section presents additional information to assess our results of operations and financial condition.  This section should be read in conjunction with the consolidated financial statements and the supplemental financial data contained elsewhere in this report.

The information under Item 1 – Business of this report is incorporated here by reference.

RESULTS OF OPERATIONS

Summary: Net income was $30.2$43.2 million ($36.853.7 million on a pretax basis) for 2020,2023, compared to $32.0$34.7 million ($39.443.1 million on a pretax basis) for 2019.2022.  Earnings per common share on a diluted basis were $0.88$ 1.26 for 20202023 and $0.94$ 1.01 for 2019.

Over the past several years,2022.

During 2023, the improvement in our earnings has beenwas the result of growth in revenuenet interest income while expenses have beenwere relatively stable.  The increaseThroughout 2022, the Federal Reserve Bank increased the federal funds rate several times, bringing the high end of their rate range from 0.25% at the beginning of the year to 4.50% by the end of 2022.  They increased rates by another 100 basis points during 2023, ending the year at 5.50%.  Given our asset sensitive balance sheet posture, this had a very positive impact on our earnings in revenue in 2020 compared to 2019 was due primarily to increased gains on sales of mortgage loans more than offsetting the reduction in net interest income.2023.  Net interest income decreasedincreased to $61.5$87.4 million in 20202023 compared to $63.5$70.1 million in 2019.  Gain2022.  Gains on sales of mortgage loans were $6.5 million$65,000 in 20202023 compared to $2.3 million$706,000 in 2019.2022 with the decrease reflecting the impact of higher interest rates in 2023.  Other categories of noninterest income were down $937,000 in 2023, partially offsetting the impact of net interest income growth.  Total noninterest expense was $45.7$51.6 million in 20202023 compared to $44.2$48.2 million in 2019.

2022.

We recorded a provision for loancredit losses of $3.0$550,000 in 2023 and a provision for credit losses benefit of $1.1 million in 2020 and a negative provision2022.   Adoption of ASU 2016-13, commonly referred to as CECL, effective January 1, 2023, resulted in an increase to the allowance for loancredit losses of $450,000 in 2019.$1.5 million.  The provision taken in 20202023 was driven by a $4.1 million charge-off takendetermined following the new CECL standard and in the second quarter of 2020 related to a single loan relationship with a movie theater business where the underlying assets were sold through bankruptcy proceedings.  The 2020 provision also included additional allocations provided to the portfolio for qualitative allocations related to the COVID-19 pandemic.2022 was determined using incurred loss methodology.  The provision in both periods was favorably impacted by low levels of nonperforming loans, strong asset quality and the levels of net loan charge-offs/charge-offs to recoveries realized in recent periods (excludingperiods.  The provision in 2022 was favorably impacted by the large charge-offeffect of reversals of the additional qualitative factors related to the movie theater business discussed above).COVID-19 pandemic.  These items are discussed more fully below.

Net Interest Income: Net interest income totaled $61.5$87.4 million during 20202023 compared to $63.5$70.1 million during 2019.

2022.

The decreaseincrease in net interest income during 20202023 compared to 20192022 was due primarily to the impact of an increase in average earning assets of $360.7 million from $1.89 billion in 2019 to $2.25 billion in 2020 being more than offset by a reduction in yields on interest earning assets, particularly overnight deposits and variable rate loans as the federal funds rate was decreasedincreased by 150425 basis points in March 20202022 and 100 basis points in response to the COVID-19 pandemic.2023.  Average yields on securities, interest earning assets and net interest margin are presented on a fully taxable equivalent basis.  Our net interest income as a percentage of average interest-earninginterest earning assets (i.e. "net interest margin" or "margin") was 2.75%3.36% for the year ended December 31, 20202023 and 3.38%2.56% for the year ended December 31, 2019.

2022.

The yield on interest earning assets decreased 104increased 164 basis points from 4.04%2.73% for 20192022 to 3.00%4.37% for 2020.2023.  The decreaseincrease from 20192022 to 20202023 was generally due to an increase of $216.5 million in average federal funds sold while the average short-term interest rates earned on theseovernight deposits decreased by 185 basis pointsand variable rate commercial loans.  The average rate on overnight deposits increased from 20191.53% in 2022 to 2020.5.07% in 2023.  Our margin in recent years hashad been negatively impacted by our decision to hold significant balances in liquid and short-term investments.

  In 2022 and 2023, our margin benefitted significantly from this strategy. Net interest income also benefitted in 2023 from growth in our investment portfolio.  Our average investment portfolio balance in 2023 was $888.4 million compared to $749.8 million in 2022.  Total average interest earning assets totaled $2.60 billion for 2023 compared to $2.74 billion in 2022.

Net interest income for 2020 decreased $2.02023 increased $17.3 million compared to 2019.the same period in 2022.  Of this decrease, $8.3increase, $18.4 million was due tofrom changes in the rates earned or paid, partially offset by $6.3a $1.1 million increasereduction from changes in the volume of average interest earning assets and interest bearing liabilities. The largest changes cameoccurred in commercial loan interest income which decreased by $1.9 million in 2020.  Of the $1.9 million decrease inon federal funds (our overnight deposits), interest income on commercial loans $7.4and interest income in our investment portfolio as we deployed more of our excess investable funds primarily into commercial and residential mortgage loans and taxable securities.  Interest income from federal funds sold and other short-term investments increased by $9.6 million was duein 2023 compared to decreases2022. The increases in rates earned,2022 and 2023 of the federal funds rate caused an $18.5 million increase in interest income, partially offset by $5.5an $8.9 million increase from increasesdecrease in net interest income due to a decrease in average balances driven by PPP loans.

Averageof federal funds sold and other short-term investments in 2023.  The net change in interest earning assets totaled $2.25 billionincome for 2020commercial loans was an increase of $18.2 million in 2023 as compared to $1.89 billion in 2019.  Increases of $216.52022, with a $14.0 million increase due to rate and $4.2 million due to an increase in average short-term investmentbalances.  The net change in interest income for taxable securities was an increase of $6.8 million with $3.6 million due to an increase in average balances and $124.2$3.2 million in average loan balances from 2019due to 2020 were the primary drivers of the increase in total earning assets.  rate.

Yield on commercial loans (excluding PPP loans) decreasedincreased from 4.72%4.23% in 20192022 to 4.01%5.60% in 2020.  Yield on PPP loans was 3.32% in 2020.2023.  Yield on residential mortgage loans decreasedincreased from 3.72%3.36% in 20192022 to 3.66%4.09% in 2020,2023, while yield on consumer loans decreasedincreased from 5.19%4.88% in 20192022 to 4.32%7.74% in 2020.2023.  The decreasesincreases in yields on commercial loans and consumer loans in particular, were the result of the predominance of loans in these categories with variable rates of interest tied to prime and LIBORSOFR, which decreased significantly in 2020.

increased throughout 2023.

Our net interest margin for 20202023 was positivelynegatively impacted from a 56124 basis point decreaseincrease in our cost of funds from 0.94%0.28% for 20192022 to 0.38%1.52% for 2020.2023. Average interest bearing liabilities increased $15.3 million from $1.32$1.72 billion in 20192022 to $1.47$1.74 billion in 2020.  Decreases2023.  Increases in the rates paid on certain deposit account types in response to the sharp market rate declinesincreases were the primary cause of the decreaseincrease in our cost of funds.  In addition, we have experienced a shifting between deposit types to higher interest bearing types, with average certificates of deposit increasing $142.1 million from $88.2 million in 2022 to $230.3 million in 2023.  While theseour funding costs have decreased,increased, the yields on our interest earning assets decreasedincreased to a larger extent, causing net interest income and net interest margin to decreaseincrease from 20192022 to 2020.

2023.

In 2024, we expect pressure on deposit costs may slow further improvement in net interest margin.  That said, expected repricing of maturing low-rate fixed rate loans and securities should partially offset the funding cost pressure and provide some protection to net interest income when interest rates begin to fall.

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In 2021, we expect that net interest margin will continue to be pressured by our higher levels of short-term investment balances held.

The following table shows an analysis of net interest margin for the years ended December 31, 2020, 20192023 and 20182022 (dollars in thousands).

		For the years ended December 31,
		2020												2019												2018
		Average Balance				Interest Earned or Paid				Average Yield or Cost				Average Balance				Interest Earned or Paid				Average Yield or Cost				Average Balance				Interest Earned or Paid				Average Yield or Cost
Assets
Taxable securities		$	184,089			$	3,700				2.01	%		$	174,121			$	3,864				2.22	%		$	180,787			$	3,716				2.06	%
Tax-exempt securities (1)			131,992				3,412				3.33				121,905				3,518				3.71				123,923				3,464				3.60
Commercial loans (2)			1,015,946				41,289				4.01				1,062,549				50,873				4.72				1,012,413				46,369				4.52
PPP loans (3)			228,047				7,681				3.32
Residential mortgage loans			183,715				6,728				3.66				230,551				8,572				3.72				235,378				8,399				3.57
Consumer loans			69,854				3,019				4.32				80,277				4,164				5.19				85,175				4,084				4.79
Federal Home Loan Bank stock			11,558				427				3.63				11,558				614				5.24				11,558				578				4.94
Federal funds sold and other short-term investments			422,649				968				0.23				206,140				4,337				2.08				124,374				2,427				1.92
Total interest earning assets (1)			2,247,850				67,224				3.00				1,887,101				75,942				4.04				1,773,608				69,037				3.91
Noninterest earning assets:
Cash and due from banks			30,917												31,704												31,025
Other			97,756												89,497												83,808
Total assets		$	2,376,523											$	2,008,302											$	1,888,441
Liabilities
Deposits:
Interest bearing demand		$	535,922			$	409				0.08	%		$	446,452			$	1,443				0.33	%		$	406,694			$	1,130				0.28	%
Savings and money market accounts			715,135				1,110				0.16				625,307				4,554				0.73				602,676				3,317				0.55
Time deposits			134,199				1,969				1.47				148,189				2,857				1.93				109,715				1,434				1.30
Borrowings:
Other borrowed funds			69,017				1,429				2.04				59,976				1,369				2.25				74,751				1,403				1.85
Long-term debt			20,619				770				3.67				41,182				2,232				5.35				41,238				2,127				5.09
Total interest bearing liabilities			1,474,892				5,687				0.38				1,321,106				12,455				0.94				1,235,074				9,411				0.76
Noninterest bearing liabilities:
Noninterest bearing demand accounts			659,387												472,987												467,663
Other noninterest bearing liabilities			13,551												10,018												6,077
Shareholders' equity			228,693												204,191												179,627
Total liabilities and shareholders' equity		$	2,376,523											$	2,008,302											$	1,888,441
Net interest income						$	61,537											$	63,487											$	59,626
Net interest spread (1)											2.62	%											3.10	%											3.15	%
Net interest margin (1)											2.75	%											3.38	%											3.38	%
Ratio of average interest earning assets to average interest bearing liabilities			152.41	%											142.84	%											143.60	%

		For the years ended December 31,
		2023												2022
		Average Balance				Interest Earned or Paid				Average Yield or Cost				Average Balance				Interest Earned or Paid				Average Yield or Cost
Assets
Taxable securities		$	766,657			$	18,191				2.37	%		$	597,899			$	11,333				1.90	%
Tax-exempt securities (1)			121,719				2,764				2.93				151,888				2,803				2.38
Commercial loans (2)			1,029,909				58,431				5.60				938,817				40,197				4.23
Residential mortgage loans			164,217				6,726				4.09				125,202				4,211				3.36
Consumer loans			56,561				4,380				7.74				56,684				2,768				4.88
Federal Home Loan Bank stock			10,211				318				3.07				10,411				199				1.89
Federal funds sold and other short-term investments			447,249				23,001				5.07				862,240				13,395				1.53
Total interest earning assets (1)			2,596,523				113,811				4.37				2,743,141				74,906				2.73
Noninterest earning assets:
Cash and due from banks			36,045												36,428
Other			71,690												85,685
Total assets		$	2,704,258											$	2,865,254
Liabilities
Deposits:
Interest bearing demand		$	629,804			$	2,985				0.47	%		$	704,926			$	952				0.14	%
Savings and money market accounts			847,245				14,483				1.71				879,273				2,474				0.28
Time deposits			230,325				8,262				3.58				88,218				347				0.40
Borrowings:
Other borrowed funds			30,000				634				2.08				49,622				987				1.96
Long-term debt			—				—				—				—				—				—
Total interest bearing liabilities			1,737,374				26,364				1.52				1,722,039				4,760				0.28
Noninterest bearing liabilities:
Noninterest bearing demand accounts			686,664												884,579
Other noninterest bearing liabilities			16,950												13,795
Shareholders' equity			263,270												244,841
Total liabilities and shareholders' equity		$	2,704,258											$	2,865,254
Net interest income						$	87,447											$	70,146
Net interest spread (1)											2.85	%											2.45	%
Net interest margin (1)											3.36	%											2.56	%
Ratio of average interest earning assets to average interest bearing liabilities			149.45	%											159.30	%

(1)	Yields are presented on a tax equivalent basis using a 21% tax rate.

(2)

Loan fees of $852,000, $946,000$362,000 and $701,000$1.8 million for 2020, 20192023 and 2018,2022, respectively, are included in interest income.  Included in these fee amounts were $0 and $1.3 million in fees on PPP loans in 2023 and 2022, respectively.  Includes average nonaccrual loans of approximately $2.2 million, $375,000$49,000 and $316,000$86,000 for 2020, 20192023 and 2018,2022, respectively.  Excludes PPP loans.

(3)	Includes loan fees of $5.4 million for the twelve months ended December 31, 2020.

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The following table presents the dollar amount of changes in net interest income due to changes in volume and rate.

		For the years ended December 31,
		2020 vs 2019 Increase (Decrease) Due to												2019 vs 2018 Increase (Decrease) Due to
		Volume				Rate				Total				Volume				Rate				Total
(Dollars in thousands)
Interest income
Taxable securities		$	213			$	(377	)		$	(164	)		$	(140	)		$	288			$	148
Tax-exempt securities			370				(476	)			(106	)			(78	)			132				54
Commercial loans, excluding PPP loans			(2,155	)			(7,429	)			(9,584	)			2,351				2,153				4,504
PPP loans			7,681				—				7,681				—				—				—
Residential mortgage loans			(1,717	)			(127	)			(1,844	)			(171	)			344				173
Consumer loans			(501	)			(644	)			(1,145	)			(243	)			323				80
Federal Home Loan Bank stock			—				(187	)			(187	)			—				36				36
Federal funds sold and other short-term investments			2,302				(5,671	)			(3,369	)			1,707				203				1,910
Total interest income			6,193				(14,911	)			(8,718	)			3,426				3,479				6,905
Interest expense
Interest bearing demand		$	243			$	(1,277	)		$	(1,034	)		$	117			$	196			$	313
Savings and money market accounts			575				(4,019	)			(3,444	)			129				1,108				1,237
Time deposits			(251	)			(637	)			(888	)			604				819				1,423
Other borrowed funds			192				(132	)			60				(302	)			268				(34	)
Long-term debt			(899	)			(563	)			(1,462	)			(3	)			108				105
Total interest expense			(140	)			(6,628	)			(6,768	)			545				2,499				3,044
Net interest income		$	6,333			$	(8,283	)		$	(1,950	)		$	2,881			$	980			$	3,861

		For the years ended December 31,
		2023 vs 2022 Increase (Decrease) Due to
		Volume				Rate				Total
(Dollars in thousands)
Interest income
Taxable securities		$	3,624			$	3,234			$	6,858
Tax-exempt securities			(786	)			747				(39	)
Commercial loans			4,192				14,042				18,234
Residential mortgage loans			1,480				1,035				2,515
Consumer loans			(6	)			1,618				1,612
Federal Home Loan Bank stock			(4	)			123				119
Federal funds sold and other short-term investments			(8,869	)			18,475				9,606
Total interest income			(369	)			39,274				38,905
Interest expense
Interest bearing demand		$	(112	)		$	2,145			$	2,033
Savings and money market accounts			(93	)			12,102				12,009
Time deposits			1,310				6,605				7,915
Other borrowed funds			(410	)			57				(353	)
Long-term debt			—				—				-
Total interest expense			695				20,909				21,604
Net interest income		$	(1,064	)		$	18,365			$	17,301

(1)  The change in interest due to changes in both balance and rate has been allocated to change in balance and change due to rate in proportion to the relationship of the absolute dollar amounts of change in each.

Provision for LoanCredit Losses: The provision for loancredit losses for 20202023 was $3.0 million$550,000 compared to negative $450,000a benefit of $1.1 million for 2019.2022. The provision for loancredit losses for 2020 was2023 and 2022 were impacted by our continued strong asset quality metrics. We adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the probable incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance for credit losses of $1.5 million, $62,000 to establish a reserve for unfunded commitments and a $1.2 million decrease to retained earnings to reflect the cumulative effect of adoption of CECL, with the $323,000 tax impact portion being recorded as part of the deferred tax asset on our Consolidated Balance Sheet.

In 2022, economic conditions improved allowing for reductions in the additional qualitative adjustments made to provide for estimated losses associated with the COVID-19 pandemic as well as a $4.1 million charge-off taken in June 2020 related to a single loan relationship with a movie theater business for which the underlying assets were sold through bankruptcy proceedings.  No otherCOVID-19 pandemic.  This contributed to the level of provision benefit recorded in 2022.  Specific reserves on collateral dependent loans of this industry type remain in our portfolio.  This was partially offset by continued strong asset quality metrics and loan portfolio contraction.  The balances of loans graded 5 and 6, which receive higher allocations increased by $1.0 million from December 31, 2019 to December 31, 2020.$7,000 in 2023.  Specific reserves on impaired loans decreased by $414,000$270,000 in 2022 from $1.6 million at December 31, 2019 to $1.2 million at December 31, 2020.  When excluding PPP loans, which are 100% guaranteed by the SBA, total loans decreased by $185.4 million from December 31, 2019 to December 31, 2020.2021.  Net loan chargeoffsrecoveries were $2.8 million$131,000 in 20202023 compared to net loan recoveries of $774,000$521,000 in 2019.

2022.

Our overall weighted average commercial loan grade has been below 4.00 for the past several years.  Our weighted average commercial loan grade was 3.713.49 at December 31, 20202023 and 3.673.53 at December 31, 2019.

2022.

The amounts of loancredit loss provision in each period were the result of establishing our allowance for loancredit losses at levels believed necessary based upon our methodology for determining the adequacy of the allowance. The sustained level of net recoveries over the past several years has had a significant effect on the historical loss component of our methodology. More information about our allowance for loancredit losses and our methodology for establishing its level may be found in this Item 7 of this report under the heading “Allowance for LoanCredit Losses” below and in Item 8 of this report in Note 3 of the Consolidated Financial Statements.

Noninterest Income: Noninterest income totaled $24.0$18.4 million in 20202023 compared to $19.7$20.0 million in 2019.2022.  The components of noninterest income are shown in the table below (in thousands):

		2020				2019
Service charges and fees on deposit accounts		$	4,030			$	4,415
Net gains on mortgage loans			6,477				2,347
Trust fees			3,758				3,812
ATM and debit card fees			5,699				5,753
Bank owned life insurance (“BOLI”) income			874				972
Investment services fees			1,535				1,246
Other income			1,603				1,183
Total noninterest income		$	23,976			$	19,728

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		2023				2022
Service charges and fees on deposit accounts		$	4,109			$	4,769
Net gains on mortgage loans			65				706
Trust fees			4,332				4,143
ATM and debit card fees			6,694				6,768
Bank owned life insurance (“BOLI”) income			903				878
Investment services fees			1,557				1,691
Other income			781				1,064
Total noninterest income		$	18,441			$	20,019

Net gains on sales of mortgage loans increased $4.1 milliondecreased $641,000 from 20192022 to 20202023 due to higher salesmuch lower volumes of mortgage loans originated for sale in 2020.2023.   Net gains on mortgage loans includedrepresent gains on the sale of real estate mortgage loans in the secondary market.  We typically sell the majority of the fixed-rate mortgage loans we originate.originate, however in 2023, with the high rate environment, we have held more of this production in portfolio. We do not retain the servicing rights for the loans we sell.

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A summary of gain on sales of loans and related loan volume was as follows (in thousands):

		For the Year Ended December 31,
		2020				2019
Gain on sales of loans		$	6,477			$	2,347
Real estate mortgage loans originated for sale		$	156,410			$	82,281
Real estate mortgage loans sold			160,759				81,749
Net gain on the sale of mortgage loans as a percent of real estate mortgage loans sold ("Loan sale margin")			4.03	%			2.87	%

		For the Year Ended December 31,
		2023				2022
Gain on sales of loans		$65				$706
Real estate mortgage loans originated for sale		$	4,145			$	26,236
Real estate mortgage loans sold			4,425				28,134
Net gain on the sale of mortgage loans as a percent of real estate mortgage loans sold ("Loan sale margin")			1.47	%			2.51	%

As demonstrated in the table above, the volume of mortgage loans originated for sale was updown significantly in 20202023 compared to 2019.2022.  The lowrapid increase in interest rates environment in 2020 hasduring 2022 and 2023 significantly impacted mortgage sale production volume.  During 2020,As long-term market interest rates impacting mortgage rates began to rise in the latter half of 2021, mortgage production slowed and resulting gains declined.  As rates increased further in 2022 and 2023, refinancing activity all but stopped and more customers chose variable rate products, which we hold in portfolio.  We also determined it appropriate to hold more of the fixed rate production in portfolio in 2023 given the higher rates and assumed shorter duration, as many loans likely will be refinanced when rates decline. We expect our residential mortgage production volume was in productsloan activity to remain below normal levels as we sell onenter 2024 given the secondary market than in the prior year, also contributing to the increase in gains on sales of mortgage loans in 2020.

existing rate environment.

Deposit service charges were down $385,000,$660,000, primarily driven by lower overdrafta higher level of earnings credits due to higher deposit rates in 2023 which offset treasury management service charges to our commercial customers.  Treasury management fee income.  These fees are driven by customer spending behaviorincome pre-earnings credit improved as a result of success in growing the number of business and this activity tracked with the overall effect of government shutdowns on the economy, particularlymunicipal customers using these services in the second quarter of 2020, which was most impacted by the COVID-19 response.  The stimulus checks sent by the federal government also helped our customers keep their accounts from overdrawing.  In the fourth quarter of 2020, these fees had recovered significantly but remained below normal levels.

last two years.  

Trust service revenue decreased $54,000increased $189,000 in 2020.2023.   This decreaseincrease was due primarily to changes in general market conditions in 2020.

valuations of assets on which fees are assessed.

ATM and debit card processing income decreased $54,000$74,000 in 20202023 to $5.7$6.7 million compared to $5.8$6.8 million in 2019.2022.  This decrease reflected a declinedecrease in usage from customers in early 2020 when COVID-19 restrictions were first implemented. By the end of 2020, thedebit card interchange charged to our account holders, as transaction volume was back to normal and above average levels.  There was overall growthslightly lower in the number of debit and ATM card customers2023 than in the latter months of the year and promotional efforts to increase volume in these low cost transaction alternatives continue to be successful.

2022.  

We did not sell any securities in 20202023 or 2019.2022.  We continually review our securities portfolio and will dispose of securities that pose higher than desired credit or market risk.

risk, or as warranted from overall portfolio maintenance or asset-liability management.

Investment services fees increased $289,000decreased $134,000 in 2020.  This increase was2023 due to growthslightly lower volumes of investment products sold in our investment services customer base along with a shift in the choice of investments by customers to those with higher associated fees.  The fees in 2020 were elevated due to the sale of a business by one of our customers with proceeds being invested in an annuity.

2023 versus 2022.

Earnings from bank owned life insurance decreasedincreased by $98,000$25,000 in 20202023 compared to 20192022 due to the general performance of the underlying investments.  Other real estate rental income was $327,000 in 2020 compared to $495,000 in 2019.  The year over year changes were a result of changes in rental arrangements on some of these properties.

Other income was updown by $420,000$283,000 in 20202023 due largely to lower swap fee income in 2023. We also experienced a reduction of title insurance fees collected on customer back-to-backof $63,000 as mortgage volume was down due to the higher interest rate swaps.  These fees were $420,000 in 2020 compared to $62,000 in 2019.

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environment. 

Noninterest Expense: Noninterest expense was $45.7$51.6 million in 20202023 and $44.2$48.2 million in 2019.  The slight increase in total noninterest expense reflected our active management of controllable costs.2022.  The components of noninterest expense are shown in the table below (in thousands):

		2023				2022
Salaries and benefits		$	28,620			$	26,194
Occupancy of premises			4,208				4,200
Furniture and equipment			4,199				4,008
Legal and professional			1,425				961
Marketing and promotion			803				803
Data processing			3,953				3,756
FDIC assessment			1,320				789
Interchange and other card expense			1,633				1,586
Bond and D&O insurance			490				518
Outside services			1,905				2,139
Other noninterest expense			3,035				3,272
Total noninterest expense		$	51,591			$	48,226

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		2020				2019
Salaries and benefits		$	25,530			$	24,679
Occupancy of premises			3,955				3,994
Furniture and equipment			3,678				3,420
Legal and professional			1,104				952
Marketing and promotion			891				919
Data processing			3,357				2,980
FDIC assessment			400				239
Interchange and other card expense			1,406				1,414
Bond and D&O insurance			418				413
Net (gains) losses on repossessed and foreclosed properties			19				(24	)
Administration and disposition of problem assets			96				277
Outside services			1,792				1,778
Other noninterest expense			3,079				3,183
Total noninterest expense		$	45,725			$	44,224

Salaries and benefits expense was the largest component of noninterest expense and was $25.5$28.6 million in 20202023 and $24.7$26.2 million in 2019.2022.  The increase in 20202023 was primarily due to $1.3 million in expenses related to the CEO retirement agreement effective November 1, 2023 incurred in the fourth quarter 2023.  The remainder of the increase was driven by annual merit increases and an increase in variablehigher base compensation, tied to higher mortgage loan production and investment services fees in 2020, partially offset by lower medical insurance costs resulting from lowerincreased claims experience in 2020,and higher salary cost deferrals (driven by PPP loan originations) and lower 401k matching costs as we suspended our 401k matching for the second quarter of 2020.401(k) contributions.  The table below identifies the primary components of salaries and benefits (in thousands):

		2020				2019
Salaries and other compensation		$	22,545			$	21,700
Salary deferral from commercial loans			(1,159	)			(834	)
Bonus			1,067				981
Mortgage production - variable comp			1,202				673
401k matching contributions			628				722
Medical insurance costs			1,247				1,437
Total salaries and benefits		$	25,530			$	24,679

		2023				2022
Salaries and other compensation			23,705				22,694
Executive retirement costs			1,261				—
Salary deferral from commercial loans			(748	)			(855	)
Bonus			1,150				1,154
Mortgage production - variable comp			431				430
Brokerage - variable comp			439				470
401(k) matching contributions			790				755
Medical insurance costs			1,592				1,546
Total salaries and benefits		$	28,620			$	26,194

Legal and professional fees increased to $1.4 million in 2023 compared to $961,000 in 2022. Of the $464,000 increase in 2023, $241,000 was due to higher audit and examination costs due to outsourcing of certain core internal audit services and $223,000 was due to higher legal expenses.  Legal expense in 2023 included additional costs associated with new accounting and proxy disclosures, regulatory compliance matters referred to legal counsel and inflationary increases and consultation related to executive transitions.

Costs associated with nonperforming assets remained at low levels, totaling $115,000$3,000 in 20202023 and $253,000$20,000 in 2019.  These costs included legal costs, repossessed and foreclosed2022.   During 2023, we did not add any other real estate owned properties.  On January 30, 2023, we sold the remaining other real estate owned property administration expense and losses (gains) on repossessed and foreclosed properties. Repossessed and foreclosed property administration expense included survey and appraisal, property maintenance and management andat a gain of $356,000, bringing the balance of other disposition and carrying costs. Net (gains) losses on repossessed and foreclosed properties included both net gains and losses on the sale of properties and unrealized losses from value declines for outstanding properties.

These costs are itemized in the following table (in thousands):

		2020				2019
Legal and professional – nonperforming assets		$	58			$	121
Repossessed and foreclosed property administration			38				156
Net (gains) losses on repossessed and foreclosed properties			19				(24	)
Total		$	115			$	253

During 2020,real estate owned to $0.  In 2022, we did not add any other real estate properties and sold $192,000 of otherone real estate and repossessed assets, allowing for another reduction in our year-end balance, bringing it from $2.7 million at December 31, 2019 to $2.5 million at December 31, 2020.  In 2019, we did not add any other real estate properties and sold $618,000.

property.  

FDIC assessmentsassessment expense increased to $400,000$1.3 million in 20202023 compared to $239,000$789,000 in 20192022 primarily due to our assessment category and assessment credits applied during 2019, resultinghigher premiums assessed by the FDIC beginning in no expense in the third and fourth quarters of 2019.  Assessment credits of $266,000 were applied in 2019, leaving approximately $172,000 in assessment credits that were fully utilized in 2020.2023.  Further discussion regarding the determination of FDIC assessments for the Bank may be found in Item 1 of this report under the heading "Supervision and Regulation."

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We expect this expense to remain elevated in 2024 until the FDIC bank insurance fund reaches the level imposed by regulations.

Occupancy expense decreasedincreased by $39,000$8,000 in 20202023 primarily due to a decreasean increase in snow removal and outside groundsbuilding maintenance costs, partially offset by an increase in janitorial costs and building maintenance.depreciation of our buildings.  Furniture and equipment expense increased by $258,000$191,000 in 20202023 primarily due to an increase in equipment and service contracts, and software related to information security solutions, partially offset by a decrease in depreciation expensefurniture and equipment rentaldepreciation and repairs.

software amortization costs.

Data processing expenses were $3.4$4.0 million in 20202023 and $3.0$3.8 million in 2019.2022.  Increases in data processing for our systems and card programs in 2020 and costs associated with our conversion to a new online banking service in 20202023 were the primary reasons for the increase in 2020.

Other noninterest expenses not discussed above were $8.3 million2023.

Outside services decreased by $234,000 in 20202023 primarily due to lower recruiting costs and $8.3 million in 2019.

certain outsourced services.

Federal Income Tax Expense:We recorded federal income tax expense of $6.6$10.5 million in 20202023 and $7.5$8.3 million in 2019.2022.  Our effective tax rate was 18.00%19.58% for 20202023 and 18.92%19.35% for 2019.  In2022.  The increase in the fourth quartereffective tax rate in 2023 over 2022 was due to higher levels of 2020, we received the final distributiontaxable income from rising interest rates while our tax-exempt income has remained relatively flat.

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Table of a partnership interest we had acquired in a loan settlement.  This removed the uncertainty regarding our realization of the related deferred tax asset and, as such, the $92,000 valuation allowance we had established at December 31, 2018 was reversed at December 31, 2020.Contents

FINANCIAL CONDITION

Summary:   Total assets were $2.64$2.75 billion at December 31, 2020, an increase2023, a decrease of $573.3$158.2 million from $2.07$2.91 billion at December 31, 2019.2022. This change reflected increases of $511.3$160.6 million in our loan portfolio, $9.5 million in securities available for sale, $1.4 million in accrued interest receivable and $904,000 in bank owned life insurance, offset by decreases of $304.8 million in cash and cash equivalents, $43.7$17.2 million in our loan portfolio, $11.6 million in securities available for sale, $7.9 million in other assets, $2.1 million in loans held for sale and $360,000 in bank owned life insurance, partially offset by decreases of $3.3 million in securities held to maturity $211,000securities, $1.4 million in premises and equipment, $2.3 million in other real estate owned, and $163,000$2.5 million in premises and equipment.net deferred tax assets. Total deposits increaseddecreased by $545.3$199.4 million and other borrowed funds were up by $10.0 millionunchanged at December 31, 20202023 compared to December 31, 2019.

2022.

Total shareholders’ equity increased by $22.4$40.0 million from December 31, 20192022 to December 31, 2020.2023.  Shareholders’ equity was increased by $30.2$43.2 million of net income in 2020,2023, partially offset by cash dividends of $10.9$11.3 million, or $0.32$0.33 per share.  Shareholders’ equity also increased by $2.7$8.7 million in 20202023 as a result of a favorable swing in accumulated other comprehensive income due to the effect of interest rate movement on the change in fair value of our available for sale securities portfolio. As of December 31, 20202023 and 2019,2022, the Bank was categorized as “well capitalized” under applicable regulatory guidelines.

Cash and Cash Equivalents: Our cash and cash equivalents, which include federal funds sold and short-term investments, were $783.7$450.4 million at December 31, 20202023 compared to $272.5$755.2 million at December 31, 2019.2022. This $511.3$304.8 million increasedecrease was primarily due to manythe result of growth in our customers holding higher balances, particularly liquidloan portfolio and reduction of deposits in the low interest rate environment and due to uncertainty related to the COVID-19 pandemic.

during 2023.

Securities: Securities available for sale ("AFS") were $236.8$508.8 million at December 31, 20202023 compared to $225.2$499.3 million at December 31, 2019.2022. The balance at December 31, 20202023 primarily consisted of U.S. Treasury and agency securities, agency mortgage backed securities and various municipal investments. The growth in securities AFS was primarily the result of an improvement in the net unrealized losses of $11.0 in the investment portfolio in 2023.  Our held to maturity ("HTM") portfolio decreased from $82.7$348.8 million at December 31, 20192022 to $79.5$331.5 million at December 31, 2020.2023.  Our held to maturityHTM portfolio is comprised of state aid notesU.S. Treasury securities and locally sourcedstate municipal and privately placed commercial bonds.  The commercial bond component of this category declinedincreased by $2.7$10.2 million in 2020.2023.  These bonds represent financing provided to some of our non-profit commercial customers who qualified for borrowing on a tax-exempt basis.

  The municipal bond component of this category decreased by $27.4 million in 2023.  

On January 1, 2022, we reclassified ten U.S. Treasury securities with an amortized cost of $123.5 million from available for sale to held to maturity, as we have the intent and ability to hold these securities to maturity. All ten of these U.S. Treasury securities were purchased within the fourth quarter of 2021.  Subsequently and upon further analysis of these purchases, management decided to reclassify them to held to maturity given their short-term nature. These securities had net unrealized gains of $113,000 at the date of transfer, which will continue to be reported in accumulated comprehensive income, and will be amortized over the remaining life of the securities as an adjustment of yield.  The effect on interest income of the amortization of net unrealized gains is offset by the amortization of the premium on the securities transferred. 

Portfolio Loans and Asset Quality: Total portfolio loans increased by $43.7$160.6 million to $1.43$1.34 billion at December 31, 20202023 compared to $1.39$1.18 billion at December 31, 2019.2022. During 2020,2023, our commercial portfolio increased by $119.6$112.8 million, while our residential mortgage portfolio decreasedincreased by $61.5$50.7 million and our consumer portfolio decreased by $14.4$2.8 million.  The SBA created the Paycheck Protection Program to provide an efficient means to provide funding for small businesses to maintain payroll and operations during the COVID-19 pandemic.  We were an active participant in this program and originated a total of 1,738 loans totaling $346.7 million in 2020.  Borrowers who use the funds from their PPP loans to maintain payroll and for certain fixed expenses such as rent, occupancy, etc. are eligible to have 100% of their loans forgiven by the SBA.  Through December 31, 2020, we had received disbursement of $113.5 million from the SBA for approved forgiveness applications.  Our remaining balance of PPP loans was $229.1 million at December 31, 2020.  We expect the majority of the remaining PPP loans to be forgiven in the first half of 2021.  This program was reauthorized at the end of 2020 and will be open until March 31, 2021, or until the $284 billion authorized is used.  We will be participating in this program again in 2021 and anticipate the volume to be somewhat less than we experienced in 2020.  This expectation is subject to change due to borrower behavior, changing SBA requirements and processes relating to loan forgiveness and other relevant factors.

The volume of residential mortgage loans originated for sale in 2020 increased significantly compared to 2019 due to the mortgage rate environment and customer preference for loan types that we sell on the secondary market, primarily longer term fixed rate mortgages. Residential mortgage loans originated for sale were $156.4 million in 2020 compared to $82.3 million in 2019.

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We experienced stronger year over year growth in commercial loan balances for the past three years, $74.9loans in 2023 than in 2022.  Commercial loans increased $43.0 million in 2018, $16.02022 and increased $112.8 million in 2019 and $119.6 million in 2020.  As discussed previously, most of the2023.  The improved growth in 2020 is attributable2023 related to PPP loan originations.  We plan to continue measured, high quality loan portfolio growtha general increase in 2021.

business activity in our market beginning in late 2022.

Commercial and commercial real estate loans remained our largest loan segment and accounted for 85.2%81.6% of the total loan portfolio at December 31, 20202023 and 79.2%83.2% at December 31, 2019.2022. Residential mortgage and consumer loans comprised 14.8%18.4% of total loans at December 31, 20202023 and 20.8%16.8% at December 31, 2019.

2022.

A further breakdown of the composition of the loan portfolio is shown in the table below (in thousands):

		December 31, 2020								December 31, 2019
		Balance				Percent of Total Loans				Balance				Percent of Total Loans
Commercial real estate: (1)
Residential developed		$	8,549				0.6	%		$	14,705				1.1	%
Unsecured to residential developers			—				—				—				—
Vacant and unimproved			47,122				3.3				41,796				3.0
Commercial development			857				—				665				0.1
Residential improved			114,392				8.0				130,861				9.4
Commercial improved			266,006				18.6				292,799				21.1
Manufacturing and industrial			115,247				8.1				117,632				8.5
Total commercial real estate			552,173				38.6				598,458				43.2
Commercial and industrial, excluding PPP			436,331				30.5				499,572				36.0
Paycheck Protection Program (PPP)			229,079				16.0				—				—
Total commercial			1,217,583				85.2				1,098,030				79.2
Consumer
Residential mortgage			149,556				10.5				211,049				15.3
Unsecured			161				—				274				—
Home equity			57,975				4.0				70,936				5.1
Other secured			4,056				0.3				5,338				0.4
Total consumer			211,748				14.8				287,597				20.8
Total loans		$	1,429,331				100.0	%		$	1,385,627				100.0	%

		December 31, 2023								December 31, 2022
		Balance				Percent of Total Loans				Balance				Percent of Total Loans
Commercial real estate: (1)
Residential developed		$	5,809				0.4	%		$	7,234				0.6	%
Unsecured to residential developers			800				—				—				—
Vacant and unimproved			39,534				3.0				36,270				3.1
Commercial development			84				—				103				—
Residential improved			123,875				9.3				112,791				9.6
Commercial improved			260,188				19.4				259,281				22.0
Manufacturing and industrial			154,809				11.6				121,924				10.4
Total commercial real estate			585,099				43.7				537,603				45.7
Commercial and industrial			506,974				37.9				441,716				37.5
Total commercial			1,092,073				81.6				979,319				83.2
Consumer
Residential mortgage			189,818				14.2				139,148				11.8
Unsecured			129				—				121				—
Home equity			53,039				4.0				56,321				4.8
Other secured			3,327				0.2				2,839				0.2
Total consumer			246,313				18.4				198,429				16.8
Total loans		$	1,338,386				100.0	%		$	1,177,748				100.0	%

(1)	Includes both owner occupied and non-owner occupied commercial real estate.

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Commercial real estate loans decreased $46.3increased $47.5 million since December 31, 20192022 and accounted for 38.6%43.7% of our total loan portfolio at year-end 20202023 and consisted primarily of loans to business owners and developers of owner and non-owner occupied commercial properties and loans to developers of single and multi-family residential properties. In the table above, we show our commercial real estate portfolio by loans secured by residential and commercial real estate, and by stage of development. Improved loans are generally secured by properties that are under construction or completed and placed in use. Development loans are secured by properties that are in the process of development or fully developed. Vacant and unimproved loans are secured by raw land for which development has not yet begun and agricultural land.

Our overall commercial and industrial loan portfolio increased by $165.8$65.3 million to $665.4$507.0 million at December 31, 20202023 and represented 46.6%37.9% of our total loan portfolio.  As discussed above, thisOf the $65.3 million increase includes $229.1in 2023, approximately $27.4 million was due to growth in outstanding balances on PPP loans, which are subject to forgiveness bytransportation leasing businesses and $31.4 million growth in automotive dealer floorplan balances.   This growth included the SBA.

addition of new dealer accounts as well as higher usage of existing lines.

Our consumer residential mortgage loan portfolio, which also includes residential construction loans made to individual homeowners, comprised approximately 10.5%14.2% of portfolio loans at December 31, 20202023 and 15.3%11.8% at December 31, 2019.2022.  We expect to continue to retain in our loan portfolio certain types of residential mortgage loans (primarily high quality, low loan to value adjustable rate loans) in an effort to continue to diversify our credit risk and deploy our excess liquidity. ATypically, a large portion of our residential mortgage loan production continues to beis sold on the secondary market with servicing released.

  However, given the significant increase in residential mortgage loan rates, we have increased the amount of such loans retained in portfolio as they will typically have lower duration due to refinancings that occur when interest rates decline.

The volume of residential mortgage loans originated for sale during 2020 increased significantly2023 decreased from 20192022 as interest rates increased in 2022 and remained high throughout 2023 and demand for refinancings declined as many potential borrowers had recently refinanced in 2020 and there was a shift in production from financing new home purchases to refinancings.the extended low interest rate environment.  In addition, customer preference drove more production in loan product types we sell onretain in portfolio (i.e. variable rate, short term mortgages).     We expect residential mortgage originations for sale to continue to be below normal levels as we enter 2024 given the secondary market (i.e. fixed-rate long-term mortgages).  As of December 31, 2020, theexisting rate environment.   Residential mortgage loans originated for sale were $4.1 million in 2023 compared to $26.2 million in 2022.  The Company had no repurchase demands or claims related to residential mortgage loans sold on the secondary market during the five-year period ended December 31, 2020.

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2023.

The following table shows our residential mortgage loan portfolio broken down by fixed and variable rate (in thousands):

		December 31, 2023				December 31, 2022
Fixed rate residential mortgage loans		$	85,431			$	64,797
Variable rate residential mortgage loans			104,387				74,351
Total residential mortgage loans		$	189,818			$	139,148

Our portfolio of other consumer loans includes loans secured by personal property and home equity fixed term and line of credit loans. Consumer loans decreased by $14.4$2.8 million to $62.2$56.5 million at December 31, 20202023 from $76.5$59.3 million at December 31, 20192022 primarily due to a decrease in home equity loans.loans due to the high rate environment.  Consumer loans comprised approximately 4.3%4.2% of our portfolio loans at December 31, 20202023 and 5.5%5.0% at December 31, 2019.

2022.

The following table shows our loan origination activity for portfolio loans during 20202023 and 2019,2022, broken out by loan type and also shows average originated loan size (dollars in thousands):

		Year ended December 31, 2023												Year ended December 31, 2022
		Portfolio Originations				Percent of Total Originations				Average Loan Size				Portfolio Originations				Percent of Total Originations				Average Loan Size
Commercial real estate:
Residential developed		$	6,768				1.6	%		$	752			$	5,998				1.2	%		$	600
Unsecured to residential developers			—				—				—				—				—				—
Vacant and unimproved			10,907				2.5				682				10,982				2.2				998
Commercial development			—				—				—				—				—				—
Residential improved			44,708				10.4				443				51,565				10.5				549
Commercial improved			32,521				7.6				879				76,523				15.5				1,594
Manufacturing and industrial			25,977				6.1				1,443				71,641				14.6				2,470
Total commercial real estate			120,881				28.2				668				216,709				44.0				1,129
Commercial and industrial			187,344				43.6				1,224				164,535				33.4				885
Total commercial			308,225				71.8				923				381,244				77.4				1,009
Consumer
Residential mortgage			81,332				18.9				313				55,289				11.2				302
Unsecured			5				—				5				—				—				—
Home equity			37,505				8.7				118				54,249				11.0				134
Other secured			2,407				0.6				39				1,855				0.4				36
Total consumer			121,249				28.2				189				111,393				22.6				174
Total loans		$	429,474				100.0	%			441			$	492,637				100.0	%			484

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		Year ended December 31, 2020												Year ended December 31, 2019
		Portfolio Originations				Percent of Total Originations				Average Loan Size				Portfolio Originations				Percent of Total Originations				Average Loan Size
Commercial real estate:
Residential developed		$	3,664				0.5	%		$	193			$	7,896				1.9	%		$	316
Unsecured to residential developers			170				—				170				5,500				1.3				2,750
Vacant and unimproved			23,956				3.3				2,178				6,788				1.6				617
Commercial development			—				—				—				—				—				—
Residential improved			58,633				8.0				381				56,482				13.4				362
Commercial improved			53,748				7.4				1,344				95,628				22.8				1,275
Manufacturing and industrial			21,110				2.9				571				21,752				5.2				906
Total commercial real estate			161,281				22.1				616				194,046				46.2				667
Commercial and industrial (1)			489,269				66.9				258				143,926				34.2				702
Total commercial			650,550				89.0				301				337,972				80.4				679
Consumer
Residential mortgage			36,605				5.0				300				41,712				9.9				262
Unsecured			49				—				16				—				—				—
Home equity			42,088				5.8				118				38,231				9.1				108
Other secured			1,560				0.2				18				2,395				0.6				21
Total consumer			80,302				11.0				141				82,338				19.6				132
Total loans		$	730,852				100.0	%			268			$	420,310				100.0	%			374

(1) 2020 includes $346.7 million in PPP loan originations

The table above demonstrates that

While our loan origination activity was down $63.2 million in 20202023 compared to 2022, our commercial loan portfolio increased $112.8 million in 2023. This is largely due to the funding of various construction projects originating in 2022, and higher usage of commercial lines by our commercial borrowers.  This utilization was higher thanup $52.3 million from December 31, 2022 to December 31, 2023.  

We also have a significant amount of unfunded commercial lines of credit that can be drawn on by our commercial loan customers.  The table below shows the total commitment, the unused portion and the percentage of unused to total commitment at December 31, 2023 and 2022 (dollars in 2019, but was significantly impactedthousands):

		December 31, 2023				December 31, 2022
Commercial - Lines of credit commitments		$	975,195			$	1,021,795
Commercial - Unused portion of lines of credit			535,642				612,317
Commercial - Unused lines of credit to total commitments			54.93	%			59.93	%

Total commercial lines of credit commitments decreased by PPP loan originations.  We believe$46.6 million from December 31, 2022 to December 31, 2023.

Given that the lower origination activity (excluding PPP activity) is primarily the result of reduced business activity occurring in our marketplacecurrent industry conditions are tightening, we expect industry pricing will increase in response to uncertainty over economiccost of funds increases and political conditions with the COVID-19 pandemic.

we will continue to respond accordingly. 

Our loan portfolio is reviewed regularly by our senior management, our loan officers, and an internal loan review team that is independent of our loan originators and credit administration. An administrative loan committee consisting of senior management and seasoned lending and collections personnel meets monthly to manage our internal watch list and proactively manage high risk loans.

When reasonable doubt exists concerning collectability of interest or principal of one of our loans, the loan is placed in nonaccrual status. Any interest previously accrued but not collected is reversed and charged against current earnings.

Nonperforming assets are comprised of nonperforming loans, foreclosed assets and repossessed assets. At December 31, 2020,2023 and 2022, nonperforming assets totaled $3.1$1,000 and $2.4 million, compared to $3.0 million at December 31, 2019.respectively. There were no additions to other real estate owned in 20202023 or in 2019.  Based on the loans currently in their redemption period, we2022.  We expect there to be few, if any, additions to other real estate owned in 2021.2024.  Proceeds from sales of foreclosed and repossessed properties were $192,000$2.7 million in 2020,2023 resulting in a net realized gain on sale of $13,000.$356,000. Proceeds from sales of foreclosed properties were $656,000$47,000 in 20192022 resulting in a net realized gain on sale of $38,000.  We expect there to be little change in the balance of our foreclosed properties in 2021.

$47,000.

Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. As of December 31, 2020,2023, nonperforming loans totaled $533,000,$1,000, or 0.04%0.00% of total portfolio loans, compared to $203,000,$78,000, or 0.01% of total portfolio loans, at December 31, 2019.

2022.

Nonperforming loans at December 31, 20202023 consisted of $438,000$1,000 of commercial real estate loans secured by various types of non-residential real estate and $95,000 of consumer and residential mortgage loans.

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Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled $2.5$0 and $2.3 million at December 31, 20202023 and $2.7 million at December 31, 2019. Of this balance at December 31, 2020, there were 4 commercial real estate properties totaling approximately $2.5 million.2022. All properties acquired through or in lieu of foreclosure are initially transferred at their fair value less estimated costs to sell and then evaluated monthly for impairment after transfer using a lower of cost or market approach. Updated property valuations are obtained at least annually on all foreclosed assets.

At December 31, 2020, our foreclosed asset portfolio had  On January 30, 2023, the Company sold the remaining other real estate owned property at a weighted average age held in portfoliosmall gain, bringing the balance of 8.83 years. Below is a breakout of our foreclosed asset portfolio at December 31, 2020 and 2019 by property type and the percentages the property has been written down since taken into our possession and the combined writedown percentage, including losses taken when the property was loan collateral (dollars in thousands):

		December 31, 2020												December 31, 2019
Foreclosed Asset Property Type		Carrying Value				Foreclosed Asset Writedown				Combined Writedown (Loan and Foreclosed Asset)				Carrying Value				Foreclosed Asset Writedown				Combined Writedown (Loan and Foreclosed Asset)
Single Family		$	—				—	%			—	%		$	—				—	%			—	%
Residential Lot			—				—				—				—				—				—
Multi-Family			—				—				—				—				—				—
Vacant Land			67				72.0				78.2				79				66.6				74.1
Residential Development			127				15.3				49.4				326				38.7				69.1
Commercial Office			—				—				—				—				—				—
Commercial Industrial			—				—				—				—				—				—
Commercial Improved			2,343				—				—				2,343				—				—
		$	2,537				7.1				12.5			$	2,748				11.7				25.8

other real estate owned to $0.

The following table shows the composition and amount of our nonperforming assets (dollars in thousands):

		December 31,
		2020				2019				2018				2017				2016
Nonaccrual loans		$	533			$	203			$	1,303			$	395			$	300
Loans 90 days or more delinquent and still accruing			—				—				1				—				—
Total nonperforming loans (NPLs)			533				203				1,304				395				300
Foreclosed assets			2,537				2,748				3,380				5,767				12,253
Repossessed assets			—				—				—				11				—
Total nonperforming assets (NPAs)		$	3,070			$	2,951			$	4,684			$	6,173			$	12,553
NPLs to total loans			0.04	%			0.01	%			0.09	%			0.03	%			0.02	%
NPAs to total assets			0.12	%			0.14	%			0.24	%			0.33	%			0.73	%

		December 31,
		2023				2022				2021				2020				2019
Nonaccrual loans		$	1			$	78			$	91			$	533			$	203
Loans 90 days or more delinquent and still accruing			—				—				1				—				—
Total nonperforming loans (NPLs)			1				78				92				533				203
Foreclosed assets			—				2,343				2,343				2,537				2,748
Repossessed assets			—				—				—				—				—
Total nonperforming assets (NPAs)		$	1			$	2,421			$	2,435			$	3,070			$	2,951
NPLs to total loans			0.00	%			0.01	%			0.01	%			0.04	%			0.01	%
NPAs to total assets			0.00	%			0.08	%			0.08	%			0.12	%			0.14	%

We adopted ASU 2022-02 effective January 1, 2023.  This standard eliminated the previous troubled debt restructuring ("TDR") accounting model and replaced it with guidance and disclosure requirements for identifying modifications to loans to borrowers experiencing financial difficulty.  The following table shows the breakoutbalance of our troubled debt restructurings (“TDRs”) between performing and nonperformingloans modified to borrowers experiencing financial difficulty at December 31, 2020 and 20192023 (dollars in thousands):

		December 31, 2020												December 31, 2019
		Commercial				Consumer				Total				Commercial				Consumer				Total
Performing TDRs		$	4,959			$	4,049			$	9,008			$	8,469			$	5,140			$	13,609
Nonperforming TDRs (1)			437				—				437				98				—				98
Total TDRs		$	5,396			$	4,049			$	9,445			$	8,567			$	5,140			$	13,707

		December 31, 2023
		Commercial				Consumer				Total
Performing		$	729			$	2,584			$	3,313
Nonperforming (1)			—				—				—
Total		$	729			$	2,584			$	3,313

(1)	Included in nonperforming asset table above

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The following table furthershows the composition of loans modified to borrowers experiencing financial difficulty as of December 31, 2023 (dollars in thousands):

		December 31, 2023
Commercial and industrial		$	244
Commercial real estate		485
Consumer			2,584
Total		$	3,313

The following table shows the composition of our TDRs overfor the past five yearsprevious four year end periods (dollars in thousands):

		December 31,
		2020				2019				2018				2017				2016
Commercial and industrial TDRs		$	3,957			$	5,797			$	6,502			$	6,403			$	5,994
Commercial real estate TDRs			1,439				2,770				3,305				7,332				11,933
Consumer TDRs			4,049				5,140				6,346				8,345				12,059
Total TDRs		$	9,445			$	13,707			$	16,153			$	22,080			$	29,986

		2022				2021				2020				2019
Commercial and industrial		$	3,604			$	3,375			$	3,957			$	5,797
Commercial real estate			517				1,127				1,439				2,770
Consumer			2,886				3,024				4,049				5,140
Total		$	7,007			$	7,526			$	9,445			$	13,707

We had a total of $9.4$3.3 million and $13.7$7.0 million of loans whose terms have been modified in TDRsto borrowers experiencing financial difficulty as of December 31, 20202023 and 2019,2022, respectively.  These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow.  These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.  For each restructuring,modification, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructuredmodified debt.  An analysis is also performed to determine whether the restructuredmodified loan should be on accrual status.  Generally, if the loan is on accrual at the time of restructure,modification, it will remain on accrual after the restructuring.modification.  In some cases, a nonaccrual loan may be placed on accrual at restructuringmodification if the loan’s actual payment history demonstrates it would have cash flowed under the restructuredmodified terms.  After six consecutive payments under the restructuredmodified terms, a nonaccrual restructuredmodified loan is reviewed for possible upgrade to accruing status.  In situations where there is a subsequent modification or renewalAt December 31, 2023, approximately 50% of the balance of modified loans to borrowers experiencing financial difficulty involved interest rate reductions, 36% involved extensions of maturity and the loan is brought toremainder were a combination of capitalized interest, renewals at below market terms, including a contractualrates and A-B note restructures.  All of the modifications involving interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired designations may be removed.

As with other impaired loans, an allowance for loan loss is estimated for each TDR based on the most likely source of repayment for each loan.  For impaired commercial real estate loans that are collateral dependent, the allowance is computed based on the fair value of the underlying collateral, less estimated costsreductions occurred prior to sell.  For impaired commercial loans where repayment is expected from cash flows from business operations, the allowance is computed based on a discounted cash flow computation.  Certain groups of TDRs, such as residential mortgages, have common characteristics and for them the allowance is computed based on a discounted cash flow computation on the change in weighted rate for the pool.  The allowance allocations for commercial TDRs where we have reduced the contractual interest rate are computed by measuring cash flows using the new payment terms discounted at the original contractual rate.

On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”.  This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19.  The guidance goes on to explain that in consultation with the FASB staff that the federal banking agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a modification are not TDRs.  The CARES Act was passed by Congress on March 27, 2020.  Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were not more than 30 days past due as of December 31, 2019 are not TDRs.  The Economic Aid Act passed by Congress on December 27, 2020 extended the date for such modifications to not be treated as TDRs to the earlier of 60 days after date on which the national emergency declared as a result of COVID-19 is terminated or January 1, 2022.  Through December 31, 2020, the Bank had applied this guidance and modified 726 individual loans with aggregate principal balances totaling $337.2 million.  The majority of these modifications involved three-month extensions.

By December 31, 2020, most of these modification had expired, down from a quarter end peak of $297.3 million at June 30, 2020.  The table below shows the number and balances of loans with such modifications as of the past four quarter end dates (dollars in thousands):

		Number of COVID-19 Modifications				Outstanding Balance of COVID-19 Modifications
March 31, 2020			176			$	87,917
June 30, 2020			599				297,269
September 30, 2020			26				79,894
December 31, 2020			6				2,018

2015.

Allowance for loancredit losses: Determining the appropriate level of the allowance for loancredit losses is highly subjective.  Timely identification of risk rating changes within the commercial loan portfolio is key to our process of establishing an appropriate allowance balance.  The internal risk rating system is discussed below.

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The allowance for loancredit losses at December 31, 20202023 was $17.4 million, an increase of $208,000,$2.2 million, compared to $17.2$15.3 million at December 31, 2019.2022.  The balance of the allowance for loancredit losses was 1.22%1.30% of total portfolio loans at December 31, 20202023 compared to 1.24%1.30% of total portfolio loans at December 31, 2019.  The ratio at December 31, 2020 was impacted by $229.1 million of remaining PPP loans which were generated during 2020.  The ratio excluding these loans was 1.45% at December 31, 2020.2022.   The allowance for loancredit losses to nonperforming loan coverage ratio remained high at 3266%1,744,200% at December 31, 20202023 compared to 8473%19,596% at December 31, 2019.

2022.

The following is a summary of our portfolio loan balances at the end of each periodcertain key ratios regarding allowance activity and the daily average balance of these loans.  It also includes changes in the allowance for loan losses arising from loans charged-off, recoveries on loans previously charged-off, and provisions for loan losses.

		December 31
(Dollars in thousands)		2020				2019				2018				2017				2016
Portfolio loans:
Average daily balance of loans for the year		$	1,495,068			$	1,372,905			$	1,332,450			$	1,265,353			$	1,218,901
Amount of loans outstanding at end of period			1,429,331				1,385,627				1,405,658				1,320,309				1,280,812
Allowance for loan losses:
Balance at beginning of year			17,200				16,876				16,600				16,962				17,081
Provision for loan losses			3,000				(450	)			450				(1,350	)			(1,350	)
Loans charged-off:
Real estate - construction			—				—				—				—				—
Real estate - mortgage			(2,957	)			(132	)			—				—				—
Commercial and industrial			(1,192	)			—				(1,206	)			(108	)			—
Total Commercial			(4,149	)			(132	)			(1,206	)			(108	)			—
Residential mortgage			(2	)			—				—				(19	)			(10	)
Consumer			(117	)			(147	)			(129	)			(139	)			(195	)
			(4,268	)			(279	)			(1,335	)			(266	)			(205	)
Recoveries:
Real estate - construction			185				177				238				333				426
Real estate - mortgage			987				211				685				488				664
Commercial and industrial			148				528				86				123				162
Total Commercial			1,320				916				1,009				944				1,252
Residential mortgage			35				64				55				66				33
Consumer			121				73				97				244				151
			1,476				1,053				1,161				1,254				1,436
Net (charge-offs) recoveries			(2,792	)			774				(174	)			988				1,231
Balance at end of year		$	17,408			$	17,200			$	16,876			$	16,600			$	16,962
Ratios:
Net charge-offs (recoveries) to average loans outstanding			0.19	%			(0.06	)%			0.01	%			(0.08	)%			(0.10	)%
Allowance for loan losses to loans outstanding at year-end			1.22	%			1.24	%			1.20	%			1.26	%			1.32	%
Allowance for loan losses to nonperforming loans at year-end			3,266	%			8,473	%			1,294	%			4,203	%			5,654	%

coverage.

		December 31
		2023				2022
Ratios:
Net charge-offs (recoveries) to average loans outstanding - Total			(0.01	)%			(0.05	)%
Net charge-offs (recoveries) to average loans outstanding - Commercial Loans			(0.01	)%			(0.05	)%
Net charge-offs (recoveries) to average loans outstanding - Residential Mortgage Loans			(0.01	)%			(0.02	)%
Net charge-offs (recoveries) to average loans outstanding - Consumer Loans			0.02	%			(0.07	%)
Nonaccrual loans to loans outstanding at year-end			0.00	%			0.01	%
Allowance for credit losses to loans outstanding at year-end			1.30	%			1.30	%
Allowance for credit losses to nonaccrual loans at year-end			1,744,200	%			19,596	%
Allowance for credit losses to nonperforming loans at year-end			1,744,200	%			19,596	%

The continued reduction inlow level of net charge-offs over the last several years has had a significant effect on the historical loss component of our allowance for loancredit losses computation as have the improvements in our credit quality metrics.computation.

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The table below shows the changes in these metrics over the past five years:

(Dollars in millions)		2020				2019				2018				2017				2016
Commercial loans		$	1,217.6			$	1,098.0			$	1,082.1			$	1,007.1			$	967.3
Nonperforming loans			0.5				0.2				1.3				0.4				0.3
Other real estate owned and repo assets			2.5				2.7				3.4				5.8				12.3
Total nonperforming assets			3.0				3.0				4.7				6.2				12.6
Net charge-offs (recoveries)			2.8				(0.8	)			0.2				(1.0	)			(1.2	)
Total delinquencies			0.6				0.4				0.9				1.0				1.4

(Dollars in millions)		2023				2022				2021				2020				2019
Commercial loans		$	1,092.1			$	979.3			$	936.4			$	1,217.6			$	1,098.0
Nonperforming loans			—				0.1				0.1				0.5				0.2
Other real estate owned and repo assets			—				2.3				2.3				2.5				2.7
Total nonperforming assets			—				2.4				2.4				3.0				3.0
Net charge-offs (recoveries)			(0.1	)			(0.5	)			(0.5	)			2.8				(0.8	)
Total delinquencies			0.0				0.2				0.1				0.6				0.4

Nonperforming loans have been low over the past several years.   At December 31, 2020,2023, we have had net loan recoveries in twenty-twothirty-four of the past twenty-fourthirty-six quarters.  Perhaps even more importantly, our total delinquencies 30 days and greater have continued to be minimal, and were just $600,000$44,000 at December 31, 2020.

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These factors all provide for a reduction in our allowance for loan losses, and thus impact our provision for loan losses. 2023.

The provision for loancredit losses was $3.0 million$550,000 for 20202023 compared to a negative $450,000benefit of $1.1 million for 2019.2022.  The provision in each period was due toimpacted by the levels of nonperforming loans and net charge-off/recovery experience.  We had net charge-offsrecoveries in 20202023 totaling $2.8 million$131,000 compared to net recoveries of $774,000$521,000 in 2019.2022.  The ratio of net charge-offs / (recoveries) to average loans was 0.19%(0.01%) for 20202023 compared to (0.06%(0.05%) for 2019.

Despite the unique charge-off we incurred in 2020, we2022.

We are encouraged by the low level of charge-offs over the past several years. We do, however, recognize that future charge-offs and resulting provisions for loancredit losses are expected to be impacted by the timing and extent of changes in the overall economy and the real estate markets.

Our

The allowance for credit losses accounting in effect at December 31, 2022 and all prior periods was based on our estimate of probable incurred loan losses is maintained at a level believed appropriate based upon our assessmentas of the probable estimatedreporting date ("incurred loss" methodology).

Under the CECL methodology, our allowance is based on the total amount of credit losses inherent inthat are expected over the remaining life of the loan portfolio. Our methodology for measuring the appropriate levelestimate of allowance and related provision for loancredit losses under CECL is determined using a complex model that relies on several key elements, which include specific allowances for loans considered impaired, general allowance forhistorical loss information including our own history as well as peer loss history, reasonable and supportable economic forecasts, and various qualitative factors.

We believe our commercial loans not considered impaired based upon applying our loan rating system, and general allocations based on historical trends for homogeneous loan groups with similar risk characteristics.

Impaired loans decreased $3.2 million, or 23%, to $10.6 million at December 31, 2020 compared to $13.9 million at December 31, 2019.   The specific allowance for impaired loans decreased $414,000 to $1.2 million, or 11.4% of total impaired loans, at December 31, 2020 compared to $1.6 million, or 11.7% of total impaired loans, at December 31, 2019.

Specific allowances are established on individually impaired credits where we believe it is probable that a loss may be incurred.  Specific allowances are determined based on discounting estimated cash flows over the life of the loan or based on the fair value of collateral supporting the loan.  For commercial real estate loans, generally appraisals are used to estimate the fair value of the collateral and determine the appropriate specific allowance.  Estimated selling costs are also considered in the estimate.  When it becomes apparent that liquidation of the collateral is the only source of repayment, the collateral shortfall is charged off rather than carried as a specific allowance.

The general allowance (referred to as “formula allowance”) allocated to commercial loans that were not considered to be impaired was based upon the internal risk grade of such loans.  We use a loan rating method based upon an eight point system. Loans are stratified between real estate secured and non-real estate secured.  The real estate secured portfolio is further stratifiedadequately diversified, with our largest commercial concentrations in Real Estate, Rental and Leasing (29.2%), followed by the type of real estate.  Each stratified portfolio is assigned a loss allocation factor.  Generally, a worse grade assigned to a loan category results in a greater allocation percentage.  Changes in risk grade of loans affect the amount of the allowance allocation.

Manufacturing (14.8%) and Retail Trade (13.5%).

The determination of our loss factors is based upon our actual loss history by loan grade and adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. We use a rolling 18 month (6 quarter) actual net charge-off history as the base for our computation for commercial loans.  The 18 month period ended December 31, 2020 reflected net recoveries for most of our loan pools.  We addressed this volatility in the qualitative factor considerations applied in our allowance computation.  We also considered the extended period of improved asset quality in assessing the overall qualitative component.

At December 31, 2020, we also considered the effect that the COVID-19 pandemic has had and is having on our loan borrowers and our local economy.  An analysis of each credit intable below breaks down our commercial loan portfolio was performed to evaluate the impact of the shutdown on each business and identify the potential loss exposure.  While this analysis revealed limited stress in our portfolio and significant stimulus and mitigation efforts are expected to soften the impact of the shutdowns, we determined a downgrade to our economic qualitative factor was appropriate and we added 7 basis points in March 2020, 6 basis points in June 2020, 2 basis points in September 2020 and 7 basis points in December, for a total of 22 additional basis points coverageby industry type at December 31, 2020.

Considering2023 and identifies the changepercentage of loans in each type that have a pass rating within our qualitative factorsgrading system (4 or better) and changescriticized rating (5 or worse) (dollars in our commercial loan portfolio balances, the general commercial loan allowance increased $840,000 to $13.8 million at December 31, 2020 compared to $12.9 million at December 31, 2019.  The general reserve increase was primarily due to additional allocations provided to address risk associated with the COVID-19 pandemic.   The qualitative component of our allowance allocated to commercial loans was $12.7 million at December 31, 2020, up from $12.2 million at December 31, 2019.

Groups of homogeneous loans, such as residential real estate and open- and closed-end consumer loans, receive allowance allocations based on loan type.  A rolling 12 month (4 quarter) historical loss experience period was applied to residential mortgage and consumer loan portfolios.  As with commercial loans that are not considered impaired, the determination of the allowance allocation percentage is based principally on our historical loss experience.  These allocations are adjusted for consideration of general economic and business conditions, credit quality and delinquency trends, collateral values, and recent loss experience for these similar pools of loans.  The homogeneous loan allowance was $2.4 million at December 31, 2020 compared to $2.6 million at December 31, 2019.

As noted above, the formula allowance allocated to commercial loans that are not considered to be impaired is calculated by applying historical loss factors to outstanding loans based on the internal risk rating of such loans.  We use a loan rating method based upon an eight point system.  Loans rated a 4 or better are considered of acceptable risk.  Loans rated a 5 exhibit above-normal risk to the Company and warrant a greater level of attention by management.  These loans are subject to on-going review and assessment by our Administrative Loan Committee.  Loans rated a 6 or worse are considered substandard, doubtful or loss, exhibit a greater relative risk of loss to the Company based upon the rating and warrant an active workout plan administered by our Special Asset Group.

thousands):

		Total				Percent of Total Loans				Percent Grade 4 or Better				Percent Grade 5 or Worse
Industry:
Agricultural Products		$	47,921				4.39	%			90.42	%			9.58	%
Mining and Oil Extraction			641				0.06	%			96.26	%			3.74	%
Utilities			—				0.00	%			0.00	%			0.00	%
Construction			89,330				8.18	%			98.98	%			1.02	%
Manufacturing			161,185				14.76	%			96.57	%			3.43	%
Wholesale Trade			60,984				5.58	%			100.00	%			0.00	%
Retail Trade			147,589				13.51	%			99.97	%			0.03	%
Transportation and Warehousing			64,259				5.88	%			99.96	%			0.04	%
Information			—				0.00	%			0.00	%			0.00	%
Finance and Insurance			39,840				3.65	%			100.00	%			0.00	%
Real Estate and Rental and Leasing			319,006				29.21	%			99.57	%			0.43	%
Professional, Scientific and Technical Services			5,604				0.51	%			96.88	%			3.12	%
Management of Companies and Enterprises			4,586				0.42	%			100.00	%			0.00	%
Administrative and Support Services			24,491				2.24	%			98.37	%			1.63	%
Education Services			4,019				0.37	%			100.00	%			0.00	%
Health Care and Social Assistance			30,115				2.76	%			100.00	%			0.00	%
Arts, Entertainment and Recreation			5,083				0.47	%			94.26	%			5.74	%
Accommodations and Food Services			51,951				4.76	%			87.37	%			12.63	%
Other Services			35,469				3.25	%			95.84	%			4.16	%
Public Administration			—				0.00	%			0.00	%			0.00	%
Private Households			—				0.00	%			0.00	%			0.00	%
Total commercial loans		$	1,092,073				100.00	%			98.04	%			1.96	%

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The qualitative factors assessed and used to adjust historical loss experience reflect our assessment of the impact of economic trends, delinquency and other problem loan trends, trends in valuations supporting underlying collateral, changes in loan portfolio concentrations, the effect of changes in interest rates on loan collectability, competition and the effect changes in internal credit administration practices have on probable losses inherent in our loan portfolio.  Qualitative adjustments are inherently subjective and there can be no assurance that these adjustments have properly identified probable losses in our loan portfolio.  More information regarding the subjectivity involved in determining the estimate of the allowance for loancredit losses may be found in this Item 7 of this report under the heading "Critical Accounting Policies and Estimates."

The following table shows the allocation of the allowance for loancredit losses by portfolio type at the dates indicated.

		December 31,
		2020								2019								2018								2017								2016
(Dollars in thousands)		Allowance Amount				% of Each Category to Total Loans				Allowance Amount				% of Each Category to Total Loans				Allowance Amount				% of Each Category to Total Loans				Allowance Amount				% of Each Category to Total Loans				Allowance Amount				% of Each Category to Total Loans
Commercial and commercial real estate		$	14,650				85	%		$	14,191				79	%		$	13,427				77	%		$	13,106				76	%		$	13,092				76	%
Residential mortgage			1,996				11				2,224				15				2,477				17				2,508				17				2,646				17
Consumer			762				4				785				6				972				6				986				7				1,224				7
Total		$	17,408				100	%		$	17,200				100	%		$	16,876				100	%		$	16,600				100	%		$	16,962				100	%

		December 31,
		2023								2022
(Dollars in thousands)		Allowance Amount				% of Each Category to Total Loans				Allowance Amount				% of Each Category to Total Loans
Commercial and commercial real estate		$	14,067				81	%		$	12,827				84	%
Residential mortgage			2,628				15				1,755				11
Consumer			747				4				703				5
Total		$	17,442				100	%		$	15,285				100	%

The components of the allowance for loancredit losses were as follows:

		December 31,
		2020								2019
(Dollars in thousands)		Balance of Loans				Allowance Amount				Balance of Loans				Allowance Amount
Commercial and commercial real estate:
Impaired with allowance recorded		$	5,593			$	900			$	6,658			$	1,245
Impaired with no allowance recorded			977				—				2,067				—
Loss allocation factor on non-impaired loans			1,211,013				13,750				1,089,305				12,946
			1,217,583				14,650				1,098,030				14,191
Residential mortgage and consumer:
Reserves on troubled debt restructurings			4,049				310				5,140				379
Loss allocation factor			207,699				2,448				282,457				2,630
Total		$	1,429,331			$	17,408			$	1,385,627			$	17,200

With the exception of certain TDRs, impaired commercial loans at December 31, 2020 were classified as substandard or worse per our internal risk rating system.  $4.2 million of residential mortgage TDRs were associated with programs approved by the U.S. government during 2009 to minimize the number of consumer foreclosures.  These loans involved the restructuring of terms on consumer mortgages to allow customers to mitigate foreclosure by meeting a lower loan payment requirement based upon their current cash flow.  Also included in this category are certain consumer home equity loans that were restructured maturing home equity lines of credit that did not qualify for traditional term financing.  We have been actively working with our customers to reduce the risk of foreclosure using these programs.  Additional information regarding impaired loans at December 31, 2020 and 2019 may be found in Item 8 of this report in Note 3 to the Consolidated Financial Statements.

		December 31,
		2023								2022
(Dollars in thousands)		Balance of Loans				Allowance Amount				Balance of Loans				Allowance Amount
Commercial and commercial real estate:
Collateral dependent/impaired with allowance recorded		$	292			$	17			$	812			$	75
Collateral dependent/impaired with no allowance recorded			1,162				—				3,309				—
Loss allocation factor			1,090,619				14,050				975,198				12,751
			1,092,073				14,067				979,319				12,826
Residential mortgage and consumer:
Reserves on troubled debt restructurings			—				—				2,886				220
Loss allocation factor			246,313				3,375				195,543				2,239
Total		$	1,338,386			$	17,442			$	1,177,748			$	15,285

Our weighted average loan grade was 3.683.49 at December 31, 2018, 3.672023 and 3.53 at December 31, 2019 and 3.71 at December 31, 2020.  The increase of $459,000 in reserves on commercial loans for 2020 was due to a $345,000 decrease in specific reserves on impaired loans and a $804,000 increase in the loss allocation factor on non-impaired loans due to additional allocations for the COVID-19 pandemic uncertainty at December 31, 2020.

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Of the $17.4 million allowance at December 31, 2020, 7% related to specific allocations on impaired loans, 78% related to formula allowance on commercial loans and 14% related to general allocations for homogeneous loans.  Of the $17.2 million allowance at December 31, 2019,   10% related to specific allocations on impaired loans, 75% related to formula allowance on commercial loans and 15% related to general allocations for homogeneous loans.  Of the $16.2 million total formula based allowance for loan loss allocations at December 31, 2020, $16.1 million is from general/environmental allocations and $56,000 was driven from historical experience.  Of the $15.6 million total formula based allowance for loan loss allocations at December 31, 2019, $14.8 million is from general/environmental allocations and $807,000 is driven from historical experience.    The above allocations are not intended to imply limitations on usage of the allowance. The entire allowance is available for any loan losses without regard to loan type.

2022.  

More information regarding steps to address the elevated levels of substandard, impaired and nonperforming loans may be found in this Item 7 of this report under the heading "Portfolio Loans and Asset Quality" above and in Item 8 of this report in Note 3 to the Consolidated Financial Statements.

Certain industry sectors will be more negatively impacted than others by the economic effects of COVID-19 and governmental action.  For example, businesses that thrive on large masses of people assembling in close proximity, such as hospitality, restaurants and sporting events will likely incur longer lasting negative effects than other industries.  We believe our commercial portfolio is adequately diversified, with our largest commercial concentrations in Real Estate, Rental and Leasing (24.0%), followed by Manufacturing (15.6%) and Retail Trade (10.6%).

The table below breaks down our commercial loan portfolio by industry type at December 31, 2020 and identifies the percentage of loans in each type that have a pass rating within our grading system (4 or better) and criticized rating (5 or worse) (dollars in thousands):

		December 31, 2020
		Excluding PPP				PPP Loans				Total				Percent of Total Loans				Percent Grade 4 or Better				Percent Grade 5 or Worse
Industry:
Agricultural Products		$	65,800			$	10,591			$	76,391				6.27	%			90.08	%			9.92	%
Mining and Oil Extraction			888				84				972				0.08	%			100.00	%			0.00	%
Utilities			—				—				—				0.00	%			0.00	%			0.00	%
Construction			73,480				31,398				104,878				8.61	%			98.87	%			1.13	%
Manufacturing			147,178				42,235				189,413				15.56	%			97.15	%			2.85	%
Wholesale Trade			40,073				10,249				50,322				4.13	%			99.84	%			0.16	%
Retail Trade			119,132				9,738				128,870				10.58	%			99.91	%			0.09	%
Transportation and Warehousing			47,551				16,943				64,494				5.30	%			99.25	%			0.75	%
Information			836				4,137				4,973				0.41	%			100.00	%			0.00	%
Finance and Insurance			45,837				5,569				51,406				4.22	%			100.00	%			0.00	%
Real Estate and Rental and Leasing			290,676				1,821				292,497				24.02	%			99.49	%			0.51	%
Professional, Scientific and Technical Services			5,181				14,190				19,371				1.59	%			98.67	%			1.33	%
Management of Companies and Enterprises			2,269				327				2,596				0.21	%			100.00	%			0.00	%
Administrative and Support Services			18,384				26,243				44,627				3.67	%			99.74	%			0.26	%
Education Services			3,110				6,605				9,715				0.80	%			98.98	%			1.02	%
Health Care and Social Assistance			53,200				29,456				82,656				6.79	%			99.99	%			0.01	%
Arts, Entertainment and Recreation			7,456				626				8,082				0.66	%			95.67	%			4.33	%
Accommodations and Food Services			39,872				9,811				49,683				4.08	%			81.42	%			18.58	%
Other Services			27,527				8,953				36,480				3.00	%			99.02	%			0.98	%
Public Administration			—				107				107				0.01	%			100.00	%			0.00	%
Private Households			50				—				50				0.00	%			100.00	%			0.00	%
Total commercial loans		$	988,500			$	229,083			$	1,217,583				100.00	%			97.80	%			2.20	%

Accommodations and Food Services in the table above includes our loans to restaurants and hotels.  We have reviewed each relationship in this industry group and have determined based upon their nature of operations and our loan structure that we believe our loss exposure is limited.

Although we believe our allowance for loancredit losses has captured the losses that are probableexpected in our portfolio as of December 31, 2020,2023, there can be no assurance that all losses have been identified or that the allowance is sufficient.  The additional efforts by management to accelerate the identification and disposition of problem assets discussed above, and the impact of the lasting economic slowdown, may result in additional losses in 2021.

Premises and Equipment:   Premises and equipment totaled $43.3$38.6 million at December 31, 20202023 compared to $43.4$40.3 million at December 31, 20192022, down $1.7 million, as capital additions were more than offset by depreciation of current facilitiesproperty during 2020.

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2023.

Bank owned life insurance (BOLI):   The Bank has purchased life insurance policies on certain officers.  BOLI is recorded at its currently realizable cash surrender value and totaled $42.5$54.2 million at December 31, 20202023 compared to $42.2$53.3 million at December 31, 2019.

2022.

Deposits and Other Borrowings: Total deposits increased $545.3decreased $199.4 million to $2.30$2.42 billion at December 31, 2020,2023, as compared to $1.75$2.62 billion at December 31, 2019.2022.  Noninterest checking account balances increased $326.9decreased $191.8 million in 2020.2023.  Interest bearing demand account balances increased $163.6decreased $121.2 million and savings and money market account balances increased $103.4decreased $101.9 million in 20202023 while our certificates of deposits (primarily short-term) decreaseddeposit, primarily in the 12-18 month term, increased by $48.6$215.5 million in 2020.2023 as a result of our increases in offered interest rates.  We believe our success in maintaining and increasing the balances of personal and business checking and savings accounts was primarily attributable to our focus on quality customer service, the desire of customers to deal with a local bank, the convenience of our branch network and the breadth and depth of our product line.

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Noninterest bearing demand accounts comprised 35%27% of total deposits at December 31, 20202023 compared to 28%31% of total deposits at December 31, 2019.  Because2022.  In recent years, because of the generally low rates paid on interest bearing account alternatives, many of our business customers chose to keep their balances in these more liquid noninterest bearing demand account types.  We have begun to see some of these balances move to higher earning deposit types.  Interest bearing demand, including money market and savings accounts comprised 60% of total deposits at December 31, 20202023 and 64% at December 31, 2019.2022. Time accounts as a percentage of total deposits were 5%13% at December 31, 20202023 and 9%4% at December 31, 2019.

2022.

Our deposit base is primarily made up of many small accounts, and balances at December 31, 2023 were comprised of 44% personal customers and 56% business customers.  Within our business customer base, there is no significant specific industry concentration.  Our core deposits - which we define as deposits we have sourced within our local markets - represented 100% of our total deposits at December 31, 2023.  Our total balances of $2.42 billion at December 31, 2023 remain elevated, reflecting a $710.4 million increase, or 42%, over pre-pandemic totals of $1.71 billion as of March 31, 2020.

Deposit balances in excess of the $250,000 FDIC insured limit totaled approximately $1.05 billion, or 43% of total deposits, at December 31, 2023 and approximately $1.21 billion, or 46% of total deposits, at December 31, 2022.  We have sufficient liquid resources to cover all of the uninsured balances at December 31, 2023.

Borrowed funds totaled $90.6$30.0 million at December 31, 2020 including $70.0 million in Federal Home Loan Bank advances2023 and $20.6 million in long-term debt associated with trust preferred securities.  Borrowed funds totaled $80.6 million at December 31, 2019 including $60.0 million2022, comprised entirely of Federal Home Loan Bank advances. The $30.0 million of advances and $20.6 million in long-term debt associated with trust preferred securities.  The $10.0 million increase in borrowed funds in 2020 was due to the addition of a single $10.0 million advance with the Federal Home Loan Bank executed in early 2020.

Atat December 31, 2020, the Company had outstanding $20.0 million aggregate liquidation amount of pooled trust preferred securities (“TRUPs”) issued through its wholly-owned subsidiary grantor trust, Macatawa Statutory Trust II (issued $20.0 million aggregate liquidation amount with a floating interest rate of three-month LIBOR plus 2.75%).

2023 are scheduled to mature during 2024. 

Information regarding our off-balance sheet commitments may be found in Item 8 of this report in Note 1516 to the Consolidated Financial Statements.

CAPITAL RESOURCES

Total shareholders’ equity increased by $22.4$40.0 million from December 31, 20192022 to December 31, 2020.2023.  Shareholders’ equity was increased by $30.2$43.2 million of net income in 2020,2023, partially offset by cash dividends of $10.9$11.3 million, or $0.32$0.33 per share.  Shareholders’ equity also increased by $2.7$8.7 million in 20202023 as a result of a positive swing in accumulated other comprehensive income due to the effect of changes in interest rate movementrates on the fair value of our available for sale securities portfolio. As of December 31, 2020,2023, the Bank was categorized as “well capitalized” under applicable regulatory guidelines.

Our regulatory capital ratios (on a consolidated basis) continue to significantly exceed the levels required to be categorized as “well capitalized” according to the requirements specified by the rules implementing Basel III.

The following table shows our regulatory capital ratios (on a consolidated basis) for the past three years.

		December 31,
		2020				2019				2018
Total capital to risk weighted assets			18.3	%			15.8	%			15.5	%
Common Equity Tier 1 to risk weighted assets			15.8				13.5				12.0
Tier 1 capital to risk weighted assets			17.1				14.7				14.5
Tier 1 capital to average assets			9.9				11.5				12.1

		December 31,
		2023				2022				2021
Total capital to risk weighted assets			18.7	%			17.9	%			18.3	%
Common Equity Tier 1 to risk weighted assets			17.7				16.9				17.2
Tier 1 capital to risk weighted assets			17.7				16.9				17.2
Tier 1 capital to average assets			11.4				9.7				8.7

Our Board of Directors declared quarterly cash dividends to common shareholders beginning with the first quarter of 2014, and each subsequent quarter in 2014 through 2020.2023.  The declaration and payment of future dividends to common shareholders will be considered by the Board of Directors in its discretion and will depend on a number of factors, including our financial condition and anticipated profitability.

All of the $20.0 million of trust preferred securities outstanding at December 31, 2020 qualified as Tier 1 capital.

Capital sources include, but are not limited to, additional private and public common stock offerings, preferred stock offerings and subordinated debt.

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On July 3, 2013, the FDIC Board of Directors approved the Regulatory Capital Interim Final Rule, implementing Basel III.  This rule redefined Tier 1 capital as two components (Common Equity Tier 1 and Additional Tier 1), created a new capital ratio (Common Equity Tier 1 Risk-based Capital Ratio) and implemented a capital conservation buffer.  It also revised the prompt corrective action thresholds and made changes to risk weights for certain assets and off-balance-sheet exposures.  Banks were required to transition into the new rule beginning on January 1, 2015.  Based on our capital levels and balance sheet composition at December 31, 2020, we believe implementation of the new rule had no material impact on our capital needs.

Macatawa Bank:

The Bank was categorized as "well capitalized" at December 31, 20202023 and 20192022 according to the requirements specified by the rules implementing Basel III.  The following table shows the Bank’s regulatory capital ratios for the past three years.

		December 31,
		2023				2022				2021
Average equity to average assets			9.4	%			8.3	%			8.8	%
Total capital to risk weighted assets			18.2				17.4				17.8
Common Equity Tier 1 to risk weighted assets			17.2				16.4				16.7
Tier 1 capital to risk weighted assets			17.2				16.4				16.7
Tier 1 capital to average assets			11.0				9.4				8.4

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		December 31,
		2020				2019				2018
Average equity to average assets			10.2	%			11.8	%			11.3	%
Total capital to risk weighted assets			17.8				15.3				15.1
Common Equity Tier 1 to risk weighted assets			16.7				14.3				14.1
Tier 1 capital to risk weighted assets			16.7				14.3				14.1
Tier 1 capital to average assets			9.6				11.2				11.8

LIQUIDITY

Liquidity of Macatawa Bank: The liquidity of a financial institution reflects its ability to manage a variety of sources and uses of funds. Our Consolidated Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We primarily focus on developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for our investment and loan portfolios. Our sources of liquidity include our borrowing capacity with the FRB'sFederal Reserve Bank's discount window, the Federal Home Loan Bank, federal funds purchased lines of credit and other secured borrowing sources with our correspondent banks, loan payments by our borrowers, maturity and sales of our securities available for sale, growth of our deposits, federal funds sold and other short-term investments, and the various capital resources discussed above.

Liquidity management involves the ability to meet the cash flow requirements of our customers. Our customers may be either borrowers with credit needs or depositors wanting to withdraw funds. Our liquidity management involves periodic monitoring of our assets considered to be liquid and illiquid, and our funding sources considered to be core and non-core and short-term (less than 12 months) and long-term. We have established parameters that monitor, among other items, our level of liquid assets to short-term liabilities, our level of non-core funding reliance and our level of available borrowing capacity. We maintain a diversified wholesale funding structure and actively manage our maturing wholesale sources to reduce the risk to liquidity shortages. We have also developed a contingency funding plan to stress test our liquidity requirements arising from certain events that may trigger liquidity shortages, such as rapid loan growth in excess of normal growth levels or the loss of deposits and other funding sources under extreme circumstances.

We maintain a non-core funding dependency ratio below our peer group average and have had no brokered deposits on our balance sheet since before December 2012.  At December 31, 2020,2023, the Bank held $752.3$418.0 million of federal funds sold and other short-term investments as well as $213.2$505.1 million of unpledged securities available for sale.  In addition, theThe Bank’s available borrowing capacity from correspondent banks was approximately $298.9$969.0 million as of December 31, 2020.

2023.

In the normal course of business, we enter into certain contractual obligations, including obligations which are considered in our overall liquidity management.

The table below summarizes our significant contractual obligations at December 31, 2020 (dollars in thousands):

		Less than 1 year				1-3 years				3-5 years				More than 5 years
Long term debt		$	—			$	—			$	—			$	20,619
Time deposit maturities			82,133				19,708				1,649				57
Other borrowed funds			10,000				10,000				40,000				10,000
Operating lease obligations			411				429				256				—
Total		$	92,544			$	30,137			$	41,905			$	30,676

In addition to normal loan funding, we also maintain liquidity to meet customer financing needs through unused lines of credit, unfunded loan commitments and standby letters of credit.  The level and fluctuation of these commitments is also considered in our overall liquidity management.  At December 31, 2020,2023, we had a total of $596.3$693.4 million in unused lines of credit, $88.0$86.2 million in unfunded loan commitments and $11.8$10.4 million in standby letters of credit.

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Liquidity of Holding Company: The primary sources of liquidity for the Company are dividends from the Bank, existing cash resources and the capital markets if the need to raise additional capital arises.  Banking regulations and the laws of the State of Michigan in which our Bank is chartered limit the amount of dividends the Bank may declare and pay to the Company in any calendar year.  Under the state law limitations, the Bank is restricted from paying dividends to the Company in excess of retained earnings. In 2019,2023, the Bank paid dividends to the Company totaling $32.5$12.7 million.  In the same period, the Company paid $20.0 million to redeem trust preferred securities and paid $9.5 million in dividends to its shareholders.shareholders totaling $11.3 million.   In 2020,2022, the Bank paid dividends to the Company totaling $11.7$11.9 million.  In the same period, the Company paid dividends to its shareholders totaling $10.9 million.  The Company retained the remaining balance in each period for general corporate purposes.  At December 31, 2020,2023, the Bank had a retained earnings balance of $86.3$136.5 million.

During 20202023 and 2019,2022, the Company received payments from the Bank totaling 7.7$9.8 million and $8.0$6.7 million, respectively, representing the Bank’s intercompany tax liability for the 20202023 and 20192022 tax years, respectively, in accordance with the Company’s tax allocation agreement.

The Company has the right to defer interest payments for 20 consecutive quarters on its trust preferred securities if necessary for liquidity purposes.  During the deferral period, the Company may not declare or pay any dividends on its common stock or make any payment on any outstanding debt obligations that rank equally with or junior to the trust preferred securities.

The Company’s cash balance at December 31, 20202023 was $6.7$8.8 million.  The Company believes that it has sufficient liquidity to meet its cash flow obligations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and future results could differ.  The allowance for loancredit losses other real estate owned valuation, loss contingencies and income taxes are deemed critical due to the required level of management judgment and the use of estimates, making them particularly subject to change.

Our methodology for determining the allowance for loancredit losses and the related provision for loancredit losses is described above in the "Allowance for LoanCredit Losses" discussion.  This area of accounting requires significant judgment due to the number of factors which can influence the collectability of a loan.  Unanticipated changes in these factors could significantly change the level of the allowance for loancredit losses and the related provision for loancredit losses.  Although, based upon our internal analysis, and in our judgment, we believe that we have provided an adequate allowance for loancredit losses, there can be no assurance that our analysis has properly identified all of the probable losses in our loan portfolio.  As a result, we could record future provisions for loancredit losses that may be significantly different than the levels that we recorded in 2020.

Assets acquired through or instead of foreclosure, primarily other real estate owned, are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis.  New real estate appraisals are generally obtained at the time of foreclosure and are used to establish fair value.  If fair value declines, a valuation allowance is recorded through expense.  Estimating the initial and ongoing fair value of these properties involves a number of factors and judgments including holding time, costs to complete, holding costs, discount rate, absorption and other factors.

Loss contingencies are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.  This, too, is an accounting area that involves significant judgment.  Although, based upon our judgment, internal analysis, and consultations with legal counsel we believe that we have properly accounted for loss contingencies, future changes in the status of such contingencies could result in a significant change in the level of contingent liabilities and a related impact to operating earnings.

2023.

Our accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated with differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes.  At December 31, 2020,2023, we had gross deferred tax assets of $5.1$10.0 million and gross deferred tax liabilities of $3.1$2.8 million resulting in a net deferred tax asset of $2.1$7.2 million.  Accounting standards require that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard.  At December 31, 2020, a valuation allowance of $92,000 that had been maintained against a capital loss carryforward created by the liquidation of the assets of a partnership interest the Bank acquired through a loan settlement was reversed as the final distribution of the partnership interest was received.   With the positive results in 20202023 and positive future projections, we concluded at December 31, 20202023 that no valuation allowance on our net deferred tax asset was required.  Changes in tax laws, changes in tax rates, changes in ownership and our future level of earnings can impact the ultimate realization of our net deferred tax asset.

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Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Our primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of our transactions are denominated in U.S. dollars with no specific foreign exchange exposure. Macatawa Bank has only limited agricultural-related loan assets, and therefore has no significant exposure to changes in commodity prices.

Our balance sheet has sensitivity, in various categories of assets and liabilities, to changes in prevailing rates in the U.S. for the federal funds rate, prime rate, mortgage rates, U.S. Treasury rates and various money market indexes. Our asset/liability management process aids us in providing liquidity while maintaining a balance between interest earning assets and interest bearing liabilities.

We utilize a simulation model as our primary tool to assess the direction and magnitude of variations in net interest income and the economic value of equity (“EVE”) resulting from potential changes in market interest rates. Key assumptions in the model include contractual cash flows and maturities of interest-sensitive assets and interest-sensitive liabilities, prepayment speeds on certain assets, and changes in market conditions impacting loan and deposit pricing. We also include pricing floors on discretionary priced liability products which limit how low various checking and savings products could go under declining interest rates. These floors reflect our pricing philosophy in response to changing interest rates.

We forecast the next twelve months of net interest income under an assumed environment of gradual changes in market interest rates under various scenarios. The resulting change in net interest income is an indication of the sensitivity of our earnings to directional changes in market interest rates. The simulation also measures the change in EVE, or the net present value of our assets and liabilities, under an immediate shift, or shock, in interest rates under various scenarios, as calculated by discounting the estimated future cash flows using market-based discount rates.

The following table shows the impact of changes in interest rates on net interest income over the next twelve months and EVE based on our balance sheet as of December 31, 20202023 (dollars in thousands).

Interest Rate Scenario		Economic Value of Equity				Percent Change				Net Interest Income				Percent Change
Interest rates up 200 basis points		$	298,069				7.19	%		$	58,490				9.94	%
Interest rates up 100 basis points			287,986				3.56				55,689				4.67
No change			278,086				—				53,203				—
Interest rates down 100 basis points			278,437				0.13				53,392				0.36
Interest rates down 200 basis points			278,428				0.12				53,556				0.66

Interest Rate Scenario		Economic Value of Equity				Percent Change				Net Interest Income				Percent Change
Interest rates up 200 basis points		$	392,361				(5.98	)%		$	101,508				2.32	%
Interest rates up 100 basis points			404,884				(2.98	)			100,364				1.17
No change			417,337				—				99,207				—
Interest rates down 100 basis points			424,472				1.71				97,174				(2.05	)
Interest rates down 200 basis points			416,425				(0.22	)			92,026				(7.24	)

If interest rates were to increase, this analysis suggests that we are positioned for an increase in net interest income over the next twelve months.  If interest rates were to decrease, this analysis suggests that we are positioned for an increasea decrease in net interest income over the next twelve months.

We also forecast the impact of immediate and parallel interest rate shocks on net interest income under various scenarios to measure the sensitivity of our earnings under extreme conditions.

The quarterly simulation analysis is monitored against acceptable interest rate risk parameters by the Asset/Liability Committee and reported to the Board of Directors.

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

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ITEM 8:

Financial Statements and Supplementary Data.

REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors

Macatawa Bank Corporation

Holland, Michigan

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Macatawa Bank Corporation (the “Company”) as of December 31, 20202023 and 2019,2022, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”) for the years then ended.. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20202023 and 20192022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 18, 2021,15, 2024, expressed an unqualified opinion thereon.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2023, due to the adoption of Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinionsopinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for LoanCredit Losses – General Reserve

As described in Notes 1 and 3 to the Company’s consolidated financial statements, the Company has a gross loan balance of $1.43$1.3 billion and related allowance for loancredit losses (“allowance”) balance of $17.4 million at December 31, 2020.2023. The allowance for credit losses consists of specificquantitative and generalqualitative components. The specific component relatesremaining life methodology is used for all loan pools to loans that are individually classified as impaired.develop a baseline lifetime loss. The general component covers non-classified loans andbaseline lifetime loss is based on historical loss experience adjusted for currentchanges in various qualitative environmental factors. The calculation of this qualitative general reserve adjustment involves estimatesfactors, including macroeconomic conditions, over the reasonable and assumptions by management based on certain qualitative environmental factors.

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supportable forecast period and reversion periods.

We identified management's assumptions related to qualitative factors used in the estimationdetermination of the qualitative general reserve adjustment to the allowance as a critical audit matter. The determination of qualitative factors involves significant assumptions that require a high degree of management’s judgment.  Management’s assumptions related to certainthe qualitative environmental factors as described in Note 1, which are used to adjust the quantitative historical losslosses (both upwards and downwards), are highly subjective and could have a significant impact on the allowance. Auditing these complex judgments and assumptions involvesinvolved especially challenging and subjective auditor judgment due to the nature of audit evidence and the nature and extent of specialized knowledge of the banking industry and local and regional economy neededeffort required to assessaddress these assumptions.

matters.

The primary procedures we performed to address this critical audit matter included:

Testing the design and operating effectiveness of internal controls over the data used by management to assess certain qualitative environmental factors and their effect on the estimation of inherent losses within the loan portfolio.

Testing the design and operating effectiveness of internal controls over management’s review of the conclusions made related to certain qualitative environmental factors and judgments over the resulting adjustment to the allowance.

Evaluating the reliability of the data used by management to support their assessment of certain qualitative environmental factors by vouching to internal and external sources.

Evaluating the appropriateness of management’s conclusion on the qualitative assessment and the resulting adjustment to the allowance.

Utilizing the engagement team’s specialized skills and knowledge of the banking industry and local and regional economy to perform an independent assessment of certain qualitative environmental factors using similar and alternative source data, and then comparing the results to management’s assessment.

●

Testing the design and operating effectiveness of internal controls over the qualitative factor assessment and the resulting adjustment to the allowance.

●

Testing the completeness and accuracy and evaluating the reliability and relevance of the data and assumptions used by management related to the qualitative factor assessment, including agreeing to internal and external sources.

●

Evaluating the reasonableness of the qualitative factor assessment and the resulting adjustment to the allowance by ensuring the methods used are appropriate, have been applied consistently and alternative assumptions or outcomes have been considered for each of the qualitative factors individually and in the aggregate.

/s/ BDO USA, LLP

P.C.

We have served as the Company’sCompany's auditor since 2010.

Grand Rapids, Michigan

February 18, 2021

15, 2024

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MACATAWA BANK CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 20202023 and 2019

2022

(Dollars in thousands)

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		2023				2022
ASSETS
Cash and due from banks		$	32,317			$	51,215
Federal funds sold and other short-term investments			418,035				703,955
Cash and cash equivalents			450,352				755,170
Securities available for sale, at fair value			508,798				499,257
Securities held to maturity (fair value 2023 - $322,098 and 2022 - $332,650)			331,523				348,765
Federal Home Loan Bank (FHLB) stock			10,211				10,211
Loans held for sale, at fair value			—				215
Total loans			1,338,386				1,177,748
Allowance for credit losses			(17,442	)			(15,285	)
Net loans			1,320,944				1,162,463
Premises and equipment – net			38,604				40,306
Accrued interest receivable			8,976				7,606
Bank-owned life insurance			54,249				53,345
Other real estate owned - net			—				2,343
Deferred tax asset - net			7,202				9,712
Other assets			17,840				17,526
Total assets		$	2,748,699			$	2,906,919
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing		$	643,035			$	834,879
Interest-bearing			1,772,695				1,780,263
Total deposits			2,415,730				2,615,142
Other borrowed funds			30,000				30,000
Accrued expenses and other liabilities			15,884				14,739
Total liabilities			2,461,614				2,659,881
Commitments and Contingencies (Notes 16 and 17)			—				—
Shareholders' equity
Common stock, no par value, 200,000,000 shares authorized; 34,361,562 and 34,298,640 shares issued and outstanding, respectively			220,255				219,578
Retained earnings			89,760				59,036
Accumulated other comprehensive loss			(22,930	)			(31,576	)
Total shareholders' equity			287,085				247,038
Total liabilities and shareholders' equity		$	2,748,699			$	2,906,919

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		2020				2019
ASSETS
Cash and due from banks		$	31,480			$	31,942
Federal funds sold and other short-term investments			752,256				240,508
Cash and cash equivalents			783,736				272,450
Securities available for sale, at fair value			236,832				225,249
Securities held to maturity (fair value 2020 - $83,246 and 2019 - $85,128)			79,468				82,720
Federal Home Loan Bank (FHLB) stock			11,558				11,558
Loans held for sale, at fair value			5,422				3,294
Total loans			1,429,331				1,385,627
Allowance for loan losses			(17,408	)			(17,200	)
Net loans			1,411,923				1,368,427
Premises and equipment – net			43,254				43,417
Accrued interest receivable			5,625				4,866
Bank-owned life insurance (BOLI)			42,516				42,156
Other real estate owned - net			2,537				2,748
Net deferred tax asset			2,059				2,078
Other assets			17,096				9,807
Total assets		$	2,642,026			$	2,068,770
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing		$	809,437			$	482,499
Interest-bearing			1,489,150				1,270,795
Total deposits			2,298,587				1,753,294
Other borrowed funds			70,000				60,000
Long-term debt			20,619				20,619
Accrued expenses and other liabilities			12,977				17,388
Total liabilities			2,402,183				1,851,301
Commitments and Contingencies			—				—
Shareholders' equity
Common stock, no par value, 200,000,000 shares authorized;  34,197,519 and 34,103,542 shares issued and outstanding at December 31, 2020 and December 31, 2019			218,528				218,109
Retained earnings (deficit)			17,101				(2,184	)
Accumulated other comprehensive income			4,214				1,544
Total shareholders' equity			239,843				217,469
Total liabilities and shareholders' equity		$	2,642,026			$	2,068,770

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 20202023 and 2019

2022

(Dollars in thousands, except per share data)

---

		2023				2022
Interest income
Loans, including fees		$	69,537			$	47,176
Securities
Taxable			18,191				11,333
Tax-exempt			2,764				2,803
FHLB Stock			318				199
Federal funds sold and other short-term investments			23,001				13,395
Total interest income			113,811				74,906
Interest expense
Deposits			25,730				3,773
Other borrowings			634				987
Total interest expense			26,364				4,760
Net interest income			87,447				70,146
Provision (benefit) for credit losses			550				(1,125	)
Net interest income after provision (benefit) for credit losses			86,897				71,271
Noninterest income
Service charges and fees			4,109				4,769
Net gains on mortgage loans			65				706
Trust fees			4,332				4,143
ATM and debit card fees			6,694				6,768
BOLI income			903				878
Other			2,338				2,755
Total noninterest income			18,441				20,019
Noninterest expense
Salaries and benefits			28,620				26,194
Occupancy of premises			4,208				4,200
Furniture and equipment			4,199				4,008
Legal and professional			1,425				961
Marketing and promotion			803				803
Data processing			3,953				3,756
FDIC assessment			1,320				789
Interchange and other card expense			1,633				1,586
Bond and D&O Insurance			490				518
Other			4,940				5,411
Total noninterest expenses			51,591				48,226
Income before income tax			53,747				43,064
Income tax expense			10,523				8,333
Net income		$	43,224			$	34,731
Basic and diluted earnings per common share		$	1.26			$	1.01
Cash dividends per common share		$	0.33			$	0.32

---

		2020				2019
Interest income
Loans, including fees		$	58,717			$	63,609
Securities
Taxable			3,700				3,864
Tax-exempt			3,412				3,518
FHLB Stock			427				614
Federal funds sold and other short-term investments			968				4,337
Total interest income			67,224				75,942
Interest expense
Deposits			3,488				8,854
Other borrowings			1,429				1,369
Long-term debt			770				2,232
Total interest expense			5,687				12,455
Net interest income			61,537				63,487
Provision for loan losses			3,000				(450	)
Net interest income after provision for loan losses			58,537				63,937
Noninterest income
Service charges and fees			4,030				4,415
Net gains on mortgage loans			6,477				2,347
Trust fees			3,758				3,812
ATM and debit card fees			5,699				5,753
BOLI income			874				972
Other			3,138				2,429
Total noninterest income			23,976				19,728
Noninterest expense
Salaries and benefits			25,530				24,679
Occupancy of premises			3,955				3,994
Furniture and equipment			3,678				3,420
Legal and professional			1,104				952
Marketing and promotion			891				919
Data processing			3,357				2,980
FDIC assessment			400				239
Interchange and other card expense			1,406				1,414
Bond and D&O Insurance			418				413
Net losses (gains) on repossessed and foreclosed properties			19				(24	)
Administration and disposition of problem assets			96				277
Other			4,871				4,961
Total noninterest expenses			45,725				44,224
Income before income tax			36,788				39,441
Income tax expense			6,623				7,462
Net income		$	30,165			$	31,979
Basic earnings per common share		$	0.88			$	0.94
Diluted earnings per common share		$	0.88			$	0.94
Cash dividends per common share		$	0.32			$	0.28

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended December 31, 20202023 and 2019

2022

(Dollars in thousands)

---

		2023				2022
Net income		$	43,224			$	34,731
Other comprehensive income:
Unrealized gains (losses):
Net change in unrealized gains (losses) on debt securities available for sale			10,965				(39,686	)
Net unrealized gain at time of transfer on securities transferred to held-to-maturity			—				113
Amortization of net unrealized gains on securities transferred to held-to-maturity			(21	)			(21	)
Tax effect			(2,298	)			8,315
Net change in unrealized gains (losses) on securities available for sale, net of tax			8,646				(31,279	)
Other comprehensive income (loss), net of tax			8,646				(31,279	)
Comprehensive income		$	51,870			$	3,452

---

		2020				2019
Net income		$	30,165			$	31,979
Other comprehensive income:
Unrealized gains:
Net change in unrealized gains on securities available for sale			3,380				4,834
Tax effect			(710	)			(1,012	)
Net change in unrealized gains on securities available for sale, net of tax			2,670				3,822
Less: reclassification adjustments:
Reclassification for gains included in net income			—				—
Tax effect			—				—
Reclassification for gains included in net income, net of tax			—				—
Other comprehensive income, net of tax			2,670				3,822
Comprehensive income		$	32,835			$	35,801

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'SHAREHOLDERS’ EQUITY

Years ended December 31, 20202023 and 2019

2022

(Dollars in thousands, except per share data)

---

		Common Stock				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Shareholders' Equity
Balance, January 1, 2022		$	219,082			$	35,220			$	(297	)		$	254,005
Net income			—				34,731				—				34,731
Cash dividends at $0.32 per share			—				(10,915	)			—				(10,915	)
Repurchase of 19,061 shares for taxes withheld on vested restricted stock			(207	)			—				—				(207	)
Other comprehensive loss, net of tax			—				—				(31,279	)			(31,279	)
Stock compensation expense			703				—				—				703
Balance, December 31, 2022		$	219,578			$	59,036			$	(31,576	)		$	247,038
Adoption of ASU 2016-13, net of tax			—				(1,215	)			—				(1,215	)
Net income			—				43,224				—				43,224
Cash dividends at $0.33 per share			—				(11,285	)			—				(11,285	)
Repurchase of 14,930 shares for taxes withheld on vested restricted stock			(143	)			—				—				(143	)
Other comprehensive income, net of tax			—				—				8,646				8,646
Stock compensation expense			820				—				—				820
Balance, December 31, 2023		$	220,255			$	89,760			$	(22,930	)		$	287,085

---

		Common Stock				Retained Earnings (Deficit)				Accumulated Other Comprehensive Income (Loss)				Total Shareholders' Equity
Balance, January 1, 2019		$	217,783			$	(24,652	)		$	(2,278	)		$	190,853
Net income			—				31,979				—				31,979
Cash dividends at $0.28 per share			—				(9,511	)			—				(9,511	)
Repurchase of 9,400 shares for taxes withheld on vested restricted stock			(101	)			—				—				(101	)
Net change in unrealized gain on securities available for sale, net of tax			—				—				3,822				3,822
Stock compensation expense			427				—				—				427
Balance, December 31, 2019		$	218,109			$	(2,184	)		$	1,544			$	217,469
Net income			—				30,165				—				30,165
Cash dividends at $0.32 per share			—				(10,880	)			—				(10,880	)
Repurchase of 11,280 shares for taxes withheld on vested restricted stock			(86	)			—				—				(86	)
Net change in unrealized gain on securities available for sale, net of tax			—				—				2,670				2,670
Stock compensation expense			505				—				—				505
Balance, December 31, 2020		$	218,528			$	17,101			$	4,214			$	239,843

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 20202023 and 2019

2022

(Dollars in thousands)

---

		2023				2022
Cash flows from operating activities
Net income		$	43,224			$	34,731
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization and accretion			316				1,558
Stock compensation expense			820				703
Provision (benefit) for credit losses			550				(1,125	)
Origination of loans for sale			(4,145	)			(26,236	)
Proceeds from sales of loans originated for sale			4,425				28,134
Net gains on mortgage loans			(65	)			(706	)
Net (gain) loss on sales of other real estate			(356	)			(47	)
Deferred income tax expense			535				766
Change in accrued interest receivable and other assets			(1,684	)			(6,051	)
Bank-owned life insurance			(903	)			(878	)
Change in accrued expenses and other liabilities			1,083				3,951
Net cash from operating activities			43,800				34,800
Cash flows from investing activities
Loan originations and payments, net			(160,507	)			(68,234	)
Purchases of securities available for sale			(24,072	)			(285,572	)
Purchases of securities held to maturity			(14,789	)			(166,566	)
Proceeds from:
Maturities and calls of securities available for sale			12,698				24,450
Maturities and calls of securities held to maturity			23,685				41,873
Principal paydowns on securities available for sale			14,679				14,918
Principal paydowns on securities held to maturity			8,268				36,053
Sales of other real estate			2,699				47
Redemption of FHLB stock			—				1,347
Additions to premises and equipment			(439	)			(796	)
Net cash for investing activities			(137,778	)			(402,480	)
Cash flows from financing activities
Change in deposits			(199,412	)			37,184
Repayments and maturities of other borrowed funds			—				(80,000	)
Proceeds from other borrowed funds			—				25,000
Cash dividends paid			(11,285	)			(10,915	)
Repurchase of shares for taxes withheld on vested restricted stock			(143	)			(207	)
Net cash for financing activities			(210,840	)			(28,938	)
Net change in cash and cash equivalents			(304,818	)			(396,618	)
Cash and cash equivalents at beginning of period			755,170				1,151,788
Cash and cash equivalents at end of period		$	450,352			$	755,170

---

		2020				2019
Cash flows from operating activities
Net income		$	30,165			$	31,979
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization and accretion			2,621				2,212
Stock compensation expense			505				427
Provision for loan losses			3,000				(450	)
Origination of loans for sale			(156,410	)			(82,281	)
Proceeds from sales of loans originated for sale			160,759				81,749
Net gains on mortgage loans			(6,477	)			(2,347	)
Write-down of other real estate			32				14
Net gain on sales of other real estate and repossessed assets			(13	)			(38	)
Net gain on sales of premises and equipment held for sale			—				(19	)
Deferred income tax (benefit) expense			(603	)			290
Deferred tax asset valuation allowance change			(92	)			—
Change in accrued interest receivable and other assets			(7,780	)			(2,037	)
Earnings in bank-owned life insurance			(874	)			(972	)
Change in accrued expenses and other liabilities			5,742				1,193
Net cash from operating activities			30,575				29,720
Cash flows from investing activities
Loan originations and payments, net			(46,496	)			20,805
Purchases of securities available for sale			(138,492	)			(58,403	)
Purchases of securities held to maturity			(29,745	)			(20,478	)
Proceeds from:
Maturities and calls of securities			111,261				72,188
Principal paydowns on securities			41,938				11,053
Sales of other real estate and repossessed assets			192				656
Sales of premises and equipment held for sale			—				342
Additions to premises and equipment			(2,274	)			(1,041	)
Net cash from investing activities			(63,616	)			25,122
Cash flows from financing activities
Change in deposits			545,293				76,555
Repayments and maturities of other borrowed funds			—				(30,619	)
Proceeds from other borrowed funds			10,000				10,000
Cash dividends paid			(10,880	)			(9,511	)
Repurchase of shares for taxes withheld on vested restricted stock			(86	)			(101	)
Net cash from financing activities			544,327				46,324
Net change in cash and cash equivalents			511,286				101,166
Cash and cash equivalents at beginning of period			272,450				171,284
Cash and cash equivalents at end of period		$	783,736			$	272,450

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Years ended December 31, 20202023 and 2019

2022

(Dollars in thousands)

---

		2023				2022
Supplemental cash flow information
Interest paid		$	25,577			$	4,717
Income taxes paid			9,600				6,500
Supplemental noncash disclosures:
Transfer of securities from available for sale to held to maturity			—				123,469
Security settlement			—				—

---

		2020				2019
Supplemental cash flow information
Interest paid		$	5,963			$	12,440
Income taxes paid			5,315				7,200
Supplemental noncash disclosures:
Transfers from loans to other real estate			—				—
Security settlement			10,153				9,901

See accompanying notes to consolidated financial statements.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 20202023 and 2019

---

2022

---

NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Macatawa Bank Corporation ("Macatawa"(“Macatawa” or the "Company"“Company”) and its wholly-owned subsidiary, Macatawa Bank (the "Bank"“Bank”).  All significant intercompany accounts and transactions have been eliminated in consolidation.

Macatawa Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Corporation. The Bank operates 26 full service branch offices providing a full range of commercial and consumer banking and trust services in Kent County, Ottawa County, and northern Allegan County, Michigan.

The Company owns all of the common securities of Macatawa Statutory Trust II.  This is a grantor trust that issued trust preferred securities and is discussed in a separate note.  Under generally accepted accounting principles, this trust is not consolidated into the financial statements of the Company.

Recent Events:   In response to the COVID-19 pandemic, federal state and local governments have taken and continue to take actions designed to mitigate the effect on public health and to address the economic impact from the virus.  The Federal Reserve reduced the overnight federal funds rate by 50 basis points on March 3, 2020 and by another 100 basis points on March 15, 2020 and announced the resumption of quantitative easing.  Congress passed a number of measures in late March 2020, designed to infuse cash into the economy to offset the negative impacts of business closings and restrictions.  Individual states, including Michigan, implemented restrictions including closure of schools, restrictions on public gatherings, restrictions on businesses, including closures and mandatory work at home orders, implementation of “social distancing” practices, and other measures.

The Company quickly responded to the changing environment by successfully executing its business continuity plan, including implementing work from home arrangements and limiting branch activities.  As of December 31, 2020, branches were fully open with additional health and safety requirements to comply with state of Michigan health mandates, including, among other things, daily deep cleaning, nonsurgical face mask requirements and strict social distancing measures.

The effects of COVID-19 could, among other risks, result in a material increase in requests from the Company’s customers for loan deferrals, modifications to the terms of loans, or other borrower accommodations; have a material adverse impact on the financial condition of the Company’s customers, potentially impacting their ability to make payments to the Company as scheduled driving an increase in delinquencies and loan losses; result in additional material provision for loan losses; result in a decreased demand for the Company’s loans; or negatively impact the Company’s ability to access capital on attractive terms or at all.  Those effects could have a material adverse impact on the Company’s and its customers’ business, financial condition, and results of operations.

On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”.  This guidance encourages financial institutions to work prudently with borrowers that are or may be unable to meet their contractual obligations because of the effects of COVID-19.  The guidance goes on to explain that in consultation with the FASB staff the federal banking agencies concluded that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a modification are not Troubled Debt Restructurings (“TDRs”).  The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020.  Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were not more than 30 days past due as of December 31, 2019 are not TDRs.  On December 27, 2020, the President signed another COVID-19 relief bill that extended this guidance until the earlier of January 1, 2022 or 60 days after the date on which the national emergency declared as a result of COVID-19 is terminated.  Through December 31, 2020, the Bank had applied this guidance and modified 726 individual loans with aggregate principal balances totaling $337.2 million.  The majority of these modifications involved three-month extensions.  By December 31, 2020, most of these modifications had expired, other than those receiving a second short-term modification as allowed under the guidance.  At December 31, 2020, there were 6 such loans under COVID-19 modification, totaling $2.0 million.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 and 2019

---

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The CARES Act, as amended, included an allocation of $659 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”).   PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP.  These loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven, in whole or in part.  Payments are deferred until either the date on which the SBA remits the amount of forgiveness proceeds to the lender or the date that is 10 months after the last day of the covered period if the borrower does not apply for forgiveness within that 10 month period. Through December 31, 2020, the Bank had originated 1,738 PPP loans totaling $346.7 million in principal, with an average loan size of $200,000.   Fees totaling $10.0 million were generated from the SBA for these loans in the year ended December 31, 2020.  These fees are deferred and amortized into interest income over the contractual period of 24 months or 60 months, as applicable.  Upon SBA forgiveness of an individual loan, unamortized fees are then recognized into interest income.  Participation in the PPP had a significant impact on the Bank’s asset mix and net interest income in 2020 and will continue to impact both asset mix and net interest income until these loans are forgiven or paid off.  The initial PPP expired on August 8, 2020.  Through December 31, 2020, 765 PPP loans totaling $113.5 million had been forgiven by the SBA and a total of $5.4 million in PPP fees had been recognized by the Bank.

On December 27, 2020, the President signed another COVID-19 relief bill that extended and modified several provisions of the PPP.  This included an additional allocation of $284 billion.  It also added some borrower size restrictions and allows for businesses to qualify for a second PPP loan if it fully utilized its first PPP loan and meets the eligibility requirements.  The SBA reactivated the PPP on January 11, 2021.  The Bank is originating additional PPP loans through the PPP, which will currently extend through March 31, 2021.  Through February 16, 2021, the Bank had generated and received SBA approval on 553 PPP loans totaling $78.8 million under the 2021 PPP authorization.

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.  The allowance for loancredit losses valuation of deferred tax assets, loss contingencies, fair value of other real estate owned, determination of other-than-temporary impairment and fair values of financial instruments are particularly subject to change.

FASB issued ASU No.2016-13, as amended, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU, commonly referred to as Current Expected Credit Loss ("CECL"), provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance eliminates the probable initial recognition threshold and, instead, reflects an entity’s current estimate of all expected credit losses. The new guidance broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. FASB also issued ASU 2022-02,Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This standard eliminated the previous accounting guidance for troubled debt restructurings and added additional disclosure requirements for gross chargeoffs by year of origination. It also prescribes guidance for reporting modifications of loans to borrowers experiencing financial difficulty.

The Company adopted these standards as required on January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the probable incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the allowance for loans of $1.5 million and an increase of $62,000 to establish a reserve for unfunded commitments, with a $1.2 million decrease to retained earnings, with the $323,000 income tax portion being recorded as part of the deferred tax asset in the Company's Consolidated Balance Sheet.

Concentration of Credit Risk:  Loans are granted to, and deposits are obtained from, customers primarily in the western Michigan area as described above. Substantially all loans are secured by specific items of collateral, including residential real estate, commercial real estate, commercial assets and consumer assets. Commercial real estate loans are the largest concentration, comprising 39%44% of total loans at December 31, 2020.2023. Commercial and industrial loans total 46%38%, while residential real estate and consumer loans make up the remaining 15%18%.  Other financial instruments, which potentially subject the Company to concentrations of credit risk, include deposit accounts in other financial institutions.

Cash and Cash Equivalents:  Cash and cash equivalents include cash on hand, demand deposits with other financial institutions and short-term securities (securities with maturities equal to or less than 90 days and federal funds sold).

Cash Flow Reporting: Cash flows are reported net for customer loan and deposit transactions, interest-bearing time deposits with other financial institutions and short-term borrowings with maturities of 90 days or less.

Restrictions on Cash:  Cash on hand or on deposit with the Federal Reserve Bank of $0 and $8.1 million$0 at December 31, 2020 2023 and 2019,2022, respectively, was required to meet regulatory reserve and clearing requirements.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023 and 2022

NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Securities: Securities are classified as held to maturity ("HTM") and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities available for sale ("AFS") consist of those securities which might be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for saleAFS are reported at their fair value and the related unrealized gain or loss is reported in other comprehensive income, net of tax.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level yield method without anticipating prepayments. Gains and losses on sales are based on the amortized cost of the security sold.

Management Accrued interest receivable on securities totaled $3.4 million at December 31, 2023 and $3.4 million at December 31, 2022.

Securities Available for Sale - For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income with an allowance for credit losses ("ACL") being established under CECL.  For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors.  In making this assessment, management considers any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the security, among other factors.  If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.  If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.  Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense.  Losses are charged against the allowance when the collectability of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met.  Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes.  The Company has never experienced a loss on any debt securities AFS.  At December 31, 2023 and at adoption of CECL on January 1, 2023, there was no ACL related to debt securities AFS.  Accrued interest receivable on debt securities was excluded from the estimate of credit losses.

Securities Held to Maturity - Since the adoption of CECL, the Company measures credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be collected.  HTM securities are charged off against the ACL when deemed uncollectible.  Adjustments to the ACL are reported in the Company's Consolidated Statements of Income in the provision for credit losses.  Accrued interest receivable on HTM securities is excluded from the estimate of credit losses.  With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities.  With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities.  The Company has never experienced any loss on HTM securities.  At December 31, 2023 and at adoption of CECL on January 1, 2023, there was no ACL related to securities HTM.

For periods prior to January 1, 2023, management evaluated securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrantwarranted such an evaluation.  Investment securities classified as available for sale or held-to-maturity arewere generally evaluated for OTTI under ASC Topic 320,Investments — Debt and Equity Instruments.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 and 2019

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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In determining OTTI, management considersconsidered many factors, including: (1)(1) the length of time and the extent to which the fair value has been less than cost, (2)(2) the financial condition and near-term prospects of the issuer, (3)(3) whether the market decline was affected by macroeconomic conditions, and (4)(4) whether the entity hashad the intent to sell the debt security or more likely than not will would be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involvesinvolved a high degree of subjectivity and judgment and iswas based on the information available to management at a point in time. Management has determined that no OTTI charges were necessary during 2020 and 2019.

2022.

Federal Home Loan Bank (FHLB) Stock:  The Bank is a member of the FHLB system.  Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts.  FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment.  Because this stock is viewed as a long term investment, impairment is based on ultimate recovery of par value.  Management has determined that there was no impairment of FHLB stock during 20202023 and 2019.2022.  Both cash and stock dividends are reported as income.

income when declared, or on the ex-dividend date.

Loans Held for Sale:  Mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors.  As of December 31, 2020 2023 and 2019,2022, these loans had a net unrealized gain of $295,000$0 and $89,000,$4,000, respectively, which are reflected in their carrying value.  Changes in fair value of loans held for sale are included in net gains on mortgage loans.  Loans are sold servicing released; therefore no mortgage servicing right assets are established.

Loans:  Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs and an allowance for loancredit losses.

Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the respective term of the loan using the level-yield method without anticipating prepayments.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023 and 2022

NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection.  Consumer loans are typically charged off no later than 120 days past due.  Past due status is based on the contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.  Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income.  Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for LoanCredit Losses ("ACL") - Loans: TheSince the adoption of CECL, the allowance for loancredit losses (allowance) is a valuation account that is deducted from the loan portfolios' amortized cost basis to present the net amount expected to be collected on loans.  The allowance for probable incurred credit losses,is increased by the provision for loancredit losses and recoveries, and decreased by charge-offs of loans. Management believes the estimated allowance for loan lossesbalance to be adequate based on known and inherent risks in the portfolio, past loan loss experience, information about specific borrower situations and estimated collateral values, current and forecasted economic conditions and other relevant factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibilityuncollectability of a loan balance is confirmed.

Management continues its collection efforts on previously charged-off balances and applies recoveries as additions to the allowance.

The allowance consists of specificis measured on a collective pool basis when similar risk characteristics exist.  Loans with similar risk characteristics are grouped into homogeneous classes, or pools, for allowance calculation.  Commercial loans are divided into eight classes based primarily on property type and general components.  The specific component relates to loans thatrisk characteristics.  They are individually classified as impaired.  The general component covers non-classified loans and isfurther segmented based on historical loss experience adjusted for current qualitative environmental factors.  The Company maintains a loss migration analysis that trackscommercial loan lossesrisk grade.  Retail loans are segmented into categories including residential mortgage, home equity, unsecured and recoveriesother secured and then further segmented based on delinquency status.

The Company's loan classportfolio classes as of December 31, 2023 were as follows:

Commercial Loans:

Commercial and Industrial - Risks to this category include industry concentration and limitations associated with monitoring the adequacy and condition of collateral which can include inventory, accounts receivable, and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.

Residential developed - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area, inadequate long-term financing arrangements and velocity of sales. Loans in this category are susceptible to weakening general economic conditions and increases in unemployment rates as well as market demand and supply of similar property. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Unsecured to residential developers - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.

Vacant and unimproved - Risks to this category include industry concentration, valuation of farm land, agricultural properties and residential properties as well as velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Commercial development - Risks to this category include industry concentration, valuation of commercial properties, lease terms, occupancy/vacancy rates and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Residential improved - Risks to this category include industry concentration, valuation of residential properties, inventory of homes for sale in the market area and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Commercial improved - Risks to this category include industry concentration, valuation of commercial properties, lease terms, occupancy/vacancy rates, cost overruns, changes in market demand for property or services and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

Manufacturing and industrial - Risks to this category include industry concentration, valuation of commercial properties, changes in market demand for products produced and velocity of sales. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Declines in real estate values and lack of suitable alternative use for the properties are also risks for loans in this category.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023 and 2022

NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Consumer Loans:

Residential mortgage - Residential mortgage loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values.

Unsecured - Unsecured loans are susceptible to weakening general economic conditions and increases in unemployment rates.

Home equity - Home equity loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values.

Other secured - Other secured loans are susceptible to weakening general economic conditions and increases in unemployment rates, regulatory risks as well as the inability to monitor collateral consisting of personal property.

The remaining life methodology is used for all loan risk grade assignmentpools. This nondiscounted cash flow approach projects an estimated future amortized cost basis based on current loan balance and repayment terms. Given the bank's limited loss history over the past twelve years, a loss rate computed for commercial loans.  At a comparable sized peer group (banks with assets between $1-3 billion) is then applied to future loan balances at the instrument level based on the remaining contractual life adjusted for amortization, prepayment and default to develop a baseline lifetime loss. The baseline lifetime loss is adjusted for changes in macroeconomic conditions over the reasonable and supportable forecast period and reversion periods.

Reasonable and supportable economic forecasts have to be incorporated in determining expected losses. The forecast period represents the time frame from the current period end through the point in time that the Company can reasonably forecast. Ideally, the economic forecast period would cover the contractual terms of all loans; however, the ability to produce a forecast that is both reasonable and supportable becomes more difficult the longer the period is projected.

For periods beyond the forecast period, the loss rate reverts back to the baseline lifetime loss.  As of December 31, 20202023, the Company used a one-year reasonable and 2019, an 18 month (six quarter) annualized historicalsupportable economic forecast period, with a six-month straight-line reversion period for all loan classes.  In determining the reasonable and supportable economic forecast period, the Company used a consensus economic forecast from a third-party provider that provided forecasts from twenty-five leading economists.  The Company considered the December 2023 report's consensus/mean estimates for gross domestic product and unemployment rates and selected a loss experience was usedperiod for commercial loansthe reasonable and a 12 month (four quarter) historical loss experiencesupportable forecast period was applied to residential mortgage and consumer loan portfolios.  These historical loss percentagesthat most closely matched that consensus.

A number of qualitative factors are adjusted (both upwards and downwards) for certain qualitative environmental factors,considered including economic trends,forecast uncertainty, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, competition, increasingimpact of rising interest rates, external factors and other considerations.

A During each reporting period, management also considers the need to adjust the baseline lifetime loss rates for factors that may cause expected losses to differ from those experienced in the historical loss periods.

The Company is also required to consider expected credit losses associated with loan commitments over the contractual period in which it is exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by the Company. Any allowance for off-balance sheet credit exposures is reported as an other liability on the Company's Consolidated Balance Sheet and is increased or decreased via provision for credit losses on the Company's Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same methodology, inputs and assumptions as the funded portion of loans at the segment level applied to the amount of commitments expected to be funded.

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the respective term of the loan using the level-yield method without anticipating prepayments. Accrued interest on loans totaled $5.3 million at December 31, 2023 and $4.0 million at December 31, 2022.

Accrued interest receivable for loans is included as a separate line item on the Company's Consolidated Balance Sheet. The Company elected not to measure an allowance for accrued interest receivable and instead elected to reverse accrued interest income on loans that are placed on nonaccrual status. The Company believes this policy results in the timely reversal of uncollectible interest.

Interest income on mortgage and commercial loans is discontinued at the time the loan is impaired when,90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on current information and events, it is believed to be probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Loans for which the terms have been modifiedloan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 and 2019

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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Commercial and commercial real estate loans with relationship balances exceeding $500,000 and an internal risk grading of 6 or worse are evaluated for impairment.  If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing interest rate or at the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral.  Large groups ofpast due 90 days still on accrual include both smaller balance homogeneous loans such as consumer and residential real estate loansthat are collectively evaluated for impairment and accordingly, theyindividually classified impaired loans.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are not separately identified for impairment disclosures.

Troubled debt restructuringsreturned to accrual status when all the principal and interest amounts contractually due are also considered impaired with impairment generally measured at the present value of estimatedbrought current and future cash flows using the loan’s effective rate at inception or using the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral.

payments are reasonably assured.

Transfers of Financial Assets:  Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished.  Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023 and 2022

NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreclosed Assets:  Assets acquired through or instead of loan foreclosure, primarily other real estate owned, are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis.  If fair value declines, a valuation allowance is recorded through expense.  Costs after acquisition are expensed unless they add value to the property.

Premises and Equipment:  Land is carried at cost.  Premises and equipment are stated at cost less accumulated depreciation.  Buildings and related components are depreciated using the straight-line method with useful lives ranging from 5 to 40 years.  Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 15 years.  Leasehold improvements are amortized over the lesser of the assets' useful lives or the lease term.  Maintenance, repairs and minor alterations are charged to current operations as expenditures occur and major improvements are capitalized.

Bank-Owned Life Insurance (BOLI):   The Bank has purchased life insurance policies on certain officers. BOLI is recorded at its currently realizable cash surrender value.  Changes in cash surrender value are recorded in other income.

Goodwill and Acquired Intangible Assets:  Goodwill resulting from business combinations represents the excess of the purchase price over the fair value of the net assets of businesses acquired.  Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually.  Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.  The Company had no goodwill at December 31, 2020 and 2019.

Acquired intangible assets consist of core deposit and customer relationship intangible assets arising from acquisitions.  They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives, which range from ten to sixteen years.  The Company had no acquired intangible assets at December 31, 2020 and 2019.

Long-term Assets:  Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows.  If impaired, the assets are recorded at fair value.  The Company had no impairment of long term assets in 20202023 or 2019.

2022.

Loan Commitments and Related Financial Instruments:  Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs.  The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.  Such financial instruments are recorded when they are funded.

Mortgage Banking Derivatives:  Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as derivatives not qualifying for hedge accounting.  Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked.  The Bank enters into commitments to sell mortgage backed securities, which it later buys back in order to hedge its exposure to interest rate risk in its mortgage pipeline.  At times, the Company also enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans.

Changes in the fair values of these interest rate lock and mortgage backed security and forward commitment derivatives are included in net gains on mortgage loans. The fair value of interest rate lock commitments was $1,000 and $0 at December 31, 2023 and 2022, respectively. The net fair value of mortgage bankingbacked security derivatives was approximately $(130,000)$17,000 and $36,000$0 at December 31, 2020 2023 and 2019,2022, respectively.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 and 2019

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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue RecognitionFrom Contracts With Customers:  The Company recognizes revenues as theyrecords revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”).  Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) it satisfies a performance obligation.  No revenue has been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

The Company’s primary sources of revenue are derived from interest and dividends earned based on contractual terms, as transactions occur, orloans, securities and other financial instruments that are not within the scope of Topic 606.  The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary.

The Company generally satisfies its performance obligations on contracts with customers as services are providedrendered, and collectabilitythe transaction prices are typically fixed and charged either on a periodic basis (generally monthly) or based on activity.  Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is reasonably assured.  The Company’s primary sourcelittle judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue is interest income from the Bank’s loans and investment securities.  The Company also earns noninterest revenue from various banking services offered by the Bank.

contracts with customers.

Interest Income: The Company’s largest source of revenue is interest income which is primarily recognized on an accrual basis based on contractual terms written into loans and investment contracts.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023 and 2022

NOTE 1– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Noninterest Revenue:  The Company derives the majority of its noninterest revenue from: (1)(1) service charges for deposit related services, (2)(2) gains related to mortgage loan sales, (3)(3) trust fees and (4)(4) debit and credit card interchange income.  Most of these services are transaction based and revenue is recognized as the related service is provided.

Derivatives:  Certain of ourthe Bank’s commercial loan customers have entered into interest rate swap agreements directly with the Bank.  At the same time the Bank enters into a swap agreement with its customer, the Bank enters into a corresponding interest rate swap agreement with a correspondent bank at terms mirroring the Bank’s interest rate swap with its commercial loan customer.   This is known as a back-to-back swap agreement.  Under this arrangement the Bank has two freestanding interest rate swaps, both of which are carried at fair value.  As the terms mirror each other, there is no income statement impact to the Bank.  At December 31, 2020,2023, the total notional amount of such agreements was $156.4$108.2 million and resulted in a derivative asset with a fair value of $4.2$4.9 million which was included in other assets and a derivative liability of $4.2$4.9 million which was included in other liabilities. At December 31, 2019,2022, the total notional amount of such agreements was $70.3$125.3 million and resulted in a derivative asset with a fair value of $1.8$6.5 million which was included in other assets and a derivative liability of $1.8$6.5 million which was included in other liabilities.

Income Taxes:  Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities.  Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.  AThe Company records a valuation allowance if needed, reduceswhen management believes it is "more likely than not" that deferred tax assets to the amount expected towill not be realized.

The Company recognizes a tax position as a benefit only if it is "more“more likely than not"not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.  For tax positions not meeting the "more“more likely than not"not” test, no tax benefit is recorded.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

Earnings Per Common Share:  Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period.  All outstanding unvested restricted stock awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation and are included in both basic and diluted earnings per share.  Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options.  In the event of a net loss, our unvested restricted stock awards are excluded from both basic and diluted earnings per share.

Stock-Based Compensation:  Compensation cost for equity-based awards is measured on the grant date based upon the fair value of the award at that date, and is recognized over the requisite service period, net of forfeitures when they occur.  Fair value of restricted stock awards is based upon the quoted market price of the common stock on the date of grant.

Comprehensive Income:  Comprehensive income consists of net income and other comprehensive income (loss).  Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale.

sale and amortization of unrealized gain upon transfer of securities from available for sale to held to maturity.

Loss Contingencies:  Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Stock Splits and Dividends:  Stock dividends in excess of 20% are reported as stock splits, resulting in no adjustment to the Company’s equity accounts.  Stock dividends for 20% or less are reported by transferring the fair value, as of the ex-dividend date, of the stock issued from retained earnings to common stock.  Fractional share amounts are paid in cash with a reduction in retained earnings. All share and per share amounts are retroactively adjusted for stock splits and dividends.

Dividend Restriction:  Banking regulations require maintaining certain capital levels and impose limitations on dividends paid by the Bank to the Company and by the Company to shareholders.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 and 2019

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NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Values of Financial Instruments:  The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).  Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately.  Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items.  Changes in assumptions or in market conditions could significantly affect the estimates.  The fair value estimates of existing on-and off-balance sheet financial instruments do not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments.

Segment Reporting:  The Company, through the branch network of the Bank, provides a broad range of financial services to individuals and companies in western Michigan.  These services include demand, time and savings deposits; lending; ATM and debit card processing; cash management; and trust and brokerage services.  While the Company’s management team monitors the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a Company-wide basis.  Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one operating segment – commercial banking.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.

Adoption of New Accounting Standards:

On March 12, 2020, the Securities Exchange Commission finalized amendments to the definitions of “accelerated” and “large accelerated filer” definitions. The amendments increase the threshold criteria for meeting these categories and were effective on April 27, 2020.  Prior to these changes, the Company was designated as an “accelerated” filer as it had more than $75 million in public float but less than $700 million at the end of the Company’s most recent second quarter.  The rule change expands the definition of “smaller reporting companies” to include entities with public float of less than $700 million and less than $100 million in annual revenues in its most recent fiscal year.  The Company met this expanded category of smaller reporting company based on the 2019 fiscal year and is no longer considered an accelerated filer.  If the Company’s annual revenues exceed $100 million in a given fiscal year, its category will change back to “accelerated filer”.  The categorization of “accelerated” or “large accelerated filer” drives the requirement for a public company to obtain an auditor attestation of its internal control over financial reporting.  Smaller reporting companies also have additional time to file quarterly and annual financial statements.  All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is not required if a company is not an accelerated or large accelerated filer.  As the Bank has total assets exceeding $1.0 billion, it remains subject to FDICIA, which requires an auditor attestation of internal controls over the Bank’s regulatory financial reporting.  As such, other than the additional time provided to file quarterly and annual financial statements, this change did not significantly change the Company’s annual reporting and audit requirements.

Newly Issued Not Yet Effective Standards:

FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The new guidance eliminates the probable initial recognition threshold and, instead, reflects an entity’s current estimate of all expected credit losses. The new guidance broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will now have to be presented as an allowance rather than as a write-down. ASU No. 2019-10 Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) – Effective Dates updated the effective date of this ASU for smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022. The Company selected a software vendor for applying this new ASU, began implementation of the software in the second quarter of 2018, completed integration during the third quarter of 2018 and ran parallel computations with both systems using the current GAAP incurred loss model in the fourth quarter of 2018.  The Company went live with this software beginning in January 2019 for its monthly incurred loss computations and began modeling the new current expected credit loss model assumptions to the allowance for loan losses computation.  In 2019 and 2020, the Company modeled the various methods prescribed in the ASU against the Company’s identified loan segments.  The Company anticipates continuing to run parallel computations as it continues to evaluate the impact of adoption of the new standard.  The COVID-19 pandemic that broke out in the United States in the first quarter of 2020 may have a significant impact on allowance computations under the incurred loss model which would be amplified under the new standard.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 2023 and 2019

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2022

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounting Standards Updates:

Accounting Standards Codification (Topic 848), Reference Rate Reform, provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. Entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. Entities that make such elections would not have to remeasure contracts at the modification date or reassess a previous accounting determination.  Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met.  The Company adopted the LIBOR transition relief allowed under this standard in 2022.

ASU No.2022-02Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures:  This ASU eliminates the accounting guidance for troubled debt restructurings (TDRs) by creditors in Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while adding disclosures for certain loan restructurings by creditors when a borrower is experiencing financial difficulty.  This guidance requires an entity to determine whether the modification results in a new loan or a continuation of an existing loan.  Additionally, the ASU requires disclosure of current period gross writeoffs by year of origination for financing receivables.  The ASU also requires disclosure of current period gross writeoffs by year of origination for financing receivables and disclosure of certain modifications of receivables made to borrowers experiencing financial difficulty.  This ASU is effective for the Company for fiscal years beginning after December 15, 2022. Adoption of this ASU on January 1, 2023 did not have a material impact on the Company’s financial results and the additional required disclosures for gross writeoffs have been included in the footnotes to the consolidated financial statements.

ASU No.2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures:  This ASU enhances disclosures about significant segment expenses.  The key amendments include: (1) require that a public entity disclose on an annual an interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss, (2) require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition, (3) require that a public entity provide all annual disclosures about a reportable segment's profit or loss currently required by GAAP in interim periods as well, (4) clarify that if CODM uses more than one measure of a segment's profit or loss in assessing segment performance and deciding how to allocate resources, an entity may report one or more of those additional measures of segment profit, (5) require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure of segment profit or loss in assessing segment performance and deciding how to allocate resources and (6) require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosures.  This ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.  As the Company has one reportable segment, the requirements of this standard for such entities will apply beginning with the Company's annual report ending December 31, 2024.  The Company does not expect adoption of the ASU to have a material effect on the Company's consolidated financial statements.

ASU No.2023-09,Income Taxes (Topic 740): Improvements to Income Tax Disclosures:  This ASU requires that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold.  The ASU requires all entities disclose on an annual basis (1) the amount of income taxes paid, disaggregated by federal, state and foreign taxes and (2) the amount of income taxes paid disaggregated by individual jurisdictions in which income taxes paid is equal or greater than 5 percent of total income taxes paid.  The ASU also requires that all entities disclose (1) income (loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic or foreign and (2) income tax expense (or benefit) from continuing operations disaggregated by federal (national), state and foreign.  This ASU is effective for public business entities for annual periods beginning after December 15, 2024.  The Company does not expect adoption of the ASU to have a material effect on the Company's consolidated financial statements.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023 and 2022

 

NOTE 2– SECURITIES

The amortized cost and fair value of securities were as follows (dollars in thousands):

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
December 31, 2020
Available for Sale:
U.S. Treasury and federal agency securities		$	63,993			$	287			$	(170	)		$	64,110
U.S. Agency MBS and CMOs			63,652				1,376				(45	)			64,983
Tax-exempt state and municipal bonds			43,739				1,903				—				45,642
Taxable state and municipal bonds			55,383				1,801				(7	)			57,177
Corporate bonds and other debt securities			4,731				189				—				4,920
		$	231,498			$	5,556			$	(222	)		$	236,832
Held to Maturity
Tax-exempt state and municipal bonds		$	79,468			$	3,778			$	—			$	83,246
December 31, 2019
Available for Sale:
U.S. Treasury and federal agency securities		$	74,839			$	95			$	(185	)		$	74,749
U.S. Agency MBS and CMOs			45,795				474				(68	)			46,201
Tax-exempt state and municipal bonds			44,718				1,244				—				45,962
Taxable state and municipal bonds			51,683				404				(65	)			52,022
Corporate bonds and other debt securities			6,263				55				(3	)			6,315
		$	223,298			$	2,272			$	(321	)		$	225,249
Held to Maturity
Tax-exempt state and municipal bonds		$	82,720			$	2,408			$	—			$	85,128

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
December 31, 2023
Available for Sale:
U.S. Treasury and federal agency securities		$	256,234			$	25			$	(10,767	)		$	245,492
Agency MBS and CMOs			123,767				173				(12,604	)			111,336
Tax-exempt state and municipal bonds			30,850				31				(284	)			30,597
Taxable state and municipal bonds			115,516				105				(5,545	)			110,076
Corporate bonds and other debt securities			11,527				3				(233	)			11,297
		$	537,894			$	337			$	(29,433	)		$	508,798
Held to Maturity
U.S. Treasury		$	251,229			$	—			$	(8,520	)			242,709
Tax-exempt state and municipal bonds			80,294				284				(1,189	)			79,389
		$	331,523			$	284			$	(9,709	)		$	322,098
December 31, 2022
Available for Sale:
U.S. Treasury and federal agency securities		$	240,921			$	23			$	(16,310	)		$	224,634
Agency MBS and CMOs			128,165				—				(14,347	)			113,818
Tax-exempt state and municipal bonds			37,198				10				(498	)			36,710
Taxable state and municipal bonds			120,647				49				(8,525	)			112,171
Corporate bonds and other debt securities			12,387				—				(463	)			11,924
		$	539,318			$	82			$	(40,143	)		$	499,257
Held to Maturity
U.S. Treasury		$	251,307			$	—			$	(13,677	)			237,630
Tax-exempt state and municipal bonds			97,458				415				(2,853	)			95,020
		$	348,765			$	415			$	(16,530	)		$	332,650

There were no sales of securities available for sale during the years ended December 31, 2020 2023 and 2019.

2022.

Contractual maturities of debt securities at December 31, 20202023 were as follows (dollars in thousands):

		Held–to-Maturity Securities								Available-for-Sale Securities
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Due in one year or less		$	24,585			$	24,782			$	29,585			$	29,806
Due from one to five years			22,800				23,842				63,590				65,826
Due from five to ten years			14,503				15,915				77,168				78,854
Due after ten years			17,580				18,707				61,155				62,346
		$	79,468			$	83,246			$	231,498			$	236,832

		Held–to-Maturity Securities								Available-for-Sale Securities
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Due in one year or less		$	153,581			$	151,849			$	126,515			$	124,986
Due from one to five years			165,867				158,034				281,413				266,356
Due from five to ten years			12,075				12,215				6,199				6,120
Due after ten years			—				—				—				—
Agency MBS and CMOs			—				—				123,767				111,336
		$	331,523			$	322,098			$	537,894			$	508,798

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 2023 and 2019

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2022

NOTE 2– SECURITIES (Continued)

Securities with unrealized losses at December 31, 2020 2023 and 2019,2022, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, arewere as follows (dollars in thousands):

		Less than 12 Months								12 Months or More								Total
December 31, 2020		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Available for Sale:
U.S. Treasury and federal agency securities		$	22,830			$	(170	)		$	—			$	—			$	22,830			$	(170	)
U.S. Agency MBS and CMOs			9,299				(45	)			—				—				9,299				(45	)
Tax-exempt state and municipal bonds			—				—				—				—				—				—
Taxable state and municipal bonds			2,336				(7	)			—				—				2,336				(7	)
Corporate bonds and other debt securities			—				—				—				—				—				—
Total		$	34,465			$	(222	)		$	—			$	—			$	34,465			$	(222	)
Held to Maturity:
Tax-exempt state and municipal bonds		$	—			$	—			$	—			$	—			$	—			$	—

		Less than 12 Months								12 Months or More								Total
December 31, 2019		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Available for Sale:
U.S. Treasury and federal agency securities		$	15,009			$	(97	)		$	27,026			$	(87	)		$	42,035			$	(184	)
U.S. Agency MBS and CMOs			19,117				(56	)			1,196				(12	)			20,313				(68	)
Tax-exempt state and municipal bonds			319				—				—				—				319				—
Taxable state and municipal bonds			8,569				(57	)			2,981				(9	)			11,550				(66	)
Corporate bonds and other debt securities			932				—				852				(3	)			1,784				(3	)
Total		$	43,946			$	(210	)		$	32,055			$	(111	)		$	76,001			$	(321	)
Held to Maturity:
Tax-exempt state and municipal bonds		$	—			$	—			$	—			$	—			$	—			$	—

Other-Than-Temporary-Impairment

		Less than 12 Months								12 Months or More								Total
December 31, 2023		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Available for Sale:
U.S. Treasury and federal agency securities		$	15,615			$	(41	)		$	215,712			$	(10,726	)		$	231,327			$	(10,767	)
Agency MBS and CMOs			8,574				(52	)			83,893				(12,552	)			92,467				(12,604	)
Tax-exempt state and municipal bonds			8,472				(50	)			13,296				(234	)			21,768				(284	)
Taxable state and municipal bonds			4,667				(18	)			93,900				(5,527	)			98,567				(5,545	)
Corporate bonds and other debt securities			—				—				10,822				(233	)			10,822				(233	)
		$	37,328			$	(161	)		$	417,623			$	(29,272	)		$	454,951			$	(29,433	)
Held to Maturity:
U.S. Treasury		$	—			$	—			$	242,709			$	(8,520	)		$	242,709			$	(8,520	)
Tax-exempt state and municipal bonds			673				(2	)			45,513				(1,187	)			46,186				(1,189	)
		$	673			$	(2	)		$	288,222			$	(9,707	)		$	288,895			$	(9,709	)

		Less than 12 Months								12 Months or More								Total
December 31, 2022		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Available for Sale:
U.S. Treasury and federal agency securities		$	144,796			$	(6,230	)		$	66,008			$	(10,080	)		$	210,804			$	(16,310	)
Agency MBS and CMOs			64,427				(4,789	)			41,340				(9,558	)			105,767				(14,347	)
Tax-exempt state and municipal bonds			31,337				(498	)			—				—				31,337				(498	)
Taxable state and municipal bonds			71,165				(3,337	)			33,452				(5,188	)			104,617				(8,525	)
Corporate bonds and other debt securities			10,668				(357	)			1,256				(106	)			11,924				(463	)
		$	322,393			$	(15,211	)		$	142,056			$	(24,932	)		$	464,449			$	(40,143	)
Held to Maturity:
U.S. Treasury		$	237,630			$	(13,677	)		$	—			$	—			$	237,630			$	(13,677	)
Tax-exempt state and municipal bonds			57,671				(2,314	)			21,721				(539	)			79,392				(2,853	)
		$	295,301			$	(15,991	)		$	21,721			$	(539	)		$	317,022			$	(16,530	)

Management evaluates securities for OTTIin an unrealized loss position at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In analyzing an issuer's financial condition, Management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer's financial condition.

At December 31, 2020, 212023, 402 securities available for sale with fair values totaling $34.5$455.0 million had unrealized losses totaling $222,000.$29.4 million. At December 31, 2020, no2022, 444 securities available for sale with fair values totaling $464.4 million had unrealized losses totaling $40.1 million.  For securities available for sale with unrealized losses, management considered the financial condition of the issuer and the Company's intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value.  At December 31, 2023, 58 securities held to maturity with fair values totaling $288.9 million had unrealized losses.losses totaling $9.7 million. At December 31, 2022, 76 securities held to maturity with fair values totaling $317.0 million had unrealized losses totaling $16.5 million.  Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities.  In addition, management believes it is more likely than not that the Company will not be required to sell any of its investment securities before a recovery of cost.  Management determined that the unrealized losses for each period and each investment were attributable to changes in interest rates and not due to credit quality.  The Company's investment portfolio contains a significant amount of agency securities which have risk characteristics similar to U.S. government bonds.  All of the Company's municipal and corporate securities were rated AA or higher at December 31, 2023 and 2022.As such, no OTTI impairment charges were necessaryrecognized on securities available for sale or held to maturity during 2020 the year ended December 31, 2022, and 2019.no allowance for credit losses on securities available for sale or held to maturity have been established as of December 31, 2023.

On January 1, 2022, the Company reclassified ten U.S. Treasury securities with an amortized cost of $123.5 million from available for sale to held to maturity, as it has the intent and ability to hold these securities to maturity. These securities had net unrealized gains of $113,000 at the date of transfer, which will continue to be reported in accumulated other comprehensive income, and will be amortized over the remaining life of the securities as an adjustment of yield. The effect on interest income of the amortization of net unrealized gains is offset by the amortization of the premium on the securities transferred.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023 and 2022

NOTE 2– SECURITIES (Continued)

Securities with a carrying value of approximately $6.1$3.7 million and $3.0$3.5 million were pledged as security for public deposits, letters of credit and for other purposes required or permitted by law at December 31, 2020 2023 and 2019,2022, respectively.

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The Company also has an investment in a fund that invests in projects qualifying for Community Reinvestment Act credit which is carried at a fair value of Contents

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$1.3 million and reported in other assets at December 31, 2020 2023 and 2019

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2022.

 

NOTE 3– LOANS

AND ALLOWANCE FOR CREDIT LOSSES

Portfolio loans were as follows at year end (dollars in thousands):

		2020				2019
Commercial and industrial
Commercial and industrial, excluding PPP		$	436,331			$	499,572
PPP			229,079				—
Total commercial and industrial			665,410				499,572
Commercial real estate:
Residential developed			8,549				14,705
Vacant and unimproved			47,122				41,796
Commercial development			857				665
Residential improved			114,392				130,861
Commercial improved			266,006				292,799
Manufacturing and industrial			115,247				117,632
Total commercial real estate			552,173				598,458
Consumer
Residential mortgage			149,556				211,049
Unsecured			161				274
Home equity			57,975				70,936
Other secured			4,056				5,338
Total consumer			211,748				287,597
Total loans			1,429,331				1,385,627
Allowance for loan losses			(17,408	)			(17,200	)
		$	1,411,923			$	1,368,427

Included in commercial

		2023				2022
Commercial and industrial		$	506,974			$	441,716
Commercial real estate:
Residential developed			5,809				7,234
Unsecured to residential developers			800				—
Vacant and unimproved			39,534				36,270
Commercial development			84				103
Residential improved			123,875				112,791
Commercial improved			260,188				259,281
Manufacturing and industrial			154,809				121,924
Total commercial real estate			585,099				537,603
Consumer
Residential mortgage			189,818				139,148
Unsecured			129				121
Home equity			53,039				56,321
Other secured			3,327				2,839
Total consumer			246,313				198,429
Total loans			1,338,386				1,177,748
Allowance for credit losses			(17,442	)			(15,285	)
		$	1,320,944			$	1,162,463

The totals above are shown net of deferred fees and industrialcosts.  Deferred fees on loans totaled $1.3 million and $1.3 million at December 31, 2020 are $229.12023 and 2022, respectively.  Deferred costs on loans totaled $1.5 million in loans issued under the PPP. This program was created by the CARES Act in March 2020 to support businesses through the COVID-19 pandemic.  Under the program, borrowers who use the funds for payroll and certain other expenses are eligible to have the loan balances forgiven by the SBA.  Applications for forgiveness can be submitted to the Bank beginning 8 weeks after loan disbursement.  The loans are 100% guaranteed by the SBA.  Through $1.4 million at December 31, 2020, the Bank had received disbursement of $113.5 million from the SBA for approved forgiveness applications.

On December 27, 2020, the President signed another COVID-19 relief bill that extended 2023 and modified several provisions of the PPP.  This included an additional allocation of $284 billion.

2022, respectively.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 2023 and 2019

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2022

NOTE 3– LOANSAND ALLOWANCE FOR CREDIT LOSSES (Continued)

The following tables present the activity in the allowance for loancredit losses by portfolio segment for the years ended December 31, 2020 2023 and 20192022 (dollars in thousands):

2023		Commercial and Industrial				Commercial Real Estate				Consumer				Unallocated				Total
Beginning balance		$	5,596			$	7,180			$	2,458			$	51			$	15,285
Impact of adoption of ASU 2016-03			1,299				(212	)			389				—				1,476
Charge-offs			—				—				(116	)			—				(116	)
Recoveries			33				100				114				—				247
Provision for credit losses (1)			(57	)			96				530				(19	)			550
Ending Balance		$	6,871			$	7,164			$	3,375			$	32			$	17,442

2022		Commercial and Industrial				Commercial Real Estate				Consumer				Unallocated				Total
Beginning balance		$	5,176			$	8,051			$	2,633			$	29			$	15,889
Charge-offs			(38	)			—				(126	)			—				(164	)
Recoveries			191				300				194				—				685
Provision for credit losses (1)			267				(1,171	)			(243	)			22				(1,125	)
Ending Balance		$	5,596			$	7,180			$	2,458			$	51			$	15,285

(1) - Beginning January 1, 2023, calculation is based on CECL methodology.  Prior to January 1, 2023, calculation was based on probable incurred loss methodology.

The following table presents gross charge-offs for the year ended December 31, 2023 by portfolio class and origination year (dollars in thousands):

		Term Loans By Origination Year
																										Revolving
December 31, 2023		2023				2022				2021				2020				2019				Prior				Loans				Total
Commercial and industrial		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Commercial development			—				—				—				—				—				—				—				—
Commercial improved			—				—				—				—				—				—				—				—
Manufacturing and industrial			—				—				—				—				—				—				—				—
Residential development			—				—				—				—				—				—				—				—
Residential improved			—				—				—				—				—				—				—				—
Vacant and unimproved			—				—				—				—				—				—				—				—
Total commercial			—				—				—				—				—				—				—				—
Residential mortgage			—				—				—				—				—				—				—				—
Consumer unsecured			—				—				—				—				—				—				—				—
Home equity			—				—				—				—				—				—				—				—
Other			—				—				—				—				—				—				116				116
Total consumer			—				—				—				—				—				—				116				116
Total loans		$	—			$	—			$	—			$	—			$	—			$	—			$	116			$	116

Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty.  Under CECL for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance on the fair value of collateral.  

The allowance is calculated on an individual loan basis of the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and the loan's amortized cost.  If the fair value of the collateral exceeds the loan's amortized cost, no allowance is necessary.  The Company's policy is to obtain appraisals on any significant pieces of collateral.  For real estate collateral that is industries that are undergoing significant stress, or properties that are specialized use or have limited marketability, higher discounts are applied in determining fair value.

There have been no significant changes to the types of collateral securing the Company's collateral dependent loans.

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2020		Commercial and Industrial				Commercial Real Estate				Consumer				Unallocated				Total
Beginning balance		$	7,658			$	6,521			$	3,009			$	12			$	17,200
Charge-offs			(1,192	)			(2,957	)			(119	)			—				(4,268	)
Recoveries			148				1,172				156				—				1,476
Provision for loan losses			18				3,263				(288	)			7				3,000
Ending Balance		$	6,632			$	7,999			$	2,758			$	19			$	17,408

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2019		Commercial and Industrial				Commercial Real Estate				Consumer				Unallocated				Total
Beginning balance		$	6,856			$	6,544			$	3,449			$	27			$	16,876
Charge-offs			—				(132	)			(147	)			—				(279	)
Recoveries			528				388				137				—				1,053
Provision for loan losses			274				(279	)			(430	)			(15	)			(450	)
Ending Balance		$	7,658			$	6,521			$	3,009			$	12			$	17,200

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023 and 2022

NOTE 3– LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)

The amortized cost of collateral-dependent loans by class as of December 31, 2023 was as follows (dollars in thousands):

		Collateral Type
										Allowance
December 31, 2023		Real Estate				Other				Allocated
Commercial and industrial		$	—			$	—			$	—
Commercial real estate:
Residential developed			—				—				—
Unsecured to residential developers			—				—				—
Vacant and unimproved			—				—				—
Commercial development			—				—				—
Residential improved			26				—				—
Commercial improved			292				—				17
Manufacturing and industrial			1,136				—				—
			1,454				—				17
Consumer
Residential mortgage			—				—				—
Unsecured			—				—				—
Home equity			—				—				—
Other secured			—				—				—
Consumer			—				—				—
Total		$	1,454			$	—			$	17

The following tables present the balance in the allowance for loancredit losses and the recorded investment in loans by portfolio segment and based on impairment method (dollarsas of December 31, 2022 (dollars in thousands):

December 31, 2020		Commercial and Industrial				Commercial Real Estate				Consumer				Unallocated				Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment		$	587			$	313			$	310			$	—			$	1,210
Collectively evaluated for impairment			6,045				7,686				2,448				19				16,198
Total ending allowance balance		$	6,632			$	7,999			$	2,758			$	19			$	17,408
Loans:
Individually reviewed for impairment		$	3,957			$	2,613			$	4,049			$	—			$	10,619
Collectively evaluated for impairment			661,453				549,560				207,699				—				1,418,712
Total ending loans balance		$	665,410			$	552,173			$	211,748			$	—			$	1,429,331

December 31, 2019		Commercial and Industrial				Commercial Real Estate				Consumer				Unallocated				Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment		$	1,213			$	32			$	379			$	—			$	1,624
Collectively evaluated for impairment			6,445				6,489				2,630				12				15,576
Total ending allowance balance		$	7,658			$	6,521			$	3,009			$	12			$	17,200
Loans:
Individually reviewed for impairment		$	5,797			$	2,928			$	5,140			$	—			$	13,865
Collectively evaluated for impairment			493,775				595,530				282,457				—				1,371,762
Total ending loans balance		$	499,572			$	598,458			$	287,597			$	—			$	1,385,627

December 31, 2022		Commercial and Industrial				Commercial Real Estate				Consumer				Unallocated				Total
Allowance for credit losses:
Ending allowance attributable to loans:
Individually reviewed for impairment		$	55			$	20			$	220			$	—			$	295
Collectively evaluated for impairment			5,541				7,160				2,238				51				14,990
Total ending allowance balance		$	5,596			$	7,180			$	2,458			$	51			$	15,285
Loans:
Individually reviewed for impairment		$	3,603			$	518			$	2,886			$	—			$	7,007
Collectively evaluated for impairment			438,113				537,085				195,543				—				1,170,741
Total ending loans balance		$	441,716			$	537,603			$	198,429			$	—			$	1,177,748

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 2023 and 2019

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2022

NOTE 3– LOANSAND ALLOWANCE FOR CREDIT LOSSES (Continued)

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 20202022 (dollars in thousands):

December 31, 2020		Unpaid Principal Balance				Recorded Investment				Allowance Allocated
With no related allowance recorded:
Commercial and industrial		$	156			$	156			$	—
Commercial real estate:
Residential improved			107				107				—
Commercial improved			714				714				—
			821				821				—
Consumer			—				—				—
Total with no related allowance recorded		$	977			$	977			$	—
With an allowance recorded:
Commercial and industrial		$	3,801			$	3,801			$	587
Commercial real estate:
Residential developed			67				67				3
Commercial improved			1,524				1,524				301
Manufacturing and industrial			201				201				9
			1,792				1,792				313
Consumer:
Residential mortgage			3,484				3,484				266
Unsecured			123				123				10
Home equity			419				419				32
Other secured			23				23				2
			4,049				4,049				310
Total with an allowance recorded		$	9,642			$	9,642			$	1,210
Total		$	10,619			$	10,619			$	1,210

December 31, 2022		Unpaid Principal Balance				Recorded Investment				Allowance Allocated				Year-To-Date Average Recorded Investment
With no related allowance recorded:
Commercial and industrial		$	3,278			$	3,278			$	—			$	2,338
Commercial real estate:
Residential improved			31				31				—				33
			31				31				—				33
Consumer			—				—				—				—
Total with no related allowance recorded		$	3,309			$	3,309			$	—			$	2,371
With an allowance recorded:
Commercial and industrial		$	325			$	325			$	55			$	365
Commercial real estate:
Commercial improved			307				307				9				313
Manufacturing and industrial			180				180				11				185
			487				487				20				498
Consumer:
Residential mortgage			2,653				2,653				202				2,619
Unsecured			29				29				2				29
Home equity			204				204				16				234
			2,886				2,886				220				2,882
Total with an allowance recorded		$	3,698			$	3,698			$	295			$	3,745
Total		$	7,007			$	7,007			$	295			$	6,116

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 2023 and 2019

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NOTE 3 – LOANS (Continued)

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2019 (dollars in thousands):

December 31, 2019		Unpaid Principal Balance				Recorded Investment				Allowance Allocated
With no related allowance recorded:
Commercial and industrial		$	180			$	180			$	—
Commercial real estate:
Vacant and unimproved			130				130				—
Residential improved			377				377				—
Commercial improved			1,380				1,380				—
			1,887				1,887				—
Consumer			—				—				—
Total with no related allowance recorded		$	2,067			$	2,067			$	—
With an allowance recorded:
Commercial and industrial		$	5,617			$	5,617			$	1,213
Commercial real estate:
Residential developed			76				76				3
Residential improved			28				28				2
Commercial improved			578				578				16
Manufacturing and industrial			359				359				11
			1,041				1,041				32
Consumer:
Residential mortgage			4,242				4,242				313
Unsecured			198				198				14
Home equity			677				677				50
Other secured			23				23				2
			5,140				5,140				379
Total with an allowance recorded		$	11,798			$	11,798			$	1,624
Total		$	13,865			$	13,865			$	1,624

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 and 2019

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NOTE 3– LOANSAND ALLOWANCE FOR CREDIT LOSSES (Continued)

The following table presents information regarding average balances of impaired loans and interest recognized on impaired loans for the years ended December 31, 2020 and 2019 (dollars in thousands):

		2020				2019
Average of impaired loans during the period:
Commercial and industrial		$	4,187			$	5,257
Commercial real estate:
Residential developed			71				139
Vacant and unimproved			—				99
Residential improved			186				430
Commercial improved			3,855				2,114
Manufacturing and industrial			326				368
Consumer			4,543				5,724
Interest income recognized during impairment:
Commercial and industrial			430				945
Commercial real estate			221				188
Consumer			187				262
Cash-basis interest income recognized
Commercial and industrial			448				955
Commercial real estate			252				192
Consumer			184				264

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 and 2019

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NOTE 3 – LOANS (Continued)

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.  The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2020 2023 and 20192022 (dollars in thousands):

December 31, 2020		Nonaccrual				Over 90 days Accruing
Commercial and industrial		$	—			$	—
Commercial real estate:
Residential improved			87				—
Commercial improved			351				—
			438				—
Consumer:
Residential mortgage			95				—
			95				—
Total		$	533			$	—

December 31, 2019		Nonaccrual				Over 90 days Accruing
Commercial and industrial		$	—			$	—
Commercial real estate:
Residential improved			98				—
			98				—
Consumer:
Residential mortgage			105				—
			105				—
Total		$	203			$	—

December 31, 2023		Nonaccrual with No Allowance				Nonaccrual with Allowance				Total Nonaccrual				Over 90 days Accruing				Total Nonperforming Loans
Commercial and industrial		$	—			$	—			$	—			$	—			$	—
Commercial real estate:
Residential developed			—				—				—				—				—
Unsecured to residential developers			—				—				—				—				—
Vacant and unimproved			—				—				—				—				—
Commercial development			—				—				—				—				—
Residential improved			—				—				—				—				—
Commercial improved			—				—				—				—				—
Manufacturing and industrial			—				—				—				—				—
			—				—				—				—				—
Consumer:
Residential mortgage			—				1				1				—				1
Unsecured			—				—				—				—				—
Home equity			—				—				—				—				—
Other secured			—				—				—				—				—
			—				1				1				—				1
Total		$	—			$	1			$	1			$	—			$	1

December 31, 2022		Nonaccrual				Nonaccrual				Nonaccrual				Over 90 days Accruing				Total Nonperforming Loans
Commercial and industrial		$	—			$	—			$	—			$	—			$	—
Commercial real estate:
Residential developed			—				—				—				—				—
Unsecured to residential developers			—				—				—				—				—
Vacant and unimproved			—				—				—				—				—
Commercial development			—				—				—				—				—
Residential improved			—				—				—				—				—
Commercial improved			—				—				—				—				—
Manufacturing and industrial			—				—				—				—				—
			—				—				—				—				—
Consumer:
Residential mortgage			—				78				78				—				78
Unsecured			—				—				—				—				—
Home equity			—				—				—				—				—
Other secured			—				—				—				—				—
			—				78				78				—				78
Total		$	—			$	78			$	78			$	—			$	78

No interest income was recognized on nonaccrual loans during the years ended December 31, 2023 and 2022.

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MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 2023 and 2019

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2022