Forward-Looking Statements

This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and Macatawa Bank Corporation. Forward-looking statements are identifiable by words or phrases such as “outlook”, “plan” or “strategy”; that an event or trend “could”, “may”, “should”, “will”, “is likely”, or is “possible” or “probable” to occur or “continue”, has “begun” or “is scheduled” or “on track” or that the Company or its management “anticipates”, “believes”, “estimates”, “plans”, “forecasts”, “intends”, “predicts”, “projects”, or “expects” a particular result, or is “committed”, “confident”, “optimistic” or has an “opinion” that an event will occur, or other words or phrases such as “ongoing”, “future”, “signs”, “efforts”, “tend”, “exploring”, “appearing”, “until”, “near term”, “concern”, “going forward”, “focus”, “starting”, “initiative,” “trend” and variations of such words and similar expressions. Such statements are based upon current beliefs and expectations and involve substantial risks and uncertainties which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These statements include, among others, those related to the risks and uncertainties related to, and the impact of, the global coronavirus (COVID-19) pandemic on the business, financial condition and results of operations of our company and our customers, future levels of earning assets, ~~statements related to stabilization~~future composition of our loan portfolio, trends in credit quality metrics, future capital levels and capital needs, ~~including the impact of Basel III,~~ real estate valuation, future levels of repossessed and foreclosed properties and nonperforming assets, future levels of losses and costs associated with the administration and disposition of repossessed and foreclosed properties and nonperforming assets, future levels of loan charge-offs, future levels of other real estate owned, future levels of provisions for loan losses and reserve recoveries, the rate of asset dispositions, future dividends, future growth and funding sources, future cost of funds, future liquidity levels, future profitability levels, future ~~FDIC assessment~~interest rate levels, future net interest margin levels, ~~building and improving our investment portfolio, diversifying our credit risk,~~ the effects on earnings of changes in interest rates, future economic conditions, future effects of new or changed accounting standards, future loss recoveries, ~~future balances of short-term investments, future~~ loan demand and loan growth ~~future levels of mortgage banking revenue~~ and the future level of other revenue sources. Management's determination of the provision and allowance for loan losses, the appropriate carrying value of intangible assets (including deferred tax assets) and other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) involves judgments that are inherently forward-looking. All statements with references to future time periods are forward-looking. All of the information concerning interest rate sensitivity is forward-looking. Our ability to sell other real estate owned at its carrying value or at all, successfully implement new programs and initiatives, increase efficiencies, maintain our current levels of deposits and other sources of funding, maintain liquidity, respond to declines in collateral values and credit quality, increase loan volume, originate high quality loans, maintain or improve mortgage banking income, realize the benefit of our deferred tax assets, continue payment of dividends and improve profitability is not entirely within our control and is not assured. The future effect of changes in the real estate, financial and credit markets and the national and regional economy on the banking industry, generally, and Macatawa Bank Corporation, specifically, are also inherently uncertain. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Macatawa Bank Corporation does not undertake to update forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

Risk factors include, but are not limited to, the risk factors described in "Item 1A - Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019. These and other factors are representative of the risk factors that may emerge and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

INDEX

		Page
		Number

Part I.	Financial Information:

	Item 1.
	Consolidated Financial Statements	4

	Notes to Consolidated Financial Statements	10

	Item 2.
	Management's Discussion and Analysis of Financial Condition and Results of Operations	4034

	Item 3.
	Quantitative and Qualitative Disclosures About Market Risk	5547

	Item 4.
	Controls and Procedures	5648

Part II.	Other Information:

	Item 1A.
	Risk Factors	49

	Item 2.
	Unregistered Sales of Equity Securities and Use of Proceeds	50

	Item 6.
	Exhibits	5750

Signatures		5851

Index

Part I Financial Information

Item 1.

MACATAWA BANK CORPORATION

CONSOLIDATED BALANCE SHEETS

As of ~~September 30, 2017~~March 31, 2020 (unaudited) and December 31, ~~2016~~2019

(Dollars in thousands, except per share data)

September 30,
2017

December 31,
2016

ASSETS
Cash and due from banks $ 28,318 $ 27,690
Federal funds sold and other short-term investments 131,571 62,129
Cash and cash equivalents 159,889 89,819
Securities available for sale, at fair value 214,182 184,433
Securities held to maturity (fair value 2017 - $62,854 and 2016 - $69,849) 61,927 69,378
Federal Home Loan Bank (FHLB) stock 11,558 11,558
Loans held for sale, at fair value 2,199 2,181
Total loans 1,260,037 1,280,812
Allowance for loan losses (16,434 ) (16,962 )
Net loans 1,243,603 1,263,850
Premises and equipment – net 46,822 50,026
Accrued interest receivable 4,532 4,092
Bank-owned life insurance 40,042 39,274
Other real estate owned - net 6,661 12,253
Net deferred tax asset 5,992 8,863
Other assets 5,639 5,286
Total assets $ 1,803,046 $ 1,741,013

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 497,310 $ 501,478
Interest-bearing 1,008,868 947,246
Total deposits 1,506,178 1,448,724
Other borrowed funds 72,118 84,173
Long-term debt 41,238 41,238
Accrued expenses and other liabilities 10,048 4,639
Total liabilities 1,629,582 1,578,774

Commitments and contingent liabilities --- ---

Shareholders' equity
Common stock, no par value, 200,000,000 shares authorized; 33,941,953 and 33,940,788 shares issued and outstanding at September 30, 2017 and December 31, 2016 217,099 216,731
Retained deficit (43,307 ) (53,008 )
Accumulated other comprehensive income (loss) (328 ) (1,484 )
Total shareholders' equity 173,464 162,239
Total liabilities and shareholders' equity $ 1,803,046 $ 1,741,013

	March 31, 2020			December 31, 2019
ASSETS
Cash and due from banks	$	25,861		$	31,942
Federal funds sold and other short-term investments		181,334			240,508
Cash and cash equivalents		207,195			272,450
Debt securities available for sale, at fair value		243,368			225,249
Debt securities held to maturity (fair value 2020 - $84,866 and 2019 - $85,128)		82,514			82,720
Federal Home Loan Bank (FHLB) stock		11,558			11,558
Loans held for sale, at fair value		1,966			3,294
Total loans		1,395,341			1,385,627
Allowance for loan losses		(18,889	)		(17,200	)
Net loans		1,376,452			1,368,427
Premises and equipment – net		43,461			43,417
Accrued interest receivable		5,356			4,866
Bank-owned life insurance		42,411			42,156
Other real estate owned - net		2,626			2,748
Net deferred tax asset		1,728			2,078
Other assets		12,455			9,807
Total assets	$	2,031,090		$	2,068,770
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing	$	492,409		$	482,499
Interest-bearing		1,212,971			1,270,795
Total deposits		1,705,380			1,753,294
Other borrowed funds		70,000			60,000
Long-term debt		20,619			20,619
Accrued expenses and other liabilities		11,511			17,388
Total liabilities		1,807,510			1,851,301
Commitments and contingent liabilities		—			—
Shareholders' equity
Common stock, no par value, 200,000,000 shares authorized; 34,107,995 and 34,103,542 shares issued and outstanding at March 31, 2020 and December 31, 2019		218,207			218,109
Retained earnings (deficit)		1,507			(2,184	)
Accumulated other comprehensive income		3,866			1,544
Total shareholders' equity		223,580			217,469
Total liabilities and shareholders' equity	$	2,031,090		$	2,068,770

See accompanying notes to consolidated financial statements.

-4-

Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Three month periods ended March 31, 2020 and ~~Nine Month Periods Ended September 30, 2017 and 2016~~2019

(unaudited)

(Dollars in thousands, except per share data)

Three Months
Ended
September 30,

Three Months
Ended
September 30,

Nine Months
Ended
September 30,

Nine Months
Ended
September 30,
2017 2016 2017 2016
Interest income
Loans, including fees $ 12,804 $ 11,838 $ 37,800 $ 35,228
Securities
Taxable 741 584 2,025 1,699
Tax-exempt 574 451 1,658 1,325
FHLB Stock 122 122 367 368
Federal funds sold and other short-term investments 385 127 666 383
Total interest income 14,626 13,122 42,516 39,003
Interest expense
Deposits 732 431 1,770 1,333
Other borrowings 314 418 1,053 1,318
Long-term debt 442 371 1,267 1,104
Total interest expense 1,488 1,220 4,090 3,755
Net interest income 13,138 11,902 38,426 35,248
Provision for loan losses (350) (250) (1,350) (1,100)
Net interest income after provision for loan losses 13,488 12,152 39,776 36,348
Noninterest income
Service charges and fees 1,172 1,152 3,342 3,312
Net gains on mortgage loans 369 1,175 1,273 2,235
Trust fees 801 790 2,412 2,286
ATM and debit card fees 1,324 1,272 3,863 3,715
Gain on sales of securities --- --- 3 99
Bank owned life insurance ("BOLI") income 249 146 730 748
Other 385 540 1,386 1,824
Total noninterest income 4,300 5,075 13,009 14,219
Noninterest expense
Salaries and benefits 6,211 6,166 18,363 18,521
Occupancy of premises 922 901 2,939 2,784
Furniture and equipment 797 772 2,278 2,476
Legal and professional 199 153 621 500
Marketing and promotion 226 275 678 825
Data processing 655 741 2,068 2,089
FDIC assessment 134 166 404 638
Interchange and other card expense 333 334 970 927
Bond and D&O Insurance 119 132 353 395
Net (gains) losses on repossessed and foreclosed properties (190) 115 (575) 409
Administration and disposition of problem assets 113 210 435 787
Other 1,237 1,308 3,900 3,943
Total noninterest expenses 10,756 11,273 32,434 34,294
Income before income tax 7,032 5,954 20,351 16,273
Income tax expense 2,157 1,350 6,253 4,429
Net income $ 4,875 $ 4,604 $ 14,098 $ 11,844
Basic earnings per common share $ 0.14 $ 0.14 $ 0.42 $ 0.35
Diluted earnings per common share $ 0.14 $ 0.14 $ 0.42 $ 0.35
Cash dividends per common share $ 0.05 $ 0.03 $ 0.13 $ 0.09

	Three Months Ended March 31, 2020		Three Months Ended March 31, 2019
Interest income
Loans, including fees	$	14,851	$	16,450
Securities
Taxable		1,061		996
Tax-exempt		882		839
FHLB Stock		124		160
Federal funds sold and other short-term investments		576		744
Total interest income		17,494		19,189
Interest expense
Deposits		1,603		2,256
Other borrowings		349		327
Long-term debt		239		586
Total interest expense		2,191		3,169
Net interest income		15,303		16,020
Provision for loan losses		700		(250	)
Net interest income after provision for loan losses		14,603		16,270
Noninterest income
Service charges and fees		1,110		1,050
Net gains on mortgage loans		650		211
Trust fees		935		890
ATM and debit card fees		1,337		1,326
Gain on sales of securities		—		—
Bank owned life insurance ("BOLI") income		242		236
Other		685		615
Total noninterest income		4,959		4,328
Noninterest expense
Salaries and benefits		6,691		6,244
Occupancy of premises		1,009		1,093
Furniture and equipment		855		844
Legal and professional		291		230
Marketing and promotion		238		228
Data processing		760		730
FDIC assessment		—		120
Interchange and other card expense		347		345
Bond and D&O Insurance		105		104
Net (gains) losses on repossessed and foreclosed properties		31		(35	)
Administration and disposition of problem assets		30		88
Other		1,365		1,247
Total noninterest expenses		11,722		11,238
Income before income tax		7,840		9,360
Income tax expense		1,429		1,714
Net income	$	6,411	$	7,646
Basic earnings per common share	$	0.19	$	0.22
Diluted earnings per common share	$	0.19	$	0.22
Cash dividends per common share	$	0.08	$	0.07

See accompanying notes to consolidated financial statements.

-5-

Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three month periods ended March 31, 2020 and ~~Nine Month Periods Ended September 30, 2017 and 2016~~2019

(unaudited)

(Dollars in thousands)

Three Months
Ended
September 30,

Three Months
Ended
September 30,

Nine Months
Ended
September 30,

Nine Months
Ended
September 30,
2017 2016 2017 2016

Net income $ 4,875 $ 4,604 $ 14,098 $ 11,844

Other comprehensive income:

Unrealized gains (losses):
Net change in unrealized gains (losses) on securities available for sale (53) 120 1,782 1,774
Tax effect 19 (42) (624) (621)
Net change in unrealized gains (losses) on securities available for sale, net of tax (34) 78 1,158 1,153

Less: reclassification adjustments:
Reclassification for gains included in net income --- --- 3 99
Tax effect --- --- (1) (35)
Reclassification for gains included in net income, net of tax --- --- 2 64

Other comprehensive income (loss), net of tax (34) 78 1,156 1,089
Comprehensive income $ 4,841 $ 4,682 $ 15,254 $ 12,933

	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Net income	$	6,411		$	7,646
Other comprehensive income:
Unrealized gains (losses):
Net change in unrealized gains (losses) on debt securities available for sale		2,939			2,261
Tax effect		(617	)		(475	)
Net change in unrealized gains (losses) on debt securities available for sale, net of tax		2,322			1,786
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 (loss), net of tax		2,322			1,786
Comprehensive income	$	8,733		$	9,432

See accompanying notes to consolidated financial statements.

-6-

Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

~~Nine Month Periods Ended September 30, 2017~~Three month periods ended March 31, 2020 and ~~2016~~2019

(unaudited)

(Dollars in thousands, except per share data)

Common
Stock

Retained
Deficit

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders'
Equity
Balance, January 1, 2016 $ 216,540 $ (64,910) $ 347 $ 151,977
Net income for the nine months ended September 30, 2016 --- 11,844 --- 11,844
Cash dividends at $.09 per share --- (3,042) --- (3,042)
Repurchase of 4,373 shares for taxes withheld on vested restricted stock (31) --- --- (31)
Net change in unrealized gain on securities available for sale, net of tax --- --- 1,089 1,089
Stock compensation expense 408 --- --- 408
Balance, September 30, 2016 $ 216,917 $ (56,108) $ 1,436 $ 162,245

Balance, January 1, 2017 $ 216,731 $ (53,008) $ (1,484) $ 162,239
Net income for the nine months ended September 30, 2017 --- 14,098 --- 14,098
Cash dividends at $.13 per share --- (4,397) --- (4,397)
Repurchase of 533 shares for taxes withheld on vested restricted stock (5) --- --- (5)
Issuance of 4,000 shares for stock option exercise 34 --- --- 34
Net change in unrealized loss on securities available for sale, net of tax --- --- 1,156 1,156
Stock compensation expense 339 --- --- 339
Balance, September 30, 2017 $ 217,099 $ (43,307) $ (328) $ 173,464

	Common Stock		Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
Balance, January 1, 2019	$	217,783	$	(24,652	)	$	(2,278	)	$	190,853
Net income for the three months ended March 31, 2019		—		7,646			—			7,646
Cash dividends at $.07 per share		—		(2,378	)		—			(2,378	)
Net change in unrealized loss on debt securities available for sale, net of tax		—		—			1,786			1,786
Stock compensation expense		59		—			—			59
Balance, March 31, 2019	$	217,842	$	(19,384	)	$	(492	)	$	197,966

	Common Stock			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)		Total Shareholders' Equity
Balance, January 1, 2020	$	218,109		$	(2,184	)	$	1,544	$	217,469
Net income for the three months ended March 31, 2020		—			6,411			—		6,411
Cash dividends at $.08 per share		—			(2,720	)		—		(2,720	)
Repurchase of 1,608 shares for taxes withheld on vested restricted stock		(11	)							(11	)
Net change in unrealized loss on debt securities available for sale, net of tax		—			—			2,322		2,322
Stock compensation expense		109			—			—		109
Balance, March 31, 2020	$	218,207		$	1,507		$	3,866	$	223,580

See accompanying notes to consolidated financial statements.

-7-

Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~Nine Month Periods Ended September 30, 2017~~Three month periods ended March 31, 2020 and ~~2016~~2019

(unaudited)

(Dollars in thousands)

Nine Months
Ended
September 30,
2017

Nine Months
Ended
September 30,
2016

Cash flows from operating activities
Net income $ 14,098 $ 11,844
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 1,435 2,149
Stock compensation expense 339 408
Provision for loan losses (1,350 ) (1,100 )
Origination of loans for sale (45,018 ) (76,096 )
Proceeds from sales of loans originated for sale 46,273 79,094
Net gains on mortgage loans (1,273 ) (2,235 )
Gain on sales of securities (3 ) (99 )
Write-down of other real estate 85 774
Net gain on sales of other real estate (660 ) (365 )
Net loss on sale of premises and equipment 240 ---
Deferred income tax expense (benefit) 2,249 (167 )
Change in accrued interest receivable and other assets (794 ) (1,142 )
Earnings in bank-owned life insurance (730 ) (748 )
Change in accrued expenses and other liabilities 4,041 1,341
Net cash from operating activities 18,932 13,658

Cash flows from investing activities
Loan originations and payments, net 21,537 (37,699 )
Change in interest-bearing deposits in other financial institutions --- 20,000
Purchases of securities available for sale (48,409 ) (72,107 )
Purchases of securities held to maturity (16,411 ) (21,977 )
Purchase of bank-owned life insurance --- (10,000 )
Proceeds from:
Maturities and calls of securities 35,763 59,680
Sales of securities available for sale 5,807 9,648
Principal paydowns on securities 4,585 3,027
Sales of other real estate 6,227 4,155
Sales of premises and equipment 1,742 ---
Death benefit from bank-owned life insurance --- 518
Additions to premises and equipment (734 ) (674 )
Net cash from investing activities 10,107 (45,429 )

Cash flows from financing activities
Change in deposits 57,454 (76,885 )
Repayments and maturities of other borrowed funds (32,055 ) (21,996 )
Proceeds from other borrowed funds 20,000 10,000
Proceeds from issuance of common stock 34 ---
Repurchase of shares for taxes withheld on vested restricted stock (5 ) (31 )
Cash dividends paid (4,397 ) (3,042 )
Net cash from financing activities 41,031 (91,954 )
Net change in cash and cash equivalents 70,070 (123,725 )
Cash and cash equivalents at beginning of period 89,819 181,476
Cash and cash equivalents at end of period $ 159,889 $ 57,751

	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Cash flows from operating activities
Net income	$	6,411		$	7,646
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		721			632
Stock compensation expense		109			59
Provision for loan losses		700			(250	)
Origination of loans for sale		(29,356	)		(6,881	)
Proceeds from sales of loans originated for sale		31,334			6,995
Net gains on mortgage loans		(650	)		(211	)
Write-down of other real estate		31			10
Net gain (loss) on sales of other real estate		—			(45	)
Deferred income tax expense		(271	)		245
Change in accrued interest receivable and other assets		(3,138	)		(2,063	)
Earnings in bank-owned life insurance		(242	)		(236	)
Change in accrued expenses and other liabilities		4,276			2,771
Net cash from operating activities		9,925			8,672
Cash flows from investing activities
Loan originations and payments, net		(8,725	)		21,357
Purchases of securities available for sale		(49,894	)		(5,297	)
Purchases of securities held to maturity		(5,876	)		(498	)
Proceeds from:
Maturities and calls of securities		26,544			8,300
Principal paydowns on securities		3,949			1,835
Sales of other real estate		91			154
Additions to premises and equipment		(624	)		(568	)
Net cash from investing activities		(34,535	)		25,283
Cash flows from financing activities
Change in deposits		(47,914	)		(58,875	)
Repayments and maturities of other borrowed funds		—			(10,000	)
Proceeds from other borrowed funds		10,000			10,000
Repurchase of shares for taxes withheld on vested restricted stock		(11	)		—
Cash dividends paid		(2,720	)		(2,378	)
Net cash from financing activities		(40,645	)		(61,253	)
Net change in cash and cash equivalents		(65,255	)		(27,298	)
Cash and cash equivalents at beginning of period		272,450			171,284
Cash and cash equivalents at end of period	$	207,195		$	143,986

See accompanying notes to consolidated financial statements.

-8-

Index

MACATAWA BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

~~Nine Month Periods Ended September 30, 2017~~Three month periods ended March 31, 2020 and ~~2016~~2019

(unaudited)

(Dollars in thousands)

Nine Months
Ended
September 30,

Nine Months
Ended
September 30,
2017 2016
Supplemental cash flow information
Interest paid $ 3,827 $ 3,770
Income taxes paid 3,525 4,960
Supplemental noncash disclosures:
Transfers from loans to other real estate 60 102
Security settlement (1,368) (1,315)

	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Supplemental cash flow information
Interest paid	$	2,234		$	2,788
Income taxes paid		—			—
Supplemental noncash disclosures:
Transfers from loans to other real estate		—			—
Security settlement		(10,153	)		(253	)

See accompanying notes to consolidated financial statements.

-9-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Macatawa Bank Corporation ("the Company", "our", "we") and its wholly-owned subsidiary, Macatawa Bank ("the 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 stock of Macatawa Statutory Trust I and Macatawa Statutory Trust II. These are grantor trusts that issued trust preferred securities and are not consolidated with the Company under accounting principles generally accepted in the United States of America.

Recent Events: In December 2019, news began to surface regarding an influenza pandemic in China, known as the novel coronavirus, or COVID-19. In January 2020, the United States restricted entry to anyone traveling from China. In February 2020, the pandemic spread broadly and swiftly throughout Europe and the Middle East, particularly in Italy and Iran. Cases began to surface in the United States in February 2020 and accelerated in early March 2020. 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. During the week of March 9, 2020, individual states began implementing restrictions and promoting “social distancing”. These restrictions included closure of schools, restrictions on the number of public gatherings, encouragement of work at home arrangements and other measures. In Michigan, Governor Gretchen Whitmer issued a “stay home, stay safe” executive order effective March 24, 2020, which required residents to remain at home "to the maximum extent feasible" and prohibited in-person work that "is not necessary to sustain or protect life." Pursuant to the order, no person or entity was permitted to operate a business that required workers to leave their homes except to the extent that those workers were necessary (i) to conduct minimum basic operations or (ii) to sustain or protect life. On April 9, 2020, the Governor issued a revised executive order, which is effective through April 30, 2020. This revised executive order further limits travel, provides guidance regarding the definition of critical infrastructure workers, places additional requirements on businesses remaining open including limiting goods that can be sold by retailers and implementing social distancing practices, and incorporates guidance issued under the earlier order. It is possible that the Governor will issue one or more additional executive orders extending the existing orders or imposing additional restrictions on the activities of individuals or businesses. 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. The COVID-19 pandemic is a highly unusual, unprecedented and evolving public health and economic crisis and may have a negative material impact on the Company’s financial condition and results of operations. The Company is in an asset-sensitive position, so decreases in short-term rates have a net negative impact on the Company’s net interest income as the Company’s interest-earning assets will reprice faster than its interest-bearing liabilities. Additionally, the negative consequences of the unprecedented economic shutdown nationally and in Michigan is likely to result in a higher level of delinquencies and loan losses and require additional provisions for loan losses, which will have a negative impact on our results of operations.

We quickly responded to the changing environment by executing our business continuity plan and purchasing and deploying additional equipment to allow for a majority of our workforce to work remotely. Our branch facilities remain open, but lobbies have been closed with transactions being conducted through drive-up windows or on-line channels. We have implemented rotations for onsite personnel, implemented enhanced daily cleaning of facilities and instructed personnel to maintain appropriate social distancing in our offices.

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 conclude 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 relief program 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 current as of December 31, 2019 are not TDRs. Through March 31, 2020, the Bank had applied this guidance and modified 179 individual loans with aggregate principal balances totaling $88.0 million. More of these types of modifications are likely to be executed in the second quarter of 2020. The majority of these modifications involved three-month extensions of interest-only periods.

The CARES Act included an allocation of $349 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”). This program is known as the 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, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. The SBA began accepting submissions for these PPP loans on Friday, April 3, 2020. In the first weekend, we originated over $100 million of these PPP loans and through April 16, 2020, the date the SBA reached the limit of funds available to disburse under this program, we had received SBA authorizations for PPP loans totaling $311.6 million. Participation in the PPP will likely have a significant impact on our asset mix and net interest margin for the remainder of 2020. At March 31, 2020, we had $181.3 million in federal funds sold and $359.4 million of available borrowing capacity from our correspondent banks. In addition, the Federal Reserve has implemented a liquidity facility available to financial institutions participating in the PPP. As such, the Bank believes it has sufficient liquidity sources to fund all pending PPP loans and to continue to provide this important service to local businesses if additional funds are appropriated for the PPP.

-10-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Basis of ~~Presentation:~~Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) believed necessary for a fair presentation have been included.

Operating results for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2017~~March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2020. For further information, refer to the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019.

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 loan losses, valuation of deferred tax assets, loss contingencies, fair value of other real estate owned and fair values of financial instruments are particularly subject to change.

Allowance for Loan Losses: The allowance for loan losses (allowance) is a valuation allowance for probable incurred credit losses inherent in our loan portfolio, increased by the provision for loan losses and recoveries, and decreased by charge-offs of loans. Management believes the allowance for loan losses balance 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, 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 uncollectibility of a loan balance is confirmed. Management continues its collection efforts on previously charged-off balances and applies recoveries as additions to the allowance for loan losses.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current qualitative factors. The Company maintains a loss migration analysis that tracks loan losses and recoveries based on loan class and the loan risk grade assignment for commercial loans. At ~~September 30, 2017,~~March 31, 2020, an 18 month annualized historical loss experience was used for commercial loans and a 12 month historical loss experience period was applied to residential mortgage loans and consumer loans. These historical loss percentages are adjusted (both upwards and downwards) for certain qualitative factors, including economic trends, credit quality trends, valuation trends, concentration risk, quality of loan review, changes in personnel, external factors and other considerations.

A loan is impaired when, 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 modified and a concession has been made, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

~~-10-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~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 and the loan is reported 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 of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and they are not separately identified for impairment disclosures.

Troubled debt restructurings are also considered impaired with impairment generally measured at the present value of estimated 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.

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.

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. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

~~We recognize~~The Company recognizes a tax position as a benefit only if it is "more likely than 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 likely than not" test, no tax benefit is recorded. ~~We recognize~~The Company recognizes interest and penalties related to income tax matters in income tax expense.

-11-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition: The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Company’s primary source 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.

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.

Noninterest Revenue: The Company derives the majority of its noninterest revenue from: (1) service charges for deposit related services, (2) gains related to mortgage loan sales, (3) trust fees and (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 ~~our~~the 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~~each of which are carried at fair value. As the terms mirror each other, there is no income statement impact to the Bank. At ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, the total notional amount of such agreements was ~~$42.7~~$75.9 million and ~~$48.1~~$70.3 million, respectively, and resulted in a derivative asset with a fair value of ~~$351,000~~$4.3 million and ~~$494,000,~~$1.8 million, respectively, which were included in other assets and a derivative liability of ~~$351,000~~$4.3 million and ~~$494,000,~~$1.8 million, respectively, which were included in other liabilities.

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

~~Adoption of New Accounting Standards: The Financial Accounting Standards Board “FASB” issued Accounting Standards Update (“ASU”) ASU No. 2016-09,~~ ~~Improvements to Employee Share-Based Payment Accounting~~. This ASU simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the following: Accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The amendments are effective for annual periods beginning after December 15, 2016, and for interim periods within those annual periods. The impact of adoption of this ASU by the Company was not material.

~~FASB issued ASU No. 2017-08,~~ ~~Premium Amortization on Purchased Callable Debt Securities~~. This ASU changes generally accepted accounting principles (“GAAP”) to require premiums on purchased callable debt securities to be amortized to the earliest call date. Previous GAAP allowed entities to amortize to contractual maturity or to call date. The amendments in this ASU are effective for annual periods beginning after December 15, 2018, with early adoption permitted. As the Company has consistently amortized premiums on its purchased callable debt securities to the earliest call date, the Company has elected to early adopt this ASU effective January 1, 2017. There was no impact of adoption of this ASU by the Company.

~~-11-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~

Newly Issued Not Yet Effective Standards: ~~FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606).~~ The amendments in this Update create a new topic in the Codification, Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, ~~Other Assets and Deferred Costs: Contracts with Customers~~, to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. This ASU may require the Company to change how it recognizes certain recurring revenue streams within trust and investment management fees and interchange income. Certain fees are currently recognized annually or semi-annually and may need to be accrued monthly under the new standard. The timing of revenue recognition is expected to change nominally. The total annual revenue for such fees amounts to less than $60,000. Financial disclosures relative to revenue will be expanded as a result of this ASU.

~~FASB issued ASU 2016-02,~~ ~~Leases~~. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. As the Company owns most of its branch locations, this ASU will apply primarily to operating leases and the impact of adoption of this ASU by the Company is not expected to be material.

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. ~~This~~

ASU isNo. 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, ~~2019, and for interim periods within those years.~~2022. The Company ~~is currently evaluating the impact of~~selected a software vendor for applying this new ASU, ~~on its consolidated financial statements.~~

~~FASB issued ASU No. 2016-15,~~ ~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus~~began implementation of the ~~FASB Emerging Issues Task Force).~~ ~~This ASU addresses concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified~~software in the ~~statement~~second quarter of ~~cash flows.~~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 ~~particular, this~~the second, third and fourth quarters of 2019, the Company modeled the various methods prescribed in the ASU ~~addresses eight specific cash flow issues in an effort~~against the Company’s identified loan segments. The Company anticipates continuing to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds fromrun parallel computations and fine tune assumptions as it continues to evaluate the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The amendments are effective for annual periods beginning after December 15, 2017, and for interim periods within those annual periods. The impact of adoption of ~~this~~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. Efforts are underway in Congress and with banking regulators to require a further deferral of implementation of ASU byNo. 2016-13.

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 are 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. The Company expects to meet this expanded category of small reporting company and will no longer be considered an accelerated filer. If the Company’s annual revenues exceed $100 million, 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 ~~expected~~required if not an accelerated or large accelerated filer. As the Bank has total assets exceeding $1.0 billion, it remains subject to ~~be material.~~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 does not significantly change the Company’s annual reporting and audit requirements.

-12-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~ ~~(Continued)~~

~~FASB issued ASU 2017-12,~~ ~~Targeted Improvements to Accounting for Hedging Activities~~. This ASU simplifies and expands the eligible hedging strategies for financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and also simplifies the application of Topic 815, ~~Derivatives and Hedging~~, through targeted improvements in key practice areas. This includes expanding the list of items eligible to be hedged and amending the methods used to measure the effectiveness of hedging relationships. In addition, the ASU prescribes how hedging results should be presented and requires incremental disclosures. These changes are intended to allow preparers more flexibility and to enhance the transparency of how hedging results are presented and disclosed. Further, the ASU provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in earnings in the current period. The ASU is effective for years beginning after December 15, 2018, and interim periods within those years. The Company does not expect the impact of adoption of this ASU to be material.

~~-13-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

NOTE 2 – SECURITIES

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2017
Available for Sale:
March 31, 2020
Available for Sale
U.S. Treasury and federal agency securities	$	98,386	$	58	$	(709)	$	97,735	$	67,794	$	584	$	—		$	68,378
U.S. Agency MBS and CMOs		20,281		13		(161)		20,133		62,555		2,118		—			64,673
Tax-exempt state and municipal bonds		41,255		677		(133)		41,799		45,820		1,123		(13	)		46,930
Taxable state and municipal bonds		43,100		89		(315)		42,874		55,015		1,102		(46	)		56,071
Corporate bonds and other debt securities		10,165		16		(20)		10,161		7,290		41		(15	)		7,316
Other equity securities		1,500		---		(20)		1,480
	$	214,687	$	853	$	(1,358)	$	214,182	$	238,474	$	4,968	$	(74	)	$	243,368
Held to Maturity
Tax-exempt state and municipal bonds	$	61,927	$	927	$	---	$	62,854	$	82,514	$	2,352	$	—		$	84,866

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2016
Available for Sale:
December 31, 2019
Available for Sale
U.S. Treasury and federal agency securities	$	85,582	$	49	$	(1,281)	$	84,350	$	74,839	$	95	$	(185	)	$	74,749
U. S. Agency MBS and CMOs		12,037		11		(231)		11,817
U.S. Agency MBS and CMOs										45,795		474		(68	)		46,201
Tax-exempt state and municipal bonds		39,578		212		(603)		39,187		44,718		1,244		—			45,962
Taxable state and municipal bonds		34,255		65		(437)		33,883		51,683		404		(65	)		52,022
Corporate bonds and other debt securities		13,765		16		(55)		13,726		6,263		55		(3	)		6,315
Other equity securities		1,500		---		(30)		1,470
	$	186,717	$	353	$	(2,637)	$	184,433	$	223,298	$	2,272	$	(321	)	$	225,249
Held to Maturity:
Held to Maturity
Tax-exempt state and municipal bonds	$	69,378	$	573	$	(102)	$	69,849	$	82,720	$	2,408	$	—		$	85,128

There were no ~~sale~~sales of securities ~~available for sale~~ in the three month periods ended ~~September 30, 2017~~March 31, 2020 and ~~2016. Proceeds from the sale~~2019.

Contractual maturities of debt securities at March 31, 2020 were ~~$5.8 million~~as follows (dollars in the nine month period ended September 30, 2017 resulting in net gains of $3,000, as reported in the Consolidated Statements of Income. This resulted in reclassifications of $3,000 ($2,000 net of tax) from accumulated other comprehensive income to gain on sale of securities in the Consolidated Statements of Income in the nine month period ended September 30, 2017. Proceeds from the sale of securities available for sale were $9.6 million in the nine month period ended September 30, 2016 resulting in net gains on sale of $99,000 as reported in the Consolidated Statements of Income. This resulted in reclassifications of $99,000 ($64,000 net of tax) from accumulated other comprehensive income to gain on sale of securities in the Consolidated Statements of Income in the nine month period ended September 30, 2016.thousands):

	Held–to-Maturity Securities				Available-for-Sale Securities
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	18,583	$	18,669	$	30,761	$	30,926
Due from one to five years		31,133		31,895		84,398		85,879
Due from five to ten years		14,173		14,869		60,823		62,003
Due after ten years		18,625		19,433		62,492		64,560
	$	82,514	$	84,866	$	238,474	$	243,368

~~-14-~~-13-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES(Continued)

~~Contractual maturities of debt securities at September 30, 2017 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 $ 14,012 $ 14,019 $ 18,486 $ 18,493
Due from one to five years 13,622 14,055 115,857 115,387
Due from five to ten years 10,687 11,019 55,693 55,805
Due after ten years 23,606 23,761 23,151 23,017
$ 61,927 $ 62,854 $ 213,187 $ 212,702

Securities with unrealized losses at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (dollars in thousands):

	Less than 12 Months				12 Months or More				Total				Less than 12 Months					12 Months or More					Total
September 30, 2017	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
March 31, 2020													Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Available for Sale
U.S. Treasury and federal agency securities	$	60,225	$	(472)	$	15,497	$	(237)	$	75,722	$	(709)	$	—	$	—		$	—	$	—		$	—	$	—
U.S. Agency MBS and CMOs		16,883		(129)		1,087		(32)		17,970		(161)		—		—			—		—			—		—
Tax-exempt state and municipal bonds		7,428		(79)		2,124		(54)		9,552		(133)		503		(3	)		—		—			503		(3	)
Taxable state and municipal bonds		20,469		(239)		3,199		(76)		23,668		(315)		5,053		(56	)		—		—			5,053		(56	)
Corporate bonds and other debt securities		4,269		(9)		1,507		(11)		5,776		(20)		2,980		(14	)		351		(1	)		3,331		(15	)
Other equity securities		1,480		(20)		---		---		1,480		(20)
Total temporarily impaired	$	110,754	$	(948)	$	23,414	$	(410)	$	134,168	$	(1,358)
Total													$	8,536	$	(73	)	$	351	$	(1	)	$	8,887	$	(74	)

Held to Maturity
Tax-exempt state and municipal bonds													$	—	$	—		$	—	$	—		$	—	$	—

December 31, 2016
   Less than 12 Months    12 Months or More    Total
Fair
Value

Unrealized
Loss
Fair
Value

Unrealized
Loss
Fair
Value

Unrealized
Loss
U.S. Treasury and federal agency securities $ 59,129 $ (1,271) $ 3,053 $ (10) $ 62,182 $ (1,281)
U.S. Agency MBS and CMOs 10,702 (231) --- --- 10,702 (231)
Tax-exempt state and municipal bonds 49,508 (698) 1,672 (7) 51,180 (705)
Taxable state and municipal bonds 22,633 (437) --- --- 22,633 (437)
Corporate bonds and other debt securities 5,745 (50) 500 (5) 6,245 (55)
Other equity securities 1,470 (30) --- --- 1,470 (30)
Total temporarily impaired $ 149,187 $ (2,717) $ 5,225 $ (22) $ 154,412 $ (2,739)

~~-15-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 2 – SECURITIES~~ ~~(Continued)~~

	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 temporarily impaired	$	43,946	$	(210	)	$	32,055	$	(111	)	$	76,001	$	(321	)

Held to Maturity
Tax-exempt state and municipal bonds	$	—	$	—		$	—	$	—		$	—	$	—

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. At March 31, 2020, 17 securities available for sale with fair values totaling $8.9 million had unrealized losses totaling approximately $74,000. At March 31, 2020, no securities held to maturity had unrealized losses. Management has the intent and ability 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 if its investment securities before a recovery of cost. Management determined that the unrealized losses for ~~each period~~the three month periods ended March 31, 2020 and 2019 were attributable to changes in interest rates and not due to credit quality. As such, no OTTI charges were necessary during ~~the three and nine month periods ended September 30, 2017 and 2016.~~each period.

Securities with a carrying value of approximately ~~$2.0~~$5.1 million and $3.0 million were pledged as security for public deposits, letters of credit and for other purposes required or permitted by law at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019, respectively.

-14-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS

Portfolio loans were as follows (dollars in thousands):

September 30,
2017

December 31,
2016

Commercial and industrial $ 418,838 $ 449,342

Commercial real estate:
Residential developed 9,077 11,970
Unsecured to residential developers 2,410 4,734
Vacant and unimproved 38,677 40,286
Commercial development 486 378
Residential improved 83,441 75,348
Commercial improved 295,924 289,478
Manufacturing and industrial 100,347 95,787
Total commercial real estate 530,362 517,981

Consumer
Residential mortgage 221,829 217,614
Unsecured 254 396
Home equity 82,296 88,113
Other secured 6,458 7,366
Total consumer 310,837 313,489

Total loans 1,260,037 1,280,812
Allowance for loan losses (16,434 ) (16,962 )
$ 1,243,603 $ 1,263,850

~~-16-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 3 – LOANS~~ ~~(Continued)~~

	March 31, 2020			December 31, 2019
Commercial and industrial	$	527,590		$	499,572
Commercial real estate:
Residential developed		12,795			14,705
Unsecured to residential developers		5,000			—
Vacant and unimproved		42,761			41,796
Commercial development		623			665
Residential improved		131,954			130,861
Commercial improved		284,565			292,799
Manufacturing and industrial		114,953			117,632
Total commercial real estate		592,651			598,458
Consumer
Residential mortgage		198,585			211,049
Unsecured		247			274
Home equity		71,462			70,936
Other secured		4,806			5,338
Total consumer		275,100			287,597
Total loans		1,395,341			1,385,627
Allowance for loan losses		(18,889	)		(17,200	)
	$	1,376,452		$	1,368,427

Activity in the allowance for loan losses by portfolio segment was as follows (dollars in thousands):

Three months ended September 30, 2017	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Three months ended March 31, 2020											Commercial and Industrial		Commercial Real Estate			Consumer			Unallocated		Total
Beginning balance	$	6,336	$	6,583	$	3,621	$	30	$	16,570	$	7,658	$	6,521		$	3,009		$	12	$	17,200
Charge-offs		---		---		(55)		---		(55)		—		—			(39	)		—		(39	)
Recoveries		32		199		38		---		269		19		974			35			—		1,028
Provision for loan losses		(212)		(94)		(43)		(1)		(350)		1,130		(582	)		125			27		700
Ending Balance	$	6,156	$	6,688	$	3,561	$	29	$	16,434	$	8,807	$	6,913		$	3,130		$	39	$	18,889

Three months ended September 30, 2016	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Three months ended March 31, 2019											Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated		Total
Beginning balance	$	4,960	$	8,065	$	3,894	$	40	$	16,959	$	6,856		$	6,544		$	3,449		$	27	$	16,876
Charge-offs		---		---		(46)		---		(46)		—			(132	)		(25	)		—		(157	)
Recoveries		50		95		39		---		184		136			224			63			—		423
Provision for loan losses		515		(548)		(190)		(27)		(250)		(3	)		(189	)		(61	)		3		(250	)
Ending Balance	$	5,525	$	7,612	$	3,697	$	13	$	16,847	$	6,989		$	6,447		$	3,426		$	30	$	16,892

Nine months ended September 30, 2017

Commercial
and
Industrial

Commercial
Real Estate
     Consumer      Unallocated      Total
Beginning balance $ 6,345 $ 6,703 $ 3,871 $ 43 $ 16,962
Charge-offs (108) --- (113) --- (221)
Recoveries 96 818 129 --- 1,043
Provision for loan losses (177) (833) (326) (14) (1,350)
Ending Balance $ 6,156 $ 6,688 $ 3,561 $ 29 $ 16,434

The provision for loan losses for the three months ended March 31, 2020 was $700,000 compared to a negative $250,000 for the same period in 2019. Positively impacting the provisions for loan losses for each period were the continued stabilization of real estate values on problem credits and asset quality metrics, and net loan recoveries of $989,000 in the three months ended March 31, 2020 and $266,000 in the same period in 2019. Negatively impacting the provision for loan losses for the first quarter of 2020 was the estimated impact of COVID-19, which impact will be far-reaching and take time to be fully realized. The Bank has been actively working with its borrowers at risk who are impacted by the stay-at-home orders issued by the Governor of the State of Michigan on March 23, 2020 and April 9, 2020, respectively. These actions include short-term extensions and acceptance of interest-only payments on a short-term basis. Many of the Bank’s customers have been applying for and receiving Paycheck Protection Program loans as well. The Bank believes these measures will partially mitigate the impact of these stay-at home orders, but it is likely that the Bank will experience increased delinquencies and loan losses as a result of the economic fallout from COVID-19.

Nine months ended September 30, 2016

Commercial
and
Industrial

Commercial
Real Estate
     Consumer      Unallocated      Total
Beginning balance $ 4,826 $ 8,457 $ 3,761 $ 37 $ 17,081
Charge-offs --- --- (158) --- (158)
Recoveries 123 772 129 --- 1,024
Provision for loan losses 576 (1,617) (35) (24) (1,100)
Ending Balance $ 5,525 $ 7,612 $ 3,697 $ 13 $ 16,847

~~-17-~~-15-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS(Continued)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method (dollars in thousands):

September 30, 2017	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
March 31, 2020											Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	568	$	244	$	534	$	---	$	1,346	$	1,720	$	36	$	359	$	—	$	2,115
Collectively evaluated for impairment		5,588		6,444		3,027		29		15,088		7,087		6,877		2,771		39		16,774
Total ending allowance balance	$	6,156	$	6,688	$	3,561	$	29	$	16,434	$	8,807	$	6,913	$	3,130	$	39	$	18,889
Loans:
Individually reviewed for impairment	$	4,555	$	8,742	$	8,663	$	---	$	21,960	$	7,164	$	8,356	$	4,820	$	—	$	20,340
Collectively evaluated for impairment		414,283		521,620		302,174		---		1,238,077		520,426		584,295		270,280		—		1,375,001
Total ending loans balance	$	418,838	$	530,362	$	310,837	$	---	$	1,260,037	$	527,590	$	592,651	$	275,100	$	—	$	1,395,341

December 31, 2016	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
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	$	605	$	368	$	723	$	---	$	1,696	$	1,213	$	32	$	379	$	—	$	1,624
Collectively evaluated for impairment		5,740		6,335		3,148		43		15,266		6,445		6,489		2,630		12		15,576
Total ending allowance balance	$	6,345	$	6,703	$	3,871	$	43	$	16,962	$	7,658	$	6,521	$	3,009	$	12	$	17,200

Loans:
Individually reviewed for impairment	$	5,994	$	11,934	$	11,726	$	---	$	29,654	$	5,797	$	2,928	$	5,140	$	—	$	13,865
Collectively evaluated for impairment		443,348		506,047		301,763		---		1,251,158		493,775		595,530		282,457		—		1,371,762
Total ending loans balance	$	449,342	$	517,981	$	313,489	$	---	$	1,280,812	$	499,572	$	598,458	$	287,597	$	—	$	1,385,627

~~-18-~~-16-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Level 1:

Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2:

Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:

Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Investment ~~Securities:~~Securities: The fair values of investment securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). The fair values of certain securities held to maturity are determined by computing discounted cash flows using observable and unobservable market inputs (Level 3 inputs).

Loans Held for ~~Sale:~~Sale: The fair value of loans held for sale is based upon binding quotes from third party investors (Level 2 inputs).

Impaired Loans: Loans identified as impaired are measured using one of three methods: the loan’s observable market price, the fair value of collateral or the present value of expected future cash flows. For each period presented, no impaired loans were measured using the loan’s observable market price. If an impaired loan has had a chargeoff or if the fair value of the collateral is less than the recorded investment in the loan, we establish a specific reserve and report the loan as nonrecurring Level 3. The fair value of collateral of impaired loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

-25-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 – FAIR VALUE (Continued)

Other Real Estate Owned: Other real estate owned (OREO) properties are initially recorded at fair value, less estimated costs to sell when acquired, establishing a new cost basis. Adjustments to OREO are measured at fair value, less costs to sell. Fair values are generally based on third party appraisals or realtor evaluations of the property. These appraisals and evaluations may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, an impairment loss is recognized through a valuation allowance, and the property is reported as nonrecurring Level 3.

Interest Rate ~~Swaps:~~Swaps: For interest rate swap agreements, we measure fair value utilizing pricing provided by a third-party pricing source that that uses market observable inputs, such as forecasted yield curves, and other unobservable inputs and accordingly, interest rate swap agreements are classified as Level 3.

~~-29-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 5 – FAIR VALUE~~ ~~(Continued)~~

Assets measured at fair value on a recurring basis are summarized below (in thousands):

	Fair			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs			Fair			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Value			(Level 1)		(Level 2)		(Level 3)			Value			(Level 1)		(Level 2)		(Level 3)
September 30, 2017
March 31, 2020
Available for sale securities
U.S. Treasury and federal agency securities	$	97,735		$	---	$	97,735	$	---		$	68,378		$	—	$	68,378	$	—
U.S. Agency MBS and CMOs		20,133			---		20,133		---			64,673			—		64,673		—
Tax-exempt state and municipal bonds		41,799			---		41,799		---			46,930			—		46,930		—
Taxable state and municipal bonds		42,874			---		42,874		---			56,071			—		56,071		—
Corporate bonds and other debt securities		10,161			---		10,161		---			7,316			—		7,316		—
Other equity securities		1,480			---		1,480		---			1,495			—		1,495		—
Loans held for sale		2,199			---		2,199		---			1,966			—		1,966		—
Interest rate swaps		351			---		---		351			4,295			—		—		4,295
Interest rate swaps		(351	)		---		---		(351	)		(4,295	)		—		—		(4,295	)

December 31, 2016
December 31, 2019
Available for sale securities
U.S. Treasury and federal agency securities	$	84,350		$	---	$	84,350	$	---		$	74,749		$	—	$	74,749	$	—
U.S. Agency MBS and CMOs		11,817			---		11,817		---			46,201			—		46,201		—
Tax-exempt state and municipal bonds		39,187			---		39,187		---			45,962			—		45,962		—
Taxable state and municipal bonds		33,883			---		33,883		---			52,022			—		52,022		—
Corporate bonds and other debt securities		13,726			---		13,726		---			6,315			—		6,315		—
Other equity securities		1,470			---		1,470		---			1,481			—		1,481		—
Loans held for sale		2,181			---		2,181		---			3,294			—		3,294		—
Interest rate swaps		494			---		---		494			1,830			—		—		1,830
Interest rate swaps		(494	)		---		---		(494	)		(1,830	)		—		—		(1,830	)

Assets measured at fair value on a non-recurring basis are summarized below (in thousands):

	Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Fair		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Value		(Level 1)		(Level 2)		(Level 3)		Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2017
March 31, 2020
Impaired loans	$	2,775	$	---	$	---	$	2,775	$	11,617	$	—	$	—	$	11,617
Other real estate owned		4,631		---		---		4,631		283		—		—		283

December 31, 2016
December 31, 2019
Impaired loans	$	3,436	$	---	$	---	$	3,436	$	5,151	$	—	$	—	$	5,151
Other real estate owned		9,542		---		---		9,542		405		—		—		405

~~-30-~~-26-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 – FAIR VALUE (Continued)

Quantitative information about Level 3 fair value measurements measured on a non-recurring basis was as follows at period end (dollars in thousands):

	Asset Fair Value		Valuation Technique	Unobservable Inputs	Range (%)
March 31, 2020
Impaired Loans	$	11,617	Sales comparison approach	Adjustment for differences between comparable sales	1.0 to 20.0
			Income approach	Capitalization rate	9.5 to 11.0
Other real estate owned		283	Sales comparison approach	Adjustment for differences between comparable sales	3.0 to 20.0
			Income approach	Capitalization rate	9.5 to 11.0

Asset

Fair

Value

Valuation

Technique

Unobservable

Inputs

Range (%)

Asset Fair

Value

Valuation

Technique

Unobservable

Inputs

Range (%)

September 30, 2017

December 31, 2019

Impaired Loans

2,775

Sales comparison approach

Adjustment for differences between comparable sales

4.0 to 15.0

5,151

Sales comparison approach

Adjustment for differences between comparable sales

1.5 to 20.0

Income approach

Capitalization rate

9.5 to 11.0

Income approach

Capitalization rate

9.5 to 11.0

Other real estate owned

4,631

Sales comparison approach

Adjustment for differences between comparable sales

3.0 to 22.0

405

Sales comparison approach

Adjustment for differences between comparable sales

3.0 to 20.0

Income approach

Capitalization rate

9.5 to 11.0

Income approach

Capitalization rate

9.5 to 11.0

Asset
Fair
Value

Valuation
Technique

Unobservable
Inputs
Range (%)
December 31, 2016

Impaired Loans $ 3,436 Sales comparison approach Adjustment for differences between comparable sales 1.0 to 35.0
Income approach Capitalization rate 9.5 to 11.5

Other real estate owned 9,542 Sales comparison approach Adjustment for differences between comparable sales 2.0 to 32.5
Income approach Capitalization rate 9.5 to 11.5

~~-31-~~-27-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 – FAIR VALUE (Continued)

The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019 (dollars in thousands):

	Level in Fair Value Hierarchy	September 30, 2017						December 31, 2016						Level in	March 31, 2020						December 31, 2019
	Level in Fair Value Hierarchy	Carrying Amount			Fair Value			Carrying Amount			Fair Value			Fair Value Hierarchy	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets
Cash and due from banks	Level 1	$	28,318		$	28,318		$	27,690		$	27,690		Level 1	$	25,861		$	25,861		$	31,942		$	31,942
Cash equivalents	Level 2		131,571			131,571			62,129			62,129		Level 2		181,334			181,334			240,508			240,508
Securities held to maturity	Level 3		61,927			62,854			69,378			69,849		Level 3		82,514			84,866			82,720			85,128
FHLB stock			11,558		NA				11,558		NA					11,558		NA				11,558		NA
Loans, net	Level 2		1,240,828			1,237,274			1,260,414			1,247,842		Level 2		1,364,835			1,411,726			1,363,276			1,395,446
Bank owned life insurance	Level 3		40,042			40,042			39,274			39,274		Level 3		42,411			42,411			42,156			42,156
Accrued interest receivable	Level 2		4,532			4,532			4,092			4,092		Level 2		5,356			5,356			4,866			4,866

Financial liabilities
Deposits	Level 2		(1,506,178	)		(1,506,115	)		(1,448,724	)		(1,448,692	)	Level 2		(1,705,380	)		(1,706,313	)		(1,753,294	)		(1,753,877	)
Other borrowed funds	Level 2		(72,118	)		(71,946	)		(84,173	)		(84,051	)	Level 2		(70,000	)		(72,454	)		(60,000	)		(61,006	)
Long-term debt	Level 2		(41,238	)		(36,562	)		(41,238	)		(36,112	)	Level 2		(20,619	)		(18,204	)		(20,619	)		(18,167	)
Accrued interest payable	Level 2		(545	)		(545	)		(282	)		(282	)	Level 2		(475	)		(475	)		(518	)		(518	)

Off-balance sheet credit-related items
Loan commitments			---			---			---			---				—			—			—			—

The methods and assumptions used to estimate fair value are described as follows.

Carrying amount is the estimated fair value for cash and cash equivalents, bank owned life insurance, accrued interest receivable and payable, demand deposits, short-term borrowings and variable rate loans or deposits that reprice frequently and fully. Security fair values are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities as discussed above. For fixed rate loans, interest-bearing time deposits in other financial institutions, or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk (including consideration of widening credit spreads). Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance sheet credit-related items is not significant.

~~-32-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The estimated fair values of financial instruments disclosed above as follow the guidance in ASU 2016-01 which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity and marketability factors.

NOTE 6 – ~~PREMISES AND EQUIPMENT – NET~~

~~Premises and equipment were as follows (dollars in thousands):~~DEPOSITS

September 30,
2017

December 31,
2016

Land $ 16,384 $ 18,227
Building 43,625 43,600
Leasehold improvements 782 779
Furniture and equipment 21,243 20,576
Construction in progress 240 358
82,274 83,540
Less accumulated depreciation (35,452 ) (33,514 )
$ 46,822 $ 50,026

During the nine months ended September 30, 2017, the Company sold land parcels that had been held for several years as sites for future branch expansion. One location was in northwest Grand Rapids (Walker) and was sold for $590,000, resulting in a net loss on sale of $70,000. The other location was in southwest Grand Rapids (Metro Village) and was sold for $1.2 million, resulting in a net loss on sale of $176,000. These losses are included in other noninterest income in the Consolidated Statements of Income for the three and nine month periods ended September 30, 2017.

~~NOTE 7 – DEPOSITS~~

Deposits are summarized as follows (dollars in thousands):

	September 30, 2017		December 31, 2016		March 31, 2020		December 31, 2019
Noninterest-bearing demand	$	497,310	$	501,478	$	492,409	$	482,499
Interest bearing demand		351,742		340,715		430,541		479,341
Savings and money market accounts		564,883		532,853		637,573		639,329
Certificates of deposit		92,243		73,678		144,857		152,125
	$	1,506,178	$	1,448,724	$	1,705,380	$	1,753,294

Time deposits that exceed the FDIC insurance limit of $250,000 were approximately ~~$28.1~~$33.8 million at ~~September 30, 2017~~March 31, 2020 and ~~$17.4~~$37.7 million at December 31, ~~2016.~~2019.

~~-33-~~-28-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 87 - OTHER BORROWED FUNDS

Other borrowed funds include advances from the Federal Home Loan Bank and borrowings from the Federal Reserve Bank.

Federal Home Loan Bank Advances

At period-end, advances from the Federal Home Loan Bank were as follows (dollars in thousands):

Principal Terms		Advance Amount	Range of Maturities	Weighted Average Interest Rate		Advance Amount		Range of Maturities	Weighted Average Interest Rate
September 30, 2017
March 31, 2020
Single maturity fixed rate advances	$	70,000	February 2018 to April 2021	1.59	%	$	40,000	April 2021 to July 2024		2.51	%
Amortizable mortgage advances		2,118	March 2018 to July 2018	3.78	%
Putable advances							30,000	November 2024 t0 February 2030		1.36	%
	$	72,118				$	70,000

Principal Terms	Advance Amount		Range of Maturities	Weighted Average Interest Rate
December 31, 2019
Single maturity fixed rate advances	$	40,000	April 2021 to July 2024		2.50	%
Putable advances		20,000	November 2024		1.81	%
	$	60,000

-29-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Principal Terms

Advance
Amount

Range of Maturities

Weighted
Average
Interest Rate

December 31, 2016
Single maturity fixed rate advances $ 80,000 February 2018 to April 2021 1.60 %
Amortizable mortgage advances 4,173 March 2018 to July 2018 3.78 %
$ 84,173

(Unaudited)

NOTE 7 - OTHER BORROWED FUNDS (Continued)

Each advance is subject to a prepayment fee if paid prior to its maturity date. Fixed rate advances are payable at maturity. ~~Amortizable mortgage advances are fixed rate advances with scheduled repayments based upon amortization to maturity.~~ These advances were collateralized by residential and commercial real estate loans totaling ~~$443.5~~$492.4 million and ~~$425.0~~$498.1 million under a blanket lien arrangement at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively.

~~-34-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 8 - OTHER BORROWED FUNDS~~

Scheduled repayments of FHLB advances as of ~~September 30, 2017~~March 31, 2020 were as follows (in thousands):

2017	$	---
2018		52,118
2019		10,000
2020		---	$	—
2021		10,000		10,000
2022				—
2023				10,000
2024				40,000
Thereafter		---		10,000
	$	72,118	$	70,000

Federal Reserve Bank borrowings

The Company has a financing arrangement with the Federal Reserve Bank. There were no borrowings outstanding at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, and the Company had approximately ~~$12.6~~$13.7 million and ~~$18.1~~$13.0 million in unused borrowing capacity based on commercial and mortgage loans pledged to the Federal Reserve Bank totaling ~~$15.1~~$16.1 million and ~~$20.7~~$15.2 million at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively.

NOTE 98 - EARNINGS PER COMMON SHARE

A reconciliation of the numerators and denominators of basic and diluted earnings per common share for the three ~~and nine~~ month periods ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 are as follows (dollars in thousands, except per share data):

	Three Months Ended September 30, 2017		Three Months Ended September 30, 2016		Nine Months Ended September 30, 2017		Nine Months Ended September 30, 2016		Three Months Ended March 31, 2020		Three Months Ended March 31, 2019
Net income available to common shares	$	4,875	$	4,604	$	14,098	$	11,844	$	6,411	$	7,646

Weighted average shares outstanding, including participating stock awards - Basic		33,942,248		33,921,599		33,942,318		33,923,067		34,106,719		34,040,380

Dilutive potential common shares:
Stock options		5,021		---		6,101		---		—		—
Stock warrants		---		---		---		---
Weighted average shares outstanding - Diluted		33,947,269		33,921,599		33,948,419		33,923,067		34,106,719		34,040,380
Basic earnings per common share	$	0.14	$	0.14	$	0.42	$	0.35	$	0.19	$	0.22
Diluted earnings per common share	$	0.14	$	0.14	$	0.42	$	0.35	$	0.19	$	0.22

Stock options for 100,896 shares of common stock for both the three and nine month periods ended September 30, 2016, were not considered in computing diluted earnings per share because they were antidilutive. There were no antidilutive shares of common stock in the three ~~and nine~~ month periods ended ~~September 30, 2017.~~March 31, 2020 and 2019.

~~-35-~~-30-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 109 - FEDERAL INCOME TAXES

Income tax expense was as follows (dollars in thousands):

	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016			Nine Months Ended September 30, 2017		Nine Months Ended September 30, 2016			Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Current	$	2,261		$	1,370		$	4,004	$	4,596		$	1,700		$	1,469
Deferred		(104	)		(20	)		2,249		(167	)		(271	)		245
	$	2,157		$	1,350		$	6,253	$	4,429		$	1,429		$	1,714

The difference between the financial statement tax expense and amount computed by applying the statutory federal tax rate to pretax income was reconciled as follows (dollars in thousands):

	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016			Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016			Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Statutory rate		35	%		35	%		35	%		35	%		21	%		21	%
Statutory rate applied to income before taxes	$	2,461		$	2,083		$	7,123		$	5,695		$	1,646		$	1,966
Deduct
Tax-exempt interest income		(195	)		(154	)		(564	)		(451	)		(178	)		(167	)
Bank-owned life insurance		(88	)		(51	)		(256	)		(262	)		(51	)		(50	)
Tax return credits and other adjustments		(5	)		(512	)		(5	)		(512	)
Other, net		(16	)		(16	)		(45	)		(41	)		12			(35	)
	$	2,157		$	1,350		$	6,253		$	4,429		$	1,429		$	1,714

The realization of deferred tax assets (net of a recorded valuation allowance) is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carryback losses to available tax years. In assessing the need for a valuation allowance, we consider positive and negative evidence, including taxable income in carry-back years, scheduled reversals of deferred tax liabilities, expected future taxable income and tax planning strategies. NoAt March 31, 2020 and December 31, 2019, a valuation allowance of $92,000 was ~~necessary at September 30, 2017 or December 31, 2016.~~established for a capital loss carryforward related to the liquidation of assets of a partnership interest the Bank acquired through a loan settlement. Management believes it is more likely than not that all of the remaining deferred tax assets will be realized against deferred tax liabilities and projected future taxable income.

~~-36-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 10 - FEDERAL INCOME TAXES~~ ~~(Continued)~~

The net deferred tax asset recorded included the following amounts of deferred tax assets and liabilities (dollars in thousands):

	September 30, 2017			December 31, 2016			March 31, 2020			December 31, 2019
Deferred tax assets
Allowance for loan losses	$	5,752		$	5,937		$	3,966		$	3,612
Nonaccrual loan interest		598			718			161			182
Valuation allowance on other real estate owned		1,292			3,714			83			76
Unrealized loss on securities available for sale		177			799			—			—
Other		539			176			271			248
Gross deferred tax assets		8,358			11,344			4,481			4,118
Valuation allowance		---			---			(92	)		(92	)
Total net deferred tax assets		8,358			11,344			4,389			4,026

Deferred tax liabilities
Depreciation		(1,608	)		(1,705	)		(1,141	)		(1,053	)
Prepaid expenses		(349	)		(399	)		(172	)		(172	)
Unrealized gain on securities available for sale								(1,028	)		(406	)
Other		(409	)		(377	)		(320	)		(317	)
Gross deferred tax liabilities		(2,366	)		(2,481	)		(2,661	)		(1,948	)
Net deferred tax asset	$	5,992		$	8,863		$	1,728		$	2,078

There were no unrecognized tax benefits at ~~September 30, 2017~~March 31, 2020 or December 31, ~~2016~~2019 and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company is no longer subject to examination by the Internal Revenue Service for years before ~~2013.~~2016.

-31-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1110 – COMMITMENTS AND OFF BALANCE-SHEET RISK

Some financial instruments are used to meet customer financing needs and to reduce exposure to interest rate changes. These financial instruments include commitments to extend credit and standby letters of credit. These involve, to varying degrees, credit and interest rate risk in excess of the amount reported in the financial statements.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment, and generally have fixed expiration dates. Collateral or other security is normally not obtained for these financial instruments prior to their use and many of the commitments are expected to expire without being used. Standby letters of credit are conditional commitments to guarantee a customer’s performance to a third party. Exposure to credit loss if the other party does not perform is represented by the contractual amount for commitments to extend credit and standby letters of credit.

A summary of the contractual amounts of financial instruments with off‑balance‑sheet risk was as follows at period-end (dollars in thousands):

	September 30, 2017		December 31, 2016		March 31, 2020		December 31, 2019
Commitments to make loans	$	121,797	$	90,293	$	84,028	$	65,648
Letters of credit		12,117		13,823		15,226		15,303
Unused lines of credit		495,151		437,435		492,793		502,200

The notional amount of commitments to fund mortgage loans to be sold into the secondary market was approximately ~~$14.2~~$32.9 million and ~~$19.8~~$11.0 million at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively.

~~-37-~~

~~Index~~

~~MACATAWA BANK CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~NOTE 11 – COMMITMENTS AND OFF BALANCE-SHEET RISK~~ ~~(Continued)~~

At ~~September 30, 2017,~~March 31, 2020, approximately ~~32.7%~~43.4% of the Bank’s commitments to make loans were at fixed rates, offered at current market rates. The remainder of the commitments to make loans were at variable rates tied to prime or one month LIBOR and generally expire within 30 days. The majority of the unused lines of credit were at variable rates tied to prime.

NOTE 1211 – CONTINGENCIES

The Company and its subsidiaries periodically become defendants in certain claims and legal actions arising in the ordinary course of business. As of ~~September 30, 2017,~~March 31, 2020, there were no material pending legal proceedings to which the Company or any of its subsidiaries are a party or which any of its properties are the subject.

NOTE 1312 – SHAREHOLDERS' EQUITY

Regulatory Capital

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required.

In July 2013, the Board of Governors of the Federal Reserve Board and the FDIC approved the ~~final~~ rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank. The rules include a ~~new~~ common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which ~~when fully phased-in,~~ effectively results in a minimum CET1 ratio of 7.0%. ~~Basel III raises the~~The minimum ratio of Tier 1 capital to risk-weighted assets ~~from 4.0% to~~is 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% ~~when fully phased-in)~~), which effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation ~~buffer fully phased-in)~~buffer), and requires a minimum leverage ratio of 4.0%. ~~Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures.~~

~~-38-~~-32-

Index

MACATAWA BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1312 – SHAREHOLDERS' EQUITY (Continued)

At ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, actual capital levels and minimum required levels were (dollars in thousands):

	Actual				Minimum Capital Adequacy				Minimum Capital Adequacy With Capital Buffer				To Be Well Capitalized Under Prompt Corrective Action Regulations									Minimum Capital					Minimum Capital Adequacy With					To Be Well Capitalized Under Prompt Corrective
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Actual					Adequacy					Capital Buffer					Action Regulations
September 30, 2017
																	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2020
CET1 capital (to risk weighted assets)
Consolidated	$	173,779	11.7	%	$	66,837	4.5	%	$	85,403	5.8	%		N/A	N/A		$	219,714		13.4	%	$	73,610		4.5	%	$	114,504		7.0	%		N/A		N/A
Bank		207,805	14.0			66,831	4.5			85,395	5.8		$	96,533	6.5	%		232,775		14.2			73,604		4.5			114,496		7.0		$	106,318		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		213,779	14.4			89,116	6.0			107,682	7.3			N/A	N/A			239,714		14.7			98,146		6.0			139,041		8.5			N/A		N/A
Bank		207,805	14.0			89,108	6.0			107,672	7.3			118,810	8.0			232,775		14.2			98,139		6.0			139,031		8.5			130,852		8.0
Total capital (to risk weighted assets)
Consolidated		230,213	15.5			118,821	8.0			137,387	9.3			N/A	N/A			258,603		15.8			130,862		8.0			171,756		10.5			N/A		N/A
Bank		224,239	15.1			118,810	8.0			137,374	9.3			148,513	10.0			251,664		15.4			130,852		8.0			171,744		10.5			163,565		10.0
Tier 1 capital (to average assets)
Consolidated		213,779	12.0			71,008	4.0			N/A	N/A			N/A	N/A			239,714		11.9			80,568		4.0			N/A		N/A			N/A		N/A
Bank		207,805	11.7			70,945	4.0			N/A	N/A			88,682	5.0			232,775		11.6			80,537		4.0			N/A		N/A			100,671		5.0

December 31, 2016
December 31, 2019
CET1 capital (to risk weighted assets)
Consolidated	$	163,663	11.0	%	$	66,743	4.5	%	$	76,013	5.1	%		N/A	N/A		$	215,925		13.5	%	$	72,187		4.5	%	$	112,290		7.0	%		N/A		N/A
Bank		197,972	13.4			66,737	4.5			76,006	5.1		$	96,398	6.5	%		228,761		14.3			72,182		4.5			112,284		7.0		$	104,263		6.5	%
Tier 1 capital (to risk weighted assets)
Consolidated		203,663	13.7			88,991	6.0			98,261	6.6			N/A	N/A			235,925		14.7			96,249		6.0			136,353		8.5			N/A		N/A
Bank		197,972	13.4			88,983	6.0			98,252	6.6			118,644	8.0			228,761		14.3			96,243		6.0			136,344		8.5			128,324		8.0
Total capital (to risk weighted assets)
Consolidated		220,625	14.9			118,655	8.0			127,925	8.6			N/A	N/A			253,125		15.8			128,332		8.0			168,436		10.5			N/A		N/A
Bank		214,934	14.5			118,644	8.0			127,913	8.6			148,305	10.0			245,961		15.3			128,324		8.0			168,425		10.5			160,405		10.0
Tier 1 capital (to average assets)
Consolidated		203,663	12.0			67,810	4.0			N/A	N/A			N/A	N/A			235,925		11.5			82,130		4.0			N/A		N/A			N/A		N/A
Bank		197,972	11.7			67,742	4.0			N/A	N/A			84,677	5.0			228,761		11.2			82,070		4.0			N/A		N/A			102,587		5.0

Approximately ~~$40.0~~$20.0 million of trust preferred securities outstanding at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively, qualified as Tier 1 capital. Refer to our ~~2016~~2019 Form 10-K for more information on the trust preferred securities.

The Bank was categorized as "well capitalized" at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019.

~~-39-~~-33-

Index

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Macatawa Bank Corporation is a Michigan corporation and a registered bank holding company. It wholly-owns Macatawa Bank, Macatawa Statutory Trust I and Macatawa Statutory Trust II. Macatawa Bank is a Michigan chartered bank with depository accounts insured by the FDIC. The Bank operates twenty-six branch offices and a lending and operational service facility, providing a full range of commercial and consumer banking and trust services in Kent County, Ottawa County, and northern Allegan County, Michigan. Macatawa Statutory Trusts I and II are grantor trusts and issued $20.0 million each of pooled trust preferred securities. ~~These trusts are~~The $20 million of trust preferred securities associated with Macatawa Statutory Trust I were redeemed in full and the trust dissolved as of December 31, 2019. Macatawa Statutory Trust II remains outstanding. This trust is not consolidated in our Consolidated Financial Statements. For further information regarding consolidation, see the Notes to Consolidated Financial Statements.

At ~~September 30, 2017,~~March 31, 2020, we had total assets of ~~$1.80~~$2.03 billion, total loans of ~~$1.26~~$1.40 billion, total deposits of ~~$1.51~~$1.71 billion and shareholders' equity of ~~$173.5~~$223.6 million. ~~During~~For the ~~third quarter of 2017,~~three months ended March 31, 2020, we recognized net income of ~~$4.9~~$6.4 million compared to ~~net income of $4.6 million in the third quarter of 2016. For the nine months ended September 30, 2017, we recognized net income of $14.1 million compared to $11.8~~$7.6 million for the same period in ~~2016.~~2019. The Bank was categorized as “well capitalized” under regulatory capital standards at ~~September 30, 2017.~~March 31, 2020.

We paid a dividend of ~~$0.03~~$0.07 per share in each quarter of ~~2016. We increased the dividend to $0.04~~2019 and $0.08 per share in the first quarter of 2020.

In December 2019, news began to surface regarding an influenza pandemic in China, known as the novel coronavirus, or COVID-19. In January 2020, the United States restricted entry to anyone traveling from China. In February 2020, the pandemic spread broadly and ~~second quarters of 2017~~swiftly throughout Europe and ~~$0.05 per share~~the Middle East, particularly in Italy and Iran. Cases began to surface in the United States in February 2020 and accelerated in early March 2020. 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. During the week of March 9, 2020, individual states began implementing restrictions and promoting “social distancing”. These restrictions included closure of schools, restrictions on the number of public gatherings, encouragement of work at home arrangements and other measures. In Michigan, Governor Gretchen Whitmer issued a “stay home, stay safe” executive order effective March 24, 2020, which required residents to remain at home "to the maximum extent feasible" and prohibited in-person work that "is not necessary to sustain or protect life." Pursuant to the order, no person or entity was permitted to operate a business that required workers to leave their homes except to the extent that those workers were necessary (i) to conduct minimum basic operations or (ii) to sustain or protect life. On April 9, 2020, the Governor issued a revised executive order, which is effective through April 30, 2020. This revised executive order further limits travel, provides guidance regarding the definition of critical infrastructure workers, places additional requirements on businesses remaining open including limiting goods that can be sold by retailers and implementing social distancing practices, and incorporates guidance issued under the earlier order. It is possible that the Governor will issue one or more additional executive orders extending the existing orders or imposing additional restrictions on the activities of individuals or businesses. 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.

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 conclude 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 relief program 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 current as of December 31, 2019 are not TDRs. The Bank applied this guidance to modifications it executed on loans following the COVID-19 outbreak. Through March 31, 2020, the Bank had modified 179 individual loans with aggregate principal balances totaling $88.0 million following this guidance. The majority of these modifications involved extensions of interest-only periods of three months.

The CARES Act included an allocation of $349 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”). This program is known as the 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, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. The SBA began accepting submissions for these PPP loans on Friday, April 3, 2020. In the first weekend, we originated over $100 million of these PPP loans and through April 16, 2020, the date the SBA reached the limit of funds available to disburse under this program, we had received SBA authorizations for PPP loans totaling $311.6 million. Participation in the PPP will likely have a significant impact on our asset mix and net interest margin for the remainder of 2020. At March 31, 2020, we had $181.3 million in federal funds sold and $359.4 million of available borrowing capacity from our correspondent banks. In addition, the Federal Reserve has implemented a liquidity facility available to financial institutions participating in the PPP. As such, we believe we have sufficient liquidity sources to fund all pending PPP loans and to continue to provide this important service to local businesses if additional funds are appropriated for the PPP.

-34-

Index

The COVID-19 pandemic is a highly unusual, unprecedented and evolving public health and economic crisis and may have a negative material impact on our financial condition and results of operations. We are in an asset-sensitive position, so decreases in short-term interest rates have a net negative impact on our net interest income as our interest-earning assets will reprice faster than our interest-bearing liabilities. Given our asset-sensitivity, several years ago we established floors on our variable rate loans to help offset the negative impact of declining interest rates on net interest income. The benefit of these floors will become more evident in future quarters if the Federal Reserve maintains short-term interest rates at the low level established in March 2020. Additionally, the negative consequences of the unprecedented economic shutdown nationally and in Michigan is likely to result in a higher level of delinquencies and loan losses and require additional provisions for loan losses, which will have a negative impact on our results of operations. Our PPP loan origination activity should provide some offsetting positive impact to second and third quarter 2020 earnings, considering interest income on the loans and the processing fees paid by the SBA. The processing fees, alone, on the PPP loans originated through April 16, 2020 amount to $8.6 million, and we expect will mostly be recognized in 2020. While the effects of ~~2017.~~COVID-19 are likely to have a far-reaching, long-lasting effect on the global, national, and Michigan economies, we believe we have sufficient capital and financial strength, as well as liquidity resources to mitigate the effects of the COVID-19 pandemic on our operations and financial condition, while continuing to serve our communities and protect shareholder value.

RESULTS OF OPERATIONS

Summary: Net income for the three months ended ~~September 30, 2017~~March 31, 2020 was ~~$4.9~~$6.4 million, compared to net income of $4.6 million in the same period in 2016. Net income per common share on a diluted basis was $0.14 for the three months ended September 30, 2017 and $0.14 for the same period in 2016. For the nine months ended September 30, 2017, net income was $14.1 million, compared to $11.8$7.6 million for the same period in ~~2016.~~2019. Net income per share on a diluted basis for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 was ~~$0.42~~$0.19 compared to ~~$0.35~~$0.22 for the same period in ~~2016.~~2019.

The ~~increase~~decrease in earnings in the three months ended ~~September 30, 2017~~March 31, 2020 compared to the same period in ~~2016~~2019 was due primarily to ~~increased~~higher provision for loan losses and lower net interest ~~income and reduced nonperforming asset expenses.~~income. Net interest income ~~increased~~decreased to ~~$13.1~~$15.3 million in the three months ended ~~September 30, 2017~~March 31, 2020 compared to ~~$11.9~~$16.0 million in the same period in 2016. Nonperforming asset expenses (including administration costs and losses) were a negative $77,000 for three months ended September 30, 2017 compared to $325,000 for the same period in 2016, primarily as a result of a decrease of $220,000 in writedowns of other real estate owned.2019. The provision for loan losses was ~~a negative $350,000~~$700,000 for the three months ended ~~September 30, 2017,~~March 31, 2020, compared to a negative $250,000 for the same period in ~~2016.~~2019, and was impacted by increased qualitative factors applied to address the increased risk of loss from the negative effects of the COVID-19 pandemic. We ~~again~~ were in a net loan recovery position for the three months ended ~~September 30, 2017,~~March 31, 2020, with ~~$214,000~~$989,000 in net loan recoveries, compared to ~~$138,000~~$266,000 in net loan recoveries in the same period in ~~2016. Also, income tax expense was reduced by $512,000 in September 2016 due to tax credits and other adjustments that did not recur in 2017.~~

The increase in earnings for the nine month period ended September 30, 2017 compared to the same period of 2016, was due primarily to increased net interest income and reduced nonperforming asset expenses. Net interest income increased to $38.4 million in the first nine months of 2017 compared to $35.2 million in the same period in 2016. Nonperforming asset expenses (including administration costs and losses) were a negative $140,000 for the first nine months of 2017 compared to $1.2 million for the first nine months of 2016, primarily as a result of a net gains on other real estate owned of $575,000 for the first nine months of 2017 compared to net losses of $409,000 for the same period in 2016. The provision for loan losses was a negative $1.35 million for the first nine months of 2017, compared to a negative $1.1 million for the first nine months of 2016. We again were in a net loan recovery position for the first nine months of 2017, with $822,000 in net loan recoveries, compared to $866,000 in net loan recoveries in the same period in 2016.2019. Each of these items is discussed more fully below.

~~-40-~~

~~Index~~

Net Interest Income:Net interest income totaled ~~$13.1~~$15.3 million for the three months ended ~~September 30, 2017 and $11.9~~March 31, 2020 compared to $16.0 million for the same period in ~~2016. For the first nine months of 2017, net interest income was $38.4 million compared to $35.2 million for the same period in 2016.~~2019.

Net interest income was positively impacted in the three months ended ~~September 30, 2017~~March 31, 2020 by an increase in average earning assets of ~~$96.5~~$63.3 million compared to the same period in ~~2016. Our~~2019. However, our average yield on earning assets for the three months ended ~~September 30, 2017 increased 18~~March 31, 2020 decreased 53 basis points compared to the same period in ~~2016~~2019 from ~~3.39%~~4.24% to ~~3.57%.~~ 3.71%, fully offsetting the effect of the growth in earning assets.

Net interest income for the first quarter of 2020 decreased $717,000 compared to the same period in 2019. Of this decrease, $3.5 million was due to decreases in rates earned or paid, partially offset by $2.8 million from increases in the volume of average interest assets and interest bearing liabilities. The largest changes came in commercial loan interest income which decreased by $1.1 million in the first quarter of 2020. Of the $1.1 million decrease in interest income on commercial loans, $3.0 million was due to decreases in rates earned, partially offset by the increase of $1.9 million in in average balances between periods. Net interest income in the first quarter of 2020 also benefitted from prepayment fees and interest recovery of $65,000 collected on two commercial loans.

Average interest earning assets totaled ~~$1.65~~$1.90 billion for three months ended ~~September 30, 2017~~March 31, 2020 compared to ~~$1.56~~$1.83 billion for the same period in ~~2016.~~2019. An increase of $57.5 million in average federal funds sold and other short-term investments were the primary components of the increase. The net interest margin was ~~3.21%~~3.25% for the three months ended ~~September 30, 2017~~March 31, 2020 compared to ~~3.04%~~3.54% for the same period in ~~2016. An increase of $42.4 million in average securities between periods and an increase of $36.4 million in average loans were the primary drivers of the increase.~~2019. Yield on commercial loans ~~increased~~decreased from ~~3.88%~~4.89% for three months ended ~~September 30, 2016~~March 31, 2019 to ~~4.11%~~4.32% for the same period in ~~2017.~~2020. Yield on residential mortgage loans ~~decreased~~increased from ~~3.51%~~3.69% for the three months ended ~~September 30, 2016~~March 31, 2019 to ~~3.47%~~3.71% for the same period in ~~2017,~~2020, while yields on consumer loans ~~increased~~decreased from ~~3.93%~~5.27% for the first quarter of 2019 to 4.79% for the first quarter of 2020. The decreases in yields on commercial loans and consumer loans were the result of the predominance of loans in these categories with variable rates of interest tied to prime and LIBOR which decreased significantly from 2019 to 2020.

The Federal Reserve Board decreased the target federal funds rate by 50 basis points in the third quarter of ~~2016 to 4.32% for~~2019 and by 25 basis points in the ~~third~~fourth quarter of ~~2017. The December 2016, March 2017~~2019 as the economy showed signs of slowing. In response to the news and ~~June 2017 increases in~~government action related to COVID-19, the Federal Reserve Board decreased the target federal funds rate ~~had~~by 150 basis points in March 2020. As the Company is in an asset-sensitive position, reductions in market interest rates have a ~~net positive~~negative impact on ~~our net interest~~ margin ~~position~~ as ~~more loans repriced at~~ the ~~higher rate than our funding sources.~~

~~Average~~Company’s interest earning assets ~~increased~~reprice faster than its interest-bearing liabilities. Much of our asset-sensitivity is due to ~~$1.61 billion for the first nine months of 2017, compared~~commercial and consumer loans that have variable interest rates. For both loan types we established floor rates several years ago. These floors provide protection to ~~$1.54 billion for the first nine months of 2016.~~net interest income when short-term interest rates decline. Our ~~average yield on earning assets increased 17 basis points for the first nine months of 2017 in comparison~~variable rate commercial and consumer loans tied to the ~~same period in 2016. Our net~~prime rate or one-month LIBOR amounted to $631.8 million at March 31, 2020. Of this total, approximately 78%, or $493 million have interest ~~margin was 3.24% for the first nine months~~rate floors.

-35-

Index

The cost of ~~2017 compared~~funds decreased to 3.04% for the same period in 2016. Net interest margin for the first nine months of 2017 benefitted from the December 2016, March 2017 and June 2017 increases in the federal funds rate. The commercial loan yield in the first nine months of 2017 was also positively impacted by the complete payoff of a loan0.66% in the first quarter of ~~2017 that had been on nonaccrual, resulting~~2020 compared to 1.00% in the ~~realization~~first quarter of ~~$267,000 in interest income that had been deferred.~~

~~The cost of funds increased to 0.53% and 0.50% in the three and nine month periods of 2017 from 0.45% and 0.47% in the same periods of 2016. Increases~~2019. Decreases in the rates paid on our interest-bearing checking, savings and money market accounts in response to the ~~December 2016, March 2017 and June 2017~~ federal funds rate ~~increases~~decreases over the past year caused the ~~slight increase~~decrease in our cost of funds. Also, our redemption of $20.0 million of trust preferred securities on December 31, 2019 reduced our cost of funds as we incurred no interest expense on those redeemed trust preferred securities in the first quarter of 2020.

~~-41-~~

~~Index~~

The following table shows an analysis of net interest margin for the three month periods ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (dollars in thousands):

	For the three months ended September 30,																For the three months ended March 31,
	2017								2016								2020								2019
	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			Average Balance			Interest Earned or Paid		Average Yield or Cost
Assets
Taxable securities	$	162,729		$	741		1.83	%	$	136,807		$	584		1.71	%	$	191,531		$	1,061		2.22	%	$	183,487		$	996		2.17	%
Tax-exempt securities (1)		104,387			574		3.51			87,918			451		3.31			127,972			882		3.54			116,094			839		3.72
Commercial loans (2)		946,105			9,930		4.11			903,484			8,965		3.88			1,103,320			12,036		4.32			1,077,500			13,169		4.89
Residential mortgage loans		219,532			1,905		3.47			219,170			1,928		3.51			205,782			1,908		3.71			238,558			2,197		3.69
Consumer loans		88,933			969		4.32			95,551			945		3.93			76,195			907		4.79			83,348			1,084		5.27
Federal Home Loan Bank stock		11,558			122		4.15			11,558			122		4.13			11,558			124		4.24			11,558			160		5.55
Federal funds sold and other short-term investments		118,784			385		1.27			101,062			127		0.49			180,878			576		1.26			123,379			744		2.41
Total interest earning assets (1)		1,652,028			14,626		3.57			1,555,550			13,122		3.39			1,897,236			17,494		3.71			1,833,924			19,189		4.24

Noninterest earning assets:
Cash and due from banks		29,940								28,482								29,142								28,833
Other		93,334								96,065								91,445								85,544
Total assets	$	1,775,302							$	1,680,097							$	2,017,823							$	1,948,301

Liabilities
Deposits:
Interest bearing demand	$	352,661		$	98		0.11	%	$	313,624		$	65		0.08	%	$	434,910		$	190		0.18	%	$	422,109		$	406		0.39	%
Savings and money market accounts		551,917			454		0.33			522,697			239		0.19			651,035			714		0.44			622,829			1,225		0.80
Time deposits		88,933			180		0.81			81,769			126		0.62			153,561			699		1.83			137,717			625		1.84
Borrowings:
Other borrowed funds		74,190			314		1.66			94,384			419		1.74			63,736			349		2.17			59,779			327		2.19
Long-term debt		41,238			442		4.20			41,238			371		3.52			20,619			239		4.59			41,238			586		5.68
Total interest bearing liabilities		1,108,939			1,488		0.53			1,053,712			1,220		0.45			1,323,861			2,191		0.66			1,283,672			3,169		1.00

Noninterest bearing liabilities:
Noninterest bearing demand accounts		488,028								459,372								462,489								463,613
Other noninterest bearing liabilities		6,348								6,817								10,935								7,553
Shareholders' equity		171,987								160,196								220,538								193,463
Total liabilities and shareholders' equity	$	1,775,302							$	1,680,097							$	2,017,823							$	1,948,301

Net interest income				$	13,138							$	11,902							$	15,303							$	16,020
Net interest spread (1)							3.04	%							2.94	%							3.05	%							3.24	%
Net interest margin (1)							3.21	%							3.04	%							3.25	%							3.54	%
Ratio of average interest earning assets to average interest bearing liabilities		148.97	%							147.63	%							143.31	%							142.87	%

(1)	Yields are presented on a tax equivalent basis using a ~~35% tax rate.~~21% at March 31, 2020 and 2019.

(2)

Includes loan fees of ~~$117,000~~$178,000 and ~~$200,000~~$350,000 for the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019, respectively. Includes average nonaccrual loans of approximately ~~$558,000~~$2,546,000 and ~~$270,000~~$757,000 for the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019, respectively.

~~-42-~~-36-

Index

The following table ~~shows an analysis~~presents the dollar amount of changes in net interest ~~margin for the nine month periods ended September 30, 2017~~income due to changes in volume and ~~2016 (dollars in thousands):~~rate:

For the nine months ended September 30,
2017 2016

Average
Balance

Interest
Earned
or Paid

Average
Yield
or Cost

Average
Balance

Interest
Earned
or Paid

Average
Yield
or Cost

Assets

Taxable securities $ 152,043 $ 2,025 1.78 % $ 132,941 $ 1,700 1.70 %
Tax-exempt securities (1) 106,481 1,658 3.29 85,682 1,324 3.29
Commercial loans (2) 952,987 29,317 4.06 898,039 26,625 3.90
Residential mortgage loans 217,223 5,649 3.47 217,185 5,730 3.51
Consumer loans 91,141 2,834 4.16 96,975 2,873 3.96
Federal Home Loan Bank stock 11,558 367 4.19 11,558 368 4.18
Federal funds sold and other short-term investments 77,710 666 1.13 99,753 383 0.51
Total interest earning assets (1) 1,609,143 42,516 3.58 1,542,133 39,003 3.41

Noninterest earning assets:
Cash and due from banks 28,911 26,690
Other 97,371 97,232
Total assets $ 1,735,425 $ 1,666,055

Liabilities

Deposits:
Interest bearing demand $ 333,148 $ 237 0.09 % $ 324,554 $ 227 0.09 %
Savings and money market accounts 552,903 1,094 0.27 515,041 708 0.19
Time deposits 82,035 440 0.71 85,862 398 0.62
Borrowings:
Other borrowed funds 86,945 1,053 1.60 97,637 1,318 1.77
Long-term debt 41,238 1,266 4.05 41,238 1,104 3.52
Total interest bearing liabilities 1,096,269 4,090 0.50 1,064,332 3,755 0.47

Noninterest bearing liabilities:
Noninterest bearing demand accounts 465,191 437,943
Other noninterest bearing liabilities 5,756 6,734
Shareholders' equity 168,209 157,046
Total liabilities and shareholders' equity $ 1,735,425 $ 1,666,055

Net interest income $ 38,426 $ 35,248
Net interest spread (1) 3.08 % 2.94 %
Net interest margin 3.24 % 3.04 %
Ratio of average interest earning assets to average interest bearing liabilities 146.78 % 144.89 %

	For the three months ended March 31, 2020 vs 2019 Increase (Decrease) Due to
	Volume			Rate			Total
(Dollars in thousands)
Interest income
Taxable securities	$	44		$	21		$	65
Tax-exempt securities		304			(261	)		43
Commercial loans		1,857			(2,990	)		(1,133	)
Residential mortgage loans		(389	)		100			(289	)
Consumer loans		(89	)		(88	)		(177	)
Federal Home Loan Bank stock		—			(36	)		(36	)
Federal funds sold and other short-term investments		1,312			(1,480	)		(168	)
Total interest income		3,039			(4,734	)		(1,695	)
Interest expense
Interest bearing demand	$	82		$	(298	)	$	(216	)
Savings and money market accounts		355			(866	)		(511	)
Time deposits		72			2			74
Other borrowed funds		22			—			22
Long-term debt		(254	)		(93	)		(347	)
Total interest expense		277			(1,255	)		(978	)
Net interest income	$	2,762		$	(3,479	)	$	(717	)

~~(1)~~

~~Yields are presented on a tax equivalent basis using a 35% tax rate.~~

~~(2)~~

Includes loan fees of $484,000 and $559,000 for the nine months ended September 30, 2017 and 2016. Includes average nonaccrual loans of approximately $511,000 and $407,000 for the nine months ended September 30, 2017 and 2016.

~~-43-~~

~~Index~~

Provision for Loan Losses: The provision for loan losses for the three months ended ~~September 30, 2017~~March 31, 2020 was ~~a negative $350,000~~$700,000 compared to a negative $250,000 for the same period in ~~2016. The negative~~2019. Positively impacting the provisions for loan losses for each period were the ~~result of~~ continued stabilization of real estate values on problem credits ~~continued improvement in~~and asset quality metrics, and net loan recoveries of ~~$214,000~~$989,000 in the three months ended ~~September 30, 2017~~March 31, 2020 and ~~$138,000~~$266,000 in the same period in ~~2016. At September 30, 2017, we had experienced net loan recoveries in each of~~2019. Negatively impacting the ~~past eleven quarters. The~~ provision for loan losses for the first ~~nine~~quarter of 2020 was the estimated impact of COVID-19, which impact will be far-reaching and take time to be fully realized. We have been actively working with our borrowers at risk who are impacted by the stay-at-home orders issued by the Governor of the State of Michigan on March 23, 2020 and April 9, 2020, respectively. These actions include short-term extensions and acceptance of interest-only payments on a short-term basis. Many of our customers have been applying for and receiving PPP loans as well. We believe these measures will partially mitigate the impact of these stay-at-home orders, but it is likely that we will experience increased delinquencies and loan losses as a result of the economic fallout from COVID-19.

Gross loan recoveries were $1,028,000 for the three months ~~of 2017 was a negative $1.35 million compared to a negative $1.1 million~~ended March 31, 2020 and $423,000 for the same period in ~~2016.~~

~~Gross loan recoveries were $269,000 for the three months ended September 30, 2017 and $184,000 for the same period in 2016.~~2019. In the three months ended ~~September 30, 2017,~~March 31, 2020, we had ~~$55,000~~$39,000 in charge-offs, compared to ~~$46,000~~$157,000 in the same period in 2016. For the nine months ended September 30, 2017, we experienced gross loan recoveries of $1,043,000 compared to $1,024,000 for the same period in 2016. Loan charge-offs were $221,000 for the nine months ended September 30, 2017 compared to $158,000 for the same period in 2016.2019. We continue to experience positive results from our collection efforts as evidenced by our net loan recoveries. While we expect our collection efforts to produce further recoveries, they may not continue at the same level we have experienced the past several quarters.

The amounts of loan loss provision in both the most recent quarter and comparable prior year period were the result of establishing our allowance for loan losses at levels believed necessary based upon our methodology for determining the adequacy of the allowance. The sustained ~~lower~~ level of quarterly net ~~charge-offs~~recoveries over the past several quarters had a significant effect on the historical loss component of our methodology. More information about our allowance for loan losses and our methodology for establishing its level may be found under the heading "Allowance for Loan Losses" below.

Noninterest Income: Noninterest income for the three ~~and nine~~ month periods ended ~~September 30, 2017~~March 31, 2020 was ~~$4.3 million and $13.0~~$5.0 million compared to ~~$5.1 million and $14.2~~$4.3 million for the same ~~periods~~period in ~~2016.~~2019. The components of noninterest income are shown in the table below (in thousands):

	Three Months Ended September 30, 2017		Three Months Ended September 30, 2016		Nine Months Ended September 30, 2017		Nine Months Ended September 30, 2016		Three Months Ended March 31, 2020		Three Months Ended March 31, 2019
Service charges and fees on deposit accounts	$	1,172	$	1,152	$	3,342	$	3,312	$	1,110	$	1,050
Net gains on mortgage loans		369		1,175		1,273		2,235		650		211
Trust fees		801		790		2,412		2,286		935		890
Gain as sales of securities		---		---		3		99		—		—
ATM and debit card fees		1,324		1,272		3,863		3,715		1,337		1,326
Bank owned life insurance (“BOLI”) income		249		146		730		748		242		236
Investment services fees		239		181		705		755		424		295
Other income		146		359		681		1,069		261		320
Total noninterest income	$	4,300	$	5,075	$	13,009	$	14,219	$	4,959	$	4,328

-37-

Index

Net gains on mortgage loans were ~~down $806,000~~up $439,000 in the three months ended ~~September 30, 2017~~March 31, 2020 compared to same period in ~~2016~~2019 as a result of an ~~overall lower level~~increase in the volume of ~~volume.~~loans originated for sale and a decrease in market interest rates. Mortgage loans originated for sale in the three months ended ~~September 30, 2017~~March 31, 2020 were ~~$11.4~~$29.4 million, compared to ~~$38.2~~$6.9 million in the same period in ~~2016.~~2019. Mortgage loans originated for portfolio in the three months ended ~~September 30, 2017~~March 31, 2020 were ~~$16.2~~$4.6 million, compared to ~~$25.4~~$6.2 million in the same period in ~~2016. Mortgage loans originated for sale for the first nine months of 2017~~2019. Investment services fees were ~~$45.0 million, down from $76.1 million~~up in the first ~~nine~~three months of ~~2016.~~2020 due to success in growing the number of investment services customer relationships we have and favorable investment market value changes. ATM and debit card fees were up in the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 due to higher volume of usage by our customers. BOLI income in the first nine months of 2016 included $290,000 in net benefits from the distribution of a death claim on a covered former employee. Trust fees were up in the first nine months of 2017 due to investment market value changes and growth in trust assets. Other noninterest income for the three month period ended September 30, 2017 was reduced by a net loss of $176,000 on the sale of property in southwest Grand Rapids (Metro Village) during the quarter. This also impacted the nine month period ended September 30, 2017, along with a net loss of $70,000 on sale of property in northwest Grand Rapids (Walker) in the second quarter of 2017.

~~-44-~~

~~Index~~

Noninterest Expense: Noninterest expense ~~decreased~~increased to ~~$10.8~~$11.7 million for the three month period ended ~~September 30, 2017,~~March 31, 2020, from ~~$11.3~~$11.2 million for the same period in ~~2016. Noninterest expense decreased to $32.4 million for the nine month period ended September 30, 2017 compared to $34.3 million for the same period in 2016.~~2019. The components of noninterest expense are shown in the table below (in thousands):

	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016		Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016		Three Months Ended March 31, 2020		Three Months Ended March 31, 2019
Salaries and benefits	$	6,211		$	6,166	$	18,363		$	18,521	$	6,691	$	6,244
Occupancy of premises		922			901		2,939			2,784		1,009		1,093
Furniture and equipment		797			772		2,278			2,476		855		844
Legal and professional		199			153		621			500		291		230
Marketing and promotion		226			275		678			825		238		228
Data processing		655			741		2,068			2,089		760		730
FDIC assessment		134			166		404			638		—		120
Interchange and other card expense		333			334		970			927		347		345
Bond and D&O insurance		119			132		353			395		105		104
Net (gains) losses on repossessed and foreclosed properties		(190	)		115		(575	)		409		31		(35	)
Administration and disposition of problem assets		113			210		435			787		30		88
Outside services		423			412		1,280			1,171		453		452
Other noninterest expense		814			896		2,620			2,772		912		795
Total noninterest expense	$	10,756		$	11,273	$	32,434		$	34,294	$	11,722	$	11,238

Most categories of noninterest expense were relatively ~~flat or had reductions~~unchanged compared to the three months ended ~~September 30, 2016~~March 31, 2019 due to our ongoing efforts to manage expenses and scale our operations. Our largest component of noninterest expense, salaries and benefits, increased by ~~$45,000~~$447,000 in the three months ended ~~September 30, 2017~~March 31, 2020 from same period in ~~2016.~~2019. This increase ~~is largely~~was partially due to a higher level of ~~costs associated with employee benefits, particularly medical insurance,~~variable based compensation which was up ~~$25,000~~$109,000 for the three months ended March 31, 2020 compared to the three months ended ~~September 30, 2016. Variable based compensation~~March 31, 2019 due in part to higher mortgage production. The remainder of the increase was primarily due to annual merit increases, which typically happen early in the second quarter.

Occupancy expenses were down ~~$83,000 compared to~~$84,000 in the three months ended ~~September 30, 2016 and was down $210,000 for the first nine months of 2017~~March 31, 2020 compared to the same period in ~~2016~~2019 due to lower ~~mortgage production and brokerage volume. We had 343 full-time equivalent employees at September 30, 2017 compared to 343 at September 30, 2016.~~

~~Occupancy expenses~~maintenance costs associated with our branch facilities. These maintenance costs were ~~up $21,000 in the third quarter of 2017 and were up $155,000 for the first nine months of 2017 compared to the same periods in 2016~~down $79,000 primarily due to ~~higher property taxes and maintenance~~lower costs incurred ~~associated with certain branch facilities.~~for snow removal.

Our FDIC assessment costs decreased by ~~$32,000~~$120,000 in the ~~third~~first quarter of ~~2017~~2020 compared to the same period in ~~2016 and by $234,000 for the first nine months of 2017~~2019 due primarily to ~~positive changes~~no assessment being due in ~~our~~the first quarter of 2020. In January 2019, the FDIC notified us that the Bank would receive an assessment ~~rates. These~~credit of approximately $438,000 to offset future assessment as the FDIC Deposit Insurance Fund had exceeded its target ratio of 1.35%. Assessment credits totaling $266,000 were applied in the third and fourth quarters of 2019 and $136,000 was applied in the first quarter of 2020, leaving approximately $36,000 in credits to be applied to future assessments. Future expense may be reduced by these remaining assessment credits depending on the level of the Deposit Insurance Fund.

While costs ~~have been trending down for the past few years and we believe the rate has stabilized and future expense fluctuations will likely be dependent on changes in our asset size.~~

~~Costs~~ associated with administration and disposition of problem assets have increased slightly in the first quarter of 2020 versus the same quarter of the prior year, they have decreased significantly over the past several ~~years.~~years and remain at negligible levels. These expenses include legal costs and repossessed and foreclosed property administration ~~expense and losses on repossessed and foreclosed properties.~~expense. Repossessed and foreclosed property administration expense includes survey and appraisal, property maintenance and management and other disposition and carrying costs. ~~Losses~~Net (gains) losses on repossessed and foreclosed properties include both net gains and losses on the sale of properties and unrealized losses from value declines for outstanding properties. ~~We experienced decreases~~The net of these two line items increased slightly from the first quarter of 2019 to the first quarter of 2020, primarily due to writedowns in ~~almost every category~~valuation of properties in the ~~third quarter of 2017 and the~~ first ~~nine~~three months of ~~2017 compared to the same periods in the prior year.~~2020.

-38-

Index

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

	Three Months Ended September 30, 2017			Three Months Ended September 30, 2016		Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016		Three Months Ended March 31, 2020		Three Months Ended March 31, 2019
Legal and professional – nonperforming assets	$	39		$	28	$	74		$	127	$	15	$	43
Repossessed and foreclosed property administration		74			182		361			660		15		45
Net (gains) losses on repossessed and foreclosed properties		(190	)		115		(575	)		409		31		(35	)
Total	$	(77	)	$	325	$	(140	)	$	1,196	$	61	$	53

~~-45-~~

~~Index~~

As the level of problem loans and assets ~~have~~has declined over the past several years, the costs associated with these nonperforming assets have decreased ~~significantly over the past several years.~~significantly. Other real estate owned decreased from ~~$13.1~~$3.3 million at ~~September 30, 2016~~March 31, 2019 to ~~$6.7~~$2.6 million at September 30, 2017. During the second quarter of 2017, we sold our largest individual other real estate owned property (carry value of $3.4 million) for a net gain of $68,000. This property was responsible for a significant portion of our nonperforming asset expense, including maintenance, property taxes and utility costs.March 31, 2020.

Net ~~gains/~~(gains) losses on repossessed assets and foreclosed properties for the three month period ended ~~September 30, 2017 decreased $305,000 from~~March 31, 2020 increased by $66,000 compared to the same period in 2016. For the first nine months of 2017, these expenses decreased $984,000 from the same period in 2016. These decreases were primarily due to net gains on sales of other real estate properties in these periods.2019. In the three month period ended ~~September 30, 2017, net gains~~March 31, 2020, valuation writedowns totaled ~~$190,000,~~$31,000 compared to ~~$105,000~~valuation writedowns of $10,000 for the same period in ~~2016.~~2019. In the ~~first nine months of 2017, we recognized~~three month period ended March 31, 2020, net realized gains ~~totaling $660,000 on such sales,~~totaled $0, compared to ~~$365,000~~net realized losses of $45,000 for the same period in ~~2016.~~2019.

Other noninterest expense increased by $117,000 in the first three months of 2020 compared to the same period in 2019. The first three months of 2020 included an expense of $156,000 related to a correction to one of our trust accounts.

Federal Income Tax Expense:We recorded ~~$2.2 million and $6.3~~$1.4 million in federal income tax expense for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2017~~March 31, 2020 compared to ~~$1.4~~$1.7 million ~~and $4.4 million, respectively,~~ in the same ~~periods~~period in ~~2016.~~2019. Our effective tax rate for the three ~~and nine month periods~~period ended ~~September 30, 2017~~March 31, 2020 was ~~30.67% and 30.73%,~~18.23% compared to ~~22.67% and 27.22%, respectively,~~18.31% for the same ~~periods~~period in 2016. Federal income tax expense and related effective tax rates were lower in the 2016 periods due to tax credits and other adjustments recognized in our 2015 federal tax return which was filed in the third quarter of 2016.2019.

FINANCIAL CONDITION

Total assets were ~~$1.80~~$2.03 billion at ~~September 30, 2017, an increase~~March 31, 2020, a decrease of ~~$62.0~~$37.7 million from ~~$1.74~~$2.07 billion at December 31, ~~2016.~~2019. This change reflected ~~increases~~decreases of ~~$70.1~~$65.3 million in cash and cash equivalents, and ~~$29.7~~$1.3 million in loans held for sale, offset by increases of $18.1 million in securities available for sale, ~~offset by decreases of $20.8~~$9.7 million in our loan portfolio ~~$7.5 million in securities held to maturity~~ and ~~$6.0~~$2.8 million in other ~~real estate owned.~~assets. Total deposits ~~increased by $57.5 million and other borrowed funds~~ decreased by ~~$12.1~~$47.9 million at ~~September 30, 2017~~March 31, 2020 compared to December 31, ~~2016.~~2019.

Cash and Cash Equivalents:Our cash and cash equivalents, which include federal funds sold and short-term investments, were ~~$159.9~~$207.2 million at ~~September 30, 2017~~March 31, 2020 compared to ~~$89.8~~$272.5 million at December 31, ~~2016.~~2019. The ~~increase~~decrease in these balances related primarily to the decrease in ~~our~~ total ~~loans and increase in total deposits in the same period.~~deposits.

Securities:~~Securities~~ Debt securities available for sale were ~~$214.2~~$243.4 million at ~~September 30, 2017~~March 31, 2020 compared to ~~$184.4~~$225.2 million at December 31, ~~2016.~~2019. The balance at ~~September 30, 2017~~March 31, 2020 primarily consisted of U.S. agency securities, agency mortgage backed securities and various municipal investments. Our held to maturity portfolio ~~decreased from $69.4~~was $82.7 million at December 31, ~~2016 to $61.9~~2019 and $82.5 million at ~~September 30, 2017.~~March 31, 2020. Our held to maturity portfolio is comprised of state, municipal and ~~municipal~~privately placed commercial bonds.

Portfolio Loans and Asset Quality: Total portfolio loans ~~decreased~~increased by ~~$20.8~~$9.7 million in the first ~~nine~~three months of ~~2017~~2020 and were ~~$1.26~~$1.40 billion at ~~September 30, 2017~~March 31, 2020 compared to ~~$1.28~~$1.39 billion at December 31, ~~2016.~~2019. During the first ~~nine~~three months of ~~2017,~~2020, our commercial portfolio ~~decreased~~increased by ~~$18.1~~$22.2 million, while our consumer portfolio ~~decreased by $6.9 million~~was unchanged and our residential mortgage portfolio ~~increased~~decreased by ~~$4.2~~$12.5 million.

The volume of residential mortgage loans originated for sale in the first nine months of 2017 decreased $31.1 million compared to the same period in 2016 due to a higher interest rate environment. Residential mortgage loans originated for sale were $45.0 million in the first nine months of 2017 compared to $76.1 million in the first nine months of 2016. Mortgage loans originated for portfolio in the first nine months of 2017 were $37.4 million, compared to $62.6 million in the first nine months of 2016. Mortgage loans originated for portfolio are typically loans that conform to secondary market requirements and have a term of fifteen years or less. Mortgage loans originated for portfolio in the first three months of 2020 decreased $1.6 million compared to the same period in 2019, from $6.2 million in the first three months of 2019 to $4.6 million in the same period in 2020.

Due primarily to re-financings associated with a lower rate environment, the volume of residential mortgage loans originated for sale in the first three months of 2020 increased $22.5 million compared to the same period in 2019. Residential mortgage loans originated for sale were $29.4 million in the first three months of 2020 compared to $6.9 million in the first three months of 2019.

~~-46-~~-39-

Index

The following table shows our loan origination activity for loans to be held in portfolio ~~loans~~ during the first ~~nine~~three months of ~~2017~~2020 and ~~2016,~~2019, broken out by loan type and also shows average originated loan size (dollars in thousands):

	Nine months ended September 30, 2017							Nine months ended September 30, 2016							Three months ended March 31, 2020							Three months ended March 31, 2019
	Portfolio Originations		Percent of Total Originations			Average Loan Size		Portfolio Originations		Percent of Total Originations			Average Loan Size		Portfolio Originations		Percent of Total Originations			Average Loan Size		Portfolio Originations		Percent of Total Originations			Average Loan Size
Commercial real estate:
Residential developed	$	7,227		3.1	%	$	903	$	5,227		2.1	%	$	871	$	126		0.0	%	$	42	$	849		1.1	%	$	283
Unsecured to residential developers		---		---			---		---		---			---		—		—			—		—		—			—
Vacant and unimproved		2,149		0.9			269		552		---			184		2,978		3.0			1,489		1,952		2.5			651
Commercial development		125		---			125		2,342		1.0			1,171		—		—			—		—		—			—
Residential improved		38,828		16.5			254		48,718		19.4			350		16,942		16.6			385		9,913		12.7			310
Commercial improved		41,436		17.6			1,480		29,632		11.8			988		8,476		8.3			848		17,986		23.0			1,285
Manufacturing and industrial		12,039		5.1			926		11,457		4.6			955		4,544		4.5			303		7,949		10.1			1,590
Total commercial real estate		101,804		43.2			482		97,928		38.9			510		33,066		32.4			517		38,649		49.4			678
Commercial and industrial		60,269		25.6			685		58,432		23.2			526		54,144		53.1			918		24,446		31.3			461
Total commercial		162,073		68.8			542		156,360		62.1			516		87,210		85.5			709		63,095		80.7			574

Consumer
Residential mortgage		37,439		15.9			234		62,616		24.9			204		4,577		4.5			254		6,235		8.0			231
Unsecured		---		---			---		20		---			10		—		—			—		—		—			—
Home equity		34,070		14.5			85		31,006		12.3			84		9,890		9.7			103		8,399		10.7			122
Other secured		1,850		0.8			16		1,808		0.7			17		299		0.3			15		501		0.6			23
Total consumer		73,359		31.2			108		95,450		37.9			121		14,766		14.5			110		15,135		19.3			128
Total loans	$	235,432		100.0	%		240	$	251,810		100.0	%		231	$	101,976		100.0	%		397	$	78,230		100.0	%		343

The following table shows a breakout of our commercial loan activity during the first ~~nine~~three months of ~~2017~~2020 and ~~2016~~2019 (dollars in thousands):

		Nine Months Ended September 30, 2017			Nine Months Ended September 30, 2016		Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Commercial loans originated	$	162,073		$	156,360		$	87,210		$	63,095
Repayments of commercial loans		(125,828	)		(115,858	)		(100,351	)		(59,123	)
Change in undistributed - available credit		(54,368	)		(3,302	)		(9,070	)		(19,337	)
Net increase/(decrease) in total commercial loans	$	(18,123	)	$	37,200
Net decrease in total commercial loans							$	(22,211	)	$	(15,365	)

Overall, the commercial loan portfolio ~~decreased $18.1~~increased $22.2 million in the first ~~nine~~three months of ~~2017.~~2020 compared to the same period in 2019. Our commercial and industrial portfolio ~~decreased~~increased by ~~$30.5~~$28.0 million ~~and~~while our commercial real estate loans ~~increased~~decreased by ~~$12.4 million. However, our~~$5.8 million in the first three months of 2020 compared to the same period in 2019. Our production of commercial loans increased by ~~$5.7~~$24.1 million from ~~$156.4~~$63.1 million in the first ~~nine~~three months of ~~2016 compared~~2019 to ~~$162.1~~$87.2 million in the same period of 2017. The decrease in ending portfolio balance from December 31, 2016 to September 30, 2017 was due primarily to changes in undistributed balances/available credit. Considering our pipeline of commercial credits at September 30, 2017, we expect to achieve measured, high quality loan portfolio growth throughout the remainder of 2017.2020.

Commercial and commercial real estate loans remained our largest loan segment and accounted for approximately ~~75.3%~~80.3% and ~~75.5%~~79.2% of the total loan portfolio at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019, respectively. Residential mortgage and consumer loans comprised approximately ~~24.7% and 24.5%~~19.7% of total loans at ~~September 30, 2017~~March 31, 2020 and 20.8% at December 31, ~~2016.~~2019.

~~-47-~~-40-

Index

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

	September 30, 2017					December 31, 2016					March 31, 2020					December 31, 2019
	Balance		Percent of Total Loans			Balance		Percent of Total Loans			Balance		Percent of Total Loans			Balance		Percent of Total Loans
Commercial real estate: (1)
Residential developed	$	9,077		0.7	%	$	11,970		0.9	%	$	12,795		0.9	%	$	14,705		1.1	%
Unsecured to residential developers		2,410		0.2			4,734		0.4			5,000		0.4			—		—
Vacant and unimproved		38,677		3.1			40,286		3.1			42,761		3.1			41,796		3.0
Commercial development		486		---			378		---			623		—			665		0.1
Residential improved		83,441		6.6			75,348		5.9			131,954		9.5			130,861		9.4
Commercial improved		295,924		23.5			289,478		22.6			284,565		20.4			292,799		21.1
Manufacturing and industrial		100,347		8.0			95,787		7.5			114,953		8.2			117,632		8.5
Total commercial real estate		530,362		42.1			517,981		40.4			592,651		42.5			598,458		43.2
Commercial and industrial		418,838		33.2			449,342		35.1			527,590		37.8			499,572		36.0
Total commercial		949,200		75.3			967,323		75.5			1,120,241		80.3			1,098,030		79.2

Consumer
Residential mortgage		221,829		17.6			217,614		17.0			198,585		14.2			211,049		15.3
Unsecured		254		---			396		---			247		—			274		—
Home equity		82,296		6.6			88,113		6.9			71,462		5.1			70,936		5.1
Other secured		6,458		0.5			7,366		0.6			4,806		0.4			5,338		0.4
Total consumer		310,837		24.7			313,489		24.5			275,100		19.7			287,597		20.8
Total loans	$	1,260,037		100.0	%	$	1,280,812		100.0	%	$	1,395,341		100.0	%	$	1,385,627		100.0	%

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

Commercial real estate loans accounted for ~~42.1%~~42.5% and ~~40.4%~~43.2% of the total loan portfolio at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019, respectively, 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 consumer residential mortgage loan portfolio, which also includes residential construction loans made to individual homeowners, comprised ~~17.6%~~14.2% of portfolio loans at ~~September 30, 2017~~March 31, 2020 and ~~17.0%~~15.3% at December 31, ~~2016.~~2019. We expect to continue to retain in our loan portfolio certain types of residential mortgage loans (primarily high quality, low loan-to-value loans) in an effort to continue to diversify our credit risk and deploy our excess liquidity. ~~A large portion of our residential mortgage loan production continues to be sold on the secondary market with servicing released.~~

The volume of residential mortgage loans originated for sale during the first ~~nine~~three months of ~~2017 decreased~~2020 increased from the first ~~nine~~three months of ~~2016~~2019 as a result of interest rate conditions. ~~We are also experiencing a shift~~The decrease in ~~production to financing new home purchases versus refinancings.~~market interest rates so far in 2020 has caused an increase in refinancing of long-term fixed rate mortgages which we sell into the secondary market.

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 $6.9 million to $89.0~~were $76.5 million at ~~September 30, 2017 from $95.9~~March 31, 2020 and $76.5 million at December 31, ~~2016, due primarily to a decrease in home equity loans.~~2019. Consumer loans comprised ~~7.1%~~5.5% of our portfolio loans at ~~September 30, 2017~~March 31, 2020 and ~~7.5%~~5.5% at December 31, ~~2016.~~2019.

~~-48-~~

~~Index~~

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 quarterly 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 ~~September 30, 2017,~~March 31, 2020, nonperforming assets totaled ~~$7.2~~$9.9 million compared to ~~$12.6~~$3.0 million at December 31, ~~2016. Additions~~2019. There were no additions to other real estate owned in the first ~~nine~~three months of ~~2017 were $60,000, compared to $102,000~~2020 or in the first ~~nine~~three months of ~~2016.~~2019. At ~~September 30, 2017,~~March 31, 2020, there was just one loan in redemption following foreclosure, so we expect there to be few additions to other real estate owned in ~~2017.~~2020. Proceeds from sales of foreclosed properties were ~~$6.2 million~~$91,000 in the first ~~nine~~three months of ~~2017,~~2020, resulting in net realized ~~gains~~gain on sales of ~~$660,000. We sold our largest individual foreclosed property in the second quarter of 2017.~~$0. Proceeds from sales of foreclosed properties were ~~$4.2 million~~$154,000 in the first ~~nine~~three months of ~~2016~~2019 resulting in net realized ~~gains~~gain on sales of $365,000. Based upon purchase agreements in place at September 30, 2017 and the sale of our largest individual property in the second quarter of 2017, we expect the level of sales of foreclosed properties to be lower in the final quarter of 2017 than experienced in the first nine months of 2017.$45,000.

Nonperforming loans include loans on nonaccrual status and loans delinquent more than 90 days but still accruing. As of ~~September 30, 2017,~~March 31, 2020, nonperforming loans ~~were negligible and totaled $521,000,~~$7.2 million, or ~~0.04%~~0.52% of total portfolio loans, compared to ~~$300,000,~~$203,000, or ~~0.02%~~0.01% of total portfolio loans, at December 31, ~~2016.~~2019. The increase of $7.0 million in the first three months of 2020 was due to a downgrade of one commercial loan relationship to nonaccrual status.

-41-

Index

Nonperforming loans at ~~September 30, 2017~~March 31, 2020 consisted of ~~$440,000~~$1.2 million of commercial and industrial loans, $5.9 million of commercial real estate loans ~~$4,000 of commercial~~ and ~~industrial loans, and $77,000~~$111,000 of consumer and residential mortgage loans.

Foreclosed and repossessed assets include assets acquired in settlement of loans. Foreclosed assets totaled ~~$6.7~~$2.6 million at ~~September 30, 2017~~March 31, 2020 and ~~$12.3~~$2.7 million at December 31, ~~2016. Of this~~2019. The entire balance at ~~September 30, 2017, there were 21~~March 31, 2020 was comprised of six commercial real estate ~~properties totaling approximately $6.6 million. The remaining balance was comprised of 4 residential properties totaling approximately $109,000.~~properties. 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 ~~September 30, 2017,~~March 31, 2020, our foreclosed asset portfolio had a weighted average age held in portfolio of ~~5.84~~8.09 years. Below is a breakout of our foreclosed asset portfolio at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~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):

	September 30, 2017								December 31, 2016								March 31, 2020								December 31, 2019
Foreclosed Asset Property Type	Carrying Value		Foreclosed Asset Writedown			Combined Writedown (Loan and Foreclosed Asset)			Carrying Value at Carrying Value		Foreclosed Asset Writedown			Combined Writedown (Loan and Foreclosed Asset)			Carrying Value		Foreclosed Asset Writedown			Combined Writedown (Loan and Foreclosed Asset)			Carrying Value		Foreclosed Asset Writedown			Combined Writedown (Loan and Foreclosed Asset)
Single Family	$	---		---	%		---	%	$	136		---	%		20.3	%		—		—	%		—	%		—		—	%		—	%
Residential Lot		109		46.9			73.1			438		30.1			48.0			—		—			—			—		—			—
Multi-Family		---		---			---			---		---			---			—		—			—			—		—			—
Vacant Land		2,246		46.8			53.6			3,096		47.2			58.3			67		72.0			78.2			79		66.6			74.1
Residential Development		2,218		29.5			71.3			2,570		36.2			74.2			216		50.9			77.5			326		38.7			69.1
Commercial Office		---		---			---			240		49.3			51.1			—		—			—			—		—			—
Commercial Industrial		---		---			---			---		---			---			—		—			—			—		—			—
Commercial Improved		2,088		9.3			28.8			5,773		48.7			51.2			2,343		—			—			2,343		—			—
	$	6,661		32.5			58.1		$	12,253		45.2			60.1		$	2,626		13.1			27.3		$	2,748		11.7			25.8

~~-49-~~

~~Index~~

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

	September 30, 2017			December 31, 2016			March 31, 2020			December 31, 2019
Nonaccrual loans	$	521		$	300		$	7,230		$	203
Loans 90 days or more delinquent and still accruing		---			---			—			—
Total nonperforming loans (NPLs)		521			300			7,230			203
Foreclosed assets		6,661			12,253			2,626			2,748
Repossessed assets		---			---			—			—
Total nonperforming assets (NPAs)	$	7,182		$	12,553		$	9,856		$	2,951

NPLs to total loans		0.04	%		0.02	%		0.52	%		0.01	%
NPAs to total assets		0.40	%		0.72	%		0.49	%		0.14	%

The following table shows the composition and amount of our troubled debt restructurings (TDRs) at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019 (dollars in thousands):

	September 30, 2017						December 31, 2016						March 31, 2020						December 31, 2019
	Commercial		Consumer		Total		Commercial		Consumer		Total		Commercial		Consumer		Total		Commercial		Consumer		Total
Performing TDRs	$	12,974	$	8,609	$	21,583	$	17,786	$	12,051	$	29,837	$	8,400	$	4,812	$	13,212	$	8,469	$	5,140	$	13,609
Nonperforming TDRs (1)		322		55		377		141		8		149		97		8		105		98		—		98
Total TDRs	$	13,296	$	8,664	$	21,960	$	17,927	$	12,059	$	29,986	$	8,497	$	4,820	$	13,317	$	8,567	$	5,140	$	13,707

(1)

Included in nonperforming asset table above

We had a total of ~~$22.0~~$13.3 million and ~~$30.0~~$13.7 million of loans whose terms have been modified in TDRs as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, 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, 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~~whether cash flows will be sufficient to support the restructured debt. An analysis is also performed to determine whether the restructured loan should be on accrual status. Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring. In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms. After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status. In situations where there is a subsequent modification or renewal and the loan is brought to market terms, including a contractual 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. Total TDRs decreased by ~~$8.0 million~~$390,000 from December 31, ~~2016~~2019 to ~~September 30, 2017. Of this decrease, $2.4 million related~~March 31, 2020 due to ~~a consumer property that~~payoffs and paydowns on existing TDRs. One new TDR was ~~sold~~added during the ~~period and the remainder of the decrease was primarily due~~quarter. There were 87 loans identified as TDRs at March 31, 2020 compared to ~~paydowns on commercial TDRs.~~91 loans at December 31, 2019.

-42-

Index

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 costs 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.

Allowance for loan losses: The allowance for loan losses at ~~September 30, 2017~~March 31, 2020 was ~~$16.4~~$18.9 million, ~~a decrease~~an increase of ~~$528,000~~$1.7 million from ~~$17.0 million at~~ December 31, ~~2016.~~2019. The ~~balance of the~~ allowance for loan losses represented ~~1.30%~~1.35% of total portfolio loans at ~~September 30, 2017~~March 31, 2020 and 1.24% at December 31, ~~2016.~~2019. The allowance for loan losses to nonperforming loan coverage ratio decreased from ~~5654%~~8473% at December 31, ~~2016~~2019 to ~~3154%~~261% at ~~September 30, 2017.~~March 31, 2020.

~~-50-~~

~~Index~~

The table below shows the changes in ~~these~~certain credit metrics over the past five quarters:

(Dollars in millions)	Quarter Ended September 30, 2017			Quarter Ended June 30, 2017			Quarter Ended March 31, 2017			Quarter Ended December 31, 2016			Quarter Ended September 30, 2016			Quarter Ended March 31, 2020			Quarter Ended December 31, 2019			Quarter Ended September 30, 2019			Quarter Ended June 30, 2019			Quarter Ended March 31, 2019
Commercial loans	$	949.2		$	949.8		$	962.1		$	967.3		$	923.2		$	1,120.2		$	1,098.0		$	1,072.5		$	1,030.6		$	1,066.7
Nonperforming loans		0.5			0.7			0.4			0.3			0.2			7.2			0.2			0.2			0.3			0.4
Other real estate owned and repo assets		6.7			7.1			12.1			12.3			13.1			2.6			2.7			3.1			3.1			3.3
Total nonperforming assets		7.2			7.8			12.5			12.6			13.3			9.9			3.0			3.3			3.4			3.7
Net charge-offs (recoveries)		(0.2	)		(0.4	)		(0.2	)		(1.2	)		(0.1	)		(1.0	)		(0.8	)		(0.3	)		(0.2	)		(0.3	)
Total delinquencies		0.8			0.8			0.9			1.4			0.3			0.5			0.4			0.2			0.4			0.7

~~As discussed earlier,~~At March 31, 2020, we have had net loan recoveries in ~~each~~twenty of the ~~last eleven~~past twenty-one quarters. Our total delinquencies have continued to be negligible and were ~~$872,000~~$513,000 at ~~September 30, 2017~~March 31, 2020 and ~~$1.4 million~~$405,000 at December 31, ~~2016.~~2019. Our delinquency percentage at ~~September 30, 2017~~March 31, 2020 was ~~just 0.07%, well below the Bank’s peers.~~only 0.04%.

These factors all impact our necessary level of allowance for loan losses and our provision for loan losses. The allowance for loan losses ~~decreased $528,000~~increased $1.7 million in the first ~~nine~~three months of ~~2017.~~2020. We recorded a ~~negative~~ provision for loan losses of ~~$1.35 million~~$700,000 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 compared to a negative ~~$1.1 million~~$250,000 for the same period of ~~2016.~~2019. Net loan recoveries were ~~$822,000~~$989,000 for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, compared to net recoveries of ~~$866,000~~$266,000 for the same period in ~~2016.~~2019. The ratio of net ~~charge-offs~~recoveries to average loans was ~~-0.09%~~-0.29% on an annualized basis for the first ~~nine~~three months of ~~2017,~~2020, compared to ~~-0.10%~~-0.08% for the first ~~nine~~three months of ~~2016.~~2019.

We are ~~encouraged by~~pleased with the ~~reduced~~low level of gross charge-offs over recent quarters. We do, however, recognize that future charge-offs and resulting provisions for loan losses are expected to be impacted by the timing and extent of changes in the overall economy and the real estate markets. We believe we have seen some stabilization in economic conditions and real estate markets. However, we expect it to take additional time for sustained improvement in the economy and real estate markets in order to further reduce our impaired loans.

Our allowance for loan losses is maintained at a level believed appropriate based upon our assessment of the probable estimated losses inherent in the loan portfolio. Our methodology for measuring the appropriate level of allowance and related provision for loan losses relies on several key elements, which include specific allowances for loans considered impaired, general allowance for 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.

Overall, impaired loans ~~declined~~increased by ~~$7.7~~$6.4 million to ~~$22.0~~$20.3 million at ~~September 30, 2017~~March 31, 2020 compared to ~~$29.7~~$13.9 million at December 31, ~~2016.~~2019. The specific allowance for impaired loans ~~decreased $350,000~~increased $491,000 to ~~$1.3~~$2.1 million at ~~September 30, 2017,~~March 31, 2020, compared to ~~$1.7~~$1.6 million at December 31, ~~2016.~~2019. The specific allowance for impaired loans represented ~~6.1%~~10.4% of total impaired loans at ~~September 30, 2017~~March 31, 2020 and ~~5.7%~~11.7% at December 31, 2016. The overall balance of impaired loans remained elevated partially due to an accounting rule (ASU 2011-02) adopted in 2011 that requires us to identify classified loans that renew at existing contractual rates as TDRs if the contractual rate is less than market rates for similar loans at the time of renewal.2019.

-43-

Index

The general 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~~non-real estate secured. The real estate secured portfolio is further stratified by the type of real estate. Each stratified portfolio is assigned a loss allocation factor. A higher numerical grade assigned to a loan category generally results in a greater allocation percentage. Changes in risk grade of loans affect the amount of the allowance allocation.

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 actual net chargeoff history as the base for our computation. Over the past few years, the 18 month period computations have reflected sizeable decreases in net chargeoff experience. We addressed this volatility in the qualitative factor considerations applied in our allowance for loan losses computation. ~~Adjustments to the qualitative factors also involved consideration of different loss periods for the Bank, including 12, 24, 36, 48 and 60 month periods.~~ We also considered the extended period of ~~improved~~strong asset quality in assessing the overall qualitative component.

At March 31, 2020, we also considered the effect that the global economic shutdown to combat COVID-19 is having on our loan borrowers and our local economy. While significant stimulus and mitigation efforts are expected to soften the impact, we believe a downgrade to our economic qualitative factor was appropriate and we added 7 basis points to this qualitative factor at March 31, 2020.

Certain industry sectors will be more negatively impacted by the economic effects of COVID-19 and governmental action than others. 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 negative effects than other industries. We believe our commercial portfolio is adequately diversified, with our largest commercial concentrations in Real Estate, Rental and Leasing (27%), followed by Retail Trade (15%). The table below breaks down our commercial loan portfolio by industry type at March 31, 2020 (dollars in thousands):

	March 31, 2020
	Balance		Percent of Total Loans
Industry:
Agricultural Products	$	78,445		7.00	%
Mining and Oil Extraction		1,877		0.17	%
Utilities		—		0.00	%
Construction		81,595		7.28	%
Manufacturing		135,166		12.07	%
Wholesale Trade		64,339		5.74	%
Retail Trade		168,420		15.03	%
Transportation and Warehousing		45,716		4.08	%
Information		7,902		0.71	%
Finance and Insurance		39,696		3.54	%
Real Estate and Rental and Leasing		302,598		27.01	%
Professional, Scientific and Technical Services		6,153		0.55	%
Management of Companies and Enterprises		9,386		0.84	%
Administrative and Support Services		24,750		2.21	%
Education Services		4,181		0.37	%
Health Care and Social Assistance		62,075		5.54	%
Arts, Entertainment and Recreation		8,099		0.72	%
Accomodations and Food Services		42,668		3.81	%
Other Services		37,159		3.32	%
Public Administration		16		0.00	%
Private Households		—		0.00	%
Total commercial loans	$	1,120,241		100.00	%

Considering the change in our qualitative factors and our commercial loan portfolio balances, the general allowance allocated to commercial loans was ~~$12.0~~$14.0 million at ~~September 30, 2017~~March 31, 2020 and ~~$12.1~~$12.9 million at December 31, ~~2016. This resulted in a general reserve percentage allocated at September 30, 2017 of 1.29% of commercial loans, an increase from 1.27% at December 31, 2016.~~2019. The qualitative component of our allowance allocated to commercial loans was ~~$12.0~~$13.2 million at ~~September 30, 2017 (down~~March 31, 2020, up $1.0 million from ~~$12.4~~$12.2 million at December 31, ~~2016).~~2019.

~~-51-~~

~~Index~~

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 (four 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 ~~$3.0~~$2.8 million at ~~September 30, 2017~~March 31, 2020 and ~~$3.1~~$2.6 million at December 31, ~~2016.~~2019.

The allowance allocations are not intended to imply limitations on usage of the allowance for loan losses. The entire allowance for loan losses is available for any loan losses without regard to loan type.

-44-

Index

Premises and Equipment: Premises and equipment totaled ~~$46.8~~$43.5 million at ~~September 30, 2017, down $3.2 million~~March 31, 2020, up $44,000 from ~~$50.0~~$43.4 million at December 31, 2016. During the second quarter of 2017 we sold a property in northwest Grand Rapids that had been held for future branch expansion for $590,000, recognizing a net loss on sale of $70,000. During the third quarter of 2017, we sold a property in southwest Grand Rapids (Metro Village) that had been held for future branch expansion for $1.2 million, recognizing a net loss on sale of $176,000.2019.

Deposits and Other Borrowings: Total deposits ~~increased $57.5~~decreased $47.9 million to ~~$1.51~~$1.71 billion at ~~September 30, 2017,~~March 31, 2020, as compared to ~~$1.45~~$1.75 billion at December 31, ~~2016.~~2019. Non-interest checking account balances ~~decreased $4.1~~increased $9.9 million during the ~~nine~~first three months of ~~2017.~~2020. Interest bearing demand account balances ~~increased $11.0~~decreased $48.8 million and savings and money market account balances ~~increased $32.0~~decreased $1.8 million in the first ~~nine~~three months of ~~2017.~~2020 as municipal and business customers deployed their seasonal increase of year-end deposits. Certificates of deposits ~~increased~~decreased by ~~$18.6~~$7.3 million in the first ~~nine~~three months of ~~2017.~~2020 reflecting decreases in market interest rates. We believe our success in maintaining 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 sophisticated product line.

Noninterest bearing demand accounts comprised ~~33%~~28.9% of total deposits at ~~September 30, 2017~~March 31, 2020 and ~~35%~~27.5% of total deposits at December 31, ~~2016.~~2019. These balances typically increase at year end for many of our commercial customers, then decline in the first quarter. 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. Interest bearing demand, including money market and savings accounts, comprised ~~61%~~62.6% of total deposits at ~~September 30, 2017~~March 31, 2020 and ~~60%~~63.8% at December 31, ~~2016.~~2019. Time accounts as a percentage of total deposits were 6%8.5% at ~~September 30, 2017~~March 31, 2020 and 5%8.7% December 31, ~~2016.~~2019.

Borrowed funds totaled ~~$113.4~~$90.6 million at ~~September 30, 2017,~~March 31, 2020, including ~~$72.1~~$70.0 million of Federal Home Loan Bank (“FHLB”) advances and ~~$41.2~~$20.6 million in long-term debt associated with trust preferred securities. Borrowed funds totaled ~~$125.4~~$80.6 million at December 31, ~~2016,~~2019, including ~~$84.2~~$60.0 million of FHLB advances and ~~$41.2~~$20.6 million in long-term debt associated with trust preferred securities. ~~Borrowed~~The $10.0 million increase in borrowed funds ~~decreased by $12.1 million~~ in the first ~~nine~~three months of ~~2017 primarily~~2020 was due to ~~an early payoff~~the addition of a $10.0 million ~~of an~~ FHLB advance in ~~July 2017.~~February 2020.

CAPITAL RESOURCES

Total shareholders' equity of ~~$173.5~~$223.6 million at ~~September 30, 2017~~March 31, 2020 increased ~~$11.2~~$6.1 million from ~~$162.2~~$217.5 million at December 31, ~~2016.~~2019. The increase was primarily a result of net income of ~~$14.1~~$6.4 million earned in the first ~~nine~~three months of ~~2017~~2020 and an increase of ~~$1.2~~$2.3 million in accumulated other comprehensive income, partially offset by ~~the~~a payment of ~~$4.4~~$2.7 million in cash dividends to shareholders. The Bank was categorized as “well capitalized” at ~~September 30, 2017.~~March 31, 2020.

~~In July 2013, the Board of Governors of the Federal Reserve Board and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's capital~~Capital guidelines for U.S. banks ~~(commonly~~are commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank.III guidelines. The rules include a ~~new~~ common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, ~~which when fully phased-in,~~ effectively ~~results~~resulting in a minimum CET1 ratio of 7.0%. The Basel III ~~raises the~~ minimum ratio of Tier 1 capital to risk-weighted assets ~~from 4.0% to~~is 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% ~~when fully phased-in)~~), ~~effectively results in a~~and the minimum total capital to risk-weighted assets ratio ofis 10.5% (with the capital conservation ~~buffer fully phased-in)~~buffer), and Basel III requires a minimum leverage ratio of 4.0%. ~~Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures. We expect that the~~The capital ratios for the Company and the Bank under Basel III ~~will continue~~have continued to exceed the well capitalized minimum capital requirements.

~~-52-~~

~~Index~~

The following table shows our regulatory capital ratios (on a consolidated basis) for the past several quarters:

Macatawa Bank Corporation	Sept 30, 2017		June 30, 2017		March 31, 2017		Dec 31, 2016		Sept 30, 2016		March 31, 2020			Dec 31, 2019			Sept 30, 2019			June 30, 2019			March 31, 2019
Total capital to risk weighted assets	15.5	%	15.5	%	15.1	%	14.9	%	15.2	%		15.8	%		15.8	%		16.8	%		16.8	%		16.1	%
Common Equity Tier 1 to risk weighted assets	11.7		11.6		11.3		11.0		11.3			13.4			13.5			13.2			13.1			12.6
Tier 1 capital to risk weighted assets	14.4		14.3		14.0		13.7		14.1			14.7			14.7			15.8			15.7			15.1
Tier 1 capital to average assets	12.0		12.2		12.1		12.0		12.0			11.9			11.5			12.2			12.3			12.2

Approximately ~~$40.0~~$20.0 million of trust preferred securities outstanding at ~~September 30, 2017~~March 31, 2020 qualified as Tier 1 capital.

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'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.

-45-

Index

We have actively pursued initiatives to maintain a strong liquidity position. The Bank has reduced its reliance on non-core funding sources, including brokered deposits, and focused on achieving a non-core funding dependency ratio below its peer group average. We have had no brokered deposits on our balance sheet since December 2011. We continue to maintain significant on-balance sheet liquidity. At ~~September 30, 2017,~~March 31, 2020, the Bank held ~~$131.6~~$181.3 million of federal funds sold and other short-term investments. In addition, the Bank had available borrowing capacity from correspondent banks of approximately ~~$304.1~~$354.6 million as of ~~September 30, 2017.~~March 31, 2020.

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 ~~September 30, 2017~~March 31, 2020 (dollars in thousands):

	Less than 1 year		1-3 years		3-5 years		More than 5 years		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long term debt	$	---	$	---	$	---	$	41,238	$	—	$	—	$	—	$	20,619
Time deposit maturities		59,436		30,505		2,262		40		116,331		25,481		2,989		56
Other borrowed funds		42,118		20,000		10,000		---	$	—		10,000		50,000		10,000
Operating lease obligations		243		422		---		---		282		150		73		—
Total	$	101,797	$	50,927	$	12,262	$	41,278	$	116,613	$	35,631	$	53,062	$	30,675

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 ~~September 30, 2017,~~March 31, 2020, we had a total of ~~$495.2~~$492.8 million in unused lines of credit, ~~$121.8~~$84.0 million in unfunded loan commitments and ~~$12.1~~$15.2 million in standby letters of credit.

We believe we have sufficient liquidity sources to fund all pending PPP loans and to continue to provide this important service to local businesses if additional funds are appropriated for the PPP.

~~-53-~~

~~Index~~

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 ~~2016,~~2019, the Bank paid dividends to the Company totaling ~~$6.2~~$32.5 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 totaling $4.0 million.~~shareholders. On February ~~27, 2017,~~25, 2020, the Bank paid a dividend totaling ~~$1.8~~$2.8 million to the Company in anticipation of the common share cash dividend of ~~$0.04~~$0.08 per share paid on February ~~28, 2017~~27, 2020 to shareholders of record on February ~~13, 2017.~~11, 2020. The cash distributed for this cash dividend payment totaled $1.4 million. On May 30, 2017, the Bank paid a dividend totaling $1.9 million to the Company in anticipation of the common share cash dividend of $0.04 per share paid on May 30, 2017 to shareholders of record on May 15, 2017. The cash distributed for this cash dividend payment totaled $1.4 million. On August 29, 2017, the Bank paid a dividend totaling $2.0 million to the Company in anticipation of the common share cash dividend of $0.05 per share paid on August 30, 2017 to shareholders of record on August 15, 2017. The cash distributed for this cash dividend payment totaled $1.7$2.7 million. The Company retained the remaining balance in each period for general corporate purposes. At ~~September 30, 2017,~~March 31, 2020, the Bank had a retained earnings balance of ~~$46.6~~$70.6 million.

During ~~2016,~~2019 and 2018, the Company received payments from the Bank totaling ~~$7.1~~$8.0 million and $5.8 million, respectively, representing the Bank’s intercompany tax liability for the ~~2016~~2019 and 2018 tax ~~year,~~years, respectively, in accordance with the Company’s tax allocation agreement. ~~During the first nine months of 2017, the Company received payments from the Bank totaling $4.1 million, representing the Bank’s intercompany tax liability for the first nine months of 2017.~~

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 ~~September 30, 2017~~March 31, 2020 was ~~$6.0~~$6.9 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 loan losses, other real estate owned valuation, loss contingencies, revenue recognition 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 loan losses and the related provision for loan losses is described above in the "Allowance for Loan 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, including judgments made related to the effect of the COVID-19 pandemic, could significantly change the level of the allowance for loan losses and the related provision for loan losses. Although, based upon our internal analysis, and in our judgment, we believe that we have provided an adequate allowance for loan 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 loan losses that may be significantly different than the levels that we recorded in the first ~~nine~~three months of ~~2017.~~2020.

-46-

Index

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.

Noninterest revenue is recognized in accordance with contractual requirements and as we fulfill our obligations under contractual terms. Most of our noninterest revenue comes from services that are transaction based and such revenue is recognized as the related service is provided.

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 ~~September 30, 2017,~~March 31, 2020, we had gross deferred tax assets of ~~$8.4~~$4.5 million, gross deferred tax liabilities of ~~$2.4~~$2.7 million resulting in a net deferred tax asset of ~~$6.0~~$1.8 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. ~~Each reporting period we consider all reasonably available positive and negative evidence and determine whether it is “more likely than not” that we would be able to realize our~~At December 31, 2018, a valuation allowance of $92,000 was established against a capital loss carryforward created by the liquidation of the assets of a partnership interest the Bank acquired through a loan settlement thereby reducing net deferred tax ~~assets~~.assets. This valuation allowance was maintained at March 31, 2020, resulting in a net deferred tax asset balance of $1.7 million. With the positive results in 2019 and the first ~~nine months~~quarter of ~~2017,~~2020, we concluded at ~~September 30, 2017~~March 31, 2020 that no other 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.

~~-54-~~

~~Index~~

Item 3.

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 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 ~~September 30, 2017~~March 31, 2020 (dollars in thousands):

Interest Rate Scenario	Economic Value of Equity		Percent Change			Net Interest Income		Percent Change			Economic Value of Equity		Percent Change			Net Interest Income		Percent Change
Interest rates up 200 basis points	$	222,340		(3.71	)%	$	55,481		3.59	%	$	289,541		2.08	%	$	61,217		10.49	%
Interest rates up 100 basis points		227,555		(1.46	)		54,498		1.75			292,239		3.03			58,213		5.07
No change		230,918		---			53,559		---			283,634		—			55,405		—
Interest rates down 100 basis points		214,540		(7.09	)		51,752		(3.37	)		283,677		0.02			54,630		(1.40	)
Interest rates down 200 basis points		206,841		(10.43	)		50,249		(6.18	)		280,899		(0.96	)		54,828		(1.04	)

-47-

Index

If interest rates were to increase, this analysis suggests that we are positioned for an improvement in net interest income over the next twelve months. If interest rates were to decrease, this analysis suggests we would experience a reduction 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~~these differing 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.

~~-55-~~

~~Index~~

Item 4:

CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and ~~Procedures.~~Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) as of ~~September 30, 2017,~~March 31, 2020, the end of the period covered by this report.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as the Company's are designed to do, and management necessarily was required to apply its judgment in evaluating whether the benefits of the controls and procedures that the Company adopts outweigh their costs.

Our CEO and CFO, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report, have concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.

(b)

Changes in Internal Controls. During the period covered by this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

~~-56-~~-48-

Index

PART II – OTHER INFORMATION

Item 1A.

Risk Factors.

The coronavirus pandemic (COVID-19) could adversely affect the business and results of operations of each of the Company.

In response to COVID-19, many state and local governments have instituted emergency restrictions that have substantially limited the activities of individuals and the operations of businesses and industries. During the week of March 9, 2020, individual states began implementing restrictions and promoting “social distancing”. These restrictions included closure of schools, restrictions on the number of public gatherings, encouragement of work at home arrangements and other measures. In Michigan, Governor Gretchen Whitmer issued a “stay home, stay safe” executive order effective March 24, 2020, which required residents to remain at home "to the maximum extent feasible" and prohibited in-person work that "is not necessary to sustain or protect life." Pursuant to the order, no person or entity was permitted to operate a business that required workers to leave their homes except to the extent that those workers were necessary (i) to conduct minimum basic operations or (ii) to sustain or protect life. On April 9, the Governor issued a revised executive order, which is effective through April 30, 2020. This revised executive order further limits travel, provides guidance regarding the definition of critical infrastructure workers, places additional requirements on businesses remaining open including limiting goods that can be sold by retailers and implementing social distancing practices, and incorporates guidance issued under the earlier order. It is possible that the Governor will issue one or more additional executive orders extending the existing orders or imposing additional restrictions on the activities of individuals or businesses. The Governor's executive orders, along with social distancing guidance issued by the federal government and the Centers for Disease Control and Prevention, have substantially affected many different types of businesses and have resulted in the temporary or permanent closing of businesses and significant layoffs and furloughs throughout Michigan and the United States generally.

COVID-19 has had a substantial impact on numerous aspects of life in the United States, including threats to public health, increased volatility in markets, and severe effects on national and local economies. The ultimate effect of COVID-19 on the Company's business will depend on numerous factors and future developments that are highly uncertain and cannot be predicted with confidence. At this time, it is unknown how long the COVID-19 pandemic will last, or when restrictions on individuals and businesses, such as Michigan’s “stay home, stay safe” executive orders, will be lifted and businesses and their employees will be able to resume normal activities. Further, additional information may emerge regarding the severity of COVID-19 and additional actions may be taken by federal, state, and local governments to contain COVID-19 or treat its impact. Changes in the behavior of customers, businesses and their employees as a result of the COVID-19 pandemic, including social distancing practices, even after formal restrictions have been lifted, are also unknown. As a result of the COVID-19 pandemic and the actions taken to contain it or reduce its impact, the Company may experience changes in the value of collateral securing outstanding loans, reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with their terms. These and similar factors and events may have substantial negative effects on the business, financial condition, and results of operations of the Company and its customers.

-49-

Index

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides information regarding the Company’s purchase of its own common stock during the first quarter of 2020. 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.

	Total Number of Shares Purchased		Average Price Paid Per Share
Period
January 1 - January 31, 2020
Employee Transactions		—		—
February 1 - February 29, 2020
Employee Transactions		—		—
March 1 - March 31, 2020
Employee Transactions		1,608	$	6.98
Total for First Quarter ended March 31, 2020
Employee Transactions		1,608	$	6.98

Item 6.

EXHIBITS.

3.1		Restated Articles of Incorporation. Previously filed with the Commission on ~~April 28, 2011~~October 27, 2016 in Macatawa Bank Corporation’s Quarterly Report on Form 10-Q, Exhibit 3.1. Here incorporated by reference.
3.2		Bylaws. Previously filed with the Commission on February 19, 2015 in Macatawa Bank Corporation's Annual Report on Form 10-K for the year ended December 31, 2014, Exhibit ~~3.1.~~3.2. Here incorporated by reference.
4.1		Restated Articles of Incorporation. Exhibit 3.1 is here incorporated by reference.
4.2		Bylaws. Exhibit 3.2 is here incorporated by reference.
4.3		Long-Term Debt. The registrant has outstanding long-term debt which at the time of this report does not exceed 10% of the registrant's total consolidated assets. The registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the SEC upon request.
31.1		Certification of Chief Executive Officer.
31.2		Certification of Chief Financial Officer.
32.1		Certification pursuant to 18 U.S.C. Section 1350.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

~~-57-~~-50-

Index

~~SIGNATURES~~SIGNATURES

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

	MACATAWA BANK CORPORATION

	/s/ Ronald L. Haan
	Ronald L. Haan
	Chief Executive Officer
	(Principal Executive Officer)

	/s/ Jon W. Swets
	Jon W. Swets
	Senior Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

Dated: ~~October 26, 2017~~		April 23, 2020

~~-58-~~-51-

Michigan		38-3391345
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock	MCBC	NASDAQ

	September 30, 2017		December 31, 2016
Not classified as impaired	$	1,247	$	2,608
Classified as impaired		5,736		7,498
Total commercial loans classified substandard or worse	$	6,983	$	10,106

	Three Months Ended September 30,		Three Months Ended September 30,		Nine Months Ended September 30,		Nine Months Ended September 30,
	2017		2016		2017		2016
Interest income
Loans, including fees	$	12,804	$	11,838	$	37,800	$	35,228
Securities
Taxable		741		584		2,025		1,699
Tax-exempt		574		451		1,658		1,325
FHLB Stock		122		122		367		368
Federal funds sold and other short-term investments		385		127		666		383
Total interest income		14,626		13,122		42,516		39,003
Interest expense
Deposits		732		431		1,770		1,333
Other borrowings		314		418		1,053		1,318
Long-term debt		442		371		1,267		1,104
Total interest expense		1,488		1,220		4,090		3,755
Net interest income		13,138		11,902		38,426		35,248
Provision for loan losses		(350)		(250)		(1,350)		(1,100)
Net interest income after provision for loan losses		13,488		12,152		39,776		36,348
Noninterest income
Service charges and fees		1,172		1,152		3,342		3,312
Net gains on mortgage loans		369		1,175		1,273		2,235
Trust fees		801		790		2,412		2,286
ATM and debit card fees		1,324		1,272		3,863		3,715
Gain on sales of securities		---		---		3		99
Bank owned life insurance ("BOLI") income		249		146		730		748
Other		385		540		1,386		1,824
Total noninterest income		4,300		5,075		13,009		14,219
Noninterest expense
Salaries and benefits		6,211		6,166		18,363		18,521
Occupancy of premises		922		901		2,939		2,784
Furniture and equipment		797		772		2,278		2,476
Legal and professional		199		153		621		500
Marketing and promotion		226		275		678		825
Data processing		655		741		2,068		2,089
FDIC assessment		134		166		404		638
Interchange and other card expense		333		334		970		927
Bond and D&O Insurance		119		132		353		395
Net (gains) losses on repossessed and foreclosed properties		(190)		115		(575)		409
Administration and disposition of problem assets		113		210		435		787
Other		1,237		1,308		3,900		3,943
Total noninterest expenses		10,756		11,273		32,434		34,294
Income before income tax		7,032		5,954		20,351		16,273
Income tax expense		2,157		1,350		6,253		4,429
Net income	$	4,875	$	4,604	$	14,098	$	11,844
Basic earnings per common share	$	0.14	$	0.14	$	0.42	$	0.35
Diluted earnings per common share	$	0.14	$	0.14	$	0.42	$	0.35
Cash dividends per common share	$	0.05	$	0.03	$	0.13	$	0.09

September 30, 2017	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
March 31, 2020							Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	1,414	$	1,414	$	---	$	168	$	168	$	—

Commercial real estate:
Residential developed		---		---		---		—		—		—
Unsecured to residential developers		---		---		---		—		—		—
Vacant and unimproved		---		---		---		—		—		—
Commercial development		190		190		---		—		—		—
Residential improved		5		5		---		200		200		—
Commercial improved		---		---		---		7,157		7,157		—
Manufacturing and industrial		---		---		---		—		—		—
		195		195		---		7,357		7,357		—
Consumer:
Residential mortgage		---		---		---		—		—		—
Unsecured		---		---		---		—		—		—
Home equity		---		---		---		—		—		—
Other secured		---		---		---		—		—		—
		---		---		---		—		—		—
Total with no related allowance recorded	$	1,609	$	1,609	$	---	$	7,525	$	7,525	$	—

With an allowance recorded:
Commercial and industrial	$	3,141	$	3,141	$	568	$	6,996	$	6,996	$	1,720

Commercial real estate:
Residential developed		181		181		4		73		73		3
Unsecured to residential developers		---		---		---		—		—		—
Vacant and unimproved		361		361		12		—		—		—
Commercial development		---		---		---		—		—		—
Residential improved		2,212		2,212		88		—		—		—
Commercial improved		5,609		5,609		139		571		571		19
Manufacturing and industrial		184		184		1		355		355		14
		8,547		8,547		244		999		999		36
Consumer:
Residential mortgage		6,865		6,846		422		4,116		4,116		307
Unsecured		---		---		---		179		179		13
Home equity		1,817		1,817		112		499		499		37
Other secured		---		---		---		26		26		2
		8,682		8,663		534		4,820		4,820		359
Total with an allowance recorded	$	20,370	$	20,351	$	1,346	$	12,815	$	12,815	$	2,115
Total	$	21,979	$	21,960	$	1,346	$	20,340	$	20,340	$	2,115

	Three Months Ended September 30,		Three Months Ended September 30,		Nine Months Ended September 30,		Nine Months Ended September 30,
	2017		2016		2017		2016
Average of impaired loans during the period:
Commercial and industrial	$	4,047	$	5,093	$	5,410	$	6,489

Commercial real estate:
Residential developed		181		126		183		42
Unsecured to residential developers		---		---		---		---
Vacant and unimproved		372		418		338		433
Commercial development		189		190		189		191
Residential improved		2,255		5,156		3,002		5,396
Commercial improved		5,925		6,627		6,026		7,660
Manufacturing and industrial		185		235		246		237

Consumer		8,793		12,501		10,366		12,828

Interest income recognized during impairment:
Commercial and industrial		179		203		697		740
Commercial real estate		108		172		360		516
Consumer		80		112		306		350

Cash-basis interest income recognized
Commercial and industrial		177		195		708		746
Commercial real estate		114		169		363		513
Consumer		79		111		306		346

	Three Months Ended March 31, 2020		Three Months Ended March 31, 2019
Average of impaired loans during the period:
Commercial and industrial	$	6,615	$	6,825
Commercial real estate:
Residential developed		74		172
Unsecured to residential developers		—		—
Vacant and unimproved		—		138
Commercial development		—		—
Residential improved		267		308
Commercial improved		5,822		2,340
Manufacturing and industrial		356		379
Consumer		4,914		6,197
Interest income recognized during impairment:
Commercial and industrial		273		288
Commercial real estate		99		44
Consumer		57		75
Cash-basis interest income recognized
Commercial and industrial		275		282
Commercial real estate		128		49
Consumer		60		76

September 30, 2017	Nonaccrual		Over 90 days Accruing

March 31, 2020					Nonaccrual		Over 90 days Accruing
Commercial and industrial	$	4	$	---	$	1,211	$	—

Commercial real estate:
Residential developed		---		---		—		—
Unsecured to residential developers		---		---		—		—
Vacant and unimproved		---		---		—		—
Commercial development		239		---		—		—
Residential improved		91		---		97		—
Commercial improved		110		---		5,811		—
Manufacturing and industrial		---		---		—		—
		440		---		5,908		—
Consumer:
Residential mortgage		58		---		103		—
Unsecured		7		---		—		—
Home equity		---		---		8		—
Other secured		12		---		—		—
		77		---		111		—
Total	$	521	$	---	$	7,230	$	—

December 31, 2019	Nonaccrual		Over 90 days Accruing
Commercial and industrial	$	—	$	—
Commercial real estate:
Residential developed		—		—
Unsecured to residential developers		—		—
Vacant and unimproved		—		—
Commercial development		—		—
Residential improved		98		��
Commercial improved		—		—
Manufacturing and industrial		—		—
		98		—
Consumer:
Residential mortgage		105		—
Unsecured		—		—
Home equity		—		—
Other secured		—		—
		105		—
Total	$	203	$	—

September 30, 2017	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	22	$	---	$	22	$	418,816	$	418,838

Commercial real estate:
Residential developed		---		---		---		9,077		9,077
Unsecured to residential developers		---		---		---		2,410		2,410
Vacant and unimproved		308		---		308		38,369		38,677
Commercial development		---		239		239		247		486
Residential improved		---		91		91		83,350		83,441
Commercial improved		107		---		107		295,817		295,924
Manufacturing and industrial		---		---		---		100,347		100,347
		415		330		745		529,617		530,362
Consumer:
Residential mortgage		---		56		56		221,773		221,829
Unsecured		---		---		---		254		254
Home equity		33		---		33		82,263		82,296
Other secured		5		11		16		6,442		6,458
		38		67		105		310,732		310,837
Total	$	475	$	397	$	872	$	1,259,165	$	1,260,037

	September 30, 2017				December 31, 2016
	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		20	$	4,555		25	$	5,994
Commercial real estate		38		8,742		49		11,933
Consumer		103		8,663		116		12,059
		161	$	21,960		190	$	29,986

	Three Months Ended September 30, 2017								Three Months Ended September 30, 2016
	# of Loans		Pre-TDR Balance			Writedown Upon TDR			# of Loans		Pre-TDR Balance			Writedown Upon TDR
Commercial and industrial		---		$	---		$	---		---		$	---		$	---
Commercial real estate		---			---			---		1			59			---
Consumer		2			222			---		---			---			---
		2			222		$	---		1		$	59		$	---

	Nine Months Ended September 30, 2017								Nine Months Ended September 30, 2016								Three Months Ended March 31, 2020						Three Months Ended March 31, 2019
	# of Loans		Pre-TDR Balance			Writedown Upon TDR			# of Loans		Pre-TDR Balance			Writedown Upon TDR			# of Loans		Pre-TDR Balance		Writedown Upon TDR		# of Loans		Pre-TDR Balance		Writedown Upon TDR
Commercial and industrial		---		$	---		$	---		---		$	---		$	---		—	$	—	$	—		—	$	—	$	—
Commercial real estate		1			1,018			---		1			59			---		—		—		—		—		—		—
Consumer		4			396			---		6			277			---		1		3		—		—		—		—
		5			1,414		$	---		7		$	336		$	---	$	1	$	3	$	—	$	—	$	—	$	—

September 30, 2017	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
March 31, 2020									Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	221,773	$	254	$	82,296	$	6,447	$	198,484	$	247	$	71,454	$	4,806
Nonperforming		56		---		---		11		101		—		8		—
Total	$	221,829	$	254	$	82,296	$	6,458	$	198,585	$	247	$	71,462	$	4,806

	Nine Months Ended September 30, 2017			Year Ended December 31, 2016			Nine Months Ended September 30, 2016			Three Months Ended March 31, 2020			Year Ended December 31, 2019			Three Months Ended March 31, 2019
Beginning balance	$	22,864		$	28,377		$	28,377		$	3,112		$	4,183		$	4,183
Additions, transfers from loans		60			339			102			—			—			—
Proceeds from sales of other real estate owned		(6,227	)		(5,339	)		(4,155	)		(91	)		(589	)		(154	)
Valuation allowance reversal upon sale		(7,003	)		(1,158	)		(533	)		—			(453	)		(77	)
Gain on sales of other real estate owned		660			645			365
Gain / (loss) on sales of other real estate owned											—			(29	)		45
		10,354			22,864			24,156			3,021			3,112			3,997
Less: valuation allowance		(3,693	)		(10,611	)		(11,046	)		(395	)		(364	)		(736	)
Ending balance	$	6,661		$	12,253		$	13,110		$	2,626		$	2,748		$	3,261

	Asset Fair Value		Valuation Technique	Unobservable Inputs	Range (%)
December 31, 2016
Impaired Loans	$	3,436	Sales comparison approach	Adjustment for differences between comparable sales	1.0 to 35.0
			Income approach	Capitalization rate	9.5 to 11.5

Other real estate owned		9,542	Sales comparison approach	Adjustment for differences between comparable sales	2.0 to 32.5
			Income approach	Capitalization rate	9.5 to 11.5

	September 30, 2017			December 31, 2016
Land	$	16,384		$	18,227
Building		43,625			43,600
Leasehold improvements		782			779
Furniture and equipment		21,243			20,576
Construction in progress		240			358
		82,274			83,540
Less accumulated depreciation		(35,452	)		(33,514	)
	$	46,822		$	50,026

	For the nine months ended September 30,
	2017								2016
	Average Balance			Interest Earned or Paid		Average Yield or Cost			Average Balance			Interest Earned or Paid		Average Yield or Cost
Assets
Taxable securities	$	152,043		$	2,025		1.78	%	$	132,941		$	1,700		1.70	%
Tax-exempt securities (1)		106,481			1,658		3.29			85,682			1,324		3.29
Commercial loans (2)		952,987			29,317		4.06			898,039			26,625		3.90
Residential mortgage loans		217,223			5,649		3.47			217,185			5,730		3.51
Consumer loans		91,141			2,834		4.16			96,975			2,873		3.96
Federal Home Loan Bank stock		11,558			367		4.19			11,558			368		4.18
Federal funds sold and other short-term investments		77,710			666		1.13			99,753			383		0.51
Total interest earning assets (1)		1,609,143			42,516		3.58			1,542,133			39,003		3.41

Noninterest earning assets:
Cash and due from banks		28,911								26,690
Other		97,371								97,232
Total assets	$	1,735,425							$	1,666,055

Liabilities
Deposits:
Interest bearing demand	$	333,148		$	237		0.09	%	$	324,554		$	227		0.09	%
Savings and money market accounts		552,903			1,094		0.27			515,041			708		0.19
Time deposits		82,035			440		0.71			85,862			398		0.62
Borrowings:
Other borrowed funds		86,945			1,053		1.60			97,637			1,318		1.77
Long-term debt		41,238			1,266		4.05			41,238			1,104		3.52
Total interest bearing liabilities		1,096,269			4,090		0.50			1,064,332			3,755		0.47

Noninterest bearing liabilities:
Noninterest bearing demand accounts		465,191								437,943
Other noninterest bearing liabilities		5,756								6,734
Shareholders' equity		168,209								157,046
Total liabilities and shareholders' equity	$	1,735,425							$	1,666,055


Net interest income				$	38,426							$	35,248
Net interest spread (1)							3.08	%							2.94	%
Net interest margin							3.24	%							3.04	%
Ratio of average interest earning assets to average interest bearing liabilities		146.78	%							144.89	%